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Contents
Preface xvi
Section One
The Role of Marketing in Developing
Successful Business Strategies 1
1 The Marketing Management
Process 2
Samsung—Building a Global Brand 2
New Competitive and Marketing Strategies
The Results 3
Marketing Challenges Addressed in Chapter 1 3
Why Are Marketing Decisions Important? 4
The Importance of the Top Line 5
Marketing Creates Value by Facilitating Exchange
Relationships 5
What Factors Are Necessary for a Successful
Exchange Relationship? 5
1. Who Markets and Who Buys? The Parties
in an Exchange 6
2. Customer Needs and Wants 7
3. What Gets Exchanged? Products
and Services 10
4. How Exchanges Create Value 10
5. Defining a Market 12
What Does Effective Marketing Practice
Look Like? 13
Marketing Management—A Definition 13
Integrating Marketing Plans with the Company’s
Strategies and Resources 15
Market Opportunity Analysis 16
Formulating Strategic Marketing Programs 17
Formulating Strategic Marketing Programs
for Specific Situations 18
Implementation and Control of the Marketing
Program 19
The Marketing Plan—A Blueprint
for Action 19
Who Does What? 21
Marketing Institutions 21
Who Pays the Cost of Marketing Activities—
And Are They Worth It? 22
Room for Improvement in Marketing
Efficiency 23
The Role of the Marketing Decision Maker 23
Some Recent Developments Affecting Marketing
Management 24
2 Globalization 24
Increased Importance of Service 25
Information Technology 25
Relationships across Functions and Firms 27
Take-aways 27
Endnotes 28
2 The Marketing Implications of Corporate
and Business Strategies 30
IBM Switches Strategies 30
Technology Changes and Competitor Actions
Require a Shift in Strategy 30
A New Corporate Strategy 31
New Business and Marketing Strategies 31
The Bottom Line 32
Marketing Challenges Addressed in Chapter 2 32
What Is Marketing’s Role in Formulating and
Implementing Strategies? 33
Market-Oriented Management 35
Does Being Market-Oriented Pay? 35
Factors That Mediate Marketing’s Strategic
Role 36
Three Levels of Strategy: Similar Components,
but Different Issues 39
Strategy: A Definition 39
The Components of Strategy 39
The Hierarchy of Strategies 40
Corporate Strategy 40
vii
viii
Business-Level Strategy 42
Marketing Strategy 42
The Marketing Implications of Corporate Strategy
Decisions 42
Corporate Scope—Defining the Firm’s
Mission 42
Corporate Objectives 47
Corporate Sources of Competitive
Advantage 49
Corporate Growth Strategies 49
Allocating Corporate Resources 52
Limitations of the Growth-Share Matrix
Sources of Synergy 57
The Marketing Implications of Business-Unit
Strategy Decisions 58
How Should Strategic Business Units
Be Designed? 59
The Business Unit’s Objectives 59
The Business Unit’s Competitive
Strategy 60
Take-aways 62
Endnotes 62
Section Two
Market Opportunity Analysis 67
3 Understanding Market
Opportunities 68
The Cellular Telephone Business: Increasing
Competition in a Growing Market 68
The Mobile Telephony Market 68
Cell Phone Manufacturing 68
Cell Phone Service Providers 69
Network Equipment Down, Too 69
Marketing Challenges Addressed in Chapter 3
Markets and Industries: What’s the Difference?
Assessing Market and Industry Attractiveness
Macro Trend Analysis: A Framework for Assessing
Market Attractiveness, Macro Level 72
The Demographic Environment 72
The Sociocultural Environment 75
The Economic Environment 76
The Regulatory Environment 77
The Technological Environment 78
The Natural Environment 79
Contents
Your Market Is Attractive: What about Your
Industry? 80
Porter’s Five Competitive Forces 80
A Five Forces Analysis of the Cellular Phone
Service Industry 83
Challenges in Macro-Level Market and Industry
Analysis 84
Information Sources for Macro-Level
Analyses 85
Understanding Markets at the Micro Level 86
54 Understanding Industries at the Micro Level 88
The Team Domains: The Key to the Pursuit of
Attractive Opportunities 89
Mission, Aspirations, and Risk Propensity 89
Ability to Execute on the Industry’s Critical
Success Factors 90
It’s Who You Know, Not What You Know 90
Putting the Seven Domains to Work 91
Anticipating and Responding to Environmental
Change 91
Impact and Timing of Event 92
Swimming Upstream or Downstream:
An Important Strategic Choice 93
Take-aways 93
Endnotes 94
4 Understanding Consumer Buying
Behavior 96
Cruise Ships—Not Just for Grandma and Grandpa
Anymore 96
Savvy Marketing Helped Fuel Industry
70 Growth 96
70 Future Challenges 97
71 Marketing Challenges Addressed in Chapter 4 98
The Psychological Importance of the Purchase
Affects the Decision-Making Process 99
How Do Consumers Make High-Involvement
Purchase Decisions? 99
Low-Involvement Purchase Decisions 107
Understanding the Target Consumer’s Level
of Involvement Enables Better Marketing
Decisions 107
Contents ix

Why People Buy Different Things: Part 1— Installations 142

The Marketing Implications of Psychological
and Personal Influences 111
Perception and Memory 111
Needs and Attitudes 112
Demographics, Personality, and Lifestyle
Why People Buy Different Things: Part 2—The
Marketing Implications of Social Influences 117
Culture 117
Social Class 118
Reference Groups 118
The Family 119
Take-aways 120
Endnotes 120
5 Understanding Organizational Markets
and Buying Behavior 122
DHL Supply Chain: Building Long-Term
Relationships with Organizational Buyers 122
Building Long-Term Relationships with
Customers 122
Long-Term Relationships Enhance Long-Term
Performance 123
Marketing Challenges Addressed in Chapter 5
Who Is the Customer? 124
A Comparison of Organizational versus
Consumer Markets 124
What Do the Unique Characteristics of
Organizational Markets Imply for Marketing
Programs? 126
The Organizational Customer Is Usually a Group
of Individuals 126
How Organizational Members Make Purchase
Decisions 129
Types of Buying Situations 129
The Purchase Decision-Making Process 130
The Marketing Implications of Different
Organizational Purchasing Situations 136
Purchasing Processes in Government
Markets 138
Selling Different Kinds of Goods and Services
to Organizations Requires Different Marketing
Programs 139
Raw Materials 139
Component Materials and Parts 141
Accessory Equipment 142
Operating Supplies 143
Business Services 143
Take-aways 144
115 Endnotes 144
6 Measuring Market Opportunities:
Forecasting and Market
Knowledge 146
Intel’s Secret Weapon 146
Bell’s Charter at Intel 146
How Do Anthropology and Ethnography
Work? 147
What Is Bell Learning about Generation X? 147
Can Bell’s Work Make a Difference? 147
Marketing Challenges Addressed in Chapter 6 148
Every Forecast Is Wrong! 148
A Forecaster’s Tool Kit: A Tool for Every
Forecasting Setting 149
Statistical and Other Quantitative Methods 150
Observation 151
123 Surveys or Focus Groups 151
Analogy 153
Judgment 153
Market Tests 154
Psychological Biases in Forecasting 154
Mathematics Entailed in Forecasting 154
Rate of Diffusion of Innovations: Another
Perspective on Forecasting 156
The Adoption Process and Rate of
Adoption 156
Adopter Categories 157
Implications of Diffusion of Innovation
Theory for Forecasting Sales of New Products
and New Firms 157
Cautions and Caveats in Forecasting 159
Keys to Good Forecasting 159
Common Sources of Error in Forecasting 160
Why Data? Why Marketing Research? 160
Customer Relationship Management: Charting a Path
toward Competitive Advantage 162
Internal Records Systems 162
Marketing Databases Make CRM Possible 163
x Contents
Why CRM Efforts Fail 166
Client Contact Systems 166
Competitive Intelligence Systems 167
Marketing Research: A Foundation for Marketing
Decision Making 167
Step 1: Identify the Managerial Problem
and Establish Research Objectives 168
Step 2: Determine the Data Sources
and Types of Data Required 169
Step 3: Design the Research 171
Step 4: Collect the Data 174
Step 5: Analyze the Data 174
Step 6: Report the Results to the Decision
Maker 175
What Users of Marketing Research
Should Ask 175
Rudimentary Competence: Are We
There Yet? 175
Take-aways 176
Endnotes 176
7 Targeting Attractive Market
Segments 178
The Developing World’s Emerging Middle Class 178
The New Middle Class: Who and How
Large? 178
Targeting India’s New Middle Class 179
Targeting: One Ingredient in Marketing
Success 179
Marketing Challenges Addressed in Chapter 7
Do Market Segmentation and Target Marketing
Make Sense in Today’s Global Economy? 180
Most Markets Are Heterogeneous 181
Today’s Market Realities Often Make
Segmentation Imperative 181
How Are Market Segments Best Defined? 182
Who They Are: Segmenting
Demographically 183
Where They Are: Segmenting
Geographically 185
Geodemographic Segmentation 185
How They Behave: Behavioral
Segmentation 186
Innovative Segmentation: A Key to Marketing
Breakthroughs 189
Choosing Attractive Market Segments: A Five-Step
Process 189
Step 1: Select Market-Attractiveness
and Competitive-Position Factors 190
Step 2: Weight Each Factor 193
Step 3: Rate Segments on Each Factor, Plot
Results on Matrices 193
Step 4: Project Future Position for Each
Segment 195
Step 5: Choose Segments to Target, Allocate
Resources 195
Different Targeting Strategies Suit Different
Opportunities 196
Niche-Market Strategy 197
Mass-Market Strategy 197
Growth-Market Strategy 198
Global Market Segmentation 198
Take-aways 199
Endnotes 200
8 Differentiation and Brand
Positioning 202
Fast Food Turns Healthy 202
The Jared Diet 202
Repositioning Fuels Subway’s Growth 202
Value: A Second Dimension to Subway’s
Positioning 203
Marketing Challenges Addressed
in Chapter 8 203
180 Differentiation: One Key to Customer Preference
and Competitive Advantage 204
Differentiation among Competing Brands 205
Physical Positioning 205
Limitations of Physical Positioning 206
Perceptual Positioning 206
Levers Marketers Can Use to Establish Brand
Positioning 207
Preparing the Foundation for Marketing Strategies:
The Brand Positioning Process 208
Step 1: Identify a Relevant Set of Competitive
Products 209
Step 2: Identify Determinant Attributes 210
Step 3: Collect Data about Customers’ Perceptions
for Brands in the Competitive Set 212
Contents xi

