Pindelski_Competitive_Strategies

modeling their portfolio of products and services. However, they restrict themselves to the same segment from time to time. Their business might be threatened by restricting budgets in the segments or cessation of the specific needs.

Large, diversified entities offer full coverage of the market. They satisfy numerous needs in a lot of segments. Such a strategy is applied by Procter&Gamble, or Unilever.

Questions and discussions

1.What segments does your university/college or company serve? What segmentation criteria can be used in order to settle them?

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2.What strategy does it follow?

3.What problems arise while the segments are fixed?

4.What may be the effects of wrong segmentation for the business?

Case study 9

Cafe Aroma Israel (לארשי המורא הפק )

Information about the company: http://www.aroma.co.il/en (hints at the end of the book)

Coffee market

The coffee market is one of the largest FMCG (Fast Moving Consumer Goods eg. Yoghurts, cheese, etc.) markets both in Israel and Poland, worth circa 1 billion US$ per year in each of those countries. Its value has been growing by ca. 10-15% per year, while quantity by circa 5-10%, for the last decade. The main reason for the growth is a fast growth of the instant coffee market by 16% in value and by 10% in cups. The higher consumption of instant coffee is the result of the comfortable, fast and simple preparation of a good cup of coffee, which is becoming more and more popular. Polish people work longer and lead a more and more stressful lifestyle, which is the reason why instant coffee becomes a necessary product for them The coffee market in both countries seems to be a market at an early stage of maturity, although the growing tendency has been maintained. The average annual coffee consumption per person in Poland is circa 3 kg, while circa 5 kg in Israel, i.e. still a few times less than e.g. in Scandinavia, where the index is 10-12 kg per capita. In addition to the quantitative growth of the consumption, the value thereof in both countries grows as well. The consumers more and more often buy higher quality coffee, out of higher segments. Moreover, coffee consumed out, at a cafe, coffee-shop or cafeteria gradually becomes a habit, particularly among the inhabitants of big cities. Along with the growing pace of life in cities and comfort of preparation, a significant growth of sales of coffee, both instant or takeaway points of sale.

About the Company

Aroma Cafe is a company originating from Israel. It was established on the concept of a model functioning in numerous countries and based on mobile coffee sales. It consists

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of selling coffee in the busiest places, full of people commuting to work, i.e. traffic jams, railway stations and near the so-called city hubs.

The company mission is “To ensure the well-being of the city inhabitants from early morning on”. The Company tries to fulfill it through providing the clients with the best quality coffee in the very places they are at the moment. The vendors and all the actions taken by them are to build a friendly link between them and the customers. While seeking for its own place on the market, Aroma has defined their competitors as:

•coffee-machines

•“drive thru” cafés, e.g. McDonald’s,

•coffee served at filling stations

•traditional cafés.

A model that would provide the usability of buying coffee at filling stations, however, expanding the group of clients beyond drivers and their passengers only. On the other hand, such usability was to be close to machine coffee. At the same time, such a model had to avoid low price and quality.

General guidelines and basic strategic principles

As a result of the analyses and decisions made on the general form of the strategy, seven basic points have been determined as a foundation for the strategy.

1)To be as close to the client as possible, on their way to work, school.

2)To offer top quality products, the freshest coffee beans, coffee freshly ground, top quality water and coffee brewing apparatus.

3)Always to offer the same excellent taste of coffee, standardization of high quality products.

4)Nice, always smiling, happy and professional staff encouraging the purchase of coffee.

5)To build solid relationships with the clients, to make them want to come back.

6)To build an environment of local authorities’ and land administrators’ support.

7)Pro-eco approach, thanks to the application of ecological packages.

The first strategy

The strategy of Aroma Cafe originally was based on selling coffee at mobile units, i.e. individual, mobile vendors, equipped with a backpack adapted for hot coffee and milk

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transport. In addition to coffee distribution directly from the backpack, the vendor was to be equipped with a cash register and two sizes of disposable cups, thanks to which they could serve each client within less than one minute. The vendor also was to move to the places of top concentration of individual clients. Like his clients, the vendor was to move and integrate with the rhythm of their movement. All kinds of mass events concentrating large groups of potential clients were to be served in the same way. On the one hand it was to be an alternative to all those who use coffee machines, though they like the quality of coffee served at good cafés. On the other hand, for those who appreciate coffee from a café, but have no time for it. The reduction of purchase time to the minimum, combined with its high quality was to be the foundation for the strategy and determination of the target group of clients. The mobile vendors also meant the reduction of costs related to the maintenance of expensive premises and, in consequence, high quality coffee could be offered for less than half the price at a café.

