[karen beamish] cim revision cards analysis and ev(bookfi.org)

CIM REVISION CARDS

Analysis and EvaluationJohn Williams of Marketing Knowledge

AMSTERDAM � BOSTON � HEIDELBERG � LONDON � NEW YORK � OXFORDPARIS � SAN DIEGO � SAN FRANCISCO � SINGAPORE � SYDNEY � TOKYO

Butterworth-Heinemann is an imprint of Elsevier

Butterworth-Heinemann is an imprint of ElsevierLinacre House, Jordan Hill, Oxford OX2 8DP30 Corporate Drive, Suite 400, Burlington, MA 01803

First published 2008

Copyright # 2008, Elsevier Ltd. All rights reserved

No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally tosome other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or underthe terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holders written permission toreproduce any part of this publication should be addressed to the publisher

Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333,e-mail: permissions @ elsevier.co.uk. You may also complete your request on-line via the Elsevier homepage(http://www.elsevier.com), by selecting ‘Customer Support’ and then ‘Obtaining Permissions’

British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library

ISBN-13: 978-0-7506-8642-6

For information on all Butterworth-Heinemann publications visit our web site at http://books.elsevier.com

Printed and bound in Spain

08 09 10 10 9 8 7 6 5 4 3 2 1

||

worgotrehtegotgnikroWseirtnuocgnipolevedniseirarbil

moc.erbas.wwwmoc.diakoob.wwwmoc.reivesle.www

TABLE OF CONTENTS

Preface .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv1. Introduction to analysis and evaluation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. Evaluating performance: marketing metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193. Brand valuation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294. Auditing marketing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375. Evaluating performance: financial measures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546. Analysing the external environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687. Analysing the internal environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808. Characteristics of the global marketplace .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1009. Defining competitive advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12510. Bibliography.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

PREFACE

Welcome to the CIM Revision Cards from Elsevier/Butterworth–Heinemann. We hope you will find these useful torevise for your CIM exam. The cards are designed to be used in conjunction with the CIM Coursebooks fromElsevier/Butterworth–Heinemann, and have been written specifically with revision in mind. They also serve asinvaluable reviews of the complete modules, perfect for those studying via the assignment route.

n Learning outcomes at the start of each chapter identify the main points

n Key topics are summarised, helping you commit the information to memory quickly and easily

n Examination and revision tips are provided to give extra guidance when preparing for the exam

n Key diagrams are featured to aid the learning process

n The compact size ensures the cards are easily transportable, so you can revise any time, anywhere.

To get the most of your revision cards, try to look over them as frequently as you can when taking yourCIM course. When read alongside the Coursebook they serve as the ideal companion to the main text.Good luck – we wish you every success with your CIM qualification!

INTRODUCTION TO ANALYSISAND EVALUATION

Unit 1

LEARNING OUTCOMES

In this unit you will:

� Appreciate the role of marketing in adding value� Understand the importance of market orientation in determining the success of an organization

(see syllabus)� Understand the range of tasks involved in undertaking rigorous evaluation and analysis� Review the strategic process and understand the importance of analysis and evaluation within it� Understand the motivation behind the Professional Postgraduate Diploma Analysis and Evaluation syllabus� Gain an overview of the main approaches to situational analysis and evaluation� Appreciate the role of marketing within the strategic planning process (see Syllabus 1.5).

ANALYSIS AND EVALUATION 1

lanretxE eht gnisylanA yadot tnemnorivnE

lanretnI eht gnisylanAtnemnorivnE

srotitepmoC

lanretxE eht gnisylanAworromot tnemnorivnE

noitaulavE & sisylanA

srotcaF sseccuS lacitirC

snoitpO cigetartS

eciohC cigetartScigetartS

tnetnIgniulaVsnoitpo

lortnoC & noitatnemelpmI

noitcnuf rehto & gnitekraM setarapes ot tluciffid secivreSsnoitcnuf rehto & gnitekraM

E&A

DMS

PMM

seicnetepmoc ,secruoser lamitpo eht evah ew oD?gninoitisop tnerruc niatsus ot seitilibapac dna

seitilibapac dna seicnetepmoc ,secruoser tahW?gninoitisop erutuf niatsus ot

Fig. 1.1. Formulating strategy – Remember what we are trying to achieve

INTRODUCTION TO ANALYSIS AND EVALUATION 2

KEY DEF IN IT IONS

Market orientation involves the specific activities that translate the philosophy of marketing into practice.

Customer orientation involves understanding customers well enough to create superior value for themcontinuously.

Competitor orientation is the awareness of the capabilities of competitors.

Interfunctional co-ordination involves the company using all its resources to create value for its targetcustomers.

Analysis represents a method for gaining information relating to external markets and internal assets.Evaluation is the study of options in the light of company capabilities and attitude to risk.


This unit looks at:

n Business orientation and the role ofmarketing – identifying the business intelligenceneeded to inform strategy-making in domestic andinternational markets.

n Assessing the impact of major trends in the globalcontext on strategy making.

n Conducting a strategic audit of the internal and externalenvironment, including an evaluation of businessperformance, using appropriate tools,models, analysisof numerical data and management information.

n Appraising the nature of culture withinorganizations and the importance of its fit withstrategy and operations.

n Synthesising a coherent and concise assessmentof the situation facing an organization, anddevelop alternative scenarios.

1 TNEMELE

tnemeganam cigetartSgnitekram fo elor eht dna

%01

3 TNEMELE

eht fo sisylanAtnemnorivne lanretni

%02

5 TNEMELE

fo scitsiretcarahCecalptekram labolg eht

%02

2 TNEMELE

fo noitaulavEecnamrofrep ssenisub

%03

4 TNEMELE

eht fo sisylanAtnemnorivne lanretxe

%02

Fig. 1.2. The five elements of the A&E unit


Marketing philosophy

n Markets are becoming increasingly competitive and dynamic. The main driver behind the marketing conceptis the belief that organizations are more likely to succeed if they are focused on the customer.

Market orientation

n Narver and Slater have identified different components of market orientation. At the core is a focus onlong-term profits. The business needs to be sustainable and have a strategic perspective rather than atactical one. This should be supported by an organizational culture that encourages all employees topromote customer satisfaction. This should be underpinned by customer orientation, competitororientation and inter-functional co-ordination.

The different types of business cultures are represented in Figure 1.3 and provide a framework to analyse andevaluate companies.


noitatneirO ssenisuB

laicnaniFsnoitarepO elpoePgnitekraMD&R

snoitseuQ yeK

° ?noitazinagro siht fo noitatneiro ssenisub eht si tahW° ?del tekram ro elpoep/snoitarepo/ecnanif noitazinagro eht si tnetxe tahw oT° ?sretekram rof noitatneiro ssenisub a gniwonk fo ecnacifingis eht si tahW° ?snalp retteb poleved ot noitamrofni siht esilitu tseb retekram a nac woH° ?snoitatneiro tnereffid gniyalpsid smrif ni gnitekram fo elor eht si tahW° ?snoitazinagro hcus ni elor a evah gnitekram seoD

noitatneirO noitatneirO noitatneirOnoitatneirO noitatneirO

° detatneiro noitcudorP° snoitarepo yb detanimoD

tnemtraped ° /reffub ot si elor lapicnirP

morf noitazinagro tcetorp snoitautculf lanretxe

° detatneiro tcudorP° detatneiro ngiseD° noitavonni no si sucoF° gnitpmetta ylsuounitnoC

ro wen htiw tsrif eb ot ecivres ro tcudorp devorpmi

serutaef

° detatneiro remotsuc yllapicnirP° remotsuc eht taht gnisingoceR

eht fo trap ylno eht si hcihw ssecorp ssenisub

eht otni hsac sgnirb gnihtyreve ,noitazinagro

tsoc a si esle

° no desucof yllapicnirPstiforp mret-trohs gnisimixam

° gnol fo esnepxe eht ta netfOnoitcafsitas remotsuc mret

° na sa nees si gnitekraM eb ot sdeen hcihw esnepxe

dellortnoc

° taht si feileb lapicnirP enotsrenroc eht era seeyolpme lanretxe gniyfsitas ot

,nrut ni ,hcihw sremotsuc ytilibatiforp sesimixam

° laicnanif eb ot dnet seeyolpmEsredlohekats

Fig. 1.3. The orientation of different business functions


° ,emulov hgih yb desiretcarahCsnur noitcudorp yteirav wol

dexif dna semit dael gnol htiw seludehcs noitcudorp

° eciohc ni detimil si remotsuC° sa droF yrneH yb desimotipE

yna evah nac sremotsuc‘ ’kcalb si ti sa gnol sa ruoloc

° tahw no tnedneped si sucoFsekam ynapmoc

° ot ylniam si elor s’gnitekraMdnamed remotsuc etaluger

° tsrif eht eb ot si evitcejbO wen ecudortni ot ynapmoc

tpecnoc ° emit revo dnuorg esol ot sdneT

etatimi lliw ohw srotitepmoc ot tpecnoc cisab evorpmi dna

srotavonni yb ecudortni ° yb desiretcarahc seinapmoC

gnimmiks ecirp gniylppa hgih puocer ot seigetarts

stsoc tnempoleved ° seinapmoc hcus fo elpmaxE

retupmoc ,spillihP edulcni erawtfos rehto dna semag ,sesuoh noihsaf hgiH ,stcudorp tnemniatretne dna stnaruatser ycnatlusnoc ,stnemhsilbatse

ycnega rehto dna ° elor detimil a syalp gnitekraM

sliatne – snoitazinagro eseht ni dna stpecnoc wen gnihcraeser

noitomorp

° esnes laedi eht ni desingoceR ynapmoc gnisaercnI taht retteb eb dluoc ecnamrofrep

gniyfsitas hguorht deveihca stnaw dna sdeen remotsuc

° yhposolihp ssenisub a sA fo stcepsa lla evird dluohs

snoitcnuf lla .e.i ,ssenisub no seitivitca rieht sucof dluohs

noitcafsitas remotsuc gnirusne ° ylno dedulcni tpecnoc yllaitinI

taht sremotsuc lanretxe dna decnanif ,decneulfni

,secivres dna stcudorp detpoda denedaorb saw tpecnoc retal sredlohekats lla edulcni ot gnicneulfni yllaitnetop gnidulcni sseccus etaroproc

sremotsuc lanretni

° tnemtsevni mret gnol gniyfitsuJ dna tcudorp gnidliub eht ni si noitatuper dnarb etaroproc snoitazinagro hcus ni tluciffid

mret trohs no si sucof sa ° tsom fo sucof tnanimod eht llitS

dna KU eht ni snoitazinagro aciremA htroN

° hcus fo selpmaxEnosnaH edulcni snoitazinagro

° eeyolpme elbaredisnoC boJ – semehcs noitavitom tnemhcirne boJ/tnemegralne

,ytilibixelf boj ,seigetarts seicilop ytinretap/ytinretam

° fo rebmun a edulcni selpmaxEni wef yrev ,seinapmoc hsinaD

si siweL nhoJ tub KU eht elpmaxe doog a ylbaborp

laicnaniFsnoitarepO elpoePgnitekraMD&R

Fig. 1.3. Continued


n A study by Doyle, Wong and Saunders (1993)demonstrated that Anglo-Saxon companies suchas those operating in North America and theUnited Kingdom were short term in outlook bybeing more profit-orientated whereas Japanesehad a balanced orientation taking each businessfunction into consideration and taking alonger-term business perspective (Figure 1.4).The study also indicated that simply adopting apurely marketing approach was not likely toimprove performance as much as it would byapplying a balanced approached depicted inFig. 1.4.

Marketing stakeholders

So far we have talked about three groups ofstakeholders in the process of creating value:customers, competitors and employees. But other

laicnaniF

snoitarepOD&R &

gnitekraM

elpoeP

Fig. 1.4. Balanced orientation

Source: Adapted Doyle, Wong and Saunders


groups can influence the success of an organization.The seven markets model is shown in Figure 1.5

Effective marketing involves the realization that allstakeholders matter. They invest in the company and

allow the business to invest in itself. But shareholdersdo not exist in a vacuum. There is overlap between thedifferent groups. Employees may become shareholders,for example. Many companies have share schemes

SREMOTSUC

SEEYOLPME

SLARREFER

SREILPPUS

TNEMTIURCER

SREDLOHERAHS

SRECNEULFNI

Fig. 1.5. The seven markets model


specifically to encourage this crossover. Shareholdersmay be encouraged by reference groups.

Marketing and value

n Marketing has been criticised in the past forfocusing solely on customer value, largely ignoringother stakeholder groups.

n Marketing needs to define value more broadly interms of economic value – the idea that everyactivity should create a surplus, that is, thatoutputs should have a higher value than inputs.

n For marketing to be seen as relevant inside thebusiness, marketing activities need to be seenas contributing to that profit by creating value,not destroying it.

n It is important to demonstrate how marketing addsvalue by using rigorous business metrics for allmarketing activities. To show how activities add valuethere is a need to be able tomeasure their contribution.

The role of marketing in corporate strategy

Marketing needs to be at the core of corporatestrategy. There are three important roles formarketing to fulfil in the planning process.

Identification of customer requirements

If a customer-orientated approach is adopted there isa need to know as much as possible about who isbuying the product or service. This will involve marketresearch.


Competitive positioning

Markets tend to be heterogeneous, i.e. they are madeup of groupings that are similar to each other butdiffer in significant respects from other groups. Theaim is to cluster these segments around the sameneed. Once this has been done there is a need to findout how attractive the potential targets are, what arethe requirements of that target and what are ourcompetencies to meet that requirement.

Implementing the marketing strategy

Effective communication across organizationalfunctions is critical to smooth implementation. This iseven more important in service companies where thecustomer may have contact with several front-lineemployees. Each must give a consistent message of

what the company is about. These ‘boundaryspanners’ (so-called because they span the boundarybetween the customer and company) are critical tothe success or otherwise of any service organization.

