Once You Have Read This Introductory Article

Week One

Lecture Notes

Chapter 1

Introduction

As a start for this course and to help understand the information in Chapter One, please read the article on IBM entitled “Market-Oriented Perspectives Underlie Successful Corporate, Business, and Marketing Strategies” which I found does a good job of demonstrating the nature of strategy development at different levels of an organization.

Once you have read this introductory article:

IBM’s experiences in the information technology industry illustrate some important points about the nature of business strategy and the interrelationships among different levels of strategy in an organization, something the textbook authors try to stress in Chapter One. The article also demonstrates the importance of timely and accurate insights into customer desires, environmental trends, and competitor actions in formulating successful strategies at every level.

Most firms, particularly larger corporations with multiple divisions or business units like IBM, pursue a hierarchy of interdependent strategies. Each strategy is formulated at different levels in the organization and deals with different sets of issues. For example, IBM’s goals of becoming a leading service provider and seeking future growth primarily through the development of new software, consulting and outsourcing services reflect its new corporate strategy. This level of strategy provides direction on the company’s mission, the kinds of businesses it should be in or the products or services it should offer, and its growth policies.

On the other hand, attempts to differentiate its offerings by providing superior quality based on the expertise, experience, and customer knowledge of its large contingent of consultants while avoiding cut-throat price competition reflect IBM’s business-level strategy in its Global Services division. This level of strategy normally addresses how a business will compete in its industry.

Finally, interrelated functional decisions about how to divide the market into segments, which segments to target, what goods and services to offer each segment, what promotional tools and appeals to employ, and what prices to charge all reflect the marketing strategies for each of IBM’s various product-market entries. Marketing strategy decision-making at this level will be the primary focus of this course. However, some marketing strategy decisions are more logically made at the business unit or corporate levels and they will be addressed too. Strategic planning at the corporate and business unit levels, which includes more than just marketing, will be addressed more specifically in the MBA Capstone course, BUS 695.

Because a major part of marketing is to monitor and analyze the needs and desires of potential customers, emerging challenges posed by competitors, and opportunities and threats related to trends in the external environment, it often plays a crucial role in influencing strategies formulated at higher levels in the firm. While the need for new corporate and competitive strategies at IBM became obvious because of stagnating sales and declining profits in some of the firm’s most venerable businesses, decisions about the content of those new strategies were influenced by information and analyses supplied by the firm’s marketing and sales personnel. Marketing executives were key members of the task force appointed by CEO Gerstner to analyze the firm’s strengths and weaknesses and develop new directions for growth and profitability.

Some firms systematically incorporate such market and competitive analyses into their planning processes. They also coordinate their activities around the primary goal of satisfying unmet customer needs. As the textbook authors discuss, such firms are market-driven and follow a business philosophy commonly called the marketing concept.

Do you remember the marketing concept from your introductory marketing course?

In summary, the marketing concept suggests that you carefully identify and understand customer needs and satisfy those needs better than competition while still making a profit. This simple, but powerful, philosophy, which initially emerged as a concept at General Electric Corp. in the 1950’s, is the philosophy behind most marketing decision making in market-driven organizations today.

Prerequisites to Effective Marketing Planning:

There are certain prerequisites to effective marketing planning and developing successful strategies. This involves gathering information and using this information to guide marketing strategy formulation. I have always believed that 50% of the success in marketing planning involves a careful understanding and analysis of critical information before you make your first decision.

The text addresses some of these critical factors but it doesn’t do a good job of clarifying that these factors are critical prerequisites to successful decision-making. Here are my thoughts regarding the most important of these factors:

Goals and Objectives: Clear objectives such as sales growth, revenue growth, profit contribution, market share growth, customer satisfaction levels, and etc. must first be established in order to guide strategy development. Typically, goals and objectives, like strategies must be developed over specified periods of time for each business unit, product-market and the organization on the whole. For example, if growth objectives are very small then perhaps only slight investments in additional sales or promotional efforts is all that is necessary. However, with aggressive growth objectives, it might be necessary to also consider new product introduction strategies or consider expanding into new geographic markets or perhaps following an acquisition strategy by acquiring one of your competitors. Thus, setting effective goals and objectives first will influence decisions regarding target markets and marketing mix strategies as well.

