strategy notes

7/26/2019 Strategy Notes

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Strategy

This set of "scrap notes" is a review of marketing and strategy tools and concepts that you may find useful

for your project. The intention is to provide you with an aid and reference in formulating and analyzingyour problem.

All of the concepts covered in lectures on competitive strategy are reviewed here. Also, some topics foundhere are notcovered in lectures or assigned readings (specifically, ections !., #.$% #., .$,.! and &.$%&.&'. These are additional topics on conceptual (i.e. )A' marketing and strategy. ince lectures in this

course are limited and cover a wider range of topics in strategy, we do not have the time to cover all the

topics in class. *owever, if you are not already familiar with basic marketing and strategy frameworks,

here is an e+posure to them. ou may find this broader e+posure helpful for several reasons-

understand the conte+t of what iscovered in some lectures,also helpful in review

properly frame your project

find leads to other concepts that may be particularly relevant to your project

CONTENTS

1 GENERIC STRATEGY: TYPES OF COMPETITIVE ADVANTAGE............................................1

2 CONCEPTUAL STRATEGY FRAMEWORKS: OW COMPETITIVE ADVANTAGE IS

CREATED...................................................................................................................................................... .2

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1 Generic Strategy: Types of Competitive Advantage)asically, strategy is about two things- deciding where you want your business to go, and deciding how toget there. A more complete definition is based on competitive advantage, the object of most corporate

strategy-

Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost

of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower pricesthan competitors for equivalent benefits or providing unique benefits that more than offset a higher price.

There are two basic types of competitive advantage: cost leadership and differentiation.

%% ichael orter, Competitive dvantage, $F&, p.#

The figure below defines the choices of "generic strategy" a firm can follow. A firm2s relative position

within an industry is given by its choice of competitive advantage(cost leadership vs. differentiation' and

its choice of competitive scope. 4ompetitive scope distinguishes between firms targeting broad industry

segments and firms focusing on a narrow segment. ?eneric strategies are useful because they characterizestrategic positions at the simplest and broadest level. orter maintains that achieving competitive

advantage reHuires a firm to make a choice about the type and scope of its competitive advantage. There

are different risks inherent in each generic strategy, but being "all things to all people" is a sure recipe for

mediocrity % getting "stuck in the middle".

Treacy and


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2 Conceptual Strategy Frameworks: How CompetitiveAdvantage is Created

3rameworks vs. odels


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P&rter'( $ F&r+e( , E-ee)t( &/ I)0(try Str+tre (source- orter, $F&, p.='

Ne E)tra)t(

3yer(S44-*er(

S5(t*tte(

I)0(try

C&4et*t&r(

6ntensity

of 0ivalry

Threat of

ubstitutes

Threat of

7ew 1ntrants

)argaining ower

of uppliers

)argaining ower

of )uyers

Deter*)a)t( &/ 3yer P&er

3arga*)*)g Le6erage

M )uyer concentration vs. firm concentration

M )uyer volume

M )uyer switching costs

relative to firm

switching costs

M )uyer information

M Ability to backward

integrate

M ubstitute products

M ull%through

Pr*+e Se)(*t*6*ty

MriceNtotal purchasesM roduct differences

M )rand identity

M 6mpact on HualityN

performance

M )uyer profits

M 8ecision makerDs

incentivesDeter*)a)t( &/ S5(t*tt*&) T7reat

M 0elative price performance of substitutes

M witching costs

M )uyer propensity to substitute

R*6a-ry Deter*)a)t(

M6ndustry growth

M 3i+ed (or storage' costs N value added

M 6ntermittent overcapacity

M roduct differences

M )rand identity

M witching costsM 4oncentration and balance

M 6nformational comple+ity

M 8iversity of competitors

M 4orporate stakes

M 1+it barriers

E)try 3arr*er(

M1conomies of scale

M roprietary product differences

M )rand identity

M witching costs

M 4apital reHuirements

M Access to distributionM Absolute cost advantages

roprietary learning curve

Access to necessary inputs

roprietary low%cost product design

M ?overnment policy

M 1+pected retaliation

Deter*)a)t( &/ S44-*er P&er

M 8ifferentiation of inputs

M witching costs of suppliers and firms in the industry

M resence of substitute inputsM upplier concentration

M 6mportance of volume to supplier

M 4ost relative to total purchases in the industry

M 6mpact of inputs on cost or differentiation

M Threat of forward integration relative to threat of

backward integration by firms in the industry

*ow is competitive advantage createdJ

At the most fundamental level, firms create competitive advantage by perceiving or discovering new and

