EFFECTS OF COMPETITIVE SUPERIORITY ON FIRMS’ STRATEGIC BEHAVIOUR ACROSS STAGES OF INDUSTRY EVOLUTION

Group No.: 4712
NANYANG TECHNOLOGICAL UNIVERSITY
NANYANG BUSINESS SCHOOL
EFFECTS OF COMPETITIVE SUPERIORITY ON
FIRMS’ STRATEGIC BEHAVIOUR ACROSS
STAGES OF INDUSTRY EVOLUTION
Submitted by: Chung Wei Peng, Joseph 075522D05
Kim Yong Wei, Luther 075797K05
Lee Kuok Howe 075635F05
Supervisor: Dr. Lim Kui Suen, Lewis
(Asst. Professor in Marketing)
Applied Research Project submitted to Nanyang Business School, Nanyang
Technological University in partial fulfillment for the degree of Bachelor
of Business
Academic Year 2009/2010
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TABLE OF CONTENTS
ACKNOWLEDGEMENTS.......................................................................................................3
ABSTRACT............................................................................................................................... 4
1. INTRODUCTION................................................................................................................. 5
a. Motivation For The Study...................................................................................................5
b. Research Objectives............................................................................................................. 6
c. Methodology........................................................................................................................... 8
d. Contribution Of The Study.................................................................................................8
1. LITERATURE REVIEW......................................................................................................9
2.1 Competitive Superiority..................................................................................................9
2.2 Market Evolution............................................................................................................. 10
2.3 Marketing Tools............................................................................................................... 11
2.3.1Advertising....................................................................................................................................... 11
2.3.2Sales Force........................................................................................................................................ 12
2.3.3Research and Development (R&D).........................................................................................13
2.4 Marketing Strategies...................................................................................................... 13
2.4.1Exploit versus Explore.................................................................................................................13
2.4.2Push versus Pull.............................................................................................................................15
2.5 Bridging the Research Gaps.........................................................................................15
2. HYPOTHESIS....................................................................................................................17
a. Initial Phase (Periods 1 – 2)............................................................................................17
b. Uncertainty Phase (Periods 3 – 4)................................................................................17
c. Growth Phase (Periods 5 – 6).........................................................................................18
d. Maturity Phase (Periods 7 – 8)......................................................................................20
3. METHODOLOGY..............................................................................................................21
4.1 Markstrat – The Simulation..........................................................................................21
b. Participants and Procedures..........................................................................................21
c. Data Collection.................................................................................................................... 22
4.3.1Measures........................................................................................................................................... 22
4.3.2Initial Phase (Periods 1 – 2)......................................................................................................23
4.3.3Uncertainty Phase (Periods 3 - 4)...........................................................................................25
4.3.4Growth Phase (Periods 5 – 6)...................................................................................................26
4.3.5Maturity Phase (Periods 7 - 8).................................................................................................27
4. RESULTS............................................................................................................................ 28
a. General Results................................................................................................................... 28
b. Initial Phase (Periods 1 – 2)............................................................................................28
c. Uncertainty Phase (Periods 3 – 4).................................................................................29
d. Growth Phase (Periods 5 – 6).........................................................................................30
e. Maturity Phase (Periods 7 – 8).......................................................................................32
f. Summary of Results............................................................................................................ 34
5. DISCUSSION...................................................................................................................... 35
a. Setting the Ideal Brand Image in the Initial Phase...................................................36
b. Pioneer Advantage and Pull Strategy in Uncertainty Phase.................................37
c. Emphasis on New Markets in Growth Phase..............................................................37
d. Push Strategy in Maturity Phase...................................................................................38
e. Overall Managerial Implications...................................................................................38
6.5.1Initial Phase (Periods 1 – 2)......................................................................................................38
6.5.2Uncertainty Phase (Periods 3 – 4)..........................................................................................39
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6.5.3Growth Phase (Periods 5 – 6)...................................................................................................39
6.5.4Maturity Phase (Periods 7 – 8).................................................................................................40
f. Potential Pitfall of Strategies Taken by Competitively Superior Firms..............40
6. LIMITATIONS AND FUTURE RESEARCH..................................................................41
APPENDIX A......................................................................................................................... 43
TABLE 7: SUMMARY OF HYPOTHESES DEVELOPMENT FOR VARIOUS PHASES..43
APPENDIX B......................................................................................................................... 45
TABLE 8: SAMPLE OF AN EXECUTIVE MEMORANDUM...............................................45
APPENDIX C......................................................................................................................... 49
TABLE 9: SAMPLE OF MARKSTRAT MARKET RESEARCH STUDIES........................49
APPENDIX D......................................................................................................................... 51
TABLE 10: SAMPLE OF MARKSTRAT INDUSTRY NEWSLETTER..............................51
APPENDIX E......................................................................................................................... 54
TABLE 11: SAMPLE CALCULATION OF COMPETITIVE SUPERIORITY.....................54
APPENDIX F......................................................................................................................... 55
TABLE 12: CHANGES IN COMPETTIVE SUPERIORITY OVER DIFFERENT PHASES
......................................................................................................................................................... 55
REFERENCES........................................................................................................................ 56
ACKNOWLEDGEMENTS
We would like to express our heartfelt gratitude and appreciation for our
supervisor, Dr. Lewis Lim, Assistant Professor in Marketing. He has patiently provided
us with continuous support and guidance throughout the course of our research, while at
the same time, equipping us with all the knowledge that he has about our research topic.
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We are also pleased to be provided with ample Markstrat data, which was compiled by
him for our easy reference and access. We are glad to finish this project under his
supervision and guidance.
ABSTRACT
Firms are constantly faced with the decision to either adapt or change their
strategy based on the stage of industry evolution as well as the actions of their
competitors. They often benchmark their own strategies against the actions of
competitors who are superior to them. However, they do not always know the likely
behaviors of superior competitors across the different stages of industry evolution. To
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address this knowledge gap, this study examines the behavioral tendencies of
competitively superior firms at the different phases of the industry. We consider five
major behavioral tendencies of superior firms, namely, advertising aggressiveness, sales
force aggressiveness, R&D aggressiveness, exploit versus exploration of growth
resources and push versus pull marketing strategies. We measured these tendencies
using quantitative data from Markstrat, a marketing strategy simulation which served as
a microcosm of real life competitive behavior. We find that competitively superior firms
exhibit different behaviors at different phases of the industry evolution: In the initial
phase, these firms allocate a greater part of their budget to both advertising and sales
force to defend their position, whereas in the uncertainty phase, they allocate more of
their budget to R&D to defend their position. In the growth phase, superior firms exploit
their resources more than they explore them. Finally, in the maturity phase, these firms
tend to employ a push strategy as opposed to a pull strategy. We discuss how the
findings of the study can aid mangers in making more informed decisions and how the
decisions made by the dominant firm may not always be the best decision despite their
superiority.
1. INTRODUCTION
a. Motivation For The Study
Consider the following scenario:
You are the marketing manager at Company A. Your company’s first
foray into a new industry was not as successful as what you wanted it to
be, resulting in other companies dominating your industry. You begin
to observe the actions of the superior companies and wonder what their
next steps will be as the industry evolves over time. What should you do
to pre-empt your competitors’ actions in different phases of the market
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evolution?
The above scenario exemplifies what managers at weaker firms often face
when making decisions over the different phases of an industry evolution. Managers
are constantly faced with making difficult strategic decisions in an ever-changing
competitive landscape within their industry. As part of their decision making, they often
benchmark their own strategies against the actions of competitors who are superior to
them. Yet, issues concerning the interactions between competitive dynamics and market
evolution have not received sufficient research attention (Lambkin & Day 1989;
Gatignon & Soberman 2002). Consequently, managers are not always equipped with
good working knowledge that would enable them to anticipate the moves of dominant
competitors.
Having information about their competitive environment thus allows managers
in weaker firms to develop a meaningful strategy (Deshpande & Gatignon, 1994) across
the different stages of industry evolution. The information allows them to develop an
understanding of what affects market position and profitability (Deshpande & Gatignon,
1994), thereby enabling them to compete more effectively against the superior firms
(Hambrick et al., 1982; Woo & Cooper, 1981, 1982).
Accordingly, there is a need to conduct this research so as to allow managers at
weaker firms to anticipate the types of strategies that dominant firms tend to undertake
in different stages. Such understanding can be used to predict competitors’ actions
(Deshpande & Gatignon, 1994) and thus make informed strategic decisions that deliver
better financial performance.
b. Research Objectives
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Investments in marketing communications like advertising will improve the
