Lesson 4 Strategic Marketing

Aim Understand the tools used to develop a strategic marketing strategy

LO 2.1 assess the value of models used in strategic marketing planning General areas Models: organisation, industry and market environment situation analysis; Porter’s Five Forces model; structure, conduct and performance; SWOT (strengths, weaknesses, opportunities, threats) analysis, STEEPLE (social, ethnological, economical, environmental, political, legal, ethical) analysis, PEST (political, economic, social, technological) analysis, marketing audit; portfolio analysais techniques eg BCG matrix, Product Life Cycle model, Ansoff matrix

Components of the General Environment Economic Demographic Sociocultural Competitive Environment Industry Environment Political/Legal Global Technological 10

SWOT Analysis Strengths Weaknesses Opportunities Threats

The purpose of SWOT Analysis It is an easy-to-use tool for developing an overview of a company’s strategic situation It forms a basis for matching your company’s strategy to its situation

SWOT is the starting point It provides an overview of the strategic situation. It provides the “raw material” to do more extensive internal and external analysis.

Opportunities An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment. Possible Opportunities: Emerging customer needs Quality Improvements Expanding global markets Vertical Integration

Threats A THREAT is a factor in your company’s external environment that poses a danger to its well-being. Possible Threats: New entry by competitors Changing demographics/shifting demand Emergence of cheaper technologies Regulatory requirements

Opportunities and Threats form a basis for EXTERNAL analysis By examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification. By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.

The purpose of Five-Forces Analysis The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

Porter’s Five Forces Model of Competition Threat of New Entrants 11

Threat of New Entrants Economies of Scale Product Differentiation Government Policy Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Barriers to Entry Expected Retaliation 12

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers 14

Bargaining Power of Suppliers Suppliers are likely to be powerful if: Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases Supplier industry is dominated by a few firms Suppliers’ products have few substitutes Buyer is not an important customer to supplier Suppliers’ product is an important input to buyers’ product Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat of forward integration 15

Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers 17

Bargaining Power of Buyers Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to seller’s sales Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality Buyer has full information Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other 18

Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products 20

Threat of Substitute Products Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery 21

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products 23

Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Making new product introductions Increasing consumer warranties or service Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors 25

Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs Lack of differentiation or switching costs High storage costs Capacity added in large increments High strategic stakes High exit barriers Diverse competitors 26

The Five Forces are Unique to Your Industry Five-Forces Analysis is a framework for analyzing a particular industry. Yet, the five forces affect all the other businesses in that industry.

Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm’s Competitors Competitive Environment Industry Environment 33

Competitor Analysis Response Assumptions What assumptions do our competitors hold about the future of industry and themselves? Response What will our competitors do in the future? Current Strategy Does our current strategy support changes in the competitive environment? Where do we have a competitive advantage? Future Objectives How do our goals compare to our competitors’ goals? How will this change our relationship with our competition? Capabilities How do our capabilities compare to our competitors? 38

Competitor Analysis Future Objectives What Drives the competitor? How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? 34

Competitor Analysis Future Objectives Current Strategy What is the competitor doing? How do our goals compare to our competitors’ goals? What can the competitor do? Current Strategy Where will emphasis be placed in the future? How are we currently competing? What is the attitude toward risk? Does this strategy support changes in the competitive structure? 35

Competitor Analysis Future Objectives Current Strategy Assumptions How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? What does the competitor believe about itself and the industry? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Assumptions Do we assume the future will be volatile? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions? 36

Competitor Analysis Future Objectives Current Strategy Assumptions How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? What are the competitor’s capabilities? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Assumptions Capabilities What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors? 37

Competitor Analysis Future Objectives Response Current Strategy How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? Response What will our competitors do in the future? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Where do we have a competitive advantage? Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Assumptions How will this change our relationship with our competition? Capabilities What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors? 38

The Structure – conduct- performance Paradigm

Basic Conditions: factors which shape the market of the industry, e. g Basic Conditions: factors which shape the market of the industry, e.g. demand, supply, political factors Structure: attributes which give definition to the supply-side of the market, e.g. economies of scale, barriers to entry, industry concentration, product differentiation, vertical integration. Conduct: the behavior of firms in the market, e.g. pricing behavior advertising, innovation. Performance: a judgment about the results of market behaviour, e.g. efficiency, profitability, fairness/income distribution, economic growth. How can the government improve the performance in an industry?

