Chapter 12: Strategic Choices

we now look in more detail at models and tools that allow the more specific elements of
strategy to be selected.

Marketing mix describes a collection of tools that can be used to construct a detailed
marketing strategy. It is a set of controllable marketing variables used to influence a
target market.
The 4Ps applicable to marketing a product are:
 Product;
 Price;
 Promotion; and
 Place.
Three additional factors (to make 7Ps) address unique problems of marketing
services:
 People;
 Processes; and
 Physical evidence.
The 7Ps extended marketing mix is also called the service marketing mix because it
refers specifically to the marketing of services. Marketers need to overcome the
problems often associated with service marketing because of the nature of services.

1.2 Product
The product, goods or services, refers to qualities and attributes of a purchase as
perceived by the customer. It is not a "thing" but a package of benefits.
 Basic (core) product – a car as a means of transport;
 Actual product – the actual car with all its physical features;
 Augmented product – the actual car with all its benefits such as a particular
brand, 0% finance and extended warranty.
Factors to be considered when taking a product from actual to augmented include:
 Quality;
 Packaging;
 Branding;
 Aesthetics;
 Product mix; and
 Servicing, warranty, guarantee.
 1.3 Price
Definitions

Penetration pricing – charging a low price to achieve early market share advantages.
Price skimming – charging high prices early on to reap maximum profits.

All companies provide customers with an amount of value. Value is a combination of the
functionality of a product or service in terms of the benefits that are offered to the
customer and the price that is charged.
Pricing is different from the other Ps in that the other Ps represent costs and
"Price" generates revenue. Price must be consistent with other elements of the
marketing mix and consider the following factors:
 Economic influences;
 Competitors' prices;
 Brand;
 Quality connotations;
 Discounts;
 Payment terms; and
 Product life cycle (penetration pricing and product skimming).

1.4 Promotion
Promotion is about communication (i.e. informing customers about the product and
persuading them to buy it). There are four main types of promotion:

1.5 Place
Once the product has been manufactured, packaged, advertised and promoted,
decisions have to be made in two areas:
1. Logistics
 How the product is distributed (e.g. transport decision); and
 Direct distribution or distribution through a retailer.
2. Channel
 Where the products will be sold:
o intensively (in every big supermarket);
o selectively (only in pharmacies);
o exclusively (only in one particular shop in town).

Product push – Company efforts are directed at distributors to stock the product.
Customer pull – A company persuades customers to demand the product from
retailers and distributors, thereby pulling the product through the chain.
1.6 People
People (e.g. bank staff, waitresses, flight attendants, taxi drivers, etc) concerns
corporate culture, job design and motivational issues. People issues include:

1.7 Processes
Processes by which marketing tasks are achieved (e.g. automated telephone booking
and ticketing systems for cinemas).

1.8 Physical Evidence

Physical evidence includes:
 Environment (e.g. furnishings, colours, layout, noise, smells, ambience);
 Facilities (e.g. aeroplanes, uniforms, paperwork); and
 Tangible evidence (e.g. labelling, tickets, logos, packaging).

2.0 Creating a Sustainable Competitive Advantage

2.1 Price-Based Strategies

 Low margins can be sustained by either increasing volume or cross-

subsidisation (using higher-margin products to sustain lower-margin
products).
 Starting a price war is a high-risk strategy where consumers may be the
only winner. Any company entering a price war must have sufficient cash
reserves to survive a period of very low prices and confidence that prices can
subsequently be increased.

 Cost leadership involves driving down costs to the extent that the
lowest selling price in the market can be set. This is a risky strategy as
only one firm in an industry can be the cost leader.
 If a market is segmented (e.g. by socio-economic class), a firm may
succeed by targeting a particular segment. This is often seen in food
retailing, where some chains focus on selling basic foods at low prices, and
others focus on the premium segment of the market.
 2.2 Differentiation Strategies
A differentiation strategy assumes that competitive advantage can be gained
through particular characteristics of a firm's products. These can be divided into
three categories:
1. Breakthrough products (e.g. iPod);
2. Improved products (e.g. microchips); and
3. Competitive products (e.g. Mercedes) which appeal to customers because of
the relationship of quality, status, design and price.
Firms may use several methods to differentiate:
 Build up a brand image (e.g. Coke versus Pepsi).
 Give the products special features (e.g. Toyota hybrid cars).
 Exploit other activities of the value chain (e.g. Tesco and its close IT link with
its suppliers through electronic data interchange).
Porter assumes that differentiated products always will be sold at a higher price. A
differentiated product, however, may be sold at the same or lower price as the
competitors' in order to increase market share. Questions to consider in
implementing this strategy are:
 Who are we competing against?
 Are competitors in the same segment of the market?
 Where is the source of differentiation?

