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Enu marketing 250812
1. Go Global !
Global Economic Environment :
External Marketing Environment
By
Stephen Ong
Edinburgh Napier University Business School
chong@mail.tarc.edu.my
Visiting Professor, College of Management, Shenzhen
University
25 August 2012
3. Learning Objectives
To explain what marketing is.
To explain the constituents of
the macro and micro
environment.
To assess the external
marketing environment for
an organisation through PEST
analysis.
To critically appraise
processes and techniques
used for auditing the
marketing environment.
To understand how external
environment impacts on
strategy development.
4. Introduction
Marketing principles (5P) in foreign
markets are similar to those in domestic
markets
1. Product
2. Price
3. Promotion
4. Place
5. People
However, some or all elements may need
to be adapted to better fit local markets
6. Marketing Strategies
Marketing strategy depends on
marketing orientation
Production
Sales
Customer
Strategic marketing
Social marketing
7. Marketing Strategies
Firms can segment and target
markets
By country
By global segment
Using multiple criteria
8. Product Policies :
Why Firms Alter Products
Firms alter products for
Legal reasons
Cultural reasons
Economic reasons
9. The Product Line:
Extent and Mix
Product line decisions depend on
Sales and cost
considerations
Product life cycle
considerations
10. Pricing Strategies
Potential obstacles in international
pricing
Government intervention
Set minimum or maximum pricing
Prohibit certain pricing practices
Market diversity
Consumers may be willing to pay higher
prices
11. Pricing Strategies
Pricing tactics
Skimming strategy
Penetration strategy
Cost-plus strategy
Export price escalation
Fluctuations in currency
value
15. Promotion Strategies
Promotion
the presentation of messages intended
to help sell a product or service
Push-pull mix
Push
uses direct selling techniques
Pull
relies on mass media
16. Promotion Strategies
Advantages of standardized advertising
lower cost
better quality at local level
common global image
rapid entry into multiple countries
However, firms could have problems with
translation
legalities
market needs
18. Branding Strategies
Advantages of a worldwide
brand
global image
global player identification
Problems with global brands
language
brand acquisition
country-of-origin
generic and near-generic names
20. Distribution Strategies
Deciding whether to standardize
Distribution can vary
substantially among
countries
Distribution can be
difficult to change
21. Distribution Strategies
When choosing distributors and channels
firms must consider
whether internal handling
is feasible
which distributors are
qualified
the reliability of after-
sales service
22. Distribution Strategies
Distributors choose which products
to handle
To get a distributor to work for
them, companies may have to
give incentives
use successful products as bait for new
ones
convince distributors that their product
and company are viable
23. Distribution Strategies
Factors that can contribute to
distribution cost differences among
countries include
Infrastructure conditions
The number of levels in the distribution
system
Retail inefficiencies
Size and operating hour restrictions
Inventory stock-outs
24. Distribution Strategies
E-commerce and the Internet
Opportunities
can replace traditional sales methods
faster customer service
Problems
cannot differentiate sales programs between
countries
still must comply with local laws
25. Managing the Marketing Mix
Gap analysis
a method for estimating a company’s
potential sales by identifying prospective
customers it is not serving adequately
Usage
Product line
Distribution
Competitive
27. Evolving Challenges
to Segment Markets
Disparities between “haves” and “have-nots” will
increase
Companies will have conflicting opportunities to serve
both “haves” and “have-nots”
Attitudinal differences will continue to affect demand
Materialism, cosmopolitanism, and consumer
ethnocentrism
28. Global Market Segmentation,
Targeting & Positioning
• How to identify like groups of
potential customers?
• How to chose the groups to
target?
• How to segment those groups?
• How to position the brand in
the mind of the customer?
29. Market Segmentation
Represents an effort to identify and categorize groups of customers and
countries according to common characteristics
77.5 million dogs are owned in the U.S.
Who owns whom?
30. Targeting
• The process of evaluating segments and
focusing marketing efforts on a country,
region, or group of people that has
significant potential to respond
• Focus on the segments that can be
reached most effectively, efficiently, and
profitably
31. Positioning
• Positioning is required to differentiate the product or brand in the minds of
the target market.
32. Global Market Segmentation
• Defined as the process of identifying
specific segments—whether they be
country groups or individual consumer
groups—of potential customers with
homogeneous attributes who are likely to
exhibit similar responses to a company’s
marketing mix.
33. Contrasting Views of
Global Segmentation
• Conventional Unconventional
Wisdom Wisdom
– Assumes heterogeneity Assumes emergence of
between countries segments that
– Assumes homogeneity transcend national
within a country boundaries
– Focuses on macro Recognizes existence
level of cultural of within-country
differences differences
– Relies on clustering of
national markets Emphasizes micro-
– Less emphasis on level differences
within-country Segments micro
segments markets within and
between countries
34. Global Market Segmentation
• Demographics
• Psychographics
• Behavioral characteristics
• Benefits sought
Skiing became a sport in
Norway where it was
invented 4,000 years ago.
35. Demographic Segmentation
• Income
• Population
• Age distribution
• Gender
• Education
• Occupation
What are the trends?
36. Demographic Facts and Trends
• In India the number of people under the age of 14 is
greater than the entire US population
• In the EU, the number of consumers aged 16 and under
is rapidly approaching the number of consumers aged
60-plus
• Asia is home to 500 million consumers aged 16 and
under
• Half of Japan’s population will be age 50 or older by
2025
37. Demographic Segmentation
• A widening age gap exists between the older populations
in the West and the large working-age populations in
developing countries
• In the European Union, the number of consumers aged
16 and under is rapidly approaching the number of
consumers aged 60-plus
• Asia is home to 500 million consumers aged 16 and
under
• Half of Japan’s population will be age 50 or older by
2025
38. Segmenting by Income
and Population
• Income is a valuable segmentation variable
– 2/3s of world’s GNP is generated in the Triad
but only 12% of the world’s population is in
the Triad
• Do not read into the numbers
– Some services are free in developing nations
so there is more purchasing power
• For products with low enough price, population is a more important variable
41. Age Segmentation
• Global Teens-between the ages of 12
and 19
– A group of teenagers randomly chosen
from different parts of the world will
share many of the same tastes
• Global Elite–affluent consumers who
are well traveled and have the money to
spend on prestigious products with an
image of exclusivity
42. Gender Segmentation
In focusing on the
needs and wants of
one gender, do not
miss opportunities to
serve the other
Companies may offer
product lines for both
genders
Nike, Levi Strauss
43. Psychographic Segmentation
Grouping people according to attitudes, values,
and lifestyles
SRI International and VALS 2
Porsche example
Top Guns (27%): Ambition, power, control
Elitists (24%): Old money, car is just a car
Proud Patrons (23%): Car is reward for hard work
Bon Vivants (17%): Car is for excitement, adventure
Fantasists (9%): Car is form of escape
44. Psychographic Segmentation
The Euroconsumer:
Successful Idealist –Comprises from 5% to 20% of
the population; consists of persons who have
achieved professional and material success while
maintaining commitment to abstract or socially
responsible ideals
Affluent Materialist –Status-conscious ‘up-and-
comers’– many of whom are business professionals –
use conspicuous consumption to communicate their
success to others
45. Psychographic Segmentation
The Euroconsumer: Disaffected Survivors
Comfortable Belongers lack power and affluence
25% to 50% of a country’s population harbor little hope for upward mobility
conservative tend to be either resentful or resigned
most comfortable with the familiar concentrated in high-crime urban inner
content with the comfort of home, family, city
friends, and community attitudes tend to affect the rest of
society
47. Behaviour Segmentation
•Focus on whether people purchase a product
or not, how much, and how often they use it
•User status
•Law of disproportionality/Pareto’s Law–80% of
a company’s revenues are accounted for by
20% of the customers
48. Benefit Segmentation
Benefit segmentation focuses on the value
equation
Value=Benefits/Price
Based on understanding the problem a
product solves, the benefit it offers, or the
issue it addresses
49. Ethnic Segmentation
Hispanic Americans
• The population of
many countries 50 million Hispanic
includes ethnic Americans (14% of total
groups of significant pop.) with $978 billion
annual buying power
size
“$1 trillion Latina” 24
million Hispanic women:
• Three main groups in 42% single, 35% HOH,
the U.S. include 54% working
African-Americans,
Asian-Americans,
and Hispanic
Americans
50. Assessing Market Potential
Be mindful of the pitfalls
Tendency to overstate the size and short-term
attractiveness of individual country markets
The company does not want to ‘miss out’ on a
strategic opportunity
Management’s network of contacts will emerge
as a primary criterion for targeting
51. Assessing Market Potential
• Three basic criteria:
– Current size of the segment and anticipated
growth potential
– Potential competition
– Compatibility with company’s overall objectives
and the feasibility of successfully reaching the
target audience
52. Current Segment Size and Growth
• Is the market segment currently large enough
to present a company with the opportunity to
make a profit?
• If the answer is ‘no,’ does it have significant
growth potential to make it attractive in terms
of a company’s long-term strategy?
53. Potential Competition
• Is there currently strong competition in the market
segment?
• Is the competition vulnerable in terms of price or quality?
54. Feasibility and Compatibility
• Will adaptation be required? If so, is this
economically justifiable in terms of expected
sales?
• Will import restrictions, high tariffs, or a
strong home country currency drive up the
price of the product in the target market
currency and effectively dampen demand?
55. Feasibility and Compatibility
• Is it advisable to source locally? Would it
make sense to source products in the country
for export elsewhere in the region?
• Is targeting a particular segment compatible
with the company’s goals, brand image, or
established sources of competitive
advantage?
56. Framework for Selecting Target Markets
• Demographic information is a starting point but
not the decision factor
• Product-Market must be considered
– Market defined by product category
• Marketing model drivers must be considered
– Factors required for a business to take root and grow
• Are there any enabling conditions present?
