marketing lect 1

8/3/2019 Marketing Lect 1

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Competitive Strategy


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Competitive Strategy

A competitive strategy consists of moves to

Attract customers

Withstand competitive pressures Strengthen an organizations market position

The objective of a competitive strategy is to generate a competitive advantage,increase the loyalty of customers and beat competitors

A competitive strategy is narrower in scope than a business strategy

Five competitive strategies are

Overall low-cost leadership strategy

Best cost provider strategy

Broad differentiation strategy

Focused low-cost strategy

Focused differentiation strategy


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The five forces model

Competitive rivalry

Rivalry is usually intense where some of the

following conditions are in evidence:

As the number of competitors increases and as theybecome more equal in size and capability.

When demand for the product is growing slowly.

When competitors are tempted by industryconditions to use price cuts or other competitive weapons

to boost unit volume.


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When competitors' products and services are so

similar that customers incur low costs in switching

from one brand to another.

When it costs more to get out of a business than to

stay in and compete.

When strong companies outside the industry

acquire weak firms in the industry and launchaggressive, moves to transform the newly acquired

competitor into a major market contender.


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Threat of entry

Economies of scale.

The existence of learning curve benefits. Here the

advantages stem not from large-scale facilities but

from the experience gained through repeatedly producing

the product or service many times.

Brand preferences and customer loyalty.

Capital requirements.

Cost disadvantages independent of size. These might

be due, for example, to access to cheaper labour or

raw materials.

Access to distribution channels.

Government actions and policies


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Threat of substitutes

If substitutes pose a credible threat, then, firms in

the industry will be prevented from raising their

prices or from failing to develop and improve their

products/services.

The competition from substitutes is affected by the

ease with which buyers can switch to a substitute. A

key consideration is usually the buyer's switching costs.


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Power of buyers

Buyers are powerful in the following situations:

When customers are few in number and they

purchase in large quantities.

When customers' purchases represent a sizeablepercentage of the selling industry's total sales.

When the selling industry comprises large numbers

of small sellers. When the item being purchased is sufficientlystandardized that customers can both find other supplierseasily and switch to them at virtually zero cost.

When the item being bought is not an importantinput.

When it is economically feasible for customers topurchase the input from several suppliers rather than one.


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Power of suppliers

Suppliers are powerful where The input is, in one way or another, important to the

buyer.

The supplier industry is dominated by a few largeproducers who enjoy reasonably secure market

positions and who are not beleaguered by intensely

competitive market conditions.

Suppliers' respective products are unique to theextent that it is difficult or costly for buyers to switch

from one supplier to another.


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The overall attractiveness of the industry

If all the five forces are strong industry profitability would

be expected to be low regardless of the products/servicesbeing produced. Conversely, weak forces permit higher

prices and above-average industry profitability.

Firms can influence the five forces through the strategies

they pursue.

But some innovations can lead to a short-term advantage

which, when every player in the industry is forced to follow

suit, can result in the whole industry being worse off.

For example, the first firm to advertise on television may

gain an increase in market share; then everyone else follows

resulting in a stalemate with the only winners being the

advertising agencies and the television companies.


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The crucial question, in determining profitability is whether

firms in the industry can capture and retain the value they

create for buyers, or whether this value is lost to others infending off competition. Industry structure determines who

captures the value

New entrants compete away value, passing it on to

buyers through lower prices, or they dissipate the

value created by raising the costs of competing.

Buyers who are powerful are able to retain most of

the value created for themselves.


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Substitutes place a ceiling on prices.

Suppliers that are powerful can appropriate the

value created for buyers - it is passed from

buyer to supplier with the firms in the middle

taking only a small proportion.

Rivalry, like entry, results either in value being

passed on to buyers (in the form of lower prices)

or it raises the costs of competing (e.g.enhanced plant, new product development,

advertising, larger salesforces).


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Generic Strategy

There are three routes to superior performance.

Become the lowest-cost producer in the industry.

Differentiate the product/service in ways that are valued

by the buyers to the extent that they will pay a premium

price to get these benefits.

Firms can choose to apply either of these strategies to a

broad market. Alternatively, they can focus on a niche

market.


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Overall cost leadership

To achieve a competitive advantage in such markets, a companyneeds to put a lot of effort into lowering its production and

distribution costs so that it can charge lower prices than itcompetitors.

If you offer a product or service that is of standard quality, butyour costs are significantly lower than the industry average you

will earn superior profits.This route to superior performance requires that the product isnotconsidered cheap or low quality by the buyer.

