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Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry¶s likely profitability is conducted in Porter¶s five forces model.
A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace.
Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business.
In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services.
Porter suggested that the intensity of competition is determined by the relative strengths of these forces.
Main Aspects of Porter¶s Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization¶s behaviour in a competitive market. These include the following:
The rivalry between existing sellers in the market. The power exerted by the customers in the market. The impact of the suppliers on the sellers. The potential threat of new sellers entering the market. The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998).
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head
This force is located at the centre of the diagram; Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
Economies of scale: for example, benefits associated with bulk purchasing; Cost of entry: for example, investment into technology; Distribution channels: for example, ease of access for competitors; Cost advantages not related to the size of the company: for example, contacts and expertise; Government legislations: for example, introduction of new laws might weaken company¶s competitive position;
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-toperformance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs ± that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service.
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry.
This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
businesses supplying large grocery companies;
Present where there is a large number of undifferentiated, small suppliers, such as small farming
Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
Where the switching costs are high (switching from one Internet provider to another); High power of brands (McDonalds, British Airways, Tesco); Possibility of forward integration of suppliers (Brewers buying bars); Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
" The nature of competition in an industry is strongly affected by suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. "
The BCG matrix or also called BCG model relates to marketing. The BCG model is a well-known portfolio management tool used in product life cycle theory. BCG matrix is often used to prioritize which products within company product mix get more funding and attention. The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. The BCG model is based on classification of products (and implicitly also company business units) into four categories based on combinations of market growth and market share relative to the largest competitor.
When should I use the BCG matrix model?
Each product has its product life cycle, and each stage in product's life-cycle represents a different profile of risk and return. In general, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products. A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. An example of this product would be an iPod. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash. An example of this product would be a regular Colgate toothpaste. But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix? Should we promote one product more than the other one? The BCG matrix can help with this. The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units.
What is the BCG matrix and how does the BCG model work?
Placing products in the BCG matrix results in 4 categories in a portfolio of a company: BCG STARS (high growth, high market share)
- Stars are defined by having high market share in a growing market. - Stars are the leaders in the business but still need a lot of support for promotion a placement. - If market share is kept, Stars are likely to grow into cash cows. BCG QUESTION MARKS (high growth, low market share) - These products are in growing markets but have low market share. - Question marks are essentially new products where buyers have yet to discover them. - The marketing strategy is to get markets to adopt these products. - Question marks have high demands and low returns due to low market share. - These products need to increase their market share quickly or they become dogs. - The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them. BCG CASH COWS (low growth, high market share) - Cash cows are in a position of high market share in a mature market. - If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of cash flow. - Because of the low growth, promotion and placement investments are low. - Investments into supporting infrastructure can improve efficiency and increase cash flow more. - Cash cows are the products that businesses strive for. BCG DOGS (low growth, low market share) - Dogs are in low growth markets and have low market share. - Dogs should be avoided and minimized. - Expensive turn-around plans usually do not help. And now, let's put all this into a picture:
Are there any problems with the BCG matrix model?
Some limitations of the BCG matrix model include:
o o o o o o o
The first problem can be how we define market and how we get data about market share A high market share does not necessarily lead to profitability at all times The model employs only two dimensions ± market share and product or service growth rate Low share or niche businesses can be profitable too (some Dogs can be more profitable than cash Cows) The model does not reflect growth rates of the overall market The model neglects the effects of synergy between business units Market growth is not the only indicator for attractiveness of a market
The GE matrix is an alternative technique used in brand marketing and product management to help a company decide what product(s) to add to its product portfolio, and which market opportunities are worthy of continued investment. Also known as the 'Directional Policy Matrix,' the GE multi-factor model was first developed by General Electric in the 1970s. Conceptually, the GE Matrix is similar to the Boston Box as it is plotted on a two-dimensional grid. In most versions of the matrix:
the Y-Axis comprises industry attractiveness measures, such as Market Profitability, Fit with Core Skills etc. and the X-Axis comprises business strength measures, such as Price, Service Levels etc.
Each product, brand, service, or potential product is mapped as a piechart onto this industry attractiveness/business strength space. The diameter of each piechart is proportional to the Volume or Revenue accruing to each opportunity, and the solid slice of each pie represents the share of the market enjoyed by the planning company. The planning company should invest in opportunities that appear to the top left of the matrix. The rationale is that the planning company should invest in segments that are both attractive and in which it has established some measure of competitive advantage. Opportunities appearing in the bottom right of the matrix are both unattractive to the planning company and in which it is competitively weak. At best, these are candidates for cash management; at worst candidates for divestment. Opportunities appearing 'in between' these extremes pose more of a problem, and the planning company has to make a strategic decision whether to 'redouble its efforts' in the hopes of achieving market leadership, manage them for cash, or cut its losses and divest.
The General Business Screen was originally developed to help marketing managers overcome the problems that are commonly associated with the Boston Matrix (BCG), such as the problems with the lack of credible business information, the fact that BCG deals primarily with commodities not brands or Strategic Business Units (SBU's), and that cashflow is often a more reliable indicator of position as opposed to market growth/share. The GE Business Screen introduces a three by three matrix, which now includes a medium category. It utilizes industry attractiveness as a more inclusive measure than BCG's market growth and substitutes competitive position for the original's market share.
So in come Strategic Business Units (SBU's). A large corporation may have many SBU's, which essentially operate under the same strategic umbrella, but are distinctive and individual. A loose example would refer to Microsoft, with SBU's for operating systems, business software, consumer software and mobile and Internet technologies. Growth/share are replaced by competitive position and market attractiveness. The point is that successful SBU's will go and do well in attractive markets because they add value that customers will pay for. So weak companies do badly for the opposite reasons. To help break down decision-making further, you then consider a number of sub-criteria: For market attractiveness:
* * * * * * Size of market. Market rate of growth. The nature of competition and its diversity. Profit margin. Impact of technology, the law, and energy efficiency. Environmental impact.
. . . and for competitive position:
* * * * * * * * Market share. Management profile. R & D. Quality of products and services. Branding and promotions success. Place (or distribution). Efficiency. Cost reduction.
At this stage the marketing manager adapts the list above to the needs of his strategy. The GE matrix has 5 steps:
* One - Identify your products, brands, experiences, solutions, or SBU's. * Two - Answer the question, What makes this market so attractive? * Three - Decide on the factors that position the business on the GE matrix.
* Four - Determine the best ways to measure attractiveness and business position. * Five - Finally rank each SBU as either low, medium or high for business strength, and low, medium and high in relation to market attractiveness.
Now follow the usual words of caution that go with all boxes, models and matrices. Yes the GE matrix is superior to the Boston Matrix since it uses several dimensions, as opposed to BCG's two. However, problems or limitations include:
* There is no research to prove that there is a relationship between market attractiveness and business position. * The interrelationships between SBU's, products, brands, experiences or solutions is not taken into account. * This approach does require extensive data gathering. * Scoring is personal and subjective. * There is no hard and fast rule on how to weight elements. * The GE matrix offers a broad strategy and does not indicate how best to implement it.
Internal-External (IE) Matrix
The Internal-External (IE) matrix is another strategic management tool used to analyze working conditions and strategic position of a business. The Internal External Matrix or short IE matrix is based on an analysis of internal and external business factors which are combined into one suggestive model. The IE matrix is a continuation of the EFE matrix and IFE matrix models.
How does the Internal-External IE matrix work?
The IE matrix belongs to the group of strategic portfolio management tools. In a similar manner like the BCG matrix, the IE matrix positions an organization into a nine cell matrix. The IE matrix is based on the following two criteria: 1. Score from the EFE matrix -- this score is plotted on the y-axis 2. Score from the IFE matrix -- plotted on the x-axis The IE matrix works in a way that you plot the total weighted score from the EFE matrix on the y axis and draw a horizontal line across the plane. Then you take the score calculated in the IFE matrix, plot it on the x axis, and draw a vertical line across the plane. The point where your horizontal line meets your vertical line is the determinant of your strategy. This point shows the strategy that your company should follow. On the x axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal position. A score of 2.0 to 2.99 is considered average. A score of 3.0 to 4.0 is strong.
