Chapter 5 Strategies in Action

Strategic Marketing052 430 Instructor: Michael CookeE-mail Address: michco@kku.ac.thOffice:IC room 817

Class hours:Friday 13:00-16:00Class Location:IC room 806Web:home/kku.ac.th/michco

1Quiz: Pass/Fail = 50%1: How would substantial innovation bring advantage?A) When a market pioneer competes with much larger competitorsB) If potential competitors view the innovations as transient (will have no lasting impact)C) If the innovators is able to establish a patent or technology barrierD) Both B and C2: Which is NOT a motivation for a company to adopt global strategyA) As a defensive stance, need presence in home market of competitorB) Access to strategic marketsC) Rapidly growing home marketsD) Investment incentives or trade barriers

3: To communicate valueA) Reduce the price, the lower the betterB) Communicate why a cost advantage existsC) Focus on the invisible price pointsD) Both B and C4: Which is an example of synergy?A) Reducing costs through sharing marketing resources or other assets B) Adding a management function to coordinate the activities of two marketing departmentsC) Two organizations with different cultures merge and managers from each fight for control D) Both B and C

Creating New BusinessLeveraging or energizing a business builds on existing businessAnother approach is to change what the customer is buying through creating a new market or sub-marketUsually involves transformational innovationInnovation may bring high returns for long time periodsThe Blue Ocean challenge is to create demand where it does not existBlue Oceans have little competitionIn crowded Red Oceans overcapacity, lack of differentiation, and low margins are the challengeInnovation can be conceptual or based on technologySuccessful innovation requires adding valueLower cost and differentiation can be achieved at same timeKey indicator of innovation is the amount of competitionNew firms perform better than existing firmsEstablished firms struggle in competitive marketsIncremental innovation tends to be quickly copiedEstablished firms tend to create over-capacityNew industries and firms with new business models tend to have higher profit

Innovators AdvantageCompetitors are slow to respond to innovationEstablished companies want to protect their revenueCompanies want to protect their brandsFirms tend to view innovations as transientCompetitors may not be able to respondTechnology barriers such as patentsOrganizational constraints, such as culture or systemsCultures are difficult to duplicateOrg constraints a common reason competitors fail to respondThe innovator can capture customer loyaltyCustomer may have no incentive to try a different productCustomer switching costs may be highFirst mover advantage involves building positionBuild customer base quickly through low pricesFirst movers may get innovative reputationPioneers tend to fail while firms that establish leadership during early growth phases are more successfulEarly Market leaders have low failure rates (though pioneers often fail)Price product at mass market levelAre patient investors Are often dominant in a related category Brand name associationsExisting distribution channels

Managing Category PerceptionsThe innovator focuses on what category to buyLeading brand viewed as authentic and reliableMarket leader need not focus on which brand to buyManaging category perceptions is important in new marketsFocus on attributes and functional benefits from the start (rather than emotional or expressive benefits)Labels are important (product descriptive or brand names)Maintaining dominance in competitive environmentsSome firms make themselves a moving targetStrong brands create an aura of being authentic (versus copies)Some create barriers to entry with competencies

The Role of Price PointsClayton Christensen studied disruptive innovationLow-end disruptive innovationEstablished firms target best customersAim to get higher margins and loyalty with features, service, etcDevelop structures, skills, incentives for reliable profitIncumbents usually win with sustainable innovations because of resourcesLow-end customers often ignored by established firmsLow-end disruptors target the ignored customersIntroduce easy to use and cheap product versionsAt outset, usually an inferior product offeringLow-end offering may improve over timeStall points for established firms often involve low-end disruptionNew-Market innovative disruptions appeal to non-customersProducts considered too expensive or difficult to use by manyEase of use and lower prices can open a new market

Environments that Bring New IdeasFew firms create multiple new businessesStrategic adaptability plays a major role in successful innovation (chapter 7)Involves organizational flexibilityOrganization can identify, evaluate, and adapt to trendsStrategic commitment required for existing productsLoyalty to a core strategy which assumes future will be much like the pastInvolves execution of strategy and continual improvementVulnerable to paradigm shiftsFew firms have both innovation (adaptable) and incremental change (commitment) capabilitiesReasons firms fail to innovateShort term financial pressure = focus on existing businessOrganizational structures (functional or product silos)Complacency (why change when business is good?)Fear of cannibalizing existing business (recall Kodak)Culture committed to existing business model Size inhibits new business ventures which start smallLack of material financial impact from new ventures (no shareholder returns)May be unable to handle smaller business (Exxon failed in electronics innovation)

