Marketing Management

Concept of Strategy:- The concept of strategy is central to understand the process of strategic management. The term Strategy is derived from a Greek word Strategos, which means generalship the actual direction of military force, as distinct from the policy governing its deployment. Hence the word Strategy means the art of the general. In business parlance, there is no definite meaning assigned to strategy. It is often used loosely to mean a number of things.

A Strategy could be:-

A plan or course of action or a set of decision rules making a pattern or creating a common thread;

The pattern or common thread related to the organization's activities which are derived from the policies, objectives and goals;

Related to pursing those activities which move an organization from its current position to a desired future state;

Concerned with the resources necessary for implementing a plan or following a course of action;

Connected to the strategic positioning of a firm, making trade-offs between its different activities and creating a fit among these activities; and

The planned or actual coordination of the firms major goals and actions, in time and space that continuously co-align the firm with its environment.

In Simplified terms, a strategy is the means to achieve the objectives.

In Complex terms, it may possess all the characteristics mentioned in the previous slide.

Strategy is one of the most significant concepts to have emerged in the subject of management studies in the recent past. Its applicability, relevance, potential and viability have been put to several test and it has emerged as a critical input to organizational success and has come in handy as a tool to deal with the uncertainties that organizations face. It has helped to reduce ambiguity and provided a solid foundation as a theory to conduct business: a convenient way to structure the many variables that operate in the organizational context and to understand their interrelationship.

Levels at which Strategy Operates:- For many companies, a single strategy is not only inadequate but also inappropriate. The need is for multiple strategies at different levels. In order to segregate different units or segments, each performing a common set of activities, many companies organize on the basis of operating divisions or simply, divisions. These divisions may also be known as profit centers or Strategic Business Units (SBUs). An SBU, is defined as Any part of a business organization which is treated separately for strategic management purpose.

Generally, SBUs are involved in a single line of business. A complementary concept to SBU, valid for the external environment of a company, is a Strategic Business Area (SBA). It is defined as A distinctive segment of the environment in which the firm does (or may want to do) business.

A number of SBUs, relevant for different SBAs, form a cluster of units under a corporate umbrella. Each of the SBUs has its own functional departments or a few major functional departments while common functions are grouped under the corporate level. The different levels of Strategy could be at the Corporate Level, the SBU Level and at the Functional Level.

Fig:- Different Levels of Strategy

The organizational levels are those of the corporate, SBU and functional levels. The Strategic levels are those of the corporate, SBU and functional level strategies.Corporate OfficeSBUASBUBSBUCFinanceOperationsHRMInformationMarketingLevels of ManagementCorporateSBUFunctionalLevels of StrategyCorporate - LevelBusiness - LevelFunctional Level

Corporate Level Strategy is an overarching plan of action covering the various functions that are performed by different SBUs. The plan deals with the objectives of the company, allocation of resources and coordination of the SBUs for optimal performance.SBU level (or business) strategy is a comprehensive plan providing objectives for SBUs, allocation of resources among functional areas and coordination between them for making optimal contribution to the achievement of the corporate level objectives. Functional Strategies deals with a relatively restricted plan, providing objectives for a specific function, allocation of resources among different operations within that functional area and coordination between them for optimal contribution to the achievement of the SBU and corporate level objectives.Ex:- Panacea Biotec is a health management company in India, involved in research, manufacturing and marketing of pharmaceuticals, biopharmaceuticals, new chemical entities, natural products and vaccines. It is organized into five SBUs: Critical Care, Diacar, PRO, GROW and Best on Health(BOH), which enables it to respond to changes in the industry and marketplace with speed and sensitivity.

Apart from the three levels at which strategic plans are made, occasionally, companies plan at some other levels too. Firms often set strategies at a level higher than the corporate level. These are called the societal strategies. Based on a mission statement, a societal strategy is a generalized view of how the corporation relates itself to the society in terms of a particular need or a set of needs that it strives to fulfill. Corporate Level Strategies could then be based on the societal strategy.

Ex:- Suppose a corporation decides to provide alternative sources of energy for the society at an optimum price and based on the latest available technology. On the basis of its societal strategy, the corporation has a number of alternatives with regard to the businesses it can take up. It can either be a manufacturer of nuclear power reactors, a maker of equipments used for tapping solar energy or a builder of windmills among other alternatives. The choice is wide and being in any one of such diverse fields would still keep the corporation within the limits set by its societal strategy. Corporate and business level strategies derive their rationale from the societal strategy.

Some strategies are also required to be set at lower levels. One step down the functional level, a company could set its operational level strategies. Each functional area could have a number of operational strategies. These would deal with a highly specific and narrowly defined area; for instance, a functional strategy at the marketing level could be subdivided into sales, distribution, pricing, product and advertising strategies. Activities in each of the operational areas of marketing, whether sales or advertising, could be performed in such a way that they contribute to the functional objectives of the marketing department. The functional strategy of marketing is interlinked with those of the finance, production and personnel departments. All these functional strategies operate under the SBU level. Different SBU Level strategies are put into action under the corporate level strategy which, in turn, is derived from the societal level strategy of the corporation. Ideally, a perfect match is envisaged among all strategies at different levels so that a corporation, its constituent companies, their different SBUs, functions in each SBU and various operational areas in every functional area are synchronized. When perceived in this manner, the organization moves ahead, towards its objectives and mission, like a well oiled machine. Such an ideal, though extremely difficult if not impossible to attain is the intent of strategic management.Strategic Marketing Management is focusing on the alignment of marketing management within an organization with its business and corporate to gain Strategic Advantage.

