Business Unit Strategic Planning

The business unit strategic-planning process consists of the steps shown in Figure 2.4. We examine each step in the sections that follow.

1. THE BUSINESS MISSION

Each business unit needs to define its specific mission within the broader company mission. Thus, a television- studio-lighting-equipment company might define its mission as “To target major television studios and become their vendor of choice for lighting technologies that represent the most advanced and reliable studio lighting arrangements.” Notice this mission does not mention winning business from smaller television studios, offering the lowest price, or venturing into non-lighting products.

2. SWOT ANALYSIS

The overall evaluation of a company’s strengths, weaknesses, opportunities, and threats is called SWOT analysis. It’s a way of monitoring the external and internal marketing environment.

EXTERNAL ENVIRONMENT (OPPORTUNiTY AND THREAT) ANALYSIS A business unit must monitor key macroenvironment forces and significant microenvironment factors that affect its ability to earn profits. It should set up a marketing intelligence system to track trends and important developments and any related opportunities and threats.

Good marketing is the art of finding, developing, and profiting from these opportunities.³¹ A market­ing opportunity is an area of buyer need and interest that a company has a high probability of profitably satisfying. There are three main sources of market opportunities.³² The first is to offer something that is in short supply. This requires little marketing talent, as the need is fairly obvious. The second is to supply an existing product or service in a new or superior way. How? The problem detection method asks consumers for their suggestions, the ideal method has them imagine an ideal version of the product or service, and the consumption chain method asks them to chart their steps in acquiring, using, and disposing of a product. This last method can often lead to a totally new product or service, which is the third main source of market opportunities.

Marketers need to be good at spotting opportunities. Consider the following:

• A company may benefit from converging industry trends and introduce hybrid products or services new to the market.Cell phone manufacturers have released phones with digital photo and video capabilities, Global Positioning Systems (GPS), and so on.
• A company may make a buying process more convenient or efficient. Mobil introduced Speed Pass, one of the first widely deployed RFID (radio-frequency identification) payment systems, to allow consumers to quickly and easily pay for gas at the pump.
• A company can meet the need for more information and advice. Angie’s List connects individuals with local home improvement and other services that have been reviewed by others.
• A company can customize a product or service. Timberland allows customers to choose colors for different parts of their boots, add initials or numbers, and select different stitching and embroidery.
• A company can introduce a new capability. Consumers can create and edit digital “iMovies” with the iMac and upload them to an Apple Web server or Web site such as YouTube to share with friends around the world.
• A company may be able to deliver a product or service faster. FedEx discovered a way to deliver mail and packages much more quickly than the U.S. Postal Service.
• A company may be able to offer a product at a much lower price. Pharmaceutical firms have created generic versions of brand-name drugs, and mail-order drug companies often sell for less.

To evaluate opportunities, companies can use market opportunity analysis (MOA) to ask questions like:

1. Can we articulate the benefits convincingly to a defined target market(s)?
2. Can we locate the target market(s) and reach them with cost-effective media and trade channels?
3. Does our company possess or have access to the critical capabilities and resources we need to deliver the customer benefits?
4. Can we deliver the benefits better than any actual or potential competitors?
5. Will the financial rate of return meet or exceed our required threshold for investment?

In the opportunity matrix in Figure 2.5(a), the best marketing opportunities facing the TV-lighting-equipment company appear in the upper-left cell (#1). The opportunities in the lower-right cell (#4) are too minor to consider. The opportunities in the upper-right cell (#2) and the lower-left cell (#3) are worth monitoring in the event that any improve in attractiveness and potential.

An environmental threat is a challenge posed by an unfavorable trend or development that, in the absence of defensive marketing action, would lead to lower sales or profit. Figure 2.5(b) illustrates the threat matrix facing the TV-lighting-equipment company. The threats in the upper-left cell are major because they have a high probability of occurrence and can seriously hurt the company. To deal with them, the company needs contingency plans. The threats in the lower-right cell are minor and can be ignored. The firm will want to carefully monitor threats in the upper-right and lower-left cells in the event they grow more likely or serious.

