Market structures (Monopoly, Oligopoly)

A continuum of Market Structures

The relationship between individual firms and the relevant market as a whole is referred to as the industry’s market structure and depends upon:

1. The number and relative size of firms in the industry.
2. The similarity of the products sold by the firms of the industry; that is, the degree of product differentiation.
3. The extent to which decision making by individual firms is independent, not interdependent or collusive.
4. The conditions of entry and exit. (McGuigan, Moyer, and Harris, 2011)

Four specific market structures are often distinguished:

-       Pure competition

-       Monopolistic competition

-       Oligopoly  and

-       Monopoly (McGuigan, Moyer, and Harris, 2011)

Pure competition:

A market structure characterized by a large number of buyers and sellers of a homogeneous (nondifferentiated) product. Entry and exit from the industry is costless, or nearly so. Information is freely available to all market participants, and there is no collusion among firms in the industry.

Monopolistic competition:

A market structure characterised by-

-       Many small sellers (as under perfect competition, the exact number of firms cannot be stated.)

-       A differentiated product (Creating  real or apparent differences between goods and services. It is a close but not perfect substitutes), and

-       Easy market entry and exit (Unlike a monopoly, firms in a monopolistically competitive market face low barriers to entry. But entry into a monopolistically competitive is not quite as easy as entry into a perfectly competitive market. Because monopolistically competitive firms sell differentiated products, it is somewhat difficult for new firms to become established). (Tucker,2009)

Oligopoly :

A market structure in which the number of firms is so small that the actions of any one firm are likely to have noticeable impacts on the performance of other firms in the industry. It is a market structure charactiresed by- few sellers, either a homogeneours or differentiated product, and difficult market entry.

Monopoly: 

A market structure characterised by- a single seller, a unique product and impossible entry into the market. Unlike perfect competition, there are no close substitutes for the monopolist’s product.

Monopoly means that a single firm is the industry. One firm provides the total supply of the product in a given market. Local monopolies are more common real-world approximations of the model than national or world market monopolies. For example, campus bookstore, London transports.

As there are no close substitute products, the monopolist faces little or no competition. In the case of monopoly, extremely higher barriers make it very difficult or impossible for new firms to enter an industry. (Tucker,2009; McGuigan, Moyer, and Harris, 2011)

Bibliography:

McGuigan, J., Moyer, R. and Harris, F. (2011), Managerial Economics: Applications, Strategy and Tactics ,12^th ed, USA: South-western, Cengage Learning

Tucker, I. B. (2009), Survey or Economics, 6^th ed, USA: Cengage Learning

Porter's 5 Forces Model

Porter’s 5 Forces Model

Michael E. Porter’s well known framework, known as the five forces model, helps managers to analyse competitive forces in the industry environment to identify opportunities and threats. The forces that shape competition within an industry are-

-       The risk of entry by potential competitors [Threat]

-       The intensity of rivalry among established companies within an industry [Rivalry]

-       The bargaining power of buyers [Power]

-       The bargaining power of suppliers, and [Power]

-       The closeness of substitute to an industry’s products [Threat]

It can also simply be said that, 2 Power + 2 Threat + 1 Rivalry = 5 Forces

Risk of Entry by Potential Competitors:

Potential competitors are companies that are not currently competing in an industry but have the capability to do so if they choose. For example, cable television companies have currently emerged as potential competitors to traditional phone companies. New digital technologies have allowed cable companies to offer telephone service over the same cable that transmit television shows.

