Marketing Management
Concept of Strategy:- The concept of strategy is central to
understand the process of strategic management. The term Strategy
is derived from a Greek word Strategos, which means generalship the
actual direction of military force, as distinct from the policy
governing its deployment. Hence the word Strategy means the art of
the general. In business parlance, there is no definite meaning
assigned to strategy. It is often used loosely to mean a number of
things.
A Strategy could be:-
A plan or course of action or a set of decision rules making a
pattern or creating a common thread;
The pattern or common thread related to the organization's
activities which are derived from the policies, objectives and
goals;
Related to pursing those activities which move an organization
from its current position to a desired future state;
Concerned with the resources necessary for implementing a plan
or following a course of action;
Connected to the strategic positioning of a firm, making
trade-offs between its different activities and creating a fit
among these activities; and
The planned or actual coordination of the firms major goals and
actions, in time and space that continuously co-align the firm with
its environment.
In Simplified terms, a strategy is the means to achieve the
objectives.
In Complex terms, it may possess all the characteristics
mentioned in the previous slide.
Strategy is one of the most significant concepts to have emerged
in the subject of management studies in the recent past. Its
applicability, relevance, potential and viability have been put to
several test and it has emerged as a critical input to
organizational success and has come in handy as a tool to deal with
the uncertainties that organizations face. It has helped to reduce
ambiguity and provided a solid foundation as a theory to conduct
business: a convenient way to structure the many variables that
operate in the organizational context and to understand their
interrelationship.
Levels at which Strategy Operates:- For many companies, a single
strategy is not only inadequate but also inappropriate. The need is
for multiple strategies at different levels. In order to segregate
different units or segments, each performing a common set of
activities, many companies organize on the basis of operating
divisions or simply, divisions. These divisions may also be known
as profit centers or Strategic Business Units (SBUs). An SBU, is
defined as Any part of a business organization which is treated
separately for strategic management purpose.
Generally, SBUs are involved in a single line of business. A
complementary concept to SBU, valid for the external environment of
a company, is a Strategic Business Area (SBA). It is defined as A
distinctive segment of the environment in which the firm does (or
may want to do) business.
A number of SBUs, relevant for different SBAs, form a cluster of
units under a corporate umbrella. Each of the SBUs has its own
functional departments or a few major functional departments while
common functions are grouped under the corporate level. The
different levels of Strategy could be at the Corporate Level, the
SBU Level and at the Functional Level.
Fig:- Different Levels of Strategy
The organizational levels are those of the corporate, SBU and
functional levels. The Strategic levels are those of the corporate,
SBU and functional level strategies.Corporate
OfficeSBUASBUBSBUCFinanceOperationsHRMInformationMarketingLevels of
ManagementCorporateSBUFunctionalLevels of StrategyCorporate -
LevelBusiness - LevelFunctional Level
Corporate Level Strategy is an overarching plan of action
covering the various functions that are performed by different
SBUs. The plan deals with the objectives of the company, allocation
of resources and coordination of the SBUs for optimal
performance.SBU level (or business) strategy is a comprehensive
plan providing objectives for SBUs, allocation of resources among
functional areas and coordination between them for making optimal
contribution to the achievement of the corporate level objectives.
Functional Strategies deals with a relatively restricted plan,
providing objectives for a specific function, allocation of
resources among different operations within that functional area
and coordination between them for optimal contribution to the
achievement of the SBU and corporate level objectives.Ex:- Panacea
Biotec is a health management company in India, involved in
research, manufacturing and marketing of pharmaceuticals,
biopharmaceuticals, new chemical entities, natural products and
vaccines. It is organized into five SBUs: Critical Care, Diacar,
PRO, GROW and Best on Health(BOH), which enables it to respond to
changes in the industry and marketplace with speed and
sensitivity.
Apart from the three levels at which strategic plans are made,
occasionally, companies plan at some other levels too. Firms often
set strategies at a level higher than the corporate level. These
are called the societal strategies. Based on a mission statement, a
societal strategy is a generalized view of how the corporation
relates itself to the society in terms of a particular need or a
set of needs that it strives to fulfill. Corporate Level Strategies
could then be based on the societal strategy.
Ex:- Suppose a corporation decides to provide alternative
sources of energy for the society at an optimum price and based on
the latest available technology. On the basis of its societal
strategy, the corporation has a number of alternatives with regard
to the businesses it can take up. It can either be a manufacturer
of nuclear power reactors, a maker of equipments used for tapping
solar energy or a builder of windmills among other alternatives.
The choice is wide and being in any one of such diverse fields
would still keep the corporation within the limits set by its
societal strategy. Corporate and business level strategies derive
their rationale from the societal strategy.
Some strategies are also required to be set at lower levels. One
step down the functional level, a company could set its operational
level strategies. Each functional area could have a number of
operational strategies. These would deal with a highly specific and
narrowly defined area; for instance, a functional strategy at the
marketing level could be subdivided into sales, distribution,
pricing, product and advertising strategies. Activities in each of
the operational areas of marketing, whether sales or advertising,
could be performed in such a way that they contribute to the
functional objectives of the marketing department. The functional
strategy of marketing is interlinked with those of the finance,
production and personnel departments. All these functional
strategies operate under the SBU level. Different SBU Level
strategies are put into action under the corporate level strategy
which, in turn, is derived from the societal level strategy of the
corporation. Ideally, a perfect match is envisaged among all
strategies at different levels so that a corporation, its
constituent companies, their different SBUs, functions in each SBU
and various operational areas in every functional area are
synchronized. When perceived in this manner, the organization moves
ahead, towards its objectives and mission, like a well oiled
machine. Such an ideal, though extremely difficult if not
impossible to attain is the intent of strategic
management.Strategic Marketing Management is focusing on the
alignment of marketing management within an organization with its
business and corporate to gain Strategic Advantage.