2.3 Niche or Focus

Definition

Niche (focus) – a segment of the broader market suitable for a specialised product that specifically
addresses the needs of that segment.

In a focus strategy, a firm concentrates its attention on one or more particular niches of
the market and does not try to serve the entire market with a single product.

A good illustration of a niche strategy is the organic food market. In order to escape the
buying power of the large supermarkets, the producers of organic food are finding
alternative ways to bring their products to market (e.g. direct sales via the Internet).
Lock-in is achieved in a marketplace when a company's product or service
becomes the industry standard
Factors affecting the success of lock-in:
 Perception of dominance (in terms of market share) by potential competitors
and suppliers;
 First mover advantage (being the first entrant into the market);
  Ability to "bundle" the product (e.g. Microsoft's operating system is pre-
installed on many PCs);
 Ability to defend a dominant position (e.g. through holding patents);
 The regulatory environment (e.g. some governments legislate against
"bundling" and investigate excessive market share).

Bowman's Strategy Clock analyses strategies in terms of price and perceived

value added.

 Strategies 1 and 2 are price-based strategies. Such strategies are not likely
to be profitable unless the company can achieve significant market share.
 Strategies 3, 4 and 5 are all differentiation strategies. Differentiation can
be created through product features, marketing (e.g. branding) and core
competences. The hybrid strategy aims at lower price than the
competition and differentiation. The company must have a cost base low
enough to allow reduced prices and make reinvestment to maintain
differentiation. Focused differentiation targets a particular segment or
"niche" in the market (e.g. premium-quality organic food).
 Strategies 6 (risky high margins), 7 (monopoly pricing) and 8 (loss of market
share) are not viable, according to Bowman, and are likely to result in failure.
3.0 Dimensions of Strategy
The Ansoff growth vector matrix considers the courses of development available. Ansoff
suggested that any strategy has two dimensions:
1. A product dimension, in which a given strategy either uses the current
products of the organisation or considers new ones.
2. A market dimension, in which a given strategy either addresses the current
markets (geographic or demographic) or new ones.

3.1 Consolidation
Consolidation strategies aim to protect and strengthen a company's position in
its current markets with current products.
Actions and tactics in a consolidation strategy may include:
 downsizing.
 withdrawal from some activities; or
 maintaining market share (high market share companies have advantages
over their competitors).

3.2 Market Penetration

Market penetration strategies aim to increase market share by aggressively selling more
of the current products to existing customers.
Reasons for pursuing this type of strategy include:
 securing dominance in a growth market; and
 reducing rivalry and costs.
The major market penetration techniques are:
 increase advertising.
 broaden distribution to include new channels or outlets;
 price cutting; and
 introductory offers.
Market penetration may depend on:
 Market growth rate (e.g. it will be easier for companies with a small market
share to grow in a rapidly growing market);
 Resource issues (e.g. capital); and
 Complacency of market leaders (e.g. market leaders might not seriously
consider lower share competitors and will be taken by surprise if they
succeed. A good example is Virgin Atlantic Airways taking market share from
British Airways on transatlantic flights).

3.3 Market Development

Market development strategies aim to offer existing products to new markets.
They depend on capability and market demands and often go hand-in-hand with
product development.
New markets can be either:
 geographic.
 new market segments (e.g. nappies for babies, for children up to age 4 and
for elderly people); or
 new uses for existing products (e.g. bikes for transport, recreation or sport).
The main advantages of market development are:
 Economies of scale may be achieved as a result of increased volumes.
 Risk from reliance on a single market is reduced; and
 Competition may be discouraged from becoming established in a hitherto
unexploited market.
The main disadvantages of market development include:
 Foreign exchange risk (if the new market is overseas);
 Complexity of managing international locations (if the new market is out of the
country); and
 Cultural differences and barriers to entry.