Step 4: Analyze the Current Positions of Brands Appropriate Conditions for a Prospector
in the Competitive Set 212 Strategy 238
Step 5: Determine Customers’ Most Preferred Appropriate Conditions for an Analyzer
Combination of Attributes 216 Strategy 240
Step 6: Consider Fit of Possible Positions Appropriate Conditions for a Defender
with Customer Needs and Segment Strategy 240
Attractiveness 218 How Different Business Strategies Influence
Step 7: Write Positioning Statement or Value Marketing Decisions 242
Proposition to Guide Development of Marketing
Strategy 218 Product Policies 243
Pricing Policies 245
The Outcome of Effective Positioning: Building Distribution Policies 245
Brand Equity 221 Promotion Policies 245
Managing Brand Equity 222 What If the Best Marketing Program for a
Some Caveats in Positioning Decision-Making 223 Product Does Not Fit the Business’s Competitive
Take-aways 224 Strategy? 246
Endnotes 224 Take-aways 248
Endnotes 248
Section Three
Developing Strategic Marketing 10 Product Decisions 250
Programs 225 Product Decisions in a Services Business 250
9 Business Strategies: A Foundation for Marketing Challenges Addressed in Chapter 10 251
Marketing Program Decisions 226 Product Design Decisions for Competitive
Business Strategies and Marketing Advantage 252
Programs at 3M 226 Goods and Services: Are the Product Decisions
Marketing Challenges Addressed in Chapter 9 228 the Same? 253
Product Quality and Features Decisions 253
How Do Businesses Compete? 229 Branding Decisions 255
Generic Business-Level Competitive Packaging Decisions 258
Strategies 229 Services Decisions and Warranties 258
Do the Same Competitive Strategies Work Managing Product Lines for Customer Appeal
for Single-Business Firms and Start-ups? 232 and Profit Performance 259
Do the Same Competitive Strategies Work
for Service Businesses? 232 Product Systems 260
Do the Same Competitive Strategies Work New Product Development Process Decisions 261
for Global Competitors? 234 The Importance of New Products to Long-Term
Will the Internet Change Everything? 234 Profitability 261
How Do Competitive Strategies Differ from New Product Success and Failure 261
One Another? 235 Organizing for New Product Development 262
Differences in Scope 235 Key Decisions in the New Product Development
Differences in Goals and Objectives 237 Process 263
Differences in Resource Deployments 237 Limitations of Stage Gate Thinking and
Differences in Sources of Synergy 238 Processes 270

Deciding When a Strategy Is Appropriate: Product Decisions over the Product Life Cycle 271
The Fit between Business Strategies and the Market and Competitive Implications of Product
Environment 238 Life Cycle Stages 272
xii
Strategic Implications of the Product Life
Cycle 277
Limitations of the Product Life Cycle
Framework 278
Take-aways 278
Endnotes 278
11 Pricing Decisions 280
Ryanair: Low Prices, High Profits—But Increasing
Costs 280
Marketing Challenges Addressed in Chapter 11
A Process for Making Pricing Decisions 282
Strategic Pricing Objectives 283
Estimating Demand and Perceived Value 286
Estimating Costs 289
Analyzing Competitors’ Costs and Prices 290
Methods Managers Use to Determine an Appropriate
Price Level 291
Cost-Oriented Methods 291
Competition-Oriented Methods 293
Customer-Oriented Methods 295
Deciding on a Price Structure: Adapting Prices to
Market Variations 299
Geographic Adjustments 299
Global Adjustments 300
Discounts and Allowances 301
Differential Pricing 303
Product-Line Pricing Adjustments 305
Take-aways 306
Endnotes 306
12 Distribution Channel Decisions
Selling Soft Drinks in Africa—Coke Builds
a Distribution System 308
Marketing Challenges Addressed in Chapter 12
Why Do Multifirm Marketing Channels Exist?
Designing Distribution Channels: What Are the
Objectives to Be Accomplished? 311
Product Availability 311
Meeting Customers’ Service Requirements
Promotional Effort 314
Market Information 314
Cost-Effectiveness 314
Flexibility 314
Contents
Designing Distribution Channels: What Kinds
of Institutions Might Be Included? 315
Merchant Wholesalers 315
Agent Middlemen 315
Retailers 316
Nonstore Retailing 317
Channel Design Alternatives 318
Alternative Consumer Goods Channels 319
Alternative Industrial Goods Channels 320
Which Alternative Is Best? It Depends on the Firm’s
281 Objectives and Resources 320
Availability and the Satisfaction of Customer
Service Requirements 321
Promotional Effort, Market Information,
and Postsale Service Objectives 323
Cost-Effectiveness 324
Flexibility 326
Multichannel Distribution 326
Channel Design for Global Markets 327
Market Entry Strategies 327
Channel Alternatives 328
Channel Design for Services 330
Channel Management Decisions 331
Vertical Marketing Systems 331
Sources of Channel Power 334
Channel Control Strategies 334
Trade Promotions—Incentives for Motivating
Channel Members 335
Channel Conflicts and Resolution
Strategies 338
Take-aways 339
Endnotes 340
308
13 Integrated Promotion Decisions 342
Nano Goes Nowhere 342
309
Marketing Missteps 342
310 Tata Responds 343
Marketing Challenges Addressed in Chapter 13 343
The Promotion Mix: A Communication Tool Kit 344
313 Developing an Integrated Marketing Communications
Plan 345
Step 1: Define the Audience(s) to Be Targeted 345
Step 2: Set the Promotional Objectives 346
Step 3: Set the Promotion Budget 347
Contents
Step 4: Design the Promotion Mix 348
Step 5: Evaluate the Results 350
The Nitty-Gritty of Promotional Decision
Making 351
Making Advertising Decisions 351
Making Personal Selling Decisions 362
Making Sales Promotion Decisions 367
Making Public Relations Decisions 368
. . . And All the Rest 369
Take-aways 370
Endnotes 370
Section Four
Strategic Marketing Programs
for Selected Situations 373
14 Marketing Strategies for a Digitally
Networked World 374
Opportunities in the App Economy 374
Games as Apps 374
More than Games 374
Business Models 375
Is It Real, or Is It a Bubble? 375
Marketing Challenges Addressed in Chapter 14
Does Every Company Need a Social Media
Strategy? 376
Threats or Opportunities? The Inherent Advantages
and Disadvantages of the Digital World for
Marketers 378
The Syndication of Information 378
Increasing Returns to Scale of Network
Products 379
The Ability to Efficiently Personalize
and Customize Market Offerings 380
Disintermediation and Restructuring of
Distribution Channels 380
Global Reach, 24/7 Access, and Instantaneous
Delivery 382
Are These Digital World Attributes
Opportunities or Threats? 382
First-Mover Advantage: Fact or Fiction? 384
Developing a Strategy for a Digitally Networked
World 385
Marketing Applications for a Digitally
Networked World 385
xiii
Developing Digital World Marketing Strategies:
The Critical Questions 391
Managing Digitally Networked Strategies:
The Talent Gap 395
Developing Strategies to Serve Digital World
Markets 396
Serving the Dot-Com Markets of Tomorrow 397
Take-aways 398
Endnotes 398
15 Strategies for New and Growing
Markets 400
Canon, Inc.—Success That Is Hard to Copy 400
Marketing Challenges Addressed in Chapter 15 401
How New Is New? 402
Market Entry Strategies: Is It Better to Be a Pioneer
or a Follower? 404
Pioneer Strategy 404
Not All Pioneers Capitalize on Their Potential
Advantages 406
Follower Strategy 407
Determinants of Success for Pioneers
375 and Followers 408
Strategic Marketing Programs for Pioneers 410
Mass-Market Penetration 410
Niche Penetration 410
Skimming and Early Withdrawal 412
Marketing Program Components for a
Mass-Market Penetration Strategy 412
Marketing Program Components for a Niche
Penetration Strategy 415
Marketing Program Components for
a Skimming Strategy 417
Growth-Market Strategies for Market Leaders 417
Marketing Objectives for Share Leaders 418
Marketing Actions and Strategies to Achieve
Share-Maintenance Objectives 418
Fortress, or Position Defense, Strategy 420
Flanker Strategy 423
Confrontation Strategy 423
Market Expansion 424
Contraction or Strategic Withdrawal 425
Share-Growth Strategies for Followers 425
Marketing Objectives for Followers 425
xiv
Marketing Actions and Strategies to Achieve
Share Growth 425
Frontal Attack Strategy 426
Leapfrog Strategy 430
Flanking and Encirclement Strategies 430
Supporting Evidence 431
Take-aways 432
Endnotes 433
16 Strategies for Mature and Declining
Markets 436
Johnson Controls—Making Money in Mature
Markets 436
Marketing Challenges Addressed
in Chapter 16 437
Challenges in Mature Markets 438
Challenges in Declining Markets 438
Strategic Choices in Mature Markets 438
Strategies for Maintaining Competitive
Advantage 439
Methods of Differentiation 440
Are the Dimensions the Same for Service
Quality on the Internet? 443
Methods of Maintaining a Low-Cost
Position 445
Customers’ Satisfaction and Loyalty
Are Crucial for Maximizing Their Lifetime
Value 447
Marketing Strategies for Mature Markets
Strategies for Maintaining Current Market
Share 449
Strategies for Extending Volume
Growth 451
Strategies for Declining Markets 457
Relative Attractiveness of Declining
Markets 457
Divestment or Liquidation 460
Marketing Strategies for Remaining
Competitors 460
Take-aways 463
Endnotes 464
Contents
Section Five
Implementing and Controlling
Marketing Programs 465
17 Organizing and Planning for Effective
Implementation 466
Electrolux—Organizing to Rule the World of
Household Appliances 466
Too Many Brands, Too Little Coordination 466
A New Structure to Implement the New
Strategy 467
Preliminary Results 467
Marketing Challenges Addressed in Chapter 17 468
Designing Appropriate Administrative Relationships
for the Implementation of Different Competitive
Strategies 469
Business-Unit Autonomy 469
Shared Programs and Facilities 471
Evaluation and Reward Systems 472
Designing Appropriate Organizational Structures
and Processes for Implementing Different
Strategies 472
Functional Competencies and Resource
Allocation 472
Additional Considerations for Service
Organizations 474
Organizational Structures 475
Recent Trends in Organizational Design 480
Organizational Adjustments as Firms Grow
and Markets Change 481
449 Organizational Designs for Selling in Global
Markets 482
Marketing Plans: The Foundation for Implementing
Marketing Actions 483
The Situational Analysis 487
Key Issues 488
Objectives 489
Marketing Strategy 489
Action Plans 489
Projected Profit-and-Loss Statement 490
Contingency Plans 490
Take-aways 490
Endnotes 490
Contents xv

18 Measuring and Delivering Marketing When and How Often Is the Information
Performance 492 Needed? 510
In What Media and in What Format(s) or Levels
Metrics Pay for Walmart 492 of Aggregation Should the Information Be
Changing Metrics for a Changing Strategy 493 Provided? 511
Can Walmart’s Overseas Stores Plug Does Your System of Marketing Metrics
the Gap? 493 Measure Up? 511
Marketing Challenges Addressed in Chapter 18 493 What Contingencies Should Be
Planned For? 512
Designing Marketing Metrics Step by Step 495 Global Marketing Monitoring 514
Setting Standards of Performance 496 A Tool for Periodic Assessment of Marketing
Specifying and Obtaining Feedback Data 501 Performance: The Marketing Audit 515
Evaluating Feedback Data 501
Taking Corrective Action 502 Types of Audits 515
Design Decisions for Strategic Monitoring Measuring and Delivering Marketing
Systems 503 Performance 516
Identifying Key Variables 503 Take-aways 518
Tracking and Monitoring 504 Endnotes 518
Strategy Reassessment 504
Design Decisions for Marketing Metrics 504 Index 519
Who Needs What Information? 505
SEO and SEM Analysis 509
Preface

Why This Book? experience spans a broad variety of manufacturing,

service, software, and distribution industries and
has taken us—and thereby you, the reader—around