Strategic Development Framework (Competitive Marketing Strategies):- There is need to develop strategies that are more than customer based. The strategy should also focus on attacking and defending against competitors. A company can follow any of the following strategies of build, hold, harvest or divest depending on the competitive conditions prevailing in the market and its own objectives.

Build Objective:- Build objective involves increasing the companys market share. Such a strategy makes sense when the market is growing and the company has a competitive advantage that it can capitalize on.When to Build:- A build objective is suitable in markets which are growing. All companies can increase their market share simultaneously because there are large number of customers who have not yet brought the product. But if a market is mature, and hence it is not growing, increase in market share of one company can happen only at the expense of market share of another company.A company can build in a mature market when there are competitive weakness that it can exploit, or a company can build if it has corporate strengths that it can exploit.

The concept of experience curve says that every time a companys cumulative production is doubled, its cost of production goes down by a certain percentage, depending upon the industry the company is in. By building sales faster than competition, a company can achieve the position of cost leader. Thus a company can be in a position to reduce price and hence be able to sell in large volumes by attracting customers of its competitors.

Strategic focus:- A company can build by market expansion, winning market share from competitors, by mergers or acquisitions and by forming strategic alliances.Market Expansion:- A company expands the market for its product by creating new users, or new uses, or by increasing frequency of purchase. It can find new users by moving to foreign markets, or targeting larger segments. It can promote now uses for its product.

Winning Market Share:- This indicates gaining market share at the expense of competition. Principles of offensive warfare apply in this case. These are to consider the strengths of the leaders position, to find a weakness in the leaders strength, and attack at that point.

Frontal Attack:- This involves the aggressor taking on the incumbent head on. The aggressor attacks the main market of the incumbent by launching a product with a similar or superior marketing mix. The incumbent gets most of its revenue and profits from this market segment. If the incumbent is a market leader, the aggressor should have clear and sustainable competitive advantage. If its competitive advantage is low cost, and it uses low price to gain market share of the market leader, the latter will match its low price because it has deep pockets. Low price can be a sustainable competitive advantage only if the aggressor has developed some proprietary technologies by which it has been able to reduce its costs of manufacturing and distribution. A distinct differential advantage provides basis for superior customer value by which incumbents customers can be enticed, but the aggressor should be able to match the incumbent in other activities. An aggressor is more likely to be successful if there is some restriction on the incumbents ability to retaliate. Finally, the challenger needs adequate resources to withstand the battle that will take place should the leader retaliate. Sustainability is necessary to stretch the leaders capability to respond.

Flanking Attack:- In flanking attack, an aggressor attacks unguarded or weakly guarded markets. The aggressor attacks geographical areas or market segments where the incumbents presence is weak or the incumbent does not consider the segment lucrative and allows the initial incursion. Ex:- The Japanese car companies launched flanking attack in the US car market. They attacked the small car segment, from which they expanded into other segments. The American car companies did not retaliate vigorously because sedans and luxury cars, and not small cars, were their major markets.Encirclement Attack:- The aggressor launches products in all segments and at all price points. It has a product for every conceivable need of customers. The aggressor needs to have deep pockets to launch and sustain such an attack, and it should have prepared for a long time, before launching the attack. Normally such an aggressor is a large corporate which enters a new category, and has ambitions to become the lead player in it. The incumbent has to regroup and redirect its resources to meet the aggressor in every segment that the aggressor has encroached. An incumbent may also decide to ration its resources, and protect its most lucrative segments, letting the less lucrative ones fall prey to the aggressors attacks. Ex:- Samsung launched mobile handsets offering both CDMA and GSM technologies at all price points, with a goal of becoming the largest player in the Indian market. It attacked the market leader Nokia directly and aggressively in all its existing segments.

Bypass Attack:- This attack involves circumventing the incumbents position. The aggressor changes the rules of the game, usually through technological leap-frogging. The aggressor can revert to making a simpler product with very low prices or it can incorporate a new technology in its product which enhances the value of the product by a big margin. Diversification is also a type of bypass attack the aggressor can bypass an incumbent by venturing in new markets with new products.

Guerilla Attack:- The aggressor pin pricks the incumbent instead of serving it body blows. The aggressor is a small player and makes life uncomfortable for the stronger incumbents by unpredictable price discounts, sales promotions or heavy advertising in a few segments and regions.

Mergers or Acquisitions:- A aggressor merges with or acquires competitors. It is able to avoid expensive marketing wars, and it is also able to gain synergies in functions such as purchasing, production, financial, marketing and R&D. Mergers and acquisitions result in immediate increase in market share when the players operate in the same market. Mergers involve high level of risk because people with different culture, language and business practices have to work together which is never easy.

Forming Strategic Alliance:- A company can build through strategic alliances. The players entering the alliance want to create sustainable competitive advantage for themselves often on a global scale. Companies can form strategic alliances through joint ventures, licensing agreements, purchasing and supply agreements, or joint product and process development programmes. The companies in alliance are able to enter new markets, get access to new distribution channels, develop new products and fill gaps in their product portfolio. By strategic alliances, partners can share the product development costs and risks. Strategic alliances are flexible, and it is easier for a player to walk out of a strategic alliance than in the case with mergers and acquisitions.A strategic alliance can work only if the players are willing and able to contribute to a common cause, and if their contributions complement each other. Strategic alliance involves risk in the sense that partners develop intimate understanding of each others competences, strengths and weaknesses an unscrupulous player can use such information to damage its erstwhile partner once the strategic alliance is dissolved.

Hold Objective:- The company defends its current position against imminent competition. It applies principles of defensive warfare it blocks strong competitive moves.

