Marketing Concept - The St. Gallen Management Approach

Management models are developed to organize those complex relationships, present them neatly and give all actors involved in corporate decision-making an orientation framework. Basically, a model can be thought of as a simplified image of a complex reality (Gomez, 1981, 87; Schwaninger, 2009, 53). A management model realizes management processes systematically and lets management become a “criticizable and optimizable reality” (Rüegg-Stürm & Grand, 2013, 4). It presents a frame of reference for reflection and is a basis for the conceptual exchange, for example in management teams. It offers structures and perspectives as an orientation in management practice and thus strengthens an organization’s ability to act and its viability (Rüegg-Stürm & Grand, 2013, 2 et seqq.).

Every model shows only one detail of reality from a specific perspective. A model is like a map that can only be appreciated through simplification and abstraction, which provides an overview. A hiking map has different elements than a sectional chart. In this sense, the St. Gallen Management Model is a formal orientation model with the main objective of offering company decision-makers an orientation in their work, and “a letter case for the meaningful”. It thus promotes the “process of collective expectation building and understanding toward the current situation and possible future development perspectives” (Rüegg-Stürm & Grand, 2013, 7; Ulrich, 1968; on St. Gallen Management Model compare Bleicher, 1991, 302 et seqq.; Rüegg-Stürm, 2003; Rüegg-Stürm & Grand, 2013; see also Ulrich, 1968; on business models compare Bartak, Little, Manzano & Sheahan, 2012, 121).

Managing challenges change, driven particularly by socio-economic developments like deregulation and the opening of markets, but also by technological developments that enable new forms of the division of labor. Today, companies and are becoming increasingly large and business models more specialized (Bieger, Knyphausen-Aufsess & Krys,[24] 2011, 14 et seqq.). Therefore, maintaining the decision-making ability and the balance between integration (e.g. focusing the strategy on common strengths) and differentiation (e.g. developing decentralized platforms as entrepreneurial, further differentiation of operating procedures in the ongoing advance of division of labor) thus becomes more difficult and more important. Also, companies frequently reconfigure themselves along the value chain, so in the age of flexible outsourcing, a dynamic understanding of company limits is necessary. That is why the fourth generation of the St. Gallen Management Model emphasizes those topics (Rüegg-Stürm & Grand, 2015). The reflective shaping of collective value-creation systems based on the division of labor has priority (see Figure 5).

Fig. 5: 4^th generation of the St. Gallen Management Model

(Source: Rüegg-Stürm & Grand, 2015)

Specifically, the fourth-generation model includes three key categories: environment (understood as a possibility space), organization (as a value-creation system) and management (as a reflective shaping practice).

[25]The following introduction to market-oriented management of a company is guided by the fourth generation of the St. Gallen Management Model. The environment is in the fore, with a focus on stakeholders such as intermediate and customer markets, and the organization of the value-creation system with customer processes, performance processes and innovation processes.

A company (as a purposeful, productive social system; compare Ulrich, 1968) can only exist if all of the relevant stakeholders cooperate. They form a primary orientation framework for management and were therefore depicted in the outer circle in several generations of the St. Gallen Management Model (compare Bleicher, 1994; Rüegg-Stürm, 2003). In the fourth generation, stakeholders are understood as “organization-relevant representatives of different environmental spheres or discourses” (compare Rüegg-Stürm & Grand, 2014, 56).

In a company like Läderach, important stakeholders are mainly employees, who often have a long-standing relationship with the company and who are integral to its core competency; suppliers such as cocoa producers, and customers, which, under the original strategy means catering businesses and specialty retailers. In addition, enterprises depend on investors, like third-party shareholders or banks. For the construction of new manufacturing plants they need the state’s approval, which is why relationships with the state, as well as the media and non-government-organizations (NGOs) such as environmental groups are important. Competitors play a role as competitors and/or cooperation partners. Coopetition describes a situation where a company cooperates with another even though they compete on other markets at the same time (compare Padula & Dagnino, 2007, 36 et seq.). For example, it would be coopetition if LÄDERACH cooperated with a manufacturer of semi-finished products in the chocolate industry by jointly influencing state regulation through an industry organization, while at the same time competing with that company in the customer market.

As a company’s core group, management has the responsibility to ensure the company’s cohesion or the cohesion of the different stakeholders and their continuing participation in the company (see Figure 6; compare Rüegg-Stürm, 2009, 70) to ensure access to the different environments’ potentials, for example, to technology via suppliers. In return for their continued participation in the company, management can offer stakeholders the opportunity to share in:

Fig. 6: Stakeholders of a company

As previously mentioned, stakeholders have different relevance depending on the context. In a growth phase, employees or the human-resource market have priority; in a start-up phase, it is rather the customer market.