W
HY DID YOUR INSTRUCTOR CHOOSE
THIS BOOK? Chances are, it was for one or the world many times. Simply put, we’ve actually
done what we teach, as well as what we write about
more of the following reasons:
in this book.
● Your instructor has designed his or her course
As the reader will see from the outset in Chapter 1,
around the use of cases, a real-world project, or a
marketing decision-making is a critical activity in
marketing simulation such as Markstrat, to bring
every firm, from start-ups to big companies with tra-
marketing decision-making to life. This book has
ditional marketing departments. Further, it is not just
been written with exactly these kinds of instructors in
marketing managers who make marketing decisions.
mind. Thus, one of your instructor’s key objectives
People in nearly every role in every company can
is to give you the necessary tools and frameworks
have powerful influence on how happy customers are,
to enable you to be an effective contributor to mar-
or are not, with the goods and services the company
keting decision-making—regardless of whether
provides. Stockbrokers must attract new customers.
you follow a career in marketing positions per se,
Accounting and consulting firms must find ways to
in another functional area, or as an entrepreneur or
differentiate their services from other providers so
in other general management roles. This book’s focus
their customers have reasons to give them their busi-
on strategic decision-making sets it apart from
ness. Software engineers must understand how their
other texts that place greater emphasis on descrip-
technology can benefit the intended customer, for
tion of marketing phenomena than on the strategic
without such benefits, customers will not buy. Thus,
and tactical marketing decisions that managers and
we have written this book to meet the marketing needs
entrepreneurs must make each and every day.
of readers who hope to make a difference in the long-
● Your instructor wants to use the most current and
term strategic success of their organizations—whether
most internet-savvy book available. We integrate
the latest web and social networking developments, their principal roles are in marketing or otherwise.
from Aprimo to Zynga and more, throughout the In this brief preface, we want to say a bit more about
book, and we devote an entire chapter, Chapter 14, each of the three distinctive benefits, listed above, that
to the development of marketing strategies for this book offers its readers. We also point out the key
today’s digitally networked world. In addition, we changes in this edition compared to previous ones;
supplement the book with an interactive website to and we thank our many students, colleagues, and oth-
help you self-test what you learn and to help your ers from whom we have learned so much and without
instructor choose the best cases and other materials whom this book would not have been possible.
and in-class activities.
Our goal—and probably that of your instructor as
well—is to make both the latest internet-based tools
as well as time-tested marketing principles relevant A Focus on Strategic
to those of you who will work in companies of all Decision-Making
kinds, dot-com and otherwise.
● Your instructor appreciates and believes you will Previous editions of this book have been known for
benefit from the real-world, global perspectives their strategic approach, an approach that helps clarify
offered by the authors of this book. Our combined the relationships among corporate, business-level, and
entrepreneurial, marketing management, and consulting marketing strategies for firms large and small; the

xvi
Preface
relationships between marketing strategies and the
marketing environment; and the relationships between
marketing and other functional areas in the firm. This
eighth edition retains this strategic perspective while
providing the reader with specific tools and frame-
works for making marketing decisions that take best
advantage of the conditions in which the firm finds
itself—both internally, in terms of the firm’s mission
and competencies, and externally, in terms of the mar-
ket and competitive context in which it operates.
By focusing on decision-making, we believe we’ve
written the best textbook available for instructors who
incorporate case-based teaching, marketing simulations,
and/or course-long projects like the development of a
marketing plan in their course design. And, by keep-
ing each chapter—and the book in total—concise and
readable, we allow space in students’ busy schedules for
instructors to add supplemental readings to highlight the
latest in marketing thinking.
Our decision-focused approach is also important to
students and executives who are our readers, because,
in most well-designed marketing management classes
and executive courses, the students or participants will
be asked to make numerous decisions—decisions in
case studies about what the protagonist in the case
should do; decisions in a course project, such as those
entailed in developing a marketing plan; or decisions
in a marketing simulation.
Our decision-focused approach is also important to
employers, who tell us they want today’s graduates to
be prepared to “hit the ground running” and contrib-
ute to the firm’s decision-making from day one. The
ability to bring thoughtful and disciplined tools and
frameworks—as opposed to seat-of-the-pants hunches
or blind intuition—to marketing decision-making is
one of the key assets today’s business school gradu-
ates offer their employers. This book puts the tools in
the tool box to make this happen. In the end, employ-
ers want to know what their new hires can do, not just
what they know.
Web-Savvy Insights
This book brings a realistic and informed perspective
to an important question many students have been
asking in recent years: “Has the advent of the inter-
net changed all the rules?” Our answer is, “Well, yes
and no.” On the one hand, the internet has made avail-
able a host of new marketing tools, from Facebook
xvii
to e-mail marketing to delivery of digital goods and
services over the internet, many of which are avail-
able to companies in every industry. On the other
hand, time-tested marketing fundamentals, such as
understanding one’s customers and competitors and
meeting customer needs in ways that are differentiated
from the offerings of those competitors, have become
even more important in the fast-moving digital world,
as the many dot-com failures attest.
Thus, throughout the book, we integrate examples
of dot-com companies—both successful and not—to
show how both yesterday’s and today’s marketing
tools and decision frameworks can most effectively
be applied. Because the advent of social networking
and other new technologies is so important in its own
right, however, we also devote Chapter 14 to this fast-
growing arena. This chapter provides for marketers in
all kinds of companies a road map for decisions about
where, when, and how to deploy the tools now avail-
able in today’s digitally networked world.
A Real-World,
Global Perspective
Theory is important, because it enhances our under-
standing of business phenomena and helps managers
think about what they should do. It is in the applica-
tion of theory—the world of marketing practice—
where we believe this book excels. Our decision focus
is all about application. But we don’t just bring an
academic perspective to the party, important as that
perspective is.
One of us, John Mullins, brings to this book 20 years
of executive experience in the retailing industry in the
United States, including three entrepreneurial compa-
nies. John now works in Europe at the London Busi-
ness School, where he draws on the perspectives of
MBA students and executive education participants
from more than 120 countries to inform this book with
the realities of building vibrant businesses in today’s
global economy. John’s work in executive education
regularly takes him not only to North America and
Europe, but to Africa, Asia, and Latin America as well.
His first-hand vantage point into these fast-growing
regions will be evident to readers of this book.
Orv Walker spent most of his career at the Carlson
School of Management at the University of Minnesota,
where he worked with some of the world’s leading
consumer goods marketers and won the marketing
xviii
discipline’s most prestigious awards for his research.
Orv also enjoyed a number of years running a business
as a vintner in the rolling hills of western Wisconsin.
Both of us have contributed the fruits of our research
to the growing body of knowledge in the marketing
management, marketing strategy, new product devel-
opment, and entrepreneurship arenas. The result of
our collective experience and expertise is a book filled
with examples of real people from around the world
making real decisions, examples of start-ups and high-
growth companies as well as examples of larger, more
established firms.
What’s New in This Edition?
In this eighth edition of Marketing Management, we’ve
done significant updating to reflect four key trends
that are sweeping the world of marketing theory and
practice and changing the aspirations of graduates
everywhere:
● The growing interest of many of today’s students in all
things entrepreneurial and in learning what it will
take to run their own companies, whether now—
upon, or even before graduation—or at some later
point in their careers.
● The growing importance of fast-growing emerging
markets like India and China on the global eco-
nomic stage and the growing realization in companies
everywhere that business today is a global game.
● The changing nature of marketing research. These
changes are being brought about by two factors:
the power of the internet to make many kinds of
research both less expensive and faster to carry
out, and by a growing recognition that understand-
ing customer needs in today’s increasingly com-
plex world requires more than a consumer survey
administered now and again.
● The growing ubiquity and power of social networks—
Facebook, Linkedln, Twitter, and the like—which
offer numerous opportunities for marketers of all
kinds, whether companies with goods of services
to market or political uprisings seeking to change
the world.
We’ve addressed the first of these issues, the grow-
ing interest of students in entrepreneurship by con-
tinuing to add new examples throughout the book
about how entrepreneurial companies—not just large,
established ones—are applying the tools and concepts
that this book brings to life. The author team knows
from experience that the entrepreneurial path makes
Preface
for achallenging—and always exciting—career path.
As increasing numbers of today’s graduates are taking
the entrepreneurial plunge, we’d like our readers who
choose such a path to be well-equipped for the journey.
Recent editions of this book have been known for
their real-world global perspective and this edition is
no exception. We’ve continued to work hard in this
revision to add examples from fast-growing emerg-
ing economies like India, China, and elsewhere. Four
new globally focused case vignettes—on the emerg-
ing middle class in the developing world (Chapter 7)
on marketing Coca-Cola in China (Chapter 12): on the
marketing of the Tata Nano, the world’s least expen-
sive automobile (Chapter 13): and on the strategy and
global organizational structure that Swedish appliance-
maker Electrolux employs (Chapter 17)—will provide
our readers with new insight into marketing on today’s
global stage. For almost every company, it seems,
India or China—or Brazil, Russia, or another devel-
oping country—is important as a source of supply or
labor, as a market for what the company produces,
or both.
To address the changing nature of marketing re-
search, we’ve done a significant updating of Chapter 6.
We now open the chapter with a case vignette on
Intel’s secret weapon, an anthropologist and ethnogra-
pher named Genevieve Bell, whose team’s consumer
insights—along with those of other technology-driven
companies that are ramping up their qualitative and
ethnographic research efforts—are changing the way
high-tech products are conceived and developed.
Throughout the chapter, we address the many changes
in marketing research—and in forecasting, too—that
these and other changes, including the growing clout
of social networks and other web-based phenomena,
are bringing about.
Perhaps nothing, however, provides a greater
opportunity for today’s marketing graduates than the
growing ubiquity and power of social networks and
their applicability for marketers of all kinds. Thus,
we’ve done a major updating of Chapter 14 to accom-
plish two things. First, we’ve removed much of the
earlier material that described many of the market-
ing possibilities of the internet, since many of today’s
internet marketing tools are well understood by
today’s web-savvy readers. Second, we’ve refocused
the chapter on the reality that today we live and work
in a digitally networked world. A new case vignette
opens the chapter with a look at the burgeoning array
of opportunities in the market for apps. In addition,
Preface
throughout the chapter, dozens of new examples
address the social networking phenomenon, mobile
and location-based advertising, and other digital world
developments from a variety of perspectives.
As today’s digitally networked world continues its
rapid evolution, keeping students (the easy part, since
many of the most important changes are being led by
members of their generation) and instructors (the harder
part!) current on such developments is essential and, in
our view, well worth the entire chapter we dedicate to it.
In addition to the major changes we’ve noted
above, every chapter has undergone rigorous scrutiny,
with materials refreshed and updated, new examples
added, outdated ones deleted, and some of the lat-
est empirical evidence incorporated so readers know
what works and what doesn’t. Instructors will be
pleased to know, however, that the structure and flow
of this eighth edition remains unchanged. Our purpose
in each and every change we have made is to better
prepare the reader to “hit the ground running” and
contribute to marketing decision-making from what-
ever vantage point in the organization he or she sits.
Our focus on strategic decision-making remains, as
always, the key strength of this book.
Additional Resources
Supplemental materials for instructors and students
are available on the book website at www.mhhe.com/
mullins8e. Instructor resources include an instructor’s
manual, PowerPoints, and a test bank. A list of rec-
ommended cases and supplementary readings is also
available. These materials range from both classical
and recent practitioner-focused articles from Harvard
Business Review and MIT Sloan Management Review
to carefully selected, classroom-ready, knock-your-
socks-off teaching cases set all over the world (all
xix
with teaching notes available), in companies large
and small, old and new. They’ll help any instructor
keep his or her course bang up to date and pragmati-
cally focused.
Thanks!
Simply put, this book is not solely our work—far
from it. Many of our students, colleagues, and those
we work with in industry have made contributions
that have significantly shaped our perspectives on
marketing decision-making. We are grateful to all
of them. We wish to give thanks to the individuals
who reviewed the previous edition of this text and
provided useful feedback: Catharine Curran, Univer-
sity of Massachusetts–Dartmouth; Anna Andriasova,
University of Maryland University College; Sanjay S.
Mehta, Sam Houston State University; Prema Nakra,
Marist College.
We also thank a small army of talented people at
McGraw-Hill/Irwin for their work that has turned our
rough manuscript into an attractive and readable book.
In particular, our editors, Laura Spell and Lori Bradshaw,
have been instrumental in giving birth to this edition.
Without them, we’d probably still be writing!
Finally, we thank Harper Boyd, without whom this
book would not exist, and our parents, without whom,
of course, neither of us would be here. To all of you
we extend our love, our respect, and our gratitude for
passing on to us your curiosity and your passion for
learning. We therefore dedicate this book to Harper
Boyd, to Jeannette and Orville Walker, Sr., and to
Alice and Jack Mullins.
John W. Mullins
Orville C. Walker, Jr.
London, U.K.; Madison, Wisconsin
Summer 2011
Walkthrough
Case Vignette
These vignettes have been chosen to increase C HAPTER S IX
the book’s global focus and international
perspective.
Measuring Market
Opportunities: Forecasting
and Market Knowledge
Intel’s Secret Weapon1