Successful Innovation within Established FirmsCreate a distinct organizationAcquisition of an innovator followed by independenceCreate a stand-alone unit within the organizationSeparate organization can use some elements of parentStand-alone needs to be flexible and entrepreneurialDual organization (both committed and adaptable)Requires different cost control systems and performance metricsCan bring energy to core businessesDifficult to achieve due to differencesNew business ventures need access to capital Stock market or venture capital available if externalTop management commitment to internal innovation needed for adequate internal funding

Global Strategies (McLoughlin 13)Global strategy uses relationships between country markets Even a local business may learn about threats and opportunities from global external analysisIssues arising from global strategy What are the global strategy objectives?Product standardization versus customizationBrand and marketing standardization How can the business expand globally?Use of alliances to enter countriesGlobal brand managementWe have covered much of the material. This will be survey

Indicators that Strategies Should be GlobalCompetitors are not domestic and are multinationalScale economies opportunities through standardizationCost reduction or effectiveness increased with locations in different countriesCross subsidy opportunitiesA way around trade barriers to desirable marketsAdvantages from global name (if available)Brand and advertising will work across countriesLocal operations do not have an advantage

How would a local operation use these to fight?Chapter 13 - Global StrategiesPPT 13-11GlobalBrandAssociationsAccess Low-CostLabor/MaterialsAccessNationalInvestment IncentivesCross-SubsidizationAccessStrategicallyImportant MarketsDodge TradeBarriersObtainingScaleEconomiesFigure 13.1Global Strategy MotivationsGlobalStrategiesMotivations for Global StrategyScale economiesScale economies result from larger sales baseStandard design (VW advantage over Renault-Nissan)Standardized worldwide marketing programsResearch and development costsCompanies may aim to reduce number of sub-brands to achieve scale economiesConsumer preference for global brands (quality and innovation associations)Worldwide sourcing of product and marketing innovationsGlobal differences in labor and materials costsNational investment incentives (taxes or subsidies)A way around trade barriers (by locating plants within a market)Cross subsidization (using the resources in one market to subsidize battles in another market)As a defensive stance, need presence in home market of competitorGoodyear retaliated in Europe against Michelins attack in the USAKodak failed to counter Fujis attack and lost market share in the USAAccess to strategically important marketsSize or potential of marketIndustry trends and technology emanate from certain marketsLocate design and manufacturing in certain areas to observe competitors and learn new technologyCertain technologies emanate from Silicon Valley, attracting other firms and talent

Standardized Products and BrandsA standardized brand is easier to manageBrand management involves establishing brand identity and making it drive brand buildingA global brand makes this easier to accomplish than country specific brand strategiesSimpler organizational structures with one brandA global product may not be perfect in any marketBrands often should not be standard across all countriesMarkets may differ in fundamental waysMarket share differences across marketsCustomer motivations (light skin in some parts of Asia)Different distribution channels Customer familiarity with the product may varyDifferences in economic developmentLocal heritage (build on relationship to local brand) or COO issuesCultural responses to words and symbols may differ (pronunciation, etc)Names and positions might be owned in certain areas (cybersquatting and trademarks owned)Local brand equity (from an acquired company)Best to coordinate strategies in individual countries

