Marketing Strategies

Compiled by

By

Prof. Kalim Khan

Prof. Kalim Khan

Table of Content

Table of Content
1. CUSTOMER RELATIONSHIP MANAGEMENT ............................................................... 2 2. SEGMENTATION, TARGETING, POSITIONING & PRODUCT DIFFERENTIATION ...... 4 3. PRICING STRATEGIES ................................................................................................... 10 4. ADVERTISING STRATEGIES ........................................................................................... 19 5. DISTRIBUTION STRATEGIES ........................................................................................... 23 6. NEW PRODUCT DEVELOPMENT ................................................................................. 34 7. MARKETING STRATEGIES FOR MARKET LEADERS AND CHALLENGERS ............... 43 8. GENERIC STRATEGIES .................................................................................................. 47 9. PRODUCT LIFE CYCLE.................................................................................................. 52 10. PORTFOLIO BUSINESS PROFILE AND BUSINESS ASSESSMENT MATRICES............ 56 11. PROFIT IMPACT OF MARKETING STRATEGY (PIMS)............................................... 68 12. MANAGING PRODUCT LINES................................................................................... 73 13. PORTERS MODEL....................................................................................................... 78

1|Page

1. CUSTOMER RELATIONSHIP MANAGEMENT

Only a small portion of a customers positive feelings and loyalty are generated by your products. The rest comes from the intangibles: service, store experience etc. They need to manage the relationship with each and every customer and make each as profitable as possible. Those companies that are successful will find increased revenue at lower cost of marketing and sales, decreased cost from lost customer and ineffective sales and marketing. The methodology that makes this possible is called Customer Relationship Management. Many organizations have collected and stored a wealth of data about their customers, suppliers & business partners. However inability to discover valuable information hidden in the data goes unrecognized. The objective of CRM is the optimization of profitability via building long lasting relationship with customers. CRM allows companies to better discriminate & more efficiently allocate resources to their most desirable customers. In the long run when most of the companies would have adopted CRM, most companies will be competing for handful of meaningful relationships. In order to stay competitive, companies develop strategies to become customer focused, customer driven & customer centric. All these terms define the companies desire to build lasting customer relationship. The best relationship marketing going on today is driven by technology. Companies are using e-mail, websites, and call-centres, databases & data base software to foster continuous contracts.

Companies that want to form strong customer bonds need to attend to the following basics:
1. Get cross departmental participation in planning & managing the customer satisfaction & retention process. 2. Integrate the voice of the customer in all business decisions. 3. Create superior products, services & experiences for the target market. 4. Organize and make accessible a database of information on individual customer needs, preferences, contacts, purchases, frequency & satisfaction. 5. Make if easy for customers to reach appropriate company personnel & express their needs, perceptions & complaints. 6. Run awards programs recognizing outstanding employees.

Besides these, 3 other retention building approaches have been identified 1. Adding Financial Benefits
Two financial benefits that companies can offer are frequency programs and club marketing programs. Frequency Programs (FPs) are designed to provide rewards to customers who buy frequently & in substantial amounts. FPs are based on the fact that 20% of companys customers might account for 80 percent of its business. 2|Page

E.g.: Citibank point system for its credit card users. Shoppers stop & other such stores having the different kinds of cards depending upon purchase level. Many companies have created club membership programs to bond customers closer to the company. Club membership can be open to everyone who purchases product or service, or it can be limited to affinity groups or to those willing to pay small fee. Although open clubs are good for building a database or snagging customers from competitors, limited membership clubs more powerful long-term loyalty builders. These clubs attract & keep those customers who are responsible for largest portion of business.

2. Adding Social Benefits

Compare personnel work on increasing social bonds with customers by individualizing & personalizing customer relationships. Some of the good social actions affecting buyer-seller relationship are listed. a) Initiate positive phone calls b) Make recommendations c) Use phone and not correspondence d) Show appreciation e) Make service suggestions f) Use We problem-solving language g) Short communication Instead of long and winding h) Talk of our future together i) j) Routinize responses Accept responsibility

3. Adding Structural Ties

Some suggestions for creating structural ties with the customer, a) Create long-term contracts A newspaper subscription replaces the need to buy a newspaper each day. A 20-year mortgage replaces the need to re-borrow the money each year.

3|Page

b) Charge a lower price to consumers who buy larger supplies offer lower prices to people who agree to be supplied regularly with a certain brand of toothpaste, detergent or beer etc. c) Turn the product into a long-term service. For e.g.: A dog food company can offer pet care services such as kennels, insurance & veterinary care along with food.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. SEGMENTATION, TARGETING, POSITIONING & PRODUCT DIFFERENTIATION

A company that decides to operate in a broad market recognises that it normally cannot serve all customers in that market. The customers are to numerous and diverse in their buying requirements. Instead of competing everywhere the company needs to identify the market segments it can serve most effectively. To choose its market and serve them well, many companies are embracing target marketing. In target marketing the seller distinguishes the major market segments, targets one or more of those segments, and develop product and marketing programs tailored to each segment. Target marketing requires marketers to take three major steps Market Segmentation
1. Identify segmentation variables and segment the market 2. Develop profiles of resulting segments

Market Targeting
3. Evaluate the attractiveness of each segment 4. Select the target segment(s)

Market Positioning
5. Identify possible positioning concepts for each target segment 6. Select, develop, and communicate the chosen positioning concept

Market segmentation is a process by which a market is divided into distinct customer subsets of people with similar needs & characteristics that lead them to respond in similar ways to a product offering and strategic marketing program. Evaluating the relative attractiveness to each segment (size, revenue potential & growth rate). The benefits sought, and the firms relative business strengths are a process called target marketing. Positioning is the act of designing the companys offering and image to occupy a distinctive place and create an enduring competitive advantage in the mind of the target market. Product differentiation is defined as the process of adding a set of meaningful and valued differences to distinguish the companys product from the competitors. 4|Page

Market segmentation is based on the premise that markets are rarely homogenous in benefits wanted, usage rate, price and promotional elasticities as a result their response rates to products and marketing programs differ. Thus markets are complex entities which can be defined or segmented in a variety of ways. A company can either follow market aggregation or market segmentation strategy. Market aggregation strategy is appropriate when most customers have similar needs and desires. When customers are more diverse, a single standardized product and marketing program does not appeal to those who need or want a variety. Segmentation has become increasingly popular because it reflects the realities faced by firms in most markets.

The process of segmentation involves

Describing the characteristics of the customers using appropriate variables (descriptors) Identifying the different needs or benefits sought by those customers and to measure the extent of differences in benefits sought across the various segments as defined by variables. Evaluation of the results from step 2 to determine the effectiveness and usefulness of the segment scheme.

The criteria for evaluation

Different - Segments must respond differently to one or more of the marketing variables i.e. the segments must be clearly distinguishable. Identifiable - It must be possible to clearly identify the customers that inhibit the various segments in order to facilitate the targeting of marketing efforts. Adequate size - There must be sufficient potential customers in each segment to make the companys efforts cost effective. Measurability - This involves the uses of measurable variables as the basis for segmentation. Compatibility - The segmentation scheme must be consistent with the companys resources.

Descriptors are the variables used to explain differences in product purchases across segments. There are four major categories. 1) Physical descriptors - These are used mainly to describe consumers largely on the basis of demographics. E.g.: Age, sex, family life cycle, income, occupation, education, geography.

5|Page

2) General behavioural descriptors - These seek to produce a better understanding for how a consumer behaves in market place and why. E.g.: Lifestyle - segmentation of consumers on the basis of their activities, interests and opinions. Social Class- every society has its status groupings based largely on similarities in income, education and occupation. 3) Product related behavioural descriptors - These descriptors reflect the behaviour of customers towards a specific product. They include product usage, loyalty, purchase predisposition and purchase influence. 4) Customers needs - It is expressed in benefits sought from a particular product or service.

Major Segmentation Variables Geographic

1. 2. 3. 4. Region City or metro size Density Climate

Psychographic
1. Lifestyle 2. Personality

Demographic
1. 2. 3. 4. 5. 6. 7. Age Family Size Gender Income Occupation Education Religion 1. 2. 3. 4. 5. 6.

Behavioural
Occasions Benefits User Status Usage Rate Loyalty Status Buyer Readiness Stage

Market targeting uses market attractiveness /business position matrix as an analytical framework to help mangers decide which market segments to target and how to allocate resources and marketing efforts. In applying such a matrix, managers must first identify relevant set of variables underlying the attractiveness of alternative market segments. This involves selecting variables related to four broad sets of factors: Market factors, economic and technological factors, competitive factors and environmental factors. Similarly one must select a relevant set of variables to judge a firms relative competitive position within the market segment. These variables include items related to market position factors, economic and technological factors, and the capabilities of the business and interaction of synergies across multiple target markets. After having weighted these factors as according to their relative importance, they can rate the attractiveness of alternative market segments and strength s of a firms competitive position within each of those segments 6|Page

Having evaluated different segments, the company can consider 5 patterns of target market selection. 1) Single segment concentration Through concentrated marketing; the firm gains a strong knowledge of the segment need and achieves a strong market presence. Further the firm enjoys operating economics though specializing its production, distribution and promotion. If it captures segment leadership, the firm can earn a high ROI. 2) Selective specialization The firm selects a number of segments each objectively attractive and appropriate. There may be little or no synergy amongst the segments, but each promises to be a money-maker. This multi segment strategy has the advantage of diversifying the firms risk.

3) Product specialization The firm makes a certain product that it sells to the several segments 4) Market specialization The firm concentrates on serving many needs of particular customer group. 5) Full market coverage The firm attempts to serve all customer groups with all the products they might need.

M1 M2 M3

M1 M2 M3

M1 M2 M3

M1 M2 M3

M1 M2 M3

P1

P1

P1

P1

P1

P2

P2

P2

P2

P2

P3
Single Segment Concentration

P3
Selective Specialisation

P3
Product Specialisation

P3
Market Specialisation

P3
Full Market Coverage

7|Page

Positioning seeks to maximize a products performance relative to competitive offerings and the needs of one or ore targeted market segments. There are two types of positioning - one based on the physical product, the other on the markets perception of the product. Physical product positioning depends primarily on technical versus market data but it still is a very important step to formulate an effective marketing strategy. It facilitates the interface between marketing and R&D, forces to discriminate between selected physical characteristics, helps in identifying key competitors and may reveal important product gaps. Physical product positioning is flawed by its failure to explicitly consider the consumer. Consumers know very little about the physical characteristics of many products, and even if they did, they would not understand them well enough to use them for the basis of selecting one brand over another. Indeed what consumers perceive in a product has various dimensions that can be classified as simple physically based attributes and abstract attributes. To determine which positioning strategy to adopt, a firm must follow 8 steps. They are 1. Identify a relevant set of competitive products 2. Identify the set of determinant attributes that define the product space in which positions of current offering s are located. 3. Collect data from a sample of customers & potential customers about perception of each product on the determinant attributes 4. Analyse, the intensity of the products current position in the customers mind. 5. Determine the products current location in the product space 6. Determine customers most preferred combination of determinant attributes. 7. Examine fit between the preferences of market segments and the current position of the product. 8. Select a positioning or repositioning strategy which should reflect future potential of various positions. Any of the following positioning strategy may be adopted 1. Mono segment positioning It involves developing a product and a marketing program tailored to the preferences of a single market segment. 2. Multi segment positioning It consists of positioning a product so as to attract consumers from different segments 8|Page

3. Imitative positioning This is essentially the same as a head on strategy where a new brand targets a position similar to that of an existing successful brand. 4. Anticipatory positioning A firm may position a new brand in anticipation of the evolution of a segments needs 5. Adaptive positioning This consist of periodically repositioning a brand to follow the evolution of the segments needs 6. Defensive positioning When a firm occupies a strong position in market segment with a single brand, it is a vulnerable to imitative positioning strategies. The firm may pre-empt competitive strategies by introducing an additional brand in a similar position for the same segment. Physical products vary in their potential for differentiation. At one extreme we find products that allow little variation: chicken, steels, aspirin. Yet even here some differentiation is possible. At the other extreme are products capable of high differentiation, such as automobiles, commercial buildings, furniture etc. Here the seller faces an abundance of design parameters, including form features, performance quality, durability, reliability, reparability, style & design Form - Many products can be differentiated in form the size, shape or physical structure of a product. Features - Most products can be offered with varying features that supplement the products basic function. Being the first to introduce valued new features is one of the most effective ways to compete. Performance quality - Most products are established at one of four performance levels: low, average, high or superior. Performance quality is the level at which the products primary characteristics operate. Conformance quality - Buyers expect products to have a high conformance quality, which is the degree to which all produced units are identical and meet promised specifications. Durability - A measure of the products expected operating life under natural or stressful conditions is a valued attribute for certain products. Reliability - It is the measure of the probability that a product will not malfunction or fail within a specified time period. Buyers will normally pay a premium for more reliable products,

9|Page

Reparability - Buyers prefer products that are easy to repair. Reparability is the measure of the ease of fixing a product when it malfunctions or fails. Style - It describes the products look & feel to the buyer. We must include packaging as a styling weapon especially for food products. Design - As competition intensifies, design offers a potent way to differentiate & position a companys products and services. Design is the totality of features that effect how a product looks & functions in terms of customers requirements.

These four decisions -- market segmentation, market targeting, positioning and product differentiation are closely linked & have a strong interdependence. All must be well considered & implemented if the firm is to succeed in managing a given product market relationship.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------3. PRICING STRATEGIES

Marketing strategies over a period of time have revolved prominently around the four Ps name product, place, promotion and price. Amongst these elements of the marketing mix, price is the only element that produces revenue, the other elements produce costs. More over it is one of the most flexible elements of the marketing mix because it can be changed more frequently and prominently unlike the product features and channel commitments. At the same time pricing and price competition are the number one problems facing executives. Yet many companies do not handle pricing well. The most common mistakes are a) Prices are too cost oriented b) It is not revised often enough to capitalize on market changes. c) It is set independent of the rest of the marketing mix, rather than intrinsic elements of marketing strategies. No wonder, therefore, pricing is often termed as a double-edged sword, simply because, considering todays scenario there cannot be anything termed as a perfect price. You under price and run the risk of eating into your margins or your products being labelled as a cheap product. You over price and you land up being on the shelf. Moreover, it is an up hill task for executives to create that gel between pricing and other marketing objectives. It is also important to keep an eye on the relationship of product quality as suggested in the matrix below.

10 | P a g e

High

Medium

Low

1. Premium Strategy

2. High value strategy

3. Super Value Strategy

High

Product Quality

4. Over Charging strategy

5. Medium value strategy

6. Good Value Strategy

Medium

7. Rip off strategy

8. False economy strategy

9. Economy Strategy

Low

Price

Keeping the above factors in the mind it is thus inevitable that a firm has to consider many factors in setting its pricing policy. Selecting the Pricing Objectives. Determining demand Estimating Costs Analysing competitors costs, prices and offers. Selecting a pricing method Selecting a final price.

1. Selecting the Pricing objectives

The company first has to decide what it wants to accomplish with its particular product offer. If the company has selected its target market and market positioning carefully, then its marketing mix strategy including price will be fairly straight forward. The clearer firms objectives, the easier it is to set price. A company can pursue any of six major objectives through its pricing: survival, maximum current profits, maximum current revenue, maximum sales growth maximum market skimming, or product quality leadership.

11 | P a g e

a) Survival - Companies pursue survival as their major objective if they are plagued with over capacity, intense competition or changing customer wants. To keep the plant operating and the inventories turning over they will cut prices. Profits are less important than survivals. As long as prices cover variable costs and some fixed costs, the companies stay in business. However, survival is only a short run objective. In the long run the firm must run how to add value or face extinction. b) Maximum Current Profit - Many companies try to set the price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow or rate of return on investments. There are problems associated with current profit maximization. This strategy assumes that the firm has knowledge of its demand and cost functions; in reality, these are difficult to estimate. Also, by emphasizing current financial performance the company may sacrifice long run performance, ignoring the effects of other marketing mix variables, competitors, reactions and legal restraints on price. c) Maximum Current revenue - Some companies set up price that maximizes sales revenue. Revenue maximization requires estimating only the demand function. Many managers believe that revenue maximization will lead to long run profit maximization and market share growth. d) Maximum sales growth - Some companies want to maximize unit sales. They believe that a higher sales volume will lead lower unit cost and higher long run profits. They set the lowest price, assuming the market is price sensitive. This practice is called market penetration pricing. The following conditions favour setting a low price: (1) The market is highly price sensitive and a low price stimulates market growth. (2) Productions and distributions costs fall with accumulated production experience. (3) A low price discourages actual and potential competition. e) Maximum Market Skimming - Many companies favour setting high prices to skim the market. Market skimming makes sense under the following conditions: (1) A sufficient number of buyers have a high current demand. (2) The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear. (3) The high initial price does not attract more competitors to the market. (4) The high price communicates the image of a superior product. f) Product Quality Leadership - A company might aim to be the product quality leader in the market. Maytags premium quality/premium price strategy has earned it a consistently higher than average rate of return in its industry.

