c



  

The Ansoff Growth matrix is a tool that helps businesses decide their product and
market growth strategy.

Ansoff¶s product/market growth matrix suggests that a business¶ attempts to grow

depend on whether it markets 
  products in 
  


The output from the Ansoff product/market matrix is a series of suggested growth
strategies that set the direction for the business strategy. These are described below:

 

Market penetration is the name given to a growth strategy where the business focuses
on selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:

‡ Maintain or increase the market share of current products ± this can be achieved by a
combination of competitive pricing strategies, advertising, sales promotion and perhaps
more resources dedicated to personal selling

‡ Secure dominance of growth markets

‡ Restructure a mature market by driving out competitors; this would require a much
more aggressive promotional campaign, supported by a pricing strategy designed to
make the market unattractive for competitors

‡ Increase usage by existing customers ± for example by introducing loyalty schemes

A market penetration marketing strategy is very much about ³business as usual´. The
business is focusing on markets and products it knows well. It is likely to have good
information on competitors and on customer needs. It is unlikely, therefore, that this
strategy will require much investment in new market research.

  

Market development is the name given to a growth strategy where the business seeks
to sell its existing products into new markets.

There are many possible ways of approaching this strategy, including:

‡ New geographical markets; for example exporting the product to a new country

‡ New product dimensions or packaging: for example

‡ New distribution channels

‡ Different pricing policies to attract different customers or create new market segments


  

Product development is the name given to a growth strategy where a business aims to
introduce new products into existing markets. This strategy may require the
development of new competencies and requires the business to develop modified
products which can appeal to existing markets.





Diversification is the name given to the growth strategy where a business markets new
products in new markets.

This is an inherently more risk strategy because the business is moving into markets in
which it has little or no experience.

For a business to adopt a diversification strategy, therefore, it must have a clear idea
about what it expects to gain from the strategy and an honest assessment of the risks.
v
 c
 :

 What are the Advertising objectives?

!" How much can be spent? (Advertising budget)

!c#! What message should be sent?

!c What media should be used?

!c$%!!& How should the results be evaluated?

'%!&&#&(!c)!%&#*+!,&)!

Advertising Objectives can be classified as to whether their aim is:

&    This aim of Advertising is generally true during the pioneering stage of a
product category, where the objective is building a primary demand.

This may include:

Telling the market about a new product

Suggesting new uses for a product

Informing the market of a price change

Informing how the product works

Describing available services

Correcting false impressions

Reducing buyers⼌ fears

Building a company image

& 
 Most advertisements are made with the aim of persuasion. Such
advertisements aim at building selective brand.

&     Such advertisements are highly effective in the maturity stage of the
product. The aim is to keep the consumer thinking about the product.

-!"

This M deals with deciding on the Advertising Budget

The advertising budget can be allocated based on:

Departments or product groups

The calendar

Media used

Specific geographic market areas

There are five specific factors to be considered when setting the Advertising budget.

 ., New products typically receive large advertising budgets to build
awareness and to gain consumer trial. Established brands are usually
supported with lower advertising budgets as a ratio to sales.

 /   ,
 0
  high-market-share brands usually require
less advertising expenditure as a percentage of sales to maintain their share.Â
To build share by increasing market size requires larger advertising
expenditures. Additionally, on a cost-per-impressions basis, it is less expensive
to reach consumers of a widely used brand them to reach consumers of low-
share brands.

,    
   In a market with a large number of competitors and
high advertising spending, a brand must advertise more heavily to be heard
above the noise in the market. Even simple clutter from advertisements not
directly competitive to the brand creates the need for heavier advertising.

c
  1 
2  the number of repetitions needed to put across the
brands message to consumers has an important impact on the advertising
budget.



0
 02 brands in the commodity class (example cigarettes,
beer, soft drinks) require heavy advertising to establish a different image.Â
Advertising is also important when a brand can offer unique physical benefits or
features.

3!c#!#!!%c&

Message generation can be done in the following ways:

 
 By talking to consumers, dealers, experts and competitors. Consumers are
the major source of good ideas. Their feeling about the product, its strengths, and
weaknesses gives enough information that could aid the Message generation process.



   



The advertiser needs to evalÂuate the alternative messages. A good ad normally

focuses on one core selling proposition.

Messages can be rated on V



 


and   
The message
must first say something desirable or interesting about the product.

The message must also say something exclusive or distinct that does not apply to every
brand in the product category. Above all, the message must be believable or provable.



 

The message⼌s impact depends not only upon what is said but also on how it is
said. Some ads aim for 


and others for 



While executing a message the style, tone, words, and format for executing the
message should be kept in mind.

2 Any message can be presented in any of the following different execution styles,
or a combination of them:

°


Shows one or more persons using the product in a normal setting.
Example: Coke 1litre ad, showed a family enjoying Coke, with a game of
antakshari when there is a power failure.

*


Emphasizes how a product fits in with a lifestyle.

Example: Collection, Asmi and Platinum ads, that focus on lifestyle of persons using
their products.

