2.3 The Marketing Implications of Corporate Strategy Decisions

To formulate a useful corporate strategy, top management must address six interrelated decisions: [1]
  1. the overall scope and mission of the organisation;
  2. company goals and objectives;
  3. the means for gaining a competitive advantage;
  4. a development strategy for future growth;
  5. the allocation of corporate resources across the firm’s various businesses; and
  6. the development of synergies across those businesses and their products.

While a market orientation – and the analytical tools that marketing managers use to examine customer desires and competitors’ strengths and weaknesses – can provide useful insights to guide all six of these strategic decisions, they are particularly germane for revealing the most attractive avenues for future growth and for determining which businesses or product-markets are likely to produce the greatest returns on the company’s resources.
In turn, all six of these corporate decisions have major implications for the strategic marketing plans of the firm’s various products or services.
Together, they define the general strategic direction, objectives, and resource constraints within which those marketing plans must operate.
We examine the marketing implications involved in both formulating and implementing these components of corporate strategy next.

2.3.1 Corporate Scope – Defining the Firm’s Mission

A well-thought-out mission statement guides an organisation’s managers as to which market opportunities to pursue and which fall outside the firm’s strategic domain.
A clearly stated mission can help instill a shared sense of direction, relevance, and achievement among employees, as well as a positive image of the firm among customers, investors, and other stakeholders.

To provide a useful sense of direction, a corporate mission statement should clearly define the organisation’s strategic scope. It should answer such fundamental questions as the following: What is our business? Who are our customers? What kinds of value can we provide to these customers? and What should our business be in the future? [2]


For example, several years ago PepsiCo, the manufacturer of the soft drink Pepsi-Cola, stated its mission as ‘marketing superior quality food and beverage products for households and consumers dining out.’ That clearly defined mission guided the firm’s managers toward the acquisition of several related companies, such as Frito-Lay, Taco Bell, and Pizza Hut.
More recently, in response to a changing global competitive environment, PepsiCo narrowed its scope to focus primarily on package foods (particularly salty snacks) and beverages distributed through supermarket and convenience store channels.
This new, narrower mission led the firm to: (1) divest all of its fast-food restaurant chains; (2) acquire complementary beverage businesses, such as Tropicana fruit juices; and (3) develop new brands targeted at rapidly growing beverage segments, such as Aquafina bottled water.[14]

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2.3.1.1 Market Influences on the Corporate Mission

Like any other strategy component, an organisation’s mission should fit both its internal characteristics and the opportunities and threats in its external environment.
Obviously, the firm’s mission should be compatible with its established values, resources, and distinctive competencies. But it should also focus the firm’s efforts on markets where those resources and competencies will generate value for customers, an advantage over competitors, and synergy across its products. Thus, PepsiCo’s new mission reflects the firm’s package goods marketing, sales, and distribution competencies and its perception that substantial synergies can be realised across snack foods and beverages within supermarket channels via shared logistics, joint displays and sales promotions, and the like.

2.3.1.2 Criteria for Defining the Corporate Mission

Several criteria can be used to define an organisation’s strategic mission. Many firms specify their domain in physical terms, focusing on products or services or the technology used. The problem is that such statements can lead to slow reactions to technological or customer-demand changes. For example, Theodore Levitt argues that Penn Central’s view of its mission as being ‘the railroad business’ helped cause the firm’s failure. Penn Central did not respond to major changes in transportation technology, such as the rapid growth of air travel and the increased efficiency of long-haul trucking. Nor did it respond to consumers’ growing willingness to pay higher prices for the increased speed and convenience of air travel. Levitt argues that it is better to define a firm’s mission as what customer needs are to be satisfied and the functions the firm must perform to satisfy them.[15] Products and technologies change over time, but basic customer needs tend to endure. Thus, if Penn Central had defined its mission as satisfying the transportation needs of its customers rather than simply being a railroad, it might have been more willing to expand its domain to incorporate newer technologies.
One problem with Levitt’s advice, though, is that a mission statement focusing only on basic customer needs can be too broad to provide clear guidance and can fail to take into account the firm’s specific competencies. If Penn Central had defined itself as a transportation company, should it have diversified into the trucking business? Started an airline? As the upper-right quadrant of Exhibit 2.6 suggests, the most useful mission statements focus on the customer need to be satisfied and the functions that must be performed to satisfy that need. But they are also specific as to the customer groups and the products or technologies on which to concentrate. Thus, instead of seeing itself as being in the railroad business or as satisfying the transportation needs of all potential customers, Burlington Northern Santa Fe Railroad’s mission is to provide long-distance transportation for large-volume producers of low-value, low-density products, such as coal and grain.
Exhibit 2.6 Characteristics of effective corporate mission statements
external image ebs-ma-bkmae0206.gifSource: Reprinted with permission from C. W. Hofer and D. Schendel, Strategy Formulation: Analytical Concepts, p. 43. Copyright © 1978 by West Publishing Company. All rights reserved.

