Marketing File

8/6/2019 Marketing File

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Ansoff's product / market matrix

The Ansoff Growth matrix is a tool that helps businesses decide their product andmarket growth strategy.

Ansoffs product/market growth matrix suggests that a business attempts to growdepend on whether it markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growthstrategies that set the direction for the business strategy. These are described below:

Market penetration

Market penetration is the name given to a growth strategy where the business focuseson selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:

Maintain or increase the market share of current products this can be achieved by acombination of competitive pricing strategies, advertising, sales promotion and perhapsmore resources dedicated to personal selling

Secure dominance of growth markets


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5 Ms ofAdvertising:

MISSION: What are the Advertising objectives?

MONEY: How much can be spent? (Advertising budget)

MESSAGE: What message should be sent?

MEDIA: What media should be used?

MEASUREMENT: How should the results be evaluated?

1. MISSION OR SETTING THE ADVERTISING OBJECTIVES

Advertising Objectives can be classified as to whether their aim is:

To inform: This aim of Advertising is generally true during the pioneering stage of aproduct category, where the objective is building a primary demand.

This may include:

y Telling the market about a new producty Suggesting new uses for a producty Informing the market of a price changey Informing how the product worksy Describing available servicesy Correcting false impressionsy Reducing buyers fearsy Building a company image

To persuade: Most advertisements are made with the aim of persuasion. Suchadvertisements aim at building selective brand.

To remind: Such advertisements are highly effective in the maturity stage of theproduct. The aim is to keep the consumer thinking about the product.

2. MONEY

This M deals with deciding on the Advertising Budget

The advertising budget can be allocated based on:

y Departments or product groups


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y The calendary Media usedy Specific geographic market areas

There are five specific factors to be considered when setting the Advertising budget.

y Stage in PLC: New products typically receive large advertising budgets to buildawareness and to gain consumer trial. Established brands are usuallysupported with lower advertising budgets as a ratio to sales.

y Market Share and Consumer base: high-market-share brands usually requireless advertising expenditure as a percentage of sales to maintain their share.To build share by increasing market size requires larger advertisingexpenditures. Additionally, on a cost-per-impressions basis, it is less expensiveto reach consumers of a widely used brand them to reach consumers of low-share brands.

y Competition and clutter: In a market with a large number of competitors and

high advertising spending, a brand must advertise more heavily to be heardabove the noise in the market. Even simple clutter from advertisements notdirectly competitive to the brand creates the need for heavier advertising.

y Advertising frequency: the number of repetitions needed to put across thebrands message to consumers has an important impact on the advertisingbudget.

y Product substitutability: brands in the commodity class (example cigarettes,beer, soft drinks) require heavy advertising to establish a different image.

Advertising is also important when a brand can offer unique physical benefits orfeatures.

3. MESSAGE GENERATIONMessage generation can be done in the following ways:

Inductive: By talking to consumers, dealers, experts and competitors. Consumers arethe major source of good ideas. Their feeling about the product, its strengths, andweaknesses gives enough information that could aid the Message generation process.

Message evaluation and selection

The advertiser needs to evaluate the alternative messages. A good ad normally

focuses on one core selling proposition.Messages can be rated on desirability, exclusiveness and believability. The messagemust first say something desirable or interesting about the product.

The message must also say something exclusive or distinct that does not apply to everybrand in the product category. Above all, the message must be believable or provable.


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5.MEASUREMENT

Evaluating the effectiveness of the Advertisement Program is very important as it helpsprevent further wastage of money and helps make corrections that are important forfurther advertisement campaigns. Researching the effectiveness of the advertisement isthe most used method of evaluating the effectiveness of the Advertisement Program.Research can be in the form of:

y Communication-Effect Researchy Sales-Effect Research

There are two ways of measuring advertising effectives. They are:

Pre-testing

It is the assessment of an advertisement for its effectiveness before it is actually used. Itis done through

y Concept testing how well the concept of the advertisement is. This is be doneby taking expert opinion on the concept of the ad.

y Test commercials test trial of the advertisement to the sample of people

y Finished testing

Post-testing

It is the assessment of an advertisements effectiveness after it has been used. It isdone in two ways


