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A R T I C L E
B
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H B R 1 9 9 7
Value Innovation
The Strategic Logic of High Growth
by W. Chan Kim and Renée Mauborgne
•

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Article Summary
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Value Innovation: The Strategic Logic of High Growth
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exploration of the article’s ideas and applications
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B
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H B R 1 9 9 7
Value Innovation
page 1

The Idea in Brief The Idea in Practice
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Struggling to stay ahead of your rivals? No
need. Instead of trying to match or beat

them on cost or quality, make the other
players irrelevant—by staking out new
market space where competitors haven’t
ventured.
How? Become a
value innovator
: identify
radical ideas that make quantum leaps in
the value you provide customers.
Value innovators ask, “What if we started
fresh—and forgot everything we know
about our industry’s existing rules and tra-
ditions?” When CNN’s creators asked this
question, they replaced the traditional net-
works’ format with real-time news from
around the world, 24 hours a day.
Value innovators don’t set out to build com-
petitive advantage. But their innovative
practices lead them to achieve precisely
that. Virgin Atlantic, for example, cut first-
class airline service and channeled cost sav-
ings into greater value for business-class
passengers: more comfortable seats and
free transportation to and from airports. It
attracted not only business-class customers
but also full-economy-fare and first-class
passengers of other airlines.
To become a value innovator, consider the fol-

lowing strategies, as exemplified by French
hotelier Accor:
Assume that you
can
shape your industry’s
conditions.
In the mid-1980s, the budget
hotel industry in France had two markets: in-
expensive hotels that had poor beds and
noise, and pricier hotels that provided upscale
amenities and a decent night’s sleep. Accor
redefined the industry by providing inexpen-
sive
and
superior accommodations to cost-
conscious travelers.
Focus on what the majority of your buyers
value.
Accor identified what customers of all
budget hotels wanted: a good night’s sleep

for a low price.
Consider how you might change your of-
fering to capture the market you’ve identi-
fied.
Eliminate features that offer no value
for customers—or that detract from value.
Simplify products or services that have been
overdesigned in the race to match or beat
rivals. Further improve high-value features
so that customers no longer have to make
compromises. And create new features that
your industry has never offered.
Example:
Accor created an entirely new hotel con-
cept: its Formule 1 line of budget hotels.
The company eliminated costly restaurants
and lounges, reckoning that target custom-
ers could do without them. It reduced
other features; for example, providing re-
ceptionists only during peak check-in and
check-out hours, and replacing closets and
dressers with a few shelves and a pole for
clothing. And it improved several fea-
tures—for instance, providing good sound
insulation by building rooms with low-cost
modular blocks.

B
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H B R 1 9 9 7
Value Innovation
by W. Chan Kim and Renée Mauborgne
harvard business review • top-line growth • july–august 2004
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What separates high-growth companies from the pack is the way
managers make sense of how they do business.
Most companies focus on matching and beating
their rivals. As a result, their strategies tend to
take on similar dimensions. What ensues is head-

to-head competition based largely on incremen-
tal improvements in cost, quality, or both. W.
Chan Kim and Renée Mauborgne from Insead
study how innovative companies break free from
the pack by staking out fundamentally new mar-
ket space—that is, by creating products or ser-
vices for which there are no direct competitors.
This path to value innovation requires a different
competitive mind-set and a systematic way of
looking for opportunities. Instead of searching
within the conventional boundaries of industry
competition, managers can look methodically
across those boundaries to find unoccupied terri-
tory that represents real value innovation. The
French hotel chain Accor, for example, discarded
conventional notions of what a budget hotel
should be and offered what most value-conscious
customers really wanted: a good night’s sleep at
a low price.
During the past decade, the authors have de-
veloped the idea of value innovation, often in the
pages of HBR. This article presents the notion in
its original, most fundamental form.
After a decade of downsizing and increasingly
intense competition, profitable growth is a tre-
mendous challenge many companies face.
Why do some companies achieve sustained
high growth in both revenues and profits? In a
five-year study of high-growth companies and
their less successful competitors, we found
that the answer lay in the way each group ap-
proached strategy. The difference in approach

was not a matter of managers choosing one
analytical tool or planning model over an-
other. The difference was in the companies’
fundamental, implicit assumptions about
strategy. The less successful companies took a
conventional approach: Their strategic think-
ing was dominated by the idea of staying
ahead of the competition. In stark contrast,
the high-growth companies paid little atten-
tion to matching or beating their rivals. In-
stead, they sought to make their competitors
irrelevant through a strategic logic we call
Value Innovation
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value innovation.
Consider Bert Claeys, a Belgian company
that operates movie theaters. From the 1960s
to the 1980s, the movie theater industry in Bel-
gium was declining steadily. With the spread of
videocassette recorders and satellite and cable
television, the average Belgian’s moviegoing
dropped from eight to two times per year. By
the 1980s, many cinema operators (COs) were
forced to shut down.
The COs that remained in business found
themselves competing head-to-head for a
shrinking market. All took similar actions.
They turned cinemas into multiplexes with as
many as ten screens, broadened their film of-
ferings to attract all customer segments, ex-
panded their food and drink services, and in-
creased showing times.

Those attempts to leverage existing assets
became irrelevant in 1988, when Bert Claeys
created Kinepolis. Neither an ordinary cinema
nor a multiplex, Kinepolis is the world’s first
megaplex, with 25 screens and 7,600 seats. By
offering moviegoers a radically superior experi-
ence, Kinepolis won 50% of the market in
Brussels in its first year and expanded the mar-
ket by about 40%. Today, many Belgians refer
not to a night at the movies but to an evening
at Kinepolis.
Consider the differences between Kinepolis
and other Belgian movie theaters. The typical
Belgian multiplex has small viewing rooms
that often have no more than 100 seats, screens
that measure seven meters by five meters, and
35-millimeter projection equipment. Viewing
rooms at Kinepolis have up to 700 seats, and
there is so much legroom that viewers do not
have to move when someone passes by. Bert
Claeys installed oversized seats with individual
armrests and designed a steep slope in the
floor to ensure everyone an unobstructed view.
At Kinepolis, screens measure up to 29 meters
by ten meters and rest on their own founda-
tions so that sound vibrations are not transmit-
ted among screens. Many viewing rooms have
70-millimeter projection equipment and state-
of-the-art sound equipment. And Bert Claeys
challenged the industry’s conventional wisdom
about the importance of prime, city-center real
estate by locating Kinepolis off the ring road
circling Brussels, 15 minutes from downtown.
Patrons park for free in large, well-lit lots. (The

company was prepared to lose out on foot traf-
fic in order to solve a major problem for the
majority of moviegoers in Brussels: the scarcity
and high cost of parking.)
Bert Claeys can offer this radically superior
cinema experience without increasing ticket
prices because the concept of the megaplex re-
sults in one of the lowest cost structures in the
industry. The average cost to build a seat at Ki-
nepolis is about 70,000 Belgian francs, less
than half the industry’s average in Brussels.
Why? The megaplex’s location outside the city
is cheaper; its size gives it economies in pur-
chasing, more leverage with film distributors,
and better overall margins; and with 25 screens
served by a central ticketing and lobby area,
Kinepolis achieves economies in personnel and
overhead. Furthermore, the company spends
very little on advertising because its value in-
novation generates a lot of word-of-mouth
praise.
Within its supposedly unattractive industry,
Kinepolis has achieved spectacular growth and
profits. Belgian moviegoers now attend the cin-
ema more frequently because of Kinepolis, and
people who never went to the movies have
been drawn into the market. Instead of bat-
tling competitors over targeted segments of
the market, Bert Claeys made the competition
irrelevant. (See the exhibit “How Kinepolis
Achieves Profitable Growth.”)
Why did other Belgian COs fail to seize that

opportunity? Like the others, Bert Claeys was
an incumbent with sunk investments: a net-
work of cinemas across Belgium. In fact, Kine-
polis would have represented a smaller invest-
ment for some COs than it did for Bert Claeys.
Most COs were thinking—implicitly or explic-
itly—along these lines: The industry is shrink-
ing, so we should not make major invest-
ments—especially in fixed assets. But we can
improve our performance by outdoing our ri-
vals on each of the key dimensions of competi-
tion. We must have better films, better ser-
vices, and better marketing.
Bert Claeys followed a different strategic
logic. The company set out to make its cinema
experience not better than that at competitors’
theaters but completely different—and irresist-
ible. The company thought as if it were a new
entrant into the market. It sought to reach the
mass of moviegoers by focusing on widely
shared needs. In order to give most moviegoers
a package they would value highly, the com-
pany put aside conventional thinking about
what a theater is supposed to look like. And it
W. Chan Kim
is the Boston Consulting
Group Bruce D. Henderson Chair Pro-
fessor of International Management at
Insead in Fountainebleau, France.