better ways to compete in an industry and bringing them to market, which is ultimately an act ofinnovation. 6nnovations shift competitive advantage when rivals either fail to perceive the new way of

competing or are unwilling or unable to respond. There can be significant advantages to early movers

responding to innovations, particularly in industries with significant economies of scale or when customers

are more concerned about switching suppliers. The most typical causes of innovations that shiftcompetitive advantage are the following-

new technologies

new or shifting buyer needs

the emergence of a new industry segment

shifting input costs or availability

changes in government regulations

*ow is competitive advantage implementedJ)ut besides watching industry trends, what can the firm doJ At the level of strategy implementation,

competitive advantage grows out of the way firms perform discrete activities % conceiving new ways toconduct activities, employing new procedures, new technologies, or different inputs. The "fit" of different

strategic activities is also vital to lock out imitators. orters ";alue 4hain" and "Activity apping"

concepts help us think about how activities build competitive advantage.

The value chainis a systematic way of e+amining all the activities a firm performs and how they interact.

6t scrutinizes each of the activities of the firm (e.g. development, marketing, sales, operations, etc.' as a

potential source of advantage. The value chain maps a firm into its strategically relevant activities in order

#


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to understand the behavior of costsand the e+isting and potential sources of differentiation . 8ifferentiation

results, fundamentally, from the way a firm2s product, associated services, and other activities affect its

buyer2s activities. All the activities in the value chain contribute to buyer value, and the cumulative costs in

the chain will determine the difference between the buyer value and producer cost.

A firm gains competitive advantage by performing these strategically important activities more cheaply or

better than its competitors. /ne of the reasons the value chain framework is helpful is because it

emphasizes that competitive advantage can come not just from great products or services, but fromanywhere along the value chain. 6t2s also important to understand how a firm fits into the overall value

system, which includes the value chains of its suppliers, channels, and buyers.


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0eferences-

orter, ichael, Competitive dvantage, The 3ree ress, 7, $F&.

orter, ichael, The Competitive dvantage of -ations, The 3ree ress, 7, $B.

orter, ichael, "


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outsourcing.


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!. x*post limits to competition PQ rents sustained

ubseHuent to a firm gaining a superior position and earning rents, there must be forces that limit

competition for those rents (imitability and substitutability'.

#. )mperfect mobilityPQ rents sustained within the firm0esources are imperfectly mobile if they cannot be traded, so they cannot be bid away from their

employerO competitive advantage is sustained.

. x*ante limits to competitionPQ rents not offset by costs

rior to the firm establishing its superior position, there must be limited competition for that position./therwise, the cost of getting there would offset the benefit of the resource or asset.

6mplications for strategyJ

anagers should build their strategies on resources that pass the above tests. 6n determining what are

valuable resources, firms should look both at e+ternal industry conditions and at their internal

capabilities. 0esources can come from anywhere in the value chain and can be physical assets,

intangibles, or routines.

4ontinuous improvement and upgrading of the resources is essential to prospering in a constantly

changing environment. 3irms should consider industry structure and dynamics when deciding which

resources to invest in.

6n corporations with a divisional structure, it2s easy to make the mistake of optimizing divisional profits

and letting investment in resources take a back seat. ?ood strategy reHuires continual rethinking of the company2s scope, to make sure it2s making the most

of its resources and not getting into markets where it does not have a resource advantage. 0); can

inform about the risks and benefits of diversification strategies.

0eferences-

4ollis, 8avid C.O ontgomery, 4ynthia A. "4ompeting on resources- strategy in the $Bs","arvard

#usiness $eview, v@#, n (Culy%August, $&'-$$F ($$ pages'.

.A. eteraf, "The 4ornerstones of 4ompetitive Advantage- A 0esource%)ased ;iew," in 1trategic

&anagement 2ournal$#, ;ol. $, pp. $@%$$.

