Chapter 3Chapter 3

External AnalysisExternal AnalysisObjectiveObjective: analyzing the external factors : analyzing the external factors (consumers and competitors) to develop (consumers and competitors) to develop

strategiesstrategies

External AnalysisExternal Analysis After the mission of the company is After the mission of the company is

determined - where you want to go and what determined - where you want to go and what you want to accomplish – it is time to analyze you want to accomplish – it is time to analyze the external factors. the external factors.

Includes the analysis of the external factors Includes the analysis of the external factors that would influence the company strategies.that would influence the company strategies.

The following external factors should be The following external factors should be analyzed;analyzed; CustomersCustomers CompetitorsCompetitors MarketMarket EnvironmentEnvironment

Affecting Strategic Affecting Strategic DecisionsDecisions

The external analysis process is crucial to The external analysis process is crucial to generate (suggest), influence or evaluate generate (suggest), influence or evaluate the possible strategic options. It the possible strategic options. It contributes to the investment decisions, contributes to the investment decisions, functional and competitive strategies. functional and competitive strategies. Should existing businesses be liquidated, Should existing businesses be liquidated,

milked, maintained or invested for growth?milked, maintained or invested for growth? Should there be market penetration, product Should there be market penetration, product

expansion, or market expansion?expansion, or market expansion? What should be the positioning strategy?What should be the positioning strategy? What are the key success factors? What are the key success factors?

Part 1: Customer Part 1: Customer AnalysisAnalysis

The first logical step in the strategic The first logical step in the strategic marketing planning process is to analyze the marketing planning process is to analyze the customers. customers.

Involves (1) identifying the company’s current Involves (1) identifying the company’s current and potential customers and (2) and potential customers and (2) understanding those customers.understanding those customers.

In order to identify and analyze the company’s In order to identify and analyze the company’s current situation, the customer is the best current situation, the customer is the best starting point. For effective strategic starting point. For effective strategic planning, it is essential to see the company planning, it is essential to see the company from the perspective of the customer. from the perspective of the customer.

Who are my customers?Who are my customers?

Under the customer analysis, one Under the customer analysis, one should identify not only the current should identify not only the current primary or target markets, but also the primary or target markets, but also the potential markets outside the current potential markets outside the current customer base.customer base.

In order to identify both current and In order to identify both current and potential customers, potential customers,

1.1. Define the products/services offered by the Define the products/services offered by the company. It is important to match the company. It is important to match the company’s offerings with the customers.company’s offerings with the customers.

2.2. Organize the current and potential Organize the current and potential customers into identifiable market customers into identifiable market segments. Write a description of the segments. Write a description of the customers in each segment. customers in each segment.

3.3. Quantify the number of customers Quantify the number of customers that the company have in each that the company have in each segment and the total number of segment and the total number of customers available in each segment.customers available in each segment.

Task 1: Defining the products and Task 1: Defining the products and

servicesservices In order to define the products/services of In order to define the products/services of

the company, first simply the inventory (or the company, first simply the inventory (or the list) of what the company sells should the list) of what the company sells should be recorded. be recorded.

Second, the product lines should be Second, the product lines should be identified. The product line is the group of identified. The product line is the group of products that are similar or complement products that are similar or complement each other or are purchased as a set of each other or are purchased as a set of products.products.

Third, the product lines should be rated Third, the product lines should be rated according to (1) quality, (2) service, and (3) according to (1) quality, (2) service, and (3) price from the customers’ perspective.price from the customers’ perspective.

Task 2. Organizing customersTask 2. Organizing customers into market segments into market segments

Segmentation means the identification of Segmentation means the identification of customer groups that respond differently than customer groups that respond differently than other customer groups to competitive other customer groups to competitive strategies. To deliver the right competitive strategies. To deliver the right competitive offering to the segments, the following offering to the segments, the following variables can be considered:variables can be considered: Benefits soughtBenefits sought UsageUsage Organization typeOrganization type Geographic locationGeographic location Customer perceptions and attitudesCustomer perceptions and attitudes Price sensitivityPrice sensitivity

How should the market be segmented How should the market be segmented into groups?into groups?

The task of identifying segments is difficult. The task of identifying segments is difficult. There are literally millions of ways to divide up There are literally millions of ways to divide up the market. The variables need to be evaluated the market. The variables need to be evaluated on the basis of their ability to identify segments on the basis of their ability to identify segments for which different strategies are pursued. for which different strategies are pursued.

Then the identified segments should be judged Then the identified segments should be judged according to size and cost-effectiveness. according to size and cost-effectiveness.

