Marketing Strategy

The marketing concept of building an organization around the profitable

satisfaction of customer needs has helped firms to achieve success in high-
growth, moderately competitive markets. However, to be successful in markets in
which economic growth has leveled and in which there exist many competitors
who follow the marketing concept, a well-developed marketing strategy is
required. Such a strategy considers a portfolio of products and takes into account
the anticipated moves of competitors in the market.

The Case of Barco

In late 1989, Barco N.V.'s projection systems division was faced with Sony's
surprise introduction of a better graphics projector. Barco had been perceived as
a leader, introducing high quality products first and targeting a niche market that
was willing to pay a higher price. Being a smaller company, Barco could not
compete on price, so it traditionally pursued a skimming strategy in the graphics
projector market, where it had a 55% market share of the small market. Barco's
overall market share for all types of projectors was only 4%.

Even though Barco's market was mainly in graphics projectors, the company had
not introduced a new graphics projector in over two years. Instead, it was
spending a large portion of its R&D budget on video projector products. However,
video projectors were not Barco's market.

Barco's engineers had been working long hours on their new projector that would
not be as good as Sony's. Some people thought they should not stop work on
that product since the engineers' morale would suffer after being told how
important it was to work hard to get the product out. However, even considering
the morale of the product team, it would not have been a good idea to introduce
a product that was inferior to that of Sony. Barco wisely stopped working on the
inferior product and put a major effort in developing a projector that outperformed
Sony's.

The Barco case illustrates several marketing strategy concepts:

Price / Selling Effort Strategies: A firm that follows a skimming

strategy seeks to be the first to introduce a product with very good
performance, selling it to the innovator market segment and charging a
premium price for it. It makes as much profit as possible, then moves on
when the competition arrives. The price is likely to fall over time as
competition is encountered. Such a skimming strategy contrasts with
a penetrating strategy, which seeks to gain market share by sacrificing
 short-term profits, and increasing the price over time as market share is
gained.
Competitors have certain strengths and abilities. To succeed, a firm must
leverage its own unique abilities.
A firm should prepare defensive strategies before potential threats arrive.
If the competition surprises a firm with the introduction of a vastly superior
product, the firm should resist the temptation to proceed with its mediocre
product. A firm never should introduce a product that is obsolete when it
hits the market.
The competition's probable response to a firm's actions should be
considered carefully.

Marketing Research for Strategic Decision Making

The two most common uses of marketing research are for diagnostic analysis to
understand the market and the firm's current performance, and opportunity
analysis to define any unexploited opportunities for growth. Marketing research
studies include consumer studies, distribution studies, semantic scaling,
multidimensional scaling, intelligence studies, projections, and conjoint analysis.
A few of these are outlined below.

Semantic scaling: a very simple rating of how consumers perceive the

physical attributes of a product, and what the ideal values of those
attributes would be. Semantic scaling is not very accurate since the
consumers are polled according to an ordinal ranking so mathematical
averaging is not possible. For example, 8 is not necessarily twice as much
as 4 in an ordinal ranking system. Furthermore, each person uses the
scale differently.
Multidimensional scaling (MDS) addresses the problems associated with
semantic scaling by polling the consumer for pair-wise comparisons
between products or between one product and the ideal. The assumption
is that while people cannot report reliably which attributes drive their
choices, they can report perceptions of similarities between brands.
However, MDS analyses do not indicate the relative importance between
attributes.
Conjoint analysis infers the relative importance of attributes by presenting
consumers with a set of features of two hypothetical products and asking
them which product they prefer. This question is repeated over several
sets of attribute values. The results allow one to predict which attributes
are the more important, the combination of attribute values that is the most
preferred. From this information, the expected market share of a given
design can be estimated.

Multi-Product Resource Allocation

The most common resource allocation methods are:

Percentage of sales
Executive judgement
All-you-can-afford
Match competitors
Last year based

Another method is called decision calculus. Managers are asked four questions:

What would sales be with:

1. no sales force
2. half the current effort
3. 50% greater effort
4. a saturation level of effort.

From these answers, one can determine the parameters of the S-curve response
function and use linear programming techniques to determine resource
allocations.

Decision algorithms that result in extreme solutions, such as allocating most of

the sales force to one product while neglecting another product often do not yield
practical solutions.

For mature products, sales increase very little as a function of advertising

expenditures. For newer products however, there is a very positive correlation.

Portfolio models may be used to allocate resources among major product lines or
business units. The BCG growth-share matrix is one such model.

New Product Diffusion Curve

As a new product diffuses into the market, some types of consumers such as
innovators and early adopters buy the product before other consumers. The
product adoption follows a trajectory that is shaped like a bell curve and is known
as theproduct diffusion curve. The marketing strategy should take this adoption
curve into account and address factors that influence the rate of adoption by the
different types of consumers.

Dynamic Product Management Strategies

Two fundamental issues of product management are whether to pioneer or
follow, and how to manage the product over its life cycle.

Order of market entry is very important. In fact, the forecasted market share
relative to the pioneering brand is the pioneering brand's share divided by the
square root of the order of entry. For example, the brand that entered third is
forecasted to have 1/3 times the market share of the first entrant (Marketing
Science, Vol. 14, No. 3, Part 2 of 2, 1995.) This rule was determined empirically.

The pioneering advantage is obtained from both the supply and demand side.
From the supply side, there are raw material advantages, better experience
effects to provide a cost advantage, and channel preemption. On the demand
side, there is the advantage of familiarity, the chance to set a standard, and the
choice of perceptual position.

Once a firm gains a pioneering advantage, it can maintain it by improving the

product, creating a standard, advertise that it was the first, and introduce a new
product in the market that may cannibalize the first but deter other firms from
entering.

There also are disadvantages to being the pioneer. Being first allows a
competitor to leapfrog the early technology. The incumbent develops inertia in its
R&D and may not be a flexible as newcomers. Developing an industry has costs
that the pioneer must bear alone, and the way the industry develops and its
potential size are not deterministic.

There are four classic price/selling effort strategies:

Price
Selling Effort
Low High

Classic Skim Strategy

Low Necessity Goods
Vulnerable to new entrants

High

Classic Penetration Strategy Luxury Goods

In general, products are clustered in the low-low or high-high categories. If a
product is in a mixed category, after introduction it will tend to move to the low-
low or high-high one.

Increasing the breadth of the product line as several advantages. A firm can
better serve multiple segments, it can occupy more of the distributors' shelf
space, it offers customers a more complete selection, and it preempts
competition. While a wider range of products will cause a firm to cannibalize
some of its own sales, it is better to do so oneself rather than let the competition
do so.

The drawbacks of broad product lines are reduced volume for each brand
(cannibalization), greater manufacturing complexity, increased inventory, more
management resources required, more advertising (or less per brand), clutter
and confusion in advertising for both customers and distributors.

To increase profits from existing brands, a firm can improve its production
efficiency, increase the demand through more users, more uses, and more
usage. A firm also can defend its existing base through line extensions (expand
on a current brand), flanker brands (new brands in an existing product area), and
brand extensions.