中国经济管理大学 

Crafting the Brand Positioning and Competing Effectively

中国经济管理大学/中國經濟管理大學

Organizations must evaluate how consumers perceive their product and servicing offerings. This perception is partially formed by the organization’s efforts to position their products and services relative to the competition. Decisions on positioning strategies are a critical component of a marketing strategy. Once they achieve Points-of Parity, companies must then achieve Points-of-Difference

In the marketplace, many companies develop effective products, channels, pricing, and advertising. However, many of these companies lose in the marketplace. There may be many reasons, but a critical variable may be an inability to understand the competitive environment and to gather and utilize data on that environment. 

To prepare an effective marketing strategy, a company must consider its competitors as well as its actual and potential customers. This is especially necessary in slow growth markets because firms generally gain sales by wining them away from competitors.

A company’s closest competitors seek to satisfy the same customers and needs and make similar product and service offers. A company should also pay attention to its latent competitors that may offer new and/or different ways to satisfy the same needs. The company should identify its competitors by using both an industry and market-based analysis.

A company should gather information on competitor strategies, objectives, strengths, weak­nesses, and reaction patterns. The company should study and understand competitor strategies in order to identify its closest competitors and take appropriate action. The company should know the competitor’s objectives in order to anticipate further moves and reactions.  Knowledge of the competitor’s strengths and weaknesses permits the company to refine its own strategy to take advantage of competitor weaknesses while avoiding engagements where the competitor is strong. Understanding typical competitor reaction patterns helps the company choose and time its moves.

The firm should collect, interpret, and disseminate competitive intelligence continuously.  Company marketing executives should be able to obtain full and reliable information about any competitor that could have bearing on a decision. As important as a competitive orientation is in today’s markets, companies should not overdo their focus on competitors. Changing consumer needs and latent competitors are more likely to hurt a firm than the existing competitors. Companies that maintain a good balance of consumer and competitor considerations are practicing effective market orientation.

·         Stimulate students to recognize and evaluate the critical issues in positioning a product, along with the research and analysis that goes with it. 

·         Points to consider in proceeding with a positioning strategy - what to stress and not stress.

·         Awareness of the need for a positioning policy and strategy.  

·         Know the difference between the industry and market concepts of competition.

·         Understand how to identify competitor strategies.

·         Understand how to determine competitor objectives.

·         Understand how to estimate competitor reaction patterns.

·         Know how to design competitive intelligence systems.

·         Know how to select competitors to attack or avoid.

·         Understand what it means to balance a customer and competitor orientation.

I.                    Introduction 

II.                 Developing and Establishing a Brand Positioning

Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the mind of a target market. The result of positioning is the successful creation of a customer-focused value proposition. Table 9.1 shows how three firms have defined their value propositions.

A.                Competitive frame of reference –

1.                  The product or sets of products with which a brand competes with and the competitive analysis focus.

2.                  Category membership – sets of products with which a brand competes with and which function as close substitutes.

3.                  Examine competition from both an industry and a market point of view.

a)                  Industry – group of firms offering a product or class of products that a re close substitutes for one another.

b)                  Market approach – define competitors, as companies that satisfy the same customer need. Refer to the Marketing Insight: High Growth through Value Innovation.

c)                  Dynamic markets may require multiple frames of reference

B.                 Points-of-parity and points-of-difference

1.                  Points-of-difference (PODs) are attributes or benefits consumers strongly associate with a brand, positively evaluate, and believe that they could not find to the same extent with a competitive brand (e.g., Toyota - reliability, FedEx - guaranteed overnight delivery, Miller Lite Beer - less calories with a great taste)

2.                  Three criteria determine whether a brand association can function as a point-of-difference

a)                  Desirable to consumer

b)                  Deliverable by the company

c)                  Differentiating from competitors

3.                  Points-of-Parity (POPs) are associations that are not necessarily unique to the brand but may be shared with other brands

a)                  Category POPs - associations consumers view as necessary to be a legitimate and credible offering within a certain category but not necessarily sufficient for brand choice. Category POPs are dynamic

b)                  Competitive POPs - associations designed to negate competitors’ points-of-difference   

C.                 Choosing POPs and PODs

1.                  Consumers must find POD desirable and perceive the organization to also have the capability to deliver

2.                  Consumer criteria for POD - relevant, distinct, believable

3.                  Organization criteria for delivering POD - feasible and capable, communicability, sustainability

4.                  Perceptual Maps can be used as part of the positioning strategy. Perceptual Maps provide quantitative portrayals of market situations and consumer perceptions along various dimensions. Refer to Figure 9.1 for an example of a Perceptual Map using a hypothetical beverage market.

D.                Brand Mantras

1.                  Articulation of the brand essence and promise, communicating what the brand is and is not in short, three-to-five word phrases.