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y Unaided recall a research technique that asks how much of an ad a personremembers during a specific period of time

y Aided recall a research technique that uses clues to prompt answers frompeople about ads they might have seen

BRAND EXTENSION

Brand Extension is the use of an established brand name in new product categories.This new category to which the brand is extended can be related or unrelated to theexisting product categories. A renowned/successful brand helps an organization tolaunch products in new categories more easily. For instance, Nikes brand core productis shoes. But it is now extended to sunglasses, soccer balls, basketballs, and golfequipments. An existing brand that gives rise to a brand extension is referred to asparent brand. If the customers of the new business have values and aspirationssynchronizing/matching those of the core business, and if these values and aspirationsare embodied in the brand, it is likely to be accepted by customers in the new business.

Extending a brand outside its core product category can be beneficial in a sense that ithelps evaluating product category opportunities, identifies resource requirements,lowers risk, and measures brands relevance and appeal.

Brand extension may be successful or unsuccessful.

Instances where brand extension has been a success are-

i. Wipro which was originally into computers has extended into shampoo, powder,and soap.

ii. Mars is no longer a famous bar only, but an ice-cream, chocolate drink and aslab of chocolate.

Advantages of Brand ExtensionBrand Extension has following advantages:

1. It makes acceptance of new product easy.a. It increases brand image.b. The risk perceived by the customers reduces.c. The likelihood of gaining distribution and trial increases. An established

brand name increases consumer interest and willingness to try new

product having the established brand name.d. The efficiency of promotional expenditure increases. Advertising, sellingand promotional costs are reduced. There are economies of scale asadvertising for core brand and its extension reinforces each other.

e. Cost of developing new brand is saved.f. Consumers can now seek for a variety.g. There are packaging and labeling efficiencies.h. The expense of introductory and follow up marketing programs is reduced.


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product lines, and can facilitate cost-effective broadening of distribution channels.Meanwhile, improvements in supply chain management technologies must also befactored into choice of distribution partners.

InfoTrends can help your company improve its distribution strategies by:

y Mapping your products to the end-usery Determining customers channel preferences and comparing these preferences

with actual availabilityy Recommending new channels, and whyy Examining competitors strategies and comparing them and their effectiveness

withyour own

y Confidential interviews with your distribution partners to identify areas for

improvement, as well as existing strengths to be encouraged

Depending on the type of product being distributed there are three common distributionstrategies available:

1. Intensive distribution: Used commonly to distribute low priced or impulse purchaseproducts eg chocolates, soft drinks.

2. Exclusive distribution: Involves limiting distribution to a single outlet. The product is

usually highly priced, and requires the intermediary to place much detail in its sell. Anexample of would be the sale of vehicles through exclusive dealers.

3. Selective Distribution: A small number of retail outlets are chosen to distribute theproduct. Selective distribution is common with products such as computers, televisionshousehold appliances, where consumers are willing to shop around and wheremanufacturers want a large geographical spread.

If a manufacturer decides to adopt an exclusive or selective strategy they should selecta intermediary which has experience of handling similar products, credible and is knownby the target audience.

DIVERSIFICATION STRATEGY

Diversification is a form of corporate strategy for a company. It seeks to increaseprofitability through greater sales volume obtained from new products and new markets.Diversification can occur either at the business unit level or at the corporate level. At thebusiness unit level, it is most likely to expand into a new segment of an industry that thebusiness is already in. At the corporate level, it is generally very interesting[clarification


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needed] entering a promising business outside of the scope of the existing businessunit.

Diversification is part of the four main growth strategies defined by the Product/MarketAnsoff matrix:

Ansoff pointed out that a diversification strategy stands apart from the other threestrategies. The first three strategies are usually pursued with the same technical,

financial, and merchandising resources used for the original product line, whereasdiversification usually requires a company to acquire new skills, new techniques andnew facilities.

