Business Strategies and Their Marketing Implications 3 Business Strategies and Their Marketing Implications

Ideal Characteristics of SBUs A Homogeneous set of markets to serve with limited number of related technologies A Unique set of product-markets Control over factors necessary for successful performance Responsibility for their own profitability Decide what is the SBU’s competitive domain or scope? Which market segments should it target, and which customer needs can it satisfy? Once a scope is defined, decide how many -- and how will -- resources be allocated within an SBU? Decide how the business unit can distinguish itself from competitors in its target market(s)? What distinctive competitive competencies can it rely on to achieve a unique position relative to its competitors?

Dimensions That Define Individual SBUs Technical compatibility Similarity in the customer needs or the product benefits sought by customers in the target markets. Similarity in the personal characteristics or behavior patterns of customers in the target markets.

Generic Business-Level Competitive Strategies Michael Porter distinguishes three strategies Overall cost leadership Differentiation Focus Robert Miles and Charles Snow classify business units into four strategic types: Prospectors Defenders Analyzers Reactors

Definitions of Miles and Snow’s Four Business Strategies Prospector Focus on growth through the development of new products and markets. Defender Concentrate on maintaining positions in established product-markets while paying less attention to new product development. Analyzer Attempt to maintain a strong position in its core product-market(s) Seek to expand into new product-markets. Reactors Businesses with no clearly defined strategy. Instructor: Refer to Exhibit 3.1

Exhibit 3.2 Combined Typology of Business-Unit Competitive Strategies Heavy emphasis No emphasis Prospector Analyzer Defender Reactor Units primarily concerned with attaining growth through aggressive pursuit of new product-market opportunities Units with no clearly defined product-market development or competitive strategy Units primarily concerned with maintaining a low-cost position in mature markets Units primarily concerned with maintaining a differentiated position in mature markets Units with strong core bus.; actively seeking to expand into rel. prod-mkts with differentiated offerings Units with strong core bus.; actively seeking to expand into rel. prod-mkts with low-cost offerings Emphasis on new product-market growth Differentiation Competitive strategy Instructor: Refer to Exhibit 3.2 Cost leadership 2

Let’s combine the two perspectives and examine the book retailing industry Heavy emphasis No emphasis Prospector Analyzer Defender Reactor Units primarily concerned with attaining growth through aggressive pursuit of new product-market opportunities Units with no clearly defined product-market development or competitive strategy Units primarily concerned with maintaining a low-cost position in mature markets Units primarily concerned with maintaining a differentiated position in mature markets Units with strong core bus.; actively seeking to expand into rel. prod-mkts with differentiated offerings Units with strong core bus.; actively seeking to expand into rel. prod-mkts with low-cost offerings Emphasis on new product-market growth Differentiation Competitive strategy Which book retailers appear to be pursuing which strategies? Amazon: Prospector Barnes and Noble : Differentiated Analyzer Borders: Low-cost Analyzer B. Dalton or Waldenbooks: Reactor Large Urban Independents: Differentiated Defender Most Mom and Pops: Reactor “Adult” Bookstores: Differentiated Defender Religious Bookstores: Differentiated Defender Discount Bookstores: Low-cost Defender Cost leadership

Service Businesses What is a service? Services A service can be defined as “any activity or benefit that one party can offer to another that is essentially intangible and that does not result in the ownership of anything. Its production may or may not be tied to a physical product.” Services Can be thought of as intangibles and goods as tangibles. Can rarely be experienced in advance of the sale, while goods can be experienced, even tested, before purchase.

The Impact of the Internet Is primarily a communications channel. Makes it easier for buyers and sellers to compare prices. Reduces the number of middlemen necessary between manufacturers and end users. Cuts transaction costs. Improves the functioning of the price mechanism. In addition, it makes it easier for firms to customize their offerings and personalize their relationships with their customers. The Internet makes it easier for buyers and sellers to compare prices, reduces the number of middlemen necessary between manufacturers and end users, cuts transaction costs, improves the functioning of the price mechanism, and thereby increases competition. One possible outcome is that it will be harder for firms to differentiate themselves on any basis other than low price. All business-level competitive strategies focused on differentiation will become less viable. Unique new products and services will continue to emerge and provide a way for the innovator to gain a competitive advantage. Firms with the resources and competencies necessary to produce a continuing stream of new product or service offerings that appeal to one or more customer segments—that is, to effectively implement a prospector strategy—should be successful regardless of whether they are lowest-cost producers in the industries. If a firm offers unique benefits that a segment of customers perceive as meaningful, it should still be able to differentiate its offering and command a premium price. The Internet will make it easier for firms to customize their offerings and personalize their relationships with their customers. Such personalization should differentiate the firm from its competitors in the customer’s eyes and improve customer loyalty and retention.

