A Preface to Marketing Management

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A Preface to Marketing Management

Twelfth Edition

J. Paul Peter University of Wisconsin–Madison

James H. Donnelly, Jr. Gatton College of Business and Economics University of Kentucky

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A PREFACE TO MARKETING MANAGEMENT, TWELFTH EDITION

Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Previous editions © 2008, 2006, and 2003. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-0-07-352996-7 MHID 0-07-352996-6

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Library of Congress Cataloging-in-Publication Data

Peter, J. Paul. A preface to marketing management / J. Paul Peter, James H. Donnelly, Jr.–Twelfth ed. p. cm.

Includes bibliographical references and index. ISBN 978-0-07-352996-7 (alk. paper) 1. Marketing–Management. I. Donnelly, James H. II. Title. HF5415.13.P388 2010 658.8–dc22

2009043316

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a Web site does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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To Rose and Angie J. Paul Peter

To Gayla Jim Donnelly

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About the Authors 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, he 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 the Journal of Marketing, the Journal of Marketing Research, the Journal of Consumer Research, the Journal of Retailing, and the Academy of Management Journal, 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 Churchill Award for Lifetime 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 twelfth edition; Marketing Management: Knowledge and Skills, nineth edition; Consumer Behavior and Marketing Strategy, nineth edition; Strategic Management: Concepts and Applications, third edition; and Marketing: Creating Value for Customers, second edition. He is one of the most cited authors in the marketing literature.

Professor Peter has served on the review boards of the Journal of Marketing, Journal of Marketing Research, Journal of Consumer Research, and Journal of Business Research and was measurement editor for JMR and professional publications editor for the 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 and Economics 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 business 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 in the Journal of Marketing Research, Journal of Marketing, Journal of Retailing, Administrative Science Quarterly, Academy of Manage- ment Journal, Journal of Applied Psychology, Personnel Psychology, Journal of Business Research, and Operations Research among others. He has served on the editorial review board of the Journal of Marketing. He is 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 he has served on the board of directors of the Institute of Certified Bankers and the ABA’s Marketing Network. He has also served as academic dean of the ABA’s School of Bank Marketing and Management.

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Preface NOTE FROM THE AUTHORS

The original purpose of A Preface To Marketing Management—to deliver a clear and con- cise presentation of the basic principles of marketing—is as relevant today as it was in ear- lier editions. To us this means emphasizing quality content and avoiding excess verbiage, pictures, and lists. We think we have succeeded in doing so since a reviewer called our book “pound for pound the best introductory marketing text available.”

We introduce the 12th edition with a sense of accomplishment knowing that our book and its eight foreign translations have been used throughout the world whenever courses require an overview of the critical aspects of marketing management. Consequently, the book has been used successfully in a wide variety of different course settings and is the best selling book of its kind. We believe it has endured because we continuously fine tune and update it to ensure that it meets the current and evolving needs of both students and instructors. Because marketing is about figuring out how to do a superior job of satisfying customers, we simply seek to practice what we preach. We refer to out book as the Preface. Welcome to this edition which is organized into four sections.

Section I. Essentials of Marketing Management This section consists of 13 chapters that present the essentials of marketing management. Our objective is to present the “must know” content of the field useful in analyzing mar- keting problems and cases and developing marketing plans. It is divided into four sections that emphasize introducing the field, understanding target markets, understanding market- ing mix variables, and marketing in special fields. Careful study of this section should give students a clear understanding of the terminology, techniques, tools, and strategies used in effective marketing management and marketing strategy development.

Section II. Analyzing Marketing Problems and Cases This section has been widely praised as the best presentation available on the topic. In fact, it has found its way to other areas of many campuses where it is used by students in fields where case problems are used but which are unrelated to the field of marketing. It presents a comprehensive framework for analyzing, preparing, and presenting case analyses.

This section could have been placed at the beginning of the book because it is designed to be read at the start of a course using cases. However, because it is referred to throughout the semester, we placed it after the text chapters. Also, for those courses that do not utilize cases, the book may be used without reference to this section.

