Marketing Strategy

SYLLABUS

1) Marketing strategy-overview

2) Pillars of marketing –STPD Strategies

3) Market situation strategy –leader, challengers, followers, nichers.

4) Competition analysis-Porter's 5 forces model competitive environment. Benchmarking Understanding competitive moves , & postures

5) Sustainable competitive advantage-Porter's generic strategies

6) Portfolio models –BCG Matrix, GE McKinsey matrix

7) New product strategy-innovation ,market entry, product line extension

8) Communication strategy-managing communication mix for product , brands

9) Advertising & sales promotion strategy-campaigns

10) Brand building-FMCG, Consumer durables, services cases

11) Distribution strategy-designing channel system, managing multi channel system

12) Pricing strategy-value pricing , optimizing pricing

13) Marketing planning-introduction ,growth & mature markets. pruning of

products.

Reference Books:

• Marketing Strategy –Boyd, Walker & Larrenche

• Marketing Strategy- Stephen Schnaars

• Strategic Market Management- David Aaker

• Strategic marketing texts & cases –Cravens

What is strategy?

"Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations".

Strategy is about:

• Where is the business trying to get to in the long-term (direction)

• Which markets should a business compete in and what kinds of activities are involved in such markets? (markets; scope)

• How can the business perform better than the competition in those markets? (Advantage)?

• What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (Resources)?

• What external, environmental factors affect the businesses' ability to compete? (Environment)?

• What are the values and expectations of those who have power in and around the business? (stakeholders)

• Strategy at Different Levels of a Business

Strategies exist at several levels in any organization - ranging from the overall business (or group of businesses) through to individuals working in it.

• Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".

• Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

• Operational Strategy - is concerned with how each part of the business is organized to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

Strategy versus Tactics:

Strategy Tactics

The annual business plan specifies actions needed to implement the strategy

Tactics are designed for the short term

Strategy is the broad approach to the achievement of objectives

Tactics are the details within the overall the strategy

It starts with the identification and evaluation of strategic objectives

The details include what, where and how activities will take place to accomplish a goal

And then summarizes how to fulfill the objectives

• Strategic options can be analyzed by using Ansoff’s matrix and Porter’s generic strategies

• Strategy is the process of planning & executing various maneuvers or actions in an attempt to reach a goal. Strategy is often associated with business, politics,& military planning, but individuals can also strategized towards achieving their career, health . Strategy is essentially akin to planning but implies a maximization of resources with logical thinking, intelligence (acquired knowledge) & leverage.

• Strategy is differentiated from tactics in that tactics are micro strategies that contribute to large goal. Opening a successful business would fall under strategy achieving financing or an important client would be considered tactics towards strategy.

• A successful strategy begins with a goal , along with an analysis of the current situation & then sets out a plan that address each operational aspects needed to realize the achievement of the goal. This generalized formula is characteristic of all straitening.

7P’s 7C’sProduct Customer valuePromotion CommunicationPrice CostPlace ConveniencePeople CapableProcess ConvergentPhysical Evidence Conductive

Issues for marketing strategy

• Product What product do customers use now? What benefits does consumer want from the product? • Promotions

What promotions appeals would influence consumer to purchase & use of our product? What advertising claims would be effective for our product?

• Pricing How important is price to the consumer in various target markets? What effect will a price change have on purchase behavior?

• Place Where do consumers buy this product? Would a different distribution system change consumer purchasing behavior?

• People What type of people is desired by the consumer to deliver the service? Would differentiation by people help in gaining competitive advantage?

• Process Would different procedure, mechanism, routine, and helps in satisfying the customer needs?

• Physical Evidence Can we have different physical evidence? Marketing Strategy

Achieving objectives requires the marketer engage in marketing decision-making which indicates where resources (e.g., marketing funds) will be directed. However, before spending begins on individual marketing decisions (e.g., where to advertise) the marketer needs to establish a general plan of action that summarizes what will be done to reach the stated objectives.

Tactical Programs – Marketing strategy sets the stage for specific actions that will take place. Marketing tactics are the day-to-day actions that marketers undertake and involve the major marketing decision areas. As would be expected, this is the key area of the Marketing Plan since it explains exactly what will be done to reach the organization’s objectives.

Marketing Budget – Carrying out marketing tactics almost always means that money must be spent. The marketing budget lays out the spending requirements needed to carry out marketing tactics. While the marketing department may request a certain level of funding

they feel is required, in the end it is upper-management that will have final say on how much financial support will be offered.

Types of Marketing Strategy:

One of the most important concepts of the marketing planning process is the need to develop a cohesive marketing strategy that guides tactical programs for the marketing decision areas.

In marketing there are two levels to strategy formulation:

1. General Marketing Strategies 2. Decision Area Strategies.

General Marketing Strategies: These set the direction for all marketing efforts by describing, in general terms, how marketing will achieve its objectives. There are many different General Marketing Strategies, though most can be viewed as falling into one of the following categories:

Market Expansion :

This strategy looks to grow overall sales in one of two ways:

– Grow Sales with Existing Products – With this approach the marketer seeks to actively increase the overall sales of products the company currently markets. This can be accomplished by: 1) getting existing customers to buy more; 2) getting potential customers to buy (i.e., those who have yet to buy); or 3) selling current products in new markets.

– Grow Sales with New Products – With this approach the marketer seeks to achieve objectives through the introduction of new products. This can be accomplished by: 1) introducing updated versions or refinements to existing products; 2) introducing products that are extensions of current products; or 3) introducing new products not previously marketed.

• Market Share Growth – This strategy looks to increase the marketer’s overall percentage or share of market. In many cases this can only be accomplished by taking sales away from competitors. Consequently, this strategy often relies on aggressive marketing tactics.

• Niche Market – This strategy looks to obtain a commanding position within a certain segment of the overall market. Usually the niche market is much smaller in terms of total customers and sales volume than the overall market. Ideally this strategy looks to have the product viewed as being different from companies targeting the larger market.

• Status Quo – This strategy looks to maintain the marketer’s current position in the market, such as maintaining the same level of market share.

• Market Exit – This strategy looks to remove the product from the organization’s product mix. This can be accomplished by: 1) selling the product to another organization, or 2) eliminating the product.

Decision Area Strategies:

• These are used to achieve the General Marketing Strategies by guiding the decisions within important marketing areas (product, pricing, distribution, promotion, target marketing).

• For example, a General Marketing Strategy that centers on entering a new market with new products may be supported by Decision Area Strategies that include:

• Target Market Strategy – employ segmenting techniques • Product Strategy – develop new product line • Pricing Strategy – create price programs that offer lower pricing versus competitors • Distribution Strategy – use methods to gain access to important distribution partners that

service the target market • Promotion Strategy – create a plan that can quickly build awareness of the product

• Achieving the Decision Area Strategies is accomplished through the development of

detailed Tactical Programs for each area.

• For instance, to meet the Pricing Strategy that lowers cost versus competitors’ products, the marketer may employ such tactics as: quantity discounts, trade-in allowances or sales volume incentives to distributors.

Chapter 2.Segmentation, Targeting, Positioning Differentiation

• Segmentation: grouping consumers by some criteria • Targeting: choosing which group(s) to sell to • Positioning: select the marketing mix most appropriate for the target segment(s)

Segmentation:

• Grouping consumers by some criteria, such that those within a group will respond similarly to a marketing action and those in a different group will respond differently.

Segment Market

Choose target

Choose target

Potential segmentation variables:

• Sex• Age• race• Income• educational level• marital status• No of children• introvert / extrovert z• usage history

Which segment – • Mass market,• Multiple segments,• Single segment

Mass market – high volumes low margins goods-example – confectionery, clothing

• Multiple segment- appealing to wider range of groups example – 4x4 vehicles, towns, country, gender, lifestyle, social class

• Single segment – often a specialized product, example – machinery, exclusive goods

MARKET SEGMENTATION STRATEGY:

• The need for market segmentation • Marketers understand they cannot do all things to all people ,all the time .

Buyers & markets are too complex & diverse for one simple marketing formula to adequately address the needs of all.

Market Segmentation

Psychographic Demographic

Firm’s marketing

mixMarket

• Target market – identifying market segment that are bite size chunks that organization can manage

• Market segmentation - identifying markets with common traits• Market targeting - process of evaluation of selected segmentation & then deciding

which market segment to operate within.• Market Positioning – process whereby market positions the product to occupy a

clear & distinctive position relative to other competing brands.• Market segmentation - markets are composed of buyers & they differ in wants,

resources, locations, & buying patterns.• Market segmentation is process that marketer use to divide the market in to smaller

segments' that can be efficiently addressed.

Six stages in market segmentation, targeting, positioning-

• Identify for segmenting the market • Develop profiles of resulting segment• Develop measure of segment attractiveness• Select the target segment • Develop position for each target segment • Develop marketing mix for each target segment

What is a Market? • PEOPLE • BUT - not just ANY people, they have to have• Willingness to buy• Purchasing power (money)• Authority to buy

Types of Markets:

• Consumer Goods and Services• Industrial Goods and Services

Classes of Consumer Products

Market Segmentation:

• With a large country• Many different types of people it is too difficult to create a product that will satisfy everybody, that is why we focus on

a segment of the total market• Market Segmentation-def • Grouping people according to their similarity related to a particular product category”

4 commonly used bases for Segmentation

Convenience

Shopping

Specialty

GoodsServicesPOP$$ATM

Market Segmentation

Descriptive Behavioural

• Geographic location - based upon where people live (historically a popular way of dividing markets)

• Demographic - based upon age, gender and income level (very often used)• Psychographic / lifestyles - based on people’s opinions, interests, lifestyles

eg, people who like hard rock music probably prefer beer to wine• Benefits - based on the different expectation that customers have about what a

product/service can do for themeg. People who want to but “lite” food cause ti will help them lose weight

Geographic Segmentation

• The reason why we study geographic segmentation is because WHERE people live has a big effect on their consumption patterns.

• Additionally, WHERE people live in a city is also a reflection of their income level and we can make certain assumptions about their ABILITY TO SPEND based upon their address.

• This helps people plan store locations and the location of other services.• Climate:

winter equipment and recreation are effected by geographic location clothing purchases are also effected by climate/geography

Demographic Segmentation

Descriptive Segmentation

Geographic location Demographic Behavioural

Psychographic Benefits

• Demographic Segmentation is the most common approach to Market Segmentation• Variables are:• age• gender (male/female)• income• occupation• education• household (family - style) size

Demographic Segmentation

• Demographic Segmentation is the most common approach to Market Segmentation• Variables are:• gender (male/female) • gender is an obvious way to divide the market into segments since so many products

are gender-specific• clothing• medical products• sports products/services • entertainment

Demographic Segmentations

• Demographic Segmentation is the most common approach to Market Segmentation• Variables are: • age• age is another obvious way to divide the market into segments since so many products

are based upon “time of life”• diapers for babies• toys for children• entertainment for “over 19”

• Age• Also, people have different consumption patterns at different ages• e.g. Milk products• Children and teens drink a lot of milk• Adults don’t• older adults need calcium, but don’t drink milk (they take pills)

• Demographic Segmentation is the most common approach to Market Segmentation• Variables are:• household (family - style) size• Segmenting by the “stages in the family life cycle”

• There are different buying characteristics of people in each stage of the family

Psychographic segmentation

• The use of psychological attributes, lifestyles and attitudes in determining the behavioral profiles of different customers”

• The use of detailed information to understand differences in what people buy• Psychographic profiles on a target market segment are obtained by doing a lot of

questionnaires and surveys to ask people if they agree/disagree with certain statements made about particular activities, interests or opinions

• AIO - activities, interests, and opinions Benefit Segmentation

• It is based on the Attributes (characteristics) of products, as seen by the customers”example, people buy something because it causes a benefitie. Diet coke - less sugar, lose weightie. Extra white toothpaste, whiter teeth, better smile

• “Many marketers now consider benefit segmentation one of the most useful methods of classifying markets”ie. Watches

• the benefits customers looked for where durability and product quality- older research was based on dividing the watch market according to a different segment - once they used the new segment, they changed the marketing plan- modern example would be price of PCs for home use - biggest use is entertainment NOT schoolwork or home based businesses

PRODUCT DIFFERENTIATION

• Offered under different brands by competing firms, products fulfilling the same need typically do not have identical features.• The differentiation of goods along key features and minor details is an important strategy

for firms to defend their price from leveling down to the bottom part of the price spectrum. •Within firms, product differentiation is the way multi-product firms build their own

supplied products' range.

• As a general rule, better products have a higher price, both because of higher production costs (more noble materials, longer production, more selective tests for throughput...) and bigger expected advantages for clients, partly reflected in higher margins.

• Thus, the quality-price relationship is typically upwards sloped. This means that consumers without their own opinion nor the capability of directly judging quality may rely on the price to infer quality. They will prefer to pay a higher price because they expect quality to be better.

• Vertical differentiation • Vertical differentiation occurs in a market where the several goods that are present can be ordered according to their objective quality from the highest to the lowest. It's possible to say in this case that one good is "better" than another-the perceived difference in quality by different consumer will play a crucial role in the purchase decisions.• Horizontal differentiation-

• When products are different according to features that can't be ordered, a horizontal differentiation emerges in the market. A typical example is the ice-cream offered in different tastes. Chocolate is not "better" than lemon.

• Horizontal differentiation can be linked to differentiation in colours (different colour version for the same good), in styles (e.g. modern / antique), in tastes.

