E L E V E N T H E D I T I O N

STRATEGICMARKET

MANAGEMENT

David A. AakerVice-Chairman, Prophet

Professor Emeritus, University of California, Berkeley

Christine MoormanT. Austin Finch Sr. Professor of Business Administration

Fuqua School of Business, Duke University

VP AND EDITORIAL DIRECTOR George HoffmanEDITORIAL DIRECTOR Veronica VisentinEXECUTIVE EDITOR Lise JohnsonSPONSORING EDITOR Jennifer ManiasEDITORIAL MANAGER Gladys SotoCONTENT MANAGEMENT DIRECTOR Lisa WojcikCONTENT MANAGER Nichole UrbanSENIOR CONTENT SPECIALIST Nicole RepaskyPRODUCTION EDITOR Bharathy Surya PrakashCOVER PHOTO CREDIT © Qweek/iStockphoto

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ISBN: 978-1-119-39220-0 (PBK)ISBN: 978-1-119-39226-2 (EVALC)

Library of Congress Cataloging-in-Publication Data

Names: Aaker, David A., author. | Moorman, Christine, author.Title: Strategic market management / by David A. Aaker, Vice-Chairman,

Prophet, Professor Emeritus, University of California, Berkeley, ChristineMoorman, T. Austin Finch Sr. Professor of Business Administration, FuquaSchool of Business, Duke University.

Description: Eleventh edition. | Hoboken, NJ : John Wiley & Sons, Inc., 2017.| Includes bibliographical references and index. |

Identifiers: LCCN 2017029437 (print) | LCCN 2017034381 (ebook) | ISBN9781119392224 (epub) | ISBN 9781119392217 (pdf) | ISBN 9781119392200 (pbk.)

Subjects: LCSH: Marketing—Management. | Strategic planning.Classification: LCC HF5415.13 (ebook) | LCC HF5415.13 .A23 2017 (print) | DDC

658.8—dc23LC record available at https://lccn.loc.gov/2017029437

The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN onthe back cover differs from the ISBN on this page, the one on the back cover is correct.

P R E F A C E

This eleventh edition of Strategic Marketing Management continues its mission to help businessleaders develop business, brand, and marketing strategies that lead to enduring competitiveadvantage—a task that has become more daunting over the years. In most markets, competitorsare reaching parity on basic functional benefits. As a result, creating and protecting strongcustomer relationships and ongoing innovation is more important than ever and requires a strongmarketing strategy and organization to make it happen.

Developing and implementing strategies is now very different from only a few decades agowhen business environments were more stable and simpler. Every market can now be described asdynamic—with Internet entrants, new business models, global competitors, and customers whoseek engagement and quality. As a result, firms need to be able to adapt strategies in order to stayrelevant. It is a challenging and exciting time—full of opportunities as well as threats.

Several unique aspects of the book have been retained:

A business strategy focus that includes consideration of product/market scope, valueproposition, assets and competencies, and functional area strategies.

A structured strategic analysis, including customer, competitor, market, environmental,and internal analyses, leading to an understanding of market dynamics that is supportedby tools, frameworks, and planning forms.

A detailed discussion of the various types of customer value propositions as the basis forstrong customer relationships and brands. A strategy requires a compelling valueproposition to be customer driven and successful over time.A deep discussion of how to grow the company by energizing the business, leveraging thebusiness into new areas, creating new businesses, and going global.

A comprehensive analysis of how to harness the key organization activities to create aneffective strategy for long-term performance.

A view of strategy emphasizing the dynamic nature of markets, which requires customer-driven strategies. It also details paths to break from the momentum of the past to generatecreative strategies and offerings.

THE ELEVENTH EDITIONThe eleventh edition reflects the following revisions:

Chapter 5, “Environmental and Strategic Analyses,” has been updated to focus oncontemporary trends. It combines materials from the previous Chapter 6 to integrate firmstrengths and weakness with environmental threats and opportunities in SWOT analysis aswell as scenario and impact analysis. Details on firm performance metrics from theprevious Chapter 6 have been retained and put into Appendix A at the end of the book.

Chapter 6 (old Chapter 8), “Creating Advantage: Customer Value Leadership,” offers aconcise overview of alternative value propositions and how a firm achieves customer valueleadership through points of parity and points of difference. It also overviews key threats

iii

to customer value leadership, including failure to select a focus and to align the businessmodel. The concept of synergy is introduced in Chapter 6 as part of achieving customervalue leadership.

Chapter 7, “Building and Managing Customer Relationships,” and Chapter 8, “CreatingValuable Customers,” are both new to the book. These chapters include several of thecustomer-related ideas in different chapters in the tenth ediction. Chapter 7 examinesmanaging the customer journey and customer experiences—two emerging topicsimportant to practice. Chapter 8 offers a tutorial on how to ensure that companies notonly create value for customers, but also that the company has valuable customers thatcontribute to its performance. Using customer lifetime value tools, the concept ofcustomer equity is introduced and evaluated.Chapter 16, “Harnessing the Organization,” has been revised extensively to focus on abroader array of factors associated with a customer-centric organization, including culture,competencies, structure, metrics and incentives, leaders, and employees.

Chapter 17, “How Marketing Creates Value for Companies,” is new to the book. Thischapter examines customer equity and brand equity discussed in earlier chapters with afocus on how these assets improve firm value—both revenues and stock marketperformance. The latter is shown to be achieved by influencing the speed, level, volatility,and vulnerability of company cash flows.

Each chapter (except Chapter 1) contains two new “Best Practice” case studies—onedigital and one global. These case studies were written to focus on successful companies—large, small, product, service, B2B, and B2C—and to highlight aspects of their strategiesthat correspond to the chapter topic. Discussion questions at the end of each case willallow instructors to turn to these mini-cases during class to discuss what these companiesdid well and to examine challenges to their success going forward.

The “Case Challenges for Part I and II” in the tenth edition have been moved to the endof the book into a section called “Case Studies.” The following cases have been retained andupdated, “The Energy Bar Industry,” “Assessing the Impact of Changes in the Environment,”“Contemporary Art,” and “Dove.” “Competing Against Walmart” has been changed tofocus on “Competing Against Amazon” given it now appears to be the “industry giant.”

AN OVERVIEWChapter 1 introduces concepts of business strategy and strategic market management. The goal ofsustainable competitive advantage (SCA) is discussed in detail because it drives all chapters thatfollow. Part I of the book, Chapters 2–5, covers strategic analysis with chapters discussingcustomer, competitor, market, environmental, and internal analyses.

Part II of the book, Chapters 6–17, covers the development, implementation, and evaluationof strategy. Chapter 6 examines alternative value propositions that can be adopted by the companyand the importance of achieving customer value leadership. Chapters 7 and 8 focus on the all-important role of the customer relationship, including building and managing strong customerrelationships and managing customer equity. Chapters 9 and 10 consider how to create valuablebrands and to develop brand equity. The next four chapters present growth strategies—energizingthe business (Chapter 11), leveraging the business (Chapter 12), creating new businesses

iv Preface

(Chapter 13), and managing global strategies (Chapter 14). Chapter 15 discusses setting prioritiesamong business units and managing investment and divestment decisions for future growth.

Chapter 16 examines the organizational challenges underlying the implementation of market-ing strategy and offers solutions in the form of developing a customer-centric organization. Finally,Chapter 17 examines how strong marketing assets in the form of strong customer relationships andbrands produce value for the company.

THE AUDIENCEThis book is suitable for any course in a school of management or business that focuses on themanagement of strategies. In particular, it is aimed at:

The marketing strategy course, which might be titled Strategic Market Management,Strategic Market Planning, Strategic Marketing, or Marketing Strategy.

The policy or entrepreneur course, which might be titled Strategic Management,Strategic Planning, Business Policy, or Entrepreneurship.

The book is also designed to be used by managers who need to develop strategies in dynamicmarkets—those who have recently moved into general management positions or who run smallbusinesses and want to improve their strategy development and planning processes. Anotherintended audience is general managers, top executives, and planning specialists who would like anoverview of recent issues, frameworks, and tools in strategic market management.

A WORD TO INSTRUCTORSThe eleventh edition is accompanied by a revision of the extensive instructor’s resource guideauthored by David Aaker and Christine Moorman, which is located on the book’s companionWeb site at www.wiley.com/college/aaker. The resource guide has a set of lecture suggestions foreach chapter, a test bank, several course outlines, case notes, recommended external cases to beused with select chapter, and case notes. An Image Gallery, containing all figures and tables in thetext, will also be available for instructors.

ACKNOWLEDGMENTSThis book could not have been created without help from friends, students, reviewers, andcolleagues at the Haas School of Business and at Prophet. Special thanks to research assistants atthe Duke University Fuqua School of Business who supported this revision, including Ishita Anil,Dion Aviki, Danilo Haliz, Maddie Hilal, Brittany Holland, Anant Johri, Shreyas Jayanth, EmilyMadden, Sarah Memmi, Debra Origel, Nishant Samuel, Dana Vielmetti, Scott Wallace, andHillary Weiner. Your insights and support were essential to this revision. Thanks to Leah Porter,John Carmichael, and Mark Brodeur at Nestle who helped with the pet food example used in theplanning forms and to Ricardo Guerra from Itau for his assistance in constructing the best practicecase study. Finally, thanks to Edward Holub for his outstanding editorial support.

We are pleased to be associated with the publisher, John Wiley, a world class organization,and its superb editors—Rich Esposito (who helped give birth to the first edition), John Woods,Tim Kent, Ellen Ford, Jeff Marshall, Judith Joseph, Jayme Heffler, Franny Kelly (who guided the

Preface v

ninth and tenth editions), and Lise Johnson who supported us in this edition. Special thanks toBharathy Surya Prakash, Wiley’s Production Editor, who supported us during each stage of thepublication process.

Thanks to friend and colleague Jim Prost, a strategy teacher extraordinaire who madenumerous suggestions about prior editions of the book and has helped create a world-classteacher’s resource manual in previous versions of the book. Thanks to Scott Wallace, Ph.D. studentat Duke, who updated the teaching guides and test bank for this eleventh edition.

From Dave: This book is dedicated to the women in my life—my wife, Kay, and my three girls,Jennifer, Jan, and Jolyn, who all provide stimulation and support.

From Christine: This book is dedicated to all of my students—thank you for inspiring me tothink harder and teach better.

David A. Aaker andChristine Moorman, 2017

vi Preface

C O N T E N T S

Chapter 1 Strategic Market Management—An Introduction and Overview 1What Is a Business Strategy? 3Strategic Market Management 10Marketing and Its Role in Strategy 14

PART ONE STRATEGIC ANALYSIS 17

Chapter 2 External and Customer Analysis 19External Analysis 19The Scope of Customer Analysis 23Segmentation 23Customer Motivations 28Unmet Needs 31

Chapter 3 Competitor Analysis 39Identifying Competitors—Customer-Based Approaches 40Identifying Competitors—Strategic Groups 42Potential Competitors 44Competitor Analysis—Understanding Competitors 44Competitor Strengths and Weaknesses 49The Competitive Strength Grid 52Obtaining Information on Competitors 55

Chapter 4 Market/Submarket Analysis 59Dimensions of a Market/Submarket Analysis 59Emerging Submarkets 61Actual and Potential Market or Submarket Size 62Market and Submarket Growth 63Market and Submarket Profitability Analysis 65Cost Structure 68Distribution Systems 69Market Trends 69Key Success Factors 70Risks in High-Growth Markets 71

Chapter 5 Environmental and Strategic Analyses 78Environmental Analysis 79Strategic Analysis 89From Analysis to Strategy 96

vii

PART TWO CREATING, ADAPTING, AND IMPLEMENTING STRATEGY 101

Chapter 6 Creating Advantage: Customer Value Leadership 103Alternative Value Propositions 104Customer Value Leadership 110Managing for Customer Value Leadership 114

Chapter 7 Building and Managing Customer Relationships 122The Customer Decision Journey 122Managing Customer Experience 128Toward Long-Term Customer Relationships 137

Chapter 8 Creating Valuable Customers 146The Purchase Funnel 147Customer Lifetime Models and Strategy Effectiveness 152Customers as Valuable Assets 157

Chapter 9 Building and Managing Brand Equity 162Brand Awareness 163Brand Loyalty 164Brand Associations 165Brand Identity 171

Chapter 10 Toward a Strong Brand Relationship 180Understanding and Prioritizing Brand Touchpoints 180Focusing on the Customer’s Sweet Spot 182How to Create or Find a Customer Sweet Spot 184Get Beyond Functional Benefits 185Broadening the Concept of a Brand 187

Chapter 11 Energizing the Business 194Innovating the Offering 195Energizing the Brand and Marketing 200Increasing the Usage of Existing Customers 208

Chapter 12 Leveraging the Business 214Which Assets and Competencies Can Be Leveraged? 215Expanding the Scope of the Offering 220New Markets 221Evaluating Business Leveraging Options 222The Mirage of Synergy 224

Chapter 13 Creating New Businesses 230Create “Must Haves,” Rendering Competitors Irrelevant 231The Innovator’s Advantage 234Managing Category Perceptions 236Creating New Business Arenas 237From Ideas to Market 242

viii Contents

Chapter 14 Global Strategies 248Motivations Underlying Global Strategies 249Standardization vs. Customization 253Expanding the Global Footprint 257Strategic Alliances 259Global Marketing Management 262

Chapter 15 Setting Priorities for Businesses and Brands 266The Business Portfolio 267Divestment or Liquidation 269The Milk Strategy 272Prioritizing and Trimming the Brand Portfolio 275

Chapter 16 Harnessing the Organization 283Customer-Centric Organizational Cultures 284Customer-Centric Competencies 286Customer-Centric Organizational Structure 288Metrics and Incentives for Customer Centricity 291Leading for Customer Centricity 292Customer-Centric Talent 294

Chapter 17 How Marketing Activities Create Value for Companies 303The Impact of Customer and Brand Equity on Firm Revenues 304The Effect of Marketing Assets on Firm Value 307How Markets Value Marketing Assets 311Managing Marketing to Contribute to Firm Value 314

Case Studies 320The Energy Bar Industry 320Assessing the Impact of Changes in the Environment 322Creating a New Brand for a New Business 324Competing Against the Industry Giant 326Leveraging a Brand Asset 329

Appendix A: Internal Analysis 332

Appendix B: Planning Forms 339

Notes 354

Index 367

Contents ix

C H A P T E R O N E

Strategic MarketManagement—An

Introduction and Overview

Plans are nothing, planning is everything.—Dwight D. Eisenhower

Even if you are on the right track, you’ll get run over if you just sit there.—Will Rodgers

If you don’t know where you’re going, you might end up somewhere else.—Casey Stengel

All markets today are dynamic. Change is in the air everywhere, and change affects strategy.A winning strategy today may not prevail tomorrow. It might not even be relevant tomorrow.

There was a time, not too many decades ago, when the world held still long enough forstrategies to be put into place and refined with patience and discipline. The annual strategic planguided the firm. That simply is no longer the case. New products, product modifications,subcategories, technologies, applications, market niches, segments, media, channels, and onand on are emerging faster than ever in nearly all industries—from snacks to fast food toautomobiles to financial services to software. Multiple forces feed these changes, includingdigital technologies, the rise of China and India, trends in healthy living, energy crises, politicalinstability, and more. The result is markets that are not only dynamic but risky, complex, andcluttered.

Such convoluted markets make strategy creation and implementation far more challenging.Strategy has to win not only in today’s marketplace but also in tomorrow’s, when the customer, thecompetitor set, and the market context may all be different. In environments shaped by this newreality, some firms are driving change. Others are adapting to it. Still others are fading in the faceof change. How do you develop successful strategies in dynamic markets? How do you stay aheadof competition? How do you stay relevant to the customer?

1

The task is challenging. Strategists need new and refined perspectives, tools, and concepts. Inparticular, they need to develop competencies around six management tasks—strategic analysis,innovation, getting control of multiple business units, developing sustainable competitive advantages(SCAs), and developing growth platforms.

Strategic analysis. The need for information about customers, competitors, and trendsaffecting the market is now stronger than ever. Furthermore, the information needs to becontinuous and not tied to a planning cycle, because a timely detection of threats, opportunities,strategic problems, or emerging weaknesses can be crucial to getting the response right. There isan enhanced premium on the ability to predict trends, project their impact, and distinguish themfrom mere fads. That means resources need to be invested and competencies created in terms ofgetting information, filtering it, and converting it into actionable analysis.

Customer value. A strategy that fails to create customer value has no future. This valuemust resonate with a segment of customers and offer more benefits and/or lower costs thancompetitors. Creating that value for customers and ensuring that company profits from it overtime are central tasks in strategy.

Innovation. Markets evolve and competitors imitate customer value. Therefore, it isimportant that the company creates new sources of value over time. The ability to innovate is keyto winning in dynamic markets as numerous research studies have shown. Innovation, however,turns out to have a host of challenges. There is the organizational challenge of creating a contextthat supports innovation. There is the brand portfolio challenge of making sure that theinnovation fits among current offerings. There is the strategic challenge of developing the rightmix of innovations that ranges from incremental to transformational to ensure the company canmaintain profits while also preparing for the future. There is the execution challenge; it isnecessary to turn innovations into offerings in the marketplace. There are too many examples offirms that owned an innovation and let others bring it to market.

Multiple businesses. It is the rare firm now that does not operate multiple business unitsdefined by channels and countries in addition to product categories and subcategories, countries,and product categories. Decentralization is a century-old organizational form that provides foraccountability, a deep understanding of the product or service, being close to the customer, andfast response, all of which are good things. However, in its extreme form, autonomous businessunits can lead to the misallocation of resources, redundancies, a failure to capture cross-businesspotential synergies, and confused brands. A challenge, explored in Chapter 16, is to adapt thedecentralization model so that it no longer inhibits strategy adaptation in dynamic markets.

Creating sustainable competitive advantages (SCAs). Creating strategic advantagesthat are truly sustainable in the context of dynamic markets and dispersed business units ischallenging. Competitors all too quickly copy product and service improvements that are valuedby customers. What leads to SCAs in dynamic markets? One possible cornerstone is thedevelopment of assets such as customer relationships, brands, and distribution channels, orcompetencies such as digital marketing skills or marketing analytics expertise. Another isleveraging organizational synergy created by multiple business units, which is much moredifficult to copy than a single new product or service.

Developing growth platforms. Growth is imperative for the vitality and health of anyorganization. In a dynamic environment, stretching the organization in creative ways becomes an

2 Chapter 1 Strategic Market Management—An Introduction and Overview

essential element of seizing opportunities and adapting to changing circumstances. Growth cancome from revitalizing core businesses to make them growth platforms as well as by creating newbusiness platforms.

This book is concerned with helping managers identify, select, implement, and adapt market-driven business strategies that will enjoy a sustainable advantage in dynamic markets, as well ascreate synergy and set priorities among business units. The intent is to provide concepts, methods,procedures, and best practice case studies that will lead to competencies in these six crucialmanagement tasks—and, ultimately, to high-quality strategic decision making and profitablegrowth.

The book emphasizes the customer because in a dynamic market, a customer orientation iscritical to company success. The current, emerging, and latent motivations and unmet needs ofcustomers need to influence strategies. Because of this, every strategy needs to have a valueproposition that is meaningful and relevant to customers.

This chapter starts with a very basic but central concept, that of a business strategy. The goal isto lend structure and clarity to a term that is widely employed but seldom defined. It continueswith an overview of the balance of the book, introducing and positioning many of the subjects,concepts, and tools to be covered. Finally, the role of marketing in business strategy is discussed.There is a significant trend for marketing to have a seat at the strategy table and to see the chiefmarketing officer (CMO) as empowered to create growth initiatives.

WHAT IS A BUSINESS STRATEGY?Before discussing the process of developing sound business strategies, it is fair to addresstwo questions. What is a business? What is a business strategy? Clarifying these concepts is anecessary start toward a winning, adaptable strategy.

A Business

A business is an organizational unit with a defined strategy and a manager with sales and profitresponsibility. The organizational unit can be defined by a variety of dimensions, including productline, country, channels, or segments. An organization will thus have many business units that relateto each other horizontally and vertically.

There is an organizational and strategic trade-off in deciding how many businesses should beoperated. On one hand, it can be compelling to have many units because then each business willbe close to its market and potentially capable of developing an optimal strategy. Thus, a strategyfor each country or each region or each major segment may have some benefits. Too manybusiness units become inefficient, however, and result in programs that lack scale economies andfail to leverage the strategic skills of the best managers. As a result, there is pressure to aggregatebusinesses into larger entities.

Business units can be aggregated to create a critical mass, to recognize similarities in marketsand strategies, and to gain synergies. Businesses that have similar market contexts and businessstrategies will be candidates for aggregation to leverage shared knowledge. Another aggregationmotivation is to encourage synergies among business units when the combination is more likely torealize savings in cost or investment or create a superior value proposition.

There was a time when firms developed business strategies for decentralized business unitsdefined by product, countries, or segments. These business strategies were then packaged or

What is a Business Strategy? 3

aggregated to create a firm strategy. That time has passed. There also now needs to be a firm strategythat identifies macro trends and strategy responses to these trends as a firm, allocates resourcesamong business units, and recognizes synergy potentials. So there needs to be a strategy for theFord company and perhaps the SUV group as well as the Ford Explorer, a major SUV brand.

The Business Strategy

Four dimensions define an effective business strategy: the product-market investment strategy,the customer value proposition, the assets and competencies, and the functional strategies andprograms. These four dimensions are depicted in Figure 1.1. To be effective, all four elementsshould be based on the idea of customer value. This foundation drives subsequent decisions aboutwhere and how to compete to win.

The Foundation of Customer Value

A critical foundation of any strategy is to ensure that the company’s actions offer value to customers.Without offering value, decisions about where and how to compete are unlikely to succeed.Unfortunately “value” may be one of the most overused and misused terms in business. Thus a“value” price is often wrongly used to mean a low price or a bundled price. Low-priced products canoffer customers excellent value. However, equating customer value with low price obscures themore fundamental role value plays in how markets operate and how firms must compete.

Ultimately, customer value is about the difference between the benefits customers perceivethey are getting from an offering minus the perceived cost of obtaining these benefits—adjusted

Assets &competencies

Functional areastrategies & programs

Valueproposition

How to Compete

Where to Compete

The product-market investment decision

A BUSINESSSTRATEGY

Figure 1.1 A Business Strategy

4 Chapter 1 Strategic Market Management—An Introduction and Overview

for the riskiness of the offering. Think about customer value using the following approach:Customer Value [1 Perceived Risk] [Perceived Benefits Perceived Costs]. The greaterthe perceived benefits and/or the lower the perceived total costs and/or risks of a product, thegreater the customer value and the higher the likelihood the customer will choose that product.Each component will now be examined in detail.

Theodore Levitt, famously observed “People don’t want to buy a quarter-inch drill. They wanta quarter-inch hole!” Perceived benefits are these outcomes that customers associate with aproduct, service, or relationship from a company. What people want from a copier are machineup-time, speed of through-put and print quality, but customers also make choices based on thequality and speed of customer service. What people want from a video game is fun, excitement,and escape.

Customers’ perceived costs also have many dimensions. Price paid is the most straightforwardcost. However, examining the full range of costs customers incur in their search for, acquisition,and disposal of products represent total life-cycle costs. In the personal computer market, forexample, the total life-cycle costs include acquisition costs (comprised of searching, ordering,price paid, processing, receiving, and installing costs), operating costs (notably energy consump-tion), psychological costs of learning a new system, and maintenance and disposal costs (includingthe cost of software upgrades, technical assistance, and repairs).

Customer choices are also swayed by differences in perceived risks between offerings and thecompanies that sell them. The degree of risk depends on the buyer’s uncertainty about theanswers to questions such as, “Can I trust the supplier’s promises? Will the offering perform asexpected? Will the vendor stay around to support the product in the future?” Small and newcompanies with unknown brand names, no recommendations, and limited track records are at areal disadvantage because perceived risks sharply offset the gains from any superior perceivedbenefits.

Leaders should be wary of these common strategy pitfalls in managing for customer value:

First, attributes do not replace benefits. Attributes are the product or service features thatthe company offers to the customer—the quarter-inch drill. The benefit is what thecustomer gets—the quarter-inch hole—and any other needs that are met by the hole.Even though managers seem to endorse Levitt’s powerful insight, most proceed to ignorethe message. Instead they segment their markets by product attributes (type of drill,power, price point, etc.) or customer demographics, rather than focusing on how they aremeeting customer needs.Second, within markets, customers vary in their emphasis on certain costs and benefits.Some segments of video game customers want high-tech performance features in a gamethat make it more realistic or futuristic, such as Rise of Tomb Raider, Grand Theft Auto,or Metro: Last Light; other segments want to personalize characters and the experiencesuch as in World of Warcraft and Minecraft. The nature of the costs depends on thecustomer segment and the particular offering. Not all customers will recognize these costsand incorporate them into their buying decisions. Furthermore, costs that are incurred farin the future may be discounted back to their present value (consciously or not) at such ahigh discount rate that they virtually vanish.

Third, customer value is dynamic. At any point in time, customers have a preference andknow what they value. However, as customers become more experienced and competitorsshift priorities, customer value evolves.

What is a Business Strategy? 5

The Product-Market Investment Strategy: Where to Compete

The scope of the business and the dynamics within that scope represent a very basic strategydimension. Which sectors should receive investments in resources and management attention?Which should have resources withdrawn or withheld? Even for a small organization, the allocationdecision is key to strategy.

The scope of a business is defined by the products it offers and chooses not to offer, by themarkets it seeks to serve and not serve, by the competitors it chooses to compete with and to avoid,and by its level of vertical integration. Sometimes the most important business scope decision iswhat products or segments to avoid because such a decision, if followed by discipline, can conserveresources needed to compete successfully elsewhere. Peter Drucker, the management guru,challenged executives to specify—“What is our business and what should it be? What is not ourbusiness, and what should it not be?” Such a judgment can sometimes involve painful choices todivest or liquidate a business or avoid an apparently attractive opportunity. Chapter 15 discussesdisinvestment judgments and why they are hard to make and easy to avoid.

Many organizations have demonstrated the advantages of having a well-defined businessscope. Williams-Sonoma offers products for the home and kitchen. IBM turned around its firmunder the direction of Lou Gerstner in part by dialing up its service component and more recentlyby expanding its software and data analytics footprint. P&G focuses on a broad spectrum ofnonfood consumer goods with an emphasis on current or potential billion dollar brands such asTide/Arial, Always/Whisper, Crest, Iams, Pampers, Charmin, Bounty, Pantene, Downy/Lenor,and Gillette. Walmart and Amazon have a wide scope that generates both scale economies and aone-stop shopping value proposition.

More important than the scope is the scope dynamics. What product markets will be enteredor exited in the coming years? As Figure 1.2 suggests, growth can be generated by bringingexisting products to new markets (market expansion), bringing new products to existing markets(product expansion), or entering new product markets (diversification).

Expanding or changing the product-market mix can help the organization achieve growth andvitality and can be a lever to cope with the changing marketplace by seizing opportunities as theyemerge. During the first five years of the Jeff Immelt era, GE changed its focus and character byinvesting in healthcare, energy, water treatment, home mortgages, and entertainment (by buyingUniversal) while exiting markets for insurance, industrial diamonds, business outsourcing based inIndia, and a motor division. In addition, the percentage of revenue sources outside the UnitedStates grew from 40 percent to nearly 50 percent.

There are risks as the scope expansion ventures further from the core business—the firm’soffering may not be distinctive, problems in operations may arise, or the firm’s brands may be

Marketpenetration

Marketexpansion

Productexpansion

Diversification

Present products New products

Presentmarkets

Newmarkets

Figure 1.2 Product-Market Growth Directions

6 Chapter 1 Strategic Market Management—An Introduction and Overview

inadequate to support the expansion. Despite similarities in manufacturing and distribution,Bausch & Lomb’s attempt to move from eye care to mouthwash was a product and brand failure.An effort by a manufacturing equipment company to go into robots failed when it could not createor acquire the needed technology. Attention and resources may also be diverted from the corebusiness, causing it to weaken.

The investment pattern will determine the future direction of the firm. Although there areobvious variations and refinements, it is useful to conceptualize the investment alternatives foreach product-market as follows:

Invest to grow (or enter the product market)

Invest only to maintain the existing position

Milk the business by minimizing investment

Recover as many of the assets as possible by liquidating or divesting the business

The Customer Value Proposition and Customer Value Leadership

The customer value proposition is a clear statement about what sources of distinctive value thebusiness wants to offer the customer. To be successful, the target market selected must find thevalue relevant and meaningful. It must also be supported by all aspects of the company’s strategy.For example, if Jessica Alba’s Honest Company promises consumers “effective, unquestionablysafe, and eco-friendly” body and home products, all ingredients must reflect this status—a pointquestioned in recent lawsuits brought against the company. To be credible, all other aspects of thecompany’s communication and interactions must also support this position, including where theproduct is sold, the transparency of the salespeople, and all online interactions. To support asuccessful strategy, the value proposition should be sustainable over time and be differentiatedfrom competitors.

Home Depot and Lowe’s are home improvement retailers with very different valuepropositions. Home Depot has very austere, functional stores that are designed to appeal tocontractors and homeowners on the basis of good price and basic functionality. Lowe’s strategysince 1994 has been to have a softer side, a look that would be comfortable to women. Thus, theirstores are well lit, the signs colorful and clear, the floors spotless, and the people friendly andhelpful. Years later, the Lowe’s strategy has traction, and Home Depot, with service problemscaused by a cost reduction program, is attempting to adjust its own value proposition.

A value proposition is just table stakes for competing, however. The most effectivestrategies pave the way the firm to be a customer value leader, which means that it performsvery well on one type of value and at least meets basic levels on other types. For example, whileIKEA competes on price, its no-frills products measure up to basic standards of functionalityand its store environments, while simple, are clean, well-lit, and organized. Customer valueleaders make decisive choices about which customers they will target within a market and withwhat types of value.

Assets and Competencies

The strategic assets and competencies that underlie the strategy are the critical resources thatproduce sustainable competitive advantage (SCA) for a firm. According to resource-based theoriesof the firm, these resources produce competitive advantage because they can be converted intosources of value for customers; they are rare, not easily imitated; and good substitutes for the

What is a Business Strategy? 7

resource do not exist, which keeps competitors from offering the same value; and the firm canleverage them to its advantage.1

A strategic asset is a resource that the firm owns or controls that can be leveraged inthe design or implementation of a firm’s strategy. Assets include general resources such asfinancial assets, human assets (leaders and employees), physical assets (plant and equipment),legal assets (patents and trademarks) as well as marketing assets in the form of strong brandreputations, customer relationships, and powerful knowledge of markets.

Competencies leverage these assets to perform activities important to the firm’s strategy. Theydo so through organizational processes, which act as recipes for actions. Without the right assets,these processes are not likely to have much impact. At the same time, the assets, whether they aresmart employees, patents, or strong brands, will not help the company unless they are leveragedrepeatedly through strong processes. These processes help companies outpace competitors andalso make it difficult for them to easily imitate the firm’s strengths because it is hard to observeall of the complex activities involved in a competency. Therefore, companies must ensure thatthey have both the strong assets and processes for leveraging those resources for marketingexcellence. If exercised well, these competencies can, over time, add to the strength of acompany’s asset base by improving customer relationships and brands.

The ability of assets and competencies to support a strategy will in part depend on theirstrength relative to competitors. To what extent are the assets and competencies unique or rare inthe marketplace? If unique now, how easily can they be imitated by competitors? Many assetsrequire a long-time to develop and so competitors trying to build the strength of Amazon’s strongcustomer relationships may be hopelessly behind. Competencies are often difficult to imitatebecause competitors cannot easily understand the recipe that companies use to create suchoutstanding processes. This is why Southwest Airlines is known to offer tours of their offices andactivities—they know that the special ingredient that makes their culture such a valuable asset canneither be understood nor imitated very easily.

Assets and competencies leveraged across multiple product markets offer additional syner-gies that can be a source of SCA. Synergies can come in many forms. Two businesses can reducecosts by sharing a distribution system, sales force, or logistics system, as when Gillette acquiredDuracell (and later was itself acquired by P&G). Synergy can also be based on sharing the sameasset, as with the HP brand shared by the dozens of business units or a competence such asToyota’s ability to manage manufacturing plants across brands and countries. Another source ofsynergy is the sharing of functional area strategies across business units. For example, the FordMotor Company may be able to sponsor the World Cup, which would benefit all brand acrossdivisions. Another synergy source is the sharing of R&D. P&G aggregates brands such as Head &Shoulders, Aussie, Infusion, and Pantene into a hair care category not only to provide shelf spaceguidance to retailers and to create promotions more easily, but also to manage its innovationprocesses. Finally, a combination of products can provide a value proposition. Some softwarefirms have aggregated products in order to provide a systems solution to customers; MicrosoftOffice is one example.

Functional Strategies and Programs

A company’s value proposition, assets, and competencies require the support of functionalactivities to succeed. Assets and competencies should mandate some strategy imperatives inthe form of a supportive set of functional strategies or programs.

8 Chapter 1 Strategic Market Management—An Introduction and Overview

Functional strategies or programs that could drive the business strategy might include:

Information technology strategy

Distribution strategy

Global strategy

Quality program

Sourcing strategy

Logistical strategy

Manufacturing strategy

Analytics program

The need for certain functional strategies and programs can be determined by asking a fewquestions. What must happen for the firm to be able to deliver on the value proposition? Are theassets and competencies needed in place? Do they need to be created, strengthened, orsupported? How?

Criteria to Select Business Strategies

The principal criteria useful for selecting a strategy can be grouped around five general questions:

Is the ROI attractive? Creating a value proposition that is appealing to customers maynot be worthwhile if the investment or operating cost is excessive. Starbucks opened inJapan in 1996 in the Ginza district and grew to over 400 units, many of which were in thehighest rent areas. The result was a trendy brand but one that was vulnerable tocompetitors, who matched or exceeded Starbucks’ product offerings and were nothandicapped with such high overhead because they developed less costly sites.

Is there a sustainable competitive advantage? Unless the business unit has or candevelop a real competitive advantage that is sustainable over time in the face ofcompetitor reaction, an attractive long-term return will be unlikely. To achieve a

PITFALLS IN STRATEGY DEVELOPMENT

Richard Rumelt, noted strategy thinker, has identified some common pitfalls in developing a businessstrategy.2 First, a central problem or threat is ignored. The problem could be a quality issue or areceding marketplace. A competitor’s innovation or a customer trend could represent a threat. Astrategy developed as if either did not exist will be doomed. Second, the strategy is a long to-do list withno sense of what is important. There needs to be a sense of priorities. Third, a set of goals is assumed tobe a strategy. It is not. There can and should be goals, especially long-term goals that go beyondfinancial measures, but a strategy needs to address the four key dimensions in order to find a path tosuccess. Finally, a strategy is a fluffy description of some desired state of affairs. We will become theindustry leaders while increasing margins and addressing sustainability challenges. Rather, thestrategies and accompanying action plans need to be specific.

What is a Business Strategy? 9

sustainable competitive advantage, a strategy should exploit organizational assets andcompetencies and neutralize weaknesses.

Will the strategy have success in the future? A strategy needs to be able to survive thedynamics of the market, with its emerging threats and opportunities. Either the strategycomponents should be expected to have a long life or the strategy should be capable ofadapting to changing conditions. In that context, future scenarios (described in Chapter 5)might be used to test the robustness of the strategy with respect to future uncertainties.

Is the strategy feasible? The strategy should be within both the financial and humanresources of the organization. It also should be internally consistent with otherorganizational characteristics, such as the firm’s structure, systems, people, and culture.These organizational considerations are covered in Chapter 16.Does the strategy fit with the other strategies of the firm? Are the sources anduses of cash flow in balance? Is organizational flexibility reduced by an investment infinancial or human resources? Is potential synergy captured by the strategy?

STRATEGIC MARKET MANAGEMENTStrategic market management is a process designed to help management create, change, or retaina business strategy and to create new strategies for the future. A marketing strategy is a subset ofbusiness strategy that involves the same four strategy components although the scope is restrictedto marketing. It includes decisions and budgets related to product market activities, customer valueproposition, marketing assets and competencies, and different functional areas within marketing.

The Book Framework

Figure 1.3 provides a structure for strategic market management and for this book. A briefoverview of its principal elements and an introduction to the key concepts are presented in thischapter.

EXPANDING THE BUSINESS SCOPE

In his classic article “Marketing Myopia,” Theodore Levitt explained how firms that define theirbusiness myopically in product terms can stagnate even though the basic customer need they serve isenjoying healthy growth.3 Because of a myopic product focus, others gain the benefits of growth. Incontrast, firms that regard themselves as being in the transportation rather than the railroad business,the energy instead of the petroleum business, or the communication rather than the telephone businessare more likely to exploit opportunities.

The concept is simple. Define the business in terms of the basic customer need rather than theproduct. Visa has defined itself as being in the business of enabling customers to exchange value (anyasset, including cash on deposit, the cash value of life insurance, or the equity in a home) for virtuallyanything anywhere in the world. As the business is redefined, both the set of competitors and therange of opportunities are often radically expanded. After redefining its business, Visa estimated thatit had reached only 5 percent of its potential given the new definition.

Defining a business in terms of generic need can be extremely useful for fostering creativity,generating strategic options, and avoiding an internally oriented product focus.

10 Chapter 1 Strategic Market Management—An Introduction and Overview

External Analysis

External analysis, summarized in Figure 1.3, involves an examination of the relevantelements external to an organization—customers, competitors, markets and submarkets, andthe environment or context outside of the market. Customer analysis, the first step of external

External Analysis

• Customer analysis • Competitor analysis • Market/submarket analysis • Environmental analysis

Internal Company Analysis

• Size, growth, and financial performance • Assets and competencies (including brand, customer

relationships, innovation) • Image and positioning • Current and past strategies • Organizational culture • Cost structure

STRATEGIC ANALYSIS

External Assessment

Opportunities, threats, trends,

insights, and external

uncertainties

Internal Company Assessment

Firm strengths, weaknesses, liabilities, problems, constraints, and uncertainties

STRATEGIC ANALYSIS OUTPUT

• Identify strategy alternatives – Product-market investment strategies

– Customer value proposition

– Assets, competencies, and synergies

– Functional strategies and programs • Select strategy

CREATING AND ADAPTINGSTRATEGY

IMPLEMENTING STRATEGY ANDPRODUCING FIRM VALUE

• Implement strategy• Measure performance

Figure 1.3 Overview of Strategic Management

Strategic Market Management 11

analysis and a focus of Chapter 2, involves identifying the organization’s customer segments andeach segment’s motivations and unmet needs. Competitor analysis, covered in Chapter 3,attempts to identify competitors (both current and potential) and describe their performance,image, strategy, and strengths and weaknesses. Market analysis, the subject of Chapter 4, aimsto determine the attractiveness of the market and submarkets and to understand the dynamicsof the market so that threats and opportunities can be detected and strategies adapted.Environmental analysis, the subject of Chapter 5, is the process of identifying and under-standing emerging opportunities and threats created by forces in the context of the business.

The external analysis should be purposeful, focusing on key outputs: the identification ofpresent and potential opportunities, threats, trends, strategic uncertainties, and strategic choices.There is a danger in being excessively descriptive. Because there is literally no limit to the scope ofa descriptive study, the result can be a considerable expenditure of resources with little impact onstrategy.

The frame of reference for an external analysis is typically a defined strategic business unit(SBU), but it is useful to conduct the analysis at several levels. External analyses of submarketssometimes provide critical insights; for example, an external analysis of the mature beer industrymight contain analyses of the import and nonalcoholic beer submarkets, which are growing andhave important differences. It is also possible to conduct external analyses for groups of SBUs,such as divisions, that have characteristics in common. For instance, a food products companymight consider analyses of the healthy-living segment and food trends that could span operatingunits within the firm.

Internal Analysis

Internal analysis, introduced in Chapter 5 (see also similar competitor criteria in Chapter 2),Appendix A, and as summarized in Figure 1.3, aims to provide a detailed understanding ofstrategically important aspects of the business. Performance analysis looks not only at financialperformance, but also examines the company’s assets and competencies (including brand,customer relationships, and innovation), the company’s current image and position, culture aswell as its past and current strategies. The identification and assessment of organizational strengthsand weaknesses will guide strategic priorities, including both the development of new strategiesand the adaptation of existing ones.

Creating and Adapting Strategy

After describing strategic analysis, the book turns to the creation and adaptation of strategy.How do you decide on the business scope? What are the alternative value propositions, and howdo they guide strategy development? What assets and competencies will provide points ofadvantage, and which will aim for points of parity? What functional strategies and programs willlead to strategic success? What growth options will receive investment? Is the core business tobe the source of growth, or is there a need to move beyond the core? What is to be the globalstrategy? How should the business units be prioritized? Should there be disinvestment in thebusiness portfolio? How can the organization be adapted so that it supports rather thanconstrains strategy?

Chapter 6 provides an overview of the scope of strategic choices by describing the firm’schoice of value propositions as a means to customer value leadership and sustainable competitiveadvantage. Chapter 7 examines customer relationships with a focus on facilitating the decision

12 Chapter 1 Strategic Market Management—An Introduction and Overview

journey, creating value through strong experiences, and defending relationships over the long-term. Chapter 8 shifts to a focus creating valuable customers by examining purchase funnelmanagement and customer lifetime value approaches. Chapter 9 shows how brand equity, a keyasset can be created and used. Chapter 10 discusses how to develop a strong brand relationshipwith customers. The next four chapters discuss growth options: Chapter 11 covers energizingthe business, Chapter 12 leveraging the business, Chapter 13 creating new businesses, andChapter 14 global strategies. Chapter 15 discusses the disinvestment option, an important andoften overlooked dimension of the investment decision.

Implementing Strategy and Producing Firm Value

Chapter 16 examines the organizational reality of implementing strategy. It considers the ideaof customer-centricity—an approach that puts the customer at the forefront of all companydecisions—as a guiding approach to ensuring that the company is able to compete effectively inthe marketplace over time. Customer centricity requires a focus on five organizational elements—culture, competencies, structure, metrics and incentives, and human capital. Finally, Chapter 17considers more deeply how marketing creates value for firm, including the effect of customerrelationships and brands on both revenues and shareholder value. The arrow feeding back to thefirm (top box) denotes the financial performance effects and improvement of assets andcompetencies that strengthen the company.

The Planning Cycle

Too often an annual planning exercise is perceived as strategy development when the output is notstrategy but an operating and resource budget that specifies financial targets, hiring plans, and

GALLO: A CASE STUDY

Gallo, despite producing roughly one of every four bottles of wine sold in the United States (primarilyin the form of cheap wines sold under the Gallo name), thought it had to adapt to a strong markettrend to premium varietals.

One vehicle was the launching of the premium Gallo of Sonoma brand, which enjoyed severalsignificant potential SCAs. The grapes available to Gallo from Sonoma County in northern California(whose climate, some say, is superior to the famous Napa region), coupled with the company’swillingness and ability to make great wine, have resulted in a product that has won some majorinternational wine competitions. In addition, the brand gained synergies from Gallo’s substantialdistribution clout and operational scale efficiencies.

The decision to put the Gallo name on the new line undoubtedly created a huge liability, but it alsohad some compensating advantages. First, it permitted the business to leverage the credibility andpersonality of a third-generation family winemaker, Gina Gallo. Second, it boosted the pride of theorganization and its partners in an aspect of the business (winemaking) that is at the core of its values.Finally, the seeming incongruity of Gallo making a fine wine could appeal to the wine tastemakers ofthe world by giving them a chance to prove that they are above labels.

The success of Gallo of Sonoma emboldened Gallo to radically change the business and brandstrategy. Gallo of Sonoma became the Gallo Family Vineyards Sonoma, one of four Gallo Familybrands. The Gallo value brands were retired, and other brands in the portfolio took on the value role.

Strategic Market Management 13

investment authorizations. Research at McKinsey involving a survey of over 700 executivessuggests ways to make the strategy development process more effective.4 In particular, a strategyprocess should involve the following activities.

Start with the issues. CEOs say that planning should focus on anticipating big challengesand spotting important trends. Strategy choice will be well served by identifying the keyassociated strategic issues. One CEO asks the business leaders in his firm to imagine howa set of specific trends will affect their business. Another creates a list of three to sixpriorities for each business to form a basis for discussion.

Bring together the right people. In particular, it is not enough to have staff peopleinvolved but also the people who will implement the strategy, the decision makers. Also,in order to foster synergies and strategies that span product or country organizational silos,it is worthwhile to have relevant teams of businesses represented.

Adapt planning cycles to the businesses. It is unrealistic to say that all businesses needto have planning exercises each year. Some may need it every other year or even everythird year. Also, trends, events, or issues should trigger a strategy review even if it is not inthe annual cycle.

Implement a strategy performance system. Too many businesses fail to follow up onstrategy development. As a result, it becomes a rather empty exercise. Major strategicinitiatives should have measurable progress goals as well as end objectives. What will bethe barrier to success? What needs to happen for the strategy to be on track?

MARKETING AND ITS ROLE IN STRATEGYMarketing’s strategic role has grown over the years. The question for each organization is whetherthe chief marketing officer (CMO) and his or her team have a seat at the strategy table or arerelegated to being tactical implementers of tasks such as managing the advertising program. Theview that marketing is tactical is changing; it is now more and more frequently being accepted asbeing part of the strategic management of the organization. Given the definition of a businessstrategy and the structure of strategic market management, the roles that marketing can andshould play become clearer.

One marketing role is to be the primary driver of the strategic analysis. The marketing group isin the best position to understand the customers, competitors, market and submarkets, and environ-mental forces and trends. By managing marketing research and market data, it controls much ofthe information needed in the external analysis. Marketing should also take the lead in the internalanalysis with respect to selected assets (such as the brand portfolio and the distribution channel)and competencies (such as new product introduction and customer relationship management).

A second role is to focus attention on customer insight and customer value. By placing apremium on meeting customer needs over other organizational imperatives, marketing helpsensure company relevance over time.

A third role is to drive growth strategy for the firm. Growth options are either based on ordependent on customer and market insights, and marketing therefore should be a key driver.In fact, a study by Booz Allen and Hamilton of some 2,000 executives found that a small butgrowing number of firms (9 percent) describe the CMO as a growth champion involved in allstrategic levers relating to growth.5

14 Chapter 1 Strategic Market Management—An Introduction and Overview

Finally, marketing should play a leading role in building, managing, and defending strongcustomer and brand assets—called customer and brand equity. These assets deliver value back tothe firm and are critical to firm strategy now and in the future.

Thus, marketing is a partner, usually a key partner, in the development and implementation ofa business strategy. The conceptualization of a business and marketing strategy as having fourdimensions helps illuminate the nature of that relationship. The firms that are able to achievesuccess over time are those that realize that marketing should have a strong voice in businessstrategy.

KEY LEARNINGS

Strategy needs to be developed and executed in the context of a dynamic market. Tocope, it is important to develop competencies in strategic analysis, innovation,managing multiple business, and developing SCAs and growth platforms.

A business strategy includes the determination of the product-market investmentstrategy, the customer value proposition, assets and competencies, and the functionalarea strategy. A marketing strategy involves the allocation of the marketing budgetover product markets, the customer value proposition by segment, the marketingassets and competencies, and the strategies of the functional areas of marketing.

Strategic market management, a process designed to help management create,change, or retain a business strategy and to create new strategies for the future. Itinvolves external analysis, internal analysis, creating and adapting strategy, andimplementing strategy and producing firm value.Marketing plays a key role in a firm’s business strategy. It drives company strategicanalysis; it focuses attention on customer insight and value; it drives company growthstrategies; and it builds, manages, and defends company customer and brand assets.The CMO role has grown over the years and is now often charged with being apartner in developing strategies and a vehicle to deal with the dysfunctions of theproduct-market silos.

FOR DISCUSSION1. What is a business strategy? Do you agree with the definition proposed? Illustrate

your answer with examples. Consider one of the following firms. Go to the firm’swebsite and annual report to gain an understanding of its business strategy. Look atelements such as the products and services offered, the history of the firm, and itsvalues. What is the business strategy? What are the firm’s product markets? What areits value propositions? What assets and competencies are important to this strategy?What outstanding functional programs and strategies exist?

a. Dellb. Zapposc. Visad. A firm of your choice

Marketing and Its Role in Strategy 15

2. In question 1, identify any distinctive elements of each firm’s marketing strategy.3. Considering the Gallo wine case, are there any current wine companies for whom

this strategy would not have worked? Why?

4. Apply Theodore Levitt’s marketing-myopia concept to print media, magazines, andnewspapers. What is the implication?

5. Which criteria to pick a strategy do you consider most important? Why? Nameone company that failed because it did not follow your priority. What should it havedone instead?

16 Chapter 1 Strategic Market Management—An Introduction and Overview

P A R TO N E

S T R A T E G I C A N A L Y S I S

C H A P T E R T W O

External and Customer Analysis

The purpose of an enterprise is to create and keep a customer.—Theodore Levitt

Consumers are statistics. Customers are people.—Stanley Marcus

Before you build a better mousetrap, it helps to know if there are any mice out there.—Mortimer B. Zuckerman

Developing or adapting strategy in a dynamic market logically starts with external analysis, ananalysis of the factors external to a business that can affect strategy. The four chapters of Part Onepresent concepts and methods useful in conducting an external analysis. The Appendix contains acomplete template for internal firm analysis.

EXTERNAL ANALYSISA successful external analysis needs to be directed and purposeful. There is always the dangerthat it will become an endless process resulting in an excessively descriptive report. In anybusiness there is no end to the material that appears potentially relevant. Without discipline anddirection, volumes of useless descriptive material can easily be generated.

Affecting Strategic Decisions

The external analysis process should not be an end in itself. Rather, it should be motivatedthroughout by a desire to affect strategy. As Figure 2.1 shows, an external analysis can impactstrategy directly by suggesting strategic decision alternatives or influencing choices among them.More specifically, it should address the following questions:

Should existing business areas be liquidated, milked, maintained, or targeted forinvestment?

Should new business areas be entered?

19

What are the value propositions? What should they be?

What assets and competencies should be created, enhanced, or maintained?

What strategies and programs should be implemented in functional areas? What shouldbe the positioning strategy, segmentation strategy, distribution strategy, brand-buildingstrategy, manufacturing strategy, and so on?

Additional Analysis Objectives

Figure 2.1 also suggests that an external analysis can contribute to strategy indirectly byidentifying the following:

Significant trends and future events

Threats and opportunities

Strategic uncertainties that could affect strategy outcomes

A significant trend or event, such as concern about saturated fat or the emergence of a newcompetitor, can dramatically affect the evaluation of strategy options. A new technology, whichcan represent both a threat to an established firm and an opportunity to a prospective competitor,can signal new business arenas.

Strategic Uncertainties

Strategic uncertainty is a particularly useful concept in conducting an external analysis. If youcould know the answer to one question prior to making a strategic commitment, what would thatquestion be? If a property casualty insurance company were to consider whether to addearthquake insurance to its line, important strategy uncertainties might include the following:

What will be the potential losses of a major earthquake?

What will be the impact on the customer base of failing to offer coverage?

Could coverage be provided in partnerships?

Strategic uncertainties focus on specific unknown elements that will affect the outcome ofstrategic decisions. “Should earthquake coverage be added?” is a strategic decision, whereas

Identification• Trends/future events• Threats/opportunities• Strategic uncertainties

Strategic Decisions• Where to compete• How to compete

Analysis• Information-need areas• Scenario analysis

ExternalAnalysis

Figure 2.1 The Role of External Analysis

20 Part One Strategic Analysis

“What are the potential losses from a major earthquake?” is a strategic uncertainty. Most strategicdecisions will be driven by a set of these uncertainties.

Figure 2.2 offers examples of strategic uncertainties and the strategic decisions to which theymight relate. A single strategic uncertainty can often lead to additional sources of strategicuncertainty. One common strategic uncertainty shown there is what will be the future demandfor a product (such as ultrasound diagnostic equipment). Asking, “On what does that depend?” willusually generate additional strategic uncertainties. One uncertainty might address technologicalimprovements, whereas another might consider the technological development and cost/benefitlevelsachievedbycompetitivetechnologies.Stillanothermightlookintothefinancialcapacityofthehealthcare industry to continue capital improvements. Each of these strategic uncertainties can, inturn, generate still another level of strategic uncertainties.

Analysis

There are three ways of handling uncertainty. First, a strategic decision can be precipitated becausethe logic for a decision is compelling and/or because a delay would be costly or risky. Second, it maybe worthwhile to attempt to reduce the uncertainty by information acquisition and analysis of aninformation-need area. The effort could range from a high-priority task force to a low-key monitoringeffort. The level of resources expended will depend on the potential impact on strategy and itsimmediacy. Third, the uncertainty could be modeled by a scenario analysis.

A scenario is an alternative view of the future environment that is usually prompted by analternative possible answer to a strategic uncertainty or by a prospective future event or trend.Is the current popularity of vitamin-enhanced waters a fad, or does it indicate a solid growtharea? Such a question could be the basis for a positive and a negative scenario. Each couldbe associated with very different environmental profiles and strategy recommendations. InChapter 5, information-need areas and scenario analysis are covered in more detail.

Strategic Uncertainties Strategic Decisions

Will a major firm enter?Will a tofu-based dessert product beaccepted?Will a technology be replaced?Will the dollar strengthen against anoffshore currency?Will computer-based operations befeasible with current technology?How sensitive is the market to price?

Investment in a product marketInvestment in a tofu-based product

Investment in a technologyCommitment to offshoremanufacturingInvestment in a new system

A strategy of maintaining price parity

Strategic Uncertainties Second-Level Strategic Uncertainties

What will be the future demand ofan ultrasound test?

Performance improvements?Competitive technological developments?Financial capacity of healthcare industry?

Figure 2.2 Strategic Uncertainties

Chapter 2 External and Customer Analysis 21

A host of concepts and methods are introduced in this and the following three chapters. It would,of course, be unusual to use all of them in any given context and the strategist should resist anycompulsion to do so. Rather, those that are most relevant to the situation at hand should be selected.Furthermore, some areas of analysis will be more fruitful than others and will merit more effort.

The Level of Analysis—Defining the Market

An external analysis of what? To conduct an external analysis, the market or submarketboundaries need to be specified. The scope of external analysis can involve an industry broadlydefined (sporting goods), narrowly defined (high performance skis), or using a scope definitionthat falls in between such as:

Ski clothing and equipment

Skis and snowboards

Downhill skis

The level of analysis will depend on the organizational unit and strategic decisions involved.A sporting goods company, such as Wilson, will be making resource decisions across sports andthus needs to be concerned with the whole industry. A ski equipment manufacturer may only beconcerned with elements of sporting goods relating to skis, boots, and clothing. The maker ofhigh-performance skis might be interested in only a subsegment of the ski industry. Oneapproach to defining the market is to specify the business scope. The scope can be identified interms of the product market and in terms of the competitors. Relevant, of course, are the futureproduct market and competitors as well as the present ones.

There is always a trade-off to be made. A narrow scope specification will inhibit a businessfrom identifying trends and opportunities that could lead to some attractive options anddirections. Thus, a maker of downhill skis may want to include snowboards and cross-countryskis because they represent business options or because they will impact the ski equipmentbusiness. On the other hand, depth of analysis might be sacrificed when the scope is excessivelybroad. A more focused analysis may generate more insight.

The analysis usually needs to be conducted at several levels. The downhill ski and snowboardindustry might be the major focus of the analysis. However, an analysis of sporting goods mightsuggest and shed light on some substitute product pressures and market trends. Also, an analysismay be needed at the segment level (e.g., high-performance skis) because entry, investment, andstrategy decisions are often made at that level. Furthermore, the key success factors could differfor different product markets within a market or industry. One approach is a layered analysis,with the primary level receiving the most depth of analysis. Another approach could be multipleanalyses, perhaps consecutively conducted. The first analysis might stimulate an opportunity thatwould justify a second analysis on a submarket.

When Should an External Analysis Be Conducted?

There is often a tendency to relegate the external analysis to an annual exercise. Each year, ofcourse, it may not require the same depth as the initial effort. It may be more productive to focuson a part of the analysis in the years immediately following a major effort.

The annual planning cycle can provide a healthy stimulus to review and change strategies.However, a substantial risk exists in maintaining external analysis as an annual event. The need

22 Part One Strategic Analysis

for strategic review and change is often continuous. Information sensing and analysis thereforealso need to be continuous. The framework and concepts of external analysis can still play a keyrole in providing structure even when the analysis is continuous and addresses only a portion ofthe whole.

External analysis deliberately commences with customer and competitor analyses because theycan help define the relevant industry or industries. An industry can be defined in terms of the needsof a specific group of customers—those buying fresh cookies on the West Coast, for instance. Suchan industry definition then forms the basis for the identification of competitors and the balance ofexternal analysis. An industry such as the cookie industry can also be defined in terms of all itscompetitors. Because customers have such a direct relationship to a firm’s operation, they areusually a rich source of relevant operational opportunities, threats, and uncertainties.

THE SCOPE OF CUSTOMER ANALYSISIn most strategic market-planning contexts, the first logical step is to analyze the customers.Customer analysis can be usefully partitioned into an understanding of how the market segments,an analysis of customer motivations, and an exploration of unmet needs. Figure 2.3 presents abasic set of questions for each area of inquiry.

SEGMENTATIONSegmentation is often the key to developing a sustainable competitive advantage. In a strategiccontext, segmentation means the identification of customer groups that respond to competitiveofferings differently from other groups. A segmentation strategy couples the identified segmentswith a program to deliver an offering to those segments. Thus, the development of a successfulsegmentation strategy requires the conceptualization, development, and evaluation of a targetedcompetitive offering.

SEGMENTATIONWho are the biggest customers? The most profitable? The most attractive potential customers? Do thecustomers fall into any logical groups based on needs, motivations, or characteristics?How could the market be segmented into groups that would require a unique business strategy?

CUSTOMER MOTIVATIONSWhat elements of the product/service do customers value most?What are the customers’ objectives? What are they really buying?How do segments differ in their motivation priorities?What changes are occurring in customer motivation? In customer priorities?

UNMET NEEDSWhy are some customers dissatisfied? Why are some changing brands or suppliers?What are the severity and incidence of consumer problems?What are unmet needs that customers can identify? Are there some of which consumers are unaware?Do these unmet needs represent leverage points for competitors or a new business model?

Figure 2.3 Customer Analysis

Chapter 2 External and Customer Analysis 23

A segmentation strategy should be judged on three dimensions. First, can a competitiveoffering be developed and implemented that will appeal to the target segment? Second, can theappeal of the offering and the subsequent relationship with the target segment be maintainedover time despite competitive responses? Third, is the resulting business from the target segmentworthwhile, given the investment required to develop and market an offering tailored to it? Asuccessful segmentation strategy creates a dominant position within a market that competitorswill be unwilling or unable to attack successfully.

How Should Segments Be Defined?

The task of identifying segments is difficult because in any given context there are literallyhundreds of ways to divide up the market. Typically, the analysis will consider five, ten, or moresegmentation variables. To avoid missing a useful way of defining segments, it is important toconsider a wide range of variables. These variables need to be evaluated on the basis of theirability to identify segments for which different strategies are (or should be) pursued.

The most useful segment-defining variables for an offering are rarely obvious. Among thevariables frequently used are those shown in Figure 2.4.

The first set of variables describes segments in terms of general characteristics unrelated tothe product involved. Thus, a bakery might be concerned with geographically defined segmentsrelated to communities or even neighborhoods. A consulting company may specialize in thehospitality industry. A fast food firm in the United States may target Hispanics because thissegment is projected to triple in size by 2050.

CUSTOMER CHARACTERISTICSGeographicType oforganizationSize of firmLifestyle

SexAgeOccupation

Small Southern communities as markets for discount storesComputer needs of restaurants versus manufacturing firms versus banks versusretailersLarge hospital versus medium versus smallJaguar buyers tend to be more adventurous, less conservative than buyers ofMercedes-Benz and BMWMothers of young childrenCereals for children versus adultsThe paper copier needs of lawyers versus bankers versus dentists

PRODUCT-RELATED APPROACHES

User typeUsageBenefits sought

Price sensitivityCompetitorApplicationBrand loyalty

Appliance buyer—home builder, remodeler, homeownerConcert—season ticket holders, occasional patrons, nonusersDessert eaters—those who are calorie-conscious versus those who are moreconcerned with convenienceEconomy-sensitive Honda Civic buyer versus the luxury Mercedes-Benz buyerUsers of competing productsProfessional users of chain saws versus homeownersThose committed to Heinz ketchup versus price buyers

Figure 2.4 Examples of Approaches to Defining Segments

24 Part One Strategic Analysis

Demographics are particularly powerful for defining segments, in part because a person’s lifestage affects his or her activities, interests, and brand loyalties. Another reason is that demo-graphic trends are predictable. Such trends are discussed in Chapter 5. Gold Violin, recognizingthis trend, has established itself as a source of products designed for the active elderly.Specialized items such as a talking watch, a bed-vibrating alarm clock, a doorknob turner,and a lighted hands-free magnifier (all with tasteful, attractive designs) are just some of the GoldViolin products that appeal to this long-ignored demographic segment.

Another demographic play is represented by the Toyota Scion xB, which is a small car with afunky design (tall, angular, and boxy), and the Scion iB, the world’s smallest four seat car, bothaimed at Generation Y, the so-called echo boomers. The average age of a Toyota buyer is 48, thecompany’s inexpensive entries are considered boring, and Scion is an effort to become relevantand interesting to a key target segment. To create a buzz around Scion xB when it wasintroduced, Toyota targeted the 15 percent of the echo-boomer target market seen as “leadersand influencers”—those who encourage their peers to gravitate to a new style, whether it be inmusic, sports, or cars.1

The second category of segment variables includes those that are related to the product.One of the most frequently employed is usage. A bakery may follow a very different strategy inserving restaurants that rely heavily on bakery products than in serving those that use fewersuch products. A manufacturer of lawn equipment may design a special line for a largecustomer such as Walmart but sells through distributors using another brand name forother outlets. Four other useful segment variables are benefits, price sensitivity, loyalty,and applications.

Benefits

If there is a most useful segmentation variable, it would be benefits sought from a product,because the selection of benefits can determine a total business strategy. In gourmet frozendinners and entrees, for example, the market can be divided into buyers who are calorieconscious, those who focus on nutrition and health, those interested in taste, and price-consciousbuyers. Each segment implies a very different strategy.

The athletic shoe industry segments into serious athletes (small in number but influential),weekend warriors, and casual wearers using athletic shoes for street wear. Recognizing that thecasual wearer segment is 80 percent of the market and does not really need performance, severalshoe firms have employed a style-focused strategy as an alternative to the performance strategyadopted by such firms as Nike.

Price Sensitivity

The benefit dimension representing the trade-off between low price and high quality is bothuseful and pervasive; hence, it is appropriate to consider it separately. In many product classes,there is a well-defined breakdown between those customers concerned first about price andothers who are willing to pay extra for higher quality and features. General merchandise stores,for example, form a well-defined hierarchy from discounters to prestige department stores.Automobiles span the spectrum from the Honda Civic to the Buick LaCrosse to the Lexus 460.Airline service is partitioned into first class, business class, and economy class. In each case, thesegment dictates the strategy.

Chapter 2 External and Customer Analysis 25

Loyalty

Brand loyalty, an important consideration in allocating resources, can be structured using aloyalty matrix as shown in Figure 2.5. Each cell represents a very different strategic priority andcan justify a very different program. Generally, it is too easy to take the loyal customer forgranted. However, a perspective of total profits over the life of a customer makes the value of anincrease in loyalty more vivid. Thus, the highest priority is to retain existing loyal customers and,if possible, increase their commitment intensity and perhaps encourage them to talk to others.

The key is often to reward the loyal customer by living up to expectations consistently,providing an ongoing relationship, and offering extras that surprise and delight.

THE MALE SHOPPER2

The male shopper has been long ignored. A segmentation scheme provides insight into how malesdiffer and suggests strategies for appealing to very different segments.

The Metrosexual. An affluent urban sophisticate, age 20–40, who loves to buy and looks for trendy,prestigious, and high-quality products. Into men’s grooming, expensive haircuts. Think Polo, RalphLauren, Beiersdorf, and Banana Republic.

The Retrosexual. Traditional male behavior, into football and NASCAR, rejects feminism, nostalgicfor the way things were, prefers below-casual clothing, not into moisturizers for men. Think Levi’s,Nike, Old Spice, Burger King, and Target.

The Modern Man. Between “metro” and “retro,” this shopper shares their interests but does not gooverboard. A sophisticated consumer in his twenties or thirties, he is comfortable with women but doesnot shop with them. Think Gap, Macy’s, and fast casual restaurants.

The Dad. Good income. Involved in the family shopping. Efficient shopper. More functional clothing.Think Nordstrom’s, McDonald’s, and Amazon.

The Maturiteen. More savvy, responsible, and pragmatic than earlier generations of teens. Atechnology master adept at online research and buying. Sony, Adidas, Old Navy, Circuit City, andInternet sites of all types do well.

Customer

Noncustomer

Medium

Low toMedium

Low Loyalty

High

High

Highest

Zero

Moderate LoyalLoyalty

Figure 2.5 The Brand Loyalty Matrix: Priorities

26 Part One Strategic Analysis

The loyalty matrix suggests that the moderate loyals, including those of competitors, shouldalso have high priority because they represent one route to increase the size of the loyal segment.Using the matrix involves estimating the size of each of the six cells, identifying the customers ineach group, and designing programs that will influence their brand choice and loyalty level. Thebrand loyal noncustomer is a low priority because the cost to attract is usually prohibitive unless acompetitor misstep provides an opportunity. The nonloyal group will have a reduced long-termvalue because they will be easily enticed by a price deal.

Applications

Some products and services, particularly industrial products, can best be segmented by use orapplication. A laptop computer may be needed by some for use while traveling, whereas othersmay use it at the office. One segment may use a computer primarily for Internet access, whileothers may use it for editing documents or for data analysis. Some might use a four-wheel drivefor light industrial hauling, and others may buy primarily for recreation.

Christiansen et al. argue that an application focus is more likely to lead to successful newproducts and marketing programs.3 They illustrate by telling the story of McDonald’s that foundmany consumers bought its milkshapes in the morning in order to help them kill time whiledriving to work and provide energy to tide them over until lunch. Being efficient to buy andcapable of being consumed with only one hand were therefore critical. Such an insight leads toideas like making the shake thicker (so it takes longer to consume), making the purchase evenmore efficient with buyer cards, and adding fruit to make it more interesting in the context of aboring commute. The basic concept is that ideas for products and marketing programs aremore likely to come from a deep understanding of how the product is used than by under-standing the customer. The success of Arm & Hammer in extending its business can be creditedto a focus on applications involving deodorizing (carpets, kitty litter, clothes, underarms, andrefrigerators).

Multiple Segments versus a Focus Strategy

Two distinct segmentation strategies are possible. The first focuses on a single segment,which can be much smaller than the market as a whole. Walmart, now the largest U.S. retailer,started by concentrating on cities with populations under 25,000 in eleven south centralstates—a segment totally neglected by its competition, the large discount chains. This ruralgeographic focus strategy was directly responsible for several significant SCAs, including: anefficient and responsive warehouse supply system; a low-cost, motivated workforce; relativelyinexpensive retail space; and a lean and mean, hands-on management style. Union Bank,California’s fifth largest bank, makes no effort to serve individuals and thus provides a serviceoperation tailored to business accounts that is more committed and comprehensive than thoseof its competitors.

An alternative to a focusing strategy is to involve multiple segments. General Motorsprovides the classic example. In the 1920s, the firm positioned the Chevrolet for price-conscious buyers, the Cadillac for the high end, and the Oldsmobile, Pontiac, and Buickfor well-defined segments in between. A granulated potato company has developeddifferent strategies for reaching fast-food chains, hospitals and nursing homes, and schoolsand colleges.

Chapter 2 External and Customer Analysis 27

In many industries, aggressive firms are moving toward multiple-segment strategies.Campbell Soup, for example, makes its nacho cheese soup spicier for customers in Texasand California and offers a Creole soup for southern markets and a red-bean soup for Hispanicmarkets. In New York, Campbell uses promotions linking Swanson frozen dinners with theNew York Giants football team, and in the Sierra Nevada Mountains, skiers are treated tohot soup samples. Developing multiple strategies is costly and often must be justified by anenhanced aggregate impact.

There can be important synergies between segment offerings. For example, in the alpineski industry, the image developed by high-performance skis is important to sales at therecreational-ski end of the business. Thus, a manufacturer that is weak at the high end willhave difficulty at the low end. Conversely, a successful high-end firm will want to exploit thatsuccess by having entries in the other segments. A key success factor in the general aviationindustry is a broad product line, ranging from fixed-gear, single-engine piston aircraft toturboprop planes, because customers tend to trade up and will switch to a different firm ifthe product line has major gaps.

CUSTOMER MOTIVATIONSAfter identifying customer segments, the next step is to consider their motivations: What liesbehind their purchase decisions? And how does that differ by segment? It is helpful to list thesegments and the motivation priorities of each, as shown in Figure 2.6 for air travelers.

Internet retailers have learned that there are distinct shopper segments, and each has a verydifferent set of driving motivations.4

Newbie shoppers—need a simple interface, as well as a lot of hand-holding andreassurance.

Reluctant shoppers—need information, reassurance, and access to live customersupport.

Frugal shoppers—need to be convinced that the price is good and they don’t have tosearch elsewhere.

Strategic shoppers—need access to the opinions of peers or experts and choices inconfiguring the products they buy.

Enthusiastic shoppers—need community tools to share their experiences, as well asengaging tools to view the merchandise and personalized recommendations.

Convenience shoppers—(the largest group) want efficient navigation, a lot ofinformation from customers and experts, and superior customer service.

Segment Motivation

Business Reliable service, convenient schedules, easy-to-use airports, frequent-flyer programs,and comfortable service

Vacationers Price, feasible schedules

Figure 2.6 Customer Motivation Grid: Air Travelers

28 Part One Strategic Analysis

Some motivations will help to define strategy. A truck, for example, might be designed andpositioned with respect to power. Before making such a strategic commitment, it is crucial toknow where power fits in the motivation set. Other motivations may not define a strategy ordifferentiate a business, but may instead represent a dimension for which parity performancemust be obtained or the battle will be lost. If the prime motivation for buyers of gourmet frozen-food dinners is taste, a viable firm must be able to deliver at least acceptable taste.

Determining Motivations

As Figure 2.7 suggests, consumer motivation analysis starts with the task of identifying motivationsfor a given segment. Although a group of managers can identify motivations, a more valid list isusually obtained by getting customers to discuss the product or service in a systematic way. Why isit being used? What is the objective? What is associated with a good or bad use experience? Fora motivation such as car safety, respondents might be asked why safety is important. Suchprobes might result in the identification of more basic motives, such as the desire to feel calm andsecure rather than anxious.

Customers can be accessed with group or individual interviews. Griffin and Hauser ofthe MIT Quality Function Deployment (QFD) program compared the two approaches in astudy of food-carrying devices.5 They found that individual interviews were morecost-effective and that the group processes did not generate enough extra information towarrant the added expense. They also explored the number of interviews needed to gain acomplete list of motivations and concluded that 20–30 will cover 90 to 95 percent of themotivations.

The number of motivations can be in the hundreds, so a second task is to cluster them intogroups and subgroups. Affinity charts developed by a managerial team are commonly used.Each team member is given a set of motives on cards. One member puts a motive on the table orpins it to a wall, and the others add similar cards to the pile until there is a consensus that thepiles represent reasonable groupings. An alternative is to use customers or groups of customersto sort the motives into piles. The customers are then asked to select one card from each pilethat best represents their motives. Although managers gain buy-in and learning by goingthrough the process themselves, Griffin and Hauser report that in the twenty applications atone firm, the managers considered customer-based approaches better representations thantheir own.

A third task of customer motivation analysis is to determine the relative importance of themotivations. Again, the management team can address this issue. Alternatively, customers canbe asked to assess the importance of the motivations directly or perhaps through trade-offquestions. If an engineer had to sacrifice response time or accuracy in an oscilloscope, whichwould it be? Or how would an airline passenger trade off convenient departure time with

IdentifyMotivations

Group andStructure

Motivations

AssessMotivationImportance

AssignStrategicRoles to

Motivations

Figure 2.7 Customer Motivation Analysis

Chapter 2 External and Customer Analysis 29

price? The trade-off question asks customers to make difficult judgments about attributes.Another approach is to see which judgments are associated with actual purchase decisions.Such an approach revealed that mothers often selected snack food based on what “the childlikes” and what was “juicy” instead of qualities they had said were important (nourishing, easyto eat).

A fourth task is to identify the motivations that will play a role in defining the valueproposition of the business. The selection of motivations central to strategy will depend oncustomer motivations and other factors, such as competitors’ strategies that emerge in thecompetitor analysis. Another factor is how feasible and practical the resulting strategy is for thebusiness. Internal analysis will be involved in making that determination, as will an analysis ofthe strategy’s implementation.

Changing Customer Priorities

It is particularly critical to gain insight into changes in customers’ priorities. In the high-tech area,customer priorities often evolve from needing help in selecting and installing the right equipment

BUYER HOT BUTTONS

Motivations can be categorized as important or unimportant, yet the dynamics of the market may bebetter captured by identifying current buyer hot buttons. Hot buttons are motivations whose salienceand impact on markets are significant and growing. What are buyers talking about? What arestimulating changes in buying decisions and use patterns?

In consumer retail food products, for example, hot buttons include the following:

Freshness and naturalness. Grocery stores have responded with salad bars, packaged precutvegetables, and efforts to upgrade the quality and selection of their fresh produce.Healthy eating. Low fat, particularly saturated and trans fat, is a prime driver, but concern aboutsodium, sugar, and processed foods is also growing and affecting product offerings in most foodcategories.Ethnic eating. A growing interest in ethnic flavors and cooking such as Asian, Mediterranean,and Caribbean cuisines has led to an explosion of new offerings. Brands usually start in ethnicneighborhoods, move into natural-food and gourmet stores, and finally reach the mainstreammarkets.Gourmet eating. The success of Williams-Sonoma and similar retailers reflects the growth ofgourmet cooking and has led to the introduction of a broader array of interesting cooking aids anddevices.Meal solutions. The desire for meal solutions has led to groups of products being bundledtogether as a meal and to a host of carryout prepared foods offered by both grocery stores andrestaurants.Low-carb foods. The influence of low-carb diets has created a demand for reduced-carb foodvariants in both grocery stores and restaurants.Convenience. Shoppers have taken convenience to a new level with frozen dinners and cakemixes and even canned soup considered to demand too much preparation. Open and eat is thekey. Snacks and yogurt deliver.

30 Part One Strategic Analysis

to wanting performance to looking for low cost. In the coffee business, customer tastes and habitshave evolved from buying coffee at grocery stores to drinking coffee at gourmet cafes to buyingand brewing their own whole-bean gourmet coffees. Assuming that customer priorities are notchanging can be risky. It is essential to ask whether a significant and growing segment hasdeveloped priorities that are different from the basic business model.

The Customer as Active Partner

Customers are increasingly becoming active partners in their relationship with the firm and brandrather than passive targets of product development and advertising. The trend is illustrated bypatients taking control of medical issues, the control of media shifting as audiences move toDVRs such as TiVo, and the power-enhancing access to information and fellow customersprovided by the Internet.

To harness this change, managers should create and support customer communities. Onemotivation is to hear customer experiences and opinions about a brand in a context that willengender unbiased, motivated thoughts. Interacting with the customer on the Internet requiresskills in listening, engaging, and leading. Each has challenges. Often there is informationoverload. There is a mention of McDonald’s on the Internet every 5 seconds or so. Softwareto summarize content can play a role if integrated into an information system. Engaging can bedifficult because it depends on where the firm has permission to enter the space, and there canbe risks of a misstatement or inflaming an issue if it is engaged. However, clearly identified firmspokespeople can be effective. Leading usually requires getting in front of the Internet discussionwith products or programs.

UNMET NEEDSAn unmet need is a customer need that is not satisfied by existing product offerings. OfficeMax,for example, found that people, especially women professionals, wanted a cubicle workplace withcolor, patterns, and textures. The result was four product lines that promised to enliven andpersonalize cubicle environments delivered under the tagline “Life Is Beautiful, Work Can BeToo.” An unmet need provided not only a route to a successful offering, but also a way toenhance a brand relationship.

Unmet needs are strategically important because they represent opportunities for firms toincrease their market share, break into a market, or create and own new markets. They can alsorepresent threats to established firms in that they can be a lever that enables competitors todisrupt an established position. Ariat, for example, broke into the market for equestrian footwearby providing high-performance athletic footwear to riders who were not well served by traditionalriding boots. Driven by the belief that riders are athletes, Ariat developed a brand and productline that was responsive to an unmet need.

Sometimes customers may not be aware of their unmet needs because they are so accustomedto the implicit limitations of existing equipment. Who could have conceived of a need for anelectric lightbulb or a tractor before technology made them possible? Unmet needs that are notobvious may be more difficult to identify, but they can also represent a greater opportunity foran aggressive business because there will be little pressure on established firms to be responsive.The key is to stretch the technology or apply new technologies in order to expose unmet needs.

Chapter 2 External and Customer Analysis 31

Using Customers to Identify Unmet Needs

Customers are a prime source of unmet needs. The trick is to access them and to get customersto detect and communicate unmet needs. What product-use experience problems haveemerged? What is frustrating? How does it compare with other product experiences? Arethere problems with the total-use system in which the product is embedded? How can theproduct be improved? This kind of research helped Dow come up with Spiffits, a line ofpremoistened, disposable cleaning towels that addressed the need for a towel alreadymoistened with a cleaning compound.

A structured approach, termed problem research, develops a list of potential problems withthe product or service. The problems are then prioritized by asking a group of 100–200respondents to rate each problem as to whether (1) the problem is important, (2) the problemoccurs frequently, and (3) a solution exists. A problem score is obtained by combining theseratings. A dogfood problem research study found that buyers thought dog food smelled bad, costtoo much, and was not available in different sizes for different dogs. Subsequently, productsresponsive to these criticisms emerged. Another study led an airline to modify its cabins toprovide more leg room.

Eric von Hippel, a researcher at MIT who studies customers as sources of serviceinnovations, suggests that lead users provide a particularly fertile ground for discovering unmetneeds and new product concepts.7 Lead users are users who:

Face needs that will be general in the marketplace, but face them months or years beforethe bulk of competitors. A person who is very much into health foods and nutrition wouldbe a lead user with respect to health foods if we assume that there is a trend towardhealth foods.

Are positioned to benefit significantly by obtaining a solution to those needs. Lead users ofoffice automation would be firms that would benefit significantly from technologicaladvancement.

USER-DEVELOPED PRODUCTS

For an internal application, IBM designed and built the first printed circuit card insertion machine of aparticular type to be used in commercial production.6 After building and testing the design in house,IBM sent engineering drawings of its design to a local machine builder along with an order for eightunits. The machine builder completed this and subsequent orders and applied to IBM for permission tobuild essentially the same machine for sale on the open market. IBM agreed, and as a result, themachine builder became a major force in the component insertion equipment business.

In the early 1970s, store owners and sales personnel in southern California began to notice thatyoungsters were fixing up their bicycles to look like motorcycles, complete with imitation tailpipes andchopper-type handlebars. Sporting crash helmets and Honda motorcycle T-shirts, the youngsters racedfancy 20-inchers on dirt tracks. Obviously onto a good thing, the manufacturers came out with a wholenew line of motorcross models. California users refined this concept into the mountain bike.Manufacturers were guided by the California customers to develop new refinements, including the21-speed gear shift that doesn’t require removing one’s hands from the bars. Mountain bike firms arestill watching their West Coast customers.

32 Part One Strategic Analysis

An effective and efficient way to access customers is to use the Internet to engage them in adialogue. Dell, for example, has a website called Ideastorm where customers can post ideas andobserve and “vote” on the ideas of others. They also see the reaction of Dell, which can includeresponses such as “under review” or “partially implemented.” Among the suggestions was tohave backlit keyboards, to support free software such as Linux, and to design quieter computers.Starbucks with its MyStarbucksidea site is among many firms that are attempting to dosomething similar. A risk with customer-driven idea sites is that there can be a surge aroundan idea that is impractical or unwise, and the company would then be defensive. But it has thepotential of leveraging many perspectives to generate ideas that can result in real energy andinnovation.

A less direct way is to create communities of customers and let them converse with eachother. The conversation will illuminate problems and unmet needs. P&G, for example, has theengagement platform BeingGirl, where preteen and teen girls can discuss coming of age issueswith each other. It is an effective forum to spread awareness and knowledge about P&G femininehygiene products and programs. Intuit’s site, developed to allow tax professionals to answer eachother’s questions, provides insights into the kinds of questions being posed, which in turn informsIntuit’s TurboTax refinement efforts.

Qualitative Research

Qualitative research is a powerful tool in understanding customers and potential customers, theirunmet needs, and their motivation at a very basic level. It can involve focus-group sessions,in-depth interviews, customer case studies, or ethnographic research. The concept is to search forthe real concerns and motivations that do not emerge from structured lists and that customersmay not be consciously aware of. For instance, buyers of sports utility vehicles might really beexpressing their youth or a youthful attitude rather than a set of functional benefits. Gettinginside the customer can provide strategic insights that do not emerge any other way.

Although a representative cross-section of customers is usually sought, special attention tosome is often merited. Very loyal customers are often best able to articulate the bonds that the firmis capable of establishing. Lost customers (those who have defected) are often particularly good atgraphically communicating problems with the product or service. New customers or customerswho have recently increased their usage may suggest new applications. Organizational buyers usingmultiple vendors may have a good perspective of the firm relative to the competition.

The Internet has changed and enhanced qualitative research.8 No longer time and locationlimited—you don’t have to gather people into a conference room or send out interviewers toconduct one-on-one dialogues. Respondents do not have to rely on the memory of an experienceweeks or months ago. A research study can now access experiences as they happen, where theyhappen. Respondents do not have to be from one location, but can be global. Furtherrespondents, even if globally located, can be engaged with each other. Spontaneous interactionsand moments of self-discovery can be stimulated. And it is more cost-effective and much fasterthan focus groups, in-depth interviews, or ethnographics.

Firms can address research tasks that ask consumers to engage in the following activities:

Assume that you are interested in wine experiences. Respondents can keep a journaland show by video or picture the context of their wine experience and their observationsabout it. A moderator can ask probing questions.

Chapter 2 External and Customer Analysis 33

Assume that you want to understand the food inventory of consumers. Instead ofasking about a respondent’s refrigerator contents, ask him or her to take you on a phototour of the fridge.

Assume you want to get into deep emotions surrounding a brand. Ask respondentsto deprive themselves of it for a day and record the resulting emotions over the courseof the day. Or ask the respondent to create or find images that reflect the feelingsassociated with a brand and post them. Encourage a discussion around the mostinteresting.

Assume you want some insight into a brand. Post six pictures and ask respondentswhich jumps out at them in a certain brand context.

Assume you need to develop a new product to revitalize a frozen dinner brand.First, ask respondents to use an online diary recording their experiences andactivities related to frozen dinners complete with videos and descriptions for a week.A moderator interjects questions. Second, expose another respondent set to tenconcepts presented with a video showing the package and use experience. An onlinediscussion with moderator interaction is part of the process. Finally, three finishedconcepts are put to an in-home test during which respondents film their testexperience.

Ethnographic Research

A powerful qualitative research approach is ethnographic or anthropological research, whichinvolves directly observing customers in as many contexts as possible. By accurately observing notonly what is done involving the target or service, but also why it is being done, companies canachieve a deeper level of understanding of the customer’s needs and motivations and generateactionable insights. It is often done by having researchers spend real time with customers in theirhomes or offices. P&G has its executives regularly engaged in such research. However, it can alsobe aided by a video camera or by the Internet-based research in which customers monitorthemselves in a structured way.

For example, the financial data company Thomson Corporation regularly studies from 25 to50 customers, examining their behavior from three minutes prior to using their data as well asthree minutes afterward.9 One such study, which found that analysts were inputting the data intoa spreadsheet, led to a new service. Although this research approach has been around for nearly acentury, it has taken on new life in the last few years in packaged goods firms such as Unileverand also in business-to-business firms such as Intel and GE.

Ethnographic research is particularly good at identifying breakthrough innovations. Cus-tomers usually cannot verbalize such innovations because they are used to the current offerings.Henry Ford famously observed that had he asked customers what they wanted, they would havesaid faster horses. By watching people buy and use in the context of their lives or their businesses,however, experienced and talented anthropologists (or executives, in the case of P&G) cangenerate insights that go beyond what customers could talk about.

Ethnographic research works.10 After one study observed the difficulty people had incleaning the bathroom, P&G developed Magic Reach, a device with a long handle and swivelhead. Visits to contactors and home renovators resulted in the development of the OXO hammer(with a fiberglass core to cut vibration and a rubber bumper on top to avoid leaving marks when

34 Part One Strategic Analysis

removing nails) as part of a line of professional-grade tools. Sirius followed 45 people for a week,studying music listened to, magazines read, and TV shows watched, and then developed aportable satellite-radio player that can load up to 50 hours of music for later playback. Black &Decker’s observation that electric drill users ran out of power led to the detachable battery pack.Intel’s research in developing countries led it to develop a cheap PC that could run on truckbatteries in 100-degree temperatures. GE found through ethnographic research that buyers ofplastic fiber for fire-retardant jackets were more concerned with performance than price. Thatled to a completely different business model in GE’s efforts to enter the field.

Ethnographic research can also be used to improve existing products or services. Marriotthad a multifunctional team of seven people (including a designer and an architect) spend sixweeks visiting twelve cities, hanging out with guests at hotel lobbies, cafes, and bars.11 Theylearned that hotels were not doing well at service for small groups of business travelers. As a result,lobbies and adjacent areas were redesigned to be more suitable for transacting business, withbrighter lights and “social zones” with a mix of small tables, larger tables, and semiprivate spaces.

The Ideal Experience

The conceptualization of an ideal experience can also help identify unmet needs. A majorpublisher of directories polled its customers, asking each to describe its ideal experience with thefirm. The publisher found that its very large customers (the top 4 percent who were generating45 percent of its business) wanted a single contact point to resolve problems, customizedproducts, consultation on using the service, and help in tracking results. In contrast, smallercustomers wanted a simple ordering process and to be left alone. These responses providedinsights into improving service while cutting costs.12

KEY LEARNINGS

External analysis should influence strategy by identifying opportunities, threats,trends, and strategic uncertainties. The ultimate goal is to improve strategicchoices—decisions as to where and how to compete.Segmentation (identifying customer groups that can support different competitivestrategies) can be based on a variety of customer characteristics, such as benefitssought, customer loyalty, and applications.

Customer motivation analysis can provide insights into what assets and competenciesare needed to compete, as well as indicate possible SCAs.

Unmet needs that represent opportunities (or threats) can be identified by askingcustomers, by accessing lead users, by ethnographic research, and by interacting withcustomers.

FOR DISCUSSION1. Why do a strategic analysis? What are the objectives? What, in your view, are the three

keys to making a strategic analysis helpful and important? Is there a downside toconducting a full-blown strategic analysis?

Chapter 2 External and Customer Analysis 35

2. Consider the buyer “hot buttons” described on page 30. What are the implicationsfor Betty Crocker? What new business areas might be considered given each hotbutton? Answer the same questions for a grocery store chain such as Safeway.

3. Consider the segments in the male shopper insert on page 26. Describe eachfurther. What cars would they drive? What kinds of vacation would they take? Whatshirt brands would they buy?

4. What is a customer buying at Nordstrom? At Banana Republic? At Zara?5. Pick a company or brand or business on which to focus, such as cereals. What are

the major segments? What are the customer motivations by segments? What are theunmet needs?

BEST DIGITAL PRACTICE

Glossier: Using Beauty to Talk Back to Consumers

When Emily Weiss founded beauty-brand Glossier her goal was simple: create an online platformthrough which women could connect and share their beauty routines and preferences with oneanother. Weiss wanted to bring a more personalized element to the experience of finding beautyproducts, and believed a forum that allowed women to more easily seek out suggestions and supportwas critical.

Glossier grew out of Weiss’ blog Into the Gloss, which highlighted the daily beauty routines ofcontemporary celebrities, models, and makeup moguls. The blog’s intention was to give individuals afirst-hand look into the bathroom “top shelves” of women like Karlie Kloss and Bobbi Brown and gaininspiration for their own collections. Additionally, Weiss included a commenting function that enabledwomen to swap stories about utilizing different skin care and makeup products. When uniquemonthly views of the site surpassed 1 million, Weiss realized that there was an opportunity to begindesigning a line of products based on her readers’ knowledge. This was the driver behind the launchof Glossier.

Since its inception in 2014, Glossier has relied on two things to set itself apart in the alreadycrowded $250 billion beauty market. The first is its brand identity. Weiss has carefully maintained aunified look and feel across its website and advertisements. For example, there is a distinct focus onshowcasing diverse women and infusing a “millennial-facing voice” into its marketing and messaging.

A second point of differentiation is the strength of Glossier’s digital community and customerfeedback loop. Weiss has made the site an ongoing “two-way conversation” between the company’sproduct team and user community. Weiss mines user-generated content as an inspiration for futureproduct development. Furthermore, as Glossier loyalists post their beauty habits on sites such asInstagram, the company benefits from free marketing.

Glossier’s concerted effort to talk “with” and not “at” its shoppers has certainly piqued consumerinterest. Two products have had 10,000-person waiting lists and the company is seeing a significantuptick in international demand.

Under Weiss, Glossier is positioned to become a major player within the beauty market. Itssuccess to date is a solid example of how careful analysis of consumer ideas can help marketersstrategically and tactically respond to unmet areas of need.

36 Part One Strategic Analysis

Questions:

1. What is Glossier’s key customer analysis tool?

2. What, if anything, should major cosmetic competitors such as L’Oreal or Estee Lauder do inresponse to Glossier’s success? What actions can Glossier take to protect itself against thesemoves?

Source:Raisa Bruner, “This Beauty Startup has Become So Popular that it has 10,000 People on a Waitlist forLipstick,” Business Insider, May 24, 2016, http://www.businessinsider.com/how-glossier-became-so-popular-2016-5

BEST GLOBAL PRACTICE

P&G Customer Analysis Guides Marketing Communications in China

Customer analysis is as essential to the marketing of existing products as it is to new product design anddevelopment. In 1998, P&G initially learned this lesson the hard way when it decided to expandthe Pampers brand into China. Assuming that parents would prioritize price point over quality,the company launched a less expensive but poorer made version of the product. Sales lagged, andP&G eventually determined that Pampers’ consumers in China valued quality-based attributes likeconvenience, dryness, and softness as much as low product cost. This drove P&G to establish a newprinciple of “Delight, don’t dilute” when it came to product development in emerging markets andresulted in P&G successfully creating a Pampers line for China that delivered both good price andquality. Still, P&G was faced with the larger task of trying to change Chinese consumers’ purchasinghabits.

Around the same time, the company was conducting in-depth research among new parents thatrevealed two key insights: that the quality of a baby’s sleep and its impact on the baby’s developmentwas a real concern. To understand whether this insight could be connected to Pampers’ attemptedexpansion in China, P&G commissioned a study at the Beijing Children’s Hospital’s Sleep ResearchCenter. The study showed that babies wearing Pampers fell asleep 30 percent faster, slept an extra 30minutes every night, and had 50 percent less disruption throughout the night.

Data from this research drove the Pampers team to launch the “Golden Sleep” campaign in 2007.The campaign’s objective was to frame disposable diapers as aides to quality sleep. P&G set upextensive advertising, mass carnivals, and in-store campaigns in urban areas, yet the cornerstone wasgetting women to post a picture of their baby sleeping on the Pampers website.

Pampers collected so many photos that they broke the Guinness World Record for photo-montages. Over 200,000 responses were received and subsequently displayed in a 7,000 square footcollection hung in a retail store in Shanghai.

By utilizing customer analysis to help shape commercialization activities, P&G was able to bothexpand its share of the baby disposable diapers market and increase the market itself. Sales went up 55percent, and from 2006 to 2011 the market grew to nearly 3 billion. It has grown bigger year over year,and Pampers remains a category leader today.

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Chapter 2 External and Customer Analysis 37

Questions:

1. Do you think “Delight, don’t dilute” is a principle that P&G can easily apply to other emergingmarkets? Why or why not? What customer analysis tool would be most helpful in making thisdetermination?

2. Why were the photos of sleeping babies more effective than just reporting P&G research reports?

Sources:David Aaker, “How Pampers Made Diapers Relevant in China,” Prophet, https://www.prophet.com/thinking/2013/05/how-pampers-made-diapers-relevant-in-china/

Mya Frazier, “How P&G Brought the Diaper Revolution to China,” CBS MoneyWatch, January 11,2010, http://www.cbsnews.com/news/how-pg-brought-the-diaper-revolution-to-china/

38 Part One Strategic Analysis

C H A P T E R T H R E E

Competitor Analysis

Induce your competitors not to invest in those products, markets and services where you expect to invest themost . . . that is the fundamental rule of strategy.—Bruce Henderson, founder of BCG

There is nothing more exhilarating than to be shot at without result.—Winston Churchill

The best and fastest way to learn a sport is to watch and imitate a champion.—Jean-Claude Killy, skier

There are numerous well-documented reasons why the Japanese automobile firms were able topenetrate the U.S. market successfully, especially during the 1970s. One important reason,however, is that they were much better than U.S. firms at doing competitor analysis.1

David Halberstam, in his account of the automobile industry,graphicallydescribedthe Japaneseefforts at competitor analysis in the 1960s. “They came in groups. . . . They measured, theyphotographed, they sketched, and they tape-recorded everything they could. Their questionswere precise. They were surprised how open the Americans were.”2 The Japanese similarlystudied European manufacturers, especially their design approaches. In contrast, according toHalberstam, the Americans were late in even recognizing the competitive threat from Japan andnever did well at analyzing Japanese firms or understanding the new strategic imperativescreated by the revised competitive environment even though the Japanese car firms were veryopen about their methods.

Competitor analysis is the second phase of external analysis. Again, the goal should beinsights that will influence the development of successful business strategies. The analysis shouldfocus on the identification of threats, opportunities, or strategic uncertainties created byemerging or potential competitor moves, weaknesses, or strengths.

Competitor analysis starts with identifying current and potential competitors. There are twovery different ways of identifying current competitors. The first examines the perspective of thecustomer who must make choices among competitors. This approach groups competitorsaccording to the degree to which they compete for a buyer’s choice. The second approachattempts to place competitors in strategic groups on the basis of their competitive strategy.

39

After competitors are identified, the focus shifts to attempting to understand them and theirstrategies. Of particular interest is an analysis of the strengths and weaknesses of each competitoror strategic group of competitors. Figure 3.1 summarizes a set of questions that can provide astructure for competitor analysis.

IDENTIFYING COMPETITORS—CUSTOMER-BASED APPROACHESOne approach to identifying competitor sets is to look at them from the perspective ofcustomers—what choices are customers making? A Cisco buyer could be asked what brandwould have been purchased had Cisco not made the required item. A buyer for a nursing homemeal service could be asked what would be substituted for granulated potato buds if theyincreased in price. A sample of sports car buyers could be asked what other cars they consideredand perhaps what other showrooms they actually visited.

Brand-Use Associations

Another approach that provides insights is the association of brands with specific-use contexts orapplications. Perhaps twenty or thirty product users could be asked to identify a list of usesituations or applications. For each use context they would then name all the brands that areappropriate. Then for each brand, they would identify appropriate use contexts so that the list ofuse contexts would be more complete. Another group of respondents would then be asked tomake judgments about how appropriate each brand is for each use context. Then brands would beclustered based on the similarity of their appropriate use contexts. Thus, if Doritos was perceivedas a snack, its set of competitors would be different than if it was perceived as a party enhancer.

WHO ARE THE COMPETITORS?

Against whom do we usually compete? Who are our most intense competitors? Less intense but stillserious competitors? Makers of substitute products?Can these competitors be grouped into strategic groups on the basis of their assets, competencies, and/orstrategies?Who are the potential competitive entrants? What are their barriers to entry? Is there anything that can bedone to discourage them?

EVALUATING COMPETITORS

What are their objectives and strategies? Their levels of commitment? Their exit barriers?What are their cost structures? Do they have cost advantages or disadvantages?What are their images and positioning strategies?Which are the most successful/unsuccessful competitors over time? Why?What are the strengths and weaknesses of each competitor or strategic group?What leverage points (or strategic weaknesses or customer problems or unmet needs) could competitorsexploit to enter the market or become more serious competitors?How strong or weak is each competitor with respect to their assets and competencies? Generate acompetitor strength grid.

Figure 3.1 Questions to Structure Competitor Analysis

40 Part One Strategic Analysis

The same approach will work with an industrial product that might be used in several distinctapplications.

Both the customer-choice and brand-use approaches suggest a conceptual basis for identi-fying competitors that can be employed by managers even when marketing research is notavailable. The concept of alternatives from which customers choose and the concept ofappropriateness to a use context can be powerful tools to understand the competitiveenvironment.

Indirect Competitors

In most instances, primary competitors are quite visible and easily identified. Coke competes withPepsi, other cola brands, and private labels such as President’s Choice. CitiBank competes withChase, Bank of America, and other major banks. NBC competes with ABC, CBS, and Fox.Boeing competes with Airbus. The competitor analysis for this group should be done with depthand insight.

In many markets, however, customer priorities are changing, and indirect competitorsoffering customers product alternatives are strategically relevant. Understanding these indirectcompetitors can be strategically and tactically important, as the following examples demonstrate.

Coke focused on Pepsi and ignored for many years the emerging submarkets in water,energy drinks, and fruit-based drinks. The result was a missed opportunity and theeventual need to pursue an expensive and difficult catch-up strategy.While the major television networks struggle against each other, independent networkshave emerged. Strong cable networks, such as ESPN, Fox, HBO, and CNN, haveflourished; pay-per-view, Netflix, computer games, mobile applications, and the Internetare competing for the leisure time of viewers.

While banks focused on competing banks, their markets were eroded by mutual funds,insurers, and brokers.

While Folgers, Maxwell House, and others competed for supermarket business usingcoupon promotions, other firms, such as Starbucks, succeeded in selling a very differentkind of coffee in different ways. And Starbucks has more recently been threatened bygourmet coffee makers sold for home use and by alternatives offered by chains likeDunkin’ Donuts and McDonald’s.Steel minimills were ignored by the major steel firms until they gradually became a majorplayer.

The energy bar category, established in the mid-1980s by PowerBar, includes directcompetitors such as Clif, Balance, and dozens of small, local niche firms. There are also ahost of indirect competitors, many with very similar products: candy bars (Snickers was called“the energy bar” for many years), breakfast bars, meal replacement bars, diet bars, granola bars,and the cereal bar category. Understanding the positioning and new product strategies of theseindirect competitors will be strategically important to businesses in the energy bar category.

Both direct and indirect competitors can be further categorized in terms of how relevant theyare, as determined by similar positioning. Thus, candy bars will be more relevant to Balance thanto PowerBar because of where the former has positioned itself (Balance Gold is even marketed as

Chapter 3 Competitor Analysis 41

being “like a candy bar”). For the same reason, Clif will be a closer competitor to PowerBar thanto Balance.

The competitive analysis in nearly all cases will benefit from extending the perspectivebeyond the obvious direct competitors. By explicitly considering indirect competitors, thestrategic horizon is expanded, and the analysis more realistically mirrors what the customersees. In the real world, the customer is never restricted to a firm’s direct competitors, but insteadis always poised to consider other options.

A key issue with respect to strategic analysis in general, and competitor analysis in particular,is the level at which the analysis is conducted. Is it at the level of a business unit, the firm, or someother aggregation of businesses? Because an analysis will be needed at all levels at whichstrategies are developed, multiple analyses might ultimately be necessary. For example, whenClif developed Luna, an energy bar designed for women, PowerBar countered with Pria. Themanager of the Luna business may need a competitive analysis of energy bars for women, inwhich case the other energy bars might be considered indirect competitors.

IDENTIFYING COMPETITORS—STRATEGIC GROUPSThe concept of a strategic group provides a very different approach toward understanding thecompetitive structure of an industry. A strategic group is a set of firms that:

Over time pursues similar competitive strategies (e.g., the use of the same distributionchannel, the same type of communication strategies, or the same price/quality position)

Has similar characteristics (e.g., size, aggressiveness)

Has similar assets and competencies (such as brand associations, logistics capability, globalpresence, or research and development)

For example, there historically have been three strategic groups in the pet food industry,which is the subject of an illustrative industry analysis in the appendix to this book. One strategicgroup consists of very large diversified, branded consumer and food product companies. Alldistribute through mass merchandisers and supermarkets, have strong established brands, useadvertising and promotions effectively, and enjoy economies of scale. The major players includeNestle Purina Petcare and Big Heart Pet Brands (owned by Smuckers).

A second strategic group of highly focused ultra-premium producers, such as Hill’s Petfood(Science Diet and Prescription Diet) and the Iams Company, sells product through veterinaryoffices and specialty pet stores. They have historically used referral networks to reach pet ownersconcerned with health. When P&G acquired Iams in 1999 and introduced it into massmerchandisers and supermarkets, the distinction between the two strategic groups blurredand new competitive dynamics were introduced. Iams became a threat to established brands inthis space, and the Hill’s brands found their competitive context very different. Now owned byMars, these two companies are still competing for premium consumers.

The third strategic group, private-label, is producers that supply Walmart and other majorretailers.

In fact, many industries are populated by several strategic groups: premium-dominatedvolume entries such as United in airlines or Budweiser in beer, low-cost entries such as JetBlue inairlines and Milwaukee’s Best in beer, and niche groups such as timeshare planes and low alcoholand craft beers.

42 Part One Strategic Analysis

Each strategic group has mobility barriers that inhibit or prevent businesses from movingfrom one strategic group to another. An ultra-premium group in pet food producers has thebrand reputation, product, and manufacturing knowledge needed for the health segment,access to influential veterinarians and retailers, and a local customer base. Private-labelmanufacturers have low-cost production, low overhead, and close relationships with customers.It is possible to bypass or overcome the barriers, of course. A private-label manufacturer couldcreate a branded entry, especially if markets are selected to minimize conflicts with existingcustomers. The barriers are real, however, and a firm competing across strategic groups isusually at a disadvantage.

A member of a strategic group can have exit as well as entry barriers. For example, assetssuch as plant investment or a specialized labor force can represent a meaningful exit barrier, ascan the need to protect a brand’s reputation.

The mobility barrier concept is crucial because one way to develop a sustainable competitiveadvantage is to pursue a strategy that is protected by assets and competencies that representbarriers to competitors. Consider the PC and server market. Dell and others marketed computersdirect to consumers by telephone and the Internet. They developed a host of assets andcompetencies to support their direct channels, including an impressive product support system.Competitors such as HP—which has used indirect channels involving retailers and systemsfirms—have developed a very different set of assets and competencies. HP and Dell have bothstruggled to cross the channel barriers. Competition has largely been between the groups ratherthan brands. As the direct channel lost appeal while products matured and service problemsemerged, HP gained in the marketplace.

Using the Strategic Group Concept

The conceptualization of strategic groups can make the process of competitor analysis moremanageable. Numerous industries contain many more competitors than can be analyzedindividually. Often it is simply not feasible to consider thirty competitors, to say nothing ofhundreds. Reducing this set to a small number of strategic groups makes the analysis compact,feasible, and more usable. For example, in the wine industry, competitor analysis by a firm likeRobert Mondavi might examine three strategic groups: jug wines, premium wines ($10–$20), andsuper-premium wines (over $20). Little strategic content and insight will be lost in most casesbecause firms in a strategic group will be affected by and react to industry developments in similarways. Thus, in projecting future strategies of competitors, the concept of strategic groups can behelpful.

Strategic groupings can refine the strategic investment decision. Instead of determiningin which industries to invest, the decision can focus on what strategic group warrantsinvestment. Thus, it will be necessary to determine the current profitability and futurepotential profitability of each strategic group. One strategic objective is to invest in attractivestrategic groups in which assets and competencies can be employed to create strategicadvantage.

The emergence of a new strategic group or subgroup is of particular importance. It cancreate a dynamic that will affect strategies of all competitors for a long time. Major disruptionsto an industry often start small with inferior products, so analysis needs to proceed with aneye toward projecting future offerings rather than assuming they will not evolve. Chapter 13elaborate on this point.

Chapter 3 Competitor Analysis 43

POTENTIAL COMPETITORSIn addition to current competitors, it is important to consider potential market entrants, such asfirms that might engage in:

1. Market expansion. Perhaps the most obvious potential competitors are firms operatingin other geographic regions or in other countries. A cookie company may want to keep aclose eye on a competing firm in an adjacent state, for example.

2. Product expansion. The leading ski firm, Rossignol, has expanded into ski clothing, thusexploiting a common market, and has moved to tennis equipment, which takes advantageof technological and distribution overlap.

3. Backward integration. Customers are another potential source of competition. GeneralMotors bought dozens of manufacturers of components during its formative years. Majorcan users, such as Campbell Soup, have integrated backward, making their owncontainers.

4. Forward integration. Suppliers attracted by margins are also potential competitors.Suppliers, believing they have the critical ingredients to succeed in a market, may beattracted by the margins, the control, and the visibility that come with integratingforward. Apple, Inc., for example, opened a chain of retail stores.

5. The purchase of assets or competencies. A current small competitor with criticalstrategic weaknesses can turn into a major entrant if it is purchased by a firm that canreduce or eliminate those weaknesses. Predicting such moves can be difficult, butsometimes an analysis of competitor strengths and weaknesses will suggest some possiblesynergistic mergers. A competitor in an above-average growth industry that does not havethe financial or managerial resources for the long haul might be a particularly attractivecandidate for merger.

COMPETITOR ANALYSIS—UNDERSTANDING COMPETITORSUnderstanding competitors and their activities can provide several benefits. First, anunderstanding of the current strategy, strengths, and weaknesses of a competitor cansuggest opportunities and threats that will merit a response. Second, insights into futurecompetitor strategies may allow the prediction of emerging threats and opportunities. Third,a decision about strategic alternatives might easily hinge on the ability to forecast the likelyreaction of key competitors. Finally, competitor analysis may result in the identification ofsome strategic uncertainties that will be worth monitoring closely over time. A strategicuncertainty might be, for example, “Will Competitor A decide to move into the western U.S.market?”

As Figure 3.2 indicates, competitor actions are influenced by eight elements. The first ofthese reflects financial performance, as measured by size, growth, and profitability.

Size, Growth, and Profitability

The level and growth of sales and market share provide indicators of the vitality of a businessstrategy. The maintenance of a strong market position or the achievement of rapid growth usually

44 Part One Strategic Analysis

reflects a strong competitor (or strategic group) and a successful strategy. In contrast, adeteriorating market position can signal financial or organizational strains that might affectthe interest and ability of the business to pursue certain strategies. To provide a crude salesestimate for businesses that are buried in a large company, take the number of employees andmultiply it by the average sales per employee in the industry. For many businesses, this method isvery feasible and remarkably accurate.

After size and growth comes profitability. A profitable business will generally have access tocapital for investment unless it has been designated by the parent to be milked. A business thathas lost money over an extended time period or has experienced a recent sharp decrease inprofitability may find it difficult to gain access to capital either externally or internally.

Image and Positioning Strategy

A cornerstone of a business strategy can be an association, such as being the strongest truck, themost durable car, the smallest consumer electronics equipment, or the most effective cleaner.More often, it is useful to move beyond class-related product attributes to intangibles that spanproduct class, such as quality, innovation, sensitivity to the environment, or brand personality.

In order to develop positioning alternatives, it is helpful to determine the image associations,including the brand personality of the major competitors. Weaknesses of competitors on relevantattributes or personality traits can represent an opportunity to differentiate and develop anadvantage. Strengths of competitors on important dimensions may represent challenges to exceedthem or to outflank them. In any case, it is important to know the competitive profiles.

Competitor image and positioning information can be deduced in part by studying a firm’sproducts, advertising, website, and actions, but often customer research is helpful to ensure thatan accurate current portrayal is obtained. The conventional approach is to start with qualitative

Current and PastStrategies

Size, Growth,and Profitability

Objectivesand Commitment

Image andPositioning

Strengths andWeaknesses

Cost Structure

Organization andCulture

Exit Barriers

COMPETITORACTIONS

Figure 3.2 Competitor Analysis

Chapter 3 Competitor Analysis 45

customer research to find out what a business and its brands mean to customers. What are theassociations? If the business were a person, what kind of person would it be? What visual imagery,books, animals, trees, or activities are associated with the business? What is its essence?

Objectives and Commitment

A knowledge of competitor objectives provides the potential to predict whether or not a competitor’spresent performance is satisfactory or strategic changes are likely. The financial objectives of thebusiness unit can indicate the competitor’s willingness to invest in that business even if the payout isrelatively long term. In particular, what are the competitor’s objectives with respect to market share,sales growth, and profitability? Nonfinancial objectives are also helpful. Does the competitor want tobe a technological leader? Or to develop a service organization? Or to expand distribution? Suchobjectives provide a good indication of the competitor’s possible future strategy.

The objectives of the competitor’s parent company (if one exists) are also relevant. What are thecurrent performance levels and financial objectives of the parent? If the business unit is notperforming as well as the parent, pressure might be exerted to improve or the investment might bewithdrawn. Of critical importance is the role attached to the business unit. Is it central to the parent’slong-term plans, or is it peripheral? Is it seen as a growth area, or is it expected to supply cash to fundother areas? Does the business create synergy with other operations? Does the parent have anemotional attachment to the business unit for any reason? Deep pockets can sometimes beaccompanied by short arms; just because resources exist does not mean they are available.

Current and Past Strategies

The competitor’s current and past strategies should be reviewed. In particular, past strategies that havefailed should be noted because such experiences can inhibit the competitor from trying similarstrategies again. Also, a knowledge of a competitor pattern of new product or new market moves canhelp anticipate its future growth directions. Is the strategy based on product-line breadth, productquality, service, distribution type, or brand identification? If a low-cost strategy is employed, is it basedon economies of scale, the experience curve, manufacturing facilities and equipment, or access to rawmaterial? What is its cost structure? If a focus strategy is evident, describe the business scope.

Organization and Culture

Knowledge about the background and experience of the competitor’s top management can provideinsight into future actions. Are the managers drawn from marketing, engineering, or manufactur-ing? Are they largely from another industry or company? Clorox, for example, has a very heavyProcter & Gamble influence in its management, lingering from the years that Procter & Gambleoperated Clorox as a subsidiary before the courts ordered divestiture following an antitrust suit.

An organization’s culture, supported by its structure, systems, and people, often has a pervasiveinfluence on strategy. A cost-oriented, highly structured organization that relies on tight controls toachieve objectives and motivate employees may have difficulty innovating or shifting into anaggressive, marketing-oriented strategy. A loose, flat organization that emphasizes innovation andrisk taking may similarly have difficulty pursuing a disciplined product-refinement and cost-reductionprogram. In general, as Chapter 16 will make clearer, organizational elements such as culture,structure,competencies,incentives,andpeoplelimittherangeofstrategiesthatshouldbeconsidered.

46 Part One Strategic Analysis

Cost Structure

Knowledge of a competitor’s cost structure, especially when the competitor is relying on a low-cost strategy, can provide an indication of its likely future pricing strategy and its stayingpower. The following information can usually be obtained and can provide insights into coststructures:

The number of employees and a rough breakdown of direct labor (variable labor cost) andoverhead (which will be part of fixed cost)

The relative costs of raw materials and purchased components

The investment in inventory, plant, and equipment (also fixed cost)

Sales levels and number of plants (on which the allocation of fixed costs is based)

Outsourcing strategy

Exit Barriers

Exit barriers can be crucial to a firm’s ability to withdraw from a business area and thus areindicators of commitment. They include the following:3

Specialized assets—plant, equipment, or other assets that are costly to transform toanother application and therefore have little salvage value

Fixed costs, such as labor agreements, leases, and a need to maintain parts for existingequipment

Relationships to other business units in the firm resulting from the firm’s image or fromshared facilities, distribution channels, or sales force

Government and social barriers—for example, governments may regulate whether arailroad can exit from a passenger service responsibility, or firms may feel a sense ofloyalty to workers, thereby inhibiting strategic moves

Managerial pride or an emotional attachment to a business or its employees that affectseconomic decisions

NINTENDO—SUCCESS THAT STARTED WITHCOMPETITOR ANALYSIS

The story of the Nintendo business strategy and brand is nothing short of astounding, and competitiveanalysis played an important part. BrandJapan, an annual survey of the strength of over 1,000Japanese brands, saw a remarkable stability spanning nine years in the cast of characters occupyingthe top two dozen positions. Then came Nintendo. In the 2005 findings, Nintendo was ranked 135 inthe survey. From that point it rose to 66 in 2006, to 5 in 2007, and finally to number one in 2008, aposition it held with a value of over 93 while the next seven brands were bunched at 82 to 84, and aposition it retained in 2009. During the 2004 to 2008 period, its stock price went up more thanfivefold, and at one point its market cap was behind only Toyota in Japan. Why? What drove thisperformance?

