Transcript 5. Strategic Planning and Marketing Management Process

Concept of Strategy:- The concept of strategy is central to understand
the process of strategic management. The term Strategy is derived from
a Greek word Strategos, which means generalship – the actual direction
of military force, as distinct from the policy governing its deployment.
Hence the word Strategy means ‘the art of the general.’ In
business parlance, there is no definite meaning assigned to strategy. It is
often used loosely to mean a number of things.
A Strategy could be: A plan or course of action or a set of decision rules making a pattern or
creating a common thread;
The pattern or common thread related to the organization's activities which
are derived from the policies, objectives and goals;
Related to pursing those activities which move an organization from its
current position to a desired future state;
Concerned with the resources necessary for implementing a plan or following
a course of action;
Connected to the strategic positioning of a firm, making trade-offs between its
different activities and creating a fit among these activities; and
The planned or actual coordination of the firm’s major goals and actions, in
time and space that continuously co-align the firm with its environment.
In Simplified terms, a strategy is the means to achieve the objectives.
In Complex terms, it may possess all the characteristics mentioned in the
previous slide.
Strategy is one of the most significant concepts to have emerged in the
subject of management studies in the recent past. Its applicability,
relevance, potential and viability have been put to several test and
it has emerged as a critical input to organizational success and
has come in handy as a tool to deal with the uncertainties that
organizations face. It has helped to reduce ambiguity and provided a
solid foundation as a theory to conduct business: a convenient way to
structure the many variables that operate in the organizational
context and to understand their interrelationship.
Levels at which Strategy Operates:- For many companies, a single strategy is
not only inadequate but also inappropriate. The need is for multiple strategies at
different levels. In order to segregate different units or segments, each
performing a common set of activities, many companies organize on the basis of
operating divisions or simply, divisions. These divisions may also be known as
profit centers or Strategic Business Units (SBUs). An SBU, is defined as “Any
part of a business organization which is treated separately for strategic
management purpose.”
Generally, SBUs are involved in a single line of business. A
complementary concept to SBU, valid for the external environment of a
company, is a Strategic Business Area (SBA). It is defined as ‘A distinctive
segment of the environment in which the firm does (or may want to do)
business.’
A number of SBUs, relevant for different SBAs, form a cluster of units
under a corporate umbrella. Each of the SBUs has its own functional
departments or a few major functional departments while common functions
are grouped under the corporate level. The different levels of Strategy could be
at the Corporate Level, the SBU Level and at the Functional Level.
Levels of Management
Levels of Strategy
Corporate
Office
Corporate
SBU
SBU
A
SBU
B
Corporate - Level
SBU
C
Functional
Finance
Business - Level
Functional – Level
Marketing
Operations
HRM
Information
Fig:- Different Levels of Strategy
The organizational levels are those of the corporate, SBU and functional
levels. The Strategic levels are those of the corporate, SBU and functional
level strategies.
Corporate Level Strategy is an overarching plan of action covering
the various functions that are performed by different SBUs. The plan
deals with the objectives of the company, allocation of resources and
coordination of the SBUs for optimal performance.
SBU level (or business) strategy is a comprehensive plan
providing objectives for SBUs, allocation of resources among functional
areas and coordination between them for making optimal contribution
to the achievement of the corporate level objectives.
Functional Strategies deals with a relatively restricted plan,
providing objectives for a specific function, allocation of resources
among different operations within that functional area and coordination
between them for optimal contribution to the achievement of the SBU
and corporate – level objectives.
Ex:- Panacea Biotec is a health management company in India,
involved in research, manufacturing and marketing of pharmaceuticals,
biopharmaceuticals, new chemical entities, natural products and
vaccines. It is organized into five SBUs: Critical Care, Diacar, PRO,
GROW and Best on Health(BOH), which enables it to respond to
changes in the industry and marketplace with speed and sensitivity.
Apart from the three levels at which strategic plans are made,
occasionally, companies plan at some other levels too. Firms often set
strategies at a level higher than the corporate – level. These are
called the societal strategies. Based on a mission statement, a societal
strategy is a generalized view of how the corporation relates itself to the
society in terms of a particular need or a set of needs that it strives to
fulfill. Corporate – Level Strategies could then be based on the
societal strategy.
Ex:- Suppose a corporation decides to provide alternative sources
of energy for the society at an optimum price and based on the latest
available technology. On the basis of its
societal strategy, the
corporation has a number of alternatives with regard to the businesses it
can take up. It can either be a manufacturer of nuclear power reactors, a
maker of equipments used for tapping solar energy or a builder of
windmills among other alternatives. The choice is wide and being in any
one of such diverse fields would still keep the corporation within the
limits set by its societal strategy. Corporate and business level strategies
derive their rationale from the societal strategy.
Some strategies are also required to be set at lower levels. One step
down the functional level, a company could set its operational level strategies.
Each functional area could have a number of operational strategies. These would
deal with a highly specific and narrowly defined area; for instance, a functional
strategy at the marketing level could be subdivided into sales, distribution,
pricing, product and advertising strategies.
Activities in each of the operational areas of marketing, whether sales or
advertising, could be performed in such a way that they contribute to the
functional objectives of the marketing department. The functional strategy of
marketing is interlinked with those of the finance, production and personnel
departments. All these functional strategies operate under the SBU – level.
Different SBU – Level strategies are put into action under the corporate – level
strategy which, in turn, is derived from the societal – level strategy of the
corporation. Ideally, a perfect match is envisaged among all strategies at
different levels so that a corporation, its constituent companies, their different
SBUs, functions in each SBU and various operational areas in every functional
area are synchronized. When perceived in this manner, the organization
moves ahead, towards its objectives and mission, like a well – oiled
machine. Such an ideal, though extremely difficult – if not impossible to
attain – is the intent of strategic management.
Strategic Marketing Management is focusing on the alignment of
marketing management within an organization with its business and corporate
to gain Strategic Advantage.
