4.market Strategy.docx

MARKET STRATEGY & PLC (PP5 – CH2) PRODUCT LIFETIME CYCLE In the market analysis field, a key issue is market attractiveness: its main drivers are dimension, growth potential and product/brand lifetime cycle, which is in fact the last to be analysed. Before taking into consideration the actual PLC curve, we need to consider another relevant concept, the Rogers’ Curve, which represents the individual probability of adopting a new product: Rogers suggests a total of five categories of adopters in relation to adoption time (true for both radical and incremental innovations).

Rogers’ curve is shaped as a standard normal curve, and has a phase of growth and of decline. The five categories of adopters in highlights are:  Innovators, who are eager to try new ideas; since they’re interested in being the first owners of a new technological product, they’re often price insensitive. They’re usually risk-takers, wealthier than the average and generally young.  Early adopters are not interested in technology for its own sake, but they can detect the value of a new product and how it will enhance their lives or their businesses; this group is critical in making a new technologically based product successful.  Early majority; these buyers are interested in new technologies, but take a wait-and-see attitude to determine if the product is worthy. It’s a large group and it’s necessary to attract them for the product to be commercially viable.  Late majority adopters are similar to the early majority, but are much more conservative in terms of how much of an industry infrastructure must be built before they’ll buy.  Laggards are often not interested in new technologies, sceptic approach. If a brand had to choose, the preferable shape of a Rogers curve is the steepest and shortest, since it expresses a very fast diffusion of the product: the brand knows anything about the potential repeat purchases, so being fast to spread the product means high initial cashflow). What’s important is that the Rogers curve tells nothing about the product life-cycle or repeated purchases: it simply represents the time needed for a product to become widespread. We can compare the Rogers curve to the PLC curve, and notice that even after the peak of the Rogers curve, the PLC still is in growth phase. The area between the PLC and the Rogers curve represents purchases made by those who already purchased the product once, namely, repeated purchases. If the PLC follows the shape of the Rogers curve, it’s a complete failure for the new product, because it means that those who once purchased the product weren’t satisfied with it and decided not to re-purchase.

Theoretical Product Life-Cycle.

The theoretical PLC curve divides the life-cycle of a product in four different stages, with own characteristics: they’re fundamental for market analysis and marketing strategy, since strategies adopted by the firms must be consistent with the phase of the PLC in which they’re adopted. 1. In the introduction phase the growth rate is at its maximum, while the size of the market is still low. The company has very few information about potential market and market shares, since the market itself still is not well defined: usually there’s one company, the pioneer, which developed the product; if he’s effective in building demand (or the category appears attractive to other companies), the number of competitors will increase, as the size of the market. Normally, this is a phase of hardship for the pioneer, because of the huge investments needed to develop the product, which cause negative profits. Since the number of competitors is low and the market is still growing, there are low entry barriers. 2. Eventually, the market reaches its growth phase: during this phase the market still grows quickly; potential market is still not definable, and the market shares are more or less equally distributed among competitors and they start to become more stable. In this phase the number of competitors is at its maximum, since many see the potential of high profits and try to enter in a still unstructured market: this means fierce competition for market shares. Moreover, company usually gained some experience and volume of sales increased, so that they can achieve economies of scale or experience curves, lowering costs and increasing profits. 3. When market growth becomes steady, the product reaches its maturity phase: the potential market is now low, and market shares are concentrated among the largest competitors, since during the growth phase small firms and competitors left the market. Market share consequently become more stable, even if competitors try to steal market shares from each other. Profits are stable, but may be quite high, depending on cost function of each firm (even if in average are lower than in previous phases). Entry barriers are high. 4. At some point (variable in time), the market slows down and the decline phase starts: instead of growing the market decreases, and potential market is very small. Market shares become more and more concentrated and volatile, since weaker firms leave the market due to decreasing sales, consequently, also number of competitors decreases. Due to lower volume of sales, profits decrease. The entry barrier concept no longer makes sense, since there are no incentives to enter in a lowincome market. The PLC is however a theoretical model, because often categories do not follow perfectly the pattern, and the curve may go through several cycles (frequently when aggressive promotions give a push) or scalloped patterns (frequent in cases of new generations of the product, as happens with iPhones).

