Session Summary

In class we discussed about PEST analysis which is a frame that can be used to scan

macro-economic environment. PEST analysis is a simple and effective tool used to

identify the key external forces that might affect firm’s business. External forces can

create opportunities for example government LPG policy (Liberalisation,

Privatisation and Globalisation) in 1991 provided an opportunity for both foreign and

national companies to expand business But external forces can become a threat for

firms for example development in smart phone technologies was one of the major

cause of Nokia failure which relied on its Symbian and later window operating system

(http://www.wired.com/2012/04/5-reasons-why-nokia-lost-its-handset-sales-lead-and-

got-downgraded-to-junk/).

Mission & Vision of

the firm

Business Objective

(S.M.A.R.T)

Operations

Strategy

Marketing

Strategy

Financial

Strategy

Human

Resource

Strategy

STRATEGY

Implementation,

Evaluation &

Control

Know yourself :

SWOT Analysis

Scan external

environment

( We can use models like

PEST, or Porter’s 5 forces) *Not yet discussed in class

Therefore, the aim of doing PEST is to

Identify current and future external factors that can effect business

A firm must focus on exploiting opportunities provided by external environment and bring

necessary changes to safeguard themselves from existing and future threats.

PEST analysis is also useful in the process of accessing potential of a new market. If there

are several external negative factors affecting a market, it is an indication that it would be

difficult for firm to do business and realise profit potential.

How to do PEST Analysis:

o Step 1: Collect all possible relevant information about PEST factors

o Step 2: Identify factors which provide opportunity or threat

o Step 3: Take your judgement based on trade off between opportunity and

possible threat ( Most difficult)

Various factors in PEST (http://crackmba.com/wp-content/uploads/2011/12/PEST-Analysis.png)

In class we discuss about the concept of core competence which is defined as

“a harmonized combination of multiple resources and skills that distinguish a firm in the

marketplace" (Prahalad and Hamel 1990).

Core competency must full fill three criteria: ( Not discussed in class, you will cover this in detail in your strategy courses)

Provide access to important market areas or segments

Make a significant contribution to the perceived customer benefits of the product or service

Prove difficult for competitors to imitate.

for example, Honda have competency in engine design and technology. Core competencies

must, however, be flexible and responsive to changing customer demands and expectations. For

example Canon had developed core competencies in precision mechanics, fibre optics and

microelectronics, and later they used them across a range of products, including cameras,

calculators, printers and photocopiers.

As there are several key factors which can determine success in competitive market different

companies might focus on different competencies. For example in the global oil industry, Exxon

key competence is it financial expertise, crucial when huge speculative and high-risk investments

are required for exploration and developing new fields. In contrast, British Petroleum (BP) has

relies heavily on its exploration skills for success. Mobil’s outstanding competency is in the field

of lubricants produced from the oil.

Growth strategy ( P.S. This is just tip of an iceberg)

We started our class by stating that for most of organization primary objective is to attain long

term sustainable profits (Maximize long term ROI or shareholders value). Organisations

generally seek growth in sales, market share or some other measure as a primary objective

(P.S. you need measure of growth). But an organization must be careful that

When to adopt a growth strategy:

i) Growth must be manageable. Companies growth ( for a given measure) sometime can

become unmanageable and it can be detrimental to companies performance Example Home

depot realised that they can’t focus on increasing stores (http://fortune.com/2012/10/26/home-

depot-knows-when-to-call-it-quits/) or Starbucks story

(http://www.businessweek.com/stories/2008-07-09/starbucks-how-growth-destroyed-brand-

valuebusinessweek-business-news-stock-market-and-financial-advice)

ii) Growth must take into account external environmental conditions. FDI limits in several Indian

sector can limit the growth rate for MNC.

iii) Growth should be the natural choice where the environment presents several opportunities

Why to pursue growth strategy?

i) To ensure survival: In a highly competitive market there is possibility that if a company doesn’t

grow at fast pace it would be forced out of market. A close example could be BSNL in Indian

market.

ii) To obtain economies of scale: As discusses in previous classes a rapid growth in long term

can help an organization to achieve economy of scale.

iii) To stimulate talent. Companies focusing on growth rate is able to recruit better talent ( I have

some arguments against this but let me leave that for some other day)

iv) To “dictate” rules of game: Companies which are growing are the one which can shape

industry structure and have a power to dictate terms.

