DATA OUTPUT.docx
GRAPHS FOR QUESTION ONE
MONTHLY STOCK RETURNS
SCATTERPLOT PLUS REGRESSION LINE
TABLE FOR QUESTION TWO (REGRESSION OUTPUT FOR MODEL ONE)
GRAPHS FOR QUESTION THREE
TABLES AND FIGURES FOR QUESTION TWO WHICH REQUIRES USE OF DIAGNOSTIC TOOLS
1.TEST FOR NORMALITY
2.HETEROSKEDASTICTY TEST USING THE WHITE METHOD
3.TEST FOR SERIAL CORRELATION USING LM TEST
USING HAC METHOD TO CORRECT HETEROSKEDASTICITY AND SERIAL CORRELATION (FIXING THE ERRORS)
QUESTION 5-USING CHOW TEST TO TEST WHETHER THE FINANCIAL CRISIS AFFECTED THE RELATIONSHIP
QUESTION 6-REGRESSION OUTPUT FOR MODEL 2
QUESTION 7: WALD TEST FOR TESTING JOINT HYPOTHESIS
-.3
-.2
-.1
.0
.1
.2
.3
-.3
-.2
-.1
.0
.1
.2
.3
808284868890929496980002040608
ResidualActualFitted
0
20
40
60
80
100
808284868890929496980002040608
General Dynamics Corp S
0
4
8
12
16
20
808284868890929496980002040608
Federal Funds Rate (Effective) FED
-.3
-.2
-.1
.0
.1
.2
.3
808284868890929496980002040608
NRSt
PROFESSOR'S COMMENTS.docx
1. In question 2, the model requires you to use the monthly stock returns to do the regression. By contrast, it is evident that you have used nominal stock prices instead of returns. This is totally wrong. You have not even made reference to the Discounted Cash flow model
2. In question 3 you are required to plot the actual values, the fitted values (predicted values) and the residuals and comment on model fitting. I am afraid that it apparently appears that you have not done so
3. You have not answered question four
4. You have not answered question five
5. Where is the answers for questions 6 and 7. To be precise the test for joint hypothesis required in question 7 is not shown and the outcome and the conclusions there in.
ECONOMETRICS ASSIGNMENT.pdf
INSTRUCTIONS
Word Limit 2500 words (excluding appendix and reference list)
Refer to the Journal Article Attached in the email as a guide on how to report
the results of the data analysis.
E-VIEWS is the preferred software for data analysis but if you are not
conversant with it you can use STATA or SPSS.
The deadline for this assignment is midday 21
st
,November 2016.
1
You have been allocated monthly time-series data for the United States
over the period January 1980-December 2009. The data refer to the following
variables:
S :the nominal stock price of a given company;
FED :the nominal short-term interest rate, measured by the effective federal
funds ratea (yields in percentage per annum);
IP :the level of industrial production.
Let NSRt be the monthly stock returns of the assigned company. Consider
the following regression model:
NSRt = β1 + β2 · FEDt + ut, (1)
where FEDt is assumed to be a stationary series.
1. Report the time series plots of the series and the scatter plot. Comment
on the graphs. [10%]
2. Use Ordinary Least Squares (OLS) to estimat.
4. USING HAC METHOD TO CORRECT
HETEROSKEDASTICITY AND SERIAL CORRELATION
(FIXING THE ERRORS)
QUESTION 5-USING CHOW TEST TO TEST WHETHER THE
FINANCIAL CRISIS AFFECTED THE RELATIONSHIP
QUESTION 6-REGRESSION OUTPUT FOR MODEL 2
QUESTION 7: WALD TEST FOR TESTING JOINT
HYPOTHESIS
6. .1
.2
.3
808284868890929496980002040608
NRSt
PROFESSOR'S COMMENTS.docx
1. In question 2, the model requires you to use the monthly
stock returns to do the regression. By contrast, it is evident that
you have used nominal stock prices instead of returns. This is
totally wrong. You have not even made reference to the
Discounted Cash flow model
2. In question 3 you are required to plot the actual values, the
fitted values (predicted values) and the residuals and comment
on model fitting. I am afraid that it apparently appears that you
have not done so
3. You have not answered question four
4. You have not answered question five
5. Where is the answers for questions 6 and 7. To be precise
the test for joint hypothesis required in question 7 is not shown
and the outcome and the conclusions there in.
ECONOMETRICS ASSIGNMENT.pdf
INSTRUCTIONS
Word Limit 2500 words (excluding appendix and reference list)
Refer to the Journal Article Attached in the email as a guide on
how to report
the results of the data analysis.
E-VIEWS is the preferred software for data analysis but if you
are not
7. conversant with it you can use STATA or SPSS.
The deadline for this assignment is midday 21
st
,November 2016.
1
You have been allocated monthly time-series data for the United
States
over the period January 1980-December 2009. The data refer to
the following
variables:
S :the nominal stock price of a given company;
FED :the nominal short-term interest rate, measured by the
effective federal
funds ratea (yields in percentage per annum);
IP :the level of industrial production.
Let NSRt be the monthly stock returns of the assigned
company. Consider
the following regression model:
NSRt = β1 + β2 · FEDt + ut, (1)
8. where FEDt is assumed to be a stationary series.
1. Report the time series plots of the series and the scatter plot.
Comment
on the graphs. [10%]
2. Use Ordinary Least Squares (OLS) to estimate the regression
model
(1). Report and discuss your results with reference to the
Present Value
Theory, also known as Discounted Cash Flow Modelb . [20%]
3. Plot the actual values, the fitted values and the residuals and
comment on the model fitting. [10%]
4. Analyze the regression output applying the appropriate
diagnostic
tools. Will your answer for question 2 remain the same when
potential diagnostic problems are taken into account? [15%]
5. The most intense period of the recent financial crisis lasted
between
September 2007 and March 2009. Test whether the relationship
between
stock returns and interest rate has been affected by the financial
crisis,
i.e. if the relationship before and during the crisis can be
considered
statistically different. [15%]
a For more information please see
https://research.stlouisfed.org/fred2/series/
FEDFUNDS
9. b See C. Ioannidis and A. Kontonikas (2008) The impact of
monetary policy on stock
prices, Journal of Policy Modelling 30, 33-53.
https://research.stlouisfed.org/fred2/series/FEDFUNDS
https://research.stlouisfed.org/fred2/series/FEDFUNDS
2
Consider the following extension of Model (1):
NSRt = β1 + β2 · FEDt + β3 · GINDt + ut (2)
where GINDt is the monthly growth rate of the industrial
production.
6.Use OLS to estimate the above relationship and report the
results. Compare the fit
of the two alternative models (Model (1) and Model (2)) and
comment. [15%]
7.Test the joint hypothesis that: H0 : β2 = β3 = 0 at the
5% level of
significance and comment on the test outcome. [15%]
10. Global Marketing. By: Gould, Marie, Research Starters:
Business (Online Edition), 2015
Database:
Research Starters
11. Global Marketing
Listen
This article will focus on how organizations can position
themselves for successful global marketing. When entering the
global market, social, economic, political, technological, and
institutional factors are added into the equation as multinational
corporations develop global marketing strategies. In order to be
successful in global marketing, organizations will have to
integrate their marketing initiatives into different countries.
Given the changes that are occurring in the way business is
conducted today, marketing professionals must be prepared to
create campaigns that appeal to a global clientele. Global
marketing is successful when there is coordination between the
marketing policies for different countries and when the
marketing equation for different countries can be adapted to the
local market.
Overview
There is much activity between people, products, and
organizations crossing over borders, which has led to the
creation and growth of new global market segments. In addition,
there are many forces that are transforming markets and
changing the way that business is conducted. Factors that
influence marketing include the marketing environment, the
types of customers, and the competition in the market. When
entering the global market, social, economic, political,
technological, and institutional factors are added into the
equation as multinational corporations develop global marketing
strategies.
In most cases, global marketing generally manifests itself in
two different phases (Caslione, 2003). The first phase is usually
when an organization experiences rapid growth, high sales and
high profits. During this period, there tends to be an increased
level of competition for limited resources. In addition,
customers, suppliers and governments tend to be difficult to
work with, and it is hard to develop relationships among these
groups. However, "there is a specific infrastructure and unique
12. behavioral mode of collective thinking and actions, which is
referred to as the accelerated reactivity phase of globalization"
(Caslione, 2003, p. 1).
The second phase occurs when an organization experiences
slower economic growth, lower sales and profits, and reduced
competition for limited sources. During this period, it is easier
to gain access to customers, suppliers and governments.
Collaboration between these three groups is positive as all are
attempting to find ways to improve the situation. Unlike the
first phase, this period is categorized as a "decelerated
proactivity phase of globalization due to a different type of
infrastructure and behavioral mode dominating" (Caslione,
2003, p. 2).
Caslione (2003) believes that successful marketing
professionals will be able to recognize and master the two
different phases mentioned above by:
· Measuring results within each country and region;
· Using a combination of marketing communication media;
· Using a globally centered mix of communications, marketing
and advertising;
· Building the corporate brand globally, country by country; and
· Appointing an experienced, highly motivated multicultural
marketing team.
Marketing professionals will be required to understand the
marketing concepts and practices needed to penetrate the
political, economic, and social environments of potential
markets (Kahle, Marshall & Kropp, 2003). In the era of global
marketing, many organizations will be challenged to keep
abreast of events effecting the marketing environment if they
want to survive (Lin & Kao, 2004). In order to be successful in
global marketing, organizations will have to integrate their
marketing initiatives into different countries.
