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Like
Disney, all companies must look ahead and develop long-term strategies
to meet the changing conditions in their industries and ensure
long-term survival. The hard task of selecting an overall company
strategy for long-run survival and growth is called strategic planning.
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In
this chapter, we look first at the organization’s overall strategic
planning. Next, we discuss how marketers, guided by the strategy plan,
work closely with others inside and outside the firm to serve
customers. Finally, we examine the marketing management process—how
marketers go about choosing target markets and building profitable
customer relationships.
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Strategic PlanningComments by Dr. Laukamm
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Each
company must find the game plan that makes the most sense given its
specific situation, opportunities, objectives, and resources. This is
the focus of strategic planning—the
process of developing and maintaining a strategic fit between the
organization’s goals and capabilities and its changing marketing
opportunities.
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Strategic
planning sets the stage for the rest of the planning in the firm.
Companies usually prepare annual plans, long range plans, and strategic
plans. The annual and long range plans deal with the company’s current
businesses and how to keep them going. In contrast, the strategic plan
involves adapting the firm to take advantage of opportunities in its
constantly changing environment.
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At
the corporate level, the company starts the strategic planning process
by defining its overall purpose and mission (see Figure 2.1). This
mission then is turned into detailed supporting objectives that guide
the whole company. Next, headquarters decides what portfolio of
businesses and products is best for the company and how much support to
give each one. In turn, each business and product develops detailed
marketing and other departmental plans that support the companywide
plan. Thus, marketing planning occurs at the business-unit, product,
and market levels, supporting company strategic planning with more
detailed planning for specific marketing opportunities.2
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Defining a Market-Oriented MissionComments by Dr. Laukamm
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An
organization exists to accomplish something. At first, it has a clear
purpose or mission, but over time its mission may become unclear as the
organization grows, adds new products and markets, or faces new
conditions in the environment. When management senses that the
organization is drifting, it must renew its search for purpose. It is
time to ask: What is our business? Who is the customer? What do
consumers value? What should our business be? These simple sounding
questions are among the most difficult the company will ever have to
answer. Successful companies continuously raise these questions and
answer them carefully and completely.
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Many organizations develop formal mission statements that answer these questions. A mission statement
is a statement of the organization’s purpose—what it wants to
accomplish in the larger environment. A clear mission statement acts as
an “invisible hand” that guides people in the organization.
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Some
companies define their missions in product or technology terms (“We
make and sell furniture” or “We are a chemical processing firm”). But
mission statements should be market oriented.
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A
market-oriented mission statement defines the business in terms of
satisfying basic customer needs. For example, 3M does more than just
make adhesives, scientific equipment, and health care products. It
solves people’s problems by putting innovation to work for them.
Charles Schwab isn’t just a brokerage firm—it sees itself as the
“guardian of our customers’ financial dreams.” At Hill’s Pet Nutrition,
“Our mission is to enrich and lengthen the special relationship between
you and your pet.” Likewise, eBay’s mission isn’t simply to hold online
auctions. Instead, it connects individual buyers and sellers in “the
world’s online marketplace.” Its mission is to be a unique Web
community in which people can shop around, have fun, and get to know
each other, for example, by chatting at the eBay Cafe.3 Table 2.1 provides several other examples of product-oriented versus market-oriented business definitions.
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Management
should avoid making its mission too narrow or too broad. A pencil
manufacturer that says it is in the communication equipment business is
stating its mission too broadly. Missions should be realistic.
Singapore Airlines would be deluding itself if it adopted the mission
to become the world’s largest airline. Missions should also be specific.