Resources Available: Every organization has limited financial and human resources. Formulating strategies also require an understanding of what resources are available and how those resources are to be allocated across businesses, product-markets, functional departments, and activities within each business or product-market. If you have $1M vs. $100k available to you for marketing activities, it will have a significant impact on the strategies and action plans you can consider. Thus, it is critical to understand a firm’s strengths and weaknesses regarding internal resources available.

Environmental factors: It is prudent to understand environmental conditions that face a firm as well as environmental trends which may pose opportunities or threats prior to making strategic decisions or developing action plans. For example, if a commercial bank, like Wells Fargo, were developing strategies for next year or the next few years, wouldn’t a clear understanding of the lending markets and housing markets and predictions of future trends have a significant impact on possible decision-making? This type of environmental analysis helps marketers to set more realistic objectives and develop more appropriate strategies and action plans.

Identification of Sustainable Competitive Advantage: One essential component of any strategy is a specification of how the organization will compete in each industry and product-market. How can it position itself to develop and sustain a differential advantage over current and potential competitors? To answer such questions before developing strategies and action plans, it is critical to examine market opportunities in each industry and product-market and to define a firm’s distinctive competencies or strengths relative to competition. This is what we will focus on in more depth in Week Two.

Two additional insights, which are especially important in helping to guide the development of marketing strategies, especially at the product-market level, are understanding the business or product’s market share position and understanding where the industry is on the product life cycle. For example, if you compete in the HDTV product-market, I would conclude with little analysis required that this product class is still in the growth stage. This would suggest strategies that focus more on capturing a large, untapped market potential rather than on strategies to take business away from competition, which might be more appropriate in the mature stage. We will also discuss these concepts in Week Two as well.

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Nine Corporate Growth Strategies and Four Consolidation Strategies

In this course the major focus will be on exploring a comprehensive list of marketing strategy alternatives to consider in marketing planning. As an example of marketing strategy alternatives, I would like to discuss one set of strategies that have relevance at all three levels of planning at the corporate, business, and product-market levels. These are typically known as corporate growth strategies.

Virtually all businesses want to grow. Do you know of many that don’t? If you look at many annual corporate reports, profits tend to vary up or down from year to year. However, most firms try their best show consistent increases in revenue each year.

As illustrated below, due to the dynamics of any market, often if a firm plots out projected sales over a number of years vs. sales growth objectives desired by management, a strategic planning gap will occur. If there is a gap the question is what basic growth strategies can be used to fill the gap?

This is a very important concept to understand because some of these growth strategies are very important at both corporate and product-market level planning. In fact, if you simply understand that there are only nine basic alternatives that any firm, large or small, can use to grow you could probably become a consultant and make a lot of money helping firms decide how to expand and grow.

Ansoff’s Product/Market Expansion Grid is illustrated below as a good guide to use as a start to determine which alternative strategies are appropriate. As we discuss later, there are 3 types of diversification strategy alternatives in addition to 3 integration strategies which total nine.

It is critical before you begin to determine which growth strategy you want to follow that you have a clear definition of how your CURRENT market is defined. This definition would be used to determine your market share AND it would guide which growth strategies are appropriate.

In addition, the use of growth strategies is most useful when the objective is increasing revenue or sales. If increasing market share is the objective, it limits the number of growth strategy alternatives that are feasible for your current markets only. If market share is your objective it usually means gaining share in your current markets against your current competitors.

Intensive Growth Strategies:

1) Market Penetration Strategy

If you are a manager responsible for developing marketing plans to try to accomplish growth objectives, what is the first logical growth strategy to consider? Market penetration. It makes sense to determine if you can get more growth out of your current products/services in your current markets. Market Penetration is an effort to increase company sales and/or market share without departing from an original product-market strategy. The company seeks to improve business performance either by increasing the volume of sales to its present customers or by finding new customers within the current marketswho have not yet tried your products/services.

How do you implement a market penetration strategy? Typically by making changes to your marketing mix (product, price, promotion, or distribution) or focusing on additional segments of your current market. In essence, trying to do more of something or do something better. This often includes, as an example only, decisions to increase advertising, increase sales coverage, reduce price, increase retail distribution, make modifications to current product design, packaging, sizes or assortments, and etc. It involves all marketing mix decisions except adding new products, product line extensions or replacement products. (NOTE: adding new products for your current market, product line extensions, or replacement products would typically be considered following a product development strategy, not market penetration)

IF you can reach your growth objectives using market penetration, then perhaps you don’t have to look any further. This is why it is critical to have a well defined growth objective to determine whether market penetration alone will be sufficient.