When To Hold:- Hold objective makes strategic sense for a market leader in a mature or declining market it is in cash cow position. The market leader generates positive cash flows by holding on to market leadership, which can be used to build other products. It is in a position to hold onto market leadership, because it is in a strong bargaining position with distribution channel members and has strong brand image. It enjoys experience curve effects that reduce costs, so it can sell at lower price. In a declining market, it a company is able to maintain market leadership, it becomes a virtual monopolist as weaker competitors withdraw. Hold objective also makes strategic sense when the costs of increasing sales and market share outweigh the benefits there are aggressive competitors who retaliate strongly if attacked. In such situations, it makes sense that the companies be content with their market share, and do not take actions that may invite strong retaliatory actions from competitors.

Strategic Focus:- A company holds on to its market share by monitoring competition or by confronting the competition.Monitoring the Competition:- When an industry is in competitive stability, all players are being good competitors. All players are content with their market share and they are not willing to destabilize the industry structure. A company needs to monitor its competitors to check that there are no significant changes in competitor behaviour, but beyond that they do not need to do anything extravagant.

Confronting the Competition:- Rivalry is more pronounced among existing players since the product is in the maturity or the decline stage. Strategic action may be required to defend sales and market share from aggressive challenges:-

Position Defense:- Position defense involves building fortification around ones existing territory, which translates into building fortification around existing products. The company has a good product which is priced competitively and promoted effectively. This will work if products have a differential advantage that is not easily copied, for instance, through patent protection. Brand and reputation may provide strong defense. Buy this strategy can be dangerous. The customers need or the underlying technologies of the product may have changed but the company may refuse to change track fearing that it will damage its current positioning and reputation.

Flanking defense:- The company takes actions to defend a hitherto unprotected market segment, because it believes that the aggressor will consolidate itself in the flanking segment, and after getting adequate experience of how to operate in the market, it will try to enter the more lucrative segments of the market. Therefore, an incumbent should not leave segments unattended, even if they are not very lucrative. Competitive incursions are less when a incumbent has presence in all segments. But if this effort is half hearted, it will not help. Failure to defend an emerging market segment may be dangerous later as competitors will entrench themselves in the unprotected segment.

Pre-emptive Defense:- Preemptive defense involves taking proactive steps to protect oneself from the imminent attack of a competitor.

Attack First:- This involves continuous innovation and new product development. The defender proactively defends its turf by adopting such measures. This may dissuade a would-be attacker.

Counter Offensive Defense:- In head on counterattacks, an incumbent matches or exceeds what the aggressor has done cuts price more sharply or advertises more intensely. The incumbent is willing to incur the high costs of such counterattacks because they are the only means left to thwart a persistent aggressor. The incumbent may also attack the aggressors cash cow, and hence choke the aggressors resource supply line. A counterattack may also be based on innovation make a product that makes the aggressors product obsolete.

Encircle the Attacker:- The defender launches brands to compete directly against attackers brands.

Mobile Defense:- When a companys major market is under threat, a mobile defense makes strategic sense. The two options in a mobile defense are diversification and market broadening. Diversification involves attempts to serve a different market with a different product. The company will have to check if it has the competences to serve the new market effectively. Market broadening involves broadening the business definition. Ex:- When film companies faced declining cinema audiences, they redefined their business As entertainment providers rather than film makers, and moved into TV, Magazines, Theme Parks etc.

Strategic Withdrawal:- The incumbent takes stock of strengths and weaknesses of its businesses. It decides to hold on to its strong businesses, and divests its weak businesses it concentrates on its core business. Therefore, strategic withdrawal allows a company to focus on its core competences. Strategic withdrawal makes sense when a companys diversification strategies have resulted in too wide a spread of business, away from what it does exceptionally well.

Niche objective:- The company seeks to serve a small segment or even a segment within a segment. By being content with a small market share, it is able to avoid competition with companies which are serving the major segments. But if the niche is successful, large competitors may seek to serve it too.

When to Niche:- A company can only niche if it has a small budget, and if strong competitors are dominating the major segments. The company finds small segments, whose customers are not well served by incumbents, and it builds special competences to serve them. It creates competitive advantage and runs profitable operations for these segments. It often happens that an industrys major players are focused on serving customer of large segments, and hence their strategies and operations are aligned to meet their needs. Needs of smaller segments are ignored by major players, and hence niching becomes a smart strategic objective in such markets.

Strategic Focus:- A strategic tool for nichers is market segmentation. They should search for underserved segments that may provide profitable opportunities. The choice of the segment will depend upon the attractiveness of the niche and the capability of the company to serve it. Focused R&D expenditure gives a small company a chance to make effective use of limited resource. The customers of a niche have peculiar needs - their needs are substantially different from those of the majority of customers in the market, and hence a nicher should develop a sophisticated understanding of their needs. It then designs a unique operation and delivery mechanism to serve those needs. Since a nicher is serving only a small segment, it may be tempted to serve a larger segment. A nicher should not fall prey to such temptations because they will have to dilute their offerings to be attractive to a larger segment, which will automatically make it unattractive for its niche. A nicher is small in its operations by design, and not by chance, and it is there because it values the high profits that a niche generates. A nicher should decide to remain small always.

Harvest Objective:- A company with harvest objective tries to maximize its profit, and it is not overly worried if its actions result in loss of market share. It is more focused on reducing cost than gaining market share. It wants to generate funds for its growing business, and hence is focused on generating large cash flows.

