MKTG 6201 Overview Company & Competition Organizational success depends on alignment… within the internal system and with the external environment. The role of management is to recognize & resolve tensions. Smith and Lewis 2011 The answer to which strategy is most effective is never… A is more effective than B, but rather… A is more effective under Conditions C1 & B is more effective under Conditions C2. The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, & still retain the ability to function. F. Scott Fitzgerald 1945 Glenn Voss

Case Analysis & Recommendation In case analysis, you apply frameworks and models to generate insights for solving a real or simulated business problem to achieve organizational success. You also calculate metrics to assess the likely outcomes associated with various alternatives. Your recommendation is formulated as a strategy.

Case Analysis & Recommendation Models Frameworks Metrics Concepts & Terminology

What is Terminology? A system of words used to name concepts in a particular discipline. Examples: Objectives, Resources & Capabilities Segmentation, Targeting & Positioning Product, Price, Promotion-Communication, Place-Channel Customer Relationship Management Customer Acquisition & Retention Customer Satisfaction & Value

Terminology An objective is defined as: The criterion by which the success or failure of the strategy is measured. Characteristics of well-written objectives: Lists a quantified standard of performance. Designates a clear time frame. States goal in measurable terms. Should be challenging but realistic. Objectives frequently require trade-offs; e.g., increasing market share versus increasing profits; acquiring new customers versus retaining current customers. Samsung: 23% market share & 28% share of profits Apple: 9% market share & 72% of profits Worldwide mobile phones

We are interested in resources & capabilities that are Terminology (cont) Resource: tangible (e.g., equipment, machinery, mail list), intangible (e.g., brand name, customer knowledge), or human asset that the firm currently possesses. Capability: the ability to deploy individual resources (e.g., patents, know-how, brand names, equipment) to perform a task or activity to produces a desired end result. What the firm can do (i.e., skills) as a result of teams of resources working together. We are interested in resources & capabilities that are rare & valuable.

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What is a Metric? A measure for quantitatively assessing a complex process or outcome, along with procedures for carrying out and interpreting the measures. Frequently become objectives, for example: Market share Revenue or Unit sales volume Incremental contribution Customer lifetime value (CLV) Growth in any of the above (e.g., % change from last year or quarter)

Common Intermediate Objectives (Metrics) Not as compelling as Volume or Financial Objectives Customer satisfaction Customer loyalty Customer acquisition & retention Customer trial & repeat Brand awareness Brand preference Brand loyalty Brand equity

What is an Analytic Framework? A structured approach to defining, analyzing or communicating the characteristics of a complex system or process. Examples: Comprehensive Metabolic Panel, CBC… Google’s PageRank Algorithm Competitive Advantage SWOT Analysis Product-Market Growth Strategies

Competitive Advantage (Framework) How to create, communicate, capture, and sustain unique value for the customer: Cost Leadership – Lowest cost structure (large share & low price) Marketing Differentiation – providing superior perceived value by developing Unique image (brand-centric differentiation) achieved through targeting, positioning & communication capabilities (large share, high advert costs) Close relationships with customers (customer-centric differentiation) achieved through CRM capabilities & customization (higher prices & costs) Product Differentiation – offering superior economic value by creating superior product/service features & quality through innovation & product development capabilities (small-to-medium share, large profit margins)

Other Terminology with Similar Meaning Marketing Differentiation Cost Leadership (Operations & Logistics Driven) Tata/Dell Operational Excellence "A great deal" "Best price" "Trouble free basic service" Product Differentiation (R&D, Technology & Sales Driven) Marketing Differentiation (Brand Advertising or CRM Driven) Product or Innovation Marketing Differentiation Differentiation Customer Responsive "Always at cutting edge" “Great brand" "High price but worth it" "Really understands me" "Constantly renewing and creative" “Valuable business partner" Porsche/Apple GM/IBM See McKinsey’s “Unbundling the corporation

Core Strategy Overview Cost Leadership - Operational Excellence Lowest delivered cost Reliability/efficiency Top down – employees directed Flat structure Standardized Logistics/fulfillment manufacturing Scale Production Supply chain Price, reliability, access… Mkt Penetration & exploration Price & distribution Marketing Differentiation – Brand- or Customer-centric Complete personalized solution Infomediary Front-line autonomy Have it your way mindset based on fine-grained information Modular operations Integrated view of customer Service Scope Customer/Collaborator relations Positioning & Communications Relationships, customization, full service… Customer satisfaction & retention Product proliferation, promotion & lateral collaborators Product/ Innovation Differentiation Innovative features Greater functionality Decentralized Team-oriented/ loose-knit Experimentation Product development Market sensing Speed Product Innovation Competitor knowledge Innovation, design, features… Product & market exploration Product innovation & key collaborators at all levels Thrust of strategy Organization Core processes Economic driver Critical Capabilities Value Proposition Marketing Objectives Implementation

