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2. Units sold

In considering a product’s cash generating potential, companies need to consider not only market share but also market size since units sold is a function of both. For example, a product that has a small market share in a large market may have the potential to generate a large amount of cash. This insight is overlooked by the BCG matrix.

3.5 Marketing Strategy

3.5.1 Four Ps Framework

A useful framework for evaluating the marketing strategy for a product

The Four Ps Framework involves examining four aspects relevant to a product’s marketing strategy:

1. Price;

2. Product;

3. Promotion; and 4. Place.

1. Price

The pricing strategy that a firm employs will affect a product’s market share and profitability.

Depending on the situation, there are many different pricing strategies that a firm might choose to employ. We can group all of these strategies under three headings: competitive pricing, cost based pricing, and value based pricing.

1.1 Competitive pricing

Under this strategy, the price of a product will be affected by the price of competing products, and by the availability of substitutes.

How do prices compare with the competition? Is the pricing appropriate given the product’s relative quality and position within the market?

A firm might consider the following competitive pricing strategies:

1. Predatory pricing: Aggressive pricing intended to undercut competitors and drive them out of the market.

2. Limit pricing: A low price charged by a monopolist in order to

3. Penetration pricing: The price is set low in order to gain market share.

1.2 Cost based pricing

Under this strategy, the price of a product will be determined by the company’s cost structure and the cost of goods sold.

What is the company’s cost structure? What percentage of costs are fixed and variable? A company that has high fixed cost and low variable costs will benefit from economies of scale and may want to lower prices to increase market share.

A firm might consider the following cost based pricing strategies:

1. Marginal cost pricing: The price of a product is set equal to the cost of producing one extra unit of output.

2. Target pricing: The price of a product is calculated to produce a particular return on investment.

3. Cost-plus pricing: Arguably the most basic pricing strategy which involves setting price equal to the unit cost of production plus a margin for profit.

1.3 Value based pricing

Under this strategy, pricing will be driven by the perceived value of the product in the mind of the customer. Perceived value will depend on various factors include branding, product differentiation, availability, the customer’s price sensitivity and willingness to pay.

Are customers price sensitive? If prices are changed, how will this affect sales volume and product perception?

Two (2) practical examples of value based pricing include:

1. A company that manufactures t-shirts might produce branded Gucci t-shirts that retail for $80 per shirt, and produce unbranded t-shirts of the same design and quality that retail for $30;

2. A movie theatre might sell adult tickets for $20, and sell the exact same tickets to students for $10.

A firm might consider the following value based pricing strategies:

1. Price discrimination: Setting a different price for the same product for different customer segments. See “Price discrimination”.

2. Dynamic pricing: A flexible pricing mechanism, which allows online companies to adjust the price of identical goods to correspond to a customer’s willingness to pay. This is made possible by using data gathered from a customer including where they live, what they buy, and how much they have spent on past purchases.

3. Market-orientated pricing: Setting a price based upon analysis of the target market.

4. Psychological pricing: Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 instead of $4.

5. Skimming: Charging a high price to gain a high profit, at the expense of achieving high sales volume. This strategy is usually employed to recoup the initial investment cost in research and development, commonly used in consumer electronic markets when a new product range is released since early adopters are typically less price sensitive.

6. Premium pricing: Keeping the price of a product artificially high in order to encourage a favourable perception among buyers.

7. Loss leader pricing: A loss leader is a product sold at a low price to stimulate other profitable sales. For example, the 30 cent soft serve cone at McDonalds.

8. Seasonal pricing: Adjusting the price depending on seasonal demand.

2. Product

Is the product a low cost commodity or differentiated? The major sources of product differentiation include:

1. Vertical differentiation: Products can differ in their quality due to differences in reliability, comfort, support services, or other

factors. For example, BMW versus Hyundai.

2. Horizontal differentiation: Products can differ in features that cannot be ordered. For example, different flavours of ice-cream.

3. Availability: Products may be available at different times (e.g.

seasonal fruits) and locations (e.g. ice-cream sold near the beach).

