Strategy Formulation begins with an analysis of the forces that shape competition in the industry in which a company is based. The goal is to understand the opportunities and threats confronting the firm and to use this understanding to identify strategies that will enable a company to outperform its rivals. Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement strategies that enable it to perform more profitable. Threats arise when conditions in the external environment endanger the integrity and profitability of the company’s business.
Components of Marketing Environment
There are two components of marketing environment or two marketing environment forces, viz., the external factors and the internal factors. We’ll look in detail about both these features.
The External Factors
Broadly classified, the external factors consist of micro-environment and macro-environment.
Micro-Environment: This type of marketing environment influences the firm directly. It includes suppliers, distributors, consumers and local stakeholders whose any step significantly affects the business of the firm.
Macro-Environment: In this type of marketing environment, all factors that influence the business of organization are out of control of the firm. For marketing environment example, consider foreign trade laws. The firm doesn’t frame these laws and it has to follow these laws, inevitably. Globalization is also an example of ever changing factors like politics, marketing trends, culture, economics on which a firm has no control but to change as per the needs of market.
SWOT analysis is a basic, straightforward model that provides direction and serves as a basis for the development of marketing plans. It accomplishes this by assessing an organizations strengths (what an organization can do) and weaknesses (what an organization cannot do) in addition to opportunities (potential favorable conditions for an organization) and threats (potential unfavorable conditions for an organization). SWOT analysis is an important step in planning and its value is often underestimated despite the simplicity in creation. The role of SWOT analysis is to take the information from the environmental analysis and separate it into internal issues (strengths and weaknesses) and external issues (opportunities and threats). Once this is completed, SWOT analysis determines if the information indicates something that will assist the firm in accomplishing its objectives (a strength or opportunity), or if it indicates an obstacle that must be overcome or minimized to achieve desired results (weakness or threat).
External Elements of SWOT analysis that impact the marketing strategy of a company
Opportunities and Threats
Managers who are caught up in developing strengths and capabilities may ignore the external environment. A mistake of this magnitude could lead to an efficient organization that is no longer effective when changes in the external environment prohibit the firm’s ability to deliver value to its targeted customer segments. These changes can occur in the rate of overall market growth and in the competitive, economic, political/legal, technological, or socio cultural environments.
Changes in the Competitive Environment
One of the largest trends in the U.S. economy in recent years has been the rapid decline in the number of small, independently owned retail businesses. Small mom-and-pop supermarkets and locally owned bookstores are fading away quickly and will soon be extinct. The most recent businesses to face extinction are neighborhood hardware stores, which have lost customers to retail giants such as Home Depot and Lowes.
Changes in the Socio cultural Environment
Social and cultural influences cause changes in attitudes, beliefs, norms, customs, and lifestyles. A firm’s ability to foresee changes in these areas can prove beneficial while failure to react to these changes can be devastating. For example, the sales of Mexican-food products have increased at an annual rate of approximately 12 percent. The trend went unnoticed by major food producers for a long time. However, Heinz Company recognized the existence of a viable opportunity and responded by introducing two versions of salsa-style ketchup. Although Heinz’s strategy was sound, its salsa ketchup eventually failed due to poor distribution during the implementation phase.
Changes in the Political/Legal Environment
Regulatory actions by government agencies often restrict the activities of companies in affected industries. The American Disabilities Act of 1990 placed restrictions on the way firms construct their places of business and design jobs. Companies with significant investment facilities that did not comply with the law viewed its implementation as a major threat. On the other hand, companies that market products designed to assist disabled shoppers and employees saw the act as a key opportunity.
Lawsuits against the tobacco industry have lead to dramatic changes in the way cigarette companies market their product. Today, companies such as Phillip Morris are airing advertisements illustrating the negative effects of their products.
Changes in the Internal Organizational Environment
Various elements within an organization’s internal environment can also have an impact on marketing activities. Changes in the structuring of departments, lines of authority, top management, or internal political climate can all create internal weaknesses that must be considered during the SWOT analysis as well as in the development of the marketing plan. McDonald’s has recently been feeling increased competitive pressure from Wendy’s and Burger King. In order to increase market share, McDonald’s created new marketing campaigns and new sandwiches. However, McDonald’s failed to get the cooperation of all its franchisees. When store sales began to fall, individual franchisees started to band together to gain power to protect their investments. The increased power of the franchisees forced McDonald’s to pull several advertisement campaigns due to lack of support. Prior to this McDonald’s was used to getting their way with franchisees. Now, the shift in power from McDonald’s to its franchisees has created an internal weakness that the company must address as it develops and implements new marketing strategies.
In pursuing an advantage over its rivals, a firm can choose from several competitive moves:
Changing prices – raising or lowering prices to gain a temporary advantage.
Improving product differentiation – improving features, implementing innovations in the manufacturing process and in the product itself.
Creatively using channels of distribution – using vertical integration or using a distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market.
Exploiting relationships with suppliers – for example, from the 1950’s to the 1970’s Sears, Roebuck and Co. dominated the retail household appliance market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price.
Question 2 .Conduct an internal analysis to identify current strengths and weaknesses in a marketing strategy?
Why within a particular industry do some companies outperform others? What is the basis of their sustained competitive advantage? Let us see an example; the competitive advantage of Dell computers comes from its direct selling business model, which lowers costs and enables the company to respond to customers demands, and also from its focus on efficient supply chain management. Efficiency and Customer Responsiveness are two of the four main building blocks of competitive advantage. The other two are innovation and the quality of product or service offering. Internal Analysis is concerned with identifying the strengths and weaknesses of the company. Internal Analysis is a three step process.
