Enu marketing 250812

Go Global !Global Economic Environment :Global Economic Environment :External Marketing EnvironmentExternal Marketing Environment

By

Stephen OngStephen OngEdinburgh Napier University Business School

[email protected] Professor, College of Management, Shenzhen

University25 August 2012

AgendaAgenda1.1. Global Marketing Global Marketing

MixMix2.2. Segmentation, Segmentation,

Targeting & Targeting & PositioningPositioning

3.3. External External Environmental Environmental AnalysisAnalysis

4.4. Strategic Strategic Competitive Competitive AdvantageAdvantage

Learning Objectives

To explain what marketing is. To explain the constituents of

the macro and micro environment.

To assess the external marketing environment for an organisation through PEST analysis.

To critically appraise processes and techniques used for auditing the marketing environment.

To understand how external environment impacts on strategy development.

Introduction

Marketing principles (5P) in foreign markets are similar to those in domestic markets

1.1. ProductProduct

2.2. PricePrice

3.3. PromotionPromotion

4.4. PlacePlace

5.5. PeoplePeople

However, some or all elements may need to be adapted to better fit local markets

Introduction

Marketing as a Means of Pursuing an International Strategy

Marketing Strategies

Marketing strategy depends on marketing orientationProduction

Sales

Customer

Strategic marketing

Social marketing

Marketing Strategies

Firms can segment and target markets

By countryBy global segmentUsing multiple criteria

Product Policies :Product Policies :Why Firms Alter Products

Firms alter products for

Legal reasonsCultural reasonsEconomic reasons

The Product Line: Extent and Mix

Product line decisions depend on

Sales and cost considerations

Product life cycle considerations

Pricing Strategies

Potential obstacles in international pricingGovernment intervention

Set minimum or maximum pricing

Prohibit certain pricing practices

Market diversityConsumers may be willing to pay higher

prices

Pricing Strategies

Pricing tacticsSkimming strategy

Penetration strategy

Cost-plus strategy

Export price escalationFluctuations in currency value

Pricing Strategies

Why Cost-Plus Pricing Pushes Up Prices

Pricing Strategies

Gray market or product diversion the selling and handling of goods through unofficial distributors

Pricing Strategies

Negotiating Import-Export Prices

Promotion Strategies

Promotionthe presentation of messages intended

to help sell a product or service

Push-pull mixPush

uses direct selling techniques

Pullrelies on mass media

Promotion Strategies

Advantages of standardized advertisinglower cost

better quality at local level

common global image

rapid entry into multiple countries

However, firms could have problems with translation

legalities

market needs

Branding Strategies

Brand

an identifying mark for a product or service

Branding Strategies

Advantages of a worldwide brandglobal image

global player identification

Problems with global brandslanguage

brand acquisition

country-of-origin

generic and near-generic names

Distribution Strategies

Distribution

the course – physical path or legal title – that goods take between production and consumption


Deciding whether to standardize

Distribution can vary substantially among countries

Distribution can be difficult to change


When choosing distributors and channels firms must consider

whether internal handling is feasible

which distributors are qualified

the reliability of after-sales service


Distributors choose which products to handle

To get a distributor to work for them, companies may have togive incentives

use successful products as bait for new ones

convince distributors that their product and company are viable


Factors that can contribute to distribution cost differences among countries includeInfrastructure conditions

The number of levels in the distribution system

Retail inefficiencies

Size and operating hour restrictions

Inventory stock-outs


E-commerce and the InternetOpportunities

can replace traditional sales methods

faster customer service

Problemscannot differentiate sales programs between

countries

still must comply with local laws

Managing the Marketing Mix

Gap analysisa method for estimating a company’s

potential sales by identifying prospective customers it is not serving adequatelyUsage

Product line

Distribution

Competitive

Managing the Marketing Mix

Gap Analysis

Evolving Challenges to Segment Markets

Disparities between “haves” and “have-nots” will increase

Companies will have conflicting opportunities to serve both “haves” and “have-nots”

Attitudinal differences will continue to affect demand

Materialism, cosmopolitanism, and consumer ethnocentrism

Global Market Segmentation, Global Market Segmentation, Targeting & PositioningTargeting & Positioning

• How to identify like groups of potential customers?

