LECTURE 7

How Do Businesses Compete? (cont’)

The Fit Between Business Strategies and the

Environment
Do the same competitive strategies work for service
businesses?
i. Service is : any activity or benefit that one party can
offer to another that is essentially intangible and that
doesn’t result in the ownership of anything. Its
production may or may not be tied to a physical
product.
ii. Services’ Characteristics
➢ can be thought as intangibles and goods as
tangibles
➢ Can rarely be experienced in advance of the sale,
while goods can be experienced, even tested,
before purchase.
ii. The framework used to classify business-level
competitive strategies is also valid for service
businesses
Do the same competitive strategies work for global
competitors?
i. Businesses competing in global markets usually
pursue one of the two types of analyzer strategies.

ii. They must continue to strengthen and defend their

competitive position in their home country while
pursuing expansion and growth in new international
markets.

iii. A single SBU may need to engage in different

functional activities across the various countries in
which it competes
Will the Internet change everything?
i. The internet makes it harder for firms to differentiate
themselves on any basis other than low price.
Competitive strategies focused on differentiation will
become less viable; low-cost strategies will be more
successful.
ii. As customers gather information from the Internet and
become more informed they’re less likely to be
influenced by superficial distinctions between brands
iii. But if a firm offers unique benefits that customers
perceive as meaningful it should still be able to
differentiate its offerings and command a premium price
iv. Finally the internet makes it easier for firms to
customize their offerings and personalize relationships
with customers, thus improving customer loyalty and
retention
How Do Competitive Strategies Differ From One Another?
A. Differences in scope
The breadth and stability of a business’s domain will
vary with different strategies, which will affect the
variables the corporation uses to define its various
businesses
1. Defenders operate in well-defined and narrow
domains where the product technology and customer
segments are mature
2. Prospectors operate in broad and rapidly changing
domains where neither technology nor customer
segments are well-established. The scope of these
businesses undergoes periodic redefinition.
3. Analyzers fall in between the extremes. They have a
well-established core business but are often in
industries that are still growing so managers must
review and adjust the domain of such businesses
from time to time.
B. Differences in goals and objectives
➢ Three performance dimensions of major importance
to both business-unit and marketing managers
1. Effectiveness: measured by sales growth relative
to competitors or changes in market share
2. Efficiency: measured by profitability as a percent
of sales and return on investment
3. Adaptability: measured by the number of
successful new products introduced relative to
competitors or the percentage of sales accounted
for by products introduced in the last five years.
➢ Good performance on one dimension often means
sacrificing performance on another
➢ Prospectors expected to outperform defenders on
new product development and market-share growth,
but defender strategies lead to better returns on
investment
C. Differences in resource development
i. Prospectors devote a large portion of
resources to the development of new
product-markets (“question marks” or
“stars”)
ii. Defenders focus the bulk of their resources
on preserving existing positions in
established product-markets (“cash cows”)
D. Differences in sources of synergy
i. Prospectors and Analyzers: sharing of operating
facilities and programs may be an inappropriate
approach to gaining synergy.
1. This can reduce SBUs ability to adapt quickly to
changing market demands or competitive threats.
2. They should seek synergy through sharing
expertise that can help improve the success rate
of their product development efforts
ii. Low-cost defenders should seek operating synergies
that will make them more efficient. This is usually
gained through sharing of resources, facilities, and
functional activities across product-market entries
Deciding When a Strategy is Appropriate: The Fit
Between Business Strategies and the Environment

a. Appropriate conditions for a prospector strategy

I. A prospector strategy is well suited to unstable,
rapidly changing environments resulting from new
technology, shifting customer needs, or both
II. A prospector strategy devote the most resources to
functional areas that identify new technology and
convert it into innovative products and functions
necessary for identification and development of new
market opportunities.
Deciding When a Strategy is Appropriate: The Fit
Between Business Strategies and the Environment

