Mkt760 - Mrketing Strategy[1]

8/4/2019 Mkt760 - Mrketing Strategy[1]

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MARKETING STRATEGY MKT 760


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WHAT IS STRATEGY?

Strategy is defined as the policies and key decisions adopted bymanagement that have major financial impacts. These policies anddecisions usually involve significant resource commitments and arenot easily reversible.

Strategy is concerned with strategic decision making. Strategicdecision involves creation of a strategy, change of a strategy orretention of a strategy. McDonald (1996) identified fourcharacteristics of strategic decisions.

First, they are concerned with the long-term orientation of theorganisation, rather than day-to-day management issues.

Second, strategic decisions define the scope of the organisation'sactivities, selecting what it will do and what it will not do i.e. typesof industries, product lines and market segments the firm competesor plans to compete with.


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Third, strategic decisions match the organisation'sactivities with the external environment. Forexample, there is no point in setting objectives

and devising strategies that are unconnected withthe realities of the business environment.

Fourth, strategic decisions match theorganisation's activities with its resource capacity.

For example, there is no point in pursuingstrategies that cannot be implemented usingavailable resources.


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Strategic marketing decisions are made away from the scene of themarketing warfare and has to do with the overall disposition ofmarketing forces.

Tactical marketing decisions are made in the heat of the marketing

battle, often in direct response to a competitor initiative. Forexample, military strategy would suggest that you should notengage in a frontal assault on a powerful enemy since the chancesof winning the battle are very poor. It makes sense to engage in anoutflanking strategy or to engage in guerrilla warfare against suchan enemy. Similarly, the chances of achieving success by attacking a

market leader by adopting a similar marketing mix are slim. Anoutflanking strategy such as (developing a next generation product)or a guerrilla strategy such as (picking off niche markets one by one)is more likely to succeed.


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What is Strategic Process

Strategic process refers to the manner in which strategy isformulated. There are several approaches.

First, the rational approach, making use of tools such as SWOTanalysis and portfolio models.

Second, the flexible approach which employs multiple scenarioplanning.

The creative approach reflects the use of imagination in planning.

The behavioural approach reflects the influence of power, politicsand personalities.

Finally, the incremental approach is based on small adjustments orchanges to previously successful strategies.

In this course we shall be concerned with rational approach i.e. howto formulate strategies using the tool SWOT analysis.


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Another Definition of Strategy

According to Walker et al (2006), A strategy is afundamental pattern of your present and plannedobjectives, resource deployments and interactions of an

organisation with markets, competitors, and otherenvironmental factors. In other words, what the authorsare saying is that a strategy consists of a pattern of

your present and planned objectives;

a pattern of your present and planned resource

deployments; a pattern of the present and planned interactions of an

organisation with markets, competitors and otherenvironmental factors.


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On the whole, this definition suggests that astrategy should specify:

What objectives to be accomplished

Where? i.e., on which industries and product-markets to focus;

How? i.e., which resources and activities toallocate to each product-market to meetenvironmental opportunities and threats and togain a competitive advantage.

All of these constitute key decisions that havemajor financial impact.


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A good strategy summarises the who, what, where,when, and how questions about a company activitiesfor building future services.

Who are your target buyers? What makes your company unique in the market? (Sources

competitive advantage such as enjoying superiority on oneor two elements of the marketing mix.)

Where will you focus your efforts to build growth?(That is

on which industries / product markets to concentrate) When will you achieve the specific milestones?

How far do you intend to move the company from itspresent position. (That is to increase our revenue by 20%)


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THE COMPONENTS OF STRATEGY (Corporate Strategy) )

A well developed strategy contains five components irrespective of itslevel.

Strategic Scope

The strategic scope of an organisation refers to the breadth of its strategic

domain- that is the number and types of industries, product lines, andmarket segments it competes in or plans to enter. Decisions about anorganisations strategic scope should reflect managements view of thefirms purpose or mission.

Goals and Objectives

Strategies also should detail desired levels of accomplishment one ormore dimensions of performance- such as sales volume growth profitcontribution or (return on investment) over specified periods of time; foreach of those businesses, and product-markets and for the organisation asa whole.


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Resource Deployments

Every organisation has limited financial and human resources. Formulatinga strategy also involves deciding on how those resources are to beobtained and allocated across businesses, functional departments andactivities within each business or product-markets.

Identification of a sustainable competitive advantage (upon which to buildthe Product position). One important part of any strategy is a specificationof how the organisation will compete in each business and product-market within its domain. How it can position itself to develop and sustaina differential advantage over current and potential competitors? Toanswer such questions, management must examine the marketopportunities in each businesses and product-market and the companysdistinctive competences and strengths relative to its competitors.


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Synergy

The strategy must show how resources can beused to enable sharing of information and

expertise across the different businesses of acompany in order to cut cost and maximiserevenue. Synergy is a result of sharing resourcesacross two or more activities resulting in less cost

so that the whole result is greater than the sumof the results of each business unit.


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THE HIERARCHY OF STRATEGIES

Rather than a single comprehensive strategy, mostorganisations have a hierarchy of interrelated strategieseach formulated at different levels of the firm. Thereare three major levels of strategy in most largemultiproduct organisations. These are CorporateStrategy, Business Level Strategy and FunctionalStrategies (e.g. marketing strategy, RD strategy, Human

resource strategy and operations strategy). Functionalstrategies are focused on a particular product-marketentry.


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Strategies at all levels contain the five componentsmentioned earlier, but because each strategy serves adifferent purpose within the organisation, each emphasisesa different set of issues. Refer to p.10 Walker

Corporate Strategy

The essential questions at this level include:

What business(es) are we in?

What businesses should we be in? and

What portion of our total resources be devoted to each ofthese businesses to achieve organisations overall goals andobjectives?


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Business-Level Strategy (Competitive Strategy)

The focus of business-level strategy is on how a businessunit competes within its industry. And this takes us to takesus to the issue of identification of sustainable competitiveadvantage. What distinctive competences can give thebusiness unit a competitive advantage? And which of thosecompetences best match the needs and wants of thecustomers in the businesss target segments?

For example, a business with low-cost sources of supplyand efficient, modern plants might adopt a low-costcompetitive strategy while the one with a strong marketingdepartment and competent sales-force may compete byoffering superior customer service.


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Marketing Strategy

The primary focus of marketing strategy is to effectively allocate andcoordinate marketing resources and activities to accomplish the firmsobjectives within a specific product-market. Therefore, the critical issueconcerning the scope of marketing strategy is specifying the targetmarket(s) for a particular product or product line.

Next, firms seek competitive advantage and synergy through a well-integrated programme of marketing mix elements (primarily the 4Ps ofproduct, price, place and promotion) tailored to the needs and wants ofpotential customers in that target market.

