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INTRODUCTION
There are many tools that can be used to help interpret the current situation. These are often referred to as auditing tools. These tools or models cannot only be used for auditing the current situation but can also play an important role in helping to develop future strategy (ie they can be used for identifying both where we are now and where we want to be). This session will outline the various models and frameworks that can be used for both strategic analysis and strategy development. The models will include; Value Chain Product Life Cycle Diffusion and Innovation Portfolio Analysis Experience Curve and the Importance of Market Share Profit Impact of Marketing Strategy PIMS Gap Analysis SWOT Analysis
Inbound logistics
Figure 1 3
By focusing on these various functions companies can improve performance an effectiveness and identify areas in which they can add customer value. It not only provides a structured framework for examining costs and performance within an organisation, but also provides a sound basis for inter-firm comparisons. The value chain can be extended to include suppliers, distributors and customers to analyse relationships between companies and to identify ways of adding value in the supply chain, such as Just in Time ( J.I.T.).
In the 1980s there were just 4 links in the chain: 1. The talent, be it a writers, performers or someone who creates powerful formats. It is the raw material of great media. 2. Production the ability to take creative talent and turn it into a programme or a website that consumers really want. 3. Content packaging and marketing Channel 4 typifies this. The channel does not produce any programmes, but creates channel brands. 4. Distribution the ability to get media to the consumer through control of spectrum, telephone wires and cables. This final link has for many years been the most profitable of all. The spectrum was so limited that the companies that controlled it had tremendous power over the entire chain, and took the largest proportion of the value created.
But 2 things have changed all that: 1. The spectrum isnt as limited as it once was. There are now more than 200 TV channels broadcasting in the UK and more than 250 analogue radio stations. There is the internet, broadband and soon the new third generation mobile media will be offering greater access to the consumer. When the analogue TV signal is switched off there will another slice of spectrum sell. There have never been so many routes to carry media content to the consumer, and it will become easier in the future. 2. A new link also appeared in the value chain that has further devalued companies that simply have access to broadcast spectrum. This is the consumer gateway. Sky and ONDigital gain their power through their TV set-top boxes, which allow them to control access to the consumer. And there are also new and powerful operators being created by the Internet, such as AOL. At the other end, the stock market already puts a high value on companies such as AOL and ONDigital, which control the consumer gateway.
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The real value seems to lie in vertically integrated businesses that have must-see content and control the gateway. This lies at the heart of BSkyBs strategy and is the rationale for the merger between AOL and Time Warner. Applying this logic to the mobile phone industry makes the companies that paid 22.48 billion for the third generation spectrum in Britain weakest link in the media value chainrather nervous. To make an acceptable return on capital employed, they will need to generate substantial profits from the content, packaging and consumer gateway links in the value chain. This will require some big changes. These companies must convert their existing billing relationships into gateway relationships where they are at the heart of everything the customer does. They also have to offer their customers must-see content that is exclusive to their network. The final step would be to vertically integrate the whole operation, as BskyB has in television. This would create significant synergies. To achieve this will require a huge cultural shift. Companies that have core skills in network and subscriber management must understand and adopt the very different skills of integrated content providers. It is a tough proposition.
Source: Ewington (2000), www.Lexis-Nexis.com
Figure 2 9
Time
The PLC can be applied at a number of levels Total industry Product Class Product Form Brands eg motor industry eg cars, vans or lorries eg people carriers, estate and sports cars eg Renault Espace, VW Passat, Rover 75
To fully understand the context in which a brand is developing it is essential to understand the distinction between the various categories of the PLC. The length of each stage will vary significantly depending on which category we are considering. For example; industry and product class tend to have the largest life cycles. However, it is difficult to judge the nature of the PLC for individual brands for example, Persil (washing powder) has endured longer than each of the product classes washing powder and liquid detergents. Product forms tend to conform to the classic PLC curve to a greater extent than the other categories. The table over summaries the various marketing mix decisions for each stage of the PLC. It must be remembered that the table simplifies the decisions and provides guidance only. Each product should be viewed independently. For example; the table indicates a low price strategy at the introduction stage. However, depending on the market a company may decide to operate a market skimming strategy of high price.
