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: Budget airlines would be an example of A) Firms with similar barriers to mobility B) A strategic group C) Firms that pursue similar competitive strategies D) All of the above 2: Indirect competitors may be firms A) In other geographic areas that may expand B) With no similar strategic interests C) With brands customers normally associate in a given use or context D) All of the above 3: If a firm lowers prices to achieve volume increase while unit costs remain constant, which will certainly occur? A) Gross margin percentage will fall B) Revenue will always decline C) Net profit will decline D) Net profit will stay the same 4: Which of the following are potential sources of competition? A) Suppliers that move downstream B) Firms with products in related product areas C) Weak competitors that become strong through mergers or acquisitions D) Any of the above 5: An important aspect of understanding competitor objectives is A) Gauging the level of commitment to a business B) Product use associations C) Customer choices D) Density of the market segment 6: Once a firm has found a competitive advantage A) It must experiment with small new product introductions since no advantage lasts forever B) Barriers to entry will drive away competition C) Customer preferences are stable, so the firm need not continue to innovate D) None of the above

Quiz: Pass/Fail = 50% 1: The market introduction phase of a PLC is characterized by low revenue and negative profit. Which of the following is true? A) Firms can use the profit from a more mature product to subsidize products in the market introduction phase B) Legal restrictions prevent firms from using profit from one product to subsidize development of another product C) Small firms with a promising but money losing product have no incentive to join a large well funded firm D) All of the above are false 2: A regional markets cross subsidy strategy is used when A) Sales of crosses in one regional market create a price ceiling for other regional markets B) High product profit in one area or country is used to gain advantage in another area or country C) Regional product price differences are easily arbitraged D) A firm markets a product in several regions to achieve economies of scale 3: As illustrated by the outcome of the Bhopal industrial accident, A) Political authorities in poor areas remain committed to high standards of public safety even if it means loss of jobs B) Parent company managers are usually found guilty of a crime when a foreign subsidiary is negligent C) Firms seek to build legal barriers between the parent company and foreign subsidiaries D) Global parent companies control all important operating decisions in their foreign subsidiaries 4: Firms having a strategic necessity A) Will have an advantage over other firms B) Gain no advantage from having the strategic necessity C) Are positioned to gain market share from having the strategic necessity D) Usually are bigger than competitor firms 5: Which is characteristic of a mature market A) Pricing pressure and overcapacity B) High profit C) Interested customers D) Differentiated products 6: When is industry profit likely to be lowest? A) Product introduction phase B) Product growth phase C) In mature product markets D) We do not make these generalizations

Exam and Grading Reminders • Midterm is 20% of course grade • Saturday December 22nd at 9:00 • Room 822 • Presentation topics due today. Will be 20% of course grade • Note the university policy about plagiarism (handbook) • Copying is ok, as long as it is properly attributed • Quizzes are 15% of course grade. Currently ½ class is failing and 25% had 100% • Participation is 15% of course grade. Absent = 0% • A bit of math: 70%*63% + 33%*15% + 0%*15% is an F. • Typical exam grade in my courses is C+ (65%) • This is a required course and no appeal for absences

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

Bhopal India, December 3rd, 1984

Anatomy of the World’s Deadliest Industrial Disaster • In total, 15,000 people died and 150,000-600,000 people were injured. • Union Carbide had exported "untested, unproven technology" to the Indian plant. Unlike Union Carbide plants in the USA, its Indian subsidiary plants were not prepared for problems. No action plans had been established to cope with incidents of this magnitude. This included not informing local authorities of the dangers of chemicals used and manufactured at Bhopal. • Pressure from competition in the chemical industry led UCIL to implement "backward integration" – the manufacture of raw materials and intermediate products for formulation of the final product within one facility. This was inherently a more sophisticated and hazardous process • The local government was aware of safety problems but was reticent to place heavy industrial safety and pollution control burdens on the struggling industry because it feared the economic effects of the loss of such a large employer • Reports issued months before the incident by scientists within the Union Carbide corporation warned of the possibility of an accident almost identical to that which occurred in Bhopal. The reports were ignored outright and never made it to senior staff. Due to falling sales, staff had been laid off and safety checks became less and less frequent. • By the end of October 2003, according to the Bhopal Gas Tragedy Relief and Rehabilitation Department, compensation had been awarded to 554,895 people for injuries received and 15,310 survivors of those killed. The average amount to families of the dead was $2,200. • Union Carbide attempted to distance itself from the tragedy by blaming its subsidiary in India and made stories about a Sikh extremist group and disgruntled former employees bent on sabotaging the plant. http://toxipedia.org/display/toxipedia/Bhopal+Disaster

