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CHAPTER 1
International marketing defined
The performance of business activities designed to plan, price, promote, and direct the flow of a
company’s goods and services to consumers or users in more than one nation for a profit. What is the
difference between domestic and international marketing? The answer lies with the environment within
which marketing plans must be implemented. The uniqueness of foreign marketing comes from the range
of unfamiliar problems and the variety of strategies necessary to cope with different levels of uncertainty
encountered in foreign markets. What makes marketing interesting is the challenge of molding the
controllable elements of marketing decisions within the framework of the uncontrollable elements of the
marketplace in such a way that marketing objectives are achieved.
The international marketing task
Uncertainty is created by the uncontrollable elements of all business environments, but each foreign
country in which a company operates adds its own unique set of uncontrollable factors. It has two levels
of uncertainty, domestic and foreign.
Environmental adaptation needed
Marketers must be able to interpret effectively the influence and impact of each of the uncontrollable
environmental variables on the marketing plan for each foreign market in which they hope to do business.
The uncontrollable elements constitute the culture; the difficulty facing the marketer in adjusting to the
culture lies in reorganizing its impact. The task of cultural adjustment, however, is the most challenging
and important one confronting international marketers; they must adjust their marketing efforts to cultures
to which they are not attuned. In dealing with unfamiliar markets, marketers must be aware of the frames
of reference they are using in making their decisions or evaluating the potential of a market because
judgments are derived from the experience that is the result of acculturation in the home country.
Stages of international marketing involvement
Once a company has decided to go international, it has to decide the degree of marketing involvement.
This decision should reflect considerable study. Research has revealed a number of factors that favor
internationalization. 1) company switch high technology and marketing based resources appear to be
better equipped to internationalize than more traditional manufacturing kinds of companies, 2) smaller
home markets and larger production capacities appear to favor internationalization, and 3) firms with key
managers well networked internationally are able to accelerate the internationalization process. In
general, 5 stages can describe the international marketing involvement of a company.
1. No direct foreign marketing
A company does not actively cultivate customers outside national borders; however, this company’s
products may reach foreign markets
2. Infrequent foreign marketing
Temporary surpluses caused by variations in production levels or demand may result in infrequent
marketing overseas. As domestic demand increases and absorbs surpluses, foreign sales activity is
reduced or even withdrawn. The first 2 stages of international marketing involvement are more reactive in
nature and often do not represent careful strategic thinking about international expansion.
3. Regular foreign marketing
A firm has a permanent productive capacity devoted to the production of goods and services to be
marketed in foreign markets. The primary focus of operations and production is to service domestic
markets, however as overseas demand grows, production is allocated for foreign markets.
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4. International marketing
Such companies seek markets all over the world and sell products that are a result of planned production
for markets in various countries.
5. Global marketing
6. At this stage, companies treat the world, including their home market, as one market.
CHAPTER 2
US and world economy post-WWII
The US invested in rebuilding Europe and aiding African and South American countries because every
dollar invested abroad, came back as purchases of agricultural products and services that the US had to
offer because of an oversupply of labor of the soldiers that came back home.
After WWI → General Agreement on Tariffs and Trade (GATT)
1995 → WTO
World trade and US multinationals
The rapid growth of war-torn societies and underdeveloped countries with large-scale economic
cooperation and assistance led to new global marketing opportunities. Rising standards of living and
broad-based consumer and industrial markets abroad created opportunities for American companies to
expand exports and investment worldwide. In the 1960s, MNCs were facing challenges such as 1)
resistance to direct investment and 2) increasing competition in export markets. The world started getting
concerned about the control the US had worldwide. Most of the industrialized world and developing
countries were competing for demand in their own countries and looking for world markets as well.
Countries once classified as less developed were reclassified as newly industrialized countries (NICs).
The world market share that the US had in the 1950s, is now shared between a lot of different actors.
Beyond the first decade of the 21st century
Developed countries are growing at a slower rate compared to developing countries. BRICs are
supposed to have a much higher market share than the European Union by 2020.
Due to these changes in the global scene, firms are looking for ways to become more efficient, improve
productivity, and expand their global reach while maintaining an ability to respond quickly and deliver
products that the markets demand. Smaller companies are using novel approaches to marketing and
seeking ways to apply their technological expertise to exporting goods and services not previously sold
abroad.
Balance of payments
Due to trade, there is a constant flow of money into and out of a country. The system of accounts that
records a nation’s international financial transactions is called its balance of payments.
A balance of payments records all financial transactions between its residents and those of the rest of the
world during a given period of time. The difference between receipts received by other countries and
receipts given to other countries. 3 main accounts, 1) current account, a record of all merchandise
exports, imports, and services plus the unilateral transfer of funds; 2) capital account, a record of direct
investment, portfolio investment, and short term capital movements to and from countries; and 3)
reserves account a record of exports and imports of gold, increases/decreases in foreign exchange, and
increases/decreases in liabilities to foreign central banks.
The current account is important because it includes all international merchandise trade and service
accounts, accounts for the value of all merchandise and services imported and exported, and all receipts
and payments from investments and overseas employment.
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Why protectionism?
- Protection of an infant industry
- Protection of the home market
- Need to keep money at home
- Encouragement of capital accumulation
- Maintenance of the standard of living and real wages
- Conservation of natural resources
- Industrialization of a low-wage nation
- Maintenance of employment and reduction of unemployment
- National defense
- Retaliation and bargaining
Trade barriers
To encourage the development of domestic industry
1. Tariffs
The tax imposed by the government on goods entering its borders. It May be used as revenuegenerating taxes or to discourage the importation of goods.
2. Quotas and import licenses
A quota is a specific unit or dollar limit applied to a particular type of good. Quotas put an
absolute restriction on the quantity of a specific item that can be imported. The difference
between quotas and import licenses as a means of controlling imports is the greater flexibility of
import licenses over quotas. Quotas permit importing until the quota is filled; licensing limits
quantities on a case-by-case basis.
3. Voluntary export restraints
VER is an agreement between the importing and the exporting country for a restriction in the
volume of exports.
4. Boycotts and embargoes
A boycott is a restriction against the purchase and importation of certain goods from other
countries. An embargo is a refusal to sell to a specific country.
5. Antidumping penalties
The non-tariff barrier is a way to keep foreign goods out of the market. Designed to prevent
predatory pricing and cutting prices to win the whole market. It is considered antitrust.
Easing trade restrictions
Lowering the trade deficit has been a priority of the US. Of the many proposals brought forward, most
deal with fairness of trade with some trading partners instead of reducing imports or adjusting trade
policies. The truth is that too many countries are allowed to trade freely with the US.
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The omnibus trade and competitiveness act
Focused on assisting businesses to be more competitive in world markets as well as on
correcting perceived injustice in trade practices. The trade act was designed to deal with trade
deficits, protectionism, and overall fairness of the US trading partners.
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CHAPTER 8
Developing a global vision through marketing research
Information is a key component in developing successful marketing strategies, avoiding major marketing
blunders, and promoting efficient exchange systems. Information needs range from the general data
required to assess market opportunities to specific market information for decisions about product,
promotion, distribution, and price.
