The Ten-Day MBA 4th Ed.

by Steven A. Silbiger

  College educated

  Professional or business executive employment

  Childless households

  Household incomes greater than $100,000

  This market segment is measurable, accessible, large, and profitable. Consequently, many large coffee companies continue to target it.

  Even in markets that appear hopeless, there may be a segment that others overlook. Xerox controlled 88 percent of the copier market in the 1970s. The majority of its sales came from large and medium-sized units. But by 1985, Xerox had lost more than half of its market share. What happened? Xerox ignored the small-copier market. Thousands of small companies with light copy needs had to run to the local copy shop every time they had a copy job. Canon, Sharp, and Ricoh seized this market by selling a smaller and less expensive copier. With a foothold in small copiers, the Japanese competitors proceeded to topple Xerox in the large-copier segment of the market.

  Consumer analysis serves to “prime the pump” when you need to form a comprehensive marketing strategy. Do it first so as not to stifle your creativity with the quantitative analysis you will perform as part of the strategy development framework. On a first pass, you can make an “intuitive” choice of a target segment. After the other steps are completed, it can be altered to fit an evolving marketing strategy.

  2. MARKET ANALYSIS

  Consumer → Market Analysis → Competition → Distribution → Marketing Mix → Economics → Revise

  While segmentation analysis focuses on consumers as individuals, market analysis takes a broader view of potential consumers to include market sizes and trends. Market analysis also includes a review of the competitive and regulatory environment. By closely examining the market, a marketing manager can determine if the segment selected is worth the trouble of a targeted marketing effort. MBAs ask three important questions to evaluate a market:

  What is the relevant market?

  Where is the product in its product life cycle?

  What are the key competitive factors in the industry?

  What is the relevant market?

  The easiest mistake to make is to believe that your relevant market includes the total sales of your product’s category. In between the first and second years of my MBA education, I worked for an international trading company. I investigated the possibility of selling a Mexican gourmet ground coffee in U.S. grocery stores. It would have been misleading for me to assume that all coffee sales were in my relevant target market. Approximately $11 billion of coffee was sold in the United States in 1990. However, 60 percent of that total was sold in stores, while the other 40 percent was sold to the institutional markets, including restaurants and vending machines. That left me with a retail market of $6.6 billion.

  But within that larger coffee market there were additional submarkets to investigate before arriving at my final relevant market. The gourmet coffee market accounted for $750 million, or 11 percent of the retail market’s sales. Within the gourmet coffee market, only 60 percent of the coffees sold had no artificial flavorings. My Mexican coffee had no additives and the producer refused to artificially flavor his coffee. Therefore, my relevant market was further reduced to $450 million. But of that market slice, only 55 percent was sold in supermarkets. That left me with a $248 million market. That was my relevant market.

  Once a market segment is identified, you have to ask if it is large and accessible enough to justify your marketing effort. If the answer to that question is no, then you have what is called a “makable” product, but not a “marketable” one. Only marketable products make money.

  These questions are difficult to answer and involve marketing research. If it is a new product, the answers will not be readily available. Test markets may have to be used to obtain that information. This step may lead to further segment investigation.

  The growth and decline of consumer segments within a market should also be noted. When the market is growing, future sales growth can come from new users or existing customers. If the pie is shrinking, any sales growth has to come out of your competitors’ hide, and they’ll fight you for market share! Following the demographic trends to attract a growing senior citizen market, Pfizer, the manufacturer of Centrum vitamins, made a minor reformulation and successfully introduced its “Silver” formula.

  Where is the product in its product life cycle?

  Products can be characterized by the stage that they are at in their product life cycles (PLC). Instead of being merely a factor of time, the PLC describes how a product’s sales grow as new segments become aware and begin buying it. Cellular phone service began in the early 1970s with fewer than ten thousand users. But it wasn’t until the 1990s, when the prices dropped and many could afford a unit for their cars, that a multisegment market of over 6 million users emerged. Now everyone has a cell phone.

  The PLC concept is important because the process of diffusion or adoption by the population has major implications for how a product is marketed. Each product develops its own unique PLC as it matures. Understanding the PLC can give you an MBA insight that your competitors may lack.

  The four generic stages of the PLC and their implications for action are:

  Stage 1: Introduction, “What is it?” Awareness and education are needed. If possible, a trial is important. High advertising costs may be incurred to get the word out. Some vendors opt for an exclusive distribution of their products in a few select outlets at first. Initially companies make frequent product changes as customers’ needs become known. The first buyers are called the innovators, followed by the early adopters. They freely take purchase risks because their personalities or pocketbooks allow them to do so. When companies introduce new products, managers must make difficult pricing decisions because there is frequently no basis for comparison. The level of initial prices and profits has great implications regarding the outcome of future battles with competitors as well as your ability to perform additional research and development (as with products like nanobots, couture fashion, and barefoot running shoes).

