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te
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Developing Marketing
Strategies & Creating
Customer Value

1
 The Value Chain Model
Michael E. Porter, professor at Harvard Business School, has
proposed the value chain model as a tool for identifying ways to
create more customer value.

2
 …The Value Chain Model

• A value chain is a set of activities that an organization

carries out to create value for its customers. The goal of
these activities is to offer the customer a level of value that
exceeds the cost of the activities, thereby resulting in a
profit margin:
Value Created and Captured – Cost of Creating that Value = Margin

• The idea of the value chain is based on the process view of

organizations, the idea of seeing a manufacturing or service
organization as a system, made up of subsystems each with
inputs, transformation processes and outputs.

• The value chain identifies nine strategically relevant

activities (five primary and four support activities) that
create value and cost in a specific business. 3
 …The Value Chain Model
Primary activities relate directly to the physical creation, sale,
maintenance and support of a product or service. They consist of the
following:
1. Inbound logistics: These are all the processes related to receiving,
storing, and distributing inputs internally. Supplier relationships are a
key factor in creating value here.
2. Operations: These are the transformation activities that change inputs
into outputs that are sold to customers. Here, operational systems
create value.
3. Outbound logistics: These activities deliver product or service to
customer. These are things like collection, storage, and distribution
systems, and they may be internal or external to an organization.
4. Marketing and Sales: These are the processes use to persuade clients
to purchase from the company instead of its competitors. The benefits
offer, and how well communicate them, are sources of value here.
5. Service: These are the activities that maintain and enhance the
product’s value, including customer support, repair services, etc. 4
 …The Value Chain Model

Support activities are handled in specialized departments:

1. Procurement: The function of purchasing the raw materials
and other inputs used in the value-creating activities.
2. Technology development: It includes research and
development, process automation, and other technology
development used to support the value-chain activities.
3. Human resource management: The activities associated
with recruiting, development, and compensation of
employees.
4. Firm infrastructure: The firm’s infrastructure covers the
costs of general management, planning, finance,
accounting, legal, and government affairs.
5
 Strategic Planning
To understand marketing management, we must understand
strategic planning.
• Strategic planning is the process of determining a company’s
long-term goals and then identifying the best approach for
achieving those goals.
• Strategic planning is an organization’s process of defining its
strategy, or direction, and making decisions on allocating its
resources to pursue this strategy. It may also extend to control
mechanisms for guiding the implementation of the strategy.
• Companies should have the capabilities such as
understanding, creating, delivering, capturing, and sustaining
customer value for marketing success. 6
 …Strategic Planning
To ensure that marketer select and execute the right
activities, they must give priority to strategic planning in
three key areas:
1. Managing The Businesses As
An Investment Portfolio

2. Assessing The Market’s Growth

Rate & The Company’s Position
In That Market

3. Establishing A Strategy
7
 …Strategic Planning
Most large companies consist of four organizational levels:
1.The corporate level: Corporate headquarters is responsible for
designing a corporate strategic plan to guide the whole
enterprise; it makes decisions on the amount of resources to
allocate to each division, as well as on which businesses to start
or eliminate.
2.The division level: Each division establishes a plan covering the
allocation of funds to each business unit within the division.
3.The business unit level: Each business unit develops a strategic
plan to carry that business unit into a profitable future.
4.The product level: Each product level (product line, brand)
within a business unit develops a marketing plan for achieving
its objectives in its product market. 8
 Marketing Plan
Each product level, whether product line or brand must develop
a marketing plan for achieving its goals.
• A marketing plan is a business document written for the
purpose of describing the current market position of a
business and its marketing strategy for the period covered by
the marketing plan.
• The marketing plan operates at two levels:
 Strategic: The strategic marketing plan lays out the target
markets and the value proposition the firm will offer,
based on an analysis of the best market opportunities.
 Tactical: The tactical marketing plan specifies the
marketing tactics, including product features, promotion,
merchandising, pricing, sales channels, and service.
• Strategy Sets the Stage, But Tactics Is the Play.
• Strategic is the what and why, Tactical is the how. 9
 Contents of A Marketing Plan
Executive Summary and table of contents

