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Chapter 3 External Analysis Objective: analyzing the external factors (consumers and competitors) to develop strategies.

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1 Chapter 3 External Analysis Objective: analyzing the external factors (consumers and competitors) to develop strategies

2 External Analysis After the mission of the company is determined - where you want to go and what you want to accomplish – it is time to analyze the external factors. After the mission of the company is determined - where you want to go and what you want to accomplish – it is time to analyze the external factors. Includes the analysis of the external factors that would influence the company strategies. Includes the analysis of the external factors that would influence the company strategies. The following external factors should be analyzed; The following external factors should be analyzed; Customers Customers Competitors Competitors Market Market Environment Environment

3 Affecting Strategic Decisions The external analysis process is crucial to generate (suggest), influence or evaluate the possible strategic options. It contributes to the investment decisions, functional and competitive strategies. The external analysis process is crucial to generate (suggest), influence or evaluate the possible strategic options. It contributes to the investment decisions, functional and competitive strategies. Should existing businesses be liquidated, milked, maintained or invested for growth? Should existing businesses be liquidated, milked, maintained or invested for growth? Should there be market penetration, product expansion, or market expansion? Should there be market penetration, product expansion, or market expansion? What should be the positioning strategy? What should be the positioning strategy? What are the key success factors? What are the key success factors?

4 Part 1: Customer Analysis The first logical step in the strategic marketing planning process is to analyze the customers. The first logical step in the strategic marketing planning process is to analyze the customers. Involves (1) identifying the company’s current and potential customers and (2) understanding those customers. Involves (1) identifying the company’s current and potential customers and (2) understanding those customers. In order to identify and analyze the company’s current situation, the customer is the best starting point. For effective strategic planning, it is essential to see the company from the perspective of the customer. In order to identify and analyze the company’s current situation, the customer is the best starting point. For effective strategic planning, it is essential to see the company from the perspective of the customer.

5 Who are my customers? Under the customer analysis, one should identify not only the current primary or target markets, but also the potential markets outside the current customer base. Under the customer analysis, one should identify not only the current primary or target markets, but also the potential markets outside the current customer base. In order to identify both current and potential customers, In order to identify both current and potential customers, 1. Define the products/services offered by the company. It is important to match the company’s offerings with the customers.

6 2. Organize the current and potential customers into identifiable market segments. Write a description of the customers in each segment. 3. Quantify the number of customers that the company have in each segment and the total number of customers available in each segment.

7 Task 1: Defining the products and services In order to define the products/services of the company, first simply the inventory (or the list) of what the company sells should be recorded. In order to define the products/services of the company, first simply the inventory (or the list) of what the company sells should be recorded. Second, the product lines should be identified. The product line is the group of products that are similar or complement each other or are purchased as a set of products. Second, the product lines should be identified. The product line is the group of products that are similar or complement each other or are purchased as a set of products. Third, the product lines should be rated according to (1) quality, (2) service, and (3) price from the customers’ perspective. Third, the product lines should be rated according to (1) quality, (2) service, and (3) price from the customers’ perspective.

8 Task 2. Organizing customers into market segments Segmentation means the identification of customer groups that respond differently than other customer groups to competitive strategies. To deliver the right competitive offering to the segments, the following variables can be considered: Segmentation means the identification of customer groups that respond differently than other customer groups to competitive strategies. To deliver the right competitive offering to the segments, the following variables can be considered: Benefits sought Benefits sought Usage Usage Organization type Organization type Geographic location Geographic location Customer perceptions and attitudes Customer perceptions and attitudes Price sensitivity Price sensitivity

9 How should the market be segmented into groups? The task of identifying segments is difficult. There are literally millions of ways to divide up the market. The variables need to be evaluated on the basis of their ability to identify segments for which different strategies are pursued. The task of identifying segments is difficult. There are literally millions of ways to divide up the market. The variables need to be evaluated on the basis of their ability to identify segments for which different strategies are pursued. Then the identified segments should be judged according to size and cost-effectiveness. Then the identified segments should be judged according to size and cost-effectiveness. The most useful segmentation variables are benefit and price sensitivity. The most useful segmentation variables are benefit and price sensitivity. Two distinct segmentation strategies are possible. The first focuses on a single segment. The alternative involves multiple segments. Two distinct segmentation strategies are possible. The first focuses on a single segment. The alternative involves multiple segments.