b. Appropriate conditions for an analyzer strategy

I. Concerned with both defending a strong share
position in established product markets as well as
paying attention to new product development
II. Because of the dual focus most appropriate for well-
developed industries that are still experiencing some
growth and change.
Deciding When a Strategy is Appropriate: The Fit
Between Business Strategies and the Environment
C. Appropriate conditions for a defender strategy
I. Units with a profitable share of major segments in a mature, stable
industry
II. Industries where basic technology isn’t very complex or where its well
developed and unlikely to change much over the short term
III. Differentiated defenders
1. Business must be strong in functional areas critical for maintaining
its competitive advantage over time
2. Marketing is also important for implementing this strategy
iv. Low-cost defenders
1. Requires business to be more efficient than its competitors
2. Combination of low margins and heavy investment
3. Need for efficiency forces standardization of product offerings and
marketing programs across customer segments
4. Not effective in fragmented markets desiring customized offerings
as it is in commodity industries
How Different Business Strategies Influence
Marketing Decisions
SBUs strategy influences the amount of resources committed to marketing
and the kind of market and competitive situation that product-market
entries are likely to face and the objectives they are asked to attain

A. Product policies
i. Concern the breadth or diversity of product lines, level of
technical sophistication, and target level of product quality
ii. Prospectors and differentiated defenders should encourage broader
and more technically advanced product lines
iii. Low-cost defenders: broad and sophisticated product lines are less
consistent with the efficiency requirements
iv. Businesses can distinguish themselves on quality of service
1. High service quality is appropriate for differentiated defenders
2. If low-cost defenders have higher operating and administrative
costs, appropriateness of high service quality is questionable
How Different Business Strategies Influence
Marketing Decisions
B. Pricing policies
i. Success in offering low prices is positively related to the
performance of low-cost defenders
ii. Low price policies are inconsistent with differentiated
defenders and prospectors
B. Distribution policies
i. Prospectors show greater degree of forward vertical
integration
ii. Prospectors are likely to devote a larger percentage of
sales to trade promotions than defenders
iii. Defenders trying to maintain strong positions in
established markets should maintain control over the
behavior of channel members
How Different Business Strategies Influence
Marketing Decisions
D. Promotion policies
i. For prospectors high advertising and sales promotion
expenditures will likely have a positive relationship with
new product and share-growth success
ii. Differentiated defenders are likely to have higher
Salesforce expenditures
iii. Low-cost defenders likely make relatively low
expenditures as a percentage of sales on promotional
activities
 What if the Best Marketing Program for a Product Does
Not Fit the Business’s Competitive Strategy
A. If a business unit is focused on a single product category the ideal
solution may be for the whole SBU to change its strategy
i. The Problem is that effective implementation of different
business strategies also requires different organizational
structures, decision-making and coordination processes, reward
systems, and personnel
ii. I can be difficult for an entire SBU to make a successful
transition to a new strategy
B. Some firms form new prospector SBUs to pursue emerging
technologies and industries rather than expecting established units
to handle extensive new product development efforts
C. Some firms that are technological leaders may divest or license
individual product-market entries as they mature rather than defend
them in the face of increasing competition and eroding margins.
Discussion questions
Understanding Market
Opportunities
 Market: composed of individuals and organizations
who are interested in and willing to buy a good or
service to obtain benefits that will satisfy a particular
need or who want and have resources to engage in a
transactions
 Industry: a group of firms that offer a product or class
of products that are similar and are close substitutes for
one another
 Markets are comprised of buyers; industries are
comprised of sellers
 To assess market and industry attractiveness we need to
have two levels of analysis:
1. Macro-level analysis are based on environmental
conditions that affect the market or industry, as a
whole, without regard to a particular company’s
strategy, target market, or role in its industry
2. Micro-level analysis look at individuals in that
market or industry, that is, specific target
customers and companies themselves.
 Macroenvrionment is divided into six categories:
➢ Demographic
➢ Sociocultural
➢ Economic
➢ Regulatory
➢ Technological
➢ Natural
 Unfavorable macro trends that negatively influence market
demand can have a devastating effect on the performance of
firms serving that market.
 Similarly, favorable trends exert positive forces that make it
easier for firms to perform well.
z
1. The Demographic Environment:
There are five major global demographic trends that are likely to
influence fortunes of many companies:
1. Aging: providers of goods/services have taken note of the increase
in portion of the population aged 60 and over and taken steps to
