This document discusses strategic planning and marketing analysis. It defines strategic planning as a process by which leaders determine their organization's vision for the future and how to achieve that vision. The strategic planning process involves analyzing internal and external environments, establishing goals and objectives, and developing functional plans including a marketing plan. It also discusses the importance of an organization having a clear mission statement that defines its reason for existence and how it differs from the organization's vision for the future.

1. Chapter Two: Strategic Planning and Marketing Analysis
2.1. Strategic Planning
 The term strategic planning has become very popular in
recent years.
 Strategic planning is a process by which leaders of an
organization determine what it intends to be in the future
and how it will get there.
 To put it another way, they develop a vision for the
organization's future and determine the necessary
priorities, procedures, and operations (strategies) to
achieve that vision.

2. Strategic Planning…
 Included are measurable goals which are realistic and
attainable, but also challenging; emphasis is on long-term
goals and strategies, rather than short-term (such as annual)
objectives.
 Strategic planning assumes that certain aspects of the future
can be created or influenced by the organization.
 Strategic planning is ongoing; it is "the process of self-
examination, the confrontation of difficult choices, and the
establishment of priorities."
 Each company must find the game plan for long-run survival
and growth that makes the most sense given its specific
situation, opportunities, objectives, and resources.

3. Strategic Planning…
• This is the focus of strategic planning—the process of
developing and maintaining a strategic fit between the
organization’s goals and capabilities and its changing
marketing opportunities.
• Strategic planning sets the stage for the rest of planning in the
firm. Companies usually prepare annual plans, long-range
plans, and strategic plans.
• The annual and long-range plans deal with the company’s
current businesses and how to keep them going.
• In contrast, the strategic plan involves adapting the firm to
take advantage of opportunities in its constantly changing
environment.

4. 2.1.1. The Strategic Planning Process
• Whether at the corporate, business unit, or functional level,
the planning process begins with an in-depth analysis of the
organization’s internal and external environments—
sometimes referred to as a situation analysis.
• Based on an exhaustive review of these relevant
environmental issues, the firm establishes its mission, goals,
and/or objectives; its strategy; and several functional plans.
• Planning efforts within each functional area will result in the
creation of a strategic plan for that area.

5. The Strategic Planning Process…
• Although we emphasize the issues and processes concerned
with developing a customer-oriented marketing strategy and
marketing plan, we should stress that organizations develop
effective marketing strategies and plans in concert with the
organization’s mission and goals, as well as the plans from
other functional areas.
• Senior management must coordinate these functional plans in
a manner that will achieve the organization’s mission, goals,
and objectives.
• In this chapter, we are interested in a particular type of
functional plan—the marketing plan. (see the figure)

6. The Strategic Planning Process…
• Although our focus is on marketing planning and strategy, we
cannot emphasize enough that marketing decisions must be
made within the boundaries of the organization’s overall
mission, goals, and objectives.
• The sequencing of decision stages outlined in the following
sections begins with broad decisions regarding the
organizational mission, followed by a discussion of the
corporate or business-unit strategy. It is within these contexts
that marketing goals/objectives and marketing strategies must
be developed and implemented.

7. 2.1.2. Organizational Mission versus Organizational Vision
• To adequately address the role of the organizational mission
in strategic planning, we must first understand the differences
between the organization’s mission and its vision. A mission,
or mission statement, seeks to answer the question ‘‘what
business are we in?’’
• It is a clear and concise statement (a paragraph or two at
most) that explains the organization’s reason for existence. By
contrast, a vision or vision statement seeks to answer the
question ‘‘What do we want to become?’’
• For example, Texas Instruments—one of the world’s largest
technology companies—defines its mission this way: ‘‘Texas
Instruments Incorporated provides innovative semiconductor
technologies to help our customers create the world’s most
advanced electronics.

8. Organizational Mission versus Organizational Vision…
• Compare this to the company’s vision: ‘‘. . . to use the
company’s unique technical skills to fundamentally change
markets and create entirely new ones.
• Similarly, Google’s mission is ‘‘to organize the world’s
information and make it universally accessible and useful.’’
Google’s vision is ‘‘Never settle for the best.’’
• Note that an organization’s vision tends to be future oriented,
in that it represents where the organization is headed and
where it wants to go.
• If you ask many business people, ‘‘What is your reason for
existence?’’ their response is likely to be ‘‘To make money.’’
• Although that may be their ultimate objective, it is not their
reason of existence.

