325-211 Principles of Marketing Organizing the Market Where to Compete?: 3 Mobile Australia by Scott Emmett and Kevin Fan 1
TABLE OF CONTENTS TABLE OF FIGURES... 2 Executive Summary... 3 1 Introduction... 4 2 Selecting Markets... 4 2.1 SWOT Analysis... 4 2.1.1 Opportunities and Threats... 5 2.1.2 Strengths and Weaknesses... 6 2.2 Strategic Market Objectives... 7 2.3 Strategic Market Focus... 8 2.3.1 Increasing Volume... 9 2.3.2 Increasing Productivity... 9 3 Segmenting Markets... 10 3.1 Behavioral Variables... 10 3.1.1 Benefits recognized by customers... 10 3.1.2 Benefits yet to be recognized by customers... 11 3.2 Descriptor Variables... 11 4 Electing Target Segments... 12 4.1 Value potential of customers... 12 4.2 Competitive potential of competitors... 12 4.2.1 Identification of competitors... 12 4.2.2 Analysis of competitors... 13 4.3 Dynamic potential of external environment... 14 5 Managerial Recommendation - How to Compete... 15 5.1 Brand Positioning... 15 5.2 Product... 16 5.3 Price... 17 5.4 Place... 18 6 Conclusion... 19 References... 20 TABLE OF FIGURES Figure 1: The 3G Strategic Characterization Matrix... 8 2
Executive Summary This investigation into the third generation (3G) mobile telecommunications market involved assessing where the new brand 3 should compete. To select a market, a conceptual framework involving the analysis of strengths, weaknesses, opportunities, and threats (S.W.O.T), along with strategic market objectives and focus analyses was used. The 3G market was found to be highly attractive and it was concluded that 3 possesses an average differential advantage. The Strategic Characterization Matrix suggests 3 should pursue a strategic market objective of growth. This should be achieved by focusing on increased volume in the market and it is recommended that the professional segment, busy business people, be pursued. Once it was determined where to compete, recommendations were made on how 3 should compete. This involved decisions based on brand positioning and product, price, and placement. Discussion is provided as to how 3 should position in order to establish its brand as a leader. It was also found the depth of their product mix be increased, a penetration pricing strategy should be adopted to create a consumer surplus to increase their customer base. Finally, the current direct distribution channels are effective in targeting the professional segment but indirect channels will have to be employed in the future as more market segments are targeted. 3
1 Introduction 3 Mobile is an innovative initiative of Hutchinson Australia to be the first player in the third generation (3G) mobile telecommunications market. 3 s service will use new technology that allows live video calling and data transmission at speeds more than double the maximum speed of existing advanced second generation technology (2.5G). There is no doubt that this technology is unique, but it is whether a market segment can be found that is of critical importance for 3. To succeed, the first step for 3 to know is where to compete. This involves selecting an attractive market, identifying potential segments of the market, and then electing market segment(s) to target. Once decided where to compete, 3 can then work on how they should compete in their chosen market. 2 Selecting Markets Whitwell, Lukas, and Doyle (2003) recommend a conceptual framework involving a detailed and integrated S.W.O.T. (Strengths, Weaknesses, Opportunities, and Threats), strategic objective, and strategic focus analyses. 2.1 SWOT Analysis The S.W.O.T analysis commences with determining the attractiveness of a market (the 3G market in the case of 3) by analyzing market opportunities and threats. 4
2.1.1 Opportunities and Threats Market attractiveness can be best determined by analyzing the market s size, growth, competitive structure, cyclicality, and risk (Whitwell et al., 2003). The 3G market is currently small with only one provider and market analysts in May 2003 estimated that there would only be around 50,000 initial subscribers (Zampetakis, 2003). Potential market growth is considerable, considering the large current 2.5G mobile market and the fact that at some stage in the future, all 2.5G carriers plan to convert to 3G. Porter s five forces model (Bradmore, 1996) can be used to analyse the competitive structure of a market by assessing the intensity of competition, power of buyers and suppliers, and threat of new entrants and substitutes. As no competition currently exists in the 3G market, buyer power is not great due to 3 being the only 3G service provider. Barriers to entry are high due to large capital investment and license fees required in establishing a 3G network. The threat of substitutes exists from the currently available 2.5G networks offering similar services as those offered by a 3G network. Supplier power is weak with competition existing amongst phone manufacturers to gain the only available 3G contracts. Currently, these factors indicate a market with little intensity. The lack of a commodity nature in the service offered indicates that the supply and demand for 3G usage should be stable, resulting in low cyclicality of the market. The political and economical environments in Australia are stable and the chance of 5