3.4 Product Development

Product development strategies sell new or modified products (and services) in existing
markets to current customers (e.g. new product lines, such as speciality razors).
Product development requires innovation, research and development, and knowledge
about what customers want and need:
 Customer expectations may change as they become more knowledgeable
(e.g. demand greater value for money);
 Companies with strong market analysis skills will have an advantage (e.g.
Walmart and data mining); and
 Previous critical success factors may shift and other factors may become
more important (e.g. ease of payment, quality of information, etc).
Dilemmas for companies include:
 New products may not be successful (e.g. the introduction of the New Coke in
response to Pepsi gaining market share); and
 Developing products may be required because the consequences of not
developing products could be unacceptable (e.g. the cell phone market).

3.5 Product Diversification

The Ansoff growth vector matrix refers to product diversification as product
development.

3.5.1 Rationale
A firm's ability to add value through its resources and competences determines whether
it should diversify in a particular direction. Diversification may be either related to the
product or unrelated to the product.

3.5.1 Advantages
 Economies of scale may arise through synergy (e.g. in marketing, operations,
investment, management, etc).
 Corporate managerial capabilities may be expandable (e.g. Virgin).
 Increased market power through cross-synergy.
 Ability to cross-subsidise (i.e. use surpluses of one product to benefit the
company and customers in the short term). This may drive out competitors to
create a monopoly.
 It may be an appropriate response to environmental change.
 Risk spreading.

3.5.2 Disadvantages
 Time and costs involved in top management at the corporate level trying to
ensure that the benefits are achieved through sharing or transfer across
business units.
 It may be difficult for business unit managers to adapt to corporate-wide
policies (strategies), especially when they are rewarded on the basis of
performance of their own business unit.

Diversification involves selling new products in new markets. Therefore, diversification can take
the organisation away from its current markets and products.
4.1 Related Diversification
A firm may choose diversification related to an existing product with vertical integration,
both forward and backward, and horizontal integration. (Vertical integration was
discussed in Chapter 10.)

4.1.1 Horizontal Integration

 Companies integrate horizontally by using current capabilities to develop
activities and product lines that are competitive with or directly
complementary to the company's present activities.
 It means specifically the merger with, or acquisition of, rival organizations.

4.2 Unrelated or Conglomerate Diversification

 Conglomerate diversification introduces the company to unrelated product

and market areas, which are likely to be beyond the current capabilities or
value networks.
 Although it can be pursued by organic growth, normally it is an acquisition
strategy.
Organisations such as the World Trade Organisation (WTO) have worked to reduce
trade tariffs, and better international legal frameworks and cheaper travel have made
international trade easier.

5.1.2 Market Drivers

 Standardisation of markets: Applies where customers have similar tastes
and needs (e.g. TV sets). However, this does not apply to all products and
services.
 Globalisation of customers: If a business produces parts for a car
manufacturer, for example, it will be expected to follow the car manufacturer
into new markets.
 Transferable marketing: The growth of many international brands where the
approach to marketing is similar across the globe.

5.1.3 Government Drivers

Governments both encourage and discourage international trade. On the one
hand, governments often adopt policies to protect domestic companies (e.g. trade tariffs
or other legal requirements). On the other hand, many countries are members of free-
trade agreements (e.g. WTO or the European Union), which promote the free
movement of goods and services among member states.

5.1.4 Cost Drivers

Where the domestic market is small, increasing sales volume by expanding into
foreign markets may lead to economies of scale. This is particularly true in industries
that have large research and development costs, where a higher volume of sales
means that these costs can be recovered more easily.

5.1.5 Competitive Drivers

Where competitors have a truly international strategy, they may be able to subsidise
operations in one country with profits from another, undercutting local competitors. The
only way to compete in such a situation is to have a similar international strategy.
5.2 International Value Network
Global organisations can manage their value chains to take advantage of strengths in
different countries. Thus manufacturing can be located in countries where labour costs
are lower, while research activities can be located in countries with excellent
universities..
 Cost advantages: Many global organisations locate parts of their operations
where there are lower labour costs (e.g. manufacturing in Southeast Asia or
call centres in India).
 Unique local capabilities: Cost is not the only factor in determining where to
locate activities. Some activities will be located in countries that provide
excellence in that field (e.g. fashion companies often locate their design
teams in countries that are associated with sophisticated tastes).
  Overcoming tariffs: One reason that car manufacturers such as Nissan
operate factories in the UK is to avoid the tariffs that would be paid if the cars
were imported from Japan.