2. (lternati)e Frame"or*s+ ,)olutionary C$ane and ypercompetition

0ecently, strategy literature has focused on managing change as the central strategic challenge. 4hange,

the story goes, is the striking feature of contemporary business, and successful firms will be the ones thatdeal most effectively with change, not simply those that are good at planning ahead.


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not hindered by too much planning or centralized control, but they have enough structure so that change

can be organized to happen. They successfully evolve, because they pursue a variety of moves, and in

doing so make some mistakes but also relentlessly reinvent the business by discovering new growth

opportunities. This strategy is characterized by being unpredictable, uncontrolled, and inefficient, but itworks. 6t2s important to note that firms should not just react well to change, but must also do a good job of

anticipating and leading change. 6n successful businesses, change is time*paced, or triggered by the

passage of time rather than events.

6n#uilt to (ast, 4ollins and orras ($' outline habits of long%successful, visionary companies.

9nderlying the habits is an orientation towards evolutionary change- try a lot of stuff and keep what works.

1volutionary processes can be a powerful way to stimulate progress. 6mportantly, though, 4ollins and

orras also find that successful companies each have a core ideology that must be preserved throughout theprogress. There is no one formula for the "right" set of core values, but it is important to have them. 6n

strategy%speak, it is this core ideology that most fundamentally differentiates the firm from competitors,

regardless of which market segments they get into. They are deeply held values that go beyond "vision

statements" % they are mechanisms and systems that are built into the system over time. Attention to thecore beliefs may sometimes defy short%term profit incentives or conventional business wisdom, but it is

important to maintain them. 1+amples of core ideologies are- *2s commitment to making an "original

technical contribution" in every market they enter, ey capabilities enabling speed and surprise in a wide range of actions

8isruptive tactics illuminated by game theory (shifting the rules of the game, signaling, simultaneousand strategic thrusts'

F


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Additional Tools for Strategic T!inking and Analysis

3.1 /ame 0$eory

?ame Theory in trategy

?ame theory helps analyze dynamic and seHuential decisions at the tactical level. The main value of gametheory in strategy is to emphasize the importance of thinking ahead, thinking of the alternatives, and

anticipating the reactions of other players in your "game." >ey concepts relevant to strategy are the payoff

matri+, e+tensive form games, and the core of a game. Application areas in strategy are-

new product introduction

licensing versus production

pricing

058

advertising

regulation

The 6mportance of 9nderstanding "The ?ame"

uccessful strategy cannot depend just on one firm2s position in industry, capabilities, activities, or what

have you. 6t depends on how others react to your moves, and how others think you will react to theirs. )yfully understanding the dynamic with others, you can recognize win%win strategies that make you better offin the long term, and signaling tactics that avoid lose%lose outcomes. oreover, if you understand the

game, you can take actions to change the rules or players of the game in your favor. )randenburger and

7alebuff ($&' give some good e+amples of this. /ne way a company can change the game and capture

more value is by changing the value other players can bring to it, as the 7intendo e+ample illustrated. 6nsummary, companies can change their game of business in their favor by changing-

players(";alue 7et"' % customers, suppliers, substitutors, and complementors (not just the

competitors'

added values% the value that each player brings to the collective game

rules% laws, customs, contracts, etc. that give a game its structure

tactics% moves used to shape the way players perceive the game and hence how they play

scope% boundaries of the game.

?ame theory has been a burgeoning branch of economics in recent years. 6t is a comple+ subject that spans

games of static (one%time' and dynamic (repeated' nature under perfect or imperfect information. Thereferences below will be helpful for those wishing to e+plore the theory and modeling of game theory in

more detail. 3or strategy, though, it can often be a major step just to recognize certain situations as games,

and thinking about how a player can set out to change the game.

0eferences-

6ntroduction to game theory in corporate strategy

/ster, ..,&odern Competitive nalysis, 4hapter, $#, /+ford ress, $, pp.!#@%!&B.

)randenburger, Adam .O 7alebuff, )arry C. "The right game- use game theory to shape strategy"

"arvard #usiness $eviewv@#, n (Culy%August, $&'-&@.

)asic introduction to game theory concepts

A.>. 8i+it and ). C. 7alebuff, Thining 1trategically: The Competitive dge in #usiness, /olitics, and

veryday (ife,


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3udenberg, 8. and C. Tirole, 3ame Theory, 4ambridge- 6T ress, $$.

yerson, 0., 3ame Theory: n nalysis of Conflict, 4ambridge- *arvard 9niversity ress, $$.

