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Lecture Notes Chapter 1 Introduction Whenever I begin any course on marketing or marketing planning I usually make the comment that anyone can be successful marketing almost anything, even in todays competitive business environment. It is simple, at least conceptually. It involves two basic, and critical, foundations of marketing Focus on your customers first and foremost. Capitalize effectively on distinctive competencies you have over competition IF you can do this, almost any firm can be successful in marketing their products or services. The first foundation is really the bases of being a market-driven organization that follows the marketing concept. The second foundation is the basis for gaining a competitive advantage. 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 1950s, is the philosophy behind most marketing decision making in market-driven organizations today. Often today, instead of talking about the marketing concept per se the focus seems to be more on providing value but by providing value that is just another way of following the marketing concept. We will discuss the second foundation, Competitive Advantage, in more detail in Week 2. 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. In this course I have NOT assigned reading Chapters 2 and 3 where basic aspects of strategic planning, marketing plans, and discovering marketing opportunities is covered since we want to focus more on applying marketing strategies. You are encouraged to read Chapters 2 and 3 if you wish. Were you required to actually conduct marketing planning and/or develop marketing plans, understanding how it fits in with strategic planning and conducting an effective situational analysis would be critical BEFORE making any marketing decisions. Here is an example of some of the key factors that are critical prerequisites to successful marketing 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 marketing 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 firms strengths and weaknesses regarding internal resources available. Environmental factors It is prudent to understand environmental conditions that a firm faces 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, wouldnt 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 firms 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, include understanding the business or products market share position and understanding where the industry is on the product life cycle. For example, if you compete in the virtual reality product-market, I would conclude with little analysis required that this product class is just in the early 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. Defining the market you compete in - the Product Market and Relevant Market Before you can select appropriate marketing strategies or before you can make any real marketing decisions, the current markets you compete in and/or the future markets you plan to compete in must be clearly understood. This involves defining the relevant market you compete in. The relevant market is the market where competition takes place. In competition law, relevant market is a market in which a particular product or service is sold. It is the intersection of a product-market and a geographic market. Relevant market product market definition a geographic delimiter. A product-market comprises all those products or services which are regarded as interchangeable or substitutable by customers by reason of the products characteristics, their prices or their intended uses. For example, one of the product-markets that the Coca Cola Co. competes in is the soft drink market. A geographic market comprises the area in which the competing firms are involved in marketing and the supply of products or services and in which the conditions of competition are sufficiently homogeneous, for example, the United States or China or southern California or Pasadena, etc. So for the Coca Cola Co, we could say that ONE of the key relevant markets that they compete in is the soft drink market in the United States. The relevant market has nothing to do with the target market or target market segments involving potential customers you plan to direct your marketing efforts towards. It focuses only on the supply side and the product markets and geographic markets you compete in. The need to first clearly define or clearly understand your relevant market for any product or service is critical because it allows you to then and only then select appropriate growth strategies, be able to identify and research relevant competitors, measure market share, measure market size and growth potential, segment the relevant market into potential target market segments, formulating competitive strategies, developing value strategies, create a positioning statement, and make many other marketing decisions. Defining just the product-market, without also including a geographic delimiter, does not allow you to make these types of decisions. For example, if you tried to measure Cokes market share in the soft drink market you really cant do it unless the product market you compete in also includes a defined geographic area. If you try to identify and analyze your key competitors, it would be very different if the defined geographic market was the United States vs. China. Defining the product markets you compete in is more difficult than it seems. Most marketing textbooks dont really do a good job of defining what a relevant market is and how to define it. When addressing corporate growth strategies, for example, they talk about current and new markets without ever describing how to define it. A good definition of your current or new product market should include some identification of the product/service category that makes the most sense at a level that allows you