_


Creates a fantasy around the product or its use.

Example: VIP Frenchie ads, showing a woman thinking of the Frenchie man saving her
from a villain.

˜
j
Evokes a mood or image around the product, such as beauty,
love, or serenity. No claim is made about the product except through suggestion.

Example: Kingfisher Beer ads, saying the King of Good Times.

˜ 
 
Öses background music or shows one or more persons or cartoon
characters singing a song involving the product.

Example: Ads of Old Spice After Shave Lotion

K


 
 
Creates a character that personifies the product. The
character might be animated

Example: Ronald McDonald for McDonald⼌s

2

  

Shows the company⼌s expertise, experience, and
pride in making the product.

Example: GE and Skoda ads


°



 


Presents survey or scientific evidence that the brand is
preferred over or outperforms other brands. This style is common in the over-the-
counter drug category.

Example: DuraCell Ads, claiming the battery lasts 6 times longer than ordinary batteries

2





This features a highly credible, likable, or expert source
endorsing the product. It could be a celebrity or ordinary people saying how
much they like the product.

Example: In ads for Sunsilk, they had hair expert Coleen, endorsing the product.

& 

The communicator must also choose an appropriate tone for the ad.

Example: Procter & Gamble is consistently positive in its toneâ¼´its ads say something
superlatively positive about the product, and humor is almost always avoided so as not
to take mention away from the message. Other companies use emotions to set the
toneâ¼´particularly film, telephone, and insurance companies, which stress human
connections and milestones.

4
Memorable and attention-getting words must be found. The following themes
listed on the left would have had much less impact without the creative phrasing on the
right:

&/  ,,2

You won⼌t have to stay at home Get Out, Get Going
because of bad hair

5%c& 

Format elements such as ad size, color, and illustration will make a difference in an
ad⼌s impact as well as its cost. A minor rearrangement of mechanical elements
within the ad can improve its attention-getting power. Larger-size ads gain more
attention, though not necessarily by as much as their difference in cost. Four-colour
illustrations instead of black and white increase ad effectiveness and ad cost. By
planning the relative dominance of different elements of the ad, optimal delivery can be
achieved.

6!c

The next â¼×M⼌ to be considered while making an Advertisement Program is the

Media through which to communicate the Message generated during the previous
stage. The steps to be considered are:
v !c$%!!&

Evaluating the effectiveness of the Advertisement Program is very important as it helps

prevent further wastage of money and helps make corrections that are important for
further advertisement campaigns. Researching the effectiveness of the advertisement is
the most used method of evaluating the effectiveness of the Advertisement Program.
Research can be in the form of:

Communication-Effect Research

Sales-Effect Research

There are two ways of measuring advertising effectives. They are:

7
 

It is the assessment of an advertisement for its effectiveness before it is actually used. It

is done through

Concept testing â¼³ how well the concept of the advertisement is. This is be done
by taking expert opinion on the concept of the ad.

Test commercials ± test trial of the advertisement to the sample of people

Finished testing


7
 

It is the assessment of an advertisement⼌s effectiveness after it has been used. It is

done in two ways

Önaided recall ± a research technique that asks how much of an ad a person
remembers during a specific period of time

Aided recall ± a research technique that uses clues to prompt answers from
people about ads they might have seen

*%c!8&!
Brand Extension is the use of an established brand name in new product categories.
This new category to which the brand is extended can be related or unrelated to the
existing product categories. A renowned/successful brand helps an organization to
launch products in new categories more easily. For instance, Nike¶s brand core product
is shoes. But it is now extended to sunglasses, soccer balls, basketballs, and golf
equipments. An existing brand that gives rise to a brand extension is referred to as
parent brand. If the customers of the new business have values and aspirations
synchronizing/matching those of the core business, and if these values and aspirations
are embodied in the brand, it is likely to be accepted by customers in the new business.

Extending a brand outside its core product category can be beneficial in a sense that it
helps evaluating product category opportunities, identifies resource requirements,
lowers risk, and measures brand¶s relevance and appeal.

Brand extension may be successful or unsuccessful.

Instances where brand extension has been a success are-

i. Wipro which was originally into computers has extended into shampoo, powder,
and soap.
ii. Mars is no longer a famous bar only, but an ice-cream, chocolate drink and a
slab of chocolate.

Advantages of Brand Extension

Brand Extension has following advantages:

1. It makes acceptance of new product easy.

a. It increases brand image.
b. The risk perceived by the customers reduces.
c. The likelihood of gaining distribution and trial increases. An established
brand name increases consumer interest and willingness to try new
product having the established brand name.
d. The efficiency of promotional expenditure increases. Advertising, selling
and promotional costs are reduced. There are economies of scale as
advertising for core brand and its extension reinforces each other.
e. Cost of developing new brand is saved.
f. Consumers can now seek for a variety.
g. There are packaging and labeling efficiencies.
h. The expense of introductory and follow up marketing programs is reduced.
 . There are feedback benefits to the parent brand and the organization.
a. The image of parent brand is enhanced.
b. It revives the brand.
c. It allows subsequent extension.
d. Brand meaning is clarified.
e. It increases market coverage as it brings new customers into brand
franchise.
f. Customers associate original/core brand to new product, hence they also
have quality associations

V$c.&"&%c&!#"
Here are many different ways in which quality can be approached, so one might wonder
which the best for technical documentation is. Önfortunately, there is no simple answer
because quality is relative. It depends not only on the subject matter, but also on
perceptions of quality from different viewpoints.