Renée Mauborgne
is the Insead Dis-
tinguished Fellow and a professor of
strategy and management. She is also
the president of ITM, a strategy re-
search group in Fountainebleau.
Value Innovation
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did that while reducing its costs. That’s the
logic behind value innovation.
Conventional Logic Versus Value
Innovation
Conventional strategic logic and the logic of
value innovation differ along the five basic di-
mensions of strategy. Those differences deter-
mine which questions managers ask, what op-
portunities they see and pursue, and how they
understand risk. (See the exhibit “Two Strate-
gic Logics.”)
Industry Assumptions.
Many companies
take their industries’ conditions as given and
set strategy accordingly. Value innovators
don’t. No matter how the rest of the industry

is faring, value innovators look for blockbuster
ideas and quantum leaps in value. Had Bert
Claeys, for example, taken its industry’s condi-
tions as given, it would never have created a
megaplex. The company would have followed
the endgame strategy of milking its business
or the zero-sum strategy of competing for
share in a shrinking market. Instead, through
Kinepolis, the company transcended the in-
dustry’s conditions.
Strategic Focus.
Many organizations let
competitors set the parameters of their strate-
gic thinking. They compare their strengths
and weaknesses with those of their rivals and
focus on building advantages. Consider this ex-
ample. For years, the major U.S. television net-
works used the same format for news pro-
gramming. All aired shows in the same time
slot and competed on their analysis of events,
the professionalism with which they delivered
the news, and the popularity of their anchors.
In 1980, CNN came on the scene with a focus
on creating a quantum leap in value, not on
competing with the networks. CNN replaced
the networks’ format with real-time news
from around the world, 24 hours a day.
CNN not only emerged as the leader in global
news broadcasting—and created new demand
around the globe—but also was able to pro-
duce 24 hours of real-time news for one-fifth

the cost of one hour of network news.
Conventional logic leads companies to com-
pete at the margin for incremental share. The
logic of value innovation starts with an ambi-
tion to dominate the market by offering a tre-
mendous leap in value. Value innovators never
say, Here’s what competitors are doing; let’s do
this in response. They monitor competitors but
do not use them as benchmarks. Hasso Platt-
ner, vice chairman of SAP, the global leader in
Researching the Roots of High Growth
During the past five years, we have studied
more than 30 companies around the world in
approximately 30 industries. We looked at
companies with high growth in both reve-
nues and profits and companies with less suc-
cessful performance records. In an effort to
explain the difference in performance be-
tween the two groups of companies, we inter-
viewed hundreds of managers, analysts, and
researchers. We built strategic, organiza-
tional, and performance profiles. We looked
for industry or organizational patterns. And
we compared the two groups of companies
along dimensions that are often thought to
be related to a company’s potential for
growth. Did private companies grow more
quickly than public ones? What was the im-
pact on companies of the overall growth of
their industry? Did entrepreneurial start-ups
have an edge over established incumbents?

Were companies led by creative, young radi-
cals likely to grow faster than those run by
older managers?
We found that none of those factors mat-
tered in a systematic way. High growth was
achieved by both small and large organiza-
tions, by companies in high-tech and low-
tech industries, by new entrants and incum-
bents, by private and public companies, and
by companies from various countries.
What did matter—consistently—was the
way managers in the two groups of compa-
nies thought about strategy. In interviewing
the managers, we asked them to describe
their strategic moves and the thinking be-
hind them. Thus we came to understand
their views on each of the five textbook di-
mensions of strategy: industry assumptions,
strategic focus, customers, assets and capa-
bilities, and product and service offerings.
We were struck by what emerged from our
content analysis of those interviews. The
managers of the high-growth companies—
irrespective of their industry—all described
what we have come to call the logic of value
innovation. The managers of the less success-
ful companies all thought along conventional
strategic lines.
Intrigued by that finding, we went on to
test whether the managers of the high-
growth companies applied their strategic

thinking to business initiatives in the market-
place. We found that they did.
Furthermore, in studying the business
launches of about 100 companies, we were
able to quantify the impact of value innova-
tion on a company’s growth in both revenues
and profits. Although 86% of the launches
were line extensions—that is, incremental
improvements—they accounted for 62% of
total revenues and only 39% of total profits.
The remaining 14% of the launches—the true
value innovations—generated 38% of total
revenues and a whopping 61% of total profits.
Value Innovation
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business application software, puts it this way:
“I’m not interested in whether we are better
than the competition. The real test is, will most
buyers still seek out our products even if we
don’t market them?”
Because value innovators don’t focus on
competing, they can distinguish the factors
that deliver superior value from all the factors
the industry competes on. They do not expend
their resources to offer certain product and ser-
vice features just because that is what their ri-
vals are doing. CNN, for example, decided not
to compete with the networks in the race to
get big-name anchors. Companies that follow
the logic of value innovation free up their re-
sources to identify and deliver completely new
sources of value. Ironically, even though value

innovators do not set out to build advantages
over the competition, they often end up
achieving the greatest competitive advantages.
Customers.
Many companies seek growth
through retaining and expanding their cus-
tomer bases. This often leads to finer segmen-
tation and greater customization of offerings
to meet specialized needs. Value innovation
follows a different logic. Instead of focusing on
the differences between customers, value in-
novators build on the powerful commonalities
in the features that customers value. In the
words of a senior executive at the French hote-
lier Accor, “We focus on what unites custom-
ers. Customers’ differences often prevent you
from seeing what’s most important.” Value in-
novators believe that most people will put
their differences aside if they are offered a con-
siderable increase in value. Those companies
shoot for the core of the market, even if it
means losing some of their customers.
Assets and Capabilities.
Many companies
view business opportunities through the lens
of their existing assets and capabilities. They
ask, Given what we have, what is the best we

can do? In contrast, value innovators ask,
What if we start anew? That is the question
the British company Virgin Group put to itself
in the late 1980s. The company had a sizable
chain of small music stores across the United
Kingdom when it came up with the idea of
music and entertainment megastores, which
would offer customers a tremendous leap in
value. Seeing that its small stores could not be
leveraged to seize that opportunity, the com-
pany decided to sell off the entire chain. As
one of Virgin’s executives puts it, “We don’t let
what we can do today condition our view of
what it takes to win tomorrow. We take a clean
slate approach.”
This is not to say that value innovators
never leverage their existing assets and capabil-
ities; they often do. But, more important, they
assess business opportunities without being bi-
ased or constrained by where they are at a
given moment. For that reason, value innova-
tors not only have more insight into where
value for buyers resides—and how it is chang-
ing—but also are much more likely to act on
that insight.
Product and Service Offerings.
Conven-
tional competition takes place within clearly
established boundaries defined by the prod-
ucts and services the industry traditionally of-
fers. Value innovators often cross those bound-

aries. They think in terms of the total solution
buyers seek, and they try to overcome the
chief compromises their industry forces cus-
tomers to make—as Bert Claeys did by provid-
ing free parking. A senior executive at Com-
paq Computer describes the approach: “We
continually ask where our products and ser-
vices fit in the total chain of buyers’ solutions.
We seek to solve buyers’ major problems
Kinepolis
Company’s Perspective Customers’ Perspective
Industry’s conditions
can be transcended.
Economies
of personnel
and overhead
Cost
savings
Cost
additions
Low
marketing
costs
Low cost
position
High

volume
Expanded
market
High growth in revenues and profits
Quantum leap
in value
Competitive
price
Radically superior
cinema experience
Low
land
costs
Better
overall
margins
Free and easy
parking
Superior screens,
sound, and seats
Best pick of
blockbusters
Go for a quantum leap
in value; competition
is not the benchmark.

Go for the mass of
moviegoers; let some
customers go.
Think beyond
existing assets
and capabilities.
Think in terms of the total
solution buyers seek.
How Kinepolis Achieves Profitable Growth
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across the entire chain, even if that takes us
into a new business. We are not limited by the
industry’s definition of what we should and
should not do.”
Creating a New Value Curve
How does the logic of value innovation trans-
late into a company’s offerings in the market-
place? Consider the case of Accor. In the mid-
1980s, the budget hotel industry in France was
suffering from stagnation and overcapacity.
Accor’s cochairmen, Paul Dubrule and Gérard
Pélisson, challenged the company’s managers
to create a major leap in value for customers.
The managers were urged to forget everything
they knew about the existing rules, practices,
and traditions of the industry. They were
asked what they would do if Accor were start-
ing fresh.

In 1985, when Accor launched Formule 1, a
line of budget hotels, there were two distinct
market segments in the industry. One segment
consisted of no-star and one-star hotels, whose
average price per room was between 60 and 90
French francs. Customers came to those hotels
just for the low price. The other segment was
two-star hotels, with an average price of 200 Fr
per room. Those more expensive hotels at-
tracted customers by offering a better sleeping
environment than the no-star and one-star ho-
tels. People had come to expect that they
would get what they paid for: Either they
would pay more and get a decent night’s sleep,
or they would pay less and put up with poor
beds and noise.
Accor’s managers began by identifying what
customers of all budget hotels—no star, one
star, and two star—wanted: a good night’s
sleep for a low price. Focusing on those widely
shared needs, Accor’s managers saw an oppor-
tunity to overcome the chief compromise that
the industry forced customers to make. They
asked themselves the following four questions:
Which of the factors that our industry takes for
granted should be eliminated? Which factors
should be reduced well below the industry’s
standard? Which factors should be raised well
above the industry’s standard? Which factors
should be created that the industry has never
offered?
The first question forces managers to con-

sider whether the factors that companies
compete on actually deliver value to consum-
ers. Often those factors are taken for granted,
even though they have no value or even de-
tract from value. Sometimes what buyers
value changes fundamentally, but companies
that are focused on benchmarking one an-
other do not act on—or even perceive—the
change. The second question forces managers
to determine whether products and services
have been overdesigned in the race to match
and beat the competition. The third question
pushes managers to uncover and eliminate
the compromises their industry forces cus-
tomers to make. The fourth question helps
managers break out of the industry’s estab-
lished boundaries to discover entirely new
sources of value for consumers.
In answering the questions, Accor came up
with a new concept for a hotel, which led to
the launch of Formule 1. First, the company
eliminated such standard hotel features as
costly restaurants and appealing lounges.
Accor reckoned that even though it might lose
some customers, most people would do with-
out those features.
Accor’s managers believed that budget ho-
tels were overserving customers along other
dimensions as well. On those, Formule 1 offers
less than many no-star hotels do. For exam-
ple, receptionists are on hand only during
peak check-in and checkout hours. At all
other times, customers use an automated
teller. Rooms at a Formule 1 hotel are small

Two Strategic Logics
The Five
Dimensions Conventional Value Innovation
of Strategy Logic Logic
Industry Industry’s conditions are given. Industry’s conditions
can be shaped.
assumptions
Strategic A company should build competitive Competition is
not the benchmark.
focus advantages. The aim is to beat A company should pursue a
quantum
the competition. leap in value to dominate the market.
Customers A company should retain and A value innovator
targets the mass of
expand its customer base through buyers and willingly lets some
existing
further segmentation and custom- customers go. It focuses on
the key
ization. It should focus on the commonalities in what
customers value.
differences in what customers value.
Assets and A company should leverage its A company must not
be constrained by
capabilities existing assets and capabilities. what it already has.
It must ask, What
would we do if we were starting anew?

