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This document contains Chapters 3 to 4 Chapter 3 Business Strategies and Their Marketing Implications I. “Business Strategies and Marketing Programs at 3M” discusses 3M’s utilization of different business and marketing strategies in their many strategic business units to become the leader in dozens of technical areas today. II. Strategic Challenges Addressed in Chapter 3 One key reason for 3M’s continuing success is that all three levels of strategy within the company have usually been characterized by good internal and external consistency, or strategic fit. Chapter 3 focuses on what marketing decision-makers can and should do to help ensure that the strategic marketing plans they develop are appropriate in light of the available resources and competitive thrust of the business that is their organizational home. First, it briefly examines the strategic decisions that must be made at the business level, including how business units should be designed. Next, it examines the interrelationships between different business competitive strategies and elements of the strategic marketing programs for the various products within the business. III. Strategic Decisions at the Business-Unit Level The components of a firm engaged in multiple industries or businesses are typically called strategic business units (SBUs). The first step in developing business-level strategies is for the firm to decide how to divide itself into SBUs. The managers in each SBU must then make recommendations about: The unit’s objectives The scope of its target customers and offerings Which broad competitive strategy to pursue to build a competitive advantage in its product-markets How resources should be allocated across its product-market entries and functional departments A. How Should Strategic Business Units Be Designed? Ideally, strategic business units have the following characteristics: A homogeneous set of markets to serve with a limited number of related technologies A unique set of product-markets Control over those factors necessary for successful performance Responsibility for their own profitability The three dimensions that define the scope and mission of the corporation also define individual SBUs: Technical compatibility, particularly with respect to product technologies and operational requirements, such as the use of similar production facilities and engineering skills Similarity in the customer needs or product benefits sought by customers in the target markets Similarity in the personal characteristics or behavior patterns of customers in the target markets B. Business-Unit Objectives Companies breakdown corporate objectives into subobjectives for each SBU. In most cases, the sub ojectives vary across SBUs according to attractiveness of their industries, the strength of their competitive positions within those industries, and resource allocation decisions by corporate management. A similar process of breaking down overall SBU objectives into a set of subobjectives should occur for each product-market entry within the unit. The sub objectives must reflect the SBU’s overall objectives, but, they may vary across product-market entries according to the attractiveness and growth potential of individual market segments and the competitive strengths of the company’s product in each market. C. Allocating Resources within the Business Unit Once a SBU’s objectives and budget have been approved at the corporate level, its managers must decide how the available resources should be allocated across the unit’s various product-market entries. Because this allocation process is quite similar to allocating corporate resources across SBUs, many firms use similar economic value, value-based planning, or portfolio analysis tools for both. Value-based panning is not as useful a tool for evaluating alternative resource allocations across product-market entries. This is because the product-market entries within a business unit often share the benefits of common investments and the costs of functional activities, as when multiple products are produced in the same plant or sold by the same salesforce. IV. How Do Businesses Compete? Most SBUs pursue a single competitive strategy—one that best fits their market environments and competitive strengths—across all or most of the product-markets in which they compete. A. Generic Business-Level Competitive Strategies Michael Porter distinguishes three strategies—or competitive positions—that businesses pursue to gain and maintain competitive advantages in their various product markets: Overall cost leadership Differentiation—building customer perceptions of superior product quality, design, or service. Focus—the business avoids direct confrontation with its major competitors by concentrating on narrowly defined market niches. Robert Miles and Charles Snow identified another set of business strategies based on a business’s intended rate of product-market development (new product development, penetration of new markets). They classify business units into four strategic types: Prospectors—focus on growth through development of new products and markets. Defenders—concentrate on maintaining their positions in established product-markets while paying less attention to new product development. Analyzers—fall in between prospector and defender. An analyzer business attempts to maintain a strong position in its core product-market(s) but also seeks to expand into new—usually closely related—product-markets. Reactors—are businesses with no clearly defined strategy. Even though both Porter and Miles and Snow typologies have received popular acceptance and research support, neither is complete by itself. The text has combined the two typologies to provide a more comprehensive overview of business strategies (Exhibit 3.2). Each of the strategic categories can be further subdivided according to whether a business applies the strategy across a broadly defined product-market domain or concentrates on a narrowly defined segment where it hopes to avoid direct confrontation with major competitors. B. Do the Same Competitive Strategies Work for Single-Business Firms and Start-Ups? Even small firms with a single business and only a few related product offerings or startups with a single product must decide how they will compete. Just like a SBU in a major corporation, their competitive strategies should be tailored to their unique resources and competencies and aimed at securing a sustainable advantage over competitors. Therefore, the same set of strategies is just as appropriate for small firms as for business units within larger ones. However, there is one important differences between these smaller firms and multi-SBU organizations: In smaller single-business firms, the distinction between business-level competitive strategy and marketing strategy tends to blur, and the two strategies blend into one. Most start-ups do not have the resources to succeed by competing as a “me-too” competitor in well-established product-markets. Therefore, while the taxonomy of strategies is still relevant to entrepreneurial firms, in reality most of them—at least those that stand a reasonable chance of success—begin life as prospectors. The critical question for a start-up firm are: What happens when the new product matures and competitors arrive on the scene? Should the firm continue to focus on developing a stream of new products to stay a step ahead of the competition, even though such a strategy would mean paying less attention to its successful first entry? Should the firm switch to a defender strategy to leverage its initial success, even though that would mean competing head to head with other, probably bigger, competitors? Should the firm create two separate SBUs with different competitive strategies, even though it is small and resources are limited? C. Do The Same Competitive Strategies Work for Service Businesses? Services can be thought of as intangibles and goods as tangibles. A service can be defined as “any activity or benefit that one party can offer to another that is essentially intangible and that does not result in the ownership of anything. Its production may or may not be tied to a physical product.” The framework used to classify business-level competitive strategies in Exhibit 3.2 is equally valid for service businesses. Some service firms attempt to minimize costs and compete largely with low prices. Other firms differentiate their offerings