The intensity of rivalry among established companies within an industry:

Rivalry is concerned with the intensity of competition within the industry. There is a high level of rivalry if competitors are continually reducing prices, introducing new products and advertising. It identifies the existing barriers, product differences, brand power, growth rate in industry, fixed costs among firms, concentration of firms in market share, etc. (Mehta, 2008)

The bargaining power of buyers:

An industry’s buyers may be the individual customers who ultimately consume its products (its end users) or the companies that distribute an industry’s products to end users, such as retailers and wholesalers. For example, whole soap powder made by Procter & Gamble and Unilever is consumed by end users, the principal buyers of soap powder are supermarket chains and discount stores, which resell the product to end users. The bargaining power of buyer refers to the ability of buyers to bargain down prices charged by companies in the industry by demanding better product quality and service. By lowering prices and raising costs, powerful buyers can squeeze profits out of an industry. Thus, powerful buyers should be viewed as a threat and vice versa. (Hill, and Jones, 2010),

                                                                                       

The bargaining power of suppliers:

The organisations that provide inputs into the industry, such as material, services, and labor (which may be individuals, organisations such as labor unions, or companies that supply contract labor).  The more the demand of a product, the more it drives the price of the suppliers up in a market-based system. Greater uniqueness of an input allows a higher price to be charged and decreases the ability of client firms in the industry to switch easily between suppliers. A credible threat of a backward integration (that is, owning own supply) will weaken the power of suppliers. (Ahlstrom, and Bruton, 2010)

The closeness of substitute to an industry’s products:

The more brand loyal the customers are, the less the threat of substitutes and the higher in the incumbent’s sustainable profitability will be. Also, the more distant the substitutes outside the relevant market, the less price responsive will be demand, and the larger will be the optimal markups and profit margins. For example, Flavored and unflavored bottled water and other noncarbonated beverages such as juice, tea, and sports drinks are growing as much as eight times faster that U.S. soda sales. This trend will tend to erode the loyalty of Pepsi and Coke drinkers. If so, profitability will decline. (McGuigan, Moyer, and Harris, 2011)

Bibliography:

Ahlstrom, D. and Bruton, G. (2010), International Management: Strategy and Culture in the Emerging World, USA: Cengage Learning

Hill, C. and Jones, G. (2010), Strategic Management Theory: An Integrated Approach, 9^th ed, USA: South-Western Cengage Learning.

McGuigan, J., Moyer, R. and Harris, F. (2011), Managerial Economics: Applications, Strategy and Tactics ,12^th ed, USA: South-western, Cengage Learning

Mehta, S. S. (2008), Commercializing Successful Biomedical Technologies: Basic Principles for the Development of Drugs, Diagnostics and Devices, UK: Cambridge University Press

Mclvor, R. (2005), The Outsourcing Process: Strategies for Evaluation and Management, UK: Cambridge University Press

Porter's Generic Strategies/ Competitive Strategies

Business Strategy: It focuses on improving the competitive position of a company’s or business unit’s products or services within the specific industry or market segment that the company or business unit serves. Business strategy is extremely important because research shows that business unit effects have double the impact on overall company performance than do either corporate or industry effects. Business strategy can be competitive (battling against all competitors for advantage) and/or cooperative (working with one or more companies to gain advantage against other competitors).

Porter’s Competitive Strategies:

Competitive strategy arises the following questions:

-     Should we compete on the basis of lower cost (and thus price), or should we differentiate our products or services on some basis other than cost, such as quality or service?

-       Should we compete head to head with our major competitors for the biggest but most sought-after share of the market, or should we focus on a niche in which we can satisfy a less sought-after but also profitable segment of the market?

Michael Porter proposes two “generic” competitive strategies for outperforming other corporations in a particular industry are- lower cost and differentiation.

These strategies are called generic (broad) because they can be pursued by any type or size of business firm, even by not-for-profit organisations:

-       Lower Cost Strategy: It is the ability of a company or a business unit to design, produce, and market a comparable product more efficiently than its competitors.

-       Differentiation Strategy: It is the ability of a company to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service.

[****N.B:****

Porter further proposes that a firm’s competitive advantage is an industry is determined by its competitive scope, that it, the breadth of the company’s or business unit’s target market. Before using one of the two generic competitive strategies (lower cost or differentiation), the firm or unit must choose the range of product varieties it will produce, the distribution channel it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. This should reflect and understanding of the firm’s unique resources.]