Assessing growth opportunities

1) Intensive growth Company is said to be focusing on intensive growth when it explore

opportunities for improving existing businesses. Ansoff proposed a useful framework for

detecting new intensive growth opportunities called a “product–market expansion grid”

a) Concentration or market penetration: In market penetration company try to achieve its

growth target by “selling more” in same market. Company can achieve this by :

a. Gaining the customers of competitors

b. Attracting non-users of your product

c. Convincing current clients to use more of your product.

Market penetration requires less resources compare to other strategy (Company already

have product and market) but company is exposed to risk (All eggs in one basket). This

strategy is useful in situation when there are no breakthrough technological innovations

happening in industry, market is stable and firms product are distinct. Example Project

Shakti by hul was market penetration (different views possible)

b) Market development: In market development t also targets new customers in new

segments in order to expand the potential market. New users can be defined as: new

geographic, demographic, institutional, or psychographic segments. Another way is to

expand sales through new uses for the product. Example Nylon by Dupoint was initially

used as parachute material, dress material and tyres. Nestle Milkmaid was initially

concentrate milk then mitthai maker and now spread.

c) Product development: Company develop product with new features, style etc. for existing

market. Example Vim dish wash bar. If a company believes that their strength lies with the

customers, then they should consider a product development strategy.

d) Diversification: Diversification seeks to increase profitability through greater sales volume

obtained from new products and new markets. At the business unit level, diversification

is most likely to expand into a new segment of an industry that the business is already in.

2) Integrative growth: A firm will go for integrative growth when it can find opportunity to grow

using backward, forward or horizontal integration

a. Backward Integration: A form of vertical integration that involves the purchase of

suppliers. Companies will pursue backward integration when it will result in improved

efficiency and cost savings. For example, backward integration might cut

transportation costs, improve profit margins and make the firm more

competitive.(Source: Investopedia) example recently Hospira acquired Orchid

(http://www.pharmpro.com/news/2014/07/hospira-completes-acquisition-orchids-api-

manufacturing-and-r-d-facility)

b. Forward Integration: A business strategy whereby activities are expanded to

include control of the direct distribution of its products. Forward integration

secures customers or outlets and guarantees product preference, and it can give a

firm much greater control over its total marketing effort.Example

http://smallbusiness.chron.com/example-companys-forward-integration-37601.html

c. Horizontal Integration: The acquisition of additional business activities that are at

the same level of the value chain in similar or different industries. This can be

achieved by internal or external expansion. Because the different firms are involved

in the same stage of production, horizontal integration allows them to share

resources at that level. If the products offered by the companies are the same or

similar, it is a merger of competitors. If all of the producers of a particular good or

service in a given market were to merge, it would result in the creation of a

monopoly. Also called lateral integration.

Forward and backward integration are part of vertical integration

3) Diversification Companies looking to grow have an option to diversify, ie move into industries using different products or serving different markets. Where the products markets involved are very diverse this is known as unrelated diversification and the marketing group is commonly described as a conglomerate.(Example TATA Group ) Where there are evident synergies between the technologies or markets concerned, this is known as related diversification. Michael Porter (1980) suggests three ‘essential tests’ which need to be met in determining whether diversification is likely to create value for shareholder:

1) Industry attractiveness 2) Cost of Entry 3) Competitive Advantage

Product life cycle:

(Page 145, Hair 2014) (Page 225, Kotler 2014)

Product life cycle (PLC) is a concept that traces the stages of a product’s acceptance, from its

introduction (birth) to its decline (death).To say a product has a lifecycle is to assert:

1) Products have a limited life

2) Product sales passes through distinct stages, each posing different challenges, opportunities,

and problems to seller.

3) Profits rise and fall at different stages of the product life cycle.

4) Product requires different marketing, financial, manufacturing, purchasing and HR strategies

in each lifecycle stage.

The PLC concept can be used to analyze a brand, a product form, or a product category.

The time a product spends in any one stage of the life cycle may vary dramatically.

Some products, such as trendy items, move through the entire cycle in weeks. Others,

such as electric dryers, stay in the maturity stage for decades.(for example In the mid-

1990s Canon, Fuji, Kodak, Minolta, and Nikon together invested around $1 billion to

develop the Advanced Photo System (APS). Several introduced APS products, but sales

lagged behind expectations. Question: Why isn’t APS widely used today? Answer: The

APS life cycle was unexpectedly short — digital cameras quickly became popular.

