CHAPTER

1. 9 CHAPTER Marketing Strategy Reformulation: The Control Process

2. AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO: Define the concept of strategic control. Describe the nature and sources of strategic change. Explain each element of operations control. Discuss the nature of marketing costs analysis and the issues involved.

3. AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO: Describe offering mix analysis and its two interrelated tasks. Discuss sales and marketing channels analyses and their impact on the firm. Explain three considerations involved in strategic and operations control.

4. THE MARKETING STRATEGY CONTROL PROCESS The marketing control process serves as the mechanism for achieving: • Strategic adaptation to environmental change • Operational adaptation to productivity needs Strategic Control “Doing the right things” OperationsControl “Doing things right”

5. THE MARKETING STRATEGY CONTROL PROCESS Strategic Control • Assesses the direction of the organization as evidenced by its: • Implicit or explicit goals and strategies • Capacity to perform in the context of changing environments and competitive actions • Defines the fit between an organization’s capabilities and objectives and environmental threats and opportunities

6. THE MARKETING STRATEGY CONTROL PROCESS Operations Control • Assesses how well the firm performs marketing activities as it seeks to achieve planned outcomes • Assumes that: • The direction of the firm is correct • Only the organization’s ability to perform specific tasks needs to be improved

7. Improving effectiveness by: Strategic Control • Seeking opportunities • Mitigating environmental threats OperationsControl Improving efficiency by heightening the marketing effort THE MARKETING STRATEGY CONTROL PROCESS • A “poorly executed plan can produce undesirable results just as easily asa poorly conceived plan.” • Remedial efforts should focus on:

8. CHAPTER 9: MARKETING STRATEGY REFORMULATION—THE CONTROL PROCESS STRATEGICCHANGE

9. STRATEGIC CHANGE • Is the change in the environmentthat will affect the long-run well-being of the organization • Represents opportunities or threatsto an organization, depending on its competitive posture • Example: The aging of the U.S. population

10. MarketEvolution Results from changes in primary demand for a product class TechnologicalInnovation Creates strategic change as newer technologies replace older ones MarketRedefinition Results from changes in the offering demanded by buyers or promoted by competitors MarketingChannel Change • The increasing role of Internet technology • The focus on reducing distribution costs • The power shifts within marketing channels STRATEGIC CHANGE: SOURCES

11. STRATEGIC CHANGE: THREAT OR OPPORTUNITY? • The organization’s business definition determines the threat severity or opportunity potential • Ask the following questions: Does thethreat or opportunity relate to: • The types of customers served? • The needs of these customers? • The means by which these needs are satisfied?

12. OPTIONS FOR DEALING WITH STRATEGIC CHANGE • Collect the resources necessary to alterthe firm’s technical and marketing capabilities to fit its market-success requirements • Shift emphasis to product markets where the match between success requirements and the firm’s distinctive competency is clear • Cut back efforts in those product markets where the firm has been outflanked • Leave the industry

13. CHAPTER 9: MARKETING STRATEGY REFORMULATION—THE CONTROL PROCESS OPERATIONSCONTROL

14. OPERATIONS CONTROL • The goal of operations control is to improvethe productivity of marketing efforts • Ways to identify and allocate costs are: Marketing-CostAnalysis Marketing Channel Analysis SalesAnalysis Product-ServiceMix Analysis CustomerProfitabilityAnalysis

15. OPERATIONS CONTROL Marketing-Cost Analysis Its purpose is to: • Trace, assign, or allocate costs to a specified marketing activity (hereafter referred to as a segment). • Accurately display the financial contribution of activities or entities to the organization

16. OPERATIONS CONTROL Marketing-Cost Analysis • Marketing segments are typically defined based on: Product-ServiceOfferingElements MarketingChannels SalesDivisions orTerritories CustomerType or Size • Cost allocation principle: Some costs are directlyor indirectly traceable or assignable to every market segment

17. OPERATIONS CONTROL Marketing-Cost Analysis Cost allocation issues: How should costs be allocated to separate segments? What costs should be allocated? Those costs that: • Arise from the performance of a marketing activity • Charged to that activity based on administrative policy

18. OPERATIONS CONTROL Marketing-Cost Analysis Cost allocation issues: Should all costs be allocated to market segments? It depends: • Allocate costs if: Opting for a “whole equals the sum of parts” income statement?? • Do not allocate if certain costs: • Have no identifiable measure of application to a segment • Do not arise from one particular segment

19. OPERATIONS CONTROL Marketing-Cost Analysis Guidelines when considering cost allocation: • Maintain distinctions between cost behavior patterns (fixed, variable, mixed) • The more joint costs there are, the less exact cost allocations will be • Greater detail in cost allocation or traceability will provide more useful info for remedial action

20. OPERATIONS CONTROL Product-Service Mix Analysis This analysis involves two interrelated tasks: • Assess the performance of offerings in relevant markets: Sales Volume Analysis Market Share Analysis • Appraise the financial worth of offerings via: Contribution Margin Approach

21. OPERATIONS CONTROL Product-Service Mix Analysis Sales Volume Analysis Is a performance index that can be based on: Growth orDecline in UnitSales Volume A quantitative indicator of the acceptance of offerings in their relevant markets Proportion ofSales fromEach Offering “80–20 rule”—80 percent of salesor profits come from 20 percentof the firm’s offerings

22. OPERATIONS CONTROL Product-Service Mix Analysis Market Share Analysis • Complements sales volume as a performance measure • Indicates whether a firm is gaining or losing ground in comparison with competitors • Can be computed by geographic area, offering or model, customer or channel

23. OPERATIONS CONTROL Product-Service Mix Analysis Market Share Analysis • Can lead to misleading results, such as having a high market share in a market whose overall sales may be declining or growing • Use unit rather than dollar volume in examining market share due to price differentials??