The different types of diversification strategies

The strategies of diversification can include internal development of new products ormarkets, acquisition of a firm, alliance with a complementary company, licensing of newtechnologies, and distributing or importing a products line manufactured by another firm

Concentric diversification: This means that there is a technological similarity between

the industries, which means that the firm is able to leverage its technical know-how togain some advantage. For example, a company that manufactures industrial adhesivesmight decide to diversify into adhesives to be sold via retailers. The technology wouldbe the same but the marketing effort would need to change.

Horizontal diversification: The Company adds new products or services that are oftentechnologically or commercially unrelated to current products but that may appeal tocurrent customers. In a competitive environment, this form of diversification is desirableif the present customers are loyal to the current products and if the new products have agood quality and are well promoted and priced.

Conglomerate diversification (or lateral diversification): The Company markets newproducts or services that have no technological or commercial synergies with currentproducts but that may appeal to new groups of customers. The conglomeratediversification has very little relationship with the firm's current business. Therefore, themain reasons of adopting such a strategy are first to improve the profitability and theflexibility of the company, and second to get a better reception in capital markets as thecompany gets bigger. Even if this strategy is very risky, it could also, if successful,provide increased growth and profitability.


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4 As of days of marketing strategy

Analyze.

You have to analyze the needs of your audience. You need to be able to identify their

core values, motivators, buying styles, fears, and sources of diversion, informationchannels and centers of influence.

You must target your marketing message so that the intended prospect feels that theservices address their needs directly.

No buyer or buying population is alike. Try to apply a one size fits all approach to yourmarketing, and you become nothing special to anyone.

Find out:

y Who has money (or who has spent money) on similar products orservices?y What are their beliefs and values?y What are their desires, dreams and passions?y What are their fears and secrets that theyd prefer to keep in the

shadows?y Where do they go on Mondays and Tuesdays and Wednesdays?y Why do they buy what they buy?

Attention.

Once youve analyzed the needs of your best prospects and found out where they areyou must then grab their attention.

Thats getting harder and harder to do. We bombard consumers with thousands ofmarketing message daily. What do they do to protect themselves? Filter them. Ignorethem. Delete them. Fight back at them.

Focus exclusively on your buying universe and their environment. Your only concernmust be getting the attention of your target audience.

Ask yourself and your entire staff questions that revolve around getting the attention of

your defined universe of prospects.

y Where are our customers on a daily basis?y What are they really looking at throughout the day?y What is shocking, beautiful, humorous, emotional, frightening, and urgent

enough for them to pay attention to our message and unique marketingproposition?


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Accept.

y Once you have their attention you move to the third step in the process, Accept. To succeed youll have to use every tool at your disposal toencourage and get the prospect to accept your proposition, no matter

what it might be.y You have to get them to accept that your marketing proposition (despite

the fact there might be countless other competitors in the marketplaceright now) is the best one to help them achieve the outcomes theyrelooking for.

y As well discuss in detail later, people do not buy products or services,they buy outcomes.You are in the outcomes business.

Action

You have to get them to act. The potential buyers have to do something with the

information and relationship youve cultivated by taking a specific, intended course ofaction. They have to make the transition from tire kicker or prospect to a full-fledgecustomer/buyer/member/inductee.

Money or some other commitment has to take place to make your marketing effortsworthwhile.

Will it be a trip to your store, a phone call to set up an appointment or a visit to yourwebsite to order online? Will it be a completed survey, petition signature or membershiprenewal?

BRANDING

Branding is a major decision issue in managing products. Well-known brands have thepower to command price premium. Today, the brands Mercedes, IBM, Sony, Canonand others enjoy a huge brand-loyal market. According to Business Week, the Intelbrand is one of the top 10 global brands, with a brand equity value of more than US 30billion dollars.

American Marketing Association defined brand as a name, term, sign, symbol, ordesign, or a combination of them, intended to identify the goods and services of oneseller or group of sellers and to differentiate them from those of competition.

Brands live in the minds of consumers and are much more than just a tag for theirrecognition and identification. They are the basis of consumer relationship and bringconsumers and marketers closer by developing a bond of faith and trust between them.

A brand mark refers to that part of brand which is not made up of words, but can be asymbol or design such as swoosh mark of Nike, or Golden Arches of McDonalds.