12 | P a g e

g) Other pricing objectives - Non-profit and public organization may adopt a number of other pricing objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover the remaining costs. A non-profit hospital may aim for full cost recovery in its pricing. A non-profit theatre company may price its productions to fill the maximum number of theatre seats. A social service agency may set a social prices geared to the varying income situations of different clients

2. Analysing competitors Costs, Prices and Offers

Within the range of possible prices determined by market demand and cost, competitors costs, prices, and possible price reactions help the firm establish where to set its prices. The company needs to benchmark its costs against its competitors costs to learn whether it is operating at a cost advantage or disadvantage. The company also needs to learn the price and quality of the competitors offers. The firm can send out comparison shoppers to price and access competitors offers, acquire competitors price list, buy competitors equipments and take it apart, and ask buyers how they perceive the price and quality of each competitors offer. Once the company is aware of the competitors prices and offers, it can use them as an orienting point for its own pricing. If the firms offer is similar to major competitors offer, than the firm will have to price close to the competitor or lose sales. If the firms offer is inferior, the firm will not be able to charge more than the competitor. If the firms offer is superior, the firm can charge more than the competitor. The firm must be aware, however, that competitors might change their prices in response to the firms price.

3. Selecting a Pricing Method

Given the three Cs the customers demand schedule, the cost function, and competitors prices the company is now ready to select price. The price will be somewhere between one that is too low to produce a profit and one that is too high to produce enough demand. Figure summarizes the three major considerations in price settings. Costs set a floor to price competitors price and the prices of the substitutes provide an orienting point that the company has to consider in setting its price. Customers assessment of unique product features in the companys offer establish the ceiling price. Companies resolve the pricing issue by selecting a pricing method that includes one or more of these three considerations. The pricing method will then lead to specific price. We will examine the following price setting methods: mark-up pricing target return pricing, perceived value pricing, value pricing, going rate pricing, and sealed bid pricing. a) Mark-up Pricing - The most elementary pricing method is to add a standard mark-up to the products cost. Construction companies submit job bid by estimating the total project cost and adding the standard mark-up profit. Lawyers, accountants and other professionals typically price by adding a standard mark-up to their costs. Some sellers tell their customers they will charge their cost plus specified mark-up; for example aerospace price this way to government. Mark-up pricing remains popular for a number of reasons. First sellers can 13 | P a g e

determine costs much more easily then they can estimate demand. By tying the price to cost, sellers simplify their pricing task. Second, where all firms in the industry use this pricing method, their prices tend to be similar. Price competition is therefore minimized, which would not be the case if firms paid attention to demand variation when they priced. Third, many people feel that costs-plus pricing is fairer to both buyers and sellers. Sellers do not take advantage of the buyers when latters demand becomes acute, and the sellers earn a fair return on their investments. b) Target Return Pricing - Another cost pricing approach is target return pricing. The firm determines the price that would yield its target rate of return on investments (ROI). This pricing method is also used by public utilities, which need to make fair return on investments. c) Perceived Value Pricing - An increasing number of companies are basing their price on the products perceived value. They see buyers perception of value, not the sellers costs, as the key to pricing. They use non-price variables in the marketing mix to build up perceived value in buyers minds. Price is set to capture the perceived value. Perceived value pricing fits well with product positioning thinking. A company develops a product concept for a particular target market with a planned quality and price. The management estimates the volumes it hopes to sell at this price. The estimate indicates the needed plant capacity, investments, and unit costs. Management then figures out whether the product will yield a satisfactory profit at the planned price and cost. If the answer is yes the company goes ahead with product development. Otherwise, the company drops the idea. The key to perceived-value pricing is to accurately determine the markets perception of the offers value. Sellers with an inflated view of their offers value will overprice their product. Sellers with an underestimated view will charge less than they could. Market research is needed to establish the markets perception of vale as a guide to effect pricing. d) Value Pricing - In recent years, several companies have adopted value pricing in which they charge a fairly low price for a high-quality offering. Value pricing says that the price should represent a high value offer to consumers. Lexus is a good example because Toyota could have prices Lexus, given its extraordinary quality, much closer to the Mercedes price. Going-rate pricing is quite popular. Where costs are difficult to measure competitive response is uncertain, firms feel that the going price represents a good solution. The going price is thought to reflect the industrys collective wisdom to the price that would yield a fair return and not jeopardize industrial harmony. e) Sealed Bid Pricing - Competitive-oriented pricing is common when firms submit sealed bids for jobs. The firm bases its price on expectations of how competitors will price rather than on a rigid relation to the firms costs or demand. The firm wants to win the contract, and winning normally requires submitting a lower price than competitors. At the same time, the firm cannot set its price below cost without worsening position. 14 | P a g e

4. Selecting the final price

Pricing methods narrow the price range from which the company must select its final price. In selecting the final price, the company must consider additional factors including psychological pricing, the influence of other marketing-mix elements on price, company pricing policies, and the impact of price on other parties. a) Psychological Pricing - Sellers should consider the psychology prices in addition to their economics. b) The influence of other Marketing-Mix Elements on Price - The final price must take into account the brands quality and advertising relative to competition. 1. Brands with average relative quality but high relative advertising budgets were able to charge premium prices. Consumers apparently were willing to pay higher prices for known products than for unknown products. 2. Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low quality and low advertising charged the lowest prices. 3. The positive relationship between high prices and high advertising held most strongly in the later stages of the product life cycle, for market leaders, and for low-cost products. c) Companys pricing policies - The contemplated price must be consistent with company pricing policies. Many companies set up a pricing department to develop pricing policies and establish or approve pricing department to develop pricing policies and establish or approve pricing decisions. Their aim is to ensure that the salespeople quote prices that are reasonable to consumers and profitable to the company. d) Impact of price on other parties - Management must also consider the reactions of other parties to the contemplated price. How will the distributors and dealers feel about it? Will the company sales force be willing to sell at that price or complain that the price is too high? How will competitors react to this price? Will suppliers raise the prices of their inputs when they see the companys price? Will the government intervene and prevent this price from being charged?

Special Features
1. Price Discounts and Allowances Most companies will modify their basic price to reward customers for such acts as early payment, volume purchases and off-season buying. Descriptions of these price adjustments called discounts and allowances follow. Before we begin, however, a word of warning is in order. Many companies are so ready to grant discounts. Allowances, and special terms (e.g. co-op advertising, freight) to their dealers and customers that they may fail to realize how little profit may be left. Companies should measure the cost of granting each discount or allowance 15 | P a g e

against its impact on marking the sale. They should then establish better policies as to what should be granted to customers in bidding for their business. a) Cash Discount. A cash discount is a price reduction to buyers who promptly pay their bills. The discount must be granted to all buyers who meet these terms. Such discounts are customary in many industries and serve the purpose of improving the sellers liquidity and reducing credit-collection costs and bad debts. b) Quantity Discounts. A quantity discounts is a price reduction to buyers who buy large volumes. Under the law, quantity discounts must be offered equally to all customers and must not exceed the cost savings to the seller associated with selling large quantities. These savings include reduced expenses of selling, inventory and transportation. They can be offered on a non-cumulative basis (on each order placed) or a cumulative basis (on the number of units ordered over a given period). Discounts provide an incentive to the customer to order more from a given seller rather than buy from multiple sources. c) Functional Discounts. A functional discount (also called trade discounts) are offered by the manufacturer to trade channel members if they will perform certain functions, such as selling, storing and record keeping. Manufacturers may offer different functional discounts to different trade channels because of their varying functions, but under the law manufacturers must offer the same functional discounts within each trade channel. d) Seasonal Discounts. A seasonal discount is a price reduction to buyers who buy merchandise or service out of season. Seasonal discounts allow the seller maintain steadier production during the year. Ski manufacturers will offer seasonal discounts to retailers in the spring and summer to encourage early ordering. Hotels, motels and airlines will offer seasonal discounts in their slow selling periods. e) Allowances. Allowances are other types of reductions from the list price. For example, trades in allowances are price reductions granted for turning in an old item when buying a new one. Trade-in allowances are most common in the automobile industry and are also found in other durable-goods categories. Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs. f) Promotional Pricing. Companies use several pricing techniques to stimulate early purchase. International companies must research these promotional pricing tools and make sure that they are lawful in the particular countries in which they do business. Loss-leader pricing Special-event pricing Cash rebates Low-interest financing 16 | P a g e Longer payment terms Warranty and service contracts Psychological discounting.

2. Discriminatory Pricing Companies often modify their basic price to accommodate differences in customers, products, location, and so on. Discriminatory pricing (also called price discrimination) occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. Discriminatory pricing takes several forms: a) Customer-segment-pricing: different customer groups are charged different prices for the same product or service, for example, museum often charge a lower admission fee to students and senior citizens. b) Product-form pricing: Different versions of the product are priced differently but not proportionately to their respective costs. c) Image pricing: some company price the same product at two different levels based on image differences. d) Location pricing: the same product is priced differently at different locations even though the cost of offering at each location is the same. e) Time pricing: Prices are varied by season, day or hour. Public utilities vary their energy rates to commercial users by time of day and weekend verses weekday. It costs more to make a long distance call during the week than it does on the weekend. A special form of time pricing is yield pricing, which is often used by hotels airlines to ensure high occupancy. To ensure that all its berths are full, for example a cruise ship may lower the price of the cruise two days before setting sail. For price discrimination to work, certain conditions must exist. First, the market must be segment able, and the segments must show different intensities of demand. Second, Members of the lowerprice segment must not be able to resell the product to the higher segment. Third, competitors must not be able to undersell the firm in the higher-price segment. Fourth, the cost of segmenting and policing the market must not exceed the extra revenue derived from price discrimination. Fifth, the practice must not breed customer resentment and ill will. Sixth, the particular form of price discrimination must not be illegal. As a result of deregulation in several industries, companies have increased their use of discriminatory pricing. Airlines, for example, charge different fares to passengers on the same flight depending on the seating class; the time of day (morning or night coach); the day of the week (workday or weekend); the season; the persons company, past business, or status (youth, military, senior citizen); and so on. This system, called yield management, is an exercise inn trying to realize as much realize as much revenue as possible in filling the planes seats.

17 | P a g e

3. Responding to competitors price changes How should a firm respond to a price change initiated by a competitor? In markets characterized by high product homogeneity, the firm has little choice but to meet a competitors price cut. The firm should search for ways to enhance its augmented product, but if it cannot find any, it will have to meet the price reduction. (It will certainly lose market share if it does not, because people are not going to pay a higher price for what is essentially the same product as a lower price version) When a competitor raises its price in the homogeneous product market, the other firm might not match it. They will comply if the price increase will benefit the industry as a whole. But if one firm does not think that it or the industry would gain, its non-compliance can make the leader (and the others who followed) rescind the price increases. In non-homogeneous product markets, a firm has more latitude in reacting to a competitors price change. Buyers chose the vendor on many considerations: service, quality, reliability, and other factors. These factors desensitise buyers to minor price differences. Before reacting, the firm needs to consider the following issues: (1) why did the competitors change the price? Is it to steal the market, to utilize the excess capacity, to meet changing cost conditions, or to lead an industry-wise price change? (2) Does the competitor plan to make the price change temporary or permanent? (3) What will happen to the companys market share and profits if it does not respond? Are other companies going to respond also? And (4) what are the competitors and other firms responses likely to be to each possible reaction? Market leaders frequently face aggressive price-cutting by smaller firms trying to build market share. Maintains Price: The leader might maintain its price and profit margin, believing that (a) it would lose too much profit if it reduced price, (b) it would not lose much market share, and (c) it would regain market share when necessary. The leader believes that it could hold on to good customers, giving up the poorer ones to the competitor. The argument against price maintenance is that the attacker gets more confident as its sales increase, the leaders sales force get demoralized, and the leader loses more share than expected. The leader panics, lowers price to regain share, and finds that regaining its market position is more difficult and costly than expected. Raised Perceived Quality: The leader could maintain price but strengthen the value of its offer. It could improve its product services and communications. It could stress the relative quality of its product over that of the low price competitor. The firm may find it cheaper to maintain price and spend money to improve its perceived quality than to cut price and operate a lower margin. Reduce Price: The leader might drop its price to the competitors price. It might do so because (a) its costs fall with volume, (b) it would lose market share because the market is price sensitive, and (c) it would be hard to rebuild the market share once it is lost. This action will cut profits in the short run. In response to the leaders price cut, some firms will reduce their product quality, services, and marketing communications to maintain profits, but this 18 | P a g e

will ultimately hurt their long run market share. The leader should try to maintain its quality as it cuts prices. Increase price and improve quality: The leader might raise its price and introduce new brands to bracket the attacking brand.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4. ADVERTISING STRATEGIES

Advertising is described as one of the most common tools companies use to direct persuasive communications to target buyers and publics Advertising could be defined as Advertising is any paid form of non personal presentation and promotion of ideas, goods, and services by an identified sponsor. Advertisers include not only business firms but also museums, charitable organizations and government agencies that advertise to various target publics. Ads are a cost effective way to disseminate messages, whether to build brand preference for Coco Cola or to educate a nations people to avoid hard drugs. In developing an advertising program, marketing managers must always start by identifying the target market and buyer motives. Then they can proceed to make the five major decisions in developing an advertising program knows as the 5 M` s. Mission Money Message Media Measurement : What are the advertising objectives? : How much can be send? : What message should be send? : What media should be used? : How should the results be evaluated

1. SETTING THE MARKETING OBJECTIVES

The first step in developing an advertising program is to set the advertising objectives. These objectives must flow from prior decision on target market, market positioning and marketing mix. The market positioning and marketing mix strategies define the job that advertising must do in the total marketing program. a) Informative advertising Figures heavily in the pioneering stage of a product category, where the objective is to build primary demand. Thus the Yogurt industry initially had to inform consumers of yogurt nutritional benefits and many uses. 19 | P a g e

b) Persuasive Advertising becomes important in the competitive stage, where a companys objective is to build selective demand for a particular product, most advertisings fall under this category. Some persuasive advertising has moved into the category of comparative advertising, which seeks to establish the superiority of one brand through specific comparison of one or more attributes with one or more brands in the product class. Comparative advertising has been used in such product categories as deodorants, fast food, toothpaste, tyres and automobiles. c) Reminder advertising Is highly important with mature products. Expensive four colour Coco-Cola ads in magazines have the purpose not of informing or persuading of reminding people to purchase Coco-Cola. A related form of advertising is reinforcement advertising which seeks to assure current purchasers that they have made the right choice. Automobile ads often depicts satisfied customers enjoying special features of their new car The choice of advertising objective should be based on thorough analysis of current marketing situation. For e.g. , if the product class is mature, the company is the market leader, and the brand usage is low, the proper objective would be to stimulate more brand usage. If the product class is new the company is not the market leader but the brand is superior to the leader, then proper objective is to convince the market of the brands superiority

2. DECIDING ON THE ADVERTISING BUDGET

After determining the advertising objectives the companys can proceed to establish its advertising budget to each product. The role of advertising is to increased demand for the product. The company wants to spend the amount require to achieve the sales goal, but how does a company know if it is spending the right amount? If the company spends too little, the effect will be insignificant. If the company spends too much on advertising, then some of the money could have been put to better use. There are 5 specific factors to consider when setting the advertising budget a) Stages in product life cycle - New products typically receive large advertising budget to build awareness and to gain consumer trial. Established brands usually are supported with lower advertising budgets as a ratio to sales. b) Market share and consumer base - High market share brands usually require less advertising expenditure as a percentage of sales to maintain their share. To build share by increasing market size requires larger advertising expenditures. Additionally on a cost per impression basis it is less expensive to reach consumers of a widely used brand than to reach consumer of low share brands. c) Competition and clutter - In a market with a large number of competitors and high advertising spending, a brand needs to advertise more heavily to be heard above the noise 20 | P a g e

in the market. Even simple clutter from advertisements not directly competitive to the brand creates a need for heavier advertising. d) Advertising Frequency - The number of repetitions needs to be put across the brands message to consumers has an important impact on the advertising budget. e) Product substitutability - Brands in a commodity class (e.g. Cigarettes, Beer, and Soft drinks) require heavy advertising to establish a different image. Advertising is also important when a brand can offer unique physical benefits or features.