Product and An industry’s traditional boundaries A value
innovator thinks in terms of
service determine the products and services the total solution
customers seek, even
offerings a company offers. The goal is to if that takes the
company beyond its
maximize the value of those offerings. industry’s traditional
offerings. C
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and equipped only with a bed and the bare
necessities—no stationery, desks, or decora-
tions. Instead of closets and dressers, there are
a few shelves and a pole for clothing in one
corner of the room. The rooms themselves
are modular blocks manufactured in a fac-
tory, a method that results in economies of
scale in production, high quality control, and
good sound insulation.
Formule 1 gives Accor considerable cost ad-
vantages. The company cut in half the average
cost of building a room, and its staff costs
dropped from between 25% and 35% of sales—
the industry average—to between 20% and
23%. Those cost savings have allowed Accor to
improve the features customers value most to
levels beyond those of the average French two-
star hotel, but the price is only marginally
above that of one-star hotels.
Customers have rewarded Accor for its
value innovation. The company has not only
captured the mass of French budget hotel cus-
tomers but also expanded the market. From

truck drivers who previously slept in their vehi-
cles to businesspeople needing a few hours of
rest, new customers have been drawn to the
budget category. Formule 1 made the competi-
tion irrelevant. At last count, Formule 1’s mar-
ket share in France was greater than the sum
of the five next largest players.
The extent of Accor’s departure from the
standard thinking of its industry can be seen in
what we call a value curve—a graphic depic-
tion of a company’s relative performance
across its industry’s key success factors. (See
the exhibit “Formule 1’s Value Curve.”) Accord-
ing to the conventional logic of competition,
an industry’s value curve follows one basic
shape. Rivals try to improve value by offering a
little more for a little less, but most don’t chal-
lenge the shape of the curve.
Like Accor, all the high-performing compa-
nies we studied created fundamentally new
and superior value curves. They achieved that
through a combination of eliminating features,
creating features, and reducing and raising fea-
tures to levels unprecedented in their indus-
tries. Take, for example, SAP, which was started
in the early 1970s by five former IBM employ-
ees in Walldorf, Germany, and became the
worldwide industry leader. Until the 1980s,
business application software makers focused
on subsegmenting the market and customizing
their offerings to meet buyers’ functional
needs, such as production management, logis-
tics, human resources, and payroll.

While most software companies were focus-
ing on improving the performance of particu-
lar application products, SAP took aim at the
mass of buyers. Instead of competing on cus-
tomers’ differences, SAP sought out common-
alities in what customers value. The company
correctly hypothesized that for most custom-
ers, the performance advantages of highly cus-
tomized, individual software modules had
been overestimated. Such modules forfeited
the efficiency and information advantages of
an integrated system, which allows real-time
data exchange across a company.
In 1979, SAP launched R/2, a line of real-
time, integrated business application software
for mainframe computers. R/2 has no restric-
tion on the platform of the host hardware; buy-
ers can capitalize on the best hardware avail-
able and reduce their maintenance costs
dramatically. Most important, R/2 leads to
El
em
en
ts
o
f p
ro
du
ct

o
r s
er
vi
ce
Relative level
Eating facilities
Architectural
aesthetics
Lounges
Room size
Availability
of receptionist
Furniture and
amenities in rooms
Bed quality
Hygiene
Room quietness
Price
average
two-star
hotel’s

value
curve
average
one-star
hotel’s
value
curve
Formule 1’s
value
curve
Low High
Formule 1’s Value Curve
Formule 1 offers unprecedented value to the mass of budget
hotel cus-
tomers in France by giving them much more of what they need
most
and much less of what they are willing to do without.
C
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Value Innovation
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HBR 1997
page 8
huge gains in accuracy and efficiency because
a company needs to enter its data only once.
And R/2 improves the flow of information. A
sales manager, for example, can find out when
a product will be delivered and why it is late by
cross-referencing the production database.
SAP’s growth and profits have exceeded its in-
dustry’s. In 1992, SAP achieved a new value in-
novation with R/3, a line of software for the cli-
ent-server market.
The Trap of Competing, the

Necessity of Repeating
What happens once a company has created a
new value curve? Sooner or later, the competi-
tion tries to imitate it. In many industries,
value innovators do not face a credible chal-
lenge for many years, but in others, rivals ap-
pear more quickly. Eventually, however, a
value innovator will find its growth and profits
under attack. Too often, in an attempt to de-
fend its hard-earned customer base, the com-
pany launches offenses. But the imitators
often persist, and the value innovator—de-
spite its best intentions—may end up in a race
to beat the competition. Obsessed with hang-
ing on to market share, the company may fall
into the trap of conventional strategic logic. If
the company doesn’t find its way out of the
trap, the basic shape of its value curve will
begin to look just like those of its rivals.
Consider this example. When Compaq Com-
puter launched its first personal computer in
1983, most PC buyers were sophisticated corpo-
rate users and technology enthusiasts. IBM
had defined the industry’s value curve. Com-
paq’s first offering—the first IBM-compatible
PC—represented a completely new value
curve. Compaq’s product not only was techno-
logically superb but also was priced roughly
15% below IBM’s. Within three years of its
launch, Compaq joined the
Fortune

500. No
other company had ever achieved that status
as quickly.
How did IBM respond? It tried to match
and beat Compaq’s value curve. And Compaq,
determined to defend itself, became focused
on beating IBM. But while IBM and Compaq
were battling over feature enhancements,
most buyers were becoming more sensitive to
price. User-friendliness was becoming more
important to customers than the latest tech-
nology. Compaq’s focus on competing with
IBM led the company to produce a line of PCs
that were overengineered and overpriced for
most buyers. When IBM walked off the cliff in
the late 1980s, Compaq was following close
behind.
Could Compaq have foreseen the need to
create another value innovation rather than go
head-to-head against IBM? If Compaq had
monitored the industry’s value curves, it would
have realized that by the mid- to late 1980s,
IBM’s and other PC makers’ value curves were
converging with its own. And by the late 1980s,
the curves were nearly identical. That should
have been the signal to Compaq that it was
time for another quantum leap.
Monitoring value curves may also keep a
company from pursuing innovation when
there is still a huge profit stream to be col-

lected from its current offering. In some rap-
idly emerging industries, companies must in-
novate frequently. In many other industries,
companies can harvest their successes for a
long time; a radically different value curve is
difficult for incumbents to imitate, and the vol-
ume advantages that come with value innova-
tion make imitation costly. Kinepolis, Formule
1, and CNN, for example, have enjoyed uncon-
tested dominance for a long time. CNN’s value
innovation was not challenged for almost ten
years. Yet we have seen companies pursue nov-
elty for novelty’s sake, driven by internal pres-
sures to leverage unique competencies or to
apply the latest technology. Value innovation
is about offering unprecedented value, not
technology or competencies. It is not the same
as being first to market.
When a company’s value curve is funda-
mentally different from that of the rest of the
industry—and the difference is valued by most
customers—managers should resist innova-
tion. Instead, companies should embark on
geographic expansion and operational im-
provements to achieve maximum economies
of scale and market coverage. That approach
discourages imitation and allows companies to
tap the potential of their current value innova-
tion. Bert Claeys, for example, has been rapidly
rolling out and improving its Kinepolis concept
with Metropolis, a megaplex in Antwerp, and
with megaplexes in many countries in Europe
and Asia. And Accor has already built more
than 300 Formule 1 hotels across Europe, Af-
rica, and Australia. The company is now target-

ing Asia.
Ironically, even though
value innovators do not
set out to build
advantages over the
competition, they often
end up achieving the
greatest competitive
advantages.
Value Innovation
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page 9
The Three Platforms
The companies we studied that were most suc-
cessful at repeating value innovation were
those that took advantage of all three platforms
on which value innovation can take place: prod-
uct, service, and delivery. The precise meaning
of the three platforms varies across industries
and companies, but in general, the product
platform is the physical product; the service
platform is support such as maintenance, cus-
tomer service, warranties, and training for dis-
tributors and retailers; and the delivery plat-
form includes logistics and the channel used to

deliver the product to customers.
Too often, managers trying to create a value
innovation focus on the product platform and
ignore the other two elements. Over time, that
approach is not likely to yield many opportuni-
ties for repeated value innovation. As custom-
ers and technologies change, each platform
presents new possibilities. Just as good farmers
rotate their crops, good value innovators rotate
their value platforms. (See the sidebar “Virgin
Atlantic: Flying in the Face of Conventional
Logic.”)
The story of Compaq’s server business,
which was part of the company’s successful
comeback, illustrates how the three platforms
can be used alternately over time to create
new value curves. (See the exhibit “How Has
Compaq Stayed on Top of the Server Indus-
try?”) In late 1989, Compaq introduced its first
server, the SystemPro, which was designed to
run five network operating systems—SCO
UNIX, OS/2, Vines, NetWare, and DOS—and
many application programs. Like the System-
Pro, most servers could handle many operating
systems and application programs. Compaq ob-
served, however, that the majority of custom-
ers used only a small fraction of a server’s ca-
pacity. After identifying the needs that cut
across the mass of users, Compaq decided to
build a radically simplified server that would
be optimized to run NetWare and file and
print only. Launched in 1992, the ProSignia
was a value innovation on the product plat-

form. The new server gave buyers twice the
SystemPro’s file-and-print performance at one-
third the price. Compaq achieved that value in-
novation mainly by reducing general applica-
tion compatibility—a reduction that translated
into much lower manufacturing costs.
As competitors tried to imitate the Pro-
Signia and value curves in the industry began
Virgin Atlantic: Flying in the Face of Conventional Logic
When Virgin Atlantic Airways challenged its
industry’s conventional logic by eliminating
first-class service in 1984, the airline was sim-
ply following the logic of value innovation.
Most of the industry’s profitable revenue
came from business class, not first class. And
first class was a big cost generator. Virgin
spotted an opportunity. The airline decided
to channel the cost it would save by cutting
first-class service into value innovation for
business-class passengers.
First, Virgin introduced large, reclining
sleeper seats, raising seat comfort in business
class well above the industry’s standard. Sec-
ond, Virgin offered free transportation to and
from the airport—initially in chauffeured
limousines and later in specially designed
motorcycles called LimoBikes—to speed busi-
ness-class passengers through snarled city
traffic.

