how marketing strategy impacts corporate performance: an

Proceedings of ASBBS Volume 15 Number 1

How Marketing Strategy Impacts Corporate Performance: An Exploratory Analysis of USA Today’s e-Consumer 25

Internet Index

Weinstein, Art

Nova Southeastern University [email protected]

Barrett, Hilton

Elizabeth City State University [email protected]

Balocco, Ingrid

Nova Southeastern University [email protected]

ABSTRACT One of the most critical issues in business is how organizations devise marketing strategies to maximize financial performance. This paper examines three separate strategic typologies with short-and-medium term metrics to provide insight on this query. A qualitative analysis of new economy business-to-consumer (B2C) companies was employed in this project. The results indicate that effective strategy differs based on time horizon, business sector, and company size. INTRODUCTION Why are some companies highly successful while others struggle for survival? Often, the key differentiator for business success is marketing strategy. This paper examines three marketing strategy typologies and assesses short-and-medium-term business performance in the e-commerce arena focusing on a census of twenty-five consumer companies. Specific e-sectors and size (number of employees) are also considered in the analysis. Hunt and Morgan explain that management’s role is to design appropriate competitive strategies to achieve the firm’s over-arching objective, which is superior financial performance (1997). Hunt (2000) states that good strategies are explicit, implemented, and offer good fit or match for the firm within a market. He adds that firms pursue superior performance because rewards will then flow to owners, managers, and employees. Consider Apple Inc.’s recent marketing strategies and business success. Apple took an existing product, the MP3 player, and created an improved version, the iPod, which is supported with iTunes. The iPod and iTunes synergy has reshaped the landscape of the music industry during the past five years. It has become the “must-have” mobile music device (MP3 player) for the masses. The iTunes store offers the ideal complement by providing a simple yet complete catalog of digital content (songs, videos, podcasts, etc.) for iPod consumers. An article in Music Week by Ashton (2007) states “Apple’s revenues (in music sales) could outstrip the world’s entire recorded music industry within the next two years as it continues to cash in on the boom in iPod and download music sales”.

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Apple Inc. has continued its anticipatory marketing capabilities (Barrett, 1996) by understanding its customer needs before the market even knew what it wanted as evidenced by creating the new iPhone. Apple expands the “i” strategy by melding the iPod with cell phone and hand-held computer by using a proprietary state-of-the-art interface. Apple’s stock price has increased from $8.78 at the time of iPod’s introduction in 2001 to $122 at the time of iPhone’s introduction. This is a 1298% increase. i While Apple Computer always had a loyal following due to its technological leadership, it was not until the company fully emphasized marketing strategy that it connected with the mainstream market. Apple’s product leadership strategy is reflected in increased iPod, iTunes, iPhone, and even Mac computer sales (Schlender, 2007).

As the Apple example demonstrates, marketing strategy and business performance strongly correlate. Google’s impressive line of search engines, advertising media, and related products is another illustration of superior competitive strategy (Klaassen and Rubel, 2007). Google has effectively fended off Microsoft with its marketing strategy. The stock market has responded to its superior financial success with stock prices hovering at about $700 per share. The e-commerce market provides a great laboratory for studying this phenomenon. We utilize the USA Today Internet Index to examine this key business issue further (the index is discussed in greater detail later in this paper).

AN OVERVIEW OF THE LITERATURE A company’s marketing strategy signals the business approach a company is using to win in the marketplace. Building on specific and thoughtful objectives, a good marketing strategy implements an on-target plan of action. Marketing managers need to select the right variables in the right situations to compete effectively. There is a rich tradition of using strategic typologies in the marketing literature. The two most widely used typologies are Miles, et al (1978) and Porter (1980). Given the changing dynamics of the Internet, more contemporary strategic typologies were sought for utilization in this study. After careful analysis by the authors, three strategic typologies consisting of ten unique strategies were used in this study. They are the 3C’s (Jain, 2004), the S-Q-I-P approach (Johnson and Weinstein, 2004), and the Value Disciplines (Treacy and Wiersema, 1995).

According to Jain, marketing strategies can emphasize one of the following three variables: customer, corporation, or competition. Customer-based strategies promote product benefits to customers, address customer needs and wants and propose the product/service as a solution, emphasize customer satisfaction, and feature user-friendly websites. Corporation-based strategies are based on organizational appraisal; are developed with minimal or no regard for the customer factor; and tend to have websites that are not user-friendly but stress awards, accomplishments, and industry experience. Competition-based strategies seek differentiation, competitive positioning within the industry, and use comparisons in their promotional materials. The customer value (CV) paradigm has captured the imagination of marketers during the past decade. Johnson and Weinstein explain that CV is based on a foundation of four key variables. Service (S) and Quality (Q) represent the core offerings to the firm, while Image (I) and Price (P) offer communication signals to the marketplace. Hence, CV-based marketing strategy is built on the S-Q-I-P framework. Building on Porter’s (1980) classic work on differentiation, cost leadership, and focus strategies, Treacy and Wiersema (1995) offer a revised three-item marketing strategy typology consisting of product leadership, operational excellence, and customer intimacy. Product leaders, such as Johnson & Johnson and Nokia, innovate and offer the best quality goods and services. Operationally excellent firms, such as