relationship between customers and a brand, thus increasing the competitive advantage
of the company. Companies that engage in aggressive marketing communications may
gain better performance than those investing less intensely (Andras & Srinivasan.
2003). Therefore, it is important to study the advertising aggressiveness of dominant
firms in defending their positions over different phases.
Sales force marketing has emerged in research studies as being important
business factors (Luo, 1995; Chen, 1994) in effective marketing means. With sales force
marketing having a positive relationship with sales growth and profitability (Luo, 1995;
Chen, 1994), it is vital to study the sales force aggressiveness of dominant firms in
defending their positions over different phases.
In gaining competitive advantage, companies invest more in research and
development (R&D) to gain profits and success of future innovation efforts (Elie &
Miklos, 2003). Research shows a positive relationship between R&D aggressiveness
and company’s performance (Kotabe, 1990). When more dominant firms show more
R&D competence, they spend more on R&D to stay ahead of competition (Elie &
Miklos, 2003). Therefore, it is important to study the R&D aggressiveness of dominant
firms in defending their positions over different phases.
The dynamic processes of exploitation and exploration are key sources of an
organization's sustainable competitive advantage (Eisenhardt & Martin, 2000).
Exploration is viewed as future sources of competitive advantage while exploitation is
viewed as current sources (Ireland & Webb, 2004). They serve as good proxies on
whether firms are able to gain or defend their superiority. Therefore, it is important to
study how dominant firms utilize exploit or explore strategies to defend their positions
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over different phases.
More companies are placing channel management as high priority (Frazier,
1999). Push strategies that include distribution channels through the use of sales force
and pull strategies in the form of marketing communications via advertising are seen as
important sources of a company’s competitive advantage (Neves et al., 2001).
Therefore, it is important to study how dominant firms utilize push or pull strategies to
defend their positions over different phases.
In short, we set out to investigate the (1) advertising aggressiveness, (2) sales
force aggressiveness, and (3) R&D aggressiveness of competitively superior firms, and
how they utilize (4) exploitation or exploration strategies and (5) push or pull strategies
to defend their positions over different phases of an industry evolution.
c. Methodology
This study utilizes data generated from “Markstrat”, a marketing strategy
simulation used widely in business programs globally. It provides us with secondary
data whereby participants made strategic marketing decisions in a realistic industry
setting (Gatignon, 1987) over eight weeks. Participants were undergraduates aged early
20s taking the Product and Pricing Management class at Nanyang Business School. As
participants competed with one another in teams (representing firms), we are able to
observe the behaviors of competitively superior firms over the different stages of
industry evolution. Analysis of the behavioral data allows us to understand the different
types of competitive actions that managers took across various industry phases.
d. Contribution Of The Study
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Our study contributes to the understanding of competitive behavior in three
important ways. First, having competitive knowledge about how dominant firms behave
allows managers to know their rivals and assess their own competitive position
(Deshpande & Gatignon, 1994). This allows managers in under-performing firms to
have sufficient knowledge to predict competitors’ actions, which is an important part of
competitive analysis (Erickson et al., 1990). Pre-emptive actions can then be devised to
allow them to compete successfully in the industry (Deshpande & Gatignon, 1994).
Second, managers can have a better understanding about the levels of different
marketing strategies that are employed in achieving maximum results. An appropriate
strategy can be devised to achieve maximum results within their financial constraints.
This is useful to managers in weaker firms who have limited financial resources, unlike
their superior counterparts who have abundant slack resources (Singh, 1990).
Third, managers can understand the different competitive nature of the industry
at different stages, enabling them to execute the optimal strategy at the most appropriate
timing to reap the highest benefits. Firms that were slower in engaging competitive
actions tend to experience market share erosion and dethronement (Ferrier et al., 1999).
1. LITERATURE REVIEW
2.1 Competitive Superiority
We define competitive superiority as competitive advantage in terms of
financial performance and available resources that a company gains over its rivals as a
result of its past strategic decisions. It is a result of relative superiority in the skills and
resources that a company deploys, allowing it to do better than its competitors (George
S. Day & Robin Wensley, 1998).
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It is necessary for companies to maintain or improve their competitive
superiority as being the dominant firm means having abundant resources and increased
capability to mount competitive attacks (Singh, 1990). Companies need to have a strong
financial background in order to carry out continued investment to stay ahead of
competition (George S. Day & Robin Wensley, 1998). Therefore, from the onset, it is
essential for managers to make the correct strategies to kick-start their dominance. This
makes the maintenance of competitive superiority a long-lasting and cyclical process
(George S. Day & Robin Wensley, 1998).
Furthermore, with most research studies focusing on the individual strategic
profiles of firms instead of the strategic competitive behaviors, such studies risk
assuming that each firm is an independent entity and only pursue its own strategic
objectives, whilst remaining oblivious to its competitor’s objectives (Chen & Hambrick,
1995). Our research seeks to gather knowledge about the types of decisions that
managers tend to undertake with greater competitive superiority, in an attempt to defend
their market position, taking in consideration their rivals’ competitive reactions.
2.2 Market Evolution
Besides understanding their competitors, managers also need to understand
their competitive environment in order to develop a successful strategy (Deshpande &
Gatignon, 1994). Research showed that strategic decisions undertaken by companies are
dependent on the market conditions and the competitive superiority that the company
holds (Ramaswamy, Gatignon & Reibstein, 1994).
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Knowing that market conditions do influence strategic decisions, we foresee
that managers will want to know what decisions their rivals made in the different
phases. Research on market evolution identified different levels of competitive activity
in the early, high-demand and the mature, decreasing demand stage of the industry
(Agarwal & Gort, 1996; Agarwal, Sarkar & Echambadi, 2002; Carroll & Hannan,
1989). Competitive actions are stronger in growing markets (Ramaswamy et al. 1994,
Robinson 1988, Bowman & Gatignon 1995) and companies undertake strategies that
help to create the demand in the industry thereby benefiting all firms (Agarwal &
Bayus, 2002). Caves (1980) suggest that in low growth situation, companies will
stimulate the industry by proposing new marketing campaigns. With differing levels of
competitive interaction at different stages (Schumpeter, 1976), it will be interesting to
note if managers employ different strategies with varying levels of competitive
superiority.
2.3 Marketing Tools
Bronnenberg et al. (2000) indicates that the marketing mix employed is
determined by a firm’s market position and maturity of the market. Therefore, our
research seeks to understand the decisions managers in more dominant firms make with
regards to the 4Ps of marketing mix. The marketing tools analyzed1
are advertising
(promotion), sales force (place) and R&D (product).
2.3.1 Advertising
Managers commonly employ advertising because it helps to create the initial
awareness amongst its target consumers. A large budget is often spent on advertising as
1
Price is left out from our analysis due to the inability to make a fair comparison between price and the
different types of products introduced by companies.
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high levels of activity on one marketing element helps to affect the responsiveness for
another (Gatignon, 1984). High levels of competitive advertising help to speed up
industry growth by increasing awareness and improving brand image (Bowman &
Gatignon, 2000). The company can also engage in other marketing efforts more
successfully if consumers have a positive brand image (Keller, 1993). With significant
benefits expected from the use of advertising, analyzing decisions made by managers in
superior firms in this dimension might provide useful insights.
2.3.2 Sales Force
Sales force is another marketing tool that companies use to bring the product
closer to consumers. Sales force is the contact point between the company and
consumers. Sales force is considered as information acquisition and dissemination
activities that are essential in understanding the company’s target consumers (Narver &
Slater, 1990; Kohli & Jaworski, 1990). A better understanding of the consumers allows
the company to exploit this advantage and deliver superior value2
to the consumers
(Kohli & Jaworski, 1990). Sales force represents the “face” of the company, whereby
the style of their selling efforts portrays the strategic orientation of the company (Narver
& Slater, 1990; Kohli & Jaworski, 1990). This adds up to the brand image of the
company which will translate to better brand awareness among consumers who are then
more willing to purchase the company’s products. Having seen the importance of sales
force, it is worthwhile to analyze the strategic decisions made by managers in superior
firms in the sales force dimension.
2
In Markstrat terms, superior value being delivered to consumers is translated to increased purchasing
intention and brand awareness of consumers.
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2.3.3 Research and Development (R&D)
Substantial research has been done on the relationship between innovation and
competitive advantage (Henderson & Cockburn, 1994). Geroski et al. (1993) and
Roberts (1999) highlighted that a successful R&D effort is capable of generating a
proprietary competitive advantage and superior financial performance to the firm.
Because of its high revenue-generating potential, R&D has gained much attention, such
that rival firms are investing significant financial resources to the creation of
technological progress (Arrow, 1962). Firms have a greater incentive to show more
competency in R&D as there is an incentive of retaining the market leader position
longer (Elie & Miklos, 2003).
However, rivalry actions in R&D efforts have undermined the financial
performance of competing firms (Barnett & Hansen, 1996). This results in high levels
of competitive tension amongst rival firms with respect to their involvement in R&D.
Therefore, it is beneficial to analyze the strategic decisions made by managers in
superior firms in the R&D dimension.
2.4 Marketing Strategies
2.4.1 Exploit versus Explore
March (1991) defines exploration as the “experimentation with new
alternatives” that have returns that are uncertain and often negative while exploitation as
the “refinement and extension of existing competencies, technologies, and paradigms”.
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Exploration and exploitation is a manifestation of organizational learning (Sinkula,
1994; Slater and Narver, 1995). However, these concepts have evolved and many
believe that exploration and exploitation strategies are key for a firm to gain competitive
advantage.
We will like to utilize marketing strategies as key measurements of the
exploration and exploitation strategies of the firm, as firms exhibit a dominant emphasis
on marketing efforts (Kyriakopoulos & Moorman, 2004).
Marketing exploitation strategies are defined as the refinement and
improvement of skills and knowledge in association to current marketing strategies,
which include marketing communications and distributions (Kyriakopoulos &
Moorman, 2004). Marketing exploration strategies are defined as strategies involved in
challenging prior approaches which interface with the market, such as new positioning,
products and channels (Kyriakopoulos & Moorman, 2004).
Previous works indicate that maintaining an appropriate combination between
exploration and exploitation strategies is essential for a firm’s prosperity (March, 1991;
Levinthal & March, 1993; Rothaermel & Deeds, 2004). However, we will like to argue
that competitively superior firms will tend to focus on one of the strategies based on
environmental uncertainty (Lawrence & Lorsch, 1967). Defenders are inclined towards
implementing exploitation techniques during low intensity period (Miles and Snow,
1978) and will shift towards using exploration strategies when competition intensifies