Breadth and scope of international marketing research
Research can be divided into three types on the basis of information needs:
1. General information about the country, area, and market
2. Information necessary to forecast future marketing requirement by anticipating social, economic,
consumer, and industry trends
3. Specific market information used to make product, promotion, distribution, and price decisions
and to develop marketing plans
There’s a broader scope of international marketing research is reflected in Unisys Corporation’s planning
steps, which call for collecting and assessing the following types of information:
- Economic and demographic
- Cultural, sociological, and political climate
- Overview of market conditions
- Summary of the technological environment
- Competitive situation
The research process
A key to successful research is a systematic and orderly approach to the collection and analysis of data.
The research process should follow these steps:
1. Define the research problem and establish research objectives
2. Determine the sources of information to fulfill the research objectives
3. Consider the costs and benefits of the research effort
4. Gather the relevant data from secondary or primary sources
5. Analyze, interpret, and summarize the results
6. Effectively communicate the results to decision-makers
Research programs might be similar for all countries, but must be adapted due to differences in cultural
and economic development.
Defining the problem and establishing research objectives
After examining internal sources of data, the research process should begin with a definition of the
research problem and the establishment of specific research objectives. Usually, researchers start with a
very vague idea of the total problem. This first step is more critical in foreign markets because an
unfamiliar environment tends to cloud problem definition. Researchers either fail to anticipate the
influence of the local culture on the problem or fail to identify the self-reference criterion (SRC) and
therefore treat the problem definition as if it were in the researcher’s home environment. difficulties in
foreign research stem from failures to establish problem limits broad enough to include all relevant
variables. Once the problem is defined and research objectives are established, the researcher must
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determine the availability of the information needed. If the data are available the researcher should
consult these secondary data sources.
Problems of availability and use of secondary data
Commercial sources, trade associations, management groups, and state and local governments provide
researchers with additional sources of detailed country information.
- Availability
- Reliability
- Comparability ( → Out of date information)
Validating secondary data
Secondary data must be checked and interpreted carefully. The following questions should be asked.
1. Who collected the data?
2. For what purpose was the data collected?
3. How was the data collected?
4. Are the data internally consistent and logical in light of known data sources or market factors?
Checking the consistency of one set of secondary data with other data of known validity is an effective
and often used way of judging validity.
Problems of gathering primary data
The success of primary research hinges on the ability of the researchers to get correct and truthful
information that addresses the research objectives. Most problems stem from cultural differences among
countries and range from the inability or unwillingness of respondents to communicate their opinions to
inadequacies in questionnaire translation.
- Ability to communicate opinions
- Unwillingness or inability to respond
Language as barrier
- Back translation
Questionnaire translated from one language to another, and then a second party translates it
back to the original, and the two original language versions are then compared. Used to see
misinterpretations before they go public.
- Parallel translation
More than 2 translators are used for the back translation; the results are compared, differences
discussed, and the most appropriate translation selected.
- Decentering
Successive process of translation and retranslation of a questionnaire, each time by a different
translator.
Multicultural Research: a special problem
A company needs to determine to what extent adaptation of the marketing mix is appropriate. Thus,
market characteristics across diverse cultures must be compared for similarities and differences before a
company proceeds with standardization on any aspect of the marketing strategy.
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An important thing to take into account when designing research to be applied across cultures is to
ensure comparability and equivalency of results. In some cases, the entire research may have to be
varied between countries to maximize the comparability of the results.
Research on the internet: A growing opportunity
Some techniques used for internet research
1. Online surveys and buyer panels: these can include incentives and they have better branching
capabilities (meaning to arrive at different branches as a consequence of answering to different
questions)
2. Online focus groups
3. Web visitor tracking
4. Advertising measurement
5. Customer identification systems
6. Email marketing lists
7. Embedded research (research tools done directly online to facilitate the purchase patterns of
customer, like comparison research and customizability)
8. Observational research: forums, social media, and blogs can be systematically monitored to
assess consumer opinions.
Estimating market demand
In assessing current product demand and forecasting future demand, reliable historical data are required.
The quality and availability of secondary data frequently are inadequate; nevertheless, estimates of
market size must be attempted to plan effectively (The trick is to find relations, for example, demand for
smuggled iPhones and real iPhones). When the desired statistics are not available, a close approximation
can be made using local production figures plus imports, with adjustments for exports and current
inventory levels. These data are more readily available because they are commonly reported by the UN
or other agencies. Once approximations for sales trends are established, historical series can be used as
the basis for projections of growth. In any straight extrapolation, however, the estimator assumes that the
trends of the immediate past will continue into the future.
- Triangulation (a result of expert opinion) → comparing estimates produced by different sources
- Analogy → this method assumes that demand for a product develops in much the same way in all
countries, as comparable economic development occurs in each country *re-review*
Responsibility for conducting marketing research
Depending on size and degree of involvement in foreign marketing, a company in need of foreign market
research can rely on an outside, foreign-based agency or a domestic company with a branch within the
country in question. It can conduct research using its own facilities or employ a combination of its own
research force with the assistance of an outside agency.
A trend toward decentralization of the research function is apparent. In terms of efficiency, local analysts
appear able to provide information more rapidly and accurately than a staff research department. The
obvious advantage to decentralization of the research function is that control rests in hands closer to the
market. One disadvantage of decentralized research management is possible ineffective communications
with home-office executives. Another is the potential unwarranted dominance of large-market studies in
decisions about global standardization. That is to say, larger markets justify more sophisticated research
procedure and larger sample sizes, and results derived via simpler approaches that are appropriate in
smaller countries are often erroneously discounted.
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CHAPTER 10
Europe, Africa and the middle east
Advantages of economic union must be clear and significant, and benefits must outweigh the
disadvantages before nations forgo any part of their sovereignty. Many political unions in Africa and
South America have had little impact because perceived benefits were not sufficient to offset the partial
loss of sovereignty.
Economic factors
Every type of economic union shares the development and enlargement of market opportunities as a
basic orientation; usually, markets are enlarged through preferential tariff treatment for participating
members, common tariff barriers against outsiders, or both. Enlarged, protected markets stimulate
internal economic development by providing assured outlets and preferential treatment for goods
produced within the customs union, and consumer benefit from lower internal tariff barrier among the
participating countries. Nations with complementary economic bases are least likely to encounter frictions
in the development and operation of a common market unit. However, for an economic union to survive, it
must have agreements and mechanisms in place to settle economic disputes.
Important also to take into account political, geographic and cultural factors.
Patterns of multinational cooperation
- Regional cooperation groups
Most basic economic integration and cooperation is the regional cooperation for development (RCD). In
the RCD, governments agree to participate jointly to develop basic industries beneficial to each economy.
Each country makes an advance commitment to participate in the financing of a new joint venture and to
purchase a specified share of the output of the venture.
- Free trade area
FTA is an agreement between two or more countries to reduce or eliminate customs duties and nontariff
trade barriers among partner countries while members maintain individual tariff schedules for external
countries.
- Customs union
Enjoys FTA benefits and adds a common external tariff on products imported from outside the union.
- Common market
Eliminates all tariffs and other restrictions on internal trade, adopts a set of common external tariffs, and
removes all restrictions on the free flow of capital and labor among member nations. A common
marketplace for goods as well as for services.
- Political union
Involves complete political and economic integration, wither voluntary or enforced. (For example, a
commonwealth or the EU).
Global markets and multinational market groups
- European integration
The EU from its beginning has made progress toward achieving the goal of complete economic
integration and, ultimately, political union. European common market is a challenge due to
heterogenous economies.
