Strategic Marketing

S4-Strategic MarketingArticles:• 1. Arndt, 1979, Towards a concept of domesticated markets• 2. Jaworski et al, 2000, Market-driven vs. driving markets • 3. Day, 1981, Strategic market analysis and definition • 4. Caldwell et al, 2005, Promoting competitive marketsGroup:Vanessa Meyer 40091Sofie Karlsson 40082Zacharias Eliender 40094Cara Webster 92044Kim Norlander 40088

Strategic Marketing: A Case & Point

• How do firms’ strategic actions relate to markets?

• The centrality of defining your market; firms’ efforts to domesticate markets; the tension in market orientation between markets being both ”out there” and possible to affect; the role of buying-side activities.

Agenda• Orange Game• Arndt, 1979, Towards a concept of domesticated

markets• Jaworski et al, 2000, Market-driven vs. driving

markets• BREAK (10 MINS)• Day, 1981, Strategic market analysis and

definition• Caldwell et al, 2005, Promoting competitive

markets• Summary• Discussion

ORANGE GAME• 2 teams of 3 people

• Read the instructions and discuss with your team (5 min)

• Negotiate with competitor (3 min)

• Give your bid to the supplier

Orange GameInstructions from the CEO of Bio-OrangeDear negotiators As you know, our unique medication is the only known cure for

the “Papapamaja disease” that terrorizes the population of Papapamaja islands. To produce the medication we need the XXX of 3000 Los Almos oranges.

Unfortunately, last year’s freeze really damaged the harvest and the only supply available on the market this year is 3000 oranges. It is crucial that we get these oranges. It has been drawn to our attention that our biggest competitor also wants to buy the oranges. We therefore give $10. 000 to spend, this is the last money we have and we’re counting on you and you're negotiation skills. If not for the company, so in the sake of the victims suffering from this horrible disease!

Toward a concept of Domesticated Toward a concept of Domesticated Markets Markets

By: By: Arndt (1979)Arndt (1979)

The Traditional Marketing Model- A market is where Supply (sellers) and Demand (buyers) meet- The explanatory mechanism Is Stimulus-Response- Strict rational economic behaviour and ad hoc guides decision making- Resources are allocated by “The invisible hand”

Toward a concept of Domesticated Markets Arndt (1979)

Ad hoc relationships Long-term relationships

To an increasing degree, transactions are occurring in ‘internal’ markets within the framework of long-term relationships, not on an ad hoc basis”

Movement towards a Domesticated Markets


Arndt argues that the Traditional Marketing Model fails to see the gap between ideals and realities.

Some of the most important imperfections of the ideal market is:- Seller concentration- Barriers to entry- Product differentiation- Lack/overload or mismatch of information- Neo-Merchantilism- Organisations make long-term commitments(eg. Joint ventures, Franchising, vertical/horizontal integration)


Motivations for domesticating markets:2. Reduction of uncertainty of operations3. Reduction of transactional costs4. The synergy of combining complementing operations

Examples of Domesticated Markets mentioned in the article:

The Japanese Car Industry The convenience goods market in Scandinavia


In practice of Domesticated Markets Arndt argues that organizations need to go beyond the traditional marketing mix (The 4 P’s) and shift focus towards:

-Design of administrative procedures(e.g. personal selling)

-Negotiations(Transactional, contract and structural)

-Politics (e.g. Lobbying, Co-operate with unions

-Conflict resolution

Toward a concept of Domesticated Markets

Arndt (1979)Four steps of establishing long-term relationships

3.Search of potential partners“A company should establish relationships with with prospective suppliers andcustomers not only on the the basis of the currently expected performance, but also in consideration of their capabilities of developing in terms of physical resources, knowledge, experience, and skills.”

2. Courting of candidates (Stern and El-Ansary, 1977)-Corporate Marketing Systems (autocratic)-Contractual Marketing Systems (democratic)-Administered Marketing Systems (democratic)-Spontaneous Co-ordination by market transactions (anarchistic)


Four steps of establishing long-term relationships

3. Maintenance of inter-organizational marketing systemsMake sure that co-operation is running smoothly by implementing information and control systems for bidirectional flows.