Strategic Development Framework (Competitive Marketing
Strategies):- There is need to develop strategies that are more
than customer based. The strategy should also focus on attacking
and defending against competitors. A company can follow any of the
following strategies of build, hold, harvest or divest depending on
the competitive conditions prevailing in the market and its own
objectives.
Build Objective:- Build objective involves increasing the
companys market share. Such a strategy makes sense when the market
is growing and the company has a competitive advantage that it can
capitalize on.When to Build:- A build objective is suitable in
markets which are growing. All companies can increase their market
share simultaneously because there are large number of customers
who have not yet brought the product. But if a market is mature,
and hence it is not growing, increase in market share of one
company can happen only at the expense of market share of another
company.A company can build in a mature market when there are
competitive weakness that it can exploit, or a company can build if
it has corporate strengths that it can exploit.
The concept of experience curve says that every time a companys
cumulative production is doubled, its cost of production goes down
by a certain percentage, depending upon the industry the company is
in. By building sales faster than competition, a company can
achieve the position of cost leader. Thus a company can be in a
position to reduce price and hence be able to sell in large volumes
by attracting customers of its competitors.
Strategic focus:- A company can build by market expansion,
winning market share from competitors, by mergers or acquisitions
and by forming strategic alliances.Market Expansion:- A company
expands the market for its product by creating new users, or new
uses, or by increasing frequency of purchase. It can find new users
by moving to foreign markets, or targeting larger segments. It can
promote now uses for its product.
Winning Market Share:- This indicates gaining market share at
the expense of competition. Principles of offensive warfare apply
in this case. These are to consider the strengths of the leaders
position, to find a weakness in the leaders strength, and attack at
that point.
Frontal Attack:- This involves the aggressor taking on the
incumbent head on. The aggressor attacks the main market of the
incumbent by launching a product with a similar or superior
marketing mix. The incumbent gets most of its revenue and profits
from this market segment. If the incumbent is a market leader, the
aggressor should have clear and sustainable competitive advantage.
If its competitive advantage is low cost, and it uses low price to
gain market share of the market leader, the latter will match its
low price because it has deep pockets. Low price can be a
sustainable competitive advantage only if the aggressor has
developed some proprietary technologies by which it has been able
to reduce its costs of manufacturing and distribution. A distinct
differential advantage provides basis for superior customer value
by which incumbents customers can be enticed, but the aggressor
should be able to match the incumbent in other activities. An
aggressor is more likely to be successful if there is some
restriction on the incumbents ability to retaliate. Finally, the
challenger needs adequate resources to withstand the battle that
will take place should the leader retaliate. Sustainability is
necessary to stretch the leaders capability to respond.
Flanking Attack:- In flanking attack, an aggressor attacks
unguarded or weakly guarded markets. The aggressor attacks
geographical areas or market segments where the incumbents presence
is weak or the incumbent does not consider the segment lucrative
and allows the initial incursion. Ex:- The Japanese car companies
launched flanking attack in the US car market. They attacked the
small car segment, from which they expanded into other segments.
The American car companies did not retaliate vigorously because
sedans and luxury cars, and not small cars, were their major
markets.Encirclement Attack:- The aggressor launches products in
all segments and at all price points. It has a product for every
conceivable need of customers. The aggressor needs to have deep
pockets to launch and sustain such an attack, and it should have
prepared for a long time, before launching the attack. Normally
such an aggressor is a large corporate which enters a new category,
and has ambitions to become the lead player in it. The incumbent
has to regroup and redirect its resources to meet the aggressor in
every segment that the aggressor has encroached. An incumbent may
also decide to ration its resources, and protect its most lucrative
segments, letting the less lucrative ones fall prey to the
aggressors attacks. Ex:- Samsung launched mobile handsets offering
both CDMA and GSM technologies at all price points, with a goal of
becoming the largest player in the Indian market. It attacked the
market leader Nokia directly and aggressively in all its existing
segments.
Bypass Attack:- This attack involves circumventing the
incumbents position. The aggressor changes the rules of the game,
usually through technological leap-frogging. The aggressor can
revert to making a simpler product with very low prices or it can
incorporate a new technology in its product which enhances the
value of the product by a big margin. Diversification is also a
type of bypass attack the aggressor can bypass an incumbent by
venturing in new markets with new products.
Guerilla Attack:- The aggressor pin pricks the incumbent instead
of serving it body blows. The aggressor is a small player and makes
life uncomfortable for the stronger incumbents by unpredictable
price discounts, sales promotions or heavy advertising in a few
segments and regions.
Mergers or Acquisitions:- A aggressor merges with or acquires
competitors. It is able to avoid expensive marketing wars, and it
is also able to gain synergies in functions such as purchasing,
production, financial, marketing and R&D. Mergers and
acquisitions result in immediate increase in market share when the
players operate in the same market. Mergers involve high level of
risk because people with different culture, language and business
practices have to work together which is never easy.
Forming Strategic Alliance:- A company can build through
strategic alliances. The players entering the alliance want to
create sustainable competitive advantage for themselves often on a
global scale. Companies can form strategic alliances through joint
ventures, licensing agreements, purchasing and supply agreements,
or joint product and process development programmes. The companies
in alliance are able to enter new markets, get access to new
distribution channels, develop new products and fill gaps in their
product portfolio. By strategic alliances, partners can share the
product development costs and risks. Strategic alliances are
flexible, and it is easier for a player to walk out of a strategic
alliance than in the case with mergers and acquisitions.A strategic
alliance can work only if the players are willing and able to
contribute to a common cause, and if their contributions complement
each other. Strategic alliance involves risk in the sense that
partners develop intimate understanding of each others competences,
strengths and weaknesses an unscrupulous player can use such
information to damage its erstwhile partner once the strategic
alliance is dissolved.
Hold Objective:- The company defends its current position
against imminent competition. It applies principles of defensive
warfare it blocks strong competitive moves.
When To Hold:- Hold objective makes strategic sense for a market
leader in a mature or declining market it is in cash cow position.
