MBA MARKETING STRATEGYStrategic Marketing Analysis Auditing Tools Lecture Overview Introduction The Value Chain The Product Life Cycle Diffusion and Innovation Portfolio Analysis - B C G Matrix - G E Multi Factor Matrix - Shell Directional Policy Matrix Experience Curve Importance of Market Share Profit Impact of Marketing Strategy ( P.I.M.S.) Gap Analysis S.W.O.T Analysis1

INTRODUCTIONThere are many tools that can be used to help interpret the current situation. These are often referred to as auditing tools. These tools or models cannot only be used for auditing the current situation but can also play an important role in helping to develop future strategy (ie they can be used for identifying both where we are now and where we want to be). This session will outline the various models and frameworks that can be used for both strategic analysis and strategy development. The models will include; Value Chain Product Life Cycle Diffusion and Innovation Portfolio Analysis Experience Curve and the Importance of Market Share Profit Impact of Marketing Strategy PIMS Gap Analysis SWOT Analysis

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THE VALUE CHAINPorter, 1980 introduced the model of the value chain as a means of identifying strategies to gain competitive advantage. The model shown below was originally developed for accounting purposes to identify the profitability of the various stages of the manufacturing process. However, today it has been applied to measures of competitive advantage rather than just profit. Porter suggests that competitive advantage is determined to a large extent by the way in which companies manage each element and the interactions between them.The model highlights 9 interrelated value creating activities that can help to create value. These are divide into primary and support activities as shown below;The four support activities The firms infrastructure Human resources management Technology development Procurement

Inbound logistics

Operations Outbound Marketing Saleslogistics and sales

Figure 1 3

The value chain (Porter, 1985)

By focusing on these various functions companies can improve performance an effectiveness and identify areas in which they can add customer value. It not only provides a structured framework for examining costs and performance within an organisation, but also provides a sound basis for inter-firm comparisons. The value chain can be extended to include suppliers, distributors and customers to analyse relationships between companies and to identify ways of adding value in the supply chain, such as Just in Time ( J.I.T.).

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Case Study The Media Value ChainDuring the 1980s and 1990s electronic media companies were highly successful. The owners such as the ITV companies and Capital Radio were exceptionally profitable. These companies dominated the key portion of the value chain described by Porter. In most electronic media markets this chain is simple. Each link is a separate stage in the process that takes the raw talent of an actor, comedian or football player and turns it into great media that the consumer will listen to or watch. At each stage value is added, but separate links in the chain are rewarded very differently for the contribution they make. The key question in assessing the value of media businesses and deciding which companies to invest in is to understand which of these links in the chain will hold the greatest value in the long-term.

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In the 1980s there were just 4 links in the chain: 1. The talent, be it a writers, performers or someone who creates powerful formats. It is the raw material of great media. 2. Production the ability to take creative talent and turn it into a programme or a website that consumers really want. 3. Content packaging and marketing Channel 4 typifies this. The channel does not produce any programmes, but creates channel brands. 4. Distribution the ability to get media to the consumer through control of spectrum, telephone wires and cables. This final link has for many years been the most profitable of all. The spectrum was so limited that the companies that controlled it had tremendous power over the entire chain, and took the largest proportion of the value created.

But 2 things have changed all that: 1. The spectrum isnt as limited as it once was. There are now more than 200 TV channels broadcasting in the UK and more than 250 analogue radio stations. There is the internet, broadband and soon the new third generation mobile media will be offering greater access to the consumer. When the analogue TV signal is switched off there will another slice of spectrum sell. There have never been so many routes to carry media content to the consumer, and it will become easier in the future. 2. A new link also appeared in the value chain that has further devalued companies that simply have access to broadcast spectrum. This is the consumer gateway. Sky and ONDigital gain their power through their TV set-top boxes, which allow them to control access to the consumer. And there are also new and powerful operators being created by the Internet, such as AOL. At the other end, the stock market already puts a high value on companies such as AOL and ONDigital, which control the consumer gateway.6

