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CHAPTER 2

LITERATURE REVIEW

2.1 Critical Success Factors (CSFs)

Key Success Factors and Critical Success Factors are terms used to identify

what important elements that exist in an organization. These factors are vital aspects

of the organization that drive the company to be successful. Thus, it is called success

factors and both terms are used correspondingly.

RH Daniel (1961, HBR) proposed that Critical Success Factors are the basis

of identifying information needed by managers to drive the company towards success.

Both F Rockhart (19749, HBR) and RH Daniel (1961, HBR) agreed that in any

organization, there will always be certain factors that is critical to the success of that

organization. If the objectives associated with the factors are not attained, the

organization will fail. There are several key success factors that are relevant in many

organizations, such as:

New Product Development

Good Distribution

Effective Advertising

Strong Brand Image & Awareness

Quick Decision making & action capability

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Human Resource Strategy

Information System Power

2.2 Word of Mouth (WOM)

According to Bughin et al.(McKinsey & Company, 2010), Word of Mouth

advertising is the most powerful marketing tool in which it is the primary factor

behind 20 to 50 percent of all purchasing decisions. The term word of mouth means

consumer-to-consumer communication with no economic incentives (Bughin et al.,

2010). Sernovitz (2006) stated that word of mouth means actions that give a reason

for everyone to talk about your product with ease and likeness.

What Bughin et al. stated is indeed very true. WOM is much more powerful

than advertisements, sales, promotion or any other marketing methods combined. To

be precise, word of mouth marketing is the oldest form of advertising/promotion in

the world. Word of Mouth is verbal communication which leads to verbal marketing.

For a marketer, getting people to talk positively about your product/service is the

most important thing to do. Silverman (2001, p. 6) stated that word of mouth is the

centre of the marketing universe and certainly the method of choice for selling

products/services. In order to realize word of mouth marketing, one must be able to

find the right person as a medium to deliver a message. On the other hand, however,

failure to find the right person will result in catastrophic consequence if negative

word of mouth is delivered.

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Why is word of mouth marketing a very effective marketing tool? Consumers

are nowadays much smarter than before, not easily persuaded into buying

products/services like they used to 5 years ago. They are more educated, open-minded

and more concerned towards community because of globalization. The media have

been bombarding us with irrelevant information, thus now we are more likely to ask

for information or recommendations from relatives. This means that word of mouth

becomes a time saver, no need to sort the information from media because the

recommendation came from a trusted source.

In the study of Consumer Behaviour, word of mouth is defined as information

sharing from one person to another. Because the information received is from

someone you know, the information is more trusted rather than information gathered

from other marketing channels (Solomon, 2006). A market research was conducted

by Onbee Marketing Research and SWA magazine to 2000 consumers in the five big

cities in Indonesia. The result was that 89% of Indonesians trusted their friends and

family more when deciding to purchase a product or service (Astaga.com, 2009).

2.2.1 Community and Opinion Leader

The growth of the WEB (internet) has created millions of communities; it is

mostly about similar hobbies and fondness of the members. These members share

views, recommendations, complaints or praise. These gatherings of members on the

internet are usually in the form of forums and blogs. Nowadays, with the rise of

social networking sites such as Facebook and Twitter, community based opinion is

stronger than ever. Even Blackberry had transformed a whole new way to create new

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communities via Blackberry Messenger. Still, blogging is the preferred way to

express the experience and sharing views with friends and family online.

Communities exist not just in the internet but also in our everyday lives.

Housewives group such as arisan, suburban gathering and other social groups are an

example of communities. There are countless of communities that exists offline.

Opinion leader plays a major role in influencing the members of a particular

community. An opinion leader can strongly influence whether a product is positive or

negative. In the food and beverage industry, an opinion leader can be a renowned

food critic or simply someone who is regarded a leader in a particular group (Group

Arisan). If we are talking about the motorcycle industry then the opinion leader is

usually the president of a motorcycle club. In the online community, an opinion

leader will most likely be the blog author. The author will share his/her views and

experience about the restaurant they just visited. In social networking, the group

creator will obviously be the group leader which acts as an opinion leader.

