Strategy development is by no means an easy job. Not only must decision makers review a variety of inside factors, they must also incorporate the impact of environmental changes in order to design viable strategies. Strategists have become increasingly aware that the old way of “muddling through” is not adequate when confronted by the complexities involved in designing a future for a corporation. Economic uncertainty, leveling off of productivity, international competition, and environmental problems pose new challenges with which corporations must cope when planning their strategies. There is, therefore, a need for systematic procedures for formulating strategy. This article discusses selected tools and models that serve as aids in strategy development. A model may be defined as an instrument that serves as an aid in searching, screening, analyzing, selecting, and implementing a course of action. Because marketing strategy interfaces with and affects the perspectives of an entire corporation, the tools and models of the entire science of management can be considered relevant here. In this article, however, we deal with eight models that exhibit direct application to marketing strategies: the experience curve concept, PIMS model, value-based planning, game theory, the delphi technique, trendimpact analysis, cross-impact analysis, and scenario building. In addition, a variety of new tools that are commonly used by strategic planners are summarily listed.

EXPERIENCE CURVE CONCEPT Experience shows that practice makes perfect. It is common knowledge that beginners are slow and clumsy and that with practice they generally improve to the point where they reach their own permanent level of skill. Anyone with business experience knows that the initial period of a new venture or expansion into a new area is frequently not immediately profitable. Many factors, such as making a product name known to potential customers, are often cited as reasons for this nonprofitability. In brief, even the most unsophisticated businessperson acknowledges that experience and learning lead to improvement. Unfortunately, the significance of experience is realized only in abstract terms. For example, managers in a new and unprofitable situation tend to think of experience in vague terms without ever analyzing it in terms of cost. This statement applies to all functions of a business where cost improvements are commonly sought except for production management. As growth continues, we anticipate greater efficiency and more productive output. But how much improvement can one reasonably expect? Generally, management makes an arbitrary decision to ascertain what level of output reflects the optimum level. Obviously, in the great majority of situations, this decision is primarily based on pure conjecture. Ideally, however, one should be able to use historical data to predict cost/volume relationships and learning patterns. Many companies have, in fact, developed their own learning curves but only in the areas of production or manufacturing where tangible data are readily available and most variables can be quantified. Several years ago the Boston Consulting Group observed that the concept of experience is not limited to production alone. The experience curve concept embraces almost all cost areas of business. Unlike the well-known “learning curve” and “progress function,” the experience curve effect is observed to encompass all costs capital, administrative, research and marketing and to have transferred impact from technological displacements and product evolution.

Historical Perspective The experience effect was first observed in the aircraft industry. Because the expense incurred in building the first unit is exceptionally high in this industry, any reduction in the cost of manufacturing succeeding units is readily apparent and becomes extremely pertinent in any management decision regarding future production. For example, it has been observed that an “80 percent air frame curve” could be developed for the manufacture of airplanes. This curve depicts a 20 percent improvement every time production doubles (i.e., to produce the fourth unit requires 80 percent of the time needed to produce the second unit, and so on). Studies of the aircraft industry suggest that this rate of improvement seems to prevail consistently over the range of production under study; hence, the label experience is applied to the curve.

Implications Although the significance of the experience curve concept is corporate-wide, it bears most heavily on the setting of marketing objectives and the pricing decision. As already mentioned, according to the experience curve concept, all costs go down as experience increases. Thus, if a company acquired a higher market share, its costs would decline, enabling it to reduce prices. The lowering of prices would enable the company to acquire a still higher market share. This process is unending as long as the market continues to grow. But as a matter of strategy, while aiming at a dominant position in the industry, the company may be wise to stop short of raising the eyebrows of the Antitrust Division of the U.S. Department of Justice. During the growth phase, a company keeps making the desired level of profit, but in order to provide for its growth, a company needs to reinvest profits. In fact, further resources might need to be diverted from elsewhere to support such growth. Once the growth comes to an end, the product makes available huge cash throw-offs that can be invested in a new product. The Boston Consulting Group claims that, in the case of a second product, the accumulated experience of the first product should provide an extra advantage to the firm in reducing costs. However, experience is transferable only imperfectly. There is a transfer effect between identical products in different locations, but the transfer effect between different products occurs only if the products are somewhat the same (i.e., in the same family). This is true, for instance, in the case of the marketing cost component of two products distributed through the same trade channel. Even in this case, however, the loss of buyer “franchise” can result in some lack of experience transferability. For example, conventional wisdom holds that market share drives profitability. Certainly, in some industries, such as chemicals, paper, and steel, market share and profitability are inextricably linked. But the profitability of premium brands brands that sell for 25% to 30% more than private-label brands in 40 categories of consumer goods, the market share alone did not drive profitability. Instead, both market share and the nature of the category, or product market, in which the brand competes, drive a brand’s profitability. Abrand’s relative market share has a different impact on profitability depending on whether the overall category is dominated by premium brands or by value brands. If a category is composed largely of premium brands, then most of the brands in the category are or should be quite profitable. If the category is composed mostly of value and private-label brands, then returns will be lower across the board. To summarize, the experience curve concept leads to the conclusion that all producers must achieve and maintain the full cost-reduction potential of their experience gains if they hope to survive.