Differentiated defender Exhibit 3.4 How Business Strategies Differ in Scope, Objectives, Resource Deployments, and Synergy Dimensions Low-cost defender Differentiated defender Scope Mature/stable/well-defined domain; mature tech. and cust. segments Mature/stable/well-defined domain; mature tech. and cust. segment Goals and objectives Adaptability (new product success) Effectiveness (inc. mrkt share) Efficiency (ROI) Very little Low High Little Resource deployment Generate excess cash (cash cows) Synergy Need to seek operating synergies to achieve efficiencies 3

Dimensions Prospector Analyzer Exhibit 3.4 How Business Strategies Differ in Scope, Objectives, Resource Deployments, and Synergy Dimensions Prospector Analyzer Scope Broad/dynamic domains; tech. and cust. segments not well-established Mixture of defender and prospector strategies Goals and objectives Adaptability (new product success) Effectiveness (inc. mrkt share) Efficiency (ROI) Extensive High Low Resource deployment Need cash for prod. development (question marks or stars) Need cash for prod. development but less so than do prospectors Synergy Danger in sharing operating facilities and programs—better to share tech./marktg. Skills Danger in sharing operating facilities and programs—better to share tech./marktg. skills 4

Environmental Factors Favorable to Different Business Strategies External Factors Prospector Analyzer Differentiated Defender Low-Cost Defender Industry and market Industry in introductory or early growth stage of life cycle; many potential customer segments as yet unidentified and/or undeveloped. Industry in late growth or early maturity stage of life cycle; one or more product offerings currently targeted at major customer segments, but some potential segments may still be undeveloped. Industry in maturity or decline stage of life cycle; current offerings targeted at all major segments; sales primarily due to repeat purchases/replacement demand. Instructor: see Exhibit 3.5

Differentiated Defender Environmental Factors Favorable to Different Business Strategies (continued) External Factors Prospector Analyzer Differentiated Defender Low-Cost Defender Technology Newly emerging technology; many applications as yet undeveloped. Basic technology well developed but still evolving; product modifications and improvements—as well as emergence of new competing technologies—still likely. Basic technology fully developed and stable; few major modifications or improvements likely. Instructor: see Exhibit 3.5

Differentiated Defender Environmental Factors Favorable to Different Business Strategies (continued) External Factors Prospector Analyzer Differentiated Defender Low-Cost Defender Competition Few established competitors; industry structure still emerging; single competitor holds commanding share of major market segments. Large number of competitors, but future shakeout likely; industry structure still evolving; one or more competitors hold large shares in major segments but continuing growth may allow rapid changes in relative shares. Small to moderate number of well-established competitors; industry structure stable, though acquisitions and consolidation possible; maturity of markets means relative shares of competitors tend to be reasonably stable over time. Instructor: see Exhibit 3.5

Differentiated Defender Environmental Factors Favorable to Different Business Strategies (continued) External Factors Prospector Analyzer Differentiated Defender Low-Cost Defender Business’s relative strengths SBU (or parent) has strong R&D, product engineering, and marketing research and marketing capabilities. SBU (or parent) has good R&D, product engineering, and marketing research capabilities, but not as strong as some competitors’; has either low-cost position or strong sales, marketing, distribution, or service capabilities in one or more segments. SBU has no outstanding strengths in R&D or product engineering; costs are higher than at least some competitors’; SBU’s outstanding strengths are in process engineering and quality control and/or in marketing, sales, distribution, or customer services. SBU (or parent) has superior sources of supply and/or process engineering and production capabilities that enable it to be low-cost producer; R&D, product engineering, marketing, sales, or service capabilities may not be as strong as some competitors’. Instructor: see Exhibit 3.5

Marketing Policies and Program Components Differentiated Defender Differences in Marketing Policies and Program Components across Businesses Pursuing Different Strategies Strategy Marketing Policies and Program Components Prospector Differentiated Defender Low-Cost Defender Product policies Product-line breadth relative to competitors Technical sophistication of products relative to competitors Product quality relative to competitors Service quality relative to competitors + ? - Price policies Price levels relative to competitors Distribution policies Degree of forward vertical integration relative to competitors Trade promotion expenses as percent of sales relative to competitors Key: Plus sign (+) = greater than the average competitor. Minus sign (-) = smaller than the average competitor. Question mark (?) = uncertain relationship between strategy and marketing policy or program component. Instructor: see Exhibit 3.6

Marketing Policies and Program Components Differentiated Defender Differences in Marketing Policies and Program Components across Businesses Pursuing Different Strategies (continued) Strategy Marketing Policies and Program Components Prospector Differentiated Defender Low-Cost Defender Promotion policies Advertising expenses as percent of sales relative to competitors Sales promotions expenses as percent of sales relative to competitors Salesforce expenses as percent of sales relative to competitors + ? - Key: Plus sign (+) = greater than the average competitor. Minus sign (-) = smaller than the average competitor. Question mark (?) = uncertain relationship between strategy and marketing policy or program component. Instructor: see Exhibit 3.6

Changing Business Strategies for a Changing Market Effective implementation of different business strategies requires different: Functional competencies and resources Organizational structures Decision-making and coordination processes Reward systems Personnel It is very difficult for an entire SBU to make a successful transition from one basic strategy to another. What should a marketing manager do if the market environment facing a particular product or service demands marketing actions that are not consistent with the overall competitive strategy of the business to which it belongs? What if newly emerging technology demands that a mature product category undergo an innovative redesign even though the defender SBU does not have extensive R&D and product development capabilities?