The market leader generates positive cash flows by holding on to
market leadership, which can be used to build other products. It is
in a position to hold onto market leadership, because it is in a
strong bargaining position with distribution channel members and
has strong brand image. It enjoys experience curve effects that
reduce costs, so it can sell at lower price. In a declining market,
it a company is able to maintain market leadership, it becomes a
virtual monopolist as weaker competitors withdraw. Hold objective
also makes strategic sense when the costs of increasing sales and
market share outweigh the benefits there are aggressive competitors
who retaliate strongly if attacked. In such situations, it makes
sense that the companies be content with their market share, and do
not take actions that may invite strong retaliatory actions from
competitors.
Strategic Focus:- A company holds on to its market share by
monitoring competition or by confronting the competition.Monitoring
the Competition:- When an industry is in competitive stability, all
players are being good competitors. All players are content with
their market share and they are not willing to destabilize the
industry structure. A company needs to monitor its competitors to
check that there are no significant changes in competitor
behaviour, but beyond that they do not need to do anything
extravagant.
Confronting the Competition:- Rivalry is more pronounced among
existing players since the product is in the maturity or the
decline stage. Strategic action may be required to defend sales and
market share from aggressive challenges:-
Position Defense:- Position defense involves building
fortification around ones existing territory, which translates into
building fortification around existing products. The company has a
good product which is priced competitively and promoted
effectively. This will work if products have a differential
advantage that is not easily copied, for instance, through patent
protection. Brand and reputation may provide strong defense. Buy
this strategy can be dangerous. The customers need or the
underlying technologies of the product may have changed but the
company may refuse to change track fearing that it will damage its
current positioning and reputation.
Flanking defense:- The company takes actions to defend a
hitherto unprotected market segment, because it believes that the
aggressor will consolidate itself in the flanking segment, and
after getting adequate experience of how to operate in the market,
it will try to enter the more lucrative segments of the market.
Therefore, an incumbent should not leave segments unattended, even
if they are not very lucrative. Competitive incursions are less
when a incumbent has presence in all segments. But if this effort
is half hearted, it will not help. Failure to defend an emerging
market segment may be dangerous later as competitors will entrench
themselves in the unprotected segment.
Pre-emptive Defense:- Preemptive defense involves taking
proactive steps to protect oneself from the imminent attack of a
competitor.
Attack First:- This involves continuous innovation and new
product development. The defender proactively defends its turf by
adopting such measures. This may dissuade a would-be attacker.
Counter Offensive Defense:- In head on counterattacks, an
incumbent matches or exceeds what the aggressor has done cuts price
more sharply or advertises more intensely. The incumbent is willing
to incur the high costs of such counterattacks because they are the
only means left to thwart a persistent aggressor. The incumbent may
also attack the aggressors cash cow, and hence choke the aggressors
resource supply line. A counterattack may also be based on
innovation make a product that makes the aggressors product
obsolete.
Encircle the Attacker:- The defender launches brands to compete
directly against attackers brands.
Mobile Defense:- When a companys major market is under threat, a
mobile defense makes strategic sense. The two options in a mobile
defense are diversification and market broadening. Diversification
involves attempts to serve a different market with a different
product. The company will have to check if it has the competences
to serve the new market effectively. Market broadening involves
broadening the business definition. Ex:- When film companies faced
declining cinema audiences, they redefined their business As
entertainment providers rather than film makers, and moved into TV,
Magazines, Theme Parks etc.
Strategic Withdrawal:- The incumbent takes stock of strengths
and weaknesses of its businesses. It decides to hold on to its
strong businesses, and divests its weak businesses it concentrates
on its core business. Therefore, strategic withdrawal allows a
company to focus on its core competences. Strategic withdrawal
makes sense when a companys diversification strategies have
resulted in too wide a spread of business, away from what it does
exceptionally well.
Niche objective:- The company seeks to serve a small segment or
even a segment within a segment. By being content with a small
market share, it is able to avoid competition with companies which
are serving the major segments. But if the niche is successful,
large competitors may seek to serve it too.
When to Niche:- A company can only niche if it has a small
budget, and if strong competitors are dominating the major
segments. The company finds small segments, whose customers are not
well served by incumbents, and it builds special competences to
serve them. It creates competitive advantage and runs profitable
operations for these segments. It often happens that an industrys
major players are focused on serving customer of large segments,
and hence their strategies and operations are aligned to meet their
needs. Needs of smaller segments are ignored by major players, and
hence niching becomes a smart strategic objective in such
markets.
Strategic Focus:- A strategic tool for nichers is market
segmentation. They should search for underserved segments that may
provide profitable opportunities. The choice of the segment will
depend upon the attractiveness of the niche and the capability of
the company to serve it. Focused R&D expenditure gives a small
company a chance to make effective use of limited resource. The
customers of a niche have peculiar needs - their needs are
substantially different from those of the majority of customers in
the market, and hence a nicher should develop a sophisticated
understanding of their needs. It then designs a unique operation
and delivery mechanism to serve those needs. Since a nicher is
serving only a small segment, it may be tempted to serve a larger
segment. A nicher should not fall prey to such temptations because
they will have to dilute their offerings to be attractive to a
larger segment, which will automatically make it unattractive for
its niche. A nicher is small in its operations by design, and not
by chance, and it is there because it values the high profits that
a niche generates. A nicher should decide to remain small
always.
Harvest Objective:- A company with harvest objective tries to
maximize its profit, and it is not overly worried if its actions
result in loss of market share. It is more focused on reducing cost
than gaining market share. It wants to generate funds for its
growing business, and hence is focused on generating large cash
flows.