The real value seems to lie in vertically integrated businesses that have must-see content and control the gateway. This lies at the heart of BSkyBs strategy and is the rationale for the merger between AOL and Time Warner. Applying this logic to the mobile phone industry makes the companies that paid 22.48 billion for the third generation spectrum in Britain weakest link in the media value chainrather nervous. To make an acceptable return on capital employed, they will need to generate substantial profits from the content, packaging and consumer gateway links in the value chain. This will require some big changes. These companies must convert their existing billing relationships into gateway relationships where they are at the heart of everything the customer does. They also have to offer their customers must-see content that is exclusive to their network. The final step would be to vertically integrate the whole operation, as BskyB has in television. This would create significant synergies. To achieve this will require a huge cultural shift. Companies that have core skills in network and subscriber management must understand and adopt the very different skills of integrated content providers. It is a tough proposition.Source: Ewington (2000), www.Lexis-Nexis.com

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Limitations of the Value Chain Inwardly orientated Needs to take account of other value added activities outside of its organisation since rarely are value creating activities limited to one company

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THE PRODUCT LIFE CYCLEWhile the product life cycle ( PLC ) appears in all marketing textbooks, yet it is often described as the least understood marketing tool. The PLC recognises that products like humans, have a finite life and move through a variety of distinct stages from introduction to growth, maturity, decline and eventually death. However, its real importance lies in identifying the stage of the life cycle the product is in and using this knowledge to modify its strategies to ensure the maximum profit is generated at each stage.

Sales Introduction Growth Maturity Decline

Figure 2 9

Time

The PLC can be applied at a number of levels Total industry Product Class Product Form Brands eg motor industry eg cars, vans or lorries eg people carriers, estate and sports cars eg Renault Espace, VW Passat, Rover 75

To fully understand the context in which a brand is developing it is essential to understand the distinction between the various categories of the PLC. The length of each stage will vary significantly depending on which category we are considering. For example; industry and product class tend to have the largest life cycles. However, it is difficult to judge the nature of the PLC for individual brands for example, Persil (washing powder) has endured longer than each of the product classes washing powder and liquid detergents. Product forms tend to conform to the classic PLC curve to a greater extent than the other categories. The table over summaries the various marketing mix decisions for each stage of the PLC. It must be remembered that the table simplifies the decisions and provides guidance only. Each product should be viewed independently. For example; the table indicates a low price strategy at the introduction stage. However, depending on the market a company may decide to operate a market skimming strategy of high price.

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Marketing MixProduct

IntroductionBasic product, limited range

GrowthDevelop product extensions and service levels Penetration strategy

MaturityModify and differentiate Develop and service levels Price to meet or beat competitors

DeclinePhase out weak brands Consider leaving market Reduce

Price

Low price strategy

Distribution Advertising

Selective Build dealer relations Heavy spending to build awareness and encourage trial among early adopters and distributorsExtensive to encourage trial Short to medium

Intensive Limited trade discounts Moderate to build awareness and interest in the mass market. Greater word of mouthReduce to a moderate level Long range

Intensive Heavy trade discounts Emphasise brand differentiation and special offers

Selective Phase out weak outlets Reduce to a level that maintains hard core loyalty. Emphasise low prices to reduce stockReduce or stop completely Short

Sales

Increase to encourage brand switching Medium range

Planning time frame

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Value of the PLCJobber (2001) identifies a number of benefits the PLC offers: Product Termination The PLC emphasises that nothing lasts forever. There is a day that marketers will fail to recognise this and become complacent, not developing new products to replace established ones. Growth Projections The PLC warns against the dangers of assuming that growth will continue indefinitely. This is particularly critical when companies are facing new investment decisions based on existing products. Marketing Objectives Strategies The PLC emphasises the need to review marketing objectives and strategies as the product/service moves through the life stages Product Planning The PLC emphasises the need to have a balanced portfolio of products (ie to have new products in the pipeline to replace those in the maturity and decline stages) companies need to use the cash generated by mature products to fund new product development

