Offerings and Markets

8/8/2019 Offerings and Markets

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Offerings and Markets: The Main Elements of Strategic Marketing DecisionsContents

1. Objectives2. 1 Introduction3. 2 The financial objective of business and strategic marketing

4. 2.1 The source of financial success5. 2.2 Strategic marketing: competitive and corporate strategy6. 2.3 The nature of competitive strategy7. 2.4 Offerings and markets: the two central elements8. 3 What competes for customer choices?9. 3.1 Offerings, not companies10. 3.2 Identifying the single offering11. 3.3 Outputs compete, not inputs12. 3.4 Differentiation and price as the dimensions of competitive positioning13. 3.5 Differentiation is more fundamental than price14. Disc players compete with cameras15. 4 Where does competition take place? The anatomy of markets

16. 4.1 The definition of a market17. 4.2 Models of a market: public and private18. 4.3 The clumps and the galaxy19. 4.4 Industries and markets20. 4.5 The value of industry and industry analysis21. King of off the road?22. Box 15.1 Direct Line23. 5 Strategic marketing decisions: competitive strategy24. 5.1 Competitive strategy: the financial criteria for selection25. 5.2 The scissors: what makes an offering profitable26. 5.3 Blade 1: attractive market position27. 5.4 Blade 2: winning resources

28. 5.5 Which blade comes first?29. Box 15.2 Get Withlt30. 6 Strategic marketing decisions: corporate strategy31. 7 The changing nature of strategic marketing32. 8 Summary33. Further reading34. Discussion questions35. Mini Case: Sandwiches filled with imagination36. Discussion Questions

Section: Formulating and Implementing Marketing StrategyObjectivesThe objectives of this chapter are:

1. to clarify the purpose and objective of a business;2. to define the role of strategic marketing in meeting that objective;3. to show that strategic marketing decisions are fundamentally about offerings and markets;4. to explain precisely what competes for the choices of customersi.e. the idea of theoffering;5. to identify where competition takes placei.e. the idea of the market;
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6. to describe how offerings competei.e. competitive positioning and its two dimensions:differentiation and price;7. to illustrate the scissors technique of matching attractive positions with competition-beating resources, for selecting each of tomorrow's offerings, and thus each competitive strategy;8. to emphasize the importance of corporate strategyselecting a value-building cluster ofofferingsand the critical role of divestments in cluster decisions.

1 Introduction

THIS chapter examines two of the most fundamental ideas of marketing. First, it examines what itis that competes to be chosen by customers. This is the product or service, which here we callthe offering. Secondly, it examines where competition takes place: this is the market.

Offerings and markets are central to the theory and practice of marketing. Market research, forinstance, collects and analyses information to decide what offerings to sell in the future, and inwhich markets. What selling persuades customers to purchase is again offerings. The centralpurpose of distribution is to make offerings accessible to customers. Advertising and promotionshape the attractiveness of offerings in their markets. Pricing decides what to charge for offeringsin changing markets. There is no aspect of marketing that does not use these two ideas.

All these marketing activities are carried out every day, often without very great clarity about

just what precisely is meant by an offering or a market. There is, however, an area of marketingwhere clarity about these ideas is absolutely essential. This is the task of deciding what thecompany should sell tomorrow and wherewhat we call strategic marketing. This strategic stageis usually the decisive one. Once an unsuitable offering is on the market, it will make losses. If so,it is usually too late to take more than cost-cutting or other fire-fighting actions, which mayimprove results only marginally and for a short time. The crucial choices are made at the designand planning stage.

Strategic marketing, like microeconomics, analyses the competitive process. Many of theanalytical tools and concepts are, therefore, common to both disciplines. On the other hand,economics tends to take the offerings as given, and to ask (a) how prices are determined undervarious conditions, and (b) what the effects of those conditions are on public welfare. It does notprimarily examine the competitive process from the point of view of the business, whose biggestdecision is what to offer. The difference lies in the fact that strategic marketing treats the offering

as something to be designed and planned, not as something given.

This chapter begins by outlining the objective of business and the key role of strategic marketing-the choice of tomorrow's offerings and markets-in meeting that objective. It then clarifies thenature of offerings and markets. It finally shows how clarity about these two ideas can help aparticular company frame its key strategic decisions and thereby move towards its objective.

Discussions with Axel Johne and Paul Raimond have been most helpful in writing this chapter.Tarun Mathur has helped with the Get Withlt illustration. I am indebted to Alfred Kenyon for manyideas and his detailed comments. I have drawn on my earlier writing, much of it with AlfredKenyon, in preparing this chapter. In particular I have greatly relied on the paperback edition ofour book Creating Value: Shaping Tomorrow's Business (Butterworth-Heinemann, 1998).

2 The financial objective of business and strategic marketing

THE purpose of a business is to create long-term financial value: to earn more than its cost ofcapital. It is that purpose of creating financial value that distinguishes businesses from charitiesand not-for-profit organizations. In a free market economy a business goes to the wall, or is takenover, if it fails to earn its cost of capital. To be successful, a business has to be financiallysuccessful, or what we shall sometimes refer to as profitable.

There are those who disagree with this financial objective (e.g. Kay 1996). They claim that theobjective is to serve not just the investors and lenders, but also other stakeholders such asemployees, customers, suppliers, the wider community, and the environment. Over a wide field
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of business decisions, there is no conflict between these two views. A business that leaves thesegroups dissatisfied will court disaffection, incur extra costs, and forgo financial value. However,beyond that point, any business must put its own survival first. Once it fails to exist as anindependent entity, its managers cannot any longer look after its employees or any otherstakeholder.

2.1 The source of financial success

Where, on what battleground, must a business beat the cost of capital? It normally does that incompetitive markets. Success in financial markets is the reward for success in commercialmarkets: the winning of profitable customers. For these customers, the business provides bettervalue than competing substitutes. Better value of what? Of the products or services, here calledofferings, that the business offers to customers. Business success, therefore, involves twodifferent types of markets: commercial and financial. Fig. 15.1 shows the relationship betweenthe two.

2.2 Strategic marketing: competitive and corporate strategy

Strategic marketing must, therefore, look at a business as a collection of offerings. It is this

imperative that puts an understanding of markets and offerings at the heart of both the theoryand the practice of business strategythe task of shaping tomorrow's business.

Business strategy seems to seek the answer to two different basic questions:

What are the top management skills and qualities that make companies successful? What should the company sell tomorrow?

The second of these is the focus of what is here called strategic marketing. It consists ofcompetitive and corporate strategy. Competitive strategy, as here defined, determinestomorrow's position of an individual offering in the eyes of its customers and relative to itscompetitors, so as to generate financial value. Corporate strategy manages tomorrow's cluster ofofferings for greater financial value: in other words, it decides which offerings to add, retain, or

divest.

2.3 The nature of competitive strategy

We must now state the essential task of competitive strategy. How an offering competesdepends on how its customers see it positioned relative to its substitutes. It is this triangularrelationship (see Fig. 15.2) that constitutes the competitive position of an offering in its market.An offering must be so positioned relative to its competitors as to be attractive to customers.Ohmae (1983a: 91) highlighted this triangular relationship, but without stressing the offering.Since competitive strategy decides how an offering is to compete tomorrow, it positions a singleoffering in a triangular relationship with tomorrow's customers and tomorrow's competitors. Acompetitive strategy is required for each of tomorrow's offerings.

