MBA MARKETING STRATEGY

Strategic Marketing Analysis Auditing Tools

Lecture Overview

Introduction
The Value Chain
The Product Life Cycle
Diffusion and Innovation
Portfolio Analysis
- B C G Matrix
- G E Multi Factor Matrix
- Shell Directional Policy Matrix

Experience Curve
Importance of Market Share
Profit Impact of Marketing Strategy ( P.I.M.S.)
Gap Analysis
S.W.O.T Analysis
1

INTRODUCTION
There are many tools that can be used to help interpret the current situation. These are
often referred to as auditing tools. These tools or models cannot only be used for auditing
the current situation but can also play an important role in helping to develop future
strategy (ie they can be used for identifying both where we are now and where we want
to be).
This session will outline the various models and frameworks that can be used for both
strategic analysis and strategy development. The models will include;

Value Chain
Product Life Cycle
Diffusion and Innovation
Portfolio Analysis
Experience Curve and the Importance of Market Share
Profit Impact of Marketing Strategy PIMS
Gap Analysis
SWOT Analysis

THE VALUE CHAIN

Porter, 1980 introduced the model of the value chain as a means of identifying strategies
to gain competitive advantage. The model shown below was originally developed for
accounting purposes to identify the profitability of the various stages of the manufacturing
process. However, today it has been applied to measures of competitive advantage
rather than just profit. Porter suggests that competitive advantage is determined to a
large extent by the way in which companies manage each element and the interactions
between them.
The model highlights 9 interrelated value creating activities that can help to create value.
These are divide into primary and support activities as shown below;
The four support activities
The firms infrastructure
Human resources management
Technology development
Procurement

Inbound
logistics

Operations Outbound Marketing Sales

logistics

and sales

Figure 1
3

ar
gi

n
gi
r
a

The value chain (Porter, 1985)

By focusing on these various functions companies can improve performance an

effectiveness and identify areas in which they can add customer value. It not only
provides a structured framework for examining costs and performance within an
organisation, but also provides a sound basis for inter-firm comparisons.
The value chain can be extended to include suppliers, distributors and customers to
analyse relationships between companies and to identify ways of adding value in the
supply chain, such as Just in Time ( J.I.T.).

Case Study
The Media Value Chain
During the 1980s and 1990s electronic media companies were highly successful. The
owners such as the ITV companies and Capital Radio were exceptionally profitable.
These companies dominated the key portion of the value chain described by Porter. In
most electronic media markets this chain is simple. Each link is a separate stage in the
process that takes the raw talent of an actor, comedian or football player and turns it into
great media that the consumer will listen to or watch.
At each stage value is added, but separate links in the chain are rewarded very differently
for the contribution they make. The key question in assessing the value of media
businesses and deciding which companies to invest in is to understand which of these
links in the chain will hold the greatest value in the long-term.

In the 1980s there were just 4 links in the chain:

1. The talent, be it a writers, performers or someone who creates powerful formats. It is the raw
material of great media.
2. Production the ability to take creative talent and turn it into a programme or a website that
consumers really want.
3. Content packaging and marketing Channel 4 typifies this. The channel does not produce any
programmes, but creates channel brands.
4. Distribution the ability to get media to the consumer through control of spectrum, telephone wires
and cables. This final link has for many years been the most profitable of all. The spectrum was so
limited that the companies that controlled it had tremendous power over the entire chain, and took the
largest proportion of the value created.
But 2 things have changed all that:
1. The spectrum isnt as limited as it once was. There are now more than 200 TV channels
broadcasting in the UK and more than 250 analogue radio stations. There is the internet, broadband and
soon the new third generation mobile media will be offering greater access to the consumer. When the
analogue TV signal is switched off there will another slice of spectrum sell. There have never been so
many routes to carry media content to the consumer, and it will become easier in the future.
2. A new link also appeared in the value chain that has further devalued companies that simply have
access to broadcast spectrum. This is the consumer gateway. Sky and ONDigital gain their power
through their TV set-top boxes, which allow them to control access to the consumer. And there are also
new and powerful operators being created by the Internet, such as AOL. At the other end, the stock
market already puts a high value on companies such as AOL and ONDigital, which control the
consumer gateway.