Section III. Financial Analysis for Marketing Decisions It is important for marketing students to appreciate that the ultimate objectives of market- ing are usually expressed in financial terms. With this in mind, this section presents impor- tant financial calculations that will be useful in evaluating the financial position of a firm and the financial impact of various marketing decisions and strategies.

Section IV. Developing Marketing Plans In keeping with the concept of our book and the needs of its users, this section helps read- ers develop practical planning skills. It contains an approach to developing a marketing plan by providing a general format for structuring and presenting one.

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THE 12TH EDITION OF THE PREFACE

The content of this book is continuously revised and updated based on extensive feed- back from students and faculty members as well as our own intuitions and judgments. Whether a topic is fundamental or emerging we try to bring innovative content and ele- ments to the book. For example, in this and the previous edition we have added new or expanded discussions of the major types of marketing, branding, marketing’s role in cross-functional strategic planning, the most current psychographic and geodemographic segmentation approaches, organizing the sales force, relationship marketing in service organizations, the difference between customers and clients in service organizations, multichannel marketing, and a new section on Porter’s diamond model of national com- petitive advantage. We have also changed the title and added content to chapter 6, “Prod- uct and Brand Strategy” to better reflect current views of these topics.

We have altered two important elements in this edition. “Marketing Insights” replace our previous “Marketing Highlights” feature. This is more than a simple name change. It was done to more accurately reflect their purpose of helping students solve marketing problems, analyze marketing cases, and develop marketing plans. More than 20 Market- ing Insights have been added to this edition.

We have also added an “Additional Resources” section to the end of each chapter. Previously, each chapter ended with a selection of additional readings. This change is designed to highlight our focus on current resources which students can utilize in solv- ing marketing problems, analyzing marketing cases, and developing marketing plans, as well as assist in writing projects and case presentations. Each resource has been selected with prospective students in mind. Our goal is to provide resources accessible to stu- dents at various stages of marketing education given the wide spectrum of courses in which the book is utilized.

UTILIZING THE PREFACE

This book has been used successfully in college courses and practical training that require an overview of the critical aspects of marketing management and marketing strat- egy development. It has been used:

• As a primary introductory text primarily at the undergraduate level. • At 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 foun-

dation in courses that utilize marketing cases and problems. • In short courses and executive development programs.

INSTRUCTIONAL RESOURCES

The Preface is accompanied by two expanded supplements. 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.

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Acknowledgements Our book is based on the works of many academic researchers and marketing practitioners. We want to thank those individuals who contributed their ideas to develop the field of mar- keting throughout the years. Indeed, our book would not be 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 individ- uals who served as reviewers of this and previous editions. We appreciate their advice and counsel and have done our best to reflect their insightful comments.

Roger D. Absmire Sam Houston State University Catherine Axinn Syracuse University Andrew Bergstein Pennsylvania State University Robert Brock Lawes Chaminade University of Honolulu Glenn Chappell Meridith College Newell Chiesl Indiana State University Reid P. Claxton East Carolina University Mike Dailey University of Texas, Arlington Linda M. Delene Western Michigan University James A. Eckert Western Michigan University Robert Finney California State University, Hayward Stephen Goldberg Fordham University Sol Klein Northeastern University Franklyn Manu Morgan State University Edward J. Mayo Western Michigan University Donald J. Messmer College of William & Mary Johannah Jones Nolan University of Alabama, Birmingham R. Stephen Parker Southwest Missouri State University

Debu Purohit Duke University Gary K. Rhoads Brigham Young University Mike Ballif University of Utah Donald Brady Millersville University Lee Richardson University of Baltimore Matthew H. Sauber Eastern Michigan University Ronald L. Schill Brigham Young University Vernon R. Stauble California State Polytechnic University David Griffith University of Oklahoma Lawrence Hamer DePaul University Jack Healey Golden State University Betty Jean Hebel Madonna University JoAnne S. Hooper Western Carolina University David Horne Wayne State University Fred Hughes Faulkner University Benoy Joseph Cleveland State University Ann Marie Thompson Northern Illinois University John R. Thompson Memphis State University

