Strategic Marketing 052 430

Strategic Marketing052 430 • Instructor: Michael Cooke • E-mail Address:michco@kku.ac.th • Office: IC room 817 • Class hours: Friday 13:00-16:00 • Class Location: IC room 806 • Web: home/kku.ac.th/michco

Quiz: Pass/Fail = 50% 1: How would substantial innovation bring advantage? A) When a market pioneer competes with much larger competitors B) If potential competitorsview the innovations as transient (will have no lasting impact) C) If the innovators is able to establish a patent or technology barrier D) Both B and C 2: Which is NOT a motivation for a company to adopt global strategy A) As a defensive stance, need presence in home market of competitor B) Access to strategic markets C) Rapidly growing home markets D) Investment incentives or trade barriers 3: To communicate value A) Reduce the price, the lower the better B) Communicate why a cost advantage exists C) Focus on the invisible price points D) Both B and C 4: 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 departments C) Two organizations with different cultures merge and managers from each fight for control D) Both B and C

Creating New Business • Leveraging or energizing a business builds on existing business • Another approach is to change what the customer is buying through creating a new market or sub-market • Usually involves transformational innovation • Innovation may bring high returns for long time periods • The ‘Blue Ocean’ challenge is to create demand where it does not exist • Blue Oceans have little competition • In crowded ‘Red Oceans’ overcapacity, lack of differentiation, and low margins are the challenge • Innovation can be conceptual or based on technology • Successful innovation requires adding value • Lower cost and differentiation can be achieved at same time • Key indicator of innovation is the amount of competition • New firms perform better than existing firms • Established firms struggle in competitive markets • Incremental innovation tends to be quickly copied • Established firms tend to create over-capacity • New industries and firms with new business models tend to have higher profit

Innovator’s Advantage • Competitors are slow to respond to innovation • Established companies want to protect their revenue • Companies want to protect their brands • Firms tend to view innovations as transient • Competitors may not be able to respond • Technology barriers such as patents • Organizational constraints, such as culture or systems • Cultures are difficult to duplicate • Org constraints a common reason competitors fail to respond • The innovator can capture customer loyalty • Customer may have no incentive to try a different product • Customer switching costs may be high • First mover advantage involves building position • Build customer base quickly through low prices • First movers may get innovative reputation • Pioneers tend to fail while firms that establish leadership during early growth phases are more successful • Early Market leaders have low failure rates (though pioneers often fail) • Price product at mass market level • Are patient investors • Are often dominant in a related category • Brand name associations • Existing distribution channels

Managing Category Perceptions • The innovator focuses on what category to buy • Leading brand viewed as authentic and reliable • Market leader need not focus on which brand to buy • Managing category perceptions is important in new markets • Focus 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 environments • Some firms make themselves a moving target • Strong brands create an aura of being authentic (versus copies) • Some create barriers to entry with competencies

The Role of Price Points • Clayton Christensen studied disruptive innovation • Low-end disruptive innovation • Established firms target best customers • Aim to get higher margins and loyalty with features, service, etc • Develop structures, skills, incentives for reliable profit • Incumbents usually win with sustainable innovations because of resources • Low-end customers often ignored by established firms • Low-end disruptors target the ignored customers • Introduce easy to use and cheap product versions • At outset, usually an inferior product offering • Low-end offering may improve over time • Stall points for established firms often involve low-end disruption • New-Market innovative disruptions appeal to non-customers • Products considered too expensive or difficult to use by many • Ease of use and lower prices can open a new market

Environments that Bring New Ideas • Few firms create multiple new businesses • Strategic adaptability plays a major role in successful innovation (chapter 7) • Involves organizational flexibility • Organization can identify, evaluate, and adapt to trends • Strategic commitment required for existing products • Loyalty to a core strategy which assumes future will be much like the past • Involves execution of strategy and continual improvement • Vulnerable to paradigm shifts • Few firms have both innovation (adaptable) and incremental change (commitment) capabilities • Reasons firms fail to innovate • Short term financial pressure = focus on existing business • Organizational 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 small • Lack 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 Firms • Create a distinct organization • Acquisition of an innovator followed by independence • Create a stand-alone unit within the organization • Separate organization can use some elements of parent • Stand-alone needs to be flexible and entrepreneurial • Dual organization (both committed and adaptable) • Requires different cost control systems and performance metrics • Can bring energy to core businesses • Difficult to achieve due to differences • New business ventures need access to capital • Stock market or venture capital available if external • Top 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 analysis • Issues arising from global strategy • What are the global strategy objectives? • Product standardization versus customization • Brand and marketing standardization • How can the business expand globally? • Use of alliances to enter countries • Global brand management • We have covered much of the material. This will be survey

