Improving Productivity

Market productivity means squeezing more profits out of the same volume of sales. The size advantage of market leaders can give them lower costs than the competition- Size itself is not sufficient to achieve low costs because this could be achieved by owning unrelated activities that impose extra costs, as Marketing Highlight 12.3 explains. The lowest costs often occur when a market leader, such as McDonald's, keeps its business simple. The buying and selling of subsidiary businesses often reflects businesses trying to gain strength by simplifying their activities. This explains the sales of Orangina, a soft-drinks business, to CocaCola for Ffr5 billion by the French drinks company Pernod Ricard. By this transaction Coca-Cola gains in efficiency and scale by having more soft drinks to sell globally. With the proceeds from the sale, Pernod Rieard aims to add more wines and spirits brands to its existing range, which includes Wild Turkey, Dubonnet, Havana Club and Jacob's Creek.18

IMPROVE COSTS. To remain competitive, market leaders fight continually to reduce costs. After facing difficulties in the early 1990s Mercedes used all the classical means of cutting costs:

8 Reduce capital cost. Firms reduce their capital cost by doing less or doing things quickly. Just-in-time (JIT) methods mean firms have less capital tied up in raw materials, work in progress on the shop floor and finished goods. By accelerating its product development Mercedes will increase its market responsiveness and accumulated development costs. It will also reduce capital costs by doing less itself. Component manufacturers will provide more preassemblcd parts and a joint venture with a Romanian company will make car-interior parts.

Reduce fixed costs. Mercedes acknowledges that Japan's manufacturers have an average 35 per cent cost advantage over their German competitors. Japan's lower capital cost and longer working hours explain only 10 per cent of the difference. Mercedes responded by cutting 18,000 jobs in 1993 to save DM5 billion. Forced redundancies are almost unknown in Germany, so the deduction is made by the 'social measures' of the non-replacement of people, early retirement and retraining.

. Reduce variable cost. The company is sticking to its unconventional production methods where 10-15 'group workers' operate round cradles holding body shells. Meanwhile its new car plant at Rastatt will pioneer methods of 'lean production', logistics, total quality and workforce management. Other plants will adopt the proven methods. Car design will also change. It will be quicker, and future cars will be designed to a target price, rather than making the best car and then pricing it. The lessons will be passed on to Mercedes' suppliers. In future they will work closer to Mercedes' research and development. The aim is to reduce the number of parts fitted at the works. The company is also changing its 'Made in Germany' policy, to produce where labour costs are lower. In 1996 it launched a US-made sports utility vehicle.

CHANGE PRODUCT MIX. The aim here is to sell more high-margin vehicles. Mercedes' current range does not cover luxury off-road vehicles, people movers or small sports cars - all growth areas commanding premium prices- Moving into these markets will reduce Mercedes' dependence on its 'lower-priced' models. While other tour operators were faced with discounting wars, Airtours profits rose by 29 per cent in 1997 thanks to its product mix moving away from the United

Kingdom's low-cost package holidays to concentrate on less price-sensitive customers in Canada. California and Scandinavian countries.

ADD VALUE. Mercedes makes and sells cars, but its customers want prestige and transport. Mercedes can add value by offering long-terra service contracts, leasing deals or other financial packages that make buying easier and less risky for customers. In the past Mercedes sold basic models that are poorly equipped by modern standards. Customers then paid extra to have a car custom made for them with the features they wanted. The 'Made in Germany' label that has served the company for so long is no longer enough to command a premium price. The aim is to maintain a price premium by the brand's strength and superior quality across a broad range of products. This contrasts with the Japanese, whose well-equipped luxury Lexus (Toyota), Acura (Honda) and Innniti (Nissan) brands have tightly targeted small ranges.

• Defending its Position

While trying to expand total market size, the leading firm must also constantly protect its current business against competitor attacks. Shell must constantly guard against BP, Exxon and Elf Aquitane; Gillette against Bic; Kodak against Fuji; Boeing against Airbus; Nestle against BSN.

What can the market leader do to protect its position? First, it must prevent or fix weaknesses that provide opportunities for competitors. It needs to keep its costs down and its prices in line with the value that the customers see in the brand. The leader should 'plug holes' so that competitors do not jump in. The best defence is a good offence and the best response is continuous innovation. The leader refuses to be content with the way things are and leads the industry in new products, customer services, distribution effectiveness and cost cutting. It keeps increasing its competitive effectiveness and value to customers. It takes the offensive, sets the pace and exploits competitors' weaknesses.