A company's executive board might approach quality in terms of value for money. They
want technical documentation that can be produced quickly and cheaply. An engineer's
approach to quality might be one expressed in terms of technical accuracy and
completeness.

&%*$&&%c&!#"

For product-focused companies, establishing the most appropriate distribution

strategies is a major key to success, defined as maximizing sales and profits.
Önfortunately, many of these companies often fail to establish or maintain the most
effective distribution strategies. Problems that we have identified include:

Önwillingness to establish different distribution channels for different products

Fear of utilizing multiple channels, especially including direct or semi-direct sales,
due to concerns about erosion of distributor loyalty or inter-channel
cannibalization

Failure to periodically re-visit and update distribution strategies

Lack of creativity and resistance to change

To be fair, there can be sound reasons for these perceived weaknesses. More
typically, however, they are due to failings such as simple inertia, lack of
understanding of the ultimate customers and their preferences, or a failure to
acknowledge the importance of a distribution strategy and invest sufficient
resources in understanding it.

³Now´ is absolutely NOT the time to blindly continue the status quo with your distribution
strategies. The Internet is creating sea-changes in terms of traditional manufacturer-
distributor relations. It has seen significant waves of disintermediation in multiple
product lines, and can facilitate cost-effective broadening of distribution channels.
Meanwhile, improvements in supply chain management technologies must also be
factored into choice of distribution partners.

InfoTrends can help your company improve its distribution strategies by:

Mapping your products to the end-user

Determining customers¶ channel preferences and comparing these preferences
with actual availability

Recommending new channels, and why

Examining competitors¶ strategies and comparing them and their effectiveness
with
your own

Confidential interviews with your distribution partners to identify areas for
improvement, as well as existing strengths to be encouraged

Depending on the type of product being distributed there are three common distribution
strategies available:

] 



 


: Ösed commonly to distribute low priced or impulse purchase
products eg chocolates, soft drinks.

  

 


 Involves limiting distribution to a single outlet. The product is
usually highly priced, and requires the intermediary to place much detail in its sell. An
example of would be the sale of vehicles through exclusive dealers.

 ° 

 


 A small number of retail outlets are chosen to distribute the
product. Selective distribution is common with products such as computers, televisions
household appliances, where consumers are willing to shop around and where
manufacturers want a large geographical spread.

If a manufacturer decides to adopt an exclusive or selective strategy they should select

a intermediary which has experience of handling similar products, credible and is known
by the target audience.

)!%5,c&&%c&!#"

Diversification is a form of corporate strategy for a company. It seeks to increase

profitability through greater sales volume obtained from new products and new markets.
Diversification can occur either at the business unit level or at the corporate level. At the
business unit level, it is most likely to expand into a new segment of an industry that the
business is already in. At the corporate level, it is generally very interesting[clarification
needed] entering a promising business outside of the scope of the existing business
unit.

Diversification is part of the four main growth strategies defined by the Product/Market
Ansoff matrix:

Ansoff pointed out that a diversification strategy stands apart from the other three
strategies. The first three strategies are usually pursued with the same technical,
financial, and merchandising resources used for the original product line, whereas
diversification usually requires a company to acquire new skills, new techniques and
new facilities.

&/ 2


 



The strategies of diversification can include internal development of new products or

markets, acquisition of a firm, alliance with a complementary company, licensing of new
technologies, and distributing or importing a products line manufactured by another firm

Concentric diversification: This means that there is a technological similarity between

the industries, which means that the firm is able to leverage its technical know-how to
gain some advantage. For example, a company that manufactures industrial adhesives
might decide to diversify into adhesives to be sold via retailers. The technology would
be the same but the marketing effort would need to change.

Horizontal diversification: The Company adds new products or services that are often
technologically or commercially unrelated to current products but that may appeal to
current customers. In a competitive environment, this form of diversification is desirable
if the present customers are loyal to the current products and if the new products have a
good quality and are well promoted and priced.

Conglomerate diversification (or lateral diversification): The Company markets new

products or services that have no technological or commercial synergies with current
products but that may appeal to new groups of customers. The conglomerate
diversification has very little relationship with the firm's current business. Therefore, the
main reasons of adopting such a strategy are first to improve the profitability and the
flexibility of the company, and second to get a better reception in capital markets as the
company gets bigger. Even if this strategy is very risky, it could also, if successful,
provide increased growth and profitability.
6c9
2
  
2

c 2:.

You have to analyze the needs of your audience. You need to be able to identify their
core values, motivators, buying styles, fears, and sources of diversion, information
channels and centers of influence.

