Strategic Marketing 052 430

1. 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

2. Term Project • Likely Project Topics • Thai silk • Thai tourist industry • Thai rice • Thai shrimp • Other business or industry • Choose a topic and a partner by 7-December • Advise 10-15 minute presentation, papers accepted • Can use the Five Forces framework to look at the business • Suggest and support a market strategy for the industry or a firm within the industry • Due 1 February

3. Foxconn challenged as global reach growsFinancial Times, 3 January, 2013 • Contract manufacturer Foxconn has embarked on an ambitious expansion plan in Brazil, which could reach $12bn of investment. • Many of the plants make Apple products to help avoid import taxes on electronic goods sent from China. • The new factories in Brazil, where unions are historically strong, have faced challenges. • Workers there have staged protests over everything from overcrowded transport to working hours and lack of career planning offered to employees. • “Strikes really aren’t that normal around here – it seems to be a problem just with Foxconn,” said one local official. • Working outside of China helps Foxconn’s customers get quicker turnaround and avoid some import taxes. • It has also created a new set of challenges for the company. • Foxconn employs more than 1m people worldwide . • Foxconn often enters new geographical markets by taking over old factories once owned by its customers. • The regimented style of management has sometimes caused conflicts when applied to cultures far different from the Chinese factory floors. • The autocratic style has led to clashes even in China, where workers are gradually gaining power. • The company recently made investments in Brazil, Mexico and Turkey, and has said it is planning projects in the US, Indonesia and Malaysia. • “Many similar companies are starting to move from a global manufacturing strategy to a more regional strategy,” said a professor at Massachusetts Institute of Technology. “That’s a completely different strategy from what we saw companies using 10-15 years ago.” • For customers, Foxconn’s factories outside China allow them to cut transportation costs, avoid many import taxes, and get quick turnaround on orders. • “We are here to service customers, and that is why we do final assembly, internationally” says one current Foxconn executive in Europe. • Older operations in the US and Europe started when Foxconn took over factories from customers such as Sony or Hewlett-Packard that wanted to cut costs by doing less of their own manufacturing. • Foxconn’s overseas operations have generally managed to avoid the violent conflicts experienced in China. • Cultural differences are muted slightly as the majority of overseas managers are locals. • Foxconn localizes production line workers and senior management, to have a good understanding of local culture.”

4. Apple’s iPhone • Why does Apple choose to assemble iPhones in China? • Scale of operations • Supply chains • Skilled technical workforce, including engineers • Clusters of excellence • Response times • Think of how 2011 floods in Thailand affected other manufacturers • Labor is not a big component of the total cost • Apple employs 47,000 (35,000 in retail and customer support) in the USA. Apple’s contractors employ 700,000 outside the USA • Apple’s profits accrue to shareholders across the world • Apple is a true global company • Sales span the globe • Software created in USA • Marketing created and managed in USA • Supply chains span the globe • iPhones assembled in China by a Taiwanese company • Some components made in USA by S. Korean company (Samsung) • Glass made in Japanese factories by an American company (Corning) • http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?pagewanted=print

5. Turning Points • The point about paradigm shifts, as Thomas Kuhn pointed out in “The Structure of Scientific Revolutions,” is that they don’t happen often • Paradigm: philosophical or theoretical framework • Paradigm shift: fundamental change in an individual's or a society's view of how things work in the world • Major changes are slow, because even when a new insight is right (dazzlingly right in hindsight) vested interests and inertia resist its adoption. • There are six slow-acting drivers of historical change in our time, as in most of recorded history. A common error is to focus on only one. They are: • 1. Technological innovation; • 2. The spread of ideas and institutions; • 3. The tendency of even good political systems to degenerate; • 4. Demographics; • 5. Supplies of essential commodities; • 6. Climate change. • One simple way of thinking about the world is to say that wealth, and with it power, are shifting from the West. In that sense, the real turning point was not Nov. 9, 1989 (end of the Cold War ), but 1979, the year Deng Xiaoping visited the United States and China’s economic reforms began in earnest. • Wars change history’s direction most decisively. November 30, 2012 Turning Points By NIALL FERGUSON