to identify the competitors and calculate your market share in a defined geographic market. As an example, if you are the brand manager for Diet Coke, which product market do you compete in For considering growth strategies and marketing planning at the brand level here are some possible product market definitions you might consider Consumer market Food beverage market Beverage market (includes all beverages like alcoholic beverages, soft drinks, juices, water, milk, etc.) Non-alcoholic beverage market Soft drink market Carbonated soft drink market Cola market Diet cola market So for marketing planning purposes which of the above is the best current product market definition that Diet Coke as a brand competes in In this example, probably consumer, food beverage, beverage, and non-alcoholic beverage markets (which would often be considered generic markets) would be too broad to be meaningful in identifying competitors, evaluating marketing measurements and planning marketing activities. Probably the diet cola market or cola market would be too narrow and restrictive. Most likely the soft drink market or perhaps the carbonated soft drink market would be the best choice. Diet Coke doesnt just compete with other diet colas but with other soft drinks like Root Beer and other soda alternatives too. This is a judgment you have to make. For planning purposes, one company might select one competitive market definition and another perhaps a different one. The important thing is that you first define and understand the current product market that you compete in or the new product market that you plan to compete in because that determines your options for selecting appropriate marketing strategies. If you are the Vice President of Marketing for the Coca Cola Co, which product markets does the company compete in at the corporate level For considering growth strategies and marketing planning at the corporate level, if we use the above list of possible product markets, it would not be adequate. The Coca Cola Co. is a worldwide beverage company but to define the markets they compete in as the beverage market or the non-alcoholic beverage market as their current market is too broad with products and competitors too varied. Instead, it would probably be more beneficial to identify narrower, multiple product markets that they compete in such as the soft drink market, juice market, bottled water market, energy/sports drink market, bottled coffee and tea market. Each of these product-markets has a very different set of competitors that require very different market decisions and marketing efforts. So, using the above examples, the logical definition of your current product market may differ depending upon whether you are planning at the product level, the SBU/Division level, or the company level. Defining the geographic component of the relevant market you compete in also must be defined relative to the area you are interested in for marketing planning purposes and/or for the logical area that you compete in. For example, if you own an independent ice cream shop in Pasadena, California your competitive market isnt the United States, or California or even southern California. Most likely as a small retail business the current market that you compete in might likely be defined as the City of Pasadena. It doesnt mean that some people from outside Pasadena wont ever visit the ice cream shop but primarily the marketing efforts and customers that visit an ice cream shop are typically very local. However, if you are a larger firm like Starbucks, one key geographic market they currently compete in is the entire United States. Although they also operate in other countries, most likely for marketing planning purposes one of the key markets is the domestic market. They may be interested in other areas of the world too but often that involves different marketing efforts required in other countries or regions. At some point, maybe they already do, they might decide that the market they compete in is worldwide. This certainly might be true at a corporate level but most likely smaller geographic areas would be logical for defining relevant markets for marketing planning purposes. For one final example, Midwest Fire Trucks in Luverne, MN is in the heavy duty commercial truck business and specialize in the production and sales of fire engines in the United States. Fire engines are just one type of heavy duty commercial truck focused only on the needs of fire departments. As a company, the Fire engine market in the United States may be the best relevant market to define for Midwest since that is the only product they currently produce and care about. Another larger company, like Peterbilt, that produces a wide variety of different types of heavy duty commercial trucks might better define the heavy duty commercial truck market in the United States as the relevant market they compete because they offer heavy duty trucks that target the needs of different segments of the relevant market like over the road, construction, municipal, and medium duty markets. If a product manager was interested in marketing planning for their specific line of cement trucks, then cement trucks in the United States might be the best way to define the relevant market. The best choice of relevant markets can be very situation specific and heavily depends upon whether you are planning at the corporate, SBU/Division, or specific product or product line. So in summary, remember that the market you compete in, the relevant market, MUST be defined by combining a product market at the appropriate and most meaningful level for marketing planning combined with a geographic delimiter. Unless the relevant market is clearly understood, defined, and communicated it is impossible to determine which of the growth strategies are appropriate to consider, to