3.8 Choosing strategic direction Flashcards
what is Strategic direction
what does it influence
how to set
is guided by the marketing strategy:
It is the general path a business takes, based on its mission and achieving its objectives
The strategic direction influences how a business’s strategy develops and affects all areas of the business
To set: which markets to compete in, what products, which direction the business should grow in
Factors influencing what markets to compete in and products to offer:
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Options for strategic growth:
Ansoff matrix- 4 different strategies that a business can use to grow- set the direction for growth & strategy development
Market penetration:
Product development:
Market development:
Diversification:
Market penetration:
existing product, existing markets
Trying to increase your market share in existing market using sales promotion, pricing strategies, advertising- works
best in a growth market not well in saturated markets.
Choice to penetrate market further, consolidate present position, withdraw from market altogether or do nothing.
Low risk strategy due to knowledge and experience
Less costs no R&D, research. Purpose to increase market share
If you plan to divest or retrenchment= penetration
Product development:
new products, existing market
issues: some form of market research to meet evolving needs
Works best when market has good growth potential/ business has high market share, strong R&D/good CA. Makes
sense if you have brand loyalty, market leader, increase cash flow, effective team= lean design- price skimming –
higher profits`
Product developing strategy is followed- involves substantial modifications to remain competitive
Useful in competitive markets product differentiation. Need R&D funding with already established customers
Market development:
existing products, new markets
Extend products market into new areas. Market research- costs increase, doesn’t guarantee sales, cultural issues if
moving internationally
Seeking new geographical territories (exploit same market segment in different country) , promoting new uses ,
entering new market segments
Can be done through repositioning- focuses on different segment- research, adapt product, new advertising, and
promotion. New channels of distribution
If core competency is product- better positioned
Good strategy if a firm’s core competence are related to product than to its experience with a specific market
segment
More risky than market penetration, not familiar with needs and wants of new markets.
Good if you need to overcome domestic recession
Diversification:
new product, new market
Very risky strategy, involves moving into markets that the business may have no experience of
Used when a business really needs to reduce dependence on product, high profits are likely, reduced risk
High risk strategy requiring both product and market development and maybe outside core competences
Organic growth: involve a move into new but related markets- vertical or horizontal integration
Higher costs- r&d, market research
Ansoffs matrix
is used to decide on a growth strategy:
A tool for comparing the level of risk involved with the different growth strategies- helps managers to decide on a
direction
Decision making tool for marketing planning and developing a suitable strategy
Useful framework for analysing a range of strategic decision in relation to risks and rewards
risk involved in ansoff matrix
Product development is less risky than diversification –
works best for firms that already have a strong competitive
advantage
Market penetration- least risky- most firms opt this
+ve ansoffs matrix
Doesn’t just lay out potential strategies for growth-
forces manager to think about the expected risks of
moving in a certain direction
It forces market planners and management to think
about the expected risks of moving in a certain direction
It lays out possible strategies for growth
Discipline: it focuses the business
Sets out aims and objectives
Presentable to stakeholders
Assessment of alternatives- shows opportunity cost
Creates a risk aware culture
Indicates level of risk and relevant risk
-ve ansoffs matrix
Fails to show that market development
and diversification strategies also tend to
require significant change in the day to day
workings of the company
Oversimplifies options available for
growth. E.g. it might be a safe option to
diversify by moving into your suppliers
business, know there’s a guaranteed
market
Does not take into account the activities
of external competitors
Positioning strategies:
Strategic positioning means choosing how to compete with other businesses in the market. Positioning strategy is
part of the marketing strategy- choice influences the general direction a business develops in and affects all areas
Different positioning strategies work for different companies- strategy should play to the company’s strengths and
give them a competitive advantage- the wrong positioning strategy- result in failure
Positioning strategy will be affected by state of the economy, reputation, resources, mission, legislation
Competitive advantage:
what is it often gaind through
what does it allow
how can it be hard to mainta
and other limitation
If a business has a comp adv- customers see an advantage to buying its products compared to its competitors- often
gained through core competences
A competitive advantage distinguishes a company from its competitors= higher prices, more customers, and brand
loyalty. Establishing such an advantage is one of the most important goals of any company.