Preparing Marketing Professionals
Given the changes that are occurring in the way business is
conducted today, marketing professionals must be prepared to
create campaigns that appeal to a global clientele. Globalization
13. is reshaping business strategy, especially marketing strategy,
and marketing professionals will have to transition from a
domestic focus to a global focus (Caslione, 2003). It will be
imperative for marketing professionals to become well versed in
the profiles of different segments that their organization plans
to pursue. Unfortunately, many in the field are not prepared to
make the transition. In a study conducted by the Massachusetts
Institute of Technology, researchers found that 29% of the
organizations surveyed did not have enough global marketing
leaders in their organizations, 56% of the organizations believed
that they did not have sufficient numbers of global marketing
leaders to take their organization to the next level, and 80%
were concerned that they lacked the global marketing
professionals needed to staff their global marketing initiatives
(Caslione, 2003). Therefore, marketers will need to upgrade
their skill set in the field in order to be competitive in the
market. As the marketing professionals become equipped for the
challenge, they will be tasked to deal with the issues that have
arisen in the field.
Application
Global Marketing Strategies
Globalization is not a new trend (IMF, 2002). With the prospect
of conducting business on a global scale, global marketing
professionals should create global strategies that will allow
their organizations to reap the benefits instead of getting
trapped by the pitfalls. In order to be successful in global
marketing, organizations will have to integrate their marketing
initiatives into different countries. Reddy and Vyas (2004)
created a list of advantages and disadvantages of globalization
as it pertains to marketing; information that is beneficial as
global marketing professionals continuously improves upon
their strategies in order to stay competitive.
Advantages
· Globalization leads to more economic growth. Economic
growth is important to every country because it makes them feel
strong, safe and secure. Effective marketing approaches will
14. lead to economic growth. Therefore, marketing is essential for
economic growth and development (Reddy, 1996), and a major
reason for globalization for multinationals, governments, and
United Nation agencies.
· Globalization causes rapid technology transfer. Rapid
technology transfers from one country to another are a result of
increased globalization. Once there is a transfer of an
organization's management and logistic expertise, there is
potential for improvement in efficiency and reduction of costs
for products and services across the world.
· Globalization is becoming effective as a result of more
countries becoming democracies. There were many communist
countries seeking a democratic state after the fall of the Soviet
Union. In a globalized economy, democratization became easier
than in a closed communist world where the information flow is
restricted.
· The rapid spread of free enterprise system. Capitalism has
been key in the success of the United States and western
countries, and many countries desired to pursue their model in
order to own and operate business corporations.
· Unification of culture, living norms, and work ethic. Values
and work ethics are becoming homogenous as a result of
globalization, which has led to improved marketing
effectiveness.
· Globalization will flourish as a result of increased
communication through the Internet and other media. The
Internet has provided many organizations with the ability to
transmit media files quickly, which allows them to operate on
an international level. Corporations can share who they are,
what they market and how customers may obtain their product.
· Instant news worldwide. Satellite and Internet
communications, such as CNN and MSNBC, allows everyone to
see news 24 hours in several languages. International media
eliminates barriers to information flow.
· Worldwide improvement of health and living conditions.
Globalization has brought improved quality of life throughout
15. the world. Many products and services can be shared across the
world with a mutual exchange of information.
· People are living longer. Life expectancy rates have increased
across the world due to medical breakthroughs and new
products that encourage health benefits. Globalization provides
this type of information to an international audience.
· Multinational corporations are the greatest beneficiaries of the
globalization trend. Corporations have the ability to use the
same advertising themes and customize them for different
countries by using marketing and distribution strategies to
transfer the same message throughout the world.
Disadvantages
· Increasing unemployment in developed countries.
Globalization has caused the unemployment rate to rise in
developed countries because corporations outsource and
manufacture their products outside of their countries. According
to Cateora (2002), there has been an increase in protests against
global organizations such as WTO and IMF because there is a
perception that "globalization creates global worker
exploitation, cultural extinction, higher oil prices, and
diminished sovereignty of nations" (p. 51).
· Increasing trade deficit in developed countries. Increased
imports of manufactured goods and services from other nations
have led to trade deficits.
· Terrorism. Since people are able to migrate between countries
so freely, there has been an increase in terrorism from other
countries.
· Loss of competitiveness in developed nations. Technology
transfer has allowed underdeveloped countries to go from
traditional manufacturing to modern manufacturing, which
brings underdeveloped countries to the same level as the
developed countries that provided them with the technology.
· Poorer nations feel that they are being taken advantage of by
advanced nations. Poor countries have limitations in education,
healthcare, and transportation, which keep them in a poor state
(Kenny, 2002). Pirages (2000) believes that there are other
16. issues (such as weakening of political authority without
substitutions, increase of economic maladies, and destruction of
culture) that create problems for poorer countries.
· Increasing economic gap between the rich and poor nations.
Many poor countries believe that globalization has given the
Western world more control over their economies. Rich
countries tend to use cheap labor to get richer and do not help
the poorer countries.
· Tradition and religion based countries feel that their norms
and religious practices are violated. Some citizens believe that
corporations will do anything to make a profit, even if it means
violating some of their cultural practices and values.
· Comparison with rich nations makes poorer nations unhappy.
With the increased use of satellites, citizens of the poorer
countries have the opportunity to see the quality of living in the
countries where corporations reside. When comparing the two
ways of living, the citizens of the poorer countries perceive that
they are being exploited in order to make the corporations and
quality of life for their countries richer.
· Increasing pollution through manufacturing and transport
worldwide. When corporations grow, there is an increase in
manufacturing and traffic, which results in an increase in
pollution. As a result, the pollution spreads globally.
· The spread of Aids, West Nile virus, various kinds of flu and
other diseases. Globalization increases the rate of diseases.
· As organizations develop their global marketing strategies,
they will need to be mindful of the above-mentioned advantages
and disadvantages of globalization as they relate to the
countries that have been identified as their target markets.
Overseas Expansion
Licensing, franchises and joint ventures that are undertaken
overseas are sometimes refered to as global marketing.
· Licensing. Licensing occurs when a target country grants the
right to manufacture and distribute a product under the
licenser's trade name in a target country. The licensee pays a fee
in exchange for the rights. Small and medium-sized companies
17. tend to grant licenses more often than large companies. Since
there is little investment required, licensing has the potential to
provide a large return on investment. However, it is seen as the
least profitable way to enter the market because most companies
use licensing to supplement manufacturing and exporting.
Licensing tends to be a viable option to enter a the market when
the exporter does not have sufficient capital, when foreign
government import restrictions forbid other ways to enter the
market or when a host country is not comfortable with foreign
ownership.
· Franchises. According to Edwards (2006), there are a number
of reasons why a franchise may consider going global, and some
of these reasons include opportunities to: "Build more brand and
shareholder value, Add revenue sources and growth markets,
Reduce dependence on the company's home market, Leverage
existing corporate technology, supply chains, know-how and
intellectual property, and Award more franchises in the home
country by being global."
· Joint Ventures. Joint ventures occur when an organization
enters a foreign market via a partnership with one or more
companies already established in the host country. In most
cases, the local company provides the expertise on the target
market while the exporting company manages and markets the
product. A joint venture arrangement allows organizations with
limited capital to expand into international markets, and
provides the marketers with access to its partner's distribution
channels. According to QuickMBA.com, "Key issues in a joint
venture are ownership, control, length of agreement, pricing,
technology transfer, local firm capabilities and resources, and
government intentions. Potential problems include conflict over
new investments, mistrust over proprietary knowledge, how to
split the pie, lack of parent company support, cultural clashes,
and when and how to terminate the relationship" if it is
necessary to take such action (2007).
Table 1
Viewpoint
18. Fair Trade Marketing
Fair trade marketing provides consumers with the opportunity to
pay higher prices for imported goods so that producers in
developing countries can have a decent standard of living
(Witkowski, 2005). Supporters of this philosophy believe that
prices need to be high enough so that multinational corporations
in developing countries can have a living wage, safe working
conditions and human dignity. In addition, there is a belief that
trading has become unfair because the cost for developing
global commodities has been undervalued when compared to
commodities imported from industrialized countries.
When reviewing the concept of fair trade, it is important to
analyze various ideological viewpoints. One could compare fair
trade to antiglobalization; marketing management, ethical
sourcing and ethical consumerism in order evaluate the different
opinions and arguments on the topic. Witkowski (2005) has
summarized some of the views by comparing and contrasting
the positions.
Conclusion
Organizations that conduct business on a global level realize
that it tends to be more complex, competitive, and difficult to
manage. When entering the global market, social, economic,
political, technological, and institutional factors are added into
the equation as multinational corporations develop global
marketing strategies. The companies that successfully master
these challenges tend to be recognized for their best practices
and excel in global marketing (Caslione, 2003).
Globalization is reshaping business strategy, especially
marketing strategy, and marketing professionals will have to
transition from a domestic focus to a global focus (Caslione,
2003). Unfortunately, many in the field are not prepared to
make the transition. Therefore, marketers will need to upgrade
their skill set in the field in order to be competitive in the
market. As the marketing professionals become equipped for the
challenge, they will be tasked to deal with the issues that have
arisen in the field.
19. The Fair Trade Movement promotes trading partnerships, and
there are organizations that work to make this effort successful.
Common themes among these organizations include helping
disadvantaged producers; promoting gender equity, transparent
relations, and economic and environmental sustainability;
reforming conventional international trade relationships; and
creating consumer awareness of these issues (Witkowski, 2005,
p. 24).
Witkowski (2005) presented the principles and goals of fair
trade as defined by three organizations, and the results are
listed below.
Table 2 International Fair Trade Association (IFAT), Fair Trade
Federation & Ten Thousand Villages
Terms & Concepts
Branding: Working to associate a feeling or awareness to a
product or service through the application and use of a name
and logo; aimed at increasing a product or service's visibility.
Fair Trade Marketing: A philosophy that supports the marketing
and sale of products at greater than fair trade prices.
Franchises: Branches of a main company or business which are
run and owned by individual entrepreneurs in the manner of the
Authorization granted to someone to sell or distribute a
company's goods or services in a certain area.
Global Marketing: International efforts undertaken by
corporations, mostly in the form of licensing, franchises and
joint ventures, to expand their product and service offerings
overseas.
Globalization: The movement away from solely regional or
local phenomena to those that are worldwide in scope.
Globalization has been facilitated by vast improvements in
technology.
