Marketing Leners 3:4, (1992): 393-393

1992 Kluwer Academic Publishers, Manufactured in the Netherlands.

Optimal Multiple-Objective Marketing Strategies

STEPHEN S. BELL
Stern School o f Business, Neu, York University, N e w York, N e w York 10003

GREGORY S. CARPENTER*
J. L. Kellogg Graduate School o f Management, Northwestern University, Evanston, IL 60208

Key words: Marketing Strategy, Multiple-Objective Decision Making

[June 1992]
Abstract

Brand managers often design strategies to achieve multiple objectives, but how managers choose
among alternatives and consequently how multiple objectives should be incorporated into models
of marketing strategy have received little attention. This paper explores the incorporation of multiple objectives into models of optimal marketing strategies. We focus on one marketing strategy
issue, defensive marketing strategy, and develop a multi-objective marketing strategy model. We
derive optimal changes in price and advertising spending given the defending brand's multipie
objectives. Our analysis produces new descriptive insights about the links between decision making and competition, as well as new insights into defensive marketing strategy. We also discuss the
potential for fl~ture work along these lines and extensions in other areas of marketing strategy.
Brand managers often design marketing strategies to achieve multiple objectives.
For example, Kotler (1991) identifies a number of different objectives for marketing strategies at different stages of the product life cycle. When launching a new
product, generating c o n s u m e r trial, awareness, and repeat purchase are critical to
generating growth and, to a lesser degree, profits. In mature or declining markets,
brands offen seek greater profits rather than high growth, although they may generate higher profits through increasing usage among existing customers or by extending the product line to generate greater volume, in designing defensive marketing strategies, brand managers often seek high profits, but often seek to
preserve sales or market share. For instance, facing intense new competition in
the U.S, luxury car market, B M W has explicitly stated its desire to maintain market share (Ross 1989).
Analyses of marketing strategy have for the most part assumed a single objective. In the case of new product strategy, theoretical modets analyze the optimal
positioning of a brand to maximize profits (e.g. Carpenter and N a k a m o t o 1990,
Choi, DeSarbo and Harker 1990, Lane 1980; one exception is Carpenter and Nak-

*Our thanks to John Hauser, Don Lehmann, and D. Sudharshan for comments. Financial support
provided to the second author by the Richard M. Clewett Research Professorship is gratefully
acknowled~ed.

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S T E P H E N S. B E L L A N D G R E G O R Y S. C A R P E N T E R

amoto 1992). On the other hand, empirical analyses of new products model consumer reaction using conjoint analysis, multidimensional scaling and other techniques to evaluate sales rather than profit potential (e.g. Urban and Hauser 1980,
Wind 1982). In the case of defensive marketing strategy, Hauser and Shugan
(1983), subsequently dubbed "Defender," identify profit-maximizing adjustments
to the defending brand's marketing mix using an empirically-grounded consumer
model of perceptually differentiated brands.
Expanding conventional models to include multiple objectives raises challenging issues about decision making. A growing number of empirical studies on decision making show that choosing among multidimensional alternatives often involves heuristics and biases such as anchoring and adjustment or elimination by
aspect (e.g. Tversky and Kahnemann 1974). When managers choose among various strategic alternatives based on multiple objectives, similar biases and heuristics may be operating. For example, previous market share or profit levels may
become anchors or reference points in evaluating alternatives, as BMW's desire
to maintain market share suggests. Multi-objective marketing strategy models reflecting these aspects of decision making should have both high descriptive and
normative value.
This paper explores the impact multiple objectives have on marketing strategy.
We focus on one strategic marketing problem, defensive marketing strategy, and
consider the impact on pricing and advertising decisions if the defending brand
seeks to maximize profit and to maintain its market share (or some significant
portion of it). To explore the impact of these objectives on defensive strategies,
we employ the Defender consumer model (Hauser and Shugan 1983). This model
is particularly appropriate because it performs weil in empirical tests (Hauser and
Gaskin 1984) and the insights it generates are robust across a variety of assumptions about competition (Kumar and Sudharshan 1988, Hauser 1988, Hauser and
Wernerfelt 1988). Using the Defender consumer model, we construct a multi-objective defensive strategy model that reflects the nature of defending manager's
decision making. We solve it to derive optimal multi-objective pricing and advertising strategies and we compare those with the profit-maximizing strategies.
Our analysis and results have significant descriptive value. The insights for
competition are especially important. Under traditional assumptions about managerial decision making, competition is the interplay of decisions made by fully
informed, perfectly rational managers seeking maximum profit and consumers
seeking maximum utility. Mounting evidence suggests real consumers behave differently. Presumably, so do real managers. Departures from the traditional assumptions by managers affect the strategies they choose and ultimately the process of competition. By relaxing traditional assumptions about managers, we
draw a closer tink between decision making and marketing strategies, which provides a richer description of competition.
Our analysis also provides new normative insights in the area of defensive marketing strategy, extending Hauser and Shugan (1983). Our analysis shows that
under identical market conditions multi-objective defensive strategies will differ
considerably from profit-maximizing defensive strategies. Some differences such