9. Organizational Mission versus Organizational Vision…
• Profit has a role in this process, of course, but it is a goal or
objective of the firm, not its mission or vision.
• The mission statement identifies what the firm stands for and
its basic operating philosophy.
• Profit and other performance outcomes are ends, and thus
are out of place and confuse the mission of the firm.
Elements of the Mission Statement
• A well-devised mission statement for any organization should
answer the same five basic questions:
1. Who are we?
2. Who are our customers?
3. What is our operating philosophy (basic beliefs, values,
ethics, etc.)?

10. Elements of the Mission Statement…
4. What are our core competencies or competitive advantages?
5. What are our responsibilities with respect to being a good
steward of our human, financial, and environmental
resources?
• A mission statement that delivers a clear answer to each of
these questions installs the cornerstone for the development
of the marketing plan.
• The mission statement is the one portion of the strategic plan
that should not be kept confidential. It should tell everyone—
customers, employees, investors, competitors, regulators, and
society in general—what the firm stands for and why it exists.
• The mission statement should be included in annual reports
and major press releases, framed on the wall in every office,
and personally owned by every employee of the organization.

11. Elements of the Mission Statement…
• Goals, objectives, strategies, tactics, and budgets are not for
public viewing. A mission statement kept secret, however, is
of little value to the organization.
Mission Width and Stability
• If the mission is too broad, it will be meaningless to those who
read and build upon it.
• A mission to ‘‘make all people happy around the world by
providing them with entertaining products’’ sounds splendid
but provides no useful information.
• Overly broad missions can lead companies to establish plans
and strategies in areas where their strengths are limited.
• Overly narrow mission statements that constrain the vision of
the organization can prove just as costly.

12. Mission Width and Stability…
• For example, in US early in this century, the railroads defined
their business as owning and operating trains. Consequently,
the railroad industry had no concerns about the invention of
the airplane.
• Mission stability refers to the frequency of modifications in an
organization’s mission statement.
• Of all the components of the strategic plan, the mission
should change the least frequently. It is the one element that
will likely remain constant through multiple rounds of
strategic planning.
• Goals, objectives, and marketing plan elements will change
over time, usually as an annual or quarterly event.
• When the mission changes, however, the cornerstone has
been moved and everything else must change as well.

13. Mission Width and Stability…
• The mission should change only when it is no longer in sync
with the firm’s capabilities, when competitors drive the firm
from certain markets, when new technology changes the
delivery of customer benefits, or when the firm identifies a
new opportunity that matches its strengths and expertise.
Customer-Focused Mission Statements
• In recent years, firms have realized the role that mission
statements can play in their marketing efforts. Consequently,
mission statements have become much more customer
oriented.
• See the table (from word)

14. 2.1.3. Corporate or Business-Unit Strategy
• All organizations need a corporate strategy, the central
scheme or means for utilizing and integrating resources in the
areas of all business functions.
• In the strategic planning process, issues such as competition,
differentiation, diversification, coordination of business units,
and environmental issues all tend to emerge as corporate
strategy concerns.
• In small businesses, corporate strategy and business-unit
strategy are essentially the same.
• Larger firms often find it beneficial to devise separate
strategies for each strategic business unit (SBU), subsidiary,
division, product line, or other profit center within the parent
firm.

15. Corporate or Business-Unit Strategy…
• Business-unit strategy determines the nature and future direction
of each business unit, including its competitive advantages, the
allocation of its resources, and the coordination of the functional
business areas (marketing, production, finance, human resources,
etc.).
• Many organizations manage their differing SBUs in ways that create
synergies by providing customers a single-branded solution across
multiple markets.
• Sony, for example, has a number of SBUs and joint ventures
including Sony Electronics (televisions, DVD players, mobile
electronics, computers), Sony Music Entertainment (record labels
such as Arista, Epic, Columbia, and LaFace), Sony Pictures
Entertainment (Columbia TriStar studios, movie distribution), Sony
Ericsson (mobile multimedia and cell phones), and Sony Computer
Entertainment (the PlayStation family of games and consoles).

16. Corporate or Business-Unit Strategy…
• An important consideration for a firm determining its
corporate or business-unit strategy is the firm’s capabilities.
• When a firm possesses capabilities that allow it to serve
customers’ needs better than the competition, it is said to
have a competitive, or differential, advantage.
• Although a number of advantages come from functions other
than marketing—such as human resources, research and
development, or production—these functions often create
important competitive advantages that can be exploited
through marketing activities.
• For example, Walmart’s long-running strategic investments in
logistics allow the retailer to operate with lower inventory
costs than its competitors—an advantage that translates into
lower prices at retail.