  Stage 2: Growth, “Where can I get it?” Education is still important, but at this stage competition is intensified. The early majority becomes interested. As more consumers become familiar with a product, they examine the new models to decide which to buy, not whether they should buy. When buyers get to the store, they start comparing features. To make the product more accessible, marketers often choose a selective distribution to gain a greater number and variety of outlets. At this “tipping point” it is important to boost your sales volume ahead of the competition in order to reduce costs through production and advertising efficiencies. This helps a company gain the competitive advantage in the next stage of the PLC (e.g., 3D TVs, tablet computers, and e-readers).

  Stage 3: Maturity, “Why this one?” At this stage the late majority of the mass market buys. Because people are accustomed to buying the product and the differences are few, brand loyalty plays a dominant role. Price competition often becomes heated in stable markets because additional market share comes directly from your competitors. The product’s features that were so important in the growth stage have become standardized. Because there is less differentiation on product attributes, advertising is used as a vehicle to differentiate products. Marketing managers try to segment their target market as much as possible to meet specific unmet consumer needs. In mature markets, competitors are ferreting out all possible segments. All possible channels of distribution are also considered using a mass market distribution strategy (e.g., GPS navigators, laptops, compact flourescent bulbs).

  Stage 4: Decline, “How much?” As a product ages in its PLC, it is likely that its competitors offer similar products. Even the most timid consumers, the laggards, find it safe to buy the product at this late stage. (If it does cause cancer, the FDA has usually found out by now.) Consumers turn a deaf ear to advertising because they know that all competing products are the same. At this stage many companies focus their efforts on reducing price if competition r
emains, or slowly increasing prices if the competitive field thins. Trade relations are key to staying on the retail shelf at this point, because without the excitement of novelty, distributors and retailers would rather allocate space to newer and potentially more profitable products. The effort to sell the trade is popularly called relationship marketing (e.g., CDs, phonographs, 35mm cameras).

  With some products the maturity phase does not necessarily mean death. Products can be reinvigorated after a period of maturity, and a new growth phase can begin. Baseball trading cards underwent such a revival, encouraged by Topps Inc.’s marketing efforts in the 1980s, and lost their luster in the 1990s.

  In some cases, lingering death throes produce large profits for the last manufacturer. In the vacuum tube business, which supplies electronic tubes for old TVs, radios, and other equipment, Richardson Electronics is the survivor in an industry once dominated by GE, RCA, Westinghouse, and Sylvania. Using an end game strategy, the remaining producers can extract large profits from customers since they have nowhere else to go for their replacement parts.

  THE PRODUCT LIFE CYCLE

  What are the key competitive factors within the industry?

  The basis of competition in each industry or market tends to be different. It has a major impact on how a business attacks its market. There are five major key competitive factors that constitute the battleground in most industries:

  Quality

  Price

  Advertising

  Research and Development

  Service

  In the fast food industry, for example, intensive advertising and promotion are key. In industries providing raw materials to others, price and service are key. In my investigation of the coffee industry, I found price and quality to be the basis of competition. When developing a marketing plan, you may want to try to change the basis of competition to one that favors your firm, but the key underlying competitive factors cannot be ignored.

  3. ANALYSIS OF YOUR COMPANY VERSUS THE COMPETITION

  Consumer → Market → Competitive Analysis → Distribution → Marketing Mix → Economics → Revise

  By this stage the marketer has preliminarily chosen a consumer segment toward which to direct his or her efforts. Now, a plan to beat the competition must be developed. You need to look at yourself and at the competition with the same level of objectivity. What are your advantages? What things do you do well? (MBAs call them core competencies.) What are your weaknesses? How can your company capitalize on its strengths or exploit your competitors’ weaknesses? The following questions help to flush that out.

  How does your SWOT Compare to Your

  Competitor’s SWOT

  SWOT is a related framework MBAs use to organize the previous questions about how your company stacks up versus the competition. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and weaknesses are internal factors. Opportunities and threats are external. It is vitally important to perform this analysis on your own company as well as on your competitors. The following questions help to flush out the key points required for a SWOT analysis.

  What is your company good at and what is the competition good at?

  Distribution (Frito-Lay)

  New Product Development and Introduction (Apple)

  Advertising (Geico)

  Who are we in the marketplace?

  Market Size and Relative Market Share

  Financial Position

  Historical Performance and Reputation

  What are our resources versus those of the competition?