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Marketing Mix
Product
Introduction
Basic product, limited range
Growth
Develop product extensions and service levels Penetration strategy
Maturity
Modify and differentiate Develop and service levels Price to meet or beat competitors
Decline
Phase out weak brands Consider leaving market Reduce
Price
Distribution Advertising
Selective Build dealer relations Heavy spending to build awareness and encourage trial among early adopters and distributors
Extensive to encourage trial Short to medium
Intensive Limited trade discounts Moderate to build awareness and interest in the mass market. Greater word of mouth
Reduce to a moderate level Long range
Intensive Heavy trade discounts Emphasise brand differentiation and special offers
Selective Phase out weak outlets Reduce to a level that maintains hard core loyalty. Emphasise low prices to reduce stock
Reduce or stop completely Short
Sales
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Diffusion of Innovation
The PLC provides an indicator of the various stages through which the product passes but provides little indication of timescale. The rate at which new products are adopted varies considerably, but Rogers (1981) developed a model which illustrates the pattern of adoption that is evident following the launch of a new product. ( see below ).
Innovators 2.5%
Laggards 15%
Figure 3
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The characteristics of consumers in each of these adopter categories varies as does the rate at which they are likely to purchase new products. As such, the model is useful to marketers in identifying potential target markets for new products and for tailoring the marketing mix to meet the needs of each group/category of customers. While a very useful tool for segmenting the market, the difficulty lies in a marketers ability to identify those segments and reach them effectively (eg the innovators in the consumer electronics market may not be innovators in the golf equipment market).
Innovators These customers are eager to try new ideas and products readily and are often prepared to pay high initial prices to be first in the market. They are regarded as opinion leaders.
Early Adopters
Early Majority Late Majority Laggards
This group is willing to adopt new ideas, but not at the same speed as the innovators. They are likely to seek out information before purchasing, but should also be seen as opinion formers.
In general this group is more conservative than above and more likely to be risk averse. For example, people who would consider making a purchase on the internet. Includes people who are cautious about anything new at the time. They tend to reflect on new products and only buy once they are firmly established in the market. This group are very traditional and averse to change. They tend to be price sensitive and wait prices to fall. They will only buy CDs once cassette tapes are no longer available.
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The value of the BCG matrix is that it examines the generation and management of cash within a business. Relative market share is seen as a predictor of the products capacity to generate cash and market growth is seen as the predictor of the products need for cash. This suggests that products with high market share will achieve high sales, but will need less investment in new brands and should have lower costs due to scale economies. Products in fast growing markets require higher levels of investment than those in slower growing markets. Products in low growth markets with a high market share will generate cash, which can be used to fund other products needing investment. Nb: Cash flow is not the same as profitability.
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Relative Market Share High Low Question Mark Cash Generated + Cash Used -----Dog
High
Cash Cow
+ 0
0.1x
Figure 4
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Question Marks
cash to attempting to become
are at the introduction stage of the PLC, with high market growth and low market share. They are absorbing fund developments in marketing in future stars of the business.
are the future of the organisation with high market share and high market growth. They are at the growth the PLC but are still absorbing cash to market share are at the maturity stage of the PLC and have high market share, but market growth is slowing. Marketing expenditure is limited so cash generated to fund product areas of the business are at the decline stage of the PLC having both low share and growth in the market. However, they are generating cash in the short term.
Dogs capable of
The matrix highlights the need for succession planning and the issue of over dependence on the current cash cows. As with the PLC there are many different patterns as products enter the market and fail, or the organisation reinvests in them to prevent them becoming dogs.
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Portfolio Analysis
Most companies have multiple products serving multiple segments / markets. Some of these products require lots of investment and are cash hungry, others require limited investment and are cash rich. Companies therefore need to devise means of allocating their limited resources among product or SBUs so as to achieve the best performance for the business as a whole.
Decisions have to be made regarding which products or brands should be invested in, which to hold and which to let go. The process of managing groups of brand/product or SBU is called portfolio planning. Portfolio models are used to identify and analyse the current position of the organisation, highlighting the current resources, capabilities and performance. Several of the more commonly used models are discussed below.
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B.C.G Strategies
Stars
Build strategies by increasing sales or market share.
Question Marks
Build selectively Identify and focus on niches markets Harvest and divest others
Cash Cows Hold strategies to maintain sales or market share Defend position Use cash generated to sustain Stars, invest in NPD and support a select number of Question Marks Limitations of BCG
Dogs Harvest or Divest or Identify profitable niche markets and focus on them.
