mindterms ni jamming Flashcards
is a concept developed by Michael Porter in his book “Competitive
Advantage.” It outlines the series of activities that a company performs to deliver a
product or service to the market. The goal of analyzing the value chain is to identify ways
to create value for customers and achieve a competitive advantage.
help increase a business’s efficiency so the business can deliver the most
value for the least possible cost.
● The end goal of a value chain is to create a competitive advantage for a company by
increasing productivity while keeping costs reasonable.
Value chains
Receiving, warehousing, and inventory management of raw
materials.
Inbound Logistics
Transforming inputs into final products or services.
Operations
Activities required to get the finished product to customers,
including warehousing and order fulfillment.
Outbound Logistics
Strategies and activities to promote and sell the product or
service.
Marketing and Sales
Activities that maintain and enhance the product’s value.
Service
Acquiring goods and services needed for the primary activities.
Procurement
Research and development, process automation, and
product design.
Technology Development
Recruitment, training, and development of the
organization’s workforce.
Human Resource Management
Organizational structure, planning, finance, and quality
management systems.
Firm Infrastructure
is a tool businesses use to evaluate competition, market
position, external factors, and industry trends. It helps identify threats, opportunities, and
strategies to stand out in a competitive market.
Industry Analysis - Industry analysis
● Step 1: Definition of Industry
● Step 2: Identification of participants
● Step 3: Assessment of the drivers of competitive forces and of overall industry
structure.
● Step 4: Analysis of future changes in the industry
● Step 5: Identification of aspects of industry structure that can be influenced by
competitors, new entrants, or by ourselves.
five steps industry analysis
It explains how markets and products evolve over time, going through introduction, growth,
maturity, and decline phases. It also emphasizes the importance of understanding these
phrases for effective marketing strategies. It first enters the market, then becomes popular, and
finally, people stop buying it because newer, better phones are available.
The Product Life Cycle
that explains that things like demand, competition, and marketing strategies
all change as the market evolves. For example, when a new phone is launched, there’s high
demand, but as other phones come out, the demand might decrease.
market factors
it emphasizes that businesses need to adapt their marketing strategies
based on the stage of the product life cycle. When a product is new, they might focus on
creating awareness and building excitement. Later they might focus on promoting its features
and benefits to keep people interested.
Marketing strategies
it highlights the difference between an industry life cycle and a product
life cycle. An industry, like the phone industry, can exist for a long time, but specific products,
like a particular phone model, have a shorter life cycle.
industry vs product
product which are products that become popular quickly but lose their appeal just as
fast, like bell-button trousers. These products have a short life cycle and quickly become
obsolete.
fad
In the initial stages, consumers are hesitant to adopt new products. They prefer
to “imitate” others rather than innovate. This creates opportunities for imitators to accelerate
adoption as more consumers use a product and observe its value.
Early Stages
As the product gains traction, multiple segments emerge. Early adopters are
joined by those seeking specific features or benefits. This can lead to differentiation in marketing
strategies to target different segments.
Growth Phase
In the mature phase, technology progresses and the need to decide between
options in the product is alleviated. This can lead to a merging of segments, as seen in the
example of the luxury/prestige segment of the American automobile market.
Mature Phase
The image highlights how competition changes as the product evolves. Initially,
a product might be unique, but as the market matures, competitors emerge with similar features.
This forces companies to focus on differentiating their products through additional features,
service, or brand image.
Competition
a framework used to understand how different product attributes affect
customer satisfaction. It’s a helpful tool for businesses to prioritize features and
understand customer expectations.
Kano Model
These are basic features that are expected and taken for granted. Their absence
leads to dissatisfaction. For example, brakes in a car are considered a “must have” - no one
expects a car without brakes.
Must Haves
These are features that directly impact customer satisfaction based on
their level of performance. The higher the performance, the higher the satisfaction. For example,
fuel consumption in a car is a performance factor. Lower fuel consumption leads to higher
satisfaction.
Performance Factors
These are unexpected features that surprise and delight customers, creating a
“WOW” effect. They are not expected but highly appreciated. For example, a car with a built-in
coffee maker would be considered a “delighter”.
Delighters
within the context of the Product Life
Cycle. It explains how consumer preferences shift as a product matures and how
businesses can adapt their strategies to cater to these changes.