Situation analysis

Marketing strategy

Financial projections

Implementation controls

10
 …Contents of A Marketing Plan
1. Executive summary and table of contents: The marketing plan should
open with a table of contents and brief summary for senior management
of the main goals and recommendations.
2. Situation analysis: This section presents relevant background data on
sales, costs, the market, competitors, and the various forces in the
macro-environment. Firms will use all this information to carry out a
SWOT analysis.
3. Marketing strategy: Here the marketing manager defines the mission,
marketing and financial objectives, and needs the market offering is
intended to satisfy as well as its competitive positioning.
4. Financial projections: Financial projections include a sales forecast, an
expense forecast, and a break-even analysis.
5. Implementation controls: The last section outlines the controls for
monitoring and adjusting implementation of the plan. Typically, it spells
out the goals and budget for each month or quarter, so management can
review each period’s results and take corrective action as needed.
11
Strategic Planning, Implementation, and Control
Processes

12
Corporate & Division Strategic Planning
All corporate headquarters undertake four planning
activities:

1 Define corporate mission

2 Establish SBU’s

3 Assign resources to SBU’s

4 Assess growth opportunities

13
 1. Defining the Corporate Mission
(A company should address Peter Drucker’s classic questions to define its mission)

3. What is of
value to the
customer? 4. What will our
business be?
2. Who is the
customer?

5. What should
1. What is our
our business be?
business?

14
 Product-Oriented vs. Market-Oriented
Definitions of a Business
Companies often define themselves in terms of products: They are in the “auto business” .
Market definitions of a business, however, describe the business as a customer satisfying
process. Transportation is a need: the horse and carriage, automobile, railroad, airline, ship,
and truck are products that meet that need.
 Mission Statements
• A mission statement is a statement of the purpose of a
company, organization or person; its reason for existing; a
written declaration of an organization’s core purpose and
focus that normally remains unchanged over time.
• Mission statement of Google: “To organize the world’s
information and make it universally accessible and useful”
• Characteristics of good mission statements:
1. Focus on a limited number of goals
2. Stress major policies and values
3. Define major competitive areas
4. Take a long-term view
5. Short, memorable, meaningful 16
 2. Establishing Strategic Business Units
• A strategic business unit is a separate, specialized
subsystem in the company which act as an independent
company.
• A strategic business unit is a fully functional and distinct
unit of the business that develops their own strategic
vision and direction.
• A strategic business unit is a semi-autonomous corporate
unit that focuses on a product offering and market
segment.
• Strategic Business Unit is an autonomous division or
organizational unit, small enough to be flexible and large
enough to exercise control over most of the factors
affecting its long-term performance. 17
 …Establishing Strategic Business Units
An SBU has three characteristics:

It has its own set

of competitors

It is a single business or
collection of related
businesses
It has a leader
responsible for
strategic planning and
profitability

18
3. Assigning Resources to Each SBU
GE / McKinsey Matrix BCG’s Growth-Share Matrix

19
 …Assigning Resources to Each SBU
GE/McKinsey matrix:
• In 1970s, General Electric (GE) was managing a huge and complex portfolio
of unrelated products and was unsatisfied about the returns from its
investments in the products. GE consulted the McKinsey & Company and as
a result the nine-box framework was designed. The nine-box matrix plots
the BUs on its 9 cells that indicate whether the company should invest in a
product, harvest/divest it or do a further research on the product and invest
in it if there’re still some resources left. The BUs are evaluated on two axes:
industry attractiveness and a competitive strength of a unit.
• Three different strategies can be distinguished and adopted using the
GE/McKinsey matrix:
– Grow/Invest: Growth is facilitated by expanding the market or making
investments.
– Hold: By making careful investments, the current market is
consolidated.
– Harvest/Sell: No extra investments but mainly focusing on maximizing
returns. 20
 …Assigning Resources to Each SBU
BCG’s Growth-Share Matrix:
• It is a portfolio planning model developed by Bruce D.
Henderson of the Boston Consulting Group in 1970.
• It classifies business portfolio into four categories
(stars, cash cows, question marks, and dogs) based on
industry attractiveness (growth rate of that industry)
and competitive position (relative market share).
• The general purpose of the analysis is to help
understand, which brands the firm should invest in
and which ones should be divested.