10 Task 3: Quantify the number of customers Project a total number of customers for each segment based on existing customers and potential customers combined. This is important to answer such questions as follows; Who are the biggest customers? The most profitable? The most attractive potential customers? Project a total number of customers for each segment based on existing customers and potential customers combined. This is important to answer such questions as follows; Who are the biggest customers? The most profitable? The most attractive potential customers?

11 Understanding Customers After identifying customer segments, the next step is to build a profile of them. The profile helps the company understand its customers and therefore discover its competitive advantages. After identifying customer segments, the next step is to build a profile of them. The profile helps the company understand its customers and therefore discover its competitive advantages. By developing a profile for each segment, the company uncovers the motivations, the needs the thought processes of the customers. By developing a profile for each segment, the company uncovers the motivations, the needs the thought processes of the customers.

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

13 The Decision-Making Process Questions that would be answered under this category would be; Who buys our product? Who buys our product? Who influences a purchase? Who influences a purchase? Where is the buying decision made? Where is the buying decision made?

14 Customer Motivations/Needs What lies behind the customer’s purchase decision? E.g. the business air traveler / vacationer What lies behind the customer’s purchase decision? E.g. the business air traveler / vacationer Why does the customer need this product in the first place? Why does the customer need this product in the first place? Why wouldn’t some other type of product or brand be better? Why wouldn’t some other type of product or brand be better? What services does the customer expect? What services does the customer expect?

15 Customer Benefits Like the question dealing with customer motivations/needs, responses here can cover a wide spectrum. However, together with motivations/needs, it provides insight into relevant assets and skills. Like the question dealing with customer motivations/needs, responses here can cover a wide spectrum. However, together with motivations/needs, it provides insight into relevant assets and skills. The presence of a unique or strong assets or skill responsive to a motivation/need/benefit, can provide the basis for a sustainable competitive advantage (SCA). The absence can be fatal. The presence of a unique or strong assets or skill responsive to a motivation/need/benefit, can provide the basis for a sustainable competitive advantage (SCA). The absence can be fatal.

16 Buying Criteria What products does the customer buy? What products does the customer buy? What sales channel does the customer prefer? What sales channel does the customer prefer? How much is the customer willing to spend? How much is the customer willing to spend? Where does the customer get information about the product? Where does the customer get information about the product?

17 Unmet Needs What needs are not now being met by the existing product offerings? What needs are not now being met by the existing product offerings? It is strategically important to identify unmet needs, because they represent opportunities for firms that want to increase their market share or break into a market. They also represent threats to established firms whose competitors can use those unmet needs to disrupt an established position. It is strategically important to identify unmet needs, because they represent opportunities for firms that want to increase their market share or break into a market. They also represent threats to established firms whose competitors can use those unmet needs to disrupt an established position.

18 How to get answers to the questions There are two basic sources of information for answering the questions in the customer profiles: The company’s experience (employees); informal one-on-one meetings, group meetings, company- wide meetings, questionnaires. The company’s experience (employees); informal one-on-one meetings, group meetings, company- wide meetings, questionnaires. The customer; The customer; Simply asking people what is important. However, they may say that all attributes are important and appear more logical than they actually are. Simply asking people what is important. However, they may say that all attributes are important and appear more logical than they actually are.

19 Identifying which attribute judgments are associated with actual purchase decisions. E.g. How would a mother select snacks for his children? Identifying which attribute judgments are associated with actual purchase decisions. E.g. How would a mother select snacks for his children? Asking trade-off questions. Sacrifices? E.g. how would an airline passenger trade off convenient departure time with price? Asking trade-off questions. Sacrifices? E.g. how would an airline passenger trade off convenient departure time with price? For the unmet needs; Discussing with the customers in focus group settings about their experiences with the products. For the unmet needs; Discussing with the customers in focus group settings about their experiences with the products. Termed problem research, developing a list of potential problems with the product. Then asking whether the problem is important, it occurs frequently, a problem solution exists. Termed problem research, developing a list of potential problems with the product. Then asking whether the problem is important, it occurs frequently, a problem solution exists.