Strategic Development Framework (Competitive Marketing
Strategies):- There is need to develop strategies that are more than
customer based. The strategy should also focus on attacking and
defending against competitors. A company can follow any of the
following strategies of build, hold, harvest or divest depending on
the competitive conditions prevailing in the market and its own
objectives.
Build Objective:- Build objective involves increasing the company’s
market share. Such a strategy makes sense when the market is
growing and the company has a competitive advantage that it can
capitalize on.
When to Build:- A build objective is suitable in markets which are
growing. All companies can increase their market share
simultaneously because there are large number of customers who
have not yet brought the product. But if a market is mature, and
hence it is not growing, increase in market share of one company can
happen only at the expense of market share of another company.
A company can build in a mature market when there are
competitive weakness that it can exploit, or a company can build if it
has corporate strengths that it can exploit.
1.
The concept of experience curve says that every time a company’s
cumulative production is doubled, its cost of production goes down by a
certain percentage, depending upon the industry the company is in. By
building sales faster than competition, a company can achieve the
position of cost leader. Thus a company can be in a position to reduce
price and hence be able to sell in large volumes by attracting customers
of its competitors.
Strategic focus:- A company can build by market expansion, winning
market share from competitors, by mergers or acquisitions and by
forming strategic alliances.
Market Expansion:- A company expands the market for its product by
creating new users, or new uses, or by increasing frequency of purchase.
It can find new users by moving to foreign markets, or targeting larger
segments. It can promote now uses for its product.
Winning Market Share:- This indicates gaining market share at the
expense of competition. Principles of offensive warfare apply in this case.
These are to consider the strengths of the leader’s position, to find a
weakness in the leader’s strength, and attack at that point.
i.
Frontal Attack:- This involves the aggressor taking on the
incumbent head on. The aggressor attacks the main market of the
incumbent by launching a product with a similar or superior
marketing mix. The incumbent gets most of its revenue and profits
from this market segment. If the incumbent is a market leader, the
aggressor should have clear and sustainable competitive advantage.
If its competitive advantage is low cost, and it uses low price to gain
market share of the market leader, the latter will match its low price
because it has deep pockets. Low price can be a sustainable
competitive advantage only if the aggressor has developed some
proprietary technologies by which it has been able to reduce its costs
of manufacturing and distribution. A distinct differential advantage
provides basis for superior customer value by which incumbent’s
customers can be enticed, but the aggressor should be able to match
the incumbent in other activities. An aggressor is more likely to be
successful if there is some restriction on the incumbent’s ability to
retaliate. Finally, the challenger needs adequate resources to
withstand the battle that will take place should the leader retaliate.
Sustainability is necessary to stretch the leader’s capability to
respond.
Flanking Attack:- In flanking attack, an aggressor attacks unguarded or
weakly guarded markets. The aggressor attacks geographical areas or
market segments where the incumbent’s presence is weak or the incumbent
does not consider the segment lucrative and allows the initial incursion.
Ex:- The Japanese car companies launched flanking attack in the US car
market. They attacked the small car segment, from which they expanded
into other segments. The American car companies did not retaliate
vigorously because sedans and luxury cars, and not small cars, were their
major markets.
iii. Encirclement Attack:- The aggressor launches products in all segments
and at all price points. It has a product for every conceivable need of
customers. The aggressor needs to have deep pockets to launch and sustain
such an attack, and it should have prepared for a long time, before
launching the attack. Normally such an aggressor is a large corporate which
enters a new category, and has ambitions to become the lead player in it.
The incumbent has to regroup and redirect its resources to meet the
aggressor in every segment that the aggressor has encroached. An
incumbent may also decide to ration its resources, and protect its most
lucrative segments, letting the less lucrative ones fall prey to the aggressor’s
attacks. Ex:- Samsung launched mobile handsets offering both CDMA and
GSM technologies at all price points, with a goal of becoming the largest
player in the Indian market. It attacked the market leader Nokia directly
and aggressively in all its existing segments.
ii.
iv.
Bypass Attack:- This attack involves circumventing the incumbent’s
position. The aggressor changes the rules of the game, usually through
technological leap-frogging. The aggressor can revert to making a simpler
product with very low prices or it can incorporate a new technology in its
product which enhances the value of the product by a big margin.
Diversification is also a type of bypass attack – the aggressor can bypass an
incumbent by venturing in new markets with new products.
v.
Guerilla Attack:- The aggressor pin – pricks the incumbent instead of
serving it body blows. The aggressor is a small player and makes life
uncomfortable for the stronger incumbents by unpredictable price
discounts, sales promotions or heavy advertising in a few segments and
regions.

Mergers or Acquisitions:- A aggressor merges with or acquires
competitors. It is able to avoid expensive marketing wars, and it is also able
to gain synergies in functions such as purchasing, production, financial,
marketing and R&D. Mergers and acquisitions result in immediate increase
in market share when the players operate in the same market. Mergers
involve high level of risk because people with different culture, language
and business practices have to work together which is never easy.
Forming Strategic Alliance:- A company can build through strategic
alliances. The players entering the alliance want to create sustainable
competitive advantage for themselves – often on a global scale.
Companies can form strategic alliances through joint ventures, licensing
agreements, purchasing and supply agreements, or joint product and
process development programmes. The companies in alliance are able to
enter new markets, get access to new distribution channels, develop new
products and fill gaps in their product portfolio. By strategic alliances,
partners can share the product development costs and risks. Strategic
alliances are flexible, and it is easier for a player to walk out of a strategic
alliance than in the case with mergers and acquisitions.
A strategic alliance can work only if the players are willing and
able to contribute to a common cause, and if their contributions
complement each other. Strategic alliance involves risk in the sense that
partners develop intimate understanding of each others’ competences,
strengths and weaknesses – an unscrupulous player can use such
information to damage its erstwhile partner once the strategic alliance is
dissolved.
2. Hold Objective:- The company defends its current position against
imminent competition. It applies principles of defensive warfare – it
blocks strong competitive moves.
When To Hold:- Hold objective makes strategic sense for a market
leader in a mature or declining market – it is in cash cow
position. The market leader generates positive cash flows by holding
on to market leadership, which can be used to build other products.