• How to chose the groups to target?

• How to segment those groups?

• How to position the brand in the mind of the customer?

Market Segmentation

Represents an effort to identify and categorize groups of customers and countries according to common characteristics

77.5 million dogs are owned in the U.S.

Who owns whom?

Targeting

• The process of evaluating segments and focusing marketing efforts on a country, region, or group of people that has significant potential to respond

• Focus on the segments that can be reached most effectively, efficiently, and profitably

Positioning

• Positioning is required to differentiate the product or brand in the minds of the target market.

Global Market Segmentation

• Defined as the process of identifying specific segments—whether they be country groups or individual consumer groups—of potential customers with homogeneous attributes who are likely to exhibit similar responses to a company’s marketing mix.

Contrasting Views of Global Segmentation

• Conventional Wisdom– Assumes

heterogeneity between countries

– Assumes homogeneity within a country

– Focuses on macro level of cultural differences

– Relies on clustering of national markets

– Less emphasis on within-country segments

Unconventional Wisdom Assumes emergence

of segments that transcend national boundaries

Recognizes existence of within-country differences

Emphasizes micro-level differences

Segments micro markets within and between countries

Global Market Segmentation

• Demographics• Psychographics• Behavioral characteristics• Benefits sought

Skiing became a sport in Norway where it was invented 4,000 years ago.

Demographic Segmentation

• Income• Population• Age distribution• Gender• Education• Occupation

What are the trends?

Demographic Facts and Trends

• In India the number of people under the age of 14 is greater than the entire US population

• In the EU, the number of consumers aged 16 and under is rapidly approaching the number of consumers aged 60-plus

• Asia is home to 500 million consumers aged 16 and under

• Half of Japan’s population will be age 50 or older by 2025

• A widening age gap exists between the older populations in the West and the large working-age populations in developing countries

• In the European Union, the number of consumers aged 16 and under is rapidly approaching the number of consumers aged 60-plus

• Asia is home to 500 million consumers aged 16 and under

• Half of Japan’s population will be age 50 or older by 2025

Demographic Segmentation

Segmenting by Income and Population

• Income is a valuable segmentation variable

– 2/3s of world’s GNP is generated in the Triad but only 12% of the world’s population is in the Triad

• Do not read into the numbers

– Some services are free in developing nations so there is more purchasing power

• For products with low enough price, population is a more important variable

Per Capita Income

10 Most Populous Countries

Age Segmentation

• Global Teens-between the ages of 12 and 19

– A group of teenagers randomly chosen from different parts of the world will share many of the same tastes

• Global Elite–affluent consumers who are well traveled and have the money to spend on prestigious products with an image of exclusivity

Gender Segmentation

In focusing on the needs and wants of one gender, do not miss opportunities to serve the other

Companies may offer product lines for both genders Nike, Levi Strauss

Psychographic Segmentation

Grouping people according to attitudes, values, and lifestyles SRI International and VALS 2

Porsche exampleTop Guns (27%): Ambition, power, control Elitists (24%): Old money, car is just a carProud Patrons (23%): Car is reward for hard workBon Vivants (17%): Car is for excitement,

adventureFantasists (9%): Car is form of escape


The Euroconsumer:Successful Idealist–Comprises from 5% to

20% of the population; consists of persons who have achieved professional and material success while maintaining commitment to abstract or socially responsible ideals

Affluent Materialist–Status-conscious ‘up-and-comers’– many of whom are business professionals – use conspicuous consumption to communicate their success to others


The Euroconsumer: Comfortable Belongers

25% to 50% of a country’s population

conservative

most comfortable with the familiar

content with the comfort of home, family, friends, and community

Disaffected Survivors

lack power and affluence

harbor little hope for upward mobility

tend to be either resentful or resigned

concentrated in high-crime urban inner city

attitudes tend to affect the rest of society

Psychographic Segmentation:Sony’s U.S. Consumer Segments

Behaviour Segmentation

•Focus on whether people purchase a product or not, how much, and how often they use it•User status•Law of disproportionality/Pareto’s Law–80% of a company’s revenues are accounted for by 20% of the customers