Indicators that Strategies Should be Global • Competitors are not domestic and are multinational • Scale economies opportunities through standardization • Cost reduction or effectiveness increased with locations in different countries • Cross subsidy opportunities • A way around trade barriers to desirable markets • Advantages from global name (if available) • Brand and advertising will work across countries • Local operations do not have an advantage • How would a local operation use these to fight?

Global Strategy Motivations Global Brand Associations Access Low-Cost Labor/Materials Obtaining Scale Economies Global Strategies Access National Investment Incentives Access Strategically Important Markets Dodge Trade Barriers Cross- Subsidization Chapter 13 - Global Strategies Figure 13.1 PPT 13-11

Motivations for Global Strategy • Scale economies • Scale economies result from larger sales base • Standard design (VW advantage over Renault-Nissan) • Standardized worldwide marketing programs • Research and development costs • Companies may aim to reduce number of sub-brands to achieve scale economies • Consumer preference for global brands (quality and innovation associations) • Worldwide sourcing of product and marketing innovations • Global differences in labor and materials costs • National 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 competitor • Goodyear retaliated in Europe against Michelin’s attack in the USA • Kodak failed to counter Fuji’s attack and lost market share in the USA • Access to strategically important markets • Size or potential of market • Industry trends and technology emanate from certain markets • Locate design and manufacturing in certain areas to observe competitors and learn new technology • Certain technologies emanate from Silicon Valley, attracting other firms and talent

Standardized Products and Brands • A standardized brand is easier to manage • Brand management involves establishing brand identity and making it drive brand building • A global brand makes this easier to accomplish than country specific brand strategies • Simpler organizational structures with one brand • A global product may not be perfect in any market • Brands often should not be standard across all countries • Markets may differ in fundamental ways • Market share differences across markets • Customer motivations (light skin in some parts of Asia) • Different distribution channels • Customer familiarity with the product may vary • Differences in economic development • Local heritage (build on relationship to local brand) or COO issues • Cultural 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 Enter • Success in some industries comes from local share (beer and cement, for example) • Reasons for choosing to enter a market • Size or growth rates • Intensity of competition in the market • Absence of cultural or operational barriers • Political climate • Entry can be sequentially or simultaneously • For competitive reasons and to achieve scale a global product roll out is often best • Sequential entry allows refinement of strategy based on experience, involves less initial investment

Pulling 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=print • The 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 Economy” • With the digital revolution people with more education start to earn much more than those without it • Those 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 talent • Which languages do people use to enter the globally connected world?

Amazon’s Warehouse in GermanyMichael Dalder/Reuters

Amazon and Apple again • After 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 8 • Quality is defined by customers in ways that change through time • Product or service performance • Reliability and customer satisfaction • Latest features • Customer support • Ease of buying and using • Design (aesthetics) • Quality dimensions are difficult for customers to measure • To get a quality image, the firm may focus on a visible dimension • In supermarkets people associate fresh produce with overall quality • Service quality is based on the people with whom customers interact • Customer 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 differentiator • Market leaders usually have an image of higher quality • Quality is usually associated with higher price and profit • Quality stimulates innovation because the target changes • An organizational culture that stresses quality motivates employees • To deliver good service and superior products • To react to blunders or improper conduct

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

Chapter 7 - Strategic Commitment Assumes that the current strategy will work into the future Long term perspective Assumption that future will be similar to past Focus on clearly defined target Buy-in throughout the organization Execution and improvement are keys to success Continuous improvement is about incremental change Often best in centralized organizations with specialist employees Improve the offering, the costs, the customer relationships Risk is strategy failure Barriers to implementation The environment changes (paradigms shift) New operating models New technology New paradigms often dominated by former minor players PPT 7-20 Chapter 7 - Creating Advantage, Synergy and Strategic Philosophies