2.                  Define the product or benefit space

3.                  Clarifies what the brand is so employees can act accordingly

4.                  Good brand mantras communicate the category and clarify the brand’s uniqueness. 

E.                 Establishing Brand Positioning- ensure that consumers understand what the brand offers and what makes it a superior competitive choice.  Typical approach is to inform consumers of a brand’s category membership before stating its point-of-difference. Several ways to convey a brand’s category membership:

1.                  Announce category benefits - define how specific product or service offerings link to benefits perceived by the respective category

2.                  Comparing to exemplars - associate brand with known brands in category

3.                  Rely on product descriptor - descriptor that follows a brand’s name can convey category origin (e.g. XM Satellite Radio places XM in category that delivers radio via satellite)

III.              Differentiation Strategies – Competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match. A leverageable advantage can be used as a springboard to new advantages. TO be effective positioned, customers must any competitive advantage as a customer advantage. 

A.                Dimensions of differentiation - products will vary in their ability to be differentiated. They can be differentiated via:

1.                  Employee differentiation – e.g. better trained employees who provide superior customer service

a)                  Competence (skill and knowledge)

b)                  Courtesy (respect and consideration)

c)                  Credibility (trustworthy)

d)                  Reliability (consistent and accurate performance). Also note that    reliability is probably the number one priority for most consumers

e)                   Responsiveness (quick to respond)

f)                   Communication (ability to understand consumer need)

2.                  Channel differentiation – optimize value chain to maximize value delivered to customer

a)                  Amount of market coverage

b)                  Expertise present throughout channel

c)                  Channel performance as a whole, which requires optimal integration relative to differentiation strategy

3.                  Image differentiation - appeal to consumer’s social and psychological needs.

4.                  Services differentiation - deliver more effective and efficient solutions to consumers

a)                  Ordering ease

b)                  Delivery - speed, accuracy, and care

c)                  Installation - making a product operational

d)                  Customer training - instruction on proper and efficient use

e)                  Customer consulting - data, information systems, and advising services

f)                   Maintenance and repair - keeping products in good working order

B.                 Rational and emotional Components of Differentiation – Brand positioning should have both rational and emotional components with POD’s and POPs that appeal to the head and the heart. Monitor the following:

1.                  Share of Market – competitor’s share of the target market

2.                  Share of mind – Percentage of customers who named the competitor in responding to the statement, “Name the first company that comes to mind in this industry”.

3.                  Share of Heart – Percentage of customers who named the competitor in responding to the statement, “Name the company from which you would prefer to buy the product”.

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IV.              Competitive Strategies for Market Leaders – Opening discussion references Figure 9.2, “Hypothetical Market Structure” and demonstrates relationships and strategies for Market Leader, Market Challenger, Market Follower and Market Nichers. This is an opening discussion. This section then contains more detail on Market Leader strategies. The other market positions are discussed in a subsequent section.

A.                Expanding the Total Market

1.                  When the total market expands, the dominant firm usually gains the most.

2.                  A Market Leader growth may grow by looking for new customers by using different strategies

a)                  Market-penetration e.g. those in the existing market who might use but do not

b)                  New-market segment strategy i.e. those who have never used it

c)                  Geographical-expansion strategy i.e. those who live elsewhere

3.                  A Market Leader may also try to increase the amount, level, or frequency of product consumption

a)                  Increase package size generate more consumption

b)                  Package or product redesign may trigger more impulse purchases

c)                  To increase frequency

(1)               Identify additional opportunities to use the brand in the same way

(2)               Identify completely new and different ways to use the brand

B.                 Protecting Market Share – dominant firm must actively defend its position

1.                  Position Defense – occupy the most desirable market space in consumer’s minds

2.                  Flank Defense – erect outposts to protect a weak front or support a possible counter attack

3.                  Preemptive Defense – attack competitor (s) first, achieve broad market envelopment that signals competitors not to attack

4.                  Counteroffensive Defense – meet attacker frontally

a)                  Crush competitor by subsidizing lower prices for the vulnerable product with revenue from more profitable products

b)                  Preannounce an upgrade to prevent customers from buying competitor product

c)                  Lobby for political action to inhibit the competition

5.                  Mobile Defense – stretch into new territories

a)                  Market Broadening – shifts focus fro the current product to the underlying generic need e.g. petroleum company recasts itself as “energy” company

b)                  Market Diversification – shift into unrelated industries

6.                  Contraction Defense – in planned contraction, give up weaker markets and reassign resources to stronger ones

C.                 Increasing Market Share – Because the cost of buying higher market share may far exceed its revenue value, firms should consider four factors first:

1.                  The possibility of provoking antitrust action – frustrated competitors are likely to cry “monopoly” and seek legal action

2.                  Economic cost

a)                  Cost of gaining further share might exceed the ensuing value

b)                  Pushing for higher share is less justifiable when there are unattractive segments, buyers who want multiple sources of supply, high exit barriers and few economies of scale

c)                  Increase profitability by selectively decreasing market share in weaker areas

3.                  Pursuing the wrong marketing activities

a)                  Firms that gain share typically outperform competitors in new-product activity, relative product quality and marketing expenditures

b)                  Cutting prices may not yield significant gains because competitors may match price cuts

4.                  Effect of increased market share on actual and perceived quality – too many customers increase the risks of strained resources resulting in overall poor product quality and service delivery

V.                Other Competitive Strategies - firms trailing market leader can attack the leader in an effort to further market share, i.e. be a market challenger, or settle for being a market follower.