When to Harvest:- Moderately successful products in mature or declining markets are the prime targets for harvest strategies, since they lose money or earn very little, and take up valuable management time and resources. Harvesting strategies can make such products highly profitable in the short term. Harvesting also makes sense if a company has a substantial number of loyal customers whom it continues to serve. In growing markets, a company has to make huge investments in operations and marketing to build, and a company may decide that payoffs of such investments are not adequate. In such markets, a company can harvest businesses which are consuming lot of resources but are not gaining market share rapidly it decides that these businesses do not have the potential to become market leaders. A company may have identified its future breadwinners. It needs to invest in them, for which it harvests some of its existing products which are not doing well. A company should always remember that if it harvests a product for a long time, it is not likely to survive.

Strategic Focus:- Harvesting involves eliminating R&D and marketing expenditure. Only the very essential expenditures are incurred. The company tries to reduce cost of manufacturing. It rationalizes its product portfolio. It eliminates brands which are not doing well, and focuses on few brands which are doing well. It reduces its promotion expenses and it also withdraws from less profitable distribution channels. And it increases price whenever it can.Continued harvesting makes a business very weak and eventually unviable. Therefore, a company has to decide as to when it should stop harvesting and sell the business. It is never a good idea to persist harvesting for such a long time that no buyer finds anything worthwhile left in the business.

Divest Objectives:- A company divests a SBU or a product, and hence is able to prevent the flow of cash to poorly performing SBUs and products. Divestment is a decision that is often considered to be the last option by a company. However, the decision to divest must be made carefully, while not only assessing the particular business, but also analyzing its impact on other businesses of the company, and its portfolio.

When to Divest:- A company divest unprofitable businesses it does not believe that it can turn them around. It wants to divert its financial and managerial resources to more promising businesses. It also divests businesses whose costs of turnaround are likely to exceed benefits. It may divest its moderately successful products of growth phase, sometimes after harvesting has run its full course, because it is not willing to commit the type of resources that will be required to make them market leaders. Before taking the decision to divest a product, a company should deliberate if it will adversely affect the sale of a profitable product. It often happens that an industrial customer buys two products in conjunction, and either he buys them together or he does not buy either of them. Some industrial customers want to buy all the products that they need to serve a specific requirement from a single supplier, and hence, a company has to retain its unprofitable products if it wants to continue to do business with such a buyer.

Strategic Focus:- A loss making product is a drain on profits and cash flows, and hence a company should divest it quickly to minimize losses. It should try to find a buyer, but if it does not find one within a reasonable frame of time, it should withdraw the product.A company may continue to harvest one of its businesses and sap all vitality form it. Such a business will not be attractive to buyers and will not fetch a good price. A company should act fast once it decides that it has to het rid of a business and sell it when it is still in a viable shape. It should look for a buyer in whose portfolio the business will fit well. Such a buyer will always be willing to pay more as it will try to salvage and grow the business rather than use it to earn some money by selling to some other party. A company should avoid the situation when its divestment is seen as a desperate sale. It will fetch less money and lot of disrepute.

Competitive Advantage:- The key to superior performance is to gain and hold competitive advantage. Firms can gain a competitive advantage through differentiation of their product offerings which provides superior customer value, or by managing for lowest delivery cost. In most cases, an industrys return on investment leader opts for one of the strategies, while the second placed firm pursues the order.Achieving Competitive AdvantageDifferentiationCost LeadershipDifferentiation FocusCost FocusFocusFig:- Achieving Competitive Advantage

Competitive Strategies:- The two means of competitive advantage of low cost of delivery and differentiation, when combined with competitive scope of activities of broad versus narrow, result in four generic strategies:- Differentiation. Cost Leadership. Differentiation Focus. Cost Focus.

The differentiation and cost leadership strategies seek competitive advantage in a broad range of market, whereas, differentiation focus and cost focus strategies are confined to a narrow segment.

Differentiation:- A company that pursues differentiation strategy selects only one or just a few of the total choice criteria that are used by customers of the industry. It then uniquely positions itself to meet these choice criteria by designing a product that gives a very high level of performance on the chosen choice criteria, and only a mediocre level of performance on other choice criteria.

Ex:- A manufacturer of A.Cs may target customers whose choice criteria is Rapid Cooling. Therefore, it designs an AC which Cools rapidly, but is not very energy efficient. Differentiation strategies raise the average cost of the industry, because players of the industry are providing higher level of performance based on one choice criteria or the other. But the players can charge premium prices because customers are getting their desired values. Such an industry will be segmented on choice criteria, and players will target only one or just a few of the total segments. Therefore, another manufacturer of AC may target customers whose choice criteria is energy efficient. Companies that pursue differentiation strategy differentiate in ways that lead to price premiums in excess of cost of differentiating. Differentiation gives customers a reason to prefer one product over another and is thus central to segmentation and positioning.

Cost Leadership:- Cost leadership involves the achievement of lowest cost position in an industry. Firms market standard products that are believed to be acceptable to customers, at reasonable prices which give them above average profits. Some cost leaders discount prices in order to achieve higher sales levels.

Differentiation Focus:- The company targets a small segment or niche, which has special needs. The special needs of the segment offer an opportunity to the company to differentiate its product from those of competitors who may be targeting a broader group of customers. It designs a product to meet the unique needs of the customers of this small segment. Therefore, when a company pursues differentiation focus strategy, its underlying premise is that the needs of its target segment differ from the broader market, and that existing competitors are underperforming in its target segment.

Cost Focus:- A firm seeks a cost advantage with one or a small number of target market segments. Services / features may be provided to all segments but in some segments those services / features may not be needed. For these segments, the company is over performing. By providing a basic product, a company is able to reduce costs more than the price discount it has to give to sell it.