When to Harvest:- Moderately successful products in mature or
declining markets are the prime targets for harvest strategies,
since they lose money or earn very little, and take up valuable
management time and resources. Harvesting strategies can make such
products highly profitable in the short term. Harvesting also makes
sense if a company has a substantial number of loyal customers whom
it continues to serve. In growing markets, a company has to make
huge investments in operations and marketing to build, and a
company may decide that payoffs of such investments are not
adequate. In such markets, a company can harvest businesses which
are consuming lot of resources but are not gaining market share
rapidly it decides that these businesses do not have the potential
to become market leaders. A company may have identified its future
breadwinners. It needs to invest in them, for which it harvests
some of its existing products which are not doing well. A company
should always remember that if it harvests a product for a long
time, it is not likely to survive.
Strategic Focus:- Harvesting involves eliminating R&D and
marketing expenditure. Only the very essential expenditures are
incurred. The company tries to reduce cost of manufacturing. It
rationalizes its product portfolio. It eliminates brands which are
not doing well, and focuses on few brands which are doing well. It
reduces its promotion expenses and it also withdraws from less
profitable distribution channels. And it increases price whenever
it can.Continued harvesting makes a business very weak and
eventually unviable. Therefore, a company has to decide as to when
it should stop harvesting and sell the business. It is never a good
idea to persist harvesting for such a long time that no buyer finds
anything worthwhile left in the business.
Divest Objectives:- A company divests a SBU or a product, and
hence is able to prevent the flow of cash to poorly performing SBUs
and products. Divestment is a decision that is often considered to
be the last option by a company. However, the decision to divest
must be made carefully, while not only assessing the particular
business, but also analyzing its impact on other businesses of the
company, and its portfolio.
When to Divest:- A company divest unprofitable businesses it
does not believe that it can turn them around. It wants to divert
its financial and managerial resources to more promising
businesses. It also divests businesses whose costs of turnaround
are likely to exceed benefits. It may divest its moderately
successful products of growth phase, sometimes after harvesting has
run its full course, because it is not willing to commit the type
of resources that will be required to make them market leaders.
Before taking the decision to divest a product, a company should
deliberate if it will adversely affect the sale of a profitable
product. It often happens that an industrial customer buys two
products in conjunction, and either he buys them together or he
does not buy either of them. Some industrial customers want to buy
all the products that they need to serve a specific requirement
from a single supplier, and hence, a company has to retain its
unprofitable products if it wants to continue to do business with
such a buyer.
Strategic Focus:- A loss making product is a drain on profits
and cash flows, and hence a company should divest it quickly to
minimize losses. It should try to find a buyer, but if it does not
find one within a reasonable frame of time, it should withdraw the
product.A company may continue to harvest one of its businesses and
sap all vitality form it. Such a business will not be attractive to
buyers and will not fetch a good price. A company should act fast
once it decides that it has to het rid of a business and sell it
when it is still in a viable shape. It should look for a buyer in
whose portfolio the business will fit well. Such a buyer will
always be willing to pay more as it will try to salvage and grow
the business rather than use it to earn some money by selling to
some other party. A company should avoid the situation when its
divestment is seen as a desperate sale. It will fetch less money
and lot of disrepute.
Competitive Advantage:- The key to superior performance is to
gain and hold competitive advantage. Firms can gain a competitive
advantage through differentiation of their product offerings which
provides superior customer value, or by managing for lowest
delivery cost. In most cases, an industrys return on investment
leader opts for one of the strategies, while the second placed firm
pursues the order.Achieving Competitive
AdvantageDifferentiationCost LeadershipDifferentiation FocusCost
FocusFocusFig:- Achieving Competitive Advantage
Competitive Strategies:- The two means of competitive advantage
of low cost of delivery and differentiation, when combined with
competitive scope of activities of broad versus narrow, result in
four generic strategies:- Differentiation. Cost Leadership.
Differentiation Focus. Cost Focus.
The differentiation and cost leadership strategies seek
competitive advantage in a broad range of market, whereas,
differentiation focus and cost focus strategies are confined to a
narrow segment.
Differentiation:- A company that pursues differentiation
strategy selects only one or just a few of the total choice
criteria that are used by customers of the industry. It then
uniquely positions itself to meet these choice criteria by
designing a product that gives a very high level of performance on
the chosen choice criteria, and only a mediocre level of
performance on other choice criteria.
Ex:- A manufacturer of A.Cs may target customers whose choice
criteria is Rapid Cooling. Therefore, it designs an AC which Cools
rapidly, but is not very energy efficient. Differentiation
strategies raise the average cost of the industry, because players
of the industry are providing higher level of performance based on
one choice criteria or the other. But the players can charge
premium prices because customers are getting their desired values.
Such an industry will be segmented on choice criteria, and players
will target only one or just a few of the total segments.
Therefore, another manufacturer of AC may target customers whose
choice criteria is energy efficient. Companies that pursue
differentiation strategy differentiate in ways that lead to price
premiums in excess of cost of differentiating. Differentiation
gives customers a reason to prefer one product over another and is
thus central to segmentation and positioning.
Cost Leadership:- Cost leadership involves the achievement of
lowest cost position in an industry. Firms market standard products
that are believed to be acceptable to customers, at reasonable
prices which give them above average profits. Some cost leaders
discount prices in order to achieve higher sales levels.
Differentiation Focus:- The company targets a small segment or
niche, which has special needs. The special needs of the segment
offer an opportunity to the company to differentiate its product
from those of competitors who may be targeting a broader group of
customers. It designs a product to meet the unique needs of the
customers of this small segment. Therefore, when a company pursues
differentiation focus strategy, its underlying premise is that the
needs of its target segment differ from the broader market, and
that existing competitors are underperforming in its target
segment.
Cost Focus:- A firm seeks a cost advantage with one or a small
number of target market segments. Services / features may be
provided to all segments but in some segments those services /
features may not be needed. For these segments, the company is over
performing. By providing a basic product, a company is able to
reduce costs more than the price discount it has to give to sell
it.
