8. Choosing Strategic Direction

Ansoff’s Matrix

• A marketing planning model that helps a business determine its product and market strategy.

Market Penetration

• Definition: A growth strategy where a business aims to sell existing products into existing markets.
• Features:
  • Aim: To increase market share.
  • Selling more existing products to the same target customers.
  • Getting existing products to the same target customers.
  • Widening the range of existing products.
• Examples of Market Penetration Strategies:
  • Aldi: Rapid organic growth in the UK, targeting the same customer base with new stores.
  • Dominos: Effective use of e-commerce to encourage existing customers to buy more pizza.
• Evaluation:
  • Business focuses on markets and products it knows well.
  • Can exploit insights on what customers want (and competitors).
  • Unlikely to need significant new market research.
  • But will the strategy allow the business to achieve its growth objectives.
• Reasons for choosing, and value of the strategy: A business will use a strategy of market penetration if:
  • There is growth in the existing market.
  • There is scope to encourage greater frequency of use among existing customers.
  • Some consumers may be encouraged to put an existing product to different uses, thus increasing demand.
  • By modifying its marketing mix, there may be potential to attract customers away from competitors, thus increasing the business's market share.

Product Development

• Definition: A growth strategy where a business aims to introduce new products into existing markets.
• Examples of Product Development Strategies:
  • Brand extensions are common examples of product development strategies.
  • Technological innovation provides significant opportunities for product development strategies.
• Evaluation:
  • A strategy that often plays to the strengths of an established business.
  • Strong emphasis on effective market research (insights into customer needs) and successful innovation.
  • A great way of exploiting the existing customer base.
  • Being first to market is usually important.
• Reasons for choosing, and value of the strategy: A business will use a strategy of product development if:
  • The scope to adapt the quality of a product in order to appeal to different market segments.
  • An existing product is becoming obsolete or out of date and needs to be replaced in order to avoid the loss of market share.
  • An existing product has created a need or desire for complementary products.
  • Market researchers reveal the potential for a new product that would serve previously unrecognized customer needs.

Market Development

• Definition: A growth strategy where the business seeks to sell its existing products into new markets.
• Approaches to Market Development:
  • New geographical markets; e.g., exporting to emerging markets.
  • New distribution channels: e.g., using e-commerce and mail order.
  • Different pricing policies to attract new customers in different segments.
• Examples of Market Development Strategies:
  • Starbucks' expansion into China is a classic example of a successful market development strategy.
  • Tesco’s market development strategy to enter the US grocery supermarket sector was a disaster for shareholders.
• Evaluation:
  • A logical strategy where existing markets are saturated or in decline.
  • Often riskier than product development, particularly expansion into international markets.
  • Existing products may not suit new markets; depends on customer needs.
• Reasons for choosing, and value of the strategy:
  • There are market segments that do not currently buy an existing product in significant numbers but that the business believes have the potential to buy more of the product.
  • There is scope to enter new markets, such as overseas countries.
  • New markets/market segments can be reached easily using the business's existing channels.
  • The business has spare capacity and high fixed costs, and therefore, it would be cost-effective to increase levels of production.
  • The business's greatest strength is the reputation of its existing products.

Diversification

• Definition: The growth strategy where a business markets new products in new markets.
• Examples of Diversification:
  • Alphabet
  • Samsung
• Examples of failed diversification:
  • Friends Reunited social networking website closed down:
    • A great example of a failed takeover and diversification: bought by ITV for £175m; sold for £25m and then closed.
  • HMV selling live music assets for £7.3m:
    • Retailer HMV diversified into the live entertainment market with £40m purchase of several live music venues. Exited the market soon after.
• Benefits of Diversification:
  1. Reduced Risk: By spreading operations across multiple products, markets, and industries, a company can reduce its exposure to any one specific market, reducing the overall risk of the business. This is an economy of scale.
  2. Increased Revenue: Diversifying into new areas can create new revenue streams, helping to stabilize and grow the business.
  3. Improved Financial Performance: Diversification can lead to improved financial performance, such as increased profits, return on investment, and cash flow.
  4. Improved Market Position: Diversification can help a company improve its market position by making it less reliant on any one market or product. This can provide a competitive advantage and make the company more resilient in the face of economic or market changes.
  5. New Opportunities for Growth: Diversification can lead to new opportunities for growth and expansion, helping a company to continue to grow and evolve over time.
• Evaluation:
  • Inherently risky strategy:
    • No direct experience with the product or market.
    • Few economies of scale (initially).
    • However, if successful, the overall risk of the business is spread.
  • Approaches to diversification:
    • Innovation and Research and Development: develop new solutions.
    • Acquire an existing business in the market.
    • Extend an existing brand into the new market.
• Reasons for choosing, and value of the strategy: A business will use a strategy of diversification if:
  • Its existing products and/or markets are in decline and likely to remain so.
  • Its existing markets are saturated and therefore there is no scope for expansion within them.
  • Senior managers of the business want to avoid complacency and so wish to give the business a new challenge.

