First, the internal and external information required for formulating marketing strategy was identified, and the methods for analyzing information were examined. Second, using the available information, the formulation of objectives was covered. This article takes us to the next step toward strategy formulation by establishing a framework for it. Our principal concern in this article is with business unit strategy.

Among several inputs required to formulate business unit strategy, one basic input is the strategic perspective of different products/markets that constitute the business unit. Therefore, as a first step toward formulating business unit strategy, a scheme for developing product/market strategies is introduced. Bringing product/market strategies within a framework of business unit strategy formulation emphasizes the importance of inputs from both the top down and the bottom up. As a matter of fact, it can be said that strategic decisions in a diversified company are best made at three different levels: jointly by product/ market managers and the SBU manager when questions of implementation are involved, jointly by the CEO and the SBU manager when formulation of strategy is the concern, and by the CEO when the mission of the business is at issue.

CONCEPTUAL SCHEME

As delineated earlier, marketing strategy is based on three key factors: corporation, customer, and competition. The interaction among these three factors is rather complex. For example, the corporation factor impacts marketing strategy formulation through (a) business unit mission and its goals and objectives, (b) perspectives of strengths and weaknesses in different functional areas of the business at different levels, and (c) perspectives of different products/markets that constitute the business unit. Competition affects the business unit mission as well as the measurement of strengths and weaknesses. The customer factor is omnipresent, affecting the formation of goals and objectives to support the business unit mission and directly affecting marketing strategy.

PRODUCT/MARKET STRATEGY

The following step-by-step procedure is used for formulating product/market strategy:

1. Start with the present business. Predict what the momentum of the business will be over the planning period if no significant changes are made in the policies or methods of operation. The prediction should be based on historical performance.

2. Forecast what will happen to the environment over the planning period. This forecast will include overall marketing environment and product/market environment.

3. Modify the prediction in Step 1 in light of forecasted shifts in the environment in Step 2.

4. Stop if predicted performance is fully satisfactory vis-à-vis objectives. Continue if the prediction is not fully satisfying.

5. Appraise the significant strengths and weaknesses of the business in comparison with those of important competitors. This appraisal should include any factors that may become important both in marketing (market, product, price, promotion, and distribution) and in other functional areas (finance, research and development, costs, organization, morale, reputation, management depth, etc.).

6. Evaluate the differences between your marketing strategies and those of your major competitors.

7. Undertake an analysis to discover some variation in marketing strategy that would produce a more favorable relationship in your competitive posture in the future.

8. Evaluate the proposed alternate strategy in terms of possible risks, competitive response, and potential payout.

9. Stop if the alternate strategy appears satisfactory in terms of objectives.

10. Broaden the definition of the present business and repeat Steps 7, 8, and 9 if there is still a gap between the objective and the alternative strategy. Here, redefining the business means looking at other products that can be supplied to a market that is known and understood. Sometimes this means supplying existing products to a different market. It may also mean applying technical or financial abilities to new products and new markets simultaneously.

11. The process of broadening the definition of the business to provide a wider horizon can be continued until one of the following occurs:

a. The knowledge of the new area becomes so thin that a choice of the sector to be studied is determined by intuition or by obviously inadequate judgment.

b. The cost of studying the new area becomes prohibitively expensive because of lack of related experience.

c. It becomes clear that the prospects of finding a competitive opportunity are remote.

12. Lower the objectives if the existing business is not satisfactory and if broadening the definition of the business offers unsatisfactory prospects.

There are three tasks involved in this strategy procedure: information analysis, strategy formulation, and implementation. At the product/market level, these tasks are performed by either the product/market manager or an SBU executive. In practice, analysis and implementation are usually handled entirely by the product/market manager; strategy formulation is done jointly by the product/ market manager and the SBU executive. Essentially, all firms have some kind of strategy and plans to carry on their operations. In the past, both plans and strategy were made intuitively. However, the increasing pace of change is forcing businesses to make their strategies explicit and often to change them. Strategy per se is getting more and more attention. Any approach to strategy formulation leads to a conflict between objectives and capabilities.