17. Corporate or Business-Unit Strategy…
• Competitive advantages cannot be fully realized unless
targeted customers see them as valuable. The key issue is the
organization’s ability to convince customers that its
advantages are superior to those of the competition.
• Walmart has been able to convey effectively its low-price
advantage to customers by adhering to an everyday low-price
policy.
• The company’s advertising plays on this fact by using a happy
face to‘‘roll back’’ prices.
• Interestingly, Walmart’s prices are not always the lowest for a
given product in a given geographic area.
• However, Walmart’s perception of offering low prices
translates into a key competitive advantage for the firm

18. 2.1.4. Functional Goals and Objectives
• Marketing and all other business functions must support the
organization’s mission and goals, translating these into
objectives with specific quantitative measurements.
• For example, a corporate or business unit goal to increase
return on investment might translate into a marketing
objective to increase sales, a production objective to reduce
the cost of raw materials, a financial objective to rebalance
the firm’s portfolio of investments, or a human resources
objective to increase employee training and productivity.
• All functional objectives should be expressed in clear, simple
terms so that all personnel understand what type and level of
performance the organization desires.

19. Functional Goals and Objectives …
• In the case of marketing objectives, units of measure might
include sales volume (in dollars or units), profitability per unit,
percentage gain in market share, sales per square foot,
average customer purchase, percentage of customers in the
firm’s target market who prefer its products, or some other
measurable achievements.
2.1.5. Functional strategy
• Organizations design functional strategies to provide a total
integration of efforts that focus on achieving the area’s stated
objectives.
• In marketing strategy, the process focuses on selecting one or
more target markets and developing a marketing program
that satisfies the needs and wants of members of that target
market

20. Functional strategy …
• Functional strategy decisions do not develop in a vacuum.
• The strategy must:
 fit the needs and purposes of the functional area with respect
to meeting its goals and objectives.
 be realistic given the organization’s available resources and
environment, and
 be consistent with the organization’s mission, goals, and
objectives.
• Within the context of the overall strategic planning process,
each functional strategy must be evaluated to determine its
effect on the organization’s sales, costs, image, and
profitability.

21. 2.1.6. Implementation
• Implementation involves activities that actually execute the
functional area strategy.
• In order for a functional strategy to be implemented
successfully, the organization must rely on the commitment
and knowledge of its employees—its internal target market.
• After all, employees have a responsibility to perform the
activities that will implement the strategy.
• For this reason, organizations often execute internal
marketing activities designed to gain employee commitment
and motivation to implement functional plans.

22. 2.1.7. Evaluation and Control
• Organizations design the evaluation and control phase of
strategic planning to keep planned activities on target with
goals and objectives.
• In the big picture, the critical issue in this phase is
coordination among functional areas. For example, timely
distribution and product availability almost always depend on
accurate and timely production.
• By maintaining contact with the production manager, the
marketing manager helps to ensure effective marketing
strategy implementation (by ensuring timely production) and,
in the long run, increased customer satisfaction.
• The need for coordination is especially keen in marketing
where the fulfillment of marketing strategy always depends
on coordinated execution with other functional strategies.

23. Evaluation and Control…
• Functional managers should have the ability to see the
interconnectedness of all business decisions and act in the
best interests of the organization and its customers.
• In some ways, the evaluation and control phase of the
planning process is an ending and a beginning.
• On one hand, evaluation and control occur after a strategy
has been implemented.
• On the other hand, evaluation and control serve as the
beginning point for the planning process in the next planning
cycle.
• Because strategic planning is a never-ending process,
managers should have a system for monitoring and evaluating
implementation outcomes on an ongoing basis.

24. 2.2. Marketing Analysis
• The goal of market analysis is to determine the attractiveness of a
market and to understand its evolving opportunities and threats as
they relate to the strengths and weaknesses of the firm.
• David A.Aeker outlined the following dimensions of a market
analysis:
a. Market Size- the size of the market can be evaluated based
on present sales and potential sales if the use of the product
is expanded.
The following are some information sources for determining
market size:
 Government data
 Trade associations
 Financial data from major players
 Customer surveys

25. b. Market Growth Rate
• It is a simple means of forecasting the market growth rate is to
extrapolate historical data into the future.
• While this method may provide a first-order estimate, it does
not predict important turning points.
• A better method is to study growth drivers such as
demographic information and sales growth in complementary
products.
• Such drivers serve as leading indicators that are more
accurate than simply extrapolating historical data.
• Important inflection points in the market growth rate
sometimes can be practiced by constructing a product
diffusion curve.