It is in a position to hold onto market leadership, because it is in a
strong bargaining position with distribution channel members and
has strong brand image. It enjoys experience curve effects that reduce
costs, so it can sell at lower price. In a declining market, it a company
is able to maintain market leadership, it becomes a virtual
monopolist as weaker competitors withdraw. Hold objective also
makes strategic sense when the costs of increasing sales and market
share outweigh the benefits – there are aggressive competitors who
retaliate strongly if attacked. In such situations, it makes sense that
the companies be content with their market share, and do not take
actions that may invite strong retaliatory actions from competitors.
Strategic Focus:- A company holds on to its market share by monitoring
competition or by confronting the competition.
Monitoring the Competition:- When an industry is in competitive stability,
all players are being good competitors. All players are content with their market
share and they are not willing to destabilize the industry structure. A company
needs to monitor its competitors to check that there are no significant changes
in competitor behaviour, but beyond that they do not need to do anything
extravagant.
Confronting the Competition:- Rivalry is more pronounced among existing
players since the product is in the maturity or the decline stage. Strategic action
may be required to defend sales and market share from aggressive challenges:i.
Position Defense:- Position defense involves building fortification around
one’s existing territory, which translates into building fortification around
existing products. The company has a good product which is priced
competitively and promoted effectively. This will work if products have a
differential advantage that is not easily copied, for instance, through patent
protection. Brand and reputation may provide strong defense. Buy this
strategy can be dangerous. The customers’ need or the underlying
technologies of the product may have changed but the company may refuse
to change track fearing that it will damage its current positioning and
reputation.
ii.
Flanking defense:- The company takes actions to defend a hitherto
unprotected market segment, because it believes that the aggressor
will consolidate itself in the flanking segment, and after getting
adequate experience of how to operate in the market, it will try to
enter the more lucrative segments of the market. Therefore, an
incumbent should not leave segments unattended, even if they are
not very lucrative. Competitive incursions are less when a incumbent
has presence in all segments. But if this effort is half hearted, it will
not help. Failure to defend an emerging market segment may be
dangerous later as competitors will entrench themselves in the
unprotected segment.
iii. Pre-emptive Defense:- Pre–emptive defense involves taking
proactive steps to protect oneself from the imminent attack of a
competitor.
Attack First:- This involves continuous innovation and new product
development. The defender proactively defends its turf by adopting
such measures. This may dissuade a would-be attacker.
Counter Offensive Defense:- In head on counterattacks, an incumbent
matches or exceeds what the aggressor has done – cuts price more sharply or
advertises more intensely. The incumbent is willing to incur the high costs of
such counterattacks because they are the only means left to thwart a persistent
aggressor. The incumbent may also attack the aggressor’s cash cow, and hence
choke the aggressor’s resource supply line. A counterattack may also be based
on innovation – make a product that makes the aggressor’s product obsolete.
Encircle the Attacker:- The defender launches brands to compete directly
against attacker’s brands.
Mobile Defense:- When a company’s major market is under threat, a mobile
defense makes strategic sense. The two options in a mobile defense are
diversification and market broadening. Diversification involves attempts to
serve a different market with a different product. The company will have to
check if it has the competences to serve the new market effectively. Market
broadening involves broadening the business definition. Ex:- When film
companies faced declining cinema audiences, they redefined their business As
entertainment providers rather than film makers, and moved into TV,
Magazines, Theme Parks etc.
Strategic Withdrawal:- The incumbent takes stock of strengths and
weaknesses of its businesses. It decides to hold on to its strong businesses, and
divests its weak businesses – it concentrates on its core business. Therefore,
strategic withdrawal allows a company to focus on its core competences.
Strategic withdrawal makes sense when a company’s diversification strategies
have resulted in too wide a spread of business, away from what it does
exceptionally well.
3.
Niche objective:- The company seeks to serve a small segment or even a
segment within a segment. By being content with a small market share, it is
able to avoid competition with companies which are serving the major
segments. But if the niche is successful, large competitors may seek to serve
it too.
When to Niche:- A company can only niche if it has a small budget, and if
strong competitors are dominating the major segments. The company finds
small segments, whose customers are not well served by incumbents, and it
builds special competences to serve them. It creates competitive advantage
and runs profitable operations for these segments. It often happens that an
industry’s major players are focused on serving customer of large segments,
and hence their strategies and operations are aligned to meet their needs.
Needs of smaller segments are ignored by major players, and hence niching
becomes a smart strategic objective in such markets.
Strategic Focus:- A strategic tool for nichers is market segmentation.
They should search for underserved segments that may provide
profitable opportunities. The choice of the segment will depend upon
the attractiveness of the niche and the capability of the company to serve
it. Focused R&D expenditure gives a small company a chance to make
effective use of limited resource. The customers of a niche have peculiar
needs - their needs are substantially different from those of the majority
of customers in the market, and hence a nicher should develop a
sophisticated understanding of their needs. It then designs a unique
operation and delivery mechanism to serve those needs. Since a nicher is
serving only a small segment, it may be tempted to serve a larger
segment. A nicher should not fall prey to such temptations because they
will have to dilute their offerings to be attractive to a larger segment,
which will automatically make it unattractive for its niche. A nicher is
small in its operations by design, and not by chance, and it is there
because it values the high profits that a niche generates. A nicher should
decide to remain small – always.
4.
Harvest Objective:- A company with harvest objective tries to maximize its
profit, and it is not overly worried if its actions result in loss of market share.
It is more focused on reducing cost than gaining market share. It wants to
generate funds for its growing business, and hence is focused on generating
large cash flows.
When to Harvest:- Moderately successful products in mature or declining
markets are the prime targets for harvest strategies, since they lose money
or earn very little, and take up valuable management time and resources.