The most useful segmentation variables are The most useful segmentation variables are benefit and price sensitivity.benefit and price sensitivity.

Two distinct segmentation strategies are Two distinct segmentation strategies are possible. The first focuses on a single segment. possible. The first focuses on a single segment. The alternative involves multiple segments.The alternative involves multiple segments.

Task 3: Quantify the number of Task 3: Quantify the number of customerscustomers

Project a total number of customers Project a total number of customers for each segment based on existing for each segment based on existing customers and potential customers customers and potential customers combined. This is important to combined. This is important to answer such questions as follows; answer such questions as follows; Who are the biggest customers? The Who are the biggest customers? The most profitable? The most attractive most profitable? The most attractive potential customers? potential customers?

Understanding Understanding CustomersCustomers

After identifying customer segments, After identifying customer segments, the next step is to build a profile of the next step is to build a profile of them. The profile helps the company them. The profile helps the company understand its customers and therefore understand its customers and therefore discover its competitive advantages. discover its competitive advantages.

By developing a profile for each By developing a profile for each segment, the company uncovers the segment, the company uncovers the motivations, the needs the thought motivations, the needs the thought processes of the customers. processes of the customers.

Customer ProfilesCustomer Profiles

Developing a profile is a matter of Developing a profile is a matter of answering a series of questions. answering a series of questions. Those questions can be broken down Those questions can be broken down into the following categories;into the following categories; The decision making processThe decision making process Customer motivations/needsCustomer motivations/needs Customer benefitsCustomer benefits Buying criteriaBuying criteria Unmet needsUnmet needs

The Decision-Making ProcessThe Decision-Making Process

Questions that would be answered Questions that would be answered under this category would be;under this category would be;

Who buys our product?Who buys our product? Who influences a purchase?Who influences a purchase? Where is the buying decision made?Where is the buying decision made?

Customer Motivations/NeedsCustomer Motivations/Needs

What lies behind the customer’s What lies behind the customer’s purchase decision? E.g. the business purchase decision? E.g. the business air traveler / vacationerair traveler / vacationer

Why does the customer need this Why does the customer need this product in the first place?product in the first place?

Why wouldn’t some other type of Why wouldn’t some other type of product or brand be better?product or brand be better?

What services does the customer What services does the customer expect?expect?

Customer BenefitsCustomer Benefits

Like the question dealing with customer Like the question dealing with customer motivations/needs, responses here can motivations/needs, responses here can cover a wide spectrum. However, together cover a wide spectrum. However, together with motivations/needs, it provides insight with motivations/needs, it provides insight into relevant assets and skills. into relevant assets and skills.

The presence of a unique or strong assets The presence of a unique or strong assets or skill responsive to a or skill responsive to a motivation/need/benefit, can provide the motivation/need/benefit, can provide the basis for a sustainable competitive basis for a sustainable competitive advantage (SCA). The absence can be fatal.advantage (SCA). The absence can be fatal.

Buying CriteriaBuying Criteria

What products does the customer What products does the customer buy?buy?

What sales channel does the What sales channel does the customer prefer?customer prefer?

How much is the customer willing to How much is the customer willing to spend?spend?

Where does the customer get Where does the customer get information about the product?information about the product?

Unmet NeedsUnmet Needs

What needs are not now being met by What needs are not now being met by the existing product offerings?the existing product offerings?

It is strategically important to identify It is strategically important to identify unmet needs, because they represent unmet needs, because they represent opportunities for firms that want to opportunities for firms that want to increase their market share or break increase their market share or break into a market. They also represent into a market. They also represent threats to established firms whose threats to established firms whose competitors can use those unmet needs competitors can use those unmet needs to disrupt an established position. to disrupt an established position.

How to get answers to the How to get answers to the questionsquestions

There are two basic sources of information There are two basic sources of information for answering the questions in the customer for answering the questions in the customer profiles:profiles:

The company’s experience (employeesThe company’s experience (employees); ); informal one-on-one meetings, group informal one-on-one meetings, group meetings, company-wide meetings, meetings, company-wide meetings, questionnaires.questionnaires.

The customerThe customer; ; Simply asking people what is important. Simply asking people what is important.

However, they may say that all attributes are However, they may say that all attributes are important and appear more logical than they important and appear more logical than they actually are. actually are.

Identifying which attribute judgments are Identifying which attribute judgments are associated with actual purchase decisions. associated with actual purchase decisions. E.g. How would a mother select snacks for E.g. How would a mother select snacks for his children? his children?

Asking trade-off questions. Sacrifices? E.g. Asking trade-off questions. Sacrifices? E.g. how would an airline passenger trade off how would an airline passenger trade off convenient departure time with price?convenient departure time with price?

