MBA Education

Experience curve

 By Shamim Hossain ( HSTU)                       

(hmd.shamim@hotmail.com) +8801717413125

Definition

Graph that depicts the 'experience effect' (increases in productivity) as reflected in reduced average and marginal costs. Unlike the learning curve, an experience curve takes into account both fixed and variable costs.

The Experience Curve

In the 1960's, management consultants at The Boston Consulting Group observed a consistent relationship between the cost of production and the cumulative production quantity (total quantity produced from the first unit to the last). Data revealed that the real value-added production cost declined by 20 to 30 percent for each doubling of cumulative production quantity:

The Experience Curve

The vertical axis of this logarithmic graph is the real unit cost of adding value, adjusted for inflation. It includes the cost that the firm incurs to add value to the starting materials, but excludes the cost of those materials themselves, which are subject the experience curves of their suppliers.

Note that the experience curve differs from the learning curve. The learning curve describes the observed reduction in the number of required direct labor hours as workers learn their jobs. The experience curve by contrast applies not only to labor intensive situations, but also to process oriented ones.

The experience curve relationship holds over wide range industries. In fact, its absence would be considered by some to be a sign of possible mismanagement. Cases in which the experience curve is not observed sometimes involve the withholding of capital investment, for example, to increase short-term ROI. The experience curve can be explained by a combination of learning (the learning curve), specialization, scale, and investment.

Implications for Strategy

The experience curve has important strategic implications. If a firm is able to gain market share over its competitors, it can develop a cost advantage. Penetration pricing strategies and a significant investment in advertising, sales personnel, production capacity, etc. can be justified to increase market share and gain a competitive advantage.

When evaluating strategies based on the experience curve, a firm must consider the reaction of competitors who also understand the concept. Some potential pitfalls include:

·         The fallacy of composition holds: if all other firms equally pursue the strategy, then none will increase market share and will suffer losses from over-capacity and low prices. The more competitors that pursue the strategy, the higher the cost of gaining a given market share and the lower the return on investment.

·         Competing firms may be able to discover the leading firm's proprietary methods and replicate the cost reductions without having made the large investment to gain experience.

·         New technologies may create a new experience curve. Entrants building new plants may be able to take advantage of the latest technologies that offer a cost advantage over the older plants of the leading firm.

80% experience curve

                            By Shamim Hossain ( HSTU)                       

(hmd.shamim@hotmail.com) +8801717413125

The experience curve is a reflection of the learning ability of a firm and the people within the firm. When a process/product is first instituted it will take time for the people involved to discover and learn all the steps necessary to make the process/product as efficient and effective as possible. This curve is an expediential curve that can be illustrated graphically. In the graphical representation, the X axis represents the cumulative number of units produced and the Y axis represents the time or the cost to produce the nth unit [9]. Exhibit 2 shows a typical 80% experience curve and an experience curve that starts at Standard Time. An 80% experience curve shows that with each doubling of the cumulative number of units produced there is a 20% reduction in the cost or time of production for that specific unit. The distance from the X axis to where the curved line starts to become fiat in relationship to the X axis, is referred to as Standard Time. Standard Time is the point where the doubling of experience (doubling of cumulative number of units) has very little effect on the numbers of units produced or cost per unit. The upper limits of efficiency and effectiveness of processes and peoples abilities have been reached at Standard Time.

The experience curve can take on various shapes depending on the firm and the industry. Variations occur for many reasons: cost reductions are never automatic, companies must work to lower costs, and some products and processes have greater potential for improvement over time than others. Manufacturing processes have steeper experience curves than purchasing, marketing, or distribution functions. Manufacturing costs decline particularly fast in industries with shared inputs or processes. In many industries, the platform or base experience includes more than one product. Many companies use the same components, production facilities, or delivery systems for their products, This multiple use of a broad experience base enables these companies to make the Learning Rate and Development S-Curves more vertical and decrease the time it takes to reach Standard Time when a new process/product is introduced.

Definition of Strategic marketing

                                     By Shamim Hossain ( HSTU)                       

(hmd.shamim@hotmail.com) +8801717413125

Definition

Strategic marketing generally the combination between opportunity and limitation of affirm to gain customer satisfaction, So Strategic marketing focus on a business intention in a market and the means and timing of realizing that intention.

Identification of one or more sustainable competitive advantages a firm has in the markets it serves (or intends to serve), and allocation of resources to exploit them.

Strategic Marketing Concept a philosophy, focus, orientation or concept which emphasis’s the proper identification of marketing opportunities as the basis for marketing planning and corporate growth

Various aspect of strategic marketing

(hmd.shamim@hotmail.com) +8801717413125

Strategic thinking represents a new perspective in the area of marketing. In this section we will examine the importance, characteristics, origin, and future of strategic marketing.