Economic and monetary union (EMU) is a provision of the Maastricht treaty, establishing the
parameters of the creation of a common currency and established a timetable for its implementation.
In 2002, a central bank was established with exchange rates.
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- Eastern Europe and Baltic states
The region is described somewhere between chaotic and unstable to an exciting place with new
business opportunities.
Eastern Europe countries are privatizing state-owned companies, establishing free market pricing
systems, relaxing import controls, and wrestling with inflation. Moving quickly allows the
transformation to be guided mainly by the spontaneity of innovative market forces rather than by
government planners.
*commonwealth of independent states
- Africa
In part stimulated by increasing foreign direct investment, particularly from China for infrastructure
projects, prospects for enterprise south of the Sahara are on the upswing. The economic community
of west African states (ECOWAS), the southern African development community (SADC), and the
East African community (EAC) are the three most active regional cooperative groups.
- Middle east/north Africa (MENA)
The unprecedented political turmoil in MENA region accelerated dramatically in 2011 and has yielded
an associated economic disaster in several countries. Perhaps the best indication of the possibilities
of peace in the region is in the comparative exports of Iraq, Iran and the UAE. Both Iraq and Iran have
oil reserves, but in the context of their political turmoil’s, they are exporting less than 1/3 as much as
the UAE.
Implications of market integration
- Strategic implications
World competition will continue to intensify as businesses become stronger and more experienced in
dealing with large market groups. For example, in an integrated Europe, US multinationals had an
initial advantage over expanded Europe because US firms were more experienced in marketing to
large, diverse markets and are accustomed to looking to Europe as one market. Despite the problems
and complexity of dealing with new markets, the overriding message to the astute international
marketer continues to be opportunity and profit potential.
- Opportunities
Economic integration creates large mass markets. Many national markets, too small to bother with
individually, take on new dimensions and significance when combined with markets from cooperating
countries. Large markets are particularly important to business accustomed to mass production and
mass distribution because of economies of scale and mass marketing efficiencies that can be
achieved. In highly competitive markets, the benefits derived from enhanced efficiencies are often
passed along as lower prices that lead to increased purchasing power. Major savings will result from
the billions of dollars now spent in developing different versions of products to meet national
standards.
- Market barriers
The initial aim of a multinational market is to protect businesses that operate within its borders. An
expressed goal is to give an advantage to the companies within the market in their dealings with other
countries of the market group. Analysis of the interregional and international trade patterns of the
market groups indicates that such goals have been achieved. Companies willing to invest in
production facilities in multinational markets may benefit from protectionist measures because these
companies become part of the market. Exporters however. Are in a considerably weaker position.
This prospect confronts many US exporters who face the possible need to invest in Europe to protect
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their export markets in the EU. The major problem for small firms may be adjusting to the EU
standards.
- Marketing mix implications
Companies are adjusting their marketing mix strategies to reflect anticipated market changes in the
single European market. In the past. Companies often charged different prices in different European
markets. Nontariff barriers between member states supported price differentials and kept lower-priced
products from entering those markets where higher prices were charged. Now, however, companies
can’t prevent the free movement of goods, and parallel imports from lower-priced markets to higherpriced markets are more likely to occur. Price standardization among country markets will be one of
the necessary changes to avoid the problem of parallel imports. In addition to initiating uniform pricing
policies, companies are reducing the number of brands they produce to focus on advertising and
promotion efforts.
Chapter 12
Global marketing management: Planning and organization
From the marketing perspective, customization is always best. The ideal market segment size, if
customer satisfaction is the goal, is one. String firms should be able to do both at the same time
à Standardization and localization (ex. Coca cola in India)
As global markets continue to homogenize and diversify continuously, the best companies will avoid the
trap of focusing on country as the primary segmentation variable. Other segmentation variables are often
more important, for example region, climate, language group, media habits, etc.
Country has been the most obvious segmentation variable, but as better communication systems
continue to dissolve national borders, other dimensions of global markets are growing in salience.
Benefits of global marketing
When large international market segments can be identified, economies of scale in production and
marketing can be important competitive advantages for multinational companies. Transfer of know-how
across countries through improved coordination and integration of marketing activities is also cited as a
benefit of global operations. Diversity of markets served brings important stability of revenues and
operations to many global companies.
Planning for global markets
Planning is a systemized way of relating to the future. It is an attempt to manage the effects of externa,
uncontrollable factors on the firm’s strengths and weaknesses. Furthermore, it is a commitment of
resources to a country market to achieve specific goals. The plan must blend the changing parameters of
external country environments with corporate objectives and capabilities to develop a workable marketing
program. A strategic plan commits corporate resources to products and markets to increase
competitiveness and profits.
Corporate planning is essentially long term, incorporating generalized goals for the enterprise as a
whole. Strategic planning is conducted at the highest levels of management and deals with products,
capital, research, and the long- and short-term goals of the company. Tactical planning, or market
planning, pertains to specific actions and to the allocation of resources used to implement strategic
planning goals in specific markets. Tactical plans are made at the local level and address marketing and
advertising questions.
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International commitment
The planning approach taken by an international firm affect the degree of internationalization to which
management is committed to. Such commitment affects the specific international strategies and decisions
of the firm. After company objectives have been identified, management needs to determine whether it is
prepared to make the level of commitment required for successful international operations.
A company uncertain of its prospects is likely to enter a market timidly, using inefficient marketing
methods, channels, or organizational forms, thus setting the stage for the failure of a venture that might
have succeeded with full commitment and support by the parent company.
The planning processes
Phase 1: preliminary analysis and screening-matching company and country needs
Evaluation of potential markets is the first step in the planning process. A critical first step is deciding
which existing country market to make a market investment. Research has shown three entry criteria to
be most useful: analyses of institutional context, cultural context, and transaction costs. In the first part of
the planning process, countries are analyzed and screened to eliminate those that do not offer sufficient
potential for further consideration.
The next step is to establish screening criteria against which prospective countries can be evaluated
These criteria are ascertained by an analysis of company objectives, resources, and other corporate
capabilities and limitations. It is important to determine the reasons for entering a foreign market and the
returns expected from such an investment. Minimum market potential, minimum profit, ROI, acceptable
competitive levels, standards of political stability, acceptable legal requirements, and other measures
appropriate for the company’s products are examples of the evaluation criteria to be established.
Once evaluation criteria are set, a complete analysis of the environment within which a company plans to
operate is made. The environment consists of the uncontrollable elements discussed previously and
includes both home-country and host-country constraints, marketing objectives, and any other company
limitations or strengths that exist at the beginning of each planning period.
The results of phase 1 provide the marketer with the basic information necessary to evaluate the potential
of a proposed country market, identify problems that would eliminate the country from further
consideration, identify environmental elements that need further analysis, determine which part of the
marketing mix can be standardized and which part of and how the marketing mix must be adapted to
meet local market needs, and develop and implement a marketing action plan.
Phase 2: defining target markets and adapting the marketing mix accordingly
Once target markets are selected, the marketing mix must be evaluated in light of the data generated in
phase 1. The primary goal of phase 2 is to decide on a marketing mix adjusted to the cultural constraints
imposed by the uncontrollable elements of the environment that effectively achieves corporate objectives
and goals.