26. Market Growth Rate…
• The shape of the curve can be estimated by studying the
characteristics of the adoption rate of similar product in the
past.
• Ultimately, the maturity and decline stages of the product life
cycle will be reached.
• Some leading indicators of the decline phase include price
pressure caused by competition, a decrease in brand loyalty,
the emergence of substitute products, market saturation and the
lack of growth drivers.
c) Market Profitability- while different firms in a market will
have different levels of profitability, the average profit potential
for a market can be used as a guideline for knowing how difficult
it is to make money in the market.

27. Market Profitability…
• Michael Porter devised a useful framework for evaluating the
attractiveness of an industry or market.
• This framework, known as Porter’s five forces (as we will see
in chapter 3), identifies five factors that influence the market
profitability:
 Buyer power
 Supplier power
 Barriers to entry
 Threat of substitute products
 Rivalry among firms in the industry
d. Industry Cost Structure- the cost structure is important for
identifying key factors for success.

28. Industry Cost Structure…
• To this end Porter’s value chain model is useful for
determining where value is added and for isolating the costs.
The cost structure also is helpful for formulating strategies to
develop a competitive advantage.
• For example in some environments the experience curve
effect can be used to develop a cost advantage over
competitors.
e. Distribution Channels- the following aspects of the
distribution system are useful in a market analysis:
 Existing distribution channels- can be described by how direct
they are to the customer
 Trends and emerging channels-new channels can offer the
opportunity to develop a competitive advantage

29. Distribution Channels…
• Channel power structure-for example, in the case of a product
having little brand equity, retailers have negotiating power
over manufacturers and can capture more margins.
f. Market Trends- changes in the market are important because
they often are the source of new opportunities and threats.
The relevant trends are industry-dependent, but some examples
include changes in price sensitivity, demand for variety, and level
of emphasis on service and support. Regional trends also may be
relevant.
g. Key Success Factors- the key success factors are those
elements that are necessary in order for the firm to achieve its
marketing objectives. A few examples of such factors include:
 Access to essential unique resources

30. Key Success Factors…
 Ability to achieve economies of scale
 Access to distribution channels
 Technological progress
• It is important to consider that key success factors may
change over time, especially as the product progresses
through its life cycle.
2.3. Market Auditing
• Although the process of marketing auditing is a fundamental
underpinning for the marketing planning process, it is for
many organizations still a relatively new and under-utilized
activity.

31. Market Auditing…
• This is despite a substantial body of evidence which suggests
that an organization’s performance in the marketplace is
directly influenced by the marketing planner’s perception of
three factors:
 The organization’s current market position
 The nature of environmental opportunities and threats
 The organization’s ability to cope with environmental
demands.
Expressed in its simplest form, if the purpose of a corporate plan
is to answer three central questions:
• Where is the company now?
• Where does the company want to go?
• How should the company organize its resources to get there?

32. Market Auditing…
• Then the audit is the means by which the first of these
questions is answered.
• An audit is a systematic, critical and unbiased review and
appraisal of the environment and of the company’s
operations.
What is marketing audit?
• The marketing audit is in a number of ways the true starting
point for the strategic marketing planning process, since it is
through the audit that the strategist arrives at a measure both
of environmental opportunities and threats and of the
organization’s marketing capability.

33. What is marketing audit?...
• The audit is, therefore, as McDonald (1995) has suggested:
“The means by which a company can identify its own
strengths and weaknesses as they relate to external
opportunities and threats.
• The audit must be comprehensive, systematic, independent
and conducted on a regular basis.
• Given this, the three major elements and potential benefits of
the marketing audit can be seen to be:
 The detailed analysis of the external environment and internal
situation
 The objective evaluation of past performance and present
activities
 The clearer identification of future opportunities and threats.

34. What is marketing audit?..
• The marketing audit can be seen in terms of providing a sound
basis for the process of resource allocation.
• In this way, any strategy that is then developed should be far
more consistent both with the demands of the environment
and the organization’s true capabilities and strengths.
The Structure and Focus of Marketing Audit
In terms of its structure, the marketing audit consists of three
major and detailed diagnostic steps. These involve a review of:
 The organization’s environment (opportunities and threats)
 Its marketing systems (strengths and weaknesses)
 Its marketing activities.