3. CHOOSING THE ADVERTISING MESSAGE

Advertising campaigns differ in their creativity. As William Bernach observed, The facts are not enough....Dont forget that Shakespeare used some pretty hackneyed plots, yet his message came through with great execution. Clearly, the effect of the creativity factor in a campaign can be more important than the number of dollars spend. Only after gaining attention can a commercial help to increase the brands sales. The advertising adage is Until its compelling, it isnt selling. However, a warning is in order. All the creative advertising in the world cannot boost market share for a flawed product. Advertisers go through four steps to develop a creative strategy: Message generation, message evaluation and selection, message execution and message social responsibility review. a) Message Generation - In principal, the products message the major benefits the brand offer should be decided as a part of developing the product concept. Yet even within this concept there may be latitude for a number of possible messages. And overtime, the marketer might want to change the message without changing the product, especially if consumers are seeking new or different benefits from the product. Creative people use several methods to generate possible advertising appeals. Many creative people proceed inductively by talking to consumers, dealers, experts and competitors. Consumers are the major source of good ideas. Their feelings about the strengths and short comings of existing brands provide important clues to create strategy. b) Message evaluation and selection - The advertiser needs to evaluate the alternative messages. A good add normally focuses on one core selling proposition. Twedt suggested that messages be rated on desirability, exclusiveness and believability. The message must first say something desirable or interesting about the product. The message must also say something exclusive or distinctive that does not apply to every brand in the produce category. Finally the message must be believable or provable. The advertiser should conduct market analysis and research to determine which appeal is most likely to succeed with its target audience

21 | P a g e

c) Message Execution - The message impact depends not only upon what is said but also on how it is said. Some ads aim for rational positioning and others for emotional positioning. Message execution can be decisive for products that are highly similar, such as detergents, cigarettes, coffee & vodka. In preparing an ad campaign, the advertiser usually prepares a copy strategy statement of describing the objective, content support and tone of the desired ad. Creative people must also find a style, tone, words and format for executing the message

4. DECIDING ON THE MEDIA

After choosing the advertising message the advertisers next task is to choose the advertising media to carry. The steps here are deciding on desired reach, frequency and impact, choosing among major media types, selecting specific media vehicles, deciding on media timing and deciding on geographical media allocation a) Deciding on reach, frequency and impact media selection involves finding the most cost effective media to deliver the desired number of exposures to the target audience Research (R): The number of different persons or households exposed to a particular media scheduled at least once during a specified time period Frequency (F): The number of times within the specified time period that an average person or the household is exposed to the message Impact (I): The qualitative value of exposure through a given medium

b) Choosing among major media types - The media planner has to know the capacity of the major media types to deliver reach, frequency and impact. Media planners make their choice among these media categories by considering several variables, the most important of these are the following Target Audience Media Habits Product Message Cost

c) Selecting specific media vehicles - The media planner must next search for the most cost effective media vehicles within each chosen media type. The media planner relies on media measurement services that provide estimates of audience size, composition and media cost. Audience size has several possible measures Circulation - The number of physical units carrying the advertising 22 | P a g e

Audience - The number of people who are exposed to the vehicle. (If the vehicle has passed on readership, then the audience is larger than circulation) Effective audience - The number of people with the largest audience characteristics who are exposed to the vehicle Effective ad-exposed audience - The number of people with the target audience characteristics who actually saw the ad.

5. EVALUATING ADVERTISING EFFECTIVENESS

Good planning and control of Advertising depends critically on measures of advertising effectiveness yet the amount of fundamental research on advertising effectiveness is appallingly small. Most measurement of advertising effectiveness is of an applied nature, dealing with its specific ads and campaigns. Most of the money is spend by the agency on pre testing ads, in much less is spend on post evaluating their effects. Many companies develop an advertising campaign, put it into the national market and then evaluate its effectiveness. It would be better to limit the campaign to one or a few cities first and evaluate its impact before rolling a campaign throughout the country with a very large budget. One company tested its new campaign first in phoenix. The campaign bombed and the company saved all the money that it would have going national. Most advertisers try to measure the communication effect of an ad i.e., its potential effect on awareness, knowledge or preference. They would also like to measure the ads sales effect but often feel it is too difficult to measure. Yet both can and should be researched.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------5. DISTRIBUTION STRATEGIES

Distribution strategies are concerned with the channels a firm may employ to make its goods and services available to customers. Channels are organized structures of buyers and sellers that bridge the gap of time and space between the manufacturer and the customer.

Channel-Structure Strategy
The channel-structure strategy refers to the number of intermediaries that may be employed in moving goods from manufacturers to customers. A company may undertake to distribute its goods to customers or retailers without involving any intermediary. This strategy constitutes the shortest channel and may be labelled a direct distribution strategy. Alternatively, goods may pass through one or more intermediaries, such as wholesalers or agents. This is an indirect distribution strategy. The diagram shows alternative channel structures for consumer and industrial products.

23 | P a g e

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

Manufacturers

Agent or Broker

Agent or Broker

Wholesaler

Wholesaler

Retailer

Retailer

Retailer

Retailer

Household Consumers (a) Consumer Products

Manufacturers

Agent or Broker

Agent or Broker

Industrial Distributor

Industrial Distributor

Business Customers (b) Industrial Products 24 | P a g e

Postponement-Speculation Theory
Conceptually, the selection of channel structure may be explained with reference to Bucklins postponement-speculation framework. The framework is based on risk, uncertainty, and costs involved in facilitating exchanges. Postponement seeks to eliminate risk by matching production/distribution with actual customer demand. Presumably, postponement should produce efficiency in marketing channels. For example, the manufacturer may produce and ship goods only on confirmed orders. Speculation, on the other hand, requires undertaking risk through changes in form and movement of goods within channels. Speculation leads to economies of scale in manufacturing, reduces costs of frequent ordering and eliminates opportunity cost.

Additional Consideration in Determining Channel Structure

A variety of environmental influences on channel-structure strategy formulation. These influences may be technological, social and ethical, governmental, geographical, or cultural. Many aspects of channel structure are affected by technological advances. For example, mass retailing in food has become feasible because of the development of automobiles, highways, refrigerated cars, cash registers, packaging improvements, and mass communications (television). In the coming years, television shopping with household computer terminals should have a farreaching impact on distribution structures. Social taboos and ethical standards may also affect the channel-structure decision. For example, Mallen reports that Viva, a womans magazine, had achieved a high circulation in supermarkets and drugstores in Canada. When Viva responded to readers insistence and to competition from Playgirl by introducing nude male photos, most supermarkets banned the magazine. Because supermarkets accounted for more than half of Vivas circulation, Viva dropped the photos so that it could continue to be sold through this channel. The channel-structure strategy can also be influenced by local, state, and federal laws in a variety of ways. Geographic size, population patterns, and typology also influence the channel-structure strategy. In urban areas, direct distribution to large retailers may make sense. Rural areas, however, may be covered only by wholesalers. Finally, cultural traits may require the adoption of a certain channel structure in a setting that otherwise might seem an odd place for it.

Channel Design Model

The model involves six basic steps: 1. List the factors that could potentially influence the direct/indirect decision. Each factor must be evaluated carefully in terms of the firms industry position and competitive strategy. 25 | P a g e

2. Pick out the factors that will have the most impact on the channel design decision. No factor with a dominant impact should be left out. For example, assume that the following four factors have been identified as having particular significance; market concentration, customer service level, asset specificity, and availability of working capital. 3. Decide how each factor identified is related to the attractiveness of a direct or an indirect channel. For example, market concentration reflects the size distribution of the firms customers as well as their geographical dispersion. Therefore, the more concentrated the market, the more desirable the direct channel because of the lower costs of serving that market (high = direct; low = indirect). Customer service level is made up of at least three factors: delivery time, lot size, and product availability. The more customer service required by customers, the less desirable is the direct channel (high = indirect; low = direct). The direct channel is more desirable, at least under conditions of high uncertainty in the environment, with a high level of asset specificity (high = direct; low = indirect). Finally, the greater the availability of working capital, the more likely it is that a manufacturer can afford and consider a direct channel (high = direct; low = indirect). Note that a high level on a factor does not always correspond to a direct channel. 4. Create a matrix based on the key factors to consider the interactions among key factors. If only two factors are being considered, a two-by-two matrix of four cells would result. For three factors, a three-by-three matrix of nine cells would result. 5. Decide (for each cell in the matrix) whether a direct channel, an indirect channel or a combination of both a direct and an indirect channel is most appropriate, considering the factors involved. Combination channels are becoming more common in business practice, especially in industrial markets. 6. For each product or service in question, locate the corresponding cell in the box model. The prediction in this cell is the one that should be followed or at least the one that should be most seriously considered by the firm.

Distribution-Scope Strategy Exclusive Distribution

Exclusive distribution means that one particular retailer serving a given area is granted sole rights to carry a product. For example, Coach Leather goods are distributed exclusively through select stores in an area. Several advantages may be gained by the use of exclusive distribution. It promotes tremendous dealer loyalty, greater sales support, a higher degree of control over the retail market, better forecasting, and better inventory and merchandising control. The impact of dealer loyalty can be helpful when a manufacturer has seasonal or other kinds of fluctuating sales. An exclusive dealership is more willing to finance inventories and thus bear a higher degree of risk than a more extensive dealership. Having a smaller number of dealers gives a manufacturer or wholesaler greater opportunity to provide each dealer with promotional support. And with fewer outlets, it is easier to control such aspects as margin, price, and inventory. Dealers are also more 26 | P a g e

willing to provide data that may be used for marketing research and forecasts. Exclusive distribution is especially relevant for products that customers seek out. Examples of such products include Rolex watches, Gucci bags, Regal shoes, Celine neckties, and Mark Cross wallets. On the other hand, there are several obvious disadvantages to exclusive distribution. First, sales volume may be lost. Second, the manufacturer places all its fortunes in a geographic area in the hands of one dealer. Exclusive distribution brings with it the characteristics of high price, high margin, and low volume. If the product is highly price elastic in nature, this combination of characteristics can mean significantly less than optimal performance. Relying on one retailer can mean that if sales are depressed for any reason, the retailer is then likely to be in a position to dictate terms to other channel members (i.e. the retailer becomes the channel captain).

Intensive Distribution
The inverse of exclusive distribution is intensive distribution. Intensive distribution makes product available at all possible retail outlets. The distribution of convenience goods is most consistent with this strategy. If the nature of a product is such that a consumer generally does not bother to seek out the product but will buy it on sight if available, then it is to the sellers advantage to have the product visible in as many places as possible. There are two main disadvantages associated with intensive distribution. First, intensively distributed goods are characteristically low-priced and low-margin products that require a fast turnover. Second, it is difficult to provide any degree of control over a large number of retailers. In the short run, uncontrolled distribution may not pose any problem if the intensive distribution leads to increased sales. In the long run, however, it may have a variety of devastating effects. For example, if durable products such as Sony television sets were to be intensively distributed (i.e., through drugstores, discount stores, variety stores, etc.), Sonys sales would probably increase. But such intensive distribution could lead to the problems of price discounting, inadequate customer service, and non-cooperation among traditional channels (e.g., department stores). The manufacturer might also lose some of its established channels. Brand image could suffer. It is because of the problems outlined above that one finds intensive distribution limited to such products as candy, newspapers, cigarettes, aspirin, and soft drinks. For these types of products, turnover is usually high and channel control is usually not as strategic as it would be, say, for television sets.

Selective Distribution
Between exclusive and intensive distribution, there is selective distribution. Selective distribution is the strategy in which several but not all retail outlets in a given area distribute a product. Shopping goods goods that consumers seek on the basis of the most attractive price or quality characteristics are frequently distributed through selective distribution. Because of this, competition among retailers is far greater for shopping goods than for convenience goods. Naturally, retailers wish to reduce competition as much as possible. This causes them to pressure manufacturers to reduce the number of retail outlets in their area distributing a given product in order to reduce competition. 27 | P a g e

The number of retailers under a selective distribution strategy should be limited by criteria that allow the manufacturer to choose only those retailers who will make contribution to the firms overall distribution objectives. For example, some firms may choose retail outlets that can provide acceptable repair and maintenance service to consumers who purchase their products. In the automotive industry, selective criteria are used by manufacturers in granting dealerships. This criterion consists of such considerations as showroom space, service facilities, and inventory levels. Obviously, the greatest danger associated with a strategy of selective distribution is the risk of not adequately covering the market. The consequences of this error are greater than the consequences of initially having one or two extra dealers. Therefore, when in doubt, it is better to have too much coverage than not enough.

Multiple-Channel Strategy
The multiple-channel strategy refers to a situation in which two or more different channels are employed to distribute goods and services.

Complementary Channels
Complementary channels exist when each channel handles a different non-competing product or non-competing market segment. An important reason to promote complementary channels is to reach market segments that cannot otherwise be served. Samsonite Corporation sells the same type of luggage to discount stores that it distributes through department stores, with some cosmetic changes in design. In this way the company is able to reach middle and low-income segments that may never shop for luggage in department stores. Selection of Suitable Distribution Policies \based on the Relationship between Type of Product and Type of Store

Classification

Consumer Behaviour

Most Likely Form of Distribution

Convenience store/ convenience good

Consumer prefers to buy the most readily available brand of a product at the most accessible store.

Intensive

Convenience store/ Shopping good

Customer selects his or her purchase from among the assortment carried by the most accessible store.

Intensive

Convenience store/ Specialty good

Consumer purchases his or her favourite brand from the most accessible store carrying the item in stock.

Selective/ Exclusive

28 | P a g e

Shopping store/ Convenience good

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

Intensive

Shopping store/ Shopping good

Customer makes comparisons among both retail controlled factors and factors associated with the product (brand).

Intensive

Shopping Store / Specialty good

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

Selective / Exclusive

Specialty store / Convenience good

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

Selective / Exclusive

Specialty store / Shopping good

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

Selective / Exclusive

There is another reason that may lead a manufacturer to choose this strategy. In instances where other firms in an industry have saturated traditional distribution channels for a product, a new entry may be distributed though a different channel. This new channel may then in turn be different from the traditional channel used for the rest of the manufacturers product line. A company may also develop complementary channels to broaden the market. To broaden their markets in recent years, many clothing manufacturer including Ralph Lauren, Liz Caliborne, Calvin Klein, Anne Klein, and Adrienne Vittadini, have opened their own stores to sell a full array of their clothes and accessories. Again, to broaden the market, brand-name fast-food companies, Pizza Hut, Subway Sandwiches, Salads Kiosk, and others, have started selling their products in public school cafeterias. Complementary channels may also be necessitated by geography. Another reason to promote complementary channels is to enhance the distribution of noncompeting items. For example, many foods processors package fruits and vegetable for institutional customers in giant cans that have little market among household customers. These products, therefore, distributed through different channels. The basis for employed complementary channels is to enlist customers and segments that cannot be served when distribution is limited to a single channel. Thus, the addition of a complementary channel may be the result of simple cost-benefit analysis. 29 | P a g e

Competitive Channels
Competitive channels exist when the same product is sold through two different and competing channels. Two franchises could be issued to the same dealer, but they are normally issued to separate dealers. Competition between dealers holding separate franchises is both possible and encouraged. The two dealers compete against each other to the extent that their products satisfy similar consumer needs in the same segment. The reason for choosing this competitive strategy is the hope that it will increase sales. It is thought that if dealers must compete against themselves as well as against other manufacturers dealers, the extra effort will benefit overall sales. The effectiveness of this strategy is debatable. It could be argued that a program using different incentives, such as special discounts for attaining certain levels of sales could be just as effective as this type of competition. It could be even more effective because the company would eliminate costs associated with developing additional channels. One of the dangers involved in setting up multiple channels is dealer resentment. This is particularly true when competitive channels are established. When this happens, it obviously means that an otherwise exclusive retailer will now suffer a loss in sales. Such a policy result in the retailer electing to carry a different manufacturers product line, if a comparable product line is available.

Channel Modification Strategy

A producer must periodically review and modify its channel arrangements. Modification becomes necessary when the distribution channel is not working as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channel emerge, and the product moves into later stage in the product life cycle. Channel Value Added and Market Growth Rate

Value Added by the Channel

High Low

Market Growth Rate

Low

1. Introductory PCs: hobbyist stores Designer apparel: boutiques 2. Growing PCs: specialty retailers Designer apparel: Better department stores

4. Declining PCs: mail order Designer apparel: Off-price stores 3. Mature PCs: mass merchandisers Designer apparel: Mass merchandisers

High

30 | P a g e

No marketing channel will remain effective over the whole product life cycle. Early buyers might be willing to pay for high value-added channels, but later buyers will switch to lower-cost channels. Small office copiers were first sold by manufacturers direct sales forces, later through office equipment dealers, still later through mass-merchandisers, and now by mail-order firms and internet marketers. Miland Lele developed the grid above to show how marketing channels have changed for PCs and designer apparel at different stages in the product life cycle: Introductory stage - Radically new products or fashions tend to enter the market through specialist channels (such as boutiques) that spot trends and attract early adopters. Rapid growth stage - As interest grows, higher-volume channels appear (dedicated chains, department stores) that offer services but not as many as the previous channels. Maturity stage - As growth slows, some competitors move their product into lower-cost channels (mass-merchandisers). Decline stage - As decline begins, even lower-cost channels emerge (mail-order houses, offprice discounters).

In competitive markets with low entry barriers, the optimal channel structure will inevitable change over time. The change could involve adding or dropping individual channel members, adding or dropping particular market channels, or developing a totally new way to sell goods. Adding or dropping individual channel members requires an incremental analysis. What would the firms profits look like with and without this intermediary? An automobile manufacturers decision to drop a dealer requires subtracting the dealers sales and estimating the possible sales loss or gain to the manufacturers other dealers.

Channel Control Importance of Channel Control

For a variety of reasons, control is a necessary ingredient in running a successful system. Having control is likely to have a positive impact on profits because inefficiencies are caught and corrected in time.

Channel Controller
The focus of channel control may be on any member of a channel system: the manufacturer, wholesaler, or retailer. Unfortunately, there is no established theory to indicate whether any one of them makes a better channel controller than the others. For example, one appliance retailer in Philadelphia with a 10 percent market share, Silo Incorporated, served as the channel controller there. This firm has no special relationship with any manufacturer, but if a suppliers line did not do well, Silo immediately contacted the supplier to ask that something be done about it. Wal-Mart (in 31 | P a g e

addition to Kmart and Target) can be expected to be the channel controller for a variety of products. Among manufacturers, Kraft ought to be the channel controller for refrigerated goods in supermarkets. These examples underscore the importance of someone taking over channel leadership in order to establish control. Conventionally, market leadership and the size of a firm determine its suitability for channel control. Strategically, the firm should attempt to control the channel for a product if it can make a commitment to fulfil its leadership obligations and if such a move is likely to be economically beneficial in the long run for the entire channel system.