On the y axis, an EFE total weighted score of 1.0 to 1.99 is considered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to 4.0 is high.
IE matrix example...
Let us take a look at an example. We calculated IFE matrix for an anonymous company on the IFE matrix page. The total weighted score calculated on this page is 2.79 which points at a company with an above-average internal strength. We also calculated the EFE matrix for the same company on the EFE matrix page. The total weighted score calculated for the EFE matrix is 2.46 which suggests a slightly less than average ability to respond to external factors. Now we plot these values on axes in the IE matrix.
This IE matrix tells us that our company should hold and maintain its position. The company should pursue strategies focused on increasing market penetration and product development (more about this below).
What does the IE matrix tell me?
Your horizontal and vertical lines meet in one of the nine cells in the IE matrix. You should follow a strategy depending on in which cell those lines intersect. The IE matrix can be divided into three major regions that have different strategy implications. Cells I, II, and III suggest the grow and build strategy. This means intensive and aggressive tactical strategies. Your strategies should focus on market penetration, market development, and
product development. From the operational perspective, a backward integration, forward integration, and horizontal integration should also be considered. Cells IV, V, and VI suggest the hold and maintain strategy. In this case, your tactical strategies should focus on market penetration and product development. Cells VII, VIII, and IX are characterized with the harvest or exit strategy. If costs for rejuvenating the business are low, then it should be attempted to revitalize the business. In other cases, aggressive cost management is a way to play the end game.
What is the difference between the IE matrix and BCG matrix?
First, the IE matrix measures different values on its axes. The BCG matrix measures market growth and market share. The IE matrix measures a calculated value that captures a group of external and internal factors. This means that the IE matrix requires more information about the business than the BCG matrix. While values for each axis in the BCG matrix are single-factor, values for each axis in the IE matrix are multi-factor figures. Because the IE matrix is broader in its definition, strategists often develop both the BCG Matrix and the IE Matrix when assessing their conditions and formulating strategies.
Is the IE matrix forward-looking?
By default, both the BCG matrix and the IE matrix are constructed using factors related to current conditions. However, strategists often develop two sets of matrices -- a BCG Matrix and an IE Matrix for the current state and another set to reflect expectations of the future.
Is there any other management model related to IE matrix?
Yes, the IE matrix model can be developed into an even more analytical tool called the SPACE matrix. Besides the IFE and EFE matrix, you might also be interested in reading about the SWOT matrix. The Quantitative Strategic Planning Matrix (QSPM) model is the next step in strategic management decision making. This method can help if we need to decide between strategic alternatives.
The TOWS Matrix, proposed by Heinz Weihrich, has a wider scope and has different emphases than the ones described above. It does not replace either the Business Portfolio Matrix, The GE Business Screen, or other matrixes, but its is proposed as a conceptual framework for a systematic analysis that facilities matching the external threats and opportunities with the internal weaknesses and strengths of the organization. The TOWS Matrix indicates four conceptually distinct alternative strategies, tactics and actions. The process of strategy formulation and the TOWS analysis is shown in Figure 4-16 in which 'T' stands for threats, 'O' for opportunities, 'W' for weaknesses and 'S' for strengths. This process includes seven steps: - Step 1, deals with some basic questions pertaining to the internal and external environments (the kind of business, geographic domain, competitive situation, top management orientation). - Step 2, concerns primarily the present situation in respect external environment factors (social, political, demographic, product technology, market and competition). - Step 3, deals with future situation in respect to the external environment (forecast, predictions and assessment of the future). - Step 4, concerns activities to develop alternatives. - Step 5, deals wit activities necessary to develop strategies, tactics and more specific actions in order to achieve the enterprise's purpose and overall objectives. - Step 6, concerns consistency of these decisions with the other steps in the strategy formulation process. - Step 7, deals with prepare contingency plans. The analysis starts with the external environment. The external threats should be listed in box "T" in Figure 14, and opportunities should be shown in box '0'. Threats and opportunities may be found in different areas, such as economic, social, political and demographic factors, products and services, technology, markets, and competition.
SWOT OR TOWS Analysis (TOWS Matrix)
SWOT is the acronym for strength, weakness, opportunities and strengths whereas TWOS is the acronym for threats,weakness,opportunities and strengths both refers to the same thing. SWOT or TWOS analysis use by the firm to develop strategies or we can say possible set of strategies. Strategist prefer SWOT or TWOS because it gives alternative set of strategies which help the firm to choose the strategies suit the firm in terms of available resources. SWOT analysis is not only the part of strategic management, it¶s also the part of marketing, human resource and other business areas. In this tutorials we will discuss the way to develop TOWS matrix and its attributes in detail and also give examples to show firm develop strategies using TOWS or SWOT matrix.
What are the things need to be included in TOWS or SWOT matrix?
TOWS or SWOT matrix as discussed above consist of strength, weakness opportunities and threats, using these variety of strategies are developed. The most common tabular form of the SWOT or TWOS is shown in the figure below.
I would like to explain strengths,weakness opportunities and threats before going into details to make easier for the readers unfamiliar to this topic. Strengths
Strengths are the strong areas or attribute of the company, which are used to overcome weakness and capitalize to take advantage of the external opportunities available in the industry. Weakness Weakness are painful for the company means these are the weak factors which needs to be improve in future otherwise if they exposed to the competitors they can take the advantage of it. Opportunities Opportunities are the chances exist in the external environment, it depends firm whether the firm is willing to exploit the opportunities or may be they ignore the opportunities due to lack of resources. Threats Threats are always evil for the firm, minimum no of threats in the external environment open many doors for the firm. Maximum number of threats for the firm reduce their power in the industry.
How to identify strengths,weakness,opportunities and threats for TWOS Matrix?
Well, if you have same question them its a good one, finding strengths, weakness, opportunism and threats is deep thinking process. The best thing to do ask the decision maker,employee, strategic partners and customer as well about your good and bad points. The other way out to use some statistical and mathematical tool.In strategic management strengths and weakness are extracted from IFE matrix, opportunities and threats from EFE matrix. Example of Wal-Mart Strengths,Weakness,Opportunities and Threats Wal-Mart Strengths
y y y y y y y y y
Customer oriented SAM S Club customers able to buy in bulk Super centers offer one stop shopping Satisfaction guaranteed programs promoting customer goodwill Buy from local merchants when possible Stock ownership and profit-sharing with employees Leads industry in information technology Ongoing development of its employees Strong community involvement
No formal mission statement
y y y y
Membership only for SAM S Club Keep poor performing employees on hand Old fashioned store policies Few women and minorities in top management
y y y y y y y y y
Consumers want ease of shopping Internet shopping growing Dollar value increasing Similar shopping patterns worldwide Retail sales expected to increase Environment conscious consumers Elderly population growing Asian market virtually untapped by retail European Market untapped by retail
y y y y y
Regulation of Wal-Mart pharmacies Small towns do not want entry of Wal-Mart Bad media exposure for Kathie Lee Brand Variety of competition nationally, regionally and locally Substitute products more easily because of intense competition
What type of strategies are the part of TOWS Matrix?
The SWOT Matrix is an important matching tool that helps managers develops four types of strategies:
1. SO strategies use a firm s internal strengths to take advantage of external opportunities. 2. WO strategies are aimed at improving internal weaknesses by taking advantage of external opportunities. 3. ST strategies use a firm s strengths to avoid or reduce the impact of external threats. 4. WT strategies are defensive tactics directed at reducing internal weaknesses and avoiding external threats.