3.2 ptions

/ptions theory has influenced corporate strategy unlike any other paradigm coming from


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0eal /ptions in 4apital 6nvestment, Trigeorgis, :, editor, $&.

* collection of articles intended for both academic and professional audience.

Trigeorgis, :., 0eal /ptions - anagerial 3le+ibility and trategy in 0esource Allocation , 6T ress, $=.* /erhaps the best overall general introduction to real options, without taing a strictly finance or strictly

decision analytic approach. 4eatures a good comparison of various approaches to valuing risy

investments. practical approach that is not as academic as %ixit and /indyc.

A+a0e*+ Re/ere)+e(

8i+it, Avinash >. and 0obert . indyck, 6nvestment 9nder 9ncertainty, rinceton, $.The boo to read if you are interested in mathematical formulations of real options problems +i.e. dynamic

programming and stochastic differential equations

:uenberger, 8., 6nvestment cience, /+ford 9niv. ress, $@(uenberger5s binomial lattice approach is a useful simplification of dynamic programming approaches to

real options. The boo also includes some powerful finance tools for pricing maret ris.

mith, Cames 1., I/ptions in the real world- :essons learned in evaluating oil and gas investments,K

/perations 0esearch, CanN3eb $.

mith, Cames 1. and 0obert 7au, I;aluing 0isky rojects- /ption ricing Theory and 8ecision

Analysis,K anagement cience, ;ol. $, 7o. &, ay $&.

mith, Cames 1., I;aluing /il roperties- 6ntegrating /ption ricing and 8ecision Analysis

Approaches,K /perations 0esearch, arNApr $F.

* 2im 1mith5s wor has been instrumental in integrating the decision analysis and finance approaches to

risy investments. 4ocuses mainly on problems that are at least partly influenced by maret*spanning riss+i.e. riss that are priced by exchange traded derivatives, such as oil and gas futures

P&4-ar 3(*)e(( Re/ere)+e(

A number of recent articles have promoted real options to the general management audience-

Amram, ., 7. >ulatilaka, I8isciplined decisions- Aligning strategy with the financial markets,K"arvard#usiness $eview, CanN3eb $.

* a concise summary of the concepts in their boo +see above.

8i+it, Avinash >. and 0obert . indyck, IThe /ptions Approach to 4apital 6nvestment,K *arvard )usiness0eview, ay $&.

* a good overview of why flexibility in decision maing is important. 6ritten by the authors who are also

experts in the academic real options literaure. A good starting point for those who are already familiar

with decision analysis.

:eslie, >. and ichaels, . IThe 0eal ower of 0eal /ptions,K c>insey Ruarterly, $@ 7o #.

* promotes the intuition from analysis of real options as a framewor for strategic thining.

4opeland, T. and . >eenan, I*ow much is fle+ibility worth,K c>insey Ruarterly, $F 7o !* general introduction to real options as a means to price maret ris, focusing more on the finance

tradition of real options +no arbitrage pricing than the decision analysis tradition. 7seful if you are

dealing with uncertainties that are traced well by the maret +i.e. oil and gas prices, etc.

:uehrman, T., I6nvestment /pportunities as 0eal /ptions- ?etting tarted on the 7umbers,K *arvard

)usiness 0eview, Culy $F.

:uehrman, T., Itrategy as a ortfolio of 0eal /ptions,K *arvard )usiness 0eview, eptember $F.

$$


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* try to generali0e the #lac*1choles basis for real options thining to a general audience. A bit hoky and

simplistic.

$!


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3.3 Strateic Scenarios

cenarios are powerful vehicles for challenging our mental models of the world. The value is not inpredicting the future, but in making better decisions today. The decision makers could be individuals,

businesses, or policy makers. cenarios are a nice complement to the principles of decision analysis- the

8A cycle ends in decisions and insights, while the scenario process ends in a scenario.


