28mm
SECOND EDITION
STRATEGIC MARKETING
SECOND EDITION
All organisations – from modest start-ups to multinational corporations
– can benefit from an effective marketing strategy, as it serves as
a roadmap for the entire business. By formulating a coherent and
well-considered marketing strategy, organisations can promote their
business, cater to the right types of clients and allocate their resources
correctly, all while safeguarding the reputation of the organisation.
Strategic Marketing is structured around the four key questions facing
organisations and top management when deciding on their strategic
direction:
1. Where are we now?
2. Where do we want to be?
3. How will we get there?
4. Did we get there?
In addressing these questions, the book covers topics such as:
• analysis of the customer, competitor and market
• competitive market strategies
• refocusing and leveraging the business
• sustainable competitive advantage
• going global and selecting strategies for the way forward.
Written with the undergraduate student in mind, Strategic Marketing
offers a comprehensive view of the current developments and
challenges facing the marketing world, and shows how an effective
strategic basis is a valuable tool for addressing these challenges and
providing strategic direction to the organisation.
In this new edition two new chapters on branding and electronic
marketing strategies have been included, making this an essential
guide to contemporary strategic marketing.
ABOUT THE EDITORS
Johannes A Wiid is a professor in the Department of Retail and
Marketing Management at the University of South Africa (Unisa).
Michael C Cant is a professor in the Department of Retail and
Marketing Management at the University of South Africa (Unisa).
Khathutshelo M Makhitha is a professor and Chair of the Department
of Retail and Marketing Management at the University of South Africa
(Unisa).
www.jutaacademic.co.za
STRATEGIC
MARKETING
JA W iid
MC Cant
KM Makhitha
Juta Support Material
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http://juta.co.za/support-material/detail/strategic-marketing-2e
Student Support
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For help with accessing support material, email supportmaterial@juta.co.za
For print or electronic desk and inspection copies, email academic@juta.co.za
STRATEGIC
MARKETING
Second edition
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STRATEGIC
MARKETING
Second edition
JA Wiid
MC Cant
KM Makhitha
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Strategic Marketing
First edition 2014
Second edition 2016
Juta and Company (Pty) Ltd
PO Box 14373, Lansdowne 7779, Cape Town, South Africa
© 2016 Juta and Company (Pty) Ltd
ISBN 978 1 48512 123 7 (Print)
ISBN 978 1 48512 473 3 (WebPDF)
All rights reserved. No part of this publication may be reproduced or transmitted
in any form or by any means, electronic or mechanical, including photocopying,
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writing from the publisher. Subject to any applicable licensing terms and conditions
in the case of electronically supplied publications, a person may engage in fair dealing
with a copy of this publication for his or her personal or private use, or his or her
research or private study. See section 12(1)(a) of the Copyright Act 98 of 1978.
Project manager: Edith Viljoen
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Typeset in 10.5 pt on 14 pt ITC Berkley
The author and the publisher believe, on the strength of due diligence exercised, that this
work does not contain any material that is the subject of copyright held by another person.
In the alternative, they believe that any protected pre-existing material that may be
comprised in it has been used with appropriate authority or has been used in circumstances
that make such use permissible under the law.
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CONTENTS
Preface............................................................................................................... xv
About the authors.............................................................................................. xvii
Acknowledgements of tables and figures.......................................................... xix
Chapter 1 – Overview of strategic marketing....................................................
1.1 Introduction................................................................................................
1.2 What is meant by strategy?..........................................................................
1.3 Strategy levels..............................................................................................
1.3.1 Corporate-level strategy...................................................................
1.3.2 Business-level strategy.....................................................................
1.3.3 Functional-level strategy..................................................................
1.4 The nature of strategic marketing.................................................................
1.4.1 Tasks of strategic marketing.............................................................
1.4.2 Strategic business units....................................................................
1.5 Strategic marketing and marketing management..........................................
1.6 Summary.....................................................................................................
Endnotes......................................................................................................
1
1
3
5
6
6
7
7
9
11
11
12
13
Chapter 2 – Analysis of the external marketing or business environment.......
2.1 Introduction ...............................................................................................
2.2 Characteristics of the external environment.................................................
2.2.1 The ever-changing nature of the external environment....................
2.2.2 The impact of external forces on the external environment..............
2.2.3 The overwhelming state of external variables...................................
2.3 Subdivisions of the external environment....................................................
2.3.1 Technological environment..............................................................
2.3.2 Economic environment...................................................................
2.3.3 Social and cultural environment......................................................
2.3.4 Demographics ................................................................................
2.3.5 International environment...............................................................
2.3.6 Legal/government environment.......................................................
2.4 External environment SWOT analysis..........................................................
2.5 Predicting the future of the external environment........................................
Environmental scanning..............................................................................
15
15
16
16
16
16
17
17
18
20
21
21
22
24
24
24
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2.6
Identifying influential external forces...........................................................
Assessing the effect of influential environmental forces ...............................
Proactive and reactive response strategies.....................................................
Risk analysis................................................................................................
Summary ....................................................................................................
Endnotes......................................................................................................
25
26
27
28
28
29
Chapter 3 – Customer analysis.........................................................................
3.1 Introduction ...............................................................................................
3.2 What is relationship marketing?...................................................................
3.3 What is customer relationship management?...............................................
3.4Guidelines for successful relationship marketing and customer relationship
management ...............................................................................................
3.4.1 Relationship marketing....................................................................
3.4.2 Customer relationship management................................................
3.5 Getting to know current and future customers.............................................
3.5.1 Information on existing customers .................................................
3.5.2 Information on future customers ....................................................
3.6Understanding customers better through a focused customer analysis
process.........................................................................................................
3.7 Customer segmentation...............................................................................
3.7.1 What is customer segmentation?.....................................................
3.7.2 The basis for customer segmentation...............................................
3.8 Evaluating the attractiveness of a market segment........................................
What is an attractive market segment?.........................................................
3.9 Planning for better relationships..................................................................
3.9.1 Activities to build customer loyalty and commitment......................
3.9.2Activities required to conduct customer research to improve
customer satisfaction.......................................................................
3.10Market information and knowledge resources about customers ..................
3.10.1 Primary research..............................................................................
3.10.2 Qualitative or quantitative research ................................................
3.11 The customer value creation process............................................................
3.11.1Customer satisfaction as a necessary precursor to customer
relationships ...................................................................................
3.11.2 The individual customer approach..................................................
3.11.3 Setting yourself apart with supporting service.................................
3.11.4 The customer relationship management process .............................
3.12 Customer loyalty management ....................................................................
3.12.1 The key aspects of CRM when establishing customer loyalty...........
3.12.2 Loyalty marketing strategies............................................................
3.12.3The service encounter – the interaction between providers and
customers........................................................................................
3.12.4 CRM goals and loyalty.....................................................................
3.12.5 Segmentation of customer loyalty....................................................
3.12.6 Potential benefits of customer loyalty..............................................
31
31
32
33
2.7
2.8
2.9
34
34
36
37
37
40
40
42
42
43
46
46
49
49
51
52
52
53
55
56
56
57
58
62
63
63
64
65
66
67
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3.13 Summary..................................................................................................... 73
Endnotes...................................................................................................... 74
Chapter 4 – Market analysis..............................................................................
4.1 Introduction ...............................................................................................
4.2 Steps in market analysis ..............................................................................
4.2.1 Define the relevant market..............................................................
4.2.2 Analyse the primary demand...........................................................
4.2.3 Analyse the selective demand within the relevant market ...............
4.2.4 Define market segments..................................................................
4.2.5 Identify potential target markets......................................................
4.3 Dimensions of market analysis ....................................................................
4.3.1 Current and emerging submarkets...................................................
4.3.2 Actual market, potential market and submarket size.......................
4.3.3 Market and submarket growth.........................................................
4.3.4 Market and submarket profitability.................................................
4.3.5 Cost structure..................................................................................
4.3.6 Distribution channels......................................................................
4.3.7 Trends and developments................................................................
4.3.8 Key success factors..........................................................................
4.4 Summary.....................................................................................................
Endnotes......................................................................................................
78
78
79
79
82
84
86
91
91
92
92
94
95
95
96
96
97
98
99
Chapter 5 – Analysing competitors................................................................... 100
5.1 Introduction................................................................................................ 100
5.2 Purpose of competitor analysis..................................................................... 101
5.3 Defining the competitive arena..................................................................... 102
5.3.1 Types of competitors........................................................................ 102
5.3.2 Identifying competitors................................................................... 104
5.4 Competitor analysis framework................................................................... 105
5.4.1 Porter’s Five Forces model............................................................... 105
5.4.2 A representative weighted competitive strength assessment............. 107
5.4.3 Online competitor analysis tools...................................................... 108
5.4.4 Blue Ocean Strategy Canvas............................................................ 110
5.5 The value of social media in analysing competitors...................................... 111
5.6Organisational strategy and competitive intelligence practices...................... 112
Step 1: Identification of key role players and sources................................... 113
Step 2: Collection of data............................................................................. 113
Step 3: Analysis of findings.......................................................................... 113
Step 4: Communication of results................................................................ 114
Step 5: Management of information collected.............................................. 115
5.7 Competitor decision-making pitfalls............................................................ 115
5.8 Summary..................................................................................................... 116
Endnotes...................................................................................................... 119
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Chapter 6 – Analysing the internal environment.............................................. 121
6.1 Introduction................................................................................................ 121
6.2 Importance and challenges of the market environment................................ 122
6.3 Internal environmental analysis................................................................... 123
6.3.1 Resource-based analysis................................................................... 124
6.3.2 Performance analysis ...................................................................... 125
6.3.3 Value chain analysis......................................................................... 128
6.3.4 Functional analysis.......................................................................... 130
6.4Strategic fit between the analyses of the different analytical processes.......... 131
6.5Strengths, weaknesses, opportunities and threats (SWOT) analysis.............. 131
6.6 Summary..................................................................................................... 138
Endnotes...................................................................................................... 139
Chapter 7 – Marketing strategy and metrics..................................................... 140
7.1 Introduction................................................................................................ 140
7.2 What is a metric?......................................................................................... 141
7.3 Why measure marketing?............................................................................. 141
7.4 The benefits of metrics in marketing strategy............................................... 142
7.5 The evolution of marketing metrics.............................................................. 143
7.6 The field of marketing metrics..................................................................... 144
7.7 From metrics to big data.............................................................................. 146
The danger of big data................................................................................. 146
7.8 Strategy and metrics..................................................................................... 147
Strategic marketing models and metrics....................................................... 149
7.9 Selected marketing metrics.......................................................................... 151
7.9.1 Revenue.......................................................................................... 151
7.9.2 Gross profit..................................................................................... 152
7.9.3 Net profit........................................................................................ 152
7.9.4 Net profit margin............................................................................. 153
7.9.5 Return on investment (ROI)............................................................ 153
7.9.6 Return on marketing investment (ROMI)........................................ 153
7.9.7 Margin return on marketing investment (mROMI).......................... 154
7.9.8 Market growth................................................................................. 154
7.9.9 Market share.................................................................................... 154
7.9.10 Market penetration.......................................................................... 155
7.9.11 Marketing costs............................................................................... 156
7.9.12 Mark-up.......................................................................................... 156
7.9.13 Unit margin..................................................................................... 157
7.9.14 Margin percentage........................................................................... 157
7.9.15 Total margin.................................................................................... 158
7.9.16 Number of customers...................................................................... 158
7.9.17 Cost per lead................................................................................... 159
7.9.18 Conversion rate............................................................................... 160
7.9.19 Recency........................................................................................... 160
7.9.20 Retention rate.................................................................................. 161
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7.9.21 Churn rate....................................................................................... 161
7.9.22 Period.............................................................................................. 162
7.9.23 Discount rate................................................................................... 162
7.9.24 Customer acquisition cost (CAC).................................................... 162
7.9.25 Customer lifetime value (CLV)......................................................... 163
7.9.26 Average price per unit...................................................................... 164
7.9.27 Contribution margin per unit.......................................................... 165
7.9.28 Unit breakeven sales level................................................................ 165
7.9.29 Total breakeven sales level............................................................... 165
7.9.30 Target volume.................................................................................. 166
7.9.31 Target revenue................................................................................. 166
7.9.32 Average number of purchases per period......................................... 167
7.9.33 Average number of purchases per period per customer.................... 167
7.9.34 Average spend per purchase............................................................ 167
7.9.35 Customer satisfaction...................................................................... 168
7.9.36 Brand equity.................................................................................... 169
7.9.37 Online metrics................................................................................. 170
7.10 Summary..................................................................................................... 172
Endnotes ..................................................................................................... 173
Chapter 8 – Sustainable competitive advantage................................................ 175
8.1 Introduction................................................................................................ 175
8.2 Dimensions of sustainable competitive advantage........................................ 176
8.3 Criteria for sustainable competitive advantage............................................. 178
8.4 Sources of sustainable competitive advantage............................................... 179
8.5 Competitive advantage strategies................................................................. 180
8.5.1 Cost effectiveness............................................................................ 180
8.5.2 Differentiation................................................................................. 181
8.5.3 Focus strategy................................................................................. 182
8.5.4 Combination strategy...................................................................... 183
8.6 Steps in creating a sustainable competitive advantage ................................. 183
8.7 Summary..................................................................................................... 184
Endnotes...................................................................................................... 185
Chapter 9 – Customer experience management as a marketing strategy.......... 187
9.1 Introduction................................................................................................ 187
9.2 Understanding touch points......................................................................... 188
9.3 Defining customer experience management................................................. 189
9.4 Customer experience and the value proposition........................................... 190
9.5 More about moments of truth...................................................................... 191
Managing moments of truth......................................................................... 192
9.6 Customer experience versus experience marketing...................................... 194
9.7Customer relationship management versus customer experience
management................................................................................................ 195
9.8 The benefits of customer experience management....................................... 196
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9.9Marketing strategy and customer experience management........................... 196
9.10 The customer experience management process............................................ 197
9.10.1 Planning the customer experience................................................... 197
9.10.2 Implementing customer experience management............................ 201
9.10.3 Controlling customer experience management................................ 203
9.11 The future of customer experience management.......................................... 205
The online realm and customer experience management............................. 207
9.12Practical perspectives on customer experience management........................ 209
9.13 Summary..................................................................................................... 210
Endnotes...................................................................................................... 214
Chapter 10 – Market strategies......................................................................... 216
10.1 Introduction................................................................................................ 216
10.2 Market strategies.......................................................................................... 217
Factors determining strategy selection.......................................................... 217
10.3 New market entry strategies......................................................................... 219
10.3.1 Pioneer strategy............................................................................... 219
10.3.2 Market challengers.......................................................................... 224
10.4 Strategies for market growth........................................................................ 230
10.4.1 Market penetration strategies........................................................... 230
10.4.2 Market development strategies........................................................ 231
10.4.3 Product development strategies....................................................... 233
10.4.4 Diversification strategies.................................................................. 234
10.5 Market strategies in mature markets............................................................. 235
10.5.1 Excess capacity................................................................................ 235
10.5.2 Increased intensity of competition................................................... 235
10.5.3 Increased difficulty of maintaining product differentiation............... 235
10.5.4 Worsening distribution problems.................................................... 236
10.5.5 Growing pressures on costs and profits........................................... 236
10.6 Market strategies in decline markets............................................................ 236
10.6.1 Divestment or liquidation ............................................................... 236
10.6.2 Maintenance strategy ...................................................................... 236
10.6.3 Harvesting strategy ......................................................................... 237
10.6.4 Profitable survivor strategy ............................................................. 237
10.6.5 Niche strategy................................................................................. 237
10.7 Summary .................................................................................................... 237
Endnotes...................................................................................................... 238
Chapter 11 – Product life cycle and branding strategies................................... 239
11.1 Introduction................................................................................................ 239
11.2 The product life cycle.................................................................................. 239
11.2.1 Key considerations about the PLC................................................... 240
11.2.2 Strategies in the stages of the PLC.................................................... 240
11.2.3 Additional product life cycle patterns.............................................. 255
11.2.4 Consumer product adoption and the diffusion process.................... 257
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11.3 Brands and branding.................................................................................... 259
11.3.1 Brand values.................................................................................... 260
11.3.2 Brand awareness and brand equity.................................................. 260
11.3.3 Brand protection............................................................................. 262
11.3.4 Branding strategies.......................................................................... 263
11.3.5 Brand management.......................................................................... 271
11.4 Summary..................................................................................................... 271
Endnotes...................................................................................................... 275
Chapter 12 – Competitive market strategies..................................................... 277
12.1 Introduction................................................................................................ 277
12.2 Definition of a sustainable competitive advantage ....................................... 277
12.3The bases for the creation of sustainable competitive advantages................. 278
12.3.1 Operational excellence.................................................................... 279
12.3.2 Product leadership.......................................................................... 279
12.3.3 Customer intimacy.......................................................................... 279
12.4 Characteristics of sustainable competitive advantage.................................... 280
12.5Comparing sustainable competitive advantage with the key success
factors and core competencies...................................................................... 280
12.6 Differentiation strategy................................................................................. 281
12.6.1 Approaches to differentiation........................................................... 282
12.6.2 Sustainability of differentiation........................................................ 285
12.6.3 Common pitfalls in differentiation................................................... 285
12.7 Low-cost strategy ........................................................................................ 286
12.7.1 Cost drivers..................................................................................... 287
12.7.2 Opening up a cost advantage........................................................... 288
12.7.3 Pitfalls in following a cost-leadership strategy.................................. 290
12.8 Focus strategy ............................................................................................. 291
12.8.1 Advantages of a focus strategy......................................................... 292
12.8.2 The sustainability of a focus strategy................................................ 292
12.9 The pre-emptive move................................................................................. 293
Potential advantages and risks of a pre-emptive move.................................. 294
12.10 Synergy........................................................................................................ 295
Advantages and disadvantages of synergy as a strategy................................. 295
12.11 Summary .................................................................................................... 296
Endnotes ..................................................................................................... 296
Chapter 13 – Going global................................................................................ 299
13.1 Introduction................................................................................................ 299
13.2 Globalisation................................................................................................ 300
13.3 The benefits of globalisation......................................................................... 301
13.4 The decision to go global............................................................................. 301
13.4.1 Steps in the decision to go global..................................................... 303
13.4.2 Born-global firms............................................................................ 306
13.5 Strategic decisions in going global................................................................ 307
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13.6
13.7
13.8
13.9
13.10
13.11
13.12
13.13
Global environments.................................................................................... 307
Trade barriers............................................................................................... 310
Global marketing research........................................................................... 311
Global market selection and entry................................................................ 312
13.9.1 Market selection............................................................................. 312
13.9.2 Market entry.................................................................................. 314
13.9.3 Segmenting, targeting and positioning........................................... 316
In-market strategies..................................................................................... 317
13.10.1 Global product decisions............................................................... 317
13.10.2 Global communication decisions................................................... 322
13.10.3 Global pricing decisions................................................................. 323
13.10.4 Global distribution decisions......................................................... 330
Online options............................................................................................. 333
Managing the global effort............................................................................ 334
Summary..................................................................................................... 335
Endnotes...................................................................................................... 336
Chaper 14 – Refocusing the business................................................................ 337
14.1 Introduction................................................................................................ 337
14.2 What is business refocusing?........................................................................ 338
14.3 The impact of the economic environment.................................................... 340
14.4 Reasons for refocusing................................................................................. 341
14.5 Focus strategies............................................................................................ 344
14.6 Building competitive advantage via focusing................................................ 346
14.7 Choosing whether to focus on one or more segments.................................. 346
14.8 The focuser’s advantage: differentiation or low cost?..................................... 347
14.9 Protecting a focus-based competitive advantage........................................... 348
14.10 Summary..................................................................................................... 349
Endnotes...................................................................................................... 352
Chaper 15 – Leveraging the business................................................................ 353
15.1 Introduction................................................................................................ 353
15.2 Theoretical framework................................................................................. 354
15.3 Value creation.............................................................................................. 357
15.4 Leveraging the business............................................................................... 360
15.4.1 Generic strategic levers................................................................... 361
15.4.2 Marketing levers............................................................................. 362
15.5 Brands as leverage........................................................................................ 364
15.6 Company reputation.................................................................................... 368
15.7 Business relationships.................................................................................. 369
15.8 Summary..................................................................................................... 371
Endnotes...................................................................................................... 376
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Chapter 16 – Selecting the strategies for the way forward............................... 378
16.1 Introduction................................................................................................ 378
16.2 Strategy formulation.................................................................................... 378
16.3 Strategy formulation process ....................................................................... 381
16.3.1 Environmental analysis.................................................................... 383
16.3.2 Resource analysis............................................................................. 384
16.3.3 Performance analysis....................................................................... 386
16.3.4 Strategic alternatives........................................................................ 386
16.4 Strategy evaluation....................................................................................... 387
Evaluation techniques.................................................................................. 389
16.5 Choice of strategy........................................................................................ 389
16.5.1 Factors that influence the choice of strategy.................................... 389
16.5.2 Criteria for selecting the correct strategy.......................................... 390
16.6 Summary..................................................................................................... 392
Endnotes...................................................................................................... 393
Chapter 17 – Strategy implementation and control.......................................... 395
17.1 Introduction................................................................................................ 395
17.2 Defining strategy implementation................................................................ 396
17.3 The importance of strategy implementation................................................. 397
17.4 The effectiveness of strategy implementation................................................ 398
17.4.1 Organisational structure.................................................................. 398
17.4.2 Resources........................................................................................ 399
17.4.3 People (human resources)............................................................... 399
17.4.4 Organisational culture (shared goals and values)............................. 400
17.4.5 Leadership....................................................................................... 400
17.4.6 Systems and processes..................................................................... 401
17.5 Implementation approaches......................................................................... 401
17.5.1 Implementation by command.......................................................... 402
17.5.2 Implementation through change...................................................... 403
17.5.3 Implementation through consensus................................................. 403
17.5.4 Implementation as organisational culture........................................ 404
17.5.5 Implementation through crescive.................................................... 405
17.6 Barriers to effective strategy implementation................................................ 406
17.7 Strategy evaluation and control.................................................................... 407
17.8 The evaluation and control process.............................................................. 408
Step 1: Establish performance criteria......................................................... 409
Step 2: Do performance projections (desired performance)......................... 409
Step 3: Measure actual strategy performance............................................... 410
Step 4:Evaluate the strategy performance (desired versus actual
performance)................................................................................... 410
Step 5: Take corrective action....................................................................... 410
17.9 Evaluation/control techniques...................................................................... 411
17.9.1 Marketing audit............................................................................... 411
17.9.2 Sales analysis................................................................................... 412
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17.9.3 Cost analysis.................................................................................... 414
17.9.4 Efficiency analysis............................................................................ 414
17.9.5 Qualitative observation.................................................................... 414
17.10Significance and benefits of strategy evaluation and control......................... 415
17.11 Summary..................................................................................................... 416
Endnotes...................................................................................................... 418
Chapter 18 – Branding...................................................................................... 422
18.1 Introduction................................................................................................ 422
18.2 What is branding?........................................................................................ 423
18.3 Definition of a brand.................................................................................... 424
The brand elements..................................................................................... 425
18.4 Advantages of brands................................................................................... 428
18.5 The brand loyalty phases............................................................................. 430
18.5.1 The three levels of brand acceptance............................................... 430
18.5.2 Building strong brand equity – the brand pyramid.......................... 431
18.6 Types of brands............................................................................................ 434
18.7 The branding process................................................................................... 437
Step 1: Identify and establish the brand position and values........................ 438
Step 2: Plan and implement brand marketing programmes.......................... 439
Step 3: Measure and interpret brand performance........................................ 440
Step 4: Grow and sustain brand equity........................................................ 441
18.8 Keller’s brand report card............................................................................. 441
18.9 Brand metrics............................................................................................... 442
18.9.1 Benefits of measuring a brand.......................................................... 443
18.9.2 Types of branding metrics................................................................ 443
18.10 Summary..................................................................................................... 450
Endnotes...................................................................................................... 451
Chapter 19 – Electronic marketing strategies................................................... 452
19.1 Introduction................................................................................................ 452
19.2 Defining electronic marketing ..................................................................... 453
19.2.1 The difference between electronic marketing and
traditional marketing ...................................................................... 454
19.2.2 The advantages and disadvantages of electronic marketing.............. 455
19.2.3 The key environmental considerations in electronic marketing........ 456
19.2.4 Consumer behaviour and electronic marketing............................... 458
19.2.5 Electronic marketing and research................................................... 460
19.3 Electronic marketing mix strategies.............................................................. 461
19.3.1 Product strategies ........................................................................... 462
19.3.2 Pricing strategies............................................................................. 463
19.3.3 Distribution strategies...................................................................... 464
19.3.4 Communication strategies............................................................... 465
19.4 The electronic marketing plan...................................................................... 470
19.5 Summary..................................................................................................... 472
Endnotes...................................................................................................... 473
Index................................................................................................................. 475
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PREFACE
All organisations – from modest start-ups to multinational corporations – can benefit
from an effective marketing strategy, as it serves as a roadmap for the entire business.
Without strategy, an organisation has no direction. Successful organisations give
direction to their activities through strategic planning based on an analysis of all the
relevant information and factors within and outside the organisation.
A strategy means to achieve the firm’s objectives. A strategy involves the development
of specific reactive actions to adapt the firm to changes in the environment. Top
management must factor in all potential influences on the firm, including macroenvironmental factors and market factors, as well as the organisation’s own internal
strengths and weaknesses. Armed with the knowledge of the firm’s capabilities and
aspirations, the customer and the competitive landscape, the aim of strategic marketing
is to maximise the firm’s positive differentiation over its competitors in the eyes and
minds of its target market. The role of strategic marketing is to decide the firm’s position
and in which markets to compete; where the firm wants to go and what the basis of the
firm’s competitive advantage is going to be; how the firm will get there; and when and
how the firm will compete.
Strategic Marketing structures the strategic marketing process in sections to allow
for an understandable and easy-to-follow process. It follows a practical and logical
approach to a topic that is often made unnecessarily difficult. The book is based around
the following questions:
•• Where are we now? An organisation needs to know this if it wants to move forward.
•• Where do we want to be/go? If an organisation knows where it is currently, it is
easier to decide where it wants to go in the future.
•• How do we get there? Knowing where an organisation wants to go makes it possible
to decide on the possible ways to get there.
This book is one of the few strategic marketing books on the market that brings in
marketing metrics and the financial implications of decisions. Customer experience
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Strategic Marketing
management, leveraging, and refocusing the business all receive attention, as these
issues form an integral part of strategic planning. Global strategies and the way forward
are also covered.
The authors consider this text a leader in its field and believe it will help students –
both undergraduate and postgraduate – and practitioners to gain a better, more holistic
understanding of strategic marketing.
The Editors
January 2017
xvi
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ABOUT THE AUTHORS
Dr Cornelius Bothma is a senior lecturer in the Department of Retail and Marketing
Management at the University of South Africa (Unisa).
Prof MC Cant is a professor in the Department of Retail and Marketing Management
at the University of South Africa (Unisa).
Cindy Erdis is a senior lecturer in the Department of Retail and Marketing Management
at the University of South Africa (Unisa).
Prof Neels van Heerden is Head of Department: Marketing, Logistics and Sport
Management at the Tshwane University of Technology (TUT).
Prof Gert Human is a professor in the Department of Business Management at
Stellenbosch University. He is an active member of the Industrial Marketing and
Purchasing Group (IMP), the European Marketing Academy (EMAC), the Academy
of Marketing (AM), the Academy of Marketing Sciences (AMS), the Marketing Science
Institute (MSI), the Strategic Management Society (SMS) and the South African Institute
of Management Scientists (SAIMS).
Ricardo Machado is a senior lecturer in the Department of Retail and Marketing
Management at the University of South Africa (Unisa). He has consulted widely in South
Africa and his fields of interest are customer experience, customer service, marketing
strategy and sales management. He has edited, authored or co-authored over 55 books
in marketing-related fields in South Africa.
Prof KM Makhitha is the COD of the Department of Retail and Marketing Management
at the University of South Africa (Unisa).
Prof Mornay Roberts-Lombard is Deputy Head of Department: Marketing Management
and head of master’s and doctoral studies at the University of Johannesburg (UJ).
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Strategic Marketing
Prof Estelle van Tonder is an associate professor in the School of Business Management
Faculty: Economic and Management Sciences. She is the Programme leader – Marketing.
Dr Kim Viljoen is a senior lecturer in the Department of Business Management –
Faculty of Management and Commerce at the University of Fort Hare.
Prof Jan Wiid is a professor in the Department of Retail and Marketing Management at
the University of South Africa (Unisa).
Dr Johan van Zyl is Director: Centre for Development Support in the Faculty of
Economic and Management Sciences at the University of the Free State.
xviii
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ACKNOWLEDGEMENTS
OF TABLES AND
FIGURES
Figure 6.2: ‘Balanced score card.’ From Fig 15.6, p 426: ‘The Balanced Scorecard.’ In
Applied strategic marketing. 4th edition. 2013. Jooste, C. J. © Heinemann.
Table 10.1: ‘Marketing strategies for leaders, challengers and followers.’ From Fig.
10.22, p 375: ‘Competitive strategies for leaders, followers and challengers.’ In Strategic
Marketing Management: Planning, implementation and control. 2nd edition. © 1997.
Wilson, R. M. S. & Gilligan, C. Butterworth-Heinemann. Reproduced by permission of
Taylor & Francis Books UK.
Case study: Sasol and Burger King®. Adapted from: Moorad, Zeenat. 2013. Burger King
coming soon to a Sasol near you. By permission of GRAND FOODS (PTY) LTD and by
permission of SASOL.
Figure 18.1: ‘The brand pyramid to build brand equity.’ From Fig 9.2, p 281: ‘Brand
Resonance Pyramid.’ In Marketing Management. 12th edition. 2006. Kotler, P. & Keller,
K. L. © Pearson Education Inc.
Figure 18.4: ‘The brand management process.’ From Fig. 1-13, p 44: ‘Strategic Brand
Management Process.’ In Strategic Brand Management: building, measuring and managing
brand equity. 2nd edition. 2003. Keller, K. L. © Pearson Education Inc.
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Chapter
1
OVERVIEW OF
STRATEGIC
MARKETING
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Understand and explain what is meant by strategy;
„„ Identify the 5 Ps of strategy;
„„ Identify the three types of strategy levels and explain them;
„„ Identify and discuss the tasks of strategic marketing;
„„ Define what strategic marketing is;
„„ Explain what strategic business units (SBUs) are;
„„ Understand the difference between strategic marketing and marketing management.
1.1 INTRODUCTION
The one thing we know about business in general and marketing specifically is that
nothing stays the same – there will always be change and these changes will impact on
whatever businesses are doing. Because of technology, the internet and the world wide
web, together with the boom in social media usage and acceptance, major changes
have occurred in the concepts and philosophies of marketing and this resulted in
new and challenging developments in the field of marketing.1 It is the responsibility
of management of organisations to understand the changes taking place and how
best to adapt to these changes. For this reason, scholars, academics and industry
professionals should be provided with a comprehensive framework that would give
them an opportunity to develop an understanding of the challenging developments in
marketing.
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The central structure of this book is broken down into three main phases. These phases
are:
1. Setting the scene (Part 1).
2. Aiming where we want to go (Part 2).
3. How do we get there? (Part 3).
This central structure rests on four central questions that top management should ask
themselves, namely:2
1. Where are we now?
(Part 1: Setting the scene)
2. Where do we want to be? (Part 2: Aiming where we want to go)
3. How will we get there?
(Part 3: How do we get there?)
4. Did we get there?
}
Figure 1.1 identifies how each chapter fits into the central structure and questions of
this textbook and also provides a structure for the remainder of the book.
Introduction
Chapter 1: Overview of strategic marketing
Part 1: S etting the
scene
Part 2: Aiming where we
want to go
Part 3: H
ow do we
get there?
„„ Chapter
„„ Chapter
„„ Chapter
2: Analysis
of the external
marketing or business
environment
„„ Chapter 3: Customer
analysis
„„ Chapter 4: Market
analysis
„„ Chapter 5: Analysing
competitors
„„ Chapter 6: Analysing
the internal
environment
„„ Chapter 7: Marketing
strategy and metrics
8: Sustainable
competitive advantage
„„ Chapter 9: Customer
experience management as
a marketing strategy
„„ Chapter 10: Market
strategies
„„ Chapter 11: Product
life cycle and branding
strategies
„„ Chapter 12: Competitive
market strategies
„„ Chapter 13: Going global
„„ Chapter 14: Refocusing the
business
„„ Chapter 15: Leveraging the
business
„„ Chapter 16: Selecting the
strategies for the way
forward
17: Strategy
implementation and
control
„„ Chapter 18: Branding
„„ Chapter 19: Electronic
marketing strategies
FIGURE 1.1 Structure of this book
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Chapter 1 – Overview of strategic marketing
Chapter 1 will start by discussing what strategy is as well as the different levels of
strategy. Thereafter, strategic marketing will be discussed and contextualised in terms of
its tasks and exploration of strategic business units (SBUs). This chapter will conclude
with a brief discussion of the difference between strategic marketing and marketing
management.
1.2 WHAT IS MEANT BY STRATEGY?
Strategic marketing is derived from strategy and, as a result, it was deemed practical
to start the chapter and book by clearly contextualising and explaining what strategy
is. An accurate definition of a strategy would go a long way in avoiding contradictory
explanations of what should be regarded as strategy and what as strategic marketing.
We all know that strategy in its simplest form means a plan that is designed in order to
meet the objectives of the organisation.
The concept of ‘strategy’ was originally introduced and defined in ancient military
literature and dictionaries as ‘… a plan of attack for winning the battle’ or ‘a plan for
beating the opposition’. Today, similar definitions are used to define strategy in the
business field. The first definition of strategy appeared in the literature and dictionaries
of the business field in 1952 only. At this point in time, strategy was seen by businesses
as a plan for achieving organisational goals. This attempt to define strategy is fairly
simplistic, but there are numerous efforts to contextualise the notion of strategy.
However, most definitions subsequent to 1952 are very similar to the definition in
1952.
The concept of ‘strategy’ is in all probability one of the most used and frequently
misinterpreted expressions in business. Strategy is used very widely and in a very
broad sense in the business world. According to Meek & Meek,3 strategy has the same
meaning, whether used in a corporate context, marketing context, or even as a strategy
to expand the product mix – it is concerned with how organisations might achieve their
goals and objectives. In fact, the only notable difference lies in the level at which the
strategy is developed − top-, middle- or lower -level. These differences will be discussed
later in this chapter.
The concept of ‘strategy’ in the modern business world can be defined as an action
plan,4 or a pattern that brings together the objectives and activities of an organisation
into a cohesive whole.5 West, Ford & Ibrahim6 defined strategy simply as ‘the means
an organisation uses to achieve its goals and objectives’, therefore a strategy sets out the
direction and the scope of an organisation over the long term.7
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Wilson & Gilligan8 added another dimension to the definition of strategy as being the
broad statement of the way in which the organisation sets out to achieve its goals and
objectives. This implies that marketers are left with a series of decisions to be made
regarding the type of products or services it offers, the service levels to offer, packaging
and distribution of these products and services, corporate culture, the basis of the
competitive level of the organisation, and many more.9 In 1987, Henry Mitzberg10
identified a multiplicity view of strategy by proposing five definitions of strategy,
which are referred to as the 5 Ps of strategy – strategy plan, ploy, pattern, position and
perspective. The 5 Ps of Mitzberg’s view on strategy are briefly discussed below:
1. Strategy plan. A plan is usually the most used manner of describing the concept of
‘strategy’. A plan basically means that a set of actions for achieving something has
been put in place and the progress of these actions monitored from the start to the
expected finish.
2. Strategy ploy. This generally refers to a short-term strategy that tends to have limited
objectives and it may be subject to change at very short notice.
3. Strategy pattern. This refers to consistent behaviour taking place. This means
progress is made due to a consistent form of behaviour that has been adopted.
4. Strategy as a position. As a position, strategy looks downwards towards the meeting
of customer needs, and outwards towards the external competitive market.11
5. Strategy as a perspective. This refers to the organisation’s way of doing things and is
also called the interviewer view or experience.12
Plan
Perspective
Ploy
5 Ps of
strategy
Position
Pattern
FIGURE 1.2 The 5 Ps of strategy13
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Chapter 1 – Overview of strategic marketing
Based on the brief discussion above, it is clear that a successful strategy is usually
characterised by four key components:14
1. It is aimed at specific long-term goals that the organisation wants to achieve.
2. It shows a clear understanding of the business environment in which the organisation
operates.
3. It is aware of the strengths and weaknesses of the company and the people, and
takes this into consideration.
4. It is implemented in such a way that the capabilities of the organisation are
maximised to achieve the competitive position targeted.
Having referred to the concept of ‘strategy’, the next step is to identify the three types of
strategies that can be defined in relation to the organisational structure. These strategy
levels are corporate strategy, business strategy and functional strategy. Each of these
levels is discussed next.
1.3 STRATEGY LEVELS
One cannot have absolute lines of strategy levels as the different levels of strategy are
interrelated and overlap each other – there are no clear-cut starting and ending points
for each of these levels. Organisations are hierarchical in nature; in other words, an
organisation is made up of several different levels at which strategic decisions are
made or where the strategy process occurs.15 These organisational levels range from
the highest levels, where the organisation’s mission, vision, goals and objectives are
set, to the lowest levels, where planning is done for specific functional areas of the
organisation, such as the financial, human resource or marketing departments. The
three core strategy levels in any organisation include the corporate-, business- and
functional-level strategy, shown in Figure 1.3, which will subsequently be discussed.
Business-level strategy
Feedback
Corporate-level strategy
Functional-level strategy
FIGURE 1.3 The hierarchy of strategy levels
5
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1.3.1 Corporate-level strategy
The reason for being an organisation − its sense of purpose – is contained in the
corporate strategy. This is the level where the future direction of the organisation is
spelled out and where the resources of the organisation are utilised to maximum effect
to take advantage of identified opportunities and to counter threats that may arise.
When looking at the corporate-level strategy, it is their responsibility to address the
more important/significant questions that an organisation is faced with. The important
question that can be asked at this level is: ‘What business are we in and should we be in
it at all?’ This pertains to the organisation as a whole and the combination of business
units and product lines that make up the corporate-level strategy.16 At this level, the
corporate strategy formulates the scope of the business, how the resources in the
organisation should be used and applied, what competitive advantages the organisation
has, and the effective coordination of the functional areas in the organisation.17
Of the wide range of definitions of corporate-level strategy, perhaps the most
comprehensive definition is that by Husted & Allen,18 who defined it as:
... the pattern of decisions that determines and reveals an organisation’s goals and
objectives, produce the principal policies for achieving these goals and objectives,
and define the range of businesses that the organisation is to pursue.
It is the task of corporate-level strategy to give direction to the organisation by making
clear in what type of business they are operating – as this establishes the playing field
for the total organisation. In other words, the corporate-level strategy refers to why
the organisation is in business and the scope of its involvement. In this way, it lays the
foundation for value added by all levels of the organisation.
In conclusion, one can see corporate-level strategy as the strategy that encompasses all
SBUs in the organisation and establishes its future direction.
The next hierarchical strategy level in an organisation is the business-level strategy, also
known as the business unit strategy or competitive strategy.
1.3.2 Business-level strategy
Business-level strategy usually focuses on the most viable strategies an organisation’s
different SBUs can follow in order to best contribute to reaching the overall objectives
of the organisation as a whole. Campbell, Stonehouse & Houston19 state that many
decisions take place at this level in the organisation. This type of decision-making is
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Chapter 1 – Overview of strategic marketing
therefore concerned with how the organisation will compete in each product market or
industry the organisation chooses to compete in.20 In short, the business-level strategy
can be seen as an action plan developed by organisations to indicate how they will
compete in the selected industry and market segment on a day-to-day basis, and in the
process attain a competitive advantage in each area of business. Strategic marketing’s
place and role on this level is to help formulate strategic perspectives of the different
SBUs.
The business-level strategy deals with the question: ‘How should we compete in a given
business or industry?’ This relates to each business unit or product line within the
organisation.
1.3.3 Functional-level strategy
At this level of strategy formulation, the emphasis is on the question: ‘How do we
support the business level strategy?’ This has to do with all the organisation’s major
departments, including marketing.
In essence, the business strategy is broad in nature, and once this has been formulated,
specific strategies aimed at specific target markets must be developed and the strategic
marketing issues addressed. The main purpose of the functional-level marketing
strategy is primarily to support the overall business strategy and competitive approach
by performing strategy-critical activities. The functional-level strategy has as its
aim and focus the support of the business-level strategy by implementing business
strategies through the functional areas such as marketing, human relations, production,
information systems and finance.
It is the responsibility of all functional managers to make sure that they focus on those
activities in their respective departments that support the business strategies and also
contribute to the ultimate realisation of the long-term objectives of the organisation.
1.4 THE NATURE OF STRATEGIC MARKETING
Strategic management of the marketing activities within an organisation enables an
organisation to plan its desired business outcomes more successfully. Strategic marketing
refers to the strategic process that is focused on the establishing and maintaining of
a relationship with new and existing customers that will result in satisfying these
customers’ needs, offering innovative products and services aimed at unmet customer
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needs and in the process also leading to the organisation attaining its long-term goals.21
Lancaster & Massingham22 see strategic marketing as:
... the process of strategically analysing environmental, competitive and business factors
that affect the business units and forecasting future trends in business areas of interest
to the organisation; participating in setting objectives and formulating corporate and
business unit strategies; selecting target market strategies for product markets in each
business unit; establishing marketing objectives; and developing, implementing and
managing program positioning strategies for meeting target market needs.
Strategic marketing therefore essentially refers to the process of planning, implementing
and controlling the marketing activities and efforts of the organisation in a way that will
lead to the achieving of the organisation’s goals and objectives, and in so doing, also
satisfy the needs of the customers. Specific strategic marketing efforts include:
•• The identifying and selection of potentially profitable and sustainable market
segments;
•• Ensuring an understanding of the the behaviour, needs and wants of the customer
in these segments;
•• Developing a selection of products to meet these requirements as well as offering
these products at prices and places acceptable to customers, as well as the places
where customers want them;
•• Monitoring the effectiveness of these efforts to ensure the satisfaction of all customers
in each segment and to take corrective action as and if required.
Strategic marketing is the process of planning, implementing and controlling the marketing
efforts of the organisation in order to meet the goals and objectives of the organisation and
successfully satisfy customer needs and wants.
As discussed at the start of this chapter, strategic marketing refers to a systematic
process that an organisation undertakes to develop its strategic marketing plan, and
consequently assists marketers in answering the following four questions:23
1. Where are we now? This question is crucial for all organisations as it allows them
to reflect on where they are at a certain point in time, and to evaluate their position
in terms of their market scope and competitive advantage. Once an organisation
knows where it is, it can make plans as to where it wants to go.
2. Where do we want to be? After establishing where it is, the organisation should
decide where it wants to be and, based on this, make decisions regarding the
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Chapter 1 – Overview of strategic marketing
development and implementation of the organisational vision, mission, goals and
objectives.
3. How are we going to get there? Knowing where the organisation wants to go
helps strategic marketing to make decisions regarding the formulation of marketing
strategies that assist marketers in achieving the goals and objectives of the
organisation. It also allows them to establish how they will successfully implement
the marketing strategies of the organisation.
4. How will we know if we got there? Strategies must be in place to monitor
the progress of the organisation in reaching its desired destination. This allows
the marketer to monitor and evaluate the development and performance of the
marketing function, and to set up systems for modifying the marketing activities or
strategies and plans.
1.4.1 Tasks of strategic marketing
Strategic marketing seeks to address two key issues, namely which markets to enter, and
how to compete in them within the scope of the organisation’s strategic elements. When
looking at strategic marketing holistically, it is clear that it comprises four essential tasks
or responsibilities.24 Strategic marketing is usually expected to perform the following
four tasks:
1. Giving strategic direction;
2. Deciding on the market scope;
3. Designing the market offering;
4. Evaluating and controlling the performance.
Each of these tasks is briefly discussed below.
Task 1: Giving strategic direction
As with all organisations, it is the responsibility of top management to provide
continuous and long-term direction for their organisations, while at the same time
looking after the interests of stakeholders.25 Strategic marketing is therefore a key
activity in organisations, which not only adds value to the growth and tendency of an
organisation, but also facilitates an organisation in determining the path that it should
pursue to stay significant in the market.26 The strategic direction of an organisation
assists in determining the goals and objectives it desires to attain from each market
segment, and this is generally communicated through tools such as the organisational
vision, mission and values.27
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In essence, the strategic direction given by strategic marketing provides a structure
for evaluating the efforts of the organisation, and for establishing to what extent it is
meeting its goals. It provides a road map for moving forward and attaining the ultimate
long-term goals and objectives of the organisation.
Task 2: Deciding on the market scope
The second task of strategic marketing involves decisions regarding the scope of the
market; that is, the industry that would be operated in and the product or service
offerings in this industry, as well as the scope of the market segment; that is, the type,
size, demographics, needs and wants of the segment(s). A market scope can either be
broad or narrow – a broad market scope implies that the organisation targets mass
markets or many market segments, for example teenagers; a narrow market scope
focuses on one specific niche group,28 such as Porsche owners. Irrespective of a broad or
narrow focus, it is important that the focus is not to limit. Generally speaking, you will
find that smaller organisations have a narrower scope compared to larger organisations,
which will have a broader scope. This will in most likelyhood be directly attributed to
the availability of resources.
Task 3: Designing the market offering
Designing the market offering is maybe the most crucial and challenging task in the
strategic marketing process, as this shows to what extent the organisation understands
the needs of the market and to what extent it will be able to meet them. The organisation
needs to ensure that the offering it placed on the market is designed in such a way that
the market offerings for each different segment or scope are met. In most organisations,
the decisions regarding the market offering are made and executed by the marketing
department, although other functional departments may also play an important role in
such decisions.
Task 4: Evaluating and controlling the performance
Planning without evaluation and control is a waste of time and effort. The marketer
needs to monitor the implementation of the decisions taken and then evaluate the
effectiveness of these plans in the meeting of the set objectives. This task of strategic
marketing serves as an instrument to obtain feedback in the strategic marketing process,
and allows the marketer to identify any gaps between actual results or performance
and the intended performance. In this way, the organisation can re-evaluate the way
in which the marketing strategy was designed and implemented, and can identify the
reasons why it did or did not work. The monitoring, evaluation and control process of
the marketing strategy can be determined by a number of control systems, which will
be discussed later on in this book.
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Chapter 1 – Overview of strategic marketing
1.4.2 Strategic business units
In organisations with a wide range and variety of products, strategic marketing takes
place through the establishment of independent divisions known as the strategic
business units (SBUs).29 SBUs can be defined as distinct businesses set up as units in a
larger company to ensure that a certain product or product line is promoted and handled
as though it were an independent business.30 These units can be divisions, product
clusters, brands or geographic units. Cant, Van Heerden & Ngambi31 state that SBUs
direct their product offering at a particular market and supervise the manufacturing,
distribution and marketing communication function with a degree of autonomy.
It is not always easy to understand and define the SBUs of an organisation in definitive
groups. The main aim of SBUs is to divide the organisation into parts or sections that
will facilitate easier strategic analysis and planning. Typically, SBUs consist of a single
product line of related products marketed to define market segments.32
CASE STUDY
SOUTH AFRICAN NATIONAL PARKS
The strategic business units of SANParks are made up of Groenkloof, Kruger, Table
Mountain, Marakee, Golden Gate, Camdeboo, Mountain Zebra, Addo Elephant, Garden
Route Park, Bontebok, Agulhas, West Coast, Karoo Namaqua, Richtersveld, Augrabies,
Kgalagadi, Mapungubwe, Tanka Karoo and Mokala. All of the national parks mentioned
above have their own characteristics, reason for existence and a unique selling point
attributed to each one.33
1.5 STRATEGIC MARKETING AND MARKETING MANAGEMENT
In order for organisations to endure and mature in the long term, marketing managers
should make decisions and take actions to balance the long-term goals and objectives
of the organisation. The goals and objectives of the marketing function, and those of
other functional areas, should be in harmony in order to meet the overall objectives of
the organisation and to offer a chance of being successful.
Strategic marketing can be seen as a continuous process taking place primarily from
a top management perspective, which aids the market and marketing strategies of the
organisation. Owing to the importance of marketing per se, marketers are becoming more
and more involved in the total organisational planning process. There are, however, still
specific differences between strategic marketing and functional marketing.
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Strategic Marketing
Table 1.1 tabulates and summarises the differences between strategic marketing and
marketing management. These points of dissimilarity highlight the importance of a
strategic approach to the marketing task.
TABLE 1.1 Difference between strategic marketing and marketing management34
Differences
Strategic marketing
Marketing management
Mission
Deals with the actions of the
SBUs
Deals with marketing activities
of the specific SBU
Nature of job
Necessitates a high degree of
originality and innovation
Necessitates maturity,
familiarity and control
Leadership style
Requires a practical viewpoint
Requires a spontaneous
viewpoint
Orientation
Inductive and instinctive
Deductive and logical
Time frame
Long-term
Day-to-day
Decision process
Mainly bottom-up
Mainly top-down
Organisational behaviour
Attains synergy between
various components of the
organisation, both horizontally
and vertically
Pursues interests of the
decentralised unit
Opportunity sensitivity
Ongoing
Ad hoc
Relationship with the
financial function
A close relationship is sustained
Relationship is less clear
Relationship with the
environment
Environment considered everchanging and active
Environment considered stable
with infrequent instability
From Table 1.1 it is clear that there are significant differences between strategic
marketing and marketing management, and the levels on which each has an influence.
1.6 SUMMARY
Chapter 1 laid the foundation for the remainder of this book. The chapter started by
structuring the book into the three main phases that are based on four central questions
most widely used in competitive marketing strategies, namely: ‘Where are we now?’,
‘Where do we want to be?’, ‘How will we get there?’, and ‘Did we get there?’ Thereafter,
strategy was contextualised and the three levels of strategy, namely corporate-, businessand functional-level strategy were differentiated. The chapter also discussed the nature
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Chapter 1 – Overview of strategic marketing
and definition of strategic marketing and the tasks of strategic marketing. It concluded
with an explanation of strategic business units (SBUs) and the differences between
strategic marketing and marketing management.
Self-evaluation questions
1. Define a strategy and name and explain the 5 Ps of Mitzberg’s view on strategy.
2. Differentiate between the three levels of strategy by naming and defining them
and providing practical examples of each.
3. Define strategic marketing.
4. Name and discuss the four tasks of strategic marketing, and provide practical
examples.
5. What is meant by SBUs?
6. Tabulate the differences between strategic marketing and marketing management.
ENDNOTES
1. Sahaf, M.A. 2008. Strategic marketing: making decisions for strategic advantage. India:
Prentice Hall.
2. West, D., Ford, J. & Ibrahim, E. 2010. Strategic marketing. 2nd ed. New York, USA: Oxford
University Press, p 22.
3. Meek, H. & Meek, R. 2003. CIM coursebook 03/04 strategic marketing management.
Burlington, MA: Elsevier, Butterworth-Heinemann, p 13.
4. Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. 2012. Understanding business strategy: concepts
plus. 3rd ed. Mason, Ohio: South-Western, Cengage Learning, p 4.
5. Stokes, D. & Lomax, W. 2008. Marketing: a brief introduction. London: Thomson, p 172.
6. West et al, op cit, p 36.
7. Stokes & Lomax, op cit, p 172.
8. Wilson, R. M. & Gilligan, C. 2005. Strategic marketing management. Burlington: Elsevier
Butterworth-Heinemann.
9. West et al, op cit, p 37.
10. Mitzberg, H. in Campbell, D., Stonehouse, G. & Houston, B. 2002. Business strategy: an
introduction. 2nd ed. Woburn, MA: Butterworth-Heinemann, p 8.
11. Louw, L. & Venter, P. 2010. Strategic management: developing sustainability in southern Africa.
2nd ed. Cape Town, South Africa: Oxford University Press, p 16.
12. Ibid.
13. Campbell et al, op cit, p 8.
14. West et al, op cit, p 37.
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15. Carroll, A.B. & Buchholtz, A.K. 2009. Business & society: ethics and stakeholder management.
Mason, OH: South-Western, Cengage Learning, p 157.
16. Daft, R.L., Kendrick, M. & Vershinina, N. 2010. Management. International ed.
Hampshire: South-Western, Cenage Learning, p 284; Hill, C. & Jones, G.R. 2010. Strategic
management theory: an integrated approach. 9th ed. Mason, OH: South-Western, Cengage
Learning, p 285.
17. Pride, W.M. & Ferrell, O.C. 2010. Marketing. 15th ed. Mason, OH: South Western, p 38.
18. Husted, R.W. & Allen, D.B. 2011. Corporate social strategy: stakeholder engagement and
competitive advantage. New York: Cambridge Press, p 192.
19. Campbell et al, op cit, p 23.
20. Ahlstrom, D. & Bruton, G.D. 2010. International management: strategy and culture in the
emerging world. Mason, OH: South-Western, Cengage Learning, p 107.
21. West et al, op cit, p 57; Xu, M. 2007. Managing strategic intelligence: techniques and
technologies. Hershy, PA/London: Information Science Reference, IGI Global, p 56.
22. Lancaster, G. & Massingham, L. 2011. Essentials of marketing management. New York:
Routledge, p 19.
23. Sahaf, op cit, p 15.
24. Hulbert, J.M., Capon, N. & Piercy, N.F. 2003. Total integrated marketing: breaking the bounds
of the function. New York: Free Press, p 36.
25. Enz, C.A. 2010. Hospitality strategic management: concepts and cases. 2nd ed. New Jersey,
USA: John Wiley & Sons, p 83.
26. Sahaf, op cit, p 15.
27. Enz, op cit, p 38.
28. Gopinath, C. & Siciliano, J. 2010. Strategize! Exercises in strategic management. 3rd ed.
Connecticut: Cengage Learning, p 55.
29. Cant, M.C., Van Heerden, C.H. & Ngambi, H.C. 2013. Marketing management: a South
African perspective. 2nd ed Cape Town, South Africa: Juta & Co, p 25.
30. Koontz, H. & Weihrich, H. 2008. Essentials of management: an international perspective. 7th
ed. New Delhi: Tata McGraw-Hill, p 168.
31. Cant, et al, op cit, p 25.
32. Ingram, T.N., LaForge, R.W., Avila, R.A., Schwepker, C.H. & Williams, M.R. 2012. Sales
management: analysis and decision making. 8th ed. New York: M.E. Sharpe, Inc, p 48.
33. Cant, M.C. & Machado, R. 2010. Marketing success stories: South African case studies. 7th
ed. Cape Town, South Africa: Oxford University Press, p 25.
34. Adapted from Cant, et al, op cit, pp. 26; Jooste, C.J., Strydom, J.W., Brendt, A. & Du
Plessis, P.J. 2012. Applied strategic marketing. 4th ed. Cape Town, South Africa: Pearson
Education South Africa (Pty) Ltd, p 7.
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Chapter
2
ANALYSIS OF THE
EXTERNAL MARKETING OR
BUSINESS ENVIRONMENT
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Discuss and explain the attributes of the external environment;
„„ Discuss the six dimensions of the external environment;
„„ Understand and evaluate a strengths, weaknesses, opportunities, threats (SWOT)
analysis;
„„ Understand the importance of environmental scanning and name three approaches
used in it;
„„ Analyse and assess the importance of identifying influential external forces;
„„ Differentiate and explain proactive and reactive strategies;
„„ Understand and apply a risk analysis procedure;
„„ Complete a decision tree.
2.1 INTRODUCTION
The environment in which all businesses operate is very dynamic and something that
needs to be monitored. The external or macro-environment is difficult to define in
absolute terms due to the many dynamic factors that make up this environment. For
organisations to maintain a long-term, successful sustainable advantage over other
organisations, they must be quick to adapt to changes taking place and not be rigid
in their approach.1 Changes in technology, the economy, social factors, international
shifts and the physical environment are all beyond the control of management. It is the
responsibility of strategic management to identify changes in the environment that can
and will impact on the organisation and to assess to what extent these can influence the
organisation’s ability to meet its objectives.2
Management can use a strengths, weaknesses, opportunities, threats (SWOT) analysis
and strategic environmental issue management methods to assist in making key
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strategic decisions. Scanning the environment for specific opportunities and threats,
and instituting proactive or even reactive strategies could assist management in reducing
the impact of major changes that may take place. Being well informed and staying up
to date by using extensive environmental scanning activities will allow management to
better react to changes in the environment and to hold on to its competitive advantage.3
2.2 CHARACTERISTICS OF THE EXTERNAL ENVIRONMENT
2.2.1 The ever-changing nature of the external environment
The nature of the external environment is dynamic, resulting in an environment that
is prone to regular transformation due to unlimited sources of change. The fact that
this environment is not controllable and very temperamental makes it difficult for
management to monitor, let alone keep up to date, and to predict and understand
future occurrences.4
2.2.2 The impact of external forces on the external environment
Changes that occur in the external environment do not happen overnight, but are
rather something that develop over a period of time. The magnitude and size of the
external environment and variables in this environment may result in management
not being aware of warning signs that change is taking place and that there may be the
possibility of major events until it has happened. Changes in the market or actions of
competitors are easier to detect and react to, whereas in most instances, management
will only experience the consequences of external forces on the macro-environment.5
2.2.3 The overwhelming state of external variables
A business or organisation has virtually no power or influence when it comes to forces
that impact on the organisation in the external environment. The best management
can hope for is to be prepared for any eventuality, to have plans in place to reduce
the impact of such changes or threats, and to turn threats into opportunities for the
organisation.6
To be able to understand the external environment, marketing management needs a
vast general knowledge and a range of expertise and skills.7 Managers need to have
knowledge in a wide range of disciplines in order to make sense of changes taking place
in the environment.
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The external environment consists of a number of sections or subdivisions which are
discussed next.
2.3 SUBDIVISIONS OF THE EXTERNAL ENVIRONMENT
The external environment can be divided into six dimensions or areas.
2.3.1 Technological environment
Technology can be defined as the focused application of information and tools in
the design, production and utilisation of goods and services to solve problems and
perform tasks more efficiently. Constant advancement in technology means that
business processes, marketing plans, and research and development are as equally
affected as machinery and production methods. The use of data mining, for example,
is made possible due to advances in software development and technology. This
enables marketing management to better target their consumers. The technological
developments impact and influence the other subdivisions of the external environment.
The effects of technology on society are evident in the way people communicate with
each other, how their needs are satisfied and the way in which they participate in causes
such as creating a sustainable environment. The world economy is hugely influenced
by technological changes, and thrives on the generation and commercialisation of new
inventions. In a similar fashion, international trade and exchange limitations are largely
nullified due to communication technology.8 Customer relationship management
(CRM) also relies heavily on up-to-date technological advancements in order to better
understand, communicate and build better relationships with customers.
Every new development in technology leads to opportunities or threats. An example
is the fact that advances in technology have led to an unprecedented growth in social
media, which has led to many new marketing opportunities for businesses.
Marketing management must be aware of technological change and be involved in the
following ways:9
•• Track technological progress and evaluate what, if any, opportunities and threats
this holds for the organisation.
•• Spread new innovations in society by means of new products and services based
on these inventions.
•• Promote new inventions by marrying new customer needs and these inventions to
satisfy market offerings.
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Marketers need to pay specific attention to the following areas regarding technological
innovation:
•• The speed of technological change. It has been said that if a computer manufacturer
stays stagnant for six months, it will be out of the market. The gap between a new
idea and commercialising is shortening dramatically as a result of technology.
•• Regulating technological change. The world today is very sensitive about issues
relating to safety, consumer rights and protecting the environment. For this reason
there are more and more rules and regulations that have to be abided by when new
products are introduced to the market.
•• Higher budgets. More and more money is spent on research and development just
to keep up with competition.
•• Product adjustment versus high research investment. Many companies prefer to rather
improve on products than to invest large sums in major product developments.
•• Limitless innovation. In the social media and cellphone market, consumers literally
expect changes almost on a monthly basis, and this is spilling over into other areas
as well.
From a marketing perspective these areas all have some merit and significance and
should be monitored in order not to lose out on opportunities.
2.3.2 Economic environment
According to the Oxford Learning Lab:
the economic factors that represent the economy include economic growth rates, levels
of employment and unemployment, costs of raw materials such as energy, petrol and
steel, interest rates, exchange rates, inflation rates, recessions and consumer buying
power.10
The components of the economic environment can make or break any organisation and
it is therefore crucial that marketing management is aware of those components that
have a profound impact on the organisation, and devise strategies and plans to either
benefit from changes or to minimise their impact.
The South African economy has gone through major changes the past year and in
May 2016 stood at the brink of being relegated to junk status. In December 2015,
the President replaced the Minister of Finance with an unknown new minister. This
led to major reactions from the world markets and it is estimated that this move
cost the country over R500 billion. The Rand dropped over 30 per cent against the
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US dollar and those companies who import products were adversely affected by
this drop, resulting in many going bankrupt. It is highly unlikely that any company
could have predicted this situation and planned for it. With the above in mind and
the unpredictability of the political scene, some factors to be taken into account by
companies include the following: the economy in 2016 is expected to grow below 1
per cent and only marginally increase in 2017, inflation is above 6 per cent (as in May
2016), and the expectations are that this will increase as the cost of electricity, fuel,
food and labour increased, and linked to a weaker and more volatile rand.11 These
steep increases have taken a toll on business budgets and spending, resulting in lower
overall profit levels. Second, consumer demand and buying power were under pressure
and will in all likelihood stay that way for the foreseeable future. Third, the aftershock
of the recession in Europe (from 2008 onwards) is still experienced in South Africa,
with unemployment levels reaching more than four million of the economically active
population – or more than 25 per cent. The number of unemployed persons increased
by more than 500 000 in early January 2016. One positive aspect is, however, the fact
that the oil price has dropped considerably from its high of nearly 120 US dollars a
barrel in 2013 to below 50 US dollars in mid-2016.
Future trends in the economy are difficult to forecast. Marketing management
must use all available resources to assist in the predicting of future trends and then
design strategies based on their expectations of how these trends will impact on the
organisation’s market.
In the case of small- to medium-sized businesses, they are limited in what they can do to
influence the occurrence of major economic trends, and are more prone to responding
to the state of the economy.
Irrespective of whether it is a small or large organisation, there is a need to be aware of
these changes, and more importantly, how these changes or trends can impact on the
business and how it performs. At present, the more specific issues that organisations
need to be aware of include the following factors:
•• Inflation is high and not within government parameters, which has a negative
impact on expenditure.
•• There is uncertainty in a number of EU countries and even the long-term survival
of the EU.
•• There is a decrease in the savings ratio compared to debt; people are saving less and
borrowing more.
•• There is an increase in the debt of First and Third World countries.
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The importance of these types of changes cannot be ignored, and when placed in
context with the political and legal environmental changes, the diminishing natural
resources, and the fact that the world population is increasing, it becomes clear that
managers must view these changes in context and not in isolation.
The main focus areas of organisations and their customers regarding the economic
factors are the inflation rate, exchange rate, oil prices, consumer employment and
income levels, economic growth, and the fluctuations that occur. These factors will
either encourage or stifle business activity, and investment and management must be
aware of the impact on their financial goals. Strategic marketing management must
constantly apply their knowledge of current and expected future economic trends to
their organisational mission and vision to make sure that the company takes timeous
and appropriate action to keep the business on track.12
2.3.3 Social and cultural environment
It has been said that one of the most difficult things to forecast is the social and cultural
changes that can and may happen, and their impact on society as a whole and the
organisation in particular. Social factors relate to society, and customers are products of
their society, which means that they will operate within the accepted values, language,
laws, and the general way things are done in such a society. Understanding and predicting
the social behaviour of people will therefore always be difficult for management, as
there is a constant transformation of culture, values, lifestyle and expectations. Owing
to the diverse nature of the South African community, marketers need to be acutely
aware of the needs and requirements of numerous subcultures that can exist in a single
region and on a national scale. As with all nations of the world, no country’s culture is
totally homogeneous, and issues such as religion, ethnic group, geographic location,
and so on will lead to variations in behaviour and actions, which in turn will lead to
great implications for management.13
A range of opportunities and threats can arise because of new social and cultural trends.
For example, due to technological advances in the field of social media, a trend businesses
are utilising is the use of social media in the development, recruitment and engagement
of their employees. Organisations are encouraging employees to use Facebook, Twitter
and LinkedIn as tools to build and develop their own personal brand.14 The idea is to
replace the traditional résumé with an in-depth personal brand.
The move towards two-income households, a greater drive by females to establish
themselves in careers, and smaller families will all impact on the decisions that managers
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have to make and the way they plan for the future. Changes in society will have an
effect on supply and demand levels. For example, customers are more health conscious
today and demand healthier food options from food outlets, which means that those
that do not currently offer these options will need to adapt their product and service
offerings to meet these demands or face a decrease in sales or a move to competitors.15
Consumerism has also empowered customers with knowledge about their rights as well
as issues such as misleading advertisements, product safety and other related topics –
all aspects that managers must consider in their planning and offerings to the market.
2.3.4 Demographics
Demographics is defined as the study of a human population based on age, race, sex,
economic status, level of education, income level and employment. These variables can
provide insight into the behaviour of various groups of customers, and allow marketers
to correctly identify and characterise them and create demographic profiles for different
target markets. Management will also be able to identify gaps in the market or possible
threats that could cause current marketing strategies to collapse.16
Demographic profiles can be used to create groupings of, for example, teenage females,
currently attending high school, between 13 and 18 years of age, so that a marketing
strategy may be designed to meet the needs and wants of this specific segment of the
market.
Marketing researchers can use the information gathered about a certain subgroup
concerning their behaviour, preferences and lifestyle to develop not only effective
marketing strategies, but also new products and services that are aimed at the needs
of these groups. It is vital that marketers know who they are dealing with and are able
to use their resources in a focused way when targeting a specific segment. Keeping up
to date with demographic changes will direct marketers in how to promote products
and services in existing markets, as well as reveal the opportunities presented in new
markets.17 This valuable information, which is collected over time, will allow marketers
to pick up on new trends or shifts in attitudes or behaviour within a target segment, and
adapt marketing strategies accordingly.
2.3.5 International environment
The fact that technology has resulted in the world becoming a global market means that
events happening in one part of the world are immediately known worldwide. Distance
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is no longer the problem it used to be. This means that the actions of other countries or
groups of countries can affect an organisation very quickly, especially if it is importing
or exporting goods. A coup in a country where a democratically elected government
has been overthrown may result in sanctions against that country – meaning no imports
or exports from the country. The impeachment of the President of Brazil on 13 May
2016, for example, will have major effect on the businesses in that country as well
as the way they do business with other countries. The USA is also slowly lifting its
trade ban with Cuba, which will be opening new opportunities to do business there. A
cruise liner from one of the major cruise line companies already capitalised on the fact
that trade ban has lifted and took the first tourist in over 50 years to Cuba by cruise
ship. The political disposition in a country, a change in leadership or the culture of a
country can either limit or increase the economic participation between nations, and
could be a potential threat or opportunity for many organisations. Political instability
as in Egypt and a number of African countries, terrorist attacks and other actions can
affect international peace and the level of confidence of international investors, thereby
impacting on organisations and their ability to meet their long-term objectives.18
The complexity of these environmental factors increases multiple times when
organisations start trading with more than one country at a time, as each country has its
own trade laws and regulations as well as its own unique technological, social, cultural
and economic factors to consider.
As mentioned before, with the rapid development in the communication and
technological industries, globalisation is causing national borders to become blurred as
many national cultural values and economic trends begin to spread and merge, creating
a new ‘international culture’. This trend, however, has led to increased international
competition becoming a reality for many local organisations, which can be seen as
either an opportunity or a threat.19 The impact of these types of changes are clear from
the dramatic increase in Chinese clothing vendors in South Africa over the past number
of years, which has had a negative impact on the local textile industry.
It is also true that there is greater interdependence between countries, as countries are
relying on each other’s economies, innovations, technologies, resources and support,
and this fact will impact on management decisions.
2.3.6 Legal/government environment
One of the major influences on organisations is the legal and governmental/political
decisions prevailing in a country. Consider Zimbabwe to see what the impact decisions
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taken by government have had on businesses and society as a whole. The political
system used in Zimbabwe is totalitarian, which means that the political party in power
makes all the decisions, and opposition is not allowed. The fact that government owns
all the resources and makes all the decisions has caused the economy to crumble, as
this system does not encourage economic innovation or development. Also, corruption
within government does not provide support to this totalitarian system.20 Legal
environmental factors refer to employment laws, international trade regulations and
restrictions, such as the Companies Act 71 of 2008 and the Close Corporation Act 69
of 1984, the Competition Act 89 of 1998 and the Consumer Protection Act 68 of 2008,
and any other laws and regulations within a country.21 Actions by local governments
affect and impact upon every legal organisation and the way in which businesses
operate on a day-to-day basis. The deeds and decisions of national governments
influence the long-term standing of every organisation operating within its borders. It
is the responsibility of management to be aware of changes in legislation and how they
impact the organisation’s way of doing business. Part of organisations being proactive
lies in their analysis of the political scenario and what they expect the government to
do or enforce. For example, non-compliance with the rules and regulations of black
economic empowerment (BEE) was not a serious threat to businesses when they were
first introduced, but by 2016 it had become crucial for businesses to comply if they
wished to do business with certain institutions.22
The free-market system, within which South African organisations operate, offers great
freedom to businesses. However, government still has the final say when it comes to
the national annual budget, import tariffs, the endorsement of exports, price control
for specific goods, infrastructure and healthcare development as well as taxation – all
factors aimed at ensuring a fair and stable environment within which to do business.
Many laws have been passed whereby pollution and eco-friendly business practices
and production methods are encouraged and prescribed, making it nearly impossible
for organisations to ignore their social responsibility. These regulations combined
with consumers demanding more sustainable marketing are forcing organisations to
adhere to such regulations and reduce their carbon footprint by implementing greener
business practices and production processes, but this will obviously come at a cost.
Businesses that refuse to adapt to these changes will face huge obstacles in the future as
green marketing becomes less of a choice as time progresses and more of a command
in order to remain sustainable.23
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2.4 EXTERNAL ENVIRONMENT SWOT ANALYSIS
Conducting a complete external environment analysis will allow management to examine
the organisation’s current state of affairs. One of the simplest methods available is a SWOT
analysis, which involves assessing an organisation’s strengths and weaknesses as well as
possible opportunities and threats it will need to manage. According to Dibb, Simkin,
Pride & Ferrell,24 strengths refer to those internal operational, managerial, resource and
marketing factors that managers believe have a competitive advantage, which allow them
to provide a strong foundation for their organisation’s activities and for their ability to
compete effectively in the marketplace, while weaknesses are those aspects in which
the organisation does not do particularly well or where it does not have a competitive
advantage, which may place them in a disadvantaged position in relation to their
competitors. An example of a strength is where a company has huge cash reserves or
personnel which are highly skilled, and a weakness may be that the company does not
have the production capacity or money to expand the business. The external forces refer
to opportunities and threats, where an opportunity can be defined as a situation that
arises in the external environment which offers a chance or opening for a company to
take advantage of, for example, increased sales or the product development and launch
of a new invention.25 An example of external forces at play creating opportunities is the
fact that carbon emissions are regulated by law and this creates opportunities for an
organisation to develop and supply a device that can limit these emissions.
2.5 PREDICTING THE FUTURE OF THE EXTERNAL ENVIRONMENT
Environmental scanning is part and parcel of the strategic marketing process, and
management needs to perform this task in order to prevent crisis management situations.
Sudden shifts in the external environment can throw any organisation off course within
a short period of time and the organisation must be prepared to weather these types of
change. By implementing an environmental scanning or monitoring system, marketers
take part in strategic environmental issue management, which involves identifying key
environmental issues, forecasting the occurrence of events and establishing how the
organisation will respond.26
Environmental scanning
Dibb et al27describe environmental scanning as:
… the process of collecting information about the marketing environment to help
marketers identify opportunities and threats, and assist in planning.
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The core responsibility of environmental scanning should be assigned to pre-identified
staff members who should take full responsibility for performing this task. These staff
members should focus on gathering information internally from other managers and
combine this with the findings of the environmental scanning system, which must
be compiled into a report and communicated to the relevant parties. It is then up to
management and these relevant parties to use the information to their advantage. There
are three approaches to environmental scanning, according to Wilson & Gilligan:28
1. Ad hoc method or irregular approach. This method is used primarily when an incident
takes place that could directly affect the organisation. An ad hoc report is drawn up
based on the investigation of the event in more detail. For example, in South Africa
and Europe processed meat was found to contain the meat of wild animals and
other animals that were not specified. This can lead to large processing companies
investigating their own suppliers in more depth.
2. Periodical method or regular approach. This method is used routinely or periodically
to provide up-to-date studies to management about events that would be of interest
to them and the performing of their tasks. Crisis management is prevented in this
way as management is informed on a regular basis on specific issues of relevance
and importance. These reports can allow management to forecast and have strategic
plans in place to deal with issues if they arise.
3. Continuous method. In an attempt to enhance strategic planning, this method
requires constant assessment of all key environmental factors that could affect the
organisation.
2.6 IDENTIFYING INFLUENTIAL EXTERNAL FORCES
Many factors or forces that can change in the environment can be identified over
any period, and these will either pose an opportunity or a threat to an organisation.
Conducting an extensive external analysis allows macro-environmental factors to be
considered in relation to micro environmental and competitive factors in an attempt
to build marketing intelligence that can be used by managers.29 Management can then
label each trend or issue that has been identified as either an opportunity or a threat.
The opportunity and threat matrixes are used by organisations to establish the
attractiveness and the probability for success of each opportunity as well as the
probability of occurrence and the potential seriousness the threat will have on the
business.30 Figure 2.1 shows an opportunity matrix and threat matrix.
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Low
Probability of occurrence
High
Low
B
High
A
Seriousness
of impact
Attractiveness
Probability of success
Low
High
Low
D
High
C
FIGURE 2.1 Opportunity matrix and threat matrix31
The opportunity matrix shows an organisation should definitely exploit an opportunity
when attractiveness is high and probability of success is high (A), while the converse
also holds true, namely that when the probability of success if high but its long-term
profitability is not guaranteed, management should be careful to consider implementation
(B). The threat matrix indicates that where the probability of occurrence is high (C),
management must be very aware of this issue. It is important that threats that are
very likely to occur but have a low degree of impact (D) are monitored for changes in
behaviour. If plans of action are put in place proactively by management and carried out,
threats will not cause moments of crisis in the organisation. Ideal business opportunity
is characterised as high in opportunity and low in threat. Situations that result in both
high in opportunity and high in threat represent a speculative opportunity that carries
a lot of risk.32
Assessing the effect of influential environmental forces
It is imperative that management assesses the impact that environmental forces may
have on the organisation. Environmental forces must be evaluated against a number of
questions such as:
•• Whether the force is a threat or an opportunity;
•• Whether the business functions will be significantly affected;
•• When they will have an influence;
•• Which marketing area(s) will be affected.
The impact of these factors must be evaluated based on the effect it can have on the
profit of the organisation and over which time line. As this assessment takes place
over the long term and impacts on the long-term profitability and existence of the
organisation, much care must be taken to assess these factors thoroughly.
It is interesting to note that one organisation might perceive the occurrence of a specific
event as an opportunity, while another could view it as a threat.33 For example, with
the increased use of technology, a large retailer could view new pricing and bar coding
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systems in a positive light, whereas a traditional cash and carry owner in a town could
feel threatened by it.
2.7 PROACTIVE AND REACTIVE RESPONSE STRATEGIES
Management needs to respond to these environmental issues and this is done in the
form of proactive or reactive strategies. Proactive strategies are self-explanatory: they
anticipate what can happen, and a strategy is formulated in response to the expected
environmental issues. In contrast, a reactive strategy is one that is developed after
something has happened, as in the case of a crisis. Companies that use proactive
strategies have a better chance of seizing and retaining the initiative in the competition
with other companies.34 They also allow for a more in-depth analysis and exploration of
additional options, and avoid situations where management is pressurised into making
a quick decision. There are a number of different response strategies that organisations
can follow in reaction to the changes in the environment. The most general responses
can be one of the following:
•• Do nothing. When an organisation is of the opinion that the threat or opportunity
is not serious or worth pursuing, it might decide to do nothing and keep the status
quo. There is always a risk to this approach, and management must make sure that
it does not underestimate the situation.
•• Attack. In this case the organisation may see an opportunity to improve its
competitive position and go on the offensive.
•• Alternatives. In order to prevent the organisation from becoming too dependent on
one supplier or material or any other need, the organisation may regard it as viable
to keep its options open and continuously look for alternatives, that means keeping
the back door open.
•• Adapting. In some instances, the organisation has no choice but to adapt its products
or methods of operation as a result of possible new laws or restrictions in some
form or other.
•• Rechannelling. In some instances, the organisation may decide to rather rechannel
its resources into new or other markets if the current markets are too exposed.
•• Opposing. Depending on the type of challenge, the organisation may decide to try
to fight or oppose the challenge identified in the market. This may be in the case of
a new law which the organisation will try to stop or delay, but generally this is not
an effective strategy.
It is management’s responsibility to make sure that it evaluates all options and
alternatives, and formulate its strategy based on what seems to be the best option
for the organisation in the long term. The strategy decided upon should also be re27
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evaluated on a regular basis, based on new information or on the level of effectiveness
of the selected strategy.
2.8 RISK ANALYSIS
Management’s task does not stop after identifying the factors in the environment that
may or may not impact on the organisation’s ability to meet its long-term objectives.
Scanning the environment does not go without risk – the risk of underestimating the
impact, the risk of identifying the wrong issues, the risk of deciding on the wrong
strategy to react to the threat or opportunity, and so forth. The challenge is to take a
calculated risk, which by its very nature means that all possible scenarios and their
outcomes must be evaluated. Here all possible outcomes are plotted and evaluated for
their likelihood of occurring using various techniques and models. Some organisations
will follow the approach that the future is just too unpredictable and cannot be
predicted, while others are of the opinion that it is possible to predict exactly what will
happen. Still others may rather focus on possible scenarios as they believe that although
uncertain, there are some assumptions that can be made regarding the likelihood of
something happening in future.
Because management is in a position to take a measured or calculated risk, it is
important to have reliable and accurate information regarding all possible eventualities
and results of actions taken.
2.9 SUMMARY
The implication of external environmental factors on an organisation should never be
underestimated. In most cases, the impact of external forces on the organisation cannot
be controlled by management. As mentioned previously, the external environment is
ever-changing, continuously impacted by external forces. Management must therefore
continuously search, identify and monitor the macro-environment and especially
changes that can affect the operations of the firm. When a potential threat is recognised,
the appropriate counter-strategy, whether reactive or proactive, must be applied in
order to manage the change.
Tools such as the SWOT analysis allow management to identify not only opportunities
and threats within the external environment, but also behavioural patterns and trends,
which will allow management to plan for future occurrences. The three approaches to
environmental scanning will allow management to gather the information needed to
plan and implement effective strategies.
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Chapter 2 – Analysis of the external marketing or business environment
It is important for management to understand the potential impact external factors
can have on the organisation. The opportunity/threat matrix allows management to
determine the probability of the occurrence, as well as the benefit/harm which the
organisation can incur. The risk analysis process can then be employed to assist in
decision-making and crisis management.
Self-evaluation questions
1. List and explain three attributes of the external environment.
2. What are two external environmental factors that impact the business environment?
Explain two aspects of each factor.
3. Using the SWOT analysis, tabulate and explain two opportunities and two threats
relating to the development of online study textbooks as a business opportunity for a
traditional textbook publisher.
4. Define the periodical method as a subdivision scanning procedure.
5. Differentiate between proactive and reactive strategies.
ENDNOTES
1. Hooley, G., Piercy, N.F. & Nicouland, B. 2012. Marketing strategy and competitive
positioning. 5th ed. England: Pearson Education Limited, p 56.
2. Dibb, S., Simkin, L., Pride, W.M. & Ferrell, O.C. 2012. Marketing concepts and strategies.
6th ed. Andover: Cengage, p 74.
3. West, D., Ford, J. & Ibrahim, E. 2010. Strategic marketing. 2nd ed. New York, USA: Oxford
University Press, p 73.
4. Slideshare. 2013. Macro factors affecting the business environment. Online: http://www.
slideshare.net/aayush30/macro-factors-affecting-business-environment/ Accessed: 10 May
2013.
5. Hooley et al, op cit, p 56.
6. West et al, op cit, p 75.
7. Wilson, R.M.S. & Gilligan, C. 2005. Strategic marketing management. Burlington: Elsevier
Butterworth-Heinemann, p 160.
8. Dibb et al, op cit, pp 89−90.
9. Kotler, P. & Keller, K.L. 2009. Marketing management. 13th ed. Upper Saddle River, NJ:
Prentice Hall, pp 80−81.
10. Oxford Learning Lab. 2012. PESTLE- Macro environmental analysis. Online: http://www.
oxlearn.com/arg_Marketing-Resources-PESTLE---Macro-Environmental-Analysis_11_31/
Accessed: 2 May 2013.
29
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11. Industrial Development Corporation. 2013. Economic overview: recent developments in
the global and South African economies. Online: http://www.idc.co.za/reports/economic_
overview_feb13.pdf/ Accessed: 2 May 2013.
12. Jain, T.R., Trehan, M. & Trehan, R. 2010. Business environment. New Delhi, India: VK
Enterprises, p 10.
13. Jain et al, op cit, p 10.
14. Forbes. 2013. 2013: The year of social HR. Online: http://www.forbes.com/sites/
jeannemeister/2013/01/03/2013-the-year-of-social-hr/ Accessed: 2 May 2013.
15. Pride, W.M. & Ferrell, O.C. 2008. Marketing 2008. Boston: Cengage Learning, p 9.
16. Jain et al, op cit, p 10.
17. Market Research. 2013. Demographics: market research reports. Online: http://www.
marketresearch.com/Marketing-Market-Research-c70/Demographics-c81/ Accessed: 30
July 2013.
18. Hooley et al, op cit, p 59.
19. Jain et al, op cit, pp 15−16.
20. Radford University. nd. Zimbabwe. Online: http://www.radford.edu/~abjones/Zimbabwe.
htm/ Accessed: 3 May 2013.
21. Oxford Learning Lab, op cit.
22. Dibb et al, op cit, p 80.
23. Environmental leader. 2010. Impact of B2B green marketing in an increasingly environmentally
conscious world. Online: http://www.environmentalleader.com/2010/06/14/impact-of-b2bgreen-marketing-in-an-increasingly-environmentally-conscious-world/ Accessed: 5 May
2013.
24. Dibb et al, op cit, p 51.
25. Ibid.
26. West et al, op cit, p 74.
27. Dibb et al, op cit, p 50.
28. Wilson & Gilligan, op cit, p 137.
29. Pride, W.M. & Ferrell, O.C. 2011. Marketing express. Mason, OH: Cengage Learning,
p 50.
30. Oldroyd, M. & Oldroyd. M. 2003. Marketing environment, 2003−2004. Burlington, USA:
Butterworth-Heinemann, p 312.
31. Ibid.
32. Ibid.
33. Goyal, A. & Goyal, M. 2007. Business environment. New Delhi, India: VK Enterprises,
p 45.
34. Houston Chronicle. 2013. Difference between a proactive and a reactive business strategy.
Online: http://smallbusiness.chron.com/proactive-vs-reactive-marketing-1491.html/
Accessed: 30 April 2013.
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Chapter
3
CUSTOMER ANALYSIS
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Define the terms ‘relationship marketing’ and ‘customer relationship management’;
„„ Understand the different guidelines for relationship marketing and customer
relationship management;
„„ Conduct a customer analysis;
„„ Understand customers better through the 6W model of customer analysis;
„„ Know what customer segmentation is;
„„ Evaluate the attractiveness of a market segment;
„„ Perform a customer segmentation analysis;
„„ Conduct a market research analysis on the customer base;
„„ Understand the customer value creation process;
„„ Describe customer loyalty;
„„ Understand how customer loyalty can be established through customer management.
3.1 INTRODUCTION
Relationship marketing focuses on the retention of existing customers. By maintaining
current customers, it is suggested that costs are reduced by saving money that would
otherwise have been spent on advertising, personal selling, the setting up of new
accounts, explaining procedures to new customers and reducing costs of inefficiencies
in the customer learning process. A relationship-orientated view of the customer takes
into account the income and profit to be earned over a long-term relationship with
a customer.1 Therefore, an understanding of the customer is central to securing the
long-term success of an organisation, as well as its marketing strategy. A strategy that is
focused on the market or the customer per se implies that the customer is offered value.
The latter can only be achieved if the organisation has a clear understanding of the needs
of the customer base that it serves and responds to such needs in its marketing strategy.
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Today, organisations realise the importance of relationship marketing and its potential
to help them acquire new customers, retain existing ones and maximise their lifetime
value.2 Value and perceived value, as perceived by customers, are strategic drivers within
the organisation. They are very important in the formulation of a marketing strategy
that enables the organisation to deliver on its promises to customers and satisfy their
expectations. Customers are increasingly demanding more from their chosen service
providers and are taking greater control of their business relationships. For example,
they change their banks more freely, adapt their behaviour more regularly, and are
more assertive in demanding quality levels of service delivery. Customers also have an
increased need for flexibility to shape the relationship with their supplier. Therefore,
to initiate and strengthen long-term relationship building strategies with customers in
the future, more in-depth customer analysis will have to be conducted. The purpose of
such an analysis should be to improve an understanding for customer demographics,
psychographics, behavioural patterns, and the manner in which customer needs and
wants evolve over a specific time period.
This chapter will focus on the concepts of ‘relationship marketing’ and ‘customer
relationship management’. A broad overview will be provided on the performance of a
customer analysis to understand the target market of the organisation. The attractiveness
of the target market will be assessed, and an understanding of customer segmentation
will be provided. How to conduct market research to have a better understanding of the
customer base will be discussed, as will the concepts of ‘customer value’ and ‘customer
loyalty’ against the background of customer management.
3.2 WHAT IS RELATIONSHIP MARKETING?
Relationship marketing can be viewed as a business approach for establishing
and managing the relationships between an organisation and its customer base. It
encompasses all the functions of marketing with the purpose of establishing, developing
and maintaining relationships with a partner at a profit through mutual exchange and
delivery on promises.3
The aim of relationship marketing is the establishment and maintenance of long-term
relationships with customers. Organisations understand that it is considerably more
profitable to keep and satisfy existing customers than to renew a strongly churning
customer base constantly. To make relationship marketing work, marketers have
adopted a customer management orientation which emphasises the importance of
customer lifetime value, retention and the dynamic nature of a person’s customer
relationship over time.
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Chapter 3 – Customer analysis
Relationship marketing and its application, customer relationship marketing (CRM),
focus on the long-term profitability of keeping customers for life. This requires two-way
dialogue between the organisation and the customer to develop a relationship.4
Relationship marketing therefore:
... refocuses marketing strategy more towards customer-relationship life cycles.
Conceptualisations of marketing as being the integration of a customer orientation
and inter-functional co-ordination stress the key features of a relationship marketing
philosophy, using all employees of an organisation to profitably meet the lifetime needs of
targeted customers better than competitors.5
3.3 WHAT IS CUSTOMER RELATIONSHIP MANAGEMENT?
Customer relationship marketing (CRM) can be described as an all-embracing approach
which seamlessly integrates sales, customer service, marketing, field support and other
functions regarding customers. When using this approach, by integrating people,
process and technologies and leveraging the internet, the relationship with all customers
and suppliers is maximised. CRM is a notion regarding how an organisation can keep its
most profitable customers and at the same time reduce the costs and increase the values
of interaction to consequently maximise the profits.6 It is furthermore also perceived as
the process of managing detailed information about individual customers and carefully
managing all customer service delivery or customer contacts to maximise customer
loyalty. CRM is a business and technology discipline that assists organisations in the
acquisition and retention of their most important and profitable customers.7
CRM enables organisations to understand their customers and may even alter their
service-rendering process to the desired service delivery of a specific customer. If an
organisation focuses on a specific customer, it will provide a service to that customer with
added value according to the customer’s specifications. If an organisation implements
CRM strategies, its customers will possibly experience higher levels of customer
satisfaction, in particular at individual service encounters. The implementation of
sufficient CRM strategies may lead to higher levels of efficiency and cost reduction for
an organisation which, in turn, may lead to lower price levels for customers.8
CRM is therefore an approach to maximising customer value through differentiating
the management of customer relationships. The organisation utilises its understanding
of the drivers of current and future customer profitability to allocate the resources
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appropriately across all areas that affect customer relationships. These areas are
communications, customer service, billing and collections, product or service
development, and pricing strategies.9
Table 3.1 highlights the key focus of CRM.
TABLE 3.1 Key focus of CRM10
Number
Focus
1
Helping an organisation to enable its marketing departments to identify and target its
best customers, manage marketing campaigns and generate quality leads for the sales
team
2
Assisting the organisation to improve telesales and account and sales management
by optimising information shared by multiple employees, and streamlining existing
processes (for example taking orders using mobile devices)
3
Allowing the formation of individualised relationships with customers, with the aim of
improving customer satisfaction and maximising profits; identifying the most profitable
customers and providing them with the highest level of service
4
Providing employees with the information and processes necessary to know their
customers, understand and identify customer needs and effectively build relationships
between the organisation, its customer base and distribution partners
3.4 G
UIDELINES FOR SUCCESSFUL RELATIONSHIP MARKETING AND
CUSTOMER RELATIONSHIP MANAGEMENT
3.4.1 Relationship marketing
Relationship marketing (RM) is crucial to any organisation that wants to maintain and
grow revenue and profitability from its existing customer base, as well as attract new
customers.
RM strategies can greatly benefit an organisation. It is used by organisations as a
fundamental strategy to create, uphold and improve relationship building with
customers and to ensure that the relationship is beneficial to both the role players.11
Therefore, effective RM has to align to various means and channels that are permissionbased and provide accurate and relevant information to each recipient. Table 3.2
illustrates guidelines to secure successful RM.
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Chapter 3 – Customer analysis
TABLE 3.2 Guidelines for successful relationship marketing12
Number
Guidelines
1
Institute a one-day response time on all calls/emails
2
Send relevant articles, tools and resources to your clients
3
Ask clients for feedback (and use it to improve)
4
Offer incentives for referrals
5
Distribute regular newsletters and organisational updates
6
Get to know your client’s business so you can anticipate their needs
7
Handle dissatisfaction quickly and thoroughly
8
Conduct regular polls and surveys of your customer database to ensure you understand
the currents challenges and needs of your market
9
Strive to integrate customer feedback as much as possible in order to improve your
products and services
10
Understand the power of social media and have active profiles set up on all the popular
social sites such as Facebook, Twitter, LinkedIn and Google
11
Have effective listening and monitoring systems in place
12
Have a corporate social media policy in place that lets staff know what can and cannot
be said, what actions can and cannot be taken, and how to handle any negative
situation
13
Generate warm leads from all online and offline marketing efforts on a regular basis
14
Utilise a reliable customer relationship management strategy
15
Conduct regular training sessions for all members of staff on proper customer relations
and social media best practices
16
Remain on the cutting edge by evolving, adapting and integrating new technologies
17
Embrace high-tech, but always maintain high-touch by reaching out to your customers,
prospects, vendors and partners
18
Have a very high customer satisfaction rate
19
Consistently go out of your way to let your customers know how much you value them
Considering the information provided in Table 3.2, RM is therefore focused on the
development of a long-term association with customers, measuring customer satisfaction
levels and developing effective programs to retain the customer to the organisation.13
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3.4.2 Customer relationship management
Organisations are increasingly realising the importance of CRM and its potential to help
them acquire new customers, retain existing ones and maximise their lifetime value. A
close relationship with customers will require a strong coordination between information
technology (IT) and marketing departments to provide a long-term retention of selected
customers. CRM encompasses an enterprise-wide commitment to identify the individual
customers of an organisation and to create a relationship between the organisation and
these customers as long as the relationship is mutually beneficial. It evolved from a
technology-centred view to a business-value activity, because organisations now view
customers as important assets rather than just exploitable income sources that have to
be looked after and developed. Total integration of every area of the organisation that
impacts on the customer is crucial in ensuring a comprehensive approach towards
CRM. It is also important to note that the process of CRM is dynamic in the sense that
working assumptions and the appropriate actions are changing due to uncertainties in
the environment or in the customer−organisation relationship.14
Let us give it some thought
Considering that delivering a service is intangible, customers can value having a relationship
with an organisation that provides a service. This implies that the building of trust is essential
in ensuring that a customer wants to return to the organisation to repurchase a service. A
returning customer can benefit the organisation providing the service as it is less costly for
a service provider to keep an existing customer than to recruit a new customer. This business
reality has supported the rise of relationship marketing which has increased in support over
time. The concept of relationship marketing is relevant to many industries, but is especially
important in the services industry, for example, in the airline.15
Relationship marketing is used by airlines to obtain a competitive advantage by developing
and nurturing strong buying habits within the consumer base. Because there are numerous
airlines competing for the same customers, effective relationship marketing not only increases
customer loyalty, but it also improves market share, brand awareness and customer retention. By
implementing a successful relationship marketing plan, airlines understand customer needs and
wants better. Airlines use this information to respond quickly to and satisfy passenger requests,
and increase the potential for future sales. For instance, airlines use frequent flier programmes to
identify customers who spend significant money on travel. The information collected through these
programmes, which include hotel stays, car rentals and credit card usage, indicates the customers
that are likely to spend the most money and boost airline profits.16
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3.5 GETTING TO KNOW CURRENT AND FUTURE CUSTOMERS
Information needed about customers can be broadly grouped into current and future
information. The critical issues concerning current customers are:
•• Who are the primary target markets?
•• What gives them value?
•• How can they be brought closer?
•• How can they be better served?
Regarding the future, we also need to know:
•• How will customers and their needs and requirements change?
•• Which new customers should be pursued?
•• How should they be pursued?
Let us give it some thought
The development, maintenance and strengthening of a relationship with customers will depend
on the customers’ perception of the importance of key relationship dimensions.
