Strategic Marketing: An Introduction [2 ed.] 9781315824222, 1315824221, 9781317834212, 1317834216, 9781317834229, 1317834224, 9781317834236, 1317834232

Table of contents :
Content: 1. Marketing strategy : introduction and overview --
2. Portfolio analysis --
3. Analysis of the business enterprise --
4. Industry analysis --
5. Market analysis --
6. Analysing competition --
7. Analysing the business environment --
8. Analysing the customer in the market place --
9. Sustainable competitive advantage and generic strategies --
10. Segmentation, targeting and positioning --
11. Marketing mix strategy --
12. Growth strategies : product-market expansion --
13. Facilitating the implementation of strategies --
14. Marketing planning and implementing marketing strategy.

Citation preview

Strategie Marketing An introduction S eco nd edition

Tony Proctor

Strategie Marketing

Fully updated and revised to include the latest case studies and examples from a broad range of industry sectors, this second edition of Strategic Marketing: An Introduction is a concise, thorough and enlightening textbook that demonstrates how organizations can cope w ith a m yriad o f demands by better understanding themselves, their products or services and the world around them. From assessing internal relationships to planning and im plem enting m arketing strategies, and featuring analysis of relationship marketing and strategic alliances, Pro cto r uses insights from a range ol key models and theoretical fram eworks to illustrate how an organization can successfully take advantage o f ‘strategic w in d ow s’ to im prove its position. Core issues covered include:

■ marketing strategy ■ analysing the business environm ent J O ■ the custom er in the market place ■ targeting and positioning ■ marketing mix strategy.

This textbook is the com plete guide to assessing and imposing a realistic and successful marketing strategy to fit an organization, its resources and objectives, and the environm ent in w hich it operates. Accessibly w ritten and supported by a user-friendly companion website, this new edition of Strategic

Marketing: An Introduction is an essential resource for all students o f m arketing and business and management.

T o n y P r o c t o r is Professor in M arketing at the University of Chester, U K . H e has w ritten extensively on m arketing and related issues, including Creative Problem Solving f o r Managers, Second Edition (Routledge, 2005).

This page in te n tio n a lly left blank

Strategie Marketing An i ntroducti on

Second edition

Tony Proctor

l ì Routledge

Taylor&FrancisGroup

LONDON AND NEW YORK

F irst published 2000 by R o u tled g e 2 P a rk Sq u are, M ilto n P a rk , A b in g d o n , O x o n , O X 1 4 4 R N Sim u lta n e o u sly published in the U S A and Canada by R o u tled g e 270 M ad iso n A v e n u e , N e w Y o r k , N Y 10016 Second ed ition 2008

R outledge is an im print o jth e Taylor S^Francis Group, an m jorm a business © 2008 T o n y P ro c to r T y p e se t in P e rp e tu a and B e ll G o th ic by K e y s tro k e , 28 H igh S tre e t, T e tte n h a ll, W o lv e rh a m p to n P rin te d and bound by T J In te rn atio n al L td , P a d sto w , C o rn w a ll A ll rights reserved . N o part o f this book m ay be rep rin te d o r rep ro d u ced o r utilised in any form o r by any e le c tro n ic , m ech anical, o r o th er m eans, n o w k n o w n or hereafter in v e n te d , in clu d in g ph o to co p yin g and re co rd in g , o r in any in fo rm atio n storage o r re trie v a l system , w ith o u t p erm issio n in w ritin g from the publishers.

British Library C ataloguing in Publication D ata A catalogue reco rd fo r this book is available from the B ritish L ib ra ry

Library o j Congress Cataloging in Publication D ata P ro c to r, T o n y . Strate g ic m ark etin g : an in tro d u c tio n / T o n y P r o c to r. —

2nd ed.

p. c m . 1. M a rk e tin g — D ecisio n m aking.

2. M a rk e tin g — M an ag e m en t.

I. T itle .

1 IF 5 4 I 5 .1 3 5 .P 7 6 2008 6 5 8 .8 ,02— dc22

2007050239

IS B N 10: 0 415

45816-1 (hb k)

IS B N 10: 0 415

45817 X (p b k )

IS B N 13: 9 78-0-41 5 -45 81 6-0 (hb k) IS B N 1 3: 978 0 415

4 58 17 -7 (p b k )

E v e r y effo rt has been m ade to contact c o p yrig h t h olders fo r th eir perm ission to re p rin t m aterial in this b o o k . T h e publishers w o u ld be grateful to hear from any co p yrig h t h o ld er w h o is n o t here ack n o w led g ed and w ill undertake to re c tify anv e rro rs o r om issions in fu ture edition s o f this book.

r Contents

List of illustrations

vii

Preface

xi

1 Marketing strategy: introduction and overview

1

2 Portfolio analysis

21

3 Analysis of the business enterprise

42

4 Industry analysis

67

5 Market analysis

85

6 Analysing competition

109

7 Analysing the business environment

128

8 Analysing the customer in the market place

148

9 Sustainable competitive advantage and generic strategies

173

10

Segmentation, targeting and positioning

190

11

Marketing mix strategy

220

12

Growth strategies: product-market expansion

246

13

Facilitating the implementation of strategies

281

14

Marketing planning and implementing marketing strategy

300

Bibliography

317

Further reading

323

Index

331

V ■

This page in te n tio n a lly left blank

r Illustrations

FIGURES 1.1

Factors impacting on marketing strategy

1.2

E lements of Porter's wheel of competitive strategy

14

2

2.1

The product life cycle

22

2.2

The BCG product portfolio matrix

26

2.3

Plotted Boston matrix

27

2.4

The product life cycle portfolio matrix

30

2.5

The GE/M cKinsey matrix

31

2.6

The directional policy matrix (1 )

32

2.7

The directional policy matrix (2 )

34

3.1

Matching strategy with resources

43

3.2

Strategy selection and marketing competencies

44

3.3

The balanced scorecard

48

4.1

Industry life cycle

68

4.2

W ays of revitalizing markets

73

4.3

Strategies for declining or stagnant industries

75

4.4

Formulating strategy

77

4.5

S P A C E analysis (1)

79

4.6

S P A C E analysis (2)

81

5.1

Market analysis

86

5.2

Response sales: whole model, actual by predicted plot

96

5.3

Residual by predicted plot

97

5.4

A simple systems dynamics model of population movement over time

98

6.1

Forces of competition (1)

110

6.2

Forces of competition (2)

114

7.1

The marketing environment

130

7.2

Effects of booms and slumps in the economy

134

7.3

Rate of technological change

135

8.1

Complex buying decision

151

8.2

Factors influencing consumer behaviour

154

8.3

Roles in the purchase decision-making process

157

8.4

Stages in the marketing research process

168

vii

ILLUSTRATIONS

9.1

Sources of competitive advantage (1)

177

9.2

Sources of competitive advantage (2)

178

10.1

Requirements of a market segment

192

10.2

Perceptual map of cost and convenience of travelarrangements when spending a holiday

211

11.1

Types of sales promotions

239

12.1

Ansoff matrix

246

12.2

Six phases of the new product development programme

254

12.3

Conceptualizing new product development

257

12.4

The grand strategy matrix

269

12.5

Cost benefit analysis

274

13.1

Reasons for customer defection

286

13.2

The ladder leading to customer relationship profitability

288

14.1

Classical gap analysis

303

TABLES 2.1

A C M E (A )

37-8

2.2

AC M E (B )

38-41

4.1

The BCG competitive advantage matrix

82

5.1

Quarterly data on shipments of a particular commodity

92

5.2

Dummy variables and multiple regression analysis

92

5.3

Car sales data

95

5.4

Response sales

96

5.5

Sales model

99

5.6

Part-time M BA courses

108

6.1

Porter competition forces

126

10.1

Perceptual mapping example

10.2

COM U NTs messaging solutions

209-10 218

12.1

Morphological analysis example

256

12.2

Projected net cash flows for two projects (payback period)

271

12.3

Average rate of return method

272

12.4

M inimum acceptable discount factor

273

12.5

New product evaluation

277

12.6

Cost benefit analysis: vertical integration

279

14.1

Product line widgets

306

14.2

Marketing objectives

307

EXHIBITS 1.1

Selected stakeholders' interests for an N H S organization

4

1.2

Stakeholders for a pharmaceutical company

5

ILLUSTRATIONS

1.3

Pest factors relating to the personal com puter m arket

6

1.4

Pest factors at w ork in the insurance industry

7

1.5

M a rk e t orientaton versus product orientation

9

2.1

Sw an sea Eng ineering : d ifficu ltie s in using the product life cycle concept

23

2.2

Assessing m arket grow th rate and m ark et share positions in six different segments

28

2.3

A D L m atrix

35

3.1

Key perform ance indicators for the balanced scorecard

50

3.2

P ro d u ct and service quality

54

3.3

Reverse engineering

55

3.4

Ronex industries: overcom ing m indset

60

3.5

Ford M o d e l'T ': the m indset of H enry Fo rd

61

3.6

Blocks to c re a tiv ity in organizations

63

3.7

Quietsleep C o rp oration : c re a tiv ity in action

64

4.1

C h a ra cteristics of em erging industries

69

4.2

C h a ra cteristics of m aturing industries

71

6.1

Custom er power in the aerospace industry

111

7.1

Cross-im pact m atrix

141

7.2

The T O W S m atrix (1 )

142

7.3

S W O T analysis and the T O W S m atrix

143

7.4

The T O W S m atrix (2 )

8.1

W h y it is im portant to understand the m ajor facto rs influencing consum er behaviour

144

8.2

Stages in the fa m ily life cycle and associated behavioural buying patterns

158

8.3

Custom er m arket research

165

9.1

N E C 's use of core com petencies

175

9.2

Sou rces of com petitive advantage

176

10.1

Generic positioning

199

10.2

Sem a n tic d ifferen tial

202

10.3

Sem a n tic d ifferen tial profile

10.4

Correspondence analysis method

10.5

M D P R E F method

205

10.6

Rank-ordered data method

206

10.7

A verage rankings: P R E F M A P method

207

10.8

A ttrib u te rating: p ro fit method

208

12.1

Generic strategies based on A nsoff m atrix

247

12.2

W h a t is a new product?

251

12.3

S tra te g ic planning

254

12.4

Dual drivers

254

12.5

Concept generation: problem-based ideation

255

148

202 203-4

12.6

C re a tiv ity techniques for obtaining new product ideas

255

12.7

Sc e n a rio analysis

256

12.8

A-T-R model

260

12.9

Concept testing

261

12.10 Techniques fo r obtaining speed in new product developm ent

262

12.11

266

E n try strategies

ILLUSTRATIONS

12.12

Integrative growth strategies

267

12.13

Egan's extension of the Ansoff matrix

268

13.1

Conditions which facilitate partnership

285

13.2

Building relationships with the customer in the N H S

291

13.3

Ormsby Motors

293

13.4

internal marketing in practice: an overview of some of the methods that can be adopted

296-7

14.1

Hierarchy of planning objectives

301

14.2

Marketing and corporate strategies

304

14.3

Marketing plan outline: an alternative

309

Preface

The sccond edition o f this book features additional material to what was in the first volume. M any new tools and techniques arc visited and illustrations o f how these can be used in conjunction w ith a spreadsheet arc highlighted. The accompanying website and instructor manual provide com puter file download files which can be used to em ploy the illustrated models and techniques. The spreadsheet models incorporate graphical m aterial so that the models can be viewed in spatial terms and not just num erical outputs. Additional case studies and accompanying questions have been incorporated into the text which provide m aterial for reflection and study. I am particularly grateful to two o f my colleagues, Ioanna C. Papasolomou in Cyprus and Rosmimah M ohd Roslin in Malaysia, for their additional case study m aterial and continued interest in the book. The case studies they have provided add an international flavour to the book. I have also included material in the text w hich relates aspects o f international marketing and which w ill provide some underpinning for the cases w ritten by my tw o colleagues. I

was originally spurred on to w rite a book about strategic m arketing in the belief that it was

som ehow a different subject to that one norm ally reads about in most textbooks on marketing management. I was fascinated by such metaphors as the strategic window, the boiled frog company and future shock. 1 thought that it represented a new dimension to marketing. I have not been too disappointed by my endeavours. The book contains a lot of material that one does not usually find in a volume on marketing management but at the same time some of the old familiar terms still appear. There are many definitions of strategy, but in business it refers to how a firm approaches both setting and achieving organizational objectives. In this book we look specifically at marketing strategy and in particular the strategy concerning the formulation and im plementation of the marketing mix. The successful implementation o f the marketing mix leads to satisfaction of customer wants and needs and increases the likelihood of achieving an organization’s objectives in the market place. In recent years, relationship marketing has come to the lore as strategic alliances and networks involving firms w orking together towards shared goals has become more fashionable. The strategic management of such relationships is at the core of relationship marketing. The argument put forward in this book is that w hen changes in the market and the marketing environm ent are increm ental in nature, firms can successfully adapt themselves to the new situation by modifying current marketing and other functional programmes. Such changes can be introduced through technological innovations, changes in custom er tastes, changcs in legal regulations, econom ic and financial constraints or any changes in environm ental conditions. The nature o f com petition may also change and in particular the elements w hich make up the five forces o f P o rte r’s competition model. N e w entrants to the industry may appear; substitute

PREFA C E products may become more attractive propositions to customers; both suppliers and customers may find their bargaining powers strengthened; and the balance o f com petition pow er between the incum bent firms in the industry may change as one firm develops a competitive advantage. However, if the cumulative changcs in the econom ic, technological, social, political and cultural environments remain unnoticed by a com pany’s managers until it is too late to respond, the problems w hich they create for the firm may be overwhelm ingly difficult to overcome. Similarly, when the degree o f market change is of such magnitude that the com petence o f a firm to continue to compete effectively is questioned, then the firm may be experiencing the closure of an im portant strategic window. W h e re change, leading eventually to the closure o f a strategic window, is either very rapid or very slow the consequences may w ell be disastrous. In the first case, the w indow closes before an organization can respond and, in the sccond instance, it docs not even notice that the w indow is about to close until it is too late to respond. It is im portant to examine not only w here the firm is today, but how w ell equipped it is to deal w ith tom orrow. In particular, the task o f predicting non-incrcmental changcs in the m arket is of critical importance. Existing firms and their competitors can sometimes be replaced in a comparatively short space o f tim e by a whole new range o f competitors. Firm s w hich arc oblivious to the opening and closing o f strategic w in do w or firms which fail to utilize overlapping strategic windows to best advantage, or firms which arc unable to divest when a w indow closes, risk disaster. Organizations need to:

1 Identify the opportunities and threats posed by the opening and closing o f strategic windows. 2

Analyse all the relevant internal and external environm ental factors acting upon the firm in the context o f the strategic window s.

3

D eterm ine the best strategy or set of strategies that arc likely to enable the firm to take best advantage o f the strategic window- w hile it is open.

4

Ensure that adequate resources are available to im plem ent the chosen strategies.

5

Im plem ent the chosen strategy to take best advantage o f the opportunities presented by the strategic w indow and to minimize the risks posed by the threats.

In this book we w ill be systematically w orking through the process. It is the opening and shutting of strategic w indow s and how the firm might react to this that is the topic of interest. W e discuss the nature and formulation of business and marketing strategy and point to the need for strategic marketing management in order to carry it out. W e also outline the nature of the marketing management process that is involved. The organization has to keep abreast o f developments in its external and internal environments. It also has to ensure that a matching process between skills and resources is available to take best advantage o f developments and opportunities in the environm ent and to avoid any threats that arc posed. W e look at the resources that the firm has available and at the developments in the environm ent that can take place that lead to opportunities and threats w ith which the firm has to get to grips. An analysis o f the relevant factors which impinge on the opening and shutting o f strategic w indow s needs to be undertaken by an organization prior to making strategic decisions.

Tony Proctor, 2008 J

xii

Chapter 1

Marketing strategy I n t r o d u c t i o n a n d o v e r v ie w

INTRODUCTION A strategy is a plan that integrates an organization’s major goals, policies, decisions and sequences of action into a cohesive whole. It can apply at all levels in an organization and pertain to any of the functional areas of management. Thus there may be production, financial, marketing, personnel and corporate strategies, just to name a few. If we look specifically at marketing then there may be pricing, product, prom otion, distribution, marketing research, sales, advertising, merchandising, etc. strategies. Strategy is concerned with effectiveness rather than efficiency and is the process of analysing the environment and designing the fit between the organization, its resources and objectives and the environment. The strategic process refers to the manner in which strategy is formulated. There arc several approaches:

■

the

rational approach, making use of tools such as S W O T analysisandportfolio models

■

the

flexible approach, which employs multiple scenario planning

■

the

creative approach reflects the use of imagination in planning

■

the

behavioural approach reflects the influence of power, politics andpersonalities; andfinally,

■ the incremental approach is based on small adjustments or changes to previously successful strategies.

Nohria et al. (2003) put forward an analysis of 160 successful U SA companies in the period 1986 to 1996. They all outperformed their competitors in terms of strategy their implementation. This supremacy was founded on:

■ clarity ■ consistent communication to customers, employees and shareholders ■ a value proposition relevant to targeted customers; and ■ a realistic appreciation of the company capabilities.

Marketing is about satisfying customer wants and needs and in the course of doing so facilitating the achievement of an organization’s objectives. By paying attention to customer wants and needs, organizations are more likely to achieve their objectives in the market place. O f course, organizations have to compete with each other and so also have to satisfy customers’ wants and needs at least as w ell

1■

M A R K E T I N G ST RAT EG Y: INTRODUCTION

as their com petitors. Fortunately, organizations can do this in different ways. Com petition involves finding a different way to satisfy customers from other organizations in the market place. In the pursuit o f this end, products and services need to be seen as m ore than physical entities - it is the benefits they offer customers that arc being purchased. Com petition involves positioning products and services in the minds of customers in such a way that the products and services are perceived to be different from one another. M arketing is about the com petitive positioning of products and services in the m inds o f customers. It is also about the com m unication o f messages and images (reflecting product and service positioning) and the means w hich are used to convey these messages and images to the customers (see Figure 1.1). M arketing is also about managing relationships. In order to persuade the ultim ate consumers of the products to buy, others conccrncd w ith the product have to be persuaded that what is on offer w ill satisfy custom ers’ wants and needs. T he chain of persuasion can stretch right back into the organization itself and involve employees of the company. This is the area where internal marketing has come to the fore in recent years. Building relationships w ith other organizations is also im portant. In fact this extends to anyone w ho has an interest or stake in the organization. Stakeholders arc held to be those individuals or groups that have a ‘stake’ in the organization (see C a rro ll, 1993, p. 22). Stakeholders include custom ers, em ployees, management, stockholders, creditors, suppliers, community, and sometimes even competitors. Shareholders arc only one set o f stakeholders in a business for customers, employees, suppliers and many others also have a vested interest in how the organization fares. I’he objective for a profit making organization might be to create value for its stakeholders in order to retain their interest and com m itm ent o f tim e and investment, financial or otherwise, to the organization. D u ring the 1980s and 1990s academics and practitioners in the field of strategic management began to focus on creating ‘shareholder value’ as the overall purpose o f any com m ercial enterprise

Figure 1.1

Factors impacting on marketing strategy

M A R K E T I N G STRAT EGY: INTRODUCTION

(Rappaport, 1986). The benefits suggested for this approach to strategic management were considered tw ofold: first, it put the interests o f the owners of the business at the heart o f strategy and, second, it engendered a m ore long-term approach to business decision-making than an emphasis upon profitability. Doyle (2000) argued that the creation of shareholder value should be used as the yardstick against which to measure marketing strategics. W e might consider replacing the term “ custom ers” w ith stakeholders in any definition of the role and scope of marketing since these include customers as w ell as the many other individuals, groups and organizations that deal w ith or are even employed by an organization. This could lead to defining marketing as: M arketing is the m anagement process responsible for identifying, anticipating and satisfying stakeholder requirem ents and in so doing serves to facilitate the achievement o f the organization’s objectives. The twenty-first century is seeing the development of strategic alliances and networks where firms w ork together towards shared goals and collaborate in their operations. Managing such relationships productively is almost certainly the key to success or failure. The foregoing is at the heart o f marketing strategy, w hich has to take into account the follow ing factors:

1 the opening and closing o f strategic window's 2

the impact o f market drivers

3

the nature of competition in the market place

4

the stage o f the market or industry life cycle

5

the assets and skills that a firm possesses or can readily acquire/access

6

stakeholder interests.

Cognizance o f all o f these factors is essential if effective long-term marketing strategies are to be evolved w hich w ill lead to a firm securing a strategic com petitive advantage in industries or product markets. W e w ill introduce these various ideas below.

Stakeholder interests and values Stakeholder interests and values arc im portant factors when considering strategic decisions (viz. Jensen, 2001). Stakeholder interests and values vary from firm to firm according to the industry and the markets that arc served by the firm . Hence, there is no universal model which can be applied to every situation. However, to give some idea of the nature o f these interests and the demands they place on a firm or other form organization consider the examples (Exhibits 1.1 and 1.2). In undertaking an analysis o f stakeholder interests, m arketers should make sure the analysis considers how factors such as, product/service development and delivery, prom otional mix, support services, m anufacturing and production processes, R & D , and m aterial purchasing affect the stakeholders’ interested in healthcare in both the public and private sectors. The influence exerted by stakeholders over decisions related to these factors w ill depend on the pow er they w ield and the attitude they have. In a private-sector organization management may have the m ost influence unless there is a single m ajor shareholder with a very active interest in the business. M anagem ent’s attitude towards decisions may therefore be the key determ ining factor in influencing what actions transpire.

3 ■

MARKETING

STRATEGY: INTRODUCTION

E X H I B I T 1.1

S E L E C T E D S T A K E H O L D E R S ’ I N T E R E S T S FOR AN N HS OR GA NI Z A T I ON

Stakeholder

Interests

Staff

u

Provision of quality healthcare

■ Self-development and promotion prospects ■ Jo b satisfaction ■ W ork in a safe and good quality environment Current patients

■

Receive excellent care and attention

■

Enhance health prospects and life expectancy

■ Advice on how best to recover from treatment and avoid future health problems ■ Access to information ■ Support from medical staff U nions

■

Responsibility to members to ensure fair working practices, safe environment

■ Support and advise members in all areas of employment rights, e.g. equal opportunities, discrimination, racial incidents ■ Government

Recruitment of new members

■ Quality standards ■

Legal requirements/health and safety/equal opportunities/pay and conditions

■ Financial management, ensure resources being used and managed effectively Press

■

Praise and publicity for high achievement

■ Adverse publicity - making the facts known ■ Challenging use of finances Prospective patients

■

Excellent treatment in a caring and pleasant environment

■ Access to information ■ Choices ■ Achievement of a full recovery after treatment

M A R K E T D R IV E R S : P O L I T I C A L , E C O N O M I C , S O C I O - C U L T U R A L AND TECH N O LO GICAL(PEST) FORCES M ark e ts o r cu stom ers are d riv e n tow ards w an tin g c erta in p rod ucts and services. P o litic a l, e c o n o m ic, so cio -cu ltu ral and tec h n o lo g ic al ( P E S T ) influences all im p a ct u pon the nature o f cu sto m er w ants and needs.

4

M A R K E T I N G STRAT EGY: INTRODUCTION

E X H I B I T 1.2

S T A K E H O L D E R S FOR A P H A R M A C E U T I C A L COMPANY

Stakeholders

Interests

General public

Safe, reliable, tested drugs

Leg al/courts

Tested drugs which do not result in serious side effects fo r the users

Government

Reasonably priced drugs which have been shown to be effective in use

M e d ia

S to ries showing either the benefits of drugs or very harm fu l sideeffects of drugs which have not been prop erly tested

S c ie n tif ic c om m unit y

Details of development and testing of new drugs

Sha re holders

Return on investment and sh areholder value created

Supplie rs

Steady and secure demand for the products and services it supplies

F in a n c ia l institutions

F o llo w in g sound m a rke tin g and c o rp o r a te strategie s w hich w ill produce guaranteed returns from lending and investment

Rank and file employees

Secure and interesting employm ent with good future prospects

Com petitors

New developments that lead to com petitive advantage

Consumers

Safe and effective treatments

M anagement

C ontro l and influence over what happens in the firm

Illustrations o f the im pact o f P E S T factors on the grow th of personal com puters and on the insurance industry are shown in Exhibits 1.3 and 1.4 respectively. Political factors acting as market drivers are often m ore difficult to identify quite so easily. A good example, however, was the 1980s policy of the Conservative governm ent o f the tim e towards home ownership. In particular, the sale of council houses gave rise to a demand for mortgage loans from people who might not norm ally consider home ownership.

I M P A C T OF C O M P E T I T I O N Com petition is im portant in influencing how successful an organization’s business venture can be. It is not simply a m atter o f producing a good product or service w hich matches w ith custom er wants and needs and provides custom er satisfaction. In one way or another, most firms are able to do this but some are much more successful in the marketplace than others. A firm must be able to position itself com petitively in the minds of its customers so that its products and services stand out very favourably in im portant respects in relationship to competitors. Shell and Esso, for example, both sell essentially the same fuel oils, but both are able to carve out positions for themselves in the minds of their customers, so that they can both operate successfully in the marketplace. The nature and strength o f com petitors and how a firm jockeys for position arc key aspects of marketing and business strategy. Technologies and products have life cycles and so do markets and industries. There arc different stages in the life cycle of markets and industries and these have im portant ramifications for marketing

5 ■

M A R K E T I N G S TRATEGY: INTRODUCTION

E X H I B I T 1.3

P E S T F A C T O R S R E L A T I N G TO T H E P E R S O N A L COMPUTER MARKET

In the 1970s, the most sophisticated portable calculating device w as a program m able hand-held calculator. In the mid-1970s it w as regarded as sophisticated to possess such a machine. Personal com puters as we know them today began to appear in the e a rly 1980s. Clive S in c la ir's Z X 8 0 and Z X 8 1 brought the power of real com puter program m ing to the elbow of every buff who had an interest in the new technology. Of course, com pared with modern-day personal computers such m achines w ere com p a ratively p rim itive. The 1980s and the 1990s saw a rapid grow th in the technology th at w as ava ila b le. N ot only did m achines become much more powerful (the original Z X 8 1 , fo r instance, had only I K of R A M !) but there w as a phenomenal grow th in the am ount of peripheral equipm ent to go alongside the personal com puter. CD R O M s, modems, colour printers, internal networks, the Internet, and so on. Technology provided an opportunity for the consum er to experience benefits th a t could only have been dream ed of by someone w ith an eye to the future a t the beginning of the 1970s. W h ile technology made all these things a va ila b le there w ere other factors at w ork which influenced the direction that the technological innovations should take. Socio-cultural factors have encouraged the growth of the Internet. E m a il w as seen as a w ay of speeding up interpersonal com m unication. Le tter w riting has been a sociological phenomenon ever since people were able to w rite but the pace of modern life is so quick th at even letter w riting needed to be speeded up. Gam e playing has a lw ays been a sociological phenomenon. The need for am usem ent does not rest solely in children but is also ch a ra cteristic of adult behaviour. Personal computers offered a real opportunity to particip ate in sophisticated sim ulations and games. The 1980s and the 1990s witnessed a rapid growth in the com puter games industry in response to this socio-cultural need. Com puters are re la tive ly expensive items to purchase. S in ce the 1980s there has been a concerted e ffort in the industry to bring out more and more sophisticated and high powered m achines to provide the benefits required by consum ers. Of course, in order to do this there have been econom ic considerations. In the first place, prices have had to be kept down in order to encourage consum ers to purchase. From the producer's standpoint this has been achieved by shifting the locus of m an u factu re to those parts of the w orld (n o ta b ly the F a r E a s t) where econom ies of scale in production can be best obtained.

strategy. M oreover, taken in conjunction w ith the num ber and strength of com petitors that operate in a m arket or an industry at any one tim e in the life cycle, it poses a tight boundary w ith in w h ich the firm can design an optimal marketing strategy. Some firm s may be ideally suited to exploiting certain types of product m arket opportunities whereas others may languish and fail when trying to exploit the same ones. In another situation the reverse can easily apply. O n e cannot assume that every firm w ill be able to exploit the same situation to its advantage, even when the opportunity docs appear to be very exciting and has much to promise. Having the necessary skills and assets, or having access to them, is critical in im plem enting successful marketing strategies. W ith o u t these assets and skills a w hole series of strategies may fail.

6

MARKETING

E X H I B I T 1.4

STRATEGY: INTRODUCTION

P E S T F A C T O R S A T W O R K IN T H E I N S U R A N C E INDUSTRY

Political/environm ental factors

Im plications

Government retirement from welfare

Poor cannot pay for traditional life provision

Self-help encouragement by government

Only middle-income groups can afford to pay

Increasingly severe pensions legislation

Driving up costs of compliance and

assurance

complexity of selling

Econom ic environment factors Widening gap between rich and poor

Poor will jettison life/savings costs traditional market will be unprofitable

Socio-cultural factors Major increases in working women in

No one at home to pay premiums

lower-income groups Fewer manual jobs/more office admin, jobs

Less need for home collection of life assurance

Lottery

Reduces disposable income

H igher expectations of middle-income groups

Better services and returns demanded

Demographic factors Population shift to middle/old ages

Need for care and illness cover

Fewer young people

Falling market for life/savings products

Technological factors New technology not easily accepted by lower-income groups Growth in telemarketing/database

Benefits of automation (costs) not imme­ diately available in traditional market Key cost-cutting forces marketing

S TR A TEG IC WINDOWS A b e ll (1 9 7 8 ) in tro d u ced the con cep t o f strategic w in d o w s . T h e p rin cip al idea behind the concep t o f a strategic w in d o w is that there are o n ly lim ite d p erio d s d u rin g w h ic h the fit b etw een the key req u irem en ts o f a m ark et and the p a rticu la r com p etencies o f a firm com p eting in that m ark et is at an o p tim u m . As a consequence it is re co m m en d ed that investm en t in a p ro d u ct line o r a m ark et area is tim ed to co in cid e w ith periods d u ring w h ic h a strategic w in d o w is o p e n . C o rrespon ding ly, w ith d raw al should be considered w h e re som ething w h ic h was a good fit, is no longer a good fit. T h e latter can arise, fo r exam ple, if changcs in m ark et requ irem ents exceed the fir m ’s capab ility to adapt to such changcs. T h e arg u m en t put fo rw ard is that w h e n changes in the m ark et and the m ark etin g e n viro n m e n t arc in cre m e n ta l in n ature, firm s can successfully adapt them selves to the n e w situation by m o d ifyin g c u rre n t m a rk e tin g and o th e r fu n ctio n al p ro g ram m e s. Su ch changcs can be in tro d u c e d throug h

7 ■

M A R K E T I N G ST RAT EG Y: INTRODUCTION

technological innovations, changcs in custom er tastes, changcs in legal regulations, econom ic and financial constraints or any changes in environm ental conditions. The nature o f com petition may also change and in particular the elements w hich make up the five forces o f P o r te r’s (1980a, 1980b) competition model. N e w entrants to the industry may appear; substitute products may become more attractive propositions to customers; both suppliers and customers may find their bargaining powers strengthened; and the balance o f competition power between the incumbent firms in the industry may change as one firm develops a com petitive advantage. However, if the cumulative changes in the econom ic, technological, social, political and cultural environm ents remain unnoticed by a com pany’s managers until it is too late to respond, the problems w hich they create for the firm may be overwhelm ingly difficult to overcom e (Large, 1992). Sim ilarly, w hen the degree of market change is of such magnitude that the competence of a firm to continue to com pcte effectively is questioned, then the firm may be experiencing the closure of an im portant strategic window. W h e re change, leading eventually to the closure of a strategic window, is cither very rapid or very slow the consequences may w ell be disastrous. In the first case, the w indow closes before an organization can respond and, in the second instance, it docs not even notice that the w indow is about to close until it is too late to respond. E n try to a new m arket constitutes an example o f w here the presence o f a strategic w in do w is critical to success. For example, in the tumble drier market in the 1970s, larger manufacturers delayed entry until the m arket was sufficiently large to generate the kind o f retu rn on investm ent they demanded (Proctor, 1989). Expenditure on plant, equipment and marketing represents another area in w hich the strategic w indow takes on im portance. The question as to w hether expenditure should be increased, diminished or maintained at the current level depends upon w hether the strategic w indow is expected to remain open or to elose in the near future. The timing of exit from a m arket is also im portant. There arc times when it is possible and advisable to divest business w h ich one cannot operate profitably so as to profit from the divestm ent. For example, one may be able to reinvest the proceeds o f a divested business in other opportunities where the strategic w indow is open. In such circumstances strategic window s are interdependent. Cunard, for exam ple, successfully moved from being involved prin cipally in passenger shipping to containerization — the strategic window s overlapped. The key seems to be being market oriented rather than product oriented in defining the business in which one is operating (see Exhibit 1.5). It is im portant to examine not only where the firm is today, but how w ell equipped it is to deal w ith tom orrow. In particular, the task ol predicting non-incremental changes in the m arket is o f critical importance. Existing firms and their competitors can sometimes be replaced in a comparatively short space of time by a whole new range of competitors. Examples of this phenomenon have included products such as digital watches, w om en ’s tights, calculators, charter air travel, office copiers and scientific instruments. B y taking a m arket rather than a product view o f what one has to offer new possible strategic windows may seem w orthy o f investigation. Newspaper producers, for example, might consider other ways of providing interesting information for people or may look more closely at the kind of information that they do provide. Travel agents might consider various ways o f making people’s dreams come true. Firm s w hich arc oblivious to the opening and closing o f strategic windows or firms which fail to utilize overlapping strategic window s to best advantage, or firms which arc unable to divest w hen a w indow closes, risk disaster.

8

M A R K E T I N G STRAT EGY: INTRODUCTION

E X H I B I T 1.5

M A R K E T O R I E N T A TI ON V E R S U S P R O D U C T O RI ENT A TI O N

Product orientation

M arket orientation

W e are a night club

W e offer an experience

W e run an airlin e

W e tra nsp o rt people and their goods anywhere in the world

W e sell jewellery

W e enhance your appearance

W e sell houses

We create happy living environments for people

W e sell newspapers

We provide interesting Information fo r people

W e run a university

We provide the opportunity fo r self development

W e m arke t personal computers

We bring a new dimension of interpersonal co m m unic a tio n

W e are travel agents

W e make people's dr eam s come true

into people's lives

E V O L V I N G M A R K E T S AND S T R A T E G I C W I N D OWS Strategic w indow s arise as a result o f market evolution. Markets are not static unchanging entities hut change substantially in nature over time. There are different ways in which a m arket can evolve. Four examples quoted by Abell (1978) are:

■ the developm ent o f new prim ary demand ■ the emergence of new competing technologies which cannibalize existing ones ■ m arket redefinition ■ channcl changes.

O th e r sourccs include:

■ restructuring of markets

rem oval o f trading barriers

■ creation o f an internal m arket

the U K health service of the 1980s and 1990s

■ creation o f new industries and markets ■ deregulation of markets ■ entry of new highly com petitive firms to an industry ■ the changing structure o f the retail trade and its impact on supplying firms ■ impact o f substitute products on an industry ■ tim ing o f w ithdrawal from a market ■ managing products in times o f high inflation or conditions o f econom ic uncertainty.

The evolving patterns of markets im ply that the resource requirements of a firm to compcte effectively in a m arket may change radically w ith time. Unfortunately the resources and key competencies o f incumbent firms cannot be so easily adjusted.

9 ■

M A R K E T I N G ST RAT EG Y: INTRODUCTION

Strategic w indow s have im plications for incum bent firm s and for new entrants to a m arket. Incum bent firms have the following four options:

1 Assemble resources needed to close the gap between the new critical marketing requirements and the firm ’s competencies. 2

Shift their efforts to selected segments, w here the fit between requirements and resources is still acceptable.

3

Shift to a low-profile approach cutting back on all further allocation o f capital and deliberately m ilking the business for short-run profit.

4

Ex it the m arket by liquidation or sale.

Abell (1978) noted that often the strategic w indow phenomenon is not recognized and the choices arc not d e arly articulated. O ld approaches arc continued long after the market has changed with the result that the market position is lost and financial losses accumulate. Alternatively, only lukewarm efforts arc made to obtain the required resources or management thinks it can adapt where this is clearly unrealistic. The result is that firms become entrapped and are unable to move forw ard. They continue w ith lost causes in the hope that a change is around the corncr. Ultim ately, they fail or incur heavy losses or at the very best experience unrecoverable opportunity costs. In the case o f new entrants to an industry getting the entry tim ing right is clearly im portant (note the tumble drier exam ple). In the case o f incum bcnt firms, assessing the im pact o f new entrants on the market or industry is a m ajor issue.

O P P O R T U N I T I E S AND T H R E A T S P R E S E N T E D BY T H E O PE N I NG AND CL OSI NG OF S T R A T E G I C WI ND OWS Essentially w e are looking at a multi-stage process. Organizations need to:

1 Identify the opportunities and threats posed by the opening and closing of strategic windows. 2

Analyse all the relevant internal and external environm ental factors acting upon the firm in the contcxt o f the strategic windows.

3

D eterm ine the best strategy or set o f strategies that arc likely to enable the firm to take best advantage of the strategic w indow while it is open.

4

Ensure that adequate resources are available to im plem ent the chosen strategics.

5

Im plem ent the chosen strategy to take best advantage of the opportunities presented by the strategic w indow and to minimize the risks posed by the threats.

In this book we w ill be systematically working through the process. Organizations should be conversant w ith the concept of the strategic window, noting that when the w indow is open an organization can prosper. This assumes that it is in touch with the market and operates in a profitable manner. I lowever, it should also be noted that over time the strategic window may w ell start to elose and the organization has to take cognizance o f this and take appropriate action. It is the opening and shutting o f strategic w indow s and how the firm might react to this that is the topic o f interest. W e discuss the nature and form ulation o f business and m arketing strategy and point to the need for strategic marketing

10

M A R K E T I N G STRAT EGY: INTRODUCTION

management in order to carry it out. W c also outline the nature of the marketing management process that is involved. The w hole idea o f strategic management is that the organization has to keep abreast of developments in its external and internal environments. It also has to ensure that a matching proccss between skills and resources is available to take best advantage o f developments and opportunities in the environm ent and to avoid any threats that are posed. W e look at the resources that the firm has available and at the developments in the environm ent that can take place that lead to opportunities and threats w ith which the firm has to get to grips. An analysis o f the relevant factors w hich impinge on the opening and shutting of strategic window s needs to be undertaken by an organization prior to making strategic decisions. Integral to ensuring that optim um use is made o f the open strategic w indow is the notion o f a sustainable com petitive advantage. It is argued that an organization must develop such a sustainable com petitive advantage to take advantage o f the open strategic window. In csscncc, organizations should review the various gencric strategies which lead to a sustainable com petitive advantage, i.e. low cost, differentiation, focus, etc. The next step in the process is to examine m ore closely the practicalities o f how an organization may seek to establish a sustainable com petitive advantage for itself in the market place. It is argued that this may be achieved through a systematic and imaginative approach to market segmentation, targeting and positioning. This involves analysis rather than action but the results o f the analysis arc put into action through a specifically designed marketing programme involving carefully constructed marketing mix strategies for individual target markets. M arkets and industries arc o f course dynamic and change over tim e. They have life cycles and attract competitors in different numbers and of different sizes and strengths according to the stage in the life cycle. R etu rn in g for a m om ent to portfolio m odels, it is argued that the products that businesses have in their portfolios make different contributions to profits and overheads. Moreover, given that an organization also has a long-term survival motivation, there is the impetus to look for ways o f ironing out large fluctuations in profitability and ensuring long-term survival. In order to do this the firm has to constantly review its product market posture and look for ways o f achieving its survival objectives. Organizations need to exam ine the strategic alternatives that are available. Essentially this involves the various strategies outlined in the well-known A nsolf grid (m arket penetration, product-market expansion and diversification) along w ith vertical integration strategics and to explore the rationale behind these strategies. The first steps identify and analyse strategic options. Consideration w ill have been given to the m atter o f selecting an appropriate strategy. Organizations must also give attention to how strategy may be pul into action to ensure that the strategic w indow (s) remain open. Organizations need to look at some o f the ways in w hich conditions can be made easier for the im plementation o f strategies in general terms. In particular they need to pick out the notion o f strategic alliances and networks as a means of gaining entry to new markets and businesses or rationalizing in terms of resource utilization so that profitability is improved. There is also the very im portant issue of custom er scrvice provision and m aintaining good custom er relations as a means o f smoothing the proccss o f im plem enting strategies. Emphasis is placcd on the internal m arketing process to ensure that all employees arc motivated to be custom er oriented and ensure that strategics arc effectively put in place. Finally, organizations should consider the im plem enting o f strategies and a system of systematic marketing planning to co-ordinate and plan the introduction o f strategic moves.

11 ■

M A R K E T I N G ST RAT EG Y: INTRODUCTION

First lot us consider the nature o f business and marketing strategy and how it is formulated.

N A T U R E OF C O M P E T I T I V E S T R A T E G Y A competitive strategy is made up o f six parts. The first four apply to any type of business whereas the other tw o are used when there is m ore than one business unit in an organization. It involves a determination of:

1

The product market in ivhich the business competes. The scope of a business is partially determined by what products it offers, by the markets it serves, by the nature o f other businesses w ith whom it chooscs to compete, and by the extent o f its vertical integration. The scopc o f the business is also affected by those same elements it chooscs to avoid. O ften the latter is more im portant because decisions regarding what to avoid, if acted upon rigorously, can conserve resources needed to compete successfully elsewhere.

2

The level o f investment. Although there arc variations and refinem ents, it is useful to see the options in terms of:

3

4

(a)

invest to grow

(b)

invest only to maintain the existing position

(c )

m ilk the business by m inimizing investment

(d )

recover as much o f the assets as possible by liquidating or divesting the business.

The functional area strategies required to compete in the selected product m arket. These arc: (a)

product line strategy

(b)

positioning strategy

(c)

pricing strategy

(d )

distribution strategy

(e )

m anufacturing strategy

(I)

inform ation technology strategy

(g)

segmentation strategy

(h)

global strategy.

The strategic assets or skills that underpin the strategy and provide the sustainable com peti­ tive advantage. A strategic skill is something that the business docs extrem ely w ell such as manufacturing or marketing and which is strategically important to the business. A strategic asset is a resource such as a brand name or installed customer base that is strong relative to competitors. Strategy formulation should take into account the cost and feasibility o f producing or maintaining assets or skills that w ill provide the basis for a sustainable competitive advantage. A single organization, firm or business, is usually made up of a number o f business units. M ost business units share an organizational fram ework w ith other business units w hich takes us to the remaining tw o points.

5

The allocation o j the resources among the business units. Financial resources generated either internally or externally, plus non-financial resources such as plant, equipment and people, have to be allocated. The allocation decision is a key component in the strategy formulation process.

6

Looking fo r synergies across the business: that is the creation of value by having business units that support and com plem ent each other. W h e re a firm has m any businesses that can achieve

12

M A R K E T I N G STRAT EGY: INTRODUCTION

synergistic effects it w ill have an advantage over those firms that ignore such possibilities in their own organizations or who fail or arc unable to achieve any synergy.

Essentially, com petitive strategy is operationalized in term s of:

1

1'he product m arket investment decision that encompasses the product m arket scope of the business strategy, its investment intensity and the resource allocation over multiple businesses.

2

The functional area strategies

3

The basis of a sustainable competitive advantage to compete in those markets. This core concept

what to do.

encompasses assets, skills and/or synergies matched w ith functional area strategies.

A rm ed w ith a knowledge of what is meant by com petitive strategy we now look at how strategies are formulated.

T H E C L A S S I C A P P R O A C H TO T H E F O R M U L A T I O N OF S T R A T E G Y Developing a com petitive strategy means developing a broad formula for how a business is going to compete, what its goals should be and what policies w ill be needed to attain those goals. Com petitive strategy is a combination o f the ends or goals tor w hich the firm is striving and the means or policies by w hich it is seeking to get there. The W h e e l o f Com petitive Strategy (see Porter, 1980a) is a device for articulating the key aspects o f a firm ’s com petitive strategy. A t the hub o f the wheel arc the firm ’s goals — definitions o f how the firm is going to compete; objectives for profitability, grow th, market share, social responsiveness, etc. The spokes of the wheel arc key operating policies with which the firm is seeking to achieve these goals —purchasing, R & D , finance and control, product line, target markets, marketing, sales, distribution, manufacturing, labour. U n d er each heading on the wheel a succinct statement of the key operating policies in that functional area should be derived from the com pany’s activities. Like a wheel, the spokes (policies) must radiate from and reflect the hub (goals) and the spokes must be connected with each other or the w heel w ill not roll. The elements that make up the w heel arc shown in Figure 1.2. A com petitive strategy requires the consideration o f matters that determ ine the upper limits of what it can reasonably accomplish. An organization’s strengths and weaknesses are reflected in its profile o f assets and skills relative to com petitors. This profile includes financial resources, technological posture, brand identification and so on. The personal values o f an organization are reflected in the motivations and needs of key executives and other personnel w ho im plem ent strategic decisions. Strengths and weaknesses along w ith values determ ine from an internal point o f view what com petitive strategy a company can successfully adopt. An organization’s industry and broader environm ent determ ine its external limits. Societal expectations reflect the im pact on the company o f such things as governm ent policy, social co n ­ cerns, evolving mores and many others. A ll o f these factors must be considered before a business can develop a realistic and implementable set of goals and policies. Assessment o f the appropriateness o f a com petitive strategy is achieved by testing the proposed goals and policies for consistency as follows.

13

M A R K E T I N G ST RAT EG Y: INTRODUCTION

Figure 1.2

Elements of Porter's wheel of competitive strategy

Internal consistency ■ Are the goals m utually achievable? ■ D o the key operating policies address the goals? ■ D o the key operating policies reinforce each other?

Environm ental fit ■ D o the goals and policies exploit industry opportunities? ■ D o the goals and policies deal w ith industry threats (including com petitive response) to the degree possible w ith available resources? ■ D ocs the tim ing o f the goals and policies reflect the ability o f the environm ent to absorb the actions? ■ A re the goals and policies responsive to broader societal concerns?

14

M A R K E T I N G S TR A TE G Y: INTRODUCTION

Resource fit ■ Do the goals and politics match the resources available to the company relative to competition? ■ Docs the timing o f the goals and policies reflect the organization’s ability to change?

Communication and implementation ■ Are the goals well understood by the key implementers? ■ Is there enough congruence between the goals and policies and the values of the key im ple­ menters to ensure commitment? ■ Is there sufficient managerial capability to allow for effective implementation?

P R O C E S S FOR F O RM UL AT I N G A C O M P E T I T I V E S T R A T E G Y I'he proccss consists of three steps as follows.

1 What is the business doing now? Where are we now? u

Identification. W hat is the implicit or explicit current strategy?

■ Assumptions. W hat assumptions about the company’s relative position, strengths and weaknesses, competitors and industry trends must be made for the current strategy to be viable?

2 What is happening in the environment? m Industry analysis. W h a t are the key factors influencing competitive success? W h a t are the important industry opportunities and threats? ■

Competitor analysis. W h at are the capabilities and limitations of existing and potential competitors, and what are their probable future moves?

■ Societal analysis. W h at important government, social and political factors w ill present oppor­ tunities or threats? ■ Strengths and weaknesses. Given an analysis of industry and competitors, what arc the firm ’s strengths and weaknesses relative to present and future competition?

3 What should the business be doing? m

Tests o f assumptions and strategy. H ow do the assumptionsembodied in thecurrent strategy compare with the analysis indicated above? How does the strategy meet the tests indicated above?

■ Strategic alternatives. W h a t arc the strategic alternatives given the analysis above? (Is the current strategy one of these?) ■ Strategic choice. W h ich alternative best relates the company’s situation to external opportunities and threats?

15

M A R K E T I N G ST RAT EG Y: INTRODUCTION

S T R A T E G Y I D E NT I F IC A T I ON AND S E L E C T I O N There are three possible broad areas for consideration. The first is the selection o f product markets in w hich the firm w ill operate and the question o f how much investment should be allocated to each. The sccond is the developm ent o f functional area strategics and the third is the determination o f the bases of sustainable com petitive advantage in those product markets. W e w ill be considering these options in much greater detail later in the book. However, we w ill just m ention them here for clarification purposes.

Product market investment strategies M any strategic decisions involve products: w hich product lines to continue, w hich to add and which to delete. Markets need to be selected in which a com petitive advantage w ill exist. It is crucial in strategy developm ent to have a dynam ic rather than a static focus. The concept o f a product market m atrix (Ansoff m atrix

sec Ansoff, 1987) is helpful for identifying options and encouraging

a dynamic perspective. In the product-markct m atrix suggested by Ansoff there arc four growth vectors. The first is to penetrate existing product markets (see Chapter 12). A firm may attempt to attract customers from competitors or to increase usage rates o f existing customers. A second growth vector involves product expansion w hile remaining in existing markets. A third growth vector is to apply the same products in new markets, w hile the fourth growth vector is to diversify into new products. In addition, there is a third dimension to the m atrix w hich is based on vertical integration.

Investment strategies For each product market, a number o f investment options arc possible. The firm can reduce or control the investment in a business area by either a milking or a holding strategy. Alternatively, it can withdraw com pletely if prospects become very unattractive or if the business area becomes incompatible with the overall thrust of the firm . It can also invest to enter or grow.

Functional area strategies The developm ent o f a business strategy involves the specification o f the strategies in functional areas such as sales, brand management, R & D , manufacturing and finance. The co-ordination o f various functional area strategics so that they don’t w ork at cross-purposes can be difficult. The role of strategic objectives is to help in that task. The strategic thrusts representing various ways to achieve sustainable com petitive advantage can be im plemented in a variety o f ways. Differentiation, for instance, can be based upon product quality, product features, innovation, service, distribution or even a strong brand name. Low-cost strategies can be based on an experience curve w hich links cost reduction to cumulative production volum e. However, it can also be based on factors such as no frills products or automated production processes.

16

M A R K E T I N G STRAT EGY: INTRODUCTION

Bases of sustainable competitive advantage An effective strategy needs to involve assets and skills or synergies based on unique combinations o f businesses. Thus, identifying w hich assets, skills and synergies to develop or maintain becomes a key decision.

STRATEGIC M A R K E T M A N A G E M E N T Strategies have to be developed and implemented as part of the business management process. M ost firms do have some form o f regular cyclical planning. However, in an era o f rapidly changing business environments such as those being experienced in the twenty-first century, the cyclical planning process does face many problems. Strategic market management is motivated by the assumption that the planning cycle is inadequate to deal w ith the rapid rale o f change that can occur in a firm's external environm ent. To cope with strategic surprises and fast-developing threats and opportunities, strategic decisions need to be precipitated and made outside the planning cycle. It is useful to have a real-time inform ation system rather than periodic continuous m onitoring of the environm ent. In addition, efforts to develop strategic flexibility arc likely to be helpful. The latter involves strategic options that allow quick and appropriate responses to sudden changcs in the environm ent. An im portant dimension to strategic market management is to be proactive rather than simply reactive to environm ental change. The firm can itself bring about change in the environm ent. It is possible to make a sizeable im pact on governm ental policies, custom er needs and technological developments. The goal is to develop market-driven strategics that arc sensitive to the customer. W e look at the practical aspects o f marketing planning in the last chapter of the book. The material in the previous chapters is highly relevant to the marketing planning proccss and many, if not all, of the topics w hich we look at are included in the marketing plan.

QUESTIONS 1

So m e people view m a rke tin g in te rm s of a d e c is io n - m a k in g p a ra d ig m . How useful is such a perspective when m arketin g is viewed w ithin the f ra m e w o rk offered by strategic windows?

2 3

Discuss how overlapping strategic w indow s m ight be Identified and exploited by an org aniz ation. W h a t is m eant by competitiv e strategy? How should an o rg a n iz a tio n set about determ ining its com petitive strategy?

4

Given the nature of a ra pid ly changing environm ent where new developments take place very rapidly and firm s need to react rapidly, Is the Idea of m ar keting planning still relevant? W h y or why not?

5

Discuss how an org aniz atio n should set about identifying and selecting co mpetitive strategies. How m ight various stakeholder interests Impinge on this process? Illustra te with an example.

17

M A R K E T I N G S TRATEGY: INTRODUCTION

CASE STUDIES Mi r e l a F a s h i o n s In 1971, a highly am bitious young wom an returned to Cyprus from Greece afte r obtaining a degree as a fashion designer. W ith the help of her parents, she bought a shop in the m ain shopping a re a in Lim assol. The shop specialized in made-to-measure garm ents fo r wom en. The clientele a t the tim e included relatives, friends and custom ers who w anted to select the design of their clothes and have them sp ecially made. G ra d u a lly, the business gained a reputation fo r high qu ality and elegance. As the custom er base increased, the need to em ploy more dressm akers became apparent. The owner decided to em ploy both qualified and untrained wom en, and according to their knowledge they were assigned to specific tasks. S lo w ly the volume increased as more people came to the south part of Cyprus follow ing the partition of Cyprus in the 1970s. A t the same tim e the troubles and uncertainty in the M iddle E a s t brought w ealth y Lebanese to the country, who transferred their businesses to Cyprus. As a result, boutiques started to emerge not only in Lim assol but also in other towns, for exam ple N icosia and L a rn a c a . The owner identified a m arket opportunity th at developed from various environm ental changes: to become a supplier of w om en's clothes to different boutiques and shops across the country.

In order to cope w ith the high dem and, the ow ner moved out of the shop to a s p e c ia lly converted area at the centre of the tow n. She bought m ore equipm ent, and hired m ore dressm akers as w ell as salespeople. The ow ner of the business also designed the clothes. The business w as nam ed 'M ir e la Fa sh io n s'. Orders w ere placed a fte r the ow ner e xh ib ited designs to custom ers th a t va ried a cco rd in g to the season. M ore and more boutiques opened and the com petition among them intensified. Subsequently, the ow ner had to develop different designs fo r each boutique. The business w as booming and had gained a reputation acquired through w ord of mouth and p articip ation at fashion shows across the country. B y the e a rly 1990s the Lebanese had left Cyprus. A t app roxim ately the same tim e, as part of the p relim in ary stages of the entry requirem ents of Cyprus to the E U, the governm ent gave permission to im port foreign brands such as Benetton, M a rlb o ro , Polo , C alvin Klein and M a rk s & Spencer. Cypriots became 'obsessed' w ith im ported clothes. How ever, not all could afford them or w ere interested in buying them. Big clothes factories started closing down since the demand for local garm ents began to decrease. L o c a l m anufacturers could not export abroad since their prices w ere not com petitive enough due to high labour costs. M a n y boutiques started closing as w ell. Som e of those th at rem ained built up stocks of both locally made clothes as w ell as imported brands. The owner had to dispense w ith the services of some people in order to keep its costs down. It w as tim e to find a new niche fo r the business. And indeed, a new niche w as found. Despite the fa ct th at C ypriots showed considerable interest in imported clothes, demand fo r madeto-measure garm ents w as equally high. A t the same tim e, the ow ner 'spotted' a new opportunity: the increasing demand for made-to-measure wedding dresses. The reputation of the business acquired over the years fo r high q u ality and attention to detail made it easy fo r the ow ner to a ttra c t custom ers from these two segments of the m arket. M eanw hile, the owner identified another opportunity: the big carnival festival in Lim assol th at lasts for two weeks in Fe b ru a ry. F o r two whole months the entire business operations are concentrated on the design, developm ent and production of fancy dresses for shops, private organizations (e.g. the R o ta ry C lu b ), big and sm all groups and individuals.

18

M A R K E T I N G S TRATEGY: INTRODUCTION

The accession of Cyprus to the E U in 2004 w as m arked by heightened com petition in the local clothing industry by local and foreign businesses, and the increase in the imports of foreign fashion brands. M ire la Fashions has been in operation for 36 years, and during th at tim e it has had to adapt in accordance to the m arket changes and fashion trends. Contributed by Io an n a C. Papasolom ou, A ssociate Professor, M ark e tin g Dept, U n ive rsity of Nicosin

QUESTIONS 1

How is the organization trying to get to grips w ith the problems and d ifficulties presented by the opening and closing of strategic w indow s?

2

Does the organization appear to have a strategic m arketing m anagem ent fu n ctio n ? Ex p la in .

3

Do you think that M ire la Fashions' current com petitive strategy is the correct one? W h y or why not?

4

The strategic window of opportunity has rem ained open for some th irty years for this firm . It has m et the changes in the m arket and the industry successfully. W h a t kind of changes are likely to ensue w ith the accession of C yprus in the Eu ro p ean U n io n ? How should the firm seek to meet these changes?

5

Id entify the various stakeholder interests and how they m ight influence choice of strategy.

K i n g Ol a f ’ s Hal l The Hall w as built in the late eighteenth century, essentially to house the growing city 's law courts and to provide a meeting place where m erchants could enter into trading contracts with one another. It is a very fine imposing building close to the shopping centre of the city and is surrounded by a cobbled space to set it back from other buildings and the main road. The main entrance to the building is hidden behind a frontage of C lassical Greek columns surmounting a series of stone steps. It has more the appearance of a Greek temple from tim es of A n tiq u ity than a com m ercial or civic building. The H all is very much in keeping arch itectu rally with the museum, library and a rt gallery which are close by. King O laf's Hall long since ceased to function as a com m ercial or civic building when the La w Courts fell into disuse in the middle of the twentieth century. A t that time new law courts were opened close to the main com m ercial hub of the city. Subsequently, the Hall fell into disrepair in the later half of the tw entieth century. The shopping centre of the city has undergone a program m e of im provem ent on a vast scale in recent tim es and boasts a m ajor m ulti-m illion pound investm ent program m e in a brand new shopping centre aim ed to a ttra c t shoppers to the city. Recently, there has also been substantial im provem ents in rail and a ir transp ort links to the city and there are adequate on street and off-street parking facilitie s to c a ter for the grow th in visitors and com m uters. E a r ly in the 1990s the C ity Council agreed for a T ru st to take over and m anage the financing, m aintenance, renovation and further use of the H all. The Council agreed to make an annual contribution to the running of the H all but it essentially devolved control and the raising of finances required to support the H all to the T rust. The T ru st had access to vario u s funding sources and has just about m anaged to keep the H all in a fa ir state of rep air since th at date.

19

MARKETING

STRATEGY: INTRODUCTION

The H a ll contains a very large am ount of flo o r space w hich can be used for such things as exhibitions, antiq ue and c o lle c to rs 7 fa irs and to p ro vid e a c co m m o d a tio n fo r the C ity C o u n c il's A n n u a l D inner. The L a w C o u rts have been preserved in the sam e state as they w ere left a fte r the la st session in the 1 9 5 0s. B e lo w the L a w C o u rts a re the dungeons w here people on rem and and a w a itin g tria l w ere held. The H a ll possesses an up per flo o r m a in ly housing a n u m b er of sm a ll ro om s but a ls o fe a tu rin g a sm a ll th e a tre /co n ce rt room c a p a b le of seating 20 0 people. E a r ly in the tw en ty- first cen tu ry the building w as designated as a W o r ld H e rita g e site and tw o years la te r the T ru s t w a s a w a rd e d £ 5 0 m illio n by the E U to help re n o v a te the b u ild ing and put it in an ex ce llen t state of re p a ir. S in c e th a t tim e much w o rk has been put in hand to undertake essential repairs. H o w e ve r, the m a n a g e m e n t of the T ru s t is concerned ab o u t m a in ta in in g the long-term v ia b ility of the H a ll. W it h som e 50 per cen t of the E E C m oney still a v a ila b le it is looking a t w ays of how it can spend the m oney to m ake a lte ra tio n s to the b u ild in g 's in te rn a l stru c tu re to m ake it a self-financing p ro ject.

QUESTIONS

1

To w h a t kinds of purposes do you think the H a ll m ig ht be p u t?

2

To w h a t extent do you think these purposes could m ake the H a ll se lf- fin a n cin g ?

3

W h a t m ig ht stak e h o ld er interests in the building be and how m ight these im p a ct on the desire to m ake the build ing se lf- fin a n cin g ?

20

Chapter 2

Portfolio analysis

IN T R OD U CT I ON W e might argue that organizations create their own environments rather than simply adapt to existing ones. They select the strategic w indow s of opportunities and threats through w hich they want to look out into the w orld and develop and market product and services to m eet the needs o f what they observe to be required in the face o f environm ental turbulence. Understanding how w ell these products and services m eet the needs presented by the w indow s o f opportunities and threats is a fitting start for exploring the subject of strategic marketing. It introduces the many factors that impinge on the firm ’s ability to operate in a strategically successful manner. These factors arc both internal and external to the organization and form subjects in their ow n right w hich w ill be explored in subsequent chapters. Organizations m arket a mix o f products or services or both. These constitute the offering that is made through the strategic window. Central to the success or failure of a business is the health o f its product (o r service) mix. A starting point is the product life cycle concept. This is a useful conceptual fram ework w ithin w hich to study how firms can vary their marketing strategies

though o f course

as w e shall see in later chapters they do have to take other factors into account. There seems to be little doubt, however, that at different stages in the product life cycle certain marketing strategies seem to be m ore appropriate than others. The life cycle concept also points to the different earning patterns o f products or services at various points in time. It indicates that it is necessary to have a balanced portfolio of products and services in terms o f cash generating capabilities in order to ensure steady sales and profits at all times. Since products w ill generate different cash flows and profits over their lives it means that the firm has to constantly review its product m ix, prune its product lines and introduce new products from time to time in order to maintain long-run profits and stay in business. Several prod uct po rtfolio m odels, perhaps the best known o f w hich are the B C G (Boston Consulting G ro u p ) m atrix, the G E / M c K in s e y m atrix, and the D irectional Policy matrix have been adopted by marketers to aid them assess the health o f a firm ’s product m ix. This chapter examines the use and lim itations o f such models. Portfolio models are useful diagnostic tools but m ore form al and detailed planning mechanisms are required to evolve and evaluate detailed strategies. Consideration o f the produc t life cycle and the various portfolio models is essential when examining the implications of strategic w indow s for an organization. A ll these tools and methods give reasonably good indicators o f when a strategic w in do w is about to close.

21

PORTFOLIO A N A LY S IS

THE PRODUCT LIFE C Y C LE The need for new products and new product m arkets has an im portant influence on strategy formulation. This is because there is evidence to show that most products have life cycles and progress through rccognized stages. E v e ry stage in the life cycle brings w ith it environm ental threats and opportunities that require changes to be made in m arketing strategy and have im plications for marketing planning. In general, life cycles exhibit the following features: ■ Products have a finite life span. ■ The typical product life cycle curve, as reflected in the sales history o f a product is ‘S ’ shaped until it eventually levels off. It is at this point that market m aturity occurs and when the maturity phase has run its course, a period o f decline follows. ■ In general term s, the stages in the life cycle are known as ‘introduction, growth, m aturity and decline'. ■ The life cycle o f a product may be prolonged by finding new uses or new users for the product or by getting present users to increase the amount they use. ■ D uring its passage through the life cycle, the average profitability per unit of the product sold at first increases and then eventually begins to decline. A typical life cycle o f a successful product appears in Figure 2.1.

The length of the product life cycle Product life cycles can vary considerably in term s o f length. The steam locom otive made its debut in the early nineteenth century and disappeared from regular service in the U K towards the end o f the 1960s. O ne can still, o f course, find enthusiasts using them in the twenty-first century in the U K and there are parts ol the world — for example, Eastern Europe, Africa and China — w here the steam locom otive is still in regular com m ercial use. In contrast, some w om en ’s and m en ’s clothes come in

Introduction

Profits--

Figure 2.1

22

The product life cycle

Growth

Maturity

Decay

PORTFOLIO A N A L Y S IS

and out of vogue with amazing alacrity. They can even become obsolete w ith the passing of the seasons, so they appear to have relatively short life cycles. However, fashions comc back in vogue again from time to time and old products are introduced as new ones. O n e problem that has been found in trying to make use o f the product life cycle concept as a management tool is that many products do not appear to perform in the m arket place as it suggests. They seem to bypass some stages w hile getting stuck at other stages. M oreover, thev may even come into vogue again after a period o f going out o f fashion. These observations have brought about criticism s o f the product life cycle as a useful planning tool (Exh ibit 2.1). Experience shows that sales and profitability vary at every stage in the life cycle. M oreover, the comparative significance of, nature of, and interrelationship between price, prom otion, distribution and the actual specification of the product itself change over the life cyc le . The quality o f the product is often im portant during the introductory stage, as inadequacies that appear during the trial o f a product can end in long-term buyer lack of interest in the product. A dvertising and m arketing communications need to be inform ative during this period. Later, widening distribution or price reductions may become m ore im portant. Awareness o f the product life cycle concept can help a firm to take b elter advantage of the market position o f the product or scrvicc. It can provide indicators o f when new launches should be considered, when moving to new markets should be

011

the agenda and the need for diversification.

The product life cycle concept can be used to analyse: ■ product category (e.g. cars) ■ product forms (e.g. small hatchbacks) ■ product brand (e.g. Ford) ■ product model (e.g. Fiesta). Perhaps the most useful application of the product life cycle concept is w ith respect to product forms.

E X H I B I T 2.1

S W A N S E A E N G I N E E R I N G : D I F F I C U L T I E S IN USING THE PRODUCT LIFE C Y C L E CONCEPT

Swansea Engineering makes wire fo r industria l uses. A p p lic a t io n s range from wire for cables to carry high voltage e le ctricity to wire fo r winding on small electric moto rs f o r inc orp ora tion In both indu stria l and domestic products. The firm has trie d to use the life cycle concept to explain generic sales in the m arke t and sales of its own products. D if ficult ie s encountered include the defining of product markets and the sep aration from na tural growth and decline in the m arke t and the effects of recession. Indeed, in recent years it has proved extre m ely d if f ic u lt to assess e xa c tly where many pro ducts and m arke ts are in relation ship to their anticipated life cycles. Ironing out the f lu ctu a tio n s caused by e co nom ic recessions and m in i-b o o m s causes one of the m ajor problems. In addition, since the life cycle has to be viewed w ithin the contex t of in div id ual marke ts the analysis can be quite c om plicate d and som etimes diffic u lt to perform. Not only are the marke ts country specific but they are also industry specific.

23

PORTFOLIO A N A LY S IS

PRODUCT LIFE C Y C L E STAGES The introductory stage Losses or at best low profits arc experienced often during the introductory stage. This is because sales are low and prom otion and distribution costs are relatively high. Obtaining distribution lo r a product requires substantial amounts o f cash and promotional costs are greatest in relationship to sales during the introductory stage. In addition, extensive prom otion is usually required to secure distribution. High margins can provide the cash for heavy prom otional expenditure and this in turn produces high initial prices that may discourage rapid adoption of the product by certain customer segments.

Growth stage N e w com petitors enter the market attracted by the prospect of large-scale production potential and the large profits to be made as the m arket grows in size and economies o f scale come into operation. There is little change in prices and prom otional expenditure from the introductory stage, though both may be slightly reduced. There is also a decline in the ‘prom otion to sales ratio’ —that amount o f money spent on prom otion in relation to the amount o f salesgenerated, since sales

is the are

expanding during this stage. The net result of all this is that increased profits are generated as costs are spread over a larger volum e and unit manufacturing costs decrease in line w ith the influence of the experience curve. G ro w th eventually decelerates as fewer first-time buyers enter the m arket. This often means that a firm has to em ploy one o f several strategies to keep up m arket growth as long as possible. These include:

■ continually looking for new’ w ays to improve product quality ■ adding new features to a product or service ■ refining the styling o f a product ■ introducing new models and flanker products ■ entering new market segments ■ switching the emphasis o f advertising away from creating product awareness to producing conviction and purchase ■ lowering price to cntice pricc-scnsitivc buyers.

Maturity stage The m aturity stage follow's on from the onset o f decline in the rate of sales growth. The latter produces over capacity in the industry w hich in turn leads to increased competition. It is a stage in which profits decline. During the maturity stage, firms implement frequent price reductions and increase advertising and consumer promotions. Emphasis is placed on product research and developm ent to come up w ith product improvements and Hanker brands. W h ile the w-ell established com petitors do w ell, the weaker competitors may quit the market. Cash earned by strong com petitors at this stage can be put into products that arc at earlier stages in their life cycles.

24

PORTFOLIO A N A L Y S IS

Decline stage Sales of most products eventually start to decline for one or more o f several reasons. These include technological progress, shifts in consum er tastes and increased domestic and foreign com petition. Over-capacity in the m arket is produced together with price cutting and low er profits. A t this lim e some firms may w ithdraw from the m arket and those remaining reduce the number o f products that they have to offer, pull out o f smaller market segments and weaker trade channels, cut the prom otion budget or reduce prices even further. Consideration must be given to dropping products during this stage unless there arc good reasons for retaining them. W eak products tend to occupy a disproportionate amount of management’s time and resources. The products often require frequent price and inventory adjustments, short production runs and expensive set-up times. M oreover, they may need the kind o f advertising and sales force attention w hich if it w’ere to be spent on m ore lively products could produce greater profitability.

T H E P R O D U C T / S E R V I C E P O RT F OL I O Som e products or services produce considerable amounts o f cash w hile others do not. W h e re considerable cash is generated, it is often m ore than is required for essential operational expenditure and for additional investment in facilities and staff. In other cases, however, the cash generated may be insufficient to cover these kinds o f expenditure. A firm might benefit if products that are not satisfactorily contributing to profits and overheads o f the firm arc dropped from the product mix. H ow ever, there may w'cll be good reasons w h y the products arc such poor cash generators at a particular m oment in time. Indeed it may well be that some o f these products w ill go on to be the big cash earners for a company in the future. Product portfolio models provide a means o f rating products and/or services in order to assess the future probable cash contributions and future cash demands of each product or scrvicc.

P OR T F OL I O M O D E L S Portfolio analyses start by examining the positions o f products. They consider the attractiveness of the m arket and the ability of the business to operate com petitively w ithin the m arket. The first of the portfolio models to be used extensively was the growth-share m atrix — sometimes referred to as the cash-quadrants model. In this m odel, market growth rate was employed as the indicator for market attractiveness and relative market share was used to indicate com petitive position. There have been a num ber o f variations on the portfolio approach, but they all rely on the w o rk o f the Boston Consulting Group for theoretical and em pirical underpinning.

The Boston matrix The Boston approach maps products on to a two-dimensional matrix (Henderson, 1970). The method applies equally w e ll to services or any form o f strategic business unit. A ccording to the Boston Consulting G roup, the tw o most significant factors w h ich govern the long-term profitability of a product arc the rate of growth o f its market and the share of the m arket that the product has relative

25

PORTFOLIO A N A LY S IS

to its largest competitor. The Boston Consulting G rou p presented the model in the form of a simple two-dimensional matrix. The two axes o f the matrix are relative market share and market growth rale (Figure 2.2). The relative m arket share o f a product is assessed w ith respect to the m arket share o f its largest com p etitor (o r average o f the leading companies as this was subsequently found to be m ore meaningful). The cut off between the high and low market share w:as originally judged to be equality w ith the leading competitor, and in the case of m arket grow th rate was originally put at 10 per cent p.a. Both these dividing points w ere subsequently revised and the m atrix was defined less mechanistically. O n e interprets the strength or limitations of a product by its position in the m atrix. Products falling into the high growth, high market share quadrant arc term ed ‘stars’. They arc to m o rro w ’s cash earners. Being high market share businesses, they w ill be highly profitable and generate a lot o f cash, but at the same time their high growth w ill also mean that they w ill require a lot of cash both to finance working capital and to build capacity. Thus, though profitable, stars might have cither positive or negative net cash How. Products positioned in the low’ growth, high market share quadrant arc designated ‘cash cow s’ . These arc the real cash generators, being profitable as a result of their high relative market share. It is quite likely that they w ill also create surplus cash not required to financc grow th. Products falling into the low growth, low relative market share quadrant arc designated ‘dogs’ . These arc inherently unprofitable and seem to possess no future, though their cash requirements arc low'. Products in the high growth, low m arket share segment have been referred to as ‘w ild cats’ , ‘problem children’ or simply ‘ ?’s. They arc unprofitable as a result of their low m arket share, and they consume a lot o f cash m erely to maintain their market position because of the high growth rate of the m arket.

High

•*

Relative market share -----------------------------------

Low

Star invest to maintain share. Cut price only to hold service

Wild cat Convert to a star or divest

Cash cow Ration new investment, maintain prices, but keep out entrants

Dog Manage for cash and withdraw

Market growth

Low

Figure 2.2

26

The BCG product portfolio matrix

PORTFOLIO A N A L Y S IS

The overall strategy is defined sim ply w ith regard to the management o f cash flow's in order to achieve a balanced portfolio over time. Cash is obtained from cash cows and invested in stars to convert them into to m o rro w ’s cash cows. Dogs are divested and problem children arc cither converted into stars or liquidated. In this way a balanced portfolio should be achieved w ith an adequate succession of stars ready to take over from today’s cash generators, the cash cows. W h e n drawing grow th share analyses, a num ber o f matrices should be drawn. In the first place, grow'th share matrices should be shown for the various stages of the planning cycle, i.e. now', in one year's time, tw o years’ tim e, five years’ tim e, etc. In this way an organization can track the projected progress over the planning horizon. It is also custom ary to circle the points on the m atrix (see Figure 2.3). The size o f circles should reflect the size of sales or profits for a particular product, product line or business unit. In addition to show ing inform ation about one’s own organization on the m atrix, it is also beneficial to show' those o f com petitors on the same m atrix. M atrices should not be too over­ crowded w ith inform ation or else they w ill be difficult to read. Business units, products or product lines shown on a m atrix should also be comparable w'ith one another. For exam ple, a vehicle m anufacturer might have three types o f m atrix - cars, vans and buses. O ne m atrix might show a range o f cars, another range o f buses, and the third might show a range o f vans. It would also be allowed to have a matrix showing the three broad categories o f buses, cars and vans in aggregate form (Exh ib it 2.2). W h ile the matrix is intuitively appealing, it has im portant shortcomings w hich lim it its value as an analytical tool. The Boston Consulting G ro u p ’s original w ork from w hich the m atrix resulted was founded on an analysis o f 24 different commodities. Although this w ork has been replicated many times w'ith other com m odities it has not been replicated w ith differentiated or branded products. Its em pirical foundations arc founded entirely on an analysis o f com m odity products selling at m arket prices, w'hereas the substance o f marketing is concerned w ith differentiating products for customers prepared to pay higher than base prices to satisfy their particular needs and wants. The m odel is based on an im plicit assumption that costs fall w ith experience and that the business that gains the most experience w ill have the lowest costs. In a young and rapidly grow ing market, experience is rapidly acquired, thus increasing the benefits o f cost reduction and making it attractive to have a large market share. However, in low -grow th, mature markets the cost benefits accruing from

BCG matrix

1 O

2 • 3 O 4 • 5 * 6

Figure 2.3

O

Plotted Boston m atrix (based on the data in E xh ib it 2.2)

27

PORTFOLIO A N A L Y S I S

EXHIBIT 2.2

A S S ES S I NG M A R K E T GROWTH R A TE AND M A R K E T S H A RE POSITIONS IN SIX D I F F E R E N T S E G M E N T S

Colour of circles in m atrix

Segment M a r k e t growth rate Sales Average 3 largest competitors Relative market share (Sales)

Blue

Purple

White

Green

Violet

Red

1 0.105 100 200

2 0.12 2,000 867

3 0.12 3,00 0 2,083

4 0.14 25 0 1,967

5 7 2,500 1,933

6 7 1,000 1,400

0.5

2.30 6 8 0 5

1.4 4 02 3

0.12 7 0 9 7

1.293326

0.714286

cxpcricncc arc low and the benefits from increasing market share in order to gain cost advantages are small. The cxpcricncc curve should not therefore suggest continuous cost reductions, but reductions during the growth phase, with cost increases occurring during the maturity stage. A firm ’s relative market share was measured as share relative to its largest competitor and the division between high and low relative share was therefore set at unity. Thus in any industry there could only be one business with a high relative market share. W here industries arc cxpcricncing low growth, all but one competitor would fall into the low growth, low share dog quadrant for which Boston’s prescription was simplv divest. The Boston prescriptions are restricted to versions of the buv, sell or hold type o f decision. There is no qualitative substance in these statements and little to assist strategic management apart from investment/divestment. Nevertheless, the model has been used far beyond the strictlv defined investment portfolio application. Corporate strategists have used the Boston portfolio to guide their investment decisions between businesses. Marketers, too, have misused the matrix to maintain a balanced portfolio of products and for them the limitations of the model arc even more profound. The Boston model has, o f course, been widely criticized by strategists and marketers (viz. Proctor and Kitchen, 1990). Strategists have objected to the fundamental proposition that the strategic success of a business could be determined by just two quantifiable factors — market growth rate and market share. This seems too simplistic and could be true only if it was assumed that management itself could not make a difference.

Product life cycle portfolio matrix To deal with specific criticisms aimed at the B C G matrix, Barksdale and Harris (1982) designed their own matrix. The specific criticisms of the B C G that they sought to address were:

1 that the B C G ignored products or businesses that were new, and 2 that the B C G overlooked markets with a negative growth rate.

28

PORTFOLIO A N A L Y S IS

As w ill be seen from the m atrix below there is a specific focus on the growth and m aturity stages of the product life cycle. Using the same assumptions as arc inherent in the B C G m atrix, Barksdale and H arris bring out the additional issues that arise out o f introducing new products (infants) and products in declining markets.

Warhorses Cash cows develop into warhorses when an established m arket enters decline. The products still exhibit a high market share and can still be substantial cash generators. M arketing expenditure may still have to be rcduced, or, selective w ithdraw al from market segments or elim ination o f ccrtain models may still be necessary.

Dodos Such products possess a low share in declining markets and there is little opportunity for growth or cash generation. Usually they should be removed from the portfolio, but if com petitors arc in the course o f w ithdraw ing from the m arket and look as if they w ill all have withdraw n fairly soon, it may be profitable for ‘dodos’ to remain.

Infants These arc high risk products not earning profits and using up considerable cash.

Lim ita tio n s As w ith the B C G there are still problems in defining products and markets or even rates o f growth. In addition, other criticism s of the B C G can be levelled at this m atrix too (see Figure 2.4).

The GE/McKinsey and Directional Policy matrices Although potentially very powerful, the Boston matrix and Product Life C ycle Portfolio matrix can be difficult to use as both m arket growth rates and relative m arket shares may be difficult to measure accurately.

