2Learning Objectives After studying this chapter you should be able to: explain the different concepts that underlie internal marketing strate-• gies generate options to break down functional barriers (e.g. between mar-• keting and human resource management) describe the difference between Market Orientation View (MOV) and • the Resource Based View (RBV) discuss the connection between MOV/RBV and Market Driven/Mar-• ket Driving explain the ‘Competitive Triangle’• describe and discuss the drivers for customers’ ‘perceived value’ and • ‘relative costs’ explain the elements in the PEST analysis• discuss the focal company’s relationships to the different actors in the • value net understand how the company can establish relationships to competi-• tors define the dimensions of consumer buying behaviour• compare the differences in evaluation of high- versus low-involvement • situations describe the nature of choice criteria and their implications• discuss how B2B customers make purchase decisions• explain the influences on organisational buying behaviour• explain how a SWOT analysis can capitalize on a company’s internal • and external issues understand the reasons for matching strengths and opportunities and • converting weaknesses and threats discuss the importance of doing some research as the basis for SWOT • analysis 2. Situational Analysis in the Marketing Planning Process Kapitel_2.indd 43 03.08.2010 12:46:28 Uhr 2. Situational Analysis in the Marketing Planning Process44 2.1 Assessing the Internal Marketing Situation 2.1.1 Internal Relationships RM has embraced the idea of a ‘broadened view of marketing’ (Christopher et al., 1991, p. 21). Whereas traditional marketing focused predominantly on the external customer, RM stressed the significance of the internal customer and consequently calls also for an ‘internal marketing’ focus on employees which is called internal branding (Javalgi and Moberg, 1997). Recognition of the importance of the employee-customer interface has promoted the interest in internal branding. Studies suggest that the quality of relationships a company has with its customers is to a great extent determined how employees at the front line make customers feel (Barnes and Howlett, 1998). Especially in service companies internal marketing strategies are recognized as being of the utmost importance as service offerings are largely through human interaction and every interaction between a customer and a representative of a brand can be considered a ‘moment of truth’ (Carlzon, 1985). Internal marketing can help these organisations attract, keep and motivate quality personnel, which in turn helps them enhance their capability to offer quality services (Berry, 1983). Although the importance of the internal dimension is regarded to be particularly relevant to service industries, any company’s final output, be it a product or service, is almost always the product of a series of operations and processes performed by employees (Buttle, 1996). According to Christopher et al. (1991) internal marketing can be recognized as an important activity in developing a customer-focused organisation. In practice, internal marketing is concerned with communications, with developing responsiveness, responsibility and unity of purpose. Fundamental aims of internal marketing are to develop internal and external customer awareness and remove functional barriers to organisational effectiveness. In this context, internal marketing is perceived as a holistic and integrative approach to the business. As stated above, organisational dynamics are of particular relevance to both the service products and service delivery given that internal interactions inevitably occur between departments in organisations. Indeed, it is perceived as so instrumental to the success of an operation that this book follows Gummesson (1991) who proposes that marketing in the future should be presented and taught from this holistic perspective and be fully integrated with other functions of the company describing this as a change from ‘marketing management’ to ‘marketing-orientated company management’. The Internal Market and the Functional Interface Internal marketing can be describes as ‘any form of marketing within the organisation which focuses attention on the internal activities that need to be changed in order that marketing plans can be implemented’ (Christopher et al., 1991, p. 26) and that enhances external performance. Internal marketing can be broadly interpreted as those activities that improve internal communications and customer marketplace performance. In addition to this, the term can be applied to the concept that every concept in an organisation is both a customer and a supplier (Buttle, 1996). Kapitel_2.indd 44 03.08.2010 12:46:28 Uhr 2.1 Assessing the Internal Marketing Situation 45 Internal marketing involves retaining customer-conscious employees and the development of employee empowerment to better meet the needs and wants of the customer (Grönroos, 1990). As a consequence, internal marketing can be regarded as a requirement for the successful implementation of the internal partnership concept and, ultimately, of RM. The traditional approach to marketing implies a functional marketing department. RM strategies imply, as mentioned above, breaking down the functional barriers in an organisation. It is the existence of so-called ‘functional silos’ that are seen to act independently and with little coordination that is often the principal cause of ‘non-goal congruence’. For a firm pursuing RM strategies, the internal interface between marketing, operations, personnel and other functions is of essential strategic importance (Grönroos, 1994). This viewpoint suggests that all activities in a company are interrelated – what Gummesson (1991, p.65) calls ‘inter-functional dependency’. A marketing orientation, therefore, means ‘the organisation-wide generation of market intelligence, dissemination of that intelligence across departments and organisationwide responsiveness to it’ (Kohli and Jaworski, 1990, p. 4). According to Doyle (1995, p. 23) ‘marketers have generally made the mistake of seeing the subject as a fundamental discipline rather than an integrated business process. Marketing Directors have sought to make marketing decisions rather than share responsibility for satisfying customers with cross-functional teams.’ Many enterprises have centralized marketing and sales staff, who might be categorized as ‘full-time marketers’. However, these employees do not represent all the marketers and salespeople the company has at its disposal. Gummesson (1990) has coined the phrase ‘part-time marketers’ (PTM), in his book of the same name, to describe these non-marketing employees who are instrumental to the company’s marketing effort, regardless of their position in the enterprise. These part-time marketers include all those employees who directly or indirectly influence customer relations. The importance of this integrative marketing approach cannot be overemphasized as it is instrumental to developing a sustainable competitive advantage, derived out of the approach to direct all activities Involvement with marketing Not directly involved with marketing Frequent or periodic customer contact Contractors Modifiers Infrequent or no customer contact Influencers Isolateds Source: Adapted from Christopher et al., 1991 Figure 2.1: Employee influence on customers Kapitel_2.indd 45 03.08.2010 12:46:28 Uhr 2. Situational Analysis in the Marketing Planning Process46 of employees, full-time marketers as well as part-time marketers, towards the customer in order to fulfil their needs and wants better than the competition and to finally create a ‘unique passion proposition’ (Kreutzer, 2010). Christopher et al. (1991) too emphasized the part that both marketers and part-time marketers play in the marketing process and further subdivide these categories based on the frequency of contact with the company as shown in figure 2.1: Contractors• have frequent or periodic customer contact and are profoundly involved with ‘traditional’ marketing activities. They should be versed in the firm’s marketing strategy and motivated to serve the customer on a daily basis. Modifiers• , while not directly involved with conventional marketing activities, have frequent customer contact, like receptionists, accounting staff etc. They should have an appropriate view of the marketing strategy and their part in it. Influencers• are involved with elements of conventional marketing, but they have rather infrequent personal contact. However, they are to a great extent part of the implementation of the marketing strategy. Roles include research and development, market research etc. Isolateds• have neither regular contact with customers, nor regular input into conventional marketing activities. Their performance, however, could affect successful fulfilment of the marketing strategy, like staff members from personnel and data processing departments. Internal Marketing Implementation Internal marketing is a relationship development process in which staff autonomy and know-how combine to create and spread new organisational knowledge. This may include ongoing training and encouragement of formal and informal communications at a tactical level and adoption of supportive management styles and personnel policies, customer service training and planning procedures at a strategic level (Hogg et al., 1998). The development of internal strategies requires a three-stage approach (Doyle, 1995): The organisation has to demonstrate a strong commitment to the security and devel-• opment of its employees. The company has to create a structure where functional barriers are broken down. It • should have ‘flatter’ organisational levels and empowerment for front-line staff. Top management must provide leadership by continuously reinforcing these values • and offering a vision of what the business will become. A RM programme should ‘be considered the firm’s life blood – percolating through all ranks, departments, functions and assets of the firm. – with the ultimate aim of simultaneously offering and gaining value at all levels. The firm’s marketing, management operations, finance and human resources should constitute nurturing organs assisting the firm to develop, create and nurture the continuous flow of value between the respective stakeholders inside and/or outside the organisation’ (Kandampully and Duddy, 1999, pp. 321-322). The adoption of RM concepts suggests a recognition of the need for a new type of organisation and management. The challenges will consequently lead to smaller marketing departments staffed by a few generalists with big responsibilities for achieving results through teams of internal and external partners. Doyle (1995, p. 35) suggests that ‘marketing managers will have to work more effectively as team players; proactively putting teams together and co-operating with other functions to enhance the core processes of Kapitel_2.indd 46 03.08.2010 12:46:29 Uhr 2.1 Assessing the Internal Marketing Situation 47 innovation, order fulfilment and customer service. Functional boundaries in the ‘professional core’ will be seen as irrelevant and general management skills will be much more prized.’ 2.1.2 Market Orientation View (MOV) The foundation of any marketing plan is the company’s mission and vision statement, which answers the question, ‘What business are we in and where should we go?’. Business mission definition profoundly affects the firm’s long-run resource distribution, profitability, and endurance. The mission statement is based on a careful analysis of benefits sought by present and potential consumers and analysis of existing and anticipated environmental conditions. When examining internal strengths and weaknesses, the marketing manager should focus on organisational resources, company or brand image, employee capabilities, and available technology. When examining external opportunities and threats, marketing managers must analyze aspects of the marketing surroundings. This process is called environmental scanning – the collection and interpretation of information about forces, events, and relationships in the external environment that may affect the future of the organisation or the implementation of the marketing plan. Environmental scanning helps identify market opportunities and threats and provides guiding principles for the design of marketing strategy. The most often studied macro-environmental forces are social, demographic, economic, technological, political and legal, and competitive. These forces are examined in subsequent sections. The matching of the internal strengths and weaknesses with the external opportunities and threats automatically leads us to the two important views: Market Orientation View (MOV)• : Outside-in perspective Resource Based View (RBV)• : Inside-out perspective The term market (or marketing) orientation generally refers to the implementation of the marketing concept. Kohli and Jaworski (1990) define market orientation in the following terms: A market orientation entails (1) one or more departments engaging in activities geared toward developing an understanding of customers’ current and future needs and the factors affecting them, (2) sharing of this understanding across departments, and (3) the various departments engaging in activities designed to meet select customer needs. In other words, a market orientation refers to the organisation-wide generation, dissemination, and responsiveness to market intelligence. One key is achieving understanding of the market and the customer throughout the company and building the capability for responsiveness to market changes. The real customer focus and responsiveness of the company is the context in which marketing strategy is built and implemented. Another issue is that the marketing process should be seen as inter-functional and crossdisciplinary, and not simply the responsibility of the marketing department. This is the real value of adopting the process perspective on marketing, which is becoming more widely adopted by large organisations (Hollensen, 2006). Kapitel_2.indd 47 03.08.2010 12:46:29 Uhr 2. Situational Analysis in the Marketing Planning Process48 In MOV it is also clear that a profound understanding of the competition in the market from the customer’s perspective is instrumental. Viewing