You must target your marketing message so that the intended prospect feels that the
services address their needs directly.

No buyer or buying population is alike. Try to apply a one size fits all approach to your
marketing, and you become nothing special to anyone.

Find out:

Who has money (or who has spent money) on similar products or
services?

What are their beliefs and values?

What are their desires, dreams and passions?

What are their fears and secrets that they¶d prefer to keep in the
shadows?

Where do they go on Mondays and Tuesdays and Wednesdays?

Why do they buy what they buy?

c  .

Once you¶ve analyzed the needs of your best prospects and found out where they are
you must then grab their attention.

That¶s getting harder and harder to do. We bombard consumers with thousands of
marketing message daily. What do they do to protect themselves? Filter them. Ignore
them. Delete them. Fight back at them.

Focus exclusively on your buying universe and their environment. ' 


 




 

 

 
 
 V  .

Ask yourself and your entire staff questions that revolve around getting the attention of
your defined universe of prospects.

Where are our customers on a daily basis?

What are they really looking at throughout the day?

What is shocking, beautiful, humorous, emotional, frightening, and urgent
enough for them to pay attention to our message and unique marketing
proposition?
c

.

Once you have their attention you move to the third step in the process,
Accept. To succeed you¶ll have to use every tool at your disposal to
encourage and get the prospect to accept your proposition, no matter
what it might be.

You have to get them to accept that your marketing proposition (despite
the fact there might be countless other competitors in the marketplace
right now) is the best one to help them achieve the outcomes they¶re
looking for.

As we¶ll discuss in detail later, people do not buy products or services,
they buy outcomes. "  / 
 
0
 

.

c


You have to get them to act. The potential buyers have to do
  with the
information and relationship you¶ve cultivated by taking a specific, intended course of
action. They have to make the transition from tire kicker or prospect to a full-fledge
customer/buyer/member/inductee.

Money or some other commitment has to take place to make your marketing efforts
worthwhile.

Will it be a trip to your store, a phone call to set up an appointment or a visit to your
website to order online? Will it be a completed survey, petition signature or membership
renewal?

*%c#

Branding is a major decision issue in managing products. Well-known brands have the
power to command price premium. Today, the brands Mercedes, IBM, Sony, Canon
and others enjoy a huge brand-loyal market. According to Business Week, the Intel
brand is one of the top 10 global brands, with a brand equity value of more than ÖS 30
billion dollars.

American Marketing Association defined brand as ³a name, term, sign, symbol, or

design, or a combination of them, intended to identify the goods and services of one
seller or group of sellers and to differentiate them from those of competition.

Brands live in the minds of consumers and are much more than just a tag for their
recognition and identification. They are the basis of consumer relationship and bring
consumers and marketers closer by developing a bond of faith and trust between them.

A brand mark refers to that part of brand which is not made up of words, but can be a
symbol or design such as swoosh mark of Nike, or Golden Arches of McDonald¶s.
*%c!&c&"

Many brands are largely unknown to consumers and for some others, there is very high
level of awareness in terms of name recall and recognition. David A. Aaker defines
brand identity as, ³a unique set of brand associations that the brand strategist aspires to
create or maintain. These associations represent what the brand stands for and imply a
promise to customers from the organisation members.´ Brand identity and brand image
are sometimes used interchangeably in different texts. Brand identity refers to an
insider¶s concept reflecting brand manager¶s decisions of what the brand is all about.
Brand image reflects the perceptions of outsiders, that is customers, about the brand.

K

 Physique dimension refers to the tangible, physical aspects. The physical
dimensions are usually included in the product such as name, features, colours, logos,
and packaging. The physique of IBM brand would be data system, servers, desktop
PCs, notebooks PCs, and service, etc.


 2 Marketers deliberately may try to assign the brand a personality; or people
on their own may attribute a personality to a brand. Bajaj Pulsar ads communicate
³Definitely male.´ The personality of Boost is seen as young, dynamic, energetic and an
achiever.

,   Culture includes knowledge, belief, rites and rituals, capabilities, habits, and
values. A brand reflects its various aspects and values that drive it. Culture manifests
various aspects of a brand. For instance, Apple computers reflect its culture. It is a
symbol of simplicity, and friendliness.

%
/: Brands are often at the heart of transactions and exchanges between
marketers and customers. The brand name Nike is Greek and relates to Olympics.
Apple conveys emotional relationship based on friendliness. Relationship is essentially
important in service products.

%
 : This refers to defining the kind of people who use it. It is reflected in the
image of its consumers: young, old, rich, modern and so on. For example, Pepsi reflects
young, fun loving, carefree people. The reflection of Allen Solly¶s brand is a typical
young executive.

7  This means how a customer relates herself / himself to the brand.
Selfimage is how a customer sees herself / himself. The self-image of users of Bajaj
Pulsar motorcycle is believed to that of be tough, young males.





*%c!V$&"
³Brand equity is defined in terms of marketing effects uniquely attributed to the brands ±
for example, when certain outcomes result from the marketing of a product or service
because of its brand name that would not occur if the same product or service did not
have the name.´

 
 The aspect of brand equity focuses on the physical and functional
attributes of a brand. Customers are concerned about how fault free and durable the
brand is, based on their judgement.

