Environment

1. Understanding of the elements that make up the external environment in general, and the competitive environment in particular.

2. Awareness of the main factors (drivers) at work in each of the main STEP (Socio-cultural, Technological, Economic, Political) domains.

3. Appreciation of the range of (analytical) tools available for dealing with the STEP environment.

4. Understanding of the main strategies and tactics which may be used to deal with competitive threats.

This chapter introduces two related topics: the external (STEP) environment and the competitive environment. The latter, whilst not a formal part of marketing, was taught by the best marketing lecturers long before Michael Porter discovered it (though his work usefully summarised, and extended, what had been learned). This latter half of the chapter looks at the strategies which may be generally employed in competitive situations, together with the related tactics. The first part, however, deals with the (STEP) environment beyond marketing. This is rarely taught to any depth, but it is very important in that changes in these domains typically offer a greater threat to long-term organisational survival than any arising from the marketing environment. The objective here, then, is at least to make the student aware of what lies in those domains and of their importance to his or her organisation.

Marketing has now expanded to encompass the wider environment on which the survival of many organisations is dependent. The simplest and most widely used framework for this is STEP (Socio-cultural, Technological, Economic, Political). The socio-cultural domain of the environment is explored, with particular reference to the main 'drivers for change' - especially 'post-materialism'. The technological, economic and political domains are similarly investigated; with particular reference to mergers and acquisitions, and the 'multiple publics' which an organisation faces. The latter part of the first half, though, is devoted to environmental analysis in general , and to 'scanning' in particular (especially for 'weak signals').

The second half of the chapter is devoted to the element of the environment with the most immediate impact, and one which dominated management activities in the 1980s, competitive strategy. Following the widely accepted frameworks developed by Michael Porter, this initially concentrates on the competitive features of different industry types, and in particular the entry barriers to them. The main part, though, revolves around competitive responses and strategies, especially between leaders and followers.

The first point which must be established is the importance of the external environment. This may not be immediately apparent to students; partly because it is not a traditional business discipline, and hence is unseen, and/or because the changes which take place are slow, and again are simply unseen (even though they are very powerful - and a matter of life and death for some organisations).

In the text this lesson is derived from the comments of some experts in the field, but a much more practical approach may be to ask the students what are the main factors currently affecting the performance of organisations. With some help they may come up with elements such as the state of the economy, the government's position on providing aid, the opportunities in Eastern Europe, the IT revolution etc. It is likely that, especially if prompted by you, they will come up with at least some major factors which can be generally described as belonging to one or more domains of the STEP environment. These answers can then be built up in groups on the blackboard to give a start to the STEP split of the environment.

But first it is useful to introduce the onion skin view of the environment; to show that (in terms of planning horizons at least) it lies beyond (but also surrounds) the marketing environment;

An interesting expansion on this is that provided by Lancaster and Massingham[1] - which is (for reasons of space) not included in the main text;

The major driver in this domain, for now and probably for a number of decades, is that very loosely described as the 'IT revolution' (twenty years ago it would have been called the 'computer revolution'). This is only just at its beginning, so it is difficult to separate out its main features.

A useful way of introducing the context is to look back to the parallel developments in the Industrial Revolution; and again to ask your students to suggest what these were. At that time (and perhaps even now) most people would have seen the steam engine as the focus of developments (though it is arguable, even in terms of technology, that it was the agricultural developments which started the overall process). It may even be true that the steam engine was the catalyst, but the greatest social changes probably came about because of the changes to the working environment. The appearance of the factory, with many workers in one building (to take advantage of the power from the one large steam engine), revolutionised the way people worked (and lived, where the urban slums grew to support these new factories). The new social structures which then emerged are still with us today.

The IT revolution will almost certainly have similarly far-reaching effects (not least because it can distribute intelligence, and hence work, to where people want it - the reverse of the Industrial Revolution process), but it is far too early to say what the most important changes will be. The electronic cottage, with the knowledge worker slaving away over a hot terminal - in the wilds of Devon, say - has long been predicted but simply has not emerged in practice (on any scale).