Preoccupation with simply market growth and relative market share. Other factors may be of equal importance ie profitability Difficulty with accurately measuring growth and share. Ignores factors such as competition and developing sustainable competitive advantage Markets that grow slowly may still be attractive as they may not cost as much in terms of investment It treats cash flow as the sole criterion for investment decisions. In practice a range of other factors, such as ROI, market size, competitive position, costs etc are also used.
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Once the criteria had been selected each factor can be given a weighting that recognises their relative importance. The table below gives an example of such weighting based on a total of 10.
Weighting the Criteria
Market Attractiveness Market share Patents Distribution capabilities Relationships Cost advantages Total
Competitive Strength Market growth rate Market size Strength of competition Social factors Profit opportunity Total
2.5 1 2 2 2.5 10
2 2.5 1 0.5 4 10
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Each market attractiveness factor and competitive strength is scored out of 10 (ie 1 = very unattractive/weak and 10 = very attractive/strong). Each score is multiplied by their weighting to produce an overall score for market attractiveness and competitive strength for each product and SBU. The results are plotted on the G.E. matrix. Once the products have been plotted on the matrix it is possible to identify potential strategies for each position of the matrix as shown below:
High
Market Attractiveness
Medium 6 Low 3 0
Figure 5
Strong
Key
Invest for growth Manage selectively for earnings Harvest/Withdraw 23
Medium
Business Strengths
Weak
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This portfolio model adopts a similar approach to that of the GE Matrix, the main difference being the axes which here are based around prospects for sector profitability and enterprise competitive capability as shown below:
Disinvest
Phased Withdrawal Cash Generation
Phased Withdrawal
Custodial Growth Growth Leader
Double or Quit
Try Harder Leader
Competitive Capabilities
Average Strong
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Cumulative experience
The implication of this is that the first company to enter a market and attain a large market share will have cost advantages over those entering the market later. Examples, such as, IBM market leader in main frame computers and Texas Instruments who entered the market a couple of years later, but had to withdraw soon after and VHS compared to Betamax video recording systems.
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Aaker, 1998 acknowledges however there are several considerations when using the experience curve;
Multiple products can complicate the concepts The experience curve does not apply to every situation Technological developments may make the experience curve obsolete Lowest costs do not have to equate to lowest prices
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Profitability
Figure 7
Profitability
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Some Thoughts on PIMS High market share in itself will not automatically improve profitability There is evidence of many successful low share businesses Often nichers develop small and successful segments while more dominant medium sized companies become stuck in the middle Does the definition of the market determine market share e.g. does easyJet have a large market share of the budget airline industry or does it have a small share of the total airline industry?
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Gap Analysis
Gap analysis is a fairly simple diagrammatical method of presenting where we are now and where we want to be, as illustrated below;
70 60 50 40 30 20 10 2 4
Current forecast
6 Time (years)
10 Figure 8
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Strategic analysis will identify the current situation and then forecasts can be made of how the company will perform in the future based on existing products serving existing markets.
However, the corporate goal/objectives of the organisation may be a lot different to that forecast and this creates the strategic gap. In closing the gap marketers can use Ansoffs Growth Matrix which seeks to develop businesses through one of 4 strategies as shown below: Market penetration Market development Product development Diversification
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SWOT
This analysis is derived from the initials of the words strengths, weaknesses, opportunities and threats. The accent is on the key factors of the marketing audit which have been identified as having an impact on the success or failure of the business eg: Strength Weaknesses Opportunity Threat - excellent quality products, reliable engineering. - poor delivery, hazardous, higher prices, management culture systems. - good supply, new uses for existing product, changes in taste or fashion. - launch of new product, major competitive ad campaign, economic depression.
The analysis is what goes into the marketing plan (not the full audit). It seeks to produce a concise, clear and reliable short account of where the is organisation is now, how it sees itself in the market place against its competitors, what shortcomings need to be overcome, where opportunities can be turned into competitive advantage, where it can do better than the competition and what is required for all these things to be achieved.
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Low
B. Concentrate here
Low
C. Possible overkill
D. Low priority
Figure 10
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The analysis points out that even when a business has major strengths/(distinctive competencies), it does not necessarily create a competitive advantage. The competence may not, or example, be of any importance to the market or competitors may have a similar strength. What becomes important is that the business has relatively greater strength in the important factor than its competitors. In examining strengths and weaknesses a business can decide which strengths and weaknesses to concentrate on.
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