It is crucial for a restaurant to be able to satisfy these so called opinion leaders

both online and offline. Celebrity chefs such as Farah Quin, Vindex Tengker (Four

Seasons Hotel) and Chef Tatang (Muchtar Alamsyah) can be approach as a strategy to

promote a restaurant through their opinion. They are in fact opinion leaders as they

have their own fans and followers that would believe their leaders.

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2.2.2 Three Forms of WOM (word of mouth)

2.2.2.1 Experiential

Experiential is the most common and powerful of word of mouth, it counts for

50-80% of word of mouth activity in any category of product or service. It results

from a customer’s direct experience with a product/service. Complaints (negative

word of mouth) have a worst affect than praise (positive word of mouth).

2.2.2.2 Consequential

Marketing activities triggers consequential word of mouth. This occurs when

consumers are directly exposed to traditional marketing campaign and then passes on

the message to their friends and relatives. The impact of those messages on

consumers is often stronger than the direct effect of advertisements. Marketing

campaigns that trigger word of mouth have higher campaign reach and influence

rather than campaigns that do not.

2.2.2.3 Intentional

A common example of intentional word of mouth is celebrity endorsements.

Companies use celebrities to trigger positive buzz when launching a new product.

Another example is when Ferrari launched their top-of-the-line Ferrari 599 GTB

Fiorano which they claimed that Michael Schumacher (Former Multiple times World

Champion Ferrari F1 driver) help build and tested the car before going into

production.

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2.3 Porter’s Five Forces Analysis

Porter’s Five Forces Model Analysis is widely used in current business

practices. It is essential and influential in analyzing a particular industry. There are

five forces that determine the industry attractiveness and long-run industry

profitability.

Figure: 2.1 Porter’s Five Forces Model

Source: Thompson et al. (2010, p. 61)

2.3.1 Rivalry of Industry Competition

The intensity of rivalry between competitors in an industry will depend on:

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The structure of competition - for example, rivalry is more intense where

there are many small or equally sized competitors; rivalry is less when an

industry has a clear market leader

The structure of industry costs - for example, industries with high fixed

costs encourage competitors to fill unused capacity by price cutting

Degree of differentiation - industries where products are commodities (e.g.

steel, coal) have greater rivalry; industries where competitors can differentiate

their products have less rivalry

Switching costs - rivalry is reduced where buyers have high switching costs -

i.e. there is a significant cost associated with the decision to buy a product

from an alternative supplier

Strategic objectives - when competitors are pursuing aggressive growth

strategies, rivalry is more intense. Where competitors are "milking" profits in

a mature industry, the degree of rivalry is less

Exit barriers - when barriers to leaving an industry are high (e.g. the cost of

closing down factories) - then competitors tend to exhibit greater rivalry.

2.3.2 Threats of New Entrants

New entrants to an industry can raise the level of competition, thereby

reducing its attractiveness. The threat of new entrants largely depends on the barriers

to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other

industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry

include:

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Economies of scale

Capital / investment requirements

Customer switching costs

Access to industry distribution channels

The likelihood of retaliation from existing industry players.

Threats of Substitute Buyers' willingness to substitute

The relative price and performance of substitutes

The costs of switching to substitutes

2.3.3 Substitute Products

The presence of substitute products can lower industry attractiveness and

profitability because they limit price levels. The threat of substitute products depends

on:

2.3.4 Bargaining Power of Buyers

Buyers are the people / organisations who create demand in an industry. The

bargaining power of buyers is greater when:

There are few dominant buyers and many sellers in the industry.

Products are standardized.

Buyers threaten to integrate backward into the industry.

Suppliers do not threaten to integrate forward into the buyer's industry.

The industry is not a key supplying group for buyers.