35. The Structure and Focus of Marketing Audit
• The first of these is designed to establish the various
dimensions of the marketing environment, the ways in which
it is likely to change and the probable impact of these changes
upon the organization.
• The second stage is concerned with an assessment of the
extent to which the organization’s marketing systems are
capable of dealing with the demands of the environment.
• The final stage involves a review of the individual components
of the marketing mix.
It should be apparent from this that, in conducting an audit, the
strategist is concerned with two types of variables.
 First, there are the environmental or market variables, over
which the strategist has little or no direct control.

36. The Structure and Focus of Marketing Audit
 Second, there are the operational variables, which can be
controlled to a greater or lesser extent.
 This distinction can also be expressed in terms of the macro-
environmental forces (political/legal, economic/demographic,
social/cultural, and technological) that affect the business,
and micro-environmental actors (customers, competitors,
distributors and suppliers) who subsequently influence the
organization’s ability to operate profitably in the marketplace.
 The process and purpose of the audit begins with an external
audit covering the macro-environmental forces referred to
above and the markets and competitors that are of particular
interest to the company.

37. The Structure and Focus of Marketing Audit
• The internal audit then builds upon this by assessing the
extent to which the organization, its structure and resources
relate to the environment and have the capability of operating
effectively within the constraints that the environment
imposes.
• With regard to the question of how frequently the audit
should be conducted, this is typically influenced by several
factors, the most important of which are the nature of the
business, the rate of environmental change and the planning
cycle (annual, bi-annual).

38. The Stages of Marketing Audit
• In conducting a marketing audit, the majority of planners
adopt a stepwise procedure.
In discussing this, Grashof (1975) advocated the following steps:
1. Pre-audit activities in which the auditor decides upon the
precise breadth and focus of the audit
2. The assembly of information on the areas which affect the
organization’s marketing performance – these would
typically include the industry, the market, the firm and each
of the elements of the marketing mix
3. Information analysis
4. The formulation of recommendations
5. The development of an implementation programme.

39. The Stages of Marketing Audit…
2.3.1. Environmental Analysis
• “When the rate of change inside the company is exceeded by
the rate of change outside the company, the end is near.” Jack
Welch, former Chief Executive Officer, General Electric.
• Marketing strategy must therefore develop out of a detailed
understanding of the environment.
Given this, the planner must:
 Know what to look for
 Know how to look
 Understand what he or she sees
 Develop the strategy and plan that takes account of this
knowledge and understanding.

40. 2.3.1. Environmental Analysis…
• See figure…
Against this background, the strategist can then move to an
assessment of the nature of the environment.
In essence, this is concerned with answering three questions:
• How uncertain is the environment?
• What are the sources of this uncertainty?
• How should this uncertainty be dealt with?
 Levels of uncertainty are directly attributable to the extent to
which environmental conditions are dynamic or complex.
 Dynamism is due largely to the rates and frequency of change,
while complexity is the result either of the diversity of
environmental influences, the amount of knowledge required
to cope with them, or the extent to which environmental
factors are interconnected.

41. Chapter Three:Formulation of Strategy
3.1. Introduction
• At a fundamental level marketing strategy is about markets
and products.
• Organizations are primarily making decisions about which
markets to operate in and which products/services to offer to
those markets.
• Once those essential decisions have been taken the company
then has to decide on what basis it is going to compete in that
chosen market.
• Segmentation is therefore at the heart of strategic marketing
decision making.
• In essence it is a strategic rather than an operational issue
and has to be treated as such.

42. 3.2. Porters Generic Competitive Strategies
• Marketing strategy aims to generate sustainable competitive
advantage.
• The process is influenced by industry position, experience
curves, value effects and other factors such as product life
cycle.
• In any given market place, businesses must adopt defensive
and attacking strategies. Such actions aim to maintain and/or
increase market share.
• Organizations need to ensure their strategic position is
relevant to current/future market conditions.
• The notions of competitive advantage and marketing strategy
are intrinsically linked.
• Competitive advantage is the process of identifying a
fundamental and sustainable basis from which to compete.

43. 3.2. Porters Generic Competitive Strategies …
• Ultimately, marketing strategy aims to deliver this advantage
in the market place.
• Porter (1980) has, however, pulled them together and
identified three generic types of strategy – overall cost
leadership, differentiation and focus – that provide a
meaningful basis for strategic thinking.
• In doing this, he gives emphasis to the need for the strategist
to identify a clear and meaningful selling proposition for the
organization.
• In other words, what is our competitive position, and what do
we stand for in the eyes of our customers?