(Auh & Menguc, 2004). Therefore, our study will fill in the gaps by examining which of
the exploration or exploitation strategies they will tend to focus based on the
environment.
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2.4.2 Push versus Pull
Push strategy is defined as the allocation of a firm’s resources to motivate
desirable outcomes at the next vertical level of the firm (Chiou, 2009). This represents
the sales force that helps sell the products. Pull strategy is defined as the allocation of a
firm’s resources to motivate brand preference with customers (Frazier, 1999). This
represents the marketing communication activities like advertising that firm
implements.
Frazier (1999) argues that the combination of both pull and push resources is
essential for the firm to grow. Furthermore, effective marketing strategy implementation
requires careful coordination of marketing communication programs with distribution
strategy to maximize brand value to the retailers and end users (Webster, 2000).
However, little research has been done to showcase the behavioral patterns of superior
firms in different phases. Therefore, we will like to explore these trends to see which
strategies superior firms will implement given a certain situation.
2.5 Bridging the Research Gaps
Looking at the diverse dynamics of competitive actions and strategies that
firms of different superiority in an evolving industry can employ, it is important that
managers are able to continuously and accurately assess their competitors’ actions to
come up with their own counter-actions (Aaker, 2007; Czepiel, 1992; Hooley et al.
2008; Porter 1980). Firms need to update themselves about their competitors’ actions in
order to maintain their competitive superiority over an industry evolution (Porter, 1980;
Shapiro, 1989; Teece, Pisano & Shuen 1997). Therefore, competitor assessment has
become an important part of strategic analysis and planning (Day & Wensley, 1988;
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Deshpande & Gatignon, 1994; Reibstein & Wittink, 2005).
However, the lack of understanding of their competitors often led to inaccurate
predictions of competitors’ moves (Clark & Montgomery, 1996; Day & Reibstein,
1997; Dickson & Urbany, 1994; Zajac & Bazerman, 1991), where wrong strategies
employed will undermine their previous competitive superiority. Therefore, we see
potential in our research in helping managers of less superior firms to better understand
the strategies undertaken by superior firms over an industry evolution, and thereby
formulate better competitive reactions to improve their company’s performance.
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2. HYPOTHESIS
Based on our literature review, we develop a research framework examining
the behavioral tendencies of superior firms at different phases. This research framework
will be analyzed based on the characteristics portrayed in different phases and formulate
the possible behaviors that a superior firm will undertake.
a. Initial Phase (Periods 1 – 2)
We will like to study factors that competitively superior firms will employ to
defend its position. Insufficient competitive knowledge would lead firms to behave
cautiously, limiting themselves to “tried and tested” strategies to establish their
competitive superiority. Furthermore, defenders (superior firms) focus on improving
their efficiency primarily through exploitation by refining their existing resources and
capabilities (Matsuno & Mentzer, 2000; Miles & Snow, 1978; Shortell & Zajac, 1990).
With no technology to explore3
, we are thus studying which of the two marketing tools
superior firms will tend to focus on to defend its position. The two strategies are
advertising and sales force.
Therefore, we hypothesize the following:
H1: In the initial phase, the greater the competitive superiority, the greater the
amount of budget being allocated to advertising to defend its position.
H2: In the initial phase, the greater the competitive superiority, the greater the
amount of budget being allocated to sales force to defend its position.
b. Uncertainty Phase (Periods 3 – 4)
3
In the Markstrat context, firms are only allowed to start their R&D process from Period 3 onwards, i.e.
Phase 2 (Uncertainty Phase).
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We will be studying variables to see how dominant firms maintain its lead. We
will like to prove that superior firms will allocate large financial resources to R&D, with
the availability of new technology. When competition intensifies, companies must
innovate and differentiate (Zahara, 1993). Furthermore, since defenders lack exploratory
capacity and are heavily involved in exploitive actions, diverting resources to
exploratory means will help increase the firm’s performance (Auh & Menguc, 2004).
Therefore,
H3: In the uncertainty phase, the greater the competitive superiority, the
greater the amount of budget being allocated to R&D to defend its position.
With the availability of new market and technology, consumers do not have
any product knowledge, compared to existing products where substantial marketing has
already been done. Therefore, it is essential for a superior firm to build a strong brand
for its new product. Thus, firms can aggressively advertise for its new products.
Therefore, we are studying whether superior firms will divert more of its resources for
its pull strategy to the new market than the existing market. Therefore,
H4: In the uncertainty phase, the greater the competitive superiority, the more
the firm will employ a pull strategy in the new market as opposed to an existing market.
c. Growth Phase (Periods 5 – 6)
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We will first compare the strategic direction superior firms will head in. Firms
will either focus its resources on developing new products through R&D to better serve
its customers in the future or exploit its existing product line to gain more profits. The
latter is typically done through a 2-prong approach, where firms utilize advertising and
sales force to capture more market share. Based on the optimal-timing approach, this is
the when exploitation should begin since the firm’s ignorance has been sufficiently
reduced through exploration (Young et al., 2008). Furthermore, superior firms will tend
to be more risk adverse at this point as they want to further extend their lead by
capitalizing on their current superiority. Therefore they will not commit significant
resources on R&D where the returns are harder to measure. Therefore,
H5: In the growth phase, the greater the competitive superiority, the more the
firm will exploit resources as opposed to explore new opportunities.
This is also the phase where new market will be growing at an exponential rate.
With many new customers and few competitors in the new market, firms will prefer to
invest its resources in there. We will like to examine whether superior firms will switch
its focus to the new market by employing a combination of both push and pull strategy
to better capture a larger market share (Fraizer, 1999 & Webster, 2000). Therefore, we
hypothesize the following:
firm will employ a push strategy in a new market as opposed to an existing market.
firm will employ a pull strategy in a new market as opposed to an existing market.
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d. Maturity Phase (Periods 7 – 8)
We will like to study whether competitively superior firms will continue to use
push strategy over pull strategy as the industry is already saturated. Furthermore,
consumers will be knowledgeable about the products due to advertising done
previously. Superior firms will refocus their marketing strategy to a push strategy where
sales personnel will promote its products through various distribution channels.
Therefore, we hypothesize the following:
H8: In the maturity phase, the greater the competitive superiority, the more the
firm will employ a push strategy as opposed to a pull strategy.
With decreasing number of new consumers, firms will vie for market share.
Profits margins will remain thin due to the cutthroat pricing that others employ. Thus,
we will like to examine among which marketing tools (sales force or advertising)
superior firms will focus on to counter the pricing strategy. Therefore,
H9: In the maturity phase, the greater the competitive superiority, the greater
the amount of budget being allocated to advertising to defend its position.
H10: In the maturity phase, the greater the competitive superiority, the greater
the amount of budget being allocated to sales force to defend its position.
The ten hypotheses4
developed will help us to better understand the strategic
decisions undertaken by competitively superior firms over an industry evolution.
4
Refer to Appendix A, Table 7: Summary of Hypotheses Development For Various Phases
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3. METHODOLOGY
The various hypotheses were examined, using secondary data obtained from a
marketing simulation game called Markstrat.
4.1 Markstrat – The Simulation
Markstrat Online (Larreche & Gatignon, 1998) is a marketing simulation
whereby players take on the role of managers and develop strategic marketing decisions.
Markstrat has been used in other studies to analyze the behavior of dominant firms in
performing R&D (Chandy, Prabhu & Antia, 2003) and competitive reactions
(Montgomery, Moore & Urbany, 2005). Markstrat is able to provide us with a
controlled environment, reducing the common issues associated with field studies.
Results from Markstrat are realistic and have high external validity (Klammer &
Kinnear, 1987).
b. Participants and Procedures
The participants were mostly 2nd
year marketing undergraduates in Nanyang
Business School, studying Product and Pricing Management. Participants were divided
into teams of four members with each team representing an individual firm in an
industry with four other firms. Participants had to come up with an Executive
Memorandum5
with regards to their decisions in alternate periods, in order to
understand their mindset. Their performance in the Markstrat simulation was also
graded to ensure that they took the simulation seriously.
The simulation lasted for 8 periods6
, over a time of period of 8 weeks. In order
5
Refer to Appendix B, Table 8: Sample of an Executive Memorandum
6
Each period in the Markstrat simulation stands for one year in the reality
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to ensure that there is fairness and also not affect the results (Ross, 1987), firms in each
industry started on equal footings and same competitive environment.
c. Data Collection
There are a total of 80 firms in our data spread across 20 industries. Each
period in Markstrat represents a year in reality. The eight periods in the simulation are
divided into four phases (initial, uncertainty, growth and maturity).
Data were collected from the Markstrat Company Reports. We extracted the
independent variable, competitive superiority, from previous period to calculate for
current period, as firms will base their decisions on previous competitive superiority.
4.3.1 Measures
We will be using the measures below to run our analysis.
TABLE 1: OPERATIONALIZATION OF VARIABLES
Dependent/
Independent
Variable
Measure Operationalization
Advertising
Aggressiveness
Advertising Expense
Total Budget7
The amount of resources spent on
advertising proportionate to total budget
Sales Force Sales Force Expense The amount of resources spent on sales
7
Total budget includes allocated available budget based on revenue made from last period and amount of
loans borrowed, where each loan is capped at K$5000 for each period.
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Aggressiveness Total Budget force proportionate to total budget
R&D
Aggressiveness
R&D Expense
Total Budget
The amount of resources spent on R&D
proportionate to total budget
New_Old_Adv Vodite Advertising
Sonite Advertising
The amount of resources spent on Vodite
advertising proportionate to Sonite
advertising
New_Old_SF Vodite Sales Force
Sonite Sales Force
The amount of resources spent on Vodite
sales force proportionate to Sonite sales
force
Exploit_Explore Advertising Expense
Sales Force Expense
R&D Expense
The amount of resources spent on total
sales force and advertising proportionate to
R&D.
Exploit: Sales Force + Advertising
Explore: R&D Expenditure
Push_Pull Sales Force Expense
Advertising Expense
The amount of resources spent on sales
force proportionate to advertising expense
Competitive
Superiority
Stock Price Index The individual figures from the 3 key
performance index were benchmarked and
compared against the industry average.
The differences were scored and expressed
in percentage. The mean of the 3 figures
would be competitive superiority
Net Contribution
Return on
Investment
4.3.2 Initial Phase (Periods 1 – 2)
We are examining if firms with greater competitive superiority will allocate
more resources into advertising and sales force. In order to reflect a better representation
of the importance, advertising aggressiveness is used instead of the total amount spent
on advertising. Likewise, sales force aggressiveness is used instead of total amount
spent on sales force. The values for advertising and sales force expenditure are extracted
from the Markstrat Market Research Studies.8
8
Refer to Appendix C, Table 9: Sample of Markstrat Market Research Studies (only sections where
values are extracted)
23

