‘Summary Articles

Marketing Strategy’
2009-2010

By;
Viola Rijnsdorp
Meta van Ouwekerk
Ruben Jongerius
Stefan Ek
Maartje Schoolderman
Claudia Felix
Gabrielle Boer

1
Inhoud

Marketing as Strategy – Week 44 ..........................................................................................................3

‘What is Strategy?’ ............................................................................................................................3

‘Are you sure you have a strategy?’....................................................................................................6

‘Customer Equity Drivers and Future Sales’......................................................................................8

Internal and External Analysis – Week 45 ...........................................................................................11

Growth Options – Week 46 .................................................................................................................23

‘Blue Ocean Strategy’.......................................................................................................................23

‘Market Busting: Strategies for Exceptional Business Growth’........................................................25

‘Value Innovation; The Strategic Logic of High Growth’................................................................26

Designing and Managing Brand portfolios – Week 47.........................................................................29

‘The brand report card – the world’s strongest brands share ten attributes. How does your brand
measure up?’.....................................................................................................................................29

‘About your brand’ ..........................................................................................................................31

‘Kill a Brand, Keep a Customer’......................................................................................................33

‘Brand Portfolio Strategy and Firm performance’............................................................................35

Designing and Managing Customers Relationships – Week 48 ...........................................................37

‘Co-opting Customer Competence’ .................................................................................................37

‘A Strategic Framework for Customer Relationship Management’ .................................................41

‘How Valuable is Word of Mouth?’ ................................................................................................45

Designing and Managing Marketing Channels – Week 49 ..................................................................49

‘The power of trust in Manufacturer-retailer relationships’..............................................................49

‘Strategic Channel Design’...............................................................................................................51

‘Distributor sharing of strategic information with supplier’..............................................................54

Designing and Managing Pricing Strategies – Week 50 ......................................................................55

‘Customer-centric prising: The surprising secret for profitability’...................................................55

‘Pay what you want: A New Partcipative Pricing Mechanism’........................................................57

‘Should you launch a Fighter Brand?’..............................................................................................59

2
Marketing as Strategy – Week 44
‘What is Strategy?’
Positioning is rejected as too static for today’s dynamic markets and changing technologies.
In many industries, a self-inflicted wound, hyper competition is a not the inevitable outcome
of a changing paradigm of competition. The root of the problem is the failure to distinguish
between operational effectiveness and strategy. Management tools have taken the place of
strategy.
Operational effectiveness and strategy are both essential to superior performance, but work in
different ways.
- Operational effectiveness means performing similar activities better than rivals
perform them.
- Strategic positioning means performing different activities from rivals’ of performing
similar activities in different ways.
Operational Effectiveness:

The productivity frontier can apply to individual activities, to groups of linked activities such
as order processing and manufacturing and to an entire company’s activities. When a
company improves its operational effectiveness, it moves toward the frontier. The frontiers is
constantly shifting outward as new technologies and management approaches are developed
and as new inputs become available. Therefore managers have embraced continuous
improvement, empowerment, change management and the so-called learning organization. As
companies move to the frontier, they can often improve on multiple dimensions of
performance at the same time.
Constant improvement is necessary to achieve superior profitability, but is not usually
sufficient. Few companies have competed successfully on the basis of operational
effectiveness. Due to the rapid diffusion of best practices. Competition becomes a series of
races down identical paths that no one can win competition based on operational effectiveness
alone and leading to wars of attention, that can be arrested only by limiting completion.
Strategy
The essence of strategy is choosing to perform activities differently than rivals do. Otherwise
a strategy is useless. Strategic positions emerge from three distinct sources:
3
 1. Variety-based Positioning: based on the choice of product or service varieties rather
than customer segments. It can serve a wide array of customers, but for most it will
meet only a subset of their needs.
2. Needs-based Positioning: is more the traditional thing about targeting a segment of
customers. It arises when there are groups of customers with differing needs and when
a tailored set of activities can serve those needs best. Differences in needs will not
translate into meaningful positions unless the best set of activities to satisfy them also
differs.
3. Access based Positioning: Segmenting customers who are accessible in different
ways. Although their needs are similar to those of other customers, the best
configuration of activities to reach them is different.
Positioning is not only about carving out a niche. A positions emerging from any of the
sources can be broad or narrow. The basis-variety, needs, access or some combinations of the
three - positioning requires a tailored set of activities, because it is always a function of
differences on the supply side, that is, of differences in activities.
What is strategy? Strategy is the creation of a unique and valuable position, involving a
different set of activities.
Sustainable strategic position requires trade-offs
Trade-offs arises for three reasons:
1. From inconsistencies in image or reputation. A company known for delivering one
kind of value may lack credibility and confuse customers if it delivers another kind of
value.
2. From activities themselves. Many trade-offs reflect inflexibilities in machinery, people
or systems. Value is destroyed if an activity is overdesigned or underdesigned for its
use. Productivity can improve when variation of an activity is limited.
3. From limits on internal coordination and control. Positioning trade-offs are pervasive
in competition and essential to strategy. They deter straddling or repositioning,
because competitors that engage in those approaches undermine their strategies and
degrade the value of their existing activities.
What is strategy? Strategy is making trade-offs in competing. The essence of strategy is
choosing what not to do. Without trade-offs, there would be no need for choice and thus no
need for strategy.
Fit drives both competitive advantage and sustainability
Strategy is about combining activities. Fit locks out imitators by creating a chain that is as
strong as its strongest link. Fit is important because discrete activities often affect one another.
Although some fit among activities is generic and applies to many companies, the most
valuable fit is strategy-specific because it enhances a position’s uniqueness and amplifies
trade-offs. Three types:
1. First-order Fit: Simple consistency between each activity (function) and the overall
strategy. Consistency ensures that the competitive advantages of activities cumulated,

4
 which makes it easier to communicate to customers, employees and shareholders and
improves implementation through single mindedness in the corporation.
2. Second-order fit: When activities are reinforcing.

3. Third-order fit: goes beyond activity reinforcement to optimization of effort.

Coordination and information exchange across activities to eliminate redundancy and
minimize wasted effort are the most basic types of effort optimization.
In all three types of fit, the whole matters more than any individual part. Competitive
advantage grows out of the entire system of activities. The fit among activities substantially
reduces cost or increases differentiation. Besides, the competitive value of individual
activities cannot be decoupled from the system or strategy.
Strategic fit among many activities is fundamental not only to competitive advantage but also
to the sustainability of that advantage. Positions built on systems of activities are far more
sustainable than those built on individual activities. The more a company’s positioning rest on
activity systems with second- and third order fit, the more sustainable its advantage will be.
Those systems are difficult to untangle form outside the company and therefore hard to
imitate. Achieving fit is difficult because it requires the integration of decisions and actions
across many independent subunits. Finally, fit among a company’s activities creates pressures
and incentives to improve operational effectiveness, which makes imitation even harder.
Strategic positions should have a horizon of a decade or more, not of a single planning cycle.
Continuity fosters improvements in individual activities and the fit across activities, allowing
an organization to build unique capabilities and skills tailored to its strategy.
What is strategy? Strategy is creating fit among a company’s activities. The success of a
strategy depends on doing many things well. If there is no fit among activities, there is no
distinctive strategy and little sustainability.
Rediscovering Strategy
Managers have become confused about the necessity of making choices. In the race for
operational effectiveness, many managers simply do not understand the need to have a
strategy.
The growth trap: The desire to grow has perhaps the most perverse effect on strategy. Trade-
offs and limits appear to constrain growth. Attempts to compete in several ways at once create
confusion and undermine organizational motivation and focus. Too often, efforts to grow blur
uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage.
In fact, the growth imperative is hazardous to strategy.
Profitable Growth: Concentrate on deepening a strategic position rather than broadening and
compromising will lead to reinforce strategy. One approach is to look for extensions of the
strategy that leverage the existing activity system by offering features or services that rivals
would find impossible or costly to match on a stand-alone basis. Deepening a position
involves making the company’s activities more distinctive, strengthening fit and
communicating the strategy better to those customers who should value it.
Globalization often allows growth that is consistent with strategy, opening up larger markets
for a focused strategy.

5
The role of leadership: With many forces at work against making choices and trade-offs in
organizations, a clear intellectual framework to guide strategy is a necessary counterweight.
General management’s core is strategy: defining and communicating the company’s unique
position, making trade-offs and forging fit among activities. Strategy renders choices about
what NOT to do as important as choices about what to do. Strategy requires constant
discipline and clear communication. Improving operational effectiveness is a necessary part
of management, but is NOT a strategy.
The operational agenda involves continual improvement everywhere there are no trade-offs.
This is the proper place for constant change, flexibility and relentless efforts to achieve best
practice.
The strategic agenda is the right place for defining a unique position, making clear trade-offs,
and tightening fit. It involves the continual search for ways to reinforce and extend the
company’s position.
A company must continually improve its operational effectiveness and actively try to shift the
productivity frontier at the same time, there needs to be ongoing effort to extend its
uniqueness while strengthening the fit among its activities. However, a company’s choice of a
new position must be driven by the ability to find new trade-offs and leverage a new system
of complementary activities into a sustainable advantage.

‘Are you sure you have a strategy?’

Strategy has become a catchall term used to mean whatever one wants it to mean. When
executives call everything strategy, and end up with a collection of strategies, they create
confusion and undermine their own credibility. Without a strategy, time and resources are
easily wasted on piecemeal, disparate activities and the result will be a potpourri of disjointed,
feeble initiatives.
A strategy consists of an integrated set of choices, but it isn’t a catchall for every important
choice an executive faces. The key is not in following a sequential process, but rather in
achieving a robust, reinforced consistency among the elements of the strategy itself.
The elements of Strategy
Arenas: Where of in what arenas the business will be active? It is important to be as specific
as possible about the product categories, market segments, geopraphic areas and core
technologies, as well as the value-adding stages the business intends to take on. The strategist
needs to indicate not only where the business will be active, but also how much emphasis will
be placed on each.
Verhicles: How to get there? Selection of vehicles should not be an afterthought or viewed as
a mere implementation detail. The company that uses various vehicles on an ad hoc or
patchwork basis, without on overarching logic and programmatic approach, will be at a severe
disadvantage compared with companies that have such coherence.
Differentiators: How a firm will win in the market place? In a competitive world, winning is
the result of differentiators. They require executives to make upfront, conscious choices about
which weapons will be assembled, honed and deployed to beat competitors in the fight for
customers, revenues and profits. Regardless of the intended differentiatiors, the critical issue
for strategists is to make up-front, delibarate choices. Without that, two unfortunate outcomes
loom.
1. If top managemet doesn’t attempt to create unique differentiations, none will occur.
6
2. Without up-front, careful choices about differentiators, top management may seek to offer
customers across-the-board superority, trying simultaneously to outdistance competiors on too
broad an array of differentiators.
In selecting differentiators, strategists should give explicit preference to those few forms of
superiority that are mutually reinforcing, consistent with the firm’s recources and capabilities
and highly valued in the arenas the company has targeted.
Staging: The speed and sequence of major moves to take in order to heighten the likelihood
of success. Decisions about staging can be driven by a number of factors.
1. Recources
2. Urgency
3. Achievement of credibility: Attaining certain tresholds can be critically valuable for
attracting resources and stakeholders that are needed for other parts of the strategy.
4. The persuit of early wins: Wiser to successfully tackle a part of the strategy that is
relatively doable before attempting more challenging or unfamiliar initiatives.
Economic Logic: How profits will be generated? Not some profits, but the profits above the
firm’s cost of capital. It is not enough to vaguely count on having revenues that are above
costs. Unless there’s a compelling basis for it, customers and competitors won’t let that
happen.
The most successful strategies have a central economic logic that serves as the fulcrum for
profit creation. Some companies can charge premium prices, because their offerings are
superior in the eyes of their targeted customers, customers highly value that superiority and
competitors can’t readily imitate the offerings. Systemic advatages of scale, experience and
know-how sharing will lead to lower costs.
The imperative of strategic comprehensiveness
First, all five are imporant enough to require intentionality. Suprisingly, most strategic plans
emphasize one or two of the elements without giving any consideration to the others. Second,
the five elements call not only for choice, but also for preparation and investment. Third, all
five elements must align with and support each other. Few managers pay attention to the
consistencies required among the elements of the strategy itself. The five elements of the
strategy diamond can be considered the hub or central nodes for designing a comprehensive,
integrated activity system.
A strategy is more than simply choices on the five fronts: it is an integated, mutually
reinforcing set of choices, choices that form a coherent whole.
IKEA: Revolutionizing an industry
Ikea is not only a retailer, but also maintains control of product design to ensure the integrity
of its unique image and to accumulate unrivaled expertise in designing for efficient
manufacturing. The company relies on a host of long-term suppliers who ensure efficient,
geographically dispersed production. As its primary vehicle for getting to its chosen arenas,
IKEA engages in organic expansion, building its own wholly owned stores. IKEA attracts
customers and beats competitors by offering several important differntiators. First, products
have a very reliable quality but are low in price. Second, IKEA customers are treated in a fun,
non-threateninng experience. Third, the company strives to make customer fulfillment
immediate. As for staging, IKEA’s speed and sequence of moves, once mangement realized
its approach would work in a variety of countries and cultures, the company committed itself
7
to rapid international expansion. The economic logic of IKEA rests primarily on scale
economies and efficiencies of replication. IKEA has enough standardization that it can take
great advantage of being the world’s largest furniture retailer. They are vigilant, astute
learners, and they put that learning to great economic use. All of IKEA’s actions fit together.
The real power and role of strategy is in looking forward. Based on a careful and complete
analysis of a company’s environment, marketplace, competiors and internal capabilities,
senior managers need to craft a strategic intent for their firm.
Brake Procducts International: Charting a new direction
BPI executives concluded that they had a potential advantage that was well suited to the
global consolidation of the automobile industry. If BPI did a better job of coordinating
activities among its geographically dispersed operations, it could provide the one-stop, low
cost global purchasing that the industry giants increasingly sought. BPI’s economic logic
hinged on securing premium prices from its customers, by offering them at least three
valuable, difficult-to-imitate benefits. First, BPI was the worldwide technology leader in
braking systems. Second, BPI would allow global customers an economical single source for
braking products. Third, through its alliances with major suspension-component
manufactures, BPI would be able to deliver integrated supsension system kits to customers.
BPI’s turnaround was highly successful. The substance of the company’s strategy was
critically important in the turnaround.
Of strategy, better strategy, no strategy
Some of skepticism about strategy stems from basic misconceptions.
1. A strategy need not be static: It can evolve and be adjusted on an ongoing basis.
2. A strategy doesn’t require a business to become rigid. Some of the best strategies for
today’s turbulent environment keep multiple options open and build in desirable flexibility.
3. A strategy doesn’t deal only with an unknowable, distant future. Strategy used to be
equated with 5 or 10 year horizons, but today a horizon of two or three years is often more
fitting.
Strategy is nog primarily about planning. It is about intentional, informed and integrated
choices. The strategy diamond is a way to craft and articulate a business aspiration.

‘Customer Equity Drivers and Future Sales’

In the current competitive marketing environment, customer equity as a measure of the
expected future behavior of a firm’s customers is a key strategic asset that must be monitored
and nurtured by firms to maximize long-term performance. Effective management requires
careful monitoring of customer equity both to detect signals of erosion in customer equity and
to appropriate programs to enhance it.
Theory
Value equity is the customers’ objective assesment of the utility of a brand based on
perceptions of what is given up for what is receive. Brand equity is more subjective and
emotional. It is the intangible asessement of the brand.
A major strength of Rust, Zeithaml and Lemon’s (2000) model is its ability to relate a
company’s perceived marketing strategy and marketing investments to the customers’
reactions to these investments and to the economic output generated by the related customer
behavior. However, the model does not include some key aspects of customer loyalty. By
8
including the construct of loyalty intentions instead of a switching matrix, it is possible to
address a core criticism of Markov models. To summerize: Our model tries to adress two
particularly important concerns of Rust, Zeithaml, and Lemon’s (2000) model: 1. Not
considering the concept of loyalty and 2. Not using behavioral data. Thus our model is well
suited to improve the understanding of the relationship among perceived marketing actions,
customer attitudes and future sales.
Development of hypothesis
Drivers of Loyalty intentions
1. Value equity: the perceived ratio of what is received ot what must be sacrificed.
Thus, a favorable price- quality ratio is indicative of high value equity.
2. Relationship equity: involves the elements that link a customer to a brand or a
company. If perceived relationship equity is high, customers believe that they are well
treated and handled with particular care.
3. Brand equity: the subjective appraisal of a customer’s brand choice. It is the value
added to a product or service as a result of prior investmetns in the marketing mix. If
customers judge a particular brand as strong, unique and desirable, they experience
high brand equity. Because a brand attach additional value to a product or service, it
increases the value compared with a nonbranded product or service.
Link between loyalty intentions and future sales
The theory of reasoned action states that loyalty intentions have an immediate influence on
behavior. Loyalty intentons may result in a readiness ot act(buy). This readiness is
accompanied by the consumer’s willingness to serach for a favorite offering, despite the
considerable effort necessary to do so. Therefore a positive effect of loyalty intentions on
future sales can be assumed.
The link between past sales and future sales
Consumers will prefer to buy at the same retailer they bought from on previous purchase
occasions, even though they might perceive other retailers as providing the same benefits.
Corstjens and Lal(2000) explain that this phenomenon is due to the psychological
commitment to prior choices and customer’s desire to minimize their cost of thinking. =
Inertia effect, is rational because it helps consumers achieve satisfactory outcomes by
simplifying the decision-making process and saving the costs of making decisions.