Increased competition in recent years has sparked management's interest in models of military warfare. Leader companies can protect their market positions with competitive strategies patterned after successful military defence strategies. Figure 12.5 shows six defence strategies that a market leader can use.19

POSITION DEFEN'CE. The most basie defence is a position defence in which a company holds on to its position by building fortifications around its markets. Simply defending one's current position or products rarely works. Henry Ford tried it with his Model T and brought an enviably healthy Ford Motor Company to the brink of financial ruin. Even lasting brands such as Coca-Cola and Nescafe cannot supply all future growth and profitability for their companies. These brands must be improved and adapted to changing conditions and new brands developed. Coca-Cola today, in spite of being the world leader in soft drinks, is aggressively extending its beverage lines and has diversified into desalinization equipment and plastics.

FLANKING DEFENCE. When trying to hold its overall position, the market leader should watch its weaker flanks closely. Smart competitors will normally attack the company's weaknesses. Thus the Japanese successfully entered the US small car market because local car makers left a gaping hole in that submarket. Using a flanking defence, the company carefully cheeks its flanks and protects the more vulnerable ones. In this way Nesde's Nescafe and Gold Blend have the support of flanking brands Blend 37, Alta Rica and Cap Colombie. By acquiring Rover,

BMW obtained access to small cars and cross-country vehicles and so defended its flanks in two growing sectors of the luxury car market where it was not active.

PRE-EMPTIVE DEFENCE. The leader can be proactive and launch a preemptive defence, striking competitors before they can move against the company. A pre-emptive defence assumes that an ounce of prevention is worth a pound of cure. Thus, when threatened in the mid-1980s by the impending entry of Japanese manufacturers into the US market, Cummins Engine slashed its prices by almost a third to save its no. 1 position in the $2 billion heavy-duty truck engine market. Today, Cummins claims a commanding 50 per cent market share in North America and not a single US-built tractor-trailer truck contains a Japanese engine.2"

COUNTEKOFFENSIVE DEFENCE. When attacked, despite its flanking or pre-emptive efforts, a market leader may have to be reactive and launch a counter-offensive defence. When Fuji attacked Kodak in the film market, Kodak counterattacked by dramatically increasing its promotion and introducing several innovative new film products. Mars' attack on the ice-cream market, using its brand extensions of Mars Bars, Snickers, Bounty and so on, created a new product class of ice-confectionery. Unilever's Walls ice-cream division, which is market leader in parts of Europe, had difficulty countering this because it had no confectionery brands to use in that way. It overcame the problem by developing brand extensions of Cadbury's products, a competitor of Mars, which has no ice-cream interests. In other parts of Europe, Nestle is leader in the ice-cream market. With its strength in both confectionery and ice cream, it was able to launch brand extensions to match Mars.

Sometimes companies hold off for a while before countering. This may seem a dangerous game of 'wait and see', but there are often good reasons for not jumping in immediately. By waiting the company can understand more fully the competitor's attack and perhaps find a gap through which to launch a successful counteroffcnsive.

Airlines in the Star Alliance defend their position in the marketplace ■with their ^¿obai network.

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MOBILE DEFENCE. In a mobile defence a company is proactive in aggressively defending a current market position. The leader stretches to new markets that can serve as future bases for defence and attack. Through marker: broadening, the company shifts its focus from the current product to the broader underlying consumer need. For example, Armstrong Cork redefined its focus from 'floor covering' to 'decorative room covering' (including walls and ceilings) and expanded into related businesses balanced for growth and defence. Market diversification into unrelated industries is the other alternative for generating 'strategic depth'. When the tobacco companies like British American Tobacco (BAT) and Philip Morris faced growing curbs on cigarette smoking, they moved quickly into new consumer products industries, Philip Morris bought up General Foods and Kraft to become the world's largest consumer packaged goods company and BAT Industries is now one of Europe's largest firms.

CONTRACTION DEFENCE. Large companies sometimes find they can no longer defend all of their positions, since their resources are spread too thin and competitors are nibbling away on several fronts. So they react with a contracting defence (or strategic withdrawal). The company gives up weaker positions and concentrates its resources on stronger ones. During the 1970s, many companies diversified wildly and spread themselves too thin. In the slow-growth 1980s, ITT, Paribas, Suez, ENI, Gulf & Western, Quaker, Storehouse and dozens of other companies pruned their portfolios to concentrate resources on products and businesses in their core industries. These companies now serve fewer markets, hut serve them much better.

The British motorcycle industry showed an extreme case of a contracting defence. Norton, Triumph, BSA, etc. once dominated the world motorcycle market. First challenged by the small bikes made by Honda, Yamaha and others, they contracted into making medium-sized (250 cc) to super-bikes. When the Japanese made 250 cc machines, the British market retreated from entry-level machines to concentrate on larger ones. Eventually only Triumph and Norton super-bikes remained as small, out-of-date specialist manufacturers facing the Japanese giants, and they did not last long. A successful contracting defence must be a retreat into a position of strength.

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