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x Acknowledgements

Gordon Urquhart Cornell College Kevin Webb Drexel University Kathleen R. Whitney Central Michigan University J. B. Wilkinson University of Akron Dale Wilson Michigan State University Eunkyu Lee Syracuse University Tina Lowrey University of Texas at San Antonio Albert Milhomme Texas State University Larry Crowson University of Central Florida Gerard DiBartolo Salisbury University Casey Donoho Northern Arizona University R. E. Evans University of Oklahoma Lawrence Feick University of Pittsburgh David Good Grand Valley State University Perry Haan Tiffin University Harry Harmon Central Missouri Catherine Holderness University of North Carolina–Greensboro Nicole Howatt UCF

Anupam Jaju GMU Chris Joiner George Mason University Chip Miller Drake University David L. Moore LeMoyne College Joan Phillips University of Notre Dame Thomas Powers University of Alabama at Birmingham John Rayburn University of Tennessee Martha Reeves Duke Henry Rodkin DePaul University Alan Sawyer University of Florida Mark Spriggs University of St. Thomas Sean Valentine University of Wyoming Stacy Vollmers University of St. Thomas Anna Andriasova University of Maryland University College Ritesh Saini George Mason University Ana Valenzuela Baruch College, CUNY Matthew Elbeck Troy University Dothan Edward Bond Bradley University

Working with professionals makes everything go smoothly. It is why being a McGraw- Hill/Irwin author is a pleasure. Thank you to Doug Hughes, our editor, and to Gabriela Gonzalez, editorial assistant, and welcome aboard. Special thanks to Robin Reed, project manager, for so many contributions to this project. We are very grateful.

We also wish to acknowledge Michael Knetter, Dean of the School of Business at the University of Wisconsin, and Devanthan Sudharshan, Dean of Gatton College of Business and Economics at the University of Kentucky who have always supported our efforts.

J. Paul Peter

James H. Donnelly Jr.

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Contents SECTION I ESSENTIALS OF MARKETING MANAGEMENT 1

PART A INTRODUCTION 1

Chapter 1 Strategic Planning and the Marketing Management Process 2

The Marketing Concept 2 What Is Marketing? 3 What Is Strategic Planning? 4

Strategic Planning and Marketing Management 4 The Strategic Planning Process 5 The Complete Strategic Plan 14

The Marketing Management Process 14 Situation Analysis 14 Marketing Planning 17 Implementation and Control of the Marketing Plan 18 Marketing Information Systems and Marketing Research 19

The Strategic Plan, the Marketing Plan, and Other Functional Area Plans 19

Marketing’s Role in Cross-Functional Strategic Planning 19

Conclusion 20 Appendix Portfolio Models 23

PART B MARKETING INFORMATION, RESEARCH, AND UNDERSTANDING THE TARGET MARKET 27

Chapter 2 Marketing Research: Process and Systems for Decision Making 28

The Role of Marketing Research 28 The Marketing Research Process 29

Purpose of the Research 29 Plan of the Research 30 Performance of the Research 35 Processing of Research Data 35

Preparation of the Research Report 36 Limitations of the Research Process 36

Marketing Information Systems 38 Conclusion 39

Chapter 3 Consumer Behavior 40

Social Influences on Consumer Decision Making 41 Culture and Subculture 41 Social Class 42 Reference Groups and Families 43

Marketing Influences on Consumer Decision Making 43

Product Influences 43 Price Influences 43 Promotion Influences 44 Place Influences 44

Situational Influences on Consumer Decision Making 45 Psychological Influences on Consumer Decision Making 45

Product Knowledge 45 Product Involvement 46

Consumer Decision Making 46 Need Recognition 47 Alternative Search 48 Alternative Evaluation 49 Purchase Decision 49 Postpurchase Evaluation 50

Conclusion 52

Chapter 4 Business, Government, and Institutional Buying 53

Categories of Organizational Buyers 53 Producers 53 Intermediaries 54 Government Agencies 54 Other Institutions 54