Phase 2 also permits the marketer to determine possibilities for applying marketing tactics across national
markets. The search for similar segments across countries can often lead to opportunities for economies
of scale in marketing programs. Frequently, the results in phase 2 indicate that the marketing mix will
require such a drastic adaptation that a decision not to enter a particular market is made.
The answers to three major questions are generated in phase 2:
1. Are there identifiable market segments that allow for common marketing mix tactics across
countries?
2. Which cultural/environmental adaptations are necessary for successful acceptance of the
marketing mix?
3. Will adaptation costs allow profitable market entry?
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Phase 3: developing the marketing plan
At this stage of the planning process, a marketing plan is developed for the target market. The marketing
plan begins with a situation analysis and culminates in the selection of an entry mode and a specific
action program for the market. The specific plan establishes what is to be done, by whom, how it is done,
and when.
Phase 4: implementation and control
All marketing plans require coordination and control during the period of implementation. An evaluation
and control system require performance-objective action, that is, bringing the plan back on track should
standards of performance fall short. Utilizing a planning process and system encourages the decision
maker to consider all variables that affect the success of a company’s plan.
With the information developed in the planning process and a country market selected, the decision
regarding the entry mode can be made.
Alternative market-entry strategies
A company has 4 different modes of foreign market entry from which to select: exporting, contractual
agreements, strategic alliances, and direct foreign investment. The amount of equity required by the
company to use different modes affects the risk, return, and control that it will have in each mode.
Companies most often begin with modest export involvement. As sales revenues grow, the firms often
proceed with more involvement.
• Exporting
With direct exporting, the company sells to a customer in another country. This method is the most
common approach employed by companies taking their first international step because the risks of
financial loss can be minimized. Indirect exporting, usually means that the company sells to a buyer
(importer or distributor) in the home country, which in turn exports the product.
Early motives for exporting often are to skim the cream from the market or gain business to absorb
overhead.
Contractual agreements
Long-term nonequity associations between a company and another in a foreign market.
• Licensing
Patent rights, trademark rights, and the rights to use technical processes are granted in foreign
licensing.
• Franchising
A way of licensing in which the franchiser provides a standard package of products, systems, and
management service, and the franchisee provides market knowledge, capital, and personal
involvement in management. The combination of skills permits flexibility in dealing with local market
conditions and yet provides the parent firm with a reasonable degree of control.
• Strategic international alliance
Business relationship between 2 or more companies to cooperate out of mutual need to share risk in
achieving a common objective. Firms enter to SIAs for several reasons: opportunities for rapid
expansion into new markets, access to new technology, more efficient production and innovation,
reduced marketing costs, strategic competitive moves, and access to additional sources of products
and capital.
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• International joint ventures
Besides serving as a means of lessening political and economic risks by the amount of the partners
contribution to the venture. IJVs provide a way to enter markets that pose legal and cultural barriers
that is less risky than acquisition of an existing company. Four characteristics define Joint Ventures:
1) JVs are established, separate, legal entities; 2) they acknowledge intent by the partners to share in
the management of the JV; 3) they are partnerships between legally incorporated entities, such as
companies, chartered organizations, and not between individuals; and 4) equity positions are held by
each of the partners.
• Consortia
Consortia are similar to joint ventures and could be classified as such except for two unique
characteristics: 1) they typically involve a large number of participants and 2) they operate in a
country or market in which none of the participants is currently active. Consortia are developed to
pool financial and managerial resources and to lessen risks.
• Direct foreign investment
Companies invest locally to capitalize on low-cost labor, to avoid high import taxes, to reduce the high
costs of transportation to market, to gain access to raw materials and technology, or as a means of
gaining market entry. Firms may either invest in or buy local companies or establish new operations
facilities. As with the other modes of market entry, several factors have been found to influence the
structure and performance of direct investments: 1) timing – first movers have advantages, but are
more risky; 2) the growing complexity and contingencies of contracts; 3) transaction of structures; 4)
technology and knowledge transfer; 5) degree of product differentiation; 6) the previous experiences
and cultural diversity of acquired firms; and 7) advertising and reputation barriers. This mix of
considerations and risks makes for increasingly difficult decisions about such foreign investments. But
as off-putting legal restrictions continue to ease with WTO and other international agreements, more
and more large firms are choosing to enter markets via direct investment.
Organizing for global competition
An international marketing plan should optimize the resources committed to company objectives. The
organizational plan includes the type of organizational agreements and management process to be
used and the scope and location of responsibility. Because the organizations need to reflect a wide
range of company-specific characteristics – such as size, level of policy decisions, length of chain of
command, cultural differences in decision-making styles, centralization, and type or level of marketing
involvement – trade-offs abound, and devising a standard organizational structure is difficult.
A single organizational structure that effectively integrates domestic and international marketing
activities has yet to be devised. Companies face the need to maximize the international potential of
their products and services without diluting their domestic marketing efforts. Companies are usually
structured around one of three alternatives: 1) global product divisions responsible for product sales
throughout the world; 2) geographical divisions responsible for all products and functions within a
geographical area; or 3) a matrix organization consisting of either of these arrangements with
centralized sales and marketing run by a centralized functional staff, or a combination of area
operations and global product management.
Companies that adopt the global product division structure are generally experiencing rapid growth
and have broad, diverse product lines. Geographic structures work best when a close relationship
with national and local governments is important. The matrix form – the most extensive of the three
organizational structures – is popular with companies as they reorganize for global competition. A
Matrix structure permits management to respond to the conflicts that arise among functional activity,
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product and geography. At its core is better decision making, in which multiple points of view affecting
functional activity.
Locus of decision
Management policy must be explicit about which decisions are to be made at corporate HQ, which at
international HQ, and which at regional offices. Most companies also limit the amount of money to be
spent at each level.
Decentralized vs centralized organizations
The chief advantages of centralization are the availability of experts at one location, the ability to
exercise a high degree of control on both the planning and implementation phases, and the
centralization of all records and information. Some companies effect extreme decentralization by
selecting competent local managers and giving them full responsibility for national and regional
operations.
Chapter 14
Products and services for businesses
Demand in global B2B markets
Three factors seem to affect the demand in international industrial markets differently than in
consumer markets. First, demand in industrial markets is by nature more volatile. Second, stages of
industrial and economic development affect demand for industrial products. Third, the level of
technology of products and services makes their sale more appropriate for some countries than
others.
• The volatility of industrial demand
Consumer products firms have numerous reasons to market internationally – gaining exposure to
more customers, keeping up with the competition, extending product life cycles, and growing
sales and profits. Firms producing products and services for industrial markets have an additional
crucial reason for venturing abroad: dampening the natural volatility of industrial markets. Indeed,
perhaps the single most important difference between consumer and industrial marketing is the
huge, cyclical swings in demand inherent in the latter. In industrial markets, three factors come
into play that exacerbate both the ups and downs in demand: industrial sellers tend to have small
numbers of customers upon which they are more dependent, professional buyers tend to act in
concert, and derive demand accelerates changes in markets.
*Derived demand: demand dependent from another source (demand for Boeing 747s is derived
from the worldwide consumer demand for air travel services)
Minor changes in consumer demand mean major changes in the related industrial demand.
Industrial firms can take several measures to manage this inherent volatility, such as maintaining
broad product lines and broad market coverage, raising prices faster and reducing advertising
costs during brooms, ignoring market share as a strategic goal, eschewing layoffs, and focusing
on stability.