9
Results
Overall, the model is stongly supported. The trhee drivers of loyalty intentions
(value,brand,relationship equity) explained 44,69% of the vairation in loyalty intention
ratings. Value equity bu itself would explain 36,85%, brand equity 36,91% and relationship
equity 20,40%. These percentages cannot be added up, because the equity drivers are not
mutualy exclusive. Brand equity has a strong impact on loyalty intentions, closely followed
by value equity. The likelihood ratio test show a significant improvement in the fit between
the original model and the new model, which includes three direct links etween the equity
drives and future sales.
Discussion
The study shows that all three customer equity drivers positively influence customers’ loyalty
intentions toward a firm and that customers’ loyalty intentions have a postive effect on the
firm’s future sales. Among the three drivers, brand equity and value equity are of primary
importance in establishing future sales. Besides relationship equity is a significant driver of
loyalty intentions. The study alos shows that future sales are directly influenced by loyalty
intentions and past sales. Furthermore, they are indirectly influenced by value equity, brand
equity and relationship equity. Considering the equity drivers in particular, it is critical to
understand that future sales could be influenced by marketing activities targeted toward
increasing the perceived equity of the three strategic fiels of investment: value, brand and
relationship.
Managerial implications
Value equity represents a customer’s balancing of what is given up (price) and what is
received in return (value). A firm could consider delivering to the customer different aspects
of value, including quality service, quality product, price, convenience and an engaging
shopping environment. It is important that managers uncover the level of influence of various
aspects of value on future sales for different customer segments in their business so that
resources can be appropriately allocated, thus maximizing value equity.
Brand equity is of equal importance to value equity in predicting loyalty intentions and,
ultimately, in establishing future sales is noteworthy. When a brand is perceived as attractive
and unique, customers are less likely to switch. Thus, managers must focus on establishing

10
and sustaining brand equity to influence loyalty directly. In establishing brand equity,
managers must focus on building brand awareness, improving brand image and ensuring the
consistency of delivery of a brand’s promise at a level that surpasses the customer’s
expectations.
Relationship equity is a significant driver of future sales. This suggests that firms must
increase relationship equity by establishing and maintaining sound relationships with
customers that will help cement customers to the firm. Firms must consider setting up
initiatives, such as community activities and loyalty programs, that provide ‘aspirational
value’ and establishing learning relationships with customers. By amplifying the nonfinancial
benefits provided to the members of the loyalty program, the retailer could become more
trustworthy while also creating switching barriers. Another way to achieve better relationship
equity would be to improve the social value that comes with the relationship with the retailer.
Finally, the challenge for managers who want to improve their marketing accountability is
related to the lack of scientific approaches that link marketing actions with customer spending
actions. This study informs managers how the proposed model could be applied to companies
in understanding the drivers that are most important for influencing the buying behavior of
their customers.
Limitations and further reserach
- The study analyzed a particular retailer from one industry. Caution must be exercised
in generalizing our findings to other retail organizations/industries.
- The analyzed data comes from customers who are current members of the loyalty
program of this particular retailer.
- Only questionnaire data from one point in time is used.

It would be fruitful to discuss the complex concept of loyalty intentions in more detail. Finally
it might by useful to examine the extent to which the three types of equity drivers have
different effects on specific aspects of purchase behaviors.

Internal and External Analysis – Week 45

‘Marketing Myopia’
By Theodore Levitt

The reason growth is threatened, slowed or stopped is not because the market is saturated, but
because of a failure of management. It is important to be customer orientated instead of
product orientated. For example railroads defined their business incorrectly, they were
railroad oriented, instead of transportation orientated. Furthermore Hollywood defined its
business incorrectly, they thought to be in movie business (product), but they were actually in
the entertainment business (customer). A customer-orientated management can keep a growth
industry growing by constant watchfulness for opportunities to apply their technical know-
how to the creation of customer-satisfying uses that accounts for their prodigious output of
successful new products, for example nylon, glass and aluminum industry. In each case the
industry’s assumed strength lay in the apparently unchallenged superiority of its product. In
the beginning there appeared to be no effective substitute for it, but over time all the industries

11
come under a shadow of obsolescence. For example supermarkets have once took over all the
demand of corner stores and the need for dry cleaning is cut by synthetic fibers and chemical
additives. The history of every dead and dying “growth” industry shows a self-deceiving
cycle of bountiful expansion and undetected decay. Four conditions that usually guarantee this
cycle:
1. The belief growth is assured by an expanding and more affluent population
2. The belief there is no competitive substitute for the industry’s major product
3. Too much faith in mass production and in the advantages of rapidly declining unit
costs as output rises.
4. Preoccupation with a product that lends itself to carefully controlled scientific
experimentation, improvement and manufacturing cost reduction.
Petroleum industry is used as example, due to its excellent reputations, they enjoy confidence
of sophisticated investors and their management are progressive thinkers.
An expanding market keeps the manufacturer from having to think very hard or
imaginatively, but it is very ceasing to be in a growth industry, but actually in a declining one,
relative to other industries. Besides there could always appear an unexpected competitive
substitute. Oil has never been a continuously strong growth industry, because each time it
thought to have a superior product safe from the possibility of competitive substitutes, the
product turned out to be inferior and notoriously subject to obsolescence (first oil was a
medicine, then used in kerosene lamps, afterwards used in space heaters and at last for
aviation in war time). It is important to know what makes a business successful. One of the
greatest enemies of the knowledge is mass production, because all effort is focused on
production and get rid of the products, that is why selling is emphasized above marketing.
Selling focuses on the needs of the seller and the objective to convert the products into cash,
whether marketing focuses on satisfying the needs of the buyer by means of the product and
the whole cluster associated with creating, delivering and consuming it. They create value-
satisfying products instead of only offering the generic product or service. For example
Detroit never really researched customer wants. They only researched their preferences
between the kinds of things they were already offering. The areas of the greatest unsatisfied
needs are ignored or get stepchild attention. Marketing effort is viewed as a necessary
condition of the product, this is a consequence of mass production with its parochial view that
profit resides essentially in low cost full production. Ford invented a assembly line, because
he concluded that at $500 he would sell millions of cars. In this case mass production was the
result, not the cause of low prices.
Most of the times profit possibilities of lower unit costs and demand leads to a declining
industry, because usually the products fails to adopt to the changing patterns of consumer
needs and tastes to new and modified marketing institutions and practices or to product
developments in competing or complementary industries. The industry has its eyes so firmly
on its own specific products that it does not see that it is being made obsolete. For example if
the buggy whip industry defined itself as being in the transportation business rather than being
in the buggy whip industry, it might have survived. Besides people actually do not buy
gasoline, they buy the right to continue driving in their cars. The gas station is perceived as a
tax collector, this makes the gas station a basically unpopular institution. Once companies
recognize the customer satisfying logic of other power systems, they have no choice about
working on an efficient, long lasting fuel. For their own good the oil firms have to destroy
12
their own profitable assets. This creative destruction is necessary to stay profitable in the
future. The historical fate of one growth industry after another has been its suicidal product
provincialism.
If a company becomes successful by creating a superior product, management continues to be
orientated towards the product rather than the people who consumer it. This develops the
philosophy that continued growth is a matter of continued product innovations and
improvement. This will lead to a selective bias in favor of research and production instead of
marketing and the organization will view itself as making things rather than as satisfying
customer needs. Marketing is treated as residual activity, that must be done once the vital job
of product creation and production is completed. To this bias is added the favor of dealing
with controllable variables. The abstractions to which they feel kindly are those that are tested
or manipulated in a laboratory or if not testable, then functional.
Important are the realities of the market. Managers believe that consumers are unpredictable,
varied, stupid, shortsighted and generally bothersome. That is why they focus on what they
know and what they control, namely product research, engineering and production. Basic
questions about customers and markets seldom get asked, the latter occupy a stepchild status.
They are recognized as existing, nut not worth very much real thought or dedicated attention.
The view that an industry is a customer-satisfying process instead of a good-producing
process is vital for all business people to understand. Given the customers’ needs, the industry
develops backward with the physical delivery of customer satisfactions, to creating things by
which these satisfactions are achieved and finally to finding the raw materials necessary for
making its products. Organizational lifetime conditioned management to look in the opposite
direction, what means marketing is a stepchild.
In any case it should be obvious that building an effective customer orientated company
involves far more than good intentions or promotional tricks, it profound matters of human
organizations and leadership. A company has to adapt to the requirements of the market and
it as to do it sooner rather than later. The trick is to survive gallantly and to feel the visceral
feel of entrepreneurial greatness. It is important to have a vigorous leader who is driven
onward by a pulsating will to succeed. This leader must have a vision that can produce eager
followers. Beside the company must think of itself as providing customer creating value
satisfactions instead of producing products. They are buying customers, as doing things that
will make people want to do business with. The leader must create this environment, this
viewpoint, this attitude and this aspiration.
“Unless a leader knows where he is going, any road will take him there.”

‘Assessing Advantage: A Framework for Diagnosing

competitive superiority’
By George S. Day & Wensley
Effective strategy moves are grounded in valid and insightful monitoring of the current
competitive position coupled with evidence that reveals the skills and resources affording the
most leverage on future cost and differentiation advantages. Superior performance requires a
business to gain and hold an advantage over competitors is central to contemporary strategic
thinking. Business seeking advantage develop distinctive competences and manage for lowest
delivered costs or differentiation trough superior customer value. The promised pay off is
market share dominance and profitability above average for the industry. A organizing
framework that clarifies the nature of competitive advantages is used to ensure a thorough and

13
balanced assessment of the reasons for the competitive position of a business. There are
different stages in the measurement system, these appraisals are highlighted. (table 3)
1. Relationship between competitor focused and customer-centered approaches
Perspectives on competitive position
Competitor-centered assessment is based on direct management comparisons with a few
target competitors. This approach is often seen in industries where the emphasis is on “beat
the competition.” The key question is: “How do our capabilities and offerings compare with
those of competitors?” These businesses watch costs closely, quickly match the marketing
initiatives of competitors and look for their sustainable edge in technology. Managers keep a
close watch on market share and try to detect changes in competitive position. This
perspective leads to a preoccupation with costs and controllable activities, which can
compared directly with the rivals.
Customer-focused assessment starts with detailed analysis of customer benefits within end-
use segments and work backward from the customer to the company to identify the actions
needed to improve performance. This “market back orientation” is often found in service-
intensive industries, like investment banking, in which new services are easily imitated, costs
of funds are the same and entry is easy. Relatively less attention is given to competitors
capabilities and performance, the emphasis is on quality of customer relationships. Continuing
customer satisfaction and loyalty id more meaningful than market share. This perspective
have the advantage of examining the full range of competitive choices in light of the
customers’ needs and perceptions of superiority but lack an obvious connection to activities
and variables that are controlled by the management.
Market environments are not unambiguous realities, there are given meaning in the minds of
managers trough processes of selective attention and simplification. Perspectives are needed
to simplify their environments.
There are several meanings of competitive advantage, because there is no agreement on what
elements to include or how they are related, information gaps cannot be identified.
Eleven distinct measurement approaches are evaluated for:
1. Conceptual validity – is the measure compatible with the framework?
2. Measurement feasibility – does the measure employ readily available inputs that are
likely to provide reliable and unbiased information?
3. Diagnostic insights – will the measure yield information that can guide strategic
choices to enhance the long run value of the business?
Competitive advantage is sometimes used interchangeably with “distinctive competence” to
mean relative superiority in skills and resources. Besides another meaning refers to what we
observe in the market – positional superiority, based on the provision of superior customer
value or the achievement of lower relative costs and the resulting market share and
profitability performance. An integrated view of those two meanings is based on both
positional and performance superiority. The sustainability of positional advantage requires
that business set up barriers that make imitation difficult. These barriers to imitation are
continually eroding, what means the company have to invest continually in sustain or improve
the advantage. That is why the creation of a competitive advantage are the outcome of a long-
run feedback or cyclical process.

14
 2. Source-position-performance framework
Performance
Sources of advantage Positional advantages
outcomes
• Superior skills • Superior customer
• Satisfaction
value
• Superior
• Loyalty
resources • Lower relative costs

Investment of profits to sustain

advantages

Sources of Advantage represents the ability of a business to do more or do better than its
competitors.
Superior skills are the distinctive capabilities of personnel that set them apart from the
personnel of competing firms. This arise from the ability to perform individual functions more
effectively than other firms. For example: superior technical skills may lead to greater
precision or reliability of the finished product. Skills derived from organization structure
enable the firm to adopt more responsively and faster to changes in market requirements.
Superior resources are more tangible requirements for advantage that enables a firm to
exercise its capabilities. Examples are scale of manufacturing facility, location, distribution
coverage, family brand name etc. The distinction between antecedent sources of advantage
and the positional advantages that result when they are deployed adroitly is seen readily in
successful turnaround strategies.
Positions of advantage are directly analogous to competitive mobility barriers that could
deter a firm from shifting its strategic position. They understood the best in a value chain,
which classifies activities of the firm into the discrete steps performed to design, produce,
market, deliver and service a product. Only value creation activities with great impact on
differentiation and that account for a large or growing proportion of costs are considered:

• lowest delivered cost positions - an overall cost edge is gained by performing most
activities at a lower cost than competitors while offering a parity product.

• Differentiated positions- a business is differentiated when some value adding activities

are performed in a way that leads to perceived superiority that are valued by
customers. These activities are only profitable, if customers are wanted to pay a price
premium. Some favored routes are providing superior service, offering innovative
features, using as strong brand name and providing superior product quality.
Performance outcomes
The most popular indicators of marketing effectiveness and competitive advantage are market
share and profitability. Alternative measures are customer satisfaction and the value of
customer franchises are less used.
Market share – this measure can distinguish winners from losers, but it is a very simplistic
view on competition, because competition is played over many time periods with evolving
markets. Besides there are few markets in which current share does not have a strong
relationship to future share. If the market share have to serve more than simply an outcome
measure, the observed market share must be difficult to imitate and must refer to a market
15
with relatively stable boundaries. Besides to be a valid measure of competitive forces, it also
should relate to ways the competitor defines the market and should reflect emerging
communalities and differences in market segment behavior. A single market share measure is
unlikely to satisfy these requirements.
Market share and profitability –there are two directions of the causality: from share to profit
and from profit to share (companies which are profitable will reinvest the profits so they grow
faster than their less fortunate rivals). Early in the evolution of the market first mover
advantages dominate.
Profitability – this is the reward from past advantages after the current outlays needed to
sustain or enhance future advantages have been paid. Profitability is influenced by actions
taken in many previous time frames, it is unlikely to be a complete reflection of current
advantage. If environment is turbulent it could be a misleading indicator. The interpretation of
profitability is complicated by limitations, because the cost based approaches that underlie
most accounting results are fundamentally different from approaches that estimate financial
value from the stream of future benefits, for example the treatment of intangibles.
Consequently future value of an asset depends critically on how it is used and whether the
stream of benefits can be protected from competitive forces.
Converting skills and resources into superior positions and outcomes
Neither the marketing or strategy approach gives much attention to the relationship of the
input sources of advantage and the performance outcomes of market share or profit. Generally
there is more attention paid to the conversion of superior skills and resources to positional
advantages. This are the structural determinants or drivers of cost or differentiation
advantages.
Converting sources into positions of advantage
Drivers of positional advantages are the high leverage skills and resources that do the most to
lower costs and create value for customers.
• Cost drivers are the structural determinants of cost of each activity. Primary drivers
are:
1. scale of economics
2. learning that improves knowledge and processes independently
3. patterns of capacity utilization and the linkages
4. linkages: the way one activity is performed affects another activity (for
example: more costly product design are used to reduce service costs).