Competitive superiority was determined by extracting the Stock Price Index
(SPI), Net Contribution and Return on Investment (ROI) of each firm from the
Markstrat Industry Newsletter9
. These figures were than benchmarked and compared
against the industry average and the differences scored in percentage. The mean of each
firms’ score in the three key performance indicators will represent the firms’
competitive superiority.10
Regression Model for Testing H1:
Y = α + β1X1 + ε
Where,
Y = Advertising Aggressiveness
X1 = Competitive Superiority
Y = α + β1X1 + ε
Where,
Y = Sales Force Aggressiveness
9
Refer to Appendix D, Table 10: Sample of Markstrat Industry Newsletter (only sections where values
are extracted)
10
Refer to Appendix E, Table 11: Sample Calculation of Competitive Superiority
24

4.3.3 Uncertainty Phase (Periods 3 - 4)
We used R&D aggressiveness, instead of the amount of money spent on R&D.
In order to test if superior firms will employ a pull strategy in a new market as opposed
to existing, a proportion whereby the new market, Vodite’s11
advertising expense is
expressed as a proportion against the current market, Sonite’s12
advertising cost. This
proportion is expressed as New_Old_Adv. The following regression model was
developed for H3 and H4.
Y = α + β1X1 + ε
Where,
Y = R&D Aggressiveness
Y = α + β1X1 + ε
Where,
Y = New_Old_Adv
11
Vodite refers the new product/technology introduced in the new market
12
Sonite refers to the product in the existing market
25

4.3.4 Growth Phase (Periods 5 – 6)
The following regression models were developed:
Y = α + β1X1 + ε
Where,
Y = Exploit_Explore
Y = α + β1X1 + ε
Where,
Y = New_Old_SF
Y = α + β1X1 + ε
Where,
Y = New_Old_Adv
26

4.3.5 Maturity Phase (Periods 7 - 8)
The following regression models were developed:
Y = α + β1X1 + ε
Where,
Y = Push_Pull
Y = α + β1X1 + ε
Where,
Y = Advertising Aggressiveness
Y = α + β1X1 + ε
Where,
Y = Sales Force Aggressiveness
27