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BRAND IDENTATY

Many brands are largely unknown to consumers and for some others, there is very highlevel of awareness in terms of name recall and recognition. David A. Aaker definesbrand identity as, a unique set of brand associations that the brand strategist aspires to

create or maintain. These associations represent what the brand stands for and imply apromise to customers from the organisation members. Brand identity and brand imageare sometimes used interchangeably in different texts. Brand identity refers to aninsiders concept reflecting brand managers decisions of what the brand is all about.Brand image reflects the perceptions of outsiders, that is customers, about the brand.

Physique: Physique dimension refers to the tangible, physical aspects. The physicaldimensions are usually included in the product such as name, features, colours, logos,and packaging. The physique of IBM brand would be data system, servers, desktopPCs, notebooks PCs, and service, etc.

Personality: Marketers deliberately may try to assign the brand a personality; or peopleon their own may attribute a personality to a brand. Bajaj Pulsar ads communicateDefinitely male. The personality of Boost is seen as young, dynamic, energetic and anachiever.

Culture: Culture includes knowledge, belief, rites and rituals, capabilities, habits, andvalues. A brand reflects its various aspects and values that drive it. Culture manifestsvarious aspects of a brand. For instance, Apple computers reflect its culture. It is asymbol of simplicity, and friendliness.

Relationship: Brands are often at the heart of transactions and exchanges between

marketers and customers. The brand name Nike is Greek and relates to Olympics.Apple conveys emotional relationship based on friendliness. Relationship is essentiallyimportant in service products.

Reflection: This refers to defining the kind of people who use it. It is reflected in theimage of its consumers: young, old, rich, modern and so on. For example, Pepsi reflectsyoung, fun loving, carefree people. The reflection of Allen Sollys brand is a typicalyoung executive.

Self-Image: This means how a customer relates herself / himself to the brand.Selfimage is how a customer sees herself / himself. The self-image of users of Bajaj

Pulsar motorcycle is believed to that of be tough, young males.


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BRAND EQUITY

Brand equity is defined in terms of marketing effects uniquely attributed to the brands for example, when certain outcomes result from the marketing of a product or servicebecause of its brand name that would not occur if the same product or service did not

have the name.

Performance: The aspect of brand equity focuses on the physical and functionalattributes of a brand. Customers are concerned about how fault free and durable thebrand is, based on their judgement.Social image: This focuses on what social image the brand holds in terms of its esteemfor customers social and reference groups.Value: This refers to the customers value perception of the brand. This is the ratiobetween what are the involved costs and the perceived delivered value.Trustworthiness: This means the customers extent of faith in the brandsperformance, quality, and service. This reflects reliability of the brand, that it would

always take care of customers interest and the people behind the brand can be trusted.Identification: To what extent customers feel emotionally attached to the brand.Their association with the brand is important because it matches their self-conceptand aspirations. This means psychological association with what the brand standsfor in the customers perceptions.

Ansoff's Product-Market Expansion Grid

Ian Ansoff has proposed a useful framework called the product/market expansion gridfor detecting new intensive growth opportunities. There are four strategies, one for each

of the quadrants:Market Penetration Strategy

When the product is in the current market, it can still grow. There are three majorapproaches to increasing current product's market share:1. Encourage current customers to buy more.2. Attract competitors customers.3. Convince non-users to use the product.

Market-Development Strategy

When the current product is launched in a new market, there are three approaches todevelop the market:1. Expand distribution channels.2. Sell in new locations.3. Identify the potential users.


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Product-Development Strategy

When a new product is launched in the current market, the intensive growth strategiescould be to:1. Develop new features.2

. Develop different quality levels.3. Improve the technology.