Information Flow: Refers to the way in which data is collected,
processed and reported throughout an organization.
Joint Ventures: A partnership or conglomerate, formed often to
share risk or expertise.
Multinational Corporations: Refers to a business organization
20. which operates within more than one country.
Bibliography
Alden, D. L., Kelley, J. B., Riefler, P., Lee, J. A., & Soutar, G.
N. (2013). The effect of global company animosity on global
brand attitudes in emerging and developed markets: does
perceived value matter?. Journal of International Marketing,
21(2), 17-38. Retrieved November 15, 2013, from EBSCO
Online Database Business Source Complete.
http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct
=true&db=bth&AN=87742599&site=ehost-live
Caslione, J. (2003). Globalization demands new marketing
skills. Marketing News, 37(14), 7-8. Retrieved May 22, 2007,
from EBSCO Online Database Business Source Complete.
http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct
=true&db=bth&AN=10089707&site=ehost-live
Cateora, P. & Graham, J. (2002). International marketing, 11th
ed. New York: McGraw-Hill.
Edwards, W. (2006). Why go global? Franchising World,
38(12), 38-40. Retrieved May 22, 2007, from EBSCO Online
Database Business Source Complete.
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=true&db=bth&AN=23508136&site=ehost-live
Ersun, A., & Karabulut, A. (2013). Innovation management and
marketing in global enterprises. International Journal of
Business & Management, 8(20), 76-86. Retrieved November 15,
2013, from EBSCO Online Database Business Source Complete.
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=true&db=bth&AN=91583049&site=ehost-live
Gao, T., & Shi, L. (2011). How do multinational suppliers
formulate mechanisms of global account coordination? an
integrative framework and empirical study. Journal of
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2013, from EBSCO Online Database Business Source Complete.
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=true&db=bth&AN=67729121&site=ehost-live
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http://globalization.about.com/library/weekly/aa080901.ahtm.
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=true&db=bth&AN=11902084&site=ehost-live
Kenny, C. (2003). Development's false divide. Foreign Policy,
January/February, 76-77.
Kolk, A. (2014). Linking subsistence activities to global
marketing systems: The role of institutions. Journal of
Macromarketing, 34(2), 186–98. Retrieved November 17, 2014,
from EBSCO Online Database Business Source Complete.
Lin, C., & Kao, D. (2004). The impacts of country-of-origin on
brand equity. Journal of American Academy of Business,
Cambridge, 5(1/2), 37-40. Retrieved May 22, 2007, from
EBSCO Online Database Business Source Complete.
http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct
=true&db=bth&AN=13200704&site=ehost-live
Pirages, D. (2000). Globalization: A cautionary note. Retrieved
on May 24, 2007, from
http://www.aaas.org/spp/yearbook/wooo/ch9.pdf.
Reddy, A., & Campbell, D. (1996). Marketing's role in
economic development. Connecticut: Quorum Books.
Reddy, A., & Vyas, N. (2004). The globalization paradox: A
marketing perspective. International Journal of Management,
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Database Business Source Complete.
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Steenkamp, J.-B. (2014). How global brands create firm value:
The 4V model. International Marketing Review, 31(1), 5–29.
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EBSCO Online Database Business Source Complete.
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Suggested Reading
Field, A. (2007). Breaking down barriers. Journal of Commerce,
8(16), 28-28. Retrieved May 22, 2007, from EBSCO Online
Database Business Source Complete.
http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct
=true&db=bth&AN=24872329&site=ehost-live
Hult, G., Cavusgil, S., Kiyak, T., Deligonul, S., & Lagerström,
K. (2007). What drives performance in globally focused
marketing organizations? A three-country study. Journal of
International Marketing, 15(2), 58-85. Retrieved May 22, 2007,
from EBSCO Online Database Business Source Complete.
http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct
=true&db=bth&AN=25020790&site=ehost-live
Laser, R. (2007). BP takes global branding role away from
marketing. Marketing Week, 30(5), 3-3. Retrieved May 22,
2007, from EBSCO Online Database Business Source Complete.
http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct
=true&db=bth&AN=24013433&site=ehost-live
Yung K. C. & Schellhase, R. (2014). Exploring globalization
and marketing performance at the 2012 Global Marketing
Conference in Seoul. Journal of Business Research, 67(10),
2053–5. Retrieved November 17, 2014, from EBSCO Online
Database Business Source Complete.
~~~~~~~~
Essay by Marie Gould
Marie Gould is an Associate Professor and the Faculty Chair of
the Business Administration Department at Peirce College in
Philadelphia, Pennsylvania. She teaches in the areas of
management, entrepreneurship, and international business.
Although Ms. Gould has spent her career in both academia and
corporate, she enjoys helping people learn new things --
23. whether it's by teaching, developing or mentoring.
Copyright of Global Marketing -- Research Starters Business is
the property of Great Neck Publishing and its content may not
be copied or emailed to multiple sites or posted to a listserv
without the copyright holder's express written permission.
However, users may print, download, or email articles for
individual use.
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25. challenge for all companies. If we failed to innovate in the
Internet era,
we would be left behind by this era.
I want to make three points. First, I will describe how
successful compa-
nies move with the changing times. To survive, all companies
must
keep up with the times. Because things change too quickly, we
must
never stop challenging and conquering ourselves. Second, I will
talk
about what innovation efforts Haier has undertaken in the
Internet era.
Third, I will discuss a problem we haven’t found a good
solution to until
this day. This is a very risky challenge to take on: it can help
you reinvent
yourself; but if not handled well, it might overturn you. I don’t
know
how far our company has gone. Even though I’m very confident,
this era
is indeed very difficult to grasp.
Successful Companies Move with the Changing
Times
A so-called successful company is one that has managed to stay
in
tune with the changing times. However, it is impossible to
always keep
in tune with the times because we are only human and not god.
A
company is like a surfer. Being able to rise to the top of a wave
today
does not guarantee that you will still stay on top of it tomorrow.
26. For
instance, in the cell phone industry, Motorola used to be number
one.
But it was soon surpassed by Nokia. The reason lies in the
changing
times. Motorola ruled the analog era, but Nokia seized the
opportu-
nity of the digital era. However, Nokia was soon surpassed by
Apple as
Apple was able to seize the opportunity of the Internet era. If
you fail
to move with the changing times, you will be phased out very
quickly.
This is especially true in the Internet era. I have a feeling that
this age will
bring about a total disruption.
The 200-year-old traditional management models are being
smashed
into pieces in the Internet era because their foundation is Adam
Smith’s
division of labor theory, which explains how small workshops
are trans-
formed into modern corporations. This theory is also the root of
theories
by three pioneers of classical management thinkers: (1)
Frederick Taylor’s
scientific management, which is the foundation of the assembly
line,
(2) the father of organization theory, Max Weber’s, idea of
bureaucracy,
which still has currency today, (3) Henri Fayol’s general
management
theory, which, in essence, is about applying various functions
within a
27. business to adapt to its external market.
With the arrival of the Internet era, I think all these theories
have been
overturned. Reason number one: zero distance. A business needs
to be
at zero distance to its customers. Therefore, production lines
must be
reformed to enable the transition from mass manufacturing to
mass
customization. Second, decentralization. In the Internet era,
anyone
can become a center, so there are really no centers nor leaders.
There-
fore, bureaucracy must be changed. Third, distributive
management: I
have access to resources from around the world. The entire
world is my
human resources department. As you can see, those general
manage-
ment theories are no longer relevant today. We are witnessing
gigantic
changes.
Greek philosopher Heraclitus said, “No man ever steps in the
same river
twice.” This is because the river flows too quickly. The current
era is like
the incessant currents of a river. This is an important reason
why Haier
must change.
Haier’s Trial and Error in Business Model Innovation
When Professor Meyer came to Haier 10 years ago and learned
about
28. the changes I was planning to implement, he said: if you
managed to
change this way, you would become an excellent global
company, but
I don’t think you could, because of the sheer magnitude of the
disrup-
tion it would cause. This is exactly why we haven’t managed to
change
the way we wanted after so many years. Due to time constraints,
I will
address only three highlights in our ongoing experiments: (1)
strategic
shift, (2) organizational shift, (3) change in our remuneration
system.
Reflections on Managing a Multinational
Corporation in China: Business Model Innovations
of the Internet Era
Zhang Ruimin, Haier Group, China
4 AIB Insights Vol. 15, No. 2
Strategy: Shifting to a Customer-Centric Win-Win Model of
“Individual-Goal Combination”
Companies used to be company-centric in the past. But in the
Internet
era, things have changed and we must put customers at the
center.
To adapt to the customer-centric reality, we adopted a strategy
that
we call “the win-win model of individual-goal combination.”
“Individual”
refers to the employee; “goal” refers to customer resources. The
29. strat-
egy is about connecting each employee with their customer
resourc-
es. “Win-win” refers to the fact that you prove your value by
creating
value for customers. What is so difficult about this multi-year
effort to
implement this strategy? The difficulty lies in how employees
find their
customers. Management guru Peter Drucker said that all
companies
must ask themselves a couple of questions, the first of which is:
who
is your customer? The second question is: what is the value that
you
create for your customer? As one can well imagine, it is very
hard to
make each and every one of your employees find their own
customers.
We’ve been working at this for a long time.
We’ve overturned our old pyramid-shaped organizational
structure,
where employees at the bottom had many leaders above them
and
were unable to make their independent decisions. Now that they
are
liberated, they can find their customers and start an enterprise
as long
as they have their own ideas. Thus, employees at the bottom can
go
solo and start their own business.
For example, we have three young people in their twenties who
discovered an opportunity in the gaming laptop segment. Many
30. gaming laptop users are technology aficionados and have their
own
ideas about how gaming laptops should be built. These three
young
people found about 30,000 such ideas online and categorized
them
into 13 types of problems. To address these problems, they
invented
a new gaming laptop. All other resources are available in the
wider
business community: design, R&D, manufacturing. As long as
you have
your customers, you can have other people make things for you.