Importance of Strategic Marketing: Marketing plays a vital role in the strategic management process of a firm. The experience of companies well versed in strategic planning indicates that failure in marketing can block the way to goals established by the strategic plan. A prime example is provided by Texas Instruments, a pioneer in developing a system of strategic planning called the OST system. Marketing negligence forced Texas Instruments to withdraw from the digital watch business. When the external environment is stable, a company can successfully ride on its technological lead, manufacturing efficiency, and financial acumen. As the environment shifts, however, lack of marketing perspective makes the best-planned strategies treacherous. With the intensification of competition in the watch business and the loss of uniqueness of the digital watch, Texas Instruments began to lose ground. Its experience can be summarized as follows: The lack of marketing skills certainly was a major factor in the . . . demise of its watch business. T.I. did not try to understand the consumer, nor would it listen to the marketplace. They had the engineer’s attitude. Philip Morris’s success with Miller Beer illustrates how marketing’s elevated strategic status can help in outperforming competitors. If Philip Morris had accepted the conventional marketing wisdom of the beer industry by basing its strategy on cost efficiencies of large breweries and competitive pricing, its Miller Beer subsidiary might still be in seventh place or lower. Instead, Miller Beer leapfrogged all competitors but Anheuser-Busch by emphasizing market and customer segmentation supported with large advertising and promotion budgets. A case of true strategic marketing, with the marketing function playing a crucial role in overall corporate strategy, Philip Morris relied on its corporate strengths and exploited its competitors’ weaknesses to gain a leadership position in the brewing industry. Indeed, marketing strategy is the most significant challenge that companies of all types and sizes face. As a study by Coopers & Lybrand and Yankelovich, Skelly, and White notes, “American corporations are beginning to answer a ‘new call to strategic marketing,’ as many of them shift their business planning priorities more toward strategic marketing and the market planning function.’’

 Characteristics of Strategic Marketing: Strategic marketing holds different perspectives from those of marketing management. Its salient features are described in the paragraphs that follow. Emphasis on Long-Term Implications. Strategic marketing decisions usually have far-reaching implications. In the words of one marketing strategist, strategic marketing is a commitment, not an act. For example, a strategic marketing decision would not be a matter of simply providing an immediate delivery to a favorite customer but of offering 24-hour delivery service to all customers. In 1980 the Goodyear Tire Company made a strategic decision to continue its focus on the tire business. At a time when other members of the industry were deemphasizing tires, Goodyear opted for the opposite route. This decision had wide-ranging implications for the company over the years. Looking back, Goodyear’s strategy worked. In the 1990s, it continues to be a globally dominant force in the tire industry. The long-term orientation of strategic marketing requires greater concern for the environment. Environmental changes are more probable in the long run than in the short run. In other words, in the short run, one may assume that the environment common set of customers belong together. Finally, products/markets in different will remain stable, but this assumption is not at all likely in the long run. Proper monitoring of the environment requires strategic intelligence inputs. Strategic intelligence differs from traditional marketing research in requiring much deeper probing. For example, simply knowing that a competitor has a cost advantage is not enough. Strategically, one ought to find out how much flexibility the competitor has in further reducing price.

Corporate Inputs: Strategic marketing decisions require inputs from three corporate aspects: corporate culture, corporate publics, and corporate resources. Corporate culture refers to the style, whims, fancies, traits, taboos, customs, and rituals of top management that over time have come to be accepted as intrinsic to the corporation. Corporate publics are the various stakeholders with an interest in the organization. Customers, employees, vendors, governments, and society typically constitute an organization’s stakeholders. Corporate resources include the human, financial, physical, and technological assets/experience of the company. Corporate inputs set the degree of freedom a marketing strategist has in deciding which market to enter, which business to divest, which business to invest in, etc. The use of corporate-wide inputs in formulating marketing strategy also helps to maximize overall benefits for the organization.

Varying Roles for Different Products/Markets: Traditionally it has been held that all products exert effort to maximize profitability. Strategic marketing starts from the premise that different products have varying roles in the company. For example, some products may be in the growth stage of the product life cycle, some in the maturity stage, and others in the introduction stage. Each position in the life cycle requires a different strategy and affords different expectations. Products in the growth stage need extra investment; those in the maturity stage should generate a cash surplus. Although conceptually this concept - different products serving different purposes - has been understood for many years, it has been articulated for real-world application only in recent years. The lead in this regard was provided by the Boston Consulting Group, which developed a portfolio matrix in which products are positioned on a two-dimensional matrix of market share and growth rate, both measured on a continuous scale from high to low. The portfolio matrix essentially has two properties: (a) it ranks diverse businesses according to uniform criteria, and (b) it provides a tool to balance a company’s resources by showing which businesses are likely to be resource providers and which are resource users. The practice of strategic marketing seeks first to examine each product/market before determining its appropriate role. Further, different products/markets are synergistically related to maximize total marketing effort. Finally, each product/ market is paired with a manager who has the proper background and experience to direct it.