2.3.1.3 Social Values and Ethical Principles

An increasing number of organisations are developing mission statements that also attempt to define the social and ethical boundaries of their strategic domain and outline the ethical principles they will follow in dealings with customers, suppliers, and employees. Roughly two-thirds of US firms have formal codes of ethics, and one in five large firms have formal departments dedicated to encouraging compliance with company ethical standards. At United Technologies, a global defense contractor and engineering firm, 160 business ethics officers monitor the firm’s activities and relations with customers, suppliers, and governments around the world.[16]
Outside America, fewer firms have formal ethics bureaucracies. To some extent, this reflects the fact that in other countries governments and organised labor both play a bigger role in corporate life. In Germany, for instance, workers’ councils often deal with issues such as sexual equality, race relations, and workers’ rights.[17]
Ethics is concerned with the development of moral standards by which actions and situations can be judged. It focuses on those actions that may result in actual or potential harm of some kind (e.g., economic, mental, physical) to an individual, group, or organisation.
Particular actions may be legal but not ethical. For instance, extreme and unsubstantiated advertising claims, such as ‘Our product is far superior to Brand X,’ might be viewed as simply legal puffery engaged in to make a sale, but many marketers (and their customers) view such little white lies as unethical. Thus, ethics is more proactive than the law. Ethical standards attempt to anticipate and avoid social problems, whereas most laws and regulations emerge only after the negative consequences of an action become apparent.[18]

2.3.1.4 Why Are Ethics Important? The Marketing Implications of Ethical Standards

One might ask why a corporation should take responsibility for providing moral guidance to its managers and employees. While such a question may be a good topic for philosophical debate, there is a compelling, practical reason for a firm to impose ethical standards to guide employees. Unethical practices can damage the trust between a firm and its suppliers or customers, thereby disrupting the development of long-term exchange relationships and resulting in the likely loss of sales and profits over time. For example, one survey of 135 purchasing managers from a variety of industries found that the more unethical a supplier’s sales and marketing practices were perceived to be, the less eager were the purchasing managers to buy from that supplier.[19]
Unfortunately, not all customers or competing suppliers adhere to the same ethical standards. As a result, marketers sometimes feel pressure to engage in actions that are inconsistent with what they believe to be right – either in terms of personal values or formal company standards – in order to close a sale or stay even with the competition. This point was illustrated by a survey of 59 top marketing and sales executives concerning commercial bribery – attempts to influence a potential customer by giving gifts or kickbacks. While nearly two-thirds of the executives considered bribes unethical and did not want to pay them, 88 per cent also felt that not paying bribes might put their firms at a competitive disadvantage.[20] Such dilemmas are particularly likely to arise as a company moves into global markets involving different cultures and levels of economic development where economic exigencies and ethical standards may be quite different.
Such inconsistencies in external expectations and demands across countries and markets can lead to job stress and inconsistent behaviour among marketing and sales personnel, which in turn can risk damaging long-term relationships with suppliers, channel partners, and customers. A company can reduce such problems by spelling out formal social policies and ethical standards in its corporate mission statement and communicating and enforcing those standards. Unfortunately, it is not always easy to decide what those policies and standards should be. There are multiple philosophical traditions or frameworks that managers might use to evaluate the ethics of a given action. Consequently, different firms or managers can pursue somewhat different ethical standards, particularly across national cultures. Exhibit 2.7 displays a comparison (across three geographic regions) of the proportion of company ethical statements that address a set of specific issues. Note that a larger number of companies in the United States and Europe appear to be more concerned with the ethics of their purchasing practices than those of their marketing activities. Comparing firms across regions, US companies are more concerned about proprietary information. Canadian firms are more likely to have explicit guidelines concerning environmental responsibility, and European companies more frequently have standards focused on workplace safety.
Exhibit 2.7 Issues addressed by company ethics statements
external image ebs-ma-bkmae0207.gifSource: Ronald E. Berenbeim, Corporate Ethics Practices (New York: The Conference Board, 1992).

2.3.2 Corporate Objectives

Confucius said, ‘For one who has no objective, nothing is relevant.’ Formal objectives provide decision criteria that guide an organisation’s business units and employees toward specific dimensions and performance levels. Those same objectives provide the benchmarks against which actual performance can be evaluated.
To be useful as decision criteria and evaluative benchmarks, corporate objectives must be specific and measurable. Therefore, each objective contains four components:
  • A performance dimension or attribute sought.
  • A measure or index for evaluating progress.
  • A target or hurdle level to be achieved.
  • A time frame within which the target is to be accomplished.[3]
Exhibit 2.8 lists some common performance dimensions and measures used in specifying corporate as well as business-unit and marketing objectives.
Exhibit 2.8 Common performance criteria and measures that specify corporate, business-unit and marketing objectives

Performance criteria

Possible measures or indices

Growth

$ sales



Unit sales



Per cent change in sales

Competitive strength

Market share



Brand awareness



Brand preference

Innovativeness

$ sales from new products



Percentage of sales from product-market entries introduced within past five years



Percentage cost savings from new processes

Profitability

$ profits



Profit as percentage of sales



Contribution margin*



Return on investment (ROI)