There are many ways to drive costs down whilst maintaining

average quality.

Moving down the experience curve more quickly than thecompetition.

Increasing the scale of the operation to gain the maximumpossible economies.


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Low cost can enable the firm to compete on price if that is

required.

It can also generate profits that can be reinvested to

improve the product quality whilst charging the same price

as the average in the industry.

There are some risks associated with the cost leadershipstrategy:

An over-emphasis on efficiency can lead to the firm losing touch

with the changing requirements of the customer.

In particular, in many industries the demands of the consumer maybecome more sophisticated and individual.

The low cost producer who is dedicated to producing a standard,

no-frills product may find his customer base is being eroded by

competitors who are adapting and developing their products.


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Many routes to a low cost position can be easily

copied.Competitors can purchase the most efficient scale

of plant.

As industries mature, the experience curve effectconfers fewer benefits.

Perhaps the greatest threat comes from

competitors who are able to price at marginal costbecause they have other, higher profit-earning

product lines that more than cover the fixed costs

of production.


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Overall Low-Cost Leadership Strategy

Strive to be the overall low-cost provider in an industry

How to achieve overall low-cost leadership

Scrutinize each cost activity

Manage each cost lower year after year

Reengineer cost activities to reduce overall costs

Cut some cost activities out of the value chain

Competitive strengths of a overall low-cost strategy

Organization in a better position to compete offensively on price

Organization is better able to negotiate with large customers

Organization is able to use price as a defense against substitutes

Low cost is a significant barrier to entry

Organization is more insulated from the power of suppliers


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When Does an Overall Low-Cost Strategy Work the Best

When price competition is a dominant competitive force

The product is a commodity e.g., car manufacturing, petrol

There are few ways to differentiate the product

Most customers have similar needs/requirements

Customers incur low switching costs changing sellers

Customers are large and have significant bargaining power


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When Doesnt a Overall Low-Cost Strategy Work

When technological breakthroughs open cost reductions for competitors, negating a

low-cost providers efficiency advantage

Competitors find it relatively easy and inexpensive to imitate the leaders low costmethods

Low-cost leader focuses so much on cost reduction that the organization fails to

respond to

Changes in customer requirements for quality and service

New product developments

Reduced customer sensitivity to price


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Differentiation

The key to a successful differentiation strategy is to be

unique in ways that are valued by buyers.

If buyers are willing to pay for these unique features,

through higher prices, and if costs are under control,then the price premium should lead to higher

profitability.

Central to this strategy is an understanding of buyer

needs. We need to know what the buyer values, deliver

that particular bundle of attributes and charge

accordingly.


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A successful differentiation strategy reduces the head-

to-head rivalry found in commodity-type industries. If

suppliers raise prices, loyal customers with low price

sensitivity are more likely to accept the resulting price

increases that the differentiator passes on. Further

more, customer loyalty acts as a barrier to new entrants

and as a hurdle that potential substitute products have

to overcome.

However, the differentiation strategy is not without its

risks:

If the basis upon which the firm seeks to bedifferentiated is easily imitated, then other firms will be

perceived as offering the same product or service. Then

rivalry within the industry is likely to switch to price-

based competition.


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Broad-based differentiators may be outmaneuvered by

specialist firms who target one particular segment.

If the strategy is based on continual product innovation,

the firm runs the risk of breaking the expensive new

ground merely for followers to exploit the benefits.

If the costs of differentiating are too high, then the

premium prices charged may not lead to superior profits.


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Broad Differentiation Strategies

Striving to build customer loyalty by differentiating an organizations products from competitors

products

Keys to success include Finding ways to differentiate to create value for customers that are not easily copied

Not spending more to differentiate than the price premium that can be charged

A successful differential strategy allows an organization to

Set a premium price

Increase unit sales Build brand loyalty


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Broad Differentiation Strategies

Where to look for differentiation opportunities

Supply chain

Research and development Production activities

Marketing, sales and service activities

Strengths of a Differentiation Strategy

Customers develop loyalty to the brand

Brand loyalty acts as an entry barrier

Organization is better able to fend off threats of substitute products because of brand loyalty

Reduces bargaining power of large customers since other brands are less attractive

Seller may be in a better position to resist efforts of suppliers to raise prices


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Pitfalls of a Broad Differentiation Strategy

Trying to differentiate on an unimportant product feature that doesnt result in providing more

value to the customer

Over differentiating the product such that the product features exceed the customers needsCharging a price premium that buyers perceive as too high

Ignoring need to signal value

Not identifying what customers consider valuable


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Focus

Involves the selection of a segment or group of segments

in the industry and meeting the needs of that segment

better than the broader targeted competitors.