G
ENEVIEVE BELL HAS A RADICAL directions, leading new product strategy and defini-
IDEA. Bell, the only female among Intel’s ros- tion, and driving consumer-centric product innovation
ter of top technical talent dubbed Intel Fellows, and thinking across the company. All this is everyday
and Director of Intel’s User Experience Group, thinks work for this wiry-haired woman who as a very small
the world would be a better place if we can better under- girl used to kill things—frogs and the like—growing
stand how people would like to use technology, rather up in an aboriginal community in Australia’s outback.
than tossing technology that people don’t really want Why is there a role like Bell’s at Intel today? “I
into the market at an alarming pace. Bell was given her joined Intel in 1998,” she recalls, “There was a col-
own lab at Intel in 2010, an event that may change Intel, lective sense in Intel’s senior management that they
or even the future of technology itself. didn’t know what was going to happen when PCs
“Imagine,” says Bell, “If we were willing to take on became mass market. They knew they had market
board the ways in which PCs don’t work and applied research, they knew they had the skills to size markets
that to other technologies such as our refrigerators or and how to survey people, and a little bit of usability
televisions. If your fridge said, “I’m terribly sorry, you work was going on even then, but I think the sense
cannot have that cold milk until I’ve rebooted myself of what was missing was this notion about what was
and downloaded new drivers!” or your TV said, “You motivating people, what did they care about and was
gives his or her permission to be sent marketing messages. Were this not the case, cannot
the watch the end of the cricket match because I am there an opportunity if you understood the things to
system would be inundated with unwanted messages to the point that it would come todefragging
a my hard drive,” we would all go insane.” drive new uses of technology.”
screeching halt!19 The growth of unwelcome e-mails, or spam, is a customer problem that “For many years thereafter, a part of every pres-
entation I gave, every class I taught, every meeting I
software makers are working hard to address. Bell’s Charter at Intel attended was explaining what an anthropologist was,
Blogging is another fast-growing internet application. Given the ease with which any-
what ethnography was, what was user centered design
one can now post material on the web, companies large and small are developing blogs In Bell’s view, her charter at Intel is straightforward, and why it was going to be a useful tool at Intel.” In
with which they can, sometimes anonymously, promote their products or ideas or even dis-
“To provide insights and inspire innovation.” Her team her 13 years at Intel, Bell has fundamentally changed
parage competition. There are even sites (for example, www.betterbusinessblogging.com of )social scientists, interaction designers and human how the company envisions, plans, and develops its
to help businesses develop their blogs! factors engineers is charged with setting research product platforms.
Podcasting, a technology that provides a way for consumers to receive audio via the
internet, is another growing web-based application. Advertisers and other providers such
146
as CNN, the Cable News Network, provide short audio feeds that can be downloaded and
listened to on a PC or on a portable MP3 player.
While the new media seem, on the surface, to be radically different from their more
traditional counterparts—radio, television, and print—the logic entailed in planning their
roles in promotional programs is no different than for other media. Considerations of
reach, frequency, and cost—measured in cost per thousand impressions (or “hits” or
“click-throughs” on the web)—provide a means of comparing their value to one another
and to traditional media. Cost per acquisition, another measure, is useful for web adver-
tising that results directly in actual customer purchases, a model familiar in the direct-
marketing industry. To the extent that new media performance can be measured (How
many extra customers does a restaurant get for weekday lunches as a result of its ad, and
at what cost per customer?), marketers will be encouraged to use them to their full eco-
nomic potential.
The rapid growth of these and other new media has led to a variety of ethical issues
marketers must address, including the implications of location-based services discussed in
Ethical Perspective 13.2.
International Media Global advertising has been aided by the rise of globally ori-
ented television media like CNN, MTV, and ESPN, all of which originate primarily in the
United States, and a variety of other media like STAR-TV and Al Jazeera, which originate
in Asia and the Middle East, respectively. The ability of media like these to deliver to Ethical Perspectives
Ethical Perspective 13.2 The Centre for Democracy and Technology, a privacy These minicases highlight ethical issues that
Do You Really Want Burglars to Know advocate, argues that the privacy policies of companies
Where You Are? that are collecting and using location-based data are
“uneven at best and inadequate at worst.”
commonly arise in marketing management.
The creators of PleaseRobMe.com, a simple website Some companies are better, of course, and some
that publishes a live feed of location-based posts worse. Loopt includes software that monitors its ser-
that appear on Twitter, points out that the tweet- vice for suspicious patterns of behaviour, it says. But
ers are somewhere other than at home. The site’s politicians are getting into the act, holding a congres-
creators want to highlight the fact that tweeters on sional hearing in Washington to examine the impli-
the likes of Foursquare and other location-based cations of such services and their rapid growth. If
services give away information that burglars would web-savvy burglars want to take advantage of all this
love to have. data, it would appear that they’d better do so soon.
But the founders of location-based services and the
venture capitalists backing them will have to deal with Source: “Follow Me,” The Economist, March 6, 2010, p. 81.
growing concerns that collecting information about peo- For more on Foursquare and Loopt, see www.foursquare.com and
ple’s movements may have unintended consequences. www.loopt.com.

xx
 much h lik
like th
Strategic Issue
Stattisstic
Sta ti al me
metho
hodds gen
enerarally
ly ass
ssumme ththat
at
CenturyLinkk Strategic Issue
the
he futur
fu ure will lookok ve
veryy muc
much llikee the
he
Mountain an n
passt.
p t SoSom me
etiimess th
his is noot th
the case e. when its statt Highlight critical information and crucial questions
failed to allo
throughout each chapter.

cal data that are available. Whee

to introduce a new flavor, its m
Global Perspective
to forecast the sales for the new
w and Internet Icons
high-technology products, for w
extremely expensive to producee Identify global examples as well as effective internet
marketing for both new and economic marketers.

music from iTunes and for the

which to play them. First, Napp
rage with consumers (though n
convinced the courts that Napstt
Take-aways than 300 million units, proving
End-of-chapter points review the most use of analogs like these, as w
important “lessons learned” from each not to copy—is
py a crucial appro
chapter.

Take-aways
1. Every forecast and estimate of market potential is
wrong! Evidence-based forecasts and estimates,
prepared using the tools provided in this chapter, are
far more credible—and generally more accurate—than
3. Superior market knowledge is not only an important
source of competitive advantage, but it also results in
happier, higher volume of, and more loyal customers.
Thus, the systematic development of market knowledge

xxi
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Section One

The Role of Marketing

in Developing Successful
Business Strategies

Chap t e r 1 The Marketing C h apter 2 The Marketing

Management Process Implications of
Corporate and
Business Strategies

1
 C HAPTER O NE

The Marketing
Management Process
Samsung—Building a Global Brand1

S
AMSUNG ELECTRONICS is the largest com-
ponent of South Korea’s largest chaebol—one
of the giant family-controlled conglomerates
that have been instrumental in building the country’s
economy over the last half century. Samsung’s elec-
tronics unit started out in 1970 making cheap TV sets
for the Sanyo label. Over time it morphed into a tech-
nically innovative company that was one of the pio-
neers in developing flat-screen displays, plasma TVs,
multifunction cell phones, and other digital devices.
But until the mid-1990s, the unit competed primarily
by (a) producing technical components or low-cost
manufactured products for firms with better-known
brands, such as Dell, Hewlett-Packard, and General
Electric; and (b) selling me-too consumer products—
like TVs and microwave ovens—under the Samsung
brand through discount chains like Walmart at very
low prices.
Samsung’s cost-driven competitive strategy worked
well until 1996, but then several shocks in its mar-
ket and competitive environments forced a major
reevaluation. First, the global market for memory
chips and other components Samsun supplied for
other electronics brands softened because of increased
competition and excess capacity. At about the same
time, sales of Samsung’s own branded products were
also declining. As Yun Jong-yong—a company vet-
eran who was brought in as CEO of the electronics
unit—complained, Samsung could build a TV that
was technically as good as a Sony, but because of the
down-market image of the Samsung brand its sets sat
at the back of the store or piled up in discount chains.
Finally, the Asian financial crisis of 1997 made a
major strategic shift essential for the unit’s survival.
New Competitive and
Marketing Strategies
Mr. Yun initiated an ambitious new competitive strat-
egy aimed at developing and marketing technically
superior products while building an image of Samsung
as a stylish, high-quality brand commanding a pre-
mium price. The objective was to establish a unique
competitive position using technical innovation and
design to appeal to younger and relatively upscale cus-
tomers around the world. “If we were to continue com-
peting only on price,” Mr. Yun argued, “the Chinese
would slaughter us.”
Technical Innovation and R&D In order to
implement its new competitive strategy, Samsung had
to become a pioneer in developing new digital tech-
nologies. While Sony and other rivals had a substan-
tial lead in consumer electronics, that lead was rooted
in the analog world. The digital world required new
technical innovations. Consequently, the firm shifted
substantial resources into R&D focused on technolo-
gies such as large-area LCDs, display drivers and chip
sets, and mobile telephony. In the 2009 fiscal year, it

2
spent 7.6 trillion won (over $7 billion)—nearly 6 per-
cent of the unit’s revenue—on R&D. More than one-
quarter of the company’s workforce—some 44,000
people—are engaged in R&D activities in about
40 research centers around the world.
New Product Development and Design But
cutting-edge technology does not guarantee market suc-
cess. It must be incorporated into products that deliver
benefits that at least some segment of consumers will
consider to be worth the price. And some of those
benefits may be subjective—attractive styling, say, or
a cool image. Therefore, new product development at
Samsung usually involves a team of designers who col-
laborate closely with the firm’s engineers, manufactur-
ing people, and marketers. To ensure they stay in touch
with consumer tastes in different countries, the firm’s
450 designers are assigned to design centers in cities
like London, Tokyo, Shanghai, and San Francisco, and
the company’s market researchers run focus groups and
user surveys in many markets around the world.
Marketing Programs to Build the Samsung
Brand Revamping Samsung’s marketing efforts
was also critical to the success of its new com-
petitive strategy because even the most technically
sophisticated and well-designed products are likely
to fail unless potential customers know they exist,
can acquire them easily, and think they’re worth the
money. Therefore, Eric Kim was recruited from out-
side the firm to head a global marketing effort. One of
his first moves was to reorganize the firm’s distribu-
tion channels. Consistent with the strategic objective
of establishing Samsung as a high-quality brand wor-
thy of a premium price, many of the company’s prod-
ucts were pulled out of low-priced discount chains
and distributed through service-oriented electronics
Marketing Challenges Addressed in Chapter 1
The activities of Samsung’s managers as they worked to redefine the company’s brand
image and supporting marketing plan demonstrate that marketing involves decisions
crucial to the success of every organization, whether large or small, profit or nonprofit,
specialty stores and web retailers—like Best Buy and
Amazon.com—instead.
To ensure consistency in Samsung’s market-
ing communications across world markets, Mr. Kim
consolidated the firm’s roster of advertising agencies
from 55 down to a single global advertising group,
British-based WPP. He then launched the firm’s first
brand-building campaign with fashion-forward TV
commercials showing off the company’s cool sense
of style as well as the technical sophistication of its
products.
The firm also makes extensive use of more contem-
porary promotional tools such as product placements,
sponsorships, and internet advertising to strengthen
its brand. For instance, Samsung provides both finan-
cial and technical support for a variety of sporting and
cultural events in every major region of the world. It
is a sponsor of the Olympics, Asian games, and other
international events, but it also supports regional and
local events—such as the Montreal Jazz Festival and
the Chelsea Football Club in the UK—as a means of
staying close to local customers.
The Results
Samsung Electronics’ revamped competitive strategy
and the marketing programs designed to implement it
have been a smashing success. According to studies
by Interbrand (a brand consultancy), the global value
of Samsung’s brand increased by more than 200 per-
cent from 2000 through 2008, and it overtook Sony
as the most valuable consumer electronics brand. As a
result, the unit’s sales grew to 139 trillion won (about
$119 billion) in the 2009 fiscal year, and operating
profit reached 11.6 trillion won.
3
4 Section One The Role of Marketing in Developing Successful Business Strategies