A.                Market Challenger Strategies

1.                  Frontal attack – match opponents marketing mix. Price cuts may work if opponent does not retaliate and if the challenger can convince the market that is mix is equal to the leader’s.

2.                  Flank attack

a)                  Identify shifts that are causing gaps the fill gaps

b)                  Attractive to challenger who is weaker than leader

3.                  Encirclement attack – launch offensive on multiple fronts

4.                  Bypass attack –shift battle ground to a place where challenger has advantage

a)                  Diversify into unrelated products

b)                  Diversify into new geographical markets\leapfrog into new technologies

5.                  Guerrilla attack – small intermittent attacks, conventional and unconventional. For example:

a)                  Selective price cuts

b)                  Intense promotional blitzes

c)                  Occasional legal action

B.                 Market Follower Strategies – not a financially attractive strategy

1.                  Can be profitable strategy as leader bears expense of developing new product, establishing distribution and informing the market

2.                  May be attractive strategy when:

a)                  Few opportunities exist for product and image differentiation

b)                  Service quality is comparable

c)                  High price sensitivity exists

3.                  Counterfeiter strategy – duplicating leader’s product and sell on black market

4.                  Cloning strategy – emulate leader’s solutions with slight variations

5.                  Imitating strategy – copy a few things from the leader but maintain differentiation of packaging, advertising, pricing or location

6.                  Adapter strategy take leader’s products and adapt or improve them for different markets

C.                 Market-Nicher Strategies (refer to Table 9.2 for Niche specialist roles)

1.                  Avoid competing with larger firms by targeting small markets of little or no interest to larger rivals

2.                  Larger firms may use niche strategy for some business units

3.                  Risks – niche may “dry-up” or be attacked

4.                  Nichers must create new niches, expand existing niches and protect niches

VI.              Executive Summary

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This discussion focuses on the uses of various sources of information for marketing. It is useful to update the examples so that students will be able to identify readily with this concept based on their general knowledge of the techniques, companies, and products involved in the lecture/discussion. There are many different approaches to competitor research. Marketers should consider the process and implications.

·         To stimulate students to think about the need for and value of competitive analysis.

·         To present points to consider in proceeding with development of a competitive analysis program.

·         Recognize some of the better sources of information for various marketing questions.

Introduction

In the textbook and several of the applications exercises, it is clear that segmentation is an important element in managing a new or existing market. Image, perceived rank, customer perception, product features, and competitive advantages are the primary tools for positioning a product in the marketplace. A firm may position its product in numerous ways, by attributes, price, quality, use/application, and type of end user, all with respect to a competitor(s). To turn this into a positioning strategy, it is essential to identify the competitors to assess the customer’s perception of the competitors, identify competitive positions, research and understand the customers, choose the positioning strategy, and monitor the effectiveness of the positioning choice.

There are many examples of positioning strategies that have either succeeded or failed. The business literature is replete with winners and losers, but the process by which the positioning strategy has been implemented proves by far to be the most critical variable for determining success.

In the marketplace, many companies do a first class job of developing a great product, great channels, great pricing, and great advertising. You might say—Wow! That is great. However, many of these companies not only lose in the marketplace, but they lose big. The reasons may be management, financial, etc., but when we get right down to it the answer may be much more interesting. The critical variable may be the competitive intelligence that the firm failed to get at the right time, with the right detail. In this discussion, we will look at some of the issues and questions behind choosing the right sources as well as approaches that might be useful in preparing the competitive intelligence program that will do the job.

First, the Kotler text gives some excellent examples of how to scan the competitive environment. As part of this framework, it also is useful to determine where to get the information, that the analyst is able to determine where and how to use the questions asked, and that the data developed is based on the marketing and strategic plans, not just collected in a random manner.  This requires knowledge of a number of variables and then bringing it all together to be utilized in the firm’s marketing positioning effort.  Remember, to achieve an effective competitive analysis it is essential to place the process in perspective.

The Positioning Concept

Positioning as a strategy started with positioning the product itself. Positioning refers to efforts to position the product in the mind of the consumer. As Reis and Trout pointed out in the 1960s and 1970s, the United States is very over-advertised, and any firm or product that seeks a more effective market position will have to achieve mental positioning before undertaking further marketing activity. If the position achieved is too general, the resulting image will be of no value to the customer who will not be able to differentiate clearly between the product choices. For example, a shampoo cannot maintain a strong position by claiming as its primary benefit its ability to get the consumer’s hair clean. 