Creating Differential Advantage:- A companys resources and skills are the sources of its competitive advantage, but they are translated into a differential advantage only when the companys customers perceive that its product is providing value more than what its competitors products are providing. Therefore, a company uses its resources and skills to create differential advantage by providing higher level of performance than its competitors on choice criteria that its target segments value highly.But, the companies should understand that attributes on the bases of which differentiation can be made are not always ones that are considered most important by customers. Ex:- If an Airline asked its customers to rank safety, punctuality and on-board service in importance when flying, most customers would rank safety on top. Buy when they choose an airline, safety ranks low, because they assume that all airlines are safe, and they choose an airline on the basis of punctuality and on board service. Therefore, airlines differentiate their services on bases which customers said were less important.A company can create differential advantage by enhancing customer value proposition on one or more elements of its marketing mix lower price, intensive distribution, knowledgeable salespeople, and slick advertisement. The key to deciding whether improving an element of marketing mix is worthwhile, is to know if the potential benefit provides value that the customers desire.

Product:- A product should give higher performance on parameters that target customers consider important and mediocre performance on other parameters. Durability, reliability, styling, capacity to upgrade, provision of guarantee, giving technical assistance, helping in installation etc., can help in differentiating a product from that of the competitor.

Distribution:- Wide distribution coverage and careful selection of distributor locations can provide convenient purchasing points for customers. Quick and reliable delivery helps in differentiating a companys offerings from those of competitors. Building exclusive channel partnerships and entering into long term contracts with these partners can also prove to be beneficial to the company in getting better customer feedback.

Promotion:- A differential advantage can be achieved by the creative use of advertising. Advertising can aid differentiation by creating a stronger brand personality than competitive brands. Using more creative sales promotional methods or simply spending more on sales incentives can give direct added value to customers. By engaging in co-operative promotion with distributors, producers can lower their costs and raise their goodwill. When products are similar, a well trained sales force can provide superior problem solving skills for their customers. Dual selling whereby a producer provides sales force assistance to distributors can lower latters cost and increase sales. Fast, accurate quotes can lower customers costs by making transactions more efficient. Free demonstrations and free trial arrangements can reduce the risk of purchase for customers. Superior complaint handling procedures can lower customer costs by speeding up the process and reduce inconvenience that can accompany it.

Price:- Using low price to gain differential advantage can fail unless the firm enjoys coat advantage and has resources to fight a price war. Credit facilities and low interest loans are indirectly low prices. A high price can be used to do premium positioning. Where a brand has distinct product, promotional and distribution advantage, a premium price provides consistency with the marketing mix.

Attaining Cost Leadership:- Some of the major cost drivers that determine the behaviour of costs in the value chain are:-

Economies of Scale:- Economies of scale can arise from the use of more efficient methods of production at higher volumes. It also arise form the less than proportional increase in overhead cost as production volume increases. Another scale economy results from the capacity to spread the cost of R&D and promotion over a greater sales volume. But scale economies do not proceed indefinitely. At some point, diseconomies of scales are likely to arise as size gives rise to complexity and personnel difficulties.

Learning:- Costs can fall through effects of learning. People learn how to assemble more quickly and pack more efficiently. The combined effect of economies of scale and learning, as cumulative output increases, has been termed the experience curve. This suggests that firms with greater market share will have a cost advantage through the experience curve effect, assuming all companies are operating on the same curve. But a move towards a new technology can lower the experience curve effect for companies that adopt such new technologies, allowing them to leap frog more traditional forms and thereby gain a cost advantage even though their cumulative output may be lower.

Capacity Utilization:- Since fixed costs must be paid whether a plant is manufacturing at full or zero capacity, underutilization incurs costs. The effect of underutilized capacity is to push up the cost per unit for production. Therefore, greater capacity utilization ensures lower per unit cost of production.

Linkage:- These describe how costs of some activities are reduced, by the way other activities are performed. (Ex:- Improving quality assurance activities can reduce after sales service costs). Activities of suppliers and distributors are also linked to the activities of a firm and affect costs of a firm. (Ex:- Introduction of JIT delivery system by a supplier reduces inventory costs of the firm. Distributors can influence a firms physical distribution costs through warehouse location decision. To exploit such linkages, the firm may need considerable bargaining power.

Inter Relationships:- Sharing costs with other business units is a potential cost driver. Sharing the costs of R&D, transportation, marketing and purchasing lower costs.

Integration:- Both integration and de integration can affect costs. Owning the means of physical distribution rather than using outside contracts could lower costs. Ownership may allow a producer to avoid suppliers or customers with sizeable bargaining power. Ownership also increases control, which may allow greater efficiency of distribution.De integration can lower costs and raise flexibility. By using many small suppliers, a company can be in a powerful position to keep costs low and also maintain a high degree of production flexibility.

Timing:- Both first movers and late entrants have opportunities for lowering costs. For first movers, it is usually economical and easier to establish a brand name in the minds of customers if there is no competition. They also have prime access to cheap or high quality raw materials and locations. Late entrants to a market have the opportunity to buy the latest technology and avoid high market development costs. They can also avoid costly mistakes made by the pioneer in building a market for the product.

Policy Decisions:- Firms have a wide range of discretionary policy decisions that affect costs. Product width, levels of service, extent of diversification, channel decisions etc., have direct impact on costs. Care must be taken not to reduce costs on activities that have a major bearing on customer value.

Locations:- The location of plants and warehouses affect costs through different wage, physical distribution and energy costs. Location near customers lowers outbound distributional costs, and location near suppliers reduces inbound distributional costs.

Institutional Factors:- These include government regulations, tariffs and local content rules. These are uncontrollable factors for a business, but changes can affect costs. A firm can anticipate such changes by conducting regular checks and follow ups of various activities in their environment. The firm cannot avoid these events, though they can be better prepared. A well equipped firm is likely to be affected less adversely in an industry, as compared to competitors.

