The Company and The Market

1. Strategic Planning
Week 4
The Company and the Market.

2. Strategic Planning
The Market – Some Key Questions:
 Are we in the right markets?
 What resources should be allocated to
the development of these markets? For
example, if a market is growing
particularly well, should we not be
investing in this market?

3. Strategic Planning
The determinants of market size include
some factors we have mentioned before:
 Product Life Cycle.
 Business Cycle.
 Exogenous Shocks.
 GNP Elasticity
 Exchange Rates

4. Strategic Planning
How much market share we have can depend
on a wide range of factors, primarily related to
the marketing mix:
 Product – design, quality etc.
 Price – what level, how competitive.
 Place/Distribution – how extensive/effective
 Promotion – how effective

5. Strategic Planning
Understanding the Demand Curve can help
us set price at an optimum level:
 An increase in price may result in an
increase in revenue up to a point and
then start reducing as customers start to
switch to substitutes.

6. Strategic Planning
The Demand Curve and Market Share are
clearly related:
 If the market is price sensitive, then a price
reduction might result in increased sales.
 If the market is non price sensitive, then the
price reduction might have limited impact.

7. Strategic Planning
Share versus Revenue is a common point of
disagreement in companies.
 A larger share might actually result in
reduced revenue because the price has
to be reduced by such a large amount to
get that share.

8. Strategic Planning
The Demand Curve and Marketing
Expenditure
 Marketing expenditure should, at least in
theory, increase demand levels at each
price. Essentially the demand curve is
shifted to the right.

9. Strategic Planning
The two factors are critical in estimating the
impact of strategy.
 Price changes will result in a movement
along the demand curve.
 Marketing is likely to move the demand
curve. Essentially more will be
demanded at all prices.
 Both may lead to increased market
share.

10. Strategic Planning
Pricing strategy may be crucial in our
success. For example:
 Price Leadership – one company leads
the market and others follow. Some
competitors may not “follow the rules”
though.
 Limit Pricing – creating an entry barrier
through price.

11. Strategic Planning
 Predatory Pricing - forcing out
competitors through pricing.

12. Strategic Planning
Market Segmentation.
 The aim of market segmentation is to
maximise all of the factors that we have
been talking about. Some segments will
be less price sensitive than others.
Revenue can be maximised by
recognising this.

13. Strategic Planning
Market Segmentation should be:
 Identifiable - should be able to note
common features that make the segment
up.
 Demand related – such as a willingness
to pay more.
 Adequate size – has to create a
reasonable return on investment.

14. Strategic Planning
Market Segmentation should be:
 Attainable – we have to be able to reach
the customers with marketing strategy.

15. Strategic Planning
Analysing Segment Attractiveness
 This will tend to use a range of models
that will be discussed during the course.
Typically this will include:
 Demand and Supply Analysis.
 Market Structures.
 Barriers to Entry.etc.

16. Strategic Planning
The Effect of Product Differentiation.
 Product differentiation may be about
“real” factors such as price and features
but may also be about perception.
 The biggest drivers are likely to be
relative price and relative differentiation.

17. Strategic Planning
Pricing in Segments
 This can be the source of complex
economic theory! However, we can
agree that a monopolist will charge
different prices in different markets
depending on market conditions….

18. Strategic Planning
Quality
The Perception of Quality will be a critical
market factor and will often influence our
strategic decisions.

19. Strategic Planning
Dimensions of Quality might include
 Performance
 Features
 Reliability
 Conformance to legal and other standards
 Durability
 Serviceability

20. Strategic Planning
 The relationship between strategy and
quality is a difficult one.
 Improved quality might increase share
and advertising expenditure and
perceived quality appear positively
related. However, this relationship may
be difficult to establish in practice.

21. Strategic Planning
Product Life Cycles.
 Most people are aware of this concept. It
can be a very powerful too in Strategic
Planning.
 The constant shortening of Product Life
Cycles is becoming an increasing
challenge.

22. Strategic Planning
 Introduction – the product is invented
and introduced to the market; it can take
some time for information about the
product to be disseminated.
 Growth – the product becomes
increasingly well known, markets are
penetrated and it possibly replaces other
products.

23. Strategic Planning
 Maturity – all markets are exploited and
there is no further increase in sales.
 Decline – the product is superseded by
technological progress or substitutes
appear.

24. Strategic Planning
The Strategic Implications of this cycle
should be considered.
 In a growth market, low investment by us may
result in a loss of market position and strong
rivalry from competitors.
 In a declining market we may decide to leave
or decide to achieve leadership by forcing out
the competition. Both are strategic decisions.

25. Strategic Planning
Typically, in the introduction phase:
 Investment in capacity and marketing will be
high.
 Cash flows will be negative – we may need
considerable resources.
 Knowledge about competition and market
acceptance will be limited – the product is a
question mark.

26. Strategic Planning
In growth:
 As sales increase, investment will be
required in terms of marketing and
production capacity. This may present a
major challenge.
 New entrants will have to be considered.
 Marketing expenditure will be high.

27. Strategic Planning
In growth:
 Prices will be set relatively low.
 Capacity will be underutilised in
anticipation of increased orders. We may
have to “plan ahead”.

28. Strategic Planning
In maturity.
 The company can now gear its
productive capacity to demand.
 A number of key drivers will be crucial.
Typically these will be:

29. Strategic Planning
 Economies of Scale.
 Supply Costs.
 Overheads.
 Product/Process Design.
 Experience.

30. Strategic Planning
In decline
 The company has to decide whether or
not to exit the industry or not.
 Investments will be few.
 Some companies may decide that
leadership is the best strategy.

31. Strategic Planning
Now lets consider Market Structures and
Barriers to Entry.
We have to appreciate that companies
achieving monopoly profits will always be
under threat.
Entry barriers may well reduce these threats
We will now consider some of these potential
barriers.