SWOT Analysis Incorporating the 5 Cs Company1 Strengths Identify valuable & rare resources & capabilities that the company1 currently possesses. Opportunities Relevant opportunities w/respect to customers2, collaborators3, competitors4 & the overall socioeconomic, technology, legal context5. Company1 Weaknesses Identify valuable & rare resources & capabilities that the company1 currently lacks. Threats Relevant threats with respect to customers2, collaborators3, competitors4 & the overall socioeconomic, technology, legal context5. See the Primer on SWOT Analysis

What is a Model? A hypothetical or simple description of a complex system or process. Effective strategies rely on insightful or valid models. Examples: Aristotle’s Geocentric Model Newton’s Model of Classical Mechanics Marketing Strategy Formulation & Implementation Product Life Cycle Model Demand Elasticity Models accounted for all observations of the movement of the sun and the moon, and the planets, and the stars; good predictor of future positions of celestial bodies (i.e., verifiable) simplicity (Principle of Parsimony) - as few assumptions or rules as possible & no contradictions.

Porter’s Value Chain Model Competitive Advantage in the Value Chain Product Differentiation Marketing Differentiation Cost Leadership

Marketing Process Model SWOT Analysis Company Customers Competitors Collaborators Context Market Segmentation Selection & Targeting Product/Service Offering Positioning Product/Service Offering Promotion/ Communication Pricing Place/ Channel Create Value Communicate & Capture Value Sustain Value Customer Relationship Management Customer Acquisition Customer Retention/Expansion Revenue & Profits

Marketing Strategy Model Formulation & Implementation Objective(s) Target Customers – Segment, Profile & Target Segmentation & Targeting define product market , competitors & product-market growth strategy. Objective(s) Target Customers – Segment, Profile & Target Key Competitors – Objectives, target customers, strategy, strengths & weaknesses Core Strategy – Competitive advantage; market penetration, market development, product development, or diversification; & positioning Marketing Mix Implementation Product Strategy Pricing Strategy Channel Strategy Communications Strategy CRM Strategy

Segmentation Variable Framework Demographic Age Family size Family life cycle Gender Social class Income Occupation Education Race Generation Geographic Country/Region/Culture Urban/rural Climate Psychological Lifestyle Personality traits Expertise & awareness Attributes/Benefits sought Behavioral (esp. w/CRM) Usage rate & loyalty Occasions Purchase patterns For working professionals in North Texas seeking career advancement, the Cox PMBA is a part-time program that…

VALS Psychographic Groups (Framework) Use in the Flare Case to Develop Customer Descriptions self-expression, ideals & achievement determine customers’ product/brand orientation Take the VALS survey at: http://www.strategicbusinessinsights.com/vals/presurvey.shtml

Marketing Strategy Model Formulation & Implementation Objective(s) Target Customers – Segment, Profile & Target Key Competitors – Objectives, target customers, strategy, strengths & weaknesses Core Strategy – Competitive advantage; market penetration, market development, product development, or diversification; & positioning Marketing Mix Implementation Product Strategy Pricing Strategy Channel Strategy Communications Strategy CRM Strategy

Competitor Analysis See Market Evolution The first thing to note about the competitive environment is the number of competitors. As the number of competitors increases (decreases): Competitive market is more fragmented (concentrated), Barriers to entry are lower (higher), Supply and demand are more heterogeneous and dynamic, Competitive advantage focuses more on product-centric innovation (downstream brand-centric or customer-centric differentiation or cost leadership) Growth focuses more on revenues (profits) & customer acquisition (retention).