Vertical Marketing Systems

The vertical marketing system is an emerging trend in the American economy. It seems to be replacing all conventional marketing channels as the mainstay of distribution. As a matter of fact, according to one estimate, vertical marketing systems in the consumer goods sector account for about 70 to 80 percent of the available market. In brief, vertical marketing systems (sometimes also referred to as centrally coordinated systems) have emerged as the dominant ingredient in the competitive process and thus play a strategic role in the formulation of distribution strategy. Vertical marketing systems may be classified into three types: corporate, administered, and contractual. Under the corporate vertical marketing system, successive stages of production and distribution are owned by a single entity. This is achieved through forward and backward integration. In an administered vertical marketing system, a dominant firm within the channel system, such as the manufacturer, wholesaler, or retailer, coordinates the flow of goods by virtue of its market power. For example, the firm may exert influence to achieve economies in transportation, order procession, warehousing, advertising, or merchandising. As can be expected, it is large organizations like Wal-Mart, Safeway, J.C. Penney, General Motors, Kraft, GE, Procter & Gamble, and Lever Brothers. In a contractual vertical marketing system, independent firms within the channel structure integrate their programs on a contractual basis to realize economies and market impact. Primarily, there are three types of contractual vertical marketing systems: wholesaler-sponsored voluntary groups, retailer-sponsored cooperative groups, and franchise systems. At the initiative of the wholesaler, small grocery stores agree to form a chain to achieve economies with which to compete against corporate chains. The joining members agree to adhere to a variety of contractual terms, such as the use of a common name, to help realize economies on large order. Except for these terms, each store continues to operate independently. A retailer-sponsored cooperative group is essentially the same. A franchise system is an arrangement whereby a firm licenses others to market a product or service using its trade name in a defined geographic area under specified terms and conditions.

32 | P a g e

Types of Conflict and Competition

Suppose a manufacturer sets up a vertical channel consisting of wholesalers and retailers. The manufacturer hopes for channel cooperation that will produce greater profits for each channel member. Yet vertical, horizontal, and multi-channel conflict can occur. Vertical channel conflict means conflict between different levels within the same channel General Motors came into conflict with its dealers in trying to enforce policies on service pricing, and advertising. Coca-Cola came into conflict with bottlers who also agreed to bottle Dr. Pepper. Horizontal channel conflict involves conflict between members at the same level within the channel. Multi-channel conflict exists when the manufacturer has established two or more channels that sell to the same market.

Managing Channel Conflict

Some channel conflict can be constructive and lead to more dynamic adaptation to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better. There are several mechanisms for effective conflict management. One is the adoption of superordinate goals. Channel members come to an agreement on the fundamental goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction. They usually do this when the channel faces an outside threat, such as a more efficient competing channel, an adverse piece of legislation, or a shift in consumer desires. A useful step is to exchange persons between two or more channel levels. General Motors executives might agree to work for short time in some dealerships, and some dealership owners might work in GMs dealer policy department. Hopefully, the participants will grow to appreciate the others point of view. Co-optation is an effort by one organization to win the support of the leaders of another organization by including them in advisory councils, boards of directors, and the like. As long as the initiating organization treats the leaders seriously and listens to their opinions, co-optation can reduce conflict, but the initiating organization may have to compromise its policies and plans to win their support. Much can be accomplished by encouraging joint membership in and between trade associations. For example, there is good cooperation between the Grocery manufacturers of America and the Food Marketing Institute, which represents most of the food chains; this cooperation led to the development of the Universal Product Code (UPC). Presumably, the associations can consider issues between food manufacturers and retailers and resolve them in an orderly way.

33 | P a g e

When conflict in chronic or acute, the parties may have to resort to diplomacy, mediation, or arbitration. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation means resorting to a neutral third party who is skilled in conciliating the two parties interest. Arbitration occurs when the two parties agree to present their arguments to one or more arbitrators and accept the arbitration decision. Sometimes, when none of these methods proved effective, a company or a channel partner may choose to file a lawsuit.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------6. NEW PRODUCT DEVELOPMENT

It generally happens that many times customers and suppliers perceptions of the degree of the product / market innovations do not match. One of them may view the innovation as a breakthrough, but the other may view it only as an incremental improvement of an existing solution. Such a mismatch will inevitably lead to faulty commercialisation. But even if the match is perfect, breakthroughs and incremental new products require quite different new development processes to enable commercial success. It is widely acknowledged that a constant supply of new products and their successful commercialisation are key to a firms survival. But studies by Booz, Allen and others have found out that after all the time; effort and money spent in screening and developing new products, 50 to 67% of them fail in the commercialisation process. So why do so many new products fail? In some cases, the product development process is flawed to start with. In others, the product concept is very poorly backed up by market research. In some others, the launch process and its execution are at fault. In any case, the failure statistic highlights the need for close management attention to the new product development and commercialisation process. Various remedies have been offered for streamlining and improving the NPD process. The concept of creating a team consisting of members from different positions is probably the singly most accepted concept in accelerating NPD. Such a team is able to solve potential problems early in the development cycle and engender commitment more easily from all of the involved functions. The need for a product champion or a product manager to coordinate the team has also been highly recommended. The whole idea is to move the project along its various phases as smoothly and efficiently as possible as shown in the figure below which gives us the various stages of new product development process.

34 | P a g e

Idea generation (Is the idea worth considering?)

Concept developmen t and testing (Can we find a good concept for the product that consumers say they would try?)

Business analysis (Will this product meet our profit goal?)

Market testing (Have product sales met our expectations?)

Yes

Yes
Product development (Have we developed a product that is sound technically and commercially ?)

Yes
Commercialisation (Are product sales meeting our expectations?)

Yes

Yes

Yes

Yes

Idea screening (Is the product idea compatible with company objectives, strategies and resources?

Marketing strategy development (Can we find a costeffective, affordable marketing strategy?)

N o

N o

Yes

Yes

Should we send back the idea for product development?

Would it help to modify our product or marketing program?

N o

N o

N o

N o

N o

N o

N o

N o

Drop the idea

New product development process

Thus a careful matching of the product development process to the type of product is required. The following figure suggests different processes for different product contents. Different levels of formal management sign-offs and checkpoints are appropriate for the different new product contexts.

35 | P a g e

High
Cash Programs

Most Challenging

Speed at which marketing window is closing. (Opportunity cost)

Low

100% Right

Low Degree of technical innovation required (Development Risk) Matching Development Process to Product type

High

We can see in this figure that when the development risks are high and the opportunity costs are low, it is not particularly advantageous to accelerate product development. Such a process could boost project expense and jeopardize product performance and cost. At the other extreme when the development risk is low and opportunity costs are high, it is absolutely important to speed up the process. Fortunately the risks of development failure are also low. The hardest process to manage is when the risks as well as the opportunity costs are high. While technology and cost considerations will necessitate a carefully staged process, market considerations demand speed.

New Product Taxonomies

Over the years many new product taxonomies have been offered. Products have been classified along various dimensions, such as newness to market, newness to company, extent of product change & extent of process change. But every one of these definitions assumes that the originator of the innovation and the customer are in complete agreement on the newness of the product or its breakthrough nature. But anecdotal evidence suggests that a significant number of new products fail precisely because suppliers and customers do not see eye to eye on what the product is supposed to do. Thus the new product development process has to start with the voice of the customer, and in this case the customers were seeking an incremental rather than a radical 36 | P a g e

innovation. They were not prepared for the next generation product. They did not see the need for it, nor were they willing to pay for it. Sir Ansoff has given some of the product strategies to us, which can be seen in chart below:

New markets

Market development

Diversification

Existing markets

Market penetration

Product Development

Existing products

New products

The categories of new products identified by Booz, Allen and Hamilton in terms of their newness to the company and to the market place are as follows:

High

New product lines (20%)

New to the world products (10%)

New to the company

Improvemen ts/ Revisions to existing products (26%) Cost reductions (11%)

Additions to existing product lines (26%)

Repositioning (7%)

Low

Low

High

New to the market

37 | P a g e

New to the world products: New products that create an entirely new market. New product lines: New products that allow a company to enter an established market for the first time. Additions to existing product lines: New products that supplement a companys established product lines. Improvements: New products that provide improved performance or greater perceived value and replace existing products. Repositioning Existing products that are targeted to new markets or market segments Cost reductions: New products that provide similar performance at lower cost. Lets have a look at the various product changes and process changes:

Process changes
New core process
Next generation Upgrade Incremental

Product changes
New core product

Break Through

Next generation product

Platform

Addition to product family

Derivative

Add-ons and Enhancements

38 | P a g e

Breakthroughs and Incremental

In order to understand such supplier customer misperceptions lets have a look at this framework. On one axis we map the suppliers perception of the new product, and the customers on the other. This world is divided into breakthrough inventions and incremental innovations, knowing fully well that many intermediate positions are feasible. Breakthrough employs a new technology and creates a new market. Incremental innovations are continuations of existing methods or practices. Both supplier and customers have a clear customization of the product and what it can do. Existing products are sufficiently close substitutes. Lets have a look at this model:

Mismatch

Break Through
Breakthrough Suppliers Perception Increment Mismatch

Incremental Increment Customers Perception Breakthrough

When both the supplier and the customer view the new product context as a breakthrough or as incremental we have then the perfect match running from east to west. The mismatch is represented by the north- south axis. Breakthrough products require intensive technology and /or applications development. Customers are awed by the new products potential. It is often doubtful at this stage if a large number of customers really understand how the product usage characteristics will evolve. It is important to have a technology vision at this stage in anticipation of the market development. While a few opinion leader customers could share that vision, it would be futile to seek extensive customer opinion on product attributes and features because the product concept may appear too distant to be of immediate use. Therefore the input has to be obtained from a handful of customers. In contrast, customers will be able to play a major role in providing input for incremental products. Based on their own product-usage history, customers will have a precise definition of what improvements they need in the product. Because of their experiences in making the previous generation product, manufacturers will be able to fairly accurately estimate the technological and manufacturing changes required to serve the customers needs. Tools and techniques such as Quality function deployment and conjoint analysis are useful for new product development 39 | P a g e

activity. Performance at a price rather than performance alone becomes an important criterion. The voice of the distribution channel has to be factored into the product launch. The products design and pricing have to be sensitive to channels profit considerations.

Some of the mistakes committed in NPD processes

Lets have a look at this figure:

Technology voice

Customer voice

Breakthrough New products

Incremental New products

Marketing tasks
Visioning the market. Building and creating demand for the product.

Marketing tasks
Listening to the market. Effectively and efficiently addressing existing demand.

Nature of marketing tasks

Mistakes
Mistake no 1 - The most common mistake is the utter lack of sensitivity to the differences in the management tasks required of incremental versus breakthrough projects. There is an overwhelming tendency to treat them all-alike. It is important to realize that cross-functional 40 | P a g e

involvement is not a panacea to all NPD problems; what matters is the cross-functional involvement. For e.g. technical people who are thrilled with the breakthrough idea may be shortsighted with respect to its commercial feasibility. Therefore the moral of the story is that crossfunctional teams require people of appropriate cross-functional abilities. Mistake no 2 - This mistake is a tendency to assume that breakthrough projects equate with high profile activities needing resources and top-management support, and that incremental profits are less important and need only back-pocket support. This is untrue. The resource allocation decision has to be based on the long-term attractiveness of the project. Some breakthrough innovations may not have a large market potential to start with. On the other hand, many incremental innovations may require a major investment up front. Thus the nature of the project should not be confused with potential payoffs.

Delusion

Breakthrough Suppliers Perception Increment Shadow Breakthrough

Increment Customers Perception

Seller-Customer mismatch

Shadowed new products By shadowed, we do not mean that the products technical merit or the customers benefit is negligible, but that the products contribution in economic terms to the companys portfolio is relatively minor in the short run. These are the products that the companys engineers and R&D scientists discovered while pursuing other, more central projects. So these are the products, which are discovered in the shadow of more important activity. The fundamental reason for the failure of these products is that these products do not generate the same sense of urgency or focus that accompanies central new products. This is the crux of the problem. 41 | P a g e

Delusionary new products These represent the largest proportion of new product failures. These are the innovations where the suppliers of the technology have grandiose visions for the product, but their customers, often do not share the same euphoria.

Factors acting as a Hindrance for the NPD process

Successful new- product development is hindered by many factors: Shortage of important New-Product ideas in certain areas There may be few ways to improve some basic products such as steel, detergents etc. Fragmented markets Keen competition is leading to market fragmentation. Companies have to aim their new products at similar segments and this means lower sales and profits for each product. Social and Governmental constraints New products have to satisfy public criteria such as consumer safety and ecological compatibility. Government requirements have slowed down innovation e.g. drug industry and have complicated product design and advertising decisions in industries such as chemicals, automobiles, industrial equipment and toys. Costliness of the NPD process A Company typically has to generate many new product ideas in order to finish with a few good ones. The company has to face R&D, manufacturing and marketing costs. Faster development time Many competitors are likely to get the same idea at the same time and the victory often goes to the swiftest. Alert companies have to compress development time by using CAD and manufacturing techniques, joint partners early concept tests and advanced market planning. Japanese companies see the challenge as achieving better quality at a cheaper price at a faster speed than competitors. Capital shortage: Some companies with good ideas cannot raise the funds needed to research them. Shorter PLC: When a new product is successful, rivals are so quick to copy it that the new products life cycle is considerably shortened. Sony used to enjoy a three-yr. lead-time on its new 42 | P a g e

products before they were extensively copied by competitors. Now Matsushista and other competitors can copy the product within six months, hardly leaving enough time for Sony to recoup its investment.

Conclusions
The mismatches i.e. the shadows and delusions could be corrected by aligning them with Breakthroughs and Incremental. But it is important to drive the analysis at all times from the customers viewpoint. A proper alignment will not automatically lead to new product success. It requires a careful piloting through the various steps of NPD process. The nature of the NPD process and the composition of the teams and the nature of their tasks will have to carefully reflect the nature of new product. All this is hard work and creative work. But at least if the ideas are right and when accompanied by good execution the chances of success are maximized. On the other hand, if the alignment is mismatched, no amount of creativity and executional excellence can remedy a guaranteed failure.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------7. MARKETING CHALLENGERS STRATEGIES FOR MARKET LEADERS AND

MARKET LEADER STRATEGIES

Many industries contain one firm that is the acknowledged market leader. This firm has the largest market share in the relevant product market. The market leader firm usually leads the other firms in price changes, new product introduction, distribution coverage and promotional intensity, but a product innovation may come along and hurt the leader. The leader might spend conservatively whereas a challenger spends liberally. The leader should call for 3 actions: The firm must find ways to expand total market demand. The firm must protect its current market share through good defensive and offensive actions. The firm can try to increase its market share further, even if market size remains constant.

Expanding the total market

The dominant firm normally gains the most when the total market expands. If Americans increase their picture taking, Kodak stands to gain most because it sells over 80%of the countrys firm. In general the market leader should look for:

43 | P a g e

1) New users - Every product class has the potential of attracting buyers who are unaware of the product or who are resisting it because of price or lack of certain features. A company can search for new users among three groups: Those who might use it but do not (Market penetration strategy) Those who have never used it (New market segment strategy) Those who live elsewhere (Geographical-expansion strategy)

2) New uses - Markets can be expanded through discovering and promoting new uses for the product. In many cases, customers deserve credit for discovering new uses, for e.g.: Vaseline petroleum jelly started out as a lubricant in machine shops; Over the years users have reported many new uses for the product, including a skin ointment, a healing agent and a hair dressing. 3) More usage - A third market expansion strategy is to convince people to use more products per occasion.

Defending market share

While trying to expand total market size, the dominant firm must continuously defend its current business against rival attacks. The most constructive response is continuous innovation. The leader leads the product and customer services, distribution effectiveness and cost cutting. It keeps increasing to competitive strength and value to customers. The leader applies the military principles of the offensive. The best defense is a good offense. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatening areas and lessens their intensity. Any attack is likely to hurt profits.

A dominant firm can use the following 6 defense strategies

1) Position Defense - The basic defense is to build an impregnable fortification around ones territory. Coca-Cola today, in spite of selling nearly half of the soft drink of the world, has acquired fruit drink companies and diversified into desalinisation, equipment and plastics. Although defense is important leaders under attack would be foolish to put all their resources into only building fortification around their current product. 2) Flank defense - The market leader should also erect out ports to protect a weak front or possibly serve as an invasion base for counter attack. 3) Pre-emptive defense A more aggressive manoeuvre is to attack before the enemy starts its offense. A company can launch a pre-emptive defense in several ways. For e.g.: Guerrilla action.