Many mission statements are written for public relations purposes and
lack specific, workable guidelines. Too often, companies develop
mission statements that look much like this tongue-in-cheek version:
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We
are committed to serving the quality of life of cultures and
communities everywhere, regardless of sex, age, sexual preference,
religion, or disability, whether they be customers, suppliers,
employees, or shareholders—we serve the planet—to the highest ethical
standards of integrity, best practice, and sustainability, through
policies of openness and transparency vetted by our participation in
the International Quality Business Global Audit forum, to ensure
measurable outcomes worldwide. . . .4Comments by Dr. Laukamm
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Such
generic statements sound good but provide little real guidance or
inspiration. In contrast, Celestial Seasonings’ mission statement is
very specific: “Our mission is to grow and dominate the U.S. specialty
tea market by exceeding consumer expectations with: The best tasting,
100 percent natural hot and iced teas, packaged with Celestial art and
philosophy, creating the most valued tea experience. . . .”5
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Missions should fit the market environment.
The Girl Scouts of America would not recruit successfully in today’s
environment with its former mission: “to prepare young girls for
motherhood and wifely duties.” The organization should base its mission
on its distinctive competencies. McDonald’s could probably
enter the solar energy business, but that would not take advantage of
its core competence—providing low cost food and fast service to large
groups of customers.
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Finally, mission statements should be motivating.
A company’s mission should not be stated as making more sales or
profits—profits are only a reward for undertaking a useful activity. A
company’s employees need to feel that their work is significant and
that it contributes to people’s lives. One study found that “visionary
companies” set a purpose beyond making money. For example, Walt Disney
Company’s aim is to “make people happy.” But even though profits may
not be part of these companies’ mission statements, they are the
inevitable result. The study showed that 18 visionary companies
outperformed other companies in the stock market by more than 6 to 1
over the period from 1926 to 1990.6
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Setting Company Objectives and GoalsComments by Dr. Laukamm
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The
company’s mission needs to be turned into detailed supporting
objectives for each level of management. Each manager should have
objectives and be responsible for reaching them. For example, Monsanto
operates in many businesses, including agriculture, pharmaceuticals,
and food products. The company defines its mission as creating
“abundant food and a healthy environment.” It seeks to help feed the
world’s exploding population while at the same time sustaining the
environment.
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This
mission leads to a hierarchy of objectives, including business
objectives and marketing objectives. Monsanto’s overall objective is to
create environmentally better products and get them to market faster at
lower costs. For its part, the agricultural division’s objective is to
increase agricultural productivity and reduce chemical pollution by
researching new pest- and disease-resistant crops that produce higher
yields without chemical spraying. But research is expensive and
requires improved profits to plow back into research programs. So
improving profits becomes another major Monsanto objective. Profits can
be improved by increasing sales or reducing costs. Sales can be
increased by improving the company’s share of the U.S. market, by
entering new foreign markets, or both. These goals then become the
company’s current marketing objectives.
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Marketing
strategies must be developed to support these marketing objectives. To
increase its U.S. market share, Monsanto might increase its products’
availability and promotion. To enter new foreign markets, the company
may cut prices and target large farms abroad. These are its broad
marketing strategies. Each broad marketing strategy must then be
defined in greater detail. For example, increasing the product’s
promotion may require more salespeople and more advertising; if so,
both requirements will have to be spelled out. In this way, the firm’s
mission is translated into a set of objectives for the current period.
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Designing the Business PortfolioComments by Dr. Laukamm
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Guided by the company’s mission statement and objectives, management now must plan its business portfolio—the
collection of businesses and products that make up the company. The
best business portfolio is the one that best fits the company’s
strengths and weaknesses to opportunities in the environment. Business
portfolio planning involves two steps. First, the company must analyze
its current business portfolio and decide which businesses should receive more, less, or no investment. Second, it must shape the future portfolio by developing strategies for growth and downsizing.
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Analyzing the Current Business PortfolioComments by Dr. Laukamm
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The major activity in strategic planning is business portfolio analysis,
whereby management evaluates the products and businesses making up the
company. The company will want to put strong resources into its more
profitable businesses and phase down or drop its weaker ones.
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Management’s
first step is to identify the key businesses making up the company.