– Conditions whose presence or absence will determine
success of the marketing model
57. 9 Questions for Creating a Product-Market
Profile
1. Who buys our product?
2. Who does not buy it?
3. What need or function does it serve?
4. Is there a market need that is not being met by current
product/brand offerings?
5. What problem does our product solve?
6. What are customers buying to satisfy the need for
which our product is targeted?
7. What price are they paying?
8. When is the product purchased?
9. Where is it purchased?
58. Target Market
Strategy Options
Standardized global marketing
Mass marketing on a global scale
Undifferentiated target marketing
Standardized marketing mix
Minimal product adaptation
Intensive distribution
Lower production costs
Lower communication costs
59. Target Market Strategy Options
• Concentrated global
marketing Differentiated
– Niche marketing global marketing
– Single segment of Multi-segment targeting
global market Two or more distinct
markets
– Look for global depth Wider market coverage
rather than national Ex.: P&G markets Old
breadth Spice and Hugo Boss for
Men
– Ex.: Chanel, Estee
Lauder
60. Positioning
• Locating a brand in
consumers’ minds over and
against competitors in terms
of attributes and benefits
that the brand does and
does not offer
– Attribute or Benefit
– Quality and Price
– Use or User
– Competition
61. Positioning Strategies
• Global consumer culture
positioning
– Identifies the brand as a symbol
of a particular global culture or
segment
– High-touch and high-tech
products
• Foreign consumer culture
positioning
– Associates the brand’s users, use
occasions, or product origins with
a foreign country or culture
Beer is associated with this German’s culture; the symbol
on his shirt is not German!
62. Positioning Strategies
• Local consumer culture
positioning
– Identifies with local cultural
meanings
– Consumed by local people
– Locally produced for local people
– Used frequently for food, personal,
and household nondurables
– Ex.: Budweiser is identified with
small-town America
Clydesdale =
Which Beer?
63. External Environmental Analysis (1)
• Analyse the broad macro-environment of
organisations in terms of political, economic,
social, technological, environmental (‘green’) and
legal factors (PESTEL).
• Identify key drivers in this macro-environment
and use these key drivers to construct alternative
scenarios with regard to environmental change.
64. External Environmental Analysis(2)
• Use Porter’s five forces analysis in order to
define the attractiveness of industries and sectors
and to identify their potential for change.
• Identify successful strategic groups, valuable
market segments and attractive ‘Blue Oceans’
within industries.
• Use these various concepts and techniques in
order to recognise threats and opportunities in
the marketplace.
65. Slide 2.65
Layers of the business environment
Figure 2.1 Layers of the business environment
66. The PESTEL framework (1)
The PESTEL framework categorises
environmental influences into six main types:
political, economic,
social, technological,
environmental legal
Thus PESTEL provides a comprehensive list of
influences on the possible success or failure of
particular strategies.
67. The PESTEL framework (2)
• Political Factors: For example, Government
policies, taxation changes, foreign trade
regulations, political risk in foreign markets,
changes in trade blocks (EU).
• Economic Factors: For example, business
cycles, interest rates, personal disposable
income, exchange rates, unemployment rates,
GDP trends.
• Socio-cultural Factors: For example,
population changes, income distribution, lifestyle
changes, consumerism, changes in culture and
fashion.
68. The PESTEL framework (3)
• Technological Factors: For example, new discoveries and technology
developments, ICT innovations, rates of obsolescence, increased spending on
R&D.
• Environmental (‘Green’) Factors: For example, environmental protection
regulations, energy consumption, global warming, waste disposal and re-
cycling.
• Legal Factors: For example, competition laws, health and safety laws,
employment laws, licensing laws, IPR laws.
69. Key drivers of change
Key drivers for change:
• The environmental factors likely to have a high
impact on the success or failure of strategy.
• For example, the birth rate is a key driver for
those planning nursery education provision in
the public sector.
• Typically key drivers vary by industry or sector.
70. Using the PESTEL framework
• Apply selectively –identify specific factors which
impact on the industry, market and organisation in
question.
• Identify factors which are important currently but
also consider which will become more important in
the next few years.
• Use data to support the points and analyse trends
using up to date information
• Identify opportunities and threats – the main point
of the exercise!
71. Scenarios
Scenarios are detailed and plausible views of how
the environment of an organisation might develop in
the future based on key drivers of change about
which there is a high level of uncertainty.
• Build on PESTEL analysis .
• Do not offer a single forecast of how the
environment will change.
• An organisation should develop a few alternative
scenarios (2–4) to analyse future strategic options.
72. Carrying out scenario analysis (1)
• Identify the most relevant scope of the study – the
relevant product/market and time span.
• Identify key drivers of change – PESTEL factors
that have the most impact in the future but have
uncertain outcomes.
• For each key driver select opposing outcomes
where each leads to very different consequences.
73. Carrying out scenario analysis (2)
• Develop scenario ‘stories’ - That is, coherent
and plausible descriptions of the environment
that result from opposing outcomes
• Identify the impact of each scenario on the
organisation and evaluate future strategies in
the light of the anticipated scenarios.
• Scenario analysis is used in industries with long
planning horizons for example, the oil industry
or airlines.
75. Industries, markets and sectors
An industry is a group of firms producing
products and services that are essentially the
same. For example, automobile industry and
airline industry.
A market is a group of customers for specific
products or services that are essentially the same
(e.g. the market for luxury cars in Germany).
A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the
health sector)
76. Porter’s five forces framework
Porter’s five forces framework helps identify the
attractiveness of an industry in terms of five
competitive forces:
• the threat of entry,
• the threat of substitutes,
• the bargaining power of buyers,
• the bargaining power of suppliers and
• the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.
78. The five forces framework (2)
The Threat of Entry & Barriers to Entry
• The threat of entry is low when the barriers to entry are high and
vice versa.
• The main barriers to entry are:
Economies of scale/high fixed costs
Experience and learning
Access to supply and distribution channels
Differentiation and market penetration costs
Government restrictions (e.g. licensing)
• Entrants must also consider the expected retaliation from
organisations already in the market
79. The five forces framework (3)
Threat of Substitutes
Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but by a different process.
Customers will switch to alternatives (and thus the threat increases)
if:
• The price/performance ratio of the substitute is superior (e.g.
aluminium maybe more expensive than steel but it is more cost
efficient for some car parts)
• The substitute benefits from an innovation that improves
customer satisfaction (e.g. high speed trains can be quicker than
airlines from city centre to city centre)
80. The five forces framework (4)
The bargaining power of buyers
Buyers are the organisation’s immediate customers, not
necessarily the ultimate consumers.
If buyers are powerful, then they can demand cheap prices or
product / service improvements to reduce profits .
Buyer power is likely to be high when:
Buyers are concentrated
Buyers have low switching costs
Buyers can supply their own inputs (backward vertical integration)
81. The five forces framework (5)
The bargaining power of suppliers
Suppliers are those who supply what organisations need to
produce the product or service. Powerful suppliers can eat into an
organisation’s profits.
Supplier power is likely to be high when:
The suppliers are concentrated (few of them).
Suppliers provide a specialist or rare input.
Switching costs are high (it is disruptive or expensive to change
suppliers).
Suppliers can integrate forwards (e.g. low cost airlines have cut out the
use of travel agents).
82. The five forces framework (6)
Rivalry between competitors
Competitive rivals are organisations with similar products and services aimed at
the same customer group and are direct competitors in the same industry/market
(they are distinct from substitutes).
The degree of rivalry is increased when :
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high
There is a low level of differentiation
83. Implications of five forces analysis
• Identifies the attractiveness of industries –
which industries/markets to enter or leave.
• Identifies strategies to influence the impact of
the forces, for example, building barriers to
entry by becoming more vertically integrated.
• The forces may have a different impact on
different organisations e.g. large firms can deal
with barriers to entry more easily than small
firms.
84. Issues in five forces analysis
• Apply at the most appropriate level – not
necessarily the whole industry. E.g. the European
low cost airline industry rather than airlines
globally.
• Note the convergence of industries – particularly in
the high tech sectors (e.g. digital industries -
mobile phones/cameras/mp3 players).
• Note the importance of complementary products
and services (e.g. Microsoft windows and McAfee
computer security systems are complements). This
can almost be considered as a sixth force.
87. Types of industry (1)
• Monopolistic industries - an industry with one firm and
therefore no competitive rivalry. A firm has ‘monopoly
power’ if it has a dominant position in the market. For
example, BT in the UK fixed line telephone market.
• Oligopolistic industries - an industry dominated by a few
firms with limited rivalry and in which firms have power
over buyers and suppliers.
• Perfectly competitive industries - where barriers to entry
are low, there are many equal rivals each with very similar
products, and information about competitors is freely
available. Few (if any) markets are ‘perfect’ but may have
features of highly competitive markets, for example, mini-
cabs in London.
88. Types of industry (2)
• Hypercompetitive industries - where the
frequency, boldness and aggression of competitor
interactions accelerate to create a condition of
constant disequilibrium and change.
• Hypercompetition often breaks out in otherwise
oligopolistic industries (e.g. mobile phones).
• Organisations interact in a series of competitive
moves in hypercompetition which often becomes
extremely rapid and aggressive as firms vie for
market leadership.
91. Strategic Groups
Strategic groups are organisations within an industry or sector with similar
strategic characteristics, following similar strategies or competing on similar
bases.
• These characteristics are different from those in other strategic groups in the
same industry or sector.
• There are many different characteristics that distinguish between strategic
groups.
• Strategic groups can be mapped on to two dimensional charts – maps.
These can be useful tools of analysis.