MULTIPLE-OBJECTIVE

385

MARKETING STRATEGIES

as simple qualitative differences are of course to be expected. However, we show

that considering multiple objectives produces insights that are qualitatively and
quantitatively different. We also show that the process of creating defensive marketing strategy differs.
We begin with a review of the Defender consumer model. We extend it by incorporating multiple objectives and we derive the pricing and advertising reactions to new entry. We conclude with a discussion of potential directions for future
work in the area of multi-objective marketing strategy.

1. Defending Market Share and Profit

1.1. Defender consumer model

The Defender consumer model, summarized in the figure (a), shows the positioning of three detergent brands (Ivory, Joy, Ajax) in a two dimensional space and
the fraction of buyers who prefer each. The market share for each brand is

where %_ and % + are the angles shown, and f(cO is the distribution of consumer
tastes. For example, numbering brands counterclockwise, the market share of
Ajax is m~ =

I cxl2fled
J0

da, of Joy is m2 =

fc~~23f(o0
12

&x, and so on.

Figure 1. D e f e n d e r c o n s u m e r m o d e l for a t h r e e - b r a n d m a r k e t (a) before and (b) after e n t r y of

Attack.

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STEPHEN S. BELL AND GREGORY S. CARPENTER

The entry of a new brand, represented in the figure (b), shows Attack has entered competitively and lower adjacent to Ajax. A t t a c k ' s entry reduces the m a r k e t
share of the adjacent brand because now the lower bound on its share, denoted
by %n, is greater than its pre-entry lower bound, %i (i.e., c9~ > %). For example,
the share of Ajax in figure (b) falls from [%2 - 0]/90 to [%2 - O t n I ] / 9 0 if the
distribution of c o n s u m e r tastes is uniform. F u r t h e r m o r e , if spending on awareness
advertising is reduced, then market shares adjusted for awareness will fall further.
Like most other previous analyses, we consider " r e c t a n g u l a r " markets in which
tastes are uniformly distributed. This enables us to focus more clearly on the
competition between the defender and the entrant, and regularity can be relaxed
for empirical application (e.g., H a u s e r and Gaskin 1984). We also limit our attention to one non-price marketing mix variable, advertising. Generalizations to distribution and other promotional expenditures is straightforward.

1.2. Brand decision model

If the defending brand seeks profit alone, its objective function can be simply
stated as
Max II(p,k) = N(p - c)m(p)A(k) - k.

(1)

where II(p,k) is the profit of the defending brand, N is the n u m b e r of buyers; p

the defending brand's price; c is its cost; ra(p) = [%j+ - &]/90 is its market
share; and cC is a p a r a m e t e r that denotes the defending brand's lower market
boundary, such as c% = ot after entry and a = %j_ before entry; A(k) is its
awareness level, and k is its awareness-advertising expenditure.
If both profits and market share are sought, a n u m b e r of objective functions are
reasonable. One possibility is a c o m p e n s a t o r y model in which managers seek to
maximize
v = y II(p,k) + ( 1 - y ) s(p,k)

(2)

where s(p,k) = A(k)m(p) is the defending brand's market share adjusted for
awareness and y is a constant such that 0 -< y -< 1. Equation (2) implies that profit
and m a r k e t share are traded oft in a constant manner. This may be suitable in
some situations, but in the case of defensive marketing strategy, our discussions
with managers suggest that the pre-attack market share takes on a special significance - it b e c o m e s a reference point or anchor (Tversky and K a h n e m a n n 1974).
As such, a suitable objective function should reflect m a n a g e r ' s desire to achieve
high profits and to preserve the pre-attack market share or some significant portion of it. This suggests that managers will choose the highest profit strategy
a m o n g all strategies that satisfy their m a r k e t share objective. More formally, this
is simply

MULTIPLE-OJECTIVE MARKETING STRATEGIES

Max H(p,k)

subject to s(p, k) >- s

387

(3)

where s is the defending brand's target share.