The Nature of DifferentiationThe Nature of Differentiation

DEFINITION: Providing something unique that is valuable to thebuyer beyond simply offering a low price. (M. Porter)

THE KEY IS CREATING VALUE FOR THE CUSTOMER

TANGIBLE DIFFERENTATIONObservable product characteristics: size, color, materials, etc. performance packaging complementary services

TANGIBLE DIFFERENTATIONObservable product characteristics: size, color, materials, etc. performance packaging complementary services

TOTAL CUSTOMER RESPONSIVENESSDifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

Differentiation and SegmentationDifferentiation and Segmentation

DOES DIFFERENTIATION IMPLY SEGMENTATION?--Not necessarily, depends upon the differentiation strategy:BROAD SCOPE DIFFERENTIATION:Appealing to what is in common

between different customers (McDonalds, Honda,

Gillette)

FOCUSED DIFFERENTIATION:Appealing to what distinguishes

different customer groups (MTV Harley-Davidson, Ralph

Lauren)

DIFFERENTIATION: is concerned with how a firm distinguishesits offerings from those of its competitors (i.e. How the firm competes)

SEGMENTATION: is concerned with which customers, needs, localities a firm targets (i.e. Where the firm competes)

Differentiation and the Product Life CycleDifferentiation and the Product Life Cycle

New packages of hardware and

software introduced

SYSTEMAugmentation:

repackaging of

hardware and

software

PRODUCTS &

SERVICES

Decommoditization

COMMODITY

PRODUCTS &

SERVICES

Commoditization

Desystematization: some

packages unbundled

Identifying Differentiation Potential: The Demand Side

Identifying Differentiation Potential: The Demand Side

THE PRODUCT

THE CUSTOMER

What needs does it satisfy?By what

criteria do they choose

?Wha

t motivate

s them?

What are key

attributes?

Relate patterns

of customer preferenc

es to product

attributes

What price

premiums do

product attributes command

?

What are demographi

c, sociological, psychologic

al correlates

of customer behavior?

FORMULATE

DIFFERENTIATION

STRATEGY

Select product positioning in relation to product attributes

Select target customer group

Ensure customer / product compatibility

Evaluate costs and benefits of differentiation

Positioning Strategy:

• A Positioning Strategy results in the image you want to draw in the mind of your customers, the picture you want him/her to visualize of you what you offer, in relation to the market situation, and any competition you may have".

• While designing your positioning strategy you will be faced with three main options: • Positioning your product against your competitors, " Our prices are half of that you

may find else where for similar products" • Emphasizing a distinctive unique benefit "the only book keeping system that instantly

calculates your taxes" • Affiliating your product with something the customer knows and values "the same

archiving system used by the library of university "

A positioning statement should have:

• Your customer: The type of customer you target. • The benefits: What you can do for your customers. • The method: How you do it. • The USP: Why you do it better than the competitors. (As you may know, USP stands

for "unique selling proposition".)

You will need to write down the following

Producer’s strategies

High quality Low quality

High 7 10Consumer’s price 7 -5strategies

Low -5 3 price 10 3

Note: In each cell, the lower left number is the payoff to the consumer and the upper right number is

the payoff to the producer.

The problem of experience goods : quality can only be ascertained after purchase. Hence: Prisoner’s Dilemma:-

Equilibrium reached with consumer paying a low price for a low quality item.If producer can signal quality--- both consumer and producer can move to preferred position: high quality product carrying a high price

Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”

Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”

• Our product offers the following benefits: --------------- • To the following customers (your target market_: ---------- • Our product is better than the competitors in the following manner: ---------------- • We can prove our product is the best because (evidence, differences, testimonials..etc)

-------------------- • Your positioning statement reflects what you need to communicate about a specific

product, and to whom, so you will always hit the right button, communicating the right message to the right customer at the right time.

• Every marketing program should cover only one product, hence must not reflect more than one clearly stated positioning strategy, So:

• 1 product = 1 marketing program = 1 positioning statement.

Developing a positioning strategy

• Developing a positioning strategy depends much on how competitors position themselves. Do organizations want to develop ‘a me too’ strategy and position themselves close to their competitors so consumers can make a direct comparison when they purchase?

• Or does the organization want to develop a strategy which positions themselves away from their competitors? Offering a benefit which is superior depends much on the marketing mix strategy the organization adopts. The pricing strategy must reflect the benefit offered and the promotion strategy must communicate this benefit.

• Ultimately positioning is about how you want consumers to perceive your products and services and what strategies you would adopt to reach this perceptual goal.

• Positioning is what the customer believes about your product’s value, features, and benefits; it is a comparison to the other available alternatives offered by the competition.

• These beliefs tend to based on customer experiences and evidence, rather than awareness created by advertising or promotion.

• Marketers manage product positioning by focusing their marketing activities on a positioning strategy. Pricing, promotion, channels of distribution, and advertising all are geared to maximize the chosen positioning strategy.

Generally, there are six basic strategies for product positioning:

• By attribute or benefit- This is the most frequently used positioning strategy. For toothpaste, it might be the mint taste or tartar control.

• By use or application- The users of Apple computers can design and use graphics more easily than with Windows or UNIX. Apple positions its computers based on how the computer will be used.

• By user- Face book is a social networking site used exclusively by college students. Face book is too cool for MySpace and serves a smaller, more sophisticated cohort. Only college students may participate with their campus e-mail IDs.

• By product or service class- Margarine competes as an alternative to butter. Margarine is positioned as a lower cost and healthier alternative to butter, while butter provides better taste and wholesome ingredients.

• By competitor- BMW and Mercedes often compare themselves to each other segmenting the market to just the crème de la crème of the automobile market. Ford and Chevy need not apply.

• By price or quality- Jewelers sell diamonds.

• Positioning is what the customer believes and not what the provider wants them to believe. Positioning can change due to the counter measures taken at the competition.

• Managing your product positioning requires that you know your customer and that you understand your competition; generally, this is the job of market research not just what the entrepreneur thinks is true.

Chapter 3 .MARKET SITUATION STRATEGY

What is market dominance?

• Market dominance is a measure of the strength of a brand , product, service or firm, relative to competitive offerings.

• There is often a geographic element to the competitive landscape. In defining market dominance, you must see to what extent a product , brand, or firm controls a product category in a given geographic area.

Ways of calculating market dominance:

• The most direct is market share. This is the percentage of the total market serviced by a firm or brand. A declining scale of market shares is common in most industries

• Market share is not a perfect proxy of market dominance. We must take into account the influences of customers, suppliers, competitors in related industries, and government regulations.

• Although there are no hard and fast rules governing the relationship between market share and market dominance, the following are general criteria:

• A company, brand, product, or service that has a combined market share exceeding 60% most probably has market power and market dominance.

• A market share of over 35% but less than 60%, held by one brand, product or service, is an indicator of market strength but not necessarily dominance.

• A market share of less than 35%, held by one brand, product or service, is not an indicator of strength or dominance and will not raise anti-combines concerns of government regulators.

Market Dominance Strategies:

• These calculations of market dominance yield quantitative metrics, but most business strategists categorize market dominance strategies in qualitative terms.

• Typically there are four types of market dominance strategies that a marketer will consider:

• There are -market leader, market challenger, market follower, and market nicher.

MARKET DOMINANCE STRATEGIES :

• Market Leader• Market Challenger• Market Follower • Market Nicher

Competitor Analysis

Competitive position in the target market:• Dominant• Strong• Favorable

• Tenable• Weak• Nonviable

Market leader:

• The market leader is dominant in it’s industry. It has substantial market share and often extensive distribution arrangements with retailers. It typically is the industry leader in developing innovative new business models and new products (although not always).

• It tends to be on the cutting edge of new technologies and new production processes. It sometimes has some market power in determining either price or output.

• Of the four dominance strategies, it has the most flexibility in crafting strategy. However it is in a very visible position and can be the target of competitive threats and government anti-combines actions.

• It was claimed that if you cannot get enough market share to be a major player, you should get out of that business and concentrate your resources where you can take advantage of experience curve effects and economies of scale, and thereby gain dominant market share.

The main options available to market leaders are:

• Expand the total market by finding – new users of the product – new uses of the product – more usage on each use occasion

• Protect your existing market share by: – developing new product ideas – improve customer service – improve distribution effectiveness – reduce costs

• Expand your market share: – by targeting one or more competitor – without being noticed by government regulators

Strategies for Market Leaders:Market Leader’s objectives:

• Expand the total market by– Finding new users– Creating new uses, and– Encouraging more usage

• Protect its current market share by– Adopting defense strategies

• Increase its market share– Note the relationship between market share and profitability

Which strategy to use?

Depends on your answer to the following:• Is it worth fighting?• Are you strong enough to fight?• How strong is your defense?• Do you have any choice but to fight?

Defense Strategy :

• A market leader should generally adopt a defense strategy• Six commonly used defense strategies

– Position Defense

– Mobile Defense– Flanking Defense– Contraction Defense– Pre-emptive Defense

– Counter-Offensive

– Defense

• Least successful of the defense strategies

• “A company attempting a fortress defense will find itself retreating from line after line of fortification into shrinking product markets.” Saunders (1987)

• e.g. Mercedes was using a position defense strategy until Toyota launched a frontal attack with its Lexus.

Mobile Defense :

• By market broadening and diversification • For marketing broadening, there is a need to

– Redefine the business (principle of objective), and– Focus efforts on the competition (the principle of mass)

• e.g. Legend Holdings, the top China PC maker Legend has announced a joint venture with AOL to broaden its business to provide Internet services in the mainland Flanking Defense:

• Secondary markets (flanks) are the weaker areas and prone to being attacked

• Pay attention to the flanks

Pre-emptive Defense:

• Detect potential attacks and attack the enemies first• Let it be known how it will retaliate• Product or brand proliferation is a form of pre-emptive defense e.g. Seiko has over

2,000 models

Counter-Offensive Defense:• Responding to competitors’ head-on attack by identifying the attacker’s weakness and

then launch a counter attack• e.g. Toyota launched the Lexus to respond to Mercedes attack

Market challenger:

• A market challenger is a firm in a strong, but not dominant position that is following an aggressive strategy of trying to gain market share.

• It typically targets the industry leader (for example, Pepsi targets Coke), but it could also target smaller, more vulnerable competitors. The fundamental principles involved are:

• Assess the strength of the target competitor. Consider the amount of support that the target might muster from allies.

• Choose only one target at a time. • Find a weakness in the target's position. Attack at this point. Consider how long it will

take for the target to realign their resources so as to reinforce this weak spot. • Launch the attack on as narrow a front as possible. Whereas a defender must defend

all their borders, an attacker has the advantage of being able to concentrate their forces at one place.

• Launch the attack quickly, then consolidate.

Some of the options open to a market challenger are:

• Price discounts or price cutting • Line extensions • Introduce new products • Reduce product quality • Increase product quality • Improve service • Change distribution • Cost reductions • Intensify promotional activity

Market Challenger Strategies :

The market challengers’ strategic objective is to gain market share and to become the leader eventuallyHow?

• By attacking the market leader• By attacking other firms of the same size• By attacking smaller firms

Types of Attack Strategies:

• Frontal attack• Flank attack• Encirclement attack• Bypass attack

• Guerrilla attack

Frontal Attack

• Seldom work unless– The challenger has sufficient fire-power (a 3:1 advantage) and staying power, and– The challenger has clear distinctive advantage(s) • e.g. Japanese and Korean firms launched frontal attacks in various countries through

quality, price and low cost Flank attack

• Attack the enemy at its weak points or blind spots i.e. its flanks• Ideal for challenger who does not have sufficient resources• e.g., opening numerous stores in markets

Encirclement attack • Attack the enemy at many fronts at the same time

• Ideal for challenger having superior resources• e.g. Seiko attacked on fashion, features, user preferences and anything that might

interest the consumer

Bypass attack • By diversifying into unrelated products or markets neglected by the leader• Could overtake the leader by using new technologies• e.g. Pepsi use a bypass attack strategy against Coke in China by locating its bottling

plants in the interior provinces

Guerrilla attack

• By launching small, intermittent hit-and-run attacks to harass and destabilize the leader

• Usually use to precede a stronger attack• e.g. Airlines use short promotions to attack the national carriers especially when

passenger loads in certain routes are low

Which Attack Strategy should a Challenger Choose?

Use a combination of several strategies to improve market share over time

Designing Competitive Strategies

• General Attack Strategies:– Frontal attacks match competition– Flank attacks serve unmet market needs or underserved areas– Encirclement “blitzes” opponent– Bypassing opponent and attacking easier markets is also an option

Market Follower:

• A market follower is a firm in a strong, but not dominant position that is content to stay at that position. The rationale is that by developing strategies that are parallel to those of the market leader, they will gain much of the market from the leader while being exposed to very little risk.

• This “play it safe” strategy is how Burger King retains its position behind McDonalds.

The advantages of this strategy are:

Designing Competitive StrategiesMajor

Strategies

Market-Challenger

First define the strategic goals and opponent(s)Choose general attack strategyChoose specific attack strategy

Competitive Markets

Price-discountLower-price goodsPrestige goodsImproved services Product proliferation

Product innovationDistribution innovationManufacturing cost reduction

Intensive advertising promotion

Specific Attack Strategies Include:

• No expensive R&D failures • No risk of bad business model • “Best practices” are already established • Able to capitalize on the promotional activities of the market leader • No risk of government anti-combines actions • Minimal risk of competitive attacks • Don’t waste money in a head-on battle with the market leader

Market-Follower Strategies

• Theodore Levitt in his article, “Innovative Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategy

e.g. Product innovation--SonyProduct-imitation--Panasonic

• Each follower tries to bring distinctive advantages to its target market--location, services, financing

• Four broad follower strategies:– Counterfeiter (which is illegal)– Cloner e.g. the IBM PC clones– Imitator e.g. car manufacturers imitate the style of one another– Adapter e.g. many Japanese firms are excellent adapters initially before

developing into challengers and eventually leaders

Market nicher

• In this niche strategy the firm concentrates on a select few target markets. It is also called a focus strategy. It is hoped that by focusing ones marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market.