93. Strategic groups in the Indian pharmaceutical
industry
Figure 2.8 Strategic groups in the Indian pharmaceutical industry
Source: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’, Journal of International Management, vol. 13 (2009),
pp. 338–55
94. Uses of strategic group analysis
• Understanding competition - enables focus on direct
competitors within a strategic group, rather than the whole
industry. (E.g. Tesco will focus on Sainsburys and Asda)
• Analysis of strategic opportunities - helps identify attractive
‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ i.e. obstacles to movement from
one strategic group to another. These barriers can be overcome
to enter more attractive groups. Barriers can be built to defend an
attractive position in a strategic group.
95. Market segments
A market segment is a group of customers who have similar
needs that are different from customer needs in other parts of
the market.
• Where these customer groups are relatively small, such
market segments are called ‘niches’.
• Customer needs vary. Focusing on customer needs that
are highly distinctive is one means of building a secure
segment strategy.
• Customer needs vary for a variety of reasons -these
factors can be used to identify distinct market segments.
• Not all segments are attractive or viable market
opportunities – evaluation is essential.
96. Bases of market segmentation (1)
Table 2.1 Some bases of market segmentation
97. Who are the strategic customers?
A strategic customer is the person(s) at whom the strategy is primarily
addressed because they have the most influence over which goods or
services are purchased.
Examples:
• For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the
strategic customers not the ultimate consumer.
• For a pharmaceutical manufacturer it is the health authorities and
hospitals not the final patient.
98. Critical success factors (CSFs)
• Critical success factors are those factors that are either
particularly valued by customers or which provide a significant
advantage in terms of cost.
• Critical success factors are likely to be an important source of
competitive advantage if an organisation has them (or a
disadvantage if an organisation lacks them).
• Different industries and markets will have different critical success
factors (e.g. in low cost airlines the CSFs will be punctuality and
value for money whereas in full service airlines it is all about
quality of service).
99. Blue ocean thinking
• ‘Blue oceans’ are new market spaces where
competition is minimised.
• ‘Red Oceans’ are where industries are already well
defined and rivalry is intense.
• Blue Ocean thinking encourages entrepreneurs and
managers to be different by finding or creating market
spaces that are not currently being served.
• A ‘strategy canvas’ compares competitors
according to their performance on key success
factors in order to develop strategies based on
creating new market spaces.
100. Strategy canvas
Figure 2.9 Strategy canvas for electrical components companies
Source: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, 2005, Harvard Business School Press
101. Summary (1)
• Environmental influences can be thought of as layers
around an organisation, with the outer layer making up the
macro-environment, the middle layer making up the
industry or sector and the inner layer strategic groups and
market segments.
• The macro-environment can be analysed in terms of the
PESTEL factors, from which key drivers of change can be
identified. Alternative scenarios about the future can be
constructed according to how the key drivers develop.
• Industries and sectors can be analysed in terms of
Porter’s five forces – barriers to entry, substitutes, buyer
power, supplier power and rivalry. Together, these
determine industry or sector attractiveness.
102. Summary (2)
• Industries and sectors are dynamic, and their
changes can be analysed in terms of the industry life
cycle, comparative five forces radar plots and
hypercompetitive cycles of competition.
competition
• In the inner layer of the environment, strategic group
analysis, market segment analysis and the strategy
canvas can help identify strategic gaps or
opportunities.
• Blue Ocean strategies characterised by low rivalry
are likely to be better opportunities than Red Ocean
strategies with many rivals.
• The most important reason for environmental
analysis is to identify OPPORTUNITIES AND
THREATS
104. Industry Analysis:
Forces Influencing Competition
Industry – group of firms that produce products that are close
substitutes for each other
Michael Porter
identifies five
forces that
influence
competition
16-104
105. Porter’s Force 1:
Threat of New Entrants
New entrants mean downward pressure on prices and reduced
profitability
Barriers to entry determines the extent of threat of new
industry entrants
106. Threat of New Entrants:
Barriers to Entry
Economies of Scale
Refers to the decline in per-unit product costs
as the absolute volume of production per period
increases
Product differentiation
The extent of a product’s perceived uniqueness
Capital requirements
Required investment for manufacturing, R&D,
advertising, field sales and service, etc.
Switching costs
Costs related to making a change in suppliers or
products
107. Threat of New Entrants:
Barriers to Entry
Distribution channels
Are there current distribution
channels available with capacity?
Government policy
Are there regulations in place that
restrict competitive entry?
Cost advantages independent of
scale economies
Is there access to raw materials,
large pool of low-cost labor, favorable
locations, and government subsidies?
Competitor response
How will the market react in
anticipation of increased competition
within a given market?
108. Porter’s Force 2:
Threat of Substitute Products
Availability of substitute products places limits on the
prices market leaders can charge
High prices induce buyers to switch to the substitute
109. Porter’s Force 3:
Bargaining Power of Buyers
Buyers=manufacturers and retailers, not
consumers
Buyers seek to pay the lowest possible
price
Buyers have leverage over suppliers
when:
They purchase in large quantities (enhances
supplier dependence on buyer)
Suppliers’ products are commodities
Product represents significant portion of buyer’s
costs
Buyer is willing and able to achieve backward
integration
110. Bargaining Power of Buyers
“We do not quibble or argue with anyone’s right to
sing what they want, to print what they want, and
say what they want. But we reserve the right to
sell what we want.”
- Wal-Mart’s response to the
accusation that it is using its
financial power to dictate what is
appropriate music and art
111. Porter’s Force 4:
Bargaining Power of Suppliers
When suppliers have leverage, they
can raise prices high enough to affect
the profitability of their customers
Leverage accrues when
Suppliers are large and few in number
Supplier’s products are critical inputs, are
highly differentiated, or carry switching
costs
Few substitutes exist
Suppliers are willing and able to sell
product themselves
112. Porter’s Force 5:
Rivalry Among Competitors
Refers to all actions taken by firms in the industry to improve
their positions and gain advantage over each other
Price competition
Advertising battles
Product positioning
Differentiation
113. Competitive Advantage
Achieved when there is a match between a firm’s
distinctive competencies and the factors critical for
success within its industry
Two ways to achieve competitive advantage
Generic strategies—four types
Strategic intent—also four types
114. Competitive Advantage
“The only way to gain lasting
competitive advantage is to
leverage your capabilities around
the world so that the company as a
whole is greater than the sum of its
parts. Being an international
company– selling globally, having
global brands or operations in
different countries–isn’t enough.”
- David Witwam, CEO, Whirlpool
116. Cost Leadership
Based on a firm’s position as the
industry’s low-cost producer
Must construct the most efficient
facilities
Must obtain the largest market
share so that its per unit cost is the
lowest in the industry
Only works if barriers exist that
prevent competitors from achieving
the same low costs
117. Product Differentiation
Product that has an actual or
perceived uniqueness in a broad
market has a differentiation
advantage
Extremely effective for defending
market position
Extremely effective for obtaining
above-average financial returns;
unique products command a
premium price
118. Cost Focus
Firm’s lower cost position enables it
to offer a narrow target market and
lower prices than the competition
Sustainability is the central issue for
this strategy
Works if competitors define their target
market more broadly
Works if competitors cannot define the
segment even more narrowly
119. Focused Differentiation
The product not only has actual
uniqueness but it also has a
very narrow target market
Results from a better
understanding of customer’s
wants and desires
eg. High-end audio equipment
120. The Flagship Firm: The
Business Network with Five
Partners
Network Relationship Commercial Relationship
121. Creating Competitive Advantage
via Strategic Intent
“Few competitive advantages are long
lasting. Keeping score of existing
advantages is not the same as
building new advantages. The essence
of strategy lies in creating tomorrow’s
competitive advantages faster than
competitors mimic the ones you
possess today. An organization’s
capacity to improve existing skills and
learn new ones is the most defensible
competitive advantage of all.”
- Gary Hamel and C.K. Prahalad
122. The Flagship Firm
• A collection of 5 partners
– Key suppliers do some tasks better than the
flagship (ex.: manufacturing)
– Key customers (ex: car dealers)
– Key consumers (ex: car buyers)
– Selected competitors like global Strategic
Partnerships
– Non-business infrastructure: universities,
governments, trade unions that supply
intangibles like technology and intellectual
property
123. Creating Competitive
Advantage via Strategic
Intent
Building layers of advantage
Searching for loose bricks
Changing the rules of engagement
Collaborating
124. Building Layers of Advantage
A company faces less risk if it has a wide portfolio of
advantages
Successful companies build portfolios by establishing
layers of advantage on top of one another
Illustrates how a company can move along the value
chain to strengthen competitive advantage
125. Searching for Loose Bricks
Search for opportunities in the
defensive walls of competitors
whose attention is narrowly
focused
Focused on a market segment
Focused on a geographic area to
the exclusion of others
126. Changing the Rules of Engagement
• Refuse to play by the rules set by
industry leaders
Example Xerox and Canon
Xerox employed a huge
direct sales force; Canon
chose to use product dealers
Xerox built a wide range of
copiers; Canon standardized
machines and components
Xerox leased machines;
Canon sold machines
127. Collaborating
Use the know-how
developed by other
companies
Licensing
agreements, joint
ventures, or
partnerships
128. Global Competition and National
Competitive Advantage
Global competition occurs when a firm
takes a global view of competition and
sets about maximizing profits
worldwide
The effect is beneficial to consumers
because prices generally fall as a result
of global competition
While creating value for consumers, it
can destroy the potential for jobs and
profits
130. Factor Conditions
Human Resources – the quantity of
workers available, skills possessed by
those workers, wage levels, and work
ethic
Physical Resources – the availability,
quantity, quality, and cost of land,
water, minerals, and other natural
resources
Knowledge Resources – the availability
within a nation of a significant
population having scientific, technical,
and market-related knowledge
131. Factor Conditions
Capital Resources – the
availability, amount, cost,
and types of capital
available; also includes
savings rate, interest
rates, tax laws, and
government deficit
Infrastructure Resources –
this includes a nation’s
banking, healthcare,
transportation, and
communication systems
132. Demand Conditions
Composition of Home Demand – determines how firms
perceive, interpret, and respond to buyer needs
Size and Pattern of Growth of Home Demand – large
home markets offer opportunities to achieve economies
of scale and learning in familiar, comfortable markets
133. Demand Conditions
Rapid Home Market Growth –
another incentive to invest in and
adopt new technologies faster and
build large, efficient facilities
Products being pushed or pulled –
do a nation’s people and businesses
go abroad and then demand the
nation’s products and services in
those second countries?