The GE/McKinsey matrix A nine-celled multi-factor portfolio matrix was designed by General Ele c tric working w ith M cKinsey and company to overcome some o f the limitations of considering only market share and market growth in accomplishing strategic marketing management. O nce again, services or other forms o f business unit can be plotted in place o f products. The G E / M c K in s e y multi-factor matrix (sec Business Horizons, 28th A pril 197S) has two dimensions. Across the horizontal axis is industrial attractiveness and along the vertical axis, business strength. Both, as w ith the B C G m atrix, increase toward the upper left corner o f the m atrix. The general

29

PORTFOLIO A N A LY S IS

Relative market share High

Low

Infants negative cash flow

Infants negative cash flow

Low

Stars Modest + o r cash flows

Problem children Large negative cash flows

High

Cash cows large positive cash flow

Dogs Modest + or cash flows

Low

Warhorses Positive cash flow

Dodos Negative cash flows

Negative

Figure 2.4

Market growth

The product life cycle portfolio matrix

Note: Based on data in E x h i b it 2.2

categories o f industry attractiveness and business strength perm it additional factors to be considered in positioning product groupings in the matrix. For exam ple, G E originally considered size, m arket grow th, pricing, m arket diversity and com petitive structure as the m ajor factors to describe industry attractiveness. In the ease of business strength, attention was focused on size, growth, share, position, profitability, margins, technology position, strength/weaknesses, image, pollution and people. However, a company can use different factors in either the business strength or industrial attractiveness category, depending on the situation. In order to construct a G E / M c K in s c y m atrix, the factors have to be rated by their im portance, cach product has to be rated on each factor and the evaluations combined into a summary measure. Sum m ary measures arc obtained for cach dimension o f the m atrix and thence plotted w ith in the m atrix. Products or product groupings falling in different cells im ply different strategic actions. For example, product groupings falling in the upper left three cells define those that should be invested in for growth; those falling in the lower right three cells o f the m atrix arc harvested or divested. This leaves three cells, starting from the upper right corner, down to the low er left corner o f the matrix. The general instructions for these three cells are to manage those products selectively for earnings. Although the G E / M c K in s e y m atrix offers a greater num ber of prescriptions than the Boston Consulting Group m atrix, the general outcom e is not much different to that produced by the latter. In all cases, products exhibiting a low share o f a low growth m arket should be divested, a high share o f a low grow th m arket should be m ilked and a high share o f a high growth m arket should receive investment (sec Figure 2 .S).

30

PORTFOLIO A N A L Y S IS

Industry attractiveness High score

Invest

Low score

Invest

Manage selectively for earnings

Invest

Manage selectively for earnings

Harvest or divest

Manage selectively for earnings

Harvest or divest

Harvest or divest

Figure 2.5

High score

Business strength

Low score

The G E/McKinsey matrix

Directional Policy matrix The Shell Chem icals D irectional Po licy m atrix is very sim ilar to the C E / M c K in s e y m atrix (see Robinson ct a l., 1978). The m ajor diffcrcnccs are greater precisión in the assessment o f factor ratings together w ith som ewhat m ore explicit strategy guidelines. Rather than using single measures of succcss, i.e. m arket growth rate and relative m arket share, the D P M uses a m ultivariate approach w here m arket growth rate is replaced by m arket attractiveness and relative m arket share by business strength. M arket attractiveness and business strength both com prise a set o f C ritical Succcss Factors (C S F s ).T h e content o f cach o f these sets o f C SFs depends entirely upon the company and the com petitive environm ent.

M ark et attractiveness M arket attractiveness should be measured in terms of the few key things one must get right in order to succeed. Some possible factors are listed below:

■ Market factors: m arket size, m arket growth rate, cyclicality, seasonality, power o f sellers and buyers, distributors, pricc sensitivity. ■ Competition: num ber of com petitors, type and pow er of com petitors, case of market entry, risk o f product substitution, market share, image in market, possibility of new technology, volatility. ■

Technological: sophistication of technology, patents, copyrights, maturity.

■ Economic: financial strength and barriers, economies o f scale, capacity utilization. ■ Socio-political: social values, attitudes and trends, laws, etc.

31 ■

PORTFOLIO A N A L Y S I S

Business strength Business strength should also be measured in terms o f the few key things one must get right in order to succeed and should enable a comparison to be made of a company relative to its major competitors. Some possible factors are listed below:

■ Market: market share, company and market image, distribution channels. ■ Product: pricing policy, product range, reputation for product reliability and quality standards, breadth of product line. ■ Capability: managerial competence, design capability, ability to respond to changing circumstances, manufacturing strength, R & D , capital strength and finances. ■ Customer relations: service levels, sales force coverage.

Selecting the business CSFs is not a trivial matter. The proccss should involve collectivc effort from key managers and executives in group meetings, and when done properly w ill result in consensus views which rellcct organizational values. As the proccss is largely unscientific it is important that as many parties are involved as possible, including the most senior management. Each factor is then assigned a range and given a score, from 0 to 10, relative to a firm ’s major competitors. Weightings can also be assigned to the factors to measure their relative importance, and the total combined score results in the market attractiveness or business strength score, which provides the two co-ordinates for the matrix plot (see Figure 2.6).

Position 1 This is equivalent to the question mark position in the Boston matrix. For products in this position the market potential is considered attractive, but they do not have the necessary strength in the market to do extremelv well. The options for this position arc cither to invest in the product to build market strength or to take as much as you can from the product. Focusing resources may be appropriate if investment is proposed

High

Market attractiveness

Low High

Low Business strength

Figure 2.6

32

The directional policy matrix ( l)

PORTFOLIO A N A L Y S I S

as a number of business functions may have to be developed because of the overall weak market position.

Position 2 This is equivalent to the star position in the Boston matrix. It is the most attractive position. The product has achieved a strong market position in a highly attractive market. The continued development of this business deserves the best resources available to maintain the success.

Position 3 This is equivalent to the cash cow position in the Boston matrix. It is also a very attractive position. The product is dominant and in a strong market position in a market that has lost its future potential.

Position 4 This is equivalent to the dog position in the Boston matrix. It is not the most attractive of market positions and equates to low market potential for a product or products with few strengths. Though these products may not generate as much profit as other more attractive products, they w ill obviously support the remainder of the product range and make a contribution to overheads. Figure 2.7 shows how a firm would portray its assessment of a product/service or business within different market segments.

Other portfolio models The A D L (A rthur D. Little) multifactor portfolio model (Exhibit 2.3) is a w idelv used one (Patel and Younger, 1978). It is a hybrid of the B C G growth share matrix and a multifactor matrix. The two dimensions used to evaluate cach business or segment arc:

Industry maturity: four classifications 1 embryonic 2 growing 3 mature 4

ageing, and

Competitive position: five classifications 1 dominance 2 strong 3 favourable 4 tenable 5 weak.

33 ■

PORTFOLIO A N A L Y S I S

Acme

Corim

Solex

Tyma

Bertin a

Dissot

Business strength Technology synergy Production synergy Mar keting synergy

18 15 20

7 8 7

6 7 3

7 7 5

4 5 2

8 8 9

7 6 7

Competitive advantage Resources required

32 15

8 6

3 4

4 5

2 4

8 7

5 5

3 7 8 3 4

3 5 8 4 4

3 8 8 8 8

3 6 8 3 4

2

2 2

100

Market attractiveness Wts Size Able to manage growth Trends Customers Competition Entrants Fir m 's strategy

23 19 9 17 14

3 9 8 7 9

3 5 8 3 3

9 9 100

2 6

2 1

2

1 O

+

Acme blue

Business strength M a rk e t attractiveness

Revenues

2 1

C o r im

3 O S ole x

purple

w hit e

2 1

4

6

4 #

Tyma

+

green

5.34

B e r tin a

#

v io le t

Dissot red

7.32 6.29

4.29 3.56

4.08

3.11 3.87

8.05 5.95

5.91 3.98

2000

200

90

400

150

200

Directional policy matrix ai 9 c: a>

tS 6 ro ® CG

0

0

0

O • w ) *

3

V s' 5

0

0

3

Business strength Figure 2 . 7

The directional policy m atrix (2)

The A D L proposes basic strategy guidelines for each combination of industry m aturity and com petitive position. For example: ■ Industry m aturity : growing ■

Competitive position: tenable

■

Guideline: find nichc and protect it.

34

PORTFOLIO A N A L Y S IS

E X H I B I T 2.3

ADL MATRIX

Industry life cycle stage Competitive position

Em b ry o nic

Grow th

M ature

Ageing

Dominant

Hold position and seek to m a x im ize share

Hold position and share

Hold position and expand with industry

Hold position

Strong

A tte m p t to Improve position and m axim iz e share

A tte m p t to im prove position and be selective in attempts to im prove share

Hold position and expand with industry

Hold position or harvest

Favourable

Selective attempts to im prove position

A tte m p t to im prove position and be selective in attempts to im prove share

Find niche and attempt to guard It.

H arvest or phased out w it hdraw a l

Tenable

S electively push for position

Find niche and attempt to guard it

Find niche and hang on or phased out w it hdraw a l

Phased out w it hdraw a l or abandon

Weak

Improve or get out

T urn aro und or abandon

Turn around or phased out w it hdraw a l

Aba ndon

Positioning in the A D L matrix Positioning in the m atrix identifies a general strategy. W h e n using the A D L approach, the line of business or S B U is not especially defined by a product or organizational unit. O n e has to look for discrete businesses by finding comm onalties among products and business lines using the following criteria as guidelines: ■ comm on rivals ■ priccs ■ customers

■ quality/style ■ substitutability ■ divestment or liquidation. This assessment o f the industry life cyclc stage of cach business is made on the basis of: ■ business m arket share, ■ investment, and ■ profitability and cash flow.

35 ■

PORTFOLIO A N A LY S IS

The com petitive position of a firm is based on an assessment of the following criteria: ■ Dominant: Rare. O ften results from a near m onopoly or protected leadership. ■ Strong: A strong business can usually follow a strategy without too much consideration of moves from rivals. ■ Favourable: Industry is fragmented. N o clear leader among stronger rivals. ■ Tenable: Business has a niche, either geographical or defined by the product. ■ Weak: Business is too small to be profitable or survive over the long

term .

■ Critical weaknesses. K n o w n limitations o f the A D L m atrix include the following. ■ There is no standard length of life cycles. ■ D eterm ining the current industry life cycle phase is awkward.

■ Competitors may influence the length ol the life cycle.

Comments on portfolio model usage Portfolio models are easy to use and the benefit o f using such models is to gain some idea of the profile o f strong/weak products or services in the mix. They may, however, cause an organization to put too much stress on market-share growth and entry into high growth businesses. They may also cause firms to pay insufficient attention to managing the current business. A nother problem is that the results produced by using the models arc responsive to the weights and ratings and can be manipulated to produce desired results. Since an averaging proccss is taking place, several businesses may end up in the same ccll location, but vary considerably in term s of their ratings against specific factors. M oreover, many products or services w ill end up in the middle o f the m atrix and this makes it difficult to suggest an appropriate strategy. The models do not accommodate the synergy between tw o or m ore products/services and this suggests that making decisions for one in isolation from the others may be shortsighted. These and other criticism s gradually diminished the popularity of portfolio analysis. However, its rise and fall did have a lasting influence on subsequent w ork on competition and business strategy because it highlighted the need for m ore careful analysis o f the tw o basic dimensions of portfolio—analytic grids: industry attractiveness and com petitive position (Ghem awat, 2002),

QUESTIONS 1

Discuss the usefulness of the concept of the pr oduct life cycle as a planning tool. W h a t are its major weaknesses?

2

E x p la in why firm s need to have a balanced product/service p o rtfo lio with elements at differen t stages In the product life cycle to ensure long-term survival and growth.

3

E x p la in h o w t h e Boston Consulting Group ( B C G ) model might be used to assess the health of a f ir m 's product m ix and to suggest strategies. W h a t are the lim itatio ns of the B C G model? Does the product life cycle portfolio m atrix offer any real Improvements on the B C G ?

36

PORTFOLIO AN ALYSIS

4

How might the GE/McKinsey matrix be used to assess the health of a firm's product mix and to suggest strategies? What are the limitations of the G E/M cKinsey model. Does the Directional Policy matrix offer anything radically new? Explain.

5

Looking at the portfolio matrices discussed in the chapter, what are their limitations? W hat use can marketers really make of these matrices?

CASE STUDIES A cme (A) Acme markets a product in six different market segments. The information in Table 2.1 is available for the firm's product and five competitors who make up the remainder of the sales to each market segment. On the basis of the information provided, comment on the probable state of health of the company from a product portfolio perspective. W hat other information would you deem necessary to facilitate an improved analysis of the situation?

Ac me (B) Acme identifies the business strengths and market attractiveness factors for its product and those of its competitors as shown in Table 2.2. In conjunction with the A case above evaluate the position.

Table 2.1

A C M E (A) Sales (£000)

Segment

Acme

Corom

So lex

Tyma

Bertina

Dissot

l 2 3 4 5 6

100 2,000 3,000 250 2,500 1,000

100 200 750 400 100 400

150 90 600 200 1,500 2,000

200 400 400 300 100 100

200 150 2,500 4,000 1,800 650

200 200 400 1,500 600 1,200

M arket share by unit sales Segment

Acme

Corom

So lex

Tyma

Bertina

Total %

l 2 3 4 5 6

0.3 6.6 9.9 0.8 8.2 3.3

0.3 0.7 2.5 1.3 0.3 1.3

0.5 0.3 2.0 0.7 4.9 6.6

0.7 1.3 1.3 1.0 0.3 0.3

0.7 0.5 8.2 13.2 5.9 2.1

3.0 3.2 3.1 4.9 2.0 4.0

3.5 10.0 25.2 21.9 21.8 17.6 100.0

37 ■

PORTFOLIO A N A LY S IS

Table 2.1

Segm ent Segm ent Segm ent Segm ent Segm ent Segm ent

continued

1 2 3 4 5 6

Market growth rates (%)

Development stage (now)

Development stage (in five years)

10.5 12.0 12.0 14.0 7.0 7.0

E a rly growth Growth Growth Growth M a t u r it y M a t u r it y

M a t u r it y M a t u r it y M a t u r it y M a t u r it y Decline Decline

Table 2.2 A C M E (B) Score (max 10) Business strengths

Weighted importance

Acme

Corom

Solex

Tyma

Bertina

Dissot

Technology synergy (po or-g o od)

18

7

fa

7

4

8

7

Pro ductio n synergy (po or-g o od)

15

8

7

7

5

8

fa

M ar keting synergy (poor-g o od)

20

7

3

5

2

9

7

C om petitive advantage ( none-distinct)

32

8

3

4

2

8

5

Resources required ( d if fic u lt -o b ta in a b le )

15

fa

4

5

4

7

5

Total

100

Market attractiveness (Segment 1)

Weighted importance

Score max (10) Acme

Corom

Solex

Tyma

Bertina

Dissot

Size ( sm a ll- la r g e )

23

3

3

3

3

3

3

Able to manage growth (po or-g o od)

19

8

5

7

5

8

fa

9

8

8

8

8

8

8

Custo m ers ( fragm e nted si m ila r)

17

5

3

3

4

8

3

Com petition (dif fic ult -e a sy )

14

8

3

4

4

8

4

Entr ants (m any-few)

9

2

2

2

2

2

2

F ir m ' s strategy ( u n lik e ly likely)

9

4

1

1

1

4

2

Trends (declinin g-em erg ent)

T otal

38

100

PORTFOLIO AN ALYSIS

Table 2.2 continued Score max (10) Market attractiveness (Segment 2)

Weighted importance

Acme

Corom

Solex

Tyma

Bertina

Dissot

S iz e ( s m a ll- l a r g e )

23

3

3

3

3

3

3

A b le to m anage grow th (poor-good)

19

9

5

7

5

8

6

T re n d s ( d e c lin in g - e m e rg e n t )

9

8

8

8

8

8

8

C u s to m e rs ( f r a g m e n t e d s im ila r )

17

7

3

3

4

8

3

C o m p e t itio n ( d if fic u lt - e a s y )

14

9

3

4

4

8

4

E n tr a n t s ( m a n y - f e w )

9

2

2

2

2

2

2

F i r m ' s strate gy ( u n lik e ly lik ely )

9

6

1

1

1

4

2

T otal

100

M arket attractiveness (Segment 3)

Weighted importance

Score max (10) Acme

Corom

Solex

Tyma

Bertina

Dissot

S iz e ( s m a ll - la r g e )

23

5

5

5

5

5

5

A b le to m anage grow th (poor-good)

19

9

4

4

4

8

3

9

8

8

8

8

8

8

C u s to m e rs ( f r a g m e n t e d s im ila r )

17

7

5

5

4

7

4

C o m p e t itio n ( d if fic u lt - e a s y )

14

8

4

4

4

7

3

E n tr a n t s ( m a n y - f e w )

9

4

4

4

4

4

4

F i r m ' s strate gy ( u n lik e ly lik ely )

9

7

3

3

3

6

4

T re n d s ( d e c lin in g - e m e rg e n t )

T otal

100

39 ■

PORTFOLIO A N A LY S IS

Table 2.2 continued Score m ax (10) M arket attractiveness (Segment 4)

Weighted importance

Acm e

Corom

Solex

Tyma

Bertina

Dissot

Size ( sm a ll- la r g e )

23

3

3

3

3

3

3

A ble to manage growth (poor-g o od)

19

3

5

4

9

9

3

9

5

5

5

5

5

5

Custo m ers ( fragm e nted sim ila r)

17

3

3

2

3

8

2

C om petitio n (dif fic ult -e a sy )

14

3

2

2

2

9

3

E ntr ants (m any-few)

9

7

7

7

7

7

7

F ir m ' s strategy (u n lik e ly likely)

9

3

4

3

4

8

3

Trends (declinin g-em erg ent)

T otal

100

M arket attractiveness (Segment 5)

Weighted importance

S c ore m a x CJ0.)

Acm e

Corom

Solex

Tyma

Bertina

Dissot

Size ( sm a ll- la r g e )

23

7

7

7

7

7

7

A ble to manage growth (poor-g o od)

19

9

2

8

2

8

5

9

5

5

5

5

5

5

Cu sto m ers ( fragm e nted sim ila r)

Trends (declinin g-em erg ent)

17

8

1

6

3

7

4

C om petition (dif fic ult -e a sy )

14

9

3

5

4

7

4

9

7

7

7

7

7

7

9

8

1

8

1

9

3

E ntr ants (m any-few) F ir m ' s strategy ( u n lik e ly likely) T otal

40

100

PORTFOLIO AN ALYSIS

Table 2.2 continued Score max (10) Market attractiveness (Segment 6)

Weighted importance

Acme

Corom

Solex

Tyma

Bertina

Dissot

S iz e ( s m a ll- l a r g e )

23

6

6

6

6

6

6

A b le to m anage grow th (poor-good)

19

7

2

7

l

3

8

T re n d s ( d e c lin in g - e m e rg e n t )

9

5

5

5

5

5

5

C u s to m e rs ( f r a g m e n t e d s im ila r )

17

6

3

5

2

6

6

C o m p e t itio n ( d if fic u lt - e a s y )

14

7

5

3

4

5

8

E n tr a n t s ( m a n y - f e w )

9

6

6

6

6

6

6

F i r m ' s strate gy ( u n lik e ly lik ely )

9

4

5

8

2

4

7

T otal

100

41

Chapter 3

Analysis of the business enterprise

I N T RO DU CT IO N M aking the best o f a strategic w in d o w opportun ity not only involves identifying promising opportunities but also having the right kind o f resources to make the best o f the opportunity. In addition to an analysis of external threats and opportunities in the environm ent, strategy development must be based on objectives, strengths and capabilities o f a business. Understanding a business in depth is the goal of self-analysis. It is sim ilar to com petitor analysis but it has a greater focus on perform ance assessment. The analysis is based on detailed currcnt information on sales, profits, costs, organizational structure, management style and other factors. There arc a number o f different approaches to self-analysis. First, there is the focus on marketing competencies and the resource-based view of the firm w hich is central to any thinking about selfanalysis from a marketing perspective. N ex t there is value chain analysis which examines the elements upon which a com petitive advantage can be based. O th er useful fram eworks include K a y ’s distinctive capabilities and the Balanced Scorecard. Then there is shareholder value analysis w hich provides a financial evaluation o f a business. The scope o f this book does not really provide an opportunity to w ork through examples o f shareholder value analysis w hich is quite com plex. Sales and profitability analysis are discussed along with the need to im plem ent more qualitative measures o f analysis which try to ascertain customer perceptions of the organization and its products or services. This then moves us along to the need to consider strategic options. The second part of the chapter looks at the need for creativity in business and stresses the problems associated w ith negative mind sets and blocks to creative thinking. Being aware o f such blocks and the damage they can inflict is crucial if one is to cope w ith the opportunities and threats provided by the opening and closing o f strategic w indow s. C onsideration is also given to some o f the ways the organization can get around the problem o f blocks to creative thinking.

MARKETING C O M P E T E N C IE S Two main ideas characterize thinking about marketing in recent years. The first is market orientation and the second is the resource-based view of the firm . M arket orientation is central to marketing (see Figure 3.1). A firm characterized as market oriented might have:

42

A N A L Y S I S OF T H E

BUSINESS

ENTERPRISE

Strategy entails

Environment

Capabilities

Figure 3.1

Matching strategy with resources

t

developed an appreciation that understanding present and p otential cu stom er needs is

2

encouraged the systematic gathering and sharing o f inform ation regarding present and potential

3

instilled an integrated, organization-wide p rio rity to respond to changing custom er needs

fundam ental to providing superior custom er value

custom ers and com p etitors as w ell as other related constituencies; and

and co m p etito r activities in ord er to ex plo it opportunities and circu m ven t threats (H u n t and M o rgan , 1995; K o h li and Jaw o rsk i, 1990; N a rv e r and Slater, 1990).

M a rk e t o rie n tatio n places emphasis on the high p erform ance o f com panies w ith high quality, organization-wide generation and sharing o f m arket intelligence w hich produces responsiveness to m arket needs. T h e resource-based v ie w o f the firm , on the o th er hand, suggests that superior perfo rm an ce reflects, in the m ain, h isto rically developed resource endow m ents. Both these approaches arc required to ensure strategic success. Strategy selection m ust reflect the demands o f environm ental changes, but at the same tim e, it should develop a com pany’s distinctive com petencies. It is through co m p etitive positioning that the benefits from both o f these independent approaches arc obtained. It enables firm s to com pete by identifying target markets and encapsulating the com petitive advantage that w ill be sought in trying to reach these target markets. It recognizes that if the advantage is to be sustainable in the face o f com p etition, it has to be based on the firm ’s distinctive resources and capabilities (sec Figure 3.2). W h e re a s the p u rsu it o f a m arket o rien tatio n may w e ll be a w o rth w h ile aim , firm s appear to significantly differ in the extent to w h ich they exhibit traits associated w ith such an orientation. There arc several reasons for this. Fo r instance, firm s may experience inter-functional riva lry (Fish er et a l ., 1997) w h ic h can re s trict m arket o rien ted activities and behaviours. T h e y can also lack suitable processes, systems and procedures used to expedite strategic and tactical actions w h ich can seriously lim it the fir m ’s responsiveness to necessary change (Jaw o rsk i and K o h li, 1993).

43 ■

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

Marketing competencies

Ma 'ket orienl ation

Resource-based view of firm

>

1

Organizational assets are the endowments a business has accumulated such as those resulting in scale, plant, location and brand equity, while capabilities reflect the synergy between these assets and enable them to be deployed to the company's advantage

Appreciates present and potential customer needs

Has systematic information gathering regarding present and potential customer needs and about competition

Figure 3 .2

Has instilled an integrated, organization-wide priority to respond to changing customers needs and competitor activities in order to exploit opportunities and circumvent threats

Strategy selection must reflect the demands of environmental changes but at the same time it should develop a company's distinctive competencies. It is through competitive positioning that the benefits from both of these indpendent approaches are obtained

Capabilities may be conceptualized as complex bundles of skills and collective learning, which promote the co-ordination of functional activities in an organization

Strategy selection and marketing competencies

R E S O U R C E - B A S E D V I E W OF T H E FIRM For a strategy to be sustainable it has to be based on the fir m ’s resources and capabilities. Day (1994) distinguished between a fir m ’s assets and capabilities as follow s. O rganizational assets are the endow m ents a business has accum ulated such as those resulting in scale, plant, location and brand equity, whereas capabilities reflect the synergy between these assets and enable them to be deployed to the com pany’s advantage. Capabilities may be conceptualized as com plex bundles o f skills and collective learning, w h ich prom ote the co-ordination o f functional activities in an organization.

44

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

Organizational assets comprise things such as: physical assets — land, facilities, buildings, equipment; financial assets

cash, credit rating; operations assets

machinery, systems and processes; human assets

em ployees, their qualities and skills; m arketing assets

distribution penetration, m arketing

expertise, m arket positioning, m arket know ledge, custom er loyalty, brand name, reputation, relationships with distributors; legal assets

patents and copyrights; systems - management information

systems and decision support mechanisms. Com pany capabilities refer to a firm ’s ability to deploy assets through organizational processes to achieve desired results. There are a number of ways o f analysing the strengths and weaknesses of the organization.These w ill be considered in the rem ainder o f the chapter.

V A L U E CHAIN A N A L Y S I S Po rte r considered the value chain as a means of ascertaining the com petitive advantage that a firm might possess. A value chain o f this nature comprises tw o types o f value-creating activities as follows.

Primary value activities ■ inbound logistics: m aterial handling and warehousing ■ operations: transforming inputs into the final product outbound logistics — order processing and distribution ■ marketing and sales: comm unication, pricing and channcl management ■ service: installation, repair and parts.

Secondary value activities ■ procurement: procedures and inform ation systems ■ technology development: im proving product and processes/systems ■ human resource management: hiring, training and compensation ■ f ir m infrastructure: general management, finance, accounting, governm ental relations and quality management.

Each of the activities in the value chain is a potential source of com petitive advantage and thus should be considered in undertaking self assessment. Value chain analysis facilitates w orking out how to create the value for customers, as w ell as maximizing benefits for the organization. Organizations take raw inputs, and ‘add value’ to them by turning them into something of w orth to other people. In a manufacturing organization, the manufacturer ‘adds value’ by taking a raw material o f little use to the end-user (for example, aluminium ore) and converting it into something that people are prepared to pay money for (e.g. w indow frames). The concept also applies in service industries, w here people use inputs of tim e, knowledge, equipm ent and systems to create services o f real value to the person being served

the customer. Custom ers aren’t necessarily outside the organization: they can be other

stakeholders in the organization. As a rule, the m ore value that is created, the m ore people w ill be prepared to pay for a product or service, and the m ore they w ill they keep on buying from the organization. Value chain analysis helps

45

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

identify the ways in which an organization can create value for customers and other stakeholders. Value Chain Analysis is a three-step proccss:

1 A ctivity analysis: identifying activities undertaken in delivering the product or service 2 3

lalue analysis: how to add value for the custom er/stakeholder; and Evaluation and planning: w hether it is w orth making changes, and then plan and im plem ent changcs.

Activity analysis O n e needs to list or brainstorm activities that in some w ay contribute towards custom ers’ / stakeholders’ experience in dealing w ith the organization. A t an organizational level, this would include the step-by-step business processes that arc used to serve the custom er — prim ary activities. These w ill include marketing; sales and order-taking; operational processes; delivery; support; and so on (this might also involve many other steps or processes specific to the industry). It could also be broadened to include:

■ how one recruits people w ith the skills to provide the best service ■ how one motivates organizational teams to perform well ■ how one keeps up-to-date w ith the most efficient and effective techniques ■ how one selects and develops the technologies that give a com petitive edge to the organization; and ■ how feedback is obtained from customers/stakeholders on how the firm is doing, and what can be done to improve further.

Value analysis This involves identifying for each activity identified the things that customers/stakeholders value in the way that each activity is conducted. For example, with respect to a telephone order-taking process, the customer w ill value a quick answer to his or her call; a polite manner; efficient taking o f order details; fast and knowledgeable answering of questions; and an efficient and quick resolution to any problems that arise. If one is thinking about delivery of a professional service, the customer w ill most likely value an accurate and correct solution; a solution based on com pletely up-to-date inform ation; a solution that is clearly expressed and easily actionable; and so on. O ne then needs to w ork out what needs to be done or changcd to improve value crcatcd for cach value factor.

Evaluate changes and plan for action This involves picking out those things w hich can be done quickly, easily, and cheaply in the first placc, N ext the more difficult changcs have to be examined. Some o f these may be im practical or may deliver only marginal improvements at a substantial cost. These latter ideas should be put aside and not considered further. The remaining ideas should then be prioritized and a plan evolved to introduce them.

46

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

S H AREH O LD ER V A L U E ANALYSIS A business can be evaluated by examining the value it creates for its shareholders (sec for example, M ills, 1994; Rappaport, 1986). A quantitative figure can be put on this value. It involves calculating the sum of the present values o f future cash flows and residual value less the market value o f any debt associated w ith the business. A positive value means that the business is creating shareholder value whereas a negative one means the shareholder value is being eroded. If a new strategy is to be considered, its value w ill be the difference between the value w ith the strategy option and the value w ithout it. Shareholder value analysis presents solutions to many o f the difficulties attached to an analysis of business profitability using return on assets as a yardstick. B y focusing on cash flow one eliminates many accounting problems such as distortions causcd by depreciation and asset book values. Shareholder value analysis also considers future measures o f profitability when evaluating a business. In theory, the m ethod encourages executives not to be driven by short-term pressures of the slock market because ofits forward-looking orientation. In addition, it focuses attention on financial analysis and cash flows. It docs not pay attention to the development o f creative, innovative strategic options and the underlying strategic com petitive advantages that must exist to support them. Such an approach requires the ability o f executives to provide good objective estimates o f future profits w hich can be very difficult. Executives tend to be overly optim istic about m arket acceptance o f new ventures and to underestimate the time and investment required. In addition, there arc many sources o f uncertainty w hich affect the financial outcomes not the least o f w hich are com petitors’ reactions. The shareholder value-based m anagement approach has encountered difficulties at m iddle management levels as and w hen attempts are made to incorporate the concept into operational plans. This should not be surprising. The low level o f financial understanding among non-financial managers is not a recently discovered phenomenon and therefore attempts at introducing financially oriented planning and control systems w ere (and are) clearly problematic. However, the fact that difficulties exist should not prevent attempts at linking financially based perform ance systems w ith marketing and operations-based measures.

K A Y ’S DISTINCTIVE CAPAB ILI TI E S Kay (1993) argued that added value could be created by successfully managing contracts and relationships. H e envisaged three factors that w ould enable organizations to achieve a competitive advantage: architecture, reputation and innovation. In addition to these factors he also argued that a firm may have a competitive advantage through its control o f strategic assets. H e conceptualized architecture as a netw ork of relational contracts w ithin or around the organization, w ith employees (internal) and w ith suppliers and customers (external). 1Iis view was that this can add value because of the inherent knowledge it possesses and the routines it encompasses. H e argued that it allows adaptable response to change taking place and promotes open exchange o f information. However, Kay suggests reputation is a key way of communicating quality values to customers when it cannot easily be determ ined in other ways. Innovation too he considered to be the basis of com petitive advantage.

47 ■

ANALYSIS

OF T H E

BUSINESS

ENTERPRISE

In n o vatio n , q uality, cu sto m e r relation s, m anag em en t capab ilities, alliances, techno lo g y, brand value, em p lo yee relation s, en viro n m e n ta l and c o m m u n ity issues taken tog ether arc im p o rta n t value creation d rive rs in an organization (L o w , 2 00 0). M o n ito rin g and assessing these is im p o rta n t. Interest has develo p ed in re c e n t years in both the public and p riva te sectors into how p e rfo rm an ce can best be m easured and re p o rte d to m an ag em en t. T h is has led to the d evelo p m en t o f interest in m easuring p e rfo rm a n c e against goals. T h e ‘balanced sco re card ’ (K a p la n and N o r to n , 1996) has been adopted w id e ly fo r this use. I Io w e v e r, the p u b lic secto r requires a som ew h at m od ified approach to that o f the p riva te sector. B e lo w w e w il l in tro d u ce the ‘b alanced sco re card ’ and a m o re re c e n t ad d ition, ‘the pu blic secto r sc o re c a rd ’ .

The balanced sc or ecar d A balanced scorecard is a p erfo rm an ce m easurem ent technique that strikes a balance b etw een financial and n o n -fin an cial/operating m easures, relatin g p e rfo rm a n c e to re w a rd s, and taking into acco u n t the m u ltip lic ity o f stakeholder interests (F ig u re 3 .3 ). T h e balanced sco recard exam ines the organization fro m fo u r perspectives and requ ires one to d evelop m e trics, c o lle c t data and analyse it re lative to each o f these persp ectives:

F in a n c ia l ' T o succeed fin a n c ia lly , how should we a p pe ar to our sh are hold ers? '

sh arholders

vision, how

and customers,

should we

Initiatives

' T o satisfy our

' T o achieve our

Measures Targets

processes

Objectives

Intern al business

Custom er

w h at business

ap pe ar to our

processes must

custom ers'

we excel a t ? '

L e a rn in g and gro w th ' T o achieve our vision, how w ill we sustain our a b ilit y to change and im p ro v e ? 7

Figure 3.3

The b a la n ce d s co re ca rd

R e p r in t e d by p e r m is s io n o f H a rv a rd Business Review. F r o m ' T r a n s l a t i n g V i s i o n and S t r a t e g y f o u r p e r s p e c t iv e s ' by R .S . K a p l a n and D. P. N o r t o n , J a n - F e b 1 9 9 6 . C o p y r i g h t © 1 9 9 6 by the H a r v a r d B u s in e s s S c h o o l P u b l i s h i n g C o r p o r a t i o n , a ll r ig h t s reserve d.

48

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

■ the learning and growth perspective ■ the business process perspective ■ the custom er perspective ■ the financial perspective

Use of the scorecard helps give a clear picture as viewed from different perspectives. Perform ance measures enable im provem ents to be identified. These measures relate to characteristics o f products, services, processes, and operations and portray the factors that lead to im proved customer, operational, and financial perform ance. Some possible measures are shown in Exhibit 3.1. The appropriateness o f measures may depend on the type and size of the organization. An alternative approach for the public scctor is reported in M o ullin (2002). It takes a strategic perspective, w hereby the organization’s perform ance is examined against its main objectives and key perform ance targets. In addition the term ‘custom er’ is replaced w ith the term ‘service user/ stakeholder’ , the ‘in ternal’ perspective is renamed ‘operational excellence’ and the term growth is omitted in the innovation and learning perspective. In this last rcspcct, w hile the meaning o f growth in the balanced scorecard is more than just growth in physical or monetary term s, it can be confusing since growth in terms o f m ore service users, may be something the organization wishes to avoid.

The public scctor scorecard can be a valuable tool to use in assessing perceptions of perform ance held by different stakeholder groups cither for the service as a w hole or even for specific projects or activities. The method of construction can involve either a large number o f different measures or a much smaller number, depending on needs and preferences. It utilizes simple data collection tools such rating scales collected by questionnaire and can be analysed and presented graphically w ith the aid o f a standard spreadsheet package. The type of data used and how it is incorporated in the model is very much in the hands of the user since there arc no hard and fast rules as far as this is concerned. In some cases hard data may be available and can be reflected in the scorecard rather than a subjective assessment based upon scale values subjectively estimated bv stakeholders. Specifically', the scorecard addresses:

■ Service user/stakeholder. H o w they view the service and to what extent thev have contributed to the service. ■ Operational excellence. Effectiveness o f processes and staff along w ith staff satisfaction. ■ Innovation and learning. H o w the organization is continuing to im prove and how it learns from others. ■ Financial. H o w w ell the service keeps costs under control and creates value for money. ■ Strategic. To what extent the service has m et its key perform ance outcomes.

The public-sector scorecard can make use o f simple rating scales filled in by various stakeholders or it can use hard data w hich is collected in other ways —for example, financial perform ance data or staff turnover ratios.

More complex and detailed collection of data for monitoring purposes As noted in the last section, there is scope for m ore com plex and detailed collection o f data and m onitoring of performance.

49

ANALYSIS

OF T H E

BUSINESS

E X H I B I T 3.1

ENTERPRISE

K E Y P E R F O R M A N C E INDICATORS FOR T H E BALANCED SCORECARD

Perspective

Key perform ance indicators

Fin a n cia l P ro fits

R e tu r n on in v e s tm e n t, re tu rn on sa les, r a t i o to i n d u s t r y / m a r k e t / c o m p e t it o r a v e ra g e

In c o m e to s h a r e h o ld e r s

Lev e l o f d iv id e n d , d iv id e n d c o v e r

B u s in e s s g r o w t h

S a le s g r o w t h

B u s in e s s s t a b ili t y

D e b t/e q u it y r a t io , in t e re s t c o v e r

Customer Satisfa ctio n

S u r v e y s a t is f a c t io n d a t a

Q u a li t y of p ro d u c t s / s e rv ic e

L e v e l/ n u m b e r / % o f c o m p l a i n t s

Leve l o f se rvic e

P r o d u c t / s e r v i c e d e liv e r y lead t im e in t e r m s of t im e

Business development I n n o v a t io n / c r e a t iv it y

N u m b e r s o f new p r o d u c t s , ne w id eas, ne w sa le s leads,

Effectiveness

S a le s /s a le s c a l l s ra t io M a r k e t p e n e t r a t io n m ea su re R e p e a t busin e ss rate

In v e stm e n t

% re t a in e d p r o f i t f o r r e in v e s t m e n t In d ex o f R & D e x p e n d it u r e ( d e fla t e d ) T r e n d ( r u n n in g a n n u a l a v e r a g e ) in c a p i t a l e x p e n d it u r e o v er p r e v io u s fiv e years . % m a r k e t i n g e x p e n d it u r e on new p r o d u c t s / s e rv ic e s

Internal S t a b i l i t y of w o r k f o r c e S t a f f d e v e lo p m e n t

S t a f f tu r n o v e r ra te N u m b e r t r a i n i n g d a y s giv en to e m p lo y e e s / m a n a g e r s at d if f e r e n t levels f o r d if f e r e n t p u r p o s e s

Perform ance

P ro d u c tiv ity measures

C o m m itm e n t

A b s e n c e levels

C o m m u n ic a tio n

S u r v e y o f s t a f f level o f a w a r e n e s s o f key re c e n t issues r e l a t i n g to t h e ir w o r k

50

A N A L Y S I S OF T H E

BUSINESS

ENTERPRISE

Stakeholder satisfaction w ith the service and service qu ality can be assessed in m uch detail. In addition the c o m p c tc n c c o f the se rvice p ro vid er, c o m m itm e n t to the service p ro vid er, attitude to w a rd s the s e rvice p ro v id e r and co m m u n icatio n effectiveness w ith the p ro v id e r can all be assessed in g reater detail. E x h ib it 3.1 sum m arizes som e o f the m easures that can be used in this co n te x t. I Io w e v cr, one docs have to bear in m in d the stakeholders in vo lve d and th e ir interests.

Innovation and learning also offer a v a rie ty o f possible w ays fo r m o re d etailed assessment. In the case o f learn in g one m ight assess am ong o th e r things: To w h a t ex tent

■ ■

L e a rn in g is linked to b oth organizational strategy and in d ivid u al goals. U se is being m ade o f n e w business and m anag em en t concepts that can im p ro ve the

organiza­

tio n ’s p e rfo rm an ce. ■ ■

T rain in g is taking place to fill existing co m p e te n cy gaps. N e w o r existing fo rm s o f c o m p e te n cy train in g arc being used — e.g. distance le a rn in g , se lf d e ve lo p m en t o r Internet-based p rog ram m es.

■

T h e care e r rew ard system p rovides reco g n itio n o f learning.

■

H o w m u ch lea rn in g takes place in teams.

■

U s e is m ade o f le a rn in g fro m p a tie n ts/ c u sto m e rs in the fo rm o f satisfaction, co m p la in ts, changing needs, changing tastes, e tc .).

■

K n o w ledge is absorbed fro m outside, k n o w led g e is

diffused w ith in , k n o w led g e is generated

w ith in , and e x p lo ite d w ith in services (viz . Sp ren g e r and H ave, 1996).

Innovation assessm ent needs to be d ire c te d to w a rd s m o n ito rin g im p ro v e m e n ts in th e processes, p eople and services w h ic h are offered to p atien ts/cu sto m ers. O n e m ight assess and m o n ito r inputs, innovation process and o utpu ts (viz . B C G , 2006) as fo llow s.

Inputs ■

F inancial resources being com m itted.

m

People c o m m itte d to an inn ovation and h o w key people arc being used.

■

The num ber o f ideas generated and the expected p a yb a ckfo r each.

■

Key capabilities. W h a t and w h e re are the shared resources — and p o ten tial bottlen ecks.

P ro ce sse s m

Resources expended per in d iv id u a l project a n d on average.

m

Cycle tim esjor the entire process and specific parts. H ow ' long it takes to get ideas tu rn e d into service offerings, etc.

■

The num ber o j ideas that are m oving fr o m one stage o f the process to the next.

m

The difference between the in itia l expected value o f an idea and the actu a l realized value.

F o r outputs m

The num ber o f new products or services launched,

m

Increm ental savings in costs.

51

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

Operational excellence involves measuring the effectiveness of processes and the satisfaction o f staff w ith their w ork. It seeks to identify critical success factors in meeting with custom er/patient requirements. The focus is on efficiency, streamlining, ensuring that resources are available as and when required and reducing organizational slack. Preventative maintenance and detailed inspection o f processes arc also aspects of operational excellence. Measures should seek to rellcct these factors.

S ta ff are a key component in ensuring the effective and efficient delivery o f a service. Indicators o f job satisfaction include adequate levels of financial compensation for w o rk perform ed, flexible w orking hours, opportunities for advancem ent, job security, an interesting job, staff w orking independently and staff feeling that they are useful to society. The measures here should reflect the extent to w hich these facilities are considered by management to be available within the organization or unit.

Financial aspccts may be largely concerned w ith how costs arc kept under control. Measures may reflect the extent to w hich managers feel costs have exceeded expectations and may be related to different areas of business activity and kinds o f w ork. In this respect there may be several different sources or types of costs assessed and m onitored. In terms of delivering value for m oney it might be advisable to ask the question ‘value for m oney to w h o m ?’ Separate measures and assessment procedures might then be w ith the perceptions o f different stakeholder groups.

F I N A N C I A L P E R F O R M A N C E : S A L E S AND P R O F I T A B I L I T Y Self-analysis starts with an analysis o f current financial performance, measures o f sales and profitability. Change in either of these can signal a change in the market viability o f a product line and the ability to produce competitively. M ost firms have sales and profitability targets as key elements of their objectives. A reasonably sensitive measure o f what customers think about a product or service is its sales or market share. If customers alter their views about a product or service, sales and m arket share should be affected. Increased sales can mean that a customer base has grown. Increased share can provide the potential to gain a strategic com petitive advantage in the form of economies of scale and experience curve effects. The converse is also true when sales decline. Nevertheless, a difficulty w ith using sales as a measure is that it can be influenced by short-term prom otional activities on the part o f the firm or its competitors. An analysis o f sales or share should therefore be viewed within the context o f a study o f custom er satisfaction.

Profitability Profits can be used for capital needed to pursue growth strategics, to replace obsolete plant and equipment and to absorb market risk. R eturn on assets is often taken as the measure of profitability. It is a product of profit margin, w hich depends on the selling price and cost structure, and asset turnover w hich depends on inventory control and asset utilization. Businesses should try to earn a return on assets that meets or exceeds the cost o f capital, the weighted average cost o f equity and cost o f debt. Although such measures are helpful, ascertaining the relevant figures is not always as straightforward as one might assume. There arc many difficulties surrounding their calculation, such as the distortions caused by depreciation and the fact that intangible assets such as brand equity arc not included, just to m ention tw'o.

52

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

O T H E R KINDS OF P E R F O R M A N C E M E A S U R E M E N T It is difficult to measure perform ance indicators that really reflect long-term prospects. It is simpler to focus on short-term profitability measures and correspondingly to rcducc investm ent in new products and brand images that w ill have long-term pay-offs. However, perform ance measures should reflect the long-term viability and health o f an enterprise. Attention should be placed on assets and skills that underlie current and future strategies and their strategic com petitive advantages. Such measures might include custom er satisfaction, brand loyalty measures, product or service quality measures, brand or firm associations, relative cost, new product activity, and manager—employee capability and performance.

C U S T O M E R S A T I S F A C T I O N AND B RAND L O Y A L T Y O n e o f the most im portant assets of many firms is the loyalty o f its custom er base. Measures o f sales and m arket share arc useful but crude indicators o f what customers really feel about a firm . Measures o f customer service and brand loyalty arc more sensitive and provide diagnostic value as well. O ne w ay o f accessing customer needs/wants is to examine custom ers’ complaints and obviously try to respond to them. As far as measurement is concerned, the most im portant point is that the range of instruments used and their sensitivity are appropriate to the clients under scrutiny. A num ber o f difficulties can arise when taking measurements. The issues of validity and reliability are critical, as are sensitivity, timeliness, specificity, ambiguity, explicitness and accuracy. Timeliness refers to the extent to which the m aterial can become available; capacity, the extent to w hich changcs in direction and pace can be detected; and sensitivity, the extent to which small levels olchange can be detected. The factor o f specificity takes account of the relationship between variables and the extent to which they arc related to each other. Am biguity is concerned w ith clarity; and explicitness and accuracy arc to do w ith which measurements are made and recorded. Finally, a number of issues affect the w hole process o f measurement in organizations, i.e. cost-effectiveness, feasibility and the effect that being measured has on the participants.

P R O D U C T AND S E R V I C E Q U A L I T Y A product or service and its components should be critically and objectively compared w ith both the com petition and with custom er expectations and needs. Q uality is usually based on several critical dimensions that can be identified and measured over tim e - num ber of defects, conform ance to perform ance specifications, durability, reliability, etc. W e can contrast notional ideas about product quality w ith similar ideas about scrvice quality (sec Exhibit 3.2).

BRAND OR FIRM A S S O C I A T I O N S Companies may become attractive takeover targets and the value o f their stock may rise because of the strength of their brands (Sherrington, 199S). M oreover, some brands arc even valued as assets in

53 ■

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

E XH I B I T 3.2

P R O D U C T AND S E R V I C E Q U A L I T Y

Product quality 1

Perform ance- how well a product pe rfo rms the task it was designed to do?

2

D urability- how long the product will last?

3

Conformance with specifications- w hat is the incidence of defects found in the product on delivery; what is the incidence of defects which cannot be remedied?

4

Features - w h at special features does the product have w hich m akes it s u pe rio r

to

com petitive offerings?

5

The nam e- can one associate the image of the fir m and the brand name with concepts of quality?

6

R e liab ility- can one expect the same kind of quality every time th at the product is used?

7

Serviceability - is the service system efficient, comp etent and convenient?

8

F it and fin ish - does the produc t look and feel like a qu alit y product?

Service quality 1

Tangibles - do the physical facilitie s, equipment and appearance of personnel associated with the service prom ote confidence in the qu alit y of the service?

2

Reliability - is there evidence of an ab ility to perform the promised service properly the first time?

3

Responsiveness- is there a willingness to help customers and provide prompt service?

4

Competence - do the personnel possess knowledge and skill and have they an a b ilit y

to

convey trust and confidence?

5

Credibility/trustworthiness - is the org an iz atio n tru stw orthy and does it alw ays deliver w hat it promises to deliver?

6

Empathy - does the prov id e r of the service pr ovide its custom ers with in d iv id u a lize d attention?

7

Courtesy- do customers perceive the service provided to be a friendly one?

8

Communication- are customers kept informed about the service offered in the language they can understand? Do the providers of the service listen to what the customers have to say?

the company balancc sheet. Branding for consumers represents the mark o f a given level of quality and value that helps them choose between one offering and another. The developm ent o f a range of brands to cover different consumer segments enables a firm to benefit from changing consumer wants. From a m arketer’s point of view, brands allow the producer, and m ore recently the retailer, to target different groups o f consumers or segments o f the market, w ith different labels and product offerings. In fact, developing more than one brand enables a firm to segment a market and target different consumers. M oreover, as long as brands add m ore value than cost for these new segments, an im provem ent in overall profitability can ensue. The developm ent of a portfolio o f discrete brands permits a firm to insulate the problems o f one product from the rest o f the range and it can allow it to divest less profitable brands.

54

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

An im portant asset o f a brand or firm is what customers think o f it: its associations and perceived quality. The latter, of course, may be different to actual quality. It can be based on experiences w ith past products or services and quality cues such as retailer types, pricing strategies, packaging, advertising and typical customers. The product may be associated w ith expertise in a particular technological area or with innovativeness. Such associations can be an im portant strategic asset for a brand or firm . Associations can be m onitored through the regular use o f questions posed in focus groups to describe user experiences. The identification of changes in im portant associations w ill likely emerge from such research. Further tracking inform ation can be obtained through surveys.

R E L A T I V E COS T A carcful cost analysis o f a product or scrvicc and its components involves tearing down com petitors’ products and analyzing their systems in detail

reverse engineering (Exh ibit 3.3). Such an analysis

enables one to see where costs may be saved in product construction and m aterial used. Alternatively, weaknesses in one’s own designs can be improved. W h e re an advantage is held in the design o f one’s own product but the additional cost is only small, this may be prom oted as a strategic competitive advantage if it is felt that the advantage can be sustained.

M A N A G E R / E M P L O Y E E C A P A B I L I T Y AND P E R F O R M A N C E Organizations have to both obtain and sustain a team of talented individuals who can carry on the necessary management activities to sustain the organization’s position vis-à-vis competitors. Moreover, an organization should be evaluated not only in terms o f how w ell it obtains human resources but also in terms o f how w ell it nurtures them . A healthy organization w ill consist o f individuals who are motivated, challenged, fulfilled and growing in their professions. Each of these dimensions can be observed and measured by employee surveys and group discussions.

E X H I B I T 3.3

R E V E R S E ENGINEERING

M a n u f a c t u r in g o rg a n iz a t io n s often have a team of engineers who buy products of th e ir c om petitors, reverse e n g i n e e r t h e m a n d f i g u r e o u t h o w m u c h t h e y cost by the parts used. Fro m that process of reverse engineering these firm s can estimate the production cost, the quality and the c apa bilit ie s of th eir c o m p etit ors ' machines. W it h this in form atio n they can im prove their own m achines' design and decrease their production cost. The needed in form atio n is not gained ille gally. It involves the use of the oretical estimates based on the engineers' own knowledge of the industry and of the m achines' ha rdware. The same princip le also applies to org aniz atio ns work ing in the service sector. In this case the steps in providing a service are analysed and costed and the qua lity of the service assessed.

55

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

OTHER P ER F O R M A N C E FACTORS Additional factors that could be considered include:

■ custom er loyalty management ■ average order/purchase value ■ the ‘expected value’ o f a transaction period ■ the cost o f attracting customers ■ the cost o f retaining customers ■ co-productivity — the involvem ent of suppliers and customers in creating value ■ operational gearing ■ financial gearing and corporate control ■ strategic and operational cash flow ■ capacity management availability and utilization.

It is arguable that cach o f these factors influences sales and/or costs, and should be considered within either sales growth rate or operating margin analysis. However, an equally justifiable case can be made for considering them as specific factors. T heir inclusion in this way acknowledges their im portance, together w ith the further acknowledgem ent that for specific organizations their influence can be significant.

Customer loyally management is reflected in average order/purchase value and the distribution of order/purchase value sizes. It has to be borne in mind that the costs o f order management and handling is not usually size related and a profile o f order size across the current and potential c ustomer base is a better indicator o f value creation. The average period of custom er loyalty and the expected value of the loyalty transaction may be a significant factor. This might be quantified by calculating the net present values o f costs o f acquiring and retaining custom ers. Such analysis is an im portant consideration in shareholder value creation; there can be quite different value results from similar levels of revenue. Norm ann and Ram irez (1993) identify the im portance o f custom er and supplier involvem ent in the ‘value creating system ’ . They use the example o flk ca to illustrate the role the customer may take in creating value. They highlighted a number of tasks assumed by customers that are usually undertaken by the retailer. The approach can be used with suppliers and distributors using transaction cost analysis. H ence, custom ers, suppliers and distributors become involved in value creation and this co ­ productivity is an im portant value driver.

D E T E R M I N A N T S OF S T R A T E G I C OPTIONS A nother aspect to self-analysis is to consider the determinants of strategic options. O ne needs to consider the characteristics of a business that make some options infeasible w ithout making m ajor organizational changes. There may also be key criteria that are critical when exercising choice among strategic options.

56

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

Past and current strategies Before beginning new strategies one should understand the basis and outcomes o f past strategies that have been adopted. H istory repeats itself only too often and there is no point in making the same mistake tw ice. In addition, a strategy that has paid dividends in the past may w ork w ell in another situation. There is no point inventing the wheel tw ice over. How ever, care has to be exercised in not assuming that w hat has w orked in the past w ill always w o rk in future situations (sec later in the chapter).

Organizational capabilities and constraints Internal organization can affect both the cost and feasibility o f some strategics. There has to be a fit between a strategy and the internal structure o f an organization. If a strategy does not w ork w ell it may be expensive or even impossible to make it work. Later in the book (see Chapter 13) we w ill be looking at strategic alliances, i.e. where organizations co-operate in order to work together for mutual benefit. Internal organizational factors relating to all firms participating in such ventures have to be compatible w ith one another and the overall strategies being pursued by the consortia.

Financial resources and constraints In the end, strategic decisions may w ell be based on access to funds to provide the necessary resources to get the best out o f a pcrccivcd opportunity. Ultim ately, judgements need to be made about whether or not to invest in a product, product line or service, or simply to withdraw cash from it. A basic consideration in all this is the firm ’s ability to supply investment resources. A financial analysis to determ ine probable, actual and potential sources and uses o f funds can help provide an estimate o f this ability.

CREATIVITY N ow adays, the m ajority o f organizations arc fully aware o f just how vital creativity is to their prosperity. O v e r tim e, considerable research has been undertaken w hich enables us to obtain a better understanding o f creativity and become more innovative ourselves. Even in the 1970s it was reported that the ‘accelerating pace o f change is now w idely accepted . . . A lvin Toffler found evidence that the pace o f change was causing “ Future shock” and social disorientation’ (Rickards, 1985) and this change is an ever present phenomenon to w hich businesses o f all kinds are forced to respond, if they w ant to stand the best chance of survival and prosperity. But how should they respond? An increasing num ber o f problems have no precedents and there are fewer tried and tested ways o f approaching them . M any suggest that creativity is indeed the answer and as Majaro (1991) suggests: ‘It is universally assumed that enhanced creativity can provide a company w ith a com petitive edge.’ A survey sponsored by Po rter/N o velli among 100 executive readers of Fortune 500 in 1993 found that people thought creativity was essential to ensure success in business. Indeed, O ldm an and Cummings (1996) note that ‘numerous commentators have argued that enhancing the creative perform ance of employees is a necessary step if organisations are able to achieve com petitive advantage’ .

57 ■

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

The main problem in management according to James M arch (1988) is that: Organisations face a large number o f problems of about equal importance, but only a few solutions. Thus the chance of finding a solution to a particular problem is small. In order to identify and so solve many o f the problems that arise in business it is necessary to challenge the problem-solving capabilities of those in charge. In many cases the creative proccss w hich is used to approach problems has to be restructured and redeveloped in order to produce new ideas and perspectives. Change is an intrinsic necessity for a company that wishes to perform w ell in the long term . As Sir John Ilarvey-Jones staled: ‘Unless a company is progressing all the tim e, it is in fact m oving backwards. It is quite impossible to maintain the status quo’ (Rogers, 1996). Attem pting to do things in the same w ay as thev have always been done in the past can lead to difficulties in a business environm ent which is experiencing rapid cultural, econom ic or technological change. The rapid growth of competition in business and industry is often quoted as a reason for wanting to understand m ore about the creative proccss (see for example, Van Gundv, 1988; Rickards, I 990). M any firms arc experiencing pressure to continually enhance old systems and products. G ro w th and survival can be related directly to an organization’s ability to produce (o r adopt) and im plem ent new products or services, and processes (Van Gundy, 1988). O ne o f the key aspects of any organization’s succcss or failure is its ability to slay ahead o f the com petition in a rapidlv changing environm ent. The m odern business w ith its emphasis on com petition, building larger markets, strategic planning, team working, etc., has created the need for new problem-solving and decision-making strategies. Another reason is that managers need to discover new and better ways to solve problems (A c k o lf and Vegara, 1988). In particular, an increasing number of problems have few or no precedents, hence there arc fewer tried and tested ways of approaching them w ith the anticipation of reaching a successful outcome. To slay in business a company has to respond creatively to the problems it faces. Problems may exist in both the external and internal environments. The form er poses problems such as how to cope w ith slow economic growth, how to deal w ith new entrants to an industry, how to increase sales at the pace of competition in high-growth markets, how to deal w ith new technological developments and how to cope w ith shorter product life cycles. The latter poses problems to do w ith poor internal communications, financial problems, alienated or poorly motivated staff and inadequate planning. Changes w ithin a company, forced by either internal or external factors, create an unhappy climate for the company and its w orkers. M anagem ent needs to respond positively to such situations. C reativity is considered to be a vital asset for anv person who is involved in a leadership situation (see, for example, Bennis and Nanus, 1985; and em pirical evidence provided by Ekvall, 1988). Creative leaders actively hunt for new' problems and arc especially succcssful in handling new challenges which demand solutions outside the routine o f orthodox strategies.They often possess significant vision and are able to inspire others by their creative talents.

HOW C R E A T I V E TH I N K I N G M A Y BE U SE D IN M A R K E T I N G Creative thinking benefits all areas and activities o f management. It is required to dream up better ways of marketing goods, to devise new production methods, to find new ways to motivate people, and so on. C reativity turns up in every business situation w'here there is a chance that things can be

58

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

done in a more business-like, more profitable or in a more satisfying way. Problems which require creative thinking arc ‘open-ended' problems. That is, problems for which there is not just one solution. Executives have to make decisions which require creative problem solving in planning, organizing, leading, and controlling their organizations, for example:

Planning ■ Determining the mission of the organization ■ Determining the organizational objectives ■ Identifying strengths, weaknesses, threats and opportunities ■ Adjusting the organization’s behaviour and strategies to competitors’ strategies ■ Deciding how to implement competitive strategies.

Organizing m Deciding what jobs need to be done within an organizational unit ■ Deciding how various jobs within an organizational unit can be grouped together, etc. ■ Deciding how much authority should be delegated to various organizational positions ■ Determ ining how best to train people for their jobs.

Leading m Finding ways of increasing productivity in marketing activities.

Controlling ■ Deciding what systems of control arc needed ■ Setting standards ■ Identifying why standards/objectives have not been achieved.

T H E NE ED TO BE R E AD Y FOR C H A NGE Executives must be ready for anything which requires having the necessary tools to proactively combat change. As Morgan (1989) states: Many organisations and their managers drive toward the future while looking through the rear­ view mirror. They manage in relation to events that have already occurred, rather than anticipate and confront the challenges of the future. If we were not at times ‘blocked’ in our thinking we would not need creative problem-solving methods. In this chapter we will first consider the nature of problem solving before going on to examine individual and organisational blocks to creative thinking. In addition, we w ill look at ways of dealing with both kinds of blocks. It is the existence of these blocks that gives rise to the need for a structured creative problem­ solving process and for training to help overcome particular mindsets (Exhibit 3.4).

59

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

E X H I B I T 3.4

RONEX INDUSTRIES: OVERCOMING M INDSET

Ronex Industries is a large electronics distributor th at has been in business since the 1950s and recently reinvented itself in a w ay that made it the talk of the entire electronics distribution industry. Ronex has 38 locations w ith about 1,300 em ployees, h alf of whom are salespeople. The C E O describes the organization as a junction box, selling and packaging the goods of over 100 suppliers to meet the needs of over 3 0 ,0 0 0 custom ers. U ntil the e a rly 1990s, Ronex w as a m aster of M BO-based com pensation plans. It w as very proud of its elaborate system of incentives fo r everyone in the organization. Then, the C E O and other senior m anagers in the com pany were exposed to ideas about creative thinking. They began to realize that the M BO-system they w ere so proud of w as a c tu a lly a b a rrie r to innovation as it discouraged full co-operation between business team m embers and increased sub-optimization. Over a one-year period, Ronex e lim in ated a ll ind ivid ual incentives, including sales com ­ missions and all supplier-sponsored prom otions. This action created a flu rry in the industry as it w as labelled everything from 'c o m m u n ist' to 'v is io n a r y 7. It turned out to be m ore on the visionary side as it set up an environm ent which has created a doubling in sales and earnings, a reduction in em ployee tu rn o ve r of over 50 per cent, and the ach ievem en t of an IS O 9002 ce rtific a tio n in every w arehouse and value-added operation in less than six months, w ith o u t using outside consultants.

M INDSET M indset is a condition w here an individual is over-sensitized to some part of the inform ation available at the expense of other parts. Mindsets can be useful:

■ It helps to become sensitized to some im portant things and serves us w ell — for example, red lights act as warnings and alert us to impending danger. ■ As a result o f learning from experience, mindset sensitizes us to patterns that rem ind us of ways w h ich have enabled us to solve past problems. W e do not have to reinvent the w heel each time that we encounter the same p rob lem . For example, if when dealing w ith an irate custom er we have found an approach that seems to be satisfactory from the point o f view o f dealing w ith the situation, then when w e subsequently encounter another irate customer we can deal w ith the situation using our acquired know ledge.

W h e n m i n d s e t b l o c k s us D u n ck er (194 5) investigated how past experience may block productive problem solving. lie suggested the expression ‘functional fixedness’ to refer to a block against using an object in a new way that is required to solve a problem . Interesting real-life examples of functional fixedness are provided by W eizenbaum (1984). According to the latter, the steam engine had been in use for a hundred years to pump w ate r out of mines before Trevithick had the idea o f using it as a source o f locom otive pow er

60

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

— it had only been seen as a tool to help pump w ater out of mines. The com puter had also been used for a long time as a calculator before its use as a general symbol manipulator was envisaged. It would seem that although mindset can provide us w ith substantial benefits, unfortunately there arc times when it can stand in the way o f progress. M indset can create difficulties for executives when they arc facing new or novel problems. W h e n stuck on a problem , executives tend to follow their m indset and this may be counterproductive as far as previously unencountered problem s are concerned. M indset is often characterized by ‘one right answer’ thinking, always looking for reasons w hy something w ill not w ork and an over-regard for logical thinking (Ex hibit 3.5). Executives may have learned from past experience that a particular way o f dealing w ith a problem usually leads to a satisfactory solution. Constant successful application o f the approach reinforces the belief that this way is the corrcct way to approach the problem and even the only way to approach the problem . W h e n a new problem arrives that defies solution by the learned approach, executives become stuck and do not know what to do.

B A R R I E R S TO I N D I V I D U A L ’S C R E A T I V I T Y M an y researchers have attem pted to address the phenom enon o f barriers to creativity. These include A rn o ld (1962), Adams (1974), Jones (1987) and M ajaro (1991). A ll have produced detailed lists o f the various kinds of barriers to creative problem solving. Some barriers lim it an individual’s creative output and arc related to the people themselves. O n the other hand, there

arc those that

emanate from the environm ent in w hich people operate. Personal barriers may besubdivided

into

physiological barriers, such as the perceptual limitations o f the senses or the brain’s data handling capacity, and psychological barriers related to the person’s behaviour or attitudes. A rnold (1962) suggested:

1 Perceptual blocks, w hich prevent a person receiving a true, relevant picture o f the outside w o rld . 2

Cultural blocks, which result from influences o f society.

3

Emotional blocks such as fear, anxiety and jealousy.

E X H I B I T 3.5

FORD M O D E L ‘T ’ - T H E M I N D S E T OF H E N R Y FORD

Henry F o rd 's model ' T ' remained unchanged fo r years while Ge ne ral M o to rs (Chevrolet) was m aking changes often using new technology. Henry Fo rd said: ' W e ' l l give the custom er any colo ur he wants as long as it is b la ck .' It was an arro g an t statement by an arro g a n t man who had been on top so long he thought nothing could dislodge him fro m the number one position. In the late 1 9 2 0 s Ford nearly went out of business as a result of this myopic ap proach. General M o t o rs (Chevrolet) took over as num ber one in the U S and F ord did not catch up until the late 19 80s.

61 ■

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

Adams added a fourth category:

4

Intcllcctual and expressive blocks.

Dealing with individual blocks to creativity Jones (1987) initiated a study designed to find out m ore about the factors w hich inhibit creativity. In review ing the literature on the subject he found that several authors included perceptual, cultural and emotional blocks w ithin their taxonomies while others m entioned factors such as errors in thinking and personal fears. H e identified four typologies of blocks. These were derived from cluster analysis o f self-reported items. The typologies arc:

■ Strategic blocks. ‘O ne right answer approaches’, inflexibility in thinking. These affect the approach taken to solve problems. They include the tcndcncy to rely heavily on past expcricncc or particular techniques without challenging their appropriateness; focusing on a narrow range of options for either problem definition or problem solving; and adapting an overly serious approach to problems which prevents the emergence of a playful, imaginative and humorous climate. ■

Value blocks. ‘O ver-generalized rig id ity influenced by personal values.’ These occur w hen personal beliefs and values restrict the range o f ideas contemplated. Values co-exist and failure to reconcile them contributes to difficult personal and organizational dilemmas.

■ Perceptual blocks. ‘O ver-narrow focus o f attention and interest.’ These arise from a lack of sensory awareness at a physical level and therefore contribute to a lack o f awareness of implications o f situations. ■ Self-image blocks. ‘Poor effectiveness through fear o f failure, tim idity in expressing ideas, etc.’ These reduce effectiveness in advancing ideas assertively. T hey arise from a lack o f selfconfidence in the value o f one’s own ideas. Individuals may be reluctant to seek help and talk about personal feelings. This barrier seems to be the greatest im pedim ent to the successful im plementation o f new ideas.

Jo n e s’s approach has resulted in training applications w hich centre on personal feedback and counselling, including suggestions for the most appropriate mechanisms for developing improved skills. Strategic blocks can be challenged through creative problem-solving training. Values, however, are a m ore difficult problem

but creating an awareness o f personal values in the individual offers

some respite. Perceptual blocks can be freed through observation and self-image blocks can profit from assertiveness training.

B L O C K S TO C R E A T I V E T H IN K I N G IN O R G AN I ZA T I O N S Some o f the m ajor blocks (see also Exhibit 3.6) are:

■ Emphasis on managerial control — control can stifle creativity since autonomy and a degree of freedom arc critical ingredients o f creative thinking. M oreover, traditional financial controls are not appropriate for long-term innovation efforts.

62

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

E X H I B I T 3.6

B L O C K S TO C R E A T I V I T Y IN O R G AN I ZA T I ON S

Pe ople and o rg a n iz a t io n s tend to fa ll into a varie ty of tra ps when tryin g to become more innovative: 1 2

Identifying the wrong problem Ju d gin g ideas too quickly

3

Stopping with the first good idea

4

F ailin g to get the support of key personnel in the o rg aniz ation

5

F ailin g to challenge assumptions.

■ Short-range thinking

there is a tendency to give prio rity to quick returns w ith financially

measurable results. ■ Analysis paralysis - ideas arc often over-analysed and time is lost along w ith any competitive advantage. ■ Rigid hierarchical structures — an unpredictable environm ent requires a responsive organ­ izational structure and this is not characteristic o f most organizations. ■ There is a tendency to look for one project that is likely to generate abig pay-off,rather than a number o f sm aller projects w ith small to medium pay-offs. Good smallprojects

can thus

often be overlooked. ■ M arket versus technology-driven product planning — there lends to be an over-emphasis on m arket research, in line w ith the marketing orientation adopted by many companies. Although the marketing orientation is very im portant it is often implemented at the expense of good ideas w hich come out o f R & D and w hich never get off the ground. ■ Pressure to achieve and do more w ith less resources — R & D departments arc often penalized for cutting costs; the m ore the departm ent saves one year, the less it has to play w ith the next. Paradoxically, the more companies have to cut back on expenditure, the m ore creative they must become. ■ Lack o f a systematic approach to innovation - a lack of real ideas about how to innovate. ■ The belief that some people arc creative and others arc not.

Ways of dealing w ith such blocks include:

■ Encouraging prudent risk taking. ■ Freedom o f thought

some degree o f autonomy.

■ Linking rewards w ith specific perform ance. ■ Encouraging different viewpoints on problems. ■ Positive involvem ent o f top management. ■ Continual flow of ideas. ■ Responding positively to new ideas.

63 ■

A N A L Y S I S OF T H E

BUSINESS

ENTERPRISE

E L E M E N T S OF C R E A T I V E O R G A N I Z A T I O N S One can divide the characteristics of organizational creativity into four distinct elements (the four Ps of creativity): ■ People : teams or individuals ■

Processes: how ideas arc developed and innovation accomplished

■

Place: creative environment

■

Product: the output of the creativity.

One cannot treat cach one of the four Ps in isolation from the other. They arc interdependent. Perhaps the one to receive the least attention is Place. An organization concerned with creating a climate that influences effective creative activity (sec Exhibit 3.7) should provide at least the following:

■

Resources: these should be appropriate and sufficient

■

Security: adequate salary and security of job tenure

■

Trust: allow for mistakes

■

R ew ard/ recognition: feedback, recognition and reward.

QUESTIONS 1

W h a t a r e the v a r i o u s q u a n t i t a t i v e an d f i n a n c i a l a p p r a i s a l s t h a t a f i r m s h o u ld u n d e r t a k e w he n u n d e r t a k in g a se lf a u d i t ?

E X H I B I T 3.7

Q U I E T S L E E P C O R P O R A T I O N : C R E A T I V I T Y IN ACTION

Q u ie tsle ep C o r p o r a t i o n is a s m a ll c o m p a n y t h a t d e v e lo p s m e d ic a l t e c h n o lo g y f o r t r e a t in g sleep ap ne a. T h e c o m p a n y has c r e a t e d a uniq ue, in n o v a t io n - f o c u s e d , r is k - h o n o u r i n g e n v ir o n m e n t t h a t has helped it t a k e a le a d in g p o s it io n in its s p e c ia l iz e d in d u stry , c o m p e t in g w it h m u c h la r g e r f i r m s . Its m is s io n s t a t e m e n t reads: ' I n n o v a t in g to H e lp P e o p l e ' and its tag line is ' W h e r e S le e p T e c h n o l o g y Is H e a d e d ' s in c e it is c o m m i t t e d to s t a y in g a t th e f o r e f r o n t o f i n n o v a t i o n an d t e c h n o lo g y . In its a p p l i c a t i o n , Q u ie tsle ep lists the c r i t i c a l s k i l l s f o r in n o v a t io n as being ' e m p a t h y and c a r i n g ' . It c a l l s th e p e r f e c t i n n o v a t io n i n c u b a t o r the a b i l i t y to e m p a t h i z e w it h c u s t o m e r s , s u p p lie r s and t e a m - m a t e s a n d to g e n u in e ly c a r e a b o u t t h e ir pa ss io n s, f e a rs , c o n c e r n s and needs. Q u ie t s le e p 's e n v ir o n m e n t o f in n o v a t i o n has a llo w e d it to d o m in a t e a p r o f it a b le m a r k e t n ic he in spite of c o m p e t it io n f r o m m u c h l a r g e r o r g a n iz a t io n s .

64

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

2

W h a t kinds of non-quantitative, non-financial analyses should a firm undertake when m aking a self a p p ra is a l?

3

C re a tiv ity in strateg y fo rm u latio n is im p ortant. How m ight organizations deal w ith the various blocks to creative thinking th at can a rise ?

4

How would you measure c re a tiv ity in an o rg anization?

5

How would the various kinds of self a p p raisals th at a firm could undertake be used in the course of form ulating strateg ies? Exam in e each aspect of self app raisal ¡n detail.

CASE STUDIES B a r r i n g t o n Br eweri es B a rrin g to n B re w e rie s has increasing volum e sales and m a rk et shares fo r most of its brands. It recognizes th at there are opportunities for expansion in Europe, the U S and P a c ific Rim countries. Nevertheless, there are some ominous threats appearing on the horizon. Foreign com petition, price w a r - eroded m argins, retail shakeout - lack of cap ital investment, increase in trade purchasing power, com m odity pricing and perception of lager, and m ark et w recking by existing com petitors have all figured of late. In analysing its own internal strengths the com pany feels th a t it has a good mission statem ent w ith focus/vision/clear objectives. It also considers that it has a com prehensive distribution network, w ith tied houses. The brew ery is a m arket leader in m any segments. This, it believes, it has achieved m ainly as a result of being a low-cost producer - econom ies of scale and experience it has gained in the trade. A t the same tim e, the firm recognizes that it has many internal weaknesses. It is a bureaucratic super­ tan k er - tra d itio n a l conservative approach to business - predom inantly h ie ra rch ica l in structure. In some m arket sectors it is losing ground and the com pany also feels th at it is perhaps too dependent on tied estate. M oreover, despite being a low-cost producer, no price leadership exists in the business. Perh ap s even more serious is the inertia in the com pany and internal resistance to change - especially among shareholders.

QUESTIONS 1

W h a t kind of mindsets is the firm most likely to experience?

2

W h a t kind of self-analysis ought the firm to undertake?

A vi l a Bat teri es A v ila B a tte rie s w as founded in the late 1950s by Fernando Braca m e n te to make starter batteries for cars and trucks. Situated around 50 kilom etres or so to the west of M ad rid , A v ila is in a very convenient position to serve central and northern Spanish towns and cities. M oreo ver, no difficulties are presented

65 ■

A N A L Y S I S OF T H E B U S I N E S S E N T E R P R I S E

in gaining access to the rem aining parts of Spain, the whole of P o rtu g a l and much of the south and southwest of France. The firm grew slow ly in size during the 1950s and 1960s. In the 1970s it stabilized its share of the Spanish m arket a t around 5 per cent of national sales and earned as much again in sales from exports to Po rtu g a l and Fran ce. This w as a position it held on to until the late 1990s when m ark et share, sales and profits in all m arkets began to slip. The fa m ily m anagem ent of A v ila B a tte rie s had alw a ys taken the view th at it didn't w an t to outgrow the fam ily membership and that a priority w as to keep ownership of the firm in the fam ily. In the past, it had forgone large growth opportunities for fe ar of losing control of the business. The change in fortunes in the e a rly 2000s accom panied Fern an d o 's retirem ent. His successor, his son-in-law, took over the business at a tim e when com petitors w ere making a big drive to capture larger shares of business on the Ib erian peninsular. Ju a n Fernandez, the new supremo of A v ila B a tte ries, w as keen to expand the business. He had w aited nearly tw enty years for the opportunity to take control and on succeeding to the business w as extrem ely perturbed to learn th at it w as at a period when the firm 's business w as declining fo r the first tim e in its history. Ju a n did not suffer from blinkered thinking. He knew ex actly w hat w as going on in the business environm ent and he wanted to take action th at would put the firm on a strong footing fo r the twentyfirst century. As a p rio rity he saw the need to undertake some creative thinking w ith respect to dealing w ith the situation.

QUESTIONS 1

W h a t kind of self-analysis ought the firm to undertake?

2

How should Ju a n set about the task of getting some creative ideas?

3

W h a t suggestions have you got regarding cre a tive courses of action he m ight pursue in order to remedy the situation of fallin g sales, m arket share and p rofits?

66

Chapter 4

Industry analysis

INTRODUCTION Organizations operate within markets and these markets arc within industries. The strategic window of opportunity opens out on a market within an industry. Understanding the nature of the industry and how it changcs is thus crucial to understanding the proccss o f how strategic-windows can be opened and elosed by external forces. Industries and markets arc different entities. Whereas markets can be looked upon as groups of customers w ith similar buying needs, industries arc collections of organizations w ith common products and technologies. Vehicle makers arc an example of an industry, whereas car products represent a market —the products and services customers use to maintain their cars. Both a knowledge of markets and industries helps to identify competition. Industries, like products (sec Chapter 2) have life cycles. As with products, industries progress through their life cycles and as they do so the nature of competition and consumer demand changcs. Naturally, this has implications for the opening and closure of strategic windows. In this chapter, we examine the implication of the different stages in the industry life cycle for the marketing activities of the organization. In addition to the progression through a life cycle, the entire nature o f industries can be different or even change from one stage in the life cycle to the next. Many industries arc fragmented — a state where no one firm predominates the others. The chapter also introduces the notion of strategic groups. These are groups within an industry which follow similar strategies and serve similar customers. The chapter also gives consideration to SPA C E analysis which like portfolio analysis (see Chapter 2) summarizes a large number of strategic-issues in a few dimensions. It relates industry strength to competitive advantage and the financial strength o f a firm . The Boston Consultancy Group competitive advantage matrix is also introduced and examined. This recognizes that strategic groups within an industry have different levels of profitability and it helps to classify the competitive environments that coexist within an industry. The material in this chapter presents an understanding of the kinds of strategies and problems that firms adopt or encounter when operating in different stages of the industry life cycle or in different types of industrial settings. Understanding the stage of the industry life cycle in which a firm is operating is a key factor in marketing planning. As w ill be seen below it has implications for other kinds of marketing analysis that have to be undertaken. Although the emphasis of these early chapters is on analysis, in this chapter analysis must go hand in hand with understanding the dynamics of the industry and the strategies that firms can pursue.

67 ■

INDUSTRY ANALYSIS

I NDUSTRY LIF E C Y C L E S In the same way that products have life cycles so too do industries. It has to be remembered that initially the conccpt of the product life cyclc was based on the notion that technologies have life cycles and that it was the technologies incorporated in products that gave the latter life cycles. O f course, other factors arc also relative to the product life. However, since industries arc about products and technologies it is not too surprising that they too should have life cycles. The three key stages which we shall look at below arc growth, maturity and dccline (see Figure 4.1). W e shall also look at two other relevant aspects of an industry - the amount of hostility that exists in an industry and the amount o f fragmentation that has taken place. In both cases we w ill relate this to strategy.

A NA L Y S I S OF E ME RG I NG AND D EV EL O PI NG INDUSTRIES Emerging industries arc cither newly formed or reformed industries that have been produced by technological innovations, shifts in cost relationships, cmergcncc of new consumer needs, or other economic and sociological changcs that make a new product or service a potentially viable business opportunity (Porter, 1980a). In such a situation, from the viewpoint of formulating strategy there are no preconceived ideas on how to operate competitively. Considerable uncertainty exists about the technology and the strategic approaches adopted by industry participants. There is little or poor information about competitors, their customers and what is happening in the industry. O ften there is ignorance regarding w hich firms are actually competitors and reliable industry sales and market share data arc often unavailable (Exhibit 4.1). In the case of producers, the initial small production volume and lack of experience with the product often combine to produce high costs relative to those the industry can potentially achieve. O ften there is a steep learning curve in operation and ideas come rapidly in terms o f improved

Growth

Figure 4.1

68

Industry life cycle

M aturit y

Decline

INDUSTRY ANALYSIS

E X H I B I T 4.1 1

C H A R A C T E R I S T I C S OF E M E R G I N G I N D U S T R I E S

Emerg ing industries are either newly formed or reformed industries that have been produced by technolog ical innovations, shifts in cost relationships, emergence of new consumer needs, or other economic and sociological changes that make a new product or service a potentially viable business opportunity.

