1. Marketing Analytics II Chapter 5A. Business Strategy
Stephan Sorger
Disclaimer:
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Slide 1:
Welcome to Module 2 of Marketing Analytics II, Competitive analysis, lecture 1 of 2 lectures. In lecture 1, we introduce several strategic scenarios. In lecture 2, we show models to address those scenarios.
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2. Outline/ Learning Objectives
Topic Description
Strategic Scenarios Identifying strategic options
Strategic Decision Models Selecting the most effective strategic option
Strategic Metrics Evaluating performance based on KPIs
Slide 2
In this module, we cover the following topics:
-Strategic Scenarios, where we identify strategic options from which to select.
-Strategic Decision Models, where we select the most effective strategic option.
-and Strategic Metrics, where we evaluate performance based on key performance indicators
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3. Analytics Approach to Strategy
Marketing Mix: 4Ps: Product
Price
Place
Promotion
Identify 3 typical strategic scenarios
Marketing Mix
Strategy
Results
Business Operations
Strategic Metrics
Business Operations: Supporting Functions
Strategic Metrics: “Big Picture”
Slide 3
This slide introduces a feedback model of company marketing. We start with our company strategy. We implement the strategy using the marketing mix and business operations. The marketing mix is often referred to as the 4Ps and is the set of product, price, place (distribution), and promotion approaches to plan to deploy to execute the strategy. We measure the results of our strategy using strategic metrics. We use the term “strategic metrics” here to emphasize their “big picture” nature. Based on the metrics, we adjust our marketing mix elements, business operations, and even strategy as necessary to ensure we are meeting organizational objectives. We apply the feedback from our strategic metrics to monitor the effectiveness of our strategy, and make changes if necessary.
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4. Strategic Scenarios Market Entry Market Approach Market Growth
Typical Major Strategic Decisions for Most Companies:
Market Entry: Should I enter this market?
Market Approach: How should I engage with this market?
Market Growth: How can I grow within the market?
Slide 4
The figure recognizes that most organizations must first decide if they want to enter particular markets (or if they wish to exit one of their existing markets). Once in the market, organizations must decide which approach they wish to take to succeed in the market. Do they want to lead through differentiation, through cost leadership, or through focus on a niche? Having decided on their general approach, they must then decide how they wish to grow revenue in those markets.
We cover each scenario in the coming slides.
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5. Strategic Scenario: Market Entry
Market Exit
Market Entry: Apply competitive advantages to characteristics of market
Example: Diaspora (and many others) entering social networking market
Organic growth: Entering markets by growing internal process and product/service line
Acquisition-driven growth: Entering markets by acquiring companies already in the market
Market Exit: Leave flat or shrinking markets, or those suffering from intense competition
Example: Siemens exiting radiation therapy market (against competitor Varian Medical)
Slide 5
The graphic summarizes the market entry strategic scenario. In the market entry scenario, organizations must decide whether or not to enter a new market. Conversely, they can decide to exit an existing market they no longer find attractive.
Companies enter new markets when they determine they can leverage their competitive advantages to take advantage of strong market demand.
Companies can enter markets by growing their internal processes and product/service line to accommodate the new market. This is often referred to as organic growth.
Alternatively, companies can enter new markets by acquiring companies already in that market. This is referred to as an acquisition-driven growth approach.
Conversely, companies exit flat or shrinking markets that hold little customer demand, or those suffering from intense competition.
For example, European radiation therapy company Siemens (Siemens.com) exited the radiation therapy market as it struggled with arch rival Varian Medical Systems.
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6. Strategic Options for Market Entry and Exit
Slide 6
This chart summarizes the market entry and exit models.
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7. Strategic Scenario: Market Approach
Cost Leadership
Generic Strategy
Differentiation
Focus
Generic Strategy: General approaches to market, as defined by Michael Porter
Slide 7
After deciding to enter a market, organizations must decide on the generic approach they plan to pursue within that market.
