AUDITING THE
MARKETING FUNCTION
William H. Rodgers, Hamilton Consultants
Gerard A. Osborne, Hamilton Consultants
Philip Kotler, Northwestern University
THE EMERGENCE AND
APPLICATION OF MARKETING
AUDITS
The marketing audit, an organized review of the strategy, systems, activities, and organization for carrying out the marketing function, dates from the early 1950s. Use of audits grew rapidly in the 1970s and 1980s as business environments became more turbulent and complex, and management's increasingly questioned their marketing approaches.
Our experience tells us that not all firms need a marketing audit. New growth companies run by customer-oriented CEOs (chief executive officers) can often progress for many years without reexamining their marketing principles. In addition, large packaged-good companies, like Procter & Gamble and General Mills, have successful marketing formulae that have worked well over the years.
Between these two groups is a broad set of firms continually adjusting complex marketing strategies to a changing web of customers, competitors, products, media, and distribution channels. Many firms, large and small, in industries ranging from fishing boats and semiconductors, to industrial uniforms and minicomputers, have turned to the marketing audit as a means to reexamine their marketing efforts. Though developed nearly forty years ago, the marketing audit is an accepted tool in management's sustained effort to improve marketing performance.
CHARACTERISTICS OF A
MARKETING AUDIT
A marketing audit, sometimes called a marketing opportunity analysis, a marketing performance evaluation, or a marketing checkup, takes many forms, but the common approaches generally cover the marketing mix elements of product, price, distribution, and promotion, as well as marketing objectives, systems, organization, and productivity. A marketing audit may be defined as a comprehensive, systematic, independent, and periodic examination of a company's -- or business unit's -- marketing environment, objectives, strategies, and activities with a view to determining problem areas and opportunities and recommending a plan of action to improve the company's marketing performance.
A marketing audit is comprehensive: it cuts across many marketing functions rather than focusing deeply on a single area like pricing or product development. The audit assumes that marketing elements interact and must be examined in concert. In addition, the audit extends beyond the marketing department to all functions having an impact on customer satisfaction. For example, finance (through flexible but sound credit policy), manufacturing (through good delivery and consistent quality), and research and development (through market-focused product development) all play marketing roles. Four dimensions of marketing-analysis and research, innovation, education and persuasion, and customer service-cut across all functional areas of a business (Exhibit 2-24).
Exhibit 2-24. Marketing Roles for Different Areas of a Firm
| Marketing Tasks |
CEO/General Manager |
Sales Department |
Marketing Department |
R&D/Engineering |
Manufacturing/Customer Service Departments |
Finance |
| Innovation (finding new ways to meet customer needs) |
Imagining new approaches to business |
Bringing back new ideas from the field |
Researching unmet needs |
Developing new products |
Developing new manufacturing processes and logistics |
Inventing new billing and customer information |
| Customer Service (making the customer feel he or she is well taken care of) |
Letting customers know the person at the tops cares |
Responding to customer needs on a timely basis |
Providing useful information |
Listening to what customers want |
Meeting delivery schedule and being responsive on telephone |
Having easy-to-use credit and invoicing systems |
| Analysis and Research (research and planning all customer-serving activitites) |
"Poking" around competitors and customers |
Gathering customer and competitor data |
Conducting survey research; developing market plans |
Researching new technologies and applications |
Researching better ways to service the customer |
Analyzing product-line benefits |
| Persuasion and Education (convincing customers to choose the company's product) |
Selling the big customers |
Selling every day |
Having effective, informative advertising and sales promotions |
Making products and user instructions "idiot-proof" |
Promoting the company on every customer contact |
Making terms and conditions clean and fair |
The audit is systematic, but not rigid; it thus contrasts with regimented accounting audit procedures. The data are collected and analyzed systematically using probing questions and a vast arsenal of analytic approaches. Typically, an audit takes six to ten weeks, encompassing research with salespeople, distributors, customers, and often competitors.
Independence is critical for an effective marketing audit. Confidential conversations with managers, objective examination of market share and financial performance, and unbiased surveys of distributors and customers can only be accomplished well by persons without a career stake in the business. Independent parties who can conduct an audit are several, each with advantages and disadvantages (Exhibit 2-25).