Attempting the impossible is not a good strategy; it is just a waste of resources. On the other hand, setting inadequate objectives is obviously self-defeating. Setting the proper objectives depends upon prejudgment of the potential success of the strategy; however, you cannot determine the strategy until you know the objectives. Strategy development is a reiterative process requiring art as well as science. This dilemma may explain why many strategies are intuitively made rather than logically and tightly reasoned. But there are concepts that can be usefully applied in approximating opportunities and in speeding up the process of strategy development. The above procedure is designed not only to analyze information systematically but also to formulate or change strategy in an explicit fashion and implement it.

Measuring the Momentum

The first phase in developing product/market plans is to predict the future state of affairs, assuming that the environment and the strategy remain the same. This future state of affairs may be called momentum. If the momentum projects future implied by the momentum may not be the desired future. The momentum may be predicted using modeling, forecasting, and simulation techniques. Let us describe how these techniques were applied at a bank. This bank grew by opening two to three new branches per year in its trading area. The measurement of momentum consisted of projecting income statement and balance sheet figures for new branches and merging them with the projected income statement and balance sheet of the original bank. A model was constructed to project the bank’s future performance. The first step in construction of the model was the prediction of Bijt, that is, balances for an account of type i in area j and in time period t. Account types included checking, savings, and certificates of deposit; areas were chosen to coincide with counties in the state. County areas were desirable because most data at the state level were available by county and because current branching areas were defined by counties. Balances were projected using multiple linear regression. County per capita income and rate of population growth were found to be important variables for predicting total checking account balances, and these variables, along with the last period’s savings balance, were shown to be important in describing savings account balances. The next step was to predict Mjt (i.e., the market share of the bank being considered in area j and time period t). This was done using a combination of data of past performances and managerial judgment.

For the existing operations of the bank, past data were utilized to produce a 10-year set of deposit balances. These deposit projections were added to those of new branches. Turning to other figures, certain line items on the income statement could be attributed directly to checking accounts, others to savings accounts. The remaining figures were related to the total of account balances. For this model, ratios of income and expense items to appropriate deposit balances were predicted by a least-squares regression on historical data. This was not considered the most satisfactory method because some changing patterns of incurring income and expenses were not taken into account. However, more sophisticated forecasting techniques, such as exponential smoothing and Box- Jenkins, were rejected because of the potential management misunderstanding they could generate. Once the ratio matrix was developed, income statements could be generated by simply multiplying the ratios by the proper account balance projection to arrive at the 10-year projection for income statement line items. These income statements, in conjunction with the bank’s policy on dividends and capitalization, were then used to generate a 10-year balance sheet projection. The net results were presented to the bank’s senior executive committee to be reviewed and modified. After incorporating executive judgment, final 10-year income statements and balance sheets were obtained, indicating the bank’s momentum into the future.

Gap Analysis

In the banking example, momentum was extrapolated from historical data. Little attention was given to either internal or external environmental considerations in developing the momentum. However, for a realistic projection of future outcomes, careful analysis of the overall marketing environment as well as the product/ market environment is necessary. As a part of gap analysis, therefore, the momentum should be examined and adjusted with reference to environmental assumptions. The industry, the market, and the competitive environment should be analyzed to identify important threats and opportunities. This analysis should be combined with a careful evaluation of product/market competitive strengths and weaknesses. On the basis of this information, the momentum should be evaluated and refined. For example, in the midst of continued concern about recession in 1998, the chairman of the Federal Reserve System, Alan Greenspan, decided to increase the money supply. To do so, the prime and short-term interest rates were decreased. For instance, the rate of interest on many 30-month certificates of deposit went down from 5.25 percent in 1997 to 4.75 percent in 1998. This increase led many depositors to choose other forms of investment over certificates of deposit. In the illustration discussed in the last section, the impact of such a decline in interest rates was not considered in arriving at the momentum (i.e., in making forecasts of deposit balances). As a part of gap analysis, this shift in the environment would be duly taken into account and the momentum would be adequately adjusted. The “new” momentum should then be measured against objectives to see if there is a gap between expectation and potential realization. More often than not, there will be a gap between desired objectives and what the projected momentum, as revised with reference to environmental assumptions, can deliver. How this gap may be filled is discussed next.

