strategy patching & coevolving
TRANSCRIPT
Product Life Cycles
• Product Life Cycle – shows the stages that products go through from development to withdrawal from the market
• Product Portfolio – the range of products a company has in development or available for consumers at any one time
• Managing product portfolio is important for cash flow
Product Life Cycles
• Product Life Cycle (PLC):– Each product may have a different life cycle– PLC determines revenue earned– Contributes to strategic marketing planning– May help the firm to identify when
a product needs support, redesign, reinvigorating, withdrawal, etc.
– May help in new product development planning
– May help in forecasting and managing cash flow
Product Life Cycles
• The Stages of the Product Life Cycle:– Development– Introduction/Launch– Growth– Maturity– Saturation– Decline– Withdrawal
Product Life Cycles
• The Development Stage:• Initial Ideas – possibly large number• May come from any of the following –
– Market research – identifies gaps in the market– Monitoring competitors– Planned research and development (R&D)– Luck or intuition – stumble across ideas?– Creative thinking – inventions, hunches?– Futures thinking – what will people be using/wanting/needing
5,10,20 years hence?
Product Life Cycles
• Product Development: Stages– New ideas/possible inventions– Market analysis – is it wanted? Can it be
produced at a profit? Who is it likely to be aimed at?
– Product Development and refinement– Test Marketing – possibly local/regional– Analysis of test marketing results and
amendment of product/production process– Preparations for launch – publicity, marketing
campaign
Product Life Cycles
• Introduction/Launch:– Advertising and promotion campaigns– Target campaign at specific audience? – Monitor initial sales– Maximise publicity– High cost/low sales– Length of time – type of product
Product Life Cycles
• Growth:– Increased consumer awareness– Sales rise– Revenues increase– Costs - fixed costs/variable costs, profits may
be made– Monitor market – competitors reaction?
Product Life Cycles
• Maturity:– Sales reach peak– Cost of supporting the product declines– Ratio of revenue to cost high– Sales growth likely to be low– Market share may be high– Competition likely to be greater– Price elasticity of demand?– Monitor market – changes/amendments/new
strategies?
Product Life Cycles
• Saturation:• New entrants likely to mean market is ‘flooded’• Necessity to develop new strategies becomes more pressing:
– Searching out new markets:• Linking to changing fashions• Seeking new or exploiting market segments• Linking to joint ventures – media/music, etc.
– Developing new uses– Focus on adapting the product– Re-packaging or format– Improving the standard or quality– Developing the product range
Product Life Cycles
• Decline and Withdrawal:– Product outlives/outgrows its usefulness/value– Fashions change– Technology changes– Sales decline– Cost of supporting starts to rise too far– Decision to withdraw may be dependent on
availability of new products and whether fashions/trends will come around again?
The Boston Matrix
• The Boston Matrix:– A means of analysing the product portfolio
and informing decision making about possible marketing strategies
– Developed by the Boston Consulting Group – a business strategy and marketing consultancy in 1968
– Links growth rate, market share and cash flow
The Boston Matrix
• Classifies Products into four simple categories:
• Stars – products in markets experiencing high growth rates with a high or increasing share of the market
- Potential for high revenue growth
The Boston Matrix
• Cash Cows:– High market share– Low growth markets –
maturity stage of PLC– Low cost support– High cash revenue –
positive cash flows
The Boston Matrix
• Dogs:– Products in a low growth
market – Have low or declining
market share (decline stage of PLC)
– Associated with negative cash flow
– May require large sums of money to support
Is your product starting to embarrass your company?
The Boston Matrix
• Problem Child:- Products having a low
market share in a high growth market
- Need money spent to develop them
- May produce negative cash flow
- Potential for the future? Problem children – worth spending good money on?
The Boston Matrix
• Implications:• Dogs:
– Are they worth persevering with?– How much are they costing?– Could they be revived in some way?– How much would it cost to continue
to support such products?– How much would it cost to remove
from the market?
The Boston Matrix
• Implications:
• Problem Children:– What are the chances of these products
securing a hold in the market?