Competitor Analysis See Product Market Definition Philosophy which is related to Objectives Strategy Strengths & Weaknesses Offensive or Defensive Leader or Follower Growth (revenue/market share) or profit related objectives? Competitive advantage Cost leadership Marketing differentiation Product differentiation Targeted customers Offering position Resources & capabilities to: Develop & produce superior products Communicate & distribute offering Manage customer relationships

Marketing Capabilities Product Management: develop & deliver superior-quality or customized goods & services. Communications Management and Brand-building: create and manage customer value perceptions leading to high levels of brand equity, using effective: positioning, advertising message delivery, personalized communications, & integrated marketing communications Pricing Management: extract the optimal revenue & profit from customers through price discrimination tactics, e.g., using sophisticated yield management capability; unrelated to charging a high (product or marketing differentiation) or low (cost leadership) price. Channel Management: establish and manage channels of distribution that effectively and efficiently deliver value to end-user customers Customer Relationship Management: identify profitable customers and prospects and initiate, maintain, and leverage relationships with these customers to create superior customer- level profits. Requires data collection & interpretation for individual customers, individual customer targeting capability, and personalized communications capability. Market Sensing & Customer Insights: Ability to learn about customers, competitors, channel members and the broader market to develop actionable market intelligence and customer segmentation and targeting schema Marketing Planning & Implementation: conceive and implement marketing strategies that optimize the match between the firm’s resources (including multiple product lines and brands) and the marketplace to achieve superior sales and profits

Marketing Strategy Model Formulation & Implementation Objective(s) Target Customers – Segment, Profile & Target Key Competitors – Objectives, target customers, strategy, strengths & weaknesses Core Strategy – Competitive advantage; market penetration, market development, product development, or diversification; & positioning Marketing Mix Implementation Product Strategy Pricing Strategy Channel Strategy Communications Strategy CRM Strategy

Product-Market Growth Strategy Framework K&P pp. 7-12 Markets Existing New Market Penetration Expand share and/or size of current customer wallet Market Development Acquire new customer markets Existing Offerings Product Development Develop new offering features/attributes Diversification Develop totally new offerings targeting new markets New

Product & Market Exploration Capabilities Markets Existing New Cost Leadership: Google and Amazon mostly compete by building scale to exploit their digitally-delivered data management and search capabilities Exploitation with incremental refinement of current product & market capabilities Market exploration Adapt current offering to create new market (& capabilities); e.g., new geographic market or new therapeutic use for existing drug Existing Amazon “good at making everything as low-cost as possible.” Google’s “cloud services will cost 50% less than competing products.” Offerings Product exploration Create new product features & capabilities that enhance offerings’ appeal to current markets Product & Market exploration Create entirely new product-market categories & capabilities; New Can Amazon’s Kindle compete effectively in the tablet market? Can Google X deliver “world-changing moonshots”?

Product & Market Exploration Capabilities Markets Samsung has repositioned itself as a competitive consumer brand, exploiting existing capabilities, developing new product (features &) development capabilities, & spending “$3 billion on ads, compared with Apple’s $933 million and Microsoft’s $1.9 billion.” Existing New Exploitation with incremental refinement of current product & market capabilities Market exploration Adapt current offering to create new market (& capabilities); e.g., new geographic market or new therapeutic use for existing drug Existing Samsung “built its business around producing & selling components to … Apple, Sony & Hewlett-Packard…” & doubles Apple’s investment in equipment Apple’s strength has been in creating or establishing entirely new product-markets (i.e., radical or disruptive innovation) in rapid succession (i.e., speed) but has not delivered since Jobs’ departure. Offerings Product exploration Create new product features & capabilities that enhance offerings’ appeal to current markets Product & Market exploration Create entirely new product-market categories & capabilities; New Apple (Jobs): “Consumers don’t know what they want.” iPod, iPhone, iPad… Samsung: “We get most of our ideas from the market.”

Marketing Strategy Model Formulation & Implementation Objective(s) Target Customers – Segment, Profile & Target Key Competitors – Objectives, target customers, strategy, strengths & weaknesses Core Strategy – Competitive advantage; market penetration, market development, product development, or diversification; & positioning Marketing Mix Implementation Product Strategy Pricing Strategy Channel Strategy Communications Strategy CRM Strategy Internal consistency between objectives, target customers & competitors, core strategy, and marketing mix implementation is the single-most important criterion for grading case recommendations.