21
4. Assessing Growth Opportunities

22
 …Assessing Growth Opportunities
Assessing growth opportunities involves:
– Planning new businesses: If there is a gap
between future desired sales and projected
sales, corporate management will need to
develop or acquire new businesses to fill it.
– Downsizing: Reducing the size of a
company by eliminating workers and/or
divisions within the company.
– Terminating older businesses
23
The Strategic-Planning Gap

24
 …The Strategic-Planning Gap
• In the above Figure, the lowest curve projects the
expected sales over the next five years from the current
business portfolio. The highest curve describes desired
sales over the same period. Evidently, the company
wants to grow much faster than its current businesses
will permit. How can it fill the strategic planning gap?
– Intensive opportunities: Identify opportunities to achieve
further growth within current businesses.
– Integrative opportunities: Identify opportunities to build or
acquire businesses that are related to current businesses.
– Diversification opportunities: Identify opportunities to add
attractive businesses unrelated to current businesses.
25
 Intensive Growth Strategies
For fill up the strategic planning gap corporate management’s first
course of action should be a review of opportunities for improving
existing businesses. One useful framework for detecting new
intensive growth opportunities is a “product-market expansion
grid” proposed by Harry Igor Ansoff. It considers the strategic growth
opportunities for a firm in terms of current and new products and
markets.

26
 …Intensive Growth Strategies
1. Market-penetration strategy: The company first
considers whether it could gain more market share
with its current products in their current markets .
2. Market-development strategy: The company
considers whether it can find or develop new markets
for its current products.
3. Product-development strategy: The company
considers whether it can develop new products of
potential interest to its current markets.

Diversification strategy: The company will also review

opportunities to develop new products for new
markets. 27
 Integrative Growth Strategies

Backward Forward
Integration Integration

Supplier Business Wholesaler

Integration
Horizontal

Competitor

28
 …Integrative Growth Strategies
• Integrative growth is a growth strategy in which a
company increases its sales and profits through
backward, forward, or horizontal integration within its
industry.
– Backward integration: A company may acquire one or more
of its suppliers to gain more control or generate more profits.
– Forward integration: It might acquire some wholesalers or
retailers, especially if they are highly profitable.
– Horizontal integration: It might acquire one or more
competitors through acquisition.
 If the company is still not satisfied with its sales and
profits, it must consider diversification.
29
 Diversification Growth
it y
t un
o r
pp
w O
Ne

30
 …Diversification Growth
• Diversification makes sense when a company finds a
highly attractive new industry where it can leverage its
strength.
Three types of diversification are possible:
– Concentric diversification: The company could seek new
products that have technological or marketing synergies with
existing product lines appealing to a new group of customers.
– Horizontal diversification: The company can develop new
products that are technologically unrelated to its current
product line and could appeal to its current customers.
– Conglomerate diversification: The company may seek new
opportunities that have no relation with its current
technology, products, or markets.
31
Downsizing & Divesting Older Businesses

32
Business Unit Strategic Planning

33
 Business Mission

Each business unit needs to define its specific mission

within the broader company mission.

34
 SWOT Analysis
The overall evaluation of a company’s strengths, weaknesses, opportunities, and threats is
called SWOT analysis. It’s a way of monitoring the external and internal marketing
environment.

Strengths

Weaknesses

Opportunities

Threats

35
 Goal Formulation
• Goals are objectives that are specific with
respect to magnitude and time. The unit’s
objectives must meet the following four
criteria:
1. Objectives must be arranged hierarchically,
from the most to the least important
2. Objectives should be quantitative
whenever possible
3. Objectives should be realistic
4. Objectives must be consistent 36
 Strategy Formulation
Goals indicate what a business unit wants to achieve; strategy is a
game plan for getting there. Every business must design a strategy
for achieving its goals, consisting of a marketing strategy and a
compatible technology strategy and sourcing strategy.