2

U ncerta inty exists about the technology and the strategic ap proaches adopted by industry participants. There is little or poor in form ation about competitors, their customers and what is happening in the industry and relia ble industry sales and m arke t share data are often unavailable.

3

The init ia l small produc tion volume and lack of experience with the produc t often combine to produce high costs relative to those the industry can potentially achieve.

4

F rom the custom er's point of view, changeover costs from what they curr en tly use can be expensive.

procedures, plant requirements for c hangeover engineering, or R & D costs o f changeover, costs in m odifying interrelated stages o f production, or related aspects o f the business. From the cu sto m er’s point o f view, changeover costs from what they curren tly use can be expensive. There is also the cost o f obsolescence. For some buyers, w here successive generations of technology in the emerging industry w ill make early versions o f products obsolete, all the benefits they require may be obtained from the first generation. O thers, however, w ill be forced to acquire successive generations of the new product to remain competitive. Given the nature of the situation,’ under such circumstances,' analysis of the situation has to be J based on prim ary research and data collection. Although inform ation collected in this way may seem to be relatively expensive, it can pay dividends by enabling firms to establish themselves early in such developing industries w ith the benefit o f possibly being a market leader. Good marketing information systems need to be put in place to collect and assimilate whatever sparse data can be collected about customers, com petitors and other relevant factors.

A N A L Y S I S OF M A T U R I N G I N D U S T R I E S G ro w th in evolving industries slows down w ith tim e, but m aturity does not occur at any fixed point in development. It can be delayed by innovations or other events that maintain continued growth, and strategic breakthroughs may even lead mature industries to recover rapid growth. Industries can cxpcricncc m ore than one transition to maturity. In many ways this is similar to the concept o f the product life cycle where the cycle can be extended by product face-lifts and so on. A ny analysis o f an industry aimed at assessing w hether or how the transition to m aturity is taking place has to take account of these factors. Clues concerning the transition to m aturity may be obtained by studying the significant changes that take place in the com petitive environm ent during this stage o f development. Analysis should try

69 ■

INDUSTRY ANALYSIS

to identify those com petitors that do not perceive the need for such changes very clearly or may perceive them but be reluctant to make the often substantial changes in strategy that are required. Such firms, their markets and customers arc obvious targets to attack when formulating marketing strategy. The reason that they are m yopic in their thinking may go beyond strategic considerations and have its roots in the organizational structure and leadership o f those com petitors. It is these implications w hich may underpin the reluctance to make appropriate strategic changes. D ecline in industry growth rate means that firms cannot keep up their own growth rate in the industry simply by holding their market share. Maintaining growth rate in sales requires that market share has to be increased at the expense o f com petition. C om petitors w ho have so far coexisted amicably may regard such a change in strategy as aggressive and irrational. M oreover, it may lead to substantial retaliation. Price cutting, new forms of prom otional activity and new additional services may be the order of the day. Firm s need to m onitor their growth rates and market share very closely and analysis should take into account the likely reactions to com petitors o f any new strategic moves that the firm is likely to take and any proactive moves that com petitors themselves are likely to make. As customers get used to the product they become m ore critical in their appraisal o f what firms have to offer and also become m ore brand conscious. Custom ers’ attention moves from deciding w hether to purchase the product to making choices among brands. This change means that the firms supplying the goods must reassess their strategy. Slow er growth, more knowledgeable customers and greater technological m aturity means that competition is based m ore upon level o f service and cost control. Key questions that the analyst has to answer here relate to responses the firm should make to changcs in customer appraisals o f the product offerings and suggesting ways o f improving customer service and at the same tim e keeping costs under control. D uring times of growth and expansion, capacity additions to the industry w ill have been continual and regular. As growth reaches maturity, over capacity can occur. Scaling down operations or at least careful m onitoring of any further demands for increasing capacity may be required. O ve r capacity can lead to over-production and thence to price warfare to take up the production capacity. Forecasting the rate o f industry growth and being able to identify turning points and distinguish them from the impacts o f recession is o f paramount im portance. Understanding whether what is being experienced is a true transition to m aturity is extrem ely im portant. In hi-tech industries this can be quite difficult since new technologies may appear rapidly and extend the growth phase of hi-tech industries. The ability to find new products and applications diminishes as m aturity is attained and where they can be found they tend to be more risky and costly. As a consequence, a reorientation in terms o f approach to R & D is required. Given the high rate o f new product failure (see Chapter 1 1) this puts m ore pressure on marketing analysts to determ ine m ore accurately the demand for new products. It underlines the im portance o f marketing research activities to do w ith identifying and testing out new product ideas. Some international com petitors possess radically different cost structures and this means that those w ho are most favourably placed can often enter foreign markets w ith a decided advantage over the co u n try’s domestic producers. E n try can take the form of exports or foreign investments. The aluminium foil wrappings market is an example o f this. For many years Bacofoil has dominated this market. Then came the advent of private label branding by supermarkets and m ore recently im ports from highly competitive overseas producers. C om petitor analysis has to be undertaken to identify and evaluate the offerings o f both actual and potential entrants to the industry (Ex hibit 4 .2).

70

INDUSTRY ANALYSIS

E X H I B I T 4.2 1 2

C H A R A C T E R I S T I C S OF M A T U R I N G I N D U S T R I E S

G r o w t h slo w in g down but m a t u r it y does not oc c u r at any fix e d p oin t in developm ent. It can be dela yed by in n o v a t io n s or o th e r event s t h a t m a in t a in c o n tin u e d g ro w th and strategic b re ak throug hs may even lead m ature industries to recover rapid growth. Industries can exp e rie nce m ore than one t r a n s it io n to m atu rit y .

3

S i g n i f i c a n t changes that tak e place in the c o m p e tit iv e e nvir onm ent.

4

Decline in in dustry grow th rate m eans t h a t f i r m s c a n n o t keep up th e ir own gro w th

rate in

the in dustry sim p ly by hold in g th e ir m a r k e t share. 5

M a in t a in in g grow th rate in sa les re q uir e s th a t m a r k e t share has to be in cre as ed at the expense o f c o m p e t it io n .

6

C o m p e t ito r s who have so f a r co exis te d a m i c a b ly may re g ard such a ch ange in strategy as ag gressiv e and irr a t io n a l. M o re o v e r , it may lead to su b sta n tia l re ta lia tio n .

7

P r ic e cuttin g, new fo r m s o f p r o m o t io n a l a c t iv ity and new a d d it io n a l se rvices m ay be the o rd e r o f the day.

8

A s cu stom ers get used to the p ro d u c t they becom e m ore c r it i c a l in th e ir a p p r a is a l of w h a t f ir m s have to o ffe r and also becom e m ore brand conscious.

9 10

C o m p e t itio n is based more upon level of service and cost c o n tro l. O v e r - c a p a c it y can lead to o v e r - p r o d u c t io n and thence to p r ic e w a r f a r e

to

take up the

p ro d u c t io n c apa c it y . 11

The a b i lit y to find new prod u c ts and a p p lic a t io n s d im in is h e s as m a t u r i t y is a tta in ed and where they can be found they tend to be m ore ris k y and costly.

12

S o m e in t e rn a tio n a l c o m p e t it o rs possess r a d i c a lly d if f e r e n t cost stru ctu res and this means that those who ar e m o st fa v o u ra b ly pla ced can often enter fo re ig n m a r k e t s w it h a decided a d v antag e over the c o u n t ry 's d o m e stic pr oducers .

I M P L I C A T I O N S OF T H E T R A N S I T I O N TO M A T U R I T Y Rationalization o f the product m ix and c o rrect pricing becom e key issues and place a considerable am ount o f emphasis on cost analysis. W h e re a s broad p ro d uct lines and the in tro d u ctio n o f n ew varieties and options m ay have characterized the g ro w th phase, at the m atu rity phase this may no longer be a viable strategy. Em phasis on cost con trol m ay accentuate the need to prune and find less risky ways o f m aintaining m arket share. T he m atu rity phase puts pressure on the advantage o f being able to measure costs o f individual item s and to set the prices accordingly. M an y firm s use average cost pricin g m ethods during the g row th stage and this means that there w ill have been some cross­ subsidization o f products. H ow ever, continuing this approach w ill invite price cutting o r ncwr product introductions by com p etitors against the item s that arc priced artificially high. A t this stage the emphasis may be on tryin g to get people to buy m ore o f the p roduct both in term s o f am ount and frequency o f purchase rather than trying to attract new' custom ers. Sales can often be increased by offering additional services or p eripheral equipm ent, or by upgrading and w iden in g the

71

INDUSTRY ANALYSIS

product line. Some degree of diversification of product market scope may result. I lowever, it is a more economical strategy than that o f finding new customers since the latter means w inning market share which can be costly. A further point is that m ore than one cost curve can exist in an industry. Even where a firm is not the overall cost leader it can sometimes find cost curves which w ill make it a lower-cost producer for certain types o f buyer, variety o f product or order sizes

this is the key to im plem enting a

focus strategy. The effects o f industry m aturity may be circum vented by competing internationally. Sometimes goods w hich are obsolete in the home market may not be so in international markets. Alternatively, the industry structure, w ithin an international context, may be favourable w ith few er competitors and less sophisticated and powerful buyers. N o t all firms w ill attempt the transition to operating in a mature industry. Choice reflects not only availability of resources but also what competitors intend to do and how long it w ill take to adjust to the new conditions and the long-term profitability during the m aturity phase. Disinvestment can be an attractive alternative for some firms. Even the industry leaders may not necessarily be in the best position to make the transitions required if they have substantial inertia built into their growth stage strategies. Indeed, it may w ell be the smaller firms who have the necessary w herew ithal to manage best. The latter may be able to segment the m arket m ore easily. M oreover, a new entrant to the industry may possess the requisite resources and be able to establish itself in a strong position.

A N A L Y S I S OF D EC LI NI NG M A R K E T S Although one is apt to think that declining markets arc ones from w hich firms arc anxious to exit, in fact, they represent good opportunities for firms that tailor their strategies successfully to the demands o f the situation. This is because declining markets are not as attractive as growing markets to many competitors and sooner or later scale economies may cause the larger firms to consider withdrawal, thereby leaving an often relatively large market w ithout m ajor forces w ith in it. M oreover, it may be possible for a firm to revitalize an industry. This may be achieved by creating new markets, new products, new applications, revitalized marketing methods, government-assisted growth and/or the exploitation o f sub-markets (Figure 4.2). Analysis of the industry in these circumstances has to point to the direction that a firm might take.

New markets are characterized by moves into neglected or ignored m arket segments w ith potential for new grow th. Som etim es a dorm ant industry can be revitalized by a new product that makes existing products obsolete and accelerates the replacement cycle. A new application for a product can stimulate new industry growth. A product class can be revived by a revitalized marketing approach. Government-stimulated growth can take the form o f tax incentives or legislation giving rise to a new industry or market. Some firms have been successful in declining or mature industries because they have been able to focus on growth sub-areas, pockets of demand that arc healthy and even expanding.

Be the profitable survivor The essence o f this strategy is to provide the impetus to encourage com petitors to leave the industry so that as the surviving firm a very strong position can be held. In order to do this a firm may:

72

INDUSTRY ANALYSIS

Figure 4.2

Ways of revitalizing markets

1 Make it d ear to all that it intends to be the surviving leader o f the industry. 2 Reduce priccs or increase promotions to make the industry less attractive to competitors. 3 Introduce new products and cover new segments so as to deter competitors from finding a profitable niche. 4

Reduce competitors’ exit barriers by assuming their long-term contracts, supplying spare parts and servicing the product in the field or even by supplying them with products.

5

Create a national dominant brand.

6

Purchase a com petitor’s market share or its production capacity.

73 ■

INDUSTRY ANALYSIS

Milk or harvest This strategy aims to generate cash flow by reducing investment and operating expenses, even if it causes a reduction in sales and market share. It assumes that the firm has better use for the funds and that the business is not crucial to the firm in any way and that a m ilking strategy is feasible because sales w ill decline in an orderly fashion. Fast m ilking involves sharp reductions in operating expenditures and even price increases to maximize short-term cash flow and to m inimize the possibility that any additional m oney w ill be invested in the business. The strategy accepts the risk o f a sharp sales decline that could precipitate a m arket exit. Slow m ilking involves sharply reducing long-term investment in plant, equipment and R & D , but only gradually reducing expenditures in operating areas such as marketing and service. The latter attempts to maximize the flow of cash over time by prolonging and slowing the decline.

Conditions favouring a milking strategy 1 The dcclinc rate is pronounced and is unlikely to changc, but it is not excessively steep and pockcts o f lasting demand ensure that the decline rate w ill not suddenly become precipitous. 2 The pricc structure is stable at a level that is profitable for the efficient firms. 3 The business position is weak but there is enough customer loyalty, perhaps in a lim ited part o f the m arket, to generate sales and profit in m ilking mode. The risk of losing relative position w ith a m ilking strategy is low. 4

The business is not central to the current mission of the firm .

5

A m ilking strategy can be successfully managed.

M ilkin g may be preferred to divesting products because the strategy can be reversed if it turns out to be based upon incorrcct premises regarding market prospects, com petitor moves, cost p ro ­ jections, ctc.

The hold strategy The strategy is a variant o f the m ilking strategy and involves avoiding growth-motivated investment but maintaining an adequate level o f investment to maintain product quality, production facilities and customer loyalty. It is appropriate when an industry is declining in an orderly way, pockets o f enduring demand exist, price pressures are not extrem e, the firm has exploitable assets or skills, and a business contributes by its presence to other business units in the firm (Figure 4 .3 ). It is preferable to an investment strategy when an industry lacks growth opportunities and a strategy for increasing share would risk triggering com petitive retaliation. It can be a long-term strategy for managing a cash cow or an interim strategy employed until the uncertainties of a situation arc resolved. O ne problem with the hold strategy is that if conditions changc, rcluctance or slowness to reinvest may result in lost market share.

Divestment or liquidation W h e n a business environm ent and business position arc both unfavourable, then divestm ent or liquidation is called for. Ex it decisions may be triggered by:

74

INDUSTRY ANALYSIS

Business position in key segments STRONG

Business position in key segments W EAK

Industry environment FA VO URA BLE

Invest or hold

Milk or exit

Industry environment U N FA VO U RA BLE

Milk or exit

Exit

Figure 4.3

Strategies for declining or stagnant industries

1 a rapid and accelerating decline rate 2

extreme price pressures

3

a weak business position: the business is incurring losses and prospects arc bad

4

the role o f the business being superfluous or unwanted

5

exit barriers w hich can be easily surmounted.

HOSTILE M A R K E T S Hostile markets are those w ith oyer-capacity, low margins, intense com petition and management in disarray. D cclin c in demand and com petitive expansion both contribute to the crcation of a hostile m arket. D eclining markets may producc hostile markets often associated w ith over capacity, low margins, intense competition and management in turm oil. Hostile markets can also occur in other situations, for instance in grow th m arkets w here there is over capacity as a result o f too many competitors.

A N A L Y S I S OF F R A G M E N T E D I N D U S T R I E S Many firms compete in industries where no one firm has a significant market share and is able to impose a strong influence over the industry. Small and medium-sized firms arc often to be found in such industries. The essential feature o f such industries is the absence of a market leader having the power to shape the industry. Fragmented industries occur across a broad section of different types o f business. Industries arc fragmented for a wide variety of reasons some o f which involve underlying economic causes. These include: ■ low overall entry barriers ■ abscncc o f economies o f scale or experience curve

75 ■

INDUSTRY ANALYSIS

■ high transportation costs ■ high inventory costs or crratic sales fluctuations ■ no advantages o f size in dealing w ith buyers or suppliers ■ diseconomies o f scale in some im portant aspect o f business ■ diverse m arket needs ■ high product differentiation, particularly when based upon image ■ exit barriers in place.

O vercom ing fragmentation represents a very significant strategic opportunity. The rewards can be high because entry costs are low and there tend to be small and relatively weak com petitors who offer little in the way of threats or retaliation. O vercom ing fragmentation needs an attack on the funda­ mental econom ic factors leading to the fragmented structure. Some common approaches include:

■ Creating economies o f scale or experience curve benefits : proccss innovations may consolidate an industry. ■ Standardizing diverse market needs: product or marketing innovations can achieve this. ■ Overcoming those aspects most responsible for fragmentation.

•

Making acquisitions for a critical mass: making many acquisitions of neighbouring firms can be successful provided that the acquisitions can be integrated and managed.

■ Spotting industry trends early: in cffcct this means examining the impact of market drivers such as political, econom ic, social, technological and business trends as they impact on the industry.

High personal service and elose control arc com m only found in fragmented industries so the strategy should involve keeping individual operations small and autonomous. The approach should also feature tight central control w ith an emphasis on rewarding perform ance. Fragmented industries often produce products or services that are difficult to differentiate from one another. An effective strategy can be to increase the added value of the business by concentrating on the nature o f the augmented product or service. W h e n there are numerous items in the product line, an effective strategy for achieving good results focuses on a tightly constrained group o f products. This is a kind of focus strategy. Another focus strategy is to specialize on a particular category o f customer. Custom ers w ith the least bargaining leverage arc most attractive since they purchase small annual volumes or because they arc small in absolute size. Alternatively, a firm may specialize in term s o f custom ers who arc the least price sensitive or who most need the added value that the firm can provide along with the basic product or service. Another approach is to service only small orders for which the custom er wants immediate delivery and is less pricc sensitive. A nother is to service only custom orders to take advantage of less price sensitivity or to build switching costs. There can be substantial economies o f scale in densely covering a given geographic area by concentrating facilities, marketing and particularly sales activities in those areas. It permits the efficient use o f the sales force, effective use o f advertising and allows for a single distribution centre, among other things. The first step is to conduct a full industry and com petitor analysis to identify the sources of competitive forces in the industry, the structure within the industry and the position o f the significant competitors (Figure 4 .4). W it h this analysis as a background the second step is to identify the causes

76

INDUSTRY ANALYSIS

Conduct a full industry and competitive analysis to identify the sources of competitive activity in the industry, the structure within the industry and the position of significant competitors Identify the causes of fragmentation. Establish their relationship to the economics of the industry or other causes, if any exist

Why is the industry fragmented?

Can fragmentation be overcome? How?

If fragmentation is inevitable, what is the best alternative for coping with it?

Figure 4.4

Form ulating strategy

Is overcoming fragmentation profitable? Where should the firm be positioned to do so?

Can innovation or strategic change help? Is the infusion of resources or a fresh perspective all that is required? Will industry trends directly or indirectly affect fragmentation?

What would be the best defensible position for the firm to adopt to take advantage of industry consolidation?

77

INDUSTRY ANALYSIS

o f fragmentation within the industry. It is im portant to list the causes and establish their relationship, if anv, to the economics o f the industry. If there are other reasons these too should be identified. The third step involves examining the causes of fragmentation and establishing whether any of these sources o f fragmentation can be overcom e through innovation or strategic changc. O r whether the infusion of resources or a fresh perspective is all that is necessary. In addition, one should assess w hether any o f the sources o f fragmentation w ill be altered directly or indirectly by industry trends. The next step depends upon a positive answer to one o f the preceding questions. If fragmentation can be overcom e, the firm has to assess w hether or not the im plied future structure of the industry w ill yield attractive returns. For the answer to this question the firm has to predict the new structural equilibrium in the industry once consolidation occurs and then it must reapply structural analysis. If the consolidated industry docs offer attractive returns then the firm must determ ine what is the best defensible position for it to adopt to take advantage of the new situation. If the chances of overcoming fragmentation arc unfavourable then the best alternative from those available has to be selected, bearing in mind the particular resources and skills of the firm .

S T R A T E G I C G R O U PS A strategic group is comprised of firms within an industry following similar strategies aimed at similar customers or custom er groups. The identification o f strategic groups is fundamental to industry analysis sincc, just as industries can rise or fall despite the state o f the overall business environm ent, so strategy groups w ith distinctive competencies can withstand and even defy the general fluctuations w ith in an industry. Understanding the dynamics o f existing strategic groups can be productive in understanding their vulnerability to com petitive attack. The separation o f strategic groups within a m arket depends on the barriers to m obility w ith in the industry, i.e. their ability to compete in all markets. Strategic groups often share common competitors because they are often competing to fulfil sim ilar market needs using similar technologies. The inability o f companies to understand the diff erences in strategic groups is one that causes the frequent failure of companies entering a new market through acquisition. Although the broad business definition, products being sold and customers may be similar within the acquired and the acquiring firm , when the tw o arc in different strategic groups there can be m ajor misunderstandings.

SP A C E ANALYSIS Strategic Position and Action Evaluation (S P A C E ) (R o w e et a]., 1989) analysis extends environmental analysis to consider industry strength and relates this to com petitive advantage and financial strength o f a company. Sim ilarly to the portfolio models it summarizes a large number o f strategic issues on a few dimensions. It plots dimensions of the firm (its financial strengths and com petitive advantages) against industry dimensions (environm ental stability and industry strength). Environm ental turbulence is seen as being counterbalanced by financial strength - a company with high liquidity or access to other reserves being able to withstand environm ental volatility. Industry strength focuses upon attractiveness o f the industry in terms o fg row th potential, profitability and the ability to use its resources efficiently. A firm operating in the industry needs to have a competitive

78

INDUSTRY ANALYSIS

advantage. S P A C E analysis involves rating a firm (and its com petitors) on all the factors and drawing up a profile as shown below (see Figure 4.5). The firm illustrated has a predom inantly aggressive quadrant posture and enjoys significant advantages, nevertheless it is likely to face threats from new com petition. It has to guard against complacency which may prevent it gaining further m arket dominance by developing products with a definite com petitive edge. A com petitive posture is typical o f a company w ith a considerable advantage in an attractive industry. How ever, the com pany’s financial strength is insufficient to balance the environm ental instability it faces. Such a firm clearly needs m ore financial resources to maintain its com petitive position. The need to raise capital or consider a m erger is on the horizon. A conservative posture is typical of a company operating in mature markets w here the lack o f need for investment has generated financial surpluses. The lack o f investment can mean that such a firm w ill compete at a disadvantage and a lack o f opportunities w ithin existing markets may augur long­ term vulnerability. They must therefore defend existing products to ensure a continued cash flow while they seek new market opportunities. A firm w ith a defensive posture is clearly vulnerable. It has little residual strength to combat com petition and needs to foster resources by operating efficiently and being prepared to retreat from com petitive markets in order to concentrate on ones it has a chance o f defending. The outlook o f such a firm is poor.

Aggressive strategies m ight entail ■ m arket penetration ■ m arket development ■ product development ■ integration ■ diversification.

C om pa ny

F in a n c ia l

d im ensions

strengths

Conservative

\

Aggressive

5

4

\

3 2 12

C om petitiv e advantage

\

\ 3 4 5^6

- 6 - 5 -4 -3 -2 - 1 N -----

Industry strength

-2

Defensive

_3 -5 -6

Figure 4.5

Competitive E n v ironm e nta l

Industry

s ta b ilit y

dimensions

S P A C E analysis ( l)

79 ■

INDUSTRY ANALYSIS

Conservative strategies might entail ■ market penetration ■ market development ■ product development ■ concentric diversification.

Defensive strategies might include ■ retrenchment ■ divestment ■ concentric diversification.

Competitive strategies might include ■ integration ■ market penetration ■ market development ■ product development ■ joint ventures.

An illustrative example of SP A C E analysis is shown in Figure 4.6.

T H E C O M P E T I T I V E A D V A N T A G E MATRIX Strategic groups within a market have differing levels of profitability. Recognition of this led the Boston Consulting Group (1979) to develop a m atrix which helps to classify the competitive environments that can coexist within an industry. The framework identifies two dimensions: the number o f approaches to achieving advantage within a market and the potential size advantage. The stalemate quadrant represents markets with few ways of achieving advantage and where potential size advantage is small. Firm s in such a strategic group find trading something akin to a commodity market. The products themselves can be complex, yet the product designs can all converge despite technological improvements. Com petitors are forced to compete mainly on the basis of efficient manufacturing and distribution. The volume quadrant represents the situation where opportunities for differentiation remain few, yet where no potential size advantage exists. It results in industries where large economies of scale can be achieved by a few dominant suppliers. Specialized markets occur where firms within the same markets have differing returns to scale. Fragmented markets occur when the m arket’s requirements are less well defined than the stalemate, volume or specialized instances. Success depends on finding niches where particular product specifications arc required. Since the opportunity to grow in a single niche is limited, multiple niches are sought (Table 4 .1).

80

Company dimensions

Fin ancial Strength (1) Return on Investment

4 F in a n c ia l S tren g th

Leverage

5 Industry S tren g th

L iq u id ity

4 E n v iro n m e n ta l S t a b ilit y

C a p ita l re q u ire d /a v a ila b le

3 C o m p e titiv e A d v a n ta g e

Cash f lo w

4

E x it b a rr ie r s

4

Risk

4

A v e ra g e

4 4.125 3.142857 3.375

4

Industry strength (2) G ro w th potential

4

P r o f it potential

3

F in a n c ia l s ta b ility

4

T e c h n o lo g ic a l know -h ow

3

Resource u tilis a tio n

5

C a p ita l intensity

5

M a r k e t entry a b ilit y

5

P ro d u c t iv it y

4

A v e ra g e

4.125

Industry dimensions

Environm ental stability (3) T e c h n o lo g ic a l changes

-5

Rate of in fla tio n

-4

D em and v a r ia b ilit y

-3

P r ic e range o f c o m p e tin g pro ducts

-2

E n tr y b a rr ie r s

-1

C o m p e titiv e pressure

-4

P r ic e E la s t ic it y of Demand

-3

A v e ra g e

-3.142857

Competitive advantage (4) M a r k e t share

-4

P r o d u c t q u a lity

-3

P r o d u c t life cycle

-3

P r o d u c t re p la ce m e n t cycle

-4

C u s to m e r lo ya lty

-4

C o m p e titio n 's c a p a c it y u tilis a tio n

-3

T e c h n o lo g ic a l know -h ow

-3

V e r t ic a l in te g ra tio n

-3

A v e ra g e

Figure 4.6

S PAC E analysis (2)

-3.375

S P A C E analysis Financial strength

INDUSTRY ANALYSIS

Table 4.1

The BCG competitive advantage matrix

Number of ways to achieve an advantage

Many

Fragmented

Specialized

Few

Stalemate

Volume

Small

Large

Potential size advantage

QUESTIONS 1

W hy is it useful to differentiate between industries at the different stages of their life cycles?

2

How would you determine the stage of the life cycle that a particular industry is at?

3

Discuss the value of S P A C E analysis.

4

Indicate how you might use the competitive advantage matrix. W h at do you regard as its main advantages and disadvantages in terms of being a useful analytical approach?

5

Discuss the relationship of the industry life cycle to the concept of the strategic window.

CASE STUDIES Stelco Analysis of past experience shows that firms have sought to protect both supply and demand problems through a series of mergers, acquisitions and takeovers which has led to vertically integrated companies. The belief has been that a high degree of backward and forward integration offers a high degree of security. Vertical integration, however, poses problems for some of the key problems associated with the opening and closure of strategic windows. Concentrating all one's efforts on protecting existing businesses can limit possibilities of exploiting new opportunities in new industries. Stelco manufactures and sells stainless steel products under well-known international brand names throughout the world. It has a considerable amount of vertical integration with operations ranging from iron-ore extraction, through steel rolling mills to manufacturing products for consumer, industrial and business markets. It also makes castings and components to assemble into its finished products for consumer and business/industrial markets. The organization owns coal-mines, iron-ore mines and transportation companies and owns firms that manufacture finished products and components for consumer and industrial/business customers. In the case of an industry that is in a long-term growth phase, vertical integration is an excellent strategy. But once the industry matures, and growth begins to flatten out- or even if the growth pattern changes as a result of technology - there is a downward trend and vertical integration does not help the business. The organization does not have the advantage of volume but still has the expense at each level of integration.

82

INDUSTRY ANALYSIS

Stelco is in an industry that has reached maturity. It has factories all over the world and it argues that it is participating in a global business. This strategy it feels w ill allow it to provide a more competitive product to different markets. The firm can put together a product for a given market that is far more competitive than it could if it were a fully integrated business building one single product.

QUESTION Consider what the future may hold for such a company and suggest how it might alter its strategies in the future.

A B C Ltd A B C Ltd considers itself to be a successful organization operating in a very competitive industry. It earns a better than industry average for its return on investment and returns exceptionally good leverage and liquidity figures. The organisation regularly retains large proportions of its profits for investment in new projects and products and can readily access further capital if this is required. Moreover cash flow in the organization is extremely good and there are few bad debtors. W hile the industry in which the organization operates is highly competitive it is not a capital intensive industry in which there are high sunk costs of any description, risks are comparatively low and both exit and entry to the industry is fairly easy. Because of the high growth and profit potential in the industry it does attract new entrants which increases the amount of competition year on year. Because the firm is well established in the industry it is financially stable and has also managed to develop its technological knowhow to keep it well ahead of both existing competition and any would be new entrants to the industry. The organization prides itself on its high productivity which it considers to be critical to its success in the face of strong competition from companies in the Far East with which it has to compete both at home and abroad. Bearing in mind its experience of the industry and strength both in financial terms and technological terms the organization feels well placed to enter into any new markets that can be found. Despite the industry's growth potential and apparent profit potential it is necessary to keep abreast of the rapid technological changes that beset the industry. While demand and inflation are not considered a problem, competitive pressure is intense and keen pricing of goods is the order of the day. The industry is price elastic so that it is important to ensure that prices are very much in line with those charged by competitors. The organization is one of the three leading companies in terms of market share in 7 of the 10 markets in which it operates. In the remaining 3 markets it has only very small market shares. In all instances, however, the organization's product quality is rated as very good .

83

INDUSTRY

AN A LY S IS

EXERCISE Co nd uct a S P A C E ana lysis for the o rg an iza tio n .

Majestic T ob a cco Company The M a je stic T o b acco Com p any was set up in the nineteenth century as a result of several s m a lle r companie s merging their resources to take advantage of w hat was to become a rapidly growing industry. Eve ntu ally it was to have customers throughout the w o rld with producers operating in many different countries. During the twentieth century the M a je stic Tobacco Com p any expanded its activ ities in internatio nal m arkets largely through the acquisitio n of successful s m a lle r enterprises operating in both developed and developing countries. To ensure a guaranteed source of raw m a teria l a su bstantial p ro gra m m e of b a ck w ard integration was undertaken. In addition, the firm acquired road tra n s p o rt com panie s and other shipping fa c ilitie s to fa c ilita te movement of the raw m a te ria l and finished products. T o w a rds the end of the twentieth century consumers started to respond to the g row in g m ountain of evidence w hich pointed to the health risks associated w ith consumin g tobacco products. By the end of the twentieth century many of the developed co untries were actively engaged in tryin g to find ways of dissuading users from using such products. Some of the firm s in the industry responded to the subsequent decline in demand fo r tobacco products by trying to find new m arkets or increase demand in those countries where there were no active attempts being made to discourage consumers. A few com panie s began to thin k about moving into other product m arkets where there were no such health risks involved. In the early years of the tw en ty-first century the M a je stic T o b acco C o m p a ny felt that it needed to consider very c a re fu lly how it should evolve its future strategy. In p a r tic u la r, it was concerned whether it should try to protect the business that it had built up for over a century or whether it should concentrate on finding new products and opportunities.

QUESTION How w ould you advise the com pany?

84

Chapter 5

Market analysis

INTRODUCTION The strategic window opens out upon a market. Market analysis builds on customer and competitor analysis to allow strategic judgements to be made about a market and its dynamics. O ne of the primary objectives of a market analysis is to assess its prospects for participants. Another key purpose of market analysis is to understand the dynamics of the market. One needs to identify emerging key succcss factors, trends, threats and opportunities and to develop strategic questions that can guide information gathering and analysis. Measuring the size of the market, identifying the trends and being able to predict how the market is going to develop in the future are critical factors in understanding the state of strategic windows. Organizations need to have a firm grasp of the methods of assessing market size and forecasting the size to which a market w ill grow. Both short- and long-term forecasts arc important. Long-term forecasts arc most useful for medium- and long-term strategic planning purposes, whereas short-term forecasts enable organizations to m onitor the effectiveness of earlier long-term forecasts. M arket size and projected market growth rates are not the only important dimensions of market analysis. One also needs to understand the factors which influence the profitability of a market at its various stages of dev elopment. Trying to understand the key factors which govern a firm \s success are very important. This moves us on from simply looking at the profitability of a market to consideration o f cost structures, distribution systems and related trends and developments.

DIMENSIONS OF M A R K E T A NA L Y S I S This varies somewhat according to the context (Figure 5.1). 1Iowever, the following arc often included:

■ actual and potential market size ■ market growth ■ market profitability ■ cost structure ■ distribution systems ■ trends and developments ■ key success factors.

85

MARKET ANALYSIS

Figure 5.1

Market analysis

A C T U A L AND P O T E N T I A L M A R K E T SIZE A starting point is always the level of sales. Estimates o f market size can be based on governm ent sourccs or trade association findings. A nother approach is to obtain inform ation on com petitors’ sales from published financial sourccs, customers or even competitors. Still another, though more expensive option, is to survey customers and project their usage to the total market. The potential market is also of interest. A new use, new user group or more frequent usage could changc dramatically the size and prospccts for the market.

86

MARKET ANALYSIS

M A R K E T G ROWT H A fte r the size of the market and its im portant sub-markets have been estimated, the focus turns to estimating trends in growth rates or dcciinc rates.

Identifying driving forces O ften the most im portant strategic question involves the prediction o f market sales and identifying the factors that w ill drive sales directly or indircctly.

A V A R I E T Y OF F O R E C A S T S There arc different types o f forecasts. A ll arc useful when trving to establish how the market w ill grow and what expected sales might turn out to be. These include:

■ Economic forecasts w hich help to understand the changes in the business environm ent that are likelv to take place as a result o f governm ent fiscal policies in particular. Thev include predicted changes in the gross domestic product ( G D P ), inflation, unem ploym ent, balancc of payments, money supply, consumer spending, public sector borrowing and so on. The use o f such forecasts provides a context to understanding what may take place in the firm ’s industries and/or markets that it serves. The financial press regularly publishes econom ic forecasts from specialist forecasting organizations (e.g. National Institute of Econom ic and Social Research), the treasury and the m erchant banks. ■ Environmentalforecasts which relate to political, social, technological, environm ental and legal changes as they may affect the firm , its industries and markets. Along with economic forecasts they provide a good starting point for analysis and forecasting demands. Such influences may be viewed and considered as part o f different scenarios for the present and for specific points in time in the future. ■ Market and product / serviceforecasts w hich relate to specific sectors and are applied to predictions about the end-user markets into which products arc sold. The forecast of end-user demand is an im portant input in the product forecast. ■ Salesforecasts which are used to assess what w ill happen to a company’s sales as a result of changes in the market environm ent and to different levels o f sales and prom otional effort.

Forecasts can be made for any num ber o f time periods. Usually there arc:

■

short-term forecasts concerned w ith periods up to a year

■ m cdium -tcrm forecasts w hich look beyond a year as far as three years ■ long-term forecasts which arc predictions beyond three years.

The forecasts o f the econom ic environm ent and the m arket enable the organization to steer its future course. They highlight general opportunities and identify unprofitable moves and areas of dcclinc.

87 ■

MARKET ANALYSIS

SELECTING THE FORECASTING METHOD Forecasts should be expressed in term s w hich are appropriate to their purpose. M onetary values should be inflation free and possibly converted to an index. It is usual to qualify a forecast by using different predictions, based on different assumptions and showing an upper and lower lim it cither side o f the best estimate. This should be accompanied by a statement of the assumptions that arc made and how they w ill influence demand. Forecasts should be made using several approaches. Long-term forecasting can be difficult sincc so much uncertainty is associated w ith many of the factors involved and the difficulties surrounding long-term forecasting arc often tackled by firms using scenario planning methods.

Defining market demand Demand can be measured at several levels:

■ product levels: product item sales, product form sales, product line sales, company sales, industry sales, national sales ■ space levels: sales to individual customers, sales by territory, area or country, w orld sales ■ time levels: short-range, medium-range, long-range sales.

There are ‘penetrated m arkets’ , ‘potential m arkets’ , ‘available m arkets’ and ‘served m arkets’ . The current number o f users o f a product or service and the sales volum e they generate constitutes the ‘penetrated m arket’ . There may be figures readily available w hich indicate this or it may be necessary to establish it by sample survey. These estimates do not take account of those people who have an interest in buying the product or service, but who currently do not do so. The latter people arc im portant sincc in looking at future demand they provide a measure o f the ‘potential m arket’ . Custom ers must be able to afford the product or service, so in assessing the ‘potential m arket’ this must be established. This w ill redefine the market size. O p po rtu nity to use the product or service also cuts down on the size of the market. If it is not possible to use a product, then this w ill obviously restrict the m arket size. Taking this into account w ill define the ‘available m ark et’ . A company has only a lim ited am ount o f resources at its dis­ posal and so selects only certain market segments where it feels that it has the capacity to compete effectively and where the market si/.c is sufficiently attractive. This becomes the ‘served’ or the ‘target m arket’ .

Predicting future demand A com pany’s production schedules, planned manning levels and financial budgeting are all related to the sales forecast. A too optim istic forecast can lead to cxccss stocks being accumulated, over-production and too high manning levels, and over borro w ing or inefficient deploym ent of financial resources. A pessimistic forecast can lead to large opportu nity costs and the creation o f frustration among potential buyers of the com pany’s products because delivery is late or not forthcoming.

88

MARKET ANALYSIS

Firm s adopt a variety of approaches to sales forecasting but the basic approach is to:

1 make an environm ental forecast regarding inflation, em ploym ent, interest rates, consumer spending and saving, business investment, etc. 2

make a forecast of sales and profits to be earned by the industry using the data in stage 1 together w ith other inform ation which links industry figures to environm ental trends

3 make a company sales forecast using the data in stage 2 and assuming a given market share.

O ften, however, firms mav not know the industry sales level. In such cases sales forecasts are made at the company level at stage 2, and stage 3 is not used. There arc tw o basic approaches to forecasting sales for established products, both o f w hich have a num ber o f variants. O n the one hand there are the methods which rely on asking people ques­ tions, and on the other hand there arc those which involve the statistical or mathematical analysis o f historical data.

A sk in g people questions Surveys of buyers' intentions There are market research organizations which conduct periodic surveys o f buying intentions. Using the results of regular sample surveys, predictions o f the likely demand for various items arc then prepared. Firm s can o f course carry out the surveys themselves, provided that they have the resources to do so. It is a method which can be applied effectively by producers o f industrial plant, m achinery and supplies.

Composite of sales force opinion The sales force is in constant contact w ith the m arket and is in an excellent position to provide estimates on potential sales demand. W h e n making use o f estimates o f the sales forcc one has to take into account any bias that may exist. For one reason or another the sales forcc may be biased cither in the direction o f pessimism or optimism. Another difficulty is that the sales forcc often may not really appreciate the larger econom ic factors which may influence sales. Providing one can identify sourccs o f bias and adjust for them in interpreting predictions it is possible to make use of these estimates.

Expert opinion Ex p ert opinion is another method o f forecasting. Experts may include dealers, distributors, suppliers, marketing consultants and even trade associations. A key factor which influences patterns o f sales in a country is the state of its economy. Various economic experts can provide their opinions and a governm ent produces its own forecast for the economy.

Analysing past data Firm s tend to base their forecasts on what they have achieved in the past. This approach to forecasting offers few opportunities for mistakes except where there are large variations in sales from one year to the next. H isto rical data can provide a useful perspective. H ow ever, the strategic interest is not on projections o f history, but rather on the prediction o f turning points w hich in turn requires lead

89

MARKET ANALYSIS

indicators. Sales of related equipment or patterns of demographic data can often provide useful lead indicators. In both cases, o f course, a reasonable lag between the changc in the lead indicator and its impact on the sales of the firm or industry is required in order for it to be of use. Governm ent forecasts o f econom ic activity, provided experience shows them to be reasonably accurate, have a similar effect. M arket sales forecasts, especially o f new markets, can be based on the expcricnce o f analogous industries. O f course, one has to be able to identify markets w ith similar characteristics.

Detecting maturity and decline O n e particularly im portant set o f turning points in market sales is when the growth phase o f the product life cycle changes to a flat m aturity phase, and when the m aturity phase changcs into a decline phase. These transitions are im portant to the health and nature o f the m arket. O ften they are accompanied by changcs in key succcss factors. H istorical sales and profit patterns o f a market can help to identify the onset of m aturity or dcclinc, but the following are often more sensitive indicators: 1 Price pressure causcd by over-capacity and the lack o f product differentiation. W h e n growth slows or even reverses, capacity developed under a more optimistic scenario bccomcs excessive. F u rth e rm o re, the product evolution proccss often results in most com petitors matching product improvements. Thus it bccomcs more difficult to maintain a meaningful differentiation. 2

Buyer sophistication and knowledge. Buyers tend to bccom c more familiar and knowledgeable as the product matures and thus becom e less w illing to apply a prem ium pricc to obtain the security of an established name. As a result, the value of big names recedes.

3 Substitute products or technologies. 4

Saturation. W h e n the num ber o f first-time buvcrs declines, m arket sales should mature or decline.

5

No growth sources. The market is fully penetrated and there arc no visible sourccs o f growth from new uses or users.

6

Customer disinterest. A reduction o f the interest o f custom ers in applications, new product announcements and so on.

FORECASTING METHODS Forecasting amounts to estimating some future event that is outside the control o f the organization and w hich provides a basis for managerial planning. The estimates produced often form the basis of production planning, sales forcc planning, setting advertising appropriations, estimating cash flow, and assessing the need for innovation. Moreover, marketing plans are only useful if the size o f current and future markets is carefully measured and estimated. Such inform ation is a useful starting point from which to determ ine how resources should be allocated among markets and products or services.

Methods which adopt a solely time dependent approach

C la ssical time series analysis The first set o f methods arc those w hich are based on tim e scries analysis. In this case, it is assumed that sales simply vary as a function of time. The time effects are divided into:

90

MARKET ANALYSIS

■ cycle-, fluctuations every few years (e.g. the effect of trade cycles as various m ajor economies in the w orld arc hit by booms and slumps) ■ trend-, a general upward, dow nward or static (no trend) pattern (e.g. upward trend o f sales of video recorders during the growth phase of the life cycle) ■ seasonal: system atic variations at certain tim es o f the year (e.g. additional sales o f bathing costumes in the summer months) ■ erratic: unpredictable or random variations (e.g. demand interrupted by an industry-wide strike).

Erra tic variation is taken into account when making forecasts, but one does not attempt to predict it exactly. O ne m erely expresses it as the erro r one attaches to the sales forecast. This method is most suitable for forecasting sales o f products w here the unexplained variation is small. The trend component results from developments in a population, the formation of capital and developments in technology. It is evidenced by a general upward or downw ard shift in the pattern of sales. If there is no such pattern then there is assumed to be no trend. The cycle depicts the w avelike flow o f sales over a num ber o f years and is most useful when examining data for use in interm ediate range forecasts (3—7 years).Traditionally, the cycle represents swings in economic activity. The seasonal component refers to recurrent sales patterns that may exist within the period of a single year. This w ill reflect things such as weather factors, holidays, seasonal buying habits and so on. Erratic variation comprises such things as strikes, fashions and other unforeseen circumstances. These factors arc unpredictable and need to be removed from past data in order to inspect the other three elements. T im e series analysis consists of deconstructing the original sales data into its trend, cyclical, seasonal and erratic components. The series is then recom bined to produce a sales forecast. Dem and for period t is:

D = [A + T J / ( S () + Erratic variation

w here A = Average level

T ( = Trend component

S = Seasonal factor t

Example Imagine Tabic S. 1 represents quarterly data on shipments o f a particular commodity. There is more than one way to forecast lim e series data such as these, but perhaps the best method is to use dummy variables and m ultiple regression analysis. M ultiple regression is a statistical tool that can be applied to past data to discover the most im portant factors influencing sales and their relative influence. The dum m y variables in this particular case represent the factors influencing sales. The approach consists o f creating a variable for each o f the four quarters (Table 5.2) and the following equation is then estimated by m ultiple linear regression analysis:

Sales = B o + Bj Tim e + B, W in te r + B t Spring + B 4 Sum m er

91

MARKET ANALYSIS

Table 5.1

Quarterly data on shipments of a particular commodity

Period

Year

Sales (tons)

l 2 3 4 5 6 7 8 9 10 11 12

2006

436 291 357 529 386 304 333 471 383 336 365 539

2007

2008

Table 5.2

Dummy variables and multiple regression analysis

Time

Sales

Winter

Spring

Summer

Autumn

l 2 3 4 5 6 7 8 9 10 11 12

436 291 357 529 386 304 333 471 383 336 365 539

l 0 0 0 1 0 0 0 1 0 0 0

0 1 0 0 0 1 0 0 0 1 0 0

0 0 1 0 0 0 1 0 0 0 1 0

0 0 0 1 0 0 0 1 0 0 0 1

It should be noted that one o f the dum my variables has to be left out so that the regression can be solved by com puter — in this case ‘F a ll’ is om itted. The values obtained arc:

B„ = 510.5 B, = 0.3125 B , = - 1 1 0 .3 9 6

B ; = -2 0 2 .0 4 2 B^ = -161.021

Substituting values into the equation for subsequent periods enables a forecast of sales to be made. For example:

Period 13 forecast sales = 510.5 + 0.3125 X 13-110.396 X 1 = 360

92

MARKET ANALYSIS

M oving average This is one o f the simplest methods and usually trend seasonal or cyclical patterns are not included in this method, although in the more advanced methods it is possible to do so. The average demand is the arithm etic mean of demand from a num ber ( N ) of past periods.

A, = I0 , + D , + . . . + D , - N + ,]/ N

The forecast demand for pcriod| + 1 is a projection of the past average demand. The number o f periods included in the average can be increased to give m ore im portance to past demand (referred to as damping). Moreover, in order to fine tune the sensitivity o f the moving average to certain periods, a weighting factor W

Ft

+

can be applied to those periods:

= A = W ,IDI , + W ,2D ,2 + . . . + W N„ D l t t -

„ ^

N + I

w here W

1

+ W 2, + . . . + W N„ = 1

Exponential sm oothing M anv businesses producc many hundreds or thousands o f products. Notable examples arc the firms operating in the pharmaccutical industry. For such firms a simple foretasting technique is required w hich requires the minimum ol data. In its simplest form exponential smoothing requires only three picccs o f inform ation:

1 the perio d’s actual sales, 2

the current period’s smoothed sales, qt

3

a smoothing parameter, a, a value between 0 and I .

The sales forecast for the next period is given by the formula: qt + 1 = a Q t + (1 - a)qt Forecasts o f this kind arc handled by computer. Using an iterative procedure (trial and erro r), the com puter program can regularly determ ine that value o f a which gives the most satisfactory results in making forecasts. The value is the one that gives the best fit to past sales. O ncc the system has been set up, all that one has to do is to add new sales figures to the database as and when they occur. There arc a number o f m ore sophisticated variants on this approach, e.g. double exponential smoothing, and exponential smoothing incorporating seasonal and trend components.

S ta tis tic a l demand analysis So far, the statistical or mathematical approaches we have considered treat the factors that seem to influence sales as regularly recurring phenomena. The difficulty w ith this approach is that some patterns do not reappear at regular intervals. For example, although there arc econom ic booms and slumps from tim e to tim e, their patterns arc not so precise as to enable accurate forecasts to be made. Statistical demand analysis attempts to identify the source o f all influences on demand so that more accurate forecasts can be made. The basic statistical method to take account o f such factors is multiple

93 ■

MARKET ANALYSIS

regression analysis. Experience seems to indicate that the factors most commonly considered arc price, income, population and marketing promotion. The first stage in a regression analysis is to build a causal model in which one tries to explain sales in terms of a number of independent variables. For example, we might conjecture that industry sales of umbrellas arc related to their relative price ( P ), personal disposable income (I), relative advertising expenditure and the absolute level of rainfall (R ). W e would express this relationship in the form of an equation: S = aoP + bjl + b,A + b 5R W h at one has to do is to estimate the parameters for a(|, bj . . . bt and apply them to quantifications of P, 1, A and R for the period of the forecast. In principle, demand equations of this variety arc acquired by fitting the best equations to historical or cross-sectional data. The coefficients o f the equation arc estimated according to what is called the ‘least squares criterion’ . According to this criterion, the best equation is the one that minimizes a measure of the error between the actual and the predicted observations. The better the fit, the more useful w ill be the equation for forecasting purposes. Although this is a popular technique, one has to use it with care. There must always be an adequate number o f observations

in making annual forecasts, 10 IS years’ data is not unreasonable, where

there arc four independent variables. Another problem is that what seem to be independent variables turn out to influence each other and are not very independent at all. For example, relative price and relative advertising expenditure may well influence cach other, sincc advertising costs can be reflected in the selling price. In addition, there arc other pitfalls to be watched for.

Building a model Building a model for sales forecasting purposes can be time consuming and has an inherent problem in that there is an in built assumption that historical relationships between variables in the model w ill remain the same in the future. Actually building the model itself can also be a challenge. For example, suppose we are interested in forecasting market demand in units for cars and have data available over the past 30 years which records actual car sales. A first step might be to conjecture what factors might influence sales (market demand) in any one year. Suppose wc adopt a fairly simplistic view that demand w ill be influenced by price, incomes and interest rates. Measuring and representing all these variables may present difficulties. For example: should we represent sales in absolute unit terms or as an index? Should we construct a price index for all cars sold or should we show an average price? H ow should wc represent income

as an average income per household or as an index? Finally, how should we

measure interest —as an average interest rate for the year or as an index? Finally, how easy is it to get any of this data if it is available at all? In the developed countries it may not be too much o f a problem but in others it may be difficult. Suppose we can obtain suitable data and decide to represent it in the way shown in the Table 5.3. O ne question we should ask is whether there arc any lagged effect relationships. That means whether it is the influence of a variable in a previous period rather than the current one that influences demand in the current period. If this is the case then wc need to set up a table which reflects the lagged effect. Suppose in this case that we argue that there are no lagged effects and proceed on this basis.

94

MARKET ANALYSIS

Table 5.3 C ar sales data Year

Sales

1978 1979 1980

6,996,148 8,339,631 8,945,623

1981 1982

9,145,356 7,228,437

1983 1984

6,876,523 7,334,823

Price index 38.2

Income

Interest (% )

25305 28343 28765 31654

7.82

44.6 48.9 53.4 58.4

30567

11.03 8.12 7.09

34375 35278 37654

8.88 12.34 17.98

39.1 39.6 40.7

31003 31987 32674

5.45 5.12 8.78

1985

8,999,991

1986 1987

9,227,325 7,943,769 6,225,337

60.5 71.4

6,118,349

91.8

2,875,345 5,228,146 7,991,342

96.3 98.4

37112 37882 38889

101.5

41098

8,117,118

105.2

42065

8,000,010 7,063,214 7,152,469

104.8 105.3 107.9

6,448,226 6,347,432

112.3 121.4

43123 44766 46987 48234

5,778,123 6,115,209

122.5 125.7

51098

10.00 8.12 6.12

6,114,889 6,783,456 6,457,325 6,876,543

129.5 131.2 138.7 143.5

51123 52224

5.78 6.97

55765 56123

7.99 8.13

2005

6,558,776

144.2

2006 2007

6,453,876 6,453,777

142.5 145.1

57678 60004 64897

8.56 8.22 8.11

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

82.5

50023 50034

7.05

13.34 13.45 9.65 11.78 8.82 8.80 8.30 9.12 10.07

N e x t w e w ill t r y to assess the param eters to ou r m odel using m u ltip le regression analysis using one o f a nu m b er o f co m p u te r statistical packages that arc available (though one can do this using a spreadsheet). L e t us assume that w e adopt the ‘least squares’ op tion approach to estim ating the param eters and that the co m p u ter package (F ig u re 5.2 and Table 5 .4 ) produces the fo llo w in g data output as a result o f reading in and analysing the data in Table 5.3. T h e p rin touts show that the m o d el produced, indicated in the section ‘Para m eter estim ates’ , only accounts for som e o f the variatio n in dem and (see the section indicated ‘sum m ary o f fit’ and the R squared values relating to the am ount o f variance exp lained ). T h e graphs give a good p ictu re o f the m argins o f e rro r in p red ictin g values. In addition in the ‘A ctu a l by p red icted p lo t’ graph (Fig u re 5.3) there is one point in p articu lar that docs no t lie close to line o f best fit. R em o val o f the data from the table w h ich relates to this point from ou r original table wrould im prove the fit o f the m odel. It m ight w e ll be that w e can explain the reason w h y this ‘o u tlie r’ p oint has occurred and that it is no t typical o f w hat w o uld n o rm a lly have occurred

strikes and natural disasters and th eir im pact on production

output m ight be exam ples. T h e graph entitled ‘Residual by predicted p lo t’ gives a good p ictu re o f

95

MARKET ANALYSIS

Sales predicted P = 0.0032 RSq = 0.41 R M S E = 1.07e6

Figure 5 .2

Table 5.4

Response sales: whole model, actual by predicted plot

Response sales

Sum m ary o f fit R squa re R s q u a re adj

0 .4 0 6 1 9 2 0.337675 1067949 7006553

R o o t mean square e r r o r M e a n o f response O b se rv a tio n s (or sum w gts)

30

A nalysis o f variance S o u rc e M odel E rror C. T o t a l

DF

Sum o f sq uares

3 26 29

2 .0 2 8 4 2 e l3 2 .9 6 5 3 4 e l3

M e a n square 6 .7 6 1 4 e l2 1 .1 4 0 5 e l2

F ratio 5.928 4 Prob > F 0.003 2

t r a tio 4 .2 7 -2 .1 5 1.42

P r o b >|t| 0.000 2 0.041 4 0.166 2

-1 .3 5

0.188 3

4 .9 9 3 7 6 e l3

Param eter estimates T e rm In te rc ep t P r ic e Incom e

E s t im a te 7 8 6 3 6 8 4 .6 -4 9 7 0 9 .7 2 1 1 4 .4 4 4 3 9

Interest

-1 1 2 1 7 9 0 9

Std e r r o r 1841435 23 1 6 3 .1 2 8 0 .3 3 3 1 8302976

Effect tests S o u rc e

N parm

DF

S u m o f sq uares

F ra tio

P r ic e Incom e Interest

1 1 1

1 1 1

5 .2 5 2 7 8 e l2 2 .3 1 4 7 3 e l2 2 .0 8 1 8 9 e l2

4.605 6 2.029 6 1.825 4

96

Prob > F 0.041 4 0.166 2 0.188 3

MARKET ANALYSIS

Sales predicted

Figure 5.3

Residual by predicted plot

the goodness o f fit o f the m odel to the data. T he addition o f m ore explanatory variables could im prove the explanatory value o f the m odel thereby im proving its predictive ab ility and make it m ore useful for forecasting In simple term s the forecasting m odel based on the regression analysis undertaken above w ould be:

7863684.6 - 49709.72 P ric e + 114.44439 In com e -

1 1217909 Interest

Thus given the expected price, incom e and interest levels for the next year w e could pred ict the expected sales o f cars. Bearing in m ind the standard e rro r the estimates shown in the ‘Param eter estim ates’ table (5 .4 ) w e could also indicate upper and lo w e r margins o f e rro r in our forecast w ith different degrees o f confidence.

System dynamics This approach offers an approach to forecasting via co m p uter sim ulation. It was originally founded in the early 1960s by Jay W . Fo rrester o f the M IT Sloan School o f M anagem ent w ith the establishment o f the M IT System D ynam ics G rou p . Sytcm s dynam ics feedback loops and stocks and flows arc the basic building blocks o f a system dynam ics m odel. T h e y arc helpful in portraying how a system is connected by feedback loops w h ich create the n o n lin earity so often found in problem s. C o m p u ter softw are is used to simulate a system dynam ics m odel o f the situation being studied. T h e use o f a system dynam ics approach can pro vide a fram e w o rk fo r investigating the likely outcom es o f policies if certain initiatives are im plem ented. H ence, system dynam ics m odelling may help in assessing the likely im pact o f different initiatives and in the subsequent form ulation o f a policy, by providing a m odel o f the m ajor influences. O n ce developed, it can aid policy-m akers by allow ing them im m ediate feedback and analysis o f how different policies may o r m ay not w o rk .

97 ■

MARKET ANALYSIS

In Figure S .4, use is made o f the com puter simulation package Vensim which facilitates systems dynamics modelling. The model presented is a very simple one depicting how a population size changes over time w ithout the intervention of any extraneous factors. O ne can develop this model into quite an elaborate representation o f real world populations of products, people, services, etc. and build in the various extraneous factors that « ill impact upon how the size of the population w ill vary over time. Indeed, one could substitute ‘dem and’ for a product or service for the ‘population’ and so assess the impact o f extraneous factors on demand itself. The method enables different scenarios and forecasts to made by varying assumptions about population factors that influence growth or decline.

Figure 5.4 A simple systems dynamics model of population movement over time

Forecasting sales of new products To forecast sales of new products, one needs some initial sales figures w ith w hich to work. Given that early sales data are available, it is then generally possible by using one or other o f a variety

of

mathematical models or ‘curve fitting routines’ to make some prediction for sales over a specified period o f time. Alternatively, it may be possible to look at sales histories of sim ilar new products and make predictions by analogy. There arc numerous examples of these models (see, for instance, Kotler and I.ilien, 1983).

Example The epidemic model of initial sales is a useful tool to have to hand when trying to make sales prediction for certain kinds o f new products. The model developed by Bass (1969), w hich he specifically tested out on a range o f consumer durable goods, is illustrative:

P, = P + q/m(Y,) where pt = probability o f purchase given no previous purchase was made Y t = total number who have tried m = total number o f potential buyers [saturation level) q = param eter reflecting the rate o f diffusion o f the model p = initial probability of first-time purchase

98

MARKET ANALYSIS

Table 5.5 Sales model Year

Salest (000s)

l 2 3 4 5 6 7 8 9

l 2 4 10 20 36 48 58

—

Y, (000s) 0 1 3 7 17 37 73 121 —

Y* 0 l 9 49 289 13 69 5329 1464 1 —

The model (Table 5.5) can be estimated by running a regression of current versus past sales: Sales t = c0 + c I Yt + c2 Y t1 Analysis of the above sales gives the forecasting model: Sales t = 2 . 0 6 + 1.016 Y t -0 .00 46 4 Y t2

Forecasting sales o f new products in retail outlets Large retail chains often add new lines to their stock. Most of these retailers have benchmarks against which to judge whether a product is likely to be successful or not. A common practicc is to offer the product for sale for a limited period in one of its shops. If the product fails to achieve a certain level of sales within the specified period it is withdrawn from sale and not put on sale in other outlets.

LO NG E R - T E R M FO RE CA STI NG Marketing strategy is an essential input into the overall corporate strategy (Johnson and Scholes, 1988) and usually determines the most important elements of that strategy. Typical approaches to the production of such marketing strategy, however, focus on the relatively short term . These arc achieved, for example, through the use of matrices balancing the impact o f current actions (Ansoff, 1987), or derived from existing forces such as competitive pressures (Porter, 1985), or — even stressing the short-term nature of decisions — derived from incremental and emergent strategies (Mintzberg and Quinn, 1991). There is, of course, the conventional corporate strategy process (Taylor, 1984), optimizing performance in the shorter term; and the traditional marketing strategy is a valuable contributor to this (M cD onald, 1989). In addition, however, there should also be a separate, presently well hidden, proccss of producing ‘robust’ plans which underpin survival over the longer term (Taylor, 1984). There are two quite distinct approaches to the strategy proccss. The two sets of strategies should have different objectives. Corporate (shorl-term ) strategy is typically about optimizing current

99 ■

MARKET ANALYSIS

performance, ‘matching the organization’s activities to the environm ent and to its resource capability’ (Johnson and Scholes, 1988, 1993). O n the other hand, ‘robust’ strategics arc about survival in the longer term , ensuring that all the potential threats arc covered (P feifer and Salancik, 1978). They demand that m ultiple, and often divergent, objectives arc m et; in order to exploit the potential emerging from changcs in the (external) environm ent, and especially to guard against the whole range of threats which might endanger survival in the longer term , w ith the aim of understanding what these might be. In general, these focus on critical developments in the external environm ent; typically not just the marketing environm ent but the w ider social environm ent, rather than on the manipulation of internal resources.

Scenario forecasting The overall proccss starts with a simple form of scenario forecasting. The techniques have been derived from those traditionally used, most notably from those publicized by Shell (W a ck , 1985; Van D c r H eijdcn, 1996). W h atever approach is adopted, this is the most com plcx part o f the overall planning proccss. O n the other hand, the sim pler it is, the better it works; not least because those involved understand what is happening. O ne focuscs on the key ‘d rivers’ for changc — things that affect the industry being investigated, over a two-decade time scale - w ithout exploring the complications. As a result, w e may lose some ‘accuracy’; especially in terms of the fine detail about the future the proccss reveals. O n the other hand, we arc able to dctcct almost all the key developments, ccrtainly all those which have surfaced by other methods, covering the great m ajority o f cxpectcd 'd rivers’ . This part o f the overall planning proccss can be undertaken in as little tim e as half a day. It might involve a m anagement team o f six to eight m em bers, using a variation on w ell understood focus group techniques combined w ith some from scenario forecasting — and w ith little more than Post-It notes stuck on a w all to facilitate their thinking. Even so, this is a critical aspect o f the process; since only if the key turning points are identified in these scenarios w ill the (robust) strategies developed in response be valid. There are just a number of simple steps to producing a long-range marketing plan.

D efinitive statement The starting point of the plan itself must be a definitive statement of what has emerged from the scenario w ork. The output o f this process should be a formal ‘m ap’ o f some kind concerning o f the issues, the turning points, which w ill decide the long-term future of the organization. Although many o f these key turning points may revolve around conventional marketing issues, especially those relating to the core relationships w ith customers, quite a few o f them bring into play factors in the social environm ent (as w ell as those in politics and econom ics). Possibly the greatest benefit, therefore, is that the process brings into consideration factors that would be otherwise overlooked by more conventional (m arketing) planning processes.

Develop the robust strategies W h a t is needed is a set of strategics to protect against (o r to capitalize on) what has emerged from the previous step — in terms of effectively addressing the key turning points.

100

MARKET ANALYSIS

Com parison with 'co rp o rate 'strate g y Exactly what form this comparison takes w ill depend upon what form you have adopted for presenting these strategics. The essence, however, is that cach (robust versus corporate) should be compared statement by statement.

Decide strategic changes Em erging directly from the comparison w ith corporate strategy w ill be a clear definition of the divergences, if any, between the tw o types o f strategy. This w ill, therefore, im m ediately highlight the nature o f any changes to be made. These should then be addressed, again statement by statement, in terms o f the changcs w hich w ill be accordingly made in the overall corporate strategy statement.

Translate to action The final stage o f any planning process should always be to do something (M cD o n ald , 1989). It may be that, here, the action is to positively incorporate these changcs in the overall corporate plan. In this case, a single sentence, stating that this has happened may be enough. The m ore thorough alternative is to produce a separate action plan w here the shorter-term (m ore certain) elements o f the revised strategy arc translated into the necessary actions (and related tim e scales).

M A R K E T PROFITABILITY ANALYSIS According to Po rter (1985), the attractiveness o f a m arket or an industry is measured by the long­ term return on investment of the average firm .This in turn depends on five factors that influence profitability:

■ the intensity o f competition ■ the existence o f potential competitors w ho w ill enter if profits arc high ■ substitute products that w ill attract customers if prices become high ■ the bargaining power o f customers ■ the bargaining pow er o f suppliers.

Competitors The intensity o f com petition from exiting competitors w ill depend on several factors, including:

■ the number of com petitors ■ their relative size ■ w hether or not their product offerings and strategies arc similar ■ the existence o f high fixed costs ■ the com m itm ent of competitors ■ the size and nature o f exit barriers.

101

MARKET ANALYSIS

As a first approximation, the more com petitors there are, then the more com petitive intensity exists. I Iowever, the nature of the competitors can have a sizeable impact. The relative size o f the competitors w ill affect the com petitive intensity. If a market is dominated by a few firms of equal size then the market is likely to be highly com petitive.

Potential competitors B arriers to entry obviously act to encourage or to deter potential entrants to a m arket. In projecting the level o f com petitive activity in a m arket, an understanding o f the relevant barriers to entry is im portant. The following are the main barriers to entry to consider:

■ capital investment required ■ economies o j scale: in production and prom otion ■ distribution channels: the cost of gaining distribution can be difficult and costly ■ product differentiation: established firms may have high levels o f custom er loyalty produced by protected product features, a brand name and image, customer service and established and accepted prom otion methods.

Substitute products Substitute products comprise those sets o f products that arc identified as competing w ith less intensity than the prim ary competitors. Thev arc still relevant, however, and can influence the profitability of the m arket and can in fact be a m ajor threat. Substitutes that show a steady im provem ent in relative price/perform ance and for which the custom er’s cost of switching is minimal arc of particular interest.

Customer power W h e n customers have relatively m ore power than sellers, thev can force prices down or demand m ore services and therefore influence profitability. A custom er’s power w ill be greater when their purchase size is a large proportion o f the seller’s business, when alternative suppliers arc available and when the custom er can integrate backward and make all or part o f the product.

Supplier power W h e n the supplier industry is concentrated and sells to a variety of customers in diverse markets, it w ill have a relative pow er that can be used to influence prices. Pow er w ill also be enhanced when the cost to the customers o f switching suppliers is high.

C O ST S T R U C T U R E An understanding o f the cost structure o f a market can provide insights into present and future key success factors. The first step is to conduct an analysis o f the value chain to determ ine where value is added to the product or service. The proportion o f value added attributed to one value chain stage

102

MARKET ANALYSIS

can becomc so important that a key succcss factor is associated with that stage. It may, for example, be possible to develop control over a resource or technology. An alternative is that competitors w ill aim to be the lowest-cost producer in a high-value added stage of the value chain. Advantages in lower-value added stages w ill simply have less leverage. W h ere transportation costs are high, for example, location close to a market w ill have significant advantages. It is most important to be able to anticipate changes in key success factors. This may be approached by examining the changes in the relative importance of the value added stages. Another market cost structure consideration is the extent to which experience curve strategies are feasible.

DISTRIBUTION S Y S T E M S O ne needs to consider alternative channels, the trends that arc taking place in choice of channel and what new channels arc likely to be emerging in the future. One also has to take account of who has the power in the channel and how that is likely to changc in the future. Access to an effective and efficient distribution channel is often a key succcss factor. Related to power in market profitability analysis is channel power. In industries without strong brand names, retailers usually have relatively high power and can hold down the price that the manufacturers arc paid. The enhanced power of supermarkets, causcd in large part by the explosion of transaction information and the importance o f promotions, has altered the way in which packaged goods arc marketed.

K E Y S U C C E S S F AC TO RS : B A S E S OF COMPE T ITION These are assets and skills that provide the basis for competing successfully. There are two types: ■ strategic necessities: if these are absent then they w ill create a substantial weakness ■ strategic strengths: those at which the firm excels and are assets or skills that are superior to those o f the competition. They can provide a competitive advantage. Key succcss factors differ by industry in a more or less predictable way.

RISKS IN HIGH-GROWTH M A R K E T S There are a number of conditions that need to be considered when evaluating whether a high growth market is really as attractive as it might seem.These arc:

Whether the number o f competitors serving the market is really greater than can be sustained by the growth opportunity The following conditions arc found in markets in which a surplus of competitors is likely to be attracted and a subsequent shakeout is likely:

103

MARKET ANALYSIS

1 the market and its growth rate are highly visible to all and therefore unlikely to be overlooked by any firms which may have an interest 2

very high initial and forecast growth

3 seemingly very few threats to the sustainability of the growth rate 4

few initial barriers to entry

5 products make use of an exiting technology rather than a risky or protected technology 6 some of the potential entrants have low visibility and their intentions are unknown or uncertain.

The shakeout itself often occurs over a relatively short period of time. The trigger is likely to be a combination of:

1 an unexpected slowing o f market growth rate, either because the market is close to saturation or a recession has intervened 2 aggressive late entrants buying their way into the market by cutting prices 3 the market leader attempting to stem the erosion of its market position with aggressive product and price retaliation 4

the key succcss factors in the market changing as a result of technological development, perhaps shifting the value-added structure.

Whether a competitor may enter with a superior product or low cost advantage The late entry of low-cost products from the Far East has occurred in many industries including radios, TVs, V C R s and computer components and peripherals.

Whether the key success factors in the market are likely to change in a way that is incompatible with the evaluating firm 's capabilities Many product markets have experienced a shift over time from a focus on product technology to process technology. A firm that might be capable of achieving product-technology based advantages may not have the resources or skills required to develop the process-technology based advantage that the evolving market requires.

Whether the technology in the market might change Developing first-generation technology can involve a commitment to a product line and production facilities that may become obsolete, and to a technology that may not survive. A safe strategy is to wait until it becomes clear which technology w ill dominate and then attempt to improve it with a compatible entry.

Whether the market growth may in fact fa il to be commensurate with expectations Many shakeouts occur when market growth rate —even though it is good —falls below expectations. Competitors may have built their capacity to meet expectations.

104

MARKET ANALYSIS

Whether resources are inadequate to m aintain a high growth rate Financing requirem ents are frequently increased by higher than expected product developm ent and market entry costs, and by price erosion caused by aggressive or desperate competitors. The organizational pressures and problems created by growth can be even more difficult to predict and deal w ith than financial strains. M any firms have failed to survive the rapid growth phase because they were unable to obtain and train people to handle the expanded business or to adjust their systems and structures.

Whether d istribution may be inadequate or not available M ost distribution channels can support only a small number of brands. For example, most distributors arc unw illing to carry more than four or five brands o f a household appliance because of the limited amount o f shelf-space available. Given the lim it on the num ber of brands that can be distributed, some brands may find it impossible to gain distribution at all or at the very least the distribution level w ill be unacceptably low. As market grow th rate begins to slow, distributor pow'er is increased. Their w illingness to use this pow er to extract price and prom otion concessions from manufacturers or to drop suppliers is often augmented by their own problems in maintaining margins in the face o f extreme competition for their own customers. M any o f the same factors that draw in an overabundance o f m anufacturers also contributes to over crow ding in subsequent stages of a distribution channel. The eventual shakeout at this level can have equally serious repercussions for suppliers.

QUESTIONS 1

One of the primary objectives of a market analysis is to assess its prospects for participants.Another key purpose of market analysis is to understand the dynamics of the market. Indicatehow

these

objectives might be achieved. 2 There are two basic approaches to forecasting sales for established products, both of which have a number of variants. On the one hand, there are the methods which rely on asking people questions, and on the other hand, there are those which involve the statistical or mathematical analysis of historical data. Discuss the various merits of these methods and indicate under what circumstances they might be used in practice. 3 Why is long-range forecasting important? How might an organization tackle the problem of longrange forecasting. 4

Outline a practical method of ascertaining the profitability of a market.

5

What are key success factors? How might they be Identified in practice?

105

MARKET ANALYSIS

CASE STUDIES Cometex Door-to-door selling ¡s something which alw ays seems to have been w ith us. The tinkers of the M iddle Ages still have their counterparts today. In modern tim es, door-to-door selling seems to have come in and out of fashion. In the 1950s, fo r exam ple, even vacuum cleaners w ere sold in this w ay. M ore usual has been the bric-à-brac type of salesm an carryin g a range of household utensils in an often large case or encyclop aedia salesmen w ith their w ell rehearsed sales chatter. One of the most popular form s of door-to-door selling has been the Avon representative selling a variety of beauty aids to the app earance­ conscious housewife. Cometex, the door-to-door home cleaning com pany, is planning an expansion strategy into emerging m arkets, as the firm has suffered drops in sales in the home U K m arket. The firm said it would invest £5 m illion in expanded joint ventures w ith a door-to-door cosm etics group. The m anaging director said sales from the joint ventures could reach 'several hundred m illion pounds' in ten years. Com etex is launching in five E a s t European countries beginning w ith Hungary, and three A sian countries including Ja p a n . The overseas expansion follow s joint ventures with the same cosm etic group in L a tin A m erica during the past few years. South A m erican turnover is expected to rise sharply, w ith its recent launch in B ra z il. Cometex has also begun local m anufacturing in M ex ico, where m argins are 10 per cent higher than in western Europe. In the U K, however, Cometex suffered from recruitm ent problems which affected its network of doorto-door distribu tors. The com pany blam ed low levels of unem ploym ent, although it added th a t its custom ers were spending on average 6 per cent more than last year. Cometex has trem endous growth prospects w ith the cosm etic group's m anagem ent in em erging m arkets which have yet to show through in its results.

QUESTIONS 1

Is door-to-door selling in m ature m arkets and developed econom ies a dying c ra ft? W h y or w hy not?

2

Do you consider th at the strategy being follow ed by Cometex is the right one? W h y or w hy not?

3

How m ight Cometex undertake m ark et analysis for its products? Be specific.

Ecoprods E v e r since environm ental pollution cam e on to the p o litical and business agendas, firm s have been steered, vo lu n ta rily or otherw ise, tow ards 'g re en ' or 'e c o ' products. Indeed, it has now become part of the appeal of products that they are environm entally frien dly and the 'e c o ' label is as fa m ilia r to the consum er as any brand label. N on-reusable batteries are an exam ple of where environm entally friendly chem ical constituents have been used to replace the undesirable m ercury content which polluted the environm ent when batteries w ere disposed of. H owever, these days, defining exactly w hat is or w hat is not an 'e c o ' product has become increasingly more d ifficu lt and boundaries are becoming blurred.

106

MARKET ANALYSIS

A firm called Ecoprods has produced a prototype battery charger th at does not require a mains source for its power. In fact, the product is essentially a solar ca r battery booster.The charger uses the latest type of solar cells to trickle charge a c a r battery w hile the ca r is left standing for long periods of tim e. It sim ply sits on the dashboard and plugs into the cigarette lighter socket. Even on dull or cloudy days it can convert enough energy from ava ila b le sunlight to keep the battery charge sa tisfa cto rily topped up. W h en one is aw ay on holiday it is an ideal w ay to ensure th at the battery is w ell charged. Eco p ro d s needs to assess the m a rk et fo r such a product. In p a rtic u la r, it is keen to assess the potential m arket size and the likely price th at it should charge. In addition, it needs to identify the best w ay of seeking to distribute the product, should the m arket seem large enough, and to establish w hat is needed in the w ay of prom otional expenditure.

QUESTIONS 1

How would you undertake a m arket analysis for this product?

2

W h a t do you consider to be the main problems or difficulties in undertaking such a m arket an alysis?

F o r e c a s t i n g d e ma n d f o r uni ver si t y par t - t i me M B A c our s e s A textbook publisher is interested in getting an idea of how the m arket for M B A courses is likely to develop over the next five years. It has been suggested that the data collected in Table 5.6 might be useful in enabling the publisher to get some idea of how the m arket is likely to develop.

QUESTION Com m ent on how useful you think this data would be.

107

MARKET ANALYSIS

Table 5.6 Year

Part-tim e M B A courses Places taken up

Price index for M B A Study

Average annual income (managers) £

Num ber o f institutions offer­ ing M B A places

48.2 49.7

25305

43

28343

43

28765 31654

43 43 43

1978

1 , 0 24

1979

1,076

1980 1981 1982

1,098 982 1,075

48.6 53.8 54 . 1

1983 1984

1,145

54.6

1,456 1,789 2,090

54.5 54.3 57.2

2,150

58.9 62.7 62.1

35278 37654 37112

48 48

1985 1986 1987

30567 31003 31987 32674 34375

43 45 46 47 48

1988 1989 1990

2,065 2,213 2,456

63.6

37882

48

1991 1992

2,519

64.5

42065 43123

49 50

1995

3,256

66.8 68 . 1 69.5 70.7

48 49

1993 1994

2,785 2,845 3,013

38889 41098

1996 1997

71.3 73.2

44766 46987 48234

52 54

1999

3,789 4,056 4,112 3,987

80.5

50023 50034

2000 2001 2002

4,067 4,234 4,345

83.6 85.8 88.4

51098 51123 52224

58 58 58

2003 2004 2005 2006

4,678 4,754

91.5

55765

4,019 4,245

94.6 100.0 102.3

56123 57678 60004

60 60 60 60

2007

4,658

104.3

64897

60

1998

108

74.6

58 58 58

Chapter 6

Analysing competition

IN T R OD U CT I ON A ll firms have strategic w indow s and some o f these w indow s open out on to markets that arc shared w ith other firm s. W h e re w in do w s share view s over the same m arket, com petition exists. It is im portant to understand how different firms view the same market sincc their pcrceivcd and actual window s o f opportunity w ill not all be the same. The nature of competition and the factors w hich influence it are explored along w ith how firms identify com petitors and how they use product positioning to obtain a com petitive advantage. Attention is paid to how firms define their marketing strategies and analyse the com petitive positions o f rivals. Consideration is given to the various sources of inform ation available to firms that enable them to gauge com petitors’ strengths and weaknesses. Success in the m arket place depends not only on an ability to identify custom er wants and needs but also upon an ability to be able to satisfy those wants and needs better than competitors are able to do. This implies that organizations need to look for ways o f achieving a differential advantage in the eyes o f the customer. The differential advantage is often achieved through the product or service itself but sometimes it may be achieved through other elements o f the marketing mix. Attention in this chapter is given to P o rte r’s five forces model to portray the various factors which influence com petition and how this influence is effected. A ctually identifying competition may not always be quite straightforward. It is im portant to be able to correctly identify different types o f com petitors so that suitable reaction to their marketing strategies and tactics can be put into practice as and when required. The various bases of competitive advantage are discussed and reference is made to P o rte r’s strategic thrust typologies. This is then followed by a discussion o f the various typologies o f com petitors that can be identified and the kind o f strategy cach one employs. Finally, the chaptcr ends by looking at how to assess com petitors’ strengths and weaknesses and the sources of inform ation that should be consulted to make this possible. A ttention is also given to ways and methods o f obtaining inform ation about com p etitors’ actual and planned activities. In particular, attention is given to market signalling actions and their interpretation.