Life-Cycle Strategies

Learning Goals Know the stages of the product life cycle Realize how marketing strategies change during the product’s life cycle

Product Life-Cycle Strategies The Product Life Cycle (PLC) has Five Stages Product Development, Introduction, Growth, Maturity, Decline Not all products follow this cycle: Fads Styles Fashions Goal 1: Know the stages of the product life cycle process

Product Life-Cycle Strategies The product life cycle concept can be applied to a: Product class (soft drinks) Product form (diet colas) Brand (Diet Dr. Pepper) Using the PLC to forecast brand performance or to develop marketing strategies is problematic Goal 1: Know the stages of the product life cycle process

Product Life-Cycle Strategies PLC Stages Begins when the company develops a new-product idea Sales are zero Investment costs are high Profits are negative Product development Introduction Growth Maturity Decline Goal 2: Realize how marketing strategies change during the product life cycle

Product Life-Cycle Strategies PLC Stages Low sales High cost per customer acquired Negative profits Innovators are targeted Little competition Product development Introduction Growth Maturity Decline Goal 2: Realize how marketing strategies change during the product life cycle

Marketing Strategies: Introduction Stage Product – Offer a basic product Price – Use cost-plus basis to set Distribution – Build selective distribution Advertising – Build awareness among early adopters and dealers/resellers Sales Promotion – Heavy expenditures to create trial Goal 2: Realize how marketing strategies change during the product life cycle

Product Life-Cycle Strategies PLC Stages Rapidly rising sales Average cost per customer Rising profits Early adopters are targeted Growing competition Product development Introduction Growth Maturity Decline Goal 2: Realize how marketing strategies change during the product life cycle

Marketing Strategies: Growth Stage Product – Offer product extensions, service, warranty Price – Penetration pricing Distribution – Build intensive distribution Advertising – Build awareness and interest in the mass market Sales Promotion – Reduce expenditures to take advantage of consumer demand Goal 2: Realize how marketing strategies change during the product life cycle

Product Life-Cycle Strategies PLC Stages Sales peak Low cost per customer High profits Middle majority are targeted Competition begins to decline Product development Introduction Growth Maturity Decline Goal 2: Realize how marketing strategies change during the product life cycle

Marketing Strategies: Maturity Stage Product – Diversify brand and models Price – Set to match or beat competition Distribution – Build more intensive distribution Advertising – Stress brand differences and benefits Sales Promotion – Increase to encourage brand switching Goal 2: Realize how marketing strategies change during the product life cycle

Product Life-Cycle Strategies PLC Stages Declining sales Low cost per customer Declining profits Laggards are targeted Declining competition Product development Introduction Growth Maturity Decline Goal 2: Realize how marketing strategies change during the product life cycle

Marketing Strategies: Decline Stage Product – Phase out weak items Price – Cut price Distribution – Use selective distribution: phase out unprofitable outlets Advertising – Reduce to level needed to retain hard-core loyalists Sales Promotion – Reduce to minimal level Goal 2: Realize how marketing strategies change during the product life cycle

(when product is very competitive) (assuming new activities) Ansoff-Matrix or Product-Market Expansion Grid Dimensions Existing Products New Products Existing Markets 1. Do nothing 2. Withdraw 3. Consolidate 4. Penetrate Product Development (risky + expensive) New Market Development (when product is very competitive) Diversification (assuming new activities)

Ansoff-Matrix Improving the performance of existing businesses “Do Nothing” if the environment is static (short-run only) “Withdraw” when there is an irreversible decline in demand or opportunity costs of staying in a market are too high “Consolidation” means concentration of resources and focusing on existing competitive advantages “Penetration” means gaining market share

SWOT Analysis SWOT is a universal analytical tool developed by the military: Matching corporate skills and resources with forecasted market opportunities Strengths: Internal Positives (available skills & competencies) Weaknesses: Internal Negatives (poor use or lack of skills) Opportunities: External Positives (evaluating areas where advantages may be gained, ex: add a new product, target new segments) Threats: External Negatives (evaluating forces that may prevent the company from accomplishing its objectives, ex: competition, regulation, customer preferences)