These can be called the strategic business units. A strategic business unit (SBU)
is a unit of the company that has a separate mission and objectives and
that can be planned independently from other company businesses. An SBU
can be a company division, a product line within a division, or
sometimes a single product or brand.
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The
next step in business portfolio analysis calls for management to assess
the attractiveness of its various SBUs and decide how much support each
deserves. Most companies are well advised to “stick to their knitting”
when designing their business portfolios. It’s usually a good idea to
focus on adding products and businesses that fit closely with the
firm’s core philosophy and competencies. However, some companies have
excelled with broad, widely diversified portfolios. An excellent
example is General Electric. Through skillful management of its
portfolio of businesses, General Electric has grown to be one of the
world’s largest and most profitable companies. Over the past two
decades, GE has shed many low-performing businesses, such as
air-conditioning and housewares. It kept only those businesses that
could be number one or number two in their industries. At the same
time, it has acquired profitable businesses in broadcasting (NBC
Television), financial services (Kidder Peabody investment bank), and
several other industries. GE now operates 49 business units, selling an
incredible variety of products and services—from consumer electronics,
financial services, and television broadcasting to aircraft engines,
plastics, and a global Internet trading network. Superb management of
this diverse portfolio has earned GE shareholders a 29 percent average
annual return over the past 10 years. It’s also put GE at the top of Fortune’s Most Admired Companies for five straight years.7
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The
purpose of strategic planning is to find ways in which the company can
best use its strengths to take advantage of attractive opportunities in
the environment. Thus, most standard portfolio-analysis methods
evaluate SBUs on two important dimensions—the attractiveness of the
SBU’s market or industry and the strength of the SBU’s position in that
market or industry. The best-known portfolio-planning method was
developed by the Boston Consulting Group, a leading management
consulting firm.
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THE BOSTON CONSULTING GROUP APPROACH Using the Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix shown in Figure 2.2. On the vertical axis, market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth-share matrix defines four types of SBUs:
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Stars.
Stars are high-growth, high-share businesses or products. They often
need heavy investment to finance their rapid growth. Eventually their
growth will slow down, and they will turn into cash cows.Comments by Dr. Laukamm
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Cash cows.
Cash cows are low-growth, high-share businesses or products. These
established and successful SBUs need less investment to hold their
market share. Thus, they produce a lot of cash that the company uses to
pay its bills and to support other SBUs that need investment.Comments by Dr. Laukamm
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Question marks.
Question marks are low-share business units in high-growth markets.
They require a lot of cash to hold their share, let alone increase it.
Management has to think hard about which question marks it should try
to build into stars and which should be phased out.Comments by Dr. Laukamm
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Dogs.
Dogs are low-growth, low-share businesses and products. They may
generate enough cash to maintain themselves but do not promise to be
large sources of cash.Comments by Dr. Laukamm
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The
ten circles in the growth-share matrix represent a company’s ten
current SBUs. The company has two stars, two cash cows, three question
marks, and three dogs. The areas of the circles are proportional to the
SBU’s dollar sales. This company is in fair shape, although not in good
shape. It wants to invest in the more promising question marks to make
them stars and to maintain the stars so that they will become cash cows
as their markets mature. Fortunately, it has two good-sized cash cows.
Income from these cash cows will help finance the company’s question
marks, stars, and dogs. The company should take some decisive action
concerning its dogs and its question marks. The picture would be worse
if the company had no stars, if it had too many dogs, or if it had only
one weak cash cow.
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Once
it has classified its SBUs, the company must determine what role each
will play in the future. One of four strategies can be pursued for each
SBU. The company can invest more in the business unit in order to build its share. Or it can invest just enough to hold the SBU’s share at the current level. It can harvest the SBU, milking its short term cash flow regardless of the long-term effect. Finally, the company can divest the SBU by selling it or phasing it out and using the resources elsewhere.
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As
time passes, SBUs change their positions in the growth-share matrix.