The PLC concept does not tell managers the length of a product’s life cycle or its

duration in any stage

Although actual lifecycle curves often depart from the idealised shape across product

forms, life-cycle stages follow one from another in a remarkably consistent fashion.

Hence, product-form life -cycles can provide important strategic insights.

STAGE 1: INTRODUCTION

Product introduction frequently follows many years of R&D and reflects the first market entry/or

entries by leading firms. (For example Honda took almost 30 years to develop a hybrid car). A high

failure rate, little competition, frequent product modification, and limited distribution typify the

introductory stage of the PLC.

Marketing costs in the introductory stage are normally high for several reasons. High dealer

margins are often needed to obtain adequate distribution, and incentives are needed to convince

consumers to try the new product. Advertising expenses are high because of the need to educate

consumers about the new product’s benefits. Production costs are also often high in this stage, as a

result of product and manufacturing flaws being identified and then corrected and because of

efforts undertaken to develop mass-production economies.

Sales normally increase slowly during the introductory stage. Moreover, profits are usually negative

because of R&D costs, factory tooling, and high introduction costs. The length of the introductory phase is largely determined by product characteristics, such as the product’s advantages over substitute products, the educational effort required to make the product known, and management’s commitment of resources to the new item. Sometimes the first product version has low quality and performs poorly, yet it may possess the seeds of an important breakthrough. The i-pad, BlackBerry, and other hand-held electronic devices are now widely popular, but their success built in part on the Apple Newton, the failed Pioneer, launched in 1993, withdrawn in 1998. STAGE 2: GROWTH STAGE

If a product category survives the introductory stage, it advances to the growth stage of the life

cycle. The growth stage is the second stage of the product life. Sales typically grow at an increasing

rate, many competitors enter the market, large companies may start to acquire small pioneering

firms, and profits are healthy. Profits rise rapidly in the growth stage, reach their peak, and begin

declining as competition intensifies. Competition often brings capacity, resources, and a loyal

customer base to fuel market growth. As competitors struggle for market position, new distribution

channels open up, and promotional effort remains high.

Previously, advertising and promotion emphasised generating primary demand, like use a mobile

phone. Now the focus shifts to differentiation and selective demand based on features,

functionality, and customer perceptions, like use the new XYZ mobile phone. Firms secure

production and marketing efficiencies, and price becomes a competitive weapon. In early growth,

many firms increase sales volume and work at managing costs. One caution: While the firm’s sales

can increase, market share may actually decrease if competitors are growing faster!

STAGE 3: MATURITY STAGE

Slow growth or flat year-to-year sales characterise maturity. Most sales are to repeat and loyal users. Examples include most everyday products like detergents and kitchen appliances. Competitive situations vary widely so that the firm must secure deep market insight. As prices and profits continue

to fall, marginal competitors start dropping out of the market.

Dealer margins also shrink, resulting in less shelf space for mature items, lower dealer inventories, and a general reluctance to promote the product. Thus, promotion to dealers often intensifies during this stage in order to retain loyalty. In maturity stage market can either become concentrated or fragmented.

a) Concentrated markets. The few major suppliers that together make most sales often coexist with some niche players. In concentrated markets, leading firms often enjoy entry barriers like economies of scale, brand preference, and/or distribution-channel dominance. Many firms pursue product differentiation approaches, but competitors that quickly offer me-too products can cause problems. Increasingly, firms focus on value-added services, packaging, distribution, and branding and promotion. Firms streamline operations and distribution to reduce costs, and pricing is often competitive. Leaders get in trouble when they fail to innovate new products and processes and do not reduce costs (Example Xerox’s failure in photocopy market)

b) Fragmented Markets. In fragmented markets, no supplier has a large market share. Fragmentation generally occurs because of some combination of low entry barriers, high exit barriers, regulation, diverse market needs, and high transportation costs. Examples include personal services like dentistry, education, and home plumbing and electrical contracting

STAGE 5: DECLINE

A long-run drop in sales signals the beginning of the decline stage. The rate of decline is governed by how rapidly consumer tastes change or substitute products are adopted. When decline is swift, overcapacity often leads to fierce price competition. Managing costs is a high priority — firms prune product lines and reduce inventory and marketing expenses. Strong firms may increase sales as weaker competitors exit. Firms often raise prices to cover costs as sales drop, but sales decline further, in a vicious cycle. Marketing efforts should target remaining customers. Firms with good cost management, and a core of loyal price-insensitive buyers, can be quite profitable. Sometimes products in decline enjoy resurgence. In the 1990s, creative marketing led to growth in cigar smoking in the U.S. Hush Puppies also revived itself after decline.