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Dell and Southwest Airlines, stress low cost and process efficiency. Organizations practicing customer intimacy, such as Lexus and Nordstrom, offer the best total solution via relationship building and service. According to the PIMS (Profit Impact of Market Strategies) Program, “strategy principles” can be discovered via an analysis of three kinds of information: 1) a description of market conditions, 2) the business unit’s competitive position in the marketplace, and 3) measures of the SBU’s financial and operating performance (Buzzell and Gale, 1987). This is consistent with Scherer and Ross’s (1990) work on the market structure-conduct-performance (SCP) paradigm. This industrial organization paradigm states that performance, in particular industries/markets, depends on the conduct of firms operating in those markets. Conduct refers to marketing mix activities (4Ps) and business strategy decisions. Similarly, conduct depends upon the structure of those markets. Thorelli (1977) explains that structure is used in two different contexts: the structure of the organization (the O-structure) and the structure of the market or environment (the E-structure). Vernon (1972) recommends the construction of specific SCP-based models for particular industries. Focused models are desirable to explain industrial behavior and performance in selected industries (e.g., e-commerce of consumer products). One of Warren Buffet’s better known quotes is “When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact” (Ghemawat, 1999 p.19). Industry forces begin at a macroeconomic level and, as such, must be considered opportunities or constraints by company strategists. For example, the 1980s saw an economic downturn in the steel industry as costs increased and therefore prices increased sufficiently to cause a downward shift in the demand curve. Steel companies should have recognized this industry trend and focused strategy on maintaining market share and controlling costs. Recently, the increasing economic growth rate and resulting infrastructure needs in China and India has caused an upward shift in demand for steel (Marley, 2007). This industry trend should induce steel companies to review the changing market demand and therefore reevaluate strategy to maximize profit based on the new opportunities. Recognizing that strategy must fit the dynamics of an industry is the first step in creating successful performance.

Business landscape simply recognizes the importance of industry in the success of various strategies (McGahan and Porter, 1997). By defining the segment studied, B2C Internet-based businesses, we have mitigated the industry effect and can better understand the relationships between strategic typologies and performance. The dot.coms have also seen a boom in the 1990s, a bust in 2000 and finally, credibility in 2007. The Internet technology, with all of its benefits and its creative destruction, abruptly changed the general business landscape by:

• driving down entry costs • accelerating the dynamic improvements in information technology. It has provided new tools to cut

costs and differentiate through mass customization • enabling focus on niche target markets through database mining • facilitating the development of new business models for B2C and B2B, thereby creating value. RESEARCH QUESTIONS To guide the analysis, five research questions (RQs) were developed. These central issues follow:

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RQ1. Are there differences in business performance based on the 3Cs strategic typology?

a. Short-term (6 month time frame) b. Medium-term (2 year time frame)

RQ2. Are there differences in business performance based on the S-Q-I-P framework?


RQ3. Are there differences in business performance based on the value disciplines?


RQ4. Are there differences in the strategic variables used (see RQ1-RQ3) within the consumer e-sector categories (retail, service, new media and finance)? RQ5. Are there differences in the strategic variables used (see RQ1-RQ3) based on company size, as expressed in number of employees? METHODOLOGY USA Today created the Internet 100 Index on August 9, 1999 in an effort to allow readers and investors to track the ups and downs of the fastest-growing segment of the U.S. economy. USA Today considers its index as the broadest, most comprehensive measure of the emerging technology companies’ stock performance. The index provides new analytical tools that help assess the forces of economic change. The original Internet 100 was divided into two sub-indices – the e-Consumer 50 and the e-Business 50. The e-Consumer 50 consisted of online vendors of goods and services that connect directly to the consumer. The e-Business 50 originally consisted of companies that support the Internet’s commercial development. In June 2003, the Internet 100 was renamed the Internet 50, reflecting 50 firms that have weathered the dot.com implosion. The Internet 50 continues to be split 50-50 between the new e-Consumer 25 and the e-Business 25. Index membership requirements are: companies must derive at least 50% of their revenues from the Internet, share value must be at least $12, minimum capitalization of $200 million, minimum 90 days of public trading, be headquartered in the U.S. and do a majority of business in this country (Smith, 1999). In this study, we limit our analysis to a census of the e-Consumer 25. Three sets of variables are used in this study – firmographics, strategic typologies, and business performance. Firmographics are organizational demographics. The USA Today has classified the e-Consumer 25 into one of four sectors: finance, new media, retail, or service (E-structure). The firm size dimension is based on number of employees (O-structure). Companies with less than 1,000 employees are considered small and those with 1,000 or more employees are considered large. The strategic typologies (3Cs, S-Q-I-P, and value disciplines) are discussed in the literature review. Using content analysis, each of the e-Consumer 25 companies is classified by dominant strategic variables for the three frameworks. One exception was made for the S-Q-I-P model. Since several companies used multiple strategic variables simultaneously, a fifth option, named “integrated” (an amalgam of the four variables – service, quality, image, and price) was used when a dominant strategy was not clearly evident. A review of each of the companies’ annual reports and their websites was assessed in identifying specific marketing strategies. ii Two business performance metrics were evaluated. The short-term measure (six months) used was the percentage change in stock price from January 1st – June 30, 2007 (the composite gain was 14.8% for the