In the fourth generation of the St. Gallen Management Model, environment is understood as the “possibility and environmental space pertinent to an organization” (compare Rüegg-Stürm & Grand, 2015). The natural environment, the social environment and the economic environment are classic environmental spheres (compare Bleicher, 1994; see also the three dimensions of sustainability, inter alia in the Brundtland report, Hauff, 1987a; Littig & Griessler, 2004). Recently, important subsets of those environmental spheres have differentiated or strengthened; for example, the areas of politics and law as part of the social environment.[27] Technology and the normative environment in the form of ethics have developed into separate environmental spheres. Science, markets and public are important intersecting areas of the traditional three environmental spheres (compare Rüegg-Stürm, 2003, 27).

A company, or any organization, has to exploit relevant organization-specific resource configurations from the environment as a possibility space and deduce entrepreneurial possibilities and potentials from it (compare Rüegg-Stürm & Grand, 2015; 2014, 42; Teece, Pisano & Shuen, 1997; Shane, 2003; Conner & Prahalad, 1996). In the natural environment, a hotel’s panoramic location can be a resource that creates potentials to attract tourists from overseas. In the economic environment, loyal and happy customers are a resource that includes the potential for continuing purchases or word-of-mouth advertising.

An environment analysis (see also opportunities / risks analysis, section 2.4) is generally geared to identifying potentials, but also risks (e.g. emergence of a new competitor) in the different environmental spheres. The environments have varying relevance, according to context and the company’s problem or objective. A market-oriented management is concerned primarily with the economic environment, especially demand-driven markets and supplier markets.

Fig. 7: St Galler Management model with environmental spheres

(Source: Dubs, Euler, Rüegg-Stürm & Wyss, 2009, 70)

Today, sustainability is always, explicitly or implicitly, the subject and aim of the enterprise. Sustainable development can be defined as development “that meets the needs of the present without compromising the ability of future generations to meet their own needs.” (Brundtland report, 1987, 24). A sustainable development is thus characterized by not using more resources than it generates or which can be regenerated (see also Ekardt, 2011; Schmidheiny, 1992). Sustainability in this sense is an intergenerational concept. It is about future generations not having less but, ideally, more resources and courses of action available to them. In terms of a triple-bottom-line (compare Savitz & Weber, 2006, 177), sustainability is mainly applied to the three main environmental spheres: economy, society and nature.

In assessing entrepreneurial projects, one often has to weigh competing interests. For example, for the extension of a production center a loss of resources has to be accepted (e.g. land needed for the expansion) to create values in the economic environment (increased added value) and in the area of the social environment (additional professional and cultural opportunities for employees and the region). This weighing of interests between the different environmental spheres is not least the public and governmental responsibility and is also influenced by culturally shaped values and norms (also see Figure 8 and inter alia Brundtland report; Hauff, 1987b). Social responsible leadership (often also CSR, Corporate Social Responsability) can be defined as sustainable management with the objective of a balance between the value demands of internal and external stakeholders in the context of an increasingly global and networked stakeholder society (see also Maak, 2007, 329-243; Pless & Maak, 2008, 236). Social responsible leadership, meaning responsible acting, presupposes that the effects of a company’s actions on different environmental areas are recognized, assessed in a general way and lead to action consequences.

Fig. 8: Triple bottom line

Management in the sense of a reflective shaping practice traditionally refers to three horizons of meaning (see also the third generation St. Gallen Management Model in Figure 7): the normative, strategic and operational horizons of meaning (see Figure 9; Bleicher, 1994, 43 et seqq.) Each of these levels has another depth of environment analysis (it is about other “ranges” of the potentials, about objectives and also about responsibility).

Fig. 9: Contents of the three horizons of meaning

(Bieger, 2007, 61; enhanced according to Espejo, Schuhmann, Schwaninger & Bilello, 1996, 230; Pümpin & Prange, 1991; Schwaninger, 1990, 50)

Normative management concerns itself with questions of long-term corporate objectives, values and norms that should inform actions in a company and with the underlying objective, which it is supposed to achieve in society and in the economy (compare Bleicher, 2004, 157 et seqq.) The owner, in the sense of an owner-strategy or the board of directors, is responsible for that. The decisions of normative management are often subsumed under a so-called mission statement. Its objective is[30] securing the long-term legitimacy of the enterprise, meaning the relevant stakeholders continue to view it as necessary and useful, so it can stay in business.