Criterion in Consumer Preferences and Choice
it shows that in the early stages of a product’s life cycle,
consumers focus on core benefits (performance, functionality). As the product matures,
consumers become more interested in peripheral attributes (service, image, design,
convenience). This shift is represented by the curved lines in the image.
Core Benefits vs. Peripherals
its also highlights that consumers are generally more price-sensitive in the
early stages of a product’s life cycle. As the product matures, consumers become less
price-sensitive and are willing to pay a premium for additional features, convenience, or brand
image.
Price Sensitivity
its suggests three strategies that businesses can employ to address the challenges of product
maturity:
1. Innovate: Introduce a new product with features that are difficult to imitate or upgrade
existing products.
2. Bundle: Sell the commoditized product with a differentiated ancillary service that increases
the value of the product and motivates consumers to pay a premium.
3. Segment: Target specific customer segments that are less price-sensitive and have a higher
willingness to pay for added value.
Strategies for Product Maturity
Introduce a new product with features that are difficult to imitate or upgrade
existing products.
Innovate
Sell the commoditized product with a differentiated ancillary service that increases
the value of the product and motivates consumers to pay a premium.
Bundle
Target specific customer segments that are less price-sensitive and have a higher
willingness to pay for added value.
Segment
the importance of distribution channels and how they evolve throughout the product life cycle. It
highlights the challenges of gaining shelf space in traditional channels for new and unproven
brands, emphasizing the need for augmented customer service and a natural education process
to overcome initial resistance.
Channels of Distribution
Strategic Implications
Generic Strategy Frameworks: The text highlights two common strategic frameworks:
Competitive Scope: Emphasizes differentiation to achieve a competitive advantage.
Competitive Advantage: Focuses on how to serve customer needs better than the
competition.
Innovation: The text acknowledges that innovation is crucial throughout the life cycle, but it
emphasizes that generic strategy frameworks often do not adequately address innovation. It
suggests viewing innovation as a separate dimension of strategy.
Strategic Implications
The text highlights two common strategic frameworks:
Generic Strategy Frameworks
Emphasizes differentiation to achieve a competitive advantage.
Competitive Scope
Focuses on how to serve customer needs better than the
competition.
Competitive Advantage
The text acknowledges that innovation is crucial throughout the life cycle, but it
emphasizes that generic strategy frameworks often do not adequately address innovation. It
suggests viewing innovation as a separate dimension of strategy.
Innovation:
Companies initially set high prices to capitalize on the novelty and demand for a
new product, aiming to maximize profits from early adopters.
Skimming
As the product gains traction, companies may switch to lower prices to
attract a wider audience and increase market penetration.
Penetration Pricing
Emphasize building awareness, educating customers about the product’s
benefits, and establishing a strong brand image.
Marketing Focus
Product Life Cycle
● Introduction
● Growth
● Maturity
● Decline
Companies focus on differentiating their product from competitors,
emphasizing unique features and benefits.
Differentiation
Companies introduce new versions or variations of the product to
cater to diverse customer needs and maintain market share.
New Product Alternatives
Companies expand their distribution channels to reach a wider audience
and increase accessibility.
Channel Expansion
Competition intensifies as the market becomes saturated, leading to price
wars and a focus on cost optimization.
Price Competition
Companies emphasize peripheral benefits (service, design, convenience)
to differentiate their products and retain customers.
Peripheral Benefits
Companies focus on reinforcing their brand image through marketing
campaigns and customer service efforts.
Brand Reinforcement
The market shrinks as demand decreases and competition intensifies.
Market Contraction
Companies focus on maximizing profits, potentially consolidating
operations, and potentially repositioning the product to extend its life cycle.
Profitable Survival
Companies may choose to “harvest” the remaining value from the product by
reducing costs and focusing on a loyal customer base.
Harvesting
- Price Competition: When industries overbuild capacity and core product benefits become
indistinguishable, price competition becomes a dominant factor. This signifies a market nearing
maturity. - Buyer Sophistication: As markets mature, customers become more knowledgeable and
discerning. They shop strategically, demanding value and rejecting irrelevant features or
services. This sophistication indicates a shift towards maturity. - Substitute Emergence: Mature markets see heightened rivalry among existing competitors,
alongside a surge in substitute products. Customers, now more aware of their core needs, are
more open to exploring alternatives, contributing to the market’s maturity. - Market Saturation and Limited Growth: Mature markets are characterized by limited growth
opportunities as most potential customers have already adopted or rejected the product. The
initial “trial” phase of a new product has largely passed. - Customer Disinterest: A significant segment of the market becoming indifferent to the
technology or product category is a strong indication of maturity. Media attention wanes as the
product loses its novelty, becoming “yesterday’s news.” This declining interest reflects a mature
market.