Competitive Strategy Selection:- A company that selects a generic strategy and faithfully and diligently follows it, is successful. Companies that do not pursue a generic strategy are stuck in the middle position, pursuing irreconcilable strategies like differentiation at low cost. They do not develop any competitive advantage, and hence perform poorly.A successful company understands the generic basis of its success. It understands its competitive advantage and eschews actions that will dilute it. A cost leader that makes no frills products should be paranoid about controlling costs and never move to make differentiated products just because they fetch more prices and margins. The move will raise the cost of its no frills product, but its differentiated product will not be differentiated enough to lure the more sophisticated customers of the market. A company that follows the focus strategy should know that it can only have limited sales volume, and that it cannot target a large segment because it does not have the competitive advantage to serve it. If it targets a larger segment, it would have diluted its product enough to make it unattractive for its original small segment.

In most situations strategies of differentiation and cost leadership are incompatible because resources have to be expended for differentiating a companys offerings. But there are circumstances when both can be achieved simultaneously. A differentiation strategy may lead to market share domination, which lowers cost through economies of scale and learning effects. Or a highly differentiated firm can pioneer a major process innovation that significantly reduces manufacturing costs leading to a cost leadership position. When differentiation and cost leadership coincide, performance is exceptional, since a premium price can be charged for a low cost product.

Sources of Competitive Advantage:- A company has several sources of competitive advantages such as R&D, scale of operations, technological superiority, more qualified personnel etc. Companies in the same industry usually have different sources of competitive advantage, which must provide superior customer value than the competition.

Superior Skills:- Are distinctive capabilities of key personnel that set them apart from personnel of competing firms. Ex:- Superior selling skills may result in closer relationships with customers than what competing firms can achieve. Superior quality assurance skills can result in higher and more consistent product quality.

Superior Resources:- Are tangible requirements that enable a firm to exercise its skills, Superior resources may be number of sales people, expenditure on advertising and sales promotion, number of retailers who stock the product (distribution coverage), expenditure on R&D, scale and type of production facilities and financial resources, brand equity etc.

Core competences:- The distinctive nature of these skills and resources sum up a companys core competences.Superior Skills Distinctive Capabilities of key personnelSuperior Resources Tangible Requirements to Exercise Skills

Core Competencies+Fig:- core Competencies of a Company

Value chain:- Is a useful method for locating superior skills and resources. A companys value chain comprises of all the activities that the company undertakes to be able to serve its customers. These activities can be categorized into primary and support activities. All companies design, manufacture, market, distribute and service its products. When a company delineates its value chain, it can better locate and understand its sources of costs and differentiation. A companys primary activities include in-bound logistics, warehousing, manufacturing, marketing, out-bound logistics, selling, order processing, installation, and repair. Support activities are found within all these primary functions and include purchasing, technology, human resource management and the companys infrastructure. They are not defined within a given primary activity because they can be found in all of them. By examining each value creating activity, a company can look for skills and resources that may form the basis for low cost or differentiated strategy. The company also looks for linkage between value creating activities. Ex:- Greater co-ordination between manufacturing and in-bound logistics may reduce costs through lower inventory levels. Value chain analysis can extend to the value chains of suppliers and customers. A company can reduce its costs or enhance its differential positions by creating effective linkages between its value chain and those of its suppliers and customers a company can reduce its inventory holding costs by enabling it supplier to supply in smaller lot sizes, or its engineers can collaborate with suppliers engineers to produce better quality products.

Value chain analysis provides an understanding of the nature and location of skills and resources that provide the basis for competitive advantage. Operating costs and assets are assigned to the activities of the value chain and improvements can be made and cost advantage defended. Ex:- If a companys cost advantage is based on its superior manufacturing facility, it should always be willing to upgrade it, to maintain its position against competitors. But, if a companys differential position is based upon skills in product design, it should always be keen to hire the best designers and procure the latest design tools. The identification of specific sources of advantage can lead to their exploitation in new markets where customers place a similar high value on these resultant outcomes.For a differential advantage to be realized, a company not only needs to provide customer value, buy the value should also be superior to that provided by competitors. Besides creating an effective marketing mix, a company also needs to react fast to changes in the market. Using advanced telecommunications, companies receive sales information from around the world 24 hours a day, every day of the year and react promptly to them.

Building corporate Advantage Across Business:- Most multi-business companies are just sum of their individual businesses. Companies have been able to build competitive advantage at the level of individual businesses. But they have not been able to build corporate advantage across their multiple businesses. Corporate advantage has to be built through the configuration and co-ordination of the various businesses that the corporate is managing. Corporate advantage is built by judiciously using resources like assets, skills and competencies a company uses these resources in a unique way, and it is almost impossible for a competitor to copy it. Ex:- Companies like Toyota and Southwest Airlines have been successful by using their resources in unique ways, and though they have been very willing to let others study their systems, not many companies have been able to copy their systems effectively. Its resources also contain a corporate in the sense that it can move into a business area only if its resources will help build a corporate advantage in the new business area. A corporate should enter a new business based on the similarity between the technology required for the new business and those possessed by the corporate, instead of similarity of products. Similarly, the structure and size of the corporate office should be dependent on the strategy being perused, rather than following prevalent practices. Today most corporations favour a lean, minimalist corporate office. The arrangement may suit some companies but can be disastrous for others.