Exhibit 2-25. Candidates for Conducting an Audit
| |
Advantages |
Disadvantages |
| New CEO |
Findings will be acted on. Whatever is learned stays in the organization. Customers feel "the boss cares." |
Managers may withold information. CEO may not be a marketer himself or herself. |
| Academic: a marketing professor |
There is good knowledge of marketing concepts. |
There is no team to conduct research. |
| Internal committee |
Whatever is learned stays in the organization. Committee members learn from experience. |
Managers may withold information. Committee members may not be fully objective. |
| Corporate internal consulting group |
Consultants know the corporation (but may not know the division). |
Managers may withold information. |
| Independent consulting team |
Knowledge of marketing concepts is high. Team has experience bringing change to organizations. |
It is the most expensive alternative. Knowledge may leave with the team. |
Periodic examination is also fruitful, in part because market conditions can change considerably in a five to ten-year period. For example, a gas utility conducted a marketing audit in both 1978 and 1987. In the 1970s, it was reeling from the aftermath of the energy crisis; the 1978 audit helped pinpoint attractive opportunities that even regulators could applaud. By 1987, with environmentalists turning against electric utilities, and with gas prices relatively low, a much more aggressive approach to marketing could be undertaken.
THE AUDIT PROCESS
Auditors must prepare for the marketing audit by holding discussions with the CEO and executive staff, and briefly reviewing some financial and marketing data. Audits are often in two parts. The first part begins with a meeting between the auditors and business unit management, and reviews of the unit's financial statements, product literature, and organizational plans (Exhibit 2-26). The auditors explain objectives, procedures, time frame and expected audit output, and required participation from each manager. Participation usually comprises an initial two-hour interview; then others are designated for potential interviews and provision of operating and financial information. The auditors typically tour manufacturing and other operations areas to better understand product features, quality levels, and cost differentials that distinguish the business from competition. The auditors also review customer service, shipping, credit operations, order entry, advertising (if in-house), research and development, and manufacturing engineering. The auditors collect memos, reports, and analyses that help them understand the firm's marketing strategy and business processes.
_________________________________________________________________
Exhibit 2-26. The Marketing Audit Process
Part I
Review background materials: financial results, organization chart, business plans.
Interview management and tour facilities.
Ride with salespeople and visit customers.
Hold interim meetings to discuss findings and likely alternatives.
Part II
Gather additional information:
- additional management and salesperson interviews.
- interview and written surveys with customers and trade.
- internal written survey.
- outside expert interviews
- competitor interviews.
- product costs and profits, sales results, marketing budgets.
Perform analysis and develop alternatives.
Hold work sessions to develop marketing strategy and next steps for implementation.
_________________________________________________________________
Managerial interviews are conducted. Managers discuss their responsibility areas in depth; many questions are asked of several managers to elicit different perspectives.
All interview data are confidential. Good auditors project a professionalism in under- standing the business and maintaining confidences that allows business unit managers to "open up" on controversial topics. Manager candor is particularly important when two or more powerful executives hold opposing views. Auditors surface these views by using unattributed quotes when reporting findings. Competent auditors continually draw upon their experience to probe the consistency, appropriateness, and sufficiency of the firm's marketing plans and actions.
After initial interviews, auditors usually take two parallel steps. First, they conduct a library search for independent published material on the firm, competition, and industry. Second, they become familiar with the sales force and customer buying behavior by making joint customer calls. Through this process, auditors gather clues in several areas including market needs, firm competitive- ness, sales and purchase processes, and where the organization is functioning well and poorly.
Visits with salespeople provide invaluable "soft" data; salespeople are notoriously irreverent regarding "what's really going on" at headquarters, including manager disagreements, rivalries, and favoritisms.
Following these steps, the auditors analyze and organize information and report key issues and observations to the management team in a two- to three-hour working session. Surfaced issues are discussed, and preliminary ideas for eventual audit outcome and alternative action courses are laid out.
The second part of the audit is typically more time consuming than the first part. It comprises customer and trade surveys; further secondary data gathering; analysis of competitive products; evaluation of marketing strengths and weaknesses; interviews with industry experts; detailed analysis of internal financial, sales, and operating information; and second managerial interviews. Management is formally surveyed to compare its views on the firm and competition with customer viewpoints. Finally, all data must be analyzed (see Exhibit 2-27 for examples).
The audit concludes with the presentation of findings and recommendations, first privately to the CEO and one or two executive staff, and then at a day-long meeting with the entire management group. The goal is to gain a common understanding of audit findings so a consensus on future marketing needs, opportunities, and actions is formed.