Each SBU has a life cycle. Many SBUs start out as question marks and
move into the star category if they succeed. They later become cash
cows as market growth falls, then finally die off or turn into dogs
toward the end of their life cycle. The company needs to add new
products and units continuously so that some of them will become stars
and, eventually, cash cows that will help finance other SBUs.
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PROBLEMS WITH MATRIX APPROACHES The
BCG and other formal methods revolutionized strategic planning.
However, such approaches have limitations. They can be difficult,
time-consuming, and costly to implement. Management may find it
difficult to define SBUs and measure market share and growth. In
addition, these approaches focus on classifying current businesses but provide little advice for future planning.
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Formal
planning approaches can also place too much emphasis on market-share
growth or growth through entry into attractive new markets. Using these
approaches, many companies plunged into unrelated and new high-growth
businesses that they did not know how to manage—with very bad results.
At the same time, these companies were often too quick to abandon,
sell, or milk to death their healthy mature businesses. As a result,
many companies that diversified too broadly in the past now are
narrowing their focus and getting back to the basics of serving one or
a few industries that they know best.
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Because
of such problems, many companies have dropped formal matrix methods in
favor of more customized approaches that are better suited to their
specific situations. Unlike former strategic-planning efforts, which
rested mostly in the hands of senior managers at company headquarters,
today’s strategic planning has been decentralized. Increasingly,
companies are placing responsibility for strategic planning in the
hands of cross-functional teams of managers who are close to their
markets. Some teams even include customers and suppliers in their
strategic-planning processes.8
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Developing Strategies for Growth and DownsizingComments by Dr. Laukamm
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Beyond
evaluating current businesses, designing the business portfolio
involves finding businesses and products the company should consider in
the future. Companies need growth if they are to compete more
effectively, satisfy their stakeholders, and attract top talent.
“Growth is pure oxygen,” states one executive. “It creates a vital,
enthusiastic corporation where people see genuine opportunity.” At the
same time, a firm must be careful not to make growth itself an
objective. The company’s objective must be “profitable growth.”
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Marketing
has the main responsibility for achieving profitable growth for the
company. Marketing must identify, evaluate, and select market
opportunities and lay down strategies for capturing them. One useful
device for identifying growth opportunities is the product/market expansion grid,9 shown in Figure 2.3. We apply it here to Starbucks.
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First, Starbucks management might consider whether the company can achieve deeper market penetration—making
more sales to current customers without changing its products. It might
add new stores in current market areas to make it easier for more
customers to visit. In fact, Starbucks is adding an average of 27
stores a week, 52 weeks a year. Improvements in advertising, prices,
service, menu selection, or store design might encourage customers to
stop by more often or to buy more during each visit. For example,
Starbucks recently introduced a company debit card, which lets
customers prepay for coffee and snacks or give the gift of Starbucks to
family and friends. Customers using the card move through stores faster
and return more often. Starbucks also began adapting its menu to local
tastes around the country.
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In
the South, where customers tend to come later in the day and linger for
a bit, [such tailoring] meant adding more appealing dessert offerings,
as well as designing larger, more comfortable locations. [In Atlanta,
Starbucks] opened bigger stores with such amenities as couches and
outdoor tables, so that people would feel comfortable hanging out,
especially in the evening. . . . Building on its Atlanta experience,
Starbucks is tailoring its stores to local tastes around the country.
That’s why you find café au lait as well as toasted items in New
Orleans, neither of which is available elsewhere in the country. (Bagel
sales in New Orleans tripled once Starbucks began toasting them.) Or
why coffee cake is featured in the Northeast, where it’s more popular.10Comments by Dr. Laukamm
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Basically,
Starbucks would like to increase patronage by current customers and
attract competitors’ customers to Starbucks shops.
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Second, Starbucks management might consider possibilities for market development—identifying and developing new markets for its current products. For instance, managers could review new demographic markets.