With those innovations, which were on the
product and service platforms, Virgin at-
tracted not only a large share of the indus-
try’s business-class customers but also some
full economy fare and first-class passengers of
other airlines. Virgin’s value innovation sepa-
rated the company from the pack for many
years, but the competition did not stand still.
As the value curves of some other airlines
began converging with Virgin’s value curve,
the company went for another leap in value,
this time from the service platform.
Virgin observed that most business-class
passengers want to use their time produc-
tively before and between flights and that,
after long-haul flights, they want to freshen
up and change their wrinkled clothes before
going to meetings. The airline designed
lounges where passengers can take showers,
have their clothes pressed, enjoy massages,
and use state-of-the-art office equipment.
The service allows busy executives to make
good use of their time and go directly to
meetings without first stopping at their ho-
tels—a tremendous value for customers that
generates high volume for Virgin. The air-
line has one of the highest sales per em-
ployee in the industry, and its costs per pas-
senger mile are among the lowest. The
economics of value innovation create a posi-
tive and reinforcing cycle.
When Virgin first challenged the industry’s

assumptions, its ideas were met with a great
deal of skepticism. After all, conventional wis-
dom says that in order to grow, a company
must embrace more, not fewer, market seg-
ments. But Virgin deliberately walked away
from the revenue generated by first-class pas-
sengers. And it further rejected conventional
wisdom by conceiving of its business in
terms of customer solutions, even if that took
the company well beyond an airline’s tradi-
tional offerings. Virgin has applied the logic
of value innovation not just to the airline in-
dustry but also to insurance, music, and en-
tertainment retailing. The company has al-
ways done more than leverage its existing
assets and capabilities. It has been a consis-
tent value innovator.
Value Innovation
•
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HBR 1997
page 10
to converge, Compaq took another leap, this
time from the service platform. Viewing its
servers not as stand-alone products but as ele-
ments of its customers’ total computing needs,
Compaq saw that 90% of customers’ costs were
in servicing networks and only 10% were in the
server hardware itself. Yet Compaq, like other
companies in the industry, had been focusing
on maximizing the price/performance ratio of
the server hardware, the least costly element
for buyers.
Compaq redeployed its resources to bring
out the ProLiant 1000, a server that incorpo-
rates two innovative pieces of software. The

first, SmartStart, configures server hardware
and network information to suit a company’s
operating system and application programs. It
slashes the time it takes a customer to config-
ure a server network and makes installation
virtually error free so that servers perform reli-
ably from day one. The second piece of soft-
ware, Insight Manager, helps customers man-
age their server networks by, for example,
spotting overheating boards or troubled disk
drives before they break down.
By innovating on the service platform, Com-
paq created a superior value curve and ex-
panded its market. Companies lacking exper-
tise in information technology had been
skeptical of their ability to configure and man-
age a network server. SmartStart and Insight
Manager helped put those companies at ease.
The ProLiant 1000 came out a winner.
As more and more companies acquired serv-
ers, Compaq observed that its customers often
lacked the space to store the equipment prop-
erly. Stuffed into closets or left on the floor
with tangled wires, expensive servers were
often damaged, were certainly not secure, and
were difficult to service.
By focusing on customer value—not on
competitors—Compaq saw that it was time for
another value innovation on the product plat-
form. The company introduced the ProLiant
1000 rack-mountable server, which allows com-
panies to store servers in a tall, lean cabinet in

a central location. The product makes efficient
use of space and ensures that machines are
protected and are easy to monitor, repair, and
enhance. Compaq designed the rack mount to
fit both its products and those of other manu-
facturers, thus attracting even more buyers and
discouraging imitation. The company’s sales
and profits rose again as its new value curve di-
verged from the industry’s.
Compaq is now looking to the delivery plat-
form for a value innovation that will dramati-
cally reduce the lead time between a customer’s
order and the arrival of the equipment. Lead
times have forced customers to forecast their
needs—a difficult task—and have often re-
quired them to patch together costly solutions
while waiting for their orders to be filled. Now
that servers are widely used and the demands
placed on them are multiplying rapidly, Com-
paq believes that shorter lead times will provide
a quantum leap in value for customers. The
company is currently working on a delivery op-
tion that will permit its products to be built to
customers’ specifications and shipped within 48
hours of the order. That value innovation will
allow Compaq to reduce its inventory costs and
minimize the accumulation of outdated stock.
By achieving value innovations on all three
platforms, Compaq has been able to maintain
a gap between its value curve and those of
other players. Despite the pace of competition
in its industry, Compaq’s repeated value inno-
vations are allowing the company to remain
the number one maker of servers worldwide.

Since the company’s turnaround, overall sales
and profits have almost quadrupled.
By following its first value innovation… …with another …and
then another.
Reliability
El
em
en
ts
o
f p
ro
d
uc
t o
r s
er
vi
ce
Configurability
Manageability
Expandability

General application
compatibility
File and print
compatibility
Performance
Price
Storability
Serviceability
Security
low � high low � high low � high
Relative Level
1989:
SystemPro
1992:
ProSignia
1993:
ProLiant 1000
1993:
ProLiant 1000
Feature
innovations
Feature

innovations
1992:
ProSignia
1994:
ProLiant 1000
rack-mountable
server
How Has Compaq Stayed on Top of the Server Industry?
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Driving a Company for High Growth
One of the most striking findings of our re-
search is that despite the profound impact of a
company’s strategic logic, that logic is often
not articulated. And because it goes unstated
and unexamined, a company does not neces-
sarily apply a consistent strategic logic across
its businesses.
How can senior executives promote value
innovation? First, they must identify and artic-
ulate the company’s prevailing strategic logic.
Then they must challenge it. They must stop
and think about the industry’s assumptions,
the company’s strategic focus, and the ap-
proaches—to customers, assets and capabili-
ties, and product and service offerings—that
are taken as given. Having reframed the com-
pany’s strategic logic around value innovation,
senior executives must ask the four questions
that translate that thinking into a new value

curve: Which of the factors that our industry
takes for granted should be eliminated? Which
factors should be reduced well below the in-
dustry’s standard? Which should be raised well
above the industry’s standard? Which factors
should be created that the industry has never
offered? Asking the full set of questions—
rather than singling out one or two—is neces-
sary for profitable growth. Value innovation is
the simultaneous pursuit of radically superior
value for buyers and lower costs for companies.
For managers of diversified corporations,
the logic of value innovation can be used to
identify the most promising possibilities for
growth across a portfolio of businesses. The
value innovators we studied all have been pio-
neers in their industries, not necessarily in de-
veloping new technologies but in pushing the
value they offer customers to new frontiers. Ex-
tending the pioneer metaphor can provide a
useful way of talking about the growth poten-
tial of current and future businesses.
A company’s pioneers are the businesses
that offer unprecedented value. They are the
most powerful sources of profitable growth. At
the other extreme are settlers—businesses
with value curves that conform to the basic
shape of the industry’s. Settlers will not gener-
ally contribute much to a company’s growth.
The potential of migrators lies somewhere in
between. Such businesses extend the industry’s
curve by giving customers more for less, but
they don’t alter its basic shape.

A useful exercise for a management team
pursuing growth is to plot the company’s
current and planned portfolios on a pioneer-
migrator-settler map. (See the exhibit “Testing
the Growth Potential of a Portfolio of Busi-
nesses.”) If both the current portfolio and the
planned offerings consist mainly of settlers, the
company has a low growth trajectory and
needs to push for value innovation. The com-
pany may well have fallen into the trap of com-
peting. If current and planned offerings consist
of a lot of migrators, reasonable growth can be
expected. But the company is not exploiting its
potential for growth and risks being marginal-
ized by a value innovator. This exercise is espe-
cially valuable for managers who want to see
beyond today’s performance numbers. Reve-
nue, profitability, market share, and customer
satisfaction are all measures of a company’s
current position. Contrary to what conven-
tional strategic thinking suggests, those mea-
sures cannot point the way to the future. The
pioneer-migrator-settler map can help a com-
pany predict and plan future growth and
profit, a task that is especially difficult—and
crucial—in a fast-changing economy.
Reprint R0407P
OnPoint 7251

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or call 800-988-0886 or 617-783-7500
or go to www.hbr.org
Current portfolio Planned portfolio
High growth
trajectory
Pioneers
Businesses
that represent
value innovations
Migrators
Businesses
with value
improvements
Settlers
Businesses that
offer me-too
products and
services
Testing the Growth Potential
of a Portfolio of Businesses
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=itemdetail&referral=4320&id=R0407P
http://www.hbr.org
B
E S T
O F
H B R 1 9 9 7
Value Innovation
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page 12
Further Reading
A R T I C L E S
What Is Strategy?