Strategic management is often shaped at the intersection of the board of directors and the executive board. There are differences depending on a country’s corporate governance tradition (see also Berger & Steger, 1998, 137; Hill, 1985). In Germany, the supervisory board is traditionally not an organizing body that influences the strategy or takes an active part in discussions. In this system (a two-tier corporate-governance system) with a categorical division between supervision and management, it is mostly the executive board that shapes strategy. In Switzerland, by contrast, the board of directors is responsible for company management and thus for strategy (one-tier system). It can delegate tasks to the executive board, but it has clearly defined inalienable responsibilities that include shaping strategy.

The preservation of a company’s competitive edge and viability is the objective of every corporate strategy. Therefore, it concentrates on securing and developing profit potentials. These can exist in the form of resources (e.g. core competencies) in the sense of an inside-out perspective, or in the form of external resources that are exploited in the environment (e.g. positive image of a well-established brand) in the sense of an outside-in perspective.

The actors on every level of a company deal with operational management. Its objective is economic viability or securing a sufficient added value. Success and liquidity, or cash flow, along with, depending on the role, sub-targets such as optimizing stock, are the target indicators of this. Important planning tools include budget planning and process management, for example, for optimum management of performance or production, as well as marketing plans for the ideal application and the coordination of marketing tools.

A company can be defined as a “purposeful”, “socio-technical” system that produces goods and services for third parties for money (compare Rüegg-Stürm, 2003, 20 et seq.; based on Ulrich, Hill & Fehlbaum, 1994, 20 et seqq.). People, as part of the company system, produce goods and services with machines in a process, and market them to create added value, which is then available to compensate stakeholders for their cooperation or resources they provided. Without business processes, the[31] company does not create added value and thus cannot compensate its stakeholders or motivate them to contribute further. This is why several authors call business processes primary processes (compare inter alia Porter, 1986, 62). Organizational value creation is the central shaping focus of management in practice (Rüegg-Stürm & Grand, 2015). Providing infrastructure, personnel or finances enables and supports business processes and can be understood as support processes (see Figure 10). So in the Management Model, business processes are presented as a connection between suppliers/partners and customers (see Figure 7).

Fig. 10: Primary processes or business processes, according to Porter

(Source: based on Porter, 1986, 62)

A process can be defined as “a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer” (Hammer & Champy, 1995, 50). The input is derived directly from the supplier or from the wholesale market; the output is delivered to markets or directly to customers. In the process, it is especially important not to miss important developments and changes, which is why management should always keep an eye on secondary procurement markets and secondary sales markets. In the Läderach example above, one has to consider the raw materials markets for chocolate as an influencing factor, and the specialty retailers’ customers, such as buyers of chocolates, virtually as the customers of the customers (see Figure 11).

[32]

Fig. 11: Business process and markets

As primary processes, business processes contribute substantially to the success and, ultimately, the survival of a company. Correspondingly, contributions to business processes’ objectives can be structured by management’s different levels of meaning.

On the normative level, this raises the question of what meaning the goods and services of a company have for society. If goods and services provided by business processes are no longer seen as meaningful, the company loses its legitimacy and thus stakeholder support or governmental concessions. In Switzerland, for example, there is the case of a theme park whose main attraction was a dolphinarium. A public and political debate about keeping sea animals in those kinds parks arose after the death of two dolphins. During the debate, the attraction and education benefit was graded lower than the values of animal welfare, so tighter regulations were enacted. This led to a ban on keeping dolphins in captivity. The company had to accept a governmental prohibition of part of its activities due to the loss of perceived legitimacy.

On the normative level, primary added value (meaning goods and services rendered, such as produced foods or, for a political party, enforcing common interests) and additional added value (e.g. an organization’s contribution to a location’s image) must be considered.

The strategic level is about the contributions of business processes to developing resources, such as generating new competencies (internal resources) or opening and securing market positions, in the form of image in target markets (external resources), for example.

[33]The operational level is concerned with objectives that manifest themselves in fiscal parameters. The basis for a company’s or an organization’s profits is that customer value is created, which leads to the customer’s willingness to pay for the goods and services, and thus to company profits. These can be direct reimbursements in the form of sales revenue or indirect reimbursements in the form of subsidies for a public service, for example.