Strategic Marketing Problems Cases: Cases in course packet MKTG 6201 Course Materials Textbook: Strategic Marketing Problems Roger Kerin & Robert Peterson (K&P) Cases: Cases in course packet Lectures and Discussions: In conjunction with cases & handouts of slides

MKTG 6201 Course Learning Outcomes At the end of this course, you should be able to: Understand how company strengths & weaknesses & external opportunities & threats influence the success of a marketing strategy; Develop and communicate marketing action plans that effectively target, attract, and retain profitable customer segments; & Conduct basic quantitative analyses to evaluate the outcomes associated with alternative marketing programs. Qualitative Analysis Recommendation Metrics/Quantitative Analysis

Assessment & Grade Distribution Group Homework (5 × 4) 20 Final Examination 20 Total 40 Cox Recommended Grade Distribution A/A- 40% B/B+ 50% B-… 10%

Sample Grade Sheet Topic Poor Fair Good Excellent Financial Comparison What assumptions are required to make the next-best alternative better?) .25 .5 .75 1 Economic Value Analysis and Consistency with price elasticity estimates   Comparative advantage analysis Summary marketing strategy TOTAL

Financial Analysis in Marketing K&P Chapter 2 Marketing Pro Formas Breakeven Analysis Customer Lifetime Value (CLV) Sales Forecasts Economic Value Analysis Channel Margin Calculus Demand Elasticity

Developing Pro Forma & B/E Analyses Traditional Line Items Revenues Cost of Goods Sold Gross Margin (Profit) Operating Expenses (e.g., SG&A) Operating Margin (Profit) Dollars Price * Quantity COGS/unit * Quantity GM/unit * Quantity Variable (VC) & Fixed (FC) Revenue–COGS–VC–FC % 100% COGS% GM% Can vary Net Income Before Tax Income Tax Net Income After Tax - See the South Delaware Coors Pro Forma To conduct breakeven analysis for a proposed change, group variable costs VC = COGS & Variable Operating Expenses And then focus on Incremental Fixed Expenses

Organizing for Effective B-E Analysis Traditional Income Statement Sales revenue Cost of goods sold = Gross margin (profit) Selling expenses Depreciation Administrative overhead = Operating margin (profit) Interest expense = Pretax profit… Incremental Costing Sales revenue Incremental, avoidable VC = Total (Gross) contribution ($) Incremental, avoidable FC = Net contribution (profit) Other fixed or sunk costs = Pretax profit… Contribution Margin % (CM%) = Total Contribution / Sales revenue Contribution Margin $ ($CM) = Total Contribution / Sales volume or $ Contribution per unit

Breakeven (BE) Analysis To calculate Incremental Sales Revenue required to breakeven (BER) for a given level of incremental fixed costs (FC): Net Contribution = Incremental Revenue – VC – FC Net Contribution = Incremental Revenue – VC – FC 0 = (Q * P) – (Q * VC/unit) – FC = Q (P – VC/unit) 0 = (Q * P) – (Q * VC/unit) – FC + FC – FC + FC FC/(P – VC/unit) = Q required to break even (BEQ) BER = BEQ * P VC = Incremental Variable Cost Q = Incremental Quantity P = Incremental Price CM = P – VC/unit See also http://harvardbusinessonline.com/flatmm/flashtools/breakeven/

Calculate Breakeven for the Following Opening a New Office Variable Costs Fixed Costs/Year COGS 20% Direct Operating Costs 20% Total Variable Costs 40% Fixed salaries 160,000 Depreciation 50,000 Utilities & phone 12,000 Insurance 10,000 Interest 20,000 Property Taxes 10,000 Maintenance/Janitorial 5,600 Miscellaneous 2,400 TOTAL $270,000 Selling Price = $25 BEQ = FC/(P – VC/unit) BEQ = BER =

Review Questions What does organizational success depend on? What are the 5 Cs and how do they relate to a SWOT analysis? What are three approaches to achieving competitive advantage? Which are most relevant to marketing? What are some key marketing resources & capabilities? What are the 5 steps in the marketing strategy formulation & implementation model? What are the 4 key growth strategies? What are the 5 marketing mix elements (4 Ps + 1)?

Chris Millican, Boston Consulting Group Next Week Chris Millican, Boston Consulting Group South Delaware Coors Case This is a practice case that addresses whether an MBA student should invest in a Coors distributorship in South Delaware. The initial decision focuses on which marketing research to purchase in order to assess the viability of the distributorship. You will have ten minutes during class to make that decision as a group. After purchasing the research, you will have 20 minutes to develop a pro forma and recommendations for the Coors distributorship (see the Coors Excel spreadsheet). If you need more background on breakeven analysis, review the Breakeven Tool. To complete the spreadsheet, fill in the key assumptions that are highlighted in yellow. The spreadsheet should fill in as you enter these numbers. Note that constructing spreadsheets in this manner is extremely important because it allows you to conduct “What-if” analyses by simply changing your assumptions. To prepare for class, read the case carefully, review the Coors Excel spreadsheet, and think about the following questions.