Deciding Which Countries to EnterSuccess in some industries comes from local share (beer and cement, for example) Reasons for choosing to enter a marketSize or growth ratesIntensity of competition in the marketAbsence of cultural or operational barriersPolitical climateEntry can be sequentially or simultaneouslyFor competitive reasons and to achieve scale a global product roll out is often bestSequential entry allows refinement of strategy based on experience, involves less initial investmentPulling Together Some ThreadsExcerpts from http://www.nytimes.com/2013/01/30/opinion/friedman-its-pq-and-cq-as-much-as-iq.html?nl=todaysheadlines&emc=edit_th_20130130&pagewanted=printThe prefix hyper means excessive.According to Thomas Friedman - In the last decade the world went from connected to hyper-connected in a way that impacts every job, industry and school.In a world connected by digital technologies, people can compete, connect and collaborate from anywhere (The World is Flat was published in 2004)Virtually everyone everywhere has access to a hand-held computer, connected via the cloud to infinite applications and storage, so they can work, invent, entertain, collaborate and learn for less money than ever before. Every boss now also has cheap, easy, and fast access to software, automation, robotics, labor and brains anywhere in the world. When the world gets this hyper-connected, the speed of change for every job and industry becomes hyper-mode. In the past, we could assume that an educational foundation would last your whole lifetime. Now people have to learn throughout life.Not surprisingly, incomes around the world converge, as bright people in poor countries get access to the same information as educated people in the developed world.We discussed the book Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the EconomyWith the digital revolution people with more education start to earn much more than those without itThose with the capital to buy and use machines earn much more than those who can only offer their labor Superstars reach global markets and earn much more than those with slightly less talentWhich languages do people use to enter the globally connected world?

Amazons Warehouse in GermanyMichael Dalder/Reuters

Amazon and Apple againAfter Amazon released quarterly results, the shares immediately jumped nearly 10 percent in after-hours trading, about the same amount that Apple fell after releasing its results a few days before. What caught the eye of investors was that operating margins as a percent of consolidated sales rose to 3.2 percent, from 2.7 percent a year ago. The carrot for Amazon investors is improvements to margin over time, an analyst said. Apple, on the other hand, would need to build a cheap iPhone to keep growing as fast as it has been, which would slice into its margins.

Notes from Chapter 8Quality is defined by customers in ways that change through timeProduct or service performanceReliability and customer satisfactionLatest featuresCustomer supportEase of buying and usingDesign (aesthetics)Quality dimensions are difficult for customers to measureTo get a quality image, the firm may focus on a visible dimensionIn supermarkets people associate fresh produce with overall qualityService quality is based on the people with whom customers interactCustomer expectations must be managed Need to plan for handling peak demand (staffing for average volume leaves peak demand times without enough coverage)Motivated employees are a differentiatorMarket leaders usually have an image of higher qualityQuality is usually associated with higher price and profitQuality stimulates innovation because the target changesAn organizational culture that stresses quality motivates employeesTo deliver good service and superior productsTo react to blunders or improper conduct

Notes from Chapter 8 ContinuedLoss of trust in a brand can be disastrous Reduce incidence and intensity of perceived failures Firms must have contingency plans for disaster managementA favored approach is to admit responsibility and quickly take actionPrice might be a signal of quality (especially in certain, categories like clothing)To communicate value (rather than low price)Communicate why a cost advantage existsPosition the product among the right competitors (which might change during a recession)Demonstrate affordability (cost over time)Add features or services rather than reduce priceBundle products (often done at little incremental cost) Use value sub-brandsManage visible price points Customers know about a few brands or categoriesCustomers closely watch auto base prices, often know little about optionsBooksellers keep best seller prices low, less well known books have higher prices

Chapter 7 - Creating Advantage, Synergy and Strategic PhilosophiesPPT 7-20Chapter 7 - Strategic CommitmentAssumes that the current strategy will work into the futureLong term perspectiveAssumption that future will be similar to pastFocus on clearly defined targetBuy-in throughout the organizationExecution and improvement are keys to successContinuous improvement is about incremental changeOften best in centralized organizations with specialist employeesImprove the offering, the costs, the customer relationshipsRisk is strategy failureBarriers to implementationThe environment changes (paradigms shift)New operating models New technologyNew paradigms often dominated by former minor players

Strategic Competitive AdvantageDiffers from a key success factor (KSF)A KSF is required to be in the game, not usually unique to a brandAn SCA confers advantage over competitors Points of differentiation (unique brand associations)A competitor might copy a POD, which then eliminates the differentiationSuperior value for money can be an SCASCAs need to be meaningful and sustainablePatentsMoving target of innovationA reputation can be more valuable than substanceValue proposition must be visible through positioningCompetitors have difficult time convincing customers their offering matches quality or performanceAn SCA is relative to whether competitors are weak or strong in key assets or competencies