This
gaming laptop, which is named ThundeRobot, is a product of
resources
integration from the wider business community. It started from
scratch
and is now among the best in its category.
What is it that empowered these three young people? First, the
power
to decide. Second, the power to hire. Third, the power to
distribute
remuneration. With these three powers, they managed to
succeed.
Some venture capitalists are investing in their project. We
would like to
see it become an entirely independent operation. Many other
employ-
ees have started their own companies. We regularly hold Maker
Fairs,
an occasion for venture capitalists in the wider business
community to
evaluate new projects. This is how we are breaking down old
31. organi-
zational structure. Our philosophy is: “I create my customers
and share
the extra value that I create.” When employees find their own
customers
and create value for them, they can share part of the value they
created.
We believe that “the company is the people; the people are the
company.” Every entrepreneur can start their own business. This
is a
far cry from traditional management theory. In traditional
manage-
ment theory, there are three essential factors: the subject of
manage-
ment, the object of management, and the means of management.
The
subject of management is the manag-
er. The object of management is the
managed. The means of manage-
ment is the models and tools
used by the manager to manage
the managed. This is a closed
system. Now I’m turning
it into an open system
where everyone can start
their own business and
thereby overturning
the old organization.
32. Organization: Shifting to a Community of Interest That
Maximizes
Benefit for All Stakeholders
The organizational structure used to be connected in series; now
it
is connected in parallel. Why this change? Business historian
Alfred
Chandler said it brilliantly: the growth of a business depends on
two
variables, strategy and organization. He also advanced the
“structure
follows strategy” thesis. Strategy follows and is designed for
the chang-
ing era. The organization changes with the changing strategy.
Now
that our strategy has changed, the organization needs to change.
In
the past, the organization is connected in series: from planning,
design,
marketing, finally to the user. There are many gears between
planning
and the user. These gears do not know where the user is. They
are the
intermediaries within the company. There are also
intermediaries in
the wider business community. For example, suppliers and
distributors
are intermediaries that the company needs to deal with.
Anyway, the
company is far away from the user. Now we need to bind the
company
and the user together. Other resources also need to change so
that they
can best satisfy customer demand. Together they form a
community of
33. interest.
The first characteristic of this community of interest is that
resources
can enter it without any barrier. When you enter it, you must be
able to
“
We’ve overturned our old pyramid-shaped
organizational
structure, where employees at the bottom had many
leaders
above them and were unable to make their
independent decisions ”
Vol. 15, No. 2 AIB Insights 5
create user resources. Second, all partners in this community
should be
able to get maximized benefit. In the past, the company and its
suppli-
ers used to engage in a tug-of-war: I would use whoever offers
the least
expensive materials. But now, I will use whoever can
participate in the
initial design process. For example, steelmakers can participate
in the
initial design process by offering expertise on what kind of steel
is best
for my product – I have expertise on the product itself but they
can offer
better solutions when it comes to choosing the right kind of
steel. This
34. process maximizes benefit for all. There is a brilliant saying:
“Whatever
cause it is, if not all participants are benefited, it will not
succeed.” Even
if it did succeed, it would not last long. We have now turned the
tug-of-
war into a cooperative relationship. This is not a static
relationship as
whoever does a good job can join us.
We have a notion: to eliminate the external middleman and the
internal
“insulated walls.” The middleman is useless. The insulated
walls are the
middle managers. Charles Handy said that the middle managers
are
cooked geese. They have no sensitivity and are unable to
communicate
the reality of the market. That’s why we downsized by 16,000
people
last year. At the beginning of last year, Haier had an 86,000-
strong
workforce. By year-end, we had 70,000, an 18% cut. This year
we expect
to further downsize by 10,000 people. These will be primarily
middle
managers as well as jobs rendered unnecessary by automation.
Remuneration: Linking Pay to an Individual’s Value Creation in
a
“People-Goal-Pay Combination”
When both strategy and organization have been reformed,
whether you
can continue to improve depends on remuneration. How does
every-
35. one get paid? In the past, we used the broadbanding system that
is
popular worldwide. A large global company customized this
system for
us. But even after the customization, we feel that it has a big
problem: in
the broadbanding system, everyone gets their pay based on their
job or
position. In other words, the calculation of pay is based on job
and work
time. Now we are using a two-dimensional dot chart. The
horizontal axis
represents the company’s value, which are the conventional
indicators
such as revenue, profit, market share, and so forth. What’s
important is
the vertical axis, which is based on Metcalfe’s law about the
network
value. What is the definition of the network value? The network
value is
proportional to the size of the network squared.
What is the size of a network? There are primarily two
variables: (1) the
nodes in the network and (2) the users connected to the
network. That’s
why we are turning every employee in the company into a node
in
the network. As a node, you need to connect with users in the
market.
Whoever gets connected with more users can make bigger
achieve-
ments. In a sense, even if you generate revenue and profit, but
are not
connected to users, your revenue and profit are not valid. This
is a quali-
36. tative change. Everyone must be connected with users in the
market.
More importantly, I believe the conventional 360-degree
evaluation
system widely in use by many multinationals where employees
are
evaluated by their superiors, subordinates, and peers are totally
useless
here in China. Why? Because in China, we have guanxi. For
example, if
you tell a co-worker: “I will give you a very good evaluation,”
then that
person will most likely do the same for you. In this way, co-
workers
collude with each other, rendering the 360-degree useless. We
have
changed that and now we depend on direct evaluation by users.
We used to have a big, dedicated team that organized 360-
degree
evaluations. But I felt that was twice the effort for half the
result. Now we
have users evaluate us. When they say we’re good, we are truly
good.
For example, we promised to give away a product for free if it
is not
delivered on time. If it is supposed to be at your doorstep by
7pm but
arrives after 7pm, it is yours for free. Why pays for it then?
Whoever is
responsible for the late delivery. Thus, we got the ball rolling.
Last year,
we delivered more than 780,000 orders. Only 58 orders were
given away
37. for free – less than one in 10,000. This system is up and
running. Now we
are pushing this further: if users click the “like” button on you,
you will
get a bonus; if they make a complaint about you, you will get
criticized.
What are our next steps after strategy, organization, and
remuneration?
We have three goals: to build a platform-based enterprise, to
develop
entrepreneurial maker employees, to provide customized user
experi-
ence.
Building a Platform-Based Enterprise
What was a company all about in the past? It was all about
managing
and controlling. Today, the company should become a platform.
There
are many definitions for the idea of platform. The one that I
agree with
is that a platform is a framework for fast resource mobilization.
When
a variety of resources join a platform, it becomes an open
ecosystem
with its own cycle. To build a platform-based enterprise, we are
in fact
changing an isolated business into an open ecosystem where you
can
integrate resources globally to achieve your goal.
Developing Entrepreneurial Maker Employees
This is a shift from a passive implementer to a self-motivated
38. entrepre-
neur. This is also a far cry from the past.
Providing Customized User Experience
In the mobile Internet era, customers are not going shopping;
they are
shopping all the time. They don’t have to go to a shopping mall;
they
can shop anywhere they want. What’s more, an individual
customer
has now become an individual “center” that publishes their
shopping
experience in real-time to the entire world. That’s why you must
be
customer-centric. To provide customized user experience is to
satisfy
the individual needs of each customer.
Lastly, from a philosophical viewpoint, as Immanuel Kant said,
people
are the ends, not the means to an end. What a brilliant
observation.
Whoever he or she is, whenever it is, all people, including
yourself, must
6 AIB Insights Vol. 15, No. 2
not treat all people, including yourself, as means—because
people are
ends in themselves. On an assembly line, people are treated as
means.
Now we must treat people as ends.
39. Paradoxes in the Innovation Process
Kevin Kelly, a founding editor of Wired magazine, gave us a
talk at Haier
recently, and I had a discussion with him. He said that in the
Internet era,
traditional companies are at the peak of hills and they must
abandon
their old ways, nosedive to the valley, and then climb up the
new peak
that is the Internet. But I think this is very difficult, if not
impossible,
to do. Why? Let’s take Haier as an example. If we took a
nosedive to
the bottom of a valley from where we are now with about 30
billion in
revenue, we wouldn’’t even be able to pay our workers. I cannot
afford
to wipe out the entire company and start from scratch again.
Without
going to such length, if I instead just do quick fixes here and
there and
try to keep the status quo, I wouldn’t be able to reach the peak
of the
Internet. That’s why we are now both breaking and building. As
we
break things, we are also building things so that the structure of
the
entire company will finally change.
We are hoping to become an ecosystem, as I discussed just
before. If
I compare each entrepreneurial employee to a tree, many trees
form
a forest. In this forest, some trees thrive today, some others die
tomor-
40. row. In general, the forest is ever-growing. When I was
conversing
with Provost Price of the University of Pennsylvania, we talked
about
the differences between Chinese and American companies. I
think
the biggest difference is that the U.S. has an environment
conducive
for entrepreneurship whereas China’s entrepreneurship
environment
is problematic. Even in the American environment, some
companies
survive and some die. I’m hoping that our company will
eventually
become an ecosystem providing such an environment.
To conclude, I’d like to quote The Book of Changes, a 3100-
year-old
Chinese book: “Overturning obstruction, instead of being
overturned
by obstruction. Overturning obstruction: first there is
obstruction, after-
ward joy.” Obstruction means being closed and isolated.
Overturning
obstruction means changing the status of self-isolation and
becoming
open. Not being overturned by obstruction means to avoid
suffocat-
ing yourself, as suffocation leads to death. Therefore, the best
way is to
reinvent yourself. The final result is obstruction first and joy
afterwards.
At first, the situation is closed and isolated. But with hard work,
you will
achieve joy and success. I hope all companies in this Internet
era will
41. achieve joy after overturning obstruction and succeed in their
self-
reinvention.
