Marketing Concept - The St. Gallen Management Approach

[1]utb 4464

Eine Arbeitsgemeinschaft der Verlage

Böhlau Verlag • Wien • Köln • Weimar

Verlag Barbara Budrich • Opladen • Toronto

facultas • Wien

Wilhelm Fink • Paderborn

A. Francke Verlag • Tübingen

Haupt Verlag • Bern

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Mohr Siebeck • Tübingen

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Ferdinand Schöningh • Paderborn

Eugen Ulmer Verlag • Stuttgart

UVK Verlagsgesellschaft • Konstanz, mit UVK/Lucius • München

Vandenhoeck & Ruprecht • Göttingen • Bristol

Waxmann • Münster • New York

[2][3]Thomas Bieger

Marketing Concept – The St. Gallen Management Approach

Haupt Verlag

[4]Prof. Dr. Thomas Bieger is a full professor of Business Administration specializing in Tourism since 1999 and director of the Institute for Systemic Management and Public Governance at the University of St. Gallen. He was Secretary General of the AIEST (International Association of Scientific Experts in Tourism), and he is the chairman of CEMS (Global Alliance in Management Education). He held several guest Professorships at the University of Innsbruck and the Vienna University of Economics and Business. He also taught at the Simon Fraser University, Vancouver, at the Università della Svizzera italiana in Lugano and as William Fraser Fellow at the University of Otago, Dunedin/New Zealand. From 2003 until 2005 he served as a Dean of the Faculty of Management at the University of St. Gallen. From 2005 until 2010 he was Vice President, since February 1^st 2011 he is President of the University of St. Gallen.

1^st edition: 2015

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[5]Preface

The St. Gallen Management Model created a comprehensive orientation framework for the management of companies and organizations of all kinds. Business processes play a special role in the model. They enable the real core function that justifies the existence of a company or organization, which is to deliver goods and services to third parties, usually for money.

This book is guided by the St. Gallen Management Model and, therefore, focuses on business processes. It also follows the approach of the marketing concept as an overall planning-and-designing approach, not just for marketing, but for all business functions. The content of this book thus offers an introduction to marketing as well as the design of business processes as a whole.

The book addresses two targets and thus two target groups: To begin with, it serves as a basis for the introduction to business administration as part of the Marketing Management curriculum during the Assessment Year at the University of St. Gallen. It covers the subject areas of marketing, performance and innovation.

At the same time, it is designed to appeal to the public at large as a basic text for study or practice. It serves as an introduction to or an update of knowledge in the areas of marketing and performance/performance process, while also presenting the marketing concept as a pragmatic thought-and-action approach used by generations of (marketing) managers.

The outline of the book follows the usual structure of a marketing concept and is also the basis for the division into six lecture blocks at the University of St. Gallen:

As a topical guide for decision makers and as teaching material on a university level, the book’s aim is not maximum depth and the transfer of detailed knowledge. Rather, the goal is contextual knowledge and new perspectives in thinking. As a textbook, it primarily points out the key sources.

At the same time, the integrative approach cultivated at the University of St. Gallen will be taken into account. This results from a focus on the St. Gallen Management Model as well as from methodically including the approach of networked thinking in the market-analysis section and by cross-referencing other disciplines, especially economics and law.

In part, this book is based on principles, concepts and text blocks of the book “Einführung in die Managementlehre” by Dubs, Euler, Rüegg-Stürm and Wyss (2009), which was used previously as a textbook at the University of St. Gallen and to which the author also contributed. The following authors also worked on the previous book in the area of business processes: Günther Schuh, Thomas Friedli, Torsten Tomczak, Fritz Fahrni and Sven Reinecke.