High degree of interdependence = High need for conflict resolution mechanisms

4. Establish divorce proceedingsDissolutions of coalitions because of incompatibility and irreparable dissatisfaction with exchange ratio

Market driven vs. Driving MarketsJaworski et al (2000)

Purpose of the article: To refine the notion of market orientation to suggest that there are two complementary approaches to market orientation, (1) market-driven and (2) driving-markets one

Conceptual framework

Market Structure

Shape

Given

ShapeGiven

Market Behavior

Market driven

Driving markets

The Different Market Views • Market driven: Learning, understanding and

responding to stakeholder perceptions within a given market structure

• Driving Markets: Changing the composition and/ or the roles and behaviors of players on the market

Important to remember that one given organization can both drive markets and be market driven, the approaches are complementary to each other and not substitutes.

Ex: When an organization is simultaneously trying to save an

cash generating old technology while attempting to build new business for the future with new technology

Shaping Market Structure

• Deconstruction

• Construction

• Functional modification

DeconstructionInvolves the elimination of players in the industry value chain.

• Channels: Eliminating players in the channel of distribution (Dell eliminating channels and changing customer behaviors)

• Competitors: Elimination of competitors in the market by joint ventures, hostile take-overs, mergers, acqusitions, partnerships.

• Suppliers: Compete direclty with suppliers to gain lower cost or better functonality (Intel)

Construction• Involves the addition of players in a

market in the industry value chain.

• Build a new web of players: ”spider” versus ”spider”. Often a winner taking almost all the market (Microsoft).

• Adding complementors: To compete by the addition of complementary players.

Functional Modification• To shift the market by changing the

functions of the players.• This can be done by forward or backward

integration. • Example: Record industry

Shaping Market Behavior: Directly• Build customer constrains: IKEAs retail tactics for

changing customer behavior• Remove customer constrains: The emerge of

internet commerce has lead to a changed customer behavior (e.g. easy to compare prices)

• Build competitors constrains: DeBeer’s near monopoly position in the diamond market gives them control over market and competitor behavior

• Remove competitors constrains: Changed regulations can have a strong effect on the market behavior (Airlines & Telecom companies)

Shaping Market Behavior: Indirectly • Create new customer preferences

Changing perceptions before changing the behavior. Either through ”new to the world” offerings or introduction of new benefits.

• Reverse existing preferencesChange customer preference from a positive to a negative evaluation (fashion)

• Create new competitor preferencesAffecting the mind-set of competitors by own behavior

• Reverse existing competitor preferencesProctor & Gamble lowprice everyday strategy forced competitor to rethink their strategies

Strategic Market Analysis and Definition: An Integrated Approach

By: George S. Day

Main Points

• Importance of an effective strategy and its implications

• Two analysis approaches to strategic marketing

• Multidimensional markets• Limitations of market analysis

approaches

Defining Markets• Effective strategy analysis hinges on the

proper definition of the market. • Defining a market- influencers and decisions

can lead to vastly different outcomes. -For example one analyst’s outline of a

customer segment and substitutes may vastly differ to another, resulting contrasting marketing decisions for the same market.

Top-Down & Bottom-Up • Top Down:– Generally the top down approach reflects

the needs of corporate and business level management.

– Resource orientated. – Objective to secure a sustainable

competitive advantage.

Bottom-up

– An approach employed by marketing planners and program managers.

– Customer orientated.– Emphasis placed on issues surrounding

product and customers.

“The issue is not which of the two perspectives is more valid, but how to harness them to achieve a balanced understanding.” (Day, 1981)

Multidimensional Markets• Abell argues that a product needs to be

looked at as a physical manifestation of “the application of a particular technology to the provision of a particular function for a particular customer group”.

• A market is defined by the choices along these three dimensions.

Multidimensional Markets Con’t• Customer Functions

-Products or services and the functions they perform.

• Technology-Alternative ways a particular function can be performed.

• Customer Segments- Grouping of consumers with similar needs.