Porter’s Generic Strategies

• The Challenge Facing Marketing Strategy: To find a way of achieving a sustainable competitive advantage over the other competing products and firms in a market.
• Porter’s Approach:
  • Porter suggested two overall business strategies that could be followed in order to gain a competitive advantage.
  • Porter argued that differentiation and low cost are effective strategies for firms to gain competitive advantage.
• What is Competitive Advantage? An advantage over competitors is gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and services that justify higher prices.

Low Cost

• With this strategy, the objective is to become the lowest-cost operator. This typically involves production on a large scale which enables the business to exploit economies of scale.
• Why low cost is a source of competitive advantage?
  • Why is cost leadership important?
    • If selling prices are broadly similar, the lowest-cost operator will enjoy the highest profits.
    • The lowest-cost operator can also offer the lowest prices (gain market share).
  • Suitable markets for this strategy?
    • Standard product.
    • Little product differentiation.
    • Branding relatively unimportant.
• Likely Features of a Low-Cost Operators:
  • High levels of productivity and efficiency.
  • High capacity utilization.
  • Large scale = economies.
  • Use bargaining power to negotiate the lowest prices from suppliers.
  • Lean production methods and culture.
  • Access to the widest and most important distribution channels.

Differentiation

• A differentiation strategy aims to offer a product that is distinctively different from the competition, with the customer valuing that differentiation.
• Ways to Achieve Differentiation:
  • Superior product quality (features, benefits, durability, reliability).
  • Branding (strong customer recognition and desire; brand loyalty).
  • Wide distribution across all major channels (i.e., the product or brand is an essential item to be stocked by retailers).
  • Sustained promotion - often dominated by advertising, sponsorship, etc.

Hybrid Strategies: Differentiation and Low Cost

• Value proposition = stylish furniture, good quality, low prices.
• Achieves its low prices via cost leadership:
  • Furniture is flat-packed to reduce storage space.
  • Large out-of-town retail units spread fixed costs.
  • Products are made in China and Malaysia, reducing unit costs.
  • Low margins/high volume allows economies of scale.
• Differentiates using:
  • Unique/unusual design.
  • Localization of the product range.
  • Targeting (mainly) the young global middle class.

Influences on the Choice of Strategic Positioning

• What factors do management need to consider as they make their choice of strategic positioning?
  • Competitors:
    • Market share/resources/strategy.
    • Competitive.
  • Core Competencies:
    • Unique selling points.
    • Scope to be able to differentiate.
    • Scale and efficiency to be able to compete at low cost.
  • External environment:
    • Changes all businesses in the market need to respond to.
    • Opportunities and Threats.

Competitors

• How strong are the competitors a business faces in its chosen strategic position? What advantages, if any, do those competitors face?
• A business considering positioning itself using a cost leadership strategy (Porter) will want to assess whether it is capable of achieving the same level of efficiency and productivity as key competitors who also adopt a cost leadership strategy. Can the business access the same economies of scale as competitors?
• Similarly, a differentiation strategy may be attractive, but are existing competitors already exploiting the market opportunities for a differentiated product or service? What are the market shares of the market segments a business might want to target?

Core Competencies

• It is essential to have an honest view of the business's ability to compete. Does the business have a unique selling point that might enable it to sustain a strategy of differentiation?
• If innovation is key to positioning, does the business have the appropriate resources, organizational culture and reward systems to create a suitable flow of innovation?

External Environment

• Careful and regular scanning of changes in the external environment is key to effective strategic positioning. For example, changes in the political and/or regulatory environment can create opportunities as well as pose threats to the existing positions of businesses in a market.
• Similarly, changes in the economic environment can challenge existing positions. For example, a significant economic downturn might increase the attractiveness of businesses that are positioned as "low-cost" operators if demand for such products and services increases at the expense of higher-priced and higher-cost alternatives.

The difficulties in maintaining a competitive advantage

• Loss of product differentiation:
  • Spending on R&D to maintain innovative image - expensive
  • Rivals launch their own 'copy-cat' products
• New competition:
  • Competitors exploit gaps in the market to gain market share
• Changes in Tastes/ Fashions:
  • Changing tastes can bring an end to competitive advantages
• New legislation:
  • Government intervention in the market. new laws and regulations
  • Example: Payday loan firms saw interest rate caps on their loans which made many of them financially unviable, e.g., the collapse of Wonga.
• Evaluation:
  • Porter's generic strategies model is more readily accepted and used in the business world. Bowman's model by contrast is considered overly complicated and confusing.
  • Porter's theory stresses the need for careful management of a firm's value chain and its key areas of differentiation, but how realistic is this theory in a modern fast-changing economy?
  • Is 'getting stuck in the middle' really as bad as Porter's model makes it out to be?
  • The largest danger to a firm's competitive advantage is that of complacency. Firms might see no reason to change and risk becoming static in dynamic markets.