134. Related and Supporting
Industries
The advantage that a nation gains by
being home to internationally
competitive industries in fields that
are related to, or in direct support of,
other industries
135. Firm Strategy, Structure,
and Rivalry
Domestic rivalry in a single national
market is a powerful influence on
competitive advantage
The absence of significant domestic rivalry
can lead to complacency in the home firms
and eventually cause them to become
noncompetitive in the world markets
Differences in management styles,
organizational skills, and strategic
perspectives also create advantages and
disadvantages for firms competing in
different types of industries
136. Firm Strategy, Structure,
and Rivalry
Capital markets and attitudes
toward investments are important
components of the national
environments
Chance events are occurrences that
are beyond control; they create
major discontinuities
Government is also an influence on
determinants by virtue of its roles as
a consumer, policy maker, and
commerce regulator
137. Current Issues in
Competitive Advantage
Today’s business environment, market stability is
undermined by:
Short product life cycles
Short product design cycles
New technologies
Globalization
Result is an escalation and acceleration of competitive
forces
138. Current Issues in
Competitive Advantage
Hypercompetition is a term used to describe a dynamic
competitive world in which no action or advantage can
be sustained for long
Competition unfolds in a series of dynamic strategic
interactions in four areas: cost quality, timing and know-
how, and barriers to entry
139. Current Issues in
Competitive Advantage
In today’s world, in order
to achieve a sustainable
advantage, companies
must seek a series of
unsustainable advantages
The role of marketing is
innovation and the
creation of new markets
Innovation begins with
abandonment of the old
and obsolete
140. Current Issues in
Competitive Advantage
“I don’t think we’re moving towards a
hypercompetitive world in which there are
no trade-offs. We’re probably moving in the
other direction. There are more customer
segments than ever before, more
technological options, more distribution
channels. That ought to create lots of
opportunities for unique positions.”
Michael Porter
142. Conclusion
“Our innovation strategy is to innovate
for every one of those consumers on
that economic curve, and if you don’t
do that, you’ll fail.”
Robert McDonald, CEO, Procter &
Gamble
143. Casestudy : SAB-MILLER
1. Read and prepare the
Casestudy on SAB MILLER
(Johnson, Whittington &
Scholes (2011)) for
discussion and presentation
next week.
2. Identify and evaluate the
global marketing challenges
facing SAB MILLER by
conducting External
Environment, Industry,
Competitor analysis,
SWOT, Marketing Mix and
Gap Analysis .
144. Core Reading
Juleff, L, Chalmers, A.. and Harte, P. (2008)
Business Economics in a Global Environment,
Napier University Edinburgh
Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P.
(2012) International Business: Environments and
Operations. 14th edition, Pearson
Keegan, W.J. and Green, M.C. (2013) Global
Marketing, 7th edition, Pearson
Johnson, Whittington and Scholes (2012) Exploring
Strategy, 9th Edition, Pearson
Editor's Notes
The Learning Objectives for this chapter are To understand a variety of international product policies and their appropriate circumstances To be aware of product alterations when deciding between standardized and differentiated marketing programs among countries To appreciate the pricing complexities when selling in foreign markets To be familiar with country differences that may necessitate alterations in promotional practices To comprehend the different branding strategies companies may employ internationally To discern effective practices and complications of international distribution To perceive why and how emphasis within the marketing mix may vary among countries
International marketing is like domestic marketing in that a firm needs a desirable product or service, must tell people about it, price it at an acceptable level, and offer it in the right location. However, because international marketing managers operate in an unfamiliar environment each of these activities becomes more complex.
This Figure shows how international marketing fits in with a firm’s operations.
There are five common marketing orientations. The production orientation assumes that customers want lower prices or higher quality. This approach is generally only used for commodity sales, passive exports, and foreign niches. The sales orientation assumes that foreign customers are similar to domestic customers, so the company simply sells abroad what it can sell at home. The customer orientation, in contrast, holds the country as a constant and varies the product and marketing method. The strategic marketing orientation adapts product strategy by degree. Finally, the social marketing orientation considers decisions from the perspective of all stakeholders. Firms using this approach try to act in a socially responsible way.
Companies have to segment markets and identify specific segments to target. Three basic ways to do this is are by country, by global segment, and using multiple criteria.
Firms prefer not to alter their product for foreign markets because of the costs involved in doing so. However, in many cases different legal, cultural, and economic conditions in the target market make product alterations a necessity. When product changes are necessary, firms can still try to find ways to control alteration costs by changing only what needs to be changed and keeping everything else the same.
In addition to deciding whether a product needs to be adapted for a target market, firms also need to consider the extent and mix of the product line that will be sold in foreign markets. This requires sales and cost considerations as well as product life cycle considerations.
Pricing in international markets is more complex than domestic pricing. Governments, for example, may establish pricing guidelines or even forbid certain pricing strategies. Similarly, market diversity can encourage different pricing across markets.
Firms can use different pricing strategies. A skimming strategy involves charging a high price for a new product by aiming first at consumers willing to pay the price, and then progressively lowering the price. Firms using a penetration strategy in troduce a product at a low price to induce a maximum number of consumers to try it. A cost-plus strategy involves pricing at a desired margin over cost. Keep in mind that export price escalation may occur. This typically happens for two reasons. First, c hannels of distribution usually include additional intermediaries because exporters need to contract with organizations that know how to sell in foreign markets. Second, tariffs and transport are additional costs that may be passed on to consumers. Finally, remember that pricing in highly volatile currencies can be extremely troublesome.
This Figure shows why cost-plus pricing pushes up prices. Keep in mind that export price escalation can make it difficult to compete in foreign markets.
According to one consulting firm, U.S. companies lose as much as $63 billion per year because of grey markets. Today, easy access to information makes it much harder for firms to price on a country-to-country basis. Grey markets typically emerge when differences exist.
This Table shows ways that exporters can negotiate prices more effectively.
Promotion can vary significantly depending on the company, the product, and the country of operation. Push promotion uses direct selling while pull relies on mass media.
Companies face numerous challenges because of diverse national environments. Very often, companies find that they have to adapt their promotion to local market conditions. For example, companies may find that promotion in rural areas requires specially designed strategies. Similarly, government regulations can pose problems as can differences in income levels. Keep in mind that even if a standardized approach is possible it may not always be beneficial.
Brands give products instant recognition. Businessweek estimates that U.S. companies own 52 of the top 100 global brands.
Using the same brand worldwide helps a firm develop a global image, but may not always be possible because of language differences or because the firm has acquired a locally branded product. Country-of-origin can also be a factor in branding. A global brand can help a company overcome negative country-of-origin images, but keep in mind that images can change. Note also that the advantages of a well-known brand can be negated if the brand becomes a generic term.
When it comes to distribution, international marketing managers not only have to figure out how to get the product to a particular country, they also need to develop a strategy to get it to the end user.
As with other elements in the marketing mix, managers need to decide whether distribution can be standardized or whether it needs to be adapted to fit the needs of each market. In general, distribution is the most difficult element to standardize. Keep in mind that the cost and time involved in establishing a distribution system can make it difficult to change even when the situation changes.
Companies must decide whether to handle distribution in-house or outsource it. If a firm decides to outsource, it must ensure that it uses a qualified distributor. In addition, reliable after-sales service needs to be available especially for products using new technology.
Companies looking for distributors may find that many are locked into exclusive arrangements. In some cases, it may be necessary to offer distributors incentives or offer proven products as bait for taking on new ones. Companies may even find that they have to convince distributors of the viability of the company itself.
Distribution costs can vary between countries because of infrastructure conditions, the number of levels in the distribution system, retail inefficiencies, size and operating hour restrictions, and inventory stock-outs.
The growth in online availability creates new opportunities and challenges in selling globally over the Internet.
The difference between total market potential and a company’s sales is a result of gaps. A usage gap exists when collectively, all competitors sell less than the market potential. A product line gap exists when the company lacks some product variations. A distribution gap exists when a company misses geographic or intensity coverage. A competitive gap exists when competitors’ sales are not explained by product line and distribution gaps.
This Figure shows the different gaps companies can face.
What challenges will face international marketing managers in the future? There are several issues to consider. It’s anticipated that disparities between the “ haves ” and “ have-nots ” will grow in the foreseeable future, both within and among countries. Those who are better educated and more connected to the Internet will be better able to search globally for lower prices for what they buy. So, globally, the affluent segment will have even more purchasing power than their incomes indicate. At the other extreme, companies will have opportunities to develop low cost standardized products to fit the needs of those with lower disposable incomes. Attitudinal differences are also likely to affect demand in general as well as demand for particular types of products and services. Although global communications are reaching far-flung populations, different people react differently to them. Finally, companies will continued to be challenged by materialism, cosmopolitanism, and consumer ethnocentrism.