• The niche should be large enough to be profitable, but small enough to be ignored by the major industry players. Profit margins are emphasized rather than revenue or market share. The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency.

• It is most suitable for relatively small firms and has much in common with guerrilla marketing warfare strategies. The most successful nichers tend to have the following characteristics:

• They tend to be in high value added industries and are able to obtain high margins. • They tend to be highly focused on a specific market segment.

• They tend to market high end products or services, and are able to use a premium pricing strategy.

• They tend to keep their operating expenses down by spending less on R&D, advertising, and personal selling.

Market-Nicher Strategies:

• Smaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firms

e.g. Logitech--mice

Microbrewers--special beers

Chapter 5

COMPETITION, COMPETITIVE ENVIRONMENT

AND PORTER’S

FIVE FORCES MODEL

• Competitiveness is essentially the ability of a firm, sector or economy to compete against other firms, sectors or economies.

• It is taken to mean the ability of a firm, sector or economy to compete internationally (ie with their equivalents in other countries) – in other words, macro-economic rather than micro-economic competitiveness.

• One common issue that comes from looking at the competition is what do you do about it? The options are:

• Ignore • Fight • Adopt • Microsoft's Embrace and Extend and Intel's "Only the Paranoid Survive" are good

examples of companies that use the competition to keep their products at the cutting edge.

Competitor analysis :

• Competitor analysis in marketing assessment of the strengths and weaknesses of current and potential competitors. • This analysis provides both an offensive and defensive strategic context to identify

opportunities and threats.

Competitor profiling:

• The raw material of competitive advantage consists of offering superior customer value in the firm’s chosen market.

• Customer value is defined relative to rival offerings making competitor knowledge an intrinsic component of corporate strategy.

• Customer profiling can reveal strategic weaknesses in rivals that the firm may exploit. Second, the proactive stance of competitor profiling will allow the firm to anticipate the strategic response of their rivals to the firm’s planned strategies, the strategies of other competing firms, and changes in the environment. Third, this proactive knowledge will give the firms strategic agility.

• Offensive strategy can be implemented more quickly in order to exploit opportunities

and capitalize on strengths. Similarly, defensive strategy can be employed more deftly in order to counter the threat of rival firms from exploiting the firm’s own weaknesses

• In addition to analyzing current competitors, it is necessary to estimate future

competitive threats. The most common sources of new competitors are ==• Companies competing in a related product/market • Companies using related technologies • Companies already targeting your prime market segment but with unrelated products • Companies from other geographical areas and with similar products • New start-up companies organized by former employees and/or managers of existing

companies

Analysis of competition:

• The third element of STRATEGIC ANALYSIS is to look at the competitive environment - what your competitors are doing, where the next technological developments are coming from and the general directions the market is moving.

Competitive and environmental analysis:• A competitive and environmental analysis of your markets should include all the key

influencing factors that affect the way in which you can compete. A competitive review is important for two reason.

• Firstly, even if you know what the customers want and have the resources to meet the customers' demands, it may be that the competitive environment means that it is not worth pursuing particular parts of the market for a whole range of strategic reasons, such as the threat a price war, channel conflict, or legal or ethical considerations.

• Secondly, you need to know if your competitors are doing things better than you are, or more dangerously, whether they are looking to change the basis of competition in

the market, for instance by moving to a direct sales model, or by introducing some revolutionary new product or technology.

The main types of competitive analysis from a strategic point of view are:

• The five forces model• Benchmarking & competitive evaluation

Why bother to analyze competitors?

• Some businesses think it is best to get on with their own plans and ignore the competition. Others become obsessed with tracking the actions of competitors (often using underhand or illegal methods).

• Many businesses are happy simply to track the competition, copying their moves and reacting to changes.

Competitor analysis has several important roles in strategic planning:

• To help management understand their competitive advantages/disadvantages relative to competitors

• To generate understanding of competitors’ past, present (and most importantly) future strategies

• To provide an informed basis to develop strategies to achieve competitive advantage in the future

• To help forecast the returns that may be made from future investments (e.g. how will competitors respond to a new product or pricing strategy?

Questions should be asked when undertaking competitor analysis?

• Who are our competitors? (see the section on identifying competitors further below)• What threats do they pose?• What is the profile of our competitors?• What are the objectives of our competitors?• What strategies are our competitors pursuing and how successful are these strategies?• What are the strengths and weaknesses of our competitors?• How are our competitors likely to respond to any changes to the way we do business?

Market Intelligence

Market Intelligence is about providing a company with a view of a market using existing sources of information to understand –• what is happening in a market place,

• what the issues are and what the likely market potential is.

• Market Intelligence can be divided into two spheres-

• Market Intelligence based on external data • Market Intelligence based on internal data

Market Intelligence from external data:

• Market intelligence from external data is normally gathered through what is known as desk research. This means sourcing and analyzing published information to build a picture of a market and to try and answer some specific commercial questions such as what is the market potential.

• For example identifying who your competitors are and analyzing their market position against yours to find strengths and weaknesses and indications of new developments.

Market Intelligence from internal data :

• Much marketing intelligence information can come from making better use of existing information. For instance by carrying out database analysis on orders taken it may be possible to understand where you have cross-sale and up-sale opportunities, or to understand what type of customers are your most profitable.

Porter's Five Forces

• A framework for the industry analysis and business strategy

• The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're looking to move into.

The five forces come from Porter's famous framework and are: • Power of Buyers • Power of Suppliers • Threat of substitutes • Barriers to entry • Competitors

• It uses concepts developed in Industrial Organization Economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability.

• An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".

• Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability.

• Firms are able to apply their core competence s, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models have been able to make a return in excess of the industry average.

• Porter's five forces include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers, bargaining power of customers.

• Firms that compete in a single industry should develop, at a minimum, one five forces analysis for its industry.

• Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis.

• The idea is that change in your market is likely to come as the basis of one of these five areas. For instance, buyers may distort the market by forcing prices down, or by deciding to take build products in-house.

• In considering how these "forces" act on your markets, you get a picture of issues such as channel conflict, threats from vertical integration, the impact of regulatory change or the advent of new technology. You can also take a view as to how you are or can affect the competitive situation for your own benefit, rather than statically accepting the status quo.

Threat of Substitution:

• This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it.

• If substitution is easy and substitution is viable, then this weakens your power. The threat of substitute products :

• The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases.

• Buyer propensity to substitute • Relative price performance of substitutes • Buyer switching costs • Perceived level of product differentiation

The intensity of competitive rivalry:

• For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

• number of competitors • rate of industry growth • intermittent industry overcapacity • exit barriers • diversity of competitors • informational complexity and asymmetry • fixed cost allocation per value added • level of advertising expense • economies of scale • Sustainable competitive advantage through improvisation

Examples

• In telecommunication industry firms are lowering their prices to increase consumer call ratio by minimize per minute profit margin but increasing overall company revenues.

• In the past few years number of new features were added in the mobiles now it not only give the functionality of cell phone but able to take pictures, make videos, watch streaming and use Internet. The firms like Nokia, Siemens, Samsung and other are following each other strategies to minimize the differentiation in the product so customer can easily switch brands.

• In the past television companies offer maximum one year warranty but now competition is tough other market player Samsung, LG, Haier, Philips and others enter in the market with their high quality products to compete Sony, that’s the reason customer is getting more services in the form of extended warranty periods.

• Pepsi Vs Coca Cola are competing by increasing advertising and offering new beverages in the market.

• The rivalry among competing firm increase as the number of competitors increases, as competitors more equal in size and capability, as demand for the company products decline, products are undifferentiated, product prices decline, consumer brand switching cost is less, number of supplier available for raw material, low price substitute products are available and entry into market is easy due to less constraints.

• As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.

Competitive Rivalry: • What is important here is the number and capability of your competitors – if you have

many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation.

• If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. • On the other hand, if no-one else can do what you do, then you can often have

tremendous strength.

Threat of New Entry: • Power is also affected by the ability of people to enter your market. If it costs little in

time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position.

• If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.

The threat of the entry of new competitors:

• Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level

• the existence of barriers of entry (patents , rights, etc.) • economies of product differences • brand equity

• switching costs or sunk costs • capital requirements • access to distribution • absolute cost advantages • learning curve advantages • expected retaliation by incumbents • government policies

Buyer Power:

• Here you ask yourself how easy it is for buyers to drive prices down.

• Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.

The bargaining power of customers:

• Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.

• buyer concentration to firm concentration ratio • degree of dependency upon existing channels of distribution • bargaining leverage, particularly in industries with high fixed costs • buyer volume • Buyer switching costs relative to firm switching costs • buyer information availability • ability to backward integrate • availability of existing substitute products • buyer price sensitivity • differential advantage (uniqueness) of industry products

Supplier Power:

• Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on.

• The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.

The bargaining power of suppliers:

• Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

• Supplier switching costs relative to firm switching costs • Degree of differentiation of inputs • Presence of substitute inputs • Supplier concentration to firm concentration ratio • Employee solidarity (e.g. labor unions) • Threat of forward integration by suppliers relative to the threat of backward

integration by firms • Cost of inputs relative to selling price of the product.

Examples

• The bargaining power of Microsoft and Intel in more because they are the huge suppliers of software and hardware.

• Microsoft enforce computer manufacturers to load Windows in their computers and place their logo on laptops, desktops and server machines.

• Intel on the other hand also demands computer manufacturers to place their logo on machines using Intel processor. Intel and Microsoft enforcing their terms and conditions also charging high cost from the computer manufacturing companies.

• Manufacturer needs to build relationship with the supplier to improve the quality and reduce the prices of the product by working together for improvement in processes and reduce time to market by implementing just-in-time inventory.

• Dell computer known for low cost and best quality computer, laptop and server manufacturer in the industry. The key behind dell success is maintaining better relationship and collaboration with the supplier of computer hardware and software.

•  To gain control or ownership over its suppler backward integration strategy is adopted by most of the companies. This strategy will help both suppliers and companies to work together for improvement in product quality, reduce cost, reduce time to market and earn good reputation in the industry.

• A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business.

• In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.

Limitations of Porter’s Five Force Model:

• Porter’s model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations.

• Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond one’s immediate competitors as there are other determines of profitability. Specifically, there might be competition from substitute’s products or services.

• These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An example would be plastic bottles, cans and glass bottle for packaging soft drinks.

• There may also be potential threat of new entrants, although some competitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can, customer loyalty.

• Finally, it is important to appreciate that company’s purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases.

• This relates to the strategic option of vertical integration, when the company acquires, or mergers with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption.

Chapter 5.Sustainable Competitive Advantage,

Porter’s Generic Strategy

What is Competitive advantage?“When two or more firms compete within the same market, one firms possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit)”

Competitive Advantage – Definition

• A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

• An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retains more customers than its competition.

•  There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support.

• Competitive advantage comes from performing better than competitors

• Sustainable competitive advantage comes from performing better than competitors for a long time

Competitive Advantage Examples

• Focus on a narrow market niche– eBay – Online auctions– McAfee – Virus protection auctions

• Develop expertise, resource strengths, andcapabilities not easily imitated by rivals

– FedEx – Next-day delivery of small packages– Walt Disney – Theme park management and family entertainment– Toyota – Sophisticated production system

• Strive to be the industry’s low-cost provider– Wal-Mart

• Outcompete rivals on a key differentiating feature– Johnson & Johnson – Reliability in baby products– Harley-Davidson – King-of-the-road styling– Rolex – Top-of-the-line prestige– Mercedes-Benz – Engineering design and performance– Amazon.com – Wide selection and convenience

There are two main types of competitive advantages:• Comparative advantage and • Differential advantage. • Comparative advantage, or cost advantage, is a firm's ability to produce a good or

service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales.

• A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers

What do you mean by “Sustainable?”

• Sustainable is not measured in calendar time.• Sustainable does not mean the advantage will last forever.• Sustainable suggests the advantage lasts long enough that competitors stop trying to

duplicate the strategy that makes the advantage sustained.

Where are we?

Assets à Capabilities à Competenciesà Competitive Advantage • Competitive advantage.

Cost advantage

Cost advantage

Differentiation advantageDifferentiation advantage

Competitiveadvantage

Competitiveadvantage

The Main Types of Competitive

Advantage

– A competitive advantage is simply an advantage you have over your competitors.

– A competency will produce competitive advantage provided:• it produces value for the organization, and it does this in a way that cannot

easily be pursued by competitors.

Sustainable Competitive Advantage:

• However, we said the primary objective of business-level strategy was to create sources of sustainable competitive advantage (SCA).

• How do we know SCA when we see it? What is it? When is it considered “sustainable”?

• To produce SCA, the capability must:1. Produce value2. Be rare3. Imperfectly imitable, i.e. not be easily imitated or substituted4. Be exploitable by the organization

1. The Question of Value:– Capabilities are valuable when they enable a firm to conceive of or implement

strategies that improve efficiency and effectiveness.

– Value is dependent on type of strategy:• Low cost strategy: lower costs (Timex)• Differentiator: add enhancing features (Rolex)

– To be valuable, the capability must either• Increase efficiency (outputs / inputs)

– Information system reduces customer service agents required, or increases the number of calls the same number of agents can answer

• Increase effectiveness (enable some new capability not previously held)

– Opening a new regional campus enables outreach to a new market of students

2. The Question of Rareness:– Valuable resources or capabilities that are shared by large numbers of firms in

an industry are therefore not rare, and cannot be a source of SCA.