develop marketing strategies to serve this fast-growing market.
2. AIDS: pharmaceutical companies and world health organizations
are struggling to develop strategies to deal with the AIDS
challenge, which presents a rapidly growing market.
3. Growing middle class: marketers can no longer view emerging
economies as consisting of a few, rich people and many poor
4. Increased immigration: implications for marketers seeking to
gain market share among immigrants
5. Declining marriage rates: implications of marrying in one’s 30s
versus one’s 20s (i.e. parents less likely to handle wedding
arrangements)
2. The Sociocultural Environment:
➢ Trends that have to do with values, attitudes, and
behavior of individuals in a society and that can
take a generation to have a significant impact.
Trends of particular relevance today:
1. Business ethics
2. Fitness and nutrition: implications are seen in
grocery stores, farming communities,
restaurant menus, health and fitness clubs
3. The Economic Environment
 Implications of trends in consumer spending can
be dramatic for marketers, but can be far indirect
than one might imagine
 Economic trends often work in concert with
other macro trends
4. The Regulatory Environment
 Political and legal trends, especially those
resulting in regulation or deregulation, can have
a large impact on market attractiveness.
5. The Technological Environment
 New technologies have created new markets, changed how
businesses operate, how goods and services and ideas are
exchanged, how crops are grown, and how individuals learn and
interact with each other
 Technological developments have created attractive new
markets as well as a profound impact on all aspects of
marketing practice
6. The Natural Environment
 Everything depends on the natural environment, including
marketing
 Discussion of problems in natural environment has stressed the
threats and penalties facing businesses
a. Businesses can do things to turn the problems into
opportunities
b. Businesses have seen opportunities in developing green
products, find new energy sources, save energy
 An industry’s attractiveness can be judged by
analyzing Porter’s five major competitive
forces:
1. Competition among present competitors
2. Threat of new entrants
3. Bargaining power of suppliers
4. Bargaining power of buyers
5. Threat of substitute products
1. Competition among present competitors
 Occurs among firms that produce products that are
close substitutes
 competition is greater under the following conditions:
a. There’s a high investment intensity; the amount
of fixed and working capital required to produce
a dollar of sales is large
b. There are many small firms or no dominant firms
exist
c. There’s little product differentiation
d. It’s easy for customers to switch from one
seller’s products to those of another
 Greater the competitive rivalry in an industry, the less
attractive it is to current players or would-be entrants
2. Threat of new entrants
 With the new entrants competition becomes more intense.
 The greater the threat of new entrants, the less attractive
an industry is.
 Entry is more difficult under the following conditions:
a. When strong economies of scale and learning effects
are present
b. If the industry has strong capital requirements at the
outset
c. When strong product differentiation exists
d. If gaining distribution is difficult
3. Bargaining power of suppliers
 Exercised through increased prices or more difficult
terms and conditions of sale.
 Power is increased under the following:
a. If the cost of switching to suppliers is high
b. If prices of substitutes are high
c. If suppliers can realistically threaten forward
integration
d. When the supplier’s product is a large part of the
buyer’s value added
 Greater the power, less attractive the industry.
4. Bargaining power of buyers
 The extent to which buyers succeed in bargaining efforts
depends on:
a. Extent of buyer concentration
b. Switching costs that reduce buyer’s bargaining power
c. Threat of backward integration
d. Product’s importance to the performance of the
buyer’s product
e. Buyer profitability
 Greater power of high-volume customers served by an
industry, less attractive the industry.
5. Threat of substitute products
 substitute products put a ceiling on the
profitability of an industry by limiting the
price than can be charged, especially when
supply exceeds demand.
 An opportunity may look attractive at the macro level but
unattractive at the micro level, or vice versa
 Opportunities are attractive at the micro level on the
market side when the market offering meets most or
all of the following tests:
a. There’s a clearly identified source of customer pain,
of some clearly identifiable set of target customers,
which the offering resolves
b. The offering provides customer benefits that other
solution do not
c. The target segment is likely to grow
d. There are other segments for which the currently
targeted segment may provide a foundation for
subsequent entry
 Can whatever competitive advantage there might be as a
result of benefits offered to the target market be sustained
over a significant period of time?
 Opportunities are attractive at the micro level on the
industry side when the company meets most or all of
the following tests:
a. It possesses something proprietary that other
companies can't easily duplicate or imitate
b. The business has or can develop superior
organizational processes, capabilities, or resources
others would find difficult to imitate
c. The company’s business model is economically viable
Discussion questions