Harvesting strategies can make such products highly profitable in the short
term. Harvesting also makes sense if a company has a substantial number of
loyal customers whom it continues to serve. In growing markets, a company
has to make huge investments in operations and marketing to build, and a
company may decide that payoffs of such investments are not adequate. In
such markets, a company can harvest businesses which are consuming lot of
resources but are not gaining market share rapidly – it decides that these
businesses do not have the potential to become market leaders. A company
may have identified its future breadwinners. It needs to invest in them, for
which it harvests some of its existing products which are not doing well. A
company should always remember that if it harvests a product for a long
time, it is not likely to survive.
Strategic Focus:- Harvesting involves eliminating R&D and marketing
expenditure. Only the very essential expenditures are incurred. The
company tries to reduce cost of manufacturing. It rationalizes its product
portfolio. It eliminates brands which are not doing well, and focuses on
few brands which are doing well. It reduces its promotion expenses and it
also withdraws from less profitable distribution channels. And it
increases price whenever it can.
Continued harvesting makes a business very weak and eventually
unviable. Therefore, a company has to decide as to when it should stop
harvesting and sell the business. It is never a good idea to persist
harvesting for such a long time that no buyer finds anything worthwhile
left in the business.
5. Divest Objectives:- A company divests a SBU or a product, and
hence is able to prevent the flow of cash to poorly performing SBUs
and products. Divestment is a decision that is often considered to be
the last option by a company. However, the decision to divest must be
made carefully, while not only assessing the particular business, but
also analyzing its impact on other businesses of the company, and its
portfolio.
When to Divest:- A company divest unprofitable businesses – it does
not believe that it can turn them around. It wants to divert its financial
and managerial resources to more promising businesses. It also divests
businesses whose costs of turnaround are likely to exceed benefits. It may
divest its moderately successful products of growth phase, sometimes
after harvesting has run its full course, because it is not willing to
commit the type of resources that will be required to make them market
leaders. Before taking the decision to divest a product, a company should
deliberate if it will adversely affect the sale of a profitable product. It
often happens that an industrial customer buys two products in
conjunction, and either he buys them together or he does not buy either
of them. Some industrial customers want to buy all the products that
they need to serve a specific requirement from a single supplier, and
hence, a company has to retain its unprofitable products if it wants to
continue to do business with such a buyer.
Strategic Focus:- A loss making product is a drain on profits and cash
flows, and hence a company should divest it quickly to minimize losses.
It should try to find a buyer, but if it does not find one within a
reasonable frame of time, it should withdraw the product.
A company may continue to harvest one of its businesses and sap
all vitality form it. Such a business will not be attractive to buyers and
will not fetch a good price. A company should act fast once it decides that
it has to het rid of a business and sell it when it is still in a viable shape. It
should look for a buyer in whose portfolio the business will fit well. Such
a buyer will always be willing to pay more as it will try to salvage and
grow the business rather than use it to earn some money by selling to
some other party. A company should avoid the situation when its
divestment is seen as a desperate sale. It will fetch less money and lot of
disrepute.
Competitive Advantage:- The key to superior performance is to gain
and hold competitive advantage. Firms can gain a competitive advantage
through differentiation of their product offerings which provides
superior customer value, or by managing for lowest delivery cost.
In most cases, an industry’s ‘return on investment’ leader opts for one
of the strategies, while the second placed firm pursues the order.
Differentiation
Achieving
Competitive
Advantage
Cost
Leadership
Focus
Fig:- Achieving Competitive Advantage
Differentiation
Focus
Cost Focus
 Competitive Strategies:- The two means of competitive advantage of
low cost of delivery and differentiation, when combined with competitive
scope of activities of broad versus narrow, result in four generic
strategies:



Differentiation.
Cost Leadership.
Differentiation Focus.
Cost Focus.
The differentiation and cost leadership strategies seek
competitive advantage in a broad range of market, whereas,
differentiation focus and cost focus strategies are confined to a
narrow segment.
 Differentiation:- A company that pursues differentiation strategy
selects only one or just a few of the total choice criteria that are used by
customers of the industry. It then uniquely positions itself to meet these
choice criteria by designing a product that gives a very high level of
performance on the chosen choice criteria, and only a mediocre level of
performance on other choice criteria.
Ex:- A manufacturer of A.Cs may target customers whose choice
criteria is ‘Rapid Cooling’. Therefore, it designs an AC which ‘Cools
rapidly’, but is not very ‘energy efficient’. Differentiation strategies raise
the average cost of the industry, because players of the industry are
providing higher level of performance based on one choice criteria or the
other. But the players can charge premium prices because customers are
getting their desired values. Such an industry will be segmented on
choice criteria, and players will target only one or just a few of the total
segments. Therefore, another manufacturer of AC may target customers
whose choice criteria is ‘energy efficient’. Companies that pursue
differentiation strategy differentiate in ways that lead to price premiums
in excess of cost of differentiating. Differentiation gives customers a
reason to prefer one product over another and is thus central to
segmentation and positioning.
 Cost Leadership:- Cost leadership involves the achievement of lowest
cost position in an industry. Firms market standard products that are
believed to be acceptable to customers, at reasonable prices which give
them above average profits. Some cost leaders discount prices in order to
achieve higher sales levels.
 Differentiation Focus:- The company targets a small segment or
niche, which has special needs. The special needs of the segment offer an
opportunity to the company to differentiate its product from those of
competitors who may be targeting a broader group of customers. It
designs a product to meet the unique needs of the customers of this
small segment. Therefore, when a company pursues differentiation focus
strategy, its underlying premise is that the needs of its target segment
differ from the broader market, and that existing competitors are
underperforming in its target segment.
 Cost Focus:- A firm seeks a cost advantage with one or a small number
of target market segments. Services / features may be provided to all
segments but in some segments those services / features may not be
needed. For these segments, the company is over performing. By
providing a basic product, a company is able to reduce costs more than
the price discount it has to give to sell it.
 Creating Differential Advantage:- A company’s resources and skills are the
sources of its competitive advantage, but they are translated into a differential
advantage only when the company’s customers perceive that its product is
providing value more than what its competitors’ products are providing.
Therefore, a company uses its resources and skills to create differential
advantage by providing higher level of performance than its competitors on
choice criteria that its target segments value highly.