Holding onto your competitive advantage is hard- maintaining low cost production might be difficult.
Competitors can
lower their price or copy your unique features. Tastes change, changing economy- need to continuously monitor internal
and external factors
Potter identified two types of competitive advantage:
Cost advantages:
Differentiation advantage:
Cost advantages:
A business can get a competitive advantage by selling a similar product at a lower cost than its rivals
Low cost airlines use a no frills strategy to keep their costs at a minimum- cheaper airports, cut out travel agent fees
Differentiation advantage:
Selling better products at the same or a slightly higher price creates a competitive advantage
Offering a product that consumers see as different from competitors products can make consumers think it’s
better. (product differentiation
Porter suggested 3 generic strategies
to gain advantage Tool to help managers strategically position business in the
market – sustainable competitive advantage- above industry profitability
These three strategies are competitive strategies based on the strengths of low costs and differentiation
Cost leadership:
how to achieve
Calls for the lowest cost of production for a given level of quality. big firms with large and efficient production
facilities, benefiting from economies of scale
In price war, firm can maintain profitability while the competition suffers losses. If prices decline, firm can stay
profitable because of its low costs
Patented technology= increase efficiency
Increase control of supplier
Same prices= produce for cheaper= higher profit margin- above industry profitability
Difficulties- customers can perceive it’ll be low quality. Competitors will copy unless patent, economies of scale,
creating barriers to entry
1. High levels of productivity
2. High capacity utilisation
3. use of bargaining power to negotiate low prices
4. LEAN production
5. Access to wider and most important distribution channels
Differentiation:
how to achieve
Strategy requires product with unique attributes which consumers value, so that they perceive it to be better than
rival products= charge premium prices. PED= inelastic
Businesses that are innovating, strong branding and offer quality benefit from this
Risks include imitation by competitors and changes in consumer tastes
- Superior product quality
- Branding
- Industry wide distribution
across all major channels - Consistent promotional
support
differentiation choices
Choices
Higher price= higher profit
Or increase market share – offer better products than rivals at the same price
Requires – thorough awareness, appreciation of target market and what they value
Knowledge of competitors
Innovation, flexible organisation
Requires investment in R &D , new tech and training
+ve and -ve of differentiation strategy (porters)
Advantages- build customer loyalty
Pass on cost increase
Create a USP
Disadvantages:
Finding ways that make it difficult to imitate
Customers becoming more sophisticated
Changing tastes
Focus:,
Focus strategy concentrated on niche market segments to achieve either cost advantage or differentiation
Suits firms with fewer resources who can target markets with specific needs. A firm using this strategy usually has
loyal customers making it very hard for other firms to compete
+ve and -ve of focus strategy
Advantages:
Gives you a better understanding of customers and their needs
Efficient allocation of resources
Rapid response to change
Customer loyalty
Can reduce power of large firms
Disadvantages:
Lower volumes… lower sales… less power
with suppliers
Customer is less price sensitive – pass on
cost rise
Risk of imitation
Porters strategic matrix helps decide on a competitive strategy
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Porter’s matrix helps a business choose its positioning strategy based on its competitive advantage and its
market scope
A business can place itself in a particular section depending on whether its aimed at a broad or narrow market
(niche) and whether it offers cheaper products than competitors or unique, quality products
Porters 5 forces model of industry competition
Porter identified 5 factors that act together to
determine the nature of competition within an
industry:
Threat of new entrants to a market
Bargaining power of suppliers
Bargaining power of customers
Threat of substitute products
Degree of competitive rivalry
Threat of new entrants
They will gain market share and rivalry intensifies
The position of existing firms is stronger if there are barriers to entry
If BTE are low- threat of new entrants= high
Investment cost- high cost deters entry, large businesses only can compete
Economies of scale available to existing firms- lower unit costs makes it difficult for smaller newcomers to break into
the market
Regulatory and legal restriction- patent protection
Product differentiation (including branding)- existing products with strong USP’s increase loyalty- hard to compete
Access to suppliers and distribution channels
Retaliation by established products- the threat of price war will act to discourage new entrants but note that
competition law outlaws actions like predatory pricing
Bargaining power of suppliers
If a firms suppliers have bargaining power they’ll:
Sell products at a higher price
Squeeze industry profits
If the supplier forces up the price paid for inputs, profits= reduced.