DiversificationWhen a new product is launched in a new market, diversification makes good sense asbetter opportunities are found outside the present business. The diversificationstrategies are of three types:1. Concentric Diversification Strategy: Develop new products with the earlier technologyfor new segments2. Conglomerate Diversification Strategy: Develop new products for new markets.3. Horizontal Diversification Strategy: Develop new products with new technology for old

customers. OLDPRODUCTS

NEWPRODUCTS

OLDMARKETS

MarketPenetration

ProductDevelopment

NEWMARKETS

MarketDevelopment

Diversification

GE Matrix Positions and Strategy

GE Matrix or McKinsey Matrix is a strategic tool for portfolio analysis. It is similar to theBCG Matrix and actually the GE / McKinsey Matrix is an extension of the BCG Matrix -multifactor portfolio analysis tool. This tool compares different businesses on "BusinessStrength" and "Market Attractiveness" variables. This allows the business user tocompare business strength, market attractiveness, market size, and market share fordifferent strategic business units (SBUs) or different product offerings.The vertical axis of GE matrix is industries attractiveness< which is determined by the

factor Market growth rate, market size, demand variability, industries profibility, globalopportunity, macro environmental factor

The horizontal axis of GE matrix is strength of business unit some factors that can beused to determine business strength include.Market share, growth in market share,brand equity, distribution channel access, production capacity, profit margin relative tocompetitors.


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Porters Generic Strategies Analysis

Introduction

Porters generic strategies framework constitutes a major contribution to the

development of the strategic management literature. Competitive strategies focus on

ways in which a company can achieve the most advantageous position that it possibly

can in its industry. The profit of a company is essentially the difference between its

revenues and costs. Therefore high profitability can be achieved through achieving the

lowest costs or the highest prices vis--vis the competition. Porter used the terms cost

leadership and differentiation, wherein the latter is the way in which companies can

earn a price premium.

Main aspects of Porters Generic Strategies Analysis

Companies can achieve competitive advantages essentially by differentiating their

products and services from those ofcompetitors and through low costs. Firms can

target their products by a broad target, thereby covering most of the marketplace, or

they can focus on a narrow target in the market. According to Porter, there are three

generic strategies that a company can undertake to attain competitive advantage: cost

leadership, differentiation, and focus.

Cost leadership

The companies that attempt to become the lowest-cost producers in an industry can be

referred to as those following a cost leadership strategy. The company with the lowest

costs would earn the highest profits in the event when the competing products are

essentially undifferentiated, and selling at a standard market price. Example : Deccan

Airlines.

Differentiation

When a company differentiates its products, it is often able to charge a premium price

for its products or services in the market. Some general examples of differentiation

include better service levels to customers, better product performance etc. in


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comparison with the existing competitors. Differentiation has many advantages for the

firm which makes use of the strategy. Some problematic areas include the difficulty on

part of the firm to estimate if the extra costs entailed in differentiation can actually be

recovered from the customer through premium pricing. Moreover, successful

differentiation strategy of a firm may attract competitors to enter the companys marketsegment and copy the differentiated product.

Focus

Porter initially presented focus as one of the three generic strategies, but later identified

focus as a moderator of the two strategies. Companies employ this strategy by focusing

on the areas in a market where there is the least amount of competition (Pearson,

1999). Organizations can make use of the focus strategy by focusing on a specific

niche in the market and offering specialized products for that niche. This is why thefocus strategy is also sometimes referred to as the niche strategy.

This strategy provides the company the possibility to charge a premium price for

superior quality (differentiation focus) or by offering a low price product to a small and

specialized group of buyers (cost focus). Ferrari and Rolls-Royce are classic examples

of niche players in the automobile industry. Both these companies have a niche of

premium products available at a premium price. Moreover, they have a small

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Porter's Five Forces

Porters fives forces model is an excellent model to use to analyse a particularenvironment of an industry. Michael Porter provided a framework that models anindustry as being influenced by five forces. The strategic business manager seeking to

develop an edge over rival firms can use this model to better understand the industrycontext in which the firm operates.