Chapter 7 - Creating Advantage, Synergy and Strategic PhilosophiesPPT 7-22Strategic OpportunismAssumes a fast changing market and that it is not possible to predict the future so that the best strategy is to be sensitive to current opportunities and exploit them.Firms will often seek niches (reduces risk of missing new business opportunities)Economies of scope with multiple products linesShort-term orientedDecentralized, entrepreneurial, risk taking organizationWith lack of vision, opportunism can become driftResponding to transitory forcesFocus on immediate profit may lead to dead end (single order)Resources may be diverted from sound businessesBusinesses might be incompatible or firm might lack assets and competencies

Chapter 7 - Creating Advantage, Synergy and Strategic PhilosophiesPPT 7-23Strategic AdaptabilityAssumes a dynamic market and that the organization can predict and manage responses to those changesAdapt products to changing markets to maintain relevanceNew markets and submarkets emerge about 5-10 years apartAdaptive firms will do transformational innovationMust be able to identify trends, respond aggressively Organizational flexibility is requiredAdjust or develop strategies when for external or internal changesOften means having liquidity (think of Apples billions) to seize opportunitiesFlexibility can come from having slack capacity in distribution, staffing or R&DA robust brand portfolio might allow the firm to avoid creating new brandsMicrosoft has succeeded in moving from operating systems via flexibility

A medium term perspectiveErrors in interpreting trends or the emergence of submarketsWasted resourcesPotential impact on the brand and the company cultureExecution issues (strategy can not be implemented) Benz & Chrysler

Chapter 7 - Creating Advantage, Synergy and Strategic PhilosophiesPPT 7-24Blended PhilosophiesFirms might use all three philosophiesEach is often needed for success across different businesses in which the firm is engagedStarbucks refines the store concept (commitment) and has:OpportunismIce Cream in supermarketsCoffee in airplanesAdaptabilityKiosks in supermarkets and airportsSoluble coffee in markets

Google is committed to searchAdaptable by acquiring search related capabilitiesMade opportunistic acquisitions such as YouTube and gone into niches such as ScholarStrategic Market Management 7th Edition David AakerKey IdeasTo create an SCA, a strategy needs to be valued by the market and supported by assets and competencies that are not easily copied or neutralized by competitors. The most common SCAs are quality reputation, customer support, and brand name.Synergy is often sustainable because it is based on the unique characteristics of an organization.Strategic commitment, involving a stick-to-your-knitting focus on a clearly articulated strategy, is based on an assumption that the business model needs to be refined and improved and not changed.Strategic opportunism assumes that the environment is so dynamic and uncertain that it is futile to predict the future and invest behind those opportunities when they present themselves, with the goal of achieving immediate profits.Strategic adaptability, based on the assumption that it is possible to understand, predict and manage responses to market dynamics that emerge, and even create or influence them, is about managing relevance.The Changing Workforce in ChinaAt a Pearl River area factory labor costs (wages plus benefits) per worker have been rising 30 percent or more each year. Nationwide migrant worker wages are rising is 21 percent annually. The government has mandated 13 percent annual minimum wage increases through 2015. This is about three times inflation.Wages at the factory are rising fast because it is in an area that was slower to develop. Five years ago, the factory paid $90 to $120 a month to new workers. Workers gave $13 to $40 of their monthly pay for six months to their foreman for training. Now the factory offers new employees 2,500 renminbi a month, about $395, before overtime *. Six-person dorm rooms have been replaced with two-person apartments. Workers no longer have to give part of their wages to the foreman. Foremen now get an $8 to $16 bonus for each month that a new blue-collar employee stays on the job. The factory struggles to find workers.

An outcome of Chinas one-child policy is that many college graduates are only children with parents and grandparents who continue to support them into adulthood. Those children do not want factory work.A factory manager said: Their parents, their grandparents give them money; they have six people to support them. They say, Why do I need to work? I can stay home and get 2,000 renminbi a month, why should I get on a bus every day to earn 2,500 a month?