In equation (3), s is a parameter that can vary from zero to one. Its value
reflects the target share set by the defending brand's managers. This target can
be set above or below the sales level associated with the profit-maximizing defensive marketing strategy, s*. We focus on the case in which s > s*, because managers exhibit a preference for holding larger not smaller market shares. Furthermore, for s > s*, there are two possible sub-cases; we focus on the case where
actual sales equal the target value (that is, s = s ) because out interest is in examining how a binding market share objective influences the defending brand's
strategy. We also examine defense against lower adjacent, competitive new
brands; generalization to defending against upper-adjacent entrants is immediate.

2. Optimal marketing mix reaetions

2.1. Pricing strategy
One property of the solution to equation (3) illustrates the first important difference between profit-maximizing defensive strategies and those designed to
achieve multiple objectives. Rather than suggesting qualitative or quantitative differences in actual defensive strategies, our first result indicates an important difference in the process by which defensive strategy is formulated:
PROPOSlTION I: PRICE-ADvERTIS1NG COUPLING. Th optimal multi-objective de-

fensive price and advertising level depend on each other, j

Proposition 1 has managerial implications for the process by which defensive
strategy is formulated. If the sole objective of the defending brand is to max[mize
profit, then its pricing and advertising decisions are decoupled, given the nature
of the response model used here (Hauser and Shugan 1983). The immediate practical consequence of decoupling is that pricing and advertising decisions can be
made independently. This suggests a sequential decision process with price set
first, followed by the advertising budget. If so, it may be useful to make the price
decision at a higher organizational level because it precedes the advertising budgeting decision and thus is, in one sense, more important. In contrast, Proposition
1 shows that pricing and advertising decision must be made simultaneously if
market share and profit are objectives. Thus, the selection of brand objectives
will have implications for the optimal process of strategy formulation.
Multiple objectives will also lead to important quantitative differences in defensive strategy. The impact of entry on optimal pricing in regular, 2 rectangular markets is unambiguous if the defending brand seeks both market share and profit.

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STEPHEN S. BELL AND GREGORY S. CARPENTER

t a s t e s a r e uniform@ distributed and the market is regular, then the optimal multi-objective defensive pricing strategy includes reducing price. Howerer, the optimal multi-objective defensive price never
exceeds the pro't-maximizing defensive price.

PROPOSITION 2" DEFENSIVE PRICING. I f c o n s u m e r

Proposition 2 provides useful insights into defensive pricing and draws an interesting comparison with the profit maximizing case. Reducing price is a useful
rule of thumb for brands pursuing either profits alone or profits and market share
in an unsegmented market. Thus, lowering price in response to new entry is an
optimal rule of thumb regardless of whether the objective is profit alone or market
share and profit. However, the extent of price decrease depends on one's objective. Maintaining market share requires greater price reductions than those required for maximizing profit.
The logic of this result is straightforward. The entry of Attack leads to lower
sales for the defending brand; lower sales reduce optimal prices if the defending
brand is maximizing profit (Hauser and Shugan 1983). Similar results are obtained
in models of spatial competition between established competitors and between
early and late entrants (e.g. Carpenter 1989, Carpenter and Nakamoto 1990, Hauser 1988). If the defending brand seeks to maintain some or all of the share threatened by Attack, it can cut price further to attract new buyers from other competitors or retain old buyers who otherwise would be lost to Attack.

2.2. Advertising strategy

For advertising strategy, however, the rules of thumb change with the defending
brand's objective:
PROPOSITION 3: DEFENSIVE ADVERTISING. I f consumer tastes are uniformly distributed and the market is regular, the optimal multi-objective
defense advertising strategy includes increasing spending on
awareness advertising if the market size does not decrease.
Proposition 3 shows that different objectives lead to fundamentally different
recommendations for advertising spending. The profit-maximizing defender optimally reduces spending on awareness advertising. The intuition behind such a
result is that the new competitor has stolen some market share, leaving fewer
buyers for the defending brand. Fewer buyers require fewer advertising dollars;
moreover, smaller margins reduce the incentive to advertise by reducing the benefit of each sale. However, if one seeks to maintain market share, higher advertising spending is required. Awareness tevels among potential Attack buyers as
well as arnong buyers of other brands must be increased to maintain the defending