SUPPLIER POWER

THREAT OFNEW ENTRANTS RIVALRY THREAT

OFSUBSTITUTES

BUYER POWER DEGREE OF RIVALRY

I. Rivalry

In the traditional economic model, competition among rival firms drives profits tozero. But competition is not perfect and firms are not unsophisticated passive pricetakers. Rather, firms strive for a competitive advantage over their rivals. The

intensity of rivalry among firms varies across industries, and strategic analysts areinterested in these differences.Economists measure rivalry by indicators ofindustry concentration. The Concentration

Ratio (CR) is one such measure. The Bureau of Census periodically reports the CR formajor Standard Industrial Classifications (SIC's). The CR indicates the percent ofmarket share held by the four largest firms (CR's for the largest 8, 25, and 50 firms in anindustry also are available). A high concentration ratio indicates that a highconcentration of market share is held by the largest firms - the industry is concentrated.With only a few firms holding a large market share, the competitive landscape is lesscompetitive (closer to a monopoly). A low concentration ratio indicates that the industryis characterized by many rivals, none of which has a significant market share. These

fragmentedmarkets are said to be competitive. The concentration ratio is not the onlyavailable measure; the trend is to define industries in terms that convey moreinformation than distribution of market share.

If rivalry among firms in an industry is low, the industry is considered to bedisciplined. This discipline may result from the industry's history of competition, therole of a leading firm, or informal compliance with a generally understood code ofconduct. Explicit collusion generally is illegal and not an option; in low-rivalryindustries competitive moves must be constrained informally. However, a maverick


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firm seeking a competitive advantage can displace the otherwise disciplined market.When a rival acts in a way that elicits a counter-response by other firms, rivalry

intensifies. The intensity of rivalry commonly is referred to as being cutthroat,intense, moderate, or weak, based on the firms' aggressiveness in attempting togain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitivemoves: Changing prices - raising or lowering prices to gain a temporary advantage.Improving product differentiation - improving features, implementinginnovations in the manufacturing process and in the product itself. Creatively using channels of distribution - using vertical integration or using adistribution channel that is novel to the industry. For example, with high-endjewelrystores reluctant to carry its watches, Timex moved into drugstores andother non-traditional outlets and cornered the low to mid-price watch market.

. Exploiting relationships with suppliers - for example, from the 1950's to the

1970's Sears, Roebuck and Co. dominated the retail household appliancemarket. Sears set high quality standards and required suppliers to meet itsdemands for product specifications and price.

The intensity of rivalry is influenced by the following industry characteristics:

1 A larger number of firms increases rivalry because more firms mustcompete for the same customers and resources. The rivalry intensifies if thefirms have similar market share, leading to a struggle for market leadership.2Slow market growth causes firms to fight for market share. In a growingmarket, firms are able to improve revenues simply because of the expandingmarket.3 High fixed costs result in an economy of scale effect that increases rivalry.When total costs are mostly fixed costs, the firm must produce near capacityto attain the lowest unit costs. Since the firm must sell this large quantity ofproduct, high levels of production lead to a fight for market share and results inincreased rivalry.4 High storage costs or highly perishable products cause a producer to sellgoods as soon as possible. If other producers are attempting to unload at thesame time, competition for customers intensifies.5Low switching costs increases rivalry. When a customer can freely switchfrom one product to another there is a greater struggle to capture customers.6 Low levels of product differentiation is associated with higher levels ofrivalry. Brand identification, on the other hand, tends to constrain rivalry.7 Strategic stakes are high when a firm is losing market position or haspotential for great gains. This intensifies rivalry.8 High exit barriers place a high cost on abandoning the product. The firmmust compete. High exit barriers cause a firm to remain in an industry, evenwhen the venture is not profitable. A common exit barrier is asset specificity.When the plant and equipment required for manufacturing a product is highly


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specialized, these assets cannot easily be sold to other buyers in anotherindustry. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustratesthis concept. Litton was successful in the 1960's with its contracts to buildNavy ships. But when the Vietnam war ended, defense spending declined andLitton saw a sudden decline in its earnings. As the firm restructured, divesting

from the shipbuilding plant was not feasible since such a large and highlyspecialized investment could not be sold easily, and Litton was forced to stayin a declining shipbuilding market.9 A diversity of rivals with different cultures, histories, and philosophies makean industry unstable. There is greater possibility for mavericks and formisjudging rival's moves. Rivalry is volatile and can be intense. The hospitalindustry, for example, is populated by hospitals that historically are communityor charitable institutions, by hospitals that are associated with religiousorganizations or universities, and by hospitals that are for-profit enterprises.This mix of philosophies about mission has lead occasionally to fierce localstruggles by hospitals over who will get expensive diagnostic and therapeutic