The demand-specific customer value can be defined as the relative perceived value of a product or service compared to the relative perceived cost of a product or service from the customer’s perspective (see Figure 12 and Woodruff, 1997, 142).

Fig. 12: Perceived customer value

(Source: based inter alia on Matzler, 2000)

The customer benefit results from a juxtaposition of needs or expectations and the meeting of those expectations through a product or service. Quality results from this juxtaposition (Seghezzi, Fahrni & Hermann, 2007, 33 et seq.). There is high quality if the individual expectations are met or exceeded, which, according to the concept of confirmation, leads to customer satisfaction (compare Doenges, 1982). In turn, the customer assesses customer satisfaction by comparing it to the expected satisfaction provided by alternative offers. From this, relative (meaning compared to alternatives) perceived customer satisfaction follows. For customer cost, the material cost (e.g. purchase price) and the intangible cost (e.g. waiting time) have to be considered.

[34]The relative perceived customer benefit leads to so-called behavioral outcomes (compare Bagozzi, Dholakia & Basuroy, 2003, 273). These include willingness to pay and other behaviors and actions like recommendations, customer loyalty and repeat purchases or readiness to complain.

From the company’s point of view, customers’ value is determined by the turnover achievable from them or the value of the positive behavioral outcomes deducting the customer-specific costs, e.g. market-cultivation costs (customer equity, compare Rust, Lemon & Zeithaml, 2004, 110; Tomczak, Kuss & Reinecke, 2007, 109-127). Companies with a well-engineered database for their customers, such as airlines with frequent-flyer programs, calculate the expected future customer value this way. Customers are then categorized according to their customer value. So-called “A customers” with high customer value are nurtured more intensely, for example, with so-called status or gold cards issued by airlines.

If one deducts the cost for the input factors (intermediate consumption) from the total customers’ sales revenue, one gets the added value of a company. From the added value one can then deduce the company value (see Figure 13).

Fig. 13: Conceptual relation between customer value, added value and company value

[35]A company’s added value generated within the frame of business processes is necessary to reimburse the different stakeholders (investors, employees, the state via taxes, etc.) for their cooperation or resources they provide. Business processes are thus the direct main purpose of the “purposeful socio-technical system” company. The continuing cooperation of the stakeholders and thus the survival of the company cannot be assured without the added value generated through business processes. The distribution of added value also mirrors the importance of the resources and stakeholders. If, for example, a certain category of manpower or capital (e.g. equity capital) is in short supply, its share of a company’s added value increases in the competition for these resources.

Added value can be defined as the difference between the value of the input and the value of the output of business processes (compare Porter, 1986, 19 & 74). Clearly, the intermediate consumption cost is deduced from the turnover. The net added value is determined by deducing the necessary depreciations (see Figure 14). In simplified terms, the sum of all added value of every company in a country is equivalent to the gross domestic product according to the national account (production account).

Fig. 14: Calculation of added value

As mentioned before, stakeholders calculate the value of a company from their perspective, thus from their potential added-value shares. Therefore, shareholders measure the company value by the total cash value of future dividends (or the achievable discounted free cash flow).

The amount of added value mainly depends on a company’s ability to maximize the customers’ willingness to pay for its output by its quality, its image and the sensible integration into a general problem solution (effectiveness: doing the right things) and to produce goods and services cost effectively (efficiency: doing things right; see also Drucker, 1974).

Physical products like chocolate spheres or services like air transport are created within the scope of the performance process. Those performance processes are supported by customer processes and innovation processes. In a market economy, mere performance is not enough. The created goods and services have to be delivered to the customers, advertised to them or rooted as brands to their thinking and their consciousness. In a dynamic competition, even performance and marketing in the form of customer processes are not enough. Goods and services have to be constantly renewed just like performance processes and marketing processes. This is the task of innovation processes (see Figure 15).

Fig. 15: Structure of business processes

The objective of performance processes is to provide the actual products of a company. A product can be defined as a performance that is geared for satisfying needs and produces a benefit for customers (Hill, 1985, 111; Kotler, 1982, 20 et seq.). Performance processes can be depicted as so-called added-value chains (see Figure 16; Österle, 1995, 21; Osterloh & Frost, 1996, 28 et seqq.). Every stage of the added-value chain creates added value independently. Within the scope of purchasing, for example, one should aim at a favorable mix of input factors in comparison to competitors through optimum terms of purchase and delivery. Processing[37] is about the most cost-effective transformation of input factors into output that meets the target groups’ demands.