Zhang Ruimin is a world renowned entrepreneur, founder of
Haier
Group, Secretary of the Party Committee of the Haier Group,
Chair-
man of the Board of Directors and CEO. Zhang Ruimin is the
alter-
native member of the 16th, 17th and 18th Central Committees of
the Communist Party of China. Details at
http://www.haier.net/en/
about_haier/ceo/introduction/
chapter
six
ANALYSING
COMPETITION
INTRODUCTION
All firms have strategic windows and some of these windows
open out on
to markets that are shared with other firms. Where windows
share views
over the same market, competition exists. It is important to
understand
how different firms view the same market since their perceived
and actual
windows of opportunity will not all be the same.
42. The nature of competition and the factors which influence it are
explored along with how firms identify competitors and how
they use
product positioning to obtain a competitive advantage.
Attention is paid
to how firms define their marketing strategies and analyse the
competitive
positions of rivals. Consideration is given to the various sources
of
information available to firms that enable them to gauge
competitors’
strengths and weaknesses.
Success in the market place depends not only on an ability to
identify
customer wants and needs but also upon an ability to be able to
satisfy
those wants and needs better than competitors are able to do.
This
implies that organizations need to look for ways of achieving a
differential
advantage in the eyes of the customer. The differential
advantage is often
achieved through the product or service itself but sometimes it
may be
achieved through other elements of the marketing mix.
Following a definition of what is meant by competition,
attention in
this chapter is given to Porter’s five forces model to portray the
various
factors which influence competition and how this influence is
effected.
43. ANALYSING COMPETITION 103
NATURE OF COMPETITION AND
IDENTIFICATION OF AN ORGANIZATION’S
COMPETITORS
Competition is the process of active rivalry between the sellers
of a particular
product as they seek to win and retain buyer demand for their
offerings. The
operational definition of competition, however, hinges upon the
meaning of
‘a particular product’.
The identification of an organization’s competitors may not be
as simple
or as obvious as it might at first sight appear. The most obvious
competitors
are those which offer identical products or services to the same
customers.
However, substitute products and services highlight the nature
of indirect
competition which must also be taken into account. Five levels
of competition
have been suggested: direct competition, close competition,
products of a
similar nature, substitute products and indirect competition.
Factors influencing competition
Industries have distinctive idiosyncrasies of their own and these
idiosyncrasies
alter over time. They are often referred to as the dynamics of
the industry.
No matter how hard a company tries, if it fails to fit into the
44. dynamics of the
industry, ultimate success may not be achieved. Porter (1985)
sees
competition in an industry being governed by five different sets
of forces
(Figure 6.1).
Citing these five ‘forces’ is rather arbitrary, since a sixth force,
government
regulation, is often the most significant influence in
determining the
p r o f i t a b i l i t y o f a n i n d u s t r y. I n f a c t , w h e n
Po r t e r s t u d i e d t h e
pharmaceuticals and airline industries he discovered that
government regulation
Actually identifying competition may not always be quite
straightforward. It is
important to be able to correctly identify different types of
competitors so that suitable
reaction to their marketing strategies and tactics can be put into
practice as and
when required.
The various bases of competitive advantage are discussed and
reference is made
to Porter’s strategic thrust typologies. This is then followed by
a discussion of the
various typologies of competitors that can be identified and the
kind of strategy each
one employs. Finally, the chapter ends by looking at how to
assess competitors’
strengths and weaknesses and the sources of information that
should be consulted to
make this possible.
45. Various competitor typologies are considered—leader,
challenger, follower,
nicher—along with their implications for approach to marketing
strategy. Attention
is then given to ways and methods of obtaining information
about competitors’ actual
and planned activities. In particular, attention is given to market
signalling actions
and their interpretation.
104 ANALYSING COMPETITION
Figure 6.1 Forces of competition
and deregulation were important factors relating to profitability
in both
(Porter, 1988). However, we will look at the five forces of the
model in more
detail.
Rivalry among competitors
Competition in an industry is more intense if there are many
comparable
rivals trying to satisfy the wants and needs of the same
customers in the
same market or market segment. Moreover, competition
increases where
industry growth is slow, costs are high and there is a lack of
product
differentiation. High exit barriers from a market or industry
contribute to
increased competition. Firms may find it difficult to get out of a
46. business
because of the relationship of the business with other businesses
in which
they are engaged. An organization may also have considerable
investments
in assets which are used for the specific business and for which
no valuable
other use can be found.
Bargaining power of customers
Customers can exert influence on producers. Where there are a
small number
of buyers, for example, or a predominant/single buyer, the
producer’s
opportunities for action are limited. In the situation where one
customer
accounts for a significant proportion of a supplier’s business,
then the one
customer can exert considerable influence and control over the
price and
quality of the products that it buys. Such firms can demand the
highest
ANALYSING COMPETITION 105
specification in products, with tight deliver y times (for just-in-
time
manufacturing and hence reducing the cost of raw material
inventories) and
customized products.
Buyers exert pressure in industries by hunting for lower prices,
higher
47. quality, additional service and through demands for improved
products and
services. In general, the greater the bargaining power of buyers,
the less
advantage sellers will have. Not all buyers have equal
bargaining power with
sellers; some may be less sensitive than others to price, quality
or service.
For example, in the clothing industry, major manufacturers
confront
significant customer power when they sell to retail chains like
Marks and
Spencer and Burton. However, they can get much better prices
selling to
small owner-managed boutiques.
Bargaining power of suppliers
Suppliers can exert pressures by controlling supplies. A
powerful supplier is
in a position to influence the profitability of a whole industry
by raising
prices or reducing the quality of the goods it supplies. A firm
that has few or
only one potential supplier may exert little influence over the
prices it pays
for bought in materials and components. It may also experience
difficulty in
influencing the quality of its raw materials and resources. If it
is the only
purchaser and constitutes an important part of the supplier’s
business,
however, it can exert a great deal of influence over both prices
and quality.
Another form of supplier power is ‘lock-in’. This involves
48. making it difficult
or unattractive for a customer to change suppliers. It can be put
into effect,
for example, by offering specific services or product attributes
that a
competitor finds difficult to match.
Powerful suppliers can have the same adverse effects upon
profitability as
powerful buyers. Suppliers can exert bargaining power on
participants in an
industry by raising prices or reducing the quality of purchased
goods and
services. Powerful suppliers can thereby squeeze profitability
out of an
industry unable to recover cost increases in its own prices.
EXHIBIT 6.1 CUSTOMER POWER IN THE AEROSPACE
INDUSTRY
When there is a downturn in the market for planes, supplying
firms are affected by
the power of their customers. Plane makers, producing for the
world’s major airlines,
are very dependent on the state of the world economy. When
demand is low and
margins are tight, they have to look for cost savings,
irrespective of production
costs. Many companies have large investments in plant and
cannot exit from the
market. They know, however, that when the economic climate
improves, demand
will recover, forcing prices back to more profitable levels. The
bargaining power of
the customer is greater when demand is low and reduces when
demand rises.
49. 106 ANALYSING COMPETITION
Threat of new entrants
The threat of new entrants can increase competitive activity in a
market.
Outsiders will be tempted to enter a market or an industry if
they feel that
the opportunity is sufficiently appealing in terms of profitability
and sales.
Markets which have grown to a substantial size become
potentially attractive
to large powerful firms provided that the level of competitive
activity enables
them to achieve the kind of market share and profits and sales
volume they
expect.
This provides an incentive for the firms already operating in the
market
to make the prospects appear less attractive to would-be
entrants by increasing
the level of competitive activity. For example, lowering price
levels would
increase the competition between firms within the market and it
might also
deter other firms from entering because it would be more
difficult to obtain
high profitability levels. Much depends, however, on the cost
structure of a
would-be entrant.
Where a market is seen to be profitable, it may attract new
50. entrants.
Suppliers may expand downstream, or buyers may move
upstream. This can
cause increased competition and a likely reduction in margins.
Methods to
discourage entry include raising the cost of entry into a market.
This may be
achieved by developing new products through R&D which the
competition
find hard to match, or introducing new marketing initiatives,
such as long-
term contracts with customers, or raising the cost of entry
through economies
of scale. Raising the cost of entry has long been practised
within many
industries. In such cases, larger, more expensive plants are
continually built
to gain competitive advantage.
Threat of substitute products or services
Substitutes, or alternative products that can perform the same
function,
impose limits on the price that an industry can charge for its
products. The
presence of substitutes is not obvious and may not be easily
perceived by
firms operating in an industry. Substitutes may even be
preferred by customers
and incumbent firms may only be noticed when it is too late to
arrest their
dominance.
An example which illustrates the rise of a substitute product is
the current
increasing proliferation of low-cost microcomputers coupled
51. with low-cost
easy-to-use business packages in areas such as accounting,
database
management and word processing. This ‘product’ has adversely
affected the
‘industry’ of specialist programmers and specialist computer
bureaux. The
threat of substitutes depends on technical comparability of
substitutes, the
relative price of substitutes, the speed of technological
development in
‘substitute’ industries and the cost of switching. Substitute
products that
deserve the most attention strategically are those that:
1 are subject to trends improving their price-performance trade-
off with
the industry’s product, or
2 are produced by industries earning high profits.
ANALYSING COMPETITION 107
Competitive strategy and profitability
A question of considerable general interest relates to how a
business can
maximize its profitability, or at least become the most
profitable performer
in its industry. Maximum profitability can, in principle, only be
achieved in
one of two ways: either by minimizing costs or by maximizing
prices. Thus
any useful business strategy must aim to follow one or other of
52. these aims: to
be the lowest-cost producer or the highest-price seller.
Porter (1988) argues that failure to make the choice between
cost
leadership and differentiation means that a company is ‘stuck in
the middle’,
with no competitive advantage. This results in ‘poor
performance’. There is
no doubt that there is a danger of this happening and it has long
been
emphasized by many other writers (e.g. Drucker’s (1964)
assertion that
concentration is the key to real economic results). Moreover,
the basic concept
of strategic direction seems to suggest much the same thing.