That brings us to a critical issue that is sometimes overlooked by those who focus exclusively oncustomer choices. Though a competitive position and strategy are defined solely in terms of howan offering is positioned, its selection by a company requires a careful review of its owndistinctive resources. As we shall see in Section 5, attractive positioning is necessary, but notenough to justify a strategy to launch a particular offering. The investment in an offering must beprofitable enough to recover its cost of capital. The offering must, therefore, be protected fromcompetitive attempts at encroachment, so that it remains a money-maker long enough to attainthat goal. To achieve that, the company must have a resource advantage over its potential rivals.The aim of strategic marketing must be to have profitable offerings, not merely attractive ones.


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2.4 Offerings and markets: the two central elements

So what exactly is meant by the terms offering and market?

There is wide agreement in marketing that a product (offering) is any good, service, or idea (Dibbet al. 1997: 11) that is offered to customers for attention, acquisition, use or consumption and

that might satisfy a want or need (Kotler et al. 1996: 545). However, we need to go beyondmerely describing what is sold if we are to assist practising and aspiring managers to makestrategic decisions. The manager needs to know more than what kind of things are offerings: heor she has to identify each separate offering in order to answer the question What are, and whatshould be, my offerings? The next section, therefore, looks more closely at offerings.

The term market, on the other hand, has several senses (O'Shaughnessy 1995: 190). Manymarketers (e.g. Dibb et al. 1997: 200) use the term to mean the set of all actual and potentialbuyers of a product or service (Kotler et al. 1996: 232). Definitions like these describe a marketquite adequately, but shed little light on the practical difficulty of defining its boundaries. This isbecause they draw attention to buyers and away from sellers. After all, a market is where buyersand sellers come together and arrive at prices. We shall, therefore, in Section 4, join others (e.g.Day et al. 1979) and the economists in defining markets in terms of both buyers and sellersi.e.customers and competing substitutes. Such an approach helps us in answering the manager's

question Which are, and which should be, my markets?

Once we have sharpened these two ideas, we will illustrate how a particular company could usethem to make its strategic marketing decisions.

3 What competes for customer choices?

3.1 Offerings, not companies

The first issue that strategic marketing must address is What is it that competes to be chosen bycustomers?

Marketing has always helpfully concentrated on competition in customer marketsthat is, on

competition to be chosen by customers. It does not focus on competition in resource markets.That kind of competition occurs when Marks & Spencer is after the same high-flying graduates asthe Bank of England, or when Barclays Bank and McDonald's are rivals for the same prime site ina high street. We shall see in Section 5 that such winning resources play an important role in theframing of a competitive strategy, but competition for resources is not what marketing peoplemean by competition.

Marketing's intense focus on customers has one clear advantage. It highlights the pitfalls ofseeing competition as if it took place at the level of companies, multi-offering firms, strategicbusiness units (SBUS), divisions, or profit centres. PepsiCo and Coca-Cola are usually termedcompetitors. That is certainly valid usage if one thinks of the companies' cola offerings;customers choose between them. However, PepsiCo also sells fast food, for which Cola-Colaoffers no significant substitutes; there they are not in competition. Customers choose betweenofferings, not between companies: the offering alone is the unit of choice (see Insert). It makesno sense to speak of PepsiCo, the company, as competing or as having a competitive strategy:the collectivity of its offerings cannot have a single competitive position.

Many of a company's offerings, perhaps even all of them, may benefit from a corporatereputation or brand. This corporate reputation may add to the attractiveness of all its offerings,but this still does not imply that it is the company itself that competes. The reputation of YvesSaint Laurent plays a significant role in helping its wide diversity of offeringsfrom men's belts toladies cosmetics and perfumesto compete. Yet in commercial markets the competition is stillbetween offerings. A man looking for an elegant suit would not consider Yves Saint Laurent
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together with the other makes unless the company sells suits. What customers may choose ornot choose is an offering bearing the brand, not the brand itself. The choice is between suitsmade by Yves Saint Laurent and suits made by other companies; not between Yves Saint Laurentitself or even its parent Sonafi and other brands or companies.

The point that it is not the company that competes for customer choice can be illustrated byextending the Yves Saint Laurent example. Several of the company's offerings are in mutual

competition. For example, its Paris and Opium perfumes compete against each other for thepreferences of customers. Nor is this example in any way exceptional. Diageo sells severalcompeting brands of Scotch whisky such as Bell's, Dimple, Johnnie Walker, Haig, White Horse,and Vat 69. Many models of Electrolux refrigerators compete with Zanussi modelsowned by thesame company. Unilever sells competing brands of detergents, such as Persil and Surf, whichmay share production resources and are probably even part of the same division. Often thehottest competition is between sister offerings of the same company. Of course, as we shall seein Section 5, companies would be ill-advised to include such rival offerings in their cluster unlessthat inclusion generated extra value. However, all this serves only to reinforce the point beingmade here: it is offerings that compete to be chosen, not companies or divisions or profit centres.

Therefore any model of competition or competitive strategy that takes the multi-offeringcompanythe firmor any of its organizational subunits as the unit of analysis is unlikely toportray the reality of customer choice.

3.2 Identifying the single offering

If the offering is the unit of competition, then it becomes vital to be clear about what exactlyconstitutes an individual offering. It may seem obvious that the Paris and Opium perfumes areseparate offerings, but is a 30 ml. bottle of Opium perfume a separate offering from a 100ml.bottle? How do we resolve such borderline cases between offerings sold by the same company?

By a single offering we mean an offering that has a single competitive position in relation to itsspecific set of competitors and customers. The test of whether two items are one offering or twois a simple one: is price determined in a common and inseparable process? If yes, then they areone offering.

It is instructive to apply this test to the two bottles of Opium perfume. If the label itself is thedecisive determinant of customer choice, then the two bottles are such close competitors thattheir unit prices are determined in a single process and in relation to an identical list ofcustomers and competitors. If, on the other hand, size is what matters to choosing customers,then they will compare the 30 ml. bottle with many other competing brands of similar size, ormaybe even with non-perfumes before they consider the 100ml. bottle. The two different-sizedbottles would in that case have distinct competitive positions, separate price-determiningprocesses, and would thus be separate offerings.

Sometimes what may look like a collection of many offerings may actually be a single offering.For example, a supermarket may sell a variety of goods besides food: it may sell cosmetics andflowers and tobacco. However, if the predominant group of customers see it as a one-stopshopping facility and regard rival supermarkets rather than independent florists and tobacconists

as its immediate competitors, then the whole range of goods maybe so complementary as toconstitute a single offering. In that case the pricein this instance the mark-up marginsthat thesupermarket can charge will be far more influenced by the pricing of other supermarkets than bythe prices of specialist shops. The rival supermarkets are much more central to the price-determining process.