But, the companies should understand that attributes on the bases of
which differentiation can be made are not always ones that are considered most
important by customers. Ex:- If an Airline asked its customers to rank safety,
punctuality and on-board service in importance when flying, most customers
would rank safety on top. Buy when they choose an airline, safety ranks low,
because they assume that all airlines are safe, and they choose an airline on the
basis of punctuality and on – board service. Therefore, airlines differentiate their
services on bases which customers said were less important.
A company can create differential advantage by enhancing customer
value proposition on one or more elements of its marketing mix – lower price,
intensive distribution, knowledgeable salespeople, and slick advertisement. The
key to deciding whether improving an element of marketing mix is
worthwhile, is to know if the potential benefit provides value that the
customers desire.
 Product:- A product should give higher performance on parameters that
target customers consider important and mediocre performance on other
parameters. Durability, reliability, styling, capacity to upgrade, provision of
guarantee, giving technical assistance, helping in installation etc., can help in
differentiating a product from that of the competitor.
 Distribution:- Wide distribution coverage and careful selection of
distributor locations can provide convenient purchasing points for customers.
Quick and reliable delivery helps in differentiating a company’s offerings from
those of competitors. Building exclusive channel partnerships and entering into
long term contracts with these partners can also prove to be beneficial to the
company in getting better customer feedback.
 Promotion:- A differential advantage can be achieved by the creative use of
advertising. Advertising can aid differentiation by creating a stronger brand
personality than competitive brands. Using more creative sales promotional
methods or simply spending more on sales incentives can give direct added
value to customers. By engaging in co-operative promotion with distributors,
producers can lower their costs and raise their goodwill. When products are
similar, a well – trained sales force can provide superior problem solving skills
for their customers. Dual selling whereby a producer provides sales force
assistance to distributors can lower latter’s cost and increase sales. Fast, accurate
quotes can lower customers’ costs by making transactions more efficient. Free
demonstrations and free trial arrangements can reduce the risk of purchase for
customers. Superior complaint handling procedures can lower customer costs
by speeding up the process and reduce inconvenience that can accompany it.
 Price:- Using low price to gain differential advantage can fail unless
the firm enjoys coat advantage and has resources to fight a price war.
Credit facilities and low interest loans are indirectly low prices. A high
price can be used to do premium positioning. Where a brand has distinct
product, promotional and distribution advantage, a premium price
provides consistency with the marketing mix.
 Attaining Cost Leadership:- Some of the major cost drivers that
determine the behaviour of costs in the value chain are: Economies of Scale:- Economies of scale can arise from the use of
more efficient methods of production at higher volumes. It also arise
form the less than proportional increase in overhead cost as production
volume increases. Another scale economy results from the capacity to
spread the cost of R&D and promotion over a greater sales volume. But
scale economies do not proceed indefinitely. At some point,
diseconomies of scales are likely to arise as size gives rise to complexity
and personnel difficulties.
 Learning:- Costs can fall through effects of learning. People learn how to
assemble more quickly and pack more efficiently. The combined effect of
economies of scale and learning, as cumulative output increases, has been
termed the ‘experience curve’. This suggests that firms with greater market
share will have a cost advantage through the experience curve effect, assuming
all companies are operating on the same curve. But a move towards a new
technology can lower the experience curve effect for companies that adopt such
new technologies, allowing them to leap – frog more traditional forms and
thereby gain a cost advantage even though their cumulative output may be
lower.
 Capacity Utilization:- Since fixed costs must be paid whether a plant is
manufacturing at full or zero capacity, underutilization incurs costs. The effect
of underutilized capacity is to push up the cost per unit for production.
Therefore, greater capacity utilization ensures lower per unit cost of production.
 Linkage:- These describe how costs of some activities are reduced, by the way
other activities are performed. (Ex:- Improving quality assurance activities can
reduce after sales service costs). Activities of suppliers and distributors are also
linked to the activities of a firm and affect costs of a firm. (Ex:- Introduction of
JIT delivery system by a supplier reduces inventory costs of the firm.
Distributors can influence a firm’s physical distribution costs through
warehouse location decision. To exploit such linkages, the firm may need
considerable bargaining power.
 Inter – Relationships:- Sharing costs with other business units is a potential
cost driver. Sharing the costs of R&D, transportation, marketing and purchasing
lower costs.
 Integration:- Both integration and de – integration can affect costs. Owning
the means of physical distribution rather than using outside contracts could
lower costs. Ownership may allow a producer to avoid suppliers or customers
with sizeable bargaining power. Ownership also increases control, which may
allow greater efficiency of distribution.
De – integration can lower costs and raise flexibility. By using many
small suppliers, a company can be in a powerful position to keep costs low and
also maintain a high degree of production flexibility.
 Timing:- Both first movers and late entrants have opportunities for lowering
costs. For first movers, it is usually economical and easier to establish a brand
name in the minds of customers if there is no competition. They also have prime
access to cheap or high quality raw materials and locations. Late entrants to a
market have the opportunity to buy the latest technology and avoid high market
development costs. They can also avoid costly mistakes made by the pioneer in
building a market for the product.
 Policy Decisions:- Firms have a wide range of discretionary policy
decisions that affect costs. Product width, levels of service, extent of
diversification, channel decisions etc., have direct impact on costs. Care
must be taken not to reduce costs on activities that have a major bearing
on customer value.
 Locations:- The location of plants and warehouses affect costs
through different wage, physical distribution and energy costs. Location
near customers lowers outbound distributional costs, and location near
suppliers reduces inbound distributional costs.
 Institutional Factors:- These include government regulations, tariffs
and local content rules. These are uncontrollable factors for a business,
but changes can affect costs. A firm can anticipate such changes by
conducting regular checks and follow – ups of various activities in their
environment. The firm cannot avoid these events, though they can be
better prepared. A well equipped firm is likely to be affected less
adversely in an industry, as compared to competitors.