(continued)

Chapter 3 Competitor Analysis 47

Assessing Strengths and Weaknesses

Knowledge of a competitor’s strengths and weaknesses provides insight into its ability to pursuevarious strategies. It also offers important input into the process of identifying and selectingstrategic alternatives. One approach is to exploit a competitor’s weakness in an area where thefirm has an existing or developing strength. The desired pattern is to develop a strategy that willpit “our” strength against a competitor’s weakness. Another approach is to bypass or neutralize acompetitor’s strength.

One firm that developed a strategy to neutralize a competitor’s strength was a small softwarefirm that lacked a retail distribution capability or the resources to engage in retail advertising.

The products were clearly the drivers. Nintendo DS, released in December 2004, was a compactportable game console characterized by an innovatively intuitive touch-pen method. It was supportedby games such as Nintendogs, Animal Crossing, and Brain Age aimed at a wide target market,including young females and even seniors. Then came Wii, a new form of game that incorporated usermovement into gaming. With a wireless controller and the Wii remote that detects movement in threedimensions, the user can dance, golf, box, play a guitar, and so on. Opponents can be sourced in otherlocations and even other countries. In fact, the DS and Wii with their supporting games created a newmarket categorized as “casual games,” video games that require less skills and experience and arecharacterized by simple and intuitive rules. The new casual game category went from 1 percent of themarket to over 20 percent by 2005.4

But what was behind the Nintendo innovation success? Why was it able to win facing Sony andMicrosoft? One principle reason was the acceptance of a realistic and astute analysis of the twocompetitors: Sony (Playstation) and Microsoft (P3 players). Nintendo recognized that Sony andMicrosoft had and will have equipment that had better technology—higher performance, higherresolution, and higher quality graphics that appeal to the heavy users—young males. They were focusedon that objective and invested in chips, software, manufacturing, and hardware to keep delivering.Given this reality, Nintendo took a different course, a low-tech route, even though that meant that theheavy user segment would be ceded to the two competitors.

Nintendo decided to refocus away from the hard core young males who were into action gamesand high-quality graphics toward a broader audience less concerned with better and better graphics.The key for this group would be a wide array of easy-to-use games that would move beyond the actiongenre and include some learning vehicles. One goal is to have the mother as a participant and anadvocate rather than a cynic and opponent. Another is to involve the whole family so the games are notsimply related to boys’ retreats. The strategy went against the convention of focusing on heavy usersand trying to better competitor’s offerings.

Sony and Microsoft aggressively responded with innovations of their own, and the Nintendolofty brand position did not hold. By 2011, the Nintendo brand had fallen but still was in the top 15 of1,000 brands, while DS was in the top 25 and Wii in the top 50. But then Nintendo fought back withmore innovations. A successor to the DS line, the Nintendo 3DS produced a three-dimensionaleffect with glasses and included games that can only be played on the device. A new Wii, the WiiU,included a GamePad controller that can be the centerpiece of the home entertainment systemallowing the user to connect and control entertainment options such as games, television shows, andmore. Both leveraged the Nintendo franchise games such as Mario and Zelda plus new brands as well.In addition, Nintendo8 provided access to the games of the 1980s and provided a link to the brand’sheritage.

48 Part One Strategic Analysis

It targeted value-added software systems firms, which sell total software and sometimes hardwaresystems to organizations such as investment firms or hospitals. These value-added systems firmscould understand and exploit the power of the product, integrate it into their systems, and use itin quantity. The competitor’s superior access to a distribution channel or resources to support anadvertising effort was thus neutralized.

The assessment of a competitor’s strengths and weaknesses starts with an identification ofrelevant assets and competencies for the industry and then evaluates the competitor on the basisof those assets and competencies. We now turn to these topics.

COMPETITOR STRENGTHS AND WEAKNESSESWhat are the Relevant Assets and Competencies?

Competitor strengths and weaknesses are based on the existence or absence of assets orcompetencies. Thus, an asset such as a well-known name or a prime location could representa strength, as could a competency such as the ability to develop a strong promotional program.Conversely, the absence of an asset or competency can represent a weakness.

To analyze competitor strengths and weaknesses, it is thus necessary to identify the assets andcompetencies that are relevant to the industry. As Figure 3.3 suggests, four sets of questions canbe helpful.

1. What businesses have been successful over time? What assets or competencieshave contributed to their success? What businesses have had chronically lowperformance? Why? What assets or competencies do they lack?By definition, assets and competencies that provide SCAs should affect performance overtime. Thus, businesses that differ with respect to performance over time should also differwith respect to their assets and competencies. Analysis of the causes of the performanceusually suggests sets of relevant competencies and assets. Typically, the superior perform-ers have developed and maintained key assets and competencies that have been the basisfor their performance. Conversely, weakness in several assets and competencies relevantto the industry and its strategy should visibly contribute to the inferior performance of theweak competitors over time.

CustomerMotivations?

Drivers of BusinessSuccess or Failure?

Critical Value-Added

Components?

Industry MobilityBarriers?

RELATIVEASSETS AND

COMPETENCIES

Figure 3.3 Identifying Relevant Assets and Competencies

Chapter 3 Competitor Analysis 49

For example, in the CT scanner industry, the best performer, General Electric, hassuperior product technology and R&D, scale economies, an established systems capa-bility, a strong sales and service organization (owing, in part, to its X-ray product line), andan installed base.

2. What are the key customer motivations? What is needed to be preferred? What isneeded to be considered?Customer motivations usually drive buying decisions and thus can dictate which assets orcompetencies potentially create meaningful advantages. In the heavy-equipment industry,customers value service and parts backup. Caterpillar’s promise of “24-hour parts serviceanywhere in the world” has been a key asset because it is important to customers. Apple hasfocused on the motivation of designers for user-friendly design platforms.

There are motivations that lead to a brand being excluded from consideration. Anoffering characteristic may not determine winners, but a deficiency will eliminate it frombeing considered. Hyundai, for example, needs to be perceived as having adequatequality. A series of “best car” awards in 2009 did not necessarily vault the brand to asuperior position, but for many, it did get rid of the “inadequate” perception.

3. What assets and competencies represent industry mobility (entry and exit) barriers?Strategic groups are characterized by structural stability even when one group is muchmore profitable than the others. The reason is mobility barriers, which can be both entrybarriers and exit barriers. Some groups have assets and competencies that will be difficultand sometimes impossible to duplicate by those seeking to enter. International deepwater oil-well drilling firms, for example, have technology, equipment, and people thatdomestic, on-shore firms cannot duplicate. These assets also represent exit barriersbecause there is no other use to which they could be put.

4. What are the significant value-added components in the value chain?A firm that can excel on a critical value-added component can have a sustainableadvantage. The component can be critical because of its cost such as package handlingfor FedEx or the call center at Dell. Or it can be critical because of the customer benefit itgenerates or affects such as the ordering system at Amazon or the ingredients of a P&Gdetergent. In examining the value chain, it is helpful to start with suppliers and endwith the customer use experience while charting all the components in between. Thecomponents can be found throughout the organization and that of its partners. For eBay,for example, operations, customer support, auction services, plus the operations of thoseselling goods are all potential candidates.

A Checklist of Strengths and Weaknesses

Figure 3.4 provides an overview checklist of the areas in which a competitor can have strengthsand weaknesses. The first category is innovation. One of the strengths of Kao Corporation is itsability to develop innovative products in soaps, detergents, skin care, and even data storage disks.Its new products usually have a distinct technological advantage. In a highly technical industry,the percentage spent on R&D and the emphasis along the basic/applied continuum can beindicators of the cumulative ability to innovate. The outputs of the process in terms of productcharacteristics and performance capabilities, new products, product modifications, and patentsprovide more definitive measures of the company’s ability to innovate.

50 Part One Strategic Analysis

The second area of competitor strengths and weaknesses is manufacturing and operations.Manufacturing is a major area of strength of Toyota, based on its culture, work processes,and ability to reduce inventory and costs. Walmart has developed significant operationalcapacity and efficiency advantages, based in part by working closely with suppliers. In additionto potential cost advantages, superior processes and systems at both Toyota and Walmart providestrategic and tactical flexibility.

The third area is finance, the ability to generate or acquire funds in the short as well as thelong run. Companies with deep pockets (financial resources) have a decisive advantage becausethey can pursue strategies not available to smaller firms. This is especially true in times of stress.Firms with a strong balance sheet can seize opportunities. Operations provide one major sourceof funds. What is the nature of cash flow that is being generated and will be generated given theknown uses for funds? Cash or other liquid assets and the deep pockets of a parent firm areimportant sources as well.

Management is the fourth area. Controlling and motivating a set of highly disparate businessoperations are strengths for GE, Disney, and other firms that have successfully diversified. Thequality, depth, and loyalty (as measured by turnover) of top and middle management provide animportant asset for others. Another aspect to analyze is the culture. The values and norms thatpermeate an organization can energize some strategies and inhibit others. In particular, some

INNOVATION MANAGEMENTTechnical product or service superiorityNew product capabilityR&DTechnologiesPatents

Quality of top and middle managementKnowledge of businessCultureStrategic goals and plansEntrepreneurial thrustPlanning/operation systemLoyalty—turnoverQuality of strategic decision making

MANUFACTURING/OPERATIONSCost structureEffective and flexible operationsEfficient operationsVertical integrationWorkforce attitude and motivationCapacityOutsourcing

MARKETINGProduct quality reputationProduct characteristics/differentiationBrand name recognitionBreadth of the product line—systems capabilityCustomer orientationSegmentation/focusDistributionRetailer relationshipAdvertising/promotion skillsSales forceCustomer service/product support

FINANCE—ACCESS TO CAPITALFrom operationsFrom net short-term assetsAbility to use debt and equity financingParent’s willingness to finance CUSTOMER BASE

Size and loyaltyMarket shareGrowth of segments served

Figure 3.4 Analysis of Strengths and Weaknesses

Chapter 3 Competitor Analysis 51

organizations, such as 3M, possess both an entrepreneurial culture that allows them to initiatenew directions and the organizational skill to nurture them. The ability to set strategic goals andplans can represent significant competencies. To what extent does the business have a vision andthe will and competence to pursue it?

The fifth area is marketing. Often the most important marketing strength, particularly in thehigh-tech field, involves the product line: its quality reputation, breadth, and the features thatdifferentiate it from other products. Brand image and distribution have been key assets forbusinesses as diverse as Pizza Hut, Dell, and Bank of America. The ability to develop a truecustomer orientation can be an important strength. For P&G, two of its strengths are consumerunderstanding and brand building. Another strength can be based on the ability and willingness toadvertise effectively. The success of Perdue chickens, MasterCard, and Budweiser were all due inpart to an ability to generate superior advertising. Other elements of the marketing mix, such asthe sales force and service operation, can also be sources of sustainable competitive advantage.One of Caterpillar’s strengths is the quality of its dealer network. Still another possible strength,particularly in the high-tech field, is an ability to stay close to customers.

The final area of interest is the customer base. How substantial is the customer base, and howloyal is it? How are the competitor’s offerings evaluated by its customers? What are the costs thatcustomers will have to absorb if they switch to another supplier? Extremely loyal and happycustomers are difficult to dislodge. What are the size and growth potentials of the segmentsserved by a competitor?

THE COMPETITIVE STRENGTH GRIDWith the relevant assets and competencies identified, the next step is to scale your own firm andthe major competitors or strategic groups of competitors on those assets and competencies. Theresult is termed a competitive strength grid and serves to summarize the position of thecompetitors with respect to assets and competencies.

A sustainable competitive advantage is almost always based on having a position superior tothat of the target competitors in one or more asset or competence area that is relevant both to theindustry and to the strategy employed. Thus, information about each competitor’s position withrespect to relevant assets and competencies is central to strategy development and evaluation.

If a superior position does not exist with respect to assets and competencies important to thestrategy, it probably will have to be created or the strategy may have to be modified orabandoned. Sometimes there simply is no point of difference with respect to the firms regardedas competitors. A competency that all competitors have will not be the basis for an SCA. Forexample, flight safety is important among airline passengers, but if airlines are perceived to beequal with respect to pilot quality and plane maintenance, it cannot be the basis for an SCA. Ofcourse, if some airlines can convince passengers that they are superior with respect to antiterroristsecurity, then an SCA could indeed emerge.

The Luxury Car Market

A competitor strength grid is illustrated in Figure 3.5 for the luxury car market. The relevantassets and competencies are listed on the left, grouped as to whether they are considered keys tosuccess or are of secondary importance. The principal competitors are shown as column headingsacross the top. Each cell could be coded as to whether the brand is strong, above average,average, below average, or weak in that asset or competence category. The figure uses an aboveaverage, average, and below average scale.

52 Part One Strategic Analysis

53

Assets and CompetenciesKey for Success

Product quality

Product differentiation

Dealer satisfaction

Market share

Quality of service

Secondary Importance

Financial capability

Quality of management

Brand name recognition

Advertising/promotion

Cadillac(GM)

Lincoln(Ford)

Lexus(Toyota)

Acura(Honda)

Infiniti(Nissan)

MercedesBenz Volvo BMW Audi Jaguar

1 = Less than average

2 = Average

3 = Above average

EuropeanJapaneseU.S.

3-point scale

Figure 3.5 Illustrative Example of a Competitive Strength Grid for the U.S. Luxury Car Market

The resulting Figure 3.5 provides a summary of the hypothetical profile of the strengths andweaknesses of ten brands. Two can be compared, such as Ford and Lexus or BMW and Audi.BMW and Lexus have enviable positions.

In the grid, Lincoln is shown as not being well regarded. But that changed in 2013 whenLincoln, blessed with an incredible heritage, attempted a break-out reinvigoration. The effortrested in large part on the new MKZ midsize car that delivered luxurious quality, good looks withan appealing fluid design described as “smooth and soft,” an interior that was competitive with theother premium brands, and included a host of differentiating innovations such as push-buttonshifting and a panoramic glass roof. There is a hybrid version that got 45 mpg.

The car was introduced with an aggressive digital marketing program and a set of televisionads that provided a link to the past heritage with glimpses of the some of the classic models and afull-page newspaper print ad that explained how Lincoln will become great again. People who testdrive a Lincoln received a diner reward, a “Lincoln date night,” and there will be a 24-hour conciergeto help navigate model choice. The dealer experience got a significant upgrade. At the same time, theorganization was renamed as the Lincoln Motor Company (both a step up and a step back in timefrom the Lincoln Division), and the customer dealer experience was upgraded to Lexus levels. Thestrategy worked and new models have been introduced every year since.

A tough assignment but it has been done before. Cadillac came back from a similar point in2003 with its CTS model. It was able to demonstrate the CTS could perform as well or better thanany rival in terms of acceleration and drivability. It further got credibility and visibility by gettingthird-party quality recognition. It took years, but Cadillac came back. Hyundai is another brand thatovercame a disastrous and well-earned reputation for poor quality and design. Hyundai changedcourse, created superior cars that won awards, and added some brilliant marketing. The result wasimpressive visibility, a revised image, and a remarkable increase in relevance.

So the image data has momentum but also is dynamic. It can change, especially if a majorrelaunch is anchored by an innovative new model that delivers value, gets recognition, and gainstraction in the marketplace. It needs to get the delicate balance required to leverage the heritageinto authenticity, personality, and self-expressive benefits rather than nostalgic charm.

Analyzing Submarkets

It is often desirable to conduct an analysis for submarkets or strategic groups and perhaps fordifferent products. A firm may not compete with all other firms in the industry, but only with thoseengaged in similar strategies and markets. For example, a competitive strength grid may look verydifferentforthesafetysubmarket,withVolvohavingmorestrength.Similarly,thehandling submarketmay also involve a competitive grid that will look different, with BMW having more strength.

The Analysis Process

The process of developing a competitive strength grid can be extremely informative and useful. Oneapproach is to have several managers create their own grids independently. The differences canusually illuminate different assumptions and information bases. A reconciliation stage can dissemi-nate relevant information and identify and structure strategic uncertainties. For example, differentopinions about the quality reputation of a competitor may stimulate a strategic uncertainty thatjustifies marketing research. Another approach is to develop the grid in a group setting, perhapssupported by preliminary staff work. When possible, objective information based on laboratory testsor customer perception studies should be used. The need for such information becomes clear whendisagreements arise about where competitors should be scaled on the various dimensions.

54 Part One Strategic Analysis

OBTAINING INFORMATION ON COMPETITORSA competitor’s website is usually a rich source of information and the first place to look. Thestrategic vision (along with a statement about values and culture) is often posted and theportfolios of businesses are usually laid out. The way that the latter are organized can provideclues as to business priorities and strategies. When IBM emphasizes its e-servers, for example,that says something about its direction in the server business. The website also can provideinformation about such business assets as plants, global access, and brand symbols. Research onthe competitor’s site can be supplemented with search engines, access to articles, and financialreports about the business.

Detailed information on competitors is generally available from a variety of other sourcesas well. Competitors usually communicate extensively with their suppliers, customers, anddistributors; security analysts and stockholders; and government legislators and regulators.Contact with any of these can provide information. Monitoring trade magazines, trade shows,advertising, speeches, annual reports, and the like can be informative. Technical meetings andjournals can provide information about technical developments and activities. Thousandsof databases accessible by computer now make available detailed information on mostcompanies.

Detailed information about a competitor’s standing with its customers can be obtainedthrough market research. For example, regular telephone surveys could provide informationabout the successes and vulnerabilities of competitors’ strategies. Respondents could be askedquestions such as the following: Which store is closest to your home? Which do you shop at mostoften? Are you satisfied? Which has the lowest prices? Best specials? Best customer service?Cleanest stores? Best-quality meat? Best-quality produce? And so on. Those chains that were wellpositioned on value, on service, or on product quality could be identified, and tracking wouldshow whether they were gaining or losing position. The loyalty of their customer base (and thustheir vulnerability) could be indicated in part by satisfaction scores and the willingness ofcustomers to patronize stores even when they were not the most convenient or the leastexpensive.

KEY LEARNINGS

Competitors can be identified by customer choice (the set from which customersselect) or by clustering them into strategic groups (firms that pursue similar strategiesand have similar assets, competencies, and other characteristics). In either case,competitors will vary in terms of how intensely they compete.Competitors should be analyzed along several dimensions, including their size,growth and profitability, image, objectives, business strategies, organizational culture,cost structure, exit barriers, and strengths and weaknesses.

Potential strengths and weaknesses can be identified by considering thecharacteristics of successful and unsuccessful businesses, key customer motivation,mobility barriers, and value-added components.

The competitive strength grid, which arrays competitors or strategic groups on eachof the relevant assets and competencies, provides a compact summary of keystrategic information.

Chapter 3 Competitor Analysis 55

FOR DISCUSSION1. Consider the news industry. Identify the competitors to CNN and organize them in

terms of their intensity of competition.

2. Evaluate Figure 3.5. What surprises are there in the figure? What are the impli-cations for Cadillac? For Audi?

3. Pick a company or brand or business on which to focus. What business is it in? Whoare its direct and indirect competitors? Which in each category are the mostrelevant competitors?

4. Consider the automobile industry. Identify competitors to Ford SUVs and organizethem in terms of their intensity of competition. Also organize them into strategicgroups. What are the key success factors for the strategic groups? Do you think thatwill change in the next five years?

5. Consider the Nintendo case on page 47. Why was Nintendo the firm to come upwith the DS and the Wii products and not SONY or Microsoft? How did Nintendodo it? What assets and competencies were required?

BEST DIGITAL PRACTICE

T-Mobile: The Un-Carrier

Consumer frustration with perceived unnecessary costs and complexity in the wireless telecommu-nications industry has long been prevalent. Yet among a market landscape dominated by rigid contractsand layers of bureaucracy for customers, one company saw an opportunity for disruption. T-Mobile,long overshadowed by AT&T, Verizon, and Sprint, decided to craft a unique “Un-carrier” strategy thatcentered on not acting like a wireless carrier.

Since 2013, T-Mobile has introduced a series of improvements to consumer plans that emphasizesimplicity, fairness, and value. These have included eliminating long-term contracts, institutingunlimited access to data, and allowing for faster phone upgrades. Though each campaign has differed,the overarching Un-carrier strategy was designed to highlight T-Mobile’s commitment to improvingthe wireless carrier experience beyond parity levels.

T-Mobile has gained traction with the strategy through targeted brand positioning and creativemessaging. Positioned as the “rebel,” T-Mobile is not afraid to challenge industry leaders over the statusquo. Putting caps on data utilization, for example, has historically allowed carriers to maximize revenue.T-Mobile observed that this frustrated consumers and thus decided to eliminate the common practiceof metering voice and text capabilities. By placing customer needs ahead of profit margins, T-Mobilewas able to effectively separate itself within the market. Additionally, rather than trying to obtain anedge with technological advances, T-Mobile created a series of must-haves that other carriers weren’tset up to provide. One example was the company’s willingness to pay the early termination fees of allcustomers who switch to T-Mobile from other carriers. Ultimately, T-Mobile’s goal was to beeverything that traditional players were not. To support this positioning, the company generated aseries of humorous advertising spots highlighting why individuals were switching their plans over fromcompetitors. CEO John Legere also initiated a series of TED-talk style presentations that pointed tothe unique points of differentiation T-Mobile offered.

56 Part One Strategic Analysis

BEST GLOBAL PRACTICE

Xiaomi: Less is More

Since its founding in 2010, the Chinese communications technology company Xiaomi has establisheditself as a true competitor among both global incumbents like Apple and Samsung and local nicheplayers like Huawei. Through CEO Lei Jun’s careful creation of strong, favorable, and uniqueassociations for the company, Xiaomi is an excellent example of a challenger within a highly competitivemarket.

Xiaomi is known for its strategy of selling high-end smartphones at an attractive cost. Products areoften marked 30–50% cheaper than Apple and Samsung. The low prices are driven by the company’spenchant for austere design, efficient manufacturing, and willingness to accept a low margin. While thisbusiness model runs contrary to many other Chinese companies, it has helped Xiaomi build good equityamong its target segment: the middle-class in China. This group wants a smartphone but often can’tafford one and are attracted to Xiaomi products because they provide “good value for the money.”

Another competitive advantage for Xiaomi has been its ability to earn the loyalty of its customers,dubbed “Mi-fans.” Executives see customer engagement as a key driver of favorable brand perception,and thus provide numerous points of interaction with the company’s fan base. For example, Xiaomifrequently interacts with customers through social media and relies on user feedback to innovate. Someof these “VIP” customers receive gifts to acknowledge their contributions to the company. Finally, thecompany hosts day-long festivals to roll out special marketing campaigns and showcase new products.Fans wait in long lines to attend and enjoy the comradery of interacting with one another and with thecompany. All of these factors combined have made the Xiaomi brand a true friend in the eyes of itscustomers.

Xiaomi has further cemented its industry foothold through its unique approach to distribution andadvertising. The company sells products directly through its own online store and large established

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Within a year and a half of launching the campaign, T-Mobile had added 22.5 million subscribersto its network. The company was also recognized as one of Fast Company Magazine’s Most InnovativeCompanies.

Questions:

1. Perform a competitive analysis of the wireless telecommunications industry?

2. How can T-Mobile maintain its competitive advantage?

Sources:David Aaker, “5 Lessons from T-Mobile’s Game-Changing Strategy,” https://www.prophet.com/thinking/2014/02/5-lessons-from-t-mobiles-game-changing-strategy/

Lauren Johnson, “How T-Mobile Trashed Its Own Industry and Gained 22 Million Subscribers in theProcess,” Adweek, October 23, 2014, http://www.adweek.com/news/technology/how-t-mobile-trashed-its-own-industry-and-gained-22m-subscribers-process-160935

Ed Oswald, “10 of the Crazy Perks T-Mobile Offers,” CheatSheet, November 16, 2015, http://www.cheatsheet.com/gear-style/10-of-the-crazy-perks-t-mobile-offers.html/?a viewall

Chapter 3 Competitor Analysis 57

online retail sites such as Tmall.com—both of which make its products more accessible to the corecustomer segment in China and to consumers in peripheral markets like Taiwan and Hong Kong. Thisstrategy also helps Xiaomi bypass the cost of retail storefronts that Samsung, Apple, and others mustunderwrite. Xiaomi also spends little to no money on expensive paid media. Rather, it relies on word-of-mouth promotion through online communities, earned media in the press, and the charisma of itsCEO, Lei Jun, who has garnered attention for his “Steve Jobs-esque” product announcements.

By 2015, Xiaomi had secured the spot of the third-ranked global smartphone company with a$45 billion market cap. Its enormous success demonstrates how a challenger brand can win amongcategory leaders in even the most crowded and competitive of markets.

Questions:

1. What assets and competencies are central to Xiaomi’s success as a challenger?

2. What is Xiaomi’s greatest vulnerability that could be exploited by global incumbents or local nicheplayers?

Sources:David Aaker, “6 Steps to Become an Ultimate Disruptor Like Xiaomi,” Prophet, https://www.prophet.com/blog/aakeronbrands/236-how-xiaomi-became-the-ultimate-disruptor-in-6-steps

Dan Seifert, “What is Xiaomi? Here’s the Chinese Company that just Stole One of Android’s BiggestStars,” The Verge, August 29, 2013, http://www.theverge.com/2013/8/29/4672668/what-is-xiaomi-china-smartphone-hugo-barra-android

David Barboza, “In China, an Empire Built by Aping Apple,” The New York Times, June 4, 2013, http://www.nytimes.com/2013/06/05/business/global/in-china-an-empire-built-by-aping-apple.html?pagewanted all&_r 0

Eva Dou, “Xiaomi: The Secret to the World’s Most Valuable Startup,” The Wall Street Journal, April 6,2015, http://www.wsj.com/articles/to-lift-brand-xiaomi-fosters-phone-fan-club-1428345473

58 Part One Strategic Analysis

C H A P T E R F O U R

Market/Submarket Analysis

The key to investing is not assessing how much an industry is going to affect society, or how much it willgrow, but rather determining the competitive advantage of any given company and, above all, the durabilityof that advantage.—Warren Buffett

Be where the world is going.—Beth Comstock, Vice Chair, General Electric

Find a niche, not a nation.—Seth Godin, Marketing Visionary

Market analysis builds on customer and competitor analyses to make strategic judgmentsabout a market (and submarket) and its dynamics. Should a firm invest, and what should the levelof commitment be? Or should it disinvest? One of the primary objectives of a market analysis is todetermine the attractiveness of a market (or submarket) to current and potential participants.Market attractiveness, the market’s profit potential as measured by the long-term return oninvestment achieved by its participants, will provide important input into the product-marketinvestment decision. The frame of reference is all participants.

A second and related objective of market analysis is to understand the dynamics of themarket. It informs the investment decision, but also sheds light on what it would take to be awinner in the space. The need is to identify emerging submarkets, key success factors, trends,threats, opportunities, and strategic uncertainties that can guide information gathering andanalysis. A key success factor is an asset or competency that is needed to play the game. If a firmhas a strategic weakness in a key success factor that isn’t neutralized by a well-conceived strategy,its ability to compete will be limited.

DIMENSIONS OF A MARKET/SUBMARKET ANALYSISThe nature and content of an analysis of a market and its submarkets will depend on context butwill often include the following dimensions:

59

Emerging submarkets

Actual and potential market and submarket size

Market and submarket growth

Market and submarket profitability

Cost structure

Distribution systems

Trends and developments

Key success factors

Figure 4.1 provides a set of questions structured around these dimensions that can serve tostimulate a discussion identifying opportunities, threats, and strategic uncertainties. Eachdimension will be addressed in turn. The chapter concludes with a discussion of the risks ofgrowth markets.

SUBMARKETSAre submarkets emerging defined by lower price points, the emergence of niches, systems solutions,new applications, a customer trend, or new technology? How should the submarket be defined?

SIZE AND GROWTHImportant submarkets? What are the size and growth characteristics of a market and submarkets? Whatsubmarkets are declining or will soon decline? How fast? What are the driving forces behind salestrends?

PROFITABILITYFor each major submarket consider the following: Is this a business area in which the average firm willmake money? How intense is the competition among existing firms? Evaluate the threats from potentialentrants and substitute products. What is the bargaining power of suppliers and customers? Howattractive/profitable are the market and its submarkets both now and in the future?

COST STRUCTUREWhat are the major cost and value-added components for various types of competitors?

DISTRIBUTION SYSTEMSWhat are the alternative channels of distribution? How are they changing?

MARKET TRENDSWhat are the trends in the market?

KEY SUCCESS FACTORSWhat are the key success factors, assets, and competencies needed to compete successfully? How willthese change in the future? How can the assets and competencies of competitors be neutralized bystrategies?

Figure 4.1 Questions to Help Structure a Market Analysis

60 Part One Strategic Analysis

EMERGING SUBMARKETSThe management of a firm in any dynamic market requires addressing the challenge andopportunity of relevance, as described in the box below. In essence, the challenge is to detectand understand emerging submarkets, identify those that are attractive to the firm given its assetsand competencies, and then adjust offerings and brand portfolios in order to increase theirrelevance to the chosen submarkets. The opportunity is to influence these emerging submarketsso that competitors become less relevant.

In Chapter 13, characteristics of new business areas or submarkets will be detailed.Knowing these characteristics can help detect and analyze emerging submarkets. They includeofferings that:

Provide a lower price point—discount airlines

Serve nonusers—Kodak Brownie camera

Serve niche markets—performance snowboards

Provide systems solutions—home theaters

Serve unmet needs—Lexus car buying experience

Respond to a customer trend—nutrient-dense energy drinks

Leverage a new technology—Gillette Fusion Razors

RELEVANCE

All too frequently, despite retaining high levels of awareness, attitude, and even loyalty, a brand losesmarket share because it is not perceived to be relevant to emerging submarkets. If a group ofcustomers want hybrid cars, it does not matter how good they think your firm’s SUV is. They mightlove and recommend it, but if they are interested in a hybrid because of their changing needs anddesires, then your brand is irrelevant to them. This may be true even if your firm also makes hybridsunder the same brand. The hybrid submarket is different than SUVs and has a different set ofrelevant brands.

Relevance for a brand occurs when two conditions are met. First, there must be a perceived needor desire by customers for a submarket defined by some combination of an attribute set, anapplication, a user group, or other distinguishing characteristic. Second, the brand needs to beamong the set considered to be relevant for that submarket by the prospective customers. This impliesthat a brand needs to be positioned against the submarket in addition to whatever other positioningstrategies may be pursued. It must also be visible and be perceived to meet minimal performancelevels.

Nearly every marketplace is undergoing change—often dramatic, rapid change—that createsrelevance issues. Examples appear in nearly every industry, from computers, consulting, airlines,power generators, and financial services to snack food, beverages, pet food, and toys. Hardware, paint,and flooring stores struggle with the reality of Home Depot. Xerox and Kodak have found it difficult toaddress a relevance challenge as other firms are carving up the digital imaging world.

The key to managing such change is twofold. First, a business must detect and understandemerging submarkets, projecting how they are evolving. Second, it must maintain relevance in the

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Chapter 4 Market/Submarket Analysis 61

ACTUAL AND POTENTIAL MARKET OR SUBMARKET SIZEA basic starting point for the analysis of a market or submarket is the total sales level. Among thesources that can be helpful are published financial analyses of the relevant firms, customers,government data, and trade magazines and associations. The ultimate source is often a survey ofproduct users in which the usage levels are projected to the population.

Potential Market—The User Gap

In addition to the size of the current, relevant market or submarket, it is often useful to considerthe potential size. A new use, new user group, or more frequent usage could dramatically changethe size and prospects for the market or submarket.

There is unrealized potential for the cereal market in Europe and among institutionalcustomers in the United States—restaurants and schools/day-care facilities. All these segmentshave room for dramatic growth. In particular, Europeans buy only about 25 percent as muchcereal as their U.S. counterparts. If technology allowed cereals to be used more convenientlyaway from home by providing shelf-stable milk products, usage could be further expanded. Ofcourse, the key is not only to recognize the potential but also to have the vision and program inplace to exploit it. A host of strategists have dismissed investment opportunities in industriesbecause they lacked the insight to see the available potential and take advantage of it.

Small Can Be Beautiful

Some firms have investment criteria that prohibit them from investing in small markets. Chevron,Microsoft, Frito-Lay, and Procter & Gamble, for example, have historically looked to newproducts that would generate large sales levels within a few years. Yet in an era of micro-marketing, much of the action is in smaller niche segments. If a firm avoids them, it can lock itselfout of much of the vitality and profitability of a business area. Furthermore, most substantialbusiness areas were small at the outset, sometimes for many years and, as noted in Chapter 13,some become attractive niche submarkets. Avoiding the small market can thus mean that a firmmust later overcome the first-mover advantage of others.

face of these emerging submarkets. Businesses that perform these tasks successfully have theorganizational skills to detect change, the organizational vitality to respond, and a well-conceivedbrand strategy. Chapters 9 and 11 examine the threat of brand energy loss to relevance.

The emergence of a new subcategory is also an opportunity for the firm that can dominate thatsubmarket, control its perception, and make competitors less relevant or even irrelevant. IBM did thiswith e-business. Gillette did it with the Mach III and Fusion brands. Charles Schwab did it withSchwab OneSource. Creating and owning subcategories can only occur when the right firm, armedwith the right idea and offering, is ready to act at the right time. But when it happens, it can be astrategic home run and the source of unusual profits over a long time period.1

Chapter 13 discusses how innovation can create new submarkets where competitors are lessrelevant.

62 Part One Strategic Analysis

Further, there is evidence recounted in the book The Long Tail by Chris Anderson that manymarkets have changed so that the small niche business is economically viable and should not beautomatically ignored.2 The book, music, entertainment, and broadcasting areas illustrate thefact that the tail—the offerings that are not the large hit products—is extensive and collectivelyimportant. Cable networks serve smaller but worthwhile audiences. Companies limited byretailers to a small selection can provide access to a full line from their websites; KitchenAid,for example, offers its products in some 50 colors. With eBay, Amazon, Google, and others, theeconomics of marketing small niche items has changed. The fact that some 25,000 items areintroduced in the grocery stores each year and car makers offer some 250 different modelsindicates that niche marketing is viable outside the Internet world as well.

There is a downside to having too many niche offerings. First, companies can createdebilitating operating and marketing costs when the offerings are too extensive. Second,customers can become overwhelmed by the confusion of too many choices and rebel—lookingfor the equivalent of Colgate’s Total, a product that simplified decision making in a clutteredenvironment. Thus, many firms are trimming lines that have gotten too large. Nevertheless, theanalysis of niche markets needs to reflect the new reality that customers have faster and moreextensive access to information than before and that products are accessible in ways not feasiblejust a few years ago.

MARKET AND SUBMARKET GROWTHAfter the size of the market and its important submarkets have been estimated, the focus turns togrowth rate. What will be the size of the markets and submarkets in the future? If all else remainsconstant, growth means more sales and profits even without increasing market share. It can alsomean less price pressure when demand increases faster than supply and firms are not engaged inexperience curve pricing, anticipating future lower costs. Conversely, declining sales can meanreduced sales and often increased price pressure as firms struggle to hold their shares of adiminishing pie.

It may seem that the strategy of choice would thus be to identify and avoid or disinvest indeclining situations and to identify and invest in growth contexts. Of course, the reality is not thatsimple. In particular, declining product markets can represent a real opportunity for a firm, inpart because competitors may be exiting and disinvesting. The firm may attempt to become aprofitable survivor by encouraging others to exit and by becoming dominant in the most viablesegments.

The other half of the conventional wisdom, that growth contexts are always attractive, canalso fail to hold true. Growth situations can involve substantial risks. Because of the importance ofcorrectly assessing growth contexts, a discussion of these risks is presented at the end of thischapter.

Identifying Driving Forces

In many contexts, the most important strategic uncertainty involves the prediction of marketsales. A key strategic decision, often an investment decision, can hinge on not only being correctbut also understanding the driving forces behind market dynamics.

Chapter 4 Market/Submarket Analysis 63

Addressing most key strategic uncertainties starts with asking on what the answer depends.In the case of projecting sales of a major market, the need is to determine what forces willdrive those sales. For example, the sales of a new consumer electronics device may be drivenby machine costs, the evolution of an industry standard, or the emergence of alternativetechnologies. Each of these three drivers will provide the basis for key second-leveluncertainties.

In the wine market, the relationship of wine to health and the future demand for premiumreds might be driving forces. One second-level strategic uncertainty might then ask on what thedemand for premium red will depend.

Forecasting Growth

Historical data can provide a useful perspective and help to separate hope from reality. Accurateforecasts for new packaged goods can be based on the timing of trial and repeat purchases.Durable goods forecasts can be based on projecting initial sales patterns. However, care needs tobe exercised. Apparent trends in data such as those shown in Figure 4.2 can be caused by randomfluctuations or by short-term economic conditions, and the urge to extrapolate should be resisted.Furthermore, the strategic interest is not on projections of history but rather on the prediction ofturning points, times when the rate and perhaps direction of growth change.

Sometimes leading indicators of market sales may help in forecasting and predicting turningpoints. Examples of leading indicators include the following:

Demographic data. The number of births is a leading indicator of the demand foreducation and the number of people reaching age 65 is a leading indicator of the demandfor retirement facilities.Sales of related equipment. Personal computer and printer sales provide a leadingindicator of the demand for supplies and service needs.

Market sales forecasts, especially of new markets, can be based on the experience ofanalogous industries. The trick is to identify a prior market with similar characteristics. Sales ofcolor televisions might be expected to have a pattern similar to sales of black-and-whitetelevisions, for example. Sales of a new type of snack might look to the history of other previouslyintroduced snack categories or other consumer products, such as energy bars or granola bars. Themost value will be obtained if several analogous product classes and the differences in the productclass experiences related to their characteristics can be examined.

Figure 4.2 Sales Patterns

64 Part One Strategic Analysis

Submarket Growth

Submarket growth is usually critical because it affects investment decisions and value proposi-tions. That involves identifying and analyzing current and emerging submarkets. While the overallbeer category is flat, a deeper look shows that imports are declining, and craft beers are showingsignificant growth. Among restaurants, fast casual chains such as Panera Bread, Chipotle MexicanGrill, and Panda Express are fast growing.

Detecting Maturity and Decline

One particularly important set of turning points in market sales occurs when the growth phase ofthe product life cycle changes to a flat maturity phase and when the maturity phase changes into adecline phase. These transitions are important indicators of the health and nature of the market.Often they are accompanied by changes in key success factors. Historical sales and profit patternsof a market can help to identify the onset of maturity or decline, but the following often are moresensitive indicators:

Price pressure caused by overcapacity and the lack of product differentiation.When growth slows or even reverses, capacity developed under a more optimistic scenariobecomes excessive. Furthermore, the product evolution process often results in mostcompetitors matching product improvements. Thus, it becomes more difficult to maintainmeaningful differentiation.Buyer sophistication and knowledge. Buyers tend to become more familiar andknowledgeable as a product matures, and thus they become less willing to pay a premiumprice to obtain the security of an established name. Computer buyers over the years havegained confidence in their ability to select computers—as a result, the value of big nameshas receded.Substitute products or technologies. Sales of fresh pre-portioned ingredients withrecipes delivered to customers’ homes (e.g., Blue Apron) may portend a decline in frozenand packaged store bought meals.

Saturation. When the number of potential first-time buyers declines, market salesshould mature or decline.

No growth sources. The market is fully penetrated and there are no visible sources ofgrowth from new uses or users.

Customer disinterest. The interest of customers in applications, new productannouncements, and so on falls off.

MARKET AND SUBMARKET PROFITABILITY ANALYSISEconomists have long studied why some industries or markets are profitable and others are not.Harvard economist and business strategy guru Michael Porter applied his theories and findings tothe business strategy problem of evaluating the investment value of an industry, market, orsubmarket.3 The problem is to estimate how profitable the average firm will be. It is hoped, ofcourse, that a firm will develop a strategy that will bring above-average profits. If the averageprofit level is low, however, the task of succeeding financially will be much more difficult than ifthe average profitability were high.

Chapter 4 Market/Submarket Analysis 65

Porter’s approach can be applied to any industry, but it also can be applied to a market orsubmarket within an industry. The basic idea is that the attractiveness of an industry or market asmeasured by the long-term return on investment of the average firm depends largely on fivefactors that influence profitability, shown in Figure 4.3:

The intensity of competition among existing competitors

The existence of potential competitors who will enter if profits are high

Substitute products that will attract customers if prices become high

The bargaining power of customers

The bargaining power of suppliers

Each factor plays a role in explaining why some industries are historically more profitablethan others. An understanding of this structure can also suggest which key success factors arenecessary to cope with the competitive forces.

Existing Competitors

The intensity of competition from existing competitors depends on several factors, including:

The number of competitors, their size, and their commitment

Whether their product offerings and strategies are similar

The existence of high fixed costs

The size of exit barriers

Competitionamong Existing

Firms

Threat ofSubstituteProducts

BargainingPower of

Customers

BargainingPower ofSuppliers

Threat ofPotentialEntrants INDUSTRY

PROFITABILITY

Figure 4.3 Porter’s Five-Factor Model of Market Profitability

Source: Michael E. Porter, Competitive Advantage, New York: The Free Press, 1985, Chapter 1.

66 Part One Strategic Analysis

The first question to ask is, how many competitors are already in the market or making plansto enter soon? The more competitors that exist, the more competition intensifies. Are they largefirms with staying power and commitment or small and vulnerable? The second consideration isthe amount of differentiation. Are the competitors similar or are some (or all) insulated by pointsof uniqueness valued by customers? The third factor is the level of fixed costs. High fixed-costindustries such as telecommunications and airlines experience debilitating price pressures whenovercapacity gets large. Finally, one should assess the presence of exit barriers such as specializedassets, long-term contract commitments to customers and distributors, and relationship to otherparts of a firm.

One major factor in the shakeout of the Internet bubble firms was the excessive number ofcompetitors. Because the barriers to entry were low and the offered products so similar, marginswere insufficient (and often nonexistent), especially given the significant investment in infra-structure and brand building that was needed. Given the fast market growth and the low barriersto entry, these results should have been anticipated; at one time there were a host of pet-supplyand drugstore e-commerce offerings competing for a still-embryonic market.

Potential Competitors

Chapter 3 discusses identifying potential competitors that might have an interest in enteringan industry or market. Whether potential competitors, identified or not, actually do enterdepends in large part on the size and nature of barriers to entry. Thus, an analysis of barriersto entry is important in projecting likely competitive intensity and profitability levels in thefuture.

Various barriers to entry include required capital investment (the infrastructure in cabletelevision and telecommunication) and economies of scale (Becton Dickinson’s 80 percentmarket share in the blood collection category means that R&D investments are spread overa large number of units making it difficult for competitors to enter). Likewise, barriers to entrycan include distribution channels (Frito-Lay and Texas Instruments have access to customers thatis not easily duplicated) and product differentiation (Apple and Harley-Davidson have highlydifferentiated products that protect them from new entrants).

Substitute Products

Substitute products compete with less intensity than do the primary competitors. They are stillrelevant, however, as the discussion in Chapter 3 made clear. They can influence the profitabilityof the market and be a major threat. Thus, plastics, glass, and fiber-foil products exert pressure onthe metal can market. Electronic alarm systems are substitutes for the security guard market.E-mail threatens some portion of the express-delivery market of FedEx, UPS, and the U.S. PostalService. Substitutes that show a steady improvement in relative price/performance and for whichthe customer’s cost of switching is minimal are of particular interest.

Customer Power

When customers have relatively more power than sellers, they can force prices down or demandmore services, thereby affecting profitability. A customer’s power will be greater when itspurchase size is a large proportion of the seller’s business, when alternative suppliers are

Chapter 4 Market/Submarket Analysis 67

available, and when the customer can integrate backward and make all or part of the product.Thus, tire manufacturers face powerful customers in the automobile firms. Soft-drink firms sellto fast-food restaurant chains that have strong bargaining power. Walmart has enormous powerover its suppliers. It can dictate prices and product specifications; if companies resist, there is anAsian supplier that will comply. Walmart is the leading seller of practically all appliances.Because approximately 15 percent of all Procter & Gamble sales go through Walmart(a proportion that approaches 30 percent for some categories), even P&G is subject tocustomer power.

Supplier Power

When the supplier industry is concentrated and sells to a variety of customers in diverse markets,it will have relative power that can be used to influence prices. Power will also be enhanced whenthe costs to customers of switching suppliers are high. Thus, the highly concentrated oil industryis often powerful enough to influence profits in customer industries that find it expensive toconvert from oil. However, the potential for regeneration whereby industries can create their ownenergy supplies, perhaps by recycling waste, may have changed the balance of power in somecontexts.

COST STRUCTUREAn understanding of the cost structure of a market can provide insights into present andfuture key success factors. The first step is to conduct an analysis of the value chain, presented inFigure 4.4, which shows the steps in the production and delivery of an offering that add value. Assuggested in Figure 4.4, the proportion of value added attributed to one value chain stage canbecome so important that a key success factor is associated with that stage. It may be possible todevelop control over a resource or technology, as did the OPEC oil cartel. More likely,competitors will aim to be the lowest-cost competitor in a high value-added stage of the valuechain. Advantages in lower value-added stages will simply have less leverage. Thus, in the metalcan business, transportation costs are relatively high, and a competitor that can locate plants nearcustomers will have a significant cost advantage.

It may not be possible to gain an advantage at high value-added stages. For example, a rawmaterial, such as flour for bakery firms, may represent a high value added, but because the raw

Production StageMarkets That Have Key Success FactorsAssociated with the Production Stage

Raw material procurementRaw material processingProduction fabricatingAssemblyPhysical distributionMarketingService backupTechnology development

Gold mining, winemakingSteel, paperIntegrated circuits, tiresApparel, instrumentationBottled water, metal cansBranded cosmetics, liquorSoftware, automobilesRazors, medical systems

Figure 4.4 Value-Added and Key Success Factors

68 Part One Strategic Analysis

material is widely available at commodity prices, it will not be a key success factor. Nevertheless,it is often useful to look first at the highest value-added stages, especially if changes are occurring.For example, the cement market was very regional when it was restricted to rail or trucktransportation. With the development of specialized ships, however, waterborne transportationcosts dropped dramatically. Key success factors changed from local ground transportation toproduction scale and access to the specialized ships.

DISTRIBUTION SYSTEMSAn analysis of distribution systems should include three types of questions:

What are the alternative distribution channels?

What are the trends? What channels are growing in importance? What new channelshave emerged or are likely to emerge?

Who has the power in the channel, and how is that likely to shift?

Sometimes the creation of a new channel of distribution can lead to a sustainable competitiveadvantage. The growth of regional airports in Europe allowed discount airlines such as RyanAirlines and Easyjet to exploit deregulation to create cheap flights across the continent. Amazonhas radically changed many categories and has recently decided to disrupt the furniture category.

An analysis of likely or emerging changes within distribution channels can be important inunderstanding a market and its key success factors. The increased sale of wine in supermarketsmade it much more important for winemakers to focus on packaging and advertising. Theconsolidation of department stores meant that clothing brands had fewer retailers through whichto sell their products

MARKET TRENDSOften one of the most useful elements of external analysis comes from addressing the question,what are the market trends? The question has two important attributes: it focuses on change andit tends to identify what is important. Strategically useful insights almost always result. Adiscussion of market trends can serve as a useful summary of customer, competitor, and marketanalyses. It is thus helpful to identify trends near the end of market analysis.

While the soft-drink market stagnated in the United States, sales of noncarbonated beveragesgrew sharply and sales of herb- and vitamin-fortified beverages exploded. Not surprisingly, themajor soft-drink companies sought to obtain a position in these trendy categories. Reports thatdark chocolate is heart-healthy has increased sales in the confectionary market and spawned newproducts involving dipped fruits and nuts. Chocolate makers scrambled to redo their lines andcreate novel and value-creating new products.

Trends versus Fads

It is crucial to distinguish between trends that will drive growth and reward those who developdifferentiated strategies and fads that will only last long enough to attract investment (which issubsequently underemployed or lost forever). Schwinn, the classic name in bicycles, proclaimedmountain biking a fad in 1985 with disastrous results to its market position and, ultimately, its

Chapter 4 Market/Submarket Analysis 69

corporate health.4 The mistaken belief that certain e-commerce markets, such as those forcosmetics and pet supplies, were solid trends caused strategists to undertake initial share-buildingstrategies that eventually led to the ventures’ demise.

Irma Zandl, marketing trendspotter, recommends three questions that can help detect a realtrend, as opposed to a fad.5

1. What is driving it? A trend will have a solid foundation with legs. Trends are morelikely to be driven by demographics (rather than pop culture), values (rather thanfashion), lifestyle (rather than a fashionable crowd), or technology (rather thanmedia).

2. How accessible is it in the mainstream? Will it be constrained to a niche market forthe foreseeable future? Will it require a major change in ingrained habits? Is therequired investment in time or resources a barrier (perhaps because the product ispriced too high or too hard to use)?

3. Is it broadly based? Does it find expression across categories or industries? Easterninfluences, for example, apparent in health care, food, fitness, and design—are a sign ofa broader trend.

Faith Popcorn observes that fads are about products, while trends are about what drivesconsumers to buy products. She also suggests that trends (which are big and broad, lasting anaverage of 10 years) cannot be created or changed, only observed.6

Still another perspective on fads comes from Peter Drucker, who opined that a change issomething that people do, whereas a fad is something people talk about. The implication is that atrend demands substance and action supported by data rather than simply an idea that capturesthe imagination. Drucker also suggests that the leaders of today need to move beyond innovationto be change agents—the real payoff comes not from simply detecting and reacting to trends,even when they are real, but from creating and driving them.7

KEY SUCCESS FACTORSAn important output of market analysis is the identification of key success factors (KSFs) forstrategic groups in the market. These are assets and competencies that provide the basis forcompeting successfully. There are two types. Strategic necessities do not necessarily provide anadvantage, because others have them, but their absence will create a substantial weakness. Thefirm needs to achieve a point of parity with respect to strategic necessities. The second type,strategic strengths, are the firm’s assets or competencies that are superior to those of competitorsand provide a base of advantage. The set of assets and competencies developed in competitoranalysis provides a base from which key success factors can be identified. The points to considerare which are the most critical assets and competencies now and, more important, which will bemost critical in the future.

It is important not only to identify KSFs but also to project them into the future and, inparticular, to identify emerging KSFs. Many firms have faltered when KSFs changed and thecompetencies and assets on which they were relying became less relevant. For example, forindustrial firms, technology and innovation tend to be most important during the introductionand growth phases, whereas the roles of systems capability, marketing, and service backupbecome more dominant as the market matures. In consumer products, marketing and

70 Part One Strategic Analysis

distribution skills are crucial during the introduction and growth phases, but operations andmanufacturing become more crucial as the product settles into the maturity and decline phases.

RISKS IN HIGH-GROWTH MARKETSThe conventional wisdom that the strategist should seek out growth areas often overlooks asubstantial set of associated risks. As shown in Figure 4.5, there are risks that:

The number and commitment of competitors may be greater than the market cansupport.

A competitor may enter with a superior product or low-cost advantage.

Key success factors might change and the organization may be unable to adapt.

Technology might change.

The market growth may fail to meet expectations.

Price instability may result from overcapacity or from retailers’ practice of pricing hotproducts low to attract customers.

Resources might be inadequate to maintain a high growth rate.

Adequate distribution may not be available.

Competitive Overcrowding

Perhaps the most serious risk is that too many competitors will be attracted by a growth situationand enter with unrealistic market share expectations. The reality may be that sales volume isinsufficient to support all competitors. Overcrowding has been observed in virtually all hypedmarkets, from railroads to automobiles, airplanes, radio stations and equipment, television sets,and personal computers.

Overcrowding was never more vividly apparent (in retrospect, at least) than in the Internetbubble that occurred around 2000. At one point there were at least 150 online brokerages, 1,000

RISKS OFHIGH-GROWTH

MARKETS

Competitive Risk• Overcrowding• Superior competitive

entry

Market Changes• Changing KSFs• New technology• Disappointing growth• Price instability

Firm Limitations• Resource constraints• Distribution

unavailable

Figure 4.5 Risks of High-Growth Markets

Chapter 4 Market/Submarket Analysis 71

travel-related sites, and 30 health and beauty sites that were competing for attention. Dot-combusiness-to-business (B2B) exchanges were created for the buying and selling of goods andservices, information exchanges, logistics services, sourcing industry data and forecasts, and ahost of other services. The number of these B2B companies grew from under 250 to over 1,500during the year 2000 and then fell to under 250 again in 2003. At the peak, there were estimatedto be more than 140 such exchanges in the industrial supplies industry alone.8

The following conditions are found in markets in which a surplus of competitors is likely tobe attracted and a subsequent shakeout is highly probable. These factors were all present in theB2B dot-com experience:

1. The market and its growth rate have high visibility. As a result, strategists in relatedfirms are encouraged to consider the market seriously and may even fear theconsequences of turning their backs on an obvious growth direction.

2. Very high forecast and actual growth in the early stages are seen as evidence confirminghigh market growth as a proven phenomenon.

3. Threats to the growth rate are not considered or are discounted and little exists todampen the enthusiasm surrounding the market. The enthusiasm may be contagiouswhen venture capitalists and stock analysts become advocates.

4. Few initial barriers exist to prevent firms from entering the market. There may bebarriers to eventual success (such as limited retail space); however, that may notbe evident at the outset.

5. Some potential entrants have low visibility and their intentions are unknown oruncertain. As a result, the quantity and commitment of the competitors are likely to beunderestimated.

Superior Competitive Entry

The ultimate risk is that a position will be established in a healthy growth market and acompetitor will enter late with a product that is demonstrably superior or that has an inherentcost advantage.

Thus, Honda was first to the U.S. market in 1999 with a hybrid car, but its offering struggledin part because it was a two-seater with a frumpy design and technological limitations. Toyota’sPrius, introduced two years later, was a bigger car with better styling and technology and tookover market leadership. The success of late-entry, low-cost products from Asia has occurred incountless industries, from automobiles to clothing to TVs.

Changing Key Success Factors

A firm may successfully establish a strong position during the early stages of market development,only to lose ground later when key success factors change. One forecast is that the survivingpersonal computer makers will be those able to achieve low-cost production through sourcing inlow-cost countries, exploitation of the experience curve, and obtaining efficient, low-costdistribution—capabilities not necessarily critical during the early stages of market evolution.Many product markets have experienced a shift over time from a focus on product technology to afocus on process technology, operational excellence, and the customer experience. A firm that

72 Part One Strategic Analysis

might be capable of achieving product technology-based advantages may not have the resources,competencies, and orientation/culture needed to respond to the demands of the evolving market.

Changing Technology

Developing first-generation technology can involve a commitment to a product line andproduction facilities that may become obsolete and to a technology that may not survive. Asafe strategy is to wait until it is clear which technology will dominate and then attempt toimprove it with a compatible entry. When the principal competitors have committed themselves,the most promising avenues for the development of a sustainable competitive advantage becomemore visible. In contrast, the early entry has to navigate with a great deal of uncertainty.

Disappointing Market Growth

Many shakeouts and price wars occur when market growth falls below expectations. Sometimesthe market was an illusion to begin with. Internet-based B2B exchanges did not provide value tofirms that already had supplier relationships that were, on balance, superior to the B2Bexchanges. There was an absence of a compelling value proposition to overcome marketplaceinertia. Sometimes the need is so apparent that potential growth seems assured. However, thispotential may not be realized for many reasons. For example, the demand for computers existsin many underdeveloped countries, but a lack of funds and the absence of suitable technologyinhibit buying.

The demand might be real but might simply take longer to materialize because thetechnology is not ready or because customers are slow to change. Demand for electronicbanking, for example, took many years longer than expected to materialize.

Forecasting demand is difficult, especially when the market is new, dynamic, and glamor-ized. This difficulty is illustrated by an analysis of more than 90 forecasts of significant newproducts, markets, and technologies that appeared in Business Week, Fortune, and the WallStreet Journal from 1960 to 1979.9 Forecast growth failed to materialize in about 55 percent ofthe cases cited. Among the reasons were overvaluation of technologies (e.g., three-dimensionalcolor TV and tooth-decay vaccines), consumer demand (e.g., two-way cable TV, quadraphonicstereo, and dehydrated foods), a failure to consider the cost barrier (e.g., the SST and movingsidewalks), or political problems (e.g., marine mining). The forecasts for roll-your-own cigarettes,small cigars, Scotch whiskey, and CB radios suffered from shifts in consumer needs andpreferences.

Price Instability

When the creation of excess capacity results in price pressures, industry profitability may beshort-lived, especially in an industry such as airlines or steel, in which fixed costs are high andeconomies of scale are crucial. However, profitability can be hurt if an influential competitor usesa visible, popular product as a loss leader to attract customers. CDs, a hot growth area in the late1980s, fueled the overexpansion of retailers that were very profitable when they sold CDs forabout $15. However, Best Buy, a home-electronics chain, decided to sell CDs for under $10 toattract customers to their off-mall locations. The result was a dramatic erosion in margins andvolume and the ultimate bankruptcy of a substantial number of the major CD retailers. A hot

Chapter 4 Market/Submarket Analysis 73

growth area had spawned a disaster, not by a self-inflicted price cut, but by price instability from afirm that chose to treat the retailing of CDs as nothing more than a permanent loss leader.

Resource Constraints

The substantial financing requirements associated with a rapidly growing business are a majorconstraint for small firms. Royal Crown’s Diet-Rite cola lost its leadership position to Coca-Cola’sTab and Diet Pepsi in the mid-1960s when it could not match the advertising and distributionclout of its larger rivals. Furthermore, financing requirements frequently are increased by higherthan expected product development and market entry costs.

The organizational pressures and problems created by growth can be even more difficult topredict and deal with than financial strains. Many firms have failed to survive the rapid-growthphase because they were unable to obtain and train people to handle the expanded business or toadjust their systems and structures.

Distribution Constraints

Most distribution channels can support only a small number of brands. For example, few retailersare willing to provide shelf space for more than four or five brands of a houseware appliance. As aconsequence, some competitors, even those with attractive products and marketing programs,will not gain adequate distribution and their marketing programs will become less effective.

A corollary of the scarcity and selectivity of distributors as market growth begins to slow is amarked increase in distributor power. Their willingness to use this power to extract price andpromotion concessions from manufacturers or to drop suppliers is often heightened by their ownproblems in maintaining margins in the face of extreme competition for their customers. Many ofthe same factors that drew in an overabundance of manufacturers also contribute to overcrowdingin subsequent stages of a distribution channel. The eventual shakeout at this level can haveequally serious repercussions for suppliers.

KEY LEARNINGS

The emergence of submarkets can signal a relevance problem or opportunity.

Market analysis should assess the attractiveness of a market or submarket, as well as itsstructure and dynamics.

A usage gap can cause the market size to be understated.

Market growth can be forecast by looking at driving forces, leading indicators, andanalogous industries.

Market profitability will depend on five factors—existing competitors, supplier power,customer power, substitute products, and potential entrants.

Cost structure can be analyzed by looking at the value added at each productionstage.

Distribution channels and trends will often affect who wins.

Market trends will affect both the profitability of strategies and key success factors.

74 Part One Strategic Analysis

Key success factors are the skills and competencies needed to compete in a market.

Growth-market challenges involve the threat of competitors, market changes, and firmlimitations.

FOR DISCUSSION1. What are the emerging submarkets in the fast food industry? What are the

alternative responses available to McDonald’s, assuming that it wants to stayrelevant to customers?

2. Identify markets in which actual sales and growth were less than expected. Whywas that the case? What would you say was the most important reason that thebottom fell out of the dot-com boom in early 2000?

3. Why were some brands (like Google) able to fight off competitors in high-growthmarkets and others were not?

4. Pick a company or brand/business on which to focus. What are the emergingsubmarkets? What are the trends? What are the strategic implications of thesubmarkets and trends for the major players?

5. What considerations go into forecasting when dark chocolate will peak?

BEST DIGITAL PRACTICE

BeMyGuest: Experience Economy in Asia

Historically, middle-class Asian travelers seeking unique excursions within their own regions havefound it difficult to connect with small to mid-size tour operators that lack the marketing budgets andinfrastructure to reach them. Singapore startup BeMyGuest helped bridge the gap by creating a tours-and-activities online booking platform. Today, travelers can access over 15,000 experiences across700 cities. The key to BeMyGuest’s scalability is effectively understanding the needs of the twosubmarkets it caters to: tour providers and travelers.

To tour providers, BeMyGuest’s value proposition is its spectrum of services. Specifically, thecompany offers four channels through which suppliers can market and advertise travel experiences.The first channel is its own website, bemyguest.com. In order to secure a listing, each supplier gives afree test of the travel experience they want to sell. Once the experience is verified as high quality, aBeMyGuest copyeditor adds a description and posts it to the site. A second channel available is theB2B Agents Marketplace. Created as a way for providers within the industry to connect with oneanother, the platform allows business and independent travel agents to browse and book activities andtours on behalf of their clients. Additionally, BeMyGuest has API (Application ProgrammingInterface) integration tools that allow for seamless access to data for each travel experience. Thishas helped link supplier inventory to complementary travel engines in China, like Ctrip, as well asmajor regional airlines such as Air Asia. For businesses without the capabilities to implement an API,BeMyGuest has a Whitelabel Partnership in which they create a branded webpage and providecustomer support in exchange for a commission from each booking. This breadth of service options

(continued)

Chapter 4 Market/Submarket Analysis 75

has resonated well with tour companies that often don’t have the means to invest in robust contentmanagement technology.

BeMyGuest also appeals to travelers. CEO and Founder Clement Wong optimized the userjourney on bemyguest.com by focusing on data driven outlets like search, social listening, and focusgroups that could provide insight into customer behavior and identify opportunities for improvement.As a result, the website has an easy-to-use interface that invites potential customers to browse travelexperiences based on their personality types: whether they are, for example, an adventure seeker,culture finder, or indulger. Another component of the site that has delighted travelers is a tool thatcompares pricing, reviews of different activities, and the operating history of the tour companies,including how long they have been in business and any awards they have won. Women in particular,who make up two-thirds of BeMyGuest’s customer base, reportedly “love” this feature.

The company’s continued rapid growth in China today serves as a tangible example of thebenefits marketers can gain by structuring business offerings to fit different submarkets.

Questions:

1. BeMyGuest is developing a two-sided market by facilitating the development of service providersand customers. What strategies have been most effective on each side of the market?

2. Are there any potential conflicts or additional sources of strategic opportunity between the twosubmarkets BeMyGuest targets? How should it manage these?

Sources:“Company Profile: BeMyGuest,” Fast Company, http://www.fastcompany.com/company/bemyguest

Clement Wong, “Launching a Travel Booking Startup from Singapore with Clement Wong, Founder &CEO of BeMyGuest,” February 14, 2014, Founders Grid, https://foundersgrid.com/travel-booking-singapore/

Kaylene Hong, “BeMyGuest Makes Buying Holiday Tours in Asia as Easy as Booking a Hotel orRenting a Car,” The Next Web, http://thenextweb.com/asia/2014/06/12/bemyguest-makes-buying-holiday-tours-in-asia-as-easy-as-booking-a-hotel-or-renting-a-car/

BEST GLOBAL PRACTICE

Cholula: America’s Hottest Sauce

In recent years the U.S. condiments and sauces market has been upended by one product: hot sauce.Since 2000, the category has grown 150%—more than BBQ sauce, ketchup, mayonnaise and mustardcombined! Multiple factors are driving this evolution. Primarily, the increasing influx of LatinAmerican and Asian immigrants has helped make spicy foods more mainstream. Hot sauce aficionadosexisted in pockets around the country for years, but the product has become prevalent in manyhouseholds and restaurants. Second, Millennials have shown an increasing desire for exploring newand exotic flavors in their food. Research points to the changing palate preferences of thisdemographic, with individuals now valuing having a variety of hot sauce flavors and heat levelsavailable at home and when eating out.

Among the numerous brands within the industry, Cholula has worked to establish itself as themost recognized Mexican hot sauce. The product was first introduced to the U.S. market in 1989 in

76 Part One Strategic Analysis

regions like Texas and Southern California that had larger Hispanic influences. Gradually though,distribution expanded nationally and Cholula appeared widely in both restaurants and grocery stores.Initially, the product was positioned alongside other Mexican food staples like taco mix and tortillas.While this placement strategy was crucial to kick-starting sales, management was cautious to avoid“pigeon-holing” the brand. In other words, the Cholula team wanted consumers to perceive theproduct as one that was instead versatile and could be used across different types of foods.

Cholula achieved this shift in brand perception through organic social media advertising.Knowing that the Millennial submarket responds well to peer influence and a sense of discovery,Cholula encouraged its fans to share descriptions and photos of their meals using the product increative ways on social media.

Relying purely on word-of-mouth advertising has helped Cholula achieve 10 percent marketshare in the U.S. hot sauce category (Tabasco has 18%) and sell an average of 10 million bottles a yearby 2015. The brand’s marked success in moving distribution from targeted Latin American markets tothe condiment aisle in mass retailers shows the potential for international brands to meet the needs ofemerging U.S. submarkets.

Questions:

1. Based on the information in the case and any outside resources, perform a profitability analysis ofthe hot sauce industry. What is Cholula’s biggest challenge?

2. Using outside resources, offer an assessment of the size of the hot sauce market in the U.S. Beprepared to defend your method for market sizing.

Sources:Elizabeth Segran, “Host Sauce, USA,” Fast Company, August 27, 2015, http://www.fastcompany.com/3050328/most-creative-people/hot-sauce-usa

Roberto A. Ferdman and Richie King, “The American Hot Sauce Craze in One Mouth-WateringChart,” Quartz, January 28, 2014, http://qz.com/171500/the-american-hot-sauce-craze-in-one-mouth-watering-chart/

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C H A P T E R F I V E

Environmentaland Strategic Analyses

I felt a great disturbance in the Force.—Obi Wan Kenobi, Star Wars

You can’t stop the waves, but you can learn to surf.—Jon Kabat-Zinn, MD, founder of Mindfulness-Based Stress Reduction

Marketing without data is like driving with your eyes closed.—Dan Zarrella, social media scientist

Thomson Corporation, in 1997, was a Toronto media company that owned 55 daily newspapersthat were doing well.1 CEO Richard Harrington, however, observed several trends in theenvironment that caused him to move the firm away from newspapers. He anticipated theInternet was going to undercut classified advertising and cable television and the Internet weregoing to steal readers. Despite the fact that the company was profitable, he made the ratherdramatic decision to divest newspapers and to move the firm into delivering information andservices online to the law, education, healthcare, and finance industries. That decision allowedThomson to thrive today while other newspaper-based firms are struggling. The decision wasbased on projecting and acting on environmental trends.

The focus in this chapter changes from the market to the environment surroundingthe market. Being attentive to these broader environmental trends can have a make-or-breakeffect on companies. The rapid rise of the App Store and mobile technologies was critical to theentry success of 2009 startup WhatsApp and set the stage for it to gain 500 million active users by2014, ultimately resulting in its acquisition by Facebook for $19 billion.2 On the other hand, agovernment regulation requiring new product labels can be the death knell for a small foodcompany that must expend a large percentage of its profits to comply. External events can help orhurt companies of all sizes. The goal is to identify and evaluate trends and events that will affectstrategy either. Getting in front of emerging trends also allows the firm to prepare strategies todefend itself against threats or, as Thomson did, to neutralize them.

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This chapter begins by examining environmental analysis. This broad topic is also covered inother strategy and strategic planning courses. Therefore, the focus here will be on trends emergingfrom technology, culture, business, government, and the economy that have implications forthe market. Given an understanding of trends, the firm can move into three types of analysis:(a) impact analysis, which will help assess the relative importance of threats facing the firm;(b) scenario analysis, which will help the firm assess the meaning and impact of differentenvironmental events; and (c) SWOT analysis, which compares environmental threats andopportunities with firm strengths and weaknesses to derive strategic actions.

ENVIRONMENTAL ANALYSISEnvironmental analysis is by definition very broad and casts a wide net to catch differentstakeholders and trends that may have implications for the firm. As a practical matter, the analysisrequires discipline to make sure that it does not become an out-of-control fishing expedition thatoccupies time and generates reports, but provides little real insight and actionable information.

Although environmental analysis has no bounds with respect to subject matter, it is helpful toprovide some structure in the form of five broad areas of inquiry that are often useful: demo-graphics, culture, business and technology, government/policy, and economic trends. The exactareas that should be monitored will vary depending on the business. For example, monitoringscience developments will be critical to a pharmaceutical company but not important to a home-delivery food service. Exactly which parts of the external environment should be monitored is thefirst decision a company makes, and it should be revisited as the business changes.

Customer Trends

Customer trends can present both threats and opportunities. They have helped create fortunesfor those companies able to take advantage of these trends and driven out less the fortunate. Thesetrends can emerge out of the sheer force of demographics or involve more profound culturalshifts. The following sections discuss recent demographic, cultural, and business and technologytrends occurring in customer markets.

Demographic Trends

Demographic trends can be a powerful underlying force in a market and can be predictable.Among the influential demographic variables are age, income, education, geographic location, andethnicity. Consider the demographic shifts described in Figure 5.1.

Aging. The world population is aging more rapidly due to decreased fertility rates and people’s tendency tolive longer. In 2015, 8.5 percent of the world’s population of 617 million people were aged 65 or older. Theshare of the population over age 65 is expected to continue to grow, hitting 12 percent in 2030 and 17percent in 2050.3 This effect is expected to be even more dramatic in the United States with 20 percent ofthe U.S. population expected to be older than 65 by 2030.4

Changing Ethnic Mix. The United States is projected to become more racially and ethnically diverse inthe coming decades due to both birth rate and immigration. Today, 14 percent of the U.S. population wasborn outside of the country, as opposed to merely 5 percent in 1965. By 2060, the non-Hispanic White

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Chapter 5 Environmental and Strategic Analyses 79

Cultural Trends

The cultural values underlying a market vary according to the unique history of a geography, whichcan be a region, country, state, or city. As customer behavior arises from this cultural soup, it isimportant that a business stays abreast of foundational and changing cultural trends for the marketsit serves. Consider the cultural values of a country. According to the Hofstede cultural valuesmeasure, there are six dimensions of culture on which countries differ:

Power Distance: Societal comfort with unequal distribution of power between membersof society.

Individualism versus Collectivism: Degree to which people primarily identify asindividuals or as members of groups

Masculinity versus Femininity: Societal preference for achievement, competition, andtoughness versus cooperation, caring, and quality of life

Uncertainty Avoidance: Level of discomfort with the unknown and ambiguity

Long-term versus Short-term Orientation: Preference for maintaining traditions andnorms versus comfort with change

Indulgence versus Restraint: Societal acceptance of people’s desire to enjoy life andhave fun.

population is expected to decrease from over 50 percent of the nation’s population to just 44 percent, andno ethnic group is predicted to have a majority share of the U.S. population. The population of thosewho identify as two or more races is projected to be the fastest growing over the next five decades, withthe Asian population and Hispanic population being the second and third fastest-growing groups. By 2060,more than one-quarter of the U.S. population is projected to be Hispanic.5

Women in the Labor Force. Since the 1960s, American women have increasingly participated in thelabor force and the gender pay gap has decreased. In 2011, 40 percent of households with childrenreported that the mother was the primary breadwinner. While the proportion of women in politicaland business leadership positions has risen, it remains small compared to that of their malecounterparts.6

Shifting Family Structures. The marriage rate has been declining for decades, and the number ofhouseholds with two-parents is declining in the United States. Simultaneously, divorce, remarriage, andcohabitation rates are increasing. The stereotypical roles of mothers and fathers are converging, in partbecause of the rise in the proportion of breadwinner mothers.Decreasing Middle Class. In 2015, the number of middle-class U.S. adults fell to 50 percent, while thelower and upper classes expanded. The income gap between middle- and upper-class Americans has alsowidened. In 1970, the wealthiest households held 29 percent of the U.S. aggregate household income;today, they hold 49 percent.Boomerang Generation. 29 percent of young adults have moved back in with their parents.7 This delaysyoung adults’ need to purchase their own homes, contributing to U.S. homeownership rates in 2016 beingat an all-time low.8

Figure 5.1 Demographic Trends Important to Customer Behavior

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Figure 5.2 shows how the U.S. and BRIC countries compare on these values. In addition tothese foundational cultural values, cultural values change over time. Consider, for example, thetrends in Figure 5.3.9

0

10

20

30

40

50

60

70

80

90

100

Power Distance Individualism Masculinity UncertaintyAvoidance

Long-TermOrientation

Indulgence

U.S. Brazil India China Russia

Figure 5.2 A Comparison on the United States and BRIC Countries on Hofstede’s Cultural Values

Me Nation. Consumers see themselves as the center of attention and crave self-expression andindividuality. Those who previously admired celebrities, for example, now desire to become them, leadingto a rise in the number of YouTube stars, reality shows, and talent competitions. Responsive firms offerproducts that can be hyper-personalized, as customer demands are satisfied through this type ofengagement with brands.Power Play. Customers want to introduce fun, spontaneous aspects into their routine. Retailers areapplying game mechanics, such as challenges, achievements, and rewards in order to engage customers.Responsive firms reward customers who frequently purchase with free products or encourage customers tovisit their social media platforms to receive discounts.Visualization. Customers demand immersive experiences through interactive visual content. Examples ofthis include the Facebook Live feature, Google Hangouts, viral sharing of photo-shopped images withTumblr, and Pinterest’s online pinboard. Taste for aesthetically pleasing designs is critical in manycategories where customers seek a beautiful look to go with strong functionality.Transparency. Customers desire transparent and genuine experiences and want to have control overtheir lives. They are increasingly choosing to purchase products that align with their values, so firms mustcommunicate details of their production processes, ethics, sustainability, and product quality in a mannerthat is easily accessible. One example of a response to this trend is TOMS One for One shoe donations.Simplification. Technology has made customers’ lives vastly simpler. Smartphones allow customers tocommunicate through social media, shop online, or use GPS trackers whenever and wherever they want.

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Chapter 5 Environmental and Strategic Analyses 81

Sustainability

A mega cultural trend worth examining in more depth is the green movement of the twenty-firstcentury. Customers care a great deal about sustainability, or the impact of their purchases on theenvironment, and there are a variety of different ways that this concern influences their purchasingbehaviors. For example, many customers have switched from conventional products, such asincandescent light bulbs, gas-fueled cars, and conventionally grown foods, to more eco-friendlyones, such as CFL or LED light bulbs, hybrid cars, and organic produce. Other customers considerhow sustainable a firm’s business practices are when deciding whether or not to make a purchase.Still other customers are choosing to not purchase new products altogether, instead repairing oldproducts or borrowing or trading products through organizations such as Freecycle.10

Importantly for firms, increasing numbers of customers—66 percent in 2015, up from 50percent in 2013—report being willing to pay more for eco-friendly products.11 Some customers,most notably Millennials in the United States and a range of customers in developing countries, dopay more for eco-friendly products, but other customers’ actual willingness to purchase environ-mentally friendly products lags behind their purported support for them. For example, 26 percentof customers say they want more eco-friendly products on the market, but only 10 percent haveactually bought these new products when they are made available. Companies seeking to competeon environmental benefits should carefully determine whether their target market’s interest equalstheir willingness to pay.

Firms must cater to this desire for instant, easier, and simpler customer experiences. PayPal, for example,allows customers to execute cashless payments and transactions. Additionally, with this instant access,customers are increasingly able to compare brands and prices. Responding firms are challenged to createmore personalized suggestions in order to decrease the time customers spend making decisions.Snacking. Through technological advances, customers expect all aspects of their lives to be immediate,interactive, and intuitive. Customers now prefer to digest smaller portions of information, data, orentertainment and they prefer access to be immediate and free. Examples of this trend include blogs,YouTube videos, RSS feeds, Tumblr photos, and Tweets.New Networking. Communities can now be based on shared interest instead of location. Social media andonline communities are thriving, and customers now digitally connect with a purpose, such as volunteeringfor a cause or participating in Kickstarter campaigns.Local Celebration. Customers are increasingly opting to purchase locally produced goods over productssourced from other countries. Customers prefer to support local communities, traditions, and culturebecause it gives them a sense of pride, belonging, and exclusivity. Responding firms offer locally sourcedbrands and products.My Tribe. There is growing affinity toward a social unit that is centered on an interest or activity and notbound by conventional social links. Harley-Davidson events, such as the annual rally in Sturgis, SouthDakota, attract hundreds of thousands of participants. The Apple users group has been a strong part ofApple’s success in a PC world. The Internet has generated a host of communities and chat groups that playan influential role through information exchange and social networking.Renting Not Owning. There is a growing trend, especially among young customers, toward valuing accessto products instead of owning them. Rather than seeing renting as a poor substitute for owning, manycustomers actually prefer the flexibility and pricing model of renting. This trend can be seen in theincreasing use of Zipcar and BMW DriveNow that allow customers to use a car for a few hours, andcompanies, such as Spotify, that allow customers to listen to music without purchasing CDs.

Figure 5.3 Cultural Trends Important to Customer Behavior

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Business and Technology Trends

Business and technology trends represent opportunities to those firms in a position to capitalizeand threats to firms which are not.

Big Data

The ability to capture and store data became possible in the 1950s and 1960s with large mainframecomputers. Since then, the advent of the personal computer in the 1980s, the rise of the Internet inthe 1990s, and expanded bandwidth into the 2000s have set up the ability to collect, store, andmanipulate large data sets often referred to as big data. Supported by the “cloud” where data arenow stored and accessed by customers and companies, big data is one of the megatrends of our era.

Firms in general and marketing teams in particular are swamped by data and are struggling toturn that data into insights, more valuable products and services, and better decisions. It is truly anavalanche that has many sources, some new and some ongoing. One distinguishing feature of thesedata is that they are at the individual customer level, which means that the company has a muchricher understanding of customer behavior and the ability to act on it. For example, a bankachieved more than 600 percent ROI (return on investment) by using predictive analytics to moreintelligently target customer offers. Among the sources of these data are Internet search andshopping records, social media activity, blogging participation, mobile phone usage behaviorincluding opt-in records of GPS (Global Positioning System) locations, digital picture and videos,purchasing data, and much more.

A second distinguishing feature of big data is that it is often real time in nature, which meansthat companies are able to learn quickly if there are problems and work to resolve them. Forexample, social media activities help alert the firms to problems with their products and services,and credit card companies are able to alert their customers to the possibility of fraud bydocumenting purchases in real time and comparing to the customers’ purchase history patterns.

Firms trying to use “big data” to get an edge or just to keep up with competitors require a set ofcompetencies. First, it is critical to be able to ask the right questions, both strategic and tactical,because with big data, questions are not obvious and the nature of the insights is often hidden.Finding the right questions requires a deep connection to customers achieved through interviewsor visits where customers purchase and use products. Second, firms need to be competent indesigning and interpreting an ongoing flow of experiments. The ability to learn in real time sets upan opportunity for companies to run small and numerous experiments to tune their strategies.Third, big data often presents big integration challenges because companies have social media datain one repository and purchase data in another. To get the 360-degree view of customers incommunication, purchasing, and social activities, systems should be set up to capture and integratecustomer data. Finally, companies need to be good at data storage, data handling, analytics, and thedevelopment of problem-driven statistical models. Without such capabilities, they can’t play thebig data game.

Innovations

Trends, both market and environmental, can stimulate innovation. It is useful to distinguishbetween incremental, substantial, and transformational innovation. They differ in terms of hownew they are and how much wealth they represent for the business. An incremental innovationmakes the offering more attractive or profitable, but does not fundamentally change customer

Chapter 5 Environmental and Strategic Analyses 83

behavior, the value proposition, or the go-to-market strategy. In general, substantial innovationshave ten times the impact of incremental innovations; the impact of transformational innovations isten times greater again. Substantial and transformational innovations need to be detected andtracked by companies.

A transformational innovation often provides a fundamental change in the business model,likely involving a new value proposition and a new way to manufacture, distribute, and/ormarket the offering. It is likely to make the assets and competencies of established firmsirrelevant. The advent of steam power, which ultimately spelled the end of sail-poweredtransport, was a transformational innovation. The automobile, Southwest Airlines, the businessmodel of Dell Computers, smartphones, Amazon.com, Uber, and Cirque du Soleil representinnovations that have transformed markets. Transformational innovations often attract cus-tomers who had been the sidelines because the prior offering was too expensive or lacked somecritical element.

Substantial innovations are in between in newness and impact. They often represent a newgeneration of products, such as the Boeing 747 or the iPad, that make existing productsobsolete for many customers. Cisco introduced a videoconference technology called tele-presence that uses massive amounts of bandwidth to provide a high-fidelity experience andshould expand the use of videoconferencing. In these cases, the basic value proposition andbusiness model were enhanced but not changed. Substantial innovations are much morecommon than transformational innovations, but can still create major changes in the competitivelandscape.

Innovations that are transformational or even substantial are often championed by newentrants into the industry, so it is important to monitor new, even small, firms and not let the large,established firms dominate the environmental analysis.12 Incumbent firms—especially successfulones—have incentives to protect and improve their profitable niches in the market by extendingcurrent offerings with incremental innovations. Their people, culture, and mix of assets andcompetencies are unlikely to support a transformational innovation. As a result, when transfor-mational innovations appear, the first reaction of incumbent firms is denial followed by discountingthe new entrant’s ability to reach and convert the market. This skepticism is why horse-drawnbuggy manufacturers never became automobile firms, telegraph companies missed out on thetelephone, and 3M and others felt that the early and primitive Xerox copy technology wouldnever replace heat-sensitive copier paper. Chapter 13 will discuss how the substantial andtransformational innovation can define new subcategories and lead to enduring success.

Workplace

Online communication platforms have increased employees’ ability to work remotely.13 Thirty-seven percent of U.S. workers reported having used a computer to work from home. Officeworkers are especially likely to be able to telecommute with 44 percent of white collar professionalsreporting working remotely at least occasionally. Remote work can be a boon for employeeswhen it increases their flexibility, but employees’ ability to work remotely also means that they areincreasingly expected to be “on call” for work outside of traditional business hours.

This blurring of the lines between work and leisure time is further augmented by the trendfor companies to offer lifestyle “perks” to their employees. These perks range from onsite healthcare (Facebook), nap pods, and an errand running service (Google) to three catered meals a dayand meditation classes (Twitter).14 These more extreme examples still are limited primarily to

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technology companies, but firms in a wider range of industries are adopting employee perks,which, they hope, can increase both employee satisfaction and productivity.

New technologies, such as Slack, an instant messaging system designed for internal teamcollaboration, are now widely used by employees for all types of instant messaging insidecompanies. Launched in August 2013, Slack grew to 4 million daily users by October of 2016.Slack also appears to be crossing over from business use to personal use as a social mediaplatform.15

Another important trend, which has been facilitated by improved technology, is the growth ofthe “sharing” or collaborative economy. This term refers to a business model in which onlinetechnologies enable people to get what they need from each other rather than from centralizedinstitutions. Sharing economy companies such as Uber, Airbnb, and TaskRabbit provide aplatform, such as an app, that enables people who are looking for a service to connect withanother person who is willing to provide it. Originally the domain of small start-ups, establishedcompanies have seen the potential in this economic model and are beginning to add sharingstyle services to their core offerings.16

Sustainable Businesses

The sustainability trend described earlier applies to business as well. In one study by MITand Boston Consulting Group in which nearly 3,000 executives from 113 countries wereinterviewed, two thirds of the firms said that sustainability was critically important to beingcompetitive.17 There are several drivers of “green.” One driver is concerns about global warmingand resource depletion. Many firms feel a responsibility to be part of the solution, includingUnilever and Walmart. Unilever’s CEO Paul Polman observed that climate change costUnilever well over 200 million Euros in just one year and that is enough motivation to dosomething about the problem.18 In response, Unilever has set a goal to cut their environmentalimpact in half by 2030.19

A second driver is the ability of green programs to provide functional benefits to firms in theform of cost savings from reduced energy consumption. Firms are often surprised at the extentto which green programs pay off. Walmart, whose green story is told in the insert, discovered, toits surprise, that an ambitious environmental program was associated with meaningful, tangiblecost savings plus a positive sales response to green products. A third driver is a desire to berespected by customers and employees, both of which value a relationship with a firm that theyadmire.

WALMART TURNS GREEN

In 2005 Walmart began to develop green programs, an amazing turnaround for a company that hadprided itself on low costs and prices first and foremost.20 Through its partnership with the Environ-mental Defense fund and its own initiatives, Walmart has set and met numerous environmental goalsover the past ten years.21 The firm has set the goal to create zero waste across its global operations. It isworking to achieve this goal through projects such as reducing in-store plastic bag usage, and as of 2016,81 percent of the materials from operations in the United States were diverted from landfills. However,Walmart’s most significant area of environmental impact is in how it can influence the thousands of

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Chapter 5 Environmental and Strategic Analyses 85

Government/Policy Trends

The addition or removal of legislative or regulatory constraints can pose major strategic threats andopportunities for companies. For example, the ban of some ingredients in food products orcosmetics has dramatically affected the strategies of numerous firms. The impact of governmentalefforts to reduce piracy in industries such as software (more than one-fourth of all software used iscopied), CDs, DVDs, and movie videos is of crucial importance to those affected. Deregulation inbanking, energy, and other industries can affect the nature and intensity of competition as firmsenter and exit to take advantage of the change. The automobile industry is affected by fuel-economy standards, the luxury tax on automobiles, and incentives for electronic car purchases.Companies such as Amazon are dramatically affected by regulations requiring collection sales taxon products shipped.

Companies should track all legislative and regulatory activities that have positive and negativeimplications for their business, including local, state, national, and international developments. Forexample, Brexit will have significant implications for firms operating in the United Kingdom andthe European Union and beyond. The influx of refugees from the Middle East and North Africainto Europe, the 2016 coup in Turkey, Russia’s annexation of Crimea, and increased tensionswith Ukraine may provide both opportunities and constraints for firms operating or planningto operate in these regions. Tracking allows companies to engage in legal advocacy activities to

suppliers that produce and transport its products. Walmart both rewards suppliers who are alreadyproducing products in an environmentally friendly way by putting a Sustainability Leader badge onapproved products and helps suppliers to shrink their environmental footprint. These assistanceinitiatives are wide ranging, from working with corn farmers to optimize their fertilizer use, toencouraging suppliers to use sustainably harvested palm oil to reduce deforestation, to improvingenergy efficiency in Chinese manufacturing facilities. Given Walmart’s footprint and influence aroundthe world, these programs are likely to make a difference.22

Also in 2005, a brand repositioning initiative was launched that resulted in a new brand position in2008. Research found that customers wanted value more than just low prices, value in the form ofcleaner stores, better customer service, more high-quality products, and the lifestyle benefits of savingmoney. The result came together under a new slogan “Save money. Live better.” It helped provide anumbrella theme for the new Walmart and its sustainability program as well as organic foods, higherquality products, and improved store look and feel.

There are still hardcore Walmart critics, but it is clear that their intensity and breadth are visiblylessened. Articles “Green Project Making It Harder to Hate Walmart” and “Walmart’s EnvironmentalGame Changer” show evidence of this change. By 2016, Walmart was in the top 7 percent of all brandsin Y&R’s Brand Asset Valuator.23

Why did Walmart suddenly make such a U-turn? Three reasons. First, the CEO decided it wasthe right thing to do, based, in part, on the influence of an environmental professional who hadvacationed with members of the outdoor-oriented Walton family. Second, a single-minded focus oncosts and the resulting policies regarding employees, communities, and suppliers had generatedextremely negative press attention that affected the company’s ability to grow and succeed. Morecommunities were turning down Walmart stores, and 8 percent of Americans were committed toshopping elsewhere. Walmart executives knew they needed to take actions to improve the companyimage. Finally, to the surprise of the executives, many of the green programs were helping thebottom line.

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influence the nature of policy decisions. Discussed in more detail in the section ScenarioAnalysis, like any trend, government actions are not necessarily bad for business and may evenbe a source of competitive advantage for some firms more than others.

Economic Trends

Economic factors play a critical role in the effectiveness of a firm strategy. A very different strategy isneeded when the economic climate is healthy than when it is under stress. Further, it is far better andsometimes critical to put strategies into place before a strong or weak economy hits. Of particularimportance is to forecast and adjust to recessions, especially deep ones, because they can threatenfirm survival. That means the balance sheet and cash position need to be buttressed, which, in turn,implies that firms need to cut budgets and programs, sometimes radically. Marketing is particularlyvulnerable because its budget appears to be discretionary. However, as marketing is the firm’sconnection to the customer, research has shown that while such cuts give a short-term boost to thebottom line, they are often damaging to long-term profits.24 Rather than cutting marketing budgetsand programs across the board, think of a budget crunch as an opportunity to develop and nurturethe effective and identify and defund the ineffective. The actual market impact of a budget reductioncan be minimized by identifying and cutting support to budget areas in which marketing perform-ance is mediocre or worse.

Recessions can also provide opportunities for major changes in a company’s competitiveadvantage. First, some industries and offerings thrive in recessions. Firms that offer lower pricedalternatives to preferred products witness increased sales during recessions. These can be directsubstitutes for higher priced goods, such as private label products over name-brand products orproducts that fulfill customers’ needs in a similar way, such as Keurig single cup coffee pods ratherthan coffee drinks at Starbucks or Coleman camping gear rather than hotel room for a vacationgetaway. Products that inexpensively satisfy customers’ needs to indulge also do well. For example,during the 2001 recession, Leonard Lauder, chairman of Estee Lauder companies, noticed thatlipstick was selling very well. He hypothesized that when money is tight, customers substitute aninexpensive, but high-quality indulgence, such as lipstick, for a larger one such as new clothing orshoes, a phenomenon that has come to be known as “the lipstick effect.”25 In the service industry,there is increased demand for firms that upgrade, maintain, or repair existing equipment ascustomers prefer to repair than replace equipment when in tough economic times. For example,auto mechanics can do well during recessions as customers choose to repair their old cars ratherthan purchase new ones.26 Products that support frugality, such as Tupperware, which storesleftovers or allows customers to break up bulk purchases into meal-sized units, also do well whenbudgets are tight.

Second, a recession can provide an excellent platform to introduce products or marketingprograms because the media environment is likely to be less cluttered and competitors will be lessmotivated and able to respond. Third, it is important to find ways to communicate value, often anecessity during tough economic times, without hurting the brand. Customers do become moreprice sensitive during recessions, but shouting price and deals is the wrong course because itannounces that the brand is not worth the price. One way is to divert attention to value subbrandssuch as the BMW One Series or the Fairfield Inn by Marriott. Another is to bundle services toprovide extra value at the same price, such as free shipping by Amazon or McDonald’s McPick 2.Still another is to demonstrate the value of quality—Bounty paper towels pay for themselves bydoing more for the same price. Finally, the frame of reference can be changed—other products

Chapter 5 Environmental and Strategic Analyses 87

can become the comparison standard. For example, KFC’s Family Value Meal versus homecooking or Crayola’s 64 colors versus expensive toys.

Fourth, firms can benefit from spending on marketing in a recession. Spending when othercompanies are cutting costs can help a firm consolidate its gains or provide an opening for a newfirm to enter the market. Firms with solid marketing fundamentals in place before a recession hitshave the culture, competencies, and assets to treat the recession as an opportunity rather than aproblem. In particular, spending on new product development during a recession is beneficial forfirms to maintain their long-term technological advantage.27

Cultivating Vigilance

There is a strong tendency to fail to perceive or underestimate important trends or to miss theaccurate prediction of future events.28 Just consider how the threats from digital photographywere ignored at Kodak. It was a Kodak engineer who invented the digital camera in 1975,and Kodak had clear indicators as early as 1979 that that the market would gradually switchfrom film to digital over the next thirty years, but these warnings were ignored.29 One reason isthat executives were focused on execution and had little attention span left for “might be.”Kodak’s executives encouraged innovation, but directed it toward the chemical side of filmdevelopment rather than the digital side.30 Another reason is a natural perceptual bias towardignoring or distorting information that conflicts with current strategies. This “confirmation bias”means that critical information is lost. Because Kodak’s business model was based on sellinginexpensive cameras and expensive film, filmless digital cameras were regarded as “the enemy”rather than the future.31 Still another reason is the support of “groupthink” within theorganization—it is awkward to point out that basic assumptions may be wrong. In the caseof Kodak, being centered in the one-company town of Rochester, New York, further limitedcriticism of the company.

Research on organizational vigilance suggests several ways that leaders and organizationscan improve. First, be curious, externally focused, and connected. What is happening in areasthat will impact the business? Travel, observe, and interact with people of all types. Second,make every employee a listening post for the organization and create processes that allow theobservance of even small signals from any sector to be shared in a low-cost manner andrecognized in annual reviews. Third, develop a systematic set of processes for collecting,disseminating, and responding to information from the firm’s stakeholders. Johnson & Johnsonhas a strategy process termed Frameworks that looks at regulations, insurance coverage, andcompetitive moves and considers their implications. Related, make sure that all units inside thecompany as well as partners outside the company are communicating so that all the pieces oftrends can be assembled in-house. Fourth, create discovery mechanisms. Texas Instrumentsholds a “Sea of Ideas” meeting each week to recognize emerging needs and innovation at thefringe of its business.32 One such meeting led to the development of a low-power chip for mobilephones. Finally, force a long-term perspective; get away from day-to-day executional issues andprograms. Some firms create a separate division of the company that is shielded from thedemand to create immediate value for the company in order to develop truly innovative ideasand seize long-term opportunities. For example, Google has a “moonshoot” research anddevelopment program, X, that is separate from Google Research and focuses on radicalinnovations, such as driverless cars, high-altitude Wi-Fi balloons, and glucose-monitoringcontact lenses.33

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STRATEGIC ANALYSISUncertainty often emerges from environmental analysis. Before strategies are developed, twoadditional strategic analysis steps should be taken, each described in the sections that follow. First,to be manageable, strategic uncertainties need to be grouped into logical clusters or themes. It isthen useful to assess the importance of each cluster in order to set priorities with respect toinformation gathering and analysis. Impact analysis is designed to accomplish that assessment.Second, sometimes the strategic uncertainty is represented by a future trend or event that hasinherent unpredictability. When this is the case, information gathering and additional analysis willnot be able to reduce the uncertainty. In that case, scenario analysis can be employed. Scenarioanalysis basically accepts the uncertainty as given and uses it to drive the development of two ormore future scenarios. Strategies are then developed for each.

Impact Analysis

An important objective of environmental analysis is to rank strategic uncertainties and decidehow they are to be managed over time. Which uncertainties merit intensive informationgathering and in-depth analysis and which merit only a low-key monitoring effort?

The problem is that dozens of strategic uncertainties and many second-level strategicuncertainties are often generated in environmental analysis. These strategic uncertainties canlead to an endless process of information gathering and analysis that can absorb resourcesindefinitely. A publishing company may be concerned about cable TV, lifestyle patterns,educational trends, geographic population shifts, and printing technology. Any one of these issuesinvolves a host of subfields and could easily spur limitless research. Unless distinct priorities areestablished, external analysis can become descriptive, ill-focused, and inefficient.

The extent to which a strategic uncertainty should be monitored and analyzed depends on itsimpact and immediacy. The impact of a strategic uncertainty is related to (a) the extent to which itinvolves trends or events that will impact existing or potential businesses; (b) the importance ofthe involved businesses to the overall firm; (c) the number of involved businesses; and (d) thelikelihood of impact on the company. The immediacy of a strategic uncertainty is related to (a) theprobability that the involved trends or events will occur; (b) the time frame of the trends or events;and (c) the reaction time likely to be available to respond compared with the time required todevelop and implement appropriate strategy. Each of these is now discussed in more detail.

THE COCA-COLA COMPANY AND WATER: FROM RISK TOOPPORTUNITY34

The Coca-Cola Company started its Global Water Initiative in 2002. Originating in a ten-personstrategy think tank the company created to study long-term challenges, the goal of the initiative was tounderstand the nature and impact of business risks related to water—an essential ingredient in allCoca-Cola products. Around the same time, Coca-Cola began receiving negative press around waterissues. For example, activists claimed the company was consuming too much water and was creatingconflicts with local municipalities around the world. In India, Coke bottles were smashed on the stepsof Parliament and the company was accused of polluting farms with a byproduct from its plants. By

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Chapter 5 Environmental and Strategic Analyses 89

2001, the company recognized water quantity and quality as one of the biggest risks to the Companyand cited it in its 10-K filing with the Securities and Exchange Commission.

Thethinktankbeganbyassessingitswateruseandassociatedrisksandthensetouttoensurethatthisassessment was accurate by working with plant managers across the Coca-Cola network. While thecompany historically had focused on operational issues such as water efficiency and wastewater manage-ment, it became clear that there were also many systemic issues in the watersheds and local communitieswhereitoperated.Toensureitwasfocusedonthecorrectrisks,thecompanytooktwoboldsteps.Thefirstwas to interview over 200 water experts, local officials, and company employees around the world tounderstand the emerging water challenges. Because water problems are so diverse, it was important tounderstandthelocalproblemsfacingthecompanyandtodevelopcustomizedsolutionsdependingonlocalpriorities—from sanitation to watershed protection to groundwater depletion and contamination. Bylisteningtolocalstakeholdersandcompanyemployeeswhofacedthesechallengeseveryday,thecompanydevelopedariskmanagementmethodologytoidentifythe100riskiestplantsaroundtheworld.Riskswereassessed and prioritized on the basis of empirical evidence about both physical and social aspects of wateruse.Incontrast tothe originalfocusof internalwater use—efficiencyand wastewater management insidethe plant walls—the risk assessment revealed that the biggest threats to company profits and reputationwere related to degrading watersheds and social conflicts with other users.

After the risks were identified, a series of two-day workshops was organized with companyemployees and bottler partners around the world to share the findings and to plan effective mitigationstrategies. This was a two-way learning process whereby Coca-Cola could refine its understandingof water challenges and set priorities and the local partners could better understand and addressthe water risks they were facing. It also created partnerships with local communities more than anoperational plan for Coca-Cola. Based on the risk assessment, it became clear that the company neededto pay more attention to the systemic water issues affecting watersheds and communities and begin todevelop metrics and support to actively mitigate these challenges. Therefore, phase two of the waterinitiative was focused on supporting community water partnerships. Local company divisions andbottlers used the risk assessment to define new goals of improving water sustainability in theirwatersheds. Of course, the company couldn’t do this alone; it required a proactive approach of formingpartnerships with local NGOs, governments, and other stakeholders to create more systemic interven-tions. By forming alliances with organizations such as WWF and USAID, the company was able to bringattention and resources to address pressing water problems. Interestingly, the risk assessment processshifted the company from a narrow and reactive approach to a much more proactive and collaborativestrategy. To reinforce this broader approach, Coca-Cola developed the following water goals:

■ Reduce: By 2020, improve water efficiency in manufacturing operations by 25 percent comparedto 2010.

■ Recycle: Treat wastewater in 100 percent of bottling plants to a level that can supportaquatic life.

■ Replenish: Facilitate water to communities and watersheds to produce volumetric benefitequivalent to global water production volume by 2020.

■ Manage Risk: Assess water quality and quantity at every plant “to make sure we do what we can toavoid adversely affecting the ability of others to access water.”

In an attempt to maximize its positive impact on water resources globally, Coca-Cola also helpedto launch multistakeholder efforts such as the CEO Water Mandate and the Global Water Challenge. Itextended its water efforts beyond manufacturing to address sustainability challenges in its supply chain,for example, by helping to launch the Better Sugarcane Initiative (now Bonsucro). In establishing its“Replenish” goal, the company aspired to be a net positive contributor to water sustainability globally.In August 2016, the company announced that it had replenished 115 percent of its operational wateruse through community and watershed partnerships, five years before its stated deadline.

90 Part One Strategic Analysis

Impact of Strategic Uncertainties

Each strategic uncertainty involves potential trends or events that could have an impact onpresent, proposed, and even potential businesses. For example, trends in the microbrewerymarket can impact a beer firm’s proposed microbrewery entry and its current imported beeroffering. A trend toward natural foods may create strategic uncertainties while also presentingopportunities for a sparkling water product line for Coca-Cola Inc. The impact of a strategicuncertainty will depend on the importance of the impacted business to a firm. Some businessesare more important than others. The importance of established businesses may be indicated bytheir associated sales, profits, or costs. However, these metrics might need to be adjusted toaccount for the future growth potential in such businesses. The number of involved businessescan also be relevant to a strategic uncertainty’s impact. The higher the number, the greater theimpact of the uncertainty. Finally, if there is a low probability of the event occurring, thisreduces the expected impact. For example, although a bill introduced to Congress couldreshape a business, if trends show no support from members, the expected impact of thelegislation is low.

IMPACT OF NEW TECHNOLOGIES

It can be important, even critical, to manage the transition to a new technology. The appearance of anew technology, however, even a successful one, does not necessarily mean that businesses based onthe prior technology will suddenly disappear. A group of researchers at Purdue studied fifteencompanies in five industries in which a dramatic new technology had emerged:35

■ Diesel-electric locomotives versus steam■ Transistors versus vacuum tubes■ Ballpoint pens versus fountain pens■ Nuclear power versus boilers for fossil-fuel plants■ Electric razors versus safety razors.

Two interesting conclusions emerged that should give pause to anyone attempting to predict theimpact of a dramatic new technology. First, the sales of the old technology continued for asubstantial period, in part, because the firms involved continued to improve it. Safety-razor saleshave actually increased 800 percent since the advent of the electric razor. Thus, a newtechnology may not signal the end of the growth phase of an existing technology. In all cases,firms involved with the old technology had a substantial amount of time to react to the newtechnology.

Second, it is relatively difficult to predict the outcome of a new technology. The new technologiesstudied tended to be expensive and crude at first. The most spectacular erroneous forecast wasattributed to Thomas Watson, the CEO of what is now IBM, who predicted in 1943 that the total worldmarket for computers is maybe five. New technologies also sometimes start by invading submarkets,and it can be hard to imagine the full market potential. Transistors, for example, were first used inhearing aids and pocket radios.

Chapter 5 Environmental and Strategic Analyses 91

Immediacy of Strategic Uncertainties

Events or trends associated with strategic uncertainties may have a high impact, but such a lowprobability of occurrence that it is not worth actively expending resources to gather or analyzeinformation. Similarly, if occurrence is far in the future relative to the strategic-decision horizon,then it may be of little concern. Thus, the harnessing of tide energy may be so unlikely or mayoccur so far in the future that it is of no concern to a utility company. Finally, consider the reactiontime available to a firm compared with the reaction time likely needed. After a trend or eventcrystallizes, a firm needs to develop a reaction strategy. If the available reaction time is inadequate,it becomes important to reinvest and anticipate emerging trends and events better so that futurereaction strategies can be initiated sooner.

Managing Strategic Uncertainties

Figure 5.4 suggests a categorization of strategic uncertainties for a given business. If bothimmediacy and impact are low, then a low level of monitoring and analysis is recommended.If the impact is thought to be low but the immediacy is high, the area may merit monitoring andanalysis. If the immediacy is low and the impact high, then the area may require more in-depthmonitoring and analysis and contingent strategies may be considered but not necessarily developedand implemented. When both immediacy and potential impact of the underlying trends and eventsare high, then an in-depth analysis will be appropriate, as will be the development of reaction plansor strategies.

Scenario Analysis

Scenario analysis can also help firms deal with strategic uncertainties. The difference betweenimpact analysis and scenario analysis is that instead of investing in more information search andanalysis to reduce uncertainty, the firm creates a small number of environmental scenarios,assesses their likelihood and impact, and then uses this analysis to develop or test potentialstrategies.

There are two types of scenario analyses. In the first type, strategy-developing scenarios, theobject is to provide insights into future potential environments and then use these insights toevaluate existing business strategies and stimulate the creation of new ones. Such analyses can helpcreate contingency plans to guard against disasters—an airline adjusting to a terror incident, forexample, or a pharmaceutical company reacting to a product safety problem. They can also suggest

Immediacy of Threats

Low High

Impactof

Threats

High Monitor and analyze; long-termcontingent strategies outlined

Monitor and analyze in more depth; performscenario analysis and develop contingent

strategies in depth

Low Monitor for changes; lowinvestments

Monitor and analyze for changes;outline a short-term response

Figure 5.4 Impact Analysis

92 Part One Strategic Analysis

investment strategies that enable the organization to capitalize on future opportunities caused bycustomer trends or technological breakthroughs.

In the second type of analysis, decision-driven scenarios, a strategy is proposed and testedagainst several scenarios.36 The goal is to challenge the strategy, thereby helping to make the go/no-go decision and suggesting ways to make the strategy more likely to withstand environmentalforces. If the decision is to enter a market with a technology strategy, alternative scenarios could bebuilt around variables such as marketplace acceptance of the technology, regulations, andcompetitor response.

In both analyses, a scenario analysis will involve three general steps—create scenarios, relatethose scenarios to existing or potential strategies, and assess the probability of the scenarios (seeFigure 5.5).

Step 1: Create Scenarios

Strategic uncertainties can drive scenario development. The impact analysis will identify thestrategic uncertainty with the highest priority for a firm. This source of uncertainty should be thefocus of the scenario. A manufacturer of a medical imaging device may want to know whether atechnological advance will allow its machine to be made at a substantially lower cost. A farmequipment manufacturer or ski area operator may believe that the weather—for example, whethera drought will continue—is the most important area of uncertainty. A server firm may want to knowwhether a single software standard will emerge or if multiple standards will coexist. The chosenuncertainty could then stimulate two or more scenarios.

When a set of scenarios is based largely on a single strategic uncertainty, the scenariosthemselves can usually be enriched by identifying related events and circumstances. Thus, aninflation-stimulated recession scenario would be expected to generate a host of conditions for theappliance industry, such as price increases and retail failures. It is sometimes useful to generatescenarios based on possible outcomes: optimistic, pessimistic, and most likely. The consideration ofa pessimistic scenario helps test existing assumptions in a firm’s strategic plan. The “what-if”exercises in a scenario analysis provide a nonthreatening way to consider the possibility of clouds oreven rain on the picnic.

Often several variables are relevant to the future period of interest. The combination candefine a relatively large number of scenarios. For example, a large greeting-card firm mightconsider three variables as important: the success of small boutique card companies, the creationand sharing of e-cards, and the nature of future distribution channels. The combination can resultin many possible scenarios. Experience has shown that two or three scenarios are the ideal numberwith which to work; if a larger number is used, the process becomes unwieldy, and any value islargely lost. Thus, it is important to reduce the number of scenarios by creating a small set thatideally includes those that are plausible/credible and those that represent departures from thepresent substantial enough to affect strategy development.

CreateScenarios

EstimateScenario

Probabilities

RelateScenarios toExisting orProposedStrategies

Figure 5.5 Scenario Analysis

Chapter 5 Environmental and Strategic Analyses 93

Step 2: Relate Scenarios to Strategies

After scenarios have been identified, the next step is to relate them to strategy—both existingstrategies and new options. If an existing strategy is in place, it can be tested with respect to eachscenario. In which scenario does the strategy do best? How bad will the strategy perform if thewrong scenario emerges? What will its prospects be with respect to customer acceptance,competitor reactions, and sales and profits? Could it be modified to enhance its prospects?

Even if the scenario analysis is not motivated by a desire to generate new strategy options, itis always useful to consider what strategies would be optimal for each scenario. A scenario by itsnature will provide a different perspective than the status quo. Any strategy that is optimal for agiven scenario should become a viable option. Strong parts of suboptimal or infeasible strategiescan also be harvested for use in future strategies.

Step 3: Estimate Scenario Probabilities

To evaluate the effectiveness of different alternative strategies, it is useful to determine thescenario probabilities. What is the probability of a scenario emerging? Experts could be asked toassess probabilities directly. A deeper understanding will often emerge, however, if causal factorsunderlying each scenario can be determined. For example, the construction equipment industrymight develop scenarios based on three alternative levels of construction activity. These levelswould have several contributing causes—interest rates, availability of funds to customers in thehome building sector (which, in turn, would depend on the emerging structure of financialinstitutions and markets), and level of government spending on roads, energy, and otherinfrastructure areas.

SWOT Analysis

Environmental analysis identifies a host of many potential threats and opportunities. The challengeis to determine which are most relevant for the firm’s business and to prioritize them. Both impactand scenario analyses can help the firm develop initial answers. However, even with similaranswers from these analyses, not all companies should respond to all environmental events.Whether and how a company responds will be a function of the nature of the environmentalactivities and the company’s own strengths and weaknesses. A SWOT analysis is a framework thatguides such decisions. SWOT analysis examines a set of environmental trends classified companystrengths (S) and weaknesses (W) and external opportunities (O) and threats (T).

Firm Strengths and Weaknesses

In developing or implementing a strategy, it is important to perform an internal analysis of the firm.This analysis follows the same checklist of strengths and weaknesses used to examine competitors inChapter 3 (see Figure 3.4) and will not be reviewed in depth again here. There are more than threedozen organized under the categories of innovation, manufacturing, financial, management,marketing, brand equity, and customer base. This checklist is a good place to start when analyzingwhether the company can respond to a threat or opportunity or whether it needs to build new assetsand competencies to do so. In addition, the Appendix A contains other financial and nonfinancialcriteria important to an internal analysis of the firm that should be used in this assessment.

94 Part One Strategic Analysis

Each asset or competence relevant to the business should be evaluated as to its strength andimpact. Is it dominant in that it provides a point of advantage that has endured and is likely toremain so in the future? The service delivery capability of Disney theme parks, for example, is sosuperior that other firms study its operation. Is the organization willing to invest to make the assetor competence dominant into the future? Certainly, Disney has shown this willingness over manydecades. The investment commitment needs to be factored into the financial resource picture.It may mean that resources for new ventures will be limited.

Is it strong but vulnerable? Are others catching up? Should the firm invest to attempt toregain a dominant position so that it is a point of advantage? If so, what program at what cost isimplied? Or should the firm retreat so that the asset or competence is simply a modest advantageover some competitors and a point of parity with respect to others? Is the asset or competenceadequate, a point of parity? Is it strong enough so that customers do not avoid the firm because ofit? If so, is that a satisfactory long-term position? Can advantage be achieved on otherdimensions? What investment is implied to maintain the current strength so that it does notbecome a point of disadvantage? If Target, for example, can deliver quality adequate enough sothat customers do not use a quality judgment as a reason to exclude Target from theirconsideration set, the battle will shift to other dimensions on which Target is likely to excel.Is the asset or competence a liability? Is it holding back the firm from gaining and retainingcustomers?

External Threats and Opportunities

Imminent threats with high impact should drive a strategic imperative, a program that has thehighest priority. If there is a visible quality problem (such as contaminated Perrier water ordefective Bridgestone tires on Ford Explorers), fixing it and thus addressing the associated threatneeds to be a high priority. When the threat is of low impact or is not immediate, a moremeasured response is possible. The most extreme threat is one that potentially makes thebusiness model obsolete. Because of the decline in the use of printers, HP has seen its cash cow,printer supplies, declined with rather troubling strategic implications. AOL, with its “You’ve gotmail” greeting and a route to the Internet for newbies and the intimidated, had a dominantbusiness model with some 35 million subscribers. However, it failed to respond to the fact that itscustomers eventually obtained more sophistication and better equipment. AOL was in a positionto be a successful social network Internet company but instead watched others such as Facebookassume that role and allowed its value proposition to erode. Recognizing the threat to thebusiness model in a timely fashion and making the organization responsive might have led to avery different outcome for AOL.

Threats can come in the form of a strategic problem or a liability. Strategic problems, events,or trends adversely affecting strategy generally need to be addressed aggressively and correctedeven if the fix is difficult and expensive. Strategic liabilities—the absence of an asset (such as goodlocation) or competence (for example, new product skills)—usually require a different response. Abusiness often copes over time with a liability by adjusting strategies in a way that neutralizes thatliability. A firm that lacks new product competencies might engage in a systematic productacquisition strategy.