Many companies
which have a clear direction and a distinct position are also
demonstrably
either cost leaders or differentiators, but not both. Names like
Rolls Royce,
Bic, Cartier and KwikSave, for example, can be immediately
classified in
one camp or the other. Some researchers have even suggested
that the most
effective strategies for some situations comprise systematic
oscillation between
cost leadership and differentiation (Gilbert and Strebel, 1988).
When ‘focus’ was introduced initially as a generic strategy it
obscured the
simple structure of the model which argued that profits could be
maximized
either by achieving lowest costs or highest prices. Competition
reduces profits
by the introduction of substitutes, new entrants, etc. as
53. suggested by Porter.
Moreover, perfect competition erodes profitability perfectly.
Minimizing
competitions would minimize erosion of profits and this could
be done by
focusing on areas of the market where there are the fewest
competitors. This
in turn is a recommendation for the adoption of the ‘focus
strategy’. However,
it is debatable as to whether ‘focus’ is really a strategy in its
own right—at
the end of the day all strategies are focused to some extent.
Even Ivory Soap
(Clifford and Cavanagh, 1985), which has a very broad appeal,
is carefully
positioned as a multi-dimensional brand aimed at a fully
researched customer
profile.
STRATEGY TYPOLOGIES
While Porter’s typologies represent one important way of
looking at how
firms behave in the market place there are other ways of looking
at what
firms do. Various suggestions have been put forward to account
for the
strategies adopted by firms. A commonly adopted framework is
to consider
firms according to the role they play in a market. The
suggestion is that firms
act as:
1 market leader 3 market follower, or
2 market challenger 4 market nicher.
54. These roles are discussed below.
108 ANALYSING COMPETITION
Leader
The market leader is the enterprise that has the largest market
share.
Leadership is exercised with respect to price changes, new
product
introductions, distribution coverage and promotional intensity.
Because of
their large volume sales, market leaders enjoy the benefits of
economies of
scale and accumulated experience which helps reduce costs and
bolster
profits. Not surprisingly, dominant firms want to stay in the
leading position
and this requires them to:
(a) find ways of expanding total market demand
(b) protect market share
(c) even increase market share.
The market leader is conscious of economies of scale of
operation and is
happiest when making inroads into large and substantial
markets. Small
specialist markets (niches) are not the prime interest of market
leaders.
For example, the Ford motor company produces a range of cars
for high
volume markets, e.g. the Fiesta for the small car market.
55. Ferrari, on the
other hand specializes in producing high-performance sports
saloons, etc.
for a very small market segment that is prepared to pay a very
high price for
such a car.
Challenger
Another group of competitors are referred to as market
challengers. These
companies aspire to become market leaders, recognizing the
benefits of
holding such an exalted position. Challengers attack the leader
and other
competitors in order to try and gain market share. It is
uncommon for market
challengers to attack the leader directly. They usually try to
gain market
share by attacking markets in which the smaller and less
efficient firms operate.
Such markets, of course, do have to be of a substantial size and
not be too
small or specialized to deter the larger firms.
There are a variety of strategies that challengers can adopt. One
strategy
is to produce an enormous variety of types, styles and sizes of
products
including both cheaper and more expensive models. This was a
strategy
adopted by the Japanese Seiko company when it attacked the
watch market.
It accompanied this strategy with another which involved
distributing its
watches through every possible channel. The wide variety of
56. models it had
available (over 2000) meant that it could supply different types
of channel
with different models and thereby avoid the adverse effects of
channel conflict.
Follower
A third role that firms can adopt is that termed market follower.
Firms which
undertake a good deal of innovation often have to recoup
massive investment
costs. Market followers are able to copy what the leading firms
produce and
ANALYSING COMPETITION 109
save themselves the burden of massive investment costs. This
means that
they can operate very profitably at the going price in a market.
Such firms
will obviously have to forego the market share which comes
from being first
into the field.
Providing they can stay cost efficient and obtain a reasonable
share of the
market they can survive. Less efficient ones, however, are open
to attack
from the market challengers.
Market niching
Most industries include smaller firms that specialize in
57. producing products
or in offering services to specific sectors of the market, i.e. in
specific segments.
In so doing they avoid the competitive thrusts of the larger
firms for whom
specialization does not offer attractive economies of scale, that
is, the segments
are too small to generate the kind of return on investment that
the larger
firms require. This is a strategy called market niching.
Market niching is a strategy that is not only of interest to small
firms but
is also of interest to the small divisions of larger companies.
The latter firms
seek some degree of specialization. In cases where the latter
occurs the position
of small firms is not quite so secure. From a firm’s point of
view, an ideal
market niche is:
(a) of sufficient size to be profitable to a firm serving it
(b) capable of growth
(c) of negligible interest to major competitors
(d) a good fit with the firm’s skills and resources.
Specialization is the corner-stone of market niching.
There is strong evidence to show that a strong brand in a niche
market
earns a higher percentage return than a strong brand in a big
market. In the
case of large markets, competitive threats and retailer pressure
can hold back
profits even for the top brand.
58. COMPETITION RESEARCH
Many of the same factors that a firm considers under self
analysis are also
relevant when looking at competitor analysis. Among these the
components
of the value chain need to be considered in the context of
evaluating
competition (see chapter 3). In addition to this the following is
relevant to
competitor analysis.
UNDERSTANDING COMPETITORS’
STRATEGIES
Understanding competition is central to making marketing plans
and strategy.
A firm has to be regularly comparing its products, prices,
channels of
distribution and promotional methods with those of its
competitors in order
110 ANALYSING COMPETITION
to ensure that it is not at a disadvantage. In so doing it can also
identify areas
where it can gain a competitive advantage.
In order to establish a sustainable competitive advantage in the
market
place it is necessary to know and understand the strategies
adopted by
competitors. This is more than noting in which
markets/segments the
59. competition is operating and their respective market shares and
financial
performance. In addition, it is important to consider how
competition will
develop in the future and thus to ascertain the focus of the
strategies that
competitors are pursuing.
Firms need to monitor competition continually. The main need
is for
information regarding:
• sales
• market share
• profit margin
• return on investment
• cash flow
• new investment
• in addition, knowledge of competitors’ financial performances
is useful.
Such information enables firms to gain comprehensive
impressions of their
rivals that may be useful in predicting short-term strategies to
be adopted by
competitors. A knowledge of competitors’ specific objectives
would be very
welcome since these would give clues as to future strategies
that competitors
are likely to pursue. This kind of information may be difficult
to obtain but
may be inferred from present or past activities.
IDENTIFYING COMPETITORS
The first step, however, is to identify the competition. This may
60. seem a simple
question for most firms to answer. For example, at first sight a
book publisher’s
main competitors might appear to be other book publishers. This
is, of course,
correct. However, product substitution also has to be
considered. This involves
looking more broadly at the types of business in which the firm
operates. If
this is done one can identify many producers of goods and
services that
people use for leisure, education and other informational needs.
Many of
these products could be potential competition for the publisher.
Many of
these products could be used instead of the publishers’ books,
i.e. they can
be substituted.
SOURCES OF INFORMATION ABOUT
COMPETITORS
Decision making can be improved by an adequate supply of
relevant
information and a knowledge of good sources of information is
an important
first step. A suitable starting point is to examine what
competitors say about
themselves and what others say about them. Sources of
information fall into
four categories:
ANALYSING COMPETITION 111
61. • public • government
• trade • investors.
Public sources
Advertising, promotional materials and press releases are prime
sources of
information on what competitors have to say about themselves.
Articles and
newspaper reports provide a good source of information on what
others
have to say about them. Nonetheless, one does have to be wary
of the
information gleaned since it may be biased or even distorted.
Trade and professional sources
Courses, seminars, technical papers and manuals prepared by
competitors
can give detailed insights into competitors’ activities. However,
it can take a
considerable amount of time to distil and analyse this
information.
Distributors, the trade press and even customers can be good
sources of
information about what others have to say about competitors.
Government
In the UK, firms have to lodge their annual reports at Company
House in
London and the contents of these reports provide insights into
the operations
of competitors. In particular, lawsuits, government ministries
and national
plans are useful sources of information.
62. Investors
Annual meetings, annual reports and prospectuses are primary
sources of
what competitors have to say about themselves. Credit reports
and industry
studies provide an outsider’s viewpoint.
BENCHMARKING
There are several notions about what benchmarking is. Here we
will adopt
the view that benchmarking is the continuous process of
measuring products,
services and practices against the toughest competitors or those
companies
recognized as industry leaders with a view to stimulating
performance
improvement. Camp (1989) identified four types of
benchmarking:
• benchmarking against internal operations
• benchmarking against external operations of direct
competitors
• benchmarking against the equivalent functional operations of
non-
competitors
• generic process benchmarking.
These approaches all involve comparison of the performance
and
management of processes. A fifth category could be added—that
of product
benchmarking which compares the features and performance of
63. products.
112 ANALYSING COMPETITION
Competitor benchmarking involves performance comparisons
between
organizations which are direct competitors. Some competitor
comparisons
are possible from public sources, but these are often of limited
detail and
hence limited value.
MARKET SIGNALS
A market signal is any action by a competitor that provides
direct or indirect
indications of its intention, motives, goals or internal situation.
Some signals
are bluffs, some are warnings and some are serious
commitments to a course
of action. Market signals are indirect ways of communicating in
the market
place and can be interpreted so as to assist competitor analysis
and strategy
formulation. A prerequisite to interpreting signals correctly is
to develop a
baseline competitor analysis—an understanding of a
competitor’s future
goals, assumptions about the market and themselves, current
strategies and
capabilities. The ability to read market signals rests on subtle
judgements
about competitors relating to known aspects of their situations
with their
64. behaviour.
TYPES OF MARKET SIGNALS
Market signals have two different functions: they can be
truthful indicators
of a competitor’s motives, intentions or goals or they can be
bluffs. Bluffs are
signals designed to mislead other firms into taking or not taking
action to
benefit the signaller. Discerning the difference between the two
can often
involve subtle judgements. Market signals take a variety of
forms, depending
on the particular competitive behaviour involved and the
medium employed.