44 | P a g e

4) Counter offensive defense - The leader cannot remain passive in the face of a competitors price cut, promotion blitz, product improvement or sales territory invasion. In a counter offensive the leader can meet the attacker, frontally or hit his flank or launch a Pincer Movement. An effective counter attack is to invade the attackers main territory so that it will have to pull back some troops to defend the territory. Another way is that the leader may try to crush a competitor by subsidizing lower price for the vulnerable product with revenue from its more profitable products or the leader may prevent customers from buying the competitor products by prematurely announcing that a product up gradation will be available. 5) Mobile Defense - In this the leader stretches its domain over new territories that can serve as future centres for defense and offense. It spreads through market broadening and market diversification. Market broadening involves the company in shifting its focus from the current product to the underlying generic needs. The company gets involve in R&D across the whole range of technology associated with that need. Market diversification into unrelated industries is other alternative. 6) Contraction defence (withdrawal strategy) - Planned contraction means giving up weaker territories and reassigning resources to stronger territories. It is a move to consolidate competitive strength in the market and concentrate mass at pivotal position.

MARKET CHALLENGER STRATEGIES

The firms that occupy 2nd, 3rd and lower ranks in an industry are often called runner-up or trailing firms, but there are many cases of market challengers that gained ground or even overtook the leader; for e.g. Toyota today produces more cars than General Motors. We will now examine the competitive attack strategies available to market challengers.

Defining the strategic objective and opponents:

It can attack the market leader: This is a high risk but potentially high pay off strategy and makes good sense if the leader is not serving the market well. It can attack firms of its own size that are not doing the job and are under financed. It can attack small local and regional firms.

Choosing a general attack strategy. It can be distinguished among the following 5 strategies:
1) Frontal attack - The attacker matches its opponents product advertising price and distribution. The principle of force says that the side with the greater manpower (resources) will win. An opponents army is strongest where it expects to be attacked; it is necessarily less secure in its flanks and rear. The major principle of offensive warfare is concentration of strength against weakness. 45 | P a g e

2) Flank attack - This attack can be directed along 2 strategic dimensions geographical and segmented. In geographical attack, the challenger spots areas where the opponent is under performing. The other flanking strategy is to serve uncovered market needs. Flank attacks make excellent marketing sense and are particularly attractive to a challenger with fewer resources than its opponents. Flank attacks are much more likely to be successful than frontal attacks. 3) Encirclement Manoeuvre - It is an attempt to capture or wide slice of the enemys territory through a blitz. It involves launching a good offensive on several fronts. Encirclement makes sense when the challenger commands superior resources and believes a swift encirclement will break the opponents will. 4) Bypass strategy - It means bypassing the enemy and attacking easier markets to broaden ones resource base. This strategy offers 3 lines of approach i.e. Diversification, New geographical markets, new technologies. 5) Guerrilla strategy - Military dogma holds that a continual stream of minor attacks usually creates more cumulative impact, disorganization and confusion in the enemy than a few major attacks. The guerrilla attacker chooses to attack small, isolated, weakly defended markets rather than major stronghold markets.

Choosing a specific attack strategy

1) Price discount - The challenger can offer a comparable product at a lower price by fulfilling 3 conditions: Must convince buyers that this product and service are comparable to the leader. Buyers must be price-sensitive. The market leader must refuse to cut its price in spite of the competitors attack.

2) Cheaper goods - The challenger can offer an average or low quality product at a much lower price. 3) Prestige goods - A market challenger can launch a higher quality product and charge a higher price then the leader. For e.g.: Mercedes. 4) Product proliferation - The challenger can attack the leader by launching a larger product variety, thus giving buyers more choice. 5) Product innovation 6) Improved Service 7) Distribution Innovation - A challenger might develop a new channel of distribution. 46 | P a g e

8) Manufacturing cost reduction 9) Intensive advertising promotion - Some challenges attack the leader by increasing expenditure on advertising and promotion.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------8. GENERIC STRATEGIES

We are already aware of the various competitive strategies, which play an important role in taking offensive or defensive actions to create a defendable position in an industry, to cope successfully with the five competitive forces: Potential entrants Bargaining power of suppliers Bargaining power of buyers Rivalry among existing firms Threat of substitutes And thereby yield a superior return on investment for the firm. Thus at the broadest level we can identify three internally consistent generic strategies (used singly or in combination) for creating a defendable position in the long run and outperforming competitors in an industry.

Three generic strategies

In coping with the five competitive forces, there are three potentially successful generic strategic approaches to outperform other firms in an industry: Overall cost leadership. Differentiation. Focus.

Sometimes the firm can pursue more than one approach as its primary target, though this is rarely possible. Effectively implementing any of these generic strategies usually requires total commitment and supporting organizational requirements that are diluted if there is more than one target. In some industries structure will mean that al, firms can earn high returns, whereas in others, success with one of the generic strategies may be necessary just to obtain acceptable returns.

47 | P a g e

Overall cost leadership

This is the first strategy mostly common in the 1970s because of popularization of the experience curve concept to achieve overall cost leadership in an industry through a set of functional policies aimed at this basic objective. Cost leadership requires: Aggressive construction of efficient scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in areas like R & D, sales force and advertising

Having a low cost position yields the firm above average returns in its industry despite the presence of strong competitive forces. Low cost position gives the firm a defense against rivalry from competitors, because its lower costs mean that it can still earn returns after its competitors have completed away their profits through rivalry. A low cost position defends the firm against powerful buyers because buyers can exert power only to drive down prices to the level of the next most efficient competitor. Low cost provides a defense against powerful suppliers by providing more flexibility to cope with input cost increases. The factors that lead to low cost position usually also provide substantial entry barriers in terms of scale economies or cost advantages. Finally a low cost position places a firm in a favourable position vis--vis substitutes relative to its competitors in the industry.

Thus a low cost position protects the firm against all the five competitive forces because bargaining can only continue to erode profits until those of the next most efficient competitor are eliminated and because the less efficient competitors will suffer first in the face of competitive forces. Achieving a low overall cost position often requires a high relative market share or other advantages such as favourable access to raw materials. It may well require designing products for ease in manufacturing, maintaining a wide line of related products to spread costs, and serving all major customer groups in order to build volume. In turn, implementing the low cost strategy may require heavy front up capital investment in the state of art equipment, aggressive pricing and start up losses to build up market share. High market share may in turn allow economies in 48 | P a g e

purchasing which lower costs even further. Once achieved the low cost position provides high margins, which can be reinvested in new equipment, and modern facilities in order to maintain cost leadership. Such reinvestment may well be a prerequisite to sustaining a low cost position.

Differentiation
The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industry wide as being unique. Approaches to differentiation can take many forms: Design or brand image Technology Features Customer service Dealer network (Mercedes) (Macintosh in stereo components) (Jenn-Air in electric ranges) (Airlines) (Caterpillar tractor)

It should be stressed that differentiation strategy does not allow the firm to ignore costs, but rather they are not the primary strategic targets. Differentiation is a viable strategy for earning above average returns in an industry because it creates a defensible position for coping with the five competitive forces, albeit in a different way than cost leadership. Differentiation provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. It also increases margins, which avoids the need for a low cost position. The resulting customer loyalty and the need for a competitor to overcome uniqueness provide entry barriers. It also yields higher margins with which to deal with supplier power and it clearly mitigates buyer power, since buyers lack comparable alternatives and are thereby less price sensitive. The firm that has differentiated itself should be better-positioned vis--vis substitutes than its competitors. Achieving differentiation may sometimes preclude gaining a high market share. More commonly, achieving differentiation will imply a trade-off with cost position if the activities required in creating it are inherently costly, such as extensive research, product design, high quality materials or intensive customer support. Not all customers will be able to pay higher prices. In some cases differentiation may not be compatible with relatively low costs and comparable prices to those of competitors.

49 | P a g e

Strategic Advantage

Uniqueness perceived by the customer

Low cost position

Industry wide

Differentiation

Overall cost leadership

Strategic Target
Particular segment only

Focus

Focus
The final generic strategy is focusing on a particular buyer group, segment of the product line, or geographic market; as with differentiation, focus may take many forms. Although the low cost and differentiation strategies are aimed at achieving their objectives industry wide, the entire focus strategy is built around serving a particular target and each functional policy is developed with this in mind. The strategy rests on the premise that the firm is able to serve its narrow strategic market more effectively and efficiently than competitors. As a result, the firm achieves either differentiation from better meeting the needs of the particular target, or lower costs in serving this target or both. Even though this focus strategy does not achieve low cost or differentiation from the perspective of the market as a whole it does not achieve one or both of these positions vis-vis its narrow market. The firm achieving focus may also potentially earn above average returns for its industry. Its focus means that the firm either has a low cost position with its strategic target, high differentiation or both. These positions provide defenses against each competitive force. Focus may also be used to select targets least vulnerable to substitutes or where competitors are the weakest.

Other Requirements of the Generic Strategies

Implementing these strategies successfully requires different resources and skills. The generic strategies also imply organizational arrangements, control procedures and inventive systems. Some common implications of the generic strategies in these areas are as follows:

Generic strategy

Commonly required skills and resources

Common organization requirements.

Overall cost leadership

Sustained capital investment and access to capital.

Tight cost control. Frequent detailed control 50 | P a g e

Process engineering skills. Products designed for ease in manufacture. Intense supervision of labour.

reports. Structured organization and responsibilities. Incentives based on meeting strict quantitative targets.

Differentiation

Strong marketing abilities. Strong capability in basic research. Product engineering. Corporate reputation for quality or technological leadership. Strong cooperation from channels.

Strong coordination among functions in R&D, product development and marketing. Amenities to attract highly skilled labour, scientists or creative people. Subjective measurement and incentives instead of quantitative measures.

Focus

Combination of the above policies directed at the particular market segment.

Combination of the above policies directed at the particular market segment.

The generic strategies may also require different styles of leadership and can translate into very different corporate cultures and atmospheres. Different sorts of people will be attracted.

Risks associated Overall cost leadership

Technological change that nullifies past investments or learning. Low cost learning by industry newcomers or followers through imitation or through their ability to invest in state of art facilities. Inability to see required product or marketing change because of the attention placed on cost.

51 | P a g e

Inflation in costs that narrow the firms ability to maintain enough of a price differential to offset competitors brand images or other approaches to differentiation.

Differentiation
The cost differential between low cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings. Buyers need for the differentiating factor falls. This can occur, as buyers become more sophisticated. Imitation narrows perceived differentiation, a common occurrence as industries mature.

Focus
The cost differential between the broad range competitors and the focussed firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus. The differences in desired products or services between the strategic target and the market as a whole narrows. Competitors find sub markets within the strategic target and out focus the focuser.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------9. PRODUCT LIFE CYCLE

Companies normally reformulate their marketing strategy several times during a products life. Economic conditions change, competitors launch new assaults, and the product passes through new stages of buyer interest and requirements. Consequently, a company must plan strategies appropriate to each stage in the products life cycle. The company hopes to extend the products life and profitability, keeping in mind that the product will not last forever. The product life cycle (PLC) is an important concept that provides insights into a products competitive dynamics.

Stages in the Product Life Cycle

We can now focus on the product life cycle. To say that a product has a life cycle is to assert four things: Products have a limited life.

52 | P a g e

Products sales pass through distinct stages, each posing different challenges, opportunities, and problems to the seller. Profits rise and fall at different stages of the product life cycle. Products require different marketing, financial, manufacturing, purchasing, and human resource strategies in each stage of their life cycle.

Most discussions of product life cycle portray the sales history of a typical product as following a bell-shaped curve. This curve is typically divided into four stages: introduction, growth, maturity, and decline. Introduction: A period of slow sales growth as the product is introduced in the market. Profits are nonexistent in this stage because of the heavy expenses incurred with product introduction. Growth: A period of rapid market acceptance and substantial profit improvement. Maturity: A period of a slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits stabilize or decline because of increased marketing outlays to defines the product against competition. Decline: The period when sales show a downward drift and profits erode.

It is often difficult to designate where each stage begins and ends. Usually the stages are marked where the rates of sales growth or decline become pronounced. Nonetheless, the marketers should check the normal sequence of stages in their industry and the average duration of each stage.

Product Category, Product Form, Product, and Brand Life Cycles

The PLC concept can be used to analyze a product category (liquor), a product form (white liquor), a product (vodka), or a brand (Smirnoff). Product Categories have the longest life cycles. Many product categories stay in the mature stage indefinitely, since they grow only at the population growth rate. Some major product categories- cigars, newspaper- seems to have entered the decline stage of the PLC. Meanwhile some others- fax machine, cellular telephones, bottled water- are clearly in the growth stage. Product forms follow the standard PLC more faithfully than do product categories. Thus manual typewriters passed through the stages of introduction, growth, maturity, and decline; their successors- electric typewriters and electronic typewriters- passed through these same stages. Products follow either the standard PLC or one of several variant shapes. 53 | P a g e

Branded products can have a short or long PLC. Although many new brands die an early death, some brand names- such as Ivory, Jell-O, Hersheys have a very long PLC and are used to name and launch new products. For instance, while we might think of Hersheys Kisses, Hersheys has also successfully introduced Hersheys Hugs, Hersheys Kisses with almonds and Hersheys Cookies and Mint Candy bar. P&G believes that it can keep a strong name going forever.

Introduction

Growth

Maturity

Decline

Sales

Time

CHARACTERISTICS
Rapidly rising sales

Sales

Low sales

Peak sales

Declining sales

Costs

High cost per customer

Average cost per customer

Low cost per customer

Low cost per customer

Profits

Negative

Rising profits

High profits

Declining profits

Customers

Innovators

Early adopters

Middle majority

Laggards

Competitors

Few

Growing number

Stable number beginning to decline

Declining number

54 | P a g e

MARKETING OBJECTIVES
Maximize profit while defending market share

Create product awareness and trial

Maximize market share

Reduce expenditure and milk brand

STRATEGIES
Offer product extensions, service, warranty

Product

Offer a basic product

Diversify brands and models

Phase out weak items

Price

Charge cost-plus

Price to penetrate market

Price to match or best competitors

Cut price

Distribution

Build selective distribution

Build intensive distribution

Build more intensive distribution

Go selective: phase out unprofitable outlets

Advertising

Build product awareness among early adopters and dealers

Build awareness and interest in the mass market

Stress brand differences and benefits

Reduce to level needed to retain hardcore loyals

Sales Promotion

Use heavy sales promotion to entice trial

Reduce to take advantage of heavy consumer demand

Increase to encourage brand switching

Reduce to minimal level

55 | P a g e

10. PORTFOLIO BUSINESS PROFILE AND BUSINESS ASSESSMENT MATRICES

Most companies operate several businesses. However, companies too often define their businesses in terms of products. They are in the auto business or the slide-rule business. But Levitt argued that market definitions of a business are superior to product definitions. A business must be viewed as a customer satisfying process, not a goods producing process. Products are transient, but basic needs and customer groups endeavour forever. Large companies normally manage quite different businesses, each requiring its own strategy; General Electric classified its business into 49 strategic business units (SBUs). A SBU has three characteristics 1. It is a single business or collection of related businesses that can be planned separately from the rest of the company; 2. It has its own set of competitors 3. It has a manager who is responsible for strategic planning and profit performance and who controls most of the factors affecting profit. The purpose of identifying the companys strategic business unit is to develop separate strategies and assign appropriate funding. Senior management knows that its portfolio of businesses usually includes a number of yesterdays has-beens as well as tomorrows bread winners. But it cannot rely just on impressions. It needs analytical tools for classifying its businesses by profit potential. Two of the best-known business portfolio evaluation models are the Boston Consulting Group Model and the General Electric Model. Figures 1 and 2 shows the Portfolio Business Profile and Portfolio Business Assessment Matrices used to plot six products of a firm whose products average life span is less than five years. This is a very dynamic portfolio, constantly changing through innovation and introduction of new products. The matrices shows the movement of the products over time-that is, where they will be in three years. The matrices are used to identify strategic gaps and to balance the portfolio in the term of cash flow, market share, and contribution margin. Notice the similarities between the two matrices regarding the product movements. The results obtained in one matrix should be reflected in the results obtained on the other matrices. There are several ways to display relevant information about your firms portfolio and make the complexities of the analysis somewhat more manageable. To do so, we move from the Portfolio Business Profile and Portfolio Business Assessment Matrices to the Growth-Share Matrix. Keep in mind, however, that the profile and assessment matrices are an important part of your portfolio analysis.

56 | P a g e

Dominant
COMPETITIVE POSITION
5

Strong Favourable

3 4

Tentative Weak
Introduction Growth Mature Decline

LIFE CYCLE STAGE

Current Position

Projected Position

(Numbers Indicate Product Line/Code)

Figure 1 Portfolio Business Profile Matrix

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

High
BUSINESS STRENGTHS

Growth
2

Growth
6

Selectivity

Medium
1

Growth
4

Selectivity
3

Harvest

Low

Selectivity

Harvest

Harvest

High

Medium

Low

MARKET ATTRACTIVENESS

Current Position

Projected Position

(Numbers Indicate Product Line/Code)

Figure 2 Portfolio Business Assessment Matrixes

57 | P a g e

STAR

QUESTION MARK

High

Modest + or Cash Flow

Large Negative Cash Flow

GROWTH RATE

Large Positive Cash Flow

Modest + or Cash Flow

Low

Cash Cow High

Losers Low
RELATIVE MARKET SHARE

Figure 3 Growth-Share Matrix Modified GrowthShare Matrix

The product category matrix or Modified GrowthShare Matrix, shown in Figure 3, is usually referred to as portfolio analysis. When completed, it displays the status and performance of the overall portfolio and suggests which strategy the company should adopt to ensure a strong performance in future. The information generated by the matrix is used as input into major company strategy planning at macro level. The GrowthShare Matrix was developed by the Boston Consulting Group (BCG), and we have adapted this concept to our approach here. Figure 4 shows an example of a Modified Growth Share Matrix using four products. The matrix indicates the following information for each product: 1. Its volume dollar sales (represented by the diameter of the circle). The larger the volume, the larger the circle. 2. Vertical axis shows the growth rate of the market /industry in which the product is competing. 3. Horizontal axis shows the relative market share that the firms product holds, compared to the share held by the competitor with the largest share.