When considering the generic approach to the market, we find it useful to adopt the generic strategy model introduced by Harvard Professor Michael Porter in his book “Competitive Advantage: Creating and Sustaining Superior Performance.” In the book, Professor Porter discusses three generic strategies to suit different markets and organizational objectives: cost leadership, differentiation, and focus
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8. Strategic Options for Market Approach
Slide 8
In a cost leadership strategy, we evaluate the potential core competencies available to the organization that give it a competitive edge in saving costs. For example, airline carrier Southwest Airlines (southwest.com) keeps costs low by consolidating operations on only one type of aircraft, the Boeing 737. The approach reduces spare parts inventory and maintenance costs.
With differentiation, the organization emphasizes unique areas that make its offerings stand out from those of competitors in ways that customers value. The uniqueness translates into higher prices demanded for its products and services. For example, New York Times newspaper readers perceive the in-depth coverage and unique writing style of the paper to differentiate it from others.
The focus generic strategy targets niche markets using the cost or differentiation approaches. For example, sunglass retailer Sunglass Hut specializes in selling only sunglasses to consumers.
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9. Product/Service Development
Strategic Scenario: Growth
Market Penetration
Market Development
Growth
Product/Service Development
Diversification
Market Penetration Grow by increasing sales of existing products/services to existing market
Target competitors; Target usage/frequency; Target revenue per order
Market Development: Grow by increasing sales of existing products/services to new markets
New demographics; New geographics
Product/Service Development: Grow by increasing sales of new products and services
Diversification Grow by increasing sales of new offerings to new markets
Slide 9
Once companies have entered a market and decided on the generic approach to it, they will seek to grow the amount of revenue they gain from that market.
According to market researcher H. Igor Ansoff, companies face four different ways to grow—market penetration, market development, product/service development, and diversification.
In market penetration, organizations grow by increasing sales of existing products and services to existing customers.
In market development, we target growth by increasing sales of existing products and services to new markets.
In product/service development, we grow by developing and introducing new products and services to the market, with the intent that our customers buy them in addition to existing products.
And in diversification, we combine market development and service development.
We show example of each approach on the next slide.
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10. Strategic Options for Growth
Slide 10
For market penetration,
In market development, we target growth by increasing sales of existing products and services to new markets.
In product/service development, we grow by developing and introducing new products and services to the market, with the intent that our customers buy them in addition to existing products.
And in diversification, we combine market development and service development.
We show example of each approach on the next slide.
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11. Strategic Decision Models
Multiple Consideration Criteria
High Risk and Uncertainty
Mix of Hard and Soft Data
QSPM
Monte Carlo Analysis
Analytic Hierarchy Process
Applications
-Market Entry and Exit
-Customer-Related Decisions
-Organizational Changes
Applications
-Growth Decisions
-Market Entry and Exit
-Product/Service Development
Applications
-Brand Decisions
-Generic Strategy Decisions
-Customer-Related Decisions
Slide 11
In lecture 1, we outlined the various strategic options available to organizations, given different strategic scenarios. To decide which options to pursue, we turn to decision models.
In this section, we cover three decision models to address common organizational situations.
Specifically, we have found that most decisions on strategic alternatives fall into one of three types—those with multiple consideration criteria, those with high risk and uncertainty, and those with a mix of hard and soft data.
For decisions involving multiple consideration criteria, such as market entry and exit, decisions around customers, and organizational changes, where we must gather the input of many departments within large organizations, we recommend employing the quantitative strategic planning matrix, or QSPM.
For decisions incorporating high risk and uncertainty, such as how to grow the company, when to enter or exit a market, or which product or service to develop, we recommend the Monte Carlo analysis model.
For decisions that incorporate a mix of hard and soft data, such as brand-based decisions, decisions around which generic strategy to use, and customer-related decisions, we recommend the analytic hierarchy process.
We will cover each of the three models in the next few slides.
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12. Strategic Decision Models
Slide 12
In summary, the QSPM model is a systematic approach for evaluating different strategies. It is used for market entry exit and other decisions. The Monte Carlo simulation incorporates uncertainty in forecasting future results. It is often used for growth-based decisions. The AHP model combines quantitative hard numbers with subjective soft criteria.
We now cover each model in detail.