The essence of strategic planning at all levels is identifying threats to avoidand opportunities to pursue. The primary strategic responsibility of anymanager is to look outward continuously to keep the firm in step withchanges in the environment.


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WHAT ARE THE DIFFERENCES

BETWEEN STRATEGY AND TACTICS?

A strategic decision involves the creation, change, or retention of a strategy,and tactical decisions are made often in direct response to a competitorinitiative. In contrast to a tactical decision a strategic decision is usuallycostly in terms of the resources and time required to reverse or change it.The cost of altering a wrong decision may be so high as to threaten the

very existence of an organisation. Normally, a strategic decision has a timeframe greater than one year; sometimes decades are involved.

Tactical manoeuvres tend to be sufficient to cope only with short-term andlocalised conditions and circumstances. Broadly speaking, strategicdecisions are important decisions that will affect the direction of the

business for a long time. It has also a considerable impact on the way inwhich organisational resources are allocated. In other words, it has asignificant resource commitment.


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McDonald (1999) made the time the key factordistinguishing strategic planning from tactical planning.He defined strategic plan as a plan that covers a period

beyond the next physical year, usually three to fiveyears, while a tactical plan goes into great detail aboutactions to be undertaken in the short term (usually oneyear or less). Tactical marketing or plan targets existingmarkets and segments. Note that tactical marketing is

synonymous with operational marketing. Tacticalmarketing or plan is concerned with doing what wealready do as effectively and efficiently as we can.


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Strategic marketing or strategic decision is concerned withidentifying important changes taking place in the market and inbusiness environment and working out how the organisation shouldrespond. There is a difference between effectiveness and efficiency.

Effectiveness means doing the right things. For example, to beeffective, a marketing organisation must have a portfolio ofproducts and services that are well designed to meet the needs ofthe market. A simple definition of efficiency is doing things right.For example, to be efficient a marketing organisation must monitorthe performance of the sales force against target, and take

corrective action where underperformance is detected. It is quitepossible to be effective but inefficient- for example, to have apoorly motivated or poorly motivated or poorly trained sales forcetrying to sell an excellent portfolio of products. The principal realmof strategic marketing is marketing effectiveness.


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WHAT IS STRATEGIC MARKETING?

As we all know, conditions affecting marketing success seldom stay thesame. Such conditions include the following: competitors, governmentregulations, the state of the national economy, technologies and customerneeds. They do change over time.

Strategic marketing is therefore concerned with identification of changesin the market and business environments, and then ensuring that the firmis well prepared to meet with them. The firm looking out of a strategicwindow watches these changes and assigns some requirements forcontinued success in each market. There is only a limited period when thefit between the requirements of a particular market and the firmscompetence is at optimum. At these times, the strategic window opens

and the firm should be investing in this market. In some subsequentperiod, the firm will find that the evolutionary path of this market is suchthat it can no longer be effective and efficient in serving the market. Atthis point, it should consider disinvestment and shifting its resources toareas of growing opportunities.


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Strategic marketing goes beyond looking at day-to-day marketingbattleground to reflect upon key changes that lie ahead anddeciding on how best the firm will respond to them. However easythis may sound, in principle, many firms, particularly small andmedium sized enterprises (SMEs) find it difficult to put into practice.

Strategic marketing means looking at the whole of a companysportfolio of products (not business) and markets, and managing theportfolio to achieve the companys overall goals. The result could bethat decisions are made not to invest in certain products ormarkets, in order to release resources to be invested elsewhere in

the portfolio, where the opportunities are judged to be greater.Note that strategic marketing operates at the level of business unit-at the level of products and markets.


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The Six Key Points Involved in

Corporate Strategy: -

Corporate strategy involves the entire organisation.

Corporate strategy concerns itself with the survival of thebusiness as a minimum objective and the creation of value

added as a maximum objective. Corporate strategy covers the range and depth of the

organisations activities.

Corporate strategy directs the changing and evolvingrelationship of the organisation with its environment.

Corporate strategy is central to the development ofsustainable competitive advantage.

Corporate strategy development is crucial to adding value.


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Strategic marketing management shares severalof these characteristics. In particular thedevelopment of sustainable competitiveadvantage is central to strategic marketing. There

is very strong case that strategic marketing iscrucial to adding value on value-based marketing.However, strategic marketing does not involvethe entire organisation nor does it cover the full

range and depth of the organisations activities.The focus of strategic marketing is on products,markets and management of relationships withcustomers both actual and potential.


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SUMMARY

Strategy is an overused word. In marketing terms,its use should be restricted to importantdecisions that will have a major effect on thefuture of the organisation. Strategic marketingdecisions are concerned primarily with ensuringthe effectiveness of the marketing organisation inthe competitive struggle. In other words, the

principal realm of strategic marketing ismarketing effectiveness.


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UNDERSTANDING THE COMPETITIVE

ENVIRONMENT.Introduction

Any form of business planning can be thought of as a process ofunderstanding the current position (situation audit), deciding on what wewant to achieve (objective setting) and deciding how those objectives areto be achieved (strategy formulation).

Situation audit involves the process of gathering and analysing relevantinformation in other to understand the resources available to the firm andcircumstances outside the firm that affect its ability to achieve itsobjectives. This takes us to analysis of marketing environment. When wetalk about marketing environment, we are concerned with circumstancesoutside the firm. The marketing environment consists of all the factors

outside the organisation that may have an influence on the achievementof its marketing objectives. It is customary to reduce marketingenvironment into a manageable size- Competitive environment andMacro-environment.


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Each of these can be further subdivided. The Competitiveenvironment (or industry environment) or micro-environmentcomprises those factors which the organisation comes into closestcontact; factors that have a rather obvious and immediate impact

on its success. The competitive environment is usually furthersubdivided using Porters (1980) classification framework into directcompetitive rivalry, the threats from new entry competition, thethreat from substitutes, the power of the buyers and the power ofthe suppliers. The macro-environment comprises factors outsidethe immediate competitive environment, some of which may have

immediate effect but many of which have longer term and moreinsidious effect on the success of the business. We start by lookingat the competitive environment.


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ANALYSING THE COMPETITIVE ENVIRONMENT

USING PORTERS FIVE FORCES

A widely accepted method of classifying the key factors in thecompetitive environment was developed by Porter in 1980. Thisclassification method is referred to as Porters five forces.

The five forces involved are direct competitive rivalry, the threat

from new entry competition, the threat from substitutes, the powerof buyers and the power of suppliers. The key feature of theframework is that it extends the concept of competition, and thecompetitive environment beyond those businesses that supplyproducts and services that are direct rivals with our own productrange. Originally, industry analysis using five forces was

developed as a method of analysing the relative profitability ofdifferent industries. Such analysis is of special intrinsic interest toeconomists who may wish to evaluate the attractiveness ofdifferent industries that they wish to enter.