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Limitations of the PLCDespite some of the insights the PLC provides it has many limitations: 1 Fads and Classics Many products do not follow the traditional S shaped PLC. Some products (fads) show raid growth but equally rapid decline with little in the way of introduction or maturity. In contrast, products known as classes, seem to defy the PLC concept and live forever, eg Bisto and Coca cola Marketing Effects The PLC is a result of marketing activity not the cause and therefore marketers have to be careful they do not fall into the self-fulfilling prophecy where they expect a product to decline, withdraw marketing support and so kill off their product. The effects of PEST can change the shape and timescale of the PLC. Unpredictability There is little indication of the timescale of the PLC. The duration of each stage varies considerably between product and may range from weeks to years. The model has limited value as a forecasting tool. Miss-leading objectives and strategies The model is criticised for being too prescriptive in terms of the objectives and strategies that are appropriate for each stage. Product Focused The PLC tends to make marketers focus its objectives and strategies around the product rather than focus on the customer needs.13

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3

4

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Diffusion of InnovationThe PLC provides an indicator of the various stages through which the product passes but provides little indication of timescale. The rate at which new products are adopted varies considerably, but Rogers (1981) developed a model which illustrates the pattern of adoption that is evident following the launch of a new product. ( see below ).

Innovators 2.5%

Early Adapters 13.5%

Early Majority 34%

Late Majority 34%

Laggards 15%

Diffusion of innovation, Rogers ( 1983)

Figure 3

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The characteristics of consumers in each of these adopter categories varies as does the rate at which they are likely to purchase new products. As such, the model is useful to marketers in identifying potential target markets for new products and for tailoring the marketing mix to meet the needs of each group/category of customers. While a very useful tool for segmenting the market, the difficulty lies in a marketers ability to identify those segments and reach them effectively (eg the innovators in the consumer electronics market may not be innovators in the golf equipment market).Innovators These customers are eager to try new ideas and products readily and are often prepared to pay high initial prices to be first in the market. They are regarded as opinion leaders.

Early AdoptersEarly Majority Late Majority Laggards

This group is willing to adopt new ideas, but not at the same speed as the innovators. They are likely to seek out information before purchasing, but should also be seen as opinion formers.In general this group is more conservative than above and more likely to be risk averse. For example, people who would consider making a purchase on the internet. Includes people who are cautious about anything new at the time. They tend to reflect on new products and only buy once they are firmly established in the market. This group are very traditional and averse to change. They tend to be price sensitive and wait prices to fall. They will only buy CDs once cassette tapes are no longer available.15

The B.C.G Matrix (Boston Box)The Boston Consulting Group developed a 2 x 2 matrix that allows the portfolio of products/SBUs to be positioned on the matrix according to: market growth rate relative market share (relative to the leading competitor)

The value of the BCG matrix is that it examines the generation and management of cash within a business. Relative market share is seen as a predictor of the products capacity to generate cash and market growth is seen as the predictor of the products need for cash. This suggests that products with high market share will achieve high sales, but will need less investment in new brands and should have lower costs due to scale economies. Products in fast growing markets require higher levels of investment than those in slower growing markets. Products in low growth markets with a high market share will generate cash, which can be used to fund other products needing investment. Nb: Cash flow is not the same as profitability.