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e-Consumer 25 during this period). The medium- term measure was the average annual percentage growth in revenues over a two-year period (source: Yahoo Finance, income statement data). The data used in this analysis are summarized in the Appendix.

FINDINGS RQ1. Are there differences in business performance based on the 3Cs strategic typology? As Figure 1 illustrates, a follow-the-leader or competitive strategy worked well in the short-term. This approach, based on stock price performance was three times as effective as an internal (corporate) strategy and seven times more effective than an external (customer) strategy. In the medium term, however, both customer and corporate strategies were substantially more successful than competitive-based strategies.

RQ2. Are there differences in business performance based on the S-Q-I-P framework? More than half (13 of 25) of the companies opted for a service-based strategy. A price-based strategy (six companies), however, resulted in the highest business performance in the short-term. As Figure 2 depicts, this was almost double the next best strategy (integrated) and a more than three-fold improvement over the service approach. Surprisingly, a quality focus resulted in a slight price decline over the six month period. Over the longer time horizon (two years), all four strategies evidenced displayed positive revenue growth ranging from 16% integrated to 25% service.

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RQ3. Are there differences in business performance based on the value disciplines? As Figure 3 shows, customer intimacy was by far the best strategy in the short-term (almost four times better than product leadership and about 19 times better than operational excellence). In the medium term, however, the playing field is somewhat leveled and customer intimacy is only slighter better than product leadership yet it is substantially greater than operational excellence.

RQ4. Are there differences in strategic variables used within consumer e-sectors?

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As Table 1 shows, customer (3Cs), service (S-Q-I-P), and product leadership (value disciplines) were the dominant strategies employed representing 68%, 52%, and 56% of the strategies employed. Given that the database is the census as defined by USA Today, there are differences as shown in the table. However, treating the twenty-five firms as a sample for each of the typologies and performing a χ2 nonparametric test, none of the differences were significant (Siegel, 1956).

Table 1- Dominant Marketing Strategies by Sector (in %)

Dominant within Typology (# & %)

Finance (6) New Media (7) Retail (8) Service (4)

3Cs –Customer (17, 68%)

67% (4) 43% (3) 88% (7) 75% (3)

SQIP – Service (13, 52%)

33% (2) 57% (4) 63% (5) 50% (2)

Value Disciplines- Product Leadership (14, 56%)

83% (5) 86% (6) 25% (2) 25% (1)

RQ5. Are there differences in strategic variables used based on size of the company (expressed in number of employees)? Two of the three strategic typologies showed differences based on the company size dimension. Seventy-one percent of the large e-consumer companies (1,000 or more employees) used a customer-based marketing strategy. Sixty-two percent of the small firms (less than 1,000 employees) used a product leadership strategy. There were no differences found based on the S-Q-I-P framework based on company size. Again, treating the twenty-five firms as a sample for each of the typologies, and performing a χ2 nonparametric test, none of the differences were significant (Siegel, 1956). STRATEGIC INSIGHTS Based on this research, several strategic implications emerged. First, it became apparent that the horizon (time frame) has a significant impact on business performance. While some strategies work well in the short-term (competitive, price-based, and customer intimacy), over a longer period these were supplanted by other strategies. A leveling effect was noticed whereby a once dominant strategy was replaced by several viable situation-specific strategies. Hence, managers must be cognizant of change and adapt their strategies to evolving market conditions. Further consideration should be made as to where the company is in the industry life cycle. Second, sector and size clearly impact strategic choice and ultimately, performance. With the exception of the e-service sector, we found dominant strategies (customer, service, and product leadership) in each of the strategic typologies for the e-finance, e-retail, and e-new media business sectors. This is illustrated in Table 1.