24. OPERATIONS CONTROL Product-Service Mix Analysis Contribution Margin Approach • Assign/trace costs to an offering that reflects its profitability • Requires astute managerial judgment • Can be illusive based on the offering’s definition • Use the contribution margin approach to examine the financial worth of offerings • Charge relevant direct/assignable overhead costs to the offering • Break down the costs by those units that contribute to the analysis

25. EXHIBIT 9.1: DISAGGREGATING SERVICE STATION COSTS FOR PRODUCT-SERVICE MIX ANALYSIS ($000) Department Gasoline GeneralMerchandise Automobile Total

26. BehavioralAspect of Sales Consists of sales effort and allocation of selling time Cost Aspectof Sales Consists of expenses from the performance and administrationof the sales function OPERATIONS CONTROL Sales Analysis Its purpose is to direct attention to both the:

27. OPERATIONS CONTROL Sales Analysis • Is based on a performance assessment by: Product-ServiceOfferings SalesDivisions orTerritories CustomerType or Size • Measures to assess sales performance include: • Sales revenue • Penetration of accountsin a sales territory • Gross profit • Selling and sales administration expenses • Sales call frequency

28. PotentialAccountsin SalesDistricta AccountCategory ActiveAccountsb SalesVolumec GrossProfitd TotalCallse SellingExpensesf SalesAdmin.g A 80 60 $48,000 $14,000 195 $18,400 B 60 40 $44,000 $15,400 200 $17,900 C 40 10 $25,000 $12,250 50 $11,250 D 20 6 $33,000 $16,500 42 $9,000 Totals 200 116 $150,000 $58,150 487 $56,550 $10,000 Expected Frequencyof Quarterly Calls Account Definition aBased on marketing research data identifying potential users of company products. A $1,000 or less in sales 2 bCurrent accounts. cBased on invoices. B $1,000 - $1,999 in sales 4 dBased on invoice price for full mix of products sold. eBased on sales call reports cross referenced by customer name. C $2,000 - $4,999 in sales 6 fDirect costs of sales including allocated salaries of two sales representatives. D $5,000 or more in sales 8 gCosts not assignable on a meaningful basis; includes office expense. EXHIBIT 9.2: PERFORMANCE SUMMARY FOR TWO SALES REPRESENTATIVES

29. Contribution toSales Administration Sales Volume perActive Account Gross Profit perActive Account Selling Expenses perActive Account AccountCategory GrossProfit perActive Acct SellingExpenses per Active Acct SalesVolume ActiveAccounts ÷ – GrossProfit ActiveAccounts SellingExpenses ActiveAccounts ÷ ÷ A $800 $240 $307 –$67 B $1,100 $385 $448 –$63 C $2,500 $1,225 $1,125 $100 D $5,500 $2,750 $1,500 $1,250 Gross Profit %per Active Account AccountPenetration Call Frequencyper Active Account Selling Expenseper Call AccountCategory TotalCalls ActiveAccounts SellingExpenses TotalCalls ActiveAccounts PotentialAccounts GrossProfit SalesVolume ÷ ÷ ÷ ÷ A 75% 3.25 $94.36 30% B 67% 5.00 $89.50 35% C 25% 5.00 $225.00 49% D 30% 7.00 $214.29 50% EXHIBIT 9.3: SELECTED OPERATING INDICES OF SALES PERFORMANCE

30. OPERATIONS CONTROL Marketing Channel Analysis Consists of two complementary processes: • Assess environmental and organizational factors that may alter the structure, conduct, and performance of marketing channels • Evaluate the profitability of marketing channels

31. OrderGettingCosts Include sales expenses and advertising allowances OrderServicingCosts Include packing and delivery costs, warehousing expenses, and billing costs OPERATIONS CONTROL Marketing Channel Analysis Two types of costs to identify and trace to marketing channels:

32. EXHIBIT 9.4: DISAGGREGATED COSTS OF FURNITURE IMPROVEMENT PRODUCTS FOR MARKETING CHANNEL ANALYSIS ($000) Marketing Channel FurnitureStores HardwareStores HomeImprovementStores Total

33. OPERATIONS CONTROL Customer Profitability Analysis A profitable customer is a person, household, or company that, over time, yields a revenue stream that exceeds, by an acceptable amount, the organization’s cost of attracting, selling, and servicing that customer.

34. ( ) CustomerProfitability CustomerGrossMargin CustomerAcquisitionCosts CustomerRetentionCosts = – + OPERATIONS CONTROL Customer Profitability Analysis Is calculated as follows:

35. OPERATIONS CONTROL Customer Profitability Analysis • When this is done for each customer,t is possible to classify customers into different profit tiers • Can cross-sell customers additional offerings • Can up-sell customers by introducing them to the firm’s more profitable offerings

36. OPERATIONS CONTROL Customer Profitability Analysis To manage low profit or unprofitable customers, marketers could: • Drop them to eliminate their costs entirely • Charge them higher prices/fees to increase profits • Reduce the cost of serving them to make them more profitable

37. CHAPTER 9: MARKETING STRATEGY REFORMULATION—THE CONTROL PROCESS CONSIDERATIONS IN MARKETING CONTROL

38. Problemsvs.Symptoms • Recognize the difference between root problems and surface symptoms • Must develop causal relationships between occurrences • Effectiveness assesses whether the firm is achieving its intended goals given its constraints, capabilities, and environmental opportunities Effectivenessvs.Efficiency • Efficiency relates to productivity—the levels of output given a specified unit of input • Data are essentially reports of activities, events,or performance Datavs.Information • Information is the classification of activities, events, or performance designed to be interpreted and useful for decision making CONSIDERATIONS IN MARKETING CONTROL