INTERNAL ENVIRONMENT (STRENGTHS AND WEAKNESSES) ANALYSIS It’s one thing to find attractive opportunities and another to be able to take advantage of them. Each business needs to evaluate its internal strengths and weaknesses. Consider Loan Bright.³³

LOAN BRIGHT At the Web site of Loan Bright, an online mortgage company, potential homebuyers can get a personalized list of lenders and available terms. At first, Loan Bright made its money by selling the homebuyer data to high-end mortgage lenders, including Wells Fargo Home Mortgage, Bank of America Mortgage, and Chase Home Mortgage. These firms turned the data into leads for their sales teams. But worrisome internal issues arose. For one thing, Loan Bright had to please every one of its big clients, yet each was becoming tougher to satisfy, eating up time and resources. The company’s top managers gathered to analyze the market and Loan Bright’s strengths and weak­nesses. They decided that instead of serving a few choice clients, they would serve many more individual loan officers who responded to the company’s Google ads and only wanted to buy a few leads. The switch required revamping the way Loan Bright salespeople brought in new business, including using a one-page contract instead of the old 12-page contract and creating a separate customer service department.

A SWOT-like analysis was instrumental in the development of the corporate strategy that drove Dell to years of success. ^[1]

• Dell’s opportunity was that the consumer market was becoming more sophisticated and customers increas­ingly knew exactly what they wanted.
• Dell’s threat was that it would fail to generate a big enough customer base in the face of strong competitors and demanding channel partners.

With consumers desiring purchasing convenience and flexibility, however, the Internet offered a powerful direct marketing and selling option. Dell’s business strategy combined direct sales, Internet marketing, mass customization, and just-in-time manufacturing to capitalize on the market opportunity it was offered.

Businesses can evaluate their own strengths and weaknesses by using a form like the one shown in “Marketing Memo: Checklist for Evaluating Strengths/Weaknesses Analysis.” Clearly, the business doesn’t have to correct all its weaknesses, nor should it gloat about all its strengths. The big question is whether it should limit itself to those opportunities for which it possesses the required strengths or consider those that might require it to find or develop new strengths.

3. GOAL FORMULATION

Once the company has performed a SWOT analysis, it can proceed to goal formulation, developing specific goals for the planning period. Goals are objectives that are specific with respect to magnitude and time.

Most business units pursue a mix of objectives, including profitability, sales growth, market share improvement, risk containment, innovation, and reputation. The business unit sets these objectives and then manages by objec­tives (MBO). For an MBO system to work, the unit’s objectives must meet four criteria:

1. They must be arranged hierarchically, from most to least important. The business unit’s key objective for the period may be to increase the rate of return on investment. Managers can increase profit by increasing revenue and reducing expenses. They can grow revenue, in turn, by increasing market share and prices.
2. Objectives should be quantitative whenever possible. The objective “to increase the return on investment (ROI)” is better stated as the goal “to increase ROI to 15 percent within two years.”
3. Goals should be realistic. Goals should arise from an analysis of the business unit’s opportunities and strengths, not from wishful thinking.
4. Objectives must be consistent. It’s not possible to maximize sales and profits simultaneously.

Other important trade-offs include short-term profit versus long-term growth, deep penetration of existing markets versus development of new markets, profit goals versus nonprofit goals, and high growth versus low risk. Each choice calls for a different marketing strategy.³⁴

Many believe adopting the goal of strong market share growth may mean foregoing strong short-term profits. Volkswagen has 15 times the annual revenue of Porsche—but Porsche’s profit margins are seven times bigger than Volkswagen’s. Other successful companies such as Google, Microsoft, and Samsung have maximized profitability and growth.

4. STRATEGIC FORMULATION

Goals indicate what a business unit wants to achieve; strategy is a game plan for getting there. Every business must design a strategy for achieving its goals, consisting of a marketing strategy and a compatible technology strategy and sourcing strategy.

PORTER’S GENERiC STRATEGiES Michael Porter has proposed three generic strategies that provide a good starting point for strategic thinking: overall cost leadership, differentiation, and focus.³⁵

• Overall cost leadership. Firms work to achieve the lowest production and distribution costs so they can underprice competitors and win market share. They need less skill in marketing. The problem is that other firms will usually compete with still-lower costs and hurt the firm that rested its whole future on cost.
• Differentiation. The business concentrates on achieving superior performance in an important cus­tomer benefit area valued by a large part of the market. The firm seeking quality leadership, for example, must make products with the best components, put them together expertly, inspect them carefully, and effectively communicate their quality.
• Focus. The business focuses on one or more narrow market segments, gets to know them intimately, and pursues either cost leadership or differentiation within the target segment.

The online air travel industry has provided a good example of these three strategies: Travelocity has pursued a differentiation strategy by offering the most comprehensive range of services to the traveler; Lowestfare has pur­sued a lowest-cost strategy for the leisure travel market; and Last Minute has pursued a niche strategy by focus­ing on travelers who have the flexibility to travel on very short notice. Some companies use a hybrid approach.