– Given the following, which are rare?• A web server• An MIS instructor

• A state-of-the-art stamping press– None of these are rare. Some researchers think only organizational assets or

resources are rare (such as culture). What do you think?

3. The Question of Imitability – Valuable, rare resources can only be sources of SCA if firms that do not

possess them cannot obtain them. They must be “imperfectly imitable”, i.e. impossible to perfectly imitate them.

– Ways imitation can be avoided:• Unique Historical Conditions (Caterpillar, e.g.)• Causal Ambiguity (why resources create SCA is not understood, even

by the firm owning them)

– Imitating firms cannot duplicate the strategy since they do not understand why it is successful in the first place.• Social Complexity (trust, teamwork, informal relationships, causal

ambiguity where cause of effectiveness is uncertain)

– E.g. A competitor steals all the scientists in an R&D lab and relocates them to a new facility. But, the “dynamics”, “culture” and “atmosphere” are not the same.

4. The Question of Substitutability– There must be no equivalent resources that can be exploited to implement the

same strategies.

– Forms of substitutability:• Duplication: Although no two management teams are the same, they

can be strategically equivalent, produce the same results.

• Substitution: Very different resources can be substitutes, e.g. – A charismatic leader with a clear vision vs. a strategic planning

dept.– A superior marketing strategy for a recognized brand name.– A superior technical support group for an intelligent diagnostic

software package• An asset is anything the firm owns or controls.

– Loosely, “Asset” is to Accounting as “Resource” is to Management.

• Types of assets: – Physical: plant equipment, location, access to raw materials– Human: training, experience, judgment, decision-making skills, intelligence,

relationships, knowledge

– Organizational: Culture, formal reporting structures, control systems, coordinating systems, informal relationships

• A capability is usually considered a “bundle” of assets or resources to perform a

business process (which is composed of individual activities)– E.g. The product development process involves conceptualization, product

design, pilot testing, new product launch in production, process debugging, etc.

• All firms have capabilities. However, a firm will usually focus on certain capabilities consistent with its strategy. – For example, a firm pursuing a differentiation strategy would focus on new

product development. A firm focusing on a low cost strategy would focus on improving manufacturing process efficiency.

• The firm’s most important capabilities are called competencies.

Competencies vs. Core Competencies vs. Distinctive Competencies

• A competency is an internal capability that a company performs better than other internal capabilities.

• A core competency is a well-performed internal capability that is central, not peripheral, to a company’s strategy, competitiveness, and profitability.

• A distinctive competence is a competitively valuable capability that a company performs better than its rivals.

Examples: Distinctive Competencies

• Toyota, Honda, Nissan– Low-cost, high-quality manufacturing capability and short design-to-market

cycles • Intel

– Ability to design and manufacture ever more powerful microprocessors for PCs

• Motorola– Defect-free manufacture (six-sigma quality) of cell phones

• SCA is an element (or combination of elements) of the business strategy that provides a meaningful advantage over both existing and future competitors.

• An SCA needs to be meaningful, sustainable and substantial.• An SCA needs to be supported and enhanced over time.• The assets and competencies of an organization represent the most sustainable

element of a business strategy, because these are usually difficult to copy or counter.

• An SCA should be visible to customers and provide or enhance a value proposition.

• The key is to link an SCA with the positioning of a business.• A solid value proposition can fail if a key ingredient is missing (e.g., Pringles).

Sustainable Competitive Advantages vs. Key Success Factors

• A KSF is an asset or competence needed to compete, whereas, an SCA is an asset or competence that is the basis for a continuing advantage.

• An SCA is analogous to a Point of Differentiation (POD), whereas a KSF can be analogous to either a Point of Parity (POP) or a POD.

Frameworks for Sustainable Competitive Advantage

• Knowledge-based strategy• Generic strategy• Hybrid strategy• Core competence/distinctive capability/resource based strategy

Knowledge-based Strategy

Knowledge (2 Types) • Explicit knowledge – knowledge whose meaning is clearly stated, the details of which

can be recorded and stored– Examples: human resource audit, financial analysis, market research

• Tacit knowledge – unstated, based on individual knowledge and experience, and is difficult to record and store (but is also difficult to imitate)

Superior Knowledge(compared to competitors)

Core Competences

Competitive Advantage

Knowledge and Core Competence

• Core competences can come from – Knowledge of customers and their needs– Knowledge of technology and how to use it distinctively– Knowledge of products and processes– Knowledge of the business environment– Knowledge of competitors– Knowledge of countries and culture

Porter’s Generic Strategy Framework:

• Porter’s generic strategy is based on answering 2 questions:– Should strategy be differentiation or cost leadership?– Should the scope of strategy be broad or narrow?

Generic Strategy

• According to Porter, competitive advantage, and thus higher profits will result either from:

• Differentiation of products and selling them at a premium price, OR• Producing products at a lower price than competitors • In association with choosing differentiation or cost leadership, the organization

must decide between:• Targeting the whole market with the chosen strategy, OR• Targeting a specific segment of the market

PORTER’S GENERIC STRATEGIES

Generic Strategy: Cost Leadership Strategy

• Strategy focus: organize value adding activities to be the lowest cost producer of a product in an industry

Strategy - Cost Leadership• With this strategy, the objective is to become the lowest-cost producer in the industry.

Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimizing costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits.

• This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers.

• Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.

Examples of Cost Leadership: Dell Computers & Wal-Mart

Advantages

• Higher profits resulting from charging prices below that of competitors, because unit costs are lower

• Increase market share and sales by reducing the price below that charged by competitors (assuming price elasticity of demand)

• Ability to enter new markets by charging lower prices• Is a barrier to entry for competitors trying to enter the industry

Cost Leadership and the Value Chain

1. Cost Leadership

2. Differentiation3 A.

Cost Focus

3 B. Differentiation Focus

Narrow Target

Broad Target

Differentiation

Lower Cost

Competitive Advantage

Competitive Score

• Analysis of the value chain identifies where cost savings can be made in the various parts and links

• With a cost leadership strategy, the value chain must be organized to:• Reduce per unit costs by copying, rather than original design, using cheaper

resources, producing basic products, reducing labor costs and increasing labor productivity

• Achieve economies of scale by high-volume sales• Using high-volume purchasing to get discounts• Locating where costs are low

Cost Leadership and Price Elasticity of Demand• Cost leadership strategy is best used in a market or segment when demand is price

elastic, OR• When charging a similar price to competitors at the same time increasing advertising

to increase sales

Generic Strategy: Differentiation Strategy

• Differentiation strategy focuses on changing customer perception about a product, i.e., that the product is superior to other products

• Based on actual superiority (superior features) or perceived superiority

Generic Strategy Framework

NOTE: If 2 or more competitors choose the same box, competition will increase

Differentiation Strategy: Advantages• Products will get a premium price• Demand for products is less price elastic than that for competitor’s products• It is an additional barrier to entry for competitors to enter the industry

Strategic Scope

Br

oad

Narrow

Low cost Differentiation

Differentiation Strategy and the Value Chain

• With differentiation strategy, the value chain must be organized to:• Create products that are superior to competitors’ products in design, technology,

performance, etc.• Offer superior after-sales service• Have superior distribution channels• Create a strong brand name• Create distinctive or superior packaging

Differentiation Strategy and Price Elasticity of Demand• Differentiation strategy, properly used, can:• reduce price elasticity of demand for the product• lead to the ability to charge higher prices than competitors, without reducing sales

volume• lead to above average profits compared to sales

Generic Strategy: Focus Strategy

• Focus strategy – targets a segment of the product market, rather than the whole market or many markets

• Segment is determined by the bases for segmentation, i.e., geographic, psychographic, demographic, behavioral characteristics

• Within the segment, either cost leadership or differentiation strategy is used

Strategy - Differentiation Focus• In the differentiation focus strategy, a business aims to differentiate within just one or

a small number of target market segments. • The special customer needs of the segment mean that there are opportunities to

provide products that are clearly different from competitors who may be targeting a broader group of customers.

• The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.

• Examples of Differentiation Focus: any successful niche retailers.

Strategy - Cost Focus

• Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".

• Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.

Focus Strategy: Advantages• Lower investment costs required compared to a strategy aimed at the entire market or

many markets• It allows for specialization and greater knowledge• It makes entry into a new market more simple

Criticisms of Porter’s Generic Strategy• A hybrid strategy may be successful, although Porter argues that either differentiation

or cost leadership must be used (a mix of the two leads to being “stuck in the middle”)• Cost leadership alone does not lead to sales of products• Differentiation strategies may be used to increase sales volume, rather than charging a

premium price• Price may be used to differentiate• Generic strategy doesn’t create competitive advantage, rather it is a model to help an

organization in analysis• The resource based framework may be more accepted now

Chapter 6.PORTFOLIO

ANALYSIS

What is a portfolio?• A business portfolio is the collection of Strategic Business Units that together form a

corporation.

Economic Performance

• The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets.

What is Business Portfolio Analysis?• Business portfolio analysis is an enterprise strategy development tool based

primarily on the market share of your business and the growth of market in which your business exists.

Why is Business Portfolio Analysis?• Business portfolio analysis as an organizational strategy formulation technique is

based on the philosophy that organizations should develop strategy much as they handle investment portfolios.

• Just as sound financial investments should be supported and unsound ones discarded, sound organizational activities should be emphasized and unsound ones deemphasized.2

The aim of Portfolio analysis• Analyze its current business portfolio and decide which SBU's should receive more or

less investment • Develop growth strategies for adding new products and businesses to the portfolio • Decide which businesses or products should no longer be retained.

The BCG Matrix Boston Consulting Group Matrix) is the best-known portfolio planning framework. The McKinsey Matrix is a later and more advanced form of the BCG Matrix.

Most Popular Business Portfolio ToolsThree most popular business portfolio tools are -

• The BCG Growth -Share Matrix ,• The GE Multifactor Portfolio Matrix,.• The GE Multifactor Portfolio Matrix was deliberately designed by General Electric

Company (GE) and McKinsey and Company to be more complete that the BCG Growth-Share Matrix.

Portfolio AnalysisDefinition

• Analyzing elements of a firm’s product mix to determine the optimum allocation of its resources.

• Two most common measures used in a portfolio analysis are market growth rate and relative market share.

The BCG matrix

It is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines .

This helps the company allocate resources and is used as an analytical tool in•Brand marketing,•Product management •Strategic management and •Portfolio analysis

• To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relative market share and growth rates.

• Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business.

• They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible.

• They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

• Dogs, or more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share.

• Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company.

• They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.

• Question marks are growing rapidly and thus consume large amounts of cash,

but because they have low market shares they do not generate much cash. The result is a large net cash consumption.

• A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows.

• If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines.

• Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

• Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows.

• Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader.

• When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.

• As a particular industry matures and its growth slows, all business units become either cash cows or dogs.

• The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell.

• Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:

– stars whose high share and high growth assure the future; – cash cows that supply funds for that future growth; and – question marks to be converted into stars with the added funds.

What is the McKinsey Matrix?

What is a Strategic Business Unit?

• A Strategic Business Unit (SBU) can either be an entire medium size company or a division of a large corporation.

• As long as it formulates its own business level strategy and has separate objectives from the parent company.

The McKinsey Matrix

• The McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects:

• Market (Industry) attractiveness is used as the dimension of industry attractiveness, instead of market growth.

• Market Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market. Compare also :Five Forces

• Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed.

• Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.

• Finally, the GE Matrix works with a 3*3 matrix, while the BCG Matrix has only 2*2. This also allows more sophistication.

Typical (external) factors that affect Market Attractiveness:

• Market size- Market growth rate- Market profitability - Pricing trends

- Competitive intensity / rivalry - Overall risk of returns in the industry

• Entry barriers - Opportunity to differentiate products and services

• - Demand variability- Segmentation - Distribution structure

• - Technology development

Typical (internal) factors that affect Competitive Strength of a Strategic Business Unit:

• Strength of assets and competencies- Relative brand strength (marketing)- Market share

• - Market share growth- Customer loyalty- Relative cost position (cost structure compared with competitors)

• Relative profit margins (compared to competitors)- Distribution strength and production capacity- Record of technological or other innovation

• - Quality- Access to financial and other investment resources

• Management strength

Often, Strategic Business Units are portrayed as a circle plotted in the GE Matrix, whereby:-

• The size of the circles represent the Market Size • The size of the pies represent the Market Share of the SBU's • Arrows represent the direction and the movement of the SBU's in the future

A six-step approach for the implementation of the McKinsey Matrix:

• Specify drivers of each dimension. The corporation must carefully determine those factors that are important to its overall strategy.

• Determine the weight of each driver. The corporation must assign relative importance weights to the drivers.

• Score the SBU's on each driver. • Multiply weights and scores for each SBU. • View resulting graph and interpret it. • Perform a review/sensitivity analysis. Make use of adjusted other weights and scores

(there may be no consensus).

Some limitations of the McKinsey Matrix

• The valuation of the realization of the various factors. • Aggregation of the indicators is difficult. • Core Competence are not represented. • Interactions between Strategic Business Units are not considered.

Chapter 7New Product Strategy –Innovation, Market Entry,

Product Line Extension

Introduction

• Product (or service) is the main element of the marketing mix• Therefore, need to determine the Product Strategies before deciding on the remaining

marketing mix

Product Hierarchy

• Need• Product family• Product class• Product Line• Product type• Brand• Item

7-Levels of Product Hierarchy• Product need—to satisfy a need e.g. feet protection• Product class—a family of products having similar function e.g. all shoes• Product line—a group of products with closely related functions e.g. sports shoes• Product type—products within a line having similar form e.g. foot ball shoes• Brand—a name representing a product or line e.g. Nike• Item (Stock Keeping Unit)—a unit item e.g. one pair of Nike football shoe

What is product?

