This document discusses marketing strategy formulation. It begins by outlining Porter's generic competitive strategies of cost leadership, differentiation, and focus. It then discusses identifying sources of competitive advantage through experience and value curves. Porter's five forces model is explained as examining the competitive environment through suppliers, new entrants, substitutes, buyers and industry rivals. Finally, it outlines strategies for market leaders to defend their position and strategies for challengers to attack opponents.

1. Chapter Three
Formulation of Strategy

2. 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.
3.2. Porters Generic Competitive Strategies
• Marketing strategy aims to generate sustainable
competitive advantage.

3. Porters Generic Competitive Strategies …
• 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.
• Competitive advantage is the process of identifying a
fundamental and sustainable basis from which to compete.
Ultimately, marketing strategy aims to deliver this advantage
in the market place.

4. Competitive Strategies…
• Porter (1980) has identified three generic types of strategy –
overall cost leadership, differentiation and focus – that
provide a meaningful basis for strategic thinking.
• According to Porter, to compete successfully the strategist
needs to select a generic strategy and pursue it consistently.
• 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.

5. Competitive Strategies…
a) Cost leadership
• Here the focus of strategic activity is to maintain a low cost
structure.
• 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.

6. 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.
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.
 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.

7. a) Cost leadership…
• 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.
• 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.

8. b) Differentiation…
• 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. 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.

9. b) 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.
 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.

10. 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.
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.

11. 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.
• 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.
 Defensible- there must be barriers to replication, otherwise
success will simply be duplicated by competitors.

12. Source of Competitive Advantage…
• 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.
• An interesting template that evaluates the strategic
competitive environment has been developed by the Boston
Consultancy Group. 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.

13. Source of Competitive Advantage…

14. Source of Competitive Advantage…
a) Stalemate industries- here the potential for competitive
advantage is limited. Advantages are small and only a few
approaches exist to achieving these advantages.
b) 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).
c) Fragmented industries-the market’s needs are less well
defined and numerous ways exist to gain advantage.
d) Specialized industries- the potential advantage of
differentiation is considerable and numerous ways exist to
achieve this advantage.

15. 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 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.

16. 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.

17. 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.

18. 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.
3.2.3. The Five-Force Model of Competition
• The industry environment combines forces that are
particularly relevant to a firm's strategy, including competitors
(existing and potential), customers, and suppliers.
• The "five forces" model, the most commonly utilized
analytical tool for examining the competitive environment,
was developed to broaden our thinking about how forces in
the competitive environment shape strategies and affect
performance.

19. 3.2.3. The Five-Force Model of Competition…
• these forces determine the nature and extent of competition
and shape the strategies of firms in their particular
competitive environments.
• Porter argues that the stronger each of these forces is, the
more limited is the ability of established companies to raise
prices and earn greater profits.
• Now let us see each of them:
1. The Threat of New Entrants
 Potential competitors are companies that are not currently
competing in an industry but have the capability to do so if
they choose.
 When a business begins operation in a new market, we say it
has entered that market; when it ceases to operate in a
market, we say it has exited.

20. The Threat of New Entrants…
• A new entrant in an industry represents a competitive to the
established firms, sometimes called the incumbents (those
already operating in an industry.)
• The incumbent companies try to discourage potential
competitors from entering the industry, since the more
companies enter, the more difficult it becomes for established
companies to hold their share of the market and to generate
profit.
• So, the incumbent firms erect some barriers to entry that
make it costly for companies to enter an industry.
• Major sources of barriers to entry include:
 Economies of scale
 Cost disadvantages independent of size

21. sources of barriers to entry…
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channel
 Government policy
2. The Intensity of Rivalry among competitors
 If this rivalry is weak, companies have an opportunity to raise
prices and earn greater profits. If rivalry is strong, significant
price competition, including price wars, may result.
 The extent of rivalry among established companies within an
industry is largely a function of three factors: (1) the industry's
competitive structure, (2) demand conditions, and (3) the
height of exit barriers in the industry.