• Drivers of differentiation represent the underlying reasons why an activity is executed

in a unique or superior way. Principal drivers are:
1. Policy choices about what activities to perform
2. Linkages within the value chain (for example: coordination between sales and
service to improve speed of order handling)
3. Timing that gains first mover advantages
16
 4. Other drivers could be: location, interrelationships with other businesses,
learning and scale.
Converting sources directly to performance
This conversion is modeled in the fundamental theorem , which holds that market shares of
various competitors are proportional to their sales of total marketing effort. This relationship
is a key feature of the so called market share attraction models. The basic notion is that the
firm’s competitive strength roughly correspond to its functional expenditures and
competencies. In the most extensive application of the theorem a firm has an advantage, when
its capacity to supply products is greater than the market demand for its output. The resulting
products can be applied to exploiting opportunities to gain share. The size of this advantage is
estimated by subtracting the firm’s share to strategic investments from its share of units sold
(Cook, 1983). The basic valuation model proposed by Cook presumes that the current level of
investments in terms of annual cash outlays is the proper basis for assessing the level of
market share a business can sustain. The resulting market share has a net present value that
relates current outlays to the discounted value of the future revenue stream (Cook, 1985). In
reality this model only gives a partial picture of the potential value of past and current
strategic investments. A complete picture must reflect:
1. The link between today’s investments and opportunities to execute tomorrow’s
options. Especially in case of new technologies a first investment if often a necessary
condition to learn enough to be in the position to make further investments
2. First mover advantages
3. Strategic choice of when and how the profit potential of a positional advantage will be
realized
The size and duration of a superior payoff depends on:

• Whether the perceived value by the customer and the resulting price premium are
greater than the extra costs of the differentiation.

• Trade off between higher immediate profit and the increased market share gained with
the penetration price.

• Opportunities to sustain an advantage over time

4. Nature of individual measures

17
In figure 2 of the article the framework for assessing advantage describes the relation of
performance of a business to that of its competitors. The framework illustrates that
conversions from superior skills and resources to positional advantages is mediated by
strategic choices, like entry timing, implementation, costs etc. Besides key success factors
must be managed obsessively to ensure long run competitive effectiveness.
Methods for assessing advantages (table 2)
Competitor-centered methods
The essence of this methods is a direct comparison with target competitors. Common
competitor-based method is judgmental identification of distinctive competences, which are
based on “unique levels and patterns of both skills and resources, deployed in ways that
cannot be duplicated by others. A company can have a distinctive advantage without gaining a
competitive advantage, if this advantage is relatively unimportant to customers.
Identifying distinctive competences
1. Judge mental analyses of strengths and weaknesses- an almost limitless array of
potentially influential factors gives no guidance. There are several reasons: first
commonly the judgments are made without any reference point. Second, there is often
no distinction between what the business does well that is valued by customers and
what is does well what is unimportant for customers. Third, the judgments are based
on historical data or simple trend extrapolations, they do not give any insight in future
possibilities. To overcome these problems a participative process involving task forces
to set priorities could be employed.
18
 2. Direct comparisons of resource commitments and capabilities- disproportionate
weight tends to given to “hard” data about competitors because it is accessible and
invites direct comparisons. This type of data gives a narrow view of the relative size of
competitive capabilities and commitment. The following factors must also be
considered: functional capabilities, the capacity to grow, capability to respond quickly
to moves by others and ability to adapt to change.
3. Assessing superiority in skills: The role of the marketing skills audit- skills are the
most distinctive encapsulation of the organization’s way of doing business. This is
what really matters in the long run, because they are the essence of adaptive
organizations. It is important to focus on customer satisfaction, continuous innovation
and a widespread commitment from the whole organization to obtain the first two
orientations.
In absence of objective and comparable measures, the only recourse is the knowledge of the
business unit managers. Subjective judgments are readily biased by selective perceptions and
dominated by facts and opinions that are easy to retrieve. Hard evidence of past and current
successes is given more weight (market share, profitability), than soft assessments of future
threats. Besides there are differences across organizational levels in the perceptions of which
skill and resource factors are important. Better overall judgments result when an external
measure of expertise can be used to pick the best expert for an issue. Unfortunately even this
person is not immune to the biasing effects of selective perception.
Indicators of positional advantage
The emphasis of competitor- center method is inevitably on cost differences and activity
comparisons, because it is difficult to say whether an activity is better performed by a
competitor without customer judgments.
1. Value chain comparisons of relative costs- a cost advantage is gained when the
cumulative cost of performing all the activities is lower than competitors’ costs. To
determine the relative cost position an identification of the costs of each competitors
value chain is accomplished.
2. Cross-sectional experience curves – provides a comparison of the current total costs
positions of the competitors in a market according to their cumulative experience base.
This makes it possible to estimate the relative profitability of each competitor at the
prevailing price.
Identifying key success factors
1. Comparison of winning versus losing competitors- there are four categories of reasons
for the differences in performance: uniqueness of the vision or strategy, resources
possessed, differences in assumptions about the environment and fortuitous factors
such as good timing or location.
2. Identifying high leverage phenomena – key success factors are too superficial because
they identify things, instead of relationships between desired outcomes and
controllable inputs (for example: distance shipped and distribution costs per unit).
2.a. Management estimates of market elastics – analyses measures degree to which
total revenues will be increased or decreased by changes in marketing activities, such
as pricing, sales efforts and service levels. It is unclear if the concept of elasticity can
be generalized.
19
 2.b. Drivers of activities on the value chain – the procedure is better suited to cost
drivers than to differentiation drivers, because these are based on relationships that can
be identified largely from internal data.
Customer focuses measures
In this approach comparison of competitors is made by customers. Emphasis is shifted to
segment differences and differentiation advantages. (figure 3)
Perspectives on positional advantages
1. Choice models – there are several choice models, but full pay off will come when they
can incorporate the effect of controllable marketing variables as well as product
attributes on the choice among competitive alternatives.
2. Conjoint analyses – offers the capability to decompose an overall preferences or value
for money measure into utility scores for each level of each attribute.
3. Market mapping – these maps compress the information from customer judgments
about related attributes to a few composite dimensions. It is a pictorial representation,
which gives the specific reasons why customers prefer one competitor over another.
Customer evidence of relative performance
These performance measures require direct customer input.
1. Customer satisfaction
2. Customer loyalty- when the costs a customer would incur in searching for further
information exceeds the benefits of the search.
3. Relative share of end-user segments- obtained by dividing the share of the firm by the
share of the top three competitors.
5. Overall process
We must look critical to the overall measurement process and its development and impact
within the organization. Any measurement systems will be of commercial value if it is linked
adequately to the strategy formulation, resource location and tacitical planning process.
Summary and implications
An effective competitive strategy begins with the timely and actionable diagnosis of current
and prospective advantages of business. Information requirements:
1. There is adequate illumination of sources of advantage: superior customer value or
lowest delivered costs or superior performance.
2. Balance of customer-focused and competitor-centered methods.
3. Proprietary information about sources that exert most leverage on positional
advantages and future performance, is a competitive advantage.
The SPP framework (source, position and performance) is used to understand the nature of
the advantages. This integrative multiple measurement perspective is required before a full
picture can drawn. A point of advantage can only be profitable, if it is perceived and valued

20
by customers and is difficult to imitate for competitors. Besides there is a certain performance
pay off between superior costs or differentiation positions.
The available information is an advantage, the evidence is not only descriptive , but also
historical, distorted and incomplete. Historical because of the convenience of using readily
available measures being collected to monitor past performance and other needs. It is
distorted, because most available measures are linked to control and reward systems and
alternatively measures rely on management judgments, which are biased by selective
perceptions and recall of past successes. Finally, available measures are usually incomplete,
because they are derived from inappropriate conceptual frameworks.
Limits to customer-centering – focus on costs and internal activities will deflects attention
from changes in market segment structures of customer requirements that might shift attribute
judgments. Managerial and other expert judgments needed to watch and judge the relative
performance of the markets and its competitor is biased by susceptibility.
Limits of customer-focusing – it is seldom apparent how attributes that are important to the
customer are influenced by activities in the value chain.

‘Mapping your competitive position’

By Richard A. D’Aveni
In case an innovation pervades the value chain, a company must be able to migrate quickly
from one competitive position to another, creating new ones, depreciating old ones and
matching rivals. A possibility to do this to track the relationship between prices and product’s
key benefits over time. Most customers are unable to identify the features that determine the
prices they are willing to pay for products or services, besides 50% of the salespeople do not
know what attributes juftify the features that determine the prices of products they sell. By
conducting a simple statistical analysis it is possible to draw a price-benefit positional map
which provides insights in the relationship between prices and benefits and tracks competitive
positions over time. Executives can use the tool to benchmark themselves against rivals,
dissect competitors’ strategies and forecast market’s future.

Developing price-benefit positional map:

1. Define market – by specifying the boundaries of the market in which you are
interested. First you have to identify the consumer needs and cast a wide net of
products and services that satisfy those needs. Afterwards you must limit the
geographic scope if the products differ widely across the border. Finally you have to
decide if you want to track the entire market for a product or only a specific segment.
2. Choose the price and determine the primary benefit –it is important to identify the
primary benefit, this is the benefit which explains largest amount of variance in prices.
It is important to use unbiased data, that is why you have to employ a regression
analysis to identify the primary benefit, because consumers mostly cannot explain why
they make their choices. The benefit with the highest R2 explains most of the variance
in prices.
3. Plot positions and draw the expected price line – this may be a oversimplification, but
shows the relative position of competitors on common scale. The expected price line
shows how much customers expected to pay on average to get different levels of the
primary benefit. The trend is mostly a straight line, because people tend to pay more
for a higher level of benefit. Companies could position a brand/product above the line
to maximize profits or below the line to maximize market share.

21
22
Interpretation positioning maps
Positioning maps helps companies to pinpoint the benefits that customers value, locate
unoccupied or less competitive spaces, identify opportunities created by changes in the
relationship between the primary benefit and prices and allow companies to anticipate rivals’
strategies.
• Valuing intangible benefits – it is important to calculate the premiums a company
earns for intangible secondary benefits, like supplementary service.
• Anticipating shifts in the value of benefits – companies can employ the price-benefit
equation to get ahead of rivals in markets where consumers keep demanding different
benefits.
• Finding paths to least resistance – to extend the use of price-benefit maps companies
can add more data, like unit sales, sales growth to identify areas with low competitive
intensity. Careful analysis can provide an early warning of a shift in customers’
priorities.
• Preempting rivals – maps can used to predict the strategic intent of rivals and find
maps of preempting them. A possibility is to project the market trends. By forecasting
the movements of prices and benefits companies can stay ahead of shifts in expected
price lines and their rivals.

Price-benefit map sounds early warnings, suggest responses to competitive threats and opens
executives’ minds to many possibilities.

Growth Options – Week 46

‘Blue Ocean Strategy’
By W. Chan Kim and Renée Mauborgne

The article starts with the example of Cirque du Soleil, in a declining business of circuses they
have managed to create a successful business.
The business universe consists of two distinct kinds of space;
Red Oceans, representing all existing firms, the known market space. Industry boundaries are
defined and accepted Competitive rules of the game are understood. Competitors try to
outperform one another by grabbing a greater share of existing demand.. Prospects for profits
and growth are reduced, products turn into commodities.
Blue Oceans, industries not in existence. Demand is created, and ample opportunity for
growth. Two ways for creating Blue Oceans;
- Completely new industries
- Created from within
While studying many creations of blue oceans a consistent strategic pattern of thinking is
observed.
Blue and Red Oceans
Companies have a huge capacity to create new industries and re-create existing ones. Looking
forward and backward in time it seems clear that Blue Oceans will remain the engine of
growth. Red Oceans are shrinking steadily. Supply is overtaking demand. In overcrowding
industries it becomes harder to differentiate brands in economic upturns and downturns

23
The Paradox of Strategy
Red oceans are much more favoured than Blue Oceans, although Blue Oceans deliver more
profit. An explanation for this is that corporate strategy is heavily influenced by its roots in
military strategy. Red Ocean strategy is therefore all about competition, confronting an
opponent and driving him off a battlefield. Blue Ocean is about creating doing business where
there are no competitors, and creating new land. Focussing on RO means accepting the key
constraints of war and means denying distinctive strength of the business world.
This focus on winning against rivals is evolved from the entrance of Japanese companies.
Competition was at the core of corporate success or failure they argued
Two lucrative aspects of strategy are ignored:

• Find markets with no or little competition – BO -

• Exploit and protect BO

Toward Blue Ocean Strategy

Study on over 100 companies with BO creating delivered these key findings;
Blue Oceans are not about technological innovation. Technology is sometimes involved
but not a defining feature
Incumbents often create BO and usually within their core businesses. BO are created from
within, they are right next to you
Company and industry are the wrong units of analysis. Company and industry have little
explanatory value when analyzing BO creation. Better to focus on strategic move, the set of
managerial actions and decisions involved in making a major market-creating business
offering
Creating BO builds brands. Companies in example are remembered for the BO they
created. So BO delivers brand equity. The key for managers is to make the right strategic
moves. The creation of BO is a product of strategy and as such is very much a product of
managerial action
The Defining Characteristics
Several characteristics of BO:
The authors found that the creators of BO never use competition as a benchmark. They make
it irrelevant by creating a leap in value for both buyers and the company itself
Furthermore BO strategy rejects the fundamental tenet of conventional strategy: that a trade-
off exists between value and cost. But BO creation tells, successful companies pursue
differentiation and low cost simultaneously.
Driving down costs while simultaneously driving up value for buyers, a company can achieve
a leap in value. BO strategy is achieved only when the whole system of a company’s utility,
price and cost-activities is properly aligned. It is the whole system approach that makes the
creation of BO a sustainable strategy. BO strategy integrates the range of a firm’s functional
and operational activities.
Rejection of the trade-off between cost and differentiation implies a fundamental change in
strategic mind-set. This is very important. The assumption of given structural conditions and
forced competition within them (RO) is called the structuralist view or environmental
determinism. This views says that companies and managers are largely at the mercy of
economic forces greater than themselves. BO is based on a view that says that market
boundaries and industries can be reconstructed by the actions and beliefs of industry players,
the reconstructionist view.
24
Barriers to Imitation
Creators of BO can often 10 to 15 years profit of their creation, because there are high barriers
for imitation.
BO are able to generate scale economies very rapidly.
They can immediately attract large number of customers and create network externalities.
The requirement to make changes to their whole system in order to imitate, organizational
politics may impede a competitors ability to switch to a different business model.
The cognitive barrier can prevent competitors to enter. When company offers a leap in value,
it earns brand buzz and loyalty.
In other situations adapting to the BO strategy conflicts with the imitators existing brand
image. Ex. Body Shop and Loreal etc.
A Consistent Pattern
Blue and red oceans have always existed. It is necessary for companies to understand the
strategic logic of both types. It is time to even the scales in the field of strategy with a better
balance of efforts across both oceans. The BO strategies have always existed but where
mostly unconscious. When companies realize that strategies for BO have different underlying
logic, they will be able to create much more Blue Oceans.

‘Market Busting: Strategies for Exceptional Business

Growth’
Opening quote: “A company can’t outperform its rivals if it competes the same way they do.
Reconceive your business’s profit drivers, and you can change from copycat to king of the
jungle.”.
Introduction
The main topic of this article is growth through changing a company’s profit driver. The
author starts with a very clear example: the ready-mix concrete (gebruiksklaar cement)
business. This has been a very stable market for many years. Each competitor played by the
rules and has a stable market share. Then, one company decide to change its profit driver;
instead of selling concrete by the cubic yard or m3 like all other companies, they decide to
make delivery their profit driver. Delivering the concrete at the right time at the right place is
much more important to costumers than the price per cubic yard.
The Language of growth
As industries emerge and evolve, most companies settle on a common unit of offering:
lawyers sell units of time (billing hours), manufactures sell units of products etc. These are all
unit of business, the fundamental basis for transactions between buyers and sellers.
Associated with these units are key metrics: used to assess how well the company is doing
(e.g. % of total billing hours actually billed). Often growth is possible by:
1. Change the unit of business: make sure the unit of business reflects the value created for
customers (so delivery speed instead of volume for the concrete firm)
2. Change your performance on existing key metric: Make the existing key metric
uniquely favor your company.
A Profitable alignment
1 and 2 above can result in: growth, higher price for your product because they are of greater
value, you can be more proactive, create more shareholder value. Above that, it takes time for
competitors to react, since their business is still build on the old metrics

25
Eight Moves for Growth
eight moves to redefine profit drivers and realize low risk growth
1. Change your unit of business: The concrete example
2. Improve your key metrics: perform better, uniquely favor your company. Productivity
3. Improve your cash-flow velocity: faster cashflows = Less working capital needed = more
effective use of assets.
4. Improve your assets utilization: which will improve ROI
5. Improve customers’ performance
6. Improve customers’ personal productivity (convenience, time saving)
7. Help improve customers’ cash flow
8. Reduce customers’ asset intensity
Putting these ideas to good use
Approach or steps:
• Identify your unit of business and associated key metrics
What does the company charge for? “We make money by billing our customers
for_____”
Does that really reflect the value you create for your customers?

• Identify obstacles to change

Why haven’t we changed yet? 2 techniques
1. Japanese Five Whys: why….? Why….? Why…? Why…? ….
2. Five RE’s
Remove: can we remove costs?
Replace: if we cannot remove the costs, can we replace them by less expensive unit
Reduce: if we cannot replace costs, can we reduce them?
Redesign: If we cannot reduce costs, can we improve in efficiency?
Redistribute: If we cannot redesign, can we distribute costs over more products?