58 | P a g e

STAR

QUESTION MARK
(Large Negative Cash Flow) 4

High
GROWTH RATE

(Modest + or Cash Flow)

10.0 4.0

2.0

1.5

1.0

.5 .4

.3
2

.2

.1

10.0

4.0

2.0

1.5

1.0

.5 .4

.3

.2

.1

Low

(Large Positive Cash flow)

(Modest + or Cash flow)

CASH COW

LOSER

High
RELATIVE MARKET SHARE

Low

Figure 4 Growths -Share Matrix with Four Products By growth rate we mean simply the percentage by which the sales volume of all firms in that particular market have changed during the most recent period for which information is available. Relative market share is the ratio of the firms unit sales of a product to the unit sales of the same product by the firms largest competitor. This is the same as the ratio of two companies market share. For example, if your product As annual sales were 3.1 million units and the market leaders annual sales were 10 million units, your firms relative market share for this product would be 0.31 (i.e., 3.1/10 =0.31). However, for markets in which your company is market leader, your firm will have a relative market share of more than 1.0. Thus, any other company with a ratio 1.0 would be tied for the lead with your firm. Relative market share is used in this analysis instead of simply market share since it captures well the relationship of your firm to the leaders share. For instance, your companys 15 percent market share has quite a different meaning if the market leader has 17 percent share of the total market rather than 45 percent share. You are much closer to the leader than if it held 45 percent market share to your 15 percent share.

59 | P a g e

High STAR
GROWTH RATE

QUESTION MARK

Low
CASH COW LOSER

100%

75%

50%
MARKET SHARE

25%

0%

Figure 5 Modified Growth-Share Matrixes Simple Market Share.

However, you may not always know your competitors market share nor be able to calculate relative market share for your products. In such cases, you can change the horizontal axis from a log scale to a percentage from 1 to 100 percent and not its relative market share. In Figure 4 we see only the current performance of these products and their markets. As a strategic market planner, you need to think about decisions for the long-range future. Projections can be made for the Growth-Share Matrix by predicting each of the two elements in the figure, although such projections entail some risk, contrary to the certainty of current data. In a Growth-Share Matrix such as the one shown in Figure 4, the value of the horizontal market share dividing line is based on a log scale. The vertical growth rate dividing line is based on the industry/growth rate associated with these products.

Setting Growth-Share Matrix Values

Setting the right values for the market share and the growth rate dividing lines is strategically important, since they serve as cut-off points in your assessment of the companys portfolio. However, it is up to you to set up points for your particular circumstances. Our example shows 1.0 as the cut-off point for market share, but your firm may have a different point (e.g., 2.0 or 5.0), depending on your firms objectives. You need to determine whether you like the direction in which your company is moving and, if not, what you need to do to correct it. In this analysis were assuming that the growth rate and cash use a re correlated, as are market share and cash generation. Keep in mind two key assumptions of portfolio analysis. 1. Cash flow from product with high relative market share will be stronger than cash flow from product with smaller shares. 60 | P a g e

2. Cash needs for product in faster growing markets will be higher than cash needs for those in slower growing markets.

Interpreting the Modified Growth-Share Matrix Values

Once you have matrix plotted, your interpretation of the data will be based on the following: Vertical axis - growth rate - represents the level of growth related to a particular product/industry. Horizontal axis market share indicates the level of market share from a particular product. (Criteria we use to set these dividing line are merely example, since these criteria probably would differ in various industries.) Margins usually increase with market share because of economies of scale effects. Sales growth requires cash input to finance added capacity and working capital. Thus, if the market share is maintained, cash input requirements increase with the market growth rates. An increase in market share usually requires cash input to support the increased advertising expenditures, lower prices, and other share gaining tactics. Growth in each market will ultimately slow as the product reaches maturity. Without losing position, cash generated as growth slow down can be reinvested in other products that are still growing.

With these factors in mind, you can see Figure 4.4 that products below the market share (horizontal) dividing lines have modest to strong cash flows from operations. Products above that line have weaker or negative cash flows. As shown in the Figure 4, these four product categories have been classified on the basis of their cash flow characteristics as follows. 1. Cash Cows - These are products that generate considerable cash, more than can be profitably invested in them. Typically, they have a dominant share of slowly growing markets. These products provide the cash to pay interest on corporate debt, cover corporate overhead, pay dividends, finance R&D, and provide funds for other products to grow. 2. Stars - these products are high growth, high share items. They may or may not be self-sufficient in cash flow, depending on whether their cash flow from operations is enough to finance rapid growth. 3. Question Marks - These are products with a low share of fast growing market. Low market share often means low profits and weak cash flow from operations because the market is growing rapidly beyond the product. The company must invest large amounts of cash simply to maintain its market share and even greater amount to increase that share. While the market 61 | P a g e

growth is attractive, considerable cash outlays will be required if the products are ever to gain enough share to become strong members of the portfolio. 4. Losers - These products have low share of slowly growing markets. They neither generate nor require significant amounts of cash. Maintaining market share usually requires reinvestment of their modest cash flow from operations plus some additional capital. Because of their low market share, their profitability is poor. They are unlikely ever to be a significant source of cash. There is as important exception to this rule, however. It is possible that a new product may be in this cell for a short period during its introduction stage before moving to the Question Mark or Star cell during its Growth or Mature stage. Thus, new products are not treated as the same older Loser products in strategic formulations. By locating products on a GrowthShare Matrix, you will get a good picture of your portfolios current health. Over time, the positions of your product will move because of market dynamics and your own strategy decisions. The objective of portfolio analysis is to discover the current state of your portfolio as a basis for strategic decisions that will strengthen that portfolio in the future. Some of the movement of products in the portfolio can be predicted in general terms, depending on the strategies selected and whether the variables are controllable or uncontrollable. For example, movements in the vertical direction (i.e., rate of total market growth) are largely beyond the firms control and must be anticipated when developing your strategy. A firm that selects only a share-maintaining strategy for its portfolio will find that eventually all the products become either Cash Cows or Loser, and more likely fall into the Loser category. Whether they become Cash Cows or Losers, however, depends on the market share they hold before market growth slows, usually before the products reach their late mature life cycle stage. High STAR
3

QUESTION MARK
4

GROWTH RATE

1
2

CASH COW

LOSER

Low High
RELATIVE MARKET SHARE

Low

Current Position Projected Position Figure 6 Growth-Share Matrix Future Positioning 62 | P a g e

Likewise, Question Marks ultimately become losers unless company invests enough during the Growth Stage to shift the product into the Star category. Stars ensure companys future because they will become Cash Cows as market growth slows and investment needs decline. Future positioning and sales volume are given in Figure 6 Shaded circles represent the data three years from now, while lines indicate the desirable future direction. Funds are pumped from the Cash Cows to strengthen the competitive positions of the Question Marks and Stars and to develop and acquire other new products. Form 4: Modified Growth-Share Matrix enables you to see the current and projected positions of product lines in a macro or portfolio view. By mapping your own product lines on the form, you can determine which products are following a success sequence, and which product may need to be repositioned or eliminated from your portfolio. All the matrices we have discussed in this section will enable you to see all the products on an equal plane and will help you to identify which products in the portfolio need to be repositioned. The Product Dynamics Matrix, discussed below, can be used to illustrate successful product repositioning strategies.

PRODUCT SALES GROWTH RATE

High *

Success Sequence Disaster Sequences

$
$

Low

High
RELATIVE MARKET SHARE

Low

Shows Product Movement

Figure 7

Product Dynamics Matrix

Product Dynamics Matrix

The Product Dynamics Matrix, illustrated in figure 7, shows the optimal repositioning of a product from one cell on the matrix to another. The cells we use in this matrix are equivalent to those used in the Growth-Share Matrix. The objective of this chart is to illustrate a success sequence that a 63 | P a g e

product can follow to gain market share and increase cash flow. Once the product has been positioned on the basis of the success sequence. It is important at this point to understand a key principle of the macro view. With market growth largely uncontrollable in most instances, portfolio analysis becomes a way to develop a market share strategy for individual products. You are going to use all the data you have generated so far and begin to determine which strategy or strategies will help you to move your portfolio in the right direction to achieve your overall company objectives. Question Mark Star Cash Cow Loser

SALES ($)

TIME INTRODUCTION GROWTH MATURITY DECLINE

Figure 8

Success Sequence and Product Life Cycle

Success Sequence - The basis of a sound, long-term strategy is to use cash generated by Cash Cows to fund market share increases for Question Mark products in which the company has a strong competitive advantage. You will be able to identify such products through your competitive analysis, product evaluation, and matrices. If successful, this strategy will produce new Stars that, in turn, will become the companys future Cash Cows. This success Sequence is illustrated in figure 7. On the other hand, the Question Mark product with a weak competitive position is a liability to the firm. The product should be allowed to remain in the portfolio only if the company spends little or no cash to maintain its position. This strategy will cause the product to become a Loser eventually. Losers should be retained only if they contribute some positive cash flow and do not tie up funds that could be used more profitably elsewhere. At some point, the company must consider eliminating loser products from the portfolio. Product Life Cycle and the Success Sequence - In many respects, the success sequence is closely associated with the movement of a product along its life cycle, as shown in figure 8. Product categories relate closely to product life cycle stages, another reason it is important to identify each products position along the life cycle curve. Thus, life cycle planning techniques also can be used in strategy formulation. 64 | P a g e

We should mention as well that because the Growth-Share Matrix represents performance only in the most recent period, either total category volume or a products market share may fluctuate temporarily and cross one of the dividing lines for that moment. As a result, you may be plotting only a short-term effect for some products falling close to the dividing lines. However, it would be wise to investigate whether even this slight movement might have some attractive strategic possibilities for your company.

Common Pitfalls in Strategic Planning

Unfortunately, many managements pursue disaster sequences instead of the success sequence described above. For example, a company may allow a Star products market share to erode to that of a Question Mark. Unless the Strategy is reversed or corrected, the product will ultimately become a loser. Companies may also over invest in Cash Cows, or they may try to save ailing Cash Cows by pumping funds into them. A better strategy would be to reposition these products according to the success sequence via such factors as product differentiation, market segmentation, and products enhancement. If firm over invest in Cash Cows, they may under invest in Question Marks. Instead of becoming Stars, these products eventually tumble into the Loser category. Some companies spread their resources too thinly among products rather than focusing their funds to achieve the maximum performance from the strongest or most promising products. Even a smaller number of products can still provide enough diversification to reduce a companys risk in the market. Look over the disaster sequence portfolios presented in figures 9 and 10 and study their mistakes. What makes these portfolios vulnerable to loss of market share and profits?

Product and Portfolio Analysis of Competitors

We strongly recommend that you do a product evaluation and matrices analysis of your strongest competitors products and product lines after you have completed the analysis for your own company. By superimposing these competitive matrices on your own, you can spot vulnerabilities, strengths and weakness, and opportunities more easily. Companies with the best product track records routinely analyze their competitors products as well as their own products. They have more accurate data on which to base their strategic marketing plans.

65 | P a g e

Figure 9

Growth-Share Matrix Disaster Sequence in Long Run

1. Products 5 and 6 will become Losers in the long run. 2. Product 1, the only new product, is a slow grower as shown by the growth rate; it is the only product that will be supporting the companys future growth in the long run. 3. Products 3 and 4 will become Cash Cows in the future, but Product 4 will not remain so far long if it follows the path of Products 5 and 6. 4. Product 2 is losing market share rapidly. 5. Product 6, as a Loser, will still be in the portfolio, but its position will rapidly worsen. In the short run, if projections had not been made as depicted in the chart, management may believe that the portfolio looks sound with its Cash Cows, growth rate, and the like. But the long-run view shows a firm that will decline in profitability, market share, and growth rate. The firm is following the success sequence only to the point where products are moving counter-clockwise, but they are not regenerating Cash Cows nor introducing new products. As a result, in the long run, if the firm continues its present course, it will have few Cash Cows or Stars, no Question Marks and many Losers. Basically, the firm has three choices: (1) regenerate Cash Cows back to Question Marks, (2) introduce new products, and (3) re-examine its company and product strategies and its company mission.

66 | P a g e

Figure 10 Growth-Share Matrixes Lost Portfolio 1. Product 1 is falling from introductory category to Loser position. Either the product is a complete failure, market research was in error, financing was not available, or strategic objectives were poorly planned. 2. Product 5 is following a disaster sequence, moving from Star position to Question Mark, again probably through poor strategy. 3. Product 3 is falling from high growth to Loser category. 4. Product 6 is not being regenerated. Its position as Cash Cows is eroding to Loser category. The basic problem of this portfolio is that little or no planning is being done in the firm. Perhaps the firm views products on an individual basis without projecting their movements to see the total portfolio effect on whatever plan they have. Its more likely that management has never mapped out the product portfolio. Managements attitude is reactive, that is, no future projections have been made, or they have been made in a product-by-product vacuum without considering the other product strategies. There is no interaction among products. The company has an extremely short-sighted view of its products and of its future.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

67 | P a g e

Prof. Kalim Khan

Porters Model

11. PROFIT IMPACT OF MARKETING STRATEGY (PIMS)

PIMS stands for Profit Impact of Marketing Strategy. PIMS is a shared experience model that helps firms to make and support marketing strategy decisions. Shared experience means that the model uses experience of a variety of successful and unsuccessful businesses to provide insights into the profitability of a corporation's different business units. The strategic Planning Institute launched a study called Profit Impact of Market Strategy (PIMS), which sought to identify the most important variables affecting profits. Data were collected from hundreds of business units in a variety of Industries to identify the most important variables associated with profitability. The key variables included market share, product quality, and several others. The study found that a companys profitability, measured by pre-tax return on investment (ROI), rises with its relative market share of its served market, as shown in figure (a). According to a PIMS report, the average ROI for business with under 10% market share was about 11 percent. On the average, a difference of 10% points in market share is accompanied by a difference of about five points in pre-tax ROI. The PIMS study shows that businesses with market share above 40% earn an average ROI of 38.5%, more than three times that of those with shares under 10 percent. These findings have led many companies to pursue market share expansion and leadership as their objective.

30 Profitability 30 17.6 20 9.1 10 14.1 23.4

Under 10 40

10-20

20-30

30-40

Over

Market Share How PIMS works? PIMS uses information about the experiences of a variety of successful and unsuccessful businesses to provide insights into a firm's expected profitability. The PIMS database contains information about 3000 businesses owned by 450 firms. Based on this reference database, PIMS develops relationships between the profitability measures of a firm (ROI and ROS) and 68 | P a g e

Prof. Kalim Khan

Porters Model

such independent variables as the rate of price inflation and vertical integration. Thus, if a firm provides PIMS with details about the nature of its business and its external and internal environments, PIMS will calculate the ROI and ROS that could be expected of such a firm. PIMS helps marketing managers to: Select the appropriate market to target. Identify the marketing strategy that will maximize profits in a business unit. Compare a firm's actual return on investment (ROI) and return on sales (ROS) with the ROI and ROS that are expected from firms in comparable businesses and circumstances.

A PIMS analysis can show a firm: 1. How well it has met its profitability potential 2. The reasons for its success or failure in achieving the expected profitability

Also helps in Product Differentiation over Time

Profit Impact of Market Strategy (PIMS) research on competitive strategy has studied how a product-markets characteristics change as the market evolves. As might be expected, product innovations diminish over time. Thus, the sales of new products-those entering the market for the first time-decline as a percentage of total market volume from 10.2 percent during the growth stage of evolution to 5.4 percent during growth maturity, to 3.5 and 3.7 percent during stable maturity and declining maturity, and to 2.8 percent in the decline stage. Research and development (R& D) expressed as an average percentage of sales, also declines over time. Rates fall from 3.1 percent during the growth period to 2.0 percent during maturity period and to only 1.2 percent during the decline phase. An important point here is that product R & D declines from 72 percent of total R &D costs during growth to 60 percent during the decline period. Thus the proportion of the R & D expenditure spent on process (Rather than on Product) R & D increases over time in an effort to decreases per unit costs as the product matures. The type and amount of R & D also appear to affect the evolutionary process by increasing the rate and level of diffusion. The more standardized the technology, the higher the diffusion rate. The more the industry spends on Product R & D, the faster standardization is achieved. Assuming the process R & D leads to lower manufacturing costs, which in turn are translated into lower prices, and then the more money spent on this activity, the faster the diffusion rate. As analysis by PIMS indicates that competitors become more alike over time. The index of product differentiation drops substantially (from 51 to 32) from the growth to the decline stage. As the market evolves, more major competitors have similar lines and serve the same 69 | P a g e

Prof. Kalim Khan

Porters Model

types of customers. As would be expected when differentiation declines, so do prices, margins and ROI. According to PIMS, margins drop from 30.5% to during the growth period to 26 percent during stable maturity and 21.8% in the decline stage. The decline in marketing expenditure for consumer goods declines from 14.1 % in growth period to 10.9 % in the decline period. Similar figures for industrial goods are 9.9 percent and 5.9 percent. PIMS indicates very clearly that as the market moves from one stage of evolution to the next, some strategic marketing program changes are necessary. Thus, in the later evolutionary stages, managers should anticipate more market share stability, fewer new products of any real significance, increased direct competition from chief rivals, and greater price sensitivity.