This is the case, for instance, if a chocolatier like Läderach can buy particularly cheap raw materials. During processing stage 1, the chocolate ball forms are produced and then filled in processing stage 2. The filled balls are wrapped attractively and then delivered to shops and end customers as quickly as possible, while retaining quality, by output logistics.

The differentiation of the stages is due to technical conditions. They can also be split off, meaning performed by other companies (outsourcing; see also Williamson, 1996, 34 et seqq.). It is possible, for example, to delegate purchasing to specialized purchasing companies, or semi-finished products can be bought from intermediate goods suppliers and processing stage 1 is avoided.

There are so-called transaction interfaces between the stages of the added-value chain where products or services are committed from one technically defined “processing stage” to the next. If the product or service comes from another company, a contract is necessary to secure the transaction spot. Therefore, transactions often work via a market with standardized contracts. Accordingly, so-called transaction costs arise for negotiating, executing and reviewing such transactions (compare inter alia Williamson, 1998).

Fig. 16: Performance process as an added-value chain

A performance process or an added-value chain looks fundamentally different depending on whether the performance is a physical product or a service. With a physical product, starting products such as cocoa are physically changed (transformed to chocolate). A transformation takes place.

Services are performed on or for an object. This can be the car during car repair or the customer himself with personal services, for example with medical care (also see Figure 17). In the added-value chain of a service chain, performance stages take the place of “processing stages” (compare Lehmann, 1993, 57). In traveling, these can include[38] getting information before the journey, booking the journey, physical transport, i.e. traveling itself, and check-in, catering at the destination etc. (see Figure 18).

Fig. 17: Business process: goods and services

Fig. 18: Service chain in incoming tourism

(Source: Bieger & Schallhart, 1996/97, 47)

The objective of customer processes is the long-term creation of customer value. It is not about making short-term profit based on selling in the sense of transactional marketing (Belz, 2002, 119). Instead, it is about the long-term satisfaction of customer needs in a longer-term customer process in the sense of relational marketing.

Customer processes can be divided into the sub-processes branding or reputation processes, customer acquisition and customer retention. Customers acquisition and customer retention are “rolling” processes over time. From the customer’s point of view, the customer process becomes an actual buying cycle (see Figure 19).

[39]

Fig. 19: The customer buying cycle

(Source: enhanced according to Dittrich, 2002, 140; following Mauch, 1990, 16)

Often, in the management of marketing tools (for example, when designing advertising), we differentiate between image or brand effect and tactical sales effect. Even though the targeting of the two forms of marketing tool application is different, they influence each other. Tactical, short-term measures also have an effect on the long-term image. It is important to keep the brand attractive for important customers at all times. A chocolate manufacturer like Läderach, for example, has to bring the brand up to date and make it relevant even for committed customers who always buy presents in its shop.

A brand can be defined as a symbol or a name that has a monopoly position for a specific use in the consumer’s mind (Domizlaff, 1992, 60; Woodruff, 1997, 139). “Brands are notions in the stakeholders’ minds that assume an identification and differentiation function and influence the decision behavior.” (Esch, 2010, 20).

Brand-name products are products the consumer spontaneously connects with a particular need. Brands have to be created through winning the customer’s trust and through long-term[40] oriented marketing. They have to be cultivated continually and recharged like a battery. A clear positioning and long-term oriented, integrated marketing are requirements for a brand (compare Domizlaff, 1992, 75 et seqq.; Kotler & Keller, 2012, 296 et seqq.).

A brand is made up of a logo or trademark, a brand claim and brand content (quality or value charge). According to Aaker (1992), the value contribution of a brand consists of a “unique set of associations” with functional and emotional components, which are strengthened by the interaction between the consumer and the brand by developing a definite brand identity (Aaker, 1992, 35). As per Aaker, a brand’s design is the result of brand essence (the brand’s substance; for example, a luxury brand), the core brand identity (for example, reliability) and the extended brand identity (for example, a particular lifestyle). The sum of the advantages and disadvantages of those brand associations is the market value. Important determinants include (Aaker, 1992, 31):

A brand’s strength is measured by two dimensions: brand awareness and brand profile (compare Kotler & Keller, 2012, 265 et seqq.). Esch (2010, 10) cites Coca-Cola’s brand strength as an example. While PEPSI was judged more favorably than Coca-Cola in a blind taste test, this assessment changed when the brand was identified. It is not the taste that is experienced differently, but the happiness associated with the brand that influences taste perception (Esch, 2010, 10).