As noted in earlier chapters, two decades ago Professor Theodore Levitt advanced the thesis that consumers in different countries increasingly seek variety, and that the same new segments are likely to show up in multiple national markets. Thus, ethnic or regional foods such as sushi, falafel, or pizza might be in demand anywhere in the world. Levitt suggested that this trend, known variously as the pluralization of consumption and segment simultaneity , provides an opportunity for marketers to pursue one or more segments on a global scale. Authors John Micklethwait and Adrian Wooldridge sum up the situation this way: The audience for a new recording of a Michael Tippett symphony or for a nature documentary about the mating habits of flamingos may be minuscule in any one country, but round up all the Tippett and flamingo fanatics around the world, and you have attractive commercial propositions. The cheap distribution offered by the Internet will probably make these niches even more attractive financially. Global market segmentation is based on the premise that companies should attempt to identify consumers in different countries who share similar needs and desires. A. Coskun Samli has developed a useful approach to global market segmentation that compares and contrasts “ conventional ” versus “ unconventional ” wisdom. This is shown on the next slide.
For example, conventional wisdom might assume that consumers in Europe and Latin America are interested in World Cup soccer while those in America are not. Unconventional wisdom would note that the “ global jock ” segment exists in many countries, including the United States. Similarly, conventional wisdom might assume that, because per capita income in India is about $820, all Indians have low incomes. Unconventional wisdom would note the presence of a higher-income, middle-class segment. As Sapna Nayak, a food analyst at Raobank India, noted recently, “The potential Indian customer base for a McDonald’s or a Subway is larger than the size of entire developed countries. The same is true of China; the average annual income of people living in eastern China is approximately $1,200. This is the equivalent to a lower-middle-income country market with 470 million people, larger than every other single country market except India.
Today, global (multi-national) companies, and the research and advertising agencies that serve them, use market segmentation to identify, define, understand, and respond to customer wants and needs on a worldwide, rather than strictly local basis. As we have noted many times in this book, global marketers must determine whether a standardized or adapted marketing mix is required to best serve those wants and needs. By performing market segmentation, marketers can generate the insights needed to devise the most effective approach. The process of global market segmentation begins with the choice of one or more variables to use as a basis for grouping customers. This slide shows the most common segmentation categories. The following slides will discuss them more in-depth.
By 2030, 20 percent of the U.S. population—70 million Americans—will be 65 years old or older versus 13 percent (36 million) today. America’s three main ethnic groups—African/Black Americans, Hispanic Americans, and Asian Americans—represent a combined annual buying power of $2.5 trillion. The United States is home to 28.4 million foreign-born residents with a combined income of $233 billion.
Demographic changes can create opportunities for marketing innovation. In France, for example, two entrepreneurs began rewriting the rules of retailing years before Sam Walton founded the Wal-Mart chain. Marcel Fournier and Louis Defforey opened the first Carrefour (“crossroads”) hypermarket in 1963. At the time, France had a fragmented shop system that consisted of small, specialized stores with only about 5,000 square feet of floor space such as the boulangerie and charcuterie . The shop system was part of France’s national heritage, and shoppers developed personal relationships with a shop’s proprietor. However, time pressed, dual-parent working families had less time to stop at several stores for daily shopping. The same trend was occurring in other countries. By 1993, Carrefour SA was a global chain with $21 billion in sales and a market capitalization of $10 billion. By 2008, sales had reached $124 billion; today, Carrefour operates 9,630 stores in 32 countries. As Adrian Slywotzky has noted, it was a demographic shift that provided the opportunity for Fournier and Defforey to create a novel, customer-matched, cost-effective business design. After segmenting in terms of a single demographic variable—income—a company can reach the most affluent markets by targeting fewer than 20 nations: the European Union, North America, and Japan. By doing so, however, the marketers are not reaching almost 90 percent of the world ’ s population! A word of caution is in order here. Data about income (and population) have the advantage of being widely available and inexpensive to access. However, management may unconsciously “read too much” into such data. In other words, while providing some measure of market potential, such macro-level demographic data should not necessarily be used as the sole indicator of presence (or absence) of a market opportunity. This is especially true when an emerging country market or region is being investigated. As noted previously, for products whose price is low enough, population is a more important variable than income in determining market potential. As former Kodak CEO George Fisher commented a decade ago, “ Half the people in the world have yet to take their first picture. The opportunity is huge, and it’s nothing fancy. We just have to sell yellow boxes of film.” Thus, China and India, with respective populations of 1.3 billion and 1 billion, represent attractive target markets. In a country like China, one segmentation approach would call for serving the existing mass market for inexpensive consumer products. (FYI, Kodak paralyzed their own growth by trying to suppress digital camera technology, even though they were the first to invent them, because of the fear their digital cameras would cannibalize their film business. They declared bankruptcy in 2012.) Procter & Gamble, Unilever, Kao, Johnson & Johnson, and other packaged goods companies are targeting and developing the China market, lured in part by the possibility that as many as 100 million Chinese customers are affluent enough to spend a few cents for a single-use pouch of shampoo.
Young consumers may not yet have conformed to cultural norms; indeed, they may be rebelling against them. This fact, combined with shared universal wants, needs, desires, and fantasies (for name brands, novelty, entertainment, trendy, and image-oriented products), make it possible to reach the global teen segment with a unified marketing program. This segment is attractive both in terms of its size (about 1.3 billion) and its multi-billion dollar purchasing power. The U.S. teen market represents roughly $200 billion in annual buying power; the United Kingdom’s 7.5 million teens spend more than $10 billion each year. Coca-Cola, Benetton, Swatch, and Sony are some of the companies pursuing the global teenage segment. The global elite is normally associated with older individuals who have accumulated wealth over the course of a long career, it also includes movie stars, musicians, elite athletes, and others who have achieved great financial success at a relatively young age.
In 2000, Nike generated $1.4 billion in global sales of women’s shoes and apparel, a figure representing 16 percent of total Nike sales. Nike executives believe its global women’s business is poised for big growth. To make it happen, Nike is opening concept shops inside department stores and creating free-standing retail stores devoted exclusively to women. In Europe, Levi Strauss is taking a similar approach. In 2003, the company opened its first boutique for young women, Levi’s for Girls, in Paris. As Suzanne Gallacher, associate brand manager for Levi’s in Europe, the Middle East, and Africa, noted, “In Europe, denim is for girls. ”
Data are obtained from questionnaires that require respondents to indicate the extent to which they agree or disagree with a series of statements. Psychographics is primarily associated with SRI International, a market research organization whose original VALS and updated VALS 2 analyses of consumers are widely known. A psychographic study showed that, demographics aside, Porsche buyers could be divided into several distinct categories. Top Guns, for example, buy Porsches and expect to be noticed; for Proud Patrons and Fantasists, however, such conspicuous consumption is irrelevant. Porsche used the profiles to develop advertising tailored to each type. As Richard Ford, Porsche vice president of sales and marketing, noted: “We were selling to people whose profiles were diametrically opposed. You wouldn’t want to tell an elitist how good he looks in the car or how fast he could go.” The results were impressive; Porsche’s U.S. sales improved nearly 50 percent after a new advertising campaign was launched.
The following characteristics come from a research team at D ’ arcy Massius Benton & Bowles. They focused on Europe and produced a 15-country study entitled: “ The Euroconsumer: Marketing Myth or Cultural Certainty? ” They identified four lifestyle groups which are highlighted here and on the next slide.
Behavior segmentation focuses on whether or not people buy and use a product, as well as how often, and how much they use or consume. Consumers can be categorized in terms of usage rates: for example, heavy, medium, light, and non-user. Consumers can also be segmented according to user status: potential users, non-users, ex-users, regulars, first-timers, and users of competitors ’ products. Nine country markets generate about 80 percent of McDonald’s revenues. This situation presents McDonald’s executives with strategy alternatives: Should the company pursue growth in the handful of countries where it is already well known and popular? Or, should it focus on expansion and growth opportunities in the scores of countries that, as yet, contribute little to revenues and profits?
Marketers of health and beauty aids also use benefit segmentation. Many toothpaste brands are straightforward cavity fighters, and as such they reach a very broad market. However, as consumers become more concerned about whitening, sensitive teeth, gum disease, and other oral care issues, marketers are developing new toothpaste brands suited to the different sets of perceived needs. The European pet food market represents $30 billion in annual sales. Nestlé discovered that cat owners’ attitudes toward feeding their pets are the same everywhere. In response, a pan-European campaign was created for Friskies Dry Cat Food. The appeal was that dry cat food better suits a cat’s universally recognized independent nature. Likewise, many Europeans are concerned with improving the health and longevity of their pets. Accordingly, Procter & Gamble is marketing its Iams brand premium pet food as a way to improve pets’ health.
From a marketing point of view, these groups offer great opportunity. Companies in a variety of industry sectors, including food and beverages, consumer durables, and leisure and financial services are recognizing the need to include these segments when preparing marketing programs for the United States. In the two-year period 1999-2000, new-vehicle registrations by Hispanics in the United States grew 20 percent, twice the overall national growth rate. Honda, Toyota, and other Japanese automakers have been courting U.S. Hispanics for years and have built up a great deal of brand loyalty. Ford and GM are playing catch up, with mixed results; despite large increases in advertising targeting Hispanics, GM’s market share is slipping. Sales of Corona Extra beer in the United States have grown dramatically recently, thanks in part to savvy marketing to the Hispanic segment. In lower-income neighborhoods, imported premium beer brands represent “ affordable luxuries. ” Although a six-pack of Corona typically costs at least a dollar more than Budweiser at a local bodega, it is usually priced lower than Heineken. Marketers must understand, though, that many Hispanic Americans live in two worlds; while they identify strongly with the United States, there is also a sense of pride associated with brands that connect to their heritage.
After segmenting the market by one or more of the criteria just discussed, the next step is to assess the attractiveness of the identified segments. This part of the process is especially important when sizing up emerging country markets as potential targets. It is at this stage that global marketers should be mindful of several potential pitfalls associated with the market segmentation process.