Signs of a Maturing Market
segment of the market becoming indifferent to the
technology or product category is a strong indication of maturity. Media attention wanes as the
product loses its novelty, becoming “yesterday’s news.” This declining interest reflects a mature
market.
Customer Disinterest:
Mature markets are characterized by limited growth
opportunities as most potential customers have already adopted or rejected the product. The
initial “trial” phase of a new product has largely passed.
Market Saturation and Limited Growth
Mature markets see heightened rivalry among existing competitors,
alongside a surge in substitute products. Customers, now more aware of their core needs, are
more open to exploring alternatives, contributing to the market’s maturity.
Substitute Emergence
As markets mature, customers become more knowledgeable and
discerning. They shop strategically, demanding value and rejecting irrelevant features or
services. This sophistication indicates a shift towards maturity.
Buyer Sophistication
When industries overbuild capacity and core product benefits become
indistinguishable, price competition becomes a dominant factor. This signifies a market nearing
maturity.
Price Competition
Ford aimed to make cars affordable for the average person, which he
achieved through standardization and mass production.
Henry Ford’s Vision
The price of the Model T significantly decreased from $850 in 1909 to $260
in 1924. This drop was a direct result of increased production efficiency.
Price Reduction
The experience curve shows that for every doubling of cumulative
production, the unit cost of producing each car decreased by 15%. This means that as Ford’s
factories produced more cars, they learned and improved their processes, leading to lower
costs.
Experience Curve Effect
This relationship between output and price reduction allowed Ford to sell
more cars at a lower price, making car ownership accessible to many families.
Impact on Pricing
Experience Curve: This concept suggests that as a company produces more of a product, it
becomes more efficient, leading to a decrease in unit costs. The Boston Consulting Group
(BCG) formulated this idea based on observations across various industries.
Experience Curve
The law states that every time cumulative production doubles, the unit
cost decreases by a fixed percentage. This is typically expressed in terms of “learning rates.”
Law of Experience
This is particularly important in industries with high fixed costs. Examples of
high fixed costs include research and development (R&D) costs in the pharmaceutical industry,
high advertisement costs in the fast-moving consumer goods industry, and high manufacturing
overhead (plant and equipment) in the auto industry
Cost Spreading
Another source of scale economies are the volume discounts that
companies receive due to the size of their purchases and their bargaining power with vendors.
Supermarket chains, fast food chains, car manufacturers and many other big companies are
able to gain price and service concessions from suppliers due to the sheer volume of their
purchases in both units and in dollars
Purchasing Power
Economies of scale also occur because large companies with high
volumes of production can divide labor into discrete activities which then are performed more
efficiently. When complex processes are broken down into a few repeatable tasks performed by
specialized workers with specialized equipment, time loss from switching from one activity to the
next is avoided, and automation is possible.
Specialization of Labor
Large companies have more capital and can more easily
afford expensive machines and technology that bring costs down.
Specialization of Technology
occur when the output increases to such a great extent that the cost
per unit starts increasing.
Diseconomies of Scale
When the production volume exceeds capacity, additional
investments have to be made; thus, additional fixed costs increase unit costs. Too much
high-capacity utilization can prevent workers from having the time to maintain the machines and
this can result in more machine breakdowns
Physical Limits to Efficient Size
Size can increase complexity and bureaucracy, and this can
reduce the manager’s ability to effectively manage an organization.
Managerial Diseconomies
In larger companies workers become segregated and communicate
less with each other, the individual’s contribution is diminished and increased specialization can
lead to demotivation.
Worker De-Motivation
Finally, diseconomies of scale can occur because of the physical
distance of larger, centralized companies from the market which leads to higher transportation
costs, less direct customer contact, etc.
Distance to Market
are realized when producing more than one product makes the
production of all units in the assortment cheaper. Economies of scope are a form of “synergy”
(from the Greek meaning “working together”).
Economies of Scope
are realized when two (or more) inputs or activities (factors) come together or act
together to result in output that is greater than the sum of the two factors taken separately.
Synergies
Unit costs can be reduced when tangible resources such as
production plants, transportation systems, or information facilities are utilized across a range of
products.
