Creating Competitive Advantage Chapter 18

Objectives Learn Major Goals of Marketing Learn how to understand competitors as well as customers via competitor analysis. Learn the fundamentals of competitive marketing strategies based on creating value for customers.

Intel Has dominated the chip industry Success is directly related to Intel’s competitive strategy Strategy focuses on superior value and product leadership Heavy focus on product and advertising innovation and R&D investments Changing market needs have challenged Intel to adapt Intel is capitalizing on the Internet now

Two Major Goals of Marketing* 1. Design and Manage a Superior Value-Delivery System to Reach and Satisfy Target Customer Segments. 2. Gain and Sustain Competitive Advantage.

- = Defining Customer Value Total Customer Benefit Cost Customer This CTR corresponds to Figure 18-1 on p. 545 and relates to the material on pp. 545-546. Instructor’s Note: This material previews the concepts that underlie the following discussion on Porter’s Value Chain (Slide 18-7). Defining Customer Value - = Total Customer Benefit Cost (Product, Service, Personnel, & Image Values) (Monetary, Time, Energy, & Psychic Costs) Customer Delivered Value (Profit to the Consumer) Elements of Customer Value Customer Value is a multi-faceted concept marketers should consider in preparing the total marketing offer. Key dimensions to the customer value concept include: Customer-Centered. To win in today’s marketplace, companies must excel at becoming more customer-centered in delivering superior value to their target customers. A key concept is market engineering - the process of designing the whole company system to deliver customer value at every level. Customer Delivered Value. Delivered value is defined as the difference between total customer value and total customer cost. Discussion Note: The text example emphasizes the dollar value of customer costs. Consumers also weigh psychological costs such as image, reputation, and decision-time.

Value Chain Analysis** Firm Infrastructure Human Resource Management Technology Development Procurement Value Chain This CTR relates to the material on pp. 553-554. Teaching Tip: Ask students to identify the primary and support activities operating at your school. Value Chain Analysis** Support Activities The Generic Value Chain Michael Porter’s value chain identifies nine value-creating activities undertaken by companies seeking to provide products that meet customer needs. Activities include: Margin Operations Outbound Logistics Marketing and Sales Primary Activities: Inbound Logistics. Inbound logistics consists of those activities and their coordination that bring needed materials into the business. Value is added in the choice of materials and their integration into the business operations in a timely manner. Operations. Operations is the first step in developing materials into value-added products. Operations add value through manufacturing innovations and processes. Outbound Logistics. Outbound logistics refers to the distribution system set up by the business. As with inbound logistics, coordination and integration of the firm’s products with the needs of retailers and customers creates value. Marketing and Sales. Marketing and sales educate consumers and position the firm’s products and image to create value. Service. Service creates value both by keeping the product’s performance in line with customer expectations and by demonstrating to the customer the firm’s commitment to meeting customer needs. Support Activities: These activities occur within each primary activity. Firm Infrastructure. How the firm is set up permeates each primary activity and determines the parameters of action each activity can take. Human Resource Management. Recruitment, training, and evaluation add value in relation to the competition’s efforts. Technology Development. All primary activities must develop and maintain technological advantages. Procurement. Every primary activity procures inputs of both material and expertise. Inbound Logistics Service Analytical tool to identify value-adding activities and maximize value. Ex) Dell Computer Cost structure and differentiation Primary Activities

Customer Value-Delivery Network* Customer (you) Customer Value-Delivery Network* Customer Value-Delivery System This CTR relates to the discussion on p. 554. Retailer (Sears) Delivery Order Producer (Levi) Order Delivery Value Delivery Systems To enhance competitive advantage, firms look beyond their own value chains for ways of improving customer value. In linking the company’s value chain with those of its suppliers and resellers, the company improves the performance of the entire customer value delivery system. A key concept of the value delivery system is partnering. Partnering. Partnering involves merging key aspects of two or more companies in the delivery system to increase customer value. The text relates the example of Honda headquarters working with Donnelly Corporation employees to reduce their costs and improve quality. Other examples include sharing sales information with suppliers by manufacturers and retailers, coordinating promotional activities throughout the chain, and sharing new technological developments in inventory and database ordering systems with other chain members. Vendor (Milliken) Delivery Order Raw Material Supplier (Du Pont) Order Delivery Order Delivery

Definition Competitive Advantage An advantage over competitors gained by offering consumers greater value than competitors offer.