the product or service from the customer’s viewpoint is often difficult, but without that perspective a marketing strategy is highly vulnerable to attack from unsuspected sources of competition. In essence, market orientation refers to the way a firm implements the marketing concept. In principle, this three-component view of market orientation (generation of, dissemination of, and responsiveness to market intelligence) makes it possible to diagnose an organisation’s level of market orientation, pinpoint specific deficiencies, and design interventions tailored to the particular needs of an organisation. It should be emphasized that a market orientation is not the exclusive responsibility of a marketing department but rather is an organisation-wide mode of operation. Research suggests that market orientation is related positively to business performance (Narver and Slater, 1990). Further, it is likely to be strongly related to performance under conditions of high market turbulence, technological stability, strong competition, and weak economic conditions. A market orientation yields higher customer satisfaction and repeat purchase, and appears to increase employees’ commitment to their organisations. In seeking to implement a market orientation, the authors suggest that the commitment of top management to the idea is key, particularly in reminding employees that it is critical for them to be sensitive and responsive to market developments. In addition, market orientation seems to require a certain level of risk tolerance on the part of senior managers and a willingness to accept an occasional failure as a normal part of transacting business. The nature of interdepartmental dynamics also plays a very important role: interdepartmental conflict reduces market orientation while interdepartmental connectedness facilitates it. Moreover, the role of market based reward systems and decentralized decision making in engendering market orientation is strong, suggesting that reward systems should take into account an individual’s ability to sense and respond to market needs. Market orientation flourish in corporate environments in which continuous learning and improvement are encouraged. Thus the concept of market orientation is likely come to full fruition only when it is enveloped in the learning organisation (O’Driscoll et al., 2001). 2.1.3 Resource Based View (RBV) The traditional market orientation literature emphasizes the superior performance of companies with high quality, organisation-wide generation and sharing of market intelligence leading to sensitivity to market needs, the RBV suggests that high performance strategy is dependent primarily on historically developed resource endowments. Resource based marketing essentially seeks a long term fit between the requirements of the market and the abilities of the organisation to compete in it. This does not imply that the resources of the organisation are seen as fixed and static. Far from it, market requirements evolve over time and the resource profile of the organisation must be continuously developed to enable it to continue to compete, and indeed to enable it to take advantage of new opportunities. The essential factor, however, is that opportunities are seized where the organisation has an existing or potential advantage through its resource base. In the context of commercial organisations a number of key stakeholders can be identified. These include shareholders and owners, managers, employees, customers and sup- Kapitel_2.indd 48 03.08.2010 12:46:29 Uhr 2.1 Assessing the Internal Marketing Situation 49 pliers. While the market-oriented culture (MOV) discussed above serves to place customers high in the priority ranking, the reality for most organisations will be a complex blend of considerations of all relevant stakeholders in the framework of a ‘stakeholder management approach’. The RBV of the company discussed above implies that the first stage in assessing strengths and weaknesses should be to conduct an audit of the resources available to the company, including both the tangible and intangible (Figure 2.2 bottom). The types of resources and capabilities listed earlier can be simplified as follows: Technical resources• : A key resource in many organisations, and one becoming increasingly imperative in a world of rapidly changing technology, is technical skill. This involves the ability of the organisation to develop new processes and products through research and development, which can be utilized in the marketplace. Financial standing• : A second central resource is the organisation’s financial standing. This will dictate, to a large extent, its scope for action and ability to put its strategies into operation. An organisation of sound financial standing can raise capital from Superior performance ?Customer equity Sustainable competitive advantage ?Excellent value to customers Core competencies Individual Group Corporate Strategic capabilities Functional capabilities Operational capabilities Tangible ? Land ? Financials - e.g. access to financial markets ? Plants and machines ? Databases Intangible ? Organisational - e.g. culture, shared visions and values ? Informational - e.g. customer and competitor intelligence ? Relational - e.g. strategic alliances, relations with customers ? Intellectual - e.g. expertise, formulas and discoveries Resources Capabilities Source: Adapted from Hollensen, 2006, modified Figure 2.2: The roots of competition Kapitel_2.indd 49 03.08.2010 12:46:29 Uhr 2. Situational Analysis in the Marketing Planning Process50 outside to finance ventures. In deciding marketing strategy a major consideration is often what financial resources can or cannot be put into the programme. Managerial skills• : Managerial skills in the widest possible sense are a further resource of the business. The experience of managers and the way in which they discharge their duties and motivate their staff have a major impact on corporate performance. Organisation• : The very structure of the organisation can be a valuable asset or resource. Some structures, such as the matrix organisation, are designed to facilitate wide use of skills throughout the organisation. The system has proved useful in focusing control at the brand level, encouraging a co-ordinated marketing mix and facilitating a flexible, rapid response to changing environment. It is not without its drawbacks, however. The product management system can lead to responsibility without authority, conflicts between product managers within the same organisation and the ‘galloping midget’ syndrome (managers moving on to the next product management job having maximized short-term returns at the expense of longer-term market position). Information systems• : The information and planning systems in operation also present a valuable resource. For example, those organisations such as banks dealing in foreign currency speculation rely heavily on accurate information systems. New technological developments, such as electronic point of scale scanning allow data to be collected and processed in a much shorter time than a few years ago. The companies with the systems to cope with the massive increases in data that