• Review key customer segments you serve

• Assess the need for new capabilities and potential internal resistance

• Decide on a marketing and communications plan

‘Value Innovation; The Strategic Logic of High Growth’

By W. Chan Kim and Renée Mauborgne

Abstract
The authors study how innovative companies break free from the pack by creating
fundamentally New market places, that is, by creating new products or services for which
there are no direct competitors. A different competitive mindset is needed by managers.
Instead of searching within the boundaries of industry competition, managers should look
across those boundaries and find unoccupied territory. For example French hotel chain Accor,
which developed what customers really needed, that is, a cheap place to stay and a good
night’s sleep.
Introduction
26
Profitable growth is a tremendous challenge many companies face. Why do some companies
achieve growth? The difference in companies, which do achieve growth, is companies‘
fundamental, implicit assumptions about strategy. High growth companies paid little attention
to beating or matching their rivals.
The article continuous with the example of Bert Claeys and his Kinopolis, the super sized
cinema in Brussels. In a declining visitors market for movie theatres, Bert developed a
megaplex with 7600 seats and 25 screen. The strength of this formula is in its differentiation.
It is completely different than the industry standard, making it irresistible, i.e. cheap, quality,
etc. for customers. The company put aside conventional thinking about how a theatre should
look like and made it even cheaper.
Conventional Logic Versus Value Innovation
Conventional logic and Value innovation (VI) differ over 5 basic dimensions of strategy
Industry Assumptions. Where many companies take their industries’ conditions as given,
value innovators don’t. They look for blockbuster ideas and quantum leaps in value. Ex. The
idea of Bert Claeys.
Strategic Focus. Many organisations let competitors set the parameters for their strategic
thinking. Compare strength and weaknesses with those of rivals. Ex. CNN developed 24/7h
news. The logic of value innovation starts with an ambition to dominate the market by
offering a big leap in value. VI monitor competitors but do not use them as benchmarks.
Furthermore they free up their resources to identify and deliver new sources of value. Often
they achieve competitive advantages, although that is not the objective.
Customers. VI do not focus on retaining and expanding their customer base. They focus on
commonalities in features that customers value. VI believe that customers will set differences
aside if they are offered a considerable increase in value.
Assets and Capabilities. VI try to develop new business. Assess business opportunities
without being biased or constraint by where they are at a given moment. Ex. Virgin
Megastores
Product and Service Offerings. VI cross the established boundaries defined by industry.
They want to provide a total solution for buyers and not let them make a forced choice of a
product. Ex. Bert and Compaq approach.
Creating a New Value Curve
Take the Accor case as example. Accor developed a hotel what customers of budget hotels
wanted, that is, a good night sleep for a low price. They created the Formula 1 hotels. The
extend to which they departure from the standard thinking can be seen in the value curve (see
article). Value curve is a graphical representation of a company’s relative performance across
its industry’s key success factors. It usually follows one basic shape, rivals try to improve
value by offering a little more or less, but never challenge the shape of the curve. Value
Innovators (VI) do, by eliminating features, creating features, and reducing and raising
features to unprecedented levels in their industries. Ex. SAP integrated software developer.
The Trap of Competing, the Necessity of Repeating
Eventually a VI will find its growth and profits under attack, by competition. In an attempt to
resist VI often fall in the trap of conventional strategic logic to defend itself. Ex. Compaq.
Monitoring the value curves may prevent a company from pursuing innovation when there is
still a huge profit to be collected from current operations. Innovation speed differs among
industries, some companies can harvest their innovations for a long time, others can not.

27
Driven by internal pressure some companies innovate, just to innovate. VI should deliver
unprecedented value, not technologies or competencies. It is not the same as being the first to
the market.
When value curve is fundamentally different than that of rest of the industry, and the
difference is valued by most customers, companies should resist innovation. Instead they
should focus on geographic expansion and operational improvements to achieve maximum
economies of scale and market coverage. This discourage imitation and allow companies to
tap the potential of their current value innovation.
The Three Platforms
Value Innovation can take place on three platforms, product, service and delivery. Companies
that are most successful on repeating value innovation were those that took advantage on all
three platforms. Platforms differ across industries and companies, but in general the product
platform is the physical product, the service platform is support such as maintenance,
customer service, warranties, training for distributors and retailers, delivery platform is
logistics and channels to deliver products to customers. Too often managers focus only on
product platform. But as customers and technologies change, each platform presents new
possibilities. Good VI rotate their value platforms.
Driving a Company for High Growth
One of the key findings is that logic is often not articulated, and because not examined, a
company does not necessarily apply a consistent logic across its businesses.
How can senior executives promote VI? First they should identify and articulate companies
prevailing strategic logic. Then challenge it, they must stop and think about industries
assumptions, company’s strategic focus, approaches - to customers, assets and capabilities,
product and service offerings – that are taken as given.
After reframing strategic logic around VI, Senior executives should ask 4 questions to create a
new value curve:
1. Which of the factors that our industry takes for granted should be eliminated?
2. Which factors should be reduced well below the industry’s standard?
3. Which should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered?
All 4 questions should be asked. VI is the simultaneous pursuit of radically superior value for
buyers and lower costs for companies.
In diversified corporations logic of VI can be used to identify most promising possibilities for
growth across portfolio. Pioneer metaphor is the extend to which a company pushes the value
for customers to new frontiers. A companies pioneers are the businesses that deliver
unprecedented value, and are the most powerful sources for growth. Settlers are the other
extreme, and do not deliver much value to the company. In between are the Migrators, they
extend the industry’s curve, but do not alter its shape.
A company which pursues growth can plot the portfolio on the pioneer-migrator-settler map.
When this mainly consists of settlers, maybe the company has fallen into the trap of
competing. Migrators indicate there can be expected growth, but it is not exploiting its
potential fully. It can predict future growth and profits, task which is crucial in a fast changing
economy.

28
Designing and Managing Brand portfolios – Week
47
‘The brand report card – the world’s strongest brands
share ten attributes. How does your brand measure
up?’
By Kevin Lane Keller

Building and properly managing brand equity has become a priority for all kind of companies.
After all, from a strong brand equity flow customer loyalty and profits.
The problem is, only few managers are able to objectively asses their brands strengths and
weaknesses. Many even find it difficult to include all relevant factors. In this article, the ten
characteristics that the world’s strongest brands share are identified. Furthermore, a brand
report card is set up (page 149) – a systematic way for managers to grade their brand’s
performances for each of those characteristics.

The top ten traits

The world’s strongest brands share these ten attributes;
1. The brand excels at delivering the benefits customers truly desire
Example - Starbucks started off as a small coffee retailer. They didn’t sold coffee by the
cup, treated coffee as groceries. By doing so, they stayed away from the heart and soul of
what coffee has meant for centuries; the sense of community. Starbucks began to focus on
building a coffee bar culture, opening coffee bars like the ones in Italy. Starbucks coffee
bars thus far have successfully delivered superior benefits to customers. Sales and profits
have grown more than 50% annually through much of the 1990s.
2. The brand stays relevant
In strong brands, brand equity is tied both to the actual quality of the product and to
various intangible factors. Without losing sight of their core strengths, the strongest
brands stay relevant in the product arena and changes their intangible assets to fit the
times.
Example – Gillette spends millions of dollars on R&D to ensure that its razor blades are
technologically advanced as possible.
Relevance now has a deeper meaning in today’s market – witness various corporate
brands that very visible support breast cancer research or current educational programs.
3. The pricing strategy is based on consumers’ perceptions of value
Example – In implementing P&Gs value-pricing strategy for the Cascade automatic-
dishwashing detergent brand, a cost cutting change in its formulation was made that had
an adverse effect on the product’s performance under certain conditions. Lever Brother
quickly responded attacking Cascade’s core equity of producing ‘virtually spotless’ dishes
out of the dishwasher. P&G immediately returned to the brands old formulation. The
lesson to P&G is that value pricing should not be adopted at the expense of essential
brand-building equities.
4. The brand is properly positioned
The most successful brands in this regard keep up with competitors by creating points of
parity in those areas where competitors are trying to find an advantage while at the same
time, creating points of difference to achieve advantages over competitors in some other
areas.
5. The brand is consistent
29
 Maintaining a strong brand means creating the right balance between continuity in
marketing activities and the kind of change needed to stay relevant. The brand’s image
shouldn’t het blurred by series of marketing efforts that confuse customers by sending
conflicting messages.
6. The brand portfolio and hierarchy make sense
Most companies have multiple brands; they create different brands for different market
segments. The corporate brand acts as an umbrella. Brands at each level of the hierarchy
contribute to the overall equity of the portfolio through their individual ability to make
consumers aware of the various products and foster favorable associations with them. At
the same time, though, each brand should have its own boundaries.
Example – BMW has a well designed hierarchy. At the corporate brand level, BMW
pioneered the luxury sports sedan category by combining seemingly incongruent style and
performance considerations. BMW’s advertising slogan ‘the ultimate driving machine’
reinforces the dual aspects of this image and is applicable to all cars sold under the BMW
name. At the same time, BMW created well-differentiated sub brands through its 3, 5 and
7 series, which suggest a logical order and hierarchy of quality and price.
7. The brand makes use of and coordinates a full repertoire of marketing activities
to build equity
Managers of the strongest brands appreciate the specific roles that marketing activities can
play in building brand equity. Some activities, such as traditional advertising, lend
themselves best to pull functions; create consumer demand. Others, like trade promotions,
work best as push programs; designed to push the product through distribution.
Example – Coca Cola makes excellent use of many kinds of marketing activities.
8. The brand’s managers understand what the brand means to consumers
If it’s clear what customers like and don’t like about a brand, and what core associations
are linked to the brand, then it should be also clear whether any given actions will fall in
line nicely with the brand or create friction.
9. The brand is given proper support, and that support is sustained over the long
run
Example – Coors Brewing. As Coors devoted increasing attention to growing equity of its
less established brands, and introduced new products, ad support for the flag ship brand
dropped from about $ 43 million in 1983 to $ 4 million in 1993. Furthermore, the themes
of Coors’ ads shifted from western images to reflecting more modern themes. Not
surprisingly, sales dropped by half. Finally, in 1994 Coors returned to its original focus,
admitting that they did not consistently give the brand the attention it needed.
10. The company monitors sources of brand equity
Strong brands usually make use of in-depth brand audits and brand-tracking studies.
Brand audits – an exercise designed to assess the health of a given brand. Normally it
consists of a detailed description of how the brand has been marketed and what the brand
does and could mean to consumers.
Brand tracking studies – can build on brand audits by employing quantitative measures to
provide current information on how a brand is performing for any given dimension.
Whereas brand audits measure where the brand has been, tracking studies measure where
the brand is now and whether marketing programs are having intended effects.

Brand equity
Ultimately, the power of brands lies in the minds of customers, in what they have learned or
experienced about the brand over time. Consumer knowledge is at the heart of brand equity.
Brand equity can provide marketers with a strategic bridge from past to future.

30
All the money spend on marketing each year can be thought of investments – investments in
what consumers know, feel, believe and think about the brand. That knowledge dictates
appropriate and inappropriate future directions for the brand – for its consumers who will
decide where they think that brand should go.
Finally, brand equity can help marketers focus. Marketers who build strong brands have
embraced the concept and use it to clarify, implement and communicate their marketing
strategy.

‘About your brand’

By Kevin Lane Keller, Brian Sternthal and Alice Tybout

Traditionally, the people responsible for positioning brands have concentrated on points of
difference. But points of difference alone are not enough to protect a brand against
competitors. Too little attention is often paid to two other aspects of competitive positioning;
- Understanding the frame of reference within which brands work
- Addressing the features that brands have in common with their competitors
Effective brand positioning requires not only consideration of a brands’ points of difference,
but also its points of parity with other products.

Example Subway

Steps in effectively positioning you brand.

A. Have we established a frame?
Brand positioning starts with establishing a frame of reference. It is important to choose the
right frame because it dictates the types of associations that will function as points of parity
and points of difference. The frame of reference could be, for example, other brands in the
same category. Coca Cola is a soft drink and it competes with Pepsi Cola, which is also a soft
drink.
A variable that might influence the choice for a frame of reference is the products’ stage in the
product life cycle. In later stages of the product life cycle, growth opportunities and threats
may emerge outside of the product category, making it necessary to shift the frame of
reference.

B. Are we leveraging our points of parity?

Once you have chosen your frame of reference, you have to consider which points of parity
should be met in order to make your consumers perceiving your product as a legitimate and
credible player within that frame (Consumers might not consider a bank truly a ‘bank’ if it
doesn’t offer saving plans, safe-deposit boxes etc.).
The approach you use to meet the minimum requirements is depending on the products’ stage
in the product life cycle.;
1. New Brands
The more innovative the product, the more difficult to fitting it into an established frame
and to meeting the frames minimum requirements.
2. Brand Extensions
When extending a brand, it is often forgotten to set a new set of points of parity.
Example; Dove was very successful with their soap with ‘moisturizing lotion’. They
moved in the dishwashing-liquid business with a product that claimed to ‘soften your
hands as you wash the dishes’. Sales were disappointing. Perhaps consumers were

31
 looking for a dishwashing-liquid that cleaned the dishes rather than soften their hands.
Dove should have established its points of parity before stressing its points of difference.
3. Established brand
Managers of established brands need to reassess points of parity from time to time,
because points that where once differentiators can have become minimum requirements.
Marketers can hold of points of difference by creating points of parity – For example,
Gillette is not the only company selling triple-blade razors anymore. In this way, a brand
can ‘break-even’ in an area where competitors are trying to break away and then achieve a
new point of difference.

C. Are the points of difference compelling?

Strong, favorable, unique associations that distinguish a brand from other brands in the same
frame of reference are fundamental for successful brand positioning. There are three types of
brand differences;
1. Brand performance associations
Brand performance associations relate to the ways in which a product attempts to meet
customers functional needs. Five broad categories;
- Benefits (Subway; taste, variety)
- Reliability, Durability and serviceability (Subway; delivering healthy choices every
time a customer enters the store)
- Service effectiveness, efficiency and empathy (Subway; speed, accuracy)
- Style and Design (Subway; simple, hygienic environment in which product is sold)
- Value and Price (Subway; more sandwich choices)
2. Brand imagery associations
When considering buying a car or laptop, brand performance associations is all you need
to distinguish product. When making choices based on experience (haircut, dinning) ,
people use brand imagery associations. Subway; represents its point of difference by using
a spokesman who has lost weight. Subway is for people who want to lose weight.
3. Consumer insight associations
Usually used when 1 & 2 don’t differ much from competitors. If all other measures are
equal, a brand that can show consumers its insight into their problems or goals can make
the case that it is the solution (Lee Jeans; helping women in their search for the perfect fit,
establishing itself as the brand with the superior fit).

Two other questions that need to be asked when establishing points of difference benefits;
1. Are they desirable to consumers?
A point of difference must be perceived by the brands’ audience as both relevant and
believable.
2. Can you deliver them?
A products point of difference should meet three deliverability criteria;
- Creating the point of difference must be feasible
- Positioning on a particular benefit must be profitable
- Positioning must be defensive and hard to attack

Market leaders typically position their brands on the basis of the category’s points of parity;
try to create the ‘We are the frame of reference message’ (McDonalds equals great taste).
Follower brands must not neglect points of parity as a means of announcing their frame of
reference, but they should compete on points of difference.

Putting it all together

32
The frame of reference, points of parity and points of difference should be internally
consistent. Some attributes contradict each other (low price, high quality). However in some
cases apparent contradictions can be transcended;
Example – When Apple introduced Macintosh, its point of difference was ‘user friendly’.
Customers assumed that a ‘user friendly’ computer would not be very powerful, with power
as a key determinant of choice. Apple solved this problem by developing an advertisements
campaign that stated; ‘The most powerful computers are the ones that people actually use’.

Making it last
As the brand ages, the challenge is to make sure it stays up-to-date with shifting customers’
needs. In some cases a point of difference becomes its essence and implies goal attainment.
We call this laddering up.
Example laddering up; A company focused in its initial advertising spot on unique product
features that made its phone service reliable. In the second generation, the ad focused on what
reliability implied; consumers are less tied to the office to await important calls. The next
generation focused on a more general implication; consumers’ greater freedom of movement.

Another approach to sustaining a brand position is to build the ‘big idea’; indentifying a
differentiating benefit that is important to consumers and presenting , over time, a variety of
attributes that imply the benefit.