Return on net assets (RONA)



Return on equity (ROE)

Utilisation of resources

Per cent capacity utilisation



Fixed assets as percentage of sales

Contribution to owners

Earnings per share



Price/earnings ratio

Contribution to

Price relative to competitors

customers

Product quality



Customer satisfaction



Customer retention



Customer loyalty

Contribution to

Wage rates, benefits

employees

Personnel development, promotions



Employment stability, turnover

Contribution to society

$ contributions to charities or community institutions



Growth in employment
  • Business-unit managers and marketing managers responsible for a product-market entry often have little control over costs associated with corporate overhead, such as the costs of corporate staff or R&D. It can be difficult to allocate those costs to specific strategic business units (SBUs) or products. Consequently, profit objectives at the SBU and product-market level are often stated as a desired contribution margin (the gross profit prior to allocating such overhead costs).


2.3.2.1 The Marketing Implications of Corporate Objectives

Most organisations pursue multiple objectives. This is clearly demonstrated by a study of the stated objectives of 82 large corporations. The largest percentage of respondents (89 per cent) had explicit profitability objectives: 82 per cent reported growth objectives; 66 per cent had specific market share goals. More than 60 per cent mentioned social responsibility, employee welfare, and customer service objectives, and 54 per cent of the companies had R&D/new product development goals.[21] These percentages add up to more than 100 per cent because most firms had several objectives.
Trying to achieve many objectives at once leads to conflicts and trade-offs. For example, the investment and expenditure necessary to pursue growth in the long term is likely to reduce profitability and ROI in the short term.[22] Managers can reconcile conflicting goals by prioritising them. Another approach is to state one of the conflicting goals as a constraint or hurdle. Thus, a firm attempts to maximise growth subject to meeting some minimum ROI hurdle.
In firms with multiple business units or product lines, however, the most common way to pursue a set of conflicting objectives is to first break them down into sub-objectives, then assign sub-objectives to different business units or products. Thus, sub-objectives often vary across business units and product offerings depending on the attractiveness and potential of their industries, the strength of their competitive positions, and the resource allocation decisions made by corporate managers. For example, PepsiCo’s managers likely set relatively high volume and share-growth objectives but lower ROI goals for the firm’s Aquafina brand, which is battling for prominence in the rapidly growing bottled water category, than for Lay’s potato chips, which hold a commanding 40 per cent share of a mature product category. Therefore, two marketing managers responsible for different products may face very different goals and expectations – requiring different marketing strategies to accomplish – even though they work for the same organisation.
As firms emphasise developing and maintaining long-term customer relationships, customer-focused objectives – such as satisfaction, retention, and loyalty – are being given greater importance. Such market-oriented objectives are more likely to be consistently pursued across business units and product offerings. There are several reasons for this. First, given the huge profit implications of a customer’s lifetime value, maximising satisfaction and loyalty tends to make good sense no matter what other financial objectives are being pursued in the short term. Second, satisfied, loyal customers of one product can be leveraged to provide synergies for other company products or services. Finally, customer satisfaction and loyalty are determined by factors other than the product itself or the activities of the marketing department. A study of one industrial paper company, for example, found that about 80 per cent of customers’ satisfaction scores were accounted for by nonproduct factors, such as order processing, delivery, and postsale services.[23] Since such factors are influenced by many functional departments within the corporation, they are likely to have a similar impact across a firm’s various businesses and products.

2.3.3 Gaining a Competitive Advantage

There are many ways in which a corporation might attempt to gain an advantage over competitors within the scope of its strategic domain. In most cases, though, a sustainable competitive advantage at the corporate level is based on company resources; resources that other firms do not have, that take a long time to develop, and that are hard to acquire.[24] Many such unique resources are marketing-related. For example, some businesses have highly developed information systems, extensive market research operations, and/or cooperative long-term relationships with customers that give them a superior ability to identify and respond to emerging customer needs and desires. Others have a brand name that customers recognize and trust, cooperative alliances with suppliers or distributors that enhance efficiency, or a body of satisfied and loyal customers who are predisposed to buy related products or services.[25]
But the fact that a company possesses resources that its competitors do not have is not sufficient to guarantee superior performance. The trick is to develop a competitive strategy for each division or business unit within the firm, and a strategic marketing program for each of its product-market entries, that convert one or more of the company’s unique resources into something of value to customers. The firm must employ its resources in such a way that customers will have a good reason to purchase from it instead of its competitors. It needs to develop competitive and marketing strategies that provide one or more superior benefits at a price similar to what competitors charge, or deliver comparable benefits at lower cost. And then it needs to communicate those benefits or cost savings effectively so they will be accurately perceived by potential customers. For example, Samsung – the Korean electronics firm – spent years developing excellent technical R&D and product design expertise, which it has employed effectively in recent years to launch a stream of very successful products aimed at upscale, high margin market segments. And recently the firm has begun building a brand image that communicates and reinforces its technical and design prowess. The firm spent $200 million on a global advertising campaign touting its innovative new products – such as flat-panel TV monitors – in 2002.[26]
While one can conceive of a nearly infinite assortment of competitive strategies based on a firm’s superior resources and capabilities, most can be classified into a few ‘generic’ types. We devote Module 3 to a detailed discussion of these basic competitive strategies and their implications for marketing programs. For now, the key point is that those strategies are built – at least in part – on the firm’s marketing-related resources and competencies. And to the extent that a single corporate resource – such as a prestigious corporate brand or an excellent salesforce – might serve as the foundation for effective competitive and marketing strategies in more than one of a firm’s business units or product lines, it may also produce synergy, as we shall see later.