estimate market measurements, or to make many other marketing decisions. So based upon the type of product or service you offer and the geographic market that you compete in or wish to compete in, the first step in market planning is ALWAYS to define the relevant markets you currently compete in or plan to compete in. That is a necessary starting point 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. Before we talk about marketing strategy alternatives, I would like to first discuss one set of more global strategies that provide direction and guidance for all three levels of marketing planning at the corporate, business unit, or product-market levels. These are typically known as corporate growth strategies. Virtually all businesses want to grow. Do you know of many that dont 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 to 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 with no changes to efforts 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 alternative directions that any firm, large or small, can take to grow you could probably become a consultant and make a lot of money helping firms decide how to expand and grow. It is critical before you begin to determine which growth strategy you want to follow that you have a clear understanding of how the CURRENT relevant market that you compete in is defined. This definition would be used to determine your market share AND it would guide which growth strategies are appropriate to consider. In addition, the use of growth strategies is most useful when the objective involves increasing sales or revenue. If increasing market share is the objective, it limits the number of growth strategy alternatives that are feasible to the current markets you compete in. If market share is your objective it usually means gaining share in your current markets against your current competitors. Intensive Growth Strategies Market Penetration Growth Strategy Market Penetration is a growth strategy used to increase sales and/or market share by getting more growth out of your current products/services in the current relevant markets that you compete in. If you are a manager responsible for developing marketing plans, to try to increase sales and/or market share, what is the first logical growth strategy that should be considered It is Market Penetration. It makes sense to determine if you can get more growth out of your current products/services in the relevant markets you currently compete in. 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 attracting new customers within your current product markets who 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 by targeting additional segments within the relevant markets you currently compete in. In essence, trying to do more of something or do something better. For example, it may involve opening new stores to reach more people within your current product market. Or it may be changing aspects of your current products including product design, ingredients, packaging, sizes or assortments to attract new buyers in your defined markets. It may involve increasing the scope of your advertising campaigns, hiring more salespeople, or reducing prices. It can involve all marketing mix decisions except adding new products, product line extensions or replacement products. (NOTE adding new products for your current relevant market, product line extensions, or replacement products would typically be considered following a product development growth strategy, not market penetration) For example, Seattles Best Coffee, a division of Starbucks, currently has over 3000 points of distribution in the single serve coffee market they compete in within the United States. They plan to expand to 30,000 locations serving the Seattle Best Brand. The brand is currently served, for example, at Burger King locations, on Royal Caribbean cruise ships, at numerous colleges and universities, and at their own cafes located throughout the country. They have now signed a deal with vending machine company Coinstar to sell coffee in thousands of kiosks in the U.S. located at grocers, drugstores, and mass-market retailers. The machines, which grind and brew beans, will serve coffee, mochas, and vanilla lattes starting at 1 per cup. Seattles Best expects to sell about 10,000 cups of coffee a year from each kiosk. This is a market penetration strategy being used to increase penetration of its brand in the single serve coffee market that they currently compete in in the United States by adding additional points of distribution, kiosks that are free standing retail locations. Lets say you own an ice cream shop in downtown Pasadena and you have primarily offered homemade ice cream products like cones, cups, shakes, and sundaes to walk in customers only. If you attempt to segment the ice cream market you conclude that three distinct segments exist customers who are interested in single serve ice cream products customers who are interested in buying bulk ice cream in pints and quarts for consumption at home and customers who are interested in specialty ice cream products like ice cream cakes. You currently target the single serve segment of the ice cream market you compete in. If you started offering your ice cream for sale as pints and quarts at the local Trader Joes in Pasadena, that would be an example of a market penetration growth strategy. There are no new products involved, just changes in packaging and distribution, and you will still be competing in the same ice cream market in Pasadena. All you are trying to do is further penetrate the current market you compete in by reaching out to an additional segment. IF you can reach your sales and/or market share growth objectives within the current markets you compete in using a market penetration strategy, then perhaps you dont have to look any further. This is why it is critical to always start with a well-defined product market that you currently compete in and a well-defined growth objective to determine whether market penetration alone will be sufficient to reach your growth objectives. Market Development Growth Strategy Market Development is a growth strategy used to expand sales by using your current products/services and expanding into new relevant markets beyond the current markets you compete in. The next logical approach is to consider taking your current products/services and determining if you can enter new relevant markets to compete in that are beyond the current markets you compete in. 