These dimensions will eventually influence the relationship inclination of customers towards the
establishment of a long-term relationship with the business. The key dimensions referred to are
bonding, empathy, reciprocity, trust, friendship, recognition, thoughtfulness, understanding, time
to listen, commitment and loyalty (depending on, amongst others, product and service quality)
and shared values.17 Therefore, it becomes important for organisations to implement customer
marketing strategies based on the customers’ experience with the organisation through their
level of relationship commitment, product quality and service delivery. Such strategies could be
to the benefit of the organisation in the long term, since satisfied customers will communicate
their experience to other members of the public in a positive manner. Such customer recruitment
is done on behalf of the travel agency without any financial expenditure.18
3.5.1 Information on existing customers
It would be wise to start with a description of the existing customer base. The answer
is not always simple and clear. The reason is that there may be other role players in the
buying process, as well as the use of a specific product. Customers are not necessarily
similar to consumers. A workable manner to approach the definition of a customer is
to understand five primary functions that exist in many purchasing situations. Often
several, or even all, of these roles may be conducted by the same individuals, but
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recognising each role separately can be a useful step in a more accurately targeting
marketing activity (see Figure 3.1).
Buying, using and
consuming
Initiator
Influencer
Decider
Purchaser
Consumer
FIGURE 3.1 Who is the customer?19
The five main roles that exist in many purchasing situations are as follows:
1. The initiator. This is the person/people who initiate the process of finding a solution
to the problems of the customer. In the case of the purchase of a packet of chips, it
could be a hungry child who recognises her own need for substance. In the case of
a supermarket, the recording of a particular line of product nearing sell-out may be
initiated by a stock controller or even an automatic order processing system.
2. The influencer. This refers to all persons who could influence or have some form of
influence on the decision to buy. A hungry child may have initiated the search for a
packet of chips, but the parents may have a strong influence (through holding the
purse strings) on whether the product is actually bought. In the supermarket, the
ultimate customers will have a strong influence on the brands offered – the brands
they buy or request the store to stock will be the most likely to be ordered.
3. The decider. When considering the opinion of the first two roles (initiators and
influencers), it is imperative that some individual actually makes the decision as
to which product or service to purchase. This may be back to the initiator or the
influencer in the case of the packet of chips. In the supermarket, the decider may
be a merchandiser whose task is to specify which brands to stock, what quantity to
order, etc.
4. The purchaser. The person that physically purchases the product or service is
referred to as the purchaser. He or she is, in effect, the individual that hands over
the cash in exchange for the benefits. This may be the child or parent in the case
of the packet of chips. In business buying, it is usually a professional buyer who,
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Chapter 3 – Customer analysis
after taking account of the various influences on the decision, eventually places the
order, attempting to get the best value for money possible.
5. The consumer. The final consumer (end-user) of the product or service is the person
who actually uses the offer. For the packet of chips, it will be the child. For the
goods in the supermarket, it will be the supermarket’s customers.
In a buying situation, it is therefore important to know who exactly has an influence on
the buying and use decision, and therefore how this will impact on the purchase and
consumption decision. Where the various roles are undertaken by different individuals,
it may be necessary to adopt a different marketing strategy for the individuals in the
buying process. The reason for this is that each of these individuals may be looking for
different benefits in the purchase and consumption process. Where different roles are
undertaken by the same individual, different approaches may be suitable depending
on what stage of the buying/consumer process the individual is in at the time. It is,
however, important to remember that the majority of markets are segmented. This
implies that different groups of customers require different benefits when buying or
using essentially similar products or services. Identifying who the different customers
are and what role they play will eventually then lead to the question of what provides
them with value. For each of the above individuals of a decision-making unit (DMU),
different aspects of the purchase and use may give value.
For example, in the child’s purchase of a packet of chips, a number of benefits may
emerge. The child/initiator/decider/user gets a pleasant sensory experience and a filled
stomach. The parent/influencer gets a feeling of having steered the child in the direction
of a product that is filling and good value for money. In a business purchase, such as
a tractor, the users (drivers) may be looking for comfort and ease of operation, the
deciders (top management) may be looking for economical performance, while the
purchaser (purchasing officer) may be looking for a bulk purchase deal to demonstrate
his/her buying efficiency. Clearly the importance of each person in the decision process
needs to be assessed and the benefits that each person gets from the process must be
understood.
After the identification of the motivators for each person, attention then changes to
how these individuals can be linked to the supplier organisation in a closer manner.
Techniques of offering increased benefits (better sensory experiences, enhanced
nutritional value, better value for money) can be examined. This may involve extending
the product service offering through the ‘augmented’ product. For corporate buyers, the
most appropriate route to bringing customers closer is to develop mutually beneficial
relationships that enhance value for both the customer and the organisation. The
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enhancement of service delivery is central to improving customer relations and making
it difficult for customers to turn elsewhere.
3.5.2 Information on future customers
The existing customer base of the organisation was the primary focus of the discussion
until now. However, it is also important to keep the future in mind when looking at
how the existing customer base might change. There are two main types of change
essential to customer analysis:
1. The first is changes in existing customers, their wants, needs and expectations. As
competition increases, so does the range of offerings that is open to customers for
purchasing. In addition, their experiences with different product or service offerings
can eventually initiate higher levels of expectations and requirements. In the South
African airline market, continuous product development improvements combined
with a few significant innovations such as airport lounge offerings, diversity of
routes covered by the airline and on-board service offerings (for example, prebooking of seats, mobile check-in, pre-ordering of meals), have served to increase
customer expectations of the airline brand. An airline that is still not offering online
bookings and check-ins will find its customers changing in favour of those airline
brands that do offer such services.
2. The second type of change comes from new customers emerging as potentially more
attractive targets. Segments that were once perceived as offering less at a particular
point in time might become more attractive in the future. As social, cultural and
economic changes have affected living standards, so have they affected the demand
for goods and services. There is now, for example, increased demand for healthy or
organically grown foods, green energy equipment and services in the South African
market, which might have been less attractive in the 1990s or even the beginning
of the 2000s, but are now booming or starting to grow.20
3.6 U
NDERSTANDING CUSTOMERS BETTER THROUGH A FOCUSED
CUSTOMER ANALYSIS PROCESS
Organisations operating in the South African market can apply three themes to gain
an improved understanding of exactly who their customer base is, what their buying
behaviour is, in which location customers purchase the products that they use, when
such purchases occur, and why they make the decision as to whether or not to purchase
such products. It is therefore vital for an organisation to conduct market research in
order to obtain an improved understanding of their existing customer base. A strong
focus on the following aspects are required, based on the following three themes:
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1. Theme A – an understanding towards the selected market segment: An under­
standing should be obtained of both the existing and predicted customer base of the
organisation (for example, specific information pertaining to consumer demographics
as well as where the consumer base is located). In addition, the reason(s) why
customers purchase the product or service must also be determined and understood.
2. Theme B – purchasing outlets and purchasing patterns: The manner of
purchasing by the selected market segment should also be understood. For
example, the consumer base purchase through brick-and-mortar outlets or new,
technological mediums of buying such as online purchasing. Furthermore, the time
of purchase by the customer segment is also of importance as this will guide an
organisation in understanding whether purchases are based on seasonality, during
promotional campaigns, etc.
3. Theme C – decisions to buy or not to buy: It is important for the organisation
to know and understand the reasons why the consumer base does or does not
purchase from the organisation. For example, is the primary motivation for
making a purchase based on the benefits of the product or service offering? Is the
decision not to purchase based on the poor brand perception of the product or
service amongst existing customers? An understanding of these reasons can guide
an organisation to improve its products and service positioning in a competitive
market environment.
Let us give it some thought
Understanding customers is the key to giving them good service. To give good customer
care, you must deliver what you promise, but great customer care involves getting to know
your customers so well that you can anticipate their needs and exceed their expectations. To
understand your customers well, you need to be attentive to them whenever you are in contact
with them. The potential rewards are great: you can increase customer loyalty and bring in
new business through positive word-of-mouth recommendation. There are three main ways to
understand your customers better:
1. The first is to put yourself in their shoes and try to look at your business from their point
of view.
2. The second way is to collect and analyse data in order to shed light on their buying
behaviour.
3. The third way is simply to ask them what they think.21
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3.7 CUSTOMER SEGMENTATION
3.7.1 What is customer segmentation?
Customer segmentation refers to the division of a customer base into groups of
individuals that are similar in specific ways relevant to marketing, such as age, gender,
interests and spending habits, amongst others. Through customer segmentation, an
organisation is enabled to target specific groups of customers effectively and allocate
marketing resources to best effect. In contrast, the traditional approach to segmentation
focuses on identifying customer groups based on demographics and attributes such
as attitude and psychological profiles. Value-based segmentation, on the other hand,
studies groups of customers with regard to the revenue they generate and the costs of
establishing and maintaining relationships with them.22
Customer segmentation enables an organisation to identify groups of similar-thinking
customers based on their transaction history and then study behavioural patterns
within these groups. Through understanding their customer base better, marketing
managers can design targeted marketing and service campaigns to reach specific
customer segments with offers that are suited to their needs, wants and preferences.
Customer segmentation procedures include:
•• Deciding what data will be collected and how it will be gathered;
•• Collecting and integrating data from various sources;
•• Developing methods of data analysis for segmentation;
•• Establishing effective communication among relevant business units (such as
marketing and customer service) about the segmentation;
•• Implementing applications to effectively deal with the data and respond to the
information it provides.23
Common business questions that are asked as part of a customer segmentation strategy
are:
•• How are existing customers distributed according to demographic criteria?
•• To what extent and how has the age distribution within the existing customer base
changed over the past decade?
•• How are customers distributed by lifetime value?
•• What percentage of an organisation’s income is contributed by a specific segment
of customers?
•• What are the revenue, profit and margin contributions by customer profile?
•• Which customer segment of the organisation responded the best to the most recent
email campaign of the organisation?
•• Which customer segment shows the greatest profitability?
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••
••
Which advertising campaign has been the most effective with segment X?
Is there a trend in the purchasing patterns by segment?24
3.7.2 The basis for customer segmentation
How do we go about segmenting a market? A market can be segmented using different
bases for such segmentation. These bases are also referred to as segmentation variables,
and can be used to develop market segments. As a simple guide, segmentation bases
can be classified into five major categories, namely:
1. Geographic.
2. Demographic.
3. Psychographic.
4. Behavioural.
5. Benefits sought.
When using any of the segmentation bases listed above, either individually or in
combination, an organisation can construct market segments for evaluation to help
them select appropriate target markets. Take note that the form of segmentation listed
in 1−5 above is only relevant to consumer markets. Table 3.3 illustrates the different
bases for consumer segmentation.
TABLE 3.3 Five bases for consumer segmentation25
Segmentation base
Description of each main consumer segmentation base
Geographic
Segmenting based on country, region, city or other geographic basis
Demographic
Segmenting according to identifiable population characteristics, such as
age, occupation, marital status, and so on
Psychographic
Segmentation according to a consumer’s lifestyle, interests, and opinions
Behavioural
The segmentation of consumers based on the specific benefits they are
searching for from the product, such as convenience and status, or value
Benefits sought
Segmenting according to the relationship that the consumer has with the
product or the organisation. Examples include heavy or light users, brand
loyal or brand switchers
Understanding market segmentation bases/variables
The different bases for segmentation can best be understood through the perusal of
examples. These examples are highlighted in Table 3.4. Take note that in some cases
textbooks classify the lower-level bases/variables slightly differently. For example, some
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textbooks integrate ‘benefits sought’ as being a ‘behavioural’ segmentation base option.
However, benefits sought are quite an important and commonly used segmentation
approach in business practice today and should be separated. Some texts will list
geodemographics (a combination of geographic and demographic measures) as a
separate category. However, considering that it is possible to have a combination of the
different bases (the use of hybrid segmentation would be relevant here), the examples
illustrated in Table 3.4 use the major categories.
There are many other approaches to segmenting (dividing) a consumer market. The
important things to remember are:
•• The major categories: there are literally hundreds of potentially useful segmentation
bases;
•• These bases can be used in combination, which is known as hybrid segmentation.
Can firms use more than one segmentation base?
Organisations can apply more than one segmentation base when segmenting a consumer
market. By using more than one approach to segmentation, organisations can have a
much stronger understanding of each of the segments. Please see the examples for
segmentation bases and the main tools used in segmenting markets in Table 3.4.
What is hybrid (multivariate) segmentation?
Hybrid segmentation, which is also sometimes referred to as multivariate segmentation,
refers to using multiple segmentation variables in the construction of market segments,
for example using a demographic segmentation variable together with a psychographic
one in order to determine the market segment.27
Two important elements when building relationships within a selected segment
Marketing literature provides encompassing support for the inclusion of trust in
building relationships. Trust exists when one party has confidence in an exchange
partner’s reliability and integrity. Trust is a key virtue in relationship building as it is the
basic foundation of a relational approach to ensure that both parties are fully committed
to the relationship. Parties to a relationship desire predictable and obligatory behaviour
from each other to such an extent that a high level of certainty is linked to future
benefits. Parties are also more willing to commit themselves to such a relationship
if it is developed from a sound foundation of trust. Ultimately, trust can be viewed
as a precursor to the establishment of customer loyalty and a key element in both
the establishment and the management of long-term relationships with customers,
supported by actions to deliver on promises made. The importance of trust has been
confirmed in a variety of sub-industries, such as retail banking, merchant banking,
financial planning, electronic banking and asset management.
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TABLE 3.4 Market segmentation variables26
Main category
Segmentation base
Examples
Geographic
Country/continent
South Africa, Nigeria, China
Region/area of the country
Gauteng, Western Cape or KwaZulu-Natal
City
Johannesburg, Lagos, Beijing
Urban/rural
Measured by the areas population density
Climate
Tropical, arid, alpine
Coastal or inland
Measured by distance to coast
Age group
Pre-teens, teens, young adults, older adults
Generation
Baby boomers, Generation X, Generation Y
Gender
Male, female
Marital status
Married, single, widowed
Family life cycle
Young, married, no kids, married, young kids
Family size
Couple only, small family, large family
Occupation
Professional, trade, unskilled
Education
High school, university, vocational
Ethnic background
Black, white, coloured, Indian
Religion
Christian, Jewish, Hindu, Muslim
Lifestyle
Family, social, sporty, travel, education
Values (VALS)
VALS = values and lifestyles
Social class
Upper class, middle class, lower class
Personality/self-concept
Ongoing, creative, innovator, serious
Activities/interests/opinions
Various hobbies, sports, interests
Benefits sought
Needs/motivations
Convenience, value, safety, esteem
Behavioural
Occasion
Birthday, anniversary, Valentine’s Day
Buying stage
Ready to buy, gathering information only
User status
Regular, occasional, never
Usage rate
Heavy, light
Loyalty status
Loyal, occasional switcher, regular switcher
Demographic
Psychographic
Ü
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Main category
Segmentation base
Examples
Brand knowledge
Strong, some, none
Shopping style
Enjoys shopping, functional shopper, avoids
shopping
Involvement level
High, medium, low
Marketing literature also emphasises the role of commitment when a long-term relation­
ship is established. Commitment refers to an exchange partner believing that an ongoing
relationship with another is so important as to warrant maximum efforts at maintaining it.
That is, the committed party believes the relationship is worth working on to ensure that
it endures indefinitely. Commitment also entails an interest by parties to a relationship to
remain with a specific course of action out of their own free will. It implies that partners
would rather consider the benefits that accrue from establishing a long-term relationship
than the short-term benefits available. Therefore, commitment relates to an implied or
unequivocal promise of continuation between parties to a relationship. It is a central
element in the relationship-building process and a strong foundation for securing a
long-term relationship-building approach. Commitment must be established within a
trustworthy environment. Relationships characterised by trust are so highly valued that
parties will desire to commit themselves to such relationships. Indeed, because relationship
commitment entails vulnerability, parties will seek only trustworthy partners. However,
commitment can be secured only if a trustworthy environment is created through which
parties to a relationship can commit to such a relationship.28
3.8 EVALUATING THE ATTRACTIVENESS OF A MARKET SEGMENT
What is an attractive market segment?
A financially viable market segment is one that offers the potential for current- or
long-term profit potential for an organisation. In the current business environment,
organisations consider the various segment options they have to market to and may
target one or multiple markets depending on how much money they have available
to invest in marketing. The majority of organisations are not able to focus on all the
identified target markets. Try to choose between one and three new markets to target
at any given time. Additionally, the organisation should ensure that it does not access
segments that it cannot support or where it does not have the resources to provide a
customer service of high quality. Attention should be on the most attractive segments.
The sections that follow will indicate how an organisation will identify attractive
markets and then evaluate them.
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When any new market is selected, the organisation must ensure that such a market
is the most attractive one. Use the following checklist to evaluate the attractiveness of
each potential segment:
•• Competitors. Study the competitor analysis well. Is the organisation better than the
competition? Is the competition getting better or worse at meeting the needs of
customers in this segment?
•• Organisational resources. Does the organisation have the appropriate strengths to
compete in this market segment? Does the organisation have weaknesses that need
to be improved and are they fixable? Evaluate the strengths and weaknesses of the
organisation. Study the culture of the organisation. Is it consistent with serving this
segment?
•• Segment size. The sales potential of the segment, in terms of the number of units of
the organisation’s product that can be sold or the number of customers served, is
important in making a segment attractive. Is it large and financially viable enough
to be considered? It is vital to consider market size. What may be too small to one
organisation may be huge to another. Assess where the segment is large enough,
based on the different requirements set by the organisation.
•• Segment growth rate. To reduce the risk of losing money when entering a new market,
find a segment that is growing, not declining, in terms of potential customers. An
organisation should therefore focus on a market for a long period of time, recouping
marketing expenses and any product or service modifications.
•• Segment profitability. The organisation must determine whether a focus on a customer
group is feasible. A segment’s profitability is important in making it attractive. To
determine profit from the segment, subtract the estimated costs associated with
producing the product or service and reaching the segment.
•• Segment accessibility. Identifying an attractive segment is possible, but there is no
cost-effective way to reach it. An attractive segment requires that the organisation
can reach a customer segment through clear communication channels. An
organisation first has to determine who the people in this group are before it can
reach them. A good indicator of segment accessibility is how easy or hard it is to dig
up information in the market research efforts of the organisation.
•• Segment differentiation. Uniqueness is a characteristic of an attractive segment.
Will this group respond to product and service offerings differently than other
groups you have identified? If not, consider combining two segments. Segment
differentiation tends to be obvious. You either see a clear difference or you do
not, but you may need to additionally research or test-market your product or
promotional message to make sure.29
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The attractiveness of a market segment can be addressed through the questions as
indicated in Table 3.5.
TABLE 3.5 Questions to address the attractiveness of a market segment30
Question
Description
What is the size of this
segment, what potential does
it have to grow and how
competitive is it?
The organisation must measure the share of the market trendsetters,
conservatives and followers represented by the market identified.
It must furthermore also determine whether that specific segment
offers potential for growth. Furthermore, the organisation has to
understand how competitive that segment is.
Can the organisation reach
the segment that it wants to
target?
Determine whether the organisation is able to approach the segment
that it wants to focus on. Is the segment approachable? Is it possible
to reach such a segment through available media sources? Does
the segment have certain cultural, religious or gender behavioural
patterns or expectations?
Does the segment assist the
organisation in achieving its
objectives?
These are the objectives of the organisation that made it interested
in the market initially. It deals with the market that the organisation
wants, the revenue base it wants, and how it wants to be positioned
in the market and the image it wants for its brand name.
Let us give it some thought
Attractive market segments include several aspects. The segment should be easy to identify and
measure in terms of the type and number of customers involved. It should be accessible so that
marketing teams can communicate easily with the target market. There should be meaningful
gaps in the market that a company’s products meet, and the segment should provide a substantial
return for the marketing effort required. Competitive strength is an important factor influencing
marketing attractiveness. Large, high-growth segments may look attractive, but some businesses
may find it difficult to compete with the large number of existing suppliers. New market entrants
would have to make a major investment in marketing, particularly if customer loyalty was also
high. In smaller niche segments, competitors are likely to be fewer because the costs and rewards
for specialisation are less attractive. An attractive market segment provides a good fit between
a company’s capabilities and product range and customers’ needs. Companies with a good fit
succeed by offering superior value to customers in the segment.31
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3.9 PLANNING FOR BETTER RELATIONSHIPS
The focus of RM is to retain the current customers of the organisation. Through
the retention of existing customers, it is suggested that costs are reduced by saving
money that would otherwise have been spent on advertising, personal selling, the
setting up of new accounts, explaining procedures to new customers and reducing
costs of inefficiencies in the customer learning process. When an organisation has a
relationship-orientated view of the customer, it considers the income and profit to be
earned over a long-term relationship with a customer. Furthermore, both trust and
commitment are two primary principles on which relationship marketing is built.32 The
level of satisfaction which a customer experiences in a relationship with an organisation
is directly related to the principles of trust and commitment.33
Organisations to which customer orientation is a primary focus create a business
culture which takes into consideration the interests of the customer in all its activities.
An organisation should observe the interests of the customer as a partner in achieving
the success of a business as superior to short-term separate interests which occur within
an organisation. This should be the case no matter whether it is in the interests of the
employees, managers or owner of the organisation.34 It is therefore only possible for
an organisation to secure the retention of customers if the principles of relationship
marketing, namely trust, honesty, commitment, open communication channels, a focus
on the interests of the customer, a commitment to quality, the provision of added value
through products and services and the willingness to retain customers, are applied
by the organisation, and if relationships with customers are managed professionally.
The different actions required to build and strengthen relationships with customers are
highlighted in the sections below.35
3.9.1 Activities to build customer loyalty and commitment
Customer loyalty is gradually recognised by organisations globally as a path to longterm business profitability. Loyalty measures the value which the purchase of a product
or service holds for a customer. It determines whether a customer will return to the
business for repeat purchases.36 There are two dimensions to customer loyalty, namely
the behaviour dimension and the attitude dimension. The behaviour dimension refers
to the manner in which a customer behaves during repeat purchasing, and indicates
over time the purchasing preference of a customer towards a specific brand or service.
The attitude dimension, on the other hand, refers to the intention of a customer to
purchase a product or service on a repeat basis and to recommend the product to
others. The customer who has the intention to purchase a product or service on a repeat
basis and who is willing to recommend such a product or service to others will have a
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high probability of being loyal to the organisation. Ensuring the satisfaction of customer
needs therefore increases the potential for customer loyalty towards the organisation.37
This ensures the long-term growth and future existence of the organisation. Satisfied and
loyal customers are therefore more profitable to the organisation than loyal customers
only.38
Marketers must therefore realise that customers are not similar and cannot be satisfied
at the same levels. Some are just satisfied, while some can be completely satisfied
(delighted). This enables relationship managers to understand the effects of customer
satisfaction on retention beyond inherent differences in customers’ propensities to
churn. Similarly, not only are some customers predisposed to stay or to churn, but they
are also sensitive to changes in customer satisfaction. The efforts of managers might be
rewarded through a careful identification of which customers are prone to stay with a
provider and likely to respond to satisfaction improvement efforts. This implies that
there is a need to understand that satisfaction alone has a low impact on customer
retention, therefore focus should also be extended to other exogenous factors (for
example, customer value), which affect both attitudinal and behavioural components.
Another activity available to an organisation to build customer loyalty and commitment
is the provision of tailor-made products with individual modifications, such as highly
individualised auxiliary services which are also important to reduce customer defection.
Thus, relationship quality also impedes organisational management to recognise the
individuality of its customers. Managers’ efforts might be rewarded through a careful
identification of which customers are prone to stay with a provider and likely to
respond to satisfaction improvement efforts. In addition, marketing and/or service
managers should be aware that competition increases customers’ propensity to seek
and investigate a variety of services or product offerings. Hence, in their customer
retention efforts, they should pay more attention to the different approaches that will
lower the variety-seeking syndrome and this can be achieved by increasing their oneon-one interactions with customers.
Finally, managing customer commitment and loyalty in isolation will not generate
maximum revenues, margins and profits. In other words, the profitability of
organisations depends particularly on their ability to get existing customers to increase
their service usage and purchase additional products and/or services (cross-buying). In
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order to accomplish this goal, marketing managers must strive to convert transactional
interactions into long-term collaborative partnerships through CRM activities.39
3.9.2 A
ctivities required to conduct customer research to improve customer
satisfaction
Customer satisfaction describes the feeling that a customer has that a product has
met or exceeded his/her expectations and can be explained in terms of the so-called
disconfirmation paradigm. The disconfirmation paradigm proposes that meeting or
exceeding customer expectations leads to customer satisfaction, but dissatisfaction
results if performance (such as product or employee performance) falls short of those
expectations (negative disconfirmation).40 An organisation that is unable to secure the
satisfaction of customers can face numerous challenges. These include (over the short
term) complaints, negative word of mouth, switching, loss of sales, loss of market share
and eventual bankruptcy.41
An organisation must therefore remain aware of the fact that the individual product
or service needs of customers are primarily based on the core product or service
offered by the business, and that such needs must be satisfied in advance. The adding
of value to the product or service of the organisation is therefore determined by the
knowledge base which the business has of its customers. It is for this reason that market
research is of vital importance to the organisation, and its marketing initiatives should
provide a stronger emphasis on the adding of value to the products and services of
the business through high-quality levels of service delivery. All customer relationships
must be approached as a long-term investment in customers, the communication mix
must be focused on the gathering of information from customers, and the distribution
system and channels of the organisation must add value to its products and services. In
customer-centric organisations there is a move towards supporting the customer ‘pull’
of products and services.42 This change requires that marketing departments generate
sufficient information to answer the following question: ‘Who are our customers?’ and
then to extend this to: ‘What products or services do our customers want to buy?’ The
researching of customer needs empowers the organisation to segment its customers
more successfully, forecast accurately against these segments, and adjust the product
or service development process to ensure that the right product mix arrives in the
marketplace at the right time, for the right customer groups.43
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3.10 M
ARKET INFORMATION AND KNOWLEDGE RESOURCES ABOUT
CUSTOMERS
It is challenging for consumers to indicate what their future preferences might be.
Individuals underestimate on a large scale what their future needs might be. The data
obtained from a customer analysis should therefore not be applied as a guideline for
action, but should be interpreted and subsequently combined with other sources.
Against this background, the focus of the discussion that follows will be on customer
research.
Customer research can be used for different purposes. A distinction is often based on
the type of research, namely:
•• Exploratory – qualitative research;
•• Descriptive – quantitative research (surveys and observation);
•• Causal – experiments.
The distinction above does not provide an indication of the type of information that is
needed. Another way to subdivide the customer analysis is by the kind of information
sought, for example the 6W model. This division is very useful, but it is limited because
no distinction is made between the different strategic goals of the customer analysis. A
customer analysis has different potential application scenarios. Each scenario requires
that different types of information must be gathered. There are four application
scenarios of customer analysis:
1. Used for segmentation and choice of the target market.
2. Used as a basis for strengths and weaknesses research and positioning decisions.
3. Used to check achieved results and to measure the effects of marketing mix
elements.
4. Used to identify competitors.
Each of the scenarios above need specified information (the division by questions) and
a specific research approach (the division by research method).44
3.10.1 Primary research
Primary data refers to data that an organisation collects for the first time through the
use of field workers. It is part of the marketing research process. When performing
marketing research, three questions must be addressed, namely:
1. Who?
2. What?
3. How?
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Each of these questions (aspects) is highlighted in Table 3.6.
TABLE 3.6 Questions (aspects) to be considered when conducting primary research45
Factor
Description
Who is the target audience?
For which target audience or audiences should the research be
performed?
This question largely determines the remainder of the structure.
What information does the
organisation require and
what research approach will
be applied (quantitative or
qualitative research)?
Section 3.10.2 focuses on this issue.
How will the research process
be structured?
Structure (how?):
collection;
„„ Sampling;
„„ Method of questioning.
„„ Data
3.10.2 Qualitative or quantitative research
Quantitative research is selected when large sample sizes are used in marketing
research. Owing to the large sample size of quantitative studies, conclusions made from
gathered data are generalised compared to qualitative research. Quantitative studies
also reflect results in a percentage format, and allow for the illustration of differences
between segments of the target market. An example is the differences between genders
in terms of a product brand preference. Considering that the fieldwork conducted for
quantitative research studies can be done through surveys, telephonic interviews or
the internet, a structural approach is required. Such research is also more appropriate
for ‘factual’ research; that is, descriptive research studies. However, keep in mind that
the primary goal of quantitative research is not to provide insight and deeper thought
into the ‘why’ of certain results. Qualitative research, on the other hand, encompasses
face-to-face interviews with individuals (for example in-depth interviews) or consumer
panels and focus groups. Qualitative research can be used as an independent source
or may be performed before quantitative research as a source of inspiration and/or
pretest of a questionnaire. Qualitative research provides answers to the different aspects
depicted in Table 3.7.
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TABLE 3.7 Aspects to which answers are provided for by qualitative research46
Aspect
Description
Strategic market description
How can we describe the various target audiences in terms of wishes,
needs and behaviour?
Consumer decision-making
behaviour
Why does the consumer purchase one product and not another?
Customer satisfaction
How satisfied are our consumers? What makes them satisfied? How
can such satisfaction be increased?
Communication research
How is our draft advertisement understood and evaluated? To what
extent is the reader inspired to take action?
Idea generation
Which potential wishes and motives exist in a product field? What
opportunities exist for responding to them?
Development of product and
concepts
How can we ensure that our new services and products have an
optimal fit with the wishes and needs of customers (the physical
product, packaging, promotion, distribution)?
Development of a
quantitative questionnaire
Which themes are relevant in relation to the specific market or a
specific product, and what words do respondents use to describe
aspects?
When an organisation has to decide on a research approach, the type of information
required should be the primary factor in deciding between quantitative and qualitative
research. The decision-making process can be strengthened through information
obtained from marketing research. When marketing research projects are selected, the
following questions should be asked:
•• What is the strategic importance of the information?
•• How will it reduce the risk of making a wrong decision?
•• What is the cost/benefit trade-off?
•• How crucial is the time factor in obtaining this information?
•• How much will it add to my knowledge base?47
The management of organisations should therefore improve the methods applied
for receiving feedback from customers. Different research approaches can be used
systematically to gather, analyse and interpret information or knowledge to support
decision-making.48
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3.11 THE CUSTOMER VALUE CREATION PROCESS
Customer relationship management (CRM) is based on an organisation’s effort to
develop long-term, mutually beneficial links with customers. Customer satisfaction is
necessary for customer relationships. Maximising customer value means cultivating
long-term customer relationships. CRM leads to customers becoming partners with an
organisation, and as a result the organisation must make long-term commitments to
maintain those relationships with quality, service and innovation. Customers will only
remain loyal if they receive greater value relative to what they expect from competing
organisations. In the past, organisations focused on increasing profits by reducing
costs, now their main aim is to increase profits through increasing sales. Currently,
organisations focus on satisfying customer needs at a profit. This requires that the
whole organisation focuses on identifying and meeting customer needs. With CRM, the
customer helps the organisation to provide the benefit bundle that the customer values.
The overall provision of service delivery can be customised for the individual customer
according to his/her needs. CRM is an ongoing process of identifying and creating new
value with customers, and then sharing the benefits over a lifetime of association. As
customers get to know an organisation and are satisfied with the quality of service they
receive, they will give more of their business to the organisation. CRM is therefore a
process that maximises customer value through ongoing marketing activity founded
on intimate customer knowledge established through the collection, management and
leverage of customer information and contact history.
Let us give it some thought
Considering the creation of customer value, it is important for organisations to differentiate
between customer satisfaction and service quality. Customer satisfaction implies a postconsumption experience which compares perceived quality with expected quality, whereas
service quality refers to a global evaluation of an organisation’s system of service delivery.
In addition, satisfaction and service quality are two distinct constructs that possess a causal
relationship in which perceptions of service quality affect the feelings of satisfaction, which
eventually influence purchase behaviour. The underlying argument is that customers tend to
maximise the subjective value they receive from a particular supplier and this depends, amongst
others, on the customer’s satisfaction level. As a result, customers who are more satisfied are
likely to remain customers of the same organisation. It is for this reason that the next section
focuses on customer satisfaction as a necessary precursor to customer relationships.49
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3.11.1 C
ustomer satisfaction as a necessary precursor to customer
relationships
What is customer satisfaction?
Customer satisfaction refers to the degree to which a business’s product or service
performance matches up to the expectation of the customer. If the performance matches
or exceeds the expectations, the customer is satisfied, but if performance is below par,
the customer is dissatisfied.
Customer satisfaction is influenced by expectations, perceived service and perceived
quality. Expectations influence total satisfaction when the customer evaluates a
product or service. Satisfaction is a customer’s emotional response when evaluating the
discrepancy between expectations regarding the service and the perception of actual
performance. This perception of performance is gained through the physical interaction
with the business and the product and services of the business. Perceived quality is
measured through recent service experiences that consist of two components, namely,
perceived product quality and perceived service quality. There is a direct link between
perceived quality and total satisfaction. The customer first forms expectations based
on needs, values, past experiences and extrinsic cues about the product. The perceived
quality is based on those first expectations and the choice that the customer made is then
evaluated to determine satisfaction. Perceived value is the customer’s overall assessment
of the quality of a product based on the perception of what is received compared with
what is provided. High levels of service quality may lead to increased customer loyalty,
higher profitability, increased market share and lower employee turnover. If customers
feel that they have a satisfying relationship with the business, they may perceive the
business to have a high level of service.50
3.11.2 The individual customer approach
To satisfy customers, it is essential that a business understands what is important to
the customer and then strives at least to meet, if not exceed, those expectations. It
is therefore important for marketers and those responsible for customer service to
have a solid appreciation for customer expectations and needs. It is through meeting
and exceeding expectations and addressing customer needs that a business produces
customer satisfaction. As customers enter into interactions with businesses, they
have expectations about several aspects of the interaction, and about what is being
exchanged.
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It may be useful to spend more time considering just what is being exchanged when a
customer deals with a business. The customer, when purchasing a product or a service,
is giving up certain things. The most obvious thing is usually the money being spent,
but there are many others. The time and effort spent in shopping around, comparing
alternatives, and making the purchase must be considered. What the customer gets in
return is also extremely complex. It is simplistic to assume that the customer is interested
only or even principally in the core product being offered. A business needs to consider
all the various components of the value proposition, because certain customer needs
are addressed by each component and customers bring certain expectations about each
of them.
If expectations are met, customers are generally satisfied. If they are exceeded, the
customer is likely to express high levels of satisfaction.
3.11.3 Setting yourself apart with supporting service
To satisfy the customer and build a relationship, a business has to differentiate itself from
the competition and add value every time a customer is served. The factors that drive
satisfaction include value-added processes and services, technological performance
of the product or service, and certain aspects of the business providing them. More
important than these drivers of satisfaction is the treatment the customer receives while
making a purchase or otherwise interacting with the business. The most intangible
driver of satisfaction is often the most important in ensuring the complete satisfaction
of the customer; that is, the emotional component of the encounter – how the customer
feels.
One of the ways in which emotions are stimulated during a service encounter is
through the creation of surprise. Usually individuals associate the element of surprise
with positive experiences, situations where the customer is pleasantly surprised with
some component of the service encounter or interaction with the business. Most
consumers, when asked to recall such a memorable encounter, will be able to recount
some fairly recent event that left them feeling surprised and impressed with how they
were treated.51
In conclusion, an organisation should understand that the provision of a high quality
level of service delivery cannot be considered a choice, but is a necessity. Any hint of
inferior service levels received by customers will result in a distrust of the organisation’s
services and competencies, leading eventually to a loss of customers. Organisations,
therefore, need to consistently provide high service levels to keep loyal customers. Also,
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organisations need to do more to ensure that their service levels are of an excellent
standard. Monthly customer satisfaction surveys should be conducted as well as
biannual mystery shopper exercises with respect to all customer segments. Customer
satisfaction surveys should also cover all the relevant service quality aspects such as
levels of reliability, responsiveness, empathy, assurance and tangibles. Customer service
staff in organisations (for example, front desk personnel, call centre employees and
customer service desk employees) should be tested on these various service aspects
to ensure that the overall service levels delivered by the organisation are consistent.
It is recommended that surveys be conducted with all customer types (business and
individual) of the organisation.52
3.11.4 The customer relationship management process
Customer relationship management (CRM) as a business strategy requires the selection
and management of customers to optimise long-term value. It requires a customercentric business philosophy and culture to support effective marketing, sales and
service processes. CRM will only be successful if the organisation has the right
leadership, strategy and culture. An organisation wishing to assess and plan to improve
relationships with its customers could employ the planning process discussed below
according to ten stages.
1. Pre-planning stage. This is essentially a planning stage before the actual process
begins. It is aimed at providing management with justification for the expenditure
of time and effort, and outlining the various components necessary to ensure that
the initiative delivers to management’s expectations.
2. Coordinating the CRM initiative. The most efficient and effective way to coordinate
and execute the many tasks required to embed CRM into an organisation’s culture
is to treat the transition as a project. It is important to appoint a project manager
to lead the CRM change, one who is accountable for achieving measurable results.
The more senior and respected this person is in the organisation, the better.
3. Customer assessment. This stage of the planning process determines where the
organisation is now with regard to its customers and relationship marketing. It is
essential to look at customer profitability, as well as the lifetime value of customers,
to determine from which companies and customers the organisation makes its
money.
4. Developing CRM strategies. To treat different customers differently, it is necessary to
group them into value-based tiers; that is, groups of customers with similar values
to the organisation. In this way, the most valuable customers, the ones that have the
most potential to grow, and the unprofitable ones can be identified. It is necessary
to look at each group more closely, and profile and categorise them by their needs
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and preferences. CRM strategies for high-profit customers could be ‘Butterflies’ and
‘True Friends’, and for low-profit customers ‘Strangers’ and ‘Barnacles’.
5. Competitive benchmarking. Competitive benchmarking implies investigating the
competitor’s actions with regard to relationships and their customers. The idea is
to establish how the competition relates to CRM. Moreover, benchmarking refers
to a comparison, not only with competitors, but with best practice in whatever
organisation or industry it can be found.
6. Internal assessment. An organisation needs to take a close look at itself to determine
what kinds of relationships it is most suited to, and even whether CRM is at all
appropriate. Attention needs to be focused on the following aspects:
•• Whether CRM is appropriate to address the needs of the organisation;
•• The business culture of the organisation;
•• The support provided by top management;
•• The availability of capable staff to assist with the implementation and
management of a CRM strategy;
•• Processes.
7. Selecting a CRM technology. If an organisation is looking to select a CRM provider,
it is necessary to take a long and very analytical look at the organisation’s business
processes, and to take an equally long and hard look at the organisational culture
and, specifically, at all customer-facing management and staff. It is in these realms
that the success or failure of any CRM programme or project will be born.
8. Training people. People require training in any new CRM business model with
its cultural shifts, processes and systems. Both job-level and executive training
are required. An organisation should plan to spend 5 per cent of its total CRM
investment on training.
9. Implementation. With the proper planning and preparation for the CRM trans­
formation, the organisation can begin implementation through distinct CRM
development cycles. These cycles allow for a small fast start, beginning with a
controlled test or pilot group. The organisation should learn from the pilot groups,
and then refine the next implementation cycle and repeat as necessary.
10. Measuring CRM results. One of the best ways to measure the CRM transformation
is with a ‘balanced’ rate of investment (ROI) scorecard. The balanced scorecard is a
management tool consisting of a set of integrated performance measures that link
current customers, internal processes, employees, and system performance to longterm financial success. A balanced scorecard includes financial measures that tell
the results of actions already taken.53
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Let us give it some thought
Just about every consumer likes the idea of a value proposition. Essentially, a value proposition
is that which helps to provide some form of additional satisfaction to the client as a result
of using a good or service over the products offered by a competing organisation. Typically,
the value proposition is provided in the form of quality customer service. However, the value
proposition can also be in the form of adapting the product or service to the individual needs
of the customer. This is referred to as customisation. In addition, the product could simply be
added with specific features that could enhance its value to the customer from a brand image
perspective.
Here are some examples of value propositions that are often used to distinguish an organisation
within a given industry: Setting up an effective customer service department is one way of
establishing a value proposition for new and existing clients. All other factors being equal, the
presence of effective client support can make the difference between a high level of customer
satisfaction that keeps clients coming back for more, and a company that quickly becomes
yesterday’s news. Staffing to eliminate long hold times and delays in responding to customer
emails will go a long way towards building customer loyalty and distinguishing the company in
the minds of the general public.
Functionality of a product or service can also make a big impact when it comes to value
proposition. For example, to strengthen customer loyalty, travel agencies in South African
can improve their value proposition to customers. This is especially important considering the
increased use of the internet to make travel related bookings. The following value proposition
improvement strategies can be considered by travel agencies as a service provider in South
Africa, namely:
•• Travel agents have the advantage of personal interaction with customers in contrast to
the disconnectedness of internet travel booking tools. Travel agencies that have customers
walking in their doors need to ensure that service levels are of an optimum standard.
Receptionists should excitedly greet customers with offers of beverages and snacks whilst
ascertaining what their travel requirements are. A comfortable lounge area should be
provided as a waiting area for customers with brochures surrounding the area and even
destinations videos playing on a large screen in order to stimulate demand for different
travel products and services.
Ü
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•• Travel agents in South Africa need to use personal interaction with customers as an
advantage to reassure customers and to obtain customers’ trust in terms of the travel
booking process. Travel agents should keep in contact with customers throughout their
booking procedure to assure them that their travel arrangements are in order and there is
no need for concern. In many cases, travellers are spending large sums of money on their
vacations and they need to be assured that their ‘investment’ is being well taken care of
and the travel agent is paying their booking due attention.
•• Travel agents need to conduct more relationship building activities with customers and
create more contact points with customers. For example, a travel agent should be in
contact with a customer before they leave on a trip to wish them well and again contact
the customer upon their return to find out how the trip was and if any problems occurred
with their travel arrangements. In addition to this, follow-up calls, emails or SMSes should
be made/sent to all customers who request quotes from a given travel agency, as this
will enhance the sales conversion rate. Customers should also be contacted on special
occasions such as birthdays or special holidays. Travel agencies should even consider
giving gifts to their most loyal customers on these occasions.
•• Innovative opportunities to make contact with customers should be sought, such as
special events evenings focusing on different locations or specialised products such as
cruising or skiing.
•• Brick and mortar travel agencies could potentially join together to recreate the demand
for their services. These activities could take the form of travel festivals, themed meal
events involving cuisine from different countries or even joint celebrations of special
foreign holidays in order to create interest in different destinations. Any opportunity to
bring travellers together with travel agents should be sought, and travel agency owners/
managers should be alerted to these opportunities and should capitalise on them
whenever possible.54
The wise use of a value proposition can help any company gain a prominent place amongst the
consumer options within a given industry. As the value proposition helps to set the company
apart from the competition, there will be intangible business results, such as promotion of the
company by loyal customers and tangible business results, like a larger client base, more sales,
and improved revenue in general.55
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3.12 CUSTOMER LOYALTY MANAGEMENT
Organisations use a relational approach to establish long-term relationships with
customers and such an approach should be to the benefit of all parties involved. The
management of long-term relationships is beneficial to all role players involved. From
an organisational perspective, the benefits that accrue from such a relationship include
a reduction in pricing competition, increased income generation from a customer
base in the long term, and the establishment of barriers against competitors. It is
important to understand that a relational approach towards customers entails more
than simply recruiting new customers. It also encompasses activities that focus on
the management of the customer to enhance customer loyalty. Customers will remain
loyal to an organisation if a relationship is established and professionally managed
between them and the organisation. Customer loyalty as such can be viewed as an
obligation based on emotion to continue purchasing a specific brand of product or
service without considering circumstantial influence or promotional efforts to secure
switching actions.56
The aim of relationship marketing is the establishment and maintenance of long-term
relationships with customers. Organisations understand that it is considerably more
profitable to keep and satisfy existing customers than to renew a strongly churning
customer base constantly. To make relationship marketing work, marketers have
adopted a customer management orientation, which emphasises the importance of
customer lifetime value, retention and the dynamic nature of a person’s customer–
organisation relationship over time. The rationale behind CRM is that it improves
business performance by enhancing customer satisfaction and driving up customer
loyalty. A model called the satisfaction-profit chain has been designed to explain this
rationale. Customer satisfaction increases because the insight into customers allows
organisations to understand them better, and through this organisations create
improved customer value propositions. As customer satisfaction rises, so does customer
repurchase intention. This then influences the actual purchasing behaviour, which
significantly impacts on business performance.
Organisations must track customer loyalty as the truer measure of how they compare
to competitors. This will shift the focus from customer acquisition to customer
retention.57 Customer loyalty refers to a customer’s likelihood of choosing a particular
brand with reference to his/her past purchases. This behavioural definition of loyalty
captures the outcomes of both attitudinal commitment and habitual buying.58 The term
‘customer loyalty’ is used to emphasise that loyalty is a characteristic of customers
rather than characteristics of brands. The effective implementation of CRM strategies
can improve customer loyalty for the business. Improvement in customer loyalty and
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customer retention has a significant effect on the profitability of the business.59 CRM
influences a business’s customer service, customer retention and customer loyalty when
implemented effectively. The assumption is that strong relationships which are mutually
beneficial between service providers and clients build loyalty through repeat purchases,
which has financial rewards for the business. This can be attributed to the following
factors: regular customers frequently visit the service provider, hence they cost less to
service; long-established customers tend to use more services; loyal customers may
pay premium prices; retaining customers makes it difficult for competitors to enter the
market or to increase their market share; and loyal customers often refer new customers
to the provider of service, which is a huge benefit as there is no expenditure to gain
these new customers.60
Effective CRM strategies can lead to many benefits to the business including customer
loyalty, but the extent and quality of these strategies may be influenced by many
different elements. A real business growth strategy is through a mutual relationship
with customers, which enables the business to clearly understand customer needs.
This is used to create superior value to customers. Businesses need to fulfil promises to
customers as this leads to customer satisfaction, customer retention, customer loyalty
and long-term profitability.61
3.12.1 The key aspects of CRM when establishing customer loyalty
The absence of a strategic framework to develop CRM successfully is one reason for
the disappointing results of many CRM initiatives. This raises the question about the
aspects of CRM which embed customer loyalty.62
3.12.2 Loyalty marketing strategies
There are many CRM tools available to businesses − from full-scale enterprise-wide
solutions to small subscription services. The potential use for CRM is therefore extensive,
ranging from the more obvious direct marketing initiatives to much broader issues. In
order to understand the importance of any CRM activities, it is necessary to understand
the overall loyalty marketing strategy. The purchaser–purveyor loyalty matrix proposes
five different loyalty marketing strategies geared towards customer loyalty. These five
strategies can be implemented by businesses, depending on the business marketing
mix and competitive position:
1. Pure loyalty strategies are aimed at existing customers with the focus on the business’s
products and service offering. These strategies are often used by businesses where
physical exchange of goods and services occur.
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2. Push loyalty strategies are aimed to push the customer closer to the business
through the focus on the business location and channel to be used. Push strategies
can be considered for a business where the accessibility and visibility of the brand
is crucial in pushing the customer towards the business.
3. Pull loyalty strategies are aimed at pulling the customer towards the business
through promotion. Pull strategies can best be used when the core product/service
of the business is interchangeable with the offering of competitors.
4. Purchase loyalty strategies are strategies which aim to increase the number of
transactions or the total amount spent by the customer. These are usually done in
coalition with a supplier, with the supplier having little concern for which retailer
has the biggest benefit, as long as the supplier benefits.
5. Purge loyalty strategies are aimed at the business eliminating unnecessary costs
and by doing this, offering the customer the lowest possible price. Purge strategy
is effective when the focus of the business is around everyday best price with the
focus on economies of scale.
The business can adopt a number of these strategies, depending on the type and loyalty
sought, the level of loyalty, as well as the product/service on offer.63
3.12.3 T he service encounter – the interaction between providers and
customers
Organisations continuously focus on the satisfaction of customer needs as a precursor
for securing their loyalty. In the current business environment, customer satisfaction
has been identified as a priority concern for organisational management in securing
future business growth. Therefore, if an organisation wants to survive in an increasingly
competitive business environment, the customer must be provided with services of
superior quality to enhance customer satisfaction levels. This can result in positive
word-of-mouth referrals by the customer. In addition, the process of service quality
management through the continuous assessment of customer satisfaction levels has
become a critical element in securing the success of services marketing compared to
the marketing of products.64
The unique property of services gives a new importance to relationships and interactions.
The customer is exposed to the business’s sales staff as well as general staff, processes
and equipment during service delivery. These encounters form a sense of interactive
marketing, and the customer and provider create value together. During this service
delivery, the customer evaluates it and makes decisions with regard to total satisfaction,
repeat business and long-term relationships. The marketing that is done through the
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service encounter is very important to the business and needs to be managed as the
‘moment of truth’. The customer interacts with staff of the business, but many other
interactions can also influence loyalty during the service encounter. These can be with
other customers, management, service systems and the environment in which the
service is delivered and competitors.65 The duty of the service provider is to effectively
demonstrate its capabilities to the customer. However, the service provider must also
attempt to create a positive overall experience.66 The provider needs to establish a
customer-orientated environment in which the working culture is one of attending
to all customers’ needs in an effort to satisfy customer needs. The customer’s need
concerns not only the service offering, but also the manner in which the offering is
delivered. The business needs to use the service encounter to build trust and instil
confidence in the provider’s abilities.67
3.12.4 CRM goals and loyalty
Loyalty measurement is a core CRM process, which focuses on customer retention
and customer development. Customer acquisition strategy aims to increase the
customer base, while customer retentions focus on keeping a high proportion of
current customers by reducing customer defections. If organisations aim to improve
relationships with customers, they have to ensure that all key business processes are
focused on the customer, and are customer-centric.68 However, the main reason for
implementing CRM is not only to build loyalty, but also to address three main CRM
objectives. These objectives are:
1. Behaviour prediction. CRM enables the business to gain in-depth customer
knowledge and to use this knowledge to segment customers and to formulate
marketing strategies which can further strengthen loyalty.
2. Customer profitability. The business is expected to use CRM to focus on the customer.
It is noted that not all customers are equally profitable, hence the organisation can
use CRM to focus on the high profitable customers and to create a sense of loyalty.
Keeping these customers loyal to business could give the business great financial
rewards.
3. Personalisation. CRM aims to differentiate amongst customers and the objective of
the business should be to personalise products and services around the requirements
of customers.69
Customer-centric business processing (CCBP), as mentioned above, recognises that
although delivering a high-quality service is important, it is not sufficient to keep up
with the change in ever-increasing competitive environments. The aim of CCBP is to
know and understand customers, to treat them correctly according to their needs and
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to respond positively to their actions. In CRM there is a high degree of importance
placed on understanding and exploring customer behaviour. CRM is believed to work
best when customers are highly involved in the service. For loyalty to exist, there must
be an element of personal interaction, and customers must be willing to engage in
relationship-building activities.70
3.12.5 Segmentation of customer loyalty
Literature focuses on two mainstream segments for loyalty: behavioural and attitudinal
loyalty. These different approaches allow differentiating customers between being
behaviourally loyal or emotionally loyal.
Behavioural loyalty
Behavioural loyalty focuses on the repeat purchase intention through external influences
that guide the decision-making process of the consumer. This type of loyalty is believed
to be stochastic, not deterministic. Behaviourally loyal customers act loyal, but have
no emotional bond with the supplier or brand. Behaviourally loyal customers can be
divided into subsegments by reason of acting:
•• Forced to be loyal. Customers are forced to be loyal when they have to be customers
of the business even if they do not want to be. This typically happens when the
customer has a poor financial status which limits his/her options of supplier, or in
cases where a business has a monopoly. Forced loyalty is also created through exit
barriers created by businesses, such as high switching costs.
•• Loyal due to inertia. The customer does not move to another supplier through
comfort or situations where the decision of supplier choice has little importance.
Thus, based on the customer’s faith in the suitability of the current supplier, he/she
does not check for alternatives.
•• Functionally loyal. Customers are loyal because they have an objective reason
to be so. Functional loyalty can be created by functional values such as quality,
price, distribution and convenience, or through loyalty programmes such as point
systems.
Emotional loyalty
Emotional loyalty is much stronger and longer lasting than behavioural loyalty. The
relationship is so important that an effort will be made to maintain it. Highly bonded
customers will buy repeatedly from the business, recommend the business and its brand
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vigorously, and defend these choices to others if need be. There are three measures of
loyalty which can be used for segmenting loyalty:
1. Customer’s primary behaviour – recency, frequency and number of purchases.
2. Customer’s secondary behaviour – customer referrals, endorsements and spreading
the word.
3. Customer’s intent to repurchase – is the customer prepared to purchase in the future?
From the above information, it can be concluded that loyalty refers to the behavioural
and attitudinal aspects of future intentions of customers. Hence, a customer must have
intent to use the service provider again in the future, and this intent needs to be realised
in a certain point in time.71
Based on the theory presented above, customers can be segmented by their loyalty as
follows:
•• Emotionally loyal customers – active customers who use only a certain provider’s
services and declare they will only use this provider and recommend this provider
to others;
•• Behaviourally loyal customers – active customers who use only a certain provider’s
services and declare they will only use this provider, but do not agree to recommend
this provider to others;
•• Dubious customers – active customers who use only the certain provider’s services,
but do not know which provider they will use in the future;
•• Disloyal reducers – customers who have reduced or will reduce the percentage of the
provider’s services in the future;
•• Leavers – customers who declare that they will certainly leave the current provider.
It is thus clear that the business needs to understand why customers are loyal in order
to build more emotionally and behaviourally loyal customers. It is also evident that
certain repeat business received has no correlation with loyal customers. This happens
when customers continue to do business, because of factors such as high switching
costs. These customers only remain loyal, because it is too expensive to change their
provider.72
3.12.6 Potential benefits of customer loyalty
Customer loyalty holds different benefits for the organisation. Each of these benefits is
briefly discussed below.
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Customer loyalty and profitability
Customer loyalty is more than having customers making repeat purchases and being
content with their experiences and products or services which they bought. Customer
loyalty implies that customers are committed to purchasing products and services from
a specific organisation and will resist the activities of rival organisations attempting
to attract their patronage. With customer loyalty, a bond is formed between the
organisation and the customer, and the bond is based on more than a positive feeling
about the organisation. Customer loyalty describes behaviour or a disposition to behave
positively towards a service provider and is a bidimensional construct (see Section
3.12.5), thus both behavioural and attitudinal. Thus, if customers are satisfied with
the services and products offered by an organisation, they are delighted and become
loyal. If they are loyal, it implies low customer relationship and customer loyalty
profitability arise through the acquisition and retention of high-quality customers with
low maintenance costs and high revenue.73
An increase in profits from long-term customer loyalty accrues for a number of reasons:
•• An increase in the number of purchases;
•• The tendency of long-term customers to trade up – purchasing more expensive
products/services;
•• The inclination of customers to become less price sensitive, which is created through
the understanding that long-term customers have of the business’s procedures,
and realising that they can extract value in terms of convenience and purchase
efficiencies;
•• Word-of-mouth referrals through family and friends;
•• Lower costs of servicing long-term customers, since the business understands the
customer’s needs better and can meet expectations better.74
Word of mouth
Word of mouth is by far the best and most cost-effective way to generate new business
and generates more loyal customers, more motivated buyers and sellers, more
profitable deals, and an increase in referral opportunity. Positive referrals by customers,
through word of mouth, will increase if the level of service delivery is improved
by the business. Word of mouth by the customers of the business is a spontaneous
form of communication. It is done since individuals base their purchasing decisions
on information communicated to them by family and friends. Such communication
is based on the own experiences of the reference group when using or purchasing
products and services.
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Word of mouth is about getting real people to talk about your product. Thus, instead
of going to television or newspaper reporters, technology allows a person to go directly
to the consumer whom in person, over the phone, by email, or on blog talks to other
consumers. Word of mouth is also more credible than other marketing techniques
because only 14 per cent of people believe what they see, read or hear in advertising.
However, 90 per cent of people will believe their family, friends or colleagues who
endorse a service or product, because they know they do not have a vested interest in it.
The fundamental objective of word-of-mouth marketing is therefore to motivate people
(also referred to as ‘trusted advisors’) to talk to others about a product or service to
ensure that those products or services are more readily purchased or used. The format
of word-of-mouth marketing (for example, positive or negative) is directly influenced
by the experience of customers with regard to aspects such as the ability of the business
to make it easy for the customer to do business with it, the willingness of the business
to be sensitive towards the needs and wants of customers, the ability of the business
to adapt speedily to a change in customer preferences, the ability of the business to
exceed customer expectations, the inclination of the business to focus on aspects that
make the customer feel special and important, the ability of the business to resolve
customer problems and complaints in a fast and efficient manner; and the willingness
of the business to deliver products and services according to the needs of high-income
customers.75
Switching costs
Customer loyalty is considered by service providers as an important source of competitive
advantage. Enhanced customer loyalty can lead to greater profitability. Higher switching
costs have a direct impact on increased loyalty as there is a higher benefit for the
customer to remain loyal. The reverse is also true. If the business can be successful
in implementing strategies which increase customer value through manipulating the
antecedents which influence customer loyalty, the customers will remain loyal even
in situations of low switching costs. Hence the importance for strategies to improve
customer loyalty is evident in industries where high switching costs and high exit costs
are absent.
Fundamentals for the creation of customer loyalty
Relationship marketing focuses on the retention of existing customers. By maintaining
current customers, it is suggested that costs are reduced by saving money that would
otherwise have been spent on advertising, personal selling, the setting up of new
accounts, explaining procedures to new customers and reducing costs of inefficiencies
in the customer learning process. A relationship-orientated view of the customer takes
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into account the income and profit to be earned over a long-term relationship with a
customer.
Trust and commitment are two primary principles on which relationship marketing is
built. The level of satisfaction which a customer experiences in a relationship with a
business is directly related to the principles of trust and commitment. Businesses which
recognise the importance of customer orientation create a business culture which
takes into consideration the interests of the customer in all its activities. The business
should observe the interests of the customer as a partner in achieving the success of a
business, as superior to short-term separate interests which occur within a business,
no matter whether it is in the interests of the employees, managers or owner of the
business. Customer loyalty is therefore only possible for the business if the principles of
relationship marketing through the establishment of trust, honesty, commitment, open
communication channels, a focus on the interests of the customer, a commitment to
quality, the provision of added value through products and services and the willingness
to retain customers are applied by the business, and if relationships with customers are
managed professionally.
Customer loyalty is increasingly being recognised by businesses globally as a path to
long-term business profitability. Loyalty measures the value which the purchase of a
product or service holds for a customer. It determines whether a customer will return to
the business for repeat purchase. There are two dimensions to customer loyalty, namely
the behaviour dimension and the attitude dimension. The behaviour dimension refers
to the manner in which a customer behaves during repeat purchasing and indicates
over time the purchasing preference of a customer towards a specific brand or service.
The attitude dimension, on the other hand, refers to the intention of a customer to
purchase a product or service on a repeat basis and to recommend the product to
others. The customer who has the intention to purchase a product or service on a repeat
basis and who is willing to recommend such a product or service to others will have
a high probability of being loyal to the business. Ensuring the satisfaction of customer
needs therefore increases the potential for customer loyalty towards the business. This
ensures the long-term growth and future existence of the business. Satisfied and loyal
customers are therefore more profitable to the business than loyal customers only.
In conclusion, each customer relationship must be approached as a long-term investment
in customers, the communication mix must be focused on the gathering of information
from customers, and the distribution system and channels of the business must add
value to its products and services. In customer-centric businesses, there is a move
towards supporting the customer ‘pull’ of products and services. This change requires
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that marketing departments generate sufficient information to answer the following
question, ‘Who are our customers?’ And then to extend this to, ‘What products or
services do our customers want to buy?’ The researching of customer needs empowers
the business to segment their customers more successfully, forecast accurately against
these segments, and adjust the product or service development process to ensure that
the right product mix arrives in the market place, at the right time for the right customer
groups.76
Let us give it some thought
Customer loyalty encompasses recruiting the right customer. It is about getting these customers
to purchase more often and in larger quantities. The loyalty of customers is built around
the principle of interacting with the customer. Such interaction could take the form of email
marketing and thank-you cards. Customer loyalty is established by rewarding customers for
selecting your brand over and above that of competitors. This is achieved by really caring about
them and establishing how to make them more successful, happy and joyful. In short, you build
customer loyalty by treating people how they want to be treated.77
Example
Below is an example of a customer management approach followed by South African Airways
(SAA).
Aviation has the potential to make an important contribution to the further economic
development and growth in Africa. It connects countries, markets and facilitates trade and
connects Africa to global supply chain links. SAA plans to be a leading and very active role
player in this market.
SAA is a multi-award winning airline based in Johannesburg, South Africa. Its core business
is the provision of passenger airline and cargo transport services together with related service
which are provided through SAA and its wholly-owned subsidiaries: SAA Technical, Mango, its
cost carrier, and Air Chefs, the catering entity of SAA.
The leading carrier in Africa, SAA serves 56 destinations in partnership with SA Express, SA
Airlink and Mango within South Africa and across the continent as well as nine intercontinental
routes.
Taking to the skies with pride
SAA owns a prestigious array of aircraft, which includes eight A319-100, twelve A320-200,
seven A737-800, six A330-200, eight A340-300, nine A340-600, three A373 Freightliners and
three Cargo B737-800s to its fast-growing name.
Ü
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The airline has received the Best Airline in Africa Skytrax Award 13 times – the result of 19
million passenger votes. SAA is also the winner of the Best Airline in Africa Award in the
regional category for thirteen consecutive years and the winner of Service Excellence Africa for
four years. Together with Mango, SAA also holds the number one and number two successive
spots as South Africa’s most on-time airlines.
The SAA experience
With SAA, every flight is a journey to remember. Thanks to the airline’s sky-high standards
and premium outlook, passengers can expect a smooth check-in process, friendly service and
superior cuisine. Meals are prepared with care, using only the freshest ingredients and the wine
list boasts top South African wines.
Travelling with SAA means sitting back and enjoying the latest offerings from the entertainment
world, from up-to-the-minute movie releases to old favorites, foreign language films and kid
blockbusters.
Further to a superior in-flight experience, SAA’s airport lounges offer luxury, modernity,
practicality and a touch of opulence. The airline’s partnership with Star Alliance gives travellers
access to many top travel lounges across the globe.
Going the extra mile
SAA also offers a generous rewards programme for frequent flyers. Launched during 1994, the
SAA Voyager programme offers its more than 2.5 million members earning and spending of
miles (the programme’s reward currency) from 63 programme partners. Voyager boasts more
than 35 airline partnerships, including the Star Alliance Global Network, which gives members
access to more than 1 300 destinations in 193 countries.
Voyager offers a hierarchy of tier statuses ranging from Blue, Silver, Gold, Platinum and Lifetime
Platinum Status. Being an SAA Voyager elite status member means access to additional
benefits based on tier status. Benefits range from additional bonus miles to free chauffeurdriven services, priority airport services, lounge access, and a companion card, to mention a few.
Furthermore, members enjoy Star Alliance benefits, according to tier status, including worldwide
lounge access for Gold, Platinum and Lifetime Platinum card holders, when traveling on any of
the 27 Star Alliance member airlines.78
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3.13 SUMMARY
Chapter 3 provided a focused approach to customer management. It laid the foundation
for what customer management is. The chapter furthermore enhances the understanding
of how to do research amongst existing customers and then project their future needs.
This is important for organisations to understand, as it influences aspects such as
forward-thinking product development and market segmentation. A brief focus was
provided on how to understand the different individuals that influence the customer
decision-making process. These individuals influence the behaviour of the individual
consumer, therefore an understanding of the role that they play is vital. In addition,
the 6W model is proposed to enhance an understanding of the customer market base
that the organisation is focusing on or plans to focus on. From this understanding a
discussion on segmenting the customer base was provided to strengthen the ability of
the organisation to improve its customer loyalty strategy. The chapter concluded with
an explanation of customer loyalty and the benefits it offers the organisation.
Self-evaluation questions
1. Explain the concept ‘relationship marketing’ briefly.
2. Discuss what is implied by the term ‘customer relationship management’ (CRM).
3. What are the key focus areas of CRM?
4. List ten guidelines for effective CRM.
5. Critique the need for an organisation to have a customer relationship management
strategy.
6. Discuss the five main roles that exist in a purchasing situation.
7. Discuss the 6W model of customer analysis by focusing on the different questions
that pertain to the model.
8. Explain the different bases for customer segmentation. Apply your answer to the
South African Airways (SAA) example provided in this chapter.
9. What is an attractive market segment?
10. Differentiate between quantitative and qualitative research. Which of these two
research types will you use when interviewing business-class customers using the
SAA lounge at OR Tambo airport before travelling to their destination of choice?
Motivate your answer clearly.
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11. Critique the role of trust and commitment in the relationship building process.
12. Guide SAA on whether the business-class market on its domestic flights can still be
perceived as an attractive/profitable market segment. Motivate your answer clearly.
13. Consult to SAA on how the company can continuously ensure the delivery of value to
its customers on both domestic and international flights.
14. What does SAA have to do to ensure the satisfaction of its domestic and
international customer needs? Support your answer with examples.
15. Explain why customer satisfaction is a precursor to customer relationships.
16. Critique the importance and value of word-of-mouth as a marketing strategy for SAA.
17. Discuss the different customer loyalty marketing strategies available to an
organisation.
18. Differentiate between behavioural and emotional loyalty.
19. What are the objectives of a CRM strategy? Are these objectives still relevant in a
changing world of customer management? Be critical in your answer.
20. Explain the potential benefits of customer loyalty to an organisation.
ENDNOTES
1. Roberts-Lombard, M. 2011a. ‘The customer market practices of the travel agency
industry in the Gauteng Province of South Africa’. African Journal of Business Management,
5(8):3096−3108.
2. Strachan, L. & Roberts-Lombard, M. 2011. ‘A conceptual framework proposition for
customer loyalty in the short-term insurance industry – A South African perspective’.
African Journal of Business Management, 3(8):207−218.
3. Van Tonder, E. & Roberts-Lombard, M. 2016. ‘Customer loyalty guidelines for
independent financial advisers in South Africa’. Acta Commercii, 16(1):1−10.
4. Roberts-Lombard, M. & Du Plessis, L. 2012a. ‘Customer relationship management (CRM)
in a South African service environment: An exploratory study’. African Journal of Marketing
Management, 4(4):152−165.
5. Palmer, A. 2010. Principles of services marketing. Berkshire: McGraw-Hill, UK.
6. Roberts-Lombard, M. & Du Plessis, L. 2012b. ‘The influence of trust and commitment on
customer loyalty: a case study of Liberty Life’. Acta Akademika, 44(4):58−80.
7. Roberts-Lombard, M. 2009. ‘Customer Retention Strategies of Fast-Food Outlets in South
Africa: A Focus on Kentucky Fried Chicken (KFC), Nando’s, and Steers’. Journal of African
Business, 10:235–249.
8. Roberts-Lombard, 2012b, op cit.
9. Rouse, M. 2006. CRM (Customer relationship management). Online: http://searchcrm.
techtarget.com/definition/CRM/ Accessed: 3 May 2013.
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Chapter 3 – Customer analysis
10. Ibid.
11. Van Tonder, E. & Roberts-Lombard, M. 2015. ‘Relationship marketing dimensions
predicting customer loyalty towards independent financial advisers’. Journal of
Contemporary Management, 12:184−207.
12. Smith, M. 2013. 12 Tenets of RM effectiveness. Online: http://www.marismith.com/tenets-ofrelationship-marketing-effectiveness/ Accessed: 6 May 2013.
13. Van Tonder, 2015, op cit.
14. Roberts-Lombard, M & Nyadzayo, W. 2013. ‘A conceptual framework to improve
customer retention at motor dealerships in an emerging economy’. Asian Journal of Social
Sciences, 4(2):001−010.
15. Fahy, J. & Jobber, D. 2012. Foundations of Marketing. Berskhire: McGraw-Hill:335.
16. Austin. B. nd. How airlines benefit from relationship marketing. Online: http://www.ehow.
com/about_6137543_airlines-benefit-relationship-marketing.html/ Accessed: 25 June
2013.
17. Sin, LYM, Tse, ACB, Yau, OHM, Chow, RPM, Lee, JSY, Lau, LBY. 2005. ‘Relationship
Marketing Orientation: Scale Development and Crosscultural Validation’. J. Bus. Res.,
58:185−194.
18. Roberts-Lombard, 2011a, op cit.
19. Hooley, G., Piercy, N.F. & Nicoulaud, B. 2008. Marketing strategy and competitive
positioning. Essex: Pearson Education Ltd.
20. Ibid.
21. The Marketing Donut. 2013. Understanding your customers. Online: http://www.
marketingdonut.co.uk/marketing/customer-care/understanding-your-customers/ Accessed:
25 June 2013.
22. Rouse, M. 2007. Definition of customer segmentation. Online: http://searchcrm.techtarget.
com/definition/customer-segmentation/ Accessed: 28 May 2013.
23. CRM. nd. Customer segmentation analysis. Online: http://www.microstrategy.com/
Download/files/Solutions/byDepartment/CRM/Customer_Segmentation.pdf/ Accessed: 28
May 2013.
24. RBC. 2013. How to do customer segmentation right. Online: http://www.cio.com.au/
article/179851/how_do_customer_segmentation_right/ Accessed: 28 May 2013.
25. Fripp, G. 2012. Segmentation bases for consumer markets. Online: http://www.
segmentationstudyguide.com/segmentation-bases/choice-of-segmentation-bases/ Accessed:
28 May 2013.
26. Ibid.
27. Ibid.
28. Van Tonder, 2016, op cit.
29. Dummies. 2013. Define an attractive market segment. Online: http://www.dummies.com/
how-to/content/how-to-define-an-attractive-market-segment.html/ Accessed: 29 May
2013.
30. RMIT University. 2012. Evaluating segment attractiveness. Online: https://www.dlsweb.rmit.
edu.au/bus/mk100/html/6-evaluating_segment_attractiv.html/ Accessed: 29 May 2013.
31. Linton. I. nd. What is an attractive market segment? Online: http://yourbusiness.azcentral.
com/attractive-marketing-segment-2732.html/ Accessed: 28 June 2013.
32. Terblanche, N. 2007. ‘Customer commitment to South African fast-food brands: an
application of the Conversion model’. Management Dynamics, 16(2):2−15.
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33. Ndubisi, N.O. 2007. ‘Relationship marketing and customer loyalty’. Marketing Intelligence
and Planning Journal, 25(1):98−106.
34. Vranesevic, T., Vignali, C. & Vignali, D. 2002. ‘Culture in defining consumer satisfaction
in marketing’. European Business Review, 14(5):364−374.
35. McPherson, M. 2006. ‘Stop navel-gazing and look at your customer’. Travel Industry
Review, January, 130:1−16.
36. Bush, R.O., Underwood, I.J.H. & Sherrell, D.L. 2007. ‘Examining the relationship
marketing, marketing productivity paradigm: establishing an agenda for current and future
research’. Journal of Relationship Marketing, 6(2):9−32.
37. Donovan, M.R. 2007. ‘Driving a reciprocal referral relationship’. Dynamic Business,
September, 14−15.
38. Lamb, C.W., Hair, J.E., McDaniel, C., Boshoff, C. & Terblanche, N.S. 2008. Marketing.
Johannesburg: Oxford University Press.
39. Roberts-Lombard, M & Nyadzayo, W. 2014 ‘Supplier-Customer Relationship Management
and Customer Retention: A Perspective on Motor Dealerships in an Emerging Economy’.
Asian Journal of Social Sciences, 5(20):792−801.
40. Boshoff, C. 2006. ‘A proposed instrument to measure the customer satisfaction of visitors
to a theme park’. Management Dynamics, 15(3):2−11.
41. Hendrik, N., Beverland, M. & Minahan, S. 2007. ‘An exploration of relational customers’
response to service failure’. Journal of Services Marketing, 21(1):64−72.
42. Jordaan, Y. & Prinsloo, M. 2004. Grasping services marketing. Pretoria: V and R Printing
Works.
43. Bolton, M. 2004. ‘Customer centric business processing’. International Journal of
Productivity and Performance Management, 53(1):44−51.
44. Alsem, K.J. 2008. Strategic marketing – an applied perspective. New York: McGraw-Hill.
45. Ibid.
46. Ibid.
47. Ibid.
48. Du Plessis, P.J., Jooste, C.J. & Strydom, J.W. 2005. Applied strategic marketing.
Sandton: Heinemann.
49. Roberts-Lombard, 2013, op cit.
50. Van Vuuren, T., Roberts-Lombard, M. & Van Tonder, E. 2012. ‘Customer satisfaction,
trust and commitment as predictors of customer loyalty within an optometric practice
environment’. Southern African Business Review, 16(3):81−96.
51. Berndt, A., Du Plessis, L., Klopper, H.B., Lubbe, I. & Roberts-Lombard, M. 2009. Starting
out in marketing. Roodepoort: Future Vision Organisation Consultants.
52. Viljoen, K. & Roberts-Lombard, M. 2016. ‘Customer Retention Strategies For
Disintermediated Travel Agents: How To Stop Customers From Migrating To Online
Booking Channels’. Journal of Applied Business Research, 32(2):1−14.
53. Berndt, op cit.
54. Viljoen, K. 2013. The reintermediation of South African travel agencies: a marketing
perspective. Johannesburg, University of Johannesburg (PhD thesis):296−297.
55. WiseGeek. nd. What is a value proposition? Online: http://www.wisegeek.com/what-is-avalue-proposition.htm/ Accessed: 28 June 2013.
56. Van Tonder, 2016, op cit.
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57. Baran, R.J., Galka, R.J. & Strunk, D.P. 2008. Principles of customer relationship management.
Mason: Thomson South-Western.
58. Zhang, J., Dixit, A. & Friedmann, R. 2010. ‘Customer loyalty and lifetime value: an
empirical investigation of consumer packaged goods’. Journal of Marketing Theory &
Practice, 18(2):127−140.
59. Helgesen, Ø. 2006. ‘Are loyal customers profitable? Customer satisfaction, customer
(action) loyalty and customer profitability at the individual level’. Journal of Marketing
Management, 22(3):245−266.
60. Rootman, C. 2006. The influence of customer relationship management on the service quality of
banks. Port Elizabeth: Nelson Mandela Metropolitan University.
61. Ibid.
62. Pedron, C.D. & Saccol, A.Z. 2009. ‘What lies behind the concept of customer relationship
management? Discussing the essence of CRM through a phenomenological approach’.
Brazilian Administration Review (BAR), 6(1):34−49.
63. Cuthbertson, R.R.C. & Laine, A.A.L. 2004. ‘The role of CRM within retail loyalty
marketing’. Journal of Targeting, Measurement and Analysis for Marketing, 12(3):290−304.
64. Van Tonder, 2016, op cit.
65. Laing, A. & Hogg, G. 2008. ‘Re-conceptualising the professional service encounter:
information empowered consumers and service relationships’. Journal of Customer
Behaviour, 7(4):333−346.
66. Gummesson, E. 2007. ‘Exit services marketing-enter service marketing’. Journal of
Customer Behaviour, 6(2):113−141.
67. Ligas, M. 2004. ‘Personalizing services encounters’. Services Marketing Quarterly,
25(4):33−51.
68. Du Plessis, op cit, 85.
69. Mukerjee, K. & Singh, K. 2009. ‘CRM: a strategic approach’. ICFAI Journal of Management
Research, 8(2):65−82.
70. Du Plessis, op cit, 85.
71. Van Vuuren, T. 2011. ‘Customer loyalty in an optometric practice – a case study
perspective’. Unpublished Master’s dissertation. Johannesburg: University of Johannesburg.
72. Wang, C. 2010. ‘Service quality, perceived value, corporate image, and customer loyalty in
the context of varying levels of switching costs’. Psychology and Marketing, 27(3):252−262.
73. Roberts-Lombard, 2013, op cit.
74. Du Plessis, op cit, 85.
75. Roberts-Lombard, M. 2011b. ‘A management perspective on the current status of referral
marketing in the property selling industry’. African Journal of Business Management,
5(8):3082−3095.
76. Roberts-Lombard, 2011a, op cit.
77. Customer Loyalty Institute. nd. What is customer loyalty? Online: http://www.
customerloyalty.org/ Accessed: 28 June 2013.
78. Wilshere-Preston, K. 2015. Brands & Branding. Auckland Park: Affinity Advertising &
Publishing.
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Chapter
4
MARKET ANALYSIS
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Understand what is market analysis and the steps in market analysis;
„„ Conduct market analysis;
„„ Analyse the dimensions of market analysis;
„„ Apply market analysis dimensions in any product market.
4.1 INTRODUCTION
Globalisation has created an immense pressure on local companies in South Africa,
as more and more companies have entered the South African market since the 1990s.
South African companies have to be more competitive to sustain their businesses.
Understanding the market is one way in which companies can become more
competitive. Companies operate in different markets and need to understand the
market in which they operate. This involves an understanding of who is in the market,
their needs, expectations and behaviour, how they buy, as well as other market factors
such as distribution channels and technological developments that impact on the
competitiveness of businesses. Trends and developments in the market must also
be understood by the marketers for them to adapt their marketing strategies in line
with changes in the market. For example, the cellphone market in South Africa has
evolved from a situation where few people could afford a cellphone to a market where
the majority of South Africans have cellphones. In fact, in most families, every single
member of the family has their own cellphone handset. Understanding the trends and
developments helps marketers to market their products successfully.
Market analysis entails determining the attractiveness of the market to current and
potential markets. The market attractiveness is the profit potential of the market which
is measured by the long-term return on investment for the product in a product market.
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The objective of market analysis is to determine the needs of the market that the
company wants to satisfy, the segments to target, as well as the market offering targeted
at the selected market.
4.2 STEPS IN MARKET ANALYSIS
Gultinan & Paul (1991)1 proposed a five-step approach to analysing the market. It
involves the following steps:
1. Define the relevant market.
2. Analyse the primary demand.
3. Analyse the selective demand within the relevant market.
4. Define market segments.
5. Identify potential target markets.
Each of the steps will be discussed in detail in the next sections.
Figure 4.1 illustrates the process of defining the relevant market.
Describe product market structure
Identify potential competitors
Classify competitors in terms of similarity
Define relevant market boundaries
Broad relevant market boundary
Narrow relevant market boundary
Primary demand
Selective demand
FIGURE 4.1 Process of defining the relevant market2
4.2.1 Define the relevant market
A market consists of a ‘group of individuals and organisations who are interested and
willing to buy goods or services to obtain benefits that will satisfy a particular need or
want and have resources to engage in a transaction’.3 A market differs from an industry
in that the industry consists of ‘a group of firms that offer a product or product class
that are similar and are close substitute’.4
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In a market, there must be both buyers and sellers for transactions to take place.
Understanding these differences would enable marketers to define the market
appropriately. Defining the relevant market involves describing the product market
structure and the relevant market boundaries within a product market structure.
The relevant market is a set of products or services within a total product market that
is considered strategically important by the company.5 The definition of a market
can change over time depending on how companies define them. A product market
structure entails a set of products or services which satisfy similar needs – refer to
Figure 4.2 below. Determining a market structure helps companies to identify types
of products and services that compete in various need satisfaction situations. It helps
companies to determine various ways in which the market can be defined. Before the
market for the product can be defined, it is necessary to identify the product market.
This can be achieved by classifying product alternatives. Product alternatives are
identified by determining products with similar characteristics – those that function in
the same way or those with similar usage situations.
A broad relevant market must be defined before a specific market to target is defined.
A broad market does not limit a company to a narrow specific market but enables the
company to pursue opportunities in the long run. The market environment may also
change, which means that a broader market would allow a company to succeed in the
market in the long run rather than a narrow one. For example, Telkom has defined its
market as a telecommunication market which enabled the company to venture into any
market that is telecommunication related. For example, they established a cellphone
division, internet networks and other telecommunication products and services. This
would not have been possible if the market was only focused on a landline market. The
South African Broadcasting Corporation (SABC) is in the broadcasting communication
market. They provide television and radio services, including any other broadcasting
services.
Figure 4.2 illustrates an example for a product market structure.
Market definition changes from time to time due to changes such as macroenvironmental changes in the external market. A company can define and redefine its
market over its life time to be up to date with the changes. For example, MTN was a
South African cellphone network company, but has since changed its market definition
to accommodate its expansion into the African market.
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Food and beverages
for breakfast meal
Generic product class
Product type
Cereals
Variant A
Natural
Ready to eat
Nutritional
Presweetened
Regular
Variant B
Kellogg’s®
Corn Flakes
Private brands
Brands
Bokomo Corn
Flakes
FIGURE 4.2 Example of a product market structure6
Referring to Figure 4.2, marketers could easily identify competing brands and position
their brand accordingly. It also helps them to identify the various needs of customers
and how the needs can be satisfied. For example, other than offering regular cereals,
Kellogg’s® Corn Flakes also offer Special K, which is a nutritional brand targeted at
health-conscious consumers.
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4.2.2 Analyse the primary demand
Analysing the primary demand leads to marketers identifying reasons why consumers
buy a product and how they buy that particular product, as well as who the buyers of
the product are.
Primary demand is the demand for the product form or class in a specific market. The
purpose of analysing primary demand is to identify the growth opportunities for the
product form or class. For example, when the cellphone industry was established in the
early 1990s, many consumers did not know what a cellphone was. Companies such as
Vodacom, a first entrant in the market, spent enormous amounts of money educating
the market about the use of the cellphone in order to create the primary demand.
Customers would not have bought cellphones without knowing why they had to buy
the product, and how they would benefit from the cellphone compared to the landline.
To realise these opportunities, marketers must answer a series of diagnostic questions
about the consumer-buying process. The two categories of questions are buyeridentification questions and questions about willingness to buy and ability to buy.
Buyer-identification questions
Identifying buyers helps markets to obtain information about the potential growth
opportunities in a market and the appropriate means to communicate to the market.
Marketers are also able to identify current buyers, which helps to determine the types
of buyers that can likely have the need for the product form or class. Marketers can
furthermore identify heavy users and frequent users. Buyer identification can be
achieved by determining the buyer or user characteristics, the buying centre and the
customer turnover. The buyer or user characteristics entail demographics, location and
lifestyles.
•• Location. Geographic factors such as climate, population density, cultural traditions
and other factors influence the rate of purchase of a product form or class. For
example, people in rural and farming areas would rather buy pick-up trucks or
bakkies than those in other areas.
•• Demographics. This includes factors such as age, income, occupation, education,
gender and family size. Knowing the demographic characteristics of buyers or users
helps marketers to formulate appropriate marketing and communication strategies
targeted at them. For example, Toyota launched Toyota Avanza targeted at large
families. The advertisements of this car emphasised the space and the fact that it is
a seven-seater car.
•• Lifestyle. Lifestyle measures how social forces influence consumption processes. It
helps marketers to determine how a product fits into a consumer’s normal pattern
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of living by examining how they spend their time, the things that are important to
them and opinions they have about themselves.
The buying centre consists of all individuals involved in the buying decision of a
product. Marketers can identify individuals who play a role in the purchase decision of
a product form and the influence they have in the buying centre. This helps marketers
to determine who to target with the marketing message for their product.
Customer turnover refers to the rate at which a company should replace some or all
of the individuals in its market because of the changes in some aspects of the buyer
characteristics. A number of factors influence customer turnover such as age, geographic
mobility, weather condition and other demographic factors. For example, companies
targeting students will experience customer turnover, since students study for a period
of time and leave after completing their studies. Marketers must determine the current
and potential demand. It is not sufficient to only determine the potential demand,
since some potential customers might not buy the products. It is well known that the
potential demand is more than the current demand, but marketers must be satisfied
with the size of the current market and not only the potential market size.
Questions about the willingness to buy and the ability to buy
Marketers cannot create customers’ willingness to buy, but can identify ways to improve
their willingness and ability to buy. Marketers must be able to turn potential buyers into
actual buyers and actual buyers into increasing the rate of product usage.
The willingness to buy is determined by the customer’s perception of a product’s utility
for one or more usage situations.
•• Related products or services. Limited usage of the products can impact on customers’
willingness to use the product. Marketers need to determine related products and
services which are essential to satisfactory usage of the product.
•• Usage problems. Marketers must ensure that customers understand how to use the
product since this might impact on their willingness to use the product. It might
require that marketers introduce new features of the product if customers are
experiencing usage problems, or educate them on how to use the product.
•• Value or experience compatibility. The rate of adoption of a product will be slower
if a new product requires a change in buying or usage behaviour that conflicts
with customers’ prior usage experience or with broader value systems. Markets can
overcome this by conveying a marketing message, emphasising the advantages of
the product as well as the advantages of the changing value or usage experience that
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••
go with the product. Since values are closely linked to culture, the primary demand
for some products can vary across cultures.
Perceived risks. The type of risks associated with product usage may impact on
customers’ willingness to buy the product. Perceived risks exist when customers
believe that there is a strong likelihood of making a poor decision and that
consequences, for poor decisions, are significant. Perceived risks may be financial
risks, convenience risks, performance risks, physical risks, social risks and
psychological risks.
Marketers must identify the types of risks associated with the product usage and design
a marketing communication strategy that will help reduce perceived risks.
Ability to buy
Customers’ ability to buy the product is limited by a number of factors, some over
which markets have some control.
•• Cost factors. The cost associated with buying and use of a product may limit the
primary demand. For example, to increase primary demand, MultiChoice sells
satellite dishes and offers free installation for customers. This is to ensure that
customers do not pay for installation on top of the price of the dish, which may
reduce the primary demand.
•• Packaging and size factors. Some customers may have space problems which might
result in them not buying some products that are large in size. Marketers need
to determine customers’ package and size requirements before packaging their
products. Some marketers sell products with different packages and sizes to
accommodate the needs of different customers.
•• Spatial availability. Location factors might also impact on primary demand.
Marketers must ensure that their products are conveniently accessible to customers
to buy, by making the product available in different locations. For example, CocaCola products are found in many locations in South Africa using various forms of
distribution channels.
4.2.3 Analyse the selective demand within the relevant market
The selective demand, also referred to as secondary demand, is the demand for a
specific brand or supplier within a relevant market. For example, the cellphone
network providers in South Africa are Vodacom, MTN, Cell C, Telkom Mobile and
Virgin Mobile. Now that the primary demand for cellphones has long been established,
customers decide whether to buy from Vodacom, MTN, Cell C, Telkom Mobile or
Virgin Mobile depending on their perceptions of the brand or supplier. Determining
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secondary demand entails understanding how customers make choices from alternative
brands or suppliers within a market. In South Africa, one of the reasons behind
selecting a particular cellphone network provider is the availability of the network.
Some customers consider the price of reloading airtime.
There are two steps of identifying secondary demand:
1. Identifying the decision-making process.
2. Identifying the determinant attributes.
These two steps will be discussed in the sections that follow.
Identifying the decision-making process
Consumers are involved in three types of decision-making when buying products. This
includes the extensive decision-making, limited decision-making and routine decisionmaking process.
The extensive decision-making process takes place when customers buy products
which they have not bought before. Customers search extensively for alternatives in
order to reduce the risks and gather information about the products. Marketers can
play a role by conveying information about their products and also educate them about
the usage and advantages of products. Examples of these products are motor cars or
houses that are expensive.
With limited buying decisions, customers have some experience in buying products;
there are limited perceived risks associated with buying products. Customers search
for alternative products, but spend less time comparing alternatives. This is done to
determine if there are changes with the products or some aspects of the products in the
market.
Routine buying decisions occur when the decision of buying a product takes place
frequently. Customers do not need to search for information on alternatives since they
know what is available in the market. Examples of these products include those we
purchase on a daily basis, such as bread or milk.
An understanding of the type of decision-making customers make in the market
helps to determine the amount of information, as well as the extent of searching for
information when buying the products. Marketers can then determine the appropriate
methods of conveying information to customers.
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Identifying the determinant attributes
Product attributes are specific features or the physical characteristics of the product that
are designed into a good or a service. Customers also seek benefits from the products
which determine whether they will buy that product or not.
A product benefit is what a customer derives from using a particular product. Knowing
which product attributes and benefits customers look for enables marketers to design
products with attributes and benefits that customers seek. To achieve this, marketers
must determine the perceived importance of an attribute and the perceived variation
among alternatives on this attribute, which will give the uniqueness of the attribute.
An attribute is considered important if it provides desirable benefits. Some attributes
may be similar across manufacturers. This means that marketers must find ways to
make the attributes of their products more unique than those of competing companies.
Marketers therefore need to determine what is important to customers and ensure that
attributes offered are unique from those of competitors.
4.2.4 Define market segments
The market segment is defined soon after the buyer groups have been identified, based
on their willingness and ability to buy. Customers are not alike and they have different
needs and expectations as well as buying behaviour. Therefore marketers need to
identify groups of customers with similar needs and group them together into one
segment. This may result in the formation of one or more market segment, which
helps marketers to formulate appropriate marketing strategies for each of the market
segments. Marketers must also establish the purpose for market segmentation, because
this influences marketing activities that may be planned to target the market segments.
When determining the purpose for segmenting the market, the following factors must
be considered:
•• Product design – benefits and attributes sought as well as the product usage
situation. For example, customers buying a cellphone handset may look for design,
quality and features of the products, while those buying a motor car may consider
different benefits and attributes. Therefore, marketers need to establish the benefits
and attributes for their products.
•• Advertising message – advertisers convey messages based on a product’s positioning.
They need to understand the benefits and attributes sought by consumers as well as
the buying situations consumers are in when buying the product.
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••
••
Packaging and distribution – this involves determining the volume or size of the
purchase which impacts on packaging size. The product buying situations also
influence these decisions. For example, tourists prefer buying small-size products
and packages to avoid the costs of carrying heavy products while flying.
Price − marketers need to determine the price sensitivity of customers before
defining the market segments, since customers have different price preferences and
affordability.7
Prerequisite for market segmentation
Before a market can be segmented, the following prerequisites must be satisfied:
•• It must be large enough. The segment must satisfy marketers with its size which
should be large enough to be profitable.
•• This is because it is riskier to enter a market based on the future growth, but should
instead be satisfied with current as well as potential growth.
•• It must be identifiable. Marketers should easily identify who is in the segment and
how many customers exist in that segment. This will help to determine the size of
the market.
•• It must be accessible for distribution and advertising purposes. For example, CocaCola use various distribution and marketing communication channels to reach its
target market in urban and rural areas.
•• It must be meaningful. This means that a segment must have different needs.
Preferences and needs should exhibit different behaviour for it to be grouped
differently from other segments.
Bases for market segmentation
Another important aspect of defining the market segment is to establish the bases
for segmenting a market. This can be achieved by using a combination of the factors
mentioned in Table 4.1 and discussed in the sections that follow.
Geographic segmentation
The geographic areas from where customers are located influence the needs and
behaviour of consumers. Consumer needs and expiation may vary depending on where
they live − in urban or rural areas. Marketers need to identify these differences and
formulate strategies accordingly for customers in different geographic location. They
might also decide to target consumers in certain geographic areas depending on the
size of market in that area. Marketers might also vary their strategies for consumers in
various climatic conditions.
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TABLE 4.1 Factors used for determining the bases of market segmentation
Bases of market
segmentation
Variables
Geographic segmentation
Region
Gauteng, Kwazulu-Natal, Western Cape, Eastern Cape, Limpopo,
Mpumalanga, North West, Free State, Northern Cape
Size of the city or town
Under 10 000, 10 001−20 000, 20 001−30 000, over 30 000
Density
Urban suburban, rural
Climate
Summer rainfall, winter rainfall, very hot and humid, very hot and dry
Demographic segmentation
Age
Under 2, 2−5, 6−11, 12−17, 18−24, 25−34, 35−49, 50−64, and over
Gender
Male, female
Household life cycle
Young, single, newly married, no children, youngest child under 6,
youngest child 6 or over, older couples with dependent children, older
couples without dependent children, older couples retired, older-single
persons
Income
Under R15 000, R15 000−24 999, R25 000−R50 000, over R50 000
Occupation
Professional manager, clerical job, sales, supervisors, blue collar, home
maker, student, unemployed
Education
Some high school, completed high school, some college education,
graduate
Race and ethnic origin
African, Asian, coloured, white
Religion
Christianity, Muslims, Hindu, Jewish, Catholic
Geodemographic segmentation
Purchase occasion
Regular use, special occasion
Benefits sought
Economy, convenience, prestige, speed, service
Usage status
Non-user, ex-user, potential user, regular use
Usage rate
Heavy user, medium user, regular user
Loyalty status
None, medium, strong, absolute
Buyer readiness stage
Unaware, aware, informed, interested, desirous, intending to buy
Attitude towards a
product
Positive, enthusiastic, indifferent, negative, hostile
Ü
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Bases of market
segmentation
Variables
Psychographic segmentation
Lifestyle
Conservative, liberal
Personality
Outgoing, outspoken, impulsive, authoritarian,
Social class
Upper class, middle class, lower class
Demographic segmentation
Age. There are many products in the market that are targeted at people of different age
groups. The fashion industry produces clothing products targeted at people of different
age groups. There are also many retail shops that sell clothes targeted at different age
groups. For example, Oxygen and other youth brands in South Africa. Toys ‘R’ Us
also sell products targeted at kids only. Some travel agencies package travel products
targeted at senior citizens.
Gender. Understanding differences in expectations and behaviour of males compared
to those of females led marketers to segment markets based on gender. Women have
needs and expectations that differ from those of men. For example, First for Women,
a short insurance company in South Africa, launched short insurance services targeted
at women. The company is also the first in the market to focus on women as the main
target market. The reason behind this brand is that women as drivers behave differently
than men and need to be treated differently.
Income. Since no consumers can purchase products without an income, income has
become one of the most important variables of market segmentation. Companies have
also grouped customers according to their earning power with high-income earners,
middle-income earners and low-income earners. Income earners have different needs
and expectations which influence their buying behaviour. Retail stores such as Pep target
low-income- and middle-income earners, while Woolworths is known for targeting
high- and some middle-income earners. The motor car industry in South Africa has
many motor car variants that reflect the differences in earning power of consumers,
from the smallest and most economical cars to the most expensive cars.
Education. The level of education impacts on the buyer behavior of consumers. Certain
products in the market are bought by people with some level of education, such as
books, magazines, newspapers, and so forth. In some situations, the level of education
impacts on the earning ability of consumers.
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Occupation. Women have become more career orientated than before. This has resulted
in companies introducing products targeted at these women based on their occupation.