According to Porter, competing firms directing the same strategy to the same target market constitute a strate­gic group.³⁶ The firm that carries out the strategy best will make the most profits. Circuit City went out of business because it did not stand out in the consumer electronics industry as lowest in cost, highest in perceived value, or best in serving some market segment.

Porter draws a distinction between operational effectiveness and strategy. Competitors can quickly copy the operationally effective company using benchmarking and other tools, thus diminishing the advantage of operational effectiveness. Strategy, on the other hand, is “the creation of a unique and valuable position involving a different set of activities.” A company can claim it has a strategy when it “performs different activities from rivals or performs similar activities in different ways.”

STRATEGIC ALLIANCES Even giant companies—AT&T, Philips, and Starbucks—often cannot achieve leadership, either nationally or globally, without forming alliances with domestic or multinational companies that complement or leverage their capabilities and resources.

Just doing business in another country may require the firm to license its product, form a joint venture with a local firm, or buy from local suppliers to meet “domestic content” requirements. Many firms have developed global strategic networks, and victory is going to those who build the better one. The Star Alliance brings together 27 airlines, including Lufthansa, United Airlines, Singapore Airlines, Air New Zealand, and South Africa Airways, in a huge global partnership that allows travelers in 193 countries to make nearly seamless connections to hundreds of destinations.³⁷

Many strategic partnerships take the form of marketing alliances. These fall into four major categories.

1. Product or service alliances—One company licenses another to produce its product, or two companies jointly market their complementary products or a new product. The credit card industry is a complicated combination of cards jointly marketed by banks such as Bank of America, credit card companies such as Visa, and affinity companies such as Alaska Airlines.
2. Promotional alliances—One company agrees to carry a promotion for another company’s product or service. In 2011, VIBE urban music and lifestyle magazine announced a promotional alliance with Hoop It Up, the world’s largest participatory 3-on-3 basketball tournament program, with competitions in 35 cities. The multi-platform partnership included VIBE digital, VIBE Cityguide App, editorial coverage and promotion in VIBE, and a highly integrated social media campaign with a strong VIBE branded presence at all Hoop It Up live events nationwide.³⁸
3. Logistics alliances—One company offers logistical services for another company’s product. Warner Music Group and Sub Pop Records created the Alternative Distribution Alliance (ADA) in 1993 as a joint venture to distribute and manufacture records owned by independent labels. ADA is the leading “indie” distribution company in the United States for both physical and digital product.
4. Pricing collaborations—One or more companies join in a special pricing collaboration. Hotel and rental car companies often offer mutual price discounts.

Companies need to give creative thought to finding partners that might complement their strengths and offset their weaknesses. Well-managed alliances allow companies to obtain a greater sales impact at lower cost. To keep their strategic alliances thriving, corporations have begun to develop organizational structures to support them, and many have come to view the ability to form and manage partnerships as core skills called partner relationship management (PRM).

After years of growth through acquisition and buying interests in two dozen companies, the world’s biggest wireless telecom operator, Vodafone, has looked outside for partners to help it leverage its existing assets.³⁹

VODAFONE To spur more innovation and growth, London-based Vodafone has embraced open source software and open platforms that allow it to tap into the creativity and skills of others. With its Web portal called Betavine, amateur or professional software developers can create and test their latest mobile applications on any network, not just Vodafone’s. While these developers retain intellectual property rights, Vodafone gains early exposure to the latest trends and ensures that innovations are compatible with its network. Some of the new apps include real-time train arrivals and departures, movie show times, and an Amazon.com widget with personalized details. With 404 million customers in 30 countries, the £46 billion company hasn’t had trouble finding help from interested corporate partners either. Dell has collaborated with Vodafone to design laptops and low-priced netbooks with built-in wireless broadband access over Vodafone’s networks.

Rather than just form a partnership, a firm may choose to just acquire another firm. Kraft acquired Cadbury in 2010, in part due to Cadbury’s deep roots in emerging markets like India where Kraft did not have a strong pres­ence. The acquisition also permitted Kraft to do a restructuring and divide its businesses into two companies: one focused on grocery products, the other on snack foods.⁴⁰

5. PROGRAM FORMULATION AND IMPLEMENTATION

Even a great marketing strategy can be sabotaged by poor implementation. If the unit has decided to attain technological leadership, it must strengthen its R&D department, gather technological intelligence, develop leading-edge products, train its technical sales force, and communicate its technological leadership.