2.3.4 Corporate Growth Strategies

Often, the projected combined future sales and profits of a corporation’s business units and product-markets fall short of the firm’s long-run growth and profitability objectives. There is a gap between what the firm expects to become if it continues on its present course and what it would like to become. This is not surprising because some of its high-growth markets are likely to slip into maturity over time and some of its high-profit mature businesses may decline to insignificance as they get older. Thus, to determine where future growth is coming from, management must decide on a strategy to guide corporate development.
Essentially, a firm can go in two major directions in seeking future growth: expansion of its current businesses and activities, or diversification into new businesses, either through internal business development or acquisition. Exhibit 2.9 outlines some specific options a firm might pursue while seeking growth in either of these directions.
Exhibit 2.9 Alternative corporate growth strategies
external image ebs-ma-bkmae0209.gif

2.3.4.1 Expansion by Increasing Penetration of Current Product-Markets

One way for a company to expand is by increasing its share of existing markets. This typically requires actions such as making product or service improvements, cutting costs and prices, or outspending competitors on advertising or promotions. Amazon.com pursued a combination of all these actions – as well as forming alliances with Web portals, affinity groups, and the like – to expand its share of Web shoppers, even though the expense of such activities postponed the firm’s ability to become profitable.
Even when a firm holds a commanding share of an existing product-market, additional growth may be possible by encouraging current customers to become more loyal and concentrate their purchases, use more of the product or service, use it more often, or use it in new ways. In addition to its promotional efforts, Amazon.com spent hundreds of millions of dollars on warehouses and order fulfillment activities, investments that earned the loyalty of its customers. As a result, by the year 2000 more than three-quarters of the firm’s sales were coming from repeat customers.[27]

2.3.4.2 Expansion by Developing New Products for Current Customers

A second avenue to future growth is through a product-development strategy emphasising the introduction of product-line extensions or new product or service offerings aimed at existing customers. For example, Arm & Hammer successfully introduced a laundry detergent, an oven cleaner, and a carpet cleaner. Each capitalised on baking soda’s image as an effective deodoriser and on a high level of recognition of the Arm & Hammer brand.

2.3.4.3 Expansion by Selling Existing Products to New Segments or Countries

Perhaps the growth strategy with the greatest potential for many companies is the development of new markets for their existing goods or services. This may involve the creation of marketing programs aimed at nonuser or occasional-user segments of existing markets. Thus, theatres, orchestras, and other performing arts organisations often sponsor touring companies to reach audiences outside major metropolitan areas and promote matinee performances with lower prices and free public transportation to attract senior citizens and students.
Expansion into new geographic markets, particularly new countries, is also a primary growth strategy for many firms. For example, General Electric announced a growth strategy that shifts the firm’s strategic center of gravity from the industrialised West to Asia and Latin America.[28]
While developing nations represent attractive growth markets for basic industrial and infrastructure goods and services, growing personal incomes and falling trade barriers are making them attractive potential markets for many consumer goods and services as well. Even developed nations can represent growth opportunities for products or services based on newly emerging technologies or business models. For instance, while the rapid growth of e-retailers such as Amazon.com is likely to slow in the United States over the next few years, growth in the number of online shoppers is expected to expand rapidly in Europe.[29]

2.3.4.4 Expansion by Diversifying

Firms also seek growth by diversifying their operations. This is typically riskier than the various expansion strategies because it often involves learning new operations and dealing with unfamiliar customer groups. Nevertheless, the majority of large US, European, and Asian firms are diversified to one degree or another.
Vertical integration is one way for companies to diversify. Forward vertical integration occurs when a firm moves downstream in terms of the product flow, as when a manufacturer integrates by acquiring or launching a wholesale distributor or retail outlet. For example, IBM recently withdrew its Aptiva desktop PCs from independent computer retailers and made them available only over the company’s own retail website in order to improve customer service and reduce costs. Backward integration occurs when a firm moves upstream by acquiring a supplier.
Integration can give a firm access to scarce or volatile sources of supply or tighter control over the marketing, distribution, or servicing of its products. But it increases the risks inherent in committing substantial resources to a single industry. Also, the investment required to vertically integrate often offsets the additional profitability generated by the integrated operations, resulting in little improvement in return on investment.[30]
Related (or concentric) diversification occurs when a firm internally develops or acquires another business that does not have products or customers in common with its current businesses but that might contribute to internal synergy through the sharing of production facilities, brand names, R&D know-how, or marketing and distribution skills. Thus, PepsiCo acquired Cracker Jack to complement its salty snack brands and leverage its distribution strengths in grocery stores.
The motivations for unrelated (or conglomerate) diversification are primarily financial rather than operational. By definition, an unrelated diversification involves two businesses that have no commonalities in products, customers, production facilities, or functional areas of expertise. Such diversification mostly occurs when a disproportionate number of a firm’s current businesses face decline because of decreasing demand, increased competition, or product obsolescence. The firm must seek new avenues of growth. Other, more fortunate, firms may move into unrelated businesses because they have more cash than they need in order to expand their current businesses, or because they wish to discourage takeover attempts.
Unrelated diversification tends to be the riskiest growth strategy in terms of financial outcomes. Most empirical studies report that related diversification is more conducive to capital productivity and other dimensions of performance than is unrelated diversification.[31] This suggests that the ultimate goal of a corporation’s strategy for growth should be to develop a compatible portfolio of businesses to which the firm can add value through the application of its unique core competencies. The corporation’s marketing competencies can be particularly important in this regard.