Chrysler in South Africa introduced a motor car that was targeted at women. Other
products such as convenience foods, financial services and fashion are targeted at career
women.
Family size. The size of a family also impacts on buyer behaviour. For example, a large
size family would buy products in big packages compared to a small size family. This
also impacts on the company’s marketing strategies that should be designed to match
the needs of consumers with different sized families.
Race and ethnic origin. Although race is no longer the major form of segmenting the
market in South Africa, there are products that are still bought by consumers from
a particular race group, such as hair products. Marketers need to also determine
differences in needs of people from different race and ethnic groups. Some restaurants
have halaal certificates, which are needed to target their Muslim customers.
Geodemographic segmentation
This segmentation basis entails looking at the behavior of consumers when buying
products. Instead of focusing on demographic and geographic segmentation bases,
marketers can also do micro-segmentation by looking at individual behaviours of
consumers in a specific market segment. This will enable them to determine the usage
rate, loyalty status, and usage status and buyer-readiness of consumers. A market
can be micro-segmented based on the usage of customers. Some customers may be
heavy users, while others are light users. This may have an effect on the distribution
strategies of the company where a company may distribute fewer products in areas
where consumers consume less and more in areas where they consume more. Knowing
the buyer-readiness stage will enable marketers to move customers from one stage to
another. For example, if a customer is unaware of the product brand, marketers may
convey a message to inform and educate consumers about the products. This will entail
formulating marketing communication strategies suitable for moving consumers from
one stage to another.
Psychographic segmentation
This basis of market segmentation looks at the lifestyles, personality and social class of
consumers. People living a different lifestyle would buy different products or services.
The same can be said of people from different social classes. Therefore, marketers need
to identify the differences in lifestyle and social class and introduce products or services
in the market that addresses the needs of people in different social classes, as well as
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those with different lifestyles and personalities. This way, marketers are able to capture
a large market size by catering to the differing needs of consumers, instead of assuming
that people with different psychographics have similar needs.
The above bases of market segmentation are useful for determining market segments
and for marketers to select those segments that best match their capabilities. At this
stage, marketers should be able to determine the customer profile and describe the size
and general composition of the customer base. It helps to be specific about customer
needs and wants, use situations, demographic profile, choice criteria, activities, interest
and opinions, as well as the purchase process of consumers.
4.2.5 Identify potential target markets
During this stage, marketers are concerned about the segments to target based on the
segments described in the previous stage. In addition to determining which segment/s
to pursue, marketers also have to determine how to position their products to each
segment. Customer profiles help to position products in each market segment. A
company may choose a segment or two when entering the market and expand by
adding more segments when opportunities arise. Where marketers realise future
opportunities in the market through the willingness or ability to buy a product type or
product class, they would consider a total product class or product form market. For
example, Toyota in South Africa targets various market segments within the motor car
market, from economy markets to luxury markets, by offering different products for
different market segments, while Range Rover focuses specifically on the luxury market
with all types and sizes of luxury motor cars.
The selection of a potential market segment must be matched with the product strategy,
pricing strategy, distribution strategies and marketing communication elements most
appropriate for the chosen target market.
The steps previously discussed gave details on the process marketers go through when
analysing the market. However, there are several dimensions one can use in market
analysis processes. The next section discusses these dimensions.
4.3 DIMENSIONS OF MARKET ANALYSIS
Market analysis is conducted using the following dimensions. Some marketers may use
dimensions other than these ones.
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4.3.1 Current and emerging submarkets
Marketers need to understand the market they are in. Because trends and developments
change over time, marketers also need to keep defining and redefining their market
over time. This means that a company can define its market differently over time.
The understanding of the market in which the company operates will determine the
marketing strategies, since each company has its own way of marketing their products.
Companies may not use the same marketing strategies in marketing products operating
in different markets, hence the need for understanding the market. For example, retail
supermarkets traditionally focused on selling groceries. However, this situation has
since changed, because supermarkets now sell a variety of products including clothes
which shows that the market for these stores has evolved over time. Companies such as
Mercedes-Benz in South Africa sell luxury motor cars. This decision to only sell luxury
motor cars has influenced their marketing strategies. Although they have introduced
different product lines in the market since the late 1990s, they remain focused on
the luxury market that they operate in. The macro-environmental changes in South
Africa created many opportunities for the motor car industry in South Africa. There are
more people in the middle-income and high-income earning group in the country than
there were before. This has meant that companies like Mercedes-Benz can sell more
of their products targeted at middle- and high-income earners due to the emerging
market. More and more young professionals prefer small luxury motors cars, which has
led to luxury motor car manufacturers such as BMW, Volvo, Audi and Mercedez-Benz
producing small luxury motor cars. Where these companies traditionally focused on
small luxury markets producing few product lines, the market has now become bigger
due to the emergence of more buyers who can afford and want different types of luxury
cars. This meant that the market has become more attractive. These companies also
launched various product lines in response to these developments in the market.
4.3.2 Actual market, potential market and submarket size
Before a company can enter the market, it is important to determine the current and
potential market size, including that of its submarket. It is the market size that determines
the sales and profit potential of that market and determines the attractiveness of the
market. Since companies invest financially, they need to ensure before investing in the
market that there will be a return on investment. The return on investment is dependent
on the size of the current and potential market. The bigger the market size, the bigger
the sales possibilities for companies to recover their costs of investment. The bigger
market size attracts competitors as well, and this means that when the market grows,
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competitors see opportunities and enter the market, which has a negative influence on
the attractiveness of the market.8
A company may enter the market that is currently small in size, but profitable because of
its potential market. For example, there were fewer individuals in the cellphone market
in the early 1990s that could afford cellphones. Some of the reasons for the small size
were affordability as well as the fact that the cellphone concept was still too new for
consumers who lacked an understanding of why they should be buying cellphones.
However, Vodacom and MTN invested in the market despite the small market size at the
time. This has since changed − the cellphone market has more than 70 per cent market
penetration in South Africa and has reached its saturation point. Through launching
different types and sizes of cellphones at different prices, cellphone companies have
reached almost everyone in the market who needs cellphones. Some cellphones costs
less than R100, making them more affordable for lower-income consumers.
Market potential is the maximum amount of product sales that can be obtained from
a defined product market during a specified period of time. Market potential includes
the total sales by all firms in the product market and is the upper limit of sales that can
be achieved by all firms for a specified product market over an indicated time period.9
The potential market can be determined by identifying new uses of the product, new
user groups and the frequency of using the product. For example, luxury motor cars
were traditionally meant for old men, whereas this has now changed to focus on young
successful working professionals. The emergence of this young professional has created
a market gap that the luxury motor car manufacturers in South Africa have successfully
served. The continuous scanning of the market to identify new uses, new user groups
and frequency, will impact on market potential. The sooner the company determines
the changes in the market, the sooner they can respond to the changes by adapting
their marketing strategies. Fast food chains such as KFC and Nando’s introduced
porridge (pap, a well-known South African term) in their menu to target the majority of
consumers who prefer their chicken with porridge. This was an opportunity for these
companies to sell more product items and thus generate more sales.
Many luxury fashion brands entered the fashion market in South Africa, because of
developments in the country that generated market potential for them. Such brands
include Jimmy Choo and Prada.
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4.3.3 Market and submarket growth
Companies estimate the current market size before they enter the market. However, the
market must grow over time for them to generate sales and profit and continue to do so.
This means that marketers must not only estimate the current size, but also the growth
of that market over time for sales and profitability.
According to Alsem,10 even if market size declines, other opportunities may exist:
•• If market sales decline, other competitors may leave the market and the firm may
become dominant.
•• If aggregate market sales decline, there may be sub-markets that grow, and so a
disaggregate market analysis is needed.11
The product life cycle has been used as a tool for estimating market growth. For
example, sales are very low at the introduction stage, but grow steadily in the growth
phase and stabilise in the maturity phase.
The funeral market has seen immersive growth in South Africa as we have witnessed
large numbers of companies from various industries such as banking, insurance, retail
and soccer clubs entering this market. It was due to the growth in this market that more
and more companies entered.
Many developments have taken place in beer markets in South Africa, leading to beer
companies introducing new products in response to this development. For example,
because more and more women use alcohol and some people do not prefer beer, beer
manufacturers introduced ciders targeting these people and leading to a growing
alcohol market. For example, brands such as Red, Extreme, Savanna and Hunters Dry
and many others were introduced less than ten years ago in South Africa, because of
some of these developments. The wine companies in South Africa also experienced
growth, because people in the townships in South Africa are now buying wine. They
traditionally considered wine as products for sissies, and men who drank wine were
thought of as not strong and masculine. This situation has since changed and it created
opportunities for wine companies to enter the township market.
However, companies might make mistakes in estimating growth and enter a market
that does not grow which will be costly to the company. The growing market might
also attract many competitors which makes it unattractive in the long run. Companies
might furthermore get involved in a price war because of the entrance of competitors,
thus making the market less attractive.
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4.3.4 Market and submarket profitability
The profitability of the market also makes the market more attractive. Companies expect
to generate profit when they enter the market. The profitability of the market will be
dependent on its current size and potential for growth. The accuracy of estimating
profit impacts on the amount of investment made in the market. The profitability of the
market will dependent on the company’s ability to formulate a competitive marketing
strategy. There are external factors that affect the profitability of the market, such as the
external marketing environment and Porter’s Five Forces model.
Assessing the external marketing environments helps companies to determine and
identify developments in the market that need their attention, as well as to identify
opportunities that might exist in the market. Many companies define and redefine their
markets by constantly assessing and analysing these factors and responding to changes
that are taking place.
The external marketing environment factors were discussed in Chapter 2. Porter’s Five
Forces model can also be used to determine the profitability of the market by studying
the five forces to determine their impact on the profitability of the market. Porter’s Five
Forces model will be discussed in Chapter 5.
4.3.5 Cost structure
This involves costs of operating in the market. Companies need to estimate such
costs before entering the market, because it has an impact on the profitability of the
market. Each market has its own cost structure which means that companies operating
in different markets must estimate costs in each market. To determine the costs of
operating in the market, marketers must study the supply chain and identify possible
costs in each activity of the supply chain. For example, costs of marketing, costs of
production which may also involve buying of machinery and raw materials, costs of
distribution, transportation costs, maintenance costs, etc. The ability to identify these
costs will enable companies to manage costs in all or some of these activities, which
can in turn be used as a competitive advantage. For example, Shoprite succeeded in
managing its costs in such a way that they are able to sell their products at lower costs
than their competitors. Kulula.com, a low-cost airline, has also built its advantage by
selling their services at low prices compared to competitors. They do so by offering
low-frilled services compared to other airlines that provide full services at high prices.
By charging lower prices, they are able to attract more customers. The major costs in
the airline industry are the costs of operation, fuel and maintenance costs. A few airlines
in South Africa closed shop during the past ten years due to high costs of operating in
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the airline market. It could be that they failed to estimate the costs of operating in the
market and entered the market without knowing how much costs they would incur or
due to environmental developments.
4.3.6 Distribution channels
Each and every market has its own distribution channels, which differ from one market
to another. The effectiveness and efficiency of the channels of distribution impact on the
company success in the market. Marketers must determine the appropriate channels
of distributing their products in the market. For example, cellphone companies in
South Africa distribute their cellphone handsets through retail chains such as those
selling furniture and clothes, as well as through supermarkets. They also sell them
through cellphone network operators’ stores such as Vodashop. Airtime is available
through these shops as well as at petrol stations, banks, on the street, through hawkers
and many small independent retail shops. They have exhausted the available channels
of distribution and made their products conveniently available to customers. The
ability of a company to match the channels of distribution used by competitors also
determines their success. Companies in the cellphone market use similar distribution
channels. This also applies to the motor car industry where the companies operating in
the market use similar channels of distribution.
The channels of distribution also evolved over the years in the banking sector. Banking
services were traditionally provided through brick and mortar branches and then
evolved to using ATM machines. However, banking services are now available via
cellphone, telephone and internet. Many services are also offered through the ATM
machines which save customers time as they do not have to go to the branch.
4.3.7 Trends and developments
Marketers need to monitor trends and developments taking place in the market for them
to be up to date with what is happening in the market. Conducting an environmental
analysis could help marketers identify trends in the market. However, it is important to
determine the cause of the trends since some of the trends are short term in nature and
might not need marketers’ responses.
Studying the nature and causes of the trends helps marketers to determine if the trends
will last long enough to make it an attractive investment. Globally, consumers are using
social media. Companies have responded to this trend by incorporating social media
into their marketing strategy.
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Another important trend was the health consciousness of consumers. This resulted
in companies adapting their marketing strategies to meet the health consciousness of
consumers. Fast food chains such as KFC and McDonald’s introduced a health menu,
while grocery shops started selling products targeting health-conscious consumers.
There are many other environmental developments that must be monitored closely by
companies so that they can be up to date with these developments. This may also include
political developments, economic, environmental, legal and social developments. The
analysis of these factors would enable marketers to identify opportunities and threats
in the market and to formulate marketing strategies in response to these developments.
Due to environmental developments, such as the need to reduce carbon emissions,
some car manufacturers have redesigned cars to emit less carbon and thus reduce air
pollution.
Section 4.4 discusses factors affecting market attractiveness.
4.3.8 Key success factors
Key success factors (KSFs) are the key assets and competencies that a company must
build up to compete successfully in the market. Each company needs to build its
advantage in the market against its rivals. It is important to understand that some
factors are necessary for a company to operate in the market, such as strategic necessity
in the market.
Strategic necessities do not provide an advantage, but a company cannot succeed in the
market without them. They differ from one market to another. However, each company
needs to build its strategic strengths. These are the factors helping a company to
perform better than its competitors. For example, it is important for cellphone network
companies to have their own cellular networks which will enable them to offer better
services to their customers. A company must be superior in some factors compared to
their competitors. This means they have a competitive advantage over its competitors.
It is also important that companies make it difficult for its competitors to copy their
competitive advantage and they should maintain these advantages over a lasting period
of time.
KSFs change over time and companies are required to adapt and develop their KSFs
from time to time in line with changes in the market. Coca-Cola in South Africa has
built some advantages over its rivalry, such as access to distribution channels, brand
loyalty and reputation. The company has maintained these advantages, making it
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difficult for its competitors to copy them. This also applies to Woolworths which is
strongly associated with quality.
Companies may develop their competitive advantages using various bases of sustainable
competitive advantages. These are discussed in Chapter 9 in detail.
4.4 SUMMARY
This chapter discussed market analysis which included the steps in market analysis
as well as the dimensions for market analysis. Companies cannot succeed without
understanding the market in which they operate. They need to define the market,
because the formulation of marketing strategy is determined by the market a company
serves. Defining a market helps companies to identify competitors, which helps them
decide which market they want to serve. In any market, there are buyers. Market
analysis therefore helps companies to identify these buyers and decide which of the
buyers they want to target. Therefore, market analysis helps companies make sound
business and marketing decisions.
Macro-environmental factors impact on the market size and potential markets. These
factors create opportunities for companies and it can lead to redefining the market to
pursue new opportunities. Monitoring changes in the market would enable companies
to respond to the changes accordingly and on time.
Self-evaluation questions
1. Conduct a market analysis of the market of your choice by applying the steps in
market analysis.
2. Using the dimensions of market analysis, show how these dimensions can be used
during market analysis of a market of your choice. Use practical examples to illustrate
your answers.
3. Explain how the basis of marketing segmentation can be used in market analysis.
4. Distinguish between primary and selective demands and give an example for each
demand. How did a company of your choice create primary and secondary demands
for their products? Explain by using practical examples.
5. Using practical examples, explain how macro factors affect the market size.
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ENDNOTES
1. Gultinan, J.P. & Paul, G.W. 1991 Marketing Management: Strategies and programs. 4th
edition. Singapore: McGraw-Hill International Editions.
2. Ibid, 58.
3. Cravens, D.W. & Peircy, N.F. 2013. Strategic marketing. 9th edition. New York: McGrawHill, 39.
4. Walker, O.C., Mullins, J.W. & Larreche, J. 2008. Marketing strategy: A decision focused
approach. 6th edition. New York: McGraw-Hill, 85.
5. Gultinan, op cit.
6. Cravens, D.W & Piercy, N.F. 2009. Strategic marketing. 9th edition. New-York: McGrawHill International edition, 57.
7. Gultinan, op cit, 70.
8. Alsem, K.J. 2007. Strategic marketing: An applied perspective. New York: McGraw-Hill Irwin,
119.
9. Cravens, op cit, 67.
10. Alsem, op cit, 120.
11. Ibid.
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Chapter
5
ANALYSING
COMPETITORS
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Explain the purpose of competitor analyses;
„„ Define the competitive arena of an industry;
„„ Explain and apply various tools to assess the competitive situation of a product or
brand;
„„ Discuss the value of social media in analysing competitors;
„„ Explain the steps an organisation needs to follow to compile a competitive intelligence
framework;
„„ Discuss competitor decision-making pitfalls that could hinder the growth of the
organisation.
5.1 INTRODUCTION
The introduction of social network sites such as Facebook and MySpace has had a
profound impact on the consumer landscape across the world. Consumers have become
more informed and tech-savvy, demanding greater products and customer service from
organisations. To win the hearts and minds of these consumers, businesses must be
able to demonstrate that they offer superior value and have what it takes to compete,
win and outlast their competitors. It is imperative for businesses to closely monitor
the actions of their rivals and ensure they are well aware of their product offerings and
future plans. Knowledge of competitors’ positions in the industry is vital for staying
ahead in the game and compiling winning strategies that will increase the organisation’s
share in the market.
Against this background, the purpose of this chapter is to explain the process organisations
need to follow to obtain more insight into the behaviour of their competitors. In this
chapter you will learn about the purpose of competitor analyses, the competitive arena,
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tools that can be applied to perform competitor analyses, the value of social media
in analysing competitors, the importance of a competitive intelligence framework,
and common mistakes managers make when they need to take strategic competitive
decisions.
Throughout this chapter we have also listed a number of YouTube videos relevant to the
topics that have been discussed. You are strongly encouraged to watch these interesting
videos that will tell you more about the topic and how it has been applied in the
industry.
5.2 PURPOSE OF COMPETITOR ANALYSIS
Sun Tzu,1 a well-known Chinese warrior-philosopher, once said: ‘If you know the
enemy and know yourself, you need not fear the result of a hundred battles. If you
know yourself but not the enemy, for every victory gained you will also suffer a defeat.
If you know neither the enemy nor yourself you will succumb in every battle.’
An organisation’s competitors can be viewed as its enemies that have the potential to win
over its customers and ultimately have a negative impact on the profit of the business.
To defeat competitors, it is imperative for organisations to have a good understanding of
not only their own strengths and weaknesses, but also the strategies their competitors
employ to win the hearts and minds of customers.
Organisations further need to be aware of the benefits competing products offer the
market, and then use this information to design superior products that will provide
more value to the customer and ultimately lead to a competitive advantage for the
business. Jobber2 confirms that organisations cannot only focus on satisfying the needs
of their customers. To ensure customers will select their products, organisations must
make sure that they offer more value to the market than competing products can
provide.
Generally, the value of a product offering is determined by the benefits customers can
obtain from purchasing a product against the cost they would need to incur to obtain
the offering. Product benefits could include, for example, superior quality, convenience
and cost saving. The cost a customer could incur to purchase the product could involve
the actual purchase price of the product, petrol cost and time spent to purchase the
product. To ensure customers will select the organisation’s products, the business
would subsequently need to sell products that are of high quality, easy to purchase,
not too expensive and would not require too much of the customer’s time to secure. In
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addition, the sum of the benefits obtained from the purchase must also exceed the value
that can be acquired through the purchase of any other competitive offering.
Organisations that are successful in obtaining a competitive advantage and persuading
customers that their products can provide superior value will be in a position to build
a strong brand that can lead to great profits for the business. Fahy & Jobber³ attest that
a strong brand can greatly improve the financial position of an organisation, as it will
be difficult for new brands to compete against the strong positive perceptions held by
customers about top brands.
The brands in the list below were identified as the top 30 most valuable brands in South
Africa in 2015:4
1. MTN.
2. Vodacom.
3. Sasol.
4. Standard Bank.
5. FNB.
6. Woolworths.
7. Nedbank.
8. ABSA.
9. Investec.
10. Mediclinic.
11. MultiChoice.
12. Shoprite.
13. Castle.
14. Spar.
15. Sanlam.
16. Mondi.
17. Netcare.
18. Pick n Pay.
19. Carling Black Label.
20. Old Mutual.
21. Discovery.
22. Mr Price.
23. Telkom.
24. Hansa Pilsener.
25. Sappi.
26. Liberty.
27. Westbank.
28. Truworths.
29. Bidvest.
30. Capitec.
5.3 DEFINING THE COMPETITIVE ARENA
The first step in the competitor analysis process is to ensure that the competitive arena
and all its role players are clearly defined.
5.3.1 Types of competitors
Organisations often make the mistake of classifying their competitor arena too narrowly
and then need to face the consequences when an unidentified competitor steals their
market share.
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Generally, organisations can consider the following five categories when classifying
their competitors:
1. Direct competitors offering similar types of products or services. Direct competitors
are generally regarded as organisations that sell a product or service very similar
to what the business is offering to the market. These types of competitors would
normally compete on the grounds of offering a product with superior ingredients or
at a lower price. Owing to the similarities between the product offerings, customers
would often make their choice based on their perceptions of the value of the brand
rather than purely on the ingredients or composition of the product.
2. Indirect competitors fulfilling the same need. Jobber5 notes that an industry is generally
classified as a group of businesses promoting products that can be viewed as close
substitutes for one another. As such, organisations can also compete against other
products in a specific industry that can be regarded as a substitute product fulfilling
the same need. Competitors offering substitute products can compete on many
levels, including, for example, product composition, technology, price and brand
value.
3. Local competitors as opposed to foreign competitors. Organisations can further
distinguish between local competitors and foreign competitors. Local competitors
refer to businesses producing similar or substitute products in South Africa, and
foreign competitors refer to organisations manufacturing similar or substitute
products in countries outside the borders of South Africa. Organisations in South
Africa competing against foreign product or service offerings often follow the
route of appealing to customers’ sense of patriotism, asking them to only support
products that were manufactured locally.
4. Key competitors posing the largest threat to the business’s profits. In certain environments
the range of local and foreign competitors offering similar or substitute products can
become quite extensive, making it nearly impossible for the organisation to design
counter-strategies to address all the competitive offerings. Organisations finding
themselves in this type of scenario could benefit from following the 80/20 Pareto
principle. This strategy entails identifying the portion of competitors that will have
the largest impact on the business’s profits and then focusing predominantly on
designing strategies to counter their offerings.
5. Current competitors versus future competitors. Lastly, organisations also make the
mistake of concentrating only on the current competitors in the arena and do not
take into consideration future players that could steal their market share in a couple
of years. New technological developments could result in more improved product
offerings of a similar or substitute nature that could easily persuade customers to
switch to the new competitors.
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Examples of types of competitors:
••
••
••
••
••
Woolworths spring water can be viewed as a direct competitor to Valpré spring water.
In the beverage industry both Woolworths spring water and a Coca-Cola soft drink
can be consumed to quench thirst − the Coca-Cola soft drink is subsequently an
indirect competitor to the Woolworths spring water brand.
In South Africa, Valpré spring water is a local direct competitor to Woolworths spring
water, and Crystal Springs water bottled in Mexico can be viewed as a foreign direct
competitor to both the Woolworths and Valpré brands.
Each brand will have their own key competitors − in the beer industry the key
competitor to Castle Lager draught, for example, is Windhoek draught.
Organisations currently investigating alternative energy sources can be viewed as a
future competitor to Eskom.
5.3.2 Identifying competitors
Once an organisation has classified its competitors in the categories described in the
previous section, it is advisable that it also take into account the checklist given in Table
5.1. This checklist provides a number of criteria that should be considered to ensure
that all competitors who have the potential to impact on the profit of the business are
identified and appropriately categorised.
TABLE 5.1 Checklist for identification of competitors
Criterion
Description
Market commonality
Measured as the extent to which a competing firm overlaps with the
principal organisation in terms of serving the needs of the market.6
Resource similarity
Determined by the types and number of resources a competing organisation
possesses. Businesses with similar types and number of resources tend to
follow the same types of strategies in the market.7
Switching cost
Established through measuring how easy it is for a customer to switch from
one brand to another. Switching cost can be measured in terms of fees as
well as the amount of time required to make the change.
Perceptual positions
Determined by assessing the competitive arena from various angles, taking
into consideration the perceptions of all the stakeholders of the business.
Share of wallet
Measured by establishing the product categories against which the
organisation’s product would need to compete. For example, if a customer
only has R10 in his/her pocket, which product would he/she most likely
purchase – a packet of Simba chips or a chocolate?
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5.4 COMPETITOR ANALYSIS FRAMEWORK
Once the competitive arena has been established, an organisation can make use of a
number of tools to analyse its competitors.
5.4.1 Porter’s Five Forces model
Model overview
Porter’s Five Forces model presents a viable tool that can be used to assess the
organisation’s current position in the industry as well as the level of ease at which
potential competitors can enter the market. Five factors must be evaluated:
1. The threat of new entrants. An industry is viewed as more attractive when it is
difficult for new competitors to enter the market. Launching a new product in
the market might require a large amount of research and product development
cost, distribution expenses and promotional expenditure. New entrants into the
industry might not have the necessary budgets to fund these expenses.
2. The bargaining power of suppliers. The bargaining power of any seller is normally
dependent on the economic principle of supply and demand. If there are large
numbers of buyers in the market, the seller can charge a higher price for the
product. Consequently, in any industry, if the number of competitors is large and
the number of suppliers is few, the suppliers will be in the position to charge a
higher price for the raw material. New entrants into the industry might not be able
to afford the high prices of the suppliers.
3. The bargaining power of buyers. If there is only a small number of buyers in the
market and a large number of sellers, buyers can easily negotiate lower prices with
sellers. Consequently, an industry might appear to be less attractive to new entrants
if there are a number of competitors in the market already, as they would not be in
a position to negotiate lower prices with suppliers. New entrants into the industry
might also not be able to afford the high prices of the suppliers.
4. Threats of substitutes. An industry will appear to be less attractive if it would be easy
for the customer to switch one type of product for another to fulfil the same need.
New entrants might subsequently not want to encounter high costs to enter a new
industry if there is a great possibility that customers might easily switch one type of
product for a substitute.
5. Industry competitors. An industry will also appear to be less attractive to new
entrants if the intensity of competition between current players is already fierce.
A number of factors could influence the degree of competition in the industry,
including market share, organisational resources and customer loyalty.
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Let us give it some thought
What does the expert say?
Michael Porter explains in an interview with the Harvard Business Review his position on the
Five Forces model.
Visit the following website and watch the video: https://www.youtube.com/watch?v=mYF2_
FBCvXw.
Benefits of the Five Forces model
Porter’s Five Forces model can be of great benefit to organisations in the following ways:
•• The model can assist an organisation to determine the extent to which potential new
entrants into the market should be viewed as a threat to the business’s profitability.
•• The organisation can determine the strength of its current position in the market.
•• Knowledge of the competitive situation in the industry can provide the necessary
direction to organisations to design future strategies that could lead to an increase
in market share and greater profits. For example, future strategies could be planned
to ensure that the organisation has higher buying power and can negotiate lower
prices from suppliers. A lower purchasing price will in turn enable the organisation
to offer discounts to customers, thereby making the product more attractive to the
market.
Weaknesses of the Five Forces model
Porter’s Five Forces model also has a number of pitfalls that organisations must be
aware of. These pitfalls are:
•• Some organisations tend to focus predominantly on this model when evaluating
the competitive situation in the industry, but despite its benefits, there are also
other factors that might have an impact on the competitive situation in the industry
which Porter’s Five Forces model does not take into consideration.
•• The model is static and simply provides a snapshot of an industry at a particular
time.
•• The model is industry-based and does not make provision for organisations opera­
ting in more than one industry.
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5.4.2 A representative weighted competitive strength assessment
Model overview
Organisations can also make use of a representative weighted competitive strength
assessment model to assess their current position in the industry as well as the position
of the other competitors in the arena. This model is also referred to as a Key Success
Factor (KSF) analysis. Four steps must be followed to complete the assessment.8,9
•• Step 1: Establish important variables that could assist an organisation in becoming
successful in the industry. Generally there is no specific list of variables that must be
included in the assessment. The variables to be selected will depend on the type of
industry under investigation. A good place to start the analysis is to consider the
findings from Porter’s Five Forces assessment that will clearly show the factors that
are critical to generate a profit in the industry. Similarly, a resource and capability
analysis may be conducted to determine the factors that will give the organisation a
competitive advantage. Examples of factors that could be included in the assessment
are manufacturing capability, financial resources, product innovation and extensive
distribution.
•• Step 2: Make use of a rating scale and evaluate the performance of the organisation as
well as the performance of the competitors. The organisation as well its competitors
must then be evaluated on each of the variables identified. A 10-point rating
scale can be used, ranging from 1 (completely inadequate) to 10 (superior). Once
this task is done, a weighting must be allocated to each variable to show their
relative importance in the overall assessment. The weighting can be expressed as
a percentage, and the total of all the weightings allocated must add up to 100.
The weighting assigned to each variable is then multiplied by the individual
score allocated to each company in order to determine the weighted score per
organisation for a particular variable. Finally, all the weighted scores allocated to a
specific company are then added up to determine the overall weighted competitive
strength rating for the organisation.
•• Step 3: Based on the findings, identify the core competitors and assess their level of threat
to the business. The overall weighted competitive strength rating for each business
can now be compared in order to identify the core competitors that can have
a significant impact on the profit of the business. A high weighted competitive
strength rating is usually an indication that the competitor is in a strong position
and can pose a threat to the business.
•• Step 4: Design counterstrategies to obtain a competitive advantage. In the final step,
the businesses of the core competitors must be further investigated and strategies
should be designed to counter their actions and provide a competitive advantage
for the organisation.
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Let us give it some thought
Examples of representative weighted competitive strength assessments
Visit the following websites and learn more about the assessments that were conducted for
Starbucks and McDonald’s:
•• Starbucks: http://www.scribd.com/doc/48355880/12/Competitive-Profile-Matrix;
•• McDonald’s: http://mba-lectures.com/management/strategic-management/974/
competitive-profile-matrix-for-mcdonalds.html.
Benefits of the representative weighted competitive strength assessment model
The representative weighted competitive strength assessment model can be of great
benefit to organisations in the following ways:
•• The model presents a scientific solution to determine the strength of the competitors
in the industry.
•• The model is aligned with Porter’s Five Forces model and when used together can
provide a comprehensive overview of the competitive situation in the industry.
•• The model also takes into consideration the fact that each variable assessed does
not equally contribute to the success of the organisation, thereby providing a more
realistic picture of the competitive landscape.
eaknesses of the representative weighted competitive strength assessment
W
model
The representative weighted competitive strength assessment model also has a number
of pitfalls that organisations must be aware of, such as the following:
•• The analyses should usually be restricted to the evaluation of only a few variables
to avoid the assessment becoming too diffuse.10
•• The model is static and simply provides a snapshot of an industry at a particular
time.
•• The model is industry-based and does not make provision for organisations
operating in more than one industry.
5.4.3 Online competitor analysis tools
Model overview
In addition to the theoretical models discussed in the previous sections, organisations
can also make use of a number of online tools to assist them in obtaining more insight
into the businesses of their competitors. Five of the tools are discussed in this section.
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1. The Search Monitor. The Search Monitor enables organisations to obtain more
insight into the market share of their competitors as well as their page rank, ad
copy, landing page and budget spent on paid and organic searches.11, 12
2. Google Trends for websites. Google Trends for websites can be used to assess the
traffic data and geographic visitation patterns of rivals. The competitor’s website
must be entered into the tool that will then display a graph indicating the number
of people that visited the website exclusively on a particular day. A maximum of
five websites can be compared at any particular time.13, 14
3. Google Alerts. Google Alerts is another tool that enables organisations to keep up
to date with the activities of their competitors. Organisations registering on the
Google Alerts website will receive email updates on news and information about
their rivals.15, 16
4. BoardTracker. BoardTracker is a tool that can inform an organisation about the
online conversations customers have about their competitors. A forum search
engine keeps record of messages and will then send alerts to the organisation. In
fact, the search engine can investigate over 37 000 forums representing more than
63 million threads!17
5. SEMRush. SEMRush is a tool that can be used to determine the Google keywords
and AdWords competitors use for their specific sites. The platform cover over 40
million keywords for 20 million domains.18, 19
Let us give it some thought
More online competitor analysis tools
You can also visit the following website to learn more about the online competitor tools
discussed in this section as well as other tools that can be used to gain insight into the activities
of competitors:
http://www.lakeshorebranding.com/company/blog/ultimate-list-of-top-29-tools-forcompetitive-intelligence/.
Benefits of online competitor analysis tools
The online tools discussed in this section can be of great benefit to organisations in the
following ways:
•• The tools present a cost-effective way to obtain more insight into the activities of
competitors.
•• The tools are relatively easy to use.
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••
The tools can monitor the activities of competitors locally as well as abroad within
a very short time frame.
Weaknesses of online competitor analysis tools
The online tools also have a number of pitfalls that organisations must be aware of, such
as the following:
•• The tools can only monitor the online activities of competitors, and some actions
performed offline might also be important to obtain a true understanding of the
competitive environment.
•• The tools are aimed at analysing company activities and cannot provide a report on
the competitive situation of the entire industry.
•• The tools only provide a basic insight into the activities of competitors. More
advanced online tools must also be considered to complete the market intelligence
exercise.
5.4.4 Blue Ocean Strategy Canvas
Model overview
The Blue Ocean Strategy Canvas was originally developed by Kim and Mauborgne
who argued that businesses should not only focus on satisfying needs of customers in
current markets. Instead, possible markets of the future must be identified and new
product innovations must be explored to address the needs of the markets of the future.
Kim and Mauborgne labelled the existing market the ‘red ocean’ and future markets
that could generate great profits for the business the ‘blue ocean’.20
In particular, Kim and Mauborgne21 explain that in the current playing field, competitors
are involved in bloody rivals over shrinking profits that stain the ocean red. The true
success of an organisation, however, should not be found in winning small battles, but
rather in making competitors irrelevant by crafting a blue ocean of new market space
that has not been contested by any rivals. Organisations following a blue ocean strategy
do not use competitors as their benchmark, but rather strive to launch new innovative
products that will add real value to the market.
Focusing on the blue ocean of the future could then have a significant impact on the
approach organisations follow to conduct their competitor analysis. Organisations
would need to have a thorough understanding of the current actions of their competitors
as well as their future growth strategies. The playing field must be monitored on a
continuous basis to ensure that new product innovations of potential future competitors
are foreseen and closely monitored. It is imperative for organisations then to think
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outside the box in order to identify new blue oceans that could be representative of the
needs of the market of the future, which the competitors have no intention of exploring
further. Only organisations that have a thorough understanding of themselves, as well
as the strategies and intentions of their competitors will be able to sail smoothly in the
blue ocean.
Let us give it some thought
What does the expert say?
Renée Mauborgne, one of the founders of the Blue Ocean model, explains more about the
design and benefits of the strategy.
Visit the following website and watch the video: http://www.youtube.com/watch?v=clpIMpuwaQ.
Benefits of the Blue Ocean Strategy Canvas
The Blue Ocean Strategy Canvas model can be of great benefit to organisations in the
following ways:
•• The model is not static and takes into account the influence of future innovations
on the business.
•• The model is not only restricted to the analysis of one particular industry.
•• The model assists organisations in crafting a well-informed plan for the future.
Weaknesses of the Blue Ocean Strategy Canvas
The model also has a number of pitfalls that organisations must be aware of. Some of
these pitfalls are the following:
•• Companies following the Blue Ocean route might have to make great financial
investments in order to realise the new strategy.
•• A great amount of time and research might also be required to design the new
innovation.
•• The model will only provide organisations with a competitive advantage for a short
period of time. Once the new innovation has been launched, other competitors
might easily copy the idea and share in the profit.
5.5 THE VALUE OF SOCIAL MEDIA IN ANALYSING COMPETITORS
In the new connected millennium, many organisations are incorporating social
media strategies into their marketing campaigns in order to reach their customers
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more effectively. Approximately 11.8 million people in South Africa are registered on
Facebook and nearly 6.6 million South Africans follow conversations on Twitter.22
Social media forums present ideal platforms for local companies to reach their target
market.
Additionally, organisations in South Africa can obtain valuable insight into the strategies
of their competitors by simply monitoring their social media platforms. Knowing
where to start, however, requires some skill and experience. Table 5.2 provides a basic
guideline of typical strategies that organisations could employ to evaluate the social
media campaigns of their competitors more effectively.
TABLE 5.2 Strategies to evaluate social media campaigns of competitors
Strategy
Description
Monitor custom
content of competitor
Facebook allows organisations to create customised content by making
use of the custom tabs. Study the products and services highlighted by
competitors and ensure a counter-offering is made.23
Investigate posts
driving most
engagements from
competitors
Analyse the messages posted by the competitors on social media platforms
and identify the posts that generate the greatest response from the
market.24
Judge the success of a
Twitter strategy
Organisations can make use of Twitter to announce discounts, special
promotions and competitions. The success of these strategies can be
evaluated by determining the number of followers of the account.25
Evaluate the
competitor’s content
mix
Competitors continuously strive to improve their content mix. Organisations
can establish the most optimum mix of content by tracking the number of
people following the competitor’s platform at any point in time. Strategies
could then be implemented to outperform the competitor.26
Assess the nature of
the competitor’s post
Study the nature of the message posted by the competitor. Assess the
tonality and mood of each post and monitor the success of the message
amongst followers. Design counter-strategies should the approach appear to
be successful.27
5.6 O
RGANISATIONAL STRATEGY AND COMPETITIVE INTELLIGENCE
PRACTICES
Up till now, Chapter 5 emphasised that an organisation should conduct a thorough
analysis of its competitors in the industry in order to design strategies for a competitive
advantage. Insight into the behaviour of competitors is very important, but organisations
would not be able to design and successfully implement these strategies should they only
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focus on the action plans of their competitors. To obtain a truly strategic competitive
advantage, organisations would need to make use of a competitive intelligence system,
and collect and analyse data from all the players in the field.
West, Ford & Ibrahim28 point out that the primary objective of a competitive intel­
ligence system is to assist organisations to identify and build on distinct competitive
advantages. The entire organisation and its networks are examined to obtain a better
understanding of all the components of the business environment. To accomplish this
task, organisations must follow a systematic process entailing the identification of key
role players and sources, collection of data, analysis of findings, communication of
results and the management of the information that has been collected.
Step 1: Identification of key role players and sources
All the stakeholders in the business that could potentially provide valuable insight
into the performance of the business must be identified. The various stakeholders to
be interviewed will be unique to each business, but may include, for example, human
resources, such as employees with individual expertise and skills, customers and
vendors.
Other sources of data may also be consulted, including financial statements, databases
and operational plans.
Step 2: Collection of data
A thorough investigation must then be conducted to ensure all necessary data is
collected. The data collection method can take the form of personal interviews with
employees, customers and stakeholders, or simply by analysing the numbers from
reports. Table 5.3 provides a basic guideline on the types of information that can be
obtained from the various sources that could add value to the competitive intelligence
system.
Step 3: Analysis of findings
Once all the necessary information has been obtained, the findings must be analysed
and interpreted. It is essential that the organisation does not assess each finding in
isolation. All findings must be evaluated in relation to each other to ensure they truly
add value to the competitive intelligence framework. Organisations must also ensure
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TABLE 5.3 Checklist of types of information important to competitive intelligence system
Key role player or
source
Type of information
Employees
Competencies and expertise
Organisational culture
Customer knowledge and suggestions for improvement
Knowledge about competitors
Customers
What do they accept as true about the organisation?
What are their opinions about the quality of the company’s products,
customer service, price and marketing campaigns in contrast to competitive
offerings?
Which of the company’s weaknesses prohibits the organisation from
delivering an excellent performance?
How do factors in the macroenvironment affect the customers of the
organisation?
How important do the customers think the above-mentioned issues are to
the performance of the business?29
Vendors
Bargaining power
Switching cost
Promotional campaigns
Quality of supplies
Financial statements
Profitability ratios, such as gross profit margin, operating income margin,
return on equity and return on assets
Liquidity ratios, such as current ratio, asset-test ratio and operation cash
flow
Databases
Sales figures
Market share
Customer complaints
Marketing metrics
Operational plans
Inbound logistics
Outbound logistics
Economies of scale
Contribution to the value chain
that current as well as future implications to the organisation are highlighted and that
the effect on the business’s current strategic objectives are assessed and understood.
Step 4: Communication of results
The results of the analysis must be formally communicated to the key decision-makers
in the organisation. It is then their task to debate the outcomes of the intelligence
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framework and design an action plan that will result in a competitive advantage for the
organisation.
Step 5: Management of information collected
The information obtained from the competitive intelligence framework can provide
valuable insight into the strategic direction that the organisation should take to obtain
a truly competitive advantage. The marketing environment in which most businesses
operate, however, is dynamic and there are many factors that could have an impact
on the performance of the business. Changing customer expectations and economic
factors could result in a carefully designed strategic plan becoming irrelevant overnight.
It is therefore imperative that organisations monitor the environment on a continuous
basis and update their competitive intelligence framework and strategies accordingly.
Figure 5.1 displays the steps in the competitive intelligence process that were discussed
in this section.
Step 1: Identification of key role players and sources
Step 2: Collection of data
Step 3: Analysis of findings
Step 4: Communication of results
Step 5: Management of information collected
FIGURE 5.1 Steps in the competitive intelligence process
5.7 COMPETITOR DECISION-MAKING PITFALLS
In real life, designing competitive strategies based on the results from the competitive
intelligence framework will not guarantee success for the organisation. Despite the
wealth of information available to businesses, management can still make a number of
mistakes when deciding on the future of the business. These mistakes could then have
detrimental results for the business. Some of the common mistakes made by managers
include the following:
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••
••
••
••
••
Procrastination. Management might decide to wait a while before acting on the
results obtained. The decision could be based on many factors, including not
having sufficient financial resources to fund the new project or the prioritisation of
less important projects. As a result, competitors might capitalise on the window of
opportunity and steal away the business from the organisation.
Thinking too small. Sound competitive intelligence will add no value to the business
if organisations are too afraid to introduce new big ideas and surprise the market
with a superior offering. To obtain different results, organisations must be prepared
to think and do things differently.
Failure to communicate strategy. Well-designed plans often fail because they have
not been communicated effectively to stakeholders. It is the task of management to
ensure all the players responsible for the execution of the strategy must have a clear
understanding of the new vision and are well informed about their responsibilities.
The benefits of the new position must also be effectively communicated to the
customers of the organisation to ensure they remain loyal to the business.
Making hasty decisions. Organisations might also make hurried decisions and not
take all the competitive information obtained into account. These decisions might
later turn out not to have been the best option, and this could impact on the
business’s performance.
Drawing incorrect conclusions about findings. Management can also make the mistake
of drawing incorrect conclusions about the findings or oversimplifying them,
thereby failing to take advantage of the great window of opportunity presented to
them.
Let us give it some thought
What does the expert say?
Dr Todd Dewett explains more about the mistakes leaders make when having to make business
decisions.
Visit the following website and watch the video:
http://www.youtube.com/watch?v=o9LcO2D51L4.
5.8 SUMMARY
It is impossible for any organisation to successfully manage a business if it does not take
the plans of its competitors into consideration and adapt its strategies accordingly. This
chapter provided a framework that can be followed to obtain a good understanding of
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the role players in the competitive arena and design a thorough strategic plan that will
provide a true competitive advantage to the organisation.
As such, it was first explained that organisations must, at the start of the process, ensure
they are aware of all the role players in the competitive arena. A number of criteria
should be considered to ensure all current and potential competitors, that could have an
impact on the profit of the business, are identified and appropriately categorised. Once
the competitive arena has been established, an organisation can make use of various
tools to analyse its competitors. Porter’s Five Forces model will give an indication of
how easy it would be for new competitors to enter the market. The representative
weighted competitive strengths assessment model will give an indication of the strength
of the competitors in the market. A number of online competitor tools can also be
used to assist organisations in obtaining more insight into the online activities of their
competitors. The Blue Ocean Canvas was the fourth tool discussed in this chapter. It
enables organisations to anticipate future events and plan their competitive strategies
accordingly. Each of these tools can greatly benefit the organisation, but they also have
a number of weaknesses that must be taken into consideration when conducting the
analysis.
In the new connected millennium, organisations would further need to incorporate
social media strategies into their marketing campaigns to reach their customers more
effectively. Organisations can also obtain valuable insight into the strategies of their
competitors by simply keeping an eye on their social media platforms.
To obtain a truly strategic competitive advantage, organisations would need to make use
of a competitive intelligence system, and collect and analyse data from all the players
in the field. More insight was provided into the steps organisations should follow to
design and use the competitive intelligence framework.
The chapter then concluded with a discussion of common mistakes organisations
normally make when they need to make strategic competitive decisions. It is important
for organisations to be aware of these pitfalls, and ensure they use the wealth of
information obtained from the competitive intelligence framework wisely.
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CASE STUDY
PICK N PAY BRAND MATCH
Watch the following video on YouTube and then answer the questions that follow:
https://www.youtube.com/watch?v=9zlcuBNrezY.
1. Briefly explain Pick n Pay’s Brand Match offering.
2. Identify the similarities between Pick n Pay’s Brand Match offering and Sun Tzu’s
warrior philosophy.
3. Discuss four potential pitfalls that may hinder the successful implementation of
the Brand Match strategy.
4. Compare and contrast Pick n Pay’s Brand Match strategy with Shoprite’s Inflation
Fund campaign and conclude on which brand you believe has won the low price
perception war in the minds of South African consumers.
5. Discuss the steps Pick n Pay should follow to obtain a more comprehensive
intelligence system.
Self-evaluation questions
1. Explain why it is imperative for organisations in the new connected millennium to
conduct a competitor analysis.
2. Briefly describe all the role players in the competitive arena.
3. Make use of Table 5.1 (Checklist for identification of competitors) and identify all the
competitors relevant to the Energade energy drink.
4. Discuss one tool organisations can use to analyse its competitors.
5. Make use of the Google Trends for websites tool, and compare the traffic data and
geographic visitation patterns of Absa and FNB banks.
6. Discuss the purpose, benefits and weaknesses of the Blue Ocean Strategy Canvas.
7. Explain the value of social media in analysing competitors.
8. Discuss two strategies organisations can implement to evaluate the social media
campaigns of their competitors.
9. Explain the purpose of a competitive intelligence system.
Ü
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10. List the types of information that can be obtained from various sources and that
could add value to the competitive intelligence system.
ENDNOTES
1. Goodreads. 2013. Sun Tzu quotes. Online: http://www.goodreads.com/author/quotes/1771.
Sun_Tzu/ Accessed: 28 July 2013.
2. Jobber, D. 2010. Principles and practices of marketing. Berkshire: McGraw-Hill.
3. Fahy, J. & Jobber, D. 2012. Foundations of marketing. Berkshire: McGraw-Hill.
4. Media Club South Africa. 2015. Top 50 brands in South Africa named. Online: http://www.
mediaclubsouthafrica.com/economy/4353-top-50-brands-in-south-africa-named. Accessed: 3
June 2016.
5. Jobber, op cit.
6. Bergen, M. & Peteraf, M.A. 2002. ‘Competitor identification and competitor analysis: A
broad-based managerial approach’. Managerial and Decision Economics, 23:157−169.
7. StudyMode. 2013. Market commonality vs resource similarity. Online: http://www.
studymode.com/essays/Market-Commonality-Vs-Resource-Similarity-733226.html/
Accessed: 28 July 2013.
8. Jooste, C.J., Strydom, J.W., Berndt, A. & Du Plessis, P.J. 2008. Applied strategic marketing.
Johannesburg: Heinemann.
9. Thompson, A.A., Peteraf, M.A., Gamble, J.E. & Strickland, A.J. 2012. Crafting and
executing strategy. New York: McGraw-Hill.
10. Jooste et al, op cit.
11. Lakeshore Branding. 2009. Ultimate list of top 29 tools for competitive intelligence. Online:
http://www.lakeshorebranding.com/company/blog/ultimate-list-of-top-29-tools-forcompetitive-intelligence/ Accessed: 28 July 2013.
12. The Search Monitor. 2013. Online: http://www.thesearchmonitor.com/ Accessed: 28 July
2013.
13. Lakeshore Branding, op cit.
14. Google Trends. 2013. Online: https://accounts.google.com/ServiceLogin?service=trendsp
ro&passive=1209600&continue=http://www.google.com/trends&followup=http://www.
google.com/trends&authuser=0/ Accessed: 28 July 2013.
15. Lakeshore Branding, op cit.
16. Google Alerts. 2013. Online: http://www.google.com/alerts/ Accessed: 28 July 2013.
17. Lakeshore Branding, op cit.
18. Ibid.
19. SEMRush. 2013. Online: http://www.semrush.com/ Accessed: 28 July 2013.
20. Lynch, R. 2012. Strategic management. London: Pearson.
21. Kim, W.C. & Mauborgne, R. 2005. ‘Value innovation: a leap into the blue ocean’. Journal of
Business Strategy, 26(4):22−28.
22. World Wide Worx. 2015. South African social media landscape 2015. Online: http://www.
worldwideworx.com/wp-content/uploads/2014/11/Exec-Summary-Social-Media-2015.
pdf/. Accessed: 3 June 2016.
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23. RivalIQ. 2013. How to reach your competitor’s social media strategy. Online: http://blog.
rivaliq.com/how-to-research-your-competitors-social-media-strategy/ Accessed: 28 July
2013.
24. Simply Measured. 2013. School your competition: 3 tips to simplify competitive analysis.
Online: http://simplymeasured.com/blog/2013/04/04/school-your-competition-3-tips-tosimplify-competitive-analysis/ Accessed: 28 July 2013.
25. Social Media Examiner. 2013. How to gain competitive insight with social media. Online:
http://www.socialmediaexaminer.com/how-to-gain-competitive-insight-with-social-media/
Accessed: 28 July 2013.
26. Social Media Circus. 2013. 5 types of competitive analysis for social media. Online: http://
shanecrombie.com/2012/01/5-types-of-competitive-analysis-for-social-media-simplymeasured/ Accessed: 28 July 2013.
27. Imedia Connection. 2013. How to do social media competitive analysis. Online: http://www.
imediaconnection.in/article/1395/Digital/how-to-do-social-media-competitive-analysis.
html/ Accessed: 28 July 2013.
28. West, D., Ford, J. & Ibrahim, E. 2010. Strategic marketing. Creating a competitive advantage.
New York: Oxford.
29. Ferrell, O.C. & Hartline, M.D. 2011. Marketing management strategies. Toronto: Cengage
Learning.
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Chapter
6
ANALYSING THE
INTERNAL
ENVIRONMENT
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Distinguish between the three environments from a marketing perspective;
„„ Identify the importance of the market environment;
„„ Identify the challenges of the market environment for marketing purposes;
„„ Understand and know how to do an internal analysis;
„„ Understand the working of the nine quadrant SWOT analysis;
„„ Apply the nine quadrant SWOT analysis in a practical business application.
6.1 INTRODUCTION
No organisation can function properly without knowing the business environment. The
role of the environment is crucial for the long-term sustainable existence and success
of any business. To make long-, medium- and short-term plans, the organisation must
analyse the environment in detail. When talking of the environment, the macro-,
market- and micro-environments are all part of it (see Figure 6.1). When thinking of
the macro-environment, an organisation has little or no influence on it, but the macroenvironment has a huge impact on the organisation. For example, the increasing inflation
rate in the economy since 2015 leaves less money in the pockets of all customers and
they are buying less or cheaper products/services. This has a devastating effect on the
many organisations. The market environments can more easily be influenced by the
organisation. For example, a new marketing strategy from a business can have a huge
impact on competitors in the same industry, causing their market share to decrease or
for them to make new plans to keep up with sales.
This chapter focuses only on the micro-environment which, from a marketing
perspective, is of equal importance to the organisation as the two other environments, the
macro-environment and market environments. The micro-environment is also known
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The enterprise has little, if any, influence
on the macro-environment
Micro-environment
Within business
• The mission of the
business and its goals
• The enterprise and its
functional activities
• The enterprise’s
resources
Within marketing dept
• Marketing objectives
• Target market
• Marketing mix
Influence
market through
strategy
Direct influence
through
competitors,
market, etc
Market environment
1. The market that
consist of consumers,
their needs, buying
power and behaviour
2. Consumerism
3. Competitors
4. Intermediator
5. Suppliers
Influence on
the enterprise
indirectly through
the market with
the aid of influence
on the market
environment
Macro-environment
1. The economic
environment
2. The social
environment
3. The technological
environment
4. The institutional
environment
5. The physical
environment
6. The international
environment
The macro-environment influences
the enterprise indirectly
FIGURE 6.1 The composition of the marketing environment for any business
as the internal environment. This is the environment within the business and includes
those forces or activities that directly affect and are directly affected by an organisation’s
major operations. For example, when the marketing skills of an organisation are not on
a par with the rest of the organisation, its marketing activities will not be competitive
enough to be a market leader in the market.
Although this chapter only outlines the micro-environment, it is important to mention
again that the micro-environment cannot be analysed and discussed in isolation from
the other two environments. For the purpose of this chapter, the micro-environment
will be discussed in detail to show how it needs to be analysed, in order to create
important strategic marketing actions and plans from the analysis.
6.2 IMPORTANCE AND CHALLENGES OF THE MARKET ENVIRONMENT
To come up with the most effective and efficient strategies, it is important to know
what the organisation can do particularly well and what resources it has. This is the
central idea on which the internal analysis focuses, because every organisation needs to
determine its resources within the business and how these resources are weighted and
classified as strengths or weaknesses.
There are many challenges in the internal environment and these make it difficult to
undertake an internal analysis. The many different methods of analysing the internal
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environment that can be used are also proof of the complexity of this process. The
internal environment exists mainly of resources such as people, equipment, capital, etc.
An example of one of the many challenges that these resources create is where there are
opportunities in the market environment, but the organisation cannot take advantage
of them because of internal capital restrictions. The following factors give an indication
of the challenges of the internal environment:
•• People. Skills, qualifications, minimum wages, productivity and commitment;
•• Capital. Shortages, cash flow, high interest rates and return on investment;
•• Equipment. Age, maintenance and technological change.
There are many more challenges, and the next part of the chapter will explore them
as part of the different types of analysis of the internal environment. The internal
environment and the different ways in which to analyse it will be discussed in more
detail in the next section.
6.3 INTERNAL ENVIRONMENTAL ANALYSIS
The internal environmental analysis aims to provide a detailed understanding of not
only those aspects of the organisation that are of strategic importance for the sustainable
existence of the business, but also for the effective marketing of products and services.
Although the external information and analysis are essential for the success of the
business analysis, they are not sufficient enough to achieve the required success unless
they are accompanied by a thorough analysis of the organisation’s internal environment.
According to West, Ford & Ibrahim,1 research proved that differences in performance
amongst companies in the same industry are best explained through the assets of the
organisation, the resources being used, and how they are applied in the business.
Organisational performance differences do not always resemble the differences in
industry performance and applications. This depends on the internal resources of a
specific organisation. For example, an organisation with enough capital will do better
in tough economic times, because the organisation can still make use of opportunities
in the market without borrowing any capital to do so.
In the past, external environmental impacts on the organisation were overemphasised,
and many strategic managers argued that a more appropriate focus for strategy
development would be on the resources of the organisation, meaning it would be
resource-based. Resource-based analysis is therefore the first analysis method to be
discussed in the next section.
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6.3.1 Resource-based analysis
The resource-based approach is one of a few approaches that strategic marketing
managers can use to analyse the internal environment. The resource-based approach
is based on using the evaluation of the resources of a company as the foundation for
formulating the company’s marketing strategies. The following approach of how to use
the resource-based analysis is adopted:
•• Step 1: List and define the resources that contribute to the strengths and weaknesses
of the company.
•• Step 2: List the combined resources for the organisation forming the different
capabilities that enhance the organisation and allow it to grow and outrun its
competitors.
•• Step 3: From the formulation of the combined capabilities, the competitive advantage
can be formulated − an organisation can also have more than one competitive
advantage.
•• Step 4: By linking the unique resources of the organisation towards different types
of strategies, it can exploit these capabilities over time, and this can lead to a
sustainable competitive advantage.
•• Step 5: The outcomes from the exploitation of the characteristics of the capabilities
can also expose gaps in the resources of an organisation.
The resources of an organisation are the primary source for developing or determining
the competitive advantage. A resource-based approach will identify the uniqueness and
the capabilities of the resources available to, and inside, the company to support the
sustainable competitive advantage. With regard to uniqueness, it sometimes means that
some resources can be so exclusive that it is impossible for any competitor to imitate. A
good example is the uniqueness of the recipe for Coca-Cola, which is one of the major
aspects that gives Coke its competitive advantage.
Resources of the organisation must also be time-based. This means that strategic
managers must link the resources to the short-, medium- and long-term to get even
more strategic advantage from them. Referring to Coca-Cola again, the unique recipe
is long-term based for that sustainable competitive advantage over time. Time-based
resources may also generate some new strategies for an organisation over the short-,
medium- and long-term in the sense that combining some resources will lead to new
competitive advantages over time.
With this clearer picture of resources and their capabilities in mind, it is also easier to
create new capabilities for the organisation as well as to sustain it. For example, if the
skills of marketing people in the organisation are unique and outstanding, then training
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and attending new marketing development courses can help to keep these capabilities
going and outrun competition in the market.
Although the resource-based approach is a very important tool, there are also some
other approaches that a strategic manager or marketer can use. One such approach is
the performance analysis approach.
6.3.2 Performance analysis
The performance of any organisation can be crucial in terms of long-term sustainable
survival. Resource-based analysis links up with performance analysis in many ways.
Performance of a business is based on the utilisation and application of resources in
and around the business. There are many ways of measuring marketing performances
of a business, from ordinary methods such as return on investment (ROI) to more
sophisticated ones such as brand equity. The performance measurement of an
organisation can be classified into two main categories, namely financial and nonfinancial performance measures.
Where non-financial performance measures are used, the following questions can be
asked:
•• What is the market standing of the organisation in the market?
•• What is the product value in the market according to customers in accordance with
competitor products?
•• What is the customer satisfaction rate of the organisation or of some individual
products and services?
•• What are the marketing management development stages in the organisation?
•• What is the marketing productivity rate of the different marketing elements in the
organisation?
•• What is the sales and marketing productivity of the people in the marketing
department?
Financial performance is more difficult to measure, because not only does it change
according to the objectives of the company, but also when the product life cycle of the
product/service is changing.
Financial performance measures that can be used are illustrated by the following
questions that can be asked:
•• What is the sales performance (turnover and profit) of a product? In the introductory
phase, this is an indicator, but, for example, in the maturity stage, sales performance
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••
••
••
is not that important anymore. Then ROI is of more importance because it will
determine a strategy of leaving the product in the maturity stage for as long as
possible or letting it decline as soon as possible.
What is the contribution of the product/service mix towards the turnover or net
profit of the organisation?
What is the cost of the sales force in relation to the other marketing communication
strategies?
What is the ROI of the company as a whole? This will also determine what the
affectivity is, measured against the ROI of competitor companies, in the same
industry.
Another method that can be used to measure the profit impact of different marketing
strategies is called profit impact of marketing strategy (PIMS). This measurement is
conducted by various institutions to help determine which new internal marketing
strategy is on a par with the profit outcomes set for the different strategies. The main
aim of PIMS is to discover empirical principles that determine which strategy variables,
under which circumstances, produce the expected results set for ROI or the cash
flow of the organisation. The main aim of PIMS is to make use of empirical research
findings in a specific industry, for example what the average gross profit margins are.
These findings will then be used to determine which strategy variables in that specific
industry can be used to produce the expected ROI results or cash flow for the business.
PIMS research identified major strategic variables that account for more or less 80
per cent of the variation in profitability (ROI) amongst businesses in the database.2
According to Lancaster, Massingham & Ashford,3 PIMS seeks to address three basic
questions:
1. What is the typical profit rate for each type of business per industry?
2. Given current strategies in a company, what are the future operating results likely
to be?
3. What strategies are likely to help improve future operating results for the company?
Dibb, Simkin, Pride & Ferrell4 cite six principal areas of information that PIMS holds
on each business:
1. Characteristics of the business environment.
2. Competitive position of the business in the industry.
3. Structure and layout of the production process.
4. How the budget is allocated to the different functional areas.
5. Strategic movement of the company.
6. Operating results per annum of the company.
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While many of these areas seem obvious, PIMS has the advantage of providing empirical
data that define quantitative relationships and what some people may consider to be
common sense.
Another tool that can be used to measure the performance of a company is the balanced
score card. This tool measures performance according to four perspectives (see Figure
6.2) namely the financial perspective, the customer perspective, the internal business
perspective, and the innovation and learning perspective of an organisation. The
mentioned four measures, when integrated and aligned, form the financial and the
non-financial aspects of an organisation.
Financial perspective
‘To succeed financially, how should
we appear to our shareholders?’
Vision
and
strategy
Customer perspective
‘To achieve our vision, how should we
appear to our customers?’
Internal perspective
‘To satisfy our shareholders and
customers, what business processes
must we excel at?’
Learning and growth perspective
‘To achieve our vision, how will we
sustain our ability to change and
improve?’
FIGURE 6.2 Balanced score card5
Generally speaking, marketing managers must, apart from categorising internal
variables in financial and non-financial aspects, measure the performance of the
marketing department as well as the overall business performance. This, once again,
means that the aspects that are major strengths as well as major weaknesses within the
organisation should be analysed.
Another aspect that can also be taken into consideration is the fact that the strengths
and weaknesses can be evaluated with the following in mind:
•• Past performance of the organisation. It is important to take the past three years of
performance into consideration to see if the same strengths and weaknesses are
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••
••
still the aspects that drive the competitive advantage and the performance of the
organisation.
Key competitors of the organisation in the specific industry. It is important to evaluate
the organisation and measure it against the other main players in the same market
or industry. There are a few different ways of evaluating competitors (see Chapter
4 on market analysis).
The industry as a whole. Because industries differ from each other, it is important
to measure corresponding factors with each other. This means that industry
records, ROI averages, etc, must be taken into consideration when measuring the
organisation’s performance.
Performance analysis can also be implemented together with the next analysis, namely
the value chain analysis.
6.3.3 Value chain analysis
The inventor of the value chain analysis was Porter,6 and up till now this theory is
still an important tool for measuring internal performance. Although Porter’s value
chain analysis measures the synergies amongst the internal factors of a firm, the overall
outcome is to enhance the performance of the organisation.
According to Porter, every organisation is a collection of activities that are performed to
design, produce, deliver, promote and support its final product/service in the market.
All these activities can be represented in five primary and four support activities using
a value chain concept (see Figure 6.3). The main aim of the value chain analysis is
that it is a systematic way of examining all the activities an organisation performs, and
how they interact to differentiate the organisation’s value delivery process from the
other competitors in the market. This differentiation, accomplished from the synergy
between the primary and the support activities, can be recognised as a key source of
competitive advantage.
The main benefit of a value chain analysis is the fact that an organisation is not only a
random collection of people, machines, money and an idea, but that these resources
are of value when deployed in activities and organised into effective systems or
departments, which ensure that products and services are produced and valued by the
final customer. Because customers are value seekers, the delivered value plays a crucial
part in determining the sustainable competitive advantage of an organisation amongst
the other competitors.
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Support activities
Firm infrastructure
M
Human resource management
ar
Technology development
gin
Procurement
Inbound
logistics
Operations
Outbound
logistics
Marketing
& sales
Service
gin
ar
M
Primary activities
FIGURE 6.3 Value chain of an organisation7
Bigger companies producing more than one product or service can use more than
one value chain. When a marketing manager wants to evaluate the internal marketing
aspects of an organisation, he or she needs to evaluate a series of value chains to make
sure that every value chain is functioning optimally. The evaluation of value chains for
an internal analysis includes the following aspects:
•• Evaluation of the value chain of each product/service line for the organisation;
•• Evaluation of the linkages within the value chain of each product line;
•• Evaluation of the linkages and synergies amongst the value chains of the product/
service portfolio of an organisation.
In addition to the evaluation of value chains, marketing managers must also remember
to look at the aspects just outside the value chain activities. This includes the supply
side such as raw materials, parts, etc. For example, the production process for the
production of a quality product can only be as successful as the quality of the raw
material or the part that fits the product. On the other side of the value chain, the
distribution side, the product and service delivery can only be as good as the wholesaler
or retailer in the distribution process.
Again the value chain refers to strengths and weaknesses in the whole internal
environment. Another analysis refers to functions in the organisation. The next section
gives more detail about the analysis of functions.
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6.3.4 Functional analysis
Functional analysis is quite a simple aspect of the internal analysis of an organisation.
Any organisation exists around different functions, such as the financial function, the
marketing function, the human resource function, etc. Each functional area does not
only exist out of financial and physical resources, but there are also people who deliver
the outputs, plan for strategies, or implement policies in the specific department or
function. The human resources of each functional area must have knowledge of the
function, the analytical concepts to implement the function and specific techniques on
how to run a functional division.
If the functional resources are used optimally, this serves as a strength in the organisation,
otherwise it can be a weakness if skills are not available or not used optimally. It is thus
the responsibility of marketing managers to make sure that there are also enough skills
and abilities in the functional areas most applicable to the output, promotion, value
delivery, etc, of products/services (see Table 6.1).
TABLE 6.1 Strategic functional areas8
Internal area
Resource
Evaluation
Strategic functional profile
Based on resource audit
Physical resources
Facilities incorporating latest
technology
Major strength (+3)
Human resources
Highly trained and skilled staff
Minor strength (+1)
Financial resources
High financial gearing
Mild weakness (–1)
Strategic functional profile
Based on the value chain
Intangibles
Brand and corporate image
strong in market
Major strength (+3)
Inbound logistics
Reliance on limited number of
suppliers
Major strength (+3)
Outbound logistics
Ineffective warehouse
automation
Weakness (–2)
HR management
High absenteeism/poor
relations in industry
Major weakness (–3)
Another aspect that plays an important role as part of the functional analysis is the
hierarchy of a function in the business. For functions to operate effectively, they must
be on the same hierarchical level. For example, if the marketing department is not on
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the same level as the finance department, it will not have the same power, and it will
always be dominated by finance or human resources, etc.
6.4 S TRATEGIC FIT BETWEEN THE ANALYSES OF THE DIFFERENT
ANALYTICAL PROCESSES
According to the different analytical processes described up to now, it makes sense to
analyse from an internal environmental perspective. All the different methods described
in the previous paragraphs boil down to two aspects, namely strengths and weaknesses
in the internal environment of the organisation.
When talking about strengths and weaknesses, the strengths, weaknesses, opportunities
and threats (SWOT) analysis is the method to use. The reason for using the SWOT
analysis makes sense because all the above-mentioned analytical methods make use of
determining or analysing strengths and weaknesses in the internal environment.
6.5 S TRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS (SWOT)
ANALYSIS
In order to analyse the internal assets along with the external assets, managers may
conduct a SWOT analysis. As mentioned above, a business’s internal analysis consists
of analysing its strengths and weaknesses and identifying its competencies, whilst the
external analysis looks at the external environment of the business and any opportunities
and threats to it from the outside.
By effectively identifying the business’s competencies after conducting an internal
analysis, managers are able to identify its strengths and weaknesses, such as process
efficiencies, powerful machinery or outdated technology, and thus capitalise on these
strengths and weaknesses as they are to be factored into the strategy formulation
process. By utilising strengths and eliminating weaknesses, businesses are able to gain
a competitive advantage, which will be reflected in their profitability.
The SWOT analysis is a systematic way of integrating internal and external analysis
(opportunities and threats) to find a ‘strategic fit’ between the market and macroenvironment and the internal aspects the organisation has to offer. The main idea for
a SWOT analysis is to build on the strengths of the internal environment and to try to
convert the weaknesses into strengths via training, restructuring, adding new methods,
etc.
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The SWOT analysis is an important foundation for any strategic planning process
helping to produce realistic, strategic recommendations for the future direction and
strategies of the organisation. It also aims to identify the extent to which the current
strategy of an organisation, and its more specific strengths and weaknesses, are relevant
and capable of dealing with the changes taking place in the business environment.
Although the SWOT analysis is a well-known analysis model and frequently used by
strategic analysts, there are a few shortcomings that are part of the model. The main
ones are the following:
•• In conducting the analysis, many managers frequently fail to come to terms with
the strategic choices that the outcomes demand. A reason for this is the fact that the
normal SWOT analysis is not ranking strategic options according to the importance
thereof. When making strategic plans, it is important to rank strategies according to
the most wanted outcomes for the organisation.
•• Fifield & Gilligan9 claim that the use of the SWOT analysis is not practical enough
and does not add value to the practical business environment. Practical use is
important, because a tool that has been used by strategic managers must be applied
in practice in the business environment.
The SWOT analysis can help to combine the above-mentioned analytical tools in one
matrix. It can really help to put strategic plans on the table in order to enhance the
competitiveness of an organisation. In taking the aforementioned shortcomings into
consideration, there needs to be an adaption to the SWOT analysis to make it more
practical and user-friendly for strategic managers. The following steps can make a
SWOT analysis worthwhile:
•• Step 1: Identify and list all the strategic internal factors applicable in helping to
produce the necessary outputs of the organisation. Table 6.1 gives an example of
some important strategic internal factors to list in a table.
•• Step 2: Ask different questions such as the following:
–– What key assets and skills have to be successful?
–– What are the key customer motivations?
–– What are major cost components and where are these components?
–– What value is added?
–– What are the mobility barriers to the organisation?
–– What components of the value chain create cost accounting (CA)?
•• Step 3: After writing down the strategic internal factors, they need to be organised
according to the magnitude or performance of the factor and whether they are
considered a major, neutral or minor strength, or a major, neutral or minor
weakness. In a practical environment, the facilitator of the strategic session needs
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Chapter 6 – Analysing the internal environment
••
••
••
to make sure of the buy-in of every member of the strategic session. If there is no
agreement; they must vote for the rating.
Step 4: Make sure that all members of the group know that a major strength is a 3,
neutral is a 2, and a minor is a 1. A major weakness is a −3, neutral is a −2, and a
minor is a −1. It is important to remember that each factor needs to be classified in
these three categories for strengths as well as for weaknesses.
Step 5: After classification according to the magnitude or performance of the factor,
managers need to do the same with each factor, but the importance of the factor
from a marketing point of view needs to be determined. The importance of a
factor can only range from a 3, which is of high importance to a 1, which is less
important. In some cases the magnitude or the performance of the factor can be
a major strength, but the importance from a marketing point of view is not that
much, therefore the value can be a 1.
Step 6: Draw a matrix with nine quadrants (see Table 6.5), where there are two qua­
drants for strengths and weaknesses and two quadrants for opportunities and threats.
Table 6.2 gives an indication of the categories and the possible factors that can be
identified for the organisation, by the strategic managers or all the role players that are
part of the strategic planning process.
TABLE 6.2 E xample of how to categorise the thinking process for identifying the strategic
internal factors
Strategic internal factor
Factor examples
Customer satisfaction
„„ Responsiveness
„„ Loyalty
„„ Market
share
„„ Positioning
„„ Brand
Resources of the organisation
awareness
„„ Operations
„„ Finance
„„ Human
capital
„„ Marketing
„„ Management/organisational
Survival factors for the business
„„ Profitability
„„ Prosperity
„„ Recognition
„„ Growth
Facilities of the business
„„ Capacity
„„ Automation
„„ Effectiveness
of buying
Ü
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Strategic internal factor
Factor examples
„„ Research
and development superiority
efficiencies
„„ Production
Shareholder value
„„ Profitability
„„ Sales
analysis
flow
„„ Liquidity
„„ Financial leverage
„„ Margins
„„ Budget control
„„ Capital structure
„„ Financial stability
„„ Turnover
„„ Cash
Number and types of employees
„„ Ability
and skills of employees
loss/replacement rate
„„ Productivity
„„ Employee attitudes
„„ Customer orientation
„„ Entrepreneurial orientation
„„ Staff
Company reputation
„„ Customer
base
intelligence
„„ Share of market
„„ Positioning
„„ Market segmentation
„„ Branding
„„ Product portfolio
„„ Innovation effectiveness
„„ Product differentiation
„„ Marketing
New product development (NPD)
process
„„ Product
Marketing process
„„ Sales
quality
quality
„„ Pricing effectiveness
„„ Promotional effectiveness
„„ Customer communication
„„ Service
force effectiveness
coverage
„„ Distribution effectiveness
„„ Customer satisfaction
„„ Geographic
Organisational structure
„„ Inter-functional
relations
culture
„„ Quality of top and middle management
„„ Leadership capacity
„„ Planning system
„„ Vision
„„ Flexibility/responsiveness of the organisation
„„ Information systems
„„ Business
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Table 6.3 shows the strengths and weaknesses classified according to the magnitude or
performance of each factor currently identified and in action in the business.
TABLE 6.3 C
lassification of strengths and weaknesses according to magnitude or
performance
Strengths/weaknesses analysis
Factor
Magnitude/performance
Major
Neutral
strength (2)
(3)
Minor
Minor
Neutral
strength strength (–2)
(1)
(–1)
Importance
Major
weakness
(–3)
High (3) Med (2)
Low (1)
By using this table or matrix, the strategic marketing manager can first plot all the
applicable internal factors for the specific organisation that will make sense to identify
the competitive advantage of the business. Then, as indicated in Step 3, the role players
need to agree on the values being awarded to the magnitude/performance as well as the
importance of each one of these listed factors.
This is not an easy task in the practical business environment and it is really timeconsuming, because all role players need to agree on the value. The facilitator of the
sessions needs to take all aspects into consideration, be neutral, but always be in
charge of the arguments around the values awarded by the role players. When there is
a mutual agreement on a value, the facilitator can move to the next one. When there is
no consensus around a value, the pros and cons of that factor need to be discussed in
more detail to reach a mutual agreement.
After the completion of the matrix, the factors and values are transferred to the four
quadrant matrix as shown in Table 6.4.
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TABLE 6.4 The four quadrant matrix
Quantitative assessment of SWOT matrix
Magnitude or
performance of
element
Importance of
element for marketing
Strengths
M
I
R
Opportunities
M
I
R
Weaknesses
M
I
R
Threats
M
I
R
Strengths M
I
R
TABLE 6.5 The nine quadrant matrix
Weaknesses M
Opportunities M I
R
SOstrategy
SR
OR
SOR WOstrategy
Threats
R
STstrategy
SR
TR
STR
M I
I
R
WR OR
WOR
WT-strategy WR TR
WTR
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After the completion of the four quadrant matrix, the facilitator needs to transfer
the four quadrants to the nine quadrant matrix. When the nine quadrant matrix is
completed, the facilitator needs to get all the role players to identify the strategies for
the four strategic quadrants.
The most important aspect to remember here is the fact that there is no fixed recipe.
Every SWOT matrix is unique according to the organisation, the internal factors, etc.
It is now the task of the role players to determine which strength to fit with which
opportunity to get the strategic fit for each and every strength with opportunity (SO)
option. The same way is necessary to determine the strategies for the weaknesses with
opportunities (WO), strengths with threats (ST) and weaknesses with threats (WT).
You also need to consider how the value that is added to the different factors work in
the matrix. How the values in each one of the quadrants work is explained as follows:
•• In the four quadrant matrix, the M-value (Magnitude) and the I-value (Importance)
are multiplied with each other. If the M-value is 3 and the I-value is also 3, the
R-value is 9. (M × I = R)
•• The nine quadrant matrix works as follows: The SR and the OR columns are added
together to give the SOR value. For example, if the SR value is 9 and the OR value
is also 9, then the SOR value is 18. In this quadrant the maximum value can thus
be an 18, meaning that an 18 is the first strategy to attend to. Any value less than
18 is second on the priority list.
•• In the WO quadrant, the value to work towards is zero. The reason is that the
opportunity cancelled out the weakness and this is the strategy to attend to.
•• In the ST quadrant, the value to work towards is also zero as in the WO quadrant.
The reason is that the strength cancelled out the threat, and this is the strategy to
attend to.
•• In the WT quadrant the maximum value is −18. This means that it is the strategy
to attend to in the first place. The attendance can be to either leave it because there
is no solution to make it less negative, or the role players can decide to implement
some workable strategies that can reduce the negativity.
The indicators mentioned give an indication of how to determine and work with the
identified strategies and the priorities for how to attend to them. If the marketing
manager is using this as a guideline, the order to use and attend to these identified
strategies make a huge difference in implementing the action plans in the most effective
way for the organisation.
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6.6 SUMMARY
The chapter explained why the analysis of the internal environment plays a very
important role in determining the competitive advantage of the organisation. As was
seen, there are a few different analyses, but they all point to determining the strengths
and weaknesses of an organisation. After identifying these, there are four other factors
that allow a business to gain and sustain competitive advantage. These factors are the
following:
1. Efficiency. This refers to achieving a high level of output from minimal input. An
efficient business will save on resources such as materials, labour, time, etc, while
producing high levels of output such as products or services. This enables the
business to reduce costs, and ultimately gain a competitive advantage over its
competitors.
2. Quality. Customers appreciate products and services offered to them that are of
superior quality; that is, the products and services exhibit attributes that satisfy
the customers’ needs and wants over those of competitors. High-quality products
and services will provide a business with a point of differentiation and thus gain a
competitive advantage.
3. Innovation. This involves creating or improving products, services or processes.
The development of new products, services and processes stems from new ideas,
creativity and an aim to provide something that is unique and meets the needs and
wants of customers. Innovative products and processes give significant competitive
advantage, as they put the business in a position to shine and stand out from
competitors.
4. Customer responsiveness. This factor addresses meeting the needs and wants of the
business’s target customers, therefore it intertwines with the previous three factors:
efficiency, quality and innovation. Customers seek products and services of a high
calibre, at the lowest possible price, that will meet their needs or solve a problem,
etc. Customer responsiveness relates to an understanding of the customer’s needs
and wants, and providing products and services that meet such needs in a superior
way over competitors. It involves offering unique products and services at a low
cost and of superior quality. Achieving efficiency, quality and innovation will thus
lead to customer responsiveness and ultimately gain the competitive advantage.
By considering these factors when developing strategies, the organisation will focus
on competitive advantage. It will attain high performance and profitability as well as
achieve the objectives and goals set out in its mission statement.
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Self-evaluation questions
1. Mention the three market environments and give a short description of each and
what it entails. Motivate your answers from the chapter.
2. Discuss two important aspects of why management needs to analyse the internal
environment.
3. List three challenges in analysing the internal environment.
4. Mention all the different methods that can be used to analyse the internal
environment.
5. Give reasons for your answer why the SWOT analysis gives the best option for
analysing the internal environment.
6. Describe why the strategic fit between the analysis method and the business itself is
so important. Motivate your answer.
7. In your opinion, why should all role players be part of the analysis process? Motivate
your answer.
ENDNOTES
1. West, D., Ford, J. & Ibrahim, E. 2006. Strategic marketing. creating competitive advantage.
New York: Oxford University Press.
2. Guiltinan, J.P. & Paul, G.W., 2005. Marketing management. Strategies and programs. 5th ed.
New York: McGraw Hill Book Company.
3. Lancaster, G., Massingham, L. & Ashford, R. 2004. Essentials of marketing management.
United Kingdom: Ammanford A.
4. Dibb, S., Simkin L., Pride, W.M. & Ferrell, O.C. Marketing: concepts and strategies. 2001.
Boston: Houghton Mifflin Company.
5. Jooste, C. J. 2013. Applied strategic marketing. Johannesburg: Heinemann. p 426.
6. Porter, M.E. 1985. Competitive advantage: creating and sustaining superior performance. New
York: The Free Press
7. Dess, G.G. & Lumpkin, G.T. 2012. Strategic management: text and cases. 6th ed. New York:
McGraw-Hill Higher Education.
8. West, D., Ford, J. & Ibrahim, E., 2011. Strategic marketing. Creating competitve advantage.
United Kingdom: Ammanford A.
9. Fifield, P. & Gilligan, C. 1998. Strategic marketing management: planning and control, analysis
and decisions. Oxford: Butterworth-Heinemann.
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Chapter
7
MARKETING
STRATEGY AND
METRICS
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Define the term ‘metric’;
„„ List the reasons for measuring the effectiveness of a firm’s marketing strategy;
„„ Discuss the need to measure marketing strategy;
„„ Outline the evolution of the field of marketing metrics;
„„ List the benefits of marketing metrics;
„„ Identify the main categories of marketing metrics;
„„ Link metrics to marketing strategy;
„„ Explain key marketing metrics including, amongst others, return on sales, gross profit,
marketing cost per unit, market growth, market penetration, churn rate, cost per lead,
cost per sales call, breakeven sales volume, return on customer and lifetime value of a
customer;
„„ Discuss the use of online metrics.
7.1 INTRODUCTION
Management guru Peter Drucker once said: ‘If you can’t measure it, you can’t manage
it’,1,2 and this adage serves as the primary justification for marketing metrics. In
this chapter, we begin by discussing the need to measure marketing in support of
the organisation’s marketing strategies. We then outline the evolution of the field of
marketing metrics as well as highlight the benefits of such metrics for strategic decisionmaking.3 We also focus on identifying the main categories of marketing metrics, as
well as explain selected key metrics within these categories that are considered to be
important in the implementation of marketing strategy. We start the discussion by
briefly defining metrics.
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7.2 WHAT IS A METRIC?
The term ‘metric’ has a number of different meanings. These vary from the world of
computer networking, through poetry and mathematics, to business. In the world of
business, a metric can be defined as:
a quantitative measure used for assessing, controlling or decision-making in all activities of a
business venture.
Organisations establish marketing metrics in order to determine how successful or
effective their marketing activities and strategies have been. Marketing metrics may
focus on specific issues such as return on sales, gross profit, the marketing cost per
unit, market growth, market penetration, churn rates, the cost per lead, the cost per
sales call, breakeven sales volume, return on customer, the lifetime value of a customer
and much more.
7.3 WHY MEASURE MARKETING?
Organisations can only achieve success if they are profitable. Being profitable means
earning or generating more money than the firm spends in order to generate these
earnings; in other words, income must exceed expenses. In generating income, most
companies undertake various marketing strategies in order to attract new customers
and to encourage existing customers to keep on buying from them. The question arises
as to whether these marketing strategies are both cost effective and relatively effective:
•• Cost effectiveness means that the benefit in money value outweighs the cost of
implementing the marketing strategies concerned, be they specific personal selling,
advertising, e-marketing, relationship marketing or other interventions that the
firm decides is best for it.
•• Relative effectiveness refers to ascertaining whether certain marketing strategies
and activities being implemented by the firm are relatively more cost effective
than other alternative marketing strategies and activities. For example, does the
same amount spent on an e-marketing strategy generate more or better customers
than, for example, focusing on traditional advertising? In order to measure the
effectiveness of a firm’s marketing efforts (or, in other words, to measure the
return on its marketing investment or marketing return on investment (ROI)), the
firm must measure this return. In order to do so, it needs to put in place various
measures (or metrics) to measure its marketing ROI and this is why marketing
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metrics are necessary. Such measures focus on both the investment (or cost) side
and the benefit (or income) side.
Of course, the metrics alone are of no value unless they are used in some way. Any
metrics that are collected or compiled in whatever way they need to be understood and
used to improve or shape the future marketing effort of the firm in question. Simply
collecting marketing metrics without putting them to use is a wasteful exercise and an
unnecessary use of the firm’s resources. It increases costs and is counterproductive to
the marketing efforts of the firm. Ultimately, these metrics should increase the return
on marketing investment and add to the profitability of the firm.
7.4 THE BENEFITS OF METRICS IN MARKETING STRATEGY
The idea behind radar is its ability to look further than the eye can see and to know
what is coming. Having an early warning system for any firm would obviously be a very
valuable tool. Currently, by the time the results of poor marketing efforts show up in the
sales figures, it is often too late to do anything about it. Customers have moved on and
the organisation will have to spend more money on acquiring new customers rather
than spending less on retaining current ones. This is where marketing metrics come
in. They serve as a radar (often referred to as a dashboard) for effectively managing the
marketing activities of the firm.
Besides directing current marketing activities, marketing metrics can also serve as
an input to marketing strategy. Measures (that is, metrics) that expose the state of
marketing activities in an organisation serve as an indication as to what should be
done to correct or even prolong the current state of affairs; that is, metrics drive future
strategies. For example, if the return on investment of a particular marketing campaign
(ROMI – discussed later) is found to be poor or below expectation, this may result in
the campaign being abandoned or radically adjusted going forward.
Besides this forward view that marketing metrics offer managers, there are several
additional benefits of determining marketing metrics. These include the following:4
•• Certain metrics enable managers to understand the payoffs from multi-period
marketing investments, especially in a business world that is focused on quarterly
or annual performance.
•• Tracking metrics highlight the benefits of market-based, off-balance-sheet assets
such as the value of brands and customers.
•• Some marketing metrics focus on the future potential of the business, whereas most
financial metrics report only on the past.
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••
••
••
••
••
••
••
••
Understanding metrics will often enable managers to appreciate the linkages
between various marketing activities that are brought together and encapsulated in
the metrics in question.
Marketing metrics help justify marketing campaigns and marketing spend;
marketing accountability can be a strategic justification for using metrics in the
first place.
They serve as an aid in managing the firm’s marketing efforts better.
Firms have had to address the need to become more accountable and visible in
what they do – this applies to marketing as well, and marketing metrics can help
with this task.
Firms are facing increasing regulation in the marketplace, and marketing metrics
help them to better understand and explain what they are doing.
Firms need more than just data and information – they need actionable intelligence,
and this is what marketing metrics strive to achieve.
The marketplace is becoming increasingly competitive and marketing metrics help
pinpoint problems and opportunities, thus enabling the firm to respond quickly
and with competitive strategies underpinned by these metrics.
Marketing metrics help translate intangibles into value.
7.5 THE EVOLUTION OF MARKETING METRICS
Since the 1960 seminal work of Theodore Levitt entitled Marketing myopia,5 seen by
some as the beginning of the modern marketing movement, marketers have largely
been right-brained creative individuals focused on mixing together an attractive blend
of marketing elements that will appeal to their consumers. Even in these early days,
the need to measure marketing management mainly through the use of research was
outlined by Roberts in a 1957 article he penned, entitled ‘The role of research in
marketing management’.6 Already, more than a half-century ago, Roberts emphasised
the need to use technical tools such as mathematics, logic and statistical inference to
address marketing challenges. Today, market research can contribute to creating metrics
that help the marketing manager assess situations, control the marketing activities of
the firm and support marketing decision-making.
Mathare7 in his Master’s dissertation on marketing metrics argues that:
… the question of marketing metrics has long been on the minds of marketing researchers
and practitioners.
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He points out that in 1979, Churchill already lamented the fact that ‘Marketers indeed
seem to be choking on their measures.’8 He further draws on the work of Clark9 to
outline the evolution of marketing metrics through the following phases:
•• Single financial output measures such as profits, sales revenue and cash flow measure
the productivity of marketing efforts in producing positive financial results.
•• Non-financial measures include market share, quality of services, customer
satisfaction, customer loyalty and brand equity. These measures seek to escape,
or add to, the purely financial ones, which were regarded as historical and placed
no emphasis on the future of the firm. It was argued that if a firm has a loyal
and satisfied customer base, they would increase revenue and lower marketing
costs because these customers are easy to retain and, less expensive to serve. Brand
equity allowed firms to charge premiums and lower risk, and could be used to
expand into new product categories. These non-financial measures highlighted
above are the main focus of this chapter.
•• Input measures include marketing assets, marketing audits, marketing implemen­
tation and market orientation. Marketing audits aim to systematically evaluate the
appropriateness of a firm’s marketing activities and assets given its position, while
market orientation refers to the extent of use of market information in a firm.
•• Finally, there are multiple measures such as efficiency, effectiveness, multivariate and
conjoint analysis.
Rust et al10 looked into the future, arguing for a greater emphasis on models that
link marketing tactics to the financial impact on a firm. The reality is that the field of
marketing metrics is still in a state of flux. Perusing the literature reveals that authors
often hold very different views as to what needs to be measured and how to measure
these aspects of marketing (in other words, the formulae often differ as well).
7.6 THE FIELD OF MARKETING METRICS
Marketing is a fairly broad topic and there are many different aspects that need to be
monitored. Farris et al11 discuss some 50 marketing metrics, while Davis12 refers to
103 metrics. Generally, however, all these metrics can be ordered into at least 11 broad
categories. Operational metrics and strategic metrics are not exclusive categories, but
include many of the broad categories. These 13 categories are:13
1. Financial metrics. These metrics come from the firm’s accounts and are common
metrics found in financial accounting (profit, net present value, etc).
2. General marketing metrics. These metrics are general marketing metrics used for
marketing planning, and include market share, market penetration, market growth,
etc.
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3. Customer-related metrics. These metrics include customer acquisition costs, customer
retention costs, customer lifetime value, churn rates and more.
4. Brand metrics. The best known of these metrics are brand value and brand equity.
5. Sales and sales-force metrics. In these metrics one would encounter cost per call,
average sales revenue per call, conversion rates, etc.
6. Product metrics. Cost and price fit in this category, as do product category volume,
trial, product performance, etc.
7. Advertising and promotion metrics. These metrics include advertising to sales ratios,
reach, frequency, response rates and conversions rates.
8. Price and pricing metrics. Price is the obvious metric, but costs, profit, margins and
breakeven analysis go together under price metrics.
9. Channel metrics. These metrics examine location performance, channel cost and
channel coverage, and make channel comparisons (in other words, which channel
performs the best).
10. Competitive metrics. Cost of purchase, price, product performance and share of
wallet fit into this category.
11. Online metrics. This kind covers the new world of the web and includes hits, page
views, visitors, unique visitors, time spent on site, bounce rates, conversion rates,
etc.
12. Operational metrics. This is a category of metrics that is used to measure short-term
marketing activities such as measuring the number of visits to a particular store
per day or the number of purchases made per day. This is not a single exclusive
category of metrics and many of the other categories of metrics discussed above may
be classified as operational metrics. Operational metrics may vary from company
to company depending on the nature of the product and the sector involved. For
example, in the case of an avocado farm, the quality or size of the fruit may be an
operational metric that influences product classification (for example standard or
premium fruit) and price on a day-to-day basis. This same metric could also be
classified as a product metric.
13. Strategic metrics. Similar to the operational metrics mentioned above, some
of the metrics are of a strategic rather than operational nature. They guide the
firm’s longer-term marketing activities rather than the day-to-day operations. For
example, the measure of the success of all of the firm’s marketing efforts is more
strategic in nature, rather than operational. As with operational metrics, strategic
metrics are not a separate category of metrics but include many of the metrics
mentioned above.
It is important when applying marketing metrics to the activities of the firm to define
what you want to measure. The first step is to define your market. You may, for example,
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want to segment the market according to product type, product category, geography
or channel. You may want to include a second level of segmentation. For example, you
may want to segment the market according to rural versus urban areas, or by region,
and then by product type. This is a sensible step to take because it is unlikely that
customers in these various segments will function similarly or buy similar products.
You would then apply the various metrics in each segment and add them all up to get
to a total. It makes sense not to have too many segments otherwise your analysis may
become too complex.
It is also important to realise that the task of compiling marketing metrics can be
tackled from several different aspects. Lamas & Sulé14 draw on the academic literature
around marketing metrics to argue that marketing metrics can be classified into
different categories, namely financial versus non-financial, one-dimensional versus
multi-criteria, input, management and output measures, hard versus soft, and tangible
versus intangible. The literature suggests that there is no clear-cut, standardised set of
marketing metrics, and most firms will need to develop or adapt marketing metrics to
suit their own needs.
7.7 FROM METRICS TO BIG DATA
Another phrase that has become very popular is big data. Big data can be defined as
‘a term describing the storage and analysis of large and/or complex data sets using a
series of [mathematical and statistical] techniques’.15 In the case of marketing, the data
sets are inevitably marketing data sets, and the analysis includes marketing research
and marketing analytics, while the output generated includes marketing insights and
marketing metrics. Essentially big data is about gathering data from inside and outside
the company (much of this data is being gathered as a matter of course anyhow) and
then to make sense of this data, in other words, to extract value from the data that
can then be used strategically. Although the concept of data mining has been around
for some time, Prof Reibstein at the University of Pennsylvania, one of the leaders in
the field of marketing analytics, metrics and big data, suggests that the world is at the
embryonic stage in the process of quantifying marketing activities.16
The danger of big data
The world of data is upon us and it is not going to get smaller. The world will simply
generate more and more data, especially with the advent of new technologies such
as the Internet of Things, new electronic devices such as 3-D printers, virtual reality
headsets, voice recognition, wearable technologies, online applications, as well as from
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digitally enabled goods ranging from fridges to cars, clothes and personal devices.
Nowadays autonomous software is able to provide more accurate cancer predictions,
legal advice and medical analyses than humans can. Google is able to predict with
considerable accuracy what individuals will do tomorrow, even before the individuals
themselves know it, simply by analysing their search patterns and interests. All of
these developments are built on data, and this data needs to be managed, analysed and
interpreted.
While big data may represent considerable opportunities for entrepreneurs, it also
represents challenges in processing and managing this data. The terms ‘information
explosion’ and ‘information overload’ have been with us for some time already, but
these concepts are becoming more and more disruptive. There is simply too much
data and the challenge is managing this data and extracting relevant metrics from this
data. Otherwise the danger is that one simply creates even more data that adds to the
information overload, rather than making it clearer.
The challenges dealing with big data include out-of-date data, misinterpreting the data,
using the wrong or insufficient analysis, creating irrelevant metrics, and misinterpreting
the metrics. Metrics can also result in ‘tunnel vision’ in which marketers focus so much
on a few key metrics that they lose sight of other developments within their respective
internal and external environments. Marketers may also get a false sense of security
from the metrics they have created and if those metrics indicate that all is in order, then
surely it must be! Over-reliance on metrics may also restrict innovation and change if
the metrics suggest that all is in order and, as a result, the company in question becomes
complacent. Thus the challenge of big data and metrics is to focus on managing the
creation and application of this data and being flexible about its use (in other words,
use the metrics, but realise that they can and will change, and that managers need to
constantly look out for new and meaningful metrics).