From the US National Institute of Health • At every turn, Union Carbide Corporation has attempted to manipulate, obscure, and withhold scientific data to the detriment of victims. The company has not stated exactly what was in the toxic cloud that enveloped the city on that December night • UCC discontinued operation at its Bhopal plant following the disaster but failed to clean up the industrial site completely. The plant continues to leak several toxic chemicals and heavy metals that have found their way into local aquifers. • UCC has shrunk to one sixth of its size since the Bhopal disaster. By doing so it placed a significant portion of UCC's assets out of legal reach of the victims. The company still operates under the ownership of Dow Chemicals and states on its website that the Bhopal disaster was "caused by deliberate sabotage". • UCC's Sevin production plant was built in Madhya Pradesh not to avoid environmental regulations in the U.S. but to exploit the large and growing Indian pesticide market. • Bhopal and its aftermath are a warning that the path to industrialization for developing countries is fraught with human, environmental and economic perils. • The US chemical giant DuPont learned its lesson of Bhopal in a different way. The company attempted for a decade to export a nylon plant from Richmond, VA to Goa, India. In its early negotiations with the Indian government, DuPont had sought and won a remarkable clause in its investment agreement that absolved it from all liabilities in case of an accident http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1142333/

“As the economy, led by the automobile industry, rose to a new high level in the twenties, a complex of new elements came into existence to transform the market: installment selling, the used-car trade-in, the closed body, and the annual model. (I would add improved roads if I were to take into account the environment of the automobile.)” Alfred P. Sloan, Jr., General Motors

“To be prepared is half the victory.” Miguel Cervantes

Markey Analysis Key Points • The emergence of submarkets can signal a relevance problem or opportunity. • Market analysis should assess the attractiveness of a market or submarket, as well as its structure and dynamics. • A usage gap can cause the market size to be understated (new uses, more frequent usage, new user groups). • Market growth can be forecast by looking at driving forces, leading indicators, and analogous industries. • Market profitability will depend on five factors – existing competitors, supplier power, customer power, substitute products, and potential entrants.

Dimensions of a Market Analysis • Emerging submarkets: how should the submarket be defined? • Actual and potential market and submarket size • Market and submarket growth • Market and submarket profitability, now and in the future. • Cost structure for various competitors • Distribution channel alternatives. Are they evolving? • Market trends and developments • Key factors needed to compete successfully

Market Analysis - Submarkets • Relevance – detecting and understanding emerging submarkets attractive to the firm’s assets and competencies • A great product will not sell if not relevant to consumer needs or wants • Consumer needs and wants defined by a combination of attributes, or uses. • The brand needs to be perceived as among the set considered to have the attribute. • The most successful brands are the only member of a set. • Emerging submarkets may be defined by: • Lower price points (budgets airlines) • Serving non-users (ease of use devices) • Niche markets (high performance sports equipment) • Systems solutions • Unmet needs (valet shopping service) • New technology (triple edge razors) • Consumer trends • Fading to irrelevance: print news (see case study p113), pay telephones. Successful transition: Fisher Body (1908) Figure 5.1

Marketing the Wrong Product SUV Hybrid Chapter 4 - Market and Submarket Analysis PPT 4-14

Customer Decision Process Brand Relevance Brand Preference Select Product Category or Subcategory Determine Brands to Consider Select Brand to Buy • SUV • Lexus • BMW • Mercedes • Mercedes Chapter 4 - Market and Submarket Analysis PPT 4-15

Market Analysis – Size and Growth • Potential market size might be underestimated • Large firms may avoid small markets, leaving attractive niche markets underserved • Some niches may generate substantial sales for a few firms (see mining equipment article from WSJ) • Note worldwide sales from a few factory clusters • Specialist ecosystems for logistics and production • Prediction of market sales highly important, and difficult – What are drivers of growth? Figure 5.1

Market Analysis – Forecasting Growth • Avoid extrapolation from past trends • Short term conditions may cause trend changes • The strategic interest is in prediction of turning points • Leading indicators of sales include • Demographic data, such as birth rates, or the number of elderly • Sales of related equipment • New market sales forecasts can be based on experience of analogous industries • Best if several analogous product classes can be found • Examine differences in product class experience • Submarket growth affects investment decisions • Must indentify and analyze current or emerging submarkets • For example, while the beer market is flat, micro breweries are growing Figure 5.1

Market Introduction Market Growth Market Maturity Sales Decline Total Industry Revenue Total Industry Profit Time The Product Life Cycle