The role of analysis and evaluation

in marketing planning

Managing the marketing planning process needs tobegin with a thorough analysis of the company’ssituation. The company needs to analyse its marketsand the marketing environment to evaluate potentialopportunities and threats. The fields of strategy andmarketing are intimately linked. Certain strategy textsdivide strategy formulation in companies into threedistinct areas (Figure 1.6).


Strategic decisions involvingwhich businesses, markets andindustries to compete in, whichassets to acquire or divest

Strategic decisions involving theformulation of competitivestrategies to effectively position thecompany’s offering relative to thecompetition

Individual strategies developedfunctionally – i.e promotional strategy from marketing

Corporate Strategy

Business Strategy

Functional Strategy

Fig. 1.6. Strategy formulation at different levels within an organization


Strategy formulation at different levels within an organization

There is an underlying assumption within the syllabus that contemporary issues such as globalization, corporatesocial responsibility, impact of technology – the internet and Customer Relationship Management (CRM) – seeFigure 1.7 should inform the analysis of the external marketing environment.

CSR

Globalisation CRM and IT SHAREHOLDER VALUE

SHAREHOLDER V

ALUE SHAREHO

LDER VALUE

Formulating marketing strategy

Fig. 1.7. Contemporary issues requiring consideration in the analytical portions of the new syllabus in additions

formulating marketing strategies


The strategic market management

process

This unit forms the basis of the strategic marketmanagement process. Figure 1.8 outlines thestrategic marketmanagement process. The dottedline delineates the remit of this unit. The cut-off pointis in the selection of strategy which leads us into theStrategic Marketing Decisions unit.

An analysis of the external and internal environmentneeds to be undertaken.

External analysis covers customers, competitors,market and macro environment.

Specifically:

Customer – segments, motivations, unmet needs

Competitors – identification, strategic groups, coststructures, strengths, weaknesses, competencies

Market – size, growth, profitability, entry barriers,cost structure, distribution networks, entry barriers,attractiveness

Macro environment – political, economic, social,demographic, cultural, environmental, legal.

Strategic planning over the decades has failed todeliver there has been a shift from strategic planningto strategic management as represented by theframework depicted by Johnson and Scholes (Figure1.9). This framework, captures the essence ofstrategic marketing formulation across the four unitsof the Post Graduate Professional Diploma.

Within the framework analysis of strategy issues,formulation of strategy decisions and implementationshare equal importance. Strategic analysis correspondsto the A&E unit whilst strategic choice and implemen-tation corresponds respectively to strategic marketingdecisions and managing marketing performance.


sisylana lanretxE

° sisylana remotsuC° sisylana tekraM° sisylana rotitepmoC° sisylana latnemnorivnE

sdnert ,staerht ,seitinutroppOytniatrecnu cigetarts dna

noitceles dna noitacifitnedi ygetartS

,shtgnerts cigetartS,smelborp ,sessenkaew

seitniatrecnu dna stniartsnoc

sisylana lanretnI

° sisylana ecnamrofreP° fo stnanimreteD

snoitpo cigetarts

° sevitanretla cigetarts yfitnedI° ygetarts tceleS° nalp gnitarepo eht tnemelpmI° ygetarts weiveR

Fig. 1.8. Overview of the strategic market management process

Source: Adapted from Aaker (1998)


Strategic analysis

StrategicImplementation

Strategic Choice

The Environment

Culture & StakeholderExpectation

Resources&

Capability

Strategic options

Evaluating options

Selectingstrategy Managing

strategic change

Organizing structure &

design

Resource Planning

Fig. 1.9. Elements of strategic management

Source: Johnson and Scholes (1999)


Summary

Market orientation is strategic and concentrateson long-term performance. It emphasises customerfocus.

n Organizations need to understand their customersand competitors, not just an end in itself but as ameans of delivering shareholder value.

n The marketing process should be interfunctional.

n Analysis and evaluation are the essential foundationstones of an effective marketing strategy.

n Detailed market research and analysis areessential to ensure that an organization makes themost of any opportunities.

n Analysis and evaluation helps companies avoidpotential risks or, as a minimum, ensures that theyare prepared. A range of models exist to helpstructure the analysis.

n An emphasis is placed on understanding thestrategic implications of analysis.

n Marketing needs to adopt a broad definition ofvalue that embraces all stakeholder groups butemphasises the importance of shareholders.

n Marketing metrics is needed to ensure thatmarketing is seen as accountable. Rigorousanalysis should be undertaken and informationsynthesised. This is followed by generation ofstrategic alternatives and their evaluation.


Hints and tips

n It is not sufficient to be able to describe a model, you also need to apply it to a particular context. At the endof a unit, or any activity, try to think of examples and commit them to memory.

n Another useful tip is to allocate your time in accordance with the number of marks allocated to a question.Even if you have a question that you could spend the whole three hours on, don’t! It is easier to get the firstfew marks rather than the last few.

n It is also important to answer the question that is set. There is a danger, particularly in Section B, thatstudents spend time telling the examiner all they know about a subject rather than focusing their answer ona particular context.

n It is worth spending a few minutes planning your answer before you start to write so that the answer shows alogical train of thought.

n After each examination the senior examiners write a report for the Chartered Institute of Marketing in whichthey discuss how the students coped with the examination and highlight any particular problems that havebeen experienced.

n Even though the Analysis and Evaluation unit is new, looking back at previous reports, for example forPlanning and Control, can give you an insight into the sort of things the examiners look for.


EVALUATING PERFORMANCE:MARKETING METRICS

Unit 2

LEARNING OUTCOMES

To analyse an organization it needs to be viewed from several perspectives. This unit focuses on marketingmeasures. In this unit you will

� Understand the quantitative techniques which can use to evaluate business performance� Examine customer measures� Consider how to evaluate marketing activities

Having completed this unit you will be able to:

� Use the various marketing measures of performance appropriately� Use the balanced scorecard� Evaluate performance over current and historic business cycles� Common language in business tends to be finance and it is used across a number of functions in order

to measure the viability of different strategic options.


n Finance has tended to dominate the businessdecision-making landscape within organizationseven though it provides only a limited measuresof performance.

n Financial quantification was seen as paramount formaking decisions as well as controlling activitieswithin firms through budgeting. This made lifedifficult for many marketing activities such asadvertising, public relations and, more recently,corporate social responsibility as the link withthese activities and financial performance isdifficult to measure.

KEY DEF IN IT IONS

Objectives – the specific intended outcomes of astrategy.

The balanced scorecard is an analytical approachwhich links setting objectives and settingperformance measures.

ROCE is Return on Capital Employed.

Marketing metrics are agreed units of marketingmeasurement and their application.

SMEs are Small Medium-sized Enterprises,that is companies which employ fewer than250 employees.

EVALUATING PERFORMANCE: MARKETING METRICS 20

Evaluating performance is a very important area. Ifwe view the contribution of marketing as worthwhilewithin the organization, then we need to be able tojustify it.

n There are quantitative measures available whichallow us to assess how:

– the company is performing in marketing terms

– how we can value our marketing assets,in particular our brands

– how we can audit our marketing activities

Objectives

n Objectives tend to be set in a hierarchy. Corporateobjectives precede functional objectives whichdevelop into operational objectives.

Performance outcomes

n The most commonly used measures ofperformance are sales, usually in the formof market share, and profitability.

n The relationship between share and profit is not atall clear cut.

Market share

n Allows us to evaluate performance against thecompetition without the confounding factor ofchanges in the market size and growth rates.

n Valuable though this measure is, there are anumber of issues that need to be addressed beforea meaningful analysis can generated.


Market definition

n This is a balance between the extendedmarket (e.g., food, snacks) and micromarkets(e.g., salt and vinegar flavoured crinkle cut crispsin 25 g packets). At one extreme our share mightbe very small and at the other we may command100 per cent share.

n It is important to define it at the appropriate levelfor the task in hand. Once the market has beendefined, we need to determine the most usefultimescale over which to evaluate the share shifts.

Timescale

n It is important not to over-react to short-termfluctuations but to be responsive if there is aproblem.

n The choice of timescale will depend on the productcategory. There are few categories where a dailyanalysis of share would be appropriate, butprobably none where a five yearly review of sharewould be helpful.

n In many markets some sort of smoothing of thedata may be appropriate such as using a MovingAnnual Total.

Volume and value

When examining market share, a distinction is neededbetween volume (units) and value (revenue). Each tellsa different story and their interaction is important.

Is current market share a good predictor of futureshare? The PIMS (Profit Impact in Market Strategy)database is useful in this regard.


PIMS

Profit Impact in Market Strategy (PIMS) began as anappraisal technique in the American General ElectricCompany in the late 1960s, but has developedinto a major longitudinal research and evaluationprogramme based at Harvard University.

n Results suggest a significant regression towardsthe mean, that is, high initial shares tend todecline and low shares to increase over time.

n Thus, pioneers (the first into a market) gain anearly share advantage over followers in industrialmarkets, and consumer industries.

n After 20 years, this lead is reduced on averageto 13 points for both industrial and consumermarkets (Robinson, 1988).

n The probable explanation is that, as a marketmatures, product quality advantages deteriorate.Unless the leader can innovate continuously,the other competitors will necessarily catch upgradually. High profits earned by the leader alsoattract entrants, so the market is likely to becomemore competitive.

Market share and profitability

n The causal direction of the relationship betweenshare and profit is unclear. Early share gains maybe due to luck, or initially superior resources.

n First-mover advantages may or may not exist.What then happens over time depends on howwell managers defend their positions and keepup-to-date with technology and the market.


n The current share may be the result of past profits,or may deliver future profits, or both (or, in somehighly contested strategic groups, neither of these).

n To be useful, market share must be gained in away that competitors will find hard to copy.

Profitability

n There is a need to decide what the objectiveis in determining profitability. Is it to make acomparison – between lines? Brands? Divisions?Countries? Companies?

n It is important to compare like with like, in makingcomparisons. Is it gross profit, that is, beforecosts; or net profit, that is, after costs? Or

somewhere in between, that is, after fixed costsbut before marketing costs? Or before tax? Orbefore tax and interest?

n The relative profitability of brands. Margins mightbe examined twice; profit after all costs includingmarketing expenditure, and then again at profitsexcluding marketing expenditure – to discoverwhich brands are successful because of theirmarketing support.

n Differences in the allocation of overheadsmay changethe apparent profitability of products or firms.

n Taking profitability alone, it may be the result ofpositional advantage. If costs are lower thancompetitors for equivalent quality, or a premiumprice can be charged because of superior customerbenefits (and extra costs are less than the additionalmargin), then higher profits can be expected.


The balanced scorecard

The balanced scorecard was developed in early 1990sby Kaplan and Norton (1992, 1993). They suggestdeveloping a balanced set of objectives alongside acoherent set of performance measures. A businessneeds to be looked at from four different perspectives:

1. Financial – See the organization from ashareholder’s perspective and evaluate thesuccess of its strategy and implementation.

2. Customer – Put yourself in the customer’s shoes.What is important to the customer and how isyour organization performing against theirrequirements?

3. Internal – What are the critical internal processeswhich allow an organization to meet customers’needs? What are the processes which createsatisfaction or dissatisfaction?

4. Innovation and learning – To create value, anorganization must be able to continuouslyinnovate and learn. How does your organizationhandle this?

n Strategic measures (or performanceindicators) are set in each of these areasto provide an objective basis with whichto evaluate and formulate strategy.

n The balanced scorecard widens the view thatmanagers have, by making them look at thebusiness from different perspectives. It forcesthem to examine inter-relationships betweenprocesses and functional areas, and to ensureconsistency between objectives.

Table 2.1 gives an idea of how the balancedscorecard might work within an organization.


Table 2.1. The balanced scorecard

Strategic objectives Strategic measures

Financial Return on capital ROCE

Cash flow Cash flow

Profitability Net margin

Profitability growth Volume growth rate vs industry

Reliability of performance Profit forecast reliability

Sales backlog

Customer Value for money Customer ranking survey

Competitive price Pricing index

Customer satisfaction Customer satisfaction survey

Internal Marketing� Product and service development Pioneer percentage of product portfolio

� Shape customer requirement Hours with customer on new work

Manufacturing� Lower manufacturing cost Total unit cost (vs competition)

� Improve project management Safety incident index


Logistics� Reduce delivery costs Delivered cost per unit

� Inventory management Inventory level compared to output

Quality Levels of rejects

Innovation and learning Innovate products and services Percentage revenue from pioneer products

Time to market Cycle time vs industry norm

Empowered workforce Staff attitude survey

Access to strategic information Strategic information availability

Continuous improvement Number of employee suggestions

Source: After Kaplan and Norton (1992, 1993)


Hints and tips

The examiners will be looking at your breadth of knowledge. So you need to move outside of your own industryand experience. Make sure you do all the activities suggested in this text but that you also read beyond this text.Read the trade press, watch the business news and listen to relevant radio programmes. Be like a magpie,picking up new examples showing how businesses analyse their situation and then apply their findings.


BRAND VALUATION Unit 3

LEARNING OUTCOMES

After completing this unit you will be able to

� Understand the importance of seeing brands as assets� Appreciate the benefits of brand valuation� Compare the various methods of valuing brands� Explain the drivers for valuing brands as assetsSections of the syllabus being covered in this unit.


KEY DEF IN IT IONS

A brand is a distinguishing name and/or symbol (such as a logo, trademark or package design) which isintended to identify the goods or services of either one seller or a group of sellers, and to differentiate thosegoods or services from those of competitors.

Brand equity is a set of assets and liabilities linked to a brand name and symbol that add to or subtract fromthe value provided by a product or service to a firm or that firm’s customers.

Some of the most important assets of a company are intangible.

One of the focal points of marketing is applying an organization’s capital to build brands to capture long-termfinancial value.