In real life there is rarely much difficulty in identifying the distinct offerings of a company.Borderline cases, such as those just illustrated, are, however, of two kinds:


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where customers see two offerings as either fairly close or very close substitutes; where customers see them as so complementary as to make it uncertain whether they areseparate or not.

This definition of a single offering in terms of a single competitive position clarifies a number ofcases that are not on the borderline at all, but that can still be confusing. It clarifies them

because the competitive position is what identifies an offering: physical similarities, sharingproperties such as the same production line or the same workforce, or any other intrinsiccommonalties do not achieve this at all.

It is easy to illustrate this. A Ford Fiesta model intended for sale in India may be completelyidentical with one intended for the UK, but that is not enough to classify the two as a singleoffering. Car buyers in India would face different competing substitutesmany of them unknownoutside Indiaand would therefore have different maps of preferences. The two sets of cars maybe physically identical, but they would have distinct competitive positions. They would beseparate offerings and would require different competitive strategies. It is not even necessary fortwo such distinct offerings to have different competitors. A French Fiesta may face exactly thesame list of rivals as its UK counterpart, but it may be seen in a different competitive position byFrench customers with a flag preference for French manufactured goods; that difference in theirconfigurations would be enough to separate the offerings and require different competitive

strategies. In the case of malt whiskies, the preference map may well be different in Scotland andEngland, let alone Singapore and Malta.

It may now be clearer why the word offering is preferred to product to describe what it is thatcompetes for customers. The Ford Fiesta may be thought of as one product, but it is in factseveral offerings in different parts of the world, each with a different competitive position.

3.3 Outputs compete, not inputs

When customers choose between offerings, what counts are those attributes of each offering thatthe choosing customer considers. Therefore, for a full understanding of positioning we need tomake a vital distinction between the outputs and inputs of an offering.

Those components and characteristics of an offering thatconsciously or subconsciouslyinfluence customers' choices are its outputs. Customers' buying decisions rest entirely on them.By contrast, all those components and characteristics that do not enter the customer's selectionprocess are its inputs. In so far as efforts or resources characterize or shape an offering without,however, themselves affecting the choices of customers, they are inputs.

If customers take picture quality into account when choosing television sets, then picture qualityis an output. On the other hand, the R&D, the precision plant, the highly skilled workforce, andthe quality-assurance programme that produce a better picture are in our illustration invisible tocustomers and are therefore inputs. If customers take the country of origin of an item intoaccount, then the location of the plant, which would in other circumstances be merely an input,also becomes an output. Charles Revlon implicitly had this input/output distinction in mind whenhe said, In the factory, we make cosmetics. In the store we sell hope (Levitt 1983b: 128).

It is therefore outputs, not inputs, that position an offering in customers' eyes. Market positionsare determined solely by the outputs of competing substitutes. If all perfumes offer hope, thenthe question is: how does Perfume X's hope differ from its competitors' hope? Does it offer morehope? Or is it a different hope: more romantic, or more career-promoting, or more independent,or more environmentally conscious? Or is it the same hope at a lower price?

None of this in any way negates the vital role of inputs. Inputs play a critical part in shapingoutputs. Our TV receivers will not have a better picture quality until we have the necessaryexpertise in production and quality control. We shall not have the right country of origin if we do


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not set up our factory there. If our airline is to be known for offering an outstanding in-flightservice, we may have to spend substantial sums on equipment and staff training. If the newmodel of our car is to have special safety features, then the assembly and the production processmust be redesigned to achieve that. If our perfume is to signify independence, we must mount anappropriate advertising campaign. There is never any point in selecting a competitive positionthat we lack the meansthe inputsto attain.

3.4 Differentiation and price as the dimensions of competitivepositioning

We are now ready to examine more closely the important idea of competitive positioning, whichdefines an offering. From the customers' perspective there are two attractive ways in which anoffering can be positioned relative to its competitors. It can either have distinctive non-priceoutputs that customers find preferable, or it can be cheaper, or even both. Therefore the twodimensions of positioning are differentiation and price.

Differentiation Differentiation is here defined as the difference (price apart) that drawschoosing customers to a particular offering and away from its rivals. The purpose ofdifferentiation is to reduce customers' interest in price comparisons. The measure ofdifferentiation, however, must always be the perceptions of customers, not the intrinsicproperties of the offering. In other words, differentiation implies distinctive and valuable non-price outputs. Differentiation describes both the act of differentiating and its result.

Differentiation can be along a single attribute, as when one hotel has better rooms than others. Itcan also take a multi-attribute form if one hotel has more attractive rooms while the other has asuperior location. It is too simple to see differentiation as merely better in some overall sense-asif there was a single scale of quality. Nor is quality necessarily a matter of more or betterinputs. For example, a restaurant with an abundance of waiters may deprive customers of someprivacy, whereas inelegant furniture and menus scrawled on cheap paper may impartatmosphere. Often less is more.

Price The other dimension along which an offering can be positioned is price. Price is whatdetermines customers' choices to the extent that they do not see offerings as differentiated.

Just as differentiation is a matter of subjective customer perceptions, so price can occasionally bea subjective impression rather than an objective fact. For example, customers may believe that anationwide plumbing business, with liveried vans that can be instantly summoned, would chargea lot more than the local handyman who responds at his leisure. Yet the nationwide business maybe the cheaper of the two.

3.5 Differentiation is more fundamental than price

To the practitioner of strategic marketing, differentiation is more fundamental than price for tworeasons. First, price can usually be changed at very short notice: price normally plays a merelytactical role. Differentiation, on the other hand, concerns output features, which usually take timeto changesometimes a lot of time. Differentiation, therefore, needs to be planned ahead, and is

invariably strategic.

The second reason is that, though a higher price can in some special cases be used todifferentiate an offering, the relationship normally works the other way round. The seller cancharge a price premium for the differentiating features. In any case, as differentiation governsthe price sensitivity of an offering, it is both a precondition and a source of whatever freedom theseller has in setting prices. The less differentiated the offering is, the less latitude the seller hasto set prices.


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Differentiation is therefore the dominant dimension of positioning. In many situationsdifferentiation policy is so much more important than price policy that differentiation andpositioning can be regarded as virtually interchangeable termsa practice we adopt, wheneverappropriate, in this chapter.

There are broadly two approaches to corporate branding. The first is what is referred to as themonolithic approach, in which the corporate name is used across a range of several different

product sectors or market segments The alternative to a monolithic approach is theendorsement approach, which allows a more market related approach to branding (Chapter20, p. 493)

the presence and nature of competitive advantages influence the extent to which a companycan maintain prices below or above competitive levels (Chapter 10, p. 222)

Disc players compete with cameras

The role of other consumer products was important because some of them competed for thesame segment of the consumer's disposable income. For example, consumer research had shownthat many consumers were trying to choose between buying a compact disc player or a compactcamera. Therefore Olympus viewed compact disc players as competitive products.

Source: R. Cooper (1995).

4 Where does competition take place? The anatomy of markets

As stated in the Introduction, this chapter focuses on two fundamental concepts of strategicmarketing, The first, the single offering, is the answer to the question what competes for thechoice of customers? This has been discussed above. We now turn to the arena ofcompetitionthat is, the market in which each offering competes. This second concept is theanswer to the question where does competition occur?