Growth - Detecting Maturity and Decline • Market sales enter flat to declining phases after initial growth. Indicators include: • Price pressure caused by overcapacity and the lack of product differentiation (as competitors match product improvements) • Buyer sophistication and knowledge means they become less willing to pay premium prices for brand security • Sales of substitute products or technologies • Saturation – The number of potential first time buyers declines • No growth sources – market is fully penetrated (no new uses) • Customer disinterest – customer interest in new product announcements or applications declines • Conventional wisdom about avoidance of declining markets may be wrong • Firms may be exiting or disinvesting (encouragement?) • Surviving firm might be dominant and profitable in viable segments

Market Analysis - Profitability • Michael Porter’s five factor approach can be applied to evaluate submarket investment value (4.3): • Is this a business area in which the average firm will make money? (Easier to profit when market is profitable) • How intense is the competition among existing firms? • Larger number of competitors increases competition • How much power and commitment do competitors have? • Are competitor products differentiated from each other? • Level of fixed costs (effect of overcapacity on firms with fixed costs) • Exit barriers, such as long term contracts or specialized assets • Evaluate the threats from potential entrants and substitute products. • Barriers to entry? • Required capital investment • Scale economies • Distribution channels (Henkel) • Product differentiation • Substitute products can influence profitability or be a threat • Watch relative price and performance • Customer cost of switching • What is the bargaining power of customers and suppliers? • Customer power high when purchase is large relative to seller’s business (Note Wal-Mart) • When alternative suppliers are available • When the customer can backward integrate • How attractive are the market and its submarkets now and in the future? Figure 5.1

Porter’s Five-Factor Model ofMarket Profitability (4.3) Competition among Existing firms Threat of Potential Entrants Industry Profitability Threat of Substitute Products Bargaining Power of Suppliers Bargaining Power of Customers Chapter 4 - Market and Submarket Analysis Figure 4.3 Source: Adapted from Michael E. Porter, “Industry Structure and Competitive Strategy: Keys to Profitability” Financial Analysis Journal,July-August 1980,p.33. PPT 4-21

Market Analysis – Cost Structure and Distribution • Cost Structure • What are the major cost and value-added components for various types of competitor? • Useful to look at highest value added stages • Possibility of gaining control over a resource at high value added stage • Commodities will usually not be a key success factor due to the near impossibility of gaining pricing control • Distribution systems • Alternative channels? (Example: wine in supermarkets) • Channel trends • Where is the power in the channel, now and future? Figure 5.1

Market Analysis – Trends and KSFs • Market Trends • What are the trends in the market? • Difficult to distinguish between enduring trends and those that merely attract investment • Early adopters are often fickle • Key Success Factors • What are the key success factors, assets, and competencies needed to compete successfully? How will these change in the future? How can the assets and competencies of competitors be neutralized by strategies? Figure 5.1

Market Analysis - Key Success Factors • Assets and competencies: Strategic necessities • Absence will create weakness, but because others have these they do not convey advantage • Assets and competencies: Strategic strengths • Provide a basis of advantage • The assets and competencies superior to competitor’s • KSFs change over time. Some become irrelevant • Technology and innovation important for industrial firms during growth phase • Systems and marketing more important in mature market • Opposite in consumer products (marketing and distribution important in growth phase) Figure 5.1

Risks in High-Growth Markets • Competitive overcrowding • Unrealistic market share assumptions • Sales volume insufficient to support all competitors • Conditions for a surplus of competitors: • Highly visible markets and growth rates • High forecast and actual early stage growth • Discounting of threats to the growth rate • Few initial barriers to entry • Potential entrants with low visibility, causing underestimation of competitor commitment • Entry of a superior product • Changing key success factors as markets evolve or mature (tech companies may be unable to address customer use experience as product matures) • First generation technologies might not survive (which technology will dominate?) • Market growth falls below expectations (with capacity built for assumed high growth rates) • Price pressure from overcapacity (especially where scale is needed for high fixed costs) • Financial and organizational constraints • Distribution constraints (crowded channels, retailers limit the number of brands)

Risks of High-Growth Market Competitive Risk • Overcrowding • Superior competitive entry Firm Limitations • Resource constraints • Distribution unavailable Market Changes • Changing Key Success Factors • New technology • Disappointing growth • Price instability Figure 4.5

Key Concepts • Cost structure can be analyzed by looking at the value added at each production stage. • Distribution channels and trends will often affect who wins. • Market trends will affect both the profitability of strategies and key success factors. • Key success factors are the skills and competencies needed to compete in a market. • Growth market challenges involve the threat of competitors, market changes, and firm limitations.