BRAND VALUATION 30

Brands as assets

n Since the 1980s brands have been increasinglyregarded as assets to be valued in the same waythat we might value plant and machinery. Somecompanies have gone to the extreme of addingbrands to the balance sheet.

n An assessment of a brand’s value will includeinherently subjective judgements about marketposition, market prospects, the quality and valueof marketing support.

Reasons for brand valuation

There are advantages to be weighed against theconsiderable risks.

Balance sheet benefits

The balance sheet provides a picture of where thecompany is at one moment in time.

Financial markets

If all brands were valued on a consistent basis itwould be far easier for outsiders to make judgementson the relative value of corporate assets.

Separability

For a brand valuation to be useful in the marketplace,there must be a boundary between the brand and thecompany’s assets. This is not always the case.


Management information

The process of valuing a brand may force managersto adopt a more strategic approach. Strategic optionscan be evaluated against the brand valuation and anassessment can be made of future brand values.

Internal management benefits

Stephen King, the brands guru sees brand valuation asproclaiming the purpose of the company. Whilst thismay be important for outside stakeholders such asanalysts and shareholders, it can be used to inspireemployees and act as a kind of mission statement.

Brand valuation

There are a number of factors which can be used toestablish the value of a brand.

Historic cost

The sum of all the investment into the brandstarting with research and development costs, andmoving onto distribution costs and promotionalinvestments.

Current or replacement cost

Current cost is the price that a third party would payfor a brand, which is theoretically at least the sameas it would cost to establish a totally new brand.Difficulties arise here because of the infrequency ofbrand trading.

BRAND VALUATION 32

Future earnings potential

n This method has proved very popular since itremoves some of the disadvantages listed above.

n It calculates the future earnings or cash flow of abrand which after all forms the basis of the valueto the owner. Normally, the current earnings areextrapolated and discounted to present values.

n There are problems with this. First, it assumes thatthe market will never change. Secondly, there willbe no new competitors. Thirdly, there will not beany changes in the macro environment.

Incremental value added

n Many companies use this as a basis for an internalmeasure of brand equity. The price of the brand iscompared with the price of the generics in the

market. The added value is viewed as equivalentto the brand’s equity. This approach undervaluesmass-market brands which profit from salesvolume and hence economies of scale. Nichebrands with small market share will also beovervalued.

The Interbrand model

A framework is based on a combination of objectiveand subjective inputs. The Interbrand model hasseven components of brand strength.


Table 3.1. Interbrand model of brand strength

Component of

brand strength

Weighting

(%) Comments

Market 10 This is a measure of market stability. Brands in market where consumer

preferences are enduring would score higher, e.g. a detergent brand would

score higher than a perfume or clothing brand, because these latter

categories are more susceptible to fluctuations in consumer preference.

Stability 15 Long established brands in any market would normally score higher because of

the depth of loyalty they command, e.g. Rolls-Royce would score higher than

Lexus.

Leadership 25 A market leader is more valuable. It is a dominant force and its relative market

position gives it power, e.g. Coca-Cola would outperform Pepsi on a global

basis.

Profit trend 10 The long-term profit performance can be viewed as a measure of the brand’s

ability to remain contemporary and relevant consumers.

BRAND VALUATION 34

Support 10 Brands which receive consistent investment and focused support usually enjoy

a stronger franchise. However, it is important to note that the quality of the

support is as important as the quantity.

Geographic spread 25 Brands that have proven international acceptance and appeal are inherently

stronger than regional or national brands as they are less susceptible to

competitive attacks and hence are more stable assets.

Protection 5 Securing full copyright protection for the brand under international trademark

and copyright law allows for greater stability and encourages investment in

the brand.

Source: Interbrand (2004)


The outcome of this approach is a brand strength score. Interbrand takes earnings to be the 3-yearweighted average of post-tax profits. The relationship between brand strength and brand value follows aclassic S-shaped curve.

n As a brand’s strength increases from virtually zero (an unknown or new brand) to a position of three orfour in the market, its value increases slowly.

n As a brand moves to a number one or number two weighting in its market or becomes internationallyknown, or both, there is an exponential effect on its value.

n Once a brand is established as a powerful world brand, its value no longer increases at the sameexponential rate even if the market share improves internationally.

Hints and tips

n It is important to keep up to date with current trends in brand valuation. Make sure that you have a goodworking knowledge of the ways brands are valued so that you can apply that knowledge to a specific brand.In particular, you need to think about how the different methods relate to each other, and how using differentmethods will give different values. Keep up with the top ten brands, understanding the reasons for theirstrength.

BRAND VALUATION 36

AUDITING MARKETINGACTIVITIES

Unit 4

LEARNING OUTCOMES

This unit has a very tight remit, focusing on audit ofmarketing activities. It

� Allows you to understand the process inconducting a detailed audit of an organization’smarketing activities.

� Develops your understanding of the potentialmeasures of marketing performance.

Techniques to be covered should include

n Balanced scorecard, with an emphasis oncustomer and innovation measures.

n Evaluation of marketing performance includingthe audit of marketing activities and valuationof marketing assets, such as brands.

n Financial techniques such as shareholder valueanalysis (using total shareholder return andeconomic profit), financial ratio analysis, trendanalysis, benchmarking and evaluation ofhistorical financial decisions.


Audit of marketing activities

One approach to assessing the overall marketing performance of the organization is to examine each elementof the marketing mix in turn.

The 4Ps framework

(Product, Price, Place, Promotion), 5Ps (add People) or 7Ps (add Process and Physical Evidence).

The 4Ps-mix is generally the most accepted. It is often useful to set up a comparator so that there is a measureof how customers perceive an offering (marketing mix) relative to a comparator.

This can be achieved by undertaking independent market research to identify and define the ideal expectationsof customer needs in the desired market and to set up the measures of what the customers would define asbeing well satisfying, moderately satisfying and not satisfying.

An audit can be set up using each aspect of the marketing mix with a list of factors with clear definitionsof what the customers expect from an ideal product.

AUDITING MARKETING ACTIVITIES 38

There is a need to review historic performance aswell as current. This concept is represented byOhmae’s strategic triangle (Figure 4.1):

Ohmae (1982) states that in the construction of anybusiness strategy, three main players must be takeninto account: the corporation, the customer and thecompetitor.

n The job of a marketing strategist is to achievesuperior performance relative to the competitionat the same time ensuring that the strategymatches the key strengths of the organizationwith the key needs of the marketplace.

n Positive matching of the needs and objectivesof both parties is essential for long-lastingrelationships, without which the long-term viabilityof the firm in terms of shareholder value maybeat stake.

sremotsuC

CompetitorsnoitaroproC

eulaVeulaV

tsoC

Fig. 4.1. The strategic triangle – 98 three Cs

Source: Ohmae, K. (1982) The Mind of the Strategist


Ideal Marketing Mix Profile

The actual audit will then be a checklist with ascoring system developed for a particular companycompeting in a specific industry setting.

It is useful to see competition as being on a numberof levels.

Primary (or real)

Secondary (or peripheral)

n Primary competition is brands that are mostsimilar. One of the easiest ways to assess whichthese brands are is to think about which brandsthe consumer would buy if your brand was notavailable. Or, ideally, ask a sample of your targetmarket that question.

n Secondary competitors are brands that are moredistant from your own positioning. For example,a Cartier watch might be primary competition toRolex. However, Rolex might view Swatch assecondary (or even tertiary) competition. Muchdepends on the need being met.

gnireffo xim rotitepmoC

noitatcepxe remotsuC

gnireffo xim ynapmoC

Ideal marketing mix profile

Fig. 4.2. Adapted strategic triangle – three Cs

Source: Ohmae, K. (1982) The Mind of the Strategist,

McGraw Hill, Inc, 91 pp.


Customer satisfaction

and service quality

n Another measure of product performance is thelevel of customer satisfaction. Satisfaction can beviewed as the difference between expectation andperformance.

n Generally speaking customer satisfaction is viewedas a short term, transaction-specific measure,whereas service quality is an attitude formed by along-term overall evaluation of a performance.

Diagnosing service quality failure

The service quality process can be described in termsof the gaps between customer expectation andperceptions on the part of management, employeesand customers. The most important gap is between

customers’ expectation of service and theirperception of the service actually delivered. The goalof the service company is to close that gap or at leastnarrow it as far as possible. Before that, four othergaps need to be closed or narrowed.

Gap 1 – Difference between what the consumersexpect of a service and what management perceivesconsumers expect

Gap 2 – Difference between what managementperceives consumers expect and the qualityspecifications set for service delivery

Gap 3 – Difference between the quality specificationsset for service delivery and the actual quality ofservice delivery

Gap 4 – Difference between the actual quality ofservice delivery and the quality of service deliverydescribed in the firm’s external communications.


tnemeganaMfo snoitpecrep

snoitpecrep remusnoc

htuom-fo-droWsnoitacinummoc

lanosrePsdeen

tsaPecneirepxe

ecivres detcepxE

ecivres deviecreP

yreviled ecivreSRETEKRAM

REMUSNOC

1 PAG

2 PAG

3 PAG

5 PAG

PAG4

fo snoitalsnarTecivres otni noitpecrep

snoitacificeps ytilauq

lanretxEnoitacinummoc

sremusnoc ot

Fig. 4.3. Conceptual model of service quality

Source: Berry, Parasuraman and Zeithaml (1994)


SERVQUAL

One well accepted research instrument used to assess service quality is a questionnaire called SERVQUAL.It sees service quality as the gap between performance and expectations in the same way as customersatisfaction might be measured. The questionnaire is a 44-item scale which measures customer expectationsand perceptions with regard to five quality dimensions.

It compares consumer perception of service quality of an organization against the consumer expectationof an excellent company in the same category.

The whole organization must be focused on the task. Processes need to be analysed and evaluated tocheck – what happens if it goes wrong?


Table 4.1. The five quality dimensions of SERVQUAL

Dimension Description E/P Example item

Tangibles Tangible evidence, e.g., carpeting, lighting,

brochures, correspondence, appearance

of personnel

Expectation Employees of excellent companies will be

neat in appearance

Perception ABC’s employees are neat in appearance

Reliability The same level of service each time,

e.g., accurate invoicing, accurate

records

Expectation When excellent companies promise to do

something by a certain time, they will

do so

Perception When ABC promise to do something by a

certain time, they will do so

Responsiveness Commitment to provide services in a timely

manner, e.g., willingness, readiness,

preparedness of employees

Expectation Employees of excellent companies give

prompt service to customers

Perception Employees of ABC give prompt service

to customers


Assurance The competence of the firm, the courtesy to

its customers, the security of operations,

e.g. has required skills to perform the

service

Expectation Customers of excellent companies will feel

safe in their transactions

Perception Customers of ABC will feel safe in their

transactions

Empathy Ability to experience another’s feeling as

one’s own, e.g., understand customer

needs and respond to them?

Expectation Excellent companies will give customers

individual attention

Perception ABC gives you individual attention

Source: Adapted from Parasuraman, Berry and Zeithaml (1991)


Complaining

Many customers seem reluctant to complain. Thiscreates problems for marketers.

1. Dissatisfied customers may stop buying. Repeatpurchase will be reduced.

2. Dissatisfied customers will pass on negativecomments discouraging other potential buyers.

3. The level of complaints is likely to underestimatethe actual level of underlying dissatisfaction.

4. Cross-selling is likely to be reduced.

5. Latent dissatisfaction means that the competitivethreat may be underestimated.

6. An opportunity is missed for service recovery.Companies need to set up an efficient complaintshandling process.

Price

To assess the effectiveness of the price element ofthe mix, the following information is needed:

1. The pricing strategy

2. Costs

3. Competitor pricing.

Pricing strategy

There is a need to understand the aims of the pricingstrategy before assessing whether it is the right one.

n Is the aim market penetration or market skimming?

n Is the profit target survival or optimisation? Whatdoes a price suggest about quality?

n A pricing strategy needs to take into account threefactors: demand, cost and competition.


Costs

n One of price’s main contributions to the marketingmix is its effect on profit as profit is essentially thedifference between revenue (i.e. price–volume)and cost. It also affects profit via the mechanismof price elasticity. Price elasticity is specific toproduct categories and varies over time.

n It is not always as simple as saying spend more onthe profitable lines and get rid of the unprofitableones. There are a number of other factors to takeinto account.

n Strategic implications – Lines may be there forreasons other than simply profit. They may fulfil astrategic purpose such as acting as loss leaders togain entry to a retailer, or to act as complementsto other more profitable lines so that a completerange may be offered.

n Sharing of overheads – By removing unprofitablelines, the fixed costs will be shared between fewerlines hence affecting the profitability of theremaining lines.

n Impact on relative marketing overhead – If more isspent on the more profitable lines, then a greaterproportion of the marketing overheads should beallocated to these lines, with the result that theybecome less profitable, so we should be spendingless on them.


Assessing price competitiveness

In virtually every market there are competitors.The relative price/quality position in the marketplaceneeds to be understood. This involves developing aspecific positioning map based on value. To do thisthe quality and price of each competitor needs to bemeasured. This can be done in a number of ways.Ideally, a lot of customer data would be collected.

Customer data

1. The dimensions of quality that matter to them,that is, what and how important are the attributes onwhich they are assessing competitive offerings?

2. How do our products and our competitors rate oneach of these attributes?

3. What are their perceptions of price?

4. What price/quality combinations are most valuedby customers?


Promotion

n The promotional mix can be divided into its separate elements and analysed separately or amalgamated andviewed holistically.

n We need to determine firstly what we are trying to achieve. For a sales promotion it may be an upturn insales, for advertising it may be an increase in awareness, for public relations it may be an improved brandimage or front-of-mind saliency.

n The next stage is to determine which measures are appropriate – to use the same measures for each or alterthem according to the characteristics of the element of the mix.