The views of Daniel Bell (albeit that they are now twenty years old) and John Naisbitt (ten years later) still offer a reasonable summary of the prospects.

post-materialism

The changes taking place now are, despite their shorter-term impact, just as controversial - since developments in society are coming thick and fast. Some sociologists and market researchers, at least, would argue that we are now moving to an age where materialist values are becoming less important. Referring back to the last chapter, we are moving from Maslow's 'Esteem' layer to 'Self-Actualization' - at the peak of the pyramid. Just as many academics would disagree (and would point out that these predictions have been around for several decades - with no major changes yet observed). Elizabeth Nelson's[2] chart (13.07A) offers an indication of what may be involved; though it is difficult to explain to students exactly what the dimensions are - and it is best perhaps to look at the vertical scale as if it is analogous to that of Maslow (though that clearly is a gross over-simplification).

[Acetate 13.07]

post-modernism

This is a term which has now become popular amongst certain groups of marketing academics. In view of the many changes taking place in society, it ought to represent an important concept. Unfortunately, at least in the context of teaching students, it turns out to be very problematic. This largely because there seems to be no consensus as to exactly what it means - apart from it being what should follow 'modernism' (which sociologists, at least, do understand). The result is that the debate about it tends to be not just esoteric but irretrievably confusing!

My advice is to avoid the subject, and to concentrate on 'post-materialism'. This covers very much the same ground, and is much more meaningful to marketing students.

demographics

One specific aspect of the social environment is the changes in population, the study of which is demography. These are very accurately predictable (once the birth-rate has been set), and they can lead to major changes in markets - yet few organisations take them into account in their planning! A typical projection is shown by Geoffrey Hobbs[3].

On the other hand Hugues de Jouvenel[4] shows some of the results of such demographic changes.

The message to convey to the students is not how to draw such graphs - there are specialists who can do that - but to appreciate that they exist (and can offer a very powerful insight into some important future developments).

There is not much that can be taught on this subject, simply because it is so vast. All that you can hope to do is to make students aware of what is involved.

To give an indication of this, Peter Senker, of the UK Science Policy Research Unit (SPRU), identifies four main 'drivers' in the field of technology:

It is worthwhile making the observation that many of the most important long-term changes are initiated by technological changes. Economic and political factors then act as brakes on the speed of development.

On the surface there should be considerable overlaps between economics and marketing; both have the market as their central feature. In reality there is now very little similarity between the two. As the history described in the text indicates, this was not originally the case - it has been a development of the past century.

The parallels should be greatest with micro-marketing. Unfortunately, though the microeconomic theory of the perfect firm is well developed the equivalent theory of imperfect markets (which almost all those in real life are, and hence the very pragmatic concerns of marketers) is almost totally undeveloped. Even the transaction costs approach, which has recently preoccupied a number of leading economists, concentrates on a narrow aspect of business operations.

On the other hand, the rigorous approaches - especially the models - which have been developed over the years by economists are often useful as starting points for marketing investigations.

The first point to make is that political here is not simply party political, or even just about government. It is about the way groups exert influence - and this perhaps may result in regulation of one form or another.

Thus, pressure groups are an important part of this scene. The organisation may encounter them from two opposing viewpoints:

(POTENTIAL) ADVERSARIES - those groups wanting to have an influence on what the organisation itself does (or the environment in which it operates).

COLLABORATORS - those other interested parties (usually other members of the same industry) who want to influence the environment (especially regulation) to their advantage.

The techniques for handling both of these are covered under Public Relations in chapter 10.

Regulation and consumerism are covered only briefly in the chapter, because they tend to be very specific to individual situations; changing with time, place (at least by country) and topic.

The best way to teach these is to take topics of current interest and discuss them with the students - drawing out any general lessons (which will still usually be relatively specific!) as you go.

multiple publics

Probably the main practical aspect of the 'political scene' is to recognise all the parties with an interest in your activities - these are variously called 'stakeholders' or 'publics'. The most important groups are:

The first four groups are those within the marketing environment (if suppliers and distributors can be included in it), and are well known to marketers. What is less well recognised is that all of these have some sort of stake in the organisation's activities. The debate has been controversial, often acrimonious, even in terms of the employees' stake. Few have even considered that customers, let alone suppliers, should have any rights. Yet considering their viewpoints may well avoid some nasty confrontations.

mergers and acquisitions

This is normally seen to be the province of corporate strategy, but - in addition to the fact that marketing and corporate strategy often overlap to a great extent - there are two main reasons for considering it:

ALTERNATIVE TO NEW PRODUCTS - marketers typically spend a great deal of time and effort considering new products, yet often the easiest and most predictable method of extending the product range or diversifying is to buy another organisation with an existing portfolio of suitable products. This route should not be neglected - not least where failure rates following the traditional new product route are known to be high.