20 Termed benefit structure analysis; product users identify the benefits desired and the extent to which the product delivers those benefits. Termed benefit structure analysis; product users identify the benefits desired and the extent to which the product delivers those benefits. Customer satisfaction studies; the identification of events leading to dissatisfaction can uncover unmet needs. Customer satisfaction studies; the identification of events leading to dissatisfaction can uncover unmet needs. Using lead users; they are such users that face needs that will be general in the marketplace, but face them months or years before the bulk of the marketplace. Using lead users; they are such users that face needs that will be general in the marketplace, but face them months or years before the bulk of the marketplace.

21 Part 2: Competitor Analysis Competitor analysis is the second phase of the external analysis. Competitor analysis is the second phase of the external analysis. Similar to the steps in customer analysis, the competitor analysis involves (1) identifying groups of competitors, and (2) understanding them. Plus (3) identifying areas of differentiation. Similar to the steps in customer analysis, the competitor analysis involves (1) identifying groups of competitors, and (2) understanding them. Plus (3) identifying areas of differentiation. The company must understand its competitors to position itself into a superior position with the customers. The company must understand its competitors to position itself into a superior position with the customers.

22 Identifying the Competitors  There are different approaches to identify groups of competitors (also the potential competitors). The approach would be based on identifying companies that; pursue the same group of customers, or pursue similar strategies (e.g. distribution channel) pursue the same group of customers, or pursue similar strategies (e.g. distribution channel) have similar assets, skills and other characteristics (e.g. quality, size) have similar assets, skills and other characteristics (e.g. quality, size) attempt to satisfy the same set of customer needs attempt to satisfy the same set of customer needs offer products for the same use situation offer products for the same use situation are selected by the same group of customers are selected by the same group of customers

23 Understanding Competitors To gain an understanding of competitors, it is useful to analyze them on the basis of several dimensions. Size, growth, profitability; provide a gross measure of their relative importance. Size, growth, profitability; provide a gross measure of their relative importance. Competitor’s objectives; and Competitor’s objectives; and Past and current strategies; can provide insight into their intentions. Past and current strategies; can provide insight into their intentions.

24 Competitor’s organization and culture; can limit the range of strategies that may be considered. Competitor’s organization and culture; can limit the range of strategies that may be considered. Cost structure; may indicate the competitor’s future pricing strategy and staying power. Cost structure; may indicate the competitor’s future pricing strategy and staying power. Strengths and Weaknesses; the assessment starts with an identification of relevant assets and skills for the industry. Then the next step is to compare the company’s assets and skills with the competitors’ (The Competitive Strength Grid). Strengths and Weaknesses; the assessment starts with an identification of relevant assets and skills for the industry. Then the next step is to compare the company’s assets and skills with the competitors’ (The Competitive Strength Grid).

25 Competitive Strengths and Weaknesses In order to identify the relevant assets and skills, the following questions are helpful. Why are successful businesses successful? Why are unsuccessful businesses unsuccessful? What assets have contributed to their success? What assets or skills do they lack? Why are successful businesses successful? Why are unsuccessful businesses unsuccessful? What assets have contributed to their success? What assets or skills do they lack? What are the key customer motivations? What is really important to the customer? What are the key customer motivations? What is really important to the customer?

26 What are the large value-added parts of the product or service? What are the large cost components? What are the large value-added parts of the product or service? What are the large cost components? What are the mobility barriers (cost and difficulty of creating the assets and skills needed to support an SCA) in the industry? What are the mobility barriers (cost and difficulty of creating the assets and skills needed to support an SCA) in the industry? Consider the components of the value chain (primary value chain: inbound logistics, operations, outbound logistics, marketing and sales, service; secondary value chain: information systems, technology development, human resources management, firm infrastructure). Consider the components of the value chain (primary value chain: inbound logistics, operations, outbound logistics, marketing and sales, service; secondary value chain: information systems, technology development, human resources management, firm infrastructure).