7.8 STRATEGY AND METRICS
In the discussion above, the chapter alluded to the fact that metrics are necessary to
drive strategy; that is, metrics are an input to strategy. At the same time, metrics serve as a
measure of the success of strategies by linking marketing strategy to financial outcomes,
thus metrics can also be an outcome of strategy. The same metric can fulfil both tasks.
For example, the return on marketing investment (ROMI) for an existing marketing
campaign can serve as an input metric and drive subsequent marketing strategies that
either focus on creating a new campaign to replace the existing one because it was not
very successful, or adapting/adjusting the existing campaign to maximise its benefit for
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the firm (or perhaps even keeping the existing campaign as is, because it is doing so
well). At the same time, ROMI can be used as a measure of the success of a marketing
campaign that, in turn, is the result of a marketing strategy implemented by the firm.
In the latter instance, ROMI serves as an output or measure of a marketing strategy that
has been implemented.
The role of marketing metrics in driving strategy or measuring strategic performance
has been enhanced in recent years for several reasons. In the first instance, technology
improvements in every aspect of life – from personal to business – have resulted in
devices being created that can measure activities in every facet of what we do. For
example, Polar and Garmin have now created sophisticated satellite-driven watches that
can record a multitude of aspects of a runner’s or athlete’s performance. Casual runners
as well as high-performance athletes can now analyse every aspect of their performance
as a result of these devices. Similarly, in-store cameras, traffic trackers, advanced pointof-sale machines, and other similar devices, are being created and used every day to
generate data that can be used for marketing purposes. Coupled with this explosion in
technology is the focus on data capture and mining in recent years. While data mining
has been a topic in literature for many years, it is really coming to the fore now as
managers seek out new ways to create competitive advantages for their respective firms.
Marketing insight gained from tracking and measuring customers, marketing activities,
competitors and even industries, and then using this insight to drive marketing strategy
and is one way of achieving a competitive advantage for the firm.
A second contributor to the growing importance of metrics in business today has
been the advent of the internet and the web. The ubiquitous nature of the internet,
combined with the real-time ‘24/7’ linkages that the internet affords businesses, thus
enabling them to reach out and track customers wherever they are, even in their social
interactions with their friends, colleagues and families using social media, brings a
new dimension to the world of marketing metrics. The digital nature of the web and
social media makes them perfectly suited for gathering data and driving marketing
measurement and ultimately strategy. At the same time, the web and social media serve
as additional, highly measurable marketing and distribution channels. With more than
two billion people already online (28 million in South Africa), the growth in the online
realm underscores the growing role of marketing measurement in business today.
A third consideration is the growing understanding of marketing and how to deliver
customer value in the literature of today. New opportunities are being uncovered all the
time, such as referral marketing, green marketing, social marketing, online marketing,
etc; with these new opportunities come new metrics.
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Strategic marketing models and metrics
In the planning of marketing strategy, numerous marketing planning models may be
used. Examples of such strategic planning models are outlined in Table 7.1, and some
of these models are discussed elsewhere in this book.
TABLE 7.1 Examples of strategic marketing planning models17,18,19
Model
Alternative name
or acronym
Purpose
The Market Growth–
Market Share matrix
The Boston Consulting
Group (BCG) matrix
This popular model attempts to categorise
a firm’s products according to whether they
are stars, cash cows, questions marks or dogs
based on their market share−market growth
situation
The Market
Attractiveness-Enterprise
Strength model
The McKinsey model
This model allocates products or strategic
business units on a grid according to their
enterprise strength versus their market
attractiveness measured by the rate of return
on investment
The Awareness-InterestDesire-Action model
AIDA
This model provides firms with guidelines on
how to reach out to customers and to get
them to respond when advertising
The Product-Market
matrix
The Ansoff matrix
This model identifies alternative growth
strategies by examining existing and potential
products in current and future markets
The Diffusion of
Innovation model
DOI
This model provides a stages approach to the
adoption of innovative products by customers
The DifferentiateReinforce-InformPersuade model
DRIP
This is a sequential model aimed at engaging
customers through marketing communications
Porter’s Five Forces
model
Porter’s diamond
This model is used to identify the industry
forces in play that are likely to impact on a
firm’s activities within the industry in question
The Price–Quality
strategy Model
The Kotler model
In this model, a firm’s products are compared
with their competitors in the eyes of
customers in terms of a price/quality trade-off
The Product Life Cycle
model
PLC
This module provides a way of tracking the
natural developmental life cycle that most
products follow
Ü
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Model
Alternative name
or acronym
Purpose
The SegmentingTargeting-Positioning
model
STP
This is a model to guide the three-stage
process that companies should follow to find
and serve the best niche in the marketplace
for their products
The StrengthWeaknessesOpportunities-Threats
model
SWOT
This model helps firms identify their strengths
and weaknesses in the context of the
opportunities and threats that exist in the
marketplace
Unique Selling
Proposition
USP
The USP is a way of identifying one key
element that differentiates one product
from another (normally its competitors). An
example might be its durability (for a farm
tractor), its light weight (for a travel allweather jacket), or the speed of delivery for a
pizza franchise
The Loyalty Ladder
model
The Situation-ObjectivesStrategy-Tactics-ActionsControl framework
The model outlines the steps that customers
follow in becoming brand advocates
SOSTAC
This is a planning framework to use when
creating marketing plans
What is important about these strategic models from a metrics point of view is that
metrics are associated with every one of these models. Without metrics, these models
would not be very effective. In some instances, the models are built directly on market
metrics. For example, the popular BCG model uses market growth rate and relative
market share as its key measures. These two inputs are typical marketing metrics and
without them the model cannot exist, thus marketing metrics play a key role in the use
of this particular strategic planning model.
In the case of the Loyalty Ladder, however, marketing metrics do not directly serve
as inputs to the model. The model is really a descriptive loyalty model that classifies
customers as being either prospects, customers, clients, supporters or advocates. The
idea behind the model is to classify potential and existing customers according to the
above categories and to try to get more prospects to become customers and ultimately
brand advocates. While marketing measures may not necessarily be used initially to
classify individuals into one of these categories, once the classification is done the firm
would want to know what percentage of their target audience falls into each category
and, over time, what the movement is from one category to the next. Both of these
questions require quantitative measures (that is, marketing metrics, for example the
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percentage growth in brand advocates), thus in the instances where marketing metrics
are not a direct input into a model, they inevitably are used to measure the effectiveness
of a marketing strategy based on the model concerned.
7.9 SELECTED MARKETING METRICS
In this section, we introduce and examine a number of different metrics.20 Note that
this is not a complete list, nor is it a definitive one. There is no specific order to these
metrics, but they are metrics that you will often encounter in the field of marketing and
you should know what they mean and what they involve.
7.9.1 Revenue
This metric refers to the earnings or income generated by a firm. It can either be
determined for a particular product type, for a small business unit (SBU) or for the firm
as a whole.
Formula
For a particular product type:
Revenue (R) is measured by price (P ) 3 quantity sold (Q ) in a particular time period (t ),
or
R 5 P 3 Qt
For the firm as a whole:
Total revenue combines all the revenue generated by each product type or SBU and is
calculated as follows:
R 5 (P1 3 Q1t) 1 (P2 ×Q2t) 1 (P3 3 Q3t) 1 … 1 (Pn 3 Qnt)
From the formula, it is clear that revenue, although generally
considered to be a firm-wide metric, can also be used to
calculate the revenue generated by a particular product or
business unit. It is therefore advisable to qualify revenue as
‘total revenue’ if it refers to the firm as a whole. Revenue is
an important metric, as it is used in the firm’s accounting
activities and it represents a key indicator of performance.
As long as revenue exceeds expenses, the firm should be
successful (although other factors such as cash flow may
also affect success).
TAKE NOTE:
Marketing metrics can be
classified into different
categories, namely:
„„ Financial vs nonfinancial;
„„ One-dimensional vs
multi-criteria;
„„ Input management vs
output measures.
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7.9.2 Gross profit
This metric refers to the profit generated by a firm. Profit is normally divided into gross
profit and net profit.
Formula
Gross profit 5 total sales 2 cost of goods sold
Companies strive to generate not only revenue, but more importantly, profit. A positive
profit means that the firm is able to pay the costs that it incurs in producing the goods
or services in question. As we have mentioned, profit can be divided into two main
categories, namely gross profit and net profit. Gross profit usually refers to the total
sales minus the cost of those sales. It is the profit associated with selling the goods and
services that the firm produces minus the costs associated with producing and selling
the goods or services in question, but before other accounting and tax deductions
are made. These accounting deductions may include accounting concepts such as
depreciation.
7.9.3 Net profit
This metric is used to calculate the net profit generated by a firm (bearing in mind that
profit can be classified either as gross profit or net profit).
Formula
Net profit 5 gross profit 2 overheads (fixed costs) 2 interest payable – any once-off
items that may be payable in a particular period
Net profit is a financial metric that is equally important to the marketing manager.
Synonymous with the ‘bottom line’, net profit indicates whether, after all the expenses
of the firm have been taken into consideration (in other words, have been paid), the
company is still making a profit (in other words, there is money left over). The net
profit can be determined from an income statement. In some countries such as South
Africa and the UK, net profit is commonly viewed as being a pre-tax profit (in other
words, tax will still need to be deducted from this amount to arrive at the distributable
profit that the owners and shareholders can take home). In other countries (the United
States, for example), net profit is seen as an ‘after tax’ figure.
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7.9.4 Net profit margin
This metric represents the ultimate profitability of the firm, expressed as a percentage.
Formula
net profit (R)
firm’s turnover (R)
Net profit margin (%) = ____________
​    ​× 100
Net profit margin is a useful metric for comparing one period against another or
comparing one company or even industry with another. It helps managers to decide
whether the firm is doing relatively well or not.
7.9.5 Return on investment (ROI)
This metric answers the question: ‘How much profit have I made from an investment?’
Formula
net profit (NP) from a particular investment
​
Return on investment (ROI) 5 _____________________________
​  investment
(I) made to generate profit
Return on investment (ROI) is one of the most important of all financial or marketing
metrics and is used extensively by managers to justify expenditure. You will see the
acronym ROI very often in newspapers, magazines and textbooks. ROI is a ‘point-intime’ metric; that is, it indicates what the return is on an investment at a particular
point in time. It does not give any indication as to the long-term benefits of a particular
investment, and some investments are by their nature ‘long-term’.
7.9.6 Return on marketing investment (ROMI)
This metric focuses specifically on determining the return on marketing investments. It
strives to apply the ROI concept to marketing.
Formula
Return on marketing investment (ROMI)
incremental revenue attributed to a particular set of marketing activities
5 ________________________________________________
​
​
the cost of these marketing activities (marketing spent both directly and indirectly)
total revenue
Quick formula: ROMI 5 ​ ____________
​
marketing budget
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7.9.7 Margin return on marketing investment (mROMI)
This metric is used to measure the value generated by a specific marketing activity.
Formula
Margin return on marketing investment (mROMI) 5 ROMI 3 contribution margin
It asks the question: ‘What incremental profit do I get from an incremental (or specific)
outlay on a defined marketing activity?’ It is useful, therefore, to judge whether a
particular direct marketing campaign has been successful or not.
7.9.8 Market growth
The purpose of this metric is to determine whether the firm sold more in the current
year compared with the preceding year.
Formula
total sales this year 2 total sales last year
​3 100
Market growth 5 _________________________
​
total sales last year
or put differently:
change in sales from Y1 to Y2
Market growth 5 ____________________
​
​
total sales in Y1
Market growth is another important metric that managers use. It is an indication of
whether the firm is growing or declining.
7.9.9 Market share
This metric compares the revenue of the firm with total revenue of the market in
question over a period of time.
Formula
company sales (R) in period (t)
​3 100
(Rand) market share (%) 5 ________________________________
​  total
sales within feasible market (R) in period (t)
change in sales from Y1 to Y2
(Volume) market share (%) 5 ​ ____________________
​3 100
total sales in Y1
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The purpose behind measuring market share is to establish the relative position or
share of the firm within the broader marketplace. In other words, it helps to understand
the relative success of the firm in penetrating the marketplace (when compared with
the rest of the market). A growing market share is generally desirable.
When measuring market share, it is important to define what one means by marketplace.
It needs to be a clearly identifiable market that is feasible for the firm to enter and in
which to achieve sales. The market can be defined as broadly as a region or country,
or an industry, including any substitute industries, or as narrowly as a specific market
segment. The choice of market depends on which level gives the best insight into
the firm’s competitive position. If a firm operates across several different industries,
however, it will only make sense to measure market share per single industry and not
for all the industries as a whole, as these relative market shares in each industry may
differ dramatically and they may not be seen conceptually as a single marketplace.
Let us illustrate this by means of an example. Assuming that a firm produces bottling
equipment for the beverage industry, it would be feasible and logical to see the entire
bottling equipment industry as a single marketplace against which to compare the
firm’s sales, but it would not make sense to compare the firm’s sales with the sales in the
beverage industry as a whole (they are two different and separate markets).
Relative market share, a metric not discussed in detail here, attempts to compare one
firm’s market share with that of its nearest rivals. Be aware that market share and market
penetration are often confused. Market share is about the rand value or volume share
of total sales in a marketplace, while market penetration is about the firm’s number
of customers in the total potential population of appropriate customers (see Section
7.9.10, where market penetration is discussed).
7.9.10 Market penetration
Market penetration is a measure of the current adoption of a product or service
compared to the total theoretical market (or population of customers) for that product
or service.
Formula
number of customers who have bought the firm’s products in a particular period
​
Market penetration 5 __________________________________________________________
​
potential number of customers who could buy the products in question in a given period
Market penetration is often misunderstood and commonly confused with market
share (volume). It is important to stress that market penetration is about numbers of
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customers and not about the rand value or volume share of a theoretical market set
(the latter relates to market share, not market penetration). Put differently, market
penetration is about the actual demand for the firm’s products (that is, measured by the
number of customers that bought the firm’s product) versus the total potential demand
for the product in question (that is, the total number of potential customers in the
marketplace). Market penetration is often difficult to measure, as the firm will probably
have to measure the number of customers it has (not easy when many of them buy on
a cash basis), followed by the potential population of customers, which will also need
to be estimated somehow (which is also not easy to do).
7.9.11 Marketing costs
This metric attempts to add together all the marketing costs that a firm incurs.
Formula
Marketing costs 5 m
arketing planning costs 1 marketing research costs 1 product
development costs 1 product R&D costs 1 product packaging and
labelling costs 1 pricing expenses 1 logistics, transportation and other
distribution costs 1 marketing promotion costs 1 selling and sales costs
Clearly, there are a large number of marketing costs associated with the marketing
activities of most firms. A marketing cost analysis will strive to determine all the actual
costs incurred in marketing and distributing products. The unit marketing cost takes
all of the above costs and divides them by the number of units sold (not necessarily
produced, as those produced may eventually not be sold).
7.9.12 Mark-up
This metric measures the difference between invoice cost and selling price, which is
then normally stated as a percentage of costs. It is often confused with ‘margin’ as they
address the same basic amount, but just from different perspectives (in this case from
the point of view of cost).
Formula
Mark-up = unit selling price – unit cost
unit selling – unit cost
​3 100
Mark-up % 5 _______________
​
unit cost
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Formula
Unit margin 5 unit selling price 2 unit cost
unit selling price 2 unit cost
​3 100
Unit margin % 5 ___________________
​
unit selling price
Mark-up may be expressed either as a percentage of the selling price or the cost price.
It is supposed to cover all the costs of doing business plus a profit. Mark-up is thus
the additional amount added to a sales price in order to cover overheads, profit, excess
costs, etc.
7.9.13 Unit margin
This metric measures the ‘profit margin’ per item of product that the firm produces,
which is then normally stated as a percentage of the selling price. It is often confused
with ‘mark-up’ as they address the same basic amount, but from different perspectives
(in this case from the point of view of price).
In this instance the unit margin includes both variable and fixed costs. This metric is
useful for understanding what each product contributes to total profits and also serves
as a useful guide for pricing and promotion. This measure would normally be applied
to a particular type of product – it would be confusing to apply this metric to different
types of products, which may have different costs and different margins.
7.9.14 Margin percentage
This metric indicates the profitability of a particular product in percentage terms.
Formula
unit margin
Margin % 5 ________
​  unit price ​3 100
We have said that unit margin incorporates both variable and fixed costs. This metric
is useful for understanding the profitability of a particular product, with higher
percentages representing more profitable products. This measure would normally be
applied to a particular type of product – it would be confusing to apply this metric
across different products. It is a useful measure to compare the profitability of products
across a range of different products. It can be used to determine the profitability of an
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incremental increase in sales and it serves as a guide in making pricing and promotion
decisions.
7.9.15 Total margin
This metric measures the ‘profit margin’ for all products that the firm produces.
Formula
Total margin 5 total revenue 2 total costs
In this instance, the unit margin includes both variable and fixed costs. The total margin
metric is useful for understanding what each product contributes to total profits and
also serves as a useful guide for pricing and promotion. This measure would normally
be applied to a particular type of product – it would be confusing to apply this metric
to different types of products, which may have different costs and different margins.
7.9.16 Number of customers
Although it may seem strange to consider this as a metric, it is actually a very important
one, as customers are what a business is all about. Without customers, the firm has no
business.
Formula
Number of customers 5 the number of people or businesses that purchased from the firm
in a specified period of time, normally a year
Knowing the number of customers a firm has is the first step in growing the business.
Simply knowing the number of customers is already good information, but it would be
even better if the firm knew the names and profiles of its customers.
In reality, it is actually quite difficult to determine the number of customers a firm has.
In the case of cash customers, the firm may never actually learn the customer’s name,
but the number of till transactions or cash receipts will give a clue as to how many
customers the firm has. While it is important to count customers only once even if they
may have purchased more than once during the period in question, in the case of cash
customers, the firm will seldom know if a customer has purchased more than once.
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It is also important for a firm to define clearly what it means by ‘customer’. For
example, when Microsoft negotiates an educational licence with a university, for the
university’s staff to use its operating system, is this one customer (the university) or
many customers (the staff)? Similarly, when a gym sells a family membership with, for
instance, the father paying the account, is this one customer or several? A customer
may take many different forms, varying from an individual or a group of individuals, to
a legal entity such as a business or division of a business, a government department, a
church or other non-profit entity.
7.9.17 Cost per lead
This metric determines the marketing or advertising cost for every lead that the firm
generates.
Formula
cost of specific marketing or advertising campaign
​
Cost per lead (per campaign) 5 _________________________________
​
number of leads obtained
This metric, which is normally calculated per campaign, indicates how expensive or
effective a specific marketing or advertising campaign is. The higher the cost per lead,
the less effective the campaign is. Cost per lead is also referred to as ‘lead acquisition
cost’. It is important that marketers know the cost per lead for every form of advertising
and promotion that they use. The cost per lead is only part of the answer. You still need
to know how many of these leads are likely to become actual customers and for this
you need to calculate the conversion rate (see Section 7.9.18). It is sometimes difficult
to know whether a lead has been generated because of a specific campaign, and it
therefore makes sense to ask customers what made them interested in buying from the
firm (you could simply ask prospects exactly what marketing activity attracted their
attention to the firm).
In addition to calculating cost per lead, it is also essential for the firm to have some
means of gathering information on leads. A good way of capturing the source of leads
and other pertinent information for the prospect database is to use lead forms. A
lead form is a paper or electronic form that is filled out when a lead is received. If
a prospective customer calls in or sends an email, the person responsible for taking
the call or responding to the email fills out the form. There can also be an enquiry
form on the firm’s website. An electronic form can be linked to the business’s contact
management system or marketing database. Paper forms that are filled out by hand can
be entered into the database for subsequent sales and marketing activity as the lead
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moves through the sales cycle. Lead forms are also valuable for management follow-up
on leads assigned to the sales force. The contact management database must have a field
for the source of lead. It is also advisable to total all leads each month to obtain a ‘leads
per month’ value that would indicate the overall success of the firm’s marketing efforts.
If the firm is getting too many or too few leads per month, management may need to
adjust the marketing effort. When these leads become customers, the database should
be updated accordingly.
7.9.18 Conversion rate
This metric is normally applied to sales staff or the sales team, and represents the
percentage of the leads generated (that is, prospects) that actually buy something from
the firm within a period of time.
Formula
Conversion rate (%)
number of prospects that become customers (that is, buy from the firm within a particular period of time)
​3 100
5 _____________________________________________________________
​
total number of prospects or leads generated in a particular period
Clearly, leads or prospects are of no value unless they buy from the firm. Any leads
generated as a result of a marketing or advertising campaign now need to be converted
into actual sales. Normally, this is when the sales team springs into action and
approaches potential customers in order to persuade them to buy from the firm and to
become actual customers. The conversion rate is a powerful metric for comparing the
effectiveness of each member of the sales team. A sales person with a low conversion
rate uses up more leads per sale than the sales person with a much higher conversion
rate, thus ultimately reducing the firm’s profits.
7.9.19 Recency
This metric attempts to measure the time since the customer’s last purchase.
Formula
the number of days
weeks/months/years since a customer’s last purchase
​
Recency 5 ___________________________________
​
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The higher the number, the more worrisome it is. A firm should strive to encourage
customers to buy as regularly (or as often) as possible, meaning that the recency value
will fall. The period used will depend on the nature of the products sold (for example,
capital equipment may only be purchased every five or ten years, whereas fruit and
vegetables may be purchased daily or weekly). Whenever possible, the firm should
strive to lock the customer into a contract which guarantees regular purchases (such as
an airtime contract).
7.9.20 Retention rate
This metric indicates the percentage of customers that remain active customers of the
firm from one period to the next.
Formula
number of customers lost during period
number of active customers at start of period
Retention rate for a single period 5 1 2 ______________________________
​      ​
Retention rate for multiple periods 5
(number of customers at end of period 2 number of customers at beginning of period)
sum of number of customers at end of each period
​
1 2 ​ ________________________________________________________
From the above formula, one can see that this does not take any new customers one
might have gained during the period in question into consideration. Taking new
customers into consideration relates to the churn rate. The retention rate has to do with
keeping existing customers. One minus the retention rate represents the churn rate (see
Section 7.9.21). The period in question is normally a year.
7.9.21 Churn rate
This metric attempts to measure the percentage of a firm’s existing customers who
deliberately stop buying from the firm or choose to buy from another firm in a given
period.
Formula
number of customers lost
​
Churn rate for period 5 _________________________________________________
​
(number of customers at end of period 2 customers at beginning of period)
One minus the churn rate is the retention rate (see Section 7.9.20). Most models can be
written using either the churn or the retention rate. If the model uses only one churn
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rate, the assumption is that the churn rate is constant across the life of the customer
relationship. Churn rate is also sometimes referred to as the customer defection rate.
7.9.22 Period
This is a unit of time used in various metrics.
Formula
Period (t) 5 year/quarter/month/week/day
A year is the most commonly used period. Some metrics are single-period metrics,
while others, such as customer lifetime value, are multiperiod metrics, looking several
years into the future. In practice, analysis beyond five to ten years is viewed as too
speculative to be reliable. The number of periods used in a calculation is sometimes
referred to as the model horizon.
7.9.23 Discount rate
This metric measures the cost of capital used to discount future revenue from a customer.
Formula
Discount rate 5 (1 1 (interest rate 3 risk factor))n
Where n
5 number of years you have to wait for your money
The discount rate is the cost of capital used to discount future revenue from a customer.
Discounting is an advanced topic that is frequently ignored in customer lifetime value
calculations. The current interest rate is sometimes used as a simple (but incorrect)
proxy for discount rate. The risk factor is a ‘guestimate’ on the risk of the customer
defaulting on payment.
7.9.24 Customer acquisition cost (CAC)
This metric calculates the average marketing and sales costs associated with acquiring
a new customer.
This is a useful metric to determine whether the amount spent on marketing or
advertising to new customers is reasonable, but it may need to be considered in
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conjunction with other metrics such as cost per lead, conversion rate and customer
lifetime value (CLV). Some firms simply take their total marketing spend and divide
this by the number of new customers acquired in a particular period, but this is not
accurate, as some of the marketing spend will be used for PR, brand building, and other
marketing expenses aimed at existing customers (for example, getting them to spend
more).
Bear in mind that you will need to define clearly what constitutes an acquisition expense,
as opinions differ. For example, it is suggested that rebates and special discounts may
not represent an actual cash outlay, yet they have an impact on cash (and presumably
on the customer’s purchasing activities). Also bear in mind that before customers
actually buy from a firm, they normally become interested or potential customers (that
is, prospects or leads), therefore it may be necessary to calculate a cost per lead value
first, followed by a conversion rate to determine the customer acquisition cost.
Formula
Customer acquisition cost
total marketing or advertising investment or cost aimed at acquiring new customers (that is, a specific campaign)
​
5 __________________________________________________________________
​
number of new customers as a result of this marketing or advertising campaign
total marketing or advertising investment
Customer acquisition cost 5 ​ ___________________________
​
number of new customers
7.9.25 Customer lifetime value (CLV)
This metric calculates what the present value is of customers, assuming they continue
to buy from the firm for their lifetime; in other words, how regularly customers buy
from a firm and what their average spend is each time they buy.
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Formula
Customer lifetime value 5 [((average value of a purchase 2 the average costs to
service each purchase) 3 (the estimated number of times per year a customer purchases
from the firm 3 the number of years that the firm expects to keep the customer)) 2 the
cost of acquiring a new customer 1 (the cost of acquiring a new customer 3 the number
of new customers referred by the first customer)] 3 a customer adjustment factor*
* The customer adjustment factor is an estimate usually provided by management and is a
weight < 1or > 1. A figure higher than 1 suggests that the CLV will grow with time, while
a figure less than 1 suggests that the CLV will ‘shrink’ over time. (The customer adjustment
factor can be adjusted to include the discount rate.)
or
(margin) 3 retention rate %
​
​
Customer lifetime value 5 _________________________
(1 1 discount rate % 2 retention rate %)
The second formula is proposed by Farris et al.21
Customer lifetime value, also known as lifetime value (LTV) or lifetime customer value
(LCV), is a fairly recent concept that argues that a customer’s value should not be
viewed just in terms of his/her past purchases, but rather in terms of the potential he/
she has to purchase from the firm in the future. It has become an important way of
judging the health of a firm and of measuring how long customers remain loyal to the
firm on average. CLV goes hand in hand with the concept of relationship marketing in
which companies strive to build a long-term relationship with their customers because
of this lifetime value and because it is cheaper to persuade an existing customer than a
new one to buy from the company.
7.9.26 Average price per unit
This metric highlights the average price of a single unit of product sold.
Formula
Average price per unit = __________
​  total revenue  ​
total units sold
In an environment where discounts are often offered or where prices change regularly,
this metric provides an indication of the average price applied to a product, whereas
using the actual unit price (at the time that a calculation is made) may prove misleading,
as the margins across all products sold may be lower than expected. The average price
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per unit metric is useful for understanding the ‘real’ profitability (less discounts) of a
particular product. This measure would normally be applied to a particular type of
product – it would be confusing to apply this metric across different products. It is also
useful in understanding how average prices may be affected by shifts in pricing and the
product mix.
7.9.27 Contribution margin per unit
This metric highlights the ‘contribution’ that is available to help cover fixed costs.
Formula
Contribution margin per unit 5 unit price 2 unit variable cost
The contribution margin does not include fixed costs, only variable costs. This metric
is useful in understanding the profit impact of changes in volume. It can also be used
to calculate the breakeven level of sales.
7.9.28 Unit breakeven sales level
This metric determines the minimum sales that are necessary to cover fixed costs
associated with a particular product type.
Formula
fixed costs associated with the product in question
​
Unit breakeven sales level 5 _________________________________
​
contribution per unit
This is a useful metric for understanding what the minimum sales are that the firm
needs to achieve, and that will contribute sufficiently to cover fixed costs associated
with a particular product type.
7.9.29 Total breakeven sales level
This metric determines the minimum sales that are necessary to cover fixed costs across
all products.
Formula
total fixed costs
​
Total breakeven sales level 5 _____________
​  contribution
margin
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This is a useful metric for understanding what the minimum sales levels must be across
all products that the firm needs to achieve, and that will contribute to covering all fixed
costs.
7.9.30 Target volume
As the breakeven sales level calculation does not include profit, the formula is adjusted
to determine the sales level in units that are sufficient to cover both fixed costs and the
firm’s profit target.
Formula
total fixed costs + profit required by firm
​
Target volume 5 ___________________________
​
contribution per unit
This is a useful metric to ensure that the sales objectives will enable the firm to
achieve its required profit. The formula takes both fixed costs and variable costs into
consideration. The variable costs form part of the calculation of ‘contribution per unit’
which in turn is used to calculate target volume. It is also worth noting that there are
limits to the number of units a firm’s capital investment (embodied in its fixed costs)
can produce. If the target volume exceeds the production capacity of the firm, the firm
may need to make additional capital investment, thus increasing the ‘total fixed costs’
component of the above formula, resulting in a different target volume calculation. If
the firm does not want to increase its total fixed costs, it can either choose to take a
smaller profit or increase its contribution per unit by decreasing its variable costs.
7.9.31 Target revenue
This metric identifies the desired rand amount that a firm wishes or needs to achieve
per period.
Formula
Target revenue 5 target volume 3 selling price per unit
In order to calculate target revenue, the firm uses its target volume estimate and
multiplies this by the selling price per unit. Note that both target revenue and target
volume are estimated figures (that is, the estimated number of items sold times the
price per item equals the estimated revenue). Target volume, as we have seen, is based
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on a formula which takes into consideration unit selling prices, variable costs, fixed
costs and desired profit.
7.9.32 Average number of purchases per period
The purpose of this metric is to establish on average how many purchases are made
from the firm for each period.
Formula
total sales of period
​
Average number of purchases per year 5 _____________
​  average
value of sale
It is likely that this metric will need to be calculated by product type, as the average value
of a sale may differ from one product to another. This provides a useful measure that
can be used as an input in other formulae and also indicates the number of customer
interactions with the firm per period.
7.9.33 Average number of purchases per period per customer
The purpose of this metric is to establish on average how many purchases a customer
makes in a period.
Formula
total sales for period/average value of sale
number of customers
​
Average number of purchases per year = ____________________________
​
This metric indicates the number of customer interactions with the firm per period. It is
likely that this metric will need to be calculated by product type, as the average value of
a sale may differ dramatically from one product to another. Also, customers are buying
different categories of products.
7.9.34 Average spend per purchase
This metric attempts to measure how much each customer spends per purchase, bearing
in mind that a customer may buy several different products at each purchase occasion.
Formula
total value of purchases (or sales)
number of individual purchases (or sales)
Average spend per purchase 5 ___________________________
​      ​
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For some firms it is important to get an idea of how much their customers are spending
each time they buy. Think of a restaurant – it would be useful for the restaurant to know
how much each sit-down customer spends on average. If they know this, this figure
can be used to calculate the lifetime value of a customer, as well as measuring the depth
per purchase.
7.9.35 Customer satisfaction
This metric attempts to establish a measure (that is, an index) of customers’ satisfaction
with the firm.
Formula
This is a multidimensional metric that requires customers to be surveyed to determine their
levels of satisfaction. Five to ten questions are best.
Alternatively, there are other satisfaction models one could use, such as the ACSI formula
which states as follows:22
Customer Satisfaction Index (0 2 100) 5 ((Satisfaction 2 1) 3 0.3885 1 (Expectancy 2
1) 3 0.3190 1 (Performance 2 1) 3 0.2925)/9 3 100
The proprietary Net Promoter Score (NPS) is another competing model. Net Promoter
is a registered trademark of Satmetrix, Bain and Reichheld. Based on responses on a
0–10-point scale, customers are grouped into promoters (9 or 10), passives (7 or 8 ) and
detractors (0 to 6). The percentage of detractors is subtracted from promoters, thereby
obtaining a Net Promoter Score (NPS). The exact formula is not available publicly.23
Generally, a firm would use a survey instrument (questionnaire) and analyse the data
collected using methods such as factor analysis and regression analysis. In the United
States, the standard American Customer Satisfaction Index (ACSI) methodology can
be used by firms to compare themselves with industry or geography benchmarks,
and which includes historical trends. Be aware that the terms ‘customer satisfaction’,
‘customer loyalty’ and ‘customer commitment’ are often used interchangeably, but that
customer satisfaction is more about the experience of the customer, while customer
loyalty is more psychological, and customer commitment is more behavioural in that,
if the customer is loyal (represented by a positive mindset), this should translate into a
commitment to purchase (an action or actual behaviour).
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7.9.36 Brand equity
This metric attempts to attach a money value to a brand. There are several approaches
to measuring brand equity, some of which are in the public domain, while others, such
as Interbrand’s Brand Valuation model,24 and Young and Rubicon’s Brand Asset Valuator
(BAV), are proprietary methods.25
Formula
Simple
Brand equity of a particular product 5 (price of the branded product 2 price of a no-name
or generic product) 3 total number of units sold of the product in question.
Moran26
Brand equity 5 effective market share (%) 3 relative price 3 durability (%)
where effective market share is calculated by weighting the share of a market segment by
the segment’s percentage of brand sales.
Relative price is the brand’s price divided by the average market price.
Durability is an estimation of how many of the brand’s consumers will purchase in the
following year.
Interbrand’s Brand Valuation model
Brand earnings = total earnings – earnings from tangible assets
On the one hand, brand value, an intangible asset, normally measures the consumer’s
attitudes about positive brand attributes and favourable consequences of brand use.
Brand equity, on the other hand, is created through extensive and ongoing mass
marketing campaigns, which are supported by competitive products and strong
customer-relationship building efforts. Aaker27 defines brand equity as:
… a set of assets (and liabilities) linked to a brand’s name and symbol that adds to
(or subtracts from) the value provided by a product or service to a firm and/or that
firm’s customers.
In other words, to what extent does the brand itself contribute to the market value of
the firm and to generating successful sales? The benefit of strong brand equity is that it
results in a more predictable income stream; increases cash flow by increasing market
share, decreasing promotional costs and allowing premium pricing; and represents an
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asset that can be sold or licensed to others. Brand equity can greatly affect the buy-out
price of a company.
7.9.37 Online metrics28
The world of the internet, the world wide web, e-commerce and e-marketing brings
with it a whole range of new and confusing metrics that marketers can use to manage
their online marketing campaigns. It is also difficult to decide what metrics to focus
on, especially when the website is simply part of a much wider marketing campaign.
Gathering data in the online world is generally much easier than in the physical world.
The computer software that underlies websites gathers most of the data automatically,
so there is generally no need to undertake additional surveys and research to gather the
data. Indeed, even when calculations have to be made, the software normally does it
automatically for the site owner.
The primary data that web servers gather include:
•• Hits. A web page contains numerous elements such as text, hyperlinks, graphics,
animations, pictures, videos, etc. They are downloaded together and compiled as a
web page in your web browser (for example Internet Explorer). Every one of these
elements constitutes a ‘hit’ – there may be several hits per web page. Although hits
are often used in ‘marketing speak’, they are actually a fairly inaccurate measure.
There are about ten hits per web page on average.
•• Page views. Counting the number of web pages that users view is a more realistic
measure. It means that a user has actually opened up a particular web page in his/
her web browser. This provides an opportunity for the marketing message that a
web page may carry to have its effect on the user (also called a visitor). However,
it does not mean that the user actually reads the page or takes in the marketing
message. What is more, as a single user may open several web pages, page views
are not a true reflection of the number of users that a site receives. Page views are
also called page impressions.
•• Visitors. A visitor is a user who has started a session on a website (in other words,
opened up the first page – usually the home page – and then opens up several other
web pages comprising the website and ultimately leaves the website). One visitor
may view several pages (usually three to five) per visit. Obviously, the more web
pages a user views and the deeper into the site the user goes, the better the site is in
keeping the user there (referred to as the stickiness of the site).
•• Unique visitors. Probably one of the best measures of the popularity of a website is
the number of unique visitors the site receives. A unique visitor is one that may
have visited the site several times per month, but is only counted once during
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••
••
••
••
••
••
••
••
••
••
the period in question. Unique visitors are traditionally counted over a month. Be
aware that some technologies, such as Flash, are not measured as page views, so
page views may be under-recorded.
Return visitors. Web server software can also indicate how often users return to the
website – another important metric that indicates the popularity of the site.
Time spent on the site. Once again, this is another statistic that the server software
can track.
Average number of pages viewed. This is calculated by dividing page impressions by
unique visitors.
Average time spent on each page. Web server software can tell the firm how long users
are spending on each page and per visit.
Referring URLs. This indicates from which websites the user is coming. This is not a
valuable fact in its own right as most users come via their internet service provider,
but it can also indicate whether there are websites with links to the firm’s website
that many users are clicking to get there (for example, from Google or some other
popular third-party website).
From which countries visitors are coming. This may be useful information for
companies that are targeting an international audience.
Search terms. What search terms are customers using on search engines to reach
the firm?
Cookies. It is possible to incorporate ‘cookies’, which are small text files that are
stored on the visitor’s own computer. The browsing behaviour, product searches or
other profile information can be stored in these cookies and retrieved the next time
the person visits the firm’s website. Being able to track the history of online users
has proved an invaluable tool for companies such as Google, Amazon and others.
Clicks on advertisements or other web links (click-through rate). This is an important
piece of information, especially if the firm has a banner advertisement on another
website, is making use of Google advertisements, or perhaps has a link on a page
that the firm would like visitors to click on. The server software can report on
whether users are clicking on the advertisement in order to see what the firm has
to offer – a very promising statistic. Note that the page that the banner or the link
leads to is known as the landing page.
Conversion rate. Just clicking on and visiting the landing web page is not enough.
Are potential customers then being persuaded to do something more, like sign up
for a service or buy a product, make further enquiries (translating into leads) etc,
and if so, how many of these that reach the landing page go further? If the firm also
provides other means for customers to contact it, such as a call-back facility or an
‘0861’ number, the firm needs to coordinate the activities between these different
services.
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••
••
••
••
••
••
Purchases. As websites have the ability to enable online purchasing and payments,
it is also possible to keep track of actual customers.
Track online campaigns. If the firm is making use of Google advertisements or email
advertisements, then it needs to track the success of these online campaigns.
Generally, if the advertisements refer to a specific landing page, then keeping track
of the number of click-throughs to the landing page will give an idea of the success
of the campaign. The firm may want to take this further by tracking actual customer
responses, queries or purchases.
Spend. How much are customers spending as a result of an online campaign and
what is the campaign costing the firm? These statistics can be used to determine the
cost effectiveness of an online campaign.
Bounce rate. The bounce rate is the number of people that land on one page of the
firm’s website and then leave without visiting any other pages. If a firm finds this is
happening to its site, it needs to look more closely. Perhaps the firm is misleading
visitors with its banner advertisement – they might be expecting something else (for
example, do not use ‘Hot Chicks’ as a tag line if you are selling chicken takeaways!).
Errors. It is possible to track errors as well. This will help the firm to know when
something goes wrong.
Bailout rate. This is also sometimes called cart abandonment. A firm that has an
e-commerce website with a shopping cart or some other type of multiple-form
process needs to know when and where potential customers give up so that the
problem can be addressed.
7.10 SUMMARY
In this chapter, you were introduced to the concept and role of marketing metrics,
including online metrics. The chapter outlined the evolution of marketing metrics as
well as some of its benefits. You were then introduced to a number of relevant marketing
metrics. This is not a definitive list, but should help ease you into the important world
of marketing metrics.
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Self-evaluation questions
1. What are marketing metrics and why are they important in driving marketing
strategy?
2. Identify five benefits of marketing metrics.
3. Identify and discuss three strategic marketing planning methods and link them to
possible marketing metrics.
4. Discuss what is meant by ‘customer lifetime value’ and indicated how you can
measure it.
5. Discuss key online metrics that one can use to measure the success of an online
marketing campaign.
ENDNOTES
1. Petersen, J.A., McAlister, L., Reibstein, D.J., Winer, R.S., Kumar, V. & Atkinson, G. 2009.
‘Choosing the right metrics to maximize profitability and shareholder value’. Journal of
Retailing, 85 (1). Amsterdam: Elsevier.
2. Ocken, J.R. 2008. Enabling analysis. Synygy Magazine, p. 19. Online: http://www.
esresearch.com/e/downloads/EnablingAnalysis_Synygy_Summer08.pdf/ Accessed: 24
October 2013.
3. Bothma, C.H. 2010. Marketing metrics. Online: http://www.marketingmetrics.co.za
Accessed: 23 May 2016.
4. Ibid.
5. Levitt, T. 1960. ‘Marketing myopia’. Harvard Business Review, 38, July–August:45–46.
6. Roberts, H.V. 1957. ‘The role of research in marketing management’. Journal of Marketing,
July:21–32.
7. Mathare, W. 2009. ‘Marketing metrics use in South Africa’. Master’s dissertation submitted
in partial fulfilment at the Gordon Institute of Business Science, November 2009, p 6.
8. Churchill, G.A. 1979. ‘A paradigm for developing better measures of marketing
constructs’. Journal of Marketing Research, February:64–73.
9. Clark, B.H. 1999. ‘Marketing performance measures: history and interrelationships’.
Journal of Marketing Management, 15(8):711–732.
10. Rust, R.T., Ambler, T., Carpenter, G.S., Kumar, V. & Srivastava, R.K. 2004. ‘Measuring
marketing productivity: current knowledge and future directions’. Journal of Marketing,
68:76–89.
11. Farris, P.W., Bendle, N.T., Pfeifer, P.E. & Reibstein, D.J. 2006. Marketing metrics: 50+
Metrics every executive should master. New Jersey: Wharton School Publishing.
12. Davis, J. 2007. Measuring marketing: 103 key metrics every marketer needs. Singapore: Wiley.
13. Bothma, op cit.
14. Lamas, M.R. & Sulé, M.A. 2004. ‘How to measure the impact of a CRM strategy on the
firm performance’. Conference paper. Online: http://wms-soros.mngt. waikato.ac.nz/NR/
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15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
ICRM2004/papers/Llamas%20and%20Sule%20-%20paper%20-%20 How%20to%20
measure%20the%20impact%20of%20a%20CRM%20strategy.doc. Accessed: 4 July 2016.
Ward, J.S. & Barker, A. 2013. ‘The big data conundrum: How to define it?’ Technology
review. Online: https://www.technologyreview.com/s/519851/the-big-data-conundrumhow-to-define-it. Accessed: 4 July 2016.
Reibstein, D. 2016. From marketing metrics to big data. Philadelphia, Pennsylvania:
Wharton Executive Education. Online: http://executiveeducation.wharton.upenn.edu/
thought-leadership/from-marketing-metrics-to-big-data. Accessed: 4 July 2016.
Curtis, P. 2011. Top 12 marketing models of all time. Bizdom. Online: http://bizdom.com.
au/2011/03/30/top-12-marketing-models-of-all-time/ Accessed: 20 September 2013.
Hanlon, A. & Chaffey, D. 2013. ‘Essential marketing models: classic planning tools to
inform strategy’. Smart insights. Online: http://www.smartinsights.com/digital-marketingstrategy/online-business-revenue-models/marketing-models/ Accessed: 20 September
2013.
Wind, Y. & Lilien, G.L. 1993. ‘Marketing strategy models’. In Handbook in operations
research and management science, eds J. Eliashberg & G.L. Lilien, vol 5. Amsterdam:
Elsevier.
Bothma, op cit.
Farris et al, op cit.
Rai, A.K. 2013. Customer relations management: concepts and cases. 2nd ed. New Delhi: PHI
Learning, Private Limited, p 118.
Reichheld, F. 2006. The ultimate question. Driving good profits and true growth. Boston, MA:
Harvard Business School Press.
Rocha, M. 2012 Brand valuation: a versatile strategic tool for business. Interbrand. Online:
http://www.interbrand.com/Libraries/Articles/Brand_Valuation_Final.sflb.ashx/ Accessed:
20 September 2013.
Y&R. nd. ‘The story of the Y&R Brand Asset Valuator investigation’. Brand Science. Online:
http://ruby.fgcu.edu/courses/tdugas/ids3301/acrobat/bav.pdf/ Accessed:
20 September 2013.
Moran, W.T. 1994. ‘Market place measurements brand equity’. In Journal of Brand
Management, 1(5). London: Henry Stewart Publications.
Aaker, D.A. 1996. Building strong brands. New York: Free Press.
Bothma, op cit.
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Chapter
8
SUSTAINABLE
COMPETITIVE
ADVANTAGE
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Understand and explain what sustainable competitive advantage is;
„„ Explain the characteristics of sustainable competitive advantage;
„„ Be able to identify the resources and capabilities of the organisation that can serve as a
competitive advantage for the organisation;
„„ Understand Porter’s generic strategies;
„„ Determine the key steps in sustaining an organisation’s competitive advantage.
8.1 INTRODUCTION
It is the task and responsibility of top management to be aware of changes taking
place in the environment in which the business operates. Based on the relevance and
importance of these changes, management must formulate a market strategy in order
to meet its objectives. These strategies can only be formulated once the organisation
has identified its sustainable competitive advantages (SCAs). Sustainable competitive
advantage (SCA) is the value-adding strategy of the organisation. This advantage can
be expressed as a value-adding strategy that competitors do not have and which is not
easily imitated by others, and is such that it will be maintained for a significant period
of time.1 An organisation’s sustainable competitive advantage must be significant and
extensive enough to make a difference to the organisation and be sustainable for a long
period of time in the face of competition.
Sustainable competitive advantage must create a higher market share and assist in
developing a barrier to entry for new competitors. It also provides organisations with
the ability to defend themselves from competitor attacks and actions aimed at limiting
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There are various ways an organisation can achieve a sustainable competitive advantage.
Obtaining a highly effective sustainable competitive advantage is, however, difficult.
The competitive advantage that the organisation has must be significant, it must be
difficult for competitors to imitate and it must last for a long period of time.2
Definition
The main focus in today’s competitive environment is to beat or sideline competition.
In order to achieve this, organisations need a competitive advantage – that is, to get
customers to purchase their products instead of those of their competitors. In this way
organisations will be able to grow and survive in the market.
A sustainable competitive advantage can be defined as the long-term advantage that
an organisation has over its competitors by offering superior value that is difficult or
impossible to duplicate or exceed.3 When looking at this definition, it is first clear that
the perception of customers must be that they will get value for money (superior value),
and the bigger the perceived benefits compared to costs, the higher the perceived value
will be. Second, this superior value must be offered over a long period of time, meaning
it must be long enough for the organisation to recover its investment and to make a
profit.
8.2 DIMENSIONS OF SUSTAINABLE COMPETITIVE ADVANTAGE
Creating a sustainable competitive advantage will guarantee the organisation’s long-term
survival in the market. By identifying an SCA, the organisation provides a platform for
long-term survival and superior performance. This means that it is important that the
marketing manager is aware of the options available to structure an SCA − also referred
to as the dimensions of the competitive advantage. The organisation must thoroughly
understand the substance, expression, locality and effect of competitive advantage as
well as the time span applicable. This will allow the organisation to better exploit the
competitive advantage that it has. An examination of the time span of the competitive
advantage will enable the organisation to take full advantage of its competitive edge
according to its potential and sustainability.4
These dimensions of sustainable competitive advantage are substance, expression,
locality, effect, cause and time span (referred to as SELECT) and they are discussed in
more detail below:5
•• Substance. These are the unique attributes that the organisation has. They can be in
the form of assets or knowledge and capabilities of staff members. The organisation
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can either outperform its competitors or it can use completely different techniques
to gain the advantage over them. An example may be an IT company that has
acquired the services of a number of young computer geniuses who are at the
forefront of technological innovation.
Expression. Competitive advantage can be either tangible or intangible. This means
that the organisation’s advantage can either be easily observed by others (tangible)
or it can be hidden and not easily observed (intangible). Competitive advantage
can also be discrete or compound. The competitive advantage could either stand
alone or be a compound of multiple advantages that work together as a whole. The
opening of shopping malls next to highways which provide easy access can be seen
as a tangible advantage for retailers such as Pick n Pay, while KFC’s secret spices are
an intangible advantage.
Locality. There are three localities that the competitive advantage can be located in
− individual-bound advantages, organisation-bound advantages or virtual-bound
advantages. Individual-bound advantages are derived from certain individuals who
possess certain skills or knowledge. We often see it in the financial world where,
for example, the CEO of a company leaves for another financial institution and
many core customers follow. Organisation-bound advantages are attributes that
are stored and shared by the organisation. These advantages are more difficult to
duplicate, as they are complex and less mobile and can be the values or culture of
the organisation. Virtual-bound advantages lie outside the organisation and can, for
example, be located in its supplier network or the relationships it has with financial
institutions.
Effect. The strength of an organisation’s competitive advantage can be absolute or
relative, direct or indirect. The competitive advantage is absolute when it has an
advantage that is overpowering over its rivals, like in the case of SABMiller who has
created high barriers to entry into the market. When the organisation’s advantage
is relative, the competitive advantage that the organisation has is small. A direct
advantage is normally tangible and directly traceable to the organisation, while an
indirect advantage is not visible and indirectly influences the organisation. Nissan,
for example, has established the perception in the market that its vehicle engines
are indestructible with its ‘we are driven’ campaign, giving it a direct advantage
over competitors.
Cause. The cause of competitive advantage is important to know as it can be
spontaneous, which means that no one can really say where it started, or it can
be strategic in nature, which means that the organisation made a conscious effort
to establish itself in the market. A firm can gain its competitive advantage through
either competitive means or cooperation. For example, if the organisation cannot
survive in the market alone, it can partner up with other organisations – as was the
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••
case with a number of technology companies. This provides the organisation with
economies of scale, scope and speed, which are classified as cooperative advantages.
In the case of competitive advantages, it may mean that a very competitive market
can force an organisation to either enter totally unrelated markets locally or
internationally.
Time span. The time span of the advantage is important to analyse, as it can be
either short-term or long-term, or potential or actual. If the advantage is short
term, it does not make a contribution to long-term sustainability, such as in the case
where the organisation offers a lower price on its products. A long-term advantage
is, for example, Mercedes-Benz with its established brand of a quality and safe
vehicle gained over many years. A potential advantage is more an advantage that
has not been used or not used to its fullest potential.
8.3 CRITERIA FOR SUSTAINABLE COMPETITIVE ADVANTAGE
Organisations have a number of core competencies, but not all can be classified as
SCAs. There are specific criteria that these competencies must adhere to in order to
be regarded as an SCA. According to Hoskisson, Hitt, Ireland & Harrison,6 sustainable
competitive advantage only results when the following four criteria are satisfied:
1. Valuable. The potential SCA must be regarded as valuable, which is made possible
if the organisation’s capabilities are effectively used, and it can lead to a sustainable
competitive advantage. Exploiting these opportunities will also help neutralise any
threats that are found in the environment.
2. Rare. To be seen as an SCA, the capability must have rareness to it. This rareness is
based on an analysis of the capabilities of the organisation’s competitors against its
own capabilities. Only when an organisation finds capabilities that its competitors
do not have, or in which they are weak, does it have a potential sustainable
competitive advantage.
3. Costly to imitate. An SCA can only be regarded as such if it is something that cannot
be followed by everybody at will. An organisation’s competitive advantage becomes
costly to imitate when it has one of the following three factors:
a. Unique resources. These resources refer to those capabilities and resources that
are unique to the organisation, which cannot be easily imitated. This may be,
for example, the culture prevailing in the organisation or a unique extraction
method in a mine.
b. Ambiguous resources. When an organisation has an advantage that is confusing,
unclear or vague to others, it becomes costly for competitors to imitate due to
the fact that they are not sure what they need to imitate. Competitors in such
a case do not know and understand how the organisation uses its capabilities
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as an advantage, and this makes it very difficult for them to develop these
capabilities as well.
c. Socially complex resources. This refers to the organisation’s relationships inside
and outside the organisation. This includes the relationships between the
managers and employees, and the organisation’s relationships with its suppliers
and customers. Competitors cannot easily imitate this resource and it is very
costly if they try.
4. Non-substitutable. An organisation’s resources and capabilities must not have
any strategic equivalent. The less visible the organisation’s capabilities are to its
competitors, the more difficult they will be to imitate.
8.4 SOURCES OF SUSTAINABLE COMPETITIVE ADVANTAGE
Various sources of SCAs can be identified, and it is the task of marketing management
to utilise them to their benefit. Competitive advantage can arise from various external
and internal sources.7 The following are some of the various sources of competitive
advantage:
•• Relational sources. These sources refer to the relationships that the organisation
has with its brand-loyal customers and the long-term relationships it has with
its suppliers. This also includes the organisation’s strategic alliance agreements
and any co-branding agreements it has. The organisation’s bargaining power and
coordination and integration with its supply chain partners can also be used as a
competitive advantage for the organisation.
•• Legal sources. These advantages can include patents and trademarks, beneficial
contracts, tax advantages, zoning laws, global trade restrictions and government
subsidies. Companies such as Coca-Cola, McDonald’s, Nike and many others
protect their brands and trademarks aggressively as these are strong competitive
advantages for them and they are used effectively in their marketing actions.
•• Organisational sources. The organisation’s competitive advantages can be gained
from its financial resources, modern plant and equipment, and its competitor and
customer intelligent systems. The organisation’s culture, vision, shared goals and
organisational goodwill are also a source of competitive advantage.
•• Human resource sources. The organisation’s superior management talent, strong
organisational culture, access to skilled labour, committed employees, and/or
world-class employee training can be used as a source of competitive advantage.
•• Product sources. Developing exclusive products that have superior quality can be
used to gain a competitive advantage. An organisation can also use its brand equity
and brand name, its production expertise, guarantees and warranties, outstanding
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customer services, research and development, and superior product image as its
competitive advantage.
Pricing sources. Lower production costs, economies of scale, large volume buying,
low-cost distribution and bargaining power with vendors can be a source of SCAs
for the organisation and a great source of competitive advantage.
Promotion sources. The organisation can use its promotional activity as an advantage,
and these activities include the company’s image, its larger promotional budget,
creativity, extensive marketing expertise and superior sales force.
Distribution sources. These sources refer to an organisation’s distribution systems,
which include real-time inventory control, extensive supply chain integration,
superior information systems, convenient locations and strong e-commerce
capabilities.
8.5 COMPETITIVE ADVANTAGE STRATEGIES
An organisation’s competitive strategy must be able to create a sustainable competitive
advantage.8 This advantage will help the organisation outperform its competitors. It
is the responsibility of management to leverage its strengths in order to position itself
in the market in which an advantage is created. Porter’s model of generic strategies
identifies two main routes to creating a competitive advantage, namely cost advantage
and differentiation. These strengths of an organisation lead to three generic strategies
namely, cost leadership, differentiation and focus.9 A fourth strategy that will be alluded
to is a combined strategy. Each strategy is briefly discussed in the sections below.
8.5.1 Cost effectiveness
There are numerous cost drivers that affect organisational cost.10 One such driver is
economies of scale, which can be very important for an organisation. Economies of
scale occur when an organisation conducts its operations more efficiently and effectively
and on a large scale. Economies of scale are achieved in a business when the cost of
performing an activity decreases as the scale of the activity increases.11
A second driver is experience. Learning the organisation’s processes and experience that
employees have gained over the years can increase the efficiency of the organisation as
things will be done faster and smarter based on this experience.
A third driver is that of capacity utilisation. This refers to the extent in which an
organisation is using its facilities and production capacity optimally.
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A fourth driver is linkages. This refers to all the activities in the process of producing
and marketing the organisation’s products, which has a cost component and/or impacts
on the costs.
A fifth driver is interrelationships. These refer to the internal and external relationships
that the organisation has with employees, management, suppliers and other stakeholders.
A sixth driver is the degree of integration. The organisation’s decisions regarding the
integration of processes or value chain components will impact on costs. Three types of
integration can be identified:12
1. Vertical.
2. Backward.
3. Forward.
Vertical integration refers to the integration of the successive channels in the distribution
process used to distribute the products. Backward integration, on the other hand, occurs
when the organisation has control over the cost, availability and quality of the raw
materials used to produce its products. Forward integration is when the organisation
gains control over its outlets.13
A seventh driver is timing. The timing of the organisation’s entry into the market can
lead to cost advantages. The organisation that moves into the market first can secure
prime locations, good-quality materials and raw materials at lower prices.
The eighth driver is policy choices. These decisions are based on the product itself and
include decisions on the product line, quality, service levels, features and the perceived
uniqueness of the product.14
The ninth and last driver includes location and institutional factors. These refer to the
location of the organisation and factors such as government regulation that can have an
effect on the cost effectiveness of operations.
8.5.2 Differentiation
Differentiation can be achieved in the following ways:15
•• Product differentiation. Product differentiation refers to the ability of the organisation
to differentiate its product offering from its competitors by means of product
attributes or benefits. A bank can, for example, have a private banker available to
its premier clients ‘24/7’ – something other banks do not offer.
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Distribution differentiation. This refers to the organisation using a different distri­
bution network for its products, which may be completely different from that of
competitors. For example, the organisation may decide to market its headache pills
only via pharmacies and not supermarkets.
Price differentiation. An organisation can be successful in using low price as a means
of differentiation when it has a cost advantage. Generally, premium pricing is used
to reinforce the organisation’s differentiated products. Being the first on the market
usually offers the organisation the opportunity to charge a higher price or premium
price until such time as competitors enter the market with substitute products.
Promotional differentiation. This type of differentiation refers to an organisation
using different types of promotional methods to market its products. Digital and
electronic modes of promotion are becoming more and more important, and
can create great differentiating opportunities for companies understanding the
value and uses of these kinds of media exposure. The organisation can also use
promotions at a different intensity. Using new promotional methods can result in
free publicity for the organisation.
Brand differentiation. Brand positioning refers to the position the brand occupies
in the mind of the consumer, based on consumers’ perceptions. This brand
positioning is built by communicating with customers in various ways and
influencing the perceptions they have of the brand. Mercedes-Benz has a strong
brand in the market and it is associated with style, status, class and prestige,
making it easier for the manufacturer to differentiate itself from most other brands.
The messages that are communicated must be consistent and tell the consumer
about the product.
8.5.3 Focus strategy
This strategy focuses on a small or narrow segment of the market, with the premise
that an organisation is better able to serve the needs of a limited segment of the market.
Small- and medium-sized companies operating in markets that are dominated by larger
operations usually make use of a focus strategy.16
An organisation using this strategy can choose to apply a cost leadership strategy or a
differentiation strategy in the market. Organisations that use a differentiation strategy
can pass on the costs to customers, as there are no close substitutes for their products.
In this case the advertising and promotion activities of an organisation can be tailored
to meet the needs of a specific target market and the organisation is also better able to
customise its products specifically to fit each customer’s needs.17
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There are, however, some disadvantages to this strategy, such as the following:18
•• There may be changes in the target market making the particular market segment
less attractive.
•• Competitors may also find submarkets within this market segment that they can
serve better, thereby diluting the attractiveness of the market.
•• The differences between the entire industry and the limited segment that the
organisation operates in can be reduced. Larger organisations operating in the
market can emulate the successful strategies of an organisation in the niche market.
This allows for other companies to enter the niche market, which reduces the cost
advantages of operating in it.
8.5.4 Combination strategy19
The combination strategy is not part of Porter’s generic strategies, but offers an additional
option to marketers. Customers sometimes seek multidimensional satisfaction from a
product – such as a high-quality product at an affordable or low price. The combination
strategy uses both product differentiation and cost leadership to satisfy customers’
needs of quality products at affordable prices.
The success of this strategy depends largely on the organisation’s ability to deliver
products that are unique, of a good quality and low in cost. This strategy can result
in higher returns for the organisation than would be the case if it was using a single
strategy, because it delivers value to the customer based on product, features and low
price. A company such as Toyota, for example, offers cars from luxury brands to entrylevel models, and uses both cost leadership and differentiation strategies.
An organisation using a combination strategy, however, faces the risk of confusing the
customer. It is difficult, for example, to convince customers that the company offers a
high-quality product at a low price − this sounds confusing and contradictory.
8.6 STEPS IN CREATING A SUSTAINABLE COMPETITIVE ADVANTAGE
Creating a sustainable competitive advantage is not easy, simple or straightforward.
There are, however, a number of methods that can be exploited by which sustainable
competitive advantage can be sustained, such as:20
•• Unique product offerings. Products do not stay unique indefinitely and their period
of uniqueness is usually limited. This implies that organisations need to constantly
be on the lookout for new differentiating factors by which they can make their
products more exclusive or different. Customers like new innovative products and
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it is important for marketers to keep their products fresh, interesting and compatible
with the market. The cellphone industry, for example, has evolved very quickly
over the past few years. With the number of smartphones on the market, cellphone
companies need to stay on top of the new technology and must constantly deliver
something that is better than their competitors or face the prospect of being cut out
of the market.
Clear, tight identification and definition of target markets. An organisation must have
a clear understanding of who its customers are, their needs and what is important
to them. This will help the organisation to maintain unique products and services
that are valued by its customers. Apple Inc., for example, makes observations of
their customers using Apple products and their competitors’ products. They then
incorporate their customers’ experiences into their designs, and develop processes
to understand what their strengths and weaknesses are.21 By knowing who their
customers are and what is important to them, they have a clear understanding of
how to approach them.
Enhance customer linkages. It is important to create a bond with the customer or
to make some sort of connection. This is done, for example, through enhanced
customer service. Delivering excellent customer service and enhancing customers’
experience not only builds a strong relationship with customers, but also creates
brand loyalty. Customers who are loyal are less likely to shop around at other stores
and will remain with the brand.
Establish and maintain brand and company credibility. The company’s brand must be
managed well, as this is one of the most defensible assets a company has. Customers
buy the brand and not just the product. A customer would much rather trust a
Sony television than one from a brand that is not well known. This is also linked
to the credibility of the company. Good governance goes a long way in building the
credibility of the company and, by implication, also the brand credibility.
8.7 SUMMARY
The focus of this chapter is on sustaining an organisation’s competitive advantage. An
organisation’s competitive advantage stems from its strengths. The organisation must
look at the resources and capabilities that it has and determine which sources can best
serve to its advantage.
In creating a sustainable competitive advantage, an organisation must leverage its
strengths. There are three generic strategies that an organisation can use: cost leadership,
differentiation and focus strategies. An organisation can also make use of both cost
leadership and differentiation strategies to create a combination strategy.
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There are key steps that an organisation can take to sustain its competitive advantage.
These include providing products that have unique attributes, having a clear definition
and understanding of its target market, creating a bond with its customer and
establishing the credibility of its brand.
Self-evaluation questions
1. Explain and give an example of sustainable competitive advantage.
2. Explain how an organisation can use substance, expression, locality, effect, cause and
time span to determine its sustainable competitive advantage.
3. What are the criteria needed to create a sustainable competitive advantage?
4. Give an example of internal and external sources of competitive advantage.
5. Explain the different strategies used to create a sustainable competitive advantage
and provide an example of each one.
ENDNOTES
1. Aaker, D.A. & McLoughlin, D. 2010. Strategic marketing management: global perspective.
West Sussex: John Wiley & Sons, p 135.
2. Bhasin, H. 2010. Sustainable competitive advantage (SCA). Online: http://www.marketing91.
com/sustainable-competitive-advantage/ Accessed: 10 May 2013.
3. Vinyan, G., Jayashree, S. & Marthandan, G. 2012. ‘Critical success factors of sustainable
competitive advantage: a study in Malaysian manufacturing industries’. International
Journal of Business and Management, 7(22):29−45. Online: http://www.ccsenet.org/journal/
index.php/ijbm/article/view/19199/14050/ Accessed: 10 May 2013; BusinessDictionary.
com. nd. Sustainable competitive advantage. Online: http://www.businessdictionary.com/
definition/sustainable-competitive-advantage.html/ Accessed: 10 May 2013.
4. Raduan, C.R., Jegak, C., Haslind, A. & Alimin, I. 2009. ‘Management, strategic
management theories and the linkage with organizational competitive advantage from the
resource-based view’. European Journal of Social Sciences, 11(3):402−417. Online: http://
www.hajarian.com/esterategic/tarjomeh/1-89/shorige2.pdf/ Accessed: 15 May 2013.
5. Based on Ma, H. 1999. ‘Anatomy of competitive advantage: a SELECT framework’.
Management Decision, 37(9):709−718. Online: http://www.hrd.nida.ac.th/fileupload/paper/
teacher/3.4.%20Ma%201999%20Anatomy%20of%20Competitve%20Adv%20SELECT.
pdf/ Accessed: 15 May 2013.
6. Based on Hoskisson, E.R., Hitt, A.M., Ireland, R.D. & Harrison, J.S. 2010. Strategic
management: competitiveness and globalization concepts. 9th ed. Mason, OH: Thompson
South-Western, p 82.
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7. Ferrell, O.C. & Hartline, M.D. 2011. Marketing strategy: text and cases. 6th ed. Mason, OH:
Cengage Learning, p 99.
8. Hooley, G., Piercy, F.N. & Nicoulaud, B. 2012. Marketing strategy & competitive positioning.
5th ed. London: Pearson Education Limited, p 265.
9. QuickMBA.com. nd. Porter’s generic strategies. Online: http://www.quickmba.com/strategy/
generic.shtml/ Accessed: 7 May 2013; Hooley et al, op cit, p 265.
10. Ferrell & Hartline, op cit, p 99.
11. Michail, A. 2011. Business models & strategy. Ways of achieving cost leadership strategy.
Online: http://strategy-models.blogspot.com/2011/06/ways-of-achieving-cost-leadership.
html/ Accessed: 7 May 2013.
12. Ibid.
13. Ibid.
14. Ibid.
15. Adapted from Hooley et al, op cit, p 265.
16. Enotes.com. nd. Generic competitive strategies. Online: http://www.enotes.com/genericcompetitive-strategies-reference/generic-competitive-strategies/ Accessed: 7 May 2013.
17. Ibid.
18. Ibid.
19. Based on Baroto, B.M., Abdullah, M.M. & Wan, L.H. 2012. ‘Hybrid strategy: a new
strategy for competitive advantage’. International Journal of Business and Management,
7(20):120−133. Online: http://www.ccsenet.org/journal/index.php/ijbm/article/
view/15016/ Accessed: 10 May 2013.
20. Hooley et al, op cit, p 278.
21. Moorman, C. 2012. Why is Apple a great marketer? Online: http://www.forbes.com/sites/
christinemoorman/2012/07/10/why-apple-is-a-great-marketer/ Accessed: 10 May 2013.
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Chapter
9
CUSTOMER EXPERIENCE
MANAGEMENT AS A
MARKETING STRATEGY
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Explain what touch points are;
„„ Describe moments of truth;
„„ Define customer experience management;
„„ Define the value proposition;
„„ Differentiate between customer experience and experience marketing;
„„ Relate customer experience management to customer relationship management;
„„ Identify the benefits of customer experience management;
„„ Link customer experience management to marketing strategy;
„„ Outline the steps involved in customer experience management;
„„ Discuss the role of the online realm in customer experience management.
9.1 INTRODUCTION
Customer experience management is increasingly being used as a mainstream marketing
strategy to target customers and to get them, in turn, to focus on the company. In a
world comprising millions of companies and billions of customers, getting a single
customer to become aware of, focus on, and ‘like’ a single company together with its
brand and products is, not surprisingly, quite challenging. Overcoming this challenge
is at the heart of any customer experience management strategy.
The customer is clearly at the heart of the concept of customer experience management.
Although customer experience management is a relatively new concept, the argument
that companies should focus on their customers is not. The adage ‘the customer is
king’ has been with marketing for a long time and customer centricity is, after all,
embodied in the marketing concept, a concept that has already been in existence for
many years. In recent years, however, there has been a growing focus on the customer
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amongst organisations, beginning with understanding the customer, followed by
meeting the needs of the customer (which is what the marketing concept addresses)
and creating customer value, then enhancing the experience of customers with the
organisation, finally establishing a long-term relationship with customers who will
hopefully ultimately become brand advocates for the firm. Much of the marketing
strategy discussed in this book has been aimed, at least in part, at achieving these goals.
9.2 UNDERSTANDING TOUCH POINTS
The task of customer experience management from a strategic perspective is to plan,
implement and control the entire customer experience pathway. This begins by
understanding the various ‘moments of truth’ that occur for customers that interact
with an organisation. These moments of truth are the moments in time when a customer
interacts with and experiences the products and services the organisation has to offer.
The interactions or moments of truth may occur throughout the organisation, and the
places or contact points where such interactions occur are called ‘touch points’ (see
Figure 9.1).
Sales staff
Promotion
message
Support
Website
Products
Organisation
Stores
Call centre
Publicity
Brand
Delivery
Examples of touch points
FIGURE 9.1 Examples of touch points in an organisation
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Touch points and moments of truth are closely related. Potential touch points may
include the promotional message put out by a company, store layout and ambience,
the organisation’s website, the security guard at the door welcoming customers into
the store, sales staff, cashiers accepting payment from customers, despatchers bringing
goods from the back of the store to customers’ cars and loading them, the products and
services produced and delivered by the organisation, the call centre operator handling
queries should a problem arise, staff at the store’s returns section should customers have
to return the product for a refund or for servicing, and so on. It is clear that a single
organisation may have many touch points.
Moments of truth, on the other hand, occur when a customer actually interacts with
one of these touch points. It is at this instance in time that customers experience the
organisation for themselves first hand. Such interactions are often, but not always, with
staff – that is, they are personal interactions. However, the interaction could also be
with a self-service facility an organisation uses, the organisation’s website, or perhaps
with the product – these are non-personal interactions. For example, every time a
customer interacts with a bank’s ATM machine, this is a moment of truth for the bank
and also for the customer. If the machine is slow or faulty, the customer’s experience of
that particular moment of truth will probably be negative.
From the above description, it is clear that a single visit to a store may offer many
places for interaction (that is, many touch points) for the customer to experience the
company, and may also result in several moments of truth when he/she actually interacts
with some aspect of the organisation’s offering. These moments of truth collectively
translate into an overall experience of the organisation for the customer. A positive
overall experience is likely to encourage repeat business, while an overall negative
experience may result in the customer going elsewhere – that is, to competitors −
not something management wants to see happen. Management, therefore, has to put
effort into ensuring that the many moments of truth the customer experiences when
interacting with the organisation are positive – this is referred to as customer experience
management (CEM).
9.3 DEFINING CUSTOMER EXPERIENCE MANAGEMENT
The academic literature contains many different definitions of CEM. We adopt the
definition proposed by Thompson,1 namely that CEM is the management of all the
interactions with an organisation’s people, processes, systems and products, with
the purpose of generating positive feelings or emotional responses on the part of the
customer by such interactions. An important point to make here is that at the core of
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CEM is the actual customer experience, but it needs to be borne in mind that the phrase
‘customer experience’ has two contexts:
1. A single experience context.
2. A multiple experiences context.
To put this differently, the customer’s total experience of a company is made up of a
number of separate and different experiences; in other words, each single customer
experience contributes to the overall customer experience (of the company). CEM
is really about managing the total customer experience, not just single experiences
(albeit that these single experiences obviously contribute to the overall experience the
customer has of the organisation).
Management, in turn, is about planning, implementing and controlling a particular
activity or process,2 thus CEM needs to include these three contexts. In other words,
managers need to plan the customer experience that they hope to achieve, they have to
ensure that this experience is put into place consistently, and they have to constantly
monitor the experience of customers to ensure that it is what they want their customers
to have. This chapter focuses on these three main tasks of CEM, but before we examine
these issues in more detail, let us incorporate the concept of the value proposition.
9.4 CUSTOMER EXPERIENCE AND THE VALUE PROPOSITION
Arussy3 in his recent book, Customer experience strategy: the complete guide from innovation
to execution, supports the definition proposed by Thompson, but takes it a step further.
He writes as follows:
Customer experience is the total value proposition provided to a customer, including the
actual product, and all interactions with the customer – pre-sale, at point of sale, and
post-sale. This value includes experience attributes such as on-time delivery and the
quality of products, as well as the experience attitudes, such as the emotional engagement
created during interaction with the customers.
His definition highlights two additional key points. First, he links value proposition
to customer experience and, second, he sees the experience occurring over a lengthy
period of time. A customer value proposition (CVP) can be defined as the value that
an organisation’s ‘offering’ or ‘solution’ provides a customer that is relevant (that is,
it helps in solving a problem or meeting a need), measurable (that is, the perceived
benefits outweigh the costs of acquiring the offering), and relative to his/her alternative
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choices (that is, the organisation’s offering is better than that of competitors or than
doing nothing).4
It is important to emphasise that a value proposition describes an organisation’s
offering from the point of view of the customer. It is the added value (that is, the
utility) that an offering brings to the customer in exchange for money. The link between
customer experience and the value proposition is that, if a customer is satisfied with
an organisation’s value proposition, then the customer’s experience of the organisation
will generally be a positive one. In a sense, the value proposition is the ‘buy from me’
message the organisation wants to communicate to its customers.
Before we examine the CEM process in more detail, let us first discuss the moments of
truth in more detail.
9.5 MORE ABOUT MOMENTS OF TRUTH
In this chapter we have already introduced moments of truth. We defined moments
of truth as every isolated contact or interaction that a customer or potential customer
has with a firm.5 Such moments of truth can be an interaction with a staff member
when physically visiting the organisation or when speaking to a staff member over the
phone, the first time a customer sees or uses the organisation’s product, when visiting
and interacting with the organisation’s website, or even when a customer comes into
contact with the firm’s brand or promotional message, in the form of an advertisement
on a billboard or on television.
In the moment of truth, there are a number of elements that come together. We need
to realise that at the moment of truth there are two sides to the interaction. On the one
side there are the organisation’s offerings which incorporate the firm’s value proposition.
An offering, although based on and constructed around the product or service the
company sells, also involves its staff, its systems and processes, as well as the brand and
promotional message it puts out into the marketplace.
On the other side is the customer. The customer also has some baggage. This baggage
comprises the expectations that the customer may have about the company and its
products/services. Such expectations may come from previous interactions that the
customer had with the organisation, or they may be based on what the customer has
heard from family, friends and colleagues or perhaps what the customer has read about
the organisation in the press or seen in adverts. If the customer has no knowledge of the
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organisation, then such expectations may be based on what the customer experienced
from similar or competitor firms and/or from hearsay.
It is important to understand that these expectations set the benchmark for the customer
in his/her moment of truth interaction with the company. If the organisation manages
to exceed expectations, the customer experience will be a positive one, whereas if the
expectation is not met, the experience will be negative.
It needs to be pointed out that the moments of truth with regard to a particular
organisation for a single customer may be many and varied. While it is quite possible
that customers may only ever have a single moment of truth experience with a particular
company, more often than not customers experience many different moments of truth
during their involvement with the organisation. It is also not surprising to learn that
these moments of truth may vary quite dramatically. One moment of truth, for example,
with a salesperson, may be extremely positive, while another experience, for example,
with a call centre operator, may be very negative. In fact, the moments of truth may vary
from positive to negative (or from negative to positive) in a matter of a few minutes. For
example, the salesperson may be friendly, knowledgeable and helpful, but the cashier
where the customer goes to pay a few minutes after his/her positive experience with the
salesperson may be rude, unfriendly and inefficient. Similarly, the customer may have
a bad experience with one salesperson, when a few minutes later another, more helpful
and knowledgeable salesperson walks across to help put things right.
Managing moments of truth
From a management perspective, therefore, there are two main challenges:
1. The first is to establish a minimum level of experience that the organisation wants
its customers to receive.
2. The second is to ensure that this level of experience remains consistent; that is, the
customer always receives this level of experience as a customer of the firm.
Neither of these two challenges is easy to achieve. In fact, strictly speaking, managers
cannot control the experience the customer has of their organisation; all managers can
control is the offering (which includes the product, image and service – the firm’s value
proposition) the organisation ‘presents’ to the customer. However, if organisations do
not at least try to understand the experience the customer has of them and instead
focus only on the offering, a ‘disconnect’ (that is, a gap) may begin to form between the
organisation’s offerings and its customers’ experiences. For example, Sultana6 reports
on a Bain & Company survey which revealed that of 362 firms surveyed, while 80
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per cent believed they delivered a ‘superior experience’ to their customers, these same
customers perceived only eight per cent of the companies as truly delivering a superior
experience. It is therefore sensible to at least try to view things from the customer
experience point of view, rather than from the firm’s offerings point of view. At the very
least, the firm should regularly ask customers what their experiences of the organisation
are and then act on these findings.
To return to the task of defining a minimum level of experience, this is extremely
difficult to achieve for two reasons:
1. First, as mentioned earlier, the moments of truth are many and varied. Customers
may experience many moments of truth during their lifetime with the company.
During this time, the organisation may change dramatically. It may undergo
ownership changes, it may change its target audience, it may change its product
offerings, it may change its systems and almost certainly it will change its staff, as
some leave and others take their place. No organisation is static; if it were, it would
almost surely die. The dynamic nature of businesses means that the moments of
truth are likely to vary as well, and with customers experiencing many moments of
truth during their lifetime with a company, it is likely that these will be both positive
and negative. The challenge for management is to strive to ensure that most of these
experiences are positive ones and when customers have a negative experience, extra
effort is made to turn it into a positive one. To make matters even more difficult
for management, not only do the moments of truth vary from positive to negative,
they also vary in their nature. For example, they vary from personal interactions
with staff members to interactions with non-personal systems and products. One
instance the customer interacts with a salesperson, the next instance the customer
interacts with the organisation’s ATM machine, an information kiosk or its website,
thus the challenge of management is not only about striving to achieve an overall
positive experience for customers, but also to ensure that the different types of
moments of truth (personal and non-personal) work well together to support
each other. Take, for example, an organisation with an efficient sales team, but
with a cumbersome logistics system. The customer has a positive experience in
the process of buying the product, but is frustrated when it comes to delivery.
These two moments of truth will almost certainly work against each other, with the
customer maybe deciding not to buy from the company again because of the delay
in getting its products. However, if the customer has bought it before and was really
happy with the product, then this positive experience (together with the positive
experience of shopping for and buying the product) may outweigh the negative
experience caused by the slow delivery (that is, the customer may be prepared to
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‘wait it out’). From this example, one can see that managing the overall customer
experience is not easy.
2. The second reason why defining a minimum level of experience is extremely
difficult is that every customer is different. It has been said that moments of
truth are a two-sided occurrence; they happen because the organisation provides
a particular offering (the value proposition mentioned earlier), which customers
then experience in a particular way. All customers are likely to have some degree
of expectation about the offering in question and if their expectations are met or
exceeded, they will probably view the experience as a positive one. The reality,
though, is that customers have very different needs and expectations. What is
acceptable to one customer may be completely unacceptable to another. Even a
single customer may differ from one day to the next. A customer that has woken
up in a bad mood may find the salesperson’s light-hearted banter irritating and an
argument may ensue resulting in a negative experience on the part of the customer
(albeit unfairly so).
9.6 CUSTOMER EXPERIENCE VERSUS EXPERIENCE MARKETING
It has been suggested that it is difficult, if not impossible, to directly control the experience
that customers have when they interact with an organisation, yet Pine & Gilmore7
wrote a ground-breaking article in the Harvard Business Review entitled ‘Welcome to the
experience economy’. In this article they explain the movement towards an economy
where customers are buying ‘experiences’ from companies instead of just products or
services. This sounds wrong if one considers what has been said about not being able
to control the experiences customers have of a company. They provide an example of
how years ago mothers generally used to bake a birthday cake from basic ingredients –
this was time-consuming and required a certain skill, but was very cheap. Thereafter,
mothers increasingly bought ready-made ingredients that made the baking process
quicker and simpler, but cost a little more. This was followed by a trend towards buying
a finished cake, which was quick and easy, but much more expensive. Today, argue Pine
& Gilmore, mothers are buying an entire birthday ‘experience’ from specialist providers
that not only provide the cake, but also run the entire birthday show for the lucky
child. This leaves the mother with hardly anything to do, but of course it is much more
expensive. This move towards providing a complete experience is called experience
marketing. Examples of organisations providing experience marketing include: Disney
World, Niketown, Planet Hollywood, Hard Rock Café and others.
Experience marketing is very different from customer experience. While experience
marketing is about a company providing a customer with an experience (which is
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within the control of the company) this is not the same as the experience customers
have when interacting with the company (which companies do not have direct control
over). Indeed, for a company selling an experience, the customer may still experience
it either positively or negatively.
It was mentioned earlier in the chapter that one of the best ways to find out what the
experience is that customers have of a firm is to ask them (or sometimes even to observe
them). Asking customers what they think of their experience of an organisation is a
form of research, and undertaking research is an important part of CEM.
9.7 C
USTOMER RELATIONSHIP MANAGEMENT VERSUS CUSTOMER
EXPERIENCE MANAGEMENT
The literature on CEM has many references to customer relationship management
(CRM), but what is CRM and how does it differ from CEM? Almotairi,8 drawing on
the work of Payne, amongst others, proposes that CRM can be defined as a strategic
approach that integrates processes, people and technologies cross-functionally to
better understand an organisation’s customers, improve stakeholder value, and deliver
profitable, long-term relationships with customers. Important keywords and phrases
derived from this definition are ‘long-term’, ‘strategic approach’, ‘technologies’ and, of
course, ‘relationships’.
The primary difference between CRM and CEM is the question of time. An experience
happens at a point in time, while a relationship happens over a period of time. Another
major difference is that the customer experience is a customer-driven view (pull), while
relationship marketing is a company-driven strategy (that is, a strategic approach or
push).9 Furthermore, CRM draws heavily on technologies (particularly IT technologies)
to bring together information cross-functionally about customers and their preferences.
This information is then used to direct the firm’s marketing effort hopefully more
meaningfully towards the customer. Finally, the idea is one of relationship, with a twoway communication channel where the firm talks with the customer and the customer
responds,10 although in reality this seldom happens. CRM is a much broader concept
than CEM, and may in fact draw on input from customer experiences of the organisation
to better mould (or customise) future exchanges with the customer.
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9.8 THE BENEFITS OF CUSTOMER EXPERIENCE MANAGEMENT
Research undertaken by Forrester Inc shows that a better customer experience drives
improvement for three types of customer loyalty, namely:
1. Willingness to consider another purchase.
2. Likelihood of switching business to a competitor.
3. Likelihood of recommending to a friend or colleague.11
Their research shows that an increase in a positive experience for customers translates
directly into significant (millions of dollars) additional revenue for the companies
concerned. Research undertaken by the Temkin Group supports a link between positive
customer experiences and revenue growth.12 Their research of 152 customer experience
professionals from companies with $1 billion or more in annual revenues reveals that
88 per cent of those surveyed felt that their customer experience efforts had a positive
impact on revenues (60 per cent felt this impact to be moderate or significant). Besides
revenue growth, other benefits of managing an organisation’s customer experiences
include:
•• Increased customer retention – they stay because they are satisfied.
•• Increased profitability – increased revenue is achieved at lower cost, because of
reduced marketing effort.
•• Differentiation as a customer-orientated firm, thus creating a sustainable competitive
advantage.
•• Increased customer lifetime value, because customers buy more in total as well as
more regularly.
•• Increased brand loyalty – satisfaction translates into brand disciples that promote
the firm’s brand at no cost to the organisation.
9.9 M
ARKETING STRATEGY AND CUSTOMER EXPERIENCE
MANAGEMENT
In this book, a number of marketing strategies have been put forward. CEM is but
one of these. The power of CEM is that it is an inclusive approach, not an exclusive
one. It is not about one or the other, but rather about one and the other (CEM can be
incorporated into many, if not all, other marketing strategies that the firm adopts – this
is its main advantage).
Globalisation, an increasingly interconnected world, technology and communication
enhancements, and the abundance of information are all expanding customers’ choices.
One way of refocusing customers’ attention on the organisation is through customer
intimacy. It is finally dawning on management that ongoing, proactive engagement and
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co-creation with customers contribute to sustainable differentiation, profitable growth
and sustainable competitive advantages for the firm. IBM’s view of CEM is that the
right market and creative customer strategy can help an organisation turn customers
into advocates, infuse customer interactions across each channel and drive customer
loyalty.13 This is the challenge of CEM, and linking this task with other marketing
strategies will almost certainly ensure that the overall strategic approach adopted by an
organisation is sustainable and successful.
In the next section, we address the management issues (that is, planning, implementing
and controlling) associated with CEM.
9.10 THE CUSTOMER EXPERIENCE MANAGEMENT PROCESS
9.10.1 Planning the customer experience
In the process of planning the customer experience, there are a number of steps that
management should follow. Figure 9.2 provides a synopsis of the planning process in
CEM. These steps are outlined below.
Step 1: Better understand customers through research
Hoversten & Baker14 suggest that: ‘Understanding and analysing the experiential world
of the customer provides a company or organisation with key insights regarding the
intricate needs, those obvious and latent, of their customers, as well as how to fulfil
those needs.’ This makes sense as we have mentioned that experiences are dependent
on the expectations and behaviours of customers.
CEM is a customer-centric approach and justifies focusing on understanding the needs
and expectations of customers. In the process of understanding customers, the first goal
is to identify those that the organisation wants to reach out to – this requires segmenting
the marketplace and targeting a particular group of potential customers with similar
desirable characteristics from the organisation’s point of view, two traditional objectives
of marketing research.
The next step is to understand the targeted group of customers better. This can be
achieved through qualitative research (customer interviews and focus groups), as
well as through the use of journaling (where employees record short notes about
their interactions with customers), personas (where customer profiles are developed
containing rich information about customer preferences, interests, behaviours, etc) and
unstructured data (companies have access to large amounts of data that they collect
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about customers in the normal day-to-day business activities).15 In this analysis, the
organisation is essentially striving to understand the experiential world as well as
the sociocultural context of the customer (needs/wants/lifestyle). In the process of
understanding the customer, the organisation also needs to consider its own business
context in terms of the requirements and solutions required to satisfy customer wants,
needs and expectations. ‘Touch mapping’ is a tool that is often used to map customer
experiences to touch points identified throughout the organisation.16
For an existing organisation the targeted segment of the marketplace will comprise
both existing and potential customers (in the case of a new company, there will only
be potential customers). Existing customers will have a track record with the company
and they too can be grouped according to certain criteria. Sultana17 suggests that by
assessing existing customer profitability and customer advocacy, companies can tailor
their CEM strategies along the following lines:
•• High-profit promoters. These are the customers the organisation cannot live without
– their core customers. The organisation will want to design and deliver its offerings
in such a way as to expand this group, as well as to target new buyers who share
their characteristics.
•• High-profit detractors. These customers are almost as important as the organisation’s
‘core’ customers. They are sticking around because of inertia or because they feel
trapped. They are profitable and attractive to the competition and are unlikely to
suffer quietly. Losing them can dent the organisation’s bottom line and its market
share. Management needs to find out what is irking them and fix their problems fast.
•• Low-profit promoters. These are diamonds in the rough, loyal customers whose
current buying patterns leave money on the table. Tap into their advocacy by
offering them additional products and services, but do not alienate them with
heavy-handedness.
•• Low-profit detractors. One cannot please everyone. If there is no economically
rational way to solve their problems, then help unhappy customers move to other
providers.
With a target audience in mind and with the wants, needs and expectations of the
target audience better understood, management can now table a vision of how the
organisation wishes to address these needs and expectations.
Step 2: Preparing an overall customer experience vision
In Step 1, the firm determined who their customers are and what their needs and
expectations are. In the case of existing customers, the firm may have already established
their experiences of the organisation and would have identified positive aspects that
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can be built upon and negative aspects that need to be addressed. These experiences
would have given the firm some clues as to the various ‘touch points’ that customers
have with the organisation. With this information in mind, managers now need to
develop a documented vision of the experience they want their customers to have of
the company, its brand as well as its products and services. The benefits of such a vision
are manifold. To begin with, a documented vision serves as a reference point not only
for staff, but also for management. Second, by having a customer experience vision
statement, management is committing them to CEM. Third, the vision statement should
link to or draw on the company’s broader business vision/mission and objectives. In
this way, CEM will not become a separate, isolated issue, but rather an integrated part
of the overall business strategy. It may even be necessary to revisit the business vision/
mission and objectives to include a customer experience statement or component in
these higher-level strategy instruments.
Step 3: Identify touch points
In Step 2, management would already have identified some of the touch points that
customers have with the company – these are probably not all of them. The next
challenge is to attempt to identify and document all the touch points (both personal
and non-personal) that customers have with the company. This could be as simple as
creating a table with a column that names each of the touch points and provides a short
description of the touch point in question.
Step 4: Touch mapping
At each of these touch points, the firm should now document the customer interaction
process, that is, exactly what customers do at each touch point. For example, Daffy,18
in his book Once a customer always a customer, outlines a retail purchasing experience
from the point of view of the customer:
•• Consider – I’m thinking about buying something.
•• Approach − I approach the store.
•• Enter − I enter the store.
•• Enquire − I enquire about what I want.
•• Recommend − The assistant makes a recommendation.
•• Purchase − I make the purchase.
•• After sale − I have an after-sales experience.
•• Reconsider − I am thinking about buying something more.
At each of these points, the customer could be delighted or disappointed/dissatisfied or
simply satisfied (the middle ground). The objective of management should be to ensure
that the customer is delighted throughout the process.
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Step 5: Determine experience expectations per touch point
The next step requires management to describe the sort of experience customers are
expected to have when interacting with each of the touch points identified in Step 3
above. Again, this requires little more than adding a column to the table describing the
touch points and in this column, elaborating on the experience they want customers
to have at each particular touch point. At this stage, it may be worthwhile undertaking
further qualitative research to better understand the expectations of customers at each
touch point.
Step 6: Prepare an output road map for each touch point
Management needs to ensure that the activities necessary to achieve a desired output to
meet or exceed customers’ expectations at each specific touch point (that is, to create
delight) are identified and documented. This document serves as an output road map
outlining what needs to be done and what the minimum outputs are per touch point
from the company’s perspective.
In this road map, the organisation must recognise that personal interaction with
frontline staff is one aspect of the total customer experience, while interaction with
non-personal systems, processes and products is another. However, even in the case
of systems, processes and products, numerous staff would have been involved in their
development. There are also procedures involved in the development of systems,
processes and products, and this is where quality management comes into being. Good
quality inevitably translates into good experiences.
Step 7: Create delivery benchmarks for each touch point
Now that management knows what the touch points are, what the experience
expectations are for each of these touch points (from the customer’s perspective) and
what activities need to be done by the company to achieve these outputs, the next step is
to create delivery benchmarks to guide the company in delivering a minimum output at
each touch point and to ensure that experience expectations are met. Bear in mind that
neither the staff that provide services to customers, nor those that develop products,
marketing campaigns, systems or processes that customers ultimately interact with,
have insight into the experiences of customers – that is, they do not know whether what
they are doing is good enough (from the customer’s point of view). However, if certain
outputs and benchmarks have been set, it is much easier to determine (both for the
staff member in question and for management) whether such minimum requirements
are being achieved.
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Road map
Insight
Vision
Touch points
Expectations
Action plan
Benchmarks
FIGURE 9.2 CEM planning
9.10.2 Implementing customer experience management
Once management has decided what needs to be done to meet and exceed customers’
expectations of the company, these actions need to be implemented (the steps involved
in this implementation process are outlined in Figure 9.3). This implementation is
done in the steps described below.
Step 1: Embed desired activities in organisational processes
The activities required to produce the outputs that will translate into satisfied customers
(that is, those identified in the road map outlined in the planning stage) need to be
embedded within the organisation (that is, they need to be part of its daily business
routine). Such activities include:
•• Designing and producing innovative products that will meet customers’ needs;
•• Creating a brand experience and company image to support the experience desired
by customers;
•• Structuring customer interfaces in such a way as to promote positive experiences
on the part of the customers;
•• Acquiring and training staff to create and deliver these positive experiences
(Hoversten & Baker19 see positive, productive employees as the success in delivering
a positive customer experience) – see next steps.
Step 2: Inform and convert staff
If managers want the organisation to create customer interactions that translate into
positive experiences for customers, then not only must they plan what needs to be
done and embed the required activities into the daily routine of the organisation, but
they also need to inform staff of their vision and new customer-orientated strategies.
However, informing staff is also not enough. They need to get commitment from staff
to take ownership of this process. This suggests that they would have involved staff
in the early stages of their management planning process. Indeed, staff would have
contributed information on the various touch points that exist and the expectations of
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customers (see Step 1 in the planning process). At this early stage, management would
already have encouraged staff to become involved in taking ownership of the ultimate
delivery of the outputs necessary to achieve satisfied customers.
Step 3: Train staff
If managers want their staff to provide good experiences for customers, a road map
(mentioned in the previous section) and good training are essential. On-the-job
training, mentoring and classroom training are all avenues that can be used to ensure
better outputs, which will translate into positive experiences on the part of customers.
In this training, staff will learn the road map they have to follow in order to deliver the
outputs required, and will be aware of the minimum requirements expected of them.
Step 4: Empower staff to improve customer experiences
Whether dealing with customers directly (that is, frontline staff) or whether working
with the systems, processes or products that customers will ultimately interact with
(that is, back-office staff), an organisation’s staff are in the best position to detect and
solve customer-related problems. Frontline and low-level staff inevitably know that
something is wrong long before management does. Too often, however, staff are seen
by management as little more than an implementation channel for delivering products,
services and rigid company policies to customers. At the same time they are also seen
by customers as a hindrance in getting their complaints or comments to someone (that
is, management) who can perhaps do something to set the matter right.
A customer-centric organisation will provide staff with the opportunity to address some
of the problems they get from customers, without referring the problem to a senior
person. This might involve accepting a return the company would normally not accept,
or perhaps offering a discount which is not normal company practice. Clearly, there
need to be rules for such exceptions, as they could quickly get out of hand or have
implications beyond the current circumstances, but this empowerment would allow
staff to solve some of the more serious problems they face from customers.
Another important proactive solution to solving negative customer experiences would
be to ensure that a fast-track communication channel exists to get staff to report
problems to management. Just as important would be for management to actively
address these problems and then to communicate solutions to all staff.
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Step 5: Reward staff
Given the key role that staff play in delivering positive experiences to customers, it
makes sense to reward staff that do an exceptional task in promoting and delivering
positive experiences to customers. Such rewards might be financial, but they could also
be as simple as acknowledgement by management.