The real value seems to lie in vertically integrated businesses that have must-see
content and control the gateway. This lies at the heart of BSkyBs strategy and is the
rationale for the merger between AOL and Time Warner.
Applying this logic to the mobile phone industry makes the companies that paid 22.48
billion for the third generation spectrum in Britain weakest link in the media value chainrather nervous. To make an acceptable return on capital employed, they will need to
generate substantial profits from the content, packaging and consumer gateway links in
the value chain.
This will require some big changes. These companies must convert their existing billing
relationships into gateway relationships where they are at the heart of everything the
customer does. They also have to offer their customers must-see content that is
exclusive to their network. The final step would be to vertically integrate the whole
operation, as BskyB has in television. This would create significant synergies.
To achieve this will require a huge cultural shift. Companies that have core skills in
network and subscriber management must understand and adopt the very different skills
of integrated content providers. It is a tough proposition.
Source:

Ewington (2000), www.Lexis-Nexis.com

Limitations of the Value Chain

Inwardly orientated

Needs to take account of other value added activities outside of its organisation since
rarely are value creating activities limited to one company

THE PRODUCT LIFE CYCLE

While the product life cycle ( PLC ) appears in all marketing textbooks, yet it is often
described as the least understood marketing tool.
The PLC recognises that products like humans, have a finite life and move through a
variety of distinct stages from introduction to growth, maturity, decline and eventually
death. However, its real importance lies in identifying the stage of the life cycle the
product is in and using this knowledge to modify its strategies to ensure the maximum
profit is generated at each stage.

Sales
Introduction

Growth

Maturity

Time

Figure 2
9

Decline

The PLC can be applied at a number of levels

Total industry
Product Class
Product Form
Brands

eg motor industry
eg cars, vans or lorries
eg people carriers, estate and sports cars
eg Renault Espace, VW Passat, Rover 75

To fully understand the context in which a brand is developing it is essential to

understand the distinction between the various categories of the PLC. The length of each
stage will vary significantly depending on which category we are considering. For
example; industry and product class tend to have the largest life cycles. However, it is
difficult to judge the nature of the PLC for individual brands for example, Persil (washing
powder) has endured longer than each of the product classes washing powder and
liquid detergents. Product forms tend to conform to the classic PLC curve to a greater
extent than the other categories.
The table over summaries the various marketing mix decisions for each stage of the PLC.
It must be remembered that the table simplifies the decisions and provides guidance
only. Each product should be viewed independently. For example; the table indicates a
low price strategy at the introduction stage. However, depending on the market a
company may decide to operate a market skimming strategy of high price.
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Marketing Mix

Introduction

Growth

Maturity

Decline

Product

Basic product,
limited range

Develop product
extensions and
service levels

Modify and
differentiate
Develop and
service levels

Phase out weak

brands Consider
leaving market

Price

Low price strategy

Penetration
strategy

Price to meet or
beat competitors

Reduce

Distribution

Selective Build
dealer relations

Intensive Limited
trade discounts

Intensive Heavy
trade discounts

Selective Phase
out weak outlets

Advertising

Heavy spending to
build awareness
and encourage trial
among early
adopters and
distributors

Moderate to build
awareness and
interest in the
mass market.
Greater word of
mouth

Emphasise brand
differentiation and
special offers

Reduce to a level
that maintains
hard core loyalty.
Emphasise low
prices to reduce
stock

Sales

Extensive to
encourage trial

Reduce to a
moderate level

Increase to
encourage brand
switching

Reduce or stop
completely

Planning time
frame

Short to medium

Long range

Medium range

Short

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Value of the PLC

Jobber (2001) identifies a number of benefits the PLC offers:
Product Termination
The PLC emphasises that nothing lasts forever. There is a day that marketers will fail to
recognise this and become complacent, not developing new products to replace
established ones.
Growth Projections
The PLC warns against the dangers of assuming that growth will continue indefinitely.
This is particularly critical when companies are facing new investment decisions based
on existing products.
Marketing Objectives Strategies
The PLC emphasises the need to review marketing objectives and strategies as the
product/service moves through the life stages
Product Planning
The PLC emphasises the need to have a balanced portfolio of products (ie to have new
products in the pipeline to replace those in the maturity and decline stages) companies
need to use the cash generated by mature products to fund new product development