Four designs for global business based on an organization’s response to these

factors:
1. An international organisation has some dealings with customers, suppliers
or trade partners outside its country of domicile (where it "lives").
These companies operate in industries that require little local differentiation
and are not under pressure for globalisation. They will be structured with an
international or export division.
2. A global organisation takes a global perspective on customers, technology,
sourcing, strategic alliances, competition and location of production.
These companies are likely to be structured around product divisions with a
global scope.
3. A multinational organisation:
 operates internationally;
 has local operations and management structures in more than one
country; and
 operates as if it has "no domicile".
These companies drive a polycentric orientation with largely independent
local operations.
4. A transnational organisation tries to respond to the global scale of its
operations but local conditions require a differentiated approach.
Some headquarter functions (e.g. research and development) will be diffused
across the organisation; other regional or national units will work
independently and share their competences with others. The strategic apex
needs to promote a corporate culture that focuses on shared values and co-
operations

5.5 Modes of Entry

5.5.1 Exporting
Exporting is the most conventional and the most common method of entering a market
in another country.
Advantages are:
 Companies can experiment without facing many risks;
 Operating costs can be minimised; and
 Concentration of production in a single location – economies of scale,
consistent product quality.
An organisation has two options for the organisation of its "field sales" – those who sell
the product or service to the customer:
1. Indirect exporting: Allow local agencies to sell products on a commission
basis.
2. Direct exporting: Set up local sales offices to sell the home-produced goods
out of the country.

5.5.2 Overseas Production

Advantages are:
 Better local understanding;
 Lower production costs (e.g. lower labour and transportation costs);
 Economies of scale in large markets;
 May be beneficial due to investment requirements of governments; and
 Avoidance of trade barriers.

This section on strategic choices delves into models and tools for developing a company’s
competitive position, particularly in marketing and product/service strategy, price-based and
differentiation strategies, and international expansion.

Key Concepts

1. Marketing Mix (4Ps and 7Ps):

o The 4Ps (Product, Price, Promotion, Place) are essential for a product-focused
marketing strategy.
o The 7Ps (adding People, Processes, and Physical Evidence) apply to services,
addressing unique challenges in delivering quality and customer satisfaction.
2. Product Strategy:
o Emphasizes the perceived value to the customer, going beyond basic product
features to include branding, quality, and after-sales support.
3. Pricing Strategies:
o Techniques like penetration pricing (low entry price) and price skimming (high
initial price) are used depending on goals for market share and revenue.
o Pricing should align with the rest of the marketing mix and consider economic
factors, competitor pricing, and brand perception.
4. Promotion and Place:
o Promotion encompasses various communication channels aimed at creating
product awareness and persuading customers.
o Place addresses distribution logistics and channel strategies, including direct,
selective, and exclusive distribution methods.
5. Competitive Strategies (Porter’s Generic Strategies and Bowman’s Strategy Clock):
o Cost Leadership: Focuses on becoming the lowest-cost producer, often achieved
through economies of scale and operational efficiency.
 o Differentiation: Adds value through unique product features or branding,
potentially allowing premium pricing.
o Niche/Focus Strategy: Targets a specific market segment with tailored
products/services.
6. Growth Strategies (Ansoff Matrix):
o Market Penetration: Increase sales within existing markets.
o Market Development: Expand into new markets.
o Product Development: Introduce new products to existing customers.
o Diversification: Venture into new products and markets, which can be related
(synergistic) or unrelated (conglomerate).
7. International Expansion:
o Driven by market, government, cost, and competitive factors, companies can
expand internationally using various modes (exporting, joint ventures, or
establishing local production) to balance risks and benefits.

These frameworks guide companies in making strategic choices for long-term success by
aligning products, pricing, promotion, and place with competitive strategies and growth
ambitions.