An opportunity similarly can be evaluated as to whether its impact will be immediate andmajor. If so, the organization should be set up to move quickly and decisively. One study found

Chapter 5 Environmental and Strategic Analyses 95

that most organizations only get faced with a “golden opportunity” once or twice a decade.The mark of a firm that can adapt to new conditions and still come out a market leaderis recognizing and reacting to such opportunities. Opportunities that have a low impact or arein the future may justify serious investment and perhaps an experimental entry into anew business area to gain information, but the resource commitment is likely to be moremodest.

In general, lost opportunities are costly and common. As Drucker wrote in several forms,“Managers need to spend more time on opportunities and less on solving problems.”

Combining Elements in a SWOT Analysis

The goal of this analysis is to identify the firm’s net ability (strengths – weaknesses) to defend itselfagainst current and emerging environmental threats or to offensively exploit opportunities in theenvironment. Take the example Gillette versus Dollar Shave Club (DSC). DSC took advantage oflower barriers to entry to reach markets through Internet channels instead of traditional retailchannels when it was founded in 2011. DSC began as a subscription model that delivered a razorand an ongoing supply of blades to buyers’ (mostly men) homes. Billed as a “club” and toutedthrough engaging Internet ads that target men’s desire to have a simple shaving experience andforgo the retail experience (“shave money, shave time”), DSC grew to 5 percent market sharewithin its first five years of business.37 Other new entrants followed, and lingering effects of thegreat recession made the monthly fees ease some of the financial burden facing many customers. Itis likely that P&G, maker of Gillette, considered this entrant and the larger trend a threat.However, P&G’s considerable branding competency, its strong relationships with the retailchannel, its financial resources, and Gillette’s long-standing reputation and many loyal followerswill help P&G defend its 60 percent market share. As a weakness, Gillette is a well-establishedbrand that is not as contemporary as the Internet startups entering the market. Further, the highprice of a Gillette razor is a vulnerability. A SWOT analysis would consider these facts and otherpotential scenarios that might emerge. How will trade agreements with China or South Korea,where DSC manufacturers its products, affect its price? Will DSC enter traditional retail marketslike three-year-old Harry’s Razor Company recently entered Target and stole 10 percent marketshare from P&G?38 Will it be purchased by a major competitor that can improve its reach? Howwell can P&G defend itself in these different scenarios? Is there an opportunity for P&G to enterthe online shave club business with an entrant of its own? In fact, DSC was bought by Unilever in2016 for 1 billion dollars and P&G entered with gilletteshaveclub.com but at considerably higherprices than DSC.

FROM ANALYSIS TO STRATEGYIn making strategic decisions, inputs from a variety of assessments are relevant, as the last severalchapters have already made clear. However, the core of any strategic decision should be based onthree types of assessments. The first concerns firm strengths and weaknesses. The secondevaluates competitor strengths, weaknesses, and strategies because a company’s strength is ofless value if it is neutralized by a competitor’s strength or strategy. The third assesses the marketand environmental context, including the customers and their needs, the market, and the largerenvironment, in order to determine how attractive the selected market will be, given the businessstrategy.

96 Part One Strategic Analysis

The goal is to develop a strategy that exploits business strengths and competitor weaknessesand neutralizes business weaknesses and competitor strengths. The ideal is to compete in ahealthy, growing industry with a strategy based on strengths that are unlikely to be acquiredor neutralized by competitors. Figure 5.6 summarizes how these three assessments combine toinfluence strategy.

GE’s decision to sell its small-appliance division illustrates these strategic principles. Smallappliances were a part of GE’s legacy and linked to its lamp and major-appliance product lines inthe minds of retailers and customers. The small-appliance industry was not profitable, however, inpart because of overcapacity and retailer power, which cut into GE’s margins. Also, cost pressurescontributed to a reduction in product performance and reliability. Further, GE’s strengths, such asits technological superiority and financial resources, were not being leveraged in the small-appliance business, as any innovation could be copied. Thus, GE decided that a strategic fit did notexist and it sold the small-appliance business to Black & Decker.

KEY LEARNINGS

Environmental analysis of technology, customer, political, and economic trends candetect opportunities or threats relevant to an organization.

Impact analysis involves assessing systematically the impact and immediacy of thetrends and events that underlie each strategy uncertainty.

Scenario analysis, a vehicle to explore different assumptions about the future, involvesthe creation of two to three plausible scenarios, the development of strategies

• Product Market Decisions• Value Proposition• Assets and Competencies• Functional Strategies and Programs

CompanyStrengths andWeaknesses

CompetitorStrengths andWeaknesses

STRATEGY DEVELOPMENT

Assessment ofEnvironmental

and MarketContext

Figure 5.6 Structuring Strategic Decisions

Chapter 5 Environmental and Strategic Analyses 97

appropriate to each, the assessment of scenario probabilities, and the evaluation ofthe resulting strategies across the scenarios.

SWOT analysis combines an environmental assessment with an examination of firmstrengths and weaknesses to assist in the development of firm strategy. It can beused to help companies determine which opportunities they should exploit, whichthreats they can manage, and which assets and competencies may need to be built inorder to take such actions.

FOR DISCUSSION1. What did the tablet replace? What will replace (or has replaced) the tablet?2. Perform a SWOT analysis for The Coca-Cola Company in the soft drink category.

What are the biggest threats and opportunities? What are Coca-Cola’s relevantstrengths and weaknesses? What strategic actions are necessary for the company tothrive by 2025?

3. Develop a scenario based on the proposition that hydrogen-fueled cars will continueto improve and take 15 percent of the automotive market in a few years. Analyze itfrom the point of view of an energy company such as Shell or a car company such asMercedes.

4. Pick a start-up you admire. What are the major trends emerging from anenvironmental analysis? What are the major areas of uncertainty? How would amajor company in the industry handle these trends and uncertainties? How do youpredict the start-up will respond?

5. Focusing on the airline industry, develop a list of strategic uncertainties and possiblestrategic actions.

6. Visible criticism has been leveled at the bottled water industry, including the claimthat their product is not better than tap water in many locales (some brands are evensaid to have an unpleasant aftertaste) and that the plastic bottles are carbon costly tomake and are not biodegradable. What programs would you consider to combatthese arguments if you were PepsiCo, the maker of Aquafina, or The Coca-ColaCompany, the maker of Dasani?

BEST DIGITAL PRACTICE

Kraft Mac and Cheese: A Stealth Marketing Approach

A trend that has a critical impact on the consumer packaged goods industry in recent years isconsumers’ desire for simpler, more transparent, and more natural ingredients. Many companies haveresponded by publicly stating their intentions to remove artificial coloring and preservatives from long-standing brands and then repositioning the product as “clean” or “pure” within the market. While thisstrategy aligns well with trends, it risks alienating individuals who are used to purchasing goods based onmore intangible factors such as nostalgia, predictability, and even taste.

98 Part One Strategic Analysis

Kraft used a novel approach to handling these shifting consumer preferences. To stay competitivewithin the category, the company realized it had to rethink the product formula of one of its superstarbrands, Kraft Mac and Cheese. However, management knew it was crucial to make changes withouttainting elements of the product that consumers had come to expect. For generations, individuals hadassociated Kraft Mac and Cheese with its orangish hue and smooth sauce consistency. Kraft made it apoint to carefully maintain these identifying attributes as it eliminated ingredients and removedartificial dyes.

The aspect of Kraft’s strategy that was a real differentiator though was how it rolled out thereformulation. Rather than advertising the measures the company had taken to make its product morenatural—common practice among competitors—Kraft simply didn’t say anything. Studies have shownthat even the mention of a new formula can cause consumers to perceive flavor to be different, so Kraftchose not to call attention to the change.

After consumers had accepted the new formula, as evidenced by sales remaining stable, Kraftlaunched a digital campaign to announce the adjustment. The campaign tagline “It changed. But ithasn’t” was featured in 15- and 30-second online video spots. Tongue-and-cheek lines such as “We’dinvite you to try it, but you already have” were incorporated into digital display ads, promotions throughchannels like Pandora radio and Snapchat, and magazine print. Kraft also encouraged fans to sharetheir experiences with the product on social media using #didntnotice and offered giveaways toencourage postings.

Kraft’s ability to make a fundamental change to an iconic product without consumer backlash is atestament to its thoughtful marketing approach. Quietly testing the waters in a landscape of uncertaintycan help companies anticipate reactions to significant product changes that ultimately help them stayone step ahead.

Questions:

1. Develop a scenario in which Kraft’s strategy might have backfired. How might Kraft haveprepared for this possibility?

2. How should Kraft respond to the demographic trends examined in the chapter?

Sources:Martha C. White, “Kraft Reveals Revamped Mac and Cheese, 50 Million Boxes Later,” The New YorkTimes, March 20, 2016, http://www.nytimes.com/2016/03/21/business/media/kraft-reveals-revamped-mac-and-cheese-50-million-boxes-later.html?_r=2

Justin Bariso, “How Kraft Used Psychology to Make Its Mac and Cheese Go Viral,” Inc., March 21,2016, http://www.inc.com/justin-bariso/kraft-just-changed-its-classic-mac-and-cheese-and-used-psy-chology-to-ensure-its-.html

BEST GLOBAL PRACTICE

How Airbnb Managed Uncertainty in the Sharing Economy

From creating new value to disrupting existing businesses, the rise of the sharing economy has had amajor impact on the hospitality and transportation industries. Built on the concept of exchanginggoods via an online marketplace, the sharing economy allows individuals to seamlessly move between

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Chapter 5 Environmental and Strategic Analyses 99

acting as buyers and sellers. Emerging companies such as Uber and Airbnb have been winners in thissharing model, creating uncertainty for traditional incumbents such as taxis and hotels. Yet their successhasn’t been without challenges, particularly when it comes to navigating the nuances of local markets.

Airbnb, an online and user-friendly platform that allows “hosts” to list their homes as a destination,was founded in 2008 with the intention of connecting people to unique travel experiences at any pricepoint. Within three years it had reached 1 million bookings, prompting CEO Brian Chesky to moreseriously consider opportunity outside of the United States. One of his initial targets was Paris, and thecompany slowly began scaling operations within the City of Light.

Initially though, Airbnb encountered several significant barriers with Parisian housing regulations.Hotel groups and local authorities launched a series of oppositions against the company, voicingconcerns about Airbnb’s impact on the local economy and the number of long-term housing options inthe city. Specifically, in a city already prevalent with tourists, activists feared that allowing Airbnb toexpand without any restrictions would drive permanent residents away, thus completely transformingquintessential parts of the city.

To help alleviate these apprehensions, Airbnb decided to open an office in Paris in 2012. Listingswere starting to increase at a rapid pace, and the company knew its continued presence in the regionwas contingent upon building more positive in-person relationships with regulators. In making inroads,Airbnb focused on educating the French government on one of the key benefits it brings to the table—an influx of travelers (and more revenues) to the city.

After several rounds of negotiations, Airbnb eventually reached a set of agreements. Among them,residents are not permitted to rent out their properties for more than four months in a year. Apartmentsare also subject to regular, unannounced inspections, and individuals found in violation of local law areheavily fined. Additionally, Airbnb started collecting a tourist tax on behalf of Parisian authorities.

Today, Airbnb has over 50,000 listings in Paris and the company estimates that between 2012 and2013 it generated approximately $240 million in economic activity in Paris and supported over 1000jobs. Airbnb’s strategic approach to managing risk in geography with sometimes unclear regulatorychallenges was integral to its growth.

Questions:

1. Should Airbnb replicate its Paris strategy in other major European markets? Why and why not?

2. How should Airbnb prepare to manage the emerging cultural trends listed in the chapter? Howshould Brazil’s cultural values influence its strategy in this country?

Sources:Mark Scott, “What Uber can Learn from Airbnb’s Global Expansion,” The New York Times, July 7, 2015,http://www.nytimes.com/2015/07/08/technology/what-uber-can-learn-from-airbnbs-global-expansion.html

Elena Berton and Katharina Wecker, “Europe Cracks Down on Airbnb, Other Room-Sharing Sites,”USA Today, July 7, 2015, http://www.usatoday.com/story/money/business/2015/07/06/europe-airbnb-room-sharing/29263881/

“Airbnb Economic Impact,” http://blog.airbnb.com/economic-impact-airbnb/

Sam Schechner and Matthias Verbergt, “Paris Confronts Airbnb’s Rapid Growth,” The WallStreet Journal, June 25, 2015, http://www.wsj.com/articles/SB12147335600370333763904581058032330315292

100 Part One Strategic Analysis

P A R TT W O

CREATING, ADAPTING, ANDIMPLEMENTING STRATEGY

C H A P T E R S I X

Creating Advantage: CustomerValue Leadership

Price is what you pay. Value is what you get.—Warren Buffett

Strategy 101 is about choices: You can’t be all things to all people.—Michael Porter, HBS professor, founder of The Monitor Group

Ever since Morton’s put a little girl in a yellow slicker and declared, “When it rains, it pours,” no advertisingperson worth his or her salt has had any excuse to think of a product as having parity with anything.—Malcolm MacDougal, Jordan Case McGrath & Taylor

Our attention now shifts from strategic market analysis to the development of strategy. Whatvalue will the firm offer and in what product markets will it compete? How will it compete, andwhat assets and competencies will be important to its sustained competitive advantage? Will itlead or follow? How will it develop strong customers and brands, and how will these assets beleveraged over time to grow the business? What investments and disinvestments should be madeto improve company success over time?

The next 12 chapters in this book are portrayed in Figure 6.1. This chapter discusses alternativevalue propositions that can be adopted by the company and the importance of achieving customervalue leadership. Chapters 7 and 8 focus on the all-important role of the customer relationship,including building and managing strong customer relationships and managing customer equity forlong-term profits. Chapters 9 and 10 consider how to create valuable brands and to develop a keyasset, brand equity.

The following four chapters present growth strategies—energizing the business (Chapter 11),leveraging the business (Chapter 12), creating new businesses (Chapter 13), and managing globalstrategies (Chapter 14). Chapter 15 discusses setting priorities among business units and managinginvestment and divestment decisions for future growth.

Chapter 16 examines the organizational challenges underlying the implementation of market-ing strategy and offers solutions in the form of developing a customer-centric organization. Finally,

103

Chapter 17 examines how strong marketing assets in the form of strong customer relationships andbrands produce value for the company.

ALTERNATIVE VALUE PROPOSITIONSCompanies choose from a variety of ways to offer value to customers. Look at any market and youwill observe an array of different types of offerings that are more or less attractive to differenttypes of customers. This is a sign of a healthy marketplace. However, a closer look reveals a fairlycommon set of different types of customers and value propositions across markets. Three broadgroupings exist—companies that compete on performance value, companies that compete onprice value, and companies that compete on relational value. Each of these types of value is definedand different varieties within each broad grouping are outlined.

Performance Value

For performance value, the value proposition is all about having the best product or serviceoffering, usually at a price premium. Performance value can take many forms but they all focus onpeerless quality. This is not “quality” in the narrow sense of compliance with standards but in thebroad sense of fitness for customer use. Customers who buy these products value this exceptional

Chapter 6Creating Advantage:

Customer ValueLeadership

Chapter 7Building and ManagingCustomer Relationships

Chapter 8Creating Valuable

Customers

Chapter 9Building and Managing

Brand Equity

Chapter 10Toward a Strong

Brand Relationship

Chapter 11Energizing the Business

Chapter 16Harnessing

the Organization

Chapter 12Leveraging the Business

Chapter 13Creating New Businesses

Chapter 14Global Strategies

Chapter 15Setting Priorities for

Businesses andBrands

Searching for Sustainable Advantage

Growth StrategiesImplementing Strategy

and Producing Firm Value

Chapter 17How MarketingActivities Create

Value for Companies

Figure 6.1 Remaining Chapters in the Book

104 Part Two Creating, Adapting, and Implementing Strategy

quality and are willing to pay for it. To compete on performance value, the company mustensure that its products or services exceed customer expectations on valued performanceattributes or benefits. There are five key types of performance value that dominate markets,which are discussed here.

Functional Quality

This is the most basic and straightforward type of quality—the product performs its basicfunction extremely well. The product works better or lasts longer than competitors, andcustomers are willing to pay for this type of quality. This type of performance value is whyso many buyers of earthmoving equipment are attracted to Caterpillar and auto enthusiasts toBMW cars. Another example is Darn Tough socks. Darn Tough’s mission is to “Create theworld’s best socks and stand behind them unconditionally.” The company knits its socks using100 percent merino wool on small needle, fine-gauge knitting machines to produce durable,high-density socks—without the bulk. To back up this quality, it offers a lifetime guarantee. Byproducing a product that performs its basic function extremely well, the company can chargehigh prices for its socks—the least expensive socks are $15 for a single pair, compared to othercompanies that sell packs of ten pairs of standard socks for $15 or less! Customers seem to agreewith Darn Tough’s claim that its socks are “the most comfortable, durable and best fitting socksyou have ever owned.”1

Innovation Quality

This type of quality focuses on offering novel sources of value that are not currently available in themarketplace. Companies such as Medtronic, 23andMe, and Tesla qualify. Medtronic dominatesthe market for implanted cardiac devices, such as pacemakers for treating patients whoseheartbeats are too slow and defibrillators for patients whose heart rates are too fast. It has along history of bringing new technology and performance-enhancing improvements to marketahead of its competition. 23andMe is a genomics and biotechnology company that offers a home-based saliva kit that is sent to a lab where DNA information is analyzed and compiled into reports,including ancestry, carrier, and DNA traits related to health. Tesla burst onto the scene in2008 with the first all-electric car to use lithium-ion battery cells and the first to travel 200 milesper charge.

Design and Fashion Quality

The focus here is on an outstanding aesthetic or style. Hermes Paris makes the Hermes Birkinhandbag that offers incredible design features, including exotic leathers, a goat-skin lining thatmatches the color of the outside of the bag, and hardware plated in gold or palladium to preventtarnishing. Handmade in France by expert artisans, each is a reflection of outstanding craftsman-ship and is one of the most expensive bags in the world (retailing between $11,550 and $150,000!).Both the design of the bag and its cachet in communicating a sense of fashion (enhanced by thefact that the company produces a limited number), contribute to its status as a fashion statement.As noted by the company, “Because of the slow manufacturing process and difficult task ofprocuring the best textiles, only a limited number of Birkins are made each year, adding to theexclusivity that can drive up prices, particularly those in the resale market.”2 The bag is usuallyonly made available to Hermes boutique brand loyal and high purchasing customers, which alsoimproves its fashion status.

Chapter 6 Creating Advantage: Customer Value Leadership 105

Service Quality

Performance value can also be achieved through service quality—which is usually a collection ofintangible and tangible sources of value. Consider the exceptional service of Singapore Airlines.With Ferragamo toiletries, Givenchy blankets, pillows, and pajamas, meals like Lobster Thermi-dor, en suite cabins on some planes, tuck-in service, and exceptionally polite and kind flightattendants, it is no wonder the airline was named the best international airline in the world.4

Research has shown that, in general, service quality is based in large part on the perceivedcompetence, responsiveness, and empathy of the people with whom customers interact.5

Social Responsibility Quality

Here the focus is on developing products and services that contribute to larger societal outcomes.Dove’s Campaign for Real Beauty offers reasonable quality products that are positioned to focuson a personal and individualized sense of beauty that is not premised on media stereotypes.Products are rarely shown; instead, media on and off the web challenge women to think beyondstandard ideas about beauty. High-impact campaigns include Dove’s “Evolution,” “Little Girls,”“Real Beauty Sketches” and most recently the powerful “My Beauty My Say”—all of which drawattention to the brand’s social role. These campaigns are complemented by contributions toworkshops and programs for girls. Toms Shoes offers a standard canvas or cotton slip-on shoes for aprice premium. The premium supports the company’s One for One® business model in which thecompany promises to deliver a pair of new, free shoes to a needy child for the sale of every pair of

MUJI NO-BRAND DESIGN3

Since its founding in 1980, the Japanese retailer Muji has gradually expanded its global footprint.In 2015, the company grew its sales 18 percent, earning over $2 billion in revenue from more than700 stores worldwide. Muji, short for Mujirushi Ryohin, is represented by four characters that mean“no-brand quality goods.” Initially, Muji included only 40 different food and household products.Today, it sells more than 7,000 items ranging from furniture to soap.

The Muji philosophy is to deliver functional products that strive not to be the best, but “enough.”Superfluous features and attributes unrelated to function are typically omitted. Muji can be described asa reaction to the glitz of Tokyo’s Ginza and other shopping districts filled with brand after brand, eachtrying to be more upscale than the last. During a visit to a Muji store, customers encounter simpleproducts with simple designs in a noncommercial atmosphere.

Fewer features lowers prices as does the company’s attention to things like packaging (most ofMuji’s paper products are unbleached), which are cheaper in bulk. This low price strategy helps Mujicompete with big-box home goods retailers as well as other casual clothing stores—it is at or aboveparity on price (low price) for these categories.

At the same time, Muji’s emphasis on no-brand and simplicity gives it a point of differentiation inthe performance area. The simple designs are, in fact, stylish in a strangely utilitarian way. Somecustomers even view its no-brand approach as a type of social responsibility, which adds further value.Finally, although generic patterns are used, pleasing design elements are offered to keep these offeringsabove what most big-box stores can offer. For example, the store provides self-expressive benefits suchas a station called “Muji Yourself” where customers can decorate notebooks with stamps or have clothesembroidered.

106 Part Two Creating, Adapting, and Implementing Strategy

shoes at retail. The company has been very successful as evidenced by its Moody’s valuation of$392M.6 This business model has inspired other startups, such as Warby Parker, to adopt a similarapproach.

Price Value

In nearly every market, from appliances to economy sedans to toothpaste to booksellers tobrokerage services, there will be a customer segment that is motivated by price. Even in high-endmarkets such as luxury sports sedans, some brands (e.g., Acura) will stake out a value position.During recessionary times, the “value segment” can become especially large.

These companies do not compete on quality or innovation, nor do they cultivate closerelationships with their customers. Instead, they provide reliable products or services positioned inthe middle of the market space at the best price. The best price is seldom the “cheapest,” but offersthe lowest total life cycle cost to the customer.

Exemplars such as Vanguard Group, IKEA, Aldi (a European discount grocery), andWalmart work on all the factors that customers consider when comparing total cost, such as(1) product reliability that lowers further costs of ownership by avoiding repairs and down-time,(2) reliable service that reduces annoyance and uncertainty about delivery or reliability, and(3) convenience and availability that makes shopping easier. But at the top of the list is alwaysthe price paid. Thus, the mutual fund giant Vanguard uses index funds that mirror the overallstock market and a bare-bones corporate structure to charge only 0.3 percent of assets forannual expenses. This is far below the average domestic stock fund that charges approximately1.5 percent for expenses.

There are many routes to price value leadership, all of which include a no-frills product orservice. The two most prevalent are applying highly disciplined cost management and usingsuperior pricing acumen.

Disciplined Cost Management

These firms sell high volumes of standard products to gain the cost savings from economies ofscale. They gain efficiencies by converting their large volumes into experience curve cost-savingsbenefits. But scale is not enough; further discipline is needed to limit variety and avoid product lineproliferation. It also means minimizing every element of overhead and installing a frugal culture.Facilities are usually simple, which sends a clear signal to customers. Procedures are highlystandardized and tight cost controls are in place. All firms need cost controls to keep costs in line,but companies competing on price value should be more thorough, rigorous, and less accepting ofcost variances.

IKEA competes on price value by staking out a “low price with meaning” position in thefragmented furniture market. Most furniture retailers offer a wide selection of brand-name itemswith lots of sales help. IKEA’s self-serve value proposition eliminates these familiar elements.IKEA does not provide in-store sales assistance and requires customers to do everything fromtaking their own measurements to pulling their own furniture off warehouse pallets. Customershave to transport their purchases home and assemble them. Costs are further reduced by limitingfurniture to modern Scandinavian designs and manufacturing in low-cost countries. Productdesign is utilitarian, and IKEA makes no pretense that its products will last forever.7 Yet IKEA isnot a low-end big-box store selling cheap furniture from dingy warehouses in out-of-the-waylocations. Its showrooms have a cheerful, airy, modern ambiance with unexpected amenities such

Chapter 6 Creating Advantage: Customer Value Leadership 107

as playgrounds for children and cafes. This means that, overall, IKEA measures up on very basicservice features of the retail experience while offering rock-bottom prices.

Superior Pricing Acumen

To be able to offer the best price, a company competing on price must have a well-definedpricing capability and deep insights into the price sensitivity and behavior of its target segment.This is how Progressive Corporation became one of the most profitable auto insurancecompanies in the United States. Auto insurance is a necessary, but not desirable, purchasefor most customers. Most states require that all car owners carry some form of liability insurance.The net effect is that most customers are highly price sensitive and put the most weight on theannual premium cost rather than service benefits, such as the timeliness of processing claims orthe location of agents.

Progressive employs a superior data mining and analysis capability to accurately assess therisk—and thus the expected cost—of each customer. It then uses highly targeted pricing schemesto attract profitable customers and discourage unprofitable ones. It is able to find customers whocompetitors are systematically over-charging and then undercut these prices. This strategy hasrequired a long-term investment to create massive data archives on customer characteristics andbehavior that competitors are so far unable to match. Progressive uses sophisticated algorithms toextract insights from its data, such as getting a ticket for “failure to yield” warrants a higherpremium increase than does getting a ticket for “speeding.”

Relational Value

Companies focusing on relational value are unlikely to offer the lowest price or the latestperformance features. Instead, these companies offer their customers a more customized setof solutions. They do this in a variety of ways depending on the market. Sometimes it is throughcustomer intimacy and personalization; in other cases, customer collaboration or a best totalsolution is important.

Companies competing on relational value have several things in common. First, theirrelationships with their best customers are unusually tight, with mutual trust based on sharedunderstanding and commitments. Second, they have broadened their offerings far beyond theircore product to include customer information and training, complementary products, supportservices, and financing as required. They compete on scope rather than scale—meaning they offera range of products and services to customers instead of focus on selling a few more standardizedofferings. Third, their customers think they are getting offerings that have been tailored to theirneeds. It may be fully customized or simply personalized. This is not the “one size fits all” approachof price value.

Take for example how Texas Instruments has prevailed over Intel in the market forsemiconductor chips for portable electronic devices by cultivating a relational approach to valuewith its customers.8 It does this by acting as the design lab for realizing their customers’ ambitions.A relationship with Nokia provided the template for this strategy. Texas Instruments customizedits chip to Nokia’s cell phone software, which enabled the fast processing of large amounts of digitalinformation and became the core of a new generation of Nokia cell phones. The strategy ofworking closely with aspiring companies was further refined when Texas Instruments provided thetailored light-processing chips that helped Samsung Electronics enter the large screen, high-definition TV market. Texas Instrument’s ability to direct its development efforts toward meeting

108 Part Two Creating, Adapting, and Implementing Strategy

customer design challenges also helped advance its own technology and enabled it to enter otherdevice markets.9,10

These common features conceal huge differences in how relational value is delivered indifferent markets. Customer relationship management (CRM) approaches are used by firms likeFidelity Investments that serve mass markets with millions of customers. Comprehensive solutionmanagement approaches are applied by firms like Rolls-Royce when complex systems are sold to asmall number of very valuable customers. Of course, there are many markets that use some of eachapproach.

Customer Relationship Management

The essence of CRM is customizing products and services for each particular customer. Moreprecisely, it is a cross-functional process involving a continuing dialogue with customers, managingacross all customer touch points, and offering personalized treatment for the most valuablecustomers. These firms harness digital technologies to cost-effectively have dialogues withcustomers and gain a comprehensive view of each customer, including their profitability. FidelityInvestments repositioned itself with a strategy of providing affluent investors with credible adviceand investment solutions tailored to the individual investor’s situation and delivered with excep-tional service to meet specific needs. This required careful identification of customer segments tonurture, the formation of dedicated service models and offerings for each segment, andpersonalized education and guidance appropriate to the profit potential of each segment. Forexample, Fidelity uses a “digital advisor” for clients with as little as $5,000 to invest, while clientswith at least $50,000 invested have access to an investment professional.11 For its wealthiest clientswith more than $5 million in assets, Fidelity Investments launched Fidelity Private WealthManagement in 2012. These clients are provided with a team of five financial professionals, led by awealth management advisor.12

Comprehensive Solution Management

Solutions are bundles of products and related services that create value greater than the sum oftheir parts.13 To offer a real solution, and not just a repackaging of existing products and services,four criteria must be met:

Each solution is co-created with customers.

It is therefore tailored to each customer.

The relationship between customer and supplier is unusually intimate.

Suppliers accept some of the risk through performance-based or risk-based contracts.

Like CRM best practices, the aim is to form a one-to-one learning relationship. This requiresrelationships that are much deeper and broader than those enabled by CRM with social andinformation connections across many levels and functions of each partner organization. This is onlyfeasible with high-value, long-term customers who warrant sizeable investments of time andenergy and are also willing to make reciprocal commitments. Customers who are partners can gainfrom such intimate relationships in several ways. Overall costs may be lower and the quality higherwhen interacting with a single supplier for multiple activities. They may see benefits from superiorperformance through preferred access to the latest technology. Their risks may be reduced bysharing them with the supplier.

Chapter 6 Creating Advantage: Customer Value Leadership 109

For example, Asea Brown Boveri, better known as ABB, had charged customers a daily rentalfee for drilling pipe used on ocean-based oil and gas rigs. The customer was responsible formanaging the delivery of equipment to drilling sites in the countries around the world, which isoften very expensive and complex to navigate. ABB saw an opportunity to shift the emphasis awayfrom price to a focus on service by charging customers for services to get the pipes to the wells(including navigating customs and import bureaucracies). Because ABB was doing this for many ofits customers across more than 100 countries, it was able to gain efficiencies in the importationprocess and lower the overall costs for its customers.

Another example is Rolls-Royce, the global market leader for commercial jet enginesthat powered half of the wide-bodied passenger jets built in 2016. It overcame formidablecompetitors like GE and Pratt & Whitney with an engine design that was more costly to make,but that can be customized to a far wider range of aircraft designs than its rivals. But beyondsupplying an excellent product, Rolls-Royce introduced an after-sale support option thataddressed customers’ concerns about engine maintenance costs. In this approach, Rolls-Royce’sairline customers don’t actually buy the engines. Instead, as part of the “Power by the Hour”program, customers pay a fee based on the number of hours flown. In exchange for this fee,Rolls-Royce handles all maintenance, repairs, and replacement expenses. This personalizedservice amounts to customer savings while also allowing the customer to focus on their ownbusiness—not on jet engine maintenance. Every function of each engine is continuouslymonitored while it is in the air to get an early warning of a service need. This means feweremergency repairs. The monitoring also provides Rolls-Royce with important information thatenables product improvements.14 As the COO noted, “You could only get closer to the customerby being in the plane.”15

CUSTOMER VALUE LEADERSHIPAlthough a value proposition is essential for competing on customer value, it is hardly sufficient.True customer value leaders work to stand out on one source of value—such as how Toms Shoesstands out on social value—while performing at least at parity on other important sources of value.The shoes perform the basic functions of footwear, use reasonable quality materials, and are sold atprices similar to other types of casual shoes (despite giving away one pair).

To understand this approach to value, think about each type of value as a vector—a continuumupon which all offerings in a given industry can be placed by customers (see Figure 6.2). These are

Performance Value

Price Value

Relational Value

Parity position

Figure 6.2 The Three Value Vectors

110 Part Two Creating, Adapting, and Implementing Strategy

the three general types of value that customers use when making choices among competingalternatives. Will their bottled water be a premium offering such as Evian or Gerolsteiner, astandard option in a Dansani or Aquafina offering by The Coca Cola Company and PepsiCo, or abottled water subscription service brought to customer’s homes from Endless Waters or CrystalSprings? In the minds of prospective customers, each of these water brands has a position that isabove, below, or at parity on each vector.

Customers judge the relative positions of the offerings in their consideration set—the setof offerings from among which they will select. To make a decision, they weight the vectorsaccording to what is most important to them—for some customers this will be price value, forothers performance or relational value. Importantly, what brands end up in the considerationset for comparison can, of course, be offerings from same category. For example, Perrier, Dasani,and Aquafina all compete head-on in the bottled water category. In other cases, the considerationset might include brands in related categories that fill the same need—in other words, watercompetes with other soft, sport, and fruit drink categories because they all have a claim oncustomer’s “share of thirst.”

Parity Performance

Each vector has a parity position. Parity is a customer-driven concept. The question is not whetherthere is an actual difference between competitors on a specific axis. It is whether customersperceive a meaningful difference. Companies often deceive themselves, believing that theircarefully managed differentiation efforts matter to, or are even noticed by, customers. Parityis the level of performance that must be met if customers are to judge a firm’s offering as credible.This parity level is more than just the minimum requirements for playing the game. Instead, itusually means at least a moderate, and often high, level of perceived competence reached by mostcompetitors. Customers do not see a meaningful difference among offerings clustered around aparity position.

How does a firm judge whether its offerings are at parity? The arbiter is always the customer,including customers who buy from the firm now, those who have never bought from the firm, andthose who may have stopped buying from the firm. Companies should ask two questions to makethis determination. The first question to ask is “Which alternatives are in the customer’sconsideration set?” For example, Saks and Neiman Marcus are competing in a different marketthan Walmart or Dollar General. Understanding what alternatives are in the set will help thecompany get a better understanding of how it fares from the customer’s perspective.

The second question is “How do the firm’s offerings compare to competitors?” Do the firm’sofferings stand out or just measure up? One way to assess parity is to ask a sample of customers torate the firms or brands on key features and benefits. The rating scale could ask, for example,whether Hewlett Packard desktop copiers are ahead, equal, or behind competitors on print quality,technical support, price, speed, and so forth. The comparisons could be against the market leaderand/or against top competitors for a certain segment of customers. A consistent rating of equalityacross offerings in a category is evidence of parity.

When competitive alternatives are all seen as close to parity on all three vectors, the marketis essentially “stalemated” as no leader is established on any value vector. Without meaningfuldifferentiation, the conversation between buyers and sellers usually deteriorates to a negotiationabout price. The resulting downward pressure on margins means that few firms have profits thatexceed their cost of capital.

Chapter 6 Creating Advantage: Customer Value Leadership 111

Points of Parity, Points of Difference

Meeting customers’ basic expectations keeps an offering in the running to be selected. However,this position does not lead to a high probability of purchase. Chances increase when the offeringhas a point of difference on one vector while measuring up to basic expectations on the other two.If, for example, a customer values health when selecting bottled water, the German brandGerolsteiner with very high levels of minerals and glass bottle truly stands out as shown in thedepiction of its position in Figure 6.3. Its premium price reflects this performance value. Forcustomers who do not value home delivery and are willing to buy the product during normalshopping trips, the brand achieves points of parity on relational value.

Few markets are as undifferentiated as refined sugar. Brand names are weak, the soft-drink,baked goods, and retail customers are powerful and insist on dual-sourcing, and the market isbarely growing. Two big competitors—Redpath and Crystal—were locked in a stalemate, whichwas reinforced by a mindset that emphasized scale and production efficiency to drive down costs.Both rivals competed on price value with the same products and similar sales approaches.Customers got the message and based their purchasing decisions solely on price and deliveryterms.

To escape the profit-draining stalemate, C-suite members at Redpath Sugar decided to talkwith the company’s 17 largest customers to understand their needs and uncover new insights uponwhich the company might compete. The results were discouraging—they discovered that the twosuppliers were considered equally competent, but no different—but also encouraging because theresearch uncovered evidence that customer needs were changing. Customers wanted shorterproduction runs, faster deliveries, more varieties of product and packaging, and smaller inventorieson hand. None of these emerging requirements could be met with the current business modelthat focused on large refineries, centralized warehouses, and scale economies.

Redpath’s selection of a relational value strategy, based on partnering to manage thecustomer’s total requirement, was obvious in retrospect, but daunting in prospect. The necessarychanges in the supply-chain (more decentralized warehousing and just-in-time dispatching anddelivery) and the tracking systems required a different mindset and significant investment(a $40 million modernization and capacity expansion project).16 Many of the traditional sales-people struggled to adapt to the sophisticated solutions approach to selling. The new strategy wasvalidated within two years, however, as customers slowly integrated their production process withthe company’s logistics system and gave Redpath a growing share of their requirements because ofthe overall associated cost savings they experienced.

Gerolsteiner’s position

Performance Value

Price Value

Relational Value

Parity position

Figure 6.3 Gerolsteiner’s Performance Value Leadership Position in the Bottled Water Category

112 Part Two Creating, Adapting, and Implementing Strategy

Evolving Value Propositions

As growth slows, the struggle for competitive position intensifies, and the strategies of incumbentsstart to converge and accelerate. There is a well-known herd mentality among incumbents thatleads to continuous jockeying to reestablish “points of parity” along the value vectors. It is notenough for a mid-tier hotel to offer cable TV and room service; it must offer premium coffeemakers and down duvets to meet the competition. From toothpaste to credit cards to orthopedicdevices, the degree of perceived differentiation steadily diminishes due to the relentless processof imitation.

Keeping pace with rivals in a market is a requirement for staying in the game. Fallingnoticeably behind on any one of the three value vectors erodes the overall customer valueposition. One effect of everyone keeping pace is that the parity level on each vector steadilymoves outward: performance improves, real prices drop, and service is better. Parity becomesan escalating target. As the Whole Foods co-founder and Chief Executive Officer John Mackeysaid of the pressure traditional supermarkets are putting on its organic and natural foodsbusiness “Our competitors are not standing still.”18

As parity advances on all three vectors, companies have to spend more just to stay in thegame. Customers, especially business customers with dedicated purchasing resources, are moreinformed and more willing to play one competitor against another. As customers’ expectations

SLACK: IMPROVING THE EXPERIENCE OF WORKPLACECOMMUNICATIONS17

Businesses increasingly rely on enterprise social network platforms to connect and drive collaborationbetween employees. Among the fastest growing is Slack—a messaging/group chat/document-sharingapplication. Both the desktop and mobile versions of the software allow teams to chat in online channelswith conversations divided by subjects.

Since the company’s launch in late 2013, Slack has attracted hundreds of clients, includingComcast, Zappos, Expedia, and even NASA. With daily users at an all-time high of 2.7 million and avaluation of $3.8 billion in 2016, Slack is poised to completely redefine workplace communications.

Several factors have been instrumental in accelerating Slack’s growth. First, the softwaredevelopment team made customer feedback integral to the process. In beta testing, for example,the company gathered input on product look and feel in waves, gradually expanding the batch of userseach time. This enabled Slack to identify and prioritize the development of features that wereresonating with end users. Another factor was management’s thoughtful approach to scaling theproduct. Early on, Slack realized that client buy-in was contingent on teams of employees “saying yes”to the software. So, the company developed training materials and other resources that helped userswork through common adoption barriers.

A final factor was Slack’s decision to infuse superior customer experience into its offering. Itssoftware features a personal level of human touch: it may greet a user with, “What a day! What cannotbe accomplished on such a splendid day?” or an amusing comment such as “Please use Slackresponsibly.” Slack also allows users to seamlessly sync information across multiple devices, providingquick transitions and follow-ups from conversations. Finally, Slack sets a high bar for its customerservice. A dedicated team tracks both good and bad customer comments that come through Twitter orthe in app “help” function—and responds to every single one. The team views every interaction as anopportunity to improve its offering features to innovate and engage its users with excellent experiences.

Chapter 6 Creating Advantage: Customer Value Leadership 113

about acceptable performance on each attribute rise, they are less willing to accept below parityperformance on any vector. These pressures require firms to pay attention to all three valuevectors, not just the value vector they seek value leadership on. Performance value leaders can’tallow prices and costs to be badly out of line or their service to be viewed as unacceptably poor.If they do, such leaders will be forced to offset the deficiencies in the total value of their offeringby lowering prices.

MANAGING FOR CUSTOMER VALUE LEADERSHIPHow does a company achieve and maintain a position of customer value leadership? Threesteps are important—selecting a focus and not trying to be all things to all customers, aligning thebusiness model, and creating strategic synergies when possible.

Selecting a Focus and Making Tradeoffs

Customer value leaders don’t try to straddle multiple value vectors. They accept the familiar adage“you can’t be all things to all people.” Many executive teams initially reject this premise becausethey don’t want to make choices that limit the markets they can serve. This delusion is dangerouson two grounds. To begin, both customers and employees are likely to be confused about thepositioning of the firm. The brand message is murky, the selling appeals lack consistency andclarity, and the product or service bundle is a series of compromises. C.J. Bruno, VP and GeneralManager of Marketing and Sales for Intel Americas, famously referred to this approach as “peanutbutter marketing”—marketing spread too thinly over the marketplace. Such a strategy is not onlytepid in its communication with the marketplace, but it is also vulnerable to attacks by morefocused competitors.

Pharmacy giant CVS made a strategic decision to compete as a health-care provider byoffering in-store clinics. Selling tobacco was too inconsistent with this aspiration, so the companydropped tobacco products from its stores in 2014. This decision is estimated to have cost thecompany about $2 billion per year. Financial results show that net revenues did not grow asfast in 2015, the year after the decision. However, longer-term growth has shown that CVShas achieved a strong position in the emerging pharmacy clinic industry and that thishas offset its losses in tobacco sales. Such decisions require vision and courage on the partof leaders: Vision to understand where markets are moving and where the company should makeits biggest bets and courage to make the tough choice to not spread the firm over too manyopportunities.

Aligning the Business Model

If the value proposition is what the company offers to the target segment, then the business modelis how the business profitably fulfills this promise. Effective business models are tightly synchro-nized to fit the value proposition—not the other way around! What distinguishes Edward Jonesfrom Chase and Wells Fargo is a strategy of providing relational value based on placing onefinancial adviser in a conveniently located in strip mall and suburban offices rather than a team ofadvisors in a more central location. Each advisor works deeply with clients offering personalizedattention and advice that is difficult to achieve when spread across advisors. As the head of talent

114 Part Two Creating, Adapting, and Implementing Strategy

notes, “You deeply serve clients by having a meaningful relationship with an appropriate amount offamilies that you focus on.” The solo advisor status also means that advisors must be entrepre-neurial and build the business through referrals from current advisors and by advertising in localmarkets.

Good business models answer two enduring questions. First, what is the value-creatingsystem—what business activities are necessary to create the value we promised our customers andwho will perform them? Second, what is the value-capture system—how does the company makemoney while creating value for its customers?19

The Value-Creating System

This comprises all the activities the firm performs to create and deliver customer value, frombasic inputs to create products and services to the channels used to sell, service, and distribute anoffering. It represents firm choices of (1) which activities to perform and (2) who performs them—whether it is the firm or a partner.

The question of which activities to perform is essential. What activities are essential to createthe value the company has promised the customer? Starbucks has a well-orchestrated set ofactivities for opening a new store—from location selection, store design, and barista training—that are a winning recipe. Whatever activity, the companies need strong competencies in thoseactivities to ensure that value is created consistently and effectively. Each competency, whether itis outstanding scientific invention, brand management, order fulfillment, pricing, or talentacquisition, is a complex bundle of skills and knowledge and systems exercised through a distinctorganizational processes. There are, however, only a few core competencies within each businessthat really contribute to the creation of superior customer value. These should be lavished withmanagement attention because they are so essential to the strategy. What sets Marriott Hotelsapart from its peer competitors is a service operations capability performed with a fanaticalattention to detail. This begins with recruiting and hiring and continues through every hoteloperation. The payoff is a consistently superior service—Marriott customers seldom haveunpleasant surprises. Marriott’s other capabilities are done well enough to keep it in the gamebut are not the basis of the company’s advantage.

The question of who performs the value-creating activities is increasingly pressing as firmsevolve toward leveraging networks of intermediaries and partners. Consider Li & Fung, the Asiantrading company that supplies more than $18 billion a year in clothing, toys, and other products fortop U.S. brands, but does not own a single factory. Instead, Li & Fung’s customers outsource theirproduction to Li & Fung, which in turn, outsources it to a network of over 15,000 suppliers aroundthe globe. This gives Li & Fung incredible flexibility and speed that customers value. Thesebenefits, however, come with some loss of control. If that loss affects whether the value propositionis fulfilled, the company’s value-creating system begins to break down and should be redesigned.

Thus, a company must carefully consider whether it will create the value (often called a“make” strategy), buy another company that can do so (a “buy” strategy), or form an alliance withanother company to create the value (an “ally” or “alliance” strategy). A make strategy is the mostexpensive and should only be undertaken if the company has the right assets and competencies.A buy strategy is also expensive because the knowledge and skills have to be bought. However, thecompany now fully controls these activities—the challenge is to manage the integration with thenew company. An ally strategy is the least expensive, but the company also encounters the costsand challenges of managing the partnership to meet its objectives.

Chapter 6 Creating Advantage: Customer Value Leadership 115

Value-Capture Mechanisms

The business model must also account for how the firm will capture profits. These value-capturemechanisms are the “monetizing” part of any business model. They include the ways the firm getspaid and the choice of fixed and variable costs built into the investments the firm makes to createthe value. These together determine the pattern of cash flows. There is a high degree ofcomplementarity between value creation and value capture, as when Gillette subsidizes the priceof razors to sell more profitable replacement blades.

Zara, the international clothing retailer, is a fashion imitator that uses a business model oftenreferred to as “fast fashion.” Its value-creating system is built on a well-tuned system of designerswho observe and quickly copy fashion and a manufacturing system that creates and moves clothingquickly into centrally located stores all over the world. Store managers and retail systems providefast feedback on customer purchases, which feeds designers with ideas. The firm captures valuebecause the clothing, often supplied in small batches to create a sense of scarcity, sells fast and noinventories are held. Prices are low, but discounts are rare. Value is also captured because storesdon’t advertise but use central locations to attract customers and remind them to visit often for thelatest fashion additions.

Coordinating the Business Model Elements

A business model is best designed as a whole, rather than the sum of isolated and separate decisionsabout pricing or outsourcing. To ensure the whole is greater than the sum of the parts, a companyneeds to:

Create a tightly bound relationship between the value proposition elements andthe business model elements. Zara has done this masterfully with the value propositionbenefitting from the business model and the business model getting clear directionfrom the value proposition. This deep integration is often referred to as strategiccomplementarity because there is a positive synergistic effect between the two elements.Remain immersed in deep customer and competitor insights. Many business modelsfail because they get out of sync with customer needs or are trumped by a competitor witha better solution.Align metrics and incentives. These should be tailored to the business model tomeasure and reward key value-creating and value-capture activities. For example, EdwardJones should reward advisors for increasing their share of clients’ investments as well asnew client acquisition—both support its business model, which is based on a singleadvisor acquiring and developing strong and long relationships with clients in a local area.

Creating Strategic Synergies

Aligning business model elements is one critical synergy the company should create. There aremany others that improve marketplace performance and the bottom line. Technologies in onebusiness can become innovations in another. For example, a core element in the GE strategicvision has always been to achieve synergy across as many of its businesses as possible. The gasturbine technology that GE pioneered facilitated the development of its aviation business.

Sony exploits synergy across its product line by showcasing them together in stores and evenon Celebrity Cruise ships. The ships are outfitted with Sony entertainment products, including

116 Part Two Creating, Adapting, and Implementing Strategy

television screens, movie theaters, and sound equipment. The result is an integrated package thathelps create and reinforce Sony’s brand of providing high-quality and technologically advancedentertainment.

Synergies can be generated by leveraging assets and competencies for multiple uses. Amazonleverages its warehouses, ordering, and distribution systems by allowing other firms to use itssystem. Services such as Elastic Compute Cloud (EC2) provide developers with computingcapacity in the Amazon Web Services Cloud. Amazon allows third parties, even competitors, to sellproducts and use fulfillment services in the Amazon Marketplace. Both generate more margin andscale for Amazon’s fixed assets. In the same way, Disney leverages its brand and its connection tokids and family over a wide variety of owned and licensed offerings including Broadway shows andcruise ships.

Companies should seek synergies such as these when creating its strategy. Leveraging existingassets, competencies, and offerings generates more value for the company. Such synergies are alsoimportant because they make it harder for competitors to imitate the company. The scale andscope of strategy that synergy is built on cannot be easily copied by rivals.

Monitoring Morphing Market Boundaries

The traditional strategy playbook of 20 years ago was anchored on fixed and well-defined markets—competitors were familiar and stable, and product functions were well-defined and distinct fromadjacent categories. These arbitrary product-market boundaries were enshrined in industrystatistics and marketing research tracking systems that offered a reassuring picture of continuity.

As markets evolve, though, firms find themselves in increasingly dynamic and competitiveenvironments. In the new game, market boundaries have evolved from fixed to fuzzy. Competitionto satisfy customers’ requirements comes from unexpected places—especially in the fast-converging computing, telecommunications, and entertainment industries. Digital technologieshave created many unlikely competitors, such as phones substituting for watches, people’s homessubstituting for hotels, and video conferencing software substituting for business travel.

There are also complex role reversals with customers becoming competitors and vice versa.For example, General Motors is a customer of Apple’s Carplay—a feature that enables users toconnect an iPhone while driving and get directions, make calls, send and receive messages, andlisten to music using voice commands and the built-in display and controls of supported vehicles—even as Apple is emerging as a competitor in the autonomous car market.

Globalization further intensifies and complicates the competition for customers. Plummetingcommunication costs and diffused manufacturing capabilities permit the entry of hordes of low-cost competitors into many industries. As emerging market firms build their capabilities, theyexpand their global reach. Some foresee a world where companies from every part of the worldcompete with each other in every market around the world. Products and services flow from manylocations to many destinations, and firms that do not solidify value leadership will soon findcustomers being enticed away by competitors that were not even on their competitive radars.

Adapting to Changing Market Realities

Given changing market boundaries, it is essential that companies be open to adapting theirstrategies over time. The balance between strategic stubbornness, in which the company is toowedded to its current strategy, and strategic drift, in which the company is too easily pulled off

Chapter 6 Creating Advantage: Customer Value Leadership 117

track by marketplace changes, is an ongoing challenge for leaders. Stubbornness is often bornefrom strategic investments companies have made in building assets and competencies to competein a market and from the mental models that get formed from repeating market activities overtime. When this happens, marketplace changes are simply missed or seem too difficult to act on.Drift arises from being overly reactive to competitor activities that challenge the company’sbusiness. The most important part of this balancing act is to remain resolutely focused onstaying relevant to customers. This perspective ensures that companies will remain aware of themost important market changes and be unwilling to stand by outdated assets and competenciesthat do not serve the market any longer. There are many companies that had others “eat theirlunch” because they would not eat it themselves, including Kodak, Blockbuster, Motorola, andBorders Books.

KEY LEARNINGS

There are three main types of value that companies offer customers: (1) performancevalue, or having the best product or service offering, (2) price value, or having thelowest price over the life cycle of the product, and (3) relational value, or being able tooffer customers a customized offering or solutions.

To achieve customer value leadership, companies should strive to be exemplary forone type of the value proposition, and at parity, or at the level of performance thatmust be met for customers to judge the firm’s offering as credible, for the othertwo types.Companies should not try to be all things to all customers and instead should focus onhaving a clear and specific value proposition.

A company’s business model, or how the firm creates and captures value from thetarget segment, should be aligned to meet the firm’s desired value proposition.

A company can create synergies by leveraging its assets for multiple uses and byaligning its business model elements.

FOR DISCUSSION1. Compare and contrast how your local grocery would position the pre-made meal

area of its store if it were trying to excel on performance, price, or relational value.What value proposition do you recommend as the path to sustainable competitiveadvantage?

2. Home Depot has decided that it wants to adopt a relational value proposition. Whatbusiness model should Home Depot adopt to support this strategy? Include in youranswer a discussion of whether a CRM or comprehensive solution managementsystem would be more appropriate.

3. Discuss one company that you think is compromising its strategic success by focusingon too many different customers. What changes do you recommend?

4. What are the value-creation and value-capture mechanisms that Amazon uses in itsbusiness model? How consistent are these with its value proposition?

118 Part Two Creating, Adapting, and Implementing Strategy

5. What synergies can LinkedIn exploit? Discuss several opportunities that exist for thecompany now and as it might grow. Consider how synergies with Microsoft, its parent,affect your choices.

6. What company is threatened by morphing product boundaries? What strategies shouldit take to protect its value in the marketplace?

BEST DIGITAL PRACTICE

CVS: In the Healthcare Business

In 2014, CVS made headlines when it decided to ban tobacco products from stores. Despite projectedannual revenue losses of up to $2 billion, CVS believed this was an important step in shifting consumers’perceptions of who it is as a company. Rather than being identified as a national retail chain, CVSwanted its brand to be known for helping people lead healthier lives. With the healthcare industryplacing a greater emphasis on improving outcomes, reducing chronic diseases, and controlling costs,CVS saw an opportunity to more effectively enter the health space and differentiate itself fromcompetitors. CVS believed that removing tobacco products would cement its strategic commitment tohealth and wellness.

CVS continues to deliver on this goal today in several ways. To more accurately brand its position,the company has adjusted its corporate name to CVS Health. CEO Larry Merlo sees the name change asa way to double down on the organization’s mission. Management has also made significant investmentsin technological innovations that offer CVS several sources of sustainable competitive advantage:

■ CVS Pharmacy App: This serves as the hub of the consumer’s digital healthcare experience. Appusers can set medication reminders, scan a picture of their insurance card, and scan prescriptionlabels to trigger auto-refills. Aimed at increasing compliance with prescriptions to medications,these tools ensure patients get and stay on the proper treatment.

■ IBM Partnership: CVS is working with IBM’s artificial intelligence software program, Watson, toprevent health crises before they happen. By analyzing medical utilization and patient behaviordata to predict which customers are potentially at risk and may need medical interventions, CVS isable to serve its customers more effectively.

■ Telehealth Pilot: As site of care expands beyond the physician’s office, CVS is piloting telehealthcapabilities that allow patients to interact with providers from their homes. Additionally, brick-and-mortar MinuteClinics may offer virtual consultation options in the near future.

CVS’ significant investment in digital solutions has led to usability among approximately one-third of itscustomers, and adoption is expected to continue to increase. Perhaps more importantly, it has helpedthe company reposition itself as a serious player in healthcare and to build a foundation for solid futuregrowth.

Questions:

1. What type of value does CVS Health offer to the market? Was it necessary to ban tobacco from itsstores to make this strategic move?

2. What strategic synergies should CVS Health exploit to improve its effectiveness in this market?(continued)

Chapter 6 Creating Advantage: Customer Value Leadership 119

BEST GLOBAL PRACTICE

Tetra Pak

In the developing country of Bangladesh, reliable electricity and a solid infrastructure for fooddistribution are hard to come by. As a result, families struggle to gain access to foundational nutritionproducts, like milk. Fortunately, Swedish company Tetra Pak developed a type of sterilized milk thatfits the people of Bangladesh’s needs remarkably well—it does not need to be refrigerated and has a sixto nine month shelf life. Despite an outstanding product, Tetra Pak foresaw two key adoptionhurdles—disorganized local milk production and a lack of consumer awareness about the benefitsof sterilized milk. To overcome these barriers, Tetra Pak decided to adjust its value proposition toemphasize a different benefit around which other stakeholders would rally—food safety.

Tetra Pak’s first initiative was to fix the broken dairy production and distribution system inBangladesh. In partnership with the country’s largest food grower and processor, PRAN, Tetra Pakestablished regional Dairy Hubs aimed at strengthening the entire value chain. This involved helpingfarmers understand how to care for their cattle better to improve the health and sanitation of the milk.Once in place, the partnership put a more efficient distribution process in place that involved collectingmilk from farms twice a day and transporting it in insulated trucks so that it remained fresh and sterile.Through these efforts, Tetra Pak was able to improve productivity and expand the dairy market. Thecompany estimates that 64 percent of farmers can now rely on milk production as their primaryincome and that PRAN has increased production from 70,000 to 200,000 liters per day.

In parallel, Tetra Pak launched a series of consumer-education initiatives. The company’s milksecret campaign, targeting Bangladesh mothers, included key messages around sterilized milk being asafe, natural option. Newspaper advertisements further supported this messaging by portraying women

Sources:Margo Geogiadis, “How Clorox, Booking.com and CVS Health are Winning Micro-Moments,” Thinkwith Google, June, 2016, https://www.thinkwithgoogle.com/articles/clorox-booking-com-cvs-health-winning-micro-moments.html

Mark Brohan, “Exclusive: Q&A with Brian Tilzer, Chief Digital Officer of CVS Health,” MobileStrategies 360, May 9, 2016, https://www.mobilestrategies360.com/2016/05/09/exclusive-q-brian-tilzer-cvs-health

“Message from Larry Merlo, President and CEO,” http://www.cvshealth.com/thought-leadership/message-from-larry-merlo-president-and-ceo

“CVS Caremark Announces Corporate Name Change to CVS Health to Reflect Broader HealthCare Commitment,” September 3, 2014, https://www.cvshealth.com/newsroom/press-releases/cvs-caremark-announces-corporate-name-change-cvs-health-reflect-broader

“CVS Health to Partner with Direct-to-Consumer Telehealth Providers to Increase Access toPhysician Care,” August 26, 2015, http://cvshealth.com/newsroom/press-releases/cvs-health-partner-direct-consumer-telehealth-providers-increase-access

Bruce Japsen, “CVS and IBM’s Watson Cloud Pursue Ways to Predict Patient Health,” Forbes, July 30,2015, http://www.forbes.com/sites/brucejapsen/2015/07/30/cvs-and-ibms-watson-partner-to-predict-patient-health-needs/#3d5338668ac9

120 Part Two Creating, Adapting, and Implementing Strategy

as the key decision-maker within the family. Tetra Pak also held seminars for nutritionists, who they sawas potential ambassadors for the product. Finally, the company piloted a program that involved a singleserving of Tetra Pak milk being included in the daily food packs of 10,000 garment factory workersacross the country.

Tetra Pak’s value proposition of underscoring safety in its products and its willingness to build abusiness model that effectively facilitates this has been core to its growth. Today, the company servespeople in more than 175 countries, and it has continued to expand its product line to support otherunmet nutrition needs.

Questions:

1. Discuss how Tetra Pak aligned its value proposition and business model for competitive advantage.

2. If Tetra Pak were to become a relational value leader (like Redpath Sugar in this chapter), howwould its strategy change?

Sources:“Educating Consumers in Bangladesh,” http://www.tetrapak.com/sustainability/food-protection/consumer-education/educating-consumers-in-bangladesh

“From Cow to Consumer in Bangladesh,” http://www.tetrapak.com/sustainability/food-availability/dairy-hubs/dairy-hubs-from-cow-to-consumer

Chapter 6 Creating Advantage: Customer Value Leadership 121

C H A P T E R S E V E N

Building and Managing CustomerRelationships

“You’ve got to start with customer experience and work back toward the technology, not the other wayaround.”—Steve Jobs

“A journey is like marriage. The certain way to be wrong is to think you control it.”—John Steinbeck

“Use authentic experiences to inspire.”—Howard Schultz, Founder of Starbucks

Creating superior value is the first critical step in creating a sustainable competitive advantage.The customer’s journey to making the purchase decision, having a positive experience, andremaining loyal must also be managed by companies to convert that offering of value into companyprofits. This chapter examines the customer’s decision journey and its changing nature giventhe evolving digital landscape. Managing the customer’s experience throughout that journey isexamined in detail, including measuring and improving the experience. Finally, customer loyalty isconsidered in depth with a focus on the nature of customer loyalty, building relationships, anddefending those relationships.

THE CUSTOMER DECISION JOURNEYCore Elements of the Customer Decision Journey

The Customer Decision Journey is the set of stages customers move through as they evolvethrough a search process to being triggered to purchase and post-purchase states. The journeyused to be a simple, linear, and unidirectional flow of activities in which brands were eliminated bythe customer as she built knowledge from retailers or salespeople and was persuaded to make apurchase. Customers operating in today’s marketplace participate in a more complex, iterative, and

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bi-directional journey. Understanding the journey opens up important opportunities for thecompany to influence it.

Figure 7.1 depicts the traditional decision journey that begins with awareness, followedby consideration, preference, purchase, loyalty, and culminating in advocacy. This is typicallymodeled as a funnel that starts wide with a large set of purchase options and then narrows ascustomers move through the journey, resulting in one brand that customers buy and are loyal to.The first step is awareness, which refers to the set of brands that a customer is aware of in aparticular category. Following search and knowledge building, the customer forms a consi-deration set, which is the subset of brands the customer is open to buying. Then thecustomer forms preferences, or evaluative judgments that reflect the degree of liking andpositive attitude, for one or more of these brands; disliked brands are removed from furtherconsideration. Next is purchase, which reflects what the customer ultimately buys. If thecustomer has a positive experience with the purchase and post-purchase, she could becomeloyal to the brand. Another common framework employed in marketing is AIDA, which standsfor Attention, Interest, Desire, and Action. AIDA and the traditional funnel are similar andhave corresponding levels (Attention = Awareness, Interest = Consideration, Desire = Prefer-ence, and Action = Purchase).

This journey is depicted as a linear one-way push method of communication fromcompanies to customers as they move through this process of eliminating brands at each stage.1

It also assumes that customers go in one direction—from awareness to advocacy.Several factors challenge this traditional funnel. New channels and technologies are changing

the ways in which companies and customers interact. Empowered and web-connected customerscan search for almost unlimited information and offerings from small and large companies aroundthe world as well as gain access to information from other customers, curators, and critics. Thetraditional funnel of one-way method of communication with brands talking at customers hasshifted from a push of information to a pull of information as customers actively seek informationat every step of the journey. Communication is now a two-way dialogue between companies andcustomers.

AttentionAWARENESS

CONSIDERATION

PREFERENCE

PURCHASE

LOYALTY

ADVOCACY

Interest

Desire

Action

Figure 7.1 The Traditional Customer Decision Journey

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The Complex Nature of Today’s Customer Decision Journey

These changes produce a modified Customer Decision Journey where brands can enter and exitmore easily. If a brand is not in the initial consideration set, it can enter later, expanding the pool ofbrands. McKinsey reports that customers in the skincare sector add 1.8 brands on average duringwhat they call the “active consideration” process.2 The degree of expansion of the consideration setcan vary greatly across different categories, customers, and occasions. Customers are more likely toconsider additional brands along the way if the purchase is high involvement (important and/orexpensive), if it’s an unfamiliar purchase in which initial knowledge is limited, or when companieshave strong capabilities to trigger new searches even as the customer is moving through theprocess.

Figure 7.2 captures several of these unique features in the modified Customer DecisionJourney. Each activity is described from the customer’s point of view starting with a trigger topurchase an item. Following the trigger, the pathway around the interior of the figure resemblesa traditional journey path—information is gathered, a consideration set is formed, preferenceemerges, and a purchase is made. Customers can begin the process without gathering information,in which case they would simply create a consideration set from memory. In addition to thesesteps, however, there are modifications that occur in the journey, which are explained in detail inthe following sections.

Trigger

Prior to an initial purchase, an event will trigger the Customer Decision Journey to begin. Triggerscan be internal, such as a change in roles like moving from being a student to a workingprofessional. Triggers can also be external, such as a neighbor buying a new car, a story on

Preference

Purchase

Considerationset

WOM/Advocacy

Post-purchase

Informationgathering

Complaining/Neutral

Trigger

Learning loop

Loyalty loop

Traditional journey path

Journey modifications

Loyalty loop

Learning loop

Figure 7.2 A Modified Customer Decision Journey

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the radio about a new film, or chatter about a new company in a customer’s social media circle.A trigger is anything that a customer experiences that influences the desire to purchase something.Importantly, triggers do not end after the first information-gathering step. Triggers can occurthroughout the Customer Decision Journey, as illustrated in Section 7.2. Those triggers can theninfluence which brands are being considered at each phase of the journey.

Information Gathering

In this stage, the customer obtains information either actively or passively. An active approachinvolves the customer pulling information from various sources while a passive approach occurswhen companies or their advocates reach customers with information those customers have notnecessarily sought out. This stage has been called the zero moment of truth. Exposure at this stageincreases the chances a company will make it into the customer’s consideration set. As Jim Lecinskiof Google describes, the zero moment of truth “is that moment when you grab your laptop, mobilephone or some other wired device and start learning about a product or service (or potentialboyfriend) you’re thinking about trying or buying.”3 For example, Google Consumer Servicesreports that 66 percent of smartphone users turn to their phones to learn more about somethingthey saw in a TV commercial.4

Consideration Set

After the customer receives information, she considers an initial set of brands. If she feelsconfident and informed in her choices, or if the purchase is time sensitive, she will move onto thenext step. If the customer feels she still needs more information, she will stay in the information-gathering stage.

This continual information gathering can be thought of as a learning loop. In this mode, thecustomer is adding and subtracting brands to his or her consideration set based on the informationprocessed. The loop can occur several times if the customer continues to gather information andrevise her consideration set. It can also happen during the preference formation and purchase stagesas the customer browses options she had not considered. Companies in a customer’s considerationset want to discourage more information gathering lest the customer find a better alternative! Asa result, they take steps to preempt search, such as offering same day discounts for purchasing.

Preference

After creating a consideration set from information gathering, the preference stage occurs. Herethe customer undertakes a final review of her short list and whittles it down to a smaller numberand ultimately, a final decision. Preference is internal to the customer and not yet acted upon.If enough time passes or circumstances change before the customer acts on her preference,she could move backward and make a different choice and/or resume active search for newinformation.

Purchase

In this phase, one brand is ultimately selected as the best option based on the informationgathered. This phase is also known as the first moment of truth, the key moment when shoppersare converted to users. It is important that all aspects of the offering—whether it is on the web, in ashowroom, in a sales pitch, or in a supermarket—fit the brand promise. If not, purchase is unlikelyand more information gathering will commence.

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Post-purchase

In the post-purchase phase, customers experience and engage with the brand they purchased. Thisis also known as the second moment of truth because it reflects the customer’s assessment ofwhether the promised value proposition has been delivered. If a customer has a positiveexperience, a relationship with the brand can begin. A positive preference for the brand ismaintained and the customer is likely to repurchase it the next time the need for the purchase istriggered. This creates a loyalty loop between positive experiences and the customer’s purchase.While in this loop, the customer is less likely to search and will likely shun competitive companies’attempts to gain his or her attention in the marketplace. This virtuous cycle is the brass ring forbusiness. A satisfied customer can also become an advocate for the brand. This can occur throughreviews, word-of-mouth, and other social media. Not all satisfied customers advocate andcompanies can take steps to encourage this important behavior in order to trigger new customersearches and to feed the information-gathering activities of customers actively searching forsolutions.

A customer who is dissatisfied or neutral will not enter the loyalty loop. Instead, she willreconsider her choice the next time a similar product or service is needed, this time including post-purchase knowledge. A particularly dissatisfied customer will not consider the brand next time, andmay even actively complain about the brand.

A SKINCARE CUSTOMER DECISION JOURNEY

You just ran out of face moisturizer and this triggered the Customer Decision Journey to begin. Youhave used Neutrogena in the past but worry you might be outgrowing the brand and the upcomingwinter season triggers the idea that a thicker lotion might be helpful. Based on ads you have seen inmagazines you read, you add Aveeno and Clearasil to your initial consideration set of Neutrogena. Yougather information from Amazon, referring to friends’ recommendations, and thinking about your ownperceptions of the brands based on television advertisements and other touchpoints in the information-gathering phase. Based on this, you remove Aveeno from your consideration set. You were just onInstagram and saw your favorite movie star post a photo with vibrant looking skin that she attributedto her favorite Clinique skincare product. You initially didn’t consider Clinique because it wasslightly above your price point but this movie star has offered a promotional code on her page.You add Clinique to your consideration set during this learning loop. Later you go shopping in thedrugstore and see a sample display of Jergens. You love the way it feels on your skin and add this brandinto the consideration set as well. In this learning loop, you have gone from three brands to four brandseven after removing Aveeno from your consideration set. Your behavior is consistent with McKinsey’sresearch which shows that the average number of brands in the initial consideration set for skincare is1.5 but on average, 1.8 are added in active consideration.5

After comparing the products, you narrow it down to Clinique and Neutrogena in the preferencephase. You ultimately decide to purchase Clinique based on the aspirational nature of the brand andthe great discount you received. In the post-purchase, you use the product and notice that althoughthe lotion makes your skin glow like the celebrity’s skin you noticed earlier, you read an online post by acelebrity about lotions having parabens, which you have been trying to avoid in all body care products.Despite searching you can’t find out if Clinique has eliminated parabens from its products. You also

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Managing the Customer Decision Journey

All stages of the Customer Decision Journey involve a dialogue between customers pullinginformation and companies pushing information, so companies must ensure they are available atkey moments of communication. Two-thirds of the touchpoints during evaluation are customer-driven pull activities, like online reviews, word-of-mouth recommendations, and in-store activa-tions.7 If a customer posts a question or complaint on Facebook, for example, the company isexpected to answer quickly and publicly through the same channel. According to research doneby HubSpot, 11 percent of customers expect a response in minutes, 40 percent expect one inhours, and 23 percent in days. The bottom line is that conversations are happening on social mediaand for a brand to be well positioned, it must be attentive to that conversation. Brands should thinkof interactions with customers as an ongoing relationship.8

Companies can also use the Customer Decision Journey to identify where they are mostlikely to lose potential customers. The area of focus will vary by company.

Mercedes-Benz is a well-known brand and hence a customer may easily recall the nameor be interested in an ad she sees for one of their vehicles. However, once a customerstarts to gather information during the information loop, she might realize that buyinga Mercedes is out of her means. Mercedes should therefore focus on converting thosewho are aware and consider their brand but who do not prefer it because of price.This might involve offering a lower-priced entry-level line of vehicles that is moreaccessible to the masses.

Hyundai, on the other hand, is an economy brand and it trails Honda, Nissan, andToyota in brand value.9 During the economic crisis in 2009, it offered the HyundaiAssurance Program. It allowed customers to return vehicles if they lost their income.This likely brought Hyundai into the initial consideration set of car buyers since the riskassociated with buying a car was lowered. Despite the tough economic times, Hyundai’smarket share grew. Hyundai diagnosed its Customer Decision Journey and tailored itsmessage to be impactful in moments where it knew it was weaker than its competitors,and it paid off.10

wonder whether it is really worth the extra amount you paid despite your promotional code. As youembark on the next skincare journey, your Clinique experience, together with the fact that you nolonger have the promotional code, sways you to return to Neutrogena. The cycle continues, againand again. This illustrates that the moment after purchase is just as important as the moment prior.Could Clinique do something to sway you to purchase this product at full price and initiate a loyaltyloop? Brands must strive for loyalty so that they can create brand advocates. Court et al. describe twotypes of brand loyalists: active and passive. An active loyalist is someone who is vocal about theirpreferences, often recommending the brands to friends and family. They write product reviews andpost on social media about positive (and negative) experiences. A passive loyalist is someone who mightnot even recognize their loyalty to a brand. They stick with a brand sometimes because of laziness orconfusion due to the onslaught of choices that make it simply more convenient to continue with onebrand.6 These customers are more at risk of being lost to other brands due to their receptiveness toother brands’ messages.

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How does a company know where its customer journey is weak? This process usually startswith the market research or consumer insights team assessing the journey, answering questionssuch as which customers are progressing and which are getting stuck in the journey, what are thebarriers to proceeding along the journey, and what factors facilitate progression. Once areas ofweakness are identified, more tailored research can be done at whatever stage of the journeyneeds analysis and improvement.

Exactly how this research is performed depends on the nature of the journey, which is likely tovary considerably depending on the industry and the offering including methods covered inChapter 2. However, several common metrics for assessing the different stages of the CustomerDecision Journey are useful in a wide range of firms. For example, companies measure the typesand levels of information searched, including where customers search and click—through rates.Aided and unaided awareness can also be measured in the pre-purchase phase, whereas advocacyscores and likelihood of repurchase are measured post-purchase. Once a set of valid measures areselected, it is important to collect these measures regularly to establish a baseline. Then firms canidentify recurring areas of weakness, when unexpected changes occur, and establish the effectof new campaigns or initiatives. For example, if research uncovers that a brand is weak at theconsideration set stage, such as a private college that low income students are aware of, but do notseriously consider because it seems too expensive, the college might consider advertising itsprominent financial aid packages and research whether it is better to advertise to students, parents,or high school counselors.

MANAGING CUSTOMER EXPERIENCEThe Different Meanings of Customer Experience

Customer experience is a multidimensional concept that captures a customer’s cognitive, emo-tional, behavioral, sensorial, and social responses to a firm’s offerings and activities across thedecision journey.11 Every touchpoint a company has with a customer contributes to the customer’sexperience, including the website used to gain initial product or service information, thecleanliness of restrooms, product packaging, and the experience of using products (whether itis in your customer’s kitchen or used as a component in your customer’s factory). How theseexperiences are combined to form an overall impression of customer experience will vary bycustomer, but companies should have a strong understanding of what matters most to their targetcustomers.

Zappos, an online shoe retailer, has grown to over $1 billion in revenue since its inception over10 years ago. The idea for the company arose for founder Nick Swinmurn when he experienced thefrustration of searching for a pair of shoes. The problem was that local retailers, from whom mostconsumers bought their shoes, had limited inventories due to space and mostly carried productsfor the mass market. As an online retailer without the same inventory limitations, Zappos is able tooffer a variety of widths and sizes. Zappos focused its resources on establishing a web presenceand optimizing its site to help move customers efficiently through the journey. On top of an alreadyexcellent site, Zappos also has the competency to build a new landing page for something specific itnotices customers are searching for. For example, if customers search for “size 18 shoes” and nopage exists, they will build one that only features size 18 shoes—a fact that is greatly appreciated byits customers. Monitoring and analyzing search activities that are occurring during the CustomerDecision Journey has enabled Zappos to successfully usher customers through to purchase.12

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Customer experience used to be relegated to the concerns of service businesses. Forexample, Singapore Airlines provides the basic service of a flight but also a superior and uniquecustomer experience, offering business travelers great food, innovative technology, new planes,and the ability to anticipate other travel needs.13 However, successful product companies arenow differentiating on experiences as well.14 At flagship Niketown stores, the customer has theopportunity to interact with Nike in a unique, fun, and more intimate way, creating value andbuilding the brand well beyond immediate sales. Sephora similarly curates an experience tocomplement its core product offerings, by allowing women to try products under glamorouslighting, request samples, and get free advice from experts. Other brands straddle the line betweenproduct and service, such as Eataly with its traditional grocery offerings alongside restaurantservice and cooking classes—all with an overarching experience of Italian culture and the celebrationof food.

The Strategic Importance of Customer Experience

A great customer experience can help companies differentiate from the competition, resistimitation attempts, add value to core products and services, and build a memorable brand. Asa differentiation point, a great customer experience can take an otherwise commoditizedproduct and give customers a reason to choose it over others. For example, the customer serviceexperience at Zappos differentiates it from not only other shoe competitors but also generice-commerce sites like Amazon. Imitation becomes difficult when firms take a holistic approachto creating a customer experience that cannot be boiled down to one or two activities that arefairly easy for competitors to observe and copy. Brands like Shoebuy have tried to imitateZappos, but Zappos’s entire activity system and commitment to putting the customer first haskept it ahead.

Additionally, the added value of a great customer experience to a core product should notbe underestimated. Customers are often willing to pay more if they receive superior touchpointexperiences such as customer service, social media interaction, post-purchase check-ins, or easyreturns. Zappos’s unique customer experience are shared on social media and in word-of-mouthdiscussions where reviews and ratings spread like wildfire. Finally, a great customer experiencecan make a brand more memorable and thus inspire loyalty. Anyone who has shopped with Zapposwill tell you it is certainly a memorable brand!

Factors Affecting Customer Experience

To understand, measure, and manage customer experience, it is useful to break the CustomerDecision Journey into pre-purchase, purchase, and post-purchase experiences.15 Pre-purchaseexperience involves touchpoints during information gathering, consideration, and preferenceformation stages. The purchase experience encompasses all aspects of the actual exchange ofmoney for the offering between the customer and the company. Think about how the purchaseprocess differs for an Amazon customer purchasing online versus a Walmart customer purchasingfrom a brick-and-mortar store. Post-purchase experiences include the customer’s experience afterpurchase that relate to the company. This might include how well the product performs, post-purchase engagement with the brand online, interactions for service requests, returns, and eventreatment of customer purchase information.

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During any of these stages, many different factors will influence the customer’s experience.To understand and appropriately manage the customer experience, a brand must recognize,monitor, and influence all of these factors. For example, to understand the iPhone experience,Apple focuses on its product design and packaging, the performance and service of wirelesscarriers, and customers’ expectations and needs, among many other factors. Some of these arefactors controlled by the brand or its partners, and some are controlled by the customer oroutside forces.

HOW GE POWER SYSTEMS MANAGES CUSTOMER EXPERIENCES16

In large-scale business-to-business settings, the touchpoints that shape the customer’s experiencealong the journey can be very complex. GE Power Systems, which provides products and servicesto clients in the energy industry, is a prime example of this complexity and of how its effectivemanagement can contribute to a unified customer experience and brand image. A single purchase forGE Power Systems can involve years of relationship building, sales efforts, stakeholder engagement,and contract negotiations in order to make the sale; months of installation and client training to deliverthe product or service; and many years of ongoing service and engagement during a power plant’sdecades-long life cycle.

Managing this lengthy and complex process to achieve a strong customer experience is nosmall feat for GE. It is a tall order with high stakes—a single client’s satisfaction can translate tohundreds of millions of dollars in revenue. The concentration of buying power in this B2B marketcreates unique challenges. To meet these challenges, GE Power Systems grounds its sales andmarketing efforts in two key principles: trusted long-term relationships and cutting-edge technicalsophistication.

Building a long-term trusting relationship by managing experiences across the journey takestime and effort. GE Power Systems uses the following strategies. It builds and reinforces relation-ships outside of the sales process by hosting “State of the Art” conferences to teach potentialcustomers about the energy industry’s latest systems, services, and products. This enables GE to takean active role in the customer journey from the very earliest stages, ensuring its place in thesecustomers’ consideration sets when the time comes. Building on these initial touchpoints, GEstructures its sales organization and practices around the goal of strong relationships. This includeshiring responsive salespeople who work to foster a trusting relationship with the customer over timeand facilitating a partnership between GE and the customer. This relationship-based strategy alsoincludes structural aspects, like having an Account Executive that is local to each client who can act asa consistent face for the brand, build long-term personal relationships, and have regular formal andinformal contact with the customer over time. This relationship enables the Account Executive tocontinuously advise the customer and respond to feedback during the sales and delivery processes.GE Power Systems also reinforces its customer relationships through a portfolio of offerings thatenable smaller ongoing sales and interactions. Aside from large-scale offerings for power plants, GEprovides customers with smaller offerings like minor upgrades and emergency replacement parts.This helps GE maintain a steady stream of both communication and revenue with its customersduring the post-purchase phase.

In addition to building trusted long-term relationships, GE Power Systems also works to reinforceits reputation for technical sophistication in all aspects of journey. Doing so benefits the brand in threecritical ways. First and most directly, technical superiority enables the brand to maintain a strongoffering portfolio and compete on functional performance. When customers are committing to massive

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Touchpoints Controlled by the Brand or Its Partners

Customer experience is inherently personal and subjective, existing only in the mind of thebuyer.17 Although no two customers will have exactly the same experience, their personalexperiences are shaped by a variety of “clues” that firms and partners may be able to shape orcontrol. The most obvious of these are functional clues related to the core features of a productor service. For example, the taste of a hamburger at a restaurant is a functional clue thatMcDonald’s controls, and the reliability of a jet engine is a functional attribute that Boeingcontrols.

Humanic clues come from the behavior and appearance of other individuals involved inthe customer journey, such as the friendly attitude of a Costco greeter or the perceived confidenceand expertise of a USAA salesperson.18 A hurried or distracted associate has the potential toaffect overall customer perception of the quality of the product or service, while someone who isappropriately dressed, knowledgeable, approaches in a timely manner, and makes eye contactsends a different signal. Even the often-overlooked sense of touch can play a powerful rolein retail environments, where a salesperson’s appropriate touch could signal friendliness andbuild trust.19

Mechanic clues come from the physical, sensory experiences involved in the customerjourney, such as the ambient light, sounds, and smells in a retail store or showroom. Manipulatingthe mechanic clues in the customer’s environment can be a powerful tool for companies. Bycarefully designing the music, lighting, colors, textures, and ambient scent of a store, a retailer canmake it more likely that customers will make a purchase, will be happy with their products, andwill buy again in the future.20 Brands have found great success by taking a holistic approach tocustomers’ sensory experience, such as Westin’s Heavenly Bed and the thoughtful design of thehotel brand’s sheets, soaps, showerheads, and even the ambient scents of the lobby.

investments that will impact them for decades, they need to be very confident that the product orservice is at the cutting edge. Second, technical superiority lets GE Power Systems become theircustomers’ go-to source for smaller day-to-day purchases or incremental upgrades throughout thelarger life cycle of a power plant. This not only wins the brand a variety of ongoing sales, but it alsocreates an opportunity to maintain and strengthen the customer relationship. Third, technicalsuperiority makes the brand a trusted source for knowledge and advice, through formal channelslike “State of the Art” conference presentations as well as informal interactions with individual clients.Although these educational interactions do not always create revenue directly, they can be immenselyhelpful for staying top-of-mind for current customers and also for building new connections withpotential future customers.

OFFICE DEPOT’S CUSTOMER EXPERIENCE TURNAROUND

The CEO of Office Depot was puzzled about the fact that sales were declining, while the customerservice scores from a third-party mystery shopper were extremely high. To find out why, he madeunannounced visits to some 70 stores in 15 states. He observed and talked to customers in the aisles.Customers leaving the store, especially if their shopping carts were empty or nearly so, were asked why

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Touchpoints Controlled by the Customer

There are many other factors involved in the customer experience that neither the brand norits partners can control. Some of these are controlled by customers, who are fundamentallyco-creators of the experience. Perhaps the most critical thing customers bring to the table is theirexpectations. These expectations can be captured in two general questions.

First, what is the standard for the brand’s performance? A luxury boutique will be judgedmuch more harshly than a big-box retailer for the same objective level of service. On the otherhand, even a poor service performance may not bother customers of a discount airline whereexpectations are low.22 Firms should strive to create expectations that are high enough to attractcustomers’ interest but low enough to be met or, preferably, exceeded.

Second, what dimensions do customers expect the firm to do well on, and what dimensionsare they likely to ignore? If expectations are stylish clothing and fast service, improving price orstore cleanliness may not matter. Brands should focus their resources on improvements thatmatch customers’ priorities. For example, among Internet retailers, consumer preferencesurveys show that free shipping and an easy return process are important across demographics.23

At the same time, brands can also work to sway these priorities by tailoring communicationsto draw attention to different features or benefits, or by segmenting customers to target thosewhose priorities match the firm’s.

Aside from their expectations and preferences, customers can also act as co-creators in moreconcrete ways. For example, Lego customers use the brand’s products to come up with their ownunique creations, and Lego in turn often makes new boxed sets based on user-designed creations.Similarly, Starbucks used its MyStarbucksIdea.com website to engage customers around improv-ing the customer experience. This type of deliberate co-creation can be especially useful whenthere is a lot of uncertainty about customer preferences, when the focus is on business customerswho are experts in an area, or when a small firm with a limited budget is trying to innovate.24

Touchpoints Controlled by Social/External Sources

Other factors that shape customer experience outside of the brand’s control may be outside ofthe customer’s control as well. For example, an airline passenger’s experience might be affectedby a friendly conversation with another passenger or by a restless child kicking the back of

they did not buy more. The mystery shopping scores were correct because they were based oncleanliness of the store, including the bathrooms, and whether the shelves were full. The stores got highmarks on these dimensions. But how was the customer experience buying products in the store? Theanswers were not good. The Associates did not focus on the customers; in one case, they actually arguedabout whether an item was carried by the store. The stores were large and complex, so items werehard to find. The experience was not as efficient as desired; customers just wanted to get in and out.Customers wanted some items not offered, such as shipping and computer repair.

As a result of these insights, stores were redesigned so they were easier to shop in and somewere downsized. Operations were made more efficient so that Associates had more time to sell.The interaction pattern was changed. For example, questions such as, “What brings you in today?” and“How are you planning to use the product?” were added to help stimulate a dialogue between thecustomer and the Associate. Finally, Associates were encouraged to offer recommendations and tosystematically cross-sell complementary items.21

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her seat. Similarly, a customer’s experience with a new mobile device might be affected byreviews or advice posted by other users in an online forum. Finally, experience can be determinedby environmental factors, such as those occurring in the political and economic environment.A newly built and financed home may be experienced as less valuable if variable interest ratesclimb during an inflationary period.

Measuring Customer Experience

Given that customer experience is internal and subjective, it can be very difficult to measure.Methods and tools can vary depending on factors such as industry or end customer, but it is worthhighlighting several approaches.

Service Blueprinting

Service blueprinting provides an overview of the customer experience. Service blueprinting is atype of experience audit that establishes when a service starts and stops for a customer and tries tovisually show the types of customer actions, visible employee actions, backstage employee actions,support processes, and physical evidence that play a role in that service experience.25 For example,a bank could examine the customer experience of opening up a checking account and all of thefirm, partner, social, and customer activities that play or should play a role in the quality of thatexperience. What part of the performance works well or not so well and what actions can the firmtake to improve the quality of the experience?

SERVQUAL

Customer satisfaction surveys are a common way to measure various aspects of the customerexperience. For service industries, one popular tool called SERVQUAL, short for Service Quality,measures key factors in service satisfaction, including reliability (ability to perform the promisedservice dependably and accurately), assurance (employees’ knowledge and courtesy and theirability to inspire trust and confidence), tangibles (appearance of physical facilities, equipment,personnel, and communication materials), empathy (caring, individualized attention given tocustomers), and responsiveness (willingness to help customers and provide prompt service).26

Customers rate what they would expect from excellent firms in the sector as a point of referenceand then rank perceptions of the specific company in question. This allows companies to measurecustomer satisfaction, which is commonly viewed as the difference between expectations andperceptions.27

For example, SERVQUAL could be used by a new restaurant to gauge whether commoncustomer service expectations are being met. In that scenario, the managers would most likely beinterested in the appearance of wait staff or reliability of taste. While there are significant culturaldifferences in what factors are most important to overall satisfaction, in the U.S., reliability isgenerally the most important factor to customers.28

Mobile Technology

Historically, there has been a delay between a customer experiencing a touchpoint and evaluatingit, but mobile technology makes it possible for firms to get real-time assessments of how customersfeel. Firms can assess customer reaction to all exposures to a brand using real-time experience

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tracking (RET). In RET, participating customers are asked to text a 4-character text message to thefirm each time they come across the brand in the course of their daily lives. In the text message,they indicate their level of positivity toward the touchpoint—the ad, word of mouth, theexperience of working with an employee, etc. Since the survey is very short and available onthe customer’s phone, the firm can get real-time customer responses to its actions.29 Firms canalso use location analytics—programs that track and analyze where a product or a person usinga mobile device is geographically—to answer questions about traffic flow in a business, wait timein lines, and when and where their customers use their products. Location analytics can tellrental car firms where their cars are at any time, technology firms whether a user is using acomputer at home or work, and retailers that customers are avoiding the back wall of theirshoe department. These new technologies are exciting for firms, but also raise concerns aboutcustomer privacy that must be considered when using them.30

Attribution Models

Ultimately firms want to know which touchpoints are influencing sales. Current models examinethis question online, but new models need to be developed for offline customer behavior or forthe common crossover behaviors of showrooming (search offline, buy online) and webrooming(search online, buy offline). For example, companies could examine how distinct touchpoints(brand, customer, partner, and social/external) contribute to the customer experience in differentphases of the journey. Importantly, companies should also consider the extent to which thetouchpoints are integrated around the brand image that the company wishes to emphasize. Suchintegration becomes very challenging when the company relies on partners or customers todrive some of the touchpoints, such as when Singapore Airlines’ customers reach its trans-Pacificflights through more mundane experiences offered by U.S. partners. When this occurs, a cleardelineation between the experiences is useful to separate the Singapore Airlines’ brand from itspartners.

Customer Journey Analysis

Across all of these methods of measuring the customer experience, it is critical to keep in mind theholistic journey instead of just particular touchpoints. Mapping the journey from beginning to endis essential to understanding what is happening to the customer is most important to the decisionto purchase or repurchase. However, adding together measures for a series of touchpoints canoften lead marketers to miss the big picture.31 For example, if the company resolves the customer’sspecific complaints or sends a replacement part each time the customer calls or emails, thecustomer may rate those individual interactions highly. This might lead the company to overlookthe fact that, after several months and a series of product failures, the customer is unhappy andunsatisfied to be having those interactions at all!

Other issues can arise from failing to understand the weight that each touchpoint has in thecustomer’s total satisfaction—a fact that can be determined in market research. The weighting ofdifferent parts of the journey will vary across categories and across different types of customers.For example, consider how differently vacationers versus business travelers value on-timedeparture and in-flight Wi-Fi. However, there are two rules of thumb that companies cankeep in mind. First, customers enjoy experiences that improve over time more than ones thatplateau or get worse over time, even if the sum of their satisfaction at each touchpoint is the same.

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Think of a concert or a boxing match, where the less-popular openers come before the headliner orthe main event—the same events in reverse order could lead to a very dissatisfied crowd. Second,customers’ evaluations and memories of an experience are subject to a peak-end bias. Overallsatisfaction is affected most by the peak of that experience—the most intensely enjoyable orthe most painful moment along the way—and the end of the experience, which could be within astage or across the entire journey.32 For example, overall impressions of a positive experiencemight be damaged if something positive but lackluster is added at the end, compared to if it hadended earlier on a high note.

Improving Customer Experience

Maintain a Customer Focus

Experience management without an orientation toward meeting customer needs is unlikely toproduce satisfied customers. Disney uses an orientation, referred to internally as “Traditions,”that emphasizes customer service. Four key values underlie this employee training. For each,Disney sets a standard of behavior, including—safety (e.g., I practice safe behaviors in every-thing I do), courtesy (e.g., I go above and beyond to exceed Guest expectations), show (e.g., I stayin character and perform my role in the show; I ensure my area is show-ready), and efficiency(I perform my role efficiently so Guests get the most out of their visit). For Disney, it’s clear thatthe focus of experience management is the customer, not the experience.33

Adopt a Touchpoint Evaluation and Improvement Process

Five steps are recommended in this process.34

Create an inventory of touchpoints by mapping the customer journey. This should includehow the journey is experienced by different target markets.

Provide an internal evaluation of all of the touchpoints to determine which are managedwell and which are deficient. A key question is how well the touchpoint experience isbeing delivered with respect to internal expectations, external expectation, or thecompetition. This should be done for each segment targeted by the company. At JiffyLube, for example, the shops were set up by men for men yet it turns out that 70 percentof the cars that came in for service were driven by women.35 Women did not want to seedirty restrooms and men’s magazines on the tables. Nor did they want to be asked to takea sleeping baby out of the car.

Determine which touchpoints have the greatest impact on customers’ decision andexperiences.

Prioritize touchpoints in the customer experience—the key is to focus on touchpointsthat are most important to developing delivering customer value.

Develop a touchpoint action plan. For the priority touchpoints, the goals of thetouchpoint and who is responsible should be clearly identified. Furthermore, adevelopment and execution plan to improve the touchpoint experience that includesperformance metrics will be needed. This plan should include consideration oftouchpoints that are missing from the current journey but that may improve it inimportant ways.

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Bridge the Gap between Customer Expectations and Perceptions36

There are many reasons why customers’ expectations and perceptions do not align. First, acompany may not have enough information about what customers expect. This may be due to aweak customer research orientation or lack of upward communication between contact employeesand managers. Second, even if expectations are understood, the company may do a poor jobtranslating them into a well-designed set of experiences. Unfortunately, great execution on a baddesign will not offer customers what they want. A third problem arises when the company doesnot deliver on a strong experience design. This can occur because of poor HR policies, customersnot fulfilling roles or following directions, or problems with service intermediaries performingkey roles. Finally, companies run into problems when they do not effectively communicate tocustomers what they should expect from the experience. There are many reasons for this failure,including poorly coordinated marketing communications, overpromising to attract customers, orinappropriate pricing that inflates expectations.

McKinsey has created a framework for addressing misalignment between customer expect-ations and outcomes that involves the following six steps:37

1. Identify the nature of the journeys customers take—from the customer’s point of view.2. Understand how customers navigate across the touchpoints as they move through

the journey.

3. Anticipate the customer’s needs, expectations, and desires during each part ofthe journey.

4. Build an understanding of what is working and what is not.5. Set priorities for the most important gaps and opportunities to improve the journey.6. Fix root-cause issues and redesign journeys for a better end-to-end experience.

Leverage Technology to Manage Customer Experiences

Technology enables management and customization of each person’s experience, even at a largescale. Mobile technology lets firms interact with customers in real-time as they search at targetedpoints in their journeys. This can be used for targeting coupons and advertisements at key decisionpoints, or for getting feedback from customers in real-time, to name just a couple of applications.Online environments create new challenges along with these opportunities. The firm has lesscontrol compared to a sales visit or in a retail store—an online user, especially a mobile one, couldbe anywhere! Online marketing is also limited in its sensory breadth, offering only visual and audioinformation—although this could change in the future. Marketers should be aware of how thismight affect their brand in particular, whether they are trying to sell clothing that shoppers can’tfeel or food that shoppers can’t smell.

The financial services industry, though not traditionally known for positive customer expe-riences, provides a good example of using technology to address service gaps. Long waits at theATM, elevator music while on hold with the credit card company, and the paperwork associatedwith a mortgage are not things people enjoy. However, advances in financial technology (“fintech”)have enabled the industry to begin to improve its reputation. Mobile apps, 24-hour online chatsupport, and transferring money through a digital assistant are all ways the banking world isimproving to create a more holistically satisfactory experience and build brand loyalty andcustomer retention in a competitive industry.38

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Manage the Extended Delivery Network

An expansive approach to managing the customer experience recognizes that many important factorsare outside of the firm’s direct control. There are three basic forms that this broader experienceecosystem, known as the delivery network, can take. First, the customer-coordinated network, wherefirms provide individual products or services that the customer selects and pulls together into aunified experience. For example, a couple’s night out at dinner could involve booking reservations inan online service, getting childcare from a neighbor, hiring a taxi for transportation, and finallyenjoying a meal at their favorite restaurant. This type of network involves a lot of uncertainty aboutthe quality of the experience because each service provider controls just part of the experience.Second, the service-coordinator-based network, allows the customer to outsource coordinationefforts to a professional such as a travel agent. This reduces the burden placed on the customer andalso allows the coordinating firm to gain valuable insights into the holistic experience—insights thatmay be used to improve the experience or may be shared with other firms in the network to do so.Third, the firm-coordinated network places the burden of coordination on one of the firms alreadyinvolved in the network, such as when a hotel concierge coordinates taxis or local restaurantreservations for hotel guests. In this type of network, the responsible firm incurs extra costs and takesthe blame for any failures in the network, but it secures greater control, more credit from thecustomer, and valuable customer insights (due to the fact that is it present) in return.

Channel Challenges

Different channels (catalogs, direct mail, online, etc.) provide different benefits and costs forboth marketers and customers. People may research in one channel and purchase in another.Showrooming (searching offline and purchasing online), and its converse webrooming (searchingonline and purchasing offline), complicate the online/offline relationship and create a complexinterplay of customer experience.39 Although marketers are sometimes frustrated by this channelcrossover behavior, it offers useful insights for improving multichannel strategy. For example,webrooming might be a sign that information presentation isn’t as clear or efficient in-store asonline, or it could be a sign that the online channel needs to better lock-in to convert browsingcustomers. On the other hand, showrooming might be a sign that the online channel lacks keyinformation that shoppers rely on, particularly for highly multisensory products like clothing orhome decor products. Marketers can embrace the potential synergies of letting customersleverage the different strengths of each channel, or they can respond by shoring up weaknessesto improve the single-channel experience (e.g., providing clear, multi-attribute comparisons ofseveral laptop models at a retail store). However, it is important to recognize that channels’ relativestrengths and weaknesses are sometimes unavoidable. Mobile shopping, for example, allows forsupplemental search in-store, which desktop browsing can never match, but the mobile interfaceis also limited in how much information can be examined compared to a computer monitor.Mobile also creates an opportunity for firm-initiated, location-based touchpoints through tailoredadvertisements or promotional offers delivered in real time.

TOWARD LONG-TERM CUSTOMER RELATIONSHIPSIn the late 1990s, Schwab had passed Merrill Lynch to become the stock-brokerage industry leader(by market capitalization).40 A darling of Wall Street, Schwab seemed unstoppable. Within a fewyears, however, the firm was faltering. New products were not regarded well and market

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capitalization plummeted. What went wrong? Analysts argue that Schwab failed to hold ontoits position as a price value leader—a low-cost, no-frills brokerage firm. Account fees rose andclient service declined. Schwab had dropped below parity on the basic relational behaviorsthat even price-conscious investors require. Customers felt abandoned and Schwab ranked27th among 38 financial services firms on the degree to which the firm was perceived to be a“customer advocate.”

To turn the firm around, new leadership decided to focus the whole firm on customerloyalty. Beginning in 2006, using a campaign called “Through Clients’ Eyes,” Schwab took severalsteps to regain customer trust. It reallocated resources so that by 2008, 84 percent of retail staffwas client-serving, up from 60 percent in 2004. This resulted in a reduction in wait times for callersfrom 2 minutes to 19 seconds. Schwab also adopted the policy of giving the customer a “direct call-back number” if a problem was not resolved with one call. It began measuring client satisfaction,and clients with a low satisfaction score received a personal call from a manager to investigateproblems. Schwab made pricing for CDs, money market funds, margins, and home loanstransparent to the customer. The company changed its internal reward system to focus onclient satisfaction—not on whether the client bought products with certain types of fees. Finally,the firm identified a set of principles for how managers should act on behalf of the customer.

The change in customers’ ratings of agreement related to Schwab’s performance wasnothing short of astonishing: “Honoring promises and guarantees” (40–91 percent increase),“Willing and able to assist me” (68–88 percent increase), “Always on my side” (57–86 percentincrease), and facilitating the “Ease of comparing prices” (42–67 percent increase). The numberof customers rating the firm high on the net promoter score—willingness to recommend tofriends and family—rose from 35 percent to 50 percent. The number of customers willing toconsider Schwab for two or more additional products increased from 49 percent to 71 percent.Sales and profits followed.41 These changes have continued to work to Schwab’s advantage as itwas ranked highest in overall investor satisfaction by J.D. Power in 2016.42

Charles Schwab understood the importance of moving the customer from a focus on thesingle transaction or purchase to a sense of loyalty to the company. As a contrast, consider thesituation with British banks during the 1990s.43 Only 50 percent of retail banking customers were“very satisfied” with their bank; a level of satisfaction lower than any other retail sector. Yet onlyone in thirty British customers switched banks in a given year. Among the reasons for the apparentstability were inertia, high switching costs, and lack of perceived differences among the banks.This circumstance demonstrates that duration and customer loyalty are not the same thing.

So what distinguishes a long sequence of purchases from true loyalty? Here it is helpful todistinguish behavioral loyalty from attitudinal loyalty. Behavioral loyalty is how frequently thecustomer purchases from the company when the need arises. Alone, behavioral loyalty producesrevenues for the company. But the revenue stream is at risk! Household customers may be buyingout of habit, because of family histories, or because of a lack of a convenient alternative—not out ofattachment. Business customers may be buying because of automatic reordering systems.

Attitudinal loyalty, on the other hand, reflects a deeper trust or commitment to the companyand what it offers. This type of loyalty is revealed in positive thoughts, feelings of affinity, orattachment to the firm and/or its specific products or services. This trust makes customers morelikely to rely on the firm for important activities, such as food for their children or key componentsfor their most important products. Trust is even more vital in service settings when the customermust trust the firm to provide clean sheets, get the package there on time, or fix an ailment on theoperating table, for example.

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For many price value leaders, trust is based on a promise of low prices. Walmart customerstrust that the company will offer low prices—always! Walmart’s tag-line, “Save Money, LiveBetter” also promises customers that the savings will give them an opportunity to lead better lives.For performance value leaders, customers trust that the company will improve technologies,designs, quality, or contribute to a social mission, and they are loyal to the company’s stream ofnew products. Customers count on performance leaders to make their lives more interesting orhealthier or to make their businesses more profitable.

The Loyalty Funnel44

A simplified Customer Decision Journey is often captured in a company’s purchase funnel usedto organize, measure, and manage customers throughout the purchase process. The managementof this funnel and associated metrics is examined in detail in Chapter 8. However, it is importantto appreciate that purchase is not synonymous with customer loyalty. Loyalty is essential to thelong-term value of a customer. To build loyalty, companies must take extra steps to ensure thecustomer progresses to this state.

Satisfy the Customer with an Offering

For a company to have any chance at loyalty with a customer, its product or service must meetcustomer expectations after purchase. This is often called the “second moment of truth” in thecompany’s interaction with customers. If the offering fails here, the prospects for loyalty are bleak.Offerings that perform as promised or exceed expectations breed satisfied customers. Of course, tomeet this requirement, companies must identify the proof points used by the customer to maketheir judgment. For example, if the number of minutes to de-plane is the indicator customers useto judge service quality, airlines should focus on this aspect of operations rather than check-in orbaggage handling.

Connect the Product or Service Performance to Deeper Customer Outcomes

To build loyalty, companies should work to link the product or service to important outcomesvalued by the customer. These “jobs to be done” are why the customer “hires” the product in thefirst place and they are often the differentiating factor that helps the product stand out. Whetherthe goal is personal, such as being a good grandparent, or commercial, such as becoming a marketleader in a category, these outcomes should be communicated and associated with the brand.

Give the Company Credit

Customers must attribute the outcomes they experience to the offering—they must give credit toSpecial K for the weight they have lost, or to Rogaine for the hair they have gained. This attributionshould not be left up to chance. For example, Chevron Energy Solutions, a division of Chevronthat designs and implements energy efficiency and renewable energy projects charges clientsnothing upfront. It gets paid when customers save on energy bills, which ensures that customerslink their savings to Chevron’s green designs.

Remember the Need and Offering

The objective at this point is to ensure that customers stay aware of their needs andkeep the company or its brands at the forefront of their consideration set. Advertising and

Chapter 7 Building and Managing Customer Relationships 139

sales efforts can keep information fresh and relevant so their brand is top-of-mind to theconsumer.

Build Habit

Loyalty can be converted into a habit and further cement bonds between the customer and theproduct. Several strategies can help convert a product or service into a habit. Loyalty programs,for one, remind customers and give them the nudge they need to make repeated purchases. Asecond strategy is to promote high-volume purchases. When customers buy a full case of wine atCostco they not only consume more, but spend less time shopping at other wine stores betweenonce-a-month Costco visits. A third option is to get the customer to make investments. For B2Ccustomers, this might involve asking them to make a financial commitment to diet such as WeightWatchers does; for B2B customers, customers could be asked to make small investments such asdownloading software or building a specialized ramp to facilitate delivery of the company’sproducts, these investments are sunk costs and a reminder of the customer’s commitment to thecompany. As such, they can prompt the customer to repeat behavior.

Raise Customer Switching Costs

Related, firms can make it very difficult for customers to walk away from a relationship by raisingswitching costs. The classic example is frequent flyer miles. These lock-in customers to a carrierbecause of the escalating benefits tied to different levels of miles flown and because miles expireafter a certain period of time.

Lock-in can also occur because customers do not want to incur the costs of learning tointeract with a new firm. Once customers accumulate enough experience with a retail storewhere they can easily locate items or talk to a favorite salesperson that knows their preferences,or a website where they have loaded their preferences, they are resistant to change. Challengersneed to reduce the costs of trial or offer large incentives to induce trial in order to offset theselearning barriers.

Deepen Commitment

As the customer builds positive experiences with the company, deep affection, trust, and a senseof commitment to the relationship will follow. A committed customer relationship sharessome qualities of a good marriage. Success in the long-run depends on trust, which is builtwith transparency and frequent, open communications. Trusted partners are transparent andhonest. In business-to-business relationships, a dashboard of mutually agreed-upon metricsbetween the firm and its customer facilitates building and maintaining trust so that surprises canbe avoided.

Sales or service personnel often develop very strong relationships with individual custom-ers. These individual relationships are an important part of building and maintaining trust, butcan be risky because employee turnover makes customer defection more likely. This problemis common among professional services and financial services firms; American Express reportsthat 30 percent of its customers follow their representatives to a new firm.45

Furthermore, when employees leave the firm, they often do not transfer what they havelearned to firm databases. New salespeople must then re-learn all that the departing employee hasgathered over the years. This takes time and leads to errors and costs for the customer.

140 Part Two Creating, Adapting, and Implementing Strategy

Defend the Customer Relationship

Given their financial importance to the company, customer relationships need to be protected overtime. What actions should companies take to safeguard loyalty from competitor challenges?

Differentiate Value

When the offering provides exceptional value that is not replicated elsewhere, customers willreturn. The jeans that fit, the familiar computer setup, the components that are compatible withthe aircraft engine design, the consultant who knows the business strategy, and the vacationspot that thrills are not easy for customers to replicate. Differentiation of offerings is the mostdefensible form of customer lock-in. It is a key to providing value and it is a key to maintainingloyalty.

Consider how American Express handles its most elite customers. In its “By Invitation Only”program, American Express might observe that a customer likes to frequent upscale restaurants,and then offer a free dining experience at a new restaurant. The customer wins through a valuableoffer from a merchant. The merchant wins because important customers are introduced to therestaurant. And American Express wins by connecting the two and deepening its relationship withits Card members and merchants.

Rebuff Competitor Challenges

When Walmart bought the U.K.’s grocery chain Asda, its competitor, Tesco expected a pricechallenge. In a brilliant strategic maneuver reported in the Wall Street Journal, “Tesco searched itsdatabase and singled out price-shoppers who buy the cheapest available item. Tesco figured theywere most likely to be tempted by Asda. Tesco identified 300 items these price-sensitive shoppersbought regularly. One was Tesco Value Brand Margarine. Tesco lowered its price along with otherproducts with similar profiles. Shoppers didn’t defect.” Outmaneuvering competitors in this andother ways is essential to building long-term customer relationships

Increase Investments in Customers

There are inherent risks associated with making dedicated investments, such as human resources,capital equipment, and information technologies, in customers. As a result, customers are likely toview these investments as a signal that the firm is interested in a long-term relationship. Better yet,when firm investments stimulate reciprocal customer investments, partners are in a “mutualhostage” situation. With incentives aligned, the relationship is even stronger. Reciprocation is apowerful norm that guides nearly all strong relationships. Most companies forget about this normwhen managing customer relationships. When the company exceeds expectations with exceptionalservice, such as a flight attendant rushing to deliver a purse left on an airplane to an unwittingcustomer waiting at the baggage carousel, customers experience a sense of reciprocity thatcompels them to return the relationship.

Resolve Need for Variety

Some customers want a great deal of variety. Regardless of the value the firm provides, thesecustomers may switch simply to have different experiences. Food and entertainment are areaswhere customers experience a strong desire for variety. Many firms defend loyalty against thisthreat by extending their product and service lines so they can offer customers that variety.

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Refresh the Relationship

Customers may also want multiple relationships or a reasonable level of switching in order toensure they continue to learn new things. In areas where innovation is important, such as productdesign, consulting, advertising, and market research, customers may reach out to find newrelationships in order to overcome the problems of stale knowledge. Companies should managethis problem by systematically infusing new insights into the relationship. Adding new and variedtalent to a key account team is one way to bring new ideas to the customer. Regular knowledge-sharing, brainstorming, or co-creation efforts with a client can also rejuvenate relationships.

Foster Customer Co-creation

If customers co-create products and services with a company, it increases involvement andcommitment to the offering and company.46 For example, in B2B co-creation relationships, value-leading suppliers rely on leading-edge customers for help in developing new products. Thisprocess can increase customer interest in the success of the new offering, which should translateinto higher investments.

The Internet has created an ever-increasing array of ways that customers can deepen theirinvolvement with companies. Whether offering new code for open source software, rating books,or designing their own sneakers and t-shirts, all of these approaches help facilitate a strongerrelationship with the company. Customers want to know they matter, and invitations to participateare key ways that companies can signal a desire to co-create with customers.

Create Multiple Relationships

It is increasingly common for B2B firms to form multiple relationships with their customers. In2002, Brocade Communications set up a marketing alliance and a joint venture with HP formanufacturing switches in addition to selling HP servers, an R&D alliance, and a licensingagreement.47 As the depth of interaction increases, the risk of relationship termination decreases.Customers gain a greater sense of shared interest and solidarity with the firm because of thenumber of shared relationships. Partners also learn to use the relationships in a compensatorymanner, trading benefits and costs so that both parties’ interests are served.

Grant Exclusivity

When the company makes pledges or signs contracts that give the business customer exclusiverights to territories or products, those commitments wed the customer to the company.

KEY LEARNINGS

The modified Customer Decision Journey accounts for the complex, nonlinearprocess that customers go through as they are triggered to make a purchase, gatherinformation, form a consideration set, develop preferences, make a purchase, andevaluate their choice post-purchase.

Customer experience is a multidimensional concept that captures a customer’sexperience with all aspects of the firm. It includes what she thinks, feels, and doeseach time she encounters touchpoints across the journey. Firms can measure andimprove aspects of the customer experience.

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Long-term customer relationships are built on customer loyalty. Behavioral loyalty isdefined by repeat purchase, whereas attitudinal loyalty is defined by a customer’sactive commitment to the firm and/or its offerings. Relationships characterized bybehavioral loyalty alone may be sustained by inertia and are at risk if customers findattractive alternatives in the market.Ways to build long-term relationships and defend a customer relationship includedifferentiating value, rebuffing competitor challenges, raising customer switchingcosts, increasing investments in customers, fostering customer co-creation, resolvingthe need for variety, refreshing the relationship, making multiple relationships, andgranting exclusivity.

FOR DISCUSSION1. Trace the Customer Decision Journey for a customer buying a new mobile phone.2. Analyze how social media could influence each stage of the Customer Decision

Journey for a customer deciding where to go on vacation.

3. Walgreens is trying to better understand its customer experience from the perspectiveof its elderly customers. What can it do in order to achieve this goal?

4. You have been tasked with assessing the current customer experience at a big-boxstore. Which tool(s) would you use to do this and why?

5. Identify two ways a grocery store’s relationship with behaviorally loyal customers couldbe at risk. How could the store reduce this risk by strengthening attitudinal loyalty?

6. Discuss three ways Netflix might defend its current customer relationships against newentrants.

BEST DIGITAL PRACTICE

Panera 2.0

In 2014, Panera Bread, a national fast-casual cafe, embarked on a digital transformation. Already amarket leader due to its ability to offer good food, a warm, welcoming ambiance, and customer perkslike free Wi-Fi, the bakery-restaurant chain hoped the initiative—called Panera 2.0—would furthercement customer loyalty.

Panera 2.0 consisted of making customer-facing improvements through new digital technologiesand operations upgrades. Rather than a series of individual, siloed enhancements, managementenvisioned each change as part of an “integrated, comprehensive, end-to-end solution” to improvethe customer experience.

Two of Panera’s key mobile-based initiatives were its Consumer Mobile App and in-store iPadKiosks. The app provides a fast, convenient way for customers to place an order, whether that be aselection from the menu or a custom-made creation. Additionally, a feature of the app called Rapid

(continued)

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Pick-Up enables individuals to pick up their food at a predetermined time. Fast-Lane Kiosks, insertedat the front of the store, also facilitate a quicker ordering process by reducing the number of people inthe order line and the food pick-up area. This is because “eat in” guests now have the option of havingtheir meals delivered directly to their table.

Non-customer facing investments have focused on updated processes and protocols so thataccuracy is not lost with the increased speed of order turnaround. For example, a dedicated Panerateam member now confirms and verifies every order before it is delivered to the customer.

Panera 2.0 has had a positive impact on the company’s customer relationships. Panera’s loyaltyprogram data indicates that customers who use rapid pick-up or in-store kiosks visit Panera more oftenthan they did before adopting the new tools. Additionally, sales in Panera 2.0 cafes have increased at afaster rate than non-cafe stores. Finally, the initiative has opened up a new revenue channel that isforecasted to continue to grow. Digital sales made up 12 percent of all sales at the end of Q32015 and22 percent of sales in stores implementing the 2.0 system.