6. Niall Ferguson’s View of the Near FuturePolitical Systems and Demographics • More than 300 million Chinese adults have wealth between $10,000 and $100,000, and nearly 20 million have wealth above $100,000. • These people are discovering that property needs to be protected by the rule of law, and that the biggest threat to that is a corruption. • Nearly always overlooked by political scientists is the tendency of systems to degenerate as rent-seeking special interests grow and civic virtue yields. • Rent seeking: Rent-seeking behavior would include lobbying government for tax, spending or regulatory policies that bring monetary benefits or other advantages at the expense of taxpayers, consumers or others in economic competition with the rent seeker. • Rent seeking tends to hurt innovative activities more than production.* • In many Western countries there has been a decline in the rule of law. In the United States, the World Bank reports declines since 2000 in the control of corruption, regulatory quality, accountability and government effectiveness. • Much of the developed world today reminds me of what Adam Smith said about China in “The Wealth of Nations” (1776): It has reached a “stationary” state in which growth is near zero and prosperity is enjoyed only by a corrupt bureaucratic elite. • Because of immigration, fertility and inefficient health care, the United States is aging much less quickly than countries like Japan and Germany. • By 2050 more than a third of Japanese will be 65 or over. For Germany the figure will be 31 percent. In China, more than a quarter of the population will be older than 64. But for the United States, the figure will be just 21 percent. • China’s labor force will start to shrink in the 2020s. That will not happen in the United States. *http://www.economics.harvard.edu/faculty/shleifer/files/rent_seeking.pdf http://www.nytimes.com/2012/11/30/opinion/global/niall-ferguson-turning-points.html?pagewanted=all

7. How Technology Changed Incomes in the Music Industry • Before the era of recorded music, the very best singer might have filled a large concert hall but would only be able to reach thousands of listeners over the course of a year at most. • Each city might have its own local stars, with a few top performers touring nationally. • Even the best singer in a large nation could reach only a relatively small fraction of the potential listening audience. • After music could be recorded and distributed at a very low marginal cost, a few top performers could capture much of the revenue in every market. • With digital technologies, entrepreneurs, top executives, entertainment stars, and financial executives have been able to distribute their talents across global markets. http://www.theatlantic.com/business/archive/2011/10/why-workers-are-losing-the-war-against-machines/247278/

8. Adjusting to Changes in the Economy • Over time, a well-functioning economy should be able to adjust to reallocations of income. • For instance, about 90% of Americans worked in agriculture in 1800; by 1900 it was 41%, and by 2000 it was just 2%. • As workers left farms over the course of two centuries, other sectors created new jobs. • Whole new industries sprang up to employed former farm workers. • Shift in income from labor to capital or from many to a few with high skills leads to a reduction in overall demand. • The wealthy tend to save more of each marginal dollar than laborers. In the short run this reduces consumption. • Corporate profits as a share of US GDP are at 50-year highs. • Compensation to labor in all forms, including wages and benefits, is at a 50-year low • The ratio of CEO pay to average worker pay has increased from 70 in 1990 to 300 in 2005, and much of this growth is linked to the greater use of IT. • Aided by digital technologies, entrepreneurs, CEOs, entertainment stars, and financial executives have been able to leverage their talents across global markets and gain enormous financial rewards. http://www.theatlantic.com/business/archive/2011/10/why-the-massive-wealth-of-the-1-could-ruin-the-economy/247277/

9. http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259/http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259/

10. Reasons for Wage Divergence • In Figure 3.5: US wage divergence accelerated in the digital era (computer mass marketing began in the early 1980s). • The increase in the relative demand for skilled labor is closely correlated with advances in technology, particularly digital technologies. • Some technologies (like robotics, numerically controlled machines, computerized inventory control, and automatic transcription) have been substituting for routine tasks, displacing those workers. • Other technologies (like data visualization, analytics, high-speed communications, and rapid prototyping) have amplified the contributions of more abstract and data-driven reasoning, increasing the value of those jobs.