on the basis of high service quality or unique benefits. Some service businesses adopt prospector strategies and aggressively pursue the development of new offerings or markets. Other service businesses focus narrowly on defending established positions in current markets. Still others can best be described as analyzers pursuing both established and new markets. D. Do The Same Competitive Strategies Work for Global Competitors? In terms of the strategies describe in Exhibit 3.2, businesses that compete in multiple global markets almost always pursue one of the two types of analyzer strategies. They must continue to strengthen and defend their competitive position in their home country—and perhaps in other countries where they are well established—while simultaneously pursuing expansion and growth in new international markets. A single SBU may need to engage in different functional activities (including different strategic marketing programs)—and perhaps even adopt different organizational structures to implement those activities—across the various countries in which it competes. E. Will the Internet change everything? The Internet makes it easier for buyers and sellers to compare prices, reduces the number of middlemen necessary between manufacturers and end users, cuts transaction costs, improves the functioning of the price mechanism, and thereby increases competition. One possible outcome of all these changes is that it will be harder for firms to differentiate themselves on any basis other than low price. All the business-level competitive strategies focused on differentiation will become less viable, whereas firms pursuing low-cost strategies will be more successful. As customers gather information from the Internet and become more informed they are less likely to be swayed by superficial distinctions between brands. But if a firm offers unique benefits that a segment of customers perceive as meaningful, it should still be able to differentiate its offerings and command a premium price, at least until its competitors offer something similar. The Internet will make it easier for firms to customize their offerings and personalize their relationships with their customers. Such personalization should differentiate the firm from its competitors in the customer’s eyes and improve customer loyalty and retention. V. How Do Competitive Strategies Differ From One Another? A. Differences in Scope Both the breadth and stability of a business’s domain are likely to vary with different strategies. This, in turn, can affect the variables the corporation uses to define its various businesses. At one extreme, defender businesses, whether low-cost or differentiated, tend to operate in relatively well-defined, narrow, and stable domains where both the product technology and customer segments are mature. At the other extreme, prospector businesses usually operate in broad and rapidly changing domains where neither the technology nor customer segments are well established. The scope of such businesses often undergoes periodic redefinition. Analyzer businesses, whether low-cost or differentiated, fall somewhere in between the two extremes. They usually have a well-established core business to defend, and often their domain is primarily focused on that business. However, businesses pursuing this intermediate strategy are often in industries that are still growing or experiencing technological changes. As a result, managers must review and adjust the domain of such businesses from time to time. B. Differences in Goals and Objectives The three performance dimensions of major importance to both business-unit and marketing managers are: Effectiveness: Effectiveness is commonly measured by such items as sales growth relative to competitors or changes in market share. Efficiency: Common measures of efficiency are profitability as a percent of sales and return on investment. Adaptability: Adaptability can be measured in a variety of ways, but the most common ones are the number of successful new products introduced relative to competitors or the percentage of sales accounted for by products introduced within the last five years. It is very difficult for any SBU, regardless of its competitive strategy, to simultaneously achieve outstanding performance on even this limited number of dimensions because they involve substantial trade-offs. Good performance on one dimension often means sacrificing performance on another. Prospector businesses are expected to outperform defenders on new product development and market-share growth, but defender strategies lead to better returns on investment. C. Differences in Resource Development Prospector—and to a lesser degree, analyzer—businesses devote a relatively large portion of resources to the development of new product-markets. In portfolio terms, they are “question marks” or “stars.” Defenders, on the other hand, focus the bulk of their resources on preserving existing positions in established product-markets. They are the “cash cows.” D. Differences in Sources of Synergy The sharing of operating facilities and programs may be an inappropriate approach to gaining synergy for businesses following a prospector strategy. To a lesser extent, this also may be true for both types of analyzer strategies. Such sharing can reduce a SBU’s ability to adapt quickly to changing market demands or competitive threats. It is appropriate for such businesses to seek synergy through the sharing of a technology, engineering skills, or market knowledge—expertise that can help improve the success rate of their product development efforts. Low-cost defenders should seek operating synergies that will make them more efficient. The primary means of gaining such operating synergies is through the sharing of resources, facilities, and functional activities across product-market entries within the business units or across related business units. VI. Deciding When a Strategy is Appropriate: The Fit between Business Strategies and the Environment Because different strategies pursue different objectives in different domains with different competitive approaches, they do not all work equally well under the same environmental circumstances. A. Appropriate Conditions for a Prospector Strategy A prospector strategy is particularly well suited to unstable, rapidly changing environments resulting from new technology, shifting customer needs, or both. Because they emphasize the development of new products and/or new markets, the most successful prospectors are usually strong in, and devote substantial resources to, two broad areas of competence: R&D, product engineering, and other functional areas that identify new technology and convert it into innovative products Marketing research, marketing, and sales—functions necessary for the identification and development of new market opportunities B. Appropriate Conditions for an Analyzer Strategy On one hand, analyzers are concerned with defending—via low costs or differentiation in quality or service—a strong share position in one or more established product-markets. At the same time, the business must pay attention to new product development to avoid being leapfrogged by competitors with more technologically advanced products or being left behind in newly developing application segments within the market. This dual focus makes the analyzer strategy appropriate for well-developed industries that are still experiencing some growth and change as a consequence of evolving customer needs and desires or continuing technological improvements. C. Appropriate Conditions for a Defender Strategy A defender strategy is most appropriate for units with a profitable share of major segments in a mature, stable industry. A defender strategy works best in industries where the basic technology is not very complex or where it is well developed and unlikely to change dramatically over the short term. Differentiated Defenders To effectively defend its position by differentiation, a business must be strong in the functional areas critical for maintaining its particular competitive advantages over time. Marketing activities that track changing customer needs and competitive actions and communicate the product offering’s unique advantages through promotional and sales efforts to maintain customer awareness and loyalty are particularly important. Low-Cost Defenders Successful implementation of a low-cost defender strategy requires the business to be more efficient than its competitors. A