THE ROLE OF STRATEGIC MARKETING IN TODAY'S FIRMS
The Evolution of Strategic Marketing
Although marketing was first developed as a business function in the 1930s by Procter & Gamble, it wasn’t really until the 1970s that consumer goods companies started differentiating their products by implementing the 4Ps - product, price, promotion and place. During the 1980s, marketing evolved from the ‘ghetto’ of fast moving consumer goods (fmcg) and was adopted by other manufacturers, such as consumer durables, electronics as well as consumer services including banking, hotels and airlines. The purpose of most firms’ marketing strategy during this time was to create customer awareness and preference over competition to help sell their products and services in meeting customer’s needs.
It wasn’t until the early 1990s that the idea of developing relationships with customers to help build customer retention, repeat purchases and customer lifetime value (CLV) was adopted as best practice across most industry sectors[1]. Customer retention then became the mantra throughout this decade as it became widely recognised that retained customers generally became more profitable over the lifetime of their relationship with the firm. The arguments presented by Reichheld and Sasser in the 1990s follow the logic that profits and returns from customers flow from both top line growth and greater operational efficiencies as the firm’s relationship with retained customers develops over time. So, in the last 10 years relationship marketing has become the norm and the nature of customer relationships developed as a result of improvements in enabling technologies, the internet and the capabilities of business leaders and their marketing management to place the ‘voice of the customer’ at the centre of the firm’s marketing strategy.
In the last few years, leading scholars would argue that the role of marketing has been extended even further than either approach would suggest as customers become more powerful and demanding in their requirements. Lusch, Vargo and O’Brien (2007)[2] have termed this contemporary approach to strategic marketing as the service-dominant era in which value maybe co-created with customers, customised and may even be based on shared risk. Developing customer lifetime value (CLV) under such conditions extends the ‘value–in–exchange’ idea which is at the heart of 4Ps marketing transactions, to a ‘value-in-use’ measure over the lifetime of the customer relationship.
The core marketing processes linked to the service-dominant marketing mix are usually considered to be customer relationship management (CRM) (to develop insights and an understanding of customer value), innovation (to continuously create superior customer value) and supply chain management to delivery this superior value consistently over time[3]. In many markets, effective CRM and closer customer relationships has enabled a greater degree of customisation in the marketing offer. Rather than simply selling product and service benefits to customers as in the past, a contemporary marketing organisation will now often engage in ‘listening, serving and customising’ with key customers. Firms which build their strategy based on such market and customer insights are considered to have a market-driven approach. Another term often used to describe the characteristics of such firms is market orientation; the strategy, structure and culture of these firms are developed in response to marketplace changes, perhaps resulting from new customer requirements or other factors which come to the fore in a competitive business environment over time. So what does having a market orientation imply for business leaders in developing their marketing strategy?
It wasn’t until the early 1990s that the idea of developing relationships with customers to help build customer retention, repeat purchases and customer lifetime value (CLV) was adopted as best practice across most industry sectors[1]. Customer retention then became the mantra throughout this decade as it became widely recognised that retained customers generally became more profitable over the lifetime of their relationship with the firm. The arguments presented by Reichheld and Sasser in the 1990s follow the logic that profits and returns from customers flow from both top line growth and greater operational efficiencies as the firm’s relationship with retained customers develops over time. So, in the last 10 years relationship marketing has become the norm and the nature of customer relationships developed as a result of improvements in enabling technologies, the internet and the capabilities of business leaders and their marketing management to place the ‘voice of the customer’ at the centre of the firm’s marketing strategy.
In the last few years, leading scholars would argue that the role of marketing has been extended even further than either approach would suggest as customers become more powerful and demanding in their requirements. Lusch, Vargo and O’Brien (2007)[2] have termed this contemporary approach to strategic marketing as the service-dominant era in which value maybe co-created with customers, customised and may even be based on shared risk. Developing customer lifetime value (CLV) under such conditions extends the ‘value–in–exchange’ idea which is at the heart of 4Ps marketing transactions, to a ‘value-in-use’ measure over the lifetime of the customer relationship.