Benefit Segmentation

Benefit segmentation focuses on the value equation

Value=Benefits/Price

Based on understanding the problem a product solves, the benefit it offers, or the issue it addresses

Ethnic Segmentation

• The population of many countries includes ethnic groups of significant size

• Three main groups in the U.S. include African-Americans, Asian-Americans, and Hispanic Americans

Hispanic Americans50 million Hispanic

Americans (14% of total pop.) with $978 billion annual buying power

“$1 trillion Latina” 24 million Hispanic women: 42% single, 35% HOH, 54% working

Assessing Market Potential

Be mindful of the pitfallsTendency to overstate the size and short-

term attractiveness of individual country markets

The company does not want to ‘miss out’ on a strategic opportunity

Management’s network of contacts will emerge as a primary criterion for targeting

Assessing Market Potential

• Three basic criteria:– Current size of the segment and

anticipated growth potential– Potential competition– Compatibility with company’s overall

objectives and the feasibility of successfully reaching the target audience

Current Segment Size and Growth

• Is the market segment currently large enough to present a company with the opportunity to make a profit?

• If the answer is ‘no,’ does it have significant growth potential to make it attractive in terms of a company’s long-term strategy?

Potential Competition

• Is there currently strong competition in the market segment?

• Is the competition vulnerable in terms of price or quality?

Feasibility and Compatibility

• Will adaptation be required? If so, is this economically justifiable in terms of expected sales?

• Will import restrictions, high tariffs, or a strong home country currency drive up the price of the product in the target market currency and effectively dampen demand?

Feasibility and Compatibility

• Is it advisable to source locally? Would it make sense to source products in the country for export elsewhere in the region?

• Is targeting a particular segment compatible with the company’s goals, brand image, or established sources of competitive advantage?

Framework for Selecting Target MarketsFramework for Selecting Target Markets

• Demographic information is a starting point but not the decision factor

• Product-Market must be considered– Market defined by product category

• Marketing model drivers must be considered– Factors required for a business to take root and

grow

• Are there any enabling conditions present?– Conditions whose presence or absence will

determine success of the marketing model

9 Questions for Creating a Product-Market 9 Questions for Creating a Product-Market ProfileProfile

1. Who buys our product?2. Who does not buy it?3. What need or function does it serve?4. Is there a market need that is not being met by

current product/brand offerings?5. What problem does our product solve?6. What are customers buying to satisfy the need

for which our product is targeted?7. What price are they paying?8. When is the product purchased?9. Where is it purchased?

Target MarketTarget Market Strategy Options

Standardized global marketingMass marketing on a global scale

Undifferentiated target marketing

Standardized marketing mix

Minimal product adaptation

Intensive distribution

Lower production costs

Lower communication costs

Target Market Strategy OptionsTarget Market Strategy Options

• Concentrated global marketing– Niche marketing– Single segment of

global market– Look for global

depth rather than national breadth

– Ex.: Chanel, Estee Lauder

Differentiated global marketing Multi-segment targeting

Two or more distinct markets

Wider market coverage

Ex.: P&G markets Old Spice and Hugo Boss for Men

Positioning

• Locating a brand in consumers’ minds over and against competitors in terms of attributes and benefits that the brand does and does not offer– Attribute or Benefit– Quality and Price– Use or User– Competition

Positioning Strategies

• Global consumer culture positioning– Identifies the brand as a

symbol of a particular global culture or segment

– High-touch and high-tech products

• Foreign consumer culture positioning– Associates the brand’s users,

use occasions, or product origins with a foreign country or culture

Beer is associated with this German’s culture; the symbol on his shirt is not German!

Positioning Strategies

• Local consumer culture positioning– Identifies with local cultural

meanings– Consumed by local people– Locally produced for local

people– Used frequently for food,

personal, and household nondurables

– Ex.: Budweiser is identified with small-town America

Clydesdale = Which Beer?

External Environmental Analysis (1)

• Analyse the broad macro-environment of organisations in terms of political, economic, social, technological, environmental (‘green’) and legal factors (PESTEL).