Questions:

1. How does Panera 2.0 influence the customer experience?

2. What part of the customer journey does Panera 2.0 influence and with what effect?

3. Is Panera 2.0 defensible source of competitive advantage? Why and why not?

Sources:Will Scott, “Review: What Operators can Learn from Panera 2.0,” Fast Casual, October 2, 2015, http://www.fastcasual.com/articles/review-what-operators-can-learn-from-panera-20/

“Panera Unveils Panera 2.0,” April 10, 2014, https://www.panerabread.com/content/dam/panerabread/documents/press/2014/panera-unveils-panera-2.0.pdf

Ben Unglesbee, “Panera’s New Secret Sauce: Fees on Digital Sales,” St. Louis Biztalk, November 19,2015, http://www.bizjournals.com/stlouis/blog/2015/11/panera-s-new-secret-sauce-fees-on-digital-sales.html

BEST GLOBAL PRACTICE

How Electricity Wizard Manages its Funnel

Organizations can utilize a number of marketing strategies to increase their ability to attract and retaincustomers, including better managing their marketing funnels. Electricity Wizard, an Australianenergy broker, employed some of these tactics. The company acts as an intermediary between localsuppliers and end consumers. At no cost, they compare a range of plans from energy companies in aconsumer’s area, and negotiate directly with those companies to find the best deals. Electricity Wizardthen presents the consumer with different options and advises him or her on what they think wouldbest match the consumer’s needs.

The company primarily relies on customers visiting its website and then calling the customerservice center for more information. Since the website is such a critical channel for attracting newcustomers, Electricity Wizard seeks to attract the best prospects. So, the company decided to work with

144 Part Two Creating, Adapting, and Implementing Strategy

Google to understand which digital ads led to the greatest level of customer interest. Specifically, thepartnership was able to identify which ads and ad features led to the greatest number and length ofphone calls—both key indicators of customer interest. As a result of this data on ad efficacy, ElectricityWizard shifted their marketing spend toward the most effective ads, which ensures that they arefeeding the funnel with higher quality prospects.

Electricity Wizard was also able to identify which times of day customers were most interestedin learning more about their services. It turns out that a high-traffic period is lunch time—which thecompany had historically understaffed. As a result, some customer inquiry calls were often lost due tolong wait times. As an adjustment, Electricity Wizard shifted staff lunch breaks, which improved theabandonment rate by 85 percent. Having made the initial contact, Electricity Wizard was able to movea larger number of interested prospects down the funnel.

Questions:

1. How will Electricity Wizard’s strategies affect its bottom-line?

2. Assume the next stage in the sales process is to perform a follow-up call to those customers thathave made an initial inquiry. Describe one step that Electricity Wizard could take to useinformation from the customer inquiry call to manage this follow-up call.

Sources:“Electricity Wizard Performs Customer Magic in Australia,” Think with Google, July, 2014, https://www.thinkwithgoogle.com/case-studies/au-electricity-wizard-performs-customer-magic.html

“The Energy Broker Totally Dedicated to Saving you Money,” https://electricitywizard.com.au/about-us/

Chapter 7 Building and Managing Customer Relationships 145

C H A P T E R E I G H T

Creating Valuable Customers

“The purpose of business is to create and keep a customer.”—Peter F. Drucker

“Make a customer, not a sale.”—Katherine Barchetti

“In God we trust; all others bring data.”—Dr. W. Edwards Deming

The focus thus far has been on ensuring that companies target customers, facilitate theirdecision journey, create value through strong experiences, and develop strong customer relation-ships. This now shifts to a focus on ensuring that the company can capture enough value from theseactivities to make the business profitable over time. When the company succeeds, it has movedfrom creating customer value to the creation of valuable customers. To illustrate this contrast,Figure 8.1 depicts four different business conditions—customers do or do not find value in whatthe company offers and customers are or are not valuable to the company. The star customers arethose that value the company’s products and services and that offer sufficient value to the companyover time to sustain and allow for reinvestment in the business. Free-riding customers value whatthe company offers but are not loyal or willing to pay for what the company offers. The companyfinds vulnerable customers valuable but the customers do not find value in what they are gettingfrom the company. The company’s objective is to move customers into the star position. Such astatus is part of the process of building and managing customer equity.

Customer equity is the sum of the value of a firm’s customers over time. This view emphasizesthe long-term or what is often called the lifetime value of customers—what they will purchasefrom the company over the course of their involvement in a market. For parents with youngchildren, this might mean two to three years in the diaper market, but for recent college graduates,this could be decades of engagement with a media company, which is why companies such as HBOprovide free cable services to undergraduate students at many universities. Whatever costs areincurred during the college years are presumably made up for in loyalty over time.

In the early 1990s, the Royal Bank of Canada (RBC) had a strong customer base, but it soughtways to become more profitable. RBC used a series of small steps designed to make its most

146

valuable customers more likely to stay with the firm and more likely to give the firm positive wordof mouth. For example, instead of applying across-the-board overdraft fees, the company adoptedmore lenient policies for its high-value customers. Although this meant giving up profits in theshort term, RBC managers predicted such policies would produce more loyal and longer-termcustomers. They were right—the lifetime value of these customers increased by 20 percent!1

While fostering longer-term relationships to build customer equity is a critical managementapproach (as discussed in Chapter 7), it must be preceded by identifying valuable potentialcustomers and moving them through their first purchase. This involves bringing the right quantityof high-quality customers into the process and then keeping them engaged through to purchase.One common management tool—the purchase funnel—is often used to understand, measure, andimprove those activities. This purchase funnel is examined first, followed by a broader considera-tion of customer equity.

THE PURCHASE FUNNELUnderstanding the customer decision journey offers marketers the opportunity to manage andmeasure customers as they move through different stages of the process. The purchase funnel is amanagement tool that allows a company to sort its customers into different stages in the journeyand monitor their progress. The term funnel is used because companies usually begin with a largenumber of customers that are targets for their offering but ultimately focus on driving the mostqualified through to purchase.

Creating the Purchase Funnel

The exact nature of a company’s purchase funnel will depend on the journey customers are takingand how the company chooses to manage the journey. Although purchase funnels can vary byindustry and target customer, most have several defining characteristics. First, each stage of thefunnel corresponds to an observable action the customer takes along the decision journey. Thisensures that the funnel is both customer-centric and that the company can measure and managecustomer progress. Second, exactly which and how many stages are used in the funnel isdetermined by a company’s strategy.

Value ofcustomer to

company

Value of company offeringto customer

Low

Low

High

High

Vulnerablecustomers

Starcustomers

Free-ridingcustomers

Figure 8.1 Moving Toward Valuable Customers

Chapter 8 Creating Valuable Customers 147

B2B companies tend to use very specific terms to describe the customer as she progressesthrough the different stages of the funnel. Figure 8.2 shows stages of a typical funnel and defineseach in terms of B2B activities taken for a B2B air-conditioning company selling units to othercompanies. B2C companies use a similar approach but may adopt different labels to capturefunnel progress, for example, a funnel that captures the journey steps of brand awareness, brand

JourneyStage B2B Terms and Progression

B2B Air-Conditioning SystemCompany Example

Awareness Prospect becomes aware of companyservices.

Company sends message to members ofbuilding owner email list orparticipates in a trade show.

Interest Prospect indicates interest in the serviceby engaging with the company throughdigital, phone, or human contact.

Company becomes aware of prospectwhen the prospect requestsinformation from company. Thecompany addresses inquiry while alsocollecting information to qualify theprospect (i.e., to determine if the leadis worthy of additional companyattention). If so, the prospect becomesa lead.

Consideration Lead offers a deeper assessment of needs,time frame, and price preferences andallows company deeper access to helpcreate value.

Company communicates total value of theoffering to lead and how this leadcompares to the competition, oftenwith a proposal written to meet theopportunity needs and specifications.

Preference Lead seeks approvals and internalfunding.

Negotiations occur between company andlead. Lead obtains internal approval forpurchasing.

Purchase Lead comes back to company withcommitment to purchase.

Company receives a signed purchaseorder from lead who now becomes acustomer in exchange for air-conditioning services for the year.

Reevaluation Customer decides whether to renewcontract.

First year of services is close to ending socompany sends customer updatedproposal to continue services.

Loyalty Customer repurchases product or serviceand continues relationship withcompany.

Company receives a signed purchaseorder from customer to continueproviding air-conditioning services.

Advocacy Customer provides positive word ofmouth and referrals to new prospects.

Company requests customer to leaveonline review, serve as a reference, orparticipate in a white paper.

Figure 8.2 B2B Company Funnel Stages and Definitions

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consideration, and brand purchase. Figure 8.2 links up the journey stage with the terms used byB2B marketers.

A prospect is a member of the firm’s target market who is likely to value what the firm offers.This group should be the focus of the company’s marketing efforts. A lead is a prospect thatbecomes aware of the company and their offerings. This can be through company channels,customer referrals, or publicity. A qualified lead is a lead that the company has identified to have animmediate or near-future need for the product or service that the company offers. A customer is aqualified lead that has decided to purchase the company’s offerings. A loyal customer is a customerwho repurchases company offerings over time. This type of customer may also advocate for thecompany by providing information about their experience with the company that could be used tofurther engage future prospects.

Purchase Funnel Metrics

Four recommendations can help companies effectively assess and manage the funnel usingmetrics. First, select funnel metrics that are aligned with the company’s goals. For example, for anew business, the goal may be to increase awareness of the company; therefore, measuring thequantity of prospects generated would be a good metric to help determine the efficiency andprogress of the marketing campaigns. Both aided (recall) and unaided customer awareness(recognition) of whether or not the company competes in the category and the nature of itsofferings are recommended. Quantity of prospects is a direct feeder to quantity of leads that havebeen qualified by the company. As time progresses and the company succeeds in reaching themarket, the focus could shift to improving the lead quality.2 Lead quantity without lead quality canlead to wasted resources trying to convert a large number of leads that are not sales ready.3

Second, develop a scoring system to measure the quality of potential customers. This type ofsystem uses information the company has about the characteristics of potential customers and theirobservable actions that the company finds correlate with ultimate purchase. Data might show thatcertain behaviors, such as number of page views, registration for a webinar, or a request for aproduct demo, for example, are strong predictors of whether a prospect will become a customer.Once known, the company can prioritize the prospects exhibiting these behaviors as higher qualityleads because they are more likely to become customers.4 This same evaluation can be used for anystage of the funnel. For example, in creating awareness, people reached with one campaign may bemore likely to progress in the funnel. Such insights should guide campaign selection over time sothe company is always improving its ability to reach and convert customers.

Third, identify and resolve bottlenecks, which represent customers getting stuck at one stageof the funnel. Bottlenecks can lead to reduced revenues and customer frustrations. Once abottleneck is identified, a deeper dive into the customer decision journey is needed to develop asolution. Key metrics, specifically stage-to-stage conversion rates can identify bottlenecks withinthe funnel. A stage-to-stage conversion rate can be calculated by dividing the quantity in one stageby the quantity in the preceding stage. For example, imagine that a company found that 10 percentof potential customers were converting from awareness to consideration, 20 percent of thoseconverted to preference, and then 60 percent of those converted to purchase. This informationwould suggest that the funnel has a bottleneck moving customers from awareness to consideration.In this case, the company might dig deeper to uncover that the reason for this bottleneck is thepremium price of the product. With this information they might consider a temporary promotionor bundling with other products.

Chapter 8 Creating Valuable Customers 149

Fourth, determine how to report and communicate the status and progress of the customerthrough the purchase funnel. One approach is to determine the quantity and quality of leads ineach stage of the funnel over a period of time, for example, a quarter or a year. Goals should becompared to actual levels, so the company can determine if it is on track. One common way toaccomplish this is with a dashboard that contains key data that are updated in real time.

Key metrics to consider including in the dashboard:

Stage-to-Stage Conversion Rate: As noted, this analysis can be performed on adjacentstages or any two stages that are meaningful to a company. This calculation is based on thequantity of leads in a stage divided by the quantity of leads in prior stage (e.g., preference/consideration). For example, if a company has 50 leads in the preference stage and 100leads in the consideration stage, the conversation rate from consideration to preference is50 percent.Sales Cycle Length: This is the average time duration it takes for a prospect to progressthrough the funnel to make a purchase. This metric offers insight into at-riskopportunities or those that are becoming a resource drain. For example, if an averagesales cycle duration is 30 days, and there is a lead that has been in the funnel much longerthan 30 days, this should be an indicator that this lead has a lower probability ofprogressing to the purchase stage. To create, track the average time (typically days) spentin each funnel stage. For newer companies, compare this information to industrybenchmarks.

Channel Cost-Effectiveness: Monitor which channel each lead was acquired through.For example, out of 10 leads, two were from a TV ad and eight were from a tradeshowbooth. Given that TV ads cost $10,000 and the tradeshow cost was $20,000, the cost perlead is $5,000 for TV and $2,500 for the tradeshow.5

Customer Acquisition Costs (CACs): CAC is the sum of all sales and marketing costsfor a given period of time, divided by the newly acquired customers during that sameperiod of time. This metric tracks company spending for each new customer. If thisnumber increases over time, that means that the company is either spending more toacquire new customers, or that the sales and marketing efforts are less efficient. Oftentimes, spending more to acquire customers who have a higher lifetime value, which isdescribed in detail later in this chapter, is well justified.6

Ratio of Customer Lifetime Value to CAC: This metric compares the lifetime value of acustomer, a tool discussed in the next section of this chapter, to the amount spent toacquire that new customer. The higher the ratio, the more ROI customers are deliveringto the company’s bottom line.7

Common Pitfalls in Funnel Management

Attracting Poor Quality Leads

If a strategy is working, the company’s marketing spending leads to the target customer enteringthe funnel. If non-target customers are attracted, the company needs to vet and manage thesecustomers which distracts from interactions with target customers. Of course, companies may findthat customers other than those they target also find value in their offerings and if so, efforts shouldbe taken to attract these customers as well if they are sufficiently profitable for the company.

150 Part Two Creating, Adapting, and Implementing Strategy

Failure to Attract Enough Leads

Many mid-size and large companies struggle to attract enough leads because they spend 80 percentof their time focusing on conversion rates and only 20 percent of their time on lead generation.8

Other companies overemphasize selling more to current customers versus attracting newcustomers.9 Over time, these approaches limit growth opportunities. While the exact rates varyby company strategy, sustained growth requires a good mix of attracting new customers andexpanding relationships with current customers.

Failure of Sales and Marketing to Work Together

Often, the marketing department focuses on acquiring as many leads as possible, regardless ofquality, to hand off to sales. Sales pushes back and refuses to waste its time on low-quality leads.This can lead to further prospecting by sales, which takes away from their time spent closing. Thiscan also lead to a delay in following up with new leads. Sales and marketing must work together.In particular, the two groups must decide on a common definition of the quality and quantityof leads.10

Failure to Link Funnel Problems to their Causes

Conversion rates can be weak because insufficient company resources are leveraged to createconversion from one stage to another, the company lacks strong insight into the barriers that arekeeping customers from progressing to the next stage, and/or low-quality inputs are available toconvert from the prior stage. Each of these underlying problems has a remedy. In the first case,more financial resources should be devoted to conversion, but in the second, greater investmentsshould be devoted to understanding the customer’s challenges in moving forward, while in thethird, quality can be improved by limiting which customers make it into the prior stage. Identifyingthe wrong problem can lead to a misallocation of company resources.

Failure to Optimize through Experimentation

In order for a company to maximize stage-to-stage conversion rates, it is important to experimentwith various calls-to-action during a customer interaction. For example, the firm could test theeffectiveness of the subject line in an email by sending 1,000 prospects the exact same email, buthalf of them receive one subject line and the other half receive a different subject line, andmeasuring the open rates associated with each subject line. This is an application of an A/B splittest, where one variable, such as the email subject line, is varied. In this test, all other variables,such as colors, fonts, and displays remain the same. Experts recommend a focus on calls-to-actionthat vary in the extent to which they have valuable, easy to use, prominent, and action-orientedemphases. These small changes can lead to surprising differences in conversion rate.11

Purchase Funnel Management

If a company is attracting, converting, and retaining its target customers over time, the funnelshould look more like a rectangle with fewer losses at each stage. Several activities can improvehow well a funnel performs. First, funnel stages should reflect observable customer actions. Thejourney underlying this process may be more intricate, and this is important to understand.However, given that the funnel is a management tool, it should be based on actions managers canobserve and therefore measure and manage.

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Second, the funnel and its metrics should be carefully negotiated within the company.Marketing and sales are often jointly responsible for managing the funnel, and, as noted earlier, ifboth parties do not agree on funnel stages and funnel metrics, conflict is likely to emerge.

Third, the funnel should be jointly managed by marketing and sales. A common problem inorganizations is that marketing controls the early stages of the funnel and sales controls the laterstages. The truth is that most businesses are better off with both functions playing a rolethroughout the entire process. Their roles are likely unequal, but both functions can offerimportant skills and feedback that can improve the funnel over time. For example, what saleslearns in the final stages of the process should be fed back to improve early exposure strategies andlead-scoring approaches. Likewise, marketing can play a key role late in the process in many B2Bcompanies by providing competitive intelligence and arranging customer events.

Finally, funnel metrics should be used to guide strategy adjustments. Therefore, when abusiness is starting up or going through major strategic transitions that require reaching newmarkets, funnel metrics may indicate that the strategy needs to be fine-tuned. Lead-scoringmetrics, for example, might indicate that a secondary market is actually easier to reach, more likelyto convert, and spends at higher levels than the firm’s primary market. If so, the strategy may shiftto spend more on the secondary market.

CUSTOMER LIFETIME MODELS AND STRATEGYEFFECTIVENESSCustomer Lifetime Value: General Approaches

Most companies don’t know the value of their customers. As a result, they don’t know how muchthey should spend to attract or retain a customer. These companies often overspend or under-spend. Knowledge of how different customers or customer segments vary in value should guidestrategy and investments. If, for example, the firm has two segments of customers and one segmenthas higher margins and is likely to be retained for a longer period, the firm should be more willingto spend on this segment and might even reduce spending on the other segment.

Customer lifetime value (CLV) models help managers calculate the long-term value of anindividual customer or segment of customers. These approaches explore what value a customerbrings to a company over the entire period a company and customer interact. This long-termhorizon offers a stronger basis for driving strategy versus only examining the company’s currentsales from a customer. The value of the customer is summed across the expected life and then thevalues of those cash flows are discounted into present day dollars.12

The core idea underlying a CLV model is based on discounted cash flow models used infinance. These models take into account the following factors—the customer’s margin in a specifictime period, the customer’s retention rate in that time period (the probability of being retainedthrough to the next period), expected life of the customer (how many years the customer isexpected to stay active in the market), and the firm’s discount rate. Lifetime value can be calculatedat the individual customer level or for an average customer within a target segment. The lifetimevalue of a customer for the average customer in a segment is:

CLVN

t 1

Mstrts

1 i tACs

In this equation, Ms is the gross margin for a customer in segment s in a given time period t (e.g., ayear) net of retention costs such as extra service costs for that segment, i is the firm’s discount rate,

152 Part Two Creating, Adapting, and Implementing Strategy

rs is the segment’s retention rate or likelihood of returning to the company at time t, ACs is theacquisition cost, such as the price of a sales call or an email, and N is the period over which thecustomer segment is assumed to remain active in the market.

Here’s an example of how CLV models are used. Consider the average customer in a segmentstays active in a market for N=3 years, has a gross margin of $17,000 in year 1, $10,000 in years 2–3,a retention rate of 80 percent, and firm discount rate of 10 percent. CLV is $21,499.62 = (year 1:($15,000 0.80))/(1.10) + (year 2: $10,000 (0.80)2)/(1.102) + (year 3: (10,000 (0.80)3) (1.103).Contrast that with the CLV of a customer who yields a margin of $8,000 in all three years (CLV =$13,126.97) or if the firm could increase its retention rate from 80 percent to 90 percent for thesegment under the original scenario (CLV = $26,080.39).

These simple CLV analyses reveal several important guidelines. First, firms should be willingto spend more to acquire and retain customers with a higher lifetime value. If the future profitsfrom a customer are high, then the company can afford to make a bigger investment in today’smarketing and acquisition costs.

Second, the firm can have a larger impact on the value of the customer by increasing retentionrather than by increasing margin.13 Research has shown that a 1 percent increase in retention ratehas a 4.9 percent increase in customer lifetime value, while a 1 percent increase in margin has onlya 1.1 percent increase in customer lifetime value. An example from USAA drives home theimportance of customer retention very well. The average retention rate in the auto insuranceindustry is 80 percent. USAA, an insurance and financial services company for military personneland their families, has an astonishing retention rate of 96 percent. This means that over a three-year period, USAA need only replace 12 percent of its customers (0.96 percent3 = 88 percentretained, 1 0.88 = 0.12 or 12 percent) compared to the average auto insurance industry company(0.80 percent3 = 51 percent retained, 1 0.51 = 0.49 or 49 percent), which has to replace almosthalf of its customer base after three years!

Third, if a firm spends according to CLV, it will receive a higher return on investment becauseevery dollar of investment means a greater return. Specifically, focusing on the acquisition ofhigher-value customers or continuing to invest in higher-value customers to increase theirlikelihood of retention provides the company with a better return on its customer investmentscompared to investing in less valuable customers.

Strategic Uses of CLV

Guide Customer Management and Acquisition

A large Fortune 1000 high-tech manufacturer of computer hardware and software offers anexample of how CLV models can guide both marketing investments and targeting strategies. Usingmonthly transaction data from January 2000 to April 2007, researchers found that the top 20percent of customers accounted for 91 percent of total profits, while the bottom 20 percent had anegative lifetime value. Further profiling showed that high-value (low-value) customers were inthe high-tech, aerospace, and financial services industries (chemicals and plastics); had beenincorporated for between 15 and 25 years (5–10 years); were multinational (domestic); had morethan 500 employees (100–300 employees); and had yearly revenues exceeding $50 million(between $5 and $10 million). In response to these customer insights, the company movedmarketing resources to high-CLV customers and directed negative-CLV customers to onlinechannels. It also increased acquisition expenses on prospective customers who matched the profileof high-CLV customers—under the assumption that these customers, if converted, would provide

Chapter 8 Creating Valuable Customers 153

long-term value at levels commensurate with their current high-CLV customers. Profits soared,and the company’s average monthly stock price increased 32.8 percent in the nine months thatfollowed.14

Predict and Mitigate Churn

Given the impact of customer retention on company performance, managing churn should be astrategic priority. A company’s churn rate is 1 minus its retention rate. Companies need tounderstand what factors influence the likelihood that a customer will not be retained. Customersexhibiting characteristics such as low engagement, smaller dollar purchases, or less frequentpurchases may be showing evidence that they are not going to return to the relationship.Companies should use the data they have available about all customer behaviors, includingfrequency of purchases, recency of purchases, value of purchases, as well as service calls,engagement in the company’s social sites, or nature of referrals—whatever information thecompany can acquire about customers—to determine if any of these behaviors are strongpredictors of churn. If so, the company can take actions to intervene when the customer beginsto engage in a problematic behavior. For example, HubSpot finds that if its small business ownersinvest in the company’s content management system upon adopting the suite of products, its churnrate per month decreases by about half.15 Hence, offering incentives to improve these sign-uprates up to the level of these retention payoffs makes good business sense.

Account for and Facilitate Customer Transitions

Firms should work to stay with customers as they transition out of one segment and into another.This may mean expanding into categories to capture the customer’s loyalty to the firm as thecustomer moves from needing one set of products and services to another. For example, collegestudents may need only checking accounts from a bank while young professional adults are lookingfor investment products or loans as they move into saving and investing new income and buyingmore permanent housing. Using these transitions is important in the valuation of a customersegment. If the bank fails to account for the student to a young working professional transition in itsvaluation of the student, the valuation will be low compared to the true valuation. To do so, thebank needs to account for when that transition is likely to occur, how likely is it to occur, andchanges in margin and retention rate for the new segment.16

The XO Group has had great success with its website The Knot, which enables couples tomanage weddings. They extended the brand to shift consumers to The Nest (a home decoratinglifestyle website) and then to The Bump (a pregnancy and parenting website) using the sameunderlying business model, including a digital platform that offers advice and support on key tasks(e.g., picking flowers for your wedding or dealing with diaper rash). As the company states, “Weinspire, inform and cheer on our community as they move through life’s most amazing (andstressful!) milestones. From the proposal to creating a home and starting a family together, we’rethere for every step of the journey.”17

Channel members can do this as well. For example, Tesco uses its data-collecting loyalty card(the Clubcard) to track which stores customers visit, what they buy, and how they pay. Thisinformation has helped Tesco tailor merchandise to local tastes. It also helps the retailer customizeoffers to individual customers. For example, shoppers who buy diapers at a Tesco store for the firsttime receive coupons by mail not only for baby wipes and toys but also for beer, according to TheWall Street Journal. Tesco’s analysis revealed that new fathers tend to buy more beer at retailbecause they can’t spend as much time at the pub!

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Firms should facilitate other transitions as well, such as the transition of a customer from alower-value segment to a higher-value segment. American Express uses customer information tounderstand the customer’s readiness to move along a predefined upgrade path among the differentbranded cards offered by the company. For example, the first purchase of an upper-class airlineticket on a Gold Card triggers an invitation to upgrade to a Platinum Card. Companies can usemarketing analytics to understand what behaviors predict the customer’s readiness to transition.This is similar to the use of data to determine churn discussed earlier.

Improve CLV by Lowering Acquisition Costs

A fundamental way to lower acquisition costs is to use referrals instead of using traditional reachmarketing methods.18 Uber does this successfully through its friend referral program, which sharesthe $10 off the next two rides with the referral and $10 off the referrer’s next two rides. Referralscan be included in customer valuations by also accounting for the customer’s referral value (CRV),which captures the net present value of future profits of new customers who purchased firmoffering as a result of referral behavior of a current customer. Together, CLV and CRV offer amore complete view of customer valuation.

Challenges in Using CLV Models

Though CLV models are straightforward calculations that can bring huge value to the business,there are a few challenges to be wary of in these calculations:

Need to Account for When Money Arrives

The approach we offer assumes that companies have to wait to receive their money fromcustomers until the end of the t period. This may not be an accurate situation for companies thatreceive their money from customers at the beginning of the relationship, such as paymentsbefore shipments or health club memberships. If this is the case, the margins, costs, andretention rates from the prior t should be used in valuing customers to get the most accurateassessment.

Missing Individual Data

Firms may find that they do not have data on the profits or costs needed to value each individualcustomer. For example, many packaged goods companies do not interface directly with theircustomers. In these cases, firms can use lifetime value models at the segment level and calculateaverage profit margins and marketing costs for a “typical customer” in a segment. This is the totalprofit and total marketing costs divided by the number of customers in a segment.19

Unsure How Long a Typical Customer is Active

Based on historical data, universities know that a typical undergraduate takes approximately four orfive years to graduate. Most companies don’t have such predictable time frames for how long theircustomers will remain in a market—and many hope this will be over for as long as possible. Adetailed, well-maintained customer database would help address this fundamental question, butwithout this resource, many experts recommend using a 3-year period.20 Another approach is toassume that the life of the customer is infinite. That might sound like an outrageous assumption.

Chapter 8 Creating Valuable Customers 155

However, this approach is quite reasonable mathematically given that the future value of acustomer is very small after 5 years due to retention rates and discount rates. Therefore, unlessretention rates are very high or discount rates are very low, the infinite CLV approach is a goodapproximation.21 To do so, use the following approach to calculate CLV—notice there are not subscripts in this approach, which reflect the fact that it is summing across years.

CLV Msrs

1 i rsACS

Difficult to Assign Marketing Costs

Firms may also find it difficult to assign marketing costs to customers or segments of customers.One way to manage this is to do simple counts of marketing contact levels with the customer.Frequency of store visits, warranty claims, customer service calls, and salesperson visits can all beestimated by managers or front-line employees.

Using CLV to Invest in Prospects

In addition to providing information on which current customers to invest in, lifetime valueapproaches can also guide companies on investments in new customers or prospects. To do so,companies can compute the lifetime value of a prospective customer (prospect lifetime value(PLV)) for that segment. PLV shows the expected value per prospect of any acquisition effort.

PLV accounts for the fact that a company has not yet acquired this customer by includingacquisition rate in the CLV equation. The acquisition rate is the probability that a company willacquire a customer. This helps companies decide the future value of a customer and directsresource allocation decisions.

PLVs ARs CLVs ACs

In this equation, PLVs is expected lifetime value of a prospective customer, ARs is the segment’sacquisition rate or likelihood that a prospect will become a customer, ACs is the segment’sacquisition cost per prospect. Here, CLVs is the segment’s CLV (and does not include ACs to avoiddouble counting).

As an example, AudioReader Inc. has introduced a new range of audiobook devices thatare targeted at children between two to seven years old. There are about 500,000 suchcustomers in their current region of operation. As a start-up, AudioReader has limited moneyfor marketing initiatives at its disposal, and it needs to decide whether or not to invest in anew salesforce that will acquire these new customers with a probability of 5 percent (AR =5 percent). The company has estimated the cost of training this salesforce as $1M, whichequates to an acquisition cost of $2 per prospect ($1M/500,000 prospects). Assume the samediscount rate of 10 percent.

The first step is to calculate CLV (AudioReader uses the infinite customer life approachand keeps acquisition cost out of the model as instructed). CLV = 100 (60%/(1 + 10% 60%)) =$120. The second step is to calculate PLV = (AR CLV) AC = (5% 120) $2 = $4 per prospect.

156 Part Two Creating, Adapting, and Implementing Strategy

Therefore, the total expected value of new salesforce = PLV # of prospects or $4 500,000 =$2,000,000. All else being equal, AudioReader should make the salesforce investment, as the totalPLV is higher than the investment required for the salesforce.

Use PLV to Guide Acquisition Cost Expenditures

The PLV calculation can also be used to determine the maximum a company should spendacquiring a new customer segment. Returning to AudioReader, the VP of Sales goes to the COOwith this analysis to get the salesforce training budget approved, and the COO poses a goodquestion—what is the maximum we should spend on customer acquisition? To make thisdetermination, AudioReader should set PLV = 0 in the equation. Because CLV does not includeAC, if we set PLV = 0 and solve for AC = AR CLV, the company should spend no more than $6per prospect in its go-to-market strategy (AC = 5 percent 120 = $6), and its maximum overallcustomer acquisition budget should be $3M ($6 500,000 prospects).22

CUSTOMERS AS VALUABLE ASSETSCustomers have always been central to marketing, but the shift into a perspective wherecustomers are an asset has become more prevalent, especially as digital tools enable data collectionabout and management of customers at scale. The hard decision of choosing investment indifferent marketing activities now extends to questions such as which customers to invest inacquiring and which to invest in keeping loyal to the business. The customer lifetime value modelprovides a strategic framework to understand how to value customers, as well as which levers toshift to gain the biggest value from customers.

KEY LEARNINGS

Star customers both bring high value to and derive high value from the firm.

The purchase funnel is a management tool that allows a company to sort itscustomers into different stages in the purchase process and monitor progress inmoving customers through the process. It also enables firms to see when in theprocess they are losing customers, which can be used to improve customer progress.

Funnel management problems like poor quality leads or slow movement of fine-grained data can often be solved by more coordination between marketing and sales,making sure funnel steps reflect observable customer actions, etc.Customer lifetime value (CLV) models can be used to calculate the long-term valueof individual customers or segments of customers. Skillful use of CLV can guidecustomer management, predict and mitigate churn, account for and facilitatecustomer transitions, and lower acquisition costs.

The CLV model can be adapted to calculating prospect lifetime value (PLV), whichidentifies the potential value of a future customer. Firms can use PLV to determinehow much to invest in acquiring new customers by segment, as well as which newcustomers to prioritize when allocating firm resources.

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FOR DISCUSSION1. Create a purchase funnel for an organic farm that wants to sell its produce to local

restaurants. What metrics do you recommend it use?

2. Perform a loyalty analysis of the automobile industry and the snack food industry.Rate key firms on attitudinal and behavioral loyalty. Take one firm in each industryand offer one suggestion for improving customer loyalty.

3. Using the AudioReader data, estimate its CLV when customer retention increasesfrom 60 percent to 70 percent and 80 percent. In each of these scenarios, assess thevalue of increasing margin by 10 percent to $110 or 20 percent to $121.

4. Considering AudioReader’s offering and target market, have a discussion about thecompany’s most effective use of customer lifetime value tools? What would youmeasure and how would you use it to improve the company’s performance over thelong-run.

5. Imagine AudioReader’s retention rate increases from 60 percent to 80 percent.What is its new PLV? How much should AudioReader now be willing to spend toacquire a customer?

BEST DIGITAL PRACTICE

Netflix Customer Loyalty Machine

Netflix has emerged as one of the most disruptive and successful on-demand video and media serviceproviders over the last decade. Started as a mail-order DVD company in 1997, Netflix has succeeded bychanging its strategies to keep pace with changing technologies. By 2015, Netflix had acquired a 52percent share of all U.S. broadband homes and, in the process, put the behemoth brick-and-mortarretailer Blockbuster out of business.

Netflix uses a dual strategy of outstanding content and a powerful subscription model to succeed.At first, content came solely from movie and television production companies, including syndicatedre-runs. However, in 2013, Netflix debuted its first original series, House of Cards, to great fanfare. Ithas continued to produce winners, including Orange is the New Black, Narcos, Making a Murderer,and most recently new episodes of Gilmore Girls. The company has also brought back award-winningshows, such as Full House. This content strategy keeps current customers engaged, as reflected in thefact that the average subscriber streams content for 2 hours a day—up 18 minutes over the prior year. Italso continuously attracts new users to the platform.

Netflix acquires customers by offering a free one-month trial that can be canceled at any time. Thisstrategy has zero cost to the company given the trial only utilizes Netflix’s existing portfolio of offerings.For current customers, Netflix uses four strategies to improve the value it offers and the value thecompany is able to extract from them.

First, the low monthly subscription rate of $9.99 makes membership an affordable luxury for manycustomers. Of course, most people don’t just sign up for one month. The average person is an estimatedNetflix subscriber for 25 months, creating a recurring source of revenue.

Second, its “Watch Anywhere” option allows customers to watch shows on any device and evendownload them to use on computers or tablets, making it easier to watch Netflix on the go—therebyextending viewing opportunities to out-of-home, non-Wi-Fi settings.

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BEST GLOBAL PRACTICE

How Starbucks Rewards Reward Starbucks

In 2008, Starbucks launched its first loyalty program, aptly called Starbucks Rewards. The program isdesigned to operate on a prepaid system, in which customers load funds onto a Starbucks card and thenuse that card to purchase products. Since its inception, the program has been tremendously successful.A recent financial analyst noted that Starbucks had $1.2 billion in customer funds loaded onto plasticand mobile cards as of the first quarter 2016. This figure, which is larger than many banks have in

(continued)

Third, Netflix tracks customer engagement and uses this information to recommend new contentto users based on their past viewing behaviors. This impacts customer retention of which Netflix has thelowest churn rate in the on-demand video sector. In 2015, just 5 percent of U.S. broadband homescanceled their Netflix accounts. This also includes customers who left after the end of a trial period so itis not a pure CLV calculation, which would not count customers until they had made a more formalcommitment. Such a high retention rate offers a strong indicator of long-term cash flows for thecompany.

Finally, Netflix uses a tiered pricing plan that allow users to pay for the number of screens onwhich they want to view content—basic streaming for one screen is $7.99, standard streaming for twoscreens is $9.99, and premium streaming for four screens is $11.00. The multiple screen options allowpeople to join together who might not otherwise join individually. Subscribers can also add people totheir plans easily by sharing access codes. This allows Netflix to gain access to new customers who mightlater join on their own.

Questions:

1. What actions to you recommend Netflix take to increase its customer lifetime value?

2. How can Netflix improve its prospect lifetime value?

3. What is Netflix’s biggest competitive vulnerability?

Sources:“The Customer Lifetime Value Equation: Will it Pay Off for Tech Companies,” Knowledge@Wharton,December 7, 2011, http://knowledge.wharton.upenn.edu/article/the-customer-lifetime-value-equation-will-it-pay-off-for-tech-companies/

Jeff Baumgartner, “Netflix Has Lowest Churn Rate among OTT Services: Study,” Multichannel News,April 14, 2016, http://www.multichannel.com/news/content/netflix-has-lowest-churn-rate-among-ott-services-study/404142

Jay Somaney “Netflix Sellsiders Say ‘Churn Baby Churn,’” Forbes, April 12, 2016, http://www.forbes.com/sites/jaysomaney/2016/04/12/netflix-sellsiders-say-churn-baby-churn/#10d21eba261b

Lara O’Reilly, “Netflix is Eating TV’s Dinner,” Business Insider, April 16, 2015, http://www.businessinsider.com/average-daily-netflix-usage-according-to-btig-research-2015-4

Kissmetrics, “How Netflix Measures Your to Maximize their Revenue & How it Can Help YourBusiness,” https://blog.kissmetrics.com/how-netflix-measures-you/

Chapter 8 Creating Valuable Customers 159

deposits, reflects 12 million loyalty club members—a number that has almost doubled since 2014!According to the company’s CFO, members spend three times more than nonmembers and visit morefrequently. Forty-one percent of Starbucks transactions in the United States and Canada came from aStarbucks card.

Why does the program work so well? First, the company created a loyalty program that rewardscustomers for all their purchases within the family of Starbucks products. Customers earn “stars” oncoffee drinks and accessories at its stores, coffee purchases at grocery stores, and purchases at Teavana.These stars and the progression of cards ranging from green to gold give loyal customers increasinglevels of rewards, such as free refills and free drinks once certain frequency requirements are met. Theprogram has an astonishing 94 percent retention rate.

Second, 24 percent of U.S. transactions occurred through Starbucks’ mobile app, which contains aMobile Order and Pay feature. This is so popular because customers can order coffee before they evenarrive at the shop, making buying coffee easier and faster than ever before. One blogger recentlydescribes this loyalty innovation “shattering customer expectations of convenience.” Another customerloyalty and retention expert noted, “It goes without saying that the companies who best utilizetechnology to meet the ever-changing needs of the customer will be the winners in the long-haul.”

Third, Starbucks has created the capability to generate hyper-personalized e-mail reward offeringswith more than 400,000 variations. The result is that customer response rates have doubled overprevious campaigns. Experts say this will not only increase the level of customer engagement but alsothe speed. By early 2017, the company expects to complete the rollout of a system that will makerecommendations to customers for items that can be paired with or added to purchases during MobileOrder and Pay checkout, which the company believes will further fuel engagement and growth.

Fourth, Starbucks provides both a high-quality product and coffee-drinking experience. Itconsistently improves its offerings, which increases visit frequency and dollar amount spent. Forexample, the introduction of seasonal favorites keeps customers coming back to try new coffees. Theintroduction of more food offerings has made it easier for customers to return for food and beveragesthroughout the day. This allows rewards to multiply quickly as customers have different day-part needs(breakfast, lunch, breaks, and dinner) met by a company they love. Finally, Starbucks is now working tofurther differentiate itself by opening new store formats such as Roasteries, which offer super-premiumcoffees and coffee experience for customers seeking an ultra-premium experience.

Questions:

1. How might Starbucks use its rewards program to attract new customers to its stores?

2. The Roasteries format carries some risks for Starbucks. Discuss these possible risks as well as thestrategic benefits Starbucks might expect from this move.

Sources:Trefis Team, “Let’s Look at Starbucks’ Growth Strategy,” Forbes, September 19, 2016, http://www.forbes.com/sites/greatspeculations/2016/09/19/lets-look-at-starbucks-growth-strategy/#1c27ca277175

Sabri Suby, “How Big Brands like Amazon and Starbucks Retain Customers,” King Kong, July 13, 2016,http://kingkong.com.au/big-brands-like-amazon-starbucks-retain-customers/

“Starbucks Presents its Five-Year Plan for Strong Global Growth,” December 7, 2016, https://news.starbucks.com/news/investor-day-2016-press-release

Hadley Malcolm, “Starbucks Loyalty Program Will Now be Based on Dollars Spent,” USA Today,February 22, 2016, http://www.usatoday.com/story/money/2016/02/22/starbucks-loyalty-program-changing-to-be-based-on-dollars-spent/80725784/

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Andrew Meola, “Starbucks’ Loyalty Program Now Holds More Money than Some Banks,” BusinessInsider, June 13, 2016, http://www.businessinsider.com/starbucks-loyalty-program-now-holds-more-money-than-some-banks-2016-6

Jessica Didion, “Starbucks: Loyalty Innovation Shatters Customer Expectations of Convenience,”Lenati, July 29, 2015 http://www.lenati.com/blog/2015/07/starbucks-customer-loyalty-innovation-shatters-customer-expectations-of-convenience/

Nate Matherson, “Starbucks Beats Competition in Building Customer Loyalty,” The Street, November12,2013,https://www.thestreet.com/story/12104711/1/starbucks-beats-competition-in-building-customer-loyalty.html

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C H A P T E R N I N E

Building and ManagingBrand Equity

You do not merely want to be considered just the best of the best. You want to be considered the only oneswho do what you do.—Jerry Garcia, The Grateful Dead

You cannot make a business case that you should be who you’re not.—Jeff Bezos, Amazon

The secret of success is constancy of purpose.—Benjamin Disraeli

A business strategy is enabled by brand assets. A brand gives a firm permission to compete inproduct markets and services and it represents the value proposition of the business strategy. Thus,it is strategically crucial to develop, refine, and leverage brand assets.

Research shows that the value of brand assets, compared with other intangible assets (such aspeople and IT technology) and tangible assets, represents from 15 percent (Toyota and GE) tomore than 75 percent (BMW and Nike) of the value of the firm. Even the lower number issignificant strategically.

Brand equity is the set of assets and liabilities linked to the brand. The conceptualization ofbrand equity, which occurred in the late 1980s, was pivotal because it changed the way thatmarketing was perceived. Where brand image could be delegated to an advertising manager,brand equity—as a key asset of the firm—needed to be elevated to become part of the businessstrategy, the purview of the CEO. Top management had to be strategic and visionary instead oftactical and reactive, long term in orientation, and use a different set of metrics. It truly changedthe role of marketing and paved the way for the creation of the chief marketing officer (CMO) role.

There are three types of brand assets—brand awareness, brand loyalty, and brand associations(see Figure 9.1). Each creates formidable competitive advantages and each needs to be activelymanaged.

162

BRAND AWARENESSBrand awareness is often taken for granted, but it can be a key strategic asset. In some industriesthat have product parity, awareness provides a sustainable competitive difference. It serves todifferentiate the brands along a recall/familiarity dimension.

Brand awareness can provide a host of competitive advantages. First, people like the familiarand awareness provides the brand with a sense of familiarity. For low-involvement products, suchas soap or chewing gum, familiarity can drive the buying decision. Taste tests of such products ascolas and peanut butter show that a recognized name can affect evaluations even if the brand hasnever been purchased or used.

Second, brand awareness can be a signal of presence, commitment, and substance, attributesthat can be very important even to industrial buyers of big-ticket items and consumer buyers ofdurables. The logic is that if a name is recognized, there must be a reason. The “Intel Inside”program was remarkably successful at creating a perception of advanced technology and earned asignificant price premium for Intel for well over a decade even though it did not communicateanything about the company or the product. Pure awareness power was at work.

Third, the salience of a brand will determine if it is recalled at a key time in the purchasingprocess. The initial step in selecting an advertising agency, a car to test drive, or a computersystem is to decide on which brands to consider. The extreme case is name dominance, where thebrand is the only one recalled when a product class is cued. Consider Kleenex tissue, Cloroxbleach, Band-Aid adhesive bandages, Jell-O gelatin, Crayola crayons, Facebook, and A-1 steaksauce. In each case, how many other brands can you name? How would you like to competeagainst these dominant brands?

Brand awareness is an asset that can be extremely durable and thus sustainable. It can be verydifficult to dislodge a brand that has achieved a dominant awareness level. Customers’ awareness ofthe Datsun brand, for example, was as strong as that of its successor, Nissan, four years after thefirm changed its name.1 An awareness study on blenders more than two decades after GE stoppedmaking the product found that the GE brand was still the second-most preferred brand.2 Another

BrandAwareness

BrandEquity

BrandLoyalty

BrandAssociations

Figure 9.1 Brand Equity

Chapter 9 Building and Managing Brand Equity 163

study of familiarity asked homemakers to name as many brands of any type as they could; theyaveraged 28 names each. The ages of the brands named were surprising: more than 85 percentwere over 25 years old, and 36 percent were more than 75 years old.3

There is a great deal of difference between recognition (have you ever heard of Brand X) andunaided recall (what brands of SUVs can you name). Sometimes recognition for a mature brand isnot even desirable when unaided recall is low. In fact, brands with high recognition and low recallare termed graveyard brands. Without recall, they are not in the game; their high recognitionmeans they are considered yesterday’s news, making it difficult for them to gain visibility andenergy.

Because consumers are bombarded every day by more and more marketing messages, thechallenge of building awareness and presence—and doing so economically and efficiently—isformidable, especially considering the fragmentation and clutter that exist in mass media. Oneroute to visibility is to extend the brand over product categories. For that reason, firms such as 3M,Sony, Toshiba, and GE have an advantage because wide product scope provides brand exposure.Another route is to go beyond the normal media channels by using event promotions, publicity,sampling, Internet community, and other attention-grabbing approaches. For example, considerthe impact of Samsung’s Olympic sponsorship, the Niketown showcase stores, Swatch hanginga 165-yard-long watch from skyscrapers in Frankfurt and Tokyo, and the Pampers Village, thego-to site for resources and conversation about infant care. All of these firms were able toincrease their awareness levels much more effectively than if they had relied only on mass mediaadvertising.

BRAND LOYALTYAn enduring asset for some businesses is the loyalty of the installed customer base. Competitorsmay duplicate or surpass a product or service, but they still face the task of persuading customersto switch brands. Brand loyalty, or resistance to switching, can be based on simple habit (there is nomotivation to change from the familiar gas station or supermarket), preference (people genuinelylike the brand of cake mix or its symbol, perhaps based on use experience over a long time period),or switching costs. Switching costs would be a consideration for a software user, for example, whena substantial investment has already been made in training employees to learn a particular softwaresystem.

An existing base of loyal customers provides enormous sustainable competitive advantages.First, it reduces the marketing costs of doing business because less marketing is required to retainthese loyal customers. Keeping existing customers happy and reducing their motivation tochange are usually considerably less expensive than trying to reach new customers andpersuading them to try another brand. Of course, the higher the loyalty, the easier it is tokeep customers happy.

Second, the loyalty of existing customers represents a substantial entry barrier to competitors.Significant resources are required when entering a market in which loyal customers must beenticed away from an established brand. The profit potential for the entrant is thus reduced. Forthe barrier to be effective, however, potential competitors must know about it; they cannot beallowed to entertain the delusion that customers are vulnerable. Therefore, signals of strongcustomer loyalty, such as customer interest groups, can be useful.

164 Part Two Creating, Adapting, and Implementing Strategy

Third, a relatively large, satisfied customer base provides an image of a brand as an acceptedand successful product. A set of loyal customers also provides reassurance to others. Customersfind comfort in the fact that others have selected the brand.

Finally, brand loyalty provides the time to respond to competitive moves—it gives a firm somebreathing room. If a competitor develops a superior product, a loyal following will allow the firmthe time needed to respond by matching or neutralizing the offering. With a high level of brandloyalty, a firm can allow itself the luxury of pursuing a less-risky follower strategy.

The management of brand loyalty is a key to achieving strategic success. Firms that managebrand loyalty well are likely to:

Have a customer culture, whereby people throughout the organization are empoweredand motivated to keep the customer happy.

Manage customer touchpoints to ensure that the brand does not falter in key contexts.

Have a relationship that goes beyond functional benefits to emotional, self-expressive, andsocial benefits.

Make customers feel that they are part of the organization, perhaps through customerclubs.

Have continuing communication with customers, using direct mail, the Internet, toll-freenumbers, and a solid customer backup organization.

Measure the loyalty of existing customers. Measurement should include not only sensitiveindicators of satisfaction, but also measures of the relationship between the customer andthe brand. Is the brand respected? Liked? Trusted? The ultimate measure is, will thecustomer recommend the brand to others?Conduct exit interviews with those who leave the brand to locate points of vulnerability.

Measure the lifetime value of a customer so expected future purchases are valued.

BRAND ASSOCIATIONSA brand association is anything that is directly or indirectly linked in the consumer’s memory to abrand (see Figure 9.2). The associations attached to a firm and its brands can be key enduringbusiness assets, because they reflect the strategic position of the brand. Thus, McDonald’s could belinked to Ronald McDonald, kids, the Golden Arches, Ronald McDonald House, having fun, fastservice, family outings, or Big Macs. All these associations potentially serve to make McDonald’sinteresting, memorable, and appealing to its customers.

Product attributes and customer benefits are the associations that have obvious relevancebecause they provide a reason to buy and thus a basis for brand loyalty. Companies love to makeclaims for good reason. Heinz is the slowest-pouring (thickest) ketchup, Amazon has the fastestdeliveries, Intel has a faster chip, LinkedIn has the largest professional network, Volvo is durableand safe, and Walmart delivers value. Companies love to make product claims, for good reason.They often engage in shouting matches to convince customers that their offering is superior insome key dimension—Brand One is a high-fiber cereal, or a Boeing plane has more range.

There are several problems with a reliance on attribute and benefit associations. First, aposition based on some attribute is vulnerable to an innovation that gives your competitor more

Chapter 9 Building and Managing Brand Equity 165

speed, more fiber, or a greater range. In the words of Regis McKenna, the Silicon Valley marketingguru, “You can always get outspeced.”

Second, when firms start a specification shouting match, they all eventually lose credibility.After a while, customers start to doubt whether any aspirin is more effective or faster acting thananother. With many conflicting claims, all of them are discounted.

Third, people do not always make decisions based upon a particular specification. They mayfeel that small differences in some attributes are not important, or they simply lack the motivationor ability to process information at such a detailed level.

Strong brands go beyond product attributes to develop associations on other dimensions thatcan be more credible and harder to copy. It is useful to understand some of these other dimensionsand learn how they have been used by firms to create customer relationships and points ofdifferentiation. The value propositions described in Chapter 6 are all prominent candidates forassociations. Several associations, all with a proven ability to drive successful firms, will now bedescribed to provide a feel for the scope of potential associations.

Product Category

The choice of a product category or subcategory with which a business will associate itself canhave enormous strategic and tactical implications. Schweppes positioned its tonic water inEurope as an adult soft drink, and the popularity of new-age adult drinks carried it to adominant position. In the United States, however, Schweppes (perhaps wanting to avoid theCoke/Pepsi juggernaut) positioned its tonic water as a mixer for alcoholic drinks, whichrelegated it to being a minor player. Energy bars became a big business by creating a categorydistinct from candy bars. Wasa Crispbread, in contrast, expanded its market by positioningitself as an alternative to bread rather than positioning itself in a category with rice cakes andRy-Krisp.

Brands Key Associations

Volvo, Crest Attributes/BenefitsApple, Calvin Klein DesignHubSpot, IBM Systems SolutionWarby Parker, Tom’s Shoes Social ProgramsNordstrom’s, Ritz Carlton Customer RelationshipsFerrari, Gold Violin Niche SpecialistsLexus, Mayo Clinic QualityWalmart, IKEA Price ValueSingapore Airlines, Zappos ServiceIntel, Toyota’s Prius Product CategoryAmazon, Google, Marriott Breadth of Product Line3M, Accenture Organizational IntangiblesVisa, Coca-Cola Being GlobalGoogle, Telsa Being ContemporaryVirgin Atlantic Airlines Brand Personality

Figure 9.2 Brand Associations

166 Part Two Creating, Adapting, and Implementing Strategy

Breadth of Product Line

A broad product offering signals substance, acceptance, leadership, and often the convenience ofone-stop shopping. For example, the strategic position that drove Amazon’s operations andmarketing was never about selling books, even at the beginning when it was simply a bookstore.(Amazon had the vision to avoid calling itself books.com.) Rather, the firm positioned itself asdelivering a superior shopping/buying experience based on the “Earth’s Biggest Selection”—anarray of choices so wide that customers would have no reason to look anywhere else. This positionallows Amazon to enter a variety of product markets, although it also puts pressure on the companyto deliver in each venue.

Breadth also works well as a dimension for other firms, such as Chevrolet, Walmart, and Black& Decker. Even under a strong brand, however, expanding the product offering involves risks. Thefirm may venture into business areas in which it lacks skills and competencies, the brand might beeroded, and resources needed elsewhere may be absorbed.

Organizational Intangibles

As already noted, attribute and benefit associations can often be easily copied. In contrast, it isdifficult to copy an organization, which will be uniquely defined by its values, culture, people,strategy, and programs. For example, at Southwest Airlines, the friendly, fun brand is not createdby advertising, but rather by the company culture and people that work there. Likewise, thecustomer-focused brand image of Nordstrom is created by its dedicated, hard-working salesassociates. As Tony Hsieh, CEO of Zappos says, “Your culture is your brand.”

Being Global

CitiGroup is a global financial institution. Visa is a global credit card. Toyota is a global carcompany. Being global provides functional benefits in that customers can access the services ofCitiGroup or Visa anywhere. It also provides the prestige and assurance that comes from knowingthat the firm has the capability of competing successfully throughout the world. Knowing thatToyota is strong in the United States helped it succeed in Europe, where customers mightotherwise look at it as a modest player. More information on global associations and strategy isprovided in Chapter 14.

Being Contemporary

Most established businesses face the problem of remaining or becoming contemporary. A businesswith a long heritage is given credit for being reliable, safe, a friend, and even innovative if that ispart of its tradition. However, it also can be perceived as “your father’s (or even grandfather’s)brand.” The challenge is to have energy, vitality, and relevance in today’s marketplace—to be partof the contemporary scene. The answer usually entails breaking out of the functional-benefit trap.Approaches to add energy will be explored in Chapter 11.

Lane Bryant, a retailer to plus-sized women, developed a dowdy, apologetic image that washolding it back. To break out, it developed a new, contemporary strategic position. It spreadthe message with new, even sexy, fashions; a Lane Bryant fashion show in New York; revitalizedstores; and a new spokesperson, rapper/actress Queen Latifah, in ads, on its website, and in a voter-registration program. Ironically, Lane Bryant’s sister company, Victoria’s Secret, had to reposition

Chapter 9 Building and Managing Brand Equity 167

itself previously from an edgy (Frederick’s of Hollywood) brand to a more mainstream one, albeitat the edge of the mainstream market.

Brand Personality

As with human beings, a business with a strong personality tends to be more memorable and betterliked than one that is bland, nothing more than the sum of its attributes. And like people, brandscan have a variety of personalities that can become key associations. For example, a brand can beprofessional and competent (CNN and McKinsey), upscale and sophisticated (Jaguar andTiffany’s), trustworthy and genuine (Hallmark and John Deere), fun and interesting (Snapchatand Lego), exciting and daring (Red Bull and HBO), or active and tough (REI and Under Armour).Certainly, Virgin is a brand whose strategic position includes a unique personality.

Harley-Davidson has a strong personality reflecting a macho, America-loving, freedom-seeking person who is willing to break out of confining social norms. The experience of ridinga Harley (or even the association that comes from wearing Harley-Davidson clothing) helpssome people express a part of their personality, which results in intense loyalty. More than250,000 of these people belong to one of the 800 chapters of the Harley Owners Group (HOG).Twice a year, believers from all over the country gather for a bonding experience. Harley ismuch more than a motorcycle; it is an experience, an attitude, a lifestyle, and a vehicle to express“who I am.”

Joie de Vivre is a San Francisco firm whose boutique hotels are each inspired by a theme thatreflects a personality. The “Rolling Stone” Phoenix hotel attracts rock-and-roll and other enter-tainment personalities with its irreverent sense of cool and funky, adventurous decor. The “NewYorker” Rex hotel is clever and sophisticated, with a literary sensibility. The “1920s luxury liner”Commodore Hotel, with its Titanic Cafe, looks and feels like a party straight out of The GreatGatsby. The “movie palace” Hotel Bijou has a miniature movie theater in the lobby, accompaniedby dramatic Hollywood portraits.

Maintaining Relevance

Strong brands stay relevant to their customers by shifting associations slowly over time. In theBrand Asset Valuator, the product of Young & Rubicam’s mammoth study of global brands,relevance is one of four key dimensions identified (along with differentiation, esteem, andknowledge). Analysis of this database reveals that relevance is necessary for brand success. If abusiness loses relevance, differentiation may not matter.

The abilityof a firmto maintainrelevance varies along a spectrum,as shown inFigure 9.3. At oneextreme are trend neglectors—firms that miss or misinterpret trends, perhaps because they are too

Trend

Neglectors

Trend

Responders

Trend

Drivers

CreateIgnore

Figure 9.3 How Companies Engage With Trends to Stay Relevant

168 Part Two Creating, Adapting, and Implementing Strategy

focused on a predetermined business model. Such firms are often characterized as havingorganizational inflexibility, inadequate strategic analysis capability, and/or a weak brand portfoliostrategy; they eventually wake up in surprise to find their products are no longer relevant. At theother end of the spectrum are trend drivers, those firms that actually propel the trends that definethe category (or subcategory). In the middle are trend followers, firms that track closely the trendsand the evolution of categories and subcategories, making sure that their products stay current.

Virgin Atlantic Airlines, Toyota, and Schwab all have been trend drivers. Virgin created a newsubcategory by introducing and owning new services such as massage services in first class. Toyotadefined the hybrid category with its Prius. Schwab’s OneSource defined a new subcategory ofbrokerage firm services.

Trend responders—those firms that can recognize and evaluate trends and then create andimplement a response—can sustain success in dynamic markets. Some fashion brands such asTommy Hilfiger have been nimble in staying abreast of fashion trends. Barbie has changed withthe times, being an astronaut, a surgeon, a presidential candidate, and a high-fashion woman;incorporating ethnicity; and becoming relevant to the Internet with an involving Barbie site.L.L. Bean has evolved its position from a hunting, fishing, and camping focus to a broaderoutdoors theme that is relevant to hikers, mountain bikers, cross-country skiers, and water-sportsenthusiasts.

Being a successful trend responder, however, is not easy. As suggested in Chapter 4, it can bedifficult to identify and evaluate trends and separate them from fads. It is also difficult to respond toemerging subcategories, especially if the subcategory starts small and if strong brands are wellestablished. Consider the difficulty that McDonald’s, Burger King, KFC, and the other fast foodgiants have had in responding to the healthy eating trend. They are simply not good at productdevelopment and delivery in that arena because it is not in their DNA—they lack the people andculture to be successful. Even worse, their brand becomes a liability as they attempt to changeperceptions ingrained by decades of doing what they do. Nevertheless, McDonald’s, after severalunsuccessful efforts to create salads, broke through with not only a line of salads that worked wellin the chain (e.g., Southwest Buttermilk Crispy Chicken Salad), but also healthy desserts forconcerned parents and even gourmet coffee to provide an alternative to Starbucks.

Box VIRGIN ATLANTIC AIRLINES

In 1970, Richard Branson and a few friends founded Virgin as a small mail-order record company inLondon, England. By the mid-1980s, this modest beginning had led to a chain of record shops and thelargest independent music label in the United Kingdom, with artists as diverse and important as PhilCollins, the Sex Pistols, Boy George, and the Rolling Stones. By the 1990s, there were more than ahundred Virgin “megastores,” many making a significant brand statement with their signage, size, andinterior design.

In February 1984, Branson decided to start Virgin Atlantic Airlines to make flying fun andenjoyable for all classes, not just first-class passengers. Defying the odds, Virgin became the numbertwo airline in most of its markets by the end of the 1990s. Not only that, it enjoyed the same consumerawareness and reputation as much larger international carriers, including service-oriented airlines suchas Singapore Airlines. Virgin Atlantic’s success is due in part to its image of service quality, value, beingthe underdog, and having an edgy personality.

(continued)

Chapter 9 Building and Managing Brand Equity 169

Extraordinary Service Quality

Virginhasdelivereda high quality ofserviceand,moreimportanttoperceptions,hasoftendazzledcustomerswith original, “wow” experiences. Virgin pioneered sleeper seats in 1986 (British Airways followed nine yearslater with the cradle seat), limo services at each end of the flight (or motorcycle service for those flying light),in-flightmassages,childsafetyseats,individualTVsforbusinessclasspassengers,drive-throughcheck-inattheairport,andnewclassesofservice.First-classpassengersareofferedanewtailor-madesuittobereadyattheirdestination, masseurs or beauty therapists, and a facility to shower or nap.

Value

Virgin Atlantic’s Upper Class is priced at the business-class level with a service level comparable tomany other airlines’ first-class service. Mid Class is offered at full-fare economy prices, and most VirginEconomy tickets are available at a discount. While this lower price point offers a clear consumeradvantage, Virgin does not emphasize the price position in its promotion. Cheapness per se is not themessage at Virgin.

The Underdog

Virgin’s business model is straightforward. The company typically enters markets and industries withlarge, established players (such as British Airways) that can be portrayed as being somewhatcomplacent, bureaucratic, and unresponsive to customer needs. In contrast, Virgin presents itselfas the underdog who cares, innovates, and delivers an attractive, viable alternative. When BritishAirways attempted to prevent Virgin from gaining routes, Virgin painted British Airways as a bullystanding in the way of an earnest youngster who offered better value and service.

The Virgin Personality

The Virgin brand has a bold, edgy personality, largely reflecting its flamboyant service innovations andthe actions of Richard Branson. Virgin as a person would be perceived as someone who:

Flaunts the rulesHas a sense of humor that can be outrageous at timesIs an underdog, willing to attack the establishmentIs competent, always does a good job, and has high standards

Interestingly, this personality spans some extremes, from competent to a feisty, fun-loving, rule-breaker—an accomplishment envied by other businesses. The key is the fact that Virgin has deliveredon each facet of this personality.

Virgin is a remarkable example of how the right set of brand associations can allow a business tostretch far beyond what would be considered its acceptable scope of operations. Rather than restrictitself to records and entertainment, Virgin has used its associations to extend from record stores toairlines, colas (Virgin Cola), vodka (Virgin Vodka), rail service (Virgin Rail), jeans (Virgin Jeans), anddozens of other categories. In each business, the Virgin associations work to provide differentiation andadvantage.

In fact, the decision to extend Virgin, a business then associated with rock music and youth, to anairline could have become a legendary blunder if it had failed. However, because the airline wassuccessful and was able to deliver value with quality, flair, and innovation, the master Virgin branddeveloped associations that were not restricted to a single type of product. The elements of the Virginstrategic position—extraordinary service quality, value for money, the underdog position, and a quirky

170 Part Two Creating, Adapting, and Implementing Strategy

BRAND IDENTITYCreating and managing a brand requires a brand strategy, the heart of which is the brandidentity, which provides direction, purpose, and meaning for the brand. A brand identity is aset of brand associations that the firm aspires to create or maintain, an aspirational externalbrand image. These associations represent what the brand aspires to stand for and imply apromise to customers from the organization. It differs from brand image in that it couldinclude elements that are not present in the current image (you now make trucks as well as cars)or even conflict with it (you aspire to have a quality reputation that is superior to the currentperceptions).

The brand identity can best be explained in terms of three steps. These steps assume that acomprehensive strategic analysis has been done. Customer, competitor, and internal analyses areparticularly critical to the development of a brand identity.

1. What the Brand Stands For

The first step is to create a set of from 6 to 12 distinct associations that are desired for thebrand. The process starts by putting down all the associations that are desired given what is knownabout the customers, competitors, and the business strategy going forward. A list of more thantwo dozen is shown in Figure 9.4 for a business-to-business service company here termed Align.In actuality, the list is more often from 50 to 100. During this process there is no effort to zero in oncategories of associations, although there is an effort to make sure that organizational intangiblesand personality dimensions are at least considered.

These items are then grouped, and each group is given a label. Align was created with a set of ahalf-dozen acquisitions, each of which continued to operate somewhat autonomously. It wasbecoming clear, though, that customers preferred a single-solution firm with broad capabilities.The new Align strategy was to orient its service to broad customer solutions and to get its

personality—work over a large set of products and services. It has become a lifestyle brand with anattitude whose powerful relationship with customers is not solely based on functional benefits within aparticular product category.

Virgin’s success has been driven in part by pure visibility, largely based on publicity personallygenerated by Richard Branson. For the launching of Virgin Bride, a company that arranges weddings,he showed up in a wedding dress. At the 1996 opening of Virgin’s first U.S. megastore in New York’sTimes Square, Branson (a balloonist holding several world records) was lowered on a huge silver ballfrom 100 feet above the store. These and other stunts have turned into windfalls of free publicity forVirgin, helping the brand in all contexts.

Branson has fully mastered his role. By employing British humor and the popular love of floutingthe system, he has endeared himself to consumers. By never deviating from the core brand values, hehas gained their loyalty and confidence. When BBC Radio asked 1,200 people who they thought wouldbe most qualified to rewrite the Ten Commandments, Branson came in fourth, after Mother Teresa,the pope, and the archbishop of Canterbury. When a British daily newspaper took a poll on who wouldbe most qualified to become the next mayor of London, Branson won in a landslide.

Chapter 9 Building and Managing Brand Equity 171

operating units to work together seamlessly. The strategy represented a significant change inculture and operations. With respect to the brand identity, the elements “partner with customers,”“customized solutions,” “collaborative,” and “close to customers” were clustered and given thename Team Solutions, which became one of eight identity elements. The brand goal was to providea face to customers that matched this new strategy.

2. The Core Identity

The second step is to prioritize the brand identity elements. The most important and potentiallythe most impactful are classified as core identity elements. The core identity will be the primarydrivers of the brand-building programs. They will be the focus of the brand investments, as they arethe most critical to the success for the businesses that they are supporting. The balance of theelements are termed the extended identity. They serve to help define the brand, make decisions asto what actions and programs are compatible with the brand, and drive minor programs that willhave lesser impact and take modest resources.

In developing the core and extended identity, four criteria should guide the process. Identityelements are sought that:

Resonate with the target market. Ultimately, the market dictates success, and thusthe identity should resonate with customers. It is useful to think in terms of howcustomers relate to the brand over time rather than simply what drives purchase decisions.Also, consider emotional and self-expressive benefits in addition to functional ones.

Differentiate from competitors. Differentiation is often the key to winning. Thereshould be some points of differentiation from competitors throughout the brand identityso there is always an answer to the question as to how the brand is different.Provide parity where competitors have an advantage that is compelling tocustomers. It is not always necessary to be different or better on all dimensions. Theremay be some dimensions where the goal is simply to be close enough so that this

Value creation In-depth understanding of customersFlexible Close to customersResourceful Team orientedDynamic Partner with customersBroad capability CollaboratorCommitted to excellence Open communicationBest-of-breed MulticulturalWorld class Risk-sharing partnerGets job done Diversified workforceExperienced Technology that worksConfident GlobalCompetent Bold (without arrogance)Straightforward World health

Figure 9.4 Partial List of Aspirational Associations for Align

172 Part Two Creating, Adapting, and Implementing Strategy

dimension is no longer a reason to not buy the brand. Hyundai need not, for example, beequal to Toyota in quality; it just needs to be close enough so that its quality image doesnot prevent purchase.

Reflect the strategy and culture of the business. Ultimately, the brand needs toenable and support the strategy of the business. Particularly, when the strategy representsa change from the status quo and requires a change in brand image, the brand identityneeds to reflect the new strategy. The brand identity should also support and reflect theculture and values of the firm because it is the organization that has to deliver on theaspirational brand promise.

The Haas Business School at UC Berkeley has created a brand identity the core ofwhich is:

Question the status quo (lead by championing bold ideas)

Confidence without attitude (lead through trust and collaboration and not arrogance)

Students always (lifelong pursuit of personal and intellectual growth)

Beyond yourself (lead ethically and responsibly)

The “confidence without attitude” dimension, in particular, resonates with students andrecruiters and differentiates Haas from other business schools.

3. The Brand Essence

The core identity compactly summarizes the brand vision. However, it is often useful to provideeven more focus by creating a brand essence, a single thought that captures the heart of the brand.The purpose of an essence is to communicate the brand internally. Thus, while there are timeswhen an external tagline, designed to communicate the message of the day externally, can and doesrepresent the essence, that is often not the case. Figure 9.5 shows the final brand identity forAlign, including the brand essence.

A good brand essence will capture much of the brand identity from a different perspective,will provide a tool to communicate the identity, and will inform and inspire those inside theorganization. The Haas School of Business has as its essence “We develop leaders who redefinehow we do business.” The Haas essence is a stretch goal encouraging faculty and students to thinkbroadly about innovation.

A key essence choice is whether to focus on what the brand is or on what it does for customers.The former, such as Banana Republic’s “casual luxury” or the Lexus essence reflected in the“passionate pursuit of perfection,” tend to involve functional benefits; the latter, such as AmericanExpress’ “do more” or BMW’s “ultimate driving machine,” tend to look to emotional and self-expressive benefits.

Proof Points and Strategic Initiatives

A brand identity should not simply reflect something that appeals to customers. Rather, the firmneeds to be willing to invest behind it and create products and programs that deliver on thepromise. Toward that end, each identity element should have proof points and/or strategicinitiatives associated with it.

Chapter 9 Building and Managing Brand Equity 173

Proof points are programs, initiatives, and assets already in place that provide substanceto the strategy position and help communicate what it means. REI has a position aroundoutdoor enthusiasts. Proof points include the brand’s heritage of outdoor activities, aflagship store geared to the outdoors, and the expertise and professionalism of the customercontact staff. Nordstrom has a customer service position supported by the following proofpoints:

A reputation for customer service

A policy that attaches a service person to a customer rather than a product area

A return policy that is well known and has credibility

An employee compensation program that makes the customer experience a priority

The quality of the staff and the hiring program

An empowerment policy permitting innovative responses to customer concerns

A gap between what the brand now delivers (even given the proof points) and the promiseimplied by the strategic position should lead to strategic imperatives. A strategic imperative is aninvestment in an asset or program that is essential if the promise to customers is to be delivered.What organizational assets and competencies are implied by the strategic position? Whatinvestments are needed in order to deliver the promise to customers?

If a regional bank aspires to deliver a relationship with customers, two strategic imperativesmight be needed. First, a customer database might need to be created so that each customercontact person would have access to all of the customer’s accounts. Second, a program might beneeded to improve the interpersonal skills of customer contact people, including both training andmeasurement.

Worldlybut Informal

Core Identity

Commitment toExcellence—anytime,anywhere, whatever it

takes

Spirit ofExcellence

Global Networkof Local Experts

OpenCommunicator

TechnologyThat Fits

SupportWorld Health

TeamSolutions

Confident,Competent

Exte

nd

ed

Iden

tity

Exten

ded

Iden

tity

Figure 9.5 The Align Brand Identity

174 Part Two Creating, Adapting, and Implementing Strategy

The Role of the Brand Identity

The need to articulate a brand identity and position introduces discipline and clarity into thestrategy formulation process. The ultimate strategy is usually more precise and elaborated as aresult. However, the brand identity and position have other, more explicit, roles to play.

One role is to drive and guide strategic initiatives throughout the organization, fromoperations to product offering to R&D project selection. The overall strategic thrust capturedby the identity and position should imply certain initiatives and programs. For example, given thatwe want to be an e-business firm, what tools and programs will customers expect from us?Initiatives and programs that do not advance the identity and position should be dialed down orkilled.

A second role is to drive the communication program. A strategic identity and position thattruly differentiates the product and resonates with customers will provide not only punch andeffectiveness to external communication, but consistency over time because of its long-termperspective over organizational units that tend to march to their own drummers.

A third role is to support the expression of the organization’s values and culture to employeesand business partners. Such internal communication is as vital to success as reaching out tocustomers. Lynn Upshaw, a San Francisco communication consultant, suggests asking employeesand business partners two questions:

Do you know what the business stands for?

Do you care?

Unless the answers to these questions are yes—that is, employees and business partnersunderstand and believe in the business strategy—the strategy is unlikely to fulfill its potential. Toomany businesses drift aimlessly without direction, appearing to stand for nothing in particular.Lacking an organizational sense of soul and a sound strategic position, they always seem to beshouting “on sale,” attached to some deal or engaging in unrestrained channel expansion.

Multiple Brand Identities

Arbitrarily insisting that a brand identity should apply to all products or market segmentscan be self-defeating. Rather, consideration should be given to adapting it to each context. Oneapproach is to augment the brand identity to make it appropriate to a specific context. Forexample, Honda is associated with youth and racing in Japan while being more family orientedin the United States, but both positions share a focus on quality and motor expertise. Anotheris to define one of the brand identity elements differently in disparate contexts. Qualityfor GE Capital might be different than quality at GE Appliances, but high standards applyto both.

The Brand Position

The brand position represents the company’s communication objectives for the brand—what partsof the identity will be actively communicated to the target audience. The conceptualization of abrand position independent of a brand identity frees the latter to become a rich, textured picture of

Chapter 9 Building and Managing Brand Equity 175

the aspirational brand. The brand identity does not have to be a compact view appropriate to guidecommunication.

The brand position will be inherently more dynamic than the brand identity. As thestrategy and market context evolve and communication objectives are met, new ones becomeappropriate. A series of four or five positions over many years may be required to achieve thebrand identity.

One fundamental choice often in front of strategists is whether to create a position that iscredible or aspirational. In the case of Align, the firm’s energy and over-the-top quality waslegendary and created a value proposition with both functional and emotional components. Anassociated brand position would be credible, compelling, and relatively easy to implement.However, it would not move the needle as far as supporting the new strategy. A position aroundcollaboration and team solutions, on the other hand, would be on-strategy but would also not becredible for a firm noted as being arrogant and silo-driven and would be expensive and maybeeven infeasible. The choice depends on the answers to two questions. Does the firm haveprograms in place to deliver on the new promise? Is the market ready to accept the changedfirm? If the answer to either question is no, it might be prudent to delay the aspirationalposition.

Another positioning choice is whether to emphasize points of differentiation or points ofparity. The answer will depend on which direction will affect the target market. If the brand has awell-established image on a point of differentiation (such as value for IKEA, safety for Volvo), itmay be more effective to attempt to create a point of parity on another dimension that is holding itback (quality for Kmart or styling for Volvo).

KEY LEARNINGS

Brand equity, a key asset for any business, consists of brand awareness, brand loyalty,and brand associations.

Awareness provides a sense of familiarity and credibility and makes it more likely thata customer will consider a brand.

A core loyal customer base reduces the cost of marketing, provides a barrier tocompetitors, supports a positive image, and provides time to respond to competitormoves.

Brand associations can and should go beyond attributes and benefits to include suchassociations as brand personality, organizational intangibles, and product categoryassociations.The brand identity represents aspirational associations. The most important ofthese, the core identity, should be supported by proof points and/or strategicimperatives and should be the driver of strategic programs, including productdevelopment.While the brand identity represents long-term aspirational associations and ismulti-dimensional, the brand position represents the short-term communicationobjectives and is more focused.

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FOR DISCUSSION1. Explain how each of the three brand equity dimensions provide value to the firm.

Explain how they provide value to customers.

2. What is the difference between identity and position? Develop alternative positioningstatements for Align. Include a tagline and the rationale for that tagline.

3. Create a brand identity for Virgin Atlantic Airlines. Are there potential dimensions,such as high quality and superior service, that are inconsistent with the brand’spersonality? If so, how is that handled? How has the identity been brought to life?What are the proof points? Why don’t more brands emulate Virgin’s brand-buildingprograms?

4. Pick out three brands from a particular industry. How are they positioned? Which isthe best in your view? Does that brand’s positioning provide any emotional or self-expressive benefits? How would you evaluate each brand’s positioning strategy?Hypothesize proof points and strategic imperatives for each brand.

5. Consider the Joie de Vivre hotel concept described on page 169. Think of themesstimulated by magazines or movies and discuss how you would design a hotel aroundeach concept. For each theme, choose five words that reflect that theme.

Box BEST DIGITAL PRACTICE

REI’s #OptOutside Brand Identity

REI, a national retail co-op selling high-quality outdoor adventure gear and apparel, has built its brandidentity on making outdoor adventures more accessible. The company’s “#OptOutside” 2015 BlackFriday campaign is an excellent example of how a strategic initiative can reinforce and extend a brand.

A month before Black Friday in 2015, REI announced that it would be giving all of its employeesa paid vacation day, closing its stores and suspending online sales on this famous shopping day. Bydoing so, REI hoped to enable its employees, and of course customers, to #OptOutside instead ofspending the day shopping. The campaign was supported by a microsite, a social media campaign, andentertaining online films. Individuals were encouraged to use the designated hashtag to share theiractivities and experiences. Additionally, REI partnered with a geo-mapping service to help those whowanted to explore the outdoors but were not as familiar with their surrounding areas.

The ambiguity of the #OptOutside tagline was intentional—it made the concept broad enough toapply to many different types of people—from highly active hikers and bikers to individuals who weresimply nature enthusiasts. It allowed the REI community to define what opting outside meant to thempersonally.

The campaign’s impact was significant. More than 150 other retailers and the National Parksdepartment also decided to participate—that number has risen to 275 for the 2016 season. Lastyear 1.4 million people joined in on the trend, and REI expects that number to continue to grow.

Ultimately, REI’s intention with the campaign was not a short-term stunt but a calculatedreinforcement of its brand identity and encouragement for more people to shop at stores.

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Chapter 9 Building and Managing Brand Equity 177

The company’s efforts certainly paid off, with customer membership to the REI co-op risingsignificantly in the wake of the campaign.

Questions:

1. Why does #OptOutside improve REI’s performance over the long run?

2. What are the risks associated with developing the brand in this way?

Sources:Ann-Christine Diaz, “REI’s ’#OptOutside’ Campaign Takes Best of Show at the One,” Advertising Age,May 13, 2014, http://adage.com/article/advertising/rei-s-optoutside-campaign-takes-show-show/304012/

Niraj Chokshi, “Looking to #OptOutside? These States Waived Park Fees in Joining REI’s Anti-BlackFriday Campaign,” The Washington Post, November 27, 2016, https://www.washingtonpost.com/news/morning-mix/wp/2015/11/25/rei-is-boycotting-black-friday-and-some-states-are-following-its-lead/

“REI Overview,” https://www.rei.com/about-rei/business.html

Patrick Coffee, “How One Brave Idea Drove REI’s Award-Winning #OptOutside Campaign,” Adweek,June 28, 2016, http://www.adweek.com/news/advertising-branding/how-one-brave-idea-drove-reis-award-winning-optoutside-campaign-172273

BoxBEST GLOBAL PRACTICE

This Girl Can: Building Awareness

While building brand awareness with a campaign is fairly intuitive, driving tangible change amongconsumers is more challenging. Sport England, a government organization with the mission of giving allindividuals access to athletics no matter their age, background, or ability, successfully accomplished thiswith its “This Girl Can” campaign. Initially aimed at educating the public on the significant gender gapin sports, the messaging also began to inspire real action.

In England, two million fewer women play sports than men, despite 75 percent of women sampledstating that they want to be more active. Understanding why this was the case was a crucial first step.Sport England’s research uncovered that fear of judgment from others was the primary reason holdingwomen back from sports. However, the type of judgment varied widely—including that they weren’t fitenough, they were being too selfish with their time (particularly among mothers), or they weren’tskilled enough.

After gathering these insights, the marketing team understood that the heart of the campaignwould need to focus on breaking down the perception regarding what being active means and lookslike. The campaign, anchored by TV commercials, featured women of all sizes, ages, and fitness abilitiesengaging in sports. The ads used humble and entertaining language to relate to women who were newto sports. For example, a popular ad said “I’m slow, but I’m lapping everyone on the couch.”

Sport England’s ability to create a campaign that stood out from traditional sports advertisingensured that the ads would capture attention. The campaign went on to yield extremely successfulresults. Upon its launch, it garnered 37 million people views on Facebook and YouTube, and 500,000members joined the “This Girl Can” online community. Most importantly, Sport England estimatedthat 50,000 more women engaged in sports.

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Questions:

1. Develop an ad campaign for “This Girl Can” that would motivate women who felt that engaging insports was a sign that they were too selfish with their time.

2. What types of partnerships and sponsorships would reinforce this brand and further increase thenumber of women engaged in sports?

Source:Nicola Kemp, “Case Study: How ‘This Girl Can’ got 1.6 Million Women Exercising,” Campaign, May18, 2016, http://www.campaignlive.co.uk/article/case-study-this-girl-can-16-million-women-exercising/1394836

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C H A P T E R T E N

Toward a StrongBrand Relationship

They laughed when I sat down at the piano—but when I started to play. . . .—John Caples, copywriter, 1926

A strong relationship develops not by driving brand involvement, but by supporting people in living their lives.—Susan Fournier, guru of the brand relationship metaphor

Any CEO who cannot clearly articulate the intangible assets of his brand and understand its connectionto customers is in trouble.—Charlotte Beers, J. Walter Thompson

Integral to a business strategy is creating a cadre of loyal customers connected to the brand basedon a strong brand relationship. The larger the cadre and the stronger the relationship the better.It will provide a base business and, often as important, a potential source of brand advocacy, themost effective brand building that exists.

A loyal customer base is the ultimate competitive advantage because it is shielded fromcompetitors. Loyal customers will have little motivation or interest in competitive offerings. As aresult, competitors will find it expensive to try to gain converts among this group. In addition,because maintaining customers is much less expensive than attracting customers, the marketingeffort to support the customer base will be relatively modest.

There are many routes to a brand relationship. Three are explored in this chapter. First, makethe brand experience as positive as possible by employing a touchpoint analyses program (see alsoChapter 7). Second, instead of focusing on selling the brand or the firm, look to the customersweet spot, something the customer is involved and even passionate about, and connect to it,possibly as a supportive partner. Third, look beyond functional benefits to provide a more intenseand differentiating basis of a relationship.

UNDERSTANDING AND PRIORITIZING BRAND TOUCHPOINTSThe brand experience is at the essence of a brand relationship. It should be pleasant, exceedexpectations, and even inspire people to talk about positive interactions. It should not be

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frustrating or disappointing and certainly should not motivate people to discuss negative incidents.The brand relationship can be compared to a personal relationship. If you have a friend orcolleague or mentor relationship with another, you expect the interaction experiences to beconsistent at a minimum and hopefully be exceptional, thereby furthering and strengthening therelationship.

The brand experience is created by brand touchpoints. A brand touchpoint occurs any timea person in the marketplace interacts with the brand. Over time, all of those touchpoints combine todefine the brand experience. It is therefore important to recognize that touchpoints need to bemanaged on an ongoing basis so that they deliver and support a strong brand relationship. This isespecially true for a service business or one that has a service component to it.

A touchpoint perspective quickly makes it clear that the drivers of each touchpointexperience are the employees and firm partners who participate in the design and executethe experience. Thus, they need to understand and believe in the brand and in the valueproposition. This is one reason why the brand vision must be communicated to employees andpartners.

All touchpoints do not have the same impact, the same execution requirements, or the samecost structure. So one task is to prioritize the touchpoints to determine which should receiveresources to improve the experience. There should be a clear understanding as towhich touchpoints should be improved, why they were selected, and how the improvementcan be achieved.1 Prioritizing the touchpoints and developing a plan to improve those thatare considered most in need of change involves the five steps summarized in Chapter 7(page 135).

The effort to improve the customer experience should strive to achieve simplicity andtrustworthiness. Customers want a touchpoint experience to be simple and easy to use, navigate,and understand. They do not want complexity, information overload, and frustration. The power ofsimplicity is shown by its effect on customer decisions. One study found that brands that scored inthe top quarter in delivering simply, relevant information were 86 percent more likely tobe purchased and 115 percent more likely to be recommended to others.2

Touchpoints around brand search are particularly prone to complexity and inconvenience.A buyer usually wants to compare brands, and communicating specifications and benefits ofone brand is not that helpful. Several automobile brands, recognizing that reality, do offer theability to compare their brand with a set of comparison brands of choice. Anything that canreduce the complexity of a decision will be welcome. DeBeers uses the four Cs (cut, color,clarity, and carat) to frame a complex decision. Herbal Essence provides a guide based onidentifying hair type and color treatment needs that simplifies the decision. Also, informationthat is screened for relevance will be valued. ShoeDazzle.com, for example, provides shoesuggestions based on personality information such as customers’ favorite fashion icons and heelpreferences.

Customers also want trustworthy, relevant information about brands and guidance as to howto compare them. Often customer input is seen as the most trustworthy because it is based onactual experience and there is no commercial bias. Walt Disney World Moms Panel, for example,answers questions about Disney vacations. Airbnb offers reviews of hosts and properties to providehelpful information to potential renters. TurboTax provides more than 100,000 unfiltered reviewsof its products and helps customers find the most relevant ones for their needs. Another source isexperts. Saks Fifth Avenue, for example, has the fashion writer Dana Riggs give fashion advice toits customers. Betty Crocker has an “Ask Betty” section on its website. Companies are also linking

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to internet celebrities that have their own followings to help customers learn more about productsand services and the lifestyle surrounding their use.

Improving the brand experience at every touchpoint is one way to build and solidify brandrelationships. Any failure of a touchpoint to deliver an on-brand experience can put customerloyalty at risk and can provide an opening for competitors. Conversely, excelling at the touchpointlevel will make customer loyalty an ongoing source of brand and business strength.

FOCUSING ON THE CUSTOMER’S SWEET SPOTThe instinct of executives developing a marketing program is to advance the offering, brand, andfirm. This is especially true when the goal is to create a digital community around a brand. How canvisibility be enhanced, associations reinforced, and user loyalty increased? This orientation isdriven by financial performance goals and the assumption that customers are rational and want toknow and act on information regarding a product or service.

When customers are highly involved in the brand and offering, an offering-driven program canwork. For example, Dell has a series of programs for which customers are motivated to be engaged.These programs include Direct2Dell blog, where users can communicate directly to Dell;IdeaStorm whereby a user can post ideas for Dell to consider and evaluate the ideas of others;and the Dell Support Forums, where users ask questions and get answers. The problem is thatmost brands and offerings are inconsequential within, tangential to, or detached from customers’lifestyles. As a result, offering-driven brand building and marketing rarely create a strong brand–customer relationship.

There is an alternative. Instead, look for a customer “sweet spot” and find a program that willallow the brand to connect with that sweet spot. A sweet spot, whether it is New York Cityadventures, healthy living, rock climbing, sustainability, a college football team, or whatever else,should be important to customers and what they are motivated to talk about. It should reflect howcustomers spend their “thinking and doing” time, their beliefs and values, their activities andpassions, those possessions that express their personality, and their higher purpose. Ideally, itwould be a part of, if not central to, their self-identity and lifestyle or reflect a higher-order purposein their lives.

The goal should be to create or find an event, activity, interest area, or cause that connects to atrue customer sweet spot. It needs to resonate, break out of the clutter, provide a hub aroundwhich a set of coordinated brand-building programs can be developed, and link to and enhance thebrand. Consider Pampers and Coke, for example.

Pampers went beyond diapers by “owning” the website Pampers Village, which provides a“go to” place for all issues relating to babies and child care and gets more than 600,000 uniquevisitors each month. Its seven sections—pregnancy, new baby, baby development, babytoddler, preschool, me, and family—each has a menu of topics. For example, under babydevelopment, there are 57 articles, 230 forums, and 23 play-and-learn activities. Its onlinecommunity allows moms and soon-to-be moms to connect with each other to share theircommon experiences, issues, and thoughts about how to raise a healthy, happy child. Theprogram demonstrates that Pampers understands mothers and works to establish a relationshipbetween the brand and the mother that will potentially continue throughout a mother’sPampers-buying life.

Coca-Cola partnered with the World Wildlife Foundation, which is engaged in majorinitiatives to conserve water, reduce carbon emissions, and save polar bears. A visible Coke

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component is an effort to spotlight polar bears with research (customers can contribute andreceive a virtual piece of arctic land from which they can monitor bears) and promotions suchas the Polar Pick-me-up where a person can send a Coke to a friend. The Coke Facebookpage with 104 million likes coordinates the effort. The community provides Coke with likability,energy, and customer engagement. It resonates with a segment important to Coke that islikely to be different than the segment that responds to the humorous videos around Coke“happiness.”

What Does the Sweet Spot–Driven Program Buy?

To connect with a customer sweet spot provides avenues to a relationship much richer than that ofan offering-based relationship that, for most brands, is driven by a functional benefit and isrelatively shallow and vulnerable. In particular, it can potentially do the following:

Stimulate a Social Network

A social community associated with a sweet-spot program often has the potential to have a highlevel of social activity, which is increasingly difficult in an era of social media fatigue. Focusing onwhat a person is passionate about, such as baby care with the Pampers Village or motorcycle tripswith Harley-Davidson, will motivate customers to reach out for information or to share experi-ences and ideas. Such efforts can stimulate the major reasons to be socially active, including to beinvolved in the contest (gain or spread information), self-involved (gain attention, show knowl-edge), and other involved (belonging to a community and helping others).

Create Brand Energy and Interest

One of the key challenges for most brands globally is to create energy and visibility. For Avon, forexample, the product line is not an energy source, but the Avon Walk for Breast Cancer createsinvolvement, connects to an area the target audience has passion about, and attaches a higherpurpose the to the Avon brand, which can lead to respect and liking. Millions of women haveparticipated directly or indirectly over two decades and the program has raised more than $600million for cancer research. That is energy. If you make hot dogs, it is hard to manufacture energy.But if you focus on a shared interest with kids, namely their events and parties, and create theOscar Mayer Wienermobile (or more accurately, eight of them) that joins the party and supports ajingle contest, you have real energy.

Enhance Brand Likability and Credibility

Finding a sweet spot and developing a connecting program with substance raises the brand wayabove the noise emanating from firms shouting, “My brand is better than your brand.” The positivefeelings associated with the shared-interest area can lead to positive feelings about the brand;people attribute all sorts of good characteristics to liked brands with whom they share interests.Hobart, a maker of high-end institutional kitchen equipment, became a thought leader andinformation source in regard to such issues as finding, training, and retaining good workers, keepingfood safe, providing enticing dining experiences, eliminating costs, and reducing shrinkage. Thisprogram impacted perceptions of the brand and propelled Hobart into a leadership role that lastedwell over a decade until the company was bought and integrated into a larger firm.

Chapter 10 Toward a Strong Brand Relationship 183

Form a Friend–, Colleague–, or Mentor–Brand Relationship

The existence of a sweet-spot program makes a friend, colleague, or mentor relationshipmetaphor likely to be applicable. California Casualty, an auto and home insurance firm thatspecializes in teachers, has a “School Lounge Makeover” program to provide $7,500 to upgradeteacher lounges for schools that make the most compelling case. Only a friend would take aninterest in such a mundane but important issue area. California Casualty also acts as a colleague,sharing goals and programs by being a sponsor and partner in IMPACT, an organization that isdesigned to attack teenage distracted driving through in-school educational and involvementprograms. Finally, a brand can be like a mentor. Udi, which promotes gluten-free living with itswebsite GlutenFree.com, for example, is in a position to offer advice and encouragement withits gluten-free bakery products as well as support a community concerned with gluten issues.

HOW TO CREATE OR FIND A CUSTOMER SWEET SPOTCreating a successful sweet spot–driven program involves identifying a customer sweet spot,creating or finding a connecting program, and linking the brand to the program. Each step hassubstantial uncertainties and challenges.

Identify a Customer Sweet Spot That Will Engage the Audience

The first challenge is to find a set of potential sweet spots by understanding the customers in depth.How do they spend their quality time? What activities do they enjoy? What possessions areimportant to them and reflect their personality and lifestyle? What do they talk about? What issuesabsorb their attention? In what areas do they hold strong opinions? What are their values andbeliefs? Their higher purpose?

Create a Sweet Spot–Driven Program

With an understanding of the customer in hand, there are three on ramps to the identification ofthe right shared-interest program.

Making the Offering an Integral Part of the Program

The first on ramp is to determine if the brand can be integrated into a “sweet-spot” program and bea full partner that contributes assets and substance. Kaiser Permanente, for example, repositionedits brand away from a focus on health care (linked to bureaucracy and sickness) to a shared interestin healthy lifestyles (associated with control and wellness). The shared-interest program involvesmembers controlling their own health by accessing a wide array of preventive health programsonline and through classes that include areas such as weight control, stress management, insomnia,smoking issues, and healthy eating, all supported by “My Health Manager,” which can be used torecord and monitor program participation. These programs have objectives very different fromselling compassionate staff and clean, effective hospitals.

Linking the Offering to the Program

A second on ramp is to build on a sweet spot that has a natural connection to the brand. There are ahost of bases for a brand connection such as lifestyle (Zipcars and urban living), an application(Harley-Davidson and touring on motorcycles), an activity (adidas Streetball Challenge, a local

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three-person basketball tournament surrounded by a weekend party with music, dance, etc.), atarget customer (Pampers and mom’s involved in baby care), a country (Hyundai makes andsponsors the Kimchi Bus, a 400-day effort to spread Korean cuisine), values (Dove on redefiningbeauty), or an interest (the Sephora BeautyTalk site for those interested in beauty tips andissues). The fit should work; it should not appear incongruous.

Linking the Target Market to the Program

A third on ramp is to find or create a sweet-spot program that has no connection with the productor service. The Avon Walk for Breast Cancer and the Red Bull Soapbox Racer video game havelittle relationship with the respective offerings. Instead the connection is to the target market’sinterests. Relaxing the commonly held dictum that there must be some kind of offering fit orconnection means that the search for a sweet-spot area that customers will be truly involved withwill be unconstrained. Anything is eligible as long as it is relevant to the target market.

It can be a challenge to connect the brand to these types of programs. If the brand is includedin the program as it is for the Red Bull Soapbox Racer, the connection challenge can be overcome.However, in other circumstances, the task requires persistent reminders, which can expensive anddifficult to do well.

Find an Existing External Program to Which the Brand Could Connect

The classic “make or buy” decision should be debated. An internal, owned sweet-spot programmeans that the substance, evolution, and investment can be controlled by the firm. However,establishing a new program can be costly, difficult, and even not feasible, especially if the sweet-spot program candidates have been preempted in the marketplace or if the firm lacks theresources to create a competing program.

An option is to find an established branded sweet-spot program with proven visibility andeffectiveness and link to it. Home Depot wanted a program to leverage its assets and expertise to helpdisadvantaged people build or rebuild homes. The solution was to connect to Habitat for Humanity,a branded program with an established record of success in building homes to those who need help.Home Depot connected by providing visible and tangible support with building supplies, volunteersfrom its knowledgeable staff, and signage in stores and on its website. For many customers of HomeDepot, the link was well known. As an aside, it does not matter if Habitat for Humanity is linked toHome Depot, only the reverse, because the goal is to influence the Home Depot brand.

The Sweet Spot—A Big Idea

The sweet-spot program should have an immediate impact by stimulating customer involvementand purchases, thus affecting the short-term financials. Its more important impact, however, islikely to be enhancing the brand, building long-term customer relationships, and increasing loyalty,all firm assets that will pay off even though they are sometimes not so easy to quantify or justify.

GET BEYOND FUNCTIONAL BENEFITSWhen identifying the top print advertisements and best headline in the past century of advertising,the one written in 1926 by a young copywriter named John Caples is always in the conversation.The ad is known by its heading: “They laughed when I sat down at the piano—but when I started to

Chapter 10 Toward a Strong Brand Relationship 185

play . . .” His assignment was to entice people to buy piano lessons by correspondence from theU.S. School of Music.

Under a picture of a young man at a party sitting down to play the piano, the headline setthe stage and indeed summarized the story, which was recounted in detail in the body of the ad.The hero was ridiculed by the guests when he sat down, but the ridicule turned to accoladesand applause when he began to play, only a few months after starting the correspondencecourse. The ad was not only critically acclaimed but, more to the point, brought in a lot ofcustomers.

There is a lot to learn today from this ad. There was almost nothing about the offering or thelearning process that surrounded it. Rather, the ad told a story in graphic detail about whathappened to someone who took the correspondence course. Most remarkable, the ad shows thatfunctional benefits are not the sweet spot of persuasion and communication. Rather, what grabspeople are emotional, self-expressive, and social benefits. There is the emotion felt not only by thepiano player who excelled in a pressure context, but also by those hearing the story who arebursting with pride that he did it. There is the self-expressive benefit, the ability of the person toexpress his talent, his perseverance, and his ability to face down doubters. And there is the socialbenefit when the man became not only accepted into a desirable reference group, but also anadmired member.

All too common is the “product-attribute fixation trap” in which the strategic and tacticalmanagement of the brand is excessively focused on product attributes and functional benefits.Product characteristics such as scope (Crest makes dental hygiene products), attributes (Volvo issafe), quality and value (Kraft delivers a quality product), and uses (Subaru is made for the snow)are assumed to dominate in the brand relationship. There is thus a failure to recognize that a brandincludes these product characteristics but potentially much more. The results are less than optimalstrategies and ineffective marketing programs.

The product-attribute fixation trap is based in part on the erroneous assumption that theseattributes are the only relevant bases for customer decisions and competitive dynamics. This“rationale person” view of customers is comfortable but usually wrong. It gets reinforced whenmarket research aimed at finding important drivers of brand preference has a significant biastoward attributes in part because they are easier to use by researchers and respondents alike.Attributes, however, often scale much higher in importance than they merit. Research on trucks,for example, suggests that rational attributes such as durability, safety features, options, and powerare the most important. Yet more intangible attributes such as “cool styling,” being “fun to drive,”and “feeling powerful” are more likely to influence decisions of consumers who often cannot or willnot admit that such frills are really important to them.

Even worse, strategies based on functional benefits are often strategically ineffective or limiting.First, customers may not believe that a brand has a functional advantage because of the conflictingclaims of competitors and puffery or may not believe the benefit represents a compelling reason tobuy the brand. In the hotel business, cleanliness is important, but most hotels are perceived to beclean. Second, if the functional benefit represents a point of differentiation, competitors may quicklycopy it. A gas-millage advantage for a car brand may be a short-term differentiator becausecompetitors will find ways to beat or bypass any performance specification. Third, the benefit maynot represent a basis of a strong, long-term relationship because there is no emotional attachment.Finally, a strong functional association confines the brand, especially when it comes to responding tochanging markets or in exploring brand extensions.

Thus, it makes sense to move beyond functional benefits and consider emotional, self-expressive, and social benefits as a basis for the value proposition.

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BROADENING THE CONCEPT OF A BRANDA brand, in addition to product attributes, can be defined by its user imagery (the Ralph Laurenman), symbols (the Apple logo), country of origin (Audi is German made), organizationalassociations (such as innovation, a drive for quality, and concern for the environment), and brandpersonality (such as being perceived to be upscale, competent, trustworthy, formal, orintellectual).

A brand is also defined by some combination of emotional, self-expressive, and social benefits,three intertwined concepts that, along with functional benefits, are components of the valueproposition. They provide a richer view of a brand and its relationship with customers.

Emotional Benefits

An emotional benefit relates to the ability of the brand to make the buyer or user of a brandfeel something during the purchase process or use experience. “When I buy or use this brand,I feel . . .” Thus, a customer can feel safe in a Volvo, excited in a BMW, happy with Coke around,warm when receiving a Hallmark card, strong and rugged when wearing Levi’s, relaxed whenhaving Numi tea, or in control when using TurboTax. Evian is simply water, but through theslogan “Another day, another chance to feel healthy” and supporting advertising, Evian associatesitself not only with working out (a common use occasion for the brand), but also with the satisfiedfeeling that comes from a workout.

Emotional benefits add richness and depth to the brand and the experience of owning andusing the brand. Without the memories that Sun-Maid raisins evoke, the brand would border oncommodity status. The familiar red package links many users to the happy days of helping mom inthe kitchen (or the idealized childhood for some who wished that they had such experiences). Theresult can be a different usage experience reinforced with feelings, and a stronger brand.

Box P&G’s “THANK MOMS”: A MODEL CAMPAIGN IN A GLOBAL WORLD

P&G’s “Thank You Mom” Olympic marketing program was a brilliant effort to draw on a universalhuman value to create a program with energy, relevance, and emotional benefits that spanned brandsand countries. Plus, it is ongoing with a life beyond one Olympics. Applied to the Vancouver Games of2010 and the Special Olympics of 2011, it made it major push in the 2012 London and 2016 Rio Games.It is all about celebrating what moms do and to thank them for their efforts, their care, and theirachievements.

In London, the campaign came to life with the “Best Job,” a short film that touches the heart andcelebrates the role that moms play in raising Olympians and great kids. There were also videos of themoms of some of the 150 athletes sponsored by P&G brands. A mom would be shown watching her childexcel by an exceptional performance or by winning an event. The campaign was promoted through a hostof media channels. A companion in-store worldwide retailer program for five months before the Londongames involved four million retailers. It was tied to an effort to raise more than $25 million to supportyouth sports programs that would aid both the Olympics and moms everywhere. The promotionsinvolved some 34 P&G brands, including Tide/Ariel, Pantene, Pampers, and Gillette. There was a“Thank You Mom” app that allowed people to thank their own moms with personalized content in theform of a video.

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In a study of brand love, researchers from the University of Michigan—Rajeev Batra, AaronAhuvia, and Richard Bagozzi—used some 90 in-depth interviews about object and brand love andfollowed them up with a quantitative study.3 One finding was that respondents had no troubleidentifying brands with which they had a love relationship. Another was that some of the keycharacteristics of that love relationship were emotional benefits such as feelings of happiness,excitement, calm, “like an old friend,” having the right “fit,” and having a strong desire to avoidbeing separated.

Self-Expressive Benefits

Russell Belk, a prominent consumer behavior researcher, wrote, “That we are what we have isperhaps the most basic and powerful fact of consumer behavior.”4 Belk meant that brands andproducts can become symbols of a person’s self-concept.

Brands and products, as symbols of a person’s self-concept, can provide a self-expressivebenefit by providing a vehicle by which a person can express his or her self. “When I buy or use thisbrand, I am ___.” A brand does not have to be Harley-Davidson to deliver self-expressive benefits.A person can be cool by buying clothes at Zara, successful by driving a Lexus, creative by usingApple, a nurturing parent by preparing Quaker Oats hot cereal, frugal and unpretentious byshopping at Aldi, adventurous and active by owning REI camping equipment, or competent byusing Microsoft Office.

Why is some contemporary art sold at astronomical prices? Why would a stuffed dead shark beworth $40 million and hang in the New York Metropolitan Museum of Art? Why would arectangular set of color spots created by an artist’s staff sell for $600,000? It is not objective qualityfor sure. Experts could not agree as to whether a painting resembling a Jackson Pollock drippainting found at a flea market was authentic. Depending on their verdict, the painting would beworth a few thousand or $40 million. The same painting! How does an artist create a brand thatcan capture such a price premium? The answer is not simple, but without question, self-expressivebenefits play a predominant role.

In the brand love study, another dimension identified was self-expressive benefits. Threebenefits were identified—current self-identity where the brand says something about who youare, a desired self-identity where the brand helps you reach for your aspirational self, and asense that a loved brand makes life meaningful.5

When a brand provides a self-expressive benefit, the connection between the brand and thecustomer is likely to be heightened. For example, consider the difference between using Oil ofOlay, which has been shown to heighten one’s self-concept of being gentle, sophisticated, mature,

The marketing program was a winner for several reasons beside the fact that it scaled over dozensof brand silos and many countries and was estimated to have generated $500 million in sales. Itprovided the prestige and energy of being involved in the Olympics plus the “feel-good” aspect ofsupporting youth sports. Further, the connection with real moms provided a hearty dollop ofauthenticity and emotion. It is easy to empathize with moms who have fed babies, provided lunches,supported at swim meets, dealt with skinned knees, been there for recitals, and shared in the joy ofwinning gold at the Olympics. Everyone can relate to the best of a mom’s role.

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down to earth, and Jergens or Vaseline Intensive Care Lotion, neither of which provides acomparable self-expression benefit.

Of course, each person has multiple roles; for example, a woman may be a wife, mother,writer, tennis player, music buff, and hiker. For each role, the person will have an associated self-concept and a need to express that self-concept. The purchase and use of brands is one way to fulfillthese multiple needs for self-expression (Figure 10.1).

Social Benefits

The drive to have friends, colleagues, family, and groups with common interests is intense andsatisfies the needs of belonging and self-identity. Many brands have the capability of participatingor even driving social benefits. Social relationships not only are linked to fundamental humanneeds, but provide a setting to influence as well. Word-of-mouth communication from friends orassociates is often the most influential communication because it is perceived to be unbiased andbased on knowledge or experience.

There are several types of social benefits. Some can involve actual or potential interactionswith friends or others who share an interest, a lifestyle, and values. Bikers can post pictures of theirlast ride on the Harley website. BeautyTalk by Sephora, for example, provides a community forthose interested in or even obsessed with skin care and cosmetics. They can directly talk aboutissues of concern with experts and peers who are every bit as involved as they are. Kraft Kitchenshas a community around cooking dishes and meals that are tasty, healthy, and easy to prepare. Thecommunity shares information but, more important, feelings about a common interest.6

Some brands can provide social benefits by defining or linking to a reference group, a group inwhich an individual identifies and whose values he or she has adopted. “When I buy or use thisbrand, the type of people I relate to are _________.” Prius may reflect a reference group for some.Or a Starbucks loyalist may feel that he or she is part of a closed club of aficionados. This referencegroup social benefit, which can occur without any actual interaction, is often very powerful. Thebrand experience becomes the device to link the person with the group, thereby providing abelonging experience. Although there is often no actual word-of-mouth communication with thereference group, it is still influential because of its implied brand endorsement.

Another type of social benefit can come from an aspirational group. A person who plays golfwith Titlist Pro V1 golf balls is among a group that contains some really good golfers. The brandmakes the link. These golfers are not assessable, but the brand provides a link that makes them apotential part of a person’s identity and lifestyle. The group can also influence by being a type ofperson to emulate.

A social benefit is powerful because it provides a sense of identity and belonging as well as aninfluence platform. Most people need to have a social niche whether it is a family, a work team, arecreation group, or whatever. If a brand can provide that, it can be a basis for a strong relationship.

Benefits Offered From Customer’s Perspective

Emotional Benefits When I buy or use this brand, I feel ______________.Self-expressive Benefits When I buy or use this brand, I am ______________.Social Benefits When I buy or use this brand, I relate to people like _________________.

Figure 10.1 Emotional, Self-Expressive, and Social Benefits

Chapter 10 Toward a Strong Brand Relationship 189

Combining Benefits

These three benefits are often related, and a brand or its associated programs can activate two or allthree benefits. BeautyTalk, for example, could provide a satisfying feeling from finding the rightcosmetic and looking good, a self-expressive benefit of being knowledgeable, if not an expert, inan area of importance to you in addition to social benefits. That was the case in the ad “Theylaughed . . .” discussed earlier.

When multiple benefits are present, it can be useful to prioritize them because it can matterwhich benefit dominates. It can impact the way that the benefits are enhanced and brought to light.For example, whereas emotional benefits tend to involve the act of using the product (wearing acooking apron confirms oneself as a gourmet cook), self-expressive benefits would tend to focus onthe consequence of using the product (feeling proud and satisfied because of the appearance of awell-appointed meal) and social benefits involving others affected by the use experience (thefeelings of others participating in cooking or attending the meal). These differences suggest that itwill be helpful to know which benefit is being used.

The Brand Ideal

One way to introduced higher-order benefits into your brand, according to Jim Stengel, theinfluential former CMO of P&G, is to develop a brand ideal, a shared goal of improving people’slives.7 For P&G, it is to “touch lives and improve the lives of the world’s consumers.” P&G’sOlympic sponsorship, the “proud sponsor of Moms,” touched lives and resulted in a sales bump aswell. P&G’s Tide has its “Loads of Hope” program in which Tide people improve lives of disastervictims by literally doing their laundry. So instead of being a peanut butter brand, become a partnerwith Mom in a children’s development.

Brand ideals come in five types:

Eliciting joy. Downey fabric softener (Lenor outside the U.S.) satisfies people’s need tostimulate and renew the senses of touch, smell, and sight.

Enabling connection. Think of the Zappos 24/7 call center that connects withcustomers on a personal level.

Inspiring exploration. REI provides clothes and equipment for real exploration.Evoking pride. Jack Daniels has a deep heritage that makes users proud.Impacting society. Method delivers green products with passion and authenticity.

According to Stengel, leaders of brands, companies, or countries should be able to concep-tualize a vision that both inspires and provides practical direction for strategy. Operationsproficiency is not enough. Vision is important.

Personal Relationship Models

Another “beyond functional benefit” route is to consider the human relationship metaphor. It hasbeen shown that relationships observed in humans, such as arranged marriages, casual friends,marriages of convenience, committed partnership, best friends, compartmentalized friendships,

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kinships, rebound relationships, childhood friendships, courtships, flings, secret affairs, andenslavements, appear in brand settings as well. Customers can identify brands that fit thesetypes of relationships and more.

Exploring whether a brand relationship can be modeled after a human analogue can provideinsights. For example, if Microsoft is perceived to be a slave–master relationship, looking at thecauses and ways to soften the relationship can be helpful. Or learning that some consumers believethat American Express looks down on them can lead to potential changes in substance and tone. Orknowing that a brand like Schwab is regarded as a mentor or a colleague suggests role models and away of looking at relationship goals that can have a clarity that would not be possible if the brandvision did not include a relationship component.

KEY LEARNINGS

Loyal customer groups based on strong brand relationship can be a significantcompetitive advantage in part because they are relatively easy to retain and expensivefor competitors to attack.The customer experience is a key part of the relationship, and one way to enhance it isto prioritize brand touchpoints for improvement.

Focus on the customer sweet spot—activities, beliefs, and values—and a higherpurpose. Find a way to connect to that sweet spot, hopefully as a partner. Gettinginvolved in a sweet spot is usually more effective that trying to sell a brand orfirm.

Get beyond the functional benefits to deliver emotional, self, or social benefits. Thegoal is to provide a deeper and more stable basis of a relationship.

FOR DISCUSSION1. Consider the bank you have a relationship with. List all the brand touchpoints.

Evaluate which are the most important to you and why.

2. What are your sweet spots? Pick an activity or interest. What brand-connectedprograms touch that activity of interest? If you were Ford, how would you design aprogram that would be relevant to your sweet spot?

3. Do you agree that marketing executions are subject to the attribute fixation trap? Forwhat brands might that not be true? Why?

4. What brands deliver emotional benefits for you? Self-expressive benefits?Social benefits? What is it about the brand that reinforces that ability to deliverbenefits?

5. Think of some brands that have a relationship that you could describe as a fling, secretaffair, or mentor relationships. Why?

6. What brands, if any, do you have a love relationship with? Why?

Chapter 10 Toward a Strong Brand Relationship 191

BoxBEST DIGITAL PRACTICE

How Sephora Creates Beauty Across Brand Touchpoints

Sephora, a premium cosmetics retailer, has earned tremendous loyalty by extending their brand acrosswhat its customers value—all things beauty. The company understands that its customers want to enjoyand experience their passion for beauty in different ways, and it uses several brand touchpoints toenable this.

The first is by providing a sensory filled in-store experience. As they shop, Sephora customers havethe unique opportunity to physically interact and experiment with different lines of products. Suchaccessibility has resonated especially well among Millennials, who view beauty buying as a “hunt” for theirright individual look. The company has introduced numerous customer-facing tools to further facilitatefinding a personalized style. For example, InstaScent spritzes raw notes of a perfume to help customersdetermine which defining scent they identify with the most before exploring specific fragrances with astore consultant. Sephora offers the Color IQ handheld device to aid customers in understanding whatproducts match their skin tones.

Sephora’s commitment to the experiential element of shopping for beauty products extends toits web presence. Sephora Virtual Artist allows customers to try on dozens of lipstick color variationsin seconds, with add-on features like the ability to compare different shades simultaneously orrandomize options to test out. For customers either seeking something specific or hoping to beinspired, the Sephora Beauty Board is a great resource. Along with the option to simply browse throughthe site, users can post pictures of products to gain feedback from others. Sephora TV provides yetanother platform where customers can see “how-to” instructional videos on how to achieve a certainlook.

Lastly, Sephora views its online community valuable for connecting customers who share thesame passion for beauty. The BeautyTalk forum provides an opportunity to converse with experts aboutmakeup, skin care, fragrances, and more.

With 360 stores in North America and nearly 1,800 worldwide, Sephora’s footprint continues togrow. By offering programs that connect its brand to what customers’ value, Sephora has successfullystrengthened customer–brand relationships and improved brand loyalty.