Many companies have repositioned, or are attempting to reposition, their products in recent years. A growing number of firms have repositioned based on one or more service variables. This may appear on the surface as incongruous, but when one recognizes the level of competition in the United States and the world today, it makes sense.  Declining profit margins and the need to differentiate many products that have become virtual commodities make it easy to see the value of repositioning so that the consumer sees the entire product and service package in the broadest sense. Since a lawyer or hospital, for example, generally is distinguishable on any basis other than service, many providers in these areas today are focusing on a specialty or specific service in their marketing as the means to get the customer mentally repositioned on who and what they are, compared to their competitors.

To conclude, the primary means for promoting differences include focusing on those differences that are important, distinctive, superior, communicable, preemptive, affordable, and profitable.

Note to the Instructor: Break the class into several groups and ask each group to discuss and identify several (four to six) brands and products/services within one or more chosen goods or service industries. The students should then evaluate the positioning activities and/or advertising used to differentiate, position, and reposition these goods and services. What they may find is that virtually everyone will agree on the ways in which the chosen products are positioned, but the larger challenge has to do with how to position or reposition in the future. For example, few would argue that Trix is positioned as a kid cereal or that Colgate fights cavities. Nevertheless, there likely will be disagreement about what Colgate (P&G) is going to do now that it is losing market share, and fighting cavities is a less important position than whiter teeth and other positioning variables used by the competition. This presents an applied example of positioning in action. Some industries to consider are: beverages, toothpaste, retailers, snack chips, entertainers, hospitals, lawyers, and ice cream. 

Competitive Analysis  

The logical starting point for the strategy analysis is to understand effectively the competitive structure and attractiveness of the industry. It is important to recognize that some industries are and will be more profitable than others. It is important also to know the real strengths of the industry, and the firms within the industry, not only in overall terms but also in specific detail. Many times appearances can be deceiving. Consider, for example, companies that project a great public relations image but in reality are quite the opposite. (Enron could serve well as an example).  

A logical overview of this process comes from Porter’s five basic forces of competition:

·         Threat of new entrants

·         Rivalry among existing competitors

·         Bargaining power of suppliers

·         Bargaining power of buyers

·         Threat of substitutes

What determines the strength of each of these five forces in the industry? The process is shaped by a number of underlying structural determinants. It is important to remember that any of the forces that undermine the structure of an industry likely will cause profitability to decline. A good example is the dot-coms that raced to steal markets from the existing well-organized physical retailers but had little to offer except investor hype. Their inability to show quality and superior results led to investor disenchantment and the loss of confidence that they could produce a profit against the existing competition. This, in turn, led to massive dot-com failures, consolidation in the industry, and finally the successful entrance of many major retailers with name, cash, and ability to stay the course. 

To begin this process, the firm should develop a complete evaluation of the competitive framework and the specific competition. This would include a detailed compilation of the competitors, both real and potential, along with their products, marketing capability, service, production strength, financial strength, and management. Next, you must detail where each firm, including your own, fits into the industry in terms of products, marketing capability, service, production strength, financial strength, and management.  At this point, you should be able to develop a thorough analysis of the following, for the past, present, and future:

·         Degree of industry concentration

·         Changes in type and mix of products

·         Market “segments” in the firm and industry (and changes)

·         Companies that have left and/or entered the industry (and why)

·         Industry market share changes (and why – technology, substitution, etc.)

·         Company market shares and share changes

·         New technology substitution

·         Each firm’s vulnerability to new technology

In addition to these specific competitive characteristics, the firm should focus on the various financial, economic, technological, and socio-political factors in the industry environment. This information is available through a variety of sources, including:

·         Company Web sites and literature

·         Industry trade show observation and contacts

Online databases, including Lexis-Nexis, EBSCO, First Source, PROMPT, Trade & Industry, and Investext, along with various other online sources, such as the TV networks, Hoover, investment houses (Schwab, Merrill Lynch, etc.), The Wall Street Journal (WSJ), BusinessWeek (BW), etc.

It is important to understand each firm’s position within the industry. Companies in large or small industries have varying levels of profitability, and it is important to understand what it takes to be a superior performer in industry. Information that may assist in this process might include some or all of the following:

·         How the industry might change, in the short to long term.

·         How the competing firms within an industry differ in the way in which the competitive forces influence each of the competitors.

·         Identify the companies that have the power to shape the industry. These companies could either make the industry or cause the demise.

·         New product development potential within the industry and which firms have the ability to make it happen.

This analysis should first provide a detailed and technical description of the products and services offered, including product mix, depth, and breadth of product line. 

This should lead to a clear understanding and listing of market position by product, citing product strengths and weaknesses individually and in the overall product line.

Among the sources for this information are company Web sites, company product literature, WSJ, BW, and online databases including DIALOG, LEXIS-NEXIS, and Hoover.

Another important area is R&D expenditures (industry and by company), analysis of each company’s research and development expenditures and capabilities, along with a run down on technical personnel and expertise. Sources for this information include EBSCO, LEXIS-NEXIS, DIALOG, Hoover, PROMPT, Trade & Industry, and Investext.