27 Methods There are different methods available to analyze the competitors. The Competitive Strength Grid The Competitive Strength Grid Competitive Value Map Competitive Value Map Positioning Maps Positioning Maps

28 Competitive Strength Grid After the relevant assets and skills are identified, those are scaled (rated) for the own firm and the major competitors. After the relevant assets and skills are identified, those are scaled (rated) for the own firm and the major competitors. It summarizes the posture of the competitors with respect to assets and skills. It summarizes the posture of the competitors with respect to assets and skills.

29 Competitive Value Map Provides a good pictorial comparison of all competitors + company on a single chart. Some guidelines; Provides a good pictorial comparison of all competitors + company on a single chart. Some guidelines; The direct competitor of the company should be in the same square or in a square immediately adjacent to it. Direct competitors are firms that take business directly away from the company, therefore, they have the greatest concern. The direct competitor of the company should be in the same square or in a square immediately adjacent to it. Direct competitors are firms that take business directly away from the company, therefore, they have the greatest concern. Firms located in boxes not in the company’s immediate area are secondary competitors. These are firms that take the company’s customers, but their blend of products is not similar. Firms located in boxes not in the company’s immediate area are secondary competitors. These are firms that take the company’s customers, but their blend of products is not similar.

30 Positioning Maps Provides the pictorial comparison of all competitors and the company on a graph. Provides the pictorial comparison of all competitors and the company on a graph. The map is drawn on the basis of customers’ perceptions on each firm. The map is drawn on the basis of customers’ perceptions on each firm.

31 Competitive Differentiation After analyzing the competitors, the company can differentiate itself in a unique way. Differentiation is some aspect of how the company does business that the customer perceives as unique (important, valuable) from the way the competitors do business. Differentiation is the path to establish a sustainable competitive advantage (SCA). After analyzing the competitors, the company can differentiate itself in a unique way. Differentiation is some aspect of how the company does business that the customer perceives as unique (important, valuable) from the way the competitors do business. Differentiation is the path to establish a sustainable competitive advantage (SCA). There are so many ways to differentiate one company from the competition. In the broadest sense, differentiation is possible in four categories; There are so many ways to differentiate one company from the competition. In the broadest sense, differentiation is possible in four categories;

32 Product differentiation; means that the customer perceives the company’s product unique, valuable or important than the competitor’s product. E.g. product capabilities may be superior, product design may be more efficient. Product differentiation; means that the customer perceives the company’s product unique, valuable or important than the competitor’s product. E.g. product capabilities may be superior, product design may be more efficient. Service differentiation; is the same as product differentiation, only it applies to the services offered. E.g. delivery capabilities, technical support, installation services, payment terms etc. Service differentiation; is the same as product differentiation, only it applies to the services offered. E.g. delivery capabilities, technical support, installation services, payment terms etc. Point-of-sale differentiation; involves availability and accessibility. It is how the customer buys the company’s products. Through point-of-sale, customers can easily access the company, learn about the company and purchase the company’s products. Point-of-sale differentiation; involves availability and accessibility. It is how the customer buys the company’s products. Through point-of-sale, customers can easily access the company, learn about the company and purchase the company’s products.

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

34 Obtaining Information Information on competitors is usually available from a variety of sources. Competitors usually communicate extensively to their suppliers, customers, distributors, security analysts, government legislators. Contacting them. Competitors usually communicate extensively to their suppliers, customers, distributors, security analysts, government legislators. Contacting them. Monitoring of trade magazines, trade shows, advertising, speeches, annual reports etc. Monitoring of trade magazines, trade shows, advertising, speeches, annual reports etc. Accessing databases including the internet Accessing databases including the internet Using market research e.g. telephone surveys, Which supermarket do you shop most often? Which has the lowest price? etc. Using market research e.g. telephone surveys, Which supermarket do you shop most often? Which has the lowest price? etc.


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