such newer collection procedures are creating will be in a stronger position to take advantage of the opportunities afforded. A resource-based model or sustainable competitive advantage in a global environment is presented in Figure 2.2. It adopts the basic logic of earlier models which link resources, competitive advantage and performance (Day and Wensley, 1988) but extends this earlier work by demonstrating the richness of the resource pool which is potentially available to a firm operating in a global environment. In general, resources have been categorized on the basis of barriers to duplication and a broad distinction is made between assets and capabilities. Assets, in turn, can be thought of as being either tangible or intangible. Tangible assets refer to the fixed or current assets of an organisation, which have a relatively long fixed, run capacity and include plant, equipment, land, other capital goods and stocks, debtors and bank deposits. Intangible assets include a firm’s intellectual property, its corporate reputation and its brand equity which have relatively unlimited capacity and can be used in-house, rented or sold. Capabilities have been described by a variety of terms, including skills, invisible assets and intermediate goods. Resources are broken down into two fundamental categories: (1) tangible resources and (2) intangible resources. Tangible resources include those factors containing financial or physical value as measured by the firm’s balance sheet. Intangible resources, on the other hand, include those factors that are non-physical (or non-financial) in nature and are rarely, if at all, included in the firm’s balance sheet. Intangible resources fundamentally fall into two categories: assets and skills (or capabilities). If the intangible resource is something that the firm ‘has’, it is an asset. If the intangible resource is something that the firm ‘does’, it is a skill and it is being turned into a competence. Kapitel_2.indd 50 03.08.2010 12:46:30 Uhr 2.1 Assessing the Internal Marketing Situation 51 Intangible assets such as copyrights, patents, registered designs and trademarks are all afforded legal protection through property rights. Such legal protection can create barriers to competitive copying. Other forms of intellectual property include held-insecret technology. Held-in-secret technology – specifically developed to fit the firm’s unique strategy and particular business model – can lead to unique, socially complex and context specific assets that may be difficult for competitors to understand let alone duplicate. Given their legally enforceable protection or held-in-secret standing, intellectual property assets are argued to be more difficult to duplicate than tangible resources (Hollensen, 2006). According to Figure 2.2 capabilities can be seen as strategic, functional or operational: Strategic capabilities• underpin the definition of direction for the firm. They include issues such as the dominant logic or orientation guiding management (which will strongly influence strategic direction), the ability of the organisation to learn (to acquire, assimilate and act on information), and the ability of senior managers to manage the implementation of strategy. Functional capabilities• lie in the execution of functional tasks. These include marketing capabilities, financial management capabilities and operations management capabilities. Operational capabilities• are concerned with undertaking individual line tasks, such as operating machinery, the application of information systems and completion of order processing. Second, capabilities may lie with individuals, with groups, or at the corporate level: Individual competencies• are the skills and abilities of individuals within the organisation. They include the ability of the individual to analyze critically and assess a given situation (whether this is a CEO assessing a strategic problem, or the shop-floor worker assessing the impact of a machine failure). Group competencies• are where individual abilities come together in teams or ad hoc, informal, task-related teams. While the abilities of individuals are important, so too is their ability to work constructively together. Corporate-level competencies• relate to the abilities of the firm as a whole to undertake strategic, functional or operational responsibilities. This could contain the ability of the firm to internalize learning, so that critical information is not held just by individuals but is shared throughout the firm. There is always a risk that such lists are arbitrary and simplistic when we come to study a real organisation, but perhaps the most fundamental importance of the RBV of the company is that it underlines the fact that many important resources and capabilities are created through company history; they are the results of enduring accumulation and learning processes. Often they cannot be changed easily or rapidly. This approach should enrich our understanding of a company’s potential in the marketplace, and we saw that it can be linked to the issue of market orientation through the competitive positioning of the firm. The RBV can also be linked to the core competencies issue discussed below. They are attacks on a similar issue – understanding what a company is capable of achieving by exploiting its capabilities in the marketplace. In recent years much attention has been devoted to identifying and understanding the ‘core competencies’ of corporations. The need to identify the ‘characteristic competence’ of a company is underlined by a very influential analysis of successful international businesses by Prahalad and Hamel (1990), Kapitel_2.indd 51 03.08.2010 12:46:30 Uhr 2. Situational Analysis in the Marketing Planning Process52 who argue that a company is likely to be genuinely world class at perhaps five or six activities, and superior performance will come from focusing on those to the exclusion of others. The late 1990s saw much effort to refocus major organisations on to their core activities. Prahalad and Hamel (1990) define core competencies as the underlying skills, technologies and competencies that can be combined in different ways to create the next generation of products and services: At 3M a core competence in sticky tape has led the company into markets as diverse as • ‘Post-it’ notes, magnetic tape, photographic film, pressure sensitive tapes and coated abrasives. Black & Decker’s competence is in small electrical motors, which can be used to power • many tools and appliances. For Canon the core competencies are its skills and technologies in optics, imaging • and microprocessor controls that have enabled it to survive and thrive in markets as diverse as copiers, laser printers, cameras and image scanners. Three tests are suggested by Prahalad and Hamel for identifying core competencies: 1. A core competence should be difficult to duplicate. Clearly a competence that can be defended against competitors has greater value than one which other companies can share. 