Next, it is important to understand clearly who holds which patents (current and pending), the product standards and specifications, including a quality and technical analysis. Some of the better sources for this could include: Claims, World Patent Index, Derwent, and IFI/Plenum Claims. Company Web sites and trade show industry contacts also can provide valuable clues in this part of the effort.

The last piece of information needed in this section of the competitive intelligence analysis includes a new product introductions analysis (past, present, and expected). Some good sources for this information include press releases (company/industry Web sites), Predicast New Product Announcements, and sales force contacts. In addition, EBSCO, LEXIS-NEXIS, DIALOG, and various investor sources can provide valuable insight.

Markets

Often, firms have a good overall understanding of the markets they are in or wish to compete in, but they tend to operate with the same attitude and perspectives that have existed in the company and industry for many years. To truly understand the market, the potential new competitor should have a solid grasp of the factors that make and drive the market for the product or service. For example, the firm should have a detailed compendium of the following, by firm within the industry:

·         Market segmentation

·         Customer base (markets targeted, regional sales analysis, penetration, importance to each firm)

·         Profiles of markets and customers (including product mix and sales data by product line)

·         Market growth and potential for future growth

·         Market share by product line

·         Market and geographic areas targeted for expansion

·         Marketing tactics and strategies (4 Ps, especially price and promotion) 

·         Distribution network/channels of distribution  

·         Advertising/marketing/sales efforts including budgets and advertising / marketing firms used

Among the sources that could be used on this activity are: PTS MARS, magazine ads, Prompt, Investext, Trade & Industry, SEC reports, Newspapers, Newswires, BW, Fortune, WSJ, company Web sites, etc.

International/Global

Depending on the expected competition and market activity, it is essential that the competitive intelligence effort include a foreign trade analysis. Without access to some expensive databases that provide specific product sales and market share information, it would be best to look at and evaluate recent order information, government contracts, and individual sales forces overseas (performance, experience, compensation, etc.).  For U.S. firms, StatUSA provides an excellent data source, along with PIERS Exports & Imports, Commerce Business Daily, Newspapers (especially WSJ, NYT, BW), LEXIS-NEXIS, and DIALOG.

Strategy/Decision Making

Identification of marketing and corporate strategies probably is one of the more important requirements of any competitive analysis. For this, most firms need experienced professional input, along with extensive use of the Internet, DIALOG, and other similar tools noted above. Below, we have established for each firm in the industry several important the intelligence needs, followed by selected sourcing:

·         Apparent strategic (long-range) plans, including details of acquisition and divestiture strategy, etc. (SEC filings)

·         New products on the horizon—with indications of a new direction for the company. (PROMPT, press releases, newspapers)

·         Apparent strategic objectives: corporate/divisional/subsidiary company priorities; business unit/segment goals; basic business philosophy/targets. (Suppliers, employees, wholesalers)

·         Analysis of company’s decision-making process. Overall company image and reputation. Company’s ability to change. How will the company look/perform in the future? Anti-takeover measures instituted; the firm’s key success factors? The key objective: Why has the firm been successful, overall? (Shareholder lawsuits pending, LEXIS-NEXIS) 

·         Corporate attitudes toward risk. (legal databases, employees, suppliers)

·         Statements of plans to enter new markets, improve market position, and/or increase market share. (Trade journals, top executive speeches, PROMPT, marketing analysts).

Following this exercise, the analysis should provide a clear understanding of the operation of the industry, and the competing firm should be able to utilize this information to provide an overall planning framework, strategy plan, and marketing plan to take advantage of current and future market opportunities.

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The focus here is on Porter’s framework for preemptive strategy in a marketing setting, and the role and value of this concept in the overall marketing process and strategy for the company.  Many students will be able to identify readily with this concept based on their general knowledge of the companies and products involved in the lecture/discussion.

The discussion begins by considering why a leader firm would consider preemptive strategy as a means of maintaining or increasing the firm’s market position. This leads into a discussion of the implications for the introduction of a preemptive strategy for other firms in the industry in the medium and long-term.

·         Stimulate students to think about the critical issues, pro and con, for a firm when it moves toward adoption of a preemptive strategy approach.

·         To consider how to proceed with a preemptive strategy.

·         To discuss the role of preemptive strategies in helping the firm achieve a position in the industry.

Introduction

Preemptive marketing involves many different possibilities for the leader to assume a defensive or offensive position in the market and with competitors. The primary elements for a firm to consider in a preemptive action are that delay and/or position are critical and that nothing is forever. The firm must recognize that eventually it will be essential to conduct some type of preemptive action if it is to maintain control or partial control of the niche or share position. 

There are many reasons for a leader to adopt a preemptive strategy approach, but often it is a consequence of product maturity. The leader firm recognizes that another firm(s) has developed a superior capability in product or service. While it is possible for a challenger or other strategic planning firm to develop a preemptive position, the reasons tend to be more to disrupt the course of the industry in order to gain advantage against an entrenched leader.