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3. t$er Particularly Rele)ant Core Concepts

tudents have a host of analytical tools available to add insight to strategic thinking and analysis. ome of

the more directly relevant topics include-

8ecision Analysis

% decision hierarchy and framing

% strategy tables% tornado diagrams

% analysis of decisions under uncertainty

% value of information

% options in decisions

3inance

% investment analysis

% real options

1conomics

% demand%oriented pricing (dynamic, monopolistic pricing'

% game theory

$


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" #arketing #odels for $roduct Strategytrategy teaches two product planning methodologies that may be used independently or as complements toeach other. They add rigor to strategy at the level of product planning and implementation. An e+cellent

reference for these and other marketing models is :ilien and 0angasaway ($F'.

.1 e" Product i##usion 4odels

The diffusionprocess is the spread of an idea or the penetration of a market by a new product from its

source of creation to its ultimate users or adopters. 7ote that adoptionrefers to the decision to use aninnovation regularly, whereas diffusionis only concerned with initial trial of the product. (ource- :ilien,

>otler and oorthy, $!,p. =$'

There are two types of diffusion effects-

)nnovation- trial of product caused by advertising and promotions

)mitation- trial of product caused by word%of%mouth recommendations and reputation

rior to )ass ($=', diffusion models were either pure innovative (assume diffusion only caused by

e+ternal forces' or pure imitative (assume diffusion only caused by imitation N word of mouth'. The )assmodel combines innovative and imitative behavior into one model-

''('((''(('('( t-mt-m

qt-mpt-tn +==

innovation

effect

or

e+ternal

influence

imitation

effect

or

internal

influence

where-

'('( t-tn = P agnitude of trial demand (P the number of adopters at time tP derivative of-with

respect to t'

'(t- P 4umulative number of adopters

m P otential number of ultimate adoptersp P 6nfluence parameter for innovationq P 6nfluence parameter for imitation

This e+pression can be rewritten for additional intuitive understanding using the eHuivalent representation-

'S('ST(T'( t9m

qpt-mt- +=

unpenetrated

market size

adoptive pressure

Pinnovative

qPimitative

Terms can be interpreted as representing one group of innovators and one group of imitators, or asrepresenting both the internal and e+ternal influences on all adopters.

$&


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6mportant ?uidelines for arket 3orecasting

The model forecasts totalmarket potential for a product, notsales for a particular company. 4ompany

sales would depend on market share of the total, which depends on particular product variables likeHuality, cost, and promotion, and distribution. 8iffusion models only help with the big pictureO use

conjoint analysis or other methods to forecast market share.

6n practice the actual coefficients are usually estimated by analogy to past products. 4oefficients for

past products are generally available in tables, or may be estimated by regression. 0emember that diffusion models only represent demand associated with the trial of a product.

Additional terms need to be added to account for repeat purchase. A model that takes into

consideration both trial and repeat purchase demand would be a complete sales forecast.

The )ass model is a predictive model that is most appropriate for forecasting sales of a discontinuous

new technology or durable product that has no competitors. 6n such situations, the success of the

product may be particularly uncertain, and the )ass model forecast may only depict one possible

outcome.


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consumers would choose among new, modified, and e+isting products. 4onjoint analysis allows us to

analyze future market scenarios based on primary market research. /ther techniHues, such as historical

analysis, would be insufficient to forecast the market for new products, whereas conjoint analysis can

model consumersD reaction to hypothetical products that may not yet e+ist.

4onjoint analysis is a decompositionalmodel in that values are derived from consumersD responses to

interview Huestions, as compared to asking consumers to directly estimate model parameters. 6n direct

assessment, respondents are asked how likely they are to buy a certain product or how much they would bewilling to pay for a product with an attribute improvement. This techniHue is limited in that products are

not shown in a competitive conte+t and these Huestions do not generally represent realistic purchase

decisions. Alternatively, conjoint analysis uses inference, which provides a more accurate picture of

consumersD buying behavior. 6n the analysis of responses to Huestions about hypothetical productconcepts, we can infer the value to each respondent of having each attribute level. 0ather than e+pecting

respondents to provide direct assessments, they are asked to make a number of decisions that are more

realistic and natural. 6n a typical pairwise comparison, two product concepts are considered


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Re/ere)+e((organized by needsNinterest and ordered by usefulness'-

A host of references and guides to choosing software are available at http-NNwww.sawtoothsoftware.comN

?etting tarted with 4onjoint on our roject

4urry, Coseph, I4onjoint Analysis- After the )asicsK

/rme, )ryan, Irieger, I4onjoint Analysis with roduct%ositioning Applications,K

"andboos in $ ; &1, v. & ($#'-=@ (#& pages'

:ilien, ?ary, and A. 0angasaway,&areting ngineering, Addison%


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:ilien, ?ary, hilip >otler, and >. ridhar oorthy, I8ecision odels for roduct 8esign,K&areting

&odels($!'-!#F

% Conceptual #arketing Frameworksuch of the )A level marketing material is not concerned with just sales and services, but rather withissues of strategic importance. The following lists and descriptions provide an overview of important

marketing concepts. ou2ll notice that some of the concepts overlap with strategy frameworks.