Table 4.2. Examples of sales promotion evaluation

Target audience Objectives Measures

Manufacturer to intermediary Stimulate intermediaries to try new products Listings

Encourage intermediaries to increase

shelf space for existing product

Retail audits

Intermediaries to consumers Generate higher levels of store traffic Footfall

Manufacturers to consumers Encourage consumer trial Consumer market research on trial,

frequency, weight

Increase frequency of purchase

Increase weight of purchase Possible use of panel data

Manufacturers to sales force Build performance Performance against targets

and historic sales


Measure definition

n Expenditure – Amount spent on advertising

n Share of voice – Relative spend compared to competitors within sector (called share of outlays in the UnitedStates)

n Exposure – No. of times an ad is delivered to a consumer

n Reach – No. of households exposed at least once to an ad in a given time period

n Rating – per cent of the population viewing an ad in a given time period

n Frequency – No. of exposures of an ad in a given time period

n TVRs or GRPs – Gross rating points are the sum of all ratings.

n Trial First purchase of brand

n Average frequency is the average number of exposures delivered in a period, calculated by dividing GRPs bythe average reach of a campaign.


Table 4.3. Model and measures of advertising effectiveness

Stage in communication Type of variable Typical measures

Firm’s advertising input Intensity Spend, relative spend, exposures, rating, reach,

frequency, gross rating points, share of voice

Media TV, radio, newspapers, magazines, telephone, internet,

outdoor, mail, classified directories

Ad content: Creative Argument and other verbal cues; pictures, sound and

other emotional cues; endorsement and other inferential cues

Consumer’s mental processes Cognitive Thoughts, recognition, recall (prompted and spontaneous)

Affective Warmth, liking, attitude

Conative Persuasion, purchase intention

Market outcomes Brand choice Trial, repurchase, switching

Purchase intensity Incidence, frequency, weight

Financial Market share, revenue, profits

Source: Adapted from Tellis (2004, p. 44)


Place – Distribution

Distribution lacks the visibility and glamour of, say,promotion but is still a vital part of an effectivemarketing mix. According to Rosenbloom (1999), themost widely used performance criteria for channelmembers are:

1. Sales performance

2. Inventory maintenance

3. Selling capabilities

4. Competitive products handled

5. Growth prospects.

To this, might be added:

1. Profitability and

2. Strategic fit.

Hints and tips

n Examiners are interested in your ability to see thestrategic implications of your analysis. Wheneveryou conduct a piece of analysis think what itmeans. Ask yourself the question ‘So what?’

n Exam questions are likely to ask you to consider anumber marketing activities related to an industryor organizational example and you will need to beable to take a theoretical framework such as the4Ps, Value Chain or the 7S framework.


EVALUATING PERFORMANCE:FINANCIAL MEASURES

Unit 5

LEARNING OUTCOMES

� The purpose of this unit is to enable you tounderstand the importance of financial measuresin the strategic decision-making process (withoutmaking you into an accountant!). The emphasis ison helping you to understand the range ofmeasures available and their contribution inhelping you to reach a decision. In an examinationyou might be expected to calculate a few of themore basic ratios, at most. What is moreimportant, however, is that you understand whatthey mean and what conclusions they can helpyou to reach.

In this unit you will

n Understand the quantitative techniques which canbe used to evaluate business performance

n Examine financial measuresn Explain the purpose and contribution of financial

evaluation of performance to strategic analysisn Use the various financial measures of performance

appropriatelyn Use financial ratio analysis, benchmarking,

shareholder value analysis and trend analysisn Evaluate performance over current and historic

business cycles.n Understanding competitive financial strength and

weaknesses is imperative.

KEY DEF IN IT IONS

Assets are resources that the organization owns and will provide a future benefit to the business.

Fixed assets are held and used over a long period of time (e.g. land, buildings, plant and equipment).

Current assets are owned for just a short period (e.g. stocks and cash).

Stock (in the United States, inventory) is the goods purchased for resale or manufacture (e.g. raw materials,work-in-progress or finished goods).

Debtors (in the United States, accounts receivable) are both the people to whom the company owes moneyand the money owed to them.

Liabilities represent the amount the company owes its creditors.

Creditors (in the United States, accounts payable) are the people who owe money to the company and themoney it owes to them.

Capital is the part of the fund of the business provided by its owners.

Cost of sales are operating expenses not treated as distribution costs or administrative expenses.

Net operating profit is operating profit minus taxes.

Capital employed is the sum of shareholders’ funds, creditors (over a year) and provision for liabilities and charges.


How can a SWOT analysis of our competitive financial standing assist?

n Porter (1985). The value chain is a means of helping to understand all the activities involved within theorganization (value chain) as well as outside organization (the value system)

n Having access to information regarding a competitor’s cost structure and how they can finance these costscan provide a significant insight into how competitors are delivering value. This would help with thepositioning of a company relative to others.

n Two additional frameworks (Figures 5.1 and 5.2) developed by Hamel and Prahalad that are similar toPorter’s Value Chain (1985) show a better representation of where financial appraisal sit within the strategyformulation process:

EVALUATING PERFORMANCE: FINANCIAL MEASURES 56

eht fo tpecnoC’tekraM devreS‘

dna euneveRerutcurtS nigraM

fo noitarugifnoCstessA & sllikS

dna ytilibixelFssenevitpadA

?gnivres ew t’nera sdeen dna sremotsuc tahW

tniop tnereffid a ta detcartxe eb stiforp dluoC?niahc eulav eht ni

yb devres retteb eb sdeen ’sremotsuc thgiM?stessa dna slliks fo noitarugifnoc etanretla na

ot ytilibarenluv ruo si tahW’?emag eht fo selur wen‘

Fig. 5.1. Interpreting an organization’s economic engine

Source: Hamel and Prahalad (1994)


Making it longer

e.g. develop positions in emerging markets, strengthen customer relationships, add line extensions.

Mak

ing

it w

ider

e.g.

pro

duct

diff

eren

tiatio

n,

v

alue

add

ed p

rodu

cts,

impr

oved

mar

gins

,

m

ore

effe

ctiv

e co

mm

unic

atio

ns.

Making it flow faster

e.g. accelerate new products to market, cross-sell, use existing distribution networks.

Fig. 5.2. The shareholder value tube


n These models use the analogy of an engine to represent the organization and integrate the marketing,finance and operations functions to provide a framework that can drill into the different parts of theorganizations in order to be able to provide an overall strategic competence level of the organization.

n Financial measures are often used as control mechanisms to check whether strategies have worked. It isimportant to bear in mind that many marketing activities such as advertising and PR have a delayed effectand therefore just because sales and profits are not immediately realised, it does not mean that thecampaign is not working.

n Within marketing the most important application of finance is probably pricing where financial data,particular cost data is used by companies to set prices. Pricing is possibly the most important componentof the marketing mix as it sets the precedence for all other parts of the mix.


Financial statements

n Financial statements, such as the balance sheetand the profit and loss account, provide historicalinformation, not current or future information. Buthistory can be useful as an indicator of the future.

n A profit and loss account presents informationabout an organization’s financial performancethroughout a period; a balance sheet givesinformation about its financial position at a certainpoint in time, that is the balance sheet date.

Profit

n The obvious definition of profit is the excess ofrevenue (or sales turnover) in a period over costsand other expenditure in the same period.

n However, financial statements tend to view profiton a number of levels and it is important tounderstand at which level profit is being calculatedin your organization to make both historic andcompetitor comparisons.

n Gross profit, for example, is sales turnover minuscost of sales.

n Net profit (or operating profit) is gross profit minusdistribution and administrative costs.

Costs

n It is important to understand how costs areallocated within your organization. There are manydifferent types of cost, and organizations may treat


them differently. This can all get very complicatedbut all we are going to cover here are the basics offixed and variable costs.

n Essentially, a ‘fixed cost’ (sometimes called ‘anoverhead’) is one which will remain the same for agiven period of time (i.e., will be a fixed amount)regardless of the volume of activity in the period.

n These costs increase over time but are fixed for agiven period of time. The important point is thatthe cost per period, such as the cost per month,does not vary with the amount of activity.

Using financial ratio analysis

n Ratios can be used very effectively in the analysisstage.

n Trends by comparing a firm’s performance over time

n Benchmarking against the competition sinceperformance with others can be compared.

n When making comparisons between firms, there isa need to decide which type of business iscomparable. There is a need to find a businesswith a similar trading pattern. The followingfactors might be considered: type of industry,nationality, regional area and size of business.

Broadly speaking, there are five different types ofratio:

1. Profitability ratios (including return on investment)

2. Asset utilisation ratios

3. Liquidity ratios

4. Capital structure ratios

5. Investor ratios.


Profitability ratios

The main measures of profit used therefore are returnon capital or return on investment.

Return on Capital Employed (ROCE)

The total capital employed in a company can bemeasuredin several ways, but these should all give the same figure.

1. Fixed assets plus net current assets

2. Current assets minus current liabilities

3. Share capital plus reserves plus long-termcreditors and provisions for liabilities and charges.

Asset utilisation ratios

This set of ratios looks at the use of resources by theorganization.

n Stock turnover – The rate at which a businessconverts its stock into sales is a critical indicatorof business activity. The stock turnover ratio tellsus the number of times the stock is completelysold and replaced by purchases during theaccounting period. But remember the tradingcycle may be cyclical, resulting in peak andlow stock levels, so the timing of this measuremay be crucial.

n Average debtor collection period – This ratioestimates the number of days of sales which arerepresented by the firm’s debtors.

n Ratio of asset values to sales – This ratio looks at theability of the assets employed by the company togenerate sales revenue. It is calculated by dividing thesales revenue by the total asset base (the sum of fixedassets and current assets). This ratio gives anindication of the ability of the assets to generate profit.


Liquidity ratios

n Liquidity ratios are used to assess whether theorganization has enough cash to meet thepayments due for its current liabilities. This iscalled short-term solvency.

n Current ratio – This is the standard test of liquidityand is the ratio of current assets to current liabilities.

n A ratio above 1.0 would normally be expected,but this varies from industry to industry. Anyorganization with a ratio of below 1.0 faces a riskof not being able to pay its debts on time. Anacceptable current ratio is 1.5 but this is only arough guide, depending on the industry.

n Most analysts would be concerned if amanufacturing firm’s current ratio falls below 2:1,but a lower ratio would be acceptable in firms withlittle or no stock.

The assumption with the current ratio is that theorganization is able to convert all its current assetsinto cash relatively easily.

n The acid test ratio – The acid test ratio, orquick ratio as it is sometimes known, takesaccount of the illiquidity of some assets. Itremoves stocks from the calculation allowing fora fairer assessment of the liquidity of somecompanies.


n This ratio should be at least 1.0 for companieswith low stock turnover. For those with a highstock turnover, this ratio can be lower than 1.0without suggesting that the company has cashflow problems. An acceptable quick ratio may be0.8 but again this is dependent on the industry,and is just a rough guide.

n Whilst a low liquidity ratio tends to be bad, a highliquidity ratio is not always good. The companymay be tying up more money in the business thanit needs to be.

n The trend in liquidity ratios should also bemonitored, whether the organization chooses touse the current ratio or quick ratio or both.Changes in the ratio can show if the company’ssolvency position is improving or declining.

Capital structure ratios

n The main ratio is the gearing ratio. Gearing is a UKterm; the US equivalent is leverage. In highlygeared companies, a small change in theoperating profits will result in a much largerpercentage change in earnings per share than in alower geared company.

n An analysis of the financial structure of thecompany is important to both the owners and thecreditors. It is important because the amount ofdebt increases the sensitivity of variation in profit.Investment in a highly geared company carriesmore risk of low returns but also more possibilityof high returns. A ratio of more than 0.5 wouldshow that lenders are contributing more capitalthan the owners. For the lenders this wouldgenerally be unacceptable.


Investor ratios

n Various ratios are used by investors andinvestment analysts to assess the value andperformance of equity investments. Some of theseare obtained from or at least partially derived fromfinancial statements.

n Earnings per share (EPS) – This is the amount ofprofit earned by the company during a financialyear that can be attributed to each ordinary share.This is often used by investors as a measure ofcorporate performance, and can be used to assesscorporate trends over time.

n Price to earnings (P/E ratio) – Another commonlyused investment ratio, the P/E ratio, expresses theshare price as a multiple of the EPS. A high P/Eratio indicates strong investor confidence.

n Dividends per share – Very few, if any, companiesretain their profits for internal investment – it isonly dividends which the owners of sharesreceive.

n Dividend cover – The dividend cover is the numberof times the annual dividend is covered byearnings.

Limitations of ratio analysis

n Ratios are valuable but need to be used withcaution. The calculation of ratios is objective andaccurate, but that does not mean that financialanalysis is similarly objective.

n The 2-year problem – Comparing only 2 yearswhere one may be atypical, that is, especiallygood or especially bad and unlikely to be repeated.


n The snapshot problem – Using figures from abalance sheet will only tell you what the situationwas on one particular day.

n The apples and pears problem – No twocompanies are the same even if they operate inthe same industry.

n The history problem – Ratios are invariablycalculated from past data.

n Ratios are largely subjective and their analysis stillremains more of an art than a science.

n Ratio analysis is only an analysis of thefinancial affairs of a company. It cannot analysenon-financial matters such as improving customerrelations, potential labour difficulties, and so on.

Shareholder value analysis

Shareholder value analysis (SVA) has evolved as aresult of the shortcomings of the other valuationtechniques. Shareholder value is a long-termmeasure. It also gives a better view of the future as itis less susceptible to short-term blips.

Asset-based valuations, for example, have limitations.They:

n Do not take account the future potential use ofthose assets.

n Use subjective assumptions.

n Are often only useful if the business is going to becannibalised and the individual assets sold off on apiecemeal basis. If the business is being takenover as a going concern, the intangible assets arelikely to be underestimated.


Profit-based valuations are limited. They:

n Are less useful in assessing future potential cashflows.

n The multiplier used for profit is subjective.

n Major companies have adopted this approach toplace value on firms to be divested and acquired,and also to evaluate business units and theirstrategic options within the company. SVA can beused directly to evaluate a business or strategy.