Finding the Gap

The gap must be filled to bring planned results as close to objectives as possible. Essentially, gap filling amounts to reformulating product/market strategy. A three-step procedure may be used for examining current strategy and coming up with a new one to fill the gap. These steps are issue assessment, identification of key variables, and strategy selection. The experience of some companies suggests that gap filling should be assigned to a multifunctional team. Nonmarketing people often provide fresh inputs; their objectivity and healthy skepticism are generally of great help in sharpening focus and in maintaining businesswide perspectives. The process the team follows should be carefully structured and the analytical work punctuated with regular review meetings to synthesize findings, check progress, and refocus work when desirable. The SBU staff should be deeply involved in the evaluation and approval of the strategies.

Issue Assessment.

The primary purpose of this step is to raise issues about the status quo to evaluate the business’s competitive standing in view of present and expected market conditions. To begin, a team would typically work through a series of general questions about the industry to identify those few issues that will most crucially affect the future of the business. The following questions might be included: How mature is the product/market segment under review? What new avenues of market growth are conceivable? Is the industry becoming more cyclical? Are competitive factors changing (e.g., Is product line elaboration declining and cost control gaining in importance?)? Is our industry as a whole likely to be hurt by continuing inflation? Are new regulatory restrictions pending? Next, the company should evaluate its own competitive position, for which the following questions may be raised: How mature is our product line? How do our products perform compared with those of leading competitors? How does our marketing capability compare? What about our cost position? What are our customers’ most common criticisms? Where are we most vulnerable to competitors? How strong are we in our distribution channels? How productive is our technology? How good is our record in new product introduction? Some critical issues are immediately apparent in many companies.

For example, a company in a highly concentrated industry might find it difficult to hold on to its market share if a stronger, larger competitor were to launch a new lowpriced product with intensive promotional support. Also, in a capital-intensive industry, the cyclical pattern and possible pressures on pricing are usually critical. If a product’s transport costs are high, preemptive investments in regional manufacturing facilities may be desirable. Other important issues may be concerned with threats of backward integration by customers or forward integration by suppliers, technological upset, new regulatory action, or the entry of foreign competition into the home market. Most strategy teams supplement this brainstorming exercise with certain basic analyses that often lead to fresh insights and a more focused list of critical business issues. Three such issues that may be mentioned here are profit economics analysis, market segmentation analysis, and competitor profiling. Profit Economics Analysis. Profit economics analysis indicates how product costs are physically generated and where economic leverage lies. The contribution of the product to fixed costs and profits may be calculated by classifying the elements of cost as fixed, variable, or semivariable and by subtracting variable cost from product price to yield contribution per item sold. It is then possible to test the sensitivity of profits to possible variations in volume, price, and cost elements. Similar computations may be made for manufacturing facilities, distribution channels, and customers.

Market Segmentation Analysis. Market segmentation analysis shows alternate methods of segmentation and whether there are any segments not being properly cultivated. Once the appropriate segment is determined, efforts should be made to project the determinants of demand (including cyclical factors and any constraints on market size or growth rate) and to explain pricing patterns, relative market shares, and other determinants of profitability.

Competitor Profiling. Profiling competitors may involve examining their sales literature, talking with experts or representatives of industry associations, and interviewing shared customers and any known former employees of competitors. If more information is needed, the team may acquire and analyze competing products and perhaps even arrange to have competitors interviewed by a third party. With these data, competitors may be compared in terms of product features and performance, pricing, likely product costs and profitability, marketing and service efforts, manufacturing facilities and efficiency, and technology and product development capabilities. Finally, each competitor’s basic strategy may be inferred from these comparisons.