Benefits of PIMS (along with comparison with respect to BCG and GE matrix)
BCG matrix is having following limitations Market growth rate is an inadequate descriptor of overall industry attractiveness. Relative market share is inadequate as a descriptor of overall competitive strength. The outcomes of growth and share analysis are highly sensitive to variations in hoe growth and share is measured. BCG matrix implicitly assumes that all business units are independent of one another except for the flow of cash.

GE matrix is having following limitations Multifactor measures in this model can be subjective and ambiguous, especially when managers evaluate different industries on the same set of factors. Conclusions drawn from these models still depends on the way industries and productmarkets are defined.

Critiques of Portfolio Matrixes

They may lead the company to place too much emphasis on market share growth and entry into high growth businesses or to neglect its current businesses. The models results are sensitive to the ratings and weighs and can be manipulated to produce a desired location in the matrix. The model fails to delineate the synergies between two or more businesses, which means that making decisions for one business at a time might be risky. There is danger of terminating a losing business unit that actually provides an essential core competence needed by several other business units. 70 | P a g e

Prof. Kalim Khan

Porters Model

Portfolio analysis specifies how firms should allocate financial resources across their businesses, without considering the competitive strategies those businesses are, or should be, pursuing. Indicators of past market attractiveness and competitive strength do not always accurately predict the future financial returns a strategic investment will produce, relying on portfolio analysis as a tool for allocating resources across businesses or strategic marketing can lead to sub optimal results.

Benefits of PIMS (as compared to BCG and GE matrix):

Stimulates managerial thinking about reasons for deviations from par performance Provides method of establishing potential return levels for businesses. Provides insight into strategic moves to improve ROI. Encourages appraisal of business unit performance Most factors that boost ROI also contributes to the long-term value.

PIMS: Strategy Principles Derived

Quality of product is the single most important factor affecting performance of product. Market share strongly related to profitability. High investment intensity drags on profitability. Vertical Integration is profitable for some businesses Most factors that boost ROI also contributes to the long-term value. Provides a method of establishing potential return level for businesses.

Limitations of PIMS study

Hamermesh reported finding many profitable companies with low market share. Woo and Cooper identified 40 low share businesses that enjoyed pre-tax ROIs of 20% or more; they characterized these businesses as having high relative product quality, medium to low prices, narrow product lines, low total cost.

Companies must not think, however, that gaining increased market share in their served market will automatically improve their profitability. Much depends on their strategy for gaining increased market share. Because the cost of buying higher market share may far 71 | P a g e

Prof. Kalim Khan

Porters Model

exceed its revenue, the company should consider three factors before pursuing increased market share. The first factor is the possibility of provoking antitrust action. Jealous competitors are likely to cry monopolization if a dominant firm makes inroads on market share. This rise in risk would cut down the attractiveness of pushing market share gains too far. Example: Microsoft has walked away from potential $2 billion merger with rival software company Insuit in 1995.Microosft wanted to pursue Insuit so that it could corner the market on personal finance software. When the Justice department challenged Microsoft with an antitrust suit, the software giant backed down rather than confronting the challenge. The second is economic cost. The fig. (b) shows the possibility that profitability might begin to fall with market share gains after some level. In the illustration, the firms optimal market share is 50 percent. A larger share might come at the expense of profitability. This conclusion is consistent with PIMS findings in that PIMS did not show what happens to profitability for different levels within the over 40% category. Basically the cost of gaining further market share might exceed the value.

Profitability

25%

50%

75%

100%

Market Share

A company that has, say 60% of the market must recognize that the holdout customers may dislike the company, be loyal to competitive suppliers, have unique needs, or prefer dislike the company, be loyal to competitive suppliers, have unique needs, or prefer dealing with smaller suppliers. The cost of legal work, public relations, and lobbying rises with market share. In general, pushing for higher market share is less justified when there are few scale or experience economies, unattractive market segments exists, buyers want multiple sources of supply, and exit barriers are high. The leader might be better off concentrating on expanding 72 | P a g e

Prof. Kalim Khan

Porters Model

market share. Some market leaders have even increased their profitability by selectively decreasing their market share in weaker areas. The third factor is that companies might pursue the wrong marketing-mix strategy in their bid for higher market share and therefore not increase their profit. While certain marketing mix variables are effective in building market share, not all lead to higher profits. Higher tend to produce higher profits when unit costs fall with increased market share and when the company offers a superior-quality product and charges a premium price that more than covers the cost of offering higher quality.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------12. MANAGING PRODUCT LINES

Product is a key element in the market offering. Marketing-mix planning begins with formulating an offering to meet target customers needs or wants. The customer will judge the offering the offering by three basic elements: the product features and quality, the services mix and quality, and the offerings price appropriateness. A product is anything that can be offered to a market to satisfy a want or need. Products that are marketed include physical goods (automobile, books), services (haircuts, concerts), persons (Michael Jordan, Barbara Streisand), places (Hawaii, Venice), organizations (American Heart Association, Girl Scouts), and ideas (family planning, safe driving).

Five Levels of a Product

In planning its market offering, the marketer needs to think through five levels of the product. Each level adds more customer value, and the five constitute a customer value hierarchy. The most fundamental level is core benefit: the fundamental service or benefit that the customer is really buying. A hotel guest is buying rest and sleep. The purchaser of a drill is buying holes. Marketers must see themselves as benefit providers. At the second level, the marketer has to turn the core benefit into a basic product. Thus a hotel room includes a bed, bathroom, towel, desk, dresser, and closet. At the third level, the marketer prepares an expected product, a set of attributes and product. For example, hotel guests expect a clean bed, fresh towels, working lamps, and a relative degree of quiet. Since most hotels can meet this minimum expectation, the traveller normally will have no preference and will settle for whichever hotel is most convenient or least expensive. At the fourth level, the marketer prepares an augmented product that meets the customers desires beyond their expectations.

73 | P a g e

Prof. Kalim Khan

Porters Model

At the fifth level stands the potential product, which encompasses all the augmentation and transformations that the product might ultimately undergo in the future. While the augmented product describes what is included in the product today, the potential product points to its possible evolution. Here is where companies search aggressively for new ways to satisfy customers and distinguish their offer. The recent emergence of all-suite hotels where the guest occupies a set of rooms represents an innovative transformation of the traditional hotel product. Some of the most successful companies add benefits to their offering that not only satisfy customers but also surprise and delight them. Delighting is a matter of exceeding the normal expectations and desires with unanticipated benefits. Thus the hotel guest finds candy on the pillow, or a bowl of fruit, or a video recorder with optional videotapes. Guests of the RitzCarlton hotels, for example, often report surprise and delight at the attention and service they receive.

Product Classification
I) Durability & Tangibility Products can be classified in to three types based on durability & tangibility a. Non-durable goods - these goods are tangible goods normally consumed in 1 or few uses: Beer & Soap. Because these goods are consumed quickly & purchased frequently the appropriate strategy is to make them available in many location, change only a small mark up,& advertise heavily to induce trial & build preference. b. Durable goods - These goods are tangible goods that normally survive many uses: Refrigerators clothings & etc. Durable goods normally require more personally selling & service, command a higher margin. c. Services- Services are intangible, inseparable, variable & perishable product: Hair cut & repairs. As a result they require more quality control & adaptability II ) Consumer goods classification These can be classified on the basis of shopping habits. a. Convenience goods - these goods are that the consumer usually purchases frequently immediately with minimum effort e.g. Tobacco products, soaps & newspaper. Convenience goods can be further divided as 1. Staples: These goods are purchased by consumer on regular basis e.g. Toothpaste

74 | P a g e

Prof. Kalim Khan

Porters Model

2. Impulse goods: These goods are purchased without any planning or search effort e.g. Candy bars & magazines. 3. Emergence goods: These goods are purchased when a need is urgent. E.g. Umbrellas during rain storm.] b. Shopping goods - these goods are the goods that the customer, in the process of selection & purchase, characteristically compares on such basis as suitability, quality, price & style e.g. Furniture, clothing. Homogenous shopping goods are similar in quality but different price while heterogeneous shopping goods differ in product features & services that may be more important than price. c. Specialty goods - These goods are goods with unique characteristic or brand identification for which a sufficient number of buyers are willing to make a special purchasing effort e.g.: Cars, stereo components & photographic equipments. d. Unsought - These goods are goods the consumer does not know about or does not normally think of buying. e.g. Smoke detectors, Life insurance & encyclopaedias III) Industrial goods a. Material & parts These are goods that enter the manufacturer s product completely. They fall in to 2 classes: Raw materials & manufactured material & parts. Raw materials farm products (e.g. Wheat, cotton etc) Natural products (e.g. fish, crude petroleum etc) Manufactured material & parts component materials (e.g. Iron, cement etc) Component parts (e.g. small motors, tires etc) b. Capital items- these are long lasting goods that facilitate developing or managing the finished product. They include 2 group installation equipments. Installation Consist of buildings (e.g. factories, offices etc) Equipments Consist of portable factor equipment & tools (generator, drill presses etc) c. Supplies & business services: - These are short lasting goods & services that facilitate developing or managing the finished product. Supplies are of 2 kinds :Operating supplies (e.g. lubricants, coal etc)& Maintenance & repair items (e.g. paints, nails, etc)

75 | P a g e

Prof. Kalim Khan

Porters Model

Business services include maintenance & repair services 9e.g window cleaning, type writer repaired) & business advisory services (e.g. legal management consulting etc)

Product Mix
It is the set of all products & items that a particular seller offers for sale. A companies product mix has a certain width, length, depth& consistence. Width- the width of a product mix refers to how many different product lines the company carries. Length The length of a product mix refers to the total number of items in the mix. Depth- The depth of a product mix refers to how many variants are offered of each product in the line. Consistence the consistence of a product mix refers to how closely relate the various product lines in end use, production requirements, distribution channel or some other way. These 4-product mix dimension permit the company to expand his business in four ways. It can add new product lines, it can lengthen each product line, and it can add more product variants to each product& finally can pursue more product line consistence.

Product line length

Companys objectives influence product line length. Companies seeking high market share & market growth will carry longer lines. Companys emphasizing on high profitability will carry shorter lines. The company lengthens its product lines in 2 ways: By line stretching & line filling. 1. Line stretching Line stretching occurs when a company lengthens its product line beyond its current range. The company can stretch its line downmarket, upmarket, or both ways. a) Downmarket stretch- A company position in the middle market may want to introduce a lower price line for any of three reasons. 1) The company may notice strong growth opportunity in the downmarket. 2) The company my wish to tie up lower end competitors who might otherwise try to move up market. 3) The company may find that the middle market is stagnating or declining.

76 | P a g e

Prof. Kalim Khan

Porters Model

b) Upmarket stretch - companies may wish to enter the high end of the market for major growth, high margin or simply to position them as full line manufactures. c) Two ways stretch - company serving the middle market might decide to stretch their line in both directions. 2. Line Filling A product line can also be lengthening by adding more items with the present reach. There are several motives for line filling: Reaching for incremental profits, trying to satisfy dealers, trying to utilize excess capacity, trying to be leading full line company, & trying to plug holes to keep out competitors. Line filling is over done if it results in self-cannibalisation & customer confusion.

Brand Strategy Decision

A company has 5 choices when it comes to brand strategy. 1. Line extension- Line extension consists of introducing additional items in the same product category under the same brand, name such as new flavours, forms, colours& packet sizes. 2. Brand extensions A company may use its existing brand name to launch new products in other categories. 3. Multibrands - A company will often introduce additional brands in the same product category. 4. New Brands- When a company launches products in a new category; it may find that none of its current brand name is appropriate. 5. Co Brands A rising phenomenon is the emergence of co branding (also called Dual branding), in which 2 or more well-known brands are combined in an offer. Each brand sponsor expects that the other brand name will strengthen preference or purchase intention. Co branding takes 4 forms. a. Ingredient co branding: Volvo advertises that it uses Michelin tires. b. Same-company co branding: General mills advertises Trix & Yoplait yoghurts. c. Venture co branding: General Electric & Hitachi light bulbs. d. Multiple -sponsor co branding: Taligent, a technological alliance of Apple, IBM & Motorola.

77 | P a g e

Prof. Kalim Khan

Porters Model

13. PORTERS MODEL

The Porters Model envisages a framework wherein five forces have been identifies which determine the attractiveness of an industry.

The goal of competitive strategy is to identify a position in the industry where the defense against the competitive forces or factors influencing them is the best possible. The idea is to study these forces and analyse their sources to obtain a better understanding of the opportunities and threats for the company, and enable strategic positioning of the company vis--vis the other players in the industry.
The strength of the forces determines the extent of investment in the industry and the ability of the firms to sustain above average returns. (The average returns are approximately equal to the return on Government securities adjusted for the risk of capital loss.) The intensity of various forces becomes crucial for strategy formulation. Different forces hold the key in shaping the fortunes of the different industries. Short run factors, which affect competition and profitability must be distinguished from the important, which determines the structure of the industry. The industry structure cab and does shift gradually overtime. The five forces driving the industry competition are: 1. Threat of entry. 2. Intensity of rivalry among existing companies. 3. Pressure form substitute products. 4. Bargaining powers of the buyers. 5. Bargaining powers of the suppliers.

1. Threat of Entry
New entrants add new capacities and often bring in substantial resources to gain market share. The threat of entry into an industry depends on numerous factors. These are as under: a. Entry Barriers Entry barriers refer to the set of obstacles that a new entrant should surmount in order to gain into an industry and to occupy a status similar to the existing players. Some of the possible entry barriers are:

78 | P a g e

Prof. Kalim Khan i. Economies of Scale

Porters Model

Existing players may enjoy economies of scale that give them a cost advantage. This would essentially mean that the new entrant must also enter at similar levels because a similar scale would mean a cost disadvantage. Economies of scale can also be achieved through sharing of operations. Economies of cost may also be achieved where joint costs may be allocated to different products through a widening of the product line and class, through such intangible assets as brands, patents etc., and through vertical integration. ii. Product Differentiation

When the existing players have built up a brand loyalty through product differentiation, an entry barrier is created. Where the output of an industry is incapable of differentiation and has to be sold as commodities, a new entrant faces no problems on this front. iii. Capital Requirements

Capital requirements are an entry barrier in industries where the initial capital outlay is very large as in the case of core sectors. Alternatively it could also be a barrier where payments are staggered because customer credit is the key to increase the market share or the customers inability to pay in full or delayed payments. The latter is usually seen where the user segment is the public sector. The latter is usually seen where the user segment is the public sector. In certain industries, high-deferred expenditure also acts, as am entry barrier. iv. Switching costs

In some cases, there is one time costs incurred by the buyers for switching from one suppliers product to anothers. This could occur when the new entrants products are not compatible with the products being used by the customers. This phenomenon is seen in the computer industry. v. Access to distribution channels

This is a key factor, which determines the relative strength of a company vis--vis the other players in the industry. More often than not, this factor acts as a major entry barrier for new entrants. The existing players are likely to have tie-ups wit the wholesaler and retailers for marketing their products based on long-tem relationships, which has been built over years. A new entrant may have to invest heavily to develop a distribution channel. vi. Government policy

Licensing requirements and limits on access of raw materials could act as a barrier to entry. In India, government policy plays a crucial role in determining the structure of an industry and the associated entry barriers. 79 | P a g e

Prof. Kalim Khan

Porters Model

vii.

Cost disadvantages independent of scale

Cost disadvantages may accrue to new entrants for reason other than those related to scale of operation and may be due to: Proprietary product technology Locational advantages - The existing players may be locational advantages, which reduce their transportation cost. In extreme cases, high transportation costs may make the entire economic activity unviable for the new entrants. Government subsidies Learning Curve This is unique to the labour intensive industries with complex assembly operations where efficiency increases with experience.

b.Expected Retaliation Existing players usually retaliate to the entry of a new entrant to make the latters life unpleasant and difficult. Such retaliation can be envisaged in the following cases: Established players with financial muscle, excess capacity and strong distribution channels. Slow growth rate in the industry. Established players with highly illiquid assets.

2. Intensity of rivalry among existing companies

Intense rivalry may be triggered of because of any of the following factors: Numerous or Equally competitors When the market is fragmented or when there is no single dominant player in the industry, intense competition may be triggered off. Slow industry growth and excess capacity. Industries where performance is volume driven. Lack of differentiation of products. High strategic stakes where profitability margins are sacrifices for enhancing market share.