combination of low margins and heavy investment can be prohibitive unless the parent corporation can commit substantial resources to the business or unless extensive sharing of facilities, technologies, and programs with other business units is possible. The low-cost defender’s need for efficiency forces the standardization of product offerings and marketing programs across customer segments to achieve sales effects. Such a strategy is usually not effective in fragmented markets desiring customized offerings as it is in commodity industries. VII. How Different Business Strategies Influence Marketing Decisions The SBU’s strategy influences the amount of resources committed to marketing and ultimately the budget available to an individual marketing manager within the business unit. The SBU’s choice of strategy influences both the kind of market and competitive situation that individual product-market entries are likely to face and the objectives they are asked to attain. A. Product Policies The product policies concern the breadth or diversity of product lines, their level of technical sophistication, and the target level of product quality relative to competitors. Because prospector businesses rely heavily on the continuing development of unique new products and the penetration of new markets as their primary competitive strategy, policies encouraging broader and more technically advanced product lines than those of competitors should be positively related to performance on the critical dimension of share growth. Differentiated defenders compete by offering more or better choices to customers than do their competitors. A policy of high service quality is appropriate for differentiated defenders because it offers a way to maintain a competitive advantage in well-established markets. The appropriateness of an extensive service policy for low-cost defenders, though, is more questionable if higher operating and administrative costs offset customer satisfaction benefits. B. Pricing Policies Success in offering low prices relative to those of competitors should be positively related to the performance of low-cost defender businesses—for low price is the primary competitive weapon of such a strategy. Such a policy is inconsistent with both differentiated defender and prospector strategies. C. Distribution Policies Some observers argue that prospector businesses should show a greater degree of forward vertical integration than defender businesses. Attempting to maintain tight control over the behavior of channel members is a more appropriate policy for defenders who are trying to maintain strong positions in established markets. Because prospectors focus on new products where success is uncertain and sales volumes are small in the short run, they are likely to devote a larger percentage of sales to trade promotions than are defender businesses. D. Promotion Policies Because prospectors must constantly work to generate awareness, stimulate trial, and build primary demand for new and unfamiliar products, high advertising and sales promotion expenditures are likely to bear a positive relationship to the new product and share-growth success of such businesses. Differentiated defenders, on the other hand, are primarily concerned with maintaining the loyalty of established customers by adapting to their needs and providing good service. Differentiated defenders are likely to have higher salesforce expenditures than their competitors. Low-cost defenders are likely to make relatively low expenditures as a percentage of sales on promotional activities. VIII. What if the Best Marketing Program for a Product Does Not Fit the Business’s Competitive Strategy? If a business unit is focused on a single product category or technological domain, the ideal solution might be for the whole SBU to change its strategy in response to shifting industry circumstances. The problem is that effective implementation of different business strategies requires not only different functional competencies and resources, but also different organizational structures, decision-making and coordination processes, reward systems, and personnel. Because such internal processes are hard to change quickly, it can be very difficult for an entire SBU to make a successful transition from one basic strategy to another. In view of the implementation problems involved, some firms might form new prospector SBUs to pursue emerging technologies and industries rather than expecting established units to handle extensive new product development efforts. Some firms that are technological leaders in their industries may divest or license individual product-market entries as they mature rather than defend them in the face of increasing competition and eroding margins. End of Chapter Discussion Questions and Answers Compare and contrast the prospector and low-cost defender business strategies discussed in this chapter on each of the following strategic dimensions: a. Scope. b. Objectives. c. Deployment of resources. d. Sources of synergy. Answer: Prospector Strategy: a. Scope: • Prospector strategy focuses on innovation and growth by seeking out new market opportunities and developing new products or services. It has a broad scope, often entering new markets and industries. b. Objectives: • The primary objective of the prospector strategy is to seek out and exploit new opportunities for growth and innovation. It aims to be a market leader or early entrant in new markets. c. Deployment of resources: • Resources are allocated towards research and development, innovation, and marketing to support the exploration of new markets and the development of new products or services. d. Sources of synergy: • Synergies are often derived from innovation, market expansion, and first-mover advantages. The prospector strategy seeks synergies through diversification and innovation. Low-Cost Defender Strategy: a. Scope: • Low-cost defender strategy focuses on cost leadership within a specific market or industry. Its scope is narrow, concentrating on a specific market segment. b. Objectives: • The primary objective of the low-cost defender strategy is to achieve and maintain cost leadership within a specific market segment. It aims to offer products or services at the lowest possible cost. c. Deployment of resources: • Resources are primarily allocated towards cost reduction, operational efficiency, and supply chain management. The focus is on minimizing costs while maintaining product quality and customer satisfaction. d. Sources of synergy: • Synergies are derived from economies of scale, efficient operations, and cost minimization. The low-cost defender strategy seeks synergies through operational efficiency and cost leadership. Comparison and Contrast: a. Scope: • Prospector strategy: Broad scope, focusing on innovation and market expansion. • Low-Cost Defender strategy: Narrow scope, focusing on cost leadership within a specific market segment. b. Objectives: • Prospector strategy: Focuses on growth, innovation, and market leadership. • Low-Cost Defender strategy: Focuses on cost reduction, operational efficiency, and cost leadership. c. Deployment of resources: • Prospector strategy: Resources are allocated towards research and development, innovation, and marketing. • Low-Cost Defender strategy: Resources are allocated towards cost reduction, operational efficiency, and supply chain management. d. Sources of synergy: • Prospector strategy: Synergies are derived from innovation, market expansion, and first-mover advantages. • Low-Cost Defender strategy: Synergies are derived from economies of scale, efficient operations, and cost minimization. By comparing and contrasting these strategic dimensions, one can understand the differences and similarities between the prospector and low-cost defender business strategies. The 3M Company’s Industrial Tape SBU pursues a differentiated defender strategy in an industry where both the basic technologies and the customer segments are relatively mature and stable. Is the objective imposed by top management of obtaining 30 percent of sales from products introduced within the last four years an appropriate objective for such a SBU? What do you think top management hopes to accomplish by imposing such an objective on the Industrial Tape SBU? What are the potential disadvantages or dangers involved in imposing such an objective? Answer: Is the objective imposed by top management of obtaining 30 percent of sales from products introduced within the last four years an appropriate objective for the Industrial Tape SBU? Given that the Industrial Tape SBU operates in a mature and stable industry, pursuing a differentiated defender strategy, the objective of obtaining 30 percent of sales from products introduced within the last four years could be both appropriate and ambitious. What top management hopes to accomplish by imposing such an objective on the Industrial Tape SBU: 1. Encouraging innovation: By setting a target for sales from recently introduced products, top management aims to encourage innovation within the SBU. This objective pushes the SBU to continually develop new products to meet changing customer needs and preferences. 