Economic value added

n Economic value added (EVA) goes beyondshareholder value analysis by adding in the ideathat every business employs capital in some way.That capital may be plant, stock, working capital,and so on. It doesn’t matter what sort of capital it

is, but the important issue is that it comes with acost. EVA builds on SVA by adding the additionalvariable of cost of capital into the mix.

n Essentially EVA uses an SVA perspective toevaluate business performance taking intoaccount profits, cost of capital and capitalemployed.

n One technique is to imagine shareholder value asa tube of future cash flows. The cylinder needs tobe as long, as wide and as fast flowing aspossible. The greater the volume contained in thetube, the more the shareholder value.


ANALYSING THEEXTERNAL ENVIRONMENT

Unit 6

There are external factors beyond every organization’s control towhich theymust respond. The first stage to determininghow to respond to these is to understand what these forces are and how significant they are to your organization.

LEARNING OUTCOMESIn this unit you will

� Appreciate the difference between the macro and micro environment� Evaluate the techniques available to allow the objective assessment of the external environment including

frameworks such as PEST and Porter’s Five Forces� Understand the tools used to evaluate an organization’s competitive position� Study the means of analysing potential and current customer bases to gain understanding.

Having completed this unit you will be able to

� Define the organization’s intelligence/research/resource needs to support a rigorous environmental audit� Undertake customer and competitor analyses at the micro level

KEY DEF IN IT IONS

Marketing environment is the set of uncontrollable external forces to which a company must adapt.

The Macro environment consists of macro factors and their trends such as politics, economics, societal andtechnological.

The Micro environment consists of trends at the industry level such as suppliers, competitors and customers.

Environmental scanning is the process of monitoring the environment, and gathering relevant marketintelligence to ensure that the organization remains up to date with trends

The marketing environment constitutes the arena in which organizations go about their business

LEARNING OUTCOMES – CONTINUED

� Assess the political, economic and social and technological trends at the macro level� Assess the organization’s competitive position in relation to them� Draw together the results of the internal and external analyses to give a summary of the organization’s

competitive position.


Environmental monitoring

Environmental monitoring in an organization is often amarketing responsibility. It consists of the following steps:

n Selection of the driving forces, or drivers, that aremost likely to have an impact on the organization’sactivities.

n Key drivers are usually selected for particular attentionas it is not possible to monitor all factors closely.

n Collection of information on these factors.

n Evaluation of information and forecasting of likelyenvironmental changes.

n Assessment of how the changes will affect theorganization.

n Adjustment of marketing strategy and mix tominimise the negative impact and maximise thepositive impact.

Scanning

This can take three forms.

n Continuous – Companies should monitor theirmain stakeholders, customers and competitors toidentify changes and trends.

n Periodic – It makes sense for organizations toundertake periodic research e.g. at the beginningof a planning cycle.

n Irregular or ad hoc – Tailored research may beundertaken for a specific project, Changes inthe environment may be either continuous ordiscontinuous.

n Continuous changes are called trends and may beeither fast or slow. Discontinuous changes areone-off events or environmental shocks and are bytheir nature hard to predict.

ANALYSING THE EXTERNAL ENVIRONMENT 70

The macro and micro environments

The marketing environment is divided into two areas:

1. The ‘macro-environment’ consisting of those factors furthest from the organization which it can neithercontrol nor influence.

2. The ‘micro-environment’ consisting of those factors close to an organization which, although it cannotcontrol them directly, it may be able to influence indirectly through marketing campaigns.


cihpargomeD

cimonocE

seiraidemretnI

ynapmoCsremotsuC

scilbuP sreilppuS

noititepmoC

lacitilop-lageL lacisyhP

larutlucoicoS

tegraTtekraM

lacigolonhceT

orcaMtnemnorivnE

orciMtnemnorivnE

Fig. 6.1. An overview of the marketing environment


The macro environmentThe macro environment includes the following factors:

n demographic factors

n economic factors

n social and cultural factors

n legal and political factors

n physical factors

n technological factors.

This is a PEST analysis – an acronym for Political,Economic, Social and Technological factors.

The micro environment

The micro environment includes the following factors:

n customers

n competition

n suppliers

n intermediaries

n publics

n the organization itself.

Customers

An organization’s customers form a key componentof its micro environment. These include directcustomers and more indirect consumers further downthe distribution chain.

Monitoring questions include:

n Who are our customers?

n How many of them are there?

n Is that number growing or declining?

n Is the customer base static or changing?


n What do they want?

n Who, apart from us, do they deal with?

Competition

Identifying competitors is a crucial task withinmarketing, but it is not always as easy as it may seem.We need to know what competes for customers’interest, time and money – directly and indirectly.

Porter identified four components of competitor analysis:

1. future goals

2. assumptions

3. current strategy

4. capabilities.

n As strategic analysis is concerned essentially with thefuture – where are competitors are going. What aretheir aims, geographically, in products and markets?

n Assumptions underlay strategies and action. Oftenthey are implicit, but from various sources it may bepossible to find out how the competitor thinks aboutthe industry. What do they think are themajor drivers?

n Their current strategy should at least be clear – atleast in-so-far as they have an explicit strategy.Although it is decreasingly common, many firmsdo not seem to have thought through what theyare doing and why, they merely carry on as beforeand react to events.

n Capabilities we also probably have a good ideaabout, but it is helpful to take a more formalapproach. A SWOT analysis applied to the majorcompetitors is a simple initial approach. A morequantitative method is to take the critical successfactors (CSFs, or key success factors, KSFs) andrate ourselves and the competitors on each. Anexample is shown in Figure 6.2.


srotcaf sseccus yeK

htgnerts laicnaniF

rewop gniyatS

D+R gnortS

lacigolonhceThtdaerb

esnopser kciuQytilibapac

gnitekram naeporuE

BAfleS

101–2–

101–

2101–2–2

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

2101–2–

22–

101– 22–

101– 22–

101– 22–

101– 22–

Fig. 6.2. Competitors’ capabilities

Source: Hooley and Saunders (1993, p. 125)


n The more difficult task is to forecast futurecapabilities, particularly of new competitors. Thiscan only be done through a careful analysis oftheir current competencies and resources,together with a view of their future goals.

n Suppliers are important in ensuring a steady flowof products from the producer to the end user.They can also be a source of new developmentsand information about the marketplace.

n Publics – A public is any group which has aninterest in an organization and its activities, andwhich has a potential impact on the organization’sability to achieve its objectives.

Porter’s five forces

Porter’s model of the forces that interact to producethe competitive situation in an industry is one of themost famous in business literature. It is reproducedas Figure 6.3. Porter identifies the five forces as:

1. Threat of new entrants

2. Bargaining power of suppliers

3. Bargaining power of buyers

4. Threat of substitutes

5. Intensity of rivalry.

Porter gives detailed suggestions for analysing eachof these.


Entry barriers Rivalry determinants

Price sensitivity

Determinants of buyerpower Bargainingleverage

Determinants ofsupplier power

Determinants ofsubstitution threat

Substitutes

Threatofsubstitutes

Intensity ofrivalry

BuyersSuppliers

Bargainingpower ofbuyers

Bargainingpower ofsuppliers

New entrants

Threatof newentrants

Industrycompetitors

Differentiation of inputsSwitching cost of suppliers and firms in the industryPresence of substitute inputsSupplier concentrationImportance of volume to supplierCost relative to total purchases in the industryImpact of inputs on cost or differentiationThreat of forward integration relative to threat of backward integration by firms in the industry

Economies of scaleProprietary product differencesBrand identitySwitching costsCapital requirementsAccess to distributionAbsolute cost advantagesProprietary learning curveAccess to necessary inputsGovernment policyExpected retaliation

Relative price performance of substitutesSwitching costsBuyer propensity to substitute

Buyer concentration versus firm concentrationBuyer volumeBuyer switching costs relative to firm switching costsBuyer informationAbility to backward integrateSubstitute productsPull-through

Industry growthFixed (or storage) costs/value addedIntermittent overcapacityProduct differencesBrand identitySwitching costsConcentration and balanceInformational complexityDiversity of competitorsCorporate stakesExit barriers

Price/total purchasesProduct differencesBrand identityImpact on quality/performanceBuyer profitsDecision makers' incentives

Fig. 6.3. Porter’s five forces

Source: Porter (1985)

ANALYSIS

ANDEVALUATIO

N77

Consolidating the analysis

There are several frameworks we can use. These arenot mutually exclusive and may be usefully combinedto pull out key themes.

1. SWOT analysis – This well known frameworkcan be used to distil the analysis, summarisingthe outcomes of the internal analysis intostrengths and weaknesses, and the externalanalysis into opportunities and threats.

2. Issue analysis – This is a broader-basedapproach and avoids some of the problemsinherent in the classification required by theSWOT analysis.

3. The 6Cs framework – The issue analysis approachdescribed above is a very open ended approach.A possible framework is that of the 6Cs.

These are

n Customers and the market

n Competitive position

n Core competencies and assets

n Chances and opportunities

n Critical success factors (CSFs) or problems to beovercome

n Constraints.

Process of strategic audit

We start with little knowledge, gather lots of data andrefine it, ending with a summary of the issues whichare important.


/weivrevOnoitatneserp

tnerruc fo yrammuSnoitautis

sisylana fo noitallitsid dna sisehtnyS

dna thgisnIgnidnatsrednu

smelborp/seussi esongaid dna yfitnedI

lanretxe dna lanretni fo sisylanAstnemnorivne

nalPhcaorppa

sisylana fo ’seiradnuoB‘

Fig. 6.4. Process of strategic audit


ANALYSING THE INTERNALENVIRONMENT

Unit 7

LEARNING OBJECTIVES

� Having analysed the external environment and itsimplication for the organization an internal audit ofthe firm’s current resources, competencies andcapabilities is needed to identify whether it has theappropriate ones to serve its current customers aswell as identifying whether it has the right set ofcompetencies to serve its customers in the future.

� Several techniques are available to anorganization in order to assess its capabilitiesof how it delivers value and you should be ableto apply these techniques to any organizationalsetting to determine this.

KEY DEF IN IT IONS

The internal environment is the set of factors withinthe organization which affects its success withinthe marketplace.

Portfolio analysis involves assessing the relativeattractiveness of products within the range (orbusinesses within the company) to allow forinformed decisions on resource allocation.

Value chain analysis divides organizational activities intofive core activities and four supporting activities, whichallows for a detailed evaluation of how value is added.

Resource-based view (RBV) suggests that highperformance depends on historic resources.

Strategy

Skills

Staff

SharedValues

Style

Systems

Structure

Fig. 7.1. The McKinsey 7 S – Framework

Source: Peters, T. and Waterman, R.H. (1985) In Search of Excellence, Harper Collins Business; Pascal, R.T. and Athos, A.G.

(1981) The Art of Japanese Management, Simon & Schuster, New York


Models to assess attractiveness

of products and markets

Portfolio analysis models

n Two of the more commonly found models aredescribed here – the Boston box and thedirectional policy matrix.

n Portfolio models provide managers with a clearframework within which to make their decisions.

n All portfolio models involve a classification anddisplay of the current and potential positions ofbusinesses and products according to theattractiveness of that market and the ability ofthe business to compete within that market.

BCG growth–share matrix

The two principal factors with which the BCG grid isconcerned are:

1. market share

2. market growth.

Market share

To understand the importance of market share, youneed to understand the impact of the learning curve,which suggests that the more often we perform acertain activity, the more efficient we get at doing it.This is for several reasons.

n Labour efficiency – Those actually performing thefunction understand what they are supposed to bedoing and perform it more effectively as theybecome more experienced.

ANALYSING THE INTERNAL ENVIRONMENT 82

n Work specialisation – As the volumes increase,companies can afford to specialise units of workinto smaller units.

n Methods improvement – The more often acompany has to produce a particular product, themore likely it is to find a better (quicker, cheaper)way of doing it.

n Economies of scale – As the company producesmore, the costs of raw materials and so on shouldgo down.

n The Boston Consultancy Group wanted to quantifythis learning curve effect, to give some idea of thecost advantage a company producing more wouldhave over one producing less. Its work suggestedthat a decline of up to 30 per cent in costs wouldoccur for each cumulative doubling of output.

tuo evitalumuC put

Uni

t cos

t

Fig. 7.2. Learning curve effect


Market growth

n Market growth is a measure of the attractivenessof the market.

n Products move through a series of stages eachwith its own characteristics.

n They begin life in the introductory phase –relatively slow sales growth and very low sales.

n The growth rate then increases dramatically as theproduct begins to recoup its development costsand move into profit.

n After a period of time (and this can almost literallybe of any length) sales will start to flatten out asthe market becomes saturated and enters themature phase.

n Eventually, the product’s sales will start to declineas new products take its place.

+ + +

+ + +

+ +

+

+

erahs tekram evitaleR)rotitepmoc tsegral fo erahs ynapmoc fo oitar(

Mar

ket

gro

wth

(an

nu

al r

ate

in c

on

stan

t £

rela

tive

to

GN

P g

row

th)

hgiH

Hig

hLo

w

woL

ratS

detareneg hsaC

desu hsaC

detareneg hsaC

desu hsaC

detareneg hsaC

desu hsaC

detareneg hsaC

desu hsaC

kram noitseuQ

woc hsaC

0

0

1.0X1X01 X

goD

Fig. 7.3. Growth–share matrix

Source: Boston Consultancy Group


Cash cows

n Cash cows have dominant positions in slow orno-growth markets, that is markets in their maturephase. They are profitable and cash positive. Theyneed some investment as their position ofdominance must be maintained, but the excesscash can be siphoned off to fund other categories.

Stars

n Stars also tend to be profitable because of their strongshare position. They may be self-financing or mayprovide or require cash at the margins. However, thepresent cash needs will tend to be modest in scaleand will be more than compensated for when thegrowth rate of the market slows. Then the product,provided that it has maintained its dominant position,will move into the cash cow category.