Questions:

1. Analyze how Sephora connects its brand to emotional, self-expressive, and social benefits for thecustomer.

2. How can Sephora’s brand touchpoints be improved to reach non-Millennials?

Sources:David Aaker, “Six Reasons to Admire the Sephora Brand,” Prophet, https://www.prophet.com/blog/aakeronbrands/261-six-reasons-to-admire-the-sephora-brand

Sarah Halzack, “The Sephora Effect: How the Cosmetics Retailer Transformed the Beauty Industry,”The Washington Post, March 9, 2015, https://www.washingtonpost.com/news/business/wp/2015/03/09/the-sephora-effect-how-the-cosmetics-retailer-transformed-the-beauty-industry/

“Sephora Concept Store Taps Next-Generation Experience,” Beauty Business Magazine, November24, 2015, http://beautystorebusiness.com/sephora-concept-store-taps-next-generation-experience

Cameron Wolf, “Sephora’s New Lipstick Try-on App Works Creepily Well,” Racked, February 3, 2016,http://www.racked.com/2016/2/3/10905650/sephora-app-virtual-artist

Victoria Dawson Hoff, “Crowdsource Your Beauty Look with Sephora’s New Social ShoppingPlatform,” Elle, March 13, 2014, http://www.elle.com/beauty/news/a19096/sephora-beauty-board/

192 Part Two Creating, Adapting, and Implementing Strategy

Box BEST GLOBAL PRACTICE

Lifebuoy

Compelling storytelling is a powerful way for brands to get core product messages across in TV or videospots, especially if it taps into viewer emotions. Lifebuoy, the world’s leading health soap, effectivelyused storytelling to help one billion people in developing countries adopt better hand-washing habits.Every year, approximately 800,000 children under the age of 5 are killed by illnesses that could havebeen prevented by proper hand sanitation. Unilever, who owns Lifebuoy, saw an opportunity topromote healthier habits through a multi-channel campaign called “Help a Child Reach 5.”

Along with a dedicated website, Lifebuoy created a short film and series of videos aimed at tellingimpactful stories. The videos take place in rural Indian villages, where Lifebuoy piloted its program,and showcases community rituals that celebrate the milestone of a child turning five. In one, a fatherwalks on his hands to a temple to give thanks; in another, a woman honors a tree the evening before herchild’s fifth birthday that was planted the day he was born. The videos close by emphasizing thetremendous effect that the simple act of washing one’s hands can have on preventing avoidable illnessand death among children.

The video series has been seen by nearly 30 million people, and Unilever estimates that itscampaign reduced the incidence rate of illnesses from a lack of handwashing from 36 percent to5 percent. Lifebuoy used five specific storytelling tactics to create such a persuasive effect:

Questions:

1. Lifebuoy used several storytelling tactics to communicate its brand message, including real,interesting and authentic characters and the use of statistics of global infant deaths were shocking.What other factors do you think contributed to the success of this approach?

2. What steps should Unilever take to ensure Lifebuoy is the only soap brand connected to health?

Source:David Aaker, “Creating Compelling Brand Stories: Lifebuoy,” Prophet, https://www.prophet.com/blog/aakeronbrands/248-creating-compelling-brand-stories-lifebuoy

Chapter 10 Toward a Strong Brand Relationship 193

C H A P T E R E L E V E N

Energizing the Business

Only the paranoid survive.—Andrew Grove, Former CEO, Intel

One never notices what has been done, one can only see what remains to be done.—Marie Curie

Where there is no wind, row.—Portuguese proverb

Businesses need growth and not only for financial reasons. Certainly, shareholders, employees,and partners look for increased sales and profits. However, growth also introduces vitality to anorganization by providing challenges and rewards. An organization that cannot improve and growmay not even be viable.

There are four ways to grow a business, as suggested by Figure 11.1. The first, covered inChapter 12, is about leveraging the current business. That can mean taking the existing productsinto new markets, finding new products or services for the existing customer base, or leveragingassets such as brand equity or competencies such as managing digital marketing. The second,introduced in Chapter 13, involves creating a new business based on finding a white space inthe market or by transformational innovation, a business for which a substantial competitiveadvantage will exist and persist. The third, presented in Chapter 14, entails going global,leveraging the business into new countries to create a broader market or creating new orimproved assets and competencies that will lead to sustainable advantage in a globalmarketplace.

The fourth route to growth, the subject of this chapter, is to energize the existing business,an attractive growth avenue because an established firm has market and operating experience,assets, competencies, and a customer base on which to build. An existing business can beenergized by:

Innovating to improve the offering

Energizing the brand and marketing

Increasing existing customer’s usage

194

INNOVATING THE OFFERINGThe ultimate business energizer is to improve the offering through innovation. An innovation, orbetter, a series of innovations, provides a sense that a firm is dynamic, creative, and alwaysimproving its offering. Innovation means new, interesting, and energetic.

A service company can improve the customer experience. The Memphis Redbirds minorleague baseball team changed the spectator experience with cheerleaders, a mascot named Rocky,five party settings, and two kids’ playgrounds—P.D. Parrot for under eight-year-olds and theBoardwalk with the Rocky Hopper ride for older kids. Add to that the Sonic Drive-In Kids Club,members of which get to run the bases, and more. The result is an experience that is involving andso unique that it engenders both loyalty and buzz.

Whole Foods Market is continuously innovating, always on-brand. It took an industryleadership role with its seafood sustainability program. The chain stopped selling wild-caughtfish species labeled “red,” or threatened by overfishing, and introduced accepted labeling forsustainable seafood that is caught or farmed in ways that consider the long-term vitality ofharvested species and the well-being of the oceans. The program not only had real substance, butalso engaged Whole Foods’ customers in conversations around the sustainable seafood concept.

How can a firm innovate around the customer experience? One approach is to improve theimportant brand touchpoints as discussed in Chapter 7. Another is to exceed expectations withrespect to the value proposition. What is expected, and what would surprise, delight, and even spura “Wow!” reaction?

A product firm can enhance the product by adding a new dimension such as a feature oringredient. P&G has introduced a steady stream of innovative diaper products from a CaterpillarFlex diaper and Feel ’n Learn training pants to Pampers Swaddlers, a diaper for newborns. Suchactivity provides vitality and credibility to the business. Product innovation, of course, does not justhappen. It involves understanding unmet needs, organizational support, and the ability to evaluateproposed improvements in terms of customer relevance.

Line extensions can be a source of energy. New flavors, packaging, sizes, or services can addenergy, interest, and the creation of new segments. Look for segments that are making do with thecurrent offering and would prefer another option or more variety. Consider trends that are leavingyour offering behind. Line extensions need to balance their value with the risk that the added costmight become a burden and that customers might rebel over the added confusion and complexity.Colgate made significant gains when it introduced Total, which simplified a purchase decision forconsumers faced with a bewildering array of choices for toothpaste.

Creating a NewBusiness

Energizing theBusiness

Leveraging theBusiness

GROWTHSTRATEGIES

Going Global

Figure 11.1 Growth Strategies

Chapter 11 Energizing the Business 195

How can the organization create the sense and substance of continuous innovation rather thansporadic episodes of improvement in the product or service that are quickly copied and blend intothe cluttered marketplace resulting in a transient advantage? A basic answer is to create anorganizational culture that builds innovation into the business strategy and views it as a basis forwinning over time. That is certainly true for the most innovative companies such as Google,Toyota, Microsoft, Nintendo, IBM, Walmart, Amazon, and P&G. These firms also have becomeskilled in reaching outside their organization to other firms to enhance their ability to innovate.P&G has a goal to source half of its innovation outside the company, a goal that potentially willdouble its R&D capability. In addition, the firms are good at branding their innovations.

Branding the Innovation

Innovations, no matter how exciting, novel, and relevant, will not energize the business unless theyare communicated to the marketplace. Being innovative does not guarantee that a firm is perceivedas such. Somehow the innovations need to be attached to the brand and to have an extendedimpact. An innovation that influences for a few months is of limited value and usually represents alost opportunity to create a long-term asset.

Branding the innovation can make a difference. It can enhance the impact of an innovationand extend its life in the minds of customers. When the innovation is not branded, the impact isusually short-lived if it occurs at all. Putting “new” or “improved” on a box of Tide detergent isunlikely to create a lasting point of differentiation.

Amazon developed a powerful feature, the ability to recommend books and other items basedon customers’ interests as reflected by their purchase history and the purchase history of those whobought similar offerings. But they never branded it. How tragic is that? As a result, the featurebecame basically a commodity that is an expected feature of many e-commerce sites. If Amazonhad branded it and then actively managed that brand, improving the feature over time, it wouldhave become a lasting point of differentiation that today would be invaluable. They missed a goldenopportunity. They did not make that same mistake with One-Click, a branded service that plays akey role in defining Amazon in what has become a messy marketplace.

The problem with sliding innovations into the existing offering is twofold. First, the market ismade up of those who are not motivated or perhaps not able to sort out claims and the rationalebehind those claims. These people develop a coping strategy that ignores what are seen to beconfused and contradictory competitive claims. As a result, the claims of “new and improved”simply fade into the muddled environment. Second, any dramatic visible improvement is likely tobe quickly copied or appear to be copied by competitors, so that any belief that a unique point ofdifferentiation has been achieved will recede as the perception that competitors have matched theadvance carry the day.

Branding changes all that. A new offering can have its own brand (Netflix), endorsed brand(Apple’s iPod), or subbrand (Glad Press’n Seal). Further, an innovation that represents a feature(Cadillac’s On-Star), ingredient (Dove’s Weightless Moisturizer), or service (Best Buy’s GeekSquad) could also be branded directly. A brand provides several powerful functions, most of whichgo back to the basic value of a brand in any context. A brand as summarized in Figure 11.2 allowsownership of the innovation, adds credibility and legitimacy, enhances visibility, and helpscommunicate sometimes detailed facts.1

First and foremost, a brand provides the potential to own an innovation because a brand is aunique indicator of the source of the offering. With the proper investment and active management

196 Part Two Creating, Adapting, and Implementing Strategy

of both the innovation and its brand, this ownership potential can be extended into the futureindefinitely. A competitor may be able to replicate the offering or its new feature, ingredient, orservice, but if it is branded, they will need to overcome the power of the brand. Another firm cancopy the objective features of Apple’s iPhone or Westin’s Heavenly Bed, but there will only be oneauthentic product, and that is the one carrying the brand name; others are perceived as only copies.In fact, it is sometimes possible to have such a strong brand that it gets credit for innovations byothers. Dolby may be an example. An advance in audio technology may be attributed to Dolby nomatter where it originates.

Second, a brand can add credibility and legitimacy to a claim. An unbranded claim—such asa “better fabric” or a “more reliable engine”—is likely to be interpreted as another example ofpuffery. The brand specifically says that the benefit was worth branding, that it is not onlymeaningful but also impactful. The observer will instinctively believe that there must be areason why it was branded. Subaru has long emphasized four-wheel drive, and many car brandsnow offer this feature. Audi, however, has a branded version, Quattro, which gives it credibilityand relevance that the others lack. In essence, there are four-wheel drives, and then there isQuattro.

The ability of a brand to add credibility was rather dramatically shown in a remarkable studyof branded attributes. Carpenter, Glazer, and Nakamoto, three prominent academic research-ers, found that the inclusion of a branded attribute (such as “Alpine Class” fill for a down jacket,“Authentic Milanese” for pasta, and “Studio Designed” for compact disc players) dramaticallyaffected customer preference toward premium-priced brands.2 Respondents were able tojustify the higher price because of the branded attributes. Remarkably, the effect occurredeven when the respondents were given information implying that the attribute was not relevantto their choice.

Third, a brand name can help make the innovation visible because it provides a label for the“news.” As a result, it is likely that it will be easier to achieve higher recall and recognition scoresaround the new offering or a branded feature, ingredient, or service. It is just much easier toremember a brand name such as the Memphis Redbird’s baseball team, its Boardwalk zone for

Branding theInnovation

Own theInnovation

Better WithstandCompetition

Add Credibility/Legitimacy

Brand SignalsWorth

VisibilityEnhancedAids Recall

and Recognition

AidsCommunication

Brand Can Represent

Complex Narrative

Figure 11.2 Why Brand Innovation?

Chapter 11 Energizing the Business 197

fans, or its Rocky Hopper ride for kids, than the details of a new feature or service. In fact, one ofthe characteristics of a good brand name is that it is easy to recall. Further, the job of linking thepoint of differentiation to the parent brand is also made much easier. The iPod is more memorablethan Apple’s MP3 player.

Fourth, a brand makes communication more efficient and feasible. A new product or productfeature, even one regarded as a breakthrough by its designers, may engender a monumental lack ofinterest among the target audience. Even when the communication registers, it can be perceivedas too complex to warrant processing and linking to an offering. The act of giving the product orfeature a name can help by providing a vehicle to summarize a lot of information without learningthe details. A name such as Oral B’s Action Cup provides a way to crystallize detailed character-istics, making it easier to both understand and remember. Imagine if Chevron attempted toexplain why “Chevron gasoline” was different without the use of the Techron brand. It would notbe persuasive or even feasible.

There is the danger of overbranding, to put brands on innovations that do not warrantbrand investments. So there is a yin and yang of branding innovation based on the Shakespeare-inspired conundrum—to brand or not to brand. The solution is to demand that any innovationthat is branded have three characteristics. First, it should be a significant advance, not amarginal improvement. Second, it should be meaningful enough to customers to affectpurchase and loyalty. Third, it should merit a long-term commitment to building and managingthe brand.

The concept of a branded differentiator provides another more formal look at brandedinnovation.

Branded Differentiators

A branded differentiator is an actively managed, branded feature, ingredient or technology,service, or program that creates a meaningful, impactful point of differentiation for a brandedoffering over an extended time period.

For example, the Westin hotel chain created the “Heavenly Bed” in 1999, a custom-designedmattress set (by Simmons) with 900 coils, a cozy down blanket adapted for climate, a comforter witha crisp duvet, high-quality sheets, and five goosedown pillows. The Heavenly Bed became a brandeddifferentiator in a crowded category in which differentiation is a challenge.

A branded differentiator does not occur simply by slapping a name on a feature. The definitionsuggests rather demanding criteria that need to be satisfied. In particular, a branded differentiatorneeds to be meaningful (i.e., it matters to customers) and impactful (i.e., not a trivial difference).The Heavenly Bed was meaningful in that it was truly a better bed and addressed the heart of ahotel’s promise—to provide a good night’s sleep. It was also impactful. During the first year of itslife, those hotel sites that featured the Heavenly Bed had a 5 percent increase in customersatisfaction; a noticeable increase in perceptions of cleanliness, room decor, and maintenance; andincreased occupancy.

A branded differentiator also needs to warrant active management over time and justifybrand-building efforts. It should be a moving target. The Heavenly Bed has received thattreatment with an active and growing set of brand-building programs. The reception to thebed was so strong that Westin started selling thousands per year. Imagine, selling a hotelbed. Think of the buzz. Further, in 2005 the bed became available in Nordstrom’s At Homedepartment. The concept has been extended to the Heavenly Bath, with dual shower heads

198 Part Two Creating, Adapting, and Implementing Strategy

plus soap and towels. The Heavenly Online Catalog is a place to connect and order all thebranded products.

The Heavenly Bed was developed and owned by Westin. It is not always feasible to developsuch products and brands, in part because the time and resources may not be available and inpart because it is simply difficult. An alternative is to explore alliances in order to create brandeddifferentiators with instant credibility. The Ford Explorer Eddie Bauer Edition, for example, wasan offering that sold more than one million vehicles over two decades. It was successful from theoutset because the Eddie Bauer brand was established with associations of style, comfort, and theoutdoors. Ford never could have achieved that success with its own brand (the Ford ExplorerLeatherRide, for example). It would be difficult to imbue such a brand with the self-expressivebenefits offered by the Eddie Bauer brand even if the necessary brand-building resources and timehad been available.

A branded differentiator, as suggested by Figure 11.3 and the definition, will be a feature,ingredient or technology, service, or program affecting the offering. A branded feature such asGeneral Motor’s OnStar often provides a graphic way to signal superior performance. The OnStarsystem provides automatic notification of air bag deployment to roadside assistance agencies,stolen vehicle location, emergency services, remote door unlocking, remote diagnostics, andconcierge services.

A branded ingredient (or component or technology) such as Uniqlo’s Heattech, the fabric thatabsorbs body moisture and turns it into heat so that clothing can keep people warm withoutlayering, has been a key differentiator for the fast-growing retailer. A branded service such as theTide Stain Detective, which provides stain removal information on the Tide website, providesproduct reinforcement and credibility to Tide. A branded program such as the Harley-DavidsonRide Planner can provide a way to deepen customer relationships.

Master Brand/Subbrand

BrandedDifferentiator

BrandedFeature

BrandedIngredient or

Technology

BrandedService

Branded

Program

• Ownability

• Communicate Benefits

• Credibility

• Visibility

Figure 11.3 Branded Differentiators

Box CREATIVE THINKING METHODS

Not all growth strategies are obvious. In fact, the obvious ones may well be marginal in terms of likelysuccess and impact, so it is useful to look for breakthrough ideas. Methods and concepts of creativethinking can help in this process. Among the guidelines suggested most often are:

Pursue creative thinking in groups, as multiple perspectives and backgrounds can stimulateunexpected results.

(continued)

Chapter 11 Energizing the Business 199

ENERGIZING THE BRAND AND MARKETINGRelevance and differentiation have long been considered the basis of success for a brand. Butrecent studies involving the mammoth Y&R’s Brand Asset Valuator (BAV) database—70 brandmetrics for each of 40,000 brands spread over 44 countries—find that another component isneeded—energy.3 An analysis of the total database from 1993 to 2007 showed that brandequities as measured by trustworthiness, esteem, perceived quality, and awareness have beenfalling sharply over the years. For example, trustworthiness dropped nearly 50 percent, esteem fellby 12 percent, brand quality perceptions fell by 24 percent, and, remarkably, even awarenessfell by 24 percent. Only those brands with energy remained healthy and retained their ability todrive financial return.

Inadequate energy can also lead to relevance problems in two ways. First, as energy declines,so does visibility. The brand is no longer among those that come to mind when considering apurchase. It is lost in the noise of the environment and is therefore no longer considered, whichmeans, by definition, it is not relevant.

Second, many brands that lack energy struggle with impressions that they are old fashioned,out of touch, and boring, an impression that can affect their relevance for some segments. That riskis especially high for the traditional brands of the world such as AT&T, John Deere, Dow, BrooksBrothers, Toshiba, and Wells Fargo Bank, which are usually portrayed as being reliable, honest,dependable, and accessible. Remember Oldsmobile, which had an ill-fated effort to become “Notyour father’s Oldsmobile.” The remedy for this all too common profile is to inject energy andvitality. The need for energy for mature respected brands is especially true to attract youngersegments, the lifeblood of the company’s future.

The best way to energize a business is by improving the offering through innovation. However,that route is not always open. In many cases, successful innovation, even with well-conceived

Begin with warm-up exercises that break down inhibitions. To make whimsy acceptable, forexample, ask individuals to identify what animal expresses their personality and to imitate thesound made by that animal. To stretch minds, ask someone to start a story based on tworandom words (e.g., blue and sail); then ask the group to create a position for a brand based onthat story.Focus on a particular task, such as how to build or exploit an asset (a brand name, for example) or acompetence (such as the ability to design colorful plastic items).Develop options without judging them. Discipline in avoiding evaluation while generatingalternatives is a key to creative thinking.Engage in lateral thinking to change the perspective of the problem. Make a list ofassociations with the brand or the usage situation (the more incongruous the fit the better),or simply pick a random object or activity (such as tiger or picnic) to stimulate a new line ofthought.Evaluate the options based on potential impact without regard to how feasible they are.Engage in a second stage of creative thinking aimed at improving the success chances of anattractive option—possibly one with high potential impact that seems too expensive or too difficultto implement.Evaluate the final choices not just rationally (“What do the facts say?”) but emotionally(“What does your gut say?”).Create an action plan to go forward.

200 Part Two Creating, Adapting, and Implementing Strategy

efforts and adequate budgets, is elusive and infrequent. And innovations that really make adifference, that rise above those that simply maintain a market position, are even rarer. Further,some businesses compete in product categories that are either mature, boring, or both. If youmake hot dogs or market insurance, it is hard to conceive of new offerings that are going toenergize the brand.

The need is to look beyond the offering for ways to give the brand energy, to make it:

Interesting/exciting. There is a reason to talk about the brand (AXE, Las Vegas(the city), Nike, Red Bull, HBO).

Involving/engaging. People are engaged; the brand can be part of a valued activity orlifestyle (Coca-Cola, Disney, Lego, Starbucks).

Innovative/dynamic. The brand is likely to be continually innovative or capable ofcreating “must-have” innovations that create new subcategories (Airbnb, Amazon, Apple,GE, Google, Netflix, Task Rabbit, Uber).

Passionate/purpose driven. There is a higher purpose that propels passion (Muji, Nike,Warby Parker, Whole Foods).

Some suggestions follow:

Create an involving promotion. Coke Zero asked basketball fans to upload their mostfanatical videos and photos supporting their favorite teams. Winners were shown in aspecial show before the championship game.Create a promotion to attract new customers. Denny’s gave away more than twomillion Grand Slam Breakfasts in one day with the help of a Super Bowl commercial andonline buzz. Free breakfasts broke through the clutter to grab the attention of newcustomers.Go retail. The Apple Store is a good part of the success of its products and brandbecause it presents the Apple line in a way that is completely on-brand. Nike and Sonyalso have statement stores that serve to present the brand and offering story in acompelling and integrative way.

Bring the brand to the customer. TaylorMade golf equipment representatives travelto golf clubs to demonstrate and sell its equipment, giving customers a more vividand on-brand way to experience them than they would get in a sporting goods store.Target created the 30-day Bullseye Bazaar in Chicago to introduce the Tracy FeithClothing collection, the private-label food line from Archer Farms, and Targetfurniture.

Hold publicity events. Consider the balloon adventures of Virgin’s Richard Branson,the BMW short films created by top directors, or the incredible Red Bull sponsorship of aperson jumping out of a balloon 24 miles above the New Mexico desert.

Support the higher order purpose. Whole Foods Market provides information andsupport to those interested in organic and natural foods.

The development of a customer community is one of the best ways to energize a brand. It canconnect the brand to a customer sweet spot, as discussed in Chapter 10, that stimulates interest,involvement, and even passion. Consider America Express’s Open Forum where small businesses

Chapter 11 Energizing the Business 201

can interact about issues. On the Udi’s Glutenfree site, visitors can access a social network for thoseinterested in gluten-free eating. Bikers on the Harley-Davidson website can post pictures of theirmost recent rides and plan new ones. Beinggirl, the Procter & Gamble feminine care site, offersadvice and promotions to 11- to 14-year-old girls.

The key to an effective site is not only to be motivated by the customer’s sweet spot ratherthan the offering, but also to engender trust, to have real substance, to have dynamic content, tostimulate interaction, and to be on-brand. It is not easy, but the payoff can be significant.

Another approach, very different than trying to make the brand or business interesting orinvolving, is to find something with energy and attach your brand to it and build a marketingprogram around the connection. Find a branded energizer.

Branded Energizers

A branded energizer is a branded product, sponsorship, endorser, promotion, symbol, socialprogram, CEO, or other entity that by association significantly enhances and energizes a targetbrand. The branded energizer and its association with the target brand are actively managed overan extended time period.

As Figure 11.4 and the definition suggest, a branded energizer can be a wide variety ofbranded entities and should have several characteristics. First, a branded energizer should itselfhave energy and vitality. An effective branded energizer should be:

Interesting versus stale

Youthful versus mature

Interesting versus boring

Dynamic versus unchanging

Contemporary versus traditional

Assertive versus passive

Involving versus separated

Second, the branded energizer needs to be connected to the master brand even if, unlike abranded differentiator, it is not part of the master brand offering and does not promise any

Master Brand/Subbrand

Branded Energizer

Sponsorships

Endorsers

Promotions

Symbols

Social Programs

CEOs

Etc.

• Energy

• Personality

• Associations

Figure 11.4 Branded Energizers

202 Part Two Creating, Adapting, and Implementing Strategy

functional benefits. This connection task can be difficult and expensive. Even the EnergizerBunny, one of the top icons among U.S. brands, often is associated with Duracell rather thanEnergizer despite the exposure over a long time period.

One connection route is to use a subbrand such as Ronald McDonald House, where themaster brand has a connection in the name. A second is to select a program or activity that is so“on-brand” that it makes the link easier to establish. A baby-oriented program would requirelittle effort to connect to Gerber. A third is to simply forge the link by consistently buildingit over time with significant link-building resources, as MetLife has done with the Peanutscharacters.

Third, a branded energizer should significantly enhance as well as energize the targetbrand and should not detract or damage the brand by being “off-brand” or making customersuncomfortable. Offbeat, underdog brands such as Virgin, Apple, and Mountain Dew, whichare perceived as quirky to begin with, have more leeway. “Senior” brands, in contrast, candevelop branded energizers that are edgier than the parent brand but with a lot of optionsforeclosed.

Fourth, the problems of finding and managing internal branded energizers leads firms to lookoutside the organization. The challenge is to find an external energizer brand that is linked intothe lifestyle of customers, that will have the needed associations to energize and enhance, that isnot tied to competitors, that can be linked to the target brand, and that represents a manageablealliance. The task takes discipline and creativity.

Fifth, branded energizers (like branded differentiators) represent a long-term commitment;the brands involved should be expected to have a long life and merit brand-building investments.If the energizers are internally developed, the cost of brand building will have to be amortized overa long enough period to make it worthwhile. If they are externally sourced, the cost and effort oflinking them to the parent brand will take time as well. And they need to be actively managed overtime so that they can continue to be successful in their roles. The concepts of branded energizersand differentiators do not provide a rationale to add brands indiscriminately.

There are many types of branded energizers. Some of the most useful include sponsorships,symbols, endorsers, promotions, programs, and even CEOs.

Branded Sponsorships

The right sponsorship, handled well, can energize a brand and create strong relationships withcustomers. Consider a rather utilitarian product like motor oil and a venerable brand like Valvoline.Such a brand would normally have trouble generating interest and energy, to say nothing ofbecoming an important part of a person’s life. Few would be motivated to read ads about motor oil,which is perceived by many to be an undifferentiated product. However, through sponsorshipactivities, Valvoline becomes part of the NASCAR scene, and everything changes.

The Valvoline racing program is multidimensional. Valvoline is not just a sponsor of NASCAR,but has a NASCAR racing team as well. At the Valvoline website, a destination site for thoseinvolved with racing, a visitor can access the schedule for NASCAR and other racing circuits andlearn the results of the most recent races, complete with pictures and interviews. A “Behind ClosedGarage Doors” section provides inside information and analyses. The visitor can adopt theValvoline NASCAR racing team and learn about their current activities and recent finishes. Inaddition, it is possible to send Valvoline racing greeting cards, buy Valvoline racing gear, downloada Valvoline racing screensaver, and sign up for a weekly newsletter (TrackTalk) that provides

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updates on the racing circuits. Valvoline thus becomes closely associated with the racingexperience, much more than simply being a logo on a car.

The core segment for Valvoline is buyers who change their own oil, are very involved in cars, andlive for NASCAR races. The Valvoline racing program has the potential to influence this group inseveral ways. At a most basic level, it provides credibility and associations of being a leader inmotor oil technology. Top teams would not use Valvoline if it was not superior—there is too muchriding on the engine’s performance. But there are more subtle possibilities. A customer, by choosingValvoline, can receive self-expressive benefits, as it is a way to tangentially associate oneself withthe top drivers and teams. And research shows that it has tangible benefits. One study found that47 percent of the U.S. public had an interest in watching NASCAR racing. In another, 60 percentof NASCAR fans said they trusted sponsors’ products (compared with 30 percent of NFL fans),and more than 40 percent switch brands when a company becomes a sponsor.4

A sponsorship can provide the ultimate in relevance, the movement of a brand upward into theacceptable if not leadership position. A software firm trying unsuccessfully to make a dent in theEuropean market became a perceived leader in a few months when it sponsored one of the topthree bicycle racing teams. Part of Samsung’s breakthrough from being just another Korean pricebrand to becoming a real player in the U.S. market was its sponsorship of the Olympics, whichbegan with the Winter games in 1988. It says so much about the brand, so much more than productadvertising could ever say. Tracking data confirm that well-conceived and well-managed sponsor-ships can make a difference. The Visa lead in perceived credit card superiority went from 15percentage points prior to the Olympics, to 30 points during, and to 20 points one month after—huge movements in what are normally very stable attitudes.5

A significant problem with sponsorship—indeed, with any external branded energizer—islinking it to the brand. DDB Needham’s Sponsor-Watch, which measures such linkage, has shownthat sponsorship confusion is common.6 Of the 102 official Olympic sponsors tracked since 1984,only about half have built a link (defined as having sponsor awareness of at least 15 percent and atleast 10 percent higher than that of a competitor that was not a sponsor—hardly demandingcriteria). Those successful at creating links, such as Visa and Samsung, surround the sponsorshipwith a host of brand-driven activities, including promotions, publicity events, website content,newsletters, and advertising, over an extended time period.

Although most sponsorships are external to the firm, there are cases of internally controlledsponsorships. The Adidas Streetball Challenge is a branded weekend event centered around localthree-person basketball tournaments and featuring free-throw competitions, a street dance,graffiti events, and extreme sports demonstrations, all accompanied by live music from bandsfrom the hip-hop and rap scenes. The Challenge was right in the sweet spot of target customers,a party. And it was connected to Adidas by its brand and supporting signage and Adidas-suppliedcaps and jackets. It revitalized Adidas at a critical time in its history. Owning a sponsorshipmeans that the cost going forward is both controllable and predictable and the event can evolveover time.

Endorsers

A brand may lack energy, but there are plenty of personalities who are contemporary, on-brand,energetic, and interesting. Think of what LeBron James has brought not only Nike but alsoBeats, Coca-Cola, KIA Motors, and Upper Deck. And Roger Federer to Credit Swiss, Mercedes,Nike, and Rolex.

204 Part Two Creating, Adapting, and Implementing Strategy

Selecting and engaging an endorser is a critical first step in creating a strategic brandenergizer. There are a host of considerations. An endorser target should have:

An appealing imageVisible among the target audience (low visibility will limit the impact)Attractive, liked (simple liking can and does get transferred to the endorsed brand)Sincere (will there be a feeling that the endorser is doing it for money and lacks a sincerebelief in the product?)Fresh, not overexposed (an endorser’s impact can be diluted by overexposure as anendorser)

On-brand associationsMatching the brand identity goalsA natural match to the brand (does the link make sense?)Confidence that the positive associations can be leveraged and that the negative ones canbe managed

Potential for a long-term relationship (how long will the endorser have the desiredassociations and how likely will a compatible relationship endure?)

Potential to create programs surrounding the endorser

Cost effectiveness and availability, which need to take into account the cost of theprograms surrounding the endorser

Branded Promotional Activities

Kraft’s Oscar Mayer Wienermobiles provide energy to a very boring category. There are eightvehicles shaped like a huge Oscar Mayer Weiner touring the United States, with license plateswith appropriate wording like “HOT DOG.” They turn up at events and parties and support theannual contest to find a child to sing the signature Oscar Mayer jingle. The Wienermobile, whichhas been shown to bump product sales, also lives on the Web, where visitors can be taken on atour of Oscartown featuring the Oscar Museum, the OscarMart, and Town Hall. The brandWeinermobile, by its linkage to the product category, also links it to Oscar Mayer.

Memorable Branded Symbols

Brands that are blessed with strong relevant symbols such as the Pillsbury Doughboy, the Maytagrepairman, P&G’s Mr. Clean, the Redbird’s Rocky, or the Michelin Man can actively manage anduse the symbols to become energizer brands. Such symbols can give a personality to even theblandest of brands. They can also suggest attributes. The Doughboy is upbeat, with a sense ofhumor, and means freshness and superb quality. The Maytag repairman is famous for beinglonely due to few calls for repairs, and symbolizes the reliability of Maytag. The Michelin Man isstrong and positive and means safety. Mr. Clean is strong and reliable. Rocky is fun, friendly, andenergetic.

Symbols can be leased as well as developed. MetLife adopted the Peanuts characters in1985. The goal was to provide a warm, light, nonthreatening approach to insurance—a toughsell in the context of an industry perceived by many to be boring, greedy, and bureaucratic. Thefamiliar, funny characters provide a vehicle toward those objectives while also providing

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interest and energy. Snoopy’s appearance on the website, on a blimp, in ads, and even on thelogo also serves to inhibit what psychologists call counterarguing. The natural tendency to becynical toward an insurance company’s ad or claim is reduced for MetLife in the presence ofthe likable Snoopy, in part because it would make no sense to argue with a cartoon character. Asimilar tact is to introduce or enhance a lively, humorous personality. Most competitors areserious about their offerings, and a business that takes itself lightly will often stand out. This isespecially true in the insurance industry. Aflac made great strides on the awareness front bydeveloping the Aflac duck.

It is important to understand the role of the symbol. Is it to create a personality? To suggestor reinforce associations? To be a vehicle to interject humor and likability into an otherwisebland and uninteresting message? To create interest and visibility, like the duck has done for Aflac?With the role in mind, it is possible to proactively look for or develop the right one.

Branded Social Programs

Branded social programs can pay off by providing the foundation of a customer relationship basedon trust and respect. However, they can also provide energy by generating interesting ideasand programs and even passion, tangible results, and opportunities for customer involvement.Consider the energy created by the Avon Breast Cancer Crusade with its signature Avon 39 TheWalk to End Breast Cancer, a program with substance (over $620 million raised for the fightagainst breast cancer) and incredible involvement not only with participants of the walks, but withfamily members and sponsors as well. That interest and energy could never have been created bynew Avon products, however different they might be. And it is branded as Avon, which means thatits track record is linked to Avon.

Creating branded social programs can effectively be costless in that existing philanthropydollars that are being spent without focus or impact can be diverted into branded social programs.However, they are also extremely hard to generate; there are firms that would like to create anAvon Walk program but simply can’t come up with one. Kellie McElhaney, the Director of theCenter for Responsible Business at the Haas School at UC Berkeley, has suggested severalprinciples to guide development of a branded social program.7

Know Thyself

The goal is to create branded programs that are authentic and effective. Ideally, they shouldsupport the business strategy, draw on firm assets and competencies, and enhance the image of thebrand. That means that the firm should address very basic questions about who they are, theirstrengths and weaknesses, and what they want to stand for.

Get a Good Fit

Being authentic, being connected to the program, and being effective will all be easier if there is afit. Avon’s program hits on a key concern of the target market and reflects a relationship withcustomers that goes beyond product. The same can be said with Crest’s Healthy Smiles (low-costdental care for poor children), Home Depot’s relationship with Habitat for Humanity, andDove’s Real Women. In contrast, the Ford association with the “Susan G. Komen for the Cure”breast cancer foundation (with its donations attached to buying a pink-trimmed Mustang) lacks alogical fit.

206 Part Two Creating, Adapting, and Implementing Strategy

Brand It

If the program has a strong visible brand, it is much more likely that people will learn andremember it. Home Depot is linked to the Habitat for Humanity program of building homes forless fortunate, a strong brand. Another challenge is to link the program brand to the brand to whichit is lending energy. In the case of Home Depot, that is done with in-store communication andpromotion and by having its employees involved in working on Habitat projects. An owned brandsuch as Ronald McDonald House or Avon Breast Cancer Crusade has the advantage of having thecorporate brand as part of the program brand.

Create Emotional Connection

An emotional connection in general communicates much stronger than does a set of facts andlogic. The message is punchier and simpler. Further, an emotional connection will tend to enhancethe relationship between the brand to which it is attached and the customer. So Pedigree AdoptionDrive with its pictures of adorable dogs triggers an emotional response. Ronald McDonald Housepresents a program that helps children with serious medical conditions and their families.

Communicate the Program

There are a host of companies that are spending real money on programs that are unknown to theircustomers and, often, even to their employees. To achieve its objectives of advancing a social cause,energizing employees, and enhancing the reputation of a corporate brand, the program needs tobe communicated. That involves accessing the right set of communication vehicles including awebsite, social media, PR, and active employees. Beware of making it too complex, too detailed,too quantitative. Simple with understandable symbols, taglines, and stories is needed.

Involve the Customers

Involvement is the ultimate way to gain supporters and advocates. Method, a maker of environ-mentally safe cleaning products, has a brand ambassador program in which customers who sign onwill get products and T-shirts and information about why their friends should use the product.Avon’s Walk for Breast Cancer involves hundreds of thousands each year either as participants orsupporters of walkers.

Branded CEOs

Some firms have branded CEOs who can serve to capture and magnify the energy in the brandor even create energy that can be transferred to the brand. Lee Iacocca helped save Chryslerby exuding confidence and competence when customers and investors had assumed the firmwould collapse. Richard Branson’s outlandish stunts (some involving hot-air balloons) have beena large part of the energy and personality of the Virgin brand. Herb Kelleher personified theSouthwest Airlines brand with his visible and colorful expression of its culture. Steve Jobs andBill Gates have driven much of the energy of Apple and Microsoft with their visible thoughtleadership. Mark Zuckerberg is a key personality in Facebook’s success.

The right CEO with the right message can often create news with credibility and has theadvantage of being able to access media. To be an energizer, however, the CEO should haveenergy with respect to ideas, have a distinctive personality, and be around for a long enough timeperiod to become a recognized representative of the brand.

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INCREASING THE USAGE OF EXISTING CUSTOMERSAttempts to increase market share will very likely affect competitors directly and thereforeprecipitate competitor responses. An alternative, attempting to increase usage among currentcustomers, is usually less threatening to competitors.

When developing programs to increase usage, it is useful to begin by asking somefundamental questions about the user and the consumption system in which the product isembedded. Why isn’t the product or service used more? What are the barriers to increaseduse? Who are the light users, and can they be influenced to use more? What about theheavy users?

Greater usage can be precipitated in two ways, by increasing either the frequency ofuse or the quantity used. In either case, there are several approaches that can be effective(see Figure 11.5). All are based on becoming obsessed with what stimulates use and the useexperience itself.

Motivate Heavy Users to Use More

Heavy users are usually the most fruitful target. It is often easier to get a holder of two footballseason tickets to buy four or six than it is to get an occasional attendee of games to buy two. It ishelpful to look at the extra-heavy user subsegment—special treatment might solidify and expandusage by a substantial amount. Examples include Schwab’s Gold Signature Services, the specialdinner parties and courier service offered by Chase Manhattan to its biggest accounts, or thefirst-class treatment provided to high rollers by Las Vegas casinos.

Make the Use Easier

Asking why customers do not use a product or service more often can lead to approaches that makethe product easier to use. For example, a Dixie cup or paper-towel dispenser encourages use byreducing the usage effort. Packages that can be placed directly in a microwave make usage moreconvenient. A reservation service can help those who must select a hotel or similar service. Theclassic but long-dormant Crock-Pot slow cookers were in 80 percent of homes, but used by only20 percent. A hot product in the early 1970s, it fell victim to out-of-home eating but is makinga sharp comeback in part due to a desire to have home-cooked meals with minimal preparation.A catalyst is the Banquet line of frozen entrees called Banquet Crock-Pot Classics, which havemade the process of cooking with the Crock-Pot much easier.

Strategy Examples

Motivate heavy users to use more Perks with more season ticketsMake the use easier Microwaveable containersProvide incentives Frequent flyer milesRemove or reduce reasons not to buy Gentle shampoo for frequent useProvide reminder communication E-mail birthday reminderPosition for regular use Floss after mealsFind new uses Snowmobiles for delivery

Figure 11.5 Increasing Usage in Existing Product Markets

208 Part Two Creating, Adapting, and Implementing Strategy

Provide Incentives

Incentives can be provided to increase consumption frequency. Promotions such as doublemileage trips offered by airlines with frequent-flyer plans can increase usage. A fast-food restaurantmight offer a large drink at a discounted price if it is purchased with a meal. A challenge is tostructure the incentive so that usage is increased without creating a vehicle for debilitating pricecompetition. Price incentives, such as two for the price of one, can be effective, but they also maystimulate price retaliation.

Remove or Reduce the Reasons Not to Buy

A business often reaches a ceiling because there are potential buyers who have a reason not to buy orto buy more. Thus, bags of snacks with 100 calories provide a way for users to partake without losingcontrol of their eating habits. Hyundai addressed the problem of job insecurity with the breathtakingoffer to buy back a car if the buyer lost his or her job. A gentle shampoo could be used daily.

Provide Reminder Communications

For some use contexts, awareness or recall of a brand is the driving force. People who know about abrand and its use may not think to use it on particular occasions without reminders. An e-mailprogram to remind Wine.com customers about an upcoming birthday may ensure that they buy apresent. Several brands, including Jell-O, have conducted advertising campaigns aimed at gettingtheir products out of the cupboard and onto the table. It is not enough for people to have recipesif they never get around to using them. Routine maintenance functions such as dental checkups orcar lubrication are easily forgotten, and reminders can make a difference.

Position for Regular or Frequent Use

Provide a reason for more frequent use. On websites, what works is to have information that isfrequently updated. People go to My Yahoo to see the latest headlines or learn how their stocks aredoing, as often as every few minutes when important things are happening. Other incentives mightinclude a new cartoon each day at a teen website or a best-practices bulletin board at a brandconsulting site.

The image of a product can change from that of occasional to frequent usage through arepositioning campaign. For example, the advertising campaigns for Clinique’s “twice-a-day”moisturizer and “three glasses of milk per day” both represent efforts to change the perception ofthe products involved. The use of programs such as the Book-of-the-Month Club, CD clubs, DVDclubs, and flower-of-the-month or fruit-of-the-month delivery can turn infrequent purchasers intoregular ones.

Find New Uses

The detection and exploitation of a new functional use for a brand can rejuvenate a business thathas been considered a has-been for years. Jell-O, for example, began strictly as a dessert productbut found major sources of new sales in applications such as Jell-O salads. Another classic story isthat of Arm & Hammer baking soda, which saw annual sales grow 10-fold by persuading people

Chapter 11 Energizing the Business 209

to use its product as a refrigerator deodorizer. An initial 14-month advertising campaign boostedthe use as a deodorizer from 1 to 57 percent. The brand subsequently was extended into otherdeodorizer products, dentifrices, and laundry detergent. A chemical process used in oil fields toseparate waste from oil found a new application when it was applied to water plants to eliminateunwanted oil. Kraft encouraged people to use cream cheese, stuck in the bagels for breakfastslot, with crackers or celery as a snack.

New uses can best be identified by conducting market research to determine exactly howcustomers use a brand. From the set of uses that emerge, several can be selected to pursue.Customer application tracking allowed BENGAY to learn that much of its volume wasgoing toward arthritis sufferers. A separate marketing strategy was developed, and the resultwas a wave of growth. Another tactic is to look at the applications of competing products.The widespread use of raisins prompted Ocean Spray to create dried cranberries, which canbe found in cookies and in cereal such as Mueslix with a “made with real Ocean Spray cranberries”seal on the package. They are also being sold as a snack food called Ocean Spray Craisins.

Sometimes a large payoff will result for a firm that can provide applications not currentlyin generaluse. Thus, surveys ofcurrentapplications may be inadequate.Firms such asGeneralMillshave sponsored recipe contests, one objective of which has been to create new uses for a product bydiscovering a new “recipe classic.” For a product that can be used in many ways, such as stick-onlabels, it might be worthwhile to conduct formal brainstorming sessions or other creative exercises.

If some application area is uncovered that could create substantial sales, it needs to beevaluated. Consideration needs to be given to the possibility that a competitor will take over anapplication area, whether through product improvement, heavy advertising, or engaging inprice warfare. Can the brand achieve a sustainable advantage in its new application to justifybuilding the business? Ocean Spray is associated with cranberries, which might protect its entryinto a cranberry snack, but the firm’s name will be less helpful in a processed application such ascookies or cereals.

KEY LEARNINGS

Energizing an existing business is a fruitful source of growth because it avoids therisks of venturing into new competitive arenas requiring new assets andcompetencies.Improving the offering through innovation is always the best route to growth andprofitability. However, innovations can represent short-lived advantages unlessbranded. A brand provides ownability, credibility, visibility, and communicability.A branded differentiator is an actively managed, branded feature, ingredient ortechnology, service, or program that creates a meaningful, impactful point ofdifferentiation for a branded offering over an extended time period.Sometimes innovation is not feasible, and then energizing the brand/marketingor creating a branded energizer is the best option. A branded energizer is abranded product, promotion, sponsorship, symbol, program, or other entity thatby association significantly enhances and energizes a target brand—the brandedenergizer and its association with the target brand are actively managed over anextended time period.

210 Part Two Creating, Adapting, and Implementing Strategy

Growth less vulnerable to competitive response can also come from increasingproduct usage by motivating heavy users to use more, making the use easierby removing or reducing reasons not to buy, providing usage incentives,reminder communications, positioning for frequent use, and finding new use.

FOR DISCUSSION1. Why are Google, Apple, Tesla, Fitbit, Dyson, and Intel considered innovative?

Did branding play a role? For which brands? What other brands would you nominate?Why? What role did branding play in your judgment for those brands?

2. Think of some highly differentiated brands. Do they have branded differentiators?If not, how did they achieve differentiation? Will it be lasting?

3. Think of some branded differentiators. How differentiated are they? Do thecustomers care? Are they impactful? Have they been managed well over time?Do they have legs? Evaluate Best Buy’s Geek Squad.

4. Think of some brands that have high energy. What gives them that energy? Willthat continue into the future?

5. Think of some brands that have branded energizers that made a difference. Evaluatethem in terms of whether they are “on-brand,” energetic, and linked to the masterbrand.

6. Using the creative thinking guidelines, think about how you would increase theusage of products or services if you were the manager of:

a. Doritosb. Charles Schwabc. GAP

Box BEST DIGITAL PRACTICE

Chiquita Banana

If you were asked to think of noteworthy marketing campaigns, produce companies probably do notimmediately come to mind. However in 2015, Chiquita Banana launched a co-branded and interactiveemail campaign that successfully increased brand engagement among a key customer segment:mothers with young children.

While bananas are typically thought of as a breakfast food or snack, Chiquita Banana saw anopportunity to also promote them as an ingredient. Specifically, the company realized it could expandproduct use by creating a series of recipes that featured bananas. To push these recipes out, ChiquitaBanana developed content that was easily shared across channels. For example, recipes were emailed asmobile-friendly in an attempt to cater to customers on the go. Additionally, the emails were made

(continued)

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interactive to encourage customers to “check off” what ingredients they already had versus what theyneeded to purchase.

Chiquita also increased reach by tying certain tactics to Universal Pictures’ recently released film,Minions. To do so, a series of collectible stickers were mass-produced and placed on bananas, and abranded “Minions Love Bananas” website was created featuring arcade games and digital content.Customers received instant prizes every time they scanned a new sticker with their mobile phone orengaged with the website. Along with mega-rewards like a vacation to London or movie-themedconsumer goods, shoppers could also win mobile-friendly wallpapers, videos, and other digital goodies.

The campaign’s structure struck a strong note with Chiquita’s intended demographic: 75 percentof traffic came from women, who were also more likely to opt into future marketing attempts or to log areturn visit to the website. Within the first three weeks of the campaign, over 400,000 prize-redeemingactivities had been completed. Traffic to Chiquita’s retail partners also increased, creating a spillovereffect that helped strengthen the company’s relationship with distributors, including the possibility ofsharing future campaigns.

Questions:

1. Develop an additional tactic for Chiquita’s campaign that further penetrates its key mothersegment.

2. Develop a completely new campaign to increase product usage among athletes—a key secondarymarket. What would you emphasize and what digital strategies and partnerships would you use?

Sources:Alex Samuely, “Chiquita Bananas’ Interactive Recipes Drive 52pc Email Engagement on Mobile,”Mobile Marketers, June 6, 2016, http://www.mobilemarketer.com/cms/sectors/food-beverage/22976.html

“Chiquita: Minions Love Bananas,” Mobile Marketing Association, http://www.mmaglobal.com/case-study-hub/case_studies/view/36696

BoxBEST GLOBAL PRACTICE

Maersk

Historically, B2B marketers have, in general, been digital laggards. B2B companies’ websites tend tooffer a plethora of information on product features but do not make a strong connection to customers’emotions or problems. The generally accepted view is that this is what business customers want.Maersk Line, a Denmark-based international shipping company, used an experimental social mediaapproach that challenged these expectations.

Maersk Line began by publishing archived photos of its ships and ports alongside stories fromships’ journeys. One such narrative recounted the rescue of over 60 Vietnamese refugees in the SouthChina Sea. The group was fleeing the country after the war, and upon sighting them the captain of theArnold Maersk decided to carry the individuals safely to Denmark. These captivating and nostalgicanecdotes inspired current and prospective customers as well as employees themselves to take theirown photos of Maersk ships around the world and share them. As the images gained more and moretraction, Wichmann decided to expand the company’s social media footprint. On Twitter, Maerskfocused on converting content from compelling internal blogs to eye-catching, pithy tweets. On

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LinkedIn, shipping experts were brought together to discuss hot topic industry issues like piracy orenvironmental policy.

One year into testing the waters of social media, Maersk Line conducted a survey asking customersabout their perceptions of the company. Amazingly, 67 percent said that the social media effort hadimproved their perceptions. With 48,000 followers on LinkedIn, 81,000 followers on Twitter, and morethan 400,000 on Facebook within the first year, the strategy appears to have helped the company reachcurrent and potential customers. Perhaps most impressive though was that Maersk Line executed all ofthis for less than $100,000.

Estimated impacts include improved sales (15–17 percent of Facebook likes are from customers)and reported customer engagement levels rivaling Lego and Disney levels. There was an impressiveimpact on the employee side as well with improved engagement and commitment levels fromemployees.

Maersk Line’s success story is an example of how social media can be a cost effective opportunityto energize the brand for all types of companies, even those not traditionally considered edgy orinnovative.

Questions:

1. What are the risks of using social media campaigns for big industrial companies such as Maersk?

2. Why did this digital strategy work?

Sources:Zsolt Katona and Miklos Savory, “Maersk Line: B2B Social Media – “It’s Communication, NotMarketing,” California Management Review, 56 (3) 2014, pp. 142–156.

Jonathan Wichmann, “Being B2B social: A Conversation with Maersk Line’s Head of Social Media,”McKinsey & Company, May 2013, http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/being-b2b-social-a-conversation-with-maersk-lines-head-of-social-media

Mark Kovac, “Social Media Works for B2B Sales, Too,” Harvard Business Review, January 4, 2016,https://hbr.org/2016/01/social-media-works-for-b2b-sales-too

Jim Flannery, “A Captain’s Good Deed Fuels a Dream,” Soundings, June 21, 2016, http://www.soundingsonline.com/features/in-depth/295048-a-captains-good-deed-fuels-a-dream

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C H A P T E R T W E L V E

Leveraging the Business

Results are gained by exploiting opportunities, not by solving problems.—Peter Drucker

The more opportunities I seize, the more opportunities multiply before me.—Sun Tzu

The most dangerous moment comes with victory.—Napoleon

Ultimately, growth avenues outside the existing business need to be explored. While it is riskyto leave the comfort of the familiar and the tested, it also removes the ceiling on the firm’sgrowth potential. There is virtually unlimited potential when you agree to extend the business.

The goal discussed in this chapter is to leverage the existing business into new productmarkets. The assets and competencies of the business are potential sources of advantage ina new marketplace. The capabilities around marketing skills, distribution clout, developingand manufacturing products, R&D, and brand equities are among the potential bases foradvantage for a new growth business. The idea is to build on the core business to createsynergy. The challenge, though, is to achieve real synergy with real impact on the customervalue proposition, costs, or investments. Too often, apparent synergy is not realized.

The spectrum of available choices can be categorized generally as to how removed they arefrom the core business. Those that are close will represent less risk and have the greatest chance ofleveraging business assets and competencies to achieve a real advantage. As more distance isallowed from the current business, opportunities become more plentiful, but the risk goes up aswell. It can be difficult to gain the necessary knowledge and operational competence to run abusiness successfully that is far removed from one’s core abilities. Of course, creating a new corebusiness can have a huge upside and taking the risk of moving far from the core business may payoff. But the risk should be visible and part of the analysis.

There are many ways to generate growth options that leverage the core business. Creativethinking processes, introduced in Chapter 11, can help. Good outcomes more often come fromhaving good options on the table rather than making optimal decisions among mediocre ones.

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The creative-thinking exercises can best be engaged around the following series of questions,which have proved to be a good source of options.

Which assets and competencies can be leveraged?

What brand extensions are possible?

Can the scope of the offering be expanded?

Do viable new markets exist?

After these questions have been discussed, some option evaluation issues will be addressedand, finally, the critical concept of synergy will be analyzed.

WHICH ASSETS AND COMPETENCIES CAN BE LEVERAGED?A focus on assets and competencies starts by creating an inventory in order to identify thereal strengths of the business. In doing so, the discussion in Chapter 3 around identifyingand evaluating assets and competencies can be helpful. What are the key assets and compe-tencies that are supporting the core business? What are their characteristics? How strongis each?

The second step is to find a business area where the assets and competencies can be applied togenerate an advantage. A line of greeting cards sold through drugstores might have an artisticcapability and a distribution asset that could be leveraged. What other items are in drugstores thatmight employ artistic talents? Are there items in the drugstore that the retailers have difficultysourcing, for whatever reason? A retailer problem might suggest an opportunity.

One fruitful exercise is to examine each asset for excess capacity. Are some assets under-utilized? A legal firm that considered this question took advantage of excess office space to offer taxservices. A supermarket chain with obsolete sites went into the discount liquor business. A cookieplant began making muffins. If a growth initiative can use excess capacity, a substantial, sustainablecost advantage could result.

The final step is to address implementation problems. Assets and competencies may requireadaptations when applied to a different business. Further, new capabilities may have to be found ordeveloped. Existing core businesses are sometimes best leveraged by making an acquisition becausedeveloping the business internally may not be economic or even feasible. When acquisitions areinvolved, two organizations with different systems, people, and cultures will have to be merged.Many efforts at achieving synergy falter because of implementation difficulties.

As the partial list profiled in Chapter 3 suggests, there are a wide range of exportable assets andcompetencies. To give a flavor of the opportunities, consider the following: marketing skills, salesand distribution capacity, design and manufacturing skills, and R&D capabilities.

Marketing Skills

A firm will often either possess or lack strong marketing skills for a particular market. Thus,a frequent motive for expanding into new product markets is to export or import marketing skills.Black & Decker had developed and exploited an aggressive new-products program (e.g., cordlessscrewdrivers and HandyChopper), effective consumer marketing (for brands such as SpaceMaker,DustBuster, and ThunderVolt cordless tools), and intensive customer service and dealer relations.The acquisition of Ernhart, with its branded door locks, decorative faucets, outdoor lighting, and

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racks, provided Black & Decker with an opportunity to apply its marketing skills and distributionclout to a firm that lacked a marketing culture.

Applying marketing skills is not always as easy as it appears. Philip Morris, a successfulmarketer of Miller Lite and other brands, failed with 7-Up, which it attempted to position as acaffeine-free soft drink in response to health interests of consumers. After a seven-year battle,Philip Morris gave up and sold the line. The problems that beset Philip Morris included thereaction of competitors who rushed caffeine-free drinks to the market, the power of existingdistributors, and the limited appeal of lemon-lime drinks. Coca-Cola made a similar misjudgmentwhen it created Wine Spectrum and failed in its efforts to overcome Gallo, in part because ofGallo’s control over distribution.

Capacity in Sales or Distribution

A firm with a strong distribution capability may add products or services that could exploit thatcapability. Thus, Black & Decker’s distribution strength helped provide a boost to the Ernhartlines. A joint venture between Nestle and Coca-Cola in the canned tea business combined Coke’sdistribution strength with the product knowledge and name of Nestle.

E-commerce firms such as Amazon or Wine.com often have operations that can add capacityjust by adding a button to access another product group. The result can be additional sales andmargins to offset the fixed costs of the operation.

Design and Manufacturing Skills

Design and manufacturing ability can be the basis for entry into a new business area. The ability todesign and make small motors helped Honda succeed in the motorcycle business and led to itsentry into lawn-care equipment, outboard motors, and a host of other products. The ability to makesmall products has been a key for Sony as it has moved from product to product in consumerelectronics. Schwinn’s experience with bicycles provided a basis to market the stylish Tailwindelectric bike that features a 30-minute fast charge.

R&D Skills

Expertise in a certain technology can lead to a new business based on that technology. GE’s earlyresearch has spawned very successful businesses. For example, its research on turbines for electricitygeneration provided the basis for its aircraft engine business and its light bulb research providedthe foundation for what became the medical instrumentation business. P&G has actively appliedtechnology from one business area to another such as fragrance technology applied to detergents tocreate both incremental and game-changing innovations. In general, breakthroughs in a businessarea tend to come from technologies owned by other industries. Creativity, often in short supply, isneeded to provide opportunities for basic technology and the R&D capability that supports it.

Brand Extensions

One common exportable asset is a strong, established brand name—a name with visibility,associations, and loyalty among a customer group. The challenge is to take this brand assetand use it to enter new product markets. The name can make the task of establishing a new

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product more feasible and efficient because it makes developing awareness, trust, interest, andaction easier.

Lenox, a maker of fine china, exploited its traditional, high-quality image and its distributionsystem by expanding into the areas of jewelry and giftware. H&R Block added legal services to itschain of income tax services, hoping to gain synergy by exploiting (and enhancing) its brand. A skiboot manufacturer leveraged its brand into skis and then ski clothing.

Many firms have built large, diverse businesses around a strong brand, including Sony, IBM,Siemens, GE, Schwab, Virgin, Mitsubishi, and Disney. More than 300 businesses carry the Virginname, and all gain from the public-relations flair of Richard Branson, its owner. Mitsubishi has itsname on thousands of products, each of which contributes two benefits that are often under-appreciated, name exposure and cumulative new-product vitality.

Disney, founded in 1923 as a cartoon company with Mickey Mouse (made famous in thecartoon “Steamboat Willie”) as its initial asset, might be the most successful firm ever at leveragingits brand. In the 1950s, the company built Disneyland and launched a long running TV show (TheWonderful World of Disney), dramatically changing the brand by making it much richer anddeeper than before. Particularly after extending the theme parks to Florida, Paris, and Japan;establishing its own retail stores, resorts, and a cruise line; and supporting a host of Disney-endorsed offerings such as the California Adventure Park, Disney can deliver an experience thatgoes far beyond watching cartoons. As a result of this brand power, the Disney Channel hasbecome a strong, differentiated TV network, an incredible achievement if you consider whatothers have put into that space.

It is instructive to see why Disney has done so well with an aggressive brand extension strategy.First, from the beginning, the company has known what it stands for—magical family entertainment,executed with consistent excellence. Everything Disney does reinforces that brand identity; when itwent into adult films, it did so under the name Touchstone rather than Disney so as not to dilute theDisney identity. Second, Disney has a relentless, uncompromising drive for operational excellencethat started with Walt Disney’s fanatical concern for detail in the earliest cartoons and theme parks.The parks are run so well that Disney holds classes to teach other firms how to maintain energy andconsistency. The cruise line was delayed, despite ballooning costs, until everything was judgedperfect. Third, the organization actively manages a host of subbrands that have their own identities,including Mickey Mouse, Donald Duck, a mountain (the Matterhorn), a song (“It’s a Small World”),film characters such as Mary Poppins and the Lion King, and on and on. Fourth, Disney understandssynergyacrossproducts. TheLion King isnot onlyafilm,butalsosupports aBroadwaymusicaland anexhaustive set of promotions at fast-food chains and elsewhere.

Brand extension options can be created by determining the current brand image and whatproducts and services would fit these associations (see Figure 12.1). In what arenas would thebrand be considered relevant? McDonald’s has associations with fun and kids, fast delivery of

New Offering Brand

Add Value

Enhance Brand

Fit

Figure 12.1 Brand Extension Logic

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consistent food, Big Macs, and fries. The fun and kids might suggest a theme park, a line of toys, ora day-care center.

A brand, of course, can evolve over time in part by the brand extensions and then getpermission to drive a broader assortment of offerings. So the addition of a healthy submenu toMcDonald’s may allow the firm to venture into areas that would have not made sense before.Virgin was a record company, and an airline under that brand name made no sense. But after theorganization became not only successful, but also known for an over-the-top attitude, customerservice, innovation, and an ability to face up to large, established competitors, its new associationsprovided the basis to go into a host of business areas.

The evaluation of each extension alternative is based on three questions. Each must beanswered in the affirmative for the extension to be viable.

1. Does the brand fit the new product context? If the customer is uncomfortable andsenses a lack of fit, acceptance will not come easily. The brand may not be seen as having theneeded credibility or expertise, or it may have the wrong associations for the context. In general,successful extensions will have one or more bases of fit such as a:

Base product—Starbucks Frappuccino (a packaged drink), VIA (instant coffee), andDreyer’s Starbucks Coffee Ice Cream

Companion product—Coppertone sunglasses, Duracell Durabeam flashlights

Common user—Gerber baby clothing, The Mint Cookie (Girl Scout) Google Flights

Distinctive attribute/benefit—Arm & Hammer Carpet Deodorizer, Sunkist Vitamin C

Expertise—Mr. Clean Performance Car Washes, Zagat Physician Rating, David Beckham(Soccer) Academy

Personality/self-expressive benefits—Pierre Cardin wallets, Festify (by Spotify)

In general, a brand that has strong ties to a product class and attributes (e.g., Boeing, Netflix,or Kleenex) will have a more difficult time stretching than a brand that is associated withintangibles such as a brand personality. For example, Cosmopolitan magazine could not extendits brand into a yogurt line or Colgate toothpaste into a line of ready-to-eat meals. Thus, brands likeDisney, Virgin, and Gucci have permission to extend further. In a TippingSprung survey of brandextensions, consumers were not enthused about Burger King men’s apparel, Kellogg hip-hopstreetwear, and Playboy energy drink in part because of a fit problem.1

2. Does the brand add value to the offering in the new product class? A customer shouldbe able to express why the brand would be preferred in its new context. Despite the fact that cruiseships are difficult to tell apart, nearly anyone could verbalize rather clearly how a Disney cruise shipwould be different from others—it would have Disney characters aboard, contain more kids andfamilies, and provide magical family entertainment. Coppertone sunglasses, the top ratedextension in the TippingSprung survey, would be expected to benefit from the years of experiencethat Coppertone has with activities in the sun.2 Mr. Clean Performance Car Washes, the secondrated extension in the same survey, offers the credibility of the Mr. Clean brand to an area that canhave high variability of service. Starbucks provides a premium quality association to its Frappuc-cino and VIA lines and a sense of authenticity to coffee-flavored ice cream.

If the brand name does not add value in the eyes of the customer, the extension will bevulnerable to competition. For example, Pillsbury Microwave Popcorn initially benefited from thePillsbury name, but was vulnerable to the entry of an established popcorn name. Thus, although

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Orville Redenbacher entered the microwave category late, it still won with a name that meantquality and authenticity in popcorn. Rice-a-Roni’s Savory Classics did not fit the consumer’s notionof the role of Rice-a-Roni in the kitchen. The Arm & Hammer name also spawned two failures—a spray underarm deodorant, for which the Arm & Hammer name may have had the wrongconnotations, and a spray disinfectant.

A concept test can help determine what value is added by the brand. Prospective customerscan be given only the brand name and then asked whether they would be attracted to the productand why. If they cannot articulate a specific reason why the offering would be attractive to them, itis unlikely that the brand name will add significant value.

3. Will the extension enhance the brand name and image? With the focus on theextension, its impact on the brand can be overlooked. An extension that fails or has inappropriateassociations can damage the brand. The ideal is to have extensions that provide visibility, energy,and associations that support the brand. Coach was a successful but a bit stodgy maker of leatherbags until it hired a new designer and extended the brand to hats, shoes, sunglasses, coats, watches,and even straw beach hats, all with the signature “C” in leather. The extensions provided energyto the brand and attracted younger customers, vital to the firm’s long-term future. Sunkist’sassociations with oranges, health, and vitality are reinforced by the promotion of Sunkist juicebases and vitamin C tablets, while Sunkist fruit rolls may be a risk. Extensions need to deliver onthe brand promise to avoid harming the brand. Coppertone sunglasses need to have sun protectionand not just be a stylish design, and Mr. Clean and the Starbucks extensions need to deliver theexpected experience for the brand.

If an extension will damage the brand but represents a viable business opportunity, anotherbrand option needs to be found. When Gap introduced a value chain and called it Gap Warehouse,the Gap brand was in danger of being confused and tarnished. Gap quickly reconsidered andprotected its namesake brand by changing the name of the new chain to Old Navy. The useof subbrands and endorsed brands provides alternatives to creating a new brand with all its costsand risks.

Subbrands and Endorsed Brands

Subbrands and endorsed brands become options when two unfortunate realities exist. First, theexisting brands are judged to have the wrong associations or to have a risk of being damaged by theextension. Second, the organization does not have the size or resources to build a new brand,perhaps because the task is too difficult in a cluttered context or because the business does notjustify the needed investment.

In such a situation, the answer may lie in the use of subbrands or endorsed brands. The GEProfile subbrand of consumer appliances allowed General Electric to stretch into a premiumsegment in order to participate in the energy and high margins afforded by that submarket.Similarly, the Pentium Zeon subbrand allowed Intel to offer a high-end server microprocessor.A subbrand lets the offering separate itself somewhat from the parent brand and offers the parentbrand some degree of insulation.

An endorsed brand offers even more separation. The Schwinn brand name in bicycles hasgiven its Johnny G. Spinner bike an edge with its endorsement. And Marriott needed to enter thehuge and growing business hotel part of the market. Because it would have been extremelyexpensive to create a stand-alone brand in that area and the existing brands were deemed to beinsufficient in quality to buy, the company created Courtyard by Marriott. The endorsement

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indicated that Marriott as an organization stood behind the Courtyard brand, so visitors could beconfident that the chain would deliver a reliable experience. Leveraging a brand by using it toendorse other brands provides a trust umbrella.

EXPANDING THE SCOPE OF THE OFFERINGA firm may look to its in-depth knowledge of and access to a market segment as an under-leveraged asset. Dometic, a Swedish company that pioneered absorption refrigerators charac-terized by silent operation, built a business selling them to hotels for use as minibars and to theRV industry.3 The RV industry success led Dometic to add other products directed at the RVindustry, such as air conditioning, automated awnings, generators, and systems for cooking,sanitation, and water purification. The product scope was broadened from refrigeration to RVinterior systems, enabling Dometic to create a direct-to-dealer distribution system that becamean ongoing competitive advantage. The Dometic experience illustrates how success in a marketcan be leveraged.

Considering the broader use context is a powerful idea. Thus, instead of being in the orangejuice business, be in the breakfast business. Instead of selling only basketballs, consider makingbaskets and courts. GE’s Jack Welch was quoted as saying that dominant companies in slow-growing businesses should redefine their markets, looking at a broader scope that will have moreopportunities.

Slywotsky and Wise make a similar suggestion in their book How to Grow When MarketsDon’t.4 They recommend identifying and serving the customer needs that emanate from the use ofexisting products. Cardinal Health, for example, moved beyond distributing drugs to pharmacies tomanaging hospital drug dispensing and related record-keeping and creating medical-supply kits forsurgeons. Clarke American Checks went from check printing for banks to managing theircustomer relations, including running call centers and helping banks come up with incentivesto increase customer retention. John Deere, the equipment manufacturer, decided to offer a one-stop shop for landscaping.

An analysis of the total set of tasks surrounding the customer use experience is a good wayto begin determining whether there is a viable growth option in expanding the view of theoffering. The use experience can be modeled by walking through exactly what the customerneeds to do in order to use the product or service. This task set for a Healthy Choice frozen mealcould include buying, paying, transporting, storing, preparing for use, using, and disposal. Canany of these tasks be made easier or eliminated by adding a feature or service to the productstrategy? ABB extended its business to include importation services that its customers hadto perform to move machinery they had rented from the company to oil drilling sites aroundthe world.

The analysis of a consumption system may not result in an end-to-end solution. But even iftwo parts can be combined, replaced by an alternative, or made to work better, the result mayhave added value or a point of differentiation for the customer. Annie Chun created a meal kitwhereby the sauce and noodles are combined into an easily microwaved dinner dish. In doing so,several steps for the cook were eliminated or combined and the easy cook/serve features wereappealing.

Another perspective on expanding the offering scope is simply to serve additional needsof the customer. What other products or services do existing customers buy that couldbe provided by the firm’s operations? Fast-food chains have expanded their offerings

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to attract customers in a time slot for which they have capacity. McDonald’s, for example,ohas gourmet coffee for afternoon snack needs. Jamba Juice and Starbucks both addedoatmeal so that they would be appealing as breakfast locations. Dometic added products RVowners bought.

NEW MARKETSA logical avenue of growth is to move existing products into new markets by duplicating thebusiness operation, perhaps with minor adaptive changes. With market expansion, the sameexpertise and technology and sometimes even the same plant and operations facility can be used.Thus, there is potential for synergy and resulting reductions in investment and operating costs. Ofcourse, market development is based on the premise that the business is operating successfully;there is no point in exporting failure or mediocrity.

Expanding Geographically

Geographic expansion may involve changing from a regional operation to a national operation,moving into another region, or expanding to another country. KFC, McDonald’s, GE, IBM, andVisa have successfully exported their operations to other countries. Most of these companies andmany others are counting on countries such as China, India, and Russia to fuel much of theirgrowth for the coming decades. They realize that success will involve significant investment inlogistics, distribution infrastructures, and organization building and adaptation. Chapter 14 willelaborate on how this occurs in global markets.

Moving from local to regional to national is another option. Samuel Adams and othermicrobreweries have generated growth by geographic expansion. The challenge is to build abrand in the face of established competitors. See’s Candies faced this hurdle as it expanded into theEast Coast. The company was aided by the fact that its reputation has seeped into markets duepress reports and because consumers had moved from the West Coast where the company is ahousehold name. See’s also used “holiday gift centers,” seasonal carts that appeared in shoppingmalls to raise awareness of the brand in these new markets.

Expanding into New Market Segments

A firm can also grow by reaching into new market segments. If the target segments are welldefined, there are always a host of other segments to consider that would provide growthdirections. Consider, for example:

Distribution channel. A firm can reach new segments by opening up a second or thirdchannel of distribution. A retail sporting goods store could market to schools via a directsales force. A direct marketer such as Avon could introduce its products into departmentstores, perhaps under another brand name.Age. Johnson & Johnson’s baby shampoo was languishing until the company lookedtoward adults who wash their hair frequently.

Home versus office. A supplier of office equipment to businesses might look to thehome office market.

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Move upscale. Olay, which was a tired mass market P&G brand, was injected withinnovation (such as Regenerist, Definity, and Pro-X), eye-catching packaging, and newpositioning and was able to demonstrate that the mass market would be willing to paypremium prices if the offering merited them. In the process, a $2.5 billion businesswas created.

A key to detecting new markets is to consider a wide variety of segmentation variables.Sometimes looking at markets in a different way will uncover a useful segment. It is especiallyhelpful to identify segments that are not being served well, such as the women’s computer marketor the fashion needs of older people. In general, segments should be sought for which the brandcan provide value. Entering a new market without providing any incremental customer value isvery risky.

EVALUATING BUSINESS LEVERAGING OPTIONSThere will be no shortage of ways to leverage the existing business. Ultimately, these need to beevaluated to see whether one or more should be pursued either immediately or within a planninghorizon. This section proposes several questions that represent important criteria to consider.

These criteria are all supported by a series of studies of initiatives that leverage existing businessesconducted by Chris Zook of Bain and Company (as reported in two books, Profit from the Core withJames Allen and Beyond the Core).5 The first study provides case studies of 25 companies thatachieved sustainable growth performance from 1992 to 2002 far in excess of their peers. The secondstudy examined 12 pairs of firms. Each pair was within the same industry and with a similar startingpoint, but with very different financial trajectories over a 10-year period. The resulting databasecontained 150 attempts to leverage a business. The third study focused on 180 attempts to leverage acore business in the United States and the United Kingdom. The focus of these studies was to attemptto determine what was associated with successful initiatives to leverage core businesses.

Is the Product Market Attractive?

Successful initiatives involve forays into markets that have robust profit going forward. Recallthe five-factor Porter model introduced in Chapter 4. The most logical expansion will fail ifthere simply are no profits to be had because competitors control them or because the marginshave been squeezed by overcapacity or the nature of customer demand. The stampede of utilitycompanies into telecommunications turned out to be a disaster because the profit pool wasshrinking to the point that their ventures were uneconomic. In contrast, the controlled productexpansion of EAS, the vitamin supplement firm, was always into areas in which the marginswere healthy. Projecting a market forward, particularly a new one with potential new entrants,is difficult, but the risk of entering a hostile market can be significant. Recall the discussion ofthe risks of growth markets in Chapter 4.

Is the Core Business Successful?

There is no point in extending mediocrity. A weak business will seldom have either resources orassets and competencies to spin out to a growth initiative. The chances of successfully leveraging

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a business has been estimated by the Zook studies to be around 25 percent.6 And this falls to wellunder 8 percent when the core business is weak.7 Budget Rent-A-Car, for example, attempted ahost of strategies without success to improve on their also-ran status, including efforts to enterthe travel arena and the truck rental business.

Can the Core Business Be Transferred to the New Product Market?

The ability of the business to adapt to a new product market and the chances for success increasethe closer the leveraged business is to the core business. Tesco, the United Kingdom grocery chain,refined its retail offering by improving the checkout experience, parking, and fresh produce. Theygrew in part by expanding into in-store pharmacies, optical product stations, auto fuel, kitchenproducts, and coffee shops. Each of these leverage efforts enhanced the core business. Suchsynergy is healthy not only because the core business benefits, but because the new business ismore likely to draw on the strengths of the core as well. In contrast to this disciplined expansion,Tesco’s competitor Sainsbury strayed further from its core, investing in a grocery chain in Egyptand two do-it-yourself chains in the United Kingdom.

This effect has been quantified by the Zook studies in which the new business initiative wasseparated from the core in terms of whether the involved customers, competitors, channels ofdistribution, cost structure, and assets and competencies were the same or different. The sum ofdifferences could range from zero to five (there could be a partial match on some dimensions). Thesuccess probability sinks from over 25 percent to under 10 percent if the sum of differences wastwo or more.8

The task of adapting a business into a new market is easy to underestimate as illustratedby the experience of FedEx when it attempted to duplicate its concept in Europe. Setting up ahub-and-spoke system in Europe was inhibited by regulatory roadblocks at every turn. Attemptsto short-circuit regulations by acquiring firms with related abilities resulted in something ofa hodgepodge—FedEx at one point owned a barge company, for example. The firm also lacked afirst-mover advantage in Europe because DHL and others had employed the FedEx conceptyears earlier. A reliance on the English language and a decision to impose a pickup deadline offive o’clock in Spain (where people work until eight o’clock) caused additional implementationproblems.

Will the New Business Be Successful, Become a Market Leader?

The first question, which is not trivial, is whether the new business can avoid failure. Theacceptance of new products is low. Even for firms with high levels of competence in a market andwith real synergy to buttress the new entry, failure rates are extremely high. And we know theprimary reason. Dozens of studies in very different contexts and in different markets haveconcluded that the main reason for failure is that the new products lacked a point of difference,a reason to succeed. Too often they were “me-too” products, at least as perceived by customers.There was in essence no reason to succeed, so they didn’t. There should be evidence thatcustomers will value the product or service and that the offering can withstand the response ofexisting and potential competitors.

Even real advances may not be perceived by customers. They may even read an advance as areason not to buy. Clairol failed with Small Miracle hair conditioner, which could be used through

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several shampoos, in part because customers could not be convinced that the product wouldnot build up on their hair if it was not washed off with each use. Even the use of an establishedbrand cannot guarantee success. The concept of a colorless cola, Crystal Pepsi, did not achieveacceptance, because the appearance had a negative flavor connotation.

The goal, of course, should not be simply to survive, but to become a market leaderat least with an attractive submarket. Simply becoming the fourth or fifth or even third playercreates the danger that it will be impossible to keep up with the ongoing investment needed.Without substantial market and financial success, needed resources from the firm may be hardto justify. There is always a competition for resources even in “wealthy” organizations.

Is the Leverage Strategy Repeatable?

There is great value in creating initiatives that are repeatable. Repeatability leads to learningcurve effects, speed of execution, organizational simplicity, strategic clarity, and the ability toget the details right. In the Zook database, around two-thirds of the most successful, sustainedgrowth companies had one or two repeatable formulas.9 Nike, for example, has done muchbetter over time than Reebok. While Reebok was buying a boat company, Nike was duplicatingits success in basketball with moves into tennis, baseball, football, volleyball, hiking, soccer, andgolf. In all these efforts, the strategy was very similar, starting with a prominent credibleendorser from Michael Jordan to Tiger Woods and systematically moving from shoes to clothingto equipment.

THE MIRAGE OF SYNERGYSynergy, as suggested in Chapter 6, is an important source of competitive advantage. However,synergy is often more mirage than real. Synergy is often assumed when in fact it does not exist, isunattainable, or is vastly overvalued.

Potential Synergy Does Not Exist

Strategists often manipulate semantics to delude themselves that a synergistic justificationexists. But when a packaged-goods manufacturer bought Burger Chef, a chain of 700 fast-food restaurants, the fact that both entities were technically in the food business was of littleconsequence. Because the packaged-goods firm never could master the skills needed to runrestaurants, there was considerable negative organizational synergy.

There are many examples of expected synergy based on a superficial analysis that did notmaterialize. A large school bus operator bought into the ambulance business thinking that sinceboth involved vehicles and drivers there would be synergy. But because ambulances were morecomplex and heavily regulated, the synergy never happened. A supermarket chain struggledto expand into other countries because of the lack of common suppliers and the difficulty ofcreating an information system. eBay bought Skype thinking that it might be another way toconnect buyers and sellers, but the connection did not work in e-commerce, and the Skype hadto be divested.10 Skype was later bought by Microsoft, which is a better fit for its current businessand customers.

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Potential Synergy Exists But Is Unattainable

Sometimes there is real potential synergy, but implementation difficulties—usually far greaterthan expected—inhibit or block this synergy from being realized. When two organizations(perhaps within the same firm) have different cultures, strategies, and processes, there aresignificant issues to overcome. The effort to combine United Airlines, Westin Hotels and Resorts,and Hertz into one organization was a classic case in which the operational problems coupled withpresenting a confused brand face to customers doomed the idea. The efforts to create multiservicetelecommunication companies and fully integrated entertainment companies in order to achievesynergies have struggled.

Even when progress occurs, the patience and resources may not last long enough to seesuccess. The ultimate integration challenge occurs when a group of entities are integrated toprovide a comprehensive customer solution. Lou Gerstner indicated that integrating the country,product, and service silos at IBM, in part to provide integrated customer solutions, was his mostsignificant task and legacy.11 He noted that it took five years to make this progress. The synergiesexpected from the merger of Daimler-Benz and Chrysler never materialized; they finally gave upand engaged in a costly separation.

Potential Synergy Is Overvalued

One risk of buying a business in another area, even a related one, is that the potential synergy mayseem more enticing than it really is. Perhaps carried away by its success with Gatorade, Quaker

Box THE ELUSIVE SEARCH FOR SYNERGY

The concept of a total integrated communications firm that comprises advertising, direct marketing,marketing research, public relations, design, sales promotions, and Internet communications has beena dream of many organizations for two decades. The concept has been that synergy will be created byproviding clients with more consistent, coordinated communication efforts and by cross-sellingservices. Thus, Young & Rubicam had the “whole egg” and Ogilvy & Mather talked about “Ogilvyorchestrations.”

Despite the compelling logic and considerable efforts, though, such synergy has been elusive.Because each communication discipline involved different people, paradigms, cultures, success mea-sures, and processes, the disparate groups had difficulty not only working together but even doing simplethings such as sharing strategies and visuals. Their inclination was to view other disciplines as inferiorcompetitors rather than partners. Further, they were often reluctant to refer clients to sister units thatwere suspected to deliver inferior results, which created client-relationship ownership issues.

The firms with at least some success stories to their credit—Young & Rubicam, Denstu, andMcCann Ericson—have a set of communication modalities such as direct marketing, public relations,Internet communications, and advertising in one organization, with shared locations and client-relations leadership. These firms make sure there is a strong, credible team leader with a dedicatedspace and a team-oriented performance measure. Even with such assets, sustained success is extremelyrare. When a virtual team is formed with separate companies under one umbrella, even if they arewithin the same communication holding company, success is even rarer.

The lesson here is that synergy does not just happen despite logic and motivation. It requires realinnovation in implementation—not just trying harder.

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Oats purchased the Snapple business in 1994 for $1.6 billion, only to sell it two years later fora mere $300 million. Quaker had difficulties in distribution and was inept at taking a quirkypersonality brand into the mainstream beverage market (its program was based on pedestrianadvertising and a giant sampling giveaway). Moreover, the fact that Quaker paid several times morethan Snapple was worth was a fatal handicap.

The acquisition of The Learning Company—a popular children’s software publisher with titlessuch as Reader Rabbit, Learn to Speak, and Oregon Trail—seemed like a logical move by Mattel,the powerful toy company with Barbie among its properties. Yet less than a year and a half afterpaying $3.5 billion for it, Mattel basically gave The Learning Company away to get out from undermounting losses.

One study of 75 people from 40 companies that were experienced at acquisition led toseveral conclusions. First, few companies do a rigorous risk analysis, looking at both the least andthe most favorable outcomes. When optimistic vibes abound, it is particularly wise to look at thedownside: What can go wrong? Second, it is useful to set a maximum price that you will notexceed. Avoid getting so exuberant about the synergistic potential that you ultimately pay morethan you will ever be able to recoup.12

KEY LEARNINGS

Leveraging assets and competencies involves identifying them andcreatively determining in what business areas they might be able to contribute.

Brand extensions should both help and be enhanced by the new offering in addition tobeing perceived to have a fit with it.

The business can be leveraged by introducing new products to the market orexpanding the market for the existing products.

Entering a new product market is risky, as the new offering might lack marketacceptance or needed resources. Success likelihood goes up if the core business ishealthy, if the new product market is attractive (competitors will be profitable), if thebusiness model is repeatable, if market leadership is possible, and if the stretch fromthe core is small.

Synergy can be a mirage. Too often, it does not exist, or it exists but is unattainable orovervalued.

FOR DISCUSSION1. Pick an industry and a product or service. Engage in a creative-thinking process, as

outlined on pages 199–200 in Chapter 11, to generate an improved offering. Do thesame to create an entirely new offering that uses one or more of firm assets andcompetencies.

2. Evaluate the following extension proposals:a. Bank of America into home safesb. Crest into a chain of dentist offices

226 Part Two Creating, Adapting, and Implementing Strategy

c. Caterpillar into automobilesd. Google into flight reservations

3. Pick a branded offering such as Southwest Airlines. Come up with 20 products orservices that are alternative extension options. Include some that would be a stretch.Then evaluate each using the three criteria provided in the chapter.

4. Consider the following mergers or acquisitions. What synergy was or would belogically possible? What would inhibit synergy? Consider operations, culture, andbrand equities.

a. Citicorp acquired Providian, a credit card firm serving low-income segmentsb. Pepsi (the owners of Frito-Lay) acquired Quaker Oatsc. Toyota acquiring Jeep

5. Evaluate Starbucks’ extension decisions: to put Starbucks on United Airlines, to openStarbucks in bookstores and supermarkets, to license Starbucks ice cream to Dreyer’s,to offer oatmeal in Starbucks stores, to sell the soluble coffee VIA in supermarkets,and to sell Frappuccino as a packaged drink. What were the risks both as individualdecisions and cumulatively?

6. Identify and evaluate a combination of businesses that have achieved synergy andanother that has failed to do so.

Box BEST DIGITAL PRACTICE

Growing the Audience for Hamilton

Since its debut in 2015, Broadway’s hit musical Hamilton has received critical acclaim and realizedunprecedented box office sales. Just a year after opening, shows were sold out through January 2017and ticket prices had climbed to $500. Such widespread success inspired the play’s management tothink about how they could extend Hamilton’s footprint beyond Broadway.

Hamilton’s digital team focused on attracting an even wider audience by establishing a presenceon the Internet and in social media. They understood how these channels provided a uniqueopportunity for fans who had never seen the live show to experience the Hamilton brand. At thecornerstone of the team’s efforts were a series of online “Ham4Ham” videos. In these, the cast ofHamilton produced short and playful scenes—some were reenactments from the play; others wereunrelated vignettes. In one, the cast recreated a popular scene from the West Wing of the White Houseright before they were set to perform for President Obama. In another, lead actor Lin Manuel-Mirandaand Hamilton’s composer Alan Menken sang songs from Disney’s The Little Mermaid. The show alsoregularly publishes digital content across Instagram, Snapchat, Twitter, and YouTube, including user-generated postings. For example, the team manages an Instagram series called #HamArt, whichdepicts drawings and paintings of characters or scenes from the play created by its fans.

Hamilton’s ability to reach unexpected markets stems from the producer’s adeptness at managingboth an entertainment brand and a Broadway musical. By understanding the strength of creativecontent creation and uncovering new distribution opportunities, Hamilton’s digital team has been

(continued)

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instrumental in earning the franchise a larger online audience than any other Broadway show, includinglong-standing blockbusters such as Wicked and the Lion King.

Off Broadway, several factors have pointed to the play’s enduring success. In 2017, the castand crew will begin a national tour across at least 15 U.S. cities. Additionally, various pieces ofmerchandise—from sweatshirts to hats—and other collectible souvenirs from the show continue tobe in high demand. Finally, Hamilton has connected with a youthful demographic who likely wereuninterested in the theater previously but now have the potential to become habitual playgoers.

Questions:

1. How can Broadway leverage its success with Hamilton to increase its convert the youngerdemographic to be become habitual playgoers?

2. Using the criteria to evaluate business leveraging options, what other growth options exist asrevenue-generating for Hamilton?

Sources:Issie Lapowsky, “Hamilton’s Savvy Plan to Keep Fans Stoked Even if They Never Get Tickets,”WIRED, May 10, 2016, http://www.wired.com/2016/05/cant-get-hamilton-tickets-show-goes-online/

Robert Viagas, “Hamilton Tour Adds Stops in California and North Carolina,” Playbill, June 10, 2016,http://www.playbill.com/article/hamilton-tour-adds-two-more-stops

BoxBEST GLOBAL PRACTICE

Tanita

Tanita, a top Japanese manufacturer of premium bathroom scales, unexpectedly stumbled on the idea todiversify the scope of its offerings. It was Tanita’s canteen (cafeteria) that inspired a series of newbusiness ventures. Historically, canteens were perceived as sources of convenient meals in an environ-ment that encouraged people to eat quickly. The cost of food was low but came at the expense of little tono flavor. Tanita decided to challenge this trend by rebranding its canteen into more of an “eatery”that offered cost conscious, healthy, and good-tasting meals. Given the company’s mission of helpingpeople live healthy lives, management knew it was important to also emphasize these values amongemployees.

The changes Tanita made to its cafeteria attracted the attention of the media, and it soon becamethe subject of a television documentary. This helped spread demand for healthy but flavorful eating,and Tanita realized that it had an opportunity to bring its cafeteria meals to consumers. In 2010, thecompany published a cookbook entitled “The Staff Canteen at Body Fat Scale Maker Tanita: 500-kcalMeals That Will Make You Full.” This book and its sequel sold almost 5 million copies and are now inapproximately 10 percent of Japanese households.

The success of these cookbooks led to another idea: an upscale cafeteria-style restaurant situatedin the business district of Marunouchi in Central Tokyo. The restaurant, featuring healthy items under500-kcal, is so popular that access has to be controlled by two different seating times and a lotterysystem that issues tickets for entrance.

228 Part Two Creating, Adapting, and Implementing Strategy

By leveraging the focus on healthy living that had made its scale business so successful, Tanita wasable to extend the brand’s relationship with customers. The recipe book was the first step in Tanitaearning credibility as a comprehensive wellness brand. Tanita’s opportunistic attitude also helped ittake advantage of other expansion growth options, such as the restaurant.

Questions:

1. Describe which assets and competencies were effectively leveraged by Tanita for growth.

2. Evaluate the quality of its brand extensions using the criteria in the case. Using these criteria, whathealth products would not make sense for Tanita to introduce?

Source:Tomoko Otake, “Canteens Put Employees’ Health on the Menu,” The Japan Times, May 22, 2012,http://www.japantimes.co.jp/life/2012/05/22/lifestyle/canteens-put-employees-health-on-the-menu/

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C H A P T E R T H I R T E E N

Creating New Businesses

The most effective way to cope with change is to help create it.—I. W. Lynett

When I arise in the morning torn between a desire to improve the world and a desire to enjoy the world.This makes it hard to plan the day.—E. B. White

The unexpected is the best source of inspiration.—Peter Drucker

Enterprise Rent-A-Car, which passed Hertz in sales during the 1990s, had sales of $20.9 billion in2016 compared with incumbent Hertz’s $1.68 billion and was much more profitable. Enterprise,formedin1957inSt.Louis,focusedontheoff-airportmarket,cateringtoleisuretravelersand(moreimportant) to insurance companies that needed to supply a car to customers whose car was beingrepaired, a market that Enterprise created and nurtured. With a signature “We’ll pick you up” offer,its inexpensive off-airport sites were run by entrepreneur managers motivated in part by a bonussystem tied to customer satisfaction. Not until the late 1980s when it was already nipping at the heelsofHertzdidEnterprisebeginnationaladvertisingandgetontheradarscreenofitscompetitors,whowere all after the prime market of business travelers who wanted a car at the airport.

Cirque du Soleil started in 1984 with a few street performers. A traditional circus with animals,trapeze artists, clowns, three-ring entertainment, and tents was oriented to families with children.Competitors were always tweaking the acts and setting. Cirque du Soleil (“We reinvented thecircus”) was qualitatively different, appealing to a different customer group—adults and corporateclients, who would pay a significantly higher price. The performers were talented acrobats, theclowns were more sophisticated, and there was a motivating story line somewhat like a theaterproduction. Further, much of the expense was eliminated: There was only one “ring,” no animals,no star performers, and no aisle concessions. It was so different that it made the traditional circusirrelevant and changed what the customer was buying.

Yamaha revitalized a declining piano market by developing the Disklavier, which functionedand played like other pianos except that it also included an electronic control system, thus creatinga modern version of the old player piano. The system allowed a performance to be recorded and

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stored in memory. It provided a professional piano experience (with an artist who did not charge orget tired) for the home, hotel lobby, restaurant, or wherever entertainment would be welcome.

During the past century, the automobile industry experienced a dozen or more innovationsthat have created new business arenas—the Model T, the enclosed car, the GM spectrum of carsfrom Chevrolet to Cadillac, installment buying, the automatic transmission, the original FordThunderbird, the VW bug, the inexpensive and reliable Japanese cars of the 1970s, minivans,SUVs, and hybrids. In each case, the innovators achieved above-average profits that extended foryears. In particular, the Chrysler minivan, introduced in 1983 with first year sales over 200,000,maintained leadership in the category for at least a decade and was a critical contributor to the verysurvival of the firm.

CREATE “MUST HAVES,” RENDERING COMPETITORSIRRELEVANTThe brand home run is an innovative offering containing a “must have” that defines a new categoryor subcategory for which competitors are not relevant. A substantial group of customers will notconsider any brand lacking the “must have.”

As the book Brand Relevance: Making Competitors Irrelevant details, such an innovationwill not happen frequently, but when it does, brand strategists need to seize that opportunity,recognizing that something bigger than a point of differentiation is present and manage itaccordingly. The firm needs to not only develop a “must have,” but also bring it to market andthen build barriers to competitors so the luxury of having a monopoly or near monopoly marketposition will not be short lived. It is not easy, but the upside is enormous.1

To generate a “must have,” there needs to be an offering innovation that is so substantial ortransformational that some customers will not do without it. Transformational innovation, asdescribed in Chapter 5, is a game changer such as salesforce.com championing cloud computingor Cirque du Soleil reinventing the circus. Substantial innovation, also described in Chapter 5(unlike transformational), innovation will not change the basic characteristics of the offering butwill significantly enhance it either through the addition of a new “must have” or an improvementof one of its characteristics that is so significant that customers will now reject any option withoutit. A new category or subcategory will then be formed. The branded ingredient Kevlar provideda substantial innovation, defining a subcategory in the body armor market. Sometimes thedistinction between the two is blurred, but the innovation should clearly not be incremental, onethat will improve or strengthen brand preference with a “like to have” in the context of theexisting categories or subcategories.

The “must have” can improve or enhance the offering such as:

A feature such as the fast delivery from Amazon

A benefit such as that provided by Nike Plus’ running shoe with a built-in chip that allowsuser to track and share their training data

An appealing design such as Apple products

A systems offering that integrates Siebel’s CMR suite of customer contact programs

A new technology such as cloud computing that salesforce.com pioneered

A product designed for a segment such as Luna, the energy bar for women

A dramatically low price point such as JetBlue airlines

Chapter 13 Creating New Businesses 231

A “must have” can also involve the basis for a customer relationship that is not involvedwith a functional benefit of the offering, but is important symbolically to the customersuch as:

A shared interest such as Pampers Village, a go-to site for baby care

A personality that connects such as the energy of Red Bull, the competence of CharlesSchwab, the irreverence of Virgin, the humor of Southwest, or the exotic service ofSingapore AirlinesA passion such as that shown by Whole Foods Market for healthy foods

Organizational values such as being customer centered (Zappos.com), innovative (3M),global (Citibank), involved in community or social issues (Avon), or being concernedabout the environment (Patagonia)

In any case, the “must have” is a characteristic or element of the brand relationship that isregarded as necessary for a brand to be considered and thus relevant.

The “Must Have” Pay-Off

Creating “must haves” through substantial or transformational innovation and making com-petitors irrelevant or less relevant, is not only desirable but, in fact, is with rare exceptions theonly way to grow. With rare exceptions, the only way! By far the more common strategy is toengage in brand preference competition—focusing on making a brand preferred among thechoices considered by customers in a defined subcategory. The goal is to beat the competitionthrough the use of incremental innovation to make the brand ever more attractive or reliableor the offering less costly. “Faster, cheaper, better” is the mantra. Resources are expended oncommunicating more effectively with cleverer advertising, more impactful promotions, morevisible sponsorships, and more involving social media programs. You win by making yourbrand preferred as opposed to making your brand the only relevant brand, the only brandconsidered.

The problem is that “my brand is better than your brand” marketing rarely changes themarketplace no matter how much marketing budget is available or how clever the incrementalinnovation. The stability of brand positions in nearly all markets is simply astonishing. There isjust too much customer and market momentum. Brand preference competition is also justso not fun.

With few exceptions, the only time that a market structure experiences any meaningful changeis when a new “must have” was introduced with major innovation. For example, the market sharetrajectory within the Japanese beer industry changed only four times during five decades, threewhen a brand created or got traction for new subcategories (Asahi Dry Beer in 1986, KirinIchiban in 1990, and Kirin’s Happoshu brand in the late 1990s) and once in 1995 when twosubcategories were both repositioned. All of the marketing in other years simply did not move theneedle.

Look at any category and the result is the same. Only when new “must haves” are introduced,with rare exceptions, does a brand achieve real growth. In automobiles, for example, marketdynamics are driven by innovations represented by brands such as Ford’s Mustang and Taurus, theVW bug, Mazda’s Miata, Chrysler’s minivans, Toyota’s Prius and Lexus, and BMW’s MINICooper. In computers, the market was altered by new subcategories such as DEC’s minicomputer,

232 Part Two Creating, Adapting, and Implementing Strategy

Silicon Graphic’s workstations, Sun’s network servers, Dell’s build-to-order PCs, and Apple’sinterface. In services, there is Westin’s Heavenly Bed, which defined the premium bed hotel.In packaged goods, there are Odwalla, SoBe, and Dreyer’s Slow Churned Ice Cream. Inretailing, there are Whole Foods, Zara, Best Buy’s Geek Squad, IKEA, Zappos.com, and Muji(the no-brand store).

Creating a marketplace with weak or nonexistent competition has a huge potential payoff. Itis Econ 101, the ticket to real growth in sales and profits. Consider the Chrysler minivanintroduced in 1982 as the Plymouth Voyager and Dodge Caravan, which sold 200,000 during firstyear and 12.5 million since and enjoyed many years with no viable competitors. It literally carriedChrysler for nearly two decades. Likewise, Uber burst onto the market in 2009 with atransportation network that allows drivers to use their own vehicles for taxi-like services atless than half the price.

In addition to numerous case studies, empirical evidence shows that creating new categoriesor subcategories pays off. Perhaps the most robust law in marketing is that new product success iscorrelated with how differentiated products are, and a highly differentiated offering is likelyto define a new category or subcategory. A McKinsey study showed that new entrants into amarket that likely involve a high percentage of new categories or subcategories had a returnpremium of 13 percent the first year, sliding to 1 percent in the tenth year.2 A more tellingstudy found that of 150 strategic moves, the 14 percent that were categorized as creating a newcategory or subcategory contributed 38 percent of the revenues and 61 percent of the profits ofthe group.3

Evaluating Potential “Must Haves”

The pay-off of a successful “must have” can be substantial real growth if not a game changer. A keyaspect of the process is to evaluate innovations to determine if there is a “must have” or whetherthe innovation is in fact incremental. It turns out that the analysis is fraught with personal,professional, and organizational biases. Evaluation is based on two judgments.

Is the Concept Significant to the Marketplace?

Does the new concept represent a substantial, transformational, or incremental innovation? Oneerror, which can be termed the “rosy picture bias,” is to assume that a substantial innovation existswhen in fact the market regards it as incremental. Innovation champions tend to inflate theprospects because they become psychologically committed and because, professionally, theconcept’s success might be pivotal in a career path. There is also organizational momentum;an offering that has been funded and part of the plan is sometimes hard to terminate. So thereneeds to be a hard-headed, research-based judgment made on the market response to theinnovation.

Another often more serious mistake is the “gloomy picture bias” leading to an erroneousjudgment that an innovation will not succeed when, in fact, it represents an opportunity to owna major category or subcategory. The judgment could rely on market size estimates based onexisting flawed products. The wrong application or market might be targeted and the potentialthus missed. Joint Juice, a product designed to reduce joint pain by making glucosamine inliquid form, found life when it went after an older demographic instead of young to middle-aged athletes. There could be a flawed assumption that a niche market could not be scaled and

Chapter 13 Creating New Businesses 233

the resulting market is too small. For that reason, Coca-Cola avoided the water market fordecades, a decision that, in retrospect, was a strategic disaster. Estimates can be colored bythe fact that people and organizations tend to be risk adverse because the cost of failure istoo evident.

Can the Offering be Created?

Is the concept even feasible, especially if a technological breakthrough is needed? And even if theoffering is feasible, does the organization have, or can it create, the needed people, systems,culture, and assets? And does the organization have the will to commit to the idea even withbarriers and difficulties in development or in the marketplace? There will be times when the risksseem great and the rewards uncertain, and alternative uses of the resources are appealingand have political support. Without commitment, the new innovation may well becomeunderfunded and potentially doomed. Creating a new category or subcategory is difficult enough.A solid vision with commitment in key parts of the organization is often needed and not easy toobtain and retain.

Is the timing right? Being first into the market is not necessary or even always desirable. Infact, the pioneering brand is often premature because the market, the technology, or the firmwas not ready. Apple was not the pioneer for the iPod (Sony beat Apple by two years), theiPhone (the technology was up and running in Europe years before), or the iPad (Bill Gates ofMicrosoft introduced the “Tablet PC” some 10 years earlier), but in each case, Apple had thetiming right. The technology was in place or around the corner, the firm had the assets andexperience, and the value proposition had been market tested albeit with inferior technology.For all the talents of Steve Jobs, his genius at timing is underappreciated.

The ability of an organization to develop “must have” opportunities depends on its beingable to generate and nurture substantial and transformational innovation even when the largeorganizational units are favoring incremental innovation. Further, the ability to capitalize on asuccessful creation of “must haves” and the new subcategory they define will depend on buildingbarriers to competitor entry or success.

THE INNOVATOR’S ADVANTAGEInnovation can create what is often termed a first-mover advantage based on several factors. First,competitors will often be inhibited from responding in a timely manner or they may believe thatthe new business will cannibalize their existing business. Chyrsler’s competitors held back inresponding to the minivan because they wanted to protect their station wagon business. Chryslerwas fortunate to have a weak position in station wagons and thus had less to lose. Further,competitors may be worried about the impact on their brand. For example, Xerox did not want tobe associated with the low-end desktop copiers that were being offered by Canon even thoughXerox had access to one from its Japanese affiliate Fuji-Xerox. Because of these concerns,competitors are tempted to minimize the long-term impact of an innovation and make themselvesbelieve that it is a passing fad.

Second, competitors often are simply not able to respond. They may be playing catch-uptechnologically, especially if the technology is evolving or if patents are involved. Sometimesthere might be natural monopolies (an area might be able to support only one muliplex cinema,

234 Part Two Creating, Adapting, and Implementing Strategy

for example). More common are organizational constraints. Responding to an innovationmight require changes in organizational culture, people, and systems, which can be allbut impossible. Many retailers unsuccessfully attempted to duplicate Nordstrom’s customerservice because although they could copy what Nordstrom did, they could not duplicate whatNordstrom was as an organization—its reward system, culture, heritage, in-store organization,and more.

Third, the innovator can create customer loyalty based on the exposure and experience with itsproduct or service. If the concept and experience are satisfactory, there may be no incentive for acustomer to risk trying something different. The innovator can also earn the valuable “authentic”label. This was a factor facing competitors such as Kirin when they tried to duplicate Asahi DryBeer’s success in Japan. Customer-switching costs can create a distinct disadvantage for a follower.Or there could be network externalities. If a large community begins to use a service such as eBay,it may be difficult for a competitor to create a competing community.

To capture a first-mover advantage, it is important to hit the market first and invest to buildposition. While high initial prices may be an attractive way to capture margin and recoverdevelopment costs, a low-price strategy may serve to build share and increase the barriers tofollowers. Followers will have the benefit of seeing the innovation, but will often need to besignificantly better to have a chance of dislodging the first mover among the user base. So it ishelpful to make that user base as large as possible.

It turns out that true market pioneers often do not survive, perhaps because they enteredbefore the technology was in place or because they got blown away by larger competitors.4

Pioneers such as Dreft in laundry detergent, daguerreotypes in photography, Star in safety razors,and Harvard Graphics in presentation software did not or could not capitalize on their first-moverstatus. In contrast, Golder and Tellis found that early market leaders, firms that assume marketleadership during the early product growth phase, had a minimal failure rate and an averagemarket share almost three times that of market pioneers and a high rate of continuing marketleadership.5 They noted that successful early market leaders tended to share certain traits:

Envisioning the mass market. While pioneers such as Ampex in video recorders andChux in disposable diapers charged high prices, the early market leaders (such as Sonyand Matsushita in video recorders and P&G in diapers) priced the product at a massmarket level. Timex in watches, Kodak in film, Gillette in safety razors, Ford inautomobiles, and L’eggs in women’s hosiery all used a vision of a mass market to fueltheir success.Managerial persistence. The technological advances of early market leaders often tookyears of investment. It took 10 years of research for P&G to create the successful Pampersentry and two decades for Japanese firms to develop the video recorder.

Financial commitment. The willingness and ability to invest are nontrivial when thepayoff is years into the future. For example, when Rheingold Brewery introducedGablinger’s light beer, it had a promising start, but financial downturns in other sectorscaused it to withdraw resources from the brand. In contrast, Philip Morris investedsubstantially in Miller Lite for five years in order to achieve and retain a dominantposition.

Relentless innovation. It is clear that long-term leadership requires continuousinnovation. Gillette learned its lesson in the early 1960s when the U.K. firm Wilkinson

Chapter 13 Creating New Businesses 235

Sword introduced a stainless steel razor blade that lasted three times longer than Gillette’scarbon steel blade. After experiencing a sharp share drop, Gillette returned to itsinnovative heritage and developed a new series of products, from the Trac II to the Altra,Sensor, Mach 3, and now the Fusion.

Asset leverage. Early market leaders often also hold dominant positions in a relatedcategory, allowing them to exploit distribution clout and a powerful brand name toachieve shared economies. Diet Pepsi and Coke’s Tab, for example, were able to use theirdistribution power and brand names to take over the diet cola market from the pioneer,Royal Crown Cola.

Being a first mover and owning an emerging market or submarket does more than provide acompetitive edge in that market. It also leads to a perception of being innovative. Gainingperceptions of innovativeness is a priority for nearly all businesses because it provides energyand credibility for new products. But few brands break out and reach that goal. Figure 13.1examines the top 20 brands on an innovativeness scale according to the 2016–2017 BAV (BrandAsset Valuator from Y&R) database covering over 3,000 brands.6 Nearly all had created and/orowned a new submarket using transformational innovation.

MANAGING CATEGORY PERCEPTIONSWhen a new product category or subcategory such as iPods, smartphones, Pringles, or hybridcars emerges, the innovators need to be aware that their challenge is not only to create anoffering and a brand, but also to manage the perception of the new category or subcategory.A new business will change what people are buying. Instead of buying any car, some customerswill be looking specifically for a hybrid. As new entrants come in, there will be different types ofhybrids. So Toyota, the early hybrid leader, has an opportunity to manage the perceptions of thecategory while simultaneously linking itself to the category as the leading brand, one withauthenticity and ability to deliver. For a business innovator, the focus is no longer just on whatbrand to buy (the preference question), but rather what product category or subcategory to buy(the relevance question).

The best way to define and manage perceptions of a new category or subcategory is tobecome its exemplar, the brand that represents it in the minds of the customers. An exemplarwill not manage perceptions, but will provide credibility and authenticity for the brand. It willoften be perceived to be an innovator and the brand that sets the quality standard. Others willusually be perceived to be imitators and inferior. Competitors will be in the awkward positionof defining their relevance in a way that only reaffirms the authenticity of the exemplar.

To become an exemplar, a brand needs to advance the category or subcategory rather thanthe brand. It needs to focus on the category or subcategory characteristics, point out its

1. Google Glass 6. Tesla 11. iPad 16. FitBit2. Pixar 7. SpaceX 12. Skype 17. Microsoft Windows3. Apple Watch 8. SodaStream 13. iPhone 18. Samsung4. Google 9. NASA 14. iOS 19. Intel5. Apple 10. Microsoft 15. Android 20. Dyson

Figure 13.1 Perceived Innovativeness—2016–2017

236 Part Two Creating, Adapting, and Implementing Strategy

advantages, and promote loyalty to the category or subcategory over other categories orsubcategories. Second, the brand’s organization needs to be a thought leader and innovator.Improvement and change will make the category or subcategory dynamic, the brand moreinteresting, and the role of the exemplar more valued. Disneyland is the exemplar of themeparks, and it is always innovating. Third, the brand should be willing to invest in capacity andmarketing to be the early market leader in terms of sales and market share. It is hard to be anexemplar and to leverage that role without market share leadership and the large voice that goeswith it.

In managing perceptions of a category, there are some guidelines. First, there may be a needto focus on attributes and functional benefits at the outset to make sure that the category and itsvalue proposition are communicated. The emotional and self-expressive benefits can havesecondary status at the beginning. Second, labels such as minivan, camcorder, SUV, etc. helpunless the first-mover brand such as TiVo or Xerox becomes the de facto subcategory label.Incidentally, these guidelines apply whenever the category is new to the market even if it isestablished elsewhere. For example, many categories of products (such as vans) are new to Chinalong after they have been established in the Western world.

CREATING NEW BUSINESS ARENASThe first step to the creation of a new business arena is to get ideas on the table and refine thebest ones to obtain potential business concepts. Good ideas are more likely to happen if they arevalued by the organization and if there is a process to stimulate them. GE has set a goal that eachbusiness should generate technology breakthrough ideas; concepts that could lead to a $50–100million business in the foreseeable future. As a result, time and resources are given toidea generation.

In Chapter 12, the starting point was the assets and competencies of the firm and how theycould be leveraged. Here, the starting point is the customer in relation to offerings. In what way arethe offerings disappointing? What are the unmet needs? What activities are the existing product orservice a part of, and what are the goals?

Box PETER DRUCKER’S DO’S AND DON’TS OF INNOVATION7

Do:Analyze the opportunities.Go out and look, ask, and listen.Keep it simple and keep it focused.Start small—try to do one specific thing.Aim at market leadership.

Don’t:Try to be clever.Diversify, splinter, or do too many things at once.Try to innovate for the future.

Chapter 13 Creating New Businesses 237

New business ideas can come from anywhere. However, the history of blue-ocean venturescontains patterns and can suggest possibilities. Among them are technological innovation, goingfrom components to systems, unmet needs, niche submarkets, customer trends, and creating adramatically lower price point.

Technological Innovation

A new technology—such as disposable razors, notebook computers, a new fabric, or hybrid cars—can drive the perception of a submarket. By creating a subcategory of dry beer, Asahi Super DryBeer made Kirin, the leading lager beer brand, irrelevant for a significant and growing segment inJapan. A minor player with less than 10 percent of the market in 1986, Asahi grew to gain marketshare leadership in the late 1990s, in large part by taking share from Kirin. Kirin finally mounted acomeback by introducing Kirin Ichiban, a different beer formulation, and taking leadership of thelow-malt subcategory, happoshu, a beer brewed with ingredients that warranted a sharply lowertax, and another no-malt beer with an even lower tax, termed the third beer. Amazingly,considering an average of three new product introductions per month and the marketing dollarsspent in the Japanese beer market each year for 30 years, three of the four changes in marketingshare momentum were due to these innovations: dry beer, Kirin Ichiban, and low-malt beer. Thefourth change was due to Asahi’s repositioning of the dry beer subcategory. The market sharedynamic was explained entirely by the emergence or evolution of subcategories.

Technological innovation can take many forms. Packaging innovation led to Yoplait’s Go-Gurt,the yogurt in a tube that kids slurp up, which created a new business with a different target market,value proposition, and competitors than conventional yogurt makers. Software innovation createdeBay’s online auction category where a host of imitators had difficulty matching both theoperational performance and the critical mass of users established by eBay.

From Components to Systems

A classic way to change the market is to move from components to systems. The idea is to look atthe system in which the product or service is embedded and expand perceptions horizontally. Siebel,for example, changed what people bought by creating customer relationship management (CRM).CRM combined a host of software programs (such as call center management, loyalty programs,direct mail, customer acquisition, customer service, sales force automation, and much more) intoa single umbrella package. It no longer was enough to provide the best direct mail program. Firmscould now buy something much broader and simply were not interested in stand-alone programsthat require idiosyncratic training and could not be linked to other complementary programs.

KLM Cargo’s offering was providing space on its airplanes, a commodity that was becoming alow-margin business.8 After studying the total system needs for customers who were shippingperishables, KLM determined that significant value could be added by providing not just cargospace, but a transportation solution that included end-to-end responsibility for the product. Thesecustomers, importers and retailers, were experiencing spoilage, and it was never clear who in thelogistics chain was responsible. Under its Fresh Partners initiative, KLM provided an unbroken“cool chain” from the producer to the point of delivery, with three levels of service—fresh regular,fresh cool, and fresh supercool (where products are guaranteed to have a specific temperaturefrom truck to warehouse to plane to warehouse to truck to the retailer). Firms importing orchids

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from Thailand and salmon from Norway were among those using the service. This initiativeallowed KLM to move from a commodity business to one that could capture attractive marginsbased on the value delivered to customers.

Unmet Needs

Unmet needs provide insight that when translated into products or services will be highly likelyto be relevant to the customer and can lead to new business. When Saturn and Lexus, forexample, changed the way customers interacted with car dealers, they were addressing asignificant unmet need. The result made some other brands less relevant for an importantsegment. Betty Crocker’s Hamburger Helper addressed the need to have a shelf-stable mealpreparation tool.

Cemex, a concrete company, realized that its customers had a lot of money riding onpredictable delivery because concrete is highly perishable.9 As a result, Cemex created capabilitiesusing digital systems that allowed drivers to adjust in real time to traffic patterns and changingcustomer timetables. It can now deliver products within minutes and process change orders on thefly. It addressed an unmet need and the totally new business model that resulted has led to Cemexgoing from a regional player to the third largest concrete company in the world, serving 30countries.