32. Strategic Planning
 Barriers to Entry.
Capital Requirements – may be the ability to
raise funds, the amount of capital equipment
required to function. Consider how much it
would take to set up a car factory and contrast
this with a shop in Ebay!

33. Strategic Planning
 Barriers to Entry.
Sunk Costs – these are often exit costs. The
cost of getting out is so high that it puts off
people entering the market. It also keeps
current participants in that market. For
example, the newspaper publishing industry
has a vast amount of money tied up in capital
equipment.

34. Strategic Planning
 Barriers to Entry.
Size of the Market – it may not be possible for
more than one firm to operate in a particular
market segment. In some cases there are
“natural” monopolies, as typical with utilities.
Some companies may operate as niche
businesses because of the small market size
available.

35. Strategic Planning
 Barriers to Entry.
Legislation or Tacit Agreement:
 Cartels/Industry agreements legal and otherwise!
 Agency or other marketing agreements.
 Legal Monopolies where markets are controlled by
the government perhaps.
 Tariff Barriers and other market distortions.

36. Strategic Planning
 Barriers to Entry.
Economies of Scale – a reduced average cost
over time can contribute to cost leadership
that is hard to compete with. We will discuss
economies of scale shortly in our class on
resources.

37. Strategic Planning
 Barriers to Entry.
Experience Effect/Learning Curve.
Companies that have been doing a certain
type of work for some time will gain
advantages through experience. We will
discuss this in more detail in the next stage of
the course.

38. Strategic Planning
 Barriers to Entry.
Reputation and Image – Brands and brand
loyalty can present very high entry barriers
that are almost impossible to overcome.

39. Strategic Planning
 Barriers to Entry.
Pricing – pricing strategy can be used in
conjunction with the experience curve to gain
advantage. For example, a company may
offer a very low price because it has a very
low cost base. This will make it difficult for
other companies to compete.

40. Strategic Planning
 Barriers to Entry.
Access to distribution channels
 Exclusive distribution channels and arrangements
can keep out competitors. This may be particularly
true with high value products and services where
the number of distributors per territory is quite
restricted.

41. Strategic Planning
Porter’s Five Forces Model
 This well known model attempts to answer the
simple question of how competitive a market is.
 It considers five specific forces in a market. The
higher these are the tougher is the business.
 A key feature of the model is that it shows how
an organisation might reduce the competitive
forces through strategic action.

43. Strategic Planning
Steps in the Application of the 5 Forces Model
 Always apply analysis to an industry even when working
on an individual company
 Define the Industry
 Decide whether each force is strong or weak
 What is the profit potential for companies?
 How can we change forces in the company’s behaviour?
 Conclude overall, how competitive is the industry?
 Apply complementary models
 Strategic Group Analysis, industry life cycle etc.

44. Strategic Planning
 Rivalry – influenced by:
 Level of industry concentration. A High ratio suggests
a small number of large firms.
 A large number of firms will increase rivalry.
 Slow market growth will increase rivalry.
 High fixed costs will increase rivalry as volume is
required to attain low unit costs.
 High storage costs/perishable products will increase
rivalry.

45. Strategic Planning
 Rivalry – influenced by:
 Low levels of product differentiation will increase
rivalry, branding will reduce it.
 Rivalry will increase when strategic stakes are high –
when a firm is losing market position perhaps.
 High exit barriers will increase rivalry.
 Industry shakeouts will increase rivalry.

46. Strategic Planning
 Substitutes influenced by:
 Is the substitute a “perfect” substitute or a partial one?
 How price sensitive are the markets involved. If the
price of an item increases, will customers go to a
substitute quickly or slowly?
 The key point about substitutes is that they are
alternate ways of meeting the same need. Sometimes
not buying the product at all may be a substitute, as in
the case of people giving up smoking.

47. Strategic Planning
 Buyer Power – buyers are powerful if:
 There are a small number of powerful buyers, such as
governments buying from defence contractors.
 There are a small number of large buyers – Tescos
etc.
 There is a strong backward integration threat – car
manufacturers buying suppliers, Fast food suppliers
buying farms.

48. Strategic Planning
 Buyer Power – buyers are weak if:
 Producers can integrate forward – Movie makers
have bought cinemas.
 There are high switching costs – often military
hardware will have unique spare parts.
 There are many weak buyers – most consumer
products.
 Producers supply a critical component – Intel
supplying the computer industry.

49. Strategic Planning
 Supplier Power – Strong if:
There is a strong forward integration threat –
manufacturers take over the distribution
chain.
Suppliers are concentrated – the Drug
industry.
Significant cost to switch suppliers – Microsoft
and the computer industry.
Customers are powerful

50. Strategic Planning
 Supplier Power – Weak if:
 The product is standardised and there are many
suppliers – Standard electronic components and
electronic products manufacturers.
 There are commodity products available – own brand
labels in supermarkets.
 There is a backward integration threat – Paper
companies and timber producers.
 Purchasers are concentrated – major stores and their
suppliers

51. Strategic Planning
 Threat of Entry can be controlled by:
 Government created barriers –
regulation/deregulation.
 Patents and proprietary knowledge – Polaroid v
Kodak, ability to grant degrees, qualifications and
other skills.
 Asset specificity – increasingly knowledge based.
 Economies of scale.
 Availability of brands.

52. Strategic Planning
 Some Key Questions
 What are the key forces at work?
 What are the underlying forces?
 Will the forces change?
 How do the competitor’s strengths and
weaknesses relate to the forces?
 Can the forces be influenced by us?
 Are some industries more attractive?

53. Strategic Planning
In conclusion, understanding both the macro
and micro elements of the environment is
critical for strategy. Some elements will be
within our control, others not. All will have
to be considered.