The Organizational Buying Process 54 Purchase-Type Influences on Organizational Buying 55

Straight Rebuy 55 Modified Rebuy 55 New Task Purchase 55

Structural Influences on Organizational Buying 56

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xii Contents

Purchasing Roles 56 Organization-Specific Factors 57 Purchasing Policies and Procedures 57

Behavioral Influences on Organizational Buying 58

Personal Motivations 58 Role Perceptions 58

Stages in the Organizational Buying Process 60

Organizational Need 61 Vendor Analysis 61 Purchase Activities 61 Postpurchase Evaluation 61

Conclusion 63

Chapter 5 Market Segmentation 64

Delineate the Firm’s Current Situation 64 Determine Consumer Needs and Wants 65 Divide Markets on Relevant Dimensions 65

A Priori versus Post Hoc Segmentation 66 Relevance of Segmentation Dimensions 66 Bases for Segmentation 67

Develop Product Positioning 73 Decide Segmentation Strategy 74 Design Marketing Mix Strategy 75 Conclusion 76

PART C THE MARKETING MIX 77

Chapter 6 Product and Brand Strategy 78

Basic Issues in Product Management 78 Product Definition 78 Product Classification 79 Product Quality and Value 80 Product Mix and Product Line 81 Branding and Brand Equity 82 Packaging 86

Product Life Cycle 88 Product Adoption and Diffusion 91

The Product Audit 91 Deletions 91 Product Improvement 93

Organizing for Product Management 93 Conclusion 95

Chapter 7 New Product Planning and Development 96

New Product Strategy 97 New Product Planning and Development Process 99

Idea Generation 99 Idea Screening 101 Project Planning 102 Product Development 103 Test Marketing 103 Commercialization 104 The Importance of Time 104

Some Important New Product Decisions 105 Quality Level 105 Product Features 106 Product Design 106 Product Safety 107

Causes of New Product Failure 107 Need for Research 107

Conclusion 109

Chapter 8 Integrated Marketing Communications 110

Strategic Goals of Marketing Communication 110

Create Awareness 110 Build Positive Images 110 Identify Prospects 110 Build Channel Relationships 111 Retain Customers 111

The Promotion Mix 111 Integrated Marketing Communications 112 Advertising: Planning and Strategy 114

Objectives of Advertising 114 Advertising Decisions 114

The Expenditure Question 115 The Allocation Question 118

Sales Promotion 122 Push versus Pull Marketing 122 Trade Sales Promotions 123 Consumer Promotions 124 What Sales Promotion Can and Can’t Do 124

Public Relations 126 Direct Marketing 126 Conclusion 127 Appendix Major Federal Agencies Involved in Control of Advertising 129

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Contents xiii

Chapter 9 Personal Selling, Relationship Building, and Sales Management 130

Importance of Personal Selling 130 The Sales Process 131

Objectives of the Sales Force 131 The Sales Relationship-Building Process 132 People Who Support the Sales Force 138

Managing the Sales and Relationship-Building Process 139

The Sales Management Task 139 Controlling the Sales Force 140 Motivating and Compensating Performance 144

Conclusion 144

Chapter 10 Distribution Strategy 146

The Need for Marketing Intermediaries 146 Classification of Marketing Intermediaries and Functions 146 Channels of Distribution 148 Selecting Channels of Distribution 149

Specific Considerations 149 Managing a Channel of Distribution 152

Relationship Marketing in Channels 152 Vertical Marketing Systems 152

Wholesaling 155 Store and Nonstore Retailing 156

Store Retailing 156 Nonstore Retailing 157

Conclusion 160

Chapter 11 Pricing Strategy 161

Demand Influences on Pricing Decisions 161 Demographic Factors 161 Psychological Factors 161 Price Elasticity 162

Supply Influences on Pricing Decisions 163 Pricing Objectives 163 Cost Considerations in Pricing 163 Product Considerations in Pricing 165

Environmental Influences on Pricing Decisions 166

Competition 166 Government Regulations 166

A General Pricing Model 167 Set Pricing Objectives 167 Evaluate Product–Price Relationships 167