44. 3.2. Porters Generic Competitive Strategies …
• Any failure on the part of the strategist to identify and
communicate the selling proposition and strategy is, he
suggests, likely to lead to a dilution of the offer and to the
company ending up as trapped in the middle-of-the-roader
heading into the marketing wilderness.
• Porter’s thesis is therefore straightforward: to compete
successfully the strategist needs to select a generic strategy
and pursue it consistently.
• The ways in which this might be done and the benefits and
the problems that might possibly be encountered should be
identified.
• Obviously, there is no single ‘best’ strategy even within a
given industry, and the task faced by the strategist involves
selecting the strategic approach that will best allow it to
maximize its strengths vis-à-vis its competitors.

45. 3.2. Porters Generic Competitive Strategies …
• This needs to be done, Porter (1979) suggests, by taking into
account a variety of factors, the five most significant of which
are:
1. The bargaining power of suppliers
2. The bargaining power of customers
3. The threat of new entrants to the industry
4. The threat of substitute products or services
5. The rivalry among current competitors.
Taken together, these factors represent the forces governing the
nature and intensity of competition within an industry, and they
are the background against which the choice of a generic
strategy should be made (see section 3.2.3).

46. 3.2. Porters Generic Competitive Strategies …
• In identifying the three specified generic strategies, Porter
suggests that the firms that pursue a particular strategy aimed
at the same market or market segment make up a strategic
group.
• It is the firm that then manages to pursue the strategy most
effectively that will generate the greatest profits.
• Thus, in the case of firms pursuing a low-cost strategy, it is the
firm that ultimately achieves the lowest cost that will do best.
a) Cost leadership
One potential source of competitive advantage is to seek an
overall cost leadership position within an industry, or industry
sector. Here the focus of strategic activity is to maintain a low
cost structure.

47. Cost leadership…
• The desired structure is achievable via the aggressive pursuit
of policies such as controlling overhead (operating) cost,
economies of scale, cost minimization in areas such as
marketing and R&D, global sourcing of materials and
experience effects.
• Additionally, the application of new technology to traditional
activities offers significant opportunity for cost reduction.
• Difficulties can exist in maintaining cost leadership. Success
can attract larger, better resourced competitors.
• If market share falls, economies of scale become harder to
achieve and fixed costs, such as overheads, are difficult to
adjust in the short-to-medium term.

48. a) Cost leadership…
• Additionally cost leadership and high volume strategy are
likely to involve high initial investment costs and are often
associated with ‘commodity’ type products
• where price discounting and price wars are common.
Remember, low cost does not need to equate automatically to
low price.
• Products provided at average, or above average, industry
price (while maintaining cost leadership) can generate higher
than average margins.
• The basic drivers of cost leadership include:
 Economy of scale- this is perhaps the single biggest influence
on unit cost. Correctly managed, volume can drive efficiency
and enhance purchasing leverage. Additionally, given large-
scale operations, learning and experience effects can be a
source of cost reduction.

49. a) Cost leadership…
 Linkages and relationships- being able to link activities
together and form relationships can generate cost savings. For
example, a‘just-in-time’ manufacturing system could reduce
stockholding costs and enhance quality. Building relationships
with external organizations is also vital.
 Infrastructure- factors such as location, availability of skills
and governmental support greatly affect the firm’s cost base.
b) Differentiation
 Here the product offered is distinct and differentiated from
the competition.
 The source of differentiation must be on a basis of value to
the customer.
 The product offering should be perceived as unique and
ideally offer the opportunity to command a price premium.

50. b) Differentiation…
 Will customers pay more for factors such as design, quality,
branding and service levels?
 The skills base for a differentiation strategy is somewhat
different from a cost leadership strategy and will focus on
creating reasons for purchase, innovation and flexibility.
 Remember, often it is the perception of performance as
opposed to actual performance that generates differentiation.
 There are several ‘downsides’ to this type of strategy:
 Firstly, it can be costly with associated costs outweighing the
benefits.
 Secondly, innovation and other initiatives can be duplicated
by competitors.
 Thirdly, customer needs change with time and the basis of
differentiation can become less important as customers focus
on other attributes.