Shared Tangible Resources
Hewlett Packard discovered that its inkjet technology could
replace hypodermic needles or pills for the delivery of vaccines or other medications. It used
that intellectual property and innovation to develop patches for drug delivery
Shared Intangible Resources
By combining their purchases, different strategic business units
can benefit from bulk discounts and from cost savings in transportation and logistics
Pooled Negotiating Power
Multi-business-unit companies can coordinate market entry
strategies, product development, pricing strategies, etc., to avoid duplication of efforts and to
benefit from cross-selling etc.
Coordinated Strategies
Vertically integrated companies can benefit from a faster flow of
products through the supply chain, reduced inventory costs, and improved market access
Vertical Integration
Diversified companies can combine the know-how and
technologies of each business unit to create new products or businesses.
Combined Business Creation
Brand recognition, customer loyalty and trust can reduce costs
dramatically when new products are introduced
Customer Assets
Access to distribution channels and distributor loyalty facilitates the
establishment of a dealer network and can help to overcome shelf-space restrictions for
new products
Channel Assets
Knowledge of and access to supplier markets and cheap raw materials or
components can also reduce costs and time to market
Input Assets
Product or market-specific experience and know-how in, for example,
production and marketing processes can facilitate the development and marketing of
new products
Process Assets
Knowledge of competitors, customers, etc. provides
valuable insights into the marketing process.
Market Knowledge Assets
Besides its appeal as a competition-oriented yardstick for one’s own performance,
market share for many companies is a strategic objective. Empirical studies have
demonstrated that it is related to cost advantages and profitability, and many managers
incorporate market-share effects into their strategic considerations. As empirical findings
regarding market share are somewhat ambiguous and the use of market share comes
with some problems, a more thorough, critical look at its effects and managerial
implications is necessary
MARKET SHARE AS A STRATEGIC OBJECTIVE
The increase in market share offers more than just a rise in sales; it provides competitive
advantages by measuring success relative to competitors. Firms with higher market
shares benefit from greater scale, which leads to reduced unit costs and improved
learning. This is due to two key factors: experience curve effects and economies of
scale.
Market Share and Cost Advantages
Increased market share allows firms to lower costs, leading to either lower prices or
higher profit margins. As production scales, quality improves, reducing defects and
enhancing uniformity, further boosting competitiveness.
Market share is often linked to profitability, but the relationship is complex. While higher
market share may increase profits, profitability could also lead to market share growth.
Other factors, such as product quality, play a role in both.
Market Share and Profits
The Profit Impact of Marketing Strategy (PIMS) database provides valuable empirical
insights into the relationship between marketing strategies and firm profitability. It reveals
that firms with higher market shares typically enjoy greater profitability. This finding
highlights the competitive advantages tied to market share, such as lower production
costs and improved efficiency through economies of scale and experience curve effects.
Key insights from the PIMS data emphasize that firms with strong market positions tend
to have higher returns on investment and better profit margins. Additionally, the data
shows that strategic factors like product quality, customer service, and innovation play
crucial roles in maintaining profitability alongside market share growth.
EMPIRICAL FINDINGS: THE PROFIT IMPACT OF MARKETING STRATEGY (PIMS)
DATA
- Market share depends on market definition, which can be complex.
- The relationship between market share and profitability may not always be direct.
- Market-share focus can lead to excessive competitor orientation and should be
carefully considered in strategy formulation.
STRATEGIC IMPLICATIONS OF MARKET SHARE
- The causal relationship between market share and profitability is ambiguous, with
uncertainties about whether one causes the other. - Factors like product quality, management skill, and organizational culture can
influence both market share and profitability, leading to complex relationships. - Extensive research suggests that well-managed firms with better product quality
tend to have higher market shares and profitability, but the exact causation
between market share and profitability remains unclear for developing effective
strategies.