Example of Pakistan State Oil TWOS Matrix
The above TWOS matrix show the four type of strategies, SO strategies are developed using PSO strengths to exploit the external opportunities, WO strategies are developed to overcome weaknesses by utilizing the opportunities. ST strategies are developed by PSO to minimize or eliminate the threats using the internal strengths and last WT strategies are developed to avoid threat and minimize weaknesses.
Product life/market life cycle
Just as in domestic marketing the concept of the Product Life Cycle has often been cited as a useful (but often maligned!) planning concept, so it can be useful in international marketing. Figure 1.8 gives an outline of the Market Life Cycle across international boundaries. Figure 1.8 The product/market life cycle The traditional four stage life cycle - introduction, growth, maturity, decline - is a well documented phenomenon. Attempts are made in the maturity stage to extend the cycle. The market life cycle is very similar and what global marketers have to be wary of is that not all markets are at the same stage globally. It may be appropriate to have tractor mounted ditchers and diggers in Africa or the UK where labour is not too plentiful, but in India, they may be the last thing required where labour is plentiful and very cheap. So the appropriate marketing strategy will be different for each market. It would be very easy to discuss the global marketing decision as a case of deciding whether to export or standardise or adapt your product/market offering. This is far from the case. Even the smallest nuance of change in the global environment can ruin a campaign or plan. Whilst the above discussion has tended to be theoretical in nature, most of it, if not all of it, is essential in practice. In food marketing systems many transactions and discussions take place across international boundaries. This involves a close look at all the necessary environmental factors. If one considers food marketing as the physical and economic bridge linking raw materials production and consumer purchases then a whole series of interdependent decisions, institutions, resource flows and physical and business activities take place. Food marketing stimulates and supports raw material production, balances commodity supply and demand and stimulates end demand and enhances consumer welfare. This process often transcends several different industries and markets, many of them crossing international boundaries. The product may change form, be graded, packed, transported and necessitate information flows, financial resources, invoice and retailing or wholesaling functions. In addition, quality standards designed for producers and transporters may apply as may product improvements. In other words, the bridge may involve a whole set of utilities afforded to the end user (time, place and form), and add value at each stage of the transaction. This system involves numerous independent and interdependent players and activities. To shift a perishable like strawberries 7000km from Harare, Zimbabwe to the UK requires an extraordinary complex series of activities, involving perfect timing. The detail involved in this intricate transaction will be explained in later chapters. With commodities, physical, Government and economic environmental factors playing a major role in international marketing. So does price and quality differentiation. In later years the enormous success of the Brazilian frozen concentrated orange juice industry has been attributable not only to poor climatic conditions prevailing in its competitive countries, but the fact that its investment in large production economies of scale, bulk transport and storage technologies considerably reduced international transport costs and facilitated improved distribution of the juice to, and within, importing countries. From a cottage industry in 1970, it grew to account for 80% of world trade by the early 1990's. Its success, therefore, has been based on price and added value quality differentiation. International marketing is, therefore, quite a complex operation, involving both an understanding of the theoretical and practical aspects involved. Prescriptions are totally inappropriate.
This concludes the discussion on the reasoning why internationalism has grown and the next chapters' took more closely at the environmental factors which have to be taken into account when considering to market internationally.
The image shows a risk matrix. The vertical line indicates the level of impact, higher meaning greater. The horizontal line indicates the probability of risk, longer meaning higher. A grid then displays the areas of low impact - low probability risks, high impact - low probability risks, low impact - high probability risks and high impact - high probability risks.
Change Management and Leadership: A Critical Factor for Sales and Operations Planning in Manufacturing
Executive Summary Only when leaders have taken ownership and responsibility for the needed changes can the organization assure meeting its objectives. Ultimately, the goal of involving leaders early, and throughout the course of the strategic change, is to mitigate the risk of not achieving ROI and long-term sustainable improvement. It takes effort from both the project team and the leaders themselves. The good news is it does not take extraordinary efforts to achieve extraordinary results if you just know how. Sales and Operations Planning (S&OP) Overview Sales and operations planning (S&OP) has been around for almost twenty years as a formal process to link functional areas and drive improved supply chain and financial decision making. Yet, today many years after MRPII first began to tie together manufacturing and sales planning, many companies are revisiting and redeveloping their S&OP approach, supporting technology and processes. A recent survey by AMR found that 50% of companies have a formalized S&OP process and 28% are considering investing to improve S&OP. The surveyed companies indicated the following primary business drivers behind the renewed S&OP interest. Mergers and Acquisitions ± 43% Contract Manufacturing ± 30% Improved Channel Response ± 17% Managing New Constraints ± 10% The first three drivers reflect a need for critical alignment with key organizational strategies. Contract manufacturing, M&A, and delivering improved channel response and customer satisfaction are typically some of the most critical decisions executives face. S&OP is the logical ³glue´ to translate these higher level strategies into operational planning and delivery. The same AMR survey identifies five key findings from the survey including three that we will focus on here. First, S&OP is a business imperative that stretches beyond typical functional supply chain functions and should include marketing, sales, product development and so on. Second, the nature of S&OP processes is evolving to reflect industry specific characteristics. Thirdly, S&OP is a ³change management journey´ where successful companies spend up to 50% of their efforts on change management. Based on our experiences, the authors strongly concur with AMR on these key findings. We have found that companies typically succeed or fail by how effectively they manage the change issues related to S&OP improvement projects. The surprise challenge for many companies is that while S&OP improvements tend have a critical technology component (Forecasting, ERP, or Enterprise Performance Management), it is typically harder to manage the process development and change implications. Also, given the cross functional nature of S&OP programs, strong executive leadership is almost always a critical requirement to reap the potential benefits available. S&OP programs by very definition cross and impact functional silos. Many times the ground level teams responsible for the ³day to day´ implementation have difficulty representing or defending proposed changes to company roles, responsibilities and processes when these changes may affect other executives or key functional business owners. Compounding this difficulty is that overcoming organizational resistance involves ³soft skills´ like facilitation, communication and consensus building while working in an often ambiguous environment. Conversely, the technical side of the project tends to be clearer and easier to grasp (although by no means easy ± especially true for data management) with elements like interfacing, testing, data validation, etc. Thus, many teams charged with improving S&OP naturally gravitate heavily to implementing the technology component, while shying away from the organizational and process change issues. Unfortunately, the result is that many good ideas for improved S&OP management are discarded or left at the design stage. Or perhaps even worse from a cost-benefit perspective, such efforts may result in implementing a technology
component yet ends with less than expected business benefit. This perceived failure can then further propagate organizational resistance by creating the perception of a failed effort (many times underpinned by a ³tried that before and it did not work´ attitude) when in fact it was just not properly implemented. The good news is that there are proven, systematic approaches to handling organizational S&OP challenges. This paper addresses some general S&OP design and organizational challenges, presents high level Organizational Change Management approaches for addressing organizational resistance and then focuses on more detailed recommendations for engaging and helping company leadership to drive successful S&OP improvement. S&OP and Organizational Change Definitions Before discussing approaches for managing the organizational change element of S&OP, a common definition provides a baseline for solid understanding. Below are definitions of both Organizational Change Management and S&OP as discussed in this paper. S&OP - A cross functional planning and decision making process that results in a common single financial and operational plan that uses projections of sales balanced by an organization's production and distribution capability to support service levels and financial objectives. Note, S&OP improvement plans can range from developing completely new processes and roles to making incremental improvements via minor process or technology modifications. Organizational Change Management ± The process, strategies and activities that support organizational and personal transitions from the current state to the desired future state in order to achieve and ultimately sustain the desired business vision and strategy. It is important to understand that improving S&OP can result in a range in impact from high to low on a change continuum. A low impact example might be replacing a forecasting system with a new, improved system with little to no change in roles, responsibilities or the basic decision making structure and approach. In this low impact example, most change effort would focus on user adoption, training and communication. A high impact example might be a new formal S&OP process in an organization with multiple, siloed plans that will involve both top down and bottoms up input from multiple functional areas, the creation of new roles and responsibilities to enable a new integrated forecasting and supply planning system. Each circumstance requires a different approach. The Intersection of Process Design and Change Management Although this paper primarily focuses on managing change associated with S&OP improvement programs, a critical link exists between process design and Organizational Change Management. This is where many organizations make first mistakes that impede overall success or cause later failure. Early in a project many team members responsible for S&OP improvements run into challenges with the relationship between process improvement and change management. These include: Inability to conceptualize the specific process change needed to achieve the objectives Inability to adequately communicate the real impact of process change to affected groups Failure to address all sub-processes and activities that will feed into the desired end state Uncertainty of approach to identify current processes that should change and opportunities for improvement Assuming technology (APS and optimization tools, for example) will perfectly fit all S&OP stakeholder requirements and provide all functionality needed Inability to think outside of technology tools pending implementation and develop a holistic solution involving other systems, offline processes and people