Pitfalls of Brand positioning

1. Build brand awareness before establishing a clear brand position
2. Promote attributes that consumers don’t care about
3. Invest to heavily in points of difference that can be easily copied
4. Becoming so intent on responding to competitors that you walk away from your one
established position
5. Think you can reposition a brand, while it is always difficult and sometimes
impossible

‘Kill a Brand, Keep a Customer’

Companies spend vast sums of money on launching new products and extending existing
ones. Furthermore, they create brand extensions, channels extensions etc. all with the purpose
to serve the growing number of niche markets. Surprisingly, most companies do not examine
their brand portfolio from time to time to check if they might be selling too many brands,
identify weak ones and kill unprofitable ones. Moreover, most products don’t make money
for companies. This research shows that businesses earn almost all their profits from a small
number of brands – even than the 80/20 rule of thumb suggest.

Example - Unilever had 1.600 brands in its portfolio in 1999. More than 90% of its profits
came from 400 brands. Most of the remaining 1.200 brands made losses or were only
marginal profitable.

This research suggests that companies can boost profits by deleting loss making brands. But
this is not the only reason for deleting brands. Many companies don’t realize that when they
sell different brands in the same product category, they incur hidden costs because
multibrand strategies suffer diseconomies of scale. In fact, some businesses have improved
performance by deleting loss-making brands. They have used the resources made free to
invest in the remaining brands. Thus, killing brands may sometimes be the best way to serve
both customers and shareholders.
33
So why don’t companies systematically delete brands? Mainly because executives believe it
is easy to erase brands. They’re wrong. When companies drop brands clumsily, they
antagonize customers. However, if you have too many loss-making or marginally profitable
brands, you will have to cut-down your portfolio. Usually this leads to great resistance
throughout the company. But it doesn’t necessarily have to be this way;
This research suggests a four step approach to optimize brand portfolios.

1. Making the Case

The process begins by organizing senior executives in joint audits of the brand portfolio
(senior executives normally don’t even know which brands are unprofitable). During the
audit, a Brand Audit Sheet is set up (page 89). In this sheet, brands are evaluated on market
position, value proposition and profitability. After the first audit, similar audits are organized
throughout the company. The audits make the need to cut down brands apparent throughout
the organization and serves as a spring-board to the next step.

2. Pruning the Portfolio

In this step, companies decide on how many brands to retain. Two complementary models are
used to do so;
Portfolio approach
Keep only those brands that conform to certain broad parameters/selection criteria.
Companies use different parameters, depending on the nature of the product.

Example portfolio approach – Unilever

Unilever had a portfolio of over 1.600 brands in 1999. Top management decided that profits
probably would be higher if many of them were dropped. Unilever decided to only retain
those brands that met all three of the following criteria;
Brand power (brand should have potential to become the number one or two in its market)
Brand growth potential
Brand scale (brand should be big and profitable enough to justify investment made in the
brand)
Unilever decided to retain 400 brands.

Segment approach
While some apply general parameters to the entire portfolio, others find it more useful to
resegment the market. And then identify the brands you need to cater to all consumers
segments in each market.

Example segment approach – Electrolux

Electrolux is a consumer durables manufacturer. In 1996, the company had 15 brands in the
professional food service equipment market, and only one, Zanussi, was sold in more than one
country. At this point, Electrolux was losing money. First a market research was conducted
and found that consumers were willing to pay premiums for leading brands. Electrolux
realized that they had to replace the 15 brands for a few big brands. But how many brands did
they need to cater the customers in this market? Electrolux had always segmented the market
by price and product specifications, generating a high, medium and low segment. Now they
segmented the market by customer needs. Four segments could be identified, three of which
Electrolux decided to target with three existing brands. They developed a new brand for the
fourth segment. Having four pan-European brands instead of 15 local brands, allowed

34
Electrolux to manage their brand portfolio effectively. Its sales never fell, and by 2001
Electrolux was profitable again.

3. Liquidating Brands
After companies have identified all the brands they plan to delete, they have to decide if they
want to merge, sell, milk or kill them.
Merging brands – Companies especially prefer to merge brands if they occupy niches that
maight grow in the future. Attributes, product features, image etc. are transferred to a retained
brand. Note that migration is expensive.
Selling brands – Companies should sell brands that are profitable when they don’t fit with
corporate strategy. P&G sold several profitable brands because they were in categories that
the company didn’t want to focus on.
Milking brands – Some brands that companies want to delete may still be popular with
consumers. In this case, a company should gradually stop marketing activities, save
distribution costs and move managers of the teams that handle the brand. Sales will slow
down until the brand is ready to be dropped entirely.
Eliminating brands – Brands that already were difficult to sell can be dropped immediately.
It’s crucial that companies retain their legal rights to the brand names for a while, otherwise
dead brands can return to haunt them. P&G, in 1993, dropped a toilet paper brand, White
Cloud. P&G didn’t notice when its claim to White Cloud trademark elapsed. A smart
entrepreneur sold the brand to Wal-Mart. Ever since, P&G is competing with is former brand.

4. Growing the core brands

At the same time a company deletes brand, they should invest in the remaining brands. They
can only reap the benefits of brand deletion if they reinvest the funds and management time
they have freed into the surviving ones.

Deletion programs release resources in several ways. Firstly, focusing on fewer and bigger
brand enables the company to generate greater economies of scale. At the same time, this
process created several opportunities for growth. In fact, done right, a brand portfolio
rationalization project will result in a company with profitable brands that is ready for growth.

‘Brand Portfolio Strategy and Firm performance’

By Neil A. Morgan & Lopo L. Rego

In this article, the authors examine the impact of the scope, competition, and positioning
characteristics of brand portfolios on the marketing and financial performance of 72 firms.
The authors analyze the relationship between specific brand portfolio characteristics and a
firms’ marketing effectiveness, marketing efficiency and financial performance.

Opposing arguments have been advanced regarding the performance benefits of several
different brand portfolio strategy decisions. Some think that a larger number of brands can
enable a firm to achieve greater channel power than its channel members. On the other hand,
others underline the greater manufacturing and distribution economies enhanced by a smaller
number of brands. The different and often conflicting viewpoints in the literature are reflected
in the business practice.

Example – in the gum category, Wrigley markets a large number of brands with multiple and
often completing brands in each taste. Its major competitor, Cadbury, markets only four
brands, each of which is aimed at different segments.
35
Despite this different viewpoints, there is little or no empirical evidence to guide managers’
brand portfolio strategy decisions. This research contributes to this gap in the research by
examining the relationship between brand portfolio strategy characteristics and marketing and
financial performance.

Dimensions of brand portfolio strategy

There are three key aspects of a firm’s brand portfolio strategy;

1. Brand portfolio scope

The number of brands the firm owns and markets and the number of market segments in
which it competes in with these brands.
Number of brands – the literature suggests both pro’s for both a larger and a smaller number
of brands.
Pro’s larger number of brands
- Attract and retain best brand managers
- Build greater market share by better satisfying heterogeneous consumer needs
- Discourage new market entrants

Con’s larger number of brands

- Inefficient, they lower manufacturing and distribution economies
- Dilution of marketing expenditure
- Weakened customer loyalty and increased price competition
Number of market segments –In marketing its brands across multiple segments, a firm runs
the risk that it will dilute their strength, making them less valuable. To avoid this dilution risk,
a firm may choose to market different brands in each market segment.

2. Intraportfolio competition
The extent to which brands within the firm’s portfolio are positioned similarly to one another
and compete for the same consumers’ spending.
Pro’s
- Creating a barrier for entry for potential rivals
- Competition for channel resources and consumer spending, creating an ‘internal
market’ leading to greater efficiency and better resource allocation

Cons’s
- Lower price premiums
- Lower administrative efficiency as a result if duplication of effort

3. Brand portfolio positioning

The quality and price perceptions of the firm’s brands among consumers.
Perceived quality – the strength of positive quality associations for the brands in the firm’s
portfolio in the minds of consumers.
Perceived price – consumers perceptions of the price of the brands in the firm’s portfolio.
Consumer price perceptions are widely believed to be fundamental determinants of consumer
brand choice and postpurchase attitudes and behavior.

Example dimensions of brand portfolio strategy – Gap

Gap Inc. currently markets eight brands across six market segments in the retail apparel
industry (men’s clothing stores, women’s clothing stores, family clothing stores, clothing
36
accessories stores, shoe stores and electronic shopping); has a relatively limited amount of
competition between its brands; and maintains a medium price – medium quality for Gap,
BabyGap, GapKids, and Piperlime; and slightly higher price – higher quality for Banana
Republic and Forth & Towne.

In this research, to explore the performance impact of brand portfolio strategy, the firms in the
American Customer Satisfaction Index (ACSI) are used as sampling frame. Regression is
conducted to examine the associations between Brand portfolio strategy measures and
Marketing performance measures and Financial performance measures.

How does a firm’s brand portfolio strategy affects its business performance?
The research shows that strategic decisions about a firm’s brand portfolio affect the firm’s
marketing and financial performance. From a financial performance perspective, the numbers
of brands and numbers of segments in which they are marketed appear to have directionally
different effects on different aspects of performance. For example, cash flow variability
decreases with a larger number of brands and increases with marketing brands across a larger
number of segments.
Furthermore, form a positioning perspective, brand portfolios with a high –quality positioning
enjoy superior performance in terms of cash flow levels, while those with a high-price
positioning have lower cash flow performance.
From a marketing performance perspective, a greater number of brands marketed across a
smaller number of segments, a low level of intraportfolio competition and strong consumers
perceptions of the quality of the firms’ brands appear to be the strongest brand portfolio
strategy drivers of consumer loyalty. Conversely, form a market share optimization
perspective, exactly the opposite appears to be true.

Overall, the results indicate that there is no simple answer to the fundamental brand portfolio
strategy question – What brand portfolio investments deliver the best return? Rather, the
research findings suggests that a firm’s brand portfolio strategy has a complex relationship to
firm performance, with several different effects on different aspects of marketing and
financial performance. The results show that exactly the same brand portfolio strategy may
have opposing results for different performance indicators. Most important, this suggests that
the appropriateness of any brand portfolio strategy is likely to be dependent on the particular
performance outcomes desired.

Designing and Managing Customers Relationships

– Week 48
‘Co-opting Customer Competence’
by C.K. Prahalad and V. Ramaswamy

In traditional business, the roles were predetermined. But in the 90’s businesses were shifting
away from formal defined roles. Major business discontinuities such as deregulation,
globalization and the rapid evolution of the Internet have changed the roles that companies
play in their relationship with other companies. Companies are now working together to
create value for the whole supply chain but at the same time negotiating the prices.

Managers think and talk about alliances, networks and collaboration among companies. But
37
managers and researchers have ignored the consumer, who is dramatically changing the
industrial system, as we know it. Thanks largely to the Internet; consumers have been
increasingly engaging themselves in an active and explicit dialogue with manufacturers of
products and services. Consumers can learn about businesses through the collective
knowledge of other customers. Customers become a new source of competence for the
corporation. The competence they bring is a function of the knowledge and skills they
possess, their willingness to learn and experiment, and their ability to engage in an active
dialogue. Businesses have to create an enhanced network of traditional suppliers,
manufacturers, partners, investors, and customers.
Customers as a Source of Competence
Some examples of companies who are already using the customers as a source of competence
are Microsoft and Cisco. Microsoft testing of new operating systems moved to the customer
environment. With Windows 2000, more than 650.000 customers tested a beta version and
shared their ideas and problems with Microsoft. Many of these customers were even prepared
to pay for a beta version. The value of the testing and ideas of these customers was an
estimated $500 million.
Cisco gave their customers open access to its information and created a forum for customers
to help each other.
Another big change happened in the medical world. Due to the availability of medical
information on the Internet, patients entered into a dialogue with their doctors.
Harnessing the competencies of the customer is not an easy task. Managers gave to face four
fundamental realities.
Encouraging Active Dialogue. In the new marketplace, companies have to recognize
that their dialogue with customers is one with equals. It becomes critical to understand the
purpose, meaning and quality of the dialogue from the customer’s perspective. Companies
also have to find ways to process what they learn from customers so they can bring the
dialogue forward and keep the consumer’s interest.
Progressive Internet companies have adapted best to the new dialogue. That is largely because
Internet has done the most to increase customer’s power.
Mobilizing Customer Communities. Thanks to the Internet, customers finding it
easier to form virtual communities. These communities can exercise a powerful influence on
the market. The power derives in large measure from the speed with which they can be
mobilized. In the case of Amazon and eBay, it was the customer who forged and legitimized
the evolving identities of those companies and gave them meaning as a brand.
Managing Customer Diversity. Companies become more vulnerable to customer
diversity. Especially companies that sell technology-intensive products, which are sensitive to
variations in customers’ sophistication. For instance, it can take anywhere from five minutes
to several hours for people to learn to use a new software application.
Consumer concerns about privacy and security can also accentuate the diversity among users.
Nearly all ‘free’ services on the Internet rely on advertisements, which depend on the (private)
information known about the user. Many consumers do not like it to provide such
information. Others are uncomfortable about proving credit card information when buying
product on the Internet.

Globalization is also a part of the increasing diversity in customers. Customers worldwide

want different products and differ in sophistication.
Cocreating Personalized Experiences. Managers have to realize that the customer is
no longer interested in the product but in the experience it delivers. Customers want to shape
these experiences themselves, both individually and with experts or other customers. It is
38
important to distinguish customization from personalization. With customization, a customer
can pick predetermined features from a menu. Personalization is about the customer becoming
cocreator of the content of their experiences. They are not held to specific choices.
Managing the Personalized Experience
To provide personalized experiences, companies must create opportunities for customers to
experiment with and then decide the level of involvement they want in creating a given
experience with a company. Since the level of customer engagement cannot be
predetermined, companies will have to give consumers as much choice and flexibility as
possible- in the channels of distribution and communication and in the design of products. But
companies can also help direct their customers' expectations by guiding public debate about
the future of technology and the economy.
Managing Multiple Channels of Experiences. Some people have argued that the
virtual distribution channels provided by the Internet will completely displace traditional
channels in some industries because of their cost advantages. But the method by which
customers and companies communicate is an integral part of creating an experience. The
more environments a company can provide, the richer its customers' experiences are likely to
be. Internet and bricks-and-mortar stores have to be combined. Companies have to manage-
and integrate- several distribution channels.
A key challenge will be to ensure that the nature and quality of the fulfillment, the
personalized experience for the individual, is not very different across the channels. One
problem companies face is that their established channel partners are likely to resist this type
of move: Why should car dealers want to let Ford or General Motors sell directly through the
Internet? Other companies will find resistance from within.
As a result, much of the progress in virtual distribution channels so far has been made by
newcomers
The biggest challenge for companies, however, will be to develop the infrastructures needed
to support a multichannel distribution network. Achieving low-cost delivery in the new
economy requires that companies combine their telecommunications and Internet
infrastructure with a physical logistics and service infrastructure.
Managing Variety and Evolution. The realization that the product is subordinate to
the experience will force managers to throw their old assumptions about product development
out the window. Managers previously focused on understanding how to use technology to
generate variety in products and on managing the way technology evolves.
Customers judge a company's products not by their features but by the degree to which a
product or a service gives them the experiences they want. Managing the variety of customer
experiences is not the same as managing variety in products. Managers must develop a
product that shapes itself to users' needs, not the other way around. But as noted, customers
evolve over time through their experience with a product. The product has to evolve in a way
that enables future modifications and extensions based both on customers' changing needs and
on the company's changing capabilities.
Shaping Customers' Expectations. Harnessing customer competence and managing
personalized experiences requires cooperation from consumers. They must be sensitive to
"what is next"-and that means companies must shape their expectations. Many chief
executives have tried to shape consumer expectations. But there are some dangers for the
unwary CEO. In the classroom, for example, teachers who go too fast can lose the attention of
their students. The same happens to consumers.
Shaping expectations is not just about traditional one-way communication by managers or
advertising. It is about engaging current and potential consumers in public debate. It is about
educating customers and being educated. Companies that are trying to introduce radical new

39
technologies have a particular interest in educating their consumers. Educated customers can
be advocates and activists for the company. Apple users are fervent customers and activists.
Customers as Competitors
In the traditional marketplace, companies had far better access to information than individual
consumers did. That allowed companies to set prices based on their costs or their perceptions
of the value of their products and services to their customers. But thanks to the Internet,
customers and companies now have much the same information available to them, and there
has been a consequent shift in power. Armed with knowledge, customers are much more
willing to negotiate terms and prices with companies.
It's not just the way that consumers judge and negotiate the price for a product that's changing;
it's the price-setting mechanism itself. The popularity of businesses such as eBay suggests that
the auction is increasingly serving as the basis for pricing goods and services on-line.
Traditional pricing won't disappear entirely. But as customers become more knowledgeable
and recognize that they have choices and the power to negotiate.