Problem children

n This category is also known as ‘question marks’ or‘wildcats’. They have a low relative market sharebut operate in markets of rapid growth. It is costlyjust to maintain share but an obvious objective for‘question marks’ is to build share to a dominantposition.

Dogs

n Dogs are products with a low share in a low orno-growth market. They are best regarded as‘cash traps’ as they are unlikely to ever generatecash themselves. As there can only be one leaderin a market and most markets are mature, thegreatest number of products and businesses fallinto this sector.


Strategic implications

n Over time, products will move because of marketdynamics and strategy decisions. The objective isto analyse the current portfolio matrix andunderstand the natural dynamics of the portfolioso that a strong portfolio will result in the future.Over time, all products would fall down the gridso that ‘stars’ become ‘cash cows’ and ‘questionmarks’ become ‘dogs’ – provided that the relativeshare position has been maintained.

n Some companies view investing in ‘dogs’ and‘cash cows’ as ‘safer’, investing less than isneeded in both ‘question marks’ and ‘stars’.

Strategic alternatives

The outline strategic alternatives for each of thequadrants in relation to marketing strategy are asfollows:

n Cash cows – use profits to maintain position; fundstars/question marks.

n Stars – maintain/increase share.

n Question marks – either intensify efforts, ormaintain current strategy, or leave the market.

n Dogs – reduce efforts, maintain, divest.

Weaknesses in the BCG grid

The BCG grid is a very useful tool, but it needs to beused with caution. One of the main problems is howthe measures are determined.


Product-market definition

n A business segment or product market is correctlydefined if it is possible to establish and defend acompetitive advantage in that segment alone,without the need to participate in other segments.

Market share estimates

n Whenever market share is used to evaluateperformance, managers become adept at movingthe market boundaries to show a static orincreasing share. The resulting narrow view of themarket may result in threats and opportunitiesbeing overlooked.

Market growth rate

n This can also be manipulated where wishfulthinking may lead to a higher growth rate beingpredicted than is realistic.

Relationship between share

and profitability

n The BCG grid assumes a direct causal relationshipbetween market share and profitability. This is, tosay the least, an oversimplification of the issue.It is important to remember that the learning curveeffect relates only to relative profitability within theindustry. It takes no account of the fact that someindustries are inherently more profitable than others.


Market share can be important, but other factorsneed to be considered in evaluating its role inprofitability:

n Size of business – In some industries both nicheand multinational companies prosper.

n Type of industry – Market share appears to bemore important in high-tech industries. In theservice sector, diseconomies of scale can occurleading to reduced profitability.

n Stage in the product life cycle – PIMS research hasshown that profitability differentials narrow as themarket matures. On average, a company withtwice the share of its leading competitor (relativemarket share of 2.0) would have a direct costadvantage of 3.5 per cent in less mature marketsand only 1.2 per cent in mature markets.

n Unionisation – This appears to mitigate the effectof large market share by ensuring that a largerpercentage of costs end up as wages.

n A third valuable such as quality of management orperceived quality of product may influence bothmarket share and profits. More recent reviewsof the PIMS data suggest that the direct causalimpact of market share may account for only10–20 per cent of the relationship.

n Empirical evidence from Porter and otherssuggests that companies with a strong share ofa tightly defined/niche market have high returnon investment (ROI). In the PIMS study, whichlooked at total rather than served markets, suchcompanies would have been defined as having lowmarket share.


n To counteract many of these criticisms, and tosupport that planning process more effectively,new portfolio models have been developed.

n The BCG grid can be viewed as an oversimplifi-cation of the market and, as a result, multifactormodels have been developed that can be adaptedto a variety of industries.

Directional policy matrix (DPM)

n The most commonly used multifactor model is oneoften referred to as the directional policy matrix.This very similar to the GE matrix. The sectors aredetermined by assessing the strength of thestrategic business unit (SBU), product group,individual product or segment on the twocomposite factors of market attractiveness andcompetitive (business) position.

n Market attractiveness reflects the difference inaverage long-run profit potential for all participantsin the market. Competitive position evaluatesthe profitability of the business relative to thecompetition. Managers select the factors that theybelieve are important in determining marketattractiveness and competitive position.

n There are two complementary approaches todeveloping the lists of factors. One is to selectfrom a standard checklist that has been developedfrom those factors that have historicallydetermined either industry or relative profitability).The other is to select a series of pairs of units(businesses) – an attractive, and an unattractiveone (to the company). Factors are then derivedfrom noting the important differences.


Factors contributing to market attractiveness

The following factors contribute to market attractiveness.

n Market factors

n Size, volume and value

n Size of segments

n Growth rate

n Stage in market life cycle

n Diversity of market

n Price elasticity

n Bargaining power of buyers

n Seasonality of demand

n Economic and technological factors

n Investment required

n Nature of investment

n Industry capacity

n Level and maturing of technology

n Utilisation

n Barriers to entry/exit

n Availability of raw materials.

Competitive factors

n Types of competitor

n Structure of competition

n Substitutes

n Degree of differentiation.

Environmental factors

n Legal/regulatory framework

n Social acceptance

n Unionisation and so on.


Once we have decided which factors we are going touse we need some method of consolidating them intoa single composite score. The section below outlinesan approach we could take.

Assessing market attractiveness

Table 7.1 offers a simple example of how we mightassess the attractiveness of a market.

Factors influencing the strength

of competitive position

Market position

n Relative market share

n Rate of change of share

n Variability of share across segments

n Perceived differentiation of quality/price/service

n Breadth of product range

n Company image.

Economic and technological position

n Relative cost position

n Capacity utilisation

n Technological position

n Patented technology, product or process.

Table 7.1. Assessing market attractiveness

Factor Score Weighting Ranking

Market size 0.5 30 15

Market growth 0.5 20 10

Level of competition 0.0 20 0

Barriers to entry 1.0 15 15

Investment required 1.0 15 15

Total 100 55


Capabilities

n Management strength and depth

n Marketing strength

n Distribution system

n Labour relations

n Manufacturing efficiency.

Once all the significant factors are agreed, the nextstage is to weight each according to its relativeimportance – it would be very unusual if all wereequally important. Problems can occur when factorsare interrelated – relative market share and costposition, for example. A factor also may be verysignificant in one market and not in another, soweights may be ignored if it is felt that they donot add anything other than a spurious scientificobjectivity.

Assessing competitive position

The profile of a unit with regard to its competitiveposition could look something like Table 7.2.

Once composite scores have been calculated on bothdimensions, the present position of the unit can beplotted on the grid in Figure 7.4.

Table 7.2. Competitive position profile

Factor Score Weighting Ranking

Relative market share 0.75 40 30

Manufacturing efficiency 0.50 20 10

Relative cost position 0.50 20 10

Distribution strength 1.00 20 20

Total 100 70


The figure illustrates an example of a completedDPM.

n The SBUs/segments/brands which appear in thetop left hand of the matrix are the stars.

n Those in the bottom left are the cash cows whichgenerate income for the organization.

n Those in the centre and top right are the equivalentof problem children, i.e. they have a question markover their future. For these, a decision needs to bemade to jump one way or another; either wedecide to invest in them or we cut the losses.

n Products in the bottom right fall into the categoryof dogs and are unlikely to succeed. In most casesthe best decision is to withdraw them or sell themto another company.

shtgnerts ssenisuB

hgiH

Hig

h

woLmuideM

Mar

ket a

ttrac

tiven

ess

Low

Med

ium

Fig. 7.4. Directional policy matrix


Strategic implications

n Organizations need to review the performance ofeach of its SBUs, products or segments in thecontext of its overall mix. The relative position ofeach will help determine the appropriate strategy.

n The organization has broadly a choice of fourstrategies. It may decide to:

n Build – increase the market share/develop further.

n Maintain – stabilise current market share/useresource to maintain the status quo.

n Harvest – sell off or pull off after milking the brand(or SBU, etc.) for its last potential profit.

n Divest – drop or sell as soon as possible.

Limitations of the multifactor model

n The multifactor model overcomes many of thecriticisms of the BCG grid by adding greatercomplexity rather than relying on the simplicity ofshare and growth, but increased complexity leadsto problems of its own. These are on two levels.

n The problem of having to reach a consensus on thefactors and/or their weighting tends to bias resultstowards the ‘medium’ categories. Managers whodisagree will compromise to reach a solution. Thematrix will then lose its discriminatory power.

n The use of composite scores can also mean thatdifferences are lost in the process of generating asingle score.


Value chain analysis

Porter (1985) developed the concept of the valuechain which divides activities into five primaryclusters, namely:

1. Inbound logistics – how the company managesthe flow of products into the company.

2. Operations – how the company changes theinputs into a saleable product, and adds value.

3. Outbound logistics – how the companydistributes its product to its buyers.

4. Marketing and sales – activities that communicateto and motivate the buyers.

5. Service – the activities to keep the productworking effectively for the buyer after purchase.

These five primary activities are underpinned by foursupport activities.

1. Procurement

2. Human resource development

3. Technological development

4. Infrastructure.


seitivitca troppus ruof ehTerutcurtsarfni s'mrif ehT

tnemeganam secruoser namuHtnempoleved ygolonhceT

tnemerucorP

dnuobnIscitsigol

snoitarepOdnuobtuO

scitsigolgnitekraMselas dna

selaS

nigr

aM

nigr

aM

seitivitca yramirp evif ehT

Fig. 7.5. The value chain



The innovation audit

Successful companies innovate. They may innovateto create new products and services or be innovativein the way they operate, creating efficiencies withinthe value chain. The innovation audit provides aframework to uncover whether the necessary assetsand competencies are available. It is divided into fourmain areas.

1. The current organizational climate and its impacton creativity.

2. Measures of current performance in innovation.

3. Policies and practices used to support innovation.

4. Balance of the cognitive styles of the seniormanagement team.

Organizational climate

First, we need to conduct an attitude survey amongststaff to see how they feel about the organizationalclimate.

Attitude survey

The survey is decided to look at how the employeesview the organization’s ability to support innovationand also to see what barriers exist to prevent stafffrom being creative.

Burnside (1990) lists 12 factors which are importantin determining the level of innovation within acompany. Eight of these are supportive of innovationand the remaining four are potential constraints.


Table 7.3. Supporting and constraining factors on innovation

Support Constraint

Factor Description Factor Description

Teamwork Level of commitment, level of trust,

willingness to help each other

Time Lack of time to consider

alternative approaches to work

Resources Access to resources such as facilities,

staff, finance, etc.

Status quo Traditional approach,

unwillingness to change

Challenge Challenge in work. Is it enough? Politics Territorial battles

within the organization

Freedom Amount of individual autonomy Evaluation Focus on criticism and

external evaluation

Supervisor Management support in goal setting,

clear communication and morale

Infrastructure Level of senior management support

and structures necessary for creativity

Recognition Level of recognition of and rewards

for creativity

Unity and co-operation Collaborative and co-operative atmosphere,

shared vision


Cognitive styles of the senior

management team

For the purposes of the innovation audit we can lookat four different cognitive styles and think about theimpact these may have on the organization.

Hints and tips

n Throughout this module we stress theimportance of using examples. But don’t just quoteours – think of ones of your own. Originality will berewarded in the examination.

n An important part of the module is in theapplication of theory in a particular context. Markswill be gained for applying the theory rather thanjust describing it.

Table 7.4. Cognitive style

Cognitive style Focuses on Tends to be

Intuitive Patterns,

possibilities

and ideas

Ingenious and

integrative

Sensing Here and now Adaptable

and practical

Thinking Logic and objectivity Pragmatic

Feeling People and values Empathetic


CHARACTERISTICS OF THEGLOBAL MARKETPLACE

Unit 8

KEY DEF IN IT IONS

Culture is patterned ways of thinking, feeling andreacting, acquired and transmitted mainly bysymbols constituting the distinctive achievementsof human groups including their embodiment inartefacts.

Marketing Intelligence System is the systematicapproach used to gather market intelligence.

Porter (1986) divides the forces which driveinternational marketing into two: currents andcross-currents.

Figure 8.1 gives examples of these two types offorce. Essentially the currents are governed by macroforces, and the cross-currents by emergent trends.

stekram fo ytienegomoh ,.g.e

noitasilanoiger ,.g.e

stekram gnigreme fo esir ,.g.e

CR

OS

S-C

UR

RE

NT

S

CURRENTS e.

g., s

trat

egic

alli

ance

s,ris

e of

the

inte

rnet

,pa

ralle

l im

port

ing

Fig. 8.1. Forces driving international marketing

Source: After Porter (1986)


Although international marketing is not conceptuallydifferent from domestic marketing, there are factorswhich may require additional attention.

1. Culture: markets can often be culturally diversewhich can provide challenges particularly in thecommunications arena. Rules of business maydiffer.

2. Markets: these can be geographically disparateleading to distribution and control problems.

3. Data: market intelligence can be difficult andexpensive to obtain, with problems of comparability.

4. Politics: the relative stability of countries variesdramatically. Also the relative power ofgovernments in regulating foreign trade.

5. Economic: economies differ in levels ofdevelopment, their finance systems, theirregulatory bodies and the stability of their currency.

International market intelligence

gathering

The first stage in any market research programmeis always to decide on the research objectiveswhich need to be defined in terms of informationrequirements.

A basic list would be:

1. Where to go?

n Assessment of global demand

n Ranking of potential by country/region

n Local competition

n Political risk

CHARACTERISTICS OF THE GLOBAL MARKETPLACE 102

2. How to get there?

n Size of markets/segments

n Barriers to entry

n Transport and distribution costs

n Local competition

n Government requirements

n Political risk

3. What shall we market?

n Government regulations

n Customer sophistication

n Competitive stance

4. How do we persuade them to buy it?

n Buyer behaviour

n Competitive practice

n Distribution channels

n Promotional channel

n Company expertise

Table 8.1 adds to this basic list and shows howdomestic firms need to adopt a structured approachto gathering international marketing intelligence.