by Michael E. Porter
January–February 2000
Product no. 4134
This article underscores the strategic power of
value innovation. Value innovators achieve
sustainable competitive advantage through
strategic positioning
: performing different
activities from rivals or similar activities in dif-
ferent ways. In addition to serving broad
needs of many customers in a narrow market,
you can establish your strategic position by
serving few needs of many customers—as
Jiffy Lube does providing only auto lubricants.
Or you can serve broad needs of few custom-
ers, as Bessemer Trust does by targeting only
very wealthy clients.
Use your strategic position to make decisions
about what you
won’t

do as well as what you
will
do to compete. Avoid activities that can
be achieved only at the expense of another
area.
Also ensure that your company’s activities
work together to reinforce your strategic posi-
tion. For instance, Vanguard aligns all of its ac-
tivities with a low-cost strategy—distributing
funds directly to consumers and minimizing
portfolio turnover. When activities mutually
reinforce each other, rivals can’t easily copy
them.
Breaking Compromises, Breakaway
Growth
by George Stalk, Jr., David K. Pecaut, and
Benjamin Burnett
September–October 1996
Product no. 96507

Value innovators in search of new markets try
to identify compromises that industries force
consumers to make—then develop new
forms of value so consumers don’t have to
compromise. This article takes a closer look at
the opportunities created by undoing those
compromises.
Companies who break compromises release
enormous trapped value—enough to stimu-
late major sales and profit growth. How to find
and exploit compromise-breaking opportuni-
ties? Here are just a few approaches: 1)
Shop
the way customers shop.
When Schwab em-
ployees, for instance, began using the com-
pany’s products and services just as Schwab’s
customers did, they confirmed the belief that
customers would value the convenience of
24-hour-a-day, seven-day-a-week systems.
2)
Find out how customers really use your prod-
uct or service.
Schwab noticed that many cus-
tomers called back to confirm that their trade
had gone through as requested. To save cus-

tomers trouble, it began providing immediate
confirmation at order-taking time. 3)
Explore
customers’ deepest dissatisfactions.
Chrysler’s
minivan tapped into consumers’ profound
dissatisfaction with hard-to-load station wag-
ons and difficult-to-drive vans. The minivan
broke the compromise with easy-to-load
and
easy-to-drive features.
http://www.hbr.org
mailto:[email protected]

•
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■
Fourteenth Edition
J. Paul Peter
University of Wisconsin-Madison
James H. Donnelly Jr.
Gatton College of Business and
Economics University of Kentucky
A PREFACE TO MARKETING MANAGEMENT,
FOURTEENTH EDmON
Published by McGraw-Hill Education. 2 Penn Plaza, New York,
NY 10121. Copyright© 2015 by McGraw-Hill
Education. All rights reserved. Printed in the United States of
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All credits appearing on page or at the end of the book are
considered to be an extension of the copy1ight page.
Library of Congress Cataloging-in-Publication Data
Peter, J. Paul.
A preface to marketing management/ J. Paul Peter, University
of Wisconsin-Madison, James H. Donnelly,
Jr., Gatton College of Business and Economics, University of
Kentucky.-Fourteenth edition.
pages cm
ISBN 978-0-07-786106-3 (alk. paper)
1. Marketing-Management. I. Donnelly, Ja,nes H. II. Title.
HF5415.13.P388 2013
658.8-dc23
2013046644
The Internet addresses listed in the text were accurate at the
time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill

Education, and McGraw-Hill Education does not
guarantee the accuracy of the infor1nation presented at these
sites.
ww,v .mhhe.com
To Rose and Angie
J. Paul Peter
To Gayla
Jim Donnelly
vi
ors
J. Paul Peter
has been a faculty member at the University of Wisconsin since
1981. He was a member
of the faculty at Indiana State, Ohio State, and Washington
University before joining the
Wisconsin faculty. While at Ohio State, l1e was named
Outstanding Marketing Professor
by the students and has won the John R. Larson Teaching Award
at Wisconsin. He has

taught a variety of courses including Marketing Management,
Marketing Strategy, Con-
sumer Behavior, Marketing Research, and Marketing Theory,
among others.
Professor Peter's research has appeared in t11e Journal of
Marketing, the Journal of
Marketing Research, the Journal of Consumer Research., the
Journal of Retailing, and the
Academy o,f Management Journ.ctl, among others. His article
on construct validity won the
prestigious William O'Dell Award from the Journal of
Marketing Research, and he was a
finalist for this award on two other occasions. Recently, he was
the recipient of the ChurchilJ
Award for Lifeti1ne Achievement in Marketing Research, given
by the American Marketing
Association and the Gaumnitz Distinguished Faculty Award
from the School of Business,
University of Wisconsin-Madison. He is an author or editor of
over 30 books, including A
Preface to Marketing Management, Fourteenth edition;
Marketing Management: Krtowledge
and Skills, ninth edition; Consumer Behavior and Marketing
Strategy, ninth edition; Strategic
Management: Concepts and Applications, third edition; and
Marketirig: Creating Value .for

Custom.ers, second edition. He is one of the most cited authors
in the marketing literature.
Professor Peter has served o n the review boards of the Journal
of· Marketing, Jour-
nal of Marketi11g Research, Journal of Corisumer Research,
and Journal of Business
Research and was measurement editor for JMR and professional
publicatio11s editor for tl1e
American Marketing Association. He has taught in a variety of
executive programs and
consulted for several corporations as well as the Federal Trade
Commission.
James H. Donnelly Jr.
has spent his academic career in the Gatton College of Business
a11d Econo1nics at the
University of Kentucky. In 1990 he received the first
Chancellor's Award for Outstanding
Teaching given at the university. Previously, he had twice
received the UK Alumni Associa-
tion's Great Teacher Award, an award one can only be eligible
to receive every 10 years. He
has also received two Outstanding Teacher awards from Beta
Gamma Sigma, national busi-
ness honorary. In 1992 he received an Acorn Award recognizing
"those who shape the future"

from the Kentucky Advocates for Higher Education. In 2001
and 2002 he was selected as
"Best University of Kentucky Professor." In 1995 he became
one of six charter members
elected to the American Bankers Association's Bank Marketing
Hall of Fame. He has also
received a "Distinguished Doctoral Graduate Award" from the
University of Maryland.
During his career he has published i n the Journal of Marketing
Research,, Journ.al o,f
Marketing, Journal of· Retailing, Administrative Science QiJ-
arterly, Academy of Man-
agemerit Jourrtal, Journal of Applied Psychology, Personnel
Psychology, Jourrial of
Business Researcli, and Operatio,is Research a1nong others. He
has served on the edito-
rial review boa.rd of the Journal o,f Marketing. He i s the
author of more than a dozen
books, which include widely adopted academic texts as well as
professional books.
Professor Donnelly is very active in the banking industry where
l1e l1as served on the board
of directors of tl1e Institute of Certified Bankers and tl1e
ABA's Marketing Network. He has
also served as academic dean of the ABA' s School of Bank

Marketing and Management.
re ace
We are proud to introdt1ce the fourteenth edition of A Pre.face
to Marketin.g Man,agement.
Our plan has always been to deliver a clear and concise
presentation of the basic princi-
ples of marketing in such a way that the core concepts and ideas
are covered in sufficient
depth to ensure in-depth understanding, By offering an
engaging, clear, and conceptu-
ally sound text, our book has been able to maintain its position
as a leading marketing
management text.
Througl1ot1t the history of the book, feedback from botl1
students and instructors has
suggested that our plan is a good one. Our book has been used
in a wide variety of set-
tings and is the best-selling book of its kind. We introduce the
fourteenth edition knowing
that our book and its eight foreign translations have been used
around the world vvhenever
courses require an overview of the critical aspects of marketing

manage1nent.
With this edition, we seek to n1ore effectively implement our
plan by building on a
strong foundation, maintaining the attributes and elements of
the book tl1at make i t a very
teachable text, updating existir1g content, adding new content,
and focusing the presenta-
tion. We seek to emphasize qttality content and examples and
avoid excess verbiage, pic-
tures, and description.
As usual, each time we revise the book there is a11 e1nphasis
on responding to feedback
from students and instructors. These two constituencies plus our
own intuitions drive each
revision, Marketing is an exciting and dynamic field of study,
We want to capture the
sense of excitement and at the same time respect its history.
Our book has become known simply as tl1e Preface. We want to
believe a major reason
it has endured is that because marketing is figuring out how to
do a superior job of satisfy-
ing customers, we simply try to practice what we preach.
Welcorne to the Pre.face.