PROMOTIONAL EFFORT - when a merger or acquisition attempt gets under way the promotional effort may be the key (either in defence or attack) and the elements of this promotion are largely those of traditional marketing.

This is the first, and most generally applicable, step in addressing the wider environment. It is also called 'scanning' - which is a good description of the process. In the main text this is explored in three stages:

The first of these looks at the various strategies which can be employed in scanning:

These, as described by Aguilar, move from the most general (undirected viewing) to the most specific (formal search). The latter is very much at the heart of most of the desk research described in chapter 3.

On the other hand, the former is very different - and very time and resource consuming if done properly (which may be one reason it is rarely carried out in practice - though ignorance of the need is probably more likely). It is, though, by far the most important form of such analysis, and the only one which will pick up the major 'fractures' coming from unexpected directions.

The usual answer is a team approach. The approach described in the text - using all staff to input (clippings) - is a particularly useful one. The organisation in question actually asked everyone, down to the cleaners, to clip their newspapers and magazines; and the inputs from the tabloids were treated just as seriously as those from the quality press (the aim is to find which items are being reported widely). An easier approach is to ask all members of the marketing department to follow this clipping process. Even so, very few organisations implement even this limited approach.

The audit, collecting newspaper clippings about a specific organisation or topic, can be usefully extended to become a group activity over a shorter timespan (say one or two weeks).

Formal 'content analysis' is very powerful indeed - but unfortunately requires the resources of the CIA!

The hard fact is that there are no really practical short-cuts. The real answer is to cultivate an attitude of mind!

Indeed, the problem is illustrated by the literature on 'weak signals', of which there was a flood in the 1980s. The problem is that it looks quite possible, even simple. It is nearly always described in retrospect. The classic example is the demise of the UK motorcycle industry. In retrospect the warning signs are so obvious that the managers of that industry could only have been idiots or suffering from terminal myopia.

Unfortunately, when you try to look in the other direction, into the future with foresight rather than into the past with hindsight, the picture is nowhere near as clear. Weak signals, whatever they might be (for, by definition, you cannot know what they are until you find them) are swamped by the 'noise' generated by the vast numbers of other events. In practice 'weak signals' have little vale for managers.

This was always implicit in marketing activities; the relative performance (of the product against its competitors) was the measure examined most rigorously by sophisticated marketers.

Even so, it remained for Michael Porter (in his book, Competitive Strategy, which is still the best text on this subject) to bring its importance to the forefront - especially in terms of corporate strategy. Much of his work, however, is very theoretical - examining general industry features rather than offering practical advice for specific situations. Indeed, Kotler and Singh's use of military analogies may have led marketing thinking in the area of practical marketing implementation.

Whatever the practical outcomes, it is now necessary for students to appreciate Porter's classification of industry features (even if the form of competition might be more obvious to them from current practice). In any case, this might make them aware of some possible future surprises.

The action is supposed to be where the money is, or at least where the volume is (and the two are usually equated). The larger the market the more attractive it is supposed to be - which is reasonable. Hence, the more competitive it is supposed to be; though the larger organisations (or at least the most sophisticated of them) are often very good at managing competition, so that it may be well controlled (to the benefit of their smaller competitors as well as themselves).

The level of competition in general seems to be more related to the patterns of concentration rather than the total number of organisations. The most stable position seems to be where there are one, two or three brands which take more than 75% of the market between them. It is possibly even more stable if one dominates (ideally with something like twice the share of the second brand and three times that of the third; The Rule of 123) - indeed if the three have similar shares there may be significant competition (each trying to gain the considerable benefits of being the clear leader).

If, on the other hand, there are four or five brands with pretty much the same share then there is likely to be severe competition.