• Identify key drivers in this macro-environment and use these key drivers to construct alternative scenarios with regard to environmental change.

External Environmental Analysis(2)

• Use Porter’s five forces analysis in order to define the attractiveness of industries and sectors and to identify their potential for change.

• Identify successful strategic groups, valuable market segments and attractive ‘Blue Oceans’ within industries.

• Use these various concepts and techniques in order to recognise threats and opportunities in the marketplace.

Slide 2.65

Layers of the business environment

Figure 2.1 Layers of the business environment

The PESTEL framework (1)

The PESTEL framework categorises environmental influences into six main types:

political, economic,

social, technological,

environmental legal

Thus PESTEL provides a comprehensive list of influences on the possible success or failure of particular strategies.


• Political Factors: For example, Government policies, taxation changes, foreign trade regulations, political risk in foreign markets, changes in trade blocks (EU).

• Economic Factors: For example, business cycles, interest rates, personal disposable income, exchange rates, unemployment rates, GDP trends.

• Socio-cultural Factors: For example, population changes, income distribution, lifestyle changes, consumerism, changes in culture and fashion.


• Technological Factors: For example, new discoveries and technology developments, ICT innovations, rates of obsolescence, increased spending on R&D.

• Environmental (‘Green’) Factors: For example, environmental protection regulations, energy consumption, global warming, waste disposal and re-cycling.

• Legal Factors: For example, competition laws, health and safety laws, employment laws, licensing laws, IPR laws.

Key drivers of change

Key drivers for change:

• The environmental factors likely to have a high impact on the success or failure of strategy.

• For example, the birth rate is a key driver for those planning nursery education provision in the public sector.

• Typically key drivers vary by industry or sector.

Using the PESTEL framework

• Apply selectively –identify specific factors which impact on the industry, market and organisation in question.

• Identify factors which are important currently but also consider which will become more important in the next few years.

• Use data to support the points and analyse trends using up to date information

• Identify opportunities and threats – the main point of the exercise!

ScenariosScenarios are detailed and plausible views of how the environment of an organisation might develop in the future based on key drivers of change about which there is a high level of uncertainty.

• Build on PESTEL analysis .

• Do not offer a single forecast of how the environment will change.

• An organisation should develop a few alternative scenarios (2–4) to analyse future strategic options.

Carrying out scenario analysis (1)

• Identify the most relevant scope of the study – the relevant product/market and time span.

• Identify key drivers of change – PESTEL factors that have the most impact in the future but have uncertain outcomes.

• For each key driver select opposing outcomes where each leads to very different consequences.

Carrying out scenario analysis (2)

• Develop scenario ‘stories’ - That is, coherent and plausible descriptions of the environment that result from opposing outcomes

• Identify the impact of each scenario on the organisation and evaluate future strategies in the light of the anticipated scenarios.

• Scenario analysis is used in industries with long planning horizons for example, the oil industry or airlines.

Scenarios for the global financial system, 2020

Illustration 2.2

Industries, markets and sectors

An industry is a group of firms producing products and services that are essentially the same. For example, automobile industry and airline industry.

A market is a group of customers for specific products or services that are essentially the same (e.g. the market for luxury cars in Germany).

A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector)

Porter’s five forces framework

Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces:

• the threat of entry,

• the threat of substitutes,

• the bargaining power of buyers,

• the bargaining power of suppliers and

• the extent of rivalry between competitors.

The five forces constitute an industry’s ‘structure’.

Slide 2.77

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved

The five forces framework (1)

Figure 2.2 The five forces framework


The Threat of Entry & Barriers to Entry

• The threat of entry is low when the barriers to entry are high and vice versa.

• The main barriers to entry are:

Economies of scale/high fixed costs

Experience and learning

Access to supply and distribution channels

Differentiation and market penetration costs

Government restrictions (e.g. licensing)

• Entrants must also consider the expected retaliation from organisations already in the market


Threat of Substitutes

Substitutes are products or services that offer a similar benefit to an industry’s products or services, but by a different process.