• Stages of economic development
The most significant environmental factor affecting the international market for industrial goods
and services is the degree of industrialization. Although generalizing about countries is almost
always imprudent, the degree of economic development can be used as a rough measure of a
country’s industrial market. Rostow’s five-stage model of economic development is useful here;
demand for industrial products and services can be classified correspondingly.
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i.
ii.
iii.
iv.
v.
•
•
•
Stage 1
The most important industrial demand will be associated with natural resources extraction
Stage 2
Manufacturing is beginning. Primary needs will be related to agriculture and infrastructure
development
Stage 3
Manufacturing of both semi durable and nondurable customer goods has begun. Goods
demanded relate to equipment and supplies to support manufacturing
Stage 4
These are industrialized economies. Their focus is more on low-cost manufacturing of a variety of
consumer and some industrial goods. They buy from all categories of industrial products and
services.
Stage 5
These are countries where design activities are going on and manufacturing techniques are being
developed, and they are mostly service economies. Japan and Germany are examples of
countries that purchase the highest technology products and services, mostly from other stage 5
suppliers and consumer products from stage 3 and 4 countries.
Technology and market demand
Another approach to grouping countries is on the basis of their ability to benefit from and use
technology. One of the best indicators is the quality of the educational system. Not only is
technology the key to economic growth, but for many products, it is also the competitive edge in
today’s global markets. Indeed, being involved in and having access to high technology markets
is a crucial source of innovations for industrial firms. Three interrelated trends spur demand for
technologically advanced products: 1) expanding economic and industrial growth in Asia, 2) the
disintegration of the soviet empire, 3) the privatization of government owned industries worldwide.
(recap form book)
Quality and global standards
The level of technology reflected in the product, compliance with standards that reflect customer
needs, support services and follow-through, and the price relative to competitive products are all
part of a customer’s evaluation and perception of quality. The factors themselves also differ
among industrial goods customers because their needs are varied.
B2B marketers frequently misinterpret the concept of quality. Good quality as interpreted by a
highly industrialized market is not the same as that interpreted by standards of a less
industrialized nation.
Quality is defined by the buyer
When a product falls short of performance expectations, its poor quality is readily apparent.
Quality for many goods is assessed in terms of fulfilling specific expectations – no more, no less.
Price-quality relationship is an important factor in marketing in developing economies,
especially those in first three stages of economic development. Standard quality requirements of
industrial products sold in the US market that command commensurately higher prices may be
completely out of line for the needs of the less developed markets of the world. Labor-saving
features are of little importance when time has limited value and labor is plentiful. Also of a lesser
value is the ability of machinery to hold close tolerances where people are not quality-control
conscious, where large production runs don’t exist, and where the wages of skillful workers justify
selective fits in assembly and repair work.
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This distinction does not mean quality is unimportant or that the latest technology is not sought in
developing markets. Rather, it means that this market requires products designed to meet their
specific needs, not products designed for different uses and expectations, especially if the
additional features result in higher prices.
Business services
For many industrial products, the revenues from associated services exceed the revenues from the
products. (For example, printers and cartridges costs). Indeed, for many capital equipment
manufacturers, the margins on after-sale services are much higher than the margins on the machinery
itself. Furthermore, when companies lease capital equipment to customers, the distinction between
products and services almost disappears completely.
• After sale services
Effective competition aboard requires not only proper product design but also effective service,
prompt deliveries, and the ability to furnish spare and replacement parts without delay. For many
technical products, the willingness of the seller to provide installation and training may be the deciding
factor for the buyers in accepting one company’s product over another’s.
Customer training is rapidly becoming a major after-sales service when selling technical products in
countries that demand the latest technology but do not always have trained personnel. China
demands the most advanced technical equipment but frequently has untrained people responsible for
products they do not understand. Heavy emphasis on training programs and self-teaching materials
to help overcome the common lack of skills to operate technical equipment is a necessary part of the
after-sales service package in much of the developing world.
Some international marketers also may be foregoing the opportunity of participating in a lucrative
aftermarket. Certain kinds of machineries use up to five times their original value in replacement parts
during an average life span and thus represent an even greater market.
• Other business services
Trade creates demands for international services. Most business services companies enter
international markets to service their local clients abroad. Accounting, banking, advertising, and law
firms were among the early companies to establish branches or acquire local affiliations abroad to
serve their US multinational clients. Once established, client followers, expand their client base to
include local companies as well. As global markets grow, creating greater demand for business
services, service companies become international market seekers. Because some business services
have intrinsic value that can be embodied in some tangible form (blueprint or architectural design),
they can be produced in a country and exported to another.
Relationship marketing in B2B contexts
The first and foremost characteristic of industrial goods markets is the motive of the buyer: to make a
profit. Industrial products fit into a services delivery or manufacturing process, and their contributions will
be judged on how well they contribute to that process. To understand the needs of the customer, the
marketer must understand those needs as they exist today and how they will change as the buyer strives
to compete in global markets that call for long-term relationships. The key functions of global account
managers revolve around the notions of intelligence gathering, coordination with the customer’s staff, and
reconfiguration.
The industrial customer’s needs in global markets are continuously changing, and suppliers’ offerings
must also continue to change. The need for the latest technology means that is not a matter of selling the
right product the first time but rather of continuously changing the product to keep it right over time. The
objective of relationship marketing is to make the relationship an important attribute of the transaction,
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thus differentiating oneself from the competitors. It shifts the focus away from price to service and longterm benefits.
1
CHAPTER 1
What is business strategy?
It is defined as a company’s dynamic plan to gain, and sustain a competitive advantage in the
marketplace. This plan is based on the fact that leaders will know how to succeed in a particular market.
This theory includes predictions about which markets are attractive and how a company can offer unique
value. This plan must be dynamic to respond to new information that comes as customers, competitors,
and technological change.
Strategies are more likely to succeed when the plan takes into account:
1. Where to compete, or the attractiveness of a market or customer segment in the target markets
2. How to offer unique value relative to the competition in the target markets
3. What resources or capabilities are necessary to deliver that unique value
4. How to sustain a competitive advantage once it has been achieved
Competitive advantage
A firm has a competitive advantage when it can consistently generate above-the-average profits through
a strategy that competitors are unable to imitate or find too costly to imitate. Above-the-average profits
are profit returns in excess of what an investor expects from other investments with similar risk. Profits are
not the only objective a firm can go after.
Strategic management process
The strategic management process for formulating and implementing a strategy involves external and
internal analysis. Only after conducting an analysis of the company’s external environment and its internal
resources and capabilities are a firm’s executives and managers able to identify the most attractive
business opportunities and formulate a strategy for achieving a competitive advantage.
We should focus on 4 strategic key choices:
1. Which market to pursue
2. What unique value does the company offer in those markets?
3. What resources and capabilities are required?
4. How the company will capture value and sustain a competitive advantage over time?
- Markets
Which markets should the firm serve? Leaders should choose the industries and the specific customer
segments or needs they will address within those industries. It is also important to select specific
geographic markets to serve.
- Unique value
This is often related to a company’s value proposition. Companies try to achieve a competitive advantage
by choosing between one of two generic strategies for offering a unique value: Low cost or differentiation.
Key sources of cost advantage include economies of scale, lower-cost inputs, or proprietary production
know-how. A firm that chooses differentiation focuses on offering features, quality, convenience, or an
image that customers cannot get from competitors.