 Competitive Strategy Selection:- A company that selects a generic
strategy and faithfully and diligently follows it, is successful. Companies
that do not pursue a generic strategy are stuck in the middle position,
pursuing irreconcilable strategies like ‘differentiation at low cost’. They
do not develop any competitive advantage, and hence perform poorly.
A successful company understands the generic basis of its
success. It understands its competitive advantage and eschews actions
that will dilute it. A cost leader that makes ‘no frills’ products should be
paranoid about controlling costs and never move to make differentiated
products just because they fetch more prices and margins. The move will
raise the cost of its ‘no frills’ product, but its differentiated product will
not be ‘differentiated’ enough to lure the more sophisticated customers
of the market. A company that follows the focus strategy should know
that it can only have limited sales volume, and that it cannot target a
large segment because it does not have the competitive advantage to
serve it. If it targets a larger segment, it would have diluted its product
enough to make it unattractive for its original small segment.
In most situations strategies of differentiation and cost
leadership are incompatible because resources have to be expended for
differentiating a company’s offerings. But there are circumstances when
both can be achieved simultaneously. A differentiation strategy may lead
to market share domination, which lowers cost through economies of
scale and learning effects. Or a highly differentiated firm can pioneer a
major process innovation that significantly reduces manufacturing costs
leading to a cost leadership position. When differentiation and cost
leadership coincide, performance is exceptional, since a premium price
can be charged for a low cost product.
 Sources of Competitive Advantage:- A company has several sources
of competitive advantages such as R&D, scale of operations,
technological superiority, more qualified personnel etc. Companies
in the same industry usually have different sources of competitive
advantage, which must provide superior customer value than the
competition.
 Superior Skills:- Are distinctive capabilities of key personnel that set
them apart from personnel of competing firms. Ex:- Superior selling
skills may result in closer relationships with customers than what
competing firms can achieve. Superior quality assurance skills can result
in higher and more consistent product quality.
 Superior Resources:- Are tangible requirements that enable a firm to
exercise its skills, Superior resources may be number of sales people,
expenditure on advertising and sales promotion, number of retailers who
stock the product (distribution coverage), expenditure on R&D, scale and
type of production facilities and financial resources, brand equity etc.
 Core competences:- The distinctive nature of these skills and
resources sum up a company’s core competences.
Superior
Resources –
Tangible
Requirements to
Exercise Skills
Fig:- core Competencies of a Company
Superior Skills –
Distinctive
Capabilities of key
personnel
+
Core
Competencies
 Value chain:- Is a useful method for locating superior skills and resources. A
company’s value chain comprises of all the activities that the company
undertakes to be able to serve its customers. These activities can be
categorized into primary and support activities. All companies design,
manufacture, market, distribute and service its products. When a company
delineates its value chain, it can better locate and understand its sources of costs
and differentiation. A company’s primary activities include in-bound
logistics, warehousing, manufacturing, marketing, out-bound logistics,
selling, order processing, installation, and repair. Support activities are
found within all these primary functions and include purchasing, technology,
human resource management and the company’s infrastructure. They are not
defined within a given primary activity because they can be found in all of them.
By examining each value creating activity, a company can look for skills and
resources that may form the basis for low cost or differentiated strategy. The
company also looks for linkage between value creating activities. Ex:- Greater
co-ordination between manufacturing and in-bound logistics may reduce costs
through lower inventory levels. Value chain analysis can extend to the value
chains of suppliers and customers. A company can reduce its costs or enhance
its differential positions by creating effective linkages between its value chain
and those of its suppliers and customers – a company can reduce its inventory
holding costs by enabling it supplier to supply in smaller lot sizes, or its
engineers can collaborate with suppliers’ engineers to produce better quality
products.
Value chain analysis provides an understanding of the nature and
location of skills and resources that provide the basis for competitive
advantage. Operating costs and assets are assigned to the activities of the
value chain and improvements can be made and cost advantage
defended. Ex:- If a company’s cost advantage is based on its superior
manufacturing facility, it should always be willing to upgrade it, to
maintain its position against competitors. But, if a company’s differential
position is based upon skills in product design, it should always be keen
to hire the best designers and procure the latest design tools. The
identification of specific sources of advantage can lead to their
exploitation in new markets where customers place a similar high value
on these resultant outcomes.
For a differential advantage to be realized, a company not only
needs to provide customer value, buy the value should also be superior to
that provided by competitors. Besides creating an effective marketing
mix, a company also needs to react fast to changes in the market. Using
advanced telecommunications, companies receive sales information
from around the world 24 hours a day, every day of the year and react
promptly to them.
 Building corporate Advantage Across Business:- Most multi-business
companies are just sum of their individual businesses. Companies have been
able to build competitive advantage at the level of individual businesses. But
they have not been able to build corporate advantage across their multiple
businesses. Corporate advantage has to be built through the configuration and
co-ordination of the various businesses that the corporate is managing.
Corporate advantage is built by judiciously using resources like assets, skills and
competencies – a company uses these resources in a unique way, and it is almost
impossible for a competitor to copy it. Ex:- Companies like Toyota and
Southwest Airlines have been successful by using their resources in unique ways,
and though they have been very willing to let others study their systems, not
many companies have been able to copy their systems effectively. Its resources
also contain a corporate in the sense that it can move into a business area only if
its resources will help build a corporate advantage in the new business area. A
corporate should enter a new business based on the similarity between the
technology required for the new business and those possessed by the corporate,
instead of similarity of products. Similarly, the structure and size of the
corporate office should be dependent on the strategy being perused, rather than
following prevalent practices. Today most corporations favour a lean, minimalist
corporate office. The arrangement may suit some companies but can be
disastrous for others.
 Resources and Business:- There should be a strict relationship
between company’s corporate capabilities and its choice of businesses –
its corporate capabilities must help its different businesses in
creating their individual competitive advantages. Ex:- If a company
has extremely efficient manufacturing plants, and very strong
relationships with discount retailers, it should venture into businesses
that can use these capabilities to create competitive advantages – it
should not enter businesses that will require it to have flexible
manufacturing plants or which will sell from high – end stores. Ex:Sharp’s most important resource is its liquid crystal display technology,
which is a critical component in nearly all Sharp’s products. Sharp keeps
its set of businesses restricted. It enters a business only when it can
create competitive advantage by using one of its technologies. Its
competitors like Sony and Mastsushita have diversified into the movie
business, but Sharp has resisted from making such a move because it
understands that it does not have the corporate capability to succeed in
the movie business.