2. A core competence provides potential access to a wide range of markets. Competencies in display systems are needed, for example, to enable a company to compete in a number of different markets including flat screen TV sets, laptop or notebook computers, mobile phones, etc. 3. A core competence should make a considerable contribution to the benefits the customer derives from using the ultimate product or service. In other words, the competence is important where it is a significant determinant of customer satisfaction and benefit. These requirements are essentially the same as those emerging from the earlier RBV literature to define resources capable of creating sustainable competitive advantage. To these three characteristics a further useful test is whether the competence can be combined with other skills and capabilities to generate unique value for customers – the grouping of competencies discussed earlier. It could be, for example, that a company does not fulfil the above criteria, but when combined with other competencies is an essential ingredient in defining the firm’s exceptionality. Put another way: What would happen if we did not have the competence? Prahalad and Hamel (1990) argue that the critical management ability for the future will be to identify, cultivate and exploit the core competencies that enable sustainable development. The argument about core competencies is compelling, and it is certainly driving major corporate changes, such as: The emergence of a network of strategic alliances, where each partner brings its core • competence into play to build a market offering; The demerger and sale of non-core activities and brands;• Organisational changes away from SBUs to a new ‘strategic architecture’• However, it should be taken into consideration that strategy is about more than simply choosing to focus on a few core competencies (Porter, 1985). Kapitel_2.indd 52 03.08.2010 12:46:30 Uhr 2.1 Assessing the Internal Marketing Situation 53 The core competencies of a company must always be viewed against the customer and the market before it can be regarded as a foundation for competitive positioning. It may be helpful to identify core competencies but then to see which are ‘differentiating capabilities’ (i.e., which produce competitive advantage). Activities are not the same as competencies• : ‘quality products’ per se are not competencies; they are attributes emerging from core competencies. In the 1980s General Electric focused on marketing to build a strong brand image but lost out to Panasonic (Matsushita), which understood that superiority in components, and assembly had a greater impact on value-added for customer. Avoid laundry lists• : by definition, core competencies should be no more than a handful of activities. Most successful companies have targeted one or two key activities – their identification is a main management issue. Achieve management consensus• : if companies are to be nurtured and shared widely in the organisation as the basis for strategy then management must agree what they are, and act in view of that. Leverage core competencies• : It is not enough to identify core competencies and agree what they are. This is pointless unless they consistently strengthen all strategic decision-making. Share core competencies outside the organisation• : focusing on core competencies may well favour the use of collaboration to link to the value-adding competencies of other corporations. Indeed the logic of the companies to share their expertise with others, the exemplar being the automotive sector. A similar approach is seen in the intracompany transfer of best practices. At the upper part of Figure 2.2 sustainable competitive advantage is one that cannot be copied by the competition. The following companies may well serve as examples of companies that have a sustainable competitive advantage: Rolex (high-quality watches), Nordstrom department stores (service), and Ryan Air (low price). Market Driven Versus Market Driving The market driven approach is derived from the construct and principles of ‘market orientation’ that is, in many ways, synonymous with ‘market driven’. However, instead of following the voice of the customer and adapting offerings, organisations sometimes need to undertake a more proactive approach to reshape, educate and lead the customer, or more commonly, the market. This approach can be defined as ‘driving market’ or ‘market driving’. The primary differences between a market driving philosophy and the existing paradigms of market driven behaviour, customer leading and product pioneering are summarized in Table 2.1. As previously suggested, market driven behaviour relies profoundly on exploitative learning, which occurs within existing market boundaries, and hence primarily regarded to be a reactive rather than a proactive stance. The customer leading philosophy, also known as proactive market orientation, is essentially an extension of market driven activity. Customer leading makes use of the untapped market space revealed by exploratory learning. Firms utilizing this approach are more likely to introduce innovations that radically change consumer behaviours and preferences. Kapitel_2.indd 53 03.08.2010 12:46:30 Uhr 2. Situational Analysis in the Marketing Planning Process54 Two contributions have recently been forwarded that concentrate on internal and external market driving issues. First, Jaworski et al. (2000) discuss how market driving may be achieved through influencing the elementary structure of a market and/or the behaviours of key players. Second, Kumar et al. (2000) forward an analysis of intra-firm behaviours that enable market driving. These two contributions require further discussion. Jaworski et al. (2000) are among the first to initiate the market driving approach based on the consideration that the current literature has an unbalanced focus on keeping the status quo (that is, on existing customer attribute preferences and current market structure). Jaworski et al. (2000) focus their analysis on the strategic business unit level and construct a theoretical framework through scheming the market orientation approach against two dimensions of market structure and market behaviour. A market driven approach occurs where market behaviour and structure are ‘given’ (that is, where existing market structures and behaviours are accepted by the focal firm). ‘Market driven’ Market structure and behaviour are specified ‘Market driving’ Market structure and Market behaviour can be formed Market orientation View (MOV) Resource based View (RVB) Source: Adapted from Hollensen, 2006, modified Figure 2.3: Market-driven versus market-driving strategy Market driven Market driving General Company responds to acts within the framework and constraints of market structure and characteristics Enterprise will act to induce changes in the market structure and alterations in the behaviours of customers and competitors Customer orientation Adaptation Be at the cutting edge of latest customer needs Identifying, analyzing and answering to consumer Predict which technologies are expected to be successful given customer preferences Respond to market structure Shape customers’ behaviour proactively Pioneer Forecast how customer needs and market boundaries evolve Competitor orientation Permanent benchmarking Duplication Shape the market structure proactively Identify