Preparing the Organization

Readying the organization for customer competence in the new economy will require a major
overhaul of the traditional governance systems and organizational structures of the company.
Accounting standards in the new economy need to factor in intellectual and human capital.
The GAAP-based accounting systems that all companies use today were designed for stable
business environments in which the important assets were physical, such as inventory, land,
and buildings. Investment in these assets is treated as a capital investment, while investment
in intangible assets, such as training, is treated as an expense. But the competence of
customers is an intangible asset, often a matter of knowledge and skill. It should be
considered capital.
Increasingly, companies will have to adopt a project-management approach to evaluating the
performance of people and businesses rather than rely on quarterly and annual budget
reviews. In this way, managers will be able to judge the performance of individuals and teams
over time while retaining the power to change the composition and tasks of the teams they
lead.
Engaging in a dialogue with a diverse and evolving customer base in multiple channels will
place a high premium on organizational flexibility. In fact, no part of the company will be
able to assume that its role in the organization is stable. Managers have to create
organizations, in which resources can be reconfigured seamlessly and with little effort.
But the creation of a flexible organization will impose psychological and emotional traumas
on the organization's employees. There is a reason why startups have fewer problems in
pushing the frontier of established business practices than established firms do, it is easier to
start something new than it is to change something old. In an era when the pace of change
keeps accelerating, the only way to stay ahead is to hire people who are self-motivated to
change.
It may sound paradoxical, but rapid change requires that companies have a stable center. The
real challenge for senior managers will be to provide that stability while embracing change.
The only way to do that is to develop a strong set of organizational values. The ability to
amplify weak signals, interpret their consequences, and reconfigure resources faster than
competitors will be a source of advantage. It's not just "running faster" but "thinking faster
and smarter" that matters.

40
‘A Strategic Framework for Customer Relationship
Management’
by A. Payne and P. Frow

The purpose of this article is to develop a process-oriented conceptual framework that

positions CRM at a strategic level by identifying key cross-functional processes involved in
the development of CRM strategy. More specifically:
• To identify alternative perspectives of CRM
• To emphasize the importance of a strategic approach to CRM within a holistic
organizational context
• To propose 5 key generic cross-functional processes that organizations can use to
develop and deliver an effective CRM strategy
• To develop a process-based conceptual framework for CRM strategy development and
to review the role and components of each process

A significant problem that many organizations deciding to adopt CRM face, stems from the
great deal of confusion about what constitutes CRM. This lack of a widely accepted and
appropriate definition of CRM can contribute to the failure of a CRM project when an
organization views CRM from a limited technology perspective or undertakes CRM on a
fragmented basis.

An important aspect of the CRM definition that we wanted to examine was its association
with technology. This is important because CRM technology is often incorrectly equated with
CRM and a key reason for CRM failure is viewing CRM as a technology initiative. This
review suggests that CRM can be defined from at least three perspectives → see figure below

Thus, we propose that in any organization, CRM should be positioned in the broad strategic
context of perspective 3. This results in the following definition:
CRM is a strategic approach that is concerned with creating improved shareholder value
through the development of appropriate relationships with key customers and customer
segments. CRM unites the potential of relationship marketing strategies and IT to create
profitable, long-term relationships with customers and other key stakeholders. CRM provides
enhanced opportunities to use data and information to both understand customers and cocreate
value with them. This requires a cross-functional integration of processes, people, operations
and marketing capabilities that is enabled through information, technology and applications.
41
Processes: A Strategic Perspective
A critical aspect of CRM involves identifying all strategic processes that take place between
an enterprise and its customers. To address the challenge of adopting a fresh approach to
CRM processes, key generic processes relevant to CRM were identified. Before doing so 6
criteria were selected:
1) The processes should compromise a small set that addresses tasks critical to the
achievement of an organization’s goals. 2) Each process should contribute to the value
creation process. 3) Each process should be at a strategic or macro level. 4) The processes
need to manifest clear interrelationships.
5) Each process should be cross-functional in nature. 6) Each process would be considered by
experienced practitioners as being both logical and beneficial to understanding and
developing strategic CRM activities.

A Conceptual Framework for CRM

In this section key generic CRM processes will be identified using the previously described
selection criteria. Thereafter, it will be developed into a conceptual framework for CRM
strategy development. Synthesis of the diverse concepts in the literature on CRM and
relationship marketing into a single, process-based framework should provide practical
insights to help companies achieve greater success with CRM strategy development and
implementation.
Interaction Research. This form of research originates from a view that ‘interaction
and communication play a crucial role’ in the stages of research and that testing concepts,
ideas and results through interaction with different target groups is ‘an integral part of the
whole research process’.
Process Identification and the CRM Framework. The five generic processes were:
1) Strategy development process. 2) Value creation process. 3) Multichannel integration
process.
4) Information management process. 5) Performance assessment process. These key generic
CRM processes are incorporated into a preliminary conceptual framework → See Figure 2 in
reader week 48
This conceptual framework illustrates the interactive set of strategic processes that
commences with a detailed review of an organization’s strategy (Strategy Development
Process) and concludes with an improvement in business results and increased share value
(Performance Assessment Process). The concept that competitive advantage stems from the
creation of value for the customer and for the business and associated cocreation activities
(Value Creation Process) is well developed in marketing literature. For large companies,
CRM activity will involve collecting and intelligently using customer and other relevant data
(Information Process) to build a consistently superior customer experience and enduring
customer relationships (Multichannel Integration Process). The iterative nature of CRM
strategy development is highlighted by arrows between the processes in both directions; they
represent interaction and feedback loops between the different processes. The circular arrows
in the value creation process reflect the cocreation process.

1. Strategy Development
This process requires a dual focus on the organization’s business strategy and its customer
strategy. How well the two interrelate fundamentally affects the success of its CRM strategy.
Business Strategy. The business strategy process can commence with a review or
articulation of a company’s vision, especially as it relates to CRM. Next, the industry and
competitive environment should be reviewed. Traditional industry analysis should be
42
augmented by more contemporary approaches to include co-operation, networks and deeper
environmental analysis, and the impact of disruptive technologies.
Customer Strategy. Customer strategy involves examining the existing and potential
customer base and identifying which forms of segmentation are most appropriate. As part of
this process, the organization needs to consider the level of subdivision for customer segments
or segment granularity. This involves decisions about whether macro, micro or one-to-one
segmentation approach is appropriate.

2. Value Creation Process

The value creation process transforms the output of the strategy development process into
programs that both extract and deliver value. The three key elements of the value creation
process are 1) determining what value the company can provide to its customer 2)
determining what value the company can receive from its customers 3) by successfully
managing this value exchange, which involves a process of cocreation or coproduction,
maximizing the lifetime value of desirable customer segments.
The Value the Customer Receives. To determine whether the value proposition is
likely to result in superior customer experience, a company should undertake a value
assessment to quantify the relative importance that customers place on the various attributes
of a product, e.g. conjoint analysis.
The Value the Organization Receives and Lifetime Value. From this perspective,
customer value is the outcome of the coproduction of value, the deployment of improved
acquisition and retention strategies and the utilization of effective channel management.
Calculating this customer lifetime value of different segments enables organization to focus
on the most profitable customers and customer segments. The value creation process is a
crucial component of CRM because it translates business and customer strategies into specific
value proposition statements that demonstrate what value is to be delivered to customers, and
thus, it explains what value is to be received by the organization, including the potential for
cocreation.

3. Multichannel Integration Process

The multichannel integration process is arguably one of the most important processes in CRM
because it takes the outputs of the business strategy and value creation processes and
translates them into value-adding activities with customers.
Channel Options. Through an iterative process, the channel options are categorized
into six categories. (1) sales force, including field account management, service, and personal
representation; (2) outlets, including retail branches, stores, depots, and kiosks; (3) telephony,
including traditional telephone, facsimile, telex, and call center contact; (4) direct marketing,
including direct mail, radio, and traditional television (but excluding e-commerce); (5) e-
commerce, including e-mail, the Internet, and interactive digital television; and (6) m-
commerce, including mobile telephony, short message service and text messaging, wireless
application protocol, and 3G mobile services.
Integrated Channel Management. Managing integrated channels relies on the ability
to uphold the same high standards across multiple, different channels. Therefore,
multichannel integration is a critical process in CRM because it represents the point of
cocreation of customer value. However, a company’s ability to execute multichannel
integration successfully is heavily dependent on the organization’s ability to gather and
deploy customer information from all channels and to integrate it with other relevant
information.

4. Information Management Process

43
The information management process is concerned with the collection, collation, and use of
customer data and information from all customer contact points to generate customer insight
and appropriate marketing responses. The key material elements of the information
management process are:
- Data Repository. The data repository provides a powerful corporate memory of
customers, an integrated enterprise wide data store that is capable of relevant data analyses. In
larger organizations, it may comprise a data warehouse (either conventional or operational)
and related data marts and databases.
- IT Systems. Information technology systems refer to the computer hardware and the
related software and middleware used in the organization. Often, technology integration is
required before databases can be integrated into a data warehouse and user access can be
provided across the company.
- Analytical Tools. The analytical tools that enable effective use of the data
warehouse can be found in general data-mining packages and in specific software application
packages. Data mining enables the analysis of large quantities of data to discover meaningful
patterns and relationships. More specific software application packages include analytical
tools that focus on such tasks as campaign management analysis, credit scoring, and customer
profiling.
- Front Office and Back Office Applications. Front office applications are the
technologies a company uses to support all those activities that involve direct interface with
customers, including SFA and call center management. Back office applications support
internal administration activities and supplier relationships, including human resources,
procurement, warehouse management, logistics software, and some financial processes.
- CRM Technology Market Participants. The information management process
provides a means of sharing relevant customer and other information throughout the
enterprise and “replicating the mind of the customer.” To ensure that technology solutions
support CRM, it is important to conduct IT planning from a perspective of providing a
seamless customer service rather than planning for functional or product-centered
departments and activities.

5. Performance Assessment Process

The performance assessment process covers the essential task of ensuring that the
organization’s strategic aims in terms of CRM are being delivered to an appropriate and
acceptable standard and that a basis for future improvement is established. This process can
be viewed as having two main components:
- Shareholder Results. To achieve the ultimate objective of CRM, the delivery of
shareholder results, the organization should consider how to build employee value, customer
value, and shareholder value and how to reduce costs. Two means of cost reduction are
especially relevant to CRM: deployment of technologies ranging from automated telephony
services to Web services and the use of new electronic channels such as online, self-service
facilities. The development of models such as the service profit chain has been important in
enabling companies to consider the effectiveness of CRM at a strategic level in terms of
improving shareholder results.
- Performance Monitoring. Standards, metrics, and key performance indicators for
CRM should reflect the performance standards necessary across the five major processes to
ensure that CRM activities are planned and practiced effectively and that a feedback loop
exists to maximize performance improvement and organizational learning.

Discussion

44
In this article, we develop a cross-functional, process-based CRM strategy framework that
aims to help companies avoid the potential problems associated with a narrow technological
definition of CRM and realize strategic benefits.

‘How Valuable is Word of Mouth?’

by V. Kumar, J. A. Petersen and R. P. Leone

THE TECHNOLOGY FOR MANAGING CUSTOMER RELATIONSHIPS has gotten fairly

sophisticated. Companies can draw on databases that tell them how much each customer has
purchased and how often, which they may supplement with detailed demographic profiles. By
applying statistical models, they can predict not only when each customer is likely to make a
future purchase but also what he or she will buy and through which channel. Managers can
use these data to estimate a potential lifetime value for every customer and to determine
whether, when, and how to contact each one to maximize the chances of realizing (and even
increasing) his or her value. However, the value of any one customer does not reside only in
what that person buys. In these interconnected days, how your customers feel about you and
what they are prepared to tell others about you can influence your revenues and profits just as
much. Companies go to considerable lengths to motivate their customers to double up as
salespeople.

Ideally, therefore, a company that wanted to know a customer’s full value would include a
measure of that person’s ability to bring in profitable new customers. But the nearest that
most firms get to estimating the value of a customer’s referral power is some estimate of the
individual’s willingness to make referrals. The trouble is that most good intentions remain just
that – good intentions. For example, both a telecommunications firm and a financial service
firm will be used as an illustration:
The number of both companies’ customers who said they intended to recommend the firms to
other people was high, but the percentage that actually did so was far, far lower. What’s more,
very few of those referrals, in either case, actually generated customers. And, of those
prospects that did become customers, only 11% of the financial services firms – and a mere
8% of the telecom company’s – became profitable new customers. Clearly, a corporation that
accurately targets those of its customers who are likely to make profitable referrals will earn a
better return on its marketing investment than its competitors that do not. Remarkably, the
customers who give you the most business (that is, those whose lifetime values are highest)
are usually not your best marketers. In other words, your most loyal customers are not your
most valuable ones.

Measuring a Customer’s Value

Estimating a customer’s lifetime value (CLV) is relatively straightforward. Let’s imagine that
Mary is a customer of FirmCo. The value to FirmCo of all that Mary will ever buy equals the
amount that her purchases will contribute to FirmCo’s operating margin minus the costs of
marketing to her. No one really knows how much Mary will buy from FirmCo in the future,
but we can make an estimate by analyzing her past purchases over some period of time,
working out the purchasing pattern, and then projecting that pattern forward over some future
period of time using sophisticated statistical models. From this we subtract the marketing
costs, both those involved in acquiring Mary and those we budget to retain her during that
future period. Her CLV is the net present value of that sum.
Calculating Mary’s referral value (CRV) is more complicated than calculating her lifetime
value. We must first estimate the average number of successful referrals she will make after
we offer her an incentive to do so through a marketing campaign. As we do for her CLV, we
45
look at Mary’s past behavior, but we need to look at a period longer than a month to get
enough variance in the number of referrals for proper statistical modeling and predictive
accuracy. The appropriate time frame for analysis is different for different industries.
In addition, we need to estimate how much time can go by and still be sure that Mary’s
referrals are actually prompted by our referral incentive. In our experience, referrals made by
customers after a referral-incentive marketing campaign can be attributed to that campaign for
about a year. So we count only those referrals made within a year, erring in our prediction of
referral behavior, as we did with our CLV calculation, on the side of caution. Next, we must
estimate how many of those referrals would have become FirmCo customers anyway, even if
Mary had not recommended the company. The distinction is important. If a new customer,
let’s call him John, would not have joined without Mary’s referral (what we call a “type-one”
referral), then Mary’s referral value should incorporate the value of John’s business. But if
John would have become a customer without Mary’s referral (a “type-two” referral), then
Mary’s CRV should incorporate only the savings in acquisition costs for John, since no direct
marketing effort was needed to get him. To estimate how many of Mary’s referrals are type-
two customers, we would ideally survey all the people she referred and ask them directly
whether or not they would have bought FirmCo’s product or service without the referral.
Mary’s referral value, then, is the present value of her type-one referrals plus the present value
of her type-two referrals. Let’s suppose John would not have become a customer had Mary
not referred him to FirmCo. The value of Mary’s type-one referral of John is essentially the
same as his lifetime customer value: the present value of the difference between John’s
contribution to margin and the cost of marketing to him, projected over one year. The
important thing here, though, is that John’s lifetime value is not necessarily higher or lower
than Mary’s, despite the lower cost of acquisition marketing to him. (Even though FirmCo
acquired Mary through costly and inefficient direct marketing, and acquired John merely by
giving Mary an incentive to make the referral, John might turn out to purchase more or less
than Mary does.) Marketing costs involved in retaining John after his acquisition remain, of
course, the same as those involved in retaining Mary. The value of type-two customers, as
we’ve noted, is simply the present value of the savings in acquisition costs.

What the Calculation Reveals

Analysis of prior referral behavior suggests that after the launch of a referral program, these
customers will typically refer four customers in each observation period, of which half are
type-one referrals and half are type-two. In reality, CRV underestimate true referral value.
Referred customers make their own referrals in turn, and credit for these should also be traced
back to the original referring customer.
Now let’s assume that John is representative of all of Mary’s type-one referrals. That means
that in each period Mary acquires two customers for the company, who go on in the
subsequent period to acquire two more customers each (or four in total) at the same time that
Mary is continuing to acquire two additional customers herself. Over two typical periods,
therefore, Mary is responsible for bringing on board eight new customers (the four she
acquires directly and the four she’s responsible for indirectly).
For the purposes of this article, however, we have elected to be cautious in our CRV
measurement, and in the pages that follow we do not take indirect referrals into account.
When looking into the specific referral behavior of customers with different CLV levels, a
high CLV is not always a good predictor of CRV and so is a very questionable proxy for a
customer’s total value.
According to the articles exhibit, there was no overlap at all in the telecom company sample
between customers with high referral values and those with high lifetime values. Any
customer segmentation scheme for this company, therefore, would have to explicitly take both
46
the purchase and the referral dimensions into account. The obvious way to do this is to break
the sample down into the four cells of a two-by-two matrix, which we’ve done for our
telecom company sample in the exhibit “The Customer Value Matrix.” The customers who
scored high on both measures we’ve called Champions. Those with high lifetime values but
low referral values we call Affluents. Those with low lifetime values and high referral values
we’ve termed Advocates. And those who score low on both measures we’ve labeled Misers.
We found that the distribution of customers across the four cells was fairly even. The matrix
dramatically demonstrates that for this company many low- CLV customers are almost as
valuable as those with the highest CLVs.