• A product can be defined as a collection of physical, service and symbolic attributes which yield satisfaction or benefits to a user or buyer.

• A product is a combination of physical attributes say, size and shape; and subjective attributes say image or "quality".

Product-Mix Decisions

Decisions on the product mix (the number of product lines and items in each line) that the company may offer:

• A single product– Most firms started off as a single-product company

• Multiple products– e.g. Creative Technology markets sound cards as well as MP3 players

• A systems of productse.g. Nikon sells camera, lenses, filters & other options

New Product Strategy:

• New products are critical to survival • New-product development (NPD) is essential for companies seeking growth

– It should be an on-going, well organized NPD process having top-management support

• What is a new product? – From a firm's perspective, a new product is a product that it is unfamiliar in

any way

Product Innovation:• Product innovation means different things to different people.• A modified version of an existing product range• A new model in the existing product range• A new product outside the existing range but in a similar field of technology • A totally new product in a new field of technology.

Product Innovation- Defined

• Product/service innovation is the result of bringing to life a new way to solve the customer's problem – through a new product or service development – that benefits both the customer and the sponsoring company.1

• The term innovation refers to a new way of doing something. • Product-innovation strategy includes introducing a new product to replace an existing

product in order to satisfy a need in an entirely different way or to provide a new approach to satisfy an existing or latent need.

• This strategy suggests that the entrant is the first firm to develop and introduce the product.

• The ballpoint pen is an example of a new product; it replaced the fountain pen.

• The VCR was a new product introduced to answer home entertainment needs.

• Product innovation, however, does not come easy. Besides involving major financial commitments, it requires heavy doses of managerial time to cut across organizational lines.

• And still the innovation may fail to make a mark in the market. A number of companies have discovered the risks of this game.

• Innovation is usually thought of as invention. Innovation is usually new technology being turned into something unique that the company can sell.

• For those companies with strong R&D departments, this focus on the invention of innovative products is probably a key element of their corporate strategy

Product Line

• Product lining is the marketing strategy of offering for sale several related products. Unlike product bundling, where several products are combined into one, lining involves offering several related products individually.

• A line can comprise related products of various sizes, types, colors, qualities, or prices.

• Line depth refers to the number of product variants in a line.• Line consistency refers to how closely related the products that make up the line are.• Line vulnerability refers to the percentage of sales or profits that are derived from

only a few products in the line.• Product line is defined as a group of products with in a product class that are closely

related because they perform similar function, are sold to the same customer groups, are marketed through the same channels, or fall within given price ranges.

• Line extensions consist of introducing additional items in the same product category under the same brand name , such as new flavors, forms, color, added ingredients, package sizes etc.For example Lux soap comes in different variants like Lux International etc. So when Lux comes with a new variant, it is a line extension.

PRODUCT LINE EXTENSION• Product line extension is the use of an established product’s brand name for a new

item in the same product category.

Line Extensions occur when a company introduces additional items in the same product category under the same brand name such as new flavors, forms, colors, added ingredients, package sizes. This is as opposed to brand extension which is a new product in a totally different product category.

Examples includei) Zen LXI, Zen VXIii) Surf, Surf Excel, Surf Excel Blue

iii) Splendour, Splendour Plusiv) Coke, Diet Coke, Vanilla Cokev) Clinic All Clear, Clinic Plus

• Product extensions are versions of the same parent product that serve a segment of the target market and increase the variety of an offering. An example of a product extension is Coke vs. Diet Coke in same product category of soft drinks.

• This tactic is undertaken due to the brand loyalty and brand awareness they enjoy consumers are more likely to buy a new product that has a tried and trusted brand name on it.

• This means the market is catered for as they are receiving a product from a brand they trust and Coca Cola is catered for as they can increase their product portfolio and they have a larger hold over the market in which they are performing in.

Expanding the Product Line1. Product line extension: add an item to the existing product line

– Many FMCG companies introduced various sizes of the same product e.g. mini-packs for travelers,

2. Product category extension: add a new item or line of items for a company e.g.– P&G have Head & Shoulders, Rejoice, and Pantene in the same category

• Two-way stretch by filling the whole line e.g. – Toyota has the Starlet at the lower end; the Corolla in the executive range; the

Camry in the upper-management range and the Lexus in the luxury range PRODUCT LINE STRATEGY:

Major product line strategies are –

• Expansion of Product Mix,• Contraction of Product Mix,• Alteration of Existing Products,• Development of New Uses for Existing Products,• Trading up &Trading down,• Product Differentiation & Market Segmentation

Expansion of Product Mix• It is possible in an area in which consumers traditionally enjoy a wide variety of

brands to choose from & are accustomed to switching from one to another. • Example – a retail outlet with provisions may add drugs, house ware, along with

increase in assortments of other category like baby food, detergents.

Contraction of Product Mix

• The product may be consolidated with several others in the line so that fewer styles, sizes, or added benefits are offered.

• Products incurring losses are discontinued.

Alteration of Existing Products• An improvement in an existing product may be more profitable & less risky than

developing & launching a new product. • The changes may be made either in the design, size, colour, exture,flavour,packaging.

Development of New Uses for Existing Products• The company may find uses for the existing products. Example – detergents used for

cleaning clothes, utensils, glass ware.

Trading up &Trading down• Trading up - adding a higher priced , prestige products to the existing lines with the

intention of increasing sales of the existing low priced products.

• Trading down - adding a low priced items to its line of prestige products with the expectations that the people who cannot buy the original product may buy these new products because they carry some of the status of the higher price4d goods.

• Example – LG marketing Sampoorna

Product Differentiation & Market Segmentation

• Product Differentiation- creating awareness of difference between the marketer's product & competitor. It is possible to differentiate on quality, design, brand, or packaging.

• Market segmentation- to meet the different demand different products are developed.

Chapter 9.Advertising & Sales

Promotional Strategy

Key Factors to Consider• Promotion strategy should be developed to • Reach your target market• Meet your goals and objectives

Tailor Promotion Strategy to:• Specific Objective:• To provide information about the product/service

• To stimulate demand• To differentiate product/ service or build brand image• To counter competitors• To respond to news

PROMOTIONAL STRATEGY:

Pushing and Pulling Strategies• Pushing strategy Relies on personal selling to market an item to wholesalers and

retailers in a company’s distribution channels. • Companies promote the product to members of the marketing channel, not to end

users. • Pulling strategy Promote a product by generating consumer demand for it, primarily

through advertising and sales promotion appeals. • Potential buyers will request that their suppliers—retailers or local distributors—carry

the product, thereby pulling it through the distribution channel. •  Most marketing situations require combinations of pushing and pulling strategies,

although the primary emphasis can vary.

THE PROMOTIONAL MIX

Promotional ObjectivesImprove Long-

Run Performance

Improve Short-

Run Performa

nceStore Image

and Position

ing

PublicServic

e

Increase Existing

Customer Patronage

Attract New CustomersFrom

Existing

Trade Area

Expand

Trade Area

• Promotional Mix: Combination of Personal and Non-Personal selling techniques designed to achieve promotional objectives.

• Non-Personal Selling: Advertising, sales promotion, public relations, and sponsorships.

• Personal Selling: Interpersonal promotional process involving a seller’s face-to-face presentation to a prospective buyer.

Non-Personal• Advertising• Sales Promotion• Public Relations• Sponsorships

Promotion, Advertising, and Sales Promotion Strategies:• Promotion Strategy• Advertising Strategy• Sales Promotion Strategy

PROMOTION STRATEGY

1) The Composition of Promotion Strategy2) Developing a Promotion Strategy3) Communications Objectives4) Deciding the Role of the Promotion Components5) Determining the Promotion Budget6) Promotion Component Strategies7) Integrating and Implementing the Promotion Strategy8) Effectiveness of Promotion Strategy

Promotion Strategy is ―Initiating and maintaining a flow of communications between a company (brand) and its market targets.

DEVELOPING THE PROMOTION STRATEGY

PromotionComponents

PublicRelations

DirectMarketing

PersonalSelling

Interactive/Internet Marketing

Composition of Promotion Strategy

ILLUSTRATIVE COMMUNICATION OBJECTIVES• Need Recognition• Finding Buyers• Brand Building• Evaluation of Alternatives• Decision to Purchase• Customer Retention

DECIDING THE ROLE OF THE PROMOTION COMPONENTS• Expected contribution for each of the promotion components.• Which communication objective(s) will be the responsibility of each component?• What part of the budget will go to each component?

Factors Guiding the Role Assigned to Each Component• Market Target(s)• Desired Positioning• Role of Promotion in Positioning• Product Characteristics• Stage of Life Cycle• Situation Specific Factors

COMMUNICATION

OBJECTIVESROLE OF PROMOTION

COMPONENTSPROMOTI

ONBUDGETPROMOTION

COMPONENTSTRATEGIES

Coordination with Product, Distribution,and Price Strategies

AdvertisingSales Promotion

Public Relations

Personal Selling

Direct Marketing

MARKET TARGETING AND POSITIONING

STRATEGIES

INTEGRATE AND IMPLEMENT PROMOTION COMPONENT

STRATEGIESEVALUATE EFFECTIVENESS OF

PROMOTION STRATEGY

Budgeting Methods

Features LimitationsPercent of sales

Fixed percent of sales, often based on past expenditure pattern.

Percent of salesThe method is very arbitrary. Budget may be too high when sales are high and too low when sales are low.

Comparative parityBudget is based largely upon what competition is doing.

Comparative parityDifferences in marketing strategy may require different budget level.

Objectives and TaskSet objectives and then determine task(and cost) necessary to meet the objectives.

Objectives and TaskThe major issue in using this method is deciding the right objectives so measurement of result is important.

Integrating and Implementing Promotion Strategy:

Integration Challenges• Avoiding fragmentation• Difficulty in evaluating productivity• Differences in priorities• Separate organizational units• Assigning integration responsibility

Promotion Strategy Issues• Expense/Response Relationships• Allocation• Impact on Brand Equity• Integration of Promotion Components• Evaluating Effectiveness

DETERMINING THE PROMOTION

BUDGET Percent of Sales

Follow the Competition

Objective and Task

All You Can Afford

Budgeting Approaches

ADVERTISING STRATEGY• Setting Objectives and Budgeting• Creative Strategy• Media/Programming Strategy• Role of the Agency• Program Implementation and Effectiveness

Determining Advertising Objectives• Does the advertising aim at immediate sales?

ADVERTISINGSTRATEGY

Target Audience

Advertising Objectives

Advertising Budget

Creative Strategy

Advertising Media and Programming Schedules

Implement and Evaluate Strategy Effectiveness

Expose communication to target

audience

Create awareness

Change attitude(s)

Increase Sales

Generate profits

Illustrative

Advertising

Objectives

• Does the advertising aim at near-term sales?• Does the advertising aim at building a long-range consumer franchise?• Does the advertising aim at helping increase sales?• Does the advertising aim at some specific step that leads to a sale?• How important are supplementary benefits of advertising?• Should the advertising impart information needed to consummate sales and build

customer satisfaction?• Should advertising build confidence and goodwill for the corporation?

What kind of images does the company wish to build?

Budget Determination

OBJECTIVE AND TASK METHOD HAS A

STRONGER SUPPORTING LOGIC THAH THE OTHER

METHODS.

Media/ Scheduli

ng

Creative Strategy

Budget Determinat

ion

MEDIA / SCHEDULING DECISION

• Television• Radio• Magazines• Online• Website• Outdoor

ADVERTISING STRATEGY IMPLEMENTATION AND EFFECTIVENESS• Decide how to measure effectiveness before implementing the strategy.• Assign responsibility for tracking performance.• Assessing the quality of advertising is important.• Exposure to advertising is not a very sensitive measure of effectiveness.

Media Selection• Coverage – maximum number of consumers in the retailer’s target market• Reach – actual total number of target customers who come into contact with the ad

message• Frequency – average number of times each person who is reached is exposed to the ad

during a given time period

Product Distribution Price Promotion

(How to communicate intended positioning to buyers and others influencing the purchase.)

CREATIVE STRATEGY

The creative strategy is guided by the market target and the positioning strategy.

Provide a unifying concept that binds together the various parts of the advertising campaign.

Chapter 10 BRAND STRATEGY

Definitions of Brand Strategy:• A plan for the systematic development of a brand to enable it to meet its agreed

objectives.• The strategy should be rooted in the brand's vision and driven by the principles of

differentiation and sustained consumer appeal. • The true brand is the sum total of the perceptions of all the constituencies which

contribute to revenues and profits.

BRAND VISION• A clean articulation of strategic, financial & brand goals that management has created

for the brand.• A first step to strategic success as to where the brand can & cannot go.• Provides a vision that forces management to articulate what they want the brand to do

for the organization over the next five years, relative to brand value, revenue & profit contributions.

BRAND’S POSITIONING IS• The place in the consumer’s mind that you want your brand to own –the benefit you

want them to think of when they think of your brand. • A strong position means the brand has a unique, credible, sustainable, & valued place

in the customer’s mind. • Good positioning gives you the direction required to focus the organization & focused

your strategic moves. • A good positioning is a single idea to be communicated to your customers.• It revolves around a benefit that helps your product or service stand apart from the

competition.

• Disney- family fun entertainment• Wall – Mart – low price & good value• McDonalds – food & fun • Apple – innovation • Google – simplicity • Toyota -- reliability

• A well crafted brand positioning has three primary components –• A definition of the target market you wish to pursue• A definition of business your company is in or the industry or category it competes in.• A statement of your point of difference & key benefits.