services. At other times, local hospitals are highly cooperative with oneanother on issues such as community disaster planning.10 Industry Shakeout.A growing market and the potential for high profitsinduces new firms to enter a market and incumbent firms to increaseproduction. A point is reached where the industry becomes crowded withcompetitors, and demand cannot support the new entrants and the resultingincreased supply. The industry may become crowded if its growth rate slowsand the market becomes saturated, creating a situation of excess capacitywith too many goods chasing too few buyers. A shakeout ensues, with intensecompetition, price wars, and company failures.

BCG founder Bruce Henderson generalized this observation as the Rule ofThree and Four: a stable market will not have more than three significantcompetitors, and the largest competitor will have no more than four times themarket share of the smallest. If this rule is true, it implies that:

_ If there is a larger number of competitors, a shakeout is inevitable_ Surviving rivals will have to grow faster than the market_ Eventual losers will have a negative cash flow if they attempt to grow_ All except the two largest rivals will be losers_ The definition of what constitutes the "market" is strategically important.

Whatever the merits of this rule for stable markets, it is clear that marketstability and changes in supply and demand affect rivalry. Cyclical demandtends to create cutthroat competition. This is true in the disposable diaperindustry in which demand fluctuates with birth rates, and in the greeting cardindustry in which there are more predictable business cycles.


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II. Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries. To theeconomist, a threat of substitutes exists when a product's demand is affected by theprice change of a substitute product. A product's price elasticity is affected by

substitute products - as more substitutes become available, the demand becomesmore elastic since customers have more alternatives. A close substitute productconstrains the ability of firms in an industry to raise prices.

The competition engendered by a Threat of Substitute comes from products outsidethe industry. The price of aluminum beverage cans is constrained by the price of glassbottles, steel cans, and plastic containers. These containers are substitutes,yet they arenot rivals in the aluminum can industry. To the manufacturer of automobile tires, tireretreads are a substitute. Today, new tires are not so expensive that car owners givemuch consideration to retreading old tires. But in the trucking industry new tires areexpensive and tires must be replaced often. In the truck tire market, retreading remainsa viable substitute industry. In the disposable diaper industry, cloth diapers are a

substitute and their prices constrain the price of disposables.While the threat of substitutes typically impacts an industry through price

competition, there can be other concerns in assessing the threat of substitutes.Consider the substitutability of different types of TV transmission: local stationtransmission to home TV antennas via the airways versus transmission via cable,satellite, and telephone lines. The new technologies available and the changingstructure of the entertainment media are contributing to competition among thesesubstitute means of connecting the home to entertainment. Except in remote areas it isunlikely that cable TV could compete with free TV from an aerial without the greaterdiversity of entertainment that it affords the customer.

III. Buyer Power

The power of buyers is the impact that customers have on a producing industry. Ingeneral, when buyer power is strong, the relationship to the producing industry is nearto what an economist terms a monopsony - a market in which there are many suppliersand one buyer. Under such market conditions, the buyer sets the price. In reality fewpure monopsonies exist, but frequently there is some asymmetry between a producingindustry and buyers. The following tables outline some factors that determine buyerpower.

IV. Supplier Power

A producing industry requires raw materials - labor, components, and other supplies.This requirement leads to buyer-supplier relationships between the industry and thefirms that provide it the raw materials used to create products. Suppliers, if powerful,can exert an influence on the producing industry, such as selling raw materials at a highprice to capture some of the industry's profits. The following tables outline some factorsthat determine supplier power.