Overall Cost Leadership

Differentiation

Focus

Porter’s Strategic Alliances

Generic Strategies 37
 …Strategy Formulation
Michael Porter has proposed three generic strategies
that provide a good starting point for strategic
thinking:
1. Overall cost leadership: Firms work to achieve the lowest
production and distribution costs so they can underprice
than competitors and win market share.
2. Differentiation: The business concentrates on achieving
superior performance in an important customer benefit
area valued by a large part of the market.
3. Focus: The business focuses on one or more narrow
market segments, gets to know them intimately, and
pursues either cost leadership or differentiation within
the target segment.
38
 …Strategy Formulation
• For achieving leadership, either nationally or globally,
companies form alliances with domestic or
multinational companies that complement or leverage
their capabilities and resources.
• A strategic alliance is an agreement between two or
more parties to pursue a set of agreed upon objectives
needed while remaining independent organizations.
• Four major type of marketing alliances:
– Product or service alliances
– Promotional alliances
– Logistics alliances
– Pricing collaborations
39
Program Formulation and Implementation

40
Feedback and Control

Strong leadership
41
 Customer Perceived Value

Customer-perceived
Economic Value

Evaluating

Functional Obtaining

Using

Psychological Disposing
Total Customer Total Customer
Benefit Cost

42
 …Customer Perceived Value
Customer-perceived value

Total customer benefit Total customer cost

Product benefit Monetary cost

Services benefit Time cost

Personal benefit Energy cost

Image benefit Psychological cost

43
 …Customer Perceived Value
• Customer-perceived value (CPV) is the difference between
the prospective customer’s evaluation of all the benefits and
all the costs of an offering and the perceived alternatives.
• Total customer benefit is the perceived monetary value of
the bundle of economic, functional, and psychological
benefits customers expect from a given market offering
because of the products, services, personnel, and image
involved.
• Total customer cost is the perceived bundle of costs
customers expect to incur in evaluating, obtaining, using,
and disposing of the given market offering, including
monetary, time, energy, and psychological costs. 44
Value Concepts - Caterpillar
Profit Price Customer
Value
$6,000 $20,000 -0-
5,000 19,000 $1,000
4,000 18,000 2,000
3,000 17,000 3,000
Worth to farmer:
2,000 16,000 4,000
$20,000
1,000 15,000 5,000
-0- 14,000 6,000

Cost to produce:
$14,000
45
 Customer Satisfaction
• Satisfaction is a person’s feelings of pleasure or
disappointment that result from comparing a
product’s perceived performance (or outcome) to
their expectations. If the performance falls short of
expectations, the customer is dissatisfied. If it
matches expectations, the customer is satisfied. If
it exceeds expectations, the customer is highly
satisfied or delighted.
• Customer satisfaction is the degree of satisfaction
provided by the goods or services of a company as
measured by the number of repeat customers.
 …Customer Satisfaction

Expectations

47
How Do Buyers Form Their Expectations?

Past Buying Experience

Friends’ & Associates’ Advice
Marketers’ & Competitors’
Information and Promises

Expectations

48
 Monitoring Satisfaction
Influence of
Customer
Satisfaction

Measurement
Techniques

Customer
Complaints 49
 …Monitoring Satisfaction
• Wise firms measure customer satisfaction regularly,
because it is one key to customer retention. A highly
satisfied customer generally--
– Stays loyal longer
– Buys more as the company introduces new and upgraded
products
– Talks favorably to others about the company and its products
– Pays less attention to competing brands
– Less sensitive to price
– Offers product or service ideas to the company
– Costs less to serve than new customers because transactions can
become routine
– Greater customer satisfaction has also been linked to higher
returns and lower risk in the stock market 50
Satisfaction Measurement Techniques
Customer Loss Rate
Surveys

Mystery Shopper

51
 …Satisfaction Measurement Techniques
1. Periodic surveys: Companies can track customer satisfaction
directly and ask additional questions to measure repurchase
intention and the respondent’s likelihood or willingness to
recommend the company and brand to others. Companies need
to monitor their competitors’ performance too.
2. Customer loss rate: Companies can monitor their customer loss
rate and contact those who have stopped buying or who have
switched to another supplier to find out why.
3. Mystery shoppers: Companies can hire mystery shoppers to pose
as potential buyers and report on strong and weak points
experienced in buying the company’s and competitors’ products.
4. Company and competitor sales situations: Managers themselves
can enter company and competitor sales situations where they
are unknown and experience firsthand the treatment they
receive, or they can phone their own company with questions
and complaints to see how employees handle the calls. 52
Role of Product and Service Quality
on Satisfaction
Performance Conformance