Combining these two types of target markets with the two competitive strategies results in the four variations of generic strategies.

-       When the lower-cost and differentiation strategies have a broad mass-market target, they are simply called cost leadership and differentiation.

-       When they are focused on a market niche (narrow target), however, they are called cost focus and differentiation focus.

[****N.B.****

Although research does indicate that established firms pursuing broad-scope strategies outperform firms following narrow-scope strategies in terms of ROA (Return on Assets). New entrepreneurial firms have a better chance of surviving if they follow a narrow-scope rather than a broad-scope strategy.]

Cost leadership:

It is a lower-cost competitive strategy that aims at the broad mass market and requires ‘aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on’. Because of its lower costs, the cost leader is able to charge a lower price for its product than its competitors and still make a satisfactory profit. Although it may not necessarily have the lowest costs in the industry, it has lower costs than its competitors. For example: Wal-Mart (discount retailing), McDonald’s (fast-food restaurants), etc.

Differentiation:

It is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design or brand image, technology, features, a dealer network, or customer service. Differentiation is a viable strategy for earning above-average returns in a specific business because the resulting brand loyalty lowers customers’ sensitivity to price. Instead costs can usually passed on to the buyers. Buyer loyalty also serves as an entry barrier; new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. For example: BMW (automobiles), Nike (athletic shoes), etc.

Bibliography:

Wheelen, T. L., Hunger, D. and Thomas, L. V. (2010), Concepts in Strategic Management and Business Policy, 12^th ed, India: Dorling Kindersley (India) Pvt. Ltd.

Marketing Planning-2

Marketing Planning

Introduction: All businesses, from the large corporation to the solely-owned and operated small business, need a plan to direct their future actions and make the most of scarce marketing resources. Effective planning is the only way to assure that the businesses are making the most use of the resources that they commit to marketing.

Marketing Plan:

It is the guide, much like a blue print guides a builder or a chart guides a pilot. It shows where the business is now, where it wants to end up, and a route to get the business to that destination.

A marketing plan has three major sections-

-       A situation alanysis: It describes the current business environment. It answers the questions- “Where are we?” and “Where are we going?”. Through answering this questions decision makers identify and examine factors that affect the business.

-       An objective section: It answers the questions- “What do we want to do?”. Priorities must be established to direct the allocation of personnel, effort and resources.

-       A strategy and action plan: It outlines the marketing strategies that will be implemented and the specific actions that will be needed to implement those strategies and accomplish each objective. Answering the questions- “How do the business get where it wants to go?”; “When do the business want to arrive?”; “Who is responsible?” and “How much will it cost?”

Figure: Marketing Plan

  

Need of Marketing Plan:

Planning forces decision makers to identify the firm’s strengths and weaknesses, and opportunities and threats.

As a result, the manager is in a position to capitalise on the identified strengths and address the weaknesses. Developing a plan forces a manager to develop direction and objectives for the business to accomplish. They need to priorities to accomplish and track the activities. A marketing plan helps focus team efforts and specific tactics to be followed, including:

-       What strategies will be implemented ?

-       Who is responsible for various tasks ?

-       When each task should be completed ?

-       What resources will be needed to complete the task ?

Failure of Plan (Causes):

-       Lack of an Adequate Situation Analysis: It is an on-going activity, not something reserved just for planning time. So, it would always be updated.

-       Unrealistic objectives: Business should not underestimate or over estimate their objectives or goals.

-       Not enough details: The business objectives may be fine but the strategy and the steps to implement it may not be complete.

-       Status Quo: Strategies are the same as last year, yet expecting different results.

-       Plan is not implemented: Often plan is written and placed in a file. Without action, planning is waste of time.

-       Unanticipated competitor actions: Business should keep enough flexibility to adjust their plan and budget.

-       Progress is not evaluated: The only way to fine tune a plan is to evaluate what works and what does not.