  People

  Technology, Research

  Sales Forces

  Cash

  Trade Relations

  Manufacturing

  Barriers to entry to new competitors in a market play an important role in assessing the competition. Barriers are conditions or hurdles that new competitors have to overcome before they can enter the market. The availability of cash and specialized knowledge are such barriers. The pharmaceutical industry, for example, is dominated by a few companies. To be a player, a company needs a large sales force, research labs, and a large bank account to pay for it all. Because of these barriers, most small companies team up with large ones if they have a promising new drug to peddle. In the online auction market, eBay has a huge advantage because of the size of its buyer audience, vendor base, and infrastructure. On the other hand, Google’s Internet search competitors have a lower barrier to entry. Internet searchers can easily switch services, and competitors, such as Yahoo! or Bing, can develop new search technologies. Google is creating proprietary databases of information that competitors’ searches can’t access to create a barrier to entry as well as tying users to the service with Gmail. MySpace was the leading social platform until Facebook overwhelmed it in 2008 with a more user-friendly, open platform.

  If in an industry the barriers to entry are low, the playing field becomes crowded. Savvy marketers should plan for that eventuality by trying to form a marketing strategy that new competitors cannot easily copy. This is more fully discussed later in the book in the “Strategy” chapter.

  During my coffee investigation, I looked at what my company had to offer. It didn’t have much. It didn’t have any experience in the United States. We lacked distribution, advertising expertise, a reputation, and cash. The only thing my Mexican employer had to offer was quality packaged coffee. What could a small competitor do against Folgers and Maxwell House coffees? After much questioning, and feeling a little ill, I hoped that there might be a large food company that would like to enter into a joint venture. We would supply the coffee and the partner would do the distribution and marketing. We could piggyback, not unlike what small pharmaceutical companies do, recognizing that some profit is better than none.

  What are the market shares of the industry players?

  Many tracking services are available for consumer products such as NPD Group and InfoScan. Checkout scanners and warehouse tracking collect supermarket sales data. However, for industrial products, such as manufacturing equipment, the information is less accessible. Trade associations are a good source.

  Market share leverage is a key concept to consider when examining market shares within an industry. The companies with larger market shares relative to their competition usually enjoy higher profits. Larger competitors can produce more cheaply per unit because they can spread their costs over more units. A smaller competitor cannot afford to spend as much on either research or more efficient equipment, because the smaller sales volume cannot support the burden. If I had been charged with a new instant coffee to sell, I would have had to reconsider entry into the declining instant-coffee market dominated by three bigger, lower-cost competitors: Kraft, Nestlé, and Folgers. Fortunately for my Mexican coffee’s entry, in 1989 18 percent of the “ground” coffee market was controlled by smaller competitors. And that share had increased from 16 percent in 1986. This constituted a far more favorable environment for a new entrant such as my Mexican ground coffee.

  How does my product perceptually map against the competition?

  The perceptual mapping technique is a graphic way to view and compare your product against the competitors’. A commonly used grid is price and quality, but many others are possible and useful. Maps are another MBA technique to generate ideas for marketing for your product, and perceptual maps may highlight an unserved market segment by showing how the consumer perceives competing products, regardless of the physical reality of performance. Perceptions are paramount in marketing, just as they are in politics. In the paper towel industry, for example, towel strength and decorator appeal are important. As an example, using my own judgment, I have created a “hypothetical” map below. Notice that Bounty found itself a profitable market segment by providing strength and a pretty pattern.

  PERCEPTUAL MAPPING PAPER TOWEL BRANDS (HYPOTHETICAL)

  By visualizing how your product maps versus the competition, you may gain an insight into how to market your existing p
roduct, make product changes, or add additional products in a comprehensive marketing strategy.

  If your company has many products within a category, then you are said to have depth of line. In the paper towel market no one producer dominates the category. But over in the dog food aisle, Nestlé Purina depth chokes the shelves with Dog Chow, Puppy Chow, HiPro, O.N.E., Beneful, Alpo, and at least six other brands.

  If your company has many products in a variety of product classes, you are said to have breadth of product line. Kimberly-Clark has a wide breadth of paper products in several categories: Viva paper towels, Kleenex and Scott tissue, Kotex sanitary napkins, and Huggies, Depend, and Pull-Ups diapers. Depth and breadth of product lines can be cleverly used in a blocking strategy to prevent competitors from gaining access to the channels of distribution. If they are not on the shelf, your competition can’t make any sales.

  In the dog food industry, competitors found other ways around Nestlé Purina to reach doggie owners. Hill’s Pet Nutrition, a division of Colgate-Palmolive, pushed $2.2 billion worth of Science Diet pet food and other products through veterinarians’ offices.

  How is my product positioned against the competition?

  In the 1950s, it was all about creating a “unique selling proposition” (USP) that focused on product features and customer benefits. In the 1960s and throughout the 1970s, the product’s “image” was important. In 1972, Al Ries and Jack Trout developed the concept of “positioning” that has been popular ever since. They believed that the perception of your product in the minds of consumers is actually more important than the physical reality of the product’s attributes. What consumers believe is their reality. They had ten rules for positioning that they believe can make a product or service stand above the competition.