India is the world ’ s fastest growing cell phone market. The industry is expanding at a rate of 50 percent annually, with 5 to 6 million new subscribers added every month. By mid-2008, India had 261 million cell phone users; that number approached 900 million by the end of 2011. 1.3 million cars sold annually, 3 million within 10 years, world’s largest car market. 75% of India’s population is under age 35, increasing affluent and looking for designer brands. Even so, barriers originating in the political and regulatory environments have shackled private-sector growth. From the perspective of a consumer packaged goods company, for example, low incomes and the absence of a distribution infrastructure offset the fact that 75 percent of India’s population lives in rural areas. The appropriate decision may be to target urban areas only, even though they are home to only 25 percent of the population. Visa’s strategy in China perfectly illustrates this criterion as it relates to demographics: Visa is targeting persons with a monthly salary equivalent to $300 or more. The company estimates that currently 60 million people fit that description; by 2010, the number could include as many as 200 million people.
Over the past several decades, for example, Japanese companies in a variety of industries targeted the U.S. market despite the presence of entrenched domestic market leaders. Some of the newcomers proved to be extremely adept at segmenting and targeting; as a result, they made significant inroads. In the motorcycle industry, for example, Honda first created the market for small-displacement dirt bikes. The company then moved upmarket with bigger bikes targeted at casual riders whose psychographic profile was quite different than that of the hardcore Harley-Davidson rider. In document imaging, Canon outflanked Xerox by offering compact desktop copiers and targeting department managers and secretaries. Similar case studies can be found in earth-moving equipment (Komatsu versus Caterpillar), photography (Fuji versus Kodak), and numerous other industries. Germany’s DHL tried to enter the U.S. package-delivery market in 2003; to achieve scale, DHL acquired Airborne Express. However, management underestimated the dominance of the entrenched incumbents FedEx and UPS. DHL finally withdrew from the United States market in 2008 after losses totaled about $10 billion.
If a market segment is judged to be large enough, and if strong competitors are either absent or deemed to be vulnerable, then the final consideration is whether a company can and should target that market. The feasibility of targeting a particular segment can be negatively impacted by various factors. For example, significant regulatory hurdles may be present that limit market access. This issue is especially important in China today Other marketing-specific issues can arise; in India, for example, three to five years are required to build an effective distribution system for many consumer products. This fact may serve as a deterrent to foreign companies that might otherwise be attracted by the apparent potential of India’s large population.
Finally, it is important to address the question of whether targeting a particular segment is compatible with the company’s overall goals, its brand image, or established sources of competitive advantage. For example, BMW is one of the world’s premium auto brands. Should BMW add a minivan to its product lineup? As former BMW CEO Helmut Panke once explained, “There is a segment in the market which BMW is not catering to and that is the minivan or MPV segment. We don’t have a van because a van as it is in the market today does not fulfill any of the BMW group brand values. We all as a team said “no.”
Global marketing expert David Arnold has developed a framework that goes beyond demographic data and considers other, marketing-oriented assessments of market size and growth potential. Instead of a “ top-down ” segmentation analysis beginning with, say, income or population data from a particular country, Arnold ’ s framework is based on a “ bottom-up ” analysis that begins at the product-market level. After marketing-model drivers and enabling conditions have been identified, the third step is for management to weigh the estimated costs associated with entering and serving the market with potential short- and long-term revenue streams. Does this segment or country market merit entry now? Or, would it be better to wait until, say, specific enabling conditions are established? The term product-market refers to a market defined by a product category; in the automotive industry, for example, phrases such as “luxury car market,” “SUV market,” and “minivan market” refer to specific product-markets. By contrast, phrases such as “the Russian market” or “the Indian market” refer to country markets. Marketing model drivers are key elements or factors required for a business to take root and grow in a particular country market environment. The drivers may differ depending on whether a company serves consumer or industrial markets. Does success hinge on establishing or leveraging a brand name? Or, is distribution or a tech-savvy sales staff the key element? Marketing executives seeking an opportunity must arrive at insights into the true driving force(s) that will affect success for their particular product-market. Enabling conditions are structural market characteristics whose presence or absence can determine whether the marketing model can succeed. For example, in India, refrigeration is not widely available in shops and market food stalls. This creates challenges for Nestlé and Cadbury Schweppes as they attempt to capitalize on Indians’ increasing appetite for chocolate confections. Although Nestlé’s KitKat and Cadbury’s Dairy Milk bars have been reformulated to better withstand heat, the absence or rudimentary nature of refrigeration hampers the companies’ efforts to ensure their products are in saleable condition.
A niche is simply a single segment of the global market. In cosmetics, the House of Lauder, Chanel, and other cosmetics marketers have used this approach successfully to target the upscale, prestige segment of the market. Similarly, Body Shop International PLC caters to consumers in many countries who wish to purchase “natural” beauty aids and cosmetics that have not been tested on animals. Stolichnaya produces three brands of Russian vodka, each targeted at a different market segment: superpremium Stolichnaya Cristal, the premium “base” brand Stolichnaya, and low-priced Privet (the name means “greetings” in Russian). In the cosmetics industry, Unilever NV and Cosmair Inc. pursue differentiated global marketing strategies by targeting both ends of the perfume market. Unilever targets the luxury market with Calvin Klein and Elizabeth Taylor’s Passion; Wind Song and Brut are its mass-market brands. Cosmair sells Tresnor and Giorgio Armani Gio to the upper end of the market and Gloria Vanderbilt to the lower end. Mass marketer Procter & Gamble, known for its Old Spice and Incognito brands, also embarked upon this strategy with its 1991 acquisition of Revlon’s EuroCos, marketer of Hugo Boss for men and Laura Biagiotti’s Roma perfume. In the mid-1990s, P&G launched a new prestige fragrance, Venezia, in the United States and several European countries. Conversely, in 1997 Estee Lauder acquired Sassaby Inc., owner of the mass-market Jane brand. The move marked the first move by Lauder outside the prestige segment.
The S001 is the flagship of Bridgestone’s Potenza tire line. The S001 is featured as original equipment on exotic automobiles from Ferrari and other manufacturers. In the replacement tire market, Bridgestone targets car enthusiasts who own high-performance cars and drive them under both wet and dry conditions. The S001 is positioned as a premium sports tire that performs well at high driving speeds. In this ad from Brazil, the headline Aproveite um Novo Limite (“Enjoy the New Limit”) underscores the S001’s performance qualities. More broadly, the tagline “Your Journey, Our Passion” supports Bridgestone’s core brand message of “supporting individuals.”
Global consumer culture positioning: “ United Colors of Benetton ” means the unity of humankind. High-tech: MP3 players, cell phones, luxury cars, financial services, Canon cameras, Adidas. High-touch: Nescafe coffee.
In any industry, competition works to drive down the rate of return on invested capital toward the rate that would be earned in the economist’s “perfectly competitive” industry. Rates of return that are greater than this so-called competitive rate will stimulate an inflow of capital either from new entrants or from existing competitors making additional investment. Rates of return below this competitive rate will result in withdrawal from the industry and a decline in the levels of activity and competition. According to Michael E. Porter of Harvard University, a leading theorist of competitive strategy, there are five forces influencing competition in an industry: the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and the competitive rivalry among current members of the industry.
New entrants to an industry bring new capacity, a desire to gain market share and position, and, quite often, new approaches to serving customer needs. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. New players mean prices will be pushed downward and margins squeezed, resulting in reduced industry profitability in the long run. Porter describes eight major sources of barriers to entry, the presence or absence of which determines the extent of threat of new industry entrants. These barriers will be discussed in the next two slides.
Economies of scale: Although the concept of scale economies is frequently associated with manufacturing, it is also applicable to R&D, general administration, marketing, and other business functions. Honda’s efficiency at engine R&D, for example, results from the wide range of products it produces that feature gasoline-powered engines. When existing firms in an industry achieve significant economies of scale, it becomes difficult for potential new entrants to be competitive. Product differentiation : Differentiation can be achieved as a result of unique product attributes or effective marketing communications, or both. Product differentiation and brand loyalty “raise the bar” for would-be industry entrants who would be required to make substantial investments in R&D or advertising. For example, Intel achieved differentiation and erected a barrier in the microprocessor industry with its “Intel Inside” advertising campaign and logo that appear on many brands of personal computers. Capital requirements : Capital is required not only for manufacturing facilities (fixed capital) but also for financing R&D, advertising, field sales and service, customer credit, and inventories (working capital). The enormous capital requirements in such industries as pharmaceuticals, mainframe computers, chemicals, and mineral extraction present formidable entry barriers. Switching costs are caused by the need to change suppliers and products. These might include retraining, ancillary equipment costs, the cost of evaluating a new source, and so on. The perceived cost to customers of switching to a new competitor’s product may present an insurmountable obstacle preventing industry newcomers from achieving success. For example, Microsoft’s huge installed base of PC operating systems and applications presents a formidable entry barrier.
Distribution channels : If channels are full, or unavailable, the cost of entry is substantially increased because a new entrant must invest time and money to gain access to existing channels or to establish new channels. Some Western companies have encountered this barrier in Japan. Government policy is frequently a major entry barrier. In some cases, the government will restrict competitive entry. This is true in a number of industries, especially those outside the United States, that have been designated as “national” industries by their respective governments. Japan’s postwar industrialization strategy was based on a policy of reserving and protecting national industries in their development and growth phases. The result was a market that proved difficult for non-Japanese competitors. Cost advantages independent of scale economies: Access to raw materials, a large pool of low-cost labor, favorable locations, and government subsidies are several examples. Competitor response: If new entrants expect existing competitors to respond strongly to entry, their expectations about the rewards of entry will certainly be affected. A potential competitor’s belief that entry into an industry or market will be an unpleasant experience may serve as a strong deterrent. Bruce Henderson, former president of the Boston Consulting Group, used the term “brinkmanship” to describe a recommended approach for deterring competitive entry. Brinkmanship occurs when industry leaders convince potential competitors that any market entry effort will be countered with vigorous and unpleasant responses. This is an approach that Microsoft has used many times to maintain its dominance in software operating systems and applications.