Bibliography:

Green, G. and Williams, J. (1996), Marketing: Mastering Your Small Business, USA: Upstart Publishing Company.

McKinsey's 7S

McKinsey 7S model

McKinsey 7S model is a useful framework to reviewing capabilities of an organisation from different viewpoints. The 7S model was designed by the consultants (like Robert Waterman, Jr. and Tom Peters) of ‘McKinsey’- an American consulting firm. It covers the key organisation capabilities needed to implement strategy successfully, whether for reviewing a business, marketing or digital strategy. It also works well in different types of business of all sectors and sizes, although it works best in medium and large businesses. The theory helps to change thinking of manager about how companies could be improved.

7S’s are- Strategy, Structure, Systems, Style, Staff, Skills, and Shared value.

They are divided into hard and soft elements.

7S’s  elements: Strategy, Structure, Systems, Style, Staff, Skills, and Shared value	Hard elements: Strategy, Structure and Systems
	Soft elements: Shared values, Skills, Style and Staff

Elements of 7S can be defined as follows:

Strategy: Strategy can be defined as the determination of a course of action to be followed in order to achieve a desired goal, position or vision.

Structure: An organisations structure is the interrelationship of process and human capital in order to fulfill the enterprise’s strategic objectives.

Systems: The organisations information systems and infrastructure.

Staff: Human resources management. The type of employees, remuneration packages and how they are attracted and retained.

Style: Corporate style is a synthesis of the leadership philosophy of executive management, the internal corporate culture generated, and the orientation an organisation adopts to its markets, customers, and competitors.

Skills: The unique or discinctive characteristics associated with an organisations human capital.

Shared Values: The concepts that an organisation utilizes to drive toward a common goal through common objectives and a common value set.

Use of 7S model:

-       Can be used to help analysing the current situation, a proposed future goal and then indentify gaps and inconsistencies between them.

-       Review the effectiveness of an organisation in its marketing operations.

-       Determine how to best realign an organisation to support a new strategic direction.

-       Assess the changes needed to support Transformation of an organisation.

***[N.B]***

Detailed questions to be asked to find out each elements of 7S’s are provided in the following-

Strategy-

-       What is our Strategy?

-       What are the objectives and how do we intend to achieve them?

-       What makes us competitive and how do you deal with competition?

-       What environmental factors affect the business and how do you keep track on the factors?

Systems-

-       What are the main systems that support and drive the business? e.g. Resource planning, financial recording and reporting, information management, HR systems, Communications, etc.

-       What controls are there in the orgaisation and how is status feedback?

Structure-

-       What hierarchical structure does the firm have?

-       What are the reporting mechanisms?

-       How is the organisation divided? e.g. Martix or Bureaucratic?

-       How do the departments and functions co-ordinate activities?

-       Is decision making centralized or decentralized??

Shared Values-

-       What are the corporate values of the organisation?

-       Do these values align with competitive pressure and strategy?

-       What is the ‘internal culture’ like in the work force?

-       Is the culture conductive to progressive improvements?

Style-

-       What is the general Leadership style of the organisation?

-       Is the Leadership participative or largely autocratic?

-       Are there participative teams or just merely groups of people?

-       Are people empowered and encouraged to proactively take risks and challenge the norm?

Skills-

-       In line with the strategy and vision, are there any skills gaps?

-       In line with operations at a team level, are there any skills gaps?

-       How is training and skills monitored and evaluated?

-       What are the strongest skills?

-       What are the core competencies or the organisation or team?

Staff-

-       What positions are vacant or need to be filled?

-       What competency gaps are needed to be filled?

-       What type of people and skills are needed to support the other 7 elements of the firm?

Bibliography:

Plant, R. T. (2000), eCommerce: Formulation of Strategy, NJ: Prentice-Hall, Inc.

Waterman, R.H., Peters, T.J. and Phillips, J.R. (1980) Structure is not organization. McKinsey Quarterly, in-house journal. McKinsey & Co., New York.