 : This focuses on what social image the brand holds in terms of its esteem
for customer¶s social and reference groups.
)  This refers to the customer¶s value perception of the brand. This is the ratio
between what are the involved costs and the perceived delivered value.
&
/ 

This means the customer¶s extent of faith in the brand¶s
performance, quality, and service. This reflects reliability of the brand, that it would
always take care of customer¶s interest and the people behind the brand can be trusted.
 
 To what extent customers feel emotionally attached to the brand.
Their association with the brand is important because it matches their self-concept
and aspirations. This means psychological association with what the brand stands
for in the customer¶s perceptions.

c


7!
 #

Ian Ansoff has proposed a useful framework called the product/market expansion grid
for detecting new intensive growth opportunities. There are four strategies, one for each
of the quadrants:
  2

When the product is in the current market, it can still grow. There are three major
approaches to increasing current product's market share:
1. Encourage current customers to buy more.
. Attract competitor¶s customers.
3. Convince non-users to use the product.

7  2


When the current product is launched in a new market, there are three approaches to
develop the market:
1. Expand distribution channels.
. Sell in new locations.
3. Identify the potential users.




7  2

When a new product is launched in the current market, the intensive growth strategies
could be to:
1. Develop new features.
. Develop different quality levels.
3. Improve the technology.



 
When a new product is launched in a new market, diversification makes good sense as
better opportunities are found outside the present business. The diversification
strategies are of three types:
1. Concentric Diversification Strategy: Develop new products with the earlier technology
for new segments
. Conglomerate Diversification Strategy: Develop new products for new markets.
3. Horizontal Diversification Strategy: Develop new products with new technology for old
customers.
OLD NEW
PRODÖCTS PRODÖCTS
OLD Market Product
MARKETS Penetration Development
NEW Market
Diversification
MARKETS Development

#!

 2

GE Matrix or McKinsey Matrix is a strategic tool for portfolio analysis. It is similar to the
BCG Matrix and actually the GE / McKinsey Matrix is an extension of the BCG Matrix -
multifactor portfolio analysis tool. This tool compares different businesses on "Business
Strength" and "Market Attractiveness" variables. This allows the business user to
compare business strength, market attractiveness, market size, and market share for
different strategic business units (SBÖs) or different product offerings.
The vertical axis of GE matrix is industries attractiveness< which is determined by the
factor Market growth rate, market size, demand variability, industries profibility, global
opportunity, macro environmental factor
The horizontal axis of GE matrix is strength of business unit some factors that can be
used to determine business strength include.Market share, growth in market share,
brand equity, distribution channel access, production capacity, profit margin relative to
competitors.
The GE / McKinsey Matrix is divided into nine cells - nine alternatives for positioning of
any SBÖ or product offering. Based on the strength of the business and its market
attractiveness each SBÖ will have a different position in the matrix. Further, the market
size and the current sales will distinguish each SBÖ. Based on clear understanding of
all of these factors decision makers are able to develop effective strategies.

The nine cells in the matrix can be grouped into three major segments:

  ' This is the best segment. The business is strong and the
market is attractive. The company should allocate resources in this business
and focus on growing the business and increase market share.

  - The business is either strong but the market is not attractive or
the market is strong and the business is not strong enough to pursue
potential opportunities. Decision makers should make judgment on how to
further deal with these SBÖs. Some of them may consume to much
resources and are not promising while others may need additional
resources and better strategy for growth.

  3 This is the worst segment. Businesses in this segment are

weak and their market is not attractive. Decision makers should consider
either repositioning these SBÖs into a different market segment, develop
better cost-effective offering, or get rid of these SBÖs and invest the
resources into more promising and attractive SBÖs.





# 

) ,/ 

Inbound Logistics > Operation > Outbound Logistics > Marketing & Sales > Service >
Margin

Firm Infrastructure
HR Management
Technology Development
Procurement
The goal of these activities is to offer the customer a level of value that exceeds the
cost of the activities, thereby resulting in a profit margin.

The primary value chain activities  

 0 .


the receiving and warehousing of raw materials, and their
distribution to manufacturing as they are required.
‡ 0 .


‡ the warehousing and distribution of finished goods.
 ;
: the identification of customer needs and the generation of sales.
‡
 the support of customers after the products and services are sold to them.

&/
 2


02 
The infrastructure of the firm: organizational structure, control systems,
company culture, etc.
‡Human resource management: employee recruiting, hiring, training,
development, and compensation.
‡Technology development: technologies to support value-creating activities.
‡ Procurement: purchasing inputs such as materials, supplies, and equipment.
The firm's margin or profit then depends on its effectiveness in performing these
activities efficiently, so that the amount that the customer is willing to pay for the
products exceeds the cost of the activities in the value chain. It is in these activities that
a firm has the opportunity to generate superior value. A competitive advantage may be
achieved by reconfiguring the value chain to provide lower cost or better differentiation.
The value chain model is a useful analysis tool for defining a firm's core competencies
and the activities in which it can pursue a competitive advantage as follows:
,
 : by better understanding costs and squeezing them out of the
value-adding activities.
‡  : by focusing on those activities associated with core competencies and
capabilities in order to perform them better than do competitors.