2. Maintaining competitiveness: In a mature and stable industry, it is essential for the SBU to stay competitive. Introducing new products regularly helps the SBU differentiate itself from competitors and maintain its market position. 3. Market expansion: Introducing new products allows the SBU to potentially tap into new customer segments or expand its presence in existing segments. Potential disadvantages or dangers involved in imposing such an objective: 1. Resource allocation: Pursuing a high percentage of sales from new products may divert resources away from the SBU's core products. This could jeopardize the SBU's current market position and revenue streams. 2. Market acceptance: There is a risk that new products introduced by the SBU may not be well-received by the market, leading to lower sales and potential losses. 3. Pressure on innovation: Setting such a high target for new product sales may put excessive pressure on the SBU to constantly innovate, which could lead to rushed product development or the introduction of low-quality products. In conclusion, while the objective set by top management for the Industrial Tape SBU is ambitious, it aligns with the company's strategic goals of encouraging innovation, maintaining competitiveness, and potentially expanding market share. However, the SBU must carefully manage the potential disadvantages and risks associated with pursuing such an objective. Balancing innovation with the maintenance of core products and market stability is essential for long-term success. If you were the general manager of the 3M Industrial Tape SBU discussed in question 2, which objectives would you argue are most appropriate for your business unit in view of its strategy and its external environment? Why? Answer: As the general manager of the 3M Industrial Tape SBU, considering the SBU's differentiated defender strategy and the characteristics of its external environment, the most appropriate objectives for the business unit would be as follows: 1. Maintain Market Leadership: Given the mature and stable nature of the industry, a primary objective would be to maintain the SBU's market leadership position. This involves focusing on defending existing market share while continuing to differentiate the SBU's products from competitors. 2. Enhance Product Innovation and Development: Emphasize the continuous development of innovative products to meet changing customer needs and preferences. While setting specific sales targets for new products might not be feasible due to the stable market, the focus should be on regularly introducing innovative products to maintain competitiveness. 3. Improve Operational Efficiency: Implement measures to improve operational efficiency and cost-effectiveness within the SBU. This could involve streamlining production processes, reducing costs, and improving supply chain management to maintain profitability and competitiveness. 4. Strengthen Customer Relationships: Focus on strengthening relationships with existing customers and identifying opportunities to expand the SBU's customer base. This could involve providing excellent customer service, offering customized solutions, and responding effectively to customer feedback. 5. Invest in Research and Development: Allocate resources to research and development activities to stay ahead of technological advancements and market trends. This will help the SBU to continue innovating and differentiating its products in the marketplace. Rationale: These objectives are aligned with the SBU's differentiated defender strategy and the characteristics of its external environment. By maintaining market leadership, focusing on product innovation, improving operational efficiency, strengthening customer relationships, and investing in research and development, the SBU can remain competitive and sustain its long-term success in the mature and stable industrial tape market. These objectives ensure that the SBU continues to differentiate itself from competitors and meet the evolving needs of its customers. You are the marketing manager for a generic products division of a major pharmaceutical manufacturer. Your division uses the corporation’s excess manufacturing capacity to produce generic prescription drugs—drugs whose patents have expired and can thus be manufactured by any company that wishes to produce them. Your division is a low-cost defender that maintains its position in the generic drug market by holding down its costs and selling generic products to distributors and pharmacies at very low prices. What are the implications of this business strategy for each of the 4 Ps in the strategic marketing program you would develop for your division? Answer: Implications of the low-cost defender strategy for each of the 4 Ps in the strategic marketing program: 1. Product: • Product Quality: While maintaining low costs is crucial, product quality should not be compromised. Ensure that the generic prescription drugs produced by the division meet regulatory standards and are perceived as safe and effective by healthcare professionals and consumers. • Product Variety: Focus on offering a wide range of generic prescription drugs to cater to different medical needs and conditions. Expanding the product portfolio can help capture a larger market share and increase sales volume. 2. Price: • Low Prices: The primary focus of the marketing program should be on offering generic prescription drugs at significantly lower prices compared to branded equivalents. Price competitiveness is essential to maintain the division's position as a low-cost defender in the market. • Price Stability: While offering low prices, ensure price stability to build trust and confidence among distributors, pharmacies, and end consumers. Avoid frequent price fluctuations to maintain long-term relationships with customers. 3. Place: • Distribution Channels: Develop strong relationships with distributors and pharmacies to ensure widespread availability of the division's generic prescription drugs. Focus on expanding distribution channels to reach a larger customer base. • Efficient Supply Chain: Optimize the supply chain to reduce costs and ensure timely delivery of products to customers. Efficient logistics and inventory management are essential to maintain the division's competitive edge. 4. Promotion: • Value Proposition: Emphasize the value proposition of the division's generic prescription drugs, highlighting their affordability and quality compared to branded equivalents. • Educational Marketing: Implement educational marketing campaigns targeting healthcare professionals and consumers to raise awareness about the safety, efficacy, and cost-effectiveness of generic drugs. • Branding: While the focus is on low prices, consider branding initiatives to differentiate the division's generic prescription drugs from competitors. Building a strong brand image can help increase customer loyalty and trust. Rationale: This strategic marketing program aligns with the low-cost defender strategy of the generic products division. By focusing on product quality, offering low prices, expanding distribution channels, and implementing effective promotional strategies, the division can maintain its competitive position in the generic drug market and achieve long-term success. Chapter 4 Understanding Market Opportunities I. “The Cellular Telephone Business: Increasing Competition in a Growing Market” discusses how despite the continuing growth in demand for mobile telephone services and the opportunities that it generates, potential entrants and current players should consider the attractiveness of these markets and industries. II. Strategic Challenges Addressed in Chapter 4 This chapter addresses the 4Cs that were identified as the analytical foundation