– How much will it cost to promote them to a stronger position?
– Is it worth it?
The Boston Matrix
• Implications:
• Stars:– Huge potential– May have been expensive to develop– Worth spending money to promote– Consider the extent of their product life cycle
in decision making
The Boston Matrix
• Implications:• Cash Cows:
– Cheap to promote– Generate large amounts of cash –
use for further R&D?– Costs of developing and promoting
have largely gone– Need to monitor their performance –
the long term?– At the maturity stage of the PLC?
The Product Life Cycle and the Boston Matrix
Sales
Time
AB
C
D
The product portfolio – four products in the portfolio
(1)
(1) ‘A’ is at maturity stage – cash cow. Generates funds for the development of ‘D’
(2)
(2) Cash from ‘B’ used to support ‘C’ through growth stage and to launch ‘D’. ‘A’ now possibly a dog?
(3)
(3) Cash from ‘C’ used to support growth of ‘D’ and possibly to finance extension strategy for ‘B’?
Importance of maintaining a balance of products in the portfolio at different stages of the PLC – Boston Matrix helps with the analysis
Kotler on Marketing
1-28
Poor firms ignore their competitors; average firms copy their competitors; winning firms lead their competitors.
Chapter Objectives
– Who the primary competitors are– How to ascertain their strategies, objectives,
strengths and weaknesses, and reaction patterns– How to design a competitive intelligence system– Whether to position as market leader, challenger,
follower or nicher– How to balance a customer versus
competitor orientation
1-29
Figure 9-1: Porter’s Five Forces Determining Segment Attractiveness
1-30
Competitive Forces
Threat of:Threat of:
1.1. Intense segment Intense segment rivalryrivalry
2.2. New entrantsNew entrants
3.3. Substitute productsSubstitute products
4.4. Buyers’ growing Buyers’ growing bargaining powerbargaining power
5.5. Suppliers’ growing Suppliers’ growing bargaining bargaining powerpower
Identifying Competitors
• Industry Concept of Competition– Number of Sellers and Degree of Differentiation
• Pure monopoly –
• Oligopoly – – Pure oligopoly – few firms, same products– Differentiated oligopoly – few firms, different products e.g.
cars,
• Monopolistic competition –
• Pure competition
1-31
Identifying Competitors
– Entry, Mobility and Exit Barriers
– Cost Structure of different companies
– Degree of Globalization
1-32
• Market Concept of Competition
– Competitors are companies that satisfy the same customer need in a given market
Identifying Competitors
• Direct Competitors – Offer similar products and services to the same
customers.
• Indirect Competitors– Sell different products to the same industry.
1-34
Analyzing Competitors
• Strategies– Strategic Group is a group of firms following the
same strategy in a given target market.
1-36
Analyzing Competitors
• Objectives – what are the competitors’ objectives?
1-37
Figure 9-5: A Competitor’s Expansion Plans
Analyzing Competitors
• Strengths and Weaknesses– A firm will occupy one of six competitive
positions:• Dominant
• Strong/Independent
• Favorable – opportunity to improve position
• Tenable – can be maintained or defended against possible attack
• Weak
• Nonviable – no opportunity for improvement1-38
Analyzing Competitors
– Three Variables to Monitor When Analyzing Competitors:
• Share of market• Share of mind/Top of mind recall• Share of heart/Customer preference
1-39
Designing The Competitive Intelligence System
– Classes of Competitors• Strong versus Weak• Close versus Distant• “Good” versus “Bad”
1-40
Competition tactics..