THE PRESENT EDITION
Every elem.ent of content in our book is designed with one
thought in mind: to assist stu-
dents in analyzing marketing problems and cases and
developing and writing marketing
plans. Section I of the book consists of 13 concise chapters that
cover the essentials of mar-
keting management. We think of it as the "must know" content
of the field. It is divided
into four parts that foct1s on strategic planning and marketing
planning, ttnderstanding tar-
get markets, tl1e marketing mix, and marketing in special
fields. These 13 chapters should
provide students a clear understanding of the tenninology,
techniques, tools, and strategies
for effective 1narketing management and marketing strategy
development.
In addition to revising and updating the text chapters, this
edition contains new content as
well. There are discussions of internal and external secondary
data sources, the use of social
media monitoring, a]ten1ative searcl1 in consumer behavior,
key characteristics of organi z a -
tional buyers, e-procurement, global virtual teams, brand equity,

using distinctive compe-
tencies in new product development, consumer databases,
business-to-business databases,
mobile marketing, online retailing and multichannel marketing,
franchising, the effects of
t11e Internet on pricing, global account 1nanagers, and ]earning
about different cultures.
In the twelfth edition, we altered two of the text elements. The
changes have been well
received by instructors and stt1dents. First, "Marketing
Insights" are included to assist students
as they solve marketing problems, analyze marketing cases, and
develop marketing plans.
Second, we know that our book is often used with case
problems, writing assignments,
and constructing marketing plans. Accordingly, there i s an
"Additional Resources" section
vii
viii Preface
at the end of each chapter. Our purpose is to highlight current
resoLLrces that students can
use in writing assign111ents and oral presentations. The
resources have been selected with

students in mind. Tl1ey include resources accessible to students
at various stages of 111ar-
keting education given the wide spectrum of courses in which
the book is utilized.
NEW FEATURES AND CONTENT CHANGES
Chapter 1: Strategic Planning and The Marketing Management
Process
• Revised basic questions that 1nust be asked when developing a
1nission state1nent.
• Marketing Insight 1-3 now contains five actual mission
statements for firms of varying
sizes and industries. It provides students with a better mix of
alternatives when com-
pleting the exercise in Marketing h1sight 1-4.
• Updated additional resources.
Chapter 2: Marketing Research: Process and Systems for
Decision
Making
• Revised section on secondary data to include both internal and
external sources
• Added new figure "Common Types of Information Available
in a Secondary Data
Search"
• Added a new Marketing Insight, "Social Media Monitoring for
Marketing Insights"

• Updated additional resources
Chapter 3: Consumer Behavior
Updated discussion of consumer and marketer reactions to
recession
• Revised and updated discussion of Alternative Search
Chapter 4: Business, Government, and Institutional Buying
• Revised Marketing Insight on "Key Characteristics of
Organizational Buying Behavior"
• New Marketing Insight, "Organizational Buying on the
Internet: E-Procurement"
• Revised Discussion of "Organizational Needs"
Chapter 5: Market Segmentation
• New Marketing Insight, "Segmenting the Mobile Phone
Market"
Revised and updated discussion of VALS
Chapter 6: Product and Brand Strategy
• Marketing Insight 6-3 now contains the latest information on
the value of the top twenty
brands in the world
• Contains a new section on branding and brand equity
• Revised and updated Marketing Insight 6-6
• Added a new section on global virtual teams
• New key terms and concepts

Preface Ix
Chapter 7: New Product Planning and Development
• New Marketing Insight 7-4 which focuses on utilizing
corporate strengths in the new
product development process. It includes eight firms with
strengths in either technol-
ogy or markets
Chapter 8: Integrated Marketing Communications
• Revised Marketing Insight 8-1 which presents up-to-date
information on the top ten
websites in Brazil, Portugal and South Korea
Revised section on direct marketing as part of the pro1notion
mix
• Revised Marketing Insight 8-6
• New section on direct marketing
• New Marketing Insight 8-7 on the contents of a comprehensive
database included are
both consumer and business-to-business databases
• Added new Key Tem1s and Concepts
Chapter 9: Personal Selling, Relationship Building, and Sales
Management
New Marketing Insight 9-1 wl1ich focuses on what a
salesperson actually does
A new discussion of an increasingly important customer

organization structure, the
global account manager
Added new Key Terms and Concepts
Chapter 10: Distribution Strategy
• Added New Marketing Insight, "Advantages and
Disadvantages of Franchising"
• New section on "Online and Mobile Retailing"
• New "Key Terms and Concepts": online retailing, mobile
retailing, multichannel marketing
Chapter 11: Pricing Strategy
Added a new discussion of the Internet as an external influence
on pricing decisions
• A new Marketing Insight, "Ten Tips for Managing Pricing
Strategy"
Chapter 12: The Marketing of Services
• The chapter has been significantly revised and has been
shortened for this edition
• A new section on the importance of all the elernents of the
marketing mix in the market-
ing of services has been added
Chapter 13: Global Marketing
• Marketing Insight 13-1 has been updated with the latest data
on selected U.S. companies
and their international sales

• The section on cultural misunderstanding as a problem i n
foreign rnarkets has been
replaced with an entirely new section
x Preface
• Marketing Insight 13-3 has been replaced with a new
Marketing Insight which focuses
on ways to lea111 about new cultures
Section 11: Analyzing Marketing Problems and Cases
• New Marketing Insight, "Objectives of Case Analysis"
• Revised and updated discussion of SWOT analysis
Section Ill: Financial Analysis for Marketing Decisions
• Updated dates and additional resources
Section IV: Developing Marketing Plans
• Updated dates and additional resources
STUDENT SUPPORT
Knowing tl1at our book is used for a variety of course levels,
programs, and students, we
have assembled several elements that we believe will support
students for whatever pur-

pose they use our book.
Key Terms and Concepts
New to the previous edition, we decided to add a section of key
terms and concepts at the
conclusion of each chapter. There was mucl1 debate as to
wl1ere they sl1ould be placed in
the book. We decided to place them at the end of the chapter in
which they appear. In this
way, they are more visible to students than as an appendix at the
end of the book. More
than a glossary, it also presents key concepts covered in the
chapter.
Analyzing Marketing Problems and Cases
Section TI presents a very practical and comprehensive
framework for analyzing, prepar-
ing, a.nd presenting case analyses. It includes discussions of
what a case is, preparing for
the class discussion and written analysis, pitfalls to avoid i n
case analysis, and preparing
to do an oral presentation. It has been praised by both
instructors and students.
For courses utilizing marketing problems and cases, w e
encourage students to read this
guide before discussing a problem or case. Tl1us, it could l1ave

been placed at the begin-
ning of the book, but because it is often referred to throughout
the semester, we have
placed it after the text chapters. And for those courses that do
not utilize cases, the book
1nay be used without reference to tl1is section.
Financial Analysis for Marketing Decisions
It is absolutely critical for marketing students to understand.
and appreciate the fact that
the ultimate objectives of marketing are usually expressed in
financial terms. Section ill
enables students to assess a company's financial position. It
presents important financial
calculations that are useful in evaluating the financial position
of a finn and the financial
impact of various decisions and strategies. Included are
discussions of breakeven analysis,
net present value, and ratio analysis.
Developing Marketing Plans
Given the purpose of this book and the needs of users, Section
IV enables students to
develop practical planning skills so they are able to construct a
quality marketing plan for

Preface xi
any product or service. It provides a complete format for
structuring and presenting one,
including specific questions to ask in competitive analysis, the
development of well-stated
objectives, analyzing custo1ners, and implementation and
control. A s with Section II, we
know that this section has become a valuable take-away
resource for many students long
after their course has been completed.
A Value-Added Website
We encourage students to view the student section of tl1e
Online Leaming Center (OLC)
at website www.mhhe.com/peterdonnelly14e, which contains a
number of useful aids for
facilitating learning and supporting student achievement. We
believe you will find i t a
useful resource.
INSTRUCTOR SUPPORT
The Preface has been used as a resotrrce in college courses and
professional development

programs that require an overview of the critical "need-to-
know" aspects of marketing
management and marketing strategy development. It has been
used:
As the primary introductory text at the undergraduate level.
• At both the undergraduate and MBA level, where several
AACSB core curriculum
courses are team-taught as one multidisciplinary 9- to 12-hour
course.
• At the advanced undergraduate and MBA level where it is
used as the content founda-
tion in courses that utilize marketing cases.
• In short courses and executive development programs.
The instructor section of www.mhl1e.com/peterdonne1Jy14e
inc]udes an instructor's
manual and other support material. It includes two expanded
suppletnents. They were
developed in response to instructors' requests. We offer a test
bank of nearly 1,300
multiple-choice, true-false, and brief essay questions. It is
available in both print and
EZ Test Online. We also offer Power Point slides that highlight
key text material. Your
McGraw-Hill representative can also assist in the delivery of

any additiona1 instructor
support materia1.
xii
nowe
Our book i s based on the works of many acade1nic researchers
and marketing practitioners.
We want to thank those individuals who conuibuted tl1eir ideas
to develop the field of m a r -
keting throughout the years. Indeed, our book would not b e
possible without their contri-
butions. We would also like to thank our teachers, colleagues,
and students for their many
contributions to our education. We would also like to publicly
acknowledge those individu-
als who served as reviewers of this and previous editions. We
appreciate their advice and
counsel and have done our best to reflect their insightful
com111ents.
Roger D. Absmire
Sam Houston State University
Anna Andriasova
University of Ma,ylarid University College

Catherine Axinn
Syracuse University
Mike Ballif
University o_f Utah
Andrew Bergstein
Pennsylvania State University
Edward Bond
Bradley University
Donald Brady
Millersville Universitv
Tim Carlson
Judson University
Glenn Chappell
Meridith College
Newell Chiesl
Indiana Stc,te University
Reid P. Claxton
East Caroline, University

Larry Crowson
University of· Central Florida
Mike Dailey
University of Texas, Arlington
Linda M. Delene
Western Michigan University
Gera.rd DiBartolo
Salisbury University
Casey Donoho
North.ern Arizona University
James A. Eckert
Western Mich.igan University
Matthew Elbeck
Troy University Dothan
Karen A. Evans
Herkimer County Community College
R. E. Evans
University of· Oklahoma

Lawrence Feick
University of· Pittsbitrgli
Robert Finney
California State University, Hayward
Stephen Goldberg
Fordham University
David Good
Grand Valley State University
David Griffith
University of Oklahoma
Perry Haan
Tiffin University
Lawrence Hamer
DePaul University
Harry Harmon
Central Missou,ri
Jack Healey
Golden State University

Betty Jean Hebel
Madonncl University
Catherine Holderness
University of North Carolina-Greensboro
JoAnne S. Hooper
Western Carolina University
David Horne
Wayne State University
Nasim Z. Hosein
Northwood University
Nicole Howatt
UCF
Fred Hughes
Fciulkner U,iiversity
AnupamJaju
GMU
Chris Joiner
George Mason University