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 and compete only in southern California, perhaps you can grow by expanding to northern California or nationally or perhaps expanding to different global markets not currently served by redirecting sales efforts or advertising or utilizing new distribution channels outside of your currently defined markets and etc Starbucks recently inaugurated its first store in India in Mumbai as the Seattle-based coffee giant seeks growth in a market long associated with tea drinkers. This is a joint venture with Tata Global Beverages whereby expansion plans in India involve opening at least 700 retail outlets throughout the country in the next few years. This is a classic example of pursuing a market development strategy by expanding into a new geographic market with new distribution channels, retail outlets, outside your current markets and an additional set of new competitors. As discussed under Market Penetration, going after additional target segments in a relevant market you currently compete in usually does not involve a market development strategy. All possible market segments combined should divide the relevant market or the market you compete in. You may only be targeting one or more segments so if you make a marketing decision to gain sales by targeting additional segments with any of your existing products, it would more likely be following a market penetration growth strategy. However, in the ice cream example above under Market Penetration, if instead of local placement at Trader Vics in Pasadena only they instead got Trader Vics to carry their ice cream at all of their stores in southern California, the primary focus would be more on growing sales from outside the current market they compete in so this would be an example of pursuing a market development growth strategy instead. Another way is to identify new uses for the product that would appeal to new product markets that you currently dont compete in. Zipcar created a market for hourly car rentals by serving the needs of young, urban dwellers and college students who didnt own their own wheels but occasionally needed to rent autos by the hour. This is a market that Hertz didnt serve. Instead they were the leader in the daily car rental market. Hertz decided to enter and compete in this new market and is equipping their entire fleet of 375,000 rental vehicles in the U.S. with a device that lets customers use a computer or smartphone to reserve and unlock a rental car from the Hertz on Demand Service and plans to compete with Zipcar for a piece of the growing hourly rental market. ONLY if you considered the daily car rental market to be different from the hourly rental market, would it be a new use for their current rental fleet for a new product market that they dont really compete in currently. If you had defined the relevant market for Hertz as simply the car rental market, then following a product development growth strategy would be the more accurate strategy by introducing a new hourly rental service. 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 you will compete in but it cannot include introducing totally new products or services, product line extensions, or replacement products. If you planned to introduce a totally new product, not currently offered, to a new product market not currently served, it would most likely be some type of diversification strategy. Product Development Growth Strategy Product Development is a growth strategy used to increase sales and/or market share by developing or acquiring new products to better serve the current relevant markets you compete in. The third intensive growth strategy involves developing new products/services, product line extensions, or replacement products for the current relevant markets you compete in. For example, Carls Jr. competes in the fast food market and frequently develops and markets new types of burgers to appeal to its existing customers in the fast food market. When Microsoft came out with Windows 10 to replace Windows 8, it was following a replacement strategy that would be considered part of a product development growth strategy. (NOTE Dont get product development growth 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.) Red Bull, the brand that made energy drinks hip announced plans to introduce flavors for the first time. The product line will be called Red Bull Editions and will include cranberry, lime and blueberry flavored Red Bull, to be sold in red, silver and blue cans. This new product line is still targeted to better serving the needs of customers in the current relevant market that they compete in. Thus, Red Bull is following a product development growth strategy. Using our ice cream shop example again, if the owners decided to begin preparing and offering ice cream cakes at their current store location, the focus would seem to be on providing additional product offerings to the current ice cream market they compete in in Pasadena. In this case it would be attempting to develop a new product offering to target the specialty ice cream segment. This would be a good example of pursuing a product development growth strategy. For a number of