• Adidas-Salomon AG acquired Reebok in a friendly takeover worth euro3.1 billion (US$3.8 billion
• Adidas has its roots in soccer and track and field,
• while Reebok's line of footwear and athletic gear is visible across American sports…
Designing Competitive Strategies
• Market-Leader Strategies (e.g. Microsoft, P&G, Coca Cola, Wal-Mart)– Expanding the Total Market by looking for the
following:• New Users
– Market-penetration strategy– New-market segment strategy– Geographical-expansion strategy
• New Uses• More Usage
– Defending Market Share against competition
1-44
– Defense Strategies• Position Defense – building superior brand • Flank Defense – erecting outposts to protect a weak front• Preemptive Defense – attack before enemy starts its offence• Counteroffensive Defense – meet attacker frontally or hit its flank,
invade market territory, exercise political or economic clout• Mobile Defense
– Market broadening – shift in focus to underlying generic need– Principle of the objective – clearly defined attainable objective– Principle of mass – concentrate efforts on enemy's weakness– Market diversification – move into unrelated industries
• Contraction Defense– Planned contraction (Strategic withdrawal)
1-45
Designing Competitive Strategies
Designing Competitive Strategies
– Brand-extension strategy– Multibrand strategy– Heavy advertising and media pioneer– Aggressive sales force– Effective sales promotion– Competitive toughness– Manufacturing efficiency and cost cutting– Brand-management system
1-46
Designing Competitive Strategies
• Market-Challenger Strategies (e.g. PepsiCo, Ford)– Defining the Strategic Objective and
Opponent(s)• It can attack the market leader• It can attack firms of its own size that are not doing
the job and are underfinanced• It can attack small local and regional firms
• Choosing a General Attack Strategy
1-47
Designing Competitive Strategies
– Choosing a General Attack Strategy• Frontal Attack – matches the 4Ps • Flank Attack – targets opponent
weaknesses• Encirclement Attack – “blitz” or grand
offensive on several fronts• Bypass Attack – attacking easier markets• Guerilla Warfare – small, intermittent
attacks aimed at demoralising opponent1-48
Designing Competitive Strategies
– Choosing a Specific Attack Strategy• Price-discount
• Lower price goods
• Prestige goods (Value pricing)
• Product proliferation
• Product innovation
• Improved services
• Distribution innovation
• Manufacturing cost reduction
• Intensive advertising promotion1-50
Designing Competitive Strategies
• Market-Follower Strategies (Fast-second)• Product imitation• Product innovation• Four Broad Strategies:
– Counterfeiter – duplicates leader’s product and sells it on black market or through disreputable dealers
– Cloner – emulates leader’s products, name & packaging with slight variations
– Imitator – copies some things from leader but maintains differentiation in packaging, advertising, pricing, location
– Adapter – takes lead products and adapts or improves them
1-51
Designing Competitive Strategies
• Market-Nicher Strategies– High margin (niche) vs. high volume (mass market)– Nicher Specialist Roles
• End-user specialist– Value-added reseller
• Vertical-level specialist• Customer-size specialist• Specific-customer specialist• Geographic specialist
1-52
MBA 296-1 Fundamentals of Business
Marketing: David Robinson
• Class 5:An Introduction to Competitive Strategy
• © D. Robinson, 2006
Haas School of BusinessHaas School of Business
© David Robinson, 2006
• Limited right to reproduce granted to students enrolled in MBA296-1 UC Berkeley, Spring 2006 only
Competitive Strategy
• Taking decisions under conditions of uncertainty• Situation analysis• Porter’s Five Factor Model of Industry
Competitiveness• SBUs and Strategic Planning Models• Competition, and why it is good for us
• What we’d like you to remember about Marketing
Taking decisions under conditions of uncertainty
• Most managerial situations involve incomplete (or perhaps untrustworthy information)
• We have no control over much of the future• We do have choices about our strategy• Firms use various techniques to handle the
uncertainty.
Risk Assessment
1. Identify what could go wrong– Is our stadium built on an active earthquake
fault?