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Relative Market Share High Low Question Mark Cash Generated + Cash Used -----Dog

High

Star Cash Generated ++++ Cash Needed ---0

Market Growth Low

Cash Cow

Cash Generated ++++ Cash Used +++10x

Cash Generated Cash Used

+ 00.1x

1x The BCG Matrix

Figure 4

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Question Markscash to attempting to become

are at the introduction stage of the PLC, with high market growth and low market share. They are absorbing fund developments in marketing in future stars of the business.are the future of the organisation with high market share and high market growth. They are at the growth the PLC but are still absorbing cash to market share are at the maturity stage of the PLC and have high market share, but market growth is slowing. Marketing expenditure is limited so cash generated to fund product areas of the business are at the decline stage of the PLC having both low share and growth in the market. However, they are generating cash in the short term.

Stars stage of sustain and develop

Cash Cows other

Dogs capable of

The matrix highlights the need for succession planning and the issue of over dependence on the current cash cows. As with the PLC there are many different patterns as products enter the market and fail, or the organisation reinvests in them to prevent them becoming dogs.

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Portfolio AnalysisMost companies have multiple products serving multiple segments / markets. Some of these products require lots of investment and are cash hungry, others require limited investment and are cash rich. Companies therefore need to devise means of allocating their limited resources among product or SBUs so as to achieve the best performance for the business as a whole.Decisions have to be made regarding which products or brands should be invested in, which to hold and which to let go. The process of managing groups of brand/product or SBU is called portfolio planning. Portfolio models are used to identify and analyse the current position of the organisation, highlighting the current resources, capabilities and performance. Several of the more commonly used models are discussed below.

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B.C.G StrategiesStars Build strategies by increasing sales or market share.

Question Marks Build selectively Identify and focus on niches markets Harvest and divest others

Cash Cows Hold strategies to maintain sales or market share Defend position Use cash generated to sustain Stars, invest in NPD and support a select number of Question Marks Limitations of BCG

Dogs Harvest or Divest or Identify profitable niche markets and focus on them.

Preoccupation with simply market growth and relative market share. Other factors may be of equal importance ie profitability Difficulty with accurately measuring growth and share. Ignores factors such as competition and developing sustainable competitive advantage Markets that grow slowly may still be attractive as they may not cost as much in terms of investment It treats cash flow as the sole criterion for investment decisions. In practice a range of other factors, such as ROI, market size, competitive position, costs etc are also used.20

G.E Multi Factor MatrixThe General Electric Matrix was developed by McKinsey & Co in conjunction with General Electric in the USA in response to some of the weaknesses of the BCG Matrix. This model built on the success of the BCG, but acknowledged that market growth alone was an insufficient measure of market attractiveness and market share in measuring competitive strength. As with the BCG, products/ businesses were plotted against 2 dimensions, but it used a multi factor matrix that enabled managers to build in measures that were relevant to their industry, such that: Market attractiveness criteria could include measures, such as; Market factors (size, growth, segment size, price sensitivity) Competition (types and strengths ) PEST factors Profit potential Competitive / business strengths criteria could include measures, such as; market share bargaining power of suppliers and customers Reputation Patents relationship/strategic alliances distribution capabilities ability to develop competitive advantage or cost advantage21

Once the criteria had been selected each factor can be given a weighting that recognises their relative importance. The table below gives an example of such weighting based on a total of 10.Weighting the Criteria

Market Attractiveness Market share Patents Distribution capabilities Relationships Cost advantages TotalCompetitive Strength Market growth rate Market size Strength of competition Social factors Profit opportunity Total

2.5 1 2 2 2.5 10

2 2.5 1 0.5 4 10

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Each market attractiveness factor and competitive strength is scored out of 10 (ie 1 = very unattractive/weak and 10 = very attractive/strong). Each score is multiplied by their weighting to produce an overall score for market attractiveness and competitive strength for each product and SBU. The results are plotted on the G.E. matrix. Once the products have been plotted on the matrix it is possible to identify potential strategies for each position of the matrix as shown below:

High

9

Market Attractiveness

Medium 6 Low 3 0

Figure 5

9

6

3

0

StrongKeyInvest for growth Manage selectively for earnings Harvest/Withdraw 23

MediumBusiness Strengths

Weak

The General Electric Multi Factor Portfolio Model

Limitation of the G.E. MatrixAlthough the GE Matrix allows for a far more robust and richer analysis than the BCG, it does receive some criticism in terms of; Difficult to obtain all the information required Getting managers to agree criteria and weightings Because of its flexibility there is the opportunity for bias. It is suggested therefore in order to avoid this, analysis should be conducted at a managerial level above the one being analysed

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Shell Directional Policy Matrix

This portfolio model adopts a similar approach to that of the GE Matrix, the main difference being the axes which here are based around prospects for sector profitability and enterprise competitive capability as shown below:

Sector Profitability Unattractive Weak Average Attractive

DisinvestPhased Withdrawal Cash Generation

Phased WithdrawalCustodial Growth Growth Leader

Double or QuitTry Harder Leader

Competitive Capabilities

Average Strong

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Summary of Portfolio ModelsPortfolio models have useful contribution to make to the planning process but their strengths must be tempered by their limitations as indicated below; Portfolio models are not as well known or widely used in marketing as they might be possibly because they are time consuming and difficult to use. While relatively easy to understand they can be easily misused. Successful use of them depends on identifying the range of factors relevant to the firms specific market not an easy task. There is an argument that the factors used to assess the current position of the portfolio do not necessarily reflect the future condition of the business or market. The models assume that market leadership invariably offers benefits Nevertheless, the models do provide an insight into; Not all products or SBUs are equal and may require different roles, such as cash generation or profitability. Different products have different profitability objectives and as such managers should have different skills and reward systems. Eg new products may require market led managers, whereas dog or harvested products may require managers who are more cost orientated. The models are simply tools. They should not be seen as a replacement for management judgement.

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Case Study Unilever Portfolio ManagementUnilever, a multinational company in fast moving consumer goods (FMCG) used to produce approximately 1600 consumer brands. The company realised that they could improve economies of scale, and increase efficiency of their supply chain, by reducing the number of products they manufactured. They undertook a portfolio exercise that revealed that only a quarter of their brands provided 90% of their turnover. Therefore, they decided to reduce their brands by 75% and to concentrate their marketing activity on 400 of their high growth brands. The criteria used to identify the brands to maintain were that they should be in the top two sellers in their market segment such as Dove soap, Lipton tea and Calvin Klein perfume. In addition, highly successful local brands, such as Marmite and Persil, were also to be supported. The rest of the brands, such as Pears soap and Timotei shampoo, would either be sold off or would be harvested gradually. It was anticipated that this strategy would reduce costs by approximately 1 billion over 3 years and provide an additional 450 million to spend on marketing the surviving brands.

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Experience Curves and the Importance of Market ShareMany marketing strategies are based on the premise that market leadership is a desirable goal. The reasons for this are in part based around the concept of the experience curve. The concept underpinning the experience curve is that experience, gained by frequently producing high volumes of production, decreases costs and increases profits. This is due to learning and economies of scale, which while working with new technology can lead to improvements in operational efficiency. (see below)

Cumulative experience

Unit costs Figure 6 Volume

The implication of this is that the first company to enter a market and attain a large market share will have cost advantages over those entering the market later. Examples, such as, IBM market leader in main frame computers and Texas Instruments who entered the market a couple of years later, but had to withdraw soon after and VHS compared to Betamax video recording systems.28

Aaker, 1998 acknowledges however there are several considerations when using the experience curve;

Multiple products can complicate the concepts The experience curve does not apply to every situation Technological developments may make the experience curve obsolete Lowest costs do not have to equate to lowest prices

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IMPORTANCE OF MARKET SHAREGenerally companies with higher market share have more experience than their competition. This results in lower costs which can lead to higher profit margins or more money to spend on R&D which helps maintain market leadership and market share. Summarised the benefits include; Economies of scale Increased bargaining power Security for stakeholders Status Measure of management performance However, there are a number of factors companies need to take account of if deciding to pursue a share gaining strategy; Competitor reaction Cost of gaining share How long can the strategy be maintained? Level of maturity in the market Effect on other areas of the companies activities and level of customer loyalty30