Probably the most effective bar to competition is product/service differentiation. If this is strong enough the brand may have an effective monopoly in its own segment. This is, therefore, probably th% marketing device of choice - in those many situations where it is possible. Branding itself is one of the main techniques for achieving such differentiation.

This is the traditional basis for much of competitive theory, and Porter also devotes much time to this.

The more recent justification, promoted by the Boston Consulting Group, revolves around 'learning effects'; whereby the economies come about because of the cumulative experience gained - conveniently even greater in effect than the straight (non-cumulative) effects which emerge from larger volumes passing through the plant.

Any of these scale effects, though, provide a massive incentive to compete (usually on a price basis) for large volumes. On the other hand, the investment levels necessary to achieve them are also a considerable (often insuperable) deterrent to new entrants - unless they have substantial resources and determination. So this can be a very effective barrier, against all but the Japanese corporations!

Such effects might not, however, be as general as some (including perhaps Porter himself) might indicate.

These are very real barriers to new entrants, which is precisely why the sitting tenants work so hard to persuade their respective governments to erect them. The Japanese are past masters of this form of barrier, particularly in terms of making them invisible to the inexpert eye (the best barriers do not look like restrictions on trade to anyone but those involved). But most countries use them (after all what is CAP but the EC's way of protecting, by legislation, its farmers).

Hidden behind such barriers the existing 'competitors' can feel comfortable about being 'gentlemanly' with one another (and will be aware that any assault on one another might lead to the external barriers also being demolished).

This is a less immediately obvious barrier to new entrants, and indeed to expansionary activities by existing competitors, but it is a very powerful controlling force. This is especially true in those sectors where there is a limit (usually due to legislation) on the scale of the distribution channels.

There are really only five UK supermarket chains which can offer national coverage (Tesco, Sainsbury, ASDA, Gateway, Safeway), and they will usually stock only the top two brands (plus their own) - which means that many FMCG markets are stable (having only three brands effectively in competition - of which one is usually the clear leader).

Despite attempts at breaking up 'monopolies', the use of tied outlets in the petrol and brewing fields has also had a major impact on competition - though in the 1980s the competition in the latter sector shifted quite dramatically to take-over activity - justifying my earlier comment that this also is an important marketing option.

The Japanese have recognised this limitation, and have made massive investments in distribution in those fields where they were attempting to expand - where the Europeans, for instance, have not seen this as being their business (and have suffered as a result).

This has traditionally been the major determinant of competition, at least in terms of price competition. Economic theory has long held out that the price is determined by the balance of supply against demand. Where supply significantly outstrips demand the price should tumble dramatically; it often does (as OPEC found out when it lost control of its members and its carefully controlled rationing of supplies ended).

This is not always the case. If the suppliers can withdraw capacity (voluntarily, as OPEC has sometimes succeeded in doing, or by a form of regulation - sometimes disguised, at least in the case of Japan, as voluntary self-regulation), then the price may still be maintained and competitive activity held down.

The Product Life Cycle (PLC), which is probably the major theoretical model in marketing, and which is investigated in detail in chapter 7, predicts that the older markets should be more competitive. Unfortunately, as with most of the predictions based on the PLC, there is little evidence of this - indeed if anything the reverse would seem to be the case. This aspect can safely be ignored as a workable predictor of competitive activity.

Not surprisingly, by far the best predictor is what has gone before. Needless to say it is the one on which, quite reasonably, organisations tend to focus - to the exclusion of all the others. If you are in a fight to the death the fact that theory says you shouldn't be is hardly helpful!

On the other hand, it simply may not be possible to detect the true position. The Japanese have made a considerable advantage out of their supposed inscrutability. They have almost waged a war of nerves with their Western adversaries, who have been reading far too much into the myths of Japanese invulnerability. In this way, simply by appearing to offer a threat, they have very effectively destabilized markets, where stability is very much to the advantage of the sitting tenants.

The best activity is usually to pick some suitable examples, which are likely to be from FMCG but should include some services (McDonald's, say) and industrial suppliers (IBM, say), and ask the students to say which of these factors was most important in each case.

But all the above may pale into insignificance when there is a major fracture in the external environment - which changes the rules. Then there may be a stampede to take advantage of the new rules - and a vigorous outbreak of competitive activities.