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Third, we found that the S-Q-I-P model still works but the “I” variable better represents an “Integrated” strategy rather than just “Image” as previously conceptualized. A good example of this is UPS’ unique sales proposition, “Look What Brown Can Do For You”. While this is an image-based promotional campaign, it implies that all aspects of the organization (service, quality, and price or “integrated”) have improved to better serve customer needs and wants. RESEARCH AGENDA The research approach in this study should be extended to other markets. USA Today’s B2B index (25 companies) is a logical starting point for separate and comparative analyses. The NASDAQ index features other growth companies and can be quite insightful as a research sample. In addition, the Fortune 500 list and international market exchanges could be utilized to continue the study of marketing strategy and performance.

Future work can bring in additional variables consistent with the SCP paradigm. Some possibilities include: market structure – years in business, market capitalization, and sales; conduct/strategy – Porter and Miles/Snow typologies; and performance - a long-term success measure (5 years) and business cycles (e.g., dot.com boom, dot.com bust, and dot.com credibility).

Our exploratory study used secondary data and a primary coder. To improve reliability and validity, multiple coders are suggested. In addition, as a new research approach, we recommend a judgment sample of stock market technical analysts (experts on companies/business sector) to classify strategies.

Additional work is called for to help improve the classification approach since strategies sometimes overlap and are not always clearly defined within the specific typologies. Therefore, measurement refinement can be the focus of another study. CONCLUDING REMARK This research project explored an important and practical topic in marketing – the relationship between strategic choice and business performance. While a number of interesting findings were evidenced (review findings and strategic insights) many other questions (see research agenda) emerged and are clearly worthy of future study. We encourage marketing scholars and managers to continue to work in this area so that best practices can be shared with the broader business community. Realize that overall increased business performance and productivity benefit society. And ultimately, shouldn’t that be an objective of good business research?

Appendix: e-Consumer 25 – Strategy and Business Performance (Six Month and Two Year Average Revenues)

Firmographics Strategic Typologies Performance (% change)

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Company/ Stock Symbol

e-Sector Employees 3 Cs S-Q-I-P Value Disciplines

Stock Price

1/1/07- 6/30/07

Revenues (annual)

1/1/05-

12/31/06 1-800-Flowers FLWS

Retail 3,700 Customer Service Customer Intimacy

57 15

Amazon AMZN


76 28

Blue Nile NILE

Retail 146 Customer Integrated Customer Intimacy

72 24

CNet CNET

New Media

2,340 Customer Quality Product Leadership

-10 17

CheckFree CKFR

Finance 3,050 Corporation Quality Product Leadership

2 23

E-Trade ETFC

Finance 3,400 Customer Integrated Operational Excellence

-1 8

eBay EBAY


8 41

Earth Link ELNK

Service 1,732 Customer Price Operational Excellence

7 -3

Expedia EXPE

Retail 6,500 Customer Price Operational Excellence

39 6iii

Google GOOG

New Media

5,680 Corporation Integrated Product Leadership

15 116

IAC Inter IACI

Retail 28,000 Customer Service Operational Excellence

-7 25

Indymac Bank IMB

Finance 6,441 Corporation Service Product Leadership

-35

57

InfoSpace INSP

New Media

620 Corporate Service Operational Excellence

56

25

Intuit INTU

Finance 7,000 Customer Service Product Leadership

-3 13

J2 Global JCOM

New Media

288 Competition Price Product Leadership

30

36

Move MOVE

Service 1,620 Customer Service Customer Intimacy

-20

17

Netflix NFLX

Service 985 ft 445temp

Customer Price Operational Excellence

-25

48

Priceline PCLN

Retail 532 Competition Price Product Leadership

57 11

Schwab,Charles SCHW

Finance 14,000 Customer Integrated Product Leadership

14

6

Sina SINA

New Media

1,900 Competition Service Product Leadership

50

3

SkillSoft SKIL

Service 979 Corporation Service Product Leadership

49

3

Stamps.com STMP

Retail

155

Customer

Service

Product Leadership

-11

61

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TD Ameritrade AMTD

Finance 2,052 Customer Price Product Leadership

25

116

United Online UNTD

New Media

900 Customer Service Product Leadership

26

8

Yahoo YHOO

New Media

9,800 Customer Service Product Leadership

5 40

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October 7, 4.

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i Stock prices sourced from www.finance.yahoo.com/q/hp?ss+AAPL

http://www.finance.yahoo.com/q/hp?ss+AAPL


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ii Summary Note: 2006 annual reports were found at http://yahoo.ar.wilink.com/asp/YAH1_search_ENG.asp iii IAC spins off Expedia and begins trading as of August 9, 2005. Percentage change is from 8/9/05 – 12/31/06. Acknowledgement: The authors thank Johanna Loli for her research assistance in this project.

http://yahoo.ar.wilink.com/asp/YAH1_search_ENG.asp

how marketing strategy impacts corporate performance: an

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