There also other limitations of the PLC model:  Differing products show different PLC shapes;

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It’s difficult to measure accurately where a product is on its life cycle, which however is crucial in defining a proper strategy.  The duration of each PLC stage is unpredictable, there’s no standard time interval for each stage. Yet, the PLC is a useful model, that can be applied to analyse product categories, product forms, products and brands. The strategic options available to the marketing managers vary over the product life cycle, as does the importance of various marketing-mix elements: 1. Strategies for the introductory phase. In the introductory phase, the market size and growth rate are low, and the customers are reluctant to buy the product recently introduced. Selling and advertising focus on the generic product, that is, the basic concept. Customers must be convinced that the benefits from this new product provide an improvement over the product or service being replaced; this is a risky stage, since because of huge initial investments to develop the product and build the market costs are high, and often this implies negative profits. However, often market pioneers can retain their leadership positions for decades. Empirical research shows that the first entrant in a category has an advantage – first mover advantage – in that it tends to maintain its position over the PLC; this advantage results from early access to distribution channels, locking in customers for products with switching costs are high, and where there are strong network effects. There are typically two choices the pioneer can take: skimming (entering with high price and creating a narrow market, often employed in technology-based markets, to obtain customers that purchase early and that are essentially insensitive to price) or penetration (entering with a low price to build market share and broader market, often used by companies who want to build market share quickly to keep competitors out, build volume and lower costs). Strategic Objectives:  Inform consumers  Induce consumers to try the new product  Reduce the duration of this phase  Access to channels of distribution  Build awareness and trust 2. Growth strategies which comprehend both early growth and late growth, where the rapid increase in sales begins to flatten out, even if the category sales are still growing. What we need to consider is that the number of competitors is increasing, and customers becoming more informed about the product and the available options: this put pressure on the price. Moreover, with the increase competition, market segmentation becomes necessary. For what concerns communication, it’s necessary to stress differentiation. General purpose is sustain rapid market growth. The general strategic options relate to the product’s position in the market: the leader can choose to fight, keeping the leadership position by enhancing the product, or to withdraw, ceding market leadership to another product, if the market entrants are just too strong – frequent if the marketing leader is a small company that develops a new technology and a small market and faces the prospect of large companies taking over. The follower, instead, has a number of options depending on the strength of the leader, its own strength and market conditions: it may decide to exit, or to imitate the leader by developing a me-too product, perhaps at a lower price. The riskiest move is to try to overcome competition, as some do with pure marketing and imitative products. 3. Maturity strategies. In this phase, the sales curve has flattened out, and few new buyers are in the market; market potential usually remains, but it is either difficult or expensive to reach non-buyers. customers are sophisticated and well versed in product features and benefits: differential advantage can be obtained, but through intangible or perceived product quality. General strategies depend on the relative market position of the product in question: leaders may decide to invest just enough money to maintain their share, or, alternatively – in the short-term – to “harvest” the product, setting an objective of gradual share decline with minimal investment to maximize short-run profits. The followers alternative depend on the leader’s strategy: if the leader is harvesting the market, the n.1 position may be left open for an aggressive n.2 brand. If the leader instead is trying to maintain its share, the follower may choose to be a profitable number 2, or exit the category. 4. Strategies for decline. What is important is that you not need to accept the fact that a market is in decline: most strategies for reviving mature markets also can be used to revive declining markets; also, changes in customers’ tastes, unexpected and not linked to firm’s strategy, can be profitably