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Initial expectations were that the profitability of an industry sector wouldbe directly related to the intensity of competitive rivalry within it. Themore fiercely firms within the industry compete with one another themore aggressively one would expect them to set their prices, resulting inlower profit margins and lower overall profitability.

However, it turns out that direct rivalry is not the whole story. The otherfour of the five forces can also influence profitability and so affect thecompetitive environment and thus the overall attractiveness of anindustry sector. The intensity of competition within an industry increasesunder the following condition:

Where there is a high risk that one or more new firms will enter the

market to compete with the incumbents. Where there is a high risk that a new product technology- a substitute

will be developed that provides the same benefits advantageously (forexample at lower cost).


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Where supplier businesses exert considerable power over theindustry.

Where customers (consumers or buyer businesses) exertconsiderable power over the industry.

On the whole, an industrys attractiveness at a point in time can

best be judged by analysing the five major competitive forces. Forexample, the market for mobile communication has grown rapidlyover the years, but is the industry attractive? This question can beanswered by analysing the five competitive forces. The fivecompetitive forces collectively determine an industrys long-termattractiveness. The mix of the forces explains why some industries

are consistently more profitable than others and provides furtherinsights into which resources are required and which strategiesshould be adopted in order to be successful. (i.e. externally-outsidethe firm).


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The Threat of New

Entry Competition.

1. How likely?

2. How seriously?

Power of Suppliers.

1. How powerful?

2. How do they influence

the market?

Direct Competitive

Rivalry.

1. Identify your direct

rivals

2. Assess their strengths,

weaknesses and

strategies.

Power of Buyer.

1. How powerful?

2. How do they influence the

market?

The Threat from

Substitutes.

1. How likely?

2. How serious?


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Direct Competitive Rivalry

Direct competitive rivalry occurs between different firms producing aproduct or service that consumers consider to be similar. For example,direct competitive rivalry occurs between automobile manufacturersproducing cars in the family car market such as Ford Mondeo, theToyota Avensis etc.Having established who are the key direct rivals, it is appropriate toundertake a detailed analysis of their strengths and weaknesses andidentify and evaluate their marketing strategies. There are many tools thatcan be used in diagnosing the strategic situation of ones own firm. As longas there are substantially publicly owned businesses, there will be

sufficient information in the public domain to make such analysismeaningful. As a rule, the fewer direct rivals there are, within an industry,the less intense the competitive rival will be.


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The Threat of New Entry Competition

Firms that do not compete in the market but maydo so in the future pose the threat of new entrycompetition. For example, a firm that is into

diamonds may decide to exploit its reputation fordiamonds (diamonds enjoy the reputation ofbeing the ultimate luxury product) by enteringother luxury goods markets, for example the

market for designer clothing, handbags andcosmetics. It becomes a strategy. This wouldrepresent a threat to the established competitors.


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A key factor affecting the extent of the threat posed by newentry competition is the level of barriers in an industry.Entry barriers are those that make it difficult for a firm toenter a new industry. For example, the substantial sunk-cost investments that automobile manufacturers have in

plant and equipment would make it very expensive for anew entrant to achieve competitive parity. Legal barrierssuch as patent protection can also represent entry barrier.If the incumbent firms own well known (established)brands, then this can also create an entry barrier. An

industry in which there are frequent price wars betweenthe incumbent firms is less attractive to new entrycompetition than one in which prices tend to remain stablefor long periods.


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The Threat from Substitutes

Beyond the firms with which you compete directly, andothers that may enter the market, there is the threat thatsomeone may develop a new product or service thatrenders your own product obsolete. This is the process ofsubstitution, most frequently found where a newtechnological solution supersedes an older one. Forexample, the manual typewriter was superseded by theelectric typewriter which was in term rendered obsoletewith the advent of word-processing equipment. Word

processor was replaced by the general purpose personalcomputer which can run word processing software but hasmany other applications besides


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The Power of Suppliers

If the supplier can also threaten to integrate forwardi.e., to become a direct competitive rival, then this is aserious strategic issue. Forward integrative

diversification occurs when a company in your supplyindustry decides to enter into direct competition inyour market. This would happen for example, if asupplier of mobile phone components (keypads,

screens, circuit boards and so on) decides tomanufacture and market complete mobile phones incompetition with Nokia and Motorola.


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The Power of the BuyersFinally, we have the influence of buyers on competitionwithin an industry. The power of buyers increases as buyingis concentrated in only a few hands, particularly if theproducts bought are undifferentiated. High levels ofdemand are not uncommon in business-to-businessmarkets. In the extreme case, there may only be a singlebuyer (this is known as a monopoly), but more commonlyin business-to-business markets one finds the situation ofonly a few buyers (known as oligopsony). The global

automotive components industry, for example, facesconditions of oligopsony, since there are only a handful ofmajor automobile manufacturers.


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SUMMARY

The essential message of the analysis of competitiveenvironment has been that to achieve above averagebusiness performance, a firm must gain a sustainable

competitive advantage over its rivals, and that theanalysis of the competitive environment is central tothe identification of such a sustainable advantage. It islogical to focus on direct rivals, and on the extended

competitive environment, since it seems obvious thatthis is where a competitive advantage must be created


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RESOURCED-BASED VIEW OF THE FIRM

In recent years a slightly different approach tocompetitive strategy has been developed,summarised as the resource-based view of thefirm. In the resource based view, the source ofcompetitive advantage for an organisation is saidto come from internal resource advantage rather

than from competitive positioning advantages.


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TARGET MARKETING PROCESS

There are three steps in target marketing process. These are marketsegmentation targeting and positioning.

MARKET SEGMENTATION:

Each market is filled with many more customer groups and customerneeds than one company can possibly serve in a superior fashion. Thetask calls for market segmentation.

Market segmentation is therefore the process of dividing a market intodistinct groups of buyers with different needs, characteristics or behaviourwho might require separate products or marketing programmes. Asegment consists of consumers who respond in a similar way to a given setof marketing efforts. In a car market, for example, consumers who choose

the biggest, most comfortable car regardless of price make up one marketsegment. Customers who care mainly about price and operating economymake up another segment companies are wise to focus their efforts onmeeting the distinct needs of individual market segments.


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TARGET MARKETING

The second step in the target marketing process iscalled target marketing. Target marketing thereforemay be defined as the process of assessing the relativeworth of different market segments and selecting oneor more to enter. Once the firm has segmented itsmarket, and the relative worth of different segments

identified, it has to consider what part of the market itwants to serve. The firm can serve one or more ofmany segments in a given market.