4. RESULTS
a. General Results
Based on the statistical test conducted on the 80 firms, most variables had
significant results in all phases. This proves that the competitive superiority behavioral
tendencies we predicted at the different phases were generally true. The only exception
will be H9 where results were insignificant. However, the hypothesis was created in
order to reinforce the concept of H8.
b. Initial Phase (Periods 1 – 2)
We compared the measurement of the competitive gap among firms against
their advertising aggressiveness (H1) and sales force aggressiveness (H2). We performed
a regression analysis and found out that the greater the competitive superiority, the
greater the amount of budget allocated to advertising and sales force to defend its
position.
TABLE 2: RESULTS FOR H1 AND H2
Results for H1
Independent Variables Standardized Beta Estimate p-value
Competitive_Superiority -.235 .036
28

*Model R2
= .055; F (1, 78) = 4.554 (p < .001)
Results for H2
*Model R2
= .056; F (1, 78) = 4.610 (p < .001)
c. Uncertainty Phase (Periods 3 – 4)
We benchmarked the measurement of competitive gap among firms against
their R&D aggressiveness (H3) and pull strategy (H4). A regression test was conducted
and the results were significant and indicate that the greater the competitive superiority,
the greater the amount of budget allocated to R&D to defend its position. Furthermore,
superior firms will focus its pull strategy on the new market than on the existing due to
the introduction of new technologies.
TABLE 3: RESULTS FOR H3 AND H4
Results for H3
Competitive_Superiority .402 .000
*Model R2
= .162; F (1, 78) = 15.071 (p < .001)
Results for H4
*Model R2
= .056; F (1, 78) = 4.667 (p < .001)
29

d. Growth Phase (Periods 5 – 6)
With R&D available from this phase onwards, we were able to further sub-
divide our results into 2 different periods to ensure better accuracy of results. We
tabulated the measurement of competitive superiority with the measurement of explore
exploit strategies (H5). We divided their resources allocated for both their push (H6) and
pull (H7) strategies into the new and existing market and benchmarked it against the
measurement of competitive superiority.
Using regression analysis, we observed that the results were positive, indicating
that superior firms tend to exploit its resources than explore new opportunities in the
growth phase. It also proves that dominant firms concentrate more of its resources on
the new market through the use of both push and pull strategy in the growth phase.
TABLE 4: RESULTS FOR H5, H6 AND H7
Results for H5: Early Period (Period 5)
*Model R2
= .084; F (1, 72) = 6.499 (p < .001)
30

Results for H5: Later Period (Period 6)
*Model R2
= .074; F (1, 79) = 6.247 (p < .001)
*Model R2
= .166; F (1, 78) = 15.476 (p < .001)
*Model R2
= .165; F (1, 78) = 15.366 (p < .001)
*Model R2
= .104; F (1, 78) = 9.086 (p < .001)
*Model R2
= .160; F (1, 78) = 14.877 (p < .001)
31

e. Maturity Phase (Periods 7 – 8)
We compared the measurement of competitive superiority against the
measurement of the push over pull strategy (H8), advertising aggressiveness (H9) and
sales force aggressiveness (H10). By using regression analysis, we observed that H8 and
H10 were significant while H9 was not. This illustrates that dominant firms tend to
employ a push strategy rather than a pull strategy. This analysis is further substantiated
where superior firms will allocate more of its budget to sales force (push strategy) rather
than advertising (pull strategy).
TABLE 5: RESULTS FOR H8, H9 AND H10
*Model R2
= .120; F (1, 78) = 10.638 (p < .001)
32

*Model R2
= .104; F (1, 78) = 9.014 (p < .001)
*Model R2
= .008; F (1, 78) = .638 (p < .001)
*Model R2
= .020; F (1, 78) = 1.562 (p < .001)
*Model R2
= .148; F (1, 78) = 13.563 (p < .001)
33

*Model R2
= .085; F (1, 78) = 7.204 (p < .001)
f. Summary of Results
The following is a summary of the results of our hypotheses.
TABLE 6: SUMMARY OF RESULTS FOR HYPOTHESES
Hypothesis Result
H1: In the initial phase, the greater the competitive superiority, the
greater the amount of budget being allocated to advertising to defend
its position.
Supported
H2: In the initial phase, the greater the competitive superiority, the
greater the amount of budget being allocated to sales force to defend
its position.
Supported
H3: In the uncertainty phase, the greater the competitive superiority,
the greater the amount of budget being allocated to R&D to defend
Supported
34

its position
H4: In the uncertainty phase, the greater the competitive superiority,
the more the firm will employ a pull strategy in a new market as
opposed to an existing market.
Supported
H5: In the growth phase, the greater the competitive superiority, the
more the firm will exploit resources as opposed to explore new
opportunities.
Supported
more the firm will employ a push strategy in a new market as
opposed to an existing market.
Supported
more the firm will employ a pull strategy in a new market as opposed
to an existing market.
Supported
H8: In the maturity phase, the greater the competitive superiority, the
more the firm will employ a push strategy as opposed to a pull
strategy.
Supported
greater the amount of budget being allocated to advertising to defend
its position.
Not Supported
greater the amount of budget being allocated to sales force to defend
its position.
Supported
5. DISCUSSION
To achieve superior performance, it is essential for managers to sustain their
competitive advantage (Stanley, 1996) by updating themselves of their competitor’s
actions. Furthermore, rapid developments in the industry have increased the pressure on
managers to maintain their firm’s advantage, especially when the strategies are
dependent on market conditions (Stanley, 1996). In situations whereby managers are
unable to make informed predictions of competitive actions due to unavailability of
competitive information (Leeflang & Wittink, 1996), we see promising relevance in our
35

research in helping managers to better understand the decisions that managers in
superior firms tend to undertake in different phases, and thereby enabling them to make
better pre-emptive strategies.
a. Setting the Ideal Brand Image in the Initial Phase
In the initial phase, we identify brand image as the top objective of managers in
superior firms. Managers are concerned with setting the correct brand image and
perception in consumers’ minds, especially when their product knowledge is low in
the initial phase. Communicating a brand image to a specific target market is an
important marketing activity (Gardner & Levy, 1995; Grubb & Grathwhol, 1967;
Moran 1973; Reynolds & Gutman, 1984; White, 1959). A positive branding is able
to help establish a brand’s position and protect the brand from competitors’ actions
(Oxenfeldt & Swann, 1964), thereby improving the company’s performance
(Shocker & Srinivasan, 1979; Wind 1973).
Hypothesis 1 and 2 show that more competitively superior firms allocate more
resources to advertising and sales force to build up their brand image in the initial
phase. Research shows that advertising is successful in generating brand equity
(Boulding, Lee, & Stealin, 1994; Chay & Tellis, 1991; Johnson, 1984; Lindsay,
1989; Maxwell, 1989) and there is a positive relationship between advertising
expenditure and brand equity (Simon & Sullivan, 1993). Likewise, managers spend
more on sales force to push products to consumers to increase distribution.
Increasing the reach to consumers reduces the efforts that consumers have to make,
thus increasing the perceived value. This leads to greater consumer satisfaction and
brand loyalty (Boonghee, Naveen & Sungho, 2000).
36