Chinas vocational schools and training programs are unpopular. They are seen as dead-ends. They are also seen as schools for people from peasant backgrounds. The more educated people are, the less they want to work in a factory. The number getting vocational training is about half that of students taking academic courses. The combination of the one-child policy and rising rates of college education is starting to hit the core of Chinas factory work force: 18- to 21-year-olds not in college. Their numbers are on track to plunge by 29 percent from 2010 to 2020 even if enrollments in higher education hold steady. We have jobs and positions for which skilled workers cannot be found, and on the other hand, we have talented people who cannot find jobs; technical and vocational education and training is the answer, the vice minister of education said at a conference last June. * Note that in dollar terms wages have risen even faster than in renminbi due to exchange rates.http://www.nytimes.com/2013/01/25/business/as-graduates-rise-in-china-office-jobs-fail-to-keep-up.html?nl=todaysheadlines&emc=edit_th_20130125&pagewanted=printWhat Strategists are Thinking About*Chinas large pool of surplus rural labor has played a key role in maintaining low inflation and supporting Chinas growth model.As agriculture surplus labor is exhausted, industrial wages rise faster, industrial profits are squeezed, and investment falls.Rebalancing Chinas growth pattern would produce significant positive external spillovers and potentially raise output in those countries within the supply chain (mainly emerging Asia) and commodity exporters.Demographics strongly suggest an imminent transition to a labor-shortage economy. China will have a profound demographic shift within the next decadeThe UN projects that growth of the working age (1564) population will turn negative around 2020. This forecast potentially understates prospects of a labor shortage: Industry employees are predominantly young.The growth rate of the core 20-39 subpopulation, shrank to zero in 2010 and will decline faster than the overall working age population. After a long period of demographic dividends, the share of dependents (those aged 014 and > 64 years of age) was lowest in 2010 and will rise (see next slide)Raising agricultural productivity by raising mechanization could result in a sizable release of rural workers that could partially offset labor shortfalls in urban areas.Scenario analysis shows that higher fertility through relaxation of the one-child policy will delay depletion of excess labor (slightly). Financial reform will accelerate the transition to a labor shortage economy, through wealth effects.Very low fertility rates still prevail, especially in the richest parts of the country. Shanghai reported fertility of just 0.6 in 2010probably the lowest level anywhere in the world. According to the UN's population division, the nationwide fertility rate will continue to decline, reaching 1.51 in 2015-20 (http://www.economist.com/node/21553056)* From an IMF working paper.Effects of The Shrinking Labor Pool*Industrys relocation to the interior provinceswhere wages are lower and the large reserve of rural labor resideshas gathered pace since the global financial crisis.Parallel developments, such as an uptick in labor activism since the financial crisis is also consistent with strengthened bargaining power that accompanies a shrinking pool of labor.* From an IMF working paper.

Other Points of ViewChinas demographic challenge may not be the disaster people are thinking about (A).Chinas industries are not very automated compared to developed countries.Chinas capital efficiency is poor. (Where, for example, does all that steel actually go? Think of the old Soviet Unions steel and concrete production.)If Chinas capital efficiency rose to match Japans, Chinas growth prospects could theoretically remain high.China invests a higher percentage of GDP, but invests less efficiently than Japan, South Korea and Taiwan during their rapid expansions. (A)In 2012 the working-age population in China decreased 3.45 million. It is 937.27 million according to the director of the National Bureau of Statistics. (B)The director said that China should work to boost labor productivity, as well as improve people's education and adjust types of employment to extend the dividend. (B)An economist at the China Center for International Economic Exchanges in Beijing says that the fading of China's demographic dividend has required China to increase spending on education and culture to boost the quality of the country's human resources, said (B)FT.com 6 Feb 2013 B) http://news.xinhuanet.com/english/indepth/2013-01/18/c_132112584.htmChanging Dependency RatiosGraph on the Left Includes Under 16 and Over 65

http://www.economist.com/node/13611235 right side, and http://www.investmentu.com/2010/January/the-dependency-ratio.htmlFT.com 6 Feb 2013