An e+cellent reference te+tbook for marketing frameworks->otler, hilip.&areting &anagement : nalysis, /lanning, )mplementation, and Control, th ed. 9pper

addle 0iver, 7C - rentice *all, $@.

5.1 0$e Four P6s o# t$e 4ar*etin 4i7

The phrase Ithe four pDsK is an easy way to remember and characterize the four most important marketing

decision variables. The four Ds are price, product, promotion, and place-

IriceK variables-

Allowances and deals 8istribution and retailer markups

8iscount structure

IroductKvariables-

Ruality

odels and sizes

ackaging

)rands

ervice

IromotionK variables-

Advertising

ales promotion

ersonal selling ublicity

IlaceK variables-

4hannels of distribution

/utlet location

ales territories

otler, $@

5.2 4ar*et-riented Strateic Plannin

Iarket%oriented strategic planning is the managerial process of developing and maintaining a viable fitbetween the organizationDs objectives, skills, and resources and its changing market opportunities. The aim

of strategic planning is to shape and reshape the companyDs businesses and products so that they yield

target profits and growth.K % >otler, $@

Three key ideas-

anage the companyDs business as an investment portfolio.

Assess the future profit potential of each business by consider the market growth rate and the

companyDs fit.

$


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8evelop a strategic game plan that makes sense in light of the companyDs industry position, objectives,

skills, and resources.

The business strategic planning process-

)usiness

mission

1+ternal

environmental

analysis

6nternal

environmental

analysis

?oal

formulation

trategy

formulation

.rogram

formulation 6mplementation3eedback

and control

)oston 4onsulting ?roup ?rowth%hare atri+- I6nvest in the stars, get rid of the dogsUK The framework

promotes the importance of market growth rate and market share in determining the strategic importance ofa product.

StarsQuestion

Marks

Cash Cows Dogs

MarketGrowthRate

0%

10%

20%

10x 1x .1xRelative Market Share

Alternative ;iews /f The ;alue 4reation rocess-

/ne traditional business approach ignores the impact of marketing research on product design. 9nder this

framework, the first step is to make the product, and then the second step is to figure out how and to whom

it will be sold. This is still a common problem in many companies today. A more sophisticated paradigmrecognizes that the consumer demand should drive product design. arketing research, segmentation,

positioning, and conjoint analysis are all e+amples of this more sophisticated approach. The diagrams

below illustrate the two paradigms.

Traditional physical process seHuence-

!B


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ake the roduct ell the product

8esign

productrocure ake rice ell

AdvertiseN

romote8istribute ervice

The value creation and delivery seHuence (c>insey'-

4hoose the value 4ommunicate the value

ourcing

aking

8istributing

ervicing

rovide the value

4ustomer

segmentation

arket

selectionN

focus

;alue

ositioning

roduct

devel

ervice

develricing alesforce

ales

promotion

Advertising

5.3 4ar*et Sementation8 0aretin8 and Positionin

IT arketingK is one way to characterize the modern strategic marketing approach. T stands for1egmenting, Targeting, and/ositioning. The idea is to use a more direct IrifleK approach instead of an

undirected IshotgunK approach-

$. 6dentify segmentation

variables and segment themarket.

!. 8evelop profiles of

resulting segments.

Mar8et Target*)g Mar8et P&(*t*&)*)gMar8et Seg.e)tat*&)

$. 1valuate the

attractiveness of each segment.

!. elect the target

segment(s'.

$. 6dentify possible

positioning concepts for each target segment.

!. elect, develop, and communicate

the chosen positioning concept.

Additional 7otes /n egmentation, Targeting And ositioning-

The following set of notes provides a brief outline some of the key ideas in this area.