b. Pioneer Advantage and Pull Strategy in Uncertainty Phase
The availability of new technology in the uncertainty phase presents companies
with a “black-box” situation, as there was no prior knowledge about consumer
preferences. However, competitively superior firms are willing to allocate more
resources to R&D despite the uncertainty involved as first entrant enjoys first-mover
advantages and are better able to maintain market share over their later counterparts
(Robinson, Kalyanaram & Urban, 1994). First movers can expect to enjoy short-term
monopoly positions that are capable of providing superior financial performance
(Geroski et al., 1993). To pull off a successful product launch in a new market, our
research shows that managers employ a pull strategy in order to educate consumers
(Soberman & Gatignon, 2005) and create the brand awareness, which will be a
competitive advantage as the industry progresses.
c. Emphasis on New Markets in Growth Phase
In the growth phase, superior firms emphasize on exploiting activities than
exploring (Hypothesis 5). From Hypothesis 3, it shows that superior firms would
probably face a tighter financial budget as compared to their counterparts due to their
previous R&D investments. This could be the reason why these firms are keener on
recouping their investments through exploiting activities instead. After a product
launch, further changes to a product take on additional resources. This spells for a new
strategy to allocate additional resources to areas like advertising and sales force in an
attempt to change consumers’ mindset (Soberman & Gatignon, 2005).
From Hypothesis 6 and 7, we infer that superior firms focus highly on the new
market in the growth phase by employing both push and pull strategies. This means that
37

less emphasis was placed on the existing market. Two possible reasons are as follows.
First, the superior firms might be successful in the existing market, propelling them into
believing that they are able to emulate the same kind of success they had in the new
market (Zook & Allen, 2003). Secondly, superior firm might be losing market share in
the existing market and believes that the new market will provide them with greater
returns to defend their position (March & Shapira, 1987). This indicates that superior
firms believe that the new market is more financially attractive and so place more
resources.
d. Push Strategy in Maturity Phase
Results from Hypothesis 8 and 10 established the strategy that superior firm
focuses when competition is the stiffest. It shows managerial intention of pushing the
products to the consumers through sales force rather than attracting more customers.
Competitively superior firms might believe that sufficient brand loyalty has already
been built (Keller, 1993), and the environment calls for a new urgency to push for hard
selling in order to maintain their foothold. It could also be that pull strategy requires a
longer time as it serves to convert customers to be familiar with the brand (Alba &
Hutchinson, 1987). Also, the merchandise novelty is already experiencing the worn-out
effects and would be difficult to reverse the already set trend.
e. Overall Managerial Implications
6.5.1 Initial Phase (Periods 1 – 2)
It might be worthwhile for managers to allocate more resources to both
advertising and sales force when companies are all starting equally. It is essential for
managers to continually make the correct decisions from the start in order to kick-start
38

their dominance. This allows the company that manages to move ahead of competition
initially to have a competitive advantage in terms of greater financial resources for
stronger competitive actions later (George S. Day & Robin Wensley, 1998). Therefore,
we see great importance in the ability of companies to pull ahead of competition in the
initial phase by placing more emphasis on both advertising and sales force.
6.5.2 Uncertainty Phase (Periods 3 – 4)
Despite the intuitive action of taking a risk adverse move by placing emphasis
on the existing market in an uncertainty phase (Pratt, 1964; Arrow, 1965; Ross, 1981), it
might be worthwhile for managers to consider the alternative of investing money into
utilizing a pull strategy in the new market as it might provide better payoffs in the future
(March & Shapira, 1987).
If the weaker firms do not have the financial capabilities to do so initially, it
might be a good alternative to be the market’s late entrant. It might be easier for late
entrants to come up with more ideal products (Carpenter & Nakomoto, 1989) according
to consumers’ preferences after the first-mover’s products as there is less uncertainty
(Soberman & Gatignon, 2005). Likewise, weaker firms who launched their innovation
later could still employ a pull strategy and focus on building a brand image to a greater
extent, which is significantly made easier as the category is already well understood
when the first-mover first entered the market (Soberman & Gatignon, 2005).
6.5.3 Growth Phase (Periods 5 – 6)
Despite the general trend that superior firms tend to employ exploit strategies
during the growth stage, managers should not rush into making similar decisions as
different firms could be in different stages of R&D. Hence, a blind adoption of the
39

observed strategy could be myopic as the benefits from their R&D might be too early to
be yielded (Levitt, 1960).
As superior firms tend to invest more in the new market through push and pull
strategy, less competitively superior firms could establish themselves in the existing
market as competitors’ investment in the new market tend to make them less
competitive in the existing (Blundell, Griffith & Van Reenen, 1999). However, these
firms have to weigh the benefits and costs of exploiting the current opportunity being
presented or following the trend of entering the new market with the rest.
6.5.4 Maturity Phase (Periods 7 – 8)
In maturity phase, merchandise desirability is declining. As superior firms
move to push more of their products to their customers, increasing monetary
investments would be involved through hiring more sales forces and granting price
promotions. The strong competitive nature might strain the firm’s resources as they
strive to maintain their market share through aggressive push strategies. Hence, it might
be possible for managers to withdraw entirely from the maturing product category when
competition becomes overly stifling to avoid commitment escalation, which could result
in severe losses (Robbins & Judge, 2009). Withdrawal might be the wiser step to retain
most of the profits obtained from earlier phases when the situation turns unfavorable
(Boulding, Morgan & Staellin, 1997).
f. Potential Pitfall of Strategies Taken by Competitively Superior Firms
A simple study was done to investigate whether superior firms were able to
maintain their superiority across phases with the strategies they employed. For example,
only about 68.75% of superior firms managed to maintain their leadership position over
40

a period of one phase (i.e. uncertainty to growth phase)13
. This suggests that strategies
that superior firms employ might not always be the most effective strategy in sustaining
their competitive superiority. Therefore, weaker firms should exercise prudence and not
emulate the strategies dominant firms tend to undertake but should only use it as a
reference to make informed decisions.
6. LIMITATIONS AND FUTURE RESEARCH
In our research study, there are several limitations, of which some could be
possible directions for future research.
We acknowledge the limitation that is involved with using Markstrat data
whereby the subjects are marketing undergraduates who have no real-life managerial
experience. As noticed by Babb, Leslie and Van Slyke (1966), the behaviors of
experienced managers differ from undergraduate students, as managers are more
cautious.
Also, the setting of the Markstrat simulation removes externalities like
13
Refer to Appendix F, Table 12: Changes in Competitive Superiority Over Different Phases
41

political, environmental and social factors that often have an impact in reality. This
makes decisions independent of externalities, which differs from reality. However, the
chances of decisions differing should be minimized by the fact that all hypotheses
developed are supported by literature review.
We see potential future directions in our research in three main areas. In our
research, we identified the potential pitfall of the strategies that competitively superior
firms tend to undertake, resulting in their failure to maintain their superiority. In
improving their company’s financial performance, it will thus be interesting to see
which strategies would be more effective in helping companies achieve sustainable
competitive advantage across phases.
Also, we left out price as one of the marketing tools because of the inability to
group products due to differences in product features of individual firms. However, with
a 1% increase in price capable of bringing a 11.1% increase in profits generated (Marn
& Rosiello, 1992), we see a future potential in exploring the effects of price in helping
companies achieve competitive superiority over an industry evolution.
In addition, another interesting area will be the managerial decision making
process. It will be enlightening to identify the behaviors and biases involved during the
decision making process when managers have to cope with limited resources. The
following abstract from an Executive Memorandum14
further illustrates this point:
“However, because of R&D, competitors will start pushing out new or
modified specialized products targeted solely at the individual market
segment. For the last period, we lost our competitive advantage in
terms of our advertising and sales force strategy due to our decision to
spend more money on R&D.”
14
Refer to Appendix B, Table 8: Sample of an Executive Memorandum
42

Finally, we strongly believe that our research on effects of competitive
superiority on managerial decision-making in an industry evolution will provide useful
insights on the strategic decisions that managers in superior firms tend to undertake.
This provides weaker firms with competitive intelligence about their competitors and
thereby enable them to come up with pre-emptive strategic actions. We hope that our
research will provide a good foundation for future research on the area of competitive
superiority in an industry evolution.
APPENDIX A
TABLE 7: SUMMARY OF HYPOTHESES DEVELOPMENT FOR
VARIOUS PHASES
H1 H2 H3 H4 H5 H6 H7 H8 H9 H10
Initial
Phase
43