PROFIT IMPACT OF MARKETING STRATEGY (PIMS)Researchers have found a strong relationship between market share and return on investment R.O.I. PIMS studies set out to identify the key factors influencing profitability by examining the performance of 3000 SBUs. The results of this study clearly shows there is a linear relationship between profits and relative market share. For example, where an organisation gained market share of say 40%, ROI was three times more than organisations with 10% market share as shown below;

Profitability

Figure 7

Profitability31

Some Thoughts on PIMS High market share in itself will not automatically improve profitability There is evidence of many successful low share businesses Often nichers develop small and successful segments while more dominant medium sized companies become stuck in the middle Does the definition of the market determine market share e.g. does easyJet have a large market share of the budget airline industry or does it have a small share of the total airline industry?

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Gap Analysis

Gap analysis is a fairly simple diagrammatical method of presenting where we are now and where we want to be, as illustrated below;

70 60 50 40 30 20 10 2 4

Objectives The strategic gap

Current forecast

6 Time (years)

8

10 Figure 8

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Strategic analysis will identify the current situation and then forecasts can be made of how the company will perform in the future based on existing products serving existing markets.However, the corporate goal/objectives of the organisation may be a lot different to that forecast and this creates the strategic gap. In closing the gap marketers can use Ansoffs Growth Matrix which seeks to develop businesses through one of 4 strategies as shown below: Market penetration Market development Product development Diversification

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SWOTThis analysis is derived from the initials of the words strengths, weaknesses, opportunities and threats. The accent is on the key factors of the marketing audit which have been identified as having an impact on the success or failure of the business eg: Strength Weaknesses Opportunity Threat - excellent quality products, reliable engineering. - poor delivery, hazardous, higher prices, management culture systems. - good supply, new uses for existing product, changes in taste or fashion. - launch of new product, major competitive ad campaign, economic depression.

The analysis is what goes into the marketing plan (not the full audit). It seeks to produce a concise, clear and reliable short account of where the is organisation is now, how it sees itself in the market place against its competitors, what shortcomings need to be overcome, where opportunities can be turned into competitive advantage, where it can do better than the competition and what is required for all these things to be achieved.

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Concept of Internal Strengths and WeaknessesEach business needs to evaluate its internal strengths and weaknesses to be able to judge which competences to develop in order to take up the opportunities that may arise. P. Kotler developed a form for carrying out this type of audit for reviewing the businesses marketing, finance, manufacturing and organisational competencies. Under each heading a list of relevant criteria is listed and assessed according to its perceived strengths and weaknesses, from major strength through to major weakness. (see figure 9) Because not all factors are of equal importance in succeeding in business or taking up a new opportunity, it is necessary to rate the importance of each criteria or factor; high or low. (see figure 10) By connecting the rating vertically the firms can now get a good view of the business's major strengths and weaknesses. BUT, by combining Performance and Importance levels, 4 possibilities emerge.

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PERFORMANCE IMPORTANCE MATRIXPERFORMANCE

High IMPORTANCE HighA. Keep up good work

LowB. Concentrate here

Low

C. Possible overkill

D. Low priority

Figure 10

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The analysis points out that even when a business has major strengths/(distinctive competencies), it does not necessarily create a competitive advantage. The competence may not, or example, be of any importance to the market or competitors may have a similar strength. What becomes important is that the business has relatively greater strength in the important factor than its competitors. In examining strengths and weaknesses a business can decide which strengths and weaknesses to concentrate on.

The issue is whether to;1. Solely focus those opportunities for which it is more capable of providing fr but may offer less profits, OR 2. Consider better opportunities and seek out and acquire those required competences to succeed, but which it lacks.

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