The availability of substitute products places limits on the prices market leaders can charge in an industry; high prices may induce buyers to switch to the substitute. Once again, the digital revolution is dramatically altering industry structures. In addition to lowering entry barriers, the digital era means that certain types of products can be converted to bits and distributed in pure digital form. For example, the development of the MP3 file format for music was accompanied by the increased popularity of peer-to-peer (p-to-p) file swapping among music fans.
In Porter’s model, “buyers” refers to manufacturers (e.g., GM) and retailers (e.g., Wal-Mart), rather than consumers. The ultimate aim of such buyers is to pay the lowest possible price to obtain the products or services that they require. Usually, if they can, buyers drive down profitability in the supplier industry. To accomplish this, the buyers have to gain leverage over their vendors. One way they can do this is to purchase in such large quantities that supplier firms are highly dependent on the buyers’ business. Second, when the suppliers’ products are viewed as commodities—that is, as standard or undifferentiated—buyers are likely to bargain hard for low prices, because many firms can meet their needs. Buyers will also bargain hard when the supplier industry’s products or services represent a significant portion of the buying firm’s costs. A fourth source of buyer power is the willingness and ability to achieve backward integration. Because it purchases massive quantities of goods for resale, Wal-Mart is in a position to dictate terms to any vendor wishing to distribute its products at the retail giant’s stores. This includes the recorded music industry; Wal-Mart accounts for approximately 10 percent of the market for CD sales. Wal-Mart refuses to stock CDs stickered with parental advisories for explicit lyrics or violent imagery. Artists who want their recordings available at Wal-Mart have the option of altering lyrics and song titles or deleting offending tracks. Likewise, artists are sometimes asked to change album cover art if Wal-Mart deems it offensive.
iTunes passed Wal-Mart to become the #1 music retailer in 2008. Until then Wal-Mart was the largest. In 2006 alone, 800 music stores including Tower Records closed. Wal-Mart has forced many artists to create versions of offensive lyrics.
Supplier power in an industry is the converse of buyer power. Microsoft and Intel are two excellent examples of companies with substantial supplier power. Because about 90 percent of the world’s nearly 1 billion plus PCs use Microsoft’s operating systems and 80% use Intel’s microprocessors, the two companies enjoy a great deal of leverage relative to Dell, Compaq, and other computer manufacturers. In fact, it was precisely because Microsoft became so powerful that the U.S. government and the European Union launched separate antitrust investigations. As the trend toward tablets, smartphones, and netbooks continue, Apple and Android or Linux OS will diminish the market share of MS.
To the extent that rivalry among firms forces companies to rationalize costs, it is a positive force. To the extent that it drives down prices, and therefore profitability, and creates instability in the industry, it is a negative factor. Several factors can create intense rivalry. Once an industry becomes mature, firms focus on market share and how it can be gained at the expense of others. Second, industries characterized by high fixed costs are always under pressure to keep production at full capacity to cover the fixed costs. Once the industry accumulates excess capacity, the drive to fill capacity will push prices—and profitability— down. A third factor affecting rivalry is lack of differentiation or an absence of switching costs, which encourages buyers to treat the products or services as commodities and shop for the best prices. Again, there is downward pressure on prices and profitability. Fourth, firms with high strategic stakes in achieving success in an industry generally are destabilizing because they may be willing to accept below-average profit margins to establish themselves, hold position, or expand.
Any superior match between company competencies and customers needs permits for the firm to outperform competitors. There are two basic ways to achieve competitive advantage. First, a firm can pursue a low-cost strategy that enables it to offer products at lower prices than competitors. Competitive advantage may also be gained by a strategy of differentiating products so that customers perceive unique benefits, often accompanied by a premium price. Note that both strategies have the same effect: They both contribute to the firm’s overall value proposition. Two different models of competitive advantage have received considerable attention. The first offers “generic strategies,” four routes or paths that organizations choose to offer superior value and achieve competitive advantage. According to the second model, generic strategies alone did not account for the astonishing success of many Japanese companies in the 1980s and 1990s. The more recent model, based on the concept of “strategic intent,” proposes four different sources of competitive advantage.
The quality of a firm’s strategy is ultimately decided by customer perception. Operating results such as sales and profits are measures that depend on the level of psychological value created for customers: The greater the perceived consumer value, the better the strategy. A firm may market a better mousetrap, but the ultimate success of the product depends on customers deciding for themselves whether or not to buy it. Value is like beauty; it’s in the eye of the beholder. In sum, competitive advantage is achieved by creating more value than is done by the competition, and value is defined by customer perception.
In addition to the “five forces” model of industry competition, Michael Porter has developed a framework of so-called generic business strategies based on the two types or sources of competitive advantage. The relationship of these two sources with the scope of the target market served (narrow or broad) or product mix width (narrow or wide) yields four generic strategies: cost leadership , product differentiation , cost focus , and focused differentiation . Generic strategies aiming at the achievement of competitive advantage or superior marketing strategy demand that the firm make choices. The choices concern the type of competitive advantage it seeks to attain (based on cost or differentiation) and the market scope or product mix width within which competitive advantage will be attained.
Cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—35mm cameras, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis. Cost leadership, however, is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs. Cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—photography and imaging, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis. Cost leadership, however, is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs.
Differentiation advantage. This can be an extremely effective strategy for defending market position and obtaining above-average financial returns; unique products often command premium prices. Examples of successful differentiation include Maytag in large home appliances, Caterpillar in construction equipment, and almost any successful branded consumer product. Nike has a unique array of product features.
Cost focus. In the shipbuilding industry, for example, Polish and Chinese shipyards offer simple, standard vessel types at low prices that reflect low production costs. Aldi, a German-based no-frills “hard discounter” with operations in numerous countries, offers a very limited selection of household goods at extremely low prices. IKEA, the Swedish furniture company described in the chapter introduction, has grown into a successful global company by combining both the focused differentiation and cost focus strategies.
The world of “high-end” audio equipment offers another example of focused differentiation . A few hundred small companies design speakers, amplifiers, and related hi-fi gear that costs thousands of dollars per component. While audio components represent a $21 billion market worldwide, annual sales in the high-end segment are only about $1.1 billion. American companies such as Audio Research, Conrad-Johnson, Krell, Mark Levinson, Martin-Logan, and Thiel dominate the segment, which also includes hundreds of smaller enterprises with annual sales of less than $10 million. The state-of-the-art equipment these companies offer is distinguished by superior craftsmanship and performance and is highly sought after by audiophiles in Asia (especially Japan and Hong Kong) and Europe. Industry growth is occurring as companies learn more about overseas customers and build relationships with distributors in other countries.
According to Professors Alan Rugman and Joseph D’Cruz, Porter’s model is too simplistic given the complexity of today’s global environment. Rugman and D’Cruz have developed an alternative framework based on business networks that they call the flagship model. The flagship firm is at the center of a collection of five partners; together, they form a business system that consists of two types of relationships. The flagship firm provides the leadership, vision, and resources to “lead the network in a successful global strategy.” Key suppliers are those that perform some value-creating activities, such as manufacturing of critical components, better than the flagship. The double-headed arrows that penetrate the flagship and key suppliers in the figure indicate that this is a network relationship, with a sharing of strategies, resources, and responsibility for the success of the network. Other suppliers are kept at “arm’s length”; these traditional commercial relationships are depicted diagrammatically by arrows that stop at the border of the flagship. Likewise, the flagship has network relationships with key customers and more traditional, arm’s length commercial relationships with key consumers . Key competitors are companies with which the flagship develops alliances such as those described at the end of Chapter 9. The fifth partner is the nonbusiness infrastructure (NBI), comprised of universities, governments, trade unions, and other entities that can supply the network with intangible inputs such as intellectual property and technology. In the flagship model, flagship firms often play a role in the development of a country’s industrial policy.
An alternative framework for understanding competitive advantage focuses on competitiveness as a function of the pace at which a company implants new advantages deep within its organization. This framework identifies strategic intent, growing out of ambition and obsession with winning, as the means for achieving competitive advantage. This approach is founded on the principles of W.E. Deming, who stressed that a company must commit itself to continuing improvement in order to be a winner in a competitive struggle.
Japanese vertical and Korean have succeeded, Rugman and D’Cruz argue, by adopting strategies that are mutually reinforcing within a business system and by fostering a collective long-term outlook among partners in the system. The authors say “long-term competitiveness in global industries is less a matter of rivalry between firms and more a question of competition between business systems.” A major difference between the flagship model and Porter’s is that Porter’s is based on the notion of corporate individualism and individual business transactions.
The book discusses the Komatsu/Caterpillar saga, and this is just one example of how global competitive battles are shaped by more than the pursuit of generic strategies. Many firms have gained competitive advantage by disadvantaging rivals through “competitive innovation.” Hamel and Prahalad define competitive innovation as “the art of containing competitive risks within manageable proportions” and identify four successful approaches utilized by Japanese competitors. These are: building layers of advantage , searching for loose bricks , changing the rules of engagement , and collaborating . This approach is founded on the principles of W.E. Deming, who stressed that a company must commit itself to continuing improvement in order to be a winner in a competitive struggle. For years, Deming’s message fell on deaf ears in the United States, while the Japanese heeded his message and benefited tremendously. Japan’s most prestigious business award is named after him. Finally, however, U.S. manufacturers are starting to respond.
Japanese TV industry:1970s—largest producer of black and white sets and becoming world leader in color sets; Comp. Adv. = low labor costs Next, they built factories large enough to serve the world market; sold under many brand names; added layers of Comp. Adv. of quality and reliability Next, they invested in marketing channels and Japanese brand name recognition; new layer of Comp. Adv. of global brand franchise Led to the introduction of new products like VCRs and photocopiers and to the establishment of regional manufacturing to adapt products to local market needs.