Customers will switch to alternatives (and thus the threat increases) if:

• The price/performance ratio of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts)

• The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre)


The bargaining power of buyers

Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers.

If buyers are powerful, then they can demand cheap prices or product / service improvements to reduce profits .

Buyer power is likely to be high when:

Buyers are concentrated

Buyers have low switching costs

Buyers can supply their own inputs (backward vertical integration)


The bargaining power of suppliers

Suppliers are those who supply what organisations need to produce the product or service. Powerful suppliers can eat into an organisation’s profits.

Supplier power is likely to be high when:

The suppliers are concentrated (few of them).

Suppliers provide a specialist or rare input.

Switching costs are high (it is disruptive or expensive to change suppliers).

Suppliers can integrate forwards (e.g. low cost airlines have cut out the use of travel agents).


Rivalry between competitors

Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (they are distinct from substitutes).

The degree of rivalry is increased when :

Competitors are of roughly equal size

Competitors are aggressive in seeking leadership

The market is mature or declining

There are high fixed costs

The exit barriers are high

There is a low level of differentiation

Implications of five forces analysis• Identifies the attractiveness of industries –

which industries/markets to enter or leave.

• Identifies strategies to influence the impact of the forces, for example, building barriers to entry by becoming more vertically integrated.

• The forces may have a different impact on different organisations e.g. large firms can deal with barriers to entry more easily than small firms.

Issues in five forces analysis

• Apply at the most appropriate level – not necessarily the whole industry. E.g. the European low cost airline industry rather than airlines globally.

• Note the convergence of industries – particularly in the high tech sectors (e.g. digital industries - mobile phones/cameras/mp3 players).

• Note the importance of complementary products and services (e.g. Microsoft windows and McAfee computer security systems are complements). This can almost be considered as a sixth force.

The value net

Figure 2.3 The value netReprinted by permission of Harvard Business Review. From ‘The Right Game’ by A. Brandenburger and B. Nalebuff, July–August 1996, pp. 57–64. Copyright © 1996 by the Harvard Business School Publishing Corporation. All rights reserved

Comparative industry structure analysis

Figure 2.5 Comparative industry structure analysis

Types of industry (1)

• Monopolistic industries - an industry with one firm and therefore no competitive rivalry. A firm has ‘monopoly power’ if it has a dominant position in the market. For example, BT in the UK fixed line telephone market.

• Oligopolistic industries - an industry dominated by a few firms with limited rivalry and in which firms have power over buyers and suppliers.

• Perfectly competitive industries - where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available. Few (if any) markets are ‘perfect’ but may have features of highly competitive markets, for example, mini-cabs in London.

Types of industry (2)

• Hypercompetitive industries - where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change.

• Hypercompetition often breaks out in otherwise oligopolistic industries (e.g. mobile phones).

• Organisations interact in a series of competitive moves in hypercompetition which often becomes extremely rapid and aggressive as firms vie for market leadership.

Cycles of competition

Figure 2.6 Cycles of competitionSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetitive Rivalries: Competing in Highly Dynamic Environments by Richard A. D’Aveni with Robert Gunther. Copyright © 1994, 1995 by Richard A. D’Aveni. All rights reserved

The industry life cycle

Figure 2.4 The industry life cycle

Strategic Groups

Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.

• These characteristics are different from those in other strategic groups in the same industry or sector.

• There are many different characteristics that distinguish between strategic groups.

• Strategic groups can be mapped on to two dimensional charts – maps. These can be useful tools of analysis.

Characteristics for identifying strategic groups

Figure 2.7 Some characteristics for identifying strategic groups

Strategic groups in the Indian pharmaceutical industry

Figure 2.8 Strategic groups in the Indian pharmaceutical industrySource: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’, Journal of International Management, vol. 13 (2009), pp. 338–55

Uses of strategic group analysis

• Understanding competition - enables focus on direct competitors within a strategic group, rather than the whole industry. (E.g. Tesco will focus on Sainsburys and Asda)

• Analysis of strategic opportunities - helps identify attractive ‘strategic spaces’ within an industry.