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V. Threat of New Entrants and Entry Barriers

It is not only incumbent rivals that pose a threat to firms in an industry; the possibilitythat new firms may enter the industry also affects competition. In theory, any firm should

be able to enter and exit a market, and if free entry and exit exists, then profits alwaysshould be nominal. In reality, however, industries possess characteristics that protectthe high profit levels of firms in the market and inhibit additional rivals from entering themarket. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that marketstypically make. For example, when industry profits increase, we would expect additionalfirms to enter the market to take advantage of the high profit levels, over time drivingdown profits for all firms in the industry. When profits decrease, we would expect somefirms to exit the market thus restoring a market equilibrium.Falling prices, or theexpectation that future prices will fall, deters rivals from entering a market. Firms also

may be reluctant to enter markets that are extremelyuncertain, especially if entering involves expensive start-up costs. These are normalaccommodations to market conditions. But if firms individually (collective action wouldbe illegal collusion) keep prices artificially low as a strategy to prevent potential entrantsfrom entering the market, such entry-deterring pricingestablishes a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriersreduce the rate of entry of new firms, thus maintaining a level of profits for those alreadyin the industry. From a strategic perspective, barriers can be created or exploited toenhance a firm's competitive advantage. Barriers to entry arise from several sources:

1 : Government creates barriers. Although the principal role of the government in amarket is to preserve competition through anti-trust actions, government also restrictscompetition through the granting of monopolies and through regulation. Industries suchas utilities are considered natural monopolies because it has been more efficient tohave one electric company providepower to a locality than to permit many electric companies to compete in a local market.To restrain utilities from exploiting this advantage, government permits a monopoly, butregulates the industry. Illustrative of this kind of barrier to entry is the local cablecompany. The franchise to a cable provider may be granted by competitive bidding, butonce the franchise is awarded bya community a monopoly is created. Local governments were not effective in monitoringprice gouging by cable operators, so the federal government has enacted legislation toreview and restrict prices.

The regulatory authority of the government in restricting competition is historicallyevident in the banking industry. Until the 1970's, the markets that banks could enterwere limited by state governments. As a result, most banks were local commercial andretail banking facilities. Banks competed through strategies that emphasized simplemarketing devices such as awarding


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toasters to new customers for opening a checking account. When banks werederegulated, banks were permitted to cross state boundaries and expand their markets.Deregulation of banks intensified rivalry and created uncertainty for banks as theyattempted to maintain market share. In the late 1970's, the strategy of banks shiftedfrom simple marketing tactics to mergers and geographic expansion as rivals attempted

to expand markets.2 : Patents and proprietary knowledge serve to restrict entry into an industry. Ideas andknowledge that provide competitive advantages are treated as private property whenpatented, preventing others from using the knowledge and thus creating a barrier toentry. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in theinstant photography industry. In 1975, Kodak attempted to enter the instant cameramarket and sold a comparable camera. Polaroid sued for patent infringement and won,keeping Kodak out of the instant camera industry.

3 : Asset specificity inhibits entry into an industry. Asset specificity is the extent to which

the firm's assets can be utilized to produce a different product. When an industryrequires highly specialized technology or plants and equipment, potential entrants arereluctant to commit to acquiring specialized assets that cannot be sold or converted intoother uses if the venture fails. Asset specificity provides a barrier to entry for tworeasons: First, when firms already hold specialized assets they fiercely resist efforts byothers from taking their market share. New entrants can anticipate aggressive rivalry.For example, Kodak had much capital invested in its photographic equipment businessand aggressively resisted efforts by Fuji to intrude in its market. These assets are bothlarge and industry specific. The second reason is that potential entrants are reluctant tomake investments in highly specializedassets.

4 : Organizational (Internal) Economies of Scale. The most cost efficient level ofproduction is termed Minimum Efficient Scale (MES). This is the point at which unitcosts for production are at minimum - i.e., the most cost efficient level of production. IfMES for firms in an industry is known, then we can determine the amount of marketshare necessary for low cost entry or costparity with rivals. For example, in long distance communications roughly 10% of themarket is necessary for MES. If sales for a long distance operator fail to reach 10% ofthe market, the firm is not competitive.

The existence of such an economy of scale creates a barrier to entry. The greater thedifference between industry MES and entry unit costs, the greater the barrier to entry.So industries with high MES deter entry of small, start-up businesses. To operate at

less than MES there must be a consideration that permits the firm to sell at a premiumprice - such as product differentiation or local monopoly.

Documents

Marketing File