Causation and Covariates
- Market definition is crucial for computing market share and has a significant
impact on strategic decisions. - The denominator must be specified before calculating market share, influencing
subsequent considerations. - Understanding the underlying drivers of share effects and having a clear market
definition are essential for effective use of market share in strategy formation
Defining the Market That Is Shared
Many drivers have a continuous range of possible outcome levels—not all equally likely,
but certainly a wide range of values the driver could have in the future. For example,
inflation is, in reality, a continuum of percentage changes that can range from 0 (or even
negative in those rare instances of “deflation”) to 5, 10, or 15 percent—and the reality will
certainly be measurable down to the tenth or hundredth of a percent (e.g., 6.9% or
3.48%). Creating specific scenarios for analysis and planning requires selecting a few
specific levels of each driver to represent the whole range (e.g., low inflation will be 2%,
moderate inflation will be 6%, and high inflation will be 12%). The chance that the
analysts will have selected the exact level that eventually occurs is very low—but the
chance that scenario analysis can select a set of specific values that, taken together,
represent the range of possibilities is very high. The specific levels selected for analysis
are not necessarily the “most likely”; they should be the levels that insure that the
planning process considers the whole range of possibilities; they should also include
levels or conditions that, even if unlikely, would have extreme impacts.
Select Specific Levels, Changes, or Events within Each Driver
- Market share is a competitor-oriented objective, focusing on performance relative
to competitors rather than customer value, internal capabilities, or profitability. - Competitor-oriented strategies have been shown to lead to inferior performance
in various settings, both in individual tasks and in corporate performance. - While most firms prefer higher market share, research suggests that internally
focused objectives are more effective than competitor-oriented objectives for
achieving long-term success.
Competitor-Oriented Objectives
- Market share is viewed as a key factor for profitability, with companies like
Wal-Mart and Toyota leveraging their dominance to lower costs and invest in
efficiencies, leading to a virtuous cycle of increased market share and purchasing
power. - While high market share is advantageous, it’s not a guarantee of success, as
evidenced by examples like General Motors, Sony, and Microsoft struggling to
realize profits despite dominating their respective markets. - Research suggests that solely focusing on competitor-oriented and
market-share-based objectives may not always lead to firm performance, with
many companies achieving high returns without relying on high market share,
highlighting the importance of a holistic approach to business strategy.
Market Share and Strategy
- Define the scope of the analysis;
- Identify the drivers of future strategic contexts;
- Select specific levels, changes, or events within each driver to frame the
future; - Combine those drivers and levels/changes/events to develop comprehensive
scenarios; - Select three or four scenarios for analysis;
- Analyze and plan for each selected scenario; and
- Integrate results to identify near- and long term directions, actions, and
investments and to appraise strategic alternatives.
SCENARIO ANALYSIS PROCESS
Most scenario analyzes in marketing strategy are focused on specific product
offerings and their target markets. In order to encourage deep analysis, creative
thinking, and relevance, the sector (markets/industries), the
environmental/internal factors to be considered (at a broad level, such as
economic, social, competitive, etc.), and the specific timeframe should all be
spelled out at the outset.
Define the Scope
A very few drivers can quickly create an unmanageable number of scenarios (two drivers
with two levels each and two drivers with three levels each yield 36 scenarios).
Therefore, three or four scenarios should be chosen that frame the range of possible
outcomes. That is, all of the possible scenarios define the universe of possibilities—but
the analysis should consider a sample from that universe. In that way it is possible to dig
deep into the selected scenarios rather than to skim a wider range. The ultimate reality
will be different than any of those three or four fictitious scenarios— but three or four is
enough to facilitate consideration of the range of possible futures and the implications of
those possibilities for current and potential strategies. At this stage it is useful to name
each selected scenario to help organize and enliven discussions, and each scenario
should be expanded into a fully-developed narrative to enrich discussions.
Select Scenarios for Further Analysis
What factors or forces could drive the firm’s future or the industry—and which of
those drivers are most important? Searching for the three to five most important
drivers involves consideration of the various elements of the situation (the PEST
domains of political/regulatory/legal, economic, social/cultural, and
technical/physical as well as the competitive environment) and consideration of
internal factors and initiatives with uncertain outcomes, such as new product
development/R&D projects and human resource and training initiatives. That is,
all drivers need not be external, but most uncertainties and uncontrollable drivers
are external. In the example developed briefly above, there were three drivers
(interest rates, building regulation, and competition); generally it is useful to
include at least three and as many as five drivers
Identify Drivers
The next step is to select levels from each driver and combine those into internally
consistent scenarios (Figure 1). Levels of some drivers may be incompatible with some
levels of other drivers and are thereby internally inconsistent; national competition may
not enter a market during a recession or downturn in the housing market. Therefore, high
interest rates would be internally inconsistent with intensification of the competitive
environment—that scenario wouldn’t make sense.
Combine Drivers into Scenarios
is the coordinated means by which an organization pursues its goals and
objectives. It encompasses an integrated set of choices and decisions intended to support
and advance the company’s vision and objectives.