2. Consider the timeframe
3. Evaluate the impact
Impact
Impact
Immediacy
Far DistantNow
Catastrophic
NoticeableSoon
Moderate
Competitor entryinto a market where
we are Leader
Drug found to havelethal complications
Patent challenged successfully; we
have to split profits
What to do
Impact
Immediacy
Far DistantNow
Catastrophic
NoticeableSoon
Moderate
Plan exitstrategy
Researchstrategy options
Monitor,continue to
assess likelihood
What to do
Impact
Immediacy
Far DistantNow
Catastrophic
NoticeableSoon
Moderate
Manage with this in mind:
Don’t over-invest
Pre-plan reaction:“no surprise”
Plan possibleresource shift
What to do
Impact
Immediacy
Far DistantNow
Catastrophic
NoticeableSoon
Moderate
Abandoncurrent strategy
Allocate significantresources tocounteract
Small shiftin resources
Example:Increase ad
spending
Risk Analysis: Likelihood
• Clearly some bad events are more-likely than others
• It’s reasonable to make an assessment of likelihood (a “forecast”):– Competitor will eventually enter our market– Sky will fall in
• Be careful not to replace a probability estimate with “hope”– Hope is not a strategy
[A parenthetical note about forecasts]
• Many “industry experts” are wrong• The market for DVD recorders for 2005
was estimated at
47 million units*Actual sales ?
* WSJ this 11/05
About 3 million, worldwide
Risk Analysis: Planning
Once risks have been identified and assessed:– Consider alternative courses of action that will
avoid the risk (risk avoidance)– Consider mitigation– Make contingency plans
Scenario Planning: Two Sets of Variables
1. Things we can do: strategy choices
2. Things that happen to us– We have no control over them– They are in the future– They are “States of Nature”
(or “True State of the World”)
Scenario Planning: How to do it
1. Identify key variables (drivers) such as:1. Market entry / non-entry by competitor2. Prices of raw materials
2. Constrain continuous variables into ranges, e.g. “High, medium, low”
3. Gather together sets of variables into specific scenarios and give them cute names:
“Good times roll” “All hell breaks loose”
1. What can happen in the Real World?
Scenario 1
Scenario 2
Scenario 3
These are future“states of Nature”
3. Estimate of the payoffs
A B C D
Scenario 1
Scenario 2
Scenario 3
Potential Strategies
Note:If we choose A, we do well . . .
unless the TSotW is 3
Note:If we choose D, we have a great payoff, but only if the TSotW is 3
4. Develop an algorithm to choose
1. Which strategy is most-good, under most scenarios?
2. Which strategies lead to really-bad outcomes under some scenarios?[Most firms will opt for a strategy that gives a pretty-good payoff and small downside, rather than the strategy that gives the single highest payoff.]
3. Are some scenarios more likely than others?[Note: this comes late in the process. Warning: Don’t let “hope” substitute for judgment.]
4. Choose a strategy
5. Risk Analysis and Regret Analysis
1. Risk analysis: Re-test the chosen strategy and be sure we are prepared for the worst: a. Is there any possible mitigation? b. What is the contingency plan
2. Regret analysis: How much are we losing from the path-not-taken, if the True State of the World is not what we expect?
Example: US Producer entering Asian Markets With a well-heeled competitor
Country’s Economic
Situation
Competitor’s Market Entry Behavior
1Enter usingdistributors
2Enter withour own
retail chain
3Delay
do nothing
4Exit
this line of business
Scenario 1Strong
a. Enters hi price------------------b. Enters low price
etc
Scenario 2Terrific
a. Enters hi price------------------b. Enters low price
etc
Scenario 3Craters
a. Enters hi price------------------b. Enters low price
Our Firm’s Possible ActionsHow likely is this?
Forecast
Risk
Regret analysis
A summary on uncertainty
• Most risks can be identified and assessed in advance– Consider avoidance, mitigation and contingencies
• We can assess the effect of an uncertain world using sensitivity analysis
• Scenario planning enables the firm to choose a robust strategy– Most future evens will come as no surprise
Defining Strategy
• Strategy is the work of Generals (Strategos)
• Setting the broad objectives of the firm
• Combines planning and implementation
• Good strategy seeks synergies
• Strategy invariably involves choices– The middling way is usually a muddle
A Situation Analysis Defines Where We Stand (as a firm
• A way to gather together facts
• Colloquially a “SWOT” analysis (but don’t use this term—it’s a cliché)
“SWOT” Analysis
Strength Weakness
Opportunity Threat
Internal
External
“good” “bad”
Culture/wishes of owners
Industry structure
Limitations of a “SWOT” analysis
• It’s a cliché
• Usually a laundry list, rather than identifying “most important,” etc
• Some facts can be both +ve and -ve
Industry Structure
• Some industries seem to have “gentlemanly” competition – others are more rivalrous – why?