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2.3.5 Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the

industry. The cost of items bought from suppliers (e.g. raw materials, components)

can have a significant impact on a company's profitability. If suppliers have high

bargaining power over a company, then in theory the company's industry is less

attractive. The bargaining power of suppliers will be high when:

There are many buyers and few dominant suppliers.

There are undifferentiated, highly valued products.

Suppliers threaten to integrate forward into the industry (e.g. brand

manufacturers threatening to set up their own retail outlets).

Buyers do not threaten to integrate backwards into supply.

The industry is not a key customer group to the suppliers.

2.4 Growth Strategy

Growth Strategy is usually defined as tactics used in marketing to expand

(expansion strategy) a company towards the consumers market. In general, a

company’s growth strategies are divided into three different categories to Portfolio

Expansion, Market Share and M&A (mergers & acquisition). In 2009, McKinsey &

Co. conducted a market research and found out that portfolio expansion is the most

effective growth strategy for firms, which counts for 50 percent of the respondents.

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The definition of Growth Strategy according to investorwords.com (2010), is

a strategy based on investing in companies or sectors which are growing faster than

their competitors. The benefits are usually in the form of capital gain rather than

dividends. AMA (American Marketing Association), however, argued that market

expansion is the prime objective in growth strategy. In order to achieve market

expansion, perhaps sometimes a company must sacrifice short-term earnings.

The difference between formulating a strategy for portfolio development

against market share and M&A is how detailed the management able to recognize the

momentum in a growing market. For M&A, the management will most likely be

recognizing the market potential aggregately and based on that aggregation, the

company will be making strategic decision. But in market share growth strategy, the

management will be bias into focusing in the existing market and is prone to ignoring

other hidden potential in the submarkets (Hanani, 2009).

Growth Strategy is imperative in order for a business to survive and sustain in

the market. Although most companies realize it, it is much more easier said than

done. In fact, in Indonesia, only a small number of companies are able to succeed

with their growth strategy. Markplus, Inc. (2009) argued that there are two emerging

school of thoughts in formulating growth strategies. The first being the ‘Opportunistic

Approach’, where a company would find the available opportunities in the markets

that is related to the business and then think about the development and/or acquisition

of capabilities that are required to capture those opportunities. Whereas the second

being the ‘Growing from the Core Approach’. This approach first identifies the

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company’s strong points and then tries to leverage their competitive advantage to

other business opportunities. So then which approach is better? Markplus, Inc. (2009)

also argues that both approaches are not better than the other; in fact, businesses

should adopt a hybrid-approach towards both approaches. It is believed that a

company should always be ready to capture any opportunities whilst it still

understands what they are good at. Going too far away from the core business is

usually not a good strategic decision (Markplus. Inc.,2009).

2.4.1 Ansoff’s Growth Matrix

Igor Ansoff first created ‘The Ansoff Product-Market Growth Matrix’ in 1957

and published his article containing his marketing-tool in the Harvard Business

Review (HBR), titled “Strategies for Diversification” (1957, HBR). The matrix

allows marketers that have an objective for growth through four different categories;

Market Penetration, Market Development, Product Development and Diversification.

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Figure: 2.2 Ansoff Matrix.

Source: tutor2u.net-b

2.4.1.1 Market Penetration

In market penetration, the business is focused on selling existing products into

existing markets. This strategy seeks to achieve four main objectives:

Maintain or increase the market share of current products – this can be

achieved by a combination of competitive pricing strategies, advertising, sales

promotion and perhaps more resources dedicated to personal selling.

Secure dominance of growth markets.

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Restructure a mature market by driving out competitors; this would require a

much more aggressive promotional campaign, supported by a pricing strategy

designed to make the market unattractive for competitors.

Increase usage by existing customers – for example by introducing loyalty

schemes

A market penetration marketing strategy is very much about “business as

usual”. The business is focusing on markets and products it knows well. It is likely to

have good information on competitors and on customer needs. It is unlikely,

therefore, that this strategy will require much investment in new market research.

