Topic 6 Market Strategy PDF - University of Alberta

Market Strategy AREC 323: Introduction to Management for Agri-Food, Environmental, and Forestry Businesses. Douglas Mugabe [email protected] Outline Announcements Strategic Positioning for competitive Advantage Schumpeter Innovation Theory...

Market Strategy AREC 323: Introduction to Management for Agri-Food, Environmental, and Forestry Businesses. Douglas Mugabe [email protected] Outline Announcements Strategic Positioning for competitive Advantage Schumpeter Innovation Theory Market Strategy Price Strategy Advertisement Strategy Sales and Profit Strategy Recap Strategy Management Process 1. Strategy Development 2. Strategy Analysis (Internal & External Analysis) 3. Strategy Formulation 4. Strategy Implementation 5. Strategy/Performance Evaluation Strategy Formulation After Environmental Analysis  then formulate strategies For example; After SWOT analysis next is strategy formulation Insight from SWOT/Environmental Analysis Strategy Short of labor given the market trends Hiring Physical capacity doesn’t meet the demand from Expansion new markets Threat of substitutes Differentiating Overall SWOT of the business within the industry Competitive advantage  Example: Highland Feeders of Vegreville, Alberta  After Environmental Analysis  They moved from a supply chain to a value chain.  Why? growing demand for consistent quality, premium natural beef products. They developed a system where partners created & shared value through the value chain: They lowered production costs to increase system efficiencies & they improved product quality Animal and carcass performance information was shared with all partners so they could more consistently meet premium targets. A production system was implemented which required all partners to adhere to the agreed protocols in order to successfully offer a differentiated product.  Market Strategy What is Market Strategy? Overarching plan and approach businesses use to deliver their products or services What is the importance of Market Strategy? help businesses identify growth opportunities; enable efficient resource allocation and supports long term sustainability and competitive advantage What are the key drivers of Market Strategy? Entrepreneurship and Innovation What are the components of Market Strategy Segmentation, Targeting and Positioning (The STP Model)  Schumpeter Innovation Theory (1939) Innovation-originated market power creates super normal profits 4 phases of Business cycle ○ Prosperity  high profit, high employment, well functioning credit markets ○ Recession  prices drop, abnormal liquidation ○ Depression  refuse in fiscal performance ○ Revival (recovery)  new innovation Lessons from Schumpeter Innovation Theory New innovation destroys the old one  creative destruction Innovation originated power is temporary No long run steady state equilibrium Long run efficiencies created by innovation will more than offset the short run inefficiencies (monopolies are not necessarily a big thing) Competition goes beyond price with rivals (destroying rivals doesn’t mean no competition) Capitalism can create so much more wealth and prosperity than centrally planned system Framework for Competitive Advantage  Cost & Benefit leadership The Strategic Logic of Cost Leadership A cost leader creates a larger B – C (benefit minus cost) than its rivals by achieving a lower C than its rivals Company can either undercut rivals’ price and sell more than they do OR Match rivals’ price and attain higher price-cost margins than they can The Strategic Logic of Benefit Leadership A benefit leader creates a larger B – C than its rivals by achieving a higher B than its rivals Match rivals’ price and sell more than they do OR Charge price premium and attain higher price-cost margins than they can Cost and Benefit Advantage When should Cost advantage be sought?  when the nature of the product does not allow benefit enhancement  when consumers are relatively price sensitive and  when the product is a search good (e.g commodities, paper) rather than an experience good When should Benefit advantage be sought  when consumers are willing to pay a premium for benefit enhancements  when economies of scale and learning have been already exploited and differentiation is the best route to value creation and  when the product is an experience good (e.g food, health care) See handout for definition of Search, Experience, and Credence goods. Market Strategy: STP Model Geographically, or What % of Alberta residents E.g perception of by income, age, will buy lamb? What % of brand names sex, race etc. people in downtown area will need gluten free bread Market Strategy: STP Model Businesses need to develop market strategies to increase their competitive advantage and gain a huge market share The STP (Segmentation, Targeting and Positioning) model is a fundamental part of market strategy It plays an important role of helping businesses effectively reach and influence their customers The STP model focuses on; commercial effectiveness, selecting the most valuable strategies for the development of the marketing mix and product positioning for each segment e.g branding and product differentiation How is STP model useful?  