109

ANALYSING COMPETITION

N A T U R E OF C O M P E T I T I O N AND I D E NT I F IC A T I ON OF AN ORGAN IZATION’S CO M P E T IT O R S Com petition is the proccss of activc rivalry between the sellers of a particular product as they seek to w in and retain buyer demand for their offerings. The operational definition o f com petition, however, hinges upon the meaning o f ‘a particular product’ . The identification of an organization’s com petitors may not be as simple or as obvious as it might at first sight appear. The most obvious competitors are those which offer identical products or services to the same customers. However, substitute products and services highlight the nature o f indirect competition w hich must also be taken into account. Five levels of competition have been suggested: direct com petition, close com petition, products o f a similar nature, substitute products and indirect competition.

Factors influencing competition Industries have distinctive idiosyncrasies o f their own and these idiosyncrasies alter over time. They arc often referred to as the dynamics of the industry. N o m atter how hard a company tries, if it fails to fit into the dynamics of the industrv, ultimate succcss may not be achieved. Po rter (1985) sees com petition in an industry being governed by five different sets o f forces (Figure 6.1). C iting these five ‘forccs’ is rather arbitrary, since a sixth forcc, governm ent regulation, is often the most significant influence in determ ining the profitability of an industry. In fact, when Porter studied the pharmaceuticals and airline industries he discovered that governm ent regulation and deregulation w ere im portant factors relating to profitability in both (Porter, 1988). However, we w ill look at the five forccs of the model in m ore detail.

4.

Threat of new entrants

I Bargaining power of suppliers

Bargaining power of customers

t 5.

Threat of substitute products or services

Figure 6.1

110

F o rc e s o f c o m p e titio n

(l )

A N A L Y S I N G COM PETITION

R iva lry among com petitors C om petition in an industry is more intense if there arc many comparable rivals trying to satisfy the wants and needs of the same customers in the same market or market segment. M oreover, competition increases w here industry growth is slow, costs are high and there is a lack o f product differentiation. High exit barriers from a market or industry contribute to increased com petition. Firm s may find it difficult to get out of a business because o f the relationship of the business w ith other businesses in w hich they arc engaged. An organization may also have considerable investments in assets w hich arc used for the specific business and for which no valuable other use can be found.

B arg aining pow er o f customers Customers can exert influence on producers (Exhibit 6.1). W h e re there arc a small number o f buyers, for example, or a predominant/single buyer, the producer’s opportunities for action arc lim ited. In the situation w here one custom er accounts for a significant proportion of a supplier’s business, then the one custom er can exert considerable influence and control over the price and quality o f the products that it buys. Such firms can demand the highest specification in products, w ith tight delivery times (fo r just-in -time manufacturing and hence reducing the cost o f raw material inventories) and customized products. Buyers exert pressure in industries by hunting for lower prices, higher quality, additional service and through demands for im proved products and services. In general, the greater the bargaining pow er o f buyers, the less advantage sellers w ill have. N o t all buyers have equal bargaining pow er w ith sellers; some may be less sensitive than others to price, quality or service. For example, in the clothing industry, m ajor manufacturers confront significant customer power when they sell to retail chains like M arks & Spencer and Burton. How ever, they can get m uch better prices selling to small ownermanaged boutiques.

B arg aining pow er o f suppliers Suppliers can exert pressures by controlling supplies. A powerful supplier is in a position to influence the profitability of a w hole industry by raising prices or reducing the quality o f the goods it supplies.

E X H I B I T 6.1

C U S T O M E R P O W E R IN T H E A E R O S P A C E I N D U S T R Y

When there is a downturn in the m arke t fo r planes, supplying firm s are affected by the power of their customers. P lane makers, producing for the w o rld 's m ajor airlines, are very dependent on the state of the w orld economy. When demand is low and m argin s are tight, they have to look for cost savings, irrespective of production costs. M any companies have large investments In plant and cannot exit from the market. They know, however, that when the econom ic clim ate improves, demand w ill recover, forc ing prices back to more profitable levels. The ba rg aining power of the custom er is greater when demand Is low and reduces when demand rises.

Ill ■

ANALYSING COMPETITION

A firm that has few or only one potential supplier may exert little influence over the prices it pays for bought-in materials and components. It may also experience difficulty in influencing the quality of its raw m aterials and resources. If it is the only purchaser and constitutes an im portant part o f the supplier’s business, however, it can exert a great deal o f influence over both prices and quality. Another form o f supplier power is ‘lock-in’ . This involves making it difficult or unattractive for a custom er to change suppliers. It can be put into effect, for exam ple, by offering specific services or product attributes that a com petitor finds difficult to match. Pow erful suppliers can have the same adverse effects upon profitability as pow erful buyers. Suppliers can exert bargaining pow er on participants in an industry by raising prices or reducing the quality o f purchased goods and services. Pow erful suppliers can thereby squeeze profitability out of an industry unable to recovcr cost increases in its own priccs.

Threat o f new entrants The threat o f new entrants can increase com petitive activity in a market. Outsiders w ill be tempted to enter a m arket or an industry if they feel that the opportunity is sufficiently appealing in term s of profitability and sales. M arkets which have grown to a substantial size become potentially attractive to large powerful firms provided that the level of competitive activity enables them to achieve the kind o f market share and profits and sales volum e they expect. This provides an incentive for the firms already operating in the market to make the prospects appear less attractive to would-be entrants by increasing the level o f competitive activity. For example, low ering price levels would increase the competition between firms w ithin the m arket and it might also deter other firms from entering because it would be m ore difficult to obtain high profitability levels. M uch depends, however, on the cost structure o f a would-be entrant. W h e re a m arket is seen to be profitable, it may attract new entrants. Suppliers may expand downstream , or buyers may move upstream. This can cause increased com petition and a likely reduction in margins. M ethods to discourage entry include raising the cost o f entry into a market. This may be achieved by developing new products through R & D w hich the com petition find hard to match, or introducing new m arketing initiatives, such as long-term contracts w ith customers, or raising the cost o f entry through economies o f scale. Raising the cost of entry has long been practised w ith in many industries. In such cases, larger, m ore expensive plants arc continually built to gain com petitive advantage.

Threat o f substitute products or services Substitutes, or alternative products that can perform the same function, impose limits on the price that an industry can charge for its products. The presence of substitutes is not obvious and may not be easily perceived by firms operating in an industry. Substitutes may even be preferred by customers and incum bent firms may only be noticed when it is too late to arrest their dominance. An example which illustrates the rise of a substitute product is the current increasing proliferation o f low-cost m icrocom puters coupled w ith low-cost easy-to-use business packages in areas such as accounting, database m anagement and w ord processing. This ‘p rod uct’ adversely affected the ‘in d u stry’ o f specialist program m ers and specialist com puter bureaux. The threat o f substitutes depends on technical com parability o f substitutes, the relative price o f substitutes, the speed o f

112

A N A L Y S I N G COM PETITION

technological developm ent in ‘substitute’ industries and the cost o f switching. Substitute products that deserve the most attention strategically arc those that:

1 are subject to trends im proving their pricc-pcrform ancc trade-off w ith the ind ustry’s product, or 2

are produced by industries earning high profits.

Figure 6.2 illustrates how one might assess the degree of competition that may exist w ithin an industry or market.

Reactions to strong competition W h e re com petition among existing firms in a market or industry is strong a good policy is to try to differentiate the product or service from what the competition has to offer. Re-segmenting the market can also be an effective approach. A fundamental competitive advantage, however, may reside in being able to offer a product or service at a low cost to the buyer while maintaining the same level o f quality. Looking critically at costs and cutting these where possible can help considerably to hold and maintain a com petitive stance w here com petition is strong. W h e re threats of new entrants to an industry or market arc high the best approach may be to try to create barriers to entry certainly to react very strongly to new entrants when they make a bid to enter. Threats o f substitute products can be parried by researching for substitutes oneself and by constantly re-engineering and im proving existing products or services. Keeping in touch w ith custom er preferences and staying at least one step ahead o f competition in terms o f being able to anticipate customers’ requirements is also an effective strategy. W h e n looking at the bargaining power o f buyers and suppliers then it may be w orthw h ile considering integrative strategies. Forward integration in the case o f buyers and backward integration in the case o f suppliers.

Competitive strategy and profitability A question o f considerable general interest relates to how a business can maximize its profitability, or at least become the most profitable perform er in its industry. Maxim um profitability can, in principle, only be achieved in one o f tw o ways: either by minimizing costs or by maximizing prices. Thus any useful business strategy must aim to follow one or other o f these aims: to be the lowest-cost producer or the highest-price seller. Po rte r (1988) argues that failure to make the choice between cost leadership and differentiation means that a company is ‘stuck in the m iddle’, w ith no com petitive advantage. This results in ‘poor perfo rm an ce’ . T here is no doubt that there is a danger of this happening and it has long been emphasized by many other w rite rs ’ (e.g. D rucker, 1964) assertion that concentration is the key to real econom ic results). M oreover, the basic concept o f strategic direction seems to suggest much the same thing. M any companies w hich have a clear direction and a distinct position arc also demonstrably cither cost leaders or differentiators, but not both. Nam es like Rolls-Royce, B ic, C a rtie r and Kw ikSave, for example, can be immediately classified in one camp or the other. Some researchers have even suggested that the most effective strategies for some situations comprise systematic oscillation between cost leadership and differentiation (G ilb e rt and Strebel, 1988).

113

Porter Competition forces

5= strongly agree 0= strongly disagree

Competition among existing firms Even distribution in terms of strength of competitors The growth within the industry is slow or declining Capital intensity / fixed costs are high Switching costs for buyers is relatively easy / cheap Incremental costs of increasing production /service delivery costs are high Staying in the market / industry is very important to the incumbent firms Average Threat o f new entrants Low economies of scale exist in the industry/market Few or no cost disadvantages independent of scale Low brand loyalty Low customer loyalty Easy to gain access to distribution Little differentiation of products/services Low expenditure on capital equipment in the market/industry Low technological, regulatory or competence barriers No excess production / supply capacity existing in market/industry High industry /market growth Low entry deterring price Defensive retaliation threats low Average Bargaining pow er o f suppliers Few substitute products / services exist Limited number of suppliers or available supply Industry unimportant as a customer for the supplier Supplier's product is an important input Suppliers can differentiate products Threat of forward integration exists High costs of switching to an alternative supply Average Bargaining p ow er o f Buyer Limited number of buyers Purchases make up a significant proportion of buyer’s costs Products / services have little differentiation Easy to switch to alternative suppliers Threat of backward integration Purchases are of low importance Buyer has full information on costs and performance Average Threat o f substitute products Buyers can easily change to buying the substitute without penalty Buyer acceptability of substitutes is high Price/performance of substitute is comparatively high Average

Figure 6 . 2

Forces o f competition (2)

4 4 4 3 4 4 3.833333 5 4 3 4 4 3 3 4 3 5 2 4 3.666667 4 5 4 4 3 3 4 3.833333 4 3 3 4 2 5 2 3.285714 3 2 1 2

Competition among existing firms Threat of new entrants Bargaining power of suppliers Bargaining power of Buyer Threat of substitute products

3.833333333 3.666666667 3 833333333 3.285714286 2

Forces of com petition Competitor! among existing firm s

A N A L Y S I N G COM PETITION

W h e n ‘focus’ was introduced initially as a generic strategy it obscured the simple structure o f the model which argued that profits could be maximized either by achieving lowest costs or highest prices. Com petition reduces profits by the introduction o f substitutes, new entrants, etc. as suggested by Porter. M oreover, perfect competition erodes profitability perfectly. M inim izing com petition would m inimize erosion of profits and this could be done by focusing on areas o f the market where there are the fewest competitors. This in turn is a recom mendation for the adoption o f the ‘focus strategy’ . However, it is debatable as to w hether ‘focus’ is really a strategy in its own right - at the end of the day all strategies are focused to some extent. Even Ivory Soap (C lifford and Cavanagh, 1985), which has a very broad appeal, is carefully positioned as a multi-dimensional brand aimed at a fully researched custom er profile.

S TRA TEG Y TYPOLOGIES W h ile P o rte r’s typologies represent one im portant way o f looking at how firms behave in the market place there arc other ways ofloo king at what firms do. Various suggestions have been put forward to account for the strategies adopted by firms. A com m only adopted fram ework is to consider firms according to the role they play in a m arket. The suggestion is that firms act as: 1 m arket leader 2

m arket challenger

3

m arket follower, or

4

m arket nicher.

These roles are discussed below.

Leader The m arket leader is the enterprise that has the largest m arket share. Leadership is exercised with respect to price changes, new product introductions, distribution coverage and prom otional intensity. Because o f their large volum e sales, m arket leaders enjoy the benefits o f economies o f scale and accumulated experience which helps reduce costs and bolster profits. N o t surprisingly, dominant firms want to stay in the leading position and this requires them to:

1 find ways o f expanding total m arket demand 2

protect market share

3

even increase m arket share.

The market leader is conscious o f economies of scale of operation and is happiest when making inroads into large and substantial markets. Sm all specialist markets (niches) are not the prim e interest o f market leaders. For example, the Ford m otor company produces a range of cars for high-volume markets, e.g. the Ka for the small car m arket. Ferrari, on the other hand specializes in producing high-performance sports saloons, etc. for a very small market segment that is prepared to pay a very high price for such a car.

115

ANALYSING COMPETITION

Challenger A noth er group o f com petitors arc referred to as m arket challengers. These companies aspire to become m arket leaders, recognizing the benefits o f holding such an exalted position. Challengers attack the leader and other competitors in order to try to gain market share. It is uncom m on for market challengers to attack the leader directly. They usually try to gain m arket share by attacking markets in which the sm aller and less efficient firms operate. Such markets, o f course, do have to be o f a substantial size and not be too small or specialized to deter the larger firms. There arc a variety of strategies that challengers can adopt. O ne strategy is to producc an enormous variety o f types, styles and sizes o f products including both chcapcr and more expensive models. This was a strategy adopted by the Japanese Seiko company w hen it attacked the watch m arket. It accompanied this strategy w ith another which involved distributing its watches through every possible channel. The w ide variety of models it had available (over 2,000) meant that it could supply different types o f channel w ith different models and thereby avoid the adverse effects o f channel conflict.

Follower A third role that firms can adopt is that term ed m arket follower. Firm s w hich undertake a good deal o f innovation often have to recoup massive investment costs. M arket followers are able to copy what the leading firms produce and save themselves the burden o f massive investment costs. This means that they can operate very profitably at the going price in a market. Such firms w ill obviously have to forgo the market share which comes from being first into the field. Providing they can stay cost efficient and obtain a reasonable share o f the m arket they can survive. Less efficient ones, however, arc open to attack from the m arket challengers.

Market niching M ost industries include smaller firms that specialize in producing products or in offering services to specific sectors o f the market, i.e. in specific segments. In so doing they avoid the com petitive thrusts o f the larger firms for whom specialization docs not offer attractive economies o f scale, that is, the segments are too small to generate the kind o f return on investment that the larger firms require. This is a strategy called market niching. M arket niching is a strategy that is not only o f interest to small firms but is also o f interest to the small divisions of larger companies. The latter firm s seek some degree o f specialization. In cases w here the latter occurs the position of small firms is not quite so securc. From a firm ’s point of view, an ideal m arket niche is: 1 o f sufficient size to be profitable to a firm serving it 2

capable of growth

3 o f negligible interest to m ajor competitors 4

a good fit w ith the firm ’s skills and resources.

Specialization is the corner-stone o f market niching. There is strong evidence to show that a strong brand in a niche m arket earns a higher percentage return than a strong brand in a big m arket. In the case o f large m arkets, com petitive threats and retailer pressure can hold back profits even for the top brand.

116

A N A L Y S I N G COM PETI TI ON

C OMP E TITION R E S E A R C H M any o f the same factors that a firm considers under self-analysis are also relevant when looking at competitor analysis. Among these the components of the value chain need to be considered in the context of evaluating competition (see Chapter 3). In addition to this the following is relevant to competitor analysis.

UNDE RS TAND I NG C O M P E T I T O R S ’ S T R A T EG I E S Understanding competition is central to making marketing plans and strategy. A firm has to be regularly comparing its products, prices, channels of distribution and promotional methods with those of its competitors in order to ensure that it is not at a disadvantage. In so doing it can also identify areas where it can gain a competitive advantage. In order to establish a sustainable competitive advantage in the market place it is necessary to know and understand the strategies adopted by competitors. This is more than noting in which markets/segments the competition is operating and their respective market shares and financial performance. In addition, it is important to consider how competition w ill develop in the future and thus to ascertain the focus of the strategies that competitors are pursuing. Firms need to m onitor competition continually. The main need is for information regarding: ■ sales ■ market share ■ profit margin ■ return on investment ■ cash flow ■ new investment. in addition, knowledge of competitors’ financial performances is useful. Such information enables firms to gain comprehensive impressions ol their rivals that may be useful in predicting short-term strategies to be adopted by competitors. A knowledge of com petitors’ specific objectives would be very welcome sincc these would give clues as to future strategics that competitors arc likclv to pursue.This kind of information may be difficult to obtain but may be inferred from present or past activities.

IDENTIFYING C O MP E T I T O R S The first step, however, is to identify the competition. This may seem a simple question for most firms to answer. For example, at first sight a book publisher’s main competitors might appear to be other book publishers. This is, of course, correct. However, product substitution also has to be considered. This involves looking more broadly at the types of business in which the firm operates. If this is done one can identify many producers of goods and services that people use for leisure, education and other informational needs. Many of these products could be potential competition for the publisher. Many of these products could be used instead of the publishers’ books, i.e. they can be substituted.

117

ANALYSING COMPETITION

S O U R C E S OF I N F O R M A T I O N A B O U T C O M P E T I T O R S Decision-making can be improved by an adequate supply of relevant inform ation and a knowledge of good sourccs o f information is an im portant first step. A suitable starting point is to examine what competitors say about themselves and what others say about them. Sources of inform ation fall into four categories:

■ public ■ governm ent ■ trade ■ investors.

Public sources A dvertising, prom otional materials and press releases arc prim e sourccs o f inform ation on what competitors have to say about themselves. A rticles and newspaper reports provide a good source of inform ation on what others have to sav about them. Nonetheless, one docs have to be w arv o f the inform ation gleaned since it may be biased or even distorted.

Trade and professional sources Courses, seminars, technical papers and manuals prepared by com petitors can give detailed insights into com p etitors’ activities. How ever, it can take a considerable amount o f tim e to distil and analyse this information. Distributors, the trade press and even customers can be good sourccs o f information about what others have to sav about competitors.

Government In the L IK , firms have to lodge their annual reports at Com pany House in London and the contents o f these reports provide insights into the operations of com petitors. In particular, lawsuits, govern­ m ent ministries and national plans are useful sources o f inform ation.

Investors Annual meetings, annual reports and prospectuses arc prim ary sourccs o f what com petitors have to say about themselves. C redit reports and industry studies provide an outsider’s viewpoint.

BENCHMARKING There arc several notions about what benchmarking is. Here we w ill adopt the view that benchmarking is the continuous proccss o f m easuring products, services and practices against the toughest competitors or those companies recognized as industry leaders with a view to stimulating performance im provem ent. Camp (1989) identified four types o f benchmarking:

118

A N A L Y S I N G COM PETITION

■ benchmarking against internal operations ■ benchmarking against external operations o f direct com petitors ■ benchmarking against the equivalent functional operations o f non-competitors ■ generic process benchmarking. These approaches all involve comparison o f the perform ance and management o f processes. A fifth category could be added - that o f product benchm arking w hich compares the features and perform ance o f products. C om petitor benchmarking involves perform ance comparisons between organizations which arc direct com petitors. Some com petitor comparisons arc possible from public sources, but these are often of lim ited detail and hence lim ited value.

M A R K E T SIGNALS A market signal is any action by a competitor that provides direct or indirect indications of its intention, m otives, goals or internal situation. Some signals arc bluffs, some arc warnings and some arc serious com m itm ents to a course o f action. M arket signals are indirect ways o f communicating in the market place and can be interpreted so as to assist competitor analysis and strategy formulation. A prerequisite to interpreting signals corrcctly is to develop a baseline com petitor analysis

an understanding o f a

c o m p e tito r’s future goals, assumptions about the m arket and themselves, current strategies and capabilities. The ability to read m arket signals rests on subtle judgements about com petitors relating to known aspects o f their situations w ith their behaviour.

T Y P E S OF M A R K E T S I G NA L S M arket signals have tw o different functions: they can be truthful indicators o f a com petitor’s motives, intentions or goals or they can be bluffs. Bluffs arc signals designed to mislead other firms into taking or not taking action to benefit the signaller. Discerning the diffcrcncc between the two can often involve subtle judgements. M arket signals take a variety o f forms, depending on the particular competitive behaviour involved and the medium employed. The im portant types of market signals arc as follows:

Prior announcement of moves This is a form al comm unication made bv a com petitor that it either w ill or w ill not take some action, such as instigating a price changc. Such an announcement does not mean w ith certainty that the action w ill be taken. Announcem ents can be made that are not carried out, either because nothing was done or a later announcement nullified the action. In general, prior announcements can serve a number of signalling functions that arc not mutually exclusive: ■ Pre-empting other competitors. They can be an attempt to indicate a com m itm ent to take action for the purpose of pre-empting other competitors, fo r example, indicating that it is going to launch a new product w ell before it is ready for the m arket place, seeking to get customers to w ait for the new product rather than buy a co m p etitor’s product in the meantime.

119

ANALYSING COMPETITION

■

Threats to competitors. Announcem ents can be threats o f action to be taken if a com p etitor follows through w ith a planned m ove. For exam ple, a firm m ight hear that its co m p etito r is about to lo w e r its price. T h e firm m ight then announce that it too is to in troduce a price reduction below that indicated by its com petitor. Such an announcem ent w ould indicate that the firm is quite happy to engage in a price w ar and this may w e ll deter the other firm from m aking the first price reduction.

■

Tests o f competitors fe e lin g s. A firm may be contem plating the introduction o f a n ew type o f after­ sales agreem ent but is unsure w h eth er com petitors w ill view this w ith pleasure or displeasure. B y m aking an announcem ent about the n ew schem e the firm can test co m p etito rs’ reactions to its proposals.

■ M inim izing the provocation oj a forthcom ing strategic adjustm ent. This kind of approach seeks to m inim ize um velcom e retaliation and w arfare resulting from a strategic adjustm ent. It usually takes the form o f announcing the strategic adjustm ent and providing full inform ation as to why the firm believes that the adjustment is necessary. C aution has to be exercised w hen interpreting such signals since the firm may sim ply be trying to disguise an aggressive move. ■

Internal marketing. Announcem ents can sometimes serve the purpose o f seeking internal support for a move. C om m itting the firm to do something publicly can be a way o f extinguishing internal debate about its d esirab ility

O n e o f the m ost difficult tasks is to determ ine w hether a p rio r announcem ent is an attem pt at p re­ em ption or a co nciliatory m ove. O n e can attem pt to assess this by studying the lasting benefits that m ight accrue to co m p etito rs from pre-em ption. I f such benefits exist then it could w e ll indicate announcem ents prelude pre-em ption. Conversely, if the co m p etito r acting in its own narro w selfinterest could have done b etter through a surprise m ove, then conciliation may be indicated. An announcem ent that discloses an action m uch less damaging than it oth erw ise m ight have been, given the capabilities o f the com petitor, may usually be view ed as conciliatory. A nnouncem ents m uch in advance o f a m ove tend to be conciliatory. A nn o u n cem ents can be bluffs because thev need not always be carried out. As such thevj j j may sim ply be viewred as m echanism s designed to produce some response from com p etitors not to continue w ith a line o f action they m ay be contem plating instigating. O ccasionally, it can be a bluff designed to tric k com petitors into expanding resources in gearing up to defend against a non-existent threat. T h e m edium in w hich a p rio r announcem ent appears may be a clue to its underlying m otives.

An no un ce me n t of results or actions after the fact These often take the form o f announcem ents about sales figures, additions o f capacity and so on. T hey ensure that o th er firm s kno w about the data released and this m ay in tu rn in fluen ce the la tte r’s behaviour. Such announcem ents can be m isleading, though this is not aKvays the case.

Public discussion of the industry by competi tors C o m p e tito rs often c o m m en t on in du stry conditions and on prospects for the future. These com m entaries are often full o f signals wrhich testify to the com m enting firm ’s assumptions about the industry and presum ably by im plication the strategy they are developing. In addition to com m entary

120

A N A L Y S I N G COM PETITION

on the industry generally, com petitors sometimes com m ent on their riv a l’s direct moves. Such com m entary can signal displeasure or pleasure w ith a move.

The manner in which strategic changes are implemented W h e n introducing a new product it can be initially introduced to a peripheral m arket or it can im m ediately be aggressively sold to the key customers o f its rivals. A price change may be made initially on products that represent the heart of a com petitor’s product line, or the price changes can be first put into effect in product or m arket segments w here the com petitor does not have any great interest. A move can be made at the norm al time o f the year or it can be made at an unusual time. O f course there can be bluffs.

Divergence from past goals If a com petitor has historically produced products exclusively at the high end of the product spectrum in terms of quality, its introduction o f a significantly inferior product is an indication of a potential m ajor realignment o f its goals or assumptions.

Divergence from industry norms A move that diverges from industry norm s is usually an aggressive signal.

The cross-parry W h e n one firm initiates a move in one area and a com petitor responds in a different area w ith one that affects the initiating firm , the situation is referred to as a cross-parry. It occurs w here firm s compete in different geographic areas or have m ultiple product lines that do not com pletely overlap. It represents a choice for the defending firm not to counter the initial move directly but to counter it indirectly. In responding indirectly, the responding firm may w ell be trying not to trigger a set of destructive moves and counter-moves in the encroached-upon market but to clearly signal displeasure and raise the threat o f retaliation at a later date. If the cross-parry is towards one of the initiator’s im portant markets it may be interpreted as a strong warning. If it is towards a lesser market then the w arning w ill be less severe. The cross-parry is an effective way to discipline a com petitor if there is a great divergence of m arket shares. If, for example, a price cut is involved then the cost o f meeting this price cut w ill be greatest for the firm w ith the largest share. If the firm w ith the largest share in the cross-parry market initiated the first move then this may increase the pressure on the firm to back off.

The fighting brand A form o f signal related to the cross-parry is the fighting brand. A firm threatened or potentially threatened by another can introduce a brand that has the effect of punishing or threatening to punish the source o f the threat. Fighting brands are warnings or deterrents to absorb the brunt o f a com petitive attack. They are also introduced w ith little push o r support before any serious attack

121

ANALYS ING COMPETITION

occurs, thereby serving as a warning. Fighting brands can also be used as an offensive weapon as part o f a larger campaign.

R e c o u r s e to legal ac t i on Large firms sometimes forcc smaller ones to yield ground by threatening to take legal action for a variety o f patent and other infringements — even if no such infringements actually exist. Such firms forcc the weaker firm to com ply because it docs not want to bear the extrem ely high legal costs which it can incur in order to make its case.

Hi s t or i c al anal ysi s of si gnal s Studying the historical relationship between a firm ’s announcements and its moves, or between other varieties of potential signals and the subsequent outcomes can greatly im prove the ability to read signals accurately. Searching for signs that a com petitor may have given in the past before making changes can also help to reveal types o f unconscious signal unique to that competitor.

QUESTIONS 1

Discuss the usefulness of P o rte r's five forces model in helping an organization to develop its business strategies.

2

P o rte r argues that failu re to make the choice between cost leadership and d ifferentiatio n implies th at a com pany is 'stuck in the m iddle', w ith no com petitive advantage. How can this point of view be reconciled w ith the success of those firm s w hich apply both of these strateg ic thrusts?

3

D ifferentiate between: (a )

m ark et leader

(b )

m ark et challenger

(c )

m ark et follow er

(d )

m arket nicher

and discuss the various strategies which m ight be pursued by each one of the four categories. 4

How might a firm set about trying to collect inform ation on a continuous basis about its com petitors?

5

Discuss the usefulness of m arket signals in the context of trying to understand com p etitors' moves.

CASE STUDIES C y p r o s w i m Lt d

A b rie f history o f the company Even if the swim m ing pool industry in the U S and in Europe has a long history, in Cyprus there were no sw im m ing pools until 1967. The first pools th at w ere constructed w ere those of the L e d ra P a la c e

122

ANALYSING COMPETITION

(N ic o s ia ), Hilton (N ic o s ia ) and Forest P a rk (L im a ss o l) hotels, between 1966 and 1967. However, there w as no specialized business responsible for the construction and m aintenance of sw im m ing pools. The construction of the pools mentioned above w as undertaken by air-conditioning businesses. The sig n ifican t increase in tourism in the country created the need for more hotels. The founder of the first sw im m ing pool business in C yprus realized the high m a rk et po tential and decided to establish its business under the name of Cyproswim Ltd, undertaking the construction of the sw im m ing pools a t the A p o llo n ia (L im a s s o l), Golden Sands and S a la m is B a y (F a m a g u s ta ) hotels. The dem and for sw im m ing pools w as high, people responded p o sitively and the local g o vern ­ m ent w as supportive to w a rd s the im p ort of sw im m ing pool equipm ent and chem ica ls. The first equipm ent w as imported from the U S . The installation of swim m ing pool equipment, m aintenance and the ch em ical tre a tm e n t w ere am ong the key business a c tiv itie s undertaken by the com pany. The com pany's efforts w ere not only supported by the governm ent of Cyprus but also by the Cyprus Tourism O rganization. The lack of a v a ila b ility of skilled labour, and the rapid increase in the demand of services w ere the key problem s encountered by the com pany. The e lectrica l and plumbing installations th at are essential for the construction of a swim m ing pool could not be carried out due to the lack of professionals that had the knowledge and knowhow. Cyproswim took the initiative to organize a sem inar given by Am erican specialists at the Am erican Em bassy. The com pany's m anager also realized the im portance of attending exhibitions and trade shows. A p a rt from the above problems, the p artition of Cyprus had a negative im pact on the com pany which at the tim e possessed more than 95 per cent of the m arket. M ost business w as located in the north of Cyprus and hence w as lost. Also, m achinery that had a value of C P 5 0 0 0 at the tim e and w as delivered to the Dome Hotel in K yren ia was never paid for. H ow ever, new business opportunities were explored in the Greek C ypriot part of the island since new hotels were built. Sw im m ing pools were also built by w ealthy individuals at their houses. Fo r many years the com pany w as operating in a m onopolistic m arket, which enabled it to achieve econom ies of scale. A few years later, another sw im m ing pool business under the name Poseidon entered the m arket. H owever, to this day the firm does not undertake the construction of sw im m ing pools but only chem ical treatm ent. A third com pany entered the m arket offering the same services as Cyprosw im . In the late 1980s two more com panies w ere established th at m arketed prefab ricated pools. Pre fa b ric a te d pools are often preferred by individuals rather than hotels. B y the late 1990s, there were 12 sw im m ing pool com panies operating in Cyprus. Although the com pany owned the highest m arket share, it realized the im portance of not losing sight of its com petitors. The com pany's com petitors have managed to take a significant m ark et share. In view of the strong com petition, the m anagem ent has started to consider m arketing as a fa c to r that plays an im p ortant role in the firm 's success. E v e ry ye a r more and more e ffo rt is placed on m ark eting , and a higher proportion of the com pany's budget is absorbed by m arketing a ctivities, w ith the intention of satisfying the com pany's custom ers in the best possible w ay. C ontributed by Io an n a C. Papasolom ou

123

ANALYS ING COMPETITION

QUESTION W h a t kind of com petitor analysis would be of most benefit to C yp rosw im ? How m ight this analysis be reflected in its m arketing strateg y?

Ca r t e c h A firm that innovates can steal a com petitive advantage over other firm s in its industry. N evertheless, there are many innovations th at fa il in the m arket place. They fa il to meet the expectations of the firm s th at launch them and quite often achieve abysm ally low sales by any standard. Som e of these products are good, w hereas others are just g im m icks or fads. H owever, one thing does seem to be cle a r, if a new product does not stand out su fficiently w ell from other existing products in the m arket place then its chances of success are dim inished. Perh ap s the best w ay to beat com petition is to be so innovative th at potential custom ers w o n 't even see a product as having any potential substitutes. It has long been known, fo r exam ple, th a t some people just adore the personification of inanim ate objects. C h ild ren 's toys are a good exam ple. Toys w ith a repertoire of songs and sayings are alw ays a favourite when displayed in most children's toy shops and a ttra c t considerable attention from passers by - both young and old. There have also been some more p ra ctic a l a p p licatio n s of voice technology in products. M ost notable among these have been talking w atches which have been a g reat help to the blind and p a rtia lly sighted. C artech has extended voice technology to ca r a larm s. It has produced a product which can be fitted in five minutes w ithout tools or d rillin g . The ala rm contains a deafening 1 3 0 d B siren and also lite ra lly talks. W h e n the alarm is activated by the rem ote control key-fob the alarm announces to all and sundry 'a la rm arm e d ' in confirm ation . If someone sets off the a la rm 's built-in vibration sensors (w ith anything from a sharp jo lt to a light ta p ) the ala rm w ill re a ct w ith the spoken w ords 'S ta n d back! This vehicle is a la rm e d '. W h en the alarm detects a change in e lectrica l cu rren t (such as th at produced by a door opening) the product w ill again em it an urgent spoken w arning , follow ed by the siren if the w ords are ignored. Other voice com m and functions include an em ergency panic button, activated by the remote control from either inside or outside the c a r ('P le a s e help! Please h e lp !' plus siren ), a handy c a r finder button for crowded c a r parks ('Y o u r ca r is h e re ') and step by step vocal instructions for setting the sensitivity of the c a r ala rm sensors. Cartech feels that it has a unique product w hich is su fficiently different from anything else on the m arket to mean th at it has no com petition. It intends to set a premium price on the product, but before m arketing the product is interested to analyse it in the context of com petitive offerings just to confirm its own feelings.

QUESTIONS 1

Does the product really stand out from w hat com petitors have to offe r? W h y or why not?

2

If the product is a success w hat other products m ight the firm also consider?

124

ANALYSING COMPETITION

3

How should the firm set about m arketing the talking ala rm so as to m axim ize its prospects for

4

W h a t kind of co m p e tito r research should the firm have undertaken p rio r to considering the

success?

developm ent of such a product?

E v a l u a t i n g c o mp e t i t i v e f or c e s A firm is evaluating the com petitive forces at play w ithin its p rim ary m arket. Using a five-point scale it assesses points shown in T able 6.1.

QUESTION How would you interpret these eva lu a tio n s?

A r n o s Gr oup The 'P o p u la r S avin g s Ban k of A rn o s ' w as established w ith the aim of encouraging saving among the general public. Sin ce its establishm ent, the corporation has emerged as one of the most com petitive fin a n cia l service organizations w ith operations expanded in nine countries. The com pany's long-term goal is the expansion and d ifferentiatio n of its sources of income through the internalizatio n of its operations w ith the focus being on Greece and countries w ith strong presence of Greek expatriates. In 1980, it opened its first branch in the U K, and in 2008 it started its operations in A u stra lia . Today the corporation has six representative offices in Johannesburg, T oronto, M o n trea l, Belg rade, New Y o rk , and M oscow . The representative offices play a m ajor role in its international a ctiv itie s and contribute significantly in the opening of new accounts and custom er investments. In 1 9 9 5, the co rp o ra tio n introduced a new life insurance com pany, w ith the aim of providing innovative insurance schemes to custom ers. In 1998 the group introduced the first internet banking service in the country, and in 1999 m arked the creation of the Arnos Telebank, the first call centre in the country. In 2000, the bank launched its new C orporate Identity. The name changed to 'A rn o s Group'. In 2008 it celebrated its 100th anniversary and an e-bank w as launched in Greece. In the same ye a r it launched full banking services in A u s tra lia w ith five branches offering innovative products. In 2 0 0 2, a new corp orate image w as established through the prom otional message 'a lifelong assistance'. In 2005 the group proceeded w ith im p ortant strateg ic moves to support its efforts for the in ternalizatio n of its operations. It founded a bank in Fran ce, and it expanded its operations to C ro a tia. A milestone in the history of the group was the change in the composition of its share capital in 2006, w ith the acquisition of a strategic share by an investm ent fund. Subsequently, the com pany has been renam ed into Arnos Po p u la r B a n k . The bank w as in fa ct created by the m erger of three groups: A F in a n c ia l G roup, A rn o s Group, and another bank. The em ergent c o rp o ra tio n is ch a ra c te riz e d by dynam ism , efficiency and a com petitive advantage. The bank has been a pioneer of new technology and

125

ANALYSING COMPETITION

T a b le 6 .1

P o r te r c o m p e t it io n

fo rc e s

C o m p e titio n a m o n g e x is tin g f ir m s

Even distribution in term s of strength of com petit ors The growth within the industry is slow or declining C a pital intensity/fixed costs are high S w it chin g costs for buyers is rela tively easy/cheap Incremental costs for increasing production/service delivery costs are high Staying in the market/ind ustry is very im porta nt to the incumbent fir m s

1 2 1 1 2 1 Av erag e

T h re a t o f n e w e n tra n ts

L ow econom ies of scale exist in the industry/market Few or no cost disad vantag es independent of scale Low brand loyalty L ow cu stom er loyalty Easy to gain access to distribution L itt le dif ferentia tion of products/services Low expenditure on capital equipment in the market/ind ustry L ow te ch nological, regulatory or competence barr ie rs No excess production/supply capacity existing in market/ind ustry High indu stry/market growth L ow entry deterring price Defensive re talia tion threats low

5 3 4 4 3 2 5 5 3 2 4 3 Average

B a r g a in in g p o w e r o f s u p p lie r s

Few substitute products/services exist L im it e d number of supplie rs or available supply Industry u nim po rta nt as a custom er fo r the supplier S u pp lie r's products is an im po rta nt input Supplie rs can differentiate products Thre at of fo rw ard integration exists H igh costs of switching to an alternative supply

1 2 4 2 2 2 1 Av erag e

B a r g a in in g p o w e r o f B u y e r

L im it e d number of buyers Purchases make up a sig nific a nt proportion of buyer's costs Products/services have little differentia tion Easy to switch to altern ativ e supplie rs T hre at of ba ck w ard integration Pur chases are of low importa nce Buyer has full in form atio n on costs and performance

1 2 3 5 2 2 2 Average

T h r e a t o f s u b s titu te p r o d u c ts

Buyers can easily change to buying the substitute w it hout penalty Buyer accep tabilit y of substitutes is high Price/p erf orm ance of substitute is c o m p arativ ely high

N o te s :

5 = strongly agree; 0 = strongly disagree

126

1 2 1 Av erag e

ANALYSING COMPETITION

w as one of the first banks to recognize the value of technology w ithin fin an cial services and focuses on pioneering e lectronic banking services in the region. The bank has received m any aw ard s fo r its achievem ents in banking and technology over the years. In 2 0 0 5, the group received the follow ing aw ards:

■

'B a n k of the ye a r'.

■

'B e s t in cla ss' fo r custody services, from an intern atio n a lly renowed finance m agazine.

■

'B e s t private banking in Eu ro p e '.

The group focuses on expanding its operations in south-eastern Europe and offering higher service q u ality, more com petitive products, and increased sh areho lder value. The com pany's approach to im proving its in ternational presence is founded on plans to acquire new banking units in Russia by purchasing local retail banks in order to be able to offer full banking services. The main com petitor of the bank is the Bank of Arnos G roup. The bank is a leading finan cial services organization w ith a strong presence in G reece, the U K and A u stra lia . The group provides a wide range of fin an cia l products/services which include banking services in the follow ing countries: Crete, Greece, U K, A u stra lia , Rom ania, Russia and the Channel islands. The corporation operates six branches in the United Kingdom and since 2000 its international operations have been enhanced w ith a w holly owned subsidiary bank in A u stra lia . In 2007, the bank expanded its operations in R o m an ia w ith the provision of leasing services and it also acquired the relevant banking license from the Central Ban k of Russia for the provision of banking services in the country. The group is also the first corp oration from the regions fin an cia l services w orld to set up full banking operations by opening up local branches in exS o v ie t bloc countries. The country has emerged as a m ajor international fin an cia l centre due to the follow ing factors: the legal fram ew ork, the infrastructure, the highly educated w orkforce, the com parative tax, and other fiscal incentives offered to international com panies. As a result, many foreign businesses have established operations there. The finan cial services sector has grown significantly since accession into the European Union, which has steadily grown by over 50 per cent annually. The regulatory requirem ents regarding in tern atio n a l businesses com ply fu lly w ith the re le van t Eu ro p e a n

Unio n d ire ctiv e s and other

international requirem ents especially in term s of money laundering. C ontributed by Io an n a C .Pap asolom o u

QUESTIONS 1

Discuss the usefulness of P o rte r's five forces model in helping an organization such as the Arnos

2

W h a t types of inform ation are required in order to m onitor com petitors co n tin u ally?

3

W h a t types of inform ation source can fin an cia l service organizations use about com petitors?

Po p u la r B a n k to develop its business strategies.

127

Chapter 7

Analysing the business environment

I N T RO DU CT IO N W h ile strategic w indow s open out on to markets w ithin industries, these same markets and industries are dynamic and changing. To understand the causes and predict the consequences o f the changcs that take place, an organization needs to appreciate the broader business issues that arc involved and the factors in the business environm ent w hich bring about such changes. Firm s operate in changing and at times hostile business environm ents. Increasing environm ental turbulence ( O ’ Rcgan and Ghobadian, 2002; D reyer and Gronhaug, 2004), has presented a variety of challenges for the strategic management of organizations. The environm ent does not always accommodate the interests of the firm . An organization in its environm ent might be likened to a ship at sea. Sometimes the sea is rough and the ship has difficulty in making progress on its journey, sometimes it is calm and the weather is clear so that the ship can make steady progress. Sometimes the weather is malevolent: there arc thick fogs and icebergs which create risk lo r the very survival o f the ship. Organizational environm ents present the same kinds of opportunities and threats for the organization as the sea does for the ship. Organizations need to respond and adapt to changing environm ental conditions it they intend to survive. T hey can even instigate changes in the environm ent w hich are in th eir own interests. Both demand an understanding o f those factors and forces w hich bring about change in the environm ent. Ideally, an organization should adapt to changes as they occur, even anticipate them in advance or system atically instigate changes to its own advantage. An inability to do so can put organizations in positions where their short- and long-term survival is jeopardized. The business environm ent is the setting within w hich a business operates, formulates policies and makes decisions. It is usual to distinguish between the internal and the external environm ent. The form er usually comprises the various assets and resources possessed by the organization. That is, its w orkforce, plant and m achinery, knowhow, financial resources, etc. The latter refers to people, institutions and developments, etc., which exert an external influence on how the organization performs. O f course, w ith the emergence o f strategic alliances and networks such a definition o f boundaries does tend to become m ore blurred. Firm s need to know all about the business environm ent in w hich they operate. It is essential that they can anticipate the changes that arc likely to take place in the marketing environm ent in the foreseeable future. H ow ever, as noted above, it is not simply a m atter o f adapting to changc. Organizations can also exercise their own influence on the environm ent. Am ong the ways that this can be achieved is the developm ent and commercialization o f new technological ideas. These new

128

A N ALYS IN G THE BUSINESS ENVIRO N M EN T

technologies then become part o f the business environm ent and in their turn have an impact upon what other organizations can do. Considerable control can be exercised over its internal environm ent by a firm , but a firm cannot exert control in the same way or to the same extent over the external environm ent. It can only attempt to influence it. There arc various ways of influencing events in the external environm ent. These may include activities such as lobbying among legislative groups. The latter is what organizations often do w hen trying to influence the form ulation of European U n io n directives w hich can have an impact on such things as product design safety standards, etc.

C HA NG I N G P A T T E R N S AND C HA NG I N G S T R A T E G I E S M arketing policies, plans and decisions arc im plemented in the context of an ever-changing external environm ent. The nature o f this environm ent and the changes o ccurring w ithin it present opportunities, threats and constraints to an organization’s activities. The changing nature of markets requires entirely different marketing strategics to be adopted for the same products from time to time. There arc fragmented markets and mass markets. Mass markets are markets in which there is a large volum e demand for a standard product. Fragmented markets are based upon distinct niches and segments. There arc many examples o f changcs in the m arketing environm ent that im pact heavily upon organizations and what they have to do in order to survive and prosper. For instance, from the point o f view o f technological changc, the introduction o f the m icrochip has had a m ajor impact on many types o f consumer durables, e.g. washers, cookcrs, etc. and on home entertainm ent, home-based office w ork and computer-based learning in education. Since the 1980s there have been many changes in people’s shopping habits as a greater emphasis has been put on convenience shopping. Since joining the E U , British firm s and people have been influenced bv the ideas expressed in other E U countries and enacted through the European parliament. Indeed all the forces o f the marketing environm ent have made an impact on what firms and people want and do throughout the world (Figure 7.1). There are a variety of different environm ental variables which affect consumers and firms. Social and cultural factors, political, fiscal and econom ic policies, and changcs in technology all have an impact on custom ers’ wants and needs for products and services and the kind of products and services that are produced. Custom ers and com petitors, too, exert an influence and we w ill look at both of these tw o factors in detail in later chapters. In the next section we w ill look specifically at social and cultural factors.

T H E C H A NG I NG N A T U R E OF S O C I A L AND C U L T U R A L A S P E C T S OF CONSUMERS W e w ill look here at demography, the nature o f cultural values, and changes in values and attitudes and how they impact upon the marketing activities of organizations.

129

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

F ig u r e

7 .1

T h e m a r k e t in g e n v ir o n m e n t

Demography Dem ographic and cultural factors make up society-wide influences and changes that can affect the marketing environm ent. In terms o f demographic factors, the following arc o f interest to marketers:

■ population: size, growth rate, distribution by gender, birth rates, death rates, life expectancy ■ density: location, geographical/regional shifts ■ household/fam ily: size, make-up ■ incom e/w ealth distribution ■ socio-economic groups: occupations, ethnic groups.

These factors changc slow ly over tim e and exert pow erful effects on the volum e and nature of demand for most products and services. Some influences are obvious: the demand for children's products and services w ill be related to birth rate patterns. The demand for products and services to m eet the wants and needs o f the elderly w ill be related to characteristics and trends o f an ageing population. In European countries in recent times there has been a slowing down o f the birth rate. Along with this, an extension o f life expectancy has resulted in a shift in the profile of the population to that of an ageing one. In addition, many changes have taken place in the make-up and size o f family households. Few er marriages and fewer children couplcd w ith an increase in the labour force of m arried wom en have changed the basic nature o f the family household. Career couplcs w ith no children arc now quite common and arc a target group of interest to many marketers because of their relatively high disposable income.

130

A N ALYS IN G THE BUSINESS ENVIRO N M EN T

A nother characteristic seems to have been a growth in non-family households. Some of these are made up o f single, career people, whereas others arc made up o f divorced or w idow ed adults. There has also been an increase in single parent families. These changcs in the structure and characteristics of households have had a m ajor affect on the pattern o f demand for a wide range o f everyday goods and services. As far as income and wealth are concerned, the total gross domestic product o f Europe is now greater than that o f the U S and accounts for over one-third o f w orld G D P and much o f w orld trade (H alibu rton and ilunerberg, 1993).W ith in Europe there are disparities in terms of relative wealth. In the case of Switzerland, for example, per capita G D P is many m ore times that o f Portugal. These differences seem to be widening because o f the unequal effects of the recent recession and the relatively higher population grow th in the poorer countries. There arc also marked disparities o f wealth distribution within individual countries in Europe. For example, northern versus southern Italy, the southeast of England versus the peripheral U K regions and, to an extent, regional differences in Germ any. It is not appropriate therefore to regard Europe as a single econom ic region for products w hich arc directly influenced by the level o f econom ic development.

The nature of cultural values O ften, different regions o f a country exhibit different buying preference patterns that seem to rcflcct different cultural and traditional values. In addition, because many towns and cities throughout the w orld arc now very cosmopolitan in nature, it is quite comm on to find large ethnic groups living in fairly large concentrations in urban areas. These groups have distinct cultural values which arc reflected in their buying preference patterns. For example, ethnic m inorities make up a very small proportion o f the population o f the U K . But in the Greater London area, in the W est Midlands and in W est Yorkshire it is significantly greater. C ulture is reflected in the prevalent core beliefs and values of people. These beliefs and values are declared in family and friendship relations, in social conventions and rites, in social institutions and in social order itself. They take a long time to change since they are inextricably linked to such things as family upbringing, the education system, national history, religion and various other institutional phenomena. A variety o f secondary beliefs and values which arc less durable and more situationally determined are also to be found. For example, while belief in law enforcem ent may be rooted in corc values, attitudes towards private law enforcem ent and vigilantes reflect secondary values and beliefs. These beliefs are m ore likely to vary within society and to changc over time. They may also be recognizable in sub-cultures w ithin society. Sub-cultures evolve for a variety of reasons and com m only involve a grouping o f people w ith com m on interests, experiences and m otivations. C ultures may also be identified w ith age groupings, regional affiliations, religious or ethnic associations, or even situational facets o f life-style (e.g. students). From the point o f view o f international marketing, language is an im portant aspect o f culture which is particularly relevant to marketing communications. Barring the Swiss, the D utch and, to a lesser extent, the Scandinavians and the Germ ans, Europeans experience m ajor language hurdles. How ever, among the younger generation of Europeans the situation is im proving and ‘international English’ is growing in popularity. Another aspect of culture w hich has an influence on consumers is

131

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

religion. Religious beliefs, both at home and abroad, have a m ajor influence on consumer attitudes and purchase behaviour. This is often reflected in the kinds o f food that people consume, the drinks they purchase and even their manner o f dress. M oreover, even business practices can vary considerably between different areas and countries. M arketers have to understand cultural values in all aspccts of im plementing the marketing concept and managing the m arketing mix.

Changes in values and attitudes The ‘perm issive’ society o f the 1960s and the effects of its aftermath reflecting individualism exerted considerable influcncc on values and attitudes in the 1970s and 1980s. However, it would seem that these changes may now be undergoing a reversal. Today, people have in some rcspccts returned to the social norm s o f the prc- 1960s. Nevertheless, there arc still many ways in w hich attitudes arc considerably different to those of the prc-1960s. Attitudes towards credit have changcd substantially sincc the 1980s. Traditionally, crcdit purchasing was something w hich people tended to avoid. Indeed, there was at one time a social stigma against purchasing on crcdit cxccpt for m ajor purchases such as homes and cars. This may have been a carry over o f so-callcd ‘V icto rian ’ values or even a product of the hardships o f debt which ensued during the years of depression — particularly in the 1920s and 1930s. C rcdit purchasing started to develop in the late 1950s as consumer confidence began to be restored following the hardships and rationing which existed in Britain in the immediate post-war period. The Conservatives’ message o f ‘You have never had it so good’ which was popular in the late 1950s and early 1960s had a ring o f truth about it. For many people, m ore affluent times have continued and today, crcdit has become an intrinsic part in the marketing o f many products. Changes in society’s attitudes towards health over a similar period o f time have resulted in a m ulti­ m illion pound industry developing and the supply o f health products and services. People are nowmore weight conscious, exercise conscious and conscious about their diets. Moreover, smoking which at one time was regarded a social sophistication is now considered to be anti-social. T here have been many changes in attitudes over the years w h ich have had im plications for marketing. O ne of the most far-reaching o f these concerns the role o f working wom en in western society. A t one time British wom en tended to stay at home and rarely held jobs w ith substantial incomes. This situation has undergone considerable changc and a high proportion of the w orkforce arc wom en. This may have contributed to the acceptance o f convenience foods and the widespread adoption of home freezers and m icrowave ovens as w ell as one-stop shopping.

T H E I N F L U E N C E OF P O L I T I C A L , F I S C A L AND E C O N O M I C P O L I C I E S Having examined one aspect o f the environm ent, consumers and culture, and its im pact on m arket­ ing activities, we now turn to examine those usually exerted by governm ent: political, fiscal and econom ic policies.

132

A N ALYS IN G THE BUSINESS ENVIRO N M EN T

Political and fiscal policies Governm ents arc in a position to take actions w hich can substantially alter a com pany’s marketing environm ent. In the L IK , privatization of the public utilities has created new terms and conditions for their suppliers and subcontractors. The creation of an internal market w ithin the health service has had a substantial impact on the way in w hich hospitals and other health service units go about their w o rk . The sale of Jaguar in the car industry and o f British A irw ays has created com m ercially com petitive companies which have had a substantial impact on the com petitors in their respective industries. D eregulation in the E U has created opportunities and threats across borders. In the ease o f car m anufacturers, their ability to restrict certain models to specific countries has been swept aside. Legislation over such things as labelling, packaging, advertising and environmentalism all have to be taken into account when designing packaging and formulating advertising messages. To discourage demand for certain im ported goods, governments impose tariffs on them. Firm s wanting to im p o rt such goods then must find ways o f getting round the problems that this creates. For example, a governm ent may impose low tariffs on sub-assemblies and firms may prefer to im port sub assemblies instead o f fully assembled goods on w hich high tariffs have been placcd. The lower tariffs may have been placed on sub-assemblies because local people can be employed to assemble the sub-assemblies into finished goods and this provides jobs w hich the governm ent wants to encourage. Political instability in a cou ntry can also have a m arked effect on m arketing methods used by exporters in accessing that c o u n try’s markets. U n d er such circumstances it may be preferable, for example, to sell the licence to manufacture the product to a producer in the country concerned for a once-only royalty fee. Licences may be granted to produce or market goods and services. In the form er case, the liccncc relates to knowhow. Royalty payments can be one-off payments or they can be fixed as a percentage of subsequent sales.

The economic cycle Traditionally, the economy has been considered to follow a cyclical pattern consisting o f four stages: boom , recession, slump (depression) and recovery. Various industries, markets and organizations can, o f course, break this trend, either demonstrating a decline in growth during a boom , or an expansion during a slump. In each stage o f the cycle there arc different business patterns (Figure 7 .2). In times of pros­ perity, consumer spending is high. Organizations norm ally exploit this by extending product lines, increasing prom otional efforts, expanding distribution and raising prices, on the presumption that consumers arc often w illing to pay m ore for well known and w ell established products and have the means to do so. In times of recession, the purchasing power of consumers declines and may even stagnate when the economy enters into recovery. D uring a recession, consumers may shift their buying patterns to purchasing m ore basic, m ore functional, less expensive products and spend less on non-essential products. This means that decisions on the purchase o f luxury items, such as cars or new homes, may be postponed. N o t surprisingly, it is the producers and marketers o f luxury goods who are most affected by an econom ic recession. The strategy for marketers during times of recession is usually to rcducc prices, and prune the size of product lines.

133 ■

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

Prosperity demand for well known and well established products

^

—

Sales Recovery demand for convenience products

\

Recession demand for basic functionalVand less expensive products

Time

Figure 7.2

E f f e c t s o f b o o m s a n d s lu m p s in t h e e c o n o m y

As recovery starts to be felt, consumers begin to buy convenience products and higher priced goods and services. Assessing the strength o f a recovery is difficult and organizations have to assess how quickly consumers arc making the transition from recession.

Inflation O n e o f the most difficult phenomena to deal w ith during the economic cycle is inflation. Inflation is an increase in the general level o f prices in an economy that is sustained over time. Inflation has two main causes:

■ excess demand beyond the output capacity of the economy to supply goods and scrviccs ■ increases in input costs: wages, raw materials and components.

Inflation, produced by rising priccs and resulting in rcduccd consumer buying power, crcatcs problems for the marketer. N o t only is uncertainty introduced into the market through the effect o f inflation on costs and sales forecasts, but it also makes it difficult to determ ine the price to charge during the next budgeting period. Inflation is not welcom ed by the business community. It is administratively expensive to constantly change priccs in line w ith inflation and it can affect a firm ’s com petitive positions in both domestic and foreign markets. High rates of inflation effectively make im ports cheaper but make exports more expensive. N ex t we w ill consider another of the environm ental forccs acting upon firms — technology.

T H E I N F L U E N C E OF T E C H N O L O G Y In m odern times the influence of technology in the marketing environm ent has come to the fore. Technology has always been im portant but the rate of innovation has increased so rapidly in recent

134

A N ALYS IN G THE BUSINESS ENVIRO N M EN T

years that the im pact o f technology has become a principal driving forcc in business activity. In this section we examine the increasingly im portant role that technology has to play. Technology is a m ajor drivin g forcc for changc everyw here. M ajo r changcs created through developments in technology have increased the potential losses or rewards associated w ith comm ercial succcss and failure. Technological progress depends on a proccss of successful innovation w hich involves comm ercialization of ideas and an understanding o f m arket needs (Figure 7.3). The role of m arketing is to guide developm ent efforts and facilitate com m ercialization. The Sony W alkm an presents an example of a product that matched custom ers’ wants. In terms of technology sophistica­ tion it was basic and unexciting but the key elem ent o f its success was that it met a latent market need for a cheap, portable cassette player. Technological advances and improvements are a feature of modern -day business. The obsolescence o f products w ith in a relatively short period from their introduction is com m onplace. Personal computers are a good example of where product obsolescencc can be very rapid indeed. Moreover, it is increasingly the case that to m o rro w ’s products arc no longer news by the tim e they arc put on the m arket. D uring the lead time between an announcement of a new product and the time it can be made available to the consumer, competitors may already have announced improved or better versions o f the same product. Organizations which do not react to technological advances w hich arc relevant to the kinds of products they produce run the risk of rapid product obsolcsccncc and going out of business. Another im portant aspect o f the environm ent which impacts on marketing activities is changcs in distribution patterns. In the next section w c w ill examine this im portant topic in some detail.

C H A N G E S IN DIS TRIBUT ION P A T T E R N S D istribution is part of m arketing and the patterns of distribution have changed substantially since the 1960s. The im pact o f changes in distribution patterns is perhaps felt most in the case o f consumer goods m arketers, particularly in retailing. In the U K , the growth in car ownership, the trend to a high percentage of husbands and wives both w orking, together w ith increasing standards o f living has led to less time being available for shopping plus greater m obility of the shopper. A ll o f these factors, in tu rn, have led to the need for one-stop

Figure 7.3

R a te o f te c h n o lo g ic a l c h a n g e

135

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

shopping facilities and thencc to the development o f supermarkets to provide this facility. M any of the traditional retail outlets have suffered severe competition as a result

fishmongers, butchers,

pharmacists, etc. W it h the passage o f tim e, some o f the chain stores such as Boots and M arks & Spencer have increased the range of products they offer to customers

for example, Marks & Spencer’s move into

food retailing and m ore recently into furniture. Large specialist retailing establishments (superstores) are now emerging to m eet the needs o f specific market segments

for example, Texas in the do-it-

vourself home-care market.

HOW F I R M S A R E R E S P O N D I N G TO E N V I R O N M E N T A L C H A N G E Firm s have adopted a number of ways of coming to grips w ith the cvcr-changing com plexity of the environm ent. Foremost among these is the im plementation of an effective marketing information system and the use o f ongoing market rcscarch so that réaction tim e to change can be speeded up. These w ill be considered in m ore detail in later chapters on m arketing inform ation systems and marketing rcscarch. Another approach involves what is called ‘fast track’ marketing. Increasing rates o f technological change and the shortening o f the life of products mean that companies have to act quickly w hen they arc introducing new products to the m arket (the proccss o f new product development is discusscd in a later chapter). Late entrants to a m arket w ith a new product may find that the product docs not offer attrac­ tive financial prospects sincc the product’s com m ercial life is much shorter than might have been tvpical in the 1980s. This is obviously most applicable to those industrial markets w here product developm ent times can be counted in years, e.g. m ilitary and com m ercial aircraft. The response is to look for ways o f reducing the amount o f time in developing and testing a product. The im plica­ tion o f this is that organizations have to ‘manage in parallel’ and not sequentially. This means that instead o f one stage following on from another, w herever possible the two stages take place at the same time. Spending m ore m oney to speed up the process o f innovation is another strategy, while spending m ore effort on planning things before something is put into action also appears to bear dividends. Another area which is receiving considerable attention is preservation of the physical environment. Public awareness of the damage that processes and products can do the physical environm ent has increased the pressure on firms to act in a way which preserves the physical environm ent rather than destroys it. W e explore ways in w hich firm s are reacting to this challenge in the next section on ‘green’ marketing.

GREEN MARKETING Green principles relate to the preservation of the environm ent. There are a number of issues which have im portant implications for marketing. These issues are now being tackled and in many cases firms take advantage o f the fact that they are producing environm entally friendly products when they arc prom oting the products. The kinds o f problems w hich exist and how firms arc tackling these problems are discussed below.

136

A N ALYS IN G THE BUSINESS ENVIRO N M EN T

It was found that damage was being caused by chloro-duoro-carbons (C F C s ) to the E a rth ’s o/.one layer. This led to the gradual removal o f C P C s from all products and, in particular, aerosol products. Chemicals arc a m ajor forcc in environm ental pollution. In an effort to make more productive use o f land, intensive farming methods make use o f artificial fertilizers and pesticides. Unfortunately, these can have a detrim ental effect on the environm ent. The use o f phosphates and bleaches in household detergents and the dum ping o f waste into rivers and the sea can also damage the environm ent. Organizations are changing their working practices to prevent such occurrences. A no th er problem is that caused by the disposal o f waste. This too can create environm ental pollution. Packaging materials in w hich goods are shipped are a m ajor contributor to waste. O v e r ­ packaging is being discouraged and the use o f reusable or recyclable materials encouraged. Greenbelt countryside is rapidly disappearing in many parts o f the w o rld as urban expansion occurs. Along w ith the disappcarancc o f grccnbclt countryside has been the cncroachm cnt of com m ercial and industrial developments on the natural habitats o f animals. M ore and better use of existing urban retailing and manufacturing sites has provided a partial answer to this problem . Anim als have been the objcct o f abuse and cruelty for a w ide variety o f purposes. Steps arc being taken to crcatc awareness, interest, desire and action to prevent this continuing unabated. People may bccom c increasingly m ore aware o f the damage that can be causcd to the environm ent by products, packaging, by-products and production processes. They may gradually learn to adopt m ore environm entally friendly products and, in particular, rcjcct throwaway products.

Green labels The U K governm ent’s plans for an official cco-labcl on green products w ere outlined in a D epartm ent o f the Environm ent (as it was then) w hite paper in N ovem ber 1991 .The kind o f products covered by the eco-labelling scheme w ere those w here there was a significant im pact on the environm ent or w here there was a high degree o f consum er confusion about the environm ental claims. Green issues are increasingly seen as im portant by consumers and this is being reflected in the types o f products consumers w ant to use. Organizations are having to change the nature o f their products to m eet these requirements. Although many firms do appear to possess a social conscience or see the benefits of meeting the demands o f green issues, this is not always the case. The legal infrastructure provides a rem edy for this kind of abuse and many other kinds of business bad practices. In the next section we w ill examine this in m ore detail.

T H E L E G A L E N V I R O N M E N T AND ITS I N F L U E N C E ON M A R K E T I N G ACTIVITIES Although most firms w illingly collaborate to act in the interests o f society and behave in a reputable way, unfortunately there are firms who do not. In this section we w ill look at how the legal dimension o f the m arketing environm ent acts to preserve the best interests o f custom ers and ensure fair com petition in the market place. Som etim es, goods arc bought that are not o f merchantable quality and it is not apparent at the time o f purchase. The law exists to protcct customers from unscrupulous manufacturers and dealers who produce shoddy, defective or dangerous goods. This also applies to the purchase of services.

137 ■

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

Legislation may also be passed to curb unfair trading practices. This can occur when companies engage in trading practices which are not in the best interests o f the customer. In the U K a variety of im portant Acts o f Parliam ent have been passed w hich have cither a direct or indirect effect on marketing in the U K . Sim ilar kinds o f laws may exist in other countries but this is not always the case. Acts of Parliam ent pertinent to marketing which have been passed in the U K cover such things as requirements w ith respect to the labelling and advertising of foods; the provision of remedies where goods or services purchased do not match w ith the descriptions given for them; and making it an offence for anyone to demand payment for goods or services that have not been ordered. There are also Acts concerning products offered at ‘sale’ prices; goods bought on credit; guarantees or conditions o f sale; liability o f traders for death or personal injury arising from negligence or from brcach o f duty; dcfccts in products that give rise to damage; and the provision of a regulatory fram ework for the financial services industry. Legislation also covcrs anti-compctitivc practiccs in both public and private scctors.

E T H I C S AND CO D E OF P R A C T I C E Laws are cnacted to deal w ith behaviour w h ich is generally considered to be illegal. Defining the boundary between what might be considered lawful and what is not lawful can sometimes be a difficult task. For instance, something might not technically be considered illegal, yet it might be considered undesirable and even im m oral. In this scction w e pay attention to actions which although not against the law may be considered to be undesirable and not in the best interests o f the consumer. Ethics is a study of the principles of morality. In the setting o f marketing, cthics relates to activities which although not actually illegal raise moral questions about their use. It is im portant to differentiate between practices w h ich are illegal and those w h ich are unethical. It is necessary to make these distinctions because o f the way in w hich society reacts to violations o f good behaviour. W h e re something is deemed to be illegal, the rem edy is to seek redress through the law. W h e re something is considered to be unethical, one can only seek redress through pressure groups such as Svatch-dogs’ (see below ). The practice of m arketing can give rise to many ethical issues. There is a view that marketing crcates wants that did not previously exist and w hich perhaps arc not needed. Adherents to this philosophy argue that this is not in the best interests of society sincc it can lead to all kinds of undesirable social consequences. In the case of products such as drugs, legislation exists to outlawtrading in such goods except under medical supervision. However, there are a range of other products that arc m ore difficult to deal with since the products themselves arc not illegal. Cigarettes, alcohol and pornography arc among the products which arc the subjcct of contention. Ethical issues arise also in connection w ith how organizations market their products. Advertising w hich makes misleading claims about products or services and advertising w hich operates at a subliminal level arc examples. Price fixing, although legally outlawed, may still operate sincc its existence may be difficult to substantiate. M oreover, distributors may fail to live up to agreements they have made w'ith producers without the la ttcr’s knowledge. Because ethical problems arise in business and because they cannot often be dealt w ith inside the legal fram ew ork, other ways have to be found for dealing w ith them. In the next scction we look at the various ways in w hich these problems may be properly addressed.

138

A N ALYS IN G THE BUSINESS ENVIRO N M EN T

P R E S S U R E G RO UP S , W A T C H - D O G S AND C O N S U M E R I S M Pressure groups have conic into being in response to the perpetration o f unethical or undesirable practices. The purpose o f such groups is to influence how decisions that result in socially unacceptable consequences are made and to bring to the attention o f the public and governments the need to outlaw such practiccs. W atch-dog organizations exist to deal w ith complaints about public sector organizations. Com plaints received from users o f these services are publicized. Another kind o f group, environ­ m ental watch dog organizations, look out for matters relating to protecting the environm ent. They seek to oppose plans to build factories or houses in the open countryside in some cases, and watch for environm ental pollution caused by factories. Consumerism is an organized movement established to guard the economic interests o f consumers by com pelling companies to behave in a socially responsible manner. M any organizations have produced voluntary codes o f practice relating to matters w h ich may give rise to environm ental pollution as a result o f pressure from consumcrism. The governm ent has established the O ffice o f Pair Trading to encourage com petition between organizations that is fair to each of them and fair to the consumer. There are various bodies w hich exist to protect the customer. The Consum er Protection A dvisory C om m ittee w as set up to deal w ith such things as terms and conditions o f sale; priccs; advertising, labelling and prom oting goods and services; and selling methods. The National Consumer Council deals w ith presenting the opinions o f consumers to industry and the governm ent. The County Council Trading Standards/Consum er Protection departments deal w ith com plaints from m em bers of the public. The D is tric t C ou ncil Environm ental Health departments enforce offences against particular Acts, such as food and drink w hich is not fit for sale and any other matters relating to shop hygiene. A nother body, the Advertising Standards Authority monitors the standard of advertising in the U K . Complaints can be made by members of the public direct to this body. A monthly report is issued which lists complaints received and the action taken by the Advertising Standards Authority.

P RE D I C T I N G E N V I R O N M E N T A L T R E N D S AND E V E N T S Scenario writing This is a tool developed and used originally in long-term planning and technological forecasting. It is a particularly useful method for speculating on the likelihood of new paradigm shifts. Scenario w ritin g is a method o f looking ahead and forccs an organization to be receptive to the need for change and creative thinking. It is an experience which involves considering new possibilities and opening up one’s mind to considering what might happen. The method involves all m embers of a team o f co-workers and requires a leader or facilitator w ho introduces and co-ordinates sessions and w ho has the responsibility for producing a final report. M em bers o f the team arc referred to as scenario w riters and each m em ber is usually an expert in his or her ow n field. O ne needs to make sure that there arc experts in the group w'hosc expertise is relevant to the problem under study. A t the start o f the exercise, the scenario w rite rs are briefed w ith the task o f considering the developm ents in their area of expertise over the next 5 to 10 years. W h e n they have done this

139

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

individually they arc brought together under the guidance o f a leader to examine the situation collectively. Participants need to be rem inded that they should be tolerant o f the views of others because a consensus o f informed opinion has to be reached. The procedure adopted is as follows:

1 Briefing: here the scenario w riters are requested to consider what developments w ill take place in their area o f specialization over the next S to 10 years. They are also asked to provide supporting evidence for this and to assess the likely im pact of these developm ents on the organization (see Exhibit 7.1). 2

Individual scenario writing: scenario w riters spend up to two weeks preparing their individual scenarios independently.

3

Collective scenario writing: here the scenario w riters m eet up to present their individual papers and view points and to rcach a consensus view point on possible developments. The output of the meeting is usually the report.

Scenario w ritin g can be extrem ely useful and productive w here the situation under review is a very complex one. It is, however, extrem ely time consuming. Although scenario w ritin g is a formal procedure it is still speculative in nature sincc it aims to predict the future of an organization thus aiding the strategic planning proccss. The cxcrcisc can be conducted over a fairly lengthy time period (say tw o weeks) for its participants have to prepare a w ritte n report explaining their view o f the future. The participants w ill be experts in the various functions o f the organization. The benefits o f bringing together experts from various functions enables an integrated vision o f the future to be exam ined w ith docum entary cvidcncc to support cach argument. An awareness o f the future environm ent (internal and external) and the changc which may take place in it w ill provoke m ore creative responses to current situations.

Scenario daydreaming Like scenario w riting, this method also looks into the future and tries to assess the im pact that trends w ill have on the organization. It is, however, less formal in its approach and it is not the custom and practice to producc a report. It is usual for the entire proccss to take up only a coupic o f days and is an ideal activity for an ‘away day’ venue, provided there arc at least tw o away days available. Scenario daydreamers arc not expected to substantiate their contributions. The purpose is to stimulate people’s imaginations to think in the broader context and to consider more unusual ideas. A good group size is 8 to 10 people, but of course much depends on the size o f the organization and the com plexity o f its business. Again there is a leader or facilitator whose role it is to plan the sessions in detail, advise on the selection o f participants, brief the participants about the sessions, lead the sessions and help summarize the conclusions which are reached. M inutes of the session also need to be taken by someone. The procedure for the session is summarized below:

■ preparation ■ the nature of the proceedings arc explained ■ the scenario daydreaming session.

140

ANALYSING

E X H I B I T 7.1

THE

BUSINESS

ENVIRONMENT

CROSS-IMPACT MATRIX

P ro d u c t

E x is t in g

P la n n e d

P o s s ib le

T o ta l

6

12

14

32

-2

3

2

3

Regulation

1

2

3

6

Economic

2

2

3

7

Cultural

2

2

3

7

Demographic

3

3

3

9

Environment Technology

M arket

6

2

-2

6

Europe

3

3

-2

4

Far East

3

-1

0

2

Competitor

2

0

-8

-6

Alpha

1

0

-4

-3

Beta

1

0

-4

-3

-5

6

6

7

Wholesalers

-3

3

3

3

Large retailers

-2

3

3

4

9

20

10

39

Customer

T otal

Cross-impact analysis One of the first things one has to do in strategy formulation at any level in an establishment is to examine how the organization relates to the environments around it. In particular one must focus on the impact that these environments can have on the enterprise's future prosperity. Cross-impact analysis is a technique that helps in examining the impact that a mixture of external threats and opportunities can have on the undertakings of an organization. In implementing the technique one has to obtain data from a range of sources including customers, competitors, the market and the environment. The procedure involves assessing the impact that changes or trends in these factors are likely to have on present, proposed or potential activities of the organization. Anything that threatens the prosperity of the organization is viewed as having a negative effect on the establishment whereas opportunities are reasoned to have positive effects. One records the various impacts on a grid and on a scale ranging from + 4 to -4, where 0 specifies a lack of impact. The sum of various extraneous threats and opportunities on each one of the identified business/organizational activities is then noted. In addition the total scores of opportunities and threats facing each activity of the organization are recorded. All ratings are a matter of the subjective opinions of executives.

141

AN ALYS IN G THE BUSINESS EN VIRO N M EN T

Procedure 1

The session has to be divided into a beginning, a middle and an end.

2

It is helpful to have a warm-up session prior to the main session.

3

T he first step is to identify the various factors that are likely to

affect

the future o f the

organization. These factors usually reflect aspects of the environm ent suchas economic trends, cost of commodities, political and governmental policies, changes in demography, technology, social structure, consumer requirements and competitive activity. 4

The main factors should be summarized on a flip chart and possibly entered into a cross-impact m atrix to indicate their im portance.

5 Those present arc then split into groups and cach group is given several of the factors to consider in depth and arrive at a future scenario for each factor. G roup m em bers should have the expertise to be able to scenario daydream effectively for the factors they have been allocated. Roughly half an hour per scenario should be taken. 6

Groups should then reassemble to present their scenarios to one another. T he entire group

7

A ll the scenarios presented should be integrated into a single comprehensive vision of the

should discuss each scenario in turn and reach a comm on consensus.

future. 8

Groups break into syndicate again and consider how the organization can respond to the opportunities and threats that arc presented. Brain-storming and the use o f the T O W S m atrix (see Exhibits 7.2 and 7.3) arc useful tools to use at this point.

9

The w hole group reconvenes and the leader should review the proceedings, summarizing how the group secs matters and how the organization can try to m eet future challenges.

The T O W S matrix presents a mechanism for facilitating the linkages between company strengths and weaknesses and threats and opportunities in the environm ent. It also provides a fram ew ork for identifying and formulating strategics. O pportunities, threats, strengths and weaknesses have to be identified and listed in the m atrix. N e x t, various combinations o f opportunities and strengths, opportunities and weaknesses, threats and strengths, and weaknesses and threats arc examined in order to generate possible strategies. It should be observed that in generating strategics one seeks to maximize on strengths and opportunities and minimize on weaknesses and threats. Brainstorming may be used effectively in helping to identify factors and generate strategies.

E XH I B I T 7.2

O p p o r t u n it ie s

T h re a ts

142

T H E T O W S M A T R I X (1)

S tr e n g th s

W eaknesses

Maximize on strengths and opportunities

Maximize on opportunities, minimize on weaknesses

Maximize on strengths, minimize on threats

Minimize on weaknesses, minimize on threats

ANALYSING

E X H I B I T 7.3

THE BUSINESS

ENVIRONMENT

S W O T A N A L Y S I S AND T H E T O W S M A T R I X

SW O T analysis is a technique specifically designed to help with the identification of suitable business strategies for an organization to follow. It involves specifying and relating together organizational strengths and weaknesses and environmental opportunities and threats. In practice this is often an activity that is not carried out well. It is all too easy, having identified all the important points, not to know what to do with the data generated. Although intended as a mechanism to explain strategy rather than to facilitate its generation, the T O W S matrix (Weihrich, 1982) presents a mechanism for facilitating linkages and presents a framework for identifying and formulating strategies. Implementing the TO W S matrix requires that the following steps are carried out: 1

Pin-point and assess the impact of environmental factors: economic, political, demographic, products and technology, market and competition on the organization.

2

M ake a prognosis about the future.

3

Undertake an assessment of 'strengths and weaknesses' in terms of management and organization, operations, finance and marketing.

4

Develop strategy options.

Working systematically through this process enables internal and external factors to be entered on a grid and different combinations to be studied. For example, the entry to one cell of the grid could involve maximizing opportunities and maximizing strengths. This would amount to putting together at least one strength and one opportunity to produce a strategy that capitalizes upon this combination.

A n y kind o f organizational unit can benefit from this type o f analysis as w e ll as any situation that involves strategic decision-making. O rig in ally, W e ih ric h (1982) illustrated a conceptual application o f the T O W S m atrix to the strategic dilem m a facing Volkswagen in the U S A during the 1970s. H is account dem onstrated how' the T O W S m atrix could be used as a structu ring device for analysing strategic problem s. For the w rite r, this raised the interesting question o f wrhether the use o f the T O W S m atrix could lead to the id entification o f appropriate strategies fo r an organization. In pursuing this question the w rite r has exam ined over 50 cases in w h ich the T O W S m atrix has been em ployed in com m ercial organizations (see Ex h ib it 7 .4 ). In all o f these cases the users o f the technique have felt that the m ethod has enabled them to gain a deeper insight into the process o f strategy fo rm u la­ tion, has helped to structure their thinking and has often enabled them to com e up w ith good new strategic ideas.

143

ANALYSING

THE

BUSINESS

E X H I B I T 7.4

ENVIRONMENT

T H E T O E S M A T R I X (2)

Product: plastic bags

S tr e n g th s

W eaknesses

1 2 3

Brand name Distribution Low costs

1 2

Exports Sales force

O p p o r t u n it ie s

1 2 3

Need for robust rubbish disposal bags European markets Scented bin-liners

Use existing distribution and brand name to market scented bin-liners ( S i , S2, 03)

Strengthen sales force and export skills. Look to European markets ( W l , W 2, 02)

Capitalize on brand name, distribution and low costs to meet competition from imports ( S I , S2, S3, T2)

Develop capability in substitute materials particularly for products that can be sold to export markets ( T l , W l )

T h re a ts

1 2

Substitute materials Imports

QUESTIONS 1

W h a t factors might give rise to inhospitable environments?

2

W hy should some firms react only slowly to changing environments?

3

Discuss the various ways in which an organization can try to change its external environment.

4

How does society try to cope with deviant behaviour in the business environment? How does this affect what firms can and cannot do?

5

Discuss how techniques such as scenario writing and scenario daydreaming may be useful in assessing the impact of environmental change on the fortunes of a business.

CASE STUDIES U ni on A s su r a n c e C o m p a n y The Union Assurance Company is reviewing its strategies to take account of current trends in the business environment. It observed the following: ■

P o litic a l/e n v ir o n m e n ta l

fa c to rs .