exploited. If the market is truly dying, the brand may decide to rapidly disinvest and to exit the market, or to consciously decide to be the last iceman, gaining a monopoly which results in the ability to charge high prices to niche consumers, reducing overall investment. COMPLETE MARKETING STRATEGY (step 4 of the marketing plan) The key decision in marketing strategy is which customer groups to target: many other decisions then flow from this crucial one. Customers’ needs, competitors and industry environment analysis lead to a core strategy that is tailored to the consumer target; finally, the marketing mix – or implementation of the strategy is customized for each target. What constitutes a marketing strategy for a product or service is a combination of strategic objective, customer segments, and understanding of the competition for each target and positioning that communicates the value proposition; often, the market strategy is referred to as “3Cs” (consumer, competitors, and company). The complete marketing strategy can be divided in some components: 1. Objectives. Many different objectives are sent in an organization; a company’s mission statement usually describes in general terms the company’s major business thrusts, customer orientation and business philosophy. The corporate objective is an overall goal to be achieved, usually stated in financial or stock price; business units/divisions also have objective (stated in sales growth or profitability), as also single brands/products (sales/market shares). Generally, the company’s objective must be focused on either market share or on profits: the company faces a trade-off taking these decisions, since many of the activities required to increase market share (lowering price, increase distribution/communication) imply higher costs, and therefore lower profits. On the other hand, increasing profits means either lowering costs (quality) or increasing price, activities which are likely to cause a fall in market share. Moreover, it’s not sufficient to state an objective in terms of increase market share/profits: characteristics of a good objective statement are:  Quantified standard of performance, giving precise percentages or quantitative measure of the objective;  Clear time frame, that is, a period within the objective should be achieved.  Measurable terms (such as market share, profitability, sales volume, which are easy to measure).  Ambitious, but not impossible. In fact, ambitious objectives are challenging, and may stretch management to improve performance; at the same time, however, internal and external constraints must be taken into consideration. 2. Customer targets and strategic alternatives. When differentiating products, brands need to take into consideration the consumer target for which they’re developing those products; this can be done according to many different factors, such as age, gender, … one example of consumer targeting is the Coke development of two different – although similar – brands, Diet Coke and Coke Zero. The underlying reason here was gender targeting, as we can infer from colours of the packaging and advertisement used. The primary reason to think about the market in terms of groups or segments is market heterogeneity: customers have different personal values and respond differently to marketing mix variables. The market can be firstly divided into four categories of consumers, own consumers, competitors’ consumers, customers in existing target segments, new segments (segments of consumers not taken into consideration when originally computed the market potential). Consequently, the company should choose between two strategic alternatives:  Market penetration strategy, which targets current consumers of the product/service, which are either buying the product of the brand or products of competitors. This kind of strategy should always be a high priority for marketing strategies, since customers who have purchased brand’s products are familiar with its benefits, and – assuming they enjoyed the experience – there’s often potential to persuade them to buy more. Targeting competitors’ customers (Apple adv vs Microsoft) is riskier and more expensive, because it involves persuading consumers who may already be satisfied with their current brand to switch: this is often done in markets in mature markets, through price-related promotions. Current markets can also be target with new products, through product development (new versions of the product)  Market development strategy, which targets consumers who have not been persuaded to buy, or customer who have not been targeted yet. New market segments may also be targeted using new

products, through product diversification. One particular case of market development strategy is entrance in foreign markets; concerning this issues, some crucial decisions must be taken at early stages, such as the choice of which country to enter, the timing of the entry, and how to operate in these countries (one practical example is H&S entrance in Italy, when they saw interesting market potential in Italian anti-dandruff market). When deciding how to enter a new foreign market, a company should consider 5 sets of factors (three external and 2 internal):  Country characteristics, such as size and growth: larger countries and those with higher growth rates are more likely to be seen as good places to make significant investments. One possible measure for market size is purchasing power, even if it doesn’t take into account for population size. A second country factor is the political and environmental risks, and finally we need to consider economic and market infrastructures.  Trade barriers and governmental regulations; many countries have laws that place restrictions on the ability of companies to operate freely, with some regulations targeting foreign companies, such as tariffs or quotas on the import of foreign products.  Product market characteristics. Physical characteristics of the product can affect how entry should be accomplished: where it’s expensive to ship a product, local licensing or manufacturing arrangements are usually made rather than direct exporting.  Management objectives (internal), which basically is the commitment to international expansion. Risk-averse and low interested companies often develop joint partnerships to minimizer risks, while those with more aggressive expansion objectives make larger investments in new markets.  Country selection strategy. 3. Competitor target; for each customer target, competitor targets must be identified: these are the brands/companies that offer the most likely competition for the targeted costumers. Competitors can be viewed on different levels: competitors of the same product (Coke vs Pepsi), but also competitors that produce goods that can, to some degree, substitute the product of the brand by satisfying the same need (Coke vs beer, …). One good approach is to consider the needs that our product satisfies for consumers, and which other products can equally satisfy that need: all identified products are potential competitors. 4. Core strategy. The basic component of the core strategy is the value proposition, a one paragraph summary of a product’s differentiation strategy and positioning to each target customer group; in short, a statement of why the consumer should buy that product rather than the competitors’. It serves as basis for programs and strategies development. The basis on which consumers will buy a brand’s product instead of the competitors’ is called competitive advantage, which allow the brand to charge higher price than competitors or gain more share at the same price. There are many possible ways to develop competitive advantage. A successful basis for developing such advantage must have three characteristics:  It should generate customer value, improve some characteristic or to be relevant to some aspect of the product or service that is valued by consumers. A point of difference is a competitive advantage if and only if from the customers’ perspectives it delivers better value than the competition.  The increased value must be perceived by consumers. If the product of a brand is better than the competition but customers cannot discern this point of difference, then that’s not a competitive advantage.  The advantage should be difficult to imitate: a successful competitive advantage is going to be emulated by others, therefore its more sustainable if its difficult to copy because of unique organizational assets and skills that can be brought into play, or because of patents. There are three general approaches to develop competitive advantage: I. Cost-price-based competitive advantage. Which, however, can be complex to achieve, since you need to know the competitors’ costs to be sure that you can compete on this basis by matching price cuts: only one firm can be the low cost competitor of the market. As a result, most managers decide to compete on the other two bases (actual/perceived quality), while exercising as much cost control as possible. There are two main ways to attain the low-cost position in an industry:  Being the largest producer of the market and take advantage of economies of scale (larger production means that fixed costs of operations can be spread over more units, which lowers average unit cost). This is true for manufacturing plant construction, but it also applies to marketing, distribution, and other expenditures.