Focus strategies can involve either being the lowest cost

producer serving that segment, or differentiating to meet

the particular requirements of the segment in a way that

allows the firm to charge a premium.


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Both variants of the focus strategy rest on differences between

the target segments and other segments in the industry.

It is these differences that result in the segment being poorly

served by the broad-scope competitor, who is not well

equipped to tailor its offerings to the particular needs of the

segment.

The firm that focuses on cost may be able to outperform the

broad-based firm through its ability to strip out 'frills' not

valued by the segment.

The obvious danger with the focus strategy is that the targetsegment may disappear for some reason. Either someone else

comes in, 'outfocuses' and steals buyers, or for different

reasons (e.g. changing tastes, demographic shifts) the target

segment withers away.


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Best-Cost Provider Strategy

Striving to give customers more value for the money by

combining an emphasis on low cost with an emphasis onupscale differentiation

Combines low-cost and differentiation

The objective is to create superior value by meeting or

beating customer expectation on product attributes andbeating their price expectations

Keys to success

Match close competitors on key product attributes and

beat them on cost Expertise at incorporating upscale product attributes at a

lower cost than competitors

Contain costs by providing customers a better product


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Advantages of Best-Cost Provider Strategy

Competitive advantage comes from matching close competitors on key product attributes and

beating them on price

Most successful best-cost providers have skills to simultaneously manage costs down andproduct quality up

Best-cost provider can often beat an overall low-cost strategy and a broad differentiation

strategy where

Customer diversity makes product differentiation the norm

Many customers are price and value sensitive


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Focus Strategies

Focus strategy based on low-cost

Concentrate on a narrow customer segment beating the competition on lower cost

Focus strategy based on differentiation Offering niche customers a product customized to their needs

Overall objective of both focus strategies is to do a better job of serving a niche target market

than competitors

Keys to success

Choose a niche were customers have a distinctive preference, unique needs or special requirements

Develop a unique ability to serve the needs of a niche target market


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What Makes a Niche Attractive?

Large enough to be profitable

Good growth potential

Not critical to the success of major competitors

Organization has the resources to effectively serve the niche

Organization can defend itself against challengers through a superior ability to serve the niche

No competitors are focusing on the niche


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Strengths and Risks of Focus Strategies

Strengths

Competitors dont have the motivation to meet specialized needs of the niche

Organizations competitive advantage could be seen as a barrier to entry Organizations competitive advantage provides an obstacle for substitutes

Organizations ability to meet the needs of customers in the niche can reduce the bargaining power of

large niche buyers

Risks

Broad differentiated competitors may find effective ways to enter the niche

Niche customers preferences may move toward the product attributes desired by a larger market segment

Profitability may be limited if too many competitors enter the niche


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Stuck in the middle

The firm that has not made a choice about either beinglow cost or differentiated runs the risk of being 'stuck in

the middle'.

These firms try to achieve the advantages of low cost and

differentiation but in fact achieve neither.

Poor performance results because the cost leader,differentiators or focusers will be better positioned to

compete in any segment.


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The Value Chain

One way of gaining a deeper insight into buyer needs isthrough value chain analysis.

The value chain breaks down the firm into its strategically

relevant activities in order to understand the behaviour of

costs and the existing or potential sources of

differentiation.

A firm gains competitive advantage by performing these

activities more cheaply or better than its rivals.

Value is the amount buyers are willing to pay for what a

firm provides them.


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Value is measured by total revenue, a reflection of the

price a firm's product commands and the units it can sell.

A firm is profitable if the value it commands exceeds the

costs involved in creating the product. Creating value forbuyers that exceeds the cost of doing so is the goal of any

generic strategy.

Value activities can be divided into two broad types:

primary activities and support activities.


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Primary activities are those that are involved in the

physical creation of the product or service, its transfer to

the buyer and any after-sales service. These primary

activities can be divided into the following categories:

Inbound logistics. Activities associated with the receiving,

storing and dissemination of inputs to the product (includeswarehousing, inventory control, vehicle scheduling).

Operations. Activities associated with transforming inputs

into the final product (machining, packing, assembly,

testing, equipment maintenance).

Outbound logistics. Collecting, storing and distributing the

product to buyers.