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Limitations of the PLC

Despite some of the insights the PLC provides it has many limitations:
1

Fads and Classics

Many products do not follow the traditional S shaped PLC. Some products (fads) show
raid growth but equally rapid decline with little in the way of introduction or maturity. In
contrast, products known as classes, seem to defy the PLC concept and live forever, eg
Bisto and Coca cola
Marketing Effects
The PLC is a result of marketing activity not the cause and therefore marketers have to
be careful they do not fall into the self-fulfilling prophecy where they expect a product to
decline, withdraw marketing support and so kill off their product. The effects of PEST can
change the shape and timescale of the PLC.
Unpredictability
There is little indication of the timescale of the PLC. The duration of each stage varies
considerably between product and may range from weeks to years. The model has
limited value as a forecasting tool.
Miss-leading objectives and strategies
The model is criticised for being too prescriptive in terms of the objectives and strategies
that are appropriate for each stage.
Product Focused
The PLC tends to make marketers focus its objectives and strategies around the product
rather than focus on the customer needs.
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Diffusion of Innovation
The PLC provides an indicator of the various stages through which the product passes
but provides little indication of timescale. The rate at which new products are adopted
varies considerably, but Rogers (1981) developed a model which illustrates the pattern
of adoption that is evident following the launch of a new product. ( see below ).

Innovators
2.5%

Early
Adapters
13.5%

Early
Majority
34%

Late
Majority
34%

Laggards
15%

Diffusion of innovation, Rogers ( 1983)

Figure 3

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The characteristics of consumers in each of these adopter categories varies as does the
rate at which they are likely to purchase new products. As such, the model is useful to
marketers in identifying potential target markets for new products and for tailoring the
marketing mix to meet the needs of each group/category of customers.
While a very useful tool for segmenting the market, the difficulty lies in a marketers ability
to identify those segments and reach them effectively (eg the innovators in the consumer
electronics market may not be innovators in the golf equipment market).
Innovators

These customers are eager to try new ideas and products readily and are
often prepared to pay high initial prices to be first in the market. They are
regarded as opinion leaders.

Early
Adopters

This group is willing to adopt new ideas, but not at the same speed as the
innovators. They are likely to seek out information before purchasing, but
should also be seen as opinion formers.

Early
Majority

In general this group is more conservative than above and more likely to be
risk averse. For example, people who would consider making a purchase
on the internet.

Late
Majority

Includes people who are cautious about anything new at the time. They
tend to reflect on new products and only buy once they are firmly
established in the market.

Laggards

This group are very traditional and averse to change. They tend to be price
sensitive and wait prices to fall. They will only buy CDs once cassette
tapes are no longer available.
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The B.C.G Matrix (Boston Box)

The Boston Consulting Group developed a 2 x 2 matrix that allows the portfolio of
products/SBUs to be positioned on the matrix according to:

market growth rate

relative market share (relative to the leading competitor)

The value of the BCG matrix is that it examines the generation and management of cash
within a business. Relative market share is seen as a predictor of the products capacity
to generate cash and market growth is seen as the predictor of the products need for
cash. This suggests that products with high market share will achieve high sales, but will
need less investment in new brands and should have lower costs due to scale
economies. Products in fast growing markets require higher levels of investment than
those in slower growing markets. Products in low growth markets with a high market
share will generate cash, which can be used to fund other products needing investment.
Nb: Cash flow is not the same as profitability.