• Should we enter this industry?– Yes, Exxon (briefly) made word processors!– GE just exited the re-insurance business
Industry Structure
Power of buyersPower of suppliers
Threat of new entrants
Threat of substitutes
Industry rivalry
[Michael Porter]
An Attractive Industry
• Has unserved, price insenitive customers, and a growing market
• Has huge barriers to entry, and no barriers to exit
• Has low supplier power, and low buyer power
• Has no foreseeable substitute
The Three Generic Strategies[M. Porter]
1. Cost leadership (not price leadership)Wal-mart, SouthWest Airlines, Home Depot
2. DifferentiationHarley Davidson, Nextel (Direct Connect)
3. FocusCross pens, Mita (copiers), Starbucks
Critique of Porter
• Good for industries, which ones to enter
• Less good for assessing a firm’s specific problems
• Are there more than just the three strategies?
Strategic Business Units
• SBUs are the genius of the American system• Running each line of business as a small
company• What do we need to make a Division an SBU?
• Why don’t we just spin them off as a small company?
• Can be acquired and divested
Strategy Decisions
• Acquisitions & Alliances
• Divestitures
• Entering new markets• Should John Deere (tractors) make lawn mowers?
• Entering new “attractive industries”• Should Apple sell tunes online?
SBU’s are the Key to Strategy Planning
• Johnson & Johnson has almost 200 units (similarly 3M)
• GE has several major business units, e.g.– Finance– Medical Scanners– Locomotives
• Did the Korean firms trip up over this?
BCG Matrix is popular
• When looking at the whole firm
• When deciding what lines of business to enter (e.g. IBM consulting) or exit (IBM printers, & ? PCs)
The Boston Consulting Group’s Growth-Share Matrix
20%-18%-16%-14%-12%-10%- 8%- 6%- 4%- 2%- 0M
arke
t G
row
th R
ate
10x 4x 2x 1.5x 1x Relative Market Share
.5x .4x .3x .2x .1x
Dogs 87
3 ?Question marks
? ?2
1
Cash cows
6
Stars
5
4
20%-18%-16%-14%-12%-10%- 8%- 6%- 4%- 2%- 0M
arke
t G
row
th R
ate
10x 4x 2x 1.5x 1x Relative Market Share
.5x .4x .3x .2x .1x
Dogs 87
3 ?Question marks
? ?2
1
Cash cows
6
Stars
5
4
Invest heavily “Nurture”Divest Sort out
How firms use BCG matrixShould Disney have a Cruise Ship
Line?
Cruise lines are fast-growing, but we have low market-share
The “Go” network—a Question Mark or a Dog?
“TPR”, movies and storesare likely Cash Cows
GE Planning Grid is similar (Fig 4.3)
The axes are multi-dimensional
Market attractiveness (more than just size)
Competitive strength (more than just share)
Harvest or divest
Build
Focus and manage
Strong Medium WeakLow
High
Limitations to the Business Strategy Models
• Great at the CEO level
• Assume you have a portfolio of products/divisions
• Most marketing managers have to manage a division within what is given
Dealing with the Competition
• Competition is good for us
• We can choose whom to attack and how to attack
• We should anticipate attacks and have some responses pre-planned
Competition is good
• Not just for the economy as a whole, but also for us as a firm
• Promotes– Innovation– Cost cutting and efficiency
• Examples: – WWF acquires WCW – French Post Office Camionnettes
• Peugeot• Citroën• Renault
1. Identify Competitors
• Existing• Their exit barriers• Their “personality” (history)• Competitive strengths and weaknesses
• Likely future competitors (or substitutes)• Entry barriers• How attractive is our market?