Must create a balance between all three.

Product Market Units• Product market units= PMU– Single celled or Multiple cells

E.g. Box of Chocolate Vs Flower Orange game

Multidimensional: Top -Down• A Corporate level planner seeking to understand the

strategic posture of a SBU or strategy centre will want to know the following:-What is the scope of the business definition?-What is the basis for the choice of the currently

served market?-What is the current forecast performance within the served market?-What is the broad strategic thrust of the SBU and

what does it imply for resource requirements or contributions?-What are the opportunities for growth into new

products or new markets?

Multidimensional: Bottom-Up• Issues and questions are usually orientated

towards short run programmes for enhancing performance with such concerns as:-What is our present and forecast

performance within our served market?-How can we improve efficiency of our

programmes?-What opportunities exist for improving

profitability?

Implications of perspectives• Bottom up- highly customer orientated

- Focuses on anticipating shifts• Top down- Supply orientated. - Focuses on economic factors

Both strive for same objective…Success

Balance

The pay off of achieving this will be clearer strategic thinking and faster response to emerging threats and opportunities.

Promoting Competitive Markets: The Role of Public Procurement

Caldwell et al. 2005

* The role of Public sector procurement agencies in influencing the development of competitive markets

Public Procurement Influencing Competitive Markets

In effort to influence the development of competitive markets, public procurement agencies typically pursue a neo-classical perspective to their procurement strategies (competitive bidding and other regulations aimed at achieving a perfectly competitive market). These strategies often lead to unintended and unwelcomed consequences, which are in fact limits to competition

Public Procurement & Neo-Classical Views

SO…. Is the neo-classical view of competitive markets an ideal to be strived for?

Is perfect competition the only public sector objective?

Challenges to Neo-Classical Views

Austrian School of Economics opposes government regulation of market activity as it is likely to “…obstruct and frustrate the spontaneous, corrective forces of entrepreneurial adjustments”

Economic Theory & Public Procurement (PP)

Perfect competition: “A market is ‘workably competitive’ if, among other things, there is a progressive technology, and the passing on to consumers of the results of this progressiveness in the form of lower prices, larger output, improved prices.” (Galbraith, 1980/1952)

Market ‘imperfections’: “That in conditions of real life the position even of any two producers is hardly ever the same due to the facts which the theory of perfect competition eliminates by its concentration on a long-term equilibrium, which is an ever changing world can never be achieved” (Hayek, 1948)

Characteristics of Traditional Public Procurement: Limits to Competition

• Arms length approach (competitive bidding) and inflexible processes

• Public accountability and competitive frameworks limit partnerships

• Few partnerships in order to avoid over-embeddedness (oligopoly, elitism barrier to entry)

• Competing/contradictory stakeholder demands• Constant re-organization: Centralized VS

Decentralized• Imperfect information and high barriers to entry

Detrimental Forms of Competitive Bidding: Limits to Competition

• Rigid application of tendering procedures for low-value items regardless of on-costs

• Too many suppliers• Locking suppliers out of the market• Short-term contracts• Absence of cooperation from suppliers• Lowest bid cutting corners once contract is won• Cross-subsidization and over-pricing• Inability to achieve Value-For-Money• Lack of innovation• Lack of entrepreneurial discovery

The Public Sector“Government needs to learn and innovate as

much as the private sector and it must create new mechanisms for sharing ideas and best practices… it needs a new generation of innovation in the public sector”

*Acknowledgement of the need to innovate but with pragmatic limits to competition

Public Procurement: A Pragmatic Approach

• Cross-departmental purchasing communication• Communication and feedback mechanism• More accurate, timely data• Coordinated purchasing consortia and framework

agreements (centralized) risk of “Oligopoly”, a need for…

• Public-Private partnerships and risk sharing• Constructive information sharing between

stakeholders (Transparency, fixed & agreed margins)

• Supplier relationship management (database of performance measures)

• Managing markets for competiveness involves making that market as attractive to suppliers as possible through: ex. Stability & continuity