11. Historic Trends in Automation • The 20th century was marked by accelerating mechanization of agriculture and of factory work. • The most productive firms reinvented and reorganized decision rights, incentives systems, information flows, hiring systems, and other aspects of the firm to get the most from technology. • This required different skill levels in the workforce. • Whole production processes, and even industries, were reengineered to exploit new information technologies. • Each dollar of computer hardware was often the catalyst for more than $10 of investment in organizational capital to take advantage of the information technologies. • Low factory wages in China have not insulated workers from being undercut by new machinery and the resulting organizational and institutional changes. • Foxconn, announced they plan to purchase 1 million robots over the next three years to replace much of their workforce. Robots will take routine jobs like painting, welding, and basic assembly.

12. http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259

13. Factory Working Conditions • Foxconn is China’s largest private employer (1,400,000 employees). • In March, a critical meeting occurred between Foxconn’s top executives and a high-ranking Apple official. The companies committed themselves wide-ranging reforms. • It promised to reduce work hours and significantly increase wages. • The reforms could create a ripple that benefits tens of millions of workers across the electronics industry. • Apple, last year has tripled its corporate social responsibility staff, and has re-evaluated how it works with manufacturers, and has reached out to worker advocacy groups it once rebuffed. • Shifts under way in China may prove transformative to global manufacturing say officials at over a dozen electronics companies. • No one inside Intel “wants to end up in a factory that treats people badly, that ends up on the front page.” • Nike has convened public meetings of labor, human rights, environmental and business leaders to discuss how to improve overseas factories. Gap Inc. has invited outside organizations to critique its purchasing practices. Patagonia shares its factory audits with competitors and has been a supporter of a an audit report clearinghouse. • But Hewlett-Packard hopes that by improving living conditions, turnover and training costs will fall. “If the people turn over every three months, think what that does to your quality,” said a Hewlett-Packard executive. • Often, the quality-of-life improvements requested by Western executives reduce a supplier’s profit. Within Apple, executives often believe improvements should be financed by suppliers, whereas suppliers say changes are not feasible unless Apple pays more. • Employees complained in March when Foxconn announced that workers’ hours would be reduced to China’s legal limits. Some companies raise wages to compensate for lost overtime. http://www.nytimes.com/2012/12/27/business/signs-of-changes-taking-hold-in-electronics-factories-in-china.html?pagewanted=1&_r=1&nl=todaysheadlines&emc=edit_th_20121227&adxnnlx=1356656440-PZLVTmAyNdxhOwHiwzXD4g&

14. Luring Factories to Relocate - 1 • Brazilian politicians used subsidies and the threat of continued high tariffs on imports to persuade Foxconn, which makes electronic devices in Asia for dozens of technology companies, to start producing iPhones, iPads and other devices near Sao Paulo. • A developing country like Brazil can adopt trade policies that would be difficult for the United States to do. Taking a hard line to reduce imports of technology goods and encourage domestic manufacturing could violate international trade agreements and set off a trade confrontation. • Protectionism is bad policy, many economists argue. Everyone benefits if countries focus on what they do best. • Trade barriers harm consumers by driving up prices. • Trade barriers undermine competitiveness by shielding industries from the market forces that stimulate innovation. • The debate is not just economic. Increasingly, it is political. http://www.nytimes.com/2012/08/05/business/the-ieconomy-nissans-move-to-us-offers-lessons-for-tech-industry.html