Uncertainty
Phase
Growth
Phase
Maturity
Phase
44

APPENDIX B
TABLE 8: SAMPLE OF AN EXECUTIVE MEMORANDUM
Memorandum05/03/09
Executive Summary
The company’s performance in period 3 was positive as stock prices and contribution
increased. However, our concern was the drop in market share in Sonite, due to the lack
of resources given to our sales force distribution. Therefore, for period 4, our focus will
be to recapture back market share and maintain our profitability by increasing
advertising and sales force distribution, and introducing products which are highly
targeted.
Internal Analysis
Looking at the company’s performance indicators in period 3, there was an increase in
performance. Stock prices and net contribution increased by 4.1% and 2.8%
respectively. This could be due to the overall increase of 18.2% in the Sonite market.
However, the company’s ROI decreased by 33.3%, due to the firm’s heavy expenditure
in R&D (K$2,480). Our efforts in R&D have produced a new product, SANE, and also
modified SAMA, so as to ensure our products target towards individual market
segments.
The overall brand awareness for both SAMA and SALT has increased, due to the
increase in advertising expenditure. However, overall purchase intention for SALT and
among the Professionals segment dropped 2.4% and 10% respectively. This is despite
having strong brand awareness and a more ideal perception of our brand than
competitors’. An explanation is the lack of resources allocated to sales force, which hurt
the distribution of SALT. The lack of sales force in the mass merchandise sector caused
the decrease in purchase intention, as there is an increasing amount of Professionals and
Others buying from this channel. This meant that our target consumers shopping in
mass merchandiser are not exposed to our product, preventing them from buying it.
External Analysis
The growing trend of the Sonite looks set to continue with forecasted growth of 7.4% to
135.2% for the various consumer segments. Only the Buffs segment market share is
expected to decrease by 28.5%. It is expected that competitors will continue to tap on
the growing force of the other four customer segments. However, because of R&D,
competitors will start pushing out new or modified specialized products targeted solely
at the individual market segment. For the last period, we lost our competitive advantage
in terms of our advertising and sales force strategy due to our decision to spend more
money on R&D.
Competitors - Differences in Advertising Strategies
Market Leader, Firm I, spent the most on advertising expenditure (K$6153) without
emphasizing much on advertising research (K$634). But, they still had the highest brand
45

awareness and purchase intentions for both their products. Therefore, we are positive
that advertising expenditure plays a more crucial role.
Looking at the trends of the other companies’ advertising expenditure, they have started
to become more specialized in their target segment. Firm E spent about 25.4% of their
total advertising expenditure and Firm I spent about 28.1% in our same targeted
Professional segment. Therefore, we expect them to further increase their advertising
expenditure as they attempt to wrest market share from us.
Competitors - Differences in Sales Force Strategies
Analyzing the market leader Firm I, it can be seen that their strategy to increase sales
force by 33.3% from the last period was a right move as it led them to be the top firm in
the market. More significantly, we notice that competitors were increasing their sales
force in the mass merchandise sector (especially Firm E which doubled their sales force
in this area). This corresponds with the shift in shopping habits of all the consumers to
mass merchandise sectors (from 26.0% to 28.1%). Therefore, it is expected that our
competitors will continue to increase their sales force to meet the increased demands.
Competitors - Differences in Price Strategies
Even though, market leader Firm I decreased and set their price at the highest level
($535) for the last period, they still managed to generate the highest amount of sales.
They still have the highest purchase intention among the various brands.
As a result, we can say that strategies on sales force distribution and advertising
expenditure employed by market leader Firm I help to justify the high price that they
set.
Research and Development
Firm E spent the most amount (K$5500). We can infer that Firm E will have gotten hold
of a feasibility report on Vodite and also a specialized portfolio of Sonite brands.
However, they are restricted by their budget constraints for the next period (K$10,000),
which is the 2nd
lowest in the industry, to push out their new products. One of the factors
that Firm I managed to achieve pole position is due to their small R&D expenditure
(K$1020). Their failure to invest in R&D last period might result in them losing their
competitive advantage as their products are not catered to the individual market
segments.
Decisions for Period 4
Our overall objective is to increase overall profitability by tuning the products
specifications to suit the needs of our target market. More emphasis will be given
towards advertising and sales force distribution.
SALT – Market Leader in the Professional Segment
SALT will be positioned to entirely focus on the Professionals segment. This is because
the product characteristic of SALT is exactly suited to the Professional segment.
Therefore, we aim to maintain our market leader status in the professional segments.
The price of the SALT brand will remain constant at K$510 as it matches the ideal price
of the professionals based on a consumer survey that was conducted. There will be an
increase of production volume by 15% to accommodate the growth of the Professionals
segment.
An increase in advertising expenditure to K$4,500 is required in order to take over
46

market leader position as Firm I is expected to increase advertising expenditure. This
increase is further substantiated from a market research that 20% increase in advertising
expenditure will help to increase the market share by 5%.
This period advertising will focus on the power and design of our products, as the
Professionals prefer these two factors based on a consumer research study.
SAMA – Market Leader in Others Segment
SAMA was decided to entirely focus on the Others segment. This is due to the fact that
SAMA has the biggest market share in the Others segment compared to the rest. As
such, SAMA was modified so that it is able to suit the Other’s needs better.
The production will only increase by 8% despite expecting a larger growth in the Others
segment as it is expected that there will be some loss in the Singles segment due to the
introduction of SANE. SAMA is set 10% above the Others ideal price as the product is
modified to better suit the Others needs.
An increase in advertising expenditure to K$3,200 is required as we need to match Firm
U, the highest spender of advertising expenditure on the Others segment. Our newly
modified SAMA did not manage to meet Others requirement in terms of power and
price thus our advertising will focus on this two aspects.
SANE- Bringing Sanity to the Singles Segment
SANE is designed to capture the majority of Singles segment, which is untapped in the
industry. Production was set to 110KU as SANE is expected to capture a estimated
market share of 30% as the product is more targeted towards the singles. Despite having
a higher ideal price of the Singles, SANE is priced at $270 because Singles will be
willing to pay a slightly higher premium as SANE is a product designed specially to suit
their needs,
As Sane is a totally new brand, we have decided to spent K$3000 to build its brand
awareness, focusing on the power aspect of SANE, as it is a relative important factor to
the Singles.
Sales Force Distribution
Our total Sales force distribution will increase by 50% with emphasis given to the Mass
Merchandiser based on the external analysis.
Forecast
Sonite market is expected to grow in Period 4 with 14.4% on average for the
Professionals and High Earners, 35.2% for Singles and 19.6% for Others. As such, we
will expect our revenue to increase with a similar range.
Increasing our overall advertising expenditures and sales force allocation for the various
brands will allow us to compete competitively in the various segments. Riding along
high brand awareness for all our brands, we are expected to increase our market share in
all our brands except SAMA.
Most likely scenario
All our brands target specifically at different segments. With different brands positioned
themselves to cater to different segment, we will expect to take hold on to our market
share in the various segments.
47

We are expected to register a net contribution after marketing of K$37,458, giving us a
budget of K$15,000 for next period to fund for our introduction of Vodite brand for the
next period. However, SANE will not be expected to rake in profits for us this period
due to the high advertising expenditures incurred to boost its brand awareness.
Best Case Scenario
Advertising expenditures and sales force allocation are targeted to be higher than other
firms. Taking advantage of our early R&D on each brand, we are able to target at
specific targets, giving us a competitive advantage over other firms. As such, we are
expected to hold 25% market share for SALT and SAMA as well as 30% for SANE.
budget of K$16,750 for the next period to fund for our introduction of Vodite brand
next period.
Worst Case scenario
Firms may attempt to drive down their price to regain market share lost to Firm I in the
last period, thus affecting our sales since our strategy this period is to increase
advertising expenditures. With market share expected to drop, SANE will be hit the
most, making a loss of K$1,700, since its objective was to increase brand awareness
through extensive advertising expenditures.
budget of only K$13,050 for the next. This budget constraint for the next period will
make it difficult for us to launch our R&D product in the Vodite market.
48

