In general, there are three aspects to the strategy of firms, regardless of the level of t...
 The structure-conduct-performance model (Bain 1956) attempts to explain "why some
industries, on average, are more ...
advantage in the market) rather than as a condition leading to equilibrium. This argument is
supported by the "Austrian" s...
 The third-factor explanation. A set of third set of factors (unobservables such as
luck, uncertainty, or manage...
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Popular Theories in Marketing Strategy

Published on: Mar 4, 2016

Transcripts - Popular Theories in Marketing Strategy

  • 1. THEORIES IN MARKETING STRATEGY1 In general, there are three aspects to the strategy of firms, regardless of the level of the strategy: content, formulation process, and implementation. Strategy content (what the strategy is) refers to the specific relationships, offerings, timing, and pattern of resource deployment planned by a business in its quest for competitive advantage (e.g., generic strategy of cost leadership versus differentiation; push versus pull strategy). Strategy formulation process (how the strategy is arrived at) refers to the activities that a business engages in for determining the strategy content (e.g., market opportunity analysis, competitor analysis, decision-making styles). Strategy implementation (how the strategy is carried out) refers to the actions initiated within the organization and in its relationships with external constituencies to realize the strategy (e.g., organization structure, coordination mechanisms, control systems). The body of marketing literature termed as strategic market planning primarily focuses on the content of strategy and process of strategy formulation at the business unit level and the corporate level, and the role of marketing in these spheres of organizational activity. Firms initiate strategic actions to achieve competitive advantage. However, these actions are shaped, and their outcomes influenced, by the external environment and internal environment of the firms. Institutional theory suggests that the actions of firms and the outcomes of these actions are influenced by the knowledge systems, beliefs, and rules that characterize the context of the organization.  The firm is embedded in a general environment comprising (a) the institutions that lay the guidelines to shape the behavior of firms and (b) macro-societal factors such as the prevailing culture.  The firm is embedded in an industry environment that comprises the actors within an industry such as suppliers, customers, competitors, and channel partners. The nature of the relationships among these industry stakeholders influences the actions that a firm can initiate in pursuit of competitive advantage  The firm has an internal environment that comprises its unique sets of skills and resources; collective beliefs about the market, competition, and industry (e.g., shared mental models; and culture. Corporate strategy, business strategy, and functional strategies such as marketing strategy interact to shape the competitive advantage of individual businesses in a firm's portfolio. It is the confluence of these strategies that determines the extent to which a particular business is able to achieve and sustain a competitive advantage. This competitive advantage, in turn, affects the market-based performance and financial performance of the businesses. A number of competing and complementary theories in industrial organization economics, business policy and strategy, and marketing provide valuable insights into the determinants of performance at different levels. For instance: 1 Varadarajan, Rajan P. and Satish Jayachandran. (1999) “Marketing strategy: An assessment of the state of the field and outlook”, Academy of Marketing Science, (Spring), 120-143
  • 2.  The structure-conduct-performance model (Bain 1956) attempts to explain "why some industries, on average, are more profitable than others."  The efficiency perspective (Demsetz 1973) provides insights into "why some firms in an industry are more profitable than others."  The works of Porter (1980,1985) provide insights into "how the structural characteristics of an industry and the competitive strategy pursued by a business jointly determine the performance of a business.”  The resource-based view of the firm (Barney 1991; Rumelt 1984; Wernerfelt 1984) attempts to explain superior firn/business performance in terms of firm-specific skills and resources that are rare, valuable, nonimitable, and characterized by absence of equivalent substitutes.  Matrix approaches to portfolio analysis and planning, such as the Boston Consulting Group (BCG) growth-share matrix and the market attractivenessbusiness competitive position matrix, provide insights into "why some businesses in a multibusiness firm's portfolio are more profitable than others."  The work of Peters and Waterman (1982) is representative of research that attempts to shed insights into content, process, and implementation factors that affect long-term performance of firms at a more general level regardless of the industry in which they operate. Important Theories in Marketing Strategy GAME THEORY: Game-theoretic models assume that firms are (hyper)rational utility maximizers, where rationality implies that they strive to achieve the most preferred of outcomes subject to the constraint that their rivals also behave in a similar fashion (Zagare 1984). While there may be uncertainty regarding the expectations and actions of its rivals, a rational firm is expected to overcome uncertainty by forming competitive conjectures, subjective probability estimates of rivals' expectations and behavior. In effect, game-theoretic models assume intelligent firms that can put themselves into the "shoes" of their rivals and reason from their perspective. SIGNALING: Competitive signals are "announcements or previews of potential actions intended to convey information or to gain information from competitors". Competitive behavior is often influenced by signals sent by competitors. Signaling could also place the firm that sends the signal at a disadvantage. For example, signals that provide competitors with advance information about the firm's intentions could hurt the competitive position of the firm, and signals that are not followed through (cheap talk) could hurt the competitive reputation of the firm. Furthermore, signaling that is interpreted as predatory behavior may trigger antitrust review into the behavior of the firm. INNOVATION: Innovation and R&D for the long-term profitability of the firm is viewed as a process of "creative destruction" (through innovation that changes the very nature of competitive