Michael Porter made the important contribution of identifying competition from unexpected quarters. That from industry competitors had always loomed large, and that from potential entrants had been appreciated (if rarely acted upon).

That from suppliers, who can for instance develop a monopoly power which then becomes the key structural factor in the industry, is not normally understood (fortunately, least of all by suppliers themselves!). Buyer power, though, is very important in a number of industries, such as the food industry where, within limits, the large supermarket chains can dictate terms to their weaker suppliers (and hence dominate the whole sector).

Substitutes may be especially threatening, because they are not usually seen until it is too late! They are a bigger problem for service industry organisations - where substitutes are more common.

Fortunately, most of these unexpected competitors are a rarity, so the industry competitors can be the focus; though you should look nervously over your shoulder from time to time.

competitive research

Performance data which is gathered as part of normal operations, including marketing research, can offer invaluable insights into what is happening to that competitor's position. A weakening of the competitor's position, whilst it may seem good news, may give warning that the competitor could be planning steps to redress the position.

Most useful of all, though, are the competitor's annual reports - which should, even with a minimal knowledge of accounting basics, reveal a great deal about that competitor's operational strengths and weaknesses (especially in terms of its financial resources, which will determine the competitive options open to it).

You should get, or you should ask the students to get, some company reports from organisations in the same industry. These can then be analysed in class (perhaps as a team game, with teams adopting different organisations) to see what the competitive positions (and strengths) are likely to be.

The whole range of techniques discussed in chapter 2 may be used here. The most important information to be found is, perhaps, how the competitor thinks. Taking a military analogy, the most successful generals spend a great deal of time trying to understand the opposing general - so that they may be able to predict the moves he will make.

The sales force should be the eyes and ears of the marketer. Unfortunately they are usually uncommunicative. Even so, it is well worthwhile obtaining their input. Their input will normally come via sales reports (even if it should), so the marketer must find another route: attending sales meetings and going out on visits with sales personnel (when the talk in the car between calls is often the most fruitful part of the day).

The most useful reports of all are those which focus on specific wins/losses. These encapsulate what is important to the marketer - and the sales professional should at that time have a very good idea of what was eventually the key to that sale. Wins provide useful information, highlighting what really counted in the sale - which is quite often very different from what was supposed to happen! Losses are even more informative - since they provide insights into what is wrong (and what can be done to correct it and improve the competitive position).

Unfortunately, such reports are rarely provided. After a win the sales professional is on a high, and does not have time for bureaucratic form filling. A loss has the opposite effect, no one wants to be forced to remember it. If you can, however, put in place a system (of win/loss reports) you will find the information invaluable. During its successful years IBM insisted on such reports from its salesmen. More recently it too has bowed to pressure and no longer requires them. This may not, by itself, have undermined IBM's competitiveness; but the abandonment of this rich source of competitive information certainly has not helped.

The outcome of the competitive research is an estimate of how the competitor will react to future changes in the environment - especially in terms of your own actions. This will colour your own views as to what are your own options.

The best situation is if there is no response. Thus, you can set your own strategy without regard to competitive response. This may happen if you are a minor player and consequently of no interest to the brand leader(s) - though beware their reaction if you ever do anything which causes sufficient damage to make them take an interest (at which stage they may just squash you out of existence!). On the other hand, the competitor(s) may be so weak that they cannot afford to invest in any response; which is the ideal (but rare) situation.

This may discourage competitive attacks, which is why it is used, and why you should regard it as an automatic response; even against the most minor infringement (perhaps especially against these) since its main purpose is to advertise that aggression (no matter how minor) will not be tolerated - it marks out the territory which the organisation will defend at all costs. Indeed, as a policy some competitors may indulge in 'overkill' to make the point - and to ensure that any future aggressors think twice.

It is a very cost-effective competitive strategy since, though the costs are high while the battle is under way, the war rarely lasts long and then there is a rapid return to profitability.

In this case the competitor selects the competitive challenges it will respond to. This may be to reduce the temperature; and to indicate those areas where it will not accept aggressive moves. On the other hand, it may be that it wants to handle some aspects - still such as product improvements - at its own pace rather than that set by others; but to still respond immediately to actions, such as price reductions, which need a rapid response.