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A target market consists of buyers who share commonneeds or characteristics that the firm wants to serve.Because buyers have unique needs and wants, it isproper for a seller to view each buyer as a separatetarget market. Ideally, a seller might design a separatemarketing program for each buyer but it may not beworthwhile. Do you know how much it will cost tomanufacture a separate car for people who are above7feet; you have captured a lot of markets. Generally,

companies can target very broadly, very narrowly orsomewhere in between. More discussion on this willbe made later under Targeting Strategies.


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CRITERIA FOR EVALUATING MARKET SEGMENTSTypically, the criteria for selecting appropriate target markets are:segment size, segment growth rate, segment compatibility with thefirms competences, segment compatibility with the firms missionand objectives.

Segment size: All things being equal, a large segment offers moreopportunities than a smaller segment.

Growth rate: A fast growing segment offers more opportunitiesthan a stow-growing segment everything being equal.

Segment Competitiveness: Large and fast-growing marketsegments typically attract more competitors, perhaps large andmore powerful competitors than small and slow-growing segments


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Segment Compatibility with the Firms Competences:The SWOT analysis should have highlighted keystrengths and weaknesses compared to rivals. Marketsegmentation analysis must have identified the specificcharacteristic of demand in each market segment. It isimportant to try to match the firms strengths to therequirements of the target segments. There is no pointin targeting a highly price-sensitive market segment ifthe SWOT revealed that your cost position is far worse

than that of your key rivals in the same segment. Thereis no point in targeting a high quality sensitive marketsegment if your production department cannot matchor better competition on product quality.


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Segment Compatibility with the Firms Mission:Finally, target market selection should take account ofthe strategic direction that the firm intends to take, notjust its current position. If the firm has a reputation forlow cost and mediocre quality but has put in place aconcrete strategy to make it an industry leader onquality, then over an appropriate timescale it willadjust its target market selection away from the low-cost segment toward the high quality segment.

Naturally, this will require the implementation of somecreative marketing communications strategies toconvince customers in the target segment of thequality of the products


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Selecting Target Market SegmentsAfter evaluating different segments, the company must now decide whichand how many segments it will target. A target market segment consists ofa set of buyers sharing common needs or characteristics that the companydecides to serve. The chosen ones must be targeted.

Targeting Strategies or Coverage Strategies:

Companies can target very broadly-undifferentiated marketing, verynarrowly (micromarketing) or somewhere in between-(differentiated); andconcentrated marketing (or niche marketing).

Note that only very large firms such as IBM (Computer market), GeneralMotors (Vehicle market) and Coca cola (Soft drink market) can undertakefull market coverage. They can cover a whole market in two ways: throughundifferentiated marketing or differentiated marketing. Lets take a look atundifferentiated marketing.


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In undifferentiated marketing, the firm ignores segment differencesand goes after the whole market with one offer. It designs a productand marketing program that will appeal to the broadest number ofbuyers. It relies on mass-distribution and mass-advertising. It aims

to endow the product with superior image in peoples minds.Undifferentiated marketing is the marketing counterpart tostandardization and mass production in manufacturing. The narrowproduct line keeps down costs of research and development,production, inventory, transportation, marketing research,advertising and product management. The undifferentiated

advertising programme keeps down advertising costs. Presumably,the company can turn its lower costs into lower prices to win theprice sensitive segment of the market.


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Differentiated marketing means complete market coveragewith different products for each segment. General Motorsdoes this when it says that it produces a car for everypurse, purpose and personality. IBM offers manyhardware and software packages for different segments in

the computer market. By offering product and marketingvariations to segments, companies hope for higher salesand stronger position within each market segment. Butdifferentiated marketing also increases the costs of doingbusiness. A firm usually finds it more expensive to develop

and produce say 10 units of 10 different products than 100units of one product. Developing separate marketing plansfor separate segments require extra research, forecastingetc.


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Concentrated marketing: A third market coveragestrategy, concentrated marketing (or nichemarketing), is especially appealing whencompany resources are limited. Instead of going

after a small share of a large market, the firmgoes after a larger share of one or a fewsegments or niches. For example, Oshkosh Truckis the worlds largest producer of airport rescue

trucks and front- loading mixers. Again,Volkswagen concentrates on the small car marketand Porsche on the sports car market.


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Steiner Optical captures 80% of the worlds military binoculars market.Whereas segments that are fairly large and normally attract severalcompetitors, niches are smaller and may attract only one or fewcompetitors. Through concentrated marketing, the firm achieves a strongmarket position because of its greater understanding of consumer needsin the niches it serves and the special reputation it acquires. It can market

more effectively by fine-tuning its products prices, and programs to theneeds of carefully defined segments. It can also market efficiently,targeting its products or services, channels, and communicationsprograms toward only the consumer that it can serve best and mostprofitably. Niching offers small companies an opportunity to compete byfocusing their limited resources on serving niches that may beunimportant to or overlooked by large competitors. The disadvantage is

that a particular market segment can turn sour, therefore, manycompanies prefer to operate more than one segment leading to thedevelopment of other patterns of target marketing selection in addition tothe ones we have mentioned.


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Micro-marketing is the practice of tailoring products and marketingprograms to suit the taste of specific individuals and locations.Rather than seeing a customer in every individual micro marketerssee the individual in every customer. Micro-marketing includes localmarketing and individual marketing. Local marketing involvestailoring brands and promotion to the needs and wants of local

customer groups- cities, neighbourhoods and even specific stores.

Individual marketing or one-to-one marketing or customizedmarketing: In the extreme, micro-marketing becomes individualmarketing- tailoring product and marketing programmes to the

needs and preferences of individual customers. for example, thetailor custom-made suit, the cobbler designed shoes for theindividual, the cabinet-maker made furniture to order.


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CRITERIA FOR EFFECTIVE SEGMENTATIONThere are many ways to segment a market but not all segmentation is effective. To be

useful, market segmentation must be:

Measurable: The size, purchasing power, and other characteristics of the segmentscan be measured.

Substantial: The segments are large and profitable enough to serve. A segment

should be the largest possible homogeneous group worth going after with atailored marketing program. It would not pay, for example, for an automobilemanufacturer to develop cars for people who are under four feet tall.

Accessible: The segment can be effectively reached and served.

Differentiable: The segments are conceptually distinguishable and responddifferently to different marketing mix elements and programs. If married andunmarried women respond similarly to a sale on perfume, they do not constitute

separate segments. Actionable: Effective programs can be formulated for attracting and serving the

segments.


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Positioning: - The third element of the target marketing process ispositioning. Positioning is arranging for a product to occupydistinctive and desirable place relative to competing products in theminds of target consumers. The idea is to give customers in thetarget market one or more good reasons to select your companyrather than one of your rivals. Thus, marketers plan positions that

distinguish their products from competing brands and give themthe greatest advantage in their target markets.