I want to thank Mrs. Margareta Brugger for transcribing the manuscript, student assistant Jessica Schulten-Baumer for revising and editing the text, and my wife Barbara for critical reading. I also thank Samuel Heer for his valuable support, not only in revising this book but also in our efforts to offer actual and method-oriented lectures on the assessment level of the University of St. Gallen. I also thank my colleagues o. Univ. Prof. Dr. Johannes Rüegg-Stürm and assistant professor Dr. Simon Grand for stimulating discussions, the good cooperation, and many valuable inputs.

[7]Contents

Preface

Table of Figures

Bibliography

Alphabetical index

[10][11]Table of Figures

LÄDERACH — Chocolatier Suisse

The LÄDERACH company dates back to a bakery founded in 1926 in Netztal, Canton of Glarus, by Rudolph Läderach Sr. In 1962, Rudolf Läderach Jr. start- ed a business as a chocolatier in Glarus. The young company achieved a breakthrough with a patented invention for manufacturing thin-walled choc- olate truffles (hollow spheres). This invention simplified manufacturing of chocolate truffles as a semi-finished product for high-quality catering busi- nesses and specialty shops, while also improving product quality. Ten years later, the foundation of CÜNFISEUR LÄDERACH GMBH & CO KG in Germany was the first step abroad. Also, the company launched an export business.

By 2004, under the next generation of leadership with Jürg Läderach, the company had developed into a strong B2B brand: trade with specialty retail- ers and catering businesses. Questions arose about whether the company should and could establish a second business focus as a consumer brand and whether it could sustain the B2B trade in the long run. The following fictional management dialogue, which could have taken place in 2003, presents es- sential aspects of this decision:

Managing director:

“We have largely reached the saturation point with our current market position in the B2B sector. We face cutthroat competition with some other suppliers of semi-finished chocolate products. We supply premium semi-finished products, especially our widely popular, high-quality thin-walled truffle-shells to specialist retailers like confectioners and to catering businesses. They refine our products and turn them into “their own” truffles and desserts. Meanwhile, the consumer market is gradually consolidating. More and more confectioners are being acquired or are merging to form bigger companies.

[16]Hotels are integrating themselves into hotel chains that run central purchasing departments. On the other end of our value chain, there are increasingly larger suppliers of cocoa raw products, like BARRY CALLEBAUT, who steadily consolidate and gain market influence. The cocoa harvests are increasingly bought up by international trading houses and are becoming more and more a plaything for commodity speculators. Hemmed in between cocoa suppliers and specialist retailers, we are faced with dwindling margins. In the longer term, stagnating sales and dwindling margins threaten the development of our company. We have to create a second mainstay.”

Marketing director:

“This is exactly the development I have warned against for years. Whoever has direct access to the end customer is in the stronger position. Eventually, the consumer decides what to buy. We will no longer be replaceable and we can demand a reasonable price for the quality we deliver only when we are a firmly established consumer brand. Committed, satisfied and loyal customers for whom we create a real value are our most important assets, virtually our customer equity.”

Production manager:

“The establishment of a second mainstay with a line of products directly addressing the end customer also means extending the value chain. We would have to reorganize production to make more ready-made end products like chocolates. This entails a massive increase in investment. Besides, I want to curb the marketing director’s euphoria a little. The end-customer market is a mature market. In an increasingly consolidating specialist retail situation, we are competing against established chocolate brands. Getting shelf space at traditional food retailers like COOP and MIËROS is a big challenge for sales and marketing.”

Finance manager:

“As finance manager, I certainly see the imperative to establish a business area in which we have larger margin flexibility. Conversely, the production manager has already noted the big investments required to extend manufacturing capabilities, on the one hand, and to establish the required reputation as a strong brand and build distribution channels, on the other. But I want to mention another aspect: if we extend the value chain and reach the end-customer market virtually around our buyers of today, we will compete with our existing clients. This could be damaging to the loyalty of today’s customers and put additional pressure on our established mainstay.”