Alternative approaches to marketing strategy-

ass marketing- one product for all customers

roduct%variety marketing- a variety of products for customers to choose from

Target marketing- targeted products for specific customer groups

atterns of market segmentation-

*omogeneous preferences

8iffused preferences

4lustered preferences

arket segmentation procedure (one common approach' (>otler, $@'-$' urvey tage- 1+ploratory interviews and focus groups, followed by Huestionnaires to assess-

Attributes and their importance ratings

!$


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)rand awareness

roduct%usage patterns

Attitudes toward the product category

8emographics, etc.

!' Analysis tage-

3actor analysis applied to remove highly correlated variables.

4luster analysis applied to Icreate a specific number of ma+imally different segmentsK.#' rofiling tage- 1ach cluster is profiled in terms of its distinguishing attitudes, behavior, V 1ach

cluster is a market segment.

arket targeting- # criteria for evaluating market segments-

egment size and growth

egment structural attractiveness (orterDs & forces'

4ompany objectives and resources

3ive patterns of target market selection (Abell' (p. !F'-

M1 M2 M3 M1 M2 M3 M1 M2 M3 M1 M2 M3 M1 M2 M3

P1 P1 P1 P1 P1

P2 P2 P2 P2 P2

P3 P3 P3 P3 P3

Singleseg!ent

"on"entration

Singleseg!ent

"on"entration

Market

s#e"iali$ation

Pro%u"t

s#e"iali$ation

&ull "overage

P ' Pro%u"t M ' Market

8eveloping a positioning strategy-

Iositioning is the act of designing the companyDs offer and image so that it occupies a distinct and

valued place in the target customersD minds.K (>otler'

9- 9niHue elling osition. romotion of a single benefit to the marketplace. 1ffective strategy(as opposed to touting multiple benefits'.

ositioning strategies-

Attribute positioning

)enefit positioning

9seNapplication positioning

9ser positioning

4ompetitor positioning

roduct category positioning

RualityNprice positioning

Three steps-$. 6dentify differences!. 4hoose most important differences

#. 1ffectively signal differences to the target market

1conomics- 8ifferentiationpremium pricing

Treacy and


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4ustomer intimacy

roduct leadership

8ifferentiation-

roduct differentiation-

ervice differentiation-

ersonnel differentiation- 6mage differentiation-

5. (naly9in Industries and Competitors

6ndustries and competition play a central role in strategic analysis. The following notes reiterate these ideasfrom a marketing perspective.

6ndustry concept of competition % factors affecting industry structure and competition-

7umber of sellers and degree of differentiation

1ntry and mobility barriers

1+it and shrinkage barriers 4ost structures

;ertical integration

?lobal reach

6ndustry structure types-

ure monopoly

ure oligopoly

8ifferentiated oligopoly

onopolistic competition

ure competition

arket concept of competition- 6t may be important to consider competitors which make different productsbut which meet similar needs. This is different from an industry perspective when the view of competition

is limited to those firms offering the same or very similar products.

roduct segmentation

arket segmentation

4ompetitive intelligence- gathering data about competitors. )enchmarking.

True market orientation balances consumer and competitor considerations. 4hanging consumer needs and

latent competitors are key factors and can be more devastating than e+isting competitor actions.

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5.5 0$e 0ec$noloy (doption :i#e Cycle+ iscontinuous Inno)ations

ome basic marketing concepts should be considered when thinking about market forecasts and newproduct strategies. 3or instance, thinking of the new product diffusion cycle ()ass model' as an inevitable

cycle of sales can be very misleading. 3irst of all, the diffusion model forecasts total market potential, and

says nothing about the market share at a particular company. econd, the decisions of the firm can

influence the sales. This is fairly obvious when it comes to the influence of product Huality and cost, butmarketing strategy is also critically important when introducing new products that are discontinuous

innovations. 6n these cases, the market is not yet aware of the need for the new product, and an

understanding of how a product moves through the technology life cycle will help a product reach its full

potential faster and with higher likelihood of success.

?eoff oore, in his books Crossing the Chasm($$' and)nside the Tornado($&', draws on marketing

theory and high%tech e+perience to describe the elements of the product life cycle for technology

innovations. *is work e+amines how communities respond to discontinuous innovations % or any newproducts or services that reHuire the end user in the marketplace to dramatically change their past behavior.