“Small opportunities are often the beginning of great enterprises.” Demosthenes

“Most of the most important experiences that truly educate cannot be arranged ahead of time with any precision.” Harold Taylor

Environmental Analysis • What factors does Nestle consider for their organic growth strategy? • World population growth and longer lives (demographic factors) • Rising new economies with adequate incomes (economic factors) • The strategy is based on projecting current trends into the future • Environmental analysis can lead to creative product or strategy ideas • Direct and indirect impacts of trends are important • Rising disposable income has a direct impact on sales of certain goods • Increasing consumer attention to healthy foods and environments is an indirect impact • Without discipline the analysis becomes an out of control fishing expedition where every trend is important • A useful framework is to look at technological, economic, governmental, and consumer trends or forces

Environmental Analysis - Technology • Incremental innovations do not change the value proposition • These make the product more attractive or profitable • Firms good at incremental change have high commitment to the current model • Incentives to protect profitable niches • Assets, competencies and cultures are unlikely to support transformational innovation • Reaction to transformational innovation is often denial • Substantial innovations make existing products obsolete but do not change business models or value propositions (new generations of products • Transformational change causes change in business models and alter industry • Substantial or transformational innovations more likely from new entrants to an industry • Impact of new technology • Firms involved in old technology have long time to react (old tech lingers) • New technologies tend to be expensive and crude at first • High cost and low volume • Refinement over time • Old technology may continue to grow after introduction of new technology • Kodak’s film sales dropped in 2001 • Apple’s digital camera was introduced in 1994. Kodak had built a digital camera in 1975 • http://www.businessweek.com/stories/2006-11-26/mistakes-made-on-the-road-to-innovation • New technologies tend to create new markets rather than take away old markets Figure 6.1

Environmental Analysis - Government and Economy • What are the economic prospects and inflation risks for the countries in which the firm operates? How will they affect strategy? • Geographic diversification is one way to mitigate unknown risks • Need for effective communication within an organization, and flexibility to adapt to political surprises • What changes in laws and regulations are possible? What will be the impact? • Particularly important for global companies to monitor and assess political and legal developments in all countries in which they do business • Distinct differences in what different countries consider corruption at different times • What tax or other incentives are being developed that might affect strategy? • Forecasting and adjusting to recessions is important (declines in economic activity) • Necessary to find ways to communicate value in a recession without hurting the brand • Divert attention to value sub-brands • Bundle services • Demonstrate the value of quality • Use the downturn to market while other firms retrench • Use a strong balance sheet to gain advantage when rivals can not respond • Advantages gained tend to endure after the recession Figure 6.1

Environmental Analysis • Consumer Trends • What are the current or emerging trends in lifestyles, fashions and other components of culture? Why? What are their implications? • What demographic trends will affect the market size of the industry or its submarkets? • What demographic trends represent opportunities or threats? Figure 6.1

Environmental Analysis • General External Analysis Questions • What are the significant trends and future events? • What threats and opportunities do you see? • What are the key areas of uncertainty regarding trends or events that have the potential to impact strategy? • Evaluate strategic uncertainties in terms of their impact and immediacy • Impact in terms of importance and number of affected businesses • Immediacy in terms of probability • Timeframe for occurrence • Reaction time available versus time required to implement strategy • Vigilance • Executives and organizations tend to ignore or distort information that does not confirm current models • Organizations tend to reward ‘groupthink’ • Scenarios analysis is useful when additional information will not reduce uncertainty • Strategy-developing or decision driven scenarios • What strategic uncertainties are worth being the basis of a scenario analysis? • Relate scenarios to strategies Figure 6.1

Being Green Motivation Practical functional benefits to customers and firms Attack global warming Generate respect from customers/employees Environmental Analysis Chapter 5 - Environmental Analysis and Strategic Uncertainty PPT 5-35

Immediacy Low High High Impact Low Strategic Uncertainties Categories Monitor and analyse;contingent strategies considered Analyse In-depth; develop strategy Monitor and analyse Monitor Figure 5.2

Scenario Analysis Identify Scenarios Relate Scenarios to Existing or Proposed Strategies Estimate Scenario Probabilities Figure 5.3

Key Learnings • Environmental analysis in technology and consumer and government/economic trends can detect opportunities or threats to an organization. • The green movement provides opportunities to connect to customers and employees. • Impact analysis involves assessing systematically the impact and immediacy of the trends and events that underlie each strategy uncertainty. • Scenario analysis, a vehicle to explore different assumptions about the future, involves the creation of two to three plausible scenarios, the development of strategies appropriate to each, the assessment of scenario probabilities, and the evaluation of the resulting strategies across the scenarios.

Strategic Marketing 052 430