2.4.1.2 Market Development

Market Development Strategy focuses on selling existing products into new

markets. Some ways of approaching this strategy are:

New geographical markets; for example exporting the product to a new

country

New product dimensions or packaging: for example

New distribution channels

Different pricing policies to attract different customers or create new market

segments

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2.4.1.3 Product Development

Product development is the name given to a growth strategy where a business

aims to introduce new products into existing markets. This strategy may require the

development of new competencies and requires the business to develop modified

products which can appeal to existing markets.

2.4.1.4 Diversification

Diversification is the name given to the growth strategy where a business

markets new products in new markets. This is an inherently more risk strategy

because the business is moving into markets in which it has little or no experience.

For a business to adopt a diversification strategy, therefore, it must have a clear idea

about what it expects to gain from the strategy and an honest assessment of the risks.

2.5 Differentiation Strategy

Differentiation strategy gives options for companies to deliver non-

standardized products. The attributes of a differentiated product or service usually

offers uniqueness and value to customers. Porter (1980) stated that the value added by

the uniqueness of the product or service allow a firm to charge a premium price. The

higher price will automatically cover the extra cost of providing that particular

differentiation.

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Figure: 2.3 Porter’s Generic Strategies

Source: marketingteacher.com

Jack Trout in his book, Differentiate or Die (2008, p. 22), noted that choosing

between multiple products is always based on differentiation whether it is implicit or

explicit. This means that when advertising a product/service, the marketer must give

reason for the consumer to choose that product. This can be done through

differentiation. Kotelnikov (2001) stated that differentiation strategy is an integrated

set course of action designed to produce or deliver goods or services that customers

perceive as being different in ways that are important to them.

Differentiation Strategies are not about pursuing uniqueness for the sake of

being different. Differentiation is about understanding customers and how our product

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can meet their needs. Grant (2008, p. 241) explained the need of identifying; who are

the customers, how to create value for them and how to do it more effectively &

efficiently than anyone else. Instituting differentiation advantage requires creativity

which means that it cannot be achieved just through using standardized frameworks

and techniques.

Firms that succeeded in implementing differentiation strategy often have the

following internal strengths (Porter, 1980):

Have a leading scientific research team/division.

Highly skilled and creative product development team.

Strong marketing and sales team that can successfully communicate the

perceived strength of the product.

Excellent corporate reputation for quality and innovation.

2.5.1 Broad Differentiation Strategy

A broad differentiation strategy involves two aspects, one is the differentiation

itself and the other on mass appeal. Firms that are implementing differentiation

strategy must carefully study buyer’s needs and behaviour. This strategy is most

successful when buyer’s need and preferences are diverse and cannot be satisfied by a

standard product or service.

When firms are successful in using differentiation, firm can;

Charge a premium price for its product/service

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Increase sales revenue

Strong brand which leads to customer loyalty

Differentiation yields a longer-lasting and more profitable competitive

advantage when it is based on product innovation, technical superiority, product

quality and reliability, comprehensive customer service and unique competitive

capabilities. There are many examples of firm that are successful in implementing

differentiation strategies, such as Mercedes-Benz, Rolex, Amazon.com, Apple, 3M

Corporation, FedEx, Coca-Cola and Caterpillar. (Thompson et al. 2010, p. 149)

2.5.2 Focused Differentiation Strategy

Focused Differentiation Strategy is designed to securing a competitive

advantage to the unique preferences and needs of a narrow market segment. The

groups of buyers are well-defined and identified clearly. Thompson (2010, p. 157)

stated that the success of a focused differentiation strategy depends on the existence

of a buyer segment that is looking for special product attributes or seller capabilities

and on a firm’s ability o stand apart from rivals competing in the same target market

segment.

Companies like Gucci, Porsche, Rolls-Royce, Häagen-Dazs and Ferrari

employed successful focused differentiation strategy. In most markets, there are a

niche segment that is also willing to pay a price premium for the best product/service

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available but this does not mean that focused differentiation is always aimed at the

premium market.