Resources and Business:- There should be a strict relationship between companys corporate capabilities and its choice of businesses its corporate capabilities must help its different businesses in creating their individual competitive advantages. Ex:- If a company has extremely efficient manufacturing plants, and very strong relationships with discount retailers, it should venture into businesses that can use these capabilities to create competitive advantages it should not enter businesses that will require it to have flexible manufacturing plants or which will sell from high end stores. Ex:-Sharps most important resource is its liquid crystal display technology, which is a critical component in nearly all Sharps products. Sharp keeps its set of businesses restricted. It enters a business only when it can create competitive advantage by using one of its technologies. Its competitors like Sony and Mastsushita have diversified into the movie business, but Sharp has resisted from making such a move because it understands that it does not have the corporate capability to succeed in the movie business.

Organization:- Organizational mechanisms have to be put in place to enable the corporate to add value to each of the businesses. Executives fear that they will either violate the autonomy and accountability of independent business units or will end up with large, bureaucratic overhead structures. It is possible to add value and avoid the two pitfalls. Ex:- Newell understands that its know how and experience are embedded in its managers and it deliberately moves them across business units and from the business units to the corporate level. Unlike Newell, Sharp is divided into functional units, not product divisions. Applied research and manufacturing of key components, such as LCDs occur in a single specialized unit where economies of scale can be exploited. The company convenes a number of cross unit and corporate committees to ensure that the corporate R&D unit and sales are optimally allocated among different product lines. Sharp invests in such time consuming co ordination activities to minimize the conflicts that arise when units share important activities like R&D and manufacturing.Depending on its typical situation a corporation will devise its strategy to add value to its business units. The company should always do one reality check: the companys business must not be worth more to another company.

Sustaining Competitive Advantage:- A company should strive to gain sustainable competitive advantage it should differentiate in ways that cannot be copied easily by its competitors. A company that competes primarily through low prices can be undone by a competitor with deep pockets. Therefore, a competitive advantage based on low prices is essentially short lived, unless the company has clear cost leadership. A company can gain sustainable competitive advantage by creating patent protected products, building strong brand personality, building strong relationship with customers, providing exemplary service and creating entry barriers like high R&D or promotional budgets.

Erosion of Competitive Advantage:- Three mechanisms are at work which can erode a competitive advantage:-

Technological and environmental changes that create opportunities for competitors by eroding the protective barriers.Competition learns how to imitate sources of competitive advantage.Complacency leads to lack of protection of the competitive advantage.

Core Strategy or Business Planning:- A companys core strategy enables it to achieve its business objectives. It comprises of three elements:- Target Markets:- A companys target market is a group of customers that it finds attractive to serve & believes that it has the capabilities to serve this group of customers profitably. To assess the attractiveness of segments of a market, it uses information like their size, growth rate, level of competitor activity, customer requirements and key factors for success. The company surveys its competences, and then arrives at one or more target markets that it can serve well.The needs of customers of its target market may change, and it is always prompt in changing its marketing mix so that it can serve the new needs effectively. A target market may become less attractive, in which case, it targets a different segment and repositions its product appropriately.

Competitor Targets:- Weak competitors may be viewed as easy prey and resources are organized to attack them. The company has to establish a policy to determine the competitors that it will take on and how.

Competitive Advantage:- A companys competitive advantage is how it is better than its competitors, in serving the needs of the customers of its target markets. A successful company achieves a clean performance differential over competitors on factors that are important to customers of its target market. The most potent competitive advantages are built upon some combination of following three superior performance:-Being Better:- A company sells high quality products or provides prompt service.Being Faster:- A company anticipates and responds to customer needs faster than competition.Being Closer:- A company establishes close long term relationship with customers.

A company can also achieve competitive advantage by becoming the lowest cost producer of its industry. To some extent, achieving a highly differentiated product is not incompatible with low cost position. High quality products suffer low rejection rates, lower repair costs and therefore incur lower costs than low quality products.

Tests of An Effective Core Strategy:- A companys core strategy must be based upon a clear definition of its target market and the needs of its customers. A company should have a thorough understanding of its competitors in terms of their strengths and competences, so that its core strategy is based upon competitive advantage, i.e. what the company can do better than or different from competitors. The strategy must incur acceptable risk it is not prudent to launch a frontal attack on a strong competitor with a clear competitive advantage, rather it is better to launch a flanking attack, so that it gets time to develop the required competences to take the competitor head on at some later stage. A company may have a fanciful core strategy on paper, but it cannot deliver value to customers if the company does not have resources to implement it faithfully. A companys core strategy should be derived from its strategic objectives heavy promotion and intensive distribution makes no sense when the products strategic objective is to harvest. Moreover, a companys core strategy should be internally consistent, in terms of its elements blending to form a coherent whole a company cannot have affluent customers as its target market, and have cost leadership as its competitive advantage.

Identifying Competitors:- It would seems a simple task for a company to identify its competitors. Ex:- PepsiCo knows that Coca Colas Kinley is the major bottled water competitor for its Aquafina brand; ICICI Bank knows that Axis Bank is a major banking competitor. However, the range of a companys actual and potential competitors can be much broader than the obvious, and a company is more likely to be hurt by emerging competitors or new technologies than by current competitors.

In recent years, for instance, a number of new emerging giants have arisen from developing countries, and these nimble competitors are not only competing with multinationals on their home turf but also becoming global forces in their own right. They have gained competitive advantage by exploiting their knowledge about local factors of production capital and talent and supply chain in order to build world class businesses.

Ex:- TCS, Infosys Technologies, Wipro and Satyam Computer Services have succeeded in catering to the global demand for software and service, even triumphing against multinational software service providers such as Accenture and EDS. These multinationals have a hard time sorting out talent in a market where the level of peoples skills and the quality of educational institutions vary dramatically. Indian companies know their way around the human resources market and are hiring educated, skilled engineers and technical graduates at salaries much lower than those that similar employees in developed markets earn. Even as the talent in urban centers such as Bangalore and Delhi gets scarce, the Indian companies will keep their competitive advantage by knowing how to find qualified employees in Indias second-tier cities.