(Analyzing Buyers behaviour)

To deliver to value to customer, it must answer three fundamental questions

Q1: Who are the customers?

A customer is any person or organisation, in the channel of distribution or decision (excluding

competitors), whose actions can affect the purchase of the firm’s products and services. The definition

reflects the fact that:

• Both organisations, macro level, and individuals, micro level, are called customers.

• Customers play various roles in purchase decisions — influencers and decision-makers.

Let us take an example of various roles of customers (Noel, 2014, Page 91)

Decision-Maker. Has the formal power to make the purchase decision

Influencer. The decision-maker values the influencer’s opinion. In family purchases, the

influencer may be a friend, colleague, husband, wife, child, or grandparent. Organisational

influencers include operations, engineering, marketing, and/or general management.

Two special types of influencer are spoilers and champions.

• Spoilers, like disgruntled former employees, try to prevent the customer from

purchasing the firm’s product.

• Champions are the opposite of spoilers. They promote the firm’s interests at the

customer, based on positive experiences with the supplier or personal relationships.

Specifier. Exercises influence indirectly by providing expertise like setting specifications.

Examples includes an architect for a family house purchase, and an engineer for an

organisational purchase.

Gatekeeper. Has the power to impede access to decision-makers and influencers.

Secretaries, administrative assistants, and purchasing agents often play this role.

Buyer. Has formal power to make the purchase, like company purchasing agents.

Information Provider. Provides the firm with important information about the customer.

User. Has little direct role in the purchase decision, but often has veto power Young

children often have strong opinions about breakfast cereal, and the factory worker who

says, “I’m not working with that red stuff,” can be very influential

The firm must pay attention to both its current and potential customers.

Q2: What do the customers need and want?

Customer needs can be classified as recognised needs or latent needs. Recognised needs may be

expressed or nonexpressed:

• Expressed needs. Customers often ask for advice on how to satisfy their needs.

• Non-expressed needs. Customers do not express their needs like adult diapers or men’s

fairness cream (before launch of Fair & Handsome)

Customers are not consciously aware of latent needs. These needs may surface as technological

innovation raises awareness and customers require benefits or values they could not previously

express. A few years ago, few consumers could have articulated a need for mobile phones. But

widespread availability surfaced a latent need of wanting to stay in constant contact.

Several firms define their products and services in terms of features and attributes (Design elements

or functions the firm builds into its products and services) but customers are interested not in

features and attributes, they are interested in “Value” which they derive from product.

A customer derives three types of benefits and value from a product or service

a) Functional benefits and values

b) Psychological benefits and values

c) Economic benefits and values

When the customer recognises the value. Sometimes customers have good data about the benefits and values a product will provide; at other

times they are uncertain and cannot assess value until long after purchase. The categories of search,

use, and credence benefit capture this uncertainty and can offer important insight.

• Search Benefits. Lots of product and service data from the firm and/or independent sources

like Consumer Reports before purchase. Customers may even inspect and try products, like test-

driving a car.

• Use Benefits. A little data on customer value before purchase. You won’t know the value until

you’ve experienced it.

• Credence Benefits. Customers cannot assess value until long after purchase. Examples include

an investment’s economic benefits and health benefits from some medical procedures.

Question 3 How do customer buy ?

An Expanded Model of the Consumer Problem-Solving Process

Competition

Porter’s five forces framework:

Why we need Porter’s five forces model

As different from one another as industries might appear on the surface, the underlying

drivers of profitability are the same

Understanding the competitive forces, and their underlying causes, reveals the roots of an

industry’s current profitability while providing a framework for anticipating and influencing

competition (and profitability) over time.