4.1 The definition of a market

A market is a communication system in which buyers and sellers can determine the prices ofcompeting offerings. In practice we regard a market as containing those offerings that have asignificant actual or potential influence on one another's prices. It contains all actual andpotential competitors with that much influence, and no others. A market and its offerings can,therefore, best be identified by the list of significant substitutesthose that customers regard aseffectively competing.

Why only those with a significant influence on prices? Because that is the most sensible pointfor drawing the line. Ultimately all offerings in the entire economy are substitutes to somedegree-poor pensioners may choose between food and heating. However, the manager isconcerned with profit, and it is only substitutes with a significant influence on prices thatappreciably affect the profitability of the offering.

On the other hand, a market includes potential as well as actual competitors. Competitors who do

not at present, but might in the future, try to capture our customers can significantly influenceprices long before that attempt actually occurs. For example, in the English Channel the ferrycompanies took the threatened entry of Eurotunnel into account for some years before the event.The market is said to be contestable by these potential competitors (Baumol, et al. 1982). Thosewho have the required skills, capabilities, and resources are well placed to contest our market.

4.2 Models of a market: public and private


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The most common assumption made by practitioners and writers alike is that competition takesplace in a market or industry. The concept of an industry is examined in greater detail below. Forthe moment we merely note that in this context it is assumed that the industry is itself a kind ofmarketthat is, a group of suppliers of competing substitutes.

This usage of industry in the sense of market illustrates that the market was traditionallyvisualized as a closed set of substitutes, in which each offering competes with all the others, but

with none outside that set. We can think of such a market, portrayed in Fig. 15.3, as the model ofpure competition. In that model all the offerings are homogeneous, so that there can only be oneequilibrium price that clears the market. However, that traditional model of a market couldaccommodate a modest degree of differentiation. It must be so modest that customers (a) treatall members of the set as effective competitors and (b) have no cause to compare the offeringswith substitutes outside the group. With such modest differentiation, the group will have not asingle equilibrium price, but a varied set of prices at which marginal customers find the offeringsequally attractive, equal value for money.

This model, illustrated in Fig. 15.3, can be called the public market. Public markets are assumedto be:

publicly visible: all participants know the competing substitutes and the interested customer

groups, so that the boundaries of the market are known as an objective fact; all-inclusive: each member is a close enough substitute for every other member; exclusive: no member competes with nonmembers, with no competition across theboundaries of the group.

This model of the public market does sometimes portray reality. The market in uranium may bean example, and so might the market in a particular type of high-density computer disks. It cancharacterize backward economies like the former Soviet Union: offerings were drably uniform.

However, in the more common case where offerings are more than modestly differentiated, thethree conditions of public visibility, inclusivity, and exclusivity do not hold. Can we speak of apublic market in bar soaps? That would require inclusivitythat is, all bar soaps are in mutualcompetition irrespective of whether they are carbolic or presentation tablets. Furthermore it

would require exclusivity, with none of the bar soaps competing with shampoos, gels, soappowders, or perfumes. The same difficulty applies to the market in wristwatches. A Rolex OysterLadyDatejust encrusted with jewels does not compete with the cheap timekeepers sold at servicestations, but it may compete with a lady's diamond necklace. What about a public market inaircraft or hotels in London? A glider does not compete with a Cessna executive jet or with aBoeing 747, but may compete with a four-wheel drive recreational vehicle. Nor does the luxurySavoy hotel in London's West End compete for the tourist trade with a one-star hotel in Earl'sCourt, but it may compete with service flats in Mayfair.

In other words, the model of the public market is not compatible with significantly differentiatedofferings that predominate in advanced economies. Each differentiated offering has its own set ofcompetitors, its own private market. That set and that private market are not exactly shared withany competing substitutes, although there may be considerable overlaps among neighbouringprivate markets. Offerings in one market are also to be found in neighbouring markets, but in

varying combinations and relationships.

Though the publicly defined market can in some rare cases fit reality, it is of limited usefulness tothe strategist. An offering can only be positioned where it competes, and that is usually a privatemarket. The private market is illustrated in Fig. 15.4. In Fig. 15.3 each of the offerings A-E is incompetition with all four of the others. Fig. 15.3 therefore describes a public market. By contrast,in Fig. 15.4 A-E is A's market: A competes with all the other four, but with no others. E's market,on the other hand, contains A, D, F, and G, F and G are outside A's market, and B and C areoutside E's, but not A's. B's market contains A and C plus two unlettered competitors, but B does


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not compete with D or E. Every offering has its own market, private to itself. Where there isdifferentiation, offerings and markets are in one-to-one relationships.

We can illustrate this model by reference to the car market or industry. This is widely definedas including everything from the Rolls-Royce Silver Seraph to the Lada Riva. However, these twocars are not mutual substitutes. Some customers may regard the Mercedes 600 or the Bentley orthe Jaguar as a substitute for the Rolls-Royce, but not the Toyota Camry. Some customers may

choose between the Camry and the Jaguar, others between the Camry and the Range Rover, butnot the Ford Escort. The Escort may or may not be seen as a serious substitute for the Lada, butit certainly is for the Volkswagen Golf. And of course, the RollsRoyceunlike the Jaguarmaycompete with a yacht, and the Lada with a motorcycle. Each offering has its private list ofsubstitutes: there is no common list, no group that includes all competitors and excludes all non-competitors.

In the model of the private market, when an offering is shifted, so usually is its market; itbecomes a new offering with a new market. Either the competitors or their configurationasseen by customersshift. If a car manufacturer decides to upgrade its offering, tomorrow'scompetitors may be Jaguar and Rolls-Royce, whereas today's were Jaguar and Range Rover. Shiftit further still and it is perfectly possible that it competes more with works of art than with cars.

4.3 The clumps and the galaxy

Figs. 15.5 and 15.6 show the public and private market models as global systems. Fig. 15.5shows a world in which all markets are public. Offerings and their markets show up as adiscontinuous pattern of clumps of offerings and ditches or gaps between the clumps. Withineach clump all offerings are close substitutes: it is inclusive. At the same time its members haveno substitutes in other clumps: it is also exclusive. At least two of the three features that makeup the conventional public image of an industry or a market are, therefore, confirmed. Fig.15.6, by contrast, shows a world in which all offerings are differentiated. The picture is that of agalaxy with a continuum of offerings. Any one offering has competing neighbours, but each suchneighbour has a partly different competing group. It is a continuum in the sense that there is noparticular discontinuity in this pattern, just infinite variety. And, of course, each offering has itsown market, unmarked in the Figure. Those markets overlap and interlock in the continuum.

Figs. 15.5 and 15.6 depict contrasting models in which either no offerings or all offerings aredifferentiated. In the real world of the advanced economies, differentiated offerings tend topredominate; however, undifferentiated ones do occur. To that extent the real world thereforepresents a mixed picture.