2.3.4.5 Expansion by Diversifying through Organisational Relationships or Networks

Recently, firms have attempted to gain some benefits of market expansion or diversification while simultaneously focusing more intensely on a few core competencies. They try to accomplish this feat by forming relationships or organisational networks with other firms instead of acquiring ownership.[32]
Perhaps the best models of such organisational networks are the Japanese keiretsu and the Korean chaebol – coalitions of financial institutions, distributors, and manufacturing firms in a variety of industries that are often grouped around a large trading company that helps coordinate the activities of the various coalition members and markets their goods and services around the world. As we have seen, many Western firms like IBM and RedEnvelope are also forming alliances with suppliers, resellers, and even customers to expand their product and service offerings without making major new investments or neglecting their core competencies.

2.3.5 Allocating Corporate Resources

Diversified organisations have several advantages over more narrowly focused firms. They have a broader range of areas in which they can knowledgeably invest, and their growth and profitability rates may be more stable because they can offset declines in one business with gains in another. To exploit the advantages of diversification, though, corporate managers must make intelligent decisions about how to allocate financial and human resources across the firm’s various businesses and product-markets. Two sets of analytical tools have proven useful in making such decisions: portfolio models and value-based planning.

2.3.5.1 Portfolio Models

One of the most significant developments in strategic management during the 1970s and 1980s was the widespread adoption of portfolio models to help managers allocate corporate resources across multiple businesses. These models enable managers to classify and review their current and prospective businesses by viewing them as portfolios of investment opportunities and then evaluating each business’s competitive strength and the attractiveness of the markets it serves.
The Boston Consulting Group’s (BCG) Growth-Share Matrix
One of the first – and best known – of the portfolio models is the growth-share matrix developed by the Boston Consulting Group in the late 1960s. It analyses the impact of investing resources in different businesses on the corporation’s future earnings and cash flows. Each business is positioned within a matrix, as shown in Exhibit 2.10. The vertical axis indicates the industry’s growth rate and the horizontal axis shows the business’s relative market share.
Exhibit 2.10 BCG’s market growth/relative share matrix
external image ebs-ma-bkmae0210.gifSource: Adapted from Barry Hedley, ‘Strategy and the Business Portfolio’, Long Range Planning, 10 (February 1977).
The growth-share matrix assumes that a firm must generate cash from businesses with strong competitive positions in mature markets. Then it can fund investments and expenditures in industries that represent attractive future opportunities. Thus, the market growth rate on the vertical axis is a proxy measure for the maturity and attractiveness of an industry. This model represents businesses in rapidly growing industries as more attractive investment opportunities for future growth and profitability.
Similarly, a business’s relative market share is a proxy for its competitive strength within its industry. It is computed by dividing the business’s absolute market share in dollars or units by that of the leading competitor in the industry. Thus, in Exhibit 2.10 a business is in a strong competitive position if its share is equal to, or larger than, that of the next leading competitor (i.e., a relative share of 1.0 or larger). Finally, in the exhibit, the size of the circle representing each business is proportional to that unit’s sales volume. Thus, businesses 7 and 9 are the largest-volume businesses in this hypothetical company, while business 11 is the smallest.
Resource Allocation and Strategy Implications
Each of the four cells in the growth-share matrix represents a different type of business with different strategy and resource requirements. The implications of each are discussed below and summarised in Exhibit 2.11.
Exhibit 2.11 Cash flows across businesses in the BCG portfolio model
external image ebs-ma-bkmae0211.gif
  • Question marks. Businesses in high-growth industries with low relative market shares (those in the upper-right quadrant of Exhibit 2.11) are called question marks or problem children. Such businesses require large amounts of cash, not only for expansion to keep up with the rapidly growing market, but also for marketing activities (or reduced margins) to build market share and catch the industry leader. If management can successfully increase the share of a question mark business, it becomes a star. But if managers fail, it eventually turns into a dog as the industry matures and the market growth rate slows.
  • Stars. A star is the market leader in a high-growth industry. Stars are critical to the continued success of the firm. As their industries mature, they move into the bottom-left quadrant and become cash cows. Paradoxically, while stars are critically important, they often are net users rather than suppliers of cash in the short run (as indicated by the possibility of a negative cash flow shown in Exhibit 2.11). This is because the firm must continue to invest in such businesses to keep up with rapid market growth and to support the R&D and marketing activities necessary to maintain a leading market share.