• In order to manage competitive markets there is a need to incentives suppliers in order to suit broader public procurement requirements = rewarding suppliers for excellence rather than volume/price

• Look beyond choosing “best” supplier and instead examine how to manage suppliers within a portfolio of market relationships

Public Procurement: A Strategic Marketing Perspective

Case Example: Procure21

The Problem: - Public construction projects know for buying on price alone (although work still came through late and over budget)

- High repair and running costs due to contractors’ use of cheap materials to keep tender prices low

- Tendering process discouraged innovation and change

- Public departments competing for capacity (Hospitals –vs- Schools)

Case Example: Procure21

The Solution: Procure21, a pragmatic approach- Procure21 is a uniform approach to public construction based on long- term relationships with 12 centrally-evaluated, regionally based suppliers and their chains- Framework agreement for Local Health Services construction buyers- Complies with EU Regulations- Individual tenders do not have to be published saving 6-12 months- Projects happen quicker and suppliers can be involved before build

Case Example Con’t: Procure21 How Procure21 helped shape a competitive

market:- Partner organizations pass detailed audit- Post selection suppliers were given agreed

margins for next 5 years in return for:• Transparency • Open book accounting

- Shared database of projects and costing/benchmarking

- Sophisticated performance management system

Case Example Con’t: Procure21 How Procure21 helped shape a competitive market:- Framework agreement with transparency and

consistency on BOTH sides- Manageable no. of core suppliers- Offered consistent work to suppliers making

market more attractive- Regular work building of knowledge and

expertise between partners- Contract awarded on performance gave

incentive for supplier to invest and innovate- Increased margins increased stability,

commitment and ability to forward plan

Case Example Con’t: Procure21 • Reusing suppliers lowers costs for PP agency by:

– New forms of standardization– Variety reduction– Modularization

• Performance database & transparency means Procure21 is a mechanism for:– Sharing good ideas– Driving out poor performance– Raising standards

• Accurate Data means:– Ensuring supplier is not “loss leading”, subsidizing other

work, or overcharging

Public Procurement: A Pragmatic Approach

• Supplier incentives at the market level• On-going post contract management• Key supplier relationship management• Purchasing professional development (softer skills)• E-procurement• Increased transparency• Contracts awarded on merit, not price =

incentivising suppliers• Understanding suppliers’ public sector business

models• Managing for long-term competitive markets

involves having a sector-level perspective

Summary• Jaworski: Defining two complementary approaches of market

orientation: Driving market and market driven• Three different ways of shaping market structure; deconstruction,

construcation and functional modification. Adding/Eliminating or changing the roles of the market players

• Two ways of shaping market behavior: Directly or indirectly reverse customer/competitor preferences.

• Day: Defining markets, an effective strategy will directly influence the definition of a market.

• Two approaches Top-Down : Focus at the corporate level on the capacity of a business unit, in order to compare and apply resources to secure a sustainable competitive advantage.

• Bottom Up: Product and Market manager level where emphasis is placed on customer requirements and issues concerning product changes.

• Important to have a balance between the two.

SummaryCaldwell: describes the efforts public procurement

agencies make to influence the development of competitive markets. Their efforts (regulations/interventions) to create competitiveness often lead to unintended consequences. These consequence are in fact limits to competition.

The are innovations in the public sector that are in fact helping to increase competiveness, however these innovations are more pragmatic in their efforts to influence a competitive market.

SummaryArndt: The Traditional Marketing Model has been

out-runned by reality. Organizations do cooperate within networks and they do make long-term commitments.

The theory of Domesticated Markets explains how organizations get away from the traditional marketing mix and now focus on political aspects and design, implementation, and maintenance of effective inter-organizational marketing systems

Discussion • As a strategic marketer how would your strategy

differ in shaping a market for a ”new to the world” offering compared to shaping a market for an establish offering

• Discuss the implications of strategy efficiency in a market that is regulated (e.g Public Procurement) in comparison to a free/pragmatic market.

• In light of what we discussed today, compared to earlier themes, consider how relationship/network or ad hoc focus effects the market structure

Strategic Marketing

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