4.4 Industries and markets

There is a very influential belief that competitive strategy should use as its main tool a processcalled industry analysis, which is widely associated with Porter's (1980) famous five-forcesmodel. There are broadly two possible grounds for advocating an analysis of the industry as anaid to the formulation of competitive strategy. One is that members of the same industry mayhave similar skills, assets, capabilities, competences, or other resources and may need watching

for that reason. Even if such members were unlikely future competitors, observing them mightstill give insights. The other possible case for industry analysis is the assumption that theindustry is the market in which competition for customers takes place. That is being scrutinized inthis chapter. To the extent that the industry is found to be a poor representation or even proxyof the market in which an offering competes for customers, the case for industry analysis isweakened.

The concept of competition for customers taking place in industries runs into two majordifficulties:


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the fact that an industry could at best be a public, not a private market; the ambiguities caused by the multiple meanings of industry.

The first of these difficulties is probably enough to make the industry a poor model of the moderncompetitive environment. This difficulty has already been discussed.

The second difficulty is that the terminology breeds ambiguity. The word industry is widely usedin a variety of meanings, of which market is only one. Common examples are:

a group of suppliers of whatever is bought by a class of customers, irrespective of whetherthe items are competing substitutes or not (thus the common characteristic of the defenceindustry is that it has the armed forces as customers); a group of suppliers of offerings using a common discipline, such as the engineering orchemical industries; a group of suppliers using a common raw material, like the plastics industry.

The defence industry cannot be of competitive significance, as ground-to-air missiles do notcompete for customer choices with grenades. Nor can the chemical industry: explosives do notcompete with pesticides or fertilizers. Nor can the plastics industry: cable insulation is no

substitute for shopping bags or telephone receiver casings.

Words such as industry, or even market, are often employed to convey some broad and usefulcommonality. This usage is clearly of practical value. It is helpful even for marketing people to beable to talk about safety in the British nuclear industry or the effect of the peace dividend onthe defence industry or credit control in the market for domestic appliances. However, suchvague usage must never be assumed to refer to a group of offerings that compete for customers'choices. In strategic marketing the term market needs to be used with much greater precision.

4.5 The value of industry and industry analysis

For our purposes in this chapter the industry is little more than a commonly used version of thepublic market. It is not therefore surprising that both practitioners and researchers in business

strategy have come up against difficulties in using the industry concept. Managers found thattheir competitors included non-members of the industry, and excluded some of its members.Researchers (Rumelt 1991) have empirically confirmed what has long been suspected (Triffin1940)that competitive features or performance were not uniform within an industry.

The first reaction was to look for smaller groups, on the hypothesis that the industry was not anaccurate enough proxy for a market. An early device of this kind was the market or industrysegment, which Grant (1995) describes. By the mid-1970s writers turned to the strategic groupas a subset of the industry, consisting of industry members with similar competitive strategies(Caves and Porter 1977; Porter, 1980). Strategic groups were said to be protected by mobilitybarriers instead of entry barriers. However, Rumelt had in 1984 made a case for dispensingwith groups altogether, at least in principle. There is certainly increasing discontent with the ideaof the industry as the arena for competition (e.g. Prahalad and Hamel 1994).

The real problem was the group concept, the public market itself, not the size of the groupanalysed. The concept of differentiation is by definition incompatible with a group concept likethat of an industry, or even the smaller strategic group. The essence of differentiation isdiversity, that of the group sameness. The whole point of differentiation is to escape groups, notto join them.

Some exceptional cases apart, neither the industry nor industry analysis can greatly assistmanagers to formulate competitive strategies. It is worth listing four of the shortcomings thathave dogged industry analysis.


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First, a single industry often contains so much diversity of offerings that it cannot be even apublic market. For example, white goods are recognized as an industry. However, within thisindustry washing machines, cookers, freezers, dishwashers, and refrigerators cannot possibly bein competition with each other. Secondly, even in a less diverse industry, the tidy concept of a public market founders onthe hard rock of untidy reality. The automobile industry's various actual private markets shade intoeach other, all the way from the Lada to the RollsRoyce: inclusivity and exclusivity are not found

for the industry as a whole, nor for any of its parts. Thirdly, the contradictions of this usage are compounded when analysts focus on multi-offering firms in such an amorphous industryfor example, if they take Sainsbury and Tesco tocompete as companies, and not just with their grocery outlets: Sainsbury, the company, also ownsDIY stores. Finally, the very process of industry analysis invites a static approach that takes even acompetitively defined market as given. Some of the most rewarding competitive strategies aim atdestabilizing and reconfiguring markets. This dynamic concept is more fully described immediatelybelow, but an example is the personal computer industry, which may appear mature and static.Yet a particular voice-operated offering might well split off from it a profitable and growing privatemarket. 4.6 Dynamic positioning: markets can be destabilized and reshaped

This chapter has repeatedly stressed that what a competitive strategy plans is tomorrow's

offering and its triangular relationship is tomorrow vis-a-vis competitors and customers. Thataccount may give a relatively sedate picture of what a company would be doing. It looks at thepresent configuration of the target space in the galaxy, adjusts this for forecast changesincluding competitive retaliation, and then positions the new offering profitably in that targetspace.

The tacit assumption is that the arrival of the new offering will rearrange, but not radicallytransform, the target neighbourhood. The landscape will not change very much, customers willnot face a dramatically different set of choices. Many competitors may lose some customers, butmost of them will survive. The newcomer is either not close enough to them, or not importantenough, or not sufficiently novel to transform the neighbourhood. The key continuity here is themap of customers' choices and preferences.

However, a new offering can cause a much greater disturbance in its own environment. The

arrival of an offering can explosively transform the configuration of markets in its part of thegalaxy (see Insert). It can destabilize and reshape the markets of its neighbours, perhaps beyondrecognition. Customers come to see their choices in an entirely new light. Preferences areawakened for which no seller had previously catered. The strategy is a transformer rather than arearranger of its part of the galaxy.

A differentiated offering that destabilizes the preferences in its part of the galaxy may blur somedistinctions and make others obsolete. The new offering may detach some preferences from therest and thereby split off a profitable private market in which competition is less intense. As thenew offering catches on, its market grows, possibly causing the decline of others. The best wayto compete can be to compete as little as possible-that is, to differentiate. The first competitor tomarket a green cosmetic attempted precisely that, as did Direct Line, the first UK insurer tooffer motor insurance cover by telephone (see Box 15.1).

In some cases the separation into new private markets will not be complete; in those cases thenew offering will still be seen as a substitute, though a distant one, for the other offerings in aradically redefined private market. In other cases, however, the separation may be so completethat a radically new private market is fashioned, remote from the others.

A market can, of course, be destabilized by price as well as by differentiation. Japanesemotorcycles destabilized markets in the 19605 more by their lower prices than by theirdifferentiated outputs. Heavy discounting in cigarettes forced Philip Morris in 1993 to slash theprice of its Marlboro brand so as to regain some lost volume. However, differentiation is a much


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more common destabilizer than price. This is what the compact disc did to vinyl discs, and wordprocessing to typewriters.