In positioning its products, the company first identifies possiblecustomer value differences that provide competitive advantages

upon which to build the position. Thus, effective positioning beginswith differentiating the market offerings to create superiorcustomer value. Once the company has chosen a desired position, itmust take strong steps to deliver and communicate that position totarget consumers.


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The company's entire marketing program should support the chosenpositioning strategy. For example, BMW makes the ultimate drivingmachine. KIA promises the power to surprise. The company can offergreater customer value either by charging lower prices than competitorsdo or by offering more benefits to justify higher prices. If a company

promises greater value, it must deliver it. An automotive componentscompany seeking to target Mercedes, BMW and Jaguar must seek toestablish a market position based on engineering excellence and quality-amarket position based simply on low cost would be entirely pointless.However establishing a low-cost position would probably be the numberone priority for an automotive components firm seeking to win businessfrom Daewoo and it rivals. This is not to say that cost is irrelevant toMercedes and others nor that quality is irrelevant to budget carmanufacturers. However, in each case they have clear priorities for thecost and quality of purchased components, based on their own selectedtarget markets and chosen market position.


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In positioning its product, the company first identifiespossible competitive advantages upon which to build theposition. To gain competitive advantage, the company mustoffer greater value to target consumers. It can do this bycharging lower prices than competitors do or by offering

more benefits to justify higher prices. But if the companypositions the product as offering greater value, it must thendeliver that greater value. Effective positioning begins withactually differentiating the company's marketing offer sothat it gives consumers more value. Once the company has

chosen a desired position it must take strong steps todeliver and communicate that position to targetconsumers. The company's entire marketing programmeshould support the chosen position.


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RELATIONSHIP AMONG MARKET SEGMENTATION, TARGET MARKETINGAND POSITIONING

The three decision processes- market segmentation, target marketing andpositioning are closely linked and have interdependence. All must be wellconsidered and implemented if the firm is to be successful in managing agiven product-market relationship. For example, Target marketing requires

evaluating the relative attractiveness of various segments (in terms ofmarket potential, growth rate, competitive intensity and other factors)and the firm's mission and capabilities to deliver what each segmentwants, in order to choose which segments it will serve.

No matter how large the firm is, its resources are usually limited

compared with the number of alternative market segments available forinvestment which calls for market segmentation. Product positioning isoften based on a set of determinant attributes (benefits) of a product thatmatters most to the target customers backed up with words that describethe features that actually deliver the benefits that are promised.


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FACTORS THAT TRIGGER OFF MARKET SEGMENTATION

Today's market realities often make segmentation imperative. Marketsegmentation has become increasingly important in the development ofmarketing strategies for several reasons. First population growth hasslowed, and more product markets are maturing. This sparks more intense

competition as firms seek growth via gains in market share (the situationin automobile industry) as well as in increase in brand extensions (Colgatetoothbrushes, Visa traveller's checks).

Second, such social and economic forces are expanding disposableincomes, higher educational levels and more awareness of the world have

produced customers with more varied and sophisticated needs, tastes,and lifestyles than ever before. This has led to the outpouring of goodsand services that compete with one another for the opportunity ofsatisfying some group of customers.


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Third, there is an increasingly important trend towardmicro-segmentation in which extremely small marketsegments are targeted. This trend has been acceleratedin some industries by new technology such ascomputer aided design, which has enabled firms tomass-customise many products as diverse as designerjeans and cars. For example, many automobilecompanies are using a flexible production system thatcan produce different models on the same productionline. This enables the company to produce cars madeto order as does General Motors in the United Stateswhich is using its online presence to fine-tune its build-to-order process.

OBJECTIVES AND GAP ANALYSIS


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OBJECTIVES AND GAP ANALYSIS

The lower line on the chart shows how sales volume is forecast to grow onthe basis of the current state of the marketing environment and thecontinuation of the current marketing strategy. The upper line shows thefirm's objective for sales growth. Clearly, there is a growing gap betweenwhat will be achieved with current strategies and what the firm wishes to

achieve.

The fundamental purpose of a revised marketing strategy will be to specifythe ways in which this gap can be reduced or if possible eliminated

To reduce or eliminate this gap, there are two options. The first is to

identify opportunities to achieve further growth within the company'scurrent businesses (intensive growth strategies). The second is to identifyopportunities to diversify either in related or unrelated areas


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1. Intensive Growth Opportunities:

Let us take a look at intensive growth. Intensive growth makes sense for acompany if it has not fully exploited the opportunities latent in its currentproducts and markets. We have 3 major types of intensive growthopportunities. These are:

Market Penetration: Market penetration consists of the company seekingincreased sales for its current products in its current markets throughmore aggressive marketing effort. There are 3 possibilities:

(i) The company can try to stimulate current customers to increase theircurrent rate of purchase-market growth.

(ii) The company can increase its efforts to attract competitors' customers-

increase market share.(iii) The company can increase its efforts to attract non-users located in itscurrent market area.


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Market Development: Market development consists of thecompany seeking to increase sales by taking its current productsinto new market segments. There are two possibilities. A market ismade up of several segments

(i) The company can open additional geographical markets(segments) through regional, national or international expansion.The company may be under-represented in certain cities.

(ii) The company can try to attract new market segments throughdeveloping product versions that appeal to those segments, or itcan market its existing products by other channels of distribution,or by advertising them in media other than the ones the company

has been using to attract users not located from the existingmarket. The company for example, may not be well represented intheir markets.


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PRODUCT DEVELOPMENT:

Product development consists of the company seekingincreased sales by developing new or improved productsfor its current markets. There are 3 possibilities

(i)The company can develop new product features orcontent through attempting to adapt, modify, magnify,minify, substitute rearrange, reverse or combine existingfeatures.

(ii)The company can create different quality versions of theproduct.

(iii)The company can develop additional models and sizes.


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No 2. EXPANSION BY DIVERSIFICATION

There are four ways a company can diversify,

as follows:

Vertical integrative diversification

Concentric or related diversification

Horizontal diversification

Conglomerate diversification


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(a) Vertical Integrative DiversificationThere are 3 vertical integrative strategies

(i) Backward Integration:

Backward integration consists of company seeking ownership or

increased control of its supply systems by acquiring a supplier

(ii) Forward Integration consists of company seeking ownership orincreased control of its distribution systems e.g. a firm acquiring or

launching a wholesale distributor or retail outlet or a supplier ofcomponents parts for cell phone seeking to produce complete cell phoneto compete with those to whom it supplied e.g. Nokia and Motorola

(iii) Horizontal Integration

Horizontal integration consists of a company that is seeking ownership orincreased control of some of its competitors. The company doing theacquisition must make sure that it is not challenged by the govt because itlessens competition.