Strategy
describes how to compete in a particular market or market segment.
Hence, strategic marketing decisions address a range of issues and critical tasks.
marketing strategy
Who the company will serve—the customer segments and products.
Where the firm will do business—the geographic markets and regions.
What needs the firm will meet—needs that a firm can meet better than the
competitors and lead to a sustainable differentiation.
How will the company serve the customers and needs—the means (core
competences and activities of the value chain)
When the firm will act—the speed and sequence of the firm’s actions.
Why the firm will do these things—the compelling business model and economic
logic.
SIX ESSENTIAL ELEMENTS OF A COMPREHENSIVE MARKETING STRATEGY (THE 5W’S AND
1H)
—the customer segments and products.
Who the company will serve
—the geographic markets and regions.
Where the firm will do business
—needs that a firm can meet better than the
competitors and lead to a sustainable differentiation.
What needs the firm will meet
the means (core
competences and activities of the value chain)
How will the company serve the customers and needs
the speed and sequence of the firm’s actions.
When the firm will act—
the compelling business model and economic
logic.
Why the firm will do these thing
Target Segments (Where’s the pain?)
Questions about who the firm serves, when the firm meets those needs (i.e. , on what
occasions), where it does these things (i.e. , geographic markets) and, especially, what
needs the firm meets are all essentially about what segments the business serves.
Competitive Advantages (Where’s the magic?)
Questions about how the firm serves those target segments and their needs better than the
competition, and why the firm does that (the business model or profit logic), are all really
about what competitive advantages (resources or capabilities) the firm has or will build.
TWO KEY ELEMENTS OF A MARKETING STRATEGY
Questions about who the firm serves, when the firm meets those needs (i.e. , on what
occasions), where it does these things (i.e. , geographic markets) and, especially, what
needs the firm meets are all essentially about what segments the business serves.
Target Segments (Where’s the pain?)
Questions about how the firm serves those target segments and their needs better than the
competition, and why the firm does that (the business model or profit logic), are all really
about what competitive advantages (resources or capabilities) the firm has or will build
Competitive Advantages (Where’s the magic?)
is the ability of a company to outperform its competitors by
creating a unique and sustainable difference.
Competitive advantage
involves offering a product or service more efficiently and at a lower cost,
allowing the company to charge less or increase profit margins.
Cost leadership
focuses on providing unique features or benefits that customers are willing
to pay a premium for. Successful companies, like Apple or Amazon, have mastered these
strategies to maintain their market edge
Differentiation
typically offer a standardized, no-frills product; adding ‘frills’ adds costs.
WalMart is the classic cost leader, continuously innovating to reduce costs in its
procurement, distribution, and logistics systems.
Cost leaders
Some experts have argued that, in certain instances, companies can pursue a hybrid
strategy that simultaneously seeks to achieve differentiation and lower price.
Hybrid Strategies
The second dimension or characteristic of strategies that has emerged across various
frameworks and been well-established by many strategy experts is competitive scope, that
is, the size and breadth of the markets) the strategy means to serve–or targets).
Competitive Scope
in marketing strategy, refers to customer perceptions that weigh or combine what
the customer gets (the benefits or “performance” the customer receives) adjusted for what
the customer gives (the costs, especially price, given in exchange for those benefits). That
is, it is a ratio of the benefits divided by the price:
Value
The pioneers of customer value analysis—Bradley T. Gale and Robert D. Buzzell3—carried
out extensive research to measure the impact that customer value has on market share
and profitability using the PIMS (Profit Impact of Market Strategies) database. PIMS
contains data on more than 3,000 business units from about 200 companies. To analyze
the role of customer value in company success, Gale and Buzzell created a twodimensional matrix and positioned each strategic business unit on this matrix based on the
dimensions of “relative price” (price compared to competitors) and “relative quality”
(quality compared to competitors). Gale and Buzzell then determined the average
profitability (return on investment, or ROI, before interest and taxes) of the strategic
business units in the four quadrants of the matrix.
THE VALUE MAP AND CUSTOMER VALUE ANALYSIS
combines Michael Porter’s cost leadership and
differentiation strategies, aiming to offer high-quality, better-performing products at lower
prices than competitors
THE SUPERIOR CUSTOMER VALUE STRATEGY
is similar to differentiation but focuses on offering high-quality,
innovative, or branded products for which customers are willing to pay a higher price
THE PREMIUM STRATEGY
Companies using the economy strategy focus on cost leadership and compete primarily on
price.