MULTIPLE-OBJECTIVE M A R K E T I N G STRATEGIES

389

brand's market share. These differences in optimal advertising spending levels are
due entirely to differences in the defending brand's objectives.
Propositions 2 and 3 are consistent with observation. Consider the early 1987
introduction of Kellogg's Nutrigrain Nuggets into a market dominated by Post
Grape Nuts. Faced with the loss oflucrative market share it had held for 90 years,
Post reacted aggressively, temporarily cutting price by 50% (through a buy-oneget-one-free offer) and boosting its promotional budget nearly 50% from $29 million the previous year to over $43 million in 1987 (Woodland i988). Tytenol's and
Excedrin's management reacted in a similar way to Bristol Myers' introduction
of Nuprin (Hamilton 1988). Defensive strategies in these cases are consistent with
the results derived in the case in which the defending brand seeks both high profit
and the retention of its pre-attack market share.

Summary
If maintaining market share is important to the defending brand, the direction of
price change remains the same for either profit-maximizing or share-maintaining
defensive strategies, but the magnitude of the price change differs. In contrast,
optimal multiple-objective defensive advertising differs qualitatively. Furthermore, out analysis shows that the process of formulating defensive strategy differs
depending on the objectives sought.

3. Future work and conclusion

3.1. Future work

These findings suggest a number of research topics about how managers make
decisions if they have multiple objectives. Previous studies show that consumer
decision making is highly context dependent. Orte might suspect the same will be
true of managerial decision making. Among brand managers, in the case of new
product introduction, greater awareness might compensate for giving up some
consumer trial, but in the case of setting market share and profit targets, conjunctive choice may prevail. These objectives may be strongly influenced by recent
experience. Eli Lily, the pharmeceutical giant, has enjoyed over 100 quarters of
consistent growth in profits. It seems plausible to suspect that the previous quarters' profits will play a large role in Eli Lily's strategy formulation. Next Computer, lacking that same history, may make decisions with complete disregard for
similar numbers and thus use entirely different decision rules. Exploring how the
context - competitive position and culture - affect decision making would appear
to be a potentially rich research direction.

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STEPHEN S. BELL AND GREGORY S. CARPENTER

Incorporating these different decision rules into models of competitive strategy

suggests other possibilities. Two brands in the same market may use different
decision rules for selecting their objectives, have different objectives as a result,
and thus compete in a fundamentally different way. The automobile and consumer
electronics industries would appear to be examples of competition with different
objectives. Extending models of brand strategy to cases in which decision rules
or objectives differ across competitors would therefore appear to be an important
and potentially fruitful direction for future work.
Another interesting area may be to examine objectives and the decision making
process. An implicit assumption in many dynamic models of marketing strategy
is that buyers and managers have fixed, unchanging objectives and preferences.
Recent studies suggest that preferences may evolve with the market (e.g. Carpenter and Nakamoto 1989) or more generally that preferences may be constructed
to respond to a particular situation as opposed to being revealed by the situation
(e.g. Tversky, Sattath, and Slovic 1988). Managers' preferences and objectives
may change given the context of competition, evolve over time, and thus be constructed as opposed to fixed. Examining and incorporating these dynamic elements of preferences and objectives would likewise be a future direction for marketing strategy models.

3.2. Conclusion
Achieving multiple objectives is often an important goal for marketing strategies.
Extending models to reflect this can have significant implications for the insights
generated by the analysis. These objectives, the foundation of models of marketing strategy, have received surprisingly little attention. Recent research on traditional assumptions about consumer decision making suggests that managerial decision making may be a fruitful area for research. Our results suggest that the
impact on optimal marketing strategy could be significant.

Notes
1. All proofs appear in the Appendix.
2. See Hauser and Shugan (1983).

Appendix
Proof of proposition 1
Let Z = (p - c)Nm(p)A(k) - k + X[s - mA] be the Lagrangian implied by
equation (3) for the case in which s = s . Then 0Z/0p = 0Z/0k = 0Z/0X = 0 implies
that

391

MULTIPLE-OBJECTIVE MARKETING STRATEGIES

OZ/Op = N m + [(p -

c)N -

(A.I)

X](Om/Op) = 0

OZ/O/k = [(p - c ) N - X ] m A ' - 1 = 0

(A.2)

0Z/0X = s -

(A.3)

m A = 0.