  • 3. advantage in the market) rather than as a condition leading to equilibrium. This argument is supported by the "Austrian" school of strategy (Jacobson 1992), which suggests that the business environment is inherently dynamic and therefore characterized by uncertainty and disequilibrium. The Austrian school views profits in such an environment as a consequence of discovery and innovation. Such discovery and innovation do not necessarily mean drastic changes of a discontinuous (Schumpeterian) nature alone. Rather, they span a continuum encompassing innovations with the potential to provide the firm with a differential advantage over its competitors (Jacobson 1992) such as reformulation of a product, developing new processes for manufacturing a present product, and developing new channels of distribution. PRODUCT QUALITY: The economic view of quality is "any aspect other than price that influences the demand curve of a product". Combining these two notions, quality can be construed as any nonprice aspect of a product that signifies its superiority and causes a shift in its demand curve. Ideally, a business would want to sustain a higher price as well as a higher market share but these two objectives may not always be compatible. That is, if the business were to follow a niching strategy by offering a high quality product at a high price targeted at a small market niche, it effectively excludes itself from the contest for market share dominance in the broader market. The ability of a business to charge higher prices for higher quality is contingent on the ease with which consumers can determine the quality of the product. When quality is uncertain, consumers tend to use price as an indicator of quality. This suggests a bidirectional relationship between quality and price, in which perceived quality positively influences price under conditions of greater information availability, and price positively influences perceived quality under conditions of lower information availability. MARKET SHARE: The structure-conduct-performance model posits a positive relationship between industry concentration and profitability. Evidence also suggests that the relationship between market share and profitability is robust across different definitions of market share, different sampling frames, and controls for accounting method variation.  The quality explanation. In markets beset by uncertainty and imperfect information about product performance, the high market share of a brand acts as a signal of superior quality to consumers. In such markets, consumers are likely to have greater confidence in high market share brands. This enables high market share brands to command a price premium over lower market share brands and thereby enhance their profitability.  The market power explanation. Businesses with a high market share, by exercising their market power-the ability to command a price premium, lower costs by negotiating for more favorable terms (than their competitors are able to) with vendors and marketing intermediaries, and obtaining favorable shelf placements from retailersenhance their profitability.  The efficiency explanation. The scale and experience effects associated with market share lead to lower costs and thereby enable a business with a high market share to earn higher profits than its competitors with a low market share.
  • 4.  The third-factor explanation. A set of third set of factors (unobservables such as luck, uncertainty, or managerial insight) may play a crucial role in helping a business achieve a high market share as well as superior performance. MARKET PIONEERING: a market pioneer or first-mover refers to a business being either the first to introduce a new product, to employ a new process, or to enter a new market. Market pioneering advantage refers to the competitive advantage associated with being the first to enter a market. The economic-analytical perspective. According to this perspective, a market pioneer is able to achieve sustainable competitive advantage as a result of entry barriers. The behavioral perspective. Behavioral theories typically explain pioneering advantage at the product or brand level in terms of the role of learning in consumer preference formation. This perspective suggests that a pioneer can shape the beliefs of consumers about ideal brand attributes and preferences in its favor. MARKET ORIENTATION: The marketing concept, the normative philosophy that underlies modern marketing thought, suggests that to be successful, firms should determine customers' needs and wants, and satisfy them more effectively than their competitors do. Narver and Slater (1990) define market orientation from a cultural perspective as "the organization culture that most effectively and efficiently creates the necessary behaviors for the creation of superior value for buyers and, thus, continuous superior performance for the business". Market orientation is conceptualized in terms of three dimensions: customer orientation, competitor orientation, and interfunctional coordination. Kohli and Jaworski (1990) define market orientation from a behavioral perspective as "the organization wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization wide responsiveness to it".

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