The core marketing processes linked to the service-dominant marketing mix are usually considered to be customer relationship management (CRM) (to develop insights and an understanding of customer value), innovation (to continuously create superior customer value) and supply chain management to delivery this superior value consistently over time[3]. In many markets, effective CRM and closer customer relationships has enabled a greater degree of customisation in the marketing offer. Rather than simply selling product and service benefits to customers as in the past, a contemporary marketing organisation will now often engage in ‘listening, serving and customising’ with key customers. Firms which build their strategy based on such market and customer insights are considered to have a market-driven approach. Another term often used to describe the characteristics of such firms is market orientation; the strategy, structure and culture of these firms are developed in response to marketplace changes, perhaps resulting from new customer requirements or other factors which come to the fore in a competitive business environment over time. So what does having a market orientation imply for business leaders in developing their marketing strategy?
Market Orientation
The concept of market orientation may appear vague to some but it is core to understanding the role of strategic marketing. The concept is perhaps most associated with George Day, a Wharton Business School professor, and his book chapter entitled “What it Means to be Market Driven[4]” makes for fascinating reading.
Organisations generally have a focus; an implicit acceptance of what is important and from where they seek inspiration. The focus or orientation of an organisation acts almost as an invisible hand that guides what investments are undertaken, who is hired and promoted, how customers are treated and where power lies within the organisation. This orientation is the result of the unique history of the organisation, its competitive context, the leadership and critical decisions taken at key moments in its development. This is a concept that academics call “path dependency”; it develops slowly over time and is therefore either a source of sustainable advantage or a millstone preventing the organisation responding effectively to changes in the competitive environment.
Changing a firm’s orientation can be an onerous, time-consuming activity as most organisations are constrained by their current assets and capabilities. So what are marketing assets and capabilities and how can they be renewed overtime to remain competitive.
Organisations generally have a focus; an implicit acceptance of what is important and from where they seek inspiration. The focus or orientation of an organisation acts almost as an invisible hand that guides what investments are undertaken, who is hired and promoted, how customers are treated and where power lies within the organisation. This orientation is the result of the unique history of the organisation, its competitive context, the leadership and critical decisions taken at key moments in its development. This is a concept that academics call “path dependency”; it develops slowly over time and is therefore either a source of sustainable advantage or a millstone preventing the organisation responding effectively to changes in the competitive environment.
Changing a firm’s orientation can be an onerous, time-consuming activity as most organisations are constrained by their current assets and capabilities. So what are marketing assets and capabilities and how can they be renewed overtime to remain competitive.
The Firm's Marketing Assets and Capabilities
The strategic challenge for marketing management today is to evaluate how their marketing assets, such as brands, customer relationships, distribution partnerships and customer insight, can create superior profits for their firms. There are some firms who seem to persistently outperform their competitors; IBM, Microsoft, SAP, Diageo, HSBC, McKinsey & Co., Tesco, Boeing, Toyota and BMW provide outstanding examples of this. Inevitably, their success in the market place is usually multifaceted, so to get an understanding of how such sustainable long-term growth is achieved, one needs to look at the strategic enablers that underpin both their marketing assets and marketing strategies. Generally speaking, this requires an analysis of how the firm’s marketing assets are nurtured by its underlying marketing capabilities. One way of thinking of this is to regard marketing assets as ’stock’ built up over time by strategic marketing capabilities which I term here as the ‘flows’. So the secret of marketing success lies in ensuring there is a degree of parity of investment over time between the firm’s marketing ‘stocks’ and ‘flows’; enduring brands need brand management who are well trained; CRM tools need skilled teams to generate customer insight, not information; and product/service innovation requires management creativity and ‘wiggle room’ to uncover customers’ hidden needs.