15. Luring Factories to Relocate - 2 • The resurgence of American auto manufacturing in the 1980s is an example of how an industry created tens of thousands of jobs. • Since June 16, 1983, Nissan has produced more than seven million vehicles in the United States. It now employs 15,000 people in the USA. The Tennessee factory makes more than a half-million vehicles including the new all-electric Nissan Leaf. • Other foreign carmakers built factories in America — Honda, Toyota, Hyundai, BMW, Mercedes-Benz and, most recently, Volkswagen. The Nissan engine plant in TN, for instance, exports engines to Japan. • Pressures were growing in 1979 for Nissan to break out of manufacturing in Japan. • Currency fluctuations made exporting more expensive. • Political pressure came from American anger as imports grabbed one-fourth of the United States market. • In May 1981, Japan agreed to limit exports to America with a 7 percent reduction from 1980 while the United States imposed a 25 percent tax on imported pickup trucks. http://www.nytimes.com/2012/08/05/business/the-ieconomy-nissans-move-to-us-offers-lessons-for-tech-industry.html

16. Luring Factories to Relocate - 3 • To train its new American engineers, Nissan flew workers to its Zama factory in eastern Japan. • There the Nissan officials, assisted by English-speaking Japanese workers taught the intricacies of the company’s production techniques to the Americans. • At first, Nissan guarded against quality concerns by shipping components from Japan or buying from Japanese companies that set up operations nearby. • Gradually, American parts makers were allowed to bid on supply contracts. The US Congress, passed a law in 1992 requiring auto makers to inform consumers of the percentage of parts in United States-made cars that came from North America, Asia or elsewhere. • Nissan’s Japanese suppliers were encouraged locate production in the USA. http://www.nytimes.com/2012/08/05/business/the-ieconomy-nissans-move-to-us-offers-lessons-for-tech-industry.html

17. Factory Innovation • Companies with their research and manufacturing employees close together might be more innovative than businesses that develop a design and send it overseas for low-wage workers to make. • Clusters of manufacturers, where workers and ideas can naturally flow between companies, may be more productive and innovative than if they were spread. • Instead of a sequential process where you look at product design and then how to manufacture it, there is a simultaneous process. • Experts are researching whether such strategies offer the same benefits for most businesses — and examining how this might show up in national data on innovation, productivity and growth. • Companies with products early in their life cycle seemed to benefit more than those with products on the market for years. • Companies making especially complicated or advanced goods, from new medicines to new machines also benefit. Economists said that while the link between making and innovating within individual businesses was not yet well established, the link between making and innovating between different companies was. • In a “spillover” effect: manufacturing companies near one another create a kind of commons. • Workers exchange ideas when they socialize or when they switch jobs, taking their knowledge with them. • Factories draw other companies, who compete to offer them goods and services. • An MIT economist analyzed what happened to towns after large manufacturing plants, like a BMW factory, moved in. • Other factories in the town became more productive. • Wages rose, too. http://www.nytimes.com/2012/12/14/business/companies-see-high-tech-factories-as-fonts-of-ideas.html?nl=todaysheadlines&emc=edit_th_20121214&pagewanted=print

18. McCloughlin Chapter 6 – Internal Analysis • Internal analysis aims to identify strengths, weaknesses, and limitations of an organization • Can be at firm or business levels • Seeks to find responsive strategies • Four aspects of internal analysis • Financial performance • Non-financial performance measures • Analysis of strengths and weaknesses • Prioritization of threats and opportunities • Successful strategy matches strengths with competitor weaknesses and market needs

19. Financial Performance • Sales and profitability are widely used for performance evaluation • Sales increases are an SCA due to scale economies and experience curves • Issue of short term effects such as promotions • Need to couple analysis of sales with analysis of satisfaction and loyalty • Market and customer inertia (delays) even if value proposition changes • Firms need to establish priority between sales growth and profitability • Amazon sacrifices profit to gain market share • Ultimately, the goal is profit for the firm or sustainability for the not-for-profit organization • An often used measure of profit is ROA (Return on Assets)