For the unmet needs; Discussing with the For the unmet needs; Discussing with the customers in focus group settings about customers in focus group settings about their experiences with the products. their experiences with the products.

Termed problem research, developing a list Termed problem research, developing a list of potential problems with the product. of potential problems with the product. Then asking whether the problem is Then asking whether the problem is important, it occurs frequently, a problem important, it occurs frequently, a problem solution exists.solution exists.

Termed benefit structure analysis; Termed benefit structure analysis; product users identify the benefits product users identify the benefits desired and the extent to which the desired and the extent to which the product delivers those benefits.product delivers those benefits.

Customer satisfaction studies; the Customer satisfaction studies; the identification of events leading to identification of events leading to dissatisfaction can uncover unmet dissatisfaction can uncover unmet needs.needs.

Using lead users; they are such users Using lead users; they are such users that face needs that will be general in that face needs that will be general in the marketplace, but face them months the marketplace, but face them months or years before the bulk of the or years before the bulk of the marketplace.marketplace.

Part 2: Competitor Part 2: Competitor AnalysisAnalysis

Competitor analysis is the second Competitor analysis is the second phase of the external analysis.phase of the external analysis.

Similar to the steps in customer Similar to the steps in customer analysis, the competitor analysis analysis, the competitor analysis involves (1) identifying groups of involves (1) identifying groups of competitors, and (2) understanding competitors, and (2) understanding them. Plus (3) identifying areas of them. Plus (3) identifying areas of differentiation. differentiation.

The company must understand its The company must understand its competitors to position itself into a competitors to position itself into a superior position with the customers. superior position with the customers.

Identifying the Identifying the CompetitorsCompetitors

There are different approaches to identify There are different approaches to identify groups of competitors (also the potential groups of competitors (also the potential competitors). The approach would be based on competitors). The approach would be based on identifying companies that;identifying companies that;

pursue the same group of customers, or pursue pursue the same group of customers, or pursue similar strategies (e.g. distribution channel) similar strategies (e.g. distribution channel)

have similar assets, skills and other have similar assets, skills and other characteristics (e.g. quality, size) characteristics (e.g. quality, size)

attempt to satisfy the same set of customer attempt to satisfy the same set of customer needsneeds

offer products for the same use situationoffer products for the same use situation are selected by the same group of customers are selected by the same group of customers

Understanding Understanding CompetitorsCompetitors

To gain an understanding of To gain an understanding of competitors, it is useful to analyze them competitors, it is useful to analyze them on the basis of several dimensions. on the basis of several dimensions.

Size, growth, profitabilitySize, growth, profitability; provide a ; provide a gross measure of their relative gross measure of their relative importance. importance.

Competitor’s objectivesCompetitor’s objectives; and; and Past and current strategiesPast and current strategies; can ; can

provide insight into their intentions.provide insight into their intentions.

Competitor’s organization and cultureCompetitor’s organization and culture; can ; can limit the range of strategies that may be limit the range of strategies that may be considered.considered.

Cost structureCost structure; may indicate the ; may indicate the competitor’s future pricing strategy and competitor’s future pricing strategy and staying power.staying power.

Strengths and WeaknessesStrengths and Weaknesses; the assessment ; the assessment starts with an identification of relevant starts with an identification of relevant assets and skills for the industry. Then the assets and skills for the industry. Then the next step is to compare the company’s next step is to compare the company’s assets and skills with the competitors’ (The assets and skills with the competitors’ (The Competitive Strength Grid).Competitive Strength Grid).

Competitive Strengths and Competitive Strengths and WeaknessesWeaknesses

In order to identify the relevant assets and In order to identify the relevant assets and skills, the following questions are helpful.skills, the following questions are helpful.

Why are successful businesses successful? Why are successful businesses successful? Why are unsuccessful businesses Why are unsuccessful businesses unsuccessful? What assets have unsuccessful? What assets have contributed to their success? What assets contributed to their success? What assets or skills do they lack?or skills do they lack?

What are the key customer motivations? What are the key customer motivations? What is really important to the customer?What is really important to the customer?

What are the large value-added parts of What are the large value-added parts of the product or service? What are the large the product or service? What are the large cost components?cost components?

What are the mobility barriers (cost and What are the mobility barriers (cost and difficulty of creating the assets and skills difficulty of creating the assets and skills needed to support an SCA) in the industry?needed to support an SCA) in the industry?