2. Be Clear about our position
• Market share (and hence our position) • Market leader, (Campbells soup 70%)
• Challenger (Avis), or• Follower (DHL)
• Competitive strengths• Are they “sustainable” or can they be cloned?
Do you believe in “The Rule of Three?” Hypothetical Market Structure & Strategies
40%
Marketleader
30%
Marketchallenger
20%
Marketfollower
Expand MarketDefend Market Share
Expand Market Share
Attack leaderStatus quo
Imitate
10%
Marketnicher
Special-ize
Why would profitability drop if we go after a very large market share?
Pro
fita
bili
ty
Market share0% 25% 50% 75% 100%
Optimal market share
3. Define the Competition
• Good versus bad competitorsMicrosoft … Starbucks
• Close versus distant Does it affect Haas if DVC adds a course on Insurance Management? (Should we match?)
• Strong vs. WeakShould American Airlines try to “kill” UA or America West?
4. Choose whom to attack
• Which markets we enter– Geographic and other segmentations
(e.g. stay out of “hospital” customers)
• Which lines of business to be in (stay, divest or enter)
• Which products to imitate (or leap-frog)And, of course, competitors will try and do this to us too!
Defensive Strategies
• Be prepared for an attack• Assess it’s seriousness• Take action:
– Withdraw, abandon• E.g. UPS and Eastern Europe
– Defend in part• E.g. UA withdraws from Ontario, consolidated SFO
– Defend “to the death” • E.g. e-Bay vs Amazon’s auction business
Possible Defensive Actions
• Reinforce our position– Product superiority– Channel “locked up”– Keeping our loyal customers
• Broaden the market• Counter-offense:
– Go after their home market (or “loyals”)– Beat you at your own game (SBC + Dish Network)
Summary
• The key to competitive strategy– Be very self-aware as a firm– Be “paranoid” about competitors– Anticipate competitor moves
1. There’s much more to Marketing than just promotion
• We focus on the value proposition
• We avoid a “product focus”
• We aim to give a customer areason to buy
2. There’s no such thing as Mass Marketing
• All markets are segmentable
• The one with the tightest segments wins– Narrowly defined– Completely meet their needs
(example: Netflix)
3. Live and die by your brand
• Make sure that the brand has meaning– Underlying product benefits are a real value to
consumers
• Manage all of the images and associations
• Above all, consistency
• Nothing succeeds like success
4. In any market, someone wants to pay more
• It’s the job of the firm to meet that need– Many firms don’t charge enough– Competing on price alone is a guarantee of “profitless
prosperity” • Example: JC Penney
• Corollary: In any market, some people can only afford to pay less– Come up with a way to meet their needs profitably
5. Be good to your channeland your channel will be good to you
• Nurture channel members—“walk in their moccasins”—try to think what motivates them
• Think win-win: Develop appropriate incentives
• Don’t be afraid to reconfigure the channel• A little bit of transparency will go a long way
• It’s nice to be nice
6. Cute ads win competitions,not customers
• There’s much more to promotion than mass media advertising—question the media plan
• Ask: “What’s the promotional task?” then develop an integrated promo-mix to achieve the goal
Patching approach
• Focuses on realizing synergies from shared capabilities & core competencies'.
• Through this value is added in multi-business companies.
Two related frameworksParental Framework & Patching Approach
• Multi-business co’s create value by influencing the business they own.
• Best parent co’s create more value than rivals.
Where Opportunities exist
• Size & Age• Management• Outsourcing & strategic alliances at strategic points of
value chain can add value.• Linkages with other businesses• Common capabilities• Specialized expertise
• ou
Patching
• Role & ability of corporate managers to create value in the mgt. of multi-busines co’s.
• Process through which CEO’s etc routinely remap businesses to match rapidly changing mkt’ ing opportunities.
• Can take from of adding, splitting, controlling, transferring or exiting chunks of tasks or businesses.
Patching
• More useful when markets are rapidly changing.
• Only way to add value beyond the sum of businesses within a company.
• Based on the postulate that strategic analysis should center on strategic processes more than stgic’ Planning.