4. Perception: Products can differ in their brand recognition, which can be influenced through sales, marketing and promotion.

How does a product compare with what the competition is offering?

Are their viable substitutes? Do customers face high switching costs?

Successful product differentiation can lead to Monopolistic competition, a situation where firms retain some control over pricing despite there being multiple competitors.

3. Promotion

Promotion is used to enhance the perception of a company or its

products in the mind of the customer. A promotion may draw people’s attention to branding, quality, product features, price or availability.

What message is the firm trying to communicate? What is the objective?

Who is the target customer? What is the right promotion medium, reach (that is, number of people reached through the chosen medium) and frequency of promotion? What is the firm’s marketing budget?

How does the firm’s marketing strategy differ from the competition?

How might the competition react to the firm’s marketing strategy?

Understanding the customer’s buying decision process can help a firm decide where and how to influence the customer’s purchase decision.

Figure 9: Customer Buying Decision Process

Promotion can be carried out in various ways including:

1. Advertising (digital, TV, newspapers, magazines);

2. Direct Sales (door to door, cold calling, warm calling, direct mail);

3. Indirect Sales (word of mouth);

4. Trade Promotions (price discounting, quantity discounting);

5. Public Relations (donating to charity, sponsoring a sports team, celebrity appearances).

4. Place

The physical location and availability of a product can be a source of competitive advantage. For example, if there are two ice-cream stores, one next to a popular tourist beach and the other in a quiet suburb, we would reasonably expect that the ice cream store near the beach will be able to charge higher prices and sell more ice-cream.

A firm should consider the markets and market segments that it serves.

Does the competition serve the same markets and market segments?

Which inventory control system should the firm use? Should the firm insource or outsource transportation and logistics?

What distribution channels does the firm use? Which channels are most closely aligned with the company’s strategy? What are the economics of available channels? Do these fit with the intended selling price of the product? How much control is the company willing to give up in the delivery of its products? What is the risk that market power shifts to the channel?

Awareness Information

Search Evaluation Purchase Re-puchase

3.5.2 Product Life Cycle Model

The Product Life Cycle Model can be used to analyse the maturity stage of products and industries

1. Background

The idea of the Product Life Cycle was first developed in 1965 by Theodore Levitt in an article entitled “Exploit the Product Life Cycle”

published in the Harvard Business Review on 1 November 1965.

2. Benefits

For a business, having a growing and sustainable revenue stream from product sales is important for the stability and success of its operations.

The Product Life Cycle model can be used by consultants and managers to analyse the maturity stage of products and industries. Understanding which stage a product is in provides information about expected future sales growth and the kinds of strategies that a firm should implement.

3. Product Life Cycle Model

The Product Life Cycle is the name given to the stages through which a product passes over time. The classic Product Life Cycle has four stages:

1. Introduction;

2. Growth;

3. Maturity; and 4. Decline.

Figure 10: Product Life Cycle Model

3.1 Introduction

At the market introduction stage the size of the market, sales volumes and sales growth are small. A product will also normally be subject to little or no competition. The primary goal in the introduction stage is to establish a market and build consumer demand for the product.

There may be substantial costs incurred in getting a product to the market introduction stage. Costs may derive from activities such as

thinking of the product idea, developing the technology, determining the product features and quality, establishing sufficient manufacturing

capacity, preparing the product branding, ensuring trade mark protection, testing the market, setting up distribution channels, and launching and promoting the product.

The market introduction stage is likely to be a period of low or negative profits. As such, it is important that products are carefully monitored to ensure that sales volumes start to grow. If a product fails to become profitable it may need to be abandoned.

Factors to consider during the introduction stage include:

 Product development: Research and development of the basic technology and product concept, determining the product features and quality level.

 Pricing: Should penetration pricing or a skimming price strategy be used? A skimming price strategy might be appropriate where there are very few competitors.

 Distribution: Distribution might be quite selective until consumer acceptance of the product can be achieved.

 Promotion: Marketing efforts are aimed at early adopters, and seek to build product awareness and educate potential consumers about the product.