Effective Brand Strategy:• Branding in essence is effective brand strategy. It's the application of sound research

into brand communications, analytical techniques, and the development of an improved strategy for your brand.

• Strategy is all about brand positioning. We'll identify the key elements of your corporate or product brand and develop a branding action plan to implement it.

Types of branding strategy:• Normally, a company can opt for one or more of the following strategies:• Product branding • Product-line branding • Product-range branding • Corporate branding

PRODUCT BRANDING STRATEGY• This type of brand give each individual product an exclusive brand name and the

company name being ignored

• It allows the brand to have unique values, personality, identity and positioning.

• By doing so, it implies that every new product the company brings on to the market is a new brand and can be positioned precisely for a specific market segment

• It has the advantage of making it easier for the company to evaluate brand performance and worth and allows better resource-allocation decisions.

• The major drawbacks are product cannibalization if consumers cannot differentiate clearly among product brands and involves higher advertising and promotion budget and is totally self-supporting with little or not brand name assistance or assurance from the parent.

PRODUCT-LINE BRANDING STRATEGY

• Here, the products appear under the same brand name and possess the same basic identity but with slightly different competencies for example Follow Me line of hair shampoos. Here the brand line comes under the hair-care category but the different line extensions cover complementary applications of essentially the same product

• Advantages therefore are economies of scale in advertising and promotion and each new line extension strengthens the position of the brand and therefore its image. The line helps defend the category from predatory attack. Hence, individual product brands can move across to line brands as companies find ways of extending the brand to different consumer groups or segments.

PRODUCT- RANGE BRANDING STRATEGY• A number of products or services in a broad category are grouped together under one

brand name and promoted with one basic identity. • Compared to product-line branding, product-range branded products carry out the

basically the same functions but at different performance levels like various cars in the Mercedes S, E, C and A class and Intel’s Pentium and Celeron ranges of microprocessors.

• Therefore the advantage here is that a single brand name allows some economies of scale in advertising and promotion as the products tend to carry the same overall brand values and positioning.

CORPORATE BRANDING STRATEGY

• Two approaches in the Corporate brand exercises • First is to promote its name as the main brand name sometimes referred to as

monolithic or umbrella branding.• Here the product is not branded individually or as strongly as the corporate brand.

Companies using this approach – IBM, Virgin, Sony.• The basic principle is that the companies believed that the company name is the life of

an enterprise. • The second approach which is becoming popular whereby the product brand name has

a high profile but is endorsed by the parent company which gives the product a stamp of quality and credibility.

• Here the product brand is self supporting in practically every respect but retains the assurance of the corporate brand endorsement.

• This type of corporate branding is also called house or endorsement branding. Nestle uses this approach to protect and guarantee the performance of their multitude products.

• Also suitable for companies engaged in service industries as their products are more intangible in nature. When consumers cannot see the products, the company name helps to give them an assurance of quality, heritage and authenticity

What is a brand?• A brand is a name, term, sign, symbol, design or a combination of the above to

identify the goods or service of a seller and differentiate it from the rest of the competitors

A brand comprises of• Tangible attributes • Product• Packaging• Labeling

• Attributes• Functional benefits• Intangible attributes• Quality• Emotional benefits• Values• Culture• Image

Brand Identity• It is the marketer’s promise to give a set of features, benefits and services

consistently.

Brand Building• Involves all the activities that are necessary to nurture a brand into a healthy cash flow

stream after launch.

What kind of activities?

Eg.• Product development• Packaging• Advertising• Promotion

Sales and distribution

Brand Equity

• When a commodity becomes a brand, it is said to have equity• What is brand equity?• The premium it can command in the market• Difference between the perceived value and the intrinsic value

What happens when equity increases?

What happens when brands have high equity? • The company can have more leverage with the trade

Commodity Brand Power Brands

Presence

+

Personality

• The company can charge a premium on their product• The company can have more brand extensions• The company can have some defense against price competition

Brand Loyalty Pyramid

How does one build brands?

• Distinguishing it from others – value proposition• Brand promise must match brand delivery

The value proposition

• Broad positioning• Specific positioning• Value positioning

Creating the brand

• Choosing a brand name• Develop rich associations and promises• Managing customer brand contact to meet and exceed expectations

Considerations in choosing a brand name• What does the brand name mean?• What associations / performance / expectations does it evoke ?

Committed buyer

Satisfied buyer. Would incur costs to switch

Satisfied buyer/no reason to change

Switchers/Price sensitive

111 Likes the brand. Considers

it a friend

• What degree of preference does it create?

A brand name should indicate• Product benefits• Product quality• Names easy to remember, recognize, pronounce• Product category• Distinctiveness• Should not indicate poor meanings in other markets or languages

Brand Associations• ‘owned word’• Slogans• Colours • Symbols and logos

Brand Ambassadors• Giving a face and personality to the brand that is expected to be rubbed off from the

brand ambassador

Brand Vitality

• Differentiation in consumer’s need• Differentiation relevant to consumer’s need• Brand Pitfalls• Brand experience must match brand image• Calls for managing every brand contact

Brand Status

Step up advertising

FAMILIARITY

ESTEEM

New Product Or Product should be phased out

Cash Cow.Need toSustain brand building activities

Troubled brand Product upgradation required

Chapter 11.Distribution

Strategycompleting course

• Distribution is all about getting your product/service to the right people at the right time with special consideration for profit and effectiveness.

• Successful marketing does not end when a business has developed a product/service and has found its appropriate target audience with a view to selling it at the right price.

• Strategic distribution is a competitive advantage that accrues generally from the configuration of a distribution network (who, what, where, when) and, more specifically, from the selection of partners (i.e. middlemen) who intermediate between the company and the customer by performing necessary fulfillment and service activities.

Distribution Objectives:

• Minimize total distribution costs for a given service output• Determine the target segments and the best channels for each segment• Objectives may vary with product characteristics

– e.g. perishables, bulky products, non-standard items, products requiring installation & maintenance

DISTRIBUTION STRATEGY

• Distribution channel Path through which products—and legal ownership of them—flow from producer to consumers or business users.

• Physical distribution Actual movement of products from producer to consumers or business users. Direct Distribution

• Direct contact between producer and customer.• Often found in the marketing of relatively expensive, complex products that may

require demonstrations. Distribution Channels Using Marketing Intermediaries

•   Producers distribute products through wholesalers and retailers.• Often used for products that sell inexpensively to thousands of

consumers in widely scattered locations.

A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to consumptionBucklin - Theory of Distribution Channel Structure (1966)

Distribution- Definitions• Retailing : Consists of the activities involved in selling goods and services to ultimate

consumers. A retail sale is one in which the buyer is an ultimate consumer and the buying motive for a retail sale is always personal or family satisfaction derived from the final consumption of item being purchased.

• Wholesalers: Wholesaling is concerned with the activities of those persons or establishments which sell to retailers and other merchants , and/or to industrial , institutional and commercial users , but who don’t sell in significant amount to ultimate consumers.

Channel intermediaries – Wholesalers• Break down ‘bulk’• buys from producers and sell small quantities to retailers• Provides storage facilities• reduces contact cost between producer and consumer• Wholesaler takes some of the marketing responsibility e.g sales force, promotions

Manufacturer

Consumer

Retailer Retailer

Wholesaler

Retailer

Agent Agent

Wholesaler

Retailer

Distribution Scheme for Consumer Sales

Manufacturer

Industrial Consumer

Reseller Reseller

Distributor

Agent

Value AddedReseller

Agent

Single Step

Direct

Two Step

Distribution Scheme for Industrial Sales

Channel intermediaries – Agents• Mainly used in international markets• Commission agent - does not take title of the goods. Secures orders.• Stockist agent - hold ‘consignment’ stock• Control is difficult due to cultural differences

Training, motivation, etc are expensive

Channel intermediaries – Retailer• Much stronger personal relationship with the consumer• Hold a variety of products• Offer consumers credit• Promote and merchandise products• Price the final product• Build retailer ‘brand’ in the high street

Functions Performed by Wholesalers/Retailers for Manufacturers.

• Market coverage: Convenience to customers• Sales contact : company sales force would be calling on a relatively small number of

wholesalers/retailers rather then the much larger number of customers.• Inventory Holding: Stock the products of the companies that they represent. They

reduce the manufacturers financial burden and risk associated with holding large inventories.

• Market Information:• Customer Support : service, spare parts.

Functions Performed by Wholesalers/Retailers for Customers• Product Availability: ready availability of range of products.• Assortment,convenience: Brings together from a variety of manufacturers an

assortment of products that can greatly simplify the customer’s selection and ordering tasks.

• Bulk-Breaking : Distributor buys in bulk and gives to customers in unit of one : SKU.• Credit and Financial Assistance• Advice and Technical Support :(installation -->A/C,PC)

Customer Service : Delivery , after sales help .

Channel intermediaries – Internet• Sell to a geographically disperse market• Able to target and focus on specific segments• Relatively low set-up costs• Use of e-commerce technology (for payment, shopping software, etc)• Paradigm shift in commerce and consumption

Vertical Marketing Systems

• Vertical Marketing Systems (sometimes also referred to as centrally coordinated systems) have emerged as the dominant ingredient in the competitive process and thus play a strategic role in the formulation of distribution strategy.Corporate, Under the corporate vertical marketing system, successive stages of production and distribution are owned by a single entity. This is achieved through forward and backward integration. KVIC, Sahakari Bhandar

- Administered, In an administered vertical marketing system, a dominant firm within the channel system, such as the manufacturer, wholesaler, or retailer, coordinates the flow of goods by virtue of its market power

- For example, the firm may exert influence to achieve economies in transportation, order procession, warehousing, advertising, or merchandising. As can be expected, it is large organizations like, Amul, Procter & Gamble, and Hindustan Unilever Brothers.

- Contractual: In a contractual vertical marketing system, independent firms within the channel structure integrate their programs on a contractual basis to realize economies and market impact.

- Three types of contractual vertical marketing systems: - wholesaler-sponsored voluntary groups, small grocery stores agree to form a

chain to achieve economies with which to compete against corporate chains Apna Bazar

- retailer-sponsored ,A kind of a co-operative arrangement Kirana Federation

Franchise systems. A franchise system is an arrangement whereby a firm licenses others to market a product or service using its trade name in a defined geographic area under specified terms and conditions. Hot Chips

Factors Retailers use in choosing Companies:• Accepts unsold or damaged merchandise returns• Has quick and easy ordering procedures• Provides prompt delivery• Maintains adequate supply• Good reputation /Brand Name• Has a large product range.• Provides deliveries in lots as desired by retailer.• Promotes brand on a regular basis.• Provides adequate margins.• Offers good schemes, quantity discounts• Extends credit > 30 days.• Has good competent sales team/product/technical team.• Ensures prompt service• Provides good store displays (POP)

Six Steps in Channel design

1) List the factors that could potentially influence the direct/indirect decision.

2) Pick out the factors that will have the most impact on the channel design decision.

3) Decide how each factor identified is related to the attractiveness of a direct or an indirect channel.

4) Create a matrix based on the key factors to consider the interactions among key factors.

5) Decide (for each cell in the matrix) whether a direct channel, an indirect channel or a combination of both a direct and an indirect channel is most appropriate, considering the factors involved.

6) For each product or service in question, locate the corresponding cell in the box model.

Channel Design Model:

• The model involves six basic steps:• List the factors that could potentially influence the direct/indirect decision. Each

factor must be evaluated carefully in terms of the firm’s industry position and competitive strategy.

• Pick out the factors that will have the most impact on the channel design decision. No factor with a dominant impact should be left out. For example, assume that the following four factors have been identified as having particular significance; market concentration, customer service level, asset specificity, and availability of working capital.

• Decide how each factor identified is related to the attractiveness of a direct or an indirect channel. For example, market concentration reflects the size distribution of the firm’s customers as well as their geographical dispersion. Therefore, the more concentrated the market, the more desirable the direct channel because of the lower costs of serving that market (high = direct; low = indirect). Customer service level is made up of at least three factors: delivery time, lot size, and product availability. The more customer service required by customers, the less desirable is the direct channel (high = indirect; low = direct). The direct channel is more desirable, at least under conditions of high uncertainty in the environment, with a high level of asset specificity (high = direct; low = indirect). Finally, the greater the availability of

working capital, the more likely it is that a manufacturer can afford and consider a direct channel (high = direct; low = indirect). Note that a high level on a factor does not always correspond to a direct channel.

• Create a matrix based on the key factors to consider the interactions among key factors. If only two factors are being considered, a two-by-two matrix of four cells would result. For three factors, a three-by-three matrix of nine cells would result.

• Decide (for each cell in the matrix) whether a direct channel, an indirect channel or a combination of both a direct and an indirect channel is most appropriate, considering the factors involved. Combination channels are becoming more common in business practice, especially in industrial markets.

• For each product or service in question, locate the corresponding cell in the box model. The prediction in this cell is the one that should be followed or at least the one that should be most seriously considered by the firm.

Channel Strategies:

• Channel Structure Strategy• Distribution Scope Strategies.• Channel Modification Strategy• Channel Integration

Distribution Scope Strategy:

Selecting Distribution Intensity•  Distribution intensity The number of intermediaries or outlets through which a

manufacturer distributes its goods.• Intensive distribution Firm’s products in nearly every available outlet. • Selective distribution Limited number of retailers to distribute its product lines. • Exclusive distribution Limits market coverage in a specific geographical area

• EXCLUSIVE DISTRIBUTION: Exclusive distribution means that one particular retailer serving a given area is granted sole rights to carry a product. Distributing through company outlets or franchisee e.g.: LG PLAZA, HONDA Showrooms: - only company products are available.-Firms targeting a single well defined Market Segment-Associated with Prestige Products-BMW-Also used for specialty products such as furniture and Clothing Eg: Gautier, Bata Stores-Buyers in this segment try to search or travel to the outlets.EG; Rolex watches, regal shoes, celine neckties, and mark cross wallets, gucci bags.