While this can be a very beneficial move, it has a tendency to convey a message to other firms in the industry that the firm could be posing a serious threat to all others in the industry. Firms that have done this, such as People Express, often find they are able to ride the crest of the wave of success only so far and so long, unable to sustain against the retaliatory moves of the industry in general. The primary preemptive objective of the leader or challenger is to maintain or occupy more of the critical or prime positions in the industry. This could include positioning their company or product in the mind of the consumers or distributors, preemptive control of the physical locations for retail facilities, preemptive control of critical raw materials, and/or preemptive control of other resources critical to success in the industry.

IDENTIFYING PREEMPTIVE OPPORTUNITIES

There are many ways to succeed to achieve a preemptive advantage, but identification of a weak link in the commitment from one or more firms in the industry is a good starting point. Among the various positions that Porter demonstrates is the attempt to secure access to raw materials or components. This ploy has worked primarily in those industries where raw or primary industries are critical to operations or success.

In like manner, programs to preempt production equipment have worked effectively. This situation works best where the production equipment involves proprietary processes or patents.  Efforts to dominate supply logistics, such as brokers, transportation, or similar settings, have made an impact. (Note to the Instructor: There are many current examples of these and other preemptive approaches. Current examples, or examples the students may know, will enhance the discussion).

Moving to the various functional area activities, in products and/or services, a number of other preemptive methods are utilized. For example, introducing new product lines and expanding production aggressively, such as IBM and many other firms have done, a competitor attempting to follow the lead of the leader can find it a very expensive and likely losing proposition.

In the area of production systems, there have been in recent years some very good examples of firms able to develop proprietary production methods, expand capacity aggressively, and secure scarce and critical production skills. In addition, in the production systems area, firms that achieve some level of vertical integration with key suppliers can create a considerable barrier for competitors without the same economies of scale.

In the 1980s, IBM, among others, applied the principle that if a firm provides the dominant product design in the industry, it will be able to constantly keep the competitors as followers. Constantly expanding the scope of the product is another variation on this theme. A classic example of this approach is Merrill Lynch with the Cash Management Account of the late 1970s, and many others more recently.

“Positioning” the product more effectively also can be an effective preemptive strategy. This can be an effective and relatively inexpensive strategy, given that there are many different types of positioning in the marketplace, including positioning in the mind of the consumer, distributors, suppliers, and others. (Note to the Instructor: There are and will be many current examples where firms have successfully achieved both challenger and leader positions with various positioning and re-positioning efforts).

Other examples of preemption relate to situations where a firm is able to secure accelerated government agency approval because of strong technical capabilities and/or market recognition. This situation obviously occurs most often in medical and pharmaceutical products or other related areas where there are health and safety concerns.

Keeping the competitors off balance by constantly adding to the market segments in the marketplace is another useful preemptive action. Coke achieved this effectively with New Coke. Even though the company had to return to the earlier formula and publicly back down from the decision, they were able to further fragment the market and take more share from the smaller competitors with fewer resources.

Lastly, it is useful to consider the role of the preemptive in working with distributors. It is appropriate for the leader firm engaging in preemptive marketing to capture key accounts, occupy prime locations, develop preferential access/key distributors, control supply systems and distribution logistics, and insure access to superior service systems. In addition, one of the most important areas for great potential is to engage in educational and promotional activities that are designed to develop the skills of the distributors. This could include a number of activities designed to enhance the capabilities for the distributors to better serve their customers.

Note to the Instructor: In all of these examples there are many firms both winning and losing with this strategy. Clearly among the best examples are firms winning, but there are many situations where those losing can provide an interesting story.

III.

  “Oracle vs. IBM,” BusinessWeek, May 28, 2001, p. 65.

Ask Oracle Corp. CEO Lawrence J. Ellison what keeps him up at night, and the answer might surprise you. It’s not his longtime nemesis, Microsoft Corp. It’s not up-and-comer Siebel Systems Inc. It’s IBM, the awakening tech giant that is vying for the No. 1 spot in the corporate-software world. “He has stopped with that ‘Microsoft is the devil’ stuff,” says Steve Mills, IBM’s software head. “He has moved on to us.”

With Good Reason

Whoever wins in this face-off will grab the lion’s share of the $50 billion corporate-software market for years. For every Oracle product, IBM has a counterpunch: Databases, applications, and e-business foundation software. At the same time, the companies’ philosophies are strikingly different. Oracle’s strategy is to offer customers a complete and tightly integrated package of software—everything a company needs to manage its financials, manufacturing, sales force, logistics, e-commerce, and suppliers. In contrast, IBM top management backed a “best-of-breed” approach in which it stitched together a quilt of business software from various companies, including itself.

The outcome of this battle had huge implications for the software industry. If IBM’s partnering strategy carries the day, it means there will be plenty of breathing room for major application makers such as SAP, Siebel, and PeopleSoft, and for countless upstarts that are bringing Internet programs to market. If Oracle gains the upper hand, it will be pushing its own applications, leaving less room for other players.