Estimate Costs and Other Price Limitations 168 Analyze Profit Potential 169 Set Initial Price Structure 169 Change Price as Needed 170

Conclusion 170

PART D MARKETING IN SPECIAL FIELDS 171

Chapter 12 The Marketing of Services 172

Important Characteristics of Services 174 Intangibility 174 Inseparability 175 Perishability and Fluctuating Demand 176 Client Relationship 176 Customer Effort 177 Uniformity 178

Providing Quality Services 178 Customer Satisfaction Measurement 180 The Importance of Internal Marketing 180

Overcoming the Obstacles in Service Marketing 182 Limited View of Marketing 182 Limited Competition 182 Noncreative Management 183 No Obsolescence 183

The Service Challenge 184 Banking 184 Health Care 184 Insurance 185 Travel 185 Implications for Service Marketers 186

Conclusion 187

Chapter 13 Global Marketing 188

The Competitive Advantage of Nations 189 Organizing for Global Marketing 190

Problems with Entering Foreign Markets 190 Organizing the Multinational Company 193

Programming for Global Marketing 195 Global Marketing Research 195 Global Product Strategy 198 Global Distribution Strategy 198 Global Pricing Strategy 199 Global Advertising and Sales Promotion Strategy 199

Entry and Growth Strategies for Global Marketing 200 Conclusion 203

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SECTION II ANALYZING MARKETING PROBLEMS AND CASES 205

A Case Analysis Framework 206 1. Analyze and Record the Current Situation 207 2. Analyze and Record Problems and Their Core Elements 211 3. Formulate, Evaluate, and Record Alternative Courses of Action 212 4. Select and Record the Chosen Alternative and Implementation Details 213

Pitfalls to Avoid in Case Analysis 213 Communicating Case Analyses 216

The Written Report 216 The Oral Presentation 218

Conclusion 218

SECTION III FINANCIAL ANALYSIS FOR MARKETING DECISIONS 219

Financial Analysis 220 Break-Even Analysis 220 Net Present Value Analysis 222 Ratio Analysis 224

Conclusion 228

SECTION IV DEVELOPING MARKETING PLANS 229

A Marketing Plan Framework 230 Title Page 231 Executive Summary 231 Table of Contents 232 Introduction 232 Situational Analysis 232 Marketing Planning 232 Implementation and Control of the Marketing Plan 234 Summary 236 Appendix—Financial Analysis 236 References 239

Conclusion 239

Chapter Notes 241

Index 248

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Introduction APart 1 Strategic Planning and the Marketing Management Process

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Part A Introduction

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Chapter 1 Strategic Planning and the Marketing Management Process The purpose of this introductory chapter is to present the marketing management process and outline what marketing managers must manage if they 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 the process of marketing planning.

THE MARKETING CONCEPT

Simply stated, the marketing concept means that an organization should 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 this is why it is often misunderstood, forgotten, or overlooked.

The purpose of the marketing concept is to rivet the attention of marketing managers on serving broad classes of customer needs (customer orientation), rather than on the firm’s current products (production orientation) or on devising methods to attract customers to current products (selling orientation). Thus, effective marketing starts with the recognition of customer needs and then works backward to devise products and services to satisfy these needs. In this way, marketing managers can satisfy customers more efficiently in the present and anticipate changes in customer needs more accurately in the future. This means that organizations should focus on building long-term customer relationships in which the initial sale is viewed as a beginning step in the process, not as an end goal. As a result, the customer will be more satisfied and the firm will be more profitable.

The principal task of the marketing function operating under the marketing concept is not to manipulate customers to do what suits the interests of the firm, but rather to find effective and efficient means of making the business do what suits the interests of customers. 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.

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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 has been a customer for most of his or her life. Last evening you stopped into a local supermarket to graze at the salad bar, pick up some bottled water and a bag of Fritos corn chips. While you were there, you snapped a $1.00 coupon for a new flavor salad dressing out of a dispenser and tasted some 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 someone 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 …

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