manufacturer, retailer, or service firm. The CEO of a high-tech firm like Samsung must
decide what technologies to pursue, what goods or services to sell, to whom, with
what features and benefits, at what price, and so on. A chief financial officer for a
large multinational corporation must market the merits of the company to the capital
markets to obtain the resources needed for continued growth. The executive director of
a nonprofit community agency must pursue the resources necessary for the agency to
achieve its mission, whether those resources come from fees for the services it deliv-
ers or from grants and contributions. And all of those managers must market their
ideas for improving their organizations’ prospects and performance to their colleagues
inside the firm as well as to customers, suppliers, strategic partners, and prospec-
tive employees. Thus, most managers engage in tasks involving marketing decisions
virtually every day.
This book provides prospective managers and entrepreneurs with the marketing tools,
perspectives, and analytical frameworks they’ll need to play an effective role in the mar-
keting life and overall strategic development of their organizations, regardless of whether
or not they occupy formal marketing jobs. Chapter 1 addresses a number of broad but
important questions all managers must resolve in their own minds: Are marketing deci-
sions important? Does marketing create value for customers and shareholders? What con-
stitutes effective marketing practice? Who does what in marketing and how much does it
cost? And finally, what decisions go into the development of a strategic marketing pro-
gram for a particular good or service and how can those decisions be summarized in an
action plan?

Why Are Marketing Decisions Important?

The improved performance of Samsung Electronics following the retooling of its strategic
marketing plan illustrates the importance of good marketing decisions in today’s business
organizations. And according to many managers and expert observers around the world, a
strong customer focus and well-conceived and executed marketing strategies will be even
more crucial for the success of most organizations as the global marketplace becomes
more crowded and competitive.2
The importance of marketing in a company’s ongoing success can be better appreciated
when you consider the activities marketing embraces. Marketing attempts to measure and
anticipate the needs and wants of a group of customers and respond with a flow of need-
satisfying goods and services. Accomplishing this requires the firm to
● Target those customer groups whose needs are most consistent with the firm’s resources and
capabilities.
● Develop products and/or services that meet the needs of the target market better than
competitors.
● Make its products and services readily available to potential customers.
● Develop customer awareness and appreciation of the value provided by the company’s
offerings.
● Obtain feedback from the market as a basis for continuing improvement in the firm’s offerings.
● Work to build long-term relationships with satisfied and loyal customers.

The most important characteristic of marketing as a business function is its focus on

customers and their needs. This is a focus that all managers—not just marketers—need to
adopt to ensure their organizations can build and sustain a healthy “top line.”
Chapter One The Marketing Management Process 5

The Importance of the Top Line

In the financial markets it is a company’s bottom line—its profitability—that is most impor-
tant. In the long run, all firms must make a profit to survive. But as the managers at Sam-
sung are well aware, there can never be a positive bottom line—nor financing, employees,
or anything else—without the ability to build and sustain a healthy top line: sales revenue.
As a wise observer once said, nothing happens until somebody sells something. Or to para-
phrase management guru Peter Drucker, everything a company does internally is a cost cen-
ter. The only profit center is a customer whose check doesn’t bounce.
Strategic Issue That is why the customer focus inherent in the marketing function
A customer focus enables firms to enjoy is important. When properly implemented, a customer focus enables
success by exploiting changes in the firms to enjoy success by exploiting changes in the marketplace, by
marketplace, by developing products and
services that have superiority over what is developing products and services that have superiority over what is
currently available, and by taking a more currently available, and by taking a more focused and integrated cross-
focused and integrated cross-functional functional approach to their overall operations, as Samsung has done
approach to their overall operations.
in its product-development process.

Marketing Creates Value by Facilitating

Exchange Relationships
While we have described marketing activities from an individual organization’s
perspective, marketing also plays an important role in the broader context of the global
economy. It helps facilitate exchange relationships among people, organizations, and
nations.
Marketing is a social process involving the activities necessary to enable individuals and
organizations to obtain what they need and want through exchanges with others and to develop
ongoing exchange relationships.3

Increased division and specialization of labor are some of the most important
changes that occur as societies move from a primitive economy toward higher levels
of economic development. But while increased specialization helps improve a soci-
ety’s overall standard of living, it leads to a different problem: Specialists are no lon-
ger self-sufficient. Artisans who specialize in making pots become very skilled and
efficient at pot making, producing a surplus of pots, but they do not make any of the
many other goods and services they need to survive and to improve their lifestyle. A
society cannot reap the full benefits of specialization until it develops the means to
facilitate the trade and exchange of surpluses among its members. Similarly, a nation
cannot partake of the full range of goods and services available around the world or
penetrate all potential markets for the economic output of its citizens unless exchanges
can occur across national boundaries.

What Factors Are Necessary for a Successful

Exchange Relationship?
Many exchanges are necessary for people and organizations to reap the benefits of the
increased specialization and productivity that accompany economic development. But
such exchanges do not happen automatically, nor does every exchange necessarily lead
6 Section One The Role of Marketing in Developing Successful Business Strategies

to a mutually satisfying long-term relationship. The conditions for a successful exchange

transaction can be met only after the parties themselves—or marketing intermediaries such
as a wholesale distributor or a retailer—have performed several tasks. These include iden-
tifying potential exchange partners, developing offerings, communicating information,
delivering products, and collecting payments. This is what marketing is all about. Before
we take a closer look at specific marketing activities and how they are planned and imple-
mented by marketing managers, we will discuss some terms and concepts in our defini-
tion of marketing and the conditions necessary for exchange. Let’s examine the following
questions:
1. Who are the parties involved in exchange relationships? Which organizations and people
market things, and who are their customers?
2. Which needs and wants do parties try to satisfy through exchange, and what is the difference
between the two?
3. What is exchanged?
4. How does exchange create value? Why is a buyer better off and more satisfied following an
exchange?
5. How do potential exchange partners become a market for a particular good or service?

1. Who Markets and Who Buys?

The Parties in an Exchange
Virtually every organization and individual with a surplus of anything engages in market-
ing activities to identify, communicate, and negotiate with potential exchange partners.
Some are more aggressive—and perhaps more effective—in their efforts than oth-
ers. When considering extensive marketing efforts aimed at stimulating and facilitating
exchange, we think first of the activities of goods manufacturers (Intel, BMW, Samsung),
service producers (Air France, McDonald’s, 20th Century Fox), and large retailers (Zara,
Marks & Spencer, Wal-Mart).
However, museums, hospitals, theaters, universities, and other social institutions—
whether for profit or nonprofit—also carry out marketing activities to attract customers,
students, and donors. In the past, their marketing efforts were not very extensive or well
organized. Now, increasing competition, changing customer attitudes and demographics,
and rising costs have caused many nonprofit organizations to look to more extensive mar-
keting efforts to solve their problems.4 For example, some U. S. churches are using mar-
keting techniques to address social problems, as well as to increase church attendance. But
as discussed in Ethical Perspective 1.1, such efforts can also raise ethical questions.
Customers Both individuals and organizations seek goods and services obtained
through exchange transactions. Ultimate customers buy goods and services for their
own personal use or the use of others in their immediate household. These are called
consumer goods and services. Organizational customers buy goods and services
(1) for resale (as when TESCO buys several gross of Jeans for resale to individual con-
sumers); (2) as inputs to the production of other goods or services (as when Toyota buys
sheet steel to be stamped into car body parts); or (3) for use in the day-to-day operations
of the organization (as when a university buys paper and printer cartridges). These are
called industrial goods and services. Throughout this book we examine differences in
the buying behavior of these two types of customers and the marketing strategies and
programs relevant for each.5
Chapter One The Marketing Management Process 7

Ethical Perspective 1.1 may be just a well-disguised attempt to identify prospects

Marketing Goes to Church
in the United States
What’s old-time religion to do? At a time when the
search for spiritual guidance is on the rise, angels,
crystals, and shamans are more engaging to some
people than organized religion.
Amid the competition for a piece of America’s
soul, denominations such as the Southern Baptists,
Lutherans, and Roman Catholics are searching for
ways to reach baby boomers—without seeming too
evangelical. Those religions, along with the Mormon
Church, which is starting its 50th advertising cam-
paign, have introduced national public-service cam-
paigns focused on children and families. They are
also producing cable and network television specials
that incorporate Christian themes in their story lines,
and studying how best to use the internet to get
their spiritual message across.
The Lutheran Hour Ministries, which spends about
half of its $20 million budget on marketing, produced
an advertising campaign with themes about family,
instead of specific religious messages. A print, radio,
and TV campaign that appeared in Chicago shows
two children with the words “Drugs. Violence. Peer
Pressure. The world is tough. Being a kid shouldn’t
be.” The rest of the text includes a toll-free number
to call to receive a free audio cassette and booklet
on how to “talk with your kids about today’s issues
and the Christian values they need in today’s world.”
Some observers have expressed doubts about the
ethics of the Lutheran Hour approach, fearing that it
for recruiting new church members. It is true that a per-
son who calls the toll-free number can request a visit
from members of a local Lutheran church. But “there’s
no hit made [to recruit]. It’s not a bait-and-switch,” says
Dr. Dale Meyer, speaker for the Lutheran Hour Ministries.
However, other denominations—particularly evan-
gelical congregations like California’s Saddleback
Valley Community Church, one of the biggest reli-
gious institutions in America—have recently been
much more aggressive in using marketing techniques
to recruit new converts as well as raise money for
social projects like fighting poverty in Africa. Those
techniques focus not only on media advertising, but
also on internet ads, blogs, websites, and a variety
of “product enhancements” such as the formation
of interest and lifestyle groups within the congrega-
tion and the addition of church coffee shops and
cafeterias. But these techniques can also provoke
some negative reactions among segments of the
churchgoing population. For instance, a recent study
suggests that while baby boomers largely approve
of these contemporary approaches to religion, “the
younger generation sees the megachurches as too
production-oriented, too precise. . . . They want a
more traditional understanding of religion and faith.”
Sources: Fara Warner, “Churches Develop Marketing Campaigns,”
The Wall Street Journal, April 17, 1995, p. B4; William C. Symonds,
“Earthly Empires,” BusinessWeek, May 23, 2005, pp. 78–88; Fara
Warner, “Prepare Thee for Some Serious Marketing,” The New York
Times, October 22, 2006, Section3, pp. 1–4; and Brett McCracken,
“The Perils of ‘Wannabe Cool’ Christianity,” The Wall Street Journal,
August 13, 2010, archived at www.online.wsj.com.