Government w ithdrawal from welfare provision: self-help

encouragement by government may restore welfare ethos

144

ANALYSING

■

E c o n o m ic e n v ir o n m e n t fa c to r s .

■

S o c io - c u ltu r a l

THE

BUSINESS

ENVIRONMENT

Widening gap between rich and poor

Substantial increase in working women in lower income groups; less

fa c to rs .

manual jobs/more office administration jobs; the lottery of higher expectations of middle-income groups ■

T e c h n o lo g ic a l f a c t o r s .

New tech not easily accepted by lower income groups; major growth in

telemarketing/database marketing ■ ■

Population shift to middle/old ages; fewer young people

D e m o g r a p h ic f a c t o r s . L e g is la tiv e fa c to r s .

Expenses/commission disclosure to every customer; increasingly severe pensions

legislation

An industry analysis using the Porter framework indicated the following:

■

B a r g a in in g p o w e r o f s u p p lie r s .

Distribution is powerful; forces vertical integration; costs high to

acquire/train ■

T h r e a t o f s u b s t it u te

p ro d u c ts .

None for life assurance; money for savings; gambling increasing

(lottery); low switching costs; no economies of scale; little differentiation; experience not a barrier - buyable ■

B a r g a in in g p o w e r o f c u s to m e rs .

Middle market strong; largely undifferentiated; switching relatively

easy; disclosure law gives power of comparison on costs; cashing in is routine in lower market ■

T h re a t

o f n e w

e n tra n ts .

Unlikely in home service market; significant in middle market; non-

financial players with good reputations (e.g. M arks & Spencer, Virgin, etc.); new technology/lower costs ■

D e g re e

o f c o m p e t it iv e

r iv a lr y .

Fragmented industry; over-capacity; few big brands/shares; high

costs; worsening expense/profit position; high exit barriers; traditional life products declining; undifferentiated; poor reputation

Shifting to:

■

R a p id

r a t io n a liz a tio n /c o n s o lid a tio n

f o r a ttr a c tiv e

g ro w th

a n d

re tu rn s .

New players; big trusted

brands; high tech/low cost; direct sales/low cost; low entry barriers; low cost driving low price; greater competition; new competencies; marketing/service

A S W O T analysis revealed the following:

■

In te r n a l s tre n g th s .

Financial - major reserves which could be accessed for development/improving

returns to customers; with profit fund - no new player has or can build one, a good capital barrier; loyalty and awareness among industrial branch customer base; investment income and track record (steady); national (locally based) distribution ■

In te rn a l w e akn e sses.

Poor sales track record Inefficient, inaccurate and untimely administration/

processing; uncompetitive returns/high expenses; management culture; low awareness levels/market profile; reliance on single distribution channel ■

E x t e r n a l o p p o r tu n itie s .

Older population - needs care and illness cover; government encouragement

of self-help welfare provision; new database/telemarketing technology and cost benefits; growing prosperity of middle income/age group; service/marketing emerging as new competencies

145

ANALYSING THE BUSINESS ENVIRONM ENT

■

E x te r n a l th re a ts .

Increasing poverty of trad ition al custom er base; reducing need for home collection

of prem ium s for life and savings products (m ore in town office w orking and more women out all d a y ); few er young people - reducing m arket for savings and life products; cost-reducing technology - not acceptable to tra d itio n a l low income groups; legislation driving up costs and cost com petition - lower m argins; substitute expenditure on lottery; p o litical uncertainty - next governm ent

QUESTION Suggest possible strategies that the firm m ight pursue.

T h e F o l d a wa y C o m p a n y M odern houses are getting sm aller and much more com pact. They are placed closer together, have sm aller rooms, use sliding w indow s in kitchens instead of back doors and do w ithout vestibules or lobbies altogether. It isn't that people necessarily w ant sm aller houses - they w an t houses that are cheap and easy to run. How ever, the trend tow ards sm aller houses does bring w ith it storage problems. Take, fo r exam ple, Tony's house. It has a living room w ith an open-plan staircase leading to three upstairs bedrooms and a bathroom . The kitchen is at the back of the house and has a sliding glass w indow in place of a back door. There is no vestibule and the front door opens straig h t into the living room. There is a cupboard under the stairs but ap a rt from a sm all airing cupboard outside the bathroom there are no other cupboards ap a rt from those in the kitchen. Space is at a prem ium . Tony runs a sm all firm which produces and m arkets a number of fold-away products. First, there is the clothes rail w ith fold-aw ay convenience. This is a clothes ra il w ith an unusual space-saving feature. N ot only does the product provide masses of storage but it also folds down to a com pact width of 15 cm when not in use for easy storage. It comes in handy for ironing, for storing out of season clothes and fo r use in spare bedrooms. The rail height is adjustable between 96.5 cm and 165 cm and can hold up to 40 kg of garm ents. It is fu lly mobile and runs on castors. Second, there is a product which provides instant extra hanging space. P laced over the top of a door, the sm art and sturdy steel hooks create hanging space for several garm ents or clothes hangers. They are perfect fo r the bedroom, bathroom or u tility room (p a rtic u la rly for w et outdoor clothing and for ironed cloth es).T he hooks require no fixing and can be easily moved from door to door. Third, there is the instant hanging rack. This is excellent for tow els and robes in the bathroom (also ideal for extra hanging/airing space in the u tility room /bedroom ). The rack fits instantly over the top of any door and four heavy-duty suction cups also fix it on to the door for com plete stab ility or can even attach it d irectly on to a shower screen. The rack com prises five bars, the top one pre-fitted w ith four sliding hooks fo r hanging garm ents. It measures 65 X 121 X 12 cm. Fourth, a mobile trouser rack which can increase the storage capacity of any w ardrobe substantially. In most w ard ro b es som ething like 50 per cent of the space is w asted (i.e . below the hanging g arm en ts).T h is com pact mobile rack ensures th at no space rem ains unused. It is designed to hang 12 pairs of trousers and m easures only 67 X 53 X 34 cm, fitting into any standard w ardrobe to create double-decker storage.

146

ANALYSING THE BUSINESS ENVIRONMENT

Tony has experienced considerable demand for the products and sales and profits of the firm are booming. He is keen to introduce new lines into the business w hich respond to the changing nature of the home.

QUESTION W h a t other kinds of products do you think Tony could introduce w hich respond to the changing environm ent?

147

Chapter 8

Analysing the customer in the market place

INTRODUCTION The markets that arc seen through strategic windows arc not abstract concepts - they contain people. In order to understand how changcs in the market occur, not only docs an organization have to understand the broader issues in the business environment and the views o f the market pcrccivcd by competitors, but it also has to understand the buying behaviour of the people themselves. In studying buyer behaviour, a distinction is made between complcx decision-making situations and those in which little consideration is given to the purchase being made. W h e re a product is relatively expensive and possibly technologically complcx, prospective purchasers often go through a complex search and evaluation process prior to making a purchase. Various models of consumer behaviour have been developed over the years. The models reflect the different buying situations in which consumers find themselves. Factors influencing consumer behaviour must be considered as well as similar factors influencing the buying decisions in business to business transactions. An understanding of these factors and how they influence the buying decision arc extremely important when putting together a selling strategy (Exhibit 8.1). M arket research also plays an important part in helping to identify relevant facts about

EXHIBIT 8.1

W HY IT IS I M P O R T A N T TO U N D E R S T AN D T H E MAJOR F A C TO RS I N F LU E N C I N G C O N S U ME R BEHAVIOUR

In order to be able to function effectively in the market place firm s need to know:

1

Who constitutes the market?

2

W h a t does the market buy?

3

Why does the market buy?

4

W ho participates in the buying?

5

How does the market buy?

6

When does the market buy?

7

Where does the market buy? Source: Kotler ( 1988)

148

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

buyer behaviour (consum er or organizational) and provides all kinds o f inform ation which forms the basis o f strategy formulation.

M O D E L S OF C O N S U M E R B E H A V I O U R The marketing strategist needs to appreciate that consumers approach the purchase of different goods in different ways. The approaches taken have been thoroughly investigated and a number o f situations have been identified. Four main purchase situations are considered here (see also Assael, 1987):

■

habitual purchases

■

impulse buying

■

lim ited decision-making

■

com plcx buying decisions.

Habitual purchases Frequently purchased items at the supermarket are often bought out of habit and consumers do not undertake an extensive search for inform ation nor do they engage in extensive evaluation prior to making a purchase. Consumers scarch for cucs as to what the product is like. C olour of the packaging, for example, may be perceived by consumers to imply a given level of quality. The task of the marketing strategist has to discover the nature o f these cucs and ascertain the best way o f making the product stand out on the shelves vis-a-vis competing products. In this sense, the products may then be seen to be ‘putting themselves fo rw ard ’ to gain the attention o f the consumer. Repeated use of a product raises the confidence people have in using certain cues and scanning becomes cursorv in nature. Cues can stem from the product itself (intrinsic cues) — taste, texture, etc. — or can be produced bv other attributes than the product (extrinsic cues) — brand name, packaging, advertising, etc. People develop confidence in the reliability o f certain cues and learn to choose w ith the help o f extrinsic cues. The m anner in w hich consumers organize their perceptions helps to compensate for their limited inform ation processing ability. To make it easier to get to grips w ith their own understanding of several competing brands consumers may categorize them according to several characteristics along a few dimensions. W h e n confronted by a new brand, consumers w ill consider its likeness to cach one o f their mental categories and then judge its probable characteristics. In-store choice is predominantly based on the comparative assessment o f rival brands. Consum ers purchase a particular brand because it is familiar and the fam iliarity is accentuated by different types o f advertising. The main job o f m arketers o f com peting brands is to persuade the consum er to switch brands. Trying out a new brand is the key, for then there is the possibility that the behaviour o f repeatedly buying the same brand w ill be transferred to the new brand. Price and value for money are the principal factors w hich consumers consider in buying goods o f this nature. Price and sales prom otion arc the key marketing variables for marketing strategists to use in such circumstances.

149

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

Impulse buying Impulse buying for many people may w ell be the main method o f purchasing and it can create em otional friction in the mind ol the consumer. This happens frequently where the price o f goods is substantial relative to the purchaser’s resources. The main task for the marketing strategist here is to allay cognitive dissonance. This may be achieved through advertising w hich is intended to specifically reassure purchasers that they have made a sensible choice in purchasing the product concerned.

Limited decision-making Consum ers engage in this form of pre-purchase activity when they buy products only occasionally and when information is required regarding an unfamiliar brand. People spend a moderate amount o f time gathering inform ation and deliberating upon it prior to making a purchase. For example, if a new im proved version o f a brand o f shampoo is introduced consumers w ill perhaps ask a friend w ho has used the product about its perform ance or even watch a com m ercial before they consider trying the product for themselves. M arketing strategists need to pay attention to advertising that is inform ative in nature and w hich provides the potential purchasers w ith the kind of inform ation they need to aid them in their decision-making.

Complex buying decisions M any people have studied consumer behaviour and a five-stage model o f the buying proccss has been distilled from these researches (see bngcl e la l., 1986). The implication is that consumers actually pass through all the stages in buying a product or scrvicc. In actual fact, o f coursc, as w c have seen in the ease o f habitual purchases, this is not necessarily the case. However, it is a useful fram ework from w ith in w hich to view the purchase of manv o f the m ore expensive tvpcs o f durable products and services. Let us look in m ore detail at cach o f these stages in turn (Figure 8.1).

Problem recognition First the prospective purchaser has to experience a need to buy a certain product, for example, a new hi-fi system. The need can be triggered by a variety o f things, for instance the unsatisfactory perform ance o f the current hi-fi system or the fact that a neighbour has bought a new one. The marketing strategist needs to identify the factors which give rise to the recognition o f the problem and use these to advantage in marketing communications about the particular product, service or brand.

Inform ation search O n ce the problem has been rccognizcd, prospective purchasers scarch for inform ation about the product in question. A person who has recognized a need for a new hi-fi system, for example, may scan many hi-fi magazines for inform ation on what is available and at what pricc. This scanning helps to identify locations w here the products or scrvicc may be purchased and the intending buyer may w ell visit these locations to obtain more inform ation and possibly to listen to a number o f different hi-fi systems.

150

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

F ig u r e 8 .1

C o m p le x b u y in g d e c is io n

The amount of scarch undertaken varies with individuals, the amount of time available and the availability of suitable products and scrviccs. From the m arketer’s point of view, key interest is shown in the sourccs of information that the prospective purchaser w ill consult and the kind of information which is likely to sway the consumer into buying one particular brand over another.

E v a lu a tio n

o f o p t io n s

There is an assumption that consumers make decisions

011

a conscious or rational basis, but this may

not necessarily always be true. However, assuming a rational model o f consumer choice, the process would seem to take account of the following:

Products are thought of as a bundle of attributes, e.g. bicycle: lightweight/heavyweight, sports/touring, etc. Relevant attributes vary from one product or service to another, e.g. size and speed are im portant with cameras whereas the variety and container arc emphasized in the case of chocolates. Some product attributes arc more important to consumers than others, e.g. dependability and convenience may be considered more important than price when considering a business trip or an airline. The degree of importance of different product attributes to different consumer groups can form the basis of market segmentation, e.g. fast, courteous service at a restaurant.

151

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

■ Consum ers develop beliefs about products with rcspcct to their various attributes - this forms a brand image, e.g.Volvo cars arc safe. ■ Consum ers have utility functions w ith rcspcct to cach one o f the attributes. Product/service satisfaction varies according to the fit between the product’s perform ance on the attribute and the consum er’s expectations, e.g. a small ca r’s petrol consumption is satisfactory provided that it is m ore than 10 km per litre. ■ Attitudes towards brands are form ed through the process of evaluation, e.g. Seiko watches are better value for m oney than competing brands because they offer the same product features and have equally elegant designs. M arketing strategists need to understand what criteria consumers use to evaluate their products and services. If it is discovered that a product or scrvicc does not meet w ith consum er’s expectations then the m arketer can try one or m ore o f a number o f options. ■ Change the product so that it fits w ith consum er expectations. ■ Change people’s beliefs about the product or service. ■ Change people’s beliefs about competing brands and demonstrate that they are no better than the com pany’s brand. ■ Changc people’s perceptions o f the im portance of different brand attributes — if the product is considered weak on one attribute then the m arketer could play down the im portance of this attribute and stress the im portance of others. ■ M ove the consum er’s perception o f what comprises an ideal product m ore in the direction of the existing brand’s profile o f attributes.

Purchase decision The attitudes of other people often influence intending purchasers. O th er factors may also arise which prevent the purchase intention being put into practice. Unfortunately, the m arketer of the product can do little to countcr these problems unless they make a thorough study of the likely sourccs of influence. This is clcarly a job for marketing rcscarch provided that it is feasible and cost-cffcctivc to study the sourccs o f influence involved.

Post-purchase behaviour Post-purchase cognitive dissonance is often experienced by consumers after making a relatively expensive purchase. There is a tendency to ask oneself whether one has done the right thing in making the purchase or whether one would have been better off to have purchased a different brand, product or service altogether. Consumers need to be reassured. If the m arketer has exaggerated the benefits o f the product then the consumer w ill m ore than likclv cxpcricncc dissatisfaction. This in turn can lead to poor word o f mouth comm unication about the product to the consum er’s circle of friends, relations and acquaintances. M arketing people can do much to allay dissonance. Some o f the methods include: ■ D irectin g specific advertising at people who have already bought the product, featuring contented, happy customers.

152

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

■ W ritin g booklets w hich arc dissonance-reducing to accompany the product or service. ■ Arranging speedy redress o f custom er grievances.

Form al models of consum er behaviour help firms to establish a fram ework w ithin w hich to both understand behaviour and form ulate com m unication strategies to take advantage o f their under­ standing. However, one also needs to have an appreciation of the various factors that influence the consumer decision-making process. The major factors influencing consumer behaviour are marketing factors (prom otion, distribution, price and the product specification), environm ental factors and buyer characteristics. W e consider the marketing factors at some length throughout the book, so we w ill restrict ourselves to m entioning environm ental and buyer characteristics here.

Environmental factors A consum er goods m arket comprises all individuals or households purchasing goods or acquiring goods or services for personal consumption. Each market can be subdivided into ‘sub-markets’ or ‘segments’ each one o f w hich could be regarded as a ‘m arket’ in its own right. T here arc many different ways in w hich ‘sub-markets’ or ‘segments’ can be defined. M arkets can be defined in geographic term s, but there is usually so m uch variation in terms of purchase behaviour w ithin markets defined in this way that further segmentation is often required. The purchasing behaviour o f individuals and groups w ithin a m arket rcflccts different consum er characteristics, buying power, and wants and needs. Consum ers vary considerably from one region o f a country to another in term s o f age, incom c, educational level, m obility patterns and taste. M oreover, clim atic conditions vary substantially in different countries. How ever, it is possible to distinguish groups o f consumers who have much in comm on w ith rcspcct to wants and needs. As is indicated above, these groups make up m arket segments and m arketing strategists need to develop products and services to serve the needs o f these m arket segments.

Situational factors The time available to make a purchase often plays an im portant role in determining what is purchased. For exam ple, a last m inute purchase of a book to read on an air journey may involve very little consideration o f what alternatives arc available and one may simply take the first reasonably appealing front cover that one secs. Even substantial purchases like houses and cars can be subjected to the influence o f tim e pressures. If one has already sold one’s house and has to move out quickly, but the new house one had previously choscn has been bought by another buyer in the m eantime, the time to scarch for an alternative may be very lim ited. A part from tim e, there are several other situational factors that may influence purchases. For example, fear of unem ploym ent may force would-be buyers of expensive dom estic appliances to postpone their decisions, or inclem ent weather may create an unseasonal demand for w aterproof clothing.

153

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

Level of involvement Highly priced goods that arc visible to others often cause consumers to undertake considerable search for inform ation before effecting a purchase. Such goods are known as high involvem ent goods. Clothing, furniture, cars and houses are products which fall readily into this category. Curiously, the degree o f involvem ent for the same products may vary across people. Some people, for example, undertake an extensive search w hen purchasing a birthday card for a particular person. Another person buying a birthday card for the same person may undertake very little scarch. N o r is this necessarily just a function o f the relationship that each person has w ith the recipient o f the card. O ne person may simply put less value on the card than the other.

BUYER CHARACTERISTICS: PSYCHOLOGICAL FACTORS I N F L U E N C I N G T H E BUY I NG DECISION P R O C E S S N o tw o individuals arc entirely alike in their behaviour and individual psychological processes intervene. People do not sec the same event in exactly the same way. People differ in their perceptual processes o f selective attention, selective distortion and selective retention (Figure 8.2). Selective attention implies that people only pay attention to a small proportion o f what is going on around them all the time. For example, when going about their daily w ork it is quite possible that they are exposed to hundreds of advertising messages but only actually ‘perceive’ a few of them. In all probability, people would screen out all of them except for the odd one or tw o which are in some way related to their currcnt thoughts. Certainly, it is quite possible that they would be unable to rccall any o f them! The real test for the advertiser is to present messages in such a way that people w ill pay attention to them. Selcctivc distortion refers to how people assimilate incoming information so that it fits in with their preconceptions. It is possible, for example, that in showing horrific accidcnts resulting from drink

Consumers F ig u r e 8 . 2

154

F a c to r s in flu e n c in g c o n s u m e r b e h a v io u r

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

driving, people w ill not take notice o f it because they feci that they cannot relate themselves to such a situation. For instance, they might assume that horrific accidents only really happen to people who arc habitually very drunk.

Motivations M arketers need to know what motivates people to buy particular brands or services. G iven this inform ation it may be possible to gain a competitive advantage in the design and/or marketing o f a product. This can be done through persuading consumers that a product is better able to satisfy their wants and needs on account o f the benefits it offers. There arc various theories o f m otivation; tw o of the most im portant, as far as marketing is conccrncd, w ere put forw ard by Freud and M aslow respectively. Freud suggested that people may be influenced at an unconscious level. Thus it may not be possible to get people to talk rationally about why they make certain purchases. Freud makes us aware o f these veiled motivations. As a consequence, different methods of rcscarch have been developed to get at these hidden kinds of motives. Maslow- suggested that human needs are ordered in a hierarchy o f importance. The most im portant needs are those to do with physiological needs, whereas the least im portant ones are to do with self actualization. Maslow contended that people would not seek to satisfy the less im portant needs until the m ore im portant ones w ere satisfied. This theory helps us to clarify how various products may fit in w ith people’s purchase plans. For example, a person may consider buying a home before purchasing a m otor car. A householder who has a car, a refrigerator, cooker, freezer, telephone and washing machine may next be interested in purchasing a dishwasher.

Learning M ost human behaviour is acquired as the result oflearning from experience. This also applies to the purchase o f goods and services and so learning is perhaps the most im portant factor underpinning consumer behaviour. D rives, stim uli, cucs and responses and reinforcem ent arc the key elements of learning. A drive is a force inside people that pushes them towards certain actions. D rives become m otives when they arc directed specifically towards a stimulus which w ill reduce the drive. Cues arc m inor stimuli which establish w hen, where and how a person w ill respond. M arketers build up demand for a product or service by linking it w ith strong drives, using cues to m otivate people and providing positive reinforcem ent to people w ho respond. In effect, this is really the w hole basis of the m arketing conccpt. M arketers seek to identify unsatisfied customer wants and needs (w here there is a strong drive w hich is not fulfilled). The firm provides the product or service (stim ulus) together w ith appropriate prom otional messages (cues). The consum er responds by purchasing the product and the m arketer follows this up w ith aftcr-salcs scrvicc or prom otional messages to reinforce the fact that the consumer has made a good choice.

Beliefs and attitudes People have beliefs and attitudes w hich affcct their purchasing behaviour. Brand images arc related to the beliefs and attitudes of people and as a result o f these images, people make purchase decisions. Attitudes are associated w ith the way in w hich people behave and act. M arketing communications tries to inform customers that a product or scrvicc meets w ith their attitudes or corrects mistaken beliefs about a product or service.

155

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

Personality A person’s lifc-stvlc is an expression of an individual’s personality. Some people mav have a life-stvlc which people might describe as being arant garde. O ther people may be described as conservative, and yet others as liberal-minded. Marketers have to look for relationships between their products and life-style groups that they can identify. They can then link this to images they wish to portray through marketing communication vehicles.

Life-style Life-style that different occupations engender is thought to influence actual buying behaviour. There have been many different attempts to use life-style classification systems in market segmentation studies. Taylor Nelson’s Applied Futures typology, which is used widely in marketing research and for segmentation purposes, has types of life-style ranging from the helonger who places great store in home, family, country, the establishment, ctc., to the aimless who is uninvolved and alienated and is aggressive towards the system and resentful of its failure to provide employment. The life-style approach usually involves presenting respondents with a series of statements and asking for their degree of agreement with cach (L ik c rt scalc). Such life-style data is then cluster analysed to produce groupings in terms of activities, interests and opinions. As indicated above, a name or type is then attributed to each grouping. If we can identify a group which corresponds to a market segment or sub-segment of the market for a product or service, appropriate features can be built into the product or scrvicc that w ill appeal to this segment. In addition, a promotional message that is congrucnt with the segment’s life-style can be developed.

B UY E R C H A R A CT E RI S T I C S: SOCIAL F A C TO RS I N F L U E N C I N G T H E BUYING DECISION P R O CE S S Social factors exert an influence on the purchase behaviour o f consumers. Several people may have a part to play in making a purchase. For example, in talking w ith friends, someone may prompt us into deciding that it is time we did something about buying a new house. Someone else suggests that we should visit a new estate where some individualistic houses arc being built. Finally, we dccidc to buy a new house on the estate in question. Each one of the persons, including ourselves, has played a role in the decision-making proccss. A friend was the initiator, another friend the influencer and we were the decidcr, buyer and actual user. A firm needs to be aware of the different influences sincc they have implications for the various marketing communications that have to be made.

Roles and status symbols People often buy products that relate to or reflect their role and status. Status symbols vary for different social groupings and it is the job of the marketer to recognize what the status symbols are for different groups of people (Figure 8.3).

156

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

F ig u r e 8 . 3

R o le s in t h e p u r c h a s e d e c i s i o n - m a k i n g p r o c e s s

Family influence Perhaps the strongest reference group w h ich influences consum er behaviour is the family. As a consequence, m arketers are interested in the roles and relative influence o f the various members of a family in the purchase of a large variety o f products and services. Traditionally, the w ife or female partner in a fam ily has tended to purchase the w eekly shopping and buy small value items. Nevertheless, where there arc children in a family the children may exert considerable influence over what is actually purchased during a trip to the supermarket. In the case o f expensive items there is generally join t decision-making. The m arketer’s main task is to identify which m em ber of the family has the greatest influence in choosing various products.

Age and life cycle People pass through various stages in their life cycles. People have different life cycles according to whether or not they decide to establish a family unit. Exhibit 8.2 illustrates life cycle concept, assuming that people decide to build a family unit. D ifferent buying patterns are exhibited at every stage in the life cycle. The m ajor weaknesses o f the concept include the exclusion o f those couples who never have children, lack o f account taken of one-parent families, undue emphasis on the age o f children and the changing role o f the father/husband but not o f the m other/w ife. The concepts here have been extended and applied in practical m arket analysis program m es such as Sagacity, w hich combines an abbreviated version of the fam ily life cycle w ith income and occupation.

157

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

E XH I B I T 8.2

S T A G E S IN T H E F A M I L Y L I F E C Y C L E AND A S S O C I A T E D B E H A V I O U R A L B UY I NG P A T T E R N S

S ta g e in th e f a m i l y l i f e c y c le

B u y in g in te r e s ts

l

S ingle and young - away from home

Fas hion clothes, sport and leisure products, cars, music centres and records, holidays

2

Y oung married couples - no children

Cars, consumer durables, holidays, furniture

3

M a r r ie d - sm all children

Wash ers , driers, baby items, econom y food

4

M a r r ie d - children m ain ly under 13

Child re n's toys, education products, domestic appliances, many foods

5

M a r r ie d - children m ain ly teenagers

Cons um er durables, better furniture, hobby items

6

M a r r ie d - children left home - both/ one still employed

Travel, recreation, self-education, investments, luxuries

7

Older - retired

Cheaper holidays, value for money goods

8

S o lit a r y su rvivor

Eco no m y living

R E F E R E N C E G R O U PS Reference groups arc made up o f people who directly or indirectly influence a person’s attitudes or behaviours. Teenagers, for example, may be influenced by a pop-star cult. M arketers try to identify the reference groups of their target customers and make use o f opinions reflected by such groups in their marketing communications.

Social class Social class reflects societal stratification. M em bers o f a social class have similar values and attitudes in com m on. These arc different to those o f members o f other social classes. The identification o f the social class to w hich a person belongs can be a rather involved business but in general it is based upon the recognition o f such points as job, pay, wealth, education and value orientation. Research appears to indicate that social classes have distinct product and brand preferences in areas such as clothing, leisure activities, home furnishings and m otor cars. There are also signs that social classcs have leanings w ith rcspcct to media prcfcrcnccs. Low er classes show a prcfcrcncc for television whereas upper classcs favour magazines and journals. M oreover, w ithin the media division itself, such as TV, w e find upper classcs favouring news and drama whereas low er classcs like soap operas and quiz shows.

158

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

Social background P e o p le ’s social background is reflected in th eir cu ltu re. C u ltu re consists o f values, p erceptions, preferences and behaviours. A lthough m any w estern societies put value on achievem ent, success and m aterialism w hich is good for the sale o f goods and services w h ich enable consum ers to dem onstrate their success and achievem ent through the kinds o f products w hich they purchase, other societies have a som ew hat different set o f values. M aterialism is not altogether absent in these other cultures but it has not been as p rom inent as it is in Eu rop e and the U S . M u ch o f w hat is revered in w estern societies is not generally revered in such countries. Nevertheless, wre live in a changing w orld and there are signs o f some w estern artefacts being adopted in countries w h ich have h ith erto been slow to showr an interest in w estern ideas, values and goods. Sub-culture reflects nationality groups, religious groups, racial groups and geographic areas. O n e can observe its effects in the w ay consum ers form preferences or tastes. Prom ising m aterial success may sell some products but there is also a ‘m ark et’ for w hat is apparently anti-m aterialist. O n e o f the most rapidly developing business sectors at the present tim e is the o ccu lt ‘m ind and sp irit’ sector w ith its crystals, U F O s , alternative m edicines and m editation. These arc profit oriented businesses despite the image o f antim atcrialism .

P O S T M O D E R N I S M IN C O N S U M E R B E H A V I O U R O n e o f the central them es o f postm odernism relevant to m arketing concerns consum er behaviour. In the twenty-first century, organizations operating in developed countries are supposedly dealing w ith w e ll educated and inform ed audiences. M o re to the point is that m any consum ers, irrespective o f their level o f educational attainm ent, arc in fo rm ed and w e ll able to judge the m erits o f the va rie ty o f products and services and the advertising messages that accom pany them . M o reover, in w h at today arc com paratively affluent societies even by standards o f the 1970s, consum er choice has burgeoned and lessened the scope for m arket suppliers to dictate w hat consum ers should buy. T he consum ers’ m ain choice at the beginning o f the twenty-first century is one o f how to spend their m oney or w ealth. Brand choice w ill always exist w h en consum ers finally make up their minds h ow to spend their m oney but it is persuading people to make up their minds in the first place that is now one o f the predom inant issues. Presented w ith a large va riety o f choices, consum ers arc beginning to question w hat they really w an t. In m any eases, consum ers may no t really know' w hat they w an t, but only how' to reject the unw anted alternatives. Postm odern m arketing has five key features according to Firat and Vcnkatesh (1995) w h ich may serve to underpin and facilitate the proccss o f exchange. These arc:

■ h yp erreality ■

fragm entation

■ reversed production and consum ption ■ decentred subjects ■ juxtaposition o f opposites.

159

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

Hyperreality Hyperreality is the most widespread sign o f postm odernism on the cu rrent marketing scene. It is evidenced by such things as fat-free fat, bccflcss beef, decaffeinated coffee, alcohol-less alcohol, and sugar-free butter (B ro w n , 1999). It is found in the virtual worlds o f cyberspace and in the pseudo worlds o f theme parks, hotels and heritage centres. It involves the creation o f consumption sites and marketing phenomena at surrealistic geographic places. The Valley o f the Kings, for example, might be recreated in a theme park just some distance from a European capital city. In some respects this would be superior to the real thing since the negative aspects of the real thing would be absent — extreme heat for example. H yperreality offers the custom er previously new, creative and innovative experiences. W h ile at the turn o f the twenty-first century such opportunities are relatively limited in scope there seems little doubt that they can be developed in all kinds o f different ways in the future. The w hole concept of shopping may be adapted to the needs of providing a ‘hyperreal’ experience. For example, if one wants to experience the ambience o f the bazaars in the N ear East, w hy should it be necessary to travel all the way to places such as Istanbul?

Fragmentation Fragmentation of markets into smaller and smaller segments, cach with its own complem ent o f carefully positioned products is apparent everyw here (B ro w n , 1999). It reflects the fact that marketing in postm odcrnity is rapid, rabid, frenetic and volatile. It is often reflected in shopping at speed and its very disjointcdncss is in part peculiar to the activities o f practitioners w ith their ccasclcss proliferation o f brands, increasing number o f outlets and preparedness to acccpt any form o f payment for goods and services provided. It also m irrors consumers’ disconnected postmodern life-styles, behaviours and moods. The postm odern consumer adopts a m ultiplicity o f roles from D IY enthusiast to pscudoacadcm ic and leads a correspondingly fragmented existence among a proliferation o f products and brands.

Reversed production and consumption Reversed production and consumption concern consumers’ loyalty to images and symbols that they produce in the proccss o f consum ption. C onsum er loyalties cannot be fixed because they arc constantly changing and consumers are correspondingly unpredictable in their behaviour. The shifting nature of the symbolism o f consum er wants and needs makes it seem apparent to marketers that consumers do not know what thev w ant, but only what thev do not want. M oreover, what is sym bolic today may not be symbolic tom orrow or alternatively it may symbolize something that is unattractive. The task for marketers is to predict what w ill be a fashionable symbol tom orrow, and equally im portant, when tom orrow w ill be.

Decentred subjects Decentred subjects means that individuals cannot be unambiguously defined by their occupation, social class, demographies, etc. Although traditional segmentation criteria may be applied and marketing strategics form ulated, it is increasingly acccptcd that these capturc the target m arket only for a relatively short time. The consumer o f the twenty-first century is always just beyond the reach of

160

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

marketing strategists. H ow ever, if one accepts decentredness as a truism this would lead one to conclude that the strategic tools o f m arketing arc too crude to be o f any effective use. Since segmentation, targeting and positioning make up the centrepiece o f m odern marketing strategy, marketers should accept that the target may be moving, that target composition may be changing and thus that target positioning is inconstant. W h e n communicating w ith target market audiences these factors take on a new significance and demand a highly creative approach to m arketing com m unications.

Juxtaposition of opposites Juxtaposition o f opposites conccrns the attempt to appeal to the difficult-to-targct postmodern consumer. The approach involves adopting an open, untargctcd, ill-defined, im prccisc appeal w hich permits imaginative consumer participation, e.g. ironic advertising treatments w here the purpose, pitch or intent is unclcar, and sometimes the product or scrvice too. This may be achieved through messages containing elements o f entertainm ent or bribery and which feature combinations of contradictory symbols, themes and references. M any advertisers arc now using these types o f messages. Such advertisem ents often leave the consum er w ondering what the advertisem ents w ere about. The messages stimulate the consum ers’ curiosity and challenge them to relate the messages to their own cxpcricnccs and desires and to producc creative insights about their meaning. A postm odern view o f consum er behaviour emphasizes knowledge interpretation through metaphor, constructed truth, semiotics and sym bolic, as opposed to actual, realities (B ro w n , 1994). From this perspective, the idealized image o f consumers as rational cognitive analytical decision­ makers, falls into disarray. If correct, m arketers and marketing comm unication professionals would be w ell advised that the postmodern route o f continuous offerings o f ambivalent but still dccodablc messages is the way forward. Postm odern consumption has m ajor implications for the practice of marketing. The old idea of finding out what customers want and delivering it to them in an efficient, tim ely and profitable manner no longer seems apt. People often do not know what they w ant — though they may recognize it when thev see it and certainly seem to know what they do not want. Perhaps the latter bears a pointer towards what marketing should be doing —finding out what people don’t want and giving them a less unacceptable alternative.

S O C I E T A L M A R K E T I N G AND C O N S U M E R B E H A V I O U R M any firms are blending communications activities w ith public purpose marketing or enlightened capitalism w ith their econom ic marketing strategies (Handelm an and A rnold, I 999). Such marketing practices are indicative o f firm s starting to practice, for econom ic reasons, corporate social responsibility (Bro w n and D acin, 1997). M oreover, the emphasis on consumerism and an increasing awareness o f environm ental and ethical issues all have their implications for marketing strategists. The fact that business depends on reputation and image as much as upon products, services or pricing suggests that firms must not ignore social responsibility.

161

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

O R G A N I Z A T I O N A L BUY I NG D E C I S IO NS Organizational buyers arc those purchasing goods and services for some tangibly productive and com m ercially meaningful purpose. They purchase on behalf o f organizations operating across a wide spectrum of markets. Organizational buyers operate in: 1 Producer markets. These arc profit-making businesses that purchase products and services and use them to make other products. These include raw materials, components, semi-finished and finished goods manufacturers. 2

Reseller markets. These consist o f distributors such as wholesalers and retailers who buy finished goods for resale.

3

Government markets. These com prise national and local governm ents seeking to provide the public w ith education, water, energy, national defence, road systems and healthcare.

4

Institutional markets. These are often organizations that seek to achieve the charitable, educa­ tional, com m unity or other non-business goals that make up institutional markets. They include churches, some hospitals, libraries, museums, universities and charitable organizations.

Demand for industrial goods is derived from the demand for consum er goods. For example, in the car industry, firms specialize in the production o f electrical components for m otor vehicles. The demand for the electrical car components depends upon the demand for the cars to w h ich the components arc fitted. If the m otor industry is depressed then the demand for clcctrical components for the m otor industry w ill also be depressed. If the demand lor a particular m otor vehicle m anufacturer’s cars is depressed but the rest o f the industry is buoyant, then only the demand for clcctrical components for that m anufacturer’s vehicles w ill be depressed. The total demand for many industrial goods is relatively price inelastic. For example, in the instance o f the electrical components for the car industry introduced above, if the price o f one or two components is increased then this w ill not rcducc the demand for those components. This is because the added cost o f incorporating them in the final consumer product — a m otor vchicic — is negligible. W h e re the added costs arc substantial in relation to the final consum er product and the price rise is substantial, then demand may w ell be reduced.

Models of business to business buying behaviour In the same way that there are models o f the consumer decision-making process there arc also models of the business to business buying behaviour process. Robinson et al. (1967) identified eight buying phases in the buying process: ■ problem recognition ■ proposal solicitation ■ general need description ■ supplier selection ■ product specification ■ ordcr-routinc specification ■ supplier’s scarch ■ perform ance review.

162

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

The model fils well where a product or scrvicc is being bought for the first tim e, but appears to be less applicable in other situations. Organizational buyer behaviour is a complex process. Although the job of buyer may exist in a firm, there may be many people concerned in the purchase decisions. M arketers have to identify the various roles played and then influence the various actors in the decision-making proccss.

Influences on organizational buying decisions Industrial goods are bought by organizational buyers. In reality, however, m ore people actually influence business buying decisions than consumer buying decisions. Indeed there may be a buying com m ittee consisting o f technical experts and senior management personnel. These arc often found in the purchase o f relatively expensive industrial goods. Even if this is not the ease, the same people may be involved or consulted in the coursc o f making buying decisions. W ebster and W in d (1972) provide a detailed account of the various influcnccs on industrial buyers. Industrial buyers respond to both rational econom ic and personal appeals when participating in buying decisions. There arc various influcnccs on industrial buyers and these may be classified as follows:

■ environmental: econom ic recessions and rcsurgcnce, technological developments, legal con­ straints, com petitive activities, ctc. ■ organi/.alional: reflecting objectives, procedures, structures and systems ■ interpersonal: arising from status differences between people associated w ith the purchasing decision ■ individual: associated w ith the age, incom e, education, job position, personality and attitude to risk o f the buyer.

Characteristics of organizational transactions There are various differences between the customers in business to business markets and consumer markets. In particular there arc:

■ fewer buyers ■ larger buyers ■ geographically concentrated custom er groups.

Generally, such purchases arc made less frequently than consumer goods sales. The contract regarding the terms o f sale of such items is often a long-term agreement requiring re-negotiation from time to lim e. In addition, purchasing decisions are often made by a com m ittee and several people or departments in the organization w ill be involved in the negotiations.

Attributes of organizational buyers Some organizational buyers simply place orders. People occupying these jobs require little or no skill. M o re often, however, the im portance that organizations give to the role of the buyer is much greater

163 ■

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

and the buyer needs to know all about the products and services on offer. Indeed, some buyers often have a great deal o f autonomy in the extent to w hich they can purchase on behalf of the organization. Buyers are also proactive rather than reactive and watch out for inform ation w hich can enable them to make better purchase decisions.

Primary concerns of organizational buyers The prim ary concerns of organizational buyers are:

■ delivery ■ scrvicc ■ price.

It is common to purchase goods on the basis of specifications. If a supplier fails to deliver goods to a specification this often terminates the agreement to supply goods to a firm. D elivery time is o f paramount im portance. Failure of a supplier to make promised deliveries can hold up production and causc considerable lost sales to a company. R eliability in terms of keeping to promised delivery dates is an im portant conccrn o f organizational buyers sincc it can help to rcducc the level o f safety stocks kept and hcnce frcc-up working capital. Specific services required vary in terms o f im portance. M arket inform ation, technical assistance, inventory maintenance, on-time delivery, repair scrvicc and crcdit facilities arc com m only soughtafter services. Price influcnccs operating costs and costs o f goods sold. These in turn affect the custom er’s selling pricc and profit margin. W h e n purchasing m ajor equipment, for example, an industrial buyer looks upon the price as the amount of investment necessary to obtain a certain level of return or savings. This leads to a comparison o f the price o f a machine w ith the value of the benefits that the machine w ill vield.

Buying decisions A firm that centralizes buying decisions has a different approach to purchasing than one w here purchasing decisions arc made at distinct locations. Centralized purchasing involves giving a separate organizational unit authority to purchase at a regional, divisional or headquarters level. Centralization o f purchasing is m ore likely where:

1 tw o or more purchasing units w ithin the organization have com m on requirements 2

there are opportunities to strengthen bargaining position, obtain low er prices through the aggregation of a firm 's total requirements and achieve economies in inventory control

3

there is opportunity to consolidate purchasing pow er and secure favourable terms and service

4

engineering involvem ent is high and the engineering group is in close organizational and

when a few large sellers dominate the supply industry

physical proximity.

164

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

S I M I L A R I T I E S OF O R G A N I Z A T I O N A L B U Y E R B E H A V I O U R WITH CO NSUMER BEHAVIOUR Sim ilarities w ith what w e have outlined earlier in this chaptcr relating to consumer behaviour do in fact exist. As is the ease o f consumers making purchase decisions, there arc a variety o f people who actually exert an influence on the decision: ■ users: w ho w ill use the product or scrvicc ■ influences: often technical persons whose expertise is requested prior to making decisions ■ deciders: those w ho actually have authority to take decisions ■ approvers: those who hold the purse strings ■ buyers: w ho sclcct the supplier and arrange the terms of purchase ■ gatekeepers: w ho can scrccn out inform ation before it ever gets into the decision-m akers’ in-trays. Firm s marketing products should be aware o f the various influential roles in decision-making. M oreover, they need to identify the key influential people and to persuade them that the product w ill m eet a felt need.

R O L E FOR M A R K E T R E S E A R C H Custom er or market rcscarch can produce quantitative facts about particular markets and market segments (Exhibit 8.3). For example, the size of the market both in terms o f unit sales and value. W h en these data arc collccted over tim e it allows one to identify trends and helps to predict future sales. It can also provide inform ation on w here customers are loeated, their spending patterns, earnings and crcditworthincss. It can also explain w hy customers prefer one brand to another and what pricc they arc w illin g to pay for a brand. M arket rcscarch can also provide information about market share of all the firms operating in a market or m arket segment. Firm s undertake m arketing rcscarch to help identify w hy people buy or do not buy products and scrviccs. It also provides inform ation for making m arketing m ix decisions (pricing, product, distribution and prom otion).

E X H I B I T 8.3

CUSTOMER M ARKET RESEARCH

Customer market research provides information on: ■

market and market segment sizes

■

trends in the market which can be used for forecasting

■

brand shares

■

customer characteristics and motivations

■

competitors'brands'shares.

165

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

Research can be undertaken both in-house and by specialist marketing research companies. W h e re the latter are involved, research can be tailor-made to a clien t’s requirem ents or bought ‘off the peg’ if a suitable omnibus research report is available. There are a variety o f other sourccs which provide rcscarch data that arc useful to companies. These include trade associations and governm ent departments. The research process involves: problem definition, consulting company records and published data sources, deciding w hether field w ork is required and if so what is the best research method, specifying the location and size/type of sample, collecting the data, analysing the data, evaluating the results and setting down recommendations for action. Various methods are used in marketing research, including surveys, experiments and observational methods. Sincc virtually all research involves w orking w ith sample data, a key aspect o f rcscarch conccrns how the sample is taken from the population. Q uota sampling and simple random sampling methods arc w id ely used in practicc. The bulk o! marketing research carricd out is actually m arket rcscarch w hich relies very much on survey methods. Questionnaire design and analysis along w ith sampling arc key aspects o f survey methods. There are costs and risks involved in undertaking research. The implications o f these have to be fully appreciated before entering into research.

N A T U R E OF M A R K E T I N G R E S E A R C H M arketing rcscarch uncovers facts about both buyers and non-buyers o f products. It involves ascertaining the nature of wants and needs and assessing the current and potential demand for products and scrviccs. Inform ation can help to reduce the elem ent o f uncertainty and guesswork in making marketing decisions. For instance, inform ation on income levels and customer perceptions o f a fair price can be used to advantage in setting prices.

INFORMATION SOUR CE S Sources o f inform ation arc o f two varieties — company records and outside sourccs.

Company records Firm s have usclul marketing iniorm ation filed away in their internal company records. These includc custom er sales records, salespersons’ reports and correspondence w ith individual customers. In addition, there are the com pany’s own sales statistics and com petitive inform ation gleaned from a variety o f sources.

Outside sources of information Sources include trade associations w hich produce reports, surveys and other statistics for companies which belong to the association. Independently published reports and surveys on specific markets arc also produced by organizations such as M in tel and the Econom ist Intelligence U n it. O th er sources of

166

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

useful inform ation include governm ent statistics (census data, family expenditure surveys, national income statistics, etc.) and company reports and accounts of competitors. The latter provide insightful inform ation about com petitors’ future strategies and plans and can be obtained from Companies House in London.

Marketing research services M anagem ent consultants can help w ith strategy formulation and advise on marketing problems. Such firms w ill survey the market to measure consumer attitudes or identify consumer wants and needs. In addition, because o f the wealth of knowledge that they have accumulated, they are able to offer expert advicc on marketing strategy. The companies undertake rcscarch on behalf o f clicnts and also carry out omnibus surveys. These cover a w ide range of products and services and probe into people’s attitudes and opinions about the products and other related matters. Inform ation obtained in these surveys is sold to client companies on request. O m nibus surveys contain both relevant and irrelevant inform ation as far as clicnt companies arc conccrncd. This means that although they arc comparatively cheap to obtain, their value is somewhat lim ited. Specific surveys relating to a com pany’s products and those of its competitors may also be commissioned and in this ease the results arc made known only to the clicnts sponsoring the rcscarch. However, the latter kinds o f surveys arc m ore expensive than the omnibus surveys.

T H E P R O C E S S OF R E S E A R C H Rcscarch is carricd out systematically to ensure that problems arc dealt with properly and that nothing is overlooked. There are a num ber o f stages to the research process (Figure 8.4). These are:

■ problem definition ■ consulting company records and published data sources ■ deciding w hether field w ork is required and if so what is the best research method ■ specifying the location and size/type o f sample ■ collecting the data ■ analysing the data ■ evaluating the results ■ setting down recommendations for action.

Problem definition The first stage in the research process is problem definition. This is an initial statement ol the research objectives. Research objectives are usually to provide information on people’s

■ opinions ■ knowledge ■ attitudes ■ behaviour

167 ■

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

F ig u r e 8 .4

168

S ta g e s in th e m a r k e t in g r e s e a r c h p r o c e s s

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

■ beliefs ■ social background. ■ intentions.

Consulting company records and published data sources Follow ing problem definition, the next step is to consult published data sources such as company records and previous reports provided by outside bodies and/or inform ation in relevant periodicals. Some o f these sources of data may provide answers to all or some o f the aspects of the problem which has been identified. O ne cannot expect to obtain answers to all aspects of a problem in this way and it is often nccessary to undertake field rcscarch to find out more specific inform ation. Field research involves finding things out by asking questions, doing experiments, making observations, ctc., all of w hich generate ‘prim ary data’ . W h e n field rcscarch is ncccssary, the next step is to choosc whether to commission consultants to undertake the rcscarch w ork or w hether to undertake the w ork oneself. iMuch w ill depend on the size o f the firm and its rcsourccs. Small firms usually do not have the rcsourccs to conduct their own J m arketing research. The research method has also to be dccidcd. From the point o f view o f the doit-yourself approach to market rcscarch this w ill probably mean that a survey of one kind or another w ill be undertaken.

ANALY SING INFORMATION The best method of analysing data varies according to the kind o f study that has been undertaken and the kind o f data that have been obtained. In this section w e w ill illustrate the application o f data analysis to data w hich have been collected by survey research. The same methods w ill sometimes be applicable to both observational and experim ental research and there may also be other forms o f data analysis w h ich can be used on survey data w h ich are not covered here. Readers interested in a comprehensive review of data analysis methods in marketing research should consult a specialized text (viz. Proctor, 2000).

M A R K E T I N G R E S E A R C H ON T H E I N T E R N E T The Internet offers marketers a unique opportunity to gather vast amounts of demographic and usagerelated m arketing data w ith w hich to better understand their custom ers. M arketers can gather secondary data on the Internet by accessing governm ent sources, such as census data, or by going to private information providers. Researchers can also access data from organizations about current events, trends, target markets and competitors, and much more may be found in the many newspapers and trade magazines available online. The web also gives m arketers an excellent opportu nity to conduct com petitive analysis by visiting com petitors’ websites to gather inform ation about their product offerings, services, priccs, ctc. W eb users can also be asked for inform ation. M any websites encourage visitors to register in order to maximize their use of the site or to gain access to premium areas; some even require it. Registration

169

ANALYSING

THE CUSTOMER

IN T H E

MARKET

PLACE

fo rm s ty p ic a lly ask for basic in fo rm atio n such as nam e, e-m ail address and age, from w h ic h m ark eters can b uild user p rofiles fo r th e ir o w n use o r to sell to o th e r com panies. M a rk e te rs can c o n d u ct surveys to learn m o re about the p eople w h o access th e ir pages, o fferin g prizes as m o tivatio n fo r particip ation . M a rk e te rs also gather in tellig en ce and c o m m u n icate in te rn a lly through intranets , w h ic h em p lo y the in frastru ctu re and standards o f the W o r ld W id e W e b . Sp ecial so ftw are called ‘fire w a lls’ p e rm it em p lo ye e s to access th e ir f i r m ’s in tra n e t w h ile b a rrin g u n au th o rized users. T h ro u g h in tran ets, em plo yees can develop th e ir o w n w e b pages and share details o f th e ir operations and p rojects w ith o th e r co m p an y em p loyees, w h e th er they are across the hall o r around the w o r ld . In tran ets p ro vid e an o p p o r tu n ity fo r o rg an iza tio n -w id e m a rk e tin g in te llig e n c e to p e rm it the co - o rd in a tio n and in te g ra tio n o f effo rts to achieve a tru e m ark et o rie n tatio n . W h e n va rio us d ep artm en ts and fun ctio nal areas o f a firm can q u ic k ly share v ita l in te rn a l in fo rm a tio n about in v e n to rie s, p ro d u c tio n o r even q u a lity tests, the w h o le co m p an y im p ro ve s its a b ility to serve both in te rn a l and e x te rn a l targ et m arkets.

QUESTIONS 1

'W hen deciding on the purchase of a new watch 1 am the only person who has any influence on the decision regarding which make or brand I will buy/ How generalizable do you feel this statement is? Ju stify your answer.

2

Many consumer-purchasing situations involve complex buying decisions. Describe some situations which illustrate this point and explain how the 'five stages in the buying process' model is relevant to these situations.

3

'The goods and services people buy represent an extension of their own personalities/ Discuss.

4

How does postmodernism impact on marketing activities in the twenty-first century?

5

'In the same way that consumers are subjected to various influences on their buying behaviour, organizational buyers are also subjected to a variety of influences/ Expand on this statement.

6

Market research is merely a qualitative approach to ascertaining customer preferences. To what extent would you agree with this statement?

CASE STUDIES Ch o o s i n g a holiday: part of a f o c u s group di scussi on First Class tour operators based in the West M id lands are trying to find out more about consumer choice as far as choosing a holiday destination is concerned. As part and parcel of the marketing strategy the firm is keen to develop an augmented service package that will appeal to its regular customers as well as pull in new customers. First Class has commissioned a small market research bureau to carry out research for this purpose. The market research bureau initially set up a number of focus group discussions at different locations in the W est Midlands for this purpose. The samples of respondents taken were essentially convenience ones comprising people of various ages in different settings, e.g. in youth clubs, social clubs, further education centres, etc., and comprised anyone who was prepared to

170

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T P L A C E

give an hour or so of their tim e. P a r t of the discussion that took place in one such session with a group of people a t a social club is shown below. ' I like the sea and the sun. I like to laze on the beach, to dance all night at a disco and do it again and a g a in / Cheryl smiled. 'T h a t's because you're young. W h e n I w as your age, I w anted to do the same th in g .' Yvonne spoke w ith a tone of nostalgia. 'N o w it's seeing different places that I like. I like going w ith Jo h n on tours. L a st year we took the pilgrim age tour route to Sa n tia g o in S p a in .W e started in Fra n ce and followed the w ell known route, stopping at different places on the w ay. There w as a party of th irty of us and we had a w hale of a tim e.' 'E v e ry o n e has their own tastes/ B ill grinned. 'I w atched

Wish You Were Here on G ra n a d a T V and

ended up getting a w ay from all the tra d itio n a l holiday destinations altogether. I w ent on my own to T hailand . I saw the bright lights and did some exploring of the ancient tem ples at A n kor W a t . ' 'S o m e of us have never been abroad and never w ill/ Old M ike com m ented. 'I c a n 't see w hat all the interest is in going to foreign parts when there is so much to see and do in Eng land . It's expensive to go abroad - and all th at foreign fo o d ! N ot to talk about different languages and the fa ct th at you ca n 't m ake yourself understood. I like to go to B lack p o o l at Ea ster, B lack p o o l in the summer, Black p o o l in Sep tem b er and B lack p o o l at Christm as. I never get bored of B la c k p o o l.' 'F ly in g puts me off going a long w a y / F io n a joined in. 'I tried it once. I w ent with a friend to P a ris for a weekend and w as sick on the plane. I am just so afraid of flying. If I c a n 't get there by land and sea I do not go. Of course, th at has not stopped me visiting places on the continent. I have been to Belgium and Fra n ce quite often. B u t th at is a ll.' ' I like doing something really different, but the cost deters me', W e n d y broke into the conversation cautiously. 'A couple of years ago I joined a singles party on a trip to A n ta rc tic a . I flew to T ie rra del Fuego and a boat took a party of us to the A n ta rc tic coast. I didn't like all the people. I also had to share a cabin w ith an older w om an. She w as a lrig h t, but it would have been d ifficu lt if we had not got on w ell. I regard m yself as a bit adventurous but not w ay out.' 'I go bungee-jumping in New Z e a la n d .T h a t is really exciting. It's a craze over there/ Tom butted in. 'W h a t I like is a cruise. I have done the Caribbean, the M ed iterran ean , the B a ltic and cruised off the coast of A la sk a and enjoyed them a ll.Y o u find all kinds of people on these cruises, make all sorts of friends and thoroughly enjoy yo u rse lf/ W in n ie put in.

QUESTIONS 1

How would F irs t Class make use of such data in form ulating m arketing strateg ies?

2

W h a t else m ight the m arket research bureau do by w ay of research?

O ff i ce I m p r o v e m e n t s O ffice Im provem ents is a m arketing com pany offering a wide range of office products and services on behalf of its clients to a wide range of businesses and organizations. The firm defines its business as finding w ays of m aking offices in o rg an ization s more e fficie n t, more em ployee-friendly and more

171

A N A L Y S I N G T H E C U S T O M E R IN T H E M A R K E T

PLACE

eco no m ical to run. John Grant, the C E O of Office Improvements, believes that this gives the firm the widest scope possible in term s of the kinds of p roducts he can m arket. 'O f c o u r s e / he says, 'this means we have two kinds of customer. Those whose products and services we m a rk et and those who buy the products and services w hich we m a r k e t / The firm does not experie nce too much d iffic u lt y finding businesses which would like to make use of Office Im p ro vem ents7 m arketing sk ills.T h e main d iffic u lty encountered by the firm is in its m a rk eting to o rg a n iza tio n s that w ant to make use of the products and services it has to offer. A s J o h n G ra n t says: 'W h e n you are a sm all com pany tryin g to make your way in the w orld, you encounter all kinds of problem s when it comes to getting new contracts. In our case it isn't a case of hiring salespeople to call on w hole salers or retailers, you have to a c tu a lly get out yourself and talk to your customers. Findin g the right person to talk to can often be a nightmare. W e define our business as that of helping firm s to create healthy w o rk in g environm ents for their employees. Th is means that we ac tu ally sell industrial solvents and cleanin g m a te ria ls as well as a variety of different types of equipment - ranging from fans and a ir e x tr a c to r units to heating appliances for offices and w o rk shops. W e are essentially a m arketing o utfit and get our products from a variety of sources both in this country and abroad. W e do not sell in sm all quantities but aim to equip other o rg a n iza tio n s as comprehensively as we can. 'O ur m a jo r d iffic u lty is locating the decision-m akers. W hen you w ant to get a local autho rity as one of your custom ers, w hom do you a p p r o a c h ? I can tell you it is not th a t easy. It is not a lw ay s s t r a ig h tfo r w a rd when you are dealing w ith a central buying office. Often the person you app roach cannot make the decisions and has to consult with other people. Yo u have a real job on your hands I can tell y o u /

QUESTION W h a t steps do you thin k J o h n G ra n t could take to ensure that his approach to users of the products and services he has to offer is o p tim a l?

172

Chapter 9

Sustainable competitive advantage and generic strategies

INTRODUCTION Keeping the strategic w indow open involves maintaining a sustainable competitive advantage. In conscqucncc, we argue that competitive advantage should be market led. W c examine the nature of corc compctcncics and interpret their importance as the basis of gaining a sustainable competitive advantage in the market placc. Along with these corc compctcncics arc a number of gcncric strategics that an organization can seek to follow or implement. W c w ill look at cach of these gcncric strategies in turn. First we w ill look at low-cost, focus and pre-emptive strategics and differentiation strategies. The latter leads us to consider product and service quality, customer focus and relevant issues relating to brand management.

C O M P E T I T I V E A D V A N T A G E S HOULD BE M A R K E T LED It can be argued that an organization’s products and services constitute the main focus of com ­ petitive strategy. In this contcxt the aim is to offer a competitive bundle of benefits, or value, to the customer. Com petitive advantage is achieved through the positioning of one firm ’s offering rela­ tive to another. An alternative view suggests that it is superior resources and processes designed to utilize such resources efficiently that w ill create a competitive advantage. Both approaches are not mutually exclusive and can be complementary (viz. Hunt and Morgan, 199S; Verdin and W illiam son, 1993). Indeed, such a view is in keeping with the view of keeping open the strategic window of opportunity.

CORE C O M P E T E N C I E S AND C O M P E T I T I V E A D V A N T A G E It seems reasonable that competitive advantage should be developed on the basis of core competencies. Through the identification of its distinctive competencies and the relating of them to its core products, a firm can develop strategies and plans which make best use of those capabilities. N ew capabilities might then be sought after in order to achieve greater sustainable advantage. If a firm identifies its core competencies incorrectly this w ill result in the firm overlooking attractive opportunities and lead it to pursuing poor ones.

173 ■

COMPETITIVE ADV ANT AGE AND STRATEGIES

In searching for a competitive advantage, businesses often develop capabilities in key func­ tional areas (Prahalad and Ham el, 1990). To be sustainable, these capabilities must be difficult to imitate and should support the organization’s business strategy (Day and W cnslcy, 1988; Day, 1994). Organizations that stress the development of key capabilities arc better able to achieve and maintain a position of advantage despite turbulent environmental impacts on the business (Achrol, 1991). The development of key marketing capabilities has been identified as one of the prim ary ways firms can achieve a competitive advantage (Day and Wensley, 1988; M cK ee et al., 1989; Day, 1990, 1994). In this context, firms must develop processes that allow them to collect information about market opportunities, develop goods and services to meet the needs of targeted customers in selected markets, pricc these products according to market information, communicatc product advantages to potential customers and distribute products to customers (Day, 1993, 1994). Organizational capabilities assist in the proccss of achieving a competitive advantage. Organizational capability is ‘a firm ’s ability to perform repeatedly a productive task which relates either directly or indirectly to a firm ’s capacity for creating value through effecting the transformation of inputs to outputs’ (Grant, 1996, p. 377). Such capabilities arc produced as a result of the integration of the knowledge and skills of the organization’s employees (Grant, 1991, 1996). To develop marketing capability repeated cxpcricncc in applying knowledge and skills to transforming marketing inputs to outputs is required. In practice, marketing capabilities are the integrative processes designed to apply the collcctivc knowledge, skills and rcsourccs of the firm to the market-related needs of the business, enabling the business to add value to its goods and scrviccs, adapt to market conditions, take advantage of market opportunities and meet competitive threats (Day, 1993, 1994).

Core competencies Selznick introduced the concept of ‘distinctive competence’ to explain how a particular business obtains a competitive advantage (Selznick, 1957). Selznick’s argument was not entirely unique. Drucker developed a parallel theme of business leadership: a business must be the leader in something — it mattered not what that something was, so long as the customer genuinely wanted it and was prepared to pav for it (Drucker, I 964). Prahalad and Hamel (1 990) put forward the idea of ‘core competencies’ as the basis upon which to build strategics. This approach differed from the ideas of both Sclznick and D ruckcr and resulted from studies examining the way successful firms, mainly Japanese, appeared systematically to acquire and exploit combinations of fundamental technologies in order to develop generic or corc products w ith which to dominate global markets. Core competence is a combination of technological and managerial capabilities which provide the firm with a leadership position in the development of ccrtain generic or core products. A firm ’s existing core competencies reflect the fundamental skills and knowledge behind its successful products. They may relate to world leadership in specific technologies or they may be related to particular organizational or managerial skills. Acquiring and nurturing competencies which arc not ‘core’ is wasteful of rcsourccs and effort. It is better to buy in non-core competencies (Q uinn et al., 1990) and focus all internal efforts on the acquisition and development of what really matters. A firm ’s capacity for competitive innovation reflects its ability to acquire relevant corc competencies and to apply them effectively in the development of core products. Capability is not constrained by the competencies already possessed,

174

COMPETITIVE ADVANTAGE AND STRATEGIES

nor by the resources available, but can be extended by the careful definition o f the competencies required and the means of their acquisition and development. Missing competencies can be painstakingly developed internally through focuscd investment in R & D or acquired externally through various forms of collaborative arrangements. However, internal developm ent is expensive and beyond the means o f all but the largest organizations. In an era when the diffusion o f technology is rapid, the resultant com petitive advantage may be short lived. M uch new technology cannot be protected and there is no real com m ercial benefit in being the holder o f patents the essence o f which is im m ediately copied by competitors. As O uchi and Bolton (1988) suggest, internal developm ent is not the best w ay to progress in areas w here the intellectual property may be ‘leakv’. The strength o f a business should not be seen in terms of a particular product, scctor o f the market or distribution channcl, but in terms of the underlying capability to generate a range of rapidly evolving products or markets. The rationale for structuring an organization as a collection o f strategic business units is questionable. M o re im portant is the developm ent and acquisition o f com m on strands of expertise w hich cut across products, markets and business units. This may lead to some apparently strange combinations o f business activities. Fo r exam ple, 3 M ’s products include Post-It notes, magnetic tape, photographic film, pressure sensitive tapes and coaled abrasives. These all have quite different production technologies, end consumers and channels o f distribution. The rationale is based on the core competencies in substrates, coatings and adhesives. Prahalad and lla m c l (1990) quoted several such examples of the use o f core competencies. The success o f N E C , for example, resulted directly from this approach (Ex hib it 9.1). In similar vein, betw een 1980 and 1988 Canon grew very rapidly to beat X e ro x w ith a range o f core products including image scanners, laser printers, copiers and cameras, based on corc competencies in precision mechanics, fine optics and m icroelectronics. C ore competencies apply also in the services sector, though in this case the competencies may be related to technology im ported from manufacturing. For example, fast cycle times are a critical factor in providing customer service in many industries (Exhibit 9.2).

E X H I B I T 9.1

N E C ’ S U S E OF C OR E C O M P E T E N C I E S

N E C adopted the core competencies approach by system atic ally explo it in g the convergence of core competencies in computing and c o m m u n ic a tio n s ( C & C ) . A C & C committee oversaw the development of these core competencies and resulting core products. This was supported by other c o-o rdin atio n groups and teams which cut across the tra dit io na l org aniz atio n structure and ensured that each member of the organization knew and understood the strategic intent. They developed competencies intern ally and also through over a 100 purposive co llab o ratio n s and alliances with other org aniz atio ns. Between 1 9 8 0 and 1 9 8 8 N E C 's sales grew from $3.8 bn to $2 1 .9 b n and the com pany became the world number one in sem iconductors and a leading player in te le com m unic atio ns and computers. Over the same period, its A m e r ic a n co m p etit or G T E , enjoyed sales growth from $1 0bn to $1 6 .5 b n and had to w it hdraw from several of its m ajor business areas. Source: P rah a la d and Ham el ( 1 9 9 0 , pp. 7 9 - 9 1 )

175

COMPETITIVE ADVANTAGE AND STRATEGIES

E XH I B I T 9.2

S O U R C E S OF C O M P E T I T I V E A D V A N T A G E

S k ills ■

specialized knowledge of m arke t and needs customer service orientation

■

design expertise

■

ap plicatio ns experience

■

tra de rela tionships

■

ut iliz ing relevant technologies

■

systems design capa bilit ie s

■

a b ilit y to respond ra pid ly and with fle x ib ilit y.

Resources ■

coverage of distribution

■

a v a ila b ility or access to capit a l

■

business contacts

■

low cost m anufacturing and distribution systems

■

produc tion capa bilit y or capacity raw m aterial ownership

■

knowledge or access to sources.

The scale and grid shown in Figure 9.1 can be used to assess competitive advantage. In the example a firm operates in six market segments. It assesses its skills and resources for each market segment using a 9-point rating and assigning different weightings to each o f the scale item that make up the tw o dimensions o f the scalc, Skills and Resources. Segments scoring highly on both dimensions are those in w hich the firm has the most favourable com petitive advantage.

STRATEGIC INTENT Strategic intent conccrns the direction in which a business is headed in the long term . If identified simply and succinctly it can have a profound effcct on the firm 's stakeholders, both internal and external. Em ployees know what they arc trying to achicvc and therefore how they should make their greatest efforts; customers know what the firm ’s products and services embody; suppliers understand what the key elements arc when dealing w ith the firm . Przybylowicz and Faulkner (1993) argue that strategic intent crcatcs a sense o f urgency, requires com petitor focus, searches for weaknesses in com petitors’ positions that can provide com petitive advantage if properly addressed, and is stable over tim e w hile remaining flexible as to the means used to achieve the intended goals. C orc competencies have to be leveraged across business unit boundaries in order to prom ote efficiency and effectiveness in rcscarch and development. The strategic intent process facilitates the attacking o f horizontal market opportunities that might be missed in a business unit structure. Achieving m arket leadership and following the path o f ‘strategic intent’ is not w ithout dangers. Prahalad and H am el argue that m arket share leadership typically yields shareholder wealth. However,

176

COMPETITIVE ADVANTAGE

AND STRATEGIES

SEGMENT Skills Wts Market knowledge Customer service Design expertis Applications experience Trade relationships Technology utilisation Systems design capability Able to respond rapidly and flexibly

1

2

3

4

5

6

12 15 14 12 15 16 6 10 100

7 8 7 8 6 3 7 5

6 7 3 3 4 4 7 6

7 7 5 4 5 5 7 4

4 5 2 2 4 6 4 4

8 8 9 8 7 4 5 7

7

19 19 19 17 14 12 100

3 9 8 7 9 2

3 5 8 3 3 2

3 7 8 3 4 2

3 5 8 4 4 2

3 8 8 8 8 2

6 7 5 5

3 6 8

Resources Wts Distribution coverage Access / availability of capital Business contacts Low cost mfrg. and distribution Production capability/capacity Raw material access to sources

SEGMENT

O l

•

2

O 3

ۥ 4

•

Skills Resources

4.88 6.49

3.15 4.21

3.82 4.73

2.35 4.52

5.43 6.33

1

1

1

1

1

Size

5

3 6 8 3 4

2

# 6

4.07 4.54

1

Sources of competitive advantage 9

6

3

0 0

6

3

9

Resources

Figure 9.1

Sources of competitive advantage (1)

177

COMPETITIVE ADVANTAGE AND STRATEGIES

nearly all companies pursue m arket share, but few achieve exem plary perform ance for their shareholders. Moreover, Kontes and Mankins (1992) suggest that one of the weaknesses of the strategic intent proposition is the absence o f an econom ic fram ework for making investment decisions. In following a strategy of global m arket leadership, it is assumed that com petitors w ill not respond in ways that drive investment returns to or below the cost o f capital. How ever, this does in fact often happen w hen all players try to lead all markets. Strategic intent needs to be defined w ith precision and it also needs to be supported by indications o f how fast the firm proposes to travel and how far. Thus milestones along the route need to be spelled out and progress at each stage m onitored and the people involved rewarded according to progress. ‘Becom e the leading w orld producer o f photocopiers’ is a statement of strategic direction which could be a powerful organizing and motivating conccpt. The strategic intent o f ‘beat X e ro x ’ is still m ore pow erful, focusing as it docs on the m ajor com petitor and thus identifying standards to be beaten, or mcchanisms to be avoided, right across every aspcct o f the business.

GENERIC STRATEGIES Low-cost, focus and pre-emptive strategies Po rter (1985) suggested the alternatives of a low-cost strategy, a differentiation strategy and a focused strategy. The low-cost strategy involves the sacrifice o f some quality, fashion and even product innovation in order to keep costs low - the lowest in the industry. W it h this strategy there is also an assumption that the achievem ent of production economies o f scale is a significant factor in succcss. This contrasts w ith a differentiation strategy which focuses on the factors ignored by the low-cost strategy such as product variety, quality and service, but again im plicit is the notion that size matters to achieve successful differentiation. Sm aller firm s arc advised to move towards strategics which target small sub-segments of the market to avoid com petition w ith larger businesses for whom these segments are too small and specialized to be o f interest (Figure 9.2). Variants on the Po rter model exist, w ith some w riters suggesting a m ore detailed categorization of options, but the notion of a set

F ig u r e 9 .2

178

S o u rc e s o f c o m p e titiv e a d v a n ta g e ( 2 )

COMPETITIVE ADVANTAGE AND STRATEGIES

o f gcn cric strategies o f this type among w hich choice must he made was the dom inant strategic paradigm of the 1980s and early 1990s.

Low-cost strategies Although there is a tendency to think o f low-cost strategies as a single approach such as scale economies, low-cost labour, or production automation, it is im portant to recognize that there are many methods of obtaining a low-cost advantage. The successful low-cost firms are those that can harness m ultiple approaches.

No fr ills p ro d u ct/se rvice A dircct approach to low cost is simply to remove all frills and extras from a product or scrvicc. A m ajor risk, cspccially in the scrvicc scctor, is that competitors w ill add just a few features and position themselves against a no-frills firm . The goal is to generate a cost advantage that is sustainable for one o f tw o reasons. First, com petitors cannot easily stop offering scrviccs that their customers cxpcct. Sccond, com petitors’ operations and facilities have been designed for such scrviccs and cannot easily be changed. A firm w ith an inherent cost advantage has a good chance of success w ith a no-frills approach.

P ro d u c t design A prod uct’s design or composition can create cost advantages. A variant is to augment a product with relatively high-margin accessories or extra features and thus provide a higher pcrceivcd value to custom ers. Produ ct downsizing is another approach that can be helpful w hen price pressures inhibit alternatives. Cost advantages can also be achieved in other ways. Some of these include:

■ obtaining good access to raw materials ■ when a m ajor cost com ponent is distribution, the use o f a different channel ■ in some labour-intensive industries, access to inexpensive labour ■ governm ent subsidies or other special treatment ■ the best retail locations arc obtained by those who enter early into a market ■ innovations in the production proccss, including automation ■ reduction o f overheads: especially where there is a bloated workforce.

Differentiation A differentiation strategy is one where w ide product ranges and higher quality products are offered for the convenience of customers as well as added services such as delivery, information services, etc. A differentiation strategy is one in w hich a product offering is different from that

o f one or more

com petitors in a way that is valued by the customers. The value added should affect custom er choice and ultimate satisfaction. iMost succcssful strategies that are not based entirely on a low-cost advantage w ill be differentiated in some way.

179

COMPETITIVE ADVANTAGE AND STRATEGIES

There arc many ways to differentiate by adding value. There might be something which can be done much better than com petitors, or an extra product feature or service that can be included. Value can be added to any aspect of a business.

Successful differentiation strategies A successful differentiation strategy should:

1 generate custom er value 2

provide perceived value

3 be difficult to copy.

G enerating value A differentiation strategy needs to add value for the customer. A distinction is needed between apparent value and actual value. Too often a point of diffcrcncc w ith apparent value is not valued by the customer. A key to a succcssful differentiation strategy is to develop the point o f differentiation from the custom er’s perspective rather than from the perspective of the business operation. In particular, one needs to assess how the point o f differentiation affects the custom er’s experience o f buying and using the product. Is there a cost saving or added perform ance, for example? M arketing rcscarch, too, can often provide an insight into customers that leads both to a better understanding o f customers and an opportunity to test out ideas and assumptions. O ne role o f such rcscarch is to ensure that the value added w ill justify the price prem ium involved. A differentiation strategy is often associated w ith high price because it usually makes price less critical to the customer and because differentiation usually costs something.

P rovide perceive d value The added value must be perceived by the customer. If that is not the ease, the problem may be that the value added has not been communicated or at least not communicated effectively. Branding the added value is one way to make it m ore memorable, meaningful and believable. The perccivcd value problem is particularly acute when the customer is not capable o f evaluating the added value. The task is to manage the signals or cucs of value added. U ser associations and endorsements can help.

D iffic u lt to copy Differentiation needs to be sustainable and thus difficult to copy. W h en it involves a total organizational effort w ith a complex set of assets and skills it is difficult and costly to copy, especially if there is a dynam ic and evolving quality to it. A creative organization w ith a heavy R & D investment can inhibit investment. In addition, if there are m ultiple points o f differentiation this too can inhibit investment since duplication w ill be expensive. Over-investmcnt in a value-added activity can have a long-term pav-off by discouraging duplication. For instance, the developm ent of a superior service back-up system might discourage competitors.

180

COMPETITIVE ADVANTAGE AND STRATEGIES

The same logic applies to a broad product line. Some elements in the line may be unprofitable, but if they plug holes that com petitors could use to provide value, then the analysis looks different.

M a n y approaches to d iffe re n tia tio n There are m any approaches or strategic orientations that can lead to sustainable differentiation strategies. These include the use of strategic inform ation systems, global thinking, being innovative, custom er driven or employing a unique distribution system. Em ploying quality and building strong brands, however, are two o f the most im portant approaches and these w ill be considered in some detail next.

The quality option The prototype o f differentiation is a quality strategy in w hich a business w ill deliver and be pcrceivcd to deliver a product or scrvicc superior to that o f competitors. A quality strategy can mean that the brand, w hether it is a hotel, car or computer, w ill be a prem ium brand as opposed to a value or economy entry. A brand can also be a quality option w ithin a group o f value or cconom y brands.

T o ta l q u a lity m anagem ent To be the quality option, a business must distinguish itself w ith rcspcct to delivering quality to custom ers. W h a t is required is a quality-focused management system that is com prehensive, integrative and supported throughout the organization. The system consists of a host of tools and prcccpts, including:

1 the com m itm ent of senior management to quality 2

cross-functional teams that focus on quality im provem ent projects and have the pow er to

3

a process rather than results orientation

4

suggestion, measurement and recognition systems

5

a focus on the problem s and underlying causcs o f custom er complaints and areas of

6

the tracking of key quality measures

7

the involvem ent o f suppliers in the system w ith supplier audits, ratings and recognition, as well

make changes

dissatisfaction

as joint team efforts 8

the im portance o f the custom er — quality is defined in terms o f custom er satisfaction.

The quality option is designed ultim ately to improve custom er satisfaction. It follows that a custom er focus w ill be part o f a successful effort. O n e indicator o f a custom er focus is the involvem ent o f top management. A hallmark of most cuslomcr-driven organizations is that the top executives have regular meaningful one-to-one contact w ith customers. A nother indicator is the link to the compensation and measurement system. It is crucial to understand not only what is im portant with rcspcct to quality but also what drives those quality perceptions.

181

COMPETITIVE ADVANTAGE AND STRATEGIES

Building strong brands Differentiation can also be accomplished by building strong brands to crcate brand equity. This strategy is likely to prove sustainable since it crcates com petitive barriers. Brand equity generates value to the customer that can emerge either as a price prem ium or enhanced brand loyalty. Brand equity is a set o f assets and liabilities linked to a brand’s name and symbol that add to or subtract from the value provided by a product or service to a firm or that firm 's customers. The assets and liabilities on which brand equity is based differ according to the situation. They come under four headings: ■ pcrccivcd brand quality ■ brand identity ■ brand awareness ■ brand loyalty. W e have already looked at quality so we w ill now look at the other three categorizations.

B ra n d awareness Brand awareness gives the product or service a sense o f familiarity. In the ease o f low involvem ent products, such as soap, this fam iliarity can be an im portant influence in the purchase decision. In market research taste tests, a recognized name can affcct evaluation o f a product even if the brand has never been purchased or used. Awareness o f the name can be a signal of presence, com m itm ent and substance, attributes that can be im portant even to industrial buyers o f big ticket items and consumer buyers o f durables. High recognition of a strong name is an enorm ous asset. The asset bccomcs stronger w ith the passage of tim e as the number of exposures and expcricnccs grows. As a result, a challenging brand, even w ith an enormous advertising budget and other points of advantage, may find it difficult to enter the m em ory o f the customer.

B ra n d id e n tity A brand identity reflects the associations attached to a firm and its brands. These associations are usually those o f product attributes or custom er benefits. A brand’s associations arc assets that can crcatc confidence and trust, affcct feelings towards a product and provide the basis for brand extensions. They can provide an im portant basis for differentiation, especially in product classes w here it is difficult to distinguish objectively between various brands.

B ra n d lo y a lty For many businesses the loyalty o f the installed customer base is a covctcd asset. C om petitors may copy or improve on a product or scrvicc but they still have to make the customers switch brands. Brand loyalty or rcsistancc to switching can be based on lack of m otivation to changc from the existing brand, a genuine liking for an existing brand or the actual cost o f switching. Sw itching costs reflect the sunk investment that has to be sacrificed in order to switch from one brand to another. Switching costs w ill be low er for fast-moving consumer goods but clearly higher for durable consumer white goods. A n existing base ofloyal customers provides an enorm ous sustainable com petitive advantage.

182

COMPETITIVE ADVANTAGE AND STRATEGIES

It reduces the marketing costs of doing business since existing customers arc relatively easy to hold whereas getting and retaining new ones is m ore difficult. The loyalty o f existing customers represents a substantial entry barrier to would-be competitors. Excessive resources arc required when entering a m arket in which existing customers must be cajoled away from an established brand with which they arc well satisfied. The profit potential for the tentative entrant is thus reduced.