- Resources and capabilities
The most critical role of the strategist is to figure out how to build or acquire the resources and capabilities
necessary to deliver unique value. Resources refer to assets that the firm accumulates over time, while
capabilities refer to processes the firm develops to coordinate human activity to achieve specific goals.
The development of key resources and capabilities to deliver unique value should be part of the
company’s strategy implementation plan. The strategy implementation plan involves the company
developing a set of processes within each function that align with the unique value the company hopes to
offer.
2
External analysis
Answers to the question, where should we compete? The external analysis involves 1) An examination of
the competition and the forces that shape industry competition and profitability, and 2) customer analysis
to understand what customers really want. The combined results of the external analysis with the internal
analysis of the firm are often summarized in the SWOT.
- Industry analysis
How to determine which markets or industries to compete in. Why are some industries more
profitable than others? → Michael Porter and the 5 forces that shape industry competition. Understanding
these 5 forces is the first step towards creating a strategy. This framework will help managers think about
what the company can do to increase its power over suppliers and buyers, create barriers to other firms
looking to enter the market, reduce the threat of substitute products, and reduce rivalry with competitors.
- Customer analysis
Analysis of actual and potential customers, notably an analysis of their needs and price
sensitivity. The strategist can make better decisions about how to offer unique value by considering
groups of customers who all have similar needs → Segmentation analysis.
Internal analysis
Focuses on the company itself. Internal analysis completes the SWOT by focusing on strengths and
weaknesses. The internal analysis involves an analysis of the company’s set of resources and
capabilities that can be deployed. After a company decides how it hopes to offer unique value, it must
allocate the resources necessary to build those resources or capabilities.
Strategy implementation
It occurs when a firm adopts a set of organizational processes that enable it to effectively carry out its
strategy.
1. Functional strategies within the company - R&D, operations, marketing, production, HR - are well
aligned with delivering the unique value identified in the overall strategy. Implementation is more
successful when a company can measure how effectively functional activities are being
performed to support the overall strategy.
2. The organizations’ structure, systems, staff, skills, style, and shared values are designed to
facilitate the execution of the strategy → Mckinsey 7S framework.
CHAPTER 2
Defining a firm’s industry
The landscape is usually defined by 1) The industry in which the firm competes, and 2) the product and
geographic markets. Usually, firms compete in more than one industry (Microsoft competes in the
operative software market and gaming). Truly understanding an industry often begins by taking a
customer-oriented-view. Rather than identifying the industry based on the product or service they
produce, firms would think carefully about the job that products do for customers. Understanding
customer needs.
5 competitive forces
1. Rivalry: Competition among established companies
There are typically a limited number of buyers, each firm’s profits often come at the expense of other
firms. Firms can defend themselves with a number of moves, varying from price and promotions to better
quality.
There are 7 factors that are critical to understanding the degree of rivalry:
- The number and relative size of competitors
The more competitors there are in an industry, the more likely it that one or more of them will take
action to gain profits. Fragmented industry → Lots of competitors each with a low market share. If
3
-
-
-
-
firms are approximately the same size, they tend to be able to respond or retaliate to moves by
rivals. Concentrated industry → has fewer competitors and competition and is directed by few
firms with large market share.
Relatively standardized product
When products are standardized or are commodities, customers are less loyal and move to the
cheaper option. Price wars increase rivalry and decrease profits.
Low switching costs for buyers
The lower the switching costs, the easier it is for competitors to poach customers, thereby
increasing industry rivalry.
Slow growth in demand for products or services
When demand is increasing rapidly, most firms can grow without taking existing customers from
competitors. When growth slows down, firms become more desperate.
High fixed costs
High exit barriers
Like investments
2. Buyer power: bargaining power and price sensitivity
When buyers have sufficient power, they can demand either lower prices or better products from their
suppliers, thereby hurting the average profitability of firms in the supplier industry. The two primary
situations in which buyers have high power are when buyers hold a stronger bargaining position than
sellers and when buyers are price-sensitive
- Buyer bargaining power
Four key factors influence the degree to which buyers have bargaining power over their suppliers. We
already discussed two of these factors—buyers’ switching costs and demand—because they are also
factors in rivalry among firms. The two remaining factors are the concentration and size of buyers and the
threat that buyers can backward integrate: Concentration and size of buyers reflect the law of supply and
demand. If there are few buyers and a lot of sellers, these will compete to gain the business of those few
buyers. The credible threat of backward integration. In some cases a buyer can exert pressure over the
suppliers by threatening them with backward integration, meaning that they will make the product.
- Buyer price sensitivity
When buyers are more price-sensitive, they are more likely to exert pressure on suppliers to keep prices
low. Buyers exert pressure not just through negotiation but also through comparison shopping and a
greater willingness to switch suppliers.
3. Supplier bargaining power
Factors that increase the bargaining power of suppliers are similar to those that increase the bargaining
power of buyers. When suppliers have strong bargaining power, they can charge higher prices, which
tends to decrease average profit-ability in the buyer’s industry.
- Concentration of suppliers
When there are few suppliers and a lot of buyers, buyers must compete for the little offer there is to
acquire. Likewise, the higher the number of suppliers, the less likely buyers are to pay the price.
- Credible threat of forward integration
A supplier can exert pressure over its buyers by threatening them with forward integration, doing what its
buyers do if the buyers don’t offer price concessions.
4. Threat of new entrants
Quickly growing industries are often attractive, which increases the incentive for outside firms to enter
those industries. New entrants pose a double hazard. First, they typically are anxious to gain market
share. Second, new entrants bring new production capacity, which tends to drive prices down unless
demand is growing faster than the increase in supply.
- Economies of scale, experience, or learning
4
These types of economies occur when the cost per unit of production decreases as a firm produces more.
Lower costs allow the firm either to lower its price, perhaps in retaliation for a new firm entering the
market or to maintain its price while earning more profits than competitors. When economies of scale,
experience, or learning exist in an industry, new firms will be at a cost disadvantage. The higher the
economies of scale, the greater the barrier to entry and the easier it is for the larger incumbent to pose a
credible threat.
- Other cost disadvantages
1. Patents or proprietary technology
2. Better locations
3. Economies of scope, less expensive costs per unit created by bundling different types of products
4. Preferential access to critical resources
- Capital requirements
High investment costs to enter a new industry, from building factories and buying machinery to investing
in R&D.
5. The threat of substitute products
A different product that serves the same basic function. If the product has the same basic characteristics
and is made using the same general set of inputs, it would be considered part of the rivalry, rather than a
substitute.
Overall industry attractiveness
The 5 forces help explain why industry profitability is what it is and why it might be changing. Attractive
industries are those where firms have created power over buyers and suppliers, created barriers to entry
to reduce the threat of new entrants, and minimized the threat of substitutes while keeping rivalry to the
minimum. Each of the 5 forces can be analyzed to determine how, and the degree to which, it contributes
to industry attractiveness.
When deciding which market to enter may depend more on what the entrant can offer to that market
rather than the structural characteristics of the market.
CHAPTER 3
The value chain
The process to transform raw inputs into finished outputs.
The horizontal elements capture the production process that a firm uses to acquire and import raw
materials, transform them into outputs, and puts them in the hands of the customer. Instead, the vertical
axis represents four administrative elements that span all of the firm’s economic activities. The supply
chain framework can help to identify which activities represent the firm’s competitive strengths and
weaknesses ( → But no guidance on strengths relative to competitors).