3.2 Growth

If the public gains awareness of a product and consumers come to

understand the benefits of the product and accept it then a company can expect a period of rapid sales growth. In the growth stage, a company will try to build brand loyalty and increase market share.

Profits are driven by increased sales volume due to growth in market share as well as an increase in the size of the overall market. Profits might also be driven by cost reductions gained from economies of scale, and perhaps more favourable market prices. Competition in the growth stage remains low, although new competitors are expected to enter the market. When competitors enter the market a company might be subject to price competition and increase its marketing expenditure.

Factors to consider during the growth stage include:

 Product improvement: Product quality might be improved, additional features and support services added, and packaging updated.

 Pricing: If consumer demand is high the price might be maintained at a high level.

 Distribution: Distribution channels might be added as consumer demand increases.

 Promotion: Promotion is aimed at a broader audience. A company might spend a lot of resources on promotion during the growth stage in order to build brand loyalty.

3.3 Maturity

When a product reaches maturity, sales growth slows and sales volume eventually peaks and stabilises. This is the stage during which the market as a whole makes the most profit. A company’s primary objective at this point is to defend market share while maximising profit.

In this stage, prices tend to drop due to increased competition. A company’s fixed costs are low because it is has well established

production and distribution. Since brand awareness is strong, marketing expenditure might be reduced, although increased marketing

expenditure might be needed to retain market share and fight increasing competition. Expenditure on research and development is likely to be restricted to product modification and improvement, and perhaps research into improved production efficiency and product quality.

Factors to consider in a mature product market include:

 Product differentiation: Increased competition in the mature product market means that a company must find ways to

differentiate its product from that of competitors. Strong branding is one way to do this.

 Pricing: Prices may be reduced because of increased competition.

Firms in the market should be careful not to start a price war.

 Distribution: Distribution intensifies and incentives may be offered to encourage preference to be given over competing products.

 Promotion: Promotion will focus on emphasising product differences and creating/maintaining a strong brand.

3.4 Decline

A product enters into decline when sales and profits start to fall. The market for that product shrinks which reduces the amount of profit available to firms in the industry. A decline might occur because the market has become saturated, the product has become obsolete, or customer needs or preferences have changed.

A firm might try to stimulate growth by changing its pricing strategy, but ultimately the product will have to be re-designed, or replaced. High-cost and low market share firms will be the first to exit the industry.

As product sales decline, a firm has three options:

1. Hold: Maintain production, add new features and find new uses for the product. Reduce the cost of manufacturing (e.g. move manufacturing to a low cost jurisdiction). Consider whether there are new markets in which the product might be sold.

2. Harvest: Continue to offer the product, but reduce marketing expenditure perhaps by targeting a smaller niche segment of the market.

3. Divest: Discontinue production, and liquidate the remaining inventory or sell the product to another firm.

Factors to consider during a declining market include:

 Product consolidation: The number of products may be reduced, and surviving products rejuvenated.

 Price: Prices may be lowered to liquidate inventory, or maintained for continued products.

 Distribution: Distribution becomes more selective. Channels that are no longer profitable are phased out.

 Promotion: Expenditure on promotion is reduced.

4. Criticisms

The Product Life Cycle is useful for monitoring sales results over time and comparing them to products with a similar life cycle. However, the Product Life Cycle model is by no means a perfect tool. Products often do not follow a defined life cycle, not all products go through each stage, and it is not always easy to tell which stage a product is in at any point in time. Consequently, the life cycle concept is not well-suited for

forecasting product sales.

The length of each stage will vary depending on the product and the marketing strategies employed. A Product Life Cycle may be as short as a few months for a fad or as long as a century or more for a product like petrol cars. In many markets the product life cycle is longer than the planning cycle of the organisations involved. Major products often hold their position for several decades or more, indeed, Coca-Cola was

introduced in 1886 and is still the leading brand of cola.

The Product Life Cycle is only one of many considerations that a

company needs to bear in mind. The product life cycle of many modern products is shrinking, while the operating life for many of these

products is lengthening. For example, the operating life of durable goods like household appliances has increased substantially. As a result, a

company that produces these products must take their market life and service life into account when planning.