and develop sustainable internal and external competences Discontinuous disruption Source: Adapted from Hollensen, 2006, modified Table 2.1: Market-driven versus market-driving perspectives Kapitel_2.indd 54 03.08.2010 12:46:30 Uhr 2.1 Assessing the Internal Marketing Situation 55 However, market driving is feasible when firms ‘shape’ market structure through altering the composition of market players and/or when organisations ‘shape’ market behaviour through varying the behaviour of market players (for example, shaping customer behaviour identifying, advancing, and exploiting customer-valued product attributes previously overlooked by other players) (see Figure 2.3). Market driven is defined as ‘the activities of learning, understanding, and responding to stakeholder perceptions and behaviours within a given market structure’ while market driving is defined as ‘changing the composition and/or roles of players in a market and/ or the behaviour(s) of players in the market’ (Jaworski et al., 2000, p. 45). Market driving is argued to be a ‘multiplicative function’ with those firms that influence more players or affect more significantly market structure being viewed as more market driven. In this respect, market driving is similar to market driven approaches in that it is presented as an incessant variable. 2.1.4 Major Sources of Competitive Advantage Companies producing offerings with a higher perceived value and/or lower relative costs (compared to competitors) are supposed to have a competitive advantage. The ‘high perceived value’ advantage can be considered as differentiation, but the elements of this must be evaluated from a customer perspective. The word ‘perceived’ is used to emphasize the fact that value is a subjective evaluation rather than a direct measure of utility. This involves an element of judgement, and is sometimes seen as irrational. It is how customers themselves rate the offering in relation to other competitive products or services that is critical in a purchase decision. The prime consideration of the value of any resource to an organisation lies in the answer to the following question: Does this resource contribute to creating value for customers? Value creation may be direct, such as through the benefits conveyed by superior technology, better service, meaningful brand differentiation and ready accessibility. The resources that contribute to these benefits (technology deployed, skilled and motivated personnel, brand name and reputation, and distribution coverage) create value for consumers as soon as they are employed. Other resources may, however, have an indirect impact on value for customers. Effective cost control systems, for example, are not valuable to customers in and of themselves. They only add value for customers when they translate into lower prices charged, or by the ability of the organisation to offer additional customer benefits through the cost savings achieved. The value of a resource in creating customer value must be evaluated relative to the resources of competitors. For example, a strong brand name such as Nike on sports-wear may convey more value than a less well-known brand. In other words, for the resource to contribute to sustainable competitive advantage it must serve to distinguish the organisation’s offerings from those of competitors (Hooley et al., 2004). The ‘value’ of a product or service should be seen in relation to the customer’s cost of obtaining the product/service and the cost of ownership. These costs will include such issues as the buying price of an offering compared to the price of a competitive offering. These elements might be modified by the perceived cost of obtaining and cost of ownership. The way components are assessed and compared Kapitel_2.indd 55 03.08.2010 12:46:30 Uhr 2. Situational Analysis in the Marketing Planning Process56 could vary from one customer to another. It is often possible to ‘delight’ customers by exceeding their expectations. The ‘perceived value’ (compared to price) together with the relative cost is illustrated in Figure 2.4. The underlying drivers for ‘perceived value’ (value drivers) are also listed in Figure 2.4. In the following, these drivers are further discussed (Hollensen, 2006). Cost Drivers Economies of scale• : Economies of scale are perhaps the single most effective cost driver in many markets. Scale economies stem from doing things more efficiently or differently in volume. In addition, sheer size can help in creating purchasing leverage to secure cheaper and/or better quality (less waste) raw materials and securing them in times of limited availability. There are, however, limits to scale economies. Size can also add complexity and thus can lead to diseconomies. The effects of economies of scale are often more prevalent in the manufacturing sector than in services. While manufacturing operations such as assembly lines can benefit Perceived value / Price A Perceived value / Price B Relative costs Source: Adapted from Hollensen, 2006, modified Customers (Target segment) Value drivers ? Product differentiation ? Product quality ? Service ? Superior branding ? Sustainable customer relationships ? Time-based competition Cost drivers ? Economies of scale ? Learning curve ? Outsourcing ? Timing Company A Competitor B Figure 2.4: The competitive triangle Kapitel_2.indd 56 03.08.2010 12:46:30 Uhr 2.1 Assessing the Internal Marketing Situation 57 through scale the advantages to service firms such as advertising agencies are less apparent. Learning and experience curve• : Further cost reductions may be achieved through learning and experience curve effects. Learning refers to increases in efficiency that is possible at a given level of scale through an employee having performed the necessary tasks many times before. Experience curves suggest that costs decline at a predictable rate as experience with a product increases. The experience curve effect encompasses a broad range of manufacturing, marketing, and administrative costs. Experience curves reflect learning by doing, technological advances, and economies of scale. Firms like Airbus and Texas Instruments use historical experience curves as a basis for prediction and setting prices. Experience curves allow management to forecast costs and set prices based on anticipated costs as opposed to current costs. The Boston Consulting Group (BCG) extended the experience curve beyond manufacturing and looked at the increased efficiency that was possible in all aspects of the business (e.g. in marketing, advertising and selling) through know-how. BCG estimated empirically that, in many industries, costs reduced by approximately 15-20 per cent each time cumulative production (a measure of experience) doubled. This finding suggests that companies with larger market share will, by definition, have a cost advantage through experience, assuming all companies are operating on the same experience curve. This is, incidentally, why relative market share is used as a proxy for cash generation in the BCG-matrix. Experience can be brought into the company by hiring experienced staff, and be enhanced through training. Conversely competitors may poach experience by attracting away