II.

III.

 Take advantage of the experience curve: costs fall with cumulative production, since over time companies learn how to make the products better and more efficiently, through changes in the production process, work specialization, product standardization and re-design. After some observations based on the first few years of product’s life, the continued decline in costs is predictable. However, it’s possible to be the low-cost producer and used low-price competitive advantage even not being the industry leader or not having the greatest experience, thanks to nowadays flexible manufacturing systems that can have short production runs of different models of products, tailored to segments and to simultaneously have low costs. What it’ important, most of all, is to focus all company’s controls on costs. Quality-based differentiation, which consists in developing an observable difference that is valued by the target customers; this approach usually implies higher costs but a concomitant higher willingness to pay by consumers, and often higher margins. The challenge, is to find the dimensions of the product that differentiate it from the competition. Because of increased competition, grater knowledge of the product by consumers and slow growth markets products can be perceived similarly by customers: for this reason, it’s important to realize that even the so-called commodities can be differentiate, even if for this kind of goods it might be difficult to differentiate on the basis of actual quality difference (instead of perceived difference); actual difference that can be supported with data is much more common for industrial or highly technical products. One approach to differentiation is to take into consideration Porter’s value chain: each step of the value chain potentially is a source of differentiation:

Perceived quality / Brand-based differentiation. Many products and services differentiate themselves from competitors by doing a better job of giving customers the perception that they are of higher overall quality or better on particular product characteristic. Perceptual differential advantages are often used when actual product differences are small, hard to achieve or difficult to sustain. Perceptual differential advantages can be conveyed using all elements of the marketing mix: high price can communicate high quality, advertising can be used as a vehicle for delivering images and feelings, and exclusive distribution channels to provide customers with the feeling that the product is rare and expensive. The dimension of a perceptual differential advantage are the same as for an actual one: we can refer, again, to Porter’s value chain. The main difference between this approach to competitive advantage and that based on actual quality is that in this case the claims are more difficult for customers to verify. An important tool in understanding how your brand or product is perceived is marketing research that measures customers’ perceptions of your product on a variety of attributes; this kind of research is then conceptualized in a perceptual map, which provides information about how the brand is perceived on attributes that customers consider important in choosing among competitors. However, the map gives you information about perceptions of your brand relative to competitors, or the brand positions (customers are often asked to provide ratings). One of the key ways to define a perceptual differential advantage is through the brand name: the value of a brand name (reputation) is communicating quality or other aspects of the products is called brand equity. Brand names by themselves are powerful communicators of product quality that form an important part of the product’s differential advantage. Another core strategy issue is product positioning, which is basically the process of putting in practice the value proposition and competitive advantages; in order to perform it, we need to know dimensions customers use to evaluate product offerings, and how important these dimensions are in the decision process, and what decision process customers do actually use. Positioning, often, involves both actual and perceived differential advantages. Re-positioning occurs when the manager is dissatisfied with the

current positioning and seeks a new perceived advantage, which might be difficult if the product has a high awareness level of the former image. 5. Marketing mix, which is the set of decisions about price, channels of distribution, product, communications and customer relationship management that implements the marketing strategy; often referred to as the “4Ps” (price, place, promotion, product). So the marketing mix is the implementation stage of the strategy, which obviously must be consistent with the strategy: a high quality proposition must be implemented with the appropriate channels of distribution, advertising, product features, a commensurate price, and customer service and other relationship activities consistent with the desired image.