B rands a nd s tra te g y It has been remarked that companies become attractive takeover targets and the value of their stock rises bccausc o f the strength of their brands (Sherrington, 1995) and some brands arc even valued as assets in the company balance sheet. Branding for consumers represents the mark o f a given level o f quality and value that helps them choosc between one offering and another. The developm ent of a range o f brands to cover different consum er segments enables a firm to benefit from changing consumer wants. From a m arketer’s point o f view, brands allow the producer, and m ore rcccntly the retailer, to target different groups of consumers or segments of the market with different label product offerings. In fact, developing more than one brand enables a firm to segment a market and target different consumers. The developm ent o f a portfolio o f discrete brands enables a firm to isolate the problems o f one product from the rest o f the range and it can enable it to divest less profitable brands.

B ra n d trends a t the r e ta il level The preparedness of branded goods producers to supply own label products for retailers stems partly from a need to take up spare production capacity but it is also indicative o f the need to prevent complete erosion o f the existing sales base. The willingness o f leading producers to supply own-label products has also reduced the quality gap between own labels and producer brands. The sophistication o f retailers’ ow n m arketing com m unications, particularly packaging and prom otion styles, has strengthened their credibility in terms of ability to deliver satisfying products. Retailers have used advertising to create a brand image w hich has been reinforced by unique design features applied to store layouts, staff training and their own-labcl product ranges. They have also begun to use product-specific advertising to prom ote own-labcl brands. It is as a result o f being able to gather prccisc consum er inform ation m ore quickly through F.PO S technology that retailers have been able to becom c innovative in term s o f their own label products. R etailers have begun to develop differentiated ranges o f own-label products to m eet segmented custom er needs. B u t own-label activity is not restricted to grocery products and supermarkets. M itchell (1995) indicated that the travel business is becoming retailer driven rather than tour-operator driven, w ith some travel agency companies offering their own packages alongside tour-operator brands. P o rte r’s model o f com petitive forces provides a useful fram ework within which to look at the com petitive forces at w ork in this instance. Seen from the point o f view of producers, it can be argued that the pow er o f the buyer (the retailer) has been strengthened by the product-markct strategics w hich the retailers pursue. In addition, retailers also represent new entrants to the markets themselves. Strictly speaking, own brands do not m eet the form al definition o f substitute products, but they certainly perform the function o f such products.

183

COMPETITIVE ADV ANT AGE AND STRATEGIES

C ounter-strategies a vailable to producers Producers use database and direct marketing to try to get closer to the consumer. Producers also meet the new challenge from own label brands by investing in the development of innovative products which can be shown to have demonstrably different advantages over own label products. Producers are also able to take advantage of their more focused image - since retailers supply such a wide range of products and producers may very w ell benefit from developing products in partnership with one another.

P ro d u c e r-re ta ile r partnerships Problems crcatcd by the cmcrgcncc of own brands may be circumvcntcd by producers and retailers getting together and co-operating. Partnerships, where both sides arc working for mutual advantage, seem to be fruitful avenues for exploration. The extent to which a producer can obtain co-operation from a retailer does depend upon how much value the latter places on its supplier’s marketing and product development expertise. In general, retailers are in the more powerful position since they have gained leverage in the retailer—producer bargaining interface. Faced with the increasing power of retailers, producers need to gain and take notice of the needs and views of retailers. There is a need for joint product development projects and joint marketing ventures between producers and retailers. Moreover, producers can augment their product offerings with product add­ ons, including services to retailers and consumers with rcspcct to delivery, after-sales contact, financing and promotion. A producer’s strength w ill be defined not just in terms of the brand strength, but in terms of the skills of staff assigned to managing brands, retailers and consumers, and the flexibility and effectiveness of the organization structure within which they operate.

C ategory m anagem ent The conccpt of managing categories rather than specific brands involves co-opcration between manufacturer and retailer in the development of a product. An alliance is formed to develop the entire product category. Here there is scope for sharing consumer and market data, especially where both parties are developing consumer databases. For example, in 1997, the Consortium Jigsaw looked at the possibility of linking data from Unilever, Bass, Kim berly Clark and Heinz (Evans and Moutinho, 1999).

E th ica l branding Ethics arc a potentially powerful influence on consumer decisions. Companies such as Shell have found out with its environmental policies and its treatment of indigenous peoples, that if a brand gets its ethical stance wrong, it can have an adverse cffcct on the company wherever it goes and whatever it docs. N or is Shell alone in this, among the big brand names for Nike, with its cheap labour sourcing policies, has also experienced similar problems. Brands such as the Bodv Shop and the Co-op Bank on the other hand have demonstrated the power of taking an ethical stancc. There arc certainly many consumers who would prefer to choose cthically safe products and companies. It is rcflcctivc of a deep shift in public expectations o f what brands do and what they stand for. Increasing marketing literacy, the rise of pressure groups and the development of the consumer press are making people realize that cthical issues arc deeply embedded in society. Moreover, relative prosperity in developed countries

184

COMPETITIVE ADVANTAGE AND STRATEGIES

is affording the consumers in these countries the luxury o f w o rryin g about these things and the opportunity to express their approval or disapproval in how they spend their money. Brands have to take an ethical stance in ethical matters whether it relates to matters which impact on the environm ent

for instance, the disposal o f toxic waste or pollution of the atmosphere

or

contributions to socicty in the form o f charitable donations. O f course, the key issue is judging the acceptable price that consumers are w illing to pay for adhering to their ethical principles. Consumers are price conscious though the existence o f an affluent society can shift the upper boundary to their discretionary purchasing activity and hence allow some degree o f ethical consideration to enter into their purchasing decisions. W ith this trend towards ethical branding the question that consumers tend to ask is not whether they can trust the brand to deliver attributes X and Y but whether the people w ho bring the brand to the market arc the sort ofp co p lc they can trust to do X and Y. Clearly this has a considerable impact on the image that firms need to project towards their audicnccs and this is accomplished through prom otional strategy.

FOCUS STRATEGIES The focus strategic thrust, w hether it involves differentiation, low cost or both, conccntrates on one part o f the market or product line. A focus strategy avoids strategy dilution or distraction and is more likely to lead to com petitive advantage. W h en the internal investment programmes and culture have all been directed towards a single end and there is buy-in on the part o f everyone in the organization, the result w ill be assets, skills and functional strategics that match market needs. In most eases the product line or market is expanded, compromises arc made in advertising, distribution, manufacturing and so on. M oreover, the strategic competitive advantage and associated entry barriers w ill be diluted. A business that lacks the resources to compete in a broad product market must focus in order to generate the impact that is needed to compete effectively. A focus strategy provides the potential to bypass com petitor assets and skills. It can also provide a positioning device. Although pay-off o f a small niche may be less than that of a growing m arket, the competition may often also be less intense. Large growth markets attract many com petitors and stimulate over-capacity whereas this is unlikely to occur in niche markets to the same extent. Nevertheless, a focus strategy docs lim it the potentials of a business. Profitable sales may well be missed and the business may have to compete w ith firms that enjov scalc economics.

Focusing the product line Focusing on part of a product line can enhance the lin e ’s technical superiority. In m ost businesses, the key people have expertise or interest in a few products. As the product line broadens, however, the products tend to be ‘me to o ’ products which do not provide value and detract from the base business. This may spur on the need to remain focused and resist product expansion.

Targeting a segment The same argument applies as in focusing the product line m entioned above.

185

COMPETITIVE ADVANTAGE AND STRATEGIES

Low -share co m p e tito rs In many industries there is a dominant firm w ith substantial scale advantages. A key to competing against such firms is usually to use some variant of focus strategy. O ne approach is to look for a portion o f the m arket in which the dom inant firm is making high profits which may be used to subsidize other parts of its business. A nother is to focus on a part o f the m arket that has been neglected and develop an offering and strategy to capture it.

THE PRE -E M P TIV E MOVE This is the im plementation of a strategy new to a business area that, because it is first, generates a skill or asset that competitors arc inhibited or prevented from duplicating or countering. A sustainable firstm over advantage can result from technological leadership, pre-emption o f assets and/or buyerswitching costs. Pre-emptive moves can be directed at supply systems, products, production systems, customers or distribution and service systems. A business can gain advantage by pre-empting access to the best or least expensive sources o f raw materials or production equipment. Like many pre-emptive moves, those oriented toward the supply system arc risky. If supply comm itm ents arc made and business docs not materialize or other superior supply sourccs emerge, such a strategy could backfire. The first product to be introduced in a market can enjoy the substantial advantage o f occupying a desirable position. It allows the first entrant the o pportu nity to adopt w hatever positioning strategy it wants. A new com petitor is almost forced into another positioning strategy. A key in some industries is to bccom c the industry standard. A first mover can develop customer loyalty by creating switching costs. A retail chain can pre-empt locations by com m itting early to an area and selecting prim e outlets. It can also discourage com petitors by reducing the profit potential. In many industries, distribution channel capacity limits exist. There is lim ited shelf space or warehousing capacity available. Getting access to the lim ited capacity makes it much harder for com petitors to make inroads.

QUESTIONS 1

How are core competencies related to strategy f o rm ulatio n?

2

H ow relevant are P o rte r's generic strategy typologies in the tw enty-first century?

3

G iven the increasing power of retailers in consumer goods marketing how has this affected producers' brand strategy?

4

H ow m ig ht ethic al branding issues be featured in the way in w hic h o rg a n iz a tio n s prom ote and otherwise m arke t themselves?

5

A re focus strategies becoming more Im portant? W h y or why not.

6

In w hat way should strategy be market led?

186

COMPETITIVE ADVANTAGE AND STRATEGIES

CASE STUDIES Ba r ne y M a l o n e Ba rn ey M al one's parents em igrated from Ireland to A u stra lia in the late 1950s. Eve n tu a lly they settled in Ad elaide in the fa r south-east of the country. Ba rn e y w as brought up and educated in the suburbs of Adelaide and follow ing a number of 'c a re e r o fferin g ' jobs in banking insurance, he opted to take up something much more pra ctica l in the 1980s by going into partnership in his m other's beauty salon business. M o lly M alone had started a beauty salon in Ad elaide soon a fte r landing there in 1958. She had w orked for several beauticians back in Dublin and knew the trade w ell. Business w as brisk and by the tim e Ba rn e y joined the business in the early 1980s, M o lly M alo ne owned three salons in A d elaide. It w a s n 't long, however, before B a rn e y learned the skills of the trade and he had an eye for business too. B a rn e y decided that providing a stra ig h tfo rw a rd beautician service w as not enough and th at the business m ight consider some form of d ive rsificatio n . M oreover, it was in the diversified areas th at he him self w as more interested. W h ile his m other M oily w as a skilled beautician, she lacked the business acumen to explore other things as w ell. Ba rn e y on the other hand w as only too keen to try. Recently, he decided to move into offering hairdressing-related products and contacted an im porter of such items in Ad elaide. The im porter obtained the items from a v arie ty of suppliers in the F a r E a s t who w ere only too keen to get into the grow ing A u stra lia n m arket. In itia lly , B a rn e y had decided to take on four different products. The products w ere sold from each of the three salons in Ad elaide. The four products w ere as follow s:

1

An electric cordless h a ir cu tting set re ta ilin g fo r around A $50. The cordless cutter set brought the users everything they needed for effective home haircutting. The rechargeable mains powered clipper cam e w ith six attachm ents which enabled the user to cut hair to pre-selected lengths. The pack also cam e w ith a choice of b arb er's scissors, a comb, clipper, lubricating oil and cleaning brush, plus a zippered leather-look storage/travel pouch. T here w as also a co lo u r booklet containing step-by-step tips to haircutting.

2

An electric hot a ir brush and styling system re ta ilin g fo r around A$45. The product w as a hot a ir paddle brush which included a series of flow vents to enable the w arm a ir to be directed on to the h a ir as it is brushed through. The product w as considered to be ideal fo r controlling and smoothing the h a ir as w ell as creating 'flic k ups' at the ends. The styling handle cam e w ith a set of additional accessories and attachm ents for creating height, volum e, w aves and curls plus an exclusive styling booklet to give instructions on use.

3

A big-power but sm all-sized h a ir dryer which fitte d in the palm o f the hand. Its high power and m icro a ir con cen trator attachm en t dries thick hair fast and is com pact enough to fold down into a sm all bag. The product has two speeds and the low speed can also be used for drying finger and toe nails afte r varnishing. The product has dual voltage fo r w orld w ide travel and an extralong power cord, plus a tra ve l pouch.

4

An e p ila to r that reta ils fo r around A $60. The e p ilato r rem oves hair as short as 0.25 mm by the root and does the job efficie n tly and alm ost painlessly The whole unit fits into the hand and its curved m icro tweezers glide sm oothly over the contours of the body. The product is cordless and comes w ith a sm art storage pouch, cleaning brush and full instructions.

187

COMPETITIVE ADVANT AGE AND STRATEGIES

Sa le s of the products have been extrem ely good over the past three years and have made a healthy contribution to the sales and profits of the business (around 5 per cent of sales). Ba rn e y now faces an im p ortant decision. M o lly has decided to retire and Ba rn ey is unsure as to w hether he w ants to retain the beauty salon business. A p a rt from M o lly and B a rn e y there are no other members of the im m ediate fam ily in the business. B a rn e y 's brothers and sisters all have other interests and none have expressed any interest in the business. B a rn e y 's w ife runs a knitw are shop w ith one assistant and although she has experience of retailing , she has no experience of the beauty trade. W h ile she is not against the idea of getting involved in the beauty business she is som ewhat w orried w hether she would have the necessary skills and experience to make a really effective contribution. Ea ch of the beauty salons is directly managed by M oily. There is a senior, very experienced assistant at each salon who w orks alongside two or three juniors. How ever, when one of the seniors leaves it usually means th at M o lly has to get involved in the day-to-day operation of the business and deal with clients and their needs. B a rn e y 's role has been essentially that of business m anager, looking afte r the accounts, purchases, tax returns and expenses.

QUESTION Given that M o lly is going to retire, w hat do you think B a rn e y 's best options a re ?

S i n g a p o r e S tan Stan runs an antiques and curios shop in Sin g ap o re. M o st of his clientele are visitors who take a w ay relics or copies as souvenirs of th e ir visit. They w an t something w hich seems to be genuinely oriental in nature to remind them of their visit to the F a r Ea s t. S ta n 's shop is not fa r from the city centre in a shopping m all. It is easily accessible and many passers-by gaze at the various a rtifa cts he has on show. Sta n did a degree in En g lan d where he took com puter science as his princip al subject. He is a proficient program m er and an expert in both softw are and hard w are. How ever, S ta n 's first love was antiques and curios and follow ing a five-year spell w ith a large m ultination al com puter com pany with large offices in K u a la Lum p ur afte r he returned with his degree from England, he decided to return home to his native Sin g ap ore and develop a sm all business of his own specializing in antiques and curios. T h a t was six months ago and in the m eantim e the business has started to develop but it has not really taken off in a big w ay. S ta n can just about make ends meet but still lives at home w ith his parents in their sm all suburban flat. S ta n 's interest in antiques and curios goes back to his childhood when he read books that w ere given to him by an uncle and which contained m any pictures of such items. It is a passion he shares w ith his g irlfriend M a y. She helps from tim e to tim e in the shop w hile S ta n is out looking for new items in the suburbs of S in g a p o re or fu rth er a field in K u a la Lum p ur. He also has co ntacts in Hong Kong and Sh an g h ai - the latter being the place from where his parents originated. The suppliers in both these places reg u larly ship him items th at he has ordered afte r perusing their Mists'. The lists are sent out m onthly along with photographs or som etim es sketches of the items concerned. Stan and M a y hope to m arry in the near future but money is something of a problem and a place of their own hard to even

188

COMPETITIVE ADVANTAGE AND STRATEGIES

think about. In Sing apore living accom m odation is at premium prices. M a y w ent to se cre ta ria l college in Sing apore and has good se cre ta ria l q u alificatio n s. She worked for a bank for three years before deciding to give this up to help Stan run his business. The business has therefore to provide incomes for both S ta n and M ay.

QUESTIONS 1

W h a t are the business's core com petencies? A re they the same as those possessed by Stan and M a y ?

2

How can Stan develop a sustainable com petitive advantage for his business?

189

Chapter 10

Segmentation, targeting and positioning

INTRODUCTION The market that the organization sees through the strategic w indow is a very complcx entity. In evolving strategies to take advantage of the opportunities that exist within it, the organization has to divide it into manageable chunks at which it can direct its relevant rcsourccs and capabilities. M arket segmentation was seen as one of the top-tier priorities for marketing rcscarch according the U S Marketing Institute. There is no doubt that it is o f great importance to practitioners and it is often viewed by managers as a means o f adopting relatively efficient use of marketing rcsourccs (M cD onald and Dunbar, 2004). Segmentation, targeting and positioning are three of the pillars of modern marketing strategy. There arc few markets these days in which an undifferentiated approach w ill pay dividends. The approach today is to acccpt that there arc different demands in the market place and that a product or service needs to be tailored-in specifically to meet these differing demands if it is to stand the best chance of success. The first step in the process of achieving this is to research the market to identify how it might best be segmented into buying groups that arc significantly different from one another in terms of their buying behaviour and product or service requirements. Having analysed the market along appropriate lines so that there are identified segments to the market, the next step is to decide which represent financially viable propositions as far as the organization is concerned. Some may be too small or others too competitive. It is the task of targeting to define those that promise the kind of returns on investment that will help the organization achieve its objectives. Lastly there is the question o f how to place or position oneself in the minds of the users in the targeted segments so that the product or service the organization has to offer stands out from those of competitors. Competitive positioning is the last of the three steps.

S E G ME N T A T I O N Products can be designed and marketed so as to have a more or less general appeal to most customers in a market. 11owever, customers have varying wants and needs and firms arc likely to achicve a greater competitive advantage by producing a number of different offerings to meet the needs of specific groups of people making up segments of the market. Attention needs to be given to procedures for identifying market segments, choosing the best market segments in which to operate and deciding the strategy to effect in entering market segments.

190

S E G M E N T A T IO N , TARGE TIN G AND POSITIONING

M arket segmentation is a technique which can help firms find ways o f establishing a com petitive advantage. A m arket segment is a section o f a m arket w hich possesses one or m ore unique features that both give it an identity and set it apart from other segments. M arket segmentation amounts to partitioning a market into a number o f distinct sections, using criteria which reflect different and distinctive purchasing m otives and behaviour of customers. Segmentation makes it easier for firms to produce goods or services that fit closely w ith what people want. Segmentation can be pul into effect in a variety of ways. M arkets comprise buyers o f products and services w ho differ in their purchase behaviour from one another in various respects. The differences point to varying buyer wants and needs, the different resources at the buyers’ disposal, their place of residence, buying attitudes and buying practices. A ny combination of these differences can be used as a basis for m arket segmentation. The im portant thing that has to be rem em bered, however, is that a m arket segment exists only when people have comm on characteristics as buyers. There arc classes of buyers, or m arket segments, where the difference is only slight in terms of product requirements. In such circumstances, the appropriate approach may be to identify the broad classes o f similar requirements and the comm on characteristics of people who share these require­ ments. Products can then be offered w hich m eet the com m on wants o f the identified segments, and marketing communications relating to the products can be directed through suitable media to appeal to people possessing the identified characteristics. Some travel companies, for example, offer packaged holidays (flight, interm ediate travel, hotel accommodation and excursions) which appeal to groups of people who have slightly different ideas on how they w ill spend their holiday. There is sufficient com m onality o f interest in what such companies have to offer, however, to attract these different groups to make use o f the same packaged holiday. Segmentation is a powerful component o f marketing strategy. Failure to segment the market at all, when competitors are doing so, can lead to almost catastrophic consequences (Figure 10.1).

M ARKET SEGMENTATION RESEARCH A segment is a unique group o f custom ers (o r potential custom ers) w ho share some comm on characteristics which make them different from other groups o f customers. D ifferent segments may have different needs; they may require different versions o f the same product; they may pay different priccs; they may buy in different places; they may be reached by different media. In consum er m arkets, custom ers and prospective custom ers can be grouped together, or ‘segmented’ by: attitude, life-style, age, gender, stage in the family life cycle, or by job type, level of income and many other relevant variables. In industrial markets, customers and prospective customers arc generally grouped together and allocated into a particular segment depending on the customer type, customer size, custom er culture, custom er location. Custom ers and prospective customers can be further segmented according to w hether they are heavy or light users o f a particular product or scrvicc and w hether they arc very loyal to a particular competitor. Segmenting and selecting the optimum m arket segments is called target marketing. This is a vital marketing skill. Target marketing requires an ability to: 1 Find the key characteristic/s that break a market into relevant ‘actionable’ segments. 2

Identify and quantify w h ich customers fall into w hich segments.

3 Target the best segments most likely to give the best results.

191

S E G M E N T A T I O N , T A R GE T IN G AND POSITIONING

The segment must be • Cle arly identifiable so that m arketing c om m unic atio ns can be easily directed at the segment • Large enough to generate the volume of sales and profits that the firm requires 2 5 % of total market M en 3 0 - 4 5 years of age incomes over £ 1 5 , 0 0 0 p.a.

Total market with four clearly identified segments

Figure 10.1

R e q u ir e m e n t s o f a m a r k e t s e g m e n t

Identifying what each segment wants, what it can afford and w h ether it is loyal to a particular com p etitor and how it might respond to an offer is vital inform ation for the m arketer. Careful segmentation and accurate targeting keeps a firm close to the m arket, reduces waste, linds the best customers and helps to keep them satisfied. O n e can segment consumer markets using many different variables including: ■ geographic ■ demographic ■ geodcmographic ■ psychographic ■ behavioural ■ Geographic segments mean location and this can include: streets, tow ns, cities, regions, countries, continents, trading blocs like the European U n io n and N A F T A . ■ Demographics, or social statistics, includes: age, sex, family, life cycle, job type/socio-econom ic and group income level. ■ Geodemographics mixes geographic and demographic data to create categories o f house types and locations, for example, people who live in detached houses in exclusive suburbs. ■ Psychographics attempts to segment according to psychological profiles o f people in terms o f their life-styles, attitudes and personalities, for example, active go getters. ■ Behavioural segments address behaviour patterns w hich include: usage (e.g. heavy or light users) and uses, the way a product or service is used, in other words, the benefit enjoyed. Haley (1968) and W in d (1973) proposed the segmentation o f markets on the basis o f benefits sought by identifiable groups o f consumers. For example, some people use toothpaste for healthy teeth, others to prevent bad breath, and some people buy it for both reasons. M o re than one variable can be used w hen segmenting markets, and indeed, the m ore variables the better since it helps to focus on a tighter target m arket. Tighter targeting means less waste, more relevant offers to appropriate customers and higher custom er satisfaction.

192

S E G M E N T A T IO N , TARGE TIN G AND POSITIONING

Industrial, organizational or business-to-business markets can also be broken into segments and the most appropriate ones selected as target markets. D ifferent variables arc used for these types of markets: custom er type, size, location, how they operate or the corporate culture. Custom er type categorizes the type o f product or service which the custom er organization produces. In the U K , industry type is defined by the SIC , Standard Industrial Classification code. The size o f the customer in terms o f sales, num ber of staff and usage may determ ine w hether it is w orth targeting or not. Size of custom er is also influenced by w hether they are heavy or light users o f a particular product or service, and w hether they are very loyal to a particular competitor.

C A R T O G R A P H Y AND G E O G R A P H I C S E G M E N T A T I O N C om puter technology has enabled the ready production o f maps which display segmentation data effectively. Depending on the data sourcc, the map(s) can be displayed in varying colours or shading patterns (w ith almost unlimited possibilities, according to category, such as proportion of potential or actual customers, per capita spending in a particular product or scrvicc group, or sales achievement versus potential). Such maps can be produced w ith the aid o f a spreadsheet package. M ost mapping sourccs can producc maps on paper, transparency film , or slides, and colour transparency overlays arc almost always a possibility.

S E G M E N T A T I O N , T A R G E T I N G AND P R O D U C T POSITIONING Having introduced the nature of market segmentation, it is now appropriate to examine how it relates to targeting and product positioning. M arketing executives em ploy the following steps:

■ segment the market ■ target the users ■ position the products.

In order to segment a m arket, characteristics have to be identified which distinguish among customers according to their buying preferences. Profiles o f m arket segments w hich reflect different combinations o f these characteristics then have to be constructed. To target the users, the financial appeal o f all segments should be assessed and segments which have the greatest appeal should be selected for targeting. The selection criteria should take account o f the relative financial attractiveness of the segments and the organization’s capability to exploit them. In positioning a product, one should aim to match it w ith that segment ol the m arket where it is most likely to succeed. This involves identifying possible positions for products w ithin each target segment and then producing, adapting and marketing them towards the target market. The product or service should be positioned in such a manner that it stands apart from competing products. The positioning o f a product or service indicates what the product represents, and how customers should evaluate it. Positioning is accomplished through the use of the marketing mix variables, in particular product design and marketing communications. Positioning to achieve product differentiation applies equally

193

S E G M E N T A T I O N , T A R GE T IN G AND POSITIONING

to consum er and to industrial goods. Sometimes product positioning can be effected on the basis of tangible differences (e.g. product features). In many instances, however, custom er perceptions about products can be utilized in order to differentiate and position products. In attempting to meet the specific needs of an identified market segment, a firm can put itself in a better position to obtain a demonstrable com petitive advantage for its product. M arket segments must, o f course, be:

■ clearly identifiable, so that marketing communications can be easily directed at the segment. ■ large enough to generate the volum e of sales and profits that the firm requires.

Having introduced the nature o f market segmentation and looked at how this relates to targeting and positioning, w c w ill now consider strategic aspccts of market segmentation.

SEGMENTATION STRATEGY It has also been found (A bell, 1978) that market segmentation may lead to profit opportunities and strategic w indow s that allow new competitors to challenge established m arket leaders. T he concept o f a strategic w indow im plies that there arc only lim ited periods during which the ‘fit’ between the key requirements o f a market and the particular competencies of an enterprise competing in that m arket arc at an optim um . For exam ple, E v e r Ready dom inated the small battery m arket until D uracell used lithium technology to replace conventional zinc cells The new batteries had operating lives tw o to three times those of E ve r Rcadv, whose market share collapsed (D o v lc , 1994). The tim ing o f investment and disinvestment in a product or scrvicc should coincide w ith periods during w hich the strategic w indow is respectively open and shut. M oreover, as a market develops, new segments become visible and older ones disappear. The marketing strategist is usually prim arily interested in those segments w hich appear to offer the best growth and profit potentials. However, it may be possible to operate very profitably in declining segments as com petition withdraws. Expanding market segments intuitively may seem to be the most appealing. However, it should be borne in mind that such segments w ill also appeal to competitors. Gaining a good position in such segments w ill be difficult and it w ill be expensive in terms of application o f rcsourccs to maintain a position in an expanding m arket segment. A successful strategy, however, could have a substantial pay-off. Static or declining m arket segments seem less appealing. To a potential new entrant they w ill seem decidedly less attractive than ones w hich arc expanding in size. N evertheless, contracting m arket segments can cause some companies to pull out, thereby not only reducing com petition in the m arket segment but also artificially enlarging the market for those firms remaining in it. Firm s may sometimes operate very profitably in a declining m arket segment provided there is a close fit between the needs o f the segment and the firm's own capabilities. Rcsourccs and objectives must be considered when selecting segments. The fit between the market needs and the com pany’s capabilities is im portant. Some firms place a product within a single market segment. Few resources or a lack of competitors in the segment may make this strategy attractive. In so doing a firm may be able to develop a strong market position through gaining an in-depth knowledge o f the segment’s needs over a long period of

194

S E G M E N T A T IO N , TARGE TIN G AND POSITIONING

tim e. Operating economies may also be obtained through specialization. Such a strategy is of course risky sincc a downturn in the market or the sudden emergence of a strong competitor can have a drastic impact on profits. A m ore conservative strategy is to look for a match between capabilities and the demands of several different segments. This makes it possible to spread the risk so that if one segment starts to bccom c unprofitable there arc still others that can bring in cash for the firm. Firm s sometimes concentrate on producing one product or service w hich is supplied to several different custom er groups. In pursuing this strategy a firm can build a good reputation in the area of the specific product. This also can be a risky strategy since it involves concentrating on a single product or service. Concentrating on serving the needs of a particular group of customers represents yet another way o f segmenting the m arket. This can involve making available many different products or scrviccs. Risk in this ease is associated w ith a downturn in the fortunes o f the particular group o f customers selected.

S E G M E N T SYNERGIES Firm s w hich decidc to serve m ore than one segment need to pay close attention to synergies between segments w ith respect to cost, perform ance and technology. Two or m ore segments might provide just the opportunity for exploitation bccausc they share common distribution channels, manufacturing facilities, ctc. The joint cffcct of marketing to all segments creates synergy. That is, the overall effect o f marketing to tw o or more segments is to produce greater sales and profits than if cach segment had been exploited one at a tim e in complete isolation from the others. In international markets it is sometimes a good strategy to use a segment to which one can gain access as a stepping stone to other segments w hich may be difficult to access unless one already has a base in the country concerned.

S E G M E N T I NVASION S T R A T E G Y Having selected segments to enter, the final strategic decision concerns the method of ‘invading’ the segments. The question is w hether firms should invade all the segments at once or w hether they should ‘pick them o ff’ one at a tim e? M uch depends on the resources that firms have available. A firm is m ore likely to be succcssful if it concentrates its efforts on one strategic objective at a time. In so doing it ensures that resources are not too thinly spread. It is also m ore prudent to enter one segment at a time and to conceal the overall plan. It is also more productive to market goods to selective market segments where synergy can be achieved.

M A R K E T T A R G E T I N G AND POSITIONING A target market is the market or market segment which form the focus of the firm ’s marketing efforts. O nce segments have been identified, decisions about how many and w hich custom er groups to target must be made. The options include the following.

195

S E G M E N T A T I O N , T A R GE T IN G AND POSITIONING

■ Mass marketing strategy: offering one product/service concept to most o f the m arket, across many m arket segments. Although scale economies can be achieved, there is a risk that few customers w ill be adequately satisfied. The underlying assumption o f this approach, referred to as undifferentiated marketing, is that all customers in the m arket have sim ilar needs and wants. It is argued that they can therefore be satisfied w ith a single marketing m ix

that is a

standard product or service, similar price levels, one method of distribution and a prom otional mix w hich is directed at everyone.

There are probably only tw o conditions under w h ich a mass m arketing approach is the most appropriate. The first reflects the demand side of the equation and is the position w here there is little variation in the needs o f consumers for a given product or scrvicc This is a situation w hich is becoming increasingly rare sincc in both consumer and industrial markets different individuals and organizations have w id ely varying characteristics, wants, needs and interests. The sccond condition reflects the supply side of the equation and refers to the ability o f the enterprise to develop and sustain a single marketing m ix that satisfies all. W h e re markets are large this capability requires the availability of substantial resources. M o re prevalent strategies arc those w hich take account o f the w ide variation in custom er wants, needs, characteristics and interests. For example:

■ Single segment strategy: conccntrating on a single segment w ith a product/scrvicc concept. This is a relatively cheap option to use in term s o f utilizing rcsourccs, but there is a risk o f putting all the eggs in one basket - if the segment fails the com pany’s financial strength w ill decline rapidly. R o lcx , for example, targets relatively high-income consumers w ith its prestigious wristwatches. W h e n world economies arc buoyant sales w ill be good, but in times of economic recession even the better off can change their spending patterns.

There is also a problem w ith regard to flexibility in changing the product-market posture. Highquality image companies experience difficulty in terms o f moving into product-market segments w hich have a lower-quality image. R olex, for example, would find it impossible to manufacture and m arket chcap quartz watches in competition w ith firms such as Sekonda. R olcx docs, however, move slightly ‘down-m arket’ by producing the Tudor range of watches w hich retail at priccs considerably less than those for the Rolex brand range. But it can only do this by offering a product under a different brand name and ensuring that the product is not too far removed price-wise from the main brand of Rolex. O n the other hand, a single segment strategy docs perm it a firm to specialize and the firm can conccntrate all its energies on satisfying the wants o f a particular m arket segment.

■ Multi-segment strategy: targeting a different product or service concept at each o f a number of segments and developing a marketing mix strategy for each of the selected segments. Although this approach can spread the risk o f being over-committed in one area, it can be extremely resource demanding.

W h ic h target segment strategy a company adopts w ill be dependent on a w ide range o f m arket, product and com petitive factors. Each of these must be carefully considered before a decision is made about segments to be targeted.

196

S E G M E N T A T I O N , T A R GE TI NG AND POSITIONING

F A C T O RS I N F L U E N C I N G CHOICE OF TAR G ET I NG S T R A T E G Y Having looked at some of the ways of targeting let us now consider the kind o f factors which influence choicc of strategy.

Stage of product-market maturity Segmentation strategies are most critical during the m aturity stage of the product market, because buyers’ needs are different. A t the introductory stage of the life cyclc there arc few, if any, producttype competitors; however, competition can occur among alternative product types. If product-type substitution exists, the new market entrant may benefit from targeting one or more segments in the existing product markets. W h ere there arc no product-type substitutes, a broad or relatively undifferentiated targeting strategy may be appropriate al the introductory stage o f the life cyclc. This may amount to attempting to identify a broad segment of potential buyers. The nature and intensity of competition at cach stage of the product life cyclc arc im portant in guiding market targeting decisions.

Extent of buyer differentiation W h en buyer wants are similar throughout the product market, there is less opportunity for extensive segmentation than there is in markets with buyers with different wants. A product market made up of a relatively small number of end-users is more suitable for a broad or relatively undifferentiated targeting strategy, particularly if the value of purchases of individual buyers is small. In addition, the more complcx that the product-markct structure is with rcspcct to competing firms, variety of product-markct offerings, variations in user needs and wants, ctc. the more likely it is that a useful method of segmentation can be found.

Market position A firm ’s market share in an existing product market plays an important role in determining the target market strategy that it uses. Low market share firms have to compete in segments where their strengths are most highly valued and where large competitors are unlikely to compete. The strength may be in the type and range of products that arc offered, the method by which the product is produced, the cost and speed of distribution or the credit and service arrangements. In these firms, management has to spend time identifying and exploiting unique segments rather than attempting to serve entire industries.

Structure and intensity of competition W h e n several firms arc competing in an industry, selective targeting is often an appropriate strategy. Such selectivity is often essential for small firms in fragmented, transitional and global industries. Large firms may be able to reap the benefits of extensive targeting using a multiplesegmentation strategy.

197

S E G M E N T A T I O N , T A R GE TI NG AND POSITIONING

Adequate resources The possession of considerable rcsourccs can often place an organization in a position where it can consider various target market alternatives. W h e re rcsourccs arc limited, however, a company may be forced to adopt a single-segment targeting strategy. The ability to analyse market capabilities is a decided asset, particularly where the task of market segmentation is a complex one. Thus possessing both resources and the capacity to undertake such complex analyses provides firms with flexibility in choosing market targets.

Production and marketing scale economies Choicc of target market strategy may be inHucnced by production and marketing scale economics. The production proccss, for example, may require large-scale output to achicve necessary cost advantages. The same may also apply to marketing and distribution programmes. In such eases an extensive market coverage strategy may be required in order to gain the sales volume necessary to support large-volume production and distribution.

Choice of segment(s) Five factors govern the attractiveness of a segment (Doyle, 1994):

■ segment size ■ currcnt and potential competition ■ segment growth ■ capabilities of the business. ■ profitability of the segment.

Deciding whether or not to enter a particular segment depends essentially on the match between the companies’ capabilities and the characteristics of the segment Although a large, expanding and lucrative market segment must be intuitively appealing, it w ill attract considerable competition so a firm must have the capabilities (rcsourccs) to compete effectively in such a market segment. Similarly, as segments contract, larger competitors may tend to withdraw making the segment less competitive and more attractive to firms with lesser capabilities. Having looked at market targeting we w ill now move on to look at positioning.

POSITIONING Positioning, it has been suggested, represents the most important decision and action that management has to take for the company and its marketing (Davis, 1977), and yet it remains one of the most nebulous and controversial areas o f new product development (M arken, 1987). Targeting and positioning strategics arc interrelated. The choicc of one or more target markets is based, at least in part, on the feasibility of the organization designing and implementing an effective positioning strategy to meet the target’s needs. Positioning strategics used to pursue target markets may vary considerably

198

S E G M E N T A T IO N , TARGE TIN G AND POSITIONING

or they may have comm on features. For example, a firm may have a unique combination of the product offering, distribution approach, price, advertising and personal selling to serve each segment. A lternatively, some marketing mix components may be similar for different segments. An airline scrvicc, for example, can appeal to business and holiday makers although different advertising and sales efforts arc aimed at cach m arket niche and fare priccs may vary across segments. W h a t is it that differentiates one product or service from another, even when they are almost identical? The answer seems to reflect the way in w hich the m arketers o f the product or service position them in the minds of users. Positioning refers to the decisions and activities intended to create and maintain a firm ’s product concept in custom ers’ minds. M arket positioning amounts to arranging for a product or service to occupy a clear, distinctive and desirable place - relative to competing products

in the minds of target customers (Ex h ib it 10.1).

W h a t is being marketed must be pcrccivcd by the sclcctcd target customers to have a distinct image, relative to com petitors, w hich meets with their own desires/expectations. The position o f an offering is related to the attributes ascribcd to it by consumers. These might be such attributes as its standing, its quality and type of people who use it, its strengths and weaknesses, and any other unusual and memorable characteristics it may possess, its pricc and the value it represents to users. The w hole of the m arketing m ix is im portant in developing effective positioning, as attributes of the offering must be closcly in line w ith the targeted custom ers’ expectations and needs, as must the associated pricc points and channels o f distribution. However, prom otional activity is one o f the

E X H I B I T 10.1

G E N E R I C POSITIONING

Hooley and S au nders ( 1 9 9 3 ) propose a generic po sit io nin g model. This provide s the broad alternatives:

c o n s o lid a tio n , la t e n t p o s it io n , d e p o s itio n a n d m e m b e r s h ip p o s it io n . C o n s o lid a t io n

m ig ht be used by m a r k e t lead ers or non- lead ers with a strong reputa tion and where the c haracteristic s of this reputation can be stressed - Land Rover's ruggedness, tra dition and cro ss­ country capa bilit y or V o lv o 's safety reputation. Where there is an unfulfille d need or want p o s itio n in g

la te n t

can be used to establish a reputation - that is, positioning is based on the promise

that need or want w ill be satisfied by the product or service - Sensodyne toothpaste promised c o m f o r t for people with sensitive teeth.

D e p o s itio n in g

is dir e ctly com p etit iv e, although the

c om p etit or may not alw ays be mentioned - e.g. 'o ur pr oduc t of fers than can be said fo r other products we could mention'.

th is a n d th a t,

M e m b e r s h ip p o s itio n in g

which is more

is att ractive for

low er-ord er c om petit ors within a m arket. F irm s m ig ht do this by identifying themselves as one of the main providers of the products or services - Llo yd s Bank identifies itself as 'one of the big four'. W ithin each of the generic positions, the positioning strategy determines the means by which each of the pr oduct's positions are comm unicated. These include positioning by attribute (e.g. distinctiveness or s im ila rit y to other products are mentioned), competition (e.g. offers more than co mpetitors ), applicatio n (e.g. how the produc t w ill benefit the user), user po rtra it s (e.g. people who use the product) and product class as sociation (e.g. with a nostalgic, desirable group of products that have a vintage appeal) (see A a k e r and Shanby, 19 82 ).

199

S E G M E N T A T I O N , T A R GE T IN G AND POSITIONING

fundamental elem ents o f creating an effective positioning, as it is through prom otion that the positioning is communicated to the target audience.

Positioning concepts The positioning concept may be functional, symbolic or experiential. The functional concept is relevant to products designed to solve consumption-related problems for externally generated consumption needs. Toothpastes aiming to prevent cavities and banks offering convenient service fall into this category. The symbolic concept relates to the buyer’s internally generated need for self-enhancement, role position, group membership or ego satisfaction. Cosm etics relating to life-style and clothes stressing image or appropriateness o f occasion arc examples o f this. The experiential conccpt is used to position products that provide sensory pleasure, variety or cognitive stimulation. D ocum entary films and books arc examples o f this.

Q U A L I T A T I V E A P P R O A C H E S TO POSITIONING R E S E A R C H Through the use o f protective techniques during qualitative research, images can be uncovered that serve to show how the brand of a firm is positioned in the mind o f the respondent. Some of the most popular techniques includc:

■ The brand o f the company as an animal or a person. U n d er this approach, respondents arc asked to name a person or an animal that embodies their view o f the product or company under study. ■ Role play. In role playing the respondent is asked to assume the role or behaviour o f another person, or of an object under research. D uring discussion, group m embers are asked to role play the object under research and explain their feelings. This is followed by further probing and discussion to identify how the product is positioned in the mind of the customers. ■ Thefriendly M artian. In this approach, the interview er or group m oderator assumes the role of an alien recently landed from space and asks m embers o f the group to explain a particular product and how it is used. By acting the alien, the m oderator can pose basic questions which the respondents would norm ally assume the m oderator knew the answers to.

A number o f stimuli can be used to prom pt respondents and aid them in articulating the images they hold o f objects. These includc:

■ Association techniques. H ere the respondents are asked for associations with a particular stimulus. ■ Concept boards. Boards with pictures o f the brand or its logo are shown to respondents and their reactions sought through probing. ■ Animatics. Drawings o f key frames from a com m ercial w ith bubble speech. Respondents are then asked for their reactions and helped to describe the feelings they have towards the item being advertised. ■ Cartoon and story completion. Cartoons o f situations, such as the purchase o f a specific brand, w here the speech bubbles are left blank for the respondent to fill in.

200

S E G M E N T A T IO N , TARGE TIN G AND POSITIONING

■

Visual product mapping. This is a qualitative form o f the perceptual mapping approaches. Here respondents arc given a large piecc of paper

the size o f a flip chart

with tw o dimensions

drawn at right angles to one another. Respondents are then given a num ber of objects (such as brands or companies) on small cards. They are then asked to position the cards on the chart w ith similar brands close to cach other but far apart from dissimilar brands. The dimensions w hich can be used to explain these differences are then discussed and w ritten on to maps. Alternatively, the identity o f the dimensions may have been elicited from earlier parts o f the research (e.g. price and quality) and respondents are then asked to position the objects on the dimensions directly.

Q U A N T I T A T I V E A P P R O A C H E S TO POSITIONING R E S E A R C H Although qualitative approaches to image research often focus on the corc object (brand, product, company, c tc .) in isolation, the more quantitative approaches typically consider positioning relative to the positioning of m ajor com petitors and relative to the desires, wants and needs o f the target custom er segments. As a starting point, therefore, it is nccessary to define the com petitive set that w ill be analysed along w ith the focal brand, product or company. O ne o f the simplest methods o f collecting quantitative positioning data is through the use of attitude or attribute scaling. In this approach, the dimensions that the respondent uses to differentiate and choose between alternative offerings arc included in a survey and presented as a semantic scale to enable respondents to express their views.

Semantic differential scale The scaling technique wras originated by Osgood et al. (1987). The originators o f the technique discovered that the perceived meaning o f a variety of words and concepts could be deconstructed in terms o f three components: potency, activity and evaluation. In marketing research, the semantic differential is frequently used to measure attitudes towards the imagery surrounding products and services. In general, only the evaluative (e.g. good/bad) com ponent is measured. The scale consists o f a num ber of bipolar adjective phrases and statements that could be used to describe the objectives being evaluated. in the original work o f Osgood et al. only single-word bipolar adjectives, not phrases, w ere used. How ever, comm on practice in marketing rcscarch applications is to use adjective phrases as w ell. An example is shown in Exhibit 10.3. Each bipolar adjective rating scalc consists of seven categories, w ith neither numerical labels nor category descriptions other than for the anchor categories. To remove any position bias, favourable and unfavourable adjective phrases are randomly distributed to the left hand and right hand anchor positions. The respondent is asked to mark one of the seven categories that best describes his or her view s about the object along the continuum implied by the bipolar object pair. An overall attitude scorc is computed by summing the responses on cach adjective pair. Before computing the overall scorc, the response categories must be coded. Usually the categories arc assigned values from 1 to 7, where 1 is assigned to the unfavourable adjective phrase and 7 is assigned to the favourable adjcctive phrase. Thus, before assigning codcs and summing the researcher must be careful to reverse the individual scalc items where necessary so that each attitude continuum ranges from unfavourable to favourable or vice versa.

201

S E G M E N T A T I O N , T A R GE T IN G AND POSITIONING

Ratings on cach o f the bipolar adjective pairs arc frequently used to provide a profile or image of the objects being investigated. This is achieved by plotting the mean ratings on each of the bipolar adjective pairs for each of the objects. Exhibit 10.2 shows an example o f such profiling. In order to facilitate interpretation of the profile, all o f the favourable adjective phrases are positioned on the same side. From this kind of plot it is possible to obtain an overall impression o f people’s perceptions of the object. In Exhibit 10.3, a comparison is made between tw o restaurants. N o t only does the scale perm it such comparisons to be taken in at a glance but it also allows one to see fairly readily w here more in-depth research is required. The decor of ‘our restaurant’, for example, is perceived to be at or about

EXHIBIT 10.2 S E MA NT I C D IF F ER E NT I AL We would like you to let us know what you think about our restaurant. Below are a number of statements that could be used to describe what we have to offer. For each pair of adjective phrases we would like you to mark the category that best describes your feelings about us. Old-fashioned

Modern

Expensive

Cheap

Friendly service

Unfriendly service

Helpful assistance

Unhelpful staff

Wide ranae of menus

Limited ranae of menus

Inviting atmosphere

Cold atmosphere

Slow service

Fast service

Attractive décor

Unattractive décor

Convenient opening hours

___

Inconvenient opening hours

EXHIBIT 10.3 S EM A N T I C D I F F E R EN T IA L PROFILE 2~;__;

Old-fashioned Expensive ___

Helpful assistance

___

Wide range of menus

___

Inviting atmosphere

___

Slow service

___

Attractive décor

___

Key 1: Our restaurant

202

:

___

:

Friendly service

Convenient opening hours

J i

__ :

Cheap lj :

2 /

___

Unfriendly service

___

Limited range of menus

___

Cold atmosphere

___

Fast service

Unhelpful staff

1 ^ 2 \ ^

2

__ : 2 / N . __ :^ 2 j:__ 2 Ç

Modern

■ .X '

12V/:

Si

___

Unattractive décor Inconvenient opening hours 2: Competitor's restaurant

S E G M E N T A T I O N , T A R GE TI NG AND POSITIONING

the neutral point. Further research is warranted to uncover how it might be improved to the taste of the clientele.

MU L TI - DI M E NS I O NA L SCALING AND P E R C E P T U A L MAPPING Product maps, sociograms, sociometric maps, psychometric maps, stimulus-response diagrams, relationship maps, concept maps, etc. arc names which arc sometimes given to perceptual maps. A perceptual map is assumed to be a map that involves object-to-object relationships that are not amenable to simple, physical measurement. It is easier to understand relationships between facts, events or objects if w'e can visualize these relationships spatially. In marketing research there are a number of techniques which go under the heading of multi-dimensional scaling and perceptual mapping techniques which enable us to do exactly that. They allow us to see visually how products and services are perceived in relationship to one another by users. The appropriateness of the technique depends on the type of data collected.

Correspondence analysis Consumers arc classified into one o f 10 categories according to their favourite soft drink. They arc then asked to pick any of 8 product attributes describing their favourite soft drink. Exhibit 10.4 identifies the number o f times cach attribute was associated with cach favourite drink category.

MDPREF Another useful mapping device involves having people rate products against a list of attributes and then using the average scores obtained by products against each attribute as a basis for producing a map (see Exhibit 10.5).

E XHIBIT 10.4 Respondent category Pepsi

C O R R E S P O N D E N C E A NA L Y S I S MET HO D 1

2 4

4

3

5

5

5

20

6 1

7

8

21

2

1

Coke

2

5

7

13

1

16

4

2

Coke classic

9

9

8

12

2

17

5

3

Diet Pepsi

5

11

10

20

1

15

3

2

Diet Slice

25

25

19

19

20

11

11

8

Diet 7 U p

25

25

21

20

19

14

12

10

Dr Pepper

22

23

18

15

20

12

14

8

Slice

17

17

18

11

11

10

11

3

7Up

7

11

8

4

3

7

3

2

TAB

12

13

13

9

11

8

12

9

203

S E G M E N T A T I O N , T A R G E T I N G A ND POSITIONING

Correspondence analysis provides a perceptual map showing the relationship between the various brands and attributes on which they were judged 8

J

B

7 5 G

6

c 4

F E H

A

3

1 D

2 I High score

A Pepsi

1 Fruitiness

non-fruity

B Coke

2 Carbonation

high carbonation

C Coke Classic

3 Calories

low calories

D Diet Pepsi

4 Tartness

very sweet

E Diet Slice

5 Quenching

not quenching

F Diet7Up

6

popular with others

Popularity

G Dr Pepper

7 After taste

no after taste

H Slice

8

a pick me up

I

7 Up

J

Tab

Pick me up

Correspondence analysis can also be used in a different way to produce a perceptual map. In this case respondents indicate with a 1 or 0 whether they purchase the brand or not Brand (+ -)

Respondent 1 2 3 4 5

..............................

(purchased) Coke +

1 0 0 0

Diet Coke +

1 1 1 1 1

1

(not purchased) Coke-

0

1 1 1 0

Diet Coke - 0 0 0 0 0 Perceptual maps are produced by correspondence analysis which shows the clustering of the products in terms of similarity and also the clusterings of the people in terms of their similarities in tastes.

204

S E G M E N T A T I O N , T A R GE TI NG AND POSITIONING

EXHIBIT 10.5 MDPREF METHOD A Fruity flavour............... ... Non fruity flavour B Low carbonation........... ...... High carbonation H Not a pick me u p ........... ....... A pick me up Products and ratings A 5.79

6.49

2.86

B 3.42

3.90

3.90

H 3.07

2.72

4.16

Coke

Coke

Classic

......... 7 Up

M D PR E F produces a map of the brands and the attributes: E

B

H E C T 1

3 5

9

1 /0

A

2 *7

r

G D 8

A

1 Coke

B Fruitiness

2 Classic Coke

C Carbonation

3

etc.

Diet Pepsi

etc.

K Y S T and associated techniques K Y ST works with data which have been rank ordered (see Exhibit 10.6).

K Y S T and P R E F M A P Here we are interested in seeing how products arc pcrccivcd with rcspcct to ‘ideal points’. First, a diagonal matrix averaged out and rc-rankcd is obtained for K Y S T (assuming several people arc participating in the exercise). Next, respondents are asked to rank order the products in order of preference (see Exhibit 10.7).

205

S E G M E N T A T I O N , T A R GE T I N G AND POSITIONING

E X H I B I T 10.6 R A N K O R D E R E D D A T A M E T H O D Here is a list of 45 pairs of soft drinks. Please rank them in terms of sim ilarity from the most sim ilar to the least sim ilar. Assign the number 1 to the pair that is the most sim ilar, 2 to the next most sim ilar pair, and so forth, until the value of 45 is assigned to the least sim ilar pair. Rank Coke - Coke Classic

_____

Coke - Diet Pepsi

_____

Coke Classic - Diet Pepsi

_____

Tab - 7 Up Rank order of sim ilarities between pairs of drinks P

C

CC

Pepsi

1

Coke

3

2

Coke Classic

7

9

8

Diet Pepsi

27

28

32

Diet Slice

41

42

43

12

11

10

Diet 7Up

Tab

Dimension 1 = Cola flavour

Dimension 2 = Dietness

* Dr Pepper * S lice Coke * Coke Classic *7 U P

Pepsi

* Diet slice * Diet 7 U P

* Tab *D ie t Pepsi dim 1

N B . W h ere more than one person makes a rating, which is usually the case, the diagonal m atrix is redrawn to show average rankings. The lowest average ranking is then redesignated '1 ' and so on.

206

S E G M E N T A T I O N , T A R GE TI NG AND POSITIONING

EXHIBIT 10.7 AVERAGE RANKINGS: P R EF MA P METHOD Here the average rankings were: Pepsi 3.91, Coke 3.37, Coke Classic 5.00, etc. The rankings along with the numerical output of the KYST program (two vectors defining the position of products on the grid) are then fed into the P R E F M A P program. In this case a map is produced which shows the positioning of the products and the ideal points.

12

7

9 ; ideal pts

5 8 6

3

10 4

For the group of people 9, '7Up' appears nearest the ideal points.

K Y S T with PROFIT Instead of preference ordering, this time ratings for cach of the attributes of the product are obtained in addition to the K Y ST output vcctors.The average values for scorcs on the attributes arc fed into P R O F IT along with the vcctor scorcs from K Y S T (see Exhibit 10.8).

A simple approach to perceptual mapping Nakanishi and Coop (2003) argue that marketing rcsearchcrs commonly interpret joint-spacc solutions as if the distances betw'ecn the points from different sets arc meaningful and that this is despite appropriate warnings from the authors of joint-space methods that the origin (or m etric) of the row' objects is not the same as the origin (or m etric). They develop a method of m etric unfolding as an alternative method (Nakanishi and Coop, 2003). They also argue that marketing practitioners and academics have lost interest in multidimensional scaling (M D S ) in general, and joint-spacc solutions in particular, in rcccnt years becausc neither marketing academics nor psychometricians have developed straightforward answers for the most compelling questions. O f course the point of perceptual mapping representation is that it appeals to our visual senses and as has been often quoted a picture is worth a thousand words. Indeed the w hole idea of graphical representation o f numbers is to make it easier for the viewer to comprehend the meaning o f what he or she is examining.

207

S E G M E N T A T I O N , T A R GE TI NG A ND POSITIONING

E XH I B I T 10.8 A T T R I B U T E RATINGS: P ROFIT M ET H O D

6 FD 9

B

58

A

1 H 4 #

CG 7

E

Products are number 1 to 9, except # = products 2 and 3 (i.e. the same point): A = Appearance, B = Fruitiness, C = Carbonation, D = Calories, E = Tartness, F = Thirst quenching, G = Popularity, H = After taste, I = Pick me up

Bearing this in mind the following simple way of representing data collected from a survey has some value and could be construed to be a perceptual map of sorts. It assumes that we can identify the principal criteria upon w hich to make judgements - perhaps by means of a focus group study — and various other relatively unsophisticated approaches to statistical representation arc also applied in the approach. In Table 10.1 we assume that a sample of 36 people arc asked to rate on an 11 -point scalc running from —5 to +5 their perception of various means of going on holiday to continental Europe from the U K . The two criterion variables assessed arc convenience (convenient= + 5, inconvenient = — 5) and cost (expensive = + 5, inexpensive — ~ 5). The data is entered into sheet 1 of a spreadsheet as shown in Table 10.1 and the average value is calculated on cach rating that has been taken. W e can then show7the summary average along with estimated market shares of each travel methods diagrammatically as follows on the second sheet of the spreadsheet (Figure 10.2). Clearly such an approach does have limitations but on the other hand it does appeal to the need to have a visually comprehendible representation of data that can easily be collected and analysed.

Corporate positioning A more rcccnt development has been the recognition that positioning is not just a matter between the brand owner and customers, but between the brand owner and every one of its stakeholders. The task has become one ol deciding what is to be positioned and among whom it is to be positioned. In general terms, the solutions fall in two categories. In the first, it is the traditional view where a product, a marketing mix and a brand has to be positioned among the targeted customers. In the second, it is the soul of the entire organization — all-inclusive of its partners up and dow n the value

208

Table 10.1

P erceptual m apping example Rail and

A ir and A ir and car Responder hire cost

Convenience

public

Rail and

public

transport

car hire

transport

cost

Convenience

cost

Convenience

cost

1

2

-4

2

-2

2

-3

1

2

3

3

4

4

4

5

5

3

2

2

3

3

0

1

3

4

2

2

2

-1

3

3

3

5

2

-4

4

-4

4

3

3

6

4

4

4

4

5

5

4

7

5

5

4

4

4

4

5

8

2

3

3

3

3

3

5

9

4

3

-2

2

-3

0

3

10

4

4

2

1

3

4

0

11

4

4

4

4

4

3

3

12

4

4

-3

-3

3

3

3

13

4

4

3

3

3

3

4

14

3

2

4

4

3

3

3

15

1

1

-1

-1

3

3

1

16

5

4

5

4

5

4

5

17

-5

-3

-5

-3

-5

-3

-5

Ferry and Ferry and

public

own car

transport

cost

Convcnicncc

cost

-3

0

2

1

3

4

2

5

3

2

1

-2

2

1

3

-3

4

-1

Coach Convcnicncc tour cost 1

1

-1

5

-1

-1

2

4

-2

2

-1

-4

4

4

3

3

3

3

-3

-3

1

2

-

3

0

3

4

1

3

-5

-4

-4

-4

1

-3

1

-1

2

2

2

4

3

3

3

2

2

5

-5

-6

2

2

-5

3

-1

2

0

-3

3

2

1

2

3

2

1

-3

-3

2

2

-4

4

5

-3

4

3

-3

-5

-5

-5

-5

-3

-5

1

-1

-

Table 10.1

continued

18

4

4

3

2

4

19

4

-5

3

1

3

20

4

4

3

4

4

21

2

5

-1

3

1

22

4

2

-1

2

1

23

2

4

1

2

1

24

3

3

2

2

-1

25

3

4

3

4

2

26

3

4

3

3

5

27

2

2

0

1

2

28

3

3

0

3

4

29

2

3

-1

3

1

30

1

2

1

2

-1

31

3

3

2

4

3

32

2

3

1

4

3

33

4

3

5

3

5

34

3

4

4

4

5

35

4

4

4

5

5

36

3

4

5

5

5

2 . 7 7 7 7 7 77 7 8

2 . 55555 556

1.944444

2 . 1 9 4 4 4 44 4

2. 583333

4

4

3

-2

3

-2

3

4

5

1

-3

-5

1

4

-2

-3

4

5

-5

-5

3

0

-5

-5

2

3

-1

-1

-1

3

-2

-5

1

3

-2

-2

-2

2

-3

-5

2

3

-2

-2

-1

-1

-1

-3

2

2

-5

-5

1

-3

-2

-3

3

4

-2

-2

3

2

-4

-3

3

4

-1

-1

4

3

-5

-3

0

0

-2

-3

2

-1

-2

-2

2

3

1

-1

4

2

-1

-4

1

3

-3

-3

-2

3

-3

-5

1

2

-5

-5

1

-1

-3

-3

2

3

-1

1

4

2

-2

-3

2

3

-5

-5

-1

3

-4

-5

5

5

5

-3

3

-1

-1

-5

4

4

1

-2

2

1

-1

-4

5

5

2

1

1

1

-1

-4

4

5

1

2

2

1

-4

-5

2. 722222

2. 5 8333 33

1. 333333

0. 944444

-1.55556

-2.47222222

-0.72222

-1.444444444

Perceptual map of cost and Convenience of travel arrangements when spending a holiday Convenient A i r & C a r Hire

Cost

Convenient

2.777778

2.555555556

M a r k e t Share

4-i

S iz e of c ir c le indicates share o f the m a r k e t

12

t r a v e l l i n g in t h i s

A i r & Public Transport

1.944444

2.194444444

11

Rail & C a r Hire

2.194444

2.583333333

9

manner

3-

2-

Rail & Public Transport

F e r r y & Own c a r

2.25

2.722222222

7

2.583333

-0.722222222

16

-1.444444

1.333333333

3

0.944444

-1.555555556

8

1 -

Ferry & Public T ransport Coach Tour

— r—

-3

-2

~d~

Inexpensive

Expensive -1

N o t e : M a r k e t s h a r e s d o n o t a d d up t o 1 0 0 %

-

b e c a u s e n o t a l l m e t h o d s o f t r a v e l ha ve been s u r v e y e d

A i r and c a r hire •

-2 -

A i r and public transport R a i l a n d c a r h ir e - 3 -

Rail and public tra n sp o rt Ferry and own car •

Ferry and public transport Coach tour

Figure 10.2

T-

3

-1

-4

Inconvenient

Perceptual map o f cost and convenience o f tra v e l arrangem ents when spending a holiday

S E G M E N T A T IO N , T A R G E T IN G AND POSITIONING

chain — w h ich has to be positioned among all the stakeholders o f an organization. T he second, m ore recent view , reflects that positioning is developing into an integrative construct w h ich depends upon and affects every individual in the organization. K a p fc re r (1992) argues that brand positioning is a process o f emphasizing the bran d’s distinctive and m otivating attributes in the light o f com p etition. Positioning refers both to the prod uct segment the brand belongs to and how it differs specifically from other brands in the segment. Po sitio n in g is becom ing the u niversal strategic preoccu patio n o f en tire organizations and the co n cern o f top m anagem ent. Eisen hardt and B ro w n (1 9 9 9 ) note that in a business en viro n m en t o f continuous flux it is m ore im p o rtan t to build corporate level strategic processes that facilitate dynam ic repositioning than it is to build any defensible position. In the pursuit o f this, organizations engage in ‘patching’ . T his is the strategic proccss by w h ich the business is ro u tin ely re-mapped to changing m arket opportunities. A good exam ple was been illustrated by V irg in (Branson , 1998).The V irg in brand was repositioned to represent service and value for the custom er, supported by an organizational cu ltu re and approach to business that stressed em ployee satisfaction, creativity, irreveren ce and fun.

QUESTIONS 1

W h a t bene fits are to be gained fro m e m p lo y in g m a r k e t se gm e ntatio n as opposed to t re a tin g the m a r k e t as a s in gle e n tity ? W h y should some bases o f se g m e n t a t io n be m o re su ita b le f o r some pro ducts than others?

2

W h a t f a c t o r s i m p a c t upon a f i r m ' s s e le ctio n of m a r k e t seg m ents? W h a t do you und erstan d by 'se gm ent s t r a te g ie s' and how do these influence a f i r m ' s a p p r o a c h to m a r k e t se g m e n ta tio n ?

3

W h a t do you understand by a co m p etit iv e posit io nin g st rategy? H o w is product o r service positioning a c c o m p lis h e d ? Discus s the f a c to r s t h a t influence choice of po s it io n in g strategy.

4

W h a t is r e p o sit io n in g and why are pro d u c ts and se rvices reposit io ned p e r io d ic a lly ?

5

H o w w ould you e valu ate c o m p e tit iv e advantag e based on p o s it io n in g an aly sis ?

CASE STUDIES Home Baker M a k in g cak e s and othe r s i m i l a r p astim es are a re g u la r d om e stic o c c u p a tio n in m any homes. How ever, home b a k in g of bread w as f o r m any years considered a bit old fashio ned and a tim e - c o n s u m in g chore w h ic h did not m ake a gre at deal of sense given the a m o u n t of off-the-s helf bread th a t could be bought. H om e ba king of bread on a re gular basis w as dead m any years before the a r riv a l of convenience shopping - at least in western developed countrie s. However, everything has its re viv al in due cours e it seems. W it h the turn of the tw e n t y - fir s t century, an interest in home b a k in g m ay once a g ain be ju st around the co rn er. E as y to use, even if you have never baked before, the H om e B a k e r enab les even the ab solu te novice to pr oduce pe rfe ct loaves of bread. The p roduc e rs of H om e B a k e r c l a im th a t nothing could be more

212

S E G M E N T A T I O N , T A R GE T I N G AND POSITIONING

g ratifying to people than adding basic ingredients to the stylish, a ttra ctive bread-making m achine, w alking aw ay and returning later to a loaf of frag ra n t, just-baked bread. The program m able Home B a k e r can be set up to 13 hours in advance and has 6 different bread settings for all types of loaf and even mixes dough for pizza and pitta bread. There are also a w ealth of other features which include crust colour control, fru it and nut bread c a p a b ility, easy rem ovable basket and other im portant features. The Home B a k e r can make loaves up to 6 8 Og (1 .5 1 b ) and includes a fitted m ains plug and a bread-making recipe book. The firm intends to introduce the product into the U K later in the year and has plans to move into west European m arkets e arly next spring. Key questions concern m arket segmentation, m arket targeting and strategic positioning of the product.

QUESTIONS 1

How should this product be m arketed ?

2

How should the firm segment the m arket - international and dom estic?

3

W h a t are likely to be the m arket targets of interest?

4

How should it position itself tow ards identified targ et m arkets?

T h e O b s e r va t o r y: s e g m e n t a t i o n s trat egy One can just catch sight on a c le a r day of the radio telescope looming up as one approaches the area. The telescope has stood there for the past fifty years and w hile today there are more powerful telescopes it still rem ains as a potent rem inder to scientific endeavour in scanning the heavens fo r inform ation about the universe in which we live. S in ce being bu ilt it has played a m ajor role in the discovery of exciting objects such as quasars and g ra vita tio n a l lenses. The U niversity astronom ers who w ork at the fa c ility use the telescope and others around the w orld to observe m any exciting events - the birth and death of stars, new planets outside our solar system, super massive black holes at the hearts of other g alaxies and the origin of the universe in the B ig Ban g . Now it is used in a netw ork of telescopes stretching across the w orld. The V is ito r Centre com prises an exhibition room , 3D theatre, large arb oretum , café and shop. V isito rs can learn about the w ork of the O bservatory in the exhibition room. The theatre provides an experience of a journey to planets in the solar system in 3D. F o r others, various tra ils and natural habitats of the extensive arboretum w ith its 2,000 species of trees and shrubs

QUESTIONS 1

How m ight the organization segment the m arket fo r w ith respect to people who m ight be interested to make use of its fa cilitie s.

2

In w hat w ays m ight the w ants or needs of the different m arket segments d iffe r?

213

S E G M E N T A T I O N , T A R G E T I N G AND POSITIONING

Cas a R eso r t C asa R esort is located about 60 kilom etres a w ay from K u a la Lum pur, the ca p ital city of M a la y sia , in the resort town of P o rt Dickson. P o rt Dickson is one of the m ost frequented seaside resorts on the west coast of M a la y s ia due to its close vicin ity to K u a la Lum p ur and easy accessib ility fo r visitors from Sin g a p o re . P o r t Dickson derived its name from S ir Jo h n F re d e ric k Dickson, the B ritis h resident responsible for developing the are a into a sig n ifican t trading port in the eighteenth century. Now P o rt Dickson, or more popularly known as P D, has been a weekend retreat fo r city dw ellers seeking a break from the hustle and bustle of city life. The popularity of this resort town and its close vicin ity to K u a la Lum pur, has attra cte d a number of property developers to focus their investm ent and property developm ent here. The mid-1990s saw the booming of resort and hotel developm ent in this are a . How ever, the fin an cial crisis of 1997 that hit a num ber of S o u th e a st A sian countries including M a la y s ia , w as bad news to the least stable developers and this led to a number of abandoned projects. T h at w as the story of Casa Resort which w as a site of an abandoned hotel developm ent whose fate w as sealed until the Urban Developm ent A uthority or U DA Holdings decided that this w as an opportunity that could lead to a potentially lucrative business undertaking. Established by the governm ent on 12 Novem ber 1971, the Urban Developm ent A u th o rity ( U D A ) w as given the responsibility to prom ote planned urban developm ent but it has now expanded into the hospitality industry. Casa R esort in P o rt Dickson is one of several projects undertaken by U DA where abandoned projects are turned into a ttra c tiv e sites. T oday, C asa has been transform ed from three blocks of ugly abandoned buildings a t the much frequented Telok Kem ang or Kem ang B a y beach in P o rt Dickson, into a resort that is alw a ys bustling w ith a c tiv ities and alw ays filled w ith the sounds of visitors. W h en it first opened in M a y 2 0 0 3, business at the beginning w as slow but it later picked up its m om entum when it introduced a to ta lly new concept in resort m ark etin g in P o rt D ickson, i.e. by targeting m ainly to corp orations who are keen to organize fam ily days or corp orate functions for staff and their fam ilies. Business picked up trem endously and C asa's weekend occupancy rate jumped to alm ost 90 per cent and at tim es 99 per cent on extrem ely busy weekends. The ta rg et m arket has become more defined and the resort is positioned as a fa m ily resort but it targ ets corp orations and governm ent agencies ra th e r than ind ivid ual fa m ilie s. T h is becam e its m ain stra teg ic focus as C asa moves to operationalize its m arketing strategies. Thus, m arketing program m es th at are aligned to corporation needs in the form of personalized selling and event m arketing w as put in full force. B y the end of 2005, C asa w as experiencing positive grow th and this has continued until today. R esort and hotel operators in P o rt Dickson are w ell a w are that it has never been easy to a ttra c t a strong pool of custom ers because of the com petitive pressure w ith too many operators targeting sim ilar m arkets. Yet, Casa prom ises something different and its perform ance since its inception has proven th at w ith the right positioning and m arketing orientation, it is possible to a ttra c t and sustain loyal custom ers. Indeed, custom er lo ya lty is som ething they value and they understand its sig n ifican ce. Satisfie d custom ers constitute the resort's custom er relationship cap ital and are likely to contribute to brand equity. C asa is banking on its loyal custom ers to sustain its existence and to ensure long term pro fitab ility. H owever, there is a need to constantly reassess its offerings and at tim es changing ta ctica l steps to ensure th a t custom er needs are m et. This is a challeng e th a t C asa cu rre n tly faces when com petitive pressure mounts as new hotel and resort operators who have forgotten the painful experience of 1997 and have decided to try their luck and open new outlets in P o rt Dickson.

214

S E G M E N T A T I O N , T A R GE T I N G AND POSITIONING

QUESTIONS

1

In the face of aggressive com petition, how should C asa reposition itself?

2

Should C asa focus on a new m arket segment w ith the entrance of new com petitors in the m a rk et? W hy?

3

W h a t suggestions would you make to ensure th at Casa could retain its loyal custom ers? C ontributed by A ssociate Pro fesso r Dr Rosm im ah M ohd Roslin, U n iversiti Teknologi M A R A , M a la y sia

C O M U N I n t e rn a t io na l

Company overview COMUN

In te rn a tio n a l, In c . ( ' C O M U N ' or the 'C o m p a n y ') is a rap id ly em erging com m unication

services firm providing messaging and com m unication infrastructure services to the L a tin A m erican region, starting w ith M ex ico. The Com pany designs, develops, sells, and supports com plete messag­ ing services fo r both in d ivid u a ls and co rp o ra tio n s seeking to extend co m m u n icatio n s to the Internet. The Com pany aim s to become the leading provider of integrated em ail, messaging solutions, and com m unications services for enterprises and individuals across L a tin A m erica .

Core business COMUN

aim s to become the leading p rovid er of com plete end-to-end In te rn e t m essaging and

collaboration solutions across the Latin A m erican region starting with M exico. The Com pany's complete range of services has positioned it at the fo refront of the messaging revolution in La tin A m erica .

■

Outsourced Messaging Solutions (V M S '). C O M U N ' s messaging platform is capable of providing services, both on a hosted and licensed basis, th at enable clients to provide feature-rich em ail, messaging, collaboration, and directory services to their customers and employees. The Com pany's all-encom passing strategy provides fle x ib ility to clients by giving them the option of: (1 ) using COM U N 's hosted services; (2 ) licensing the software to run on their own hardw are; or (3 ) selecting a com bination of both. These solutions enable clients to im prove messaging perform ance with custom ers and employees, reduce the cost of providing messaging services, and focus on other core aspects of their businesses.

■

Consumer E m a il Services ('C E S '). O ffered through a v a rie ty of targeted a ffilia te websites, COM U N currently has about 2 0 0 ,0 0 0 consum er em ail users and is on tra ck to exceed 1 m illion users. This service, offered m ostly free to end users, is com prised of a basic w ebm ail application and em ail red irection services using the C o m p an y's expansive reg istry of p o p ular dom ain names.

215

S E G M E N T A T I O N , T A R G E T I N G AND POSITIONING

■

Domain Registry Services ('DRS'). T o date, C O M U N has registered app roxim ately 2-3 per cent of all M exican domain names through an alliance with the governing body for the M exican Internet. Through another w orking relationship, the Com pany has acquired a valuable inventory of unique nam es (c itie s, sports team s, and a ffin ity group s) th a t it uses to personalize and enhance its consum er em ail services as w ell as to provide com petitive synergies fo r its a ffilia te websites and partnerships.

These three p rim ary services, coupled with an experienced m anagem ent team , have positioned the firm to cap italize on the growing m arket opportunity to serve M e x ico 's digital w orkplace. The C om pany's com petitive edge lies in its a b ility to c a ter d irectly to the regional m arkets by offering services tailored to local cultures and needs. In the dom inant business trend of globalization , the successful player w ill be one who offers a local approach to its products or services. C O M U N has positioned Itself to offer such localized messaging services to the M exican m arket, one of the fastest growing Internet service m arkets in the w orld and a grow ing economy.

G lobal strategy The Com pany plans to become the prem ier provider of messaging and com m unication infrastructure services in the L a tin A m erican region through the follow ing key strategies:

■

Strengthen technology platform for messaging application. C O M U N intends to continue developing and expanding its suite of services by im proving the fu n ctionality of its technology architecture. The Com pany also plans to develop com plem entary app lications that w ill extend the fu n ctio n ality of the messaging platform to w ireless devices and co llab oration platform s.

■

Develop and leverage strategic relationships. The Com pany aim s to expand its existing re la ­ tionships w ith other In te rn e t in fra stru c tu re service providers, d ata centres, co m m u n icatio n s providers, and leading web po rtals to increase its custom er base.

■

Increase sales and marketing efforts. C O M U N w ill begin to build up a su bstan tial acco unt m anagem ent and custom er service team to support its growing corp orate client base. In addition, the Com pany plans to hire experienced sales professionals to ensure this growth.

■

Expand throughout Latin Am erican region. In addition to targeting the M ex ican m arket, the Com pany anticipates an extensive rollout throughout the L a tin A m erican region.

M arket opportunity No Internet business is more ubiquitous than em ail. Ju p ite r C om m unications estim ates that 93 per cent of Internet users w orldw ide regularly use em ail, making this activity the most popular use of the Internet (searching is second w ith 83 per cent, and downloading softw are is th ird ). W ith more than 500 m illion people and 7 per cent of the w o rld 's G D P , La tin A m e ric a is a large m arket opportunity fo r the developm ent of the In tern et. A ccording to Lehm an Bro th ers estim ates, the total number of unique web users in L a tin A m e ric a w as projected to grow at a C A G R of 37 per cent from 15 m illion in 2000 to alm ost 75 m illion by 2005. In tern et penetration w as expected to increase from less than 3 per cent in 2000 to over 10 per cent by 2005.

216

S E G M E N T A T I O N , T A R GE T I N G AND POSITIONING

A young population (one-third of the population is under 15 years old) makes the region an even m ore interesting ta rg e t for te c h n o lo g ic a lly advanced services such as e-messaging and online co llab o ratio n . In fact, 90 per cent of the users expected to be online in 2005 were not yet connected.

Products and services C O M U N offers its messaging solution through both outsourced services, w hereby C O M U N hosts the softw are on its servers, and server softw are packages, w hereby the custom er licenses the softw are to run on the custo m er's own servers. Through either of these approaches, or a com bination thereof, COM U N ' s messaging solutions can satisfy v irtu a lly all the messaging needs of corp orate custom ers (T ab le 1 0 .2 ). T h is targ eted m essaging solution is packaged and custom ized to satisfy each cu sto m er's com ­ m unications needs. In addition, the product interface is branded w ith the corresponding corporate logo and com pany identity. The free consumer em ail service, on the other hand, is defined by limited features and directed consum er advertising. Although the underlying technology platform is the sim ilar, the visible product varies g reatly between the O M S product and the C E S product.

Target industries C O M U N currently offers unified messaging products and services to thousands of end users across its ta rg et m arkets. C O M U N focuses on various types of consumers and com panies th at have either a focus on technology or th at are sm all to medium-sized professional services firm s th a t would benefit by providing employees and clients w ith remote access to corp orate inform ation and services. Som e of the segments targeted by COM U N are:

■

Outsourced Messaging Solutions C O M S ' ) . COM U N 's corp orate messaging platform is targeted a t d elivering a service to the fo llo w in g types of businesses: In te rn e t S e rv ic e

Pro v id e rs,

T eleco m m u n icatio n s P ro v id e rs, W e b P o rta ls , W e b Hosting C om panies/D ata Centers, S m a ll/ M edium Sized C om panies, L a rg e C o rp o ra tio n s.T o these custom ers, C O M U N aim s to d e liver complete, turnkey, private-labeI em ail and messaging solutions th at in effect can help each business reduce operating costs and increase focus on core businesses.

■

Consumer E m a il Services ( 'C E S ' ) . The m ail service, offered p rim a rily through em ail on the Internet, is targeted tow ards the follow ing types of users: R eg ular Users, A ffin ity Users, A ffilia te Users. To each of these types of users, COM U N offers directed opt-in m ail distribution allow ing each end user to receive special offers and inform ation from prem ier content providers.

■

Domain Registry Services CDRS'). The M ex ican portal, through its varied services, is positioned to serve alm ost any individual user or organization seeking to build a presence online: Ind ivid u al Users, and C ollective O rganizations. Dom ain registration, as one of the first activities perform ed by any user seeking to begin using the Internet, com plem ents the C om pany's suite of offerings and creates a point of access for both the Outsourced Messaging Solution or Consum er E m a il S ervice.

217

Table 1 0 .2

COM U N 's messaging solutions

Core service

Description

Web-based email

Hosting service based on a web mail interface

P O P 3 hosting

Hosting service based on Post Office protocol

Web-based administration

Customized multi-user management interface

Spelling correction

Feature that verifies spelling in 13 languages

Secure delivery

Secure delivery of documents

Spam blocking

Utilizes comprehensive filtering system

Virus scan

Up-to-date anti-virus solution provides real-time virus detection

Digital signature

Latest Pretty Good Privacy ( P G P ) key encryption stane

Wireless redirection

Directs messages to paging services

lards

Defined benefits

■ Requires no software downloads ■ End-users simply point any browser to http://mail.userdomain.com and enter account name and password for full email access ■ Allows users to connect to a shared mail server and download email to their desktop client which stores the message on the user's hard drive ■ Allows email administrators to add, delete, and modify accounts online ■ Allows for emails to be correctly written in English, Spanish, Portuguese and French, to name a few ■ Reliably and securely delivers documents to only the intended recipient ■ Protects users from unsolicited bulk email ■ Identifies and eliminates 'spam' and 'junk' mail ■ Real-time scanning and automatic cure for continual protection ■ Virus quarantine isolates the source of infection to prevent damage ■ Allows for private and secure email delivery ■ Ensures authenticity of sent messages ■ Allows users to automatically redirect certain messages to any pager

S E G M E N T A T I O N , T A R GE T I N G AND POSITIONING

Strategic alliances The Com pany has been extrem ely successful in forging m arketing and business developm ent a llian ces w ith a wide range of com panies in the region and sig n ifican tly m ajor international players looking for com petent and w ell positioned local partners. These range from data centres to equipm ent suppliers. It is through these alliances th at the Com pany has been able to reach such a high level of recognition and m arket presence in such a short am ount of tim e. C O M U N has form ed strateg ic allia n ces w ith a leading supplier of hardware, software, and e-business services, a facilities-based Internet infrastructure and com m unications provider, and a m ajor softw are producer. C ontributed by Io an n a C. Papasolom ou

QUESTIONS 1

W h a t benefits is COM U N trying to gain from employing m arket segmentation, as opposed to treating the m arket as a single e n tity?