[17]Managing director:

“Ladies and gentlemen, I see your concerns from a broader perspective. To successfully lead our company into the next generation, I want to develop a second mainstay. I see this as a necessary step to maintain our ground in a continuously consolidating market, characterized by bigger companies, and to achieve the necessary margins, while maximizing our traditional core competencies in processing chocolate. I, therefore, want our marketing director to develop a marketing concept for entering the end-customer market, and I want the production manager to outline the consequences in regard to our performance concept and the necessary innovations.”

The LÄDERACH company did indeed take the step onto the consumer market in 2004 by acquiring MERKUR CONFISERIE AG. At the time, MERKUR CONFISERIE AG operated a network of 41 specialty shops throughout Switzerland. Thus, LÄDERACH was able to reach end customers directly via a strong and well-established retailer and implement an effective distribution concept. Gradually, the MERKUR shops were repositioned as LÄDERACH chocolate boutiques, whereby the LÄDERACH brand was positioned successfully with consumers through branded stores. At the same time, performance processes were changed. For example, the company opened a new distribution-and-service center in Bilten, Canton of Glarus, in 2006, and opened a chocolate factory in Bilten in 2012. In 2012, the company also presented itself with an integrated value chain that spanned manufacturing of semi-finished and consumer products, and distributing consumer products to the end customer. It presented itself as a strong brand with clearly defined business-and-competency areas. LÄDER-ACH’s management is already transitioning into the hands of the next generation, with Elias Läderach as a confectioner entering the product development of the family business, and Johannes Läderach joining the company after completing his master’s degree at HSG in 2011.

For consideration:

Generating benefit is the objective of every human effort. Benefit can be defined as “a good’s ability to satisfy a specific need of the consumer” (Suchanek, Lin-Hi & Piekenbrock, 2015). For example, one chops wood and lights a fire to satisfy the need for warmth.

An object’s value is defined by the benefit expected to stream from it. Thus, value is defined as “the expression of a product’s importance for satisfying the subjective needs” (Suchanek, Lin-Hi & Piekenbrock, 2015). If someone chops more wood than he actually needs for his fire and makes a woodpile, he creates economic value. He can use the wood later for cooking or heating, or sell it. More complex products or services require more processing stages. Chocolate products, for example, require the production of cocoa, transport to a producing country, roasting / melting / conching as the actual chocolate production, finishing in the sense of converting it into the final shape (i.e. bar of chocolate), packaging, transport and sale. Those procedures are called the value added chain (or process) (compare Gutenberg, 1971). Every element of a value chain can be subdivided into individual activities, e.g. soil cultivation, planting cocoa trees, harvesting.

Fig. 1: Example of a value chain

(Source: the author)

[19]Such value-creation processes must be performed based on a division of labor and often are spread geographically, because of the necessary resources or competencies. Cocoa production requires a tropical climate; chocolate production requires milk and machinery.

Such a value-creation process based on a division of labor must be organized (compare Weick, 1979: Organization as a process of continuous organizing), because a value-creation process that yields sensible, useful products must be created from a system. This means a “set of organized elements with qualities linked by relations” (Suchanek, Lin-Hi & Piekenbrock, 2015), such as different cocoa producers, milk producers, means of transport etc. The organization’s objective is a lasting, stable, efficient and cooperative integration and coordination of the labor services provided.(compare Rüegg-Stürm & Grand, 2015, 74 et seqq.).

This requires a “meta-system” of communication, events, decisions and actions (see also Rüegg-Stürm & Grand, 2014, 78).

Fig. 2: Value-creation network and meta-system

(Source: the author)

There are interfaces, frequently technical transitions, between the individual value-creation stages. For example, different machines are necessary for chocolate production and packaging. Different people or organizations perform these activities — transaction interfaces arise that incur costs. Transaction costs can be defined as costs that arise from using the market (compare Williamson & Masten, 1995, 233 et seqq., see also section 2.2.1).