Applying the Knowledge

A segmentation scheme such as the Customer Value Matrix (Figure 1) is worthwhile only if
the strategies it suggests actually have an impact. To test the value of this classification
scheme, we launched three one-year marketing campaigns tailored to the particular needs of
the Affluent, Advocate, and Miser cells, and we drew customer value matrices for the sample
both before and after the campaigns. At the end of the year, it was clear that each campaign
had had a significant impact on the customers in each of the targeted cells. We aimed these
campaigns at the sample customers from both firms and saw similar results, however, only the
telecom company will be discussed. For the outcome see the Difference We Made (Figure 2).
Affluents. Our goal here was to get Affluents to become Champions by encouraging
them to refer more new customers while maintaining their highly valuable purchasing
behavior. We expected that if this campaign were successful, the average lifetime value of the
Champion cell would increase, since the converting Affluents would take their higher CLVs
with them. These customers were sent an initial direct-mail promotion, followed by another
direct-mail communication within two weeks, offering a $20 incentive ($10 for the referring
customer and $10 for the person referred), pointing out that referring three to four customers
would pay for approximately one month of service.
Advocates. We aimed to turn Advocates into Champions by increasing their lifetime
value without compromising their high referral value. This would also improve the overall
value of the Champion cell, as the migrating Advocates brought their higher CRVs with them.
This campaign focused on crossselling and up-selling the telecom firm’s products. Customers
received a personalized direct-mail piece that included offers for bundling one or more
products, such as long-distance, local phone service, high-speed Internet, and extra lines
added to existing wireless lines. To follow up and make it more likely that the customers
received these proposals, the firm sent another piece of direct mail within two weeks and
phoned these customers, volunteering to answer any questions they might have about the
additional services and the value of subscribing to multiple services. As an incentive, the
company offered a discount worth two months’ subscription fees to customers signing a one-
year contract.
Misers. We sought to move Misers to any of the other three cells by proffering
incentives for them to both buy more products (increasing CLV) and refer new customers
(increasing CRV). This campaign, therefore, combined the features of the other two. The
company sent customers bundled product offerings with the same two-month discounts via
direct mail and followed up with another direct mailing two weeks later. A phone call was
also made to each to answer any questions regarding the additional services. In the same
communication, the company offered the $10 reward to the referring customer and $10 for the
person referred, emphasizing the fact that three to four referrals would pay for two months of
service.

47
Of course, success in moving customers from one cell to another is not the only measure of a
good campaign. We need to factor in the cost of running the campaigns and compare it with
the amount of profit generated to determine their returns on investment.
Figure 1 Figure 2

CRV is not relevant in all situations, of course. Customers in many B2B markets, for
example, don’t make referrals because they compete with one another and wouldn’t want to
do their rivals a good turn. Nor do customers make referrals if they don’t feel much
attachment to the product, which is the case with many categories in fast moving consumer
goods markets. (In these instances, it’s also difficult to track individual customers’ behavior
anyway.) And managers should never make the mistake of assuming that customers who
recommend one product in their company’s portfolio will necessarily tout any other.
Nonetheless, it’s clear that in many situations companies need to rethink their CRM strategies
and tactics, ensuring that they not only focus their efforts on increasing purchases but also
make it easier for their customers to communicate positive information about their firm’s
products and services to others.

48
Designing and Managing Marketing Channels –
Week 49
‘The power of trust in Manufacturer-retailer
relationships’

Nowadays retailers control access to enormous numbers of consumers. In earlier days the
manufacturers dominated their retailers, but now ‘mega retailers’ hold the upper hand. Thus,
the balance of power between manufacturers and retailers is shifting. This shift raised the
important question, ‘is the use of fear the most effective way to manage this relation, or does
trust produce greater benefits?’
They found that although exploiting power may be advantageous in the short run, it tends to
be self-defeating in the long run because of the three following reasons;
Exploiting power to extract unfair concessions can come back to haunt a company if its
position of power changes. When manufacturers had the upper hand, they limited the
quantities of high-demand products delivered to retailers and forced those retailers to carry all
sizes of a certain product and to participate in promotional programs. Nowadays this
phenomenon reversed, it is payback time for retailers, they have the power in their hands (like
for example when it comes to the battle between manufacturers for shelf spaces in
supermarket chains)
When companies systematically exploit their advantage, their victims ultimately seek ways
to resist. Retailers form associations or buying groups, pursue vertical integration or mergers
to counteract the power of the manufacturers. They also develop private labels to compete
with the internationally renowned manufacturer brands. Manufacturers react on this by trying
to achieve direct links with their end users. With this approach they bypass their retailers and
strive to become less dependent on them.
By working together as partners, retailers and manufacturers can provide the greatest
value to customers at the lowest possible cost. If supermarkets and manufacturers agree upon
having partnership they are able to implement systems such as ‘JIT delivery’ and ‘efficient-
consumer-response systems’. Those systems enable manufactures to adapt their quantity of
manufactured goods to the actual consumer demand. As a consequence, high inventory costs
will decrease. Moreover if they decide to cooperate, they can customize their products at
different stores for different end users.
About trust, manufacturers and retailers often mention trust when discussing their relation.
What really distinguishes trusting from distrusting the relationship is the ability of both
parties to make a leap of faith. Both manufacturers and retailers tend to believe that partners
they trust also trust them. However this is not always the case, some manufacturers trust their
retailers, while those retailers at the same time seek for alternative sources of supply.
Benefits of trust
More committed to the relationship. Less likely that retailers search for alternatives sources to
supply. Retailers with high level of trust in manufacturer generated more sales, perform
better. Creating a reservoir of Goodwill. Less likely that they will drop the manufacturer’s
product line. Ability to share confidential information. Customize their information system
and dedicate people and resources to serve each other better. Cutting the cost of monitoring

49
each other. And trust allows a company to capture the hearts and minds of channel partners so
that they will go the extra mile.
However, trust requires companies to become more dependent on each other. High level of
interdependence->high level of trust and satisfaction->low level of perceived conflicts.
Limits of trust
There are always underlying tensions in the relationship between the manufacturer and its
retailer. Trust is rarely all-encompassing, meaning that one may trust the partner on some
issues but not on others. Furthermore, parties pursue some goals that are contradicting to the
goals of the other party. Those limits of trust are especially obvious when the manufacturer
and retailer do not have a mutually exclusive relationship, that is when retailers do not carry
product lines of competing manufacturers and when those manufacturers offer exclusivity for
that retailer. However the growth of multiple channel distribution systems has made such
exclusive situations less common nowadays
Creating trust (important characteristics when it comes to creating trust)
The majority of manufacturer-retailer relationships are unbalanced. Huge manufacturers sell
their products through small retailers, and major retailers buy from numerous relatively small
manufacturers. In those relationship the powerful party has to build a trusting relationship by
treat the weaker partner fairly. Fairness encompasses: distributive justice (allowing channel
partners to earn a fair return. The responsibility you have to take responsibilities for your
partner’s profitability). Besides we have procedural justice which indicates the fairness of a
party’s procedures and policies for dealing with its vulnerable partners.
Another important aspect to create trust is by means of ‘bilateral communication’, the more
powerful party is willing to engage in two-way communication with its partner, which
encourages the suppliers to be proactive, to point out the company’s weaknesses and it
enhances mutual understanding.
Impartiality (onpartijdigheid); As the more powerful party it is important to give partners
equitable opportunities (give everyone a fair share of the business)
Refutability (weerlegbaarheid); Mark&Spencer for example has a rule that a supplier always
can appeal a decision to a higher level in the company.
Explanation; The most powerful party should provide its partners with an explanation for its
channel decisions and policies. Decisions and policies are more likely to be accepted by
partners when the logic behind them is apparent.
Familiarity; The most powerful party should understand or be aware of the local conditions
under which its channel partners operate. This interaction between retailer and manufacturer
permits the retailer to find out whether the manufacturer is able to meet its requests or
demands.
Courtesy; Treating a partner with respect because ultimately relationships between companies
are actually relationships between teams of people.
Opportunities for attractive returns are usually the magnet for a relationship, but procedural
fairness is the glue that holds the relationship together. It is expensive and risky to try to retain
partners by giving them higher margins than competitors give them. In contrast, developing
procedurally just systems requires greater effort, patience and perhaps even a change in

50
organizational culture. For those reasons, developing such systems is more likely to lead to
sustainable competitive advantage.
Moving from the Power game to the Trust game
The capabilities you need to have to make this transition:
- Select partners that bring distinctive competencies but similar values
- Relationship must be flexible and informal. Thus minimize the amount of contracts.
- It is not about legal force that holds the relationship together. It is about moral binding.

- Work together to discover opportunities that will benefit both parties.

- Encourage personal ties with the channel partners. Minimize employee turn-over
because it takes a long time to build and maintain a relationship based on trust.
- Redesign the incentive and performance measurement programs. Nowadays P&G
rewards their sales managers for maximizing the profits of both P&G and its retailers.
- Design joint educational programs and focus on value-chain management to break
down the barriers between manufacturers and retailers.
By developing trust, manufacturers and retailers can exploit their complementary skills to
reduce transaction costs, adapt quickly to marketplace changes, and develop more creative
solutions to meet consumers’ needs. The competitive advantage that can flow from the ability
to manage relationships with several companies is obvious.

‘Strategic Channel Design’

Companies more often recognize that the way they manage their distribution can provide
opportunities for competitive advantages.
Forces for change in distribution channels.
Three forces are now changing the traditional rules of channel management;
1 Proliferation (uitbreiding) of customers’ needs. Three factors contribute to mass
customization and market fragmentation; Expanding capabilities for addressability and
variety; Firms are able to engage in a direct dialogue with their customers and appreciate their
diversity of their needs. Channel diversity; Manufacturers shift from centralized production to
more localized, one-at-a time productions. Meanwhile, distributors can respond to orders
more rapidly and cheaply and are able to customize the products. Customer expectations;
Nowadays customers are more frequently used to the current benefits of customized products,
their services and the availability. Thus, customers increasingly demand improved
performance that is based on what they now know is possible. As a consequence their
expectations go up.
The new ability to address customers in small groups encourages channel diversity.
Addressability and diversity together raise customer expectations. And these expectations put
further strain (pressure) on distribution channels.
2 Shifts in the balance of channel power. The increased concentration of channel structures
has adverse effects on suppliers’ profitability. All the elements underlying the power of the
51
buyer (porter model) favor the intermediaries or end buyers, and not the manufacturers
anymore. These three underlying elements of Porter’s model will be discussed; Enhanced
bargaining power; Distributors/retailers become more effective, design their own
merchandising programs and demand the participation of their supplier to underwrite these
programs. However, analysis reveals that not only manufacturers have lost their power. Both
manufacturers and retailers have lost power to the consumers.
More knowledgeable buyer;. Resellers enhance their power by increasing their knowledge
about their suppliers’ cost, their own operations and their customers’ needs.
Credible threats of backward integration. Buyers and channel intermediaries can further
enhance their power by threatening to take over some of their suppliers’ activities or
displacing them with their own products (such as, the private-label products of retailers). By
taking over some of the suppliers’ activities they will strengthen their relationship with the
end customer and creating a disadvantage for the supplier.
3Changing Strategic Priorities. Companies strive to make their activities and organizational
and channel structures more efficient (rationalizing). Besides they are exploring new
relationships with customers, suppliers and intermediaries. The resulting openness to
partnering is producing new channel collaborations for the sharing of activities like, order
fulfillment, inventory management, distribution, purchasing and after sales services. Both
parties must realize durable mutual benefits in financial terms and in sharing the risk, the
expertise and the market knowledge. With this, a change in strategic priorities occurred.
Examine the implications of these changes for channels
Shifting patterns of commitment; Many firms experiment with new arrangements. Some lead
to close relationships between producer and distributor. These close relationships involve
substantial, durable and irreversible investments on both sides (strategic alliances). While at
the same time other suppliers have numerous of third-party arrangements, which enables them
to diversify their channels to match the diverse needs in their markets. These two different
arrangements could overlap, possibly leading to rivalry and conflict in the channel.
Vertical compression In traditional vertical channels firms transferred responsibility from one
layer to the next. No matter which system is adopted, either manufacturer->wholesaler-
>dealer->customer or manufacturer->distributor->customer, customers rely solely on the
dealer for the fulfillment of all channel functions, such as information, inventory and repair.
Nowadays, by means of innovative Information technology and direct marketing
manufacturers are able to get in contact with their end users easier. Flexible manufacturing
systems allow suppliers to produce small lots at only a marginally higher cost than scale-
efficient larger orders. With this development, new forms of direct channels are emerging,
and indirect channels are getting shorter with fewer intermediary layers. The role of the
distributor as a buffer between the manufacturer and the retailer is threatened, (channel
compress). Here the role of the so-called ‘master distributor’ is most at risk. In an highly
competitive market an extra margin saved by not having a master distributor can become a
price advantage at the customer level. Furthermore retailers become larger and sophisticated
in handling both suppliers and the end users. Thus, the supplier with a master distributor in his
channel will lose revenue, share and profit. This will force them to lose their master
distributor. Still there are also manufacturers that have such strong relations with their master
distributor, they are willing to share their margins and benefits with those parties.
Horizontal diversity In the current ‘high-velocity’ (turbulent) environment, changes are
occurring rapidly and there is no time to determine whether an initial channel design is

52
effective. There is no time for forecasting and analyzing all possibilities. The best way to
manage in this environment is to place small bets (holding options). A strategic option is a
small investment of a company in an operation that creates the right but not the obligation to
take further action. If a company has small options, it may be costly but it also prevents more
expensive mistakes when they find out that the type of channel is inappropriate. Furthermore,
options could indicate in which they should invest more. This type of supplier does business
through many different distribution entities in many different ways, thereby creating openings
and gathers a lot of information. Once the market becomes more stable, those suppliers can
drop some options (for example by selling out a distribution joint venture) and call other
options. Because channel relationships are very difficult for competitors to duplicate or
match, these options have substantial value. Multiple channels; they reflect the range of
channel options available to buyers and suppliers. Different customers with different buying
behaviors will seek channels that serve their specific needs. Customers can make use of these
multi channels, by participating in both the full-service channel and the low-price channel. As
long as higher price reflects higher service, customers will be loyal to a particular channel, but
if the service is unnecessary or can be obtained at a lower cost, customers will cross to the
low-price channel. Then, the customer gets a free ride on the full-service channel. Those
multiple channels are most prevalent in fast-changing market environments. In these turbulent
times, the channel diversity pays off, but only if the arrangements are treated as options. As
the environment stabilizes, distribution arrangements should become fewer, more substantial
and more stable because otherwise the firm is solely exploring and does not develop ideas,
realize opportunities and will not get a chance to develop distinctive competence.
Functional decomposition In those high-velocity environments it is useful to have distribution
options with both specialists (few routines and narrow operations) and generalists (do more
and cover more domains) When the environment stabilizes it is more likely that the survivors
in the channel are specialists. To conclude, a firm does better in uncertain environments by
dealing through many specialists because they tend to be more focused and have valuable
local knowledge about small market niches. In Composite channels the horizontal tasks are
allocated. A team of channel partners (including suppliers), each specializing in a few tasks,
satisfies the customer´s total needs. Here, the members of the channel work together with
certain members specializing in certain functions (horizontal). In the conventional channel,
each member performs the full channel functions (vertical). There is a trend towards
functional specialization (horizontal channels) because customers desire to receive products
and services in the most cost- and time- efficient manner.
With new channel forms, as discussed above, come new management challenges, like channel
compensation. Because the channel member who deals with the customer no longer performs
all channel functions, it cannot expect to receive a traditional margin. Although the composite
channels are highly effective it can be very costly to manage them. Ideally, channel members
are compensated only for the functions they perform. However, if one member fails to do so,
the whole team will suffer. Free riders can abuse their position. Thus, managing those
channels involves monitoring and coordinating the members. It depends on the environment
and the type of supplier whether it is beneficial to use the composite channel. For example,
for weaker suppliers, the coordination costs of the composite channel often exceed the
benefits of its functional effectiveness.
Design channels strategically (channel design process)
The channel supports the overall strategy and needs to enhance effective delivery of the
customer value. The channel must meet the following requirements; Effectiveness (channel
design addresses customers´ requirements?) Coverage (Can the customer find and appreciate
53
the value in a firms offer?) Cost-efficiency and Long-run adaptability (Can the channel design
handle possible new products and incorporate emergent channel forms?)
First, asses the company´s situation by identifying the company´s threats, opportunities,
strengths and weaknesses and a company should asses what customers are seeking from
channels. After having analyzed the current situation they should select the most appropriate
channel arrangement among the alternatives: Align channels with overall competitive
strategy, Decompose and recompose channels into integrated collections of functions, invest
in learning and translate strategic choices into short term plans and establish controls for
monitoring the channel performance.
Ultimately a channel strategy is a series of trade/offs and compromises that align the company
´s resources with what it should do to satisfy its target customers and stay ahead of
competitors.