22. 3.The bargaining power of customers (buyers)…
• Buyers can exert bargaining power over a supplier's industry
by forcing its prices down, by reducing the amount of goods
they purchase from the industry, or by demanding better
quality for the same price.
• Porter, buyers are most powerful in the following
circumstances:
 When the supply industry is composed of many small
companies and the buyers are few in number and large.
 When the buyers purchase in large quantities.
 When the supply industry depends on the buyers for a large
percentage of its total orders.
 When the buyers can switch orders between supply
companies at a low cost, thereby playing off companies
against each other to force down prices.

23. 3.The bargaining power of customers (buyers)…
 When it is economically feasible for the buyers to purchase
the products from several companies at once.
 When there is threat of backward integration by buyers
 Undifferentiated or standard supplies
 Accurate information about the cost structure of the supplier
 Price sensitivity of the buyer
4. The Bargaining power of Suppliers
• Suppliers can be viewed as a threat when they are able to
force up the price that a company must pay for its inputs or
reduce the quality of the inputs they supply, thereby
depressing the company’s profitability.

24. 4.The Bargaining power of Suppliers…
• According to Porter’s suppliers are most powerful:
 When the product that they sell has few substitutes and is
important to the company.
 When the company's industry is not an important customer of
the suppliers.
 When the suppliers’ respective products are differentiated to
such an extent that it is costly for a company to switch from
one supplier to another.
 When, to raise prices, they can use the treat of vertically
integration forward into the industry and competing directly
with the company.
 When buying companies cannot use the threat of vertically
integrating backward and supplying their own needs as a
means to reduce input prices.

25. 5. The Threat of substitute products…
• Substitute products are those of industries that serve
consumers' needs in a way that is similar to those being
served by the industry being analyzed.
• For example, companies in the coffee industry compete
indirectly with those in the tea and soft drink industries. All
three industries serve consumers' need for drinks.
3.3. Marketing Strategy for Leaders, Challengers, Followers and
Nichers
i) Market Leader Strategies
• Market leader is dominant firm within the given industry or
segment. This dominance is normally due to market share.
However, some organizations may achieve ‘leadership’ via
innovation or technical expertise.

26. i) Market Leader Strategies…
• If a market leader is to remain as the dominant company, it
needs to defend its position constantly.
• Marketing strategy for leaders in defending their position
include:
 Position Defense -position defense involves occupying the
most desirable market space in the minds of the consumers,
making the brand almost secure, like Tide laundry detergent
with cleaning; Crest toothpaste with cavity prevention; and
Pampers diapers with dryness.
 Flank Defense- although position defense is important, the
market leader should also erect outposts to protect a weak
front or possibly serve as an invasion base for counterattack.

27. i) Market Leader Strategies…
• Preemptive Defense- a more aggressive maneuver is to attack
before the enemy starts its offense. A company can launch a
preemptive defense in several ways. It can wage guerrilla action
across the market—hitting one competitor here, another there—
and keep everyone off balance; or it can try to achieve grand
market envelopment.
• Counter offensive Defense- when attacked, most market leaders
will respond with a counterattack.
• Mobile Defense - mobile defense, the leader stretches its domain
over new territories that can serve as future centers for defense
and offense through market broadening and market diversification.
• Contraction Defense -large companies sometimes recognize that
they can no longer defend all of their territory. The best course of
action then appears to be planned contraction (also called strategic
withdrawal): giving up weaker territories and reassigning resources
to stronger territories..

28. ii) Market-Challenger Strategies
• Many market challengers have gained ground or even
overtaken the leader.
• Toyota today produces more cars than General Motors and
British Airways flies more international passengers than the
former leader, Pan Am, did in its heyday. Airbus delivers more
aircraft than Boeing.
The challenger must decide whom to attack:
 It can attack the market leader. This is a high-risk but
potentially high-payoff strategy and makes good sense if the
leader is not serving the market well.
 It can attack firms of its own size that are not doing the job
and are underfinanced.
 It can attack small local and regional firms

29. ii) Market-Challenger Strategies…
Choosing a General Attack Strategy
• Given clear opponents and objectives, what attack options are
available? We can distinguish among five attack strategies:
frontal, flank, encirclement, bypass, and guerilla attacks.
 Frontal Attack- in a pure frontal attack, the attacker matches
its opponent's product, advertising, price, and distribution.
The principle of force says that the side with the greater
manpower (resources) will win.
 Flank Attack -an enemy's weak spots are natural targets. A
flank attack can be directed along two strategic dimensions—
geographic and segmental.