51. b) Differentiation…
For example, in the car market, safety may now be seen as more
important than fuel economy.
 Common sources of differentiation include:
 Product performance- does product performance enhance its
value to the customer? Factors such as quality, durability and
capability all offer potential points of differentiation.
Performance is evaluated relative to competitors’ products
and gives customers a reason to prefer one product over
another.
 Product perception- often the perception of a product is
more important than actual performance. Hopefully, the
product has an enduring emotional appeal generating brand
loyalty. This is commonly achieved via marketing
communications (advertising, branding, endorsement, etc.)
and direct experience of customer groups.

52. b) Differentiation…
 Product augmentation- we can differentiate by augmenting
the product in a way that adds value. For example, high levels
of service, after-sales support, affordable finance and
competitive pricing all serve to enhance the basic product
offering. It is common for distributors, such as retailers, to
provide the added-value augmentation.
c) Focus
• The third of the generic strategies identified by Porter involves
the organization in concentrating its efforts upon one or more
narrow market segments, rather than pursuing a broader-
based strategy.
• The organization concentrates on a narrower range of
business activities. The aim is to specialize in a specific market
segment and derive detailed customer knowledge.

53. c) Focus…
• This focus, or niche, strategy can also generate the benefits of
cost leadership or differentiation within a defined market
segment.
• For example, it may be possible to obtain cost leadership
within a chosen segment or that segment may regard your
product offering as differentiated.
• Success within a specialist niche can attract competitors –
perhaps much better resourced.
• Additionally, the narrow business base means more
susceptibility to downturns in demand from key customer
groups.
A focus strategy is based on factors such as:
 Geographic area- using geographic segmentation allows a
product to be tailored to local needs.

54. c) Focus…
• The local association may offer the potential to differentiate
the offering (e.g. Champagne comes from a specific French
region) and protect the market from larger predators.
• Another rationale for such segmentation is to serve markets
too small or isolated to be viable on a large scale (e.g. rural
communities).
 End-user focus- it is possible to focus on a specific type of
user as opposed to the entire market.
• Specialization offers the opportunity to get ‘close’ to
customers and have a better understanding of their needs.
• Additionally, within a narrow segment the focused
organization may be able to offer the choice, service and
economy-of-scale not available to more broadly based
competitors.

55. c) Focus…
• This strategy often works by selecting specific points on the
price/quality spectrum within a given market (e.g. discount
food retailer).
 Product/product line specialist- the organization focuses on a
single product type or product line.
• Value is derived from the specialization in terms of skills,
volume and range (e.g. industrial power supplies).
3.2.1. Identifying the Source of Competitive Advantage
 Once the generic strategy is understood, it is possible to
consider how it can be translated into specific competitive
advantage.
 Competitive advantage is achieved whenever you do
something better than competitors.

56. Identifying the Source of Competitive Advantage
• If that something is important to consumers, or if a number of
small advantages can be combined, you have an exploitable
competitive advantage.
• One or more competitive advantages are usually necessary in
order to develop a winning strategy, and this in turn should
enable a company to achieve above-average growth and
profits.
• A prerequisite to competitive advantage is sustainability. The
organization must be able to sustain its competitive
advantage over the long term.
In order to be sustainable the competitive advantage must be:
 Relevant- it must be appropriate to current and future market
needs. Additionally, it must be relevant to the organization –
achievable within the available resource base.

57. 3.2.1. Identifying the Source of Competitive Advantage…
 Defensible- there must be barriers to replication, otherwise
success will simply be duplicated by competitors. Such
barriers tend to be:
(i) asset based – tangible factors controlled by the organization,
such as location, plant and machinery, brands and finance;
(ii) skills based – the skills and resources required to make
optimum use of the assets, such as quality management,
brand development, product design and IT skills.
 Clearly competitive advantage must be appropriate to the
strategic nature of the industry.
 An interesting template that evaluates the strategic
competitive environment has been developed by the Boston
Consultancy Group.

58. 3.2.1. Identifying the Source of Competitive Advantage…
• This matrix identifies four types of industry. The industries are
classified in terms of: (i) size of competitive advantage, and (ii)
number of possible ways to achieve advantage.
See the figure…
• Stalemate industries- here the potential for competitive
advantage is limited.
 Advantages are small and only a few approaches exist to
achieving these advantages.
 Technological advances are commonly adopted by all industry
‘players’ and we see rapid convergence in product
design/performance.
 Such industries tend to be mature, highly competitive and
often akin to commodity-type products where price is the key
buying criterion (e.g. manufacturing desktop computers).