regulatory interference is minimal, judging by the changes the government has made towards deregulating markets over the last decade. The opportunity and threat analysis undertaken indicates a highly attractive market due to expected growth, no direct competition, stable demand, and low risk. Future changes to the market environment can be expected. The size of the market will inevitably increase with Telstra, SingTel Optus, and Vodafone all planning to make the transition from 2.5G to 3G as part of their long term strategy. This will intensify the competitive structure of the market. The cyclicality and risk of the market is not expected to change drastically. 2.1.2 Strengths and Weaknesses To determine if a company possesses or is capable of creating a differential advantage, internal factors of an organization such as strengths and weaknesses in cost and differentiation need to be considered. A cost advantage can exist for a company if it can operate at a lower total economic cost than its competitors. Establishing a 3G network will cost $3 billion in initial capital and operation costs (Kirby, 2003). The high total economical cost increases the uncertainty of creating corporate value giving little hope of gaining a cost advantage. A differential advantage can also exist if a company provides a unique service to their customer that warrants them paying a price premium. The 3G network can allow 3 to 6
create such an advantage. The data transmission speed of a 3G network is at least twice as fast as the maximum speed of the 2.5G network, a major substitute, and 3 can provide the unique experience of making face-to-face video calls along with many other multimedia services to its handset users. The differential position of 3 is average because some aspects of their service are unique that no other company offers, but many similar aspects of the service are offered by 2.5G networks, email, etc. This has the potential to reduce the perceived uniqueness of 3 s service. Whether 3 s differential advantage is sustainable, will depend largely on how 3 can continuously produce innovative marketing strategies to differentiate their services, as potential competitors such as Telstra believe they can establish a 3G network within 7 months (Kirby, 2003). 2.2 Strategic Market Objectives Once an attractive market is chosen, the organization then needs to define a strategic objective to act as a guideline in maximizing its shareholder value. Objectives include entering, growing, maintaining, harvesting, or divesting an organization s market position. The Strategic Characterization Matrix (Whitwell et al., 2003) is a two dimensional approach, requiring information on the market attractiveness and differential position of the business, to define such an objective. 7
The S.W.O.T Analyses found the 3G market to be highly attractive and that the 3G technology gave 3 an average differential advantage. Applying this to the Strategic Characterization Matrix (Figure 1), it is proposed 3 should pursue a strategic objective of growth in order to generate future cash flow. This will require large investment and short term losses can be expected, however, this is deemed to be an optimal approach to maximize shareholder value. Figure 1: The 3G Strategic Characterization Matrix The 3G Market High Diverst/Grow Growth Enter/Growth Market Attractiveness Medium Harvest Maintain Growth Low Divest Harvest Maintain Disadvantage Average Advantage Competitive Advantage 2.3 Strategic Market Focus The principal strategic market focus can be to increase sales or productivity. Increasing sales is usually a focus for companies entering or pursuing growth in a market, while 8
productivity increases are usually a focus for companies maintaining, harvesting, or divesting their market position. 2.3.1 Increasing Volume The initial market task involved in a volume focus is converting non-users. 3 can expect to gain a small number of innovators as customers who are first adopters who will buy at any price (Fist, 2003). However, to fully capitalize on their differentiation advantage they need to create a network effect by gaining more market share than just innovators, as there is no customer value created in having the ability to make live video calls if you have no one to call. To pursue a volume increase, 3 must price competitively by keeping prices level with substitutes such as phones with 2.5G technology, and use their advantage to gain market share. As 3 gains market share, they will need to look at further increasing volume by entering new segments or markets, increasing their usage rates, and winning future competitor s customers. 2.3.2 Increasing Productivity The benefits of increasing productivity are cost savings and better returns, normally an issue when an organization is pursuing an objective of maintaining, harvesting, or divestment. Options available include rationalizing and reducing costs, increasing prices that may lead to better returns, or enhancing your sales mix to offer range products at a range of prices. As 3 s current objective is the growth of their company, increasing 9