Once they have formulated marketing programs, marketers must estimate their costs. Is participating in a particular trade show worth it? Will hiring another salesperson contribute to the bottom line? Activity-based cost accounting (ABC)—described in greater detail in Chapter 5— can help determine whether each marketing program is likely to produce sufficient results to justify its cost.⁴¹

Today’s businesses recognize that unless they nurture other stakeholders—customers, employees, suppliers, distributors—they may never earn sufficient profits for the stockholders. A company might aim to delight its customers, perform well for its employees, and deliver a threshold level of satisfaction to its suppliers. It must not violate any stakeholder group’s sense of fairness about the treat­ment it is receiving relative to the others.⁴²

A dynamic relationship connects the stakeholder groups. A smart company creates a high level of employee satisfac­tion, which leads to higher effort, which leads to higher-quality products and services, which creates higher customer satisfaction, which leads to more repeat business, which leads to higher growth and profits, which leads to high stockholder satisfaction, which leads to more investment, and so on. This virtuous circle spells profits and growth.

According to McKinsey & Company, strategy is only one of seven elements—all of which start with the letter s—in successful business practice.⁴³ The first three—strategy, structure, and systems—are considered the “hardware” of success. The next four—style, skills, staff, and shared values—are the “software.”

The first “soft” element, style, means company employees share a common way of thinking and behaving. The second, skills, means employees have the skills needed to carry out the company’s strategy. Staffing means the company has hired able people, trained them well, and assigned them to the right jobs. The fourth element, shared values, means employees share the same guiding values. When these elements are present, companies are usually more suc­cessful at strategy implementation.⁴⁴

6. MARKETING INSIGHT Businesses Charting a New Direction

Continued prosperity or even survival may depend on how quickly and effectively a firm is able to chart a new direction. Consider these examples.

• With consumers increasingly using smart phones for directions and maps, Garmin, the biggest maker of GPS devices, found sales declining rapidly. Its solution was to concentrate on partnering with automakers to embed GPS systems in dashboard “command centers.” Its selling points are that most smart phones are not optimized for use when driving and are thus dangerous to use behind the wheel. Hedging its bets, Garmin also has its own app available for smart phones.
• When Dow Chemical found its commodity chemical strategy was no longer profitable, new CEO Andrew Livirie decided to shift the company’s focus to unique, innovative high-margin products like solar shingles. Dow’s intent was to capitalize on four main trends: clean energy, health and nutrition, consumerism in the emerging world, and infrastructure. R&D investments in those four areas totaled $9 billion over a five-year period.

• The runaway success of Amazon’s Kindle, Apple’s iPad, and other tablet products have turned the book world upside down. Bookstores, libraries, and publishers are all recognizing that the sale and delivery of a book are now just a download away. Libraries are lending e-readers in addition to “stocking” e-books for lending. When the due date arrives, the book just disappears!
• The textbook market is being transformed by new entries such as Flat World Knowledge offering customizable, discount texts. Free e-textbooks at some schools allow users to scroll page by page, highlight and annotate, and share comments with classmates and instructors. Some students buy a new or used paper version of the e-textbook anyway. As one notes, “When I’m using the e-textbook, there’s the temptation to check e-mail, check my grades, or check Facebook.”

Sources: Erik Rhey, “A GPS Maker Shifts Gears,” Fortune, March 19, 2012; Geoff Colvin, “Dow’s New Direction,” Fortune, March 19, 2012; Ben Bradford, “Libraries Grapple with the Downside of E-books,” www.npr.org, May 29, 2012; Sharon Tregaskis, “Buy the Book,” Corneii Alumni Magazine, November-December 2012; “Great Digital Expectations,” The Economist, September 10, 2011.

7. FEEDBACK AND CONTROL

A company’s strategic fit with the environment will inevitably erode because the market environment changes faster than the company’s seven Ss. Thus, a company might remain efficient yet lose effectiveness. Peter Drucker pointed out that it is more important to “do the right thing”—to be effective—than “to do things right”—to be efficient. The most successful companies, however, excel at both.

Once an organization fails to respond to a changed environment, it becomes increasingly hard to recapture its lost position. Organizations, especially large ones, are subject to inertia. It’s difficult to change one part without adjusting everything else. Yet organizations can be changed through strong leadership, preferably in advance of a crisis. The key to organizational health is willingness to examine the changing environment and adopt new goals and behaviors. “Marketing Insight: Businesses Charting a New Direction” describes how some different companies and industries are adjusting to the new marketing realities that have changed their fortunes.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.