Some critics have argued that a Product Life Cycle can become self-fulfilling. For example, if sales peak and then fall a manager may conclude that a product is in decline and cut back on marketing, thus precipitating a further drop in sales.

3.6 Cost Management

1. Cost Structure

In order to understand a company’s costs, it will help to break each business unit down into the collection of activities that are performed to produce value for customers. This is an application of Value Chain

Analysis (see “3.2.1 Value Chain Analysis”). The way each activity is performed combined with its economics will determine a firm’s relative cost structure within its industry.

In examining a firm’s cost structure, relevant considerations include:

1. What are the business’s fixed costs? For example, Sales General &

Admin, overheads, rent and interest expenses, depreciation, capital costs, R&D, and wages under fixed employment contracts.

2. What are the business’s variable costs? For example, raw materials, shipping, energy, sales commissions and performance bonuses.

3. What are the main cost drivers?

4. How have costs changed over time?

5. How does the firm’s cost structure compare to the competition?

A company that has more fixed costs relative to variable costs is said to have more operating leverage, and will experience a greater percentage change in profits for a given percentage change in sales. Firms with high operating leverage tend to be in industries that require large economies of scale, such as the software industry. Operating leverage is a form of risk since a company with high operating leverage will require high sales volumes in order to ensure profitability.

2. Cost Reduction

When developing a cost reduction strategy, three questions to consider include:

1. How long will it take to reduce major cost drivers?

3. To what extent do the activities contribute to operational performance?

Figure 11: Cost reduction decision matrix

A company will want to eliminate or outsource costly activities that have low strategic importance. If the activity has a low contribution to

operational performance it should probably be eliminated, and if it has a high contribution to operational performance it can be outsourced.

A company will want to retain control of activities that have high

strategic importance. This can be done by continuing with business as usual, finding ways to increase efficiency, or forming a strategic alliance with more capable firms.

Twelve (12) common cost reduction techniques include:

Procurement

1. Consolidate procurement or renegotiate supply contracts;

HR Management

2. Reduce labour costs through decreasing salaries, training, overtime, benefits and healthcare, introducing employee stock ownership, and ‘right sizing’;

Technology Development

3. Use IT and digital technology to reduce communication and organisational costs;

4. Employ more advanced production technology;

Operations

5. Improve the utilisation rate of plant, property and equipment;

6. Outsource manufacturing to a lower cost jurisdiction (for example, China or India);

7. Relocate the centre of operations to a lower cost city, region or country;

Logistics

8. Partner with distribution companies (for example, FedEx);

Finance

9. Reduce working capital including inventory and accounts receivable;

10. Refinance outstanding debt;

11. Buy futures contracts to hedge against changes in commodity prices and foreign exchange rates;

12. Divest non-core assets.

3.7 Financial Management

3.7.1 Five C Analysis of Borrower Creditworthiness

When a company is trying to borrow money, executives,

entrepreneurs and consultants need to be aware of the five criteria that lenders typically care about

It is important to understand what lenders look for when they assess a company’s creditworthiness because companies often need to borrow money for various purposes: increasing working capital, refinancing existing debt, paying operating expenditures, conducting research and development, undertaking new product development, expanding into new markets, or pursuing M&A activity.

There are five criteria that most lenders use to assess a borrower’s creditworthiness:

1. Capacity to generate sufficient cash flows to service the loan;

2. Collateral to secure the loan in case the borrower defaults;

3. Capital that shareholders have invested in the business;

4. Conditions prevailing in the borrower’s industry and the broader economy; and

5. Character and track record of the borrower and the borrower’s management.

It is important to bear in mind that lenders don’t give equal weight to each criterion and will use all five criteria to create an overall impression

It is important to bear in mind that lenders don’t give equal weight to each criterion and will use all five criteria to create an overall impression

In document Aportaciones a la mejora de la eficiencia de la búsqueda del vecino más cercano Eva Gómez Ballester (página 69-76)