corporations and most small businesses, most likely they will seldom go beyond the above three intensive growth strategies of market penetration, market development and/or product development to guide their marketing activities. Often, it is all they need to reach their growth objectives with the resources they have available. Diversification Growth Strategies Horizontal Diversification Growth Strategy Horizontal Diversification is a growth strategy used to increase sales by introducing new products/services into new relevant markets that you do NOT currently compete in which are broadly related to your core business but does NOT offer synergistic benefits from sharing common technologies, production, or marketing resources. This growth strategy involves developing or acquiring new products/services or businesses that appeal to new relevant markets that are related to your core business or products but would not share synergistic effects. For example, Greyhound Bus Lines is in public transportation 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 probably involve synergistic effects. Starbucks is pushing beyond coffee with the opening of the first Evolution Fresh juice store. Starbucks which is looking for new businesses for growth, purchased the California based juice maker for 30 million. Evolution Fresh had been selling its juices in such grocery stores as Whole Foods. The first Evolution Fresh retail shop was opened by Starbucks in Bellevue, Wash. Aside from juices, Starbucks says Evolution Fresh shops will have wraps, soups, salads, vegetarian and vegan options, and other offerings. In this example, retail juice stores are broadly related to Starbucks core retail coffee business, they both involve similar single serve retail operations. However, it is a separate operation with no apparent synergistic benefits. Although Evolution Fresh may also appeal to some of the same customers that patronize Starbucks cafes, the single serve juice drink market would be a new product market for Starbucks to compete in that was different from their core single serve coffee market. 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. Tortilla chips and Mexican frozen dinners appeal to two totally different product markets with different competitors but both could be considered food related products that might appeal to the same customers. 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. If we consider the ice cream shop example again, lets say the owners decided to open a Jamba Juice bar in Pasadena too at a different location. This would be a different market to compete in than ice cream. As a separate operation it would probably benefit from little or no synergistic benefits like cost sharing. Since these are both single serve type retail establishments which might appeal to the same customers it suggests that this would be an example of pursuing a horizontal diversification growth strategy. Be careful if you try to utilize and interpret definitions that are different from what I provide because they can easily be incomplete or misleading. For example, on Wikipedia.org and businessdictionary.com, a definition of horizontal diversification is adding new products which are often technologically or commercially unrelated to current products but may appeal to current customers. What isnt stated is the assumption that the primary focus will still be on new product markets even though it may appeal to some current customers too who are buyers in both markets. All diversification strategies involve focusing primarily on new product markets to compete in. Concentric Diversification Growth Strategy Concentric Diversification is a growth strategy used to increase sales by introducing new products into new relevant markets that you do NOT currently compete in which are broadly related to your core business and offers synergistic benefits from sharing common technologies, production, or marketing resources. This growth strategy involves developing or acquiring new products/services or businesses directed to new relevant markets not currently served by your firm when the technologies used or the resources required for either production or marketing are highly compatible with existing resources. In essence you can gain synergistic benefits from sharing manufacturing facilities, technologies, or marketing resources. For 20 years, Siemens Rail Systems has supplied light-rail cars to cities across North America from its south Sacramento manufacturing plant. The company recently began a push to diversify into trolley cars, locomotives, and train coaches. They recently won a massive 466 million contract to build 70 locomotives for Amtrak. They will be the first locomotives ever built by Siemens Rail Systems. They have successfully expanded from the current product market they competed in of light rail systems into a new product market they will be competing in with a new product not currently produced, locomotives. They will share their current manufacturing facilities in Sacramento and be able to capitalize on their current marketing resources. The cost benefits from sharing these existing facilities and resources should provide synergistic benefits in the form of cost savings. Thus, this suggests following a concentric diversification strategy which is usually more beneficial than just a horizontal diversification strategy where no synergistic effects are involved. Using the example of the ice cream shop again, if the owners decided to begin offering a line of homemade candies and fudge in addition to ice cream at their retail location, if they provided a large enough offering, the candy products would be competing in a new market in addition to the ice cream market. Because it shared the same retail and kitchen space it would most likely provide synergistic benefits in the form of