2.5.3 Pitfalls of Differentiation Strategy

There are several points that need to be addressed when executing

differentiation strategy. Companies should not make the following mistakes (Porter,

p. 160-162):

Differentiating product or service that does not lower a buyer’s cost or

benefits the buyer’s well-being. (eg. Chinese restaurant).

Charging too high price premium.

Ignoring the need to indicate value and depend only on fundamental product

attributes to achieve differentiation.

Not understanding or identifying what buyers consider as value.

Overspending on efforts to differentiate which erodes profitability.

2.6 Consumer Behaviour

Solomon (2004) explained that consumer behaviour is about the study of

individuals or groups select when purchasing, using or disposing of products,

services, ideas or experiences to satisfy the needs and desires. He also argued that

consumers are actors in the marketplace as consumers are the focus of consumer

behavioural studies.

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Customer value according to Hawkins et al. (2007, p. 11), is the difference

between all the benefit derived from a total product and all the costs of acquiring

those benefits. Sinha (2008) indicated that understanding consumer behaviour is

essential for a business to be successful. It helps to identify the weak points and

reflects the positive aspect of any business.

Consumer behaviour involves the use and disposal of products and they study

of how they are purchased. When customers decide to purchase or decide not to

purchase a product or service, there are influences that affect consumer purchase

decision. Consumer motivation and decision strategies differ between products that

differ in their level of interest and importance that they entail for the consumer.

Marketers can formulate their marketing strategies to a more effective method by

understanding consumer behaviour.

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Figure: 2.4 Consumer Decision Making Process

Source: tutor2u.net-c

Problem Recognition: Perceiving a difference between a person's ideal and

actual situations big enough to trigger a decision. Eg. Hunger and Thirst.

Information Search:

• Internal information Search:

o Scanning one’s memory to recall previous experiences with

products or brands.

o Often sufficient for frequently purchased products.

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o When past experience or knowledge is insufficient

o The risk of making a wrong purchase decision is high

o The cost of gathering information is low

o External information search:

o Personal sources, such as friends and family.

o Public sources, including various product-rating organizations such

as Consumer Reports.

o Marketer-dominated sources, such as advertising, company

websites, and salespeople

Alternative Evaluation: Assessing Value The information search clarifies the

problem for the consumer by:

(1) Suggesting criteria to use for the purchase.

(2) Yielding brand names that might meet the criteria.

(3) Developing consumer value perception.

Purchase Decision: There are three possibilities here; where to buy, from

whom to buy or do not buy at all. From whom to buy can be influenced by terms of

sale, past experience, return policy, etc. When to buy can be influenced by store

atmosphere, time pressure, a sales, pleasantness of the experience, ambience, etc.

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Post-purchase Behaviour: after buying a product, a customer will compare it

with his or her expectations, whether it is satisfying or dissatisfying. Satisfaction or

dissatisfaction affects:

o Consumer value perceptions

o Consumer communication

o Repeat-purchase behaviour

2.7 Business Life Cycle

The business life cycle theory is similar to the product life cycle theory. There

are four stages in the cycle; introduction, growth, maturity and decline. According to

Businessdictionary.com (2010), the life cycle is four separate but not predictable

stages every business goes through from its introduction to withdrawal from market.

As a company move through these stages, its pricing, promotion, packaging and

distribution are re-evaluated and changed to prolong its existence.

Introductory

This is the stage where a product is conceptualized and first brought to market. The

goal of any new product introduction is to meet consumer's needs with a quality

product at the lowest possible cost in order to return the highest level of profit. The

introduction of a new product can be broken down into five distinct parts:

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• Idea validation, which is when a company studies a market, looks for areas

where needs are not being met by current products, and tries to think of new

products that could meet that need. The company's marketing department is

responsible for identifying market opportunities and defining who will buy the

product, what the primary benefits of the product will be, and how the product

will be used.