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Marketing. Activities associated with providing a means by

which buyers can purchase the product, and inducing

them to do so.

Service. Providing a service to maintain or enhance the

value of the product.

Support activities can be divided into four categories:

Procurement. This is the function of purchasing inputs. Itincludes all the procedures for dealing with suppliers.


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Technology development. This embraces not just

machines and processes, but 'know-how', procedures and

systems.

Human resource management. This includes all the

activities involved in the recruitment, training,

development and remuneration of staff.

Firm infrastructure. This includes general management,

finance and planning, estate management, quality

assurance. The infrastructure supports the entire value

chain.

P iti F t f St t i B fit


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Positive Factors of Strategic Benfits

Opportunities

The significant customer related opportunities in presentand future marketplaces for current potential products and

product Technology.

Strengths:

The most significant current strengths of the product group in

terms of the value for money, and attractiveness of existing

products and services, market shares, product profitability,

repeat customer bases and strengths related to product

group capabilities in design, marketing, manufacturing,s ales

servicing and so on.


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Successes:

The successes that indicate a significant current capability toinnovate successfully.

This is the indication of the ability to identify and exploit

opportunities and strengths.

Competitive Weaknesses:

The significant weaknesses of competitor that offer future

opportunities to the product group and indicate areas in which

competitors might be slow and unable to react to competitivemoves by the product group.

N ti A f St t i Ri k


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Negative Areas of Strategic Risk

Weaknesses:

If weaknesses of the product/group is not corrected, will constrain the

ability of the product to innovate and implement competitive initiatives.

Failures:

Significant indicators that the product group has recetly been

unsuccessful in overcoming weaknesses and in implementing new

initiatives, and an analysis of the basic causes of failures.

Threats:

Are the anticipated external trends or occurrences that threaten the

competitive success of the product group. The analysis will examine social, political, technological, economic,

environmental, competitive and customer trends and possible future

shocks.


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Competitors Strength:

Strengths of key competitors which will create difficulty inimplementing new initiatives and responses to external

threats.

Quality of the strategy and realism of the implementation plan

developed by a product group will be directly related to thequality in terms of focus, concentration, depth of insight vision

and lateral thinking.

Organizations and markets coexist in the marketing system.

The production capacity, production range, quality

parameters, extent of distribution and extent of market

coverage are various criteria for an organization to have a

competitive edge in the competitive environment.

Market Leaders


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Market Leaders

Market Leaders:

Firms with largest market share, generally 30 to 40 % of themarket share, would be in the hands of the market leader.

Eg.,

Colgate Toothpaste

Palmolive Shaving Cream

Hindustan Lever Surf Detergent

Amul Butter

Bata Shoes

Maruti Cars

Asian Paints Paint industry

Hero Hoda two wheeler segment

Britannia - Biscuit


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Organizational leadership in the market has been

possible due to stable and effective and efficient

management practices and finally very dynamic and

consistent aggressive marketing strategies.

The dominant firms keep on adding new products,

carry out promotional activities, try new usage andkeep on increasing production capacity to keep te cost

of production at the desirable level.

Trhe competing companies are closely following themarket leader and the leading company will have to be

vigilant and on its toes to ward off any challenge from

other companies in the industry.

Strategies Market Leaders


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Strategies Market Leaders

Innovation Strategy: launch of a new product based on innovation.Better product, low price range (probably). Mark of being offensive. Eg., Surf

vs Nirma (Wheel)

Fortification Strategy: constructive approach to maintain a dominantposition. Reasonable approach as well as its quality and continues to offer

products which would be superior to competitors. E.g., Surf Excel

Confrontation Strategy: a competing company go for a veryaggressive marketing efforts, which would result in clash with leader.

Besides an advertisement/promotional strategy, leader comes up with an

advertisement campaign aggressive enough to counter the competitors

challenges.e.g., Kodak vs Fuji

Harassment Strategy: the leader uses an unethical method forcingdistributors and dealers not to stock and sell the competitors product or will

try to influence materials suppliers or vendors not to be associated with the

competitor. E.g., Cigaratte company,

Market Challengers


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Market Challengers

A runner up firm actively and continuously trying to

expand its market share by aggressive efforts.

These firms would have shares between 20 30 %

E.g.,

Promise Toothpaste

Nirma Detergent

Keokarpin Hair Oil

Savlon

Compaq Computers

Market Challengers Strategies


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Market Challengers Strategies

Price Discount Strategy: expenses are lowered compared tomarket leaders. They offer price discount to potetial buyers keeping the

quality comparable to the leaders. E.g., 2-wheelers, automobiles, fast foodindustry.