Creating Differential Advantage:- A companys resources and
skills are the sources of its competitive advantage, but they are
translated into a differential advantage only when the companys
customers perceive that its product is providing value more than
what its competitors products are providing. Therefore, a company
uses its resources and skills to create differential advantage by
providing higher level of performance than its competitors on
choice criteria that its target segments value highly.But, the
companies should understand that attributes on the bases of which
differentiation can be made are not always ones that are considered
most important by customers. Ex:- If an Airline asked its customers
to rank safety, punctuality and on-board service in importance when
flying, most customers would rank safety on top. Buy when they
choose an airline, safety ranks low, because they assume that all
airlines are safe, and they choose an airline on the basis of
punctuality and on board service. Therefore, airlines differentiate
their services on bases which customers said were less important.A
company can create differential advantage by enhancing customer
value proposition on one or more elements of its marketing mix
lower price, intensive distribution, knowledgeable salespeople, and
slick advertisement. The key to deciding whether improving an
element of marketing mix is worthwhile, is to know if the potential
benefit provides value that the customers desire.
Product:- A product should give higher performance on parameters
that target customers consider important and mediocre performance
on other parameters. Durability, reliability, styling, capacity to
upgrade, provision of guarantee, giving technical assistance,
helping in installation etc., can help in differentiating a product
from that of the competitor.
Distribution:- Wide distribution coverage and careful selection
of distributor locations can provide convenient purchasing points
for customers. Quick and reliable delivery helps in differentiating
a companys offerings from those of competitors. Building exclusive
channel partnerships and entering into long term contracts with
these partners can also prove to be beneficial to the company in
getting better customer feedback.
Promotion:- A differential advantage can be achieved by the
creative use of advertising. Advertising can aid differentiation by
creating a stronger brand personality than competitive brands.
Using more creative sales promotional methods or simply spending
more on sales incentives can give direct added value to customers.
By engaging in co-operative promotion with distributors, producers
can lower their costs and raise their goodwill. When products are
similar, a well trained sales force can provide superior problem
solving skills for their customers. Dual selling whereby a producer
provides sales force assistance to distributors can lower latters
cost and increase sales. Fast, accurate quotes can lower customers
costs by making transactions more efficient. Free demonstrations
and free trial arrangements can reduce the risk of purchase for
customers. Superior complaint handling procedures can lower
customer costs by speeding up the process and reduce inconvenience
that can accompany it.
Price:- Using low price to gain differential advantage can fail
unless the firm enjoys coat advantage and has resources to fight a
price war. Credit facilities and low interest loans are indirectly
low prices. A high price can be used to do premium positioning.
Where a brand has distinct product, promotional and distribution
advantage, a premium price provides consistency with the marketing
mix.
Attaining Cost Leadership:- Some of the major cost drivers that
determine the behaviour of costs in the value chain are:-
Economies of Scale:- Economies of scale can arise from the use
of more efficient methods of production at higher volumes. It also
arise form the less than proportional increase in overhead cost as
production volume increases. Another scale economy results from the
capacity to spread the cost of R&D and promotion over a greater
sales volume. But scale economies do not proceed indefinitely. At
some point, diseconomies of scales are likely to arise as size
gives rise to complexity and personnel difficulties.
Learning:- Costs can fall through effects of learning. People
learn how to assemble more quickly and pack more efficiently. The
combined effect of economies of scale and learning, as cumulative
output increases, has been termed the experience curve. This
suggests that firms with greater market share will have a cost
advantage through the experience curve effect, assuming all
companies are operating on the same curve. But a move towards a new
technology can lower the experience curve effect for companies that
adopt such new technologies, allowing them to leap frog more
traditional forms and thereby gain a cost advantage even though
their cumulative output may be lower.
Capacity Utilization:- Since fixed costs must be paid whether a
plant is manufacturing at full or zero capacity, underutilization
incurs costs. The effect of underutilized capacity is to push up
the cost per unit for production. Therefore, greater capacity
utilization ensures lower per unit cost of production.
Linkage:- These describe how costs of some activities are
reduced, by the way other activities are performed. (Ex:- Improving
quality assurance activities can reduce after sales service costs).
Activities of suppliers and distributors are also linked to the
activities of a firm and affect costs of a firm. (Ex:- Introduction
of JIT delivery system by a supplier reduces inventory costs of the
firm. Distributors can influence a firms physical distribution
costs through warehouse location decision. To exploit such
linkages, the firm may need considerable bargaining power.
Inter Relationships:- Sharing costs with other business units is
a potential cost driver. Sharing the costs of R&D,
transportation, marketing and purchasing lower costs.
Integration:- Both integration and de integration can affect
costs. Owning the means of physical distribution rather than using
outside contracts could lower costs. Ownership may allow a producer
to avoid suppliers or customers with sizeable bargaining power.
Ownership also increases control, which may allow greater
efficiency of distribution.De integration can lower costs and raise
flexibility. By using many small suppliers, a company can be in a
powerful position to keep costs low and also maintain a high degree
of production flexibility.
Timing:- Both first movers and late entrants have opportunities
for lowering costs. For first movers, it is usually economical and
easier to establish a brand name in the minds of customers if there
is no competition. They also have prime access to cheap or high
quality raw materials and locations. Late entrants to a market have
the opportunity to buy the latest technology and avoid high market
development costs. They can also avoid costly mistakes made by the
pioneer in building a market for the product.
Policy Decisions:- Firms have a wide range of discretionary
policy decisions that affect costs. Product width, levels of
service, extent of diversification, channel decisions etc., have
direct impact on costs. Care must be taken not to reduce costs on
activities that have a major bearing on customer value.
Locations:- The location of plants and warehouses affect costs
through different wage, physical distribution and energy costs.
Location near customers lowers outbound distributional costs, and
location near suppliers reduces inbound distributional costs.
Institutional Factors:- These include government regulations,
tariffs and local content rules. These are uncontrollable factors
for a business, but changes can affect costs. A firm can anticipate
such changes by conducting regular checks and follow ups of various
activities in their environment. The firm cannot avoid these
events, though they can be better prepared. A well equipped firm is
likely to be affected less adversely in an industry, as compared to
competitors.