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Relative Market Share

High

High

Low

Star

Question Mark

Cash Generated ++++

Cash Needed
---0

Market Growth

Cash Generated
+
Cash Used
------

Cash Cow

Low

Dog

Cash Generated ++++

Cash Used
+++

Cash Generated
Cash Used

10x

1x
The BCG Matrix

Figure 4

17

+
0
0.1x

Question Marks
cash to
attempting to become

Stars
stage of
sustain and develop

Cash Cows
other

Dogs
capable of

are at the introduction stage of the PLC, with high market

growth and low market share. They are absorbing
fund developments in marketing in
future stars of the business.
are the future of the organisation with high market share
and high market growth. They are at the growth
the PLC but are still absorbing cash to
market share
are at the maturity stage of the PLC and have high market
share, but market growth is slowing. Marketing
expenditure is limited so cash generated to fund
product areas of the business
are at the decline stage of the PLC having both low share
and growth in the market. However, they are
generating cash in the short term.

The matrix highlights the need for succession planning and the issue of over dependence
on the current cash cows. As with the PLC there are many different patterns as products
enter the market and fail, or the organisation reinvests in them to prevent them becoming
dogs.
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Portfolio Analysis
Most companies have multiple products serving multiple segments / markets. Some of
these products require lots of investment and are cash hungry, others require limited
investment and are cash rich. Companies therefore need to devise means of allocating
their limited resources among product or SBUs so as to achieve the best performance
for the business as a whole.
Decisions have to be made regarding which products or brands should be invested in,
which to hold and which to let go. The process of managing groups of brand/product or
SBU is called portfolio planning. Portfolio models are used to identify and analyse the
current position of the organisation, highlighting the current resources, capabilities and
performance. Several of the more commonly used models are discussed below.

19

B.C.G Strategies
Stars

Build strategies by increasing sales or

market share.

Question Marks

Build selectively
Identify and focus on niches markets
Harvest and divest others

Cash Cows

Dogs

Hold strategies to maintain sales or

market share
Defend position
Use cash generated to sustain Stars,
invest in NPD and support a select
number of Question Marks

Harvest or
Divest or
Identify profitable niche markets and
focus on them.

Limitations of BCG
Preoccupation with simply market growth and relative market share. Other factors may be
of equal importance ie profitability
Difficulty with accurately measuring growth and share.
Ignores factors such as competition and developing sustainable competitive advantage
Markets that grow slowly may still be attractive as they may not cost as much in terms of
investment
It treats cash flow as the sole criterion for investment decisions. In practice a range of other
factors, such as ROI, market size, competitive position, costs etc are also used.

20

G.E Multi Factor Matrix

The General Electric Matrix was developed by McKinsey & Co in conjunction with General
Electric in the USA in response to some of the weaknesses of the BCG Matrix. This model
built on the success of the BCG, but acknowledged that market growth alone was an
insufficient measure of market attractiveness and market share in measuring competitive
strength.
As with the BCG, products/ businesses were plotted against 2 dimensions, but it used a
multi factor matrix that enabled managers to build in measures that were relevant to their
industry, such that:
Market attractiveness criteria could include measures, such as;
Market factors (size, growth, segment size, price sensitivity)
Competition (types and strengths )
PEST factors
Profit potential
Competitive / business strengths criteria could include measures, such as;
market share
bargaining power of suppliers and customers
Reputation
Patents
relationship/strategic alliances
distribution capabilities
ability to develop competitive advantage or cost advantage
21

Once the criteria had been selected each factor can be given a weighting that recognises
their relative importance. The table below gives an example of such weighting based on a
total of 10.
Weighting the Criteria
Market Attractiveness
Market share
Patents
Distribution capabilities
Relationships
Cost advantages
Total

2.5
1
2
2
2.5
10

Competitive Strength
Market growth rate
Market size
Strength of competition
Social factors
Profit opportunity
Total

2
2.5
1
0.5
4
10
22

Each market attractiveness factor and competitive strength is scored out of 10 (ie 1 = very
unattractive/weak and 10 = very attractive/strong). Each score is multiplied by their weighting
to produce an overall score for market attractiveness and competitive strength for each
product and SBU. The results are plotted on the G.E. matrix. Once the products have been plotted
on the matrix it is possible to identify potential strategies for each position of the matrix as
shown below:

High
Market
Attractiveness

Medium 6
Low

3
0

Figure 5

6
Strong

3
Medium

0
Weak

Business Strengths

Key
Invest for growth

The General Electric Multi Factor Portfolio Model

Manage selectively for earnings

Harvest/Withdraw
23

Limitation of the G.E. Matrix

Although the GE Matrix allows for a far more robust and richer analysis than the BCG, it
does receive some criticism in terms of;

Difficult to obtain all the information required

Getting managers to agree criteria and weightings
Because of its flexibility there is the opportunity for bias. It is suggested therefore in
order to avoid this, analysis should be conducted at a managerial level above the one
being analysed

24

Shell Directional Policy Matrix

This portfolio model adopts a similar approach to that of the GE Matrix, the main difference
being the axes which here are based around prospects for sector profitability and enterprise
competitive capability as shown below:

Sector Profitability
Unattractive

Competitive
Capabilities

Average

Attractive

Weak

Disinvest

Phased Withdrawal

Double or Quit

Average

Phased Withdrawal

Custodial Growth

Try Harder

Strong

Cash Generation

Growth Leader

Leader

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Summary of Portfolio Models

Portfolio models have useful contribution to make to the planning process but their
strengths must be tempered by their limitations as indicated below;
Portfolio models are not as well known or widely used in marketing as they might be
possibly because they are time consuming and difficult to use.
While relatively easy to understand they can be easily misused. Successful use of
them depends on identifying the range of factors relevant to the firms specific market
not an easy task.
There is an argument that the factors used to assess the current position of the portfolio
do not necessarily reflect the future condition of the business or market.
The models assume that market leadership invariably offers benefits
Nevertheless, the models do provide an insight into;
Not all products or SBUs are equal and may require different roles, such as cash
generation or profitability.
Different products have different profitability objectives and as such managers should
have different skills and reward systems. Eg new products may require market led
managers, whereas dog or harvested products may require managers who are more
cost orientated.
The models are simply tools. They should not be seen as a replacement for
management judgement.
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Case Study
Unilever Portfolio Management
Unilever, a multinational company in fast moving consumer goods (FMCG) used to
produce approximately 1600 consumer brands. The company realised that they could
improve economies of scale, and increase efficiency of their supply chain, by reducing
the number of products they manufactured.
They undertook a portfolio exercise that revealed that only a quarter of their brands
provided 90% of their turnover. Therefore, they decided to reduce their brands by 75%
and to concentrate their marketing activity on 400 of their high growth brands.
The criteria used to identify the brands to maintain were that they should be in the top
two sellers in their market segment such as Dove soap, Lipton tea and Calvin Klein
perfume. In addition, highly successful local brands, such as Marmite and Persil, were
also to be supported.
The rest of the brands, such as Pears soap and Timotei shampoo, would either be sold
off or would be harvested gradually. It was anticipated that this strategy would reduce
costs by approximately 1 billion over 3 years and provide an additional 450 million to
spend on marketing the surviving brands.

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Experience Curves and the Importance of Market Share

Many marketing strategies are based on the premise that market leadership is a
desirable goal. The reasons for this are in part based around the concept of the
experience curve.
The concept underpinning the experience curve is that experience, gained by frequently
producing high volumes of production, decreases costs and increases profits. This is due
to learning and economies of scale, which while working with new technology can lead to
improvements in operational efficiency. (see below)

Cumulative experience

Unit costs
Figure 6
Volume

The implication of this is that the first company to enter a market and attain a large market share
will have cost advantages over those entering the market later. Examples, such as, IBM market
leader in main frame computers and Texas Instruments who entered the market a couple of
years later, but had to withdraw soon after and VHS compared to Betamax video recording
systems.
28

Aaker, 1998 acknowledges however there are several considerations when using the
experience curve;

Multiple products can complicate the concepts

The experience curve does not apply to every situation
Technological developments may make the experience curve obsolete
Lowest costs do not have to equate to lowest prices