Inability to project impact to roles and jobs Resistance to sharing information due to political concerns Reliance on using systems flow charting or informal decisions alone to develop new processes One key to success is to use a variety of tools to address these issues. For example, if designing a new S&OP process that will impact the processes of inventory planning, sales forecasting, financial forecasting, and communication flows to contract manufacturers, it is critical to identify the high level current state attributes including: sub-processes, key activities, KPIs used, formal or informal approaches to make decisions, people involved, systems involved, unique features and gaps in the for each of these process areas. Flow charting can be very useful but this is the wrong time to put swim lane diagrams together. It is much better to use a facilitative technique that involves highly knowledgeable participants. The session is usually held with one to two facilitators that use a structured approach to uncover the attributes described earlier. During and after the session, the S&OP team can distill out gaps against best practices, identify non or limited value adding steps, and envision new features to the process. After envisioning and documenting the ³end to end´ approach of the desired process, the new ideas can be presented back to the original workshop participants for discussion, debate and consensus. This is more productive than trying to flowchart out new processes before understanding all the nuances of the current process. It will also engage most people more than trying to place symbols on a flowchart or whiteboard. This technique should be used to ensure that all people have a common understanding and can begin to identify areas of potential trouble or conflict. The outcome is a common vision for an overall approach for key areas affected by new S&OP, new KPIs, key sub-process ideas and identification of key parts of the old process that will be changed. Then once everyone is on the same page, begin the more detailed process and technology design steps. Other handy future state process design tools include (applicable but not limited to S&OP design): Influence / driver maps* Level two and three process flows Responsibility, Accountability, Consult and Inform (RACI) organizational matrixes Best practices and research where applicable Interviewing Surveys Benchmarking other organizations performance and approach * A technique to identify the influencing factors (external and internal) on a key process that has many influences like inventory management Process design should not be done in a vacuum and is usually best done with formal approaches to uncover all nuances of the current state prior to defining the future state. Some key steps to starting an S&OP process design include: Understand the general level of change to the current process and organization (see sample Change Impact Matrix) Identify formal tools / techniques appropriate based on the level of expected change to the S&OP process to help decompose and then redevelop new processes
Be as inclusive as possible with a good representation of extended stakeholders If similar efforts have failed in the past, use ³lessons learned´ sessions with a variety of stakeholders (affinity analysis techniques work well and get everyone hands on involved) Be cognizant of each stakeholder groups understanding of the processes they are and are not involved in day to day Make sure the case for change is clear or begin to identify the case for change Understand and employ tools to help translate process, technology and organizational change into a change management framework During the early process design phase it is critical to link process development directly to the appropriate change management planning and approach. It is absolutely critical that the team members designing the new S&OP processes, organizational roles and supporting technologies be fully integrated into the change management effort. This is where we have seen many organizations make mistakes. Organizational Change Management is left to be dealt with later in a technology implementation phase or is viewed as only encompassing communications and training ± where in fact it is important very early on and requires excellent leadership. ne of the first steps is to understand the complexity of process change and the likely resistance and map that directly to a customized Organizational Change Management approach that includes the proper level of tools, resources and relationship between the process and organizational impact elements. On the right is an example of a simplified Change Impact Matrix to help assess the right level of process and change effort.
There are four key dimensions that most companies should evaluate in planning S&OP or any other business transformation initiative. These components include the Organizational Landscape, Learning, Leadership and Stakeholder Commitment and Communication dimensions. With each dimension you need to plan for tools and techniques appropriate for the complexity of the effort. One last note, we have found that many companies do pretty well generally planning for and understanding organizational change. However, the hard part is the actual execution of change management. That is why it is important to use formal techniques and tools to focus the team and not allow it to lose focus on the execution. An IT focused analogy can be gleaned from the use of common tools like unit and integration tests (and the whole toolbox of well known and used IT approaches) to thoroughly make sure the system touch points and functionality works as needed. In the same light, process and organizational touch points and functional integration need to work as properly as well and require the right tools and techniques to succeed.
Typical Change Tools Used in Conjunction with Process Design in S&OP Change Efforts: Business Case for Change
Organization Change Assessment Stakeholder Analysis Job Impact Analysis Change Management Plan Leadership Involvement and Champion Framework
Experience curve effects
Models of the learning curve effect and the closely related experience curve effect express the relationship between equations for experience and efficiency or between efficiency gains and investment in the effort.
Learning curve and learning curve effect
The experience of "learning curves" was first observed by the 19th Century German psychologist Hermann Ebbinghaus according to the difficulty of memorizing varying numbers of verbal stimuli. Subsequent learning about the complex processes of learning are discussed in the Learning curve article. The experienced learning rates for exploratory discovery and development processes, for individuals and organizations, is more the focus of the main Learning curve article. As individuals and/or organizations get more experienced at a task, they usually become more efficient at it, following a progression of the learning first getting easier and then harder as one approaches a limit. A "steep" learning curve, in colloquial usage, usually means experiencing a large and increasing amount of effort for a constant amount of learning, i.e. approaching a natural limit. Much the reverse is the meaning of a steep slope in a learning progress curve. A learning progress curve is steep when very little effort is required, as further discussed in the main article. The rule used for representing the learning curve effect states that the more times a task has been performed, the less time will be required on each subsequent iteration. This relationship was probably first quantified in 1936 at Wright-Patterson Air Force Base in the United States, where it was determined that every time total aircraft production doubled, the required labour time decreased by 10 to 15 percent. Subsequent empirical studies from other industries have yielded different values ranging from only a couple of percent up to 30 percent, but in most cases it is a constant percentage: It did not vary at different scales of operation. Learning curve theory states that as the quantity of items produced doubles, costs decrease at a predictable rate. This predictable rate is described by Equations 1 and 2. The equations have the same equation form. The two equations differ only in the definition of the Y term, but this difference can make a significant difference in the outcome of an estimate. 1. This equation describes the basis for what is called the unit curve. In this equation, Y represents the cost of a specified unit in a production run. For example, If a production run has generated 200 units, the total cost can be derived by taking the equation below and applying it 200 times (for units 1 to 200) and then summing the 200 values. This is cumbersome and requires the use of a computer or published tables of predetermined values. 2. This equation describes the basis for the cumulative average or cum average curve. In this
equation, Y represents the average cost of different quantities (X) of units. The significance of the "cum" in cum average is that the average costs are computed for X cumulative units. Therefore, the total cost for X units is the product of X times the cum average cost. For example, to compute the total costs of units 1 to 200, an analyst could compute the cumulative average cost of unit 200 and multiply this value by 200. This is a much easier calculation than in the case of the unit curve.
The experience curve
The experience curve effect is broader in scope than the learning curve effect encompassing far more than just labor time. It states that the more often a task is performed, the lower will be the cost of doing it. The task can be the production of any good or service. Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage. In the late 1960s Bruce Henderson of the Boston Consulting Group (BCG) began to emphasize the implications of the experience curve for strategy. Research by BCG in the 1970s observed experience curve effects for various industries that ranged from 10 to 25 percent.