2. Customer Needs and Wants

Needs are the basic forces that drive customers to take action and engage in exchanges.
An unsatisfied need is a gap between a person’s actual and desired states on some physi-
cal or psychological dimension. We all have basic physical needs critical to our survival,
such as food, drink, warmth, shelter, and sleep. We also have social and emotional needs
critical to our psychological well-being, such as security, belonging, love, esteem, and self-
fulfillment. Those needs that motivate the consumption behavior of individuals are few and
basic. They are not created by marketers or other social forces; they flow from our basic
biological and psychological makeup as human beings.
Organizations also must satisfy needs to assure their survival and well-being. Shaped
by the organization’s strategic objectives, these needs relate to the resource inputs, capital
equipment, supplies, and services necessary to meet those objectives.
Wants reflect a person’s desires or preferences for specific ways of satisfying a basic
need. Thus, a person wants particular products, brands, or services to satisfy a need.
8 Section One The Role of Marketing in Developing Successful Business Strategies

A person is thirsty and wants a Coke. A company needs office space and its top executives
want an office at a prestigious address in midtown Manhattan.
Basic needs are relatively few, but people’s many wants are shaped by social influences,
their past history, and consumption experiences. Different people may have very different
wants to satisfy the same need. Everyone needs to keep warm on cold winter nights, for
instance. But some people want electric blankets, while others prefer old-fashioned down
comforters.
This distinction between needs and wants helps put into perspective the charge that
“marketers create needs,” or that “marketers make people want things they don’t need.”
Neither marketers nor any other single social force can create needs deriving from the
biological and emotional imperatives of human nature. On the other hand, marketers—and
many other social forces—influence people’s wants. A major part of a marketer’s job is to
develop a new product or service and then to stimulate customer wants for it by convincing
people it can help them better satisfy one or more of their needs.
Do Customers Always Know What They Want? Some managers—particularly
in high-tech firms—question whether a strong focus on customer needs and wants is
always a good thing. They argue that customers cannot always articulate their needs and
wants, in part because they do not know what kinds of products or services are technically
possible. As Akio Morita, the late visionary CEO of Sony, once said:
Our plan is to lead the public with new products rather than ask them what kind of products
they want. The public does not know what is possible, but we do. So instead of doing a lot of
marketing research, we refine our thinking on a product and its use and try to create a market
for it by educating and communicating with the public.6

Others have pointed out that some very successful new products, such as the Chrysler mini-
van and Compaq’s pioneering PC network server, were developed with little or no market
research. On the other hand, some famous duds, like Ford’s Edsel, New Coke, and McDonald’s
McLean low-fat hamburger, were developed with a great deal of customer input.7
The laws of probability dictate that some new products will succeed and more will fail
regardless of how much is spent on marketing research. But the critics of a strong customer
focus argue that paying too much attention to customer needs and wants can stifle innova-
tion and lead firms to produce nothing but marginal improvements or line extensions of
products and services that already exist. How do marketers respond to this charge?
While many consumers may lack the technical sophistication necessary to articulate
their needs or wants for cutting-edge technical innovations, the same is not true for indus-
trial purchasers. About half of all manufactured goods in most countries are sold to other
organizations rather than individual consumers. Many high-tech industrial products are
initiated at the urging of one or more major customers, developed with their cooperation
(perhaps in the form of an alliance or partnership), and refined at customer beta sites.
As for consumer markets, one way to resolve the conflict between the views of technolo-
gists and marketers is to consider the two components of R&D. First there is basic research
and then there is development—the conversion of technical concepts into actual salable
products or services. Most consumers have little knowledge of scientific advancements
and emerging technologies. Therefore, they usually don’t—and probably shouldn’t—play
a role in influencing how firms like Samsung allocate their basic research dollars.
However, a customer focus is critical to development. Someone—or some develop-
ment team—within the organization must have either the insight and market experience
or the substantial customer input necessary to decide what product to develop from a new
technology, what benefits it will offer to customers, and whether customers will value
Chapter One The Marketing Management Process 9

those benefits sufficiently to make the product a commercial success. The importance of a
customer focus often becomes clear when a firm attempts to develop a variety of success-
ful new product offerings from a single well-established technology as illustrated by the
travails of LEGO, the Swedish toy company, described in Exhibit 1.1.
In the case of an innovative new technology, it often must be developed into a con-
crete product concept before consumers can react to it and its commercial potential can
be assessed. In other cases, consumers can express their needs or wants for specific ben-
efits even though they do not know what is technically feasible. They can tell you what
problems they are having with current products and services and what additional benefits
they would like from new ones. For instance, before Apple introduced the i-Pod, few con-
sumers would have asked for such a product because they were unfamiliar with the pos-
sibilities of digitization and miniaturization in the electronics industry. But if someone had
asked whether they would buy a product smaller than a Sony Walkman that could store
and play thousands of songs they could download from their computer without messing
with cassette tapes or CDs, many probably would have said, “Sure!”
A strong customer focus is not inconsistent with the development of technically inno-
vative products, nor does it condemn a firm to concentrate on satisfying only current,
articulated customer wants. More important, while firms can sometimes succeed in the
short run even though they ignore customer desires, a strong customer focus usually pays

Exhibit 1.1 How LEGO Revived Its Brand

N ot many toy companies in the world have as

much brand recognition as LEGO. Three genera-
tions of kids around the world have built cars, fire
trucks, even entire cities, with the Swedish compa-
ny’s plastic bricks. But despite its widely known and
respected brand, the firm’s profits declined dramati-
cally in the early to mid-2000s.
One reason for the decline was a loss of strategic
focus. LEGO launched a kid’s TV series, a set of action
figures drawn from that series, and other products
in highly competitive categories which were largely
unrelated to the firm’s popular bricks and where the
firm had no experience or special expertise.
More critically, LEGO began foundering within its
core product line as well. Top management had given
free reign to the firm’s designers to develop more
imaginative creations for kids to build with LEGO
bricks. The designers happily embraced their new
freedom and developed many increasingly complex
and artistic designs. Unfortunately, those complex
designs incorporated thousands of new compo-
nents, many of which were not interchangeable with
those of other products in the line. As a result, parts
inventories exploded and supply costs went through
the roof. To make matters worse, many of the new
designs did not appeal to the kids who are the firm’s
ultimate consumers, and sales of the company’s core
products went down hill.
Paradoxically, the solution to LEGO’s product design
and profitability problems involved reducing the cre-
ative freedom of the firm’s designers. Top executives
decreed that new product development projects should
be managed by teams involving marketing managers
familiar with tastes, preferences, and purchase behav-
iors in different countries; manufacturing managers who
could help control production and supply costs; market
researchers who could test kids reactions to various
product prototypes; as well as designers.
While innovative product design is LEGO’s primary
competitive strength, the company has found that
designers function most successfully when placed
under some constraints; namely that the products
being designed appeal to the customers who will use
them. As Mads Nipper, LEGO’s VP of Products and
Markets points out, “Children are . . . very demand-
ing about what they want to buy. If your offer does
not stack up, they will go somewhere else.”
Source: Jay Greene, “How LEGO Revised Its Brand,” www
.businessweek/design.com, July 23, 2010. See also, Jay Greene, Design
Is How It Works (New York: Portfolio/Penguin Group, 2010), and
www.LEGO.com.
10 Section One The Role of Marketing in Developing Successful Business Strategies

big dividends in terms of market share and profit over the long haul,8 as we’ll see in the
next chapter.

3. What Gets Exchanged? Products and Services

Products and services help satisfy a customer’s need when they are acquired, used, or
consumed. Products are essentially tangible physical objects (such as cars, watches, and
computers) that provide a benefit. For example, a car provides transportation; a watch tells
the time. Services are less tangible and, in addition to being provided by physical objects,
can be provided by people (doctors, lawyers, architects), institutions (the Roman Catholic
Church, the United Way), places (Walt Disney World, Paris), and activities (a contest or a
stop-smoking program).

4. How Exchanges Create Value

Customers Buy Benefits, Not Products As argued earlier, when people buy
products to satisfy their needs, they are really buying the benefits they believe the products
provide, rather than the products per se. For instance, you buy headache relief, not aspirin.
The specific benefits sought vary among customers depending on the needs to be satisfied
and the situations where products are used. Because different customers seek different
benefits, they use different choice criteria and attach different importance to product fea-
tures when choosing models and brands within a product category. (This is diagrammed in
Exhibit 1.2.) For example, a car buyer with strong needs for social acceptance and esteem
might seek a socially prestigious automobile. Such a buyer would be likely to attach great
importance to criteria relating to social image and engineering sophistication such as a
high-powered motor, European-road-car styling, all-leather interior, and a state-of-the-art
sound system.
Keep in mind, too, that services offered by the seller can also create benefits for cus-
tomers by helping them reduce their costs, obtain desired products more quickly, or use
those products more effectively. Such services are particularly important for satisfying

Exhibit 1.2
Customers Buy Benefits, Not Products

Need

Benefits sought

Choice criteria

Product/service features

Brand/supplier chosen
Chapter One The Marketing Management Process 11

organizational buyers. For example, a few years ago the Massachusetts Institute of Tech-
nology discovered that it was doing business with about 20,000 vendors of office and
laboratory supplies each year. To improve the efficiency of its purchasing system, MIT
developed a computerized catalog that staff members can access via the school’s intranet.
It then formed alliances with two main suppliers—Office Depot Inc. and VWR Corp.—
who won the bulk of MIT’s business by promising to deliver superior service. Both firms
deliver purchases within a day or two right to the purchaser’s desk rather than to a build-
ing’s stockroom.9
Product Benefits, Service, and Price Determine Value A customer’s estimate
of a product’s or service’s benefits and capacity to satisfy specific needs and wants deter-
mines the value he or she will attach to it. Generally, after comparing alternative products,
brands, or suppliers, customers choose those they think provide the most need-satisfying
benefits per dollar. Thus, value is a function of intrinsic product features, service, and
price, and it means different things to different people.10
Customers’ estimates of products’ benefits and value are not always accurate. For
example, after buying an air-conditioning installation for its premises, a company may find
that the product’s cost of operation is higher than expected, its response time to changes in
the outside temperature is slow, and the blower is not strong enough to heat or cool remote
areas in the building.
A customer’s ultimate satisfaction with a purchase, then, depends on whether the prod-
uct actually lives up to expectations and delivers the anticipated benefits. This is why
customer services—particularly those occurring after a sale, such as delivery, installation,
operating instruction, and repair—are often critical for maintaining satisfied customers.
Also, it is essential that companies handle customer complaints effectively. The aver-
age business never hears from 96 percent of its dissatisfied customers. This is unfortu-
nate, for 50 percent of those who complain would do business with the company again if
their complaints were handled satisfactorily—95 percent if the complaints were resolved
quickly.11
The Value of Long-Term Customer Relationships Firms have traditionally
focused on the individual transaction with a customer as the fruition of their marketing
efforts. But as global markets have become increasingly competi-
Strategic Issue tive and volatile, many firms have turned their attention to building
Many firms have turned their attention a continuing long-term relationship between the organization and the
to building a continuing long-term
relationship between the organization and customer as the ultimate objective of a successful marketing strategy.
the customer as the ultimate objective of a They are taking action to increase lifetime customer value—the pres-
successful marketing strategy. ent value of a stream of revenue that can be produced by a customer
over time. For an automobile manufacturer, for instance, the lifetime
value of a first-time car buyer who can be kept satisfied and loyal to the manufacturer—
buying all future new cars from the same company—is well over a million dollars.
Throughout this book we will discuss marketing decisions and activities geared to
increasing the satisfaction and loyalty—and therefore the lifetime value—of customers.
While such activities can add to a company’s marketing costs, they can also produce big
dividends, not only in terms of long-term revenues and market share, but also in terms of
profitability. The reason is simple: It costs more to attract a new customer than to keep
an existing one.12 To persuade a customer to leave a competitor and buy your product or
service instead usually takes either a financial inducement (a lower price or special pro-
motional deal) or an extensive and convincing communication program (advertising or
sales force effort), all of which are costly. Consequently, the increased loyalty that comes
through developing long-term customer relationship translates into higher profits.
12 Section One The Role of Marketing in Developing Successful Business Strategies

Brand Equity The assets—including customers’ perceptions of a product’s benefits

and value, their positive past experiences, and their loyalty over time—linked to a brand’s
name and symbol constitute the brand’s equity.13 Brand equity reflects the value of the
brand name and logo as promotional tools for attracting future buyers and building market
share and profitability. That is why Samsung’s recent marketing efforts have concentrated
on building the equity of the Samsung brand in global markets by incorporating innovative
technologies and stylish design in the firm’s offerings and advertising them as appropriate
products for modern lifestyles. Ultimately, in other words, a brand’s value to the company
depends on how much value customers think the brand provides for them; value creation
cuts both ways.