• EXCLUSIVE DISTRIBUTION Exclusive distribution is especially relevant for products that customers seek out.

• E.g.: Rolex watches, Gucci bags, regal shoes, Celine neckties, and Mark Cross wallets. Advantages and Disadvantages:

Advantages Disadvantages1) Promotes tremendous dealer

loyalty.1) First, sales may be lost.

2) Greater sales support. 2) Second, the manufacturer places all its fortunes in a geographic area in the hands of one dealer.

3) A higher degree of control over the retail market

3) High price, high margin and low volume

4) Better forecasting 4) Rely on one retailer can mean dictating terms to other channel members (i.e. the retailer becomes the channel captain)

5) Better inventory and merchandising control.

• INTENSIVE DISTRIBUTION: Placing the products in as many outlets as possible.• Products : Soaps, cigarettes, soft drinks , BPL MOTS etc. ( each outlet has various

brands ) • If the nature of a product is such that a consumer generally does not bother to seek out

the product but will buy it on sight if available, then it is to the seller’s advantage to have the product visible in as many places as possible.

Advantages

• In the short run, uncontrolled distribution may not pose any problem if the intensive distribution leads to increased sales.

• Provides high product visibility

Disadvantages

• First, suitable for low-priced and low-margin products that require a fast turnover.• Second, difficult to control a large number of retailers.

Over the long run, it may foster duplicate productsLocal packing and poor service for the firm Collective bargaining for higher margins and lower stock level a variety of devastating effects.

• SELECTIVE DISTRIBUTION : Here companies select a combination of Exclusive distribution (only company’s products) & Intensive Distribution (some important outlets which are multibrand outlets) E.g. SAMSUNG, VIDEOCON

- Customers need to do comparison shopping to select between stores- Multiple stores sell products to suit the convenience of customers, Vijay Sales,

Sumaria, etc for TVs and white goods.

Channel-Structure Strategy:• The channel-structure strategy refers to the number of intermediaries that may be

employed in moving goods from manufacturers to customers.

• To a significant extent, channel structure is determined by where inventories should be maintained to offer adequate customer service, fulfill required sorting processes, and still deliver a satisfactory return to channel members.

Selection of a Channel Structure:• Selection of channel structure may be explained with reference to Bucklin’s

Postponement-Speculation framework.

• Postponement matches production/distribution with actual customer demand. -Firm holds the stock and not the channel

• Speculation, on the other hand, requires the channel to hold the inventory. -Firm undertakes risk through changes in form and movement of goods within channels.

• Postponement produces efficiency in marketing channels -eliminates risk arising from unsold goods - Sale matches actual customer’s demand - Works on Market Pull factors• Speculation

- leads to economies of scale in manufacturing, -reduces costs of frequent ordering -and eliminates opportunity cost. - Works on Push factors

Selection considerations:• Market segment - must know the specific segment and target customer• Changes during plc - different channels are exploited at various stages of plc• Producer-distributor fit - their policies, strategies and image• Qualification assessment - experience and track record must be established• Distributor training and support

Selection of Suitable Distribution Policies \based on the Relationship between Type of Product and Type of Store

Shopping store/ Convenience good

The customer is indifferent to the brand of product he or she buys but shops different stores to secure better retail service and/or retail price.

Intensive

SShopping store/ The customer makes comparisons Intensive

Shopping goodamong both retail controlled factors and factors associated with the product (brand).

SSShopping Store / Specialty good

The consumer has a strong preference as to product brand but shops a number of stores to secure the best retail service and/or price for this brand.

Selective/ Exclusive

Specialty store/ Convenience good

The consumer prefers to trade at a specific store but is indifferent to the brand of product purchased.

Selective/ Exclusive

Specialty store / Shopping good

The consumer prefers to trade at a certain store but is uncertain as to which product he or she wishes to buy and examines the store’s assortment for the best purchase.

Selective/ Exclusive

Criteria for choosing Channel Partners:• Financial Strength of Prospective Channel Partner : revenue, P& L statement , balance

sheet etc.• Sales Strength : no. of salesmen and their technical competency• Product Lines: 1) Competitive products, 2) Compatible products 3) Complementary

products.• Reputation: 1) leadership 2) Well Established 3) Level of expertise.• Market coverage: Geographic coverage, outlets per market area.• Sales Performance.• Advertising & Sales promotion programs.• Ordering & Payment Procedures.• Willingness to share data: a) customers b) Inventory c) sales figures.• Installation & Repair services.

Multiple-Channel Strategy:• The multiple-channel strategy refers to a situation in which two or more different

channels are employed to distribute goods and services.• Complementary Channels

Complementary channels exist when each channel handles a different non-competing product or non-competing market segment. An important reason to promote complementary channels is to reach market segments that cannot otherwise be served.

Tibbs Frankie, Orpat Calculators with Stationery, Orpat Clocks thru Watch shops in the same place.

• Competitive Channels Competitive channels exist when the same product is sold through two different and competing channels. Two franchises could be issued to the same dealer, but they are normally issued to separate dealers. Competition between dealers holding separate franchises is both possible and encouraged. Amul Ice creams are sold in competing retail channels

Channel Modification StrategyFirm to periodically review and modify its channel arrangements. Modification becomes necessary when:

• The distribution channel is not performing.• Consumer buying patterns change. • The market expands.• New competition arises.• Innovative distribution channels emerge. • The product moves into later stage in the product life cycle.• No marketing channel will remain effective over the whole product life cycle. Early

buyers might be willing to pay for high value-added channels, but later buyers will switch to lower-cost channels.

• Small office copiers were first sold by manufacturers’ direct sales forces, later through office equipment dealers, still later through mass-merchandisers, and now by mail-order firms and internet marketers.

• Introductory stage - Radically new products or fashions tend to enter the market through specialist channels (such as boutiques) that spot trends and attract early adopters.

• Rapid growth stage - As interest grows, higher-volume channels appear (dedicated chains, department stores) that offer services but not as many as the previous channels.

• Maturity stage - As growth slows, some competitors move their product into lower-cost channels (mass-merchandisers).

• Decline stage - As decline begins, even lower-cost channels emerge (mail-order houses, off-price discounters).

Channel Integration• Firms have to build this activity in their Channel Activities• Benefits: When managed properly the synergy at the marketplace provides a high

competitive advantage and smooth flow of information, goods and services

Factors for Integrating Channels:

• Connectivity: ensures real time flow of information on activities of the channels.• Community: Ensure a common vision and a shared set of objectives with the channel

members.• Collaboration: Recognize Mutual interdependence. Promote shared understanding

beyond contractual obligations.

Chapter 12.PRICING

STRATEGY

Introduction• Pricing is one of the 4 Ps of the marketing mix. The other three aspects are product,

promotion, and place. It is also a key variable in microeconomic price allocation theory.

• Price is the only revenue generating element amongst the 4ps, the rest being cost centers.

• Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others.

Definitions:

• Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, Quality of product.

• The effective price is the price the company receives after accounting for discounts, promotions, and other incentives.

• Promotional pricing refers to an instance where pricing is the key element of the marketing mix.

Pricing Process:1. Set Pricing Objectives2. Analyze demand3. Draw conclusions from competitive intelligence4. Select pricing strategy appropriate to the political, social, legal and economical

environment5. Determine specific prices

Pricing Objectives:• It is necessary that the marketing manager decide the objective of pricing before

actually setting price.

• According to experts, pricing objectives are the overall goals that describe the role of price in an organization’s long-range plans.

• The objectives help the marketing manager as guidelines to develop marketing strategies. The following are the important pricing objectives.

• Market Penetration • Market Skimming • Target rate of Return • Price Stabilization • Meet of Follow Competition • Market Share • Profits Maximization • Cash Flow • Product Line Promotion • Survival

Market Penetration Objective: • In the initial stages of entering the market, the entrepreneurs may set a relatively low

price. This is mainly to secure a large share of the market. In a highly price sensitive market, the businessman may continue to sell his products even without profit. He is interested in growth rather than in making a profit.

• In the market penetration objective, the unit cost of production and distribution will decrease when the volume of sales attain a particular target.

• In brief, market penetration objective is an attempt to secure a large share of the market by deliberately setting the low prices.

Market skimming objective:

• Market skimming means utilizing the opportunities in the market to reap the benefits of high sales, increased profits and low unit costs. Some of the entrepreneurs study the buyer’s needs and try to provide the suitable goods, but charge them high prices.

• This objective is realized in those markets where the magnitude of competition is very low. The entrepreneurs, in this situation, make profits over a short period.

• The market-skimming objective would not be meaningful, when the consumer refuses to purchase the goods at the prices fixed by the producers.

• This pricing objective would be suitable in the markets where the consumers feel that costly goods are of the superior quality.

Target rate of return objective: • Rate of return is normally measured in relation to investment and sales. The producers

enjoying some protection may prefer to earn a target rate on investment.

• This would be possible where the entrepreneur enjoys a franchise or a monopolistic situation. But in the long run, every businessman attempts to secure an adequate return on investment through price setting.

• Mostly, middleman like wholesalers, retailers will price their merchandise to earn a particular rate of return on sales.

Price stabilization objective:• Frequent changes in the prices of product will harm the long-term interests of the

companies. Hence, they aim at stabilization of prices.

• They do not exploit a short supply position to earn the maximum. During the periods of good business, they try to keep prices from rising and during the periods of depression, they keep prices from falling too low.

• Thus, they take a long-term view in achieving price stability.

Meet or follow competition objective:• Pricing is often done to meet or even prevent competition. If a company is a price

leader, it is better to follow it to ward off the possibility of competition.

Market share objective:• A company may either have the objective of maintaining the present market share or

increase its share depending upon its stature. Particularly, big business houses adopt such pricing that it enables them to retain their market share.

• If they raise their market share, they may draw the attention of the government and if they shed their share, they may lose revenues.

• Contrary to this, small business houses are found interested in raising their share in the market so as to reap the benefit of large-scale production. In few cases, firms may sell the products even at a lower cost to capture the market.

• However, such practice may lead to financial crisis. As a matter of fact, this is an objective to be adopted by new firms cautiously.

Profit maximization objective:

• Profit maximization does not mean profiteering. There is nothing wrong in this policy if practiced over the long run. As a matter of fact, many of the enterprises strive to maximize their profits.

• Maximization of profits should be on the total output and not on a single item. In such case, consumers do not get dissatisfied since a particular group is not called for paying a high price.

• While adopting this pricing objective, the marketers should attempt to project their image in the market through sales promotion techniques. The marketers should watch the reactions of the consumers. Profit maximization through price hikes should be sparingly used.

Cash flow objective:• One of the important objectives of pricing is to recover invested funds within a

stipulated period. Most of the time you will find different prices for the cash and credit transactions.

• Generally, you find lower prices for the cash sales and high prices for the credit sales. But this pricing objective could be implemented with good results only when the firm has monopoly in the market.

Product line promotion objective:• Product line means a group of products that are related either because they satisfy

similar needs of different market segments or because they satisfy different but related needs of a given market segment.

• While framing the product line, the marketer may also include such goods, which are not popular.

• The intention of the marketer is to push through all the goods without any discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In this pricing objective, equal prices are adopted for the entire product line.

Survival objective:• Perpetual existence of the business over a period is the indication of the sound

financial position of the enterprise. All organizations will have to meet expected and unexpected, initial and external economic losses.

• These enterprises have to pool up the resources to meet all the contingencies through appropriate pricing strategies. Price is use to increase sale volume to level up the ups and downs that come to the organization.

Demand-Based Pricing:• Definition: Price depends upon your customers' perception of your products' value

and the level of demand for your item. Your product must provide a unique benefit to your target market. Example: Your product has prestige appeal so it can be priced in a range well above the cost of production. For example, luxury cars and gourmet food have prestige appeal.

• Caution: Success depends on your knowledge of your customers and your market. You must have an uncanny skill for accurately estimating customer demand to avoid disappointing sales results.

• Demand-based pricing is any pricing method that uses consumer demand - based on perceived value - as the central element. These include:

• Price skimming, • Price discrimination & Yield management, • Price points,• Psychological pricing,• Bundle pricing,• Penetration pricing,• Price lining, • Value -based pricing, and • Premium pricing.

Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.

Multidimensional Pricing:• Multidimensional pricing is the pricing of a product or service using multiple

numbers. In this practice, price no longer consists of a single monetary amount (e.g., sticker price of a car), but rather consists of various dimensions (e.g., monthly payments, number of payments, and a down payment).

• Research has shown that this practice can significantly influence consumers' ability to understand and process price information

• Premium Pricing. Use a high price where there is a uniqueness about the product or service. This

approach is used where a substantial competitive advantage exists. • A few examples of companies which partake in premium pricing in the marketplace

include Rolex .People will buy a premium priced product because:• They believe the high price is an indication of good quality; • They believe it to be a sign of self worth - "They are worth it" - It authenticates their

success and status - It is a signal to others that they are a member of an exclusive group;

• Penetration Pricing. The price charged for products and services is set artificially low in order to gain

market share. Once this is achieved, the price is increased. DTH• Economy Pricing. This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Retail outlets often have economy brands for soups, spaghetti, etc.