Steps in Analyzing Competitors* Figure 18-1: Steps in Analyzing Competitors*

Competitor Analysis Steps in the Process: Firms face a wide range of competition Be careful to avoid “competitor myopia” Methods of identifying competitors: Industry point-of-view Market point-of-view Steps in the Process: Identifying Competitors Assessing Competitors Selecting Competitors to Attack or Avoid

Levels of Competition Diet lemon limes Baseball cards Coffee Coke Fruit flavored colas Coffee Coke Pepsi Diet-Rite cola Bottled water Lemon Regular colas Beer Juices Wine Fast food Tea Video rentals Ice cream Product form competition: Diet colas Product category competition: Soft drinks Generic competition: Beverages Budget competition: Food and entertainment

230-year-old Encyclopedia Britannica viewed itself as competing with other publishers of printed encyclopedias. Big mistake! Its real competitors were software encyclopedias and the Internet.

Discussion Question Create a levels of competition diagram for one of the following: WalMart McDonald’s Nike Starbucks Google

Competitor Analysis Steps in the Process: Identifying Competitors Determining competitors’ objectives Identifying competitors’ strategies Strategic groups Assessing competitors’ strengths and weaknesses Benchmarking Estimating competitors’ reactions Steps in the Process: Identifying Competitors Assessing Competitors Selecting Competitors to Attack or Avoid

Competitor Analysis Steps in the Process: Identifying Competitors Strong or weak competitors Customer value analysis Close or distant competitors Most companies compete against close competitors “Good” or “Bad” competitors The existence of competitors offers several strategic benefits Steps in the Process: Identifying Competitors Assessing Competitors Selecting Competitors to Attack or Avoid

Customer Value Analysis (for Competition) Identify Attributes Customers Value Assess Attribute Importance Assess Company and Competitor Performance Examine Segments on Attribute-by-Attribute Basis Monitor Customer Values Over Time

Competitive Strategies* Basic Winning Competitive Strategies: Michael Porter Overall cost leadership Lowest production and distribution costs Differentiation Creating a highly differentiated product line and marketing program Focus Effort is focused on serving a few market segments

Attractiveness of an Industry Threat of Potential Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Existing Rivalry Threat of Substitutes

Hohner has successfully implemented a focus strategy to capture an 85% share of the harmonica market.

Competitive Strategies Basic Competitive Strategies: Value Disciplines* Operational excellence Superior value via price and convenience Customer intimacy Superior value by means of building strong relationships with buyers and satisfying needs Product leadership Superior value via product innovation

Discussion Question Firms that follow a customer intimacy strategy are willing to do almost anything for their customers. Does such a strategy make sense for local businesses, or only for national / global corporations? British Airways practices customer intimacy with select frequent flyers

Hypothetical Market Structure Figure 18-3: Hypothetical Market Structure

Competitive Positions Competitive Strategy Expanding the total demand Finding new users Discovering and promoting new product uses Encouraging greater product usage Protecting market share Many considerations Continuous innovation Expanding market share Profitability rises with market share Competitive Positions Market Leader Market Challenger Market Follower Market Nicher

Competitive Strategy WD-40 has a knack for developing new uses for its product. What other brands have adopted a similar strategy? Clicking the WWW icon will open your web browser and link to the web site pictured in the screen shot. WD40

Competitive Positions Competitive Strategy Option 1: challenge the market leader High-risk but high-gain Sustainable competitive advantage over the leader is key to success Option 2: challenge firms of the same size, smaller size or challenge regional or local firms Full frontal vs. indirect attacks Competitive Positions Market Leader Market Challenger Market Follower Market Nicher

Pepsi is an example of market challenger that has chosen to use a full frontal attack

Competitive Positions Competitive Strategy Follow the market leader Focus is on improving profit instead of market share Many advantages: Learn from the market leader’s experience Copy or improve on the leader’s offerings Strong profitability Competitive Positions Market Leader Market Challenger Market Follower Market Nicher

Dial Corporation successfully uses a market follower strategy

Competitive Positions Competitive Strategy Serving market niches means targeting subsegments Good strategy for small firms with limited resources Offers high margins Specialization is key By market, customer, product, or marketing mix lines Competitive Positions Market Leader Market Challenger Market Follower Market Nicher

FedEx and UPS are two competitors in the package delivery business FedEx and UPS are two competitors in the package delivery business. What competitive strategy seems to describe each company?

Balancing Customer and Competitor Orientations Companies can become so competitor centered that they lose their customer focus. Types of companies: Competitor-centered companies Customer-centered companies Market-centered companies

Evolving Company Orientations Figure 18-4: Evolving Company Orientations

Latest thinking on Competition Monopolist Competitive Approach Cooperative Approach Co-opetition