Perhaps new groups—such as senior consumers or ethnic groups—could be
encouraged to visit Starbucks coffee shops for the first time or to buy
more from them. Managers also could review new geographical markets.
Starbucks is now expanding swiftly into new U.S. markets, especially in
the Southeast and Southwest. It is also developing its international
markets, with stores popping up rapidly in Asia, Europe, Australia, and
Latin and South America.
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Third, management could consider product development—offering
modified or new products to current markets. For example, Starbucks has
increased its food offerings in an effort to bring customers into its
stores during the lunch and dinner hours and to increase the amount of
the average customer’s sales ticket. The company has also partnered
with other firms to sell coffee in supermarkets and to extend its brand
to new products, such as coffee ice cream (with Dreyer’s) and bottled
coffee drinks (with PepsiCo).
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Fourth, Starbucks might consider diversification.
It could start up or buy businesses outside of its current products and
markets. For example, Starbucks is testing two new restaurant
concepts—Café Starbucks and Circadia—in an effort to offer new formats
to related but new markets. It has also introduced a Hear Music brand
of compilation CDs. In a more extreme diversification, Starbucks might
consider leveraging its strong brand name by making and marketing a
line of branded casual clothing consistent with the “Starbucks
experience.” However, this would probably be unwise. Companies that
diversify too broadly into unfamiliar products or industries can lose
their market focus, something that some critics are already concerned
about with Starbucks.
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Companies must not only develop strategies for growing their business portfolios but also strategies for downsizing
them. There are many reasons that a firm might want to abandon products
or markets. The market environment might change, making some of the
company’s product or markets less profitable. This might happen during
an economic recession or when a strong competitor opens next door. The
firm may have grown too fast or entered areas where it lacks
experience. This can occur when a firm enters too many foreign markets
without the proper research or when a company introduces new products
that do not offer superior customer value. Finally, some products or
business units just age and die.
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When
a firm finds products or businesses that no longer fit its overall
strategy, it must carefully prune, harvest, or divest them. Weak
businesses usually require a disproportionate amount of management
attention. Managers should focus on promising growth opportunities, not
fritter away energy trying to salvage fading ones.
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Strategic Planning and Small BusinessesComments by Dr. Laukamm
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Many
discussions of strategic planning focus on large corporations with many
divisions and products. However, small businesses can also benefit from
sound strategic planning. Whereas most small ventures start out with
extensive business and marketing plans used to attract potential
investors, strategic planning often falls by the wayside once the
business gets going. Entrepreneurs and presidents of small companies
are more likely to spend their time “putting out fires” than planning.
But what does a small firm do when it finds that it has taken on too
much debt, when its growth is exceeding production capacity, or when
it’s losing market share to a competitor with lower prices? Strategic
planning can help small business managers to anticipate such situations
and determine how to prevent or handle them.
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King’s
Medical Company of Hudson, Ohio, provides an example of how one small
company has used very simple strategic-planning tools to chart its
course every three years. King’s Medical owns and manages
magnetic-resonance-imaging (MRI) equipment—million-dollar-plus machines
that produce X-ray–type pictures. Several years ago, William Patton,
then a consultant and the company’s “planning guru,” pointed to
strategic planning as the key to this small company’s very rapid growth
and high profit margins. Patton claimed, “A lot of literature says
there are three critical issues to a small company: cash flow, cash
flow, cash flow. I agree those issues are critical, but so are three
more: planning, planning, planning.” King’s Medical’s planning process,
which hinges on an assessment of the company, its place in the market,
and its goals, includes the following steps.11
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Clearly,
strategic planning is crucial to a small company’s future. Thom
Wellington, president of Wellington Environmental Consulting and
Construction, Inc., says that it’s important to do strategic planning
at a site away from the office. An off-site location offers
psychologically neutral ground where employees can be “much more
candid,” and it takes entrepreneurs away from the scene of the fires
they spend so much time stamping out.12
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