  • Cash cows. Businesses with a high relative share of low-growth markets are called cash cows because they are the primary generators of profits and cash in a corporation. Such businesses do not require much additional capital investment. Their markets are stable, and their share leadership position usually means they enjoy economies of scale and relatively high profit margins. Consequently, the corporation can use the cash from these businesses to support its question marks and stars (as shown in Exhibit 2.11). However, this does not mean the firm should necessarily maximise the business’s short-term cash flow by cutting R&D and marketing expenditures to the bone – particularly not in industries where the business might continue to generate substantial future sales.
  • Dogs. Low-share businesses in low-growth markets are called dogs because although they may throw off some cash, they typically generate low profits, or losses. Divestiture is one option for such businesses, although it can be difficult to find an interested buyer. Another common strategy is to harvest dog businesses. This involves maximising short-term cash flow by paring investments and expenditures until the business is gradually phased out.
Limitations of the Growth-Share Matrix
Because the growth-share matrix uses only two variables as a basis for categorising and analysing a firm’s businesses, it is relatively easy to understand. But while this simplicity helps explain its popularity, it also means the model has limitations:
  • Market growth rate is an inadequate descriptor of overall industry attractiveness. Market growth is not always directly related to profitability or cash flow. Some high-growth industries have never been very profitable because low entry barriers and capital intensity have enabled supply to grow even faster, resulting in intense price competition. Also, rapid growth in one year is no guarantee that growth will continue in the following year.
  • Relative market share is inadequate as a description of overall competitive strength. Market share is more properly viewed as an outcome of past efforts to formulate and implement effective business-level and marketing strategies than as an indicator of enduring competitive strength.[33] If the external environment changes, or the SBU’s managers change their strategy, the business’s relative market share can shift dramatically.
  • The outcomes of a growth-share analysis are highly sensitive to variations in how growth and share are measured.[34] Defining the relevant industry and served market (i.e., the target-market segments being pursued) can also present problems. For example, does Pepsi Cola compete only for a share of the cola market, or for a share of the much larger market for nonalcoholic beverages, such as iced tea, bottled water, and fruit juices?
  • While the matrix specifies appropriate investment strategies for each business, it provides little guidance on how best to implement those strategies. While the model suggests that a firm should invest cash in its question mark businesses, for instance, it does not consider whether there are any potential sources of competitive advantage that the business can exploit to successfully increase its share. Simply providing a business with more money does not guarantee that it will be able to improve its position within the matrix.
  • The model implicitly assumes that all business units are independent of one another except for the flow of cash. If this assumption is inaccurate, the model can suggest some inappropriate resource allocation decisions. For instance, if other SBUs depend on a dog business as a source of supply – or if they share functional activities, such as a common plant or salesforce, with that business – harvesting the dog might increase the costs or reduce the effectiveness of the other SBUs.
Alternative Portfolio Models
In view of the above limitations, a number of firms have attempted to improve the basic portfolio model. Such improvements have focused primarily on developing more detailed, multifactor measures of industry attractiveness and a business’s competitive strength and on making the analysis more future-oriented. Exhibit 2.12 shows some factors managers might use to evaluate industry attractiveness and a business’s competitive position. Corporate managers must first select factors most appropriate for their firm and weight them according to their relative importance. They then rate each business and its industry on the two sets of factors. Next, they combine the weighted evaluations into summary measures used to place each business within one of the nine boxes in the matrix. Businesses falling into boxes numbered 1 (where both industry attractiveness and the business’s ability to compete are relatively high) are good candidates for further investment for future growth. Businesses in the 2 boxes should receive only selective investment with an objective of maintaining current position. Finally, businesses in the 3 boxes are candidates for harvesting or divestiture.
Exhibit 2.12 The industry attractiveness–business position matrix
external image ebs-ma-bkmae0212.gif
These multifactor models are more detailed than the simple growth-share model and consequently provide more strategic guidance concerning the appropriate allocation of resources across businesses. They are also more useful for evaluating potential new product-markets. However, the multifactor measures in these models can be subjective and ambiguous, especially when managers must evaluate different industries on the same set of factors. Also, the conclusions drawn from these models still depend on the way industries and product-markets are defined.[35]