If a rearranger strategy is one of differentiation, then it oftenbut by no means invariablytargets a narrower group of customers and a smaller volume of sales, but at higher margins.More differentiation seldom means more sales for the rearranger. The transformer, on the otherhand, in rare cases achieves a high volume of sales, scale economies, and an attractive cost

position in a completely realigned and reconfigured environment.

Even the most established market system can be totally reshaped by a well-positioned offering.Good examples of market transformation are

Mars's transformation of the humble choc ice into the ice-cream bar in 1989; Hagen-Dazs's introduction of the premium adult ice cream; Body Shop's introduction of green cosmetics.

The trick is to outmanoeuvre competitors by destabilizing a part of the galaxy in your own favour.That means defining and shaping a private market to suit yourselves, and being prepared to dothis as quickly and as often as required. Even when the present configuration of markets suits

you, you may still wish to destabilize the area again, if only to maintain and increase your lead bypre-empting or wrong-footing competitors. Customers can move away from offerings of their ownaccord, but much more often they are attracted away by nimbler competitors who reshapemarkets, merging some and splitting others.

Moreover, the transformer holds the initiative. If its vision of the fallout is correct, it will have aprofitable and prolonged advantage. This is because competitors have a process of mentaladjustment to go through as well as the physical and financial logistics of mounting an effectiveresponse. In the UK Haagen-Dazs had few close competitors for several years. The threat fromBen & Jerry, for example, came after five years of dominance by Hagen-Dazs.

The notion of destabilizing and reshaping markets requires a new way of thinking about theconcept of the market. It goes beyond the usual model in which a market is regarded as an inertblack box with unchangeable boundaries. The important lesson for managers is to regard

markets as inherently pliable or even fragile. Virtually all market systems can be destabilized bycompetitors trying to shape a private market to suit themselves. There is an aggressive as wellas a defensive lesson.

Marketers try to create market situations for themselves typified by the presence of as fewclose substitute offerings as possible. They are in favour of product market selections with thelowest number of participants and the highest degree of positive differentiation of their ownoffering. (Chapter 9, P-194)

King of off the road?

If you are a Japanese maker of fashion-heavy 4 x 4's you will be dreading this moment. Peoplewho like your cars probably like the idea of a Land rover, but the real thing is too big or too

expensive, so they buy the toy version instead. Trouble is Land Rover has now come up with atoy version of its own.

The Land Rover Freelander is compact, car-like in its driving feel, more thoroughly engineeredthan any Land Rover before it, and itproudly displays that famous badge on nose and tail. Landrover, maker of the original, copies the copies and makes it better. Result? Full circle, and a neworiginal.

Source: Independent, 15 Nov. 1997.


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Box 15.1 Direct Line

Direct Line Insurance Plc sold its first motor insurance policy by telephone in April 1985. within afew years it had transformed the way motor insurance was bought and sold in the UK.

Prior to the advent of Direct Line, the motor-insurance business in the UK was dominated by the

British composite insurers, who traditionally sold their policies through independent insurancebrokers. Direct Line's revolutionary approach was to bypass the broker and establish a directcontact with customers primarily via the telephone. It aimed to provide customers with high-quality cover as well as a high level of personal attention and service, all at a lower price. Thelower price was made possible not only by eliminating the insurance brokers but also by theinnovative use of technology.

An outstanding television advertising campaign that featured a red telephone on wheelsencouraged customers to use the telephone to obtain insurance cover. Sophisticated technologyand trained operators at the receiving end ensured that customers received fast, competent, andcourteous attention. Proposal forms could be completed on the telephone; quotations based onupdated underwriting experience could then be generated. If the quotation was accepted,immediate cover could be provided to the customer. Claims too were handled on the telephone,the aim being to settle rapidly and to make the whole process as painless to the customer as

possible. In 1990 Direct Line was one of only three companies given the highest rating for claimshandling by the consumer magazine Which?

By 1992 Direct Line had grown dramatically: it had about 700,000 policies in force, a significantand growing share of those issued in the UK. The company had also done well financially. It was,however, facing increasing competitive pressures. Some composite insurers had retaliated bystrengthening their links with brokersa few going so far as to acquire holdings in leadingbrokers. However, there was also more direct competition. One of the co-founders of Direct Linehad left to start a very similar operationChurchill Insurancewhich was later acquired by one ofthe leading Swiss insurers. Three composite insurers had established their own direct operationsbetween 1988 and 1990. These initiatives were not always wholeheartedly promoted, for fearthat they might jeopardize the traditional broker-based operations.

On 30 January 1996 the Guardian reported that by 1994 Direct Line had 1.9 million policies inforce. It mentioned that Britannic Assurance had decided to pull out of motor insurance, as thebusiness was no longer worth its while, and commented: The move highlights the rapidlychanging nature of the UK motor insurance market, which has been fundamentally altered by thenewstyly direct telephone insurers, notably market leader Direct Line.

Source: Channon (1996).

5 Strategic marketing decisions: competitive strategy

STRATEGIC marketing decisions are amongst the most important decisions that managers make,for they shape tomorrow's business. Strategic marketing, as we have said, can be subdivided intocompetitive and corporate strategy. We shall now show that the concepts of offerings andmarkets are fundamental in both cases.

5.1 Competitive strategy: the financial criteria for selection

A competitive strategy has to be designed for each of tomorrow's offerings: some of these maybesuccessors to those we have today, others may be entirely new. In any case, if we decide toreposition today's offering, then the very act of repositioning creates a new competitive position:in other words, a new offering. Thus in this strict way of thinking the repositioning of an offeringhas to be treated as its removal and replacement by another. Besides, as we shall argue in thenext section, some of today's offerings may best be removed altogether.


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The reason for selecting an offering, and thus a competitive strategy, must be that it is expectedto add to the financial value of the company, or, more precisely, that the company will be morevaluable with it than without it. Competitive strategies that are unlikely to add financial valuemust be rejected.

The relevant value of an offering is the amount by which it will raise the value of the wholecompany. It depends not only on its own cash flows, but also on its impact on cash flows

elsewhere in the company. For example, adding a service station may boost the sales of oursupermarket. On the other hand, adding a detergent with a new brand name may bite into thesales of our existing brand. Yet that may well be the better move if by cannibalizing ourselves weavoid annihilation by an invader (see Box 15.2).

5.2 The scissors: what makes an offering profitable

Competitive strategy asks how an offering should compete tomorrow for tomorrow's customersagainst tomorrow's competitors. However, attractive positioning is not enough to launch a givenoffering. The offering has above all to recover its cost of capital. It therefore needs sufficient cashflows for that end to be achieved. If the offering is to remain a moneymaker long enough toachieve its objective, it must be protected from competitive attempts at aping it and thusencroaching on its market. That protection requires a sustainable resource advantage over its

rivals.

It is perfectly possible to identify a competitive position that would be attractive to customers yetis either unattainable or unprofitable for the company. For example, a given prime high-streetlocation might attract customers to our fast-food outlet. However, that site might not be for saleat all, or only at an uneconomic costfor example, because a bank is bidding against us. Again, ifa competitor could encroach on our market by acquiring an adjacent location or by providing ahome-delivery service without a high-street location, the offering would cease to add valuebefore we had recovered our cost of capital.