Frontline
staff
Embed
Backend staff developing
processes/systems/
products/image
Inform &
convert staff
Train staff
Empower
staff
Reward
staff
FIGURE 9.3 Implementing CEM
9.10.3 Controlling customer experience management
This is the third part of the management process, in which the objective is to determine
gaps in the system. In other words, management wants to know at which of the touch
points customers’ experiences are negative and company outputs are not up to standard
(see Figure 9.4 for an overview of this stage of the process).
Step 1: Determine at which touch points customer experiences are negative
The first step in the control process is to determine at which touch points the firm’s
customers are generally unhappy. The word ‘generally’ is important, because there is
always the odd customer for whom something has gone wrong, even though most
other customers are satisfied. What the firm is looking for are the touch points where
many, or most, customers are unhappy. If this is the case, then something needs to be
done about it, but how will the firm know?
The firm’s internal sources are probably the best sources of information about problems
that the organisation is experiencing. To begin with, if a communication channel is
set with staff to enable them to report on problems, then this will serve as a primary
warning system. The next thing to do is to track complaints that have been submitted
by customers themselves, either by email, phone, fax, in person or in writing. The
organisation needs to create a channel where these communications will reach a person
who can report meaningfully on them.
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The organisation also needs to track third-party sources of information such as
Hellopeter20 to see if customers are complaining about it. Finally, the firm would
also undertake regular surveys of customers to learn what their experiences are of
the organisation. These surveys need not always be expensive and could be built into
existing customer interfaces. For example, a simple electronic input device could be
located at cashiers where customers can indicate, by selecting one of three buttons,
whether they are satisfied, dissatisfied or indifferent about their interaction with the
organisation (there are examples of banks in South Africa using this form of customer
input). Customer experience forms could also be made available to customers or a
facility online where they can report their experience (good or bad) with the firm.
Clearly, if the organisation has a call centre, then call centre staff need to proactively
solicit an ‘experience’ response from customers – this need not be complicated (for
example, when the interaction was; was it good, bad or indifferent; what would they
like to see changed).
Step 2: Is the company following road maps and achieving benchmarks?
While management can use different ways of determining customer satisfaction, as
described above, what management is really concerned with are the activities and
outputs by the company that are experienced by customers and that ultimately
translate into satisfaction or dissatisfaction; in other words, what is happening inside
the company at each touch point that can be improved on and, in so doing, improve
customers’ experiences. In the implementation phase, we indicated that it is important
to prepare a road map incorporating benchmarks for each of the touch points in the
company. The question to be answered is whether this road map is being followed and
whether the benchmarks are being achieved. Clearly, if the road map or benchmarks are
not being followed or achieved, then management needs to give this urgent attention.
Step 3: Assessing the effectiveness of outputs in meeting/exceeding customer
expectations
It is one thing following road maps and achieving benchmarks, but this may still not
result in a positive customer experience. For this reason, it is important for management
not only to measure outputs from the company’s side at each touch point, but also
to measure the experience on the customer’s side. If staff are doing everything right,
but customers are still dissatisfied, then clearly the road map and benchmarks are
inadequate, and management needs to urgently review them.
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Step 4: Improve the experience for customers
If the organisation is not getting it right, then something needs to be done about it,
but even if customers are satisfied, there is no reason why the organisation should
not improve and enrich their experience. This may require some creative thinking.
Enhancing an already good customer experience could be turned into a competitive
advantage for the organisation.
Step 5: Feedback to planning
The feedback gained from this control process needs to feed back to further planning –
it is an iterative process. The organisation needs to constantly improve its moments of
truth for all its customers.
Problem
areas
Meeting
benchmarks?
Outputs ≠
experiences
Improve
Feedback to
planning
FIGURE 9.4 Controlling CEM
In this management process, Accenture has identified several key questions for
organisations to explore as they begin to evaluate their customer experience and define
their strategy:21
•• Which elements of the customer experience can an organisation enhance or
automate with minimal capital investment?
•• Which cost drivers can an organisation eliminate without degrading the customer
experience?
•• Are the organisation’s resources strategically deployed to support the most important
enablers of the customer experience?
•• Is the organisation’s customer experience strategy consistent, known and understood
across the organisation?
•• Does the organisation know who its best customers are and what they value most?
•• Does the organisation’s customer experience strategy support its brand promise and
differentiate the firm in the marketplace?
In the next section, we will discuss the way forward for CEM.
9.11 THE FUTURE OF CUSTOMER EXPERIENCE MANAGEMENT
Over the history of marketing, the importance of the customer has been highlighted time
and time again. In the 1960 article ‘Marketing myopia’ by Theodore Levitt published
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in the Harvard Business Review,22 he used this term to criticise firms for focusing on
products rather than on customers. Since these early times, the academic literature
has gone through various waves of focusing on the customer with the introduction
of the marketing concept (which specifically identifies customer needs as the driving
force behind marketing), through relationship marketing (which proposes establishing
a relationship with customers), customer orientation (which is an approach based on
marketing research to better understand customers), the customer value proposition
(which recognises that customers seek value when they buy from companies), to CEM
(which strives to manage the experiences customers have with a company). Please note
that this is not an exhaustive list.
While a customer focus is recognised as playing a key role in success in business,
unfortunately companies often revert to old-style marketing in which they produce
products based on the flimsiest understanding of customers and then strive to market
(that is, promote) them to customers – a very strong ‘push’ effort to get customers to
buy their products. These same companies will pay lip-service to the importance of the
customer, but in reality it is much simpler and easier to produce products and push
them to customers than to first understand customers, learn what they want and then
produce products to satisfy these wants and needs – a ‘pull’ approach.
In the past, however, there has been a time and place gap between companies and
customers. Today, with the advent of the internet, the dynamics of the web, and the ‘in
your face’ reality of social media, companies can no longer ignore or distance themselves
from customers – customers will not allow it. There is a need amongst companies,
therefore, to take up the ‘customer’ mantra and truly become customer focused. The
adoption of CEM is a key step in this direction.
In this adoption process, Temkin23 suggests that there are eight customer mega trends
that organisations will need to deal with:
1. Customer insight propagation is where companies institute Voice of the Customer
(VoC) programmes in order to collect, analyse and share customer information
broadly across the organisation.
2. Unstructured data analysis using text analytics is becoming more important in
order to better understand the deep feelings that customers have about a company.
3. Customer service rejuvenation is essential, as this area is often neglected because
of cost-cutting activities within the organisation, yet it represents a key moment of
truth for customers with poor service resulting in a negative brand image in the
minds of customers.
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4. Loyalty intensification is likely to be the outcome, as organisational executives
realise that shareholder value is not an objective, but rather the outcome of building
stronger customer loyalty.
5. iPod-isation, which is the use of tablet and smartphone devices with touch screens,
is likely to have a consideration influence on facilitating remote and mobile
touch-based interactions between customers and companies. Also, voice-driven
applications are likely to increase in use in the CEM field.
6. Social media are already a key communication and interaction channel between
many companies and their customers and are expected to grow in importance.
7. Digital/physical integration will occur, because with tablet devices and smartphones
enabling remote and mobile task-driven interactions between customers and
companies; they can no longer think about online as a separate and distinct
channel. They will start designing more experiences that blend together online and
offline interactions.
8. Cultural renovation will occur, because companies are increasingly recognising that
‘unengaged employees cannot create engaged customers’. That is why many firms
are starting to focus on the culture of their firms, trying to align employees with
their vision, mission and brand.
The online realm and customer experience management
One cannot end a chapter on CEM without at least highlighting some of the issues
that will be brought to bear on CEM as a result of recent online developments. The
internet, or more specifically the world wide web, has had a major impact on businesses
around the world. On the one hand, websites serve as a marketing channel for the
organisations they represent, and they are increasingly being used as virtual stores
where customers can shop and buy products. On the other hand, websites also serve as
an interactive communication channel for customers to use for asking, stating, sharing
and complaining.
As a marketing and shopping channel, the web serves as a powerful touch point for
the customer in doing business with organisations concerned. As a communication
channel, the website remains a touch point, but it now also provides the customer with
an easily accessible ‘voice’ to speak back and complain (or compliment) if necessary.
Customers can, furthermore, ask about products, share their views and provide
feedback. The web is a ‘24/7’ environment, media rich and easy to use, all of which
are factors that facilitate and enhance communication between customer and company.
The web also facilitates the automation of many tasks (for example, paying accounts,
lodging a service request, etc). The fact that there is a computer monitor between the
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customer and company provides some protection to the customer who might otherwise
be intimidated by having to speak face to face with a person in the complaints or
customer service department.
Organisations unfortunately still pay too little attention to their online efforts − they
are too engrossed in the physical world, yet the website is itself a touch point that may
be the source of a negative experience for the customer. As customers increasingly
make use of the web as their primary contact with companies, so they may become
frustrated with badly designed and user-unfriendly websites. Companies thus need to
pay attention to the functionality of the user experience of their websites.
As far as social media are concerned, this latest online development is accelerating the
impact that the online world has on the day-to-day activities of companies. Social media
can be defined as the various forms of electronic communication channels through
which users create online and peer-to-peer communities to share information, ideas,
personal messages and other content such as videos.24
The power of social media is that they facilitate instant communication: primarily
between customers and secondly between customer and company. This means that if
customers are unhappy, they can immediately share their complaint with a community
of family, friends, colleagues and peers. A 140-character ‘tweet’ (on Twitter) to several
thousand friends could prove very harmful for the transgressing organisation that the
‘tweet’ is about. Unfortunately, there is very little that organisations can do to stop this
form of communication – companies have lost control of their marketing.25 The best
that they can do is to engage as openly and honestly about the issues at hand. The only
real way to deal with this real-time inquisition is to provide a better customer service –
companies no longer have a place to hide.
Clearly, web and social media strategies need to be incorporated into the CEM process.
There are a few suggested actions that companies can follow:
•• Get the customer experience and customer service right – a company can listen
and state its case as much as it wants, but if the experience it is offering is not up
to scratch, nothing that it does on social media or in the online realm will set that
right!
•• Become involved − if organisations are not using social media, they will not know
what is being said about them.
•• Engage – start communicating with customers. This not just one-way
communication, this is interactive communication. Give customers a chance to
share their views and state their opinions and then listen to them. Management
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••
••
••
••
••
••
does not know what is best, customers do. At the very least, use this channel to
identify the touch points that count and share the experiences that customers have
from their point of view. This will be invaluable input in the firm’s future customerorientated efforts.
Respond – do not just listen – and do something about it. Get involved in a
conversation. If customers are drawn in, they will feel as though they are part of
the organisation. In this way the firm is building a relationship with them.
Improve – customers will want to see changes. Try to enrich their experiences and
tell them about the changes, even if they are small ones. Make customers feel that
they have contributed in some way. If there are reasons why the change cannot
be done the way they have suggested, share this with them (assuming it is not
competitive information). If they understand the firm’s plight, they may be willing
to accept it (or they may even come up with alternatives).
Get staff involved – social media are in the hands of every one. If staff are using
social media positively, this can only benefit the firm. By bringing staff into the
process, they also take ownership and may become disciples of the customer
experience themselves.
Inform – use social media to inform customers and staff of what the firm is doing.
Do not miss the opportunity to inculcate the organisation’s brand into all its
communications.
Be honest – do not lie. Customers will catch the firm out.
Innovate – use this social media realm as a way of innovating customers’ experiences
and setting the organisation apart from the competition.
9.12 P
RACTICAL PERSPECTIVES ON CUSTOMER EXPERIENCE
MANAGEMENT
Around the world companies are striving to find new and creative ways of improving the
experience of the company amongst their customers. Companies are finding different
ways of doing this. For example, Ernst and Young (EY) have developed a new customer
experience management framework – the Intelligent Customer Experience (ICE). The
methodology focuses on finding new and quicker ways of measuring and analysing
CEM and reacting to the findings in retail banking. In so doing, banks can optimise
the experience of individual customers quickly, resulting in direct enhancements in
satisfaction, loyalty and revenues. The secret of this approach is the speed at which
individual experiences are tracked and responses are put into play.26
Shopkick, a popular shopping app, has developed technology that enables it to detect
customer movement through a store and to provide suitable sales promotions or related
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offerings on the app as the customer walks through the store, thus enhancing the
customer’s shopping experience.27
Another banking CEM example is when a customer forgets a card in an ATM machine.
Normally, the ATM just ‘swallows’ the card leaving the customer to wonder what
happened and to follow up on their own initiative. The CEM approach is to take the
lead and to detect this event and automatically arrange a new card to be created and
sent to the customer’s bank (or nearby bank) immediately, and to inform the customer
of what has happened almost immediately. In this way, a forgetful, irritating event can
be turned into a positive, proactive CEM success for the bank.28
The focus in the world of CEM needs to be on dynamism. Customers change all the
time, even from day to day, and understanding the customer journey at a point in time
is not enough anymore. Companies need to use technologies to understand not just a
single customer journey, but the changing customer journey, and then they need to adapt
to these changes, regularly and even constantly. It is a big challenge for any company,
but technology can help to gather the data and turn this into real-time knowledge
of the customer’s journey and their individual experiences. This knowledge can then
be used to create new and changing experiences for customers, while also soliciting
immediate feedback on these experiences, which will, in turn, drive the development
of new experiences.29
Earlier in this chapter, the concept of customer journey mapping was discussed.
Clarabridge30 developed a useful guideline or template for developing a journey map,
comprising six steps, namely:
1. Gaining executive buy-in.
2. Defining the scope.
3. Gathering and analysing customer feedback.
4. Designing a journey map.
5. Improving the experience.
6. Putting the map to work.
This is a comprehensive and useful working document for strategists to use.
9.13 SUMMARY
In this chapter, CEM as a marketing strategy was discussed. The chapter identified
some of the key components of CEM, such as touch points and moments of truth. CEM
was defined and the concepts of a customer value proposition, experience management
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and customer relationship management were introduced. The benefits of CEM for an
organisation were also highlighted.
The main thrust of this chapter was to outline the process of managing the customer
experience as a strategic approach, and this process was structured according to the
planning, implementing and controlling steps indicative of management. Finally, the
chapter ended by discussing the way forward for CEM, and also briefly touched on the
role of the online realm in shaping CEM.
CASE STUDY 1
AIRLINE MOMENTS OF TRUTH – GARTNER
RESEARCH31
Torch points are the places and moments where and when, if left alone,
problems could flame up and spread, causing even bigger ‘fires’... Figure
9.5 is an example from an airline and a customer development interaction
process (ie, taking a business flight). It illustrates the moments of truth as
points at which a good experience will reap benefits and a negative one
will have a very detrimental effect.
The value of customer experience management
Efficient
Functional
Experience
assessment
Upgraded
Brand
selection
Enjoyable
+
Reservation
process
Run of the mill
‘Ugh!’
Not again
Loathing
–
Legroom
Frequent flyer
programme
In-flight
service
Flight
cancelled
Luggage
lost
Complaints
response
Missed connection
Touch points and torch points
Poor experience of
airport personnel Flight delayed
FIGURE 9.5 Mapping the moments of truth
The business traveller in this case study experienced every one of the negative
moments of truth in one journey, with little compensation on the positive
side. The following is an excerpt from the actual complaint and claim-forcompensation letter.
Ü
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‘This was a most horrendous experience. Without my persistence in trying
to find my luggage, and managing to find someone who had the sense and
ability to help, I do not think I would have been reunited with it for a few
days. At the moment, I will never fly XXX again, unless I am forced to do
so. The whole experience from late planes to unhelpful staff has been very
stressful. However, I would be grateful if Ronald could be officially thanked
for his help. He fully deserves it.’
The customer went from a view of the airline company as ‘run of the mill’
to loathing in one journey, and even the helpfulness of one staff member
did not compensate for the bad experience.
The heart of the complaint was not so much about the flight being cancelled
and delayed and luggage lost, but more about the poor attitude of staff
and the lack of help in quickly putting things right. The staff were more
interested in sticking to their processes and procedures than providing a
quality customer experience.
Questions
1. Explain what you understand the difference to be between touch points and
torch points.
2. In Figure 9.5 there are a number of positive as well as negative experiences.
Surely, there are generally likely to be more positive than negative experiences in
the case of most customers, therefore there is no need to worry too much about
the negative experiences. Discuss this statement.
3. Should companies concern themselves only with addressing the negative
experiences, the positive experiences, or both? Explain your answer.
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CASE STUDY 2
UNITED BREAKS GUITARS32
Linking up with the above case study research from the Gartner Group is the unusual story
of musician Dave Carroll who said his guitar was broken while in the airline’s custody.
He alleged that he and fellow passengers on board a plane saw baggage-handling crew
throwing guitars on the tarmac in Chicago O’Hare on his flight from Halifax, Nova Scotia
to Omaha, Nebraska. He arrived at his destination to discover that his $3,500 Taylor guitar
had indeed suffered a broken neck (shown in his video on the web). Fox News questioned
Carroll on why he checked the valuable guitar into the baggage holding part of the plane,
and Carroll explained that it is difficult to bring guitars onto flights as carry-on luggage.
Carroll claims that he ‘alerted three employees who showed complete indifference towards
me’ when he raised the matter in Chicago. He then filed a claim with the airline, and was
informed that he was ineligible for compensation because he had failed to make the claim
within the company’s stipulated standard 24-hour timeframe. Carroll says that his fruitless
negotiations with the airline for compensation lasted nine months.
Eventually Carroll decided to take the matter into his own hands. He wrote a trilogy of
songs and created a music video about his experience. The lyrics included the verse ‘I
should have flown with someone else, or gone by car, ‘cause United breaks guitars’. The
first song was released on 6 July 2009 and amassed 150 000 views on YouTube in one day.
By February 2011, the video had 10 million views resulting in a public relations humiliation
for United Airlines. The Times newspaper reported that within four days of the video being
posted online, United Airline’s stock price fell 10 per cent, costing stockholders about $180
million in value (although this amount has been disputed).
Questions
1. What would you have done as the United Airlines customer services manager to
rectify the situation?
2. What should have been done to prevent the situation in the first place?
3. It seems that this is a publicity blunder, not a customer experience matter.
Discuss this statement.
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Self-evaluation questions
1. Explain in your own words what is meant by customer experience management.
2. Does customer experience management have a role to play in marketing strategy?
Justify your answer.
3. Explain why it is important to identify all the customer touch points within an
organisation.
4. Outline the process that you would follow in order to implement customer experience
management within a firm.
5. Discuss the link between customer experience management and the value
proposition.
ENDNOTES
1. Thompson, B. 2006. Customer experience management: the value of ‘moments of truth’.
Online: CRMGuru.com. Accessed: May 2006.
2. Cant, M.C. & Van Heerden, C.H. 2010. Marketing management: a South African perspective.
Cape Town: Juta & Co.
3. Arussy, L. 2010. Customer experience strategy: the complete guide from innovation to execution.
New Jersey: Strativity Group Inc.
4. Scheer, B. 2003. Developing a compelling value proposition for technology solutions.
FutureSight Consulting. Online: http://futuresightconsulting.com/download/WSA_Value_
Proposition_Development_Talk_v1.pdf
5. Ramírez, R. 2010. ‘Moments of truth: unexplored dimension to communicate
effectiveness’. The Canadian Journal of Program Evaluation, 23(2): 117−138.
6. Sultana, N. 2008. ‘Achieving customer satisfaction through customer experience
management’. Centre For Management Research and Development (CMRD) Journal of
Management Research, 7(1), January–June 2008.
7. Pine, B.J. & Gilmore, J.H. 1998. ‘Welcome to the experience economy’. Harvard Business
Review, July−August 1998.
8. Almotairi, M. 2009. ‘A framework for successful CRM implementation’. Paper presented at
the European and Mediterranean Conference on Information Systems, 12−14 July 2009,
Izmir.
9. Baseline. 2009. ‘Customer management: whose line is it?’ Insight paper prepared by the
Baseline Consulting Group, Inc. Online: http://www.baseline-consulting.com/uploads/
BCG_datasheet_CMWhoseLine_2009.pdf/ Accessed: 5 July 2011.
10. Zaayman, P. 2003. ‘Functional requirements of eCRM solutions for the South African SME
sector’. Master’s dissertation submitted to Rand Afrikaans University, November 2003.
11. Burns, M. 2010. The business impact of customer experience. Forrester Research Inc,
November, 2010.
12. Temkin, B. 2010. Customer experience accelerates in 2011. Temkin Group, January 2011.
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13. IBM. 2013. Customer-driven strategy. Online: http://www-935.ibm.com/services/us/gbs/
strategy/market-and-customer-management.html/ Accessed: 21 September 2013.
14. Hoversten, S. & Baker, S.M. 2007. ‘Developing a sustainable customer experience
management plan for public land management’. College of Business White Paper Series,
University of Wyoming, Fall 2007.
15. Metcalf, C. & Bowman, M. 2009. ‘Seven keys to improved customer experience: a
practical guide to creating holistic customer experiences that drive long-term loyalty and
profit’. Hitachi Consulting White Paper.
16. Thompson, B. 2006. Customer experience management: accelerating business performance.
Online: CRMGuru.com/ Accessed: June 2006.
17. Sultana, op cit.
18. Daffy, C. 2001. Once a customer always a customer: how to deliver customer service that creates
customers for life. 3rd revised ed. Cork: Oak Tree Press.
19. Hoversten & Baker, op cit.
20. Hellopeter website. Online: http://www.hellopeter.com/ Accessed: 23 October 2013.
21. Rauen, P., Hernandez, J., Sawczuk, A. & Renaud, M. 2009. Using customer experience for
competitive advantage in uncertain times. United States: Accenture.
22. Levitt, T. 1960. ‘Marketing myopia’. Harvard Business Review.
23. Temkin, B. 2010. Eight customer experience megatrends for 2011. Temkin Group, December
2010. Online. Accessed: 23 October 2013.
24. Edosamwan, S., Prakasan, S.K., Kouame, D., Watson, J. & Seymour, T. 2011. ‘The
history of social media and its impact on business’. The Journal of Applied Management and
Entrepreneurship, 16(3).
25. Bennett, A. 2011. ‘Preparing for social media – a route map to a successful strategy’. Paper
published by Cocreated Ltd, United Kingdom.
26. Brandirali, M., Nieddu, F., Saiz, B.S. and Ghigliano, G. 2015. ‘The intelligent customer
experience: A new approach for banks’. Report prepared by EY. Online: http://www.
ey.com/Publication/vwLUAssets/EY-the-intelligent-customer-experience-a-new-approachfor-banks/$FILE/EY-the-intelligent-customer-experience-a-new-approach-for-banks.pdf.
Accessed: 3 July 2016.
27. Software AG. 2014. ‘Customer Experience Management (CEM) for retail’. Business White
Paper by Software AG. Online: https://www.softwareag.com/corporate/images/sec_SAG_
CEM_Retail_WP_Mar14_Web_tcm16-119943.pdf. Accessed on 4 July 2016.
28. Ibid.
29. SAP Hybris. 2016. ‘The tension in B2B customer experience management’. Report by
SAP Hydris, April 2016. Online: http://www.hybris.com/medias/sys_master/root/h5e/
h8d/8811562270750/ebook-The-Tension-in-B2B-Customer-Experience-Management-EN.
pdf. Accessed: 4 July 2016.
30. Clarabridge. n.d. The ultimate guide to customer journey mapping. Reston, Virginia:
Clarabridge. Online: http://go.clarabridge.com/rs/009-BPM-590/images/Clarabridge_
Ultimate_Guide_to_Customer_Journey_Mapping.pdf. Accessed: 4 July 2016.
31. Kirkby, J, Wecksell, J. Janowski, W. & Berg, T. 2003. ‘The value of customer experience
management’. Strategic analysis report prepared by the Gartner Group.
32. Wikipedia. 2011. United breaks guitars. Online: http://en.wikipedia.org/wiki/United_
Breaks_Guitars/ Accessed: 12 July 2011.
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Chapter
10
MARKET STRATEGIES
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Discuss the factors influencing choice of market entry strategy;
„„ Discuss new market entry strategies;
„„ Distinguish between pioneer, challenger and follower strategies;
„„ Understand the advantages for pioneer, challenger and follower strategies;
„„ Discuss market growth strategies;
„„ Discuss market maturity strategies;
„„ Discuss declining market strategies;
„„ Determine how to gain a competitive advantage.
10.1 INTRODUCTION
The previous chapters discussed the importance of analysing the business environment
of the company and its customers. The steps in analysing a market as well as the
dimension of market analysis were discussed. This chapter will highlight the strategies
a company can formulate at the different life cycles of a market or product. The factors
impacting on the choice of a strategy are also discussed. Furthermore, the chapter
discusses strategies in the market entry stage (introduction), growth, maturity and
decline phase. A company gains competitive advantages over its competitors by
possessing resources that competitors do not have. Such resources include marketing
resources. Marketing plays an important role in sustaining the competitive advantages
of a company. Some of the successful companies in the market do so by building
marketing-related competitive advantages.
A market has a life cycle and so are its products. Therefore the market strategies must
be formulated throughout the life cycle of the product market that the company is
operating in. These strategies can be adapted from time to time to suit the market
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conditions and the state at which the market is in. It is important to understand the
different market strategies one may consider throughout the life cycle of the market.
The next section discusses these strategies.
10.2 MARKET STRATEGIES
It is the purpose of every company to make profit and to grow its profits and revenue
over its life time. Companies need to formulate market strategies throughout the
market life cycle to sustain their businesses and to maintain their revenue and profit.
This means a company must have strategies when the market is in the introduction
phase or entering a new market, the growth phase, maturity phase and decline phase.
The choice of a market strategy and its implementation determine the success of the
company. It also determines the competitive advantage the company will have in the
market.
As with products, markets also go through life cycles. Therefore, it is important for
companies to match the choice of the strategy with the product or market life cycle. The
product life cycle (PLC) has been widely adopted as a concept for managing products
in the life cycle. Managing products or markets in the life cycle enables companies to
adapt marketing strategies throughout the life cycle so that they can be up to date with
changes in the product or market life cycle. This chapter will focus on market strategies
in the market life cycle and not the product life cycle. The product life cycle is discussed
in detail in Chapter 12.
The market strategy choice is determined by various factors. These factors impact on
the success of the market strategy. Companies need to carefully determine the strategy
by monitoring these factors. The next section discusses these factors.
Factors determining strategy selection
The choice of a strategy by a company depends on the stage of the product life cycle that
it is in. The main objective of strategy selection is for companies to ensure that there is a
fit between the marketing environment, company’s capabilities and the chosen market
strategy.1 The company needs to adapt its strategies as market conditions change. This
requires a close monitoring of the changes in the market so that they can adapt their
market strategies. Several factors affect the market strategy choice2 and these factors are
discussed in the sections that follow.
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Demand factors
These factors include the nature of customer needs and supplier selection criteria,
responsiveness of customers to the company’s offerings and whether customer needs
are currently satisfied or not. The customer buyer behaviour, degree of bargaining
power, type of buying decision as well as usage and loyalty status are some of the factors
to be considered. Companies must also consider the prevailing demand and how the
demand factors are expected to change over the product life cycle.
Competitive factors
The company must identify the available competitors in the market, their capabilities
and objectives as well as their marketing strategies. The company needs to further
identify the competitive advantages of these competitors and how sustainable these
advantages are. They could also determine who the market leader is and whether they
compete on cost or differentiation.
Environmental factors
These are internal as well as external factors to the company. They include microand macro-factors. Micro-factors will be discussed in Chapter 6 and include those
factors internal to the company over which the company has direct control, such
as its resources, marketing, production, human resources, products, and so forth.
The macro-factors were discussed in Chapter 3 and include external factors such as
economic, technological, political, social and environmental factors. Companies need
to constantly monitor the micro- and macro-factors since they have direct influence on
the marketing strategies to be adopted.
Company factors
Company factors affect strategy selection. For example, a company must achieve a
balanced product market portfolio and might decide which product to growth or
which products to replace or if they should develop new products. Such a decision is
dependent on the capabilities of the company − what is the company abilities in terms
of growing existing products or introducing new ones. Capabilities may include their
finances, technological assets, reputation, market shares, human resources, access to
distribution channels and so forth. For example, do they have the marketing budget
needed to market the products? Do they have access to distribution channels for them to
expand in the market? When introducing new products, a company must consider the
synergies which can happen in marketing and the distribution of the different products.
This benefits the company in that they can use similar marketing and distribution
channels instead of having to develop new marketing and distribution channels.
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Risk factors
The choice of a strategy must consider the risk associated with the strategy. Potential
risks may be financial or competitive failures. This must be determined prior to adopting
the strategy to avoid the costs of such as strategy. It can happen, for example, when a
company decides to enter the market as the first entrant, which may be costly to enter
than when a company enters as a challenger. There are risks associated with being the
first in the market.
10.3 NEW MARKET ENTRY STRATEGIES
Chapter 4 dealt with market analysis. A company analyse the market to determine the
potential that exist in that market. Having identified these opportunities, the company
may decide to enter the market if they find it attractive. Companies entering new
markets need to formulate market strategies for entering new markets. This is because
there are different market strategies through the life cycle of the market and product.
These strategies are discussed in the next section starting with strategies for market
entry followed by growth strategy, maturity strategy and decline strategies. A company
may enter a new market as a pioneer, challenger or a follower in the market.
10.3.1 Pioneer strategy
A pioneer is a company that enters the market first. It is the first entrant before any
other competitor. The pioneer strategy offers a company several advantages. First, being
the first entrant, the company has the market to itself. The company will be known for
having entered the market first. However, being a first entrant in the market is not
without risks. The company will have to create the primary demand, especially when
entering the market with products that are new to the world and which the market
has never known before. This can be a costly exercise which involves huge financial
investment, particularly in marketing, production and distribution of the product. For
example, Vodacom was the first cellphone company to net the cellphone market in
South Africa. Cellphones were products that the majority of South Africans did not
have any knowledge of. The company spent enormous amounts of money educating
the market on what a cellphone is, how one makes calls, how they charge customers
and how the message is transmitted from one person to another. This was a costly
exercise. However, Vodacom has remained number one in terms of market share in
South Africa and is the market leader in the South African cellphone market.
Being a pioneer does not guarantee success, however. There have been many failures
in the market of companies that entered the market with products the market did not
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accept. The pioneer strategy offers several advantages to companies.3 These advantages
are discussed in the sections that follow.
Advantages of being a pioneer in the market
First choice of market segments and positions
Customers looking for new products will have the pioneer company available to supply
the products whenever they want to buy since there will be no other companies to
supply the products. This creates an opportunity for pioneers to build customer loyalty
before other companies enter the market. The company may even position itself in
the market and gain competitive advantage before challengers and followers enter the
market. The pioneer sets the standard in the market since, by developing a new product
before other competitors, customers accept the products’ features that the pioneer
has developed and these features become the standard for all companies entering the
market. This creates an advantage for pioneers since challengers and followers will
face a challenge to convince consumers that their brands are superior to those of the
pioneer. The pioneer can occupy an attractive market position ahead of competitors,
making it difficult for competitors to find attractive positions in the market.
The pioneer defines the rule of the game
Being the first entrant in the market means that the pioneer can develop standards
in terms of product quality, distribution channels, customer services, promotion and
other marketing elements. Challengers and followers will have to either copy these
standards or come up with better advantages. For example, Coca-Cola in South Africa
distributes its products through various formal and informal distribution channels,
which has made it difficult for its competitors to match.
Distribution advantages
Distribution advantages can be achieved through building relationships with distribution
channels before competitors enter the market. Such relationships can create advantages
for pioneers and is a major threat to new entrants who might not be able to build
relationships with distribution channels.
Economies of scale and experience
Pioneers can gain accumulated volume and experience, which lead to reduced costs per
unit faster than their followers. Economies of scale can be achieved through lowering
prices to discourage followers to enter the market. They can achieve this by raising
the volume to break even or invest its cost savings by expanding the marketing effort
to expand its penetration in the market. Competitors might not be able to match the
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pioneer’s marketing budget and this will discourage them from entering the market or
end in failure if they decide to enter the market.
High switching costs for early adopters
High switching costs can discourage early adopters to switch brands, thus making
it difficult for followers to steal customers away from pioneers. For example, some
customers prefer to remain with their banks, because they have different bank accounts
with their banks, such as home loan accounts, car finance accounts, investment
accounts, savings accounts, etc. This ties them with the company and discourages them
from switching to other banks.
Early profits
Companies that enter the market first can be in a position to gain profits through
pricing their products aggressively, using skimming pricing policy. This policy allows
companies to set higher prices during the introduction stage of a product in order to
generate profits early.
Possibility of pre-empting scarce resources and suppliers
New entrants may gain favourable access to resources before followers and resources
might be difficult for followers to access. Pioneers are able to select the best locations,
access distribution channels, access raw materials or negotiate favourable deals with
suppliers that cannot be attained by followers.
The next section focuses on the strategic marketing programmes for pioneers.
The strategic marketing programmes for pioneers
Companies entering the market first are faced with a decision on the strategies they must
adopt when entering the market. Pioneers must formulate the appropriate marketing
strategies that will enable them to succeed in the market. The choice of such a strategy
will determine their success and whether company objectives will be met. Pioneers can
choose from the following three marketing strategies:
1. Mass market penetration.
2. Niche penetration.
3. Skimming or early withdrawal.
Mass market penetration
The mass market penetration strategy entails persuading as many customers as possible
to start adopting the company’s products quickly. The objective is to capture and
maintain a high market share of the total market for the new product. Attracting many
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potential customers drives costs for pioneers and they are also able to build loyalty before
followers enter the market. This strategy is most successful when entry barriers are high
and other companies find it difficult to enter the market since it gives pioneers more
time to build volume, lower costs and develop relationships with customers. It is also
successful when pioneers have built resources or competencies that most competitors
cannot match. Companies need to build advantages in many areas and make it difficult
for followers to copy them. They can build advantages through distribution, promotion,
product development, and pricing, as well as through developing the necessary skills
needed for them to succeed in the market.
To attract as many people as possible, the company may aggressively build product
awareness and motivation to buy among potential customers. This will involve
marketing strategies such as aggressive advertising, aggressive sales effort, aggressive
introductory and sales promotions, to introduce product trials as well as offering free
trials or extended warranty. The company adopting the mass market penetration strategy
can also make it as easy as possible for those customers to try new products. This will
be achieved through penetration pricing policy, extended credit terms to encourage
initial purchases, and offering support services such as installation and training.
Neotel focused on the business market first when entering the South African
telecommunications market and expanded overtime to enter other markets.
Niche penetration
The niche penetration strategy is suitable when a company has limited resources to adopt
a mass market penetration strategy. The lack of resources means that a company must
select a smaller market they can effectively serve with available and limited resources.
Such companies also avoid head-on competition with large companies. This strategy
is more appropriate when a market is expected to grow quickly. It is also appropriate
when there are a number of different benefit or applications segments to appeal to and
is more suitable for small businesses. It is also more suitable when the entry barriers are
few and the pioneer has limited resources and competencies to defend the advantages
it gained through early entry.
The niche marketing strategy may still apply similar marketing strategies as the mass
market strategy. Since they focus on a concentrated market, their marketing efforts
should also use selected media and channels. To be successful, nichers can specialise
geographically, by end-user type, by product or product line, on a quantity/price
spectrum, by service and by size of customers or product features. This enables them to
specialise in the market and they can serve their markets better. For example, Land Rover
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specialises in 4×4 motor cars and have built their advantages in this market focusing on
different sizes of 4×4 to cater for different needs in the 4×4 motor car market.
Skimming and early withdrawal
The skimming strategy is applied by pioneers who want to gain high profits in the early
stages of the product life cycle and before competitors can enter the market. This strategy
involves selling at high prices and making less effort in advertising and promotion to
maximise profit per unit, recovering the costs of developing the product as quickly as
possible. Companies use skimming price strategy before competitors enter the market
and lower prices as soon as competitors enter the market. The strategy is suitable for
companies of all sizes. It requires that a company have the capabilities to develop new
products or to move to new markets when competitors enter the market. The strategy
also requires the company to have a good research and development department and,
product development skills to produce a constant stream of new products or new
applications to replace older ones as they attract heavy competitors.
The marketing strategy for skimming and early withdrawal is different from those
of mass market and niche strategies. Companies charge higher prices to lure those
customers who are not price sensitive. They also succeed through continued product
development, which might involve product line extensions or adapting product
packages to match the changing needs of the market.
Strategies for pioneers
Pioneers are in some cases market leaders. As market leaders they face challenges from
other companies that want to challenge their position in the market. Therefore, as
market leaders, pioneers need to formulate appropriate strategies for them to maintain
their position in the market. This means that the position a company occupies in the
market influences the marketing strategies that they will formulate. The main concern
for market leaders is how best to expand the total market, how to protect the company’s
current market share of the market and how to increases market share.4
Market leaders can expand the overall market by adopting the strategies discussed in
the sections that follow.
Expansion of the overall market
The overall market can be expanded by searching for new users and also identifying
new uses of the products. The company may furthermore encourage customers to use
more of their products. By continuously monitoring market changes, companies may
identify emerging market segments or changes in existing market segments that may be
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targeted. Research may also be conducted to identify the different uses of the products.
This may lead to introduction of new product models that can be used to target nonusers or users with changing needs.
Guarding the existing market share
A market leader must constantly be aware of possible attacks by its challengers and
never forget defending its market share. This requires the market leader to formulate
appropriate marketing strategies to fend off the competitors. Such strategies may
include aggressive advertising, strong distribution channels, continuously developing
new products and processes and strong customer support. The cellphone handset
manufacturers Nokia, which is currently the market leader, has defended its market
position through continuous introduction of new product models, introducing a
variety of modules, advertising, strong distribution channels and customer support.
However, Samsung, which is a challenger in the market, is also exerting such efforts
and challenging Nokia.
Expansion of current market share
Companies expanding the current market share do so through heavy advertising,
expanding distribution channels, offering price incentives and through new product
development. Some companies merge or take over other companies. For example, Pick
n Pay has expanded its distribution channels to townships and rural areas in South
Africa, to expand its market share. The company also took over Boxer, a supermarket
selling groceries.
Some companies might not realise the opportunity in the market and fail to enter
the market first. They then enter the market as challengers instead of pioneers. These
market challengers are discussed in the next section.
10.3.2 Market challengers
Market challengers are companies with smaller market share, who decide to attack
the market leader in an attempt to gain market share or to dominate the market.5 The
objective of the market challenger is to build its share by expanding faster than the
overall market growth rate. They do so by stealing existing customers away from the
leader or other competitors, capturing a larger market share of new customers than the
market leader or both.6
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Challengers are attracted to growing markets for various reasons, including the
following:
•• It is easier to gain market share when a market is growing.
•• Share gains are worth more in a growth market than in a mature market.
•• Price competition is likely to be less intensive.
•• Early participation in a growth market is necessary to make sure that the company
keeps pace with technology.7
Challenging the market leader can be very costly and companies need to carefully
consider this strategy when entering the market. There are costs involved in attacking
the leader. Management must also determine the necessity for attacking the leader as
well as the willingness to invest in this attack.
Because of the high costs and the risky situation in attacking the leader, challengers
must consider whether to go ahead and attack the leader, attack companies of similar
sizes to itself that are underfinanced, or attack smaller regional companies. The two
latter options are less costly in that the challenger does not have to spend as many
financial resources attacking other companies as when attacking the market leader.
There are five strategies a challenger may opt for when attacking the market leader.
These strategies are discussed in the sections that follow.
Frontal attack
With frontal attack, the challenger decides to pursue the same marketing strategies as
the market leader. This is a head-to-head attack and attempts to steal the market leader’s
customers. They may pursue the same market segments and try to match the leader’s
other strategies such as product, price, place and promotion. For example, the cellphone
network companies in South Africa bombard customers with heavy advertising, price
specials and aggressive direct marketing. It is clear that the market leader, Vodacom, is
defending its position, while MTN and Cell C are challenging its position in the market.
This strategy is costly because it involves matching the marketing budget of the market
leader, which the challenger might not have, and if they have the budget, it might not
yield benefits if the market leader succeeds in defending its position.
Depending on the position of a market leader, the leader might sit back and wait for
the challenger to fail. This is particularly the case when the leader has established a
strong market position, and has attained a high level of customer preference and loyalty
in the market. Market leaders might alternatively decide to be proactive and attack
the challenger before they enter the market. This can be achieved by bettering the
competitors’ product offerings and other marketing programmes. Before entering the
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market in South Africa, Cell C announced its intention to introduce per second billing.
Vodacom launched an attack by introducing the per-second billing system before Cell
C did. This was an attack by Vodacom on it challenger.
Before launching an attack on competitors, a market challenger must decide which
competitor to target. The options available to market challengers are:
•• Attacking the market share leader within its primary target market;
•• Attacking a follower who has an established position within the major market
segment;
•• Attacking one or more small competitors who have limited resources;
•• Avoiding direct attacks on any established competitors.8
Flank attack
Some companies prefer to avoid direct attack on the market leader by not adopting the
frontal attack. They instead adopt a flanking attack, which involves attacking the market
leader in areas that the leader is weak or in the segments that have been neglected. Cell
C in South Africa entered the market offering lower prices, which Vodacom and MTN
did not charge at the time. This was going to be an advantage for the company, but
it did not take long before Vodacom and MTN adapted their marketing strategies to
also target lower-income consumers by introducing lower prices on their products and
services.
A leader can defend its position during an attack directed at a weakness in its current
offering by developing a second brand to compete directly against the challenger. This
might involve trading up, which means that the leader develops a high-quality brand
aimed at prestige customers, or trading down, offering lower-priced products aimed at
price-sensitive customers.
A challenger must identify one or more ways in which it can achieve a sustainable
competitive advantage. It is important to avoid relying on one advantage where the
leaders do better.
The Asian motor car manufacturers such as Hyundai, Kia and others entered the SA
motor car market with low priced motor cars. Their brands were unknown and in some
cases considered as of inferior quality to existing motor car brands. Today, Hundyai and
Kia are selling more motor cars in the market that they did decades ago. The market
has accepted the brands.
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Encirclement
This attack strategy entails launching an attack on as many fronts as possible to reduce
the defender’s ability to maintain the leading position. This strategy is successful if the
market leader fails to defend itself in all the positions that are targeted. It is an expensive
strategy to adopt, but if done well, it can lead to better returns. The strategy entails
developing a variety of product lines with product attributes tailored to meet the needs
of different segments.
Bypass attack
A company might avoid a direct attack on the market leader and instead opt for a
bypass attack. This takes place when competitors decide to sell unrelated products,
enter new geographical markets, or through technological leapfrogging.
Guerrilla attack
The guerrilla attack involves targeting limited geographical areas where the market
leader is not well entrenched. Companies choose this strategy when market leaders
have covered all major market segments and the challengers have limited resources. It
is most suitable for small companies and involves drastic short-term price reduction,
product comparisons, poaching competitors’ key staff, legislative moves, geographically
concentrated campaigns, and intensive advertising.9 Table 10.1 summarises the
marketing objectives for each of the challenger attack strategies.
The objectives of market challengers for each of the strategies are the following:
•• Frontal attack − capture substantial repeat/replacement purchases from target
competitor’s current customers, attract new customers among later adopters by
offering lower price or more attractive features.
•• Bypass − induce current customers in mass markets to replace their current brand
with superior new offering, attract new customers by providing enhanced benefits.
•• Flank attack − attract substantial share of new customers in one or more major
segments where customers’ needs are different from those of early adopters in the
market.
•• Encirclement attack − attract a substantial share of new customers in a variety of
smaller, specialised segments where customers’ needs or preferences differ from
those of early adopters in the mass market.
•• Guerrilla attack − capture a modest share of repeat/replacement purchases in
several market segments or territories; attract a share of new customers in a number
of existing segments.
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Some companies prefer to enter the market after the pioneer has entered the market.
They avoid taking risks of being the first in the market and may also not want to be
challengers. They therefore adopt a follower strategy, which is discussed in the next
section.
Follower strategy
The follower strategy is best for companies that have fewer resources and do not want
to compete head-on with resourceful companies. Market followers are less aggressive
than market challengers and maintain the status quo.10 They wait for pioneers to enter
the market and copy from the pioneer that which is less costly for them. There are
several advantages of adopting a follower strategy.11 Some advantages are the ability to
take advantage of:
•• The pioneer’s positioning mistakes;
•• The pioneer’s product mistakes;
•• The pioneer’s marketing mistakes;
•• The latest technology;
•• The pioneer’s limited resources.
The above advantages mean that followers must study the pioneer’s marketing strategy
so that they could identify gaps in the pioneer’s marketing strategies and focus on these
weaknesses when entering the market. For example, a pioneer might enter the market
with high-quality, high-priced products in the market. If a follower studies the market
and finds that some customers want low-priced products, they can take advantage of
the pioneer’s mistakes and launch products at low prices. The supermarkets in South
Africa such as Shoprite and Pick n Pay are also positioned differently in the market.
Shoprite is positioned as a low-price enterprise, while Woolworths is positioned as a
quality enterprise. Each one has their own market segments to pursue, although the
Shoprite Group has been trying to tap into Woolworths’s market through the Checkers
Hyper brand.
Table 10.1 summarises strategies that market leaders, challengers and followers apply
in the life cycle of the product in the market.
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TABLE 10.1 Marketing strategies for leaders, challengers and followers12
Stage in industry development
Strategic
position
of a
company
Leader
Challenger
Growth
Decline
„„ Keep
ahead of the field
other
possible entrants
„„ Raise entry barriers
„„ Develop strong selling
proposition and
competitive advantage
‘lick ink’ distributors
„„ Build loyalty
„„ Advertise extensively
„„ Hit
back at challengers
costs
aggressively
„„ Raise entry barriers’
further
„„ Increase differentiation
„„ Encourage greater
usage
„„ Search for new uses
„„ Harass competitions
„„ Develop new markets
„„ Develop new products
and product variations
„„ Tighten control over
distributors
„„ Redefine
„„ Discourage
„„ Manage
„„ Divest
„„ Enter
early
aggressively
„„ Develop strong
alternative proposition
„„ Search for leader’s
weaknesses
„„ Constantly challenge
the leader
„„ Identify possible new
segments
„„ Advertise aggressively
„„ Harass the leader and
the followers
„„ Exploit
the weaknesses
of the leader and
followers
„„ Challenge the leader
„„ Leapfrog technologically
„„ Maintain high level of
advertising
„„ Price aggressively
„„ Use short-term
promotions
„„ Develop alternative
distributors
„„ Take over from smaller
companies
„„ If
„„ Imitate
„„ Search
„„ Search
„„ Price
Follower
Maturity
at lower costs if
possible
„„ Search for joint
ventures
„„ Maintain vigilance
and guard against
competitive attacks
„„ Look for unexploited
opportunities
for possible
competitive advantages
in the form of focus of
differentiation
„„ Manage costs
aggressively
„„ Look for unexplored
opportunities
„„ Monitor products and
market developments
scope
peripherals
„„ Encourage departures
„„ Squeeze distributors
„„ Manage costs
aggressively
„„ Increase profit
margins
the challenging
strategy has not been
successful, manage
the withdrawal in the
least costly way to
you, but in the most
costly way to others
for
opportunities created
by the withdrawal of
others
„„ Manage costs
aggressively
„„ Prepare to withdraw
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As soon as companies enter the market as pioneers, they must monitor changes in
the market to determine if the market is moving to the growth stage. Monitoring and
analysing such developments will enable the company to formulate market growth
strategies before competitors do. The next section focuses on strategies for market
growth.
10.4 STRATEGIES FOR MARKET GROWTH
Pioneers who have entered the market first or companies who are leaders in the
market strive to maintain their market share. This requires the formulation of market
growth strategies to increase or maintain their market share. However, it is not an easy
task, because there may be an increasing number of competitors, the market may be
fragmented and there may be a threat of product innovation. The main objectives for
companies that want to maintain their market share is to retain their current customers
and to stimulate selective demand among late adopters of the products.13 Table 10.2
shows the strategies in a growing market.
TABLE 10.2 Market growth strategies14
Current product
Current
market
New markets
Market penetration strategies
market share
„„ Increase product usage
„„ Increase the frequency of use
„„ Increase quantity of use
„„ Increase
Market development strategies
market for existing products
„„ Geographic expansion
„„ Target new segments
„„ Expand
New products
Product development strategies
improvements- add new
product features
„„ Product line extensions
„„ New innovative products
„„ Adding compatible products
„„ Product
Diversification strategies
into related businesses
„„ Diversification into unrelated
businesses
„„ Diversification
The strategies in Table 10.2 are discussed next.
10.4.1 Market penetration strategies
Market penetration entails increasing the company’s market share in an existing market.
The total sales volume of a market segment is determined by the number of potential
customers in the segment, the promotion of potential customers who actually use
the product, product penetration and the average frequency with which consumers
consume the product.15
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The company offers existing products to the current market and formulate strategies
to increase the market share in the current market. There are various ways in which a
company can achieve these goals:
•• Increase its market share. This can be achieved by increasing the marketing effort.
A company may lower its prices to attract more consumers to the market. They
may also include advertising and sales in trying to lure consumers into buying
their products. A company may, furthermore, consider increasing the distribution
channels within the current market. For example, in the cellphone industry, major
cellphone providers have launched intensive marketing efforts to get consumers to
use more of their products. They lowered prices for buying airtime, offered price
specials and discounts, as well as running competitions in a bid to get consumers
to buy more of their products. They are also fighting to keep their customers. Their
market efforts for doing so are similar, which shows that they are all fighting to
increase and/or maintain their market share.
•• Encourage consumers to increase product usage. This can be achieved by
introducing new uses of the product. Companies selling margarine launched
advertisements educating the market that margarine can be used as butter spread,
for cooking, baking and other purposes. It was important to encourage consumers
to use more of their products.
•• Encourage consumers to use the product more than they currently do. This means
that consumers will have to buy bigger quantities of the products and also use the
products more frequently. For example, apple farmers launched a campaign many
years ago educating the market that an apple per day keeps the doctor away. This
was meant to increase the consumption of apples as fruit and so increase their
market share. In addition to using bigger quantities, consumers can also use the
product more frequently. For example, the airline industry offers price discounts
for frequent fliers, which encourages travellers to fly more and get discounts.
•• Identify non-users and those not interested in the product. To attract these potential
customers, the company can enhance the value of the product by adding features
or benefits. This can also be achieved by means of line extensions.
•• Enhance the product’s value by offering additional services that improve the
performance of the product or the ease of use by potential customers.
10.4.2 Market development strategies
These strategies involve entering new markets with existing products. This means
that the company finds markets where they can sell their existing products in other
geographic markets. Market development can take place locally, regionally and
globally. South African supermarkets that have traditionally operated in urban areas
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have expanded their businesses to operate in rural and township markets, which
were initially considered high-risk markets that were unprofitable. This is because
they have identified opportunities in this market and are seeking opportunities for
growth by expanding in other areas. Adopting local or domestic expansion means that
a company can rely on existing expertise and technology, and even the same production
and distribution facilities it already has. The South African banking sector has also
responded to these opportunities by placing their ATM machines in townships to make
their services convenient and available to their consumers.
Alternatively, a company may target new markets or new application segments with
its existing products. This means that a company identifies potential consumers in
the market who are currently not using their products and finds ways to reach these
consumers. This is why marketers should continuously monitor developments in the
markets as it will help them to identify opportunities to target new market segments.
The company can reach new segments by simply expanding the distribution system
without changing the characteristics of the product or other marketing elements.
Another alternative to market development is to launch private label brands for large
retailers. These companies adopt this strategy as a means to reduce excess production
capacity. It allows companies to gain access to established market segments, without
incurring additional expenditure, which increases the company’s volume while reducing
unit costs.16
South African companies have expanded regionally into southern Africa and into other
African states. Many South African companies can be found in African countries such
as Nigeria, the Democratic Republic of the Congo, Zimbabwe, Ghana and Kenya. Some
companies such as SABMiller and Sasol are global companies that have expanded
their businesses to enter the European and American markets. Global expansion has
favoured many companies in South Africa as can be witnessed in the increasing number
of companies expanding, especially to African countries. However, local and global
expansion must be supported by appropriate marketing strategies that will be effective
in reaching the new markets. Although the company may offer similar products when
expanding the market, they might adapt their pricing, distribution and promotion
strategies to suit the market conditions in those countries. Global market expansion
can be achieved by either standardising or adapting the marketing mix. Standardising
can easily be achieved through product design and packaging, but it poses a challenge
with distribution and pricing since this might have to be adapted for different markets.
Companies are also under pressure to adopt some part of their marketing strategies in
response to local preferences.
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With regard to standardisation of the product, the company has three options.
1. They can market the same product to all the countries. This is the case with CocaCola where the product is the same in different counties except for packaging
which is adapted for different countries.
2. They could also adapt the product to local conditions. This is more appropriate
when market needs and preferences differ across countries. The physical appearance
of the product however remains the same with minor adaptations.
3. The company might also consider a country-specific product, which involves altering
the physical product to accommodate the differences in customer preferences and
behaviour across countries.17 Some motor car manufacturers produce different
designs for different countries.
10.4.3 Product development strategies
Product development strategies are strategies that involve a company developing new
products for the existing market. Consumer needs change and companies need to
adapt their marketing strategies to match the changing needs of consumers. Failure to
adapt their products and marketing strategies will lead to failure of the company. New
product development takes various forms:
•• Improving existing products. Instead if introducing new innovation to the market,
some companies improve the attributes of their existing products. They monitor
changes in consumers’ needs and improve those features of the products that
would meet the changing needs. This is appropriate in a situation where consumers
still want the products, but want better features of the product. Many companies’
new products will fall in this category. For example, in the cellphone industry,
some companies introduced new designs and kept some of the product features
similar to their existing products. The motor car industry also kept their models for
some time, but keep updating some features of the products. Instead of bringing a
completely new product design, they improved some features of the products and
introduced it as new in the market.
•• Product line extension. Product line extension is an extension of a product’s lines
that the company is currently selling. In the luxury car market in South Africa,
brands such as BMW, Audi, Mercedes-Benz and Volvo have introduced various
versions of their luxury cars − from the small version of the luxury car to the
biggest and the most expensive models. This is necessary to cater for the needs of
different consumers. In the case of luxury motor cars, companies might try to reach
consumers of different social classes and income that may want luxury cars, but
have different affordability levels.
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••
••
New innovative products for existing consumers. For example, cellphone hand set
manufacturers introduced the tablets, which were also targeted at consumers who
buy cellphones. The purpose is to bring something new to address the emerging
needs of consumers who may not be satisfied with the current products. This is also
important for growing the company’s sales and profitability.
Adding compatible products. This occurs when a company launches new products that
are compatible with existing ones. For example, cellphone handset manufacturers
sell handsets and pouches.
10.4.4 Diversification strategies
A company may decide to diversify its market by entering new markets with new
products. A company may diversify with related or unrelated products. Related
diversification is when the company diversifies its products by introducing new
products that have similar characteristics to existing products. These products may use
the same technology or be distributed through the same channels of distribution. Many
large retailers in South Africa own more than one retail brand in their group. Edcon
and Foschini, for example, own clothing shops as well as home decor shops. They are
all retailers located in major shopping centres and use store cards to sell their products
to customers who prefer to buy by using a store card.
The advantage of using related diversification is that if offers synergies through sharing
of skills and existing competencies. Using existing skills and competencies could lead to
cost savings since the company does not have to develop new skills and competencies.
Cost savings can be achieved by using similar distribution channels and existing
skills, as well as economies of scale achieved in production and through research and
development.
Unrelated diversification is when a company introduces new products to the market
that are unrelated to its existing products. These products may require new usage,
new machinery, new distribution channels, or new production processes. This is the
most risky approach to growing the market since the company enters a market it has
never operated in and lacks the experience to operate in that market. It is also costly
because the company has to learn about the market and how to market its products in
that market, which might lead to slow adoption of company products. For example,
LG produces consumer electronics including household white goods and cellphone
handsets. White goods such as fridge, washing machines and stoves complement each
other while cellphones function differently from the others and require a different
production system to that of a fridge or washing machines.
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The next section discusses strategies in a mature market.
10.5 MARKET STRATEGIES IN MATURE MARKETS
The maturity stage is characterised by the decline in sales and market share. Sales
decline during this stage is because of changing consumer needs and preferences and
availability of new alternatives in the market. Companies decide at this stage whether
to stay in the market or exit the market. Mature markets are characterised by excess
capacity, increased intensity of competition, increased difficulty of maintaining product
differentiation, worsening distribution problems, and growing pressures on costs and
profits.18 Each of these characteristics are discussed in the next sections.
10.5.1 Excess capacity
Excess capacity happens at the end of the growth stage, because companies invest
heavily in new plans, equipment and personnel to keep up with the demand. They
sometimes fail to anticipate the nature of demand and oversupply products leading to
excess capacity. Companies struggle for market share as they seek increased volume to
hold down unit costs and maintain profit margins.
10.5.2 Increased intensity of competition
Due to excess capacity, companies intensify their marketing effort to increase the sales
volume and market share by reducing prices and increasing selling and promotional
efforts. They also modify products to appeal to specialised segments of the market,
make deals to produce private labels, and increase research and development and
marketing costs.
10.5.3 Increased difficulty of maintaining product differentiation
Technology matures at this stage, leading to better and more popular products becoming
industry standards. The physical differences among brands become less substantial.
This leads to weakening of brand preferences among consumers and makes it difficult
for market leaders to command premium prices. The decline in differentiation also
increases costs since companies will seek alternative ways of differentiating their
products by offering, for example, improved services.
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10.5.4 Worsening distribution problems
Channel members are reluctant to stock products that are not selling, especially when
demand for products has declined. This is detrimental to companies who might not
gain access to distribution channels. It forces low market share companies to offer trade
incentives to maintain their products’ coverage.
10.5.5 Growing pressures on costs and profits
During the maturity stage, prices go down and sales and profit margins get squeezed.
Smaller companies suffer at this stage, because costs per unit remain higher which
means they operate at a loss. Companies with high market share are more likely to
survive, although they also experience decline in sales and profits and might also fail to
maintain the cost advantage.
10.6 MARKET STRATEGIES IN DECLINE MARKETS
Products go through a life cycle and eventually reach a decline stage. The decline
stage takes place when sales of the products market go down and there are limited
opportunities for a company to regain the market share. A decision must be made
whether to keep the product in the market or to withdraw it. There are different strategies
a company can adopt during the decline stage and these strategies are discussed in the
sections that follow.
10.6.1 Divestment or liquidation
This strategy is adopted when the industry has become less attractive or when the
company has a relatively weak position. To recover its investment, the company sells
its businesses. Divestment is possible when there are lower exit barriers. For example,
the company might have made costly investments that may not be recovered by selling
the business.
10.6.2 Maintenance strategy
This involves holding or maintaining the investment levels and maintaining the same
marketing strategies as in the mature stage. This is done until the company is sure that
there will not be any sales growth. It is usually applied by companies with a leading
market position and is aimed at maintaining market share.
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10.6.3 Harvesting strategy
The company adopting this strategy wants to generate its sales by maximising cash
flow over a short-term. It is achieved by reducing investments in business, operating
expenses as well as marketing efforts. This strategy is appropriate when a company is
in a strong position in the market and has loyal customers who may continue buying
the products.
10.6.4 Profitable survivor strategy
The profitable survivor remains in the market even after other companies have
withdrawn from the market. This is usually a company with a high market share and
a sustainable competitive advantage in a declining market. The purpose is to invest
enough to increase market share and to establish itself as an industry leader. A company
seeks increased market share by aggressively cutting prices or by increasing advertising
and promotional expenditures. It might introduce line extensions to cater for the
existing demand and to make it difficult for competitors to find profitable niches.
10.6.5 Niche strategy
A niche strategy is suitable when a company can identify one or more segments that are
viable. It requires a company to have a strong competitive position in the market and be
able to build sustainable competitive advantages. The strategy is also suitable for small
businesses that lack resources to operate on a large scale.
10.7 SUMMARY
This chapter discussed the market strategies of companies in different market life
cycles. Managing the products and markets throughout the life cycle helps companies
to determine strategies they can put in place. It also helps them to monitor competitive
actions and to respond with appropriate marketing strategies. Studying the different
market strategies helps companies to decide, particularly in the early stage of the market,
whether they want to enter the market as pioneers, challengers or followers. Whether
a company enters the market as a pioneer, challenger or follower, it needs to apply
relevant marketing strategies for them to succeed and gain competitive advantages.
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Self-evaluation questions
1. Select a market of your choice and apply the market entry strategies. Provide relevant
practical examples in your answer.
2. Referring to a market of your choice and motivate which company is a pioneer,
challenger or follower. Supply practical examples as motivation for your answer.
3. Show how a company of your choice is applying market strategies in a growth
market.
ENDNOTES
1. Shipley, D. 1998. ‘Strategic marketing: A practical guide for designing and implementing
effective marketing strategies.’ In C. Egan & M.J. Thomas. The CIM Handbook of Strategic
Marketing. Oxford: Butterworth-Heinemann.
2. Ibid.
3. Walker, O.C., Boyd, H.W. & Larreche, J. 1999. Marketing strategy: Planning and
implementation. 3rd ed. Singapore: McGraw-Hill Irwin.
4. Wilson, R.M.S & Gilligan, C. 1997. Strategic marketing management: Planning,
implementation and control. 2nd ed. Oxford: Butterworth-Heinemann.
5. Ibid.
6. Walker, Boyd & Larreche, op cit.
7. Aaker, D.A. & McLoughlin, D. 2010. Strategic marketing management global perspective.
West Sussex: John Wiley & Sons.
8. Walker, Boyd & Larreche, op cit.
9. Wilson, op cit.
10. Wilson, op cit.
11. Walker, O.C., Mullins, J.W. & Larreche, J. 2008. Marketing strategy: A decision-focused
approach. 6th ed. New-York: The McGraw-Hill Companies.
12. Wilson, op cit.
13. Walker, Mullins & Larreche, op cit.
14. Ibid.
15. Walker, Boyd & Larreche, op cit.
16. Ibid
17. Ibid.
18. Ibid.
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Chapter
11
PRODUCT LIFE CYCLE AND
BRANDING STRATEGIES
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Define and explain the product life cycle;
„„ Outline the key consideration with regard to the product life cycle theory;
„„ Identify and discuss the stages of the product life cycle;
„„ Identify possible marketing strategies that can be adopted in each stage;
„„ Explain that not all product life cycles are the same;
„„ Explain what a brand is and the brand values associated with brands;
„„ Discuss brand awareness, brand equity and brand protection;
„„ Discuss various branding strategies.
11.1 INTRODUCTION
So far the concept and importance of marketing strategy have been put forward, and
specific strategies have been discussed related to various aspects of marketing. This
chapter takes the discussion further and focuses on product life cycle and branding
strategies. These two concepts are briefly introduced, and then marketing strategies
related to the two concepts are presented to the reader.
The discussion begins with the product life cycle.
11.2 THE PRODUCT LIFE CYCLE
The product life cycle (PLC) can be defined as ‘a marketing theory which outlines the
period of time associated with all products over which a product is developed, brought
to market and ultimately removed from the market’.1 During this period, most products
typically move through a number of stages of development. Understanding these stages
is valuable to managers, as different strategies can be applied in each stage to boost the
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product’s growth, and the PLC serves as a useful planning tool for choosing marketing
strategies appropriately. The length of time a product is on the market is largely
contingent upon the nature of the product, the competition it faces, the technology
involved in the product, and even the savvy of an organisation’s marketing department
in keeping the product alive. Figure 11.1 provides an example of a typical PLC for a
consumer product.
Sales in rand ‘000s
600
500
400
300
200
100
0
Time
Introduction
Growth
Maturity
Decline
FIGURE 11.1 Typical four-stage life cycle of consumer product
11.2.1 Key considerations about the PLC
In broad terms, there are several assertions that can be made about the PLC:2
•• Products have limited lives.
•• Like humans, products move through various stages of growth.
•• Profits vary according to the stage in the PLC.
•• Products require different manufacturing, purchasing and human resource
strategies along each stage of the PLC.
•• Not all products follow the PLC exactly (for example, ‘fads’ may bypass one or more
of the stages).
•• The PLC concept can be used as an aid to understanding the life cycle of a product
category (for example, motor vehicles), a product form (for example, commercial
vehicles), a product (for example, a sedan), or a brand (for example, Mercedes-Benz).
With these key considerations in mind, we now move on to linking marketing strategies
to the PLC.
11.2.2 Strategies in the stages of the PLC
In this section, the four stages of the traditional PLC are discussed, and marketing
strategies that can be used in each stage are identified. These strategies include extending
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the product life cycle, encouraging existing customers to use existing products more
regularly, canvassing new customers, entering new target markets (for example, export
markets), entering new market segments, promoting different uses of the product (as
Nivea has done with its new range of men’s facial products), etc.
The PLC is a useful predictor or forecasting tool. Because products pass through
distinctive life cycle stages, it is often possible to estimate a product’s location on the
curve using the characteristics of the stages outlined in the sections that follow. This
enables marketing managers to align the cycle stages with the different marketing
strategies, which collectively would constitute a marketing plan.
These cycle stages are discussed in the next sections.
Stage 1: The introductory stage
The introductory stage refers to the first phase in the product’s life, when the product
is brought to life, launched and introduced to the marketplace. Some authors further
divide this stage into a gestation (or prelaunch) period and the action launch phase. In
the gestation phase, the process begins with a new product development process, which
identifies a number of tasks that need to be dealt with before a product comes to life.
These tasks include planning, needs analysis, idea generation and screening, research
and development, product design and prototyping, production line installation, raw
materials and components procurement, and actual production. All of this has to
happen before a single product can be sold.
During this product development or gestation stage, the organisation spends a
considerable amount of money (that is, investment costs are high) before sales have
been generated (that is, sales are zero). With zero sales, profits are in fact negative − that
means that the organisation is running at a loss. However, there is really no way for a
company to bypass this stage, unless it buys these new products for resale from another
company, but even then there is still a cost involved − the company has to pay for the
purchase of the products upfront. Clearly, it makes sense for this stage to be as short as
possible. The sooner a product can be manufactured, the sooner selling can begin. This
will reduce the amount needed for the pre-sales investment.
Once the product has been brought to life, it can be introduced to the marketplace –
this is the primary task in the launch phase. During the launch phase, sales normally
grow quite slowly as customers are not yet aware of, or informed about, the product.
Slow sales translate into lower profits, which are exacerbated by high production
and promotion costs, and the organisation inevitably remains in the red during this
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phase. For this reason, firms monitor the speed of product adoption very closely. The
organisation may also find that potential customers may be quite resistant to the new
product, mainly because they are already using other products that may either be
supplied by the manufacturer or its competitors. This is typical of human nature − we
are all resistant to change and we tend to look at new ideas or products with suspicion.
Or at least most of us do − there are consumers who are quite adventurous when it
comes to new products. They are referred to as early adopters. One strategy is for
an organisation to identify typical early adopters and to encourage them to buy the
product first. These early adopters serve as testimonials for other customers to follow.
Displacing existing products in the marketplace will certainly be one of the greatest
challenges for any new product.
During the introductory stage, the organisation will normally spend a considerable
amount of time and effort on marketing and selling the new product. The reason for this
is that there is urgency in generating product awareness amongst potential customers in
order to grow sales and recover investment − see the ‘Let us give it some thought’ box
on page 244.
Also during the introductory stage, the organisation faces the challenge of having very
few distribution outlets or, if they already have distribution outlets for their other
products, such as wholesalers and retailers, these distributors may be reluctant to carry
the product. This is not surprising, as distributors only want to carry products that sell
well. Carrying stock that is new to the market means:
•• It is likely to sell slowly, meaning that distributors have slow stock turnover and
lower income as a result.
•• They need to get to know the product and convince their customers to buy it,
which is time-consuming and involves considerable effort, which could be spent
more profitably selling existing products that customers already know.
•• There is no guarantee that the product will succeed, so it is risky for distributors to
take on new products.
Another problem that organisations face when introducing a new product is that they
may experience problems, either with the product itself or with its production. It is often
the case that only once customers begin to use a new product in earnest, real problems
are identified, which may have been missed during the product testing phase. These
problems may be minor or major. Minor problems can probably be explained away or
quickly fixed (either on the production line or through repairs), but major problems
may destroy a product and even the organisation’s overall brand. Consider Microsoft’s
Vista operating system. This proved so problematic that Microsoft quickly withdrew it,
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replacing it with Windows 7 and allowing buyers of Vista, who did not want to upgrade
to Windows 7, to replace it with the older XP operating system instead − a very unusual
move indeed for a corporation such as Microsoft. (It is interesting to note that although
MS Windows brought out Windows 8, it soon jumped to Windows 10 which included
a few of the old favourites such as the Start Menu left out on Windows 8). Making
product or production line changes to accommodate product problems can prove to be
a very expensive exercise indeed.
One of the few possible advantages for the organisation during the introductory
phase, is that there may be few competitors in the marketplace. This is generally
true in the case where the new product is either significantly or completely new,
or very different from those of any of the other competitors and does not compete
with them directly. However, in the case where the new product competes directly
with existing products (for example, butter versus margarine, or tubeless tyres versus
those with tubes), customers may be reluctant to switch and may need a great deal
of promotional convincing. If the product replaces an existing product offered by the
organisation, then even the previous product (or model) may represent competition
for the new product, and the firm may have to think about withdrawing it as quickly
as possible. This is common practice in the case of motor vehicles, but less common in
the case of cellphones, where handset manufacturers bring out many different models
one after the other, each with slightly different features, which tend to compete with
each other.
While the nature of the product typically determines its price, there are two pricing
strategies that can be employed during the launch of the introductory stage. These
are:
1. Price skimming.
2. Penetration pricing.
In the case of price skimming, the idea is to introduce the product with quite a high
price in order to generate as much income as possible to recoup investment costs in
bringing the product to market. The price of the product is gradually reduced over time
and throughout the PLC − this is common practice in the case of cellphones. In the
case of penetration pricing, the objective is almost exactly the opposite, and the new
product is introduced at a very low price in order to generate as many sales as possible
so as to recover costs. The price is then increased over time or after a certain period of
time as sales increase.
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Some of the identifying features of the introductory stage are:
•• Sales are usually quite low.
•• Investment costs in developing the product are high.
•• There is limited or no competition.
•• The firm often supports the product with extensive promotion.
•• Profits are usually quite low and sometimes losses are common, given the high
development costs.
Let us give it some thought
It’s a surprise
When Shell introduced their Helix motor oil many years ago, they ran an advertising campaign
which spoke of the helix (which is a three-dimensional shape often associated with DNA)
but did not mention what the actual underlying product (motor oil) was. When they ran their
initial advertisement campaign, they had not yet launched the motor oil onto the market. This
campaign ran for several weeks with customers shaking their heads and asking what the
campaign was all about − what was Shell marketing or selling? No one could figure out the
link as there was no product on the market at that stage. Most viewers thought that Shell had
messed up their advertising campaign somehow, and this gave rise to speculation and much
interest amongst consumers. Eventually, Shell ran a second series of advertisements explaining
and promoting their new motor oil called ‘Helix’. Customers were finally able to make the
connection. In so doing, Shell created a huge awareness for the Helix brand before it was
even launched, resulting in an easy and quick introduction phase with the product selling and
sales increasing rapidly (that is, the product life cycle moved from the introductory stage to the
growth stage very quickly).
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Integrated marketing strategy in the introductory phase
Product decisions
The product remains unchanged or minor product modifications may be required.
Distribution decisions
„„ Manufacturer to ensure optimal distribution;
„„ Decide on the number and kind of middlemen who affect the price and marketing
communication decisions;
„„ Market coverage is determined by the nature of the product, the nature and geographical
dispersion of the market, the nature of the middlemen;
„„ New products usually have reasonably limited distribution;
„„ Exclusive distribution: only a small portion of the target marked will be reached;
„„ Selective and intensive distribution: the product will be available to larger portions of the
target market.
Pricing and marketing communications
Pricing and marketing communications used for communication create primary demand for
the product in four decision combinations:
1. Marketed at high price and with an aggressive marketing communication
campaign, known as a rapid skimming strategy; a lot is spent on advertising/
personal selling to increase the rate of market penetration; a combination is used
if competition is expected, and to promote brand preference for the product.
2. Marketed at high price and low expenditure on marketing communications,
known as low skimming strategy; an attempt is thus made to make profit in this
phase, especially if the product is an innovation.
3. Marketed at low price and high expenditure on marketing communication, known
as rapid penetration; this enables the most rapid market penetration rate and
largest market share; a combination can be used if the market is very large and
unaware of the product, and most consumers are price sensitive, and if costs per
unit decrease considerably with an increase in production size.
4. Marketed at low price and low expenditure on marketing communication, known
as slow penetration strategy ; a low price encourages rapid acceptance of the
product; marketing communication costs are kept low to realise more profit;
this is a good combination if the demand is price elastic, if the market is large, if
consumers know the product, the market is price sensitive and some competition
already exists.
Ü
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The above pricing and marketing communication decisions are summarised in Figure 11.2.
Marketing communication
High
High
Low
Rapid skimming strategy
Slow skimming strategy
Rapid penetration strategy
Slow penetration strategy
Price
Low
FIGURE 11.2 Pricing and communication decisions during the introductory phase3
Stage 2: The growth stage
During the second stage of the PLC, the product finds favour amongst customers, and
sales begin to take off. This ‘growth stage’ is thus characterised by a period of faster
growth in sales and the start of profit growth. As far as profit growth is concerned, there
may be two realities during this stage. In the one instance, the organisation may begin
to earn profits early on in the phase. These profits may grow during the growth stage,
and may begin to decline towards the end of it as the product moves into maturity.
Alternatively, although sales grow quickly, real profits may only be achieved later on
in this stage, because of the drag caused by the high cost of the initial investment in
bringing the product to life (that is, the early part of this stage may still reflect a loss for
the organisation). Whichever trend this phase follows, it is represented by sales growth,
growing market acceptance and ultimately increasing profits for the firm.
Unfortunately, with growth and success comes competition; the organisation may find
other firms entering this segment of the market. The growth phase is thus characterised
by the presence of a growing number of competitors. What is more, by the time the
growth stage is reached, most of the teething problems associated with the introduction
of new products have been sorted out. The product functions more efficiently and
this translates into happier customers. Product improvement is another characteristic
of this phase of the PLC. More distributors are also willing to carry the new product
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as they can see that there is a demand for it, and customers will often shop elsewhere
if the distributor in question does not stock the product. The growth stage is thus
characterised by the proactive approach by distributors to the manufacturer to stock
the product − the selling task becomes easier and quicker. The whole selling process
gains momentum. If a price-skimming approach has been used during the introductory
phase, prices would begin to fall. Conversely, if a penetration price was set, prices
would begin to climb.
Some of the identifying features of the growth stage are:
•• Sales begin to grow and continue to grow, often quite quickly.
•• Investment costs remain high, but begin to fall as they are apportioned over a
greater number of sales.
•• There is growing competition as other firms introduce competing products.
•• The firm continues to support the product with extensive promotion.
•• Profits begin to grow and, if attractive enough, they encourage further promotion
of the product.
Integrated marketing strategy in the growth phase
Product decisions
Product decisions are relatively unimportant; moderate differences exist between
competitive products; only a small variety of models for new product is offered; expensive
product differentiation is not required; emphasis is on the ability to produce in sufficient
quantities; a service strategy is very important (that is, after-sales service; expert service) to
capture the market share.
Distribution decisions
Fast-growing sales and tougher competition force manufacturers to expand market coverage;
the new product must be made available at outlets where it will have maximum exposure
to the target market; physical distribution needs special attention (that is, preventing delays
with delivery); as competitive products do not differ much, consumers easily switch to
another brand.
Price decisions
The selling price shows a declining tendency; if the price in the introductory phase is low, the
profit margin will also be small; slight price reductions can now be made; if the introductory
price is relatively high, there should be drastic price reductions.
Ü
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Marketing communication decisions
The emphasis is on creating secondary demand; inform potential consumers, remind them
and convince them to buy it; expenditure on marketing communication also drops now as
a result of the increase in turnover; as larger and more intensive market coverage occurs,
media such as radio, television and magazines can be used to advertise, point-of- purchase
advertising is also important.
Stage 3: The maturity stage
After some time, the product eventually reaches the third stage of the PLC, namely
the ‘maturity stage’. This stage is characterised by substantially slower sales growth,
slowing down until eventually sales level off or maybe even decline or grow at a very
slow rate. This stage is said to comprise three substages:
1. Growth maturity.
2. Stable maturity.
3. Declining maturity.
These substages are explained as follows:4
•• Growth maturity. In this instance, the product continues to grow, albeit at a much
slower rate. Though distributions channels are full, new competitors may enter the
market and try to undercut the product in terms of price or by offering additional
value.
•• Stable maturity. Considered the classic example of the maturity stage, sales flatten out
completely and the market becomes saturated for all competitors. Sales and profits
remain stable and the product may represent a ‘cash cow’ for the organisation.
•• Declining maturity. During this substage, sales growth is ‘eaten away’ slowly leading
into the fifth stage of the PLC, the decline stage.
Ultimately, whether a product follows a growth maturity phase, a stable maturity phase
or a declining maturity phase, the product will ultimately collapse into the decline
stage, discussed later in this section. The maturity stage is all about sales slowing down.
Although sales may slow down, the level of sales that have been achieved during the
growth stage may still be significant and the product may become one of the ‘cash cows’
for the firm. Flat sales also do not necessarily mean that profits are low. Because the
firm has recouped all of its investment, the firm now begins to ‘sweat’ its investment
(in this context, the term ‘sweat’ means to derive the maximum benefit from assets at
the minimum cost to the firm). To this end, the organisation may run its production
line ‘24/7’ and reduce production staff to a minimum. Maintenance may be neglected
in some instances, except for crucial repairs, where machines are not upgraded or
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replaced, but are instead repaired where possible. Low operating costs and stable, albeit
flat, sales may translate into good profits for the firm.
However, having said that profits may be good, the opposite may also be true. Because
the product’s price may have been declining in order to keep it competitive, and in order
to continue to generate sales, this may lead to lower profits. The battle for market share
through product improvements, advertising and sales promotions usually prolongs the
product’s stay in this stage. The need for effective brand building is highlighted during
the maturity stage, as brand leaders are in the strongest position to resist the pressure
on profit margins.
Most organisations will also strive to extend their products to last longer in the
marketplace somehow. This is referred to as product extension. There are various
strategies to achieve this goal. These strategies include:
•• Continue unchanged. Retain the existing product and marketing efforts as before.
•• Focus on marketing. This means retaining the existing product, but changing the
organisation’s marketing efforts to highlight various aspects of the product (for
example, its price, eco-friendliness, new distribution channel, etc).
•• Focus on the product. In this instance, the organisation may want to do one of the
following:
–– Improve product quality;
–– Improve product attributes;
–– Improve product styling;
–– Reduce the cost of production (useful in the decline stage of the PLC);
–– Introduce product range extension (new target markets or segments − see the
next point).
•• Enter new target markets or new market segments. Perhaps it is possible to develop
new products from existing ones. An example of this strategy was the way in which
nylon was extended from use in parachutes and thread to use in hosiery, carpets
and tyres.
•• Encourage current customers to use existing products more regularly (such as encouraging
them to chew gum daily because it protects their teeth).
•• Canvass new customers for an existing product. Consider the move of Nivea into men’s
facial care products.
•• Promote different uses for existing products. An example is the cellphone being used
for texting and as a computer, rather than just a phone.
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Organisations can extend their existing product ranges in one of six ways:
1. Trading-up strategy. This refers to the addition of new higher-priced or prestige
product items, such a Mazda tried to do when it introduced the 929, which proved
to be a failure.
2. Trading-down strategy. This occurs when management introduces a lower-priced
item to an existing prestige range (for example the Audi A1, which was introduced
to enable middle-class car buyers to afford an Audi).
3. Complementary strategy. This is a strategy which is quite popular and focuses on
management seeking products that complement their existing product item or line.
For example, a manufacturer of computers may move into the manufacturing of
printers or other related peripheral equipment.
4. Product overlapping strategy. This involves producing products that may compete
against the company’s existing products.
5. Diversification strategy. This has to do with making a decision about the broader
product mix/range or offering of the enterprise and seeking unfamiliar product lines
or markets, or even both. The diversification can be vertical by buying up suppliers
or supply chain intermediaries such as retailers or wholesalers, or horizontal by
adding a greater variety of product lines to the firm’s existing product mix.
6. Product elimination strategy. It is not always about getting bigger, but sometimes also
about getting smaller or reducing. There may come a time when an organisation
needs to get rid of products. They either offer too many competing products or
too many different product lines. This may involve a simple decision to get rid of
a single product item that is in the decline stage or that is not performing, or it
may mean simplifying the product range, or even divestment of the entire product
range if it proves too complicated (for example, Motorola, who decided to sell off
its cellphone and networking division in 2010).
The academic literature also identifies a saturation phase, which could either be seen
as a separate phase or part of the maturity phase. The saturation stage is seen as the
advanced stage of the maturity phase. The traditional four-stage model (there are other
models with up to six stages) sees saturation as being part of the maturity phase. The
early stages of the maturity phase may still have attracted additional competitors who
see the size and intensity of the market as attractive enough to compete, even though
they may be wrong. Their entry into the market results in additional competition and
a further erosion of sales and possibly profits. Eventually, competitors begin to leave
the market because it is not attractive enough for them. Over time, more and more
competitors fall by the wayside until only a handful − usually large firms − remain.
They stay in the market because they have recouped their investment, and because
profits are still acceptable or even good for them (but would not be good for a new firm
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that has to invest money to enter the market). At this point, at the end of the maturity
phase, there are only a handful of competitors, sales are flat, and profits stable and
sufficient for the remaining firms to stay in the market. New firms have realised that
there is no further potential in the market and they stay away (that is, there are no new
competitors).
This saturation phase is characterised by a few large firms serving a mass market, which
has the bulk of the sales, with a few smaller firms serving niche markets with low
volumes of sales. The product is usually in its most advanced form with little scope for
further improvements. The firms remaining in the market are able to reap the reward
of stable sales and profits, but cannot let their guard down as the other remaining
competitors may yet wrestle market share away from them through effective marketing.
Marketing and brand promotion remain important for firms.
Some of the identifying features of the maturity stage are:
•• Sales are quite high, but start to level off.
•• Investment (fixed) costs have largely been covered contributing to even higher
profits.
•• There is now extensive competition in the marketplace.
•• The firm often supports the product with extensive promotion.
•• Profits are near their maximum, given that the investment costs have mostly been
paid off.
Integrated marketing strategy in the maturity phase
1. Retain the existing marketing strategy
Retain the current marketing strategy with no changes, if the market share will remain the
same in spite of competition in form of price reductions, aggressive advertising, better profit
margins to middlemen and lower net profits; it will be successful only if brand loyalty is
strong, and sales and market share are insensitive to price difference, product differentiation
and aggressive advertising.
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2. Retain the current product and revise other marketing instruments
Present market share and sales can be maintained by retaining the product base and
amending other marketing instruments through:
„„ Changing price. Reduce prices to involve new market segments or attract consumers
of competing products, but it can be used only if demand is characterised by relatively
high price elasticity.
„„ Changing marketing communication. Promotion activities can be launched to
persuade consumers to buy more and potential consumers to make first purchases; this
can be used only when the market reacts favourably to advertising and personal selling,
for example, internet as well as traditional methods used to sell more cars.
„„ Changing distribution. Adjust the distribution channel for better market coverage;
review agreements with existing middlemen; eliminate certain distribution channels
and/or add new ones.
„„ Changing price, marketing communication and distribution. A combination of
these factors can be adjusted.
3. Change all the marketing instruments
Product differentiation and product range extension can be used to attract consumers from
new target markets and/or make existing consumers increase consumption:
„„ Product differentiation:
††Improved quality. Improve the functional efficiency of the product, if the
differential advantage from improved quality is bigger than costs involved, if the
quality of the product can be improved, and if many consumers will react to quality
improvement; could also improve safety, packaging, size, colour, etc.
††Improved product characteristics. Can be costly; one of the best ways of
creating an image of product leadership; can serve as motivation for middlemen,
but can also be imitated by competitors, therefore cost involved must not be greater
than the returns.
††Improved styling. Improve the appearance, for example, change packaging,
colour; this is a good competitive strategy (for example, with fashion articles); also
a form of product differentiation; can create a unique image; often used in the
motor industry where models are improved by means of styling changes and new
technology.
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„„ Product
range extension:
††This enables the organisation to increase the sales of the present product ranges;
new target markets are entered in this way and present target market are encouraged
to buy more of the existing products.
„„ Other marketing instruments: These need to be adjusted to fit in with product
differentiation and product extensions.
Stage 4: The decline stage
Ultimately, all products and even broad categories of products will begin to decline.
The fourth stage in the PLC is thus the decline stage, which arrives when sales decline
permanently as new technologies or changes in consumer tastes work to reduce
demand for the product in question. The overall size of the market also declines as
consumers switch to new products. At this stage, suppliers and marginal distributors
may be dropped. The manufacturer may reduce expenditure on advertising and
promotion to a minimum, and may implement other cost-saving strategies in an effort
to reduce expenses and increase or maintain profits. The reduction in sales and profits;
and the competitive situation in general, often result in marginal competitors leaving
the market and no new competitors entering it. As competitors leave the market, this
is likely to suspend the decline in sales for a while, as the departing competitors’ sales
are shared amongst those suppliers that remain. However, in time the decline will
continue. Eventually the firm will have to decide whether to remove the product from
the organisation’s product mix.
At some point in the decline stage, the organisation will need to consider getting rid of
(or eliminating) the product. The decision is usually made when the cost of the product
exceeds any revenues generated and profits become negative − the product has become
unprofitable and there is no hope of returning to profitability. At this point the product
is withdrawn from the marketplace.
Withdrawing unprofitable products is not inevitable, and there are other possibilities.
Companies may want to continue with the unprofitable product for various reasons.
For example, it may bring the firm certain status or it may be linked to another, very
profitable product. By dropping one unprofitable product, a firm may hurt the sales of
other more profitable ones. Keeping the product in the marketplace may also keep a
competitor occupied in still trying to compete, allowing the firm to focus on developing
new products.
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Finally, the identifying features of the decline stage are:
•• Sales have peaked and begin to fall off and may do so quite quickly.
•• Investment costs in developing the product are low, if not zero.
•• There is limited competition as other firms have moved into other competitive
areas or developed new products.
•• The firm often supports the product with minimum promotion, if at all.
•• Profits are commonly quite low, given the falling sales.
It is in the decline stage that the new product development process comes into being
again (recall that we discussed it as part of stage 1 of the PLC). In the decline stage, the
firm is challenged with finding new products to replace their existing products − this
process may even start during the maturity stage if the product development process
takes a long time. There are numerous sources of new product ideas, including from
customers, suppliers, distributors, staff, competitors, and the firm’s own research and
development efforts. In the new product development process, the firm is challenged
with deciding when to introduce a new product and where to launch the new product
and even whether to launch a new product. There is a recognised process for new product
development comprising some eight stages which we touched on earlier in the chapter,
ranging from idea generation, idea screening and concept development and testing, to
developing support marketing strategies, undertaking accompanying business analysis,
the actual product development, test marketing and finally, commercialisation of the
product at which point a new product life cycle begins.
Continue with the existing marketing strategy
The decision to continue can lead to an increase in sales in the short term; some businesses
buy out competitive firms to close their production facilities to limit the supply of a product;
it is important not to start a price war if this phase is to be extended; the existing strategy
can continue until the product is removed, but cannot be followed indefinitely due to a drop
in profit; when turnover drops below the break-even point, strategy has to be drastically
adjusted or products have to be abandoned.
Revise existing marketing strategy partly or entirely
Direct the marketing strategy only at the most profitable target market; terminate this
in weaker target markets; also cut back on marketing costs of the product so that the
product will fizzle out; some loyal consumers may remain, making profitable marketing of
the product possible.
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Withdraw product from all markets
Products can be eliminated gradually to have time for making adjustments; or they can
be abandoned immediately and finally before resistance develops and the decision is
reversed; also decide on the supply of spare parts and after-sales service when the product
is abandoned.
11.2.3 Additional product life cycle patterns
In this chapter it has been indicated that not all PLCs are the same. They differ from
product to product. For example, the planning and implementation of the marketing
strategies for IT products will come to fruition faster than for non-IT products. The
pattern of a PLC has considerable influence on the marketing strategies to be followed.
While a more typical or traditional PLC was described previously, the literature
identifies a number of patterns of similar PLCs, which are briefly described in Table
11.1. The different types of PLCs may well require an adjustment to the marketing
strategy associated with each one, and marketing managers therefore need to plan
their marketing strategies very carefully with these patterns in mind (although it is not
always that easy to know which pattern of PLC a product will follow).
TABLE 11.1 Commonly encountered product life cycle patterns5
Type of product
life cycle pattern
Description
Traditional
The traditional PLC is the four-stage pattern, which
includes a slowly growing introductory and growth
section, a peak and a plateau representing maturity.
This is followed by a fall-off section representing the
decline stage. Most products are said to follow this
pattern.
Classic
This pattern reflects a rapid rise in sales, which reach a
peak and eventually stagnate because of a lack of new
customers and/or distribution outlets. By incorporating
new distribution outlets, or perhaps because of other
marketing efforts, the maturity stage is extended and
the product continues to grow, albeit very slowly.
Graphic
Traditional
Time
Classic
Time
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Type of product
life cycle pattern
Description
Fad
This PLC describes a product that rapidly gains
popularity, but just as quickly loses it. The lives of these
products are short and their popularity does not extend
over a long period of time. Their sales decline in a short
time frame as well. An example of a fad might be the
Big Brother TV show.
Graphic
Fashion fad
Time
Extended fad
Seasonal or
fashionable
This pattern is similar to that of the fad, except that
after the initial success, sales start to stabilise at a
lower level once the fad has worn off. The difference
with the fad is that in the case of the extended fad,
sales do not drop off altogether. The Star Trek trilogy
is an example. It was extremely popular and successful
at the time, but obviously popularity did not fall away
altogether and today there is still a thriving Star Trek
community that keeps this fad alive.
This PLC pattern reflects the life of a typical seasonal
or fashionable product such as swimwear in summer or
soup as a restaurant dish in winter. In-season demand
picks up, but falls off out of season.
Extended
fashion fad
Time
Season or fashion
Time
Revival
The revival PLC is reflective of a product that has
followed a traditional life cycle, but that has been able
to regain sales because of marketing interventions.
Revival
Time
Fiasco
This pattern reflects a product that is launched in the
market but that fails in a short period of time. There
may be many reasons for the failure, but ultimately
it does not find favour with customers. Perhaps a
technologically superior product is developed, one
which consumers adopt instead. The Sony Betamax
fiasco is a prime example.
Fiasco
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One further insight in helping to develop marketing strategies to match the stage of the
PLC where a product may be located, is to understand the consumer product adoption
and diffusion process. This process is discussed in the next section.
11.2.4 Consumer product adoption and the diffusion process
As the product moves through the PLC, consumers increasingly adopt it, but some
consumers are by nature more inclined to adopt new products than others. The
literature6, 7 identifies various categories of consumers that describe their readiness to
adopt new products. The reality is that there are consumers who are more ready and
willing to adopt new products, while there are others who resist change at all costs.
Understanding these categories of consumers is useful for product managers. If they
can identify the early adopters, they can focus on getting them to try the product first,
and then hopefully convince other consumers to try the product as well.
In adopting products, consumers follow a well-documented process referred to as the
consumer adoption process, which is related to the consumer decision-making process.
The consumer adoption process comprises five phases, namely:
1. Awareness (the consumer becomes aware that a product is available).
2. Interest (the consumer actively starts to seek out information about the product).
3. Evaluation (the consumer now evaluates the information obtained, considering the
benefits and value of the product which may entice him/her to try it out).
4. Trial (the consumer now does a trial purchase to see if he/she likes the product).
5. Adoption (if the consumer likes the product, he/she will probably buy it again).
The last stage in the consumer adoption process is adoption. There are various categories
of product adopters amongst consumers − ones who are willing to adopt new products,
those who are not, and those who are undecided. Figure 11.38 shows these categories
which include the following:
•• Innovators. These are the consumers who are usually willing to try something new,
and will even seek out new products just to be the first. They often see themselves
as opinion leaders and are very self-confident. Of course, the risk of selling to these
consumers is high, as the product may fail them, or prove to be a flop. This is a
relatively small group, representing only about 2,5 per cent of all target adopters.
For example, when the Samsung Galaxy S3 came onto the market, there were many
consumers willing to pay a premium just to have the phone. Now the Samsung S4
is available and the S3 is no longer an innovator. Those who buy the S4 will suffer
the same fate − buying a new product that becomes out of date in a short space of
time.
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••
••
••
••
Early adopters. This group is also usually amongst the first to try new products
ahead of average consumers. However, they are seldom the leaders in the adoption
process. They buy to fulfil a need which they hope will be met by the new product.
They will only adopt the new product if it meets their needs. This group represents
about 13,5 per cent of all target adopters.
Early majority. The early majority are similar to the early adopters in the sense
that they buy the product or service offering, because they possess a need and
want to fulfil it. However, they are not as quick as the early adopters to take up
new products; they take longer to enter into a purchase. This is because, unlike
the previous two categories, the early majority does not have much interest in the
product/service category into which the new product or service falls. Consumers
that belong in this category have to collect information, evaluate it, deliberate
carefully, and then make a decision, therefore the process takes longer. The early
majority makes up the next 34 per cent of the target adopters.
Late majority. The next 34 per cent of target adopters are referred to as the late
majority. They are referred to as ‘late’ because members of their social class, reference
group and peer group have already made the purchase. The social influence of
this class or group is strong and, because the late majority have evaluated the
new product and/or service for themselves, they are ready to buy it. They have a
need, and after careful thought and deliberation, as well as with social influence
and pressure, the late majority eventually make the purchase. By nature they are
sceptical, but will conform to social pressure.
Laggards. The laggards are the last to adopt a new product or service offering, and
as such make up the last 16 per cent of the target market. They are slow to buy any
innovative offering, because they are generally uninvolved with the product and
service, they do not possess much information they remain uninfluenced by social
pressure, their social ties are not very strong, and they believe in making routine
purchases. In addition, they prefer to buy the familiar rather than the unfamiliar.