Awareness of the five forces can help a company understand the structure of its industry

and stake out a position that is more profitable and less vulnerable to attack

POSITION YOUR COMPANY WHERE THE FORCES ARE WEAKEST

Example:

In the heavy-truck industry, many buyers operate large fleets and are highly motivated

to drive down truck prices. Trucks are built to regulated standards and offer similar

features, so price competition is stiff; unions exercise considerable supplier power; and

buyers can use substitutes such as cargo delivery by rail. To create and sustain long-term

profitability within this industry, heavy-truck maker Paccar chose to focus on one customer

group where competitive forces are weakest: individual drivers who own their trucks and

contract directly with suppliers. These operators have limited clout as buyers and are

less price sensitive because of their emotional ties to and economic dependence

on their own trucks. For these customers, Paccar has developed such features as luxurious

sleeper cabins, plush leather seats, and sleek exterior styling.

Buyers can select from thousands of options to put their personal signature on these built-

to-order trucks. Customers pay Paccar a 10% premium, and the company has been

profitable for 68 straight years and earned a long-run return on equity above 20%.

EXPLOIT CHANGES IN THE FORCES

Example:

With the advent of the Internet and digital distribution of music, unauthorized downloading

created an illegal but potent substitute for record companies’ services. The record

companies tried to develop technical platforms for digital distribution themselves,

but major labels didn’t want to sell their music through a platform owned by a rival.

Into this vacuum stepped Apple, with its iTunes music store supporting its iPod music

player. The birth of this powerful new gatekeeper has whittled down the number of major

labels from six in 1997 to four today.

RESHAPE THE FORCES IN YOUR FAVOR

Use tactics designed specifically to reduce

the share of profits leaking to other players.

For example:

• To neutralize supplier power , standardize specifications for parts so your company can

switch more easily among vendors.

• To counter customer power , expand your services so it’s harder for customers to leave

you for a rival.

• To temper price wars initiated by established rivals , invest more heavily in products

that differ significantly from competitors’ offerings.

• To scare off new entrants, elevate the fixed costs of competing; for instance, by escalating

your R&D expenditures.

• To limit the threat of substitutes , offer better value through wider product accessibility.

Soft-drink producers did this by introducing vending machines and convenience store

channels, which dramatically improved the availability of soft drinks relative to other

beverages.

Kotler classifies firms by the role they play in the target market: leader, challenger,

follower, or nicher. (Notes from Duke )

Market Leader Strategies: The market leader generally leads the other firms in price

changes, new-product introductions, distribution coverage, and promotional

intensity.The market leader must maintain a constant vigilance as other firms keep

challenging its strength or trying to take advantage of its weaknesses.To remain

number one, dominant firms must find ways (1) to expand total market demand, (2)

to protect its current market share through good defensive and offense actions,

and/or (3) try to increase its market share further, even if market size remains

constant.

Market Challenger Strategies: Challengers can attack the leader and other

competitors in an aggressive bid for further market share.The strategic objective of

most challengers is to increase their market shares.An aggressor can choose to

attack the market leader, to attack firms of its own size that are not doing the job or

are under-financed, or attack small local and regional firms that are not doing the job

or are under-financed. The attack strategies include frontal attack, flank attack,

encirclement attack, bypass attack, and guerilla attack.

Market Follower Strategies: Followers tend not to want to steal others customers, but

instead they present similar offers to buyers, usually by copying the leader.Follower

market shares show a high stability.Each follower tries to bring distinctive advantages

to its target market.The follower is a major target of attack by challengers.Therefore

the follower must keep its manufacturing costs low and its product quality and service

high. Following does not mean the firm is passive or a carbon copy of the leader. The

specific strategies are: the cloner, which lives parasitically off the leader; the imitator,

which copies some things from the leader but maintains differentiation in terms of

packaging advertising, pricing, etc; and the adapter, which takes the leader’s

products and adapts and often improves them.

Market Nicher Strategies: An alternative to being a follower in a large market is to be

a leader in a small market or niche. Smaller firms normally avoid competing with

larger firms by targeting small markets of little or no interest to the larger firms. Firms

with low shares of the total market can be highly profitable through small niching.The

nicher ends up knowing the target customer group so well that it can meet their

needs better than other firms casually selling to this niche could.The nicher receives

high margins in contrast to the high volume of the mass marketer.The key idea is

specialization. Nichers need to create niches, expand niches, and protect niches.