2

W h a t m a rk et op portunities and 's tra te g ic w in d o w s' have resulted fo r C O M U N

from m ark et

segm entation? 3

Has COM U N adopted a m ass-marketing stra teg y? Ju s tify your answ er.

4

How in your view COM U N m ay try to accom plish product or service positioning?

219

Chapter 11

Marketing mix strategy

I N T RO DU CT IO N The organization has to connnunicatc w ith the custom er through the strategic window. This can be achieved in a variety o f ways ranging from spoken and w ritten communications (advertising, selling, ctc.) to m ore symbolic forms of comm unication (the image convcycd in the quality of the product, its price and the type o f distribution outlet chosen). This is the function of the m arketing mix. The point is that the elements of the marketing mix should not be seen as individual entities, but as a set o f interrelated entities w hich have to be set in conjunction w ith one another and in the context o f the strategic w indow presented. Positioning products in people’s minds and making them attractive to m arket segments requires careful formulation of the m arketing mix. Getting the right blond o f the product, prom otion price and distribution is essential to put the carefully carried out analysis into operation. The aim is to portray an image for the product or service that w ill match w ith how one wants the product to be visualized in people’s minds, i.e. its positioning. Image is not only reflected in the prom otional messages which are directed towards the m arket target but also in the pricing strategy, the mode of distribution and, of course, in the appearance of the product or service itself. The chapter reviews the product as a complex entity, stressing the quality dimensions. Attention is also given to the strategic implications o f product mix policy. Distribution is a critical element in the marketing of products and services and wc examine the different types o f decision that have to be made w ith regard to channel strategy. P ricin g is not just a m echanistic process involving knowledge of costs and the addition o f a profit margin. There are strategic pricing decisions to be made and pricing is inherently lim ited to product quality specification. Strategic considerations w ith rcspcct to m arketing com m unications arc considered. This is a very com plcx area since there arc several prom otional methods and each requires detailed consideration of matters relat­ ing to qualitative m arketing communications as w ell as, in the case of advertising, choicc of media. Finally, people, processes and physical evidence are also considered as elements o f the extended marketing mix.

T H E P R O D U C T AS A C O M P L E X E N T I T Y The products or services o f an organization help to create the image of the organization in the mind o f the customer. This image is rcflcctcd in the custom ers’ perceptions and feelings about its products

220

M A R KE T IN G MIX STRATEGY

or services. It is im portant, sincc experience w ith only one of a firm ’s products or services can affcct a person’s attitude to the organization’s other products or services. This can apply even if the customer has never used the other products. Products arc more than tangible objects and services arc more than a visible activity. People purchase products and services to satisfy needs or wants and obtain benefits as a result. Organizations have to understand the nature of the needs and wants in order to appreciate the kind o f benefits people expect to obtain. Am ong the different kinds of benefits that people can obtain from buying goods and services are:

■ good value for money ■ ease of use ■ novelty ■ safety ■ availability ■ economy in use ■ good design.

Benefits enter into the equation when a customer dccidcs to buy one product in prefcrcnce to another. Similarly, w hen m arketing a product or a service an organization should give attention to the benefits it creates for the user. It is the benefits which make a product or scrvicc attractive to a customer. Organizations have to com m unicate these benefits to the user, directly or indirectly, in order to persuade the latter to make a purchase. The capability o f a product or scrvicc to producc the kinds of benefits desired bv the user is exhibited in various characteristics o f the product or scrvicc. ‘Product decisions’ have to be made w ith rcspcct to these various attributes. W h e n a producer of goods or scrviccs makes decisions about 'the p rod uct’ , he or she is making decisions about the following: quality, features, options, style, brand name, packaging, sizes, services, warranties, returns. O n e o f the most im portant of these is quality.

Quality Q u ality reflects differences among products or differences among services. As long as it is possible to crcatc differences among products then it should be possible to crcatc differences in quality. Even in cases w here it is difficult to create differences, producers can still try to prom ote products through ‘perceived’ qualitv differences, i.e. the way in w hich thcv arc perceived by the customer. Q uality is a relative value that people attribute to things. It reflects people’s expectations concerning a product o r service and how w ell it w ill provide the various benefits they require from using it. Fortunately, large groups o f people have shared ideas about quality and it is possible to produce and market products and services that w ill meet with the perceptions of large groups of customers. Groups o f customers sharing a common perception o f a particular level o f quality form market segments. A firm can direct its prom otional messages to these groups o f customers provided that it knows how to reach th em . Product quality contributes to business profitability. It has been found to be positively related to m arket share and return on investm ent over a w ide range o f products and in different m arket situations. M oreover, high quality is usually associated w ith prem ium prices. A business has to build sufficient quality into its goods and services to satisfy custom er requirements. If quality levels are set

221

MAR KETING MIX STRATEGY

too high or too low, under- or over-engineering as it is called, this can result in leaving customers disgruntled. (See also Chapter 3, for more on quality.)

P R O D U C T MIX Except in the case of very small firms, it is rare to find a firm offering a single product or service. It is m uch more comm on to find firms offering a mix of products or services. The product m ix has:

■ width: quantity oflin es the firm carries, e.g. radios, T V s, video recorders, etc. ■ length: quantity of items in the product m ix, e.g. three kinds of radio and four kinds of T V ■ depth: num ber o f variants o f each product offered in the line, e.g. clock radios, car radios, pocket radios, ctc. ■ consistency: how closely related the various product lines are in terms o f the use to w hich they arc put, e.g. all clcctrical leisure/entertainm ent goods.

The above provides a basis for defining the com pany’s product strategy sincc the company can increase its business in four ways.

1 New lines can be added to widen the product m ix, e.g. a manufacturer of radios could introduce a line o f cassette players. 2

The length o f existing product lines can he increased by introducing additional items, e.g. the radio m anufacturer may introduce larger or smaller radios than arc currently being offered.

3

.Vciv product variants can be added to deepen the product m ix, e.g. the radio m anufacturer can add new models w hich are the same size as existing items but w hich have different features.

4

Product consistency can be made more or less depending upon whether a firm wants to acquire a strong reputation in a few or many different areas.

Product-line decisions The various items within a product line make different contributions to sales and profits. In eases where a couple o f items make up the bulk o f the contribution, this means that a product line is vulnerable in the event that com petition increases since sales o f these items could fall substantially. W h e re products are making very low contributions it would probably be better to drop them from the product line unless there arc good reasons for doing otherwise. Attention needs to be paid to what com petitors arc offering. Gaps in the product line may become apparent when product offerings are compared with those of competitors. If a product line is too short, a firm may be able to increase its profits by adding items to the line. O n the other hand if it is too long, profitability may be improved by dropping products. There is a tendency for product lines to grow longer over time. This may result from excess production capacity at various times and the need to introduce new items to lake up cxccss capacity and increase overall profitability. However, as items arc introduced to the line, costs may rise. W h e n a product line is reviewed for its profitability, it may become apparent that profits can be improved substantially by pruning less profitable or unprofitable products and shortening the line.

222

M A R KE T IN G MIX STRATEGY

Three broad categories of action can be taken w ith rcspcct to a product or service. It can be introduced to the m arket, it can be given a ‘face lift’ and it can be w ithdraw n, discontinued or eliminated. The first tw o o f these arc discussed in the next chapter in the contcxt o f new products. They relate to the introduction of entirely new product lines into the product m ix, to the introduction o f new items within a product line and to major changcs to existing product items within a line. H ere, w e w ill briefly review the third option o f discontinuance, elim ination or withdrawal.

Product elimination Recalling the discussions o f the B C G m atrix and other portfolio models it w ill be recognized that there can be benefits to a firm from discontinuing a product/scrvicc or line of products/scrviccs. It may, for example, free up rcsourccs w hich can be assigned to m ore viable or profitable products. The rcsourccs comprise money, staff and machine time. There are three courscs o f action w hich can be taken w ith rcspcct to the product elim ination strategy:

1 Harvesting. This involves getting the most from the offering while it lasts. Efforts should be made to cut costs to help im prove cash flow. Alternatively, priccs may be increased without a simultaneous increase in costs. H arvesting produces a slow decline in sales and when the business no longer provides a positive cash flow, it should be dropped. 2

Line simplification. H ere a line is trim m ed by pruning the number and variety o f products or scrviccs on offer. The aim is to keep the falling line stable and to restore the health o f the line. It is a strategy w hich bccomcs especially relevant during times o f rising costs and rcsourcc shortages.

3

Total line divestment. In this case the w hole product line is discontinued.

D IS TRIBUTION S T R A T E G Y Channel decisions There are six basic channel decisions to make. These are:

1 Whether to distribute direct to the custom er o r in directly through middlemen The advantages o f going d ircct arc that it enables firm s to cxcrcisc m ore control over m arketing activities and it rcduccs the amount o f tim e spent in the channel. The disadvantages arc that it is difficult to obtain widespread distribution and m ore resources are required to maintain distribution. Going dircct is the method w idely used by industrial goods producers. In the ease of consum er goods, examples o f going direct to the custom er arc to be found in marketing cosmetics and encyclopaedias.

2 Whether to adopt single or m ultiple channels o f distribution The advantage of using a single channel is that it guarantees a m inimum level of sales. Interm ediaries can be asked to accept a m inim um non-returnable order quantity. The exclusivity o f using a single

223

MAR KETING MIX STRATEGY

channel guarantees attention to the product, and the fact that a product is only available from very specific outlets suggests that it is difficult to obtain because it is exclusive. The harder it is to get, the m ore people w ill w ant to know about it

or so the argument goes. O n the other hand, the

disadvantage o f using exclusivity is that it docs lim it sales. In contrast, the use o f m ultiple channels should lead to increased sales and a potential for w ider distribution. It must be argued that the m ore establishments put the product on view, the more likely it is that sales w ill be substantial. Restricting the num ber o f channels through which the product is sold, restricts the number o f people w ho can come into contact w ith the product. O n the other hand, there are disadvantages w ith using m ultiple channels. First, greater investment, m ore salespeople in the field, m ore marketing effort in general and m ore administration are required. Second, it can lead to detrim ental com petitive rivalry among channcl members. Channel m embers who find themselves competing w ith one another to sell the same product may not behave in the best interests of the producer.

3 How long the channel o f distribution should be In determ ining the best channcl length to adopt, the following factors have to be taken into account:

1

The financial strength o f the producer: those in a strong position can carry out the functions provided by interm ediaries.

2

Si/.e and completeness o f the product line: the costs o f carrying out the distribution function can be spread across the various items in the product line. The m ore items, the more economical it might be to consider a shorter distribution channcl.

3 4

The average order si/.e: large orders may be distributed dircct to customers. The geographical concentration o f customers: geographically dispersed customers m erit a longer distribution channel since servicing them requires substantial investment of resources.

5

The distance o f the distributorfrom the market: geographical distance makes it less attractive for the producer to want to supply direct.

The above arc guidelines and o f coursc exceptions may be cncountcrcd in practice.

4 The types o f interm ediaries to use This effectively means choosing between different types o f retailer in the ease o f consumer goods, e.g. supermarkets as opposed to cash and carry, and different types of distributor in the case o f industrial goods, e.g. w hether to use franchised dealerships or not.

5 The number o f distributors to use at each level In principle, more distributors are required if:

1 The unit value o f the product is low and/or the physical quantity o f stock held is likely to be high. 2

The product is purchased frequently.

224

M A R KE T IN G MIX STRATEGY

3 There is a high degree o f technological com plexity in the product. 4

The service requirem ent is high.

5

The inventory investment is high.

6

Geographic concentration is low.

7

Total market potential is high.

8

The m arket share of the producer is high.

9

C om petition is intense.

6 W hich interm ediaries to use This is a qualitative decision and rcflccts whether the image o f the particular outlet, the way in which it perform s and the deals w hich can be struck w ith the distributor arc satisfactory. It may mean choosing C & A rather than M arks & Spcnccr, or Tcsco rather than A S D A . Even w hen strategics have been sclcctcd they have to be im plemented and this involves producers and interm ediaries working together in the most effective manner. W e w ill explore this topic in detail in the next scction.

EVOLVING C H A N N E L S O v e r time the nature o f channels changc. The changc is brought about by changcs in the marketing environm ent such as evolving custom er needs and technical progress and innovation w hich crcatcs new and better ways o f delivering value to customers. The developm ent of low -cost channels and the grow th o f vertical, horizontal and multi-channel systems arc apparent at the present time.

Growth of low-cost channels The growth o f low-cost channels results from market evolution and the decline in the value added by a channel. A t the early stages in market developm ent, interm ediaries provide high-level support in helping m anufacturers to find customers and in offering help and scrvicc to customers. I.atcr on, customers become more familiar w ith the product, priccs decline and product reliability improves. A shift then takes place from specialist to higher-volumc, low-added value channels. Eventually mass m erchandising channels may be used and even mail order and discount shops may distribute the product. This has been characteristic o f the changing pattern in distributing personal computers. Initially, they w ere only available from specialist dealers who helped to educate the custom er in how to use the machines. Although post-purchase technical service is still required by most users today, the market has evolved to a stage where customers are quite knowledgeable about the products available. This is helped to some extent by the availability o f com puter magazines which provide information on different models, their capabilities, ctc. How ever, consumers today are much m ore inform ed about PC s and their operation and capabilities than they were ten years ago and many now buy through mail order. The technical com plexity of the product obviously plays an im portant role in determ ining the speed at which the growth of low-cost channels can develop. G iven an educated consum er who has

225

MAR KETING MIX STRATEGY

acccss to inform ative magazines and given also a not-too-complex product, the speed of development o f low-cost channels can be quite rapid. This is evidenced by the cam corder and m obile telephone markets w here low-cost channels feature fairly early in the life cycle.

Development of vertical marketing systems The trend is towards vertical marketing systems in which channel activities are integrated and managed by one m em ber o f the channel - either a manufacturer, interm ediary or retailer. Such systems reduce cost, minimize conflict among channel members, and build on the experience and expertise of channel members. Corporate vertical marketing systems arc found in vertically integrated companies w hich have their own manufacturing, wholesaling and retailing operations. The current trends, however, arc to build administered vertical marketing systems and contractual vertical marketing systems. In the form er case, channel members maintain their financial independence and legal autonomy, but arc led by the most pow erful m em ber o f the channcl. In the latter case, channcl m em b ers’ rights and obligations arc defined by legal agreements. These may take the form of collaborative or franchise agreements.

Development of horizontal marketing systems Strategic alliances and networks facilitate the developm ent o f horizontal marketing systems. They rcflcct the readiness o f two or m ore autonomous units, who may even be com petitors, at the same level in a channcl to co-opcratc. Co-operation rcduccs the risks for an individual firm . It facilitates acccss to other channels o f distribution thereby accclcrating m arket penetration. M o rco cvcr, it provides access to new technologies and knowhow.

Development of multi-channel marketing systems As a result o f markets becoming highly fragmented w ith customers having different product and service needs as w e ll as pricc sensitivities, different channels have emerged to m eet custom ers’ expectations. Although a multi-channel m arketing system provides the opportunity for a firm to serve a range o f segments, it is a potential source o f channcl conflict. A producer has therefore to guard against the problems that this can crcatc by being seen to be as fair as possible in dealing with channcl members.

PRICING D E C I S IO NS There are m arket conditions under which organizations can exert some control over the level at which price is set. If an organization cannot exert any control over the setting o f pricing then it has to accept whatever the market determines w ill be the price. Perfectly com petitive markets specify that there is a homogeneous product, complete information among buyers, rational buyer behaviour and large numbers o f producers. In a perfectly com petitive m arket, a producer has almost no control over prices. They are determ ined by market forces brought

226

M A R KE T IN G MIX STRATEGY

about by com petitive pressures and patterns o f consum er expenditure. There arc extremely few such markets in reality. M ost markets arc im pcrfcct and some control over the setting o f priccs is possible. O v e r lim e there have been various ideas expressed on how priccs should be set. These range from theoretical ideas o f economists through to ideas of modern-day practitioners who arc concerned with earning revenues for their organizations. In the next scction we w ill explore these various approaches from a strategic perspective. W e have to distinguish between a cost-oriented approach on a knowledge o f a firm ’s own costs

based solely

and those w hich also take into account the demands of the

m arket place.

Pricing: the classical economics perspective Econom ic theory argues that pricc balances supply and demand for goods and scrviccs in the market placc and uses the ‘law o f dem and’ to explain this phenomenon. The law of demand purports that the quantity demanded per period o f time is inversely related to pricc. W ith an increase in price, demand w ill fall, and as pricc falls then demand w ill increase. In this context, pricc elasticity o f demand is a key concept. This is defined as the ratio o f the percentage changc in demand to a percentage changc in pricc. W h ile , by definition, the ratio usually has a negative sign — this is because as pricc rises, demand usually falls - it is customary, in illustrating elasticities, to drop the sign. A pricc elasticity equal to one signifies that demand rises (falls) by the same percentage that pricc falls (rises). Know ing the pricc elasticity o f demand for its products or scrviccs can help a firm to set its priccs. Estimating the pricc elasticity of demand can be m ore difficult. In csscncc one needs to m onitor the cffcct of pricc changcs on demand. O n e can do this by looking at pricc changcs over a period of tim e but carc must be taken to ensure that the priccs examined arc deflated in value. Pricc, o f course, is only one element o f the marketing m ix and the other variables may w ell have an impact on demand. O th e r factors such as disposable income and com petitive activity mav also cloud the picture so while price elasticity is conceptually useful its practical usefulness as a tactical or strategic tool may be somewhat lim ited in value.

Marginal pricing An im portant cost-oriented approach is that ol marginal pricing. Suppose a firm manufactures widgets which carry a fixed overhead charge o f £100,000 and variable costs o f £0.50 per w idget. The firm currently supplies 1,000,000 widgets to breweries in the U K at £0.75 each and has considerable spare capacity. An enquiry has come in from a company in the Far East w hich is interested in using the same widgets for a different purpose. The interesting question is: at what price should it offer to sell the widgets to the firm in the Far East, assuming that additional production capacity is not required? Commonsense tells us that the firm w ill have already recovered the fixed overhead on the widgets it supplies to the brew ery industry. O ne m illion widgets at £0.75 generate £750,000 o f revenue; 1,000,0000 widgets at a unit cost of £0.50 per widget generate a variable cost o f £500,000. This leaves £750,000—£500,000 = £250,000 to cover the fixed costs and the profit. W ith fixed costs al £ 100,000 this means that the firm is already making a profit of £250,000—£ 100,000 = £1 50,000. The pricc to be charged to the company in the Far East need only take account o f the variable costs and additional transportation and delivery costs. This may mean that, in theory, the price charged to

227

MAR KETING MIX STRATEGY

the firm in the Far East can be low er than that charged to brew ery firms at home and the firm w ill still be generating profit! This is what is known as marginal pricing. The key point, however, is w hether the tw o markets supplied know that a pricc differential exists and that essentially the products supplied arc identical. If such inform ation is available to both parties, then a marginal pricing strategy may be impossible to im plem ent sincc the parties w ill argue for equal treatment. In addition, the application of a marginal pricing policy does require that no new fixed costs have to be incurred

w hich would seem to be satisfactory in the foregoing case.

Demand-oriented pricing A demand-oriented approach to pricing takes account of the strength o f demand. Firm s ask a high pricc w hen or w here demand is strong and a low pricc w hen or w here demand is weak, even if there is no dissimilarity in costs in cither ease. Differences in the strength of demand in the m arket enable firms to charge different prices in different market segments. The ability to practice this kind of price discrimination requires:

■ different levels of demand in m arket segments ■ inability o f buyers to resell at a higher pricc ■ that com petitors w ill not undersell the firm in the segment being chargcd the higher pricc ■ cost o f segmenting and policing the market not to cxcccd the extra revenue obtained ■ that pricc discrimination is legally permissible ■ that customers who pay m ore do not react negatively.

Such an approach is com m only referred to as charging what the market w ill bear. Pric c discrim ination helps suppliers to increase sales and profits, im prove m arket share and contribute to the full capacity utilization of manufacturing plant. However, when it is exercised by a firm in a dominant position in an industry or m arket it is sometimes used to remove troublesome competition or as a means o f exploiting buyers.

O T H E R D I M E N S I O N S TO PRICING Price squeeze D iscrim inatory prices may sometimes be charged by a firm w hich is vertically integrated for the supply o f inputs to non-integrated rivals in order to put the latter at a com petitive disadvantage. This can occur when the integrated firm produces both the input and the finished product, w hile its custom er produces only the finished product, and is dependent on the integrated firm for supplies of the materials, sub-assemblies or parts. A ‘squeeze’ occurs w here the integrated firm charges the non-integratcd firm a high price for the input but sells its own finished product at a low price. This allows the non-integratcd firm only minimal profits or even forces it to make a loss. It is common for there to be many suppliers o f partly finished goods in an industry so that the power o f any one supplier to effect a price squeeze is lim ited. However, as a result o f acquisitions, takeovers

228

M A R KE T IN G MIX STRATEGY

and mergers it is not beyond the bounds o f possibility for a group o f companies to comc to dominate the supply side for certain materials and components and thence to exert a price squeeze on the industry. Such a practice may be regarded as anti-competitive and, in the U K , eases referred to the M onop olies and M ergers Com m ission arc scrutinized for evidence that practices such as price squeezing may result from formal linkages among firms.

Penetration versus skimming pricing strategies Penetration and skimming policies are most often encountered when dealing w ith new products but they are sometimes used in other situations.

Penetration strategy W h e n introducing a new product, the objective may be to achicvc early market penetration. The strategy may amount to setting a comparatively low pricc to instigate m arket growth and capturc a large share o f it. The cffcct o f the experience curve w ill causc long-run profitability to rise as a result o f gaining a large market share or a growth in market share. A penetration strategy may be appropriate if the m arket seems to be highly price sensitive, or if a product is favoured by economies o f scalc in production or, w here a low pricc discourages actual and potential competition.

Skim m ing strategy A skimming strategy contrasts w ith a penetration strategy and is used to take advantage o f the fact that some buyers arc prepared to pay a much higher pricc bccausc they want the product very much. Firm s adopting this strategy may initially set a high price to gain a prem ium from such buyers and may only reduce it progressively to bring in the m ore price-elastic segments. This strategy is appropriate w here there exists a substantially large num ber of buyers whose demand is relatively inelastic. It may also be used w here the unit production and distribution costs associated w ith producing a smaller volum e are not so much higher that they cancel out the advantage o f charging what some o f the m arket w ill buy, or w here little danger exists that a high price w ill stimulate the em ergcncc o f competition.

Competition-oriented pricing In this ease, a firm makes sure that the priccs it sets arc in keeping with those chargcd by competitors and it is often referred to as the going-ratc price. This kind o f pricing is used often in homogeneous product markets where the m arket structure ranges from pure competition to pure oligopoly. In a purely com petitive m arket, the firm exercises little choice in setting its price. In the case of pure oligopoly it has more choice, firms can charge the same price as competitors. In view ol the fact that there are only a few firms, each one of them knows the other’s price, and buyers are also w ell abreast o f prices.

229

MAR KETING MIX STRATEGY

Psychological dimensions to pricing Goods may be priccd at 12.99 or 14.99 rather than 13 or 15 reflecting the fact that research into consum er perceptions suggests that people tend to round down prices in their minds, so that the prices in fact are perceived to be 12 and 14 respectively. A nother interesting point is that putting up priccs can actually increase sales and pricc is often seen as a surrogate for quality. In the absence of inform ation to the contrary, people tend to assume goods or scrviccs arc o f better quality if they carry a higher pricc tag. This can lead to nonsenses whereby tw o products w hich have the same intrinsic value may fetch vastly different priccs because the consum er considers one to be more ‘special’ than the other. A good example is to be found in the purchase o f jewellery. Rings, in particular, can be composed o f exactly the same gems in terms o f size and be of the same carat gold. However, because o f the way the gems are cut and the ring is set, there can be large differences in the price w hich is asked.

Pricing points R etailers like to sell goods in stores at specific pricing points. Pricin g points may, for instance, always end in the number 9.That is 9p, 19p, 29p, ctc. The retailer may argue that these are the priccs which consumers prefer to pay. A producer and a retailer may agree on a point-of-sale shop pricc of say 89p. The retailer is obtaining a satisfactory margin on the product at this pricc and the producer is also happy w ith the price. W ere the producer to require extra shelf space then it would probably have to offer the retailer m ore prom otional discount so that the retailer can sell the product at 79p. The retailer w ill not agree to sell it at 80p or 8 5p because these prices do not correspond w ith pricing points. The producer then has to determ ine w hether this would be w orthw hile. O ne way round this problem , o f course, is to producc products in different packet sizes to m eet w ith retailers’ specific pricing points.

Increasing prices without increasing prices Sooner or later organizations have to adjust their priccs. W h e n it is in a downw ard direction this usually pleases the custom er and the firm docs not need to disguise its actions. However, when an upward adjustment in price is required, consum er resistance is often felt quite strongly. Organizations can often disguise price rises, perm anent or temporary, by making it appear that no pricc rise is in fact occurring. This can be achieved in any one of the following ways:

1

The discount structure can be altered so that the total profit to the company is increased but the list pricc to customers remains the same.

2

The m inimum order size is increased so that small orders are eliminated and overall costs thereby reduced.

3 D elivery and special services are charged for. 4

In\ oices are raised for repairs on purchased equipment.

5

There is a charge for engineering, installation and supervision.

6

Custom ers are made to pay for overtim e required to get out rush orders.

7

Interest is collected on overdue accounts.

230

M A R KE T IN G MIX STRATEGY

8

Lo w er margin models in the product line are eliminated and more profitable ones sold in their place.

9

Escalator clauses are built into bids for contracts.

10 The physical characteristics o f the product are changed, e.g. it is made smaller.

PRICE LEADERSHIP STRATEGY This is the position w here a particular supplier is generally accepted by other suppliers as the ‘lead’ firm in introducing changcs in m arket priccs. There arc tw o principal forms o f pricc leadership. The first form of price leadership occurs when the largest firm in terms o f market share, and/or the lowest-cost producer, leads on price changes and where other firms are prepared to follow because the price change yields them adequate profits. The second form , sometimes referred to as barom etric pricc leadership, is w here a particular firm , often a smaller firm , is ‘adopted’ as the price leader, because it has demonstrated itself to be capable of spotting changes in market conditions. In theory, a m arket leader enjoys all the advantages over com petitors that arc associated w ith highcr-volume sales. The leader should be able to set the price structure for the market. In the event that the m arket leader dccidcs to take a low unit profit margin, then bccausc o f the volume o f sales achieved, profits generated should be substantial. This profitability w ill not be enjoyed by competitors who do not have the same high volum e o f sales. In fact, these com petitors w ill have higher unit costs, higher distributor margins and probably low er selling prices to the trade. A m arket leader w hich takes a higher unit profit margin gives the whole m arket a form o f price um brella. Since all firms can charge higher prices, then profitability all round can be increased. This allows com petitors to introduce product im provem ents, funded by retained additional profits. C om petitors can also invest in more aggressive marketing. The net result w ill probably be to weaken the market leader’s position. Pric c leadership is often viewed by suppliers as a way of co-ordinating pricing policies so as to lim it price competition and avoid the problems o f pricc wars.

The leader’s strategy in relationship to the product life cycle stage if the m arket is in the growth stage of the product life cyclc then extra sales volum e is available. The leader w ill want to take a major share of new business and so it w ill want to keep com petitors’ actions under control and persuade other firm s not to enter the m arket. By keeping the unit margin of profitability low, the leader can make progress towards this end. As volume sales o f a market increase, the cffccts of the experience curve arc felt and product unit costs should dcclinc. The dilemma facing the market leader is whether to rcducc prices and, if so, the speed with which this should be cffcctcd. The answer is to be found in the leader’s designs w ith rcspcct to the next stage in the product life cyclc — the m aturity stage. If it is the market leader’s intention to lead in this phase then it w ill have to maintain its leadership through the transition phase. It must ensure that its prices move downwards as the volume moves ahead and unit costs decline. If it does not do this then there is always a chance that competitors w ill take advantage of the position and increase capacity and market share. It is usually advantageous for the leader to maintain its position since the additional volum e o f sales generated can mean that total margins w ill increase despite the low er selling prices.

231

MAR KETING MIX STRATEGY

O th e r firms w ill not enjoy the same cost advantages as the leader and as they are operating on tight profit margins, they arc not in a position to achieve great improvements in differentiation. A potential entrant on seeing this situation may feci deterred from entering the market. D u rin g the m arket m aturity or the declinc phases, the horizon for the m arket leader can be altogether different. There w ill be little chance of a new com petitor entering the market and brand loyalty w ill have been established. In such circumstances, the leader should be able to take higher margins w ithout taking excessive risks. Firm s w ith a low er level o f m arket share should follow the leader when it comes to changes in prices. M arketers o f lo w share brands do not want to engage the leader in direct price competition. D irect and indirect costs of production o f these com petitors are higher than the leader’s and price to the trade is probably lower.

PRICE WARS Price wars arise from time to time and involve general price cutting w ithin a m arket. Haphazard price wars may materialize from gossip and slip-up. Others may be introduced intentionally. In neither case does the end result bring about an im provem ent for anv of the parties involved. O n ce in a while a price w ar can work to the aggressor’s advantage. It is clearly an advantage in a pricc w ar to have lower unit costs than competitors, in such a position the aggressor may fare w ell from the cxpcricncc.

MARKETING COMMUNICATIONS Communication objectives In developing an effective communications program m e the basic steps involve:

■ identifying the target audience ■ determ ining the communications objective ■ designing the message ■ selecting the communications channels ■ allocating the total promotions budget ■ deciding on the prom otions mix ■ measuring the results o f the prom otion.

W c have already discussed targeting in Chapter 10 and w ill therefore start w ith com m unication objectives. M arketing communications efforts can have different communications objectives. Some o f these are listed below:

■ to create awareness of a product or service ■ to provide information about a product or service ■ to generate enquiries ■ to build récognition of a company name

232

M A R KE T IN G MIX STRATEGY

■ to reach those people who are beyond the rcach o f salespeople ■ to evoke desire for a product or scrvicc ■ to make the selling task easier ■ overcom e prejudices ■ to rem ind people about a product’s benefits ■ to allay cognitive dissonance.

Designing the message Effective communications have to appeal to the needs and wants of the recipients. They should give the recipient a m otive or incentive to act. They also need to generate involvem ent w ith the message on the part o f the recipient by asking questions which leave the message incomplete. In addition they should also spell out cxactly what coursc of action it is cxpectcd that the rccipicnt w ill follow. Getting people to consider purchasing a product or scrvicc can be achieved through appeal to their cognitive processes. O ne needs to arouse desire, indicate a need or give a logical reason w hy a product or scrvicc offers the best means o f satisfying a need. In so doing the message bccomcs implanted in the recipient’s m em ory and can be triggered by future needs, motives and associations. H owever, one docs have to bear in mind that the rational approach may not be so effective for less cducatcd recipients or in situations w here there is likely to be less involvem ent in the purchase, i.e. little scarch behaviour. In these cases emotional appeals may be used. Pro m o tio n through mass media requires that the story be told in such a way that it w ill comm unicatc to groups of sales prospects. This is an inflexibility that may cause the message to miss the m ark w ith some individuals. The salesperson, by contrast, is free to vary the message to meet cach situation; this is a powerful advantage o f personal selling. The appeal, theme, idea or unique selling proposition is what the com m unicator has to get over to the target audience in order to produce the desired response. Benefit, identification, m otivation are all concepts that can be built into the message. Messages can be built around rational, emotional or moral appeals, themes, ideas or unique selling propositions. Economy, value and performance are used in messages w ith a rational content. This type o f message is often directed at industrial buyers and consumers making expensive purchase items such as cars, houses and substantial consumer durables. Em otional appeals make use o f both positive and negative themes. O n the negative side this can involve fear, guilt and shame, whereas on the positive side it may comprise humour, love, pride and joy. Too much fear in a message may cause the audience to reject it. The use o f hum our may generate ‘noise’ and interfere w ith the message. M oral appeals are attractive to people’s sense o f what is right and just. They can be used in ‘green’ advertising or in prom oting social causes or even in things for children, e.g. books and safety prams.

The promotional mix There are a number of prom otional vehicles available to a firm:

■ advertising O ■ sales prom otion

233 ■

MAR KETING MIX STRATEGY

■ publicity ■ personal selling.

The proportion of a firm ’s marketing communications budget that is spent on cach o f these activities varies somewhat across organizations and industries. There is a tendency, for example, in the case of industrial and business goods for m ore effort to be put into personal selling, whereas advertising features prom inently in the case of fast-moving consumer goods. Despite these broad generalizations, considerable variation exists w ith in product classes. In the case o f advertising there is also the complicating factor that there are a number of advertising vehicles w hich can be used to communicate about the product: television, radio, newspapers, magazines, mobiles, posters, etc. The most appropriate marketing m ix for a product w ill be influenced by a number of factors:

1

The available budget. The amount of money available for expenditure oil prom otion is obviously a critical factor. Sm all firms have comparatively small budgets for prom otional expenditure and hence have to sclcct the most cost-effective means o f communicating with the m arket. T V advertising for such firm s, for example, may be prohibitively expensive.

2

The promotional message. The nature o f the message, as influenced by the objectives w hich have been set for the com m unication, w ill exert considerable influence over the choicc o f mix. W h e re a product is to be demonstrated, cither face-to-face selling or a visual medium such as television or cincma advertising w ill be most appropriate. In addition, if w e take the hicrarchyof-cffccts comm unication model into consideration then it w ill be recalled that at the various stages o f the stcp-by-stcp proccss, different messages arc deemed appropriate.

3

The complexity o f the product or service. In some cases, a large amount of service support is required and in this ease the only appropriate communication method is personal selling. W h e re this kind of support is not required, as is the case in fast-moving consumer non-durables, then advertising is m ore appropriate.

4

Market size and location. Large dispersed markets tend to favour mass comm unication coverage, such as advertising. Local markets or small numbers o f buyers may favour direct m ail, specialist press or even personal selling.

5

Distribution channels. The key to successful marketing of a product often lies in obtaining suitable distribution for the product. D istributors therefore can exert considerable influence over the choice of prom otional medium used to comm unicate w ith the ultimate customer.

6

l.ije cycle. In the same way that application o f the hierarchy-of-effects models suggests that different messages may be appropriate, so too does the stage in the life cycle a product has reached. If the service or product is in the introductory stage o f the life cycle, building awareness is the main aim . If it is in the growth stage, the requirem ent is to persuade customers to change their buying patterns and switch brand loyally.

7

Competition. Matching o r beating competition is obviously a key com ponent in determ ining the strategy behind the form ulation o f the prom otional mix. W h e re a firm does not have the financial rcsourccs to match com petitors in term s o f expensive prom otional campaigns, for example, it must find some other mechanism.

234

M A R KE T IN G MIX STRATEGY

ADVERTISING S T R A T E G Y For a product or a service to be successful in the market place it has to be noticcd and it has to be trusted by the customer. This means that the advertising w ill have to stand out from the crow d. Advertising faccs a m ajor challenge in so far as m uch of the inform ation provided to the custom er is ignored. Advertising has therefore to catch the custom er’s attention and deliver the message in an original way that w ill enable the custom er to rem em ber and identify w ith the message and the brand. In addition to its key function to inform , advertising is also expected to entertain. Following on from this, advertising has to rely m ore heavily on emotions and images to attract the custom er’s attention and interest. The emphasis is therefore on images. Images have the capacity to capture the essence o f a thousand words. Thev can also be absorbed and rem em bered w ith much less effort by a viewer. Images also have much more power to satisfy view ers’ needs for entertainment. Advertising w ill need to become increasingly m ore em otional as it becomes increasingly more difficult to base a com petitive advantage on the functional attributes o f a brand. Differentiation w ill be achieved through emotional attributes o f a brand. A ll this means that advertising w ill have to become m ore creative.

M E D I A D E C I S IO NS In choosing media in w hich to advertise, organizations seek to discover the most cost-effective way to deliver the desired number of exposures to the target audience. This involves examining the reach, frequency and impact of advertisements that are placed in different media. The media planner has to be familiar w ith the reach, frequency and impact of the m ajor media types. Each type — newspapers, TV, d ircct m ail, radios, magazines and outdoor posters - has advantages and limitations in terms o f reach, frequency and impact. M edia planners match limitations and advantages w ith the requirem ents of the message. For example, a message announcing that a sale is taking placc today may be given over the radio. Obviously, the nature of the product, the nature of the message, the cost and the type o f audience using the media arc key factors in the process.

Assessing the cost effectiveness of media vehicles The size and composition o f the target market and the cost of reaching that audicncc arc indicators o f the effectiveness o f the media and are studied carefully by planners. In addition, circulation and type o f audicncc arc im portant measures taken into account by the planners. They calculatc the cost per thousand o f the target rcachcd by a particular vehicle. O ne should bear in mind that this is not the same thing as the cost per thousand reached w ith respect to users o f the media. M any of these people may not be in the target group. O th e r things being equal, a planner prefers media vehicles that have the lowest cost per thousand reached of the target media group. O th e r considerations are the quality o f the editorials and the extent to which people pay attention to the advertisements.

235

MAR KETING MIX STRATEGY

Media scheduling A firm can vary its advertising expenditure to suit the seasonal pattern or it can advertise throughout the year. M ost firms do the latter. Kuchn (1962) showed that the appropriate pattern o f tim ing should reflect how much advertising carry-over effect exists and the degree of habit that exists in custom ers’ choice of brand. W h e re both are low, it is appropriate to use a seasonal pattern and it is better to time the advertising so that it coincides w ith the seasonal pattern. W h e re carry-over effects and habit are high, it is better to time advertising to lead the sales curve. The higher the carry-ovcr then the greater should be the lead tim e. Steady advertising expenditure should be used when habitual purchase patterns are greatest. Having decided how to vary expenditure, a firm has then to look at advertising over a short period o f time so as to obtain the maximum impact. M ore continuous advertising should be used when the rate at w hich new customers appear in the market is high. This should also be the ease when the frequency w ith w hich people make purchases is high or the rate at w hich people ‘forget the brand’ is high. A dvertisers tend to use continuous advertising when the m arket is expanding. Concentrated advertising in a single period o f tim e occurs when the product is sold in a single period. In the ease o f seasonal or infrequently purchased items or when lim ited funds exist, bursts of advertising are used. A n alternative is to use continuous advertising at low weight levels reinforccd periodically by waves o f heavier activity.

SELLING Selling involves:

■ creating positive attitudes towards a product or service ■ m otivating people to want to purchase a product or scrvicc ■ convincing people that they arc acting w isely if they do buy ■ clinching a sale ■ reassuring people that they have acted wisely in making a purchase.

Selling can influence any or all of the various stages in the purchase decision-making process. Earlier, w e saw that advertising creates awareness, interest and desire but only rarely produces action. Selling, too, can cffcct the first three stages but it is most frequently associated w ith the action stage. Salespeople arc often paid, at least in part, by results and results inevitably means action in the form o f purchase by the customer. Selling is a face-to-face encounter w ith the customer. It is tim e consuming, puts considerable emotional strain on the salesperson and is a relatively slow way o f influencing the purchase proccss. W h e re it is possible to achieve the same effect w ith other prom otional tools, such as advertising, for example, selling w ill not be preferred since it w ill not be m ore cost-effective in terms of tim e and money. How ever, it is possible to use selling as a marketing communications tool in niche market situations where advertising would be wasteful. For example, there is a nichc market which comprises people who like to shop at home for one reason or another. D ircct selling is involved when salespeople

236

M A R KE T IN G MIX STRATEGY

call on people in their ow n homes to sell them products which they might norm ally purchase al retail outlets in towns and citics. The amount o f marketing effort that firms put into personal selling varies according to the types o f goods and services that are on offer. The magnitude o f the effort often reflects the nature o f the target m arket w hich is heing addressed, though as pointed out above, there are exceptions to the rule. Industrial goods manulacturers put a greater financial emphasis on selling in the marketing mix, whereas large consumer-goods producers tend to spend more on other forms o f prom otion.

The task of the salesperson The selling task is influenced by the nature o f what is being sold and to whom it is being sold, e.g. w hether it is a consumer product, an industrial product or a scrvicc.

Consumer goods Fast-moving consum er goods salespeople often must negotiate w ith professional buyers who have responsibility for a large number o f sales outlets. In such a situation, the retailer’s buyer expects that the account manager w ill be very fam iliar w ith the re taile r’s operations. Large retailers, such as multiples, cxpcct to be consulted in advance about a m anufacturer’s new product plans, including pack and package design, and cxpcct co-operation! In addition to inform ing the buyer about new lines and persuading the buyer to stock quantities o f the products, the salesperson has to persuade the retail management staff, w ith the aid o f the buyer, to ensure that the product is stocked and displayed in an eye-catching manner at the point o f sale.

In dustrial goods The selling task o f an industrial goods salesperson is somewhat different. In this case, the first task is to identify the persons who arc involved in the often com plcx proccss o f purchase decision-making and then find ways o f influencing them . Som etim es the decision-making may incorporate recommendations by outside consultants. Because o f the technical and specialized nature o f the selling situation, salespeople in such a situation need to have the skills and the knowledge to negotiate w ith these kinds of specialists.

Services Selling can be im portant in marketing services either to industrial or consumer markets. O n account o f the intangible nature of services, some people take the view that it is more difficult to sell services. Products are tangible and the benefits can be readily demonstrated and this makes the selling task easier. This is not the case w ith services, however, and getting people to persuade themselves that they need or want a particular service can be a hard task. This is particularly the ease w ith services which do not seem to offer any immediate benefits, such as life assurance policies. II

people do not attach a high personal p rio rity to something they may w ell put off the decision to

purchase even il they recognize that it is a service which they N E E D . M oreover from the salesperson’s point o f view il may be difficult to relate long-term benefits to the cost of the service.

237 ■

MAR KETING MIX STRATEGY

S A L E S PRO MO TI O N Sales prom otion offers consumers the chance to get more than they expected and at the same time rcduccs the risk associated w ith buying. For example, product sampling affords the consumers the opportunity to try the product without actually buying it. M oreover, in terms o f providing motivation to purchase, an extra discount or rebate means that the consumer is m ore likely to buy a product. M any product managers find it difficult to differentiate their product in a real way from that o f their competitors and sales prom otion methods enable product managers to achievc this end. Every time w e need to visit the petrol station to fill up our car’s tank o f petrol w e arc enticcd to visit one or other station because o f special prom otions that arc being offered — free air travel mileage, redeemable tokens w hich we can eventually exchange for goods, or even drinking glasses. W c may in fact not pcrceivc or be conscious o f any diffcrcnccs between the brands o f petrol at the different filling stations but we can differentiate in terms of the kinds of prom otions that are being offered. O n e prom otion may have m ore appeal than another and we may purchase the product from that source bccausc o f the prom otion. From management’s point o f view, sales prom otions often provide exactly what it most requires: an immediate boost in sales. N e w life, albeit temporary, can be pumped into ailing brands by dropping coupons in the mail. A t a m ore general level, the use o f sales prom otion has been stim ulated by factors that have adversely affected advertising, such as the high costs o f mass media advertising. In addition, retailers, w orking on small profit margins and needing the increased sales volum e generated through sales prom otion, have encouraged the growth o f sales prom otion. The severest criticism of sales prom otion is that it diminishes the value o f the brand. The move from brand-building advertising to trade prom otions and couponing, critics argue, can lead to consumers w ho view all products as commodities. O th er critics say that the management of sales prom otion over a long period o f time is fraught w ith difficulties. M any sales prom otion tools arc short-run, tactical devices. Coupons, prem ium s and contests, for exam ple, set out to produce immediate responses. W h ereas advertising provides reasons w hy a custom er should buy a product o r service, sales prom otion provides the incentive to buy. Sales prom otion can take many forms (sec Figure I 1.1). Some o f these apply to sales prom otion to consumers and others to sales prom otion to the trade.

The extra three Ps W h ile the four Ps are generally regarded as the traditional marketing mix variables one should not overlook the additional three Ps w hich were traditionally associated w ith a service organization but now have considerable relevance to all kinds of organizations.

People An organization’s ‘people’ arc its most valuable resource in terms o f creating a successful business. Staff need to be com m itted to raising perform ance standards and im proving scrvicc encounters w ith custom ers and other stakeholders. In this contcxt it is im perative that they should have a clear understanding o f the business and its visions and values. Im proving customer service and the customer

238

M A R KE T IN G MIX STRATEGY

F ig u r e 1 1 .1

T y p e s o f s a le s p r o m o t io n s

experience can be achieved through having an organizational culture that is in line w ith the business vision and values. In addition the organization needs to provide m otivation/incentive packages for new ideas that im prove sales, customer service. Getting people to adopt a custom er orientation is the key to making best uses of the organization’s human resources. Staff can be encouraged by im plementing clear comm unication channels, tor example regular team briefings; w eekly/m onthly newsletters; email and intranet services. Ensuring that staff understand the business objectives and im plem enting a business developm ent plan for the short/m edium -term future is also im portant. Introducing a reward scheme to involve stafl in thinking about and generating ideas for better ways o f w orking and exceeding custom er expectations may also produce good results. Even giving recognition to the w ork of individuals or teams gives a positive feedback to staff and signals that the organization is responding to staff accomplishments. People are the organization

the rcccptionist, doorm an, janitor, carpark attendant may be the first

person a visitor or custom er encounters when visiting an organization. It is im perative that these first point of contact staff are w ell trained in how to represent the organization.

Physical evidence The physical evidcncc is the environm ent in w hich the service is delivered to the custom er and where the organization and custom er interact. The physical evidence is concerned w ith the physical building and infrastructure; the quality and availability o f prom otional m aterial (prospectuses, information leaflets, newsletters, websites) which provide inform ation about the scrviccs on offer. D ecor and surroundings project the cultural image o f the organization. They also provide another means of reinforcing custom er satisfaction. The organization’s publications promoting products and scrviccs should contain information about the organization and its perform ance. The way this is presented w ill have an impact upon customer and other stakeholder perceptions o f how the organization docs business.

239 ■

MAR KETING MIX STRATEGY

Processes This is the wav enquiries and purchases arc handled and it is crucial to the com petitive success o f any company. The way in which an organization operates often revolves around its processes. The less cluttered these arc then the better the opportunity to provide value for money to customers as well as give a good return to investors and shareholders. The organization should be looking to im plem ent processes to ensure quality. N otice should be taken of feedback from customers and others regarding how the processes are viewed by them. This w ill show to customers that it is a listening organization, com m itted to continuous im provem ent and ensuring customers have an input and influence on its operation. A process can be looked at from various perspectives depending on the kind o f inform ation required. Usually, this concerns what work is going to be done, who w ill do it and how is it going to be done, w hen w ill il be done, and who w ill take the decision. H ence, a process has functional, behavioural, organizational, informational, decisional and rcsource-based content. Exam ple processes might be: a quality system for the answering o f telephones, an open-door policy enabling prom pt consultation w ith the public and staff, surveys and questionnaires and a complaints procedure. A management inform ation system should be in place to record, evaluate, m onitor and review the inform ation gathered.

M A R K E T I N G MIX S T R A T E G Y FOR I N T E R N A T I O N A L M A R K E T S Firm s that operate in one or m ore foreign markets must decide how much to adapt their marketing mix to local conditions. They can either standardize the product, advertising, and distribution channels to producc the lowest costs because it involves no major changcs to the domestic market or adjust the markcting-mix elements to cach target m arket. In the case o f using an adaptation-marketing strategy it w ill be necessary to consider the following adaptations.

Product adaptation This involves altering or adjusting the product or service to meet local conditions or preferences. This may also mean adapting to local superstitions or beliefs, too.

P rom otion adaptation Firm s can use the same prom otion campaigns as in the domestic market but adapt them for each local market. How ever, the use o f media w ill require international adaptation because media availability varies from country to country.

P rice Priccs o f products and services usually differ across countries. The increased costs o f transport, supplies, taxes, tariffs and other expenses that are ncccssarv to adjust a com pany’s operations to international marketing can raise priccs. However, firms do have to be competitive and match offerings from other foreign competitors and home producers.

240

M A R KE T IN G MIX STRATEGY

Place Across countries the nature o f channels of distribution vary considerably. There arc differences with regard to the number and types o f interm ediaries (e.g. product wholesalers, regional wholesalers; retailers) serving cach foreign m arket. Another difference refers to the size and character of retail units abroad. Getting distribution for a product is a key to successful m arketing operations and a thorough understanding of distribution channels and how they function is of paramount im portance.

Developing an internationalization strategy In order to operate beyond the bounds o f its domestic market, an organization needs to internationalize its core business strategy. Choice o f markets in which to operate is the first item on the agenda and initial matters include identifying the market attractiveness o f different options, assessing potential competition and studying ways in w hich to adapt to local conditions. Account of how to adapt products and program m es to respond to foreign needs, preferences, culture, language, clim ate, etc., is essential. O n e has also to consider barriers to trade, such as im port tariff's and quotas and foreign ownership rules, as w ell as differences from the home country in laws, language, tastes and behaviour. Internationalization can bring w ith it disadvantages and in order to overcome the disadvantages it creates then companies need to adopt a globalization strategy that aids their scarch for a competitive advantage in w orld markets. Firm s need to systematically analyse industry conditions and appreciate how they can best take advantage o f the situations that exist. M ark et, cost, governm ent and com petitive drivers influence the industry conditions that affcct competing w ith a global strategy. M arket drivers relate to customer behaviour, the structure of distribution channels and the nature o f m arketing in the industry. Cost drivers relate to the economics o f the business. G overnm ent drivers arc set by the decisions laid down by national governments. C om petitive drivers arc produced by com petitors strategies. Em ploying a global marketing strategy implies that a consistent marketing approach is used across different countries, although a small amount o f latitude is allowed in terms o f varying the marketing m ix. W h e th e r a product or service can be globally marketed depends on the extent to w hich usage o f the product or service is rooted in national traditions. For example, the marketing of household cleaning products is rooted in traditional concepts of the role o f homemaking. As these roles often differ considerably from country to country, there is often little scope for transferability advertising that depends on such roles. O n the other hand, products and services not influenced by national culture perm it transferable advertising/m arketing messages and themes. B y and large this applies to most business to business products and services and also many newer consumer products and services, such as fast food and electronic entertainm ent goods.

Using a global positioning strategy and marketing mix U sing a com m on global positioning strategy can strengthen the effectiveness o f a m arketing program m e sincc it has been tried and tested in many countries. Nevertheless, differences in the business’s com petitive position, purchase m otivation and use/consumption patterns may strengthen the case for differing positioning strategics. However, firms that use a common positioning often find that they can make a large part o f the marketing mix globally uniform

241

MAR KETING MIX STRATEGY

Global brand names facilitate building global recognition for the product or service. In addition, combining a globally standard umbrella name w ith a local product name can be advantageous. The appeal of a global brand name is partly related to the global acccptancc or prestige o f the home country o f the brand name, how im portant it is to have a name that means something, and how easy the name is to pronounce. Brand names that mean something usually need to be translated in order to carry out the positioning job for which they were intended. I

laving a global price is seldom possible because o f international differences in market price levels

and other factors influencing price. A useful strategy is to try to set the prices in relative to competitors in each m arket. Global advertising can be varied in a number o f ways:

■

Use the same copy: here a product, scrvicc or brand is positioned in the same way making the same claims.

■

Use the same script: the advertising employs the same script in different countries, but the actual cxccution is different. Being able to use a comm on script depends largely on the universality o f the images chosen, and o f the situations and characters to be used, and also the need for differentiation from local competitors

■

Use the identical advertisement: in cach country the same advertisement is used and only the voices or text or translated.

Some companies use tw o types of campaign for different purposes. First, a globally uniform campaign w hich sets out the main theme, and then local campaigns for tactical purposes.

Conditions where a global marketing approach may be most useful A firm may benefit m ore from applying global m arketing in larger countries. In this case cost reduction, im proved program m e effectiveness, enhanced custom er preference, and increased competitive leverage can be more significant. However, larger markets can be more challenging from the point o f view of local adaptation than smaller markets. Custom ers in smaller countries are more accustomed to products and programmes that arc not specifically adapted for them and arc usually subject to more cultural influence from larger neighbours.

Disadvantages of adopting a global strategy Globalization has its disadvantages. For instance, it can lead to increased management costs through increased co-ordination, reporting requirem ents, and human resources. It can also decrease management effectiveness if over-centralization adversely affects local motivation and morale. Product standardization can produce a product or service that fully satisfies no one.

USING T H E I N T E R N E T The 1990s saw the growth o f the Internet or W o rld W id e W'cb as a facilitator o f mass communication. Businesses soon realized the potential o f the Internet as a strategic marketing tool. However, despite

242

M A R KE T IN G MIX STRATEGY

the involvem ent of many large and small firms in the use o f the net it is a medium which presents new kinds o f problems both for firms and customers alike. A t the turn o f the twenty-first century, many possible customers remain nervous about the security of doing business over the net with credit cards. This is despite the fact that in reality it presents few er problems than using credit cards over the telephone. In addition, while the Internet brings goods to the screens o f very geographically distant customers, the same distance creates difficulties in returning unsatisfactory goods and in many cases even the payment for such goods. Although credit cards facilitate intercontinental transactions, people are reluctant to give out their credit card num bers over the Internet for reasons o f security as m entioned above. The alternative ways o f paying for goods are often too daunting for the uninitiated user o f such mechanisms. Firm s doing business w ith customers in other countries have to be aware of the laws that apply when prom oting their goods and scrviccs over the Internet. This is m ore o f a problem for some goods and scrviccs than for others. The prom otion of financial scrviccs is a ease in point. In addition, in the online com m unity there is a general feeling that unsolicited e-mail is unacceptable. Organizations need to be w ary o f considering such approaches in order to induce dialogue w ith consumers. Such approaches may even incur legal action. H ow ever, the In tern et w ill be an im portant source of communication for marketers and customers alike in the future. It is unlikely to stay in its present form and the traditional marketing tools w ill no doubt have to changc their nature when applied to Internet communications. In order to get the best out o f website m arketing, organizations need to understand how the potential customers arc making use o f the web. Users o f the web tend to surf or skim its contents so would-bc marketers need to find something w ith im m ediate appeal to potential customers. The site would need to be updated regularly as w ell and inform ation given as to the changcs that have taken placc. Advertisements on the Internet must be useful and/or entertaining if they arc to appeal to viewers. A t present, few advertisers can take advantage o f the Internet technology.

M A R K E T I N G MIX AND T H E I N T E R N E T The growth o f the Internet and the W o rld W id e W eb presents opportunities for marketers to reach customers w ith new products. Successful online marketers exploit the interactive capabilities o f the W o rld W id e W eb for the benefit of their customers. The web pages they create become communities w here people swap information and buy regularly. M o re and m ore companies are recognizing the value o f the W o rld W id e W e b to provide ‘infotainm ent’ which can foster brand identity and loyalty and develop long-term relationships with customers. M arketers are also advertising their products on the websites o f other organizations. This is found in the form of banner ads, which are small, static or animated rectangular ads that typically appear at the top of a web page. Users can click on the banners to visit the advertiser’s site for more information. Finally, sponsorship or co-branded ads integrate companies’ brands and products with the editorial content o f certain websites. T heir role is to link the advertiser with the website’s mission in the user’s mind. Consumers can gain ready access to prices. This helps customers in comparative shopping and gives manufacturers that want to make price a key elem ent in their marketing mix another opportunity to get pricing inform ation to customers. M any organizations im plem ent low-price policies through the Internet.

243

MARKET ING MIX STRATEGY

QUESTIONS 1

Discuss the im portance of the price qu ality relationship in form ulatin g m arketing strategies.

2

W h a t does the term strategy mean in the context of channel m anagem ent?

3

How m ight the accu ra cy of com m unication be influenced by noise or distortion which enters into both the message and the channel?

4

Suggest some of the kinds of objectives that might be set for m arketing com m unications. How might these objectives be pursued in p ra ctic e ?

5

Three im p ortant m arketing com m unication tools are advertising, selling and sales prom otion. To w h a t extent are they:

6

(a )

com plem entary

(b )

m utually exclusive as prom otional tools?

Discuss the value of the Internet as a vehicle for m arketing goods and services.

CASE STUDIES E a u de N uit Distributing and promoting soft drinks is largely achieved through fa irly trad itional methods. Prom otion is often in m agazines and directed tow ards selected ta rg et audiences (usually younger people) although billboard advertising close to schools and colleges is also used. Distribution follow s the classical route of w holesaler to re ta iler w ith m any soft drinks these days being sold direct to large su perm arket chains w hich buy in bulk. The latter prefer on the whole to stock branded labels rather than have th e ir own private label drinks. There are also vending m achine operators who buy dire ct and distribute through thousands of vending m achines stra teg ica lly located in sports centres, colleges, universities and other sites which a ttra c t large numbers of young people. T rad itio n ally, Colette S o ft Drinks has followed the methods outlined above. However, in recent times it has taken an innovative approach. Six months after launching a fizzy drink called Ea u de N uit, Colette S o ft Drinks allow ed shops and superm arkets to stock the product. Shop owners expressed surprise saying: 'I t 's really strange - the kids know all about Eau de N uit, but w e've never heard of it. Now it's flying off the shelves by ityself.' C olette's m arketing strategy for Eau de N uit might seem highly unusual. F o r the first six months it did no advertising and restricted distribution to a handful of popular clubs. Getting the products stocked in these venues required a strategy all of its own. Colette recruited people off the street to be its salespeople. They tended to be scruffy, but knew the music, so the clubs took them seriously. Having convinced venues such as F ra n c e 's M in istry of Sound to stock Ea u de Nuit, the idea w as th at its reputation would spread by w ord of mouth. Ten months afte r the launch, Ea u de N uit is now being advertised, and distribution includes superm arkets. Colette e ffectively has two m arketing budgets. One is the mass m arket, but to m aintain cred ib ility it has to nurture its original people. C re d ib ility is the most im p ortant thing. It is im p ortant to gain this sort of cre d ib ility as a growing number of consum ers are both w ary of large com panies and extrem ely sophisticated judges of m arketing.

244

A senior m a rk e t researcher w o rk in g for a company sp ecia lizing in youth m arkets commented that at one tim e f irm s used to just put an ad on television next to a p a r t ic u la r p ro gra m m e or in a p a r tic u la r magazin e. Now there are m ag azin es fo r everything and no one can be sure that they have reached the audience. Because of all this there is a move to alternativ e ways of pro m o tio n and distrib utio n and to alternativ e agencies.

QUESTION Do you thin k that the m arketing m ix strategy employed here could be applied equally as well to other products? W h y or why not?

L o n g e v i t y bul bs L ig h t bulbs always seem to burn out with a m a zing ala crity . It often seems as if it were only yesterday that we put in a new bulb only to find that it has burned out yet again. L ig h t bulbs are not eco-friendly and in an age when the em phasis is on protecting the enviro nm ent and reducing waste in w hat we produce and consume, it is a produ ct that needs some hard thin king about. Ordinary elec tric light bulbs have a very short rated life of 1 ,0 0 0 hours. Longevity introduced its prem iu m -priced, 10-year light bulbs to the m a rk e t in Ja p an a couple of years ago. A lthough the product has taken off rather slowly, the company is hopeful of higher sales in the future when its newly appointed distrib uto r, backed up by a su bstantial natio nal advertising cam p aig n, gets under way later this year. The 10-year light bulbs offer a num ber of im p o rta n t benefits - they are designed to last in excess of 1 6 ,0 0 0 hours and are ideal fo r locatio ns where the bulb is hazardous to reach fo r replacem ent or for bulbs in and around the home where a blown bulb c ould make the going dangerous. In independent tests in J apan, the bulbs recorded an average w o rk in g life which ac tu ally reduced the need to replace them to once every ten years. Fin a lly , unlike low-energy fluorescent bulbs, these bulbs can be dimmed to create more atm o sp heric lighting effects. M o reo v er, because they are e xac tly the same shape as conventio nal bulbs they f it all lampshades and fittings. Each bulb is guaranteed to last a full 10 years and bulbs are available in screw or bayonet fitting and are supplied in a choice of 60 W or 100 W , opaque or c le a r glass. Longevity is keen to introduce the produ ct on to internation al markets. Since growth in home sales has been slow it feels that it could increase its output substantially if it could find internatio nal markets. T h is would lead to econom ies of scale in produ ction and the benefits of lower prices could then be passed on to customers which in turn would stim ulate sales growth. Key questions relate to choice of markets, pricing and advertising strategy and distrib ution methods.

QUESTION How should the firm set about d eterm ining its m a rk eting m ix strategy?

245

Chapter 12

Growth strategies P r o d u c t - m a r k e t e x p a n s io n

INTRODUCTION Strategic windows arc dynamic entities that change over time. They represent opportunities in which it is possible for the organization to increase sales both in volume and cash. A firm can have more than one strategic window open at a time and these may be related to the different types o f growth strategy that an organization can pursue. This chapter examines the strategic alternatives that arc available. Essentially this involves the various strategics outlined in the well-known Ansoff matrix (market penetration, product-markct expansion and diversification) along with vertical integration strategics (Figure 12.1). The chapter explores the rationale behind these strategies. The importance of new product development is explored and causes for failure in exploiting new product opportunities arc examined. Ways of screening out winners and losers in terms of new product opportunities arc considered. Leading on from new product development, diversification is highlighted as an important strategy in the scarch for new strategic windows. An alternative strategy of vertical integration is also explored.

Ansoff's Product M arket Expansion Grid Existing products

New products

Existing markets

M arket penetration strategy

Product development strategy

New markets

Market development strategy

Diversification strategy

F ig u r e 1 2 . 1

A n s o f f m a t r ix

Reprinted by permission of Harvard Business Review. From 'Strategies of diversification' by H. I. Ansoff, 25 (5) Se pt-Oct 1957 . Copyright © 1957 by the Harvard Business School Publishing Corporation, all rights reserved.

246

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Ansoff’s product-markct expansion grid provides a useful though not exhaustive framework for looking at possible strategies to cope with the problem of strategic windows and finding ways of creating overlapping strategic windows. All four of the strategies suggested by Ansoff are discussed below along with others (see e.g. Exhibit 12.1).

M A R K E T P E N E T RA T I O N S T R A T E G Y OF EXISTING M A R K E T S Here the strategy amounts to increasing sales of existing products while at the same time trying to maintain current margins o f profitability on sales. W h en the market is expanding this may be accomplished with nominal outlays of marketing expenditure by getting more first-time users to buy the product or to increase product usage of existing buyers or to increase the frequency of use. in a saturated market, extra sales may only be generated as a result of increased market share. Another possibility, however, is to promote new applications for existing product users. Such new uses can best be identified by market rcscarch aimed at determining exactly how customers use the brand. Increasing market share puts heavy pressure on marketing resources and can impact negatively on short-run profitability. However, if economies of scale or the impact of the ‘experience cu rve’ are felt as a result of increased supply to the market then this may more than offset the impact on profitability of any additional marketing expenditure. A share gain can be based on tactical actions such as advertising, trade allowances, promotions or price reductions. The problem is that such share gains can be difficult to sustain. A preferred option is to generate a more permanent share gain by winning a sustainable competitive advantage with enhanced customer value or by matching a com petitor’s sustainable competitive advantage. The aim is to create or enhance the assets and skills of the business and neutralize those o f competitors. Attem pts to increase market share w ill very likely affect competitors directly and therefore precipitate competitor responses. The alternative of attempting to increase usage among current customers is usually less threatening to competitors. Heavy users arc usually the most fruitful target. Light users, however, should not be ignored because there may be a way to unlock their potential. Increased product usage can in fact be stimulated in three different ways. First, the frequency can be increased. Second, the quantity used in each application can be increased. And finally, new applications can be promoted.

EXHIBIT 12.1

GENERIC S TR A T EG I E S BASED ON A N S OF F MATRIX

M a r k e t p e n e t r a t io n s tr a te g y

P r o d u c t d e v e lo p m e n t s t r a t e g y

Increase purchase use by existing customers

N ew features

W in customers from competition

Different quality levels

Convert non-users

New products

M a r k e t d e v e lo p m e n t s t r a t e g y

D iv e r s ific a t io n s t r a te g y

New market segments

Through organic growth

New distribution channels

Through acquisition

New geographic markets

Through joint venture

247

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

In order to increase the frequency of use, rem inder communications arc necessary. In the case of getting people to use more o f the product, this may simply involve repositioning the product from one w hich is used occasionally, to one that is used regularly and this can be achieved through a repositioning promotional campaign. O th er increases o f frequency of purchase may be sought through providing incentives

competitions and sales promotions.

Sim ilar techniques can be used to increase the quantity used on each occasion, e.g. rem inder communications and incentives.

MARKET D EVELO PM EN T STRATEGY Finding new markets docs not guarantee long-term or short-term profitability but economies o f scalc in producing for the m arket or in supplying the m arket w ill contribute to profitability. However, there may w ell be barriers to entry to the market w hich means that neither short-run nor long-term contributions to overall profitability arc attractive. A logical avenue o f growth is to develop new markets by duplicating the business operation, perhaps w ith m inor adaptive changcs. In the case of market expansion, the same expertise and technology and sometimes even the same plant and operations facility can be used. There is thus potential synergy and resulting reductions in investment and operating costs. O f course, market development is based upon the premise that the business is operating successfully. Geographic expansion may involve changing from a regional operation to a national operation, m oving into another region, or expanding to another country. A firm can also grow by reaching into new m arket segments. There is, o f course, a variety o f ways to define target segments and hence growth directions. A key to detecting new markets is to consider a w ide variety of segmentation variables. Som etim es looking at a m arket from different perspectives w ill uncover useful segments:

■ usage: the non-user can be an attractive target ■ distribution system: new markets can be reached by opening up additional distribution channels ■ age: pulling in additional age categories in the population (consum er goods).

A key to detecting new markets is to consider a w ide variety of segmentation variables. It is especially useful to identify segments that arc not being w ell served. In general, segments should be sought for w hich the brand can producc value.

G RO WT H INTO I N T E R N A T I O N A L M A R K E T S M any firms engage in international marketing activities. The reasons for this vary and w e w ill explore these below. There are also several dilferent wavs in which firms can become involved in international marketing. These approaches can range from supplying goods to interm ediaries in the home market w ho then arrange the shipping o f the goods to various overseas markets to actually setting up in business in other countries to undertake production and/or marketing activities.

248

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Reasons for engaging in international marketing Some firms prefer to supply goods or services just to their domestic markets if these arc large enough to produce the kinds o f financial returns they desire. For such firms they would not then need to learn another c o u n try’s language and laws, deal w ith volatile currencies, face political and legal uncertainties, or design their products to suit different custom er needs and expectations. As a result, business negotiations would be much easier to conduct. H ow ever, there are several reasons w hy a firm might decide to become involved in international marketing operations. In the first place, foreign com petitors offering superior products or low er prices might attack the com pany’s domestic market. The firm might want to counterattack these com petitors in their home markets to lie up iheir resources. Another point is that the firm might discover that some foreign markets present higher profit opportunities than the domestic market. U n d e r such circumstances even if there were risks and additional effort and resources required to securc business il might be deemed w orthw hile. Many firms also seek to grow sales and recognize the benefits to be gained from economies o f scalc. In the pursuit o f such an objective a firm might need a larger customer base to achieve economies o f scalc and see additional sales in international markets as a means o f achieving this end. A further reason might be that w hile there is additional risk involved in operating internationally, a firm may wish to reduce its dependence on any one market so as to reduce risk arising from such over-reliance on a domestic market.

International market entry methods O n ce a company decides to become involved in international m arketing it has to decide upon an approach. There are five broad m arket-entry strategies: indirect exporting, direct exporting, licensing, joint ventures and dircct investment.

In d ire c t e x p o rt H ere, firms w ork through independent interm ediaries to export their products. There arc four types o f interm ediaries:

■ A domestic-based export merchant who buys the manufacture’s products and then sells them abroad. ■ A domestic-based export agent who seeks and negotiates foreign purchases and is paid a commission. ■ A co-operative organisation which conducts exporting activities on behalf o f several producers and is under their administrative control. ■ An export-management company which agrees to manage a com pany’s export activities for a fee.

D ire c t e x p o rt In this case, firms can decide to handle their own exports. The investment and risks are greater, but so is the potential return as a result o f not paying an interm ediary. There arc several approaches and these can be made through the mechanism of:

■ A domestic-based export department or division where there is an export sales manager and a team o f salespeople w ho carry out the actual selling and draw on market assistance as needed.

249

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

■ An overseas sales branch or subsidiary w hich allows the firm to achieve greater presence and programme control in a foreign market. ■

Travelling export sales representatives w here the firm can send home-based sales representatives abroad where they w ill operate in much the same way as they do in the domestic market.

■ Foreign-based distributors or agents w here the company hires foreign-based distributors or agents to sell its goods on its behalf.

Licensing This is a simple and relatively low-risk way for a firm to become involved in international marketing. The licensor licenses a foreign company to use a manufacturing proccss, trademark, patent, trade sccret, or other item of value for a fee or a loyalty. The licensor in this way achieves entry into the market at little risk; the licensee gains production expertise or a well-known product or name without having to start from scratch. This is an approach which may be preferred where there is high monetary inflation or political instability in a country.

Jo in t ventures Foreign investors may join w ith local investors to create a joint venture in which they share ownership and control. Form ing a joint venture might be nccessary or desirable for economic or political reasons. The exporting firm may lack the financial, physical, and managerial rcsourccs to undertake the venture alone.

Direct Investment O n e form o f foreign investment is the dircct ownership o f a foreign-based assembly/manufacturing or service facility. The would-be international marketer can buy part or the w hole of a local company or even build its own facilities. As a company becomes m ore experienced in exports, and if the foreign market is large enough, then foreign production/m arketing or service provision facilities can offer significant advantages. For example, a firm can secure cost economies in the form o f cheaper labour or raw materials. It can also gain a better image in the host country because it creates jobs. The amount a company needs to invest varies w ith the degree o f control it requires and the degree o f risk it w ill encounter in entering a foreign m arket. It is often the case that the higher is the degree o f investment, the higher the degree o f risk. This is particularly the case if the company is attempting to enter the market alone. Sometimes firms enter international markets with the co-operation o f other firms already operating in the m arket. D eveloping strategic alliances and licensing agreements can allow entry to an international market w hich would otherwise have been expensive or very difficult to enter. The most appropriate entry method to a new market is dependent upon various considerations. These include the extent o f the company’s existing international operations, the nature of competition in the m arket, the potential barriers to entry, the degree of control required by the company, the availability o f financial resources and the company ’s objectives in wishing to enter the market

250

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

PRODUCT D E V E L O P M E N T S TRATEGY O n e o f the avenues to gain a com petitive advantage is through innovation (viz. N ieto and Q uevedo, 2005; Olson et a l., 2005). M oreover, it has been specifically argued that one of the components for the succcss o f industrial firms is the extent o f their innovativeness (H u lt et a l., 2004). Innovativeness has been described as ‘possession o f newness’ (R och rich, 2004), or the degree o f newness o f a product (F rc cl, 2005). However, although the introduction of new products can have a positive impact on sales growth, initially, profitability may not increase sincc there may be substantial rcscarch, development and launching costs associated w ith the venture w hich have to be recouped. Longer-term rates o f return on investment w hich arc at least equal to the current rate o f return on capital employed arc required from new products. This may not be possible and firms may have to acccpt the possibility or even certainty of lower profitability, just to stay in business. Predicting demand for new products can be difficult and hence so is the estimation o f profit potential. A ‘new product’ can be defined in several different ways. A product can refer to a physical entity or a cluster o f expected custom er benefits, depending on w hether the perspective adopted is that of the business or that o f the market. From the point o f view o f a business, a product innovation may represent a changc in, or addition to, the physical entities that make up its product line. From a market perspective, the term refers to a new or revised set of customer perceptions about a particular cluster o f benefits. Thus, that w hich is considered a product innovation by a business enterprise may not be recognized as such by its customers. H ere we w ill adopt a business perspective. A new product is one that is new in anv w av for the company concerned (M c C a rth y and Perreault, 1993). Additions to existing product lines and im provem ents o f an existing product may also be thought o f as ‘new products’ . In practicc only a few new products are actually new to the firm and new to the m arket (Ex h ib it 12.2).

Importance of new products Theodore L e vitt (1 960) stressed the im portance of innovation in the market place in the 1960s when he warned against the dangers facing firms w hich did not respond to new developments in the market place and w hich lurked in the shadow of product obsolescence. Two im portant trends in the market place have been o f m ajor im portance in stimulating product innovation: the increasing instability of consum er preferences and the growing intensity and sophistication ol com petition.

E X H I B I T 12.2

W H A T IS A N E W P R O D U C T ?

■

N e w to th e w o r ld p r o d u c ts :

■

N e w c a te g o r y e n tr ie s :

■

A d d it io n s t o p r o d u c t lin e s :

■

P r o d u c t im p r o v e m e n t s :

■

R e p o s itio n in g s :

inventions - in-line skates, P o la ro id camera, etc.

P & G ' s first shampoo, F o rd 's first M in i Tide liquid detergent

curr ent products made better

A r m & H a m m e r 's baking soda repositioned several tim e s as dr ain

deodorant, re fr ig erator deodorant, etc.

251

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

Changes in consum er and com petitor behaviour are not the only external forces affecting product innovation. Technological advances have an equally significant impact, often leading to the radical changes in size and characteristics o f established product markets. A good example is the impact o f the m icrochip on the w orld m arket for w ristwatches. This was initially dom inated by Swiss manufacturers making use of mechanical movements but latterly m anufacturers in the Far Cast have moved in using m icrochip technology. M oreover, improvements in product and process technology are often introduced to a w ide range o f product markets simultaneously. N e w products can account for a substantial proportion o f a firm ’s sales and profits over a relatively short time period. A good illustration is provided by Lever which, between 1968 and 1984, introduced 12 new brands of soaps and soap powders to L IK national markets. Five o f these introductions became brand market leaders and three others became scctional leaders (Hardy, 1987). A business develops new products for one o f tw o reasons: 1 to replace or supplement its existing offerings in their present markets; or 2

to serve new markets, defined in terms o f custom er benefits or geography.

It can develop new markets w ithout new products by making appropriate adjustments in the pricing, prom otion and/or distribution policies associated w ith an existing offering. Although new products arc essential to companies, much expense can be incurred and squandered in developing and launching unsuccessful ones. In the next scction w e look at why new products fail.

NEW PRODUCT FAILURES Innovation may be thought o f as the cornerstone of succcss in many industries, but not all innovations arc successful. Indeed, the incidcnce o f failure in introducing new products is extrem ely high. O f course what is a failure for one firm may w ell be a successful product for another firm . It all depends upon the expectations o f the firm . Failures are never absolute entities in themselves. The usual measure taken when evaluating the comparative success o f a new product is the financial return on investment it generates. But of course what w ill satisfy one companv w ill not necessarily satisfy another. A company accustomed to earning an overall after-tax rate o f retu rn on capital employed exceeding 30 per cent per annum w ill on average need to introduce new products which w ill generate at least this level of after-tax return on investm ent in order to maintain long-run profitability. Firm s w ith different rates o f return on capital may have different expectations, reflecting the nature o f the industrv in which they operate. In addition, firms o f substantially different size, yet considering the same product-markct opportunity, w ill also have different expectations. Forecasting sales, profits and costs for new products is difficult and the estimates made can sometimes be w idely inaccurate. Potential new product opportunities that are likely to incur heavy R & D costs need to be screened out at a very early stage to avoid unnecessary losses. In the early 1980s, spending in the early phases of new product developm ent accounted for 10 per cent o f the total cost of bringing out the product. By 1990 this figure had risen to 20 per cent. In the face of uncertainty and soaring costs, firms would definitely benefit from examining ways of screening new product opportunities. D u rin g the early stages o f the product life cycle o f the tum ble drier, the larger firm s, such as Philips, w ere deterred from entering the market because they considered they would be unable to generate sufficient profits in order to earn the level of return on investm ent they required. It

252

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

was only later when the market had increased in size that they felt the m arket was attractive (Proctor, 1989). Large firms working on the frontiers o f technology often come up with good ideas but because the initial m arket size or even long-term market size is small they may not choose to develop the product. Instead they may ‘transfer the technology’ to a smaller firm , for a royalty payment. The sm aller firm is better able to exploit the opportunity. O f course the reverse can happen too when a small firm lacks the resources to exploit a new product idea it may call upon the help of a larger firm w hich has the resources required.

Reasons for failure There arc many different reasons for new products failing to m eet up w ith the expectations of the firms w hich launched them. Some m ajor reasons for new product failure arc as follows: ■ products lack useful/meaningful uniqueness ■ planning is poor during the introduction phase ■ the introduction is badly tim ed, e.g. before the market is ready for the product ■ key im portant points are sometimes overlooked in the enthusiasm to go ahead ■ poor marketing and failure after launch ■ the top management in the organization does not provide adequate support for the product ■ company politics intervene, e.g. between various brand managers ■ unforeseen high product costs. A firm ’s inability to use commonsense reasoning or inattention to the management task of marketing the product are often causal factors o f new product failure (Proctor, 1993). It is also easier w ith hindsight to evaluate the success or failure of a new product - this too can sometimes be difficult. In the next scction w e w ill look at how firms can try to avoid new product failures by adopting a systematic approach to finding, screening and evaluating new product ideas.

A methodical approach Costs accumulate as firms progress through the six phases and the earlier potentially poor product ideas arc screened out the better it is for the company (Figure 12.2).

Idea acquisition It is suggested that particular attention should be given in the first place to an organization’s rcsourccs and that the organization’s m ajor problems should be analysed. A ttention should also be given to identifying external growth opportunities ready for exploitation

expanding markets, technological

breakthrough or rising profit margins. This w ill help to determ ine the product fields that arc of p rim ary interest to the organization (Ex hib it 12.3). The dual drivers of innovation arc technology and market demand (Ex hib it 12.4). Although the impact o f technology is prim arily felt in the R & D environm ent, market drivers have to be ascertained prim arily w ith the aid o f market research. Essentially this involves generating new product concepts based upon the notion o f problem-based ideation (Ex hib it 12.S).