Categories of innovativeness
Early
adopters
13,5%
Early
majority
34%
Late
majority
34%
Laggards
16%
Innovators 2,5%
FIGURE 11.3 Categories of consumer adoption9
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The diffusion process
At the start of this section, we said that consumers slowly, but increasingly begin to
adopt new and innovative products. This process of adoption is referred to as the
diffusion process. Schiffman & Kanuk define the diffusion process as:
the process by which the acceptance of an innovation (a new product, new service,
new idea, or new practice) is spread by communication (mass media, salespeople, or
informal conversations) to members of a social system (a target market) over a period
of time.10
The diffusion process normally deals with the adoption of new or innovative products,
and is often referred to as the ‘diffusion of innovation’. There are thought to be five
characteristics that affect the speed of adoption (that is, the speed of diffusion). These
characteristics are:
1. Relative advantage (the new product is better than the one it replaces).
2. Compatibility (the new product fits in with the needs of customers).
3. Simplicity (the new product is easy to use).
4. Trialability (customers are able to try out the new product before making serious
purchases thereof).
5. Observable results (clear benefits can be observed in the new product).11
These considerations regarding consumer product adoption and diffusion are also
likely to impact on the marketing strategies.
From the PLC, the chapter now turns its attention to brand-related strategies.
11.3 BRANDS AND BRANDING
Brands are important to consumers, because they add value to the product or service
they consume. For example, the decision to purchase expensive chocolate pralines
manufactured by a Belgian company such as Godiva or Leonidas will be based on
the perception that these brands offer high-quality and exclusive products. The same
pralines in an unbranded package will probably be perceived as a lower-quality, less
expensive, generic product, even though the taste is the same. The brand therefore
has the ability to change consumer perceptions in ways that are not related to the
actual characteristics of the product. We consume chocolate because of the taste and
the texture, but we perceive the product in a particular way because of the packaging,
the logo and the product name, therefore branding helps consumers to differentiate
between similar products in the same category.
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Brands have a strong impact on our lives, since almost everything we consume is
branded. Staple products such as sugar (Huletts), tomato paste (Koo) and maize meal
(Iwisa) come in branded packages. Tools and equipment such as drills and lawnmowers
are branded (for example, Makita, Bosch and Wolf), and even spices and medicines are
sold in branded containers. In fact, even the stores themselves are branded, for example
Fruit & Veg City or Woolworths Food or Builders Warehouse. The entire shopping
experience is designed to provide added value, over and above making available the
products that consumers need and desire. Companies have to distinguish themselves
and their products from those of the competition. Fashion items such as shoes, clothes,
sunglasses, watches and perfumes always carry branded logos and names to differentiate
them from their competitors.
Brands can also tell the consumer about the unique qualities of the product, such as
the product features, price, performance, status, etc. A consumer who buys the same
brand over and over again has certain expectations of it, and will therefore not easily
change to another brand that may not offer the same benefits. The brand name, logo or
the trademark therefore provides a creative platform to tell consumers about the special
features of the product, and what sets it apart from competing products.
11.3.1 Brand values
It is possible for a product or a service to express certain values that create a set of
benefits or an added value, which is preferred and appreciated by consumers. Brands
can fulfil different purposes and create different values. Table 11.2 summarises the
different functions a brand can perform and the values it can create.
In order to create these brand values, some degree of emotional involvement is required
from both the consumer and the company. This involvement often leads to brand loyalty.
Maximum brand loyalty can be achieved if a continuous relationship is maintained
between the company and the consumer, based on the values of that particular product
or service.12
11.3.2 Brand awareness and brand equity
Most manufacturers and service providers would like their brands to be recognised
by potential consumers. Familiarity with a brand means that the brand is playing a
significant role in consumers’ attitudes towards the product. Different brands project
different values to consumers – a powerful brand therefore has a major influence on
awareness, loyalty, perceived quality and positive associations.
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TABLE 11.2 Brand functions and brand values13
Function of the
brand
Description
Ownership value
Can be used in order to protect intellectual property, a patent or a secret
formula. Used to inform the consumers that they are buying an original
manufacturer’s brand and not a retailer brand, for example Coca-Cola
(originally manufactured) versus Pick n Pay No Name Cola (retailer brand).
Differentiation
value
Brand name can differentiate the product from other similar products, but
the product itself must also possess qualities that set it apart from competing
products. For example, the brand name Pioneer is unique, but Pioneer Plasma
created a difference in that it was the first to introduce high definition (HD)
plasma screens in 1997.
Functionality value
The brand expresses an image of its quality, performance and other specific
features to the consumer. For example, Rolex watches denote top quality and
accuracy for consumers.
Symbolism value
The symbolism of some brands enables consumers to project a particular public
image. For example, a pair of Levi’s® jeans will reflect a different image than,
for example, a pair of unbranded jeans. The symbolism value of the brand will
result in an image-conscious consumer making an additional effort to obtain
that particular brand
Risk reduction
value
Any purchase decision involves risk. Strong brands tend to reduce this risk
in that they offer some degree of reassurance regarding product quality,
functionality and performance. For example, Hi-Fi Corporation sells LG products
alongside some lesser-known, cheaper brands in order to provide consumers
with a degree of confidence regarding their purchase. They will also refund
products, as they trust the brands they sell.
Memorising value
Brands can be used to tag information in consumers’ minds. Consumers will be
able to adapt easily to a new brand if the company adds it to an existing brand
image. For example, the Bidvest group has successfully extended its brand
image to such diverse products as financial services, travel agencies, food and
cleaning services.
Legality value
Brands can guarantee legal protection over packaging, name and design. For
example, the Apple iMac desktop computer has protection over its special
features, which may not be copied by competitors.
Strategic value
A breakdown of the assets of a specific brand can be analysed and managed in
order to improve its value added to consumers.
One of the best ways to actually evaluate the brand is called brand equity. An influential
brand will have high brand equity, while a less powerful brand will have low brand
equity. A high equity brand is considered a very valuable asset to the manufacturer,
seller or service provider.
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Brand equity is an intangible asset that depends on associations made in the consumer’s
mind. There are three ways in which brand equity can be assessed:14
1. Monetary. One way to measure brand equity is to determine the premium price
consumers are willing to pay for a similar brand. For example, if consumers are
willing to pay R500 more for a branded internet service provider over a similar but
unbranded one, the premium paid provides important information about the value
of the brand as perceived by consumers. However, expenses such as promotional
costs must be taken into account when using this method to measure specific brand
equity.
2. Brand extensions. A successful brand can be used as a platform to launch additional
products or services. The benefits of extending an existing brand include leveraging
existing brand awareness while minimising costs such as media and advertising
expenditure and, from the consumer’s perspective, lowering the risk of purchasing
the product or service. Moreover, brand extensions can enhance the existing brand.
However, it is more complicated to assess the value of a brand through brand
extensions than it is by applying the financial method.
3. Consumer attitudes. A strong brand increases positive consumer attitudes towards
the product or service associated with the brand. The strength of the positive
attitude is based on the consumer’s actual experience with the product or service.
This is why trial versions or samples of a product or service are often more effective
than advertising in the early stages of the brand-building process. The consumer’s
awareness of, and associations with, the brand lead to perceived quality, inferred
attributes and eventually brand loyalty.
However, brand equity does not always result in a positive attitude. Some brands gain
a poor reputation that translates into negative brand equity. Such negative equity can
be measured by, for example, conducting surveys in which consumers indicate that
a discount is needed to purchase the branded product over a similar one. In other
words, consumers are not willing to pay a premium since they cannot see a significant
difference between the branded product or service and the generic equivalent.15
11.3.3 Brand protection
It is expensive to create a brand – a company can easily spend a few million rand to
create and build a successful brand. Registering the brand for copyrights, trademarks
and patents can afford the company some legal protection. Microsoft Outlook, for
example, is a registered trademark of the Microsoft Corporation. No other company
can copy the software and sell it under another name, because the Microsoft Outlook
software program belongs to the Microsoft Corporation. Copying the software can be
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considered theft or brand piracy. Microsoft Corporation will be able to sue anyone who
sells such software without permission.
Brand piracy is a critical problem for companies around the world. Consumers can
be easily misled into thinking that a fake brand is an actual brand, due to incomplete
authentication. A person may buy a counterfeit brand believing it to be the original
brand, and only realise later that the product is of an inferior quality or does not
function as expected. For example, fake watches, which are nearly identical replicas of
the original models, are sold in markets all over the world. The fake watch is normally
priced much lower than the original model, it may differ in weight, it may not keep
time as accurately as the original, and it does not carry a guarantee in case it stops
functioning shortly after it was bought. Tackling brand piracy and protecting a brand is
an important strategy for companies with considerable investment in their brands (and
even for smaller organisations as well).
11.3.4 Branding strategies
There are different strategies which companies can adopt when deciding how to
brand their products or services. The chosen strategy will define the company’s brand
impression or image. Brands can be classified as generic, private, family, manufacturer
or individual brands, as shown in Table 11.3.
The advantages and disadvantages of each branding strategy are discussed below.
Generic products
Some companies decide to sell their products without any investment in branding.
These products are called generic products and will normally carry a very basic label
with no branding, and the company will spend little money to promote or advertise
them. These products are found in the food, home ware and hardware categories, and
are normally cheaper than their branded equivalents. Companies often use this strategy
during economic downturns, when there is greater demand for cheaper products. A
company may also adopt the generic product strategy when it wants to offer a cheaper
alternative to a well-known brand.
Manufacturer brands and private brands
Manufacturer brands are products that are produced and promoted by the producer or
manufacturer. The manufacturer develops the product and creates an image for the
brand. Very successful companies such as Coca-Cola, Samsung, Nokia, McDonald’s,
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TABLE 11.3 Different branding strategies16
Branding
strategy
Examples of actual brands
Generic
products
Unbranded: broom, mop, ironing board, screws, nuts and bolts
Private brands
At Pick n Pay:
The PnP brand: many food and household products, for example black peppercorn
grinder
The No Name brand: many food and household products, for example frozen
sweetcorn
At Spar:
The Spar brand: many food and household products, for example tomato and onion
mix, aluminium foil, yoghurt
Family brands
Radox: bath oil, bubble bath, liquid soap, shower gel
Palmolive: bar soap, foam bath, liquid soap
Gillette: razors, blades, shaving gel, aftershave lotion
Manufacturer
brands
Koo: butter beans, marmalade, whole kernel corn, etc
Wellington’s: tomato sauce, sweet chilli sauce, chutney, etc
Hyundai: cars, elevators, medical equipment, tourism, etc
Gucci: sunglasses, clothing, footwear, perfume, luggage, etc
Individual
brands
Aromat seasoning – manufactured by Knorr
Vaio computers – manufactured by Sony
Pampers disposable nappies – manufactured by Procter & Gamble
Brand
extensions
This involves extending the successful branding associated with one particular
product to other products
Re-branding
This occurs when an organisation introduces substantial changes to their existing
brand
Co-branding
This occurs when two firms with different brands work together to create a new
brand (that is, a co-brand)
Dell and Sony have strong manufacturer brands. These companies invest a great deal of
money, time and effort in creating and promoting their brand names.
Sometimes a successful distributor, usually a retailer, may buy in bulk from the
manufacturer and then put its own name or logo on the product. These brands are
called private brands as they are offered to consumers directly by the distributor or
retailer. Woolworths, Pick n Pay, Edgars, Clicks and Dis-Chem all carry private brands.
This strategy allows retailers to offer their own brands without getting involved in
the manufacturing process. Manufacturers, on the other hand, can use the strategy
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to reach additional market segments and increase turnover, since they can produce
products under both their manufacturer and private label brands for retailers and other
distributors.
Family brands
A family brand is a common brand name that is used for several related products. This
type of branding is also known as umbrella branding. Both manufacturing companies
and service providers make use of this branding strategy. For example, Johnson &
Johnson offers a complete line of baby products, including baby oil, shampoo, soap and
lotion, under the Johnson & Johnson name. Chocolate manufacturer Cadbury also uses
the same brand name for all its products, as do Kellogg’s and Heinz.
The main advantage of using this strategy is that customer trust and loyalty can be
built into the family brand name, which is something all the products that carry the
family brand can benefit from. On the other hand, if one of the products under the
family brand name attracts negative publicity or fails, it can damage the reputation
of the entire product line. Promotion is focused on all the products under the family
brand name, therefore the entire product line benefits from such promotional efforts.
Using the family brand strategy also assists with the introduction of new products to
consumers, wholesalers and retailers, as the new product can piggyback on the success
of other, well-known and successful products in the same family. Such products are
also perceived to carry less risk and have a lower failure rate than newly introduced
individual brands.
Example: The Nike brand17
Nike is widely regarded as an iconic brand, selling world-class and expensive products.
The Nike marketing strategy centres on a unique brand image that includes a distinctive
logo and advertising slogan. The Nike brand reflects a state of mind, an attitude that
inspires and drives consumers to dare to take action to achieve their goals. Images
such as achieving sporting targets while using the Nike brand are highlighted and are
reinforced by the slogan ‘Just do it’. Another Nike strategy is to show people from all
walks of life in their advertisements – from professional football players to children
playing football in the streets, sending a clear message that anyone can achieve success
if they buy the Nike brand.
Individual brands
Many products and services are marketed as standalone or separate brands. Individual
brands are promoted independently, rather than being bundled under a company
name or family brand. In some cases, these individual brands may be so exclusive that
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consumers will not even be able to identify the parent company that manufactures
the brand. Individual branding requires a unique approach for the market segment,
as these brands compete with many other unique brands in the same marketplace or
niche. Table 11.4 lists some individual brands and their parent companies.
TABLE 11.4 Individual brands and their parent companies18
Individual brand
Product/service
Parent company
Castle Lager
Beer
SABMiller
ProNutro
Cereal
Bokomo Foods
Milo
Chocolate drink
Nestlé
Maizena
Cornflour
Bokomo Foods
Panado
Medication
Adcock Ingram
Lexus
Luxury cars
Toyota Motor Inc
HRG Rennies Travel
Travel and tourism
Bidvest
Ferrari
Luxury cars
Fiat Group Automobiles
Lamborghini
Luxury cars
Volkswagen Inc
Barbie doll
Toys
Mattel Inc
Cobra
Cleaning product
Reckitt Benckiser
iPhone
Communications
Apple Inc.
Marlboro
Cigarettes
Philip Morris-Altria Group
When considering using the individual branding strategy, the company should bear
in mind that the cost of promoting individual brands is higher than any other type of
brand, because each individual brand will require its own unique marketing campaign.
Brand extensions
Companies that own highly successful and widely admired brands often decide to
take advantage of their winning brand by extending it to other products or services. The
thinking behind this strategy is that the success of the leading brand will ‘rub off’
or reflect onto the new product or service, and therefore make it easier for the new
brand to gain consumer acceptance. In addition, this strategy is aimed at widening the
company’s customer base by attracting a host of new potential consumers who may buy
the product or service that is associated with a winning brand. For example, Nike started
out as a distributor of running shoes imported from Japan. Over the years the company
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has extended its brand to include shoes and clothing for a variety of other sports as well
as sports equipment, such as footballs, basketballs, golf balls, skateboards, electronic
monitoring equipment and even sunglasses. These extensions were not related to the
core business, which was running shoes, but instead Nike’s strategy was to extend the
brand to different products in the same industry. There are three types of extensions, as
described in Table 11.5.
TABLE 11.5 Types of extensions20
Type of
extension
Explanation
Line extension
Uses an established brand name to launch a new and different product or a service
in the same sector. For example, Coke Light is a line extension of the parent brand
Coke. Coke Light is different to Coke, but very dependent on customer recognition
of the leading brand name Coke.
Range extension
Relies on the promises delivered by the original brand name and its association
with certain features and qualities to add a range of products or services in the
same area of competence or capability. Cosmetic companies often employ this
strategy. For example, Neutrogena extended its original range of skincare products
to include separate ranges for teenagers, mature women and dark-skinned
women.
Brand extension
Entails expanding an existing brand into new and different product categories
aimed at different target markets or similar ones. The products or services may be
different to the original brand, or the brand may be extended into a completely
different product category or sector. The target market may be the same or
can be a completely new one. For example, Virgin has extended their brand to
communication, travel, entertainment, health and many more.
One of the advantages of using extensions is that fewer resources (money, time, effort,
etc) are required to launch and promote the new brand, because consumers are already
familiar with the original brand and have positive associations with it. It is therefore fair
to assume that the new brand, through its association with a well-known established
brand, will be able to capitalise on the goodwill consumers have towards the original
or main brand. With an extension, the company can therefore take advantage of the
existing brand awareness, and leverage associations consumers have regarding the
parent brand.
We saw earlier that consumers try to minimise their risk when buying new products
or adopting new services. An established brand provides a kind of ‘psychological
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guarantee’, which minimises the risk in consumers’ minds and assures them of the
quality, functionality or any desirable feature that they may expect of the new product.
Example: Managing the Maserati brand19
Another example of brand management from the same industry is the luxury brand
Maserati. The brand’s history spans glorious sporting achievements and the launch
of some truly great road cars. Nearly a century of activity has brought the Maserati
brand to its current peak of magnificent achievements, both on the racetrack and on
the road. Maserati cars have a reputation for excellent handling and providing a sporty,
stimulating ride. At the same time, on-board comfort has not been ignored, and the
choice of quality materials, attention to detail and generous interior space all contribute
to making the brand a market leader. Maserati is successfully managing their brand
while at the same time meeting the requirements of discerning consumers who look for
luxury, comfort and excitement when buying a car.
Re-branding
Re-branding involves making significant changes to the brand’s name, logo, image,
advertising, features or marketing strategies. Companies often adopt this strategy
after a merger when they re-brand the newly acquired products, should they decide
to retain them along with their existing product line/s. Re-branding is aimed mainly
at repositioning the brand, improving brand differentiation to distinguish it from
competing brands, or overcoming negative opinions or perceptions about the previous
brand.21
The decision to re-brand an existing product or service is one that the company should
not take lightly. An important aspect of brand management is doing research on how to
evolve the brand to make sure that it remains competitive in the market, and continues
to match consumers’ needs, expectations and preferences.22 When a company decides
to re-brand as part of a wider strategy to change or update the technological features
of a product, or implement a new approach in the service it provides, the process of
re-branding will often include a change of brand name, logo, slogan, packaging, etc.
Re-branding is also an option in the case where a company failed to successfully launch
a brand the first time, or the brand was caught up in a controversy that tarnished its
reputation. In such a case, the purpose of re-branding would be to erase the negative
brand image and perceptions consumers have of the brand, and establish a new brand
image.23
Re-branding can be successfully applied to new products, products that are still in
the process of development; even mature products that have been on the market for
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some time. Because re-branding is an expensive and complex process, the company
should plan it carefully before it proceeds. Many companies make the mistake of rebranding just for the sake of it or because a competitor did so. The company must be
very clear about why it wants to re-brand and do thorough research before proceeding.
It is important to realise that re-branding entails much more than just a logo redesign.
Re-branding is an opportunity to increase market share and address the needs of
potential consumers in the particular market segment. However, it is a mistake for
a company to think that re-branding will be the answer to any problem it may have
with its product or service. Without actually offering current consumers a totally
new experience, re-branding will not succeed. Changing the logo, slogan, company
letterhead and signage is not enough to change consumers’ perception of the product
or service. In fact, re-branding can backfire if consumers see it as a superficial attempt
to disguise the same old product they have become disenchanted with, therefore
the company has to actually change consumers’ experience to make the re-branding
effective. In order to do so, it must research how consumers perceive differentiation and
how the re-branded product or service can fulfil consumer desires and requirements.
Promotion, advertising and design should follow the outcome of such research.
Interesting rebranding cases
Some websites to be consulted:
companies that reversed their horrible attempts at rebranding: Business Insider
http://www.businessinsider.com/14-brands-that-had-to-reverse-their-horribleattempts-at-rebranding-2012-3;
„„ 40 examples of classic branding next to the modern version: Canva Design School
https://designschool.canva.com/blog/40-examples-classic-branding-next-modernversion;
„„ 20 famous rebranding stories: Brightpink Studio
https://brightpinkstudio.com/pinkink/design/20-famous-rebranding-stories.
„„ 14
Example: Re-branding a university24
An example of re-branding is the University of Port Elizabeth (UPE), which became
the Nelson Mandela Metropolitan University (NMMU). The new brand was the result
of the merging of the Port Elizabeth Technikon, the University of Port Elizabeth (UPE)
and the Port Elizabeth campus of Vista University (Vista Port Elizabeth). This union of
three very different institutions came about as a result of the government’s nationwide
restructuring of higher education, which intended to deliver a more equitable and
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efficient system to meet the needs of a democratic South Africa. As part of the rebranding process, the new institution revised its name, logo, slogan and policies.
Co-branding
Co-branding is an increasingly popular strategy used by companies interested in
exploiting the positive association of their brand with another company’s brand to
promote a newly formed co-brand (for example, Disney and McDonald’s). These
companies believe that the co-branding strategy will be a win-win situation for
both, even if the brands have different standings or dissimilar brand equity in the
marketplace.25 The co-branding strategy is often used to launch a new product into a
market that was previously unavailable to one or both of the co-branding companies.26
One or both companies may benefit from the arrangement in terms of increased market
share or positive brand exposure. In other words, the co-brand will also have an effect
on the two original brands. The original brands may be perceived differently, based on
the performance of the newly introduced co-brand.27
The rights and responsibilities of the participating parties and the conditions of the
arrangement are set out in a co-branding agreement that is binding on both companies.28
The co-branding agreement contains important provisions, such as the specifications
of the new brand, marketing strategy, licensing, royalties, fees and payments,
representations and warranties, terms and termination, confidentiality, indemnification
and disclaimers. This agreement must be carefully drafted to protect both companies.
Reasons for co-branding include the following:
•• It enables a company to penetrate a new market that was previously unavailable
to it.
•• It can increase the company’s market share in the existing market segment.
•• It creates a financial benefit for both companies and improves brand equity.
•• It can assist a company with global expansion.
•• It can improve both companies’ competitive position in the market, and create
additional future benefits to their existing products.
•• It gives the customer added value and lessens the risk when a product or service
combines the benefits of two well-known and trusted brands.
However, co-branding also has certain disadvantages. Like any partnership,
disagreements over issues such as responsibility and financial aspects can fail the cobrand. Trust is a key issue, which both companies have to take into consideration. Each
partner must trust the other and take good care of the co-brand. Poor coordination is
another aspect that can fail such a partnership. Both companies must coordinate their
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advertising, sales, promotion and all marketing efforts in order to get the maximum
benefit from the newly launched co-brand.29
11.3.5 Brand management
Deciding whether to make a product part of a family brand or market it as a standalone
brand is not the only decision marketing management has to make. For a brand to
succeed, it needs to be managed properly. Brand management entails making decisions
about, amongst other things, advertising, promotion and market allocation.30 The
management process includes a mix of marketing strategies designed to improve the
effectiveness of brand performance throughout the product’s life cycle.
In order to manage the brand effectively, management must define it in terms of its
target market, usability, functionality, unique features, special consumer needs in that
industry, and competing products in the market segment. A ‘good’ brand is one that
offers consumers added value and that evokes feelings, creates excitement and directs
consumer preference to the point that the consumers purchase the brand. For many
years, Volvo’s strategy has been to stress the importance of safety in its vehicles. The
mission of the Volvo brand is to reduce the risk of accidents, to minimise the impact
of car accidents when they do occur and to improve passenger safety in its vehicles.
Consequently, the Volvo brand has, for a long time, enjoyed a leading market position
with regard to safety features. In Volvo’s case, brand management will centre around
maintaining this position and keeping the focus on safety as an integral part of the
brand’s production.31
Showcasing the brand’s unique characteristics, values and features is another important
task of brand management. A properly managed brand will be able to stand on its own
in its market segment, and differentiate itself from competing brands. Management
therefore needs to research and analyse the capabilities, values, features and other
promises or claims made by competing brands, and come up with a unique brand that
sets itself apart from all its competitors.
11.4 SUMMARY
In this chapter we have examined the product life cycle (PLC). Understanding the PLC
is very important for managing a firm’s product mix. The PLC also provides managers
with a guide as to what strategy to follow at each stage of the life cycle, and some of
these strategies were discussed in the chapter.
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The chapter began by defining the product life cycle, explained the relevance of the
life cycle, discussing the different stages of the life cycle, and highlighting marketing
strategies that can be adopted at each stage of the life cycle. The different PLC patterns
were also introduced, emphasising the need to adapt strategies to match these PLC
patterns.
The PLC was followed by a discussion of brands and branding. A brand was defined and
brand value, equity and brand protection introduced. A number of branding strategies
were introduced and discussed.
CASE STUDY
SPECIAL EDITIONS KEEP CITI AHEAD32
One of the most compelling case studies on the role of advertising in building a brand must
be that of the Volkswagen Golf. Launched in 1978, Golf 1 was positioned as a ‘small yet
spacious, economic runabout’. This launch was followed by the introduction of Golf 1 GTi
in 1983, a car that would set the platform for the introduction of Golf 2. With the launch of
Golf 2 in 1984, the Golf positioning was elevated to that of a small to medium sporty hatch.
At the same time, the need to retain a product offering in the entry level market prompted
Volkswagen to continue production of the Golf 1. This signalled the birth of the Citi,
positioned as a small, economic runabout, with an element of youthfulness and fun added
to the package. A great packaging job and imaginative advertising created a new image
for what was effectively a Golf 1. The new car was younger, more hip and more fun.
Through the years, a series of special edition Citis helped to keep the brand ahead of the
competition – a position it still holds after some 18 years in the A0 segment of the market.
The first of these was the Citi Golf Sport, introduced in 1985. Initially seen as a female
favourite, this sportier version of the Citi began to attract quite a macho market. A 1,6
litre engine with 63 kW on tap, sports seats, close-ratio five-speed transmission, and rev
counter and a digital clock in the instrument panel completed the picture.
In 1986 the Citi’s 1,6 litre motor was replaced by a more tractable 60 kW version and the
1,3 litre engine’s compression ratio was raised to develop 48 kW. New exterior colours
were introduced that year to extend the original choice of red, yellow and blue. More body
colours to choose from were introduced in 1987 and hydraulic tappets made maintenance
Ü
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on the 1,6 litre (60kW) engine simpler. Front seats from the Golf 2 became standard on the
Citi, while rear seatbelts were included in the package.
The facelift for Citi in 1988 comprised new front and rear bumpers with integrated apron,
modified side and fender panels, a redesigned radiator grille, new alloy wheels, revised
trim and tinted windscreen. The following year air conditioning became available as a cost
option, as well as an immobiliser system.
The big Citi news in 1990 was the arrival of the CTi – a reincarnation of the immortal
GTi that put many racing drivers on track. With a 1,8 litre high-torque fuel-injected motor
pushing out 82 kW, it accelerated from 0 to 80 km/h in just more than 6 seconds. A special
leather-covered sports steering wheel, neatly-styled alloys with low-profile 175/65 R14
tyres, new trim and body colours, and not forgetting businesslike twin exhaust tailpipes,
made the CTi an instant success and re-established a Golf performance cult all over again.
In 1991 the model range comprised a 1,3 litre economy version, a 1,6 litre with manual
or automatic transmission, a 1,8 litre carb-fed Citi Golf Sport, and the range-topping fuelinjected 1,8 litre CTi. A special ‘Designa’ package became available for the Sport and 1,6
litre models – comprising Sports seats, alloy wheels, colour-coded mirrors and bumpers,
and special trim.
The Citi Shuttle from 1992 was a no-fuss price leader version, going back to the roots of the
Citi concept. Clear glass, a single instrument cluster, and the deletion of roof grab handles
and a wiper/washer for the rear window made the four-speed Shuttle outstanding value.
Volkswagen’s engineers and designers embarked on an innovation programme in 1993
and subtle changes to the Citi’s exterior followed. And to celebrate a decade of Citi, the
Ritz special edition was introduced in 1994. Based on the 1,6 litre, the Ritz was launched
as an ‘urbane, high-class luxury version that makes the owner feel really special’. Alloy
wheels from the CTi, tinted glass all round, twin headlamps and a sporty three-spoke
steering wheel made this Citi quite elegant.
The Citi Chico made its debut in 1995, boasting new trim and body colour, while the
special edition Blues model appealed to those with a keen ear for quality sound. A Grundig
Ü
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radio and tape deck was standard, as well as a roof-mounted aerial, sport alloy wheels
and metallic paint.
The Citi Sonic from 1997 brought a touch of retro-styling to the range, with silver instrument
dials, a radio and tape-deck as standard, roof-mounted aerial, and high-level brake light.
The suspension was lowered for a road-hugging look and alloy wheels completed the
picture.
To celebrate the national soccer team, a Bafana Bafana option was offered in 1998, also
with trim and decals to distinguish this model, front sports seats, and even a Bafana
Bafana keyring.
Fuel-injected 1,4 litre and 1,6 litre engines for the Citi were the big news in 1999. This
required upgraded brakes, a new exhaust system, and an externally-mounted fuel pump.
The Citi Life was fitted with the new 74 kW 1,6 litre engine, new alloy wheels and trim to
match its performance character.
Some of the other product innovations in following years included twin headlights for the
entire range, side indicators, an engine cover and central locking for fuel-injected models,
lowered front wipers and additional storage pockets.
Questions:
1. Discuss the VW Citi Golf case study in the context of the PLC.
2. Which of the PLC patterns does this case study conform to and why?
3. What other PLC strategies might VW have considered to extend the life of the
Citi Golf?
4. Why is it important for a firm such as VW to protect its brands, such as the Citi
Golf?
5. What branding strategy has VW used to leverage value from the Citi Golf brand?
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Self-evaluation questions
1. Explain the product life cyle (PLC).
2. Discuss three basic strategies that can be used in the maturity phase of the PLC.
3. What is meant by the diffusion process?
4. Discuss five different branding strategies.
5. Explain what is meant by a brand.
6. Discuss co-branding.
ENDNOTES
1. Investopedia. nd. 2012. Definition of the product life cycle. Investopedia.com. Online:
http://www.investopedia/terms/p/product-life-cycle.asp#axzz2C4MouLlk/ Accessed: 13
November 2012.
2. Kotler, P. & Keller, K.L. 2006. Marketing management. 12th ed. Upper Saddle River,
NJ: Pearson Prentice Hall, pp 321−322.
3. Cant, M.C., Strydom, J.W., Jooste, C.J. & Du Plessis, P.J. 2006. Marketing management.
5th ed. Cape Town: Juta & Co, p 247; Kotler, P. 1997. Marketing management: analysis,
planning, implementation, control. Upper Saddle River, NJ: Prentice Hall, p 351.
4. Frenz, R. 2012. ‘Marketing strategies for the maturity stage.’ eHow. Online: http://www.
ehow.com/info_8503578_marketing-strategies-maturity-stage.html/ Accessed: 23 August
2012.
5. Cant, M.C. & Van Heerden, C.H. 2010. Marketing management: a South African perspective.
Cape Town: Juta & Co, p 197.
6. Ibid., p 66.
7. McDaniel, C., Lamb, C.W. & Hair, J.F. (Jr). 2012. Marketing essentials. Toronto: SouthWestern Cengage Learning, p 376.
8. Everett, M.R. 2003. Diffusion of innovasions. 5th ed. New York: Simon & Schuster,
pp 282−285.
9. Rogers, E.M. 1995. Diffusion of innovation. 4th ed. New York: The Free Press.
10. Schiffman, L.G. & Kanuk, L.L. 2004. Consumer behavior. 8th ed. Burgin, KY: a2zbooks.
11. Robinson, L. 2009. A summary of diffusion of innovations. Revised ed. Enabling change.
Online: http://www.enablingchange.com.au/Summary_Diffusion_Theory.pdf/ Accessed: 24
August 2012.
12. Klopper, H.B., Berndt, A., Chipp, K., Ismail, Z., Robert-Lombard, M., Subramani,
D., Wakeham, M., Petzer, D., Hern, L., Saunders, S. & Myers-Smit, P. 2006. Marketing:
fresh perspectives. Cape Town: Pearson Education.
13. Blythe, J. 2006. Principles and practice of marketing. London: Thomson.
14. Brand Equity. nd. Online: http://www.netmba.com/marketing/brand/equity/ Accessed: 25
May 2010.
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15. Armstrong, G. & Kotler, P. 2003. Marketing. 6th ed. New Jersey: Prentice Hall.
16. Blythe, op cit.
17. Almaney, A.J. 2000. Analysis of Nike, Inc. Online: http://condor.depaul.edu/~aalmaney/
StrategicAnalysisofNike.htm/ Accessed: 26 May 2010.
18. Cant & Van Heerden, op cit.
19. Maserati. nd. Online: http://www.maserati.com/maserati/en/en/index/ passion/ company/
history.html/ Accessed: 28 May 2010.
20. Groucutt, J. 2005. Foundations of marketing. New York: Palgrave Foundations
21. Brand Management. nd. Online: http://www.eagency.com/branding/brandingbook.shtml/
Accessed: 29 May 2010.
22. Happy Meal. 2010. Online: http://www.happymeal.com/en_US/#/ Accessed: 28 May 2010.
23. Dawson, D.B. 2009. Re-branding strategy failure: new corporate logos that fail to improve
consumer perception. Online: http://www.examiner.com/x-3040-Life-in-the-CubicleExaminer~y2009m9d21-Re-branding-strategy-FAIL-New-corporate-logos-that-fail-toimprove-consumer-perception/ Accessed: 26 May 2010.
24. History. 2010. Online: http:// www.nmmu.ac.za/default. asp?id=164&bhcp=1/ Accessed:
24 May 2010.
25. Disney World’s Restaurantosaurus and Co-branding (or lack of). 2010. Online: http://
www.georgepneumaticos.com/blog/2010/01/27/disney-worlds- restaurantosaurus-and-cobranding-or-lack-of/ Accessed: 30 May 2010.
26. Beezy, M.C. nd. Co-branding: a popular form of strategic alliance. Online: http://www.
buildingipvalue.com/05_NA/095_098.htm/ Accessed: 26 May 2010.
27. Tanje, M. & Kalyani, J. 2005. Co branding: beyond brands. Vertical: marketing. Online:
http://www.indianmba.com/Occasional_Papers/OP96/op96.html/ Accessed: 30 May 2010.
28. Kotler, P. & Armstrong, G. 2004. Principles of marketing. 10th ed. New Jersey: Pearson
Education.
29. Pilch, C. 2007. ‘Re-branding: how to avoid failure’. In Business West. Online: http://
growmyco.typepad.com/articles/4-16-07Re-branding-HowToAvoidFailure.pdf/ Accessed:
24 May 2010.
30. Kurtz, D.L. & Boone, L.E. 2010. Principles of contemporary marketing. 14th ed. Ohio:
South-Western Cengage.
31. Volvo. nd. Online: http://www.volvo.com/group/volvosplash-global/en-gb/volvo_splash.
htm/ Accessed: 28 May 2010.
32. VW. 2003. ‘Special editions keep Citi ahead’. In press release. VWSA. Online: http://
www.volkswagen-media.co.za/picsites/PHP/siteframe.mp?k=448&d=10&tvnod
es=-1989.6-1990.y2003/ Accessed: 19 November 2012.
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Chapter
12
COMPETITIVE MARKET
STRATEGIES
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Explain what a sustainable competitive advantage (an SCA) is;
„„ Discuss the bases for the creation of SCAs;
„„ Compare SCAs with key success factors and core competencies;
„„ Explain the differentiation strategy as a competitive market strategy for creating SCAs;
„„ Explain the low-cost strategy as a competitive market strategy for creating SCAs;
„„ Discuss the focus strategy as a competitive market strategy for creating SCAs;
„„ Discuss the pre-emptive move strategy as a competitive market strategy for creating
SCAs;
„„ Discuss synergy as a competitive market strategy for creating SCAs.
12.1 INTRODUCTION
How many times have you seen shops open in a new shopping centre, and then visit the
centre again and those shops are closed? How do some organisations manage to remain
competitive and successful for many years, while others barely survive for one year? In
a business arena where competition is constantly increasing, success and survival are
dependent on the attainment of a competitive advantage over one’s competitors.1 In this
chapter, sustainable competitive advantages or SCAs will be discussed, as well as the
various generic competitive strategies that organisations can adopt when competing in
the marketplace.
12.2 DEFINITION OF A SUSTAINABLE COMPETITIVE ADVANTAGE
A sustainable competitive advantage or an SCA is made up of a combination of unique
competitive capabilities. It is also something that a competitor cannot easily achieve.
A sustainable advantage has, per definition, a long-term effect and cannot easily be
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An SCA is something that a business does exceptionally well, better than its competitors
can.2
•• SCAs are actions or elements in a company’s strategy that cause a number of buyers to
have a lasting preference for a company’s products or services as compared to the offerings
of competitors.3
••
The functional marketing strategy, including the ‘Ps’ of marketing such as product,
distribution (place), promotion, processes, people and price all provide competitive
capabilities for the development of SCAs. A unique brand name which is very wellknown and regarded in the market is such a competitive capability.4
The reputation of this name has been created by extensive advertising over a long
period. A competitor will find it difficult to compete against this brand with its proven
track record. A well-established and wide local and international distribution network
is also a competitive capability that cannot be established overnight by a competitor.
Besides the marketing strategy and marketing decisions, there are also aspects of other
functional strategies that may be competitive capabilities, for example, well-trained and
loyal employees (human resource management), availability of scarce raw materials
(purchasing management), or thorough financial management processes. Although in
this chapter we will be focusing mainly on the way marketing management can create
SCAs, it is important to remember that marketing management does not function in
isolation. All the functional management areas such as production, human resources,
finance and information technology should be involved in the continued quest for
competitive advantages. Now that we have looked at what SCAs are, let us examine
how they can be created in an organisation.
12.3 T HE BASES FOR THE CREATION OF SUSTAINABLE COMPETITIVE
ADVANTAGES
In recent years, many successful organisations have developed capabilities and
sustainable competitive advantages based on one of three basic strategies:
1. Operational excellence.
2. Product leadership.
3. Customer intimacy.5
These strategies are illustrated in Figure 12.1 and subsequently discussed.
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Operational
excellence
SCA
creation
strategies
Customer
intimacy
Product
leadership
FIGURE 12.1 SCA creation strategies
12.3.1 Operational excellence
This strategy focuses on the efficiency of operations and processes in order to develop a
competitive advantage over other organisations. Advantages may be developed through
efficient distribution systems, convenient locations, extensive supply chain integration
and even convenient locations.
12.3.2 Product leadership
When using this strategy, organisations focus on technology and product development
in order to develop sustainable advantages over their competitors.6 As a result,
organisations offer customers the most advanced, high-quality products and services,
based on factors such as production expertise, guarantees and warranties, research and
development, and superior quality or features.
12.3.3 Customer intimacy
Organisations could also base their competitive advantage on working to know their
customers and understanding their needs better than the competition.7
Building customer relations can lead to brand-loyal customers, high customer switching
costs and customer satisfaction. Using brand loyalty as a basis for building SCAs means
that, as brand loyalty goes up, customers grow less sensitive to changes in the brand’s
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price. Loyal customers are less likely to be sensitive to competitive promotions, therfore
driving down the brand’s marketing costs. Marketing managers should thus bear in
mind that it costs four to six times as much to attract a customer than it does to retain
an old one,8 thus highlighting the importance of brand loyalty as a possible basis for
building a sustainable advantage.
12.4 CHARACTERISTICS OF SUSTAINABLE COMPETITIVE ADVANTAGE
An effective SCA has three important characteristics:9
1. An SCA must be substantial. It serves no purpose to spend time and money on
creating an SCA if it is not worthwhile in terms of the effort.
2. An SCA must, as the concept suggests, be sustainable. The organisation should be
able to maintain the combination of competitive capabilities over a period of time.
3. An SCA should be visible. If nobody knows of Levi’s ability to produce custom-made
jeans, for example, there will be little demand for them. An intensive advertising
campaign should draw attention to this.
12.5 C
OMPARING SUSTAINABLE COMPETITIVE ADVANTAGE WITH THE
KEY SUCCESS FACTORS AND CORE COMPETENCIES
A key success factor consists of competitive skills or assets needed to compete successfully
in the market, and are needed to place the organisation on an equal footing with its
competitors,10 whereas SCAs are needed to outperform competition. The key success
factors (KSFs) distinguish successful competitors from those that are less so. Failure
awaits an organisation that cannot match its SCAs with the KSFs of competitors.11
The core competency of an organisation, on the other hand, is the unique competitive
capabilities on which SCAs can be based and which are shared by all the strategic
business units (SBUs) of the organisation. A core competency can therefore be viewed
as a dedicated effort to exploit where the organisation can add value with rare and hardto-imitate activities.12 The core competency of a chain of hotels, for example, could be
consistent delivery of service quality. Each individual hotel will be expected to utilise
this core competency in delivering services to its guests.
Synergy is achieved by a well-designed training programme for the staff of all hotels in
the chain. The Ritz Carlton, for example, keeps tabs on guests to the point of noting
their pillow and biscuit preferences, so that guests can check into the Ritz anywhere
and expect the same treatment.
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A core competency should be:13
•• Untransparent to competitors – the product or service should have some benefit
or quality that cannot easily be understood or imitated (such as Coca-Cola’s secret
formula);
•• Durable over the product’s life cycle;
•• Immobile, in that capabilities or resources should be difficult or impossible to
transfer.
In the sections that follow, the importance of competitive strategies in developing SCAs
will be discussed, with an emphasis on five strategies for competitiveness:
1. Differentiation strategy.
2. Cost-leadership strategy.
3. Focus strategy.
4. Pre-emptive move strategy.
5. Synergy.
These strategies are illustrated in Figure 12.2 and discussed in the next sections.
Generic strategies for
developing SCAs
Differentiation
strategy
Low-cost
strategy
Focus
strategy
Pre-emptive
move strategy
Synergy
FIGURE 12.2 Strategies for developing SCAs
12.6 DIFFERENTIATION STRATEGY
Differentiation is a competitive strategy that involves the creation of a significantly
differentiated offering for which the organisation may charge a premium.14 Most
strategic thrusts which organisations use are in some way aimed at differentiation by,
amongst others, enhancing the performance, quality, prestige, features, service backup,
reliability or convenience of their product.15
By pursuing a strategy of differentiation, the organisation gives emphasis to a particular
element of the marketing mix that is seen by customers to be important and, as a result,
provides a meaningful basis for competitive advantage.16 In most cases, a differentiation
strategy is associated with a higher price, because such a strategy usually makes price
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less important to the customer due to the unique attributes built into the product.17 It
is important that the attempt at differentiation possesses three characteristics:
1. It should generate customer value.
2. It provides perceived value.
3. It is difficult to copy.
It is important that these unique attributes provide value to the customer and are
substantial enough to matter; that is, the consumer is prepared to pay more for the
product because of these attributes. The way to ensure this is to develop the point of
differentiation from the customer’s perspective. When differentiation succeeds by also
being an advantage according to customers, and competitors cannot imitate it easily,
then the enterprise has created a sustainable competitive advantage for itself.
12.6.1 Approaches to differentiation
In this section, we will be examining three main approaches to differentiation:
1. The general approach.
2. The quality approach.
3. Branding.
These approaches are illustrated in Figure 12.3 and discussed in the next sections.
Approaches to
differentiation
General
Quality
Branding
FIGURE 12.3 The approaches to differentiation
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The general approach
General marketing approaches to differentiation include the following aspects:18
•• Differentiation by unique product characteristics. Customers that value certain unique
characteristics over others are often willing to pay a premium for these products.19
Pampers disposable nappies, for example, are differentiated on the basis of fluid
retention, which offers convenience and reduced risk of nappy rash as its unique
product characteristics.
•• Differentiation by distribution and shipping activities.20 Speedy delivery and distribution
may also assist an organisation to differentiate itself from others, as well as have
fewer warehouses and on-the-shelf stock outs, more accurate order filling and
lower shipping costs.
•• Differentiation based on consumer orientation. Here organisations differentiate
themselves based on their ‘consumer centricity’, and strive to meet consumer
needs, demands and preferences.21 Organisations that are consumer-centric have
already laid the basis for a strong and sustainable competitive advantage, as loyal
customers are inalienable assets that would not even consider buying the products
of competing organisations.
Quality
The most important single factor affecting a business unit’s performance is often the
(perceived) quality of its products and services relative to those of its competitors.22
There are two types of differentiation that can occur:
1. Vertical differentiation.
2. Horizontal differentiation.
Vertical differentiation occurs when the products in a specific market differ in terms of
quality and price. In vertical differentiation, there is a trade-off of quality and price: the
higher the quality; the higher the price. The customer has to decide to pay more for the
higher-quality product or to go for a lower-quality choice at a lower price.
In horizontal product differentiation, the quality is kept constant and the marketers use
factors other than price/quality to differentiate their products.
The BMW 7 series, Lexus and Mercedes-Benz are very different, but they are similar in
terms of price and quality. Customers would use criteria other than quality to choose
a product. This means that when using horizontal differentiation, the marketer is not
competing on the basis of price.
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Product quality goes hand in hand with performance, durability and reliability. When
choosing which product to buy, the consumer is usually unable to judge all these
characteristics and he/she therefore concentrates on the ‘finish’ of a product. If the
finish is good, the consumer believes that the quality of the product is also good − this
is called the ‘halo effect’. It is even more difficult for a consumer to evaluate the quality
of the services. The politeness, helpfulness and friendliness of the staff of a retailer all
serve as a measure of the quality of the product.23 As far as service is concerned, a highquality service is also one of the most important methods for creating an SCA for the
retailer. A store that offers its customers a good service automatically distinguishes itself
from those who do not. It has also been found that there is a direct relation between a
reputation for high-quality products and size of market share.24
Branding
Brand names not only distinguish competitive products from one another, but also give
these individual products symbolic value, thus creating an image or ‘personality’ for the
product in question. A good example here is the name, and therefore image, attached
to the different retail stores.25 Another example is when Absa, the large banking group
in South Africa (acquired by British-owned Barclays Bank), acknowledged that it would
be better to use one single brand to promote all of the individual banks in the group.
The value of having brand-loyal customers is that an existing base of brand-loyal
customers provides an organisation with a strong base to realise a differentiation
SCA, in a sense creating a loyalty barrier that makes it substantially more difficult for
competitors to enter the market.26 Other benefits include the following:27
•• It is often considerably less costly to keep existing customers happy and prevent
them from changing to another brand than it is to reach new customers and
persuade them to switch, especially when they are not dissatisfied with the product
they are currently buying.
•• Brand loyalty provides leverage with intermediaries.
•• A satisfied customer base provides an image of a brand as an accepted, successful
product that will be around, and will be able to afford service backup and product
improvement when needed.
•• Finally, brand loyalty provides an enterprise with time to respond to competitive
moves.
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12.6.2 Sustainability of differentiation
The following conditions make it easier for an organisation to sustain its differentiation:28
•• The organisation’s sources of uniqueness create barriers for competitors. Aspects
such as learning, linkages and first-mover advantages tend to sustain uniqueness:
they are harder to copy and easier to maintain by protecting the source of
differentiation.
•• The organisation has a cost advantage in differentiating. If the cost advantage is
sustainable, then the differentiation will also be more sustainable.
•• The more the source of differentiation is based on coordination of value activities,
the harder it will be for the competitor to imitate, since it will require many changes
to their operating systems and culture. This is one reason why the ability to provide
good service is such a difficult aspect to copy.
•• The organisation creates switching costs at the same time as it differentiates. A
switching cost is a fixed cost that the buyers must pay if they change suppliers. This
would allow the organisation to sustain a price premium even if its product is equal
to competitors’ products. The buyer would be reluctant to change supplier because
of this switching cost, and this would enhance the sustainability of differentiation.
12.6.3 Common pitfalls in differentiation
Many organisations following a differentiation strategy face some common pitfalls often
as a result of not understanding the underlying basics of differentiation. These pitfalls
include the following:29
•• Uniqueness that is not valuable. The uniqueness must be perceived by the buyers and
valued by them. A good way to measure this is to see if the organisation can sustain
a price premium in selling to its customers.
•• Too much differentiation. If the product or quality levels are higher than the buyer’s
need, the organisation could be vulnerable to competitors that may have correct
levels of quality and a lower price.
•• Too big a price premium. Care must also be taken not to let the price premium charged
by the organisation over its competitors get too large or the organisation might find
itself in the situation where customers might sacrifice some of the features, services
or even image portrayed because it costs too much.30
•• Not knowing the cost of differentiation. Organisations must be aware of the cost of the
differentiation activities that they perform. They need to compare these costs with
the price premium they gain from the differentiation or the perceived value attached
to it by the buyer. One cannot assume that differentiation should be done because
it makes economic sense, and organisations must isolate the costs of differentiation.
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••
••
Focus on the product instead of the whole value chain. Many organisations consider
differentiation only in terms of the physical product, and are unaware of the many
opportunities provided by the value chain for effective differentiation.
The risk of imitation is a very real risk for an organisation. It is therefore difficult to
sustain a competitive advantage through innovation for a long period of time.31
Next, we will be looking at the low-cost strategy as a means of establishing a competitive
advantage.
12.7 LOW-COST STRATEGY
One of the most attractive positions for any organisation to be in is to be the low-cost
producer in its industry.32 Organisations that follow a low-cost strategy concentrate on
lowering their costs of production with the aim of lowering their prices to customers.
A low-cost strategy entails vigorous pursuit of cost reduction from experience, tight
cost and overhead control and cost minimisation in areas such as service, research and
development and advertising.33
In order to achieve this, the organisation will strive to reduce costs at all times, which
will enhance efficiency.34 This includes efficiency drives, tight cost controls and a
preoccupation with low-cost production. This could, in turn, entail investment in
production to achieve productivity gains, or even investment in marketing to ensure
that adequate sales volumes are achieved. This strategy is based on the interplay
between costs, prices, profit margins and market share.
There are two distinct directions that an organisation can take in order to earn a profit:35
1. Lower margins/higher share. Low-cost producers usually earn lower profit margins
than differentiated marketers, but they gain a higher share of the market. They may
lower prices and attain small margins, but they gain on the volumes that they sell.
Pick n Pay, for example, makes very little on each sale, but total sales volume is very
large.
2. Lower costs/higher margins. Here the low-cost producer tries to lower costs faster
than prices. This results in higher profit margins rather than a high share of the
market. For example, many of the house brands sold by retailers sell for less than
national brands, but they earn higher margins for the retailer by lowering the costs
of the product.
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There are many competitive advantages that could be gained by being the overall cost
leader, such as the following:36
•• The high volumes which low-cost producers gain give them bargaining power
against suppliers who would be unable to exert the same pressure on them as on
smaller accounts.
•• Customers would also have difficulty bargaining against an organisation selling at
the lowest prices.
•• These lower prices would also make substitute products less attractive.
•• Lastly, many competitors choose not to compete with low-cost producers, and
often leave the low end of the market to them.
12.7.1 Cost drivers
Cost drivers are the factors that, when combined, determine the cost of a given activity
of an organisation, and result in the cost position of the organisation in its industry.37
These drivers are listed below:
•• Economies of scale. Economies of scale arise from the ability of the organisation
to perform activities or purchase raw materials differently and more efficiently at
larger volumes than at the costs of activities such as advertising or research and
development over a greater volume of sales. The effect of scale varies widely, and
different activities are more sensitive to it than purchasing and sales, because their
costs are heavily fixed, no matter what the volume. Economies of scale can be
found to some extent in almost every activity of the organisation.
•• Learning. The cost of an activity can decline over time due to learning. Learning
is based on the premise that over time people learn to do tasks or activities
better through repetition. Learning can reduce costs over time through layout
changes, improved scheduling, labour efficiency improvements, product design
modifications and better tailoring of raw materials to the process. Learning is often
the result of many small improvements rather than one big breakthrough.38
•• Linkages. The cost of an activity is often affected by how other activities are
performed. In order to understand costs, the activity being done alone cannot be
examined, but rather the activities and the linkages within the organisation’s value
chain, as well as vertical linkages with the value chain of suppliers and channel
members. By coordinating purchasing and assembly, an organisation could reduce
its inventory and lower costs. Linkages with channels means that an organisation
looks at the materials handling, warehousing and transport costs of getting products
to customers. This is an area where many organisations are finding tremendous
opportunities to reduce costs.
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••
••
••
••
Sharing. This deals with the interrelationships with other organisations. The most
important aspect of interrelationships is found when activities can be shared
between organisations or units. This may increase the throughput of units or may
help in achieving scale. Expertise could also be shared, and significant cost savings
can be achieved by sharing knowledge amongst an organisation’s different assets or
locations.
Experience. When employees learn to do their jobs more efficiently with repetition,
the time required to complete a task decreases, which means that more units can
be produced in the same period.39 The more often one performs a task, the more
proficient one will be at performing that task and the more likely it is that one will
discover efficient ways of doing it. Total costs decrease as experience increases, thus
if a company acquires a higher market share, its costs decline, enabling it to reduce
its prices.
Location cost advantage. The geographic location of an activity can affect its cost.
Locations differ in terms of costs with respect to many factors such as labour,
expertise, customers and raw materials.40 Location relative to suppliers of inputs
affects inbound logistical costs, while location relative to buyers would affect the
outbound logistical costs. It is clear that location has an effect on almost every cost
factor in an organisation.
Institutional factors. Factors such as government legislation, unionisation, local
content, sales subsidies and levies are also important cost drivers.41 These factors
can be favourable for a given industry (SA has local content rules for automobile
manufacturers that would favour component manufacturers) or unfavourable (tariff
protection for the SA textile industry was recently reduced). Although institutional
factors are often not controlled by business, there are ways to influence them
through lobbying to minimise their effect.
12.7.2 Opening up a cost advantage
One way to gain a cost advantage over competition is to control the cost drivers, so as
to improve efficiency and control costs.42 The second way is to reconfigure the value
chain. Here the idea is to think of and adopt better and more efficient ways of designing,
producing, distributing or marketing the product. It is important to note that both
these approaches can be used at the same time, and successful cost leaders gain cost
advantage from a number of sources within the value chain. These two approaches are
illustrated in Figure 12.4.
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Methods of obtaining
a cost advantage over
competition
Controlling cost
drivers
Reconfiguring the
value chain
FIGURE 12.4 Methods of gaining a cost advantage over competition
Controlling cost drivers43
The organisation should concentrate initially on the activities that represent a significant
or growing proportion of costs.
Scale can be controlled by ensuring that the organisation increases the scale effect
through its activities in acquisitions or marketing. It is important to selectively look for
the types of scale that affect the major activities and costs in the organisation. This, in
turn, implies that the organisation should look to exploit scale economies where the
organisation is favoured; for example, an organisation with global market share should
look for activities that emphasise global scale.
Learning can be controlled by managing learning to ensure that it occurs. An organisation
should also ensure the sharing of learning across facilities and business units. It
should further ensure that the organisation’s learning stays within the organisation by
protecting it from competition. The organisation should also analyse competition to
learn from them.
Reconfigure the value chain44
It is often necessary to look at the total value chain to design a value chain that is totally
different from that of the competition.
This could come from a number of sources such as:
•• A different production process;
•• Differences in automation;
•• Different selling methods;
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••
••
••
••
New distribution channels;
Differences in forward or backward integration;
Differences in location of facilities relative to suppliers and/or customers;
New advertising media.
This redesign of the value chain can lead to cost advantages for many reasons.45 First, it
often gives the organisation the opportunity to fundamentally change the cost structure
instead of relying on a number of small shifts. Second, it can lead to cost advantages
by changing the basis of competition so that it favours an organisation’s strengths. The
redesign may change important cost drivers so that they favour an organisation. The
organisation would have to audit its entire operations and activities, as well as the
competitors’ to try to find new creative ways of doing things.
12.7.3 Pitfalls in following a cost-leadership strategy
Some of the most common mistakes include the following:46
•• Focusing only on manufacturing costs.47 Most managers immediately think of
manufacturing if they want to reduce costs, but a large proportion of total cost
is often found in marketing, development or infrastructure. The total value chain
must be examined so as to significantly reduce cost.
•• Ignoring the purchasing or procurement function. Again, many organisations often look
only at labour in order to reduce input costs, yet all inputs and the linkages between
inputs and costs need to be examined. This is an area where many organisations
are finding significant improvements in costs through improving relationships with
suppliers.
•• Overlooking smaller activities. Attention is focused only on the large cost activities,
and sometimes little attention is given to smaller cost activities or indirect activities
such as maintenance.
•• False perception of cost drivers. A good understanding of cost drivers and the value
chain is necessary so that action is taken where the organisation can achieve results.
•• Failure to exploit linkages. The ability of the organisation to understand its value
chain and cost drivers is underlined by the fact that many organisations rarely
identify all the linkages that affect costs. This could also lead to errors in terms of
setting the same cost reduction targets for all departments when raising costs in
some departments could lead to lower total costs.
•• Reduced flexibility. In order to achieve lower production costs, an organisation may
have to invest heavily to gain efficiency. This means that the organisation may tie
itself to a single way of serving the market, losing flexibility to respond to market
changes. This may make it difficult to adjust to shifts in customer tastes.
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In the next section, we will be examining the focus strategy as a means of attaining a
competitive advantage.
12.8 FOCUS STRATEGY
Selecting a particular target market and catering for the needs of consumers in this market
is the basis of a focus strategy.48
The key to a successful focus strategy is being able to identify a specific niche and to
monopolise it in the market. The basis for the competitive advantage would then be
lower costs than competitors (low-cost strategy) in serving the market niche, or the
ability to offer customers in the niche something different from the other competitors
(differentiation).49
A cost basis for the focus strategy depends on the marketer finding a buyer segment
whose needs would be less costly to meet than the rest of the market. Many organisations
in different industries have used a focus strategy to help them gain cost breakthrough.
Budget-priced motel chains (for example, Stay Easy and Town Lodge motel chains50)
have lowered their investment and operating costs per room by using a no-frills
approach aimed at price-conscious travellers.
A focus strategy based on differentiation would need a buyer segment in the market
that wants unique product attributes. Examples of specific product attributes could be
luxury in automobiles, specific applications in computers, paper types in printing and
short-haul commuter flights in airlines.
The need to create a viable SCA is therefore of utmost importance in the focus strategy.
There are many ways of attempting to achieve this: focusing the product line, targeting
a segment, or concentrating on a specific geographic area. Examples of these focus
strategies include the following:51
•• Focusing the product line. This involves, for instance, choosing a specific line of
software (for example desktop publishing programs) or stocking only high-quality
stereo equipment.52
•• Targeting a market segment. This could, for example, involve trying to meet the
clothing needs of ‘larger’ people (for example, The Foschini Group’s Donna-Claire
brand) or providing a resort which caters for only a certain class of holidaymaker.
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••
••
Choosing a limited geographic area. This might be the decision to deliver bakery
services to a specific region to take advantage of lower transportation costs in that
region.
Targeting low-share competitors. This involves finding a specific portion of the
market that is extremely profitable or one that has been neglected by the big
competitors. For example, Douglas Green of Paarl has enjoyed tremendous success
in concentrating its efforts on the imported liquor market in South Africa, which
was overlooked by many of the large local competitors.53
12.8.1 Advantages of a focus strategy
A number of advantages exist which an organisation can gain from following a focus
strategy, including the following:54
•• The biggest advantage is the ability to carve a niche market against larger, broaderline competitors.
•• In many cases a focus strategy enables an organisation to utilise its specialised
distinctive competence or assets to create new niches.
12.8.2 The sustainability of a focus strategy
The organisation should consider the sustainability of a focus strategy against broadly
targeted competitors, imitations and segment substitution as illustrated in Figure 12.5.55
Sustainability against
broadly targeted competitors
Sustainability of a focus
strategy
Sustainability against
segment substitution
Sustainability against
imitators
FIGURE 12.5 Factors that determine the sustainability of a focus strategy
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••
••
••
Sustainability against broadly targeted competitors. A broadly targeted company
would either already be a competitor in the focuser’s segment or it could be a
potential entrant into the segment. The crux of the issue is that the more focused
the organisation’s value chain is on delivering value to a customer segment that is
significantly different, the more successful the focus strategy will be.
Sustainability against imitators. A significant threat to the focuser is that another
organisation will copy the focus strategy. This could be a totally new organisation or
one that has re-evaluated its own strategy and decided to follow the focus strategy.
The barriers to entry (scale, differentiation, channel loyalty, etc) would depend
on the industry and need to be analysed so as to understand the likelihood of
imitation. The size and growth rate of the segment would also affect the likelihood
of imitation.
Sustainability against segment substitutions. There is always the threat that the
segment could disappear altogether. Factors such as technology or changes in the
environment could lead to a market eroding or disappearing completely.
A focus strategy could be a particularly attractive option for an organisation when:56
•• The segment is big enough to be profitable;
•• The segment has good growth potential;
•• The segment is not crucial to the success of major competitors;
•• The focusing organisation has the skills and resources to serve the segment
effectively;
•• The focuser can defend itself against challengers based on the customer;
•• The focuser can defend itself against challengers based on the customer goodwill it
has built up and its superior ability to serve buyers in the segment.
The pre-emptive move as a competitive strategy will now be discussed.
12.9 THE PRE-EMPTIVE MOVE
The pre-emptive move involves being ‘first in the field’. A pre-emptive move strategy is
also called a first mover or pioneer strategy.
A pre-emptive move is the implementation of a strategy new to a business area that, because it
is first, generates a skill or an asset that competitors are inhibited or prevented from duplicating
or countering.57
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There are a few important factors to take into account when considering a pre-emptive
move:58
•• ‘Being first’ requires some form of innovation. The culture of the organisation must
be such that it is prepared to take risks.
•• A substantial commitment of resources is usually called for, which can be risky.
On the other hand, a strong financial commitment can dissuade competitors
to enter.
•• The pre-emptive move assumes it will be difficult for competitors to copy or counter
the enterprise. The key to a successful pre-emptive move is therefore to ensure that
competitors will actually find it difficult to respond.
Potential advantages and risks of a pre-emptive move
Advantages of a pre-emptive move for an organisation include the following aspects:59
•• Economies of scale and experience built by the early entry and experience in the
industry;
•• High switching costs for early adopters who might be considering moving to
competitors;
•• Distribution advantage with regard to developing relations with logistical companies;
•• Customer loyalty, which is usually greater amongst buyers of a first mover
organisation.60
The following risks and disadvantages are pitfalls that need careful consideration:61
•• The basis of competition and market segmentations may be different to those which
will be important later on during the industry’s development. The danger is that the
firm then builds the wrong skills or might face very high costs to adapt.
•• The costs of opening up the market are high, including such things as customer
education, regulatory approval by government and breakthrough technology.
•• Early competition with small, newly started organisations will be costly, but these
organisations could be replaced by even tougher competitors later.
•• Technological change might make early investments obsolete and allow firms
entering later to have an advantage, by having the newest products and processes.
In fact, organisations that enter later or follow would gain from the technological
shake-out, and could even overtake the company who moved first.
The last competitive strategy that will be discussed is synergy.
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12.10 SYNERGY
Synergy is an important force in the attainment of a sustainable competitive advantage.62
The principle of synergy is that the whole becomes greater than the sum of the parts.63
Different SBUs sharing corporate personnel, research and development, financial
resources, operations techniques or distribution channels may create synergy for the
enterprises involved.
Figure 12.6 below illustrates the various forms of existing synergy that an organisation
can take advantage of.64
Sharing of
knowledge
and skills
Vertical
integration
of SBUs
Aligning
strategies
between
SBUs
Forms
of
synergy
Sharing of
assets and
resources
Pooled
negotiation
power
FIGURE 12.6 Forms of synergy
Advantages and disadvantages of synergy as a strategy
These advantages and disadvantages include the following:65
•• An increase in customer value and sales if synergy is properly applied;
•• A decrease in operating costs through the impact of economies of scale and the
SBUs working together;
•• A reduction in the amount needed to be invested;
•• An incorrect definition of the synergy;
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••
••
Failing to act on a possible synergistic opportunity;
High-pressure deals that might result in less synergy being realised.
12.11 SUMMARY
In this chapter, SCAs were introduced. We compared SCAs with key success factors
and core competencies. We then explained the various competitive strategies available
to organisations for developing SCAs by examining five strategies: the differentiation
strategy, the low-cost strategy, the focus strategy, the pre-emptive move and synergy.
The advantages and disadvantages of each of these strategies were explained as well as
the marketing implications for organisations.
Self-evaluation questions
1. Explain the meaning of an SCA.
2. Discuss the difference between an SCA, a core competency and a key success factor.
3. Explain the various approaches that an organisation could consider when adopting a
differentiation strategy.
4. Highlight the various cost drivers that could be used by an organisation when
implementing a low-cost strategy.
5. Describe the advantages of following a focus strategy.
6. Explain the various advantages and risks of adopting a pre-emptive move strategy.
7. List and discuss the various forms that a synergistic strategy could take.
ENDNOTES
1. Ehlers, M.B. & Lazenby, J.A.A. (eds). 2004. Strategic management: southern African concepts
and cases. Pretoria: Van Schaik, p 122.
2. Cant, M.C. 2009. Only study guide for PRET04D: Strategic retail marketing. Pretoria: UNISA,
p 67.
3. Hough, J., Thompson, A.A., Strickland, A.J. & Gamble, J.E. 2011. Crafting and executing
strategy: creating sustainable high performance in South Africa – text, readings and cases. 2nd
ed.. Berkshire: McGraw-Hill.
4. Cant, M.C. 2009. Only study guide for PRET04D: Strategic retail marketing. Pretoria: UNISA,
p 67.
5. Ferrell, O.C. & Hartline, M.D. 2011. Marketing management strategies. 5th ed. Canada:
Cengage Learning, p 135.
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Chapter 12 – Competitive market strategies
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
Ibid.
Cant, op cit, p 68.
Ibid.
Cant, op cit, p 69.
Jooste, C.J., Strydom, J.W., Berndt, A. & Du Plessis, P.J. (eds). 2012. Applied strategic
marketing. 4th ed. Cape Town: Pearson, p 206.
Cant, op cit, p 69.
West, D., Ford, J. & Ibrahim, E. 2010. Strategic marketing: creating competitive advantage.
2nd ed.. New York: Oxford University Press, p 137.
Cant, op cit, p 70.
West et al, op cit, p 120.
Cant, op cit, p 75.
Gilligan, C. & Wilson, R.M.S. 2009. Strategic marketing planning. 2nd ed. Oxford:
Butterworth Heinemann, p 409.
Cant, op cit, p 75.
Cant, op cit, p 76.
Ehlers & Lazenby. op cit, p 126.
Hough et al, op cit, p 161.
Jooste et al, op cit, p 235.
Cant, op cit, p 77.
Jooste et al, op cit, p 232.
Jooste et al, op cit, p 235.
Jooste et al, op cit, p 233.
Ehlers & Lazenby, op cit, p 127.
Cant, op cit, p 80.
Cant, op cit, p 82.
Ibid.
Ehlers & Lazenby, op cit, p 128.
Ibid.
Cant, op cit, p 91.
West et al, op cit, p 139.
Jooste et al, op cit, p 239.
Cant, op cit, p 92.
Ibid.
Jooste et al, op cit, p 240.
Cant, op cit, p 93.
Ehlers & Lazenby, op cit, p 124.
Jooste et al, op cit, p 241.
Jooste et al, op cit, p 242.
Cant, op cit, p 94.
Cant, op cit, p 95.
Cant, op cit, p 96.
Ibid.
Jooste et al, op cit, p 243.
Ehlers & Lazenby, op cit, p 126.
Ehlers & Lazenby, op cit, p 128.
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49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
Cant, op cit, p 99.
Jooste et al, op cit, p 245.
Jooste et al, op cit, p 246.
Cant, op cit, p 102.
Jooste et al, op cit, p 246.
Ehlers & Lazenby, op cit, p 129.
Jooste et al, op cit, p 247.
Cant, op cit, p 104.
Cant, op cit, p 107.
Jooste et al, op cit, p 249.
Cant, op cit, p 107.
Jooste et al, op cit, p 251.
Cant, op cit, p 109.
Jooste et al, op cit, p 253.
Ferrell & Hartline, op cit, p 272.
Jooste et al, op cit, p 254.
Jooste et al, op cit, p 255.
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Chapter
13
GOING GLOBAL
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Explain what is meant by globalisation;
„„ Identify the benefits of going global;
„„ Discuss each of the steps involved in making the decision to go global;
„„ Explain what is meant by ‘born global’ firms;
„„ Outline the process of going global;
„„ Explain the impact and importance of the global environment on global strategy;
„„ Discuss standardised and adaptation approaches to product, promotion, pricing and
distribution decisions;
„„ Understand the opportunities offered by the web to help firms go global;
„„ Explain the task of managing a firm’s international activities.
13.1 INTRODUCTION
This book is about strategic management and one of the important strategic decisions
that some companies will need to make is whether to ‘go global’; that is, whether to
compete outside the borders of South Africa or not. Going global is a big decision to
make for any organisation, as the globalisation process is an extremely costly one that
will quickly deplete the financial coffers of even well-off organisations. Once this key
strategic decision has been taken, the organisation is then faced with a number of
additional strategic decisions that relate to how it should best deal with the challenges
of going global and how to succeed in extremely competitive global markets, given the
fast-changing environment we live in – think of the recent Brexit developments where
the United Kingdom decided to leave the European Union, and the weakening of the
Rand against currencies such as the US dollar, the euro and the British pound, which is
good for exports, but not for imports. This chapter strives to examine these decisions
in more detail. The chapter begins by defining and briefly explaining globalisation,
and then moves on to discuss some of the issues organisations need to consider when
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deciding to go global. This is followed by a discussion of some of the strategic decisions
organisations will need to make in the process of going global. The next section begins
by defining globalisation.
13.2 GLOBALISATION
Globalisation may be defined as ‘the process of going global’; that is, expanding business
beyond the borders of the home country. Globalisation is a term which can be used
in both a macro- and micro-context, perhaps more so in a macro-context. A macro
perspective of globalisation concerns a country becoming more global. This means
a situation in which the country in question grows its exports to the point that they
represent a major part of the country’s GDP. Inevitably, a globalised nation will also
have significant imports to support its domestic and export industries − such countries
are said to have open economies. A country such as Singapore is considered to have
one of the most global and open economies in the world, and Singaporean trade to
GDP ratio for 2014 is 359.3 per cent.1 Other relatively globalised countries measured
by their trade to GDP ratios include Belgium (166.8 per cent), Hong Kong (180 per
cent), Ireland (194.4 per cent), Luxembourg (309.7), Vietnam (164.2 per cent), the
Netherlands (159.2 per cent) and Thailand (145.2 per cent).2
South Africa’s exports of goods and services for 2014 represented 30.73 per cent of the
country’s GDP, which is on a par with and even better than countries such as Australia
(20.3 per cent), Brazil (11.3 per cent), China, (24.9 per cent), France (30.0 per cent),
India (23.1 per cent), Italy (30.1 per cent), Russia (30.2 per cent), New Zealand (29.7
per cent), the United Kingdom (28.7 per cent) and the United States (13.3 per cent).3
Bear in mind that the macro view of globalisation simply suggests that the country
concerned is more integrated with, and open to doing trade with, the rest of the world.
It does not necessarily mean that the economy is strong, growing or even healthy.
The micro perspective of globalisation sees the process of going global from an
organisation’s point of view. It sees the organisation making the decision to sell outside
its home country and growing its sales to the rest of the world (that is, its exports) to
the point that they represent an important part of the organisation’s total sales (in many
instances, its major source of income). As an organisation moves into global markets, so
it must learn to adapt its marketing effort to meet the needs of the foreign marketplace.
These needs are generally very different from the needs of the home marketplace
because of the different cultures, languages, social contexts, laws, regulations, standards,
politics, economies, technologies and topographies that are found in other parts of
the world. Adapting an organisation’s marketing offering to fit in with these foreign
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environments is a challenging task, which makes international (or export) marketing
very difficult and very different from domestic marketing. The rest of the chapter will
focus on globalisation from the organisation’s point of view.
13.3 THE BENEFITS OF GLOBALISATION
There are many benefits of globalisation for organisations. Some benefits include the
following:
•• Increasing sales. This may be very important for an organisation that has a relatively
small domestic market (although South Africa has quite a large population, the
income per capita is quite low and a company that produces a luxury product may
have to expand abroad to grow its sales).
•• Growing profits. For some products and in some countries, the potential profit
margins may be greater than in the domestic market, making it attractive to move
abroad (although this is not always the case).
•• Maximising economies of scale. This means using resources more efficiently.
•• Lowering unit costs. As efficiency increases, so the organisation is able to produce
more with the same resources, meaning that the cost per unit drops for both foreign
and domestic sales.
•• Accommodating seasonal sales. For organisations that produce seasonal products
such as swimwear, selling these products in the northern hemisphere when they
have their summer season, as opposed to South Africa’s winter, can level out sales
across entire years, instead of being subject to sales slumps and peaks based on
seasonal demand.
•• Increasing competitiveness. By competing in global markets, companies have to
become more competitive and efficient, and this has a positive impact on the
organisation’s domestic market.
•• Prestige/status. There is a certain prestige associated with competing internationally;
this may have a positive impact on domestic sales as well, as customers may perceive
the firm to be more successful and attractive than its non-global alternative.
In the next section the decision to go global is explained in more detail.
13.4 THE DECISION TO GO GLOBAL
For an organisation, the issue of going global is a key decision. Not going global is
perhaps just as important a strategic decision to make as deciding to go global. Taking
on the challenge of exporting is not for every company. In reality, exporting is a tough,
expensive and daunting task, and few companies succeed. Although there are no
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published figures on the number of export companies in South Africa, it is estimated
that there are about 4 000 to 5 000 regular export companies, with several thousand
occasional exporters (there may, however, be more occasional exporters in the country).
This is a small percentage (less than 1,5 per cent) of the total population of registered
businesses in South Africa (estimated to be more than 350 000).4 One of the reasons
for there being so few exporters is that it is actually very difficult to succeed in export
markets, and the process requires considerable input in terms of money, time, human
resources and effort. There are no definitive statistics on the time that it takes to succeed in
exporting, but anecdotal evidence suggests that achieving success in exports may require
upwards of two years, and time spans of five to seven years have also been mentioned.
The decision to go global is thus one that should not be taken lightly and needs to be
part of the firm’s overall strategic vision. The strategic process underpinning the going
global process is outlined in Figure 13.1, and it has at least six steps. These steps are
subsequently discussed.
Step 1
Strategic
vision
Step 2
Export
readiness audit
Step 3
Top management
commitment
Step 4
Allocation of
interim resources
Step 5
Buy-in
Step 6
Strategic business
units, export plan
and budget
FIGURE 13.1 Steps in making the decision to go global
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13.4.1 Steps in the decision to go global
Step 1: Strategic vision
The first step in the process of deciding to go global is to ensure that this decision
is aligned with the organisation’s strategic vision as embodied in its vision/mission
statement, as well as business/marketing goals. In these (hopefully) documented
statements and goals, one would expect to see words such as ‘global’, ‘international’,
‘foreign’, etc. For example, the organisation may state in its vision statement that it
sees itself as a ‘global competitor in the jewellery manufacturing sector in South Africa’
(assuming that it operates in the jewellery sector). If a global vision is not part of the
organisation’s strategic view, then it is unlikely to succeed, even if an export department
is established with a budget and other resources. The lack of a global vision will always
serve as a stumbling block when future decisions have to be made between investing in
the domestic or international markets.
Step 2: Export readiness audit
Assuming that a global view is indeed part of the organisation’s strategic vision, the next
step is to consider a number of other issues that are likely to impact on the firm’s likely
success or failure in global markets. These issues include the following:
•• Management commitment. Not only must a global view be embedded in the firm’s
strategic vision/goals, but management must formally document its support of the
decision to go global. This issue is discussed in more detail in the next step.
•• Financial resources. Exporting costs money – serious money – and an adequate budget
needs to be set aside for this effort. There needs to be enough money for employing
export staff, undertaking overseas trips, funding foreign advertising, taking part in
trade fairs, making changes to the product, paying for longer distribution channels,
additional insurance, undertaking new and additional research and development
efforts, supporting online activities, repacking the product, adapting the product to
meet foreign standards and regulations, providing service and support over longer
distances, as well as enough to cover the shortfall before foreign payments are
received (which may be 90 to 180 days from dispatch/delivery).
•• Exportable product. The organisation must make an unemotional and logical
decision as to whether the product is exportable (that is, sellable abroad) in its
current form. This is a tough decision to make, as most staff will be convinced that
it is. It may require the involvement of an outside, third-party consultant to help
make this decision. This person may have to travel abroad to several countries to
explore the overseas potential for this product (although a lot can be achieved these
days using the web). If the product is sellable, the process can continue. If not,
either a new product may have to be developed (involving additional research and
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••
••
••
••
••
••
development, design, materials, specifications, etc) or adaptations may have to be
made to create a sellable/marketable product for the foreign marketplace.
Export skills. Special skills are necessary to succeed in exporting. These skills
incorporate documentation skills, language skills, cultural experience, marine
insurance skills, environmental knowledge, logistical skills, foreign marketing
experience, packaging and labelling skills, etc. Few staff members are likely to have
these skills, and additional staff may need to be employed to gain them. These staff
members may need to be employed for one or more years, before any income is
generated from exports.
Foreign contacts. A company going global cannot succeed without appropriate
contacts abroad. These contacts include people involved in clearing and forwarding,
logistics, distribution, marketing and selling in foreign markets abroad. A good
contact can open many doors and provide in-market experience that is invaluable
to the new exporter. If the firm already has such contacts (perhaps they are already
importing from the target market and their overseas supplier or agent can serve as
a first port of call to learn more about the foreign marketplace, and gain access to
relevant contacts that can help them further), it can prove a major advantage in
entering the foreign marketplace.
Foreign experience. Having staff with foreign experience – be it staff that speak a
foreign language, are immigrants, have travelled internationally extensively or, best
of all, have done business overseas before, is a definite advantage. These individuals
need to be identified and, if interested, involved in the firm’s export development
and activities. Be aware, though, that not everyone with international experience
or exposure is suited to the export task. It will be necessary for the firm to seek
out suitable individuals and employ them from outside to run the export division.
Capacity. Perhaps one of the biggest stumbling blocks in the South African context
is that of capacity. Organisations that decide to go international need to have
spare production capacity available to export and, most importantly, they need to
commit to this capacity. A common lament in the South African context is that new
exporters do not commit any or enough production capacity for exports, and as
soon as orders have to be picked up in the local market, they abandon their export
endeavours for the easier and often more lucrative local market, often leaving
export clients in the lurch.
Production flexibility. Firms considering exporting also need to consider how
flexible their product capacity is. Can they easily adapt their product to meet the
requirements of the foreign marketplace? If not, they may not be suited to exporting.
Ability to adapt. The question of adaptability goes beyond production flexibility
and refers to a flexible or adaptable approach in general. Is the firm willing to be
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flexible in its pricing approach? Can it adapt to different cultures and ways of doing
business? Is it willing to learn?
With the export readiness exercise done and assuming the firm can meet most of
the requirements as outlined above, the next step is to consider top management’s
commitment to exports.
Step 3: Top management commitment
It is simply a fact that needs to be addressed up front: Organisations cannot go global
unless they enjoy management’s commitment. The cost, effort and time involved will
draw on resources that managers will not be able to justify, unless they have their top
management’s approval. Approval will make it possible to ring-fence a portion of the
firm’s production capacity for export only, and to ensure that it is not cannibalised for
any reason (for example, to supply a shortfall in the domestic market: South African
exporters are notorious for abandoning export markets in good times in favour of
domestic markets that are flourishing and that suddenly demand all of the production
capacity of a firm). Management commitment will also ensure that enough money is
made available for the export effort and should facilitate the rapid appointment of staff,
the additional research and development effort needed in support of exports, and the
quick adaptation of production lines to meet foreign requirements. It is crucial that this
management commitment is formally documented, otherwise it is too easy to suddenly
change vision to focus on more lucrative opportunities that present themselves in the
short term, such as an upswing in the economy.
Step 4: Allocation of resources
With management’s commitment in hand, the next step is to allocate interim resources
to support the establishment of an export department. This has to do with providing
financing, appointing staff, apportioning production capacity, and allocating research
and development capacity in support of the export effort. These are interim measures,
as the actual export plan probably has not yet been finalised. This plan can only be
documented after some market research has been done to determine:
•• Potential target markets;
•• Market needs;
•• Market size;
•• Expected sales;
•• Production capacity required to support sales.
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Step 5: Buy-in
Another step in the process of deciding to go global is to obtain the buy-in from other
parts of the organisation, such as the research and development department, the design
department, the production department, engineers, the finance department, human
resources, the marketing department, etc. Even with management commitment, not
everyone in the organisation is likely to be in support of or even aware of the firm’s
globalisation effort. An internal education effort is necessary to inform colleagues of
where the organisation plans to go, what the advantages are and what is required from
them. Getting the buy-in from colleagues plays a key role in ensuring the success of the
process of going global.
Step 6: Strategic business units, export plan and budget
With the interim money and resources allocated in Step 4, the firm would then undertake
certain market and marketing research to ascertain whether an export market does in
fact exist for its products. If this is the case, then the decision can be taken to move
forward with its export endeavours. At this point, the final step is to create a formal
export department and to allocate further resources in the form of adequate longerterm funding and staffing to the department. The export department should operate as
a stand-alone strategic business unit, able to operate independently with the purpose
of generating income and profits, and whose success can be measured accordingly. One
of the first tasks of this newly formed department would be to prepare a formal export
plan, incorporating a complete budget. The approval of this plan and budget would be
seen as the start of the firm’s formal export endeavours.
The above process is what happens to most start-up exporters. However, there are some
companies that are created from scratch with the sole purpose of exporting. These
born-global firms are discussed in the next section.
13.4.2 Born-global firms
Sometimes, very occasionally, companies are created for one purpose only and that is to
compete in global markets. Global examples of such firms are Skype (web applications),
Mavi (clothing), HTC (smartphones) and Cochlear (medical devices).5 These firms were
all created to focus first on the global market, with the domestic market a secondary
consideration and only as part of their global approach. The factors that contribute to
this phenomenon include the ubiquitous nature of the internet, the affordability and
access to technology, easier communication, reducing barriers to trade, and the global
movement of skills.
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The nature of born-global companies is that they are globally active almost from
conception. The leadership of these firms is inevitably globally focused; the firms
are often at the cutting edge of technology and require global markets to justify their
existence.
13.5 STRATEGIC DECISIONS IN GOING GLOBAL
Going global, as suggested, is a slow and time-consuming process, except perhaps for
born-global firms. What is more, even when firms succeed in global markets, they
inevitably do not succeed in all markets at the same time. Usually, they manage to break
into a single market to start off with and then, over time, they expand their activities
to other markets. As they grow, their global activities begin to gain prominence and
soon the global component of their business activities becomes the dominant focus of
the firm. Eventually the firm is focused on global markets primarily and the domestic
market is just seen as another global market that they are active in. Finally, a handful of
firms eventually become truly global firms where they have a single, standard approach
to the world, often with a core product with minimum product and promotional
diversification between countries (Coca-Cola is one such example). This process may
take years and even decades to achieve.
Once the first and most important strategic decision has been taken, namely to go
global, the next series of strategic decisions needs to be taken. These decisions deal
with the organisation’s approach to overcoming environmental barriers, undertaking
market research, making a country/market choice, deciding on an entry method,
segmenting markets, targeting specific markets and positioning the product with the
selected segment, and then adapting the marketing mix for that segment specifically.
The typical decisions that need to be taken in the process of going global are outlined
in Figure 13.2.
13.6 GLOBAL ENVIRONMENTS
One of many strategic decisions that organisations have to make is how to overcome the
environmental barriers that they are likely to face in the internationalisation process.
The environmental challenges that exporters face include the (often vastly) different
sociocultural, economic, legal, political, technological and geographic environments
encountered in foreign markets, compared with the home markets. These challenges
are briefly outlined as follows:
•• Sociocultural environment. This environment deals with numerous issues associated
with the functioning of individuals, families and communities in society. The
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Trade
barriers
Marketing
research
Environments
STRATEGIC
DECISIONS TO TAKE
Market selection
and entry
Online
In-market
decisions
FIGURE 13.2 Strategic decisions in going global
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main sub-issues often discussed in this context include language, religion,
education, belief systems, material culture, the role of the family and the extent of
consumerism. For example, how families function, whether they are patriarchal
or matriarchal, whether they are generally large or small, whether they are close
or more independent, etc, may impact on what, how and to whom a product is
marketed. In a patriarchal family, the marketing effort would focus on the father,
while in a matriarchal one the focus would be on the mother. Similarly, in a
culture where large families are common, there may be opportunities to market
products that are less suitable for smaller families. For example, large cereal packs
are probably better suited in markets where large families are to found, but may
not be so successful in markets where family size is generally small. In a similar
way, religion may impact on the marketing efforts of exporters. The use of women
to promote products may be less acceptable in predominantly Islamic countries
compared with most Christian countries. The promotion of beef may not be wise
in India, for example, where the cow is considered sacred.
Legal environment. Countries around the world have different legal and regulatory
systems. While some of these systems may be similar between some countries, no
two legal systems are exactly the same. When doing business in a country with
a different legal system to South Africa, exporters need to tread warily to ensure
that they do not break the law, which could prove costly or even disastrous for an
organisation. Exporters are unlikely to have much knowledge about the laws of
other countries, and for this reason they will need to obtain the advice of lawyers
located in or at least familiar with the foreign markets in question. Not only is
this advice likely to be costly in its own right, but it may lead to costly changes
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having to be made to the exporter’s products or promotional campaign. Meeting the
regulatory requirements of foreign markets, such as electrical, advertising, health
standards or product requirements, can be a minefield in itself.
Economic environment. As legal systems differ, so do economic systems, and the
economic circumstances differ from country to country. Every country follows a
slightly different way of doing business with varying degrees of success. Exporters
need to understand the economic system and economic position associated with
their foreign target markets. This includes factors such as the size of the economy,
the growth of the economy, the economic growth per capita, the general health
of the economy (is it expanding or contracting?), inflation rates, interest rates,
disposable income, etc. These economic factors are important to exporters, as they
provide some insight as to the well-being of a particular country and the potential
to sell the exporter’s products in the country concerned. Some products are likely
to succeed only in well-off economies, for example luxury goods such as watches,
cigars or caviar, while others are better suited to struggling economies, for example
wind-up radios that need no batteries, or food packs. The size and growth of a
potential economy is also a good indication of the likelihood of success of a product
in a marketplace. The bigger the economy and the faster it grows, the more chances
there are to succeed in that country. This information is also valuable in strategic
planning, as it will help in deciding which countries to focus on and what the size
of sales is likely to be.
Political environment. Politics also differ from country to country, and the political
system and the politics of the day to be encountered in a foreign country may have
a serious impact on the success of export organisations. Some governments are
open for business, imposing minimal regulations and with minimal involvement
in business and trade, while others are very protectionist in their approach to
business, especially with respect to imports from other parts of the world, and
may be very involved in business and trade. Zimbabwe, for example, is currently
considering expanding its requirement that foreign companies have a majority
ownership by local citizens. In some countries there is even the danger that the
government could confiscate or seize foreign-owned companies or assets, with or
without compensation. This could prove very costly for an exporting firm. Being
aware of the political situation in a country is therefore an important consideration
for export organisations. These export organisations may still wish to target risky
countries because of the financial rewards that they offer, but the exporters need
to be aware of the risks associated with such strategies and may consider obtaining
export credit insurance as a risk-mitigation strategy.
Technological environment. Countries also differ according to their state of and use of
technology. Some countries, for example, are very high-tech nations, while others are
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very low-tech. Sweden and the USA would be considered high-tech, while Bolivia
or the Sudan may be considered to be low-tech. An exporter that has a high-tech
offering will probably seek out high-tech countries to focus on, while organisations
with low-tech offerings will probably seek out low-tech markets, although this may
not always be the case. Sometimes a high-tech product can succeed very well in
a low-tech country. For example, cellphones have done extremely well in Africa,
quickly overcoming the previous disadvantage that African countries had as a
result of the low penetration rates of landline telephones. Not only did cellular
technology overcome the shortage in telephonic communication in these countries,
but it also opened up the way for African countries to access the internet and share
in the virtual realm.
Geographic environment. Another way in which countries differ from one another
is in terms of their geography and topography. Some countries are mountainous,
while others have a large number of rivers and lakes. Others, in turn, are dry or
flat, or subject to extreme weather, such as heat, cold, tornados, earthquakes,
hurricanes, etc. Exporters need to be aware of the geographical environments that
exist in the foreign markets that they are considering targeting and how these may
impact on their activities. For example, some glues used in making furniture may
not work the same way in extremely hot or extremely cold countries. Similarly, high
humidity rates may affect a product – especially an electronic device – negatively.
Besides the possible impact that climates may have on products, there are other
considerations that need to be addressed. For example, in countries with rivers and
lakes, additional transportation options such as barges come into play and more
trans-shipment may have to take place − from truck/rail to ship, to rail, to barge, to
truck, etc, exposing products to more chances of damaging or spoiling.
Beyond the many environments that firms will have to deal with in their globalisation
efforts, there are also many trade barriers that they may need to overcome. These are
discussed briefly in the next section.
13.7 TRADE BARRIERS
Not only are the environments that firms encounter in global trade dramatically
different, but governments often take deliberate steps to protect their domestic markets
from competition from abroad. These are referred to as trade barriers. Trade barriers
can take many different forms and include the imposition of import tariffs, import
licences, quotas, subsidies, voluntary export restraints, local content requirements,
standards, embargoes, labelling requirements, etc. Trade barriers generally have the
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effect of increasing the cost and hence the price of the imported goods, making them
less competitive compared with locally produced goods.
13.8 GLOBAL MARKETING RESEARCH
Given the complexities that exporters face in overcoming the environmental challenges
they face, and adapting to marketing complexities in markets a long way away from
the domestic market, relevant environmental and market information becomes even
more crucial than in the domestic market. However, market and marketing research is
extremely costly in most foreign markets (consider a South African firm having to pay
for market researchers in dollars or euros). What is more, the task of communicating
in different languages adds to the cost, even in markets where research may be more
affordable, and then there are also countries where the ability to do research is limited
(for example, in many developing nations), thus exporters face this conundrum − the
need to do research versus the cost and difficulty associated with it. The end result is
that exporters often do not do any research at all, or at best, very limited research. This
is a paradox in a sense – research is needed more than ever before, yet they do less
research because it is difficult to do.
One of the key strategies exporters will need to decide on is what research to do and
how to do it. This research effort will be focused on a number of issues. These issues
include:
•• Identifying suitable countries/markets as a shortlist to focus further research effort
on;
•• Undertaking market research to better understand the markets in each of the
shortlisted countries, and to identify one or two markets of the shortlisted countries
to focus further marketing effort on;
•• Undertaking marketing research to better identify the buyer/consumer needs of the
specific marketplaces previously identified;
•• Undertaking further research to understand specific issues relevant to the markets
previously identified, such as the environmental barriers to overcome, market entry
methods, marketing mix considerations, etc.
In achieving the above tasks, the firm inevitably makes use of desk research to undertake
a wider (but now more detailed) look at the target market, especially with the marketing
offering in mind. This will normally be followed up with in-market research to undertake
an even more detailed study of the target market concerned.
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Desk research involves the collection of information from documentary or published
sources (secondary sources). If a limited amount of information about a market is
required and reliable documentary sources are available, desk research may be sufficient
in itself. However, a more in-depth picture of a particular market is usually needed,
and the results of desk research should be combined with those of in-market research.
In-market or field research (sometimes also called primary market research) involves
obtaining information in the foreign market itself by means of questionnaires and
interviews, etc (primary sources). Inevitably, in-market research is far more expensive
than the comparatively simple desk research.
The next sections deal with specific issues such as market selection, market entry
strategies, segmenting, targeting, positioning, global marketing mix consideration,
strategic alliances, etc.
13.9 GLOBAL MARKET SELECTION AND ENTRY
13.9.1 Market selection
Before an organisation initiates in-depth marketing research into a particular market or
country, it is important to narrow the world down to only a handful of possible markets
or countries on which to focus its further in-depth research; in other words, to create
a shortlist of one to three possible markets or countries. The researcher will probably
use desk research for this purpose − this is discussed in more detail in the next section.
The desk research will help the researcher narrow down the list of possible markets or
countries through a process of elimination.
The international screening process consists of three stages. The factors examined in
each of the three stages will vary according to the nature of the product, the size of
the market, the time permitted for research and the available budget, etc, thus the
procedures discussed below are intended to provide only a general idea of the kind of
approach that could be used.
Stage 1: Eliminate obviously unsuitable markets or countries
The market researcher should eliminate those countries that are clearly ruled out by
internal or external constraints. In this regard, the researcher would consider, for
example, only markets where English is widely spoken, or perhaps only countries in a
particular part of the world. Other factors that may play a role in ruling out countries
include trade regulations and restrictions which may be imposed by local authorities
(that is, the government in South Africa). For example, the host government may
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require that the exporting firm performs certain procedures that are so cumbersome
that international marketing to some countries becomes unattractive. This could be the
case if the firm, for example, were considering the export of weapons. Similarly, South
Africa may have applied official trade restrictions against a particular country, much
like sanctions were once applied against South Africa. Such markets should be dropped
from the list for further consideration.
Stage 2: Eliminate markets or countries that have poor potential
The researcher should now eliminate markets or countries which have very little
potential in relation to the volumes the company wishes to export. In this regard, the
researcher may consider, for example, import statistics, growth in imports, trade and
tariff barriers, and payment restrictions, etc. For example, those countries whose imports
of the relevant product are clearly insignificant or are declining, should be eliminated
from the list. Similarly, markets dominated by one or two supplying countries (unless
these include South Africa) should be avoided, especially if they are known to be highly
price competitive.
Stage 3: Scrutinise the remaining markets or countries
Having eliminated a number of markets or countries, the researcher can now take a
closer look at the remaining markets to gain a better idea of market size and potential
growth. In this regard, the researcher should consider, for example:
•• Political stability. The researcher would ignore any country whose political stability
or foreign relations are so fragile that business is likely to be disrupted at short
notice.
•• Consumption and imports. Hopefully, the research will highlight those markets in
which imports are growing at the real interest rate. The researcher should now
compare this information with data for total consumption. If imports are growing
at a much slower rate than consumption, and in so doing are losing their share of
the total market, this could be a negative sign.
