Marketing current position: 1. Weaknesses of financial
Marketing Strategy –Strategic Position Assessment Strategic position assessment: provides the basic information about the sources of value in the business and the drivers that create value in the business. The SPA should be done at two levels: The corporate level should focus on the value potential of the company’s portfolio of businesses. The unit level should focus on the value and drivers of the individual markets and products.
Each business is assigned one for the five strategic objectives: 1. Divest: closed or sold 2. Harvest: capable of generating healthy CF with limited growth opps. 3.Maintain: mature markets with acceptable share and further share-building activities do not generate a (+) NPV. 4.
Growth: positioned in attractive market where they posses competitive advantage 5. Enter: new growth opps. Assessing the current position: 1. Weaknesses of financial measures: do not give reliable indicators on whether current performance is creating long-term value a. Company-level: most measures fall short in providing an indicator of long-term performance. b. Unit-level: can be even more misleading because they encourage deceptive comparisons across business units 2.
Strategic value drivers: those organizational capabilities that have the most significant impact on the firm’s ability to create SV. These drivers shape a company’s ability to create and retain competitive advantage. c. To measure whether value is being created in any one year management must: i.
Identify those org variables that are critically affecting competitive advantage and long-term cash flow. ii. Set target level performance on these iii. Measure performance achieved and compare to targets 3. Identifying value drivers: d. Should be a current asset or capability that has an impact on long-term value e.
Should be capable of being measured and communicated f. Should be capable of being influenced by management actions 4. Target level of performance: benchmark performance against a peer group or other companies the business aspires to emulate 5. Measuring performance: targets set and individuals and groups have to be assigned responsibility The Balanced Scorecard: performance and plans cannot be built around a single measure such as return on capital or EPS but need a set of indicators to track performance and ensure that managers are achieving on the drivers of long-term performance .
Financial perspective a. Return on capital employed b. Operating margins c. EVA d.
Cash flow e. Sales growth 2. Customer perspective f. Market share g. Brand image and awareness h.
Customer satisfaction i. Customer retention j. Customer acquisition k. Ranking by key accounts 3. Internal business perspective l.
% of sales from new products m. Manufacturing costs n. Manufacturing cycle time o. Inventory management p.
Quality indices q. Technological capabilities 4. Innovation and Learning perspective r. Product development s. Purchasing t.Manufacturing u. Technology v.
Marketing and Sales Exploring the portfolio: performance needs to be broken down into smaller units than the aggregate to identify winners and losers (Pareto 80/20) and the profit waterfall (total economic profit v capital invested) Explaining the current position: analysis begins with the basic economic proposition that there are two basic ways in which a business can earn profits that exceed its cost of capital. One is to find attractive markets where competition is weak which allows the firm to earn monopoly profits.The other is to possess unique resources or assets that enable the business to create a competitive advantage in the form of lower costs or a superior offer. These are called Ricardian Rents.
1. Market attractiveness: defined as a market where the average competitor consistently earns a return above its cost of capital a. The most important factors determining the attractiveness of the market are: i. Size of the market: big markets offer firms more opportunity to grow. ii. Market growth: it is easier to grow if the market in which the firm is operates in also growing iii.
Competitive structure of the market: the five elements are 1. Intensity of direct competition characterized by excess production capacity, standardized products or services, many competitors, low growth 2. Buyer power: buying pressure is a function of price sensitivity and negotiating power 3. Threat of new entry: major barrier to entry are patents, economies of scale, high capital requirements, strong brands, threat of retaliation, access to distribution channels 4.Threat from substitutes: types of substitutes are alternate products, new products, elimination of need, generic substitution, abstinence 5.
Power of suppliers: supplier power is likely to be high when few suppliers are available, suppliers have unique products or strongly differentiated brands, switching costs are high, suppliers can threaten to integrate forward, large number of small customers with weak negotiation power. iv. Cyclicality of the market: highly cyclical identified when prices are 30% or more higher at the peaks than in the troughs. .
Risk factors Competitive Advantage: the explanations of a firm’s differential advantage will be found in the firm’s resources and the way they are integrated to form its core capabilities. A business has differential advantage if it is able to sustain economic profits that exceed the average for competitors in its market. The differential advantage can be based on a cost advantage or a differentiation advantage. 1. Cost advantage: a business has a cost advantage if it has a lower total economic cost than the average of the competitors in its market.Total economic cost is the sum of operating costs plus a charge for capital, where the capital charge is the cost of capital X the amount of capital employed. Cost advantage creates SV value by allowing the business to charge the same price as competitors but earning a higher profit margin.