• Conceptual design occurs when an idea has been approved and begins to take

shape. The company has studied available materials, technology, and

manufacturing capability and determined that the new product can be created.

Once that is done, more thorough specifications are developed, including price

and style. Marketing is responsible for minimum and maximum sales

estimates, competition review, and market share estimates.

• Specification and design is when the product is nearing release. Final design

questions are answered and final product specs are determined so that a

prototype can be created.

• Prototype and testing occurs when the first version of a product is created and

tested by engineers and by customers. A pilot production run might be made

to ensure that engineering decisions made earlier in the process were correct,

and to establish quality control. The marketing department is extremely

important at this point. It is responsible for developing packaging for the

product, conducting the consumer tests through focus groups and other

feedback methods, and tracking customer responses to the product.

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• Manufacturing ramp-up is the final stage of new product introduction. This is

also known as commercialization. This is when the product goes into full

production for release to the market. Final checks are made on product

reliability and variability.

In the introduction phase, sales may be slow as the company builds awareness

of its product among potential customers. Advertising is crucial at this stage, so the

marketing budget is often substantial. The type of advertising depends on the product.

If the product is intended to reach a mass audience, than an advertising campaign

built around one theme may be in order. If a product is specialized, or if a company's

resources are limited, than smaller advertising campaigns can be used that target very

specific audiences. As a product matures, the advertising budget associated with it

will most likely shrink since audiences are already aware of the product.

GROWTH

The growth phase occurs when a product has survived its introduction and is

beginning to be noticed in the marketplace. At this stage, a company can decide if it

wants to go for increased market share or increased profitability. This is the boom

time for any product. Production increases, leading to lower unit costs. Sales

momentum builds as advertising campaigns target mass media audiences instead of

specialized markets (if the product merits this). Competition grows as awareness of

the product builds. Minor changes are made as more feedback is gathered or as new

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markets are targeted. The goal for any company is to stay in this phase as long as

possible.

MATURITY

At the maturity stage, sales growth has started to slow and is approaching the

point where the inevitable decline will begin. Defending market share becomes the

chief concern, as marketing staffs have to spend more and more on promotion to

entice customers to buy the product. Additionally, more competitors have stepped

forward to challenge the product at this stage, some of which may offer a higher

quality version of the product at a lower price. This can touch off price wars, and

lower prices mean lower profits, which will cause some companies to drop out of the

market for that product altogether. The maturity stage is usually the longest of the

four life cycle stages, and it is not uncommon for a product to be in the mature stage

for several decades.

A savvy company will seek to lower unit costs as much as possible at the

maturity stage so that profits can be maximized. The money earned from the mature

products should then be used in research and development to come up with new

product ideas to replace the maturing products. Operations should be streamlined,

cost efficiencies sought, and hard decisions made.

From a marketing standpoint, experts argue that the right promotion can make

more of an impact at this stage than at any other. One popular theory postulates that

there are two primary marketing strategies to utilize at this stage—offensive and

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defensive. Defensive strategies consist of special sales, promotions, cosmetic product

changes, and other means of shoring up market share. It can also mean quite literally

defending the quality and integrity of your product versus your competition.

Marketing offensively means looking beyond current markets and attempting to gain

brand new buyers. Relaunching the product is one option. Other offensive tactics

include changing the price of a product (either higher or lower) to appeal to an

entirely new audience or finding new applications for a product.

DECLINE

This occurs when the product peaks in the maturity stage and then begins a

downward slide in sales. Eventually, revenues will drop to the point where it is no

longer economically feasible to continue making the product. Investment is

minimized. The product can simply be discontinued, or it can be sold to another

company. A third option that combines those elements is also sometimes seen as

viable, but comes to fruition only rarely. Under this scenario, the product is

discontinued and stock is allowed to dwindle to zero, but the company sells the rights

to supporting the product to another company, which then becomes responsible for

servicing and maintaining the product.