The important types of market signals are as follows:
Prior announcement of moves
This is a formal communication made by a competitor that it
either will or
will not take some action, such as instigating a price change.
Such an
announcement does not mean with certainty that the action will
be taken.
Announcements can be made that are not carried out, either
because nothing
was done or a later announcement nullified the action.
In general, prior announcements can serve a number of
signalling functions
that are not mutually exclusive:
Pre-empting other competitors. They can be an attempt to
indicate a commitment
65. to take action for the purpose of pre-empting other competitors.
For example,
indicating that it is going to launch a new product well before it
is ready for
the market place, seeking to get customers to wait for the new
product rather
than buy a competitor’s product in the meantime.
Threats to competitors. Announcements can be threats of action
to be taken if
a competitor follows through with a planned move. For
example, a firm
ANALYSING COMPETITION 113
might hear that its competitor is about to lower its price. The
firm might
then announce that it too is to introduce a price reduction below
that indicated
by its competitor. Such an announcement would indicate that
the firm is
quite happy to engage in a price war and this may well deter the
other firm
from making the first price reduction.
Tests of competitors’ feelings. A firm may be contemplating the
introduction of
a new type of after-sales agreement but is unsure whether
competitors will
view this with pleasure or displeasure. By making an
announcement about
the new scheme the firm can test competitors’ reactions to its
proposals.
66. Minimizing the provocation of a forthcoming strategic
adjustment. This kind of
approach seeks to minimize unwelcome retaliation and warfare
resulting
from a strategic adjustment. It usually takes the form of
announcing the
strategic adjustment and providing full information as to why
the firm believes
that the adjustment is necessary. Caution has to be exercised
when
interpreting such signals since the firm may simply be trying to
disguise an
aggressive move.
Internal marketing. Announcements can sometimes serve the
purpose of
seeking internal support for a move. Committing the firm to do
something
publicly can be a way of extinguishing internal debate about its
desirability.
One of the most difficult tasks is to determine whether a prior
announcement
is an attempt at pre-emption or a conciliatory move. One can
attempt to
assess this by studying the lasting benefits that might accrue to
competitors
from pre-emption. If such benefits exist then it could well
indicate
announcements prelude pre-emption. Conversely, if the
competitor acting
in its own narrow self-interest could have done better through a
surprise
move, then conciliation may be indicated. An announcement
that discloses
an action much less damaging than it otherwise might have
67. been, given the
capabilities of the competitor, may usually be viewed as
conciliatory.
Announcements much in advance of a move tend to be
conciliatory.
Announcements can be bluffs because they need not always be
carried
out. As such they may simply be viewed as mechanisms
designed to produce
some response from competitors not to continue with a line of
action they
may be contemplating instigating. Occasionally, it can be a
bluff designed to
trick competitors into expanding resources in gearing up to
defend against a
non-existent threat.
The medium in which a prior announcement appears may be a
clue to its
underlying motives.
Announcement of results or actions after
the fact
These often take the form of announcements about sales figures,
additions
of capacity and so on. They ensure that other firms know about
the data
114 ANALYSING COMPETITION
released and this may in turn influence the latter’s behaviour.
Such
68. announcements can be misleading, though this is not always the
case.
Public discussion of the industry by
competitors
Competitors often comment on industry conditions and on
prospects for
the future. These commentaries are often full of signals which
testify to the
commenting firm’s assumptions about the industry and
presumably by
implication the strategy they are developing. In addition to
commentary
on the industry generally, competitors sometimes comment on
their rival’s
direct moves. Such commentary can signal displeasure or
pleasure with a
move.
The manner in which strategic changes are
implemented
When introducing a new product it can be initially introduced to
a
peripheral market or it can immediately be aggressively sold to
the key
customers of its rivals. A price change may be made initially on
products
that represent the heart of a competitor’s product line, or the
price changes
can be first put into effect in product or market segments where
the
competitor does not have any great interest. A move can be
made at the
normal time of the year or it can be made at an unusual time. Of
69. course
there can be bluffs.
Divergence from past goals
If a competitor has historically produced products exclusively at
the high
end of the product spectrum in terms of quality, its introduction
of a
significantly inferior product is an indication of a potential
major realignment
of its goals or assumptions.
Divergence from industry norms
A move that diverges from industry norms is usually an
aggressive signal.
The cross parry
When one firm initiates a move in one area and a competitor
responds in
a different area with one that affects the initiating firm, the
situation is
referred to as a cross parry. It occurs where firms compete in
different
geographic areas or have multiple product lines that do not
completely
overlap. It represents a choice for the defending firm not to
counter the
initial move directly but to counter it indirectly. In responding
indirectly,
the responding firm may well be trying not to trigger a set of
destructive
moves and counter moves in the encroached-upon market but to
clearly
70. ANALYSING COMPETITION 115
signal displeasure and raise the threat of retaliation at a later
date. If the
cross parry is towards one of the initiator’s important markets it
may be
interpreted as a strong warning. If it is towards a lesser market
then the
warning will be less severe.
The cross parry is an effective way to discipline a competitor if
there is a
great divergence of market shares. If, for example, a price cut is
involved
then the cost of meeting this price cut will be greatest for the
firm with the
largest share. If the firm with the largest share in the cross
parry market
initiated the first move then this may increase the pressure on
the firm to
back off.
The fighting brand
A form of signal related to the cross parry is the fighting brand.
A firm
threatened or potentially threatened by another can introduce a
brand that
has the effect of punishing or threatening to punish the source
of the threat.
Fighting brands are warnings or deterrents to absorb the brunt
of a
competitive attack. They are also introduced with little push or
71. support before
any serious attack occurs, thereby serving as a warning.
Fighting brands can
also be used as an offensive weapon as part of a larger
campaign.
Recourse to legal action
Large firms sometimes force smaller ones to yield ground by
threatening to
take legal action for a variety of patent and other
infringements—even if no
such infringements actually exist. Such firms force the weaker
firm to comply
because it does not want to bear the extremely high legal costs
which it can
incur in order to make its case.
Historical analysis of signals
Studying the historical relationship between a firm’s
announcements and
its moves, or between other varieties of potential signals and
the subsequent
outcomes can greatly improve the ability to read signals
accurately.
Searching for signs that a competitor may have given in the past
before
making changes can also help to reveal types of unconscious
signal unique
to that competitor.
QUESTIONS
1 Discuss the usefulness of Porter’s five forces model in
helping an
72. organization to develop its business strategies.
2 Porter argues that failure to make the choice between cost
leadership and
differentiation implies that a company is ‘stuck in the middle’,
with no
competitive advantage. How can this point of view be
reconciled with the
success of those firms which apply both of these strategic
thrusts?
3 Differentiate between:
116 ANALYSING COMPETITION
(a) market leader
(b) market challenger
(c) market follower
(d) market nicher
and discuss the various strategies which might be pursued by
each one of
the four categories.
4 How might a firm set about trying to collect information on a
continuous
basis about its competitors?
5 Discuss the usefulness of market signals in the context of
trying to
understand competitors’ moves.
CASE STUDIES
73. Cyproswim Ltd
A brief history of the company
Even if the swimming pool industry in the US and in Europe has
a long
history, in Cyprus there were no swimming pools until 1967.
The first pools
that have been constructed were those of the Ledra Palace
(Nicosia), Hilton
(Nicosia) and Forest Park (Limassol) hotels, between 1966 and
1967.
However, there was no specialized business responsible for the
construction
and maintenance of swimming pools. Construction of the pools
mentioned
above was undertaken by air-conditioning businesses.
In the intervening period, the significant increase in tourism has
created
the need for more hotels to be built. A hotel is now considered
not only as a
place where people can stay, but also a place of pleasure and
entertainment.
Moreover, in Cyprus, a swimming pool in a hotel is an essential
feature.
Fully equipped hotels have played an important role in the
increase of tourism
and the development of Cyprus’s economy.
The first swimming pool business in
Cyprus
The owner of the first swimming pool business in Cyprus saw
the high
probabilities of success for that business. He decided to
74. establish such a
business in order to satisfy the needs of the market. A
specialized swimming
pool firm was formed under the name Cyproswim Ltd and
undertook the
construction of the swimming pools at the Apollonia
(Limassol), Golden
Sands and Salamis Bay (Famagusta) hotels.
The owner specified the main reasons for his decision to
establish such a
company as follows:
1 the considerable increase in tourism that had led to a
considerable increase
in the number of hotels
ANALYSING COMPETITION 117
2 the market potentials were high, as were the probabilities for
success
3 it was expected that the government would encourage and
support him,
since the satisfaction of tourists was one of the government’s
primary
concerns during that time.
These expectations were fulfilled. Demand for swimming pools
was high,
people responded positively and the government created no
problems for
the import of swimming pool equipment and chemicals.
75. The first equipment was imported from the US but had
European
specifications. In addition to the installation of swimming pool
equipment,
the maintenance and the chemical treatment were among the
responsibilities of the owner of the company. However, the
chemicals needed
for the treatment and purification of water were imported from
Spain.
According to the owner of the company, the government of
Cyprus
encouraged the import of equipment and chemicals, and there
were no
problems in obtaining import licences. The Cyprus Tourism
Organization
in its attempt to attract more and more tourists encouraged this.
Nevertheless, the firm faced a number of problems during the
first years of
its operations. The lack of availability of skilled labour and the
rapid increase
in demand, which was too high to be satisfied, were some of the
major
problems that are discussed below.
The first problems that faced the first swimming
pool company
The most important difficulties were as follows:
Since the construction of swimming pools was something new,
many
problems arose, not only for the firm, but also for the Cyprus
market.
Electrical and plumbing installations are included in the
procedures to be
followed for the construction of a pool, and skilled labour is
76. essential.
However, there was no labour available and there were no
specialists in Cyprus
to train unskilled labour. For this purpose, a seminar was held
by American
specialists at the Ledra Palace Hotel. The seminar was
organized under the
auspices of the American Embassy, and many Greek Cypriots as
well as
Turkish Cypriots attended.