In other words, attractive outputs are not enough to meet the financial objective. For that, theoffering also needs winning inputs and resources that cannot be poached, duplicated, orbypassed by competitors before we have attained our goal. Before we can select a new offering,

we must be sure that we have the necessary competition-beating inputs or resources.

A company should therefore select an offering only if it simultaneously exploits:

a competitive position that attracts profitable customers, and the company's own distinctive winning resources and other inputs that give that offering adurable edge over competitors.

An offering will not build value unless these two requirements, like the blades of a pair ofscissors, as illustrated in Fig. 15.7, are simultaneously met. We shall now examine each of theseblades in turn.

5.3 Blade 1: attractive market position

What are the various possible types of competitive positioning for an offering in its triangularrelationship with customers and competitors? In practical terms, how can an offering bedifferentiated so as to be attractive to targeted profitable customers? The answer to thatquestion will effectively give us a classification of competitive strategies.

There are two dimensions along which an offering can be differentiated. We call these themerchandise and support dimensions. Those differentiating features that customers regard as


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helping them in choosing, obtaining, and then using the offering constitute its support dimension.All other differentiating features belong to its merchandise dimension.

An automobile's merchandise features would include the colour, shape, size, performancecharacteristics, facia board, and in-car entertainment equipment; its support features wouldinclude the test drive, instruction manual, promptness of delivery, servicing arrangements, andthe service agent network.

A restaurant's merchandise features could include the waiter service and the quality andpresentation of the food, drink and accommodation, whereas its support dimension might coverthe ease of booking a table, the car park, help with interpreting the menu, and credit and debitcard facilities. Similarly, a new motor insurance policy's merchandise would include the extentand features of the cover provided, while its support dimension might include the ease withwhich the cover and assistance with claims can be obtained.

The distinction is mainly practical. What matters is not the precise borderline betweenmerchandise and support. It is not critical whether we think of the provision of a courtesy carwhile the damaged one is being repaired as merchandise or support. What matters is that we donot neglect either dimension when deciding how to position our offering.

Support features may in some cases be technical; if so, they might consist of process andapplication assistance, help with design, procurement, and subsequent use. Such help is as likelyto be supplied in cosmetics as in engineering. It cannot be overstressed that all merchandise orsupport features are by definition outputs, not input features and efforts. Input features are thosethat do not influence the choosing customer.

In each of these two dimensions, merchandise and support, we can select a high or low degree ofdifferentiation. That choice is in fact very significant. It gives us the four base cases illustrated inFig. 15.8. The figure labels four generic forms of differentiation. They show how an offering canbe positioned in relation to substitutes. If an offering is bought with little awareness of differencesin either dimension, it is a commodity-buy; if highly differentiated in both dimensions, a system-buy. If differentiation is low in merchandise, but high in support, it is a service-buy, and in thereverse case a product-buy.

The unfamiliar suffix -buy in each case is a reminder that differentiation exists only in the eyesof the choosing buyer. The four generic cases thus show four different forms of the triangularcompetitive positioning of outputs illustrated in Fig. 15.2. Their labels denote an outputperspective: they are output terms. Strategic marketing decisions will benefit from a languagethat encourages managers to think in these terms.

These four generic forms of differentiation should not be thought of as peculiar to this trade orthat. Any itemtangible or intangiblecan be transacted in any of the four ways. For example, adomestic burglar alarm for a standard threebedroom house can be offered in all four ways:

Burglar alarm as system-buy: the offering is differentiated in both the merchandise and thesupport dimension. The highly specialized supplier analyses the distinctive features of thecustomer's premises, such as any special threats in the neighbourhood, discusses with thecustomer options such as connection to a police station or security service, or extra sensors justinside the front door, recommends the most appropriate configuration, then designs, installs, andmaintains the specified configuration as part of a unique package. Burglar alarm as product-buy: here the offering is differentiated in the merchandisedimension, but not in the support dimension. The equipment has special features and robustquality. To the customer it is differentiated by way of merchandise, but undifferentiated as regardsany individual support from the supplier. Burglar alarm as service-buy: here the offering is differentiated as regards support, but notmerchandise. The supplier acts as adviser, analysing the customer's requirements and specifyingthe installation from a range of standard equipment. The supplier specifies, installs, and maintainsthe recommended configuration.


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Burglar alarm as commodity-buy: the offering is indistinguishable from that of manycompetitors. Help given by the supplier may well be significant, but is no different from help givenby competitors. The customer chooses whatever is cheapest to buy and use. Cost alone governsthe buyer's decision.

Differentiation is a matter of degree. In the limiting cases, the degree of differentiation is eitherzero or infinite. Where it is zerothat is, in the bottom-right corner of Fig. 15.8the offerings are

homogeneous, and the slightest price difference would shift customer choices. Where it is infinitethat is, in the top-left cornerthe offerings are hardly substitutes at all and virtually no pricedifference would shift choices. In the intermediate cases the seller can charge a price premiumfor the differentiating features. At any given level of differentiation the seller must aim for aprice/volume combination that adds financial value. It is in this manner that, for the strategist,differentiation policy governs price policy.

Each of the four competitive strategies-system-buy, service-buy, product-buy, and commodity-buyis potentially profitable. There may be uncrowded areas in the galaxy where an offeringwith the required degree and kind of differentiation would be attractive to a sufficient number ofcustomers. Perhaps an innovative offering may be able to destabilize customer preferences andso shape an attractive private market for itself. Even a commodity-buy strategy can be rewardingif the company has a durable cost advantage and the capacitynot necessarily exercisedtoattract customers by undercutting competitors.

5.4 Blade 2: winning resources

An offering, no matter how attractive to customers, must have cash inflows that enable it torecover its cost of capital. It must, therefore, be protected from competitive attempts atencroachment till that end is achieved. That protection comes from resource advantages overrivals: these provide barriers to encroachment. These winning resources are the other blade ofthe scissors. Resources in this context need to be widely interpreted: structures, culture,alliances, supplier networks, and routines such as those helpful to close relationships withcustomers are included in the means of competing.

Perhaps the company has inimitable resources that put an attractive way of differentiating within

its reach and outside the reach of others; or perhaps its advantage lies in its unique ability toundercut their costs. It is these superior supplyside endowments that protect our company'soffering from competitive attempts to ape its success and erode the very process that buildsfinancial value.

The quality of our resources can be tested by asking some searching questions (Peteraf 1993,adapted by Mathur and Kenyon 1998).

Are they diverse enough? If competitors can easily access similar resources, ours may offerlittle protection. Our ability to attract brilliant MBAs may be called a key success factor, but it is oflittle or no advantage if other management consultancies can do the same. Can the resources be easily copied or bypassed? If our resources are not matchless, thenonce again they offer little protection. We may decide to equip our vacuum cleaners with speciallydesigned bags that collect dust more effectively. However, the advantage may be too short-lived if

our competitors can easily acquire the technology to copy us, or introduce alternative cleaningsystems that dispense with the need for bags altogether. Will the NPV of the resource to the company exceed its acquisition or opportunity cost? Inother words is the resource felicitous? If not, it cannot add value. We may wish to acquire a primesite for our restaurant, but the acquisition costs may be bid up to such a level by competitors whohave the same idea that it would no longer add value to the company. Even if we already ownsuch a site, we may be better off selling it than building on it, if it will fetch more than its NPV tous. Is the resource inseparable? Or can the resource or its value be prised away from us? Wemay think that our bond trader is a real gem. However, she may be so much more valuable to a


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rival company that she could renegotiate her terms with us to such a level that we would be betteroff without her.