Cheap Pricing Strategy: improve the quality of the product andonce accepted by the consumers then they raise the prices. E.g., Godrej

Introduction of mini size packages: in the shampoo market bymarket challengers has created dominant companies and other companiesultimately followed the trade.

Improvement in Service Strategy: e.g., Jet Airways / SaharaAirlines ion comparison with Indian Airlines. They are improving their market

shares by improving service, customer care, punctuality in maintaining timeschedules and other benefits to frequent flyers.

HMT watches restructured its distribution network resulting in a seriousthreat to the dominant Titan watches. Titan firm also improved its distributionstrategy to counter this move and emerged as a dominant player in the

market.


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Manufacturing cost production Strategy: this is a difficultidea. As far as this strategy is considered all good companies are

continuously trying to reduce manufacturing cost or carrying out costreduction exercises. Japanese companies have used a manufacturing cost

product strategy for their onslaught on the international automobile market,

electronic market and electrical product.

Intense Advertisement Campaign Strategy: e.g., PrivateInsurance companies have launched an offensive in an advertisementagainst a dominant firm LIC.

Market Followers


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Market Followers

Firms whose market share is below firms who aremarket challengers in the range of 10 20 %

These firms generally have conservative companydealers

They try to retain their marketing shares with standard

marketing efforts.

These firms have their set of customers in differentsegments and they try to retain the same.

They decide their growth depending on the growthpotential of the target market.

These firms often concentrate on profit and cost and

effective organizational management.

Market Nichers


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Market Nichers

The 10% of the market is in the hands of several

companies which would serve the consumers and

markets who are interested in the products of the

lower price and quality.

Market leader / challengers would not be interested in

this part of the market segment.

Specialist Niche: specialize on one type of job. E.g., radiators ofautomobile, fabrication fo air filters, etc.

Vetrical Job Specialist: specializing in certain production parts orjobs which are required by large original equipment manufacturers like

plastic moulded cabinet for television sets, etc.


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Customers Specialist: includes companies such as travel agentswho specialize in operating in suburban areas or towns where the big travel

agents are not present.

Product Line Specialist: includes companies which may productspecial product and continue to sell these products. e.g., Laboratories

Round Bottles, Laboratory Glass material, distillators, beakers, etc.

Service Specialist: firms who offer superior service not easilyavailable from other firms. E.g., diagnostic centers, health clubs, travel

departments or automobile service centers, publishers for special subjects

and restaurants specializing in particular food category.


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SWOT

Internal

Strengths

Weaknesses

External

Opportunities

Threats


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Environmental Analysis

Political

Economic

Social

Technological


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Portfolio Analysis

Market attractiveness & Companys position

B C G

- Stars

- Cash cows

- Question marks

- Dogs

GE 9 Cell grid


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Strategy Formulation Core competence

Value migration

Skating to where the money lies

Look at what market needs, not what you are

good at.

Look for opportunities to innovate


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Innovations

Process

Product

Business Model


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Strategic Options

Capacity Expansion

Market Development

Product Development

Vertical Integration

Diversification

Mergers & Acquisitions

Strategic Alliances

Turnaround

Divestment

Focus areas of strategy


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Focus areas of strategy

Supply Chain Management

Knowledge Management

Enterprise Risk Management

Globalisation


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Supply Chain Management

Goes beyond value chain

Suppliers supplier to buyers buyer

Cost reduction

Agility/responsiveness

Information Vs. Inventory

Bullwhip effect

Postponement


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Knowledge Management

Data

Information

Knowledge

Tacit

Explicit

Wisdom


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Enterprise Risk Management

Risk

Strategic planning

Technology risk

M&A risk

Political risk

Marketing risk

HR risk

Financial risk

Cultural issues


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Globalisation

Standardisation

Customisation

Knowledge sharing

Global mindset

Strategy Implementation


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Strategy Implementation

Leadership

Structure

Culture


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Leadership

Autocratic

Democratic

Visionary

Hands on

Vision

Where we are

Creative tension


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Structure

Simple

Functional

Divisional

Matrix

Cross functional teams


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Culture

Beliefs

Values

Assumptions

Setting priorities

Power distance

Individualistic/Collective

Masculine/Feminine

Formal/Informal


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Thank You

marketing lect 1

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