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(b) Related or Concentric diversification:

When a firm internally develops or acquiresanother business that does not have products or

customers in common with its current businessesbut that might contribute internal synergythrough sharing of production facilities, brandnames, R&D know how, or marketing and

distribution skill. For example a university can setup a consulting house that can make use of theability of its lecturers.


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(c) Horizontal Diversification

The company might search for new products that appeal to currentcustomers even though the new products are technologicallyunrelated to its current product line. For example, a company that

was in business of producing records that appealed to teenagersmay decide to start publishing teenage magazines or make teenageclothing because of its great understanding of teenage tastes andlife styles. Or the company may want to produce cassett-holdingtrays, even though producing them requires a differentmanufacturing process. Therefore, horizontal diversification occurs

when a firm acquires or internally develops another business thatdoes not have the same product in common but has the samecustomers in common.


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(d) Conglomerate Diversification: Here, the company is seeking to add

new products for new classes of customers either because such amove promises to offset some deficiency or because it represents agreat environmental opportunity. Whichever is the case, the newproducts have no relationship with the companys currenttechnology, products or markets. Most companies experienceseasonal or cyclical fluctuations, which are costly in terms of manpower, inventory carrying costs or cash flow management. Thesefactors might lead it to look for business opportunities that have adifferent seasonal or cyclical pattern. Thus, we have seen that acompany can systematically identify growth opportunities throughapplication of a marketing system framework by looking first atopportunities in the current products and markets; then atopportunities in other parts of the task-marketing system andfinally at relevant opportunities outside the task marketing system.

COST CONCEPT The Experience Effect


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COST CONCEPT- The Experience Effect

The experience effect is concerned with the relationship between average unit costof production and the cumulative production volume. It postulates that the firmwith the greatest accumulated experience will have a unit cost advantage over itsrivals. Economies of scale are concerned with the relationship between unit cost ofproduction and production volume per time period.

In many cases, the firm will find that increasing production volume will result inlower unit cost of production. While the experience effect proposes that a firmwith greater cumulative experience will have a unit cost advantage over its rivals(particularly in a manufacturing industry), economies of scale refer to the costadvantage that a firm with a high current volume of production is expected tohave. Firms, with higher volumes have a number of advantages over those withsmaller volumes. Empirical studies have shown that each time the volume of

production doubles, there is a consistent percentage reduction in average cost. Forexample, if there is 20% reduction in average cost for a doubling of cumulativeproduction, then this is known as an 80% experience curve (80% = 100% - 20%).


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COMPANY PORTFOLIO

OverviewA major task of top management is the shaping of a businessportfolio plan. At any point in time, a company consists of aportfolio of many businesses- divisions, product lines, productbrands). This section examines one of the techniques used by multi-business enterprises to analyse their portfolio of business. Thetechnique was developed by the Boston Consulting Group (BCG).

Portfolio analysis provides the managers with an overview of thelong-term prospects and competitive strengths and weakness of acompany's various businesses, thus enabling them to evaluate

whether the portfolio is adequate from the perspective of long-term corporate growth and profitability. For example, Rockwell'sportfolio in the mid-1980's was judged by management to providethe company with too few long-term growth and profit prospects.


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The objective of most companies when analysing theirportfolio is to identify what needs to be done to construct abalanced portfolio of business. A balanced portfolio can bedefined as one that enables a company to achieve thegrowth and profit objectives associated with its corporate

strategy without exposing the company to undue risks.

If the company does not have the right balance of businessin its portfolio, it needs to pursue strategies designed tocorrect the imbalance. Thus Rockwell acquired Allen-

Bradley in an attempt to shift the balance of activities in itsportfolio toward business with greater long-term growthand profit prospects.


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After examining the portfolio technique, we shallconsider the means that companies employ tochange the composition of their portfolios. These

means include both entry and exit strategies.Acquisition and internal venturing are alternativeways of entering new business, while divestment,liquidation, and harvest strategies are alternative

ways of exiting from existing business areas. Weshall also examine the factors that affect acompany's choice in each situation.


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THE BOSTON CONSULTING GROUP MATRIXThe main objective of the Boston Consulting Group(BCG) technique is to help strategic managers identifythe cash flow requirements of different businesses in

their portfolio. The BCG approach involves 3 mainsteps:

Dividing a company into strategic business units andassessing the long-term prospect of each. A companymust create a SBU for each economically distinct

business area that it competes in. The objective is todivide the company into the most relevant entities forplanning purposes.


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Comparing all SBUs of the company against each other by means ofa matrix that indicates the relative prospect of each. Here, thecompany assesses each SBU according to two criteria;

(i) The SBUs Relative Market share and

(ii) The growth rate of the SBU's industry

Developing strategic business objectives with respect to each SBU(i.e. decisions are made on each SBU as to whether it will be built,held (maintained), harvested, divested or liquidated).

SBUs mean different businesses within the portfolio of business.The objective is to divide the company into relevant entities forplanning.


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RELATIVE MARKET SHAREThe objective when identifying an SBU relative share is to establishwhether that SBU's market position can be classified as a strengthor a weakness. Relative market share is defined as the ratio of anSBU's market share to the market share held by the largest rivalcompany in the industry. If an SBU has a market share of 10%, andits largest rival has 30% then, its relative market share is 10/30 or.3.

It is only if an SBU is a market leader in the industry will it have arelative market share greater than 1.0. For example, if an SBU has a

market share of 40% and its largest rival has a market share of 10%,then its relative market share is 40/10 = 4.0.


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When an SBU has a relative market share greater than 1.0,it is assumed that the SBU is operating at furthest part,down the experience curve and therefore has a significantcost advantage over its rivals. By similar logic, an SBU with arelative market share smaller than 1.0 is assumed to be at a

competitive disadvantage because it lacks the economies ofscale and low cost position of the market leader, due toexperience effect. So a relative market share greater than 1can be characterised as a strength, while a relative marketshare smaller than 1.0 is a weakness. The BCG characterises

SBUs with a relative market share greater than 1.0 ashaving high relative market share and SBUs with a relativemarket share smaller than 1.0 as having a low relativemarket share.


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INDUSTRY GROWTHThe objective, when assessing industry growth rates is to determinewhether industry conditions offer opportunities for expansion, orwhether they threaten the SBU (as in a declining industry). Thegrowth rate of an SBU's industry is assessed according to whetherits growth is faster or slower than that of the economy as a whole.Industries with growth rates faster than the average arecharacterised as having high growth.

The BCG position is that high growth industries offer a morefavourable competitive environment and better long-term

prospects than slow growth industries. In other words, high growthindustries present an opportunity, low growth industries a threat.