59. 3.2.1. Identifying the Source of Competitive Advantage…
• Volume industries- here few but highly significant advantages
exist.
 These industries are often capital intensive and are
dominated by a few large players who achieve economies of
scale (e.g. volume car manufacture).
• Fragmented industries-the market’s needs are less well
defined and numerous ways exist to gain advantage.
 The industry is often well suited to niche players and
profitability may not be linked directly to size.
 Commonly, organizations grow by offering a range of niche
products to different segments – a multi-segmentation
strategy (e.g. computer software).

60. 3.2.1. Identifying the Source of Competitive Advantage…
• Specialized industries- the potential advantage of
differentiation is considerable and numerous ways exist to
achieve this advantage. Profitability and size are not
automatically related.
 Such industries include those developing customized solutions
to specific problems (e.g. management consultancy) and firms
involved in the development/ application of innovative
technology (e.g. biomedical engineering).
 Understanding generic strategies and the application of
competitive advantage to the business environment are
fundamental to success.

61. Source of competitive advantage include:
 Actual product performance E.g. Robust, economic, easy to
use
 Perception of product -Brand image, product positioning
 Low cost operations- Location, buying power
 Legal advantage -Patents, contracts and copyright
 Alliances and relationships -Networking, procurement and
joint ventures
 Superior skills- Database management, design skills
 Flexibility -Developing customized solutions
 Attitude-Aggressive selling, tough negotiation

62. 3.2.2. The Experience and Value Effects
• The experience curve denotes a pattern of decreasing cost as
a result of cumulative experience of carrying out an activity or
function.
• Essentially, it shows how learning effects (repetition and
accumulated knowledge) can be combined with volume
effects (economy of scale) to derive optimum benefits with
experience, the organization should produce better and lower
cost products.
• The main influence of experience effects has been to promote
a high volume/low cost philosophy aiming at a reduction in
unit cost.
• However, in today’s competitive business world, organizations
cannot simply rely on a ‘big is beautiful’ strategy based on
economy of scale and market share.

63. 3.2.2. The Experience and Value Effects…
• It is vital to recognize the importance of learning effects on
factors such as product quality and service levels. Such factors
hold the key to future success and greatly influence the ability
to ‘add value’ to product offerings.
• Eventually, cost and learning effects will display diminishing
returns and an optimum level is reached. However, the
process never stops. The advent of new technologies may
mark a shift in experience and offer new challenges.
• The concept of a value chain, developed by Porter (1980),
categorizes the organization as a series of processes
generating value for customers and other stakeholders. By
examining each value-creating activity, it is possible to identify
sources of potential cost leadership and differentiation.

64. 3.2.2. The Experience and Value Effects…
• The value chain splits activities into: primary activities and
secondary activities
(i) Primary Activities
1. Inbound logistics, which are the activities that are
concerned with the reception, storing and internal
distribution of the raw materials or components for
assembly.
2. Operations, which turn these into the final product.
3. Outbound logistics, which distribute the product or service to
customers. In the case of a manufacturing operation, this would
include warehousing, materials handling and transportation. For
a service, this would involve the way in which customers are
brought to the location in which the service is to be delivered.

65. 3.2.2. The Experience and Value Effects…
4. Marketing and sales, which make sure the customers are
aware of the product or service and are able to buy it.
5. Service activities, which include installation, repair and
training.
(ii) Secondary Activities
1. The procurement of the various inputs
2.Technology development, including research and development,
process improvements and raw material improvements
3. Human resource management, including the recruitment,
training, development and rewarding of staff
4. The firm’s infrastructure and the approach to organization,
including the systems, structures, managerial cultures and ways
of doing business.

66. 3.2.2. The Experience and Value Effects…
• These secondary activities take place in order to support the
primary activities. For example, the firm’s infrastructure (e.g.
management, finance and buildings) serves to support the
five primary functions.
• While each activity generates ‘value’, the linkages between
the activities are critical. Consider the interface between in-
bound logistics and operations.
• A just-in-time logistics system, supported by computerized
stock ordering (technology development – secondary activity)
could reduce stock costs and enhance the quality of products
manufactured in the operations phase of the chain, thus
enhancing the overall value generated by the process.

67. 3.2.2. The Experience and Value Effects…
• The value chain provides an additional framework to analyze
competitive advantage.
• It helps identify the key skills, processes and linkages required
to generate success. Additionally, the concept can link
organizations together.
• A series of value chains can be analyzed as one overall
process. For example, the value chains of a component
manufacturer and equipment manufacturer could be merged
into one system, with common support activities.
• This could have the effect of reducing overall costs and
improving co-ordination between the companies.

68. 3.2.3. The Five-Force Model of Competition…