Table 8.1. The task of global marketing research: what should it determine?

The marketing

environment

Differences across countries and regions of interestFirm-specific

historical dataThe competition The product Marketing mix

Political context:

leaders,

national goals,

ideology,

key institution

Relative market shares,

new product moves

Analysis of users.

Who are the

end-user industries?

Channels of distribution:

evolution and performance

Sales trends

by product and

product-line, salesforce

and customer

Economic

growth prospects,

business cycle stage

Pricing and

cost structure,

image and

brand reputation

Industrial and

consumer buyers;

characteristics:

size, age, sex,

segment growth

rates

Relative pricing

elasticities and tactics

Trends by country

and region

Per capita income levels,

purchasing power

Quality: its attributes and

positioning relative

to competitors

Purchasing power

and intentions

Advertising and promotion:

choices and impacts

on customers

Contribution margins


End-user industry

growth trends

Competitors’ strengths:

favourite tactics

and Strategies

Customer response to

new products,

price, promotion

Service quality: perceptions

and relative positioning

Marketing mix used,

marketing response

functions across

countries and regions

Government: legislation,

regulation, standards,

barriers to trade

Switching behavior,

role of credit

and purchasing

Logistics networks,

configuration

and change

Future needs,

impact of

cultural differences

Source: Terpstra and Sarathy (1997)


Secondary research

n International market research often begins withsecondary data. There is generally a correlationbetween the stage of economic development andthe availability, depth and accuracy of theinformation.

n The internet is becoming the most popular toolfor gathering secondary data with many usefulwebsites easily available, often for free. Theinternet has revolutionised the ability of SMEs tocarry out data searches. Another useful resourcefor UK companies is the Department of Trade andIndustry (DTI) which provides a reasonably pricedservice based on a vast database and experiencedstaff.

Primary research

Carter (2003) lists the following problems inconducting international market research.

n Costs – These vary with the United Kingdom beingone of the cheapest and Japan one of the mostexpensive.

n Language – In which language should the surveybe conducted? Singapore with a population of3 million has four official languages requiring fourtranslations and four different ethnic interviewers.

n Some concepts are very difficult to translate andmay not have an exact parallel in another culture.Levels of literacy may be a problem.

n Sample – Rural countries offer particular problemswhere respondents may be geographicallyscattered. There may be problems in interviewingfemale respondents in certain cultures.


n Geography – Where do you conduct the study?Responses may differ widely depending on theproduct category.

n Non-response – some countries it may be hard tofind respondents as interviewers are seen as akinto ‘agents of the state’. Japanese respondentstend to be falsely positive in an attempt to pleasethe interviewer.

n Social organization – Family-owned businessesmay value secrecy about their operations and maybe unwilling to divulge information.

n Terminology – This may differ from country tocountry. What do we mean by health food?Affluent? Middle age? Green?


Co

nte

xtLo

w

hgiHwoLsegasseM

ssiwS

snamreG

snaivanidnacS

snaciremA htroN

hsilgnE

hcnerF

hsinapS/snailatI

snaciremA nitaL

sbarA

esenapaJ

Hig

h

Fig. 8.2. The contextual continuum of differing cultures

Source: From Usunier, adapted from Edward T. Hall


A useful way to examine other cultures is to useLee’s Self Reference Criterion (SRC). This is a fourstep process designed to help organizations isolateessential cultural differences.

1. Look at the situation through the eyes of thehome culture.

2. Define the problem from step 1 through the eyesof the foreign culture.

3. Find the gap between the cultures in steps 1 and2 and how this will influence the problem.

4. Bridge the gap between the cultures.

Scanning international markets/

countries

The process of selecting an international target isoften a multi-stage process as illustrated in theFigure 8.3.


laitinIelpmas stekraM

elbissopmi,.g.e ,retne ot

evitalsigel rofsnosaer

stekraMno tuo deretlif

noitceles fo tes tsrifssenisub ,.g.e ,airetirc

xirtam oiloftropderetlif stekraM

no tuonoitceles fo tes dnoces

,airetircsC 21 ,.g.e

ngierof laitnetoPrat g stekram te

Fig. 8.3. A multi-stage selection process


In the initial stage of evaluating international markets,it makes sense to scan many countries but onlyrelatively superficially.

Three useful criteria to use at this stage are:

1. Accessibility – Can we get there? What’spreventing us? Trade barriers? Legislation?Geography?

2. Profitability – What percentage of the populationcan afford our product? What is the level ofcompetitive activity? What’s the exchange rate?What are the payment terms?

3. Market size – Present and future trends.

n Having undertaken this initial scanning themarketer will have developed a list ofcountries where marketing opportunities exist.

n The next stage is to make an assessment oftheir viability. We can define three types ofmarket opportunity.

n Existing markets – The market is alreadysupplied by competitors. Market entry willbe difficult unless the company has asuperior product or new concept.

n Latent markets – Potential customers existwhose needs are not being met. Nocompetition allowing for easier market entry.

n Incipient markets – Markets which mayemerge in the future but do not exist atpresent.


The nature of the product offered can be analysed ina similar way also categorising in three ways.

1. Competitive product – Broadly similar to thosealready in the marketplace.

2. Improved product – A product which offers someimprovement on existing products available butis not unique.

3. Breakthrough product – An innovation offering asignificant competitive advantage.

We can pull these two sets of factors together to givea matrix of product/market combinations and to allowfor an initial assessment of competitive advantage.This matrix allows the evaluation of the costs andrisks of launching the product against the costs andrisks of opening up the market (see Figure 8.4).


fo epyTtcudorp

evititepmoC

devorpmI

hguorhtkaerB

hgiHwoL hgiH

woL

tneipicnItnetaLgnitsixE

tcudrop roirepuSevititepmoc sreffo

dna egatnavdayrtne tekram sesae

ylgnisaercnIeliforp decnavda

retaerg sreffoeht ot tifeneb

tcerid on ;tekramnoititepmoc

era sdnarb gnitsixEekat ot denoitisop

fo egatnavdagnipoleved elbissop

tcerid on ;sdeentub ,noititepmoc

ot deen sremusnoceb dna dnuof ebeht fo dedausrepot eulav s'tcudorp

tsoc dna ksiR .mehtyam eruliaf fo

hgih eb

tnacifingis sreffo tcudorp hguorhtkaerBeb ot deen stekram tub segatnavda

fo doohilekil elttiL .depoleved dna deifitnedi,mret muidem dna trohs eht ni srotitepmoc

hgih eb yam ecnatsiser remusnoc tub

gninepo fo ksir dna tsoCtekram eht pu

sir dna tsoC kgnihcnual fotcudorp eht

hguorhtkaerB-fles sreffo tcudorp

ytiroirepus tnediveevititepmoc eht dna

hgih si egatnavda

tekram fo epyT

Fig. 8.4. Product/market combinations and the scope for competitive advantage on market entry

Source: Gilligan and Hird (1985)


Assessing the attractiveness of markets

The Figure 8.5 on the matrix indicates the likely order of priority in terms of market entry.

hgiH

hgiH

muideM

muideM

woL

woL

321

32

3

ssenevitcartta yrtnuoC

s’ynapmoCytilibitapmoc

hcae htiwyrtnuoc

yramirP = 1yradnoceS = 2

yraitreT = 3evitcarttanu yreV =

Fig. 8.5. Business portfolio matrix

Source: Harell and Keifer (1993)


Primary markets

n The markets falling in the top left hand corner, thatis, highly attractive and highly compatible, arelikely to offer the best opportunities for long-terminvestment.

Secondary markets

n These markets fall into the second tranche ofpriority since they are hampered by a mediumattractiveness or medium compatibility score.

Tertiary markets

n These are likely to be opportunistic markets atleast in the short term.

The international marketing intelligence

system

A systematic method for gathering the data to allowthe evaluation of candidate markets is required, i.e. aMarketing Intelligence System (MIS).

n To be effective there must be an effectivecommunication channel between the environmentin which the company operates and the decisionmakers.

n An effective MIS provides a solid base for strategicdecisions to be made.

n The 12C framework for analysis of internationalmarkets is shown in Figure 8.6 to give a structureto the data you should collect before deciding ontarget countries.


An alternative way to assess market potential in emerging markets is offered by Cavusgil (1997). He also uses aweighted composite score and a variety of dimensions.

yrtnuoCstaevaC

erutluC

tnemtimmoC

noitacinummoC

seciohClautcartnoC

ag tnemeer

ycnerruC

yticapaCyap ot

slennahC

noitpmusnoC

noitartnecnoC

sC 21

Fig. 8.6. The 12 Cs

Source: Doole and Lowe (1993)


Table 8.2. Dimensions, weights and measures used to assess market potential

Dimension Weight (out of 50) Potential measures

Market size 10 � Urban population

� Electricity consumption

Market growth rate 6 � Average annual growth rate of commercial energy use

� Real GDP growth rate

Market intensity 7 � GNI per capita estimates using PPP

� Private consumption as a % of GDP

Market consumption capacity 5 � % share of middle class in consumption/income

Commercial infrastructure 7 � Phone lines (per 100 inhabitants)

� Mobile phones (per 100 inhabitants)

� No. of PCs (per 100 inhabitants)

� Paved road density (km per million people)

� Internet hosts (per million people)

� Population per retail outlet

� TVs per 1000 people

(continued)


Table 8.2. Continued

Dimension Weight (out of 50) Potential measures

Economic freedom 5 � Economic Freedom Index

� Political Freedom Index

Market receptivity 6 � Per capita imports from the US

� Trade as a percentage of GDP

Country risk 4 � Country risk rating


Table 8.3. Determinants of level of involvement

Factor Comment

Corporate objectives, ambitions, resources Will narrow the options but not necessarily to one

Nature of the market, product category, competition Need to know scale, number, nature and level

Nature of consumer culture What, where, how, why and how often consumers buy

Coverage of the market Breadth, depth and quality, dictated by consumer need

Speed of entry Nature of product, diffusion of innovation, stage in PLC,

pace of market development

Level of control Feedback required, research information to assess

effectiveness

Marketing costs Commitment increases as these get higher

Profit payback Paybacks tend to take longer overseas.

How long will the company wait?

Investment costs Commitment increases as these get higher

Administrative requirements Documentation, legal requirements, foreign taxation

Personnel Level, training, language, assimilation

Flexibility Testing before heavy involvement, multiple entry modes, ease

of exit


Market entry methods

By the time an organization has to make this decision, it will already have made three others:

1. To market internationally

2. Where to market

3. What to market.

The next stage addresses how to determine the best way of entering the chosen market to optimise thepotential of the chosen product range.

Market entry strategy alternatives

When we are talking about market entry strategies we essentially have two main routes. We can either:

n Make it here and sell it there, i.e. export, requiring relatively little involvement or

n Make it there and sell it there, i.e. overseas production, requiring a greater level of involvement.

Figure 8.7 sets out the main strategic routes with the choice of entry modes listed under each.


sevitanretla ygetarts yrtnE

gnitropxEgnitropxe tceridnI

gnitropxe tceriD

snoitazinagro citsemod aiVseinapmoc gnidarT

)sCME( sesuoh tropxEgnikcab-yggiP

tnemtsevni tcerid tuohtiWgnisneciL

gnisihcnarFerutcafunam tcartnoC

tnemtsevni tcerid htiWylbmessA

serutnev tnioJsecnailla cigetartS

noitisiuqcAtnempoleved dleifneerG

ytilibatiforPstessAecnaniF

stsoCksiR

yrotnevnInimda/lennosreP

seiraidemretnIscitsigoL

yrtnEygetartsnoisiced

ygetarts tixE

stnegAsrotubirtsiD

gnitekram ynapmoCyraidisbus

ygetarts yrtnEnoitatnemelpmi

sisylana yrtnE

noitcudorp saesrevO

Fig. 8.7. Market entry alternatives


To make the decision on mode of entry strategy anorganization needs to address three factors.

1. What are the resources and investment necessaryto enter the market?

2. To what extent does the organization want tocontrol corporate activities in the foreignmarket?

3. How much knowledge can the organization gainby using this entry mode?

Figure 8.8 emphasises the interaction between thesefactors on the choice of entry strategy.

woL

woLwoL

SAESREVOGNITROPXENOITCUDORP yllohW

denwoyraidisbus

noitisiuqcA

tnioJserutnev

cigetartSsecnailla

gnisihcnarF

gnisneciL

tceriDgnitropxe

tceridnIgnitropxe

hgiHtnemevlovnI

Con

trol

Fig. 8.8. Factors in assessment of entry modes


Culture

The development of international marketingstrategies is based on a sound understandingof the similarities and differences that exist incountries around the world.

egaugnaL noigileRdna seulaV

sedutitta

noitacudE

laicoSnoitazinagro

dna ygolonhceTerutluc lairetam

dna waLscitilop

scitehtseA remotsuCruoivaheb

Fig. 8.9. The components of culture

Source: Adapted from Terpstra and Sarathy (2000)


Role of IT

Much has been made of the role of IT and inparticular the internet in opening up the globalmarketplace.

According to Orlikowski (2000), companies use ITin three ways:

1. Reinforcing the status quo – These companiesuse IT to retain their existing ways of doingthings.

2. Enhancing the status quo – These companiesuse IT to augment, improve and refine theirexisting work processes.

3. Transforming the status quo – These companiestreat IT as a philosophy and use IT to altersubstantially their existing ways of doingbusiness.

Hints and tips

Examiners will expect you to demonstrateunderstanding of the global marketplace.

Try to gain a detailed understanding of a sample ofother countries. Keep a folder on each of your chosencountries. It helps to take one developed country andone less developed one as a minimum. Compare andcontrast your chosen countries.