To get ahead, IBM is targeted what it sees as Oracle’s chief vulnerability: The Silicon Valley company competes in the applications market with the same software makers it relies on to help sell its databases. IBM has an advantage because it doesn’t sell applications of its own. So, by setting itself up as a neutral party, IBM is able to gain those companies as allies. That boosts its database sales, since application companies often recommend to customers which database they think should be used with their software. IBM’s consultants then sew the software together.

Analysts are split on whether the Oracle or IBM strategy will succeed long-term. They expect both companies to remain among the strongest players in the market. But competitive juices are flowing. Ellison has only disdain for the idea of corporations buying major software components from different suppliers and then hooking them together. “You would never buy a car that way,” he says.

Yet IBM’s momentum has been undeniable. Take Oracle’s flagship database business. Oracle is still in the lead in the non-mainframe piece of the market, with a 50 percent share, according to AMR Research. But Oracle’s database sales have stagnated while IBM’s  surged.  IBM’s sales on high-end computers running the Unix operating system have jumped  substantially, while Oracle’s grew  approximately 1/6 as much In addition, thanks in part to the $1 billion acquisition of Informix Corp., IBM became the second-largest maker of non-mainframe database software, with a 25 percent share.

Ellison, however, is worried about more than databases. Consider the e-business software dubbed “application servers”—a foundation of e-commerce software that processes transactions and connects to back-end programs such as databases. Because of an early jump in the business, IBM owns about 30 percent of the market—three times Oracle’s share—according to Giga Information Group Inc. “The problem is that we didn’t have a very good product until recently,” concedes Oracle Chief Financial Officer Jeffrey O. Henley.

Way Back

There’s a lot of history between Oracle and IBM. In 1970, IBM researchers wrote the first paper on so-called relational databases, creating a programming language called SQL that, for the first time, allowed people to analyze, rather than just store computer information. IBM applied this research to its then-thriving mainframe-database business. That allowed Ellison, then a young mainframe programmer, to exploit its potential in the emerging market for Unix systems.

In the late 1980s, a new wave of business software companies, led by SAP, helped boost Oracle’s fortunes. They built their software to run on Oracle databases even though Oracle sold its own competing applications software. In the mid-1990s, analysts estimate that those software companies helped drive at least 25 percent of Oracle’s database sales.

IBM’s key move was getting out of the application business in late 1999. That freed Big Blue to focus on providing infrastructure technologies, such as databases, and to partner with companies that were leading players in various application markets such as sales-force automation, or supply-chain management.

The new partnership strategy was like a pincer movement against Oracle.  IBM signed also 60 alliances with application makers such as Siebel Systems, Ariba, and PeopleSoft—all Oracle rivals. Many of them, long under Oracle’s thumb, were happy to align with a company they did not compete with, and were rather vocal about their willingness to help IBM. To be sure, Oracle remains an important partner. PeopleSoft and companies like it still sell a majority of their software to run on Oracle’s databases. But IBM began catching up in 2000 when the percentage of Siebel projects that included IBM’s database jumped from 2 percent to 30 percent, while Oracle’s share dropped from 81 percent to 60 percent, according to Siebel.

 In May, 2001, IBM announced that its Internet-infrastructure software would soon support Net standards that make it easier to connect disparate computing systems. That meant that customers would not have to rip out old systems to do e-commerce. “IBM clearly jumped on this growing business early and they had a goal to sign up hundreds more Net-infrastructure software partners, many of which would compete against Ellison & Co.

 IBM went so far in the fight to rent a billboard near Oracle’s Silicon Valley headquarters declaring a “search for intelligent software,” only to find, a few days later, an Oracle billboard retorting “Then you’ve come to the right place.” 

Who’s Cheaper?

The latest fracas is over pricing. Ellison derides IBM software as nothing more than a come-on to sell “services, services, services.” While IBM typically sells its database software at nearly a fifth the price of Oracle’s, Ellison says the consulting work to get it up and running makes IBM products pricier. Some customers beg to differ. Recently, the Toronto Police Service switched from Oracle to IBM database software. A longtime consultant to the police service recommended the switch, noting that Oracle’s database was three to five times as expensive as IBM’s, including IBM’s service fees. The consultant pointed out that: “We could not afford to run Oracle anymore”

To forestall more damage, Ellison introduced the new version of his database, and analysts said the easier-to-use update should cut maintenance costs. However, IBM is, after all, the world’s second-largest software company. And its new partnering strategy could be the beginning of a long nightmare for Ellison.

Tale of the Tape 

For years, IBM and Oracle were like two bullies who played in the same sandbox but rarely bumped into each other. Now, they are increasingly butting heads, competing in nearly every part of the e-business software market. Here’s how they stack up:

Databases
IBM owns the mainframe-database business, and Oracle is the heavyweight everywhere else, with a 50 percent share on Unix servers. Now, IBM is coming on strong. Thanks to its acquisition of Informix in 2001, Big Blue held a 25 percent market share. The winner still should be Oracle by a long shot, though IBM is gaining ground.