These effects are often expressed graphically. The curve is plotted with cumulative units produced on the horizontal axis and unit cost on the vertical axis. A curve that depicts a 15% cost reduction for every doubling of output is called an ³85% experience curve´, indicating that unit costs drop to 85% of their original level. Mathematically the experience curve is described by a power law function sometimes referred to as Henderson's Law:
y y y y
is the cost of the first unit of production is the cost of the nth unit of production is the cumulative volume of production is the elasticity of cost with regard to output
Reasons for the effect
Examples NASA quotes the following experience curves:
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Aerospace 85% Shipbuilding 80-85% Complex machine tools for new models 75-85% Repetitive electronics manufacturing 90-95% Repetitive machining or punch-press operations 90-95% Repetitive electrical operations 75-85% Repetitive welding operations 90% Raw materials 93-96%
Purchased Parts 85-88%
The primary reason for why experience and learning curve effects apply, of course, is the complex processes of learning involved. As discussed in the main article, learning generally begins with making successively larger finds and then successively smaller ones. The equations for these effects come from the usefulness of mathematical models for certain somewhat predictable aspects of those generally non-deterministic processes. They include:
Labour efficiency - Workers become physically more dexterous. They become mentally more confident and spend less time hesitating, learning, experimenting, or making mistakes. Over time they learn short-cuts and improvements. This applies to all employees and managers, not just those directly involved in production. Standardization, specialization, and methods improvements - As processes, parts, and products become more standardized, efficiency tends to increase. When employees specialize in a limited set of tasks, they gain more experience with these tasks and operate at a faster rate. Technology-Driven Learning - Automated production technology and information technology can introduce efficiencies as they are implemented and people learn how to use them efficiently and effectively. Better use of equipment - as total production has increased, manufacturing equipment will have been more fully exploited, lowering fully accounted unit costs. In addition, purchase of more productive equipment can be justifiable. Changes in the resource mix - As a company acquires experience, it can alter its mix of inputs and thereby become more efficient. Product redesign - As the manufacturers and consumers have more experience with the product, they can usually find improvements. This filters through to the manufacturing process. A good example of this is Cadillac's testing of various "bells and whistles" specialty accessories. The ones that did not break became mass produced in other General Motors products; the ones that didn't stand the test of user "beatings" were discontinued, saving the car company money. As General Motors produced more cars, they learned how to best produce products that work for the least money. Network-building and use-cost reductions (network effects) - As a product enters more widespread use, the consumer uses it more efficiently because they're familiar with it. One fax machine in the world can do nothing, but if everyone has one, they build an increasingly efficient network of communications. Another example is email accounts; the more there are, the more efficient the network is, the lower everyone's cost per utility of using it. Shared experience effects - Experience curve effects are reinforced when two or more products share a common activity or resource. Any efficiency learned from one product can be applied to the other products. (This is related to the principle of least astonishment).
Experience curve discontinuities
The experience curve effect can on occasion come to an abrupt stop. Graphically, the curve is truncated. Existing processes become obsolete and the firm must upgrade to remain competitive. The upgrade will mean the old experience curve will be replaced by a new one. This occurs when:
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Competitors introduce new products or processes that you must respond to Key suppliers have much bigger customers that determine the price of products and services, and that becomes the main cost driver for the product Technological change requires that you or your suppliers change processes The experience curve strategies must be re-evaluated because o they are leading to price wars o they are not producing a marketing mix that the market values
Strategic consequences of the effect
The BCG strategists examined the consequences of the experience effect for businesses. They concluded that because relatively low cost of operations is a very powerful strategic advantage, firms should capitalize on these learning and experience effects.  The reasoning is increased activity leads to increased learning, which leads to lower costs, which can lead to lower prices, which can lead to increased market share, which can lead to increased profitability and market dominance. According to BCG, the most effective business strategy was one of striving for market dominance in this way. This was particularly true when a firm had an early leadership in market share. It was claimed that if you cannot get enough market share to be competitive, you should get out of that business and concentrate your resources where you can take advantage of experience effects and gain dominant market share. The BCG strategists developed product portfolio techniques like the BCG Matrix (in part) to manage this strategy. Today we recognize that there are other strategies that are just as effective as cost leadership so we need not limit ourselves to this one path. See for example Porter generic strategies which talks about product differentiation and focused market segmentation as two alternatives to cost leadership. One consequence of the experience curve effect is that cost savings should be passed on as price decreases rather than kept as profit margin increases. The BCG strategists felt that maintaining a relatively high price, although very profitable in the short run, spelled disaster for the strategy in the long run. They felt that it encouraged competitors to enter the market, triggering a steep price decline and a competitive shakeout. If prices were reduced as unit costs fell (due to experience curve effects), then competitive entry would be discouraged and one's market share maintained. Using this strategy, you could always stay one step ahead of new or existing rivals.
Some authors claim that in most organizations it is impossible to quantify the effects. They claim that experience effects are so closely intertwined with economies of scale that it is impossible to separate the two. In theory we can say that economies of scale are those efficiencies that arise from an increased scale of production, and that experience effects are those efficiencies that arise from the learning and experience gained from repeated activities, but in practice the two mirror each other: growth of experience coincides with increased production. Economies of scale should be considered one of the reasons why experience effects exist. Likewise, experience
effects are one of the reasons why economies of scale exist. This makes assigning a numerical value to either of them difficult. The well travelled road effect may lead people to over-estimate the effect of the experience curve.
Porter's Generic Strategies
Choosing Your Route to Competitive Advantage
Which do you prefer when you fly: a cheap, no-frills airline, or a more expensive operator with fantastic service levels and maximum comfort? And would you ever consider going with a small company which focuses on just a few routes? The choice is up to you, of course. But the point we're making here is that when you come to book a flight, there are some very different options available. Why is this so? The answer is that each of these airlines has chosen a different way of achieving competitive advantage in a crowded marketplace. The no-frills operators have opted to cut costs to a minimum and pass their savings on to customers in lower prices. This helps them grab market share and ensure their planes are as full as possible, further driving down cost. The luxury airlines, on the other hand, focus their efforts on making their service as wonderful as possible, and the higher prices they can command as a result make up for their higher costs. Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a few routes to provide better or cheaper services than their larger, international rivals. These three approaches are examples of "generic strategies", because they can be applied to products or services in all industries, and to organizations of all sizes. They were first set out by Michael Porter in 1985 in his book Competitive Advantage: Creating and Sustaining Superior Performance. Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely desirable products and services) and "Focus" (offering a specialized service in a niche market). He then subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation Focus". These are shown in Figure 1 below.
The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could be interpreted as meaning "A focus on cost" or "A focus on differentiation". Remember that Cost Focus means emphasizing cost-minimization within a focused market, and Differentiation Focus means pursuing strategic differentiation within a focused market.
The Cost Leadership Strategy
Porter's generic strategies are ways of gaining competitive advantage - in other words, developing the "edge" that gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost Leadership strategy:
Increasing profits by reducing costs, while charging industry-average prices. Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you've reduced costs.
Remember that Cost Leadership is about minimizing the cost to the organization of delivering products and services. The cost or price paid by the customer is a separate issue!
The Cost Leadership strategy is exactly that - it involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low cost producers who may undercut your prices and therefore block your attempts to increase market share.
You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:
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Access to the capital needed to invest in technology that will bring costs down. Very efficient logistics. A low cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors.
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it's important to continuously find ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizen philosophy of "continuous improvement".
The Differentiation Strategy
Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value. To make a success of a Differentiation strategy, organizations need:
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Good research, development and innovation. The ability to deliver high-quality products or services. Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings.
Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments.