Competitive Strategy Selection:- A company that selects a
generic strategy and faithfully and diligently follows it, is
successful. Companies that do not pursue a generic strategy are
stuck in the middle position, pursuing irreconcilable strategies
like differentiation at low cost. They do not develop any
competitive advantage, and hence perform poorly.A successful
company understands the generic basis of its success. It
understands its competitive advantage and eschews actions that will
dilute it. A cost leader that makes no frills products should be
paranoid about controlling costs and never move to make
differentiated products just because they fetch more prices and
margins. The move will raise the cost of its no frills product, but
its differentiated product will not be differentiated enough to
lure the more sophisticated customers of the market. A company that
follows the focus strategy should know that it can only have
limited sales volume, and that it cannot target a large segment
because it does not have the competitive advantage to serve it. If
it targets a larger segment, it would have diluted its product
enough to make it unattractive for its original small segment.
In most situations strategies of differentiation and cost
leadership are incompatible because resources have to be expended
for differentiating a companys offerings. But there are
circumstances when both can be achieved simultaneously. A
differentiation strategy may lead to market share domination, which
lowers cost through economies of scale and learning effects. Or a
highly differentiated firm can pioneer a major process innovation
that significantly reduces manufacturing costs leading to a cost
leadership position. When differentiation and cost leadership
coincide, performance is exceptional, since a premium price can be
charged for a low cost product.
Sources of Competitive Advantage:- A company has several sources
of competitive advantages such as R&D, scale of operations,
technological superiority, more qualified personnel etc. Companies
in the same industry usually have different sources of competitive
advantage, which must provide superior customer value than the
competition.
Superior Skills:- Are distinctive capabilities of key personnel
that set them apart from personnel of competing firms. Ex:-
Superior selling skills may result in closer relationships with
customers than what competing firms can achieve. Superior quality
assurance skills can result in higher and more consistent product
quality.
Superior Resources:- Are tangible requirements that enable a
firm to exercise its skills, Superior resources may be number of
sales people, expenditure on advertising and sales promotion,
number of retailers who stock the product (distribution coverage),
expenditure on R&D, scale and type of production facilities and
financial resources, brand equity etc.
Core competences:- The distinctive nature of these skills and
resources sum up a companys core competences.Superior Skills
Distinctive Capabilities of key personnelSuperior Resources
Tangible Requirements to Exercise Skills
Core Competencies+Fig:- core Competencies of a Company
Value chain:- Is a useful method for locating superior skills
and resources. A companys value chain comprises of all the
activities that the company undertakes to be able to serve its
customers. These activities can be categorized into primary and
support activities. All companies design, manufacture, market,
distribute and service its products. When a company delineates its
value chain, it can better locate and understand its sources of
costs and differentiation. A companys primary activities include
in-bound logistics, warehousing, manufacturing, marketing,
out-bound logistics, selling, order processing, installation, and
repair. Support activities are found within all these primary
functions and include purchasing, technology, human resource
management and the companys infrastructure. They are not defined
within a given primary activity because they can be found in all of
them. By examining each value creating activity, a company can look
for skills and resources that may form the basis for low cost or
differentiated strategy. The company also looks for linkage between
value creating activities. Ex:- Greater co-ordination between
manufacturing and in-bound logistics may reduce costs through lower
inventory levels. Value chain analysis can extend to the value
chains of suppliers and customers. A company can reduce its costs
or enhance its differential positions by creating effective
linkages between its value chain and those of its suppliers and
customers a company can reduce its inventory holding costs by
enabling it supplier to supply in smaller lot sizes, or its
engineers can collaborate with suppliers engineers to produce
better quality products.
Value chain analysis provides an understanding of the nature and
location of skills and resources that provide the basis for
competitive advantage. Operating costs and assets are assigned to
the activities of the value chain and improvements can be made and
cost advantage defended. Ex:- If a companys cost advantage is based
on its superior manufacturing facility, it should always be willing
to upgrade it, to maintain its position against competitors. But,
if a companys differential position is based upon skills in product
design, it should always be keen to hire the best designers and
procure the latest design tools. The identification of specific
sources of advantage can lead to their exploitation in new markets
where customers place a similar high value on these resultant
outcomes.For a differential advantage to be realized, a company not
only needs to provide customer value, buy the value should also be
superior to that provided by competitors. Besides creating an
effective marketing mix, a company also needs to react fast to
changes in the market. Using advanced telecommunications, companies
receive sales information from around the world 24 hours a day,
every day of the year and react promptly to them.
Building corporate Advantage Across Business:- Most
multi-business companies are just sum of their individual
businesses. Companies have been able to build competitive advantage
at the level of individual businesses. But they have not been able
to build corporate advantage across their multiple businesses.
Corporate advantage has to be built through the configuration and
co-ordination of the various businesses that the corporate is
managing. Corporate advantage is built by judiciously using
resources like assets, skills and competencies a company uses these
resources in a unique way, and it is almost impossible for a
competitor to copy it. Ex:- Companies like Toyota and Southwest
Airlines have been successful by using their resources in unique
ways, and though they have been very willing to let others study
their systems, not many companies have been able to copy their
systems effectively. Its resources also contain a corporate in the
sense that it can move into a business area only if its resources
will help build a corporate advantage in the new business area. A
corporate should enter a new business based on the similarity
between the technology required for the new business and those
possessed by the corporate, instead of similarity of products.
Similarly, the structure and size of the corporate office should be
dependent on the strategy being perused, rather than following
prevalent practices. Today most corporations favour a lean,
minimalist corporate office. The arrangement may suit some
companies but can be disastrous for others.
Resources and Business:- There should be a strict relationship
between companys corporate capabilities and its choice of
businesses its corporate capabilities must help its different
businesses in creating their individual competitive advantages.