Managers must understand the process by which companies create value for customers and profit themselves, and they need to understand the role of resources, capabilities & distinctive competencies in this process.
They need to understand how important superior efficiency, innovation, quality & responsiveness to customers are in creating value & high profitability.
They must be able to analyze the sources of their company’s competitive advantage to identify what is driving the profitability of their enterprise and where opportunities for improvement might lie.
The Internal Factors
In the internal market environment, the parameters that is crucial for a firm are all internal or within the firm. The five pillars around which internal marketing environment revolves are the five M’s, viz.
Managing internal factors in a marketing environment is essential for a firm to perform at peak. It has to be understood more than external control; improvement in any internal plans can be made easily, if the firm works hard to improve its efficiency.
Internal Elements of SWOT Analysis that impact the marketing strategy
Strengths and Weaknesses
Relative to market needs and competitors’ characteristics, a manager must begin to think in terms of what the firm can do well and where it may have deficiencies. Strengths and weaknesses exist internally within a firm, or in key relationships between the firm and its customers. SWOT analysis must be customer focused to gain maximum benefit; strength is really meaningful only when it is useful in satisfying the needs of a customer. At this point, the strength becomes a capability. When writing down strengths, it is imperative that they be considered from both the view of the firm as well as from the customers that are dealt with. These strengths should be realistic and not modest. A well-developed listing of strengths should be able to answer a couple of questions. What are the firm’s advantages? What does the firm do well?
A customer-focused SWOT may also uncover a firm’s potential weaknesses. Although some weaknesses may be harmless, those that relate to specific customer needs should be minimized if at all possible. In addition, a focus on a firm’s strengths in advertising is promotion is important to increase awareness in areas that a firm excels in. This method not only evokes a positive response within the minds of the consumer, but pushes the weaknesses further from the decision making process. Weaknesses should also be considered from an internal and external viewpoint. It is important that listing of a firm’s weaknesses is truthful so that they may be overcome as quickly as possible. Delaying the discovery of weaknesses that already exist within a company will only further hurt the firm. A well-developed listing of weaknesses should be able to answer a few questions. What can be improved? What is done poorly? What should be avoided?
The role of the internal portion of SWOT is to determine where resources are available or lacking so that strengths and weaknesses can be identified. From this, the marketing manager can then develop marketing strategies that match these strengths with opportunities and thereby create new capabilities, which will then be part of subsequent SWOT analysis. At the same time, the manager can develop strategies to overcome the firm’s weaknesses, or find ways to minimize the negative effects of these weaknesses.
The resource strength, behavior, weakness, synergy and distinctive competences are major components of the internal environment of an organization. An organization uses different types of resources which lead to its advantage (synergy) or disadvantage disynergy within an organization. Some of the constituents of internal environments of an organization are:
These are all the inputs physical or human used in the organization to create outputs in the firm of product or services through a transformation process.
Some other resources of organizations are money, facilities, systems, knowledge, materials and manpower. The cost and availability of these resources are important factors that determine the success of an organizations policy and strategy.
Two or more department could combine to support each other, in order to realize higher output or to share an impact within the organization. For instance, marketing, distribution and promotion may support each other for higher level of marketing strategy. Conversely, marketing inefficiency on the other hand, reduces production efficiency (disynergy) i.e. negative synergy occurs.
Strengths and Weaknesses
The strength of an organization is the attributes the organization has over another organization. The strength gave the organization the competitive edge over another in the same industry, while weaknesses are areas within the organization where the competitors in the same industry can take advantage of as their competitive edge.
This is a comparative quality of one organization over the other.
A distinctive competence of an organization is the ability of that firm to do what its competitors cannot do or do better whet they can do. This concept is useful for strategy formulation. Use of trained and qualified manpower could be an organization distinct. Competences over the other who may resolve o use the unskilled and low paid workers.
Question3 Propose strategic marketing responses to key emerging themes in a marketing strategy?
Most Important Marketing Environmental Factors
For gaining a competitive edge, firms have to ensure that they’re successfully able to follow some that can help marketing tools them immensely in external marketing environment. They’re as follows:
Five Forces Analysis
Strategic marketing responses to key emerging themes in a marketing strategy
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.
Following on from his work analysing the competitive forces in an industry Michael Porter suggested four “generic” business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a business’ activities are narrow versus broad and the extent to which a business seeks to differentiate its products.
The four strategies are summarized in the figure below:
The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
Strategy – Differentiation
This strategy involves selecting one or more criteria used by buyers in a market – and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product – often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.
Examples of Differentiation Strategy: Mercedes Cars
Strategy – Cost Leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimizing costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering “standard” products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.
Examples of Cost Leadership: Nissan, Tesco & Dell Computers
Strategy – Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants – in other words that there is a valid basis for differentiation – and that existing competitor products are not meeting those needs and wants.
Examples of Differentiation Focus: any successful niche retailers; (e.g. The Perfume Shop); or specialist holiday operator (e.g. Carrier)
Strategy – Cost Focus
Here a business seeks a lower-cost advantage in just one or a small number of market segments. The product will be basic – perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called “me-toe”.
Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.
Value Chain Analysis
Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:
(1) Primary Activities – those that are directly concerned with creating and delivering a product (e.g. component assembly); and
(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others (“out sourced”).
Linking Value Chain Analysis to Competitive Advantage
What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.
Steps in Value Chain Analysis
Value chain analysis can be broken down into a three sequential steps:
(1) Break down a market/organization into its key activities under each of the major headings in the model;
(2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;
(3) Determine strategies built around focusing on activities where competitive advantage can be sustained.
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