The resource-based view
5
Resources are what a firm employs to create value and competitive advantage. Capabilities represent
how firms do things - the processes they use. Priorities explain why firms allocate critical resources to
achieve key objectives.
- Resources
Assets, capabilities, organizational processes, firm attributes, information, knowledge, or any other aspect
that is controlled by a firm that enables the firm to conceive of and implement strategies that improve its
efficiency and effectiveness. Resources are the “what” of competitive advantage.
- Physical resources (tangible assets)
- Financial resources
- Human resources
- Intangible assets
- Capabilities
Processes that the firm has developed to coordinate human activity in order to achieve specific goals.
Capabilities represent the “how” of competitive advantage. Operating capabilities are procedures,
processes, or routines for delivering value to customers, employees, suppliers, or investors. Competitive
advantage relies on a strong set of operating capabilities. A firm’s advantage becomes stronger if it
develops dynamic capabilities, processes that are designed to continuously expand existing resources
or to improve or modify operating capabilities. These are then refined over time. Dynamic capabilities can
help firms modify and evolve processes to keep pace with environmental changes such as new
competitors, shifting demographics, or emerging technologies. They can also enable firms to incorporate
learning into their processes. Companies with strong dynamic capabilities have a more secure foundation
for competitive advantage than those without them. First, dynamic capabilities entail complex connections
and coordination among different internal units within the firm. Second, dynamic capabilities take time to
develop and require significant learning.
- Priorities
Priorities are driven by a company’s underlying values. Values led to priorities that help executives and
employees make decisions. Priorities drive the creation of resources and capabilities in two ways. First,
they guide resource allocation processes, such as capital investment. Second, they maintain those
allocations over time when things get tough.
Creating a sustainable competitive advantage: The VRIO model
Competitive advantage arises when resources or capabilities possess two attributes: value and rarity.
Two other principles determine the durability, or sustainability, of competitive advantage: inimitability
and the organization’s ability to exploit profits - are often abbreviated VRIO.
- Value
A resource creates value if its contributions allow a company to produce a product or service that is of
worth to end-users. Products or services have value when they create direct pleasure for the end-users,
or when they create indirect opportunities for users to experience pleasure and satisfaction. User’s wont
pay for products unless they create value in their lives. Also, resources and capabilities that provide firms
with the opportunity to produce and sell at a lower cost than their rivals, create value. Resources that help
a firm bring such differentiated products and services to the market create value for customers.
- Rarity
Rare or unique resources create a competitive advantage through scarcity. When products are scarce,
users are willing to pay more.
- Inimitability
The extent to which competitors cannot easily reproduce a product by employing equal, or equivalent,
sources of value in their own products and services
6
*Path dependence: means that the process through which a resource or capability came into being may
make it difficult for competitors to imitate.
*Tacit knowledge: For many processes, the actions needed to imitate the sequence can be codified,
written down, or easily memorized → explicit knowledge. On the other hand, tacit knowledge is difficult to
learn or teach and is difficult to imitate by competitors → Tacit knowledge.
→ Time compression diseconomies: diseconomies happen when an action increases, rather than
decreases, cost, and inefficiency. Timing is crucial in the employment of resources and can become a
diseconomy in many cases. Resources that come from natural or physical processes cannot be rushed.
Similarly, resources that come from differences in individual or organizational abilities to learn to require
time for lessons to be deciphered and processed.
CHAPTER 4
A firm that chooses a cost advantage win with customers by reducing its prices below all of its
competitors, thereby allowing it to gain market share. Alternatively, a firm with a cost advantage may
choose the same price as competitors, which results in greater profits rather than higher market share.
à Sources of cost advantage:
1. ECONOMIES OF SCALE AND SCOPE
They exist when an increase in company size (measured as volume of production) lowers the
company’s average cost per unit produced. Economies of scale arise from four principal sources:
• Ability to spread fixed costs of production
7
High volumes of production enable firms to spread the fixed cost of production, such as the costs
of plant and equipment, thereby lowering their cost per unit. This happens because increases in
output do not require proportionate increases in output.
• Ability to spread nonproduction costs
Large volumes enable companies to spread the cost of R&D, advertising, and general
administrative expenses.
R&D à Once a company has made a R&D investment, these costs essentially become a fixed
cost to spread across as many consumers as possible. In fact the best predictor of whether an
industry is global is the company’s R&D costs as a percentage of sales. The higher a firm’s R&D
costs as a percentage of sales, the more incentive the firm has to expand globally to spread
those costs across more consumers
Advertising à The cost of an advertising banner is the same if we sell 1 or 1,000,000 units.
General administrative costs à same principle.
• Specialization of machines and equipment
A firm with high volumes of production is often able to purchase and use specialized equipment
or tools that small firms can not afford.
• Specialization of tasks and people
Task specialization à when work tasks are specialized, workers can become more and more
efficient at the particular task and avoid the loss of time that occurs from workers switching
between jobs.
Employee specialization à The value of employee specialization occurs not just in
manufacturing environments, but also in knowledge industries such as management, investment
banking, legal and finance.
The scale curve
Q* = minimum efficient scale
Some firms with high FC have moved to reduce the risks of high FC by shifting more of their cost
structure from FC to VC. One way to do this is by outsourcing more of their activities.
à Economies of scope
Does not mean cost reduction by increase in output, but by expanding the scope of ots operations to
related activities, so that some costs can be shared. Economies of scope ecist when the cost of
conducting two businesses activities within the same company is less than the cost of those same two
businesses operated separately.
2. LEARNING AND EXPERIENCE
• The learning curve
A tool that managers can use to determine the contribution of human learning on the
part of employees to reductions in costs per unit. The learning curve is more complex
8
than a scale curve to calculate because it requires gathering data on the cumulative
volume of a given product or service produced, the total amount since the company
started making the product or providing the service.
• The experience curve
BCG, 1968 generalized the concept of the learning curve to encompass not just direct
labor hours but all costs incurred to produce a product or service. Costs drop with
increases in cumulative volume due to a combination of factors, including economies of
scale, but also due to learning.
The experience curve shows how costs per unit change with increases in cumulative
volume produced. *review w book*
• Experience curves and market share
The logic of the experience curve suggests that the company with the highest volume in
an industry – the highest share of an industry’s output – will also be the lowest-cost
producer. In fact, early work by BCG suggests that a company’s relative market share
was a key indicator of competitive advantage and profit performance. The logic follows:
the higher the company’s volume (market share), the lower the costs per unit, and the
better the profit performance. If a company wants to increase its profitability, it should
increase its market share. This had a clear implication for pricing strategy: a company
should set its price based on its anticipated costs per unit (at the higher market share),
not at current costs per unit. à this is not the reality.
How strategists use the scale and experience curves to make decisions?
- Growth/investment strategy
Experience curves tend to be steeper in fast-growing industries. A scale or experience curve
slope in a particular industry that is quite steep, indicates that first movers in a fast-growing
market will secure a widening cost advantage. Firms in an industry with a steep curve have
an imperative to grow as fast, or faster, than their rivals, so they do not end up at cost
disadvantage. A steep curve suggests that a firm should take whatever action is necessary
to become a market-share leader.