Ex:- If a company has extremely efficient manufacturing plants, and
very strong relationships with discount retailers, it should
venture into businesses that can use these capabilities to create
competitive advantages it should not enter businesses that will
require it to have flexible manufacturing plants or which will sell
from high end stores. Ex:-Sharps most important resource is its
liquid crystal display technology, which is a critical component in
nearly all Sharps products. Sharp keeps its set of businesses
restricted. It enters a business only when it can create
competitive advantage by using one of its technologies. Its
competitors like Sony and Mastsushita have diversified into the
movie business, but Sharp has resisted from making such a move
because it understands that it does not have the corporate
capability to succeed in the movie business.
Organization:- Organizational mechanisms have to be put in place
to enable the corporate to add value to each of the businesses.
Executives fear that they will either violate the autonomy and
accountability of independent business units or will end up with
large, bureaucratic overhead structures. It is possible to add
value and avoid the two pitfalls. Ex:- Newell understands that its
know how and experience are embedded in its managers and it
deliberately moves them across business units and from the business
units to the corporate level. Unlike Newell, Sharp is divided into
functional units, not product divisions. Applied research and
manufacturing of key components, such as LCDs occur in a single
specialized unit where economies of scale can be exploited. The
company convenes a number of cross unit and corporate committees to
ensure that the corporate R&D unit and sales are optimally
allocated among different product lines. Sharp invests in such time
consuming co ordination activities to minimize the conflicts that
arise when units share important activities like R&D and
manufacturing.Depending on its typical situation a corporation will
devise its strategy to add value to its business units. The company
should always do one reality check: the companys business must not
be worth more to another company.
Sustaining Competitive Advantage:- A company should strive to
gain sustainable competitive advantage it should differentiate in
ways that cannot be copied easily by its competitors. A company
that competes primarily through low prices can be undone by a
competitor with deep pockets. Therefore, a competitive advantage
based on low prices is essentially short lived, unless the company
has clear cost leadership. A company can gain sustainable
competitive advantage by creating patent protected products,
building strong brand personality, building strong relationship
with customers, providing exemplary service and creating entry
barriers like high R&D or promotional budgets.
Erosion of Competitive Advantage:- Three mechanisms are at work
which can erode a competitive advantage:-
Technological and environmental changes that create
opportunities for competitors by eroding the protective
barriers.Competition learns how to imitate sources of competitive
advantage.Complacency leads to lack of protection of the
competitive advantage.
Core Strategy or Business Planning:- A companys core strategy
enables it to achieve its business objectives. It comprises of
three elements:- Target Markets:- A companys target market is a
group of customers that it finds attractive to serve & believes
that it has the capabilities to serve this group of customers
profitably. To assess the attractiveness of segments of a market,
it uses information like their size, growth rate, level of
competitor activity, customer requirements and key factors for
success. The company surveys its competences, and then arrives at
one or more target markets that it can serve well.The needs of
customers of its target market may change, and it is always prompt
in changing its marketing mix so that it can serve the new needs
effectively. A target market may become less attractive, in which
case, it targets a different segment and repositions its product
appropriately.
Competitor Targets:- Weak competitors may be viewed as easy prey
and resources are organized to attack them. The company has to
establish a policy to determine the competitors that it will take
on and how.
Competitive Advantage:- A companys competitive advantage is how
it is better than its competitors, in serving the needs of the
customers of its target markets. A successful company achieves a
clean performance differential over competitors on factors that are
important to customers of its target market. The most potent
competitive advantages are built upon some combination of following
three superior performance:-Being Better:- A company sells high
quality products or provides prompt service.Being Faster:- A
company anticipates and responds to customer needs faster than
competition.Being Closer:- A company establishes close long term
relationship with customers.
A company can also achieve competitive advantage by becoming the
lowest cost producer of its industry. To some extent, achieving a
highly differentiated product is not incompatible with low cost
position. High quality products suffer low rejection rates, lower
repair costs and therefore incur lower costs than low quality
products.
Tests of An Effective Core Strategy:- A companys core strategy
must be based upon a clear definition of its target market and the
needs of its customers. A company should have a thorough
understanding of its competitors in terms of their strengths and
competences, so that its core strategy is based upon competitive
advantage, i.e. what the company can do better than or different
from competitors. The strategy must incur acceptable risk it is not
prudent to launch a frontal attack on a strong competitor with a
clear competitive advantage, rather it is better to launch a
flanking attack, so that it gets time to develop the required
competences to take the competitor head on at some later stage. A
company may have a fanciful core strategy on paper, but it cannot
deliver value to customers if the company does not have resources
to implement it faithfully. A companys core strategy should be
derived from its strategic objectives heavy promotion and intensive
distribution makes no sense when the products strategic objective
is to harvest. Moreover, a companys core strategy should be
internally consistent, in terms of its elements blending to form a
coherent whole a company cannot have affluent customers as its
target market, and have cost leadership as its competitive
advantage.
Identifying Competitors:- It would seems a simple task for a
company to identify its competitors. Ex:- PepsiCo knows that Coca
Colas Kinley is the major bottled water competitor for its Aquafina
brand; ICICI Bank knows that Axis Bank is a major banking
competitor. However, the range of a companys actual and potential
competitors can be much broader than the obvious, and a company is
more likely to be hurt by emerging competitors or new technologies
than by current competitors.
In recent years, for instance, a number of new emerging giants
have arisen from developing countries, and these nimble competitors
are not only competing with multinationals on their home turf but
also becoming global forces in their own right. They have gained
competitive advantage by exploiting their knowledge about local
factors of production capital and talent and supply chain in order
to build world class businesses.
Ex:- TCS, Infosys Technologies, Wipro and Satyam Computer
Services have succeeded in catering to the global demand for
software and service, even triumphing against multinational
software service providers such as Accenture and EDS. These
multinationals have a hard time sorting out talent in a market
where the level of peoples skills and the quality of educational
institutions vary dramatically. Indian companies know their way
around the human resources market and are hiring educated, skilled
engineers and technical graduates at salaries much lower than those
that similar employees in developed markets earn. Even as the
talent in urban centers such as Bangalore and Delhi gets scarce,
the Indian companies will keep their competitive advantage by
knowing how to find qualified employees in Indias second-tier
cities.