The Focus Strategy
Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low cost or well-specified products for the market. Because they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors. As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own. But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only
that market niche. It's simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against betterresourced broad market companies' offerings.) The "something extra" that you add can contribute to reducing costs (perhaps through your knowledge of specialist suppliers) or to increasing differentiation (though your deep understanding of customers' needs). Generic strategies apply to not-for-profit organizations too. A not-for-profit can use a Cost Leadership strategy to minimize the cost of getting donations and achieving more for their income, while one with pursing a Differentiation strategy will be committed to the very best outcomes, even if the volume of work they do as a result is lower. Local charities are great examples of organizations using Focus strategies to get donations and contribute to their communities.
Choosing the Right Generic Strategy
Your choice of which generic strategy to pursue underpins every other strategic decision you make, so it's worth spending time to get it right. But you do need to make a decision: Porter specifically warns against trying to "hedge your bets" by following more than one strategy. One of the most important reasons why this is wise advice is that the things you need to do to make each type of strategy work appeal to different types of people. Cost Leadership requires a very detailed internal focus on processes. Differentiation, on the other hand, demands an outward-facing, highly creative approach. So, when you come to choose which of the three generic strategies is for you, it's vital that you take your organization's competencies and strengths into account. Use the following steps to help you choose. Step 1: For each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses, and the opportunities and threats you would face, if you adopted that strategy. Having done this, it may be clear that your organization is unlikely to be able to make a success of some of the generic strategies. Step 2: Use Five Forces Analysis to understand the nature of the industry you are in. Step 3: Compare the SWOT Analyses of the viable strategic options with the results of your Five Forces analysis. For each strategic option, ask yourself how you could use that strategy to:
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Reduce or manage supplier power. Reduce or manage buyer/customer power. Come out on top of the competitive rivalry. Reduce or eliminate the threat of substitution.
Reduce or eliminate the threat of new entry.
Select the generic strategy that gives you the strongest set of options.
According to Porter's Generic Strategies model, there are three basic strategic options available to organizations for gaining competitive advantage. These are: Cost Leadership, Differentiation and Focus. Organizations that achieve Cost Leadership can benefit either by gaining market share through lowering prices (whilst maintaining profitability,) or by maintaining average prices and therefore increasing profits. All of this is achieved by reducing costs to a level below those of the organization's competitors. Companies that pursue a Differentiation strategy win market share by offering unique features that are valued by their customers. Focus strategies involve achieving Cost Leadership or Differentiation within niche markets in ways that are not available to more broadly-focused players. Apply This to Your Life
Ask yourself what your organization's generic strategy is. How does this affect the choices your make in your job? If you're in an organization committed to achieving Cost Leadership, can you reduce costs by hiring less expensive staff and training them up, or by reducing staff turnover? Can you reduce training costs by devising in-house schemes for sharing skills and knowledge amongst team members? Can you reduce expenses by using technology such as video conferencing over the Internet? If your organization is pursuing a Differentiation strategy, can you improve customer service? Customer Experience Mapping may help here. Can you help to foster a culture of continuous improvement and innovation in your team? And if you're working for a company that has a chosen a Focus strategy, what knowledge or expertise can you use or develop to add value for your customers that isn't available to broad market competitors?
Strategy formulation is vital to the well-being of a company or organization. There are two major types of strategy: (1) corporate strategy, in which companies decide which line or lines of business to engage in; and (2) business or competitive strategy, which sets the framework for achieving success in a particular business. While business strategy often receives more attention than corporate strategy, both forms of strategy involve planning, industry/market analysis, goal setting, commitment of resources, and monitoring.
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Market dominance strategies Porter generic strategies Mass customization Vendor lock-in Scenario planning
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Aggressiveness strategies Horizontal integration Innovation Innovation strategies Profit impact on marketing strategy Vertical integration
Marketing warfare strategies
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Defensive marketing warfare strategies Flanking marketing warfare strategies Guerrilla marketing warfare strategies Offensive marketing warfare strategies
Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage. A marketing strategy should be centered around the key concept that customer satisfaction is the main goal.
Key part of the general corporate strategy
Marketing strategy is a method of focusing an organization's energies and resources on a course of action which can lead to increased sales and dominance of a targeted market niche. A marketing strategy combines product development, promotion, distribution, pricing, relationship management and other elements; identifies the firm's marketing goals, and explains how they will be achieved, ideally within a stated timeframe. Marketing strategy determines the choice of target market segments, positioning, marketing mix, and allocation of resources. It is most effective when it is an integral component of overall firm strategy, defining how the organization will successfully engage customers, prospects, and competitors in the market arena. Corporate strategies, corporate missions, and corporate goals. As the customer constitutes the source of a company's revenue, marketing strategy is closely linked with sales. A key component of marketing strategy is often to keep marketing in line with a company's overarching mission statement. Basic theory:
1. Target Audience 2. Proposition/Key Element 3. Implementation
Tactics and actions
A marketing strategy can serve as the foundation of a marketing plan. A marketing plan contains a set of specific actions required to successfully implement a marketing strategy. For example: "Use a low cost product to attract consumers. Once our organization, via our low cost product, has established a relationship with consumers, our organization will sell additional, highermargin products and services that enhance the consumer's interaction with the low-cost product or service." A strategy consists of a well thought out series of tactics to make a marketing plan more effective. Marketing strategies serve as the fundamental underpinning of marketing plans designed to fill market needs and reach marketing objectives. Plans and objectives are generally tested for measurable results. A marketing strategy often integrates an organization's marketing goals, policies, and action sequences (tactics) into a cohesive whole. Similarly, the various strands of the strategy , which might include advertising, channel marketing, internet marketing, promotion and public relations can be orchestrated. Many companies cascade a strategy throughout an organization, by creating
strategy tactics that then become strategy goals for the next level or group. Each one group is expected to take that strategy goal and develop a set of tactics to achieve that goal. This is why it is important to make each strategy goal measurable. Marketing strategies are dynamic and interactive. They are partially planned and partially unplanned. See strategy dynamics.
Types of strategies
Marketing strategies may differ depending on the unique situation of the individual business. However there are a number of ways of categorizing some generic strategies. A brief description of the most common categorizing schemes is presented below:
Strategies based on market dominance - In this scheme, firms are classified based on their market share or dominance of an industry. Typically there are four types of market dominance strategies: o Leader o Challenger o Follower o Nicher Porter generic strategies - strategy on the dimensions of strategic scope and strategic strength. Strategic scope refers to the market penetration while strategic strength refers to the firm s sustainable competitive advantage. The generic strategy framework (porter 1984) comprises two alternatives each with two alternative scopes. These are Differentiation and low-cost leadership each with a dimension of Focus-broad or narrow. o Product differentiation (broad) o Cost leadership (broad) o Market segmentation (narrow) Innovation strategies - This deals with the firm's rate of the new product development and business model innovation. It asks whether the company is on the cutting edge of technology and business innovation. There are three types: o Pioneers o Close followers o Late followers Growth strategies - In this scheme we ask the question, How should the firm grow? . There are a number of different ways of answering that question, but the most common gives four answers: o Horizontal integration o Vertical integration o Diversification o Intensification
A more detailed scheme uses the categories:
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Prospector Analyzer Defender
Reactor Marketing warfare strategies - This scheme draws parallels between marketing strategies and military strategies.
Marketing participants often employ strategic models and tools to analyze marketing decisions. When beginning a strategic analysis, the 3Cs can be employed to get a broad understanding of the strategic environment. An Ansoff Matrix is also often used to convey an organization's strategic positioning of their marketing mix. The 4Ps can then be utilized to form a marketing plan to pursue a defined strategy. There are many companies especially those in the Consumer Package Goods (CPG) market that adopt the theory of running their business centered around Consumer, Shopper & Retailer needs. Their Marketing departments spend quality time looking for "Growth Opportunities" in their categories by identifying relevant insights (both mindsets and behaviors) on their target Consumers, Shoppers and retail partners. These Growth Opportunities emerge from changes in market trends, segment dynamics changing and also internal brand or operational business challenges.The Marketing team can then prioritize these Growth Opportunities and begin to develop strategies to exploit the opportunities that could include new or adapted products, services as well as changes to the 7Ps.