Application to Marketing The application of the experience curve concept to marketing requires sorting out various marketing costs and projecting their behavior for different sales volumes. It is hoped that the analyses will show a close relationship between increases in cumulative sales volume and declines in costs. The widening gap between volume and costs establishes the company’s flexibility in cutting prices in order to gain higher market share. Declines in costs are logical and occur for reasons such as the following:

1. Economies of scale (e.g., lower advertising media costs).

2. Increase in efficiency across the board (e.g., ability of salespersons to reduce time per call).

3. Technological advances.

Conceivably, four different techniques could be used to project costs at different levels of volume: regression, simulation, analogy, and intuition. Because historical information on growing products may be lacking, the regression technique may not work. Simulation is a possibility, but it continues to be rarely practiced because it is strenuous. Drawing an analogy between the subject product and the one that has matured perhaps provides the most feasible means of projecting various marketing costs as a function of cumulative sales. But analogy alone may not suffice. As with any other managerial decision, analogy may need to be combined with intuition. The cost characteristics of experience curves can be observed in all types of costs: labor costs, advertising costs, overhead costs, distribution costs, development costs, or manufacturing costs. Thus, marketing costs as well as those for production, research and development, accounting, service, etc., should be combined to see how total cost varies with volume. Further, total costs over different ranges of volume should be projected while considering the company’s ability to finance an increased volume of business, to undertake an increased level of risk, and to maintain cordial relations with the Antitrust Division. Each element of cost included in total cost may have a different slope on a graph. The aggregation of these elements does not necessarily produce a straight line on logarithmic coordinates. Thus, the relationship between cost and volume is necessarily an approximation of a trend line. Also, the cost derivatives of the curve are not based on accounting costs but on accumulated cash input divided by accumulated end-product output.

The cost decline of the experience curve is the rate of change in that ratio. Management should establish a market share objective that projects well into the future. Estimates should be made of the timing of price cuts in order to achieve designated market share. If at any time a competitor happens to challenge a firm’s market share position, the firm should go all out to protect its market share and never surrender it without an awareness of its value. Needless to say, the perspective of the entire corporation must change if the gains expected from a particular market share strategy are to become reality. Thus, proper coordination among different functions becomes essential for the timely implementation of related tasks. Although the experience effect is independent of the life cycle, of growth rate, and of initial market share, as a matter of strategy it is safer to base one’s actions on experience when the following conditions are operating: (a) the product is in the early stages of growth in its life cycle, (b) no one competitor holds a dominant position in the market, and (c) the product is not amenable to nonprice competition (e.g., emotional appeals, packaging). Because the concept demands undertaking a big offensive in a battle that might last many years, a well-drawn long-range plan should be in existence. Top management should be capable of undertaking risks and going through the initial period of fast activity involved in sudden moves to enlarge the company’s operations; the company should also have enough resources to support the enlargement of operations. The experience effect has been widely accepted as a basis for strategy in a number of industries, the aircraft, petroleum, consumer electronics, and a variety of durable and maintenance-related industries among them. The application of this concept to marketing has been minimal for the following reasons:

      

1.  Skepticism that improvement can continue.
      
2.  Difficulty with the exact quantification of different relationships in  marketing.
      
3.  Inability to recognize experience patterns even though they are already  occurring.
      
4.  Lack of awareness that the improvement pattern can be subjectively approximated
   and that the concept can apply  to groups of employees as well as to individual
   performance across the board in  different functions of the business.
      
5.  Inability to predict the effect of future technological advances, which can  badly
   distort any historical data.
      
6.  Accounting practices that may make it difficult to segregate costs adequately.
   Despite these obstacles, the  concept adds new importance to the market share
   strategy.