Marketing Strategy

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• Marketing Strategy
• Competitive Strategies
• Fall 2004

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Summary

• 1. Basic problem
• 2. Dynamics
• 3. Uncertainty and competition
• 4. Differentiation
• 5. Other techniques that alleviate price
  competition

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British Satellite Television

• In April 1986 the British government invited
  applications to provide a commercial service for
  satellite television in the UK. It received five
  serious bids.
• December 1986 fifteen-year franchise for
  high-powered direct broadcast by satellite (DBS)
  awarded to British Satellite Broadcasting (BSB).
  
• July 1987 BSB had raised 222.5 M pounds (to buy
  two high-powered satellites). Total cost for
  start-up estimated at 500M
  
• Projections 1st year 1990 400K satellite
  dishes
  
• (cumulative) 1992 2M
• 1995 6M
• 2001 10M
• Break-even expected at 3 to 4M dishes.
• June 1998 News Corporation announced that it
  would launch its own DBS venture in the UK, to be
  called Sky Television. Broadcast to be made by
  medium-powered satellite, Astra. Consumers would
  need bigger dishes than for BSB, but still
  relatively small and inexpensive.
• Target launch February 1989
• Projections Start-up costs 100M (no need to
  launch own satellites, and
  
• cheaper programming)
• February 1990 1M dishes
• End of 1994 5-6 M dishes
• Break-even expected in early 1992

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British Satellite Television

• Response by BSB
• Revised sales projections 1993 5M dishes
• 1998 10M dishes
• Increase sales by increasing advertising
  promotion
  
• Bidding war between BSB and Sky for British
  television rights to Hollywood films By the end
  of 1988, BSB and Sky had committed a total of
  670M pounds to Hollywood film rights (150M
  up-front, twice what they anticipated)
• February 1989 Sky went on the air. Only 600K
  dishes by February 1990 (shortages of receiving
  equipment, patchy programming, negative
  advertising by BSB, rising interest rates, very
  nice weather).
• BSB Supplementary first round of financing in
  January 1989 of 131M pounds, and later that year
  more 70M in financing (higher-than expected
  costs).
• May 1989 Stated that it would miss launch data
  because of technical problems.
  
• February 1990 New 450M financing in debt from
  banks 450M equity for Operation Fastburn to
  increase advertising (as never seen in the UK).
  Second costliest start-up in UK behind the
  Channel Tunnel.
• April 1990 BSB went on the air. Target of 3M
  dishes in first 3 years.
  
• April-October 1990 175K dishes (Sky got 350K
  for a cumulative of 950K).
  
• October 1990 BSB losing 6-7M pounds per week,
  Sky losing 2M per week. News Corp with cash
  problems.

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British Satellite Television

• November 2, 1990 BSB and Sky announced that they
  would merge into BSkyB, control 50-50. News Corp.
  would shoulder less than 50 of the cash in-flow.
  Sky managers took over. Official description a
  combination of Skys commercial acumen with the
  financial resources of BSBs major
  shareholders.
• Collective loss of 1.25b pounds before merger.
  Several hundred million pounds in additional
  losses after merger.
  
• Why?

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(No Transcript)
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Understanding the Competitors

• S. Holmes and Professor Moriarty (Napoleon of
  Crime)
  
• S. Holmes All that I have to say has already
  crossed your mind.
  
• P. Moriarty Then possibly my answer has crossed
  yours.

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1. Basic Problem

• The Defense Department puts up a sealed bid
  auction for the development of a new aircraft
  (greatest project in the next 20 years - 40
  Billion).
• Only two likely candidates Lockheed and Boeing.
  If similar bids, the Defense Department is
  equally likely to allocate the project to either
  candidate (uncertain technological issues).
  Otherwise, the lowest bid gets all the project.

Lockheed
Low bid
High bid
Med. bid
0, 2 b
High bid
4 b, 4 b
0, 6 b
Boeing
0, 2 b
Med. bid
6 b, 0
3 b, 3 b
2 b, 0
2 b, 0
1 b, 1 b
Low bid
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What if competition with multiple products?

• Complements?
• Dynamic effects?
• British satellite television?

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2. DynamicsREPEATED INTERACTION

• Same case as before, but now there are several
  projects (one
  
• after the other)

Lockheed
Low bid
High bid
Med. bid
0, 2 b
High bid
4 b, 4 b
0, 6 b
0, 2 b
Med. bid
6 b, 0
3 b, 3 b
Boeing
2 b, 0
2 b, 0
1 b, 1 b
Low bid
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3. COMPETITION WITH MARKET UNCERTAINTY

• 10 of the time a firm charges a high price, the
  market
  
• behaves as if the firm had charged a low price
  (and
  
• vice versa).

Pepsi
High Price
Low Price
4,4
0,6
High Price
Coke
6,0
3,3
Low Price
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PRICE WARS

• 1. Way of disciplining possible defections by
  competitors.
  
• 2. Cooperation not possible in periods of very
  strong
  
• demand.

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4. Differentiation

• Product Differentiation
• ? Less advantage in price cutting
• (? But, less harsh punishments)
• Examples - comfort of airline seats.
• - different schedules.

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DifferentiationNo Price Competition
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DifferentiationPrice Competition
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5. Conditions that Alleviate Price Competition

• 1. Product differentiation.
• 2. Capacity constraints.
• 3. Short detection lags.
• 4. Harsh punishments for price-cuts.
• 5. Simplicity of tacit agreement.
• 6. Similarity of costs.
• 7. Stability of demand.
• 8. Mutual monitoring.
• 9. "Most-Favored-Nation" clauses.
• 10. Lack of extremely large orders.

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Summary

• Understanding the competitors
• Price competition
• Dynamic competition
• Market uncertainty
• Differentiation
• Principle of Minimum Differentiation
• Principle of Maximum Differentiation
• Techniques to alleviate price competition