Customers are not always a good source for some kinds of unmet needs, especially thoseinvolving emotional and self-expressive benefits, and so insight from creative and knowledgeablepeople might be required. The attractiveness of an SUV, for example, did not really result from itsfunctional benefits. Further, customers have a difficult time getting around the boundaries of thecurrent offering and may not have been much help in going from a horse to a car to an airplane.When analyzing the customer, it is important for the analysis to have both breadth and depth, andthat is where ethnographic research excels.

Ethnographic (or anthropological) research, introduced in Chapter 2, is a good way to uncoverand analyze unmet needs. Simply observing customers in their “native habitat” can provide a freshand insightful look at the problems customers are facing.

Niche Markets

The market can be broken into niches with each niche having its own dominant brand. The energybar market created by PowerBar ultimately fragmented into a variety of submarkets, including barsdesigned for women (Luna), high protein (Balance), low calories (Pria), and candy bar taste(Balance Gold).

A niche can be defined by an application. Bayer helped define a new subcategory—takingbaby aspirin regularly to ward off heart attacks—with its Bayer 81 mg. It attempted to furtherdefine the subcategory by introducing Enteric Safety Coating to reassure those concerned aboutthe effects of regular aspirin use on the stomach.

A niche can be also defined by a unique position that appeals to a distinct submarket. In theUnited Kingdom, the Ford Galaxy minivan was positioned away from the functional soccer momsor family outing slot. It was instead introduced as being roomy and comfortable, like first-class airtravel, and therefore suitable for busy executives. Starbucks similarly created a different retailcoffee experience that made other competitors irrelevant.

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Customer Trends

A customer trend can be a driver of a submarket. The expression “Find a parade and get in front ofit” has some applicability. That was part of the strategy of Whole Foods with organic foods andApple’s iPod with music sharing.

It is even better if multiple trends can be accessed because the competitors will be morediffused. The dual trends toward wellness and the use of herbs and natural supplements havesupported a new category, healthy refreshment beverages (HRBs). This arena now contains a hostof subcategories, such as enhanced teas, fruit drinks, soy-based drinks, and waters. The pioneer andsubmarket leader is SoBe, which started in 1996 (with SoBe Black Tea 3G, containing ginseng,ginkgo, and guarana) and now has an extensive line of teas, juices, and energy drinks. The largebeverage companies ignored this trend for too long and have been playing a frustrating andexpensive game of catch-up. Annie Chun developed a line of packaged Asian food that capitalizedon a host of trends, including the rise of Asian foods, healthy eating, convenience, and quality meals.

Creating a Dramatically Lower Price Point

Many blue-ocean businesses occur when an offering appears that is simpler and cheaper thanthat of established firms. Clayton Christensen, a noted Harvard strategy researcher, has studieda wide variety of industries with a series of colleagues and developed two theories aboutdisruptive innovations. His research is reported in three books: The Innovator’s Dilemma, TheInnovator’s Solution (with Michael Raynor), and Seeing What’s Next (with Scott Anthony andErik Roth).10

The first theory is termed low-end disruptive innovation, where industries are altered byemerging products whose price appears dramatically low. In these industries, established firmstarget the best customers and attempt to sell them better products for more money. More features,services, and reliability are all aimed at capturing a higher level of loyalty and margin. The firmsthat are successful develop structures, staffs, incentives, and skills designed to generate andimplement a continuous flow of “sustaining innovations” to improve the offering. They invest inbuilding deeper relationships with their best customers, wealthy clients in the case of financialinstitutions. Packaged goods firms offer line extensions to provide variety and interest to loyalcustomers. Retailers and others invest in loyalty programs.

This drive to service the most profitable customers provides an opening in the form of thelow-end customer. These customers, often ignored or considered a nuisance by the establishedfirms, are typically “overserved” and would be happy with a simpler, cheaper product thatdelivers satisfactory performance. Capitalizing on this opportunity, firms (often new to theindustry) engage in “low-end disruptive innovation.” They introduce an entry that is easier to useand much less expensive. Typically, the entrant’s product is so inferior that its appeal is to alimited number of applications and customers, which incumbent firms consider marginalanyway. But often these firms then improve their offering over time and become competitorsin a broad section of the market. A study of stall points, where steady sales growth abruptlychanges to prolonged decline, of some 500 firms over 50 years showed that the leading cause,occurring in 23 percent of the cases, was low-end disruption innovation.11

The steel minimills in the 1960s initially made low-quality steel, serving a market for rebar(reinforcing concrete) that did not require high quality and was a low-margin, unattractivebusiness. Over the decades, they improved their technology and products, however, and began

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to challenge the incumbents on a broad front. There are many similar examples. The Japanese carcompanies entered the market in the late 1960s and provided an option for buyers who did notneed the features and self-expressive benefits of the large American firms. The copier market inthe 1970s was changed by Canon’s low-end disruptive innovation strategy, which met the needs ofsmall businesses that did not need the power of Xerox products.

The Christensen team also advances a second theory, that of new-market disruptive innova-tions aimed at noncustomers. In many markets, large groups of noncustomers either do not buybecausetheproductsorservices areconsideredtooexpensiveorcomplexorbuymuchlessthan theywould like because the process is inconvenient. A more accessible offering that is priced right canopen up the market. Apple’s Macintosh attracted new users into the computer market and onlineretail stockbrokers enabled day traders to thrive. The single-use camera provided a new market justas the Kodak Brownie did a century earlier. Vanguard’s low-cost index funds attracted new buyersintothe industry.Thenoncustomers have typically been ignoredby theestablishedfirmswho,again,tend to focus their efforts on the current “heavy users,” the most profitable customers.

An attractively priced option can appeal to both the low-end and noncustomer segmentssimultaneously. Southwest Airlines targeted customers looking for a value airline and alsopeople who could be lured from their automobiles, a segment that was ignored by theestablished airlines of the day. Dell Computer also succeeded both serving the low end andattracting new users.

Evaluation—Real, Win, Worth It

The evaluation of a major or transformational innovation is difficult because it will stray from thecomfort zone and knowledge base of a business. A structured, disciplined evaluation approach ishelpful not only to provide a termination decision but also to identify the roadblocks to successso that they can be addressed. The “real, win, worth it” structure suggested by Wharton’sGeorge Day involves the following sets of questions:12

Is the market real? Is there a need or desire for the product? Can and will the customerbuy it? Is the market size adequate? Segway’s personal transporter was an ingenioustechnical innovation but did not solve transportation problems for any target market.

Is the product real? Is there a clear concept that will satisfy the market? Can the productbe made? Putting nuclear energy plants in the ocean presented construction barriers.

Can the product be competitive? Does it have a sustainable competitive advantage? If acompetitor can copy or neutralize the new product, it may have only a short window toestablish a loyal customer base.Can our company be competitive? Do we have superior assets and competencies?Appropriate management? The success of the digital animation company Pixar dependedon a unique blend of culture and people that would not have worked in most filmorganizations.

Will the product be profitable at an acceptable risk? Is the forecast ROI acceptable?Overoptimistic sales forecasts and unrealistic pricing expectations need to be considered.

Does launching the product make strategy sense? Does it fit our overall strategy? Will topmanagement support it? 3 M launched a privacy computer screen that opened up marketsfor anti-glare filters.

Chapter 13 Creating New Businesses 241

Keeping the Edge

The goal is to maintain dominance in the new submarket and the returns that go along withdominance. This is not so easy when success breeds competitors. Those that have keptdominance have one or more characteristics. Some, like Apple, keep innovating so that theyare a moving target. Others, like Snuggles and Asahi Dry, are the “authentic” choice. Still otherslike Cirque du Soleil have created significant entry barriers in terms of competencies and scale.And those like Southwest Airlines surround their innovation with a personality. The list goeson, but there needs to be an edge to avoid a transformational innovation becoming only a short-term win.

FROM IDEAS TO MARKETThe payoff for creating a successful new business is huge. Historically, most financially successfulfirms are based on the creation of a new business. Yet few firms can have a history of creatingmultiple new businesses. It turns out that it is not easy for an organization to be successful with anestablished business and still provide an environment that will foster new business ideas and allowthem to flourish. That is exactly what is required, though, when markets get dynamic. Thechallenge is to create an organization that can excel at existing businesses and still allow a newbusiness, especially a transformational business, to survive if not thrive.

Most organizations lack a healthy mix of transformational and incremental innovation. Onestudy concluded that the percentage of major innovation in development portfolios dropped from20.2 to 11.5 from 1990 to 2004.13 And from the mid-1990s to 2004, the percent of total sales due tomajor innovations fell from 32.6 percent to 28 percent. Why should there be such a bias towardincremental “little i” innovations? To answer that question, we turn to a discussion of the severalreasons why organizations fail to support transformational innovations at an optimal level.

Biases Inhibiting New Business Creation

Understanding the several biases that inhibit firms from innovating new business areas is a first stepto dealing with them. These biases can be expressed in terms of six related “curses”—short-termpressures, silo, success, incumbency, commitment, and size.

The Short-term Financial Pressure Curse

When the organization is doing well, there is pressure to create short-term growth and margins, inpart driven by the desire for stock return and in part driven by managers with short job tenures.Firms cut R&D and marketing investments to meet these short-term expectations, which researchhas shown hurts long-term performance.14

The Silo Curse

The power of product silos within organizations often leads to a delegation of innovation anddevelopment from the corporation to the silo unit in part to gain accountability and funding ability.Silos by their nature have limited resources and are focused on a particular product line with itsassociated customer base, operations, assets, and competencies. The natural goal is to respond to

242 Part Two Creating, Adapting, and Implementing Strategy

opportunities to improve the offering or to leverage the existing business. A transformationalinnovation will require more resources, will often need to operate between existing silos, and canbe a threat to the existing profit stream.

The Curse of Success

When times are good and the business is doing well, resources should be available to take risks andcreate new business areas. Curiously, however, complacency usually wins the day. Why changeif the current business is generating growth and profits? Why not instead invest in a sure thing,to make the costs even lower and the profits even higher? It is much easier to change when thereis a crisis than when things are going well, although in a crisis, both resources and time may be inshort supply.

The Incumbent Curse

When a transformational innovation is aimed at the marginal customer or the noncustomer, thereis a tendency to ignore the threat to the basic business. The natural strategy is to focus on the good,high-margin customers. If the new concepts steal marginal customers, so what? Those customerswere more of a nuisance anyway. Further, it does not seem wise to invest in an offering that will killthe golden goose. Why invest in an offering that may cannibalize your business?

The Commitment Curse

Successful incumbent firms often have a tunnel focus on their strategic vision. They investvigorously in incremental innovation to reduce costs, improve the offering, and satisfy their loyalcustomers. The people hired, the culture created, the systems developed, and the organizationalstructure employed all are tailored to the task of making the existing business better. In thatcontext, it is difficult for any new business concepts to get resources or serious traction withinthe firm.

The Size Curse

A new business by definition will start small. If a firm has been successful and grown to a meaningfulsize, it will look to business concepts that can make a difference to shareholders. McDonald’s, forexample, is inhibited from trying new restaurant concepts because even a successful conceptaggressively expanded will have no impact on its financials; the core business is simply too huge. As aresult, it became stuck in a model that was not supported by customer trends. Coke resistedmarketing waters and other beverages in part because it was so unlikely for such business ventures tomaterially affect its shareholder value. A related problem is that a huge business like McDonald’s orGE has built assets, processes, and organizations that are not adapted to run smaller businesses. Onesnack company once proclaimed that it was not capable of handling a business that was under $250million. That inhibited it from participating in potential growth areas.

Making New Business Viable in Established Organizations

The basic problem is that a new business, particularly a transformational one, will require anorganization that is very different from that of the core business. It will require people, systems, aculture, and a structure that must adapt quickly to an emerging market area, one that is almostby definition going to be very different from the core business.

Chapter 13 Creating New Businesses 243

One approach is to create a separate organization, either by acquiring the industry innovatorand retaining its autonomy or by creating a stand-alone entity within the corporate framework.In either case, the separate organization will be free—indeed, encouraged—to create its ownpeople, systems, culture, and structure. Of course, it can borrow elements of the core business,such as its accounting systems or perhaps marketing skills, but it needs to be committed to thestrategic vision of the new organization while still being entrepreneurial and flexible. As thebusiness matures, the link with the core business can become greater.

The other approach is to create a dual organization within the same firm. People who excel at“start-up” adaptability and change, as well as those who have proven to be good at incrementalinnovation, will need to be developed side by side. A more diverse set of people will likely be theresult. Entrepreneurial cultural values will need to be tolerated within the organization. Exper-imentation and trial and error will need to be accepted if not encouraged. Different cost controlsystems and performance metrics will be needed. The new ventures will probably require a flatterorganization.

Developing a dual organization is difficult and requires active management. However, it ispossible and can result in providing new ventures with access to significant assets and competen-cies while also breathing energy into the core businesses.

In any case, an innovative new business cannot be starved for resources. The reason thatmost new businesses succeed as start-ups is because they have access to money from the stockmarket and from venture capitalists. Internally funded ventures are often at a disadvantage inobtaining needed resources. Too often, executives in large firms are said to have deep pocketsbut short arms.

To overcome resource shortfalls, top management has to make a commitment to growthrough internal innovation and allocate resources toward that goal. Then a new venture will beable to compete for these resources with other new ventures and not from the existing businessunits. GE, with its program of encouraging and supporting breakthrough initiatives, does just that.Another key to resource availability is the disciplined process to disinvest in businesses that are notgoing to be the future of the firm, so that they do not exert their priority over future resources.Chapter 15 discusses the divestment decision process.

KEY LEARNINGS

Over time, businesses that are new and different enough to have reduced or nocompetition will earn much more than average profits.

The innovator has the potential to create a marketing position because competitors arereluctant to damage their own businesses, cannot match the technology, or believe ittoo costly to compete against a firm with an established customer base. Often it is notthe innovator but the early market leader that captures these advantages.In creating a new business, managing the perceptions of the category is important.

A new business can be based on technological innovation, moving from components tosystems, by satisfying unmet needs, by creating niche marketing, by responding tocustomer trends, or by having a dramatically lower price point.

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There are organizational biases that inhibit the development of a new business. These canbe described as the short-term financial pressure curse, the silo curse, the curse ofsuccess, the incumbent curse, the commitment curse, and the size curse.

FOR DISCUSSION1. Why didn’t Hertz or Avis start an off-airport business directed at insurance companies

and vacationers? What advantages would they have had over Enterprise? Why didn’tSteinway come up with the electronic organ? Why didn’t Barnum and Bailey createCirque du Soleil?

2. In order to revitalize its brand with women, Reebok, the company that rode theaerobics craze over two decades ago, introduced Jukari Fit to Fly, an exercise programdesigned with Cirque du Soleil. A piece of equipment, the Fly Set, allows a person tofly through the air hanging on to a low trapeze. The goal is to invent a new fitness fad inexercise establishments with a program that is supported by a line of Reebok clothing.

a. Is this a transformational or substantial innovation that defines a new category orsubcategory?

b. Evaluate its pros and cons for Reebok.3. Think of some transformational new businesses such as Starbucks, Blue Apron, or

Amazon.

a. How was each different from what came before? What was similar? Scale them interms of “newness” from truly transformational to substantial (some elementscommon to what came before but enough new to create a new subcategory).

b. Was there an innovator advantage? How long did it last, and why?c. Did the business originate from an established business? If not, why not?d. Where did the idea for the business come from? If you don’t know, try to speculate.

4. Consider some new businesses that have managed category perceptions well. Considerothers that have not.

5. Pick a firm such as Bank of America, Patagonia, or L.L. Bean. Develop some potentialinnovations that would generate a “must have.” How would you evaluate them?

Box BEST DIGITAL PRACTICE

Adobe’s Subscription Model

Adobe’s Creative Suite software is a compilation of graphic design, video editing, and web developmentapplications. Traditionally, Adobe’s B2B clients would purchase physical software and a license to usethe product for approximately two years. However beginning in 2010, Adobe began to transform its

(continued)

Chapter 13 Creating New Businesses 245

Creative Suite into a 100 percent subscription-based cloud delivery model. Now clients subscribe to acloud-based product that could be managed through a monthly subscription.

Such a transformation is rare for companies of Adobe’s size. However, there were numerouscustomer trends and market factors that drove Adobe’s migration to the cloud. From a customerperspective, the rapid speed of innovation within the technology industry meant customer’s softwareneeds were changing quickly. The cloud model allows Adobe to regularly deliver software updates to itssubscribers, instead of releasing new editions every 18–24 months. Additionally, an increase in thenumber of small businesses with digital design needs (such as mobile application developers) hadopened up new market opportunities for Adobe. Under the company’s old way of working, the productwould have been too expensive for this group of users. Finally, Adobe understood the transformationwas necessary to maintain its competitive edge.

To make the new cloud subscription model viable, the company had to dramatically change how itmanaged its business both internally and externally. Internally, Adobe had to train and compensate thesales force to sell subscription-based software. The accounting organization had to shift fromrecognizing revenue up front for a few large contracts to billing millions of individuals and enterprisecustomers on a monthly basis. Operations and supply chain management functions were affected aswell, as there was no longer a need to ship physical units. Externally, Wall Street’s expectations had tobe set and managed throughout the change. Initially, the transformation was anticipated to result in asignificant drop in revenue and earnings, and Adobe knew it was crucial to help analysts understandhow they were measuring success during the transition.

As a result of Adobe’s efforts in managing the change, the company has been able to deliver abetter customer experience and tap into new markets. The subscription model has paid off financially.For the third quarter of 2016 alone, Adobe earned over $1.46 billion in revenue, up year-on-year from$1.22 billion, and reported $272 million in net income. Revenue from the company’s digital mediabusiness rose 28.6 percent year-on-year to $990 million. Most importantly, Adobe’s willingness to adaptand create new businesses has given it the agility and capabilities to continue to be a market leader foryears to come.

Questions:

1. Why is Adobe’s subscription model a win-win for the customer and the company?

2. Which part of the market is unlikely to prefer this approach? Should Adobe compete for thismarket?

Sources:Stuart Lauchlan, “Adobe Turns in Record Revenues, Uses Subscription Model to Take on Pirates,”Diginomica, September 21, 2016, http://diginomica.com/2016/09/21/adobe-turns-in-record-revenues-uses-subscription-model-to-take-on-the-pirates/

Kara Sprague, “Reborn in the Cloud,” McKinsey & Company, July 15, 2015, http://www.mckinsey.com/business-functions/business-technology/our-insights/reborn-in-the-cloud

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Box BEST GLOBAL PRACTICE

Wanglaoji Tea

JDB Group, a Hong Kong soft-drink manufacturer, repositioned an almost 200-year-old Chineseherbal tea, Wanglaoji, into a top-selling canned beverage. Key to their success? Honing in on serving alarge consumer groups’ unmet needs.

Until 1995, Wanglaoji was owned by state-governed Guangzhou Pharmaceuticals and thought ofprimarily as an herbal elixir. However, upon JDB’s acquisition of the trademark, it saw an opportunityto instead position the product as a healthy and refreshing companion to China’s spicy hot-pot dishes.To execute this strategy, JDB relied on a series of intensive promotional strategies. The companypartnered with restaurants specializing in Sichuan hot pot cuisine to try and establish an immediateconnection between consumers and the brand. JDB also forged relationships with “Wanglaoji-trusted”retailers, offering them product discounts and free advertising materials. Additionally, the companyestablished itself as a title sponsor in sports, high-end business events, and national competitions. Forexample, Wanglaoji had a notable presence at the Asia Pacific Economic Cooperation summit as well asthe musical talent contest “The Voice of China.”

JDB has also been thoughtful about how they package the product, manufacturing the beverage ina red can with colorful lettering. This has helped solidify the perception of the herbal tea as a modernand everyday beverage.

Within five years, Wanglaoji tea climbed from $30 million to $1.5 billion in sales. By 2012,Wanglaoji had surpassed Coca-Cola’s China sales with over $3 billion in revenue. Now the company islooking to expand into peripheral markets in Southeast Asia and even stretch its footprint into SouthAmerica.

Questions:

1. Why did Wanglaoji succeed as a healthy refreshing tea? What asset was central to its success?

2. Who are Wanglaoji’s competitors? What factors are critical to the brand’s long-term competitiveadvantage?

Sources:Kwong Man-ki, “China’s JDB Plans Global Push for its Popular Herbal Tea Drink,” South ChinaMorning Post, December 24, 2014, http://www.mckinsey.com/industries/retail/our-insights/from-oxcart-to-wal-mart-four-keys-to-reaching-emerging-market-consumers

Alejandro Diaz, Max Magni, and Felix Poh, “From Oxcart to Wal-Mart: Four Keys to ReachingEmerging-Market Consumers,” McKinsey Quarterly, October 2012, http://www.scmp.com/business/companies/article/1668547/chinas-jdb-plans-global-push-its-popular-herbal-tea-drink

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C H A P T E R F O U R T E E N

Global Strategies

Most managers are nearsighted. Even though today’s competitive landscape often stretches to a globalhorizon, they see best what they know best: the customers geographically closest to home.—Kenichi Ohmae

A powerful force drives the world toward a converging commonality, and that force is technology. . . . Theresult is a new commercial reality—the emergence of global markets for standardized consumer products ona previously unimagined scale of magnitude.—Theodore Levitt

My ventures are not in one bottom trusted, nor to one place.—William Shakespeare, The Merchant of Venice

The global reality. Few businesses can escape the reality that customers, competition, andmarkets have a global face. To compete successfully, firms need global strategies. Global strategiesneed to create competitive advantage, be opportunistic, and remain flexible in the face ofincredible complexity.

A global strategy represents a worldwide perspective in which the interrelationships amongcountry markets are drawn on to create synergies, economies of scale, strategic flexibility, andopportunities to leverage insights, programs, and production economies. A global strategy isdifferent from a multidomestic or multinational strategy, in which separate strategies aredeveloped for different countries, implemented autonomously, and managed as a portfolio ofindependent businesses.

A global strategy can result in strategic advantage or neutralization of a competitor’sadvantage. For example, products or marketing programs developed in one market might beused in another. Or a cost advantage may result from scale economies generated by the globalmarket or from access to low-cost labor or materials. Operating in various countries can lead toenhanced flexibility as well as meaningful sustainable competitive advantages (SCAs). Investmentand operations can be shifted to respond to trends and developments emerging throughout theworld or to counter competitors that are similarly structured. Plants can be located to gain access tomarkets by bypassing trade barriers.

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Even if a global strategy is not appropriate for a business, making the external analysis globalmay still be useful. A knowledge of competitors, markets, and trends from other countries mayhelp a business identify important opportunities, threats, and strategic uncertainties. A globalexternal analysis is more difficult than a domestic analysis, of course, because of the differentcultures, political risks, and economic systems involved.

A global strategy requires addressing issues that include the following:

1. What are the motivations (objectives) for a global strategy?2. To what extent should products and service offerings be standardized across

countries?

3. To what extent should the brand name and marketing activities (such as brand position,advertising, and pricing) be standardized across countries?

4. How can the global footprint be expanded successfully?5. To what extent should strategic alliances be used to enter new countries?6. How should the brand be managed globally?

Each of these issues will be explored in turn. The next section, in which the motivations forglobal strategies are presented, will be followed by discussions of standardization versus custom-ization, how to select which countries to enter, the use of alliances in developing global strategies,and global marketing management.

MOTIVATIONS UNDERLYING GLOBAL STRATEGIESA global strategy can result from several motivations in addition to simply wanting to invest inattractive foreign markets. The diagram of these motivations shown in Figure 14.1 provides asummary of the scope and character of global strategies. Understanding what motivations havepriority will inform how global strategies should be developed and how success should bemeasured.

Obtaining Scale Economies

Scale economies can occur from product standardization. The Ford global footprint, for example,allows product design, manufacturing tooling, parts production, and product testing to best spreadover a large base of similar products. A firm similarly benefits when fixed costs involving IT andproduction technologies can be distributed across countries.

Scale economies can also occur from standardization of marketing, operations, and manu-facturing programs. Brands that share advertising (even when it is adjusted for local markets)spread the production and creative effort over multiple countries and thus a larger sales base.Consider Coca-Cola, which since the 1950s has employed a marketing strategy—the brandname, concentrate formula, positioning, and advertising theme—that has been virtuallythe same throughout the world. Only the artificial sweetener and packaging differ acrosscountries.

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Global Brand Associations

Being global generates the image of being global, which turns out to be a significant advantage. Astudy of associations made of global brands involved qualitative interviews with 1,500 consumersover 41 countries, followed up with a quantitative study that included a preference scale of threeleading brands in six product categories.1 The result showed that associations with being globalimpacted preference. In fact, 44 percent of the variance in preference is caused by the fact thatconsumers believe that global brands have higher quality in part because they tend to have thelatest innovations. Two other associations, the prestige of being global and social responsibility, alsoinfluence preference but much less so (12 percent and 8 percent, respectively) than the qualitydimensions.

Global Innovation

Being global means that innovation around brand building, new product, and productimprovements can be sourced anywhere. At P&G, for example, the successful Pantenepositioning (“For hair that shines”) came from P&G Taiwan and the feminine protectionbrand Naturella featuring the herbal ingredient chamomile came from P&G Mexico. The blackCoke Zero package came from Australia and the U.K. And collaboration from other firms isbecoming important for most global companies. P&G has people all over the world coordinat-ing the development efforts of firms that have a collaborative relationship with P&G. As aresult, P&G’s R&D budget and capability is highly leveraged. IBM and others are creatingmajor R&D centers in India to access talent, but also to participate in the intellectual vitality ofthe region.

CreateGlobal

Associations

GLOBALSTRATEGIES

AccessLow-Cost

Labor/Materials

AccessNational

Incentives

ObtainScale

Economies

Access

Strategic

Markets

Cross-

SubsidizeDodge

Trade

Barriers

ObtainGlobal

Innovation

Figure 14.1 Global Strategy Motivations

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The classic global trickle down innovation model no longer works.2 The products of thedeveloped countries, even with some features omitted, are often too high priced for the emergingcountry world. Local innovation is needed. For example, GE Healthcare, leaders in ultrasoundmachines, sold very few devices in China and India in the 1990s. However, by 2007, a localbusiness unit developed an ultrasound machine that could be sold for $15,000 as opposed theU.S. price range of $100,000–350,000. The sales took off. Significantly, such innovations can beintroduced to the markets of developed countries. GE’s inexpensive ultrasound machine became amajor business in the U.S. used by ambulance units and rural hospitals and others. As a result, GElaunched an initiative to generate 100 other similar innovations that would service the local marketand also create new markets at home.

Access to Low-Cost Labor or Materials

Another motivation for a global strategy is the cost reduction that results from access to theresources of many countries. Substantial cost differences can arise with respect to raw materials,R&D talent, assembly labor, and component supply. Thus, a computer manufacturer maypurchase components from South Korea and China, obtain raw materials from South America,and assemble in Mexico and five other countries throughout the world in order to reduce labor andtransportation costs. Access to low-cost labor and materials can be an SCA, especially when it isaccompanied by the skill and flexibility to change when one supply is threatened or a moreattractive alternative emerges.

Access to National Investment Incentives

Another way to obtain a cost advantage is to access national investment incentives that countriesuse to achieve economic objectives for target industries or depressed areas. Unlike other means to

Box INDICATORS THAT STRATEGIES SHOULD BE GLOBAL

Major competitors in important markets are not domestic and have a presence in severalcountries.Standardization of some elements of the product or marketing strategy provides opportunities forscale economies.Costs can be reduced and effectiveness increased by locating value-added activities in differentcountries.There is a potential to use the volume and profits from one market to subsidize gaining a positionin another.Trade barriers inhibit access to worthwhile markets.A global name can be an advantage and the name is available worldwide.A brand position and its supporting advertising will work across countries and has not beenpreempted.Local markets do not require products or service for which a local operation would have anadvantage.

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achieve changes in trade, such as tariffs and quotas, incentives are much less visible andobjectionable to trading partners. Thus, the British government has offered Japanese car manu-facturers a cash bonus to locate a plant in the United Kingdom. The governments of Ireland, Brazil,and many other countries offer cash, tax breaks, land, and buildings to entice companies to locatefactories there.

Cross-Subsidization

A global presence allows a firm to cross-subsidize—to use the resources accumulated in onepart of the world to fight a competitive battle in another.3 Consider the following: One firm usesthe cash flow generated in its home market to attack a domestically-oriented competitor in aforeign market. For example, in the early 1970s, Michelin used its European home profit baseto attack Goodyear’s U.S. market. The defensive competitor (in this case, Goodyear) canreduce prices or increase advertising in the United States to counter, but by doing so, it willsacrifice margins in its largest markets. An alternative is to attack the aggressor in its homemarket, where it has the most to lose. Thus, Goodyear carried the fight to Europe to put a dentin Michelin’s profit base.

The cross-subsidization concept implies that it is useful to maintain a presence in the countryof a competitor. The presence should be large enough to make the threat of retaliation meaningful.If the share is only 2 percent or so, the competitor may be willing to ignore it.

Dodge Trade Barriers

Strategic location of component and assembly plants can help gain access to markets by penetratingtrade barriers and fostering goodwill. Peugeot, for example, has plants in 26 countries fromArgentina to Zimbabwe. Locating final-assembly plants in a host country is a good way to achievefavorable trade treatment and goodwill because it provides a visible presence and generates savingsin transportation and storage of the final product. Thus, Caterpillar operates assembly plants in eachof its major markets, including Europe, Japan, Brazil, and Australia, in part to bypass trade barriers.An important element of the Toyota strategy is to source a significant portion of its car cost in theUnited States and Europe to deflect sentiment against foreign domination.

Access to Strategically Important Markets

Markets can be strategically important because of their size and growth. It is hard to be successfulavoiding the large growth global markets. There is good reason that firms are looking to theemerging markets of China, India, and others for growth opportunities when home markets areoften stagnant. For example, the 2010 growth in the beauty market was only 1.1 percent in the U.S.and nearly zero in Japan, but over 10 percent in the major South American countries.4 Firms in theindustry recognize that leaders need to be relevant in these markets.

Other markets may be strategically important because of their role in the industry’s valuechains. It could be because of a raw material supply, labor cost structure, or technology. Anelectronics firm, for example, may need to have a presence in Mumbai and Silicon Valley becauseboth are sources of engineering innovation. A firm in the fashion industry may benefit from apresence in countries that have historically led the way in fashion.

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STANDARDIZATION VS. CUSTOMIZATIONStandardized products and brands gained widespread credence as a strategy because of TedLevitt’s classic 1983 Harvard Business Review article, “The Globalization of Markets,” which gavethree reasons why standardization would be a winning strategy.5 First, the forces of communica-tion, transport, and travel were breaking down the insulation of markets, leading to a homogeneityof consumer tastes and wants. Second, the economics of simplicity and standardization—especiallywith respect to products and communication—represented compelling competitive advantagesagainst those who held on to localized strategies. Third, customers would sacrifice preferences inorder to obtain high quality at lower prices. The article provided an academic underpinning to thelogical premise that standardization should be the goal of a global business.

Pringles, Visa, MTV, Starbucks, Sony, Dove, Vodafone, BP, DeBeers, Heineken, Nike,McDonald’s, Pantene, Disney, and IBM are the envy of many because they seem to havegenerated global businesses with a high degree of similarity in terms of product, brand, position,advertising strategy, personality, packaging, and look and feel. Pringles, for example, stands for“fun,” a social setting, freshness, less greasiness, resealability, and the whole-chip producteverywhere in the world. Further, the Pringles package, symbols, and advertising are almostthe same globally. Disney’s brand of magical family entertainment is implemented by theme parks,movies, and characters that are remarkably consistent across countries.

These “standardized” products and brands are often not as identical worldwide as one mightassume. McDonald’s, once the model of standardization, now has rice burgers in Taiwan,vegetarian entrees in India, tortillas in Mexico, rice cakes in the Philippines, and wine with mealsin many European cities. Pringles uses different flavors in different countries and advertisingexecutions are tailored to local culture. Heineken is the premium beer to enjoy with friendseverywhere—except at home in the Netherlands, where it is more of a mainstream beer. EvenCoke has a sweeter product in areas such as southern Europe. Regardless of these variations,however, brands that have moved toward the standardized end of the spectrum demonstrate somereal advantages.

A standardized offering can achieve significant economies of scale. For example, when IBMdecided to exchange some three dozen advertising agencies for one in order to create a singleglobal campaign (even if it needed some adapting from market to market), one motivation was toachieve efficiencies. The task of developing packaging, a website, a promotion, or a sponsorshipwill also be more cost-effective when spread over multiple countries. Economies of scale acrosscountries can be critical for sponsorships with global relevance, such as the World Cup or theOlympics.

Perhaps more important, though, is the enhanced effectiveness that results from betterresources. When IBM replaced its roster of agencies with Ogilvy & Mather (O&M), it immediatelybecame the proverbial elephant that can sit wherever it wants. As the most important O&M client,it gets the best agency talent from top to bottom. As a result, the chances of a well-executedbreakout campaign are markedly improved.

Cross-market exposure produces further efficiencies. Media spillover, where it exists, allowsthe standardized brand to buy advertising more efficiently. Customers who travel can get exposedto the brand in different countries, again making the campaign work harder. Such exposure isparticularly important for travel-related products such as credit cards, airlines, and hotels.

A standardized brand is also inherently easier to manage. The fundamental challenge of brandmanagement is to develop a clear, well-articulated brand identity (what you want your brand to

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stand for) and to find ways to make that identity a driver of all brand-building activities. Theabsence of multiple strategies makes this task less formidable with a global brand. In addition,simpler organizational systems and structures can be employed. Visa’s “worldwide acceptance”position is much easier to manage than dozens of country-specific strategies.

The key to a standardized brand is to find a position that will work in all markets. Sprite, forexample, has the same position globally—honest, no hype, refreshing taste. It is based on theobservation that kids everywhere are fed up with hype and empty promises and ready to trust theirown instincts. The Sprite advertising tagline (“Image is nothing. Thirst is everything. Obey yourthirst.”) resonates around the world. In one scene from a Sprite ad, kids are discussing why theirbasketball hero would drink Sprite.

Several generic positions seem to travel well. One is being the “best,” the upscale choice. High-end premium brands such as Mercedes, Montblanc, Heineken, and Tiffany’s can cross geographicboundaries because the self-expressive benefits involved apply in most cultures. Another is thecountry position. For example, the “American” position of brands such as Coke, Levi’s, Baskin-Robbins, KFC, and Harley-Davidson will work everywhere (with the possible exception of theUnited States). A purely functional benefit such as Pampers’ dry, happy baby can also be used inmultiple markets. Not all brands that are high-end or American or have a strong functional benefit,however, can have a common position globally.

Standardization can come from a centralized decision to create a global product. Canon, forexample, developed a copier that had a common design throughout the world in order tomaximize production economies. Unfortunately, the copier could not use the standard paper sizein Japan, resulting in substantial customer inconvenience. The risk inherent in a truly globalstandardization objective is that the result will be a compromise. A product and marketingprogram that almost fits most markets may not be exactly right anywhere; such a result is a recipefor mediocrity or failure.

Another strategy is to identify a lead country, a country whose market is attractive because it islarge or growing or because the brand has a natural advantage there. A product is tailored tomaximize its chances of success in that country, then exported to other markets (perhaps withminor modification or refinements). A firm may have several lead countries, each with its ownproduct. The result is a stable of global brands, with each brand based in its own home country.Nissan has long taken this approach, developing a corporate fleet car for the United Kingdom, forexample, and then offering it to other countries. Lycra, a 35-year-old ingredient brand fromDuPont, has lead countries for each of the product’s several applications all under the globaltagline “Nothing moves like Lycra.” Thus, the Brazilian brand manager is also the global lead forswimsuits, the French brand manager does the same for fashion, and so on.

Global Leadership, Not Standardized Brands6

The fact is that a standardized global brand is not always optimal or even feasible. Yet, attracted bythe apparent success of other brands, many firms are tempted to globalize their own brand. Toooften the underlying reason is really executive ego and a perception that a standardized brand is thechoice of successful business leaders.

Such decisions are often implemented by a simple edict—that only standardized globalprograms are to be used. The consolidation of all advertising into one agency and the developmentof a global advertising theme are typically cornerstones of the effort. Even when having a

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standardized brand is desirable, though, a blind stampede toward that goal can be the wrongcourse and even result in significant brand damage. There are three reasons.

First, economies of scale and scope may not actually exist. The promise of media spilloverhas long been exaggerated, and creating localized communication can sometimes be lesscostly and more effective than adapting “imported” executions. Further, even an excellentglobal agency or other communication partner may not be able to execute exceptionally well inall countries.

Second, the brand team may not be able to find a strategy to support a global brand, evenassuming one exists. It might lack the people, the information, the creativity, or the executionalskills and therefore end up settling for a mediocre approach. Finding a superior strategy in onecountry is challenging enough without imposing a constraint that the strategy be used throughoutthe world.

Third, a standardized brand simply may not be optimal or feasible when there are fundamentaldifferences across markets. Consider the following contexts where a standardized global brandwould make little sense:

Different market share positions. Ford’s European introduction of a new van, theGalaxy, into the United Kingdom and Germany was affected by its market share positionin each country. In the United Kingdom, as the number-one car brand with a superiorquality image, Ford sought to expand the Galaxy’s appeal beyond soccer moms to thecorporate market. The U.K. Galaxy became the “nonvan,” and its roominess wascompared to first-class airline travel. In Germany, however, where Volkswagen held thedominant position, the Galaxy became the “clever alternative.”Different government contexts. The Galaxy also faced in the United Kingdom (and notin Germany) the fact that because of the tax structure, corporations supplied cars to theiremployees as a way to provide compensation with less onerous taxes. As a result, a modelwith the price range of the Galaxy needed to appeal to corporate buyers or it would not berelevant to a major segment of buyers of vehicles in the Galaxy price range. A soccermoms position would not work, but the “first-class” travel provided a rationale for theinclusion of a van among the acceptable vehicles to buy.Different brand images. Honda means quality and reliability in the United States,where it has a legacy of achievement based on the J.D. Powers ratings. In Japan, however,where quality is much less of a differentiator, Honda is a car-race participant with ayouthful, energetic personality.Different customer motivations. P&G’s Olay found that in India, people wantedlighter-looking skin rather than younger-looking skin, as was the case in the United Statesand Europe. Campbell Soups found little demand for ready-to-eat soups in soup-lovingRussia and China but did better when they introduced “starter soups” and broths.According to a 2008 study, 78 percent of consumers in China cited health benefits areimportant in food buying compared with 55 percent in the United States. In the UnitedKingdom and Argentina, the number was less than 50 percent, and in Germany, it was only34 percent.7

Different distribution channels. The distribution channel can affect the offering andthe marketing strategy. In China, reaching rural areas can involve many levels of

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distribution, so that it is hard to control the brand using methods that would work in theUnited States, where the distribution channel tends to be shorter and clearer. In theUnited States, ice cream is sold in bulk for people to use at home, but in manycountries, it is mainly sold on a stick for snacks through bodegas, kiosks, or vendingmachines.Different stages in customer trends. A brand may not be at the same stage in allcountries even though a common customer trend exists in each. The appreciation of winevaries from country to country. In China, it exists, but is embryonic and affects the go-to-market strategy of a company such as the E. & J. Gallo Winery—it does not use itspremium offerings in the Chinese market. Trends toward health and healthier eating arefurther along in the United States than in many other countries.Different social economic stage. For some markets, such as in rural India or some partsof China and Africa, most products and brands sold in the West are simply irrelevant.When an area lacks electricity or when it is unreliable, the product profile and attributepreferences change dramatically. Or when the household budget is a small fraction of thatin developed countries, constraints dictate buying habits.Strong local heritage. Nestle and Unilever often retain an acquired local brandsimply because there is significant customer loyalty based on the brand’s heritageand connection to the local community that could not be transferred to a globalbrand. Relationships with local brands can be powerful, especially in contexts in whichthe incidence of advertising is low and the historical relationships therefore take onmore weight.Preempted positions. A superior position for a chocolate bar is to own the associationswith milk and the image of a glass of milk being poured into a bar. The problem is thatdifferent brands have preempted this position in different markets—for example,Cadbury in the United Kingdom and Milka in Germany.

Different customer responses to executions and symbols. There are tactical concernsas well. A Johnnie Walker ad in which the hero attends the running of the bulls inPamplona was effective in some markets, including Spain, but seemed reckless inGermany and too Spanish in other countries. The attitude toward diet drinks and foodoutside the United States is very different and is one reason that light instead of diet isseen on food products.

A global business strategy is often misdirected. The priority should not be to developstandardized brands (although such brands might result) but global brand leadership, strongbrands in all markets. Effective, proactive global brand management should be directed atenhancing brands everywhere by allocating brand-building resources globally, creating globalsynergies, generating common marketing planning processes, enhancing cross-country commu-nication, stimulating common performance measures, and coordinating and leveraging thestrategies in individual countries. Chapter 16 elaborates.

A key to a successful global strategy is to understand the local marketplace and customers.Panasonic’s experience in China is informative. Starting in the late 1970s, Panasonic entered Chinato source manufacturing. However, as China became an important market, Panasonic createdofferings based on Japanese products sometimes stripped down. But by 2000, it became clear that

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Panasonic needed products more responsive to Chinese consumers. In 2003, the Shanghai-basedChina Lifestyle Research Center was launched, the first serious attempt to develop a deepunderstanding of the Chinese customer. The center was close to the technology and R&D staffs inJapan and worked together to create China-oriented products.

The resulting products made Panasonic a player against tough local competition. In studyingsome 3,000 households throughout China, researchers at the center noticed that in Chinesekitchens, the space of a refrigerator is usually 10 centimeters less than the standard width of thePanasonic product. This simple finding that had eluded Panasonic allowed changes that resulted ina 10-fold increase in the sales of Panasonic’s refrigerators. Another study uncovered the fact that inmore than 90 percent of Chinese homes with washers, consumers were still washing by handunderwear fearing that bacteria from outerwear would be transferred to underwear. The solutionwas a means to sterilize clothes in the wash using silver ions. Refining and publicizing the newtechnology in 2007, Panasonic increased its share of the washer market from 3 to 15 percent inChina. The technology was imported back to Japan, where it was employed in refrigerators as a wayto sterilize food.8

The key takeaway is that Panasonic got serious about understanding the Chinese householdsand provided the Chinese Panasonic operation to have at least an equal role in charting strategyand precipitating innovation.

EXPANDING THE GLOBAL FOOTPRINTMotivation to be global naturally leads to global initiatives to expand a firm’s market footprint, atask that can be messy and difficult. Strategy development gets much harder when the context is adifferent language, an unfamiliar culture, new competitors and channels, and very different sets ofmarket trends and forces. There are many routes to failure. A study of some 150 internationalexpansion initiatives during a five-year period showed that less than half avoided failure. However,the examination of those that survived suggested that success was usually accompanied by fourconditions.9

A strong core. A strong home market provides resources and experience that can beleveraged in geographic expansion. It is a rare firm that finds success abroad without asuccessful home market.A repeatable formula for expansion. When the same model works in country aftercountry, the risk of entry is reduced. Avon, for example, uses its direct model everywhereand has refined the execution to a science.

Customer differentiation that travels. When the same segments are targeted and thesame product and position work across countries, there is no need to research the marketand reinvent the offering every time a new country is entered. Nike, Pampers, andAirbnb, for example, have been able to differentiate their respective brands the same wayeverywhere.

Industry economics. It is important to recognize whether global share or local share willdrive success. Some industries like razors or computers, for example, provide costadvantages for global scale. Others, like beer, cement, and software, reward high localshare. A mistake is to expect global scale in a local scale industry.

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What Country to Enter?

Once a firm has decided to become global, deciding what country or countries to enter—and inwhat sequence—is a key challenge. Entering any new market can be risky and take away resourcesthat could be used to make strategic investments elsewhere. A frequently unforeseen consequenceof global expansion is that healthy markets, especially the home market, are put at risk by thisdiversion of resources. It is thus important to select markets for which the likelihood of success willbe high and the resource drain minimized.

Market selection starts with several basic dimensions:

Is the market attractive in terms of size and growth? Are there favorable market trends?For many companies, China and India often appear attractive because of their sheer sizeand growth potential.Can the firm add value to the market? Will the products and business model provide apoint of differentiation that represents a relevant customer benefit? Tesco has developedan Internet-based home delivery system for grocery retailers that adds value in manymarkets.10

How intense is the competition? Are other firms well entrenched with a loyal following,and are they committed to defending their position? Tesco, a major retailer in the UnitedKingdom, found that expansion to France was unattractive because of the establishedcompetition, whereas eastern European countries had much less formidable competition.As a result, Hungary was the first country in continental Europe that Tesco entered.11

Can the firm implement its business model in the country, or do operational or culturalbarriers exist? How feasible is any adaptation that is required? Marks & Spencer, a U.K.retailer spanning food, clothing, and general merchandise, attempted to export itsproducts and the look and feel of its stores to the Continent only to find that theseofferings had little appeal to Europeans.

Are there political uncertainties that will add risk? In addition to the obvious risks ofpolitical instability, there are more subtle issues. Coke and Pepsi got blindsided in Indiawhen a nongovernmental entity claimed to have found residue of pesticides in theirproducts. Despite the firms’ protestations and evidence that the claims were unfounded,their businesses took a 12 percent dive and their images suffered. A false claim ofcontamination similarly hurt P&G’s cosmetics effort in China.Can a critical mass be achieved? It is usually fatal to enter countries lacking the salespotential needed to support the marketing and distribution effort needed for success.

Walmart’s surprising failure in Germany shows the power of the last three dimensions.12

In 2006, the firm gave up a 10-year effort to get a successful presence in Germany in the wakeof several mistakes and misjudgments. For example, the first CEO spoke only English andinsisted that his managers do the same. The next CEO tried to manage from the UnitedKingdom. The short shopping hours in Germany and the fact that Germans did not wantassistance in the store were just a few of the conditions to which Walmart had trouble adjusting.Walmart also seemed to underestimate the major German competitors, which did not providemuch of an opening for a value offering. Finally, Walmart failed to achieve the economies ofscale needed to justify its infrastructure. Walmart failure in Germany and the fact that it is

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weak elsewhere in the world makes visible the difficulty of exporting even successful businessmodels, especially those based on scale.

A strategy of entering countries sequentially has several advantages. It reduces the initialcommitment, allows the product and marketing program to be improved based on experience inpreceding countries, and provides for the gradual creation of a regional presence. Other factors,however, argue that global expansion should be done on as wide a front as possible. First,economies of scale, a key element of successful global strategies, will be more quickly realized andwill be a more significant factor. Second, the ability of competitors to copy products and brandpositions—a very real threat in most industries—will be inhibited because a first-mover advantagewill occur in more markets. Third, standardization is more feasible because it can be plannedbefore local decisions fragment the marketing and branding program.

STRATEGIC ALLIANCESStrategic alliances play an important role in global strategies because it is common for a firm tolack a key success factor for a market. It may be distribution, a brand name, a sales organization,technology, R&D capability, or manufacturing capability. To remedy this deficiency internallymight require excessive time and money. When the uncertainties of operating in other countriesare considered, a strategic alliance is a natural alternative for reducing investment and theaccompanying inflexibility and risk.

Box MARKETING IN CHINA

An Advertising Age study by Normandy Madden, a student of developing markets, provided somewarnings to those Western firms that enter China:13

China is not a single country. Rather, it is more like dozens of countries each with its own points ofdifference in spending power, motivations, and channels. Looking at China as a single market islike believing Europe is a homogeneous entity.Western goods are popular and provide self-expressive benefits, but that does not mean that theChinese people are not grounded in their Confucian traditions and culture.The Chinese consumer is price conscious, demanding, and knowledgeable in part because of therise of the Internet. Beware of talking down to them.Don’t underestimate local brands. In many categories, local brands were bystanders at first butrose to be market contenders if not leaders.Mass media in China has limitations: the audience will include many who are unable to buy somebrands and the programming is not compelling.The more effective route is often more focused marketing using events, sampling, promotions,or digital marketing. In large retail outlets, there are often up to 100 “push girls” in action.They provide energy to the store and influence the ability of a brand to get attention and trialwith often loud and aggressive sampling efforts.14 Shopping in China is, in part because of thepush girls, likely to be a considered entertainment to be enjoyed rather than drudgery to beendured.

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A strategic alliance is a collaboration leveraging the strengths of two or more organizations toachieve strategic goals. There is a long-term commitment involved. It is not simply a tactical deviceto provide a short-term fix for a problem—to outsource a component for which a temporarymanufacturing problem has surfaced, for example. Furthermore, it implies that the participatingorganizations will contribute and adapt needed assets or competencies to the collaboration andthat these assets or competencies will be maintained over time. The results of the collaborationshould have strategic value and contribute to a viable venture that can withstand competitive attackand environmental change.

A strategic alliance provides the potential for accomplishing a strategic objective or task—suchas obtaining distribution in Italy—quickly, inexpensively, and with a relatively high prospect forsuccess. This is possible because the involved firms can combine existing assets and competenciesinstead of having to create new assets and competencies internally.

A strategic alliance can take many forms, from a loose informal agreement to a formal joint venture.The most informal arrangement might be simply trying to work together (selling our products throughyour channel, for example) and allowing systems and organizational forms to emerge as the alliancedevelops. The more informal the arrangement, the faster it can be implemented and the more flexible itwill be. As conditions and people change, the alliance can be adjusted. The problem is usuallycommitment. With low exit barriers and commitment, there may be a low level of strategic importanceand a temptation to back away or to disengage when difficulties arise.

Motivations for Strategic Alliances

Strategic alliances can be motivated by a desire to achieve some of the benefits of a global strategy,as outlined in Figure 14.1. For example, a strategic alliance can:

Generate scale economies. The fixed investment that Toyota made in designing a carand its production systems was spread over more units because of a joint venture with GMin California, which lasted for some 25 years.

Gain access to strategic markets. The Italian auto maker Fiat combined with Chryslerto access the U.S. market.

Overcome trade barriers. Inland Steel and Nippon Steel jointly built an advanced cold-steel mill in Indiana. Nippon supplied the technology, capital, and access to Japanese autoplants in the United States. In return, it gained local knowledge and, more important, theability to get around import quotas.

Perhaps more commonly, a strategic alliance may be needed to compensate for the absence ofor weakness in a needed asset or competency. Thus, a strategic alliance can:

Fill out a product line to serve market niches. Ford, General Motors, and Chryslerhave, for example, relied on alliances to provide key components of their product lines.Ford’s longtime relationship with Mazda has resulted in many Ford models, as well asaccess to some Far East markets. When Mazda decided not to build a minivan, Fordturned to Nissan for help. One firm may not be able provide the breadth needed in amajor market such as the United States.

Gain access to a needed technology. While Fiat gained access to the U.S. market,Chrysler gained economy car designs.

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Use excess capacity. The GM/Toyota joint venture used an idle GM plant in California.

Gain access to low-cost manufacturing capabilities. Companies from Walmart toDell have alliances in China to source products.

Access a name or customer relationship. NGK bought an interest in a GE subsidiarywhose product line had become obsolete in order to access the GE name and reputationin the U.S. electrical equipment market. A U.S. injection molder joined with Mitsui inorder to help access Japanese manufacturing operations in the United States thatpreferred to do business with Japanese suppliers.Reduce the investment required. In some cases, a firm’s contribution to a joint venturecan be technology, with no financial resources required.

The Key: Maintaining Strategic Value for Collaborators

A major problem with strategic alliances occurs when the relative contribution of the partnersbecomes unbalanced over time and one partner no longer has any proprietary assets andcompetencies to contribute. This has happened in many of the early partnerships involving U.S.and Japanese firms in consumer electronics, heavy machinery, power-generation equipment,factory equipment, and office equipment.

The result, when the U.S. company has become de-skilled or hollowed out and no longerparticipates fully in the venture, can be traced in part to the motivation of the partners.Offshore firms are motivated to learn skills; they find it embarrassing to lack a technology andthey work to correct deficiencies. U.S. firms are motivated to outsource elements of the valuechain in order to reduce costs. They start by outsourcing assembly and move on to components,to value-added components, to product design, and finally to core technologies. The U.S.partner is then left with just the distribution function, whereas the offshore firm retains the keybusiness elements, such as product refinement, design, and production.

One approach to protecting assets and competencies is to structure the situation so thatoperating management is shared. Compare, for example, the joint Toyota/GM manufac-turing facility, where GM was involved in the manufacturing process and its refinements,with Chrysler’s effort to sell a Mitsubishi car designed and manufactured in Japan. In thelatter case, Mitsubishi eventually developed its own name and dealer network and sold itscars directly. When the motivation for an alliance is to avoid investment and achieveattractive short-term returns instead of to develop assets and competencies, the alliancewill break down.

Another approach is to protect assets from a partner by controlling access. ManyJapanese firms have a coordinated information transfer. Such a position avoids uncoordinated,inappropriate information flow. Other firms put clear conditions on access to a part of theproduct line or a part of the design. Motorola, for example, released its microchip technology toits partner, Toshiba, only as Toshiba delivered on its promise to increase Motorola’s penetrationin the Japanese market. Still others keep improving the assets involved so that the partner’sdependence continues. Of course, the problem of protecting assets is most difficult when theasset can be communicated by a drawing or it has been codified in writing. It is somewhat easierwhen a complex system is involved—when, for example, when it involves a competency inmanufacturing, that involves a complex combination of knowledge and skills manufacturingexcellence.

Chapter 14 Global Strategies 261

A second set of problems involves execution of the alliance. With strategic alliances, at leasttwo sets of business systems, people, cultures, and structures need to be reconciled. In addition,the culture and environment of each country must be considered. The Japanese, for example, tendto use a consensus-building decision process that relies on small group activity for much of itsenergy; this approach is very different from that of managers in the United States and Europe.Furthermore, the interests of each partner may not always seem to be in step. Many otherwisewell-conceived alliances have failed because the partners simply had styles and objectives that werefundamentally incompatible.

When a joint venture is established as a separate organization, research has shown that thechances of success will be enhanced if:

The joint venture is allowed to evolve with its own culture and values—the existingcultures of the partners will probably not work even if they are compatible with eachother.The management and power structure from the two partners is balanced.

Venture champions are on board to carry the ball during difficult times. Without peoplecommitted to making the venture happen, it will not happen.

Methods are developed to resolve problems and to allow change over time. It isunrealistic to expect any strategy, organization, or implementation to exist withoutevolving and changing. Partners and the organization thus need to be flexible enough toallow change to occur.

Alliances are a widespread part of business strategy (the top 500 global businesses have anaverage of 60 major alliances each), but need to be actively managed. One study of some 200corporations found that the most successful at adding value through alliances employed staffwho coordinated all alliance-related activity within the organization.15 This function woulddraw on prior experiences to provide guidance to those creating and managing new alliances.One firm, for example, has “thirty-five rules of thumb” to manage alliances from creation totermination. The dedicated alliance staff would also increase external visibility (an allianceannouncement has been found to influence stock price), coordinate internal staffing andmanagement of alliances, and help identify the need to change or terminate an alliance.

GLOBAL MARKETING MANAGEMENTManaging a global marketing program is difficult. The country or regions are often highlyautonomous. Each manager tends to think that he or she is different and others, particularlythose in “central marketing,” cannot understand the culture, customers, distribution, competitors,etc. of their country. As a result there tends to be little leveraging of successful programs fromcountry to country and even little communication about common problems and programs that aresuccessful. Further, the expertise around such areas as Internet communication, sponsorships,market research, etc. tends to be limited because of scale.

The challenge for global marketing teams is to change that—to create cooperation andcommunication where there have been competition and isolation. In Chapter 16, the problemsthat silo organizations often present in marketing teams are further outlined and practical ways tomake marketing more effective in a silo world are discussed.

262 Part Two Creating, Adapting, and Implementing Strategy

KEY LEARNINGS

A global strategy considers and exploits interdependencies among operations indifferent countries.

Among the motivations driving globalization are obtaining scale economies, accessinglow-cost labor or materials, taking advantage of national incentives to cross-subsidize,dodging trade barriers, accessing strategic markets, enhancing firm innovation, andcreating global associations.

A standardized brand is not always optimal. Economies of scale may not exist, thediscovery of a global strategy (even assuming it exists) may be difficult, or the context(e.g., different market share positions or brand images) may make such a brandimpractical. However, the management of the business should be common acrosscountries—all using the same planning processes and performance measures.

Companies successful at expanding their global footprint usually had a strong coremarket, a repeatable expansion formula, customer differentiation that travels, and anunderstanding of local versus global scale. The selection of a country to enter shouldinvolve an analysis of the attractiveness of the market and the ability of the firm tosucceed in that market.

Strategic alliances (long-term collaboration leveraging the strengths of two or moreorganizations to achieve strategic goals) can enable an organization to overcome a lackof a key success factor, such as a brand or distribution. A key to the long-term successof strategic alliances is that each partner contributes assets and competencies overtime and obtains strategic advantages.

Global brand management needs to include moving the silo country business unitsfrom competition and isolation to cooperation and communication.

FOR DISCUSSION1. Assess the motivations for going global. What would be the most important for a bank?2. What products are likely to be more standardized across countries? Why? What

products are least likely?

3. Pick a product like Applegate Deli Meats or a service such as Nationwide Insurance.Assess the advantages of expanding to a more global presence.

4. For a particular product or service, such as Crest toothpaste or the Toyota Scion, howwould you evaluate the countries that would represent the best prospects? Be specific.What information would you need, and how would you obtain it? Prioritize the criteriathat would be useful in deciding which countries to enter.

5. For a brand such as Bank of America, Pantene, or Ford, how would you go aboutcreating blockbuster global brand-building programs—for example, sponsorships,promotions, or advertising? How would you leverage those programs?

6. Select a company. How would you advise it to find an alliance partner to gaindistribution into China? What advice would you give regarding the management of thatalliance?

7. What is the advantage of a global brand team? What are the problems of using a teamto devise and run the global strategy?

Chapter 14 Global Strategies 263

BoxBEST DIGITAL PRACTICE

Mars + Alibaba

Food and beverage has been one of the fastest growing categories in China, driven in part bychanging consumer taste preferences in favor of foreign brands. Mars Inc., parent company of sweettreats such as Snickers, M&M’s, and Dove, decided to capitalize on this trend in order to expand itsbusiness.

The company formed a strategic partnership with Alibaba, the world’s largest online retailer.Under the agreement, Mars will sell 17 brands on Tmall.com, Alibaba’s business-to-consumer (B2C)platform, as well as Ruraltaobao.com, Alibaba’s new platform targeting China’s 600 million ruralcitizens. The partnership benefits Mars by helping improve the brand’s reach and distribution,particularly to the China’s more geographically dispersed, harder-to-serve rural population. It alsoenables Mars to leverage Alibaba’s local marketing expertise, extensive media properties, and big datainsights. For example, in a Snickers test campaign earlier in the year, the brand partnered with aChinese pop group and used Alibaba’s targeting and big data analysis capabilities to maximize thecampaign’s ROI. In only three days, the campaign generated almost a year’s worth of sales!

For strategic partnerships to endure though, they need to benefit both parties. A major advantagefor Alibaba is that the deal includes an “e-commerce food safety initiative” that will be managed byMars’ Global Food Safety Center in China. The Center has built a reputation for world-class scientificresearch and effective global food safety education. This knowledge and skill will be important forAlibaba as they continue to grow their B2C consumer goods business, as food safety is a top concern forChinese consumers.

Mars’ financial gains from the partnership are yet to be determined, but look promising given thesize of the market and other foreign brands’ performance in China to date. China’s e-commerce marketis made up of 550 million consumers who made $589 billion in purchases last year alone. Should thesebuying patterns continue among Chinese consumers, Mars will likely be well positioned to grow itsfootprint in the region.

Questions:

1. Strategic partners often seek exclusive deals—in this case, Alibaba would only sell Mars productsand/or Mars will only sell its product on Alibaba e-commerce sites (other brick and mortar storeswould not be included in the deal). Why would these partners strike such a deal?

2. Chocolate consumption decreased in China during the recent recessionary period in a country thatis starting to opt for healthier treats and with lower chocolate consumption compared to WesternEurope, United States, and Brazil to begin with. Develop one other strategy for improvingadoption in the Chinese market?

Sources:“Mars and Alibaba Group Launch Global Strategic Business Partnership – Elevating the OnlineShopping Experience and Enhancing E-Commerce Food Safety,” June 29, 2016, http://www.mars.com/china/en/press-center/press-list/news-releases.aspx?SiteId 203&Id 7244

Jeff Daniels, “China’s Sweet Tooth for Chocolate Melts with Economic Slowdown,” CNBC, October 7,2016, http://www.cnbc.com/2016/10/07/chinas-sweet-tooth-for-chocolate-melts-with-economic-slowdown.html

Michael Zakkour, “Alibaba & Mars Partner On Sweet Deal To Bring Products Online In China,”Forbes, June 29, 2016, http://www.forbes.com/sites/michaelzakkour/2016/06/29/alibaba-mars-partner-on-sweet-deal-to-bring-products-online-in-china/#75191dd33d28

264 Part Two Creating, Adapting, and Implementing Strategy

Box BEST GLOBAL PRACTICE

Gillette India

In 2009, Procter and Gamble’s Gillette brand controlled 20 percent of the shaving market in India—afar cry from its 70 percent market share in the U.S. Furthermore, sales had recently plateaued, raisingfurther concerns about the company’s strategy in capturing the Indian market. After considering whatfactors might be causing the market share disappointment, the Indian brand management teamrealized there was an opportunity to better customize the marketing of Gillette to the Indian context.

The primary need for customized marketing was that Indian consumers had different motivationsfor shaving. Indian men have a poor image of razors that were historically double-edge blades, whichcaused cuts, nicks, and rashes. Cultural norms related to the virility of facial hair along with famousbearded Bollywood actors meant that Indian men were less motivated to shave than men in otherGillette markets. To educate men about the benefits of shaving, Gillette launched an innovativecampaign, known as “Shave India Movement.”

The overall campaign was anchored on the research insight that 77 percent of Indian womenprefer clean-shaven men. Gillette used a number of creative tactics to bring that statistic to life:

Women Against Lazy Stubble: Opinion poll results were published and female celebrities wererecorded promoting the appeal of clean-shaven men.To shave or not? An urban campaign asked India’s women to vote on whether men should shave ornot. Attention to the issue was amplified on Facebook as Indian consumers debated the question.Bringing more attention to this seemingly mundane task helped Gillette bolster energy for themovement.Shave-a-thons: Grassroots stunts that increased word of mouth and brought the Gillette brand intoeveryday conversation. These events took place in crowded urban centers with crowds of womencheering the men on as they shaved their facial hair. One location even broke the world shavingrecord!

It was also important simplify the product to its essential features so the price could be dropped.Gillette was able to reduce the price from $7.00 to $2.30. As a result of the campaign, Gillette increasedsales 500 percent and grew its market share to 80 percent. Additionally, the campaign influenced a U.S.campaign called “Kiss and Tell,” which reported that U.S. women also prefer clean-shaven men. Similarcampaigns have been found to be effective around the world.

Questions:

1. What is the downside to customizing Gillette’s products and marketing in India?

2. Perform a brief analysis of the Brazilian market. Do you think Gillette’s approach will work there?

Source:Srinivas Reddy and Christopher Dula, “Gillette’s ‘Shave India Movement’,” The Financial Times,November 4, 2013, http://www.ft.com/cms/s/0/8da786b8-37e7-11e3-8668-00144feab7de.html#axzz4Eg78O6aV

Chapter 14 Global Strategies 265

C H A P T E R F I F T E E N

Setting Priorities for Businessesand Brands

There is nothing so useless as doing efficiently that which should not be done at all.—Peter Drucker

If you want to succeed, double your failure rate.—Thomas Watson, founder, IBM

Anyone can hold the helm when the sea is calm.—Publilius Syrus

All firms, from Mercedes to GE to Nestle to Marriott to Intel, should view their business unitsas a portfolio. Some should receive investment because they are cash-generating stars in thepresent and will be into the future. The investment is needed to keep them healthy and to exploitgrowth opportunities. Others need investment because they are the future stars of the companyeven though they now have more potential than sales and profits. Identifying the prioritybusiness units is a key to a successful strategy.

Equally important, perhaps more important, is to identify those business units that are notpriorities. Some of them should assume the role of generating cash through a milking or harvestingstrategy. These units, termed cash cows, should no longer absorb investments aimed at growingthe business. Still other units should be divested or closed or merged because they lack thepotential to become either stars or cash cows—their profit prospects may be unsatisfactory, orthey may lack a fit with the strategic thrust going forward. These decisions, which are strategicallyand organizationally difficult, are crucial to organizational success and even survival.

A related issue is dealing with too many brands by eliminating or merging them. Brandstrategy and business strategy are closely related because a brand will often represent a business.As a result, brand strategy is often a good vehicle to develop and clarify the business strategy. Toomany brands, like too many business units, result in confusion and inefficiency. The firm cansupport only so many brands, and brand proliferation has often grown to the point of paralyzing theorganization. In the automobile field there are now over 300 brands, which have resulted in

266

confusion, overlap, inefficiency, and, worse, an inability to fund promising brands. Certainly, onereason behind the restructuring of GM in 2009, which resulted in the dropping of Oldsmobile andSaturn, was that there were too many brands with the result that some were underfunded andpotential scale economies were unrealized.

We start with an overview of portfolio strategy and then discuss the divest and milk strategyoptions. We then turn to the problem from the perspective of brand strategy and explore howbrand portfolios can be reduced so that more brand focus becomes possible and clarity can beenhanced in both the brand strategy and the accompanying business strategy.

THE BUSINESS PORTFOLIOPortfolio analysis of business units dates from the mid-1960s with the growth-share matrix,which was pioneered and used extensively by the Boston Consulting Group (BCG). The conceptwas to position each business within a firm on the two-dimensional matrix shown in Figure 15.1.The market-share dimension (actually the ratio of share to that of the largest competitor) was asummary measure of firm strength and cost advantages resulting from scale economies andmanufacturing experience. The growth dimension was defended as the best single indicator ofmarket attractiveness.

The BCG growth-share matrix is associated with a colorful cast of characters representingstrategy recommendations. According to the BCG logic, the stars, important to the business anddeserving of any needed investment, reside in the high-share, high-growth quadrant. Stars shouldreceive investments to maximize ROI until market growth slows and they are retired to Cashcows (the high-share, low-growth quadrant). These products provide a great deal of the cash forthe rest of the portfolio and they should be milked for as long as possible. The dogs, which arecash traps and candidates for liquidation, are in the low-growth, low-share quadrant. They shouldbe removed as soon as possible if there are no other strategic reasons for retaining. Problem

StarsProblemchildren

Cash cows DogsLow

Hig

h

Mark

et

Gro

wth

Rate

10 High 1.0 Low 0.1

Competitive Position (Ratios of Firm Share toShare of Largest Competitor)

Figure 15.1 The Growth-Share Matrix

Chapter 15 Setting Priorities for Businesses and Brands 267

children with heavy cash needs but the potential to eventually convert into stars, are in the low-share, high-growth quadrant. Companies should work to identify the potential stars while divestingof the rest of these offerings.

The BCG growth-share model, although naive and simplistic in its analysis and recommen-dations, was very influential in its day. Its lasting contribution was to make visible the issue ofallocation across business units; that some businesses should generate cash that supports others.It also introduced the experience curve (discussed in Chapter 11) into strategy and showed that,under some conditions, market share could lead to experience-curve-based advantage.

A more realistic, richer portfolio model associated with GE and McKinsey also evaluates thebusiness on two dimensions—market attractiveness and the business position. Each of thesedimensions, as suggested by Figure 15.2, is richer and more robust than those used in the BCGmodel. The investment decision is again suggested by the position on a matrix. A business that isfavorable on both dimensions should usually be a candidate to grow using the tools of the lastfour chapters.

When both market attractiveness and business position evaluations are unfavorable, theharvest or divest options should be raised. Of course, even in a hostile environment, routes toprofitability can be found. Perhaps the business can turn to new markets, growth submarkets,superpremium offerings, new products, new applications, new technologies, or revitalized market-ing. When the matrix position is neither unambiguously positive or negative, the investmentdecision will require more detailed study.

BusinessPosition:Its Abilityto Compete

1. Invest/grow2. Selective investment3. Harvest/divest

Market Attractiveness

1 1 2

1 2 3

2 3 3

High

Medium

Low

LowMediumHigh

Evaluating the Ability to Compete

• Organization• Growth• Share by segment• Customer loyalty• Margins• Distribution• Technology skills• Patents• Marketing• Flexibility

Evaluating Market Attractiveness

• Size• Growth• Customer satisfaction levels• Competition: quantity, types, effectiveness, commitment• Price levels• Profitability• Technology• Governmental regulations• Sensitivity to economic trends

Figure 15.2 The Market Attractiveness/Business Position Matrix

268 Part Two Creating, Adapting, and Implementing Strategy

DIVESTMENT OR LIQUIDATIONThere are usually three drivers of a divestment decision besides the current and expected profitdrain. The first is market demand. Perhaps demand estimates were overly optimistic in the firstplace or perhaps the demand was there but deteriorated as the market matured. The second iscompetitive intensity. New competitors could have emerged or the existing competitors mayhave been underestimated or could have enhanced their offerings. The third is a change instrategic thrust of the organization, a change that affects the fit of the business. The firm may nolonger be a synergistic asset or the business may no longer be a link to the future. In fact, thebusiness may be not only a resource drain, but a distraction to the internal culture and theexternal brand image.

These factors all came into play in 2011 when Home Depot made the painful decision after a17-year effort to close its Expo Design Centers, stores that carried high-end products embeddedin an upscale design service and elaborate aspirational displays.1 Introduced in the early 1990s asa way to provide a high margin, growth platform, the idea was to introduce chain economies intowhat is a mom and pop industry buttressed by the buying clout and logistic assets of HomeDepot. Even during the housing boom, the concept struggled perhaps because Home Depot’simage of functionality and value got in the way of delivering the self-expressive benefits that werethe heart of Expo; perhaps because the design culture just did not fit organizationally; andperhaps because the design community turned out to be tougher competitors than envisioned.When new housing construction declined sharply, demand dried up. In addition, Home Depot, inthe midst of a recession, needed to sharpen its strategy to focus on its core business and Exponeeded to go.

Being able to make and implement an exit decision can be healthy and invigorating. Theopportunity cost of overinvesting in a business and of hanging on to business ventures that are notperforming and never will perform can be damaging and even disastrous. Further, this cost is oftenhidden from view because it is shielded by a nondecision. When a business that is not contributing tofuture profitability and growth absorbs resources in the firm—not only financial capital but alsotalent, thefirm’smost importantcurrency—those businessesthatdorepresentthe future ofthefirmwill suffer. Perhaps worse, some businesses with the potential to be important platforms for growthwill be left on the sidelines, starved victims of false hopes and stubborn, misplaced loyalty.

Jack Welch, the legendary GE CEO, believed that identifying the talent of the future was hismost important job. The flip side was identifying those who did not fit the future plans and lettingthem seek careers elsewhere. He believed the firm would be stronger and the people involvedwould benefit in the long run as well. He felt the same about business units. Welch, during his firstfour years as GE’s CEO, divested 117 business units, accounting for 20 percent of thecorporation’s assets. Such an active divestiture program can generate cash at a fair (as opposedto a forced-sale) price, liberate management talent, help reposition the firm to match its strategicvision, and add vitality. The divested businesses often benefit as well, as many will move intoenvironments that are more supportive in terms of not only assets and competencies but also thecommitment to succeed. It is healthy all around to trim businesses and there will always bebusiness units to trim. One study by Bain & Company estimated that of 181 growth initiatives thatinvolved moving into a business adjacent to a core business (having much in common with the corebusiness such as customers, technology, distribution, etc.), only 27 percent were deemedsuccessful and about the same number were clear failures.2 In packaged goods, a Procter &Gamble study showed that the number of new products tested that were still on the shelf two yearslater was only 10–15 percent.3

Chapter 15 Setting Priorities for Businesses and Brands 269

Achieving sustained growth is rare, and when it appears, it is often fueled by new businesses.One theory advanced by James Brian Quin, a strategy theorist, and others about how to find anddevelop successful new businesses is to “let a thousand flowers bloom,” tend those that thrive,and let the rest wither. The venture capital industry lives by the mantra that if you fund 10ventures, two will be home runs, and they will represent overall success. Getting home runsrequires funding many ventures. The key to the prescription that it takes many tries to findsuccess is to have a process and the will to terminate business units that are not going to fuelgrowth in the future. Without that process, a thousand flowers will result in an overgrown gardenwhere none are healthy.

Many firms avoid divestiture decisions until they become obvious or are forced by externalforces. In addition to wasted resources, delayed divestiture decisions result in lower pricesbeing obtained for the business. As painful divest decisions are delayed, the forces that createthe decline of the business continue to exert pressure and often increase. The result is adeclining value often accompanied with more losses. One study showed that organizationsare more profitable when they systematically evaluate the strategic fit and future prospects ofeach business and then regularly make divestiture decisions or place business units on aprobationary status.4

When any of the following conditions are present, an exit strategy should be considered:

Business Position

The business position is weak—the assets and competencies are inadequate, the valueproposition is losing relevance, or the market share is in third or fourth place and decliningin the face of strong competition.The business is now losing money and future prospects are dim.

Market Attractiveness

Demand within the category is declining at an accelerating rate and no pockets of enduringdemand are accessible to the business. It is unlikely that a resurgence of the category or asubcategory will occur.Price pressures are expected to be extreme, caused by determined competitors with highexit barriers and by a lack of brand loyalty and product differentiation.

Strategic Fit

The firm’s strategic direction has changed so that the business has become superfluous oreven unwanted.The firm’s financial and management resources are being absorbed when they could beemployed more effectively elsewhere.

Exit Barriers

Even when the decision seems clear, there may be exit barriers that need to be considered. Someinvolve termination costs. A business may support other businesses within the firm by providingpart of a system, by supporting a distribution channel, or by using excess plant capacity. Long-term

270 Part Two Creating, Adapting, and Implementing Strategy

contracts with suppliers and labor groups may be expensive to break. The business may havecommitments to provide spare parts and service backup to retailers and customers, and it may bedifficult to arrange alternative acceptable suppliers.

An exit decision may affect the reputation and operation of other company businesses,especially if that business is visibly tied to the firm. Thus, GE was concerned about the impact itsdecision to discontinue small appliances would have on its lamp and large-appliance businessretailers and consumers. At the extreme, closing a business could affect access to financialmarkets and influence the opinion of dealers, suppliers, and customers about the firm’s otheroperations.

If there is any reason to believe the market may change to make the business more attractive,the exit decision could be delayed. Remaining in the business may be a contingency play.

Biases Inhibiting the Exit Decision

There are well-documented psychological biases in analyzing a business. One such bias isreluctance to give up. There may be an emotional attachment to a business that has been inthe “family” for many years, or that may even be the original business on which the rest of the firmwas based. It is difficult to turn your back on such a valued friend, especially if it means laying offgood people. Managerial pride also enters in. Professional managers often view themselves asproblem solvers and are reluctant to admit defeat.

Another obstacle is due to the confirmation bias.5 People naturally seek out information thatsupports their position and discount disconfirming information, whatever the context. Confirma-tion bias can be rampant in evaluating a business to which some have emotional and professionalties. Information that confirms that the business can be saved is more likely to be uncovered andvalued than disconfirming information. Questions asked in market research may be slanted,perhaps inadvertently, toward providing an optimistic future for the business. When there isuncertainty, the bias can get large. When predicting future sales or costs, for example, extremenumbers may be put forth as plausible. Such a tendency is seen in major governmental decisions,such as funding a fighter plane or building a bridge.

Another bias to deal with is the escalation of commitment. Instead of regarding priorinvestments as sunk costs, there is a bias toward linking them to the future decisions.Thus, a decision to invest $10 million more is framed as salvaging the prior $100 millioninvestment.

All three biases were in view when Tenneco Oil Company made decisions that helped leadto its demise.6 Tenneco Oil was a healthy company, a top 20 in the Fortune 500, but stoledefeat from the jaws of victory, so to speak. It had a division, J. I. Case, a manufacturer ofagricultural and construction equipment, which was doing badly. Case had weak products,weak distribution, high costs, and a 10 percent market share facing a declining, low-profitindustry with excess capacity that was dominated by John Deere. Instead of facing reality,Tenneco doubled down by buying International Harvester, a competitor of Case, that had20 percent share, but was on the verge of bankruptcy. The market did not improve, synergiesdid not materialize in a timely fashion, and the losses of the combined equipment companywere substantial. Meanwhile, the profit flow of the energy operations faltered as the price of oilfell. These events coupled with high leverage meant the end of Tenneco Oil; the company wassold off in pieces. A series of bad decisions was driven not by an objective analysis but rather by

Chapter 15 Setting Priorities for Businesses and Brands 271

these biases coupled with the illusion that success and cash flow largely dependent on externalevents will continue.

Injecting Objectivity into Disinvest Decisions

To deal with these biases, the decision needs to be more objective in terms of both processand people. The process should be transparent and persuasive, thereby encouraging the discussionto be professional, centered on key issues and discouraging emotional gut reactions. It helps if it isapplied to a spectrum of business units instead of just the marginal ones. For example, it is wellknown that the only way to close down a military plant is to evaluate all of them and let the processidentify which ones are no longer needed. When politicians are faced with such objective evidenceand required to make an up or down vote, it becomes harder to fight for their “base.”

It is also helpful to have people interjected into the analysis who do not have histories thatprevent them from being objective. Such people can be from within the firm, but sometimes anoutside party from a consulting company or a new hire can be more objective. This can be donevicariously as well. There is the often-repeated story of how Intel made the painful decision to turnits back on the memory business, which represented not only its heritage but also the bulk of itssales. Intel’s president, Andy Grove, at one point looked at CEO Gordon Moore and asked what anew outside CEO would do. The answer was clear—get out of memory. So the two mensymbolically walked out the door and walked back in and then made the fateful decision toexit a business that had been destroyed by Asian competitors. Even after making the decision, itwas difficult to cut out all R&D and close it down. Two people sent to close the business draggedtheir heels and continued to invest. Finally, Grove himself had to step in. It turns out that theimplementation of an exit decision is also difficult.

Peter Drucker recounted a story about a leading firm in a specialized industry that organized agroup of people every three months to look critically at one segment of the company’s offerings.This group was a cross-section of young managers and changed every quarter. They addressed theAndy Grove question—if we were not in this business now, would we go into it? If the answer wasno, an exit strategy would be considered. If the answer was yes, then the next question was whetherthe existing business strategy would be used. A negative judgment would lead to proposed changes.One key to the firm’s success was that this process led to the exit or modification of every single oneof its businesses over a five-year period.

THE MILK STRATEGYA milk or harvest strategy aims to generate cash flow by reducing investment and operatingexpenses to a minimum even if that causes a reduction in sales and market share. The underlyingassumptions are that the firm has better uses for the funds, that the involved business is not crucialto the firm either financially or synergistically, and that milking is feasible because sales will stabilizeor decline in an orderly way. The milking strategy creates and supports a cash cow business.

There are variants of milking strategies. A fast milking strategy would be disciplined aboutminimizing the expenditures toward the brand and maximizing the short-term cash flow, acceptingthe risk of a fast exit. A slow milking strategy would sharply reduce long-term investment, butcontinue to support operating areas such as marketing and service. A hold strategy would provideenough product development investment to hold a market position, as opposed to investing togrow or strengthen the position.

272 Part Two Creating, Adapting, and Implementing Strategy

Conditions Favoring a Milking Strategy

A milking strategy would be selected over a growth strategy when the current market conditionsmake investments unlikely to improve a negative environment caused by competitor aggressive-ness, consumer tastes, or other factors. Sometimes it is precipitated by a new entrant that turns amarket hostile. Chase & Sanborn was once a leading coffee; the “Chase & Sanborn Hour,” starringEdgar Bergen, was one of the most popular radio shows of its time. After World War II, though,Chase & Sanborn decided to retreat to a milking strategy rather than fight an expensive customerretention battle that was occurring in the instant coffee market and the introduction of GeneralFoods’ heavily advertised Maxwell House brand.

Several conditions support a milking strategy rather than an exit strategy:

The business position is weak, but there is enough customer loyalty, perhaps in a limitedpart of the market, to generate sales and profits in a milking mode. The risk of losingrelative position with a milking strategy is low.

The business is not central to the current strategic direction of the firm, but still hasrelevance and leverages assets and competencies.

The demand is stable or the decline rate is not excessively steep, and pockets of enduringdemand ensure that the decline rate will not suddenly become precipitous.

The price structure is stable at a level that is profitable for efficient firms.

A milking strategy can be successfully managed.

One advantage of milking rather than divesting is that a milking strategy can often bereversed if it turns out to be based on incorrect premises regarding market prospects,competitor moves, cost projections, or other relevant factors. Oatmeal, for example, hasexperienced a sharp increase in sales because of its low cost and associations with nutrition andhealth. In men’s apparel, suspenders have shown signs of growth. Fountain pens, invented in1884, were virtually killed by the appearance in 1939 of the ballpoint. However, thecombination of nostalgia and a desire for prestige has provided a major comebackfor the luxury fountain pen. As a result, the industry has recently seen years in which salesdoubled.

Implementation Problems

It can be organizationally difficult to assign business units to a cash cow role because in adecentralized organization (and most firms pride themselves on their decentralized structure),it is natural for the managers of cash-generating businesses to control the available cash thatfunds investment opportunities. The culture is for each business to be required or encouragedto fund its own growth, and of course all business units have investment options withaccompanying rationales. As a result, a fast-growing business with enormous potential butrelatively low sales volume will often be starved of needed cash. It requires a sometimesdisruptive centralized decision to assign a large business unit a cash cow role. The irony is thatthe largest businesses involving mature products may have inferior investment alternatives, butbecause cash flow is plentiful, their investments will still be funded. The net effect is thatavailable cash is channeled to areas of low potential and withheld from the most attractive areas.

Chapter 15 Setting Priorities for Businesses and Brands 273

A business portfolio analysis helps force the issue of which businesses should receive theavailable cash.

Another serious problem is the difficulty of placing and motivating a manager in a milkingsituation. Most SBU managers do not have the orientation, background, or skills to engage in asuccessful milking strategy. Adjusting performance measures and rewards appropriately can bedifficult for both the organization and the managers involved. It might seem reasonable to use amanager who specializes in milking strategies, but that is often not feasible simply because suchspecialization is rare. Most firms rotate managers through different types of situations, and careerpaths simply are not geared to creating milking specialists.

There are also market risks associated with a milking strategy. If employees and customerssuspect that a milking strategy is being employed, the resulting lack of trust may upset the wholestrategy. As the line between a milking strategy and abandonment is sometimes very thin, customersmay lose confidence in the firm’s product and employee morale may suffer. Competitors mayattack more vigorously. All these possibilities can create a sharper-than-anticipated decline. Tominimize such effects, it is helpful to keep a milking strategy as inconspicuous as possible.

The Hold Strategy

A variant of the milking strategy is the hold strategy, in which growth-motivated investment isavoided, but an adequate level of investment is employed to maintain product quality, productionfacilities, and customer loyalty. A hold strategy will be superior to a milk strategy when the marketprospects and/or the business position is not as grim. There may be more substantial and protectedpockets of demand, better margins, a superior market position, a closer link to other business unitsin the firm, or the possibility of improved market prospects. A hold strategy would be preferable toan invest strategy when an industry lacks growth opportunities and a strategy of increasing sharewould risk triggering competitive retaliation. The hold strategy can be a long-term strategy tomanage a cash cow or an interim strategy employed until the uncertainties of an industry areresolved.

Sometimes a hold strategy can result in a profitable “last survivor” of a market that is decliningslower than most assume. A survivor may be profitable, in part because there may be littlecompetition and in part because the investment to maintain a leadership position might berelatively low. The cornerstone of this strategy is to encourage competitors to exit. Toward thatend, a firm can be visible about its commitment to be the surviving leader in the industry byengaging in increased promotion or even introducing product improvements. It can encouragecompetitors to leave by pricing aggressively and by reducing their exit barriers by purchasing theirassets, by assuming their long-term obligations, or even by buying their business. Kunz, whichmade passbooks for financial institutions, was able to buy competitor assets so far under book valuethat the payback period was measured in months. As a result, Kunz had record years in a businessarea others had written off as all but dead decades earlier. A hold strategy is particularlyproblematic if a disruptive innovation appears and the strategy prevents a firm from makingnecessary investments to remain relevant. As a result, firms may be slow to convert from film todigital, to reduce trans fats from packaged goods, or to adapt hybrid technology. The result couldbe a premature demise of a cash cow business.

A problem with the hold strategy is that if conditions change, reluctance or slowness toreinvest may result in lost market share. The two largest can manufacturers, American and

274 Part Two Creating, Adapting, and Implementing Strategy

Continental, failed to invest in the two-piece can process when it was developed because they wereengaged in diversification efforts and were attempting to avoid investments in their cash cow. As aresult, they lost substantial market share.

PRIORITIZING AND TRIMMING THE BRAND PORTFOLIOBrands are the face of a business strategy, and getting the brand strategy right is often a route tomaking the right business strategy decisions. One element of brand strategy is to set prioritieswithin the brand portfolio, identifying the strong strategic brands, other brands playingworthwhile roles, brands that should receive no investment, and brands that should bedeleted.7

One reason to prioritize brands and trim the brand portfolio is that the exercise provides agood way to prioritize the business portfolio because the brand will usually represent a business.When the brand perspective is used, the business prioritization analysis can sometimes be moreobjective and the resulting conclusion more transparent and obvious. The brand is usually a keyasset of the business and represents its value proposition. Thus, a recognition that the brand hasbecome weak can be a good signal that the business position is weak. Without prioritization of thebrand portfolio, strategic brands will lose equity and market position because marginal brands areabsorbing brand-building dollars and, worse, managerial talent. Managers simply follow an instinctto solve problems rather than exploiting opportunities, and too many marginal brands create a hostof problems.

A second reason is that prioritizing and trimming the brand portfolio can correct thedebilitating confusion associated with overbranding. Most firms simply have too many brands,subbrands, and endorsed brands, all part of complex structures. Some brands may reflect producttypes, others price value, and still others customer types or applications. The branded offeringsmay even overlap. The totality often simply reflects a mess. Customers have a hard timeunderstanding what is being offered and what to purchase. Even employees may be confused.The business strategy therefore operates at a huge disadvantage.

A third reason is to address the strategic paralysis created by an overbranded, confused brandportfolio without priorities. It is all too common for a firm to be immobilized by an inability tocommit to how a new offering or new business should be branded. To provide a brand to a newoffering or business that will foster success, there needs to be a sense of what brands will bestrategic going forward and what their role and image will be. Assigning a brand that lacks astrategic future or whose future is incompatible with that assignment can be a serious handicap to abusiness strategy.

One partial step to reduce overbranding is to be more disciplined about the introduction ofnew offerings and new brands; avoid ad hoc business expansion decisions made without asystematic justification process. In particular, any proposed new brand should representa business that is substantial enough and has a long enough life to justify brand-buildingexpenses. It should have a unique ability to represent a business—that is, no other existingbrands would work.

Controlling the introduction of new brands is only half the battle. There needs to be anobjective process to phase out or redeploy marginal or redundant brands after they have outlivedtheir usefulness. The strategic brand consolidation process, summarized in Figure 15.3,addresses that challenge. It involves five distinct steps: identify the relevant brand set, assess

Chapter 15 Setting Priorities for Businesses and Brands 275

the brands, prioritize brands, create a revised brand portfolio strategy, and design a transitionstrategy.

1. Identify the Relevant Brand Set

The brand set will depend on the problem context. It can include all brands or subsets ofthe portfolio. For example, an analysis for GM might include the brands GMC, Chevrolet, Pontiac,Buick, and Cadillac. Or it might include the brand set within a narrow context such as theChevrolet Silverado truck brands 1500, Hybrid, 2500HD, 3500HD, and Chassis. When brands areinvolved that share similar roles, it becomes easier to evaluate the relative strength.

2. Brand Assessment

If brand priorities are to be established, evaluation criteria need to be established. Further, thesecriteria need to have metrics so that brands can be scaled. A highly structured and quantified

• Strategic brands• Brands with specialized roles• Cash cow role• Eliminate• On-notice

Prioritize the Brands

Develop the Revised Brand PortfolioStrategy

Design and Implement the MigrationStrategy

Determine the Relevant Brand Set

Brand Assessment

• Brand equity• Business strength• Strategic fit• Brand options

Figure 15.3 The Strategic Brand Consolidation Process

276 Part Two Creating, Adapting, and Implementing Strategy

assessment provides stimulation and guidance to the discussion and the decision process. Thereshould be no illusion that the decision will default to picking the higher number. The criteria willdepend on the context, but, in general, there are four areas or dimensions of evaluations:

Brand Equity

Awareness—Is the brand well known in the marketplace?

Reputation—Is the brand well regarded in the marketplace? Does it have highperceived quality?

Differentiation—Does the brand have a point of differentiation?

Relevance—Is it relevant for today’s customers and today’s applications?

Loyalty—How large a segment of loyal customers is there?

Business Prospects

Sales—Is this brand driving a significant business?

Share/market position—Does this brand hold a dominant or leading position in themarket? What is the trajectory?

Profit margin—Is this brand a profit contributor and likely to remain so? Orare the market and competitive conditions such that the margin prospects areunfavorable?

Growth—Are the growth prospects for the brand positive within its existing markets? If themarket is in decline, are there pockets of enduring demand that the brand can access?

Strategic Fit

Extendability—Does the brand have the potential to extend to other products as either amaster brand or an endorser? Can it be a platform for growth?

Business fit—Does the brand drive a business that fits strategically with the direction ofthe firm? Does it support a product or market that is central to the future businessstrategy of the firm?

Branding Options

Brand equity transferability—Could the brand equity be transferred to another brandin the portfolio by reducing the brand to a subbrand or by developing a descriptor?

Merging with other brands—Could the brand be aggregated with other brands in theportfolio to form one brand?

Brands need to be evaluated with respect to the criteria. The resulting scores can becombined by averaging or by insisting on a minimal score on some key dimensions. For example,a low score on strategic fit may be enough to signal that the brand’s role needs to be assessed. Or,if the brand is a significant cash drain, then it might be a candidate for review even if it isotherwise apparently healthy. In any case, the profile will be important and judgment will beneeded to make final assessments of the brand’s current strength.

Chapter 15 Setting Priorities for Businesses and Brands 277

3. Prioritize Brands

The brands that are to live, be supported, and be actively managed need to be prioritized or tieredin some way. The number of tiers will depend on the context, but the logic is to categorize brandsso that precious brand-building budgets are allocated wisely. The top tier will include the strategicpower brands—those with existing or potential equity that are supporting a significant business orhave the potential to do so in the future. A second tier could be those brands involving a smallerbusiness, perhaps a niche or local business, or brands with a specialized role such as a flanker brand(a price brand that deters competitors from penetrating the market from below). A third tier wouldbe the cash cow brands, which should be dialed down with little or no investment of brand-buildingresources.

The remaining brands need to be eliminated, placed on notice, merged, or restructured.

Eliminate. If a brand is judged to be ill-suited for the portfolio because of weak orinappropriate brand equity, business prospects, strategic fit, or redundancy issues, a planis needed to eliminate the brand from the portfolio. Selling it to another firm or simplykilling it become options.On notice. A brand that is failing to meets its performance goals but has a plan to turn itsprospects around might be put on an on-notice list. If the plan fails and prospectscontinue to look unfavorable, elimination should then be considered.

Merged. If a group of brands can be merged into a branded brand group, the goal ofcreating fewer, more focused brands will be advanced. Microsoft combined the productsWord, PowerPoint, Excel, and Outlook into a single product called Office. The originalproduct brands are now reduced to descriptive subbrands.

Restructure. Firms can attempt to transfer brand equity and customers from ade-prioritized brand to another. This is what Unilever did when it moved from a focus onRave hair products to Suave and from Surf detergent products to All.

Nestle has long had a system of brand portfolio prioritization. Twelve global brands arethe tier one brands on which the company focuses. Each of the global brands has a topexecutive who is designated as its brand champion. These executives make sure that allactivities enhance the brand. They have final approval over any brand extensions and majorbrand-building efforts. Peter Brabeck, who became CEO, has elevated six of these brands—Nescafe for coffee, Nestea for tea, Buitoni for pasta and sauces, Maggi for bouillon cubes,Purina for pet food, and Nestle for ice cream and candy—as having priority within Nestle.Nestle has also identified 83 regional brands that receive management attention from theSwiss headquarters. In addition, there are hundreds of local brands that are either consideredstrategic, in which the headquarters is involved, or tactical, in which case they are managed bylocal teams.

4. Develop the Revised Brand Portfolio Strategy

With brand priorities set, the brand portfolio strategy will need to be revised. Toward that end,several brand portfolio structures should be created. They could include a lean structure with asingle master brand, such as Sony or HP, or a “house of brands” strategy like P&G, which has over80 major product brands. The most promising options are likely to be in between. The idea is to

278 Part Two Creating, Adapting, and Implementing Strategy

create structures around two or three viable options, with perhaps two or three suboptionsunder each.

The major brand portfolio structure options, together with suboptions, need to be evaluatedwith respect to whether they:

Support the business strategy going forward

Provide suitable roles for the strong brands

Leverage the strong brands

Generate clarity both to customers and to the brand team

5. Implement the Strategy

The final step is to implement the portfolio strategy, which usually means a transition for theexisting strategy to a target strategy. That transition can be made abruptly or gradually.

Box THE CASE OF CENTURION

A large manufacturing firm, which is here labeled as Centurion Industries, went through a strategicbrand consolidation process before selecting its portfolio strategy going forward. The process startedwhen the CEO observed that the brand portfolio in a major division was too diffuse and that futuregrowth and market position were dependent on creating a simpler, more focused portfolio of powerfulbrands. The division had grown in part by acquisition and now had nine product brands, only three ofwhich were endorsed by the corporate brand, Centurion. The nine brands served a variety of productmarkets that could be roughly clustered into two logical groupings. One, the green business group,included five brands. The other, the blue business group, involved four brands. Competitors with lessbrand fragmentation and more natural brand synergy had developed stronger brands and wereenjoying share growth.

In the green business group, a brand assessment supported by customer research wasconducted on all five brands. One of these brands, Larson, represented the largest business,had substantial credibility in that business, and had high awareness levels. Further, it could bestretched to cover the other four parts of the market even though it had no current presence in anyof those areas. It did have a visible quality problem, however, that was being addressed. The decisionwas made to migrate all of the green business brands to Larson and to make the quality issue atLarson a corporate priority. The first migration stage was to endorse three of the brands with Larsonand replace the fourth brand, which drove a small business, with the Larson brand. The secondstage, to occur within two years, was to convert all of the brands in the green business group to theLarson name and add an endorsement by the corporate brand.

In the blue business group, the brand Pacer emerged from the brand assessment stage as thestrongest, especially in terms of awareness, image, and sales. Because Pacer was in a business areaclosely related to that of the other three brands, using the Pacer brand for the entire blue businessgroup was feasible. However, one of the four brands in the blue group, Cruiser, was an extremelystrong niche brand with a dominant position in a relatively small market and delivered significant self-expressive benefits to a hard-core customer base. Thus, it was decided that migrating the Cruiser brandto Pacer would be too risky, but that the balance of the blue group would operate under the Pacerbrand. Again, both Pacer and Cruiser going forward would be endorsed by the corporate brand.

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Chapter 15 Setting Priorities for Businesses and Brands 279

An abrupt transition can signal a change in the overall business and brand strategy; itbecomes a one-time chance to provide visibility and credibility to a change affecting customers.So when Norwest Bank acquired Wells Fargo and changed the name of Norwest to Wells Fargo,it had the opportunity to communicate new capabilities that would enhance the offering forcustomers. In particular, Norwest customers could be assured that the personal relationshipsthey expected would not change, but they could also expect upgraded electronic bankingservices because of the competence of Wells Fargo in that area. The name change reinforcedthe changed organization and the repositioning message. An abrupt transition assumes that thebusiness strategy is in place; if not, the effort will backfire. If, for example, the Wells Fargotechnology could not be delivered, the best course would have been to delay the name changeuntil the substance behind the new position could be delivered.

The other option is to migrate customers from one brand to another gradually perhaps withintervening steps where the brand becomes an endorsed brand and then a subbrand beforedisappearing. Each stage may involve years. This will be preferred when:

There is no newsworthy reposition that will accompany the change.

Customers who may not have high involvement in the product class may need time tolearn about and understand the change.

There is a risk of alienating existing customers by disrupting their brand relationship.

KEY LEARNINGS

The exit decision, even though it is psychologically and professionally painful, can behealthy both for the firm because it releases resources to be used elsewhere but evenfor the divested business, which might thrive in a different context.

A milking or harvest strategy (generating cash flow by reducing investment andoperation expenses) works when the involved business is not crucial to the firmfinancially or synergistically. For milking to be feasible, though, sales must decline inan orderly way.Prioritizing and trimming the brand portfolio provides another perspective onprioritizing businesses, can clarify brand offerings, and can remove the paralysis ofnot being able to brand new offerings. A five-step prioritization process involves

The end result was a brand architecture involving three brands rather than nine, with all threeconsistently endorsed by the corporate brand. The critical decision was making the tough call that in thelong run, the brand architecture would be stronger if niche brands were migrated into one of twobroader brands. There were emotional, political, economic, and strategic forces and arguments againsteach move. The fact that one exception was allowed made the case more difficult to make and toimplement. Critical to organizational acceptance was the use of an objective assessment template,which clearly identified the dimensions of the decision and facilitated the evaluation. It helped thatmuch of each assessment was quantified from hard sales and market research data. Also critical was thestrategic vision of the top management because at the end of the day, owners of some of the nichebrands were not on board, and without a commitment from the top, it would not have happened.

280 Part Two Creating, Adapting, and Implementing Strategy

identifying the relevant brand set, assessing the brands, prioritizing brands, creating arevised brand portfolio strategy, and designing a transition strategy.

FOR DISCUSSION1. In 2008, Ford sold Jaguar to Tata Motors for $2.3 billion, about half of what it

cost Ford in 1989. Based on chapter tools, what analyses should have beenconducted to determine whether Jaguar should be sold?

2. Why is it hard to divest a business? Jack Welch divested hundreds of businesses duringhis tenure. What are some of the motivations that led to these divestitures?

3. Identify brands that are employing a milking strategy. What are the risks?4. How would you determine if a firm has too many brands?5. What, in your judgment, are the key problems or issues in the brand consolidation

process?

Box BEST DIGITAL PRACTICE

Microsoft Acquires Skype

In 2011, Microsoft purchased the online telecom company, Skype, to improve the video and voicecommunication capabilities of its Office products. In addition to gaining access to Skype’s 107 millionusers, who were, on average, connected for over 100 minutes per month, the deal kept the platformaway from rivals Google and Facebook.

Microsoft knew that its business clients would benefit from Skype’s friendly user-interface andsophisticated tools and features. However, the company currently had the homegrown Lync productin its portfolio, which was designed to integrate with Outlook and serve as clients’ primary communi-cations platform.

Because of the redundancy of the two brands, Microsoft ultimately decided to eliminate theLync brand and rebrand the tool’s properties as Skype for Business. This allowed them to takeadvantage of the Skype brand’s familiarity among consumers. Lync users could enjoy the samefeatures they were used to but with the sleeker Skype interface and additional Skype features. Sincemany Lync users were already users of Skype’s consumer product, the transition was fairly seamless.

Microsoft initially managed the transition by giving IT companies two different Skype for Businessoptions, with varying levels of departure from the Lync interface. Also, by maintaining core Lyncfeatures with which its customers were familiar, the transition did not interfere with one of Microsoft’score brand attributes—productivity. Overall, eliminating the Lync brand helped Microsoft make themost out of its Skype acquisition.

Questions:

1. Make an argument for Microsoft to retain both Skype and Lync.

2. Consider how Microsoft’s decision might have been affected if they had owned Skype andacquired Lync.

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Chapter 15 Setting Priorities for Businesses and Brands 281

Sources:“See what’s New in Skype for Business,” https://support.office.com/en-us/article/Lync-is-now-Skype-for-Business—see-what-s-new-aba02d7e-c801-4a82-bccd-e7207240f612

Andrew Ross Sorkin and Steve Lohr, “Microsoft to Buy Skype for $8.5 Billion,” The New York Times,May 10, 2011, http://dealbook.nytimes.com/2011/05/10/microsoft-to-buy-skype-for-8-5-billion/?_r=0

BoxBEST GLOBAL PRACTICE

Target Canada

In 2012, Target expanded its business into Canada. The proximity to the U.S. and Canadian’s familiaritywith the brand made expansion across the border seem like a natural step for the retail powerhouse.However, after only two years, Target faced $2 billion is losses and announced plans to close all ofits Canadian stores. Here are some of the reasons the global expansion led to an exit decision:

1. Target was able to initially to minimize its capital costs by purchasing obsolete stores from a formerCanadian discount chain. While this gave Target quick and affordable access to a high numberof locations, the stores were not designed for Target’s big box format. Also, the associationcreated by locating the new Targets in outdated spaces damaged its “Expect More, Pay Less”brand reputation.

2. Target compromised quality for speed-to-market. The company opened 124 stores in only twoyears, and essential parts of the business, such as inventory planning, could not keep up with thatpace. As a result, empty shelves and stock outs were an issue. This was especially disappointing forCanadian consumers, who were accustomed to seeing abundant merchandise in U.S. stores.

3. Target faced stiff competition from Walmart, which had been present in Canada since 1994.Historically, Target’s trendy and more fashionable merchandise had helped the brand distinguishitself. However its Canadian assortment lacked these qualities, which put Target in the position ofhaving to compete on price, which is Walmart’s sustainable competitive advantage. Walmartresponded with a price war that they appear to have won.

Each of these factors put Target’s brand equity, one of its most precious assets, at risk andultimately it was left with little choice but to pull out of the market. While opportunity may still existin the future for Target to re-enter Canada, its failed first attempt is a good lesson for companiesconsidering expanding operations into new global regions.

Questions:

1. Evaluate the three criteria for divestment for Target Canada.

2. Imagine you were assigned President of Target Canada at the time when Walmart started theprice war. How would you respond?

Source:Phil Wahba, “Why Target Failed in Canada,” Forbes, January 16, 2016, http://fortune.com/2015/01/15/target-canada-fail/

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C H A P T E R S I X T E E N

Harnessing the Organization

When given the choice of obsessing over customers or obsessing over competitors, we always obsess overcustomers. We pay attention to what our competitors do, but it’s not where we put our energy . . . it’s notwhere we get our motivation from.—Jeff Bezos, Amazon1

Your culture is your brand.—Tony Hsieh, Zappos2

A strategy must be effectively implemented for the company to benefit. The firm’s product-market decisions and value proposition will drive exactly what activities are important toperform for any given strategy. For example, General Motors will likely emphasize design andadvertising, Amazon will focus on distribution and pricing, and Medtronic is likely to stressinnovation.

One organizing approach that underlies all these strategic directions is customer centricity.3

Customer centricity occurs when a company places the customer at the forefront of all its decisionsand actions. When an organization is customer centric, it has the best opportunity to createexceptional value for customers and to capture value for itself in the form of profits. Peter Druckerfirst pointed to the importance of customer centricity when he noted, “. . . it is the prospect ofproviding a customer with value that gives the corporation purpose, and it is the satisfaction of thecustomer’s requirements that gives it results.”4 Importantly, these results may take the form ofprofits or social impact depending on the organization’s mission. Over 25 years of researchdemonstrates that a customer-centric approach to managing has a positive effect on firmperformance.5

To be clear, customer centricity does not mean giving customers everything they want or evenrelying on direct customer requests for insight about unmet needs and opportunities. Instead, itrequires the business to generate deep insight from engaging with their customers to guide thedevelopment and delivery of offerings and their go-to-market strategies.

In order to do so, companies need to focus on developing and strengthening key strategiclevers to infuse the philosophy and practice of customer centricity across the organization.

283

Customer centricity requires the business to focus on five organizational elements—culture,competencies, structure, metrics and incentives, and human capital.

CUSTOMER-CENTRIC ORGANIZATIONAL CULTURESOrganizational culture is often viewed as the shared values, beliefs, norms, behaviors, and artifactsthat carry deeply held meanings and create patterns of activities within a company.6 The challengeof organizational culture is that is it pervasive but often operates in the background and drivescompany actions in almost invisible ways. A customer-centric culture emphasizes customerinterests as the best way to drive long-term profits. It puts the customer ahead of respondingto competitors or short-term profits. Cultures that have these priorities reversed can get intotrouble fast.

For decades Toyota set the standard for automotive quality and reliability. With closeattention to detail and an unrelenting expectation of continuous improvement, the companycould credibly promise a car that was close to trouble-free. This image was badly tarnished in 2010by a storm of quality complaints and a dozen recalls. As Chairman Aiko Toyoda confessed before aCongressional hearing, the pursuit of growth meant the firm lost sight of the priority of puttingcustomer satisfaction above all else. The origin of Toyota’s problems has been traced to a decisionin 2002 to overtake GM as the world’s largest car maker. This objective altered priorities andperformance metrics. For example, to meet the accelerated growth target, Toyota chose to workwith a large number of new component suppliers that didn’t have a deep understanding of theToyota culture, quality standards, or just-in-time manufacturing system. Toyota completely missedhow these choices would affect its value proposition.7

Traits of Customer-Centric Cultures

What are the most important cultural elements in a customer-centric culture?

Make the Customer is the Company’s Raison d’etre

Peter Drucker said “The purpose of a company is to make and keep a customer at a profit.” To beeffective, this must be the anchoring mindset for everything the company does. It requires that allemployees know who the customer is and what is most important to the customer’s experiencewith the company. Without this shared understanding, employees’ efforts to serve the customerwill not be effective.

Create a Customer-defined Business

When A.G. Lafley, the former CEO of P&G, said, “The customer is boss,”8 employees knew thecustomer was the firm’s key priority. Similarly, the Mayo Clinic’s mission to be “. . . the mosttrusted partner for health care” and eBay’s mission to “. . . help people trade practically anything,enabling economic opportunity around the world” are vivid illustrations of defining the businessfrom the customer’s point of view. Theodore Levitt’s insight that “The organization must learn tothink of itself not as producing goods or services but as buying customers, as doing the things thatwill make people want to do business with it”9 is exactly the point. Here’s a good test: Ask leaderswhat business they are in. If they talk about products and services and not the customer need theyare fulfilling or customer problem they are solving, you know this cultural foundation needsadjustment.

284 Part Two Creating, Adapting, and Implementing Strategy

Direct Contact with Customers

A defining feature of customer-centric cultures is the insistence that everyone spend time withcustomers. Medtronic, a medical device maker, requires all engineers and designers to attend atleast one surgical procedure a year to get face-to-face customer feedback from surgeons usingMedtronic’s products.10 This mindset makes it difficult for the company to stray too far from whatcustomers’ value. Likewise, when IBM was undergoing its legendary transformation from ahardware company to a software/solutions/consulting company, Lou Gerstner created IBM’sOperation Bear Hug, which required the top fifty officers to visit a minimum of five of the firm’sbiggest customers within three months. The officers were to listen and take immediate action asneeded.11 Direct contact also increases the opportunity for companies to observe unmet needsor pain points that open the door for innovation. Finally, customer visits can produce actualor photographic evidence of artifacts (physical objects from the customer’s home, business, orenvironment), which can inspire company solutions and innovations.

Evaluate Competitors Through Customers’ Eyes

Customer centricity does not mean the company ignores competitors. Instead, it means thatcompanies work to see competitors through the eyes of their customers. This frame of referencehelps companies uncover true weaknesses that need to be shored up or opportunities that might beexploited. It is dangerous for companies to become obsessed with beating the competition, as canoccur in market share races. This approach causes marketers to take short-term actions such asprice promotions to drive up market share. However, these same actions can erode customerequity and brand equity over the long run as customers are taught to focus on price and not value.It is also important that managers not feel compelled to mimic competitors’ strategies which maybe a bad fit for the company and its value proposition.

Be Vigilant About Customer Value

Increasing sales can lull companies into complacency—a state that is quickly disrupted whencompetitors arrive with better solutions. Johnson & Johnson (J&J) fell prey to overlookingcustomer needs after it pioneered the stent, a device inserted to support failed arteries or veinsof the heart. Within two years of creating the market, it had a 91 percent market share. Three yearslater it only had an 8 percent share. What happened? The initial product was only offered in onesize and couldn’t be seen in an X-ray machine—both problems for heart surgeons. J&J was so busymeeting the strong demand for the current stents that they were too slow responding withimproved versions that resolved these concerns.12 Competitors more receptive to customers’needs stepped in and dominated the market.

How Should Firms Build and Sustain a Customer-Centric Culture?

Studies addressing this question all point in one clear direction—the firm’s leaders are the criticalfactor in a customer-centric culture. Research has found that leaders direct revolution-like changeprocesses to bring about the disruption necessary to shift companies to emphasize customers.13

Other research shows that these managers must model customer-centric behaviors to front-lineemployees interacting with customers for change to happen.14 When Denise Morrison, the CEOof Campbell’s Soup Company told her employees, “Consumers first” or Jeff Bezos, CEO of

Chapter 16 Harnessing the Organization 285

Amazon asked, “What do our customers need?,” they were modeling behaviors they expect allemployees to mimic.

Figure 16.1 synthesizes other factors that have been found in studies on this topic. First, thefirm needs to attract managers and employees with a sincere desire to serve the customer andwhose curiosity and open-mindedness ensure the company stays close to customer needs. Second,aligning leaders’ talk and walk is critical, as a customer-centric culture can only be built uponconsistent leadership that employees can trust. Third, firms need effective informal and formalsystems to continuously learn about how customers are changing and to disseminate customersuccesses and lessons throughout the company. Fourth, resourcing and rewarding customer-centric actions both enable and motivate right actions. Finally, it is critical to demonstrate thatcustomer centricity pays off over the long-run for company performance.

CUSTOMER-CENTRIC COMPETENCIESA focus on the customer requires the company develop competencies to ensure it can performcustomer-facing activities better than the competition over time. The most important is the firm’smarket orientation, defined as the organization-wide generation, dissemination, and responsive-ness to intelligence, including insight, about the market.15 Over 100 studies of these competenciesfinds very strong evidence that a firm’s market orientation influences the firm’s customer

Align leader walkand talk

Offer resources andrewards

Build effectiveinformal and formal

learning mechanisms

Build through values,beliefs, norms, behavior,

and artifacts

Attract curious open-minded human capital

Core value:Prioritize

serving targetcustomers

over the long-term

Demonstrate impactacross financial and

nonfinancial outcomes

Figure 16.1 Creating a Customer-Centric Culture

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performance (customer loyalty, customer satisfaction), employee consequences (organizationalcommitment, team spirit, and job satisfaction), and organizational performance (profits, sales, andmarket share).16

The ability to generate customer insights goes beyond market research, although competen-cies in this area will be tapped. Add to this the use of marketing analytics competencies that offer a360-degree view of customers, social media engagement activities, and deep engagement withcustomers like when Harley Davidson managers go on rides with their customers, and you have theingredients for the type of customer insight that can drive practice in profitable ways.

It also requires cross-functional, cross-division, and cross-country information sharing toensure that a complete understanding of customers is gained and that information is not lost in anysingle individual or unit in the company. Strong horizontal (between functions, units, andcountries) and vertical (from employees to leaders or leaders to employees) information flowsthroughout the company serve to educate people. Both formal and informal types of informationsharing are important to this effort because formal reports are costly to create and may take toolong to reach decision makers. Regular sharing also obviates the problem that a customer insight istaken for granted and not shared by its owner.

A final challenge to sharing customer insight is that it may involve bits and pieces ofintelligence that need to be assembled for a complete picture. Employees generally don’twant to share half-baked ideas or hunches with their superiors. A particularly stunning exampleof the power of market orientation occurred in Organon, then a division of AkzoNobel.17 Organonwas conducting clinical trials for a new antihistamine, and the secretary in charge of registering thetrial volunteers for periodic medical checkups noticed that some participants were unusuallycheerful. She shared her observation with the doctors who followed up with an investigation. Itturned out that although the drug failed as an allergy treatment, it proved to be an effectivedepression remedy. There are several remarkable features of this account. First, the secretary wasa true listening post for the company in that she was attending carefully to all of the signals, eventhose that seemed peripheral, in her work environment. Second, she shared her account withdoctors, who had far more experience and knowledge in the area than she did. Third, the doctorstook her ideas seriously and launched an investigation.