THE ECONOMY STRATEGY
A customer value analysis serves two purposes. First, it can be useful in the formulation of
market data- based strategies, which are preferable to vague definitions or blurry
descriptions of strategies
APPLICATION OF CUSTOMER VALUE ANALYSIS
STEP 1: DEFINING THE TARGET MARKET
STEP 2: IDENTIFYING COMPETITORS.
STEP 3: IDENTIFYING AND ASSESSING BUYING CRITERIA.
STEP 4: ASSESSING PRODUCT PERFORMANCE AND PRICE
STEP 5: CALCULATING RELATIVE QUALITY AND PRICE
STEP 6: ESTIMATING PRICE SENSITIVITY
STEP 7: CREATING THE CUSTOMER VALUE MAP AND FORMULATING STRATEGIES.
STEP 8: DEFINING AN ACTION PLAN
EIGHT STEPS OF ANALYSIS
The final step of customer value analysis involves defining an action plan. One especially
useful tool for doing this is the importance-performance-analysis method
STEP 8: DEFINING AN ACTION PLAN.
MAP AND FORMULATING STRATEGIES.
At this point, the relative quality and relative price of each product can be used to create
the customer value map (Figure 5). On this map, a “1” on each dimension indicates the
average quality and average price of all products
STEP 7: CREATING THE CUSTOMER VALUE
Customers’ price sensitivity can simply be measured using a constant sum scale and a
question similar to the following: “Please indicate how much weight you put on quality and
how much weight you put on price in the selection of a laptop. Please divide 100 points
between quality and price.” In our example, let’s assume that the customers are rather
price sensitive. Thus, they place 40 percent of the weight of their buying decision on quality
and 60 percent on price. Here—and in all cases—the slope of the fair value line will be
equal to the percentage of the decision based on quality divided by the percentage of the
decision based on price.
STEP 6: ESTIMATING PRICE SENSITIVITY
Next, in order to calculate the quality score of each competing product, the performance
rating of each attribute must be multiplied by the relative weight of that attribute, and the
resulting values must be added together. By themselves, the absolute individual quality
scores and prices are not meaningful—they have to be compared to those of the
competitors.
STEP 5: CALCULATING RELATIVE QUALITY AND PRICE
Product performance is best assessed using a rating scale (eg. , from 1 to 5, where 5 is
best). In our example above (Figure 4), data on buying criteria and their relative weight, as
well as on the performance of the single competing products, were taken from secondary
market research on a European market.
STEP 4: ASSESSING PRODUCT PERFORMANCE AND PRICE
Next comes a particularly crucial step in customer analysis: identification of the
customers’ buying criteria and their relative weights. This step usually requires market
research in order to formulate a clear understanding of what customers want, how they
decide, and what is more (or less) important to them.
STEP 3: IDENTIFYING AND ASSESSING BUYING CRITERIA.
The second step of the strategy formulation process involves identifying competitors
within the market segment. For this task, the concept of strategic groups can be
particularly helpful.
STEP 2: IDENTIFYING COMPETITORS.
A good customer value analysis begins with the definition of market segments.
STEP 1: DEFINING THE TARGET MARKET.
Quadrant 1 (high importance -high performance)
These product characteristics or attributes (such as performance in Figure 4) are the
competitive advantages. A company should keep up the good work here.
Quadrant 2 (high importance -low performance)
These product characteristics or attributes are the “burning fires “. A company should take
immediate action here.
Quadrant 3 (low importance -high performance)
A higher performance on unimportant attributes can represent a possible overkill. If costs
need to be reduced, these are the best candidates to cut expenses.
Quadrant 4 (low importance -low performance)
Actions have low priority here, as these disadvantages are not very relevant.
FOUR QUADRANTS
(high importance -high performance)
These product characteristics or attributes (such as performance in Figure 4) are the
competitive advantages. A company should keep up the good work here.
Quadrant 1
(high importance -low performance)
These product characteristics or attributes are the “burning fires “. A company should take
immediate action here
Quadrant 2
(low importance -high performance)
A higher performance on unimportant attributes can represent a possible overkill. If costs
need to be reduced, these are the best candidates to cut expenses.
Quadrant 3
(low importance -low performance)
Actions have low priority here, as these disadvantages are not very relevant.
Quadrant 4