volume should be priority, but neglecting productivity could lead to lower quality and low margins and can therefore not be neglected. 3 Segmenting Markets Customers find different products advantageous over alternatives for varying reasons. Market segmentation analyzes behavioral and descriptor variables to allow an organization to understand why customers are benefiting from their product or service and then analyse whom these customers are. They can then focus on capturing the particular group or segment of the market by marketing the product to the needs of the customer. 3.1 Behavioral Variables Behavioral variables are psychological characteristics of a customer such as interests, personality, attitudes, and opinions. They provide in depth understanding into why people are choosing a particular product or service. 3.1.1 Benefits recognized by customers Benefits to be recognized by customers in the 3G market are the obvious advantage the technology has over existing 2.5G technologies. Video calling allows people to be able to say goodnight to their loved ones face when they cannot be there in person, often a direct result of leading a busy lifestyle. The functional capabilities of the service allow for a more integrated business communication device that can replace multiple phones, laptops, notebooks, personal digital assistant, and digital camera (Zampetakis, 2003) and people see 3G as more practical and convenient. People are also adopting it to be seen as 10
fashionable or trendy and have to be seen with the newest technology. People have even found benefit in holding phones up at concerts as a substitute for cigarette lighters (Westfield, 2003). 3.1.2 Benefits yet to be recognized by customers Potential benefits that are yet to be recognized by customers include the 3G experience and fun involved with video calling, or using the phone as an electronic storage device. It could also be used as a replacement to the modem. These are unexplored avenues that have yet to be marketed, and market segments may well exist for these unseen benefits. 3.2 Descriptor Variables Descriptor variables give an organization indications on who a product s customer is, allowing organisations to target market segments more effectively. Descriptor variables include demographic characteristics such as age, income, geographic location, ethnicity, gender, and occupation. People using 3G so they can see loved ones when talking to them are generally professionals working many hours working at the office, and spend a lot of time interstate or overseas on business. These same people are also using the technology for convenience so they can access email and office networks at a high speed. Innovators are typically young people and high up managers from upper middle class metropolitan areas. 11
4 Electing Target Segments The market segment analysis discovered a majority of the people who are realizing the benefits of 3G are of the professional segment. They are people who earn above average salaries who lead busy lives and are after a convenient, practical means of communicating for business and personal purposes. 4.1 Value potential of customers The value potential of customers is dependent on whether they are strategic, significant, profitable, and loyal to the company. The professional segment is strategically important as they desire the advantages 3G offers, and they are people in positions of influence such as managers. The segment is also both significant and profitable as there are more people than ever before working long hours who are willing to spend the money on the advantages 3G offer. Finally, the segment is regarded as loyal as they are not fully concerned about spending the money or following the latest fashion, but are more concerned with the level of service provided. 4.2 Competitive potential of competitors In order to maintain their differential advantage, an organization needs to know who their competitors are, and then analyze their strengths and weaknesses. 4.2.1 Identification of competitors An organization doesn t just face direct competition. They also face competition from potential, indirect, and incipient competitors. 12