2.3.5.2 Value-Based Planning

As mentioned, one limitation of portfolio analysis is that it specifies how firms should allocate financial resources across their businesses without considering the competitive strategies those businesses are, or should be pursuing. Portfolio analysis provides little guidance, for instance, in deciding which of two question mark businesses – each in attractive markets but following different strategies – is worthy of the greater investment or in choosing which of several competitive strategies a particular business unit should pursue.
Value-based planning is a resource allocation tool that attempts to address such questions by assessing the shareholder value a given strategy is likely to create. Thus, value-based planning provides a basis for comparing the economic returns to be gained from investing in different businesses pursuing different strategies or from alternative strategies that might be adopted by a given business unit.
A number of value-based planning methods are currently in use, but all share three basic features.[36] First, they assess the economic value a strategy is likely to produce by examining the cash flows it will generate, rather than relying on distorted accounting measures, such as return on investment.[37] Second, they estimate the shareholder value that a strategy will produce by discounting its forecasted cash flows by the business’s risk-adjusted cost of capital. Finally, they evaluate strategies based on the likelihood that the investments required by a strategy will deliver returns greater than the cost of capital. The amount of return a strategy or operating programme generates in excess of the cost of capital is commonly referred to as its economic value added, or EVA.[38] This approach to evaluating alternative strategies is particularly appropriate for use in allocating resources across business units because most capital investments are made at the business-unit level, and different business units typically face different risks and therefore have different costs of capital.
Discounted Cash Flow Model
Perhaps the best-known and most widely used approach to value-based planning is the discounted cash flow model proposed by Alfred Rappaport and the Alcar Group, Inc. In this model, as Exhibit 2.13 indicates, shareholder value created by a strategy is determined by the cash flow it generates, the business’s cost of capital (which is used to discount future cash flows back to their present value) and the market value of the debt assigned to the business. The future cash flows generated by the strategy are, in turn, affected by six ‘value drivers’ : the rate of sales growth the strategy will produce, the operating profit margin, the income tax rate, investment in working capital, fixed capital investment required by the strategy, and the duration of value growth.
The first five value drivers are self-explanatory, but the sixth requires some elaboration. The duration of value growth represents management’s estimate of the number of years over which the strategy can be expected to produce rates of return that exceed the cost of capital. This estimate, in turn, is tied to two other management judgements. First, the manager must decide on the length of the planning period (typically three to five years); he or she must then estimate the residual value the strategy will continue to produce after the planning period is over. Such decisions are tricky, for they involve predictions of what will happen in the relatively distant future.[39]
Exhibit 2.13 Factors affecting the creation of shareholder value
external image ebs-ma-bkmae0213.gifSource: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from Creating Shareholder Value: A Guide for Managers & Investors, revised and updated by Alfred Rappaport. Copyright © 1986, 1998 by Alfred Rappaport.
Some Limitations of Value-Based Planning
Value-based planning is not a substitute for strategic planning; it is only one tool for evaluating strategy alternatives identified and developed through managers’ judgements. It does so by relying on forecasts of many kinds to put a financial value on the hopes, fears, and expectations managers associate with each alternative. Projections of cash inflows rest on forecasts of sales volume, product mix, unit prices, and competitors’ actions. Expected cash outflows depend on projections of various cost elements, working capital, and investment requirements.
While good forecasts are notoriously difficult to make, they are critical to the validity of value-based planning. Unfortunately, there are natural human tendencies to overvalue the financial projections associated with some strategy alternatives and to undervalue others. For instance, managers are likely to overestimate the future returns from a currently successful strategy. Evidence of past success tends to carry more weight than qualitative assessments of future threats.
Some kinds of strategy alternatives are consistently undervalued. Particularly worrisome from a marketing viewpoint is the tendency to underestimate the value of keeping current customers. Putting a figure on the damage to a firm’s competitive advantage from not making a strategic investment necessary to maintain the status quo is harder than documenting potential cost savings or profit improvements that an investment might generate. And, finally, value-based planning can evaluate alternatives, but it cannot create them. The best strategy will never emerge from the evaluation process if management fails to identify it.[40]

2.3.6 Sources of Synergy

A final strategic concern at the corporate level is to increase synergy across the firm’s various businesses and product-markets. As mentioned, synergy exists when two or more businesses or product-markets and their resources and competencies, complement and reinforce one another so that the total performance of the related businesses is greater than it would be otherwise.

2.3.6.1 Knowledge-Based Synergies

Some potential synergies at the corporate level are knowledge-based. The performance of one business can be enhanced by the transfer of competencies, knowledge, or customer-related intangibles – such as brand-name recognition and reputation – from other units within the firm. For instance, the technical knowledge concerning image processing and the quality reputation that Canon developed in the camera business helped ease the firm’s entry into the office copier business.
In part, such knowledge-based synergies are a function of the corporation’s scope and mission – or how its managers answer the question, What businesses should we be in? When a firm’s portfolio of businesses and product-markets reflects a common mission based on well-defined customer needs, market segments, or technologies, the company is more likely to develop core competencies, customer knowledge and strong brand franchises that can be shared across businesses. However, the firm’s organisation structure and allocation of resources also may enhance knowledge-based synergy. A centralised corporate R&D department, for example, is often more efficient and effective at discovering new technologies with potential applications across multiple businesses than if each business unit bore the burden of funding its own R&D efforts. Similarly, some argue that strong corporate-level coordination and support are necessary to maximise the strength of a firm’s brand franchise and to glean full benefit from accumulated market knowledge, when the firm is competing in global markets.