In short, a competitive strategy will not normally add value unless it uses winning resources:those that can pass these stringent tests. These tests are not often passed by tangible resources,nor by intangible resources located in individual people. Individuals are easily poached bycompetitors. The most promising category of winning resources is collective intangible ones such

as team knowledge, team skills, corporate capabilities, networks, and competences (Nelson andWinter 1982).

Winning resources can enable a company to sustain its differentiation or lower costs long enoughfor the offering to become a value-builder. In fact, an exceptional advantage may enable thecompany to accomplish the rare task of producing an offering that is not only better, but alsocheaper to produce.

5.5 Which blade comes first?

Fig. 15.7 illustrates that the quest for a valueadding offering is like the two blades of a pair ofscissors. One blade searches for supply-side advantages and the other for demand-side ones. Thedemand-side blade looks for an attractive position in tomorrow's market configuration that would

exploit the company's winning resources. This positioning task requires imagination, competitoranalysis, and customer intelligence. The supplyside blade looks for resources that wouldsafeguard an attractive market position. The task requires internal analysis to identify thoseresources that could keep competitors at bay. Neither blade on its own is enough. The demandand supply sides must both be explored for a suitable match.

It is, therefore, important that managers who make strategic marketing decisions do not ignoreeither blade. It is far too easy to overstress the importance of either blade. Fashionable market-led strategies, which focus primarily on the demand side, may fail to pay sufficient attention tothe supply side. On the other hand, resource-based strategies that overlook the demand sidemiss the point that resources are valuable only if they exploit an attractive market opportunity.

There is no general rule about which blade should be used first. If a company's winning resources

are easier to identify, then the resources blade is the better starting point. It often is. However, itis not impossible that a company has a flair for positioning, or that the company's winningresources are not clearly visible, or that they could be mustered. In these cases the positioningblade is the better starting point.

Box 15.2 Get Withlt

Onyx Brewries was the dominant of two brewers on the island of Maybee. Its beers had long beenpopular and commanded a loyal following. The owner-managers of the company had prosperedthrough their ancestors' foresight in building an exceptional distribution system and a verysuccessful Onyx brand. They had expected their success to last.

Recently, however, there had been some cause for concern. Television broadcasts from the

neighbouring islands had carried advertisements for a new alcoholic drink incorporating tropicalfruit juices called alcotrops. some customers there, especially young ones, had been drawnaway from the more traditional alcoholic drinks. Yesterday had brought the news that the otherlocal brewer had obtained a licence to make and sell the drink in Maybee. The owners of Onyxwere considering their response to this threat. They debated three options:

The first option was to do nothing, and allow the rival's new offering to bite into the sales oftheir beers. They estimated that under this option their total sales next year would drop from 5million to 4 million. More importantly, the net present value (NPV) of their cluster of beers, andconsequently of their business, would drop from 3 million to 2 million.


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Another option was to sell alcotrops of their own, but under a new brandWithlt. Such amove would reduce the sales of their beers still further, for they would now not only be attackedby the alcotrops of the rival brewer, but also cannibalized by their own. Sales of beers would dropto 3.3m., though the new offering would add sales of 1.2 m. by using the efficient distributionsystem. After accounting for the investment in the new Withlt offering, the NPV of the proposedcluster of drinks was estimated at 2.5m. The final option was to market alcotrops, but under the Onyx label. Under that label alcotrop

sales would rise to 1.4m. However, there was another consideration. The Onyx label might bedevalued in the community, which had long considered it a symbol of tradition. If prices weremaintained, such a move would reduce the sales of beers to 2.9m. When this consideration hadbeen factored in, the NPV of the whole proposed cluster of drinks was estimated at 2.3m.

None of the options available to the owners would make the company as valuable as it had beenin a world without alcotrops. However, this was not an option: choices could only be madebetween future scenarios. Moreover, it was clearly better to cannibalize the existing cluster ofdrinks rather than to try and sfeguard their sales. The best alternative seemed to be to marketthe new drink under the Withlt label. The company is better off with Withlt than without it.

6 Strategic marketing decisions: corporate strategy

THIS chapter has several times referred to corporate strategy as a strategy for creating andmaintaining a value-optimizing cluster of offerings. There are those who see something wider

than an individual offering as the unit of competitive strategy, and discuss the choice of clustersin terms of such units. This chapter has argued for adopting the individual offering as the unit forcompetitive strategy.

It is unusual for a business to have just one offering; even a small commercial business is usuallya cluster of offerings. The way to shape tomorrow's business is to ask: what should be tomorrow'scluster of offerings and their markets?

Proponents of strategy frameworks such as business portfolios asked a similar question, butabout clusters of strategic business units (SBUs) rather than offerings. The objective in the caseof the Boston Consulting Group matrixthe most popular version of the portfolio frameworks inthe 1970s and 1980swas to achieve a cluster that matched cash-generating SBUs withcashabsorbing ones, so that the company could finance its growth internally. Modern financialtheory questions the validity of that objective. In any case, such frameworks did not ask whether

or not there were any links between the members of a cluster. The current trend in corporatestrategy favours related clusters, for, if there are no valueboosting links between an offering andthe remainder of the company, then there is no justification for putting them together.

The decisions of corporate strategy concern which offerings should be added to the cluster, whichretained, and which divested.

In the selection of new offerings the tasks of competitive and corporate strategy overlap, as theGet Withlt example illustrated. Moreover, though customers are won by the outputs of a singleoffering, inputs, if there are economies of scale, are economic only if they are shared by anumber of offerings. A winning set of resources can be the result of a well-chosen cluster ofofferings. There is an asymmetry here: on the demand side, a single offering competes forcustomer choices; on the supply side, a single resource, often within a profit centre, can serve

several offerings. Life would be so much simpler for both strategists and writers on strategy if theprofit centre could be treated as the unit for competition. However, that would not portray thereality of how customers choose: they choose between offerings, not profit centres.

Corporate and competitive strategies can also add value to each other in other ways than bysharing resources (Mathur and Kenyon 1998). For example, one offering can add to theattractiveness of another. Another way is that of increasing market power. For example, the onlyradio station in a remote community may acquire the only local newspaper so as to exercise agreater degree of monopoly in the setting of local advertising rates.


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The most distinctive function of corporate strategy is the continual review of existing offerings orparts of the cluster, if some offerings must be considered together. An offering may, for example,be past its peak; it may no longer have a positive net present value from now on. A shrewddecision to retain or divest, and skilful timing of a divestment, can add much value to acompetitive strategy that had been adopted earlier. This pruning function can add a lot of valuein its own right.

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