3 faces indirect competition from 2.5G carriers Telstra, SingTel Optus and Vodafone, along with email providers such as Hotmail and other forms of data transmission services. The current 2.5G carriers are also potential competitors as all plans to enter the 3G market in the future. Companies such as Intel are incipient competitors as although they have no clear intention on entering 3G, it could be feasible for them to apply their competency in technology to the 3G market in the future. 4.2.2 Analysis of competitors An analysis of the competition is required to understanding a competitor s strategy and the threat they pose to your operations. The current strategies of the indirect and potential competition from the 2.5G carriers is to maintain or harvest their current position in the 2.5G market. They are all looking to improve the productivity of their current operations by enhancing their sales mix in order to achieve a cost advantage. In the future all have made it clear that they plan to enter the 3G market. These larger companies would be looking to match 3 s service, and then gain 3G market shares by converting their existing customer base so they can achieve economies of scale and gain a cost advantage. The professional segment will already have switched from 2.5G by the time these companies transfer to 3G. As these companies will be focusing on converting their existing customers to 3G, it is not expected that such a strategy would have a large impact on the professional segment for 3. 13
4.3 Dynamic potential of external environment The external environment is not stable over time, and its dynamics need to be analyzed to understand the affects of changes on your organization. Rao & Steckel (1998) use political, economic, social, and technological (P.E.S.T) factors to carry out such an analysis. From analysis of content in the print press, the political, economic, and social factors of the external environment were determined to be stable. It is unlikely that the political situation in Australia would deteriorate rapidly and Australians have stably growing income. Although the analysis showed Australia to have an old economy, it was found Australians still embrace technological change (Zampetakis, 2003) making technological factors an important issue. The advancements in technology that give 3 their differentiation advantage may no longer appeal to the professional segment in the future. New technology may be more beneficial to them and 3 will have to shift its attention from declining segments to new attractive segments. 14
5 Managerial Recommendation - How to Compete Once determined where to compete, the next task is deciding how to compete in order to maintain a sustainable competitive position that maximizes shareholders long term value. This task begins with brand positioning in the elected market segment, followed by product, price, and placement decisions that attempt to further increase corporate value. 5.1 Brand Positioning 3 should attempt to position itself as a leader in the 3G market. To become an iconic brand, Keller (2003) suggests excellence in brand awareness, favorability, strength and uniqueness is required. The exclusive functionality and experience that 3 s products offer already give them strong uniqueness. However, their brand awareness, favorability and strength are weaker as many potential customers do not yet realize the potential benefits that 3 can offer, while current awareness of the brand is average. Applying the strength-stature matrix indicates 3 is at the position of emerging potential. To achieve leadership, 3 need to improve brand strength, awareness, and favorability. Brand strength can be increased by increasing the quantity and quality of information known about the brand, awareness by exposing the brand as frequently as possible to this market to increase their familiarity of the brand, and favorability by increasing the brands desirability (Keller, 2003). 15
To achieve this it is recommended 3 increase their customer base in the professional segment, as direct experience is the source of information creating the strongest brand associations (Keller, 2003, p103). This can be expected to have flow on effects such as personal recommendations and other noncommercial sources of promotion. Favorable images also need to be constructed into this target market s mind, such as 3 mobile representing a total business solution and a convenient, practical means to balance busy business and personal lives. 5.2 Product Product mix is an important issue in developing a leadership brand position and maximizing shareholder value. 3 need to establish a product mix by asking the important questions How much should we invest in new product development? and How many products should we be offering the target market? Such decisions depend on 3 s core strategy, strategic objective and focus, elected market segment, the competitive potential of competitors, and PEST variables (Whitwell et al., 2003) discussed earlier in this report. 3 should increase the depth of their product mix to maintain their differential advantage by increasing their market share by attracting more of the professional segment. Recommendations include increasing software features and the variety in make and design of handsets, along with the range of service packages targeting specific market segments. 16