This is potentially the most dangerous competitor, since there is no way of knowing just what might start a price war. Beware such competitors, and treat them with a great deal of caution.

In very bitter wars, though, it may be a useful ploy to let your competitors think (through your words rather than your actions) that you are not merely unpredictable but actually rather unbalanced. They may then listen rather more carefully to your terms for an end to the war - because the alternative (ultimate destruction) is unthinkable. But beware, too many of your competitors are genuinely unbalanced and may happily engage in mutual destruction!

Some competitors may take competition to levels which would be worthy of the CIA. The advice, if you are considering it, is to avoid such tactics. All the information you will ever be able to handle is usually available through normal means; and the risk of dirty tricks - should you ever be discovered (and the chances are that you will be) - is destruction of your reputation.

Reverse engineering is, on the other, hand a perfectly valid technique - and is now a quite normal business practice.

According to Porter, there are the three main approaches. One of them is overall cost leadership, which is related to the economies of scale discussed earlier.

The other two categories try to avoid head-on price competition by making the product different from its competitors. Product differentiation simply looks for something will differentiate it from everything else in the market - a USP (Unique Selling Proposition) which creates a brand monopoly.

Focus takes this rather further, to concentrate on segment (of customers or of the product set) where differentiation can have the most impact. Segmentation - which is the key to this - is described in chapter 4.

THE POWER DIAMOND [Acetate 13.31A]

We b%lieve that Porter's two basic dimensions need to be extended - adding two longer term factors - by 'market position' and 'brand investment'. These are encapsulated in the 'Power Diamond'; which is described in the student text.

There are very different options open to the few market leaders (typically the two or three brands which account for more than two-thirds of total sales) as compared with their many followers which have small shares.

The leaders (particularly those with shares approaching 50%) have a considerable investment in maintaining the health of the market; and indeed in expanding it. For every percentage point it grows they will gain half a per cent (and will in the process enhance their image as market leader). On the other hand, all the followers' attention will be focused on improving their share of the cake.

In terms of expanding the market there are the above three routes (assuming that you stay with the existing brand). The first is the most profitable if the market is not saturated; which unfortunately many mature markets are (at least in terms of finding new heavy users who will justify investment in promotion).

The second can be very profitable, as Beechams found when it switched Lucozade from being a drink for invalids to one for athletes (and, more importantly, for those who liked to think they were). Unfortunately, additional uses are normally peripheral and low volume (but on a marginal costing basis may still be justifiable).

The main target is usually that of increasing usage - often by promotional deals which, the suppliers hope, will persuade the consumer temporarily (and then permanently) to use more.

The main split between leaders and followers in terms of promotion is that set by cost effectiveness. The leaders have large volumes of sales, which mean that overall spends (usually advertising) which carry a large impact with consumers can be spread over a large number of units - giving a low unit cost. On the other hand, the followers have no choice but to gain impact on each individual unit (which lowers profitability - but is the only front on which they can compete on equal terms with the leaders) - so price promotion (in its various forms - but usually just a price reduction) is a major promotional device for followers.

A similar consideration will usually determine the product policy. Leaders will have the resources to invest in the brand across the market, where followers will try to find small segments (niches) where their limited resources will go furthest.

THE RULE OF 123 [Acetate 13.34]

This is a very simple rule which encapsulates many of the lessons of competitive strategy. Its simplicity should not, however, be allowed to detract from its power.

[1] Lancaster, Geoff and Massingham, Lester (1988) Essentials of Marketing McGraw-Hill

[2] Nelson, Elizabeth (1989) Marketing in 1992 and Beyond, RSA Journal, April 1989

[3] Hobbs, G D (1989) The Commercial, Social and Political Implications of Future Demographic Change, paper presented at Exploring the Future: Trends and Discontinuities Chatham House, London, October 1989

[4] De Jouvenel, Hugues (1989) Europe's Ageing Population: Trends and Challenges to 2025 Butterworths

post-materialism

[Acetate 13.07]

post-modernism

demographics

multiple publics

mergers and acquisitions

competitive research

THE POWER DIAMOND [Acetate 13.31A]

THE RULE OF 123 [Acetate 13.34]