• Analysis of ‘mobility barriers’ i.e. obstacles to movement from one strategic group to another. These barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.

Market segments

A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.

• Where these customer groups are relatively small, such market segments are called ‘niches’.

• Customer needs vary. Focusing on customer needs that are highly distinctive is one means of building a secure segment strategy.

• Customer needs vary for a variety of reasons -these factors can be used to identify distinct market segments.

• Not all segments are attractive or viable market opportunities – evaluation is essential.

Bases of market segmentation (1)

Table 2.1 Some bases of market segmentation

Who are the strategic customers?

A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.

Examples:

• For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers not the ultimate consumer.

• For a pharmaceutical manufacturer it is the health authorities and hospitals not the final patient.

Critical success factors (CSFs)

• Critical success factors are those factors that are either particularly valued by customers or which provide a significant advantage in terms of cost.

• Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them).

• Different industries and markets will have different critical success factors (e.g. in low cost airlines the CSFs will be punctuality and value for money whereas in full service airlines it is all about quality of service).

Blue ocean thinking

• ‘Blue oceans’ are new market spaces where competition is minimised.

• ‘Red Oceans’ are where industries are already well defined and rivalry is intense.

• Blue Ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served.

• A ‘strategy canvas’ compares competitors according to their performance on key success factors in order to develop strategies based on creating new market spaces.

Strategy canvas

Figure 2.9 Strategy canvas for electrical components companiesSource: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, 2005, Harvard Business School Press

Summary (1)

• Environmental influences can be thought of as layers around an organisation, with the outer layer making up the macro-environment, the middle layer making up the industry or sector and the inner layer strategic groups and market segments.

• The macro-environment can be analysed in terms of the PESTEL factors, from which key drivers of change can be identified. Alternative scenarios about the future can be constructed according to how the key drivers develop.

• Industries and sectors can be analysed in terms of Porter’s five forces – barriers to entry, substitutes, buyer power, supplier power and rivalry. Together, these determine industry or sector attractiveness.

Summary (2)

• Industries and sectors are dynamic, and their changes can be analysed in terms of the industry life cycle, comparative five forces radar plotscomparative five forces radar plots and hypercompetitive cycles of competitionof competition.

• In the inner layer of the environment, strategic group analysis, market segment analysis and the strategy canvas can help identify strategic gaps or opportunities.

• Blue Ocean strategies characterised by low rivalry are likely to be better opportunities than Red Ocean strategies with many rivals.

• The most important reason for environmental analysis is to identify OPPORTUNITIES AND THREATS

Strategic Competitive Advantage

Factors that shape competition

Competitive advantage at the industry and national levels

Hypercompetitive industry

16-104

Industry Analysis: Forces Influencing Competition

Industry – group of firms that produce products that are close substitutes for each other

Michael Porter

identifies five forces that influence competition

Porter’s Force 1: Threat of New Entrants

New entrants mean downward pressure on prices and reduced profitability

Barriers to entry determines the extent of threat of new industry entrants

Threat of New Entrants:Barriers to Entry

Economies of Scale Refers to the decline in per-unit product costs as

the absolute volume of production per period increases

Product differentiationThe extent of a product’s perceived uniqueness

Capital requirementsRequired investment for manufacturing, R&D,

advertising, field sales and service, etc.Switching costs

Costs related to making a change in suppliers or products

Threat of New Entrants:Barriers to Entry

Distribution channels Are there current distribution channels

available with capacity?

Government policy Are there regulations in place that

restrict competitive entry?

Cost advantages independent of scale economies Is there access to raw materials, large

pool of low-cost labor, favorable locations, and government subsidies?

Competitor response How will the market react in

anticipation of increased competition within a given market?

Porter’s Force 2: Threat of Substitute Products

Availability of substitute products places limits on the prices market leaders can charge

High prices induce buyers to switch to the substitute

Porter’s Force 3: Bargaining Power of Buyers

Buyers=manufacturers and retailers, not consumers

Buyers seek to pay the lowest possible price

Buyers have leverage over suppliers when: They purchase in large quantities (enhances

supplier dependence on buyer) Suppliers’ products are commodities Product represents significant portion of buyer’s

costs Buyer is willing and able to achieve backward

integration

Bargaining Power of Buyers

“We do not quibble or argue with anyone’s right to sing what they want, to print what they want, and say what they want. But we reserve the right to sell what we want.”