# 


c 2



 
 

Porter¶s generic strategies framework constitutes a major contribution to the

development of the strategic management literature. Competitive strategies focus on
ways in which a company can achieve the most advantageous position that it possibly
can in its industry. The profit of a company is essentially the difference between its
revenues and costs. Therefore high profitability can be achieved through achieving the
lowest costs or the highest prices vis-à-vis the competition. Porter used the terms µcost
leadership¶ and µdifferentiation¶, wherein the latter is the way in which companies can
earn a price premium.

 



# 

c 2


Companies can achieve competitive advantages essentially by differentiating their

products and services from those of competitors and through low costs. Firms can
target their products by a broad target, thereby covering most of the marketplace, or
they can focus on a narrow target in the market. According to Porter, there are three
generic strategies that a company can undertake to attain competitive advantage: cost
leadership, differentiation, and focus.

,

/

The companies that attempt to become the lowest-cost producers in an industry can be
referred to as those following a cost leadership strategy. The company with the lowest
costs would earn the highest profits in the event when the competing products are
essentially undifferentiated, and selling at a standard market price. Example : Deccan
Airlines.

  

When a company differentiates its products, it is often able to charge a premium price
for its products or services in the market. Some general examples of differentiation
include better service levels to customers, better product performance etc. in
comparison with the existing competitors. Differentiation has many advantages for the
firm which makes use of the strategy. Some problematic areas include the difficulty on
part of the firm to estimate if the extra costs entailed in differentiation can actually be
recovered from the customer through premium pricing. Moreover, successful
differentiation strategy of a firm may attract competitors to enter the company¶s market
segment and copy the differentiated product.

5



Porter initially presented focus as one of the three generic strategies, but later identified
focus as a moderator of the two strategies. Companies employ this strategy by focusing
on the areas in a market where there is the least amount of competition (Pearson,
1999). Organizations¶ can make use of the focus strategy by focusing on a specific
niche in the market and offering specialized products for that niche. This is why the
focus strategy is also sometimes referred to as the niche strategy.

This strategy provides the company the possibility to charge a premium price for
superior quality (differentiation focus) or by offering a low price product to a small and
specialized group of buyers (cost focus). Ferrari and Rolls-Royce are classic examples
of niche players in the automobile industry. Both these companies have a niche of
premium products available at a premium price. Moreover, they have a small
percentage of the worldwide market,

55







  is an excellent model to use to analyse a particular
environment of an industry. Michael Porter provided a framework that models an
industry as being influenced by five forces. The strategic business manager seeking to
develop an edge over rival firms can use this model to better understand the industry
context in which the firm operates.

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In the traditional economic model, competition among rival firms drives profits to
zero. But competition is not perfect and firms are not unsophisticated passive price
takers. Rather, firms strive for a competitive advantage over their rivals. The
intensity of rivalry among firms varies across industries, and strategic analysts are
interested in these differences.
Economists measure rivalry by indicators of industry concentration. The Concentration
Ratio (CR) is one such measure. The Bureau of Census periodically reports the CR for
major Standard Industrial Classifications (SIC's). The CR indicates the percent of
market share held by the four largest firms (CR's for the largest 8,  , and 0 firms in an
industry also are available). A high concentration ratio indicates that a high
concentration of market share is held by the largest firms - the industry is concentrated.
With only a few firms holding a large market share, the competitive landscape is less
competitive (closer to a monopoly). A low concentration ratio indicates that the industry
is characterized by many rivals, none of which has a significant market share. These
  V
markets are said to be competitive. The concentration ratio is not the only
available measure; the trend is to define industries in terms that convey more
information than distribution of market share.
If rivalry among firms in an industry is low, the industry is considered to be
disciplined. This discipline may result from the industry's history of competition, the
role of a leading firm, or informal compliance with a generally understood code of
conduct. Explicit 

generally is illegal and not an option; in low-rivalry
industries competitive moves must be constrained informally. However, a maverick
firm seeking a competitive advantage can displace the otherwise disciplined market.
When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat,
intense, moderate, or weak, based on the firms' aggressiveness in attempting to
gain an advantage.
In pursuing an advantage over its rivals, a firm can choose from several competitive
moves:
‡ Changing prices - raising or lowering prices to gain a temporary advantage.
Improving product differentiation - improving features, implementing
innovations in the manufacturing process and in the product itself.
‡ Creatively using channels of distribution - using vertical integration or using a
distribution channel that is novel to the industry. For example, with high-endjewelry
stores reluctant to carry its watches, Timex moved into drugstores and
other non-traditional outlets and cornered the low to mid-price watch market.