cost savings. Thus, this might more appropriately be considered pursuing a concentric diversification strategy. A concentric diversification strategy depends upon the existence of some type of synergistic effect. Otherwise, it would most likely be considered horizontal diversification. If you pursue a concentric diversification strategy, you still need to make the necessary marketing mix decisions to introduce the new product into the new market. Conglomerate Diversification Growth Strategy Conglomerate Diversification is a growth strategy used to increase sales by developing or acquiring new products for new relevant markets that you do not compete in where the new products/services are significantly unrelated to your core business and offers little or no synergistic effects. This growth strategy simply takes advantage of any growth opportunity with new products/services or businesses in new relevant markets without any regard to synergistic effects or being related to the firms core business or core competencies. This strategy typically involves a totally different, unfamiliar product market. Back in the 1970s this was a big thing for many firms. For example, ITT, a telecommunications and electronics manufacturer, moved into a number of totally different service industries like hotels, car rentals, and insurance primarily because of the high growth rates expected in the service sector. Perhaps the most current example of successfully pursuing conglomerate diversification strategies to simply capitalize on growth opportunities is Berkshire Hathaway. This financial holding company has acquired dozens of firms competing in very diverse markets with very unrelated products or services. Their acquisitions have included such diverse areas as railroads (Burlington Northern Santa Fe Corp.), food and beverage (Diary Queen), insurance and finance (U.S. Liability Insurance Group), clothing (Fruit of the Loom), and etc. Using the ice cream shop again as an example, if the owners decided to also open an insurance agency in Pasadena, this would involve competing in a new market that is totally unrelated to their current ice cream business. The skills for success in the insurance business are totally different from operating an ice cream shop so this would probably be considered pursuing a conglomerate diversification growth strategy. Integrative Growth Strategies The most difficult type of growth strategies to understand is integrative growth strategies that typically involve some type of acquisition or merger involving ownership. Typically, these strategies are developed at the corporate or business unit level more than the product/market level. The following diagram can graphically give you a better idea of these alternatives Horizontal Integration Growth Strategy Horizontal Integration is a growth strategy used to increase sales and/or market share by merging with or acquiring one or more competitors in the current relevant markets that you compete in at the same level of the supply chain. Pursuing a Horizontal Integration strategy is a growth strategy used where your company acquires one or more competitors in the current relevant markets you compete in. Obviously, a lot of mergers that we read about are the result of following a horizontal integration strategy. Clearly, it is one definite way to grow and to increase market share almost instantaneously. Typically this strategy would be appropriate within your currently defined relevant markets only. For example, UPS recently acquired Dutch rival TNT Express for 6.77 billion, by far the companys biggest deal ever. After months of negotiation, the worlds largest package delivery company locked in a deal for Europes No. 2 express mail company. The acquisition will allow UPS to better compete with Germanys DHL. UPS will now grow share to between one-quarter and one-third of the European package delivery market, according to one analysts estimate. This horizontal integration strategy was used to acquire a competitor in a current product market that they already competed in. Horizontal integration strategies can be used for small businesses too. Using the ice cream example again, lets say the owners buy out another ice cream shop in Pasadena, Suzies. By acquiring a competitor in the current market of Pasadena that they compete in this would increase market share immediately. This would be an example of pursuing a horizontal integration strategy. However, if they bought out an ice cream shop in Irvine, that would be considered a new geographic market that they didnt currently compete in so it would more likely represent a market development growth strategy because that ice cream shop in Irvine is not currently a competitor in your existing relevant market. Backward Integration Growth Strategy and Forward Integration Growth Strategy Backward Integration is a growth strategy used at the company level to help increase sales by buying out your own suppliers at a different level of the supply chain from where you compete Forward Integration is a growth strategy used at the company level to help increase sales by acquiring a channel intermediary such as a retailer or distributor that does or could market your products/services. Backward Integration involves buying out your own suppliers whereas Forward Integration means acquiring a channel intermediary such as a retailer or distributor that markets your product. For example, if Hart, Schaffner Marks, the clothing manufacturer, bought out a chain of mens clothing stores that would be a form of forward integration. If Hewlett Packard bought a chip manufacturer that provided microchips for their PCs that would be a form of backward integration. Be careful to distinguish between these specific types of growth strategies vs. a more general vertical integration strategy that often involves channels of