Market Development Strategy

The next logical approach to consider is to take your “existing” products/services and determine if you can attract new markets One way is to identify new product uses that would appeal to new markets that you currently don’t serve. For example, Arm & Hammer Baking Soda is a classic example. They use basically the same product but target to different markets for use in eliminating odors in cat boxes, vs. an ingredient for cooking, and etc. Each of these product uses are targeted to different markets with different needs and a different set of competitors. Can you think of any other products that have used this strategy successfully?

Probably the most common market development strategy involves entering new geographic markets. This can often increase sales growth substantially. For example, if you currently market your product on the East Coast, perhaps you can grow by expanding nationally or perhaps expanding to different global markets not currently served by redirecting sales efforts or advertising or utilizing new distribution channels and etc?

Effectively determining if market development is the appropriate strategy depends heavily on how you define your current market. Usually, but not always, going after a different market segment in a given market is not market development but market penetration or product development instead. For example, Sony offers ebook readers to the casual reader and business reader market segments in the total ebook reader market. They have about a 10% market share. If they were to enter the college e-textbook segment, would that be following a market development or market penetration strategy? If it involves just going after additional penetration of your “current e-book reader market” by better targeting an additional segment of the market, it would most likely be market penetration. So be careful if you are just entering an additional segment of your current market rather than a new market.

Again, much of the decision depends upon a clear definition of your current market. If targeting a new segment with your current products places you in a different product category or involves a totally different set of competitors with a different measurement of market share position in the new segment, it would probably be following a market development strategy. However, if you are just targeting an additional segment in your currently defined market and it does not involve competing in a new product category with a different set of competitors, then it is most likely to be considered simply a market penetration strategy instead. If developing new products for a segment of your current market is involved, then it might be considered following a product development growth strategy.

Following a market development strategy still requires making marketing mix decisions for introducing the current product into the new market. Again you might make product decisions to modify or adjust the current product to better fit the new market but it cannot include introducing totally new products, product line extensions, or replacement products. If you planned to introduce a totally new product, not currently offered, to a new market it would most likely be some type of diversification strategy.

Product Development Strategy

The third intensive growth strategy involves developing new products/services, modified new products, product line extensions, or replacement products for your current markets. For example, if a commercial bank begins to also sell insurance products to better serve their existing customer base, this would suggest that they are following a product development strategy. Carl’s Jr. is in the fast food industry and frequently develops and markets new burgers to appeal to its existing customers. When Microsoft came out with Windows 7 to replace Windows XP, this was following a replacement strategy that would be considered following a product development strategy . (NOTE: Don’t get product development “strategy” mixed up with the commonly used term Product Development which involves all the activities involved in developing new products or modifying existing products from idea generation to market launch.)

Many marketing strategy decisions that you make during this course will most likely be an attempt to follow one or more of the above three intensive growth strategies.

Diversification Growth Strategies:

All diversification strategies involve developing or acquiring new products or businesses to go after totally new markets that you don’t currently serve! This is a key to selecting the correct strategy otherwise it is easy to confuse with product development. Diversification strategies can’t be used if the objective is to increase market share in your current market because diversification results in new markets with new competitors so it would typically result in a totally different measurement of market share relevant to the new market. There are three specific types of diversification strategies:

Horizontal Diversification Strategy

This growth strategy involves developing or acquiring new products/services or businesses that are related to your core business AND directed to new markets but would not share synergistic effects. For example, Greyhound Bus Lines is in the transportation business and if they acquired Schneider Trucking it would be an example of horizontal diversification because it is related to their core transportation business capabilities and understanding but would NOT involve synergistic effects. Both companies would still operate independently providing different services to totally different markets.

This strategy can be used at a product level too. For example, if a small business produces and sells tortilla chips and decides to pursue a horizontal diversification strategy, they might enter the frozen Mexican dinner market by producing their own line of frozen dinners or purchasing an existing business. Tortilla chips and Mexican frozen dinners appeal to two totally different markets with different competitors but both could be considered food related products. Most likely these two product offerings are different enough that they would not offer any synergistic effects. Thus, the small business is most likely following a horizontal diversification strategy. If, by chance, the firm was able to share production facilities, distribution or sales resources, which helped them competitively to reduce costs through synergistic effects, then this would more appropriately be considered following a concentric diversification strategy.