Real-life marketing primarily revolves around the application of a great deal of common-sense; dealing with a limited number of factors, in an environment of imperfect information and limited resources complicated by uncertainty and tight timescales. Use of classical marketing techniques, in these circumstances, is inevitably partial and uneven. Thus, for example, many new products will emerge from irrational processes and the rational development process may be used (if at all) to screen out the worst non-runners. The design of the advertising, and the packaging, will be the output of the creative minds employed; which management will then screen, often by 'gut-reaction', to ensure that it is reasonable. For most of their time, marketing managers use intuition and experience to analyze and handle the complex, and unique, situations being faced; without easy reference to theory. This will often be 'flying by the seat of the pants', or 'gut-reaction'; where the overall strategy, coupled with the knowledge of the customer which has been absorbed almost by a process of osmosis, will determine the quality of the marketing employed. This, almost instinctive management, is what is sometimes called 'coarse marketing'; to distinguish it from the refined, aesthetically pleasing, form favored by the theorists.
Marketing warfare strategies
Marketing warfare strategies are a type of strategies, used in business and marketing, that try to draw parallels between business and warfare, and then apply the principles of military strategy to business situations, with competing firms considered as analogous to sides in a military conflict, and market share considered as analogous to the territory which is being fought over. It is argued that, in mature, low-growth markets, and when real GDP growth is negative or low, business operates as a zero-sum game. One person¶s gain is possible only at another person¶s expense. Success depends on battling competitors for market share.
The use of marketing warfare strategies
Strategy is the organized deployment of resources to achieve specific objectives, something that business and warfare have in common. In the 1980s business strategists realized that there was a vast knowledge base stretching back thousands of years that they had barely examined. They turned to military strategy for guidance. Military strategy books like The Art of War by Sun Tzu, On War by von Clausewitz, and The Little Red Book by Mao Zedong became business classics. From Sun Tzu they learned the tactical side of military strategy and specific tactical proscriptions. In regard to what business strategists call "first-mover advantage", Sun Tzu said: "Generally, he who occupies the field of battle first and awaits an enemy is at ease, he who comes later to the scene and rushes into the fight is weary." From Von Clausewitz they learned the dynamic and unpredictable nature of military strategy. Clausewitz felt that in a situation of chaos and confusion, strategy should be based on flexible principles. Strategy comes not from formula or rules of engagement, but from adapting to what he called "friction" (minute by minute events). From Mao Zedong they learned the principles of guerrilla warfare. The first major proponents of marketing warfare theories was Philip Kotler and J. B. Quinn.In an early description of business military strategy, Quinn claims that an effective strategy: "first probes and withdraws to determine opponents' strengths, forces opponents to stretch their commitments, then concentrates resources, attacks a clear exposure, overwhelms a selected market segment, builds a bridgehead in that market, and then regroups and expands from that base to dominate a wider field." The main marketing warfare books were:
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Business War Games by Barrie James, 1984 Marketing Warfare by Al Ries and Jack Trout, 1986 Leadership Secrets of Attila the Hun by Wess Roberts, 1987
By the turn of the century marketing warfare strategies had gone out of favour. It was felt that they were limiting. There were many situations in which non-confrontational approaches were more appropriate. The Strategy of the Dolphin was developed in the mid 1990s to give guidance as to when to use aggressive strategies and when to use passive strategies. Today most business strategists stress that considerable synergies and competitive advantage can be gained from
collaboration, partnering, and co-operation. They stress not how to divide up the market, but how to grow the market. Such are the vicissitudes of business theories.
Marketing Warfare Strategies
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Offensive marketing warfare strategies - are used to secure competitive advantages; market leaders, runner-ups or struggling competitors are usually attacked Defensive marketing warfare strategies - are used to defend competitive advantages; lessen risk of being attacked, decrease effects of attacks, strengthen position Flanking marketing warfare strategies - Operate in areas of little importance to the competitor. Guerrilla marketing warfare strategies - Attack, retreat, hide, then do it again, and again, until the competitor moves on to other markets. Deterrence Strategies - Deterrence is a battle won in the minds of the enemy. You convince the competitor that it would be prudent to keep out of your markets. Pre-emptive strike - Attack before you are attacked. (see Defensive marketing warfare strategies for a description) Frontal Attack - A direct head-on confrontation. (see Offensive marketing warfare strategies for a description) Flanking Attack - Attack the competitor s flank. (see Flanking marketing warfare strategies for a description) Sequential Strategies - A strategy that consists of a series of sub-strategies that must all be successfully carried out in the right order. Alliance Strategies - The use of alliances and partnerships to build strength and stabilize situations. Position Defense - The erection of fortifications. (see Defensive marketing warfare strategies for a description) Mobile defense - Constantly changing positions. (see Defensive marketing warfare strategies for a description) Encirclement strategy - Envelop the opponents position. (see Offensive marketing warfare strategies for a description) Cumulative strategies - A collection of seemingly random operations that, when complete, obtain your objective. Counter-offensive - When you are under attack, launch a counter-offensive at the attacker s weak point. (see Defensive marketing warfare strategies for a description) Strategic withdrawal - Retreat and regroup so you can live to fight another day. (see Defensive marketing warfare strategies for a description) Flank positioning - Strengthen your flank. (see Defensive marketing warfare strategies for a description) Leapfrog strategy - Avoid confrontation by bypassing enemy or competitive forces. (see Offensive marketing warfare strategies for a description)
Companies typically use many strategies concurrently, some defensive, some offensive, and always some deterrents. According to the business literature of the period, offensive strategies were more important that defensive one. Defensive strategies were used when needed, but an offensive strategy was requisite. Only by offensive strategies, were market gains made. Defensive strategies could at best keep you from falling too far behind.
The marketing warfare literature also examined leadership and motivation, intelligence gathering, types of marketing weapons, logistics, and communications.
Learning from Napoleon
To understand how business strategists used military strategies, we can look at the innovations of Napoleon and apply them to business situations. Napoleon made four key innovations. They were 1) increase his army¶s marching rate, 2) organize the army into self contained units, 3) live off the country, and 4) attack the opponent¶s lines of supply. All four provide lessons for business strategists: 1) By increasing the speed that the army marched and fought, they created a military advantage. They could implement their tactics faster than the enemy. Hitler used the same strategy with his Blitzkrieg. The enemy was overrun before they were able to organize a viable resistance. But once these innovations were used, other armies made adjustments and the nature of warfare changed. All armies had to increase their pace of operations to be effective. Businesses, like armies must operate at a faster pace than their competitors in order to have a competitive advantage. They must develop and introduce products faster, implement strategies faster, and respond to environmental factors faster. They must be proactive. 2) Napoleon returned to the cohort organization of the Greek phalanx. These were self contained fighting units of citizens that knew each other in daily life, and had a wide variety of skills and various skill levels. Under the Roman Empire the phalanx was replaced by specialized legions containing 100 fighters (centurion). Each legion had a specialized skill (such as the archer legions from Thrace). For more than 100 years, businesses have taken Adam Smith¶s advice and organized by functional specialization, just like the Roman legions did. Accountants populated the finance department and technicians populated the operations department. According to Adam Smith this is the most efficient way of organizing. But as the speed of business increases we need a more flexible system. We use cross functional teams (like the Greek phalanx) that have enough breadth of knowledge to see the big picture, are objective enough to get accurate and unbiased perceptions of environmental factors, and are flexible enough to act quickly. 3) Napoleon¶s armies lived off the country instead of bringing supplies with them. This allowed them to march faster. The disadvantage is that stealing from the local population created resentment. But this was a longer term problem. It could be dealt with when the time came. The short term advantage outweighed the long term disadvantage. In business we no longer stock inventory based on an EOQ model. We use a Just In Time model and this reduces costs considerably. However it makes us vulnerable to our supply channel partners. Just as Napoleon had to manage the local people that supplied him his provisions, businesses today have found supply chain management to be a critically important part of doing business. 4) Striking at the opponents lines of supply is known as a flanking strategy. It is effective because it eliminates the need to fight the enemy head-on. An attack on a poorly defended supply line can render the whole enemy army unable to fight. In business today we attempt to do this with exclusivity agreements with suppliers (if you sell Pepsi, you can¶t sell Coke). If Pepsi has
an exclusivity agreement with Pizza Hut, Coke will effectively be eliminated from that part of the market.