Strategic Competitive Advantage • Differs from a key success factor (KSF) • A KSF is required to be in the game, not usually unique to a brand • An SCA confers advantage over competitors • Points of differentiation (unique brand associations) • A competitor might copy a POD, which then eliminates the differentiation • Superior value for money can be an SCA • SCAs need to be meaningful and sustainable • Patents • Moving target of innovation • A reputation can be more valuable than substance • Value proposition must be visible through positioning • Competitors have difficult time convincing customers their offering matches quality or performance • An SCA is relative to whether competitors are weak or strong in key assets or competencies

Strategic Opportunism Assumes 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 lines Short-term oriented Decentralized, entrepreneurial, risk taking organization With lack of vision, opportunism can become drift Responding to transitory forces Focus on immediate profit may lead to dead end (single order) Resources may be diverted from sound businesses Businesses might be incompatible or firm might lack assets and competencies PPT 7-22 Chapter 7 - Creating Advantage, Synergy and Strategic Philosophies

Strategic Adaptability Assumes a dynamic market and that the organization can predict and manage responses to those changes Adapt products to changing markets to maintain relevance New markets and submarkets emerge about 5-10 years apart Adaptive firms will do transformational innovation Must be able to identify trends, respond aggressively Organizational flexibility is required Adjust or develop strategies when for external or internal changes Often means having liquidity (think of Apple’s billions) to seize opportunities Flexibility can come from having slack capacity in distribution, staffing or R&D A robust brand portfolio might allow the firm to avoid creating new brands Microsoft has succeeded in moving from operating systems via flexibility A medium term perspective Errors in interpreting trends or the emergence of submarkets Wasted resources Potential impact on the brand and the company culture Execution issues (strategy can not be implemented) – Benz & Chrysler PPT 7-23 Chapter 7 - Creating Advantage, Synergy and Strategic Philosophies

Blended Philosophies Firms might use all three philosophies Each is often needed for success across different businesses in which the firm is engaged Starbuck’s refines the store concept (commitment) and has: Opportunism Ice Cream in supermarkets Coffee in airplanes Adaptability Kiosks in supermarkets and airports Soluble coffee in markets Google is committed to search Adaptable by acquiring search related capabilities Made opportunistic acquisitions such as YouTube and gone into niches such as Scholar PPT 7-24 Chapter 7 - Creating Advantage, Synergy and Strategic Philosophies

Key Ideas • To 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 China • At 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 China’s 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?” • China’s 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 China’s 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=print

What Strategists are Thinking About* • China’s large pool of surplus rural labor has played a key role in maintaining low inflation and supporting China’s growth model. • As agriculture surplus labor is exhausted, industrial wages rise faster, industrial profits are squeezed, and investment falls. • Rebalancing China’s 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 decade • The UN projects that growth of the working age (15–64) 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 0–14 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 2010—probably 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* • Industry’s relocation to the interior provinces—where wages are lower and the large reserve of rural labor resides—has 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 View • China’s demographic challenge may not be the disaster people are thinking about (A). • China’s industries are not very automated compared to developed countries. • China’s capital efficiency is poor. (Where, for example, does all that steel actually go? Think of the old Soviet Union’s steel and concrete production.) • IfChina’s capital efficiency rose to match Japan’s, China’s 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 employmentto 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.htm

Changing 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.html

FT.com 6 Feb 2013

An Article by Michael Lewis • In 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 you’d 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 could—anything—to 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 Innovation • Carnegie Mellon University said it was awarded $1.17 billion by a federal jury in Pittsburgh last December in • Marvell 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 Carnegie’s Data Storage Systems Center, a university research organization • CMU 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=print

Thai Companies Invest Abroad • Thai 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 Resources • July 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 billion • With 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) KarimRaslan The Star Kuala Lumpur January 4, 2013 WSJ.com 18-7-12

Wal-Mart’s FCPA Problem • Last 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-Mart’s 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 Mexico • Wal-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 Mexico’s 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

Strategic Marketing 052 430