5. Defining a Market
A market consists of (a) individuals and organizations who (b) are interested and willing to
buy a particular product to obtain benefits that will satisfy a specific need or want, and who
(c) have the resources (time, money) to engage in such a transaction. Some markets are suf-
ficiently homogeneous that a company can practice undifferentiated marketing in them. That
is, the company attempts to market a line of products using a single marketing program. But
because people have different needs, wants, and resources, the entire population of a society is
seldom a viable market for a single product or service. Also, people or organizations often seek
different benefits to satisfy needs and wants from the same type of product (e.g., one car buyer
may seek social status and prestige while someone else wants economical basic transportation).
The total market for a given product category thus is often fragmented into several
distinct market segments. Each segment contains people who are relatively homogeneous
in their needs, their wants, and the product benefits they seek. Also, each segment seeks a
different set of benefits from the same product category.
Strategic marketing management involves a seller trying to determine the following
points in an effort to define the target market:
1. Which customer needs and wants are currently not being satisfied by competitive product
offerings.
2. How desired benefits and choice criteria vary among potential customers and how to identify
the resulting segments by demographic variables such as age, sex, lifestyle, or some other
characteristics.

Exhibit 1.3 Haier—A Chinese Manufacturer

Pursues Segments of the Appliance Market

H aier, the rapidly growing Chinese manu-

facturer of washing machines, refrigera-
tors, and other household appliances, uses
extensive market research to modify product
designs and marketing programs to fit the unique needs
and preferences of a variety of geographic, socioeco-
nomic, and lifestyle segments. For instance, customer
surveys discovered that people in Saudi Arabia desired
extra-large washing machines to hold the flowing robes
that are commonly worn there. Consequently, Haier
developed a machine with a 26-pound capacity—more
than double that of the average washer. The product
was a hit, selling more than 10,000 units in its first year.
At the other extreme, the firm also offers a miniwasher,
aimed at developing economies, that costs only $38.
Another washing machine, designed to handle fluctua-
tions in voltage and pick up where it left off if the power
goes out, is marketed in rural areas of Asia where the
power supply is not always reliable.
Source: David Rocks, “China Design,” BusinessWeek, November 21,
2005, pp. 56–62.
Another random document with
no related content on Scribd:
The Logical Algebra
We come now to another most important reason for the
effectiveness of the digital computer; the reason that makes it the
“logical” choice for not only mathematics but thinking as well. For the
digital computer and logic go hand in hand.
Logic, says Webster, is “the science that deals with canons and
criteria of validity in thought and demonstration.” He admits to the
ironic perversion of this basic definition; for example, “artillery has
been called the ‘logic of kings,’” a kind of logic to make “argument
useless.” Omar Khayyám had a similar thought in mind when he
wrote in The Rubáiyát,

The grape that can with logic absolute,

The Two-and-Seventy Sects confute.

Other poets and writers have had much to say on the subject of
logic through the years, words of tribute and words of warning.
Some, like Lord Dunsany, counsel moderation even in our logic.
“Logic, like whiskey,” he says, “loses its beneficial effect when taken
in too large quantities.” And Oliver Wendell Holmes asks,

Have you heard of the wonderful one-hoss shay

That was built in such a logical way
It ran a hundred years to the day?

The words logic and logical are much used and abused in our
language, and there are all sorts of logic, including that of women,
which seems to be a special case. For our purposes here it is best to
stick to the primary definition in the dictionary, that of validity in
thought and demonstration.
 Symbolic logic, a term that still has an esoteric and almost
mystical connotation, is perhaps mysterious because of the strange
symbology used. We are used to reasoning in words and phrases,
and the notion that truth can be spelled out in algebraic or other
notation is hard to accept unless we are mathematicians to begin
with.
We must go far back in history for the beginnings of logic.
Aristotelian logic is well known and of importance even though the
old syllogisms have been found not as powerful as their inventors
thought. Modern logicians have reduced the 256 possible
permutations to a valid 15 and these are not as useful as the newer
kind of logic that has since come into being.
Leibniz is conceded to be the father of modern symbolic logic,
though he probably neither recognized what he had done nor used it
effectively. He did come up with the idea of two-valued logic, and the
cosmological notion of 1 and 0, or substance and nothingness. In his
Characteristica Universalis he was groping for a universal language
for science; a second work, Calculus Ratiocinator, was an attempt to
implement this language. Incidentally, Leibnitz was not yet twenty
years old when he formulated his logic system.
Unfortunately it was two centuries later before the importance of
his findings was recognized and an explanation of their potential
begun. In England, Sir William Hamilton began to refine the old
syllogisms, and is known for his “quantification of the predicate.”
Augustus De Morgan, also an Englishman, moved from the
quantification of the predicate to the formation of thirty-two rules or
propositions that result. The stage was set now for the man who has
come to be known as the father of symbolic logic. His name was
George Boole, inventor of Boolean algebra.
In 1854, Boole published “An Investigation of the Laws of Thought
on which are Founded the Mathematical Theories of Logic and
Probabilities.” In an earlier pamphlet, Boole had said, “The few who
think that there is that in analysis which renders it deserving of
attention for its own sake, may find it worth while to study it under a
form in which every equation can be solved and every solution
interpreted.” He was a mild, quiet man, though nonconformist
religiously and socially, and his “Investigation” might as well have
been dropped down a well for all the immediate splash it made in the
scientific world. It was considered only academically interesting, and
copies of it gathered dust for more than fifty years.
Only in 1910 was the true importance given to Boole’s logical
calculus, or “algebra” as it came to be known. Then Alfred North
Whitehead and Bertrand Russell made the belated acknowledgment
in their Principia Mathematica, and Russell has said, “Pure
mathematics was discovered by Boole, in a work he called ‘The
Laws of Thought.’” While his praise is undoubtedly exaggerated, it is
interesting to note the way in which mathematics and thought are
considered inseparable. In 1928, the first text on the new algebra
was published. The work of Hilbert and Ackermann, Mathematical
Logic, was printed first in German and then in English.
What was the nature of this new tool for better thinking that Boole
had created? Its purpose was to make possible not merely precise,
but exact analytical thought. Historically we think in words, and these
words have become fraught with semantic ditches, walls, and traps.
Boole was thinking of thought and not mathematics or science
principally when he developed his logic algebra, and it is indicative
that symbolic logic today is often taught by the philosophy
department in the university.
Russell had hinted at the direction in which symbolic logic would
go, and it was not long before the scientist as well as the
mathematician and logician did begin to make use of the new tool.
One pioneer was Shannon, mentioned in the chapter on history. In
1938, Claude Shannon was a student at M.I.T. He would later make
scientific history with his treatise on and establishment of a new field
called information theory; his early work was titled “A Symbolic
Analysis of Relay and Switching Circuits.” In it he showed that
electrical and electronic circuitry could best be described by means
of Boolean logic. Shannon’s work led to great strides in improving
telephone switching circuits and it also was of much importance to
the designer of digital computers. To see why this is so, we must
now look into Boolean algebra itself. As we might guess, it is based
on a two-valued logic, a true-false system that exactly parallels the
on-off computer switches we are familiar with.
The Biblical promise “Ye shall know the truth, and the truth shall
make you free” applies to our present situation. The best way to get
our feet wet in the Boolean stream is to learn its so-called “truth
tables.”
Conjunctive Boolean Operation
A and B equal C ABC
(A · B = C) ———
000
100
010
111

Disjunctive Boolean Operation

A or B equals C ABC
(Ā ∨ B = C) ———
000
101
011
111
In the truth tables, 1 symbolizes true, 0 is false. In the conjunctive
AND operation, we see that only if both A and B are true is C true. In
the disjunctive OR operation, if either A or B is true, then C is also
true. From this seemingly naïve and obvious base, the entire
Boolean system is built, and digital computers can perform not only
complex mathematical operations, but logical ones as well, including
the making of decisions on a purely logical basis.
Before going on to the few additional conditions and combinations
that complete the algebra, let’s study some analogies that will make
clear the AND/OR principles of operation. We can think of AND as
two bridges in sequence over two rivers. We can reach our
destination only if both bridges are working. However, suppose there
are two parallel bridges and only one river. We can then cross if
either or both of the bridges is working. A closer example is that of
electrical switches. Current will flow through our AND circuit if—and
only if—both switches are closed. When the switches are in parallel
—an OR circuit—current will flow if either, or both, are closed.
The truth tables resemble the bridge or switch arrangements. We
can proceed across the line of 1’s and 0’s in the first table only if
both switches are closed. The symbol 1 means that the switch is
closed, so we can cross only the bottom line. In the second table, we
are told we can proceed across the line if either switch is closed.
Thus we can cross lines 2, 3, and 4. We can use many symbols in
our two-valued system.
Symbol
Bridge No
Bridge
Power No
Power
1 0
True False
A little imagination suggests a logic computer of sorts with one
switch, a battery, and a light bulb. Suppose we turn on the switch
when we drive into our garage. A light in the hallway then indicates
that the car is available. By using two switches we can indicate that a
second car is also in the garage; or that either of them is, simply by
choosing between AND logic and OR logic. Childish as this seems, it
is the principle of even our most complex thinking processes. You
will remember that the brain is considered a digital computer, since
neurons can only be on or off. All it takes is 10 billion neuron
switches!
 Remington Rand UNIVAC

AND and OR gates in series. Switches 1 and 2, plus 3 or 4, are needed to light the
bulb.
 In addition to the conjunctives AND and OR, Boolean algebra
makes use of the principle of negation. This is graphically illustrated
thus:

Original Negation
A Ā
1 0
0 1
The negation device used in computer circuitry is called an inverter,
since it changes its input from a 1 to a 0, or vice versa. The
usefulness of such an element is obvious when we remember the
computer trick of subtracting by adding complements. The inverter
circuit used with a code like the excess-3 readily forms these
complements.
Further sophistication of the basic Boolean forms leads to units
other than the AND and OR gates. Possible are NOT, NOR, and
exclusive-OR forms. In the latter, there is an output if one and only
one input is present. The NOR circuit is interesting in that it was
made possible with the introduction of the transistor; the vacuum
tube does not permit this configuration.
 Computer Control Co.

The functions of two binary variables.