An Article by Michael LewisIn 2005 the investment bank Goldman Sachs changed the way it paid its employees:Before 2005 managers made assessed employees based not just on how much business youd brought in, but also on how good you were for the organization. These two factors combined indicated your true economic value to the company. After 2005 the system has become largely mathematical: employee bonuses were a percentage of the amount of revenue the employee brought to the firm. In some years, the bonus would be 5 percent of that revenue; in better years, it would be 7 percent.The problem with the new system was that people would do anything they couldanythingto pump up the number next to their name.The incentives changed, the behavior followed.According to Lewis: Goldman now rewarded its people for advancing their narrow interests at the expense of their customers, the wider society, and even the firm's own long-term interests. The change in incentives almost certainly can be traced back to Goldman's decision, in the late 1990s, to go public. The firm ceased to be a partnership (with partners having unlimited personal liability) and became a public corporation. The people who ran it ceased to have a long-term interest in Goldman's reputation and ceased to have a long-term exposure to its losses.

http://www.newrepublic.com/article/112209/michael-lewis-goldman-sachs#Patent Infringement and InnovationCarnegie Mellon University said it was awarded $1.17 billion by a federal jury in Pittsburgh last December inMarvell Technology Group had used technology developed at the university without a license. The patents were developed by a professor and a former Ph.D. student in the department of electrical and computer engineering. Their work was supported by Carnegies Data Storage Systems Center, a university research organizationCMU said Marvell had infringed on patents relating to technology for increasing the accuracy of reading data from high-speed magnetic disks used in hard drives. The university said Protection of the discoveries of our faculty and students is very important to us.

http://www.nytimes.com/2012/12/27/technology/marvell-ordered-to-pay-1-17-billion-in-patent-case.html?nl=todaysheadlines&emc=edit_th_20121227&pagewanted=printThai Companies Invest AbroadThai companies are going where the money is. They're going to countries with large natural resources and markets (A).PTT Exploration & Production (PTT) has been expanding abroad aggressively. In November 2010 it purchased 40 per cent of Statoil ASA's oil sands project in Canada for $2.28 billion. In August 2012, PTT made a $959-million offer to buy out a Singaporean coal miner Sakari ResourcesJuly 2012 PTT purchased UK-listed Cove Energy for $1.9 billion, with assets in Africa.PTT has invested more than $6BB in Myanmar.Charoen Pokphand Group in December purchased a 15.5-per-cent stake in China's second largest insurance company from HSBC for $9.39 billionWith a market cap of about US$13.79 billion and over $864 million in profits Siam Cement Group has been very actively investing in Indonesia. (A)Thai Beverage, makers of Chang Beer made an $11BB bid for the Singapore based Fraser and Neave Ltd. ThaiBev said the deal brings exposure to high-growth Southeast Asian markets with attractive demographics and consumer-spending trends. (WSJ)Fraser & Neave has a portfolio of soft-drink brands and properties in the region.Central Retail Corp. spent 260 million, or about US$320 million, to acquire the entire stake in La Rinascente in Milan in May last year. (WSJ)(A) Karim Raslan The Star Kuala Lumpur January 4, 2013WSJ.com 18-7-12Wal-Marts FCPA ProblemLast November Wal-Mart said that its investigation into violations of a federal anti-bribery included Mexico , China, India and Brazil, among their most important international markets. More than half of Wal-Marts 10,524 stores are international. Mexico has 2,230 stores. Brazil has 534, China, 384. Wal-Mart found evidence of potential violations of the Foreign Corrupt Practices Act, beginning with bribery involving the opening of stores in MexicoWal-Mart sees the degree to which corruption may have infected its international operations, and shows growing alarm within the company about the problem.In 2005, a former lawyer for Wal-Mart in Mexico spent hours telling company investigators how Wal-Mart de Mexicos leadership had managed a bribery campaign to speed expansion. The lawyer said hundreds of bribes were paid for construction permits and other licenses needed to open new stores.Wal-Mart is changing as a result of investigations. Lawyers for each country now report to the general counsel of Wal-Mart International . Before they reported to the chief executives of that country which could create conflicts of interest if the chief executive was involved in corruption.According to a lawyer, in these situations a company will report to government agencies with very detailed presentations about the results of the internal investigation in the hope of receiving lesser punishment from the agencies.

http://www.nytimes.com/2012/11/16/business/wal-mart-expands-foreign-bribery-investigation.html?nl=todaysheadlines&emc=edit_th_20121116&_r=0