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COMPARING ALL STRATEGIC BUSINESS UNITS

(SBUs)

This step involves comparing SBUs of the

company against each other by means ofmatrix based on two dimensions of relative

market share and an industry's growth rate.

The diagram on the board provides theexample of such matrix.


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Relative Market share

The horizontal dimension measures relative market share, and the verticaldimension, an industry's growth rate. Each circle represents an SBU.

The centre of each circle corresponds to the position of that SBU on the twodimensions of matrix.

The size of each circle is proportionate to the sales revenue generated by eachbusiness in the company's portfolio.

The bigger the circle, the larger is the size of an SBU relative to total corporaterevenues.

The matrix is divided into 4 cells. SBUs in cell 1 are defined as stars, in cell 2 asquestion marks, in cell 3 as cash cows, and in cell 4 as dogs.The BCG argues that these different types of SBUs have different long-termprospects and different implications for corporate cash flows.


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STARS: Stars are the leading SBUs in the company's portfolio.They have a high relative market share and are based inhigh-growth industries. In the language of SWOT (strength,weakness, opportunities and threats) analysis, they haveboth competitive strengths and opportunities for

expansion. They offer excellent long-term profit and growthopportunities.

Generally, the BCG predicts that established stars are likelyto be highly profitable and therefore can generate sufficient

cash for their own investment needs. Emerging stars,however, may require substantial cash injections to enablethem to consolidate their market lead.


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QUESTION MARKS: Question marks are SBUs that are

relatively weak in competitive terms, having low relativemarket shares. However, they are based in high-growthindustries and may offer opportunities for long-term profit

and growth. Question marks can become stars if nurturedproperly.

To become market leaders, question marks requiresubstantial net injection of cash; they are cash hungry. Thecorporate head-quarter has to decide whether a particularquestion mark has the potential to become a star towarrant the capital investment necessary to achieve it.


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CASH COWS: Cash cows are in low-growth industries but have a high relativemarket share and a strong competitive position in mature industries. Theircompetitive strength comes from being furthest down the experiencecurve. They are the cost leaders in their industries. The BCG argues thatthis position enables such SBUs to remain profitable. However, low growthis taken to imply a lack of opportunities for future expansion.Consequently, BCG argues that the capital investment requirements ofcash cows are not substantial, and thus they are shown as generating astrong positive cash flow.

DOGS: Dogs are SBUs in low-growth industries but have a low relative marketshare. They have a weak competitive position in unattractive industriesand are viewed as offering few benefits to the company. The BCG suggeststhat such SBUs are unlikely to generate a positive cash flow and indeedmay become cash hogs. They may require substantial capital investmentsjust to maintain their low market share while offering few prospects forfuture growth in returns


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INVESTMENT STRATEGIESBCG recommendations include:

Use the surplus from any cash cows to support the development ofselected question marks and to nurture emerging stars. The long-term objective is to consolidate the position of stars and to turn

favoured question marks into stars, thus making the company'sportfolio to be more attractive.

Question marks with the weakest or most uncertain long-termprospects are divested so that demands on the company'sresources are reduced. Selected question marks should be built i.e.a strategy aimed at improved market position while the company

forges short time earnings. The company should exit from any industry where the SBU is a dog

by divestment, harvesting, or liquidation.


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If the company lacks sufficient cash cows, stars,or question marks, it should consider

acquisitions, to build a more balanced portfolio.

Such a portfolio should contain enough stars andquestion marks to ensure a healthy growth and

profit outlook for the company and enough cash

cows to support the investment requirements of

the stars and question marks.

Weak cash cows should be harvested.

STRENGTHS AND WEAKNESSES OF BCG


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STRENGTHS AND WEAKNESSES OF BCG

MATRIX

STRENGTHS: The major strength of the BCG matrix is that it focuses a company's

attention on the cash flow requirements of different types of businessesand points out ways of using cash flows to optimise the value of corporateportfolio.

It indicates when a company needs to add another SBU to its portfolio and

when it needs to remove an SBU

WEAKNESSES:

Market growth rate is an inadequate descriptor of overall industryattractiveness. Market growth is not always directly related to profitabilityor cash flow. Some high-growth industries have never been very profitable

because low entry barriers and low capital intensity have enabled supplyto grow even faster, resulting in intense price competition. Also, rapidgrowth in one year is no guarantee that growth will continue in thefollowing year.


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Relative market share is inadequate as a description of overall competitive

strength. Market share is more properly viewed as an outcome of pastefforts to formulate and implement effective business unit and marketingstrategies than as an indicator of enduring competitive strength. If theexternal environment changes or the SBUs managers change their

strategy, the businesss relative market share can shift dramatically.

While the matrix specifies appropriate investment strategies for eachbusiness, it provides little guidance on how best to implement thosestrategies. While the model suggests that a firm should invest cash in itsquestion mark businesses, for instance, it does not consider whether

there are any potential sources of competitive advantage that thebusiness can exploit to successfully increase its share. Simply providing abusiness with more money does not guarantee that it will be able toimprove its position within the matrix.


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The model implicitly assumes all business units

are independent of one another except for theflow of cash. If the assumption is inaccurate, the

model can suggest some inappropriate resourceallocation decisions. For instance if other SBUsdepend on a dog business as a source of supply-or if they share functional activities, such as a

common plant or sales force, with that business-harvesting the dog might increase the costs orreduce the effectiveness of the other SBUs.


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What a Manager should do to Reap the Benefits of Portfolio Analysis while Avoiding

some Short-Comings Identified?

Specifying Appropriate Investment

In addition to specifying appropriate investment for each SBU, a manager shouldalso suggest ways to improve its companys position within the matrix byidentifying potential sources of competitive advantages that the business canexploit to successfully increase its share since providing a business with moneydoes not guarantee that it will be able to improve its market share

A Manager Should Constantly monitor the Environment

A manager should not always view relative market share as an indicator ofenduring overall competitive strength but must constantly monitor the

environment to identify changes that can affect his firm and make sure that thefirm is well prepared to meet with these changes and revise the marketing strategyaccordingly.


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All Business Units May Not be Independent

If the assumption that all business units areindependent is found not to be correct.

In other words, if other business units depend ona dog business as a source of supply or if theyshare functional activities such as a commonplant or sales force, the manager should allow a

dog business to stay and not divest , harvests norliquidate a dog business.


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Developing Strategic Business Objectives with Respect to each SBU

Decisions are made on each SBU as to whether it will be built, held(maintained), harvested or divested.

Build: The objective in using this strategy is to increase market

share with the willingness to for-go short term earnings to achievethis goal. The strategy is particularly good for selected questionmarks whose shares have to grow if they are to become stars.