20. Shareholder Value Analysis • Excellent discussion on McLoughlin pages 101-102 • The idea is that each business should generate profits from an investment that meet or exceed cost of capital • Cost of capital can be from borrowing or equity • Weighted average of debt and equity is used • Typically equity has higher cost, so firms tend to borrow • Strategies to increase shareholder value: • Increase profit by reducing costs or by increasing revenue with the same amount of capital (cost reduction in Ch 8) • Invest in high return products • Reduce cost of capital (increase debt to equity ratio) • Use less capital (since assets are not free) • Difficulty in estimating value of long term initiatives • Risks in reducing investments (through outsourcing) • Loss of control over quality • IP risks • Increase debt to equity ratio exposes firm to leverage issues • Firms that use SVA tend to be focused and decentralized (ex: WFC)

21. Performance Measures ReflectingLong-Term Profitability Customer Satisfaction/ Brand Loyalty Long Term Profits Current Performance Product/Service Quality Brand/Firm Associations Relative Cost New Product Activity Manager/Employee Capability and Performance Figure 6.1 Figure 7.1

22. Non-financial Performance Measures • Customer satisfaction and brand loyalty • Identify problems and causes of dissatisfaction • Best information is from defecting customers • Use exit interviews • Measure size and intensity of attached customer group • Base lifetime value of a customer on usage and time period they might remain attached to the brand or firm • Track comparisons with competitors over time • Product and service quality (compared to competitors) • Brand and Firm associations • Perceived quality (based on past products or quality cues) • Other associations • These can be monitored by surveys • Relative cost, often determined by analysis of competitor products. • Result may be component de-emphasis such as stressing economy rather than handling (see figure 6.2). • This analysis may play a key role in positioning and promotion strategies • Innovation – does the organizational culture support innovation (note Booz study in which most executives say their organizations do not) • Time to market? • Is the process from concept to market well managed? • What is the track record of new products? • Human resources - healthy organizations motivate and develop their employees (sustain salesperson attitude?) • Heritage – values known and accepted throughout an organization (these influence employees and the brand) • Benchmarking is comparing business component performance with others (as best practices)

23. More Expensive Inferior Superior Less Expensive Relative Cost vs. Relative Performance - Strategic Implications Change: • -Design • -Manufacturing/Systems Ignore Value Analysis • -Raise prices • -Promote Cost Reduction Our Component is Value Analysis • -De-emphasize • -Upgrade Value Analysis • -Emphasize/promote • -Leave it alone Figure 6.2

24. Threats and Opportunities • Which of the external threats and opportunities are most relevant to the firm? • Prioritize threats and opportunities according to immediacy and impact • Highest priority to imminent threats of high impact • Opportunities can be ranked similarly • Time to strategy implementation needs to be factored into assessment of immediacy • Threats can be in the form of a problem or a liability • Problems usually require aggressive action • Strategic liabilities (absence of a competency or asset) usually can be handled by adjusting strategies • Immediate and major opportunities should be pursued quickly and decisively (MSFT’s shift to internet)

25. Structuring Strategic Decisions Organizational Strengths and Weaknesses Competitor Strengths and Weaknesses Strategy Development • Strategic Investment • Functional Strategies and Programmes • Value Proposition • Assets and Competencies Market Needs, Attractiveness, and Key Success Factors Figure 6.4

26. Key Ideas • Sales and profitability analysis provide an evaluation of past strategies and an indication of the current market viability of a product line. • Shareholder value holds that the flow of profits from an investment should exceed the cost of capital (which is the weighted average of the cost of equity and cost of debt). Routes to achieving shareholder value – such as downsizing, reducing assets employed, and outsourcing – can be risky when they undercut assets and competencies. • Performance assessment should go beyond financials to include such dimensions as customer satisfaction/brand loyalty, product/service quality, brand/firms associations, relative cost, new product activity, and manager/employee capability and performance. • Assets and competencies can represent a point of advantage, a point of parity or a liability. Threats and opportunities that are both imminent and important should trigger strategic imperatives, programs with high priority.