. Exploiting relationships with suppliers - for example, from the 19 0's to the
1970's Sears, Roebuck and Co. dominated the retail household appliance
market. Sears set high quality standards and required suppliers to meet its
demands for product specifications and price.

The intensity of rivalry is influenced by the following industry characteristics:

'c 0
increases rivalry because more firms must

compete for the same customers and resources. The rivalry intensifies if the
firms have similar market share, leading to a struggle for market leadership.
  /causes firms to fight for market share. In a growing
market, firms are able to improve revenues simply because of the expanding
market.
3 (/


result in an economy of scale effect that increases rivalry.
When total costs are mostly fixed costs, the firm must produce near capacity
to attain the lowest unit costs. Since the firm must sell this large quantity of
product, high levels of production lead to a fight for market share and results in
increased rivalry.
4 (/



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/0

cause a producer to sell
goods as soon as possible. If other producers are attempting to unload at the
same time, competition for customers intensifies.
.

/ 


increases rivalry. When a customer can freely switch
from one product to another there is a greater struggle to capture customers.
6 .

  is associated with higher levels of
rivalry. Brand identification, on the other hand, tends to constrain rivalry.
7 


//when a firm is losing market position or has
potential for great gains. This intensifies rivalry.
8 (/0
place a high cost on abandoning the product. The firm
must compete. High exit barriers cause a firm to remain in an industry, even
when the venture is not profitable. A common exit barrier is asset specificity.
When the plant and equipment required for manufacturing a product is highly
specialized, these assets cannot easily be sold to other buyers in another
industry. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates
this concept. Litton was successful in the 1960's with its contracts to build
Navy ships. But when the Vietnam war ended, defense spending declined and
Litton saw a sudden decline in its earnings. As the firm restructured, divesting
from the shipbuilding plant was not feasible since such a large and highly
specialized investment could not be sold easily, and Litton was forced to stay
in a declining shipbuilding market.
9 c
2
with different cultures, histories, and philosophies make
an industry unstable. There is greater possibility for mavericks and for
misjudging rival's moves. Rivalry is volatile and can be intense. The hospital
industry, for example, is populated by hospitals that historically are community
or charitable institutions, by hospitals that are associated with religious
organizations or universities, and by hospitals that are for-profit enterprises.
This mix of philosophies about mission has lead occasionally to fierce local
struggles by hospitals over who will get expensive diagnostic and therapeutic
services. At other times, local hospitals are highly cooperative with one
another on issues such as community disaster planning.
'< 
2/ A growing market and the potential for high profits
induces new firms to enter a market and incumbent firms to increase
production. A point is reached where the industry becomes crowded with
competitors, and demand cannot support the new entrants and the resulting
increased supply. The industry may become crowded if its growth rate slows
and the market becomes saturated, creating a situation of excess capacity
with too many goods chasing too few buyers. A shakeout ensues, with intense
competition, price wars, and company failures.

BCG founder Bruce Henderson generalized this observation as the Rule of

Three and Four: a stable market will not have more than three significant
competitors, and the largest competitor will have no more than four times the
market share of the smallest. If this rule is true, it implies that:

_ If there is a larger number of competitors, a shakeout is inevitable

_ Surviving rivals will have to grow faster than the market
_ Eventual losers will have a negative cash flow if they attempt to grow
_ All except the two largest rivals will be losers
_ The definition of what constitutes the "market" is strategically important.

Whatever the merits of this rule for stable markets, it is clear that market
stability and changes in supply and demand affect rivalry. Cyclical demand
tends to create cutthroat competition. This is true in the disposable diaper
industry in which demand fluctuates with birth rates, and in the greeting card
industry in which there are more predictable business cycles.



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In Porter's model, substitute products refer to products in other industries. To the
economist, a threat of substitutes exists when a product's demand is affected by the
price change of a substitute product. A product's price elasticity is affected by
substitute products - as more substitutes become available, the demand becomes
more elastic since customers have more alternatives. A close substitute product
constrains the ability of firms in an industry to raise prices.
The competition engendered by a Threat of Substitute comes from products outside
the industry. The price of aluminum beverage cans is constrained by the price of glass
bottles, steel cans, and plastic containers. These containers are substitutes,yet they are
not rivals in the aluminum can industry. To the manufacturer of automobile tires, tire
retreads are a substitute. Today, new tires are not so expensive that car owners give
much consideration to retreading old tires. But in the trucking industry new tires are
expensive and tires must be replaced often. In the truck tire market, retreading remains
a viable substitute industry. In the disposable diaper industry, cloth diapers are a
substitute and their prices constrain the price of disposables.

While the threat of substitutes typically impacts an industry through price

competition, there can be other concerns in assessing the threat of substitutes.
Consider the substitutability of different types of TV transmission: local station
transmission to home TV antennas via the airways versus transmission via cable,
satellite, and telephone lines. The new technologies available and the changing
structure of the entertainment media are contributing to competition among these
substitute means of connecting the home to entertainment. Except in remote areas it is
unlikely that cable TV could compete with free TV from an aerial without the greater
diversity of entertainment that it affords the customer.