distribution decisions. For example, when Apple began opening their own Apple Stores, they were following a vertical integration strategy because they owned the retail stores but that was just an example of pursuing a market penetration growth strategy, not forward integration. All Apple was doing was expanding their distribution capabilities to better serve the relevant markets they competed in. There was no acquisition or merger involved. Usually a firm follows one of these two growth strategies to gain better control, perhaps lower costs, and to be less dependent upon outside firms. The acquisitions may be, hopefully, additional sources of sales and profit as well. Usually, these two strategy alternatives are more valuable when considering corporate strategy more than marketing strategy. Weve talked about 9 specific growth strategies. Can you think of any other growth strategy that is not covered under any of these broad alternatives Most large organizations and even smaller firms will often pursue a number of these growth strategies simultaneously. For example, most firms cant just concentrate on new products and new markets and ignore current products or markets. Also, it is often the case that multiple strategies are required to reach management objectives. Consolidation Strategies Although most firms focus on growth, it is just as important to know when to downsize and perhaps get out of a market. Many firms dont do a good job of this. The BCG model, for example, describes these types of strategies for some question marks or dogs. The four most common consolidation strategies are Retrenchment where you reduce your commitment to a current product by withdrawing from a weak market. Harvesting where you reduce expenditures and efforts in current markets to milk profits as long as possible. Pruning where you reduce the number of products offered to current markets. Divestment where you sell off your product and exit the market. Prior to 2007 very little focus was on consolidation strategies. Demand was growing, economic conditions were good, most businesses were profitable, and many consumers were growing incomes and wealth especially from housing and the stock market. All of that changed with the great recession. The economy tanked, demand declined significantly, many businesses had to cut costs and operations to stay afloat, and consumers reduced expenditures wherever possible. When demand declines dramatically, the focus tends to be more on consolidation strategies. For example, Southwest Airlines reduced the number of flights to various cities and a growing number of restaurants cut the number of items offered on their menus. This would be following a pruning strategy. United Airlines actually eliminated service to smaller markets while Home Depot closed certain stores in unprofitable markets. These would be examples of following a retrenchment strategy. Clearly poor economic conditions and weak demand resulted in retailers like Circuit City, Mervyns, Borders and Linen n Things close their doors completely by following a divestment strategy. Probably the most common strategy used in difficult times is a harvesting strategy where you reduce expenditures. Many firms were forced to cut expenditures on personnel, advertising or even product ingredients in an attempt to harvest profits or stay in business as long as possible. The hotel industry was a good example of an area where demand was down and expenses were being trimmed in a way that minimized guest impact. For example, the Hilton Anaheim cut back its room service from 24 hours to 18 hours per day. When they anticipated low turnout for its morning breakfast, they shut down buffet tray tables and instead offered guests a fixed-priced personal buffet where items were cooked in the kitchen. Mindful of guests lower budgets, hotel restaurants introduced less expensive entrees and added more appetizers. Hilton Anaheim introduced Comfort Food room service, with a separate menu designed to be budget friendly with items such as burgers and chicken wings. These were all examples of following a harvesting strategy. Recognize that planning for growth is increasingly possible in most industries and markets today. As the economy continues to turn around and demand continues to increase you will see a major shift back to a focus on growth strategies by almost every business entity. An Example of Identifying Growth Strategies It is not as easy to look at a company from the outside in and try to determine which corporate growth strategies they were following. It is much easier to be management within the company looking from the inside out and planning your next strategic moves. However, in this course we will mostly be looking from the outside in so lets give it a try now. Ford Motor Company announced in July 2011 its plans for a 50 global sales boost based on expansion in Asia. Currently in Asia, especially China, Ford is an also ran with a scant 2.6 market share. Fords success in Asia will come from the introduction of a number of new models for the Asian market, like the Kuga, a small SUV. They plan to build four factories in China, triple the models available, and double the distribution network by 2016. According to CEO Alan Mulcally, Asia is critical to the strategic goal of selling 8 million cars annually. Now, based upon this brief information provided, which corporate growth strategy do you think Ford is following to reach its sales goals It isnt any diversification strategy because Ford already competes in this market. It isnt market development because the focus is not on current products for new markets. It isnt market penetration because it will be hard to reach their goals by increasing sales of the few models they currently offer in Asia. 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Solution: Midterm Exam