- Pricing strategy
A firm can use the curve to anticipate future costs at different levels of volume. If higher unit
volumes will produce lower costs per unit, the company may want to price its product or
service aggressively low now, so that it can gain enough market share to reach those higher
volumes and make more money.
- Cost management strategy
Useful to analyze relative cost position. For example, it is possible to plot scale or
experience curve for a company and its competitors, allowing company leaders to assess
how well each company is managing its costs.
- Acquisition strategy
A scale curve can be useful to predict cost synergies: the amount by which costs will likely
decrease if two firms combine their volume/scale.
3. LOWER INPUT COSTS
Inputs are any purchases made by a firm in the course of conducting business activities.
4 ways to obtain lower input costs:
• Bargaining power over suppliers
There are two main sources of bargaining power: buying a lot from the supplier and
using successful negotiating tactics.
• Purchasing volume
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Suppliers can be expected to drop prices when buyers increase their volume of
purchases. (usually 5-10% with a doubling of purchased volume)
• Purchasing and negotiation tactics
- Cooperation with suppliers
Rather than strong-arm suppliers offering lower prices as a result of bargaining power, some
companies achieve cost advantages by working cooperatively with suppliers.
- Location advantages
Another way to achieve cost advantage through low-cost inputs is to source inputs from the
lowest-cost location or country. The price of inputs can vary significantly between locations
because of differences in wage rates, exchange rates, or raw material or energy costs.
4. DIFFERENT BUSINESS MODEL OR VALUE CHAIN
There are two basic ways to create a new business model: to eliminate activities or steps in
the value chain or to perform different activities altogether. The value chain refers to the
sequence of all activities that are performed by a firm to turn raw materials into the finished
product that is sold to a buyer.
• Eliminating steps in the value chain
Ryanair study case à eliminating elements that offer value to continue with cost
advantage strategy
• Performing completely new activities
Barnes & Noble vs Amazon
Chapter 5
What is product differentiation?
Is a strategy whereby companies attempt to gain competitive advantage by offering value that is not
available in other products. This value may come in the form of different product features, product
quality or reliability, convenience, or brand image.
Product differentiation is always a matter of customer perception. The perceived value of the product
increases in the mind of the customer, it also increases the customer’s willingness to pay a higher price.
There is a clear trade-off companies must make between cost and differentiation. Greater differentiation
typically requires greater costs, so in order to make a differentiation strategy successful, customers must
typically be willing to pay for greater product differentiation.
Sources of product differentiation
• Different product/service features
o Does a better job on existing features
o Does more jobs than other products
o Does a unique job that nothing else does
• Quality or reliability
A product differentiated based on quality or reliability offers essentially the same features and
functionality of other products, but lasts longer.
• Convenience
The product itself might actually be identical to other products on the market, but the seller has
figured out a way to make it easier for customers to buy. (ex. Starbucks, amazon, Walmart)
• Brand image
Companies turn to this source of advantage when they have difficulty differentiating their products
based on features, reliability, or convenience. Brand image is typically developed through
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marketing. Beyond exposure, companies also attempt to actively associate their products with
positive qualities in the minds of customers.
How to find sources of product differentiation
• Customer segmentation
Individual customers have different needs that they want satisfied. They also differ in the amount
of money they have to purchase products to satisfy those needs. Companies are more successful
when they can offer the exact value that each customer is looking for. However, the cost of
designing a specific product for each customer is usually prohibitely high. The next best solution
is to group customers based on similar needs and then create products that meet the needs of a
particular group. Customer segments are groups of people who share similar needs and thus are
likely to desire the same features in a product. Along with defining customer segments, a
company must choose which segments are actually in its target market. Companies often have to
decide which customer segments they think they can serve – and which segments deserve little
or no attention.
When companies do not effectively segment customers into similar need-based groups, then they
are likely to run into one of two problems. The first problem is that they may add features, and
costs, to their products that some groups of customers don’t really want and wont pay for it. The
second problem is that they may not add features that certain groups care about and would be
willing to pay for it.
Marketers typically segment markets in one of three ways:
1) Based on various attributes or the price of products
2) Based on attributes of the individuals or companies who are customers, including
demographics or psychographics
3) Based attributes of the customers circumstance, job-to-be-done
Product attributes
By assessing the relative importance that customers put on different attributes, and grouping customers
based on what they want in those attributes, it may be possible to design products to meet the needs
of that customer segment.
Demographics/customer attributes
Popular ways to segment the consumer market include by age, socioeconomic status, education,
profession, and ethnic group. Segmenting based in demographics has the advantage that is relatively
easy to do, once you have data to place customers into different demographic categories. The
disadvantage is that not all individuals within a particular demographic category share the same needs
and wants.
Job-to-be-done
Customers “hire” products to do “jobs” for them. What this means is that the job, not the customer or the
product, should be fundamental unit of market segmentation analysis. The job to be done is related to
helping the buyer express his or her identity (an emotional job) and be part of an elite group of rugged
individualists (a social job).
Segmenting a market in different ways can provide different insights as to how to differentiate a product.
Mapping the consumption chain
Another process that can be used to look for differentiation opportunities is to map the consumption
chain, which involves tracing your customer’s entire experience with your product or service. Mapping the
consumption chain involves identifying all the steps through which customers pass from the time they first
become aware of your product to the time when they finally have to dispose of it or discontinue using it.
To understand the consumption chain, we should ask the following questions
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• How do customers become aware of their need for a product or service?
By providing a way to make customers aware that they may need a particular product, companies
can find a way to differentiate their product.
• How do customers find your offering?
After potential customers are aware, they have a need for a product, then they must find it.
Companies can differentiate their offering if they can make the search process easier for
customers by making it less complicated, more convenient, or less expensive.
• How do customers make their final selections?
This is the time when product attributes typically dominate, and it is critical to ensure that
customers are aware of features that differentiate a product. A comparison list makes it easier for
customers to see which product has more features or has the features they care the most.
• How do customers order and purchase your product or service?
Another way to differentiate your product is to make the process of ordering and purchasing more
convenient. One potential benefit of making your product more convenient to order is your
company can create a switching cost, especially for repeating customers.
• How is your product or service delivered or installed?
Transporting and assembling products are stumbling blocks for customers, so these services can
be a source of differentiation.
• How is your product stored?
When it is expensive, inconvenient, or even dangerous for customers to have a product simply
sitting around, a company has the potential to differentiate by providing better or easier storage
options.
• What do customers need help with when they can use your product?
A company can differentiate on that dimension if it understands what kind of help customers need
and can provide that assistance more effectively than the other companies.
• What if customers aren’t satisfied and need a return?
Long-term loyalty requires attention to customers’ needs throughout their experience with a
product. Handling problems well when the product doesn’t work out for a customer can be
important as meeting the need that motivated the initial purchase.
Building resources and capabilities to differentiate
Customer segmentation and mapping the consumption chain are useful tools for identifying what unique
value to offer a customer. However, they still need to figure out how to deliver value. Building the
capacity to deliver unique value requires acquiring and allocating resources.
New thinking: achieving low cost and differentiation
Low-cost is achieved by deeply understanding the economics of the supply and value-added chain. In
contrast, differentiation is best achieved by deeply understanding customer needs and then
developing and configuring unique sets of product features that increase customers’ willingness to
pay. Business units that successfully combine both low cost and differentiation advantage had the
highest ROI.