Internet Infrastructure Software

IBM was one of the first to jump into this nascent market. It is the second-biggest provider of application servers, with market share of about 30 percent. Oracle has a 9 percent share. Winner: IBM hands down. Oracle is going to have a hard time catching up.

Enterprise Applications

Oracle’s new e-commerce applications have had moderate success. Sales of its business software have grown substantially. Big Blue has decided to stay out of the apps biz, instead partnering with Oracle’s rivals. Winner: A draw. Oracle is picking up steam, but IBM has more friends.

B.     Source:  “Oracle,” New York Times, March 15, 2002.

The first quarter of 2002 was the fifth consecutive quarter that Oracle announced that earnings would not meet its own initial projections. In the previous four quarters, Oracle said that the dot-com collapse was a large factor in the downturn. A company officer acknowledged that Oracle could not continue to use the Internet boom as a basis for comparison. The dot-com comparison went away and Oracle continued the downward trend.  The company instead saw “more fall-off” in other sectors, notably telecommunications. “Customers aren’t doing big deals,” he said. “They aren’t sure their businesses are going to grow.”

While it has been a difficult time for the software industry because it has been hit both by a drop in corporate technology investments, spurred by the recession, as well as delays of new software purchases by companies that have found themselves with more software than they need.

Some industry analysts question whether Oracle is feeling acute pressure in its database business because I.B.M. and Microsoft have increased their efforts. Meanwhile, with the applications business maturing, products from various competitors look similar, making it tough for Oracle to differentiate itself.

IV. 

“Matching Dell”

HBS Case: 799-158     TN: 700-084

Teaching Perspectives

Dell Computer Corporation has enjoyed enormous success in the structurally unattractive market for personal computers by means of its “Direct Model”: Dell takes PC orders directly from customers, builds PCs to order, and ships machines right to end users. Other PC makers, which have traditionally used distributors, resellers, and retail channels to reach customers, now struggle to match Dell’s performance. The case examines in detail the largely futile attempts of four rivals to catch up with Dell.

The case is designed to serve a variety of purposes in a course on business-unit strategy. In declining order of importance, the case does the following:

·         Examines barriers to imitation. Specifically, it illustrates how the corporate fit among numerous activities, such as tradeoffs between positions, historical commitments, and threats of retaliation by other players, can deter imitation. Interestingly, the retaliation threats come from both immediate rivals and downstream “partners.”

·         Illustrates different types of imitation attempts: “Straddling” by Compaq and IBM, “repositioning” by Gateway, and potentially new entry by some members of the channel.

·         Permits a rich discussion of competitive dynamics. One can see, for instance, how the PC industry gradually became structurally unattractive; how activities that conferred advantage at one point in time became a source of disadvantage later; how Dell “sneaked up on” established PC makers; and how the competitive moves of PC makers spark consolidation in the channel and the possibility of backward integration by channel players.

·         Allows students to quantify Dell’s cost advantage and estimate the portion of that advantage which is threatened by the imitation attempts of others.

·         Illustrates, with Dell, a highly consistent and richly elaborated set of activities that, together, yield advantage.

The quantitative analysis of competitive advantage in the case is potentially quite involved. To navigate through it smoothly in class, it may be useful to have several student volunteers submit their analyses the evening before class, then select one or two volunteers who have done a decent job on the assignment, copy their analyses onto overhead slides, and ask them to lead the class through that part of the discussion. This approach focuses class time on interpretation of the analysis rather than discussion of mathematical mechanics.

Recommended Readings

Michael E. Porter and Jan W. Rivkin, “Activity Systems as Barriers to Imitation,” Harvard Business School Working Paper 98-066, 1998.

Jan W. Rivkin, “Imitation of Complex Strategies,” Management Science (46), 2000, pp. 824-844.

Michael E. Porter, “What Is Strategy?” Harvard Business Review (74:6), November-December 1996, pp. 61-80.

Pankaj Ghemawat, “Anticipating Competitive and Cooperative Dynamics,” Strategy and the Business Landscape (Reading: Addison-Wesley, 1999), pp. 75-110.

For further background on Dell, see:

Das Narayandas and V. Kasturi Rangan, “Dell Computer Corporation,” Harvard Business School Case 596-058, 1996.

Kasturi Rangan and Marie Bell, “Dell Online,” Harvard Business School Case 598-116, 1998.

For a discussion of competitive positioning, especially quantitative analysis of competitive advantage, see

“Creating Competitive Advantage” (HBS 798-062).

Questions

1.      How and why did the personal computer industry come to have such low average profitability?

2.      Why has Dell been so successful despite the low average profitability in the PC industry?

3.      Prior to the recent efforts by competitors to match Dell (1997-1998), how big was Dell’s competitive advantage? Specifically, calculate Dell’s advantage over the team of Compaq and a reseller in serving a corporate customer.

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