N o t i n g t h a t 0m/0p = - N m 2 A ' a n d t h a t [(p - c ) N f o r t h e o p t i m a l p r i c e a n d a d v e r t i s i n g o u t l a y as

X] =

1/mA', we can solve

pO = c + (X/N) + ( I / N m A ' )
k o = [(pO _ c ) N - X ] m G A
w h e r e G = A ' ( A / k ) . C l e a r l y pO d e p e n d s o n k t h r o u g h A ' ( k ) a n d k is a f u n c t i o n
o f p. Q. E. D.

Lemma
G i v e n a unique pO a n d
o f o~ a n d s w h e r e

k , g(p, k; ,

s ) d e f i n e s pO a n d k as an i m p l i c i t f u n c t i o n

g ( p , k ; o , s ) = H d w + h ~ d + h_,ds = 0
w h e r e H is t h e b o r d e r e d H e s s i a n m a t r i x o f Z ( p , k, X), w = (k , pO), a n d h, a n d
h 2 a r e v e c t o r s o f d e r i v a t i v e s o f ( A . I ) t h r o u g h ( A . 3 ) w i t h r e s p e c t to OL a n d s respectively.

Proof.

T o t a l l y d i f f e r e n t i a t i n g (A. 1)
as d e f i n e d a b o v e . Q. E . D.

through (A.3) produces g(p, k; o~,

Proof of proposition 2
L e t ds = 0 so t h a t H d w =

- h a de, , w h i c h c a n b e s o l v e d f o r dp/do~

as

dp/d~~,

= A-I

-Zoo

Zpxl

- Zko
-Zxo

Zkk
Zxk

z
O kx

s )

= 0

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S T E P H E N S. B E L L A N D G R E G O R Y S. C A R P E N T E R

w h e r e A = det(H) > 0. E x p a n d i n g this d e t e r m i n a n t p r o d u c e s

dp/dot = A-I(Om/Oot)Nm2[(A')2(I + A) - A"]
w h e r e 2x-~ > 0, m/O~ <- 0; N, m 2 -> 0, and (A')2(1 + A) - A"-> 0. T h e r e f o r e
dp/d~ -< 0. L e t p(jn) and p(c%) d e n o t e the optimal price given %o and ~_ respectively. B r a n d n is c o m p e t i t i v e and lower adjacent so e% > %j_. But dp/do -<
0 so that pO (%n) -< pO (C~~j.).
N e x t , c o n s i d e r the relationship b e t w e e n p* and p, w h e r e p* is the profit-maximizing defensive price. To do so we derive dp/ds b y letting d & = 0, and solving
H d w = - h 2 ds for
0
dp/ds = A 1 0
-- 1

0
Zvx
Zkk Zkh"
ZXk

which can be simplified to dp/ds = A - ~ N m 2 A A '' _< 0. L e t p(s) d e n o t e the optimal multi-objective price given s . If s = s*, e q u a t i o n (1) r e d u c e s to an u n c o n strained model so pO = p , . If s -> s*, then pO < p , b e c a u s e dp/ds -< 0. T h e r e f o r e ,
pO < p , for all s -> s*. Q. E. D.

P I v o f o f proposition 3
Letting ds = 0, H d w = -- h I da; solving for dk/da yields

zpp

- Zpo

Zpa

dkO/daO = I Zxp

-- Zkeo
_ Zx~

kx

which can be e x p a n d e d and simplified to p r o d u c e

dk/dc~ = A-~(0m/aed)[m" + (A -

I)(A')2N2m 3]

H e f e A > 0, 0m/0c~ --< 0; m" = 0m2/Op 2 --< 0 for regular, rectangular m a r k e t s , and
(A - 1)(A')2N2m 3 <- 0 so that dk/dc~ -> 0. L e t k(otjn) d e n o t e the optimal advertising e x p e n d i t u r e given 0% and k(cq>) given jj_. B r a n d n is c o m p e t i t i v e and lower
adjacent so e% > jj_ and, by o u r analysis, dk/d >- 0 so that k(%1) -> k
(Otii_). O . E . D .

MULTIPLE-OBJECTIVE MARKETING STRATEGIES

393

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