Organizational Level: Strategic marketing is conducted primarily at the business unit level in the organization. At General Electric, for example, major appliances are organized into separate business units for which strategy is separately formulated. At Gillette Company, strategy for the Duracell batteries is developed at the batteries business unit level.

Relationship to Finance: Strategic marketing decision making is closely related to the finance function. The importance of maintaining a close relationship between marketing and finance and, for that matter, with other functional areas of a business is nothing new. But in recent years, frameworks have been developed that make it convenient to simultaneously relate marketing to finance in making strategic decisions.

Origin of Strategic Marketing: Strategic marketing did not originate systematically. As already noted, the difficult environment of the early 1970s forced managers to develop strategic plans for more centralized control of resources. It happened that these pioneering efforts at strategic planning had a financial focus. Certainly, it was recognized that marketing inputs were required, but they were gathered as needed or were simply assumed. For example, most strategic planning approaches emphasized cash flow and return on investment, which of course must be examined in relation to market share. Perspectives on such marketing matters as market share, however, were either obtained on an ad hoc basis or assumed as constant. Consequently, marketing inputs, such as market share, became the result instead of the cause: a typical conclusion that was drawn was that market share must be increased to meet cash flow targets. The financial bias of strategic planning systems demoted marketing to a necessary but not important role in the long-term perspective of the corporation. In a few years’ time, as strategic planning became more firmly established, corporations began to realize that there was a missing link in the planning process. Without properly relating the strategic planning effort to marketing, the whole process tended to be static. Business exists in a dynamic setting, and by and large, it is only through marketing inputs that perspectives of changing social, economic, political, and technological environments can be brought into the strategic planning process. In brief, while marketing initially got lost in the emphasis on strategic planning, currently the role of marketing is better understood and has emerged in the form of strategic marketing.

Future of Strategic Marketing: A variety of factors point to an increasingly important role for strategic marketing in future years. First, the battle for market share is intensifying in many industries as a result of declining growth rates. Faced with insignificant growth, companies have no choice but to grasp for new weapons to increase their share, and strategic marketing can provide extra leverage in share battles. Second, deregulation in many industries is mandating a move to strategic marketing. For example, take the case of the airline, trucking, banking, and telecommunications industries. In the past, with territories protected and prices regulated, the need for strategic marketing was limited. With deregulation, it is an entirely different story. The prospect of Sears, Roebuck and Merrill Lynch as direct competitors would have been laughable as recently as ten years ago. Thus, emphasis on strategic marketing is no longer a matter of choice if these companies are to perform well. Third, many packaged-goods companies are acquiring companies in hitherto non marketing-oriented industries and are attempting to gain market share through strategic marketing. For example, apparel makers, with few exceptions, have traditionally depended on production excellence to gain competitive advantage. But when marketing-oriented consumer-products companies purchased apparel companies, the picture changed.

General Mills, through marketing strategy, turned Izod (the alligator shirt) into a highly successful business. Chesebrough-Pond’s has done much the same with Health-Tex, making it the leading marketer of children’s apparel. On acquiring Columbia Pictures in 1982, the Coca-Cola Company successfully tested the proposition that it could sell movies like soft drinks. By using Coke’s marketing prowess and a host of innovative financing packages, Columbia emerged as a dominant force in the motion picture business. It almost doubled its market share between 1982 and 1987 and increased profits by 20 percent annually. Although in the last few years Izod, Health-Tex, and Columbia Pictures have been sold, they fetched these marketing power houses huge prices for their efforts in turning them around. Fourth, shifts in the channel structure of many industries have posed new problems. Traditional channels of distribution have become scrambled, and manufacturers find themselves using a mixture of wholesalers, retailers, chains, buying groups, and even captive outlets. In some cases, distributors and manufacturers’ representatives are playing more important roles. In others, buying groups, chains, and cooperatives are becoming more significant. Because these groups bring greatly increased sophistication to the buying process, especially as the computer gives them access to more and better information, buying clout is being concentrated in fewer hands. Fifth, competition from overseas companies operating both in the United States and abroad is intensifying. More and more countries around the world are developing the capacity to compete aggressively in world markets. Businesspeople in both developed and developing countries are aware of world market trends and are confident that they can reach new markets. Eager to improve their economic conditions and their living standards, they are willing to learn, adapt, and innovate. Thirty years ago, most American companies were confident that they could beat foreign competitors with relative ease. After all, they reasoned, we have the best technology, the best management skills, and the famous American “can do’’ attitude. Today competition from Europe, Japan, and elsewhere is seemingly insurmountable. To cope with worldwide competition, renewed emphasis on marketing strategy achieves significance. Sixth, the fragmentation of markets - the result of higher per capita incomes and more sophisticated consumers - is another factor driving the increased importance of strategic marketing.