Let look a little closer at this symbiotic relationship between a firm’s stocks and flows. Increasingly, scholars view organisations as goal-seeking, learning entities[5] whose specific history of investments and management policies create unique assets, including the marketing assets mentioned earlier. For example, great brands often attract premium prices and have lower marketing support costs per unit sold because customers are aware of the brand and are disposed to buying it. A good customer base costs less to maintain (lower defection rates and higher retention), buys more, has lower service costs and may recruit other good customers through positive word of mouth; these loyalty effects increase a firm’s profitability dramatically[6] as mentioned earlier. The best distribution partners allow the firm to reach more customers for less cost than competitors. These examples demonstrate that the link between marketing assets and performance is intuitive and widely accepted[7]. While it is intuitively appealing to create strategies that identify, develop and then leverage profit-generating assets, in practice, managers find it difficult to do so.[8] Reflecting on your own experiences, perhaps, and thinking about companies which try to enhance the value of their brands solely through advertising investment for instance, many fail to see any real returns on that investment. Advertising alone cannot build the brand asset – other marketing capabilities are also needed. These marketing capabilities do not develop automatically from investments in marketing assets; they require sustained management development and conscious long term investment[9]. This is where managers can make a real difference and add value. The need for capabilities in conjunction with assets leads to a three-part model of how marketing strategy shapes up (see Figure 1), where marketing assets and capabilities co-develop as a result of effective management and shared knowledge built on customer and market insights:
Let look a little closer at this symbiotic relationship between a firm’s stocks and flows. Increasingly, scholars view organisations as goal-seeking, learning entities[5] whose specific history of investments and management policies create unique assets, including the marketing assets mentioned earlier. For example, great brands often attract premium prices and have lower marketing support costs per unit sold because customers are aware of the brand and are disposed to buying it. A good customer base costs less to maintain (lower defection rates and higher retention), buys more, has lower service costs and may recruit other good customers through positive word of mouth; these loyalty effects increase a firm’s profitability dramatically[6] as mentioned earlier. The best distribution partners allow the firm to reach more customers for less cost than competitors. These examples demonstrate that the link between marketing assets and performance is intuitive and widely accepted[7]. While it is intuitively appealing to create strategies that identify, develop and then leverage profit-generating assets, in practice, managers find it difficult to do so.[8] Reflecting on your own experiences, perhaps, and thinking about companies which try to enhance the value of their brands solely through advertising investment for instance, many fail to see any real returns on that investment. Advertising alone cannot build the brand asset – other marketing capabilities are also needed. These marketing capabilities do not develop automatically from investments in marketing assets; they require sustained management development and conscious long term investment[9]. This is where managers can make a real difference and add value. The need for capabilities in conjunction with assets leads to a three-part model of how marketing strategy shapes up (see Figure 1), where marketing assets and capabilities co-develop as a result of effective management and shared knowledge built on customer and market insights:
Consider a successful consumer goods marketer such as Procter and Gamble: how did it develop its portfolio of brands that generates such strong profit? Some of its most important brands have been nurtured, enhanced and developed over decades to ensure that they remain appealing and relevant to modern consumers. Without great brand development capabilities, P & G’s resource base of global brands would have withered. Yet without its brands, how would it have built its branding know-how? It is hard to conceive of how one can exist without the other. That means that merely buying brands is not enough, marketing management need to have the capabilities to leverage the brand portfolio over time in order to generate returns. It is the lack of appropriate marketing capabilities that explains why so many acquisition-based growth strategies fail. It should also be said that whilst both assets and capabilities are needed for successful market growth, they can also constrain the choice of strategies open to a firm. For instance, a corporate bank considering the development of a retail strategy for what seems like good commercial reasons, could face the risk of business failure and reputation damage if it doesn’t first invest in the necessary retail capabilities and asset base.
To conclude this brief summary paper on the role of strategic marketing, I am often asked the question: what, if anything, is the contribution of marketing in the creation of shareholder value? Whist this is a difficult question to answer, as it is for most functions in the firm when discussed in isolation, one can draw up a framework that connects the ability to identify, create and deliver superior customer value with the growth in shareholder value.
To conclude this brief summary paper on the role of strategic marketing, I am often asked the question: what, if anything, is the contribution of marketing in the creation of shareholder value? Whist this is a difficult question to answer, as it is for most functions in the firm when discussed in isolation, one can draw up a framework that connects the ability to identify, create and deliver superior customer value with the growth in shareholder value.
Strategic Marketing and Shareholder Value Creation
Research by PA Consulting suggests that effective strategic marketing can have three times more impact on shareholder value than operational efficiencies through superior value creation, customer retention, and sales growth. Schematically, this connection can be represented in figure 2 below. As superior customer value is created, the marketing capabilities and assets enable the drivers of customer profitability - retention, lifetime value and risk reduction – to generate positive cash flow and reduce the cost of capital to the firm. When such conditions prevail in a company, shareholder value is created since shareholder value is the net present value of the firm’s future cash flows.
Summary
In a truly market-driven firm, all decisions start with the customer and the anticipated opportunities to create superior customer value. Customer insight and knowledge is of great valuable since both provide decision-making insurance as the marketing strategy is developed and implemented thorough the marketing mix. The emphasis of this strategy has shifted from customer acquisition to retention in mature economies as customer relationships and the lifetime value of these retained customers influence levels of marketing investments and returns. Although all customer marketing strategies tend to reflect both transactional and relational approaches, opportunities for growth usually lie in the firm’s ability to build close customer relationships so that superior customer value can be created.