APPENDIX C
TABLE 9: SAMPLE OF MARKSTRAT MARKET RESEARCH
STUDIES
INDUSTRY BENCHMARKING
BENCHMARKING - ESTIMATED OVERALL
PERFORMANCE
Unit A E I O U
Sales
Retail sales K$ 135,186 179,447 118,570 127,048 82,960
Revenues K$ 88,943 114,935 77,978 83,730 54,350
Production
Cost of goods sold K$ -40,244 -66,088 -25,768 -39,628 -19,516
Inventory holding cost K$ -52 -283 -1 -985 -132
Inventory disposal loss K$ 0 0 0 -1 0
Contribution before
marketing
K$ 48,646 48,564 52,210 43,116 34,702
Marketing
Advertising expenditures K$ -10,000 -5,600 -7,329 -8,600 -5,782
Advertising research
expenditures
K$ -1,600 -600 -815 -1,113 -850
Sales force K$ -3,546 -2,499 -3,479 -3,580 -2,215
Contribution after marketing K$ 33,500 39,865 40,587 29,824 25,855
Other expenses
Market research studies K$ -687 -777 -923 -467 -923
Research and development K$ 0 -3,550 -7,690 -390 -1,310
Interest paid K$ -353 -500 -564 -752 -98
Exceptional cost or profit K$ 0 0 0 0 0
Net contribution K$ 32,460 35,038 31,410 28,215 23,524
Next period budget K$ 13,000 14,000 12,550 11,300 9,400
BENCHMARKING - ESTIMATED PERFORMANCE IN SONITE MARKET
Unit A E I O U
Sales
Retail sales K$ 135,186 72,733 118,570 127,048 82,960
Revenues K$ 88,943 47,747 77,978 83,730 54,350
Production
Cost of goods sold K$ -40,244 -17,797 -25,768 -39,628 -19,516
Inventory holding cost K$ -52 -283 -1 -985 -132
Inventory disposal loss K$ 0 0 0 -1 0
Contribution before K$ 48,646 29,667 52,210 43,116 34,702
49

marketing
Marketing
Advertising expenditures K$ -10,000 -3,600 -7,329 -8,600 -5,782
Advertising research
expenditures
K$ -1,600 -100 -815 -1,113 -850
Sales force K$ -3,546 -1,754 -3,479 -3,580 -2,215
Contribution after marketing K$ 33,500 24,213 40,587 29,824 25,855
BENCHMARKING - ESTIMATED PERFORMANCE IN VODITE
MARKET
Unit A E I O U
Sales
Retail sales K$ 0 106,713 0 0 0
Revenues K$ 0 67,188 0 0 0
Production
Cost of goods sold K$ 0 -48,291 0 0 0
Inventory holding cost K$ 0 0 0 0 0
Inventory disposal loss K$ 0 0 0 0 0
Contribution before marketing K$ 0 18,897 0 0 0
Marketing
Advertising expenditures K$ 0 -2,000 0 0 0
Advertising research expenditures K$ 0 -500 0 0 0
Sales force K$ 0 -745 0 0 0
Contribution after marketing K$ 0 15,652 0 0 0
50

APPENDIX D
TABLE 10: SAMPLE OF MARKSTRAT INDUSTRY NEWSLETTER
STOCK MARKET AND KEY PERFORMANCE INDICATORS
STOCK
MARKET
Firm
Stock
price
index
Market capitalization Net contribution (K$)
base
1000
K$ Period 4 Cumulative
E 1,847 523,068 35,038 128,738
51

A 1,526 431,960 32,460 127,307
I 1,495 423,404 31,410 127,158
O 1,384 391,899 28,215 101,793
U 1,125 318,484 23,524 110,755
COMPANY KEY PERFORMANCE
INDICATORS
(period 4
values)
Unit A E I O U
Market
share
Total %$ 21.0% 27.9% 18.4% 19.8% 12.9%
Sonite
market
%$ 25.2% 13.6% 22.1% 23.7% 15.5%
Vodite
market
%$ 0.0% 100.0% 0.0% 0.0% 0.0%
Retail
sales
Total K$ 135,186 179,447 118,570 127,048 82,960
Sonite
market
K$ 135,186 72,733 118,570 127,048 82,960
Vodite
market
K$ 0 106,713 0 0 0
Contributio
n
Before
marketing
K$ 48,646 48,564 52,210 43,116 34,702
After
marketing
K$ 33,500 39,865 40,587 29,824 25,855
Net K$ 32,460 35,038 31,410 28,215 23,524
Cumulative
net
K$ 127,307 128,738 127,158 101,793 110,755
Shareholder
value
Stock
price index
Base 1000 1,526 1,847 1,495 1,384 1,125
Market
capitalization
K$ 431,960 523,068 423,404 391,899 318,484
Current return
on investment
Ratio 2.05 2.69 1.55 1.99 2.12
Cumulative
return on
investment
Ratio 2.67 2.71 2.46 2.29 2.83
COMPANY KEY PERFORMANCE INDICATORS
(% change from period 3 to
period 4)
A E I O U
Market share
Total 0.3% 41.2% -24.7% 14.4% -26.4%
Sonite market 20.2% -31.4% -9.8% 37.1% -11.7%
Vodite market - - - - -
Retail sales
Total 30.9% 84.3% -1.7% 49.3% -3.9%
Sonite market 30.9% -25.3% -1.7% 49.3% -3.9%
Vodite market - - - - -
Contribution
Before marketing 14.5% 22.3% 2.7% 25.9% 0.8%
52

After marketing -0.6% 27.4% -1.9% 11.4% -0.6%
Net 5.7% 40.2% -20.8% 23.5% -7.0%
Cumulative net 34.2% 37.4% 32.8% 38.3% 27.0%
Shareholder value
Stock price index 3.8% 32.3% -8.0% 20.5% -7.9%
Market capitalization 3.8% 32.3% -8.0% 20.5% -7.9%
Current return on investment -21.3% 55.2% -56.9% -3.6% -23.3%
Cumulative return on
investment
-10.3% -0.2% -19.1% -5.7% -9.0%
53

APPENDIX E
TABLE 11: SAMPLE CALCULATION OF COMPETITIVE
SUPERIORITY
Southeast_09 P04
Firms Net Contribution Industry Average Score
Southeast_A_09 32,460
30129.4
7.74%
Southeast_E_09 35,038 16.29%
Southeast_I_09 31,410 4.25%
Southeast_O_09 28,215 -6.35%
Southeast_U_09 23,524 -21.92%
Firms SPI Industry Average Score
Southeast_A_09 1,526
1475.4
3.43%
Southeast_E_09 1,847 25.19%
Southeast_I_09 1,495 1.33%
Southeast_O_09 1,384 -6.19%
Southeast_U_09 1125 -23.75%
Firms Current ROI Industry Average Score
Southeast_A_09 2.05
2.08
-1.44%
Southeast_E_09 2.69 29.33%
Southeast_I_09 1.55 -25.48%
Southeast_O_09 1.99 -4.33%
Southeast_U_09 2.12 1.92%
Calculation of Industry Average for Net Contribution
= (32,460 + 35,038 + 31,410 + 28,215 + 23,524) / 5
= 30,129.4
Calculation of Individual Score for Each Firm (e.g. Firm A’s Net Contribution)
54

= [(32,460 – 30,129.4) / 30,129.4] x 100%
= 7.74%
*Calculations remain as same for SPI and Current ROI tables.
Calculation of Competitive Superiority (e.g. Firm A)
= [7.74% + 3.43% + (-1.44%)] / 3
= 3.24%
APPENDIX F
TABLE 12: CHANGES IN COMPETTIVE SUPERIORITY OVER
DIFFERENT PHASES
55
This shows the change in
competitive superiority of a
particular market leader from
one period to the other period
in an example - the Southeast
industry.

From To Transition of
phase
Number of
superior firms
that maintain
leadership
positions
Percentage of
superior firms that
maintain
leadership
positions
Period 2 Period 3 Initial to
Uncertainty
7 out of 16 43.75%
Period 4 Period 5 Uncertainty to
Growth
11 out of 16 68.75%
Period 6 Period 7 Growth to
Mature
10 out of 16 62.5%
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65

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