Taiwan based Inventec has become one of the worlds largest manufacturers of notebook computers, PCs, and servers, also by exploiting its knowledge of local factors of production. It makes products in China and supplies them to giants such as Hewlett Packard and Toshiba and also makes cell phones and MP3 players for other multinational customers. Inventecs customers get the low cost of manufacturing products in China without investing in factories there, and they can also use Chinas talented software and hardware professionals. It wont be long, however, before Inventec begins competing directly with its own customers; it has already started selling computers in Taiwan and China under its own retail brand name.

Using the market approach, we define competitors as companies that satisfy the same customer need. Ex:- A customer who buys a word-processing package really wants writing ability a need that can also be satisfied by pencils, pens, or typewriters. Marketers must overcome marketing myopia and stop defining competition in traditional category and industry terms. Coca Cola, focused on its soft-drink business, missed seeing the market for coffee bars and fresh-fruit-juice bars that eventually impinged on its soft-drink business.The market concept of competition reveals a broader set of actual and potential competitors than competition defined in just product category terms.

Analyzing Competitors:- Once a company identifies its primary competitors, it must ascertain their strategies, objectives, strengths and weaknesses.

Strategies:- A group of firms following the same strategy in a given target market is called a strategic group. Suppose a company wants to enter the major appliance industry in India, what is its strategic group?

Group D Narrow Line Lower Mfg. Cost Very High Service High PriceGroup C Moderate Line Medium Mfg. Cost Medium Service Medium PriceGroup B Full Line Low Mfg. Cost Good Service Medium PriceGroup A Broad Line Medium Mfg. Costs Low service Low PriceHighHighLowLowQualityVertical IntegrationFig:- Strategic Groups in the Major Appliance Industry

Objectives:- Once a company has identified its main competitors and their strategies, it must ask What is each competitor seeking in the marketplace? What drives each competitors behaviour? Many factors shape a competitors objectives, including size, history, current management, and financial situation. If the competitor is a division of a larger company, it is important to know whether the parent company is running it for growth, profits, or milking it.Most U.S firms operate on a short-term profit-maximization model largely because of the stock market pressures. Japanese firms operate largely on a market share maximization model. Many Indian companies combine the objectives of sales growth and profits.

Finally, a company must monitor competitors expansion plans. The below figure shows a product-market battlefield map for the personal computer industry. Dell, which started out as a strong force in selling personal computers to individual users, is now a major force in the commercial and industrial market. Other incumbents may try to set up mobility barriers to Dells future expansions.DELL

SoftwareHardwareAccessoriesPersonalcomputersIndividualUsersCommercial AndIndustrialEducationalFig:- A Competitors Expansion Plans

Strengths and Weaknesses:- A company needs to gather information about each competitors strengths and weaknesses.

Customer AwarenessProduct QualityProduct AvailabilityTechnical AssistanceSelling StaffCompetitor AEEPPGCompetitor BGGEGECompetitor CFPGFFNOTE:-E= ExcellentG= GoodF= FairP= Poor

Table:- Customers Ratings of competitors on Key Success Factors

In general, a company should monitor three variables when analyzing competitors:-

Share of Market:- The competitors share of the target market.Share of Mind:- The percentage of customers who named the competitor in responding to the statement, Name the first company that comes to mind in this industry.Share of Heart:- The percentage of customers who named the competitor in responding to the statement, Name the company from which you would prefer to buy the product.

Companies that make steady gains in mind share and heart share will inevitably make gains in market share and profitability. To improve market share, many companies benchmark their most successful competitors, as well as other world-class performers.

Selecting Competitors:- After the company has conducted customer value analysis and examined its competitors carefully, it can focus its attack on one of the following classes of competitors:-

Strong Versus Weak:- Most companies aim their shorts at weak competitors, because this requires fewer resources per share point gained. Yet, the firm should also compete with strong competitors to keep up with the best. Even strong competitors have some weaknesses.

Close Versus Distant:- Most companies compete with the competitors that resemble them the most. Ex:- Chevrolet competes with Ford, not with Ferrari. Yet companies should also identify distant competitors. Ex:- Coca-Cola recognizes that its number one competitor for Kinley brand is Tap water, not Pepsi Cos Aquafina. Museums now worry about theme parks and malls.

Good Versus Bad:- Every industry contains good and bad competitors. Good competitors play by the industrys rules; they set prices in reasonable relationship to costs; and they favor a healthy industry. Bad competitors try to buy share rather than earn it; they take large risks; they invest in overcapacity; and they upset industrial equilibrium. A company may find it necessary to attack its bad competitors to reduce or end their dysfunctional practices.

Selecting Customers:- As part of competitive analysis, firms must evaluate its customer base and think about which customers its willing to lose and which it wants to retain. One way to divide up the customer base is in terms of whether a customer is valuable and vulnerable, creating a grid of four segments as a result as given below. Each segment suggests different competitive activities.

Ex:- BSNL, in one of its circles decided to protect its Valuable / Vulnerable institutional customers by specifically analyzing their past usage pattern and suggesting appropriate tariff plans to them. This resulted in substantial savings for the customer despite the company incurring short-term loss in profits.VulnerableNot VulnerableValuableThese customers are profitable but not completely happy with the company. Find out and address their sources of vulnerability to retain them.These customers are loyal and profitable. Dont take them for granted but maintain margins and reap the benefits of their satisfaction.Not ValuableThese customers are likely to defect. Let them go or even encourage their departure.These unprofitable customers are happy. Try to make them valuable or vulnerable.