Quality

Satisfaction

Profitability

53
 …Role of Product and Service Quality on Satisfaction
• Satisfaction will also depend on product and service quality. What
exactly is quality?
• Various experts have defined it as “fitness for use,” “conformance to
requirements,” and “freedom from variation.”
• Quality is the totality of features and characteristics of a product or
service that bear on its ability to satisfy stated or implied needs.
--American Society for Quality
David Garvin proposed eight dimensions of quality which can help
build a competitive advantage:
1. Performance: Performance refers to a product’s primary operating
characteristics. This dimension of quality involves measurable
attributes; brands can usually be ranked objectively on individual
aspects of performance.
2. Features: Features are additional characteristics that enhance the
appeal of the product or service to the user.
54
 …Role of Product and Service Quality on Satisfaction
3. Reliability: Reliability is the likelihood that a product will not
fail within a specific time period.
4. Conformance: Conformance is the accuracy with which the
product or service meets the specified standards.
5. Durability: Durability measures the length of a product’s life.
6. Serviceability: Serviceability is the speed with which the
product can be put into service when it breaks down, as well
as the competence and the behavior of the serviceperson.
7. Aesthetics: Aesthetics is the subjective dimension indicating
the kind of response a user has to a product. It represents
the individual’s personal preference.
8. Perceived Quality: Perceived Quality is the quality
attributed to a goods or service based on indirect measures.
55
Maximizing Customer Lifetime Value

20% of 80% of
Customers Profits

Customers

56
 The “80/20” Customer Pyramid
• Developed in the late 1800s by the Italian economist Vilfredo
Pareto.
• The 80–20 rule or Pareto’s Principle argues that 20% of a
population often account for 80% of an occurrence.
• In a business context, this means that 80% of a company’s business
stems from 20% of its customers. Management’s task is finding and
keeping this lucrative 20%.
• The lucrative 20% are sometimes termed ‘barnacles,’ because they
tend to stay with a business over their lifetime, while the 80% are
sometimes termed ‘butterflies’ because they tend to give their
business to a variety of firms.

References: Newell, F. (2000), “Loyalty.com: Customer Relationship

Management in the New Era of Internet Marketing”, New York:
McGraw-Hill Professional Books.
57
…The “80/20” Customer Pyramid

58
 Customer Profitability

Customer Profitability
Analysis

Profitable

Customer Lifetime Value

Unprofitable
 

59
 …Customer Profitability
• A profitable customer is a person, household, or
company that over time yields a revenue stream
that exceeds by an acceptable amount the
company’s cost stream for attracting, selling,
and servicing that customer.
• Note that the emphasis is on the lifetime stream
of revenue and cost, not on the profit from a
particular transaction.
• Marketers can assess customer profitability
individually, by market segment, or by channel.
60
 Customer Lifetime Value (CLV)
• The case for maximizing long-term customer
profitability is captured in the concept of
customer lifetime value (CLV).
• CLV describes the net present value of the stream
of future profits expected over the customer’s
lifetime purchases.
• The company must subtract from its expected
revenues the expected costs of attracting, selling,
and servicing the account of that customer,
applying the appropriate discount rate (say,
between 10 percent and 20 percent, depending
on cost of capital and risk attitudes). 61
 Example to Illustrate CLV Calculation
Year Year Year Year Year Year Year Year Year Year Year
0 1 2 3 4 5 6 7 8 9 10

No. of
Customers 100 90 80 72 60 48 34 23 12 6 2

Revenue per
Customer 100 110 120 125 130 135 140 142 143 145

Variable Cost
per Customer 70 72 75 76 78 79 80 81 82 83

Margin per
Customer 30 38 45 49 52 56 60 61 61 62

Acquisition Cost
per Customer 40

Total Cost or
Profit -4000 2700 3040 3240 2940 2496 1904 1380 732 366 124

Present Value
-4000 2455 2512 2434 2008 1550 1075 708 341 155 48
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THE END

63