Alternately, it can charge a lower price and gain a higher market share. 2. Differentiation advantage: differentiation occurs when there is a perceived difference in delivered value that leads target customers to prefer one company’s offer to those of others.Differentiation only occurs if customers are willing to pay a price premium. If customers are willing to pay a premium then the business has three strategies it may follow: a.
Charge the full price premium by increasing the price to the point where it just offsets the improvement in customer benefit b. Keep the price at the level of competitors and use the advantage to gain share c. Price above competition but below the full premium to gain a combination of unit margin improvement and share gain.
d. Sources of differentiation i. Product or service leadership ii. Customer intimacy iii.Brand leadership Market attractiveness and competitive position: the analysis of a company’s internal and external forces can be brought together in a strategic characterization matrix (see Fig 5.
6 on page 165). The past performance of a company is explained by a combination of the attractiveness of the market and its competitive advantage. Projecting the future of the business: 1. Market attractiveness: Each of the dimensions of market attractiveness has to be evaluated.
First, on the size and growth of the market. Of particular importance is how the market will be segmented and which segments are most attractive.The industry structure must be evaluated. What are the strategies of the competition and how will they affect competitive intensity. What impact will this have on prices and margins? Similar projections need to be made about the cycle and cyclical pressures. 2. Differential advantage: How will the firm’s competitive advantage will shift over the coming years? This requires extensive quantitative information on the firm’s products and services but also those of the competitors and the changing needs of the customer.
SEE FIG 5. 6 page 167 for an example of a competitive position assessment.Once the CPA is complete, integrate this with the market attractiveness projections using the strategic characterization matrix Implications of the strategic position assessment: 1.
It provides the information for the valuation of the complete business under its current strategy. 2. It forces management to consider the options open to it to create more value. 3. It identifies the business unit’s strategic value drivers The Value Based Plan: 1. Establishing the current market value of the firm: the market determined value should be close to the manager’s own discounted NPV of the company’s long-term CF.If it is not the following may explain some of the gap: a.
Management perception of the future is unrealistic b. Management valuation may be higher if they are in possession of information that has not yet been made available to investors c. The market’s valuation may be higher if investors anticipate a successful take-over of the company at a premium. 2. The value of the company as is: this stage examines HOW the company’s market value is arrived at, and which are the company’s most and least valuable businesses.
3.The potential value with internal improvements: Action teams are set up for each business unit to undertake a fundamental reappraisal of the plan with the objective of significantly increasing the unit’s value using the firm’s core strategic value drivers of sales performance, price increases, cost reduction and investment. 4. The potential value with external improvements: enhancements may be possible through shrinking or expanding the business. More value may be added if some, or all, units are sold, spun-off. Acquisitions may also be considered. 5.
Optimal restructured value: What is the business worth with all the internal and external improvements Strategic Objectives: 1. Divest: exiting from markets or market segments that do not offer profit potential. Divesting cuts costs and shifts resources from uneconomic activities a. Divestment should be considered when a product or activity is not making an economic profit or where another company values the business more highly than the current owner.
Capturing this surplus creates value for shareholders 2. Harvest: this strategy maximizes the firm’s cash flow from its existing assets.It is an appropriate strategy when the net divestment value of the business is below its optimal restructured value or the enhanced value from the restructured option accrues from increasing CF from the current volume of sales rather than growth. Harvesting is often accompanied by declining sales volume.
It usually considered when the competitive advantage of the business is in an unavoidable decline or where market conditions are deteriorating b. Strategies for harvesting through increased operating margin: i. Raising prices ii.
Cutting variable costs iii. Cutting fixed costs v. Focusing on premium market niches c. Strategies for harvesting through reduced investment: v. Reducing inventory and tightening payment terms vi. Pushing suppliers for extended financing vii.
Reducing fixed assets 3. Maintain: this strategy is different from harvesting in that management does not expect market share to erode over time nor does management expect to increase share. The conditions for a maintenance strategy are: d. The business is earning healthy economic profits and marginal investments earn a return exceeding the unit’s cost of capital e.The market is not expected to decline over the foreseeable future and the business has a well established competitive position f.
The market is dominated by a small number of producers (2 to 3) g. Significant barriers to entry h. Strategies for maintenance: viii.
Avoid price competition ix. Maintain barriers to entry x. Maintain a focus on innovation xi. Market signaling: selective communication of information to competitors designed to influence competitors’ perceptions and behavior in order to provoke or avoid certain types of actions. 4.
Growth: strategies for growth (see growth ladder in chapter 4)