Another important problem was the maintenance of equipment
and
chemical treatment of the water, both of which also required
skilled labour.
However, this problem could be met by meticulous reading of
the instructions
when using chemicals, or the booklets and leaflets that the
manufacturers
sent. Moreover, visiting the various exhibitions in the exporting
countries
proved to be useful.
Third, problems arose because of the rapid increase in demand
accompanying the increase in tourism. In view of the lack of
skilled labour,
such a high demand was very difficult to satisfy. In addition to
the swimming
pools of hotels, there was a great response by the private sector
and many
pools were constructed in private homes.
118 ANALYSING COMPETITION
77. The partition of Cyprus
Apart from the above problems, the partition of Cyprus had a
very
destructive effect on the company which at the time possessed
more than
95 per cent of the market. Since most of the swimming pools
were in
Famagusta and a significant number in Kyrenia, the partition
had a negative
effect on the financial position of the firm. Machinery that had
a value of
CP5000 had been delivered to the Dome Hotel in Kyrenia and
never been
paid for.
This is only one example of how destructive the partition was
for the
business. Nevertheless, in the aftermath, many hotels were built
in Larnaca,
Limassol and Paphos and the firm recovered the losses. Most of
the problems
were overcome and the firm not only survived, but excelled. For
many years
it was operating in a monopoly market and this enabled the firm
to enjoy the
advantages of economies of scale.
More businesses in the market
A few years later, another swimming pool business under the
name Poseidon
entered the market. However, to this day the firm does not
undertake the
construction of swimming pools but only chemical treatment,
and it does
78. not import much equipment. A similar company, Aphrodite Ltd,
was
established later still and during the past three years it has
undertaken the
construction of swimming pools together with the chemical
treatment.
Furthermore, in the late 1980s two other companies were
established to
market prefabricated pools. Prefabricated pools are often
preferred by
individuals for houses. However, they are not preferred or
recommended
by hotel owners. In 1995, there were 12 swimming pool
companies in
Cyprus. Even though Cyproswim possesses the highest market
share, or in
other words is the market leader, the threat from the
competition cannot
be ignored.
The company’s competitors have managed to take a significant
market
share and this has made Cyproswim’s management sit up and
take note.
In view of the strong competition, the management has started
to consider
marketing as a factor that plays an important role in the firm’s
success.
Every year more and more effort is placed on marketing, and a
higher
proportion of the company’s budget is absorbed by marketing
activities,
with the intention of satisfying the company’s customers in the
best possible
way.
79. Contributed by Ioanna C.Papasolomou-Doukakis
Question
What kind of competitor analysis would be of most benefit to
Cyproswim?
How might this analysis be reflected in its marketing strategy?
ANALYSING COMPETITION 119
Cartech
A firm that innovates can steal a competitive advantage over
other firms in
its industry. Nevertheless, there are many innovations that fail
in the market
place. They fail to meet the expectations of the firms that
launch them and
quite often achieve abysmally low sales by any standard. Some
of these
products are good whereas others are just gimmicks or fads.
However, one
thing does seem to be clear, if a new product does not stand out
sufficiently
well from other existing products in the market place then its
chances of
success are diminished.
Perhaps the best way to beat competition is to be so innovative
that
potential customers won’t even see a product as having any
potential
substitutes. It has long been known, for example, that some
people just adore
80. the personification of inanimate objects. Children’s toys are a
good example.
Barney with its repertoire of songs and sayings is a favourite
when displayed
in most children’s toy shops and attracts considerable attention
from passers
by—both young and old. How many older people will squeeze
Barney’s
hand when asked to do so! There have also been some more
practical
applications of voice technology in products. Most notable
among these
have been talking watches which have been a great help to the
blind and
partially sighted.
Cartech has extended voice technology to car alarms. It has
produced a
product which can be fitted in five minutes without tools or
drilling. The
alarm contains a deafening 130dB siren and also literally talks.
When the
alarm is activated by the remote control key-fob the alarm
announces to
all and sundry ‘alarm armed’ in confirmation. If someone sets
off the alarm’s
built-in vibration sensors (with anything from a sharp jolt to a
light tap)
the alarm will react with the spoken words ‘Stand back! This
vehicle is
alarmed’. When the alarm detects a change in electrical current
(such as
that produced by a door opening) the product will again emit an
urgent
spoken warning, followed by the siren if the words are ignored.
Other voice
81. command functions include an emergency panic button,
activated by the
remote control from either inside or outside the car (‘Please
help! Please
help!’ plus siren), a handy car finder button for crowded car
parks (‘Your
car is here’) and step by step vocal instructions for setting the
sensitivity of
the car alarm sensors.
Cartech feels that it has a unique product which is sufficiently
different
from anything else on the market to mean that it has no
competition. It
intends to set a premium price on the product, but before
marketing the
product is interested to analyse it in the context of competitive
offerings just
to confirm its own feelings.
Questions
1 Does the product really stand out from what competitors have
to offer?
Why or why not?
2 If the product is a success what other products might the firm
also consider?
120 ANALYSING COMPETITION
3 How should the firm set about marketing the talking alarm so
as to
maximize its prospects for success?
82. 4 What kind of competitor research should the firm have
undertaken prior
to considering the development of such a product?
j u ly 2 0 1 3 | v o l . 5 6 | n o . 7 | C o m m u n i C at
i o n s o f t h E a C m 27
V
viewpoints
P
h
o
t
o
g
r
a
P
h
b
y
t
h
83. o
r
J
o
r
g
e
n
u
D
V
a
n
g
computing ethics
information and communication
technology for managing supply
chain risks
How to encourage ethical behavior among all links in a global
supply chain.
Information security. In a multi-
tier supply chain, it takes only one
unethical supplier to create an IT se-
curity breach. In 2011, the U.S. Senate
Armed Services identified over 1,800
instances of suspected counterfeit
electronics from China that were in-
84. stalled in military systems made by
Raytheon, L-3 Communications, and
O
V e r t h e l a s t two decades,
many firms implemented
various supply chain initia-
tives to: increase revenue,
for example, more product
variety, more-frequent new product
introductions, more sales channels/
markets in new markets; reduce cost,
for example, supply base reduction,
online sourcing, and offshore manu-
facturing; and reduce assets, for ex-
ample, outsourcing of manufacturing,
information technology, logistics, and
even product design. Supply chains to-
day are more “efficient” but also much
more complex than those in the past.
As a consequence, they are more vul-
nerable to disruptions and delays. In
some cases, unethical behavior of one
supplier along the supply chain can
cause serious security risks and even
deaths. Here are some examples:
Communication and coordination
risk. Complex global supply chains of-
ten create major communication and
coordination problems. For example,
Boeing outsourced the design and de-
velopment of many critical sections of
its 787 aircraft to tier-1 suppliers. How-
ever, these tier-1 suppliers subcontract
85. various modules to tier-2 suppliers, who
in turn outsource certain components
to tier-3 suppliers. With a multi-tier sup-
ply chain that has at least 500 suppliers
located in over 10 countries, the com-
munication and coordination between
Boeing and those nondirect suppliers
regarding various product development
activities were essentially nonexistent.
This is one of the reasons why Boeing’s
787 was launched 3.5 years late and the
development cost was $6 billion over
budget.5 Further, the lack of communi-
cation and coordination is thought to
have caused the battery problems that
grounded the fleet for a period of time.
DOI:10.1145/2483852.2483862 Christopher S. Tang and Joshua
Zimmerman
supply chain coordination and communication problems
contributed to delays and cost
overruns affecting Boeing’s 787 aircraft.
28 C o m m u n i C at i o n s o f t h E a C m | j u ly 2 0
1 3 | v o l . 5 6 | n o . 7
viewpoints
scanned at each link of the supply
chain all the way to the pharmacist.
By using direct communication links
among the pharmacy, the pharmaceu-
86. tical manufacturer, and the regulatory
body, the pharmacist can authenticate
the drug, the pharmaceutical firm can
know if its drug has been counterfeit-
ed, and the regulator can take appro-
priate actions (for example, product
recalls) immediately. In Africa, HP
and the African social enterprise net-
work mPedigree teamed up in 2012
to develop a drug authentication ef-
fort to combat counterfeit drugs in
2012. Under this effort, pharmaceuti-
cal manufacturers add a “scratch-off
label” containing a verification code
before distribution. When a customer
buys the medicine at the pharmacy,
the customer scratches the label to re-
ceive the code, and sends a Short Mes-
sage Service (SMS) text message to the
pharmaceutical manufacturer via mo-
bile phone so the manufacturer can
verify the drug’s authenticity.
Information technology for expos-
ing unethical supplier behavior. Rec-
ognizing information access as an
important first step to creating public
exposure, voluntary groups of activ-
ists and NGOs are using the Internet
to provide more timely and accurate
information about food safety issues
in China. In 2012, a group of Chinese
volunteers developed websites (http://
www.zccw.info), and smartphone apps
(http://tinyurl.com/72orssq) to report
the latest Chinese food safety scandals
87. (location, food categories, safety is-
sues, vendor identity, supplier identity,
and so forth). By providing fast and ac-
curate information about food safety
issues on a single website or an app,
public exposure creates incentives for
vendors to be more vigilant and suppli-
ers to think twice before committing
product adulteration. Pushing this line
of thinking further, manufacturers
may consider partnering with NGOs to
expose the identity of unethical suppli-
ers who produce adulterated products
on the Internet and mobile phone apps
to create the threat of public humilia-
tion for suppliers who produce adulter-
ated products.2
management tools for
mitigating supply Chain Risks
While ICT is an enabler for firms to
Boeing. Some counterfeit electronic
parts can have malware preinstalled
in the motherboards, making it ex-
tremely difficult to trace and putting
U.S. troops at risk.3 In the same vein,
when firms (banks, hospitals, and
insurance companies) procure their
computers and servers with counter-
feit electronics, they are exposed to
the risk of leaking credit card data,
personal data, and intellectual prop-
erty information to cyber criminals.
Food safety. In Europe, the horse-