•• Economic growth. The researcher should examine data on each country’s overall
economic growth. If the product is a consumer product, then the researcher should
look at trends in purchasing power and employment. If the product is an industrial
product, then the researcher may try finding similar trends in the industries
concerned. Countries with unfavourable economic data can also be eliminated
from the list.
At this point, the organisation will have compiled a shortlist of potential markets or countries
on which to focus more closely. The next step is to look at these shortlisted markets or
countries in more detail. This involves international marketing research. The objective
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now is to gain a deeper understanding of the marketing potential and challenges
associated with the markets or countries in question, given the marketing offering of
the firm in question. The international research will again make use of desk research to
undertake a wider, but now more detailed, look at the target market, especially with the
marketing offering in mind. This will normally be followed up with in-market research
to undertake an even more detailed study of the target market concerned. This inmarket research should help firms make the decision as to which markets/countries to
focus on, but it should also help to make various in-market marketing decisions related
to the firm’s global marketing mix, which are discussed in a later section.
13.9.2 Market entry
Once markets and/or countries have been selected to focus on using the three-stage
approach outlined above, the next step is to decide on how to enter the market/country
in question. This decision is outlined below.
There are many market entry strategies available to exporters. These strategies include
the following:
•• Indirect exporting. Indirect exporting occurs in several different ways. One example
is when a local manufacturer produces a product that is incorporated in another
product, which is then sold abroad by the second manufacturer. Another example
is when a local distributor buys a manufacturer’s products and sells them abroad
for its own account. Piggybacking is a third example of indirect exporting, and
occurs when a second manufacturer sells the first manufacturer’s products as
complementary to its own products. Consider a special gift package of brandy
together with two crystal glasses. The glasses are unlikely to be manufactured by
the brandy producer. Instead they would have been purchased from a glass tumbler
producer, but they are being exported abroad as a single product – a gift pack. The
second manufacturer is not doing the exporting, but its products are being sold
abroad.
•• Exporting. Perhaps the most common way of entering global markets is through
the process of exporting; that is, selling to an overseas buyer (note that no
assumption is made that the domestic exporter must be a manufacturer; it could
be a distributor, a trading house, a wholesaler, or even a retailer). On the other
side of the foreign divide, the overseas buyer could be an import agent, a foreign
distributor, a wholesaler, a retailer or even another manufacturer that requires the
products of the exporter as an input into its manufacturing process. In the modern,
internet-enabled world, the overseas buyer could even be the end user. Nowadays
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customers are increasingly willing to buy directly from foreign suppliers, be they
manufacturers, wholesalers, retailers, etc.
Franchising. An alternative to exporting, depending on the nature of the product or
service being sold, is franchising. In a franchising model, the local firm provides
the overseas firm with a complete business solution, including the product, a
promotional/marketing and management package, training as well as support. The
foreign buyer takes this business package and starts to do business. Examples of
franchises include Hi-Q, KFC, McDonald’s, Steers and Debonairs. The franchisee
(the overseas firm) operates as a separate business, but under licence to the South
African franchisor (the owner of the franchise). This type of market entry method
is suitable for selected products and services.
Licensing. Licensing also involves the South African firm ‘authorising’ (or licensing)
the overseas firm to undertake certain business activities. The difference is that
while, in the case of franchising, an entire business package is licensed, with
licensing the permission being granted is usually somewhat narrower in scope.
For example, a South African company might give an overseas firm the licence to
either sell the product in a particular country or perhaps even to manufacture the
product in that country (this is referred to as ‘manufacturing under licence’ and
is an important means of market entry as it reduces the risk for the exporter in
entering a foreign marketplace).
Joint ventures. As the name suggests, this market entry method has to do with
working together with another company – the partner company. The partner
company in the joint venture does not have to be a foreign company; it could be
another South African company. If the partner is indeed a foreign company, it does
not necessarily have to be located in the target market; for example, an Australian
firm could partner with a South African organisation in order to penetrate the
European market. More often than not, however, a local company will partner with
an organisation located in the target market with the purpose of leveraging value
from the local expertise (language and cultural skills, as well as industry knowledge
and contacts) that the partner firm has. It is unlikely that the two companies
(the local firm and the partner firm) will be direct competitors, although this
sometimes also can happen. Inevitably, the two firms have complementary skills
and/or products/services. For example, the local exporter may produce large-scale
forestry equipment which it wants to sell in a particular country, while the foreign
firm may be a specialist firm with expertise in servicing machinery. By partnering,
the South African firm can sell its products in a market with the full service and
support from a local service provider, thus making the product more attractive and
sellable to customers. The partnership could also be about two companies that
have complementary products – perhaps they both produce forestry equipment,
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but the one firm produces equipment for cutting down trees and the other for
transporting logs. Whatever the common ground, the two firms will agree to work
together, sharing their knowledge, contacts and marketing clout in order to better
access the foreign market in question.
Wholly-owned subsidiaries. Another way to enter foreign markets is either to start
an entirely new company in the target market that will manufacture and/or market
products in that marketplace, or to buy an existing company that produces similar
products to what the exporter produces as a way of entering the marketplace. In
the latter instance, the exporter will either replace the foreign firm’s product line
with its own, or add its product line to what the foreign firm already produces, and/
or incorporate the products produced by the foreign firm it has acquired into its
own domestic product line and perhaps even sell this newly acquired product line
to other countries where the export firm is already established. Foreign acquisition
may therefore occur either as a means of entering a marketplace and/or to acquire
a product range or brand that will add value to the exporting firm.
Strategic alliances. On occasion it may make sense to enter a strategic alliance with a
firm in the foreign market to assist or to represent the exporter. A strategic alliance
is similar to a joint venture, but a joint venture is more formal and involved,
usually with significant financial contributions being made by both firms, whereas
a strategic alliance is less formal, more like a memorandum of understanding
– a form of cooperation. For example, the South African firm may enter into a
strategic alliance where an overseas firm provides service support for the products
in question.
13.9.3 Segmenting, targeting and positioning
Three key strategic decisions that an organisation will need to take as part of its market
selection and entry process are:
1. Segmenting.
2. Targeting.
3. Positioning.
Segmenting means to divide the marketplace into homogeneous groups of customers
with similar characteristics (that is, characteristics that are meaningful to the
organisation). The types of characteristics that might be used in the case of a consumer
product include gender, age, income, education, social class, personality, etc. Each
segment identified should be actionable, profitable, accessible, identifiable and effective.
In order to segment the marketplace, market research is needed, combined with an
analysis of customer data.
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The next step is to select one or more of these segments to focus the firm’s marketing
efforts on (that is, to target), while the last step is to position the organisation’s market
offering within this segment to appeal to the customers in question. In this three-step
process, the decisions that will need to be taken are similar to those taken for the
domestic market. These three tasks have been discussed in this book in a previous
chapter.
In the final step, the organisation has to make specific decisions with respect to each
of the marketing mix elements. For example, will they market a premium product, a
basic product or perhaps a durable product? Will they use a prestige, fun, or emotional
promotion campaign? Will the organisation attach a premium price to the product or
introduce it at a low price, or one that offers value, but still with a lucrative margin
built in. How will the firm distribute the product − will it use an intensive, selective or
exclusive distribution channel?
13.10 IN-MARKET STRATEGIES
In the earlier chapters of this book, readers were introduced to various strategies
associated with the traditional marketing mix, namely product decisions, promotion
decisions, distribution decisions and pricing decisions. These decisions remain equally
important in the global context, if not more so, because of the risk of getting them
wrong and the cost associated with this risk. In the sections below, the various global
marketing mix decisions are considered.
13.10.1 Global product decisions
In the world of exporting, there are two important strategic decisions organisations
need to make. The first is whether to market the same product in the global market as
in the domestic market (a standardised approach), or whether to adapt the product for
different markets (an adaptation approach). The second decision is whether to apply a
standardised or adaptation approach to promotion. In this section the focus is on the
product.
There are two main product strategies available to international marketers, namely
product standardisation and product differentiation or adaptation.
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Factors favouring product standardisation
The following are factors favouring product standardisation:
•• Where the product is manufactured at one plant, long production runs can give
rise to considerable economies of scale, assuming that the decreasing costs per unit
will prevail over the full extent of output required to satisfy international markets.
•• A standardised product permits amortisation of development costs over larger
production volumes and turnover.
•• Additional products give rise to the need for additional records and stock audits.
Furthermore, each product must be stocked to a level that not only caters for
normal demand, but also includes a safety margin to cover unexpected upsurges in
demand. Consequently, the minimum ‘safe’ stock level for several different products
will exceed the one for one standard product.
•• Whereas consumer products are likely to be affected by cultural and environmental
differences in the foreign market, industrial processes are relatively uniform from
one country to another, and many industrial products can therefore be standardised,
especially those in which technical specifications are critical. Even when industrial
goods are modified, the changes are likely to be minor. For example, adjustments
may have to be made to the voltage level, or metric measures (metres, grams and
litres) may have to be changed to imperial measures (yards, pounds and gallons),
etc.
•• Standardisation is essential to consumer acceptance where products are of particular
relevance to travellers or tourists, for example batteries, baby foods, etc.
•• Although sales literature and advertising may vary from country to country – at
least in terms of the language in which the advertising message is conveyed – it will
be easier to achieve uniformity (and thus savings) with a standardised product than
with one which must be adapted to suit various foreign markets. In addition, it is
easier for the company to provide after-sales service and parts for a standardised
product.
•• Some products are homogeneous, and a world market is available without product
modifications being necessary, for example blue jeans, DVDs, raw materials, etc.
Factors favouring product differentiation
The following are factors favouring product differentiation:
•• Maximisation of profits is usually the primary motivation for going to the expense
of modifying a product and is in direct contrast to the policy of cost reduction
through standardisation.
•• Differing consumer tastes affect food, fashion and household products in particular.
However, they also have a strong influence on the design and manufacturing
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of items such as motor cars. For example, the French normally show a strong
preference for four-door models, whereas the Germans prefer two-door models.
Inadequate consumer purchasing power may necessitate a low price and a
corresponding reduction in the quality of a product, for example the finish or
grade. Packaging, in particular, would be affected in such a case.
Variations in national conditions, such as different approaches to wearing and
washing clothes, may necessitate different kinds of washing machines or soaps and
detergents. In some European countries, boiling water is used for washing and,
consequently, washing machines must have special built-in heaters. In developing
countries, however, washing is done in streams or rivers, and bar soap is much
preferred to packaged soap powders, which are ineffective if the water used for
washing is not confined to a washing machine or other container.
Where the level of technical ability is generally low, a product may have to be
simplified or provided with good back-up. Poor maintenance standards in
developing countries may give rise to the need for improvements to product
reliability or the simplification of the product.
Tariff levels may dictate local manufacturing or assembly, or local purchasing of
components, thus preventing standardisation.
Government taxation policy may necessitate changes to the product in order to
reduce the amount of tax payable, for example motor vehicle tax related to engine
size.
Owing to varying road and traffic conditions, cars, trucks and tyres may need to be
modified, depending on whether they are destined for industrialised or developing
countries.
Sometimes climatic conditions dictate that modifications be made to products
that are sensitive to temperature or humidity; for example, the composition of car
tyres will vary from one market to another depending on the extremes of climate.
Similarly, the inclusion of heaters or air conditioners in certain car models will
depend on the climatic conditions of the markets concerned.
When a product is perceived as new in a particular market, it may have to be
adapted to overcome consumer resistance and slow market growth.
Local labour costs may influence the extent of automation in the production
process.
In some instances, firms may be forced to make product modification in order to meet
mandatory requirements. These requirements are discussed in the next section.
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Mandatory product modification requirements
In certain areas, international marketers are not free to decide whether or not a product
should undergo modification, for example where government regulations or technical
requirements are of overriding importance:
•• Legal requirements. Minimum or special standards are often imposed by law. In
addition, government regulations relating to product packaging and labelling,
particularly in the case of food and medicines, can influence product modifications.
For example, the mandatory declaration of certain food preservatives on the
containers of food products could have a detrimental effect on consumer acceptance
of the product.
•• Nationalism. Governments may require that a certain proportion of components
be of local manufacture. They may even forbid the importation of certain goods.
However, this form of restriction is now discouraged.
•• Technical requirements. Certain technical changes, for example in voltage or in the
calibration of measuring instruments, may be necessary.
Evaluating the need for product modification
There are five criteria in respect of which the likely acceptability of a new source of
supply (or one perceived as such) in a specific market can be assessed. These are:
1. The relative advantage that the product has over the product it replaces or those
products with which it competes (relative advantage is usually perceived by the
customer as an additional value – therefore a product perceived to have a relative
advantage is unlikely to require modification).
2. The product’s compatibility with existing values and behaviour patterns.
3. The complexity of the product, which could lead to the consumer experiencing
difficulty in understanding the product’s purpose and/or how it works.
4. The extent to which the product may be used on a trial basis (for example, the
availability of samples or the extent to which the product may be purchased on a
limited basis prior to the importer having to commit itself to large numbers).
5. The extent to which the advantages of accepting the new product can be observed
by prospective buyers.
A product which, when rated against the above criteria, does not score highly is likely
to require modification as well as greater emphasis on advertising and sales promotion
in order to overcome consumer resistance. A product may be modified physically to
improve its relative advantage over competing products, to enhance its compatibility
with cultural values, and even to minimise its complexity. In addition, small sizes,
samples, packaging and product demonstrations can assist in overcoming resistance.
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Ultimately, it may become necessary to decide on developing new products for the
global market. This challenge is discussed in the next section.
Developing new products
Because of exposure to new product ideas that have been generated and, in some
cases, even successfully developed in other parts of the world, international marketers
can make an important contribution to new product development. To do this, the
organisational structure must be in place. This will provide the exporter with feedback
from each of the markets. New product ideas can be acquired from a variety of sources,
such as:
•• Distribution agents and company sales staff operating in each international market;
•• The overseas customer with whom international marketers should be in constant
contact;
•• International organisations and publications that report on new inventions,
including new patents;
•• Exhibitors at international trade fairs, especially in Europe − some fairs are general
industrial shows, while others focus on a specific product or industry, for example
automotive, electronics, photographic, etc;
•• Planning programmes of governments and international agencies. These are
published by international organisations and cover all types of economic activity;
for example, projects in agriculture, infrastructural development, health, education,
housing, etc, can indicate new product opportunities for equipment and chemical
manufacturers, food and pharmaceutical companies, publishing houses and
educational suppliers.
There are several advantages in obtaining new product ideas from the foreign
marketplace. These advantages are the following:
•• Because the idea is generated by a market need, it is less speculative than an idea
based solely on technological possibilities.
•• The market needs identified are usually high-priority items and are therefore
assured of financial backing.
•• Response to market needs can assist the company in acquiring a better corporate
image in the marketplace, where it will be seen to be identifying with specific
problem areas.
•• The company may be able to benefit from selling, in other markets, the product
originally developed for one country.
Following on from product decisions, there are also global communication decisions
to make.
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13.10.2 Global communication decisions
Another very important element of the international marketing mix is promotion. Also
known as marketing communication, promotion remains one of the most important
decision areas that an international marketer will be concerned with. These decisions
not only influence the methods that will be used by marketers for promoting themselves
in international markets, but also the way in which the international customer perceives
the organisation and its offering.
Once a product has been developed to meet the requirements of the consumer, and
is correctly priced and distributed both to and within the foreign market, prospective
customers must be informed of the product’s availability and its value.
Developing an export promotional policy involves five steps:
1. Determining the most appropriate blend of advertising, sales promotion, publicity
and personal selling for each foreign market.
2. Determining the extent of standardisation of international communications.
3. Developing the most effective message(s) with which to promote the product.
4. Selecting effective media.
5. Establishing the necessary controls to ensure that the firm’s international marketing
objectives are met.
Essentially the same promotion channels exist in foreign markets as in local markets.
These channels include the following:
•• Advertising.
•• Sales promotion.
•• Publicity and public relations.
•• Direct marketing, including e-marketing.
•• Personal selling.
•• Trade fairs.
International trade fairs
International trade fairs are one of the most often used and powerful sales promotion
methods available to exporters, and for this reason they are discussed in more detail
below. Participation in international trade fairs should form an integral part of any
company’s overall international marketing plan. Not only do they go a long way towards
solving the problems of time, distance and cost in reaching prospective customers,
but product demonstrations also help the company overcome communication barriers.
However, for maximum benefit to be derived from trade fair participation, it needs to
be accompanied by a planned promotional programme.
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Participation in a trade fair should always be planned well in advance and needs to be
preceded by the identification of a target audience, a direct-mail campaign aimed at that
audience and advance publicity. An appropriate trade fair budget also plays a key role
in the successful participation in a trade fair.
Before selecting a fair in which to participate, the objectives for doing so should be
defined. These objectives may include the following:
•• Taking orders on the stand;
•• Obtaining enquiries for later follow-up;
•• Obtaining general market publicity with a view to securing orders in the longer
term;
•• Meeting prospective agents and distributors;
•• Assessing market potential or product acceptability.
Crucial to the overall impression that the company makes on prospective customers is
the way in which the stand is organised and controlled. The senior executive responsible
should organise the activities of all the staff on the stand (including local interpreters),
make all the necessary arrangements for the security of exhibits and publicity material
and ensure that customers, both on and off the stand, are treated courteously and
hospitably. Enquiry forms and visitors’ books should be readily available.
After the exhibition, it is important to evaluate the success of participation and follow
up on all product enquiries. The results should be compared with the original objectives
set, actual costs should be compared with budgeted costs, all market information
obtained should be carefully assessed, and a decision taken as to whether or not to
exhibit at the same trade fair the following year.
The next element of the global marketing mix to consider is the price.
13.10.3 Global pricing decisions
Pricing decisions and the concept of value are crucial to the success of the international
marketing venture. We have already addressed a number of pricing issues in an earlier
chapter – many of these issues are relevant to international marketing as well. In this
chapter we will look at pricing techniques and methods that can be used to enter
an international market with a competitive edge. We will also look at the types of
discounts available to international marketers.
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To penetrate international markets, a competitive edge is important, and price is a major
determinant in this respect. It is not, however, the sole determinant − technological
superiority, worldwide company image or scarcity of supply, for example, could also
ensure success in the foreign marketplace. However, although a non-price competitive
edge can result in customer acceptance of premium prices, this is not usually achieved
without considerable investment in both time and money, and it is usually on the basis
of price that the less affluent firm establishes itself in a new market.
The long-term objective of a pricing policy (domestic or international) is to achieve
sufficient volumes to ensure maximum profits. Setting a high price could limit the
volume of goods sold, whereas a low price might increase volume, but could have an
adverse effect on profits. As a rule, the total cost of exports, which includes the cost
of producing, packaging, distributing, marketing and servicing the products, plus a
minimum required profit, should be used to set the lower limit on the price. The upper
limit will be that price above which the company cannot remain competitive, and it is
determined by the potential value that customers place on the product and the amount
of money that they are prepared to pay for it. Often, this value will depend on the
circumstances of the buyer. For example, a moderately priced household product may
be considered too expensive by parents with considerable family commitments, while
their son, who has a lower income but no such respon sibilities and who pays no more
than a nominal contribution towards board and lodging, will consider the same product
to be cheap and good value for money. Similarly, a dishwasher may be considered an
essential purchase by some consumers, but regarded as a luxury by others.
Within the range of prices permitted by the marketplace, the competition and various
government regulations, the exporter is responsible for setting and attempting to
control the actual prices of the goods traded in different markets. The challenge is to
arrive at a selling price that will enable all costs to be recovered, and that will provide
the best possible return on the investment made and the risks being taken. To achieve
this goal, an image for a product must be projected that focuses on value for money
and, once customers have decided to purchase, a marketing strategy must be used to
convince them that their decision was a sound one.
Approaches to pricing policy
There are a number of ways in which pricing policies can be approached. Some of these
pricing policies are the following:
•• Competitor-orientated pricing. In terms of this approach, no pricing decision has
to be made – prices are established through the interaction of a large number of
buyers and sellers. Any producers quoting prices in excess of the price prevailing
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••
in the marketplace would effectively cut themselves out of the market – they
would, of course, be equally foolish to quote below the prevailing rate. Competitororientated pricing is particularly common in commodity markets, for example
wheat, tea, coffee, grain, etc, where all transactions take place at publicised world
prices. The international marketer’s primary function in this regard would be to
keep production costs and overheads as low as possible in order to increase profits.
Cost-orientated pricing. With cost-orientated pricing, calculating the total unit cost
and adding on a profit margin arrives at the export price. Consumer demand thus
has little bearing on decision-making. This approach is commonly used in the case
of industrial goods, where it is often difficult to differentiate between products in
terms of their perceived value to the customer.
Demand-orientated pricing. A demand-orientated company sets prices according to
the intensity of demand for the product – where demand is strong, high prices
prevail, and where demand is weak, lower prices are the norm. The unit cost is
not a major determinant of pricing in this case, although it is obviously taken
into consideration when the lower limit on a price is being established. Demandorientated prices are usually applied to branded consumer goods, but they may
also be appropriate in respect of many industrial products.
Short-term pricing strategies
In formulating an optimal pricing strategy, it is important to consider the objectives of
a pricing policy. These objectives might include the following:
•• Reaching a particular profit level;
•• Winning a specific market share;
•• Establishing an acceptable market image;
•• Reinforcing product differentiation; that is, a unique feature which differentiates a
product from its competitors;
•• Combating competition;
•• Stabilising prices;
•• Creating a competitive advantage;
•• Securing wider distribution.
In pursuing pricing objectives, a number of strategies may be adopted, and these are
outlined in the following sections.
Differential pricing strategy
This is a specific strategy often used in international markets. In adopting this strategy,
the demand-orientated exporter – usually of consumer products – takes advantage of
different price levels in various countries by establishing different prices, based on what
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the market will bear, for each international market. The success of differential pricing
depends to a large degree on the extent to which markets can be kept separate. Where
markets are integrated, such as in the EU for example, problems could arise where the
product is purchased at a low price in one country and resold at a higher price (but one
that undercuts the original supplier) in another country.
With the advent of the web, it is becoming more difficult to introduce differential
pricing. In most cases, where a company uses its website to sell its products, for example
Amazon.com, buyers visiting this website would surely query why different prices exist
for different markets. They would inevitably demand that they also enjoy the benefit
of the lower prices available to other markets and, for this reason, it is becoming less
feasible to have differential pricing when selling over the web.
Market-orientated global pricing
In order to establish a market-orientated price for an international product, an export
price analysis should commence with an assessment of the demand and competitive
situations in the target market, and the identification of a market-related price. This
would then be compared with the total cost of the product, including the export-related
costs, in order to assess profitability. The steps taken might be as follows:
•• All relevant market data on competitive prices for similar products (both wholesale
and retail) should be obtained.
•• Both weight/value and volume/value comparisons should be made.
•• Competitive wholesale and retail trade profit margins should be identified and
compared to assist in the setting of competitive, but not excessive, margins; should
the export costing exercise later indicate that bigger margins could be offered
without the company losing its price competitiveness, the difference could be
earmarked for sales promotional activity.
•• A group of potential purchasers should then be identified − this will usually be
that part of the market which appears to have the greatest propensity to purchase
− and an attempt made to identify likely reasons for buying; an examination of
competitors’ brochures is usually helpful in this regard.
•• The perceived benefits associated with the product should then be used to establish
where in the price ranking the product should be targeted in order to meet sales
expectations.
•• A brand image should subsequently be identified and a marketing mix budgeted
for.
Essential to the budget is a quantification of the market and the number of prospective
buyers within that market who can be reached and persuaded cost effectively. In order
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to do this, a selling price capable of persuasion – that is, generating a given sales volume
– must be set. Having thus established what the market will pay, it must be established
whether the firm can afford to sell at that price. This is done by working back from the
market price to the base unit or Ex Works cost of the product. The various intermediary
costs associated with transport, distribution taxes, duties, etc, must be subtracted from
the consumer price. The final base or Ex Works price arrived at should be compared
with the Ex Work cost in order to establish the profit margin, if any. This margin should,
apart from meeting the company’s requirements, cover:
•• Advertising and promotional costs;
•• Market returns;
•• Spoilage allowances;
•• The distributor’s handling, storage and distribution costs;
•• A profit contribution for all distributors, wholesalers and retailers involved.
Irrespective of the pricing strategy adopted, every price should be set with cost
considerations in mind. The level of profitability of international sales has implications
not only for short-term profit, but also for pricing policy and overall marketing policy,
and it is imperative that this should be calculated correctly. The inflationary effects of
including costs that are relevant only to domestic sales, for example domestic sales and
promotional expenditure usually built into the Ex Works cost, should be taken into
account, as should the debilitating effects on profit levels of overlooking indirect costs
such as financing charges, minimum handling and storage charges for small shipments,
and the replacement of parts under guarantee.
There are specific costs to consider when assessing the profitability of international
sales. Apart from customs duties levied on goods coming into a country, additional
costs, for example fees for import certificates and for other administrative processing,
also have to be taken into consideration. In addition, many countries have purchase or
excise taxes which apply to various categories of goods, value-added or turnover taxes
which apply as a product goes through a channel of distribution, as well as retail sales
taxes, all of which serve to increase the final price of the goods.
In addition, the effect of inflation on the cost of the goods should not be ignored.
The selling price should always be related to the cost of the goods sold and the cost
of replacing the items concerned. By selling goods in foreign markets below their
replacement cost, the exporter may be better off not exporting at all. Inflation becomes
an important consideration when payment is delayed by several months or credit
extended over a long-term contract.
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Many South African companies have experienced heavy financial losses because of
adverse movements in exchange rates. Of particular concern to the exporter should be
those areas of exchange risk that they cannot cover forward. For example, where freight
rates are given in US dollars, the exporter needs to ensure that they are covered if the
rand weakens. Worse still, should the rand strengthen significantly between the time
of accepting an order and the actual date of shipment, the exporter could be providing
the customer with an unexpected discount.
For these reasons, it is important that every exporter has some knowledge of exchange
rate trends and can adjust the rates used for currency conversions accordingly. This
additional cost, however, may have a detrimental effect on price competitiveness.
An easy form of protection is to quote all international prices in South African rand.
However, from a marketing point of view, this would be unwise. Importers usually
prefer all quotes to be in their own currency or US dollars. First, they can easily compare
the offers of various foreign and national suppliers and, second, they may be equally
concerned about the exchange risk, particularly if their own currency is susceptible to
devaluation or appreciation.
Another form of protection against exchange rate fluctuations is to stipulate in the
export quotation that the quoted price is subject to alteration depending on exchange
rate fluctuations. This solution, however, is seldom acceptable to the buyer. The length
of a channel of distribution can have a considerable impact on the final international
price. Apart from the various intermediaries who will be marking up the product, a
lack of standardisation in respect of such mark-ups makes it very difficult to assess their
actual contribution to the final price. Often, intermediaries will use higher wholesale
and retail margins for foreign goods than for similar domestic goods.
Cost reduction strategies
Where the exporter finds that it cannot compete in the foreign marketplace, a number
of strategic approaches can be adopted to overcome the problem of price escalations.
Some of these approaches are as follows:
•• Lowering the net price of goods sold in foreign markets can offset tariffs and
transport costs. This can be done using marginal-cost pricing (see the next section).
The problem with this approach is that it might be viewed by the importing country
as dumping, with the result that countervailing duties may be imposed, effectively
destroying the original price advantage that was established.
•• An investment in an offshore production facility can be made to remain competitive
in the foreign market.
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••
••
••
••
Shorten channels of distribution, although this is often difficult to do. The web is
now being used by manufacturers to sell directly to end users.
Eliminate costly financial features or even lower the product quality in the case of
products destined for less-sophisticated markets, for example those in developing
countries. Labour-saving features in a product have little value where labour is
plentiful and where little importance is attached to time saving. Similarly, the
ability of machinery to hold close tolerances is of no value if people are not quality
conscious.
It may be possible to modify a product so that it will qualify for a different or
lower rate of import duty. Products may also be charged lower duties if shipped in
knocked-down form and reassembled in the country of destination.
Arrange to have goods assembled in a free trade zone (FTZ) in the importing
country. A free trade zone (or export processing zone) is an area in which imported
goods can be stored or processed without import duties being payable until such
time as the goods leave the zone and enter the foreign market. Processing can
include repackaging, cleaning, grading, assembling and light manufacturing. There
are currently more than 300 FTZs in the world today. A bonded warehouse can also
serve this purpose.
Marginal-cost pricing
Manufacturing costs, apart from being split into direct and indirect costs, can also be
divided into fixed costs and variable costs. Fixed costs are those costs, such as factory
rental, which at least in the short or medium term, remain unchanged, regardless of the
level of output achieved. Variable costs are those costs, such as raw material purchases,
which vary directly according to the level of output achieved.
Once a company has achieved an output that generates sufficient revenue to cover both
the fixed and variable costs, it will have reached a breakeven point. At this point, total
revenue is equal to total costs. Above breakeven, the only additional costs incurred
should be variable costs, therefore any price per unit that exceeds the variable costs
will yield a profit. Marginal-cost pricing involves basing the price on the variable costs
of producing a product, not on the total costs. Obviously, the company cannot within
its usual markets sell some of its stock at normal prices and the rest at marginal-cost
prices. All prices would have to be reduced with the result that a greater volume of
output would be required to reach a breakeven point. The exporter can, however, take
advantage of cost pricing in certain international markets, but the target markets should
be sufficiently divorced from the company’s main markets to prevent price levels in
those markets being affected.
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Marginal-cost pricing should only be considered when the profitable use of resources,
such as an alternative market which may offer high price levels, or a more profitable
product that could be manufactured at the same plant, can no longer be identified. It
has obvious attractions for markets where lower income levels dictate lower prices or
where foreign competition is such that a company cannot compete at normal price
levels. However, it should relate only to short-term business aimed at disposing of
temporary surpluses, following the construction of a new plant or a seasonal fall-off in
other orders.
The final element of the marketing mix is discussed in the next section.
13.10.4 Global distribution decisions
The next component of the international marketing mix that management will need
to consider is that of how to get the export product to the foreign customer. This is
perhaps one of the most complicated of the marketing mix elements that management
will have to deal with. In this respect, there are two main options available to exporters:
1. The exporter can sell and deliver the goods directly to the end user, as is often the
case with industrial goods.
2. The exporter can sell through intermediaries who perform a variety of functions
associated with the marketing of the product, as is often the case with consumer
products.
Working through intermediaries
Should the second alternative be chosen, involvement will normally be with more
than one intermediary, and each individual link in the distribution chain will interface
with the others. This marketing network is known as a marketing channel or a
distribution channel. A typical example is the manufacturer→import agent→wholesaler
→retailer→consumer distribution channel used for many consumer goods.
The marketing function of intermediaries in the export distribution channel is
multifaceted, thus the intermediary could be involved in any of the following duties:
•• Assembling products so that they form a range of complementary items that are
likely to be of interest to buyers;
•• Converting bulk items into smaller lots in accordance with customer requirements;
•• Adapting goods to meet the needs of the marketplace;
•• Organising the physical distribution of products, namely transportation and storage;
•• Setting appropriate prices for the goods;
•• Handling sales promotion and advertising;
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••
••
Identifying buyers and selling to them;
Extending credit to buyers where this is required.
Ideally, the exporter should control or be involved in the distribution process through
the various channels to the final buyer, whether this is an industrial end-user or a
consumer. Such involvement is not always practical or cost-effective. Consequently, the
choice of intermediary and subsequent management of the channels must be sound.
The channels the exporter selects will ultimately affect every other marketing decision
made.
For example, if the marketing channel is a long one, the various mark-ups enjoyed by
the intermediaries involved will ultimately affect the consumer price and this will have
an impact on sales volume. Similarly, the size of a sales force will depend on whether
goods are sold directly to retailers or only to wholesalers. The channel decision will
also involve the company in long-term commitments from which it may be difficult to
extract itself, should company policy change at a later stage.
Sight should not be lost of the fact that by using intermediaries, effective control over
the market is lost, and therefore the selection of the channel constituents must be
carried out with particular care. Before embarking on this task, the exporter needs
to ensure that company policy has been clarified and communicated to each channel
member in respect of the following:
•• The company’s specific marketing goals, expressed in terms of sales volume, market
share and profit margin requirements;
•• The financial and human resources that are to be allocated to the development of
international distribution;
•• How the channels of distribution will be controlled, the length of channels, terms
of sale, etc.
Choosing a distribution channel
In making the choice of distribution channel, the exporter must consider both of the
following:
•• Market-entry channels (discussed earlier) – those channels that will enable the goods
to reach the foreign marketplace. These decisions are seen as being part of the
earlier decision to go global;
•• Foreign market channels (or in-market channels) – those channels that will supply
the product to the end-user in the target market. These are the typical distribution
decisions export firms will need to make.
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In making these decisions, there are a number of other factors unrelated to the company
and its industry that will also need to be taken into consideration whenever entry into
a new market or a change of established channels is contemplated. These factors are
the following:
•• Channel availability. Different markets call for different approaches to market entry.
For example, some countries will not permit wholly-owned foreign operations,
licensing may not be an option because of the lack of qualified licensees, and in
some small markets the only reputable agent may already be representing the
competition. The company may thus eventually opt for wholly-owned operations
in some markets, marketing offices in others, and agents or distributors in the rest.
•• Sales volume and profit objectives. Sales volume will depend to a large degree on the
channel selected – a small marketing office in the capital city is going to generate
fewer sales than a sales force that covers the entire national market. Estimating its
long-term sales and costs, and comparing profit margins with sales volume can
determine the profitability of a particular market-entry method. A 15 per cent
profit margin on a high sales volume may be preferable to a 20 per cent margin on
a lower sales volume.
•• Operating costs. Estimated sales volumes should always be considered in relation to
the cost of a particular market-entry method. Setting up a manufacturing operation
in another country will involve considerable initial investment and ongoing working
capital. For other market-entry channels, finance may be required for inventories
or for extending credit facilities.
•• Personnel requirements. Certain market-entry channels may be out of the question,
because it may not be possible to meet the necessary personnel requirements. The
establishment of a production plant, for example, may require skilled managerial
and technical staff.
•• Risk. The greater the company’s investment in the foreign market, the higher the
risk is. Apart from capital investment, the company may risk inventories and
receivables, and may incur a financial loss because of exchange rate movements,
etc. In general, the more direct and visible the entry of a company in the market,
the more vulnerable the company is.
•• Control. The degree of control that a company is able to exercise will depend on the
market channel selected. A firm selling to a local trading company may have no
control at all, whereas it would be possible to exercise firm control over an overseas
marketing or manufacturing operation.
•• Flexibility. Environmental and market conditions often change over time. The
exporter may either want to expand its involvement in the foreign market to take
advantage of new market opportunities, or to cut down its operations because of
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adverse developments. This should be borne in mind at the time of choosing a
particular entry channel.
Foreign market channels
Once a strategy has been chosen to get the products into foreign markets, as explained
in the earlier discussion on market entry in this chapter, the challenge of distributing
the product in those foreign markets is faced. Distribution systems vary significantly
amongst nations whose economic, social and cultural environments differ from one
another. Consequently, every product and country will present a unique distribution
problem, the solution of which will require careful research.
In the course of research, problem areas will be identified. For example, channels
adopted in other markets may be non-existent in the target market in question, few
intermediaries may be available in many developing markets, and those who are
available may be operating exclusively on behalf of competitors.
The final choice of foreign market channel, whether of the traditional type or an
innovation, will depend on the anticipated distribution costs, the degree of control that
can be exercised over the channel, market coverage, and the likely continuity of the
distribution service over the longer term. All these tasks need to be properly managed.
13.11 ONLINE OPTIONS
The advent of the internet and the web has opened up many new opportunities for
exporters, and the task of going global has become much easier. Not only can local
firms use the web to do comprehensive in-depth research about foreign markets and
countries, but also to market themselves (using websites, email and social media),
communicate with potential customers quickly and cheaply, actually sell their products
online using e-commerce, provide support to customers online, and keep control of
their global endeavours. For example, e-marketplaces, such as Alibaba.com, have now
made it possible to enter the global market simply by working through a computer
screen. It needs to be borne in mind, however, that although the web makes many
tasks associated with going global much easier than before, the challenge of distributing
products to customers located abroad still exists, unless the firm sells a digital product
such as software, which can be distributed electronically. Most companies that enter the
global market using the web fall short when it comes to delivering. It is easy to market
and sell, but the challenges of global distribution remain, although an increasing
number of courier companies are now offering global delivery services to help exporters
overcome this problem.
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The final challenge facing firms planning to go global is how to manage their global
endeavours.
13.12 MANAGING THE GLOBAL EFFORT
The firm must manage its global marketing activities just as it manages its domestic
marketing efforts. This begins with setting international marketing objectives for the firm,
based on its overall business as well as marketing objectives. International marketing
strategies then need to be formulated that will translate these objectives into strategic
and operational activities. These strategies need to be implemented and controlled to
ensure that the strategies decided upon achieve the objectives set. The day-to-day
exporting activities also need to be managed.
In smaller firms, the organisation will normally make use of a wide range of
intermediaries such as export agents, trading houses, third-party logistics providers,
courier companies and other specialists to help with the exporting task. The small
company need only employ a coordinator, possibly on a part-time basis, or it may form
part of the marketing manager’s task to liaise with all these service providers.
As a company grows and its international turnover increases, the need for a separate
international marketing division may become apparent. Careful consideration, however,
should be given to the costs involved in employing specialised personnel. This additional
expense would have to be exceeded by the profit generated by international sales in
order to ensure the continued profitability of the operation. A newly created export
division consisting of, for example, an export manager, a secretary and a shipping clerk,
may only be involved in shipping the orders secured by the company’s domestic sales
department. The export manager may, however, also control the marketing and sales
functions.
In a large company, specialisation becomes essential and the division is usually divided
into an international marketing or sales department and a shipping department, both of
which fall under the control of an international marketing manager. The international
marketing manager is concerned with policy matters and he/she coordinates
international marketing activities. The manager should be conversant with all aspects
of international marketing, preferably fluent in one or more foreign languages, and
be able to command the respect of a foreign buyer as well as the trust and loyalty
of employees. An international marketing division may be vertically or horizontally
structured, or a combination of both.
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A vertically structured operation works in such a way that staff specialise in specific
fields of operation; for example, one person may have a thorough knowledge of
payment methods and banking procedures, while another person’s expertise may lie in
the field of insurance, documentary requirements, transportation or perhaps in the area
of packing, marking and labelling of export consignments. In the case of a horizontally
organised structure, staff specialise according to geographic regions, for example North
America, Asia, Europe or Africa.
13.13 SUMMARY
This book is about strategic management and one of the important strategic decisions
that some companies will need to make is whether to go global; that is, whether to
compete outside the borders of South Africa or not. Going global is a big decision
to make for any organisation, as the globalisation process is an extremely costly one
that will quickly deplete the financial coffers of even well-off organisations. Once this
key strategic decision has been taken, the organisation is then faced with a number of
additional strategic decisions that relate to how the organisation should best deal with
the challenges of going global and how to succeed in extremely competitive global
markets. This chapter strives to examine these decisions in more detail. The chapter
begins by defining and briefly explaining globalisation, and then moves on to discuss
some of the issues organisations need to consider when deciding to go global, followed
by a discussion of some of the strategic decisions organisations will need to take in the
process of going global. These decisions include how to deal with global environments,
trade barriers and marketing research. It addressed international market selection and
entry, as well as in-market decisions to do with the four elements of the global marketing
mix. The role of the web in facilitating the globalisation process was briefly discussed,
as was the challenge of managing the firm’s globalisation endeavours.
Self-evaluation questions
1. Explain what is meant by ‘globalisation’.
2. Briefly discuss the steps involved in making the decision to go global.
3. Discuss four alternative marketing entry methods.
4. Explain what is meant by marginal-cost pricing
5. Discuss the factors favouring product differentiation.
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ENDNOTES
1. The World Bank. 2013. Merchandise trade (% of GDP). Online: http://stat.wto.org/Home/
WSDBHome.aspx?Language=E Accessed: 18 July 2016.
2. Ibid.
3. Ibid.
4. CIPC. 2013. 2011/12 – 2013/14 strategic plan. Online: http://www.cipc.co.za/Publications_
files/StrategicPlan.pdf/ Accessed: 22 August 2013.
5. Haar, J. ‘More and more, companies born to be global’. Miami Herald blog. Online: http://
miamiherald.typepad.com/the-starting-gate/2012/12/more-and-more-companies-born-tobe-global.html/ Accessed: 22 August 2013.
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Chapter
14
REFOCUSING THE
BUSINESS
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Define business refocusing;
„„ Differentiate between refocusing and diversification;
„„ Explain the impact of the economic environment on the need to refocus;
„„ Give reasons for refocusing;
„„ Choose whether to focus on one or more segments;
„„ Give eight ways to define a business;
„„ Explain focus strategies;
„„ Identify building competitive advantage via focusing;
„„ Identify the focuser’s advantage: differentiation or low cost;
„„ Explain protecting a focus-based competitive advantage.
14.1 INTRODUCTION
Any business that has stood the test of time, such as Coca-Cola, has been able to deal
with constant change. Since the early 1900s, Coca-Cola has continuously refocused
their core business, while also exploiting new consumer needs and wants. They learnt
a huge lesson, though, when they reformulated the taste of its product in 1985 in
response to consumer tests that seemed to indicate a preference for a sweeter beverage,
such as Pepsi. After the launch of New Coke, with a sweeter taste, market share dropped
and Coca-Cola had to return the original formula, which was re-launched as CocaCola Classic. Dietary demands further led to the introduction of beverages labeled as
Lite, Diet, Max, etc.
Refocusing (refreshing) can cover every possible area of a company – mission, vision,
objectives, product-market fit, products, and services. In fact, the marketing strategy
needs continuous refocusing as new technology is developed, customer requirements
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14.2 WHAT IS BUSINESS REFOCUSING?
Various definitions and examples of business refocusing exist. Refreshing the current
business offering might be regarded as the opposite of diversification. Diversification is
often regarded as a process of disinvesting from (sometimes very lucrative and profitable)
non-core market offerings (products, services, business units and markets). Corporate
refocusing could also relate to the process of the selloff of products and business
units, gaining spin-offs by selling them to strategic alliance partners that will prevent
competition, or split-ups of business units. By selling off non-core businesses, the
refocused firm obtains the means to reinforce its core business activities, by deepening
the focus on particular product markets.2 It is of no use to refocus the firm on a few
core businesses, if a firm does not explore ways of redefining, renewing, reorganising,
and re-energising themselves to create long-term sustainable and profitable advantages
with those customer segments that they are servicing well. Thus, the firm has to find
different means to reach efficiency, by reinforcing the existing core business units or
product markets such as developing better technology or products and services that
enhance the need satisfaction of their current customers.
On paper, a business becomes successful when an unmet need is identified within a target
market, and then the heart and soul of the business is focused on meeting that need. In
doing so, the main premise is to serve these needs better than any competitor who is
perhaps not addressing such needs properly at the moment or who also wants to target
those needs. The basic product/service life cycle describes different stages:
„„ An unmet need is identified within a target market;
„„ Products, services and/or brands are developed which attempt to meet the target
market’s current unmet need;
„„ As the target market becomes aware of the company’s offering, sales climb slowly until
substantial acceptance is achieved;
„„ Eventually, when the entire market is aware of the offering, sales level off;
„„ To get sales ‘up’, the organisation will wisely decide to offer its product to the same
target market, but in other geographic locations, for example, local to regional, regional
to national, national to international; ultimately though, sales will again level off;
„„ Some companies then lose their focus because they misread new or changing needs.
They then make mistakes by launching product or brand derivates that do not excite the
market.
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One example of a company that lost its way a bit is that of McDonald’s.3 In the early 1950s
fast-food options burst on to the scene. McDonald’s became an immediate success story
and held a distinct advantage for a few decades, primarily because they had a narrow
focus on providing good hamburgers, French fries and soft drinks at very affordable prices,
and their service was excellent. Then they started experimenting with every menu item
imaginable such as pizza, chicken and ribs. Their original success was that of being ‘childrenorientated’, but then they tried to become more ‘adult-orientated. McDonald’s tried to grow
through diversification. They were unfortunately largely unable to gain ‘share of mind’ in
terms of certain product categories. For people who wanted pizza, there was Roman’s Pizza.
For those who wanted chicken, there was KFC. In a sense, McDonald’s defocused their
ability to offer good and affordable hamburgers by broadening their menu. This confused
customers, who initially thought McDonald’s was really something quite special in terms
of hamburgers. It would be interesting to note whether Burger King will make the same
mistake since its recent launch into South Africa.
It could be argued that, over the years, companies such as McDonald’s merely followed a
diversified strategy dictated by changing or new needs and desires of an ever-changing
consumer market. The decision could have been based on the notion that all companies
must attempt to continually broaden their product and service offerings to stay ahead of
the competition. The bottom-line is that a strategy of trying to ‘be all things to all people’,
ultimately ends up being ‘nothing to no-one’. In the real world, companies and their products,
services and/or brands have life cycles, and losing focus (by not refreshing their products,
services or brands to adapt to new or changing customer needs) spells the beginning of the
end for such products, services or brands.
The failings of diversification do not mean that companies should follow a static strategy.
Companies that started off due to a unique product or service should ‘refresh or reinvent’
itself if that unique product or service has reached a mature stage in its corporate life cycle,
McDonald’s added some logical product extensions, such as the ‘Big Mac’.
Suppose you were to open a truly African cuisine restaurant and feature only food that
is associated with the African continent. This means that you are going to be catering
to a rather narrowly focused clientele, that is, those who regularly or periodically enjoy
having African food. Two years into the business it is flourishing and your restaurant is
fast becoming known as one of the best African cuisine restaurants in the city. If you are
wise, you will be content to simply continue providing the very best in African food dining.
Ü
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If you are unwise, however, you may decide to ‘adapt’ the menu and the general African
look and feel of the restaurant to attract customers who prefer baked beans and bacon and
eggs for breakfast. Wimpy is better at servicing this need.
It all boils down to finding the best product-market fit, and to continuously refreshing your
ability to meet the needs of the most appropriate customer segments that find your product
or service so attractive that they will keep on supporting you.
14.3 THE IMPACT OF THE ECONOMIC ENVIRONMENT
One of the most influential arenas that raises the need to refocus is changes in the
economic environment. An important aspect that forces continuous adaptation
of marketing activities is the business cycle in a particular industry. This cycle is
irregular, but has periodic up-and-down movements in economic activity, measured by
fluctuations in real gross domestic product (GDP) and other macro-economic variables.
A business cycle is not a regular, predictable, or repeating phenomenon like the swing
of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable.
A business cycle is identified as a sequence of four phases:4
1. Contraction: A slowdown in the pace of economic activity.
2. The lower turning point of a business cycle, where a contraction turns into an
expansion.
3. Expansion: A speedup in the pace of economic activity.
4. Peak: The upper turning of a business cycle.
An economic expansion is an increase in the level of economic activity and of the goods
and services available. It is a period of economic growth as measured by a rise in real
gross domestic product. The explanation of such fluctuations in aggregate economic
activity is one of the primary concerns of macroeconomics.
Typically, an economic expansion is marked by an upturn in production and utilisation
of resources. Economic recovery and prosperity are two successive phases of expansion.
It may be caused by factors external to the economy, such as weather conditions or
technical change, or by factors internal to the economy, such as fiscal policies, monetary
policies, the availability of credit, interest rates, regulatory policies or other impacts on
producer incentives. Global conditions may influence the levels of economic activity in
various countries.
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Economic contraction and expansion relate to the overall output of all goods and
services, while the terms ‘inflation’ and ‘deflation’ refer to increasing and decreasing
prices of commodities, goods and services in relation to the value of money. Expansion
means enlarging the scale of a company. The ways of expansion include internal
expansion and integration. Internal expansion means a company enlarges its scale
through opening branches, inventing new products or developing new businesses.
Integration means a company enlarges its scale through taking over or merging with
other companies.
Any business must therefore be able to change its scope of activities to handle any
changes in the business cycle. Continuous changes may lead to a decision to refocus.
14.4 REASONS FOR REFOCUSING
The need for refocusing of business units may not only be due to institutional changes,
such as the development of more market-based systems in emerging economies.
Reasons for refocusing are:5
•• Various shocks or crisis events in many emerging economies have dramatically
increased the pressure for business groups to refocus. One example of such a shock
is the Asian market crisis of the 1990s or the shutdown of the US government in
October 2013.
•• The degree of market power that the business has influences its ability to adapt to
new types of demand generated by, for example, new technology. The rise of the
internet created the need for e-commerce engineering.
•• Because of cultural differences, businesses operate differently in different markets.
In Brazil, Portuguese is the dominant language, while in Argentina, Spanish is the
lingua franca.
•• Poor business performance is another reason for refocusing. This happened following
the Asian financial crisis, when businesses in many of the affected countries came
under strong pressure to refocus their operations to improve financial performance.
The Brexit saga will force new trade agreements between the United Kingdom and
those countries who stick to being members of the European Union.
•• A leadership change may also lead to subsequent refocusing. A new CEO may bring
new ideas and new strategies into a business which leads to revised plans.
•• Organisational culture may be another important reason for refocusing activities.
The rise of labour union activities and black economic empowerment (BEE)
requirements changed focus. In 2013, a leading German motor vehicle manufacturer
announced that it would not manufacture new models in South Africa due to
labour unrest.
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••
••
Identify more profitable customers for refocusing. The 80−20 principle might
apply. Get rid of the 80 per cent of customers that only contribute to 20 per cent
of the profit margin.
The marketing approach is another reason for refocusing. Pricing is one area that
needs constant attention. Under-pricing or overpricing needs thorough scrutiny.
Lowering prices to raise volume, or focusing on a narrow niche market can lead to
setting of a premium price. When thinking about products and services, there is
a need to evaluate core competencies of a business – a unique selling proposition
(USP). If the USP is not marketable anymore, a refocus is definitely required. A
business cannot survive if they want to ‘be all things to all people’. Value proposition
analysis is required, and a revisit of Theodore Levitt’s premise that businesses
should ensure that they understand ‘what business they are in’.
Theodore Levitt was born in Vollmerz, Germany, in 1925 but became an United States’ citizen
in 1940. In 1960, the Harvard Business Review published his best-known article, ‘Marketing
Myopia’, which is a business manifesto that still holds true for businesses today. Levitt
formulated a very strong argument that companies should stop defining themselves by what
they produced and instead reorientate themselves towards customer needs. Levitt intended
marketing myopia to be a challenge to businesses as a whole, not just to their marketing
departments.
Let us give it some thought
Eight ways to define a business6
Managers can frame an answer to the question of ‘What is our business?’ in at least eight
different ways:
1. In terms of the products or services being provided. Thus, a maize grower may define
its business simply as one of producing maize, a fridge-freezer manufacturer may
regard itself as being in the convenience household appliance business, and a local
clinic may view its business as community wellness care.
2. In terms of the principal ingredient in a line of products. Paper companies, for
example, can use the same paper machines to turn out newsprint, stationery and
notebook paper, yet they see themselves as being in the paper business, rather than
in the newsprint business or the stationery business or the notebook paper business,
because they have some flexibility to shift production and sales from one end-use
segment to another as market conditions warrant.
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3. In terms of technology that spawns the product(s). General Electric (GE) owes
its name and a big portion of its revenues to its broad, deep exploitation of the
technology of electricity, coming up in the process with literally thousands of useful
electricity-related products. 3M Corporations’ line-up of some 50 000 products
has emerged from the company’s distinctive expertise in finding new applications
for chemical coating and bonding technology. The 3M Company started off as the
Minnesota Mining and Manufacturing Company, but got renamed as 3M. Anglovaal
Limited has its roots in mining, but as AVI Limited, it centres on fast-moving
consumer goods with a brand portfolio of more than 50 of the most well-known
brands in South Africa, from hot beverages, to biscuits and snacks, and to fashion
apparel.
4. In terms of the customer groups being served. Toyota has long seen itself as being
a full-line car manufacturer with models to fit every purse and lifestyle. Personal
computers sold to corporations and business professionals define a business/market
segment that is quite distinct from home computers sold to individuals through
mass-merchandise retail chain stores. Likewise, the business of a neighbourhood
butchery entails a narrower product line for a narrower customer group than the
butchery business of a large supermarket such as Spar or Pick n Pay Hypermarket.
5. In terms of the customer needs and wants being met. The business of small
appliance manufacturers is hinged on offering a variety of effort-saving and
timesaving conveniences to household members. The educational program offerings
of a Technical and Vocational Education and Training (TVET) college are intended to
meet a different set of student needs than the programs of a major, multicampus
university of technology such as Tshwane University of Technology (TUT).
6. In terms of the scope of activities within an industry. At one end of the spectrum,
organisations can be highly specialised, with a mission of performing a limited
service or function to fill a particular industry niche, an example would be an oil
service firm that engaged exclusively in supplying parts and equipment to well
drillers and well operators. At the other end of the spectrum, firms may seek to be
fully integrated, participating in every aspect of the industry’s production chain,
such as in the case of leading international oil companies which all engage in
leasing sites to drill on, drilling their own wells, pumping crude oil out of the wells,
transporting their own crude oil in their own ships and through their own pipelines
to their own refineries, and selling gasoline and other refined products at wholesale
and retail prices through their own networks of branded distributors and service
station outlets. In between these two extremes of industry scope, firms can stake out
partially integrated positions, participating only in selected stages of the industry.
Ü
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7. In terms of creating a diversified enterprise that engages in a group of related
businesses. The ‘related’ aspect can be based on a core skill, a core technology,
complementary relationships amongst products, common channels of distribution,
common customer groups, or overlapping customer functions and applications.
Famous Brands offer casual dining such as Wimpy, Mugg & Bean, Europa, Fego
Caffé, Pubs, Tashas, Vovo Telo, House of Coffees, NetCafe, Keg and Turn n Tender.
It also provides quick service such as Steers, Debonairs Pizza, Fishaways, Milky
Lane, Giramundo, Juicy Lucy, and Coffee Couture. Procter & Gambles’s line-up of
products, for example, includes peanut butter, cake mixes, coffee, laundry detergent,
toothpaste, shampoo, vegetable oil and shortening, toilet tissue, and soap – all
different businesses with different competitors, different manufacturing techniques,
and so on. But what ties them together into a package of related diversification is
that they are all marketed through a common distribution system to be sold in retail
food outlets to customers everywhere − much the same core consumer marketing
skills and merchandising know-how come into play for all P&G’s products.
8. In terms of creating a multi-industry portfolio of unrelated businesses. In this regard
the answer to ‘what is our business?’ can be based on any of several considerations:
opportunism, a preference for not putting all the firm’s eggs in one basket, attempts
to stabilise earnings over the cycle of economic ups and downs, the fun of making a
profit by shifting and shuffling the assets of several companies, a belief in growth via
diversification, or even ‘getting into any business where we can make good money’.
In companies built around unrelated diversification, there is no conceptual theme
that links different businesses in customer needs/customer groups/technology terms.
When you answer questions like these honestly, you may uncover new opportunities,
challenges and direction for your business.
14.5 FOCUS STRATEGIES7
A focus or specialisation strategy aims at building a competitive edge and carving out a
market position by catering to the special needs of a particular group of customers, by
concentrating on a limited geographic market, or by concentrating on certain uses for
the product. The distinguishing feature of a focus strategy is that the firm specialises
in serving only a portion of the total market. The underlying premise is that a firm
can serve its narrow target market more effectively or more efficiently than rivals that
position themselves broadly.
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The competitive advantage of a focus strategy is earned either by differentiation from
meeting the needs of the target market segment better, or by achieving lower costs
in serving the segment, or both. A focuser can gain a cost advantage, because more
than one cost curve can prevail in an industry. The cost curve for a specialist firm
concentrating on custom orders and short production runs can differ substantially from
the cost curve for a firm pursuing a high-volume, low-cost strategy. In such cases, small
firms are positioned to be cost-effective focusers in the small-volume, custom-order
buyer segments, leaving the mass market to large-volume producers.
Because of its specialised approach and unmatched skills in serving a limited market
target, a focused firm gains a basis for defending against the five competitive forces.
Rivals do not have the same ability to serve the focused firm’s target clientele. Entry into
the focused firm’s market niche is made harder by the competitive edge generated by the
focused firm’s distinctive competence. The focused firm’s distinctive competence also
acts as a hurdle that substitutes must overcome. The bargaining leverage of powerful
customers is blunted somewhat by their own unwillingness to shift their business to
firms with lesser capabilities to serve their needs.
A competitive strategy based on focus or specialisation has merit:
•• When there are distinctly different groups of buyers who either have different needs
or else utilise the product in different ways;
•• When no other rival is attempting to specialise in the same target segment;
•• When a firm’s resources do not permit it to go after a wide segment of the total
market;
•• When industry segments differ so widely in size, growth rate, profitability, and
intensity of the five competitive forces, that some segments are much more attractive
than others.
Examples of firms employing a focus strategy include Rolls-Royce (in super-luxury
automobiles), Miele (a maker of top-of-the-line refrigerators, freezers, and cooking
appliances), the numerous low-cost airlines such as Kulula.com and Mango Airlines,
and Patio Warehouse (a reseller of premium-quality patio furniture).
The risks of a focus strategy include:
•• The possibility that broad-range competitors will find effective ways to match the
focused firm in serving the narrow target market;
•• Shifts in buyer preferences and needs that make the difference in product attributes
desired by the target segment, and the market as a whole, narrow enough to allow
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••
broad-range rivals a strong competitive footing in the target markets of the focused
firms;
The chance that competitors will find sub-segments within the target segment and
out-focus the focuser.
14.6 BUILDING COMPETITIVE ADVANTAGE VIA FOCUSING
Buyer segments within an industry are far from being homogeneous.8 The strengths of
the five competitive forces vary from segment to segment, and different segments can
have significantly different activity-cost chains. As a consequence, segments differ in
their competitive attractiveness and in what it takes to achieve competitive advantage
in each segment. It is these differences that give rise to the appeal of a focus strategy.
The two crucial issues concerning adoption of a focus strategy revolve around:
1. Choosing which segments to compete in.
2. How to build competitive advantage in the target segments.
Deciding which segments to focus on, hinges upon attractiveness of the various
segments. Segment attractiveness is typically a function of segment size and growth
rate, the intensity of the five competitive forces in the segment, segment profitability,
the strategic importance of the segment to other major competitors, and the match
between a firm’s capabilities and the segment’s needs. These are self-explanatory, except
for the differences between analysing the five forces at the segment level, compared to
the industry level. In the five forces analysis at the segment level, potential entrants
include firms serving other segments, as well as firms not presently in the industry.
Substitutes for the product varieties already included in the segment can be product
varieties in the rest of the industry, as well as products produced in other industries.
Rivalry in the segment involves both the firms focusing exclusively on the segment and
the firms that serve this and other segments. Buyer and supplier power, while mostly
segment-specific, can be influenced by buyer purchases in other segments and supplier
sales to other segments. As a rule then, five forces analysis of a segment tends to be
heavily influenced by conditions in other segments.
14.7 CHOOSING WHETHER TO FOCUS ON ONE OR MORE SEGMENTS
The most attractive segments for focusing on have one of the following characteristics:
•• The segment is of sufficient size and purchasing power to be profitable.
•• The segment has good growth potential.
•• The segment is not crucial to the success of major competitors.
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••
••
The focusing firm has the skills and resources to serve the segment effectively.
The focuser can defend itself against challengers via the customer goodwill it has
built up and its superior ability to serve buyers in the segment.
However, segments are often related in ways that make it desirable to compete in two
or three segments, rather than just one.9 The thing to look for here is an opportunity
to share activities in the overall activity-cost chain across segments. Multi-segment
focusing becomes a strong consideration when:
•• The same sales force can effectively sell to different buyer groups;
•• The same manufacturing plants can produce enough product varieties to supply
two or more segments;
•• Research and development can be done simultaneously for several product groups
within the industry family;
•• Outbound shipping and distribution activities for two or more buyer groups can
be closely coordinated, all with resultant cost savings in serving multiple segments;
•• In addition, there are times when sharing produces scale economies, more
rapid learning, improved capacity utilisation, increased differentiation, or lower
differentiation costs.
However, the cost-saving benefits associated with segment interrelationships can be
offset when:
•• The costs of coordinating shared activities are high (because of greater operating
complexity);
•• The activity-cost chain designed to serve one segment is not optimally suitable
for serving another segment, thereby compromising a firm’s ability to serve both
segments well;
•• Sharing activities across segments limits the flexibility of modifying strategies in the
target segments.
The net competitive advantage of focusing on one versus several target segments is a
function of the balance between the benefits and costs of sharing activities. In general,
the stronger the interrelationships amongst several segments, the more attractive the
multisegment focus strategy.
14.8 THE FOCUSER’S ADVANTAGE: DIFFERENTIATION OR LOW COST?
To achieve competitive advantage, a focuser has to succeed at low-cost leadership or at
differentiation in its chosen segment or segments. If a focuser opts to pursue low-cost
leadership, then the same kinds of cost-reducing approaches as explained above for
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industry-wide cost leadership have to be used in managing the activity-cost chain for
the segment. If a focusing firm opts for differentiation, then it must look at buyer needs
and develop ways to lower these costs or enhance the performance they get from the
product. The specific kind of differentiating approaches are the same for focusers and
for broad competitors. What sets the creation of competitive advantage by focusing
apart is that focus strategies are grounded in creating differences amongst segments.
A focuser excels in serving the target segment. However, what can give the focuser
a special boost in winning a segment-based competitive advantage is the fact that
differences across segments can impose significant costs of coordination, compromise,
and inflexibility on broadly targeted competitors in trying to meet the specific needs of
buyers in the focuser’s target segments. This is the condition that makes focusing really
attractive. When the differences amongst the segments are slight, a focuser has little
defense against more broadly targeted competitors, because the latter can serve the
needs of the buyer segment about as well as the focuser can.
14.9 PROTECTING A FOCUS-BASED COMPETITIVE ADVANTAGE
For a focus strategy to be successful over time, three conditions must be present:10
1. A focuser must be able to defend its position against inroads from more broadly
targeted competitors. This is easier when segment differences are big and harder
when they are small.
2. A focuser needs to erect barriers to imitation from other focusers. Another
competitor, either new to the industry or one dissatisfied with its current strategy,
may try to replicate the focus strategy. The more attractive the segment and the
more successful a focuser’s strategy, the greater the threat of imitation (unless the
focuser has built a good defense against fast followership).
3. A focuser must not be threatened by conditions that will cause the segment to
dissolve into the broader market or to shrink to an unattractive size. Competitors
serving broader parts of the industry may well use product innovation advertising,
promotional efforts and other marketing tactics to induce buyers to leave the
focuser’s segment and come into theirs.
In the absence of these three conditions, it is an uphill struggle to make a success of
focusing. Thus, it is a mistake to think of focusing, per se, as generating competitive
advantage.11
For focusing to work, the target segment must:
•• Involve buyers with materially different needs;
•• Entail the use of an activity-cost chain that differs from the chain needed to serve
other segments.
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Without doing so, it is not likely that the segment can be successfully defended against
challengers attracted by the segment’s size and profitability.
14.10 SUMMARY
Business refocusing is, for all intents and purposes, the opposite of diversification. It is
a focus or ‘reinforcement’ or the ‘refreshing’ of core businesses. Corporate refocusing
therefore relates to the process of reducing a diversified scope of products, services or
business units through the sell-off of products, services and business units, gaining
spin-offs by selling them to strategic alliance partners that will prevent competition
or split-ups of business units. Firms must continuously explore ways of redefining,
renewing, reorganising and re-energising products, services and business units to create
long-term sustainable and profitable advantages.
Having made a decision to refocus a firm may follow a focus or specialisation strategy
that is aimed at building a competitive edge and carving out a market position by
catering to the special needs of a particular group of customers, by concentrating on
a limited geographic market, or by concentrating on certain uses for the product or
service. The distinguishing feature of a focus strategy is that the firm specialises in
serving only a portion of the total market.
CASE STUDY
GROWING GREAT BRANDS12
AVI Ltd is recognised as a company that is home to many of South Africa’s leading and
most-liked brands. The company is listed on the Johannesburg Stock Exchange in the food
products sector, and centred on the FMCG market, with an extensive brand portfolio that
includes more than 50 brands.
AVI’s brands span a range of categories including hot beverages, sweet and savoury
biscuits and snacks, frozen convenience foods, out-of-home ranges, personal care products,
cosmetics, shoes, accessories and fashion apparel. The company claims that its brands
have grown into great South African favourites including Five Roses, Freshpak, House
of Coffees, Frisco, Koffiehuis and Ellis Brown in the beverages category; Bakers, Pyotts,
Baumann’s, Willards and Provita in the biscuits and snacks category; I&J in the frozen
foods category; as well as Ciro, Lavazza and Douwe Egberts Cafitesse for the out-of-
Ü
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home market. Beauty and personal care brands include Yardley, Lentheric and Coty, while
international and local Fashion Brands in the AVI stable include Spitz, Carvela, Kurt Geiger,
Lacoste, Gant and Green Cross shoes. The company reported a turnover of R11.24 billion
in the previous financial year.
Five Roses
The marketing blurb for Five Roses states that it has been masterfully blended for over
100 years:
... to produce the distinctively rich, smooth, luxurious taste tea-lovers have
come to love and trust. Only the best hand-picked Ceylon tea leaves are lovingly
selected by our Tea Master to ensure every bag of original Five Roses delivers the
outstanding quality one would expect from South Africa’s favourite tea. Since
Five Roses was first produced, only five known tea masters have been charged
as custodians of this unique quality blend to ensure consistency and continuity,
so that you can always trust, no one makes better tea than you and Five Roses.
The extensive Five Roses range has something for everyone and offers a wide variety of tea
blends and flavours. Look out for the new Five Roses infusions range for a really special
indulgence.
Bakers biscuits
Bakers biscuits claims to be South Africa’s favourite for over 150 years, and Bakers biscuits
are baked with the best ingredients and, of course, a touch of Bakers magic. The range
includes ‘much-loved’ South African favourites such as Tennis, Eet-Sum-Mor, Boudoir,
Blue Label Marie, Red Label Lemon Creams, Romany Creams, Strawberry Whirls, Iced Zoo,
Topper and, at Christmas time, Choice Assorted. Bakers also produces a range of delicious
savoury biscuits, including Provita, Cream Crackers, Mini Cheddars, Salticrax, Crackerbread,
Kips, Wheatsworth, Vitasnacks and Snacktime. You can now add some Bakers magic to
breakfast with NEW Bakers Good Morning Breakfast biscuits, an on-the-go solution to
fuel your morning!
I&J
I&J is labeled as a leading fishing company and manufacturer of high-quality chilled and
frozen foods. For more than 100 years, I&J has been a trusted name in seafood – it operates
a modern and efficient fleet and continues to train and develop experienced fishing crews
Ü
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committed to fishing responsibly according to their long-term vision. I&J has achieved and
maintained accreditation from the Marine Stewardship Council (MSC) since 2004.
Questions
1. Is AVI successful in terms of its claim to be growing ‘great brands’? Evaluate
the description of each of its brands on its website to assist you in answering
this question. Also find market size information on each of its brands and try to
establish which brands are close competitors.
2. Are any brands in AVI’s portfolio examples of not having a clear focus? Which
brand has the clearest focus?
3. Do you agree that AVI has managed to deepen its focus in particular product
markets? Substantiate your answer by referring to Five Roses tea, Bakers biscuits
and I&J frozen food.
4. Which of the AVI brands are the best examples of having a sustainable focus?
Defend your answer and also discuss which brands might be the first to be sold
off if AVI decided to disinvest from certain product markets.
Self-evaluation questions
1. In this chapter the economic environment was highlighted as one of the most
important influencing arenas that raises the need to refocus a business. Discuss
how other elements of the external environment (PESTLE analysis) would impact on
business refocusing:
P – Political
E – Environmental
S – Social
T – Technological
L – Legal
E – Economical.
2. Theodore Levitt first published an article, ‘Marketing myopia’, in 1960 in the Harvard
Business Review. Read this article and analyse his opinion that businesses must
‘know what business they are in’.
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3. Compare the advantages and disadvantages of a focus strategy to that of a
diversification strategy.
4. Compare the menu of different fast food outlets such as KFC, Roman’s Pizza and
Something Fishy. Form a syndicate group and discuss whether these outlets are
successful in focusing their business offerings.
5. Google has examples of marketing warfare such, as the Cola wars and the Sneakers
wars. Form a syndicate group and discuss whether participants in these wars are
successful in focusing their business offerings.
ENDNOTES
1. Sadler, D. 2003. Is it time to refocus your business? Online: http://www.
smallbusinessadvocate.com/small-business-articles/is-it-time-to-refocusyourbusiness-1004. http://smallbusiness.forbes.com/small-business-articles/is-it-timetorefocus-your-business-1004; http://www.illuminationconsulting.com/blog/smallbusinessconsulting-tips-for-refocusing-during-difficult-times/ Accessed: 20 June 2013.
2. Rogers, E.M. 1962. Diffusion of innovations. Glencoe: Free Press. Online: http://
thedrawingboard.me/2013/05/03/the-product-market-fit-cycle/; Germain, O. 2001.
‘Strategic refocusing of large firms on core businesses – A process approach’. Unpublished
PhD, Business Administration Institute, University of Lower Normandy. Caen: University
of Lower Normandy.
3. Schori, T.R. & Garee, M.L. nd. Losing focus: ‘Kiss of death’ for a company. Normal, IL:
Millennium Marketing Research®. Online: http://www.tomschori.com/35793.
4. Moffat, M. nd. What are the Phases of the Business Cycle? An Introduction to the Business Cycle.
Online: economics.about.com/cs/studentresoures/f/business_cycle.htm Accessed: 26
October 2016
5. Hoskisson, R.E., Johnson, R.A., Tihanyi, L. & White, R.E. 2005. ‘Diversified business
groups and corporate refocusing in emerging economies’. Journal of Management, vol 31,
no 6:941−965.
6. Thompson, A.A. & Strickland, A.J. 1989. Strategic formulation and implementation − tasks of
the general manager. Homewood, IL: BPI/Irwin.
7. Monger, B. 2012. A Secret of Success – Focus and Specialisation. Online: smartamarketing.
wordpress.com/2012/02/13/a-secret-of-success-focus-and-specialisation
Accessed: 26 October 2016.
8. Porter, M.E. 1985. Competitive advantage. New York: Free Press; Aaker, D.A. 2001.
Developing business strategies. 6th ed. Hoboken, New Jersey: Wiley.
9. Kotler, P. 1984. Marketing management: Analysis, planning and control. 5th ed. EnglewoodCliffs: Prentice-Hall.
10. Porter, op cit.
11. Ibid.
12. Online: www.avi.co.za. Also consult: www.ij.co.za; and www.bakers.co.za.
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Chapter
15
LEVERAGING THE
BUSINESS
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Explain the basic principle of leverage as it can be applied to business in general and in
marketing specifically;
„„ Identify marketing levers;
„„ Explain the importance of leverage in the creation of value for all stakeholders;
„„ Explain structural and managerial leverage;
„„ Explain how marketing managers can leverage a brand;
„„ Explain how marketing managers can leverage the organisation’s reputation;
„„ Explain how marketing managers can leverage business relationships.
15.1 INTRODUCTION
It is often claimed that management is about doing the right things (effectiveness)
as well as doing things right (efficiency). In pursuit of both these goals, marketing
managers ultimately attempt to maximise results with the least amount of effort. To sell
more products or services, marketers need to do a better job of segmenting markets,
targeting the right customers and positioning their offerings optimally for those targeted
customers. Some might say such an approach is the conventional way of doing things,
which is largely a linear extension of what the firm is already doing. The real question
is, however: What is needed to create exponential growth? In answering this question,
managers inevitably arrive at the issue of: How can we get more from what we already
have? For example: A business may look at a new partnership with a distributor that
can lead to an exponential increase in sales, without any expending a corresponding
number of resources. It means that the firm now needs to decide if it wants to make
the additional investment in collaborating with this new distributor in order to gain the
increased sales. In short, they need to decide if they want to leverage their relationship
with this distributor. That is what a lever does. It allows us to lift or move something
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by expending much less force or energy than what is otherwise required to achieve the
same result.
Let us give it some thought
What is a lever?
What do a fork, a pair of scissors and the little handle that flushes your toilet have in common?
They are all levers. Levers are some of the most important machines in our daily lives. Simply
put, levers are machines used to increase force. We call them ‘simple machines’ because they
have only two parts − the handle and the fulcrum (pivot). The handle or bar of the lever is
called the ‘arm’ – it is the part that you push or pull on. The ‘fulcrum’ is the point on which the
lever turns or balances.1
In business terms, it means that we can use different types of levers to generate
disproportionately large returns with a minimal investment. This idea is not new. Rather,
it is central to economic theory to create the maximum output with the minimum
input.2 It boils down to the idea of ‘working smarter, not harder’. This dreadful phrase
is meant to address the apparent lack of time, money and resources managers often
experience in business. In this chapter we will be exploring the idea of leverage in
business from a marketing perspective. First we look at the importance of leverage in a
business and consider its underlying theoretical motivations, before we identify specific
sources of leverage. Then we consider a few critical aspects of leverage particular to
marketing. This includes issues such a brands, marketing channel relationships and
reputation. Finally we conclude with reference to the strategic importance of using
leverage in the organisation.
15.2 THEORETICAL FRAMEWORK
One may well conclude that the reason (importance) of thinking about leveraging
the business is simply a case of seeking to do more with less. Closer investigation,
however, reveals that it is not quite that simple. Rather, it is about finding additional
sources of value across a wide spectrum of activities; resources and actors with which
the firm engages. This idea of value creation is well embedded in modern marketing,
but managers need to understand its origins (what drives it) before they can consider
what tools and techniques (levers) are available to them to unlock the value they seek.
Figure 15.1 offers a framework to assist in understanding that environmental stimuli
often manifest themselves in changes in the general business conditions, markets and
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how businesses organise themselves.3 These changes fuel the need to create value, and
managers seek the tools for creating value across all aspects of the firm.
What drives the need for value? The answer to this question is: change. One often hears the
phrase: The one thing we can be certain of is change. Change comes from the environment
around us. Moreover, it is not only the endless string of books, blogs, tweets, narratives
and TV programmes that say so. In management, almost all our teachings deal with the
importance of changes in the external environment and invariably we read and study
the so-called PESTLE analysis to consider the influence of the political, economic,
social, technological, legal and environmental factors on business. These are all sources
of change. This wisdom almost always takes us to the cause-and-effect relationship a
business has with its environment. As managers we study these effects (weak or strong,
direct or indirect) and we come to the conclusion that markets are growing more
competitive and consumers/customers become more sophisticated in their decisionmaking. As dated and overemphasised as this may sound, it remains fundamental to
our understanding of business, because it provides the canvas for life – be it for an
individual or a business. Hooley et al4 refer to this as the ever-changing competitive
arena where, from a marketing perspective, deep change can be observed in three
spheres:
1. The changing business environment.
2. Changes in markets.
3. Changes in organisations.
Change also means opportunity – more specifically, the opportunity to create value and
therefore a chance to do a better job than our competitors to satisfy customer needs
(enter new markets, etc). Hence, it is safe to say that in business we are always looking
to extract more value from current resources and circumstances in our endless pursuit
of adapting to change.
Business environments are rarely stable. The business environment in which organisations
operate lies outside the organisation itself. This ‘external environment’ is always
changing (at the very least, it is never static). Some changes are so dramatic that
everybody notices them, but others may creep up on an industry over the years and be
largely ignored for too long. Changes in the business environment are a result of many
factors, but they usually include:
•• Intensifying competitive pressures;
•• An acceleration in the pace of economic change;
•• New organisational structures that are emerging as organisations seek to make
themselves more competitive;
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Drivers of the need to create value
Macro environmental
stimuli
Change in:
Business conditions
Markets
Organisations
Firm’s search for value levers
Generic strategic levers:
Actions
Programmes
Systems
Policies
Interaction
Allocating
Monitoring
Organising
Marketing-specific
strategic levers:
Product & brand
strategies
Price strategies
Distribution channel
strategies
Advertising strategies
Customer satisfaction
management
FIGURE 15.1 A framework of strategic levers
••
••
••
••
••
••
An explosion in the amount of innovation and new knowledge generation at an
ever-increasing pace;
Companies’ actions that are becoming increasingly visible;
Manufacturing that can now take place almost anywhere;
Customers that are demanding more, both economically and environmentally;
Organisations that have reorganised, reduced overheads, de-layered and merged,
and created alliances and partnerships in attempts to create advantage in the
marketplace;
The liberalisation of international trade (such as the efforts of the World Trade
Organisation and other global organisations).
Changes in markets, in turn, are driven by uncertainty in the business environment,
increasing customer demands, organisational changes and increased competition.5 As
markets become more competitive and complex, organisations are under increasing
pressure to collaborate with others. This growing collaboration takes place among
suppliers, customers and even competitors. It also means that the clear demarcation
lines of the past are becoming vague, and executives have to deal with highly ambiguous
new roles. Today we see that customers are starting to demand that suppliers show
their ethical credentials and undertake social responsibility initiatives. These notions
are comparable to the customer demands for price and quality in an earlier marketing
environment, yet the exciting challenge facing executives is to achieve economic
efficiency while being a socially responsible organisation that creates competitive,
advantage.6
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Organisations therefore also needed to change. The focus, especially in developing
economies, is less on downsizing to sustain cost pressures, but rather on inter-firm and
intra-firm relationships, where boundaries between traditional units (groups within the
business) are constantly challenged. Where firms once were organised with clear-cut
divisions between marketing, finance and operations, they now need to accept that
functional silos can result in myopic organisations and suboptimal strategies. In leading
firms, the functional boundaries are being replaced by process teams that can view the
operations of the organisation holistically with as few as possible turf battles between
functions. For marketing, this means profound changes. An example of this can be
seen in IBM when it announced a restructuring of its marketing activities in 1997. This
took the form of refocusing of the business to transforming it from a ‘make and sell
organisation’ to a ‘sense-and-respond organism’.7 Aspects such as customer relationship
management and core business processes such as information management (amongst
others) were focused upon to achieve the desired change. This is very different from
conventional views of how marketing operates. Moreover, it is argued that marketing
departments can get in the way of servicing customers. This largely relates to turf battles
and shifting the responsibility to serve customers to ‘other’ units. Silo operations create
the danger that some individuals and groups in the firm can easily think there is no
need to concern themselves with customers, because someone else is already taking
care of them. From these perspectives, it is understandable that there are those that
argue that the conventional days of marketing are long gone. The challenge now is, to
design and implement better ways of managing the processes of marketing in ways that
cut across traditional functional boundaries, as well as opening the external boundaries
to other firms. Often this can even mean cooperating with traditional competitors.
In essence, the environmental, market and organisational changes push marketers to
rethink value creation.
15.3 VALUE CREATION
Environmental pressures feed change and therefore, in today’s dynamic environment,
organisations need to find new and innovative ways to unlock value. Paul O’Malley8
noted that successful organisations understand that the purpose of any business is to
create value for customers, employees and investors, and that the interests of these
three groups are inextricably linked, therefore sustainable value cannot be created for
one group unless it is created for all of them. The first focus should be on creating value
for the customer, but this cannot be achieved unless the right employees are selected,
developed and rewarded, and unless investors receive consistently attractive returns.
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Consistent with the idea of market orientation, Ind et al9 noted that those organisations
that seek to be innovative and have the ambition to grow and build new markets,
have to begin by gaining a thorough knowledge of their customers − their needs and
desires. The problem is that many traditional organisational structures and methods
tend to inhibit the opportunity for closeness and learning between an organisation and
its customers. The co-creation of value is then offered as one way of bridging this gap.
Similar to the observations by O’Malley as given above, this process brings consumers,
managers and employees together to participate in brand development and to create
new products and services. Through co-creation activities such as events and online
communities, organisations can now engage with consumers and explore together their
emotions, feelings and memories while generating deep insights. A well-managed cocreation process has clear benefits for the organisation, because it can lead to successful
innovations and new business opportunities, hence we can say that co-created value
arises in the form of personalised, unique experiences for the customer (value-in-use)
and ongoing revenue, learning and enhanced market performance drivers for the firm
(loyalty, relationships, word of mouth). An example of such a co-creation event is that
of Distell, a leading drinks company in South Africa, who uses a beach club facility
in Cape Town, the Shimmy Beach Club, to create value for its Mainstay cane brand.
Distell introduced the ‘Sunday Mix’ to attract the right customers to a fun event where
they can directly interact with their customers. This allows Distell to create a ‘brand
community’10 and some hype around a rather mature brand to co-create value for
consumers, the Shimmy Beach Club and of course for Distell.
Value is co-created with customers if and when they are able to personalise their
experience using a firm’s product-service proposition. This must be done to such a
level that is best suited to the customers to get their tasks done, and it allows the firm
to derive greater value from its product-service investment. In turn, the investment may
be in the form of new knowledge, higher revenues/profitability, and/or superior brand
loyalty.
The research by Ind et al11 alerts managers to four key ideas regarding value creation
from a marketing perspective that are worth noting:
1. Building trust is an important lever that managers can use to build brand
communities. This also means that managers should avoid the temptation to control
creative processes, but rather attempt to provide a flexible environment that will
accommodate a variety of approaches and views about the organisation, its brands
and its products. The researchers12 also suggest that by giving brand community
participants clear and timeous feedback, people will feel there is fair reciprocity
between themselves and the brand. In this process, employees should reflect the
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brand, because they need to maintain interaction with participants, listen to their
needs, be open to ideas and suggestions, and give regular feedback.
2. Managers also need to support participants who have a high degree of intimacy
and a strong sense of ownership with the brand. These individuals are often willing
to increase their involvement with the brand and can become brand ambassadors.
By training managers appropriately, they can grow the brand community and, in
so doing, facilitate the co-creation process. This approach obviously puts more
pressure on the organisation to open up to a different kind of relationship with
outsiders and to treat them more as insiders.
3. The co-creation process also has implications for the management of brand–
customer relationships across broader social media and online channels. It is argued
that managers should try to generate a trusting and open environment by taking
an active role in dialogue, being receptive to new ideas and providing information
and support. This approach requires a belief in the value of participation built
around explicit benefits of participation. Brand relevance can be enhanced by
making participation a central issue. When a firm is able to get customers to think
about and engage with the brand, this reminds people inside the organisation of the
importance of connecting and sharing with all the stakeholders.
4. Managing co-creation has implications for leadership. In contrast to the traditional
approach to leadership, more open and participative approaches enhance cocreation. This moves away from focusing on how to bring the experience of the
outside world inside the organisation to inform the brand and the employees who
would represent it. The result is that people become conditioned to see the world
with the organisation’s vision and therefore underplay the social and communicative
aspects of a brand relationship. With co-creation, many of the barriers between the
inside and the outside world can be taken away. Consumers can ‘live the brand’
as they are invited to help build brands and contribute to product and service
innovation.
The idea of value creation is especially important when we think of the ability of the firm
to compete. Kim & Mauborgne13 emphasise the importance of value innovation to create
uncontested market space. The idea of this approach is that instead of spending endless
resources and energy in trying to compete on known aspects (red ocean), organisations
can eliminate, reduce, raise and create things to move to uncontested market space
(blue ocean). A central point here is that the firm finds new (different) value drivers.
Consider the case of two auto manufacturers in Figure 15.2. For manufacturer B to
successfully compete with manufacturer A, instead of trying to match manufacturer A
on conventional unique selling points such as price, performance and the road-holding
capabilities of its cars, it can attempt to shift the market focus to new aspects such as
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vehicle finance, extended warranties and roadside assistance, hence moving to a new
‘value curve’.
Value innovation
Roadside assistance
Extended warranties
Finance
Model range
Dealer network
Manufacturer B
Road holding
Performance
Safety
Price
Manufacturer A
FIGURE 15.2 Illustrative value curve for two competing auto manufacturers
We can now return to the issue of marketing levers. From the preceding sections it
is clear that environmental change often pushes organisations to seek new sources of
value. We have seen that value creation often involves multiple stakeholders (even
communities) and the process is best executed via a co-creation approach. A key
question remains, though: How do we unlock the value? In the following section we will
consider the levers that managers and organisation can use to achieve this.
15.4 LEVERAGING THE BUSINESS
For most businesspeople the word ‘leverage’ refers to a financial ratio. These leverage
ratios (also commonly referred to as gearing) usually show the level of an organisation’s
debt in relation to its assets. This ratio is of interest to shareholders and potential
investors because its level influences their returns. Efficient use of debt can enhance
returns, while inefficient use of debt can reduce them. Simply put, if an organisation
borrowed a small amount of money, then it is possible to increase the amount of money
it can raise in the marketplace either via loans or issuing shares. This money can then
be used to make further investments, such as developing a new product. However, if
the firm borrowed a large amount relative to its assets (debt to asset ratio), it reduces
its ability to raise funds for investments. The best-known examples of gearing ratios
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include the debt-to-equity ratio (total debt/total equity), times interest earned (earnings
before interest and tax (EBIT)/total interest), equity ratio (equity/assets), and debt ratio
(total debt/total assets).
Talking about leverage in marketing is not fundamentally different from what is used
in financial terms, because it also refers to generating disproportionately large returns
with a minimal investment, thus it remains a ‘lever’. As we have shown in Figure 15.1,
it is possible to distinguish between general levers that we use across functional areas
and marketing-specific levers.
15.4.1 Generic strategic levers
Crittenden & Crittenden14 considered the challenges of strategy implementation and
noted that it comprised two main categories of factors:
1. Structures.
2. Managerial skills.
Structures provide the framework or configuration in which companies operate
effectively. Managerial skills are the behavioural activities that managers engage in
within the structures developed by the organisation. Using managerial skills strategies
are implemented through the structure. The structure facilitates the application of
managerial skills. The authors propose that within these two categories a set of levers
for strategic implementation can be specified, as shown in Table 15.1.
TABLE 15.1 Generic strategic levers for strategy implementation15
Structural
levers
Managerial
levers
Actions
Who, what and when of cross-functional integration
and company collaboration
Programmes
Instilling organisational learning and continuous improvement
practices
Systems
Installing strategic support systems
Policies
Establishing strategy-supportive policies
Interacting
The exercising of strategic leadership
Allocating
Understanding when and where to allocate resources
Monitoring
Tying rewards to achievement
Organising
The strategic shaping of corporate culture
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Structural variables offer an implementation toolkit for identifying key levers that affect
the formulation-implementation process, ensuring a formulation-implementationperformance cycle. Actions should foster cross-functional integration to obtain the input
and cooperation of all players in a company, and to effect the collaboration which is
required for successful strategy implementation. Programmes for instilling organisational
learning and continuous improvement practices are important to ultimately empower
the creative thinkers in the firm. This creativity is also important to the process of value
creation. Installing strategic support systems suggest that companies that manage their
information technology investments successfully will generate considerably higher
returns than their competitors. Also, strategy-supportive policies promote a collective
way (pattern) of doing things and making decisions that become part of the fabric of
the organisation.
Managerial skills are discretionary in nature and vary with individual perceptions and
behaviours.16 These skills are drivers that individuals and groups can employ to create
value. In their interaction, managers provide direction, protection and orientation, and
manage conflicts and shape norms. These key responsibilities of leaders are managerial
levers to empower others to effect value creation through their interaction. Understanding
when and where to allocate resources leverages the physical capital (plant, equipment,
geographic location and access to raw materials), human capital (training, experience,
judgement, intelligence, relationships, and the insight of managers and workers), and
organisational capital (formal reporting systems, informal relationships within the
firm, and relationships between the firm and its external environment) in the firm.
Monitoring is usually linked to rewards systems. By rewarding people appropriately,
the act of monitoring can become a lever for value creation. Naturally, this aspect
needs to be approached with great care as it ties into human dynamics. It has been
shown that that organisational culture relates strongly to strategy implementation.17
When managers organise, they shape the corporate culture by influencing the system of
shared values and norms. While an organisational culture is unique to each company,
shaping corporate culture requires clearness in content, consistency in nature and
comprehensiveness in coverage.
15.4.2 Marketing levers
We can now explore some of the levers in marketing. Much of what we do in modern
marketing is related to the idea of leverage. Invariably we are often busy to leverage
some product, company capability, reputation, brand, etc, to achieve sales growth,
change market position, influence customers’ perceptions, etc. In essence, marketers
use leverage to create disproportionate advantage. These actions are rarely the result of
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a single ‘lever’ and usually we need to use multiple levers to achieve the desired effect.
Also, it may require one or more ‘fulcrums’. For example, Toyota leveraged the success
of Giniel de Villiers, the South African rally driver, in the world-famous Dakar Rally to
promote the performance and ruggedness of its Hilux pickup truck – better known as
a ‘bakkie’ in South Africa. In its strategy, one may argue that Toyota cleverly used the
Hilux’s reputation and its target market’s love of the outdoors and exploration desires
to make a success of the campaign. Obviously we cannot claim this for a fact, as many
other aspects of the business or the market may have contributed. Furthermore, we can
say it will always work. Suppose De Villiers did not do well in the Dakar? However, it
does show how marketers can creatively use leverage to achieve their objectives. Figure
15.3 gives examples of various ‘levers’, ‘fulcrums’ and ‘loads’ used by marketers.
Load
Lever
Fulcrum
Typical levers used in marketing
• Product levers: new products,
product platforms, new uses
for existing products, product
innovatiions, technology, etc;
• Brand levers: brand extensions,
co-branding, corporate brands,
reputation, etc;
• Price levers: cost sharing
opportunities, value for money
perceptions, etc;
• Distribution levers: channel
partners, vertical integration,
networks, buyer capabilities,
alternative designs, etc;
• Promotional levers: social media,
sponsorships, point of sale, word
of mouth;
• Customer relationship
management: relationship ties,
trust, commitment, relationship
specific investments, relationship
values (accomplishment,
belonging self-fulfilment, selfesteem, family, satisfaction, and
security).
Typical fulcrums (pivots) used in marketing
Buying processes (B2C and B2B)
Buying behaviour:
• Cultural influences: values, ethics, rituals,
traditions, material objects & services, as
well as sources of culture: sex, language,
family, religion, group, nationality, education,
profession, social class, organisational culture;
• Social: reference groups, family, roles &
statuses;
• Personal: age/life cycle stage, occupation,
economic situation, lifestyle, personality;
• Psychological: motivation, perception, learning,
beliefs & attitudes.
Typical loads objectives in marketing
•
•
•
•
•
•
•
Increased sales;
Increased customer loyalty;
Customer retention;
New market entry;
Increased profits;
Geographical expansion;
Global markets.
FIGURE 15.3 Examples of typical levers in marketing
It is almost impossible to describe all the levers that marketers use in the modern
business environment. Moreover, what one marketing manager might perceive as a
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leveraging opportunity, the next may not. However, in marketing it does seem that
certain aspects are particularly popular as levers. Some of these aspects are:
•• Corporate and product brands;
•• Company reputation;
•• Business relationships.
15.5 BRANDS AS LEVERAGE
One of the most interesting (and arguably most successful) examples of leveraging a
brand to achieve market penetration and sales growth is the 1960s Volkswagen Beetle
advertising campaign. As competing automakers built ever bigger cars for growing their
business with post-World War II families, the Volkswagen’s Beetle was seen as too small,
too ugly and too German. The now legendary campaign played up the ‘small’ and
‘ugly’ perceptions with headlines touting its status as a ‘lemon’ and clever copy that
then drove home the benefits of driving a small German (rebranded as ‘well-made’)
automobile.
CASE STUDY
VOLKSWAGEN BEETLE18
America loved 1960s Volkswagen Beetle advertising, and with good reason. In an age
of blustery pitches glorifying size, power, and prestige, the 1960s Volkswagen Beetle
advertising was the calm voice for a different set of values. Plus, it made you smile. The
understated style was introduced in 1959 by New York ad agency Doyle Dane Bernbach.
In a sea of hard sell, Volkswagen appeals were islands of refreshing wit that extolled its
products’ virtues with breezy self-effacement. ‘Live Below Your Means,’ advised one ad.
‘Think Small’, counselled another. One ad didn’t even bother with pictures. ‘No point in
showing you the 1962 Volkswagen,’ read the headline. ‘It still looks the same.’ One ad
portrayed a Beetle above the word ‘Lemon,’ explaining how Wolfsburg inspectors rejected
the entire car because of one blemished chrome strip on the dash. You couldn’t help
but love a company willing to kid itself in public, and no one responded more to the
Beetle or its advertising than America’s vaunted ‘baby boomers.’ As these children of post
war affluence came of age in the 1960s, they embraced Volkswagens as a way to show
rejection of what they saw as the materialism of older generations. Besides, Volkswagens
were cheap to buy and run, and they were easily fixed. Most of these kids probably didn’t
realise the Beetle was born of war, but it didn’t matter. They were too busy decorating the
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cars with flowers, ‘peace symbols,’ and psychedelic colours. Free-living hippies became
especially fond of the roomy Beetle-based Microbus because it was so easily turned into
a rolling bedroom. Yet even as ‘Beetlemania’ continued across the land, a threat was on
the horizon, and it wasn’t coming from Europe or Detroit. Though Volkswagen increased
sales throughout the 1960s to remain America’s top-selling foreign make, its share of the
import-car market withered from 67 per cent in 1965 to a less commanding 51 per cent by
decade’s end. In other words, small-car demand was still rising, but the Beetle no longer
drove it. Who was? Two little-known companies called Toyota and Datsun then starting to
sell high-quality small cars with performance, room, comfort, features and even style that
put the Beetle in the shade – and for no more money. Suddenly, the Beetle looked very
old. It still had charm, yet everyone – Wolfsburg included – knew that it could no longer be
relied upon to guarantee Volkswagen’s continued good health. After decades of unbridled
success, the Beetle was running out of time.
Branding guru David Aaker argued in a 2004 California Management Review article that
large multinational corporations such as Marriott, Microsoft and Disney leverage their
corporate brands with great success. Aaker19 asserts that product brands benefit from
the leverage they get, in terms of power and credibility, when they are associated with
corporate brands. This is because the corporate brands are often associated with a rich
heritage, marketable assets and/or capabilities, the best people, sound values that guide
organisational priorities, local and global presence, promoting good citizenship, and
exhibiting demonstrated performance (Figure 15.4).