Barriers to entry
In economics and mostly especially in the theory of competition, barriers to entry are obstacles in the path of a firm that make it difficult to enter a given market. Barriers to entry protect incumbent firms from competition from newcomers. Barriers to entry are the source of a firm's pricing power - the ability of a firm to raise prices without losing all its customers. The term refers to hindrances that an individual may face while trying to gain entrance into a profession or trade. It also, more commonly, refers to hindrances that a firm (or even a country) may face while trying to enter a market, industry or trade grouping. Barriers to entry restrict competition in a market.
George Stigler defined an entry barrier as ³A cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry´.
A barrier to entry is anything that prevents entry when entry is socially beneficial
²Diagnosing Monopoly (1979), Franklin M. Fisher
Joe S. Bain defined as a barrier to entry anything that allows incumbent firms to earn supranormal profits without threat of entry.
Barriers to entry for firms into a market
Barriers to entry into markets for firms include:
Capital: need the capital to start up such as equipment, building, and raw materials
Advertising - Incumbent firms can seek to make it difficult for new competitors by spending heavily on advertising that new firms would find more difficult to afford. This is known as the market power theory of advertising. Here, established firms' use of advertising creates a consumer perceived difference in its brand from other brands to a degree that consumers see its brand as a slightly different product. Since the brand is seen as a slightly different product, products from existing or potential competitors cannot be perfectly substituted in place of the established firm's brand. This makes it hard for new competitors to gain consumer acceptance.
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Control of resources - If a single firm has control of a resource essential for a certain industry, then other firms are unable to compete in the industry. Cost advantages independent of scale - Proprietary technology, know-how, favorable access to raw materials, favorable geographic locations, learning curve cost advantages. Customer loyalty - Large incumbent firms may have existing customers loyal to established products. The presence of established strong brands within a market can be a barrier to entry in this case. Distributor agreements - Exclusive agreements with key distributors or retailers can make it difficult for other manufacturers to enter the industry. Economy of scale - Large, experienced firms can generally produce goods at lower costs than small, inexperienced firms. Cost advantages can sometimes be quickly reversed by advances in technology. For example, the development of personal computers has allowed small companies to make use of database and communications technology which was once extremely expensive and only available to large corporations. Government regulations - It may make entry more difficult or impossible. In the extreme case, a government may make competition illegal and establish a statutory monopoly. Requirements for licenses and permits may raise the investment needed to enter a market, creating an effective barrier to entry. Inelastic demand - One strategy to penetrate a market is to sell at a lower price than the incumbents. This is ineffective with price-insensitive consumers. Intellectual property - Potential entrant requires access to equally efficient production technology as the combatant monopolist in order to freely enter a market. Patents give a firm the legal right to stop other firms producing a product for a given period of time, and so restrict entry into a market. Patents are intended to encourage invention and technological progress by offering this financial incentive. Similarly, trademarks and servicemarks may represent a kind of entry barrier for a particular product or service if the market is dominated by one or a few wellknown names. Investment - That is especially in industries with economies of scale and/or natural monopolies. Network effect - When a good or service has a value that depends on the number of existing customers, then competing players may have difficulties in entering a market where an established company has already captured a significant user base. Predatory pricing - The practice of a dominant firm selling at a loss to make competition more difficult for new firms that cannot suffer such losses, as a large dominant firm with large lines of credit or cash reserves can. It is illegal in most places; however, it is difficult to prove. See antitrust. Restrictive practices, such as air transport agreements that make it difficult for new airlines to obtain landing slots at some airports. Research and development - Some products, such as microprocessors, require a large upfront investment in technology which will deter potential entrants. Supplier agreements - Exclusive agreements with key links in the supply chain can make it difficult for other manufacturers to enter an industry. Sunk costs - Sunk costs cannot be recovered if a firm decides to leave a market. Sunk costs therefore increase the risk and deter entry. Vertical integration - A firm's coverage of more than one level of production, while pursuing practices which favor its own operations at each level, is often cited as an entry barrier
Barriers to entry for individuals into the job market
Examples of barriers restricting individuals from entering a job market include educational, licensing, or quota limits on the number of people who can enter a certain profession such as that of lawyer, and educational, licensing, and experiential requirements for people who wish to be neurosurgeons. Whilst both types of barriers to entry attempt to guarantee that people entering those fields are suitably qualified, the barriers to entry also reduce competition. This has the effect of facilitating premium pricing for the services of regulated professions. That is, if just anyone could enter these fields, the income of the incumbents would be expected to be lower.
Classification and examples
Michael Porter classifies the markets into four general cases:
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High barrier to entry and high exit barrier (for example, telecommunications, energy) High barrier to entry and low exit barrier (for example, consulting, education) Low barrier to entry and high exit barrier (for example, hotels, ironworks) Low barrier to entry and low exit barrier (for example, retail, electronic commerce) Markets with high entry barriers have few players and thus high profit margins. Markets with low entry barriers have lots of players and thus low profit margins. Markets with high exit barriers are unstable and not self-regulated, so the profit margins fluctuate very much over time. Markets with a low exit barrier are stable and self-regulated, so the profit margins do not fluctuate much over time.
The higher the barriers to entry and exit, the more prone a market tends to be to natural monopoly. The reverse is also true. The lower the barriers, the more likely the market is to become a perfect competition.
Barriers to entry and market structure
1. 2. 3. 4. Perfect competition: Zero barriers to entry. Monopolistic competition: Low barriers to entry. Oligopoly: High barriers to entry. Monopoly: Very High to Absolute barriers to entry.
Barriers to exit
In economics, barriers to exit are obstacles in the path of a firm which wants to leave a given market or industrial sector. These obstacles often cost the firm financially to leave the market and may prohibit it doing so. If the barriers of exit are significant; a firm may be forced to continue competing in a market, as the costs of leaving may be higher than those incurred if they continue competing in the market.
Types of exit barrier
The factors that may form a barrier to exit include:
High investment in non-transferable fixed assets. This is particularly common for manufacturing companies that invest heavily in capital equipment which is specific to one task. High redundancy costs. If a company has a large number of employees, employees with high salaries, or contracts with employees which stipulate high redundancy payments, then the firm may face significant cost if it wishes to leave the market. Other closure costs. Contract contingencies with suppliers or buyers and any penalty costs incurred from cutting short tenancy agreements. Potential upturn. Firms may be influenced by the potential of an upturn in their market that may reverse their current financial situation.
As more firms are forced to stay in a market, competition increases within that market. This negatively affects all firms in the market and profits may be lower than in a perfectly competitive market.
barriers to exit
For many businesses there are also barriers to exit which increase the intensity of competition in an industry because existing firms have little choice but to ´stay and fightµ when market conditions have deteriorated. There are several costs associated with exiting an industry. (1) Asset-write-offs ² e.g. the expense associated with writing-off items of plant and machinery, stocks and the goodwill of a brand
(2) Closure costs including redundancy costs, contract contingencies with suppliers and the penalty costs from ending leasing arrangements for property
(3) The loss of business reputation and consumer goodwill - a decision to leave a market can seriously affect goodwill among previous customers, not least those who have bought a product which is then withdrawn and for which replacement parts become difficult or impossible to obtain. (4) A market downturn may be perceived as temporary and could be overcome when the economic or business cycle turns and conditions become more favourable
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