Competitive Advantage

• What is Competitive Advantage?
  • Competitive advantage is a sustainable advantage that a business has over competitors that enables it to succeed in the market.
  • Competitive advantage explains why a buyer might prefer one offer over another. In other words, why do they choose to buy what they buy…This could be because of:
    • Awareness and familiarity
    • Powerful brands - Trust
    • Being more 'in tune' with buyers’ needs
    • More effective promotion
    • Being better at bringing innovation to the market
• What is Cost Advantage?
  • Where a business is able to produce its product at a lower cost than the competition
• What is the Differentiation Advantage?
  • Where a business is able to differentiate its product from the competition such that customers perceive superior value
• What is the Focus/Niche?
  • Focus is a marketing strategy of targeting specific market segments, rather than the entire market.
  • This is often essential for smaller businesses that lack the resources to compete across the whole market or specialise in servicing the needs of a niche segment that includes buyers with particular needs and preferences.
  • A focus strategy is also pursued by many large businesses that develop different offers that are targeted at distinct market segments.
• Value propositions as a competitive advantage:
  • Customers often choose products and services based on their value proposition - how they perceive the merits of a product relative to the alternative, competing products.
  • Providing a superior value proposition than the competition is a likely source of competitive advantage - but only if it can be sustained.
  • There are various possible value differences that have the potential to deliver a competitive advantage
• Four ways to create a winning value proposition:
  • Offer more for less: IKEA - Good quality at low prices
  • Offer more for more: Rolex - High price luxury products with prestige value
  • Offer more for the same: iPhone - New features and capabilities in each release
  • Offer less for much less: Primark - Low-cost fast-fashion
• Challenges to achieving competitive advantages over time:
  • Competitor innovation: At least some competitors are learning and innovating, sometimes with enough success to overhaul the market leader.
  • Wear-out caused by growth: It can be difficult to sustain some sources of competitive advantage in businesses that achieve sustained rapid growth. For example, innovation is often easier within a smaller business, where employees often have closer and less formal relationships, which tends to encourage creativity.
  • Changing buyer preferences: Markets are always changing, and a key dimension of change is changing buyer preferences and expectations. This is sometimes caused by innovation but is also a frequent outcome of demographic change.
• Benefits:
  • Higher profits: A competitive advantage can lead to higher profit margins because businesses can make a reasonable profit on each good or service sold.
  • More customers: A competitive advantage can help attract more customers and maintain brand loyalty.
  • Predictable revenue: A competitive advantage can add predictability and constancy to a company's revenue streams.
  • More brand alliances: A competitive advantage can help attract more brand alliances, talent, and potential investors.
  • Long-term sustainability: A competitive advantage can contribute to long-term sustainability by creating barriers to entry for potential competitors.
• Disadvantages:
  • Competitive response: Competitors may try to replicate or surpass a company's competitive advantage. Businesses need to be prepared for this and continuously improve their unique value proposition.
  • Difficulty maintaining a competitive edge: It can be difficult to maintain a competitive edge for a number of reasons, including:
    • Lack of differentiation
    • Well-informed buyers
    • The rise of different types of competition
    • Obsession with what the competition is doing
  • Slower growth: Competitive advantage strategies may lead to slower growth compared to other strategies.
  • Limited rapid market capture: Competitive advantage strategies may be limited in terms of rapid market capture.
  • Requires time and patience: Competitive advantage strategies may require time and patience to see substantial results.
• Determinants:
  • Investment in new equipment and technology: Machinery and computers can improve the speed, reliability, and quality of produces, and still provide flexibility. Labour and other costs can be reduced. Advanced technology can also enable a business to provide unique products that are highly valued by consumers.
  • Staff skills, education, and training: A skilled and educated staff will be more adaptable and flexible, able to cope with change more readily, and possess more creativity and innovative talents.
  • Innovation through investment in research and development: The pace of change requires companies to update and broaden their product range constantly. Product life cycles are becoming shorter, and new ideas must be incorporated into products more quickly.
  • Enterprise: The entrepreneurial skills of owners of business startups and their desire to become their own bosses create a culture of independence, hard work, and flexibility, which helps to supply the needs of larger organizations while also providing alternative products and services.
  • The effectiveness of a business's marketing: A well-planned marketing mix, suited to the needs of a business, can greatly improve its competitive advantage and therefore its ability to gain greater sales volume and charge higher prices in the face of competition.
  • Improving quality: As living standards have improved, quality has become more important to consumers. Improving quality can help a business to increase both sales volume and the selling price of its products and services.
  • Effective human resource management: This can take different forms, such as effective recruitment, high-quality training, an efficient organizational structure, and appropriate use of incentives in order to motivate workers.
• Difficulties of maintaining a competitive advantage:
  • Lack of differentiation: Companies need to create a unique value proposition to set themselves apart from their competitors. This could involve offering high-quality products, exceptional customer service, or a distinct brand image.
  • Well-informed buyers: Buyers are more aware of what's available in the marketplace, making it harder for companies to maintain a competitive edge.
  • Increased competition: There are more types of competition than ever before, making it harder for companies to stand out.
  • Need for constant adjustment: Competitive advantages aren't permanent, and companies need to be able to adapt and evolve to meet changing customer preferences and challenges from competitors.