Hold: This is a strategy designed to preserve the market position ofan SBU. This strategy is particularly appropriate for strong cash

cows if they are to continue to yield a large positive cash flow andstars to consolidate their positions


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Harvest: This is a strategy that aims at getting short-term

increase in cash-flow regardless of long-term effect. Thisstrategy is particularly appropriate for a weak cash cowwhose future is dim and from which more cash flow is

needed.

Divest: This is a strategy that aims at selling or liquidatingthe business because resources can be used betterelsewhere. The strategy is particularly appropriate for dogs

and for question marks that the company decides it cannotfinance for growth.


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ENTRY STRATEGIES TO CORRECT IMBALANCESAs we have noted earlier, correcting imbalancesin a companys corporate portfolio frequentlyrequires entry into new business areas, adding

question marks, winners or profit producers tothe portfolio and exit from existing businessesthat are problematic. In this section, we shallexamine the means of entry into a new business

area. The choice which strategic managers face isbetween entry through acquisition and entrythrough internal new venturing.


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Acquisition versus Internal Venturing Entry into a new business area through

acquisition involves purchasing an establishedcompany complete with all its facilities,

equipment and personnel.

Entry into a new business area through internalventuring involves a company starting a new

business from scratch, building facilities,purchasing equipment, recruiting personnel,opening up distribution outlets, and so on.


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The choice between acquisitions and internal venturing asthe preferred entry strategy is influenced by a number offactors. The most important among them are:

Barriers to Entry

When barriers are too (substantial) much, a company finds

it difficult to enter the industry through internal venturing.To do so, it may have to construct efficient scalemanufacturing plant; undertake massive advertising tobreak down established brand loyalties and quickly build updistribution outlets- all hard to achieve and likely to involve

substantial expenditure. The sources of barriers to entryarise from factors associated with product differentiation(brand loyalty) absolute cost advantages as a result ofeconomies of scale


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The Relatedness of the New Business to the Existing BusinessThe more related a new business is to the existing companysestablished operations, the lower the barriers to entry becausewhat this means is that the company has accumulated the requiredexperience of this type of business. These factors favour internalnew venturing as the entry mode.

The Comparative Speed and Development Costs of the Two EntryModes.

When the speed (matters) is important, acquisition should be thefavoured entry mode. The reason being that it has been found out

by Ralph of University of Virginia in a study of corporate newventuring, it takes 8years for a new venture to reach profitabilitylevel and 10years before the profitability of an average new ventureequals that of a mature business.


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The Risks Involved in the Different Entry Modes.Failure rates are very high in new ventures. Research byEdwin of University of Pennsylvania indicated that onlybetween 12% and 20% of R&D based new venturesactually succeed in earning economic profit.Overestimation of synergies prevail in acquisition.

Industry Life Cycle Factors.

In embryonic and growth industries, barriers to entry

are typically lower than in mature industries since inthe former, the companies are still going through alearning process.


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PITFALLS OF ACQUISITIONWhy do many acquisitions fail? Four majorreasons account for that:

Companies experience difficulties when trying to

integrate divergent corporate cultures. Companies overestimate the potential gains from

synergy.

Acquisitions tend to be very expensive

Companies often do not adequately screen theiracquisition targets.


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ASSIGNMENTS

Why do many acquisitions fail?

What are the guidelines for Acquisition

Success?

What are the guidelines for Internal Venture

Success?

What are the pitfalls of Internal Venturing?

Portfolio Gaps Entry Strategy


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1. Insufficient cash cows Acquire companies in

mature industries

2. Insufficient winner (stars) Acquire established

winners profit producers

3. Insufficient question

marks? Or developing

winners

Internal venturing in

growth or embryonic

industry.


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WHY MANY COMPANIES FAVOUR ACQUISITION In the face of obvious difficulties of succeeding

with acquisitions companies continue to use thisentry mode because of the following reasons:

When companies make an acquisition it isacquiring known profitability, known revenues,and known market shares. It avoids uncertaintieswhereas internal venturing involves

establishment of a question mark business.Acquisition allows a company to buy a winner.Hence many companies favour acquisition.


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EXIT STRATEGIES TO CORRECT IMBALANCES

Just as building a balanced portfolio requires entry into anew business area so it also require exit from existingbusiness areas. Exit is normally required when a company

has too many (dog) losers or question marks andsometimes when it has too many developing winners. Acompany in dealing with exit problems has 3 choices tomake as follows: divest, harvest, or liquidate. Whichstrategy is best in a given situation depends on 2 factors:

the characteristics of the relevant industry and thecharacteristics of the business to be divested.


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Divestment: Divestment involves selling a business to another company,or to the management of that business. Divestment makes sense if thefuture prospects for the business to be sold seem good i.e. if the businessto be sold is a developing winner or a particular question mark. This willhelp it to command a high price. Divestment can be difficult to implementparticularly if the prospect for the business are poor as in the case of aloser.

Harvesting: A harvest exit strategy involves controlled disinvestment in abusiness unit to optimise cash flow as the company exits from theindustry. To increase cash flow, management eliminates or severelycurtails new investment, cuts maintenance of facilities, and reducesadvertising and research while reaping the benefits of past good will. The

effects are as follows:The business loses market share but in the short-run cash flow out of thebusiness increases markedly


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The cash generated can be invested elsewhere in thecorporation

Once the cash flow begins to decline, then liquidation isnormally considered.

Divestment is difficult because by this time the business

has run down and its long-term prospects are poor.

Liquidation: Liquidation involves closing down anoperation. Liquidation is normally the exit of last resort. It isselected only when all other options have failed because bydefinition the company must take substantial write-offs onthe closure of the operation and bear


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ANSOFF'S GROWTH VECTOR MATRIXThe Ansoff matrix itemises the four ways in which a firm can develop itsportfolio of products and markets- market penetration (currentproducts/current markets), product development (developing newproduct/current markets), market development (current products/newmarkets) and diversification (new products/new markets). Igor Ansoff(1987) suggested four growth vector's for a firm's future business- that isto say four directions that future growth could take.

A firm pursuing a market penetration strategy aims to increase its marketshare in its existing markets and with broadly the same product range.Should this prove insufficient to achieve the firm's objectives, then it mayconsider a product development strategy. In the former case, newproducts are developed, but they are sold into markets which the firmalready addresses- so much of the existing database of marketing researchis relevant.


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Market development means that the firm pushes into new

markets, but with broadly the same products. In this case, itneeds to research the new markets, but the firmunderstands the product technology involved. Finally, if the

firm decides to enter new markets with new products, thisis known as a diversification strategy. By definition, boththe market and the product are unfamiliar whendiversification is pursued, so that the managers of the firmhave to gain experience of both new markets and new

products simultaneously. In consequence, diversificationcan be regarded as a relatively high-risk strategy.

Mkt760 - Mrketing Strategy[1]

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