253

GROWTH

STRATEGIES:

PRODUCT-MARKET

Idea acquisition from

2

Customers

Initial screening

Market research Competitors R&D

Fit with resources and objectives ROs estimate

EXPANSION

3

Business analysis Formal estimate of costs, sales and profits

Product development R&D prototyping product testing

Marketing testing Test marketing

6 Product introduction Roll out in selected markets monitor performance

Figure 12.2

S ix p h a s e s o f th e n e w p r o d u c t d e v e lo p m e n t p r o g r a m m e

E X H I B I T 12.3

■ ■ ■ ■

Opportunities for new products: under-utilized resources-e.g. strong franchise with dealers New resources- e.g. particular technical discoveries External mandate - e.g. market driver Internal mandate - e.g. derived from classical gap analysis

E X H I B I T 12.4

■ ■

STRATEGIC PLANNING

DUAL DRIVERS

Technology: laboratories, etc. Market: customer group, end use

Example: ■

University M icrofilms International was oriented to the technology of microfilming and the

■

Microfilm readers for libraries were just one new line.

■

Signode used plastic extrusion and food manufacturing to come up with plastic trays for

market activity of education.

packaging food that could be put in a microwave oven for warming.

254

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

E X H I B I T 12.5

CONC EP T GENERATION: PROBLEM-BASED I DE ATION

D is c o v e r u n m e t n e e d s a n d p r o b le m s

R o u t in e m a r k e t c o n ta c ts :

P r o b le m

sales call reports, service departm en t records, co m p la in ts

1 determine the produc t or activ ity category to study; 2 gather list of user

a n a ly s is :

problems: 1

expert opinion

2

published sources

3

focus groups or heavy user interviews: user panels, user observation, role playing.

There arc a variety o f ways o f obtaining new product ideas. M onitoring com petitors’ new product development, feedback from customers, m arket research, contact w ith R & D establishments, a firm ’s ow n R & D .T h e re is not one best method and firms should try all methods wherever possible. The use o f a creativity technique (Ex hib it I 2.6) such as m orphological analysis can help executives to generate many new product ideas. The basic premise behind using the technique is the idea that a product is an entity that has different dimensions. It may come in different shapes and sizes, appeal to different target markets, be made of different materials, etc. It is the combination o f attributes of these different dimensions that go into creating the product entity itself. A desk may be made of w ood, be relatively large w ith respect to comparable products, be styled in the classical mould and appeal to the user at home. Il is even possible to go beyond tangible dimensions. M orphological analysis entails recognizing the most im portant dimensions o f a product tw o, three or four

usually

and then generating a list of attributes relating to these dimensions. The next

stage involves taking combinations of the attributes listed (one for each dim ension) and deciding w hether or not this kind of product is already marketed by the firm . For example, taking fast foods as an example, one combination might be as shown in Table 12.1. The technique can be elaborated and ‘com puterized’ by making use of a random word generator to suggest possible attributes. If the combination generated does not represent a current product

E X H I B I T 12.6

C R E A T I V I T Y T E C H N I Q U E S FOR OBTAINING N E W P R O D U C T I D E AS

B ra in sto rm in g A t trib u te analysis: features, functions and benefits and how to im prove them D im ensional analysis: listing all the features and how we m ig ht im prove them Checklists: can it be adapted, modified, reversed, etc. M o rp h o lo g ic a l analysis Gap analysis: use of perceptual maps to identify gaps.

255

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

Table 12.1

M o r p h o lo g ic a l a n a ly s is e x a m p le

T y p e o f d is h

T a rg e t m a rk e t

Curry Piz z a s Fish and chips

Late night supper callers Evening meal Lunch -tim e shoppers

offering and it is felt that it could constitute an attractive product-markct opportunity then it could be retained as a possible idea to be progressed to the next o f the six phases — screening. An organization needs to establish a programme for planned idea generation. This could involve identifying idea-generating groups and giving them a clear concept of the organization’s interest fields. Conducting exploratory technical rcscarch can also be productive. Yet another fruitful approach is to use scenario analysis (see Chapters S and 6 for fuller accounts; see also Exhibit 12.7). Figure 12.3 provides some ideas o f sourccs o f inspiration which may lead to new product ideas. The sourccs shown arc not exhaustive and the readers may care to extend these sourccs for themselves. H owever, although some o f these sourccs (e.g. responding to needs for convenience) have given rise to the proliferation and introduction o f many new products and scrviccs (e.g. convenience shopping, vacuum dcaners, rem ote controlled televisions, etc.) many o f the sources have still to be m ore fully exploited (e.g. the use of leisure in a w ork w ay). Conceptualizing new product development within the fram ework presented offers a creative and constructive way o f searching for potentially profitable new products and services. For example, while ‘responding to unconscious needs’ has already resulted in the generation of new product ideas in the food and fashion industries (need not to be fat — dietary products; need to be appear thin - clothes that help one appear slim ) or in the insurance and property protection industries (security for on e’s possessions) there arc m any other unconscious needs of people and businesses to w hich creative and innovative tirm s might respond in the form o f new products and services.

E XH I B I T 12.7

SCENARIO ANALYSIS

Need to know future co nsu m er problems: 1

paint future scenario

2

study it for pr oblems and needs

3

evaluate those problems and try to solve the more important.

S c e n a r io a n a ly s is e x a m p le

A p a rtm e n ts 20 years from now m ight have lots of w indow s and su n lig h tstr e a m in g in. Furniture analysts m ig ht see two new problems: 1

upholstery needed which is more resistant to the

2

chair s needed that w ill pe rmit normal activ itie s - such as conversation and eating - but at the same time allo w more exposure to the sunlight.

256

sun

GROWTH S T R A T E G I E S : P R O D U C T - M A R K E T E X P A N S I O N

Responding to people's ethical beliefs

Life-style Eating out things to do with eating (e.g. tableware, attractive glasses) linked to entertaining friends

Not dangerous to animals e.g. The Body Shop What children should buy/see etc.

Symbolism (e.g. primitive people, belief systems)

Environmentally friendly

Celtic imagery People looking for meaning

Ecologically tested paper green products Presentation Relate the product to giving to charity

Responding to unconscious needs

N E W PRODUCTS PRODUCT PR ESEN T A T IO N

(fat, thin, secure, good parent, loved, etc.) Responding to needs for convenience (e.g. making work easier, cleaning, convenience food)

--- -----Creating needs

Use of leisure in a work way

(e.g. Viagra, certain sorts of decorations)

Postmodernism need for constant change and variety Washing powders Car styles Toothpaste Making things look old fashioned Car number plates Kitchens Computer games

Figure 12.3 Conceptualizing new product development

R ecently, th e d e m a n d for en v iron m entally friendly p ro d u c ts has c o m e into focus. As the tw enty first c e n tu r y unfolds, th e need to re sp o n d to p e o p l e ’s ethical beliefs o r needs and to finding m eaning throug h sym bols m ay increase in im p o rta n c e . This will have a w ide range o f po ten tial co nsequ ences for a vast array o f c o n s u m e r goods. T h e effects o f ‘p o s t m o d e r n i s m ’ have already b ee n felt —the need for co n stan t change and variety has b ee n ex p ressed and satisfied th ro u g h changes in style and in the increased variety w h ich has b ee n m a d e available in m any p ro d u c ts. Life-style also p re sen ts a pow erful influence o n the d em ands that people m ake for co n su m er goods and services. A lthough this has already had a significant im pact, its influence is likely to increase as peo p le b e c o m e m o r e affluent and ad o p t p a tte rn s o f life-style w hich at the p re se n t tim e ca n n o t even be im agined.

Screening

Usually, ideas for new p ro d u c ts arise sequentially, one at a tim e, and ca nno t be com p ared and evaluated along w ith a large set o f alternative ideas for n ew p ro d u c ts —unless a tech n iq u e such as m orphological analysis is used. B enchm arking against im p o r t a n t c rite ria is thus an im p o r t a n t p ro c e d u re to follow. Clearly, the likely financial p e r fo rm a n c e and im plications o f developing a n d / o r ad opting a new p r o d u c t idea are the key factors th at need to be taken into acco unt. H ow ever, w ith o u t u n d e rta k in g desk a n d / o r field research it is difficult to quantify w h at w e m ight c x p c c t to sell. Fooled estim ates o f subjective e x p e r t opinions, however, can s o m etim e s p rovide rem arkably close estim ates. M e m b e rs

257

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

o f the firm w ho might have some idea of the quantities o f the various new product ideas that the firm might cxpcct to sell should he consulted. W ith such estimates it should then be possible to make rough financial estimates of likely profits to be generated. These rough estimates are turned into more precise estimates at the third phase - business analysis

where a full quantitative analysis and evaluation

is made. The initial screening stage is characterized by a checklist of benchmarks which new products have to satisfy before they can be moved on to the next phase in the six-step process. For example:

■ Is the product compatible w ith present distribution channels? ■ Is the product com plem entary to current products? ■ Can it be priced com petitively alongside products of a similar quality? ■ W il l prom otion of the product be easy? ■ W il l there always be uses for the product? ■ Is there a w ide variety of potential customers? ■ A rc existing resources sufficient to facilitate production and marketing o f the product? ■ W ill the product fill an unsatisfied need in the m arket place? ■ Is the m arket likely to grow in size?

Experience seems to indicate that successful products:

■ fit w ell w ith the internal functional strengths o f the business ■ fit w ith the need of the market.

Such a checklist can of course be extended and modified. N e w product ideas can be rated against the items on the checklist and those satisfying kev criteria moved on to the next phase —business analysis.

Business analysis A t the business analysis phase sales, costs and profit projections have to be made in order to determ ine w hether the adoption o f the new product into the product mix w ill satisfy company objectives. The phase involves predicting sales and cost behaviour so that profitability of the product can be estimated. This can be done in a variety of ways and it is always advisable to use as many different ways as is feasible. Approaches include:

■ examining sales histories o f similar products ■ surveying market opinion ■ using expert opinions ■ statistical models (see chapter on marketing inform ation and decision support systems).

Irrespective o f the approach taken, m inimum and maximum sales estimates need to be obtained to provide an idea o f the amount o f risk involved. The method of forecasting depends on whether the product is a one-time purchase, an infrequently purchased product or a frequently purchased product. In the case of infrequently purchased products, attention has to be given to predicting first-time sales and replacem ent sales. In the case o f frequently purchased products, attention has to be given to

258

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

first-lime buyers and repeat purchases. In using any of the identified methods o f forecasting it is essential to gain a separate estimate, as appropriate, of:

■ first-time purchase ■ replacem ent purchase ■ repeat purchase.

Costs also have to be estimated and these may change over the time span o f the sales forecast. This has to be taken into account when estimating profits and likely sales since costs do have uncertainties attached to them. Escalating prices of raw materials or bought-in parts can stifle the sales growth of a new product bccausc of the need to continually adjust its pricc upwards. Placing a value on the financial appeal of a new product is of course very im portant. However, it docs have

to be borne in mind that a large amount ol uncertainty surrounds any estimates that

made. M oreover, there is always the danger that once

arc

numbers arc putdown on paper they w ill be

treated as if they represent certainties. It is therefore a good idea to keep in mind the m ore qualitative aspects o f evaluation as defined in the chccklist o f criteria used at the screening stage. The financial evaluation o f new product ideas should examine the following:

■ estimated after tax return on investment ■ payback period ■ variance in the estimates o f return on investment and payback between the best scenario and the worst scenario

to indicate risk.

Surveys o f m arket opinion can be particularly helpful at the business analysis phase sincc in addition to helping to quantify potential demand they can also help to provide other inform ation as w ell. It may be possible that w ith some adjustment to the product or service it w ill sell better. It is im portant to get this right at the outset. The kind of qualitative questions to ask here relate to whether:

■ the benefits o f using the product are clear to the user ■ the

product solves a problem or fills a need

■ other products already fill this need and give satisfaction ■ the pricc is right in relationship to the perceived value.

O ne should, of course, pick an appropriate group of target customers. W h e re the new product is only a concept it can be presented symbolically. A t this stage a word and/or a picture description w ill suffice. Products that satisfy the criteria set for this phase can then move on to the product development phase. The A-T-R model and an example o f its application in evaluating the financial potential o f a new product is shown in Exhibit 12.8.

Product development Developm ent is the stage at which a new product proposal is developed into a physical entity and plans are pul together for its production and introduction to the market place. Some products are obviously m ore complex than others. Product developm ent can therefore be an extrem ely lengthy business or

259

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

E X H I B I T 12. 8

A-T-R M O D E L

P ro fit = U nits sold X P ro fit per unit U nits sold = % who become aw are of the product X % who opt to try the product if they can get it X % of intended triers who can get the product (if it is available to them ) X % of triers who like the item enough to repeat purchase X the number of units th at repeaters w ill buy in a year. P r o f it per unit = Revenue per unit (u n it list price less trad e m arg ins, prom otion allow ances, freig ht e tc.) - cost per unit (u su ally cost of goods sold plus direct m arketing costs)

Therefore: Pro fit = Buying unitsX % aware X % trial X % availability X % repeat X annual units bought X (revenue per unit - cost per unit) (S e e A n til, 1 9 8 8 .) A-T-R exam ple: a new compound for polishing sports cars ■

N um ber of owners of sports cars: 3 m illion

■

% who become aw are of the new polish: 4 0 %

■

% of those a w are who w ill decide to try the new polish: 2 0 %

■

% of stores th at w ill have stocked the product (assum es potential user w ill not seek beyond one store if they cannot find it th e re ): 4 0 %

■

% of triers who like the product and try more: 5 0 %

■

N um ber of cans typ ical user buys in a year: 2

■

D o llar revenue at the fa cto ry, per can, afte r trade m argins and prom otion discounts: $2

■

U nit cost of can at the intended volum e: $0.65

■

P ro fit contribution forecast: 3 m illion X 0.40

X 0.20 X 0.40 X 0.50 x 2 x ($ 2 - $ 0 .6 5 )

= $ 1 2 9 ,6 0 0

it can be reasonably short. As a stage in the new product developm ent process it is im portant for all products. It is the stage w here the product moves into R & D and engineering (in the case o f a com plex technological product) and it is here that the really heavy costs can start to mount up. Efforts are directed at trying to turn the idea into a technically and com m ercially feasible product. This involves what is know n as prototyping. The objective is to develop a physical version o f the product (a prototype) which:

■

w ill m eet w ith consum ers’ expectations

■ w ill perform safely under norm al use and conditions ■ can be produced for the budgeted manufacturing costs.

Developing a prototype can take days, months or years according to the nature o f the product. For exam ple, com m ercial aircraft take several years to develop. W h e n com pleted, the prototype is

260

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

subjected to rigorous functional and consum er tests. These tests arc carried out both on the bench and in the field to ensure that new products perform safely and effectively (Exh ibit 12.9). There are a variety o f approaches to consum er testing. These include bringing consumers into the laboratory to try out the product or allowing them samples or models to try out in their ow n homes.

Test marketing W h e re launch costs arc high it would seem comm onscnsc to test m arket new products before embarking on comm ercialization on a national or international scalc. How ever, not all products arc test m arketed. It is possible under certain circumstances that test marketing the product may provide im portant business knowledge to competitors. Nevertheless, test m arketing, on the other hand, can avoid disasters and save firms m illions o f pounds. The amount o f test marketing to be given to a product reflects investment cost and risk on the one hand and pressure o f time and cost of research on the other. C learly the greater the amount of investment, the more need there is to proceed w ith thorough testing. The same is also true o f highrisk new products. A variety o f test marketing methods exist and there are differences between test m arketing industrial and consumer goods. O n e o f the most im portant factors these davs is speed in new product developm ent (Ex h ib it 12.10). N e w products have to be put into the m arket quickly in order to stay ahead of competition.

D IV ER SI FI C AT I ON Diversification involves m oving simultaneously into new products and new markets. It is a risky strategy but w ith careful selection o f the right kind o f businesses, considerable im provem ents in profitability can be experienced. D iversification represents an opportu nity for growth and revitalization. A diversification strategy can be im plem ented by an acquisition (o r m erger), new business venture or strategic alliancc.

E X H I B I T 12.9

CO N C EP T TESTING

■

Uniqueness of the concept

■

B elie v abilit y of the concept

■

Im portanc e of the problem being addressed

■

E xtent to which the concept is interesting

■

E xtent to which it is realistic, practic al, useful

■

E xtent to which it solves a problem or meets a need

■

How much they like the concept

■

How likely they would be to buy the produc t

■

T heir reactions to the proposed price

■

W h a t pr oblems they see in using the product.

261

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

E X H I B I T 12. 1 0

T E C H N I Q U E S F O R A T T A I N I N G S P E E D IN N E W PRODUCT D E V E L O P M E N T

■

Do the job right first tim e

■

Find certain w inners not those th at 'also ra n '

■

T ra in everyone involved

■

Com m unicate w ith everyone who needs to be 'in the know '

■

Be flexible and include contingency arrangem ents

■

M ake speedy decisions and im plem ent them quickly

■

Cut things out but show caution and prudence

■

Use venture team s, etc.

■

W o rk in sm all groups to get round bureaucracy

■

Em p o w e r a team and m otivate it

■

B rea k down o rganizational b arriers

■

M ake sure supporting departm ents are ready when called on

■

Use computer-aided design

■

Use design-aided m anufacture: reduce

■

Use common components

■

M ake it easy to product/service test

■

Inco rp o rate qualities th at make for fast tria l

■

parts; set tolerances according to needs; etc.

Use rollouts not test m arkets

■

Spend w hat it takes to get im m ediate m arket awareness

■

M ake tria l purchasing as easy as possible

■

Get custom er service ca p a b ility in place ahead of need, and test it out.

It is usual to differentiate between diversification that is ‘related’ from that which is ‘unrelated’ . A related diversification is one in w hich the new business has meaningful com m onalities w ith the O core business. These provide the potential to generate econom ics o f scalc or synergies based on exchange of skills and resources. D iversification can take place into related or unrelated products. A firm in m icrocom puter production might move into making personal telecommunications equipment. This m ight be seen as diversifying into related products sincc both products make use o f m ic ro ­ electronic technology and the experience gained in one field might be usefully employed in the other. The same firm diversifying into shoe manufacturing w ould be shifting into unrelated products. M oving into areas w here a firm docs not have any p rio r cxp cricncc is highly risky and firms may prefer to move into related markets. M oreover, there may be some synergy to be gained from moving into related markets. The synergy may be in marketing or even in production. In theory, as a result of diversification, the business should be able to im prove its return on investment ( R O I ) because of increased revenues, decreased costs or reduced investment. M eaningful com monalties can involve similar ■ distribution channels ■ images and their impact on the m arket

262

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

■ sales and advertising efforts ■ facilities ■ production processes ■ R & D efforts ■ operating systems ■ staff needs. It is im portant to determ ine whether there is any real area o f com m onality that w ill affect the R O I. Sometimes an unrelated diversification can be justified but it does require a different rationale.

Related diversification Related diversification provides the potential to attain synergies by sharing assets or skills across businesses. W h e n related diversification is achieved by internal expansion, the goal is to export assets or skills. W h e n acquisition o f or m erger w ith another business takes place, the goal is to combine two sets of complem entary assets and skills - brand names, marketing skills, sales and distribution capacity, and R & D capabilities. The aim is to find business areas w here the assets and skills can be applied to generate an advantage. O n e approach is to exam ine each asset for excess capacity and ascertain w hether it is under utilized. Im plementation problems have to be ascertained, too. Assets and skills may require adaptations when applied to different business and new capabilities may have to be found or developed. There are the cultural problems which can arise as two organizations may have to merge and, if not carefully handled, these may negate the benefits o f diversification. T he following also have to be taken into account.

Continuing to use the brand name A strong brand name can provide name fam iliarity that w ill aid in the tasks o f acquiring awareness, generating trial purchases and gaining distribution for new products. M ost im portant is the brand association

what the brand means. Four types o f association arc com m only found:

■ image o f high or low perceived quality ■ attribute associations w ith the brand or product class ■ attribute associations that would be negative in a new context ■ association w ith a product class. Three factors influence what associations w ill carry over into a new context: ■ the strength o f the attribute or quality association in the existing context ■ the fit o f a brand into the new context ■ whether il is plausible lo consider the brand in the new context. Developing brand extension options starts by finding out on what products a brand name would fit and what associations it would bring to the new product class. A brand extension can provide substantial support for a brand name by increasing its awareness level and by increasing its associations. H owever, brand extensions do have the potential to damage a corc brand by creating undesirable attribute associations or weakening those that exist.

263 ■

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Making use of marketing skills or compensating for lack of them A firm w ill either possess or lack strong marketing skills for a particular market. Thus a frequent m otive for diversification is to export or im port marketing skills.

Capacity in sales or distribution A firm w ith a strong distribution capability may add products or services that could exploit that capability. A firm with capacity in its sales or service organization can look to diversify into products that can use that capacity.

Manufacturing skills M anufacturing or processing ability can be the basis for an entry into a new business area.

R&D skills Expertise in a certain technology can lead to a new business based on that technology. Creativity is often required to provide opportunities for basic technology and the R & D capability that supports it.

Achieving economies of scale Related diversification can som etim es provide econom ies o f scale. Som etim es a critical mass is required in order to be effective.

Risks of related diversification There are three problem areas:

■ Sim ilarities and potential synergy simply do not exist. ■ Potential synergy may exist but it is never realized because o f im plementation problems. ■ An acquisition is over-valued.

Unrelated diversification The objectives of unrelated diversification arc mainly financial, to generate profit streams that arc cither larger, less uncertain or m ore stable than they would otherwise be.

Manage and allocate cash flow Unrelated diversification can balance the cash flows of strategic business units. A firm which has many such units that m erit investment might buy or merge w ith a cash cow to provide a source o f cash. The acquisition o f the cash cow may reduce the need to raise debt or equity over time. Conversely, a firm w ith a cash cow may enter new areas seeking growth opportunities or sim ply areas to generate future earnings.

264

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Entering business areas with high ROI prospects A basic diversification motive is to improve an R O I by moving into

business

areaswith high

and R O I prospccts.

Obtaining a bargain price for a business A way to improve R O I is to acquire a business at a bargain price so that the investment w ill be low and the associated R O I w ill therefore be high.

Reducing risk The reduction of risk can be a motivation for unrelated diversification. Heavy reliancc on a single product line can stimulate a diversification move. Risk can also be reduced by entering businesses that w ill counter or reduce the cyclical nature of existing earnings.

Risks of unrelated diversification The very concept of unrelated diversification suggests risk and difficulties because there is no possibility of synergy. Among the major risks are:

■ attention may be diverted from the corc business ■ managing the new business may be difficult ■ the new business may be over-valued.

Unrelated diversification, if unsuccessful, may actually damage the core business by diverting attention and rcsourccs from it. The potential for difficulties in managing a diversification is magnified when an unrelated business is acquired. The new business may require assets, skills and an organiza­ tional culture that differ from those of the corc business. Indeed, the skilled team in an acquired firm might well leave and be difficult to replace. A new business area might be incorrectly evaluated. Environmental threats may be overlooked or misjudged and if an acquisition is involved, its strategic liabilities, weaknesses and problems may be undiscovered or miscalculated.

Selecting the right entry strategy The right entry strategy depends on the firm ’s familiarity with the product market to be entered. One may envisage familiarity being defined along two dimensions: market; and technology or scrvicc embodied in the product. W ith respect to the market factors, three levels of familiarity are defined: ■ base: existing products arc sold within this market ■ new /familiar: the firm is familiar with the market because of extensive research, experienced staff or links with the market as a customer ■ new/unfamiliar: knowledge of and experience o f the market arc lac king.

265 ■

growth

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

There are also three levels o f fam iliarity w ith the technologies or services embodied in the products: ■ base: the technology or service is embodied w ithin existing products ■ new /fam iliar: the company is fam iliar w ith the technology because o f w ork in related technologies, an established R & D effort in the technology, or extensive focused research in the technology ■ new /unfam iliar: knowledge o f and experience with the technology are lacking. The basic suggestion is that as the level o f fam iliarity on these tw o dimensions declines, the com m itm ent level should be reduced (see Exhibit 12.1 1).

V E R T I C A L I N T E G R AT I O N Vertical integration can take two forms. It can be forward integration, as when a producer takes over a distributor, or backward integration as is the case when a m anufacturer takes over a supplier. Integrative strategies enable firms to gain greater control over the chain of production and distribution. For example, a m anufacturer may have difficulty in gaining vital components from a supplier. It may be because the supplier is also selling the same component to other firms and cannot producc enough to satisfy everyone. U n d er such circumstances the manufacturer may be tempted to try to buy out the supplier (i.e. become the owner of the supplier’s business) to ensure that it can always have supplies o f the key component. A good way to understand when vertical integration should be considered and how it should be evaluated is to look at the possible benefits and costs o f a vertical integration strategy. These may be such things as: ■ Benefits: operating economies, access to supply or demand, control o f the product system, entry into a profitable business, enhanced technological innovation.

EXHIBIT12.il

ENTRY STRATEGIES

Technolog y of service embodied in the product

Market facto rs

Base

New fa m ilia r

New u nfam iliar

New u nfam iliar

jo in t ventures

New fa m ilia r

internal m arket developments or ac quisitions (or joint ventures) internal base developments (or acqu isitions)

venture cap ital or educational acquisitions internal ventures or acquisitions or licensing

venture capit a l or educationa l acquisitions venture capital or educational acquisitions

internal product developments or acquisitions or licensing

jo in t ventures

Base

266

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Com bining operations can result in improved production and related economies. In some contexts, a key succcss factor is acccss to a supply o f raw m aterial, a part or another input factor - backward integration can reduce the risk. Sim ilarly, forward integration could be motivated by concern about product outlets. W h en ever only one buyer and one seller exist for highly specialized products and scrviccs, there w ill be an incentive to consider vertical integration. W h e n such specialization occurs there is a real danger that one party may hold up the other by taking opportunistic advantage o f a change in cither its circum stance or the environm ent. It may be necessary to integrate vertically to gain sufficient control over a product or scrvicc to maintain the integrity o f a differentiation strategy. Vertical integration may be the only way to ensure that quality is maintained. A vertical integration decision can be motivated by an attractive profit potential or an advantage in achieving technological innovation.

■ Costs: operating costs, management of a different business, increase in risk, reduced flexibility, cost o f inward focus.

Vertical integration often involves adding an operation that requires organizational assets and skills w hich differ markedly from those o f a firm ’s other business areas. As a result, the firm may not be suited to run the integrated operation, effectively and competitively. The classic way to reduce risk is to avoid having too many eggs in one basket — to diversify. Vertical integration tends to increase the amount of com m itm ent and investment that arc tied to a ccrtain market. If that m arket is healthy then integration may enhance profits. O n the other hand if the m arket turns down, integration may cause profits to be m ore depressed. Integration also raises exit barriers. If the business becomes weak, the additional investment and com m itm ent crcatcd by integration w ill inhibit consideration of an exit alternative. Furtherm ore, if one operation becomes dependent on the other, it may be aw kward to trv to exit from one. Vertical integration usually means that a firm is com m itted to an in-house supplier or customer. The flexibility o f changing suppliers may be lim ited because o f com m itm ent made to an integration partner. T here is often a trade-off between flexibility and com m itm ent. Increased com m itm ent provides the potential o f higher profits but is associated w ith a reduction in the ability to adapt to changing circumstances. The process o f actively dealing w ith suppliers or customers in the m arket place and o f anticipating a supplier’s technological developments and new customer applications can be extrem ely healthy. The integrated firm w ith captive supplier—custom er units has a reduced need for that process (Exhibit 12.12). Furtherm ore, there is the reduced pressure on cost control.

E X H I B I T 12.12

I N T E G R A T I V E G RO WT H S T R A T E G I E S

C u rre n t p ro d u c ts

Curre nt m arkets New m arkets

B ac kw a rd integration F o rw a rd integration

N e w p ro d u c ts

H o riz o n ta l integration Unrelated acqu isition

267 ■

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

F U R T H E R D E V E L O P M E N T S OF T H E A N S O F F M A T R I X Egan (1998) has extended the Ansoff m atrix to incorporate other contemporary issues such as product augmentation, acquisition and internationalization but still stays w ithin A nsoff’s two by two format (Ex h ib it 12.13). The new m atrix differentiates between organic and acquisitive market penetration. The form er indicates reaching m ore o f the target users through growth in the corc, existing product offering. Acquisition, it is argued, if not a new product is an extended offering. It is only if a product is tru ly o f a gcneric unbranded nature that it can be regarded as offering the same product. Egan placcs the concept o f vertical integration in the area o f diversification. A akcr (1995) view s this fundamentally differently. H e placcs vertical integration as a third dimension to Ansoff s m atrix. Vortical integration, he im plies, can occur alongside penetration, product or market development. Aakcr uses the example of the forward integration of Nike into opening retail outlets and backward integration o f Safeway into in-store bakeries. These, he suggests, constitute a new dimension to market penetration strategy. Egan’s argument concludes that this is really diversification sincc the new product is in fact the retail cxpcricncc rather than the item purchased. Vertical integration may be perform ed for reasons of increasing econom ic power (i.e. reducing costs, supplier or distributor pow er) or im proving competitive intensity. However, Stein el al. (1996) suggest that vertical integration is not necessarily the best answer since the same outcom e can be achieved m ore cost effectively through improved supply chain arrangements.

GRAND S T R A T E G Y M A T R I X (GSM) A nother useful tool is ‘The Grand Strategy M a trix ’ (G S M : see Figure 12.4). The m atrix considers tw o parameters, namely

E XH I B I T 12.13

Current markets

New markets

E G A N ’S E X T E N S I O N OF T H E A N S O F F M A T R I X

C u rre n t p ro d u c ts

N e w p ro d u c ts

Penetration - organic - acquisition

Product augmentation

Market expansion - increase usage rejuvenate PLC

Product development - related - unrelated

Market development - new uses - new users

Diversification - related - conglomerate Vertical integration Internationalization

268

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

The Grand Strategy Matrix Rapid market growth 20%

Weak competitive position

Quadrant 11

Quadrant 1

1 2 3 4 5 6

1 Market development 2 Market penetration 3 Product development 4 Forward integration 5 Backward integration 6 Horizontal integration 7 Concentric diversification

Market development Market penetration Product development Horizontal integration Divestment Liquidation

10o/o Strong -► competitive position

Quadrant I I I

Quadrant IV

1 Retrenchment 2 Concentric diversification 3 Horizontal diversification 4 Conglomerate diversification 5 Divestment 6 Liquidation

1 Concentric diversification 2 Horizontal diversification 3 Conglomerate diversification 4 Joint ventures

0% F ig u r e 1 2 . 4 S o u rc e :

T h e G ra n d S tr a te g y M a t r ix

David, Fred R.

S tr a te g ic

M a n a g e m e n t: C o n c e p ts a n d C a s e s ,

9th E dition, © 2 0 0 3 ,

p. 21 5, by perm ission of Pear son Education, Inc., Upp er Saddle River, NJ.

■ com petitive position ■ market growth

(See the Boston Consultancy G rid and D irectional Policy matrices in Chapter 2.) C om petitive position could be measured by a D irectional Po licy M atrix . T he G S M m atrix indicates ‘appropriate’ strategics for the organisation or business unit in order o f attractiveness.

Quadrant 1 (SO) H ere a firm is in a strong strategic and com petitive position in a high growth market. A n organization in this position should concentrate on its current markets and products, e.g. market development, market

penetration, product development. O f course an organization or business unit may wish to changc its position for a num ber o f reasons. For example, it may wish to apply excess rcsourccs (physical, financial, human) to a more profitable activities. A narrow product portfolio may indicate the need for concentric diversification to safeguard its future prosperity.

269

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

Quadrant 2 (WO) In this situation while there may be opportunities for expansion an organization may be relatively weak in terms o f its rcsourccs at its disposal, the strength of its products or services or its management capabilities. In such a situation an intensive strategy may be advisable but there may be other possible options including horizontal integration possibly in collaboration or alliancc with another organization that can make up for these weaknesses. If the organization cannot find a com petitive advantage to exploit the market growth then divestment and even liquidation may even be the only other options.

Quadrant 3 (WT) An organization in this quadrant has a weak com petitive position and is competing in slow growth industries. The options are divestment o r liquidation though retrenchm ent and even diversification may be possible if exit costs arc too high.

Quadrant 4 (ST) H ere an organization has com petitive strength but operates in low growth industries. The best move w ould be into a m ore attractive industry by con cen tric, horizontal or possibly conglom erate diversification.

E V A L U A T I N G G RO WT H S T R A T E G I E S W h ile the A-T-R m odel described above is a useful tool there are also other financial approaches to evaluating growth developm ent alternatives. In essence the central aim is to identify costs and benefits associated w ith the available alternatives and, taking account o f the differences among the various alternatives, to decide upon the course of action that is most appropriate for the organization. Effect on cash flow is a m ajor concern when examining alternative courses o f action. O n e needs to treat cach alternative as a project and estimate the nature of anticipated cash flows over the period o f tim e that the project is likely to be alive. Initial and end o f project flows have to be taken into account as w e ll as inflows and outflows o f cash during the time the project is up and running. Initial investment and one time set up costs may be needed at the beginning while there may be disposal costs and shut down costs at the end of the project and even inflows o f cash resulting from selling equipment at scrap or residual values. There arc a number o f methods that can be used to appraise projects. These includc the payback

period method, the average rate of return method and the discounted cash flow method. The payback period method is simple to use but ignores profitability so that its use in the context we wish to consider is only really useful for non-profit making organizations. The average rate o f return method docs take account o f profitability but does not take into account the tim ing o f benefits. Discounted cash flow methods make up for the limitations in the other two approaches. W e w ill illustrate each method in turn.

270

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Payback period method Suppose a Council runs a sports centre and wants to expand its existing facilities but bas a limited budget to spend in order to do so. Imagine that there arc two possible projects that can be considered expansion to the range o f non-aquatic sports facilities available and expansion of the swim m ing facilities. The life of the project is put at 10 years in cach case and account has to be taken o f different charging and running costs. The projected net cash flows for the tw o projects are shown in Table 12.2. Initial investments arc shown as an outflow in year — £50,000 in the case o f non-aquatic sports facilities and £60,000 in the case of the swim m ing facilities. The surplus in cash flow is shown in each o f the next 10 years for both projects. It w ill be observed that in the case o f the non-aquatic sports facilities then the initial investm ent o f £50,000 w ill not be recovered until the end o f year 5 (as indicated by the bold figure in the table) and that in the case of the swimm ing facilities it w ill be some tim e during year 6 when the initial investment (£60,000) w ill be recovered since in this last case only £55,000 w ill have been recovered by the end o f vcar 5. The analysis provides interesting inform ation sincc both projects w ill generate the same surplus of £50,000 by the end o f their lives. The decision taken w ith regard to the projects w ill be affected by many other factors, o f course, and the criterion o f payback lim e w ill be only one such factor.

Average rate of return method This approach enables one to evaluate alternative strategies by comparing the return on the original sum invested in each and every instance. Using the example above again then we have the data shown in Table 12.3. This would indicate that expanding the sports facilities offers the better returns in financial terms. But o f coursc there may be other considerations, too, particularly sincc in this case profitability may not necessarily be an im portant criterion. However, in the ease of a privately run sports centre it would certainly be relevant.

T a b le 1 2 . 2

Year

0

l 2 3 4 5 6 7 8 9 10 Total 1 - 1 0

P r o je c te d n e t c a s h flo w s f o r tw o p r o je c ts ( p a y b a c k p e r io d )

N o n - a q u a t ic : s p o r ts f a c i l i t y im p r o v e m e n t

S w im m in g f a c ilit ie s im p r o v e m e n t

£ 00 0

£ 00 0

-50 10 10 10 10

-60 11 11 11 11 11

10 10 10 10 10 10 100

11 11 11 11 11 110

271

GROWTH STRATEGIES: P RO D U CT-M ARKET EXPANSION

Table 12.3 A verage rate of return method N o n - a q u a tic s p o r ts

S w im m in g f a c ilit ie s

f a c i l i t y im p r o v e m e n t

im p r o v e m e n t

P e r io d

£ 00 0

£ 00 0

Initial investment Cash flow over the life of the project (years 1-10) Net inflow Average annual inflow Net Inflow/10 Average rate of return (Average inflow/initial investment) as a %

-50 100

-60 110

100

100

10

10

10/50 = 20%

10/60 = 16.7%

Discounted cash flow M oney we receive today is w orth more than the same amount o f money we receive in the future. This principle reflects the fact that any money can be invested and earn interest for the period il is invested so it must be more valuable than the same amount received al a later dale. The discounted cash flow principle takes into account this factor. In applying this method one can either use the net present value approach or the more sophisticated

yield method. In the case of the net present value approach the present values for future cash flows are calculated assuming a given rate o f discount. This is usually the m inim um rate that the organization considers acceptable. O n e calculates the net present value o f the cash flows each period and sums these over the period of the project. As long as the summed amount remains positive then it w ill have m et w ith or exceeded the rate o f return criterion as reflected in the discount rate used. Applying the y ield method involves uncovering the discount rate at w hich the sum o f all the discounted values is zero and this reflects the internal rate o f return o f the project. Using the above example again and using a discount factor o f 15 per cent as the m inim um acceptable discount factor produces the results shown in Table 12.4. Using the net present value approach shows that both projects failed to exceed the 10 per cent m inim um rate o f return set down by the organization but that the non-aquatic sports facilities improvements seems to offer the better return on investment since the value o f —4.3 for this option in the table is greater than that o f —9.71 for the swim m ing pool facilities improvements. The actual^'ic’/J of the two projects individually can be determined experim entally w ith the aid of a spreadsheet by increasing the discount rate until the total net present value of the project equates to zero. Sincc this w ill be less than the m inimum requirem ent o f a 10 per cent return in both cases then on purely financial term s both projects might reasonably be rejected. However, there may be reasons other than financial ones for giving the go ahead for one or other o f the tw o projects.

272

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Table 12.4

Minimum acceptable discount factor

Year

N o n - a q u a t ic

N o n - a q u a tic

s p o r ts

s p o r ts

S w im m in g

fa c ilit ie s

fa c ilitie s

fa c ilitie s

f a c ilit ie s

im p r o v e m e n t s

im p r o v e m e n t s

im p r o v m e n ts

im p r o v m e n ts

S w im m in g

D is c o u n t fa c to r

P re s e n t

P re s e n t

(£ 0 0 0 )

(1 0 % )

C a s h flo w

v a lu e

C a s h flo w

v a lu e

0 1 2 3 4 5 6 7 8 9 10

1 0.909 0.756 0.631 0.526 0.438 0.365 0.304 0.254 0.211 0.176

-50 10 10 10 10 10 10 10 10 10 10

-50 9.09 7.56 6.31 5.26 4.38 3.65 3.04 2.54 2.11 1.76

-60 11 11 11 11 11 11 11 11 11 11

-60 10 8.33 6.94 5.78 4.82 4.02 3.35 2.79 2.32 1.94

Total net present value

-50 + 45.7 = -4.3

-60 + 50.29 = -9.71

C O ST B E N E F I T A N A L Y S I S Cost benefit analysis usually involves trying to evaluate opportunities using measures that arc not directly comparable w ith one another. If everything could be measured, say, in simple financial terms then comparisons would be relatively easy to make. However, since this is not always possible, an alternative is to make use o f subjective judgements using ratings and weightings for the different criteria. In the example shown (Figure 12.5) below, a 10-point scalc is used to evaluate the options and the scores are then weighted to obtain an overall value for benefits and costs. T he data supports the view that as far as the firm is concerned Poland, Rom ania, Austria and Greece are not attractive propositions. None of the other countries seem anything like as attractive as the home market (in this instance the United Kingdom ). However, G erm any and the Scandanavian countries may be w orth further consideration.

QUESTIONS 1

How might the Ansoff matrix be usefully employed when looking for new marketing strategies?

2

In what order should an organization consider the various strategic approaches which make up the Ansoff matrix along with integrative strategies. In particular when is each one most appropriate?

3 What is a new product? What is a new product success? How can risk of failure in introducing products to the market be minimized?

273

Cost benefit analysis - international sales Costs

Learn Language

Weighting

France Germany Spain Italy Belgium United Kingdom Holland Denmark Sweden Norway Finland Greece Portugal Poland Roumania Austria Switzerland Cyprus

Volatile Currency

Law s

Political/Legal Uncertainties

1.1

1.2

1.5

5 6 5 6 5 0 5 3 3 3 3 6 6 7 7 5 2 1

6 6 5 6 5 5 6 6 5 6 5 7 6 7 7 7 5 7

1 1 1 1 1 1 1 2 2 2 2 1 1 2 3 1 1 2

Design products to suit market customers 1.4 1.6 1 1 2 2 2 0 1 1 1 1 1 2 2 3 4 2 1 1

Cost benefit analysis 4

□ France □ Germany

3.5

□ Spain

□ □ □ ■

3 2.5

III n

2

I- !

Q>

S

CO

1.5

1

1

.

1

■

■■

rj

0.5

f

c

]

■ ■ ■ ■ □ □

Italy Belgium United Kingdom Holland Denmark Sweden Norway Finland Greece Portugal Poland Romania Austria

■ Sw itzerland

□ Cyprus 0

Country

Figure 12.5

Cost benefit analysis

2 2 3 3 2 0

3 3 3 3 2 1 1

0 = low

10 = high Total

Benefits

Deter Competition

HighGrow Reduce Profits Sales Dependency

Total benefits

Benefits /costs ratio

Costs

0.8

1.6

1.4

1.7

1 6 2 2 0 4 0 0 0 0 0 0 4 4 0 0 0 0

4 5 5 6 6 5 3 4 4 5 3 4 3 3 2 2 2 3

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5

18.6 19.7 20.4 22.7 19 7.5 17.2 16.5 15.3 16.5 15.3 23.9 22.7 28.1 31.2 21.4 12.7 15.5

22.7 28.3 25.1 26.7 25.1 26.7 20.3 21.9 21.9 23.5 20.3 21.9 23.5 23.5 18.7 18.7 18.7 20.3

Costs: 1 Need to learn another country's language 2 Understand laws 3 Deal with volatile currencies 4 Face political and legal uncertainties 5 Design their products to suit different customer needs and expectations Benefits: 1 Prevent foreign competitors offering superior products or lower prices might attack the company's domestic market 2 Some foreign markets present higher profit opportunities than the domestic market 3 Grow sales and recognize the benefits to be gained from economies of scale 4 Reduce its dependence on any one market so as to reduce risk arising from such over reliance on a domestic market

1.22043011 1.43654822 1.23039216 1.17621145 1.32105263 3.56 1.18023256 1.32727273 1.43137255 1.42424242 1.32679739 0.91631799 1.03524229 0.83629893 0.59935897 0.87383178 1.47244094 1.30967742

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

4

D iversification is sim ply a form of horizontal integration. To w hat extent would you agree w ith this

5

W h a t are the benefits and disadvantages of v ertica l in teg ra tio n ? How m ight the advantages best be

point of vie w ?

sought in the tw enty-first century? 6

Using the yield method calcu la te the internal rate of return of the two projects illustrated in the text above. W h a t other fa cto rs m ig ht govern w h eth er or not one or other of the projects m ight be im plem ented?

CASE STUDIES R e mo t e A p p l i c a t i o n s People are getting lazier - or is it that they need more tim e to re la x ? Or is it sim ply that m anufacturers think that people are getting lazier? Or think that people need more time to relax ? It may just simply be part of the convenience culture that has grown up over the past forty years. First, there was remote controlled television - switching the T V receiver controls on/off/over from a distance. Next the same principle w as applied to video recorders. Cam eras, too, began to appear which could be operated from a distance. No longer w as there any need to ask a passer-by to photograph one when travelling alone or needing to be photographed with another person. The new device enabled one to set up the cam era so that it would point at the spot where you were going to take your picture, then on returning to the spot, at the flick of a button, one could then photograph oneself. No longer w as there any need to rush back to the spot for a tim er on the cam era to perform the same function. Remote control devices have taken different form s and operated in different ways. Sensors on outdoor lights can pick up the presence of people nearby and auto m a tica lly switch themselves on to illum inate possible intruders to the premises. Garage doors can be made to open a u to m atically in response to flashes from ca r headlights - and so on. Founded in 1993, Rem ote A p p licatio n s defines its business as that of im proving convenience in the home. Es se n tia lly an electronics-based com pany, it has invented a device w hich enables the user to convert any appliance to remote control. The device itself consists of two parts - an adaptor th at one plugs into any m ains power socket or light fitting and a remote control device th at fits into the palm of the hand. A ctiva tin g the latter enables one to switch an appliance on or off at a distance of up to 25 metres. The equipm ent enables one to turn appliances on or off from the co m fort of one's a rm c h a ir or to boil a kettle before one gets up. It enables one to switch on the greenhouse heater from the com fort of one's kitchen in the w in ter and a m yriad of other sim ila r actions it is preferable to do from a distance. Indeed the app lications are v irtu a lly endless. The handheld con trollers use powerful radio signals th a t tran sm it their power even through w alls and ceilings. E a c h one is pre-programmed w ith security codes so th at it w ill not interfere w ith other rem ote controlled appliances or devices. The controllers are also pre-fitted w ith a 12 V battery for im m ediate usage. Tw o types of ad ap tor are supplied - one for m ains plug sockets and the other for bayonet bulb light fittings. The adaptors are controlled in a choice of three ways, either by the remote handset, by an instant-fit surface mounted on/off switch or via a wall-m ounted dim m er switch. The producer, based in T a iw an , is looking for a m arketing strategy to introduce the devices into European m arkets. Key decisions relate to pricing, prom otion and distribution.

275

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

QUESTIONS 1

How should the com pany set about m arketing its products?

2

W h a t steps do you think the firm should take p rior to launching such a product?

3

Do you think that there really is a world-wide m arket for this product? W h y or why not?

4

W h a t would you see as being the m ajor ap p lication for such a product?

S u r p l u s Ga r de n F u r n i t u r e The Gardening Exp erience owns a chain of gardening superstores selling a wide range of gardening equipment, furniture and plants and shrubs across the whole of the U K. Founded o rig in a lly as a sm all garden centre in Sussex the firm has grown now to a m ulti-m illion pound enterprise. In recent tim es the firm has developed the gardening fu rn itu re side of the business. Its m ain com petitors on this side of the business are D IY superstores most of whom m arket som ew hat inferior q u ality garden furniture which typ ica lly lasts only for two to three years of usage by custom ers. The Gardening Experience chain's furniture is much more durable and known to last for much longer periods of tim e even w ith heavy usage by customers. Forecasting demand for garden furniture is a bit of a hit and miss business since demand depends la rg e ly on sudden surges in fine w eath e r. Businesses buy in fu rn itu re from foreign suppliers and hold stocks in anticipation of estim ated average demand during the spring and summer months. In a poor ye a r this means that at the end of the summer m any businesses are left with surplus stock which is disposed of at prices at or even below cost to make w ay for new designs in furniture in the following spring. The G ardening Ex p erie n ce is keen to expand its custom er base and is considering entering in tern atio n al m arkets as a means of achieving this end. Such a strategy it feels would enable it to reduce the seasonal effect on demand and lessen the need to sell of items at ultra-low prices at the end of the sum m er since stocks could be tra n s fe rre d from one in tern atio n a l m a rk et to an o th er w ith com p arative ease.

QUESTION How would you advise the firm in m atters relating to international m arketing ?

NEW PRODUCT EVALUATION A firm is considering three proposals fo r new products to add to its range. The average of the w orst and best estim ate of net cash flow s for each of the products is shown in Table 12.5.

276

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

Table 12.5 Period

New product evaluation Product A cashflow

Product B cashflow

Product C cashflow

0

-100

-110

-125

1 2

20

25

20

25

30

30

25

30

35

3 4

25

30

35

5

25

30

35 35 35

6

25

30

7

25

30

8 9

25 25

30

35 35

10

25

30

35

145

185

205

T otal

30

QUESTIONS 1

W h ic h product appears to offer the best return on investm ent?

2

Assum ing th at the firm does not w an t to go ahead w ith products th at offer less than a 20 per cent return on investment as measured in the answer to question 1, how would this influence its evaluation of the new products under consideration?

3

The figures in T able 12.5 show the estim ate of cash flow s associated w ith each of the products that is the average of the w orst and best scenarios. If the w orst scenario would show a reduction of 10 per cent in the positive cash flow s in all cases how would this influence the firm 's assessment of the situation, assuming it w anted to use the w orst scenario criterio n as the basis on which to make a judgement.

P r o f i t c o n t r i b u t i o n f o r e c a s t f or pet f o o d A firm is introducing a new food for pet ham sters. It is estim ated that the number of fam ilies owning ham sters is 4 ,5 0 0 ,0 0 0 . Previo u s research indicates th at 80 per cent of fam ilies are likely to become aw are of the new food and of these 15 per cent w ill try it. The firm estim ates that it can get 40 per cent of pet shops to stock the food. Of those fam ilies who try the food it estim ated th at 30 per cent w ill like the product and try more and that the number of packets of the food th at a typ ical user buys in a year is 25. The revenue the com pany w ill receive at the facto ry per packet is put a t 50p per packet and the unit cost at the intended volum e is 15p.

QUESTION Estim a te the profit contribution of the ham ster food.

277

GROWTH STRATEGIES: PRODUCT-MARKET EXPANSION

V e r t i c a l i nt egr at i on A firm is considering the costs and benefits of vertica l integration as a means of gaining more control over the m anagem ent of its products and achieving cost economies. P re lim in a ry analysis of the situation provides the data shown in Table 12.6.

QUESTION W h a t m ight the p relim in ary analysis suggest?

E l e c t r i c cars E lectric cars have been proposed for years but now they are more than a possibility. Som e m anufacturers have moved to the interm ed iate technology stage of com bining e le c tric ity as a pow er source w ith tra d itio n a l fuels but others have gone the whole w ay and begun to produce cars dependent solely on electricity. The perform ance of electric cars in the past has alw ays been the main problem when trying to assess their v ia b ility a product th at w ill appeal to the user. The tra d itio n a l image of an electric vehicle is that of the milk flo a t m eandering its w ay slow ly around housing estates helping the milk delivery person perform his job. Fork lift truck in factories also come to mind. The whole image is one of bulkiness, slowness of operation and sm all distances th at the vehicles can cover once their batteries have been fu lly charged. A ll this is about to change! B a tte ry power alone can now enable a two-seater sports ca r to reach 60 mph in 4 seconds, attain a top speed of 140 mph and travel up to 220 miles when fully charged. Of course these vehicles need m any thousands of battery cells to achieve this kind of perform ance and the battery itself can weigh up to a third of the w eight of the ca r. C ars also need to be made of very light m aterials. Nevertheless, so much progress has been made that a m anufacturer now has started up a production line to produce these vehicles and plans are in hand to produce a four-seat fam ily saloon. From the consum er's point of view cars using only battery power w ill have some attra ctio n s and not least of these is the estim ated running cost in term s of fuel and m aintenance. Fuel cost are put at 1/2Oth of the average price of petrol in Europe and the 'en g in e' does not require oil and has less than a dozen moving parts. This is very appealing! There are downsides to these new e lectric cars th at depend on batteries alone, how ever. A range of 22 0 miles is re la tive ly sm all. One might just about manage to drive from Liverpoo l to Birm in g h am and back when the battery has been fu lly charged, but w hat happens if one does get a fla t battery on the return m otorw ay journey? In addition continuous driving for distances of over 210 miles (rou g h ly 3 hours m otorw ay driving in the U K ) are not possible and would require a long stop to recharge the batteries before the journey could be com pleted. So one does have to consider how such vehicles m ight be used. D aily com m uting over short distance does not constitute a problem. So w hat price tag should be attached to such vehicles? The m anufacturer of the sports c a r set the price a t roughly £ 4 5 ,0 0 0 fo r such a vehicle and q u ickly got advanced orders fo r the firs t y e a r's production.

278

Table 12.6

Cost benefit analysis: vertical integration Benefits

Costs

Risk

Reduced fle x ib ility

Inward focus

Operating economies

Access supply/ demand

1

1.1

0.7

1

1.5

1.9

1.3

1.7

1.4

2

2

2

2

3

2

4

7

4

5

4

6

3

2

3

5

5

5

3

3

Operating

M anaging different business

Weighting

1.5

Forward Backward

Note: 0 = low

Control product system

Profitable business

Enhance technology innovation

T H E IM P L E M E N T A T IO N

OF S T R A T E G I E S

QUESTIONS 1

Is the solely e lectric ca r a viable proposition at the present tim e ? W h y or why not?

2

To which m arket segments is the c a r likely to a p p eal?

3

Does a c a r th at uses the dual technology offered by e lectricity and tra d itio n a l oil-based fuels have a better short-term fu tu re? W h y or why not?

280

Chapter 13

Facilitating the implementation of strategies

INTRODUCTION In this chapter we introduce the notion that strategic windows offer possibilities for opportunities to be shared with other organizations where it is of mutual interest to co-operate. Even the traditional idea of competition may be sacrificed in favour of collaboration and co-operation if the circumstances arc right and it is mutually beneficial to all concerned. In the last decade of the twentieth century, changcs in the environment put a greater emphasis on collaboration and partnership between organizations as a means of enabling all to benefit from the independent strategics which they were pursuing. Marketing partnerships, strategic alliances and networks became fashionable ways of achieving this end. Such inter-organizational arrangements have fostered the need for relationship marketing. The emergence of networks of collaborating organizations linked by various forms of alliancc has become a dominant form of strategic development in many different industries. The international airline business, for example, is dominated by a small number of groupings ol airlines operating as competing alliances throughout the world. O ne of the most significant trends in marketing thinking and practice during the I 990s has been the shift in focus from achieving single transactions to establishing longer-term relations with customers. W hereas transactional marketing is concerned w ith making a single sale, relationship

marketing is more concerned with establishing a rapport with the customer that w ill result in repeat business and opportunities for further business development. Service quality and internal marketing have both come to the fore in terms of importance as a result of the focus on relationship marketing. In particular, ways and means of assessing level o f service quality have been developed and a whole new emphasis on internal marketing of the customer focus ideology has sprung into being. In order to got staff to implement the company focus strategy, management itself is now seen as needing to treat its employees as internal customers to whom messages and other forms of two-way communication have to be directed and received. The chapter introduces some of the current thinking both on service quality measurement and on internal marketing. In essence, this chapter is looking in a broader perspective at how an organization can seek to keep the strategic window open by ensuring how its human assets

other organizations and its own staff

can best be applied to the opportunity presented by the strategic window. Through strategic collaboration the organization can gain acccss to markets and even products and scrviccs that it would otherwise find difficult to acquire. Internal development of such products and scrviccs might not be feasible alternatives given the organization’s capabilities alone. However, it is often on the delivery of

281

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

product and services and the use o f the seven ps of the marketing mix that strategic collaboration can be beneficial. The organization’s own resources alone for this purpose may be inadequate and the im plementation of strategy is thus aided by collaboration w ith other organizations w hich are able to offer suitable expertise. However, collaboration alone is not sufficient. It is through good customer relationship management and an internal m arketing philosophy and approach that the alliance or netw ork heightens the probability of successfully im plem enting strategic marketing decisions. Good customer relationship management ensures a receptive audience for new product and service ideas. G o o d internal m arketing helps to ensure that the entire n etw ork or alliance w ill be custom er orientated which in turn w ill help to guarantee the best chance o f im plementing strategy successfully.

STRATEGIC COLLABORATION Rapidly changing markets, new technologies and a shortage o f skills and rcsourccs have made firms think in terms of building relationships w ith other companies so that together they can present a more powerful front. This has led to a shift from an emphasis on com petition, to an emphasis on strategic collaboration. The latter varies, ranging from vertical channcl relationships and supplier/ manufacturer collaboration, to horizontal relationships in the form o f strategic alliances and joint ventures. The new organizational forms resulting from collaborative relationships w ith customers, suppliers, distributors and even com petitors arc referred to as networks. In these kinds o f organizational structures, m arketing and other business functions arc carricd out by different independent organizations and individuals. Many networks have been crcatcd in the scrvicc scctor and networks spanning complexes of supply chains have also begun to develop. Netw orks can be complcx in nature and are often controlled and directed by management information and decision support systems w hich perform many o f the command and global functions of the traditional organization. As a result, networks tend to be flexible and adaptable to change. The relationships among the firms in a network can include simple transactional contracts of the conventional buver—seller tvpe; supplier—producer collaborative agreements; strategic alliances or partnerships; consortia; franchising; and joint ventures.

R E A S O N S B EHIND C O L L A B O R A T I V E S T R A T E G I E S Risk is part and pared o f business life and risk sharing w ith other organizations is one way of dealing with problems that risk brings. Risk arises in different ways. For example, the disappearance o f market boundaries in the inform ation industry illustrates this. Telecommunications, consumer electronics, entertainm ent media, publishing and office equipment industries have all come together so that the industry is an amalgam of other industries. Individual firms trying to compete for the attention of customers encounter problems where there is a widening of the range o f custom er requirem ents and technologies available to satisfy custom er requirements. Products required often exceed the design, m anufacturing and marketing capabilities of a single company. It is often not cost effective for an individual firm to develop internally the full range of skills and capabilities required to compete effectively. Indeed, such skills and rcsourccs are more cheaply available through alliances w ith other firms w hich can contribute their own core competencies.

282

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

Firm s arc also motivated to co-opcrate by the notion o f efficient consumer response where emphasis is on category m anagement instead of the traditional product and brand approach. U n d er this approach, the emphasis is on the elimination of weak brands, m ore efficient prom otion by substituting value pricing for special offers; continuous replenishment systems to reduce and possibly eliminate stocks in the channel; electronic data interchange for automated ordering and inform ation (low.

A L L I A N C E S AND P A R T N E R S H I P S O n e can visualize collaborative business relationships in term s o f a spectrum running from transactional relationships to complete vertical integration. A t one end of the spectrum, a firm buys in goods and scrviccs from outside as an alternative to producing them internally. It might go outside for scrviccs such as advertising, marketing rcscarch and dircct marketing. A t the other end is the fully vertically integrated firm which docs very little or no outsourcing at all. In between there arc a number o f different kinds o f collaborative arrangements.

■ Partnerships arc alliances between organizations some o f which may have a short-term focus and involve lim ited co-ordination, whereas others have a longer-term focus and move beyond co­ ordination to integration o f activities. Yet another type of partnership may be an arrangement view ed as perm anent where each party views the other as an extension o f its own firm . ■ Joint ventures arc alliances w here the ownership o f a project or operation is shared between the parties concerned. Some joint ventures focus on partners from different industries sharing innovative design abilities, technological expertise and marketing capabilities to innovate. ■

Vertical integration is w here an activity is fully owned by the corc organization although the relationship may still be seen as a strategic alliance.

T Y P E S OF N E T W O R K There arc different types o f netw orks, some o f w hich arc very im portant from a marketing perspective:

■

Vertical market networks or m arketing channcl netw orks reflect traditional vertical channel relationships along w ith the focal firm that co-ordinates upstream supplier firms and dow n­ stream distributor firms. The integrating firm often specializes in marketing functions and uses specialists for manufacture and distribution.

■ Inter-market or concentric networks are encountered often in Japan and Korea. They represent alliances among firms operating in a variety of unrelated industries. They comprise institu­ tionalized affiliations among firms operating in different industries along w ith firms linked in vertical exchange relationships w ith them. They are characterized by dense interconnections in resource-sharing, strategic decision-making and culture and identity. The centre may be a trading company

possibly functioning as the marketing arm of the netw ork

associated w ith

manufacturing affiliates, which in turn have large vertical clusters of subcontractors, distributors and satellite companies, and are often involved in technology alliances w ith competitors.

283

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

■ O pportunity networks comprise a set of firms specializing in various products, technologies or services that form tem porary relationships around specific projects or problems. A t the centre of the netw ork is a marketing organization specializing in collecting and disseminating market inform ation, negotiating, co-ordinating projects for customers and suppliers and regulating the n etw ork.

S T R A T E G I C A L L I A N C E S AS A C O M P E T I T I V E F O R C E In developing marketing strategies in some markets one has to take into account that competition may be based on the relationship between alliances and the networks that they crcatc and not between individual companies. Any analysis o f competition should take this into account. Strategic alliances can go badly w rong and the strength and permanence o f strategic alliances should be viewed with caution. O th e r im portant factors lim it the effectiveness o f collaborative strategics. The power relationships w ithin a netw ork arc im portant. If the locus o f power docs not suit all the parties concerncd it could have a negative influence on the viability of a project or a strategy that is im plemented. Commitment

and interdependence rcflcct w hether people in the organizations arc really supporting the alliance and w hether the mechanisms arc in place for ensuring that there is com m itm ent and proper liaison between the parties concerned. If this is not the case then the alliance may be very ineffective. Trust is required on behalf of all the alliance members. The network organization requires that cach partner relinquishes some degree o f influence or control over im portant issues. This is a key aspect o f relationship management in a netw ork. N e tw o rk organizations should also be view ed in term s o f behavioural issues like solidarity — unitv o f action among netw ork members; m utuality — netw ork m em bers acting for the com m on good and receiving a pay-off in term s of benefits from the collaboration; flexibility, and so on.

STRATEGIC ALLIANCES: M A N A G E M E N T ISSUES Collaboration and partnerships perm it cach organization to focus on its own corc competencies and to benefit from the specialization o f other organizations in their own area o f expertise. C la rity in defining corc com pctcncics is essential and this can sometimes be difficult to do. Failure to accomplish this can underm ine the purpose of the alliance. Choice of partners is critical and one has to take account o f w hether an environm ent of trust, com m itm ent and co-operation between the members o f the alliance is likely to occur (Exhibit 13.1). An im portant issue for the m arketing strategist is the im pact o f netw orked operations on the m arket orientation o f the new type of organization and its ability to deliver the required levels of customer service and customer value. W h e re the prim ary motivation for collaboration is technological or supply chain efficiency, this may be a particularly significant concern. There is often a lack o f clarity about how m arketing is loeated and operated in a netw ork organization and applying relationship marketing skills to managing the links between partners in the netw ork is im portant.

284

THE

E X H I B I T 13.1

IMPLEMENTATION

OF S T R A T E G I E S

CONDITIONS WHICH F A C IL IT A T E P A R T N E R S H IP

Success is most likely where there is: ■

corporate compatibility - cultures and objectives mesh

■

com patibility of managerial philosophy and techniques - in terms of organizational structures, attitudes towards employees and methods of working

■

benefits for all partners

■

sim ilarity between the companies which facilitates inter-firm communication

■

willingness to shut out others who are not part of the network

■

shared competitors

■

prior experience of successful collaboration

■

shared end-users.

C U S T O M E R S E R V IC E AND RELATIO N SHIP M A R K E T IN G F e w e r newTcustom ers are to be found in m any m arkets w h ic h are n o w m atu re o r g ro w in g v e r y slowly. M o re o ve r, co m p etitio n m ay be strong and the costs o f getting n e w custom ers high. C u sto m ers that have been w ith a com pany for some length o f tim e tend, on average, to spend m ore on each transaction, o ffer m o re o pportunities for selling them other products and services and give better recom m endations to th e ir friends and colleagues than other custom ers. C u sto m er loyalty is considered to be an im p ortan t d riv e r o f succcss and increased profitability. H o w e ve r, cu sto m er loyalty and cu sto m er reten tio n need to be distinguished from one another. C u sto m e r reten tio n reflects only repeat purchase behaviour. C u sto m e r loyalty, how ever, is m o re to do w ith h ow custom ers feel about the firm — w h e th e r they trust the firm , w h e th e r they actively w a n t to do business w ith the firm and w h e th e r they w ill reco m m en d the firm to others. C u sto m e r lo yalty is closely related to cu sto m er satisfaction. W h ile rete n tio n can be obtained through discounts fo r repeat purchase and so on, g ettin g high cu sto m er lo yalty requires g reater long-term investm ent. It involves emphasis on achieving excellence in the service activities that augm ent the basic p ro d u c t offering. Som e o f the reasons fo r cu sto m er defection are show n in Figu re 13.1 .To achieve cu sto m er loyalty firm s m ust, am ong o th er things, p reven t defection.

T H E GOODS AND S E R V I C E S S P E C T R U M M o st offerings in the m arket place arc som e com b in ation o f tangible and intangible elem ents. Tangible elem en ts can be seen, tou ch ed , sm elled , heard o r tasted. T h e y c o n stitu te the physical aspects o f the offer, such as the p ro d u ct itself and the surroundings in w h ic h it is bought o r consum ed. T h e intangible elem en ts arc often m o re elusive. T h e y c o m p rise the level o f service offered in su p p o rt o f the tangible and the im age o r beliefs that surro u n d the pro d u ct. A t one end o f the spectru m are offers to cu sto m ers that arc p rim a rily tangible. These in clu d c packaged goods such as canned peas and ligh t bulbs and con su m er durables such as C D players and

285

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

Service: on account of poor or bad service

Organization: on account of external or political reasons

Figure 13.1

Product: to a superior product offering better value for money

Customers defect because of:

Service: on account of poor or bad service

R e a s o n s f o r c u s to m e r d e fe c tio n

personal computers. However, from the perspective o f the custom er the benefits from the purchase o f suc h items may w ell be less tangible - canned peas overcome hunger, light bulbs turn darkness into light, C D players provide entertainm ent and personal computers greater efficiency both at home and at w ork. The distinguishing factor is that these benefits arc prim arily delivered by the physical features and characteristics o f the product. There are, o f course, less tangible elements to such purchases. Tangible products arc sold through retail outlets w here sales staff may provide advice and demonstrations. Individual brands, through their media advertising and other prom otional activities, w ill have established images and reputations in the minds of customers that may enhance value to them. A t the other end of the spectrum, intangibles are much m ore im portant. In legal services, the essence o f the offer is intangible. It is concerncd w ith the service provided to the custom er and the way in w hich the legal executive interacts w ith the custom er and third parties. There arc some tangible, physical elements involved, such as legal documents and the physical surroundings. The essence o f legal scrviccs, however, is the intangible proccss that takes place in dealing w ith the custom er’s affairs. Between these tw o extremes lie offers w hich combine tangible and intangible elements in more equal proportions. M o re and m ore firms w hich arc marketing essentially tangible products arc looking to enhance differentiation through focus on the intangible elements o f the offer. This includes branding the offer and the delivery o f service to augment the physical product offer. Essentially, scrvicc providers, on the other hand, are recognizing that the type and quality o f the service is the m ajor means o f differentiation. The line between tangible and intangible elements is becoming blurred so that the intangible elements arc becoming increasingly m ore im portant across the w hole spectrum.

286

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

RELATIONSHIP MARKETING Relationship marketing brings long-term financial benefits to an organization. It is a means to an end and is based upon two economic arguments. First, it is m ore expensive to w in a new customer than it is to keep an existing customer. Second, the longer the association between the company and the customer, then the m ore profitable the relationship for the firm should be. Relationship marketing evolves tics between the organization and its custom ers to im prove feedback and develop custom er loyalty. C ustom ers arc open to the pressures o f com petitive promotions and may readily switch brands or store so a firm needs to establish a stronger relationship w ith customers. Relationship marketing tries to get customers to actively support the firm and its products and to cncouragc others to do the same. The aim o f relationship marketing is to find ways o f enhancing the mutual benefits derived from the relationship. Successful relationship marketing involves the targeting o f customers of sufficient value to justify the investment in creating a relationship w ith them. Relationship-building rcsourccs can be directed to those customer groups where this is m utually advantageous. The strongest relationships arc based on the establishment of mutual trust and respect between organizations concerned. Getting employee com m itm ent to the relationship-building and maintaining proccss is im portant since its success is in the hands o f those who im plem ent it. Evervone needs to understand their role in the relationship building, be comm itted to it and be motivated to ensure that it succeeds. This is the function o f internal marketing w h ich w ill be discussed later in the chapter.

BUILDING R E L A T I O N S H I P S WITH C U S T O M E R S The moving of customers from the situation where they arc simply prospects to the position where they are brand loyal customers requires an active and creative approach. Firm s should stress to the customers the benefits which are to be derived from loyalty to the supplier. Benefits include discounts for bulk or repeat purchase or some other form o f reward. Practical examples include store loyalty cards where shoppers can amass credits towards free purchases. Financial benefits, o f course, are not the only mechanism that can be employed. Preferential treatment in terms o f access to updated models or preferential treatm ent when purchasing or taking advantage o f special offers illustrate the kind of benefits that can be offered. Structural tics with customers which make it difficult or costlv for customers to switch brands arc useful. In the ease of business to business relationships, some firms offer to rectify costly repairs to plant, m achinery and vehicles at relatively low cost. In some industries the structural ties may be based on legal agreements and com m itm ents, particularly w here the use o f protected patents is concerned. The sharing o f knowledge and expertise that the client w ould otherwise not have access to also crcatcs bonds between the parties conccrncd. O ffering groups o f interrelated products at favourable term s, for example, may deter brand switchcrs w ho might otherwise defect on a single product item. The essence o f the w hole approach is to crcatc barriers to discourage customers from defecting and switching brands. Getting people to realize that they arc benefiting m ore from a relationship than they had initially anticipated can also discouragc defectors. Customers need to be more than just satisfied with a product to remain brand loyal. To improve the probability o f custom er retention and develop loyalty one has

287

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

to deliver greater value to customers than they had expected. This demands a high p rio rity to be given to custom er service both in the strategies the organization designs and the action it takes in the m arket.

C H A R A C T E R I S T I C S OF A M A R K E T I N G R E L A T I O N S H I P Relationship marketing is about healthy associations which are typified by concern, trust, comm itm ent and service. Relationship marketers are concerned for the welfare o f their customers and want to m eet, or preferably exceed, custom ers’ expectations, producing satisfaction or delight. It is vital therefore for firms to understand the expectations of customers. Trust and com m itm ent cncouragc organizations to work at preserving relationships. Organizations do this by co-operating w ith exchange partners, resisting attractive short-term alternatives in favour o f the long-term expected benefits o f staying w ith existing partners. C om m itm ent is a lasting desire to maintain a relationship, and trust is the confidence that one partner has in the o th er’s reliability and integrity. Relationship marketing requires an organization-wide com m itm ent to provide highquality service w hich is reliable, empathic and responsive. The fram ework incorporates the sequence shown in Figure 13.2.

Figure 13.2

T h e la d d e r

le a d in g t o c u s t o m e r r e la t io n s h ip p r o f i t a b ilit y

288

Customer relationship profitability

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

R E Q U I R E M E N T S FOR S U C C E S S F U L R E L A T I O N S H I P M A R K E T I N G A supportive organizational culture is necessary for relationship marketing to flourish since the latter represents a paradigm shift from older, transactional ways of doing business. Paradigm shifts inevitably pose threats to and demand changcs o f existing corporate culture. Relationship m arketing is characterized by mutual co-operation and interdependence between customers and suppliers. U nder a transactional regim e the relationship is better characterized as manipulation of customers. Internal marketing is a second prerequisite. The aim o f internal marketing is to convert employees to the new ideology of relationship marketing, to prom ote the developm ent of the new culture, to persuade them that it is a reasonable approach to business, and to m otivate them to develop and im plem ent relationship marketing strategies. The internal m arket’s expectations and needs have to be met. If the organization is unable to m eet its em ployees’ needs, it is likely that they w ill defect to other jobs before being able to build long-lasting relationships w ith customers. The third point is that the firm needs to understand the custom ers’ expectations. This means that there must be a continuous flow of inform ation into the business regarding custom ers’ expectations sincc these changc over time. Fourth, a sophisticated custom er database is required which provides inform ation in actionable form at for the developm ent and m onitoring of relationship marketing strategy and tactics. Firm s can use databases to track retention rates, conduct root-causc investigations o f defections, segment their markets and establish retention objectives. Lastly, new organizational structures and compensation or reward schemes may be required. The traditional marketing and sales function is organized around products or geographic markets. U nder the influence of relationship marketing, organization around customers is more appropriate. Customer or account managers are better placed to build long-term relationships w ith clients, m ore deeply understand their expectations and build financial, social and structural links to the firm.

T H E S E A R C H FOR C O N S U M E R F O C U S W ith in the retail sector, firms arc moving into database marketing w ith their so-callcd loyalty cards. Superm arkets, in particular, have long been criticized for a low level o f service and have been attempting to increase the scrvicc elem ent in their stores and stress this in their communications. Initiatives such as Tesco’s Clubcard enable the retailer to communicate w ith the custom er on almost a one-to-one level and develop an offer which can be heavily focused towards individual consumers according to their purchasing patterns. In tw o years from launch, British A irw a ys’ w o rld w id e executive club grew from 100,000 to I .3 m illion m em bers. Starting as a lounge at H eathrow airp o rt, the club is now based on card ownership and the provision of m ultiple benefits. The cards arc linked to B A ’s custom er database which tells the airline w hich seat is preferred by the customer, w hether the custom er is a smoker and the custom er’s flying history. R enau lt’s relationship marketing program m e is mediated by the car firm ’s dealership network. Notes thanking owners for buying Renault, service reminders and special offers are printed on dealers’ headed note paper and personalized.

289

THE IM P L E M E N T A T IO N

OF S T R A T E G I E S

T he above represents the efforts o f three organizations in their scarch for an im proved custom er focus.

C U S T O M E R S E R V I C E : S T R A T E G Y , S Y S T E M S AND S T A F F A clear service strategy is needed w h ich is com m unicated throughout the organization so that everyone O O J knows their role in providing service to custom ers and clients. T he strategy should dem onstrate the organization’s com m itm ent to service and its role in overall corporate strategy. O ften custom ers are using custom er satisfaction measures alongside financial and o th er c rite ria for m easuring overall perform ance, signalling the higher p rio rity that they now give to custom er satisfaction. Indeed, some o f these companies now prom ote and rew ard staff on the basis o f custom er satisfaction ratings achieved. Firm s need to be com m itted not just to superior scrvicc in their strategics but they also need to put in place systems to enable their staff to deliver scrvicc to their clicnts. This may entail com puter systems to share inform ation rapidly and easily throughout the firm , or even sim ply queuing practices. T he use o f new technologies in im proving custom er scrvicc is a characteristic o f modern-day enterprises. Staff m ust also recognize the im portance o f custom er service and must be com m itted to providing it. This demands recru itin g , training and em pow ering em ployees to provide levels o f scrvicc that w ill give satisfaction to custom ers. R ew ards for staff arc im p o rtan t but so also is the provision o f in fo rm atio n m ade available to staff — in fo rm atio n on w hat custom ers require and how w e ll the organization is providing that service.

P RO V I D I N G S U P E R I O R S E R V I C E Research into custom er satisfaction m easurem ent suggests that custom ers measure their experiences against a benchm ark o f the service that they expect to receive. T he quality o f a service provision and subsequently the level o f satisfaction o f the custom er is d irectly related to the gap between experiences and expectations. Expectations m ay be used as com parison standards in tw o ways (Parasuram an et a l ., 1991). First, there arc expectations o f w hat custom ers believe w ill o ccu r in a service encounter. These are called p redictive expectations. Sccond are w hat custom ers w an t from the service encounter, their desires. These constitute adequate and desired levels o f service and betw een these tw o extrem es is a zone o f tolerance. A p erform an ce level above the zone o f tolerance is likely to delight the custom er and strengthen loyalty, w hereas perform an ce b elo w the zone o f tolerance w ill create custo m er dissatisfaction, frustration and u ltim ately may lead to decreasing custom er loyalty. A num ber o f factors influence expectations. These range from the personal needs o f the custom er, through the alternative services considered, to the specific promises made by service providers in their bid to w in business in the first place. W o rd o f m outh com m u nications w ith influencers and the custom er’s past experiences also affect the level o f service expectations. In addition, expectations tend to rise w ith tim e. T he promises the firm itself makes p rio r to the custom er using the prod uct or service arc relevant. Prom ising too little can result in failing to attract custom ers, whereas prom ising m o re than can be d elivered m ay result in dissatisfied custom ers.

290

THE

IMPLEMENTATION

OF S T R A T E G I E S

E xc ee di ng c u s t o m e r s ’ ex p ect at i ons C u sto m e r expectations have to be exceeded in o rd e r to produce d elight. T his can be achieved by either p ro vid in g an e x c e lle n t s e rv ic e o r p ro d u c t o r by m anaging cu sto m er ex p ectatio n s’ d o w n w a rd s so that the expectations can easily be exceeded. T h e re arc a n u m b er o f w ays o f doing this. T h e first is to ensure that prom ises are kept o r even exceeded. C lo sely associated w ith this is placing a p rem ium on reliab ility — that is doing w h a t you say you w ill do w h e n yo u say you w ill do it. A n o th e r im p o rta n t facto r is keeping in to u ch w ith cu stom ers to understand th e ir expectations and to explain the lim its o f se rvice p ossibilities. C o m m u n ica tio n can encourage to leran ce , d em onstrate co n ce rn fo r the cu sto m e r and even serve to w id e n the to leran ce zone (E x h ib it 13.2).

EVALUATIONS Parasu ram an et al. (1 9 8 8 ) suggest that c u sto m e rs evaluate a s e rv ic e p ro v id e d against five m ajo r c rite ria : re lia b ility , assurance, tangibles, em p ath y and responsiveness. R e lia b ility is the a b ility o f the p ro v id e r to p e rfo rm the p rom ised s e rvice dependably and accu rately

co n fo rm an ce to sp ecifi­

cations. A ssu ran ce relates to the k n o w led g e and co u rtesy o f em plo yees and th e ir ab ility to convey tru st and co n fid ence in th e ir tech n ical abilities. Tangibles relate to the physical features o f the firm s p ro vid in g the se rvice. T h e y in clud e such things as: eq u ip m en t, p erso n n el, re p o rts, co m m u n icatio n m echanism s and so on. E m p a th y is the pro visio n o f carin g, in d ivid u alized atten tio n to custom ers. Responsiveness is the ab ility o f the organization to react p o sitively and in tim e to cu sto m er requests and req u irem en ts.

E X H I B I T 13.2

BUILDING R E L A T IO N S H I P S WITH T H E C U S T O M E R IN T H E N H S

Ormsby district hospital has a notice pinned on the wall in every waiting area. It reads: 'This hospital is keen to ensure that customers receive the very best attention when waiting to be seen by consultants and other medical staff. Every waiting area has a board which shows the average waiting time that you will have to spend on the day of your visit before the person you have come to see will be able to attend to you. Unfortunately delays are often inevitable since emergencies do often occur and staff have to interrupt their pre­ planned schedules in order to attend to the pressing needs of emergencies. The nurse on duty will keep you informed of any delays that are impending and explain to you what is happening if the delay time you are experiencing is excessive. Please feel free at any time to speak to the receptionist in this area if you have any queries regarding delays or any other queries for that m atter/

291

T H E I M P L E M E N T A T I O N OF S T R A T E G I E S

M E A S U R I N G AND M ONITORING C U S T O M E R S A T I S F A C T I O N C om plaint an