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IMPORTANCE OF MARKET SHARE

Generally companies with higher market share have more experience than their
competition. This results in lower costs which can lead to higher profit margins or more
money to spend on R&D which helps maintain market leadership and market share.
Summarised the benefits include;
Economies of scale
Increased bargaining power
Security for stakeholders
Status
Measure of management performance
However, there are a number of factors companies need to take account of if deciding to
pursue a share gaining strategy;
Competitor reaction
Cost of gaining share
How long can the strategy be maintained?
Level of maturity in the market
Effect on other areas of the companies activities and level of customer loyalty
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PROFIT IMPACT OF MARKETING STRATEGY

(PIMS)
Researchers have found a strong relationship between market share and return on
investment R.O.I.
PIMS studies set out to identify the key factors influencing profitability by examining the
performance of 3000 SBUs. The results of this study clearly shows there is a linear
relationship between profits and relative market share. For example, where an
organisation gained market share of say 40%, ROI was three times more than
organisations with 10% market share as shown below;

Profitability

Figure 7

Profitability
31

Some Thoughts on PIMS

High market share in itself will not automatically improve profitability

There is evidence of many successful low share businesses
Often nichers develop small and successful segments while more dominant medium
sized companies become stuck in the middle
Does the definition of the market determine market share e.g. does easyJet have a
large market share of the budget airline industry or does it have a small share of the
total airline industry?

32

Gap Analysis
Gap analysis is a fairly simple diagrammatical method of presenting where we are now
and where we want to be, as illustrated below;

Objectives

70

The strategic gap

60
50

Current forecast

40
30
20
10
2

10

Time (years)

Figure 8

33

Strategic analysis will identify the current situation and then forecasts can be made of how
the company will perform in the future based on existing products serving existing markets.
However, the corporate goal/objectives of the organisation may be a lot different to that
forecast and this creates the strategic gap. In closing the gap marketers can use Ansoffs
Growth Matrix which seeks to develop businesses through one of 4 strategies as shown
below:
Market penetration
Market development
Product development
Diversification

34

SWOT
This analysis is derived from the initials of the words strengths, weaknesses,
opportunities and threats. The accent is on the key factors of the marketing audit which
have been identified as having an impact on the success or failure of the business eg:
Strength
Weaknesses
Opportunity
Threat

- excellent quality products, reliable engineering.

- poor delivery, hazardous, higher prices, management culture
systems.
- good supply, new uses for existing product, changes in taste or
fashion.
- launch of new product, major competitive ad campaign, economic
depression.

The analysis is what goes into the marketing plan (not the full audit). It seeks to produce a
concise, clear and reliable short account of where the is organisation is now, how it sees
itself in the market place against its competitors, what shortcomings need to be overcome,
where opportunities can be turned into competitive advantage, where it can do better than
the competition and what is required for all these things to be achieved.

35

Concept of Internal Strengths and Weaknesses

Each business needs to evaluate its internal strengths and weaknesses to be able to
judge which competences to develop in order to take up the opportunities that may arise.
P. Kotler developed a form for carrying out this type of audit for reviewing the businesses
marketing, finance, manufacturing and organisational competencies. Under each heading
a list of relevant criteria is listed and assessed according to its perceived strengths and
weaknesses, from major strength through to major weakness. (see figure 9)
Because not all factors are of equal importance in succeeding in business or taking up a
new opportunity, it is necessary to rate the importance of each criteria or factor;
high or low. (see figure 10)
By connecting the rating vertically the firms can now get a good view of the business's
major strengths and weaknesses. BUT, by combining Performance and Importance
levels, 4 possibilities emerge.

36

37

PERFORMANCE IMPORTANCE MATRIX

IMPORTANCE

PERFORMANCE
High

Low

High

A. Keep up good work

B. Concentrate here

Low

C. Possible overkill

D. Low priority

Figure 10

38

The analysis points out that even when a business has major strengths/(distinctive
competencies), it does not necessarily create a competitive advantage. The competence
may not, or example, be of any importance to the market or competitors may have a
similar strength.
What becomes important is that the business has relatively greater strength in the
important factor than its competitors. In examining strengths and weaknesses a business
can decide which strengths and weaknesses to concentrate on.
The issue is whether to;
1. Solely focus those opportunities for which it is more capable of providing fr but may
offer less profits, OR
2. Consider better opportunities and seek out and acquire those required competences
to succeed, but which it lacks.

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