of the marketing management process. The chapter provides a framework to help managers, entrepreneurs, and investors comprehensively assess the attractiveness of opportunities they encounter, in terms of : The company and its people The environmental context in which it operates The competition it faces The wants and needs of the customer it seeks to serve The chapters addresses the three questions crucial to the assessment of any market opportunity: How attractive is the market we serve or propose to serve? How attractive is the industry in which we would compete? Are the right resources—in terms of people and their capabilities and connections—in place to effectively pursue the opportunity at hand? III. Markets and Industries: What’s the Difference? A market is defined as being composed of individuals or organizations who are interested in and willing to buy a good or service to obtain benefits that will satisfy a particular want or need and have the resources to engage in such a transaction. An industry is a group of firms that offer a product or class of products that are similar and are close substitutes for one another. Markets are composed of buyers; industries are composed of sellers. IV. Assessing Market and Industry Attractiveness On both the market and industry sides, the macro-level analyses are based on environmental conditions that affect the market or industry, respectively, as a whole, without regard to a particular company’s strategy, target market, or its role in its industry. At the micro-level, analyses look not at the market or the industry overall but at individuals in that market or industry, that is, specific target customers and companies themselves, respectively. V. Macro Trend Analysis: A Framework for Assessing Market Attractiveness, Macro Level Assessing market attractiveness requires that important macroenvironmental trends—or macro trends for short—be noticed and understood. The macroenvironment can be divided into six major components: Demographic Sociocultural Economic Regulatory Technological Natural arenas The key question marketing managers and strategists must ask in each arena is what trends are out there that are influencing demand in the market of interest, whether favorably or unfavorably. A. The Demographic Environment While the number of specific demographic trends that might influence one marketer or another is without limit, there are currently four major global demographic trends that are likely to influence fortunes of many companies, for better or worse: The aging of the world’s population The effect of the AIDS plague on demography A rapidly growing middle class in emerging a countries Increased levels of immigration Aging Providers of health care, vacation homes, life insurance, and other goods and services have taken note of the graying of the world’s population and are taking steps to develop marketing strategies to serve this fast-growing market. AIDS Pharmaceutical companies and world health organizations are struggling to develop strategies to deal with the AIDS challenge, one that presents a huge and rapidly growing market, but one in which there is little ability to pay for the advanced drug therapies that offer hope to AIDS victims. Growing middle class In the emerging economies of Asia and Latin America, the pace of economic development in recent years has led to a rapid increase in the number of consumers deemed by demographers to be middle class. Marketers can no longer view emerging economies as consisting of a few, rich people, alongside huddling masses of the poor. Increased immigration In the United States, many years of immigration from Mexico and Latin America have made the Sun Belt a bilingual region, and many now view Miami as the crossroads of Latin America. The implications for marketers seeking to gain market share among Hispanic Americans are obvious. B. The Sociocultural Environment Sociocultural trends are those that have to do with the values, attitudes, and behavior of individuals in a given society. Cultures tend to evolve slowly, however, so some sociocultural trends can take a generation to have a significant impact as people tend to carry for a lifetime the values with which they grow up. Two trends of particular relevance today are: Greater interest in corporate social responsibility by businesses Trends toward fitness and nutrition—The implications of running, working out, fitness clubs, the South Beach, Atkins diets, etc. are playing out in grocery store produce departments, where entire sections are now devoted to organic produce; in the farming communities of North America and Europe, where fields formerly farmed with fertilizers are being transformed into organic ones; and on restaurant menus, where selections are being revamped to make them appeal to customers who have adopted new eating habits. C. The Economic Environment When people’s incomes rise or fall, when interest rates rise or fall, when the fiscal policy of governments results in increased or decreased government spending, entire sectors of economies are influenced deeply, and sometimes suddenly. The implications of trends like these in consumer spending can be dramatic for marketers to be sure, but they can be far subtler than one might imagine. It seems abundantly clear that the world’s wealth is moving inexorably eastward and south, to the rapidly growing markets of Asia and Latin America, including the BRIC countries and others. Marketers everywhere must face the fact that the so-called emerging markets are no longer just seen as sources of low-cost commodities and labor. Rather, they are where any growth in demand must come from. In purchasing-power-parity terms, three of the world’s four biggest economies (China, Japan, and India) are already in Asia, and more than half of global GDP growth over the past decade has come from Asia. D. The Regulatory Environment In every country and across some countries, there is a regulatory environment within which local and multinational firms operate. As with other macro trend components, political and legal trends, especially those that result in regulation or deregulation, can have powerful impact on market attractiveness. Government, business, and the general public throughout much of the world have become increasingly aware that overregulation protects inefficiencies, restricts entry by new competitors, and creates inflationary pressures. Deregulation has typically changed the structure of the affected industries as well as lowered prices, creating rapid growth in some markets as a result. A trend of reregulation is taking hold, especially in Europe and the United States, as a result of the perceived failure of the global financial services industry to self-regulate its practices, seen as a key cause of the 2007-2008 financial meltdown. E. The Technological Environment In the past three decades, an amazing number of new technologies have created new markets, changed how businesses operate, how goods and services as well as ideas are exchanged, how crops are grown, and how individuals learn and interact with each other. Some observers say the digitization of manufacturing will bring on the third industrial revolution, following mechanization of the British textile industry in the eighteenth century and Henry Ford’s invention of mass production in the twentieth. The cost of producing smaller batches with wider variety is falling dramatically, and mass customization may be the wave of the future. In addition to creating attractive new markets, technological developments are having a profound impact on all aspects of marketing practice, including: Marketing communication (ads on the web or via e-mail) Distribution (books and other consumer and industrial goods bought and sold via the web) Packaging (use of new materials) Marketing research (monitoring supermarket purchases with scanners or internet activity with digital “cookies”) F. The Natural Environment Everything ultimately depends on the natural environment, including marketing. Changes in the earth’s resources and climate can have significant and far-reaching effects. In general, discussion of the problems in natural environment has stressed the threats and penalties facing businesses throughout the world. But businesses can do a number of things to turn problems into opportunities. In response to growing consumer concern in Britain about environmental issues, a growing number of marketers, including Tesco, the United Kingdom’s largest