Suppliers are in a powerful position if:
Only a few large suppliers
Resource is scarce
Cost of switching to an alternative supplier is high
Product Is easy to distinguish and loyal customers are reluctant to switch
Supplier can threaten to integrate vertically
Customer is small and unimportant
There are no or few substitute resources available
Power is determined by:
Uniqueness of the input supplied- necessity to business
Number and size of firms supplying resources- a few large suppliers exert more power over market prices that
many smaller supplier each with a small market share
Competition for the input from other industries- great comp= stronger position for supplier
Cost of switching to alt sources- business may be locked in. changing supplier may mean changing production
process
Bargaining power for customers:
Powerful customers- exert pressure to drive down prices, or increase the required quality for the same price, = reduce
profits
Factors determining bargaining power of customers:
Number of customers- smaller= greater power
Size of their orders- larger= > bargaining power
Number of firms supplying the product- smaller alt suppliers, less opportunity for customers to shop around
Threat of integrating backwards- they will enjoy increased power
Cost of switching
Threat of substitute product
The extent of the threat depends upon:
The extent to which the price and performance of the substitute can match the industry’s product
The willingness of customers to switch customer loyalty and switching costs
If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs
and therefore prices and by differentiation
Overall degree of competitive rivalry:
If these intense rivalry it will encourage businesses to engage in
Price wars (competitive price reductions)
Investment in innovation and new products
Intensive promotion
Several factors determine the degree of competition rivalry; the main ones are
Number of competitors in the market
Market size and growth prospects- most intense in stagnating markets
Product differentiation and brand loyalty- greater loyalty= less intense the competition
Power of buyers and the availability of substitutes- if close substitutes are available- there’ll be intense competitive
rivalry
Capacity utilisation- existence of spare capacity= intensifies competition
Cost structure of industry
Exit barriers- expensive to exit, firms will remain adding to intensity of comp
Bowman’s strategic clock
shows pricing and differentiation strategies
- Based on different combinations of price (low to high) and perceived added value or benefits (low to high). it
shows that some positioning strategies are likely to be more successful than other
A model that offers various options for strategic positioning in a market to gain a competitive position. The strategic
options are based upon decisions about price and perceived value more detail
Position one:
Low price, low added value
Massive volume- profit
Bargain basement strategy
Not a very comp position
Inferior goods = negative YED
Economies of scale – lower AVC
Position two:
low price
Cost leadership- PGS
High volume- profit
Intense comp= price wars
Increase efficiency
Economies of scale
Position three-
hybrid area;
modest prices, highly perceived added value
Good quality
Persuade customers there’s good added value
through reasonable price and acceptable product
differentiation- very effective positioning
Loyal customer base
Position four:
differentiation
medium prices, highest PAValue
PGS- differentiation
Within mass markets
Branding, brand awareness and loyalty
Position five:
high prices, high PAValue
Focused differentiation- one/ narrow segment
Corresponds to differentiation and focus section
Adopted by luxury brands by targeted segmentation= high PM
Position 6,7,8 –
destined to fail unless monopoly
High price, average-low PAValue
Influences on choice of positioning strategies
- Competitors
- Core competencies
- External environment
Main sources of sustainable competitive advantage:
Innovation
Architecture- relationship with suppliers, customers
Reputation
How can a company protect its comp adv- legally (patents), culture within the business, control over resources