Exhibit 2-27. Diagnostics and Analysis in a Marketing Audit
| Marketing strategy and objectives verification |
Individual managers state independently what they believe are the strategy and objectives. Often major differences exist and must be resolved. |
| Product-line profit |
Auditors calculate which product lines produce profit and which do not, using direct costs and activity-based allocations of overheads. |
| Comparison of company to competition |
Customers and internal managers are surveyed on how the company stacks up against competition on several dimensions. |
| Allocation of additional marketing |
Managers are surveyed on how they would spend an additional $1-5 million among ten to fifteen marketing activities. This provides evidence of agreement and disagreement on what areas of marketing are most important. |
| Customer market share |
The company's and competitors' market shares are calculated for key customers or segments to identify company areas of strength and weaknesses. |
| Sales penetration |
Territory penetration versus sales potential of territory by individual salesperson is measured to determine if some territories should be split. |
| Product development tracking |
Case studies are analyzed to determine possible bottlenecks and improper procedures in product development processes. |
| Price-profit interaction |
Demonstration of impact of price increases or decreases on profit. |
| Product-line additions and deletion |
Product-line length is measured over time to see if complexity has escalated beyond manageability. |
MARKETING AREAS FOR REVIEW
Data collection, analyses, and reporting are organized around set comprehensive marketing constructs. The authors use a six-part framework.
- Marketing environment -- The auditors investigate all key aspects: customers, competitors and suppliers, and social, political, technological, and regulatory trends. This analysis both identifies important trends for the business and gauges firm performance versus competition. Management frequently speaks proudly of historical sales increases, yet analysis can reveal market share losses in growing markets.
- Marketing strategy and objectives -- Marketing strategy and objectives should be realistic and understood by all managers; this is not always so. A semiconductor firm's goal was 25-percent growth from new products; analysis revealed less than 10 percent historically; management reassessed goals. An auto parts company sought high performance on service, quality, and price; however, rapid product line expansion caused substandard performance in each area.
- Marketing organization -- Auditors must assess if job roles and responsibilities are clear, and if measurement and reward systems motivate performance. A typical issue is that marketing and sales are often viewed as having marketing responsibility for the entire company; of course, each department-manufacturing, R&D, and so forth-must be customer driven. Marketing should plan and help coordinate the marketing effort, and carry out key functions like advertising and product management. It should not try to carry out marketing for the entire business.
- Marketing systems -- Auditors assess the efficiency and effectiveness of marketing systems: new product development, marketing research, customer satisfaction measurement, sales forecasting, sales lead generation, customer database design and update, competitor intelligence, and product pruning. Often these processes are languishing or are nonexistent; the audit provides impetus to get back on track.
- Marketing productivity -- Marketing productivity raises questions of product line profitability. Do some products merit additional marketing effort? Should others be repriced, cost reduced, or discontinued? A door panels manufacturer also distributed frames and, sills with its doors. Product profitability analysis revealed the same dollar contribution from distribution as from manufacturing and prevented an exit from distribution.
How should marketing resources be allocated across the marketing mix -(e.g., product improvements, trade incentives, additional sales staff)? Asking managers to allocate an additional $5 million of marketing resources is a very telling exercise when framed against customer and distributor comments regarding necessary improvements.
- Marketing mix -- Marketing auditors examine the four P's (i.e., product, price, promotion, and place [distribution]) to determine company performance versus competition and to assess internal consistency. Managers often place too much emphasis on one element (e.g., advertising copy) and shortchange others (e.g., pricing, distribution).
BENEFITS FROM A
MARKETING AUDIT
Four major benefits flow from a marketing audit. First, management is provided with an independent, objective review of the firm's marketing performance and opportunities. Audits often reveal inconsistencies in opportunities and marketing efforts. For example, in a photographic products firm, pricing and product policy were at odds. The product was positioned as superior in quality, yet dealer prices were set below competition in an attempt to provide dealers with higher margins. However, using standard markups, many dealers set retail prices below competition; consumers therefore perceived the product as inferior.
Second, marketing audits often lead to strategic marketing change. Careful assessment of the changing environment, customers, channels, and competitors may lead to a reassessment of firm direction, not just fine-tuning of pricing advertising, or sales force deployment. As a result of an audit, the semiconductor division of a large communications firm refocused efforts on serving other design and manufacturing divisions in the firm, and deemphasized the merchant market where prices and margins were slipping precipitously.