Benoy Joseph
Cleveland State University
Sol Klein
Northeastern Uriiversity
Robert Brock Lawes
Cha,ninade University of Hc)nolulu.
Eunkyu Lee
Syracuse University
Tina Lowrey
University of Texas at San Antonio
Franklyn Manu
Morgan State Un.iversity
Edward J. Mayo
Western Michigan. University
Edward M. Mazze
University o_f Rhode Island
Donald J. Messmer

College of William & Mary
Albert Milhomme
Texas State Vn.iversity
Chip Miller
Drake University
David L. Moore
LeMoyne College
Johannah Jones Nolan
University of.Alabama, Birmingham
R. Stephen Parker
Southwest Missouri State University
Joan Phillips
Uriiversity of'Notre Dame
Thomas Powers
University o.f Alabama at Birmingham
Debu Purohit
Ditke Un,iversity
John Rayburn

University o_f Ten.nessee
Martha Reeves
Duke
Ga.ry K. Rhoads
Brigh.am Young University
Lee Richardson
University of Baltimore
Henry Rodkin
DePaul University
Ritesh Saini
Gec>rge Mason U11iversity
Matthew H. Sauber
Eastern Michigcin University
Alan Sawyer
University of' FlcJrida
Ronald L. Schill
Brig/iam Young University
Mark Spriggs

University of· St. Tho,nas
Vernon R. Stauble
Cal(fomia State Polytechnic University
David X. Swenson
College of· St. Scholastica
Ann Marie Thompson
Northern. Illin.ois U11iversity
John R. Thompson
Memphis State University
Gordon Urquhart
Cornell College
Sean Valentine
University of· Wyoming
Ana Valenzuela
Baruch College, CUNY
Stacy Vollmers
University of.St. Thomas
Jacquelyn Warwick

Andrews University
Kevin Webb
Drexel Urziversity
Kathleen R. Whitney
Central Michigan University
J.B . Wilkinson
University of Akron
Dale Wilson
Micliigan State University
It is always easy to work with professionals. That is why
working with tl1e profession-
als at McGraw-Hill is always enjoyable for us. Sankha Basu,
publisher, and Jane Mohr,
project manager, support what we do and we are very grateful.
Thank you Heather Darr,
develop1nent editor, and welcome to our team. We also wish to
acknowledge Francois
Ortalo-Magne, dean of the School of Business at the University
of Wisconsin, and David
Blackwell, dean of the Gatton College of Business and
Economics at the University of

Kentucky, who support what we do.
J. Paul Peter
James H. Donnelly, Jr.
SECTION
ESSENTIALS OF MARKETING
MANAGEMENT 1
PART A
INTRODUCTION 3
Chapter
Strategic Planning and the Marketing Man-
agement Process 4
The Marketi11g Concept 4
What Is Marketing? 5
What Is Strategic Planning? 6
Strategic Planning and Marketing Manage,nent 6
The Strategic Planning Process 7
The Complete Strcitegic Plan 16
The Marketing Management Process 16

Situation Analysis· 16
Marketing Planning 19
Implementation and Control of the Marketing Plan 20
Marketing lnforniation Systems and Marketing
Research 21
The Strategic Plan, tl1e Marketing Plan, and
Other Functional Area Plans 21
Marketing's Role in Cross-Functional Strategic
Planning 21
Summary 22
Appendi,
Portfolio Models 27
PARTS
MARKETING INFORMATION,
RESEARCH, AND UNDERSTANDING
THE TARGET MARKET 31
Chapter 2
Marketing Research: Process and Systems
for Decision Making 32

Tl1e Role of Marketing Research 32
The Marketing Research Process 33
xiv
Purpose o,f the Research 33
Plan of· the Research 34
Pe,formance o,f the Research 37
Processing of Researcli Data 39
Preparation of' the Research Report 40
Limitcitions o,f the Reselirc/1 Process 40
Marketing Information Systems 42
Summary 43
Chapter 3
C onsumer Behavior 45
Social Influences on Consumer Decision
Making 46
Culture and Subculture 46
Social Class 47
Re,ference Groups and Fa,nilies 48

Marketing Influences on Consumer Decision
Making 48
Product lnfluences 48
Price Influences 4 8
Promotion Influences 49
Place Influences 4 9
Situational Int1uences on Consumer Decision
Making 51
Psychological Influences on Conswner Decision
Making 51
Product Kno�vledge 51
Product Involvement 52
Consruner Decision Making 52
Need Recognition 53
Alternative Search 54
Alternative Evaluation 55
Purchase Decision 55
Postpurchase Evctluation 56
Summary 58

Chapter 4
Business, G overnment, and Institutional
Buying 60
Categories of Organizational Buyers 60
Prollucers 60
Intermediaries 61
Government Agen.cies 61
Other Institutions 61
The Organizational Buying Process 61
Purchase-Type Influences on Organizational
Buying 62
Straight Rebuy 62
Modi
f
ied Rebuy 62
New Task Purchase 62
Structt1ral Influences on Organizational Buying 63
Purchasing Roles 63
Organization-Specific Factors 64

Purchasing Policies ancl Procedures 65
Behavioral Influences on Organizational Buying 65
Personal Motivations 65
Role Perceptions 66
St.ages in the Organizational Buying
Process 68
Or
<
(?anizational Need 68
Vendor Analysis 68
Purchase Activities 69
Postpurchctse Evaluation 70
Summary 70
Chapter 5
Market Segmentation 72
Delineate the Firm's Current
Situation 72
Detenuine Consumer Needs
and Wants 73
Divide Markets on Relevant Dimensions 73

A Priori versus Post Hoc Segnientation 74
Relevance of Segmentation Diniensions 75
Bases for Segmentation 75
Develop Product Positioning 81
Decide Segmentation Strategy 82
Design Marketing Mix Strategy 84
Summary 84
PARTC
THE MARKETING MIX 85
Chapter 6
Product and Brand Strategy 86
Basic Issues in Product Ma11agement 86
Product Definition 86
Procluct Classification 87
Product Quality and Value 88
Procluct Mix and Product Line 89
Bran.cling and Brand Equity 90
Packaging 96

Product Life Cycle 97
Product Adoption and Diffusion 99
Tl1e Product Audit 100
Deletions 100
Product lmprovenient 101
Organizing for Product Management 10 l
Su1nmary 103
Chapter 7
New Product Planning and
Development 105
New Product Strategy 106
New Product Planning and Development
Process 108
Idea Generation 108
Idea Screening 110
Project Planning 111
Product Develop,n.ent 112
Test Marketing 112
Comniercialization 113

The /1nportance l?f Ti,ne 113
Contents xv
Some Important New Produ.ct Decisions 114
Quality Level 114
Product Features 115
Product Design I 16
Product Safety 116
Causes of New Product Failure 116
Needfor Research 117
Summary 118
Chapter 8
Integrated Marketing Communications 120
Strategic Goals of Marketing
Co1n111unication l 20
Create A ivareness 120
Build Positive Images 120
Identify Prospects 120
Build Channel Relationships 121
Retain Custoniers 121

The Promotion Mix 121
Integrated Marketing Communications 122
Advertising: Planning and Strategy 124
Objectives of Advertising 724
Advertising Decisions 126
The Expenditure Question 126
The Allocation Question 127
Sales Promotion 132
Push versus Pull Marketing 132
Trade Sales Proniotions 133
Consunier Pro,notions 133
What Sales Promotion Can and Can't Do 134
Public Relations 135
Direct Marketing 136
Summary 137
Appendix
Major Federal Agencies Involved in Control
of Advertising 139

xvi Contents
Chapter 9
Personal Selling, Relationship Building,
and Sales Management 140
Importance of Personal Selling 140
The Sales Process 141
Objectives of the Sales Force 141
The Sales Relationship-Buildirig Process 142
People Who Support the Sales Force 146
Managing the Sales and Relationship-Building
Process 147
The Sales Management Task 148
Con.trolling tlie Sales Force 149
Motivating and Compensating Perjorrnance 152
Summary 154
Chapter 10
Distribution Strategy 156
Tl1e Need for Marketing Intermediaries 156
Classification of Marketing Intermediaries and

Fttnctions 156
Channels of Distribution 158
Selecting Channels of Distribution 159
Spec�fic Considerations 159
Managing a Channel of Distribt1tion 162
RelationshiJJ Marketing in Channels 162
Vertical Marketing Systenis 162
Wholesaling 164
Store and Nonstore Retailing 165
Store Retailing 166
Nonstore Retailing 167
Summary 170
Chapter 11
Pricing Strategy 172
Demand Influences on Pricing Decisions 172
Deniographic Factors 172
Psychologiccil Factors 172
Price Elasticity 174

Supply Influences on Pricing Decisions 174
Pricing Objectives 174
Cost Considerations in Pricing 174
Product Considerations in Pricing 176
Environmental Influences on Pricing
Decisions 177
The Internet 177
Conipetition 177
Government Regulations 178
A General Pricing Model 178
Set Pricing Objectives 179
Evaluate Product-Price Relationships 179
Estiniate Costs and Otlier Price Liniitations 180
Analyze Proftt Potentictl 181
Set Initial Price Structure I 81
Change Price as Needecl 181
Summary 181
PARTD

MARKETING IN SPECIAL FIELDS 183
Chapter 12
The Marketing of Services 184
Important Characteristics of Services 186
Intangibility 186
Inseparability 187
Perish.ability and Fluctuating De,nand 188
Client Relationship 188
Customer Effort 189
Un(formity 190
Providing Quality Services 190
Custo1n.er Sati.�faction, Measurement 192
Th.e Importance of Internal Mcirketing 192
Overcoming the Obstacles in Service Marketing 194
Liniited View o,f Marketing 194
Li,nited Co,npetitiori 194
Noncreative Management 195
No Obsolescence 195