- Wal-Mart’s response to the accusation that it is using its financial power to dictate what is appropriate music and art

Porter’s Force 4: Bargaining Power of Suppliers

When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers

Leverage accrues whenSuppliers are large and few in numberSupplier’s products are critical inputs, are

highly differentiated, or carry switching costs

Few substitutes existSuppliers are willing and able to sell

product themselves

Porter’s Force 5: Rivalry Among Competitors

Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other

Price competition

Advertising battles

Product positioning

Differentiation

Competitive Advantage

Achieved when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry

Two ways to achieve competitive advantage Generic strategies—four types

Strategic intent—also four types

Competitive Advantage

““The only way to gain lasting The only way to gain lasting competitive advantage is to competitive advantage is to leverage your capabilities around leverage your capabilities around the world the world so that the company as a so that the company as a whole is greater than the sum of its whole is greater than the sum of its parts. Being an international parts. Being an international companycompany–– selling globally, having selling globally, having global brands or operations in global brands or operations in different countriesdifferent countries––isn’t enough.”isn’t enough.”

- David Witwam, CEO, Whirlpool

Generic Strategies for Creating Competitive Advantage

Broad market strategies Cost Leadership—low price

Product Differentiation—premium price

Narrow market strategies Cost Focus—low price

Focused Differentiation—premium price

Cost Leadership

Based on a firm’s position as the industry’s low-cost producer

Must construct the most efficient facilities

Must obtain the largest market share so that its per unit cost is the lowest in the industry

Only works if barriers exist that prevent competitors from achieving the same low costs

Product Differentiation

Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage

Extremely effective for defending market position

Extremely effective for obtaining above-average financial returns; unique products command a premium price

Cost Focus

Firm’s lower cost position enables it to offer a narrow target market and lower prices than the competition

Sustainability is the central issue for this strategyWorks if competitors define their target

market more broadlyWorks if competitors cannot define the

segment even more narrowly

Focused Differentiation

The product not only has actual uniqueness but it also has a very narrow target market

Results from a better understanding of customer’s wants and desires

eg. High-end audio equipment

The Flagship Firm: The Business Network with Five Partners

Network Relationship Commercial Relationship

Creating Competitive Advantage via Strategic Intent

“Few competitive advantages are long lasting. Keeping score of existing advantages is not the same as building new advantages. The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. An organization’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all.”

- Gary Hamel and C.K. Prahalad

The Flagship Firm

• A collection of 5 partners– Key suppliers do some tasks better than the

flagship (ex.: manufacturing)– Key customers (ex: car dealers)– Key consumers (ex: car buyers)– Selected competitors like global Strategic

Partnerships– Non-business infrastructure: universities,

governments, trade unions that supply intangibles like technology and intellectual property

Creating Competitive Advantage via Strategic Intent

Building layers of advantage

Searching for loose bricks

Changing the rules of engagement

Collaborating

Building Layers of Advantage

A company faces less risk if it has a wide portfolio of advantages

Successful companies build portfolios by establishing layers of advantage on top of one another

Illustrates how a company can move along the value chain to strengthen competitive advantage

Searching for Loose Bricks

Search for opportunities in the defensive walls of competitors whose attention is narrowly focused Focused on a market segment

Focused on a geographic area to the exclusion of others

Changing the Rules of Engagement

Example Xerox and CanonXerox employed a huge

direct sales force; Canon chose to use product dealers

Xerox built a wide range of copiers; Canon standardized machines and components

Xerox leased machines; Canon sold machines

• Refuse to play by the rules set by industry leaders

Collaborating

Use the know-how developed by other companies

Licensing agreements, joint ventures, or partnerships

Global Competition and National Competitive AdvantageGlobal competition occurs when a firm

takes a global view of competition and sets about maximizing profits worldwide

The effect is beneficial to consumers because prices generally fall as a result of global competition