The corporate brand finds its usefulness in the fact that it explicitly and unambiguously
presents an organisation and its products. Therefore, as a lever, the characteristics of the
corporate brand and the programmes that are based on it can help build the product
brands. That means the corporate brand can:
•• Help the organisation to emphasise its product differentiations, because the product
brand is associated with a distinct corporate brand. Especially in commoditised
markets, product and service brands tend to become similar over time, making it
hard for firms to differentiate their product/service brands.
•• Energise product brands. Again the association between corporate brand and
product brand may well allow firms to enter products into new markets or motivate
existing customers to buy more.
•• Corporate brand associations can also provide credibility. Attitudinal research in
psychology has shown the believability and persuasive power is enhanced when a
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Corporate brand levers
Heritage, assets/capabilities, people, values/priorities, local/global, citizenship, performance
Potential impact
• Organisationally based differentiation;
• Corporate programmes as branded energisers;
• Credibility-liking, expertise, trust;
• More effective management of the brand portfolio;
• Support for internal brand building;
• Provide a message to supplement the product brand;
• Support for communication to audiences such as investors, prospective
employees and political leaders;
• Provide the ultimate branded house.
FIGURE 15.4 Corporate brand levers and their potential impact
••
••
••
••
person is perceived as being trustworthy, well-liked and an expert. The same is true
for organisations. A trustworthy organisation will be given the benefit of the doubt,
an organisation will be liked because it has shown good corporate citizenship, and
an expert organisation will be seen as especially competent in making and selling
products.
A strong corporate brand facilitates the management of product/service brands.
This is especially true when the corporate brand is well-defined and established. In
such a case, marketing managers have a clear vision of what the firm stands for and
this assists product/service brand portfolio decisions.
The internal translation of the corporate brand to employees (internal stakeholders)
should be based on the mission, goals, values and culture of the organisation. The
corporate brand thus becomes the face of the firm and is the point of reference for
employees. It defines who they are and what they do. It follows that if this reference
is a positive one, positivity will be reflected in how they treat customers and other
stakeholders.
Corporate brands provide a platform for customer relationship management.
Because the corporate brand is often closely associated with certain values, it
provides the mandate for treating customers in a certain way. Moreover, it provides
a communication lever to engage with a variety of the firm’s audiences – external
and internal.
Finally, Aaker20 proposed that the corporate brand provides the ultimate branded
house. In a ‘branded house’ the company is the brand. All products and services
within that company will be subsets of the primary brand. A good example of a
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branded house is Apple, which uses a singular name across all its activities. To
all stakeholders it is known simply as ‘Apple’. It may have different categories/
divisions (iPod, Mac, iTunes, iPhone, etc) but they all have to fall under the scrutiny
of existing branding strategies and standards. In this way a products can benefit
from the synergy of their association with corporate brands.
Leveraging the corporate brand to achieve all these goals also has challenges.21 Some of
these challenges include:
•• Maintaining relevance. When Xerox wanted to leverage its brand to move into other
digital imaging devices, one of its key problems was the traditional association with
copiers. To establish new associations yet maintain brand relevance may require
specific actions and investments.
•• Creating value propositions. Not all corporate brands necessarily have a value
proposition. Some corporate brands are not much more than a name for a large
organisation. A strong corporate brand is one that will provide the value proposition
that help differentiate and support the customer relationship.
•• Avoiding visible negatives. Sometimes the ability of a corporate brand to be leveraged
is limited by negative history. For example, the Firestone tyre scandal in 2002
proved to be problematic when Firestone wanted to leverage the brand to enter
new markets.
•• Managing the brand across contexts. It is important for managers to remember
that brands must achieve consistency across various contexts. This is because,
fundamentally, brands represent a promise, and therefore firms should not be seen
to be breaking their promise.
•• Making the brand identity emerge. Over time the brand wants to develop a certain
image (aspirational associations) in the minds of its customers. For this to happen,
brand identity needs to be developed. That means that there should be priorities
in terms of which aspirational associations the brand should pursue first, and these
should be backed by strategic actions.
At a product level, leveraging the brand is also an option for the marketing strategist.
The two best-known options here are brand extensions and line extensions. Brand
extensions are new launches that use and establish brand to enter new product
categories.22 Line extensions are new launches that use an established brand for a
new offering in the same product categories.23 An example of such extensions was
when Freshpak Rooibos black tea and Five Roses black tea extended their brands into
speciality teas and the ready-to-drink (RTD) markets. The benefits of brand extensions
stem from the leverage of:
•• Consumer knowledge and trust of existing brands;
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••
••
Enhancement of the parent brand’s visibility and image;
Low marketing costs and low risk.
Also, Aaker24 notes that a key measure of a good brand extension is its ability to ‘bring
something to the party’, meaning that the extension adds value for the customer. That
is the effect of leveraging the brand.
15.6 COMPANY REPUTATION
Closely associated with the corporate brand is a good corporate reputation. This is
primarily critical because of reputation’s potential for value creation. Secondarily, the
intangible character of an organisation is what makes its replication by competing firms
considerably more difficult.
Organisations that have assets that are valuable and rare possess a competitive advantage
and may expect to earn superior returns. Simply, those whose assets are difficult to
imitate may achieve better financial performance.25 By employing this line of reasoning
we can say that intangible assets − such as good reputations − are critical not only
because of their potential for value creation, but also because their intangible character
makes replication by competing firms considerably more difficult. Such an intangible
characteristic is corporate reputation and, not surprisingly, several researchers confirm
the expected benefits associated with a good reputation. Take for instance the findings
by Landon & Smith,26 who showed how reputation influences consumer perceptions
of Bordeaux wine. A Bordeaux wine is any wine produced in the Bordeaux region of
France. Centred around the city of Bordeaux, covering the whole area of the Gironde,
and with a total vineyard area of over 120 000 hectares, makes it the largest winegrowing area in France. Average vintages produce over 700 million bottles of Bordeaux
wine, ranging from large quantities of everyday table wine, to some of the most expensive
and prestigious wines in the world, which leverage the Bordeaux wine-making heritage.
Roberts & Dowling27 highlight some key reasons for leveraging corporate reputation:
•• Because reputation is valued in its own right, customers value associations and
transactions with high-reputation firms.
•• Because reputation also serves as a signal of the underlying quality of a firm’s
products and services, consumers may pay a premium for the offerings of highreputation firms, at least in markets characterised by high levels of uncertainty.
•• A firm with a good reputation may also possess a cost advantage because, all
else being equal, employees prefer to work for high-reputation firms and should
therefore work harder or for lower remuneration.
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••
At the same time, because suppliers are less concerned about contractual hazards
when transacting with high-reputation firms, good reputations should also lead to
lower contracting and monitoring costs.
Other more indirect benefits of leveraging the organisation’s reputation include the
following benefits:
•• Potential customers receive advertising claims more favourably if the reputation of
the firm making those claims is more positive.
•• A good reputation supports and enhances sales force effectiveness, new product
introductions and recovery strategies in the event of crises.
•• Quality improvement investments yield better returns if the firm has a good
reputation.
15.7 BUSINESS RELATIONSHIPS
Businesspeople often say that doing business successfully has always been, and will
always be, driven by relationships. Today, more than ever before, leaders develop
skills to leverage casual and formally sustained relationships with clients, suppliers,
competitors and alliance partners. Central to business relationships is the idea of value
creation that we referred to earlier. This is because every party in a business relationship
entertains the old question of ‘What is in it for my organisation?’ Whether they do this
directly or indirectly or perhaps explicit or rather tactfully, all of them eventually ask
this question. The answer is that there are a number of benefits to any organisation for
building relationships. Managers can therefore use (leverage) these relationships to gain
benefit for their organisation.
Palmatier et al28 identified possible sources (variables) of leverage in business relation­
ships. Table 15.2 summarises these ‘levers’ from three different perspectives:
1. Those operating at a customer level.
2. Those operating at salesperson level.
3. Those present at firm level.
From the customer’s perspective, Table 15.2 suggests that the marketing manager
primarily wants to influence the motivation of the customer to build a strong relationship
with the seller. The rationale for this approach is obviously to build a strong relationship
with the customer and thereby locking him/her into doing business with the seller. In
addition, marketers are trying to get customers to contribute to the relationship in kind,
hence exhibiting reciprocal behaviour and deepening the relationship.
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TABLE 15.2 Potential sources of leverage in business relationships29
Perspectives
The drivers for leverage
in relationship marketing
investments
Potential leveraging variables
Customer
Factors influencing customers’
motivation have a strong customer–
seller relationship
Interaction frequency, customer
dependence, product involvement,
environmental uncertainty, relationship
proneness and customer processes for
rewarding strong supplier relationships
Factors influencing customers’
willingness to reciprocate for benefits
received
Customer commitment, possibility of
future interaction, customer stake in
the relationship, individual differences
for reciprocity, customer firm’s norms
Factors influencing the salesperson’s
ability to allocate relationship
marketing investments efficiently
Experience, adaptive selling skills,
interpersonal skills
Factors influencing a salesperson’s
motivation to allocate relationship
marketing investments efficiently
Ownership interest, sales management
attention, supervision of relationship
marketing expenditure
Factors influencing a selling firm’s
employees’ ability to allocate
relationship marketing investments
efficiently
The selling firm’s customer relationship
management programme, customer
segmentation processes, management
and tracking processes for relationship
marketing investments, employee
recruiting, training and incentive
programmes
Factors influencing a selling firm’s
employees’ motivation to allocate
relationship marketing investments
efficiently
Selling firm’s customer relationship
management programme, market
orientation, customer-centric culture,
organisational climate
Salesperson
Selling firm
From a sales perspective, the sales manager wants to make sure that relationship
resources are invested in the correct customers, hence the salesperson wants to enhance
his/her ability and motivation for making relationship management resource allocation
decisions. In short, the salesperson desires some level of control over how much time,
energy and other resources is devoted to a specific relationship.
The perspective from the selling firm is similar to that of the salesperson. Here the
selling firm also seeks to enhance both its ability and its motivation for allocating
relationship management resources.
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To summarise, marketing managers tend to leverage their business relationships in ways
that yield better sales from existing customers to allow them to enter new markets. For
example, a construction company may leverage its relationship with the directors of a
major client to also enter the residential building market by perhaps building a house
for one of the directors. That is, of course, if the director is in the market for building a
new house and willing and able to pay for it. What is important from Table 15.2 are the
many variables that can be used in achieving the leverage. It is probably impossible to
offer a complete and exhaustive list of all the leveraging variables that may or may not
exist in business relationships. The marketing strategist therefore needs to have a clear
understanding of the firm’s multiple relationships in order to make decisions regarding
which aspects of these relationships can and should be used as leverage. In this way,
marketers can find new and innovative ways to create value.
In order to fully utilise the leverage from business relationships, marketing managers
should first know that the organisation’s relationship marketing programmes work
and that their impact on bottom-line results is measurable. In addition, the ability to
document these economic returns provides managers with a stronger basis to request
resources in support of relationship marketing. Second, they should also know under
what circumstances which relationship marketing programmes can be employed
beneficially. For example, Palmatier et al30 noted that many firms may be underspending
on social programmes, while additional social investments can provide substantial profit
levers. Overall, managers should develop a profile of customers or customer segments
that can become the focus of targeted relationship marketing efforts and vary the mix of
relationship marketing programmes according to the segment characteristics.
15.8 SUMMARY
In this chapter we introduced the idea of leveraging varying aspects of the business
to achieve certain outcomes. No business has unlimited resources or possesses
all the know-how and skills it needs, therefore organisations find levers to achieve
extraordinary results with minimal inputs. Firms use leveraging to achieve a variety
of objectives, but at the core of these motivations sits the idea of value creation. This
means that fundamentally the organisation may use whatever leverage they can find to
create value for all stakeholders.
By leveraging the organisation, its brand, and/or its core competencies, firms can create
uncontested market space (blue oceans) by establishing new rules for competition.
The levers available for achieving this might be generic and include managerial and
structural aspects. From a marketing perspective, the key levers include the corporate
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brand, the reputation of the firm and the various business relationships that the firm
has. Corporate brands often represent some heritage, capabilities, people, values,
etc, that allow organisations to push their product brands into stronger competitive
positions. Similarly we noted that the reputation of a firm can, for example, lead to
significant social contributions with long-term strategic benefits for the firm. Finally, a
firm’s business relationships are the lever through which multiple layers of value can
be created, and it allows firms access to complex networks of other entities that may
represent new markets or sources of innovation.
CASE STUDY
SASOL AND BURGER KING®
Burger King South Africa, which launched in Cape Town in May, has signed an agreement
with Sasol to open restaurants at its petrol-station forecourts, starting at the end of the
year. The deal includes company-owned outlets as well as franchising opportunities to
current and potential Sasol franchisees. José Cil, president of Europe, Middle East and
Africa at Burger King Worldwide, said on Tuesday that the agreement with Sasol allowed
the group to position its brand across new channels and expand in South Africa. Burger
King SA is a joint venture between Burger King Worldwide and Cape-based, JSE-listed
Grand Parade Investments, a diversified company with interests in tourism, gaming and
leisure. Burger King SA CEO Jaye Sinclair said the deal supported the company’s growth
strategy. ‘Partnering with Sasol supports our rapid expansion plans and will enable us to
increase our growth potential in South Africa over the next few years,’ he said. According
to Sasol Oil MD Alan Cameron, working with Burger King will allow it to expand its retail
footprint in South Africa. ‘This collaboration will allow two leading brands to leverage
each other’s strengths and capabilities,’ he said. Grand Parade Investments chairman,
Hassen Adams, said there was an international trend of fuel retail groups partnering with
quick-service restaurant brands as it provided them with a point of differentiation and a
competitive advantage.
Founded in 1954, Burger King is the second-largest hamburger chain in the world. The
original ‘Home of the Whopper’, it operates in more than 12,600 locations worldwide,
serving an estimated 11-million customers daily in 83 countries. Although the local market
was competitive, Burger King was different as ‘we flame-grill our products’, Mr Cil said
earlier this year, while taste, service and cleanliness ‘are key attributes of our business and
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we think that sets us apart from the rest’. ‘We have strong plans for Europe, the Middle
East and Africa. Our next frontier as a brand and as a company is here in Africa. We’re just
getting started and the growth potential in Africa as a whole is massive,’ he said. Burger
King already has two outlets in South Africa and was to open its third on in Cavendish
Square in Cape Town. Mr Sinclair said the group planned to become the leader in the fastgrowing QSR sector in South Africa. ‘Although the competition in this sector is fierce, we
believe there is a lot of growth in the market and that our offering will find a lot of traction
in the market,’ he said.
Retailers are feeling the pinch as disposable incomes in South Africa come under pressure,
but those in the quick-service restaurant segment are being affected to a lesser degree as
consumers favour convenience and value over cost. Last year, a study from market research
firm Analytix BI said despite increasing costs eating into consumers’ pockets, South Africa’s
appetite for fast food was growing steadily — a trend attributed to ‘deliberately’ large
portions at low prices that appealed to consumers’ desire for value for money.31
Burger King®
Burger King, often abbreviated as BK, is a global chain of hamburger fast food restaurants
headquartered in unincorporated Miami-Dade County, Florida, United States. The company
began in 1953 as Insta-Burger King, a Jacksonville, Florida-based restaurant chain. After
Insta-Burger King ran into financial difficulties in 1954, its two Miami-based franchisees,
David Edgerton and James McLamore, purchased the company and renamed it Burger
King. Over the next half century, the company would change hands four times, with its
third set of owners, a partnership of TPG Capital, Bain Capital, and Goldman Sachs Capital
Partners, taking it public in 2002. In late 2010, 3G Capital of Brazil acquired a majority
stake in BK in a deal valued at US$3.26 billion. The new owners promptly initiated a
restructuring of the company to reverse its fortunes.
At the end of fiscal year 2012, Burger King reported it had almost 12,700 outlets in 73
countries; of these, 66 per cent are in the United States and 95 per cent are privately
owned and operated with its new owners moving to an entirely franchised model by
the end of 2013. BK has historically used several variations of franchising to expand its
operations. The manner in which the company licenses its franchisees varies depending
on the region, with some regional franchises, known as master franchises, responsible
for selling franchise sub-licenses on the company’s behalf. Burger King’s relationship with
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its franchises has not always been harmonious. Occasional spats between the two have
caused numerous issues, and in several instances the company’s and its licensees’ relations
have degenerated into precedent-setting court cases.
The Burger King menu has expanded from a basic offering of burgers, French fries, sodas,
and milkshakes in 1954, to a larger, more diverse set of product offerings. In 1957, the
Whopper was the first major addition to the menu; it has since become Burger King’s
signature product. Conversely, BK has introduced many products which failed to catch hold
in the marketplace. Some of these failures in the United States have seen success in foreign
markets, where BK has also tailored its menu for regional tastes. From 2002 to 2010,
Burger King aggressively targeted the 18–34 male demographic with larger products that
often carried correspondingly large amounts of unhealthy fats and trans-fats. This tactic
would eventually come to hurt the company’s financial underpinnings and cast a negative
pall on its earnings. Beginning in 2011, the company began to move away from the
previous male-orientated menu and introduce new menu items, product reformulations,
and packaging as part of 3G Capital’s restructuring plans of the company.
The 1970s were the ‘Golden Age’ of Burger King advertising, but beginning in the early
1980s, the company’s advertising began to lose focus; a series of less successful ad
campaigns created by a procession of advertising agencies continued for the next two
decades. In 2003, Burger King hired the Miami-based advertising agency of Crispin Porter
+ Bogusky (CP+B). CP+B completely reorganised Burger King’s advertising with a series
of new campaigns centred on a redesigned Burger King character accompanied with a
new online presence. While highly successful, some of CP+B commercials were derided
for perceived sexism or cultural insensitivity. New owner, 3G Capital, terminated the
relationship with CP+B in 2011 and moved its advertising to McGarryBowen to begin a
new product-orientated campaign with expanded demographic targeting.32
Sasol
Sasol is an international integrated chemicals and energy company that leverages
technologies and the expertise of its 30 100 people working in 33 countries. It develops
and commercialises technologies, and builds and operates world-scale facilities to produce
a range of high-value product streams, including liquid fuels, chemicals and low-carbon
electricity.
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Sasol’s updated value chain-based operating model has resulted in a more streamlined
organisation with three distinct groupings of activities, supported by fit-for-purpose
functions.
By combining the talent of its people together with its technological advantage, Sasol
has been a pioneer in innovation for over six decades. As market needs and stakeholder
expectations have changed, so too have its methods, facilities and products, driving
progress to deliver long-term shareholder value sustainably. The growth and enhancement
of its foundation businesses in southern Africa is complemented by the significant chapter
of growth, notably in Mozambique and the United States, it has embarked on.
Sasol recognises the growing need for countries to secure a supply of energy and chemicals.
For many countries, specifically those with abundant hydrocarbons, in-country conversion
of these resources into liquid fuels and chemicals will go a long way to boost national
economies.
Sasol’s focused and strong project pipeline means it is actively capitalising on the growth
opportunities that play to its strengths to deliver gas-based growth in sub-Saharan Africa
and North America. Its focus is on creating value sustainably.
Sasol was established in 1950 in South Africa and it remains one of the country’s
largest investors in capital projects, skills development and technological research and
development. The company is listed on the JSE in South Africa and on the New York Stock
Exchange in the United States.33
(As at 30 June 2016)
Questions
1. What managerial and structural elements of Burger King® can Sasol use to
enhance the positioning of their brand?
2. Why or why not do you support the leveraging of the Burger King® brand by
Sasol?
3. What other levers could Sasol use to build its brand?
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Self-evaluation questions
1. Explain what is meant by a value lever.
2. Use a diagram to explain a framework for strategic levers in a firm.
3. List four key aspects of value creation from a marketing perspective and then provide
an example of each that explains it.
4. Explain structural and managerial levers by using examples from the business world.
ENDNOTES
1. Tomecek, S.M. n.d. Dirtmeister’s Science and Lab on Levers. Online: http://teacher.scholastic.
com/dirt/lever/whatlevr.htm.Accessed: 28 October 2016
2. Leontief, W. 1987. ‘Input-output analysis’, In J. Eatwell, M. Milgate & P. Newman (eds),
The new Palgrave. A dictionary of economics, 2, pp 860−864.
3. Shankar, V. & Carpenter, G.S. 2012. Handbook of marketing strategy. Cheltenham: Edward
Elgar Publishing Limited.
4. Hooley, G., Piercy, N.F. & Nicouland, B. 2008. Marketing strategy and competitive
positioning. 4th ed. Edinburgh Gate: FT Prentice Hall.
5. Ibid.
6. Ibid.
7. Haeckel, S.H. 1999. Adaptive enterprise: creating and heading sense-and-respond organisations.
Cambridge: Harvard Business School Press.
8. O’Malley, P. 1998. ‘Value creation and business success’. The Systems Thinker, 9(2):1−20.
9. Ind, N., Iglesias, O. & Schultz, M. 2013. ‘Building brands together: emergence and
outcomes of co-creation’. California Management Review, 55(3):5−12.
10. Schau, H.P., Muñiz, A.M (Jr) & Arnould, E.J. 2009. ‘How brand community practices
create value’. Journal of Marketing, 73(5):30−51.
11. Ind et al, op cit.
12. Ibid.
13. Kim, W.C. & Mauborgne, R. 2005. Blue Ocean Strategy: how to create uncontested market
space and make competition irrelevant. Boston: Harvard Business Press.
14. Crittenden, V.L. & Crittenden, W.F. 2008. ‘Building a capable organization: the eight levers
of strategy implementation’. Business Horizons, 51(4):301−309.
15. Ibid.
16. Ibid.
17. Chatman, J. A. & Cha, S. E. 2003. ‘Leading by leverage culture’. California Management
Review, 45(4):20−34.
18. Trotta, M. n.d. Volkswagen Beetle (1938-1979). Online: www.classic-car-history.com/
volkswagen-beetle-history.htm Accessed: 2 November 2016
19. Aaker, D.A. 2004. ‘Leveraging the corporate brand’. California Management Review,
46(3):6−18.
20. Ibid.
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21. Ibid.
22. Aaker, D.A. & Keller, K.L. 1990. ‘Consumer evaluations and brand extensions’. Journal of
Marketing, 54(1):27−41.
23. Reddy, S.K, Holak, S.L. & Bhat, S. 1994. ‘To extend or not to extend: success determinants
of line extensions’. Journal of Marketing Research, 31(3):243−262.
24. Aaker 2004, op cit.
25. Grant, R.M. 1991. ‘The resource-based theory of competitive advantage: implications for
strategy formulation’. California Management Review, Spring:114−135.
26. Landon, S. & Smith, C.E. 1997. ‘The use of quality and reputation indicators by
consumers: the case of Bordeaux wine’. Journal of Consumer Policy, 20(3):289−323.
27. Roberts, P.W. & Dowling, G.R. 2002. ‘Corporate reputation and sustained superior
financial performance’. Strategic Management Journal, 23(12):1077−1093.
28. Palmatier, R.W., Gopalakrishna, S. & Houston, M.B. 2006. ‘Returns on business-tobusiness relationship marketing investments: strategies for leveraging profits’. Marketing
Science, 25(5):477−493.
29. Ibid.
30. Ibid.
31. Moorad, Z. 2013. ‘Burger King coming soon to a Sasol near you’. Business Day, 30 July,
9:25.
32. Online: http://en.wikipedia.org/wiki/Burger_King/ Accessed: 16 August 2013.
33. Sasol. 2016. Company Overview. Online: http://www.sasol.co.za/about-sasol/companyprofile/overview. Accessed: 31 October 2016
377
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Chapter
16
SELECTING THE
STRATEGIES FOR THE
WAY FORWARD
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Understand all the aspects of strategy formulation;
„„ Identify the steps in the strategy selection process;
„„ Explain the strengths, weaknesses, opportunities and threats (SWOT) analysis process;
„„ Understand how to evaluate the strategy chosen by the organisation;
„„ Evaluate the strategic alternatives of the organisation;
„„ Know how to decide on the correct strategy for the organisation.
16.1 INTRODUCTION
When formulating strategies, organisations must take into account the goals and
objectives of the organisation, the customers and the benefits that the customer will
receive from the organisation. There are certain steps and processes that should be
followed to ensure that the organisation develops a good strategy.
In this chapter we look at the aspects involved in developing a strategy, the steps
in formulating a good strategy and choosing the correct strategy, and evaluating the
strategy chosen by the organisation.
We will first discuss strategy formulation and what it entails.
16.2 STRATEGY FORMULATION
Strategy formulation is regarded as the stage that involves the planning and the decisionmaking that leads to the establishment of the strategic plan of the organisation. It
is the process of choosing the appropriate and most suitable cause of action for the
organisation to achieve its goals and objectives. The process provides a framework for
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actions that will result in predicted results.1 It is the processes and procedures that will
be used to implement the marketing plan.
In formulating strategies, the following should be assessed:
•• The strategic marketing objectives;
•• The desired target market;
•• The position that the organisation wants to occupy in the market;
•• The competitors and how to react to their strategies;
•• The organisation’s innovation strategies;
•• Customer relationship management;
•• The design and structure of the marketing management mix.
These factors are all discussed below.2
The strategic marketing objectives and target market of the organisation must be
assessed. The organisation should be clear on what it wants to achieve and who it wants
to reach. The specific objectives and outcomes must be identified. The different market
segments should be looked at and the organisation must decide if it wants to focus on a
specific segment of the market or to target every segment. It has to look at its available
resources and which segments will be more profitable.
The position in the market that the organisation wants to occupy is a factor that should
be assessed in formulating the strategy. For the organisation to create a competitive
position in the market, it must provide its customers with a core benefit. This benefit
will be the minimum qualification for surviving in the market. Core benefits are what
satisfy the customer’s basic needs, and the organisation should look at what core
benefits it can supply. The various types of benefits that can be offered to the customer
include the following:3
•• Functional benefits are the basic functions of the product. For example, the basic
function of a telephone is to make calls.
•• Economic benefits refer to the product features and whether the products are
financially viable. A telephone is financially viable if it can not only make calls, but
also send SMSes.
•• Process-related benefits are a result of the process, and lead to further interaction
with the customer. Vodacom, for example, will repair any damage free of charge.
•• Emotional benefits refer to the feelings or emotions that are experienced. For
example, the owner of a new Samsung S4 is excited to start using the phone.
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••
Social benefits are the feelings that individuals get when their friends, family or peers
admire their purchase, for example the feeling of pride when people admire the
owner of the Samsung S4.
The way the organisation wants to differentiate itself with regard to its competitors also
depends on the competitive advantage it has. The organisation can use two types of
competitive strategies to gain an advantage. These strategies are:4
•• Cost leadership strategy. This refers to attaining a favourable cost position within
the organisation. The organisation can set prices that are lower than those of its
competitors and gain a large market share.
•• Differentiation strategy. This strategy focuses on the performance of the organisation’s
products relative to its competitors. Differentiation can be based on the organisation’s
superior products or it can also focus on the organisation’s customer relationships.
Competitive strategies
Cost leadership
Differentiation strategy
FIGURE 16.1 Two types of competitive strategies
The organisation must then look at its ability to develop new products, how it should
prioritise for new developments, and what technologies will be needed. Innovation
can be done with regard to new products or new markets. There are four innovation
strategies that the organisation can use:
1. Market penetration strategy. This is where the organisation concentrates on
penetrating the existing market with its current products. For example, Coca-Cola
concentrates on selling its other soft drinks to the same target market.
2. Product development strategy. This strategy focuses on pushing new products into
already existing markets. Coca-Cola, for example, develops a new flavour of soft
drink and sells it to its current customers.
3. Market development strategy. With this strategy the organisation tries to penetrate
different market segments with the same product offerings. The Coca-Cola
Company will, for example, sell Coke to people of all ages and races.
4. Diversification strategy. The organisation develops new products and enters new
markets. For example, Coca-Cola develops a new energy drink and enters a new
market for energy drinks.
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All aspects of customer relationship management must be discussed. The desired
outcome of the organisation’s customer relationship management is customer loyalty.
The organisation will look at how loyalty should be established, which customers it
wants to target with its loyalty programmes, and how should it ensure customer loyalty.
The organisation must also look at how it should react to competitors and its marketing
campaigns. The organisation must look at the competitor’s actions and decide if they
will affect the organisation positively or negatively. There are four ways in which the
organisation can respond to competitors:
1. Ignore competitor’s actions.
2. Cooperate with the competitor.
3. Retaliate and plan counter-attacks against the competitor.
4. Move to a new market.
Finally, the organisation must look at the basic design and structure of its marketing
mix. The organisation will look at the product and price positioning and decide on how
it should be designed, and the size and allocation of the budget.
There are four approaches to strategy formulation:5
1. The classical approach. This approach places high importance on maximising profits
for the organisation.
2. The evolutionary approach. The evolutionary approach argues that the marketer
cannot control the market environment and therefore the strategy will be dictated
by the market itself. There cannot be one set strategy to follow and there should
always be other available options. The overall marketing strategy should form as a
result of the market environment and the competitor’s initiatives.
3. The processual approach. This approach realises the need for the detailed involvement
of the manager in every aspect of the day-to-day business of the organisation.
Planning and implementation are of high importance and need to be interlinked to
result in a good strategy and success of the organisation.
4. The systematic approach. There is no one set strategy that is applicable to all
organisations. The implementation of the strategy is an important process which is
influenced by the organisation’s environment, values, beliefs and culture.
16.3 STRATEGY FORMULATION PROCESS
There are a few steps that are useful in formulating strategy. These can be seen in Figure
16.2 and are subsequently discussed.6
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Setting objectives
Evaluating the organisation’s environments
Setting targets
Performance analysis
Choosing a strategy
FIGURE 16.2 Steps in formulating strategy
1. Setting objectives. The first step involves determining what the organisation’s longand short-term objectives are. The strategy that is developed will try to accomplish
these objectives.
2. Evaluating the organisation’s environments. The organisation’s internal and external
environment will be analysed at this stage. A review of all aspects of the organisation
must be done. This includes analysing the competitors, the market itself, suppliers,
distribution channels, etc. Analysis of the organisation and its products and
their position in the market must also be reviewed. This step is important as the
organisation is then able to identify its strengths and weaknesses.
3. Setting targets. At this stage, the organisation sets quantitative targets that can later be
measured. The organisation is then able to determine and analyse the contributions
that were made by the different departments, products or customers. Once they
have been identified, the organisation develops a strategic plan for each subunit.
4. Performance analysis. During this stage, an analysis is done of the organisation’s
past, present and desired future performance. This is done to identify any gaps that
occur between the organisation’s present and planned estimated performance, and
also to plan and estimate the future conditions of the organisation based on current
market trends.
5. Choosing a strategy. In this final step of the process, the best strategy is chosen. The
choice of strategy will depend on the goals, objectives, strengths, future potential
and the opportunities of the organisation.
In developing and formulating the organisational strategy, a number of elements must
be identified and considered. These include the environments of the organisation, the
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organisation’s resources, its past, present and future performance, and the strategic
alternatives available to it. These elements will be discussed in the sections below.
16.3.1 Environmental analysis7
The business is influenced by factors in the environment such as economic conditions,
technological advancements, and natural and global factors. It helps the business to
identify opportunities which it can then use to its advantage, and this helps prevent
threats that may occur. This is why conducting an analysis of the environment is
important.
Objectives of environmental analysis are the following:
•• To understand the changes that may occur in the environment;
•• To provide information that can be used as input for decision-making, and
information of the various alternative decisions that are available to the organisation;
•• To identify potential opportunities and threats, and strengths and weaknesses so
that the organisation can develop appropriate strategies;
•• To ensure that the organisation’s resources are being used effectively.
Strengths, weaknesses, opportunities and threats (SWOT) analysis
The SWOT analysis provides information about the organisation’s strengths and
weaknesses in relation to the opportunities and threats. The SWOT analysis helps the
organisation to build on its strengths, turn its weakness into strengths, maximise and
take full advantage of the opportunities and overcome threats. The process helps to
identify the core competencies of the organisation and to set up the objectives for
strategic planning.
The elements of SWOT are given in Figure 16.3 and will subsequently be discussed:8
•• Strengths. This involves analysing the internal environment of the organisation.
The strengths refer to the qualities of the organisation that accomplish the
organisation’s mission and that sustain the success of the organisation. It is a
source of competitive advantage for the organisation. The organisation’s strengths
can include technological advancements, financial resources, production facilities,
human resources and its marketing capabilities. For example, companies such as
Apple Inc. are continuously developing new technologies. This is seen as their
strength and is used as their competitive advantage.
•• Weaknesses. The weaknesses of the organisation refer to those aspects that
are detrimental to the organisation. They prevent the accomplishment of the
organisation’s missions and objectives, and prevent it from achieving its full potential.
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Strengths
Opportunities
Weaknesses
Threats
FIGURE 16.3 SWOT analysis
••
••
This results in poor performance in comparison to the organisation’s competitors.
Weaknesses include aspects such as insufficient research and development, old
machinery, narrow product range and poor management. Debt, as well as large
turnover rates of employees, can also be weaknesses to the firm.
Opportunities. This refers to favourable conditions that arise within the organisation’s
environment. These opportunities can be used to gain a competitive advantage and
generate extra income. The increase of social media and technology advancements
can help organisations use this new technology to communicate directly with
specific customers.
Threats. This refers to unfavourable conditions that arise in the organisation’s
environment and create risks for the organisation. Threats that arise can affect
the stability and profitability of the organisation. Threats can occur in the form of
increasing competition, employee conflict and changes in government regulations.
Table 16.1 shows the benefits and limitations of conducting an analysis of the
organisation’s environment.9
16.3.2 Resource analysis
The resources of the firm are those elements that contribute to the generation of added
value for the firm. These resources can be divided into three main categories which
include the following:10
1. Tangible resources. These are the physical resources of the firm and include assets
such as land, vehicles and machinery.
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TABLE 16.1 B enefits and limitations of conducting an analysis of the organisation’s
environment
The benefits of conducting an analysis
of the environment
Limitations of the environmental
analysis
It helps to frame organisations’ policies.
Organisations should adjust and change their
policies according to the changes that occur in
the environment.
The analysis conducted focuses on activities
in the current environment. Events can occur
unexpectedly within the environment which
affect the results of the analysis.
The analysis will help the organisation in
effectively and efficiently using its resources.
The environmental analysis is one of the factors
in formulating the business strategy and cannot
assure the success of the organisation.
Organisations are able to analyse competitors’
strategies and develop countermeasures.
Data that is used to forecast the future
performance of the organisation must be
accurate to result in a reliable analysis.
It identifies the strengths, weaknesses,
opportunities and threats that may affect the
organisation and its operations.
The environmental analysis sometimes results in
the organisation becoming too careful and it can
miss opportunities that appear to be too risky,
but may be beneficial to the organisation.
It provides input for managers when making
important decisions and helps them to monitor
any changes that may occur in the organisation’s
internal environment.
2. Intangible resources. These are the non-physical elements that provide value to the
firm, such as the name or brand, patents and technology.
3. Organisational capacity. This includes aspects of the business such as human capital,
management skills and regulations.
Resources of the firm are important, as this can be a source of competitive advantage.
Not all of the firm’s resources are valuable and can be used as competitive advantage.
Resources are considered to be competitive advantages when they are:11
•• Valuable. Resources are considered to be valuable when they are able to help the
organisation take advantage of any opportunities that arise − they also help the
organisation to eliminate any threats that it may face.
•• Rare. This is when the resource is not readily available and not many competitors
have it or are aware of it.
•• Costly to imitate. Other firms cannot acquire the resource, or the resource is too
costly for competitors to imitate.
•• Non-substitutable. The resource has no structural or strategic equivalents.
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16.3.3 Performance analysis
A comprehensive evaluation of the firm’s present, past and future performance is
necessary, as it identifies areas of strengths and weaknesses within the firm. It determines
if the organisation is performing well and it identifies aspects that need to be developed
and improved.12
The criteria used to evaluate the organisation’s performance should be timely and
accurate. They should be understandable by all staff, and should also be realistic,
attainable and flexible.13
There are various tools that can be used to assess the performance of an organisation.
Two of the more popular tools are the following:14
1. Gap analysis, which makes use of measurement gaps that occur between the actual
performance of the firm and the expected performance.
2. Balanced scorecards, which make an evaluation of the organisation based on the
finance of the organisation, the internal processes and the growth of the organisation.
16.3.4 Strategic alternatives
The strategic alternatives refer to the different courses of action that the organisation
can use. There are various methods used to generate alternative strategies for the
organisation, such as brainstorming, having special meetings with managers, acquiring
the assistance of consultants to help generate alternatives, and meetings with the
consultant and the managers from the organisation.15
The organisation must select the best alternative strategies and from these few it must
select the best one. There are two factors used to evaluate the alternatives, namely:
1. Objective factors.
2. Subjective factors.
Objective factors are the facts or rational factors, and subjective factors refer to the
descriptive factors such as feasibility and consistency of the strategy.16
There are five elements in evaluating strategic alternatives:17
1. Consistency. The strategic options must be consistent with the organisation’s vision,
mission and goals.
2. Validity. The expectations of the strategy must be valid and must include the future
business environment, competition of the organisation, customers and supplies.
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3. Feasibility. The strategy must be capable of realising the vision, mission, and goals
and objectives of the organisation.
4. Risk. The potential risk of the strategy must be analysed, and management must
decide if the risk is worth the profits it will bring in.
5. Flexibility. The strategy must be flexible enough to adapt to the constant changes in
the internal and external environment of the business.
16.4 STRATEGY EVALUATION
Timely evaluations of the business strategy can alert managers to problems that they did
not know about or potential problems that may arise. The purpose of the evaluation
is to determine and appraise the effectiveness of the strategy. It can be defined as the
process of evaluating the effectiveness of the organisation’s strategy in achieving its
goals and objectives.18
The process of strategy evaluation consists of the steps outlined in Figure 16.4 and
these steps are subsequently discussed.19
Fixing the benchmark for performance
1
Measuring performance
2
3
Analysis of discrepancies
Corrective action to be taken
4
FIGURE 16.4 Steps in strategy evaluation
••
Step 1: Fixing the benchmark for performance. In the analysis, the organisation must
determine the requirements for performing its essential tasks. The performance
criteria that best indicate the requirements for the optimum performance of these
tasks can then be used to evaluate the performance. The organisation can use
criteria such as net profit, return on investment (ROI), earnings per share and rate
of employee turnover to assess the performance. A subjective evaluation of the
skills and competencies, and its flexibility and potential growth of the organisation
can also be used as criteria in assessing the business performance.
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••
••
••
Step 2: Measuring performance. The actual performance of the organisation will be
compared to the standard performance in the market. Flexible objectives must be
set to which measurement of performance can be done.
Step 3: Analysis of discrepancies. Variances between the organisation’s actual
performance and standard performance must be analysed, and the limits to which
the degree of the actual and standard performance differs must be set. If the
discrepancies are too large, the cause of the deviances must be analysed so that the
organisation can take corrective action.
Step 4: Corrective action to be taken. The organisation has now determined that
there is a deviation in its actual and standard performance. It must now take
corrective action to rectify the situation. During this phase, the strategy can also
be reformulated.
There are several criteria used for the strategy evaluation:20
•• Consistency. The strategy must be consistent with the goals and objectives of the
organisation. The organisation’s internal operations must be in line and consistent
with the resource allocation process of the organisation.
•• Feasibility. The strategy must be practical and must be able to use the available
resources of the organisation. Aspects such as the resources available and the
resources needed must be looked at. The organisation must also determine if the
strategy can be integrated by the managers and if it will motivate the employees in
the organisation.
•• Advantages. The strategy must create a competitive advantage for the organisation.
The organisation should look at its costs relative to the competition, the positioning
it has in the market compared to the competition, and the economic value that the
organisation gains in relation to its competitors.
•• Solidarity. The strategy must be able to assist the organisation in adapting to its
environment. To assess the compatibility of the organisation within the market
environment, the following factors should be considered:
–– Does the organisation have appropriate boundaries?
–– Who are the current and potential clients/customers of the organisation?
–– How does the organisation create value and attract customers?
–– What are the cost drivers and benefits of the different segments that the
organisation targets?
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Evaluation techniques
Evaluation techniques are used after the marketing plan has been finalised, and are
used to analyse the success of the marketing plan in achieving the goals and objectives
of the organisation.
There are two techniques that are used to evaluate the performance of the marketing
strategy. These are illustrated in Figure 16.5 and subsequently discussed.21
Evaluation techniques
Sales analysis
Marketing cost analysis
FIGURE 16.5 Evaluation techniques
1. Sales analysis. The sales figures are an indication of the success of the firm in the
market. The sales analysis is done by looking at the current sales and comparing
them to the forecast sales, the sales of competitors or to the cost acquired to achieve
the sales.
2. Marketing cost analysis. The cost of all marketing activities are analysed, and the
organisation categorises the activities based on the cost in relation to the sales.
The cost incurred is also compared to the previous year’s costs, cost incurred by
competitors and the average cost in the market.
16.5 CHOICE OF STRATEGY
16.5.1 Factors that influence the choice of strategy
Choosing the correct strategy for the organisation is important, as the strategy must be
compatible with the business objectives and it must be able to carry out the organisation’s
goals. There are several factors to consider when choosing the correct strategy:22
•• Corporate governance is an important factor in the strategy development of an
organisation. It refers to the social and environmental activities of the organisation
and how these activities impact on the organisation’s environment.
•• Past strategies of the organisation will have a great influence on the choice of the
new strategy. These strategies are integrated into the organisation and are much
more difficult to replace.
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••
••
••
••
••
External factors such as suppliers, customers and competitors that influence the
organisation’s operations must be considered in choosing the correct strategy. The
organisation will have to choose a strategy that will maintain and enhance these
relationships.
The organisation’s attitude towards risks will influence the type of strategy chosen.
If the organisation is more willing to take risks, its strategic choices will be vast. If it
has a negative attitude towards risks, its strategic choices will be limited.
The attitude and personality of the manager who makes the decisions with regard
to the organisation’s strategy will influence the type of strategy chosen.
The strategy chosen must be carefully analysed to make sure that it is aligned with
the organisation’s mission, vision, goals and objectives.
Timing is important, as a good strategy that is implemented at the wrong time will
not produce results.
16.5.2 Criteria for selecting the correct strategy
The criteria used to evaluate and choose a strategy are very important in the performance
of the organisation. The criteria for selecting the correct strategy can be divided into
financial, which measure the efficiency of the strategy, and non-financial, which measure
the effectiveness of the criteria.23
The financial measures include:24
•• The profits and the profitability of the organisation;
•• The cash flow within the organisation;
•• Shareholder returns;
•• The organisation’s earnings;
•• Return on sales;
•• Earnings per share.
These measures are compared to the organisation’s past performance, the market
average, and the competitors of the organisation.25
The non-financial measures include aspects such as:26
•• The market share of the organisation;
•• The sales volumes;
•• The competitive advantage that the organisation has over its competitors;
•• The position that the organisation occupies within the market;
•• New product developments;
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••
••
••
The extent of customer satisfaction;
The market penetration;
The image the market has of the organisation.
CASE STUDY
STANDARD BANK – CEMENTING STANDARD
BANK’S BRAND IN THE MIDST OF THE GLOBAL
RECESSION27
At a time when many organisations were focusing on leveraging resources and cutting
budgets due to global recession, Standard Bank was poised to cement its brand in the
minds of consumers, stakeholders and employees globally. Now more than ever, it was
critical that the group’s strategy and vision was clearly understood and articulated across
all geographies, and that the marketing strategy was aligned to the refined group strategy.
This proved to be no small feat, as it was critical to take the brand to new heights both
internally and externally. In conjunction with business units, a strategic plan was developed
to communicate the group’s strategy and positioning to all its markets of operation. Its
conception began in September 2008, with an evaluation of the external environment,
global and in-country competitors, resulting in a brief to the group’s advertising agency,
TBWAH/Hunt Lascaris (TBWA/).
In response to the brief TBWA/ initiated a global SWOT process. This was a first for
Standard Bank, as previous campaigns had all been developed and implemented on an
individual, in-country basis under the monolithic brand, but with little focus on ideas that
could stretch across markets and geographies.
Phase one comprised a gathering of creative directors from eight markets across the
world, ranging from South Africa, Turkey, Singapore and Nigeria. Pooling their universal
insights resulted in a big idea and unique style that could position Standard Bank in the
multinational context. Phase two of the SWOT process sees this idea being developed
into local market campaigns, comprising product and sponsorship messages supported by
internal messaging. The central ‘theme’ for the marketing campaign to position Standard
Bank as making the right connections to move its customers and clients forward in an
emerging market world was born. This underpinned Standard Bank’s pay-off line ‘Moving
Ü
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Forward’ and highlighted the opportunities that exist in emerging markets − demonstrating
how Standard Bank ‘connects Africa to the world and the world to Africa’.
Questions
1. Develop a SWOT analysis for Standard Bank.
2. What strategy did Standard Bank choose?
3. What factors could have influenced the choice of strategy that was chosen?
16.6 SUMMARY
Strategy formulation leads to the establishment of the organisation’s strategic plan for
the organisation. This strategic plan must be aligned with the organisation’s goals and
objectives to be successful.
There are various steps in the strategy formulation process. These include setting
the objectives, evaluating the organisation’s environments and setting targets for the
organisation. It also involves analysing the organisation’s past performance and choosing
the appropriate strategy.
When selecting a strategy, several factors must be considered. These strategies include
the timing of strategy, the organisation’s corporate governance and its past strategies.
Evaluating the chosen strategy on a regular basis will help the organisation to identify
potential problems and problems that it did not know about. The organisation’s external
environment and the attitude of top management towards taking risks must also be
looked at.
Self-evaluation questions
1. Why is strategy formulation important?
2. Discuss the different approaches of strategy formulation.
3. What are the elements that must be considered when formulating a strategy?
Explain each one.
Ü
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4. Name and explain the process of evaluating strategy.
5. What are the factors that influence the choice of the strategy?
ENDNOTES
1. The Saylor Foundation. 2013. Strategy formulation. Online: http://www.saylor.org/site/wpcontent/uploads/2013/02/BUS208-7.3.1.1-Strategy-Formulation-FINAL.pdf/ Accessed: 26
June 2013, p 1.
2. Universitate Mannheim. 2008. Formulation, evaluation and selection of marketing strategies.
Online: http://homburg.bwl.uni-mmannheim.de/marketing_textbook/pdf/Free_
Chapter_4.pdf/ p 68.
3. Ibid.
4. Ibid.
5. Based on Gilligan, C. & Wilson, R.M.S. 2013. Strategic marketing planning. London:
Macmillan Publishing Solutions, p 47.
6. Management study guide. nd. Steps in strategy formulation process. Online: http://www.
managementstudyguide.com/strategy-formulation-process.htm/ Accessed:
26 June 2013.
7. Jain, T.R., Trehan, M. & Trehan, R. 2010. Business environment. New Delhi: V. K. India
Enterprise, p 22.
8. Ibid, p 23.
9. Ibid, p 26.
10. Hill, C.W.L. & Jones, G.R. 2013. Strategic management: an integrated approach.
10th ed. Ohio: South-Western Cengage Learning, p 86.
11. Based on Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2013. Strategic management:
competitiveness and globalization. 10th ed. Ohio: South-Western Cengage Learning,
p 16.
12. Wendel, C. 2013. Company performance analysis. Online: http://www.ehow.com/
facts_6786595_company-performance-analysis.html/ Accessed: 26 June 2013.
13. Modern, T. 2007. Principles of strategic management. Surrey, UK: Ashgate Publishing
Limited, p 297.
14. Wendel, op cit.
15. Rao, C.A., Parvathiswara, R. & Sivaramakrisn, K. 2008. Strategic management and business
policy. New Delhi: Excel Books, p 260.
16. Ibid, pp 241.
17. Economist Intelligent Unit. nd. Guide to business planning. Online: http://lostlagoon.info/
Planning/18.pdf/ Accessed: 26 June 2013.
18. Slideshare.net. nd. Strategic evaluation & control. Online: http://www.slideshare.net/
RADHEY06/strategic-evaluation-and-control/ Accessed: 26 June 2013.
19. Management study guide.com. nd. Strategy evaluation process and its significance. Online:
http://www.managementstudyguide.com/strategy-evaluation.htm/ Accessed: 26 June 2013.
20. Gwin, C.R. 2000. A guide for strategy evaluation. Online: http://faculty.babson.edu/gwin/
indstudy/strategy.html/ Accessed: 26 June 2013.
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21. Pride, W.M. & Ferrell, O.C. 2013. Marketing. 17th ed. Connecticut: Cengage Learning, p
54.
22. Based on Smit, P.J., Cronje, G.J., Brevis. T., Vrba, M.J. 2011. Management principles:
a contemporary edition for Africa. Cape Town: Juta & Co, p 123.
23. Fifield, P. 2007. Marketing strategy: the difference between marketing and markets.
Amsterdam: Elsevier Ltd, p 257.
24. Ibid.
25. Rao, et al, op cit, p 527.
26. Fifield, op cit, p 258.
27. Van Heerden, C.H. 2013. Contemporary retail and marketing case studies. Cape Town: Juta
& Co, p 137.
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Chapter
17
STRATEGY
IMPLEMENTATION
AND CONTROL
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Discuss the concept of strategy implementation;
„„ Understand the importance of strategy implementation;
„„ Name and explain the six components that influence the effective implementation of
strategies;
„„ Name and explain the various approaches of strategy implementation;
„„ Explain the barriers of strategy implementation;
„„ Discuss the concept of strategy evaluation and control;
„„ Name and discuss the strategy evaluation and control process;
„„ Explain the various evaluation/control techniques that organisations can utilise to
determine the effectiveness of a strategy;
„„ Explain the significance of strategy evaluation and control for any organisation.
17.1 INTRODUCTION
Many marketers are of the opinion that planning is the easiest part of strategic
development, but this is not at all the case in reality. The importance of knowing where
an organisation is heading is sometimes just as crucial as knowing how the organisation
will get there.1 It is one thing for a manager to sit down with a blank piece of paper
and develop an outline for strategy planning, but the implementation, evaluation and
control are just as valuable in determining the success or failure of the strategy, and
ultimately the entire organisation.2 A well-planned strategy is doomed to failure if one
does not know how to implement the strategy properly. As a result, the plan remains
merely an idea or thought on a piece of paper.3
Implementation is crucial to the success or failure of any organisation, and throughout
the years businesses have emphasised strategic planning at the expense of strategic
implementation.4 Traditionally, management was of the opinion that strategic planning
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by itself was the key to business success, but even though this rationale is logical, many
organisations are not geared for or prepared to deal with the realities of effectively
implementing the strategy.5 It is clear that planning and implementation cannot be
separated, and if the strategy is not implemented, planning is useless. In this chapter,
the focus will be on the critical role of strategy implementation, evaluation and control
in any organisation.
The chapter focuses on those issues that impact on the implementation of strategies. It is
the responsibility of management to be mindful of how it will integrate the plans it has
devised with the actual execution of these strategies by, amongst others, evaluating the
effectiveness of the different approaches of strategy implementation. The components of
strategy implementation will be discussed first, followed by the various implementation
approaches and the barriers influencing the effective implementation of strategies. Lastly,
the evaluation and control of the strategy implementation processes are discussed in
order to understand the successes and failures of the strategy implemented and to be
able to take the necessary corrective steps in the process. However, first we will define
what is meant by strategy implementation.
17.2 DEFINING STRATEGY IMPLEMENTATION
We all know that planning without implementation is a recipe for disaster, and is costly.
According to Olsen,6 implementation refers to the process of turning strategies and
plans into action so as to achieve the objectives and goals of the organisation. Strategy
implementation is therefore a fundamental component of the strategic development
process and it involves the logical arrangement of strategies into action.7 MacLennan8 is
of the opinion that strategy implementation can be defined as:
… the action that moves the organisation along its choice of routes towards its goals
– the fulfilment of its mission, the achievement of its vision, and the realisation of its
intentions.
More simply put, the implementation strategy refers to what the organisation is going to
do.9 In essence, strategy implementation is the summation of activities in which people
use various resources according to a plan, with the purpose of attaining the objectives
of the strategy and achieving the overall goals of the organisation.10
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From a marketing perspective, strategy implementation refers to:
… the process of executing the marketing strategy by creating and performing specific actions
that will ensure the achievement of the organisation’s marketing objectives.11
As is clear from the opinions of these different authors, the common aim of strategy
implementation is the meeting of the goals and objectives of the organisation. This
implies that the lack of proper strategy implementation may mean that the organisation
will not meet its objectives, as the needs of the consumers may not be met resulting in
their abandoning the organisation for others who might meet their needs more. More
specifically, poor strategy implementation will result in the organisation failing to reach
its organisational goals and objectives.12
The remainder of this chapter will focus on the effective implementation of strategies
and ways of evaluating and controlling the marketing activities of the organisation to
determine whether its marketing goals and objectives have been achieved.
17.3 THE IMPORTANCE OF STRATEGY IMPLEMENTATION
In many organisations the focus is mainly on strategic planning as opposed to the
management of the implementation process. In so doing, many organisations tend to
forget that implementation actually establishes whether the strategy is successful or not.13
Implementation is often the catalyst in the improvement of business performance, but
it is also in many instances seen as one of the most difficult challenges facing managers
today. Strategy implementation has become the Achilles heel for many organisations,
and many managers have learnt their lesson − they do not underestimate the importance
of strategic intent any more.14 As many organisations fail to implement new strategic
initiatives, the biggest challenge now lies in achieving the necessary changes.
Given the significance and implications of weak or no implementation, the focus
of strategic management has now shifted from the formulation of strategy to the
implementation thereof.15 According to some sources, successful implementation
depends on strategy formulation, communication, monitoring and management of the
implementation process.16 Regardless of the significance and importance of strategy
implementation, it must be emphasised that the development of a strategy, and the
implementation thereof, is an integrated process in which superior coordination and
performance are essential.
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17.4 THE EFFECTIVENESS OF STRATEGY IMPLEMENTATION
An important part of the strategic management process in any organisation is the
effective implementation of strategies. This is also referred to as implementation with
intent and as such must be handled with the attention it deserves. There are a number
of components that organisations should be aware of to ensure that their planned
strategies are implemented effectively and successfully,17 and this means that a number
of organisational issues need to be considered.18 Some of these fundamental issues,
which impact on the effectiveness of strategy implementation, have been identified
as the organisational structure, resources, people (human resources), organisational
culture, leadership, and systems and processes. The components determining the
effectiveness of strategy implementation are illustrated in Figure 17.1 and subsequently
discussed further on.
Organisational
structure
Systems and
processes
Resources
Effectiveness
of strategy
implementation
People
(human
resources)
Leadership
Organisational
culture
FIGURE 17.1 Components determining the effectiveness of strategy implementation
17.4.1 Organisational structure
The structure of an organisation has an indirect influence on strategy implementation.
The organisational structure is important in strategy implementation, as it determines
the degree to which delegation is inspired and decision-making is enabled in the
organisation.19 It provides a framework within which the strategy must be implemented
to achieve the goals of the organisation; it also identifies, groups and coordinates the
tasks that are necessary for the strategy implementation.20 It is therefore essential
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that the organisation has a clearly defined mission and strategy, as well as a thorough
understanding of this strategy in order for implementation to be effective.
The organisational structure must be such that it enables the systematic coordination
of resources and activities in order to implement the strategy effectively. It is also true
that the organisation’s structure can have an effect on the type of strategy that can
be implemented, therefore the structure of the implementation team should reflect
the needs of the strategy, while assisting with the integration of the team with the
organisation’s structure that is already present.21
17.4.2 Resources
The resources of an organisation can include a range of belongings (that is, resources)
that can and will be integrated in a certain way during the implementation of strategies.
These resources to be used can be tangible or intangible in nature. Tangible resources
refer, amongst others, to the buildings, monetary resources, technology, machinery,
material, manufacturing equipment and storage facilities. Intangible resources, on the
other hand, refer, amongst others, to the assets, such as customer and brand loyalty,
corporate citizenship and external stakeholder relationships.22 The existing resources
of the organisation, including the reputation of the organisation and the support of
the organisation’s branding programmes, are crucial in determining the effective
implementation of the strategy.23
Despite the various types of resources accessible to organisations, the quantity of available
resources is as important to the success or failure of the strategy implementation. An
honest and decisive evaluation of the available resources during the planning stages of
strategy formulation can help to ensure that the strategy implementation is within the
realm of realistic possibilities.24 It is therefore crucial for management to keep up to date
with the different resources available during both the planning and implementation
process of the strategy.
17.4.3 People (human resources)
In spite of the information age, the importance of people in strategy implementation
cannot be overlooked, as the effectiveness of strategy implementation is directly affected
by the quality of the people in the organisation who are involved in the planning and
implementation process. The people referred to include top management, middle
management, lower management and non-management, who all play different roles
in the strategy planning and implementation process.25 Management must ensure that
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the right people are on board, and the right people include those with the required
competencies and skills26 to create and ensure the successful, sustainable and
competitive planning and implementation of strategies.27 In order to create and ensure
the correct strategy over the long term, management should place specific emphasis on
the expertise, skills and capabilities of human resources.28 This is where the planning
process is important, as provision has to be made to expand employees’ skills by means
of training, recruitment and new competencies as required by the strategic plan.
17.4.4 Organisational culture (shared goals and values)
The prevailing culture in an organisation can make or break any plan and the
implementation strategy. The organisational culture is important in determining the
effectiveness of strategy implementation, as it defines the nature in which a strategy
is developed and implemented.29 Any organisation is developed around a clear set of
shared goals and values in the form of a mission statement and objectives. A mission
statement refers to:
… the broadly stated definition of the organisation’s basic business scope and operations
that distinguishes it from similar types of organisations.30
These shared goals and values are implemented to ensure that every employee from
various departments can contribute effectively to the success of the organisation.31
Creating a strong organisational culture − that is embraced by all employees − is a long
and difficult process, but the potential benefits to the organisation are high.32
17.4.5 Leadership
Leaders are the driving force within any organisation and are therefore a fundamental
part of the strategy implementation process. Leadership entails the delegation of
authority to subordinates, coordinating tasks and activities, communicating on all
levels of the organisation, and the establishment of a corporate culture that is conducive
to the attainment of the overall objectives of the organisation.33 A leader should provide
the strategic vision that needs to be articulated and help to motivate employees in order
to achieve greatness. Leaders must also be able to anticipate, envision and maintain
flexibility throughout the implementation process.34
In order to get and keep employees motivated, the leaders on all levels of management
must themselves be motivated in order to see that the strategic objectives of the
organisation are met.35 The influence of strong leaders within an organisation cannot
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be denied, as they have the ability to understand the deepest needs and requirements
of employees, and in so doing motivate them.36 Strong leaders encourage employees
to look beyond short-term problems or objectives, and to rather focus on setting the
long-term decisions and plans of the organisation.37 Leaders are furthermore also
responsible for instilling the values of organisational culture,38 and allowing employees
to feel that they can freely communicate their views and opinions to all employees
and management.39 True leaders do not have to use their power to manage employees,
but rather aim to inspire through their words and actions. The most important aspect
of leadership is to ensure that the set goals are achieved, but in the event that failure
occurs, leaders will motivate and refocus staff.
17.4.6 Systems and processes
Systems and processes refer to the:
… collection of work activities that absorb a variety of inputs to create information
and communication outputs, and to ensure the consistent day-to-day operations of the
organisation.40
These systems and processes include, for example, manufacturing processes, control
systems, data-capturing devices and information systems. As many organisations
have become more customer-centric, many of these systems are outsourced to other
organisations. Nevertheless, each organisation is responsible for monitoring and
evaluating the results produced by systems (or people) that are subcontracted.
In the previous sections we have discussed six components that can determine the
effectiveness of strategy implementation. Organisations should ensure that the abovementioned components are correct and available to ensure the success of the strategy
planning and implementation process. There are, however, a number of ways in which
organisations can approach the process of strategy implementation; some of these are
discussed in the next section.
17.5 IMPLEMENTATION APPROACHES
There is no correct or single way for strategy implementation. Various options and
methods are available for doing this, but this does not mean that there will be a different
outcome – in essence, irrespective of the method followed, the same outcomes should be
achieved by all. Phadtare41 identifies the five C approaches to strategy implementation:
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Command, Change, Consensus, Culture and Crescive. These are summarised in Figure
17.2 and are subsequently explained.
Implementation by
Command
Implementation
through Change
Implementation as
organisational Culture
Implementation
through Consensus
Implementation
through Crescive
FIGURE 17.2 Strategy implementation approaches42
17.5.1 Implementation by command
The fundamental principle for implementation by command is:
Strategies are developed at the top of the organisational hierarchy and strained downward
to lower levels where lower-level or non-managerial employees are forced to implement
these strategies.43
This approach is based on the principle that top management takes the responsibility
of planning and setting strategy, and then tells or commands what lower-level or nonmanagerial levels must do to implement the strategy. From this approach, there is a
division between the decision-makers and the ones who implement these decisions.
An advantage of this approach is that the process of planning and implementation is
expedited. Unfortunately, due to the lack of input from employees and the fact that
lower level management, who are in direct contact with customers, have little say in
strategy development, the motivation and morale of employees can be affected.44 This
lack of consultation or buy-in may impact on the willingness of employees to carry
out their responsibilities. This approach is questionable as a universal approach, as
there is a disconnection between top management, the lower-level employees and the
customers.45 The command approach is, for instance, quite popular in the franchising
businesses, where top management develops the plan and each franchise has to
implement it accordingly. In such a case, there is merit in using the command approach
as it ensures uniformity and the same standards overall.
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17.5.2 Implementation through change
The fundamental principle for implementation through change is:
The organisation modifies its current systems and structures to ensure the strategy is
implemented successfully.46
The change approach involves the adaptation and modification of current
organisational systems and structures by management to ensure the effectiveness of
strategy implementation.47 Changes made to organisational structures are, for instance,
outsourcing departmental responsibilities (for example, human resource services) or
appointing new personnel to take over a division. The amendment of amalgamations
and acquisitions are also examples of using the change approach to implement certain
strategies.
This approach is different from the command approach, in the sense that top
management is required to surrender some of its control so that the organisation
can be restructured in a way that will benefit the implementation of strategies.48 The
disadvantage of the change approach is that it is a very time- and resource-consuming
method. Some organisations may, however, be vulnerable to environmental change,
meaning that as management is involved in effecting these changes to its structures
and systems, the market environment could undergo some drastic changes that may
impact on the new structure of the business. Further to this, it is not always easy to
secure change, and a dynamic and credible leader is required to guide the organisation
through these changes and the challenges they may bring.
17.5.3 Implementation through consensus
The fundamental principle for implementation through consensus is:
Managers from various departments come together to brainstorm and develop an effective
marketing strategy. Through collective agreement, a consensus is reached as to the overall
direction of the organisation.49
The main idea behind the consensus approach is that managers, from top and lowerlevel management in different departments, collaboratively participate in the strategy
planning and implementation processes.50 This approach allows for the managerial
representation from different departments to reach a consensus and collectively solve
strategic issues. Parties from each department combine their skills and expertise in
sharing their knowledge, perspectives, opinions and suggestions in order to develop a
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feasible strategic plan.51 In this approach, top-level management is responsible for the
supervision of the process, to ensure the most effective strategy is developed and will
be implemented effectively.
The consensus approach is a useful method when there is widespread acceptance of
the goals, and the issues involved are not controversial. This approach is particularly
beneficial to departments that could be negatively affected by the implementation of a
specific strategy, as it provides them with the opportunity to air their views and creates
the feeling that they are part of the solution.52 Implementation through consensus is a
useful method where there is a high level of interaction between front-line employees
and customers, as is found especially in service businesses.
A disadvantage of this method is that it can be time-consuming to consult widely and
to seek the input of others. This also implies that top management needs to be fully in
control of brainstorming sessions in order to give direction and value to opinions. Not
everybody’s ideas can be entertained and implemented, and therefore top management
should play an important role. For this approach to work, open horizontal and vertical
communication channels are needed, because, if communication channels between
employees and their superiors are too rigid and strict, instructions will be lost in
translation and the strategy will not be implemented effectively.53
17.5.4 Implementation as organisational culture
The fundamental principle for implementation as organisational culture is:
The strategy is part of the overall mission and vision of the organisation; therefore, the
strategy is embedded in the organisation’s culture. Continually manage the culture of the
organisation to ensure all employees are vested in the organisation’s strategy.54
The organisational culture is another approach that can be used as the driving force in
determining how a specific strategy is planned and implemented. Under this approach,
strategies and the implementation thereof become extensions of the organisation’s
mission, vision and objectives. Organisations that use this approach are focused on
making sure that their employees are not only aware of their mission and vision, but
that they strive to accomplish every task assigned to them with this mission and vision
in mind.55 It is argued that the execution of strategies, according to an organisation’s
mission, will come naturally to personnel if they see the bigger picture.
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If organisations succeed in achieving the buy-in from staff regarding the values, mission
and vision, they actually assist in the empowering of their staff, as these employees will
be more aware of the place and role they fulfil in the organisation and as such be more
effective in implementing strategy. In organisations with decentralised organisational
structure, this method can be effective, because an element of trust is already embedded
in employees to make decisions.
Unfortunately, instilling an organisation’s culture and values into employees is not a
quick process and takes considerable time, effort and financial resources. All levels of
management must be committed to this process if it is to be successful. The rewards will,
however, be seen in the increased efficiency that will happen in the implementation. On
the other hand, adopting such an approach too soon or quickly can lead to problems
in the organisation as well. This usually happens if the approach is vastly different from
what employees are used to.
17.5.5 Implementation through crescive
The fundamental principle for implementation through crescive is:
The crescive approach emphasizes the importance of a bottom-up, learning approach to
strategy development.56
The crescive (meaning ‘increase’ or ‘growth’) approach addresses the question: How can
managers be encouraged to develop, champion and implement sound strategies?57 In
this approach the manager does not merely focus on strategy planning and implementing
by him- or herself, but actively seeks the input of employees as well as encouraging
them to implement their own strategies. Rather than a top-down approach, the crescive
approach is a bottom-up one, since it relies on input from the lower levels, whose input
moves upward to top-level management.58
This approach is advantageous, as it encourages lower- and middle-level managers
to develop suitable and workable strategies, and if found acceptable, is given the
opportunity to implement these strategies. This fact has a strong influence on lowerand middle-level management’s commitment to the strategy implementation.
Apart from the advantages of employing the crescive approach, there are also
disadvantages or limitations to this approach. First, one inhibiting and even demoralising
disadvantage may be due to a lack of resources. Even though good solutions may be
proposed, a lack of funds may nullify it. This means that this approach is probably more
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suitable to larger organisations. Second, tolerance should be extended in the inevitable
cases where failure occurs despite worthy efforts to make the strategy work.59
Given the various approaches available to the organisation, it is the responsibility of top
management to analyse the current situation of the organisation, compare it with the
suggested strategy, and decide which approach will best benefit the organisation and
the implementation of its strategies.
Next, we will discuss the barriers that influence the effective implementation of
strategies in organisations.
17.6 BARRIERS TO EFFECTIVE STRATEGY IMPLEMENTATION
The complexity of strategy implementation is a result of the presence of a variety
of barriers or obstacles that influence the effective implementation of a strategy. As
previously mentioned, the effective implementation of strategies necessitates the
same willpower and energy that are dedicated to the planning and development of
the strategy.60 Kazmi61 identified several widespread and all-embracing matters that
obstruct the effective implementation of strategies in organisations. The major barriers
are, for example:62
•• Managers are trained more frequently on the planning of the strategies, rather than
on the implementation thereof.
•• The strategy planning and implementation process are done by different parties,
which may lead to incoherent strategies or activities; for example, top management
would develop the strategy plan, but middle- or lower-level management is required
to implement it, and might not fully understand the strategy or are not motivated
to implement the plan effectively.
•• The inability for managers to change and adapt to the current issues in the
organisation may lead to failed strategies.
•• Strategies that are poorly or ambiguously planned may be implemented incorrectly,
as they are not understood. Alternatively, if guidelines or a model to guide
implementation is not properly planned and developed, the implementation
thereof will be unsuccessful.
•• There is a lack of understanding the strategy by employees.
•• There is poor or inadequate sharing of information.
•• Responsible and accountable parties for the effective implementation of the strategy
are not clearly indicated.
•• Employees are not motivated to implement the strategy effectively or they are not
affiliated with it.
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••
••
••
••
There is a lack of resources or the improper allocation of organisational and human
resources.
There is poor vertical communication and inadequate leadership skills and
development in the organisation.
There is an inconsistent or weak idea of what a strategic position within an
organisation infers, as well as having a prejudiced view of what is needed for the
successful management of operational tasks and within a strategic mandate.
There are ineffective evaluation and control feedback devices.
Most of these barriers and obstacles that organisations are faced with are associated
with the individual implementation of factors and not being able to achieve coherence.
Because strategy implementation is complex and dynamic, it may be challenging or
even impossible to achieve and maintain coherence in the organisation and amongst
employees. It is therefore imperative to understand how strategies can be implemented
effectively without having complete coherence in the organisation. Strategy
implementation cannot be effective if proper control is not managed, and the effects
and effectiveness of the strategy are not evaluated.
Any strategy that has been implemented in an organisation should be evaluated and
controlled to establish whether the desired performance is reached. The next section
will look at how managers or organisations can determine whether their strategy
implementation process is successful by means of applying the process and various
techniques.
17.7 STRATEGY EVALUATION AND CONTROL
Control refers to:
... the managerial task of setting standards, evaluating these standards according to reality,
and the taking of corrective or reinforcing action where necessary.63
Strategic control systems are tools that permit management to monitor and evaluate
whether its strategy and the organisational structure are effective, if improvements
are required, how to make these improvements, and how they should be changed if
needed.64 These systems, however, do not only focus on the monitoring activity or
the use of resources, but also on motivating employees to work more efficiently by
setting personal objectives to keep them motivated to attain the organisational goals
and objectives.65 The main aim of strategic control is therefore to be certain that an
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organisation is aware of its opportunities and that it is in the process of exploiting the
advantages.66
The purpose of strategic evaluations is to evaluate the effectiveness of strategy in
achieving organisational objectives. Management develops the strategy to achieve a set
of objectives and then implement the strategy. Strategy evaluation and control should
therefore be employed to ensure the strategy development and implementation is
effective and reaches the goals and objectives of the organisation. Strategic evaluation
and control can therefore be defined as:
… the process of determining the effectiveness of a given strategy in achieving the
organisational objectives and taking corrective action whenever required.67
In the next section we will discuss the steps in the strategy evaluation and control
process, followed by the various evaluation/control techniques that can be used
by organisations. This section, and the chapter, will conclude with a discussion on
the significance and benefits of evaluating and controlling strategies that have been
implemented.
Step 1: Establish performance criteria
Step 2: Do performance projections
Step 3: Measure actual strategy performance
Feedback
Step 4: Evaluate the strategy performance
Step 5: Take corrective action
FIGURE 17.3 Strategy evaluation and control process69
17.8 THE EVALUATION AND CONTROL PROCESS
Key elements in the management process are the evaluation of strategies that were
implemented and the control of the results of these strategies. Evaluation and control
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are therefore the process by which organisational activities and performance results
are monitored in order to determine the actual performance compared to the desired
performance. For evaluation and control to be effective, the organisation needs to obtain
clear, prompt and unbiased information.68 The five steps, as shown in Figure 17.3, can
be utilised to evaluate and control the strategy planning and implementation phase.
We will now discuss each of the five steps in the strategy evaluation and control process.
Step 1: Establish performance criteria
The first step in the strategy evaluation and control process is to develop the performance
criteria against which the strategy will be measured. The standards that are used to
measure performance are comprehensive expressions of the strategic objective of the
organisation. Each standard measures the acceptable performance results.
The performance criteria or standards can naturally be laid down for once-off projects,
for instance activities that involve a specific advertising campaign. Furthermore, the
performance criteria can be set in quantitative and/or qualitative terms for different
organisational activities.70
Step 2: Do performance projections (desired performance)
Step 2 in the strategy evaluation and control process is to do performance projections to
establish the desired goals of the strategy. For the key performance criteria or standards
that were identified in Step 1, an organisation needs to determine performance
projections (or the desired performance outcomes) for both short-and long-term
planning.71 The desired performance can be defined as:
… a statement about which performance is desired from an object, that is, stating what
performance an object should have.72
A well-known method of doing performance projections is in the form of a profit and
loss statement (also known as an income statement). The profit and loss statement
summarises the results of the organisation’s activities during the financial period under
review.73 It reports sales or turnover, operating expenses, exceptional items, interest
payments, taxation charges, and dividends paid and proposed.74 In order to develop
a profit and loss statement, management must establish a budget for a product or
business unit that will provide cost and revenue estimates.75
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Step 3: Measure actual strategy performance
Step 3 entails the measurement of the actual performance of the strategy. Actual
performance can be explained as the real performance observed of an object during the
development phase or its operating life.76 In this case, the actual performance refers to
the performance of the strategy that was developed and implemented in the organisation.
The actual performance will differ from the desired performance. Information should
therefore be accurately gathered, so as to make significant associations between the
performance projections – or the desired performance – and the actual performance of
the strategy.
Step 4: Evaluate the strategy performance (desired versus actual performance)
Once the actual strategy performance has been measured, an organisation can evaluate
and compare the actual performance to the formulated performance standards or the
desired performance. Managers therefore need to investigate systematically whether or
not activities have been performed according to the performance standards set in the
strategy plan.77
In order to establish whether the actual performance of a strategy corresponds to the
performance projections or the desired performance, the difference between them
should be evaluated and corrected if necessary. It is crucial that the difference between
the desired and actual performance of strategies be critically evaluated to understand
the reason for the discrepancy and rectify it accordingly.
Step 5: Take corrective action
Corrective action is required where the actual performance is below the set standards
(or the desired performance), in order to improve the performance of the strategy and
ensure that deviations do not occur again in the future. One of a number of options can
be employed by the organisation in order to take corrective action on failed strategy
implementations:
•• The actual performance can be amended to achieve the desired performance of the
strategy implementation.
•• The strategy itself can be modified so that the desired performance of the strategy
is achieved.
•• The desired performance of the strategy can be either reduced or elevated to make
it more representative in terms of the organisation’s structure, goals and objectives.
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Strategy evaluation and control can be conducted in various ways, depending on the
structure of the organisation, the available resources and the complexity of the strategy
to be implemented. The next section will briefly discuss the various evaluation/control
techniques organisations can employ.
17.9 EVALUATION/CONTROL TECHNIQUES
The techniques available to an organisation to do evaluation/control basically include
the following five more popular techniques:
1. The marketing audit.
2. Sales analysis.
3. Cost analysis.
4. Efficiency analysis.
5. Qualitative observation.
These techniques are briefly discussed below.
17.9.1 Marketing audit
A marketing audit can be described as:
… a periodic, comprehensive, systematic and independent investigation into the
organisation’s marketing environment and specific marketing activities, with the aim
of identifying opportunities and challenges, and to recommend action plans in order to
increase the organisation’s overall marketing efficiency.78
The objective of performing a marketing audit is to assess the current processes of the
value provided by an organisation, as well as its resources and competences to do so
effectively, proficiently and distinctively.79
In the definition given by Cant, Van Heerden and Ngambi,80 there are four aspects in
the definition that deserves special attention:
1. Periodic investigation. This refers to the marketing audit that should be conducted
intermittently, usually annually, and not merely when problems arise.
2. Comprehensive investigation. The marketing audit should include all the organisational
or marketing functions and not only focus on one or a few problems.
3. Systematic investigation. The marketing audit should be conducted in a logical,
methodical and technical manner. In other words, the marketing audit should be
significant to the organisation in order to be efficient.
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4. Independent investigation. Individuals who are impartial to the organisation should
conduct the marketing audit in order to ensure the necessary detachment from the
organisation and its employees.
A marketing audit should be planned and managed with caution so as to guarantee
that the time and resources expenditure are kept as low as possible. While there is no
set-in-stone method of implementing a marketing audit, the following generic steps can
act as a guideline:81
•• Step 1: Stipulate an overview of the organisation.
•• Step 2: Set the objectives that will assist in determining the scope of the marketing
audit.
•• Step 3: Decide who should be included in the interviews (for example management,
employees, customers, suppliers and stakeholders).
•• Step 4: Utilise the suitable documentation.
•• Step 5: Report comprehensively in a written document the findings of the audit.
•• Step 6: Provide arguments, evaluations, recommendations and actions.
All the organisation’s marketing actions may possibly be included in the marketing
audit, or they may merely focus on a small number of marketing actions or activities.
The degree of scope of the marketing audit hinges on the costs involved, the target
market of the organisation, the arrangement of the marketing mix and the environmental
circumstances of the organisation. The results of the marketing audit may signify
changes that need to be made to the strategy, or that the organisation should focus on
different target marketing, or that it should take an additional direction.
17.9.2 Sales analysis
Sales analysis examines sales reports to see what goods and services have or have not
sold well. Sales analysis is defined as:
… the collection, classification, comparison, and evaluation of an organisation’s sales
figures.82
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The analysis is used to determine how to stock inventory, how to measure the
effectiveness of a sales force, how to set manufacturing capacity, and how the organisation
is performing against its goals.83 Typically, sales analysis involves analysing the sales
volumes or the total sales of the organisation.84
A simple example of a sales analysis report is illustrated in Figure 17.4. It is evident from
Figure 17.4 that product X made an accurate prediction regarding the sales performance
for the year of 2013, while product Z has not achieved the desired performance set for
the year and product Y has slightly overachieved. Various determining factors can be
added to determine the problem area, for example the region in which the product did
not perform as expected.
Sales analysis for products X, Y and Z (2013)
R 30 000 000
R 25 000 000
R 20 000 000
R 15 000 000
R 10 000 000
R 5 000 000
R–
R –5 000 000
Product X
Product Y
Product Z
Sales forecast
R 24 000 000
R 22 000 000
R 17 500 000
Actual sales
R 24 000 000
R 21 000 000
R 20 000 000
R0
R 1 000 000
R –2 500 000
Variance
FIGURE 17.4 Example of sales analysis for products X, Y and Z (2013)
It is clear from the figure that product Z has not achieved the desired performance, as
it came up short with R2 500 000. While product Y has slightly overachieved with R1
000 000, the forecast for product X was accurate.
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17.9.3 Cost analysis
Cost analysis is:
… a comprehensive investigation by breaking down into sections the operational costs and
reporting on each of the factors separately.85
This is a useful method of determining whether the current activities must be continued
along the same lines, extended, diminished or destroyed completely.86
The income statement of the organisation forms the basis for cost analysis. The analysis
and comparison of the costs in an income statement are reasonably simple and easily
understood by management. This method is not logical and accurate to formulate welldefined guidelines for improved performance. The costs in the income statement are
mainly classified according to the nature of the costs rather than the specific purpose
for which they are incurred.87
17.9.4 Efficiency analysis
Efficiency analysis refers to determining whether particular characteristics of the clients
or the programme are associated with different levels of outcomes.88 In other words,
efficiency analysis is the standards that are expressed in terms of the relationship
between the input and output. These relationship figures provide organisations with an
indication of the effectiveness with which activities are performed in the organisation.
17.9.5 Qualitative observation
During qualitative observation, a person should look, listen, learn, ask, ponder and
record his/her observations.89 With this technique, the person merely makes an
observation regarding the evaluation and control to determine whether the strategy
is planned and implemented effectively. Questioning and probing is done with this
technique to gather more information and determine the effectiveness of the strategy.
In the next section, we will look at a few reasons why strategy evaluation and control is
significant and what the benefits of evaluating the strategies implemented are.
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17.10 S IGNIFICANCE AND BENEFITS OF STRATEGY EVALUATION AND
CONTROL
Strategy evaluation and control is important for the following reasons:90
•• Strategy evaluation and control determines whether the strategy is valid and
realistic; it tests the strategy against the organisational goals, the availability of
resources, and the general strategic framework.
•• Evaluation and control guarantees that all the responsible parties and employees in
the organisation are on the same page and operate on the same sound principles.
•• Evaluation and control is valuable in negotiating and integrating problems amongst
interdependent divisions.
•• Evaluation and control identifies areas of concern that need the attention of toplevel management.
•• There is a need within the organisation to receive feedback on current performance
so that good performance can be assessed and rewarded.
•• Evaluation and control provides organisations with a lot of information and
experience to plan effective and proper strategies from the start.
•• Reports published from evaluation and control processes assist organisations in
broadening the scope of knowledge in all employees.
•• Strategy evaluation and control is beneficial to organisations, as it helps to keep up
to date with the validity and feasibility of the strategy.
Strategy evaluation and control has the following three broad benefits:91
1. Evaluation and control fosters direction. It enables management to ensure that it is
heading in the right direction and that corrective action is taken when needed.
2. Evaluation and control provides guidance to everyone in the organisation. It guides both
managers and employees to understand what is happening and whether the desired
and actual performance line up.
3. Evaluation and strategy inspires confidence. When management and employees of the
organisation know they are performing well, this motivates them to maintain and
achieve better performance in order to keep a good track record. Those outside –
customers, government authorities, shareholders – are likely to be impressed with
the good performance.
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17.11 SUMMARY
Chapter 17 focused on strategy implementation and control. The chapter started by
contextualising strategy implementation and the importance that this plays in the
organisation. The effective implementation of the planned strategies is determined by
six component or factors, namely:
1. The organisational structure.
2. Available resources.
3. The people or human resources.
4. The organisational culture (shared goals and values).
5. Leadership.
6. The systems and processes in the organisation.
There are also five approaches to strategy implementation (known as the five C
approaches), namely:
1. Implementation through command.
2. Change.
3. Consensus.
4. Organisational culture.
5. Crescive.
Thereafter, the barrier to effective strategy implementation was discussed. The chapter
concluded with a discussion on strategy evaluation and control by focusing on the
process, techniques that can be implemented, and the significance of evaluation and
control in organisations.
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Self-evaluation questions
1. Define, in your own words, what is meant by strategy implementation and why it is
important in any organisation.
2. Name and discuss the six components that have an influence on the effective
implementation of a strategy. Give a reason why you think each component can
affect the strategy implementation process.
3. There are five ways in which an organisation can implement its strategy. Name and
discuss these five implementation approaches.
4. Name some of the barriers that organisations should be aware of when
implementing its strategies.
5. Define, in your own words, what is meant by strategy evaluation and control, and
indicate the significance thereof for organisations.
6. Provide the steps of the evaluation and control process, and briefly discuss each one.
7. Name and discuss the various evaluation/control techniques that organisations can
use.
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ENDNOTES
1. Cant, M.C., Van Heerden, C.H. & Ngambi, H.C. 2010. Marketing management: a South
African perspective. Cape Town, South Africa: Juta & Co, p 488.
2. Ferrell, O.C. & Hartline, M.D. 2011. Marketing strategy. 5th ed. Mason, OH: Cengage
Learning, p 323.
3. Drummond, G., Ensor, J. & Ashford, R. 2001. Strategic marketing: planning and control.
p 249.
4. Ibid.
5. Ferrell & Hartline, op cit, p 323.
6. Olsen, E. 2012. The bedrock of strategic implementation. Online: http://mystrategicplan.com/
resources/the-bedrock-of-strategic-implementation/ Accessed: 6 September 2013, p 1.
7. Shah, A.M. 1996. ‘Strategy implementation: a study of critical factors’. Indian Journal of
Industrial Relations, 32(1):42−55. Online: http://www.jstor.org/stable/27767452/ Accessed:
6 September 2013, p 42.
8. MacLennan, A. 2011. Strategy execution: translating strategy into action in complex
organizations. New York: Routledge. p 11.
9. Cant et al, op cit, p 488.
10. Shah, op cit, p 42; Business Dictionary.com. 2013. Strategy implementation. Online: http://
www.businessdictionary.com/definition/strategic-implementation.html/ Accessed: 30
August 2013.
11. Ferrell & Hartline, op cit, p 323.
12. Ibid.
13. Pride, W.M. & Ferrell, O.C. 2012. Marketing. Mason, OH: South-Western Cengage
Learning, p 38.
14. Cant et al, op cit, p 488.
15. Barlett in Okumus, F. 2003. ‘Framework to implement strategies in
organisations’. Management Decisions, 41(9):271−882. Online: http://doi.dx.o
rg/10.1108/00251740310499555/ Accessed: 5 August 2013, p 273.
16. Cant et al, op cit, p 488.
17. Karami, A. 2007. Strategy formulation in entrepreneurial firms.Burlington: Ashgate
Publishing Ltd. p 120.
18. Munyoroku, K. 2012. The role of organization structure on strategy implementation
among food processing companies in Nairobi. Online: http://erepository.uonbi.ac.ke/
handle/123456789/14927/ Accessed: 10 September 2013, p 1.
19. Cole, G.A. 1997. Strategic management: theory and practice. 2nd ed.Bedford: Thomson.
p 144.
20. Cant et al, op cit, p 490.
21. Tan, K.H. & Matthews, R.L. 2009. Operations strategy in action: a guide to the theory and
practice implementation.Cheltenham: Edward Elgar Publishing Limited. p 71.
22. Ferrell & Hartline, op cit, p 330.
23. Analoui, F. & Karami, A. 2003. Strategic management: in small and medium enterprises.
Surrey: Thomson Learning, p 208.
24. Ferrell, O.C. & Hartline, M.D. 2014. Marketing strategy. 6th ed. Mason, OH: Cengage
Learning, p 261.
418
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25. Mazzola, P. & Kellermanns, F.W. 2010. Handbook of research on strategy process.
Cheltenham: Edward Elgar Publishing Limited. p 169.
26. Olsen, op cit, p 1.
27. Analoui & Karami, op cit, p 204.
28. Ibid.
29. Cole, op cit, p 144.
30. Daft, R.L., Mendrick, M. & Vershinina, N. 2010. Management: international edition.Mason,
OH: South-Western Cengage Learning. p 250.
31. Dibb, S., Simkin, L., Pride, W.M. & Ferrell, O.C. 2012. Marketing concepts and strategies.
6th ed. Hampshire: Cengage Learning, p 711.
32. Ferrell & Hartline, 2014, op cit, p 260.
33. Cant et al, op cit, p 496.
34. Ehlers, T. & Lazenby, K. 2004. Strategic management: southern African cases and concepts.
Pretoria: Van Schaik, p 182.
35. Dibb et al, op cit, p 713.
36. Analoui & Karami, op cit, p 199.
37. Ferrell & Hartline, 2014, op cit, p 263.
38. Dibb et al, op cit, p 710.
39. Ferrell & Hartline, 2011, op cit, p 333.
40. Ferrell & Hartline, 2014, op cit, p 261.
41. Phadtare, M.T. 2001. Strategic management: concepts and cases. New Delhi: PHI Learning
Private Limited, p 168.
42. Adapted from Phadtare, op cit, p 168.
43. Ferrell & Hartline, 2014, op cit, p 267.
44. Ferrell & Hartline, 2011, op cit, p 334.
45. Enz, C.A. (ed) 2010. The Cornell School of Hotel Administration handbook of applied
hospitality. Thousand Oaks: SAGE Publications, Inc, p 811.
46. Ferrell & Hartline, 2014, op cit, p 267.
47. Phadtare, op cit, p 168.
48. Ferrell & Hartline, 2011, op cit, p 334.
49. Ferrell & Hartline, 2014, op cit, p 267.
50. Ibid.
51. Enz, op cit, p 812.
52. Ibid.
53. Ferrell & Hartline, 2011, op cit, p 325.
54. Ferrell & Hartline, 2014, op cit, p 267.
55. Ibid.
56. Sanchez, R. 2008. A focused issue on fundamental issues in competence theory development.
Bingley : Emerald Group Publishing Ltd. p 146.
57. Barnat, R. 2007. The crescive approach. Online: http://www.strategy-implementation.24xls.
com/en115/ Accessed: 10 September 2013, p 1.
58. Singh, T.P. 2007. Strategy implementation. Online: http://mba312.blogspot.com/2007/11/
strategy-implementation.html/ Accessed: 10 September 2013, p 1.
59. Barnat, op cit, p 1.
60. Ginter, P.M. 2013. The strategy management of health care organizations. 7th ed. West Sussex
John Wiley & Sons, Ltd.
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61. Kazmi, A. 2008. Strategic management and business policy. 3rd ed. New Delhi, India: Tata
McGraw-Hill. p 315.
62. Cant et al, op cit, p 502; Kazmi, op cit p 315.
63. West, D., Ford, J. & Ibrahim, E. 2010. Strategic marketing. 2nd ed. New York: Oxford
University Press, p 513.
64. Hill, C.W.L. & Jones, G.R. 2013. Strategic management: an integrated approach. Mason, OH:
Cengage Learning, p 388.
65. Ibid.
66. West et al, op cit, p 489.
67. Sekhar, G.V.S. 2010. Business policy and strategic management. New Delhi: I.K. International
Publishing House Pvt Ltd, p 205.
68. Karami, op cit, p 58.
69. Largely adapted from Cant et al, op cit, p 505.
70. Cant, M.C. 2010. Marketing: an introduction. Cape Town: Juta & Co, p 226.
71. Blazey, M.L. 2009. Insights to performance excellence, 2009–2010.Milwaukee American
Society for Quality, Quality Press. p 12.
72. Murthy, D.N.P. & Blischke, W.R. 2006. Warranty management and product manufacture.
London: Springer-Verlang, p 26.
73. Pendlebury, M. & Groves, R. 2004. Company accounts: analysis, interpretation and
understanding. Bedford: Thomson Learning. p 23.
74. Ibid.
75. Cant et al, op cit, p 507.
76. Murthy & Blischke, op cit, p 29.
77. Cant et al, op cit, p 508.
78. Ibid.
79. Nijssen, E.J. & Frambach, R.T. 2001. Creating customer value through strategic marketing
planning: a management approach. Dordrecht: Kluwer Academic Publishers. p 72.
80. Cant et al, op cit, p 214.
81. Ibid.
82. Boachie-Mensah, F.O. 2010. Sales management. Victoria: Trafford Publishing. p 233.
83. Nielsen, L. 2013. Define sales analysis. Online: http://smallbusiness.chron.com/
define-sales-analysis-5258.html/ Accessed: 11 September 2013, p 1.
84. Dutta, B. 2011. Sales and distribution management. New Delhi, India: I.K. International
Publishing House Pvt Ltd. p 109.
85. Dictionary.com. 2013. Cost analysis. Online: http://dictionary.reference.com/browse/
cost+analysis?s=t/ Accessed: 11 September 2013.
86. Rix, P. 2004. Marketing: a practical approach. 5th ed. Australia: McGraw-Hill.
87. Cant et al, op cit, p 510.
88. Centers for Disease Control and Prevention (CDC). 2007. Glossary of terms. Online: http://
www.cdc.gov/hiv/topics/evaluation/health_depts/guidance/glossary.htm/ Accessed: 11
September 2013, p 1.
420
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89. Efron, S.E. & Ravid, R. 2013. Action research in education: a practical guide. New York: The
Guilford Press. p 87.
90. Sekhar, op cit, pp 205−206.
91. Moore, D. nd. Strategic evaluation and control. Online: http://web.idv.nkmu.edu.
tw/~hgyang/Module9.pdf/ Accessed: 11 September 2013, p 5.
421
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Chapter
18
BRANDING
CHAPTER OUTCOMES
After studying this chapter, you should be able to:
„„ Define what branding is;
„„ Explain the components of a brand;
„„ Explain the elements of a brand;
„„ Discuss the advantages of branding;
„„ Explain the phases followed to build brand loyalty;
„„ Discuss the brand pyramid to build up brand equity by Keller;
„„ Explain the different types of brands;
„„ Discuss the branding process and the elements of each of the steps in the process;
„„ Explain the basic brand metrics that can be used to manage the branding effort.
18.1 INTRODUCTION
The brand is one of the most important factors to consider when making important
purchasing decisions, either in terms of a product or service purchase. As an example,
consider the purchase of a simple product such as chutney. Would you purchase the
cheapest chutney available, or would you go for an established brand that gives you
a quality product? Knowledge of which one is the best purchase in either of the two
examples is facilitated through good branding. Think of the power of an iconic brand
such as Mrs H.S. Ball’s Chutney that has through consistency in its quality and branding
efforts almost isolated itself from the influence of price. Many consumers don’t even
look at the price of Mrs H.S. Ball’s Chutney when they purchase groceries − they simply
list it on the grocery list and put it in the cart!
In this chapter we will introduce the concept of branding and explain what a brand is.
We will then discuss what is good and bad about the branding effort, as well as work
through the different types of brands. We will furthermore explain the process followed
by marketers in doing branding and close the chapter off with an explanation of the
concept of brand equity and the metrics that can be used to manage the brand.
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18.2 WHAT IS BRANDING?
Branding is the activity of trying to differentiate your product or service from those of
the competitor by providing it with a distinct and recognisable identity and building
the right associations with that brand so that it is relevant and distinct from competitive
products in the mind of the customer or user. The two important words in this
explanation are ‘distinct’ and ‘differentiate’. Differentiation is the activity of trying to
make your product different from that of the competitor in the mind of the customer.
This can either be physically different, such as a different form or structure, or it can
also be psychologically different, such as the perception that it is more reliable, for
example, a great consistent chutney or even a range of white goods for your kitchen.
This, however, is not yet branding. In branding we want that differentiation to be
linked to a specific name for the product and service so that the differentiation is clearly
identified as belonging to a specific name, for example, Mrs H.S. Ball for chutney, and
a brand like Defy for white goods and appliances for your kitchen.
Examples of the link between differentiation and a brand
Below are some well-known brand names. Try to identify what makes them different from
the other brands in their market or category. Once you have done so, give the distinguishing
characteristics for each of these well-known brands.
„„ Mrs H.S. Ball’s Chutney;
„„ Johnny Walker whisky;
„„ Toyota automobiles;
„„ Avis;
„„ University of South Africa (Unisa).
Mrs. Balls is known for its quality product, but is recognisable through its packaging and
label, the bottle itself being distinctive. Johnny Walker is known for its iconic ‘walking man’.
Toyota is renowned for reliability, but has a distinctive brand logo and colour associations
as well. Avis is associated with its distinctive logo design, and its famous slogan ‘We try
harder’. Avis has been the leading car hire brand in South Africa, and in a tough environment
has used service quality to establish and maintain its position as leader in the field. Unisa is
known for its approach to education − it is an open distance learning institution.
Many of the brands that are purchased by consumers have managed to establ