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13. Quantitative Strategic Planning Matrix (QSPM)
Determine
Strengths and
Weaknesses
Determine
Opportunities
and Threats
Assign
Weights to
Criteria
Assign
Attractiveness
Score
Complete
QSPM
Spreadsheet
Slide 13
We start with the quantitative strategic planning matrix, known as the QSPM. As we stated earlier, the QSPM decision model works well for situations involving many evaluation criteria. The model can assign different weights to different criteria to reflect the priorities of the decision, and is perfect for situations where we want to incorporate the input of many stakeholders in the organization.
We apply the model in the five steps shown on the slide—first assigning strengths and weaknesses, then determining opportunities and threats, with the strengths, weaknesses, opportunities and threats acting like decision criteria, much like a SWOT analysis. We then assign weights to the criteria, and multiply assessments for each criteria to calculate the assignment scores, and total them up to complete the QSPM spreadsheet and make the final decision between multiple choices. We review a typical example on the next slide.
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14. Quantitative Strategic Planning Matrix (QSPM)
Determine
Strengths and
Weaknesses
Determine
Opportunities
and Threats
Assign
Weights to
Criteria
Assign
Attractiveness
Score
Complete
QSPM
Spreadsheet
Slide 14
We demonstrate the QSPM process by reviewing a typical example. We want to decide between the organic growth option and the acquisition growth option when entering a new market. The slide shows a completed QSPM spreadsheet for the organic growth option. We start by holding a meeting, inviting all the relevant stakeholders for the decision. We ask them to select the key strengths, weaknesses, opportunities, and threats, or SWOT criteria, to evaluate when making the decision. We also ask them to state the importance weights for each criteria. We will be applying the same SWOT criteria for both decisions.
For example, the stakeholders might believe that a wide product line is a desirable strength, and they decide on a 15% weight.
In another meeting, the stakeholders evaluate the degree to which each option fulfills the criteria, which QSPM labels with the term attractiveness. In this case, this company has decided to evaluate the choices on a 1 to 5 scale, similar to Amazon.com ratings, where 1 is very poor and 5 is very good. For example, the stakeholders have decided that the organic growth option rates an attractiveness score of 2 on a scale of 5, which is a fairly low score. Perhaps the stakeholders believed that the time required to create multiple products, for a wide product line, is excessive. We multiply the weight by the attractiveness score to calculate the total attractiveness. For example, we multiply 15% by 2 to obtain 0.30 for the first criterion. We repeat the process for the remainder of the criteria and add them up to calculate the total attractiveness score. In this case, we get 6.00 for the organic growth option.
Organic Growth Option
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15. Quantitative Strategic Planning Matrix (QSPM)
Determine
Strengths and
Weaknesses
Determine
Opportunities
and Threats
Assign
Weights to
Criteria
Assign
Attractiveness
Score
Complete
QSPM
Spreadsheet
Slide 15
We then repeat the process for the acquisition option. The key factors, or decision criteria, as well as their weights, remain constant for a fair evaluation of the two choice. The individual attractiveness scores vary, of course, because the stakeholders are now evaluating the acquisition option.
For example, the stakeholders have decided that the acquisition option rates an attractiveness score of 3 out of 5, because an organization that we acquire could already have an existing product line that we could leverage.
Just as we did for the organic growth option, we multiply the weights by the attractiveness scores to calculate the total attractiveness scores for each criterion, and complete the QSPM spreadsheet by summing up the individual attractiveness scores to calculate the total attractiveness scores. In our case, the acquisition option results in a total attractiveness score of 5.55.
Because it is lower than the 6.0 score we calculated in the organic growth option, the QSPM recommends that the organization proceed with the organic growth option.
Acquisition Option
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16. Monte Carlo Analysis: Technique
Establish
Possible
Scenarios
Gather
Relevant
Data
Declare
Uncertain
Variables
Declare
Uncertainty
Function
Interpret
Simulation
Results
Step Description
Scenarios Weak Market: Economic Recession
Typical Market: Average Conditions
Strong Market: Economic Boom
Relevant Data See data for each scenario on upcoming slide
Uncertain Variables Fixed Costs certain
Unit Price uncertain; depends on market condition
Unit Cost uncertain; depends on manufacturing
Uncertainty Function Profit = (Unit Sales) * (Unit Price – Unit Cost) – (Fixed Costs)
Simulation Results See output plot on upcoming slide
Slide 16
In today’s dynamic environment, marketers cannot count on certainty. But markets must still make decisions. Monte Carlo simulation, named after the casinos at Monte Carlo in Monaco, incorporates random elements to address uncertain and risky situations.