Market Strategy: Product Differentiation What is Product Differentiation? Marketing strategy of distinguishing a product from similar offerings in the market. Why? Helps to create competitive edge by highlighting unique features, benefits or value propositions Enables companies to avoid direct price competition, allowing premium pricing Key elements Unique characteristics or functionalities Superior quality or craftmanship to enhance product appeal Strong brand identity and perception to foster loyalty and recognition Integrates with the STP Model to ensure that differentiation aligns with the needs and preferences of the market Product Strategy: Product Differentiation  Differentiated products are imperfect substitutes  Why do competitors open their stores next to one another? Ū - utility from a non moving ice cream seller at shack (midpoint) with price P U0 - the utility that consumers receive from a moving ice-cream seller with price P0 X – distance from shack and t – transport/moving cost  Horizontal Differentiation (Hotelling’s Model) Horizontal Differentiation: different characteristics  one product is a poor substitute for another Assume 2 types of cars at point 0 (sports car liked by young customers) and 1 (liked by older people) X represents how much consumers like a product characteristic (age). As you get old your desire (μ) for type 1 car increases & desire (λ) for type 0 decreases In horizontal differentiation if 2 products are priced equally consumers will still buy both (non zero mkt share) μ & λ are degrees of horizontal differentiation  Homogenous product are such that μ= λ=0; Vertically Differentiated Products Vertical differentiation: pure quality improvement  one product is vastly superior to the other X represents how much consumers like a product characteristic. If the two products are two luxury cars, income could be used as a proxy for consumers desire for them. In vertical differentiation if two products are priced equally consumers will buy only one of them One product looses mkt share Strong Vs Weak Differentiated Products  Weak differentiation  Strong differentiation  Products are not very different  products are very different  Have low degree of differentiation  Have high degree of differentiation  Product has elastic demand to own/rivals  Product inelastic demand to own/rivals price changes price changes Class activity 1. Using graphs show the difference in the demand curves faced by firms with and without product differentiation. 2. How about a) Tim Horton’s and Starbucks b) Apple and Samsung? Vertical or Horizontal? 3. List other examples of horizontally and vertically differentiated products? 4. With differentiated products, customers do not switch easily when a firm cuts prices (can you explain why?) Selecting a Price Strategy Penetration Pricing  Setting lower than normal prices to hasten market acceptance of a product or service or to increase market share. Skimming Pricing  Setting very high prices for a limited period before reducing them to more competitive levels. Follow-the-Leader Pricing  Using a particular competitor as a model in setting prices. Variable Pricing  Setting more than one price for a good or service in order to offer price concessions to certain customers. Selecting a Price Strategy Flexible Pricing  Offer different prices to reflect differences in customer demand. Bundling  Offering several products for one combined price. Odd-Even  Make the price appear to be lower. Ending in 0.99 Unit Pricing  Comparison where a product may be sold in different sizes Price Lining  Setting a range of several distinct merchandise levels. Loss Leader  Products offered at or slightly below cost to attract people What the Market Will Bear  Charging as high a price as possible before resistance.  Sales and Profit Strategy Why sales and profit matters? Clearly state the sales and profit objectives. Objectives should be a guide to action and, therefore, SMART. “The objective is to obtain a leadership position.” is this SMART? “The objective is a 20% pre-tax profit on sales by selling 100,000 units of the new mousetrap to cottage owners north of Prince Albert during the second year of production.” is this SMART? Come up with SMART sales and profit objectives for your proposed business?  Remember, you are planning for the future not trying to predict the future. Class Activity 1. Your company will make and sell gift baskets from a retail location. Annual fixed costs are $40, 000. You sell the gift baskets for $25/each and the variable costs per basket are $14. What is your breakeven point in units and dollars. 2. If You sell 3, 800 units would you make a profit or a loss? 3. Determine the percentage of the markup to the selling price, when 3,800 units are sold. Answer: Class activity 1. At breakeven  Total Revenue = Total Costs Total Revenue = Price * Quantity  TR=P*Q=$25Q Total Costs = Total Fixed Costs +Total Variable Cost  TC=TFC+AVC*Q=$40,000+$14Q $40,000+$14Q = $25Q  11Q=40,000 Q=3,637units and TR=3,367*$25=$90,925 2. Profit =TR-TC  $25*3,800 – ($40, 000+14*3,800)= $1,800 (positive profit) 3. Markup  the difference between the selling price of a good or service and cost $93,200 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = $40, 000 + $14 ∗ 3,800 = $93,200  AC = = $24,53 3800 𝑀𝑎𝑟𝑘 𝑢𝑝 $25−$24,53 Mark up % = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 ∗ 100 = ∗ 100 =1.88% $25 Perform: Implement Strategy Goal (Vision & No matter how good the strategies, the organization cannot 1 Mission Setting) succeed unless the strategies are implemented. Analyze the 2 Environment Who should be involved? Generate Strategy 3 Involving all members of the organization in strategic Implement 4 Strategy planning can be effective Evaluate Strategy Example: if one of the producers does not adhere to the 5 quality standards, there will be a consumer mistrust in the quality of the meat. Evaluate Strategy What questions should be answered here? Goal (Vision & 1 Mission Setting) How effective have the strategies been? Analyze the Are the strategies sustainable? 2 Environment Generate Strategy Reliability concerns  especially with distribution channels 3 Implement Strategy What adjustments, if any, are necessary? 4 Evaluate Strategy This step is discussed in the Control section of the course. 5 Accounting Measures Return on Sales, Return on Assets, etc Economic measures  NPV, Capital Budgeting, BCR, etc 26 Roundup: Class activity 1. Why do firms within the same industry position themselves in different ways? 2. What determines a higher profitable positioning or one that leads to higher odds of survival? 3. Does position within the industry determine firm’s ability to create value and enjoy a competitive advantage over other firms? 4. At what point is a firm said to have a competitive advantage in a market? 5. What determines the economic profit earned by a firm? 6. What is the effect of cost and benefit positioning on value creation relative to competitors?  Any Questions Next: Marketing Analysis