‘Distributor sharing of strategic information with

supplier’
This article tries to investigate the degree to which distributors share external and internal
strategic information with associated suppliers. To put it differently, they examined the
influence of relational, distributor and environmental characteristics on distributor sharing of
two types of strategic information with upstream suppliers. The two types of information can
be distinguished on two dimensions: the sensitivity of the information to the distributor and
the accessibility of the information to the supplier. The internal strategic information is
sensitive and proprietary. The external strategic information is less sensitive and proprietary
because it originates outside the distributor. Suppliers are able to get access to the external
information through other sources like, end customers and industry studies.
In this study the following variables are examined:
Distributor characteristic; their product-market familiarity. This is the extent to which the
distributor understands the market for a supplier´s product.
Environmental characteristic; Environmental uncertainty is the degree to which it is
difficult to make accurate predictions about the future
The nature of the exchange relationship between the distributor and the supplier; when
for example the supplier´s dependence is higher than the distributor´s dependence then there
is a ´dependency asymmetry favoring the distributor. Furthermore, we have the variable ´trust
in supplier´, the ´distributor Transaction specific investments´ and the ´supplier transaction
specific investments´
This study found that high environmental uncertainty inhibits the sharing of ISI (internal
strategic information). When the exchange relationship is unpredictable, a distributor doesn´t
want to take the risk that their organizational plans will get into the wrong hands. When the
supplier dependence and distributor dependence are balanced (both either high or low) the
relation between the exchange of ISI and the uncertainty of the environment becomes
insignificant (then suppliers are able to get the ISI after all). Besides, the relationship between
sharing ISI of the distributor and the uncertain environment disappears when there is a high
level of STSI. STSI´s are nonrecoverable expenditures a supplier has to make to support the
sales of its products by a distributor. An explanation for this is that STSI´s represent a
credible commitment to the distributor that should reduce the perceived risks of sharing ISI in
54
highly uncertain environments. However, when the distributor is less dependent on the
supplier than the supplier is on that distributor, the relation between the uncertain
environment and the sharing of ISI becomes stronger.
The distributor´s trust in the supplier promotes the sharing of ISI. When they perceive the
supplier as honest, they believe that the supplier will not misuse shared ISI against the self-
interest of the distributor. Moreover, it can be said that when a distributor is very familiar with
the product-market they will share more ESI with their supplier.
Managerial implications
Suppliers can gain more strategic information from distributors if they enhance the benefits
and reduce the costs and risk that distributors perceive. Suppliers can achieve this by; ceding
a power advantage the distributor (het afstaan van een machtsvoordeel aan de distributor),
by undertaking investments to the distributor, by encouraging DTSI´s(the nonrecoverable
expenditures distributors make to support the sales of a supplier´s product) and by gaining
the trust of the distributor.
Furthermore it is highly important for suppliers to keep careful track of how much and what
type of strategic information they receive from which distributor. Without this inside they
will not be able to determine which information they need to gather from other sources.
And third, suppliers with a power advantage compared to their distributors face a dilemma.
Other studies suggest that this power advantage has a positive outcome for those suppliers. On
the other hand, in this study it is suggested that strategic information cannot easily be
squeezed from their distributors by using pressure because verifying the strategic information
a distributor actually possesses is difficult. It is important to enhance distributor´s trust in the
supplier.
From a distributor perspective, sharing strategic information with suppliers can provide major
benefits to a distributor if costs are controlled and risks can be reduced.

Designing and Managing Pricing Strategies –

Week 50
‘Customer-centric prising: The surprising secret for
profitability’

Customer-centric pricing requires the simultaneous and continuous assessment of products

attributes, customer perceptions, and the circumstances of time and place by listening to
customers’ actions.

Due to an uncertain economy and fierce global competition, profits will be continue to be
inconsistent. Companies need to find new ways to consistently grow the bottom line.

Mass-market expansion led to standardized means of production and standardize sales terms.
This resulted in companies who were more product centric, also when they determined the
price for their products.
55
Product centric pricing = Pricing focused on the cost of the product, its physical attributes
(size, features and functions) and the margins they seek from the product.

This mostly internal focus often creates a disparity between what product managers and
customers perceive a product’s value to be. This disparity in value perception leads to lost
profit opportunities from underpricing (creating consumer surplus) or overpricing (lost sales).
Therefore, price should be seen as a communicative device between buyer and seller which
continually reflects constantly changing market variables such as brand preferences, the
availability of supply, substitutable alternatives and a host of other factors. This is a customer
centric approach of pricing.

Conventional market segmentation techniques (segmentation based on demographics and

psychographics) prove to be effective in classify homogenous groups for purposes of product
development, promotions, communications, advertising and other marketing mix variables.
They are not necessarily effective in segmenting consumers by willingness to pay. Unlike
demographics and psychographics that attempt to define who consumers are, segmentation by
buying behaviour focuses on predicting how consumers respond at the time of the purchase.
For example: A certain women might be less price sensitive when she is on a business trip and
she is looking for a hotel than when she looking for a place to stay when she is on vacation
with her family on a personal budget.
Also subjective, intangible factors like status, loyalty and convenience may be more
meaningful to the customer than the product’s tangible attributes.
Segmentation based on buying behaviour uncovers a tremendous differential in willingness to
pay for subjective product attributes such as convenience, status, quality and need. It is this
price differential that companies could have or should have which is essential to incremental
profit.

Customers’ purchase decisions are made through an assessment of a number of factors

balancing perceptions of value components against price using subtle, complex and often sub-
conscious decision variables. Customer-centric pricing requires understanding and utilizing
these decision variables, in order to optimize revenue opportunities.

Most firms that attempt to align product prices with customer value perceptions do so by
gathering information through customer focus groups, surveys, or similar methods.
Unfortunately, customers often say one thing but do another. The consumers themselves, may
not be able to predict exactly what they would do, until faced with the decision.
At the critical point in the purchase decision, customers scan the immediate offerings in the
marketplace and develop a consideration set based upon factors particular to their individual
preferences.
Consumers may not know in advance of making the purchase decision exactly how much
weight they may give to each component in the value equation.

Understanding the wide range of customer preferences across a broad product line and
expansive geographical market requires significant experimentation, data gathering and
analysis.

Customer-centric pricing involves identifying key customer segments, understanding what

these customers value, creating customer value by offering unique bundles of products or
service and charging for it appropriately.

56
Customers want individualistic products and they are often willing to pay a significant
premium for them. The more differentiated a products, the less price sensitive it will be.
Through customer centric pricing, firms set prices based on the perceived value of a product
or service to specific customers or segments of customers. This strategy minimizes consumer
surplus and maximizes profitability.

Building and sustaining customer value that generates a source of continual revenue requires
long-term customer relations. Customer-centric prices are essential to complete the customer
retention cycle.
A firm that optimizes revenue through customer-centric pricing not only increases profit, but
is in a better position to offer price-sensitive customers lower priced products with only
attributes they value (for example: different prices for seats for different kind of competitions
of a certain football team)

Understanding customer value creation and capturing that value through customer-centric
pricing is a step toward a pareto optimal in the economy. A pareto optimal is a relationship in
which all parties are better off, and no one is worse off.
Using the feedback from customer centric pricing, producers can assess the market value that
various customer segments place on more subjective attributes such as brand preferences,
status, quality and reliability.
Customer-centric pricing is a mean to assure that the value a firm creates us accurately
assessed and captured through the price mechanism.

‘Pay what you want: A New Partcipative Pricing

Mechanism’

The goal of this study is to explain buyers’ pricing behaviour in the pricing mechanism “pay
what you want to pay” and to analyze the impact of this pricing strategy on sellers’ revenues
and unit sales.

A key element of the marketing strategy is companies’ pricing strategy. The key objective of
pricing strategies is maximizing sellers’ profits by capturing consumers’ heterogeneous
product valuations and accounting for competition and cannibalization. Pricing models an be
an additional opportunity for companies to differentiate themselves from competition.

Participative pricing mechanisms involve consumers in the price-setting process. Participative

pricing models can be perceived as 1) innovative and 2) preferable owing to their inherent
delegation of some control over the price setting process to consumers. In this study, different
types of participative pricing mechanism are distinguished according to the type of
interaction: one seller and one buyer (one-to-one interaction) or several buyers and/or several
sellers (horizontal interaction). For the classification of participative pricing mechanism I
refer to figure 1 of the article.
Participative pricing has become more popular because the Internet provides a direct link to
consumers and has made it easier for firms to implement pricing mechanism, such as
auctions.

Benefits Participative Pricing:

57
- Participative pricing mechanisms allow for differentiated prices as an outcome of the
interaction which accounts for heterogeneous valuations of consumers, and thus, increased
efficiency.
- Sellers can attract new costumers’ attention as a result of the mechanism’s high level of
innovativeness.
- Higher perceived control on behalf of the buyers led to greater intent to purchase.
- Prices set through bidding were perceived as fairer than posted prices.
- Participative pricing mechanisms can provide useful information about consumers., such as
their willingness to pay.

Pay what you want ( PWYW) is a participative pricing model in which a buyer’s control
over the price setting is at a maximum level; the buyer can set any price above or equal to
zero. The seller must accept the buyer’s price and cannot withdraw the product offer. Pay
what you want does not entail competition among the buyers, unless the seller offers a
product of limited availability.
Given greater purchase intentions and the preference for participative pricing mechanisms,
consumers may prefer PWYW because of the level of control and the novelty of the
mechanism. The risk is that consumers could exploit their control and pay nothing at all or a
price well below the seller’s cost.

Consumers’ motives differ from the assumption in neoclassical economic theory that
consumers purely maximize their utility. Because a buyer can pay any price, the relationship
between buyer and seller is governed by social exchange norms. This involves norms of
distribution, which imply that people seek an equal allocation of recourses. Violating these
social norms – in the case of PWYW, by paying nothing at all- may result in distress and
disapproval by others. The benefit of non-payment, must be greater than the anticipated
distress and fear of disapproval associated with the violation of social norms. It appeared that
people are more willing to incur a loss than to accept an unequal distribution. Also people do
not want to avoid appearing poor or cheap (price as an impression management).→
H1: Prices paid at PWYW in face-to-to face interactions are greater than zero.

The model op prices paid at PWYW consist of two principal components: Buyers’ reference
price for the product (RPij) and the proportion of consumer his reference price he is willing to
discharge to the seller for a specific product (aij).

Price paid at PWYW= RPij * aij

Drivers of the proportion of buyer’s reference price discharged to the seller

The fairness equilibrium is based on the assumption that people help those who are kind to
them and punish those who are unkind. Individuals preference for a balance of equity and a
fair split.→
H2: Fairness has a positive influence on the proportion of a buyers reference price to the
seller.
Buyers also pay higher prices because of altruism, defined as “behaviour carried out to benefit
another without anticipation of rewards from external resources. →
H3: Altruism has a positive influence on the proportion of a buyer’s refrence price discharged
to the seller.
If the seller offers a product with high quality, consumers’ satisfaction and utility increase.→
H4: Satisfaction has a positive influence on the proportion of a buyer’s reference price
discharged to the seller.
58
It is expected that buyer pay higher prices because 1) they want the seller to survive and 2)
they fear the feeling of embarrassment in the future when they pay a low price.
H5: Loyalty has a positive influence on the proportion of a buyer’s reference price discharged
to the seller.

Empirical studies on consumers’ price evaluations have shown that consumers use past prices
to create a reference level that affects their perceptions of current prices. These internal
reference prices are created in different ways: consumers can derive them from the previous
period’s prices or from a weighted or smoothed average of prices.

Integration of the drivers that affect the proportion aij of consumer i’s RPij for product j he or
she is willing to discharge to the seller yields the following estimation model to explain prices
set by consumers under PWYW conditions:

PijPWYW= β0 + (β1 * Fairij + β2 * Altrui + β3 *Satisij + β4 * Loyij + β5 * PriceConsci + β6 * Incomei)

* RPij + εij

To test this model, three different field studies with products in service industries were
conducted:
- Lunch buffet meal at a restaurant.
- Movie screenings at a cinema
- Hot beverages at a delicatessen

Conclusions
Conducting this three field studies PWYW was experimentally test and there was found that
consumers do not behave as rational as traditional economic theory suggested.
The final price paid depends on the buyer’s internal reference price and the proportion of how
much a buyer is willing to share of his or her (potential) deal with the seller. This proportion
was mainly driven by the consumer’s fairness, satisfaction, price consciousness, and income.
Altruism and loyalty are insignificant in the model. However, a more detailed examination of
each study separately revealed that altruism and loyalty are not negligible influences.

The case of the restaurant illustrates the potential of PWYW as a marketing instrument for
new business. By implementing PWYW, the restaurant owner attracted more customers and
increased revenues.

Average prices paid were higher than regular prices at the delicatessen. These higher prices at
PWYW imply an opportunity to raise prices in the future.

Overall, the results of the experiments imply that PWYW might be suitable as a price
promotion tool, even it did not lead to a revenue increase for cinema tickets.

PWYW may help improve a seller’s credibility by letting the consumers decide the prices of
products. By implementing PWYW the seller gives buyers the chance to self determine the
prices that may lead to an overall increase of perceived fairness.

‘Should you launch a Fighter Brand?’

Thanks to consumers’ rising incomes and desire for superior quality, the era began with a
focus on “premiumzation”, “trading up”, and luxury for the masses”. But economic strains are
59
now causing consumers to trade down and many midtier and premium brands are losing share
to low-price rivals. Managers of premiums brands can react to these economic changes in
three ways:
Reducing prices (which will destroy profits and brand equity)
Hold the line and hope for better times to return ( and in the meantime losing many customers
and revenues)
Launching a Fighter Brand

Fighter Brand = A fighter brand is a lower priced offering launched by a company to take
on, and ideally take out, specific competitors that are attempting to under-price them.

Unlike traditional brands that are designed with target consumers in mind, fighter brands are
specifically created to combat a competitor that is threatening to steal market share away from
a company’s main brand. A fighter brand is designed to combat, and ideally eliminate, low
price competitors while protecting an organization’s premium-price offerings.

In the most positive scenario the fighter brand not only eliminates competitors but also opens
up a new, lower-end market for the organization to pursue. But there are five major hazards
that a manager must negotiate in order to enjoy fighter brand success.

Hazard 1 – Cannibalization

Cannibalization = In marketing and strategy, cannibalization refers to a reduction in the

sales volume, sales revenue, or market share of one product as a result of the introduction of
a new product by the same producer.

Positioning a fighter brand presents a manager with a dual challenge: You must ensure that it
appeals to the price-conscious segment you want to attract while guaranteeing that it falls
short for current consumers of your premium brand. That means you must match your fighter
brand’s low price with equally low perceived quality.
To prevent cannibalization, a company must deliberately lessen the value, appeal and
accessibility of it’s fighter brand to its premium brand’s target segment. The best way to avoid
cannibalization is by Test marketing.

Hazard 2 – Failure to Bury the Competition

A failure to bury the competition as a result of overprotecting the premium brand from
cannibalization at the expense of the combative potential of the fighter brand.
To prevent this: Market test your fighter brand and be prepared to recalibrate its price and
performance to ensure it finds the sweet spot between cannibalizing overperformance and
uncompetitive underperformance.

Hazard 3 – Financial Losses

Fighter brand success depends on more than initially matching the price and value your
intended enemy; you must also achieve those goals while attaining a sustainable level of
profits.
A fighter brand has to compete in the low-price sector against brands that probably originated
there and that have evolved an operating model suited to it. To meet that challenge a premium

60
organization may have to strip back a fighter’s brand cost structure and alter its traditional
definition of what constitutes strategic success.

Hazard 4 – Missing the mark with Customers

Though a fighter brand inevitably originates from the recognition of a competitor and the
limitations of an organisation’s existing premium brand, management’s focus should
immediately switch to the consumers segments that the new brand is targeting. Only then will
it achieve the kind of consumer orientation necessary to avoid a potentially focus on
competitors.

Hazard 5 – Management Distraction

Launching a fighter brand while selling a premium brand is like fighting a war on two fronts:
you need to invest and focus on the fighter brand while staying alert at the challenges a
premium brand might also face other than low-price entrants in the market.
The greatest cost of a fighter brand may be its propensity to cause managers to delay essential
strategic decisions on their existing portfolio of brands.

So for a fighter brand to be successful, five hazards need to be avoid and the following advice
can be given:
Think about how thoroughly a fighter brand might cannibalize premium brand sales, and
make sure that the value equation between your two brands is suitably distinct in the mind of
the consumer. Check that you will be able to launch a fighter brand that is competitive enough
to damage your enemy and profitable enough to continue to do so over the long haul.
Consider carefully the strategic implications of dividing your organization’s resources during
a period hen focus and investment are critical.

61