Effective and sustainable marketing strategies are clearly dependent upon investment in both marketing assets and capabilities. However, since both these drivers of shareholder value are intangible, it requires considerable skill on the part of business leaders and their marketing management to recognise firstly the scale of the required investment over time and, secondly, the split necessary for both facets of business develop needed to facilitate shareholder value creation.
Summary
In a truly market-driven firm, all decisions start with the customer and the anticipated opportunities to create superior customer value. Customer insight and knowledge is of great valuable since both provide decision-making insurance as the marketing strategy is developed and implemented thorough the marketing mix. The emphasis of this strategy has shifted from customer acquisition to retention in mature economies as customer relationships and the lifetime value of these retained customers influence levels of marketing investments and returns. Although all customer marketing strategies tend to reflect both transactional and relational approaches, opportunities for growth usually lie in the firm’s ability to build close customer relationships so that superior customer value can be created.
Effective and sustainable marketing strategies are clearly dependent upon investment in both marketing assets and capabilities. However, since both these drivers of shareholder value are intangible, it requires considerable skill on the part of business leaders and their marketing management to recognise firstly the scale of the required investment over time and, secondly, the split necessary for both facets of business develop needed to facilitate shareholder value creation.
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1: Reichheld, F.F. and Sasser, W.E. Jr. (1990), “Zero Defections: Quality Comes to Service”, Harvard Business Review, Sept-Oct, pp.105-111.
2: Lusch, Vargo and O’Brien (2007) “Competing through service: Insights from service-dominant logic”, Journal of Retailing, Vol.83, No.1, pp.5-18.
3: Srivastava, R.K., Shervani, T.A. and Fahey, L. (1999), “Marketing, Business Processes, and Shareholder Value: An Organisationally Embedded View of Marketing Activities and the Discipline of Marketing”, Journal of Marketing, Vol. 63 (Special Edition), pp. 168-179.
4: Day, G. S. (1999), “What it Means to be Market Driven”, Chapter 1, pp 3–26, The Market Driven Organization, Free Press, New York.
5: K Conner and C.K. Prahalad, 'A Resource-Based Theory of the Firm: Knowledge Versus Opportunism', Organizational Science, 7/5 (1996): 477-501.
6: F Reichheld, 'Loyalty-Based Management', Harvard Business Review, 71/2 (1993): 64-73.
7: R Srivastava, L Fahey and H Christensen, 'The Resource-Based View and Marketing: The Role of Market-Based Assets in Gaining Competitive Advantage', Journal of Management, 27/6 (2001): 777-802.
8: R Priem and J Butler, 'Is the Resource-Based "View" a Useful Perspective for Strategic Management Research?', Academy of Management Review, 26/1 (2001): 22-40.
9: W Zollo and S Winter, 'Deliberate Learning and the Evolution of Dynamic Capabilities', Organization Science, 13/ 3 (2002): 339-351.
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1: Reichheld, F.F. and Sasser, W.E. Jr. (1990), “Zero Defections: Quality Comes to Service”, Harvard Business Review, Sept-Oct, pp.105-111.
2: Lusch, Vargo and O’Brien (2007) “Competing through service: Insights from service-dominant logic”, Journal of Retailing, Vol.83, No.1, pp.5-18.
3: Srivastava, R.K., Shervani, T.A. and Fahey, L. (1999), “Marketing, Business Processes, and Shareholder Value: An Organisationally Embedded View of Marketing Activities and the Discipline of Marketing”, Journal of Marketing, Vol. 63 (Special Edition), pp. 168-179.
4: Day, G. S. (1999), “What it Means to be Market Driven”, Chapter 1, pp 3–26, The Market Driven Organization, Free Press, New York.
5: K Conner and C.K. Prahalad, 'A Resource-Based Theory of the Firm: Knowledge Versus Opportunism', Organizational Science, 7/5 (1996): 477-501.
6: F Reichheld, 'Loyalty-Based Management', Harvard Business Review, 71/2 (1993): 64-73.
7: R Srivastava, L Fahey and H Christensen, 'The Resource-Based View and Marketing: The Role of Market-Based Assets in Gaining Competitive Advantage', Journal of Management, 27/6 (2001): 777-802.
8: R Priem and J Butler, 'Is the Resource-Based "View" a Useful Perspective for Strategic Management Research?', Academy of Management Review, 26/1 (2001): 22-40.
9: W Zollo and S Winter, 'Deliberate Learning and the Evolution of Dynamic Capabilities', Organization Science, 13/ 3 (2002): 339-351.
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