Present-day symbolic logic is not the pure Boolean as presented

back in 1854. Boole’s OR was the exclusive, one and only one, type.
Today the logician generally assumes the either-or connotation. The
logic has also been amplified, using the commutative, associative,
and distributive laws much like those of conventional algebra. We
are indebted to De Morgan for most of this work, showing that A and
B equals B and A; A and (A and B) equals (A and B) and A; and so
on. While these seem intuitively true, the implications are
nonetheless of great importance both in pure logic and its practical
use in circuitry.
A graphic representation of the metamorphosis from symbolic to
actual implementation of Boolean equations follows: The implication
of importance is that logic applies equally well whether we are
making a qualifying statement such as “A man must have strength
and courage to win a barehanded fight with a lion,” or wiring a
defensive missile so that it will fire only if a target is within range and
is unfriendly.
In the early period of computer design the engineer was faced with
the problem of building his own switches and gates. Today many
companies offer complete “packaged” components—AND gates, OR
gates, and the other configurations. This is the modular approach to
building a computer and the advantages are obvious. The designer
can treat the components simply as “black boxes” that will respond in
a prescribed way to certain input conditions. If he wants, the
engineer can go a step further and buy a ready-built logic panel
consisting of many components of different types. All he need do to
form various logic circuits is to interconnect the proper components
with plug-in leads. This brings us to the point of learning what we can
do with these clever gates and switches now that we have them
available and know something about the way they work.
We talked about the computer adder circuit earlier in this chapter.
It is made up of two half-adders, remember, with perhaps an
additional OR gate, flip-flop, etc. Each half-adder is composed of two
AND gates and an OR gate. So we have put together several
basically simple parts and the result is a piece of equipment that will
perform addition at a rate to make our heads swim.
There are other things we can do with Boolean logic besides
arithmetic. A few gates will actuate a warning signal in a factory in
case either of two ventilators is closed and the temperature goes up
beyond a safe point; or in case both vents are closed at the same
time. We can build a logic computer that will tell us when three of
four assembly lines are shut down at the same time, and also which
three they are.
 General Electric Co., Computer Dept.

Electronic computers are built up of many “building blocks” like this one.

Logic problems abound in puzzle books, and many of us spend

sleepless nights trying to solve them in our heads. An example is the
“Farnsworth Car Pool” problem. Rita Farnsworth asks her husband if
someone in his car pool can drive for him tomorrow so that she may
use the car. Joe Farnsworth replies, “Well, when I asked Pete if he
would take my turn he said he was flying to Kansas City today, but
he’d be glad to drive tomorrow if he didn’t have to stay over and that
his wife has been staying home lately and he will drive her car if she
doesn’t go to work. Oscar said that since his own car is due back
from the garage tomorrow he can drive it even if his wife does use
hers, provided the garage gets his back to him. But if this cold of
mine gets any worse I’m going to stay home even if those fellows
have to walk to work, so you can certainly have the car if I don’t go to
work.” This dialogue of Joe’s confuses Rita and most of us are in the
same state.
 Autonetics Division, North American Aviation, Inc.

Testing an assembled digital computer.

The instruction manual for BRAINIAC, a do-it-yourself computer

that sells for a few dollars, gives a simple wiring diagram for solving
Rita’s dilemma. Electrically the problem breaks down into three OR
gates and one AND gate. All Mrs. Farnsworth has to do is set in the
conditions and watch the indicator light. If it glows, she gets the car!
These are of course simple tasks and it might pay to hire a man to
operate the vents, and ride to work on the bus when the car pool got
complicated. But even with relatively few variables, decision-making
can quickly become a task requiring a digital computer operating
with Boolean logic principles.
Science Materials Center
 Problem in logic reduced to electrical circuits.

The Smith-Jones-Robinson type of problem in which we must find

who does what and lives where is tougher than the car pool—tough
enough that it is sometimes used in aptitude tests. Lewis Carroll
carried this form of logical puzzler to complicated extremes involving
not just three variables but a dozen. To show how difficult such a
problem is, an IBM 704 required four minutes to solve a Carroll
puzzle as to whether any magistrates indulge in snuff-taking. The
computer did it the easy way, without printing out a complete “truth
table” for the problem—the method a man would have to use to
investigate all the combinations of variables. This job would have
taken 13 hours! While the question of the use of snuff is perhaps
important only to tobacconists and puzzle-makers, our technical
world today does encounter similar problems which are not practical
of solution without a high-speed computer. A recent hypothetical
case discussed in an electronics journal illustrates this well.
A missile system engineer has the problem of modifying a Nike-
Ajax launching site so that it can be used by the new Nike-Hercules
missile. He must put in switching equipment so that a remote control
center can choose either an Ajax system, or one of six Hercules
systems. To complicate things, the newer Hercules can be equipped
with any of three different warheads and fly either of two different
missions. When someone at the control center pushes a button, the
computer must know immediately which if any of the missiles are in
acceptable condition to be fired.
This doesn’t sound like too big a problem. However, since there
are twelve on-off signals to be considered, and since each has two
possible states, there are 4,096 possible missile combinations. Not
all these are probable, of course, but there is still sufficient variation
to make it humanly impossible to check all of them and close a firing
switch in the split second the control center can allow.
The answer lies in putting Boolean algebra on the job, with a
system of gates and inverters capable of juggling the multiplicity of
combinations. Then when the word comes requesting a missile
launch, the computer handles the job in microseconds without
straining itself unduly.
Just as Shannon pointed out twenty-five years ago, switching
philosophy can be explained best by Boolean logic, and the method
can be used not only to implement a particular circuit, but also to
actually design the circuit in the first place. A simple example of this
can be shown with the easy-to-understand AND and OR gates. A
technician experimenting with an AND gate finds that if he simply
reverses the direction of current, he changes the gate into an OR
gate. This might come as a surprise to him if he is unfamiliar with
Boolean logic, but a logician with no understanding of electrical
circuits could predict the result simply by studying the truth tables for
AND and OR.
Reversing the polarity is equivalent to changing a 1 to a 0 and vice
versa. If we do this in the AND gate table, we should not be
surprised to find that the result looks exactly like the OR table! It acts
like it too, as the technician found out.
Boolean logic techniques can be applied to existing circuits to
improve and/or simplify them. Problems as simple as wiring a light
so that it can be turned on and off from two or more locations, and
those as complex as automating a factory, yield readily to the simple
rules George Boole laid down more than a hundred years ago.
Watching a high-speed electronic digital computer solve
mathematical problems, or operate an industrial control system with
speed and accuracy impossible for human monitors, it is difficult to
believe that the whole thing hinges on something as simple as
switches that must be either open or closed. If Leibnitz were alive, he
could well take this as proof of his contention that there was
cosmological significance in the concept of 1 and 0. Maybe there is,
after all!
 Industrial Electronic Engineering & Maintenance

“Luckily I brought along a ‘loaner’ for you to use while I repair your computer.”
“Whatever that be which thinks, understands, wills, and
acts, it is something celestial and divine.”

—Cicero
6: The Electronic Brain

The idea of a man-made “brain” is far from being new. Back in

1851, Dr. Alfred Smee of England proposed a machine made up of
logic circuits and memory devices which would be able to answer
any questions it was asked. Doctor Smee was a surgeon, keenly
interested in the processes of the mind. Another Britisher, H. G.
Wells, wrote a book called Giant Brain in 1938 which proposed much
the same thing: a machine with all knowledge pumped into it, and
capable of feeding back answers to all problems.
If it was logical to credit “human” characteristics to the machines
man contrived, the next step then was to endow the machine with
the worst of these attributes. In works including Butler’s Erewhon,
the diabolical aspects of an intelligent machine are discussed. The
Lionel Britton play, Brain, produced in 1930, shows the machine
gradually becoming the master of the race. A more physical danger
from the artificial brain is the natural result of giving it a body as well.
We have already mentioned Čapek’s R.U.R. and the Ambrose
Bierce story about a chess-playing robot without a built-in sense of
humor, who strangles the human being who beats him at a game.
With these stories as models, other writers have turned out huge
quantities of work involving mechanical brains capable of all sorts of
mischief. Most of these authors were not as well-grounded
scientifically as the pioneering Dr. Smee who admitted sadly that his
“brain” would indeed be a giant, covering an area about the size of
London!
 The idea of the giant brain was given new lease by the early
electronic computers that began appearing in the 1940’s. These
vacuum-tube and mechanical-relay machines with their rows of
cabinets and countless winking lights were seized on gleefully by
contemporary writers, and the “brain” stories multiplied gaudily.
Many of the acts of these fictional machines were monstrous, and
most of the stories were calculated to make scientists ill. Many of
these gentlemen said the only correct part of the name “giant brain”
was the adjective; that actually the machine was an idiot savant, a
sort of high-speed moron. This opinion notwithstanding, the name
stuck. One scholar says that while it is regrettable that such a vulgar
term has become so popular, it is hardly worth while campaigning
against its use.
An amusing contemporary fiction story describes an angry crowd
storming a laboratory housing a “giant brain,” only to be placated by
a calm, sensibly arguing scientist. The mob dispersed, he goes back
inside and reports his success to the machine. The “brain” is
pleased, and issues him his next order.
“Nonsense!” scoff most computer people. A recent text on
operation of the digital computer says, “Where performance
comparable with that of the human brain is concerned, man need
have little fear that he will ever be replaced by this machine. It
cannot think in any way comparable to a human being.” Note the
cautious use of “little,” however.
Another authority admits that the logic machines of the monk
Ramón Lull were very clever in their proof of God’s existence, but
points out that the monk who invented them was far cleverer since
no computer has ever invented a monk who could prove anything at
all!
The first wave of ridiculous predictions has run its course and
been followed by loud refutations. Now there is a third period of
calmer and more sensible approach. A growing proportion of
scientists take a middle-of-the-stream attitude, weighing both sides
of the case for the computer, yet some read like science fiction.
 Cyberneticist Norbert Wiener, more scientist than fictioneer,
professes to foresee computerized robots taking over from their
masters, much as a Greek slave once did. Mathematician John
Williams of the Rand Corporation thinks that computers can, and
possibly will, become more intelligent than men.
Equally reputable scientists take the opposite view. Neuro-
physiologist Gerhard Werner of Cornell Medical College doubts that
computers can ever match the creativity of man. He seems to share
the majority view today, though many who agree will add, tongue in
cheek, that perhaps we’d better keep one hand on the wall plug just
in case.
Thinking Defined
The first step in deciding whether or not the computer thinks is to
define thinking. Far from being a simple task, this definition turns out
to be a slippery thing. In fact, if the computer has done no more than
demand this sort of reappraisal of the human brain’s working, it has
justified its existence. Webster lists meanings for “think” under two
headings, for the transitive and intransitive forms of the verb. These
meanings, respectively, start out with “To form in the mind,” and “To
exercise the powers of judgment ... to reflect for the purpose of
reaching a conclusion.”
Even a fairly simple computer would seem to qualify as a thinker
by these yardsticks. The storing of data in a computer memory may
be analogous to forming in the mind, and manipulating numbers to
find a square root certainly calls for some sort of judgment. Learning
is a part of thinking, and computers are proving that they can learn—
or at least be taught. Recall of this learning from the memory to solve
problems is also a part of the thinking process, and again the
computer demonstrates this capability.
One early psychological approach to the man-versus-machine
debate was that of classifying living and nonliving things. In Outline
of Psychology, the Englishman William McDougall lists seven
attributes of life. Six of these describe “goal-seeking” qualities; the
seventh refers to the ability to learn. In general, psychologist
McDougall felt that purposive behavior was the key to the living
organism. Thus any computer that is purposive—and any
commercial model had better be!—is alive, in McDougall’s view. A
restating of the division between man and machine is obviously in
order.
Dr. W. Ross Ashby, a British scientist now working at the
University of Illinois, defines intelligence as “appropriate selection”
and goal-seeking as the intelligent process par excellence, whether
the selecting is done by a human being or by a machine. Ashby does