supermarket chain, have begun adding carbon footprint labels to some of their products. Businesses have seen opportunities in developing thousands of green products (those that are environmentally friendly). VI. Your Market is Attractive: What About Your Industry? A. Porter’s Five Competitive Forces Five competitive forces collectively determine an industry’s long-term attractiveness— rivalry among present competitors, threat of new entrants into the industry, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitute products. Rivalry among Present Competitors Rivalry occurs among firms that produce products that are close substitutes for each other, especially when one competitor acts to improve its standing or protect its position. Rivalry is greater under the following conditions: There is high investment intensity; that is, the amount of fixed and working capital required to produce a dollar of sales is large. There are many small firms in an industry or no dominant firms exist. There is little product differentiation. It is easy for customers to switch from one seller’s products to those of others. The greater the competitive rivalry in an industry, the less attractive it is to current players or would-be entrants. Threat of New Entrants New competitors add capacity to the industry and bring with them the need to gain market share, thereby making competition more intense. The less the threat of new entrants, the greater will be an industry’s attractiveness. Entry is more difficult under the following conditions: When strong economies of scale and learning effects are present If the industry has strong capital requirements at the outset When strong product differentiation exists among current players If gaining distribution is particularly difficult At least one study suggests that a combination of effectively managing innovation cycles while building entry barriers through cost advantages or proprietary technologies can enhance incumbents’ ability to sustain competitive advantage over time. Bargaining Power of Suppliers The bargaining power of suppliers over firms in an industry is exercised largely through increased prices or more onerous terms and conditions of sale. Their power is increased under the following conditions: If the cost of switching to suppliers is high If prices of substitutes are high If suppliers can realistically threaten forward integration When the supplier’s product is a large part of the buyer’s value added The greater the bargaining power of the key suppliers to an industry, the less will be the overall attractiveness of the industry. Bargaining Power of Buyers The extent to which buyers succeed in their bargaining efforts depends on several factors, including these: The extent of buyer concentration Switching costs that reduce buyer’s bargaining power The threat of backward integration The product’s importance to the performance of the buyer’s product Buyer profitability The greater the power of the high-volume customers served by an industry, the less attractive will be that industry. Threat of Substitute Products Substitutes are alternative product types (not brands) produced by other industries that perform essentially the same functions. Substitute products put a ceiling on the profitability of an industry by limiting the price than can be charged, especially when supply exceeds demand. B. A Five Force Analysis of the Cellular Phone Service Industry Marketers who must decide whether to enter or continue to invest in the cellular phone service industry must make a judgment as to whether the rapid growth of the market—a favorable environmental context—is sufficient to offset the deteriorating attractiveness of the industry—the not-so-favorable competitive situation. VII. Challenges in Macro-Level Market and Industry Analysis In order to analyze the attractiveness of one’s market or industry, one must first identify exactly which market or industry is to be analyzed. On the market side and recalling that markets consist of customers—whether individual consumers, trade customers like retailers, or business users in B2B markets—the challenge often lies in sizing the relevant market. It is informative to measure market size and growth rates in customer numbers as well as in unit and value terms. On the industry side, there is the question of how narrowly or broadly to define one’s industry. A good way to identify the most suitable definition of the industry you are in is to consider whether the kinds of key suppliers, the processes by which value is added, and the kinds of buyers are the same for your company and other companies whose industry you may consider yourself a part of. A. Information Sources for Macro-Level Analyses In the developed economies, there is an endless supply of information about macro trends and industry forces, including the popular and business press, the internet, supplier and customer contacts, and so on. In emerging economies, however, such information is more difficult to find and can, in many cases, be misleading. The key outputs of a competent macro trend analysis for any market should include both quantitative and qualitative data. VIII. Understanding Markets at the Micro Level In assessing market opportunities at the micro level, one looks individually at customers—whether trade customers or end consumers or business users—to understand the attractiveness of the target segment itself. Opportunities are attractive at the micro level on the market side when the market offering meets most or all of the following tests: There is a clearly identified source of customer pain, for some clearly identifiable set of target customers, which the offering resolves. The offering provides customer benefits that other solutions do not. The target segment is likely to grow. There are other segments for which the currently targeted segment may provide a springboard for subsequent entry. For most companies and most goods or services, meeting the first two of these tests is all about delivering generic category benefits—the basics that customers expect a good marketer to provide in a product category. Often, doing so involves effective implementation rather than a fancy strategy. IX. Understanding Industries at the Micro Level On the industry side, the key micro-level question to ask is whether whatever competitive advantage there might be as a result of the benefits offered to the target market—the market side, micro-level assessment—can be sustained over a significant period of time. Opportunities are attractive at the micro level on the industry side when the company itself meets most or all of the following tests: It possesses something proprietary that other companies cannot easily duplicate or imitate. The business has or can develop superior organizational processes, capabilities, or resources that others would find it difficult to imitate or duplicate. The company’s business model is economically viable. X. The Team Domains: The Key to the Pursuit of Attractive Opportunities The following three questions address the remaining three of the seven domains in the opportunity assessment framework: Does the opportunity fit what we want to do? Do we have the people who can execute on whatever it takes to be successful in this particular industry? Do we have the right connections? XI. Mission, Aspirations, and Risk Propensity Notwithstanding the merits of a particular opportunity in market and industry terms, it must also measure up to the expectations of the people who will pursue it. Most large companies will not pursue opportunities to serve very small niche markets. It is not worth their time and attention to do so. XII. Ability to Execute on the Industry’s Critical Success Factors In most industries, in addition to hard-to-imitate elements that are firm specific, there are also a small number of critical factors that tend to separate the winners from the also-rans. These few factors are that industry’s critical success factors, or CSFs for short. Two key questions are to be asked in order to identify one’s CSFs: Which few decisions or activities are the ones that, if gotten wrong, will almost always have severely negative effects on company performance? Which decisions or activities, done right, will almost always deliver disproportionately positive effects on performance? To assess opportunities, one must identify the industry’s few CSFs. Then one must ask a simple question: Do we have on our team—or can we attract—the competencies and