Selecting Marketing Strategies Introduction to marketing strategies The challenge for a marketing strategy is to find a way of achieving a sustainable competitive advantage over the other competing products and firms in a market. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The strategies relate to the extent to which the scope of a business' activities are narrow versus broad and the extent to which a business seeks to differentiate its products. The four strategies are summarised in the figure below:

The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.

Cost leadership With this strategy, the objective is to become the lowest-cost producer in the industry. The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of scale.

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Why is cost leadership potentially so important? Many (perhaps all) market segments in the industry are supplied with the emphasis placed on minimising costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are readily acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. A strategy of cost leadership requires close cooperation between all the functional areas of a business. To be the lowest-cost producer, a firm is likely to achieve or use several of the following: • • • • • •

High levels of productivity High capacity utilisation Use of bargaining power to negotiate the lowest prices for production inputs Lean production methods (e.g. JIT) Effective use of technology in the production process Access to the most effective distribution channels

Cost focus Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".

Differentiation focus In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants. Differentiation focus is the classic niche marketing strategy. Many small businesses are able to establish themselves in a niche market segment using this strategy, achieving higher prices than un-differentiated products through specialist expertise or other ways to add value for customers. There are many successful examples of differentiation focus. A good one is Tyrrells Crisps which focused on the smaller hand-fried, premium segment of the crisps industry.

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Differentiation leadership With differentiation leadership, the business targets much larger markets and aims to achieve competitive advantage across the whole of an industry. This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products. There are several ways in which this can be achieved, though it is not easy and it requires substantial and sustained marketing investment. The methods include: • • • •

Superior product quality (features, benefits, durability, reliability) Branding (strong customer recognition & desire; brand loyalty) Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers) Consistent promotional support – often dominated by advertising, sponsorship etc

Great examples of a differentiation leadership include global brands like Nike and Mercedes. These brands achieve significant economies of scale, but they do not rely on a cost leadership strategy to compete. Their business and brands are built on persuading customers to become brand loyal and paying a premium for their products.

Ansoff’s Matrix The Ansoff Growth matrix is another marketing planning tool that helps a business determine its product and market growth strategy. Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets.

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The output from the Ansoff product/market matrix is a series of suggested growth strategies which set the direction for the business strategy. These are described below: Market penetration Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives: • • • •

Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling Secure dominance of growth markets Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors Increase usage by existing customers – for example by introducing loyalty schemes

A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research. Market development Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including: • • • •

New geographical markets; for example exporting the product to a new country New product dimensions or packaging: for example New distribution channels (e.g. moving from selling via retail to selling using ecommerce and mail order) Different pricing policies to attract different customers or create new market segments

Market development is a more risky strategy than market penetration because of the targeting of new markets. Product development Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. A strategy of product development is particularly suitable for a business where the product needs to be differentiated in order to remain competitive. A successful product development strategy places the marketing emphasis on:

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• • •

Research & development and innovation Detailed insights into customer needs (and how they change) Being first to market

Diversification Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks. However, for the right balance between risk and reward, a marketing strategy of diversification can be highly rewarding.

Strategies for investing in international markets A Board of Directors studying the options offered by the Ansoff Matrix might well be tempted to focus on the bottom-left quadrant (market development) and try to enter international markets as part of the growth strategy. Selling into international markets is increasingly attractive for UK businesses. For example because of: • • • •

Stronger economic growth in emerging economies such as China, India, Brazil and Russia Market saturation and maturity (slow or declining sales) in domestic markets Easier to reach international customers using e-commerce Greater government support for businesses wishing to expand overseas (e.g. through the

The four main methods of investing in international markets are: Exporting direct to international customers

The UK business takes orders from international customers and ships them to the customer destination

Selling via overseas agents or distributors

A distribution or agency contract is made with one or more intermediaries Distributors & agents may buy stock to service local demand The customer is owned by the distributor or agent

Opening an operation overseas

Involves physically setting up one or more business locations in the target markets Initially may just be a sales office – potentially leading onto production facilities (depends on product)

Joint venture or buying a business overseas

The business acquires or invests in an existing business that operates in the target market

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Which ever method is used, a business looking at international expansion needs to consider some specific risk factors: Cultural differences: a business needs to understand local cultural influences in order to sell its products effectively. For example, a product may be viewed as a basic commodity at home, but not in the target overseas market. The sales and marketing approach will need to reflect this. Language issues: although the common business language worldwide is now English, there could still be language issues. Can the business market its product effectively in the local language? Will it have access to professional translators and marketing agencies? Legislation: legislation varies widely in overseas markets and will affect how to sell into them. A business must make sure it adheres to local laws. It will also need to consider how to find and select partners in overseas countries, as well as how to investigate the freight and communications options available. Each of the above methods has benefits and drawbacks, as summarised below: Advantages

Disadvantages Exporting direct to international customers

Uses existing systems – e.g. e-commerce Online promotion makes this cost-effective Can choose which orders to accept Direct customer relationship established Entire profit margin remains with the business Can choose basis of payment – e.g. terms, currency, delivery options etc

Potentially bureaucratic No direct physical contact with customer Risk of non-payment Customer service processes may need to be extended (e.g. after-sales care in foreign languages)

Selling via overseas agents or distributors Agent of distributor should have specialist market knowledge and existing customers Fewer transactions to handle Can be cost effective – commission or distributor margin is a variable cost, not fixed

Lost profit margin Unlikely to be an exclusive arrangement – question mark over agent and distributor commitment & effort Harder to manage quality of customer service Agent / distributor keeps the customer relationship

Opening an operation overseas Local contact with customers & suppliers Quickly gain detailed insights into market needs Direct control over quality and customer service Avoids tariff barriers

Significant cost & investment of management time Need to understand and comply with local legal and tax issues Higher risk

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Joint venture or buying a business overseas Popular way of entering emerging markets Reduced risk – shared with joint venture partner Buying into existing expertise and market presence

Joint ventures often go wrong – difficult to exit too Risk of buying the wrong business or paying too much for the business Competitor response may be strong

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