Moving customer insight into new strategies and new offerings is the final step in the marketorientation competency. Resistance to acting on insight occurs when managers are risk averse andvalue the security of the status quo. Likewise, incentives that put a premium on short-termperformance can interfere with making changes to existing strategies. Finally, if there is conflictbetween different areas of business and centralized decision making, new initiatives can easily getstuck in bottlenecks as they move toward approval.

Customer-centric competencies of any type progress through several stages to contribute to afirm’s sustained competitive advantage (Figure 16.2). First, vet the knowledge and skills that formthe basis of the competency to ensure they will contribute to customer value. Second, assemble thecompetency by training, hiring, partnering, or acquiring the knowledge and skills. Third, embed thecompetency in both formal and informal organizational processes to ensure its continued enact-ment. Fourth, integrate the new competency with other competencies to create a strongercontribution to the firm and to make it more difficult for competitors to imitate. For example, acustomer insight competency could be leveraged in conjunction with a firm’s R&D activities togenerate stronger new product innovations. Finally, practice! Experience with a competency makesit more effective, more efficient, and harder to imitate as company experience accumulates.

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CUSTOMER-CENTRIC ORGANIZATIONAL STRUCTUREThe Problem of Silos18

A major challenge to customer centricity in companies is the presence of silos or divisions ofspecialized company activities. Silos can arise from the division of labor across different functions,such as marketing, finance, R&D, manufacturing, and operations. Silos can also emerge whencompanies develop country or regional divisions that empower leaders to make decisions for thesemarkets. Finally, many companies use product or brand groups that have profit-and-lossresponsibility. These types of divisions have many advantages. Managers are close to the marketor the offering, which allows them to become true experts. The same is true of functions—specialized training and experiences allow challenging operations, accounting, and marketingactivities to be resolved with deep knowledge and skills. Divisions are also accountable fordecisions and results, which empowers and motivates members to perform.

Despite these advantages, silos present challenges to a firm’s customer centricity andperformance. To begin, communicating and cooperating across silos is challenging. This meansthat information related to customer insights, strategies, and key competencies is locked in ageographic or product division or in one of the firm’s functional areas. When this happens,activities that require across-company cooperation are unlikely to emerge or are doomed to failure.Relatedly, silos often prevent successful and unsuccessful marketing programs being shared.This limits the degree to which companies can scale their successes and learn from their failures.Scaling is particularly important in building marketing competencies that require cross-functional,

Identify companyknowledge and

skills thatcontribute to

customer value

Assemble knowledgeand skills (train, hire,partner, or acquire)

Embed in formal and informal organizational processes

Build experienceand climb thelearning curve

SustainedCompetitive Advantage

Ensurescompetencies create

superior value

Makes competenciesdifficult to imitate

Integrate with other competencies to create complementarities (e.g., R&D)

Figure 16.2 Building New Marketing Competencies

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cross-product, and often cross-market activities to succeed. Silos hurt the company’s ability toensure that new marketing capabilities in digital, marketing analytics, and social media caneffectively span multiple areas of the firm. This means that competencies are not helping as muchas could because they are stuck in one part of the firm. Likewise, silos can interfere with effectivelyserving customers who want solutions that span individual products and require the use of cross-functional account teams to develop and implement.

Lastly, a silo structure nearly always leads to the misallocation of resources across product andcountry silo units, functional teams, brands, and marketing programs. Take the case of a master orcorporate brand, which is shared by many, sometimes all, silo groups. Each silo is motivated tomaximize the power of the brand without any concern for the brand’s role in other business units.Especially when there is overlap in markets, inconsistent product and positioning strategies candamage the brand and result in marketplace confusion.

Managing Structure to Span Silos

Organize Teams to Span Silos

Teams that formally link members of different functions, brands, markets, and regions solvesome of the problems. Rohm and Haas, the specialty chemical giant purchased by DowChemical, organized functional managers in new product development, technical support,supply chain, marketing, and manufacturing into account teams that served customers. A seniormanager was assigned to each team as well. In conjunction with this move, R&H segmented itscustomers into one of three tiers. The bottom tier was turned over to R&H’s national distributorsso the new customer account teams could focus on customers in the top tiers. On top of thesemoves, the product line was optimized to focus on the products most relevant to these top-tiercustomers.

Teams can also be used to span brands and regions. Teams or councils, such as Chevron’sGlobal Brand Council, HP’s Customer Experience Council, Dow Corning’s Global MarketingExcellence Council, IBM’s Global Marketing Board, or P&G’s Global Marketing Officer’sLeadership Team, are powerful vehicles to create consistency and/or synergy in marketing. Theseformal teams create opportunities for formal communication and also tie team members to oneanother informally which also improves communication.

Build a Matrix Organization to Span Silos

A matrix organization allows a person to have two or more reporting links. Several business unitscould share a sales force by having the salespeople report to a business unit as well as to the centralsales manager. Likewise, an advertising manager could report to a central advertising group as wellas a business unit. An R&D group could have a research team that reports to both the business unitand the R&D manager. As a result, the salespeople, advertising managers, and research team areeach supported by a critical mass of employees and infrastructure that allows them to excel whilestill being a part of a business unit they serve. The concept of dual reporting requires coordinationand communication and often appears to be the ideal solution to a messy situation. However,matrix structures can be unstable because attention and loyalty is divided across leaders andactivities. It requires strong leaders who can command this dual attention and employees who cancoordinate in these more complex ways.

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Align Around Customer Segments to Span Silos

This approach forms divisions, departments, or teams around the customer segment that is beingtargeted—not the product that is being sold. A “new mom” segment might house brands, newproduct teams, and customer relationship teams that are focused on serving first-time mothers.The division is led by a customer segment manager. Brand managers, under the customermanagers’ direction, then supply the products that fulfill customers’ needs. This requires shiftingresources—principally people and budgets—and authority from product managers to customermanagers. This structure is common in the B2B world. Unilever, for instance, has key accountmanagers for major retailers like Walmart. They are incentivized to maximize the value of the totalrelationship over the long term rather than sell any particular product. Some B2C companies usethis structure as well, foremost among them retail financial institutions that put managers in chargeof segments—wealthy customers, college kids, retirees, and so forth—rather than products.

The benefit of this structure is that it keeps the customer at the forefront of all activities—meaning attention is focused on uncovering unmet needs that lie outside the current brand andmoving customers to more profitable brands in the portfolio. This wouldn’t happen in theconventional system where brand and product managers call the shots. Brand A’s manager isunlikely to encourage customers to defect to Brand B—even if that would benefit the company—because he’s rewarded for brand performance, not improving customer lifetime value or someother long-term customer metric. This is no small change: It means that product managers muststop focusing on maximizing their products’ or brands’ profits and instead are responsible forhelping customer and segment managers maximize theirs.

Shell International has developed and transformed its organizational structure to align withspecific customer segments (e.g., sectors for Shell).19 Instead of individual sales people in charge ofdifferent petroleum products each visiting the customer, key account managers supported byR&D product specialists regularly visit business clients in a sector, for example, food, marine,aviation, power generation, and mining. Trained in an understanding of the customer’s businessneeds, the account manager can efficiently sell the entire portfolio of products to the customer.Whereas Shell used to allow competitors to own parts of its customer’s business in areas where itlacked product alternatives, this organizational approach stimulated the development of newproducts so that Shell could own all of the business. For example, Shell developed a food-gradelubricant for Unilever’s food manufacturing facilities. Shell also partners with its customers toco-develop products that meet localized needs and customer preferences, such as perfumedproducts in Thailand or red-colored products in China. By aligning the organization around customersegments, Shell’s revenue per customer expanded and profits increased due to lower selling costsand the introduction of higher-margin products developed to address customer pain points.

Tighten Marketing–Sales Alignment to Span Silos

The benefits of structural changes that infuse customer-centric thinking into every corner of theorganization can be magnified further with supporting efforts that break down silo barriers. A keyplace to begin is with the sales–marketing interface. Both groups should be working together tobring market realities into the rest of the organization. More often their influence is dilutedbecause they behave more like feuding family members, with scant respect for each other andconflicting views of customer needs and requirements. Workable ways to align sales and marketinginclude dedicated team liaisons, mechanisms for sharing problems and information such ascommon customer data bases, and the alignment of incentives to recognize collective behavior.20

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For example, marketing could be rewarded for the number of qualified leads that are convertedinto new customers. At the same time sales incentives should be shifted from revenue to theprofitability of the account.

Develop a Marketing Doctrine to Span Silos

A marketing doctrine is a firm’s unique principles, distilled from its experiences, which providefirm-wide guidance on market-facing choices.21 These principles ensure consistency in firmactions. For example, at Apple, Inc., these principles include, “Have the courage to cannibalize;don’t hang on to ideas from the past even if they have been successful; if we don’t cannibalizeourselves, someone else will,” “Put products before profits—push for perfection in products,” and“Take end-to-end responsibility for the user experience.” At a consumer-packaged goods firm,principles include “Brand positioning must be consistent across regions and over time,” “Differ-entiation must be supported by ‘reasons to believe’ that are based on tangible attributes,” and“Allocate marketing budgets based on brand potential, not current sales.” Research finds that theseprinciples, which are generally very few in number, offer firm-wide guidance on the firm’s mostimportant market-facing choices. Able to traverse silos, these principles can guide many aspects ofthe firm’s strategy, including its diversification and international growth decisions.

Centralize Selectively

Decisions as to what should be centralized will be based on the following questions: What activitiesspan markets and to what extent is coordination key to making them effective? What brands spanmarkets? Does market adaptation compensate for a dilution of the central message? GE Moneyresisted the “imagination at work” theme at first, and then ultimately came to believe that the valueof the corporate effort was worth embracing as a standardized message to customers around theworld. What truly requires local knowledge and management? Are there positions and programsthat work across products and markets? Pringles, for example, requires different flavors indifferent markets, but most of the other taste and social benefits of the product work everywherearound the world.

METRICS AND INCENTIVES FOR CUSTOMER CENTRICITYWhether a strategy is effectively implemented is dramatically influenced by the company’s choiceof performance measures and whether they are linked to incentives and rewards. Metrics such ascustomer satisfaction, customer loyalty, and net promoter score put the emphasis on ensuring thatcustomers have products and services they value. Therefore, a sale is likely to receive customerloyalty, positive word of mouth, and an expanding share of wallet.

On the other hand, metrics such as short-term sales or profits can produce strong incomestatements in the short run, but problems in the long run. Customers may buy once, but not returnand they may give the company negative word-of-mouth. Such incentives can also lead to anincrease in opportunistic behaviors by employees and intentional marketer misbehaviors. Thesebehaviors can include salespeople encourage sales that are not right for a customer or encouragingbuying more than is necessary—both to meet sales quota. Other problematic behaviors includegaming the system, inaccurate reporting, preferential treatments to select vendors and clients,compromising marketing research integrity, and breaching client confidentiality. Such misbe-haviors result in the breakdown of customer trust and erosion of the organization’s brand equity,

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which have devastating effects on short-term share prices as well as long-term profitability andgrowth. The Wells Fargo scandal that broke out in August 2016 over the creation of fake bankaccounts and the subsequent firing of around 5,300 employees showcases the catastrophic effectsof ignoring customer centricity in the design of performance metrics and incentives.22

Wells Fargo had spent decades nurturing a brand image as the “Bank for Main Street,” farremoved from the excesses of Wall Street banks. But Wells Fargo’s brand name was tarnishedwhen federal investigations revealed that Wells Fargo employees secretly created over two millionphantom checking accounts and credit cards for unsuspecting customers, complete with forgedsignatures, bogus email addresses, and fake PIN numbers—all created under pressure from banksupervisors to meet unrealistic targets set to beat stock market expectations. While Wells Fargo’sstock doubled in value between 2011 and 2015 and employees earned millions in performancebonuses, unsuspecting customers were charged overdraft and maintenance fees and many of themtook “significant hits” to their credit scores for not paying dues on accounts that they did not evenknow existed in their names! In the end, Wells Fargo was ordered to pay $185 million in fines forits gross misdemeanor, suffered significant damage to its brand equity, and its market capitaliza-tion was greatly eroded.23 Additionally, as part of the settlement, Wells Fargo was ordered to makesignificant changes to its internal sales practices and monitoring processes to reduce the likelihoodof similar future incidents. The lesson of Wells Fargo is that people will respond to the incentivesthey are given and misbehavior will be rampant if these incentives prioritize short-term financialgains over customer centricity and long-term performance.

Take as a contrast, Caesars Entertainment Corporation (formerly known as Harrah’sEntertainment)—an organization that placed customer centricity at the core by managing itsmarketing performance metrics.24 In 2000, Caesars made vast investments in informationtechnology and data management, which helped the company capture transactional data tounderstand its customers’ entertainment preferences, gaming interests, and other behavioralpatterns. Using this intimate customer knowledge, Harrah’s differentiated itself in the highlycommoditized gaming industry by providing a unique, personalized experience to each of itscustomers. Caesars placed customer loyalty at the core of its business strategy and aimed todo everything possible to secure the loyalty of its target customer segment. Focusing on speedof service and hospitable behavior from employees, Harrah’s hit the target’s sweet spot.

These performance metrics were published in clear graphics each period comparing thespecific property to its past performance and the performance of other casinos. These reports werevisible to all employees in the “back of house” so that everyone understand which part of theorganization, whether it was the valets or the bartenders, was doing well or underperforming.Importantly, 25 percent of senior executives’ annual bonuses was tied to customer satisfactionscores, which encouraged managers to take active measures to help improve customer satisfaction.Additionally, matters that didn’t address the needs of the customers didn’t receive much attentionfrom the leadership.

LEADING FOR CUSTOMER CENTRICITYSeveral traits of effective marketing leaders have been discussed, including being a strong rolemodel for customer centricity. What other management approaches are important to the successof marketing leaders?25 To begin, marketing leaders should focus on the strategic role ofmarketing, including customer equity and brand equity as well as growth and innovation.Marketing is too often equated with advertising or tactical level actions such as social media

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and coupons. To defeat this view, marketing leaders should focus on strategic-level activities thathave the potential to grow the top line and contribute to the bottom line.

Marketing leaders should adopt an investment mindset. In many firms a short-term, expense-oriented approach is used to evaluate customer expenditure decisions. The fallacy of this mindset isthat it leads to a “pay as you go” requirement that confuses cause and effect. Budgets for the salesforce or advertising are set according to what the company can afford according to next year’s salesforecast, rather than making heavier investments that would spur future sales. Customer-centricfirms view initiatives to manage marketplace interactions as long-run investments that drive futurerevenue and may, in fact, drive down costs.

Marketing leaders must be innovators—active participants in bringing an offering todevelopment and to market. At General Electric, for example, marketing was instrumental inchampioning an initiative around improving the operational efficiency of aircraft based on“myEngines”—software that provides customers with real-time updates as to when repairsare required and how long they will take. Beth Comstock, Executive Vice President of GE noted,“. . . we have made sure that marketing has been redefined as innovation. We expect ourmarketers to be the champions of ‘what’s next.’”26 She also noted “You don’t get to be a 130 year-old company without developing some kind of resilience and an ability to be nimble. You certainlyhave to focus on today, but also be prepared for tomorrow. We expect our marketing andinnovation teams to be the champions for that.”

Innovating marketing leaders should also focus on leveraging customers to co-create. TheDifferential Value Proposition (DVP) System combines software, data, and processes to fosterconversations between GE businesses and their clients. These exchanges start with questionssuch as “If you had $1M of GE’s money, how would you spend it to best impact your business?”These conversations produce an assessment of the monetary value that GE brings clients overGE’s closest competitor. From there, these GE-customer teams create plans to increase themutual value of the relationship. This involves mapping out “promises” that GE will execute over agiven time frame and a monetary value these promises will deliver to the customer.

Marketing leaders must also be effective integrators, reflected in the ability to bring togetherdifferent functional areas, product areas, partners, and geographies to deliver marketplace success.This can involve being a translator able to speak the language of design engineers, production,and finance people as well as easily “go native” in engaging with customers on their problems.It involves getting disparate people together. When she was Chief Marketing Officer, BethComstock recognized the need to link GE’s technological genius with its emerging commercialcompetency to serve new markets, new segments, and new customers. To do so, she created theImagination Breakthrough Process, which fosters cross-company talent and cross-disciplinaryengagement on future-oriented projects.

Marketing leaders must be effective implementers. This involves building strong talent,nurturing effective competencies, and ensuring that the best marketing tools are availableand used by the business units. At GE, this also involved creating a central source ofinformation about best practices and introducing metrics and processes that encouragedthem to be used.

Marketing leaders must be good listeners to inspire customer centricity. They must have theirears to the ground inside the company and externally as they interface with partners andcustomers. This stance not only motivates employees to share critical information that canlead to important offensive and defensive moves but also increases the likelihood that followingemployees will also be good listeners. Tom Peters says that a leader’s four most important words

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are “What do you think?” —the use of which maintains a listening stance in their interactions insideand outside the company.27

Finally, marketing leaders must engage in transformational leadership to inspire theiremployees to become brand champions who build and reinforce an organization’s brand image.Transformational leadership involves motivating followers by aligning their personal priorities andvalues with those of the organization by acting as a role model who authentically lives the brand’svalues and increasing followers’ sense of personal connection to and pride in the corporate brand.Research shows that high levels of transformational leadership lead employees to engage in highlevels of in-role brand-building behavior (i.e., meeting the standards prescribed by their role asbrand representatives) and extra-role brand building behavior (i.e., going above and beyond theirprescribed role, such as by personally advocating for the brand outside of work hours).28

Importantly, this research also shows that leaders can be trained to be effective transformationalleaders.

CUSTOMER-CENTRIC TALENTHire Customer-oriented Employees

Just as companies vary in their customer centricity, so do individual employees. Some employeeswill have a stronger predisposition to meet customer needs. Research shows that employeeconscientiousness (a tendency toward organization and precision), agreeability, and need foractivity all increase employee customer orientation while instability and introversion decrease it.29

Other research shows that higher employee customer orientation reduces turnover and increasejob commitment.30

Satisfied Employees Lead to Satisfied Customers

Research shows that employee satisfaction and customer satisfaction are closely linked.31

If employees are unhappy with how the firm treats them, it is nearly impossible to get themto focus on serving customers. Managers must compete on talent if they are to have a chance atcompeting on customer value. A central part of Marriott Hotels’ value proposition is consistency ofoperations so that customers are not surprised. Marriott achieves this largely through its oft-statedgoal to “treat its people right.”32 As founder Bill Marriott says, “If the employees are well takencare of, they’ll take care of the customer, and the customer will come back . . . That’s basically thecore value of the company.”33

Everyone Is Responsible for the Customer

The firm will not be successful unless all functions and employees perceive the connectionbetween their work and customer value. For example, at the American Girl division of Mattel,designers, buyers, and inspectors are asked to focus on the joyful reaction of each young customeropening a gift, versus criteria such as cost per yard or acceptable defect rate per thousand. DavidPackard, co-founder of Hewlett Packard, pointed out that “Marketing is too important to be left tothe marketing department.” His statement is not a condemnation of marketing, but rather areminder to all employees about the connection between their work and what the customerexperiences. Southwest Airlines brings this mentality to life by teaching employees a “systems

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level” view of the business, which stresses how actions taken by every member of the airline acrossevery aspect of the business impacts the customer.

Educate Employees on Key Customer Requirements

When Gary Lovemen was CEO of Harrah’s Entertainment, he made sure that all employees knewwhat the company’s target customers wanted from the company in their casino experiences—fastservice and a genuinely hospitable type of engagement. Employees were trained to understandhow to deliver these qualities to customers. Customers were asked to rate employees in each partof the casino experience on these dimensions.

In other situations, retraining may be important given how easy it is to lose sight of whatcustomers need when there are pressures to grow. CEO Howard Shultz took an extraordinaryaction after he had diagnosed Starbucks’s problems—he shut all stores at 7,100 U.S. locations forthree hours on February 26, 2008.34 This unprecedented step was taken to re-educate baristas inhow to deliver to customers the “art of espresso”—the central element in the unique mix of service,ambience, and great coffee the company refers to as the “Starbucks Experience.”

Disseminate Knowledge Among Employees

A system that facilitates communication and stores knowledge forms the most basic building blockof developing customer-centric talent. The system can help employees share marketing informa-tion regarding customer insights, trends, competitor actions, technology developments, and bestinternal practices about processes, methods, strategies, and new products and technologies.Information can be shared through communication platforms such as knowledge sharing sessions,knowledge hubs, and the creation of a marketing university. Knowledge sharing sessions duringformal and informal meetings not only result in information exchange, but also create channels ofpersonal communication. Personal links can create a comfort level allowing colleagues to havefrank discussions about proposed programs or potential problems, which can stave off a disaster orencourage a potential initiative. Knowledge hubs serve as an organized repository of data,experience, case analyses, and insights that make handling and exchanging useful informationeasy, efficient, and seamless across the entire organization. Frito-Lay sponsors a marketinguniversity three times a year where thirty-five or so marketing directors and general managersfrom around the world come to Dallas for a week. The purpose of this marketing university is toinvolve and educate different regions about the language and models of the central marketinggroup and to share and collect insights that might help the organization improve overall. Duringthe week, case studies are presented on tests of packaging, advertising, or promotions that weresuccessful in one country and can be successfully applied to another country.

Empower Employees

Problems arise when employees are not empowered to take responsibility for ensuring thecustomer is successful or for helping the customer solve problems. “I just work here” or “That’sanother department’s problem” are common phrases heard in firms without a customer-centricculture. A culture that tolerates passing the buck on customer problems will not get very far increating value for customers or making money for the company. This cultural trait is strongestwhen it is backed up by recognition and advancement for employees who step up and take

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responsibility and by resources to help employees solve customers’ problems. At Ritz-Carlton, forexample, the manager on duty has a $2,000 expense account each day dedicated to resolvingcustomer issues. This money might be spent to offer a gift, such as a bottle of wine, a free meal, oran upgraded room to customers who have experienced problems.

Align Internal and External Brand

A powerful strategy to develop, nurture, and sustain customer-centric talent is to link the customerand employee value propositions under a unifying brand position. Southwest Airlines exemplifiesthis strategy by unifying its internal and external branding under the brand promise of “freedom.”35

Southwest’s external positioning is that low fares allow its customers the freedom to fly and enrichtheir life experiences through travel. Southwest’s internal positioning to employees reinforces theexternal positioning of freedom by offering eight basic freedoms—the freedom to pursue goodhealth, create financial security, continually learn and grow, make a positive difference, travel,work hard and have fun, create and innovate, and stay connected. Employees are encouraged topersonalize their freedoms to reflect individual goals and preferences. Furthermore, employeesare given the freedom to show their authentic (and often very funny) selves to customers in theirinteractions on and off the plane. This consistency in branding ensures that employees receive thesame concern, respect, and caring attitude from the company that they are expected to shareexternally with every Southwest customer. And by aligning the internal and external branding,Southwest is able to create a virtuous self-reinforcing cycle that has helped the company carve aprofitable and sustainable competitive advantage in the airline industry.

KEY LEARNINGS

A customer-centric firm is one in which the customer is at the forefront of all the firm’sdecisions and actions. Firms should have a customer-centric attitude to create value forcustomers and to grow long-term profits.

Firms can become customer-centric by creating an organizational culture that hasshared values, beliefs, norms, behaviors, and artifacts that reflect a focus on thecustomer. There are well-known traits of customer-centric cultures and companies canbuild and sustain a customer-centric culture.

Building customer-centric competencies ensure that the firm has the sustained ability toperform a range of activities to create value for the customer and for the company.A firm’s market orientation is a competency that ensures it can generate, disseminate,and respond to market information.Creating an organizational structure that limits silos and breaks down barriers betweendivisions of the company is essential to customer centricity. Cross-silo communicationand cooperation and other structural devices can improve the value a company deliversto customers.Metrics and incentives need to be aligned for customer centricity. Customer-focusedperformance rewards and metrics (e.g., customer satisfaction, net promoter score)ensure the company is measuring the customer’s experience and satisfaction and notfirm outcomes (which should follow from satisfied customers).

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Customer centricity requires marketing leaders who understand the strategic role ofmarketing, have an investment mindset, are innovators, can integrate different parts ofthe company to serve customers, are good listeners, and are good implementers. It isimportant to hire employees who are customer oriented and feel responsible andempowered to fulfill this role.

FOR DISCUSSION1. Subscription-based delivery companies, such as Blue Apron and Birchbox, are growing

rapidly, but competition in the area is growing as well. Using the ideas from thischapter, how should they respond to these competitive threats?

2. Identify the different groups within a major U.S. airline that could be operating insilos, then design one approach for how the company could be structured to cut acrosssilos and stay close to the customer.

3. Design a customer-centric incentive program for retail employees at a sporting goodsstore.

4. Imagine you are the new marketing manager for a chain of hospitals that views itsclients as patients rather than customers. How, if at all, would you lead your team andpersuade your bosses to encourage a more customer-centric perspective?

5. A hotel is implementing a new training program for employees to increase customersatisfaction rates. How would you design the training program to be as effective aspossible?

BEST DIGITAL PRACTICE

Itau Unibanco

Itau was founded as a family business in 1945 as Banco Central de Credito S.A. In 2008, Itau mergedwith Unibanco (founded in 1924, also as a family business) with the goal “to be the leading bank insustainable performance and customer satisfaction.” By 2016, Itau Unibanco reached US $65.2 billionin market cap, with stocks on the NYSE. Itau Unibanco is the largest privately owned financialconglomerate in Latin America and is among the largest banks by market cap in the world afteracquiring a series of local and international banks over the years. Interbrand recognized Itau Unibancoas the most valuable brand in Brazil 13 consecutive times between 2004 and 2016.

How did Itau Unibanco achieve this status? One foundational reason is a strong focus on customersatisfaction and how to achieve it. Beginning in 2003, Itau recognized that customers wanted secure,fast, and convenient banking and that technology was needed to deliver it. The bank introducedusability methods to get closer to the customer and to understand how to improve the bankingexperience. This involved observing customers actually using banking technologies and gatheringcustomer feedback during the process. Although development cycle times were long, the strategyworked and by 2009 the company secured its leadership position in Internet banking as evidenced incustomer satisfaction scores.

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However, Itau Unibanco foresaw the online space becoming even more important—digitaltransactions grew from 26 percent in 2008 to 38 percent in 2010 while traditional physical transactionsdecreased from 74 to 62 percent in the same period. Aware of the demands from digital customers,Ricardo Guerra, head of Digital Channels, convinced the Board to invest in 200+ new employees whowould understand the entire design cycle—from customer experience to technology design. Theseincluded anthropologists and sociologists who go into the field to generate customer insights andsegment customers based on their behaviors, designers who come up with solutions focused on knownand unknown customer needs, and technologists who were willing to participate in building solutionsand improving them over time.

Progress was made, but as Ricardo Guerra shared, “We were still working for the bank and itsstockholders. We needed to do what was best for customers, which is, in the end, best for the bank.”The bank made even bigger commitments to the digital transformation. First, it defined six areas thecompany should emphasize—technology, user experience, innovation, communication, CRM, andbusiness financial performance. Ricardo Guerra noted that the company had to focus on “readingcustomer behavior to drive solutions.” Second, it focused on three key methods—design thinking,customer-centric design, and agile development. Third, it defined shared goals for IT and the bankinglines of business (involving products and services), to ensure these groups were not working in silos butcollaborating in selecting and managing technologies to enable new business opportunities and advanceperformance metrics. Although top-notch programmers might leave the company because they wantedto be insulated from business pressures, leaders knew the risk was worth taking to set appropriateculture and behavior in the company.

Fourth, the bank made several structural changes. It moved from a product-based structure to onethat focused on the customer segments’ experiences, such as the one dedicated to high-incomecustomers, Itau Personnalite. This change re-directed employees’ attention to the customer (not on theproducts and services). Finally, leaders did not dictate how goals should be achieved. Instead, theyempowered people to make more decisions. They flattened the organization, effectively puttingbusiness and technology leaders in direct contact with teams on a weekly basis. Using an approach thatmimics meetings between startup owners and venture capitalists, teams update leaders on projectresults, share challenges and propose next steps to test solution hypotheses with customers. Thisapproach allows the company to cut through layers of bureaucracy, get to customer solutions faster,foster cohesive teams, and generate trust among people across different levels and divisions.

By the third-quarter of 2016, 72 percent of customers’ transactions occurred through digitalchannels, such as Internet and mobile banking. To support this trend, Itau created the digital branchconcept, in which account managers and product specialists are available from 7AM to midnightthrough email, SMS, chat, and videoconference for more than 2.2M mid- and high-income consumersegments. Two years after its launch, this operation accounts for 40 percent of these segments’ financialresults. By October 2016, all small and medium enterprise (SME) account managers were equippedwith videoconference-capable smartphones and tablets, enabling them to deliver all products to$300K + SME clients with no or minimum back-office involvement. This improved the speed andeffectiveness of service, while also reducing its costs.

Mobile has become a ubiquitous experience among Itau Unibanco customers over the last fewyears. Between 2013 and 2016, the number of customers using mobile phones to access their bankaccounts more than doubled, mainly among low-income customers. To act on this opportunity, Itautested a remote way of opening accounts through mobile phones by launching the Itau AbreConta app.In less than two months, more than 36,000 accounts were opened, exceeding all expectations.According to Ricardo Guerra, Itau Unibanco worked to change Brazilian Central Bank regulationsto allow people to open up accounts online.

298 Part Two Creating, Adapting, and Implementing Strategy

Itau has also expanded its collaborative, cross-functional digital operations to accommodate thestartup ecosystem by creating a co-working space named Cubo that hosts 55 startups. This venturenurtures the Brazilian entrepreneurial space, promotes inspiring and networking events, and gives thebank access to top-notch talent in the digital space.

Itau Unibanco’s culture was an important part of the success of these strategic and structuralchanges. Nosso Jeito (Our Way) consists of seven attitudes that reflect expectations. These include “It’sonly good for us if it’s good for our client,” “We’re passionate about performance,” and “Simple.Always.” Acting on these cultural values, leaders pushed teams to implement solutions that coulddisrupt and expand current experiences. This approach was risky, so leaders also had to allow failure inthe short term. Moreover, leaders sent a message to the whole organization through the annual WaltherMoreira Salles Award, which recognizes best practices and results in categories such as customersatisfaction and innovation. In 2015, 803 projects were registered to compete for the award.

Itau Unibanco’s digital retail financial results increased by 43 percent between 2014 and 2016 andsecured its leadership position in digital satisfaction, scoring 9 and 8.5 points out of a 10 point-scale forconsumer (noncommercial) and SME segments, respectively. In addition, Itau was recognized as themost reputable bank among retail banks in the 2014 Brazilian Consumer Satisfaction Index (BCSI).

Ricardo Guerra summed up Itau Unibanco’s successful journey by noting: “Over the years, wehave thought about and revised our solutions, our branches, our customer service model, and the waywe work. We progressed by bringing the client into the core of our operation, working to strengthen thebank’s availability and the client’s experience.”

Questions:

1. What organizational factors were important to Itau’ Unibanco’s digital transformation?

2. What growth opportunities do you envision for Itau Unibanco and what is the best organizationalapproach to develop and implement these growth strategies?

Sources:Interview with Ricardo Guerra, Itau Systems and Architecture Executive Director.

Itau Unibanco Consolidated Annual Report 2015, https://www.itau.com.br/_arquivosestaticos/RI/pdf/en/Itau_RAC_2015_ing.pdf?title=Consolidated%20Annual%20Report%20-%202015.

Itau Unibanco Institutional Presentation (3Q16), http://www.itau.com.br/_arquivosestaticos/RI/pdf/en/ITUB_Institutional_Presentation_3Q16.pdf.

Transforming Experiences: Banking in the Digital Age, Itau Unibanco, November 17, 2016, https://apimec.mediagroup.com.br/eng.asp.

BEST GLOBAL PRACTICE

The Phillips Journey to Customer Centricity

In early 2000, Philips Electronics, the multinational company based in the Netherlands, was widelyseen as a trusted but dull global company. With a history of technology leadership, it had a well-entrenched culture with a “factory mind-set” that focused on reducing costs while improving currentproduct performance. The company was under-performing relative to its potential—sales had flat-lined

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Chapter 16 Harnessing the Organization 299

and net income was negative. One analyst criticized, “Philips is a company that consistently destroysshareholder value.” This occurred for several key reasons.

First, the company was organized into six loosely related product divisions (including lighting,consumer electronics, appliances, and medical systems) with a legacy of entrepreneurial countryoperations that impeded global coordination. Second, there was a costly muddle of hundreds ofdifferent brand names that lacked both ties to Philips and a meaningful umbrella positioning theme.Third, there was no unifying thrust to what strategic marketing should or should not do. Fourth, themarketing capabilities at the corporate and business levels were weak—even though each productdivision had its own CMO.

The transformation to a customer-centric organization was orchestrated by the CEO, GeraldKleisterlee. A key first step was to establish a corporate CMO function. Following a worldwidesearch, the position of group-wide CMO was awarded to Andrea Ragnetti, a former P&G managerwho was heading Telecom Italia’s efforts to become more market-driven. Kleisterlee chargedRagnetti with turning Philips into the “P&G of its space,” which meant new growth driven bycustomer insights.

Ragnetti’s first move was to constitute a strong and committed marketing board made up of theCMOs from each product division to share best practices and coordinate activities. The second movewas to start a Philips Marketing Academy to enhance marketing capabilities throughout the organiza-tion. These two moves were designed to work in tandem to help nurture common projects, showcasebest practices, and facilitate networking across divisions. A third move was to form the “SimplicityAdvisory Board” comprised of health care, fashion, design, and architecture specialists from outsidePhilips that would ensure the company was focused on the customer and also innovative.

Meanwhile, the existing Global Brand Management group that reported to Ragnetti was investingheavily in gathering customer insights. The research program engaged over 1,650 consumers and 180customers in 120 in-depth interviews, 24 focus groups, and 1,439 quantitative interviews. That workrevealed deep customer frustration with the difficulty of using technology and with the complexity ofbuying from Phillips. Instead, customers wanted simplicity in their lives and technology that got the jobdone. They also wanted an easier way of doing business with Philips. Phillips’ current umbrellapositioning of “Let’s Make Things Better” lacked coherence and clearly did not signal a focus on thecustomer.

After much debate, a new umbrella positioning called “Sense and Simplicity” was chosen. It wasbased on three brand pillars:

■ Designed around you: “This means all our activities must be driven by insights into how ourcustomers experience technology.”

■ Easy to use: “People should be able to enjoy the benefits of technology without any hassle orfrustrations.”

■ Advanced: “The central idea is progress . . . something is only truly advanced when it improvesthe lives of people.”

The adoption and implementation of the new positioning theme was not smooth, however. Someopponents were worried about the fate of products that contradicted the brand promise, while othersdid not want to bear the €80 million cost of the initial campaign. At this point, the CEO stepped in andforcefully decided to proceed.

The implementation of the new value proportion had a huge impact on the traditionallytechnology-driven company. All new product development projects had to go through a rigorousprocess called the “Value Proposition House and Marketing Funnel” that demonstrated how well the

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offering fit the three brand pillars. The process also ensured a clear connection between customerinsights, what Phillips was offering in the value proposition, and how this was unique relative to thecompetition.

The new customer-focused initiatives influenced hiring decisions and annual review criteria usedby HR. This meant that employee criteria and the customer value proposition were now aligned. Thebrand pillars were also used to introduce improvements to the sales organizations within each of theproduct divisions. New, more collaborative sales models that focused on bringing simplicity tocustomers were piloted and rolled out. Results indicated that the new systems were working asPhilips began to rack up awards in this area.

One of Ragnetti’s key hires during this time was Geert van Kuyck as senior vice president ofglobal marketing management in fall 2005. Van Kuyck, also a former P&Ger, was the vice presidentof marketing for Starbucks when hired. He was charged with, in his words, “bolting the brandpromise to the company.” In 2006, van Kuyck began piloting a program that used the Net PromoterScore (NPS) measure to evaluate Philips’ performance with the customer in three product units: oralcare, MRI, and TVs. NPS was chosen because it connected the customer and the product or serviceofferings, and it was simple enough to be used across all the units. The pilot study showed that itpredicted customer behavior well. Specifically, a high NPS predicted Philips’ ability to drive revenue,retain margin, and improve share of wallet. Based on this success, the program was then rolled out toother units, using a variety of approaches such as digital strategies, warranty cards, and a survey ofbusiness partners. The company evaluated Philips’ NPS performance relative to competitors andrelative to its goals. This singular focus helped drive attention toward the customer inside the boardroom. The CFO began thinking about investing in customers for whom high NPS could be achieved,and the chief strategy officer began thinking about product portfolio decisions from the customers’point of view. Even R&D adopted a “beta NPS” in which it used NPS to evaluate customers’ responseto early products. These types of changes inside the boardroom and throughout the company made itclear that managers understood, in van Kuyck’s words, that “Profits don’t get made in the factoryanymore.”

With a single-minded focus on the customer, Philips has seen improvement in the company’sconsumer and professional businesses, from its power base in Europe to highly competitive emergingmarkets such as China and India. By 2007, revenue from new products introduced within the previoustwo years had increased from 25 percent to 53 percent of the company’s total. Interbrand estimatedthat the value of the Philips brand had risen from $4.4 billion in 2004 to $7.7 billion in 2008, mainlybecause of improved earnings.

Apropos of Philips’ deep commitment to customer focus, in January 2008 Philips implemented anew organizational structure focused on market sectors—Philips Healthcare, Philips Lighting, andPhilips Consumer Lifestyle. The product divisions disappeared. At that time, Ragnetti was appointedCEO of Consumer Lifestyle and Geert Van Kuyck was appointed CMO.

Philips proved remarkably resilient throughout the recession. Brand value grew, NPS scores werethe highest the company has ever seen, with 60 percent of revenue coming from markets where Philipsis the NPS leader. Even in markets such as construction in Spain, where competitors have seen a 40percent drop in business, Philips has held its performance levels for the year.

Fast-forward to 2013 when Philips unveiled a new brand logo “Innovation and You,” whichwas cited by Philips to signify the company’s continued emphasis on ensuring that innovation isonly meaningful if it is based on an understanding of people’s needs and desires. As noted bycurrent Philips Chief Executive Officer Frans van Houten, “We believe that the new brandpositioning much better reflects Philips’ mission to improve people’s lives through meaningfulinnovation.”

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Chapter 16 Harnessing the Organization 301

Questions:

1. How did the new brand positioning guide the firm’s customer centricity?

2. Why was the Net Promoter Score an effective metric for Philips to adopt during its journey tocustomer centricity?

Source:This case is adapted from George S. Day and Christine Moorman, Strategy from the OutsideIn, New York: McGraw Hill, 2010 and Sean Meehan, The Philips Marketing Journey (A), (B), and(C), Lausanne, Switzerland: IMD, 2007. http://www.newscenter.philips.com/gb_en/standard/news/press/2013/20131113-Philips-unveils-new-brand-direction-centered-around-innovation-and-people.wpd#.UvpZn2J5PnF

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C H A P T E R S E V E N T E E N

How Marketing Activities CreateValue for Companies

“As a marketing leader, I must accept the burden of proof that our activities create value for the company.”—Benjamin Karsch, CMO, Revlon

“Traditionally, marketing activities focus on success in the product marketplace. Increasingly, however, topmanagement requires that marketing view its ultimate purpose as contributing to the enhancement ofshareholder returns.”—Rajendra Srivastava, Tasadduq Shervani, and Liam Fahey, Journal of Marketing

At its best, marketing creates value for customers and for companies. Previous chapters haveidentified some of the ways, including smart growth strategies and management of customers andbrands, that effective marketing produces firm value. This chapter formalizes these ideasbeginning with a review of how marketing impacts revenues, such as those found on an incomestatement, and then moves to how marketing impacts more finance-based measures associatedwith firm cash flows.

To begin, it is important to adopt a mindset that should seem natural at this point in the book,but that is uncommon in businesses—that customer equity, brand equity, and the associatedcompetencies important to their creation are among the company’s most important strategicassets. These resources are difficult to create, are even more challenging to imitate and substitutesfor their roles are not easily identified or purchased. As a result, these resources can be criticalgenerators of sustainable competitive advantage for the firm.

These resources are what accountants call “intangible” assets and, in general, they do notappear in a firm’s balance sheet where other tangible assets such as plant and equipment, rawmaterials, and finished products appear. Although the “goodwill” category on the balance sheetmay include some of the value of a firm’s brand equity, the full value of the firm’s customer equityand its powerful marketing competencies are noticeably absent. This general status has over timemade many companies less clear about the value of these intangible marketing assets and theinvestments made to develop them. It also creates other managerial challenges that will bediscussed at the end of the chapter.

303

There is a strong case to be made for placing marketing assets alongside other tangibleassets. As shown in Figure 17.1, tangible assets, such as plant and equipment, compare well withintangible marketing assets, such as customer and brand equity, on important company outcomes.1

THE IMPACT OF CUSTOMER AND BRAND EQUITY ONFIRM REVENUESHow Strong Customer Relationships Increase Firm Revenues

Recall that customer equity is the sum of a firm’s lifetime value of its customers. This intangiblemarketing asset is built on the firm’s ability to maintain relationships with customers. Beginningwith this retention payoff, loyal customers exhibit several behaviors that contribute to higher firmrevenues.2

Lower Defection Rates

The fiscal rewards of customer retention are on display at USAA. In auto insurance, USAA has acustomer retention rate of 96 percent, compared with 80 percent retention for the averagecompetitor such as Geico or Esurance.3 This means USAA must replace only 12 percent of itscustomer base every three years versus 49 percent for the average firm. Profits are higher due tolower costs because new customers do not need to be recruited and current customers need fewerincentives to stay.

Tangible Assets (e.g., Plant andEquipment)

Intangible Marketing Assets(e.g., Customer and Brand

Equity)

Lower costs Enhance productivity Strong customer relationships andrelated knowledge lower salesand service costs

Attain pricepremiums

Leverage plant and equipment to createsuperior product functionality, features,and durability, which allow company tocharge higher prices

Strong brands improve perceivedvalue of offering

Generate barriersto competitors

Expensive for competitors to compete onplant and equipment

Customer loyalty increasesswitching costs for customersto purchase from competitors

Improves value ofother firmresources

Modern plants and equipment can increaseemployee productivity

Satisfied customers are moreresponsive to marketingexpenditures and new products

Create growthoptions formanagers

Plant and equipment can be shared acrossproducts the firm might sell

Strong brands can be leveraged tointroduce extensions in currentand new categories

Figure 17.1 How Intangible Marketing Assets Compare to Tangible Assets

304 Part Two Creating, Adapting, and Implementing Strategy

Greater Share of Wallet

Of the 64 ounces of liquid consumed in a day, how much does the average person give to TheCoca-Cola Company? How much of its logistics budget does Amazon give to UPS versus FederalExpress? The answer to each question provides the company’s “share of wallet”—in short, thepercentage that the company gets of the customer’s total expenditure in a category. Loyalcustomers are more likely to give greater shares to companies they value.

Cross into New Categories and Buy New Offerings

When customers cross over from Disney films to Disney theme parks to Disney stores, it’s a bigwin for the company. Compared to a new or casual customer, those with multiple connectionsto the firm are less expensive to reach and are more likely to make purchases across categories.This fact has been established in both business-to-business markets and business-to-consumermarkets.

Endorse the Firm

Customers provide value to companies when they spread positive word-of-mouth. Threetypes of advocates can help the firm—early adopters, opinion leaders, and mavens. Earlyadopters are valued for their expertise in the category. These aficionados have deep knowledgeabout products in a category and are among the first to try new products. Opinion leadersmay not have the depth of knowledge of the early adopters, but these loyal customers arerevered for their social standing and drive market acceptance by the force of their recommen-dations. Mavens know a great deal about what can be purchased, at what price, and where.These social butterflies gain satisfaction from helping others find what they need in themarketplace.4

Many top firms, including GE and Charles Schwab, use the Net Promoter score to measurethe power of these and more general advocacy networks. The score is derived from regular surveysof the firm’s current customers. Customers are asked a simple question: “How likely is it that youwould recommend [company X] to a friend or colleague?” Customers respond on a 10-point scale,where 10 = “extremely likely” and 1 = “not at all likely.” Promoters are those giving the firm a 9 or10, detractors are those giving the firm a 0–6, and passively satisfied customers are those giving thefirm a 7 or 8. Based on these choices, the Net Promoter score is the % Promoters % Detractors.A company’s NPS trend offers insight into performance over time as does buying access to industrybenchmark data available from vendors.5 Research shows that this score has a strong positiverelationship with a firm’s three-year growth rate.6

How Strong Brands Impact Firm Revenues

Most of the customer equity benefits driving revenues also apply to brand equity. In this section,several unique outcomes are identified.

Increased Brand Consideration

An important feature of strong brands is that they are more easily recalled from memory when theneed for a product or service is triggered. This ease of retrieval puts the brand in a strong positionto enter the customer’s consideration set as she move through the purchasing journey. However,even if a brand is not easily retrieved from memory, it is also useful if the brand is recognized when

Chapter 17 How Marketing Activities Create Value for Companies 305

the customer begins to search. This status increases the likelihood that the brand will be givenmore consideration in the process.

More Likely to Purchase

When visiting the computer monitor aisle, the venerated electronics brand Samsung stands outcompared to lesser known brands such as Acer. Strong brands, such as Samsung, bring reassuranceand confidence about the purchase decision to customers unwilling to spend more timeaccumulating information. For the same reason, distributors and retailers are much more disposedto carry a brand that is well known, with built-in demand, than one that is new to the market. Thisbehavior is especially true when buying a product that is expensive and infrequently purchased,such as a car, or when purchasing a product in a market in which it is difficult to make comparisons,such as medical services.

Pay Price Premiums

Strong brands generally command price premiums in the marketplace relative to weaker brands.Prices need to be in the range of parity for a premium automobiles, of course, so outrageously highprices are not the focus. However, when a customer trusts a brand and prices are aligned with thetotal value they are receiving, prices receive less attention in the search and negotiation process.One research study reports that the average premium for strong brands is 10.8 percent—which issizable.7 It follows that customers are less likely to switch on the basis of a price change. Price-to-switch is a metric that uses this idea. It asks customers how low the price of a competing brand hasto drop before the customer is willing to switch from one brand to another. That differential is thevalue of the brand to customers. For many strong brands, there is no price at which loyal customerswill switch.

Becton Dickinson, maker of the color-coded plastic tubes and blood collection systemused to collect venous blood samples, was being pressured by a large hospital buying group in1985 to replace the Vacutainer brand name on its product with the group’s brand name.Although the customer represented 10 percent of the entire market, Becton Dickinson wasprepared, if necessary, to lose the customer in order to protect its brand name. It correctlyviewed the brand name as a symbol of the company’s quality and innovation. Without it,products would not be recognized, could not command a price premium, and would ultimatelybecome undifferentiated. In the end, Becton Dickinson did not give in and remains a marketleader today.8

Bigger Growth Options

Strong brands are a growth platform. In financial terms, strong brands have greater option valuethat the company can convert into new offerings in a current category or into new categories.It was for this reason that Unilever made Dove—a soap brand—into a master brand in 2000.With this shift, the company expanded the brand’s authority into new categories such as haircare, deodorant, and lotions. Growth options can also be found in co-branding alliances.Companies seek out other companies to combine their brands in a new product. Companiesthat contend for those partnerships have strong brands that complement one another. This iswhy the Ford launched two generations of Explorer vehicles in partnership with Eddie Bauer,which offered special trims and other internal design features associated with the outdoorcompany.

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Stronger Endorsements

Like strong customer relationships, strong brands foster endorsements. However, an importantdifference is that in addition to customers who have first-hand experience with the brand makingendorsements, strong brands also arise from non-customers who share what they think and knowabout brands. This can happen via word-of-mouth at a dinner party, on Facebook, or in on-lineforums. People share both positive and negative information about stores they have not visited,consultants they have not hired, books they have not read, and movies they have not seen—although bad information often spreads faster. When both customer and non-customer networksendorse, brand knowledge is built, brands enter consideration sets, brands are adopted morequickly, and price premiums may be possible. The power of these social network effects is evidentin the fact that many strong brands, including Starbucks, Krispy Kreme, Zara, and McKinsey dolittle to no media advertising.

THE EFFECT OF MARKETING ASSETS ON FIRM VALUERising revenues, while important to firm performance, are not going to guarantee marketingleaders a seat in the firm’s top management team. More importantly, revenues do not fully capturethe many ways that marketing impacts the firm. To do so, a stronger connection to the firm’s long-term value is necessary. The impact of marketing on firm shareholder or market value is a metricused in public companies to gauge its long-term expected value. Defined as the net present valueof all future cash flows expected to accrue to the firm, research has shown that firms with highcustomer satisfaction scores tend to beat the average stock market effects in any given period. Forexample, a recent study found that the cumulative company stock market returns from 2000–2014for firms with strong customer satisfaction were 518 percent compared to a 31 percent increase forthe Standard & Poor’s 500.9

Not without controversy and valuation challenges, this finance-based view is grounded in theassumption that the stock market examines firm actions, then increases or decreases the firm’sfuture value to reflect its assessment of how those actions are expected to change the firm’s futureprofits. While firm value can be defined in a multitude of ways, a commonly utilized practice infinance is the Discounted Cash Flow (DCF) model. The basic premise behind this model is thatthe present value of all future firm cash flows, where cash flows are the net of cash entering the firm(revenues) and cash exiting the firm (costs).

The calculation utilized for the DCF model is PVN

t 1

FCFt1 i t

where PV, the present value

of the firm, is the sum of a firm’s future cash flows (FCF) in a given period (t), with each cash flowbeing discounted by the relevant discount rate (i) that reflects a measure of the risk associated withthe firm and market. The model sums (Σ) over the total number of time periods (T) to somepredetermined point in the future often referred to as the “terminal value” of the asset.

Given this model, there are four key ways that marketing assets can improve the future valueof a firm’s cash flow: (1) the firm’s cash flows can arrive sooner (affects t); (2) the firm can receivehigher cash flow levels (affect FCF); (3) the firm’s cash flows are less volatile (affect i); and (4) thefirm’s cash flows are less vulnerable (affects i). Each of these is now discussed.

Faster Cash Flows

Strong brands and customer relationships can positively impact the speed at which the firm collectscash flows in many ways.

Chapter 17 How Marketing Activities Create Value for Companies 307

Faster Brand Retrieval

Strong brands can increase the speed of brand recognition and recall. A strong brand, meaning amemorable brand with positive associations, will likely occupy the top of a consumer’s mind.Such brands are easily retrieved and can often become symbols of the category overall, just asKleenex and Xerox represent tissues and copying machines. Research shows that this status notonly makes the firm’s brand more likely to be recalled, but other less well-known brands lesslikely be recalled!

Faster Purchase Decision

Cash flows will also be accelerated with a strong brand due to the fact that consumers trust strongbrands, which means they are more likely to accept uncertainty and give these brands the “benefitof the doubt”—both of which speeds up the decision-making process. The same effect occurs withstrong customer relationships. This accelerated process relates not only relates to the firm’sexisting portfolio, but can extend to new offerings the firm puts forward. The reason is similar—brands are a strong signal that increases customer confidence, lowers customer risk, and cuts offthe need for more search.

Faster Response to Marketing Spending

Customer response to marketing spending should also be faster for strong brands and relation-ships. This is because, all else equal, customers more easily retrieve their stored memories ofthe brand and take action when given the opportunity. For example, when P&G puts a coupon inthe Sunday paper for its Pantene shampoos and conditioners, it gets clipped and saved for thenext shopping trip whereas an unknown brand may need to engage in other brand-building ortrial-inducing strategies. An added benefit of these faster responses is that the firm may need tospend less overall in order to achieve profit or market share goals.

Business customers also respond more quickly to brands they trust. When Google wasplanning the Pixel smartphone—the first Google-branded product in the Android line-up in2016—negotiations with intended manufacturer Huawei fell through. Google was left with a veryshort timeline in which to develop and launch a version of the Pixel with another manufacturer.How could they find a partner in time to pull this off? In this moment of potential crisis, with abouthalf the time typically needed to develop a new smartphone, Google turned to a trusted brand andlong-standing relationship partner, HTC. The two companies had collaborated on the very firstAndroid device in 2008—the HTC Dream—and had a working relationship since. It was thisrelationship and foundation of trust between the two brands that enabled them to design andsuccessfully launch the Pixel on its accelerated schedule. Because HTC had invested in itsrelationship with Google in the past, it was able to beat out the competitors and capture this majorpartnership opportunity.10

Higher Cash Flows

Cash flow levels can increase in two key ways: increasing revenues or reducing costs. The revenuebenefits of strong customer relationships and brands have been examined in a previous section.Although nonobvious, marketing can also increase firm cash flow levels by reducing costs in severalimportant ways.

308 Part Two Creating, Adapting, and Implementing Strategy

Lower Marketing Research and New Product Development Costs

Strong customer relationships not only allow a firm easier access to customers’ wallets, but also totheir thoughts. These relationships can translate to greater communication, engagement, andtransparency. When customers are more willing to engage with the firm, they more readily offerfeedback that would otherwise require more spending on market research. Beyond these insights,firms can also benefit from the creativity and unique knowledge of their long-term customers.When Lays Potato Chips calls on customers to submit new flavor ideas or Lego introduces newboxed sets from customers’ creations, they effectively outsource parts of the otherwise-costlycreative process to their base of engaged customers.

Lower Marketing Expenditures to Acquire Customers

If the firm has already established a reputable brand, it will need to incur fewer resources to attractnew customers. This is the case because, as mentioned earlier, strong brands benefit from customerendorsements and positive word-of-mouth (WOM), which can translate into lower advertising ormarketing expenditures.

Lower Employee Pay

Research shows that strong brands can reduce costs by lowering employee pay. The reason is thatemployees are eager to work for reputable brands in order to build their resumes or to receive otheridentity-based benefits of being associated with a strong brand. This effect was quantified as thefollowing cost reduction—a one standard deviation increase in brand strength is, on average,associated with an 11.8 percent decrease in pay, which translates to roughly $1.2 million in yearlysavings per firm.11

Better Human Capital

Just as brands stand out to customers in the market, they also stand out in the labor market.Potential employees often learn about companies by interacting with them as customers orthrough endorsements in social networks. These reputation effects make employees more likely tojoin and to stay with companies with strong brands, which lowers costs and boosts effectiveness ifstrong brands get a better selection of top employees. For example, Google has been listed asamong the top ten firms on Fortune’s annual survey of “Best Companies to Work For” since 2007.It is also among the fastest rising brands valued by Interbrand in Business Week’s “Best GlobalBrands” during this same time period. It is not surprising that these metrics moved in the samedirection for Google.

Lower Costs of Debt

A reputable brand can reduce the costs associated with financing its operations. Research demon-strates that a one unit increase in a firm’s customer satisfaction scores (measured by the AmericanCustomer Satisfaction Index, see www.asci.org) is associated with a 6 percent increase in creditratings and a 2 percent decrease in cost of debt financing.12 With lower interest rates, cash flowsshould increase.

Larger Relationship Investments. Companies benefit when customers make investmentson their behalf. Among B2B customers, commitments can be small, such as investing in a jointpromotion for the channel. However, these investments can also be substantial, as when custo-mers build specialized equipment, locate the firm’s managers on site, train employees to sell a

Chapter 17 How Marketing Activities Create Value for Companies 309

product or service, and even build shared information systems. For example, Walmart hascost-saving partnerships with P&G that focus on increasing the efficiency of order placement,order processing, cross-docking, and inventory holding and P&G, as a customer, makes invest-ments in Walmart to achieve these goals. These investments also benefit the firm becausethey make it much less likely customers will leave the relationship given these investmentswill be lost.

Less Volatile and Less Vulnerable Cash Flows

The volatility and vulnerability of cash flows reflect two different risks to a firm’s cash flow,which, in the DCF model shown earlier, reduce its value. Volatility refers to the stability ofcash flows over time and vulnerability refers to the firm’s ability to withstand internal errors orcompetitor attacks.

Greater Customer Stability

Firms with strong customer relationships are more likely to have higher customer retention rates.Higher retention means that the firm experiences a more predictable revenue stream, whichlowers cash flow volatility. When firms improve customer retention by 1 percent, they gain a5 percent increase in firm value. This makes retention almost five times more powerful as a lever forenhancing firm value than focusing on increased margins or a lower cost of capital.13 Higherretention also means that firms do not need to replace customers and incur new acquisition costs,which are usually higher than past acquisition costs due to inflation and other economic pressures onemployee salaries.

Stronger relationships also benefit business-to-business firms because deep partnerships withupstream suppliers and downstream customers allow the firm to smooth its operations in reachingthe market with products and services. This is due, in part, to the fact that strong partnershipsfoster investments, including human and financial resources, that make the relationship functionmore efficiently. Companies in strong partnerships are also more likely to share information aboutdemand, competition, and other bottlenecks that threaten performance and to do so more quicklyin order to thwart problems.

Protection Against Rival Switching Strategies

Warren Buffet, perhaps the greatest investor of all time, describes a strong brand as a moat—thebody of water surrounding a castle that protects it from invading armies. Strong brands are moatsbecause customers have a great deal of stored knowledge about strong brands, can easily retrievethese brands from memory, and know they can trust and rely on these brands. As a result,customers will be unlikely to be open to competitive offers to switch, including price deals.Profiling Coca-Cola, Buffet noted, “Coca-Cola is associated with people being happy aroundthe world . . . wherever they are happy, at Disneyland, the World Cup, the Olympics—happinessand Coke go together. You give me . . . I don’t care how much money and tell me that I’m goingto do that with RC Cola around the world; to have 5 billion people around the world have afavorable image of RC in their minds—it can’t get done. You can fool around with the formula,have price discounts on the weekend—you can do anything you want to do, but you’re not goingto touch it. That’s what you want to have in a business—that’s the moat and you want that moatto widen.”14

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Protection Against Rival Entry

Strong customer relationship and strong brands are also a barrier to entry for new competitors.Prospective entrants face a daunting challenge when they look at firms like LinkedIn, whichhad 467 million subscribers in 2016.15 Close to 70 percent of LinkedIn users have over 300connections in LinkedIn. These connections create customer stickiness, making the industry lessattract to prospective entrants.

Protection Against Internal Mistakes

A significant benefit of strong marketing assets is the ability to protect against internal mistakesand still be able to maintain loyalty after a significantly destructive activity. The ability to gain“forgiveness” is important to maintain stability in future cash flows. For example, Facebook hasrun into a number of privacy-related scandals in recent years, from running experiments thatmanipulate users’ emotions to putting users’ photos in product ads without their consent. In eachcase, Facebook has bounced back nearly unscathed. These quick recoveries can largely beattributed to Facebook’s exceptional marketing assets. Facebook not only has one of the industry’sstrongest and most well-known brands, but it has customer relationships that are deep, long-standing, and span a vast network of customers. These assets protect and stabilize Facebook’s cashflows, in part by reducing the impact of internal mistakes.

Summary

Strong marketing assets in the form of customer relationships and brands create value forcompanies in a variety of ways. Figure 17.2 summarizes these different sources of value. Ascan be seen from this list, brands and customer relationships can often have similar effects onfirm value. This is because they generally co-occur—strong customer relationships often signalthe presence of strong brands and vice versa. There are, however, some effects that have onlybeen documented for one or the other.

HOW MARKETS VALUE MARKETING ASSETSDespite the absence of many marketing assets from firms’ balance sheets and formal financialstatements, their value directly appears in certain contexts. The impact of strong brands andcustomer relationships on firm value is particularly visible for early-stage firms that are growingquickly and do not yet have positive earnings, for corporate acquisitions involving a large premiumfor marketing assets, and for companies that purchase access to brand assets through licensingagreements.

Customers as Assets at High-Growth Companies

At many fast-growing new companies, particularly in the technology sector, a strong customer baseis often a much better predictor of long-term success than current revenues. Indeed, suchcompanies often have negative profits and can be very difficult to value with traditional metrics.Several analyses of financial performance in the Internet sector have found that net income oftenhas no relationship to stock price and that firm value is best predicted by non-financial, customer-oriented metrics such as monthly active users or visit duration. One investigation demonstrated

Chapter 17 How Marketing Activities Create Value for Companies 311

Marketing Asset Financial Payoff Sources of Value

CustomerRelationships

Increased revenue Lower defect ratesGreater share of walletBuy new offerings in current categoriesFollow company into new categoriesStronger endorsementsMore effective human capital

Decreased costs Lower marketing research and new productdevelopment costsLower customer acquisition costsLower employee payLower employee acquisition costsLower employee turnoverLower costs of debtLarger investments in relationship by customer

Faster cash flows Faster brand retrievalFaster purchase decisionFaster response to marketing spending

Less volatile/vulnerablecash flows

Greater customer retentionProtection against rival switching strategiesProtection against rival entryProtection against internal mistakes

Brand

Increased revenue Price premiumsIncreased brand considerationGreater likelihood of purchaseBigger growth optionsStronger endorsementsMore licensing opportunities

Decreased costs Lower customer acquisition costsLower employee payLower employee acquisition costsLower employee turnover

Faster cash flows Faster brand retrievalFaster purchase decisionFaster response to marketing spending

Less volatile/vulnerablecash flows

Protection against rival switching strategiesProtection against rival entryProtection against internal mistakes

Figure 17.2 A Summary of How Intangible Marketing Assets Create Company Value

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that total customer value, based entirely on customer lifetime value, was a better predictor offirm value for both Internet-based and bricks-and-mortar companies compared to traditionalfinancial metrics or tangible assets.16

Marketing Assets in Firm Acquisitions

In 2016, Microsoft acquired LinkedIn for $26.2 billion, one of the technology industry’s biggestacquisitions ever.17 This price was a 49.5 percent premium over the trading price of LinkedIn’sstock at the announcement of the deal. Was this a mistake on Microsoft’s part? If the purpose wasjust to acquire LinkedIn’s technical assets, which Microsoft could instead develop in-house, thisinvestment would be hard to justify. However, Microsoft was largely paying for marketing assets,particularly so that Microsoft could leverage LinkedIn’s extensive customer base and strongbrand.18

Another acquisition that demonstrates the willingness to pay for customer relationshipassets is Amazon’s 2014 purchase of Twitch for $970 million. Twitch is a video streamingplatform used to watch and chat about video games; it has 10 million active users per day andover 50 million unique users per month.19 It is a market leader in the large and fast-growingworld of gaming and e-sports, which draws as many as 32 million live viewers for major eventslike the League of Legends Championships.20 By comparison, that’s nearly quadruple the 8.9million viewers who tuned in for the most popular episode of HBO’s landmark series Game ofThrones.21 But this acquisition was more than a media play for Amazon. The Twitch acquisitionwas a critical opportunity to access the coveted market of young adults that Amazon haspreviously targeted with offerings like free student Amazon Prime memberships.22 To penetratethe market, Amazon promptly offered Twitch subscribers discounts on Amazon-purchased videogames and hardware and even rolled Twitch’s $8.99/month Turbo subscription into Amazon’s$10.99/month Prime subscription at no extra charge. This might seem generous on Amazon’spart, but it’s an investment intended to transfer Twitch’s customers into Amazon’s other productlines. Amazon knows that Prime subscribers spend more than four times as much on Amazonpurchases as non-subscribers do.23 If even a modest fraction of Twitch’s large and fast-growinguser base can be converted into loyal Amazon customers and Prime subscribers, the lifetimevalue of those customers to Amazon will be well worth the investment.

Just as acquisitions are often motivated by the ability to gain key marketing assets, they can alsobe undermined by the inability to do so. One of the best examples of this is the Kit Kat brand ofchocolate bars, which are produced in the United States by the Hershey Company under a licenseagreement with Nestle. Kit Kat is one of Hershey’s top brands, with a tremendous level of brandrecognition and loyalty. Importantly, the agreement with Nestle is not transferable to a newcompany in the event that the Hershey Company is sold. As a result, several proposed acquisitionsover the years have ultimately fallen through because this important brand asset would be lost.Due to this non-transferable marketing asset, Hershey is more valuable on its own than it wouldbe to any acquirer.

Brand Assets and Licensing

The value of brands and other marketing assets is also highly visible when those assets are sold orlicensed on their own. Sir Richard Branson’s Virgin Group makes extensive use of brand licensing.

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Of the 80 or so companies bearing the Virgin name, the Virgin Group actually owns stock in lessthan half, and even in the 12 largest Virgin companies the group has just 27 percent ownership.Virgin Group Holdings collects licensing fees of more than $180 million per year for permittingother Virgin companies, such as Virgin Money or Virgin Mobile, to use its valuable brand name.24

On a discounted-cash-flow basis, these revenues provide a reasonable estimate of Virgin’sbrand value, which adds up to about 20 percent of the Virgin Group’s total market capitalization.Although most top brands don’t use licensing as extensively as Virgin, trademark licensing feeshave been similarly used to estimate the value of many companies’ brand assets. These analysesreveal that for the top ten brands, including Apple, Google, IBM, and Walmart, brand assetsaccounted for 19 percent of the firms’ total market value.25 In other words, brand equity at thesemajor global firms is worth about one fourth of all other assets combined.

MANAGING MARKETING TO CONTRIBUTE TO FIRM VALUEFoster Strong Marketing Competencies

This chapter has emphasized strong brands and customer relationships as value-producing assets.However, marketing competencies—the knowledge and skills housed within the company thatallow it to take smart marketing actions—are also critical to firm value. As noted in Chapter 1,marketing competencies do the heavy lifting of both developing these two valuable marketingassets and effectively leveraging them to create long-term value. These competencies must beupdated over time as the marketplace changes. For example, many companies are working tocreate stronger digital marketing competencies so they can communicate their brands and engagewith customer more effectively online.

The challenge of marketing competencies is similar to the challenge of intangible brand andcustomer assets. These competencies do not show up on the firm’s balance sheet and they work inthe background, often invisibly, to produce and leverage the company’s customer and brand assets.Without these competencies, these assets will ultimately lose their value. Therefore, leaders needto stay vigilant in building, maintaining, and reinventing those competencies that are critical totheir company’s long-term performance.

Focus on the Long Term

There is evidence that companies will often sacrifice marketing investments to meet quarterlyexpectations or to make their income statements appear stronger during times when the financialmarkets or potential suitors are paying close attention to their books. The long-run effects of suchactions suggest this is unwise. Specifically, although the firm makes better returns in the short-run,the long-term costs outweigh these benefits. Simply put, the stock market exacts a price for stealingfrom marketing investments.

Jeff Bezos urges his employees at Amazon to think long-term and to ignore criticisms in theshort-term. He said, “. . . basically if we needed to see meaningful financial results in two to threeyears, some of the most meaningful things we’ve done we would never have even started. Thingslike Kindle, things like Amazon Web Services, Amazon Prime.” When asked whether he caresabout Amazon’s share price, “I care very much about our share owners, and so I care very muchabout our long term share price. I do not follow the stock on a daily basis, and I don’t think there’s

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any information in it. Benjamin Graham said, ‘In the short term, the stock market is a votingmachine. In the long term, it’s a weighing machine.’ And we try to build a company that wants to beweighed and not voted upon.”26

KEY LEARNINGS

Marketing assets are often underappreciated, but they provide substantial valueto firms. Although marketing-related expenditures are often treated as costsrather than as investments in marketing assets, they are similar to traditional,tangible assets in many ways: they can increase product value, reduce costs, createbarriers to entry, enable future growth, and increase the value of other firmresources.

Strong customer relationships make market share less vulnerable, increase customerretention, increase share of wallet, allow for cross-selling of new offerings, and lead toword-of-mouth endorsements.Strong brands can demand a price premium, increase brand consideration, facilitatecustomer acquisition, provide better options for growth, protect against switchingand new entry, attract better human capital at a lower cost, and even lower the costof debt.

Marketing assets not only enable higher cash flows (increased revenue, decreasedcosts), but they also enhance firm value through other financial levers: faster cashflows, less volatile cash flows, and less vulnerable cash flows.

FOR DISCUSSION1. You work for a big-box retailer that is on track to miss its financial targets this year and

your CEO wants to cut costs by reducing the marketing budget next quarter. Howwould you argue against this?

2. Look at the strong and weak recruiters coming to your university to hire. How dothese firms’ marketing assets affect their success in recruiting you and your peers?

3. Take your favorite Internet start-up and rate its marketing assets as might be observedby potential acquirers. What needs to be improved and what has value?

4. Consider the placement of Starbucks into grocery stores. Pick two different localgrocery store chains in your area and rate how well each performs on brand andcustomer relationships. How do these assets affect Starbucks’ entry and the terms ofthe deal?

5. Two large manufacturers make similar products but have different brandingstrategies: one houses all of its products under the parent brand, but the other hasa collection of different brands that are unconnected in the minds of consumers.Which of these companies would you expect to have a higher discount rate,and why?

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BoxBEST DIGITAL PRACTICE

LinkedIn’s Greatest Assets

LinkedIn, the professionally-oriented online social network, was acquired in 2016 by technology giantMicrosoft for $26.2 billion. Although Microsoft was partly motivated by LinkedIn’s top-notch talentand intellectual property, the vast majority of this price tag can be attributed to the firm’s network ofcustomer relationships and brand. At the time of its acquisition, LinkedIn had a registered user base ofabout 430 million individuals, with about 106 million unique monthly active users (MAU).

Like many technology firms, LinkedIn gets value from its ongoing customer relationships inmultiple ways. Firms often achieve this value through paid subscriptions, targeted advertising, and thesale of user-generated data to outside parties. LinkedIn is no exception. The network sells paidsubscriptions that offer premium features like enhanced personal profiles and priority ranking in hirerecommendations to job recruiters. For advertisers, LinkedIn can provide finely targeted ads based notjust on demographic information, but also on site-specific insights like users’ personal interests, careeraspirations, and social connections.

In an industry where major acquisitions (like Facebook’s purchases of Instagram in 2012 andWhatsApp in 2014) typically involve valuations of less than $50 per monthly active users (MAU),LinkedIn weighed in at over $250 per MAU. This exceptional valuation can be attributed to threeunique benefits of LinkedIn’s customer relationship management model.

First, one of LinkedIn’s key sources of revenue is helping corporate recruiters connect withpotential hires. The network’s large active user base offers a value proposition for both sides of the jobmarket. Because LinkedIn is the go-to site for job seekers, it is highly attractive to recruiters. Likewise,the large presence of recruiters from top-level firms across many different industries makes LinkedInequally attractive to job seekers. This self-reinforcing cycle makes current customer relationships a keyasset for securing future customers.

Second, LinkedIn’s existing customer relationships and brand equity allow for quicker rollout andadoption of new offerings. When it sells new products, the firm starts with direct access to millions ofengaged users. For example, LinkedIn purchased the professional-skills training providerLynda in2015,gaining ownership of its large catalogue of training courses and videos. Because this content was directlyrelevant to those on the LinkedIn network, LinkedIn was able to sell Lynda products to millions of users.

Third, LinkedIn’s active user base provides a vast, ongoing stream of data that can be leveraged forMicrosoft’s other core products. A prime example of this is Cortana, Microsoft’s machine learning andartificial intelligence offering. Because the Cortana software is built around machine learning, itsfunctionality depends entirely on having access to vast amounts of data. The continuous stream of datafrom LinkedIn’s users helps Microsoft’s offerings such as Cortana become more profitable.

Questions:

1. What are the three key aspects of LinkedIn’s customer management approach?

2. What new customers might Microsoft target with the data it has acquired and will continue toacquire from the LinkedIn acquisition? What types of companies would be most interested inthis data?

Sources:Jay Greene, “Microsoft to Acquire LinkedIn for $26.2 Billion,” Wall Street Journal, June 14, 2016.http://www.wsj.com/articles/microsoft-to-acquire-linkedin-in-deal-valued-at-26-2-billion-1465821523

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“LinkedUp,” The Economist, June 18, 2016. http://www.economist.com/news/business-and-finance/21700605-it-one-most-expensive-tech-deals-history-it-may-not-be-smartest-making-sense

Grant Feller, “This is the Real Reason Microsoft Bought LinkedIn,” Forbes, June 14, 2016, http://www.forbes.com/sites/grantfeller/2016/06/14/this-is-the-real-reason-microsoft-bought-linkedin/#7d01603e4acd

Rob Salkowitz, “Why Did Microsoft Buy LinkedIn? Ask Cortana,” Forbes, June 13, 2016.

Mahesh Vellanki, “Here is How You Really Value Snapchat, Instagram, and Other Big ConsumerApps,” Mahesh VC, July 30, 2015, http://www.mahesh-vc.com/blog/here-is-how-you-really-value-snap-chat-instagram-and-other-big-consumer-apps

Box BEST GLOBAL PRACTICE

Apple: Building the World’s Most Valuable Brand

Apple Inc. was ranked the world’s most valuable brand in 2016 (for the fourth year in a row), with anestimated value of $178 million. Interbrand creates these valuations based on experts ratings of sevenkey characteristics, including brand market leadership, brand stability, market stability and growth,geographic spread, trend, brand support, and brand protection. These rates form a multiplierthat current sales are multiplied by to generate the brand’s future earnings (this is used instead ofthe discounted cash flow approach which projects future brand value and discounts back intopresent value).

How did Apple build such a valuable brand? The most important reason underlying all of itsstrategies is that Apple shows unwavering commitment to creating value for its customers. This seedwas planted at the company founding by Mike Markkula, Jobs and Wozniak’s third partner, with asimple 3-point “Apple Marketing Philosophy.”

■ Empathy – We will truly understand their [customer] needs better than any other company.■ Focus – In order to do a good job of the things we decide to do, we must eliminate all of theunimportant opportunities.

■ Impute – People DO judge a book by its cover. We may have the best product, the highestquality, the most useful software, and so on; if we present them in a slipshod manner, they will beperceived as slipshod; if we present them in a creative, professional manner, we will impute thedesired qualities.

This founding philosophy has been reinforced by several key strategies.

1. Hire customer-obsessed, empathetic employees. Steve Jobs used a quote originally attrib-uted to Henry Ford to describe why customer insights were so important: “If I had asked peoplewhat they wanted, they would have said faster horses”—illustrating the problem that customersmay be limited to thinking only in terms of what they know, instead of what is possible. So Jobs andcolleagues thought about the customer experience more deeply than the customer could.

(continued)

Chapter 17 How Marketing Activities Create Value for Companies 317

2. Iterative customer involvement. This customer obsession made formal market research lessimportant. However, it is no secret that Apple spends an enormous amount of time observingcustomers using Apple’s and other companies’ technologies. Participatory design or usabilitytesting also ensures that Apple understands customer “pain points” and “opportunities” and in thedesign and development process.

3. Protect against scope creep and feature bloat. There were mp3 players before the iPod andsmart phones before the iPhone, but Apple’s innovation was to distill those products down to theirfundamental purposes (e.g., 1000 songs in your pocket) and then design them to be simple andinteresting to use. As Jobs noted, “We make progress by eliminating things.”

4. Build compatible experiences. Customers want a streamlined, intuitive way to make theircomputing and entertainment devices work as a system. Apple understood this and conceived ofits array of products as offering the customer first a “digital hub” and then an “entertainment hub.”

5. Enable customer discovery and differentiation through Apple Stores. A retail presencegave Apple another forum to flex its design prowess. Customers come into the stores to experiencethe aesthetics and ease of use of Apple products. They also see the larger “solution” that the arrayof interconnected products offers and interact with Apple’s carefully recruited and trained salesassociates. The stores also personal customer support (the Genius Bar), creating yet another touchpoint. The result: the highest retail sales per square foot among U.S. retailers.

6. Build a moat. Apple has done this in two ways. First, Apple’s unique products are communicatedto customers through novel and provocative advertising. The 1984 Super Bowl ad introducing theMacintosh is a perfect example. Apple vividly contrasted its independent philosophy with thetired and unimaginative computer industry establishment. Apple built on this theme of indepen-dence in 1997 with its “Think Different” ad campaign which lauded “rebels” and “the crazy ones”as the source of great ideas and inventions. The iPod, heavily advertised with silhouettes of peopledancing to the beat of their own drummer, kept this brand image alive and well. Steve Jobs alsocontributed to this renegade, non-conformist image through press accounts of his demandingaesthetic.

Second, although Apple’s utilizes multiple branded partners for some hardware and softwaresolutions, it has turned down co-marketing efforts (such as Intel stickers on its machines) thatevery other major competitor participates in with those same suppliers. This keeps customersfocused on the Apple brand and not its component providers. Likewise, Apple limits non-Appleproducts in its stores to those that complement, not compete with its offerings.

7. Devise a business model that creates ongoing customer value. Generating customer valuemeans building a business model that ensures this value is created repeatedly. Apple’s customer-obsessed employees and retail stores are a big part of creating value for customers. However,iTunes should also be viewed as an integral part of the business model. While not a big moneymaker for Apple, the iTunes desktop software and Music Store make Apple’s hardware even morevaluable. This bundle of integrated device and content promotes customer loyalty and cross-category spending.

8. Cannibalize when necessary. Apple has done this at this least twice. First, Apple dropped itsmost popular iPod, the Mini, when it introduced the Nano. Second, although offering uniquefeatures, the iPhone is a potential threat to independent iPod sales because both play music. Manyorganizations might have been unwilling to build a product that would detract from its mostpopular product. Apple understood that if it did not do it, another company would.

9. Don’t try to be all things to all customers. Many companies fail by being unwilling to maketough decisions about which customers to seek and products to offer. Apple, on the other hand,

318 Part Two Creating, Adapting, and Implementing Strategy

made these tough decisions and adopted a strategy that focused on a limited number of productlines and limited offerings within each line. When he returned in 1997, Jobs slashed Apple’s 15product lines to just four. This strategy holds today. With laser-like focus, Apple makes a few bigbets that deliver customer value and stand out in the crowd.

10. Create an ecosystem that makes offerings valuable. The introduction of the iPhone wascoupled with building an online App Store. However, the App Store only works if companies arewilling to develop for Apple’s iOS platform. Apple created development tools that promote asimple, consistent experience for developers. This helps speed up app development and deepenuser engagement—a win-win-win for developers, customers, and Apple.

Questions:

1. Take two of the ten factors contributing to Apple’s powerful brand and assess whether its actionsover the last year support or dilute the brand?

2. Why is cannibalization such an important part of building an innovative brand?

Sources:Based on Christine Moorman, “Why Apple is a Great Marketer,” Forbes, July 10, 2012. http://www.forbes.com/sites/christinemoorman/2012/07/10/why-apple-is-a-great-marketer/#2d83d3396cb0

Interbrand Best Global Brands 2016, https://sf-asset-manager.s3.amazonaws.com/95993/1052/7602.pdf

David B. Yoffie and Renee Kim (2011) “Apple in 2010,” Harvard Business School case 9-710-467.

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C A S E S T U D I E S

THE ENERGY BAR INDUSTRYIn 1986, PowerBar, a Berkeley firm, created the energy bar category with its classic chewy bar.Positioned as an athletic energy food, it was distributed at bike shops and events that usuallyinvolved running or biking. The target segment was the athlete who needed an efficient, effectiveenergy source.

Six years later, seeking to provide an alternative to the sticky, dry nature of the PowerBar, acompetitor developed an energy bar with superior taste and texture and branded it the Clif Bar.Soon after, another competitor introduced the Balance bar, which offered a blend of protein, fat,and carbohydrates based on the nutrition formula associated with the “Zone Diet.” Faced withthese challengers, PowerBar responded with Harvest (a bar with a much more mainstream tasteand texture) and ProteinPlus (an entry into the high-protein subcategory closely related toBalance).

The makers of the Clif Bar observed that women athletes or those involved in fitness wereapproximately half of the market. However, their unique needs in terms of macronutrients,vitamins, and taste were not being addressed. Luna, the first nutritional (not energy) bar forwomen, was Clif Bar’s answer to this unmet need. The bar had a light crunchy texture, came inflavors like “lemon zest” and chai tea, and contained nearly two dozen vitamins, minerals, andnutrients. The target market consisted of time-strapped women who wanted an energy bar, butone more tailored to their needs.

Both in reaction to Luna’s success and to expand the segments for which the category wasrelevant, PowerBar focused on the sensitivity of women to calories and portion size. In response,the firm created Pria, which was smaller and had only 110 calories but had superior—almostindulgent—taste and texture.

The energy bar industry exploded over the next few decades exploiting the demand for healthand weight control, portable meals, better ingredients, and nutritious snacks. Sales went from $100million in 1996 to $2 billion a decade later and well over $6 billion by 2016. The growth was fueledby submarkets each driven by a unique “must have.”

These submarkets are defined by different applications, ingredients (consumers are becomingmore ingredient sensitive), and value propositions. Over time, there have been nutrition bars,cereal bars (a replacement for breakfast), protein bars, diet bars (brands like Balance or Atkins thatfollowed a popular diet), natural ingredient bars, all with numerous textures, flavors, sizes, andcoatings. Over the decades, many hundreds of products were introduced. However, only a fewbecame major players.

One of the successes was KIND, a brand that grew from nothing in 2004 to over $550 millionin 2015 (33% of the market). It was driven by a clear vision to be a healthy, tasty, and natural snackin a sea of snacks that look and feel very different. KIND products are composed of whole fruitsand nuts using gluten-free, non-GMO, sustainable ingredients with much less sugar thancompetitors. They are not cheap nor easy to produce given high-quality ingredients and productionbarriers that required innovation, investment, and commitment to overcome. The brand vision is

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communicated by a clear package that allows customers to see the ingredients. The tagline“ingredients you can see and pronounce” reinforces this transparency positioning. Reacting to asurge in interest in protein, KIND introduced a line of savory bars with more protein, includingflavors such as honey smoked barbeque.

KIND has a higher purpose—to encourage people to reward acts of kindness. There is#kindawasomeness cards handed out to someone doing a kind act for someone else. The card has awebsite and code on which the card holder can request a packet of KIND bars along with anothercard to give to someone spotted doing an act of kindness. There have been 1.2 million documentedacts of kindness as a result. There is the KIND Causes where, each month, members vote on whichcustomer-nominated causes should be supported with a $10,000 donation. They vote by commit-ting to do an act of kindness. For example, one proposal was to train mentors for Dryhootch, a non-alcoholic rally point for military personnel.

The energy bar market represents how a dynamic fast-changing and innovative marketplaceworks and the evolving winners and losers over just two decades!

FOR DISCUSSION

1. Identify the different submarkets or subcategories in the energy bar market. Whichhave “must haves” that drive a loyal and sizable segment? What are the strategicgroupings? To what extent does each submarket represent fads that will peak anddecline instead of grow. Why?

2. To what extent do you think the KIND subcategory is driven by its Kindnessinitiatives? Are these “must haves”?

3. What are the environmental trends that will affect this industry? Considering thesetrends, generate two or three viable future scenarios.

4. How can brands like Luna, Pria, and KIND be leveraged to other products andcategories? What makes these brands extendable?

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ASSESSING THE IMPACT OF CHANGES IN THE ENVIRONMENTThe following are three environmental trends that will have a substantial impact on manycategories.

Democratization of Education

Thanks to new online platforms and free access to world-class content, people can experienceeducation on any number of topics—anywhere, anytime. Stanford offered three courses in2011, each of which had over 100,000 attendees. By 2017, MIT offered 118 courses thatincluded complete video lectures. These efforts are termed Massive Open Online Courses(MOOCs). Because of the massive scale of learners, MOOCs require instructional design thatfacilitates large-scale feedback and interaction. One approach is to leverage learner connectionby encouraging peer-to-peer review and crowd source interaction and group collaboration.Another is to use automated feedback through objective, online assessments (e.g., quizzes andexams).

FOR DISCUSSION

1. What is the business model for MOOCs?2. What should a business school do to adapt?3. What are the threats and opportunities for a text publisher like Wiley? What changes

will they have to make to remain relevant?

4. What do these education trends mean for corporate training and company hiring?

Changing Payment Forms

Trends toward mobile payments and an increased concern for security is affecting most firms.

FOR DISCUSSION

1. What companies will be the winners and which will be the losers?2. How will these trends affect retailers?

The 3Ps of Digital Health

Applications are enabling a new wave of innovation that is changing the face of the health careindustry. The future of health care is personalized, participatory, and preventive with the helpof mobile devices seamlessly integrating technology into our daily lives to drive healthyoutcomes.

322 Case Studies

FOR DISCUSSION

1. How has your own health care been affected by the 3Ps?2. How should health insurers act on this trend to influence their bottom lines and the

health of their subscribers?

3. Dream up two new products or services ideas (including apps) that take advantage ofthese trends.

4. What types of businesses stand to lose and gain the most from this trend?

Case Studies 323

CREATING A NEW BRAND FOR A NEW BUSINESSContemporary Art

Contemporary art, often defined as nontraditional art from the 1970s, can sell for incredible sumsof money. Damien created a square array of colored dots that have been sold for up to $1,500,000.Hundreds of these have been made and sold. While still an unknown artist, Hirst sold a work thatconsisted of flies being hatched and attracted to a decaying cow’s head only to be zapped by a bugzapper to Charles Saatchi, the advertising executive and prominent collector. It was called “AThousand Years” and was said to depict life and death. Saatchi, who owns over 3,000 contemporaryartworks, is generous about loaning them to museums if they agree to display other pieces (so thatthey can be said to have been displayed in the museum).

There are dozens of artists who command high prices:

On Kawara paints a date such as Nov 8, 1989 on a canvas. There are approximately2,000 in existence; one sold for $500,000 in 2006 at a Christie’s auction. Christie’sand Sotheby’s are the two most prestigious auction houses. It has been estimated that apainting will get 20 percent more if sold at one of these two auction houses, in part,because of their brands.Christopher Wool sold a painting of fifteen stenciled letters that spelledRundogrundogrun for $1.24 million in 2005.

In 2008 a seven-foot Mark Rothko painting that had been owned by David Rockefeller(who bought it in 1960 for $8,500) sold at Sotheby’s for $72.8 million, nearly three timesmore than the previous high for a Rothko.Jeff Koons, famous for making vacuum cleaners an art object, sold life-size a sculpture ofMichael Jackson and his pet monkey for $5.6 million despite the fact that there were twoother copies of the piece. The fact that the other copies were owned by the San FranciscoMOMA and a prominent collector actually enhanced the value of the third piece.Tracey Emin, an artist with a reputation for taking on taboo topics with anautobiographical flair, established a style and the premium prices that go with it bycreating a bad girl image. For example, she posed nude for commercials, created a tentembroidered with names of her past lovers, and appeared on British television so drunkthat she had no memory of it.

Why these prices? One hypothesis is that this art is objectively exceptional and its high qualitymerits a premium price. That is demonstratively false. Consider the following.

There was a painting of Joseph Stalin, worthless until Damien Hirst painted a red nose onthe subject and signed his name—it then sold for $250,000. A Jackson Pollack look-alikepainting was bought at a flea market. A series of experts could not ascertain if it was an authenticPollack or not. The same painting was either worth a few thousand or tens of millionsdepending on whether it was deemed authentic. An auction professional once said, “Neverunderestimate how insecure buyers are about contemporary art, and how much they alwaysneed reassurance.”

What makes these prices even more puzzling is the fact that several of the top artists do not dotheir own work. Andy Warhol famously did little of his own artwork. Hirst has a staff of 20 or so whodo all of his work including the colored spots.

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Sothequestioniswhydotheseartistsattractsuchprices?Andmorebasically,howdoesapaintercreate a brand that will command such fantastic sums? These questions are more general than theymightseem.Therearemanybusinessesforwhichitisnotpossibletoobjectivelyknowthevalueoftheproduct or service. Most customers lack the information and often the expertise to evaluate servicefirms.Therearealsoproducts,suchasmotoroil,forwhichitisnotpossibletojudgethequality.Evenproducts such as cars or computers are difficult to evaluate because they are complex andspecifications do not tell the whole story. Furthermore, even if a person took the time to pourthrough Consumer Reports, it is not clear that its recommendations will reflect the right decisioncriteria for that customer.

FOR DISCUSSION

1. Why do people buy contemporary art? Why might the demand for contemporary artincrease?

2. How does an artist develop a brand?3. How does an art dealer develop a brand?4. Is Damien Hirst famous because of his work and its shock value, because of Charles

Saatchi, or is Hirst “famous because he’s famous?

5. How would you develop a brand if you were a new investment advisory service? Canyou use any of the techniques that artists use?

Source: This case draws on material in Don Thompson, The $12 Million Stuffed Shark: The CuriousEconomics of Contemporary Art, London: Aurum Press, 2008.

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COMPETING AGAINST THE INDUSTRY GIANTCompeting Against Amazon

Amazon was started in July 1994 by Jeff Bezos as a company that sold books online. In doing so,they could offer many more titles than the largest bookstore and without the costs of a storefrontoperation, they could sell them cheaper. It was a good model and was extended by the Kindle bookreader/computer launched in 2007. In 2015 Amazon had at least a 65 percent share of the book andebook market.

But Amazon did not stop at books—Bezos wanted to be the “Everything” store. In 1998 itadded music and DVDs/videos and a year later added home improvement products, software,video games, and gifts. Every year Amazon added more categories until there is not much thatyou cannot buy from Amazon. It even introduced grocery products in some markets. You selectthe grocery items, a delivery time, and it will be there. In 2015, Amazon with some 50 fulfillmentcenters in the United States (and another 30 worldwide), passed $100 billion and overcameWalmart as the largest U.S. retailer. And it continued to aggressively add more fulfillmentcenters.

In 2005 Amazon launched the Prime program, which addressed a desire for even fasterdelivery speeds. It included free Two-Day Shipping for eligible purchases (grown to some 30million items by 2015), Sunday delivery, and free same-day delivery on hundreds of thousandsof products in more than 35 cities around the world. There is also unlimited streaming of moviesand TV shows with Prime Video and the ability to borrow books from the Kindle Owners’Lending Library for $99 a year or $10.99 a month. Over 50 million people were estimated to beU.S. customers of Prime in 2016.

Amazon is guided by values and a strong culture. First, it starts with an obsession with keepingthe customer first. That is a bedrock of company decision making and, in particular, the drive tohave low prices, a wide selection, reliable service, a personalized and easy-to-use website, andmore. Second, invention and innovation are supported and encouraged. Experimentation iseverywhere and failure is accepted because Amazon believes that without failures the big successeswill not occur. Third, there is a long-term focus, and short-term profits are sacrificed if investmentswill result in a long-term payoff. Enormous investments in expansion at the expense of currentprofits have long been the hallmark of Amazon.

It is not all positive. Amazon with its gigantic size, hold on customers, and scope is a threat tomany large and small retailers. It caused Borders to close its 400 bookstore chain and Barnes &Noble to close many of its stores. Weak retail chains and independents throughout the retail worldhave also had to close. Furthermore, Amazon may take over its own delivery perhaps with dronesor self-driving vehicles, which would be blow to services like UPS, FedEx, and the U.S. PostalService.

When Amazon opened its operation to third-party dealers in 2000, it created another source ofcompetition for retailers because their suppliers now had an e-commerce option where customerscould easily check to see if the Amazon price was cheaper. About 50 percent of the volume ofAmazon was with third party firms in 2015. Amazon is a lender for many of these firms, thus alsocompeting with traditional lending institutions.

In addition, Amazon has been accused of exploiting workers by unreasonable jobpressures and arbitrary dismissal decisions. The acknowledged aggressive-growth culturemakes these complaints credible. Amazon does have creative employee programs to helpwith issues such as moms returning to work after a new baby and offering financial support

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for post-secondary educational activities. But these do not counter the stress of coping with day-to-day jobs.

It is not impossible to compete with Amazon. Curiously, independent book stores have beenon the rise from 2007—offering a personal experience, a sense of community, and diversifiedofferings. And there are other retailers that have been able to compete on ways that differentiatesthem from Amazon, including Costco, which is discussed next.

FOR DISCUSSION

1. Why is Amazon so successful? What are its assets and competencies? What is the roleof Jeff Bezos?

2. What do you think Amazon will be like in 5 years? 10 years?3. Is Amazon positive or negative for consumers? For the culture and economy of the

countries in which it has become a dominant power?

4. What type of retailer will be most vulnerable to Amazon’s power? Least vulnerable?5. Amazon opened some grocery stores in 2016 with no checkout. Your phone keeps

track of what customers buy? Will grocery chains have to also replace checkoutpersonnel with such an automation system?

6. Consider the Sephora case in Chapter 10. Describe how Sephora has thriveddespite the shadow of Amazon? Why does the strategy work? Can Sephora maintainits success?

Consider Costco, which must design a strategy that will lead to success in the Amazonenvironment.

Costco

Costco has enjoyed healthy sales and profit growth generally in the 6–10 percent range through theAmazon era. In 2016 it had grown to nearly 120 billion in sales with nearly $2.5 billion in profit thatcome from over 700 stores (up from 600 in 2011).

Costco focuses on low prices and high volume with a target market of small businesses andlarge families. The low prices in part comes from an operational strategy that leads to a costadvantage. The assortment is limited; there is usually only one brand for any category, which givesCostco significant market power and logistic efficiencies. Where a typical Walmart Supercentercarries over 140,000 products, Costco carries fewer than 4,000. The items are generally bulk-packaged, which means customers buy more of the item on their Costco trips and the brandinvolved can justify having Costco sell the brand at a sharply lower price. It has a well-regardedhouse brand, Kirkland, that is sold at a very low profit margin—around 15 percent mark-up—andgenerates about 12 percent of the sales. Most products are delivered to the warehouse on shippingpallets and these pallets are used to display products for sale on the warehouse floor. Costco doesnot have a large advertising budget.

Costco has a membership model, which generates a close customer relationship andcommitment plus significant revenue since the memberships represent about 15 percent of

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the value of the firm. The in-store experience is unique with many tasting opportunities, someupscale brands, and a lot of energy. The meat and produce selections have an outstanding qualityreputation and include many organic options.

Costco was behind in e-commerce in 2016, generating only about 3 percent of sales. The firmhad a slow start and a rather poor web presence compared to Amazon and even to its othercompetitors.

FOR DISCUSSION

1. Why is Costco immune from the Amazon threat? Will that continue going forward?What are the strengths and weaknesses?

2. How should Costco react to the Amazon threat? Besides create a more competitivewebsite, is there anything that Costco could do to leapfrog competitors on thee-commerce side?

3. How does Amazon’s recent purchase of Whole Foods threaten Costco? What shouldCostco do in response?

328 Case Studies

LEVERAGING A BRAND ASSETDove

In 1955, Unilever (then Lever Brothers) introduced Dove, which contained a patented, mildcleansing ingredient, into the soap category. It was positioned—then and now—as a “beauty bar”with one-fourth cleansing cream that moisturizes skin while washing (as opposed to the dryingeffect of regular soap). Advertisements reinforced the message by showing cream being pouredinto the beauty bar. In 1979, the phrase “cleansing cream” was replaced with “moisturizer cream”when a University of Pennsylvania dermatologist showed that Dove dried and irritated skinsignificantly less than ordinary soaps. Based on this study, Unilever began aggressively marketingDove to doctors. Soon about 25 percent of Dove users said they bought the brand because a doctorrecommended it, greatly enhancing the bar’s credibility as a moisturizer. By the mid-1980s, Dovehad become the best-selling soap brand and commanded a price premium.

In 1990 the Dove soap patent ran out, and arch-competitor P&G was soon testing anOlay beauty bar with moisturizing properties, a product that rolled out in 1993. One yearlater, Olay Body Wash appeared and soon garnered over 25 percent of a high-margin subcategory. Blindsided, the Dove brand team belatedly recognized that Dove was in the bestposition to compete as a moisturizer body wash and that they had missed the chance to be aleader in this new subcategory. In response, the firm rushed Dove Moisturizing Body Washinto stores. The product did not live up to the Dove promise, however, and a reformulation in1996 was only a partial improvement. In 1999, though, Dove finally got it right with theinnovative Nutrium line, based on a technology that deposited lipids, vitamin E, and otheringredients onto the skin. The advanced skin-nourishing properties provided enough of a liftto allow Dove to charge a 50 percent premium over its regular body wash and ultimately pulleven with Olay in the body wash category. By leveraging strong brand equity, pursuinginnovative technology, and being persistent, Dove was able to overcome a late entry into themarket.

In 2000 Unilever made Dove a masterbrand, which meant that it would invest in extendingDove’s authority to a broader set of categories, including hair care, lotion, and deodorant. Forexample, Dove introduced a deodorant line with uncharacteristically bold advertising (one tag linewas “Next stop, armpit heaven”). As it turned out, the deodorants were named as one of the top 10nonfood new products in 2001, garnering over $70 million in sales with close to 5 percent of themarket and making Dove the number-two brand among female deodorants. The “one-quartermoisturizing lotion” positioning, effectively communicated as protecting sensitive underarm skin,generated a Dove spin on dryness that differentiated the product line.

The next product extension was Dove Hair Care, with moisturizing qualities directlyresponsive to one of the top two unmet needs in the category. The product’s branded differentia-tor, Weightless Moisturizers, is a set of 15 ingredients designed to make hair softer, smoother, andmore vibrant without adding any extra weight. After achieving top-selling status in Japan andTaiwan, Dove Hair Care entered the U.S. market in early 2003 with a massive introductioncampaign, joining a product family used by nearly one-third of American families. Two years later itintroduced Dove Body Nourishers Intensive Firming Lotion, formulated with collagen andseaweed, intended to give the user firmer skin after two weeks.

These extensions contributed to a dramatic sales success. The brand’s business grew fromaround $200 million in 1990 to over $5 billion today by some estimates (exact figures have notbeen reported since 2011). Geographic expansion also contributed. Dove’s presence

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increased to over 100 countries, far more than in 1990, with particular strength in Europe (whereit gained 30 percent of the cosmetics and toiletries market), Asia-Pacific (25 percent), and LatinAmerica (11 percent). Kantar’s brand valuation has Dove at $5.5 billion dollars and the eighthmost valuable personal care brand in the world. How did Unilever pull off this feat?

By 2004, with no major geographic expansion or brand extension in sight, Dove looked toanother route to add energy and purpose to its brand. Global company research involving 3,200interviews revealed several surprising facts about how women thought about themselves—only2 percent of women described themselves as “beautiful,” 5 percent “pretty,” and 7 percent “goodlooking,”—50 percent of women thought their weight was too high (60 percent in the UnitedStates), and two-thirds of women felt that the media and advertising set unrealistic standards ofbeauty. Dove saw an opportunity to take a leadership role in what was ultimately called the “TheCampaign for Real Beauty.”

The result was set of advertising campaigns (first created in the United Kingdom) featuring“real women” instead of ultrathin models. In the early tick-box campaign, viewers were shownpictures of a range of women and asked to vote on billboards in popular locations such as TimesSquare for the words “outsized” or “outstanding,” “wrinkled or wonderful,” and “44 and hot or44 and not” by phoning 1-800-342-DOVE. In other campaigns, Dove photographed groups ofwomen in their underwear claiming “Real Women have Real Curves.” The campaign receivedenormous exposure in the media with over a thousand stories and parodies, most, but not all,positive (some felt it would be ineffective, others pointed out that Unilever was still usingmodels for its other products, and still others thought Dove was promoting obesity). Itgenerated a 10 percent sales boost.

Based on this response, in 2006 Dove took even bolder steps by developing a Super Bowl ad,which showed adolescent girls with comments under their pictures, such as “Hates her freckles,”“Afraid she’s fat,” “Wishes she were blonde,” and ending by saying “Let’s change theirminds . . . because every girl deserves to feel good about herself and to see how beautifulshe really is.” This ad was a smashing success as was the program that Dove called “The Self-Esteem Fund,” which funded workshops for girls to counterbalance other media and culturalideas about beauty. Dove’s social mission was to encourage girls to develop a positive relationshipwith beauty, helping to raise their self-esteem and thereby enabling them to realize theirfull potential. Over 119 million young people in 115 countries have received help from 2005through 2015.

Other campaigns followed, including the very popular 2006 “Evolution” ad that won awards atthe Cannes advertising festival and went straight to the web. This provocative footage shows awomen going from a makeup session to a billboard and all of the alterations that are made to herand to her image in the process. This ad has spawned hundreds of such transformations andparodies on the web. In 2013, the Dove “Real Beauty Sketches” ad involves a blinded forensicartist capturing women’s descriptions of themselves compared to other women’s descriptions ofthese same women. The comparisons were striking with most women describing themselves as lessattractive than others described them. The byline “You are more beautiful than you think,”supported Dove’s position. More recent campaigns to “Love your curls” encourage mothers anddaughters to celebrate their curly hair and “Dove Selfie” involves girls and their moms capturingtheir own individualized beauty and to “redefine beauty one photo at a time.”

As intended, the Dove brand now serves as an umbrella for products in four main groups—barand body wash, deodorants, skincare lotions, and haircare—and more than 100 different linesincluding facial wipes, firming lotions, shampoos, body washes, anti-aging cleansers, skin

330 Case Studies

nourishing treatments, underarm deodorant, and several varieties of bar soap. The main Dovebrand has also given rise to a set of new products, including Dove Firming (to reduce theappearance of cellulite), Dove Silk (a moisturizing range containing pure silk), Dove FreshTouch, Dove Pro-Age (for “mature” skin and hair), and Dove Summer Glow (with self-tanningagents).

Dove continues to face strategic challenges in managing this powerful brand. First, Unilever,Dove’s parent, uses a house of brands management approach in which the larger corporation(Unilever) is given less attention, if at all, in promoting the brand. This allows Unilever to alsopromote a men’s product named Axe (called Lynx in some countries), which was introduced intothe United States in 2002 as a spray deodorant and now covers shampoo, shower gels, aftershave,and other products. The Axe brand was built around the humorous premise that beautiful womenwould go crazy over a man who uses the Axe spray. The advertisements and promotions werewidely perceived as sexist and even degrading. Some pointed out that Unilever was hypocritical topromote the Axe brand so blatantly at odds with the “real women” concept.

Second, in taking on an important societal issue such as the nature of beauty stereotypes,Unilever faced the very real threat that it would lose control of the brand conversation. In fact, aquick look at the social media that have been created over time by the reverberations of Dove’sactions suggests that this is the case. Like many companies, Unilever had to figure out a way tomanage the brand when external sources were controlling a great deal of the dialogue, whether itwas Jay Leno talking about the brand on the Late Show or a German company showing a group ofmen in their underwear in a page taken directly from Dove’s strategy.

Third, given the choice to focus on an issue that is important to contemporary women,Unilever had to question, Will Dove’s ideas about real beauty sell globally or will they need to beadapted to local markets? Will women around the world, especially in large markets such as Chinaor Russia, be as open to the “Campaign for Real Beauty”?

FOR DISCUSSION

1. What were the keys to the success that Dove achieved in building its brand into a$5 billion business? What were the roles of success momentum and of brandeddifferentiators?

2. What was the role of a vigorous competitor? Would Dove have gotten there withoutP&G pushing (or, more accurately, pulling) the brand?

3. What is your opinion of the “Real Beauty” campaign? Why does it work? What are itsbiggest challenges?

4. How should Unilever manage the Axe–Dove tension, if at all?5. How should Unilever measure the success of the “Campaign for Real Beauty?”6. Will the campaign sell in China? If not, should the brand position be adapted and if so,

how? Discuss the costs and benefits of doing so.

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A P P E N D I X A

Internal Analysis

Should the existing strategy be enhanced, expanded, altered, or replaced? Are existing assets andcompetencies adequate to win? An internal analysis of the business will help the strategist addressthese questions. This exploration is similar in scope to an analysis of a competitor or strategic groupbut much richer and deeper because of its importance to strategy and because much moreinformation is available.

Just as strategy can be developed at the level of a business, a group of businesses, or the firm,internal analysis can also be conducted at each of these levels. Of course, analyses at differentlevels will differ from each other in emphasis and content, but their structure and thrust will be thesame. The common goal is to identify organizational strengths, weaknesses, and constraints and,ultimately, to develop responsive strategies, either exploiting strengths or correcting or compen-sating for weaknesses.

Three aspects of internal analysis are discussed in this Appendix. The first, financial perform-ance, provides an initial approximation as to how the business is doing. The second, an analysis ofother performance dimensions such as customer satisfaction, product quality, brand association,relative cost, new products, and employee capability, can often provide a more robust link to futureprofitability. The third is an analysis of the strengths and weaknesses that are the basis of current andfuture strategies.

FINANCIAL PERFORMANCEInternal analysis often starts with an analysis of current financials, measures of sales, andprofitability. Either can signal a change in the market viability of a product line and the abilityto produce competitively. Furthermore, they provide an indicator of the success of past strategiesand thus can often help in evaluating whether strategic changes are needed. In addition, sales andprofitability at least appear to be specific and easily measured. As a result, it is not surprising thatthey are so widely used as performance evaluation tools.

Sales and Market Share

A sensitive measure of how customers regard a product or service can be sales or market share.After all, if the value proposition to a customer changes, sales and share should be affected,although there may be an occasional delay caused by market and customer inertia.

Sales levels can be strategically important. Increased sales can mean that the customer basehas grown. An enlarged customer base, if we assume that new customers will develop loyalty, will

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mean future sales and profits. Increased share can provide the potential to gain SCAs in theform of economies of scale and experience curve effects. Conversely, decreased sales can meandecreases in customer bases and a loss of scale economies.

A problem with using sales as a measure is that it can be affected by short-term actions, such aspromotions by a brand and its competitors. Thus, it is necessary to separate changes in sales thatare caused by tactical actions from those that represent fundamental changes in the value deliveredto the customer, and it is important to couple an analysis of sales or share with an analysis ofcustomer satisfaction and loyalty, which will be discussed shortly.

Profitability

The ultimate measure of a firm’s ability to prosper and survive is its profitability. Although bothgrowth and profitability are desirable, establishing a priority between the two can help guidestrategic decision making.

A host of measures and ratios reflect profitability, including margins, costs, and profits.Building on the assets employed leads to the return on assets (ROA) measure, which can bedecomposed with a formula developed by General Motors and DuPont in the 1920s.

ROAprofitsales

salesassets

Thus, return on assets can be considered as having two causal factors. The first is the profitmargin, which depends on the selling price and cost structure. The second is the asset turnover,which depends on inventory control and asset utilization.

The determination of both the numerator and denominator of the ROA terms is not asstraightforward as might be assumed. Substantial issues surround each, such as the distortionscaused by depreciation and the fact that book assets do not reflect intangible assets, such as brandequity, or the market value of tangible assets.

Shareholder Value

The concept of shareholder value, an enormously influential concept during the past twodecades, provides another perspective on financial performance. Each business should earnan ROA (based on a flow of profits emanating from an investment) that meets or exceeds the costsof capital, which is the weighted average of the cost of equity and cost of debt. Thus, if the cost ofequity is 16 percent and the cost of debt is 8 percent, the cost of capital would be 12 percentif the amount of debt was equal to the amount of equity; if there were only one-fourth as muchdebt as equity, then the cost of capital would be 14 percent. If the return is greater than the costof capital, shareholder value will increase, and if it is less, shareholder value will decrease.Marketing can play an important role in influencing shareholder value as discussed in more detailin Chapter 17.

Some of the routes to increasing shareholder value are as follows:

Earn more profit by reducing costs or increasing revenue without using more capital.

Invest in high-return products.

Reduce the cost of capital by increasing the debt to equity ratio or by buying back stock toreduce the cost of equity.

Appendix A: Internal Analysis 333

Use less capital. Under shareholder value analysis, the assets employed are no longer afree good. If improved just-in-time operations can reduce the inventory, it directly affectsshareholder value.

Increase the speed by which revenues reach the company.

Reduce the volatility and vulnerability of profits.

PERFORMANCE MEASUREMENT BEYOND PROFITABILITYOne of the difficulties in strategic market management is developing performance indicators thatconvincingly represent long-term prospects. The temptation is to focus on short-term profitabilitymeasures and to reduce investment in new products and brand images that have long-term payoffs.

The concept of net present value represents a long-term profit stream, but it is not alwaysoperational. It often provides neither a criterion for decision making nor a useful performancemeasure. It is somewhat analogous to preferring $6 million to $4 million. The real questioninvolves determining which strategic alternative will generate $6 million and which will generate$4 million.

It is necessary to develop performance measures that will reflect long-term viability andhealth. The focus should be on the assets and competencies that underlie the current and futurestrategies and their SCAs. What are the key assets and competencies for a business during theplanning horizon? What strategic dimensions are most crucial: to become more competitive withrespect to product offerings, to develop new products, or to become more productive? These typesof questions can help identify performance areas that a business should examine. Answerswill vary depending on the situation, but will often include customer satisfaction/brand loyalty,product/service quality, brand/firm associations, relative cost, new product activity, and manager/employee capability and performance.

Product and Service Quality

Internal analysis needs to start with the ability of the firm to deliver against the promise. Thequality must meet or exceed expectations of the customer base and even do more if the customerneeds are different than expectations. Is the offering delivering value? How? Is it deliveringsuperior quality?

It is important to compare the ability of a firm to deliver quality with current and futurecompetitor offerings. One common failing of firms is to avoid tough comparisons with a realisticassessment of competitors’ current and potential offerings. A newly appointed CEO of Frito-Layonce put all programs on hold for a year until the firm’s manufacturing units around the world wereable to make products that would win blind taste tests. He realized that product quality was anecessary condition for success.

In order to develop precision and diagnostics in the assessment of quality, the underlyingdimensions should be identified and measured over time. For example, an automobile manufac-turer can measure defects, ability to perform to specifications, durability, reparability, and features.A bank might be concerned with waiting time, accuracy of transactions, and the quality of thecustomer experience. A computer manufacturer can examine relative performance specificationsand product reliability as reflected by repair data. A business that requires better marketing of agood product line is very different from one that has basic product deficiencies.

334 Appendix A: Internal Analysis

Brand/Firm Associations

An important asset of a brand or firm is its associations. What comes to mind with the brand or firmbecomes visible? What is its perceived quality? Perceived quality, which is sometimes verydifferent from actual quality, can be based on experience with past products or services andon quality cues, such as retailer types, pricing strategies, packaging, advertising, and typicalcustomers. Is a brand or firm regarded as expert in a product or technology area (such as designingand making sailboats)? Innovative? Expensive? For the country club set? Is it associated with acountry, a user type, or an application area (such as racing)? Such associations can be key strategicassets for a brand or firm.

Associations can be monitored by regularly asking customers to describe their use experiencesand to tell what a brand or firm means to them. The identification of changes in importantassociations will likely emerge from such efforts. Structured surveys using a representative sampleof customers can provide even more precise tracking information.

Chapter 9 provides a discussion of why associations are strategically important and describesthe major types such as having a brand personality, organizational values and programs, beingglobal, being contemporary, and being relevant to a customer need or application.

Brand Loyalty

Perhaps the most important asset of many firms is the loyalty of the customer base. Strategicinvestments will be influenced by an assessment of customer loyalty. Loyalty will affect profitabilityby supporting prices and by reducing cost of customer acquisition and retentions. Consequently, afirm should, in general, invest behind product-markets in which a strong loyal customer base exists.If a business lacks loyalty and a program cannot be economically created to generate that missingasset, on average, that would not be a place to invest.

It is important to recognize that there are different forms and levels of loyalty. Especially inlow-involvement categories, loyalty can be driven by satisfied customers that buy because of habitand because it is not worth spending time or resources reviewing whether that habit should bechanged. In that case measures of distribution (making sure the purchase remains convenient),customer satisfaction (looking for warning signs that the brand is losing satisfaction), and repeatpurchase (the ultimate measure) are needed. In higher involvement categories, loyalty oftenrequires a scale that ranges from liking to having self-expressive benefits to being a brand that aperson will talk about and recommend to others. In that case, measures of activity in brandcommunities and a willingness to recommend will be useful.

Two other comments. First, customers who have left the brand should be probed to identifythe motivating problems and causes of dissatisfaction. The result is often insights that are sensitiveand operational. Second, measures should be tracked over time and compared with those ofcompetitors. Relative comparisons and changes are most important.

Chapter 9 has a discussion of brand loyalty and a component of brand equity that adds depthand texture to the concept and how it can be managed.