In addition, 3 need to constantly review their existing products and improve their product mix in order to offer the changing benefits required by customers. 3 can expect to face strong competition from entrants in the near future. Continual innovation is required to maintain 3 s competitive advantage as these new entrants will quickly offer 3 s unique benefits, eroding 3 s competitive advantage. 3 could also consider downward stretching its product line or launching fighter products, such as those without Email or modem function to prevent new entrants penetrating the market. 5.3 Price Pricing decisions are most important as they have a major effect on cash flow, and therefore shareholder value. Whitwell et al. (2003) suggest pricing should be based upon the differing value perceived by customers, and a range of prices should be offered to capitalize on these differences. As the professional segment was determined to attach the most value to 3 s unique benefits, a premium price could be charged for this segment. However, in order to align pricing with the objective of growth and focus of increased volume, 3 should not charge the full premium by pricing below the maximum price customer s are willing to pay. These penetration prices should be similar to those charged by 3 s indirect competition in order to win the competitions customers. This customer surplus will represent greater value for 3 s customers than with the competition. Once 3 successfully attract the professional segment, they can then move their attention to attracting new segments by offering different services at different prices. 17
5.4 Place Place refers to the distribution channels companies use to deliver their product to target markets. The two basic types are known as direct and indirect distribution channels. Direct channels are completely owned by the product or service provider, while indirect channel distribution relies on intermediaries. 3 are currently using direct distribution by means of company owned inner-city stores. Due to the geographic proximity of the stores to the homes and workplaces of the professional segment, this approach is effective as higher control along with better information, service and education on these customers is possible. In order to capture other segments and assist the strategic objective of growth, 3 will have to look at indirect distribution channels and a combination of push and pull strategies can be used. Incentives can be offered to retailers for them to push 3 s products into the wider market, while creating demand through marketing will force retailers to sell 3 s products. The advantages offered by an indirect channel will include the potential for a more cost-efficient system, with the potential to reach a large customer base without the investment in sales forces and commercial premises. 3 must be careful in selecting distributors so that conflict can be minimized and strategic objectives and focuses are shared. As 3 s strategic objectives and target markets must constantly be reviewed, so too must their distribution channels. 18
6 Conclusion From undertaking an investigation into where 3 should be compete, it was concluded that the 3G market is highly attractive and that 3 possess an average competitive advantage. These conditions indicated 3 should pursue a strategic objective of growth. To achieve such an objective requires 3 to focus on increasing their sales volume. Upon segmenting the 3G market, it was found the professional segment has the greatest value potential for 3 and would be a difficult segment for potential competitors to target. A P.E.S.T analysis revealed a stable external environment can be expected. Once it was determined where to compete, recommendations were made on how 3 should compete. It was found that 3 should position its brand as a leader by improving their current brand awareness, favorability, and strength. The depth of their product mix should be increased, and a penetration pricing strategy should be adopted to create a consumer surplus to increase their customer base. Finally, the current direct distribution channels are effective in targeting the professional segment but indirect channels will have to be employed in the future as more market segments are targeted. 19
References Bradmore, D. (1996). Michael E Porter and sustainable competitive advantage. Competitive Advantage: Concepts and Cases (pp. 53-73). Sydney, Australia: Prentice Hall. Fist, S. (2003, April 22). Static and monochrome, but 3G works. The Australian, p. 9 Keller, K. (2003). Brand Knowledge Structures. Strategic Brand Management: Building, Measuring, and Managing Brand Equity (pp. 86-129). Upper Saddle River, New Jersey: Prentice Hall. Kirby, J. (2003, April 3). Hutchinson s do or die. Business Review Weekly, p 48. Rao, V., & Steckel, J. (1998). Analysis for Strategic Marketing, Reading, Mass.: Addison-Wesley. Westfield, M. (2003, June 12). Figuring out how to make 3 add up. The Australian, p.19. Whitwell, G., Lukas, B., & Doyle, P. (2003). Marketing Management A Strategic Value-Based Approach, Milton, Australia: John Wiley & Sons Australia. Zampetakis, H. (2003, May 13). Embracing the 3G force. The Age, p. Computers 4. 20