skilled staff. Outsourcing• : Labour cost can be an important component of total costs in low-skill, labour-intensive industries such as product assembly and clothing manufacturing. Many U.S. and European manufacturers outsource production activities to Mexico, Eastern Europe and China in order to achieve cheaper manufacturing costs. Increasing numbers of companies are also outsourcing activities such as software programming and other labour intensive jobs to India. Linkages and interrelationships• : External linkages with suppliers of factor inputs or distributors of the firm’s final products can also lead to lower costs. Recent developments in just in time (JIT) manufacturing and delivery can have a noteworthy impact on stockholding costs and work in progress. Beyond the cost equation, however, the establishment of closer working links has far wider marketing implications. For JIT to work effectively requires a very close working relationship between purchaser and supplier. This often means an exchange of information, a meshing of forecasting and scheduling and the building of a long-term relationship. This in turn helps to create high switching costs (the costs of seeking supply elsewhere) and hence barriers to competitive entry. Interrelationships with other SBUs in the overall corporate portfolio can help to share experience and gain economies of scale in functional activities (such as marketing research, R&D, ordering and purchasing). Timing• : Timing, though not always controllable, can lead to cost advantages. Often the first mover in an industry can gain cost advantages by securing prime locations, cheap or good quality raw materials, and/or technological leadership. Second movers can often benefit from exploiting newer technology to leapfrog first mover positions. Kapitel_2.indd 57 03.08.2010 12:46:31 Uhr 2. Situational Analysis in the Marketing Planning Process58 Location and governmental factors• : The final cost drivers are location (geographic location to take advantage of lower distribution, assembly, raw materials or energy costs), and institutional factors such as government regulations (e.g. larger lorries on the roads can reduce distribution costs but at other environmental and social costs). The sensitivity of governments to lobbyists and pressure groups will dictate the ability of the company to exercise institutional cost drivers. Sometimes, governments may provide assistance to target industries with grants and interest-free loans. Government assistance enabled Japanese semiconductor manufacturers to become global leaders. Value Drivers Product differentiation• : Product differentiation seeks to raise the value of the product or service to the customer. Levitt (1986) suggested four levels of a product: Core offer, expected offer, augmented offer and potential offer. Differentiation is possible at all these four levels: Core offer (basic offering) – : A different way of satisfying the same basic want or need. It is typically created by a change in the technology, the application of innovation. Expected offer – : Additional benefits normally provided with the core offer. It is often improvements on expected features such as warranties, packaging quality or service. E.g. it could be offering a lifetime guarantee on audiotape as Scotch provided. Augmented offer – : Additional benefits not normally provided, but serving to differentiate from competitors’ offers. It could be credit facilities, additional features, branding, delivery etc. Potential offer – : Anything else that could (in future) be used to distinguish from existing competitors’ offering. These features are potentially feasible to attract and Core product Expected offer Augmented offer Potential offer Source: Adapted from Hollensen, 2006, modified Figure 2.5: Levels of product differentiation Kapitel_2.indd 58 03.08.2010 12:46:31 Uhr 2.1 Assessing the Internal Marketing Situation 59 hold customers. In most highly competitive markets any breakthrough or development is soon spotted and often copied rapidly, and many skill-based augmentations are easy for competitors to replicate. Therefore, many advantages last for only a very short period of time especially in certain industries like the computer business. If an advantage is offset by a competitor, what was once an augmentation by one supplier can become an expected feature demanded from all suppliers. This illustrates one aspect of migration between the levels of a total product. Thus, an ongoing resettlement might take place, with features moving in from the outer to the inner ring of Figure 2.5. Product quality and service• : For manufactured products quality can include durability, product features and advanced design. For services it often comes down to the tangible elements of the service, the reliability and responsiveness of the service provider, velocity, assurance provided, the empathy and the caring attention (willingness to help). For a marketing person it will be obvious that quality is a necessary objective, but it may not be sufficient to gain a sale or ensure repeat business. There will be certain levels of quality that are expected as ‘order qualifying’. These have to be met in order to be considered in the marketplace, but this is the minimum acceptable level and it does nothing to add towards achieving a competitive advantage. As discussed in previous sections, consumers will evaluate the comparative value of competitive offerings and will decide based on their own perceptions and personal frames of reference. Quality programmes that lead towards the delivery of ‘superior’ customer value are the only ones that really prevail. These could be the result of including real tangible and intangible features that enhance the benefits of the contribution. The ultimate test, however, is the perception by a customer that an offering not only meets or even exceeds their needs, but also does so in a way that offers the greatest added value to them. It is also important to remember that a quality programme of service delivery cannot save an inferior product. While the activities that surround the promotion of an offering can occasionally dominate at the point of sale, the true test is whether the product/service meets the customer’s vital needs, both current and over the life of the product. This will be the ultimate test and will be remembered long after the clever advertising of the low price is forgotten (Adcock, 2000). Packaging• : Packaging too can be used to differentiate the product. Packaging has five main functions, each of which can be used as a basis for differentiation (Adcock, 2000). 1. Packaging protects the product during transit and prior to consumption to ensure consistent quality (e.g. the use of film packs for potato crisps to ensure freshness). 2. Packaging stores the product, and hence can be used to extend shelf life, or facilitate physical storage (e.g. tetra-packs for fruit juice and other beverages). 3. Packaging facilitates use of the product (e.g. applicator packs for floor cleaners, wine boxes, domestic liquid soap dispensers). 