*e describes how companies must position their products differently through the cycle to reach their full

sales potential and become an industry standard instead of a novelty. any new hi%tech products start

along a classic new product diffusion curve, but fail soon thereafter. Anyone developing strategy for

discontinuousinnovations should be familiar with the ideas oore writes about. Through the variousphases of the technology adoption life cycle, very different strategies for product and service offering and

positioning are called for.

The basis of the technology adoption life cycle is similar to the basis for diffusion models- different groups

of potential customers react differently to innovations, and adoption proceeds from most enthusiastic to

most conservative. 4ommunities respond to discontinuous innovation % when confronted with the

opportunity to switch to a new infrastructure paradigm, customers self%segregate along an a+is of risk%aversion. oore separates customers into five categories, along which the cycle of new technology

adoption proceeds-

$. 6nnovators * technology enthusiastswho are fundamentally committed to new technology on the

grounds that sooner or later it will improve their lives.!. 1arly Adopters % visionariesand entrepreneurs in business and government who want to use the

innovation to make a break with the past and start an entirely new future

#. 1arly ajority %pragmatistswho make up the bulk of all technology infrastructure purchasesO their

purchasing behavior is based on evolution rather than revolution, and they buy only when there is aproven track record of useful productivity improvement.

. :ater ajority % conservativeswho are very price sensitive and pessimistic about the added value of

the productO they buy only when technology has been simplified and commoditized.

&. :aggards %septicswho are not really potential customersO goal is not to sell to them, but sell aroundtheir constant criticism.

The customer segments correspond to zones in the "landscape" figure below. 6n addition, there is a si+th

zone that oore calls the "chasm," separating adoption by the early market customers ($,!' from adoptionby the early majority (#'. oore describes the chasm as follows-


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T7e La)0(+a4e &/ t7e Te+7)&-&gy A0&4t*&) L*/e+y+-e (source- oore, $&, p.!&'

1arly arket The

4hasm

TheTornado

ain treet

1nd of :ife

The strategy for "crossing the chasm," as well as the strategy for each of the other "zones", are very

particular to where the product is in the life cycle.

The figure below emphasizes the different value disciplines reHuired at different stages. 7ote that thesource of competitive advantage changes through the cycle % in orter terms, it draws on various

combinations of competing on cost (operational e+cellence', differentiation (product leadership', and focus(customer intimacy'.

Va-e D*(+*4-*)e( a)0 t7e L*/e Cy+-e(source- oore, $&, p.$@='

roduct:eadership

only

roduct :eadership

5

/perational 1+cellence

roduct :eadership

5

4ustomer 6ntimacy

/perational 1+cellence

5

4ustomer 6ntimacy

oore ($&, p.!&' characterizes the zones as follows- The arly &aret

A time of great e+citement when customers are technology enthusiasts and visionaries looking to be

first to get on board with the new paradigm. ;isionaries are willing to work through bugs and put in

effort themselves to make the solution work. The product sells itself.

The Chasm

A time of great despair, when the early market2s interest wanes but the mainstream market is still not

comfortable with the immaturity of the solutions available. The only safe way to cross the chasm is to

put all your eggs in one basket % target a single beachhead of pragmatist customers in a mainstreammarket segment and accelerate the formation of $BB percent of their whole product.

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The #owling lley

A period of niche%based adoption in advance of the general marketplace, driven by compelling

customer needs and the willingness of vendors to craft niche%specific whole products. A wholeproductis the minimum set of products and services necessary to ensure that the target customer will

achieve his or her compelling reason to buy. ragmatists want a whole product, with the necessary

user infrastructure and customer support. At this stage, companies should resist the temptation to try to

provide a general purpose whole product and simplify the whole product challenge. To get customerson board, service content is high, 0/6 to end user must be high, and partnerships with other companies

may be called for. uccess in the niche can then be leveraged elsewhere. The two keys to targeting the

right niche customers here are ($' the segment has a compelling reason to buy, and (!' the segment is

not currently well served by any competitor.

The Tornado

An ugly and frenzied period of mass%market adoption, when the general marketplace (early majority

customers' switches over to the new infrastructure paradigm. 6t2s a herd mentality. >eys to success in

this period are to ignore customer needs and product modifications and

strategy notes

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