* 2

The power of buyers is the impact that customers have on a producing industry. In
general, when buyer power is strong, the relationship to the producing industry is near
to what an economist terms a monopsony - a market in which there are many suppliers
and one buyer. Önder such market conditions, the buyer sets the price. In reality few
pure monopsonies exist, but frequently there is some asymmetry between a producing
industry and buyers. The following tables outline some factors that determine buyer
power.

) 

A producing industry requires raw materials - labor, components, and other supplies.
This requirement leads to buyer-supplier relationships between the industry and the
firms that provide it the raw materials used to create products. Suppliers, if powerful,
can exert an influence on the producing industry, such as selling raw materials at a high
price to capture some of the industry's profits. The following tables outline some factors
that determine supplier power.
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It is not only incumbent rivals that pose a threat to firms in an industry; the possibility
that new firms may enter the industry also affects competition. In theory, any firm should
be able to enter and exit a market, and if free entry and exit exists, then profits always
should be nominal. In reality, however, industries possess characteristics that protect
the high profit levels of firms in the market and inhibit additional rivals from entering the
market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets
typically make. For example, when industry profits increase, we would expect additional
firms to enter the market to take advantage of the high profit levels, over time driving
down profits for all firms in the industry. When profits decrease, we would expect some
firms to exit the market thus restoring a market equilibrium.Falling prices, or the
expectation that future prices will fall, deters rivals from entering a market. Firms also
may be reluctant to enter markets that are extremely
uncertain, especially if entering involves expensive start-up costs. These are normal
accommodations to market conditions. But if firms individually (collective action would
be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants
from entering the market, such entry-deterring pricingestablishes a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriers
reduce the rate of entry of new firms, thus maintaining a level of profits for those already
in the industry. From a strategic perspective, barriers can be created or exploited to
enhance a firm's competitive advantage. Barriers to entry arise from several sources:

1 : Government creates barriers. Although the principal role of the government in a

market is to preserve competition through anti-trust actions, government also restricts
competition through the granting of monopolies and through regulation. Industries such
as utilities are considered natural monopolies because it has been more efficient to
have one electric company provide
power to a locality than to permit many electric companies to compete in a local market.
To restrain utilities from exploiting this advantage, government permits a monopoly, but
regulates the industry. Illustrative of this kind of barrier to entry is the local cable
company. The franchise to a cable provider may be granted by competitive bidding, but
once the franchise is awarded by
a community a monopoly is created. Local governments were not effective in monitoring
price gouging by cable operators, so the federal government has enacted legislation to
review and restrict prices.

The regulatory authority of the government in restricting competition is historically

evident in the banking industry. Öntil the 1970's, the markets that banks could enter
were limited by state governments. As a result, most banks were local commercial and
retail banking facilities. Banks competed through strategies that emphasized simple
marketing devices such as awarding
toasters to new customers for opening a checking account. When banks were
deregulated, banks were permitted to cross state boundaries and expand their markets.
Deregulation of banks intensified rivalry and created uncertainty for banks as they
attempted to maintain market share. In the late 1970's, the strategy of banks shifted
from simple marketing tactics to mergers and geographic expansion as rivals attempted
to expand markets.

 : Patents and proprietary knowledge serve to restrict entry into an industry. Ideas and
knowledge that provide competitive advantages are treated as private property when
patented, preventing others from using the knowledge and thus creating a barrier to
entry. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the
instant photography industry. In 197 , Kodak attempted to enter the instant camera
market and sold a comparable camera. Polaroid sued for patent infringement and won,
keeping Kodak out of the instant camera industry.

3 : Asset specificity inhibits entry into an industry. Asset specificity is the extent to which
the firm's assets can be utilized to produce a different product. When an industry
requires highly specialized technology or plants and equipment, potential entrants are
reluctant to commit to acquiring specialized assets that cannot be sold or converted into
other uses if the venture fails. Asset specificity provides a barrier to entry for two
reasons: First, when firms already hold specialized assets they fiercely resist efforts by
others from taking their market share. New entrants can anticipate aggressive rivalry.
For example, Kodak had much capital invested in its photographic equipment business
and aggressively resisted efforts by Fuji to intrude in its market. These assets are both
large and industry specific. The second reason is that potential entrants are reluctant to
make investments in highly specializedassets.

4 : Organizational (Internal) Economies of Scale. The most cost efficient level of

production is termed Minimum Efficient Scale (MES). This is the point at which unit
costs for production are at minimum - i.e., the most cost efficient level of production. If
MES for firms in an industry is known, then we can determine the amount of market
share necessary for low cost entry or cost
parity with rivals. For example, in long distance communications roughly 10% of the
market is necessary for MES. If sales for a long distance operator fail to reach 10% of
the market, the firm is not competitive.
The existence of such an economy of scale creates a barrier to entry. The greater the
difference between industry MES and entry unit costs, the greater the barrier to entry.
So industries with high MES deter entry of small, start-up businesses. To operate at
less than MES there must be a consideration that permits the firm to sell at a premium
price - such as product differentiation or local monopoly.