A second approach takes advantage of the “loose bricks” left in the defensive walls of competitors whose attention is narrowly focused on a market segment or a geographic area to the exclusion of others. For example, Caterpillar’s attention was focused elsewhere when Komatsu made its first entry into the Eastern Europe market. Similarly, Taiwan’s Acer Inc. prospered by following founder Stan Shih’s strategy of approaching the world computer market from the periphery. Shih’s inspiration was the Asian board game Go, in which the winning player successfully surrounds opponents. Shih gained experience and built market share in countries overlooked by competitors such as IBM and Compaq. By the time Acer was ready to target the United States in earnest, it was already the number one PC brand in key countries in Latin America, Southeast Asia, and the Middle East.
Canon introduced the first full-color copiers and the first copiers with “connectivity”— the ability to print images from such sources as video camcorders and computers. The Canon example shows how an innovative marketing strategy—with fresh approaches to the product, pricing, distribution, and selling—can lead to overall competitive advantage in the marketplace. Canon is not invulnerable, however; in 1991 Tektronix, a U.S. company, leapfrogged past Canon in the color copier market by introducing a plain-paper color copier that offered sharper copies at a much lower price.
History has shown that the Japanese have excelled at using the collaborating strategy to achieve industry leadership. As noted in Chapter 9, one of the legendary licensing agreements of modern business history is Sony’s licensing of transistor technology from AT&T’s Western Electric subsidiary in the 1950s for $25,000. This agreement gave Sony access to the transistor and allowed the company to become a world leader. Building on its initial successes in the manufacturing and marketing of portable radios, Sony has grown into a superb global marketer whose name is synonymous with a wide assortment of high-quality consumer electronics products. More recent examples of Japanese collaboration are found in the aircraft industry. Today, Mitsubishi Heavy Industries Ltd. and other Japanese companies manufacture airplanes under license to U.S. firms and also work as subcontractors for aircraft parts and systems. Many observers fear that the future of the American aircraft industry may be jeopardized as the Japanese gain technological expertise.
The automobile industry has also become fiercely competitive on a global basis. Part of the reason for the initial success of foreign automakers in the United States was the reluctance—or inability—of U.S. manufacturers to design and manufacture high-quality, inexpensive small cars. For U.S. manufacturers, small cars meant smaller unit profits. Therefore, U.S. manufacturers resisted the increasing preference in the U.S. market for smaller cars, a classic case of ethnocentrism and management myopia. European and Japanese manufacturers’ product lines have always included cars smaller than those made in the United States. In Europe and Japan, market conditions were much different: less space, high taxes on engine displacement and on fuel, and greater market interest in functional design and engineering innovations. First Volkswagen, then Japanese automakers such as Nissan and Toyota discovered a growing demand for their cars in the U.S. market. It is noteworthy that many significant innovations and technical advances—including radial tires, anti-lock brakes, and fuel injection—also came from Europe and Japan. Airbags are a notable exception. In the United States, foreign companies have provided consumers with the automobile products, performance, and price characteristics they wanted. If smaller, lower-priced imported cars had not been available, it is unlikely that Detroit manufacturers would have provided a comparable product as quickly. What is true for automobiles in the United States is true for every product class around the world. Global competition expands the range of products and increases the likelihood that consumers will get what they want. The downside of global competition is its impact on the producers of goods and services. Global competition creates value for consumers, but it also has the potential to destroy jobs and profits. When a company offers consumers in other countries a better product at a lower price, this company takes customers away from domestic suppliers. Unless the domestic supplier can create new values and find new customers, the jobs and livelihoods of the domestic supplier’s employees are threatened.
According to Porter, the presence or absence of particular attributes in individual countries influences industry development, not just the ability of individual firms to create core competences and competitive advantage. Porter describes these attributes—factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry—in terms of a national “diamond” which is illustrated on this slide. The diamond shapes the environment in which firms compete. Activity in any one of the four points of the diamond impacts on all the others and vice versa. The following slides will discuss the various subsections of the model.
Human Resources: Countries with a plentiful supply of low-wage workers have an obvious advantage in the production of labor-intensive products. On the other hand, such countries may be at a disadvantage when it comes to the production of sophisticated products requiring highly skilled workers capable of working without extensive supervision. Physical Resources: The availability, quantity, quality, and cost of land, water, minerals, and other natural resources determine a country’s physical resources. A country’s size and location are also included in this category, because proximity to markets and sources of supply, as well as transportation costs, are strategic considerations. These factors are obviously important advantages or disadvantages to industries dependent on natural resources. Knowledge Resources: The presence of this factor is usually a function of the number of research facilities and universities—both government and private—operating in the country. This factor is important to success in sophisticated products and services, and to doing business in sophisticated markets. This factor relates directly to Germany’s leadership in chemicals; for some 150 years, Germany has been home to top university chemistry programs, advanced scientific journals, and apprenticeship programs.
Capital Resources: The advantage enjoyed by industries in countries with low capital costs versus those located in nations with relatively high capital costs is sometimes decisive. Firms paying high capital costs are frequently unable to stay in a market where the competition comes from a nation with low capital costs. The firms with the low cost of capital can keep their prices low and force the firms paying high costs to either accept low returns on investment or leave the industry. Infrastructure Resources: Infrastructure includes a nation’s banking system, healthcare system, transportation system, communications system, as well as the availability and cost of using these systems. More sophisticated industries are more dependent on advanced infrastructures for success.
The nature of home demand conditions for the firm’s or industry’s products and services is important because it determines the rate and nature of improvement and innovation by the firms in the nation. These are the factors that either train firms for world-class competition or that fail to adequately prepare them to compete in the global marketplace. Three characteristics of home demand are particularly important to the creation of competitive advantage: the composition of home demand, the size and pattern of growth of home demand, rapid home market growth, and the means by which a nation’s home demand pulls the nation’s products and services into foreign markets.
The best example of this is Japan’s rapid home market growth that provided the incentive for Japanese firms to invest heavily in modern automated facilities. Early home demand , especially if it anticipates international demand, gives local firms the advantage of getting established in an industry sooner than foreign rivals. Equally important is early market saturation , which puts pressure on a company to expand into international markets and innovate. Market saturation is especially important if it coincides with rapid growth in foreign markets. Push/Pull: When the U.S. auto companies set up operations in foreign countries, the auto parts industry followed. The same is true for the Japanese auto industry. Similarly, when overseas demand for the services of U.S. engineering firms skyrocketed after World War II, those firms in turn established demand for U.S. heavy construction equipment. This provided an impetus for Caterpillar to establish foreign operations.
Downstream industries will have easier access to these inputs and the technology that produced them, and to the managerial and organizational structures that have made them competitive. Access is a function of proximity both in terms of physical distance and cultural similarity. It is not the inputs in themselves that give advantage. It is the contact and coordination with the suppliers, the opportunity to structure the value chain so that linkages with suppliers are optimized. These opportunities may not be available to foreign firms. Similar advantages are present when there are internationally competitive, related industries in a nation. Opportunities are available for coordinating and sharing value chain activities. Consider, for example, the opportunities for sharing between computer hardware manufacturers and software developers. Related industries also create “pull through” opportunities as described previously. For example, non-U.S. sales of PCs from Compaq, Dell, IBM, Acer, and others have bolstered demand for software from Microsoft and other U.S. companies.
The personal computer industry in the United States is a good example of how a strong domestic rivalry keeps an industry dynamic and creates continual pressure to improve and innovate. The rivalry between Dell, Gateway, Compaq, Apple, and others forces all the players to develop new products, improve existing ones, lower costs and prices, develop new technologies, and continually improve quality and service to keep customers happy. Rivalry with foreign firms may lack this intensity. Domestic rivals have to fight each other not just for market share, but also for employee talent, R&D breakthroughs, and prestige in the home market. Eventually, strong domestic rivalry will push firms to seek international markets to support expansions in scale and R&D investments, as Japan amply demonstrates. The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets.
Capital markets and attitudes toward investments are important components of the national environments. For example, U.S. laws prohibit banks from taking an equity stake in companies to which they extend loans. This drives a short-term focus on quarterly and annual gains and losses. This focus is carried into equity markets where low profits produce low share prices and the threat of a takeover. As a result, U.S. firms tend to do well in new-growth industries and other rapidly expanding markets. They do not do well in more mature industries where return on investment is lower and patient searching for innovations is required. Many other countries have an opposite orientation. Banks are allowed to take equity stakes in the customer companies to which they loan, which therefore take a long-term view and are less concerned about short-term results. Chance includes such things as wars and their aftermaths, major technological breakthroughs, sudden dramatic shifts in factor or input cost, like an oil crisis, dramatic swings in exchange rates, and so on. Governments devise legal systems that influence competitive advantage by means of tariffs and nontariff barriers and laws requiring local content and labor. In the United States, for example, the dollar’s decline over the past decade has been due in part to a deliberate policy to enhance U.S. export flows and stem imports. In other words, government can improve or lessen competitive advantage, but it cannot create it.
Dartmouth College professor Richard D’Aveni suggests that the Porter strategy frameworks fail to adequately address the dynamics of competition in the 1990s. In light of the information shared on this slide D’Aveni believes the goal of strategy has shifted from sustaining to disrupting advantages. The limitation of the Porter models, D’Aveni argues, is that they are static; that is, they provide a snapshot of competition at a given point in time. Acknowledging that Hamel and Prahalad broke new ground in recognizing that few advantages are sustainable, D’Aveni aims to build upon their work in order to shape “a truly dynamic approach to the creation and destruction of traditional advantages.” The next several slides will discuss his theory.
The only source of a truly sustainable competitive advantage is a company’s ability to manage its dynamic strategic interactions with competitors by means of frequent movements and counter movements that maintain a relative position of strength in each of the four areas.