Price Skimming.• Charge a high price because you have a substantial competitive advantage. However,

the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

• Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

• Psychological Pricing. This approach is used when the marketer wants the consumer to respond on an

emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

• Product Line Pricing. Where there is a range of product or services the pricing reflect the benefits of parts of

the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

• Optional Product Pricing. Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

• Captive Product Pricing Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

• Product Bundle Pricing. Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

• Promotional Pricing. Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

• Geographical Pricing. Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

• Value Pricing. This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Cost-Based Pricing:• Definition: Price is based on a product's total fixed and variable costs.

Example: Typical pricing in commodity markets. For example, a commodity-type raw product such as steel is priced using a standard formula based on cost. Caution: If you use this exclusively, you must be able to stay in business with a very low profit margin. In non commodity businesses, this option should be only one aspect of the total product pricing strategy.

Competition-Based Pricing:• Definition: Price is set in relationship to your competition's prices. In some cases this

may be below cost and is usually indicative of a product that has no competitive edge.

Example: You are caught in an industry "price war" where all products must compete on the basis of price or risk losing their market share. Caution: Your Company’s long-term goals may be sacrificed in the interest of competitive pricing. Also, you are at the mercy of the larger companies in your industry that can afford short-term losses in order to play this expensive game of war.

Value Pricing:• Definition: Gives your customer more quality for less than they expected to pay.

Example: Used when you want to gain market share, position your product with customers, or obtain market acceptance of a new product. Caution: Product quality must be consistent and your company must operate efficiently for this to be an effective strategy. Using this strategy means that you understand your customers and competitors very well. In addition, you may find it difficult to raise prices to more profitable levels once your initial distribution goal is achieved.

• The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality.

• The belief in this relationship is most important with complex products that are hard to test, and experiential products that cannot be tested until used (such as most services).

• The greater the uncertainty surrounding a product, the more consumers depend on the price/quality hypothesis and the more of a premium they are prepared to pay.

Chapter 13.Product Life Cycle Strategy

• The PLC indicates that products have four things in common: • They have a limited lifespan; • Their sales pass through a number of distinct stages, each of which has different

characteristics, challenges, and opportunities; • Their profits are not static but increase and decrease through these stages; and • The financial, human resource, manufacturing, marketing and purchasing strategies

that products require at each stage in the life cycle varies

• The Product Life Cycle (PLC) describes the stages a new product idea goes through from beginning to end.  The PLC is divided into five major stages:

•   Product Development

•   Market Introduction•   Market Growth•   Market Maturity•   Sales Decline

Product Life-Cycle Strategies:

PLC Stages

• Product Development:• Begins when the company develops a new-product idea• Sales are zero• Investment costs are high• Profits are negative

• Introduction • Low sales• High cost per customer acquired• Negative profits• Innovators are targeted• Little competition

Stages in the Product Life Cycle:

IntroductionThe seller tries to stimulate demandPromotion campaigns to get increase public awarenessExplain how the product is used,• Features Advantages BenefitsYou will lose money, but you expect to make profits in the future

Introduction Stage of the PLCSummary of Characteristics, Objectives, & Strategies

SalesSalesCostsCostsProfitsProfits

Marketing ObjectivesMarketing Objectives

ProductProductPricePrice

Low sales Low sales

High cost per customerHigh cost per customer

NegativeNegative

Create product awareness and trial

Create product awareness and trial

Offer a basic productOffer a basic product

Use cost-plus Use cost-plus

DistributionDistribution Build selective distributionBuild selective distribution

AdvertisingAdvertising Build product awareness among early adopters and dealers

Build product awareness among early adopters and dealers

Marketing Strategies: Introduction Stage• Product – Offer a basic product• Price – Use cost-plus basis to set• Distribution – Build selective distribution• Advertising – Build awareness among early adopters and dealers/resellers• Sales Promotion – Heavy expenditures to create trial

Growth• Rapidly rising sales• Average cost per customer• Rising profits• Early adopters are targeted• Growing competition

GrowthA lot is sold - The seller tries to sell as much as possible. Other competitor companies watch, and decide about joining in with a competitor product.

Growth will continue until too many competitors in the market - and the market is saturated.

At the end of the growth stage profits starts to decline when competition means you have to spend more money on promotions to keep sales going, which cuts in to your profits.

Growth Stage of the PLC:Summary of Characteristics, Objectives, & Strategies

Marketing Strategies: Growth Stage

• Product – Offer product extensions, service, warranty• Price – Penetration pricing• Distribution – Build intensive distribution

SalesSalesCostsCostsProfitsProfits

Marketing ObjectivesMarketing Objectives

ProductProductPricePrice

Rapidly rising sales Rapidly rising sales

Average cost per customerAverage cost per customer

Rising profitsRising profits

Maximize market shareMaximize market share

Offer product extensions, service, warranty

Offer product extensions, service, warranty

Price to penetrate marketPrice to penetrate market

DistributionDistribution Build intensive distributionBuild intensive distribution

AdvertisingAdvertising Build awareness and interest in the mass market

Build awareness and interest in the mass market

• Advertising – Build awareness and interest in the mass market• Sales Promotion – Reduce expenditures to take advantage of consumer demand

Maturity:• Sales peak• Low cost per customer• High profits• Middle majority are targeted• Competition begins to decline

MaturityMany competitors have joined - the market is saturated

The only way to sell is to begin to lower the price - and profits decrease

It is difficult to tell the different between products since most have the same F.A.B. - Features, Advantages & Benefits

Competition can get “Nasty” and commercials are intense“Persuasive Promotion” becomes more important during this stageThat is to say, you have commercials almost begging the customer to still buy your

product because you still make it just as good.

Maturity Stage of the PLC:Summary of Characteristics, Objectives, & Strategies

Marketing Strategies: Maturity Stage

• Product – Diversify brand and models• Price – Set to match or beat competition

SalesSalesCostsCostsProfitsProfits

Marketing ObjectivesMarketing Objectives

ProductProductPricePrice

Peak salesPeak sales

Low cost per customerLow cost per customer

High profitsHigh profits

Maximize profit while defending market share

Maximize profit while defending market share

Diversify brand and modelsDiversify brand and models

Price to match or best competitorsPrice to match or best competitors

DistributionDistribution Build more intensive distributionBuild more intensive distribution

AdvertisingAdvertising Stress brand differences and benefits

Stress brand differences and benefits

• Distribution – Build more intensive distribution• Advertising – Stress brand differences and benefits• Sales Promotion – Increase to encourage brand switching

Decline• Declining sales• Low cost per customer• Declining profits• Laggards are targeted• Declining competition Newer products are now more attractive - even a low price does not make consumers

want to buy.Profit margin declines - and so the only way to make money is to sell a high volumeTo increase volume you try to – 1. Increase the number of customers - get new customers 2. Increase the amount each customer uses Decline Stage of the PLCSummary of Characteristics, Objectives, & Strategies

Marketing Strategies: Decline Stage:• Product – Phase out weak items• Price – Cut price• Distribution – Use selective distribution: phase out unprofitable outlets• Advertising – Reduce to level needed to retain hard-core loyalists• Sales Promotion – Reduce to minimal level

Extending the Product Life Cycle:Two things you can do – Market Modification- • Increase frequency of use by present customers• Add new users• Find new uses

SalesSalesCostsCostsProfitsProfits

Marketing ObjectivesMarketing Objectives

ProductProductPricePrice

Declining salesDeclining sales

Low cost per customerLow cost per customer

Declining profitsDeclining profits

Reduce expenditure and milk the brand

Reduce expenditure and milk the brand

Phase out weak itemsPhase out weak items

Cut priceCut price

DistributionDistribution Go selective: phase out unprofitable outlets

Go selective: phase out unprofitable outlets

AdvertisingAdvertising Reduce to level needed to retain

hard-core loyal customers Reduce to level needed to retain

hard-core loyal customers

• Product Modification• Change product quality or packaging

MARKET MODIFICATION

You look for new consumers by changing the product so it has new users - and then new customers.

PRODUCT MODIFICATION • To prevent the product going into decline you modify the product• Adding new features, variations, model varieties will change the consumer reaction -

create more demand• Therefore you attract more users

• Examples• C D players• Chip flavours - many kinds• Digital sound at theatres

Styles, Fashions, and Fads

• Fashion product life cycles last a shorter time than basic product life cycles.

• By definition, fashion is a style of the time.

• A large number of people adopt a style at a particular time.

• When it is no longer adopted by many, a fashion product life cycle ends. Fashion products have a steep decline once they reach their highest sales.

• The fad has the shortest life cycle. It is typically a style that is adopted by a particular sub-culture or younger demographic group for a short period of time.

• The overall sales of basic products are the highest of the three types of products, and their life cycles are generally the longest.

• Five types of consumers emerge at each of the life cycle stages.

• Different marketing strategies should be used to reach each of these consumer types.

• Fashion innovators adopt a new product first. They are interested in innovative and unique features. Marketing and promotion should emphasize the newness and distinctive features of the product.

• Fashion opinion leaders (celebrities, magazines, early adopters) are the next most likely adopters of a fashion product. They copy the fashion innovators and change the product into a popular style. The product is produced by more companies and is sold at more retail outlets.

• At the peak of its popularity, a fashion product is adopted by the masses. Marketing is through mass merchandisers and advertising to broad audiences.

• As its popularity fades, the fashion product is often marked for clearance, to invite the bargain hunters and consumers, the late adopters and laggards, who are slow to recognize and adopt a fashionable style.

Product life cycle – Marketing implication

Effect & response

Introduction Growth Maturity Decline

Characteristics of the stages

Customer Innovator Early adopters Middle majority

Laggard

Competitor Few, less important

Growing in numbers & followers

Stable intense competition

Declining shakeouts

Sales Low sales Sales will be growing rapidly

Stagnating sales

Declining sales

Cost High cost per consumer

Cost start declining

Low cost due to higher volumes

Low cost per consumer

Marketing Objectives:

Introduction Growth Maturity DeclineEstablishment in the market.Creating product awareness and trial.

Market penetration increasing market share.

Define the market and the brand

Costing cutting.Milking the product

MARKETING STRATEGIES:

Introduction Growth Maturity DeclineProduct Basic product

offeringAugmenting

productDiversification of brands and

models

Divesting weak product

Distribution Building distribution selectively

Intensive distribution

Retention of higher shelf

spaces

Unprofitable are phased out

Price High, cost plus to recover the

cost of production

Price to penetrate the

market

What consumer can bear &

beast competitors are

offering

Low price

Advertising Building awareness especially

target innovators & distribution

channels

Mass communication

Stress on brand difference

Reduced just to retain loyal customers

Sales promotion

High to increase trials

Moderate High to build loyal consumers

Low

Product Pruning:

• Discontinuation of a product or brand in response to declining demand or insufficient financial returns.

• Product pruning enables the marketer to dedicate its resources to its best products or brands.

• The marketer must first evaluate whether a product or marketing mix modification could revive demand for the ailing product.-

• Innovative and multiband companies do a better job of product pruning than companies who have relied too much on one product or brand.

• A product may be pruned gradually by discontinuing all promotion expenditures and milking the market for any remaining demand.

• The declining product may also be sold to a competitor or sold in limited quantities to a market segment with self-sustaining demand.

• There is a tendency for product lines to lengthen over time. Hence a review must be carried out regularly. This review is what is termed as product line pruning.

• Product line pruning may also be defined as a method of shortening the product line by dropping a few items from the present product range.

Harvesting:

• Harvesting refers to getting the most from a product while it lasts. It is a controlled divestment whereby the business unit seeks to get the most cash flow it can from the product.

• The harvesting strategy is usually applied to a product or business whose sales volume or market share is slowly declining.

• An effort is made to cut the costs associated with the business to improve cash flow. Alternatively, price is increased without simultaneous increase in costs. Harvesting leads to a slow decline in sales.

• When the business ceases to provide a positive cash flow, it is divested.

Harvesting Strategy:

• A strategic management decision to reduce the investment in a business entity (division, product line, product or item) in the hope of cutting costs and/or improving cash flow.

• A deliberate decision to cut back expenditure of all kinds on a particular product (usually in the decline stage of its life cycle) in order to maximize profit from it, even if in doing so it continues to lose market share.

• Harvesting strategy has been popularized by the Boston Consulting Group in its application to what is termed 'dogs'.

What is a Harvest Strategy?

• Internationally, there are two alternative uses of the term “harvest strategy”. The simplest one is that the harvest strategy specifies target and limit reference points and management actions associated with achieving the targets and avoiding the limits.

• This is sometimes referred to as a “harvest control rule”. The more comprehensive definition takes a systems approach that links together a stock assessment process and

management and monitoring controls, along with associated performance measures, and sometimes also includes research and enforcement needs.

• For the purposes of the Harvest Strategy Standard, the definition adopted is the simpler one, with the more comprehensive definition being referred to as a “management strategy”. The process of evaluating alternative management strategies against one or more operating models (simulation models of the real world) is termed a “management strategy evaluation” (MSE).

• Implementation of the harvesting strategy requires severely curtailing new investment, reducing maintenance of facilities, slicing advertising and research budgets, reducing the number of models produced, curtailing the number of distribution channels, eliminating small customers, and cutting service in terms of delivery time, speed of repair, and sales assistance.

• Ideally, harvesting strategy should be pursued when the following conditions are present:

• The business entity is in a stable or declining market.

• The business entity has a small market share, but building it up would be too costly; or it has a respectable market share that is becoming increasingly costly to defend or maintain.

• The business entity is not producing especially good profits or may even be producing losses.

• Sales would not decline too rapidly as a result of reduced investment.

• The company has better uses for the freed-up resources.

• The business entity is not a major component of the company’s business portfolio.

• The business entity does not contribute other desired features to the business portfolio, such as sales stability or prestige.