[20]How a value chain is divided between organizations and how extensive the value-creation of a company is, or how much of the value chain it covers, depends mostly on the relationship between transaction and organization costs (compare Crew, 1975; Coase, 1937: Theory of the Firm). A Swiss chocolate producer would save transaction costs if it also owned plantations, but organization costs, such as costs for managing and controlling business units with different production logic overseas, would increase.

Fig. 3: Transaction interface and company

(Source: the author)

Companies and other productive organizations, such as public administrations, churches and associations, can be defined as socio-technical systems that provide goods and services for third parties (compare Rüegg-Stürm, 2003, 20 et seq.). In this sense, they are purpose-oriented and create added value that arises from the difference between their input and output. A chocolate producer creates additional value on pure cocoa, a specific contribution to the entire value chain (see also Rüegg-Stürm & Grand, 2014, 79).

As mentioned before, companies, but also entire value chains, must be organized, meaning deliberately shaped. This is included in the general term “managing”. The traditional notion of “managing” is expressed in the management cycle defined by Fayol.

[21]

Fig. 4: Management cycle according to Fayol

(Source: Fayol, 1929, 34 et seqq.)

“Preview and planning” as an analysis is the basis for organization, management and coordination, followed by controlling. That way, a process with analysis and goal setting arises. To reach those goals or to overcome “gaps” between the status quo and goals, measures are taken, their effect is controlled and this can lead to new goals. There is a mechanistic understanding behind this notion of management, e.g.:

That is why in the first generation of the St. Gallen Management Model, management was described as shaping, leading and developing social systems (Ulrich & Krieg, 1972). The fourth generation understands management as a reflective shaping practice (compare Rüegg-Stürm & [22]Grand, 2015). It is necessary to reach common views, to agree on goals and achieve conviction about the necessity of measures.

A company acts in an environment. This includes the economic context (supplier relations, demand, markets), the social / political context (local culture, political interests, legal framework resulting from it) and the natural context (natural resources, location etc.). In the St. Gallen Management Model, environment is understood as “the possibility and survival space pertinent to an organization” (compare Rüegg-Stürm & Grand, 2015). In this, a company must develop its organization-specific resource configuration. In a biotech company, for example, this includes access to a regional university and a relationship with a supplier network that facilitates access to new technologies.

Since the environment changes constantly, e.g. customers’ needs, management has to solve a twofold problem: on one hand, it must create a certain value as well and cheaply as possible, i.e. effectively and efficiently, which requires standardization and stabilization. On the other, it must constantly react to changes in the environment and remake itself, which requires differentiation and disrupting routines. This often generates conflict: a statically efficient company that makes the best chocolate today can be dynamically inefficient, if it misses trends.

Environment also includes stakeholders. A company can survive only if it is legitimized by all stakeholders and is considered attractive, so that they continue to support the company. If, for example, investors loose faith in a company and withdraw their money, the company fails or is sold to a new owner. Companies that damage their employees’ trust have trouble recruiting on the job market and may even face a strike. Obviously, a company without customers cannot generate revenue.

As previously mentioned, a company is always subject to new challenges through changes in its different environmental spheres and stakeholders. Legal circumstances, for example, can alter the resources of a company if properties it owns get designated for building through a change in zoning and thus become more valuable. A societal change in values can lower demand for products or even label them as ethically questionable — something that is the case today with drink and tobacco, which were still widely accepted in the 1960s. Or the globalization of markets leads to new competitors and a company has to reposition itself.

Thus, corporate management constantly faces new challenges and has to communicate, reflect, convince, stabilize, intervene and make decisions in a stream of events. In the example above, the Läderach company is confronted with the consolidation and focusing processes of the[23] customer market and specialty retailers and thus faces increased pressure on margins. Decision imperatives about strategic focus, markets, products and methods of manufacturing follow from this. Therefore it needs decision routines, for example in a business meeting, as described above. The bases for the decision capacity are legitimacy of the deciding bodies and reliability of resources such as information.