The second strategy

While enforcing the first strategy a group was separated consisting of clients who appreciate spending time at a café over a cup of coffee. Even though they buy takeaway coffee, they purchase at a café full of noise and the smell of coffee is very important to them. They do not associate a mobile vendor with high quality coffee, they are also surprised that this is not a promotion and they have to pay for it. Therefore, a large part of street vendors has been withdrawn and replaced with high quality, though with fast service, modern cafés, slightly resembling other popular networks of cafés. Such cafés were not only located in shopping malls and the busiest and most pedestrian traffic loaded city centres, but also near selected hubs near motorways and other important roads of the country.

Discussion questions:

1)Describe the segments served within the first strategy. What segmentation criteria were used?

2)Describe the segments served within the second strategy. What segmentation criteria were used?

3)What are the differences between the first and the second strategy?

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4)Is there any justification possibility to serve the segments of the first and the second strategy at the same time?

5)Do the basic principles of the strategy support serving the very segments? If so, in what way? How do the principles meet the needs of such segments?

6)Would you recommend the first, the second or both strategies at the same time, according to your own, subjective assessment?

Further readings

To be read and study by yourself . You can discuss the papers, materials and conclusions during the next class.

1.Roger Kerin, Steven Hartley and William Rudelius , Marketing, McGraw-Hill/Irwin; 11th Edition, 2012

2.Cooil B., Aksoy L., Keiningham T., Approaches to Customer Segmentation, 2008

3.McCarthey E.J., Brogowicz A.A., Essentials of Marketing, Homewood, 1982

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4.2. Strategic Business Units

Pre-class readings:

1.Ocasio, William P. (1997), Towards an Attention-Based View of the Firm, Strategic Management Journal, 18. (Summer Special Issue), 187-206.

2.Ocasio, William and John Joseph (2005), An attention-based theory of strategy formulation: Linking decision making and guided evolution in strategy processes.”

Advances in Strategic Management, Vol. 22, 39-61.

Summary of the two above articles available on: http://insight.kellogg.northwestern.edu/article/coupling_within_the_firm

On the website above you will also find a way to read whole versions of the articles for free.

Task: Prepare a short presentation demonstrating the main thesis, assumptions and conclusions of the articles.

Additional questions to be answered and/or discussed after pre-class readings:

Decoupling Channels is based on William Occasio's observation and research made in some international companies. Take a closer look into the concept and think:

1.How does one manage business units and decision channels in multinational companies ?

2.Where is the difference between managing and strategy of small – medium and huge, international companies ?

3.How does the environment influence international companies and their national branches ?

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4.2.1. Matrix Methods of analysis

Portfolio methods constitute a tool that often becomes immensely helpful in the analysis of businesses and their management. They basically originate from the 1970’s and 1980’s and comprise the analysis of products and services as well as specific business units called strategic business units – SBU). They are particularly useful to those entities that have several such units.

Strategic Business Units are parts distinguished within the organization, largely independent or simply important and slightly different from others. Their distinction enables better planning, strategy creation and performance, control, definition of suppliers and customers, etc. A strategic business unit is often treated as a separate integrity within a certain scope. It may not be easy to distinguish business units. In so far specific services and products, for example, may be distinguished from one another relatively easily, in as many business units may bring some problems. Territorial criteria may be applied thereto, for example specification of business units based on the location of the enterprise branches. This may also be based on various markets or various target groups of customers.

The possible criteria of distinguishing a Strategic Business Unit against the whole enterprise, [a strategic business unit]:

-has its own suppliers,

-offers its own products, different from those of the rest of the enterprise,

-has separate characteristics and skills,

-has competitors different from the rest of the enterprise,

-operates on the market specified exclusively for it,

-has its own targets and operating plans (marketing, sales, etc.) and sometimes strategic plans,

-has been distinguished as a separate section against the whole organization,

-has its own management,

-accounts for its own profits/losses and its existence depends thereon,

-it is able to operate separately from the rest of the organization.