Difference between Strategic marketing and Marketing management

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Strategic marketing focuses on choosing the right products for the right growth markets at the right time. It may be argued that these decisions are no different from those emphasized in marketing management. However, the two disciplines approach these decisions from different angles. For example, in marketing management, market segments are defined by grouping customers according to marketing mix variables. In the strategic marketing approach, market segments are formed to identify the group(s) that can provide the company with a sustainable economic advantage over the competition. To clarify the matter, Henderson labels the latter grouping a strategic sector. Henderson notes: A strategic sector is one in which you can obtain a competitive advantage and exploit it. . . . Strategic sectors are the key to strategy because each sector’s frame of reference is competition. The largest competitor in an industry can be unprofitable in that the individual strategic sectors are dominated by smaller competitors.

A further difference between strategic marketing and marketing management is that in marketing management the resources and objectives of the firm, however defined, are viewed as uncontrollable variables in developing a marketing mix. In strategic marketing, objectives are systematically defined at different levels after a thorough examination of necessary inputs. Resources are allocated to maximize overall corporate performance, and the resulting strategies are formulated with a more inclusive view. As Abell and Hammond have stated: A strategic market plan is not the same . . . as a marketing plan; it is a plan of all aspects of an organization’s strategy in the market place. A marketing plan, in contrast, deals primarily with the delineation of target segments and the product, communication, channel, and pricing policies for reaching and servicing those segments - the so-called marketing mix. Marketing management deals with developing a marketing mix to serve designated markets. The development of a marketing mix should be preceded by a definition of the market. Traditionally, however, market has been loosely defined. In an environment of expansion, even marginal operations could be profitable; therefore, there was no reason to be precise, especially when considering that the task of defining a market is at best difficult. Besides, corporate culture emphasized short-term orientation, which by implication stressed a winning marketing mix rather than an accurate definition of the market. To illustrate how problematic it can be to define a market, consider the laundry product Wisk.

 The market for Wisk can be defined in many different ways: the laundry detergent market, the liquid laundry detergent market, or the prewash- treatment detergent market. In each market, the product would have a different market share and would be challenged by a different set of competitors. Which definition of the market is most viable for long-term healthy performance is a question that strategic marketing addresses. A market can be viewed in many different ways, and a product can be used in many different ways. Each time the product-market pairing is varied, the relative competitive strength is varied, too. Many businesspeople do not recognize that a key element in strategy is choosing the competitor whom you wish to challenge, as well as choosing the marketing segment and product characteristics with which you will compete. Strategic marketing differs from marketing management in many respects: orientation, philosophy, approach, relationship with the environment and other parts of the organization, and the management style required. For example, strategic marketing requires a manager to forgo short-term performance in the interest of long-term results. Strategic marketing deals with the business to be in; marketing management stresses running a delineated business. For a marketing manager, the question is: Given the array of environmental forces affecting my business, the past and the projected performance of the industry or market, and my current position in it, which kind of investments am I justified in making in this business? In strategic marketing, on the other hand, the question is rather: What are my options for upsetting the equilibrium of the marketplace and reestablishing it in my favor? Marketing management takes market projections and competitive position as a given and seeks to optimize within those constraints. Strategic marketing, by contrast, seeks to throw off those constraints wherever possible. Marketing management is deterministic; strategic marketing is opportunistic. Marketing management is deductive and analytical; strategic marketing is inductive and intuitive.

 Exhibit: Major differences between strategic marketing and marketing management.

 Addressing the problem of Strategic Marketing

The following concerns should be addressed:

Ø      Develop attainable goals and objective.

Ø     Involve key operating personnel.

Ø     Avoid becoming so engrossed in current problems that strategic marketing is neglected and thus becomes discredited in the eyes of others.

Ø     Don’t keep marketing strategy separate from the rest of the management process.

Ø     Avoid formality in marketing strategy formulation that restrains flexibility and inhibits creativity.

Ø     Avoid creating a climate that is resistant to strategic marketing.

Ø     Don’t assume that marketing strategy development can be delegated to a planner.

Ø     Don’t overturn the strategy formulation mechanism with intuitive, conflicting decisions.