Consider the components of the value Consider the components of the value chain (primary value chain: inbound chain (primary value chain: inbound logistics, operations, outbound logistics, logistics, operations, outbound logistics, marketing and sales, service; secondary marketing and sales, service; secondary value chain: information systems, value chain: information systems, technology development, human resources technology development, human resources management, firm infrastructure).management, firm infrastructure).

MethodsMethods

There are different methods There are different methods available to analyze the competitors.available to analyze the competitors.

The Competitive Strength GridThe Competitive Strength Grid Competitive Value MapCompetitive Value Map Positioning MapsPositioning Maps

Competitive Strength Competitive Strength GridGrid

After the relevant assets and skills After the relevant assets and skills are identified, those are scaled are identified, those are scaled (rated) for the own firm and the (rated) for the own firm and the major competitors.major competitors.

It summarizes the posture of the It summarizes the posture of the competitors with respect to assets competitors with respect to assets and skills. and skills.

Competitive Value MapCompetitive Value Map

Provides a good pictorial comparison of Provides a good pictorial comparison of all competitors + company on a single all competitors + company on a single chart. Some guidelines;chart. Some guidelines; The direct competitor of the company should The direct competitor of the company should

be in the same square or in a square be in the same square or in a square immediately adjacent to it. Direct immediately adjacent to it. Direct competitors are firms that take business competitors are firms that take business directly away from the company, therefore, directly away from the company, therefore, they have the greatest concern.they have the greatest concern.

Firms located in boxes not in the company’s Firms located in boxes not in the company’s immediate area are secondary competitors. immediate area are secondary competitors. These are firms that take the company’s These are firms that take the company’s customers, but their blend of products is not customers, but their blend of products is not similar.similar.

Positioning MapsPositioning Maps

Provides the pictorial comparison of Provides the pictorial comparison of all competitors and the company on all competitors and the company on a graph. a graph.

The map is drawn on the basis of The map is drawn on the basis of customers’ perceptions on each firm.customers’ perceptions on each firm.

Competitive Competitive Differentiation Differentiation

After analyzing the competitors, the company After analyzing the competitors, the company can differentiate itself in a unique way. can differentiate itself in a unique way. Differentiation is some aspect of how the Differentiation is some aspect of how the company does business that the customer company does business that the customer perceives as unique (important, valuable) from perceives as unique (important, valuable) from the way the competitors do business. the way the competitors do business. Differentiation is the path to establish a Differentiation is the path to establish a sustainable competitive advantage (SCA).sustainable competitive advantage (SCA).

There are so many ways to differentiate one There are so many ways to differentiate one company from the competition. In the broadest company from the competition. In the broadest sense, differentiation is possible in four sense, differentiation is possible in four categories;categories;

Product differentiationProduct differentiation; means that the customer ; means that the customer perceives the company’s product unique, perceives the company’s product unique, valuable or important than the competitor’s valuable or important than the competitor’s product. E.g. product capabilities may be product. E.g. product capabilities may be superior, product design may be more efficient.superior, product design may be more efficient.

Service differentiationService differentiation; is the same as product ; is the same as product differentiation, only it applies to the services differentiation, only it applies to the services offered. E.g. delivery capabilities, technical offered. E.g. delivery capabilities, technical support, installation services, payment terms etc.support, installation services, payment terms etc.

Point-of-sale differentiationPoint-of-sale differentiation; involves availability ; involves availability and accessibility. It is how the customer buys and accessibility. It is how the customer buys the company’s products. Through point-of-sale, the company’s products. Through point-of-sale, customers can easily access the company, learn customers can easily access the company, learn about the company and purchase the company’s about the company and purchase the company’s products. products.

Price differentiationPrice differentiation; is a matter of ; is a matter of extremes on the pricing scale. The extremes on the pricing scale. The company may offer premium products company may offer premium products that can command a higher price. Or, the that can command a higher price. Or, the company may offer products equal to the company may offer products equal to the competition at a lower price to competition at a lower price to differentiate itself.differentiate itself.

Obtaining Information Obtaining Information

Information on competitors is usually Information on competitors is usually available from a variety of sources. available from a variety of sources.

Competitors usually communicate Competitors usually communicate extensively to their suppliers, customers, extensively to their suppliers, customers, distributors, security analysts, government distributors, security analysts, government legislators. Contacting them.legislators. Contacting them.

Monitoring of trade magazines, trade shows, Monitoring of trade magazines, trade shows, advertising, speeches, annual reports etc.advertising, speeches, annual reports etc.

Accessing databases including the internetAccessing databases including the internet Using market research e.g. telephone Using market research e.g. telephone

surveys, Which supermarket do you shop surveys, Which supermarket do you shop most often? Which has the lowest price? etc.most often? Which has the lowest price? etc.