 Organization:- Organizational mechanisms have to be put in place to
enable the corporate to add value to each of the businesses. Executives
fear that they will either violate the autonomy and accountability of
independent business units or will end up with large, bureaucratic
overhead structures. It is possible to add value and avoid the two pitfalls.
Ex:- Newell understands that its know – how and experience are
embedded in its managers and it deliberately moves them across
business units and from the business units to the corporate level. Unlike
Newell, Sharp is divided into functional units, not product divisions.
Applied research and manufacturing of key components, such as LCDs
occur in a single specialized unit where economies of scale can be
exploited. The company convenes a number of cross – unit and corporate
committees to ensure that the corporate R&D unit and sales are
optimally allocated among different product lines. Sharp invests in such
time – consuming co – ordination activities to minimize the conflicts
that arise when units share important activities like R&D and
manufacturing.
Depending on its typical situation a corporation will devise its
strategy to add value to its business units. The company should always do
one reality check: the company’s business must not be worth more to
another company.
 Sustaining Competitive Advantage:- A company should strive to
gain sustainable competitive advantage – it should differentiate in ways
that cannot be copied easily by its competitors. A company that
competes primarily through low prices can be undone by a competitor
with deep pockets. Therefore, a competitive advantage based on low
prices is essentially short – lived, unless the company has clear cost
leadership. A company can gain sustainable competitive advantage by
creating patent – protected products, building strong brand personality,
building strong relationship with customers, providing exemplary service
and creating entry barriers like high R&D or promotional budgets.
 Erosion of Competitive Advantage:- Three mechanisms are at work
which can erode a competitive advantage: Technological and environmental changes that create opportunities for
competitors by eroding the protective barriers.
 Competition learns how to imitate sources of competitive advantage.
 Complacency leads to lack of protection of the competitive advantage.
 Core Strategy or Business Planning:- A company’s core strategy
enables it to achieve its business objectives. It comprises of three
elements: Target Markets:- A company’s target market is a group of customers
that it finds attractive to serve & believes that it has the capabilities to
serve this group of customers profitably. To assess the attractiveness of
segments of a market, it uses information like their size, growth rate,
level of competitor activity, customer requirements and key factors for
success. The company surveys its competences, and then arrives at one or
more target markets that it can serve well.
The needs of customers of its target market may change, and it is
always prompt in changing its marketing mix so that it can serve the new
needs effectively. A target market may become less attractive, in which
case, it targets a different segment and repositions its product
appropriately.
 Competitor Targets:- Weak competitors may be viewed as easy prey
and resources are organized to attack them. The company has to
establish a policy to determine the competitors that it will take on and
how.
 Competitive Advantage:- A company’s competitive advantage is how
it is better than its competitors, in serving the needs of the customers of
its target markets. A successful company achieves a clean performance
differential over competitors on factors that are important to customers
of its target market. The most potent competitive advantages are built
upon some combination of following three superior performance: Being Better:- A company sells high quality products or provides prompt service.
 Being Faster:- A company anticipates and responds to customer needs faster than
competition.
 Being Closer:- A company establishes close long term relationship with
customers.
A company can also achieve competitive advantage by becoming
the lowest cost producer of its industry. To some extent, achieving a
highly differentiated product is not incompatible with low cost position.
High quality products suffer low rejection rates, lower repair costs and
therefore incur lower costs than low quality products.
 Tests of An Effective Core Strategy:- A company’s core strategy must
be based upon a clear definition of its target market and the needs of its
customers. A company should have a thorough understanding of its
competitors in terms of their strengths and competences, so that its core
strategy is based upon competitive advantage, i.e. what the
company can do better than or different from competitors. The
strategy must incur acceptable risk – it is not prudent to launch a frontal
attack on a strong competitor with a clear competitive advantage, rather
it is better to launch a flanking attack, so that it gets time to develop the
required competences to take the competitor head on at some later stage.
A company may have a fanciful core strategy on paper, but it cannot
deliver value to customers if the company does not have resources to
implement it faithfully. A company’s core strategy should be derived
from its strategic objectives – heavy promotion and intensive
distribution makes no sense when the product’s strategic objective is to
harvest. Moreover, a company’s core strategy should be internally
consistent, in terms of its elements blending to form a coherent whole –
a company cannot have affluent customers as its target market, and have
cost leadership as its competitive advantage.
 Identifying Competitors:- It would seems a simple task for a
company to identify its competitors. Ex:- PepsiCo knows that Coca Cola’s
Kinley is the major bottled – water competitor for its Aquafina brand;
ICICI Bank knows that Axis Bank is a major banking competitor.
However, the range of a company’s actual and potential competitors can
be much broader than the obvious, and a company is more likely to be
hurt by emerging competitors or new technologies than by current
competitors.
In recent years, for instance, a number of new ‘emerging giants’
have arisen from developing countries, and these nimble competitors are
not only competing with multinationals on their home turf but also
becoming global forces in their own right. They have gained competitive
advantage by exploiting their knowledge about local factors of
production – capital and talent – and supply chain in order to build
world – class businesses.
Ex:- TCS, Infosys Technologies, Wipro and Satyam Computer
Services have succeeded in catering to the global demand for software
and service, even triumphing against multinational software service
providers such as Accenture and EDS. These multinationals have a hard
time sorting out talent in a market where the level of people’s skills and
the quality of educational institutions vary dramatically. Indian
companies know their way around the human resources market and are
hiring educated, skilled engineers and technical graduates at salaries
much lower than those that similar employees in developed markets
earn. Even as the talent in urban centers such as Bangalore and Delhi
gets scarce, the Indian companies will keep their competitive advantage
by knowing how to find qualified employees in India’s second-tier cities.