Implications for Service Marketers 196
Swnmary 197
Chapter 13
Global Marketing 199
The Competitive Advantage of Nations 200
Organizing for Global Marketi11g 201
Problems with Eriterin,g Foreign Markets 201
Organizing the Multinational Company 204
Programming for Global Marketing 206
Global Marketing Research 206
Global Product Strategy 209
Global Distribution Strategy 209
Global Pricing Strategy 210
Global Advertising and Sales Promotion
Strategy 210
Entry and Growth Strategies for Global Marketing 211
Summary 214

SEC ION II
ANALYZING MARKETING PROBLEMS
AND CASES 215
A Case Analysis Framework 216
1. Analyze and Record the Current Situation 217
2. Analyze and Record Problems and Their Core
Elements 221
3. Formulate, Evaluate, and Record Alternative Courses
of.Action 222
4. Select and Record the Chosen Alternative and l1nple-
mentation Details 223
Pitfalls to A void in Case Analysis 223
Communicating Case Analyses 226
The Written Report 226
The Oral Presentation 228
Su1nmary 228
SECTION Ill
FINANCIAL ANAL Y.SIS FOR MARKET-

ING DECISIONS 229
Financial Analysis 230
Breakeven Analysis 230
Net Present Value Analysis 232
Ratio An.alysis 234
Summary 238
Contents •vii
SECTION IV
DEVELOPING MARKETING PLANS 239
A Marketing Plan Fra1nework 240
Title Page 241
Executive Sunimary 241
T,1ble of Contents 242
Introduction 242
Situational A,ialysis 242
Marketing Planning 242
Implementation and Control o_f the Marketing Plan 244
Sunim.ary 246

Appendix-Financilll Analysis 246
References 249
Summary 249
Chapter Notes 251
Index 256
Es ent1als
of Marketing
Management
Section
Part
Introduction
I Strategic Planning and the Marketing Management Process

Chapter
• •
ann1n
ana emen rocess
The purpose of this introdL1ctory chapter is to present the
marketing management process
and outline what 111arketing managers 111ust manage if tl1ey
are to be effective. In doing so,
it will also present a framework around which the remaining
chapters are organized. Our
first task is to review the organizational philosophy known as
the marketing concept, since
it underlies much of the thinking presented in this book. The
remainder of this chapter will
:focus on the process of strategic planning and its relationship
to tl1e process of marketing
planning.
THE MARKETING CONCEPT
4
Simply stated, the marketing concept means that an organization
shoitld seek to make a

profit by serving the needs of· customer groups. The concept is
very straightforward and
has a great deal of commonsense validity. Perhaps t11is is wl1y
it is often misunderstood,
forgotten, or overlooked.
The purpose of the marketing concept is to rivet the attention of
marketing ma.nagers on
serving broad classes of customer needs (customer orientation),
rather than on the firm's
current products (prodLtction orientation) or on devising
methods to attract custo1ners to
cu1Tent products (selling orientation). Thus, effective
marketing starts with the recogni-
tion of customer needs and then works backward to devise
products and services t o satisfy
these needs. In this way, marketing managers can satisfy
customers more efficiently i n
the present and anticipate cl1anges in customer needs more
accurately in the future. This
111eans that organizations should focus 011 building long-tenn
customer relationships in
which tl1e i11itial sale is viewed as a beginning step in the
process, not as an end goal. As a
result, the custorner will be more satisfied and the firm will be
more profitable.

The principal task of the marketing function operating under the
marketing concept is
11ot to 1nanipL1late custo1ners to do . what suits the interests
of the firm, but rather to :find
effective and efficient meai1s of making tl1e business do what
suits tl1e interests of custom-
ers. This is not to say that all firms practice marketing in this
way. Clearly, many firms still
emphasize only production and sales. However, effective
marketing, as defined in this text,
requires that consumer needs come first in organizational
decision making.
.MARKETING INSIGHT Some Gµideli_nes_ for
lrr1pl�n1enti17g the
·Mara�etimg Comcegt· d1-- �,
1 . Create customer focus throughout the business.
2. Listen to the customer.
3. Define and nurture your distinctive competence, that is, what
your organization does
well, better than competitors.
4. Define marketing as market intelligence.
5. Target customers precisely.

6. Manage for profitability, not sales volume.
7. Make customer value the guiding star.
8. Let customers define quality.
9. Measure and manage customer expectations.
10. Build customer relationships and loyalty.
11. Define the business as a service business.
12. Commit to continuous improvement and innovation.
13. Manage the culture of your organization along with strategy
and structure.
14. Grow with strategic partners and alliances.
15. Destroy marketing bureaucracy.
Source: For a very early discussion of the marketing concept,
see Robert L. King, "The Marketing Concept:
Fact or Intelligent Platitude," The Marketing Concept in Action,
Proceedings of the 47th National Conference
(Chicago: American Marketing Association, 1964), p. 657. Also
see Frederick E. Webster Jr., "Defining the
New Marketing Concept," Marketing Management 2, no. 4
(1994) pp. 22-31; William 0. Bearden,
Thomas N. Ingram, and Raymond W. LaForge, Marketing:
Principles and Perspectives, 5th ed. (Burr Ridge,
IL: McGraw-Hill/Irwin, 2007), p. 9; and William D. Perreault
Jr., Joseph P. Cannon, and E. Jerome Mccarthey,
Basic Marketing: A Managerial Approach, 19th ed. (Burr Ridge,
IL: McGraw-Hill Education, 2014), pp. 19-26.

One qualification to this statement deals with the question of a
conflict between con-
sumer wants and societal needs and wants. For example, if
society deems clean air and
water as necessary for survival, this need may well take
precedence over a consumer's
want for goods and services that pollute the environment.
WHAT IS MARKETING?
Everyone reading this book l1as been a customer for most of lus
or l1er life. Last evening you
stopped at a local supermarket to graze at the salad bar, pick up
some bottled water and a bag
of Fritos coin clups. Wlule you were there, you snapped a $1.00
coupon for a new flavor salad
dressing out of a dispenser and tasted som.e new breakfast
potatoes being cooked in the back
of the store. As you sat down at home to eat your salad, you
answered the phone and so1neone
suggested that you need to have your carpets cleaned. Later on
in the evening you saw TV
commercials for tires, soft drinks, athletic shoes, and the
dangers of smoking and drinking
during pregnancy. Today when you enrolled in a marketing
course, you found tl1at tl1e instruc-
tor has decided that you 1nust purchase this book. A friend has
already purchased the book on
the Internet. All of tl1ese activities involve marketing. And
each of us knows something about
marketing because it has been a part of our life since we had our
first dollar to spend.
Since we are all involved in marketing, it may seem strange
tl1at one of the persistent

problems in t11e field has been its definition. The American
Marketing Association defines
marketing as "the activity, set of institutions, and processes for
creating, co1nmunicating,
delivering, and exchanging offerings that have value for
customers, clients, partners, and
society at large.''1 This definition takes into account all parties
involved in the marketing
effort: members of tl1e prodt1cing organization, resellers of
goods and services, and custom-
ers or clients. While the broadness of the definition allows the
inclusion of nonbusiness
5
6 Part A Introduction
FIGURE 1.1
Major Types of
Marketing
Type Description Example
Product Marketing designed to create exchange Strategies to
sell
for tangible products. Gateway computers.
Service Marketing designed to create exchanges Strategies by
Allstate
for intangible products. to sell insurance.
Person Marketing designed to create favorable Strategies to

elect
actions toward persons. a political candidate.
Place Marketing designed to attract people to Strategies to get
places. people to vacation
in national or state
parks.
Cause Marketing designed to create support Strategies to get
for ideas, causes, or issues or to get pregnant women not
people to change undesirable to drink alcohol.
behaviors.
Organization Marketing designed to attract donors, Strategies
designed to
members, participants, or attract blood donors.
volunteers.
exchange processes, the primary emphasis in this text is on
marketing in the business environ-
1nent. However, this emphasis is not meant to imply that
marketing concepts, principles, and
techniques cannot be fruitfully en1ployed in other areas of
exchange as is clearly illustrated i11
Figure 1.1.
WHAT IS STRATEGIC Pl.ANNING?
Before a production manager, marketing manager, and personnel
manager can develop plans
for their individual depa1t1nents, some larger plan or blueprint
for the entire organization

should exist. Otherwise, on what would the individual
departmental plans be based?
In other words, there is a larger context for planning activities.
Let us assun1e that we are
dealing with a large business organization that has several
business divisions and several
prod11ct lines within each division (e.g., General Electric,
Altria). Before individual divi-
sions or departments can implement any marketing planning, a
plan has to be developed for
the entire organization.2 Tl1is 1neans that senior 1n.anagers
must look toward the future and
evaluate their ability to shape their orga1lization' s destiny in
the years and decades to come.
The output of this process is objectives and strategies designed
to give the organization a
chance to compete effectively in the future. The objectives and
strategies established at the
top level provide the context for planning in each of tl1e
divisions and departments b y divi-
sional and departmental n1anagers.
Strategic Planning and Marketing Management
Some of the most successful business organizations are here
today because many years
ago tl1ey offered the right product at the right time to a rapidly

growing market. Tl1e
same can also be said for nonprofit and governmental
organizations. Many of the criti-
cal decisions of the past were made without the benefit of
strategic thinking or planning.
Whether these decisions were based on wisdom or were just
luck is not important; they
worked for these organizations. However, a worse fate befell
countless other organiza-
tions. More than three-quarters of the 100 largest U.S.
corporations of 70 years ago have
fallen from the list. These corporations at one time donlinated
their markets, controlled
vast resources, and had the best-trained workers. In the end,
they all made the same criti-
cal mistake. Their managements failed to recogruze tl1at
bttsiness strategies need to reflect
1 . It costs a great deal more to acquire a new customer than to
keep an old one.
2. Loyal customers buy more from your firm over time.
3. The longer you keep a customer, the more profitable they
become over time.
4. It costs less to service loyal customers than new customers.

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