Relative Cost

A careful cost analysis of a product (or service) and its components, which can be critical whena strategy is dependent on achieving a cost advantage or cost parity, involves tearing down

Appendix A: Internal Analysis 335

competitors’ products and analyzing their systems in detail. The Japanese consultant Ohmaesuggested that such an analysis, when coupled with performance analysis, can lead to one of thefour situations shown in Figure A.1.3

If a component such as a car’s braking system or a bank’s teller operation is both moreexpensive than and inferior to that of the competition, a strategic problem requiring change mayexist. An analysis could show, however, that the component is such a small item in terms of bothcost and customer impact that it should be ignored. If the component is competitively superior,however, a cost-reduction program may not be the only appropriate strategy. A value analysis, inwhich the component’s value to the customer is quantified, may suggest that the point ofsuperiority could support a price increase or promotion campaign. If, on the other hand, acomponent is less expensive than that of the competition, but inferior, a value analysis mightsuggest that it be de-emphasized. Thus, for a car with a cost advantage but handling disadvantage, acompany might de-emphasize its driving performance and position it as an economy car. Analternative is to upgrade this component. Conversely, if a component is both less expensive andsuperior, a value analysis may suggest that the component be emphasized, perhaps playing a keyrole in positioning and promotion strategies.

Sources of Cost Advantage

The many routes to cost advantage include economies of scale, the experience curve, productdesign innovations, and the use of a no-frills product offering. Each provides a different perspectiveto the concept of competing on the basis of a cost advantage.

Average Costing

In average costing, some elements of fixed or semivariable costs are not carefully allocatedbut instead are averaged over total production. Average costing can provide an opening for

More Expensive

Change • Design • Manufacturing/systemsIgnore

Value analysis • Raise prices • PromoteCost reduction

Value analysis • De-emphasize • Upgrade

Value analysis • Emphasize/promote • Leave it alone

OUR COMPONENT IS

Less Expensive

Inferior Superior

Figure A.1 Relative Cost vs. Relative Performance—Strategic Implications

336 Appendix A: Internal Analysis

competitors to enter an otherwise secure market. Large customers can be much more profitablethan small ones, and premium priced products can be more lucrative than value priced ones.A product line that is subsidizing other lines is vulnerable, representing an opportunity tocompetitors and thus a potential threat to a business.

Innovation

Does the R&D operation generate a stream of new product concepts? How does the flow ofpatents compare to that for competitors? Is the process from product concept to new productintroduction well managed? Is there a track record of successful new products that has affected theproduct performance profile and market position?

Are the new products arriving in the marketplace in a timely fashion? Time to market isparticularly important in many industries, from cars to software.

More broadly, does the organizational culture support innovation? Is it possible to generatesubstantial (if not transformational) innovations in addition to incremental innovations? Are thereprograms to precipitate innovation?

Manager/Employee Capability and Performance

Also key to a firm’s long-term prospects are the people who must implement strategies. Are thehuman resources in place to support current and future strategies? Do those who are added to theorganization match its needs in terms of types and quality or are there gaps that are not beingfilled? Is there enough diversity so that the organization can identify and respond to new threatsand opportunities when they are not within the existing business arena?

An organization should be evaluated not only on how well it obtains human resources butalso on how well it nurtures them. A healthy organization will consist of individuals who aremotivated, challenged, fulfilled, and growing in their professions. Each of these dimensions canbe observed and measured by employee surveys and group discussions. Certainly, the attitude ofproduction workers was a key factor in the quality and cost advantage that Japanese automobilefirms enjoyed throughout the past three decades. In service industries such as banking andfast foods, the ability to sustain positive employee performance and attitude is usually a keysuccess factor.

Values and Heritage

The firms with strong performance over time usually have a well-defined set of values that areboth known and accepted within the organization, values that are more than simply increasingfinancial return. Strong values that guide and even inspire are enhanced if they are supported by awell-known and relevant heritage. Values and a heritage not only create a strong and consistentbrand but also support the business strategy. In fact, when business falters, one tact that oftenworks is to return to the roots of the business—what made it strong in the first place. WhenMcDonald’s faltered, a turnaround was based in part on their historic core values of service,people, convenience, quality, and good prices.

Values provide a reason to believe in for employees and will influence the brand as a result.Among the values that are often influential are the organizational associations discussed in

Appendix A: Internal Analysis 337

Chapter 9 such as innovation, social responsibility, concern for the customer, quality, service, andbeing globally and environmentally responsible.

Having a heritage based on a founder or on early success can be a guide and a value anchor.Consider L.L. Bean with a vision of their founder who designed a shoe for hunters that waswaterproof. When the first batch had a problem, he took them all back. His focus on the customerand on the outdoors and the outdoorsmen continue to guide the firm. General Electric still has theinnovation emphasis that was the hallmark of its founder Thomas Edison.

More generally, values are best communicated inside and outside a firm with stories. Peopleremember and respond to stories. A firm should strive to have a story bank that collectivelyillustrates the values of the firm. The stories are not limited to the heritage of the firm but canreflect the actions of an employee or a program. The legend that Nordstrom’s once took back adamaged tire even though they do not sell tires (although the store that did take back a tireformerly did sell ties, although under another owner) says so much about their customer service.

ASSETS AND COMPETENCIESIn developing or implementing strategy, it is important to identify the assets and competencies thatrepresent areas of strength and weakness. A successful strategy needs to be based on assets andcompetencies because it is generally easier for competitors to duplicate what you do rather thanwho you are. Further, current assets and competencies, as illustrated in Chapter 12, can beleveraged to create new businesses.

Figure 3.4 is a partial list of the types of assets and competencies that an organization mightdevelop. There are more than three dozen, organized under the categories of innovation,manufacturing, access to capital, management, marketing, and customer base. This checklist isa good place to start when identifying the most relevant assets and competencies. Another are themotivating questions introduced in Chapter 3 that identify assets and competencies important tocustomers, those developed by successful competitors, and those representing large or importantparts of the value added chain.

338 Appendix A: Internal Analysis

A P P E N D I X B

Planning Forms

A set of standard planning forms can be useful for several reasons. First, they are helpful inpresenting strategy recommendations and supporting analyses. Second, the forms can encourageconsistency in presentations over time and across businesses within an organization. Third, theycan ensure accuracy by providing a checklist of areas to consider in strategy development. Thefollowing sample forms are intended to provide a point of departure in designing forms for aspecific context. The external analysis in the example is drawn from the pet food industry. Theforms are for illustration purposes only.

Planning forms need to be adapted to the context involved: the industry, the firm, and theplanning context. They may well be different and shorter or longer given a particular context.Forms for use with other product types—an industrial product, for example—could be modifiedto include information such as current and potential applications or key existing or potentialcustomers.

THE PET FOOD INDUSTRYSection 1. Customer Analysis

A. Segments

Segments Market ($ Billions) Comments

Dog—dry 7.3 Largest segment, segmented nutritional offerings, growingDog—canned 1.9 Made from real meat and by-productsCat—dry 3.4 Second largest segment, nutritional offerings, accelerating growthCat—canned 2.3 Made from real meat, high levels of flavor and textural varietyDog treats 1.8 Del Monte dominates with Milk-BonePet specialty(including petshops,veterinarians,farm andfeed)

6.3 Large players—Science Diet and Iams, uses vets and pet stores,about 70% dog food, mostly dry, growing at 5%

339

B. Customer Motivations

Segment Motivations

Dog—dry Nutrition, convenience, teeth cleaning, often better value than canned pet food in groceryand mass channels

Dog—canned For finicky dogs, taste and nutrition, varietyCat—dry Nutrition, convenience, complement to meal, teeth cleaningCat—canned Taste, convenient sizes, easy to serve, for finicky cats, variety of textures and flavorsTreats Complement to meal, reward, animal likes it, functional nutritional benefits (e.g., tartar

control)Pet specialty Health concern, scientific nutrition, perceived superior ingredients

C. Unmet Needs

Food to accommodate dogs with special diet restrictions or physical goalsPackaging that is sustainable and also convenient

Section 2. Competitor Analysis

A. Strategic Groups

Strategic Group Major Competitors2015 GlobalSales ($B)

(1) Dominant firms Big Heart (Smuckers) 17.2Nestle Purina Petcare 12.9

(2) High-end specialty brands Hill’s (Colgate-Palmolive) 2.2Iams (Mars) 2.2

(3) Private-label brands Other Not available

340 Appendix B: Planning Forms

Strategic GroupCharacteristics/

Strategies Strengths Weaknesses

(1) Dominant firms Mainstream productsLarge portfolio ofproductsWide range of pricepoints to meet theneeds of manySell to multiplechannelsHeavy use ofadvertisingEmphasis on nutritionand variety

Production-scaleeconomiesSignificant presence insupermarkets and massmerchandisers, where70% of industry

volume is soldDeep global financialresources and expertise(e.g., dedicated R&D)Long-termcommitment toindustry

High fixed costcommitment tocapacity increasescompetitive pressureon all players todefend share throughpromotions, etc.Perception as lessnutritious thanspecialty brandsPrivate label share atWalmart andelsewhere isincreasing

(2) High-end specialtybrands

Narrowly focused,super-premium–pricedproduct linesHigh presence innonsupermarketchannels, such asveterinary offices, petbreeders, and petspecialty stores (e.g.,Petsmart)

Product line focus onhealth, naturalingredients, andnutrition, resulting inincreasing consumerdemand; high-marginbusinessFirst-in advantage tohigh-end specialtysegment, resulting in aperceptual edge thatmainstream brandsfind difficult toovercomeSell through alternativechannels, which aregrowing faster and areless competitive andoffer limited access toother brands—creatinga barrier to entryHigh volume and lowunit costs

Higher ingredientand production costsLack economies ofscaleUltra premium pricepoints limit appeal

(3) Private-label foods Sell through multiplesupermarkets and massmerchandisersunder housebrand designation

Profit margins areattractive to retailersPower of Walmart as alarge powerful retailerGood-quality offeringswith high perceivedconsumer value

Little branddifferentiationWeak brand equity

Appendix B: Planning Forms 341

B. Major Competitors

CompetitorCharacteristics/

Strategies Strengths Weaknesses

Nestle PurinaPetcare

Overall marketleader, product lineis broad and deepIncreasing movetoward“premiumization”with niche productlines and upgrade ofproducts to premiumstatusHeavy emphasison innovativefirst-to-market newproductsMassive advertisingand promotionalspending to growshareHigh commitment tocategoryDeep financialresourcesCompany takes long-term view on brand-building efforts; highlevel of commitmentto brandsGlobal commitmentto building brands

Large, powerfulbrands—Alp,Friskies, Cat/DogChow, Moist &Meaty, Purina,ProPlanEconomies of scale,low costsSupply-chainefficienciesStrong retailerrelationshipsGlobal expertise andR&D support

Weak presence inspecialty segmentNeed to supportmultiple brandsacross multiplecategories with finiteresources

342 Appendix B: Planning Forms

CompetitorCharacteristics/

Strategies Strengths Weaknesses

Big Heart(Smuckers)

Emphasis on cat food anddog treats but competes inall segments of marketLow-cost producerstrategyMigrating to a moreconsumer-centric modelwith recent acquisitions

Focused on fewbrands and categoriesAcquired strongbrands in Milk-Boneand Meow Mix

Relatively weak inbrand buildingMilking brands, suchas 9-LivesLack of productinnovation in cat anddog food

Mars Leadership positionoutside of the U.S.Commitment to buildingbrandsUpgrading supermarketbrands for premium appeal

Dog food expertiseEconomies of scale,low costs withacquisition of theprivate-label supplierDoaneDeep financialresourcesStrongbrands—Pedigree,Whiskas

Lack of cat foodexpertise and marketshare in U.S.

Hill’s Petfood Strong player in specialtyand vet marketsEntry barriers in vetbusiness for Science Dietbrand

Leading recipient ofveterinaryrecommendationBest niche-marketproduct positioningin the industry

No presence insupermarkets or massoutlets, where 60%of industry volume issoldUnder pressure fromnew high-end specialtyBrand (e.g., BlueBuffalo)

Iams (Mars) Traditionally a specialtymarket brand, withemphasis on specialty-storesales and referrals from petbreedersMoved to grocery and massmerchandise channels,which stimulated growth

Deep financialrecoursesStrong brand equity

Economies of scaleLimited marketpenetration and shareLimited portfoliovariety

Appendix B: Planning Forms 343

C. Competitor Strength Grid

344 Appendix B: Planning Forms

Assets and Competencies

Name recognition

Breadth of product line

Breadth of channel coverage

Specialty/veterinarian coverage

Financial resources

Cost structure

Geographic coverage

U.S.

International

Index:

NestléPurinaPetcare

Big HeartPet Brands(Smuckers) Hill’s

Iams(Mars)

Pet Food Competitors in the U.S. Market

Strong

Above average

Average

Less than average

Weak

Section 3. Market Analysis

A. Market Identification: The U.S. Pet Food Market

B. Market Size

1990 1995 2000 2005 2008 2013

U.S. industry sales ($ in billions) 7.7 9.1 12.2 13.9 18.9 23.1

Emerging Submarkets

Special diet-based products

Walmart and other private-label products

Wellness-focused items (e.g., Naturals)

Product “humanization”

Market Growth (in Dollars vs. 2011)

Overall pet—growing at 5 percent

Supermarket—growing at 3 percent

Specialty store—growing at 3 percent annually

Mass merchandisers—growing at 7 percent annually

Online—fastest growing retail sales

Factors Affecting Sales Levels

Growth of pet population

Growth of higher-value products

General economic consumer pressure, especially at low end of the market

C. Market Profitability Analysis

Barriers to Entry

Brand awareness, budget for marketing programs, access to distribution channels, largeinvestment required for manufacturing, science, and technology.

For pet specialty segment—loyalty to Hill’s Science Diet and other entrenched specialtybrands; difficulty of getting recommendations of vets and other influentials

Potential Entrants

The probability of new entrants is quite low because the pet food industry is already verycompetitive, with lots of incumbents, and barriers to entry are high.

Threats of Substitutes

Human food leftovers

Food cooked especially for pets

Appendix B: Planning Forms 345

Bargaining Power of Suppliers

Growing

Raw materials shared with human food markets

Consolidation of suppliers

Quality of raw ingredients requirements growing

Bargaining Power of Customers

Grocery stores and warehouse clubs have strong bargaining power over pet foodsuppliers.

Specialty stores and veterinarians might have moderate bargaining power.

Mass merchandisers (especially Walmart, with around 24 percent of the volume in thiscategory) have very strong bargaining power.

D. Cost Structure

Diversified firms have lower cost because of economies in advertising, manufacturing,promotion, and distribution.

Specialized firms have higher costs and often are required to co-manufacture theirproducts.

E. Distribution System

Major Channels

Online retailers have grown from 7 percent in 2010 to 9.3 percent in 2015.

Supermarkets are dominant in terms of quantity they deal with (35 percent).

Mass merchandisers handle about 29 percent of market and are growing.

Pet foods are effective traffic builders in supermarkets and mass merchandisers.

Farm-supply stores are generally located in suburbs.

Pet stores handle most premium brands and many “mainstream” national brands.

Veterinarians handle only super-premium brands.

Observations/Major Trends

Vets’ sales are flat and have very high margins both for producers and for themselves.

Specialty stores’ sales are growing at approximately 6 percent.

These two channels have captured high-involvement customers’ needs to feed their petshealthier foods.

Warehouses have gained footholds in market-leader brands.

Innovations in packaging are begging to address unmet needs around convenience.

Product innovations are creating subcategories.

Online especially is appealing to Millennials.

346 Appendix B: Planning Forms

Transparency of labeling is increasing in importance.

Use of premium and healthy ingredients—grain-free, organic, raw veggies, etc.

F. Market Trends and Developments

Premium and super-premium brands have grown, and most producers are introducingnew products in this area.

Large manufacturers are introducing new products continuously.

G. Key Success Factors

Present

Brand recognition

Product quality

Access to major channels

Gain market share in premium brands

Introduction of new products

Breadth of product line

Marketing program

Cost reduction

Awareness or recommendation by specialists

Packaging

Capitalizing on relevant human trends (naturals; shift to healthier, higher-qualityingredients)

Future

Continue to capture the trends of consumers

Packaging

Follow the trends of distributors

Ability to demonstrate corporate responsibility (e.g., environmental sustainability)

Appendix B: Planning Forms 347

Section 4. Environmental Analysis

A. Trends and Potential Events

Source Description Strategic ImplicationTimeFrame Importance

Technological New product forms Limited LowRegulatory Impose standards of

contentLimited Low

Economic Insensitive toeconomic changes

Very limited Low

Cultural Think of pets asmembers of families

Demand for new,healthy products

Users’ needs havediversified

Growth of super-premium brands

Introduction of healthy productsMultiple specialized segments

Since themid-1980s

High

Demographic Household formationis slowing

The number of cats isincreasing morethan dogs

The baby boomer isaging

Continued innovation of productand communications to keepbrands relevant

Since the1980s

Medium–high

Threats High dependence onanimal proteins

Risk of animal-borne diseases (e.g.,BSE) could severely impactingredient

Current Medium

Opportunities Growing market forpremium brands

Expanding market forprivate labels

There is still room for growth inspecialized segments

Since themid-1980s

High

348 Appendix B: Planning Forms

B. Scenario Analysis

Two most likely are:

Little growth in specialty-store and super-premium segments

High growth in both specialty-store and super-premium segments

C. Key Strategic Uncertainties

Will growth in demand for super-premium specialty products continue?

What new subcategories will emerge as significant markets?

Section 5. Internal Analysis

A. Performance Analysis

Objective Area Objective Status and Comment

1. Sales2. Profits3. Quality/service4. Cost5. New products6. Customer satisfaction7. People8. Other

B. Summary of Past Strategy

Appendix B: Planning Forms 349

C. Strategic Problems

Problem Possible Action

D. Characteristics of Internal Organization

Component Description—Fit with Current/Proposed Strategy

Culture, competencies, structure, metrics, incentives, leaders, and talent.

E. Portfolio Analysis

High

BusinessPosition

Market Attractiveness

Low

LowHigh

SBUa

SBUdSBUc

SBUb

SBUe

Note: An SBU (strategic business unit) can be defined by product or by segment.

350 Appendix B: Planning Forms

F. Analysis of Strengths and Weaknesses

Reference StrategicGroup

Competencies/Competency Deficiencies, Assets/Liabilities, Strengths/Weaknesseswith Respect to Strategic Groups

G. Financial Projections Based on Existing Strategy

Past Present Projected

Operating StatementMarket shareSalesCost of goods soldGross marginR&DSelling/advertisingProduct G&ADiv. & corp. G&AOperating profit

Balance SheetCash/AR/inventoryAPNet current assetsFixed assets at costAccumulated depreciationNet fixed assetsTotal assets—book valueEstimated market value of assetsROA (base—book value)ROA (base—market value)

Uses of FundsNet current assetsFixed assetOperating profitDepreciationOther

Resources Required________________________________________________________________

Note: Resources required could be workers with particular skills or backgrounds or certain physical facilities. A negative useof funds (i.e., profit) is a source of funds. Projected numbers could be for several relevant years.

Appendix B: Planning Forms 351

Section 6. Summary of Proposed Strategy

A. Business Scope—Product-Market Served

B. Strategy Description

Investment Objective Product MarketWithdraw ⃞Milk ⃞Maintain ⃞Growth in market share ⃞Market expansion ⃞Product expansion ⃞Vertical integration ⃞

Value Proposition Product MarketFunctional value ⃞Innovation value ⃞Design value ⃞Service value ⃞Social responsibility value ⃞Price value ⃞Relational value ⃞

Assets and Competencies Providing SCAs

Functional Strategies

C. Key Strategy Initiatives

352 Appendix B: Planning Forms

D. Financial Projections Based on Proposed Strategy

Past Present Projected

Operating StatementMarket shareSalesCost of goods soldGross marginR&DSelling/advertisingProduct G&ADiv. & corp. G&A

Operating profitBalance SheetCash/AR/inventoryAPNet current assetsFixed assets at costAccumulated depreciationNet fixed assetsTotal assets—book valueEstimated market value of assetsROA (base—book value)ROA (base—market value)

Uses of FundsNet current assetsFixed assetsOperating profitDepreciationOther

Resources Required________________________________________________________________

Appendix B: Planning Forms 353

N O T E S

Chapter 11. A. G. Lafley, “What Only the CEO Can Do,” Harvard Business Review, May 2009, p. 58.2. Richard Rumelt, “The Perils of Bad Strategy,” McKinsey Quarterly, 2011, Number 1, pp. 30–39.3. Theodore Levitt, “Marketing Myopia,” Harvard Business Review, July–August 1960, pp. 45–56.4. Renee Dye and Olivier Sibony, “How to Improve Strategic Planning,” McKinsey Quarterly, Number 3,

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Chapter 21. Andrew Tilim, “Will the Kids Buy It?” Business 2.0, May 2003, pp. 95–99.2. This insert was inspired by Nanette Byrnes, “Secrets of the Male Shopper,” BusinessWeek, September 4,

2006, pp. 45–53.3. Clayton M. Christiansen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the

Cure,” Harvard Business Review, December 2005, pp. 74–83.4. Melinda Cuthbert, “All Buyers Not Alike,” Business 2.0, December 26, 2000.5. Abbie Griffin and John R. Hauser, “The Voice of the Customer,” Marketing Science, Winter 1993,

pp. 1–27.6. Eric von Hippel, “Lead Users: A Source of Novel Product Concepts,” Management Science, July 1986,

p. 802.7. Ibid.8. For more on web-based qualitative research, see revolutionglobal.com.9. Richard J. Harrington and Anthony K. Tjan, “Transforming Strategy One Customer at a Time,” Harvard

Business Review, March, 2008, p. 67.10. Spencer E. Ante, “The Science of Desire,” Business Week, June 5, 2006, pp. 99–106.11. Ibid., p. 104.12. George S. Day, “Creating a Superior Customer-Relating Capability,” Sloan Management Review,

Spring 2003, pp. 82–83.

Chapter 31. David Halberstam, The Reckoning, New York: William Morrow, 1986, p. 310.2. Ibid.3. Michael E. Porter, Competitive Strategy, New York: The Free Press, 1980, pp. 20–21.4. Study by Enterbrain mentioned in Nikkei Business Daily, July 23, 2007.

Chapter 41. For more details in the relevance concept, see David A. Aaker, “The Brand Relevance Challenge,”

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2. Chris Anderson, The Long Tail, New York: Hyperion, 2006.

354

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4. Scott Davis of Prophet Brand Strategy suggested the Schwinn case.5. Irma Zandl, “How to Separate Trends from Fads,” Brandweek, October 23, 2000, pp. 30–35.6. Faith Popcorn and Lys Marigold, Clicking, New York: HarperCollins, 1997, pp. 11–12.7. James Daly, “Sage Advice—Interview with Peter Drucker,” Business 2.0, August 22, 2000, pp. 134–144.8. George S. Day, Adam J. Fein, and Gregg Ruppersberger, “Shakeouts in Digital Markets: Lessons for

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13. Jeffrey M. Jones, “In U.S., Telecommuting for Work Climbs to 37%,” Gallup, August 19, 2015,http://www.gallup.com/poll/184649/telecommuting-work-climbs.aspx

14. Laurene Bradford, “13 Tech Companies that Offer Cool Work Perks,” Forbes, July 27, 2016, http://www.forbes.com/sites/laurencebradford/2016/07/27/13-tech-companies-that-offer-insanely-cool-perks/2/#26b1bfbb63c8

15. “Slack’s Growth Could be Slowing Because of What Made it Attractive in the First Place,” BusinessInsider, October 24, 2016, http://www.businessinsider.com/slack-growth-signs-of-slowing-2016-10

Notes 355

16. O.H. Maycotte, “Millennials Are Driving the Sharing Economy—And so is Big Data,” Forbes Magazine,May 5, 2015, http://www.forbes.com/sites/homaycotte/2015/05/05/millennials-are-driving-the-sharing-economy-and-so-is-big-data/#6654e4f62991

17. David Kiron, Nina Kruschwitz, Knut Haanaes, and Ingrid Von Streng Velken, “Sustainability Nears aTipping Point,” MIT Sloan Management Review, Winter 2012, pp. 69–74.

18. Captain Planet, Harvard Business Review, June 2012, pp. 112–118. Op cit. p. 114.19. “The Unilever Sustainable Living Plan” 2016, https://www.unilever.com/sustainable-living/the-

sustainable-living-plan/reducing-environmental-impact/20. Mac Gunther, “The Green Machine,” Fortune, August 7, 2006, pp. 42–57.21. Fred Krupp, “Walmart: The Awakening of an Environmental Giant,” The Huffington Post, February 17,

2016, http://www.huffingtonpost.com/fred-krupp/walmart-the-awakening-of_b_9253920.html22. “Sustainability,” Walmart, 2016, http://corporate.walmart.com/global-responsibility/sustainability/23. Personal communication, John Gerzema, Y&R’s BAV, 2016. Walmart’s performance on these metrics is

also due to its response to national disasters starting with Hurricane Katrina. However, other researchsupports a strong environmental record as well. Walmart USA was in the 78th percentile of companies(where 100% is high) in terms of environmental efforts according to CSRHub and in the top 15 percentof companies for efforts related to increasing energy efficiency and combatting climate change.“Walmart Stores, INC. CSR Ratings,” CSRHUB, 2016, https://www.csrhub.com/subscription_sample/

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28. George Day and Paul Schoemaker, “Are You a ‘Vigilant Leader’?” MIT Sloan Management Review,Spring 2008, pp. 43–51.

29. “The Last Kodak Moment?” The Economist, January 14, 2012, http://www.economist.com/node/21542796

30. Chunka Mui, “How Kodak Failed,” Forbes, January 18, 2012, http://www.forbes.com/sites/chunkamui/2012/01/18/how-kodak-failed/2/#4e430b3d1a42

31. Claudia H. Deutsch, “Chief Says Kodak is Pointed in the Right Direction,” The New York Times,December 25, 1999, http://www.nytimes.com/1999/12/25/business/chief-says-kodak-is-pointed-in-the-right-direction.html

32. Peter Lewis, “Texas Instruments’ Lunatic Fringe,” Fortune, November 14, 2006, http://archive.fortune.com/magazines/fortune/fortune_archive/2006/09/04/8384732/index.htm

33. Jon Gertner, “The Truth about Google X: An Exclusive Look Behind the Secretive Lab’s Closed Doors,”Fast Company, April 15, 2014, https://www.fastcompany.com/3028156/united-states-of-innovation/the-google-x-factor

34. Based on an interview with Dan Vermeer, Professor of the Practice, Fuqua School of Business, DukeUniversity and former head of the Global Water Initiative at The Coca-Cola Company.

35. Arnold Cooper, Edeard Demuzlio, Kenneth Hatten, Elijah Hicks, and Donald Tock, “StrategicResponses to Technological Trends,” Academy of Management Proceedings, 1976, pp. 11–12.

36. Hugh Courtney, “Decision-Driven Scenarios for Assessing Four Levels of Uncertainty,” Strategy &Leadership, Vol. 31, No. 1, 2003, pp. 14–16.

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356 Notes

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5. Valarie Zeithaml, A. Parasuraman, and Leonard L. Berry, Delivering Quality Service: BalancingCustomer Perceptions and Expectations, New York: Simon and Schuster, 1990.

6. Leigh Buchanan, “What’s Next from Toms, the $400 Million For-Profit Built on Karmic Capital,” Inc.,May 2016, http://www.inc.com/magazine/201605/leigh-buchanan/toms-founder-blake-mycoskie-social-entrepreneurship.html

7. Richard Normann and Rafael Ramirez, “From Value Chain to Value Constellation: Designing Inter-active Strategy,” Harvard Business Review, July/August 1993, pp. 65–77.

8. Tom Murphy, “Intel’s Window Closing in Portable Device Market,” Electronic News (May 27, 2002),http://findarticles.com/p/articles/mi_m0EKF/is_22_48/ai_86875517/

9. Damon Darlin, “Cashing In its Chips: Texas Instruments on the Rebound,” New York Times, BU1 andBU7, July 9, 2006.

10. Coreen Bailor, “Texas Instruments Takes a Walk,” CRM Magazine, August 2, 2004, http://www.activapr.com/news.detail.php?articleID=13

11. “Our Low Fees,” https://www.fidelity.com/why-fidelity/pricing-fees12. “Fidelity Private Wealth Management,” https://www.fidelity.com/wealth-management/private-wealth-

management13. Similar criteria are proposed by Devon Sharma, Chuck Lucier, and Richard Molloy, “From Solutions

to Symbiosis: Blending with Your Customers,” Strategy + Business (Second Quarter 2002): 38–43.For empirical support, see Kapil R. Tuli, Ajay K. Kohli, and Sundar G. Bharadwaj, “RethinkingCustomer Solutions: From Product Bundles to Relational Processes,” Journal of Marketing, July 2007,pp. 1–17.

14. “‘Power by the Hour’: Can Paying Only for Performance Redefine How Products Are Sold andServiced?,” Knowledge@Wharton, February 21, 2007.

15. “Briefing Rolls-Royce: Britain’s Lonely High Flier,” The Economist, January 10, 2009, p. 63.16. “Canadian Sugar Industry,” Canadian Sugar Institute website, http://www.sugar.ca/english/

canadiansugarindustry/sugarmarket.cfm17. Rick Tetzeli, “Slack’s Workplace Revolution,” Fast Company, September 15, 2015, http://www.

fastcodesign.com/3050294/innovation-by-design/slacks-workplace-revolution. “From 0 to $1B – Slack’sFounder Shares Their Epic Launch Strategy,” First Round Review, http://firstround.com/review/From-0-to-1B-Slacks-Founder-Shares-Their-Epic-Launch-Strategy/. Jack Flanagan, “7 Workplace Chat Appsto Keep Your Team in Sync,” Huffington Post, January 26, 2015, http://www.huffingtonpost.com/fueled/7-workplace-chat-apps-to_b_6548914.html

18. David Benoit and Heather Haddon, “Whole Foods Overhauls Board; Vows Big Changes,” WallStreet Journal, May 11, 2017, A1.

19. Christoph Zott and Raphael Amit, “Business Model Design: An Activity System Perspective,” LongRange Planning, June 2009, pp. 216–226.

Notes 357

Chapter 71. David Court, Dave Elzinga, Susan Mulder, and Ole Jùrgen Vetvik. “The Consumer Decision Journey,”

McKinsey Quarterly, 2009, p. 3.2. Ibid., p. 43. Jim Lecinski, Winning at the Zero Moment of Truth. N.p.: Google, 2011, p. 9.4. Google Consumer Surveys, U.S., May 2016.5. Court et al., op cit, p. 4.6. Court et al., op cit, p. 6.7. Court et al., op cit, p. 5.8. “The Social Lifecycle: Consumer Insights to Improve Your Business,” Hubspot, October 29, 2014,

http://www.slideshare.net/HubSpot/the-social-lifecycle-consumer-insights-to-improve-your-business9. “Automotive Brands Ranked by Digital IQ Score – 2016,” L2, February 10, 2016, http://www.

rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=99&year=104210. Court et al., op cit, p. 8.11. Katherine N. Lemon and Peter C. Verhoef, “Customer Experience Along the Customer Journey,”

Journal of Marketing, November 2016, pp. 69–96.12. Halligan and Shah, op cit, pp. 123–124.13. Loizos Heracleous and Jochen Wirtz, “The Globe: Singapore Airlines Balancing Act,” Harvard Business

Review, July–August 2010, pp. 145–149.14. Joseph B. Pine II and James H. Gilmore, “Welcome to the Experience Economy,” Harvard Business

Review, July–August 1998, p. 97.15. Lemon and Verhoef, op cit, p. 76.16. Scott M. Davis and Michael Dunn, Building the Brand Driven Business, San Francisco: Josey-Bass 2002,

pp. 133–134.17. Pine and Gilmore, op cit, p. 99.18. Leonard L. Berry, Lewis P. Carbone and Stephan H. Haeckel, “Managing the Total Customer

Experience,” MIT Sloan Management Review, Spring 2002, p. 45.19. Joann Peck and Terry Childers, “To Have and to Hold: The Influence of Haptic Information on Product

Judgments,” Journal of Marketing, April 2003, pp. 35–48.20. Joann Peck and Terry Childers, “Sensory Factors in Consumer Behavior,” in Handbook of Consumer

Psychology, 2008, 193–219.21. Kevin Peters, “Office Depot’s Resident on How ‘Mystery Shopping’ Helped Spark a Turnaround,”

Harvard Business Review, November 2011, pp. 47–50.22. Roland T. Rust, J. Jeffrey Inman, Jianmin Jia, and Anthony Zahorik, “What You Don’t Know about

Customer-Perceived Quality: The Role of Customer Expectation Distributions,” Marketing Science,February 1999, pp. 77–92.

23. MarketingSherpa, “Consumer Purchase Preference Survey,” 2016.24. Ruth N. Bolton, “Creating Customer Experiences That Build Relationships,” Marketing Science

Institute Webinar, 2016.25. Mary Jo Bitner, Amy L. Ostrom and Felicia N. Morgan, Service Blueprinting: A Practical Technique for

Service Innovation, California Management Review, Spring 2008, pp. 72–74.26. A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry (1991), “Refinement and Reassessment of

the SERVQUAL Scale,” Journal of Retailing, Winter 1991, pp. 420–450.27. Valarie A. Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating

Customer Focus Across the Firm, 2013, McGraw Hill-Irwin, p. 125.28. A. Parasuraman, A., Valarie Zeithaml, and Leonard Berry, “SERVQUAL: A Multiple-item Scale for

Measuring Consumer Perceptions of Service Quality,” Journal of Retailing, Spring 1988, pp. 12–40.29. Emma K. Macdonald, Hugh N. Wilson, and Umut Konuş, “Better Customer Insight—in Real Time,”

Harvard Business Review, September 2012, pp. 102–108.

358 Notes

30. Tony Costa, “How Location Analytics Will Transform Retail,” Harvard Business Review, March 12,2012, https://hbr.org/2014/03/how-location-analytics-will-transform-retail

31. Ewan Duncan, Harald Fanderi, Nicholas Maechler, and Kevin Neher, “Customer Experience: CreatingValue Through Transforming the Customer Journey,” McKinsey Quarterly, July 2016, p. 6.

32. Barbara L. Fredrickson and Daniel Kahneman, “Duration Neglect in Retrospective Evaluations ofAffective Episodes,” Journal of Personality and Social Psychology, July 1993, p. 45.

33. Disney at Work, http://disneyatwork.com/disneys-four-keys-to-a-great-guest-experience34. This touchpoint process model is taken from Scott M. Davis and Michael Dunn, Building the Brand

Driven Business, San Francisco, Jossey-Bass, 2002.35. Allen P. Adamson, The Edge: 50 Tips from Brands that Lead, London: Palgrave Macmillan, 2013, p. 97.36. Zeithaml, Bitner and Gremler, op cit, pp. 36–45.37. Duncan, Fanderi, Maechler, and Neher, op cit, p. 17.38. Ethan Morantz, Miglena Armutlu, Cody Greer, and Vishal Pua, “Making Banking Intimate: Fintech and

the Customer Experience,” American Marketing Association, 2016, https://www.ama.org/resources/Pages/making-banking-intimate-fintech-customer-experience.aspx

39. Lemon and Verhoef, op cit, p. 8.40. Bill Doyle, “Case Study: Charles Schwab Storms Back by Focusing on Customer Loyalty,” Forrester

Research, May 21, 2008, pp. 1–7.41. Charles Schwab Corporation 2007 Annual Report.42. “Investors Adopt More Hands-On Approach to Advisors, Says J.D. Power Full Service Investor

Satisfaction Study,” J.D. Power, April 7, 2016, http://www.jdpower.com/press-releases/2016-us-full-service-investor-satisfaction-study

43. “First Direct Branchless Banking,” INSEAD Case 597-028-1, Fontainebleau, France: INSEAD 1997.44. This section is drawn from George S. Day and Christine Moorman, Strategy from the Outside In,

New York: MacMillian, 2010.45. Stephen S. Tax and Stephen Brown, “Recovering and Learning from Service Failure,” Sloan Manage-

ment Review, Fall 1998, pp. 75–88.46. The key ideas in this literature are best summarized in C. K. Prahalad and Venkat Ramaswamy, The

Future of Competition: Co-creating Unique Value with Customers, Boston, MA: Harvard BusinessSchool Press, 2004.

47. Kapil Tuli, Sundar Bhardawaj, and Ajay Kohli, “Ties That Bind: The Impact of Multiple Types of Tieswith a Customer on Sales Growth and Sales Volatility,” Journal of Marketing Research, February 2010,pp. 36–50.

Chapter 81. Don Peppers and Martha Rogers, “Return on Customer: A New Metric of Value Creation,” Journal of

Direct, Data and Digital Marketing Practice, April/June 2006, pp. 318–332.2. Alison Savery, “How to Calculate & Track a Leads Goal That Sales Supports,” Hubspot, March 16, 2012,

https://blog.hubspot.com/blog/tabid/6307/bid/31902/How-to-Calculate-Track-a-Leads-Goal-That-Sales-Supports.aspx#sm.0000bzy3uc8dcfruui516q6zd8sdg

3. Ibid.4. Pamel Vaughan, “The Steps You Need to Define the Stages of Your Sales & Marketing Funnel,”

Hubspot, October 17, 2012, http://blog.hubspot.com/blog/tabid/6307/bid/33711/The-Steps-You-Need-to-Define-the-Stages-of-Your-Sales-Marketing-Funnel.aspx#sm.0000bzy3uc8dcfruui516q6zd8sdg

5. Brian Halligan and Dharmesh Shah, Inbound Marketing, Hoboken, NJ: John Wiley & Sons, Inc, pp.109–140.

6. Mike Volpe, “The 6 Marketing Metrics & KPIs Your CEO Actually Cares About [Cheat Sheet],”January 15, 2013, http://blog.hubspot.com/blog/tabid/6307/bid/34054/The-6-Marketing-Metrics-Your-CEO-Actually-Cares-About-Cheat-Sheet.aspx#sm.0000bzy3uc8dcfruui516q6zd8sdg

Notes 359

7. Ibid.8. Halligan and Shah, op cit, p. 122.9. David B. Godes “Avaya (A),” Harvard Business School Publishing, Boston: MA, 2008.

10. Jonathan John, “7 Ways You Could be Screwing Up Your Sales Funnel,” Smart Insights, August 21, 2015,http://www.smartinsights.com/ecommerce/7-ways-you-could-be-screwing-up-your-sales-funnel/

11. Halligan and Shah, op cit, p. 113.12. Philip E. Pfeifer and Paul W. Farris, “Customer Profitability,” University of Virginia Note HBS – UV0407

(2005) and Elie Ofek, “Customer Profitability and Lifetime Value,” Harvard Business School Note9-503-019, Cambridge, MA: Harvard Business School, 2002.

13. Sunil Gupta, Donald R. Lehmann, and Jennifer Stuart, “Valuing Customers,” Journal of MarketingResearch, February 2004, pp. 7–18.

14. V. Kumar and Denish Shah, “Expanding the Role of Marketing: From Customer Equity to MarketCapitalization,” Journal of Marketing, November 2009, pp. 119–136.

15. Thomas Steenburgh, Jill Avery, and Naseem Daho, “HubSpot: Inbound Marketing and Web 2.0,”Harvard Business School Case 9-509-049, Cambridge, MA: Harvard Business School, 2011.

16. Pfeifer and Farris, op cit.17. “About Us,” XO Group, http://xogroupinc.com/about-us/18. V. Kumar, Andrew Petersen, and Robert P. Leone, “How Valuable is Word of Mouth?,” Harvard

Business Review, October 2007, pp. 139–146.19. Once the average individual customer value is derived, it can be multiplied by the number of firm

customers in the segment in order to derive the total value of the segment.20. V. Kumar, Managing Customers for Profits, Upper River Saddle, NJ: Pearson, 2008.21. Sunil Gupta and Donald R. Lehmann, “Customers Assets,” Journal of Interactive Marketing, December

2003, pp. 9–24. Sunil Gupta and Donald R. Lehmann, Managing Customers as Investments, Philadel-phia: Wharton School Publishing, 2005.

22. If companies are effectively spending on acquisition, these budgets should be lifting their acquisitionrates. This potential relationship can be accounted for in a regression model. To do so, the companyneeds to understand the relationship between spending and response. Think of this like an elasticity—foreach dollar spent on acquisition, what happens to the acquisition rate? This calculation, estimated in asimple regression model, can use the company’s data or, if working with a consultant, broader industrydata. Once calculated, the company can take the resulting parameters from the output of the estimatedequation (which are the intercept α and slope β) and use these together with any acquisition cost (AC)level to compute an adjusted acquisition rate (AR) that accounts for the impact of acquisition spend.This is shown in the following equation where AR is replaced by α β1 ACs as inPLV s α β1 ACs CLV s ACs. This can be made more complicated by allowing fordiminishing returns in AC’s effect on AR but a good start on assessing the shape of the relationship willbe captured in a simple linear regression.

Chapter 91. David A. Aaker, Managing Brand Equity, New York: Free Press, 1991, p. 57.2. “Shoppers Like Wide Variety of Houseware Brands,” Discount Store News, October 24, 1988, p. 40.3. Leo Bogart and Charles Lehman, “What Makes a Brand Name Familiar?” Journal of Marketing

Research, February 1973, pp. 17–22.

Chapter 101. This touchpoint process model is taken from Scott M. Davis and Michael Dunn, Building the Brand

Driven Business, San Francisco: Jossey-Bass, 2002.

360 Notes

2. Patrick Spenner and Karen Freeman, “Keep It Simple,” Harvard Business Review, May, 2012,pp. 109–114.

3. Rajeev Batra, Aaron Ahuvia, and Richard P. Bagozzi, “Brand Love,” Journal of Marketing, March, 2012,pp. 1–16.

4. Russell W. Belk, “Possessions and the Extended Self,” Journal of Consumer Research, September 1988,p. 139.

5. Batra et.al., op cit, p. 8.6. Batra et.al., op cit, p. 8.7. Jim Stengel, “GROW: How Ideals Power Growth and Profit at the World’s Greatest Companies,” Crown

Business, 2011.

Chapter 111. Branded differentiators and branded energizers are introduced and discussed in more detail in Chapter 5

of David Aaker, Brand Portfolio Strategy, New York: The Free Press, 2005.2. Gregory S. Carpenter, Rashi Glazer, and Kent Nakamoto, “Meaningful Brands from Meaningless

Differentiation: The Dependence on Irrelevant Attributes,” Journal of Marketing Research, August1994, pp. 339–350.

3. John Gerzema and Ed Lebar, The Brand Bubble, San Francisco: Jossey-Bass, 2008, Chapters 1 and 2.4. Kevin Lane Keller, Strategic Brand Management, 2nd ed. Saddle River, NJ: Prentice Hall, 2003, p. 317.5. James Crimmins and Martin Horn, “Sponsorship: From Management Ego Trip to Marketing Success,”

Journal of Advertising Research, July–August 1996, pp. 11–21.6. Ibid.7. Kellie A. McElhaney, Just Good Business, San Francisco: Berrett-Koehler Publishers, 2008.

Chapter 121. “TippingSprung Publishes Results for Fifth Annual Brand-Extension Survey,” PRWEB, January 7, 2009.2. Op. cit.3. Chris Zook, “Finding Your Next Core Business,” Harvard Business Review, April 2007, p. 70.4. Adrian Slywotsky and Richard Wise, How to Grow When Markets Don’t, New York: Warner Business

Books, 2003.5. Chris Zook with James Allen, Profit from the Core, Boston: Harvard Business School Press, 2001; Chris

Zook, Beyond the Core, Boston: Harvard Business School Press, 2004.6. Zook, Beyond the Core, p. 22.7. Ibid, p. 112.8. Ibid, pp. 87–88.9. Ibid, p. 36.

10. “How eBay Developed a Culture of Experimentation,” Harvard Business Review, March 2011,pp. 93–97.

11. Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance, New York: Harper Business, 2002,pp. 251–252.

12. Robert G. Eccles, Kirsten L. Lanes, and Thomas C. Wilson, “Are You Paying Too Much for ThatAcquisition?” Harvard Business Review, July–August 1999, pp. 136–143.

Chapter 131. David Aaker, Brand Relevance: Making Competitors Irrelevant, San Francisco: Jossey-Bass, 2011.2. Richard Foster and Sarah Kaplan, Creative Destruction, New York: Doubleday, 2001, p. 47.3. W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy, Boston: HBS Press, 2005, p. 7.

Notes 361

4. Peter N. Golder and Gerard J. Tellis, “Pioneer Advantage: Marketing Logic or Marketing Legend?”Journal of Marketing Research, May 1993, pp. 158–170.

5. Gerard J. Tellis and Peter N. Golder, “First to Market, First to Fail? Real Causes of Enduring MarketLeadership,” Sloan Management Review, Winter 1996, pp. 65–75.

6. Special thanks to John Gerzema and staff at BAV Consulting for providing this list.7. James Daly interview with Peter Drucker, “Sage Advice,” Business 2.0, August 22, 2000, p. 139.8. The example is recounted in James C. Anderson and James A. Narus, “Selectively Pursuing More of Your

Customer’s Business,” MIT Sloan Management Review, Spring 2003, pp. 43–49.9. Rita Gunther McGrath and Ian C. MacMillan, “Market Busting,” Harvard Business Review, March

2005, pp. 81–89.10. Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail,

Boston: Harvard Business School Press, 1997; Clayton M. Christensen and Michael E. Raynor, TheInnovator’s Solution: Creating and Sustaining Successful Growth, Boston: Harvard Business SchoolPress, 2003; and Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth, Seeing What’s Next: Usingthe Theories of Innovation to Predict Industry Change, Boston: Harvard Business School Press, 2004.

11. Matthew S. Olsen, Derek van Berer, and Seth Verry, “When Growth Stalls,” Harvard Business Review,March, 2008, pp. 51–61.

12. George S. Day, “Is It Real? Can We Win? Is It Worth Doing,” Harvard Business Review, December,2007, pp. 110–120.

13. Robert G. Cooper, “Your NPD Portfolio May Be Harmful to Your Business Health,” PDMA Visions,April 2005.

14. Mizik, Natalie (2010), “The Theory and Practice of Myopic Management,” Journal of MarketingResearch, 47 (4), pp. 594–611.

Chapter 141. Douglas B. Holt, John A. Quelch, and Earl L. Taylor, “How Global Brands Compete,” Harvard Business

Review, September 2004, pp. 68–75.2. C. K. Prahalad and Hrishi Bhattacharyya, How to be a Truly Global Company,” Strategy & Business, 64,

Autumn, 2011, pp. 54–61.3. Gary Hamel and C. K. Prahalad, “Do You Really Have a Global Strategy?” Harvard Business Review,

July–August 1985, pp. 139–148.4. Geoffrey Jones, “The Growth Opportunity that Lies Next Door,” Harvard Business Review, July–

August 2012, p. 145.5. Theodore Levitt, “The Globalization of Markets,” Harvard Business Review, May–June 1983, pp. 92–102.6. The material in this section draws from Chapter 5 of the book Spanning Silos by David Aaker, Boston:

Harvard Publishing Company, 2008.7. KarleneLukovitz,“BrandsLoseRelevanceinFood-BuyingDecisions,”MarketingDaily,October21,2008.8. Toshio Wakayama, Junjiro Shintaku, and Tomofumi Amano, “What Panasonic Learned in China,”

Harvard Business Review, December 2012, pp. 109–112.9. James Root and Josef Ming, “Keys to Foreign Growth: Four Requisites for Expanding Across Borders,”

Strategy & Leadership, Vol. 34, No. 3 (2006), pp. 59–61.10. Victoria Griffith, “Welcome to Your Global Superstore,” Strategy + Business, Vol. 26, 2002, p. 95.11. Ibid.12. “Heading for the Exit,” Economist, August 5, 2006, p. 54.13. Normandy Madden, “Looking to Grow in China? Ad Age Has 10 Surefire Tips,” Advertising Age, May 4,

2009, pp. 3, 30.14. Anita Chang Beattie, “Catching the Eye of the Chinese Shopper,” Advertising Age, December 10, 2012.

pp. 20–22.

362 Notes

15. Jeffrey H. Dyer, Prashant Kale, and Harbir Singh, “How to Make Strategic Alliances Work,” MIT SloanManagement Review, Summer 2001, pp. 37–43.

Chapter 151. Tom Kraeutier, “The Home Depot drops EXPO business,” Weblogs, January 27, 2009.2. Chris Zook, Beyond the Core, Boston: HBS Press, 2004, p. 23.3. Zook, op-cit, p. 24.4. Lee Dranikoff, Tim Koller, and Antoon Schneider, “Divestiture: Strategy’s Missing Link,” Harvard

Business Review, May 2002, pp. 75–83.5. An excellent article that documents these biases and suggests solutions is John T. Horn, Dan P. Lovallo,

and S. Patrick Viguerie, “Learning to Let Go: Making Better Exit Decisions,” McKinsey Quarterly, 2006,No. 2, pp. 65–76.

6. Dale E. Zand, “Managing Enterprise Risk: Why a Giant Failed,” Strategy & Leadership, 2009, Vol. 37,No. 1, pp. 12–19.

7. This material draws from David Aaker, Brand Portfolio Strategy, New York: The Free Press, 2004,Chapter 10.

Chapter 161. Jeff Bezos, “Video from Jeff Bezos about Amazon and Zappos,” YouTube, July 22, 2009, https://www.

youtube.com/watch?v=-hxX_Q5CnaA2. Tony Hsieh, Delivering Happiness, New York: Business Plus, 2010.3. Many of the ideas in this chapter were drawn from George S. Day and Christine Moorman,

Strategy from the Outside In, New York: McGraw Hill, 2010 and Christine Moorman andGeorge S. Day, “Organizing for Marketing Excellence,” Journal of Marketing, November 2016,pp. 6–35.

4. Peter Drucker, The Practice of Management, New York: Harper and Row, 1954.5. Ahmet H. Kirca, Satish Jayachandran, and William O. Bearden, “Market Orientation: A Meta-Analytic

Review and Assessment of Its Antecedents and Impact on Performance,” Journal of Marketing, April2005, pp. 24–41.

6. Christian Homburg and Christian Pflesser, “A Multiple-Layer Model of Market-Oriented OrganizationalCulture: Measurement Issues and Performance Outcomes,” Journal of Marketing Research, November2000, pp. 449–462. Gary F. Gebhardt, Gregory S. Carpenter, and John F. Sherry, Jr. (2006), “Creating aMarket Orientation: A Longitudinal, Multifirm, Grounded Analysis of Cultural Transformation,” Journalof Marketing, October 2006, pp. 37–55.

7. George S. Day and Christine Moorman, “Regaining Customer Relevance: The Outside-In Turn-around,” Strategy & Leadership, June 2013, pp. 17–23.

8. A.G. Lafley and Ram Charan, “The Customer is Boss,” The Game-Changer, New York: Crown Business2008.

9. Theodore Levitt, “Marketing Myopia,” Harvard Business Review 38 (July/August 1960): 56.10. Paul Kaihla, “Best Kept Secrets of the World’s Best Companies,” Business 2.0 (3, 2006), p. 94.11. Louis V. Gerstner Jr., Who Says Elephants Can’t Dance, New York: Harper Business, 2002.12. Ron Winslow, “How a Breakthrough Quickly Broke Down for Johnson & Johnson,” Wall Street Journal

(September 18, 1998), p. A1.13. Gebhardt, Carpenter, and Sherry, op cit.14. Son K. Lam, Florian Kraus, and Michael Ahearne, “The Diffusion of Market Orientation Throughout

the Organization: A Social Learning Theory Perspective,” Journal of Marketing, September 2010,pp. 61–79.

Notes 363

15. Kohli, Ajay K. and Bernard J. Jaworski (1990), “Market Orientation: The Construct, ResearchPropositions, and Managerial Implications,” Journal of Marketing, April 1990, pp. 1–18.

16. Kirca, Jayachandran, and Bearden, op cit.17. George S. Day and Paul Schoemaker, Peripheral Vision, Boston: Harvard Business School Press, 2006.18. This part of the chapter draws on David Aaker, Spanning Silos: The New CMO Imperative, Boston:

Harvard Business Press, 2008.19. Based on an interview with Dr. Yanos Michopoulous, Global Leadership Team, Shell International.20. Philip Kotler, Neil Rackham, and Suj Krishnaswamy, “Ending the War Between Sales & Marketing,”

Harvard Business Review, July/August 2006, pp. 1–13.21. Goutam Challagalla, Brian R. Murtha, and Bernard Jaworski (2014), “Marketing Doctrine: A Principles-

based Approach to Guiding Marketing Decision Making in Firms,” Journal of Marketing, July 2014,pp. 4–20.

22. Matt Egan, “5,300 Wells Fargo employees Fired Over 2 Million Phony Accounts,” CNN Money,September 9, 2016, http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/

23. “Wells Fargo’s Phony-Account Scandal, Explained,” The Week, September 17, 2016, http://theweek.com/articles/649015/wells-fargos-phonyaccount-scandal-explained

24. Gail McGovern and John Quelch, “Gary Loveman Interview,” Measuring Marketing Performance,Cambridge, MA: Harvard Business School Publishing, 2007.

25. Beth Comstock, Ranjay Gulati, and Stephen Liguori, “Unleashing the Power of Marketing,” HarvardBusiness Review, October 2010, pp. 90–98.

26. “Beth Comstock: Make Heroes Out of the Failures,” 99U, http://99u.com/videos/7079/Beth-Comstock-Make-Heroes-Out-of-the-Failures

27. Tom Peters, “LEADERSHIP: 4 Most Important Words,” YouTube, August 11, 2010, https://www.youtube.com/watch?v=aOoy7QavONQ

28. Felicitas M. Morhart, Walter Herzog and Torsten Tomczak, “Brand-Specific Leadership: TurningEmployees into Brand Champions,” Journal of Marketing, September 2009, pp. 122–142.

29. Tom J. Brown, John C. Mowen, D. Todd Donovan, and Jane Licata (2002), “The Customer Orientationof Service Workers: Personality Trait Effect on Self- and Supervisor Performance Ratings,” Journal ofMarketing Research, February 2009, pp. 110–119.

30. Alex R. Zablah, George R. Franke, Tom J. Brown, and Darrell E. Bartholomew, “How and When DoesCustomer Orientation Influence Frontline Employee Job Outcomes? A Meta-Analytic Evaluation,”Journal of Marketing, May 2012, pp. 21–40.

31. Steven P. Brown and Son K. Lam, “A Meta-Analysis of Relationships Linking Employee Satisfaction andCustomer Responses,” Journal of Retailing, September 2008, pp. 243–255. Wagner A. Kamakura,Vikas Mittal, Fernando de Rosa, and Jose Afonso Mazzon, “Assessing the Service-Profit Chain,”Marketing Science, Summer 2002, pp. 294–317.

32. Marc Gunther, “Marriot Gets a Wake-Up Call,” Fortune 160 (July 2009), p. 62.33. Marc Gunther, “Marriot Family Values,” Fortune, May 25, 2007, http://archive.fortune.com/2007/05/24/

news/companies/pluggedin_gunther_marriott.fortune/index.htm34. C.C. Miller, “Now at Starbucks: A Rebound,” New York Times, January 21, 2010, B9.35. “About Southwest,” Southwest Airlines, https://www.southwest.com/html/about-southwest/index.html?int

Chapter 171. See discussion in Rajendra Srivastava, Tasadduq A. Shervani, and Liam Fahey, “Market-Based Assets

and Shareholder Value: A Framework for Analysis,” Journal of Marketing, January 1998, pp. 5–6.2. George S. Day and Christine Moorman, Strategy from the Outside In, New York: McGraw Hill, 2010,

pp. 135–139.

364 Notes

3. “USAA Auto Insurance Reviews,” The Planned Life, http://www.theplannedlife.com/insurance/auto-usaa.htm. Jeremy Hope and Tony Hope, Competing in the Third Wave: The Ten Key Management Issuesof the Information Age, Boston, MA: Harvard Business School Press, 1997.

4. Lawrence F. Feick and Linda L. Price, “The Market Maven: A Diffuser of Marketplace Information,”Journal of Marketing, January 1987, pp. 83–97.

5. “2016 B2C Net Promoter Benchmarks,” Net Promotor Network, https://www.netpromoter.com/2016-nps-benchmarks/

6. Frederick F. Reichheld, “The One Number You Need to Grow,” Harvard Business Review, December2003, pp. 1–9.

7. John Gerzema and Ed Lebar, “The Trouble with Brands,” Strategy + Business, Summer 2009,pp. 48–57.

8. Frank Cespedes and V. Kasturi Rangan, “Becton Dickinson & Company: VACUTAINER SystemsDivision (Condensed),” Harvard Business School Case 9-592-037, Cambridge, MA: Harvard BusinessSchool, 1991.

9. Claes Fornell, Forrester V. Morgeson III, and G. Tomas M. Hult, “Stock Returns on CustomerSatisfaction Do Beat the Market: Gauging the Effect of a Marketing Intangible,” Journal of Marketing,September 2016, pp. 92–107.

10. Ron Amadeo, “The Google Pixel: A Nine Month Dash to Model an HTC Phone into a Google Product,”ArsTechnica,October24,2016,http://arstechnica.com/gadgets/2016/10/the-google-pixel-a-nine-month-dash-to-mold-an-htc-phone-into-a-google-product/

11. Nader T. Tavassoli, Alina Sorescu, and Rajesh Chandy (2014), “Employee-based Brand Equity: WhyFirms with Strong Brands Pay Their Executives Less,” Journal of Marketing Research, December 2014,pp. 676–690.

12. Eugene W. Anderson and Sattar A. Mansi, “Does Customer Satisfaction Matter to Investors,” Journal ofMarketing Research, October 2009, pp. 403–414.

13. Sunil Gupta, Donald R. Lehmann, and Jennifer Ames Stuart, “Valuing Customers,” Journal ofMarketing Research, February 2004, pp. 7–18.

14. LeylandPAM, “Warren Buffett speaks with Florida University,” YouTube, July 2, 2013, https://www.youtube.com/watch?v=2MHIcabnjrA

15. “About Us,” Linkedin, https://press.linkedin.com/about-linkedin16. Gupta, Lehmann, and Stuart, op cit.17. Sarah Frier and Adam Satariano, “Microsoft Pays $26 Billion for LinkedIn in Biggest Deal Yet,”

Bloomberg Technology, June 13, 2016, https://www.bloomberg.com/news/articles/2016-06-13/microsoft-to-buy-linkedin-in-deal-valued-at-26-2-billion-ipe079k9

18. Thomas H. Davenport, “7 Ways Microsoft Can Make LinkedIn Worth $26 Billion,” Harvard BusinessReview Blog, June 13, 2016, https://hbr.org/2016/06/7-ways-microsoft-can-make-linkedin-worth-26-billion

19. “About Twitch,” Twitch, https://www.twitch.tv/p/about20. David Carr, “Amazon Bets on Content in Deal for Twitch,” The New York Times, August 31, 2014, http://

www.nytimes.com/2014/09/01/business/media/amazons-bet-on-content-in-a-hub-for-gamers.html?_r=021. Laura Prudom, “Game of Thrones Season 6 Finale Ratings Hit Series High,” Variety, June 28, 2016,

http://variety.com/2016/tv/ratings/game-of-thrones-ratings-season-6-finale-record-1201805035/22. Adam Satariano and Brad Stone, “Amazon Bets on Game Website Twitch in $970 Million Deal,”

Bloomberg, August 26, 2014, https://www.bloomberg.com/news/articles/2014-08-25/amazon-buying-gamer-website-twitch-for-1-billion

23. Eugene Kim, “Amazon Just Made Thousands of Books Free for Its Prime Members – Here’s a SimpleReason Why,” Business Insider, October 5, 2016, http://www.businessinsider.com/amazon-prime-members-spend-a-lot-more-than-non-prime-members-2016-10

Notes 365

24. Sarah Gordon, “Virgin Group: Brand it like Branson,” Financial Times, November 5, 2014, https://www.ft.com/content/4d4fb05e-64cd-11e4-bb43-00144feabdc0

25. Sean Stonefield, “The 10 Most Valuable Trademarks,” Forbes, June 15, 2011, http://www.forbes.com/sites/seanstonefield/2011/06/15/the-10-most-valuable-trademarks/#7b8a43a41c29

26. Adi Ignatius, “Jeff Bezos on Leading for the Long-Term at Amazon,” Harvard Business Review,January 2013, https://hbr.org/2013/01/jeff-bezos-on-leading-for-the.html

366 Notes

I N D E X

Aacquisitions for leveraging a business,

215actual and potential market

potential market, 62substantial business, 62

Acura, 107Adidas, 26, 184, 204advantages. See also leveraging the

business; sustainable competitivecost advantage, 248, 251, 257, 267innovator’s advantage, 234–236

affinity charts, 29Aflac, 206aggregate impact, 28Airbnb, 85, 99–100, 181, 201, 257airline industry, 25, 29, 32, 42, 98, 296Aldi, 107, 188Align brand identity, 174alliance partners, 259–263alternative value propositions (AVPs).

See also scale economiesperformance value, 104–107price value, 107–108relational value, 108–110

Amazon, 63, 283, 286breadth of product line, 167competing against Amazon,

326–328customer-centric culture, 286customer relationships, 8early positioning, 167failure to brand customer reviews,

196–197growth into new categories, 69long-term, 314niche marketing, 63One-Click, 196ordering process as value added

component, 50purchase of Twitch, 313scope of, 6synergies, 117value proposition of, 7

American Can Company, 274

American Express, 140, 141, 155,173, 191

Ampex video recorders, 235analysis outputs. See also external

analysis; internal analysis;opportunities

competitive strength grid, 52–55overview, 11scenario analysis, 21, 22, 349

Annie Chun, 220, 241annual strategic plan. See also

business strategiesanthropological research, 34, 239Apple

building a valuable brand, 317–319competing with General Motors,

117customer experience, 130design, 50, 130, 231doctrine, 291innovation, 241, 242iPhone, 197, 234iPod, 196, 198logo, 187Macintosh, 241Newton’s failure, 73ordering process as value added

component, 50scope of, 6self-expressive benefit, 188Steve Jobs, 207store, 201user group, 82value proposition of, 7

App Store, 78, 319Aquafina, 98, 111Ariat, 31Arm & Hammer, 27, 209, 219Asahi Dry Beer, 232, 235, 238Asea Brown Boveri, 110aspirational association, 172asset leverage, 236assets and competencies. See also

brand assets; relevant assetsand competencies

of competitors, 49, 50, 342identifying for leveraging, 215and innovation evaluation, 241key success factors, 70–71overview, 7–8protecting during strategic

alliances, 261, 262and strategic imperative, 174

assets and liabilities, 163. See alsobrand

associations, 170, 171. See also brandassociations

automobile industry4-wheel drive offerings, 197luxury car market competitor

strength grid, 52–54as powerful customer for tire

companies, 68relevance concept, 61transformational innovations in, 84

aviation industry, 28Avon, 183, 185, 206, 207, 221, 257Avon Breast Cancer Crusade,

206, 207

BB2B (business-to-business)

experience, 72backward integration, 44Bain & Company, 269Balance bar, 41, 320Banana Republic, 26, 36, 173Bank of America, 41, 52, 226,

245, 263Barbie, 169, 226barriers to success, 235. See entry

barriers; exit barriersBaskin–Robbins, 254Bausch & Lomb, 7Bayer, 239Beiersdorf, 26benefits from product segmentation

variables, 25Best Buy, 73Betty Crocker, 36, 181, 239

367

biases inhibiting new businesscreation, 242–243

big data trends, 83Birkins, 105Black & Decker, 35, 97, 167, 215, 216BMW, 24, 53, 54, 82, 87, 105, 162,

173, 187, 201, 232Boston Consulting Group (BCG),

267, 268BP, 253brand. See also brand strategy

business strategy and, 162, 175, 267Gallo of Sonoma market strategy,

13local heritage, 256marketing and, 200–207overbranding, 275standardization vs. customization,

253–257strategic alliances for gaining access

to, 260–261subbrands, 275, 278

brand analysis, 255–257brand architecture. See also assets and

competencies; brand equitybrand awareness, 163–164leveraging, 215, 216

brand assets, 15, 86, 162, 168, 200,216, 236, 311, 313–314, 329–331

Brand Asset Valuator (Young &Rubicam), 86, 200

brand associationsbrand personality, 45, 168, 187contemporary, 167–168emotional benefits, 172, 187–188the experience, 195–196global, 250organizational intangibles, 166overview, 165product category, 166self-expressive benefits, 173

brand awareness, 148, 162–164brand descriptor roles, 278branded CEOs, 207branded differentiators, 198–199,

202, 203branded energizers, 202–203branded promotional activities, 205branded social programs, 206–207branded sponsorships, 203–204brand endorsers, 204–205brand equity, 162–176

brand add value, 218–219brand awareness, 163–164brand fit new product, 218

brand identity, 171–176, 217brand personality, 168brand position, 196–198, 256brand salience, 163extension and brand name, 219and goodwill, 303impact on firm revenues, 304–307impact on firm value, 307–311intangible marketing assets, 304and Dove, 329overview, 162

brand essence, 173brand extension logic, 217brand extensions for leveraging the

business, 216–219brand/firm associations, 334, 335brand identity, 171–176, 217brand image, 52, 130, 134, 162, 167,

171, 217, 255, 269, 292, 294,318, 334

BrandJapan, 47brand loyalty

as aspect of brand equity, 164and customers, 26, 27, 52, 164loyalty matrix, 26, 27

brand management, global, 256, 263brand managers, 254, 290brand personality, 45, 166, 168brand portfolio, 275–280brand position, 175–176, 198–200,

259brand proliferation, 266brand relevance, 231brand salience, 163brand strategy

brand identity, 171–176brand personality, 168and business strategy, 267and relevance, 61

brand-use associations, 40–42Branson, Richard, 169, 201, 207British Airway, 170Budweiser, 43, 52Buick, 25, 27, 276building and managing customer

relationshipscustomer decision journey,

122–128improving customer experience,

135–137long-term customer relationships,

138–142measuring customer experience,

133–135Burger Chef, 224

Burger King, 26business and technology trendsbig data, 83cultivating vigilance, 88economic trends, 87–88government/policy trends, 86–87innovations, 83–84sustainable businesses, 85–86workplace, 84–85

businessesand competitor analysis, 44–46,

51, 52and innovation, 2intangible benefits, 171limitations and high-growth market

risks, 71–75overview, 3–4position and divestiture decision,

269, 270prospects and brand value, 277

business modelelements, 116value-capture mechanisms, 116value-creating system, 115

the business portfolio, 266, 268, 275,348

business strategiesand brand, 162, 267contingency plans, 92and core identity, 172–173criteria for selecting, 9–10decentralization model, 2,

273, 274and divestment or liquidation

decision, 269–272functional strategies and programs,

3–4, 8–10and global footprint, 249, 257–259,

263indications of need for global

strategies, 250, 251and innovation evaluation, 242milking cash cows, 272–274, 278,

280, 281overview, 3–11, 15product-market investment

strategy, 350ROI considerations, 9, 241and strategic market management

system, 10–14strategic uncertainties and, 21

business-to-business (B2B)exchanges, 72

business units. See silo unitsBusiness Week, 73

368 Index

buyer hot buttons, 30buyer sophistication, 65

CCadillac, 54, 196, 231Caesars Entertainment Corporation,

292Campbell Soup, 28, 44, 255Canon, 234, 241, 254capital, 21, 45, 51Cardinal Health, 220cash cows or milking strategy,

272–275, 279category perceptions, managing,

236–237Caterpillar, 50, 52, 195, 252CD sales, 73cement market, 65Cemex, 239Centurion Industries, 279, 280CEOs, branded, 207channel barriers, 42, 43channels of distribution, 69Charles Schwab, 62, 138, 211,

232, 305Chase Manhattan, 208Chase & Sanborn, 273Chevrolet, 27, 167, 231, 276Chevron, 62, 139, 198, 289Chief Marketing Officer (CMO), 3,

14, 162, 293China, marketing in, 259Chipotle Mexican Grill, 65Christensen, Clayton, 240Chrysler, 207, 231–233, 260Chux disposable diapers, 235Circuit City, 26Cirque du Soleil, 84, 230–232,

242Cisco, 40, 84CitiGroup, 167Clairol, 223Clarke American Checks, 220Clif, 41, 42, 320Clinique, 126, 127, 209Clorox, 46, 120, 163CNN, 41, 56, 168Coach, 219Coca-Cola

“American” position of brands, 254brand energy, 201global brand building, 250, 251Global Water Initiative, 89–90in India, 258moats, 310

partner with World WildlifeFoundation, 182–183

share of wallet, 305size curse of, 243

Coca Cola Company, 89–90, 98, 111coffee competitors, 41Colgate’s Total, 195collectivism trend, 80Comcast, 113commitment curse, 243communication, 198, 207, 209communication modalities, 225companion products, 218company performance

customer and brand equity impact,304–307

how markets value marketingassets, 311–314

managing marketing firm value,314–315

marketing assets effect, 307–311competencies. See assets and

competenciescompetition. See also competitor

analysis; competitors; sustainablecompetitive advantage

brand loyalty as buffer, 164, 165from existing competitors, 62–63and market selection in global

arena, 258from potential competitors, 67overcrowding, 71–72, 74superior competitive entry, 72vulnerability to innovation, 165,

218competitive intensity and divestment

decision, 269competitive risks in high-growth

markets, 71–74competitive strength grid, 52–54

analysis process, 54analyzing submarkets, 54luxury car market, 52–54

competitor actions model, 44–49competitor analysis, 39–55

assessing strengths and weaknesses,48–52

brand identity, 171–176and business portfolio, 267, 268competitive strength grid, 52–54competitor identification, 40–43Nintendo’s success with, 47, 48obtaining information on

competitors, 55overview, 12, 39, 40, 55

planning form, 338–342potential future competitors, 44understanding competitors, 44–49underestimating quantity and

commitment, 72competitorsand business strategy, 4–7and cross-subsidization threat, 252and loyalty matrix, 27and market profitability, 66major competitor planning form,

340, 341primary vs. indirect, 41, 42strength grid, 342understanding your, 44–49

Comstock, Beth, 293confirmation bias, 271, 272Consumer Reports, 325contemporary art price premiums,

188contemporary brand associations,

167–168contingency plans, 92convenience shoppers, 28Coppertone, 218core business and stand-alone

innovative entity, 243, 244core identity, 172–173corporate brand and silos, 13, 14cost advantageand market-share dimension, 267,

268sources of, 215, 249, 251, 252, 258and superiority, 51

cost of maintaining unprofitablebusiness units, 269, 271

cost structure, 46, 68–69, 344Courtyard by Marriott, 219Crayola, 163creating new businesses, 230–244arenas for, 231, 237from ideas to market, 242–244managing category perceptions,

236–237overview, 230

creating strategic synergies, 116–117creating valuable customerscustomer lifetime models, 152–157customers as valuable assets, 157pitfalls in funnel management,

150–152purchase funnel, 147–150

creative external analysis, 22creative thinking methods, 199–200credible brand positions, 176

Index 369

Credit Swiss, 204Crest, 6, 166, 186, 206critical mass in global arena, 258, 259CRM. See customer relationship

managementcross-market exposures, 253cross-subsidization, 252Crystal Pepsi, 224CT scanner industry, 50cultural trends (social), 80–82, 256culture (business)

and brand equity, 165, 175and competitor analysis, 45, 46, 51core identity as reflection of,

172–173customer-centric, 284–286entrepreneurial, 52frugal, 107synergies, 225culture (global strategies), 257,

259, 262current strategies and competitor

analysis, 45, 46curse of success, 243, 245customer analysis, 23–35

brand identity, 171–176buyer hot buttons, 30consumer motivations, 28–31, 35and cultural trends, 80–82customer use experience, 220overview, 12, 23, 24planning form, 337, 338segmentation strategies, 23, 204unmet needs, 31–35, 239

customer-centric approach, 283customer-centric competencies,

286–288customer centricity, 283–285

customer-centric organizationalcultures, 284–286

customer-centric structure,288–291

customer-centric talent, 294–296leading for, 292–294metrics and incentives for, 291–292

customer-centric organizationalcultures

building and sustaining, 285–286traits of, 284–285

customer-centric organizationalstructure

centralize selectively, 291silos, 288–291managing structure to span silos,

289–291

customer-centric talentalign internal and external brand,

296customer value, 294–295educate employees on customer

requirements, 295employee and customer

satisfaction, 294empower employees, 295–296hire customer-oriented employees,

294customer characteristics approach to

segmentation, 24, 204customer decision journey

complex nature of, 124–127consideration set, 125core elements of, 122–123information gathering, 125managing the, 127–128post-purchase, 126preference, 125purchase, 125skincare, 126–127trigger, 124–125

customer-driven idea Web sites, 33customer equity

definition, 146erosion, 285impact on firm revenues, 304–305impact on firm value, 307–311intangible marketing asset, 304

customer experience manageby brand or its partners, 131controlled by the customer, 132different meanings of, 128–129factors affecting, 129–130GE power systems, 130–131office depot’s customer experience

turnaround, 131social/external sources control,

132–133strategic importance of, 129

customer lifetime modelsaccount for and facilitate customer

transitions, 154–155acquisition cost expenditures, 157assign marketing costs, 156customer management and

acquisition, 153–154general approaches, 152–153invest in prospects, 156–157by lowering acquisition costs, 155missing individual data, 155need to account for when money

arrives, 155

predict and mitigate churn, 154typical customer is active,

155–156customer orientation, 3, 51, 52customer relationship management

(CRM), 109, 238customer decision journey,

122–128improving customer experience,

135–137long-term customer relationships,

138–142measuring customer experience,

133–135customer relationshipsbuy new offerings, 305endorse the firm, 305greater share of wallet, 305lower defection rates, 304

customersas active partners, 31–34and branded social programs, 207and brand loyalty, 26, 27, 52for competitor identification,

40–42and customer trends, 240existing usage of, 208–211involving in brand energizing, 201low-end market, 240power superior to seller’s, 67–68priorities of, 31satisfaction and loyalty of, 334sophistication and knowledge of, 65

customer servicebranded differentiators, 198–199innovation in, 167–168type of performance value,

104–107customers valuable assets, 157customer value, 294–295customer value leadershipbusiness model, 114changing market realities, 117–118creating strategic synergies,

116–117evolving value propositions,

113–114managing for, 114monitoring morphing market

boundaries, 117parity performance, 111points of difference, 112points of parity, 112tradeoffs, 114workplace communications, 113

370 Index

customer value propositionsidentifying motivations central to,

29, 30marketing role in determining, 14overview, 7and submarket growth, 65

customized products and brands inglobal arena, 254–257

DDaimler-Benz, 255Darn Tough, 105Dasani, 98, 111Datsun, 163Day, George, 241–242DDB Needham’s Sponsor-Watch,

204DeBeers, 181, 253decentralization model, 2, 273, 275.

See also silo unitsdecision-driven scenarios, 93defensive strategies, 44Dell Computer

brand image and distribution,51, 52

business model, 84call center as value added

component, 50direct sales model, 43Ideastorm Web site for customers,

33Del Monte, 339demographic data, 25, 346demographics, defining segments, 25demographic trends, 79–80Denny’s, 201descriptor roles for brands, 278design and manufacturing skills, 216design quality, 105digital, see best digital practice

examples in each chaptercommunity, 182impact on competitive

threats, 117health, 322Lincoln campaign, 54marketing skills and competences,

2, 314photography, 88platform at the XO Group, 154technologies for customer

relationship management, 109,157

differential value proposition (DVP)System, 293

differentiationbranded differentiators, 198–199,

202, 203and brand position, 198–199, 202,

203core identity, 172–173as entry barrier, 67failure to utilize opportunities,

196–197in global markets, 257–259and low cost, 230–232price pressure from lack of, 65, 67and profitability analysis, 67and trends vs. fads, 69, 70

Direct2Dell blog, 182direct vs. indirect competitors, 41, 42discounted cash flow (DCF) model,

152, 307, 314, 317Disney

diversification of, 51, 52leveraging brand, 117, 216–219service delivery capability, 95

distribution constraints, 74distribution systems, 69

constraints of, 74as entry barrier, 67and expansion into new market

segments, 221and global strategies, 254and market/submarket analysis, 69planning form for market analysis,

344–345utilizing excess capacity, 216

diversification, 6, 48, 51, 52divestment or liquidation decision,

269–272, 280, 281Dollar Shave Club (DSC), 96Dometic, 220, 221dominant brands, 163Dove brand (Unilever), 253, 329–331Dow, 32, 200, 289Dow Chemical, 289downhill skis, 22driving forces. See also motivations

brand recall, 209, 277global vs. local share, 258identifying, 63product-driven growth, 207, 208scale economies, 263for strategic repositioning, 195, 196trends drivers, 70, 169

Drucker, Peter, 6, 70, 96, 272, 283,284

dual organizations, 244durable goods forecasts, 64

Duracell, 8, 203dynamic markets. See market

dynamics

EEAS, the vitamin supplement, 222eBay, 50, 63, 224, 235, 238e-commerce, 224economic recessions, 87–88economies of scale. See scale

economiesEddie Bauer Edition Ford Explorer,

199Elastic Compute Cloud (EC2), 117emerging key success factors, 70emerging market, owning, 236emerging submarkets, 60–62, 343emotional attachment to business

unit, 46, 47emotional benefits and unmet needs,

172employeesand customer satisfaction, 294educate employees on customer

requirements, 295empower employees, 295–296hire customer-oriented employees,

294empower employees, 295–296Endless Waters, 111endorsed brands, 219endorsers, 204–205Energizer bunny, 203energizing the business, 194–211branded energizers, 202–203energizing the brand and

marketing, 200–207innovating the offering,

195–199overview, 194–195, 210–211

energy bar market, 41–42,320–321

Enterprise Rent-A-Car, 230enthusiastic shoppers, 28entrepreneurial culture, 51, 52entry barriersassets and competencies, 50channel barriers, 43and competitive overcrowding,

71, 72in global arena, 258loyalty of existing customers,

164–165overview, 67and trends vs. fads, 69–70

Index 371

environmental analysis, 11, 12, 79–88.See also future environment;trends

cultural trends, 80–82customer trends, 79demographic trends, 79–80economic trends, 87–88and government regulations, 86–87impact analysis of strategic

uncertainties, 91, 92planning form, 346–347scenario analysis, 347sustainability, 82

Ernhart, 215–216escalation of commitment bias, 271ethnographic research, 33–35evaluation of brands, 276, 277evaluation of major innovations, 241Evian, 187, 248excess capacity of assets, 215execution of strategic alliances,

261–262executives surveyed on strategies, 14exit barriers, 43, 45, 47, 48, 50, 260,

270–272Expedia, 113extended identity, 172external analysis, 19–35

defining the market, 22global focus, 248–249objectives, 19, 20overview, 11–12, 19, 20, 22–23, 35strategic uncertainties, 19–22, 89,

347timing of, 23

external energizer brands, 203

Ffads vs. trends, 69–70fashion quality, 105fatal biases inhibiting new business

creation, 242FedEx, 50, 67, 223, 326femininity trend, 80Ferragamo, 106Fiat, 260Fidelity Investments, 109Fidelity Private Wealth Management,

109financial performance. See also

investment decisionsoverview, 332profitability, 44, 277, 333sales and market share, 332–333sales patterns and forecasts, 64

shareholder value, 333–334financial projections, 349, 351financing and access to capital, 51firm revenues, brand impact

bigger growth options, 306increased brand consideration,

305–306pay price premiums, 306purchase, 306stronger endorsements, 306

firm revenues, customer relationshipsbuy new offerings, 305endorse the firm, 305greater share of wallet, 305lower defection rates, 304

firm revenues, marketing assetsacquire customers, lower marketing

expenditures, 309better human capital, 309brand assets and licensing,

313–314faster brand retrieval, 308faster cash flows, 307–308faster purchase decision, 308faster response to marketing

spending, 308firm acquisitions, 313higher cash flows, 308–310high-growth companies, 311–313larger relationship investments,

309–310lower costs of debt, 309lower employee pay, 309lower marketing research, 309new product development costs,

309fixed-cost industries, 67focus strategy. See also alternative

value propositions; customervalue propositions

Ford, Henry, 34Ford Motor Co.

business units, 4, 8Eddie Bauer Edition of Explorer,

199envisioning the mass market, 235Galaxy in Europe, 239, 255

forecastingdemand, 73and economic recessions, 87and government regulations, 86–87growth, 64and incremental innovation, 83and reaction strategies, 92technology, 91

forecasting market growthdemographic data, 64sales of related equipment, 64

Fortune, 73forward integration, 44frugal shoppers, 28Frito-Lay, 62, 67, 295, 334functional quality, 105functional strategies and programs,

8–9funnel management pitfallsattract enough leads, 151attracting poor quality leads, 150link funnel problems to their

causes, 151optimize through experimentation,

151sales and marketing to work

together, 151future environment. See also

environmental analysisdriving force identification, 63–64key success factors, 345potential competitors, 44–49and strategic uncertainties, 21, 22

future events, 19, 20, 43, 347. See alsoforecasting

GGalaxy in Europe, 255Gallo of Sonoma brand, 13Gap, 26Gates, Bill, 234GE Money, 291General Electric (GE)breakthrough innovations, 244creating new business, 237and CT scanner industry, 50divestment decisions, 269ethnographic research, 35geographic expansion, 221GE Profile subbrand, 219GE’s decision, 97global trickle down innovation, 251leading innovation, 293managing customer experiences,

130–131market attractiveness/business

position matrix, 268net promoter, 305organizational culture, 244portfolio model, 268scope of, 6selling of small-appliance division,

97, 271

372 Index

size curse of, 243successful diversification, 51, 52synergy, 116technology breakthrough ideas,

237, 238turbine research, 216visibility of, 164

General Foods, 273General Mills, 210General Motors, 117, 283

backward integration strategy, 44multiple segments strategy, 28OnStar, 199restructuring of, 266, 267strategic alliances, 260, 261

generic positions in advertising, 254geographic expansion, 221geographic focus strategy, 27German brand Gerolsteiner, 112Germany, Wal-Mart’s failure in, 258Gerstner, Lou, 6, 285Gillette, 6, 8, 62, 96, 187Givenchy, 106global brand associations, 250global brand leadership, 256Globalization of markets (Levitt), 253global, see best global practice

examples in each chapterexpanding the global footprint,

257–259marketing management, 262motivations behind, 249–252overview, 194–195, 248, 249, 263standardization vs. customization,

253–257strategic alliances, 259–262strategies, 248–263

Gold Violin, 25Google, 63, 88green movement/trend, 82, 85growth. See also energizing the

businessand competitor analysis, 44divestiture program in support of,

269–272and market analysis, 343market growth-based shakeouts

and price wars, 73options and marketing assets, 306overview, 194–195stall points vs., 240, 241sustainable growth performance,

222–224growth platform development, 2–3growth rate, 63–65, 71,

growth-share matrix, 267growth strategy, 14, 160, 273

HHaas School of Business at UC

Berkeley, 173habit and brand loyalty, 164Halberstam, David, 39Hallmark, 168, 187, 326, 338Harley-Davidson, 82, 183, 184, 188,

202, 254healthy eating trend, 256healthy refreshment beverages

(HRBs), 240heavy users, 48, 208Heineken, 253, 254Hermes, 105Hertz, 225, 230Hewlett Packard, 111, 294high-growth companies, 311–313high-growth markets risks

competitive overcrowding, 71–72distribution constraints, 74market growth disappointment, 73price instability, 73–74resource constraints, 74

Hill’s Petfood, 42, 343Hippel, Eric von, 32historical data and growth forecasts,

64hold strategy, 272, 274, 275Home Depot, 7, 185, 206, 207, 269Honda, 24, 25, 72, 127, 175, 255hot buttons, 30, 36How to Grow When Markets Don’t

(Slywotsky and Wise), 220HRBs. See healthy refreshment

beverages (HRBs)hybrid submarket, 61Hyundai, 50, 54, 173, 209

IIacocca, Lee, 207Iams Company, 42IBM

ad agency consolidation, 254brand, 218–219geographic expansion, 257Gerstner and, 6product-market investment

strategy, 6as trend driver, 196user-developed products, 32

ideal brand, 190ideal experience, 35

ideas to market, 242–244Ideastorm Web site (Dell), 33Ikea, 107–108, 176, 233image and positioning strategy, 45–46immediacy of strategic uncertainties,

92impact analysis, 89–92impact of innovations, 83–84impact of new technologies, 268impact of strategic uncertainties, 91improving customer experiencechannel challenges, 137evaluation and improvement

process, 135maintain a customer focus, 135manage the extended delivery

network, 137incentives. See rewards and incentivesincremental innovations, 83–84, 233,

234incumbent curse, 243, 245incumbent firms. See also businessesdivestiture or liquidation process

bias, 269–270making new businesses viable,

242–244need for energy, 200new business development bias,

234–236, 242–244strategic stubbornness, 84

indirect vs. primary competitors,41–42

individualism trend, 80indulgences trend, 80industrial firms, 70industry economies, 248–249industry mobility, 49, 50. See also

barriers to successinformation sources, competitor, 55innovation quality, 105innovationsadvantages, 234–236and branded differentiators,

198–199, 202, 203branding innovations, 198as competitor strength, 49, 50creating new business arenas,

237–242creative thinking methods, 199–200Drucker’s do’s and don’ts, 237employees as source of, 164evaluating potential of, 233–234global influence, 250from ideas to market, 242–244incremental, 83–84

Index 373

innovations (Continued)low-end disruptive innovations,

240–241managing category perceptions,

236–237overview, 2, 195–196perceived innovativeness, 236performance analysis of, 337relentless leadership for,

235–236and silos, 242–243substantial, 83–84transformational, 83–84types of, 83–84vulnerability to innovations of

competitors, 165–166intangible benefits, 167intangible marketing assets

create company value, 312vs. tangible assets, 304

Intel, 34, 163, 266, 272Intel Americas, 108, 114Intel Inside brand, 163internal analysis. See also

performance analysisbrand identity, 171–176identifying assets and competencies

for leveraging, 222–224overview, 12planning form, 347–349strategic options, 11, 248strategy development, 96–97

International Harvester, 271Internet, 78, 82, 83, 95, 96

B2B dot-com experience, 72channel barriers and e-marketing, 43customer-driven idea web sites, 33customer segments, 28–29and maturiteen male segment, 26web sites, 63

Internet bubble, 67, 71Internet sales. See Amazon; Dell

Computerinterviewing customers, 29, 30Intuit, 33investment decisions. See also

financial performancebusiness units as a portfolio

approach, 266–268and future direction, 7and niche segments, 62product-market investment

strategy, 350investment mindset, 293Irma Zandl, 70

JJaguar, 24, 168, 281Jamba Juice, 221Japan, 39, 47, 53, 231, 252, 254–257Jell-O, 163, 209J. I. Case, 271Jim Lecinski, 125Jobs, Steve, 207, 234, 317, 318John Deere, 168, 200, 220, 271Johnson & Johnson (J&J), 88,

221, 285Joie de Vivre, 168, 177joint ventures, 260–262

KKao Corporation, 50Kelleher, Herb, 207key strategic assets. See assets and

competencies; brand assetskey success factors (KSFs)

employee attitudes, 337and external analysis, 23and market analysis, 59and market trends, 71–74overview, 70–71planning form for market analysis,

345and segmentation strategy, 23shift from product to processtechnology, 72–73and strategic alliances, 259–262and strategy development,

96–97KFC, 88, 169, 221, 254KitchenAid, 63KLM Cargo’s Fresh Partners

Initiatives, 238–239Kmart, 176knowledge hubs, 295knowledge-sharing sessions, 295Kodak, 61, 88, 118, 235, 241Kraft, 205, 210KSFs. See key success factors

LLafley, A.G., 284Lane Bryant, 167lateral thinking, 200layered analysis, 22lead countries in global strategy, 254leading indicators of market sales, 64lead users, 32–33The Learning Company, 226L’eggs, 235Lenox, 217

leveraging a brand asset casechallenge, 329–331

leveraging the business, 214–226brand extensions, 216–220core business, 222–223evaluating your options, 222–224expanding the scope of the

offering, 220–221and global strategies, 248identifying assets and competency

for leveraging, 215–216new business and market leader,

223–224overview, 194–195, 214–215product market, 222strategy, 224synergy and, 224–226

leveraging to achieve synergy, 260Levi’s, 26, 187, 253, 254Levitt, Theodore, 5, 10, 284Lexus, 25, 54, 173, 188, 232, 239Lincoln, 54line extensions, 195–196LinkedIn’s greatest assets, 316liquidation or divestment decision,

269–272L.L. Bean, 169, 245, 338local celebration trend, 82The Long Tail (Anderson), 63long-term customer relationshipsattitudinal loyalty, 138build habit, 140company credit, 139connect the product or service

performance, 139create multiple relationships, 142deepen commitment, 140defend the, 141differentiate value, 141foster customer co-creation, 142grant exclusivity, 142impact on firm revenues, 304–305impact on firm value, 307–311and impact on firm revenuesincrease investments in customers,

141raise customer switching costs, 140rebuff competitor challenges, 141refresh the relationship, 142remember the need and offering,

139–140resolve need for variety, 141satisfy the customer with an

offering, 139long-term orientation trend, 80

374 Index

Lovemen, Gary, 295low-cost labor or materials and global

strategies, 251low-cost production, 43, 72low-end disruptive innovations, 240,

241Lowe’s, 7low-involvement products, 163loyalty matrix, 26–27. See also brand

loyaltyLuna bar, 42, 231, 239, 320, 321luxury car market competitor strength

grid, 52–54Lycra, 254

MMacy’s, 26male shoppers, 26, 36management. See also marketing

as competitor strength, 50–52and divestiture or liquidation

decision, 269–272marketing management, 262utilizing for competitor analysis, 55

manager/employee capability andperformance, 337

managing category perceptions,236–237

managing customer experienceby brand or its partners, 131controlled by the customer, 132different meanings of, 128–129factors affecting, 129–130GE power systems, 130–131office depot’s customer experience

turnaround, 131social/external sources control,

132–133strategic importance of, 129

managing marketing, firm valuefoster strong marketing

competencies, 314long-term, 314–315

manufacturing, 51, 52market. See also market position; new

markets; submarket analysiscoping strategy for contradictory

claims, 196core identity, 172–173declining demand and divestiture

decision, 271defining the market, 22growth-based shakeouts and price

wars, 73from ideas to, 242–244

and innovation evaluation, 241–242overcrowding in, 71, 74owning emerging markets, 236price instability, 73–74selection, basic dimensions, 258straegically important, 252and submarket profitability analysis,

65–68market and submarket growth

forecasting growth, 64identifying driving forces, 63–64

market and submarket profitabilityanalysis

change in technology, 73cost structure, 68–69customer power, 67–68existing competitors, 67Porter’s Five-Factor Model, 66–67potential competitors, 67substitute products, 67supplier power, 68

market changes and high-growthmarket risks, 71–73

market demand and divestmentdecision, 269

market dynamicsand business strategy, 10–14innovation requirement, 242–244plan requirements, 1–3and relevance concept, 61understanding, 61

market expansion, 6, 44market growth disappointment, 73marketing

and growth strategy, 14and strategic management, 14–15

marketing assets and competencies,10, 15

marketing assets in firm valueacquire customers, lower marketing

expenditures, 309better human capital, 309brand assets and licensing, 313–314faster brand retrieval, 308faster cash flows, 307–308faster purchase decision, 308faster response to marketing

spending, 308firm acquisitions, 313higher cash flows, 308–310high-growth companies, 311–313larger relationship investments,

309–310lower costs of debt, 309lower employee pay, 309

lower marketing research, 309new product development costs,

309marketing doctrine, 291marketing management, 262“marketing myopia” (Levitt), 10marketing–sales alignment, 290–291marketing skills and leveraging the

business, 215marketing strategy, 10, 14–15market positionbrand position, 232, 249, 251and divestiture decision, 270market attractiveness/business

position matrix, 268and sustainable competitive

advantage, 52market realities changes, 117–118market sales forecasts, 64market selection in global arena,

258–259market/submarket analysis, 59–74cost structure, 47dimensions, 59–60emerging submarkets, 60–62market trends and distributive

systems, 60profitability and cost structure, 60size and growth, 60

market trends. See also trendsvs. fads, 69–70

Marks & Spencer, 258Marriott, 35, 87, 166, 219, 220Marriott Hotels, 115, 294Mars, 42, 264, 340, 343, 344masculinity trend, 80MasterCard, 52Maturiteen male segment, 26maturity and decline of market

sales, 65Maytag, 205Mazda, 232, 260McDonaldscompeting with Starbucks, 41expansion, 253Ronald McDonald House, 203, 207

McElhaney, Kellie, 206McKinsey, 14, 124, 126, 136, 168,

233, 268, 307measuring customer experienceattribution models, 134customer journey analysis, 134–135mobile technology, 133–134service blueprinting, 133SERVQUAL, 133

Index 375

Medtronic, 105, 283, 285memorable branded symbols,

205–206Me Nation trend, 81Mercedes, 98, 127, 204, 254, 266mergers of competitors, 44merging brands, 277MetLife and Peanuts characters, 203,

205, 206Metrosexual male segment, 26Michelin, 205, 252Microsoft, 8, 48, 62, 191, 196, 207,

224, 234, 281, 313, 316Microsoft Office, 8, 188milking strategy or cash cows, 266,

267, 272–274mobile technologies, 78, 133–134,

136mobility barrier concept, 43Montblanc, 254morphing market boundaries, 117motivation analysis, 29, 35motivations

and competitor analysis, 44customer analysis for determining,

23for global strategies, 248–252key customer motivation strategy,

50of offshore firms, 261planning form, 337scale economies, 248

MTV, 253Muji, 106, 201, 233multiple brand identities, 175multiple businesses, 2multiple segments vs. a focus strategy,

27–28myopic product focus, 10My Tribe trend, 82

Nname dominance, 163national investment incentives and

global strategy, 251–252Neiman Marcus, 111Nestle, 256, 266, 278, 340, 342Nestle Purina Petcare, 42, 340, 342,

344Netflix, 41, 143, 158–159, 196, 201,

218newbie shoppers, 28new business. See also creating new

businessescreating viability, 243–244

in established organizations,243–244

and innovation, 91leveraging a business into, 223–224and niche segments, 239overview, 194–195and resource allocation, 244

new business arenascomponents to systems, 238–239customer trends, 240evaluation, 241lower price point, 240–241niche markets, 239technological innovation, 238unmet needs, 239

new-market disruptive innovations,241

new marketsadapting to, 223case challenge, 320–321of competitors, 46disruptive innovations, 241diversification, 6, 48, 51, 52expanding segments, 221–222fulfilling unmet needs, 31geographical expansion, 221for leveraging the business,

222, 226market expansion, 6, 44from new technologies, 91and relevance, 61–62sales forecasts for, 64sources of advantage, 214–215

new networking trend, 82niche segments, 204Nike

differentiation in global markets,258

global businesses, 253Niketown showcase stores, 164performance strategy, 25repeatable leveraging strategy, 224and retrosexual male segment, 26

Nintendo, 47–48, 56, 196Nissan, 127, 163, 254, 260Nokia, 108nonfinancial objectives, 46Nordstrom, 26, 36, 166, 167, 174,

198, 235, 338Norwest Bank, 280

Oobjectives, commitment, and

competitor analysis, 44–46Ocean Spray, 210

Office Depot’s customer experience,131–132

OfficeMax, 31offshore firms, 261Ogilvy & Mather, 225, 253Olay brand (P&G), 6, 8, 33, 37, 42,

50, 96, 187–188, 190, 196, 235,250, 255, 310

Old Navy, 26, 219Old Spice, 26operations, 51, 216opportunitiesfailure to utilize, 196–197identifying, 20managing category perceptions,

236–237opportunity cost of hanging on, 269organic foods and products, 86organizational biases. See incumbent

firmsorganizational characteristics. See also

internal analysisinternal analysis planning form, 349

organizational cultures, customer-centric, 284–286

organizational intangibles and brandassociations, 167

Organon, 287Oscar Mayer Wienermobiles, 183,

205overbranding, 198, 275overcapacity, 67, 71, 97, 222

Ppackaged goods forecasts, 64packaging innovation, 238Pampers, 6, 37, 164, 182, 183, 185,

187, 195, 232, 235, 254, 257Panda Express, 65Panera Bread, 65Pantene, 6, 8, 187, 250, 253,

263, 308parity. See points of parityparity performance, 29, 111, 114Pedigree Adoption Drive, 207PepsiCo, 41, 74, 98, 111, 166, 258perceived innovativeness, 236perceived need or desire, 61perceived qualityand BAV, 200brand and firm associations, 335and brand equity, 277and brand/firm associations, 335of global brands, 250, 254value of quality, 87

376 Index

perceived valueauthenticity as, 206–207impact of customer and brand

equity, 304Perdue chickens, 52performance analysis. See also

financial performancebrand and firm associations, 335customer satisfaction, 230, 334–335innovation considerations, 337of managers and employees, 337overview, 12, 332, 334planning form for internal analysis,

349–351relative cost, 334–336shareholder value, 333–334values and heritage, 337–338

performance dimensions analysis, 332performance value

design quality, 105fashion quality, 105functional quality, 105innovation quality, 105service quality, 106social responsibility quality,

106–107Perrier, 95, 111pet food industry strategic groups,

42–43, 339–340Peugeot, 252Philip Morris, 216, 235Pillsbury, 205, 218Pizza Hut, 52planning cycles, 2, 13–14, 22planning forms, 337–351points of difference, 112points of parity, 112

and assets and competencies, 8and brand position, 175–176close enough to, 173and cost analysis, 335–336and customer motivations, 28–29and key success factors, 70–71market sensitivity and price

parity, 21and relative cost analysis, 335–336and strategic necessities, 70

political uncertainties and globalstrategy, 258

Polo Ralph Lauren, 26Popcorn, Faith, 70, 218–219Porter’s Five-Factor Model of Market

Profitability, 66portfolio

brand, 275–280

business, 266–268, 348positioning strategies. See also market

positionfor brand and submarkets, 61–62of General Motors, 27, 44in global markets, 254–255market attractiveness/business

position matrix, 268potential market, 44, 62potential synergy, 2, 10, 137, 224–226PowerBar, 41, 42, 239, 320power distance trend, 80power play trend, 81power systems manages customer

experiences, 130–131Pratt & Whitney, 110preference and brand loyalty,

164–165price instability, 73–74price points, 170price premiums, 163, 188price pressure, 65, 270price sensitivity benefit dimension,

24–25price instability, 71, 73–74price value

general strategy, 107disciplined cost management,

107–108superior pricing acumen, 108

primary vs. indirect competitors,41–42

Pringles, 236, 253, 291priorities, customers, 31priorities for businesses and brands,

266–281the brand portfolio, 275–280the business portfolio, 267–268,

273, 275divestment or liquidation decision,

269–272, 280milking strategy, 272–274, 281opportunity/threat identification,

95–96, 337overview, 266–267, 280prioritizing brands, 278

private-label manufacturers, 41–43,87, 201, 340

problem research, 32–33Procter & Gamble (P&G)

assets and competencies of, 8BeingGirl Web site, 33brand ideal, 190branding competency, 96business scope, 6

in China, 37–38ethnographic research, 34–35global brand building, 250Global Marketing Officer’s

Leadership team, 289“house of brands” strategy, 279investment criteria, 62leveraging the business, 216–217product expansion, 6product-market investment

strategy, 6–7products of, 42, 195–196sharing R&D across business

units, 8Thank Mom campaign, 187–188value added components, 50and WalMart, 68

product and service quality, 334product category and brand

associations, 166–167product expansion, 44, 195–196product line quality, reputation, and

breadth, 51. See also productquality

product-market investment strategy,4, 6, 15

product markets, 6, 8, 15, 22, 63, 72,103, 167, 208, 214–216, 279, 335

product market value propositions.See alternative value propositions

product quality, 46, 51, 53, 55, 274product-related approach to

segmentation, 24productsbrand associations and breadth of

product line, 167, 195–196customers’ use of, 27finding new uses for, 209–210KSF changes over time, 70and segmentation, 24standardization vs. customization,

253–257substitute products, 66, 67value of authenticity, 206–207

profitability, 43–46, 55, 268analysis, 343–344

profitability measurementaverage costing, 336–337brand/firm associations, 335brand loyalty, 335cost advantage, 336innovation, 337manager/employee capability and

performance, 337product and service quality, 334

Index 377

profitability measurement(Continued)

relative cost, 335–336values and heritage, 337–338

profitable survivors, 63Progressive Corporation, 108promotional activities, branded, 205proof points and strategic initiatives,

173–174prospect lifetime value (PLV), 156publicity events, 149, 164, 171, 201,

204purchase funnel

creating the, 147–149failure to attract enough leads, 151management, 151–152metrics, 149–150

QQuaker Oats, 188, 227qualitative research, 33–34quality. See perceived qualityQuality Function Deployment (QFD)

program, 29quality of life trend, 80

RRalph Lauren, 26, 187R&D skills, 216reaction strategies, 92Redbirds minor league baseball

team, 195regulations, government, 86relational value

comprehensive solutionmanagement, 109–110

customer relationshipmanagement, 109

general strategy, 108–109relative cost, 335–337reluctant shoppers, 28renting not owning trend, 82repeatable strategies

expansion strategies, 257in leveraging in general, 224

researchBrand Asset Valuator of Young &

Rubicam, 200, 236DDB Needham’s Sponsor-Watch,

204on growth initiative success, 269–270homemakers naming brands from

memory, 163–164research and development (R&D)

and global innovations, 250and innovativeness, 51–52

sharing across business units, 8resource allocation

and brand loyalty, 26–27constraints, 74importance of, 2–3, 14and milking strategy, 272–273and rapid growth, 74and strategic uncertainty, 21

resource constraints, 71, 74restraint trend, 80retailing, 74, 105, 233retrosexual male segment, 26return on investment (ROI), 9, 83,

150risks

developing business outside coreabilities, 214

of entering global markets, 258of milking strategy, 273

Robert Mondavi, 43ROI. See return on investmentRolls-Royce, 109, 110Ronald McDonald House, 165,

203, 207Rossignol powder skis, 44Royal Crown’s Diet-Rite cola, 74

SSainsbury, 223Saks, 111, 181sales, 91, 144, 145, 194, 221sales and market share, 332–333sales or distribution capacity, 215, 216sales patterns and forecasts, 64Samsung, 57, 58, 108, 164, 204, 306Samuel Adams, 221saturation, 65Saturn, 239, 267SBUs. See strategic business unitsSCA. See sustainable competitive

advantagescale economies

as entry barrier, 67and global strategies, 248, 249and growth-share matrix, 267, 268for leveraging the business, 216loss of, 333from product standardization, 249,

253–257and strategic alliances, 260, 261

scenario analysis, 21, 22, 92–94, 347create, 93estimate probabilities, 94relate to strategies, 94

scenarios, creating, 21, 22, 347Schweppes, 166

Schwinn, 69, 216, 219scope dynamicsdefining the market, 22expanding the scope of the

offering, 220–221overview, 6and visibility, 164

scope expansion, 6, 220–221“Sea of Ideas” meetings (Texas

Instruments), 88segmentationbenefits, 25definition, 23how to approach, 24–28male shopper segments, 26multiple segments vs. a focus

strategy, 27–28petfood segmentation strategies,

339, 340variables, 24, 25, 222

segment level. See submarket analysisself-expressive benefits, 54,

172, 186, 188–190, 199,204, 239, 241, 254,269, 335

service quality, 106, 133, 139,170, 334

shareholder value, 13, 243, 333–334Shell International, 290short-term financial pressure curse,

242, 245short-term orientation trend, 80Siebel, 231, 238silo curse, 242–243, 245silo unitscustomer segments align to, 290managing structure to, 289–291marketing doctrine development,

291marketing–sales alignment,

290–291matrix organization, 289organize teams to, 289overview, 3–4as portfolio, 266problem of, 288–289synergy among, 4

simplification trend, 81–82Singapore Airlines, 106, 129, 134,

169, 232Sirius, 35size curse, 243, 245size of competitor, 44skincare customer decision journey,

126–127Slack, 85, 113

378 Index

snacking trend, 82Snapple, 226SoBe, 233, 240social programs, 206–207social responsibility quality, 106–107Sony

competing against Nintendo, 48creating synergies, 116design and manufacturing skills,

216global businesses, 253and retrosexual male segment, 26visibility of, 164

sponsorships, branded, 203–204Sprite, 254standardized products and brands in

global arena, 253–257Starbucks

customer centricity, 295expanding offering scope, 220–221as indirect competitor of Folgers,

41in Japan, 9My Starbucksidea site, 33niche market, 239reward program and customer

management, 159standardization, 253

stock return, 242, 262role of cash flows and marketing

assets, 307–311strategic advantage. See sustainable

competitive advantagestrategic alliances, 249, 259–262strategically important markets, 252strategic analysis, 42, 43. See also

analysis outputs; externalanalysis; internal analysis

immediacy of strategicuncertainties, 92

impact analysis, 89–90impact of strategic uncertainties, 91managing strategic uncertainties,

92strategic brand consolidation process,

275–281strategic business units (SBUs),

12, 348definition, 12portfolio analysis, 350

strategic decisions, 19–21, 63, 96–97strategic fit evaluations, 270, 277strategic flexibility

and business strategy selection, 10as company strength, 51and global strategies, 249

strategic analysis, 89strategic groups

competitor identification, 42, 43,338–342

creative thinking, 199–200strategic initiatives and proof points,

173–174strategic market management system,

10–14strategic necessities, 70strategic options, 10, 12strategic paralysis, 275strategic shoppers, 28strategic strengths, 70strategic stubbornness, 117strategic uncertainties, 20, 21, 347

immediacy, 92impact of, 91managing, 92

strategic value for collaborators,261–262

strategic visions, 55, 116, 243, 244,269, 280

strategy, 1–3, 19, 20. See also businessstrategies; marketing

strategy development, 9, 12–14, 52,93, 257

strategy performance system, 14, 339strengths and weaknesses

internal analysis, 12and leveraging options, 202market decline, 274planning form for internal analysis,

349profitable survivors of market

decline, 274strategic analysis, 97strategic strengths, 70SWOT analysis, 94–95

strengths and weaknesses ofcompetitors, 49–52

competitive strength grid,52–55

relevant assets and competencies,49–52

strategies based on, 48–49subbrands

effect on brand reputation,217–219

and endorsed brands, 220–221subcategory labels, 237submarket

emerging, 61new technologies in, 91

submarket analysisactual and potential size, 62–63

defining the submarket, 22dimensions, 59–60emerging, 61growth, 63profitability analysis, 65–68

submarket growth, 65substantial innovation, 84substitute products, 65superior position and SCA, 52supplier power, 68sustainability, 9, 81, 82, 85, 86, 90,

182, 195sustainable competitive advantage

(SCA). See also assets andcompetencies; competition

access to low-cost labor andmaterials as, 251

and assets and competencies, 7–8,214–215

and barriers to competition, 43and brand loyalty, 164and business strategy, 9from channel of distribution, 69from distribution, 69from geographic focus strategy, 27and global strategies, 249from geographic focus strategy, 27overview and creating, 2sales, market share, and, 333–334from segmentation, 23and selecting business strategies,

9–10and standardized products, 253superior position and, 52

Swatch, 164sweet-spot program, 183–185switching costs and brand loyalty, 164SWOT analysis, 94–96symbols, branded, 205synergiescreating, 116–117difficult to obtain, 225and global strategies, 248between offerings, 28

Ttangible benefits of going green, 204Target, 26, 95, 96, 201, 282TaskRabbit, 85technological innovation, 238technologyas bargaining chip in strategic

alliances, 261branded differentiators, 198–199business trends, 83–86impact of new, 91

Index 379

technology (Continued)information technology strategy, 9innovation, 238innovation quality, 105leverage to manage customer

experiences, 136mobile, 133–134motivation for strategic alliances,

260R&D skills, 216, 268strategic uncertainties, 21

Tenneco Oil Company, 271Tesco grocery chain, 223Tesla, 105Texas Instruments, 67, 88, 108The Learning Company, 226Thomson Corporation, 34, 78threats

and cross-subsidization concept, 252competitor analysis, 44customer analysis, 79of e-mail, to FedEx and UPS, 67emerging, 10–12, 20entrepreneurial culture, 72established firms, 31to growth rate, 72immediacy of threats, 92impact of threats, 92intangible attribute, 167superior competitive entry, 72SWOT analysis, 94–96

Tide, 187, 190, 196, 199Tiffany, 168, 254Timex, 235Tokyo, 106, 164, 228Tommy Hilfiger, 169Toms Shoes, 106, 110Toshiba, 164, 200, 261Toyoda, Aiko, 284Toyota, 284

and demographic segments, 25competitor analysis, 53intangible brand value and

associations, 167joint venture with GM, 260, 262manufacturing as strength, 51recalls and quality problems, 284scale economies, 260U.S. and European factories, 252

trade barriers, 248, 251, 252, 260trade-off questions for customer

interviews, 30transformational innovations, 83–84.

See also creating new businessestransformational leadership, 294

transparency trend, 81trends

cultivating vigilance, 88cultural trends, 80–82customer trends, 79–80environmental analysis of, 12, 346fads vs., 69–70identifying with external analysis,

22and market/submarket analysis,

59–60planning form, 337–351and strategic analysis, 2

23andMe, 105

UUber, 84, 85, 100, 155, 201, 233Udi, 184, 202unaided recall, 164uncertainties, strategic, 20–21uncertainty avoidance trend, 80Unilever, 34, 85, 96, 193, 256, 278,

290, 306, 329–331Union Bank of California, 27United Airlines, 225, 227unmet needs, 3, 12, 23–24, 31–35, 40,

195, 237–239, 247, 283, 285,290, 320, 329, 340

Upshaw, Lynn, 175user-developed products, 32

Vvalue added components, 49, 50, 55,

60, 261value-added stages, 68value-capture mechanisms, 116, 118value chain, 50, 68, 120, 219, 252, 261value chain analysis, 68–69value-creating system, 115, 116value proposition, 7, 9, 12, 20,

104–110, 113–114, 181, 195,237, 275, 293, 301

Valvoline and NASCAR, 203–204Vanguard Group, 107Victoria’s Secret, 167vigilance, 88Virgin Atlantic Airlines, 166, 169–171,

177Virgin brand, 170, 207Visa, 10, 167, 204, 221, 253, 254visibility, 54, 164, 182, 183,

185, 196, 216, 219,262, 280

visualization trend, 81Vodafone, 253

volatility and vulnerability, cash flowsgreater customer stability, 310internal mistakes, 311rival entry, 311rival switching strategies, 310

Volvo, 54, 165, 176, 186, 187

WWall Street Journal, 73, 141, 154Walmart, 107breadth dimension, 167competencies, 51failure in Germany, 258green strategies, 85–86operational capacity and efficiency,

51power over suppliers, 68price value leadership, 139, 166and Procter & Gamble, 202scope of, 6single segment focus originally, 27supplier power, 68value proposition of, 7and Unilever, 290

Warby Parker, 107, 201Wasa Crispbread, 166weaknesses. See strengths and

weaknessesWeb sites, 63, 209, 212Welch, Jack, 220, 269, 281Wells Fargo, 114, 200,

280, 292Westin Hotel Chain’s Heavenly Bed,

131, 197–199, 233Whole Foods, 113, 195, 201, 232,

233, 240Williams-Sonoma, 6, 30wine industry competitor analysis, 43Woods, Tiger, 224workplace communications, 113

XXerox, 61, 234, 237, 308

YYahoo, 209Yoplait’s Go-Gurt, 238Young & Rubicam, 168, 225YouTube, 81, 82, 178, 227

ZZappos, 15, 113, 128, 129, 166, 167,

190, 232, 233Zara, 36, 116, 188, 233, 307Zook, Chris, 222–224

380 Index

External Analysis

• Customer analysis • Competitor analysis • Market/submarket analysis • Environmental analysis

Internal Company Analysis

• Size, growth, and financial performance • Assets and competencies (including brand, customer

relationships, innovation) • Image and positioning • Current and past strategies • Organizational culture • Cost structure

STRATEGIC ANALYSIS

External Assessment

Opportunities, threats, trends,

insights, and external

uncertainties

Internal Company Assessment

Firm strengths, weaknesses, liabilities, problems, constraints, and uncertainties

STRATEGIC ANALYSIS OUTPUT

• Identify strategy alternatives – Product-market investment strategies

– Customer value proposition

– Assets, competencies, and synergies

– Functional strategies and programs • Select strategy

CREATING AND ADAPTINGSTRATEGY

IMPLEMENTING STRATEGY ANDPRODUCING FIRM VALUE

• Implement strategy• Measure performance

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