80 | P a g e

Prof. Kalim Khan

Porters Model

High exit barriers Exit Barriers may either be economic, strategic, emotional or legal/ regulatory in nature and include: Specialised assets Fixed costs of exit Strategic inter-relationship Emotional angle Government and social restrictions

The exit barriers should be studied in conjunction with the early barriers to get a wider perspective about the industry. The relation between the barriers and profitability are given below: EXIT BARRIERS

LOW

HIGH

E N T R Y

B A R R I E R S

LOW

Low stable returns

Low risky returns

HIGH

High stable returns

High risky returns

3. Pressure form substitute products

The presence of substitute, which perform functions essentially similar to the existing one and offer a price advantage, the profits of the industry are under stress. The substitute may offer varied benefits like cost, quality and easy availability.

4. Bargaining powers of the buyers

Established buyers play competitors against one another and force prices down and can afford better credit terms. Buyer power is determined largely by the characteristics of the

81 | P a g e

Prof. Kalim Khan

Porters Model

market situation and on the relative importance of its purchase. The buyer power is high when: The products are undifferentiated The industrys product is not important to the buyers product or service Buyers pose a potential threat of backward integration Buyer purchases large volumes relative to the total sales of the industry

The wholesalers and retailers buying power are dependent on their ability to influence the buying decisions of their consumers.

5. Bargaining powers of the suppliers

Suppliers may raise the prices of goods thereby affecting the profitability of the industry. Suppliers power is high in the following cases: Concentration of suppliers Absence of substitutes] Products are differentiated Threat of forward integration by suppliers exists The suppliers products as an important input to the buyer

The diagnosis of the industrys structure is the key for formulating competitive strategy, as it is a template for SWOT analysis. The structural analysis aids the positioning of the firm so that it can influence the balance of forces through strategic moves; create adequate defenses or anticipating shifts and pro-active responses.

82 | P a g e

Prof. Kalim Khan

Porters Model

PORTERS MODEL
NEW ENTRANTS

Bargaining Power

Bargaining Power

Of Suppliers
SUPPLIERS COMPETITON (within the industry)

Of Buyers

BUYERS

SUBSTITUES

Input Output Matrix

The industry can also be fit into the input-output matrix wherein all the factors governing/ affecting the industry are identified and classified based on the stage of production or sales. The three broad categories used for classification are:

INPUT

PROCESS

OUTPUT/ MARKET

Availability of power, water and other utilities Seasonality Cyclicability Cost fluctuation Tariff level Suppliers bargaining

Technology, its availability and obsolescence Economies of scale

Competition Consumption pattern Major players

Labor capital ratio Tariff levels Gestation period Price & price control Upstream/ downstream industry Product life cycle Break even point Degree of fragmentation 83 | P a g e

Prof. Kalim Khan power Bargaining power of manpower Availability of appropriate manpower Capital input R&D requirements Regulatory developments/ Govt. policies Social issues/ environmental factors

Porters Model Degree of competition Demand/ Supply Market segmentation Demand Cyclicality Product/ service quality factors Advertising

Regulatory developments Import content Infrastructure facilities

Distribution Rate of growth Threats of imports Regulatory developments Impact of trade agreements Social issues/ environmental factors Entry barriers Substitute products Export potential

1. Input The requisites factors affecting the inputs required for the production like raw materials, utilities, suppliers etc. fall under this category. The various factors identified are: a. Availability of power, water, and other utilities: Adequate power supply should be available to cater to the needs of the industry. This parameter becomes even more significant if the industry is power intensive. A careful study of this factor would indicate a captive power plant is required. Usually in process industries, a captive power plant is a common phenomenon. Similarly all the other utilities like water, fuel etc. should be adequately available and will be one of the deciding for the selection of the site.

84 | P a g e

Prof. Kalim Khan

Porters Model

b. Seasonality: The seasonality of the raw materials will determine the working capital requirements of industry and the working capital management. The seasonality of the raw materials would mean that huge inventories of the raw materials have to be maintained there by blocking up the working capital c. Cyclicality: The raw materials required for the industry could also be cyclical because of various economic factors governing that industry. The demand supply situation could also result in the cyclical nature of the raw materials industry. d. Cost fluctuation: The cost fluctuations of the inputs for the industry will have a direct impact on the profitability of the industry. if the industry operates on wafer thin margins, any cost escalation will have an adverse impact on the economic operations of the industry. e. Tariff level: Tariff levels in India are high compared to that of the developed countries and play a crucial role. With the openings up of the economy, the tariff levels are being reduced in a phased manner. Some industries still attract high tariff levels and if the inputs required happen to fall under such an industry, then the impact of the tariff should be studied in detail. f. Suppliers bargaining power: The demand and supply of the input materials determine the bargaining power of the suppliers. In case the demand for the input materials outstrips the supply, then the suppliers have superior bargaining powers as regards the prices and the credit terms extended. If the suppliers bargaining power is high for any industry, sufficient cushion should be in-built for the deviations in prices and credit terms. The size and stature of the supplier also is a key factor in deciding his bargaining strength. g. Bargaining power of manpower: Manpower is of prime importance for industries, which are labour intensive and where highly skilled labour is required. In case of highly competitive markets, wherein the manpower has alternative employment sources, theyre in a price war to attract the right kind of talent to the industry. The demand and supply for the manpower shall determine the bargaining power of the manpower h. Availability of appropriate manpower: This factor is linked to the bargaining power of the manpower. Adequate and equipped manpower should be available. In case the industry is one that has a high degree of health hazards and potential danger of loss of life, it is difficult to attract the requisite manpower. Manpower turnover is a potential problem in highly competitive industries.

85 | P a g e

Prof. Kalim Khan i.

Porters Model

Capital input: The nature of the industry and its structure would determine the capital requirements of the industry. The initial capital outlay shall also determine the type of players entering the industry. In cases where the capital required is not high, the number of player in the industry would also be on the higher side for industries which are attractive and high growth rates are projected.

j.

R&D requirements: The expenditure on Research & Development and allied activities for the industries also follows a set pattern. Industries that are technology intensive would require a focus on R&D activities for any player in that industry. In cases where the technology is imported, the indigenisation of the technology shall constitute the R&D requirements of the industry. in-house research cell has become a common phenomenon for a majority of the companies except for those, which are small in size and cannot afford a dedicated research department. In industries where product innovation and product improvement is the name of the game, R&D becomes a thrust area and becomes a critical factor for analysing the industry.

k. Regulatory developments: Various regulatory bodies may govern some of industries that produce the input materials and it is essential to keep track of the regulatory developments, which might affect the players in the industry. l. Import content: Some of the raw materials may need to be imported either for nonavailability in local markets or lower international prices when compared to the domestic prices. The movement of the import tariffs also could affect the prices of the input materials. When the import content is high, the currency risk comes into play. Unless the industry has high exports, it would be a pre-condition for the players in the industry to employ the hedging techniques to minimise the currency risk. m. Infrastructure required: The nature of the industry would determine the infrastructure requirements. The infrastructure required for process plants is generally on the higher side. High degree of automation could also lead to high infrastructure requirements. The infrastructure required includes Plant & Machinery, Buildings, Office Automation equipment etc. The relative strength of the players in the industry could arise from the strong infrastructure of a company vis--vis the other players in the industry.

86 | P a g e

Prof. Kalim Khan 2. Process

Porters Model

a. Technology: Some of the industries are technology intensive and hence it is imperative too the availability and obsolescence rate. Technology tie-up and technology transfer also assume significance in the performance of the players in the industry. b. Economies of scale: The existing players with larger scale of operation would generally enjoy economies of scale. Economies of scale would mean a lower cost structure for that companies any new or existing player operating at a lower scale would be at disadvantage. c. Labour Capital ratio: The optimal mix of the labour and capital varies from player to player in the industry. While the ratio could move in a pre defines band for an industry, it is not essential that the same strategy have to be followed by the entire place. It would be interesting to study the cost of capital and cost of labour and arrive at the right combination for the minimal cost, within the predefined band. d. Gestation period: The gestation period for the projects should also be taken into consideration while studying the industry. Industries like power, oil, refineries etc. have a long gestation period. Gestation period is an important phase for the implementation of any project. Project scheduling and cost control measures are essential to prevent any cost or time over run. e. Upstream/ Downstream industry: The upstream industries are those, which are the users of the products or services of the industry under study. The player in the industry may contemplate backward integration to ensure a continual supply of raw materials at an affordable price. Alternatively the players may also contemplate forward integration if the value addition results in better returns and price realization. f. Breakeven point: Ultimately it is the bottom line that counts in assessing the performance or relative attractiveness of an industry. An important parameter would be to determine the breakeven point viz the minimum numbers of units to be sold to recover the costs. The higher the breakeven point, the more riskier is the industry. g. Regulatory developments/ Government Policies: The industry could be governed by the regulatory bodies like DPCO etc. in such a control industry, the change in the regulatory framework and guidelines would also be of paramount importance in understanding the forces affecting the industry The various government policies would also have a direct impact on the industry. E.g. if the industry relies on exports, the change in the EXIM policy would effect the industry.

87 | P a g e

Prof. Kalim Khan

Porters Model

h. Social issues/ environmental factors: Social issues could also upset the applecart. E.g. some of the develop countries are not accepting the product of Indian industries which employ child labour. With the advent of Green revolution, environmental factors have risen to the fore. Pollution control boards have vested with more power and a demanding stringent pollution control norms from the industrial sector. The Central Government has a negative list of industries, which are highly polluting in nature. 3. Output/ Market a. Competition: It is seldom the case that the industry is monopolistic in nature. Competition is existent in any industry. The intensity of the competition would influence the behaviour of any player in the industry. The players have to prepare their competitive strategy to survive in the market. Competition could either be from the players in the same industry or substitute products. Within the industry, the presence of an unorganised sector would further aggravate the competition. Competition is very intense in highly fragmented markets. b. Consumption pattern: The consumption pattern for the end products of the industry essentially defines the target market for the players who shall constitute the user segment. The consumption pattern can be classified based on any of the following parameters: User industry Individuals Vs Institutions Region c. Major players: The size and market share of various players in the industry shall define the major players in the industry. Usually the major players determine the future course for the industry, which is followed by all the fringe players. d. Tariff levels: The tariff structure governing the industry comes into the picture when the players sell the products in the market. The government reviews the tariff level from time to time or in the budget based on the representations made by the industrial organisations. e. Price and price control: Price is one of the 4Ps of marketing which governs any company or industry. Pricing strategies plays an important role in defining the industry structure. The demand/ supply position, the nature of the industry and the number of players influence 88 | P a g e

Prof. Kalim Khan

Porters Model

the price of product or service. The players in the industry may indulge in price wars to increase their marker share. In the controlled economy, the government controls prices of end product of some industries. f. Product life Cycle: The product life cycle has already been dealt with as a separate head in the section of industry analysis.

g. Degree of Fragmentation; Fragmented industries are populated by a large number of companies. The essential notion that makes these industries a unique environment in the absence of market leader with powers to shape industry events. An industry could be fragmented because of an of the underlining economic causes: Low overall entry barriers Absence of economies of scale High transportation costs. High inventory cost or erratic sales fluctuations Diverse market needs Exit barriers Local regulations Government prohibition of concentration Fragmented industries are characterised not only by many competitors but also by generally weak bargaining power with suppliers and buyers. The results could be marginal profits. In such an environment, strategic position is of particularly crucial significance. The degree of fragmentation determines the strategy to be adopted by players in the industry. h. Degree of competition: Degree of competition could be a fall out of the degree of fragmentation. The degree of competition is dependent on the following factors: Number of competitors The relative strength of the competitors

89 | P a g e

Prof. Kalim Khan

Porters Model

The degree of competition would have a direct impact on the bottom line of the players in the industry. i. Demand / Supply: Demand supply position in the industry is the most important criteria for judging the potential of an industry. When demand exceeds supply, there is under capacity in the industry. When it is vice-versa, there is over capacity in the industry. The demand supply position will determine the growth prospects of the industry and the possibility of new entrants. Market segmentation: Market consists of buyers who may differ in their wants, purchasing power, and geographical locations, buying attitudes and buying practices. Any of these variables can be used to segment a market. Every market can be broken down into market segments, niches and ultimately individuals. Market segments are large identifiable groups within a market. A niche is a more narrowly defines group that may seek a special combination of benefits.

j.

Market segments normally attract a lot of competitors, whereas a niche attracts one or only a few competitors. Niche marketers presumably understand the niches needs so well that their customers are willing to pay a price premium. The segmenting variables for consumer markets are: Demographic (age, gender, occupation, income, education etc.) Geographic (region, climate, city etc.) Psychographics (social class, lifestyle, personality etc.) Behavioural (loyalty, benefits, user status, usage rate etc.) The segmenting variables for business markets are: Demographic (industry, company, size, location etc.) Operating variables (technology, user/ non-user etc.) Purchasing approaches (purchasing criteria, general purchasing policies etc.) Situational factors (urgency, specific application, size of order etc.) Personal characteristics (loyalty, attitude towards risk, buyer-seller similarity)

Proper market segmentation could also give the company a competitive edge over the other players in the industry.

90 | P a g e

Prof. Kalim Khan

Porters Model

k. Demand Cyclicability: As discussed earlier, the user industry demand could be cyclical in nature or could be impervious to the business cycles in the economy. The finished goods inventory management shall depend on the nature of the used industry. The production cycles any have to be realigned to match the needs of the user industries. l. Product/ service quality factors: The customer is the king. The quality of the product and the service are the essential ingredients to keep the customer satisfied. Moreover these factors are instrumental in building a strong base of loyal customers. The one who deliver the goods of the requisite quality on time every time shall have the competitive edge. Product quality can be achieved by high-class technology and rigorous quality control measures. Quality of services will play a crucial role in influencing repeat purchases. m. Advertising: The nature of the industry and stage of the industry cycle will determine the typical advertising expenses for a company in a given industry. In the introductory and growth phases, the advertising expenditure as a percentage of sales is very high. The marketing mix would determine the quantum of funds allocated to advertising. Advertising is the tool, which increases the brand awareness and brand recall. It is often combined with sales promotion to project the company to the potential customers. n. Distribution: Distribution is the arm, which ensures a wide reach for the products manufactured by the company. Especially in the case of consumer goods, a strong distribution network is required to ensure easy availability of the product. o. Rate of growth : One of the parameters for assessing the industry attractiveness is the rate of growth of the industry sales. The factors influencing the rate of growth are manifold but the key factor is the demand supply position and the overall health of the economy p. Threats of imports: With the opening up of the economy and the phased reduction in the import duties, there is a potential threat of imports to the existing players in the industry. The import duty structure, the comparative analysis of the cost and quality of local products and the imported products, availability and brand images are some of the factors that influence the imports The demand-supply position worldwide also will gain significance while exploring this possibility. In case of dumping, the anti-dumping measures initiated by the government will come to play. q. Regulatory developments: The players in any industry are governed by certain rules and regulations that keep changing from time to time. The players should be able to adapt to these changes very fast in order to gain an edge over the others.

91 | P a g e

Prof. Kalim Khan

Porters Model

The regulatory developments of the user industry would also indirectly affect the industry under study. Hence it is imperative to keep track of the regulatory developments of the user industry to stay ahead of the pack. r. Impact of trade agreements: The trade agreements would have a direct bearing on the industry. The trade agreements are usually bilateral or otherwise general trade agreements like GATT etc.

The industry has to gear up to the stringent conditions as laid down by the trade agreements in order to be competitive in the global markets. The pressure is not so high in case bilateral agreements. s. Social issues/ environmental factors : What applies to one industry applies to its user industry also. The social issues and the environment issues affecting the user industry should also be studied in conjunction with the same for the industry under study. t. Entry barriers: Industries differ greatly in their ease of entry. The major entry barriers include high capital requirements, economies of scale, patents and licensing requirements, scarce locations, availability of raw materials, reputation requirements and so on. Some of the barriers are intrinsic to certain industries, and the others are erected by the singled and combined actions of the incumbent firms.

Even after a firm enters an industry, it might face mobility barriers when it tries to enter more attractive segments. u. Substitute products: Substitute and copies are created in a shorter span of time than the original product itself. This has been the tradition in the past. But for the substitute product to pose a serious threat to the industry under study, they should have one or more of these advantages over the products being substituted are listed below: Price advantage Easy availability Environmental factors Superior quality Catering to an unsatisfied need of the customer The substitutes eat into the market shares of the players in the industry. Unless the industry counters the onslaught by the substitutes, the industry per se could be in jeopardy.

92 | P a g e

Prof. Kalim Khan

Porters Model

v. Export potential: The worldwide demand-supply scenario and the absence of a strong player abroad could create avenues for exports. The demand for the product in the global market could be because of any of the following factors: Non-availability of technology Non-availability of skilled manpower Cost disadvantage Non-availability of raw materials

Any company shall consider exports only if it is more lucrative than the domestic markets or when there is saturation in the domestic markets. While considering the export potential it is also necessary to study the exchange rate fluctuations and the management of the exposure in any currency by the company. 4. Time frame for industry research The Unit Head, Research shall specify the time frame within which a research assignment should be completed depending upon the scope of study and availability of information. Generally, an analyst would take about 3 weeks time to complete research study and prepare report on an industry. Updating of industry report shall be done on a continual basis.

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

93 | P a g e