Keep a file on the internet. What are the trends?How are organizations using the Internet to marketthemselves. Keep examples of good practice, andbad. You can learn from both of them.


DEFINING COMPETITIVEADVANTAGE

Unit 9

LEARNING OUTCOMES

In this unit you will

� Develop an understanding of the sources ofcompetitive advantage

� Identify the implications of the external and internalanalyses for the company’s strategic direction

� Appreciate the importance of buyer behaviourin defining competitive advantage

� After completing this unit you will be able to:

n Define a source of competitive advantagefor an organization

n Be able to plan scenarios effectivelyn Assess the risk implicit in decision making.

KEY DEF IN IT IONS

Competitive advantage is the means by which acompany can outperform its competitors and earnhigher than average profits.

Core competence is something which the companydoes or possesses which gives it an edge over itscompetitors. It can be defined as the skills andtechnologies that enable the company to provide aparticular benefit to customers. It may be a sourceof competitive advantage.

Scenario planning is the identification of a diverserange of potential futures.


What is competitive advantage?

n Competitive advantage is the means by which acompany can outperform its competitors and earnhigher than average profits.

n The problem with competitive advantage is thatcompetitors have an irritating habit of copying it.

n Managers need to discourage this as much aspossible. The two most common barriers to entryare brands and core competencies based onorganizational effectiveness.

Core competence

n This can be defined as the skills and technologiesthat enable the company to provide a particular

benefit to customers. To be a core competence,the following three criteria must be met:

1. Customer value – A core competence mustmake a disproportionate contribution tocustomer-perceived value.’

2. Competitive differentiation – If a competenceis widely spread throughout an industry,it should not count as core unless the firmis demonstrably superior to that of itscompetitors.

3. Extendibility – It must be capable of leading toa wide array of new products and servces.

DEFINING COMPETITIVE ADVANTAGE 126

Sustainable

n A successful competitive advantage is sustainable,not transitory. It should not be easily copiedbecause the company wants to hold on to it in thelong term.

Fit with external environment

n A competitive advantage derives not only fromcompetitors’ weaknesses (and therefore yourstrengths) but also from the market andconditions. Environmental dynamics can throwup threats and opportunities over time.

n A well-thought-out SWOT analysis is invaluablehere. The changes in the environment will happenanyway – there is nothing you can do to stopthem. The trick is to be prepared for them and toadapt them to your advantage.

Route to above-average profits

n The whole purpose of developing a competitiveadvantage is to earn above-average (for theindustry) profits. Competitive advantage has anunderlying assumption that the advantage is theresult of past and present activity, and that itdelivers (potentially at least) superior profits.However, competitors will be striving constantly tomatch and overtake the advantage, so the superiorprofits must be reinvested to stay ahead. Thesource–position–performance (SPP) modelsummarises this process (Figure 9.1).


egatnavda fo secruoSslliks roirepuS

secruoser roirepuS

segatnavda lanoitisoPremotsuc roirepuS

eulavstsoc evitaler rewoL

semoctuo ecnamrofrePnoitcafsitaS

ytlayoLerahs tekraM

ytilibatiforP

stiforp fo stnemtsevnIegatnavda niatsus ot

Fig. 9.1 The source–position–performance (SPP) model of competitive advantage

Source: Day and Wensley (1988)


Sources of advantage

n The ability of a company to do things better thanits direct competitors arises from superior skills orsuperior resources. The competitors are usuallythose in the strategic group in which we arecompeting for our served market.

Superior skills

n These stem from the ability of people in the firm tocarry out certain tasks at a superior level. Thisassumes a generalised capability that does notdepend on single individuals, and that can bemaintained over time (though it may need supportand reinvestment to do so).

Superior resources

n Resources may be financial or physical: readyavailability of cash, for example, location, astate-of-the-art manufacturing plant.

Positions of advantage

n Positional advantage is delivered by the sources, andmay be either superior customer value or lowerrelative costs. Both can be understood within theframework of the value chain popularised by Porter(1985). Porter’s generic strategies of differentiationand low cost mirror the two categories of advantage.

n Competitive advantage delivers to targetcustomers an offer that they perceive as providingsuperior value to the offers of competitors.Customers will buy the best value as they see it.


Their perception of value can be broken down into three elements, as shown in Figure 9.2.

eulav deviecreP

pihsrenwo fo stsoC

noitallatsnIgniniart ffatS

noitpmusnoc ygrenEecnarusnI

eulav ni edarTstsoc gnihctiwS

emiT

ecirP

diap yenoM

stifeneb deviecreP

ecnamrofrep tcudorPytilauq ecivreS

egami dnarB

Fig. 9.2 Determinants of perceived value


Methods for assessing advantage

n Advantage can be assessed from a competitor-centred or customer-focused assessment, or both. It ispreferable to use both, as any one method will address only a part of the total picture.

Table 9.1. Methods of assessing advantage

Competitor-centred Customer-focused

A. Assessing sources (distinctive competences)

1. Management judgments of strengths and weaknesses

2. Comparison of resource and capabilities

3. Marketing skills audit

B. Indicators of positional advantage4. Competitive cost and activity comparisons

a. Value chain comparisons of relative costs

b. Cross-section experience curves

5. Customer comparisons of attributes of firm

versus competitors

a. Choice models

b. Conjoint analysis

c. Market maps

(continued)


Table 9.1. Continued

Dimension Weight (out of 50)

C. Identify key success factors6. Comparison of winning versus losing competitors

7. Identifying high leverage phenomena

a. Management estimates of market share elasticities

b. Drivers of activities in the value chain

D. Measure of performance8. Customer satisfaction surveys

9. Loyalty (customer franchise)

10a. Market share 10b. Relative share of end-user segments

11. Relative profitability

(return on sales and return on assets)

Source: Day and Wensley (1988)


Porter’s generic strategies

n The best-known advocate of generic strategieshas been Michael Porter. Porter (1980) set outthree generic strategies, although he latersubdivided the third (see Figure 9.3). Porter arguedthat only the generic strategies – cost leadership,differentiation or focus – would lead to success.

n Companies that try to use a mixed strategy (costleadership and differentiation, for example), wouldbe ‘stuck in the middle’. This idea that asuccessful strategy demands a single-mindedfocus has been a lasting and influential one (‘stickto the knitting’), although Porter has become lessdogmatic on this.

noitaitnereffiDtsoC rewoL

tsoC .1pihsredael

noitaitnereffiD .2

noitaitnereffiD B3sucof tsoC A3sucof

daorBtegrat

worraNtegrat

Com

petit

ive

Sco

pe

Fig. 9.3 Porter’s generic strategies competitive advantage



ecirP

tsoC

ecirP

tsoC

tiforP

tiforP

tsoc woLrerutcafunam

detaitnereffiDtcudorp

rerutcafunam

Fig. 9.4 An example of competitive advantage


n Profit is obviously the differential between priceand cost, so above-average profit can be earnedeither by charging a premium price (and acceptinga higher cost for producing a differentiatedproduct) or by keeping costs low (and oftenaccepting a lower price for your product). Thesetwo extremes can be viewed as the two ends of aspectrum, with companies occupying positionsalong it.


Overall cost leadership

This strategy has the following advantages:

n Reduced bargaining power of suppliers, ashigh-volume production generated by low priceswill lead to your holding large accounts with themanufacturers.

n Reduced bargaining power of customers –customers have little room to bargain against thecompany selling at the lowest prices.

n The two dangers for a company following acost-leadership strategy are the entry of evenlower-cost producers and a reduction in flexibility.

Differentiation strategy

n A strategy of differentiation is concerned withmaking the intangible and/or tangible aspects of aproduct different from those offered by other sellers.

n Firms sell unique products in the hope of buildinga franchise among less price-sensitive buyers. Thereduced price sensitivity, and hence the higherprice charged, tends to lead to higher profits.

The elements of product quality, product innovation,style and image are all important factors in creatingdifferentiation. Differentiation as a strategy has anumber of advantages:

n Reduced bargaining power of consumers. Thedifferences between products mean that productsare not directly comparable – the consumer eitherhas to pay the price or settle for somethingdifferent.


n Substitutes are less attractive because they arenot direct substitutes.

n Reduced competition, because differentiationcreates a series of monopolistic submarkets.

Focus strategy

n The strategy relates to companies that specialisein a certain segment of the market. There isconsiderable overlap between this type ofsegmentation and that of differentiation strategy.Segmentation focuses on the market anddifferentiation on the product differences.

n A focus strategy has the following two advantages:

1. Reduced competition, by meeting the needsof a particular segment rather than thelarger market.

2. Reduced pressure from substitutes. Its mainproblems occur by being dependent on justone segment, and by being successful andenlarging the segment, other, larger manu-facturers may be attracted into it.

Day’s matrix

Day proposed a similar model (Figure 9.5), usingcustomer price sensitivity and real or perceiveddifferences in the product offering as the axes.


tsoc llarevOpihsredael

leets talFragus denifeR

tnemeCenilosaG

Cus

tom

er p

rice

sens

itivi

ty hgiH

noitaitnereffiDro ytilauq rojam keeS()secnereffid larutcurts

yrenihcam gnivom-htraEsretupmoc emarfniaM

secnailppa rojaM

sucoFro laer rof hcraeS(

)secnereffid deviecrep

secivres tiderCsenizagam sweN

sevitidda dooF

woL

llamS

ni secnereffid evitaler deviecrep ro laeR sgnireffo tcudorp

egraL

dirbyHdna tsoc woL(

)secnereffid esisahpme

noitalusni emoHsevisarba eniF

mug gniwehC

Fig. 9.5 Day’s matrix

Source: Day (1984)

How to use generic strategies

n Generic strategies are best viewed as a frameworkwithin which to think about the strategicpossibilities for an organization.

n Use the generic strategies as a first step in theprocess of developing a strategy, but do not betied by them. Use them creatively and adapt themto your own business and its environment.

n As with all general business models, the genericstrategy approach has been subject to criticism.In particular, it has been pointed out that somecompanies are successful while combiningsupposedly incompatible strategies. Increasingly,low cost has become an absolute essential ratherthan an option.


Scenario planning

n Scenario planning is all about identifying a diverserange of potential futures. This can be done by thesenior management group, the whole company,with external people, whatever. The importantthing is that the group has alternative perspectivesto offer and that all are familiar with theenvironmental analysis which has already beenundertaken.

n A simple approach involves the following foursteps:

1. Identify the critical variables – The long-termdrivers of the business should be identifiedand evaluated on the basis of theirimportance to the business and the level ofcertainty associated with their direction.

2. Develop possible strings of events – The keydrivers of change are those which areimportant but not predictable.

3. Refine the scenarios – At the end of stage 2there should be a range of scenario some ofthese will be more believable than others.The group needs to assess the potentialscenarios on the grounds of internalconsistency, credibility and recognisability.

4. Identify the issues arising – Those scenarioswhich survive need to be reviewed. Have anycritical events or outcomes been identifiedwhich would have a major impact on theorganization?


Assessing risk

n All strategic options carry an element of risk as thefuture is uncertain. Our scenario planning carrieswith it an explicit or implicit prediction of theactivities of many groups, but particularly those ofcustomers and competitors. All of these have anelement of unpredictability.

n The Ansoff matrix can be used to determine thegeneral level of risk. Continuing in existingmarkets is likely to offer the lowest level of risksince the organization is familiar both with themarket and the technology. Market developmentand new product development each add to the riskby adding newness; the first in terms of thecustomer base and the second in terms oftechnology.

n The fourth option within the Ansoff classification isdiversification, which is generally accepted as themost risky as it involves a leap in the unknown interms of marketing and technological knowledge.

n Aaker (1998) suggests the following responses touncertainty dependent on the likely immediacyand potential impact.


hgiH

hgiHwoL

woL

Impa

ct

ycaidemmI

rotinoMrotinoM

dnaesylana

htped-ni esylanAygetarts poleveD

esylana dna rotinoMseigetarts tnegnitnoC

deredisnoc

Fig 9.6 Strategic uncertainty categories

Source: Aaker (1998, p. 109)

n Strategy is defined as the set of decisions taken todetermine how an organization allocates itsresources and achieves sustainable competitiveadvantage in those markets. Its sources aresuperior skills and superior resources, whichdeliver the positional advantages of superiorcustomer value and lower relative costs.

n These link to Porter’s generic strategies ofdifferentiation and cost leadership. Theperformance outcomes of these advantagesare of enhanced market share and profitability.


Hints and tips

n Examiners are interested in your ability to see thestrategic implications of your analysis. Since wecannot change the past, the future is important.Practise your ability to plan alternative futurescenarios which are logically based on youranalysis. Include a sensitivity analysis whichallows the company to make strategic decisionseffectively.

n Return to the learning outcomes listed in Unit 1.Remember that the examiners will be assessingyou on these. Make sure that you feel comfortablewith your ability to demonstrate each of these.


BIBLIOGRAPHYAnsoff, I. (1988) Corporate Strategy, Penguin Books, Harmondsworth.

Day, G.S. (1984) Strategic Market Planning: The Pursuit of Competitive Advantage, West Publishing,Minneapolis.

Day, G.S. and Wensley, R. (1988) ‘Assessing Advantage: A Framework Published by American MarketingAssociation for Diagnosing Competitive Superiority’, Journal of Marketing, 52, April, pp. 1–20.

Doyle, P. (1994) Marketing Management and Strategy, Prentice-Hall International, Hemel Hempstead.

Gurden, D. (2001) In Internet World, Mecklermedia Corporation, Westport, Conn.

Hamel, G. and Prahalad, C.K. (1996) Competing for the Future, Harvard Business School Press, Boston, MA.

Johnson, G. and Scholes, K. (1997) Exploring Corporate Strategy, Prentice-Hall International, HemelHempstead.

Porter, M.E. (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors, New York,Free Press.

Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance, New York,Free Press.

[karen beamish] cim revision cards analysis and ev(bookfi.org)

Documents