Taiwan based Inventec has become one of the world’s largest
manufacturers of notebook computers, PCs, and servers, also by
exploiting its knowledge of local factors of production. It makes products
in China and supplies them to giants such as Hewlett –Packard and
Toshiba and also makes cell phones and MP3 players for other
multinational customers. Inventec’s customers get the low cost of
manufacturing products in China without investing in factories there,
and they can also use China’s talented software and hardware
professionals. It won’t be long, however, before Inventec begins
competing directly with its own customers; it has already started selling
computers in Taiwan and China under its own retail brand name.
Using the market approach, we define competitors as companies
that satisfy the same customer need. Ex:- A customer who buys a wordprocessing package really wants ‘writing ability’ – a need that can also be
satisfied by pencils, pens, or typewriters. Marketers must overcome
‘marketing myopia’ and stop defining competition in traditional category
and industry terms. Coca – Cola, focused on its soft-drink business,
missed seeing the market for coffee bars and fresh-fruit-juice bars that
eventually impinged on its soft-drink business.
The market concept of competition reveals a broader set of actual
and potential competitors than competition defined in just product
category terms.
 Analyzing Competitors:- Once a company identifies its primary
competitors, it must ascertain their strategies, objectives, strengths and
weaknesses.
 Strategies:- A group of firms following the same strategy in a given
target market is called a strategic group. Suppose a company wants to
enter the major appliance industry in India, what is its strategic group?
Quality
Group C
• Moderate Line
• Medium Mfg. Cost
• Medium Service
• Medium Price
Low
Group B
• Full Line
• Low Mfg. Cost
• Good Service
• Medium Price
Group A
• Broad Line
• Medium Mfg. Costs
• Low service
• Low Price
High
Vertical Integration
Low
Fig:- Strategic Groups in the Major – Appliance Industry
High
Group D
• Narrow Line
• Lower Mfg. Cost
• Very High Service
• High Price
 Objectives:- Once a company has identified its main competitors and
their strategies, it must ask – What is each competitor seeking in the
marketplace? What drives each competitor’s behaviour? Many factors
shape a competitor’s objectives, including size, history, current
management, and financial situation. If the competitor is a division of a
larger company, it is important to know whether the parent company is
running it for growth, profits, or milking it.
Most U.S firms operate on a short-term profit-maximization
model largely because of the stock market pressures. Japanese firms
operate largely on a market – share – maximization model. Many Indian
companies combine the objectives of sales growth and profits.
Finally, a company must monitor competitors’ expansion plans.
The below figure shows a product-market battlefield map for the
personal computer industry. Dell, which started out as a strong force in
selling personal computers to individual users, is now a major force in
the commercial and industrial market. Other incumbents may try to set
up mobility barriers to Dell’s future expansions.
Personal
computers
Individual
Users
DELL
Commercial And
Industrial
Educational
Hardware
Accessories
Software
Fig:- A Competitor’s Expansion Plans
 Strengths and Weaknesses:- A company needs to gather
information about each competitor’s strengths and weaknesses.
Customer
Awareness
Product
Quality
Product
Availability
Technical
Assistance
Selling
Staff
Competitor A
E
E
P
P
G
Competitor B
G
G
E
G
E
Competitor C
F
P
G
F
F
NOTE:-
E= Excellent
G= Good
F= Fair
P= Poor
Table:- Customers’ Ratings of competitors on Key Success Factors
In general, a company should monitor three variables when analyzing
competitors:Share of Market:- The competitor’s share of the target market.
2. Share of Mind:- The percentage of customers who named the
competitor in responding to the statement, “Name the first
company that comes to mind in this industry.”
3. Share of Heart:- The percentage of customers who named the
competitor in responding to the statement, “Name the company
from which you would prefer to buy the product.”
1.
Companies that make steady gains in mind share and heart share
will inevitably make gains in market share and profitability. To
improve market share, many companies benchmark their most
successful competitors, as well as other world-class performers.
 Selecting Competitors:- After the company has conducted customer value
analysis and examined its competitors carefully, it can focus its attack on one of
the following classes of competitors:1.
Strong Versus Weak:- Most companies aim their shorts at weak
competitors, because this requires fewer resources per share point gained.
Yet, the firm should also compete with strong competitors to keep up with
the best. Even strong competitors have some weaknesses.
2.
Close Versus Distant:- Most companies compete with the competitors that
resemble them the most. Ex:- Chevrolet competes with Ford, not with
Ferrari. Yet companies should also identify distant competitors. Ex:- CocaCola recognizes that its number one competitor for Kinley brand is Tap
water, not Pepsi Co’s Aquafina. Museums now worry about theme parks and
malls.
3.
Good Versus Bad:- Every industry contains good and bad competitors.
Good competitors play by the industry’s rules; they set prices in reasonable
relationship to costs; and they favor a healthy industry. Bad competitors try
to buy share rather than earn it; they take large risks; they invest in
overcapacity; and they upset industrial equilibrium. A company may find it
necessary to attack its bad competitors to reduce or end their dysfunctional
practices.
 Selecting Customers:- As part of competitive analysis, firms must evaluate
its customer base and think about which customers it’s willing to lose and which
it wants to retain. One way to divide up the customer base is in terms of whether
a customer is valuable and vulnerable, creating a grid of four segments as a
result as given below. Each segment suggests different competitive activities.
Vulnerable
Not Vulnerable
Valuable
These customers are profitable
but not completely happy with
the company. Find out and
address their sources of
vulnerability to retain them.
These customers are loyal and
profitable. Don’t take them for
granted but maintain margins
and reap the benefits of their
satisfaction.
Not Valuable
These customers are likely to
defect. Let them go or even
encourage their departure.
These unprofitable customers are
happy. Try to make them
valuable or vulnerable.
Ex:- BSNL, in one of its circles decided to protect its Valuable /
Vulnerable institutional customers by specifically analyzing their past usage
pattern and suggesting appropriate tariff plans to them. This resulted in
substantial savings for the customer despite the company incurring short-term
loss in profits.