While creating value for consumers, it can destroy the potential for jobs and profits

Global Competition and National Competitive Advantage (Porter’s Diamond)

Factor Conditions

Human Resources – the quantity of workers available, skills possessed by those workers, wage levels, and work ethic

Physical Resources – the availability, quantity, quality, and cost of land, water, minerals, and other natural resources

Knowledge Resources – the availability within a nation of a significant population having scientific, technical, and market-related knowledge

Factor Conditions

Capital Resources – the availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws, and government deficit

Infrastructure Resources – this includes a nation’s banking, healthcare, transportation, and communication systems

Demand Conditions

Composition of Home Demand – determines how firms perceive, interpret, and respond to buyer needs

Size and Pattern of Growth of Home Demand – large home markets offer opportunities to achieve economies of scale and learning in familiar, comfortable markets

Demand Conditions

Rapid Home Market Growth – another incentive to invest in and adopt new technologies faster and build large, efficient facilities

Products being pushed or pulled – do a nation’s people and businesses go abroad and then demand the nation’s products and services in those second countries?

Related and Supporting Industries

The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of, other industries

Firm Strategy, Structure, and Rivalry

Domestic rivalry in a single national market is a powerful influence on competitive advantageThe absence of significant domestic rivalry

can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets

Differences in management styles, organizational skills, and strategic perspectives also create advantages and disadvantages for firms competing in different types of industries

Firm Strategy, Structure, and Rivalry

Capital markets and attitudes toward investments are important components of the national environments

Chance events are occurrences that are beyond control; they create major discontinuities

Government is also an influence on determinants by virtue of its roles as a consumer, policy maker, and commerce regulator

Current Issues in Competitive Advantage

Today’s business environment, market stability is undermined by: Short product life cycles

Short product design cycles

New technologies

Globalization

Result is an escalation and acceleration of competitive forces


Hypercompetition is a term used to describe a dynamic competitive world in which no action or advantage can be sustained for long

Competition unfolds in a series of dynamic strategic interactions in four areas: cost quality, timing and know-how, and barriers to entry


In today’s world, in order to achieve a sustainable advantage, companies must seek a series of unsustainable advantages

The role of marketing is innovation and the creation of new markets

Innovation begins with abandonment of the old and obsolete


“I don’t think we’re moving towards a hypercompetitive world in which there are no trade-offs. We’re probably moving in the other direction. There are more customer segments than ever before, more technological options, more distribution channels. That ought to create lots of opportunities for unique positions.”

Michael Porter

Location of Companies with Competitive Advantage

ConclusionConclusion“Our innovation strategy is to innovate

for every one of those consumers on that economic curve, and if you don’t do that, you’ll fail.”

Robert McDonald, CEO, Procter & Gamble

Casestudy : SAB-MILLERCasestudy : SAB-MILLER

1.1. Read and prepare the Read and prepare the Casestudy on SAB MILLER Casestudy on SAB MILLER (Johnson, Whittington & (Johnson, Whittington & Scholes (2011)) for Scholes (2011)) for discussion and discussion and presentation next week. presentation next week.

2.2. Identify and evaluate the Identify and evaluate the global marketing global marketing challenges facing SAB challenges facing SAB MILLER by conducting MILLER by conducting External Environment, External Environment, Industry, Competitor Industry, Competitor analysis, SWOT, Marketing analysis, SWOT, Marketing Mix and Gap Analysis .Mix and Gap Analysis .

Core ReadingCore Reading

Juleff, L, Chalmers, A.. and Harte, P. (2008) Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Business Economics in a Global Environment, Napier University EdinburghNapier University Edinburgh

Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: Environments and (2012) International Business: Environments and Operations. 14Operations. 14thth edition, Pearson edition, Pearson

Keegan, W.J. and Green, M.C. (2013) Global Keegan, W.J. and Green, M.C. (2013) Global Marketing, 7Marketing, 7thth edition, Pearson edition, Pearson

Johnson, Whittington and ScholesJohnson, Whittington and Scholes (2012) (2012) Exploring Exploring StrategyStrategy, 9, 9thth Edition, Edition, PearsonPearson