4. Packaging helps create an image for the product through its visual impact, quality of design, illustration of uses, etc. 5. Packaging helps promote the product through eye-catching, unusual colours and shapes etc. Branding• : A brand name is an indication of what to expect from a product – a quality statement of a value-for-money signal. It is often a feeling among many managers that the ability of most companies to copy the tangible aspect of competitors’ actions, such as production method or application of technology, and to replicate service levels will imply that these offer little in the way of sustainable competitive advantage. Kapitel_2.indd 59 03.08.2010 12:46:32 Uhr 2. Situational Analysis in the Marketing Planning Process60 Against this background, a brand is an intangible, which develops out of exchanges with customers, and is impractical for competitors to duplicate. Therefore, it is able to distinguish a specific offer, separating it from others in the same product class. If branding is considered from the perspective of a potential customer it can be seen as a way of helping buyers to choose between different offerings and to determine those that best meet given needs. The ability to identify a particular brand thus makes the purchase decision more rapidly and easier, and it gives some reassurance by reducing the risk of unfamiliar selection. A sustainable competitive advantage is a function of the momentum with which competitors can imitate a leading company’s strategy. The rate of technological and market change nowadays is so swift and products so transient that customers find security and continuity in the least tangible of the company’s assets: the reputation of its brands and company name. Price differentiation• : Lower price as a means of differentiation can be a flourishing basis for strategy only when the company enjoys a cost advantage, or where there are barriers to competing firms with a lower cost structure competing at a lower price. Without a cost advantage a price war can be a devastating course to follow. Premium pricing is generally only possible where the product or service has actual or perceived advantages to the customer and therefore it is often used in combination with a differentiated product. In general, the greater the degree of product or service differentiation the more capacity there is for premium pricing. Where there is little other ground for differentiation, price competition becomes stronger, and cost advantages assume greater significance. Creating customer relationships• : Creating closer bonds with customers through enhanced service can help establish a more defensible position in the market. As suggested above, a major advantage of JIT manufacturing systems is that they require closer links between supplier and buyer. As buyers and suppliers become more enmeshed so it becomes more difficult for newcomers to enter. Creating switching costs, the expenses associated with moving from one supplier to • another, is a further way in which customer linkages can be improved. This enhancement of the linkages with its customers makes it less likely they will shop around for other sources of supply. Time-based competition• : Competitive advantage and how it is gained have changed to a large extent over the years. In lesser-developed markets advantage can be gained through simple market mechanisms such as achieving distribution where none existed before. As markets mature, competitive advantage becomes increasingly difficult to attain and maintain. Many factors contribute to this, including increases in classiness of competitors and consumers, purchaser mobility, distribution intensity, and flow of product and market insight. At a macro level, such things as the structural nature of industries, networking, alliances, and governmental interventions contribute to difficulties in achieving competitive advantage in a mature market. In essence, time-based competition focuses on gaining advantage by being faster than competitors – quicker in responding to marketplace changes, more rapidly with new product development and introductions, earlier in integrating new technology into products, and faster in distribution and customer service. Success stories of timebased competitors are numerous; for example the Japanese used time-based competition as a fundamental component of their automobile manufacturing strategy that caught U.S. firms off guard. Japanese car manufacturers reduced new car design time Kapitel_2.indd 60 03.08.2010 12:46:32 Uhr 2.2 Assessing the External Marketing Situation 61 to two and a half to three years as compared to Detroit’s four to over six years. Being twice as fast resulted in the Japanese having more up to date designs that embodied more contemporary and sophisticated technology. The fundamental ingredients of time-base competition are low-cost variety and fast reaction time. Companies using this strategy give attention to reducing the time required to manufacture and distribute their products and cutting the time required to develop and introduce new products. By doing so companies can offer a broader product line, cover more market segments, and rapidly increase the technological superiority of their products. The benefits of these practices can be generically expressed as gains in quicker response time. In essence, time-based competition is a customer-focused strategy. Promptness and variety are the means by which a company can deliver superior value to its clients. However, succeeding at this requires a coordinated company effort. A time-based competitor develops the high degree of internal responsiveness and coordination among different parts of the company that allows it to discern differences among key clients and customize the products and services delivered to each. Thus, the ultimate purpose of the time-based competitor is not maximizing speed and variety, but owning the customer (Stalk and Hout, 1990; Johnson and Busbin, 2000). 2.2 Assessing the External Marketing Situation A marketing-oriented company continually analyzes the environment in which it operates, adapting to take advantage of emerging opportunities and to minimize eventual threats. At the simplest, the whole marketing system can be divided into three levels (see Figure 2.6): The focal company• : Understanding and analyzing the internal situation was dealt with already within this chapter Industry level/value net/micro level• : The focal company’s most important actors/ stakeholders at this level are suppliers, partners/complementors, competitors and of course the customers. Macro level• : The most important changes taking place in the macroenvironment can be summarized in the so-called PEST analysis: P Political and legal factors – E Economic factors – S Social/cultural factors – T Technological factors – In the following we will discuss each of the four elements in the PEST analysis. Later in the chapter, the dimensions of the microenvironment will be introduced and examined. 2.2.1 PEST Analysis The macroenvironment consists of a number of broad forces that influence not only the company but also the other stakeholders and actors in the microenvironment. Traditionally, four forces – political/legal, economic, social/cultural and technological – have Kapitel_2.indd 61 03.08.2010 12:46:32 Uhr