Burning Ideas

Market-driven companies, or those with a strong market orientation, are superior in two important ways. First, market-driven companies do a better job of market sensing, or anticipating market requirements ahead of competition. Market sensing is the gathering of information from the market. Market research, is one form of market sensing, but market sensing can be achieved through listening to the sales force, observing competition at trade shows, and developing stronger ties with innovative customers and suppliers.

Similarly, the second important difference is that market-driven companies are able to develop stronger relationships with their customers and their channels of distribution. Stronger relationships include more direct lines of communication; instead of all communication going between a purchasing agent and a salesperson, interaction among engineers in all three firms (customer, manufacturer, and supplier) can occur. Stronger relationships can result in greater attention to the customer throughout the firm.
Research indicates several outcomes of a market orientation. Increased profit is one outcome, although increased market share does not necessarily follow a market orientation. That higher profit is due to the better pricing and product development that occur because of market orientation. In fact, in studies conducted in Japan, India, Australia, the United States, and Hong Kong, market orientation was found to influence performance.

A market orientation influences performance more in economies or industries that are rapidly changing. There is some evidence from transitional economies, such as Ghana or China, that firms with market orientations may last longer and respond better to dynamic economies. In stable markets, market orientation seems to be less important, but there are few markets that stay stable. As competition grows more fierce, market orientation becomes essential.
Companies that want to adopt a market orientation must have adequate spanning processes, processes that link internal processes with the customer. New product development is one such spanning process, as it links market requirements with internal processes such as manufacturing. All companies have new product development processes; the difference is how the process incorporates the voice of the customer. For internal processes to contribute to the value delivered by the value chain, there must be adequate spanning processes.

Profits are the economic rewards to a business for providing value to customers better than the rest and running an efficient operation. If we briefly examine a few sources of profit, we can get a good preview to the upcoming discussion of the anatomy of competition. Competition is more than industrial rivals cutting prices in an effort to gain market share. It has a structure that can be described and analyzed.

Five Forces

The preceding scenarios suggest that firms have improved profit capabilities to the extent that they can withstand price pressures in the business environment. If we pause to reconsider each scenario, we see that price pressures come from five distinct sectors.

Rivalry in the Industry Not all businesses face the same amount of price pressure from their competitors in the same business. In Atlanta during the 1996 Olympics, hotels enjoyed great pricing latitude because demand outpaced the supply of local rooms. Like the lodging business, other industries are partitioned by natural boundaries or customer purchasing constraints.
If industry rivals offer relatively undifferentiated products or if demand is significantly less than overall capacity, firms will tend to find intense rivalry. Price competition frequently intensifies in declining markets because firms try to grab market share to cover fixed expenses that can’t be shrunk as rapidly as the market.

Powerful Suppliers A manufacturer that relies heavily on a unique input for its product becomes vulnerable to price hikes or other means of “holdup” from the supplier. Of course, the unique input may provide a means of differentiation for the manufacturer. The “Intel inside” sticker on a desktop computer provides many buyers assurance of a top-quality Pentium processor, no matter what the brand name on the PC. The buying firm must carefully weigh the benefits from depending on a powerful source of supply. A key question may be what the future supply situation looks like. Perhaps there will be alternative suppliers when patent protection expires or when another source—maybe even one internal to the firm— has been brought up to speed.

Threat of Substitutes Industries are typically defined by their channel position and their output. Are they manufacturers or distributors? Do they sell chemicals or rolled wire? Notice that user considerations get no mention. But clearly, if a buyer regards the products from two different industries as substitutes, the makers of those products must be considered competitors.

Threat of Potential Entrants Rapidly growing or profitable markets tend to attract new sellers. And newcomers can
change the competitive landscape in several ways. First, new participants in the market increase the productive capacity serving the market; therefore the existing demand from customers has to cover more fixed costs. Second, a new rival will fight to increase market share, perhaps displacing incumbents in the assortments of resellers or underbidding the established firms. Third, new rivals can bring new or substantial resources to the fray.

A business strategy also has to develop the detailed aims and action plans for the functional areas. A host of questions must be addressed in this portion of a strategy. Will special emphasis be given logistics for customer service or will the firm decentralize manufacturing to provide short supply linkages to key customers? Will the firm need a strong advertising campaign or will it need to support distributor activities that play key roles in product differentiation? How important is supply management, relative to other facets of the value creation process? How can the sales, service, and operations people at the branches be encouraged to work as a team?
In many markets, careful analytical attention and planning are given to the product line—its scope, composition by functional feature and durability, horizontal and vertical connectivity, price, and so on. A computer company must consider the relationship of each model to the others it markets. What is the positioning strategy for each model and the array of accessories and peripherals? Engineering, purchasing, manufacturing, and logistics must collaborate in the formulation of supporting goals and activities.
The growing interconnectivity in today’s information environment has posed new challenges for computer makers. For the small and midsized firms that want network services, manufacturers are relying more heavily on their value-added resellers (VARs). But at least two distinct action plans are evident. The approach used by Digital and Compaq favors Internet and/or intranet technology to provide technical and strategic support to a broad base of VARs. The other approach, exemplified in moves by IBM and Apple, provides increased service and incentives for an elite group of VARs.
Of course, the remainder of the marketing mix must also be tightly formulated. Advertising and distribution strategies must be worked out to support the intended positioning and product line strategies. The roles of the sales force with respect to each product and customer group need to fit with the advertising and telephone marketing strategies. Also, pricing strategies need to be in harmony with the advertising, selling, distribution, and manufacturing strategies.