Taiwan based Inventec has become one of the worlds largest
manufacturers of notebook computers, PCs, and servers, also by
exploiting its knowledge of local factors of production. It makes
products in China and supplies them to giants such as Hewlett
Packard and Toshiba and also makes cell phones and MP3 players for
other multinational customers. Inventecs customers get the low cost
of manufacturing products in China without investing in factories
there, and they can also use Chinas talented software and hardware
professionals. It wont be long, however, before Inventec begins
competing directly with its own customers; it has already started
selling computers in Taiwan and China under its own retail brand
name.
Using the market approach, we define competitors as companies
that satisfy the same customer need. Ex:- A customer who buys a
word-processing package really wants writing ability a need that
can also be satisfied by pencils, pens, or typewriters. Marketers
must overcome marketing myopia and stop defining competition in
traditional category and industry terms. Coca Cola, focused on its
soft-drink business, missed seeing the market for coffee bars and
fresh-fruit-juice bars that eventually impinged on its soft-drink
business.The market concept of competition reveals a broader set of
actual and potential competitors than competition defined in just
product category terms.
Analyzing Competitors:- Once a company identifies its primary
competitors, it must ascertain their strategies, objectives,
strengths and weaknesses.
Strategies:- A group of firms following the same strategy in a
given target market is called a strategic group. Suppose a company
wants to enter the major appliance industry in India, what is its
strategic group?
Group D Narrow Line Lower Mfg. Cost Very High Service High
PriceGroup C Moderate Line Medium Mfg. Cost Medium Service Medium
PriceGroup B Full Line Low Mfg. Cost Good Service Medium PriceGroup
A Broad Line Medium Mfg. Costs Low service Low
PriceHighHighLowLowQualityVertical IntegrationFig:- Strategic
Groups in the Major Appliance Industry
Objectives:- Once a company has identified its main competitors
and their strategies, it must ask What is each competitor seeking
in the marketplace? What drives each competitors behaviour? Many
factors shape a competitors objectives, including size, history,
current management, and financial situation. If the competitor is a
division of a larger company, it is important to know whether the
parent company is running it for growth, profits, or milking
it.Most U.S firms operate on a short-term profit-maximization model
largely because of the stock market pressures. Japanese firms
operate largely on a market share maximization model. Many Indian
companies combine the objectives of sales growth and profits.
Finally, a company must monitor competitors expansion plans. The
below figure shows a product-market battlefield map for the
personal computer industry. Dell, which started out as a strong
force in selling personal computers to individual users, is now a
major force in the commercial and industrial market. Other
incumbents may try to set up mobility barriers to Dells future
expansions.DELL
SoftwareHardwareAccessoriesPersonalcomputersIndividualUsersCommercial
AndIndustrialEducationalFig:- A Competitors Expansion Plans
Strengths and Weaknesses:- A company needs to gather information
about each competitors strengths and weaknesses.
Customer AwarenessProduct QualityProduct AvailabilityTechnical
AssistanceSelling StaffCompetitor AEEPPGCompetitor BGGEGECompetitor
CFPGFFNOTE:-E= ExcellentG= GoodF= FairP= Poor
Table:- Customers Ratings of competitors on Key Success
Factors
In general, a company should monitor three variables when
analyzing competitors:-
Share of Market:- The competitors share of the target
market.Share of Mind:- The percentage of customers who named the
competitor in responding to the statement, Name the first company
that comes to mind in this industry.Share of Heart:- The percentage
of customers who named the competitor in responding to the
statement, Name the company from which you would prefer to buy the
product.
Companies that make steady gains in mind share and heart share
will inevitably make gains in market share and profitability. To
improve market share, many companies benchmark their most
successful competitors, as well as other world-class
performers.
Selecting Competitors:- After the company has conducted customer
value analysis and examined its competitors carefully, it can focus
its attack on one of the following classes of competitors:-
Strong Versus Weak:- Most companies aim their shorts at weak
competitors, because this requires fewer resources per share point
gained. Yet, the firm should also compete with strong competitors
to keep up with the best. Even strong competitors have some
weaknesses.
Close Versus Distant:- Most companies compete with the
competitors that resemble them the most. Ex:- Chevrolet competes
with Ford, not with Ferrari. Yet companies should also identify
distant competitors. Ex:- Coca-Cola recognizes that its number one
competitor for Kinley brand is Tap water, not Pepsi Cos Aquafina.
Museums now worry about theme parks and malls.
Good Versus Bad:- Every industry contains good and bad
competitors. Good competitors play by the industrys rules; they set
prices in reasonable relationship to costs; and they favor a
healthy industry. Bad competitors try to buy share rather than earn
it; they take large risks; they invest in overcapacity; and they
upset industrial equilibrium. A company may find it necessary to
attack its bad competitors to reduce or end their dysfunctional
practices.
Selecting Customers:- As part of competitive analysis, firms
must evaluate its customer base and think about which customers its
willing to lose and which it wants to retain. One way to divide up
the customer base is in terms of whether a customer is valuable and
vulnerable, creating a grid of four segments as a result as given
below. Each segment suggests different competitive activities.
Ex:- BSNL, in one of its circles decided to protect its Valuable
/ Vulnerable institutional customers by specifically analyzing
their past usage pattern and suggesting appropriate tariff plans to
them. This resulted in substantial savings for the customer despite
the company incurring short-term loss in profits.VulnerableNot
VulnerableValuableThese customers are profitable but not completely
happy with the company. Find out and address their sources of
vulnerability to retain them.These customers are loyal and
profitable. Dont take them for granted but maintain margins and
reap the benefits of their satisfaction.Not ValuableThese customers
are likely to defect. Let them go or even encourage their
departure.These unprofitable customers are happy. Try to make them
valuable or vulnerable.