Third, the audit helps set priorities for marketing programs. Ideas for improved marketing frequently exist somewhere in the firm, but controversy and political in-fighting make choices difficult. A seasoned auditor with group process skills, using new data and analyses, can focus managerial effort on important moves, circumventing political struggles that bog down the business.
Fourth, audits educate managers that satisfying customers is a joint responsibility, not simply a task to be delegated to sales and marketing.
MOST COMMON FINDINGS IN AUDITS
Based on over forty marketing audits across a broad range of industries, some common marketing failure patterns emerge:
Insufficient knowledge of customers' behavior and attitudes -- Many consumer durables and business-to-business product firms fail to survey customers deeply or frequently enough. When surveys are conducted, data on needs, perceptions, preferences, and behavior are frequently never seen or used by senior management.
By contrast, the story is different in consumer packaged-goods firms; in start-up firms where CEOs are in active contact with customers; and in many Japanese firms where managers are continuously in the field with distributors or customers. More general managers should follow the late Sam Walton's example. While chairman of Wal-Mart, he visited two or three Wal-Marts a day, spent time with employees and customers, and, by his own example, emphasized the importance of customer knowledge and satisfaction.
The audit process should focus on both the firm's direct customers (e.g., wholesalers and dealers) and final customers. Enlightened firms increasingly view channel members as partners with whom to work toward satisfying ultimate customers.
Failure to segment the market most advantageously -- Many managements believe all customers are driven by the same needs and responses. They may view customers as geographically segmented (viz., geographic sales force deployment), or segmented by size (viz., different distribution for small and large customers). More subtle differentiation in how different segments buy or use the product is overlooked.
For example, a cellular telephone company used industry segmentation based on Standard Industrial Classification (SIC) categories for traditional products; cellular opportunities were also examined by SIC. Analysts determined that types of people driving frequently and needing inbound or outbound communication service were a better segmentation system. Occupation-for example, salespeople, repair and maintenance service people, construction contractors, and service professionals like physicians and consultants-was a far better way to segment than SIC classification like agriculture, manufacturing, and distribution.
Cutting price vs. increasing value -- Management personnel in many firms too frequently listen to sales force complaints that prices are too high. They reduce price more than necessary and have too little profit to reinvest in value-adding activities or product features. Introduction of low-price second and third lines may help hold market, but often management fails to invest in a high value-added line that can be priced high with good margin.
Failure to invest in the future, particularly in human resources -- Too often, managers view marketing expenditures as a today cost rather than an investment in the future. Packaged goods companies understand that expenditures like advertising build future demand, but less sophisticated marketers view expenditures other than plant and equipment, and R&D, as here-and-now expenses: they are reluctant to spend money if profits are not immediate.
A common shortcoming is failure to view the sales force as an investment. Frequently firms in mature businesses, particularly during or after recession, add sales people reluctantly, if at all. They bet on more sales from existing salespeople and fail to add salespeople in underpenetrated territories. The cause is often an almost unconscious agreement between sales management and salespeople to maintain the status quo. Sales managers dislike adding salespeople and cutting territory sizes. Salespeople agree, as they fear a lower income with smaller territories. The result is both suboptimal sales and profits for the company.
Tendency to delegate new product development to the developers -- All businesses need continually to improve products, or to introduce new products, to keep up with changing customer tastes and expectations, and to stay ahead of competition. A close marriage between technology and customer needs is essential. Too often, senior management delegates product development to technical people who are disinclined to talk to customers in sufficient depth to understand real needs. Also, sales and marketing people report new product ideas from the field, but these are ignored or "handed off" to developers and dealt with on a secondhand or thirdhand basis.
Best product development occurs when senior management is in frequent touch with customers and knows firm technology well. The turnaround at Harley Davidson motorcycle company was driven in large part by improved products based on detailed management knowledge gained from circulating among Harley owners at motorcycle rallies.
Considering marketing as the job of the marketing department -- For over twenty years, the "ideal" organizational move to improve marketing was appointment of a marketing vice president. Identification of a high-level marketing officer was expected to bring a marketing orientation to the entire firm. Unfortunately, the reverse often happened; marketing was viewed as the marketing department's job; others took no marketing initiatives. Some, like Tom Bonoma, formerly of the Harvard Business School, now believe the marketing director's job really should be to "self destruct," leaving marketing in the hands of other functions -- sales, advertising, customer service, manufacturing, development, and finance.
AMA Management Handbook © 1994