Thus, an enterprise is a set of strategic business units. Managing them in such a way so that they would perform a common integrity is now a serious challenge to the management boards, particularly those of larger entities.

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Another important term that appears in the portfolio analyses is that of the industry sector. It includes a range of branch activities of approximately similar profile. From the economic point of view, there are three to more than a dozen basic sectors to be distinguished – agriculture, forestry, fishery, industry, construction, services, IT. The literature concerning management, however, treats the notion much more extensively. A sector here is a national economy section, like in economics, and a type of industry or services, such as media, automotive sector, consumer services, etc. Distinguishing one sector from another is, without limitation, to determine the competitors, suppliers and sector analysis limits in general. At present, however, such analyses have begun to encounter a crisis. On the one hand, the number of difficulties grows at the determination of limits between sectors, whatever name we call them. The enterprises manufacture, provide services and develop real estates at the same time. Moreover, the number of transsector competitors is expanding.

4.2.2. BCG Method

The BCG (Boston Consulting Group) Matrix is one of the widely known and applied methods of portfolio analysis. It presents a system of products or strategic business units on the matrix determined by two variables: the relative market share and the relative market growth. They determine four basic fields the business units presented in the picture below may be located within. Depending on the quarter of matrix they may be plotted on, the following names have been assumed: milking cows, question marks, stars and problems (balls and chains).

The market growth rate is defined, depending on the type of business it concerns. If business units significantly differ from one another and apply to various markets, GNP may be the appropriate level distinguishing high and low market growth. If it concerns one sector, such a sector’s growth rate, etc. In the case of relative market share the boundary value usually is 0.9 (with dispersed competition) or 1.0 (with several – more than a dozen competitors). This is the result of using the formula:

The market share of an enterprise business unit / market share of corresponding business unit of the largest competitor (or, if no data on competitive business units are available, the general market share of the largest competitor).

It means that either the market shares of the largest competitor are bigger than those of the enterprise analyzed, or the latter is the one with the biggest shares. Sometimes, while

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determining the location of a business unit in the matrix, the size of the circle is marked which expresses its share in the revenue structure. With such assumptions four types of business units or products may be distinguished.

Fig. 4 BCG (Boston Consulting Group) Matrix

0,9 – 1,0

Relative market share*

SBU – Strategic Business Unit (1, 2 … n)

*Relative market share may be lower or higher than a market share of the main competitor.

Source: G. Gierszewska M. Romanowska, Analiza Strategiczna Przedsiębiorstwa, PWE, Warszawa 1997, p. 178

Milking cows are products or business units that are usually in a stable market position and of low financial demand. However, simultaneously they generate significant financial surplus and simply bring profits. They usually contribute to funding other business units,

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products or services. However at the maturity or declining life cycle stage their time is limited and without supporting actions they may soon lose their profitability and disappear from the portfolio.

Stars are business units with a significant development potential, however currently they need significant financial support. Their maintenance and development are related to the necessity to bear significant costs with relatively low revenues such entities generate at the same time. In exchange, however, there is a reasonable hope that in the future they will become milking cows and will start to bring fair profits.

Question marks demand significant funding, however their future is not necessarily optimistic, as in the case of stars. Actually no one knows whether they will become stars or rather dogs.

Dogs are business units with a low market share, although with low demand for funding. They are often failed investments or declining products. Although in general resignation from them is recommended, there are cases where enterprises maintain them. This is the case when such entities do not want to withdraw from a market, plan to intensify their actions in the future or count on the future market growth.

In general, the indications for particular business units are as follows:

•pay particular attention to milking cows so that they would bring profits for as long as possible,

•assign the financial surpluses generated by milking cows for the development of milking cows and stars,

•reinforce the position of stars and question marks,

•eliminate weaker question marks,

•eliminate dogs,

The BCG method has both advantages and disadvantages. Most of all, it is a simple portfolio method, easy to present, understand and interpret. Its disadvantages include significant simplifications, only two dimensions and adaptation to less complex markets and enterprises for which the market shares, for example, are easily settled.

4.2.2. Arthur D. Little method (ADL)

The approach suggested by Arthur D. Little is a slightly different portfolio method. In general, the presentation and matrix preparation principle is similar to that of BCG. The basic difference is in plotting the life cycle stage sector (market) on one of the coordinates, from its embryo development to declining stage. The other coordinate was determined by

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