capabilities necessary to deliver what’s called for by our industry’s CSFs? XIII. Connectedness: It’s Who You Know Not What You Know Despite the insights to be gleaned from the seven domains, reality dictates there will remain considerable uncertainty about how attractive a particular opportunity really is. The people who are the best connected—up the value chain, to insightful suppliers with a broad view of what’s happening in their customer markets; down the value chain, to customers who can tell you about their changing needs; and across the value chain, among fellow players in your own industry who face the same challenges you do—are the ones who will first see the winds of change shifting direction. XIV. Putting the Seven Domains to Work The seven domains are not additive. An opportunity’s strength on some domains—especially at the micro level—can outweigh weaknesses on others. Opportunities do not just sit there; they change and may be further developed. The seven domains provide a useful and integrative lens through which to examine the fundamental health of a business and the opportunities it has chosen to pursue at any stage in its products’ life cycles. XV. Anticipating and Responding to Environmental Change To the extent that a firm identifies and effectively deals with key trends before competitors do, it is more likely to win and retain competitive advantage. Management needs systems to help identify, evaluate, and respond to environmental events that may affect the firm’s longer-term profitability and position. A. Impact and Timing of Event In any given period, many environmental events that could have an impact on the firm—either positively or negatively—may be detected. Somehow, management must determine the probability of their occurrence and the degree of their impact. One relatively simple way to accomplish these tasks is to use a 2 × 2 dimensional opportunity/threat matrix. The opportunity/threat matrix enables the examination of a large number of events in such a way that management can focus on the most important ones. XVI. Swimming Upstream or Downstream: An Important Strategic Choice The influence of macro trends like fitness, graying of world population, global warming, and increased attention to sustainability can be pervasive and powerful. In general, life is better swimming downstream, accompanied by favorable trends, than upstream, running counter to them. For some trends, managers can do little but react and adapt. For other trends, favorable moves can be reinforced through effective marketing. Sometimes, unfavorable ones can be mitigated. End of Chapter Discussion Questions and Answers You are an entrepreneur who has developed a packaging technology that instantly chills single-serving containers of cold beverages such as beer, carbonated drinks, and fruit juices. The customers of such packaging, therefore, would be beverage-makers. You are not certain whether your technology is patentable. Using the seven domains framework, assess this opportunity and describe any strategic decisions you could make to maximize the opportunity’s attractiveness. Answer: Using the seven domains framework, here's how you could assess the opportunity and describe strategic decisions to maximize its attractiveness: 1. Customers: • Who are the customers? Beverage-makers who produce single-serving containers of cold beverages such as beer, carbonated drinks, and fruit juices. • What are their needs and preferences? Beverage-makers need innovative packaging solutions that can instantly chill their products, enhancing customer experience and convenience. 2. Competitors: • Who are the competitors? Other packaging technology providers offering similar or alternative solutions for beverage-makers. • What are their strengths and weaknesses? Assess competitors' technological capabilities, market presence, and pricing strategies. 3. Company: • What are your company's strengths and weaknesses? Assess your company's technological expertise, resources, and ability to scale production. • What is your unique value proposition? Highlight the unique features and benefits of your packaging technology, such as instant beverage chilling. 4. Collaborators: • Are there potential collaborators? Explore partnerships with beverage-makers, distributors, and retailers to introduce and promote your packaging technology. • How can collaborations enhance your market reach? Collaborations can help increase market penetration and accelerate the adoption of your technology. 5. Context: • What are the current market trends and regulations? Analyze trends in the beverage packaging industry, including demand for innovative solutions and any regulatory requirements. • How might external factors impact your opportunity? Consider factors such as consumer preferences, environmental concerns, and economic conditions. 6. Complements: • Are there complementary products or services? Identify complementary products or services that can enhance the value proposition of your packaging technology, such as marketing services or distribution solutions. • How can you leverage complementary offerings to strengthen your position? Develop partnerships or integrated solutions that provide added value to beverage-makers. 7. Constraints: • What are the potential constraints or limitations? Assess potential challenges such as scalability, cost-effectiveness, and intellectual property protection. • How can you mitigate these constraints? Explore strategies to address constraints, such as seeking patent protection, optimizing production processes, and managing costs effectively. Strategic Decisions to Maximize Opportunity's Attractiveness: 1. Intellectual Property Protection: Invest in patenting your packaging technology to secure a competitive advantage and protect your innovation. 2. Market Positioning: Position your packaging technology as a premium solution that offers unique benefits such as instant beverage chilling, convenience, and improved customer experience. 3. Partnerships and Collaborations: Forge strategic partnerships with beverage-makers, distributors, and retailers to introduce and promote your technology effectively. 4. Market Expansion: Explore opportunities to expand beyond single-serving cold beverages into other market segments such as food packaging or pharmaceuticals. 5. Continuous Innovation: Invest in research and development to enhance your packaging technology, improve efficiency, and stay ahead of competitors. By assessing the opportunity using the seven domains framework and making strategic decisions to address each domain effectively, you can maximize the attractiveness of your packaging technology and increase its chances of success in the market. Drinking water pollution (contamination) has become a serious problem in many countries. What problems and opportunities does this present for what consumer and industrial goods? Answer: Drinking water pollution presents the following problems and opportunities for consumer and industrial goods: Problems: 1. Health Risks: Drinking water contamination poses serious health risks to consumers, including the spread of waterborne diseases and long-term health issues. 2. Environmental Damage: Pollution of drinking water sources can harm aquatic ecosystems, leading to loss of biodiversity and ecosystem services. 3. Legal and Regulatory Challenges: Companies may face legal consequences and regulatory scrutiny if their activities contribute to water pollution. 4. Public Perception: Consumers may lose trust in brands associated with water pollution, leading to reputational damage and decreased sales. Opportunities: 1. Water Treatment Technologies: There is a growing demand for water treatment technologies and products that can effectively remove contaminants from drinking water. 2. Bottled Water Market: Increased awareness of water pollution may lead to a surge in demand for bottled water, especially from trusted brands that guarantee water purity. 3. Water Filtration Systems: Consumer demand for home water filtration systems is likely to increase as people seek to ensure the safety and quality of their drinking water. 4. Sustainable Solutions: There is an opportunity for companies to develop and market environmentally friendly products and technologies that reduce water pollution and promote sustainability. Consumer Goods: 1. Bottled Water: Increased demand for bottled water, especially from reputable brands that offer pure and safe drinking water. 