To execute Monte Carlo, we start by declaring three typical scenarios, a weak market, such as an economic recession, a typical market with average conditions, and a strong market. Having declared the three scenarios, we calculate what the expected company results would be for each scenario.
We declare the uncertain variables and the uncertainty function.
In many cases, the fixed costs, such as rent, is certain. The unit price is often uncertain, because it depends on market conditions. The unit cost is also uncertain, because it can depend on manufacturing tolerances.
The uncertainty function, in cases, where we want to examine profit, is defined as the unit price minus the unit cost, less the fixed costs, all subtracted from the unit sales.
We then run the monte carlo simulation to get the simulation results.
We show a typical example in the next slides.
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17. Data for different scenarios
Monte Carlo Analysis: Data Table
Slide 17
In our example, our organization estimates we will sell only 40,00 units in a weak market, which increases to 50,000 in a typical market, and shoots up to 60,000 when the market is strong.
Based on past history, we find that unit prices vary from $22 per unit in weak markets to $18 in strong markets, perhaps because we can drop our unit cost due to economies of scale that come with increased sales in strong markets and thus sell products for less.
Manufacturing tells us that unit cost can vary between 9 and 11 dollars per unit, depending on machining tolerances, irrespective of market conditions.
Fixed costs, such as rent, remain fixed.
We enter the data into the Monte Carlo simulation tool to arrive at the results shown in the next slide.
Data for different scenarios
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18. Profit from New Product
Monte Carlo Analysis: Output Plot C
Relative
Probability B D A
Loss
Profit
Profit from New Product
Slide 18
This slide shows a typical output plot from a Monte Carlo simulation. The letters A, B, C, and D denote different scenarios, each with their own probability of occurring.
Scenario A shows a small probability of losing a substantial amount of money due to the possibility of weak market conditions and high unit costs.
Scenario B denote a break-even condition where we make no profits, but don’t lose money either.
Scenario C shows the most likely scenario, where we make a moderate profit.
And Scenario D indicates the possibility that we can make a substantial profit.
Because the overall graph skews right, we could make the interpretation that we should move forward with the plan.
Typical Output Plot
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19. Analytic Hierarchy Process: Technique
Declare
Decision
Goal
Declare
Selection
Criteria
Declare
Decision
Alternatives
Rank
Criteria and
Alternatives
Execute
AHP
Algorithm
Step Description
Decision Goal Example: Decide on generic strategy to apply to new market
Selection Criteria Quantitative criteria: Potential profitability for each alternative
Psychological criteria: Alignment of resources for each alternative
Decision Alternatives Cost Leadership; Differentiation; Focus
Rank Criteria Can declare that profitability is twice as important as alignment
Value for quantitative criteria: Profitability in monetary terms
Rating for psychological criteria: Alignment rating from
Execute AHP Complex algorithm; Recommend use of statistical software
SPSS; SAS; AHP Microsoft Excel templates
Slide 19
We close our discussion of strategic decision models with the analytic hierarchy process, or AHP.
In AHP, we first declare our decision goal.
For example, we could declare that we want to decide on which generic strategy alternative—cost leadership, differentiation, or focus—to apply to a new market.
Next, we gather the selection criteria.
Our case is typical of those used with AHP in that we have both hard data and soft data.
Our hard, or quantitative data, consists of the potential profitability for each alternative.
Our soft, or psychological criteria, consists of our rating from 1-10 the degree of alignment each alternative has with organization competitive advantages.
In the final step, we execute the AHP model.
Due to the complexity of the AHP mathematics, we recommend the use of
Statistical software programs such as R, SPSS, or SAS.
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20. Check Your Understanding
Number Question
1 Strategic Scenarios: Identifying strategic options from which to select
2 Strategic Decision Models: Selecting the most effective strategic option
Slide 20
In this module, we covered
strategic Scenarios, where we Identified strategic options from which to select and Strategic Decision Models, where we selected the most effective strategic option
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