2.3.6.2 Corporate Identity and the Corporate Brand as a Source of Synergy

Corporate identity – together with a strong corporate brand that embodies that identity – can help a firm stand out from its competitors and give it a sustainable advantage in the market. Corporate identity flows from the communications, impressions and personality projected by an organisation. It is shaped by the firm’s mission and values, its functional competencies, the quality and design of its goods and services, its marketing communications, the actions of its personnel, the image generated by various corporate activities and other factors.[41]
In order to project a positive, strong and consistent identity, firms as diverse as Caterpillar, British Airways, and Sony have established formal policies, criteria and guidelines to help ensure that all the messages and sensory images they communicate reflect their unique values, personality and competencies. One rationale for such corporate identity programmes is that they can generate synergies that enhance the effectiveness and efficiency of the firm’s marketing efforts for its individual product offerings. By focusing on a common core of corporate values and competencies, every impression generated by each product’s design, packaging, advertising and promotional materials can help reinforce and strengthen the impact of all the other impressions the firm communicates to its customers, employees, shareholders and other audiences and thereby generate a bigger bang for its limited marketing bucks. For example, by consistently focusing on values and competencies associated with providing high-quality family entertainment, Disney has created an identity that helps stimulate customer demand across a wide range of product offerings – from movies to TV programmes to licensed merchandise to theme parks and cruise ships.

2.3.6.3 Corporate Branding Strategy – When Does a Strong Corporate Brand Make Sense?

Before a company’s reputation and corporate image can have any impact – either positive or negative – on customers’ purchase decisions, those customers must be aware of which specific product or service offerings are sponsored by the company. This is where the firm’s corporate branding strategy enters the picture. Essentially, a firm might pursue one of three options concerning the corporate brand:[42]
  1. The corporate brand (typically the company’s own name and logo) might serve as the brand name of all or most of the firm’s products in markets around the world, as is the case with many high-tech (e.g., Cisco Systems, Siemens, IBM) and service (e.g., British Airways, Amazon.com) companies.
  2. The firm might adopt a dual branding strategy in which each offering carries both a corporate identifier and an individual product brand. Examples include Microsoft software products (e.g., Microsoft Windows, Microsoft Word, etc.) and Volkswagen automobiles.
  3. Finally, each product offering might be given a unique brand and identity – perhaps even different brands across different global markets – while the identity of the source company is de-emphasised or hidden. This is the strategy pursued by Unilever, Procter and Gamble and many other consumer package goods firms.
The question is, When does it make sense to emphasise – and seek to gain synergy from – a strong corporate identity and brand name in a company’s branding strategy? Some of the conditions favouring a dominant corporate brand are rather obvious. For instance, the corporate brand will not add much value to the firm’s offerings unless the company has a strong and favourable image and reputation among potential customers in at least most of its target markets. Thus, the 3M Company features the 3M logo prominently on virtually all of its 70 000 products because the firm’s reputation for innovativeness and reliability is perceived positively by many of its potential customers regardless of what they are buying.
A related point is that a strong corporate brand makes most sense when company-level competencies or resources are primarily responsible for generating the benefits and value customers receive from its various individual offerings. For example, many service organisations (e.g., Disney, Intercontinental Hotels, etc.) emphasise their corporate brands. This is due, in part, to the fact that services are relatively intangible and much of their value is directly generated by the actions of company personnel and facilitated by other firm-specific resources, such as its physical facilities, employee training and reward programs, quality control systems, and the like.
Finally, a recent exploratory study based on interviews with managers in 11 Fortune 500 companies suggests that a firm is more likely to emphasise a strong corporate brand when its various product offerings are closely interrelated, either in terms of having similar positionings in the market or cross-product elasticities that might be leveraged to encourage customers to buy multiple products from the firm.[43] The study also found that firms with strong corporate brands tended to have more centralised decision-making structures where top management made more of the marketing strategy decisions. The obvious question, of course, is whether a firm’s decision-making structure influences brand strategy, or vice versa. We will explore such organisation design issues and their marketing strategy implications in more detail later in Module 18.

2.3.6.4 Synergy from Shared Resources

A second potential source of corporate synergy is inherent in sharing operational resources, facilities and functions across business units. For instance, two or more businesses might produce products in a common plant or use a single salesforce to contact common customers. When such sharing helps increase economies of scale or experience-curve effects, it can improve the efficiency of each of the businesses involved. However, the sharing of operational facilities and functions may not produce positive synergies for all business units. Such sharing can limit a business’s flexibility and reduce its ability to adapt quickly to changing market conditions and opportunities. Thus, a business whose competitive strategy is focused on new-product development and the pursuit of rapidly changing markets may be hindered more than helped when it is forced to share operating resources with other units.[44]

  1. ^ Parts of the Overall Corporate Strategy
  2. ^ corporate mission statement should clearly define the organisation’s strategic scope.
  3. ^ Therefore, each objective contains four components:
      • A performance dimension or attribute sought.
      • A measure or index for evaluating progress.
      • A target or hurdle level to be achieved.
      • A time frame within which the target is to be accomplished.