2. Water Filtration Systems: Growing market for home water filtration systems, including pitchers, faucet filters, and under-sink filtration systems. 3. Water Purification Tablets: Demand for water purification tablets and sachets for use in emergency situations or in areas with limited access to clean drinking water. Industrial Goods: 1. Water Treatment Technologies: Growing demand for advanced water treatment technologies such as filtration systems, reverse osmosis systems, and UV disinfection systems. 2. Chemical Treatments: Increased need for chemicals and additives used in water treatment processes, including coagulants, flocculants, and disinfectants. 3. Monitoring and Testing Equipment: Demand for monitoring and testing equipment used to assess water quality and detect contaminants in drinking water sources. In conclusion, while drinking water pollution poses significant challenges, it also presents opportunities for companies to develop innovative solutions and products that address water quality issues and meet the growing demand for clean and safe drinking water. Taking into account the five competitive forces, what do you think lies ahead for the worldwide automotive industry? Answer: Taking into account the five competitive forces, the following trends and challenges are likely to shape the future of the worldwide automotive industry: 1. Threat of New Entrants: • Electric Vehicle (EV) Startups: Increasing interest and investment in electric vehicles may lead to the emergence of new EV startups, challenging traditional automakers. • Technology Companies: Tech companies such as Apple and Google are exploring opportunities in the automotive industry, potentially disrupting the market with innovative technologies and business models. 2. Bargaining Power of Suppliers: • Shift to Electric Vehicles: With the rise of electric vehicles, automakers may face increased dependence on suppliers of key components such as batteries and electric drivetrain systems. • Competition for Resources: Demand for critical materials like lithium, cobalt, and rare earth metals may lead to supply chain challenges and increased costs for automakers. 3. Bargaining Power of Buyers: • Demand for Sustainable and Connected Vehicles: Consumers are increasingly demanding vehicles that are environmentally sustainable, technologically advanced, and connected. Automakers need to adapt to these changing preferences to remain competitive. • Rise of Mobility Services: The growth of ride-sharing, car-sharing, and subscription-based models is giving buyers more flexibility and choice, increasing their bargaining power. 4. Threat of Substitute Products: • Shared Mobility Services: The popularity of ride-sharing and other mobility services presents a substitute for vehicle ownership, particularly in urban areas. • Public Transportation and Active Mobility: Improvements in public transportation and the popularity of cycling and walking as alternative modes of transportation pose a threat to traditional automotive sales. 5. Intensity of Competitive Rivalry: • Competition in Electric Vehicles: Intensifying competition in the electric vehicle market as traditional automakers and new entrants vie for market share. • Technological Innovation: Rapid advancements in technology, including autonomous driving, connected cars, and artificial intelligence, are driving intense competition among automakers to innovate and differentiate their products. Future Strategies for Automakers: 1. Investment in Electric Vehicles: Increase investment in electric vehicle technology and infrastructure to meet growing demand and regulatory requirements. 2. Partnerships and Collaboration: Collaborate with technology companies, suppliers, and mobility service providers to drive innovation and address changing consumer preferences. 3. Focus on Sustainability: Develop sustainable manufacturing processes, reduce carbon emissions, and invest in renewable energy to address environmental concerns. 4. Enhanced Customer Experience: Embrace digitalization and connectivity to offer personalized, seamless, and integrated mobility solutions to consumers. 5. Diversification of Revenue Streams: Explore new business models such as mobility-as-a-service (MaaS), subscription-based models, and digital services to diversify revenue streams and mitigate the impact of changing market dynamics. In conclusion, the worldwide automotive industry is facing unprecedented challenges and opportunities driven by technological innovation, changing consumer preferences, and regulatory pressures. Automakers must adapt to these changes by embracing electric vehicles, enhancing sustainability, investing in technology, and exploring new business models to remain competitive in the evolving automotive landscape. The president of a large manufacturer of household appliances (such as dishwashing machines, refrigerators, washers, and dryers) that are manufactured and sold in the United States, Japan, Mexico, and Europe has asked you to develop a system for monitoring and evaluating the impact of major environmental trends on the company’s strategies and programs. Briefly describe your proposed system in terms of how you would organize your scanning activities, identify important environmental issues, and evaluate the impact of each issue. Answer: Proposed System for Monitoring and Evaluating Environmental Trends: 1. Organizing Scanning Activities: • Internal Scanning: • Review existing company strategies, programs, and environmental initiatives. • Conduct interviews with key stakeholders within the organization to identify current environmental practices and concerns. • External Scanning: • Monitor industry reports, trade publications, and market research studies related to environmental trends in the household appliance industry. • Utilize environmental scanning tools such as PESTEL analysis (Political, Economic, Social, Technological, Environmental, and Legal factors) to identify relevant environmental issues. 2. Identifying Important Environmental Issues: • Climate Change and Energy Efficiency: • Evaluate the impact of climate change regulations and energy efficiency standards on household appliances. • Monitor consumer preferences for energy-efficient appliances and the adoption of eco-friendly technologies. • Resource Conservation and Sustainable Materials: • Assess the availability and sustainability of raw materials used in appliance manufacturing. • Identify opportunities to reduce resource consumption and waste generation throughout the product lifecycle. • Waste Management and Recycling: • Evaluate the impact of regulations and consumer preferences on product recycling and end-of-life disposal. • Identify opportunities to improve product recyclability and implement effective recycling programs. • Supply Chain Sustainability: • Assess the environmental impact of the company's supply chain operations, including transportation, packaging, and manufacturing processes. • Identify opportunities to reduce carbon emissions, minimize waste, and improve overall supply chain sustainability. 3. Evaluating the Impact of Each Issue: • Impact Assessment Criteria: • Quantitative and qualitative criteria should be developed to assess the impact of each environmental issue on the company's strategies and programs. • Criteria may include factors such as regulatory compliance, market demand, competitive positioning, cost implications, and brand reputation. • Impact Evaluation Process: • Conduct a comprehensive analysis of each environmental issue to determine its potential impact on the company. • Evaluate the likelihood and severity of each impact, considering both short-term and long-term implications. • Scenario Planning: • Develop alternative scenarios to assess the potential outcomes of different environmental trends and their impact on the company's strategies and programs. • Identify proactive measures to mitigate risks and capitalize on opportunities presented by environmental trends. Conclusion: By implementing this system for monitoring and evaluating environmental trends, the company can effectively identify, assess, and respond to important environmental issues that may impact its strategies and programs. This proactive approach will enable the company to maintain its competitive edge, minimize risks, and capitalize on emerging opportunities in the dynamic household appliance industry. Instructor Manual for Marketing Strategy: A Decision-Focused Approach Orville C. Walker, John Mullins 9780078028946
