Strategic direction

Strategic direction definition: describes how a business plans to get where it wants to be in the long term

In most cases, strategic direction is concerned with a business using its understanding of its internal and external environments in order to choose:

• the products is should produce
• the markets in which to sell those products

Ansoff's Matrix: a strategic or marketing planning model that can be used to help a business decide its strategic decision in terms of its product portfolio and target markets

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 e-commerce 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 that 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:

• 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.

Strategic positioning: the view people take of a business that results from the business' strategic decision making

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.

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 one 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.

With differentiation leadership, the business targets much larger markets and aims to achieve competitive advantage through differentiation across the whole of 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 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.

Bowman’s Strategic Clock is a model that explores the options for strategic positioning – i.e. how a product should be positioned to give it the most competitive position in the market.

The purpose of Bowman's Stategic clock is to illustrate that a business will have a variety of options of how to position a product based on two dimensions – price and perceived value.

Low Price and Low Value Added (Position 1)

This is not a very competitive position for a business. The product is not differentiated and the customer perceives very little value, despite a low price. 

This is a bargain basement strategy. The only way to remain competitive is to be as “cheap as chips” and hope that no-one else is able to undercut you.

Low Price (Position 2)

Businesses positioning themselves here look to be the low-cost leaders in a market. 

A strategy of cost minimisation is required for this to be successful, often associated with economies of scale. Profit margins on each product are low, but the high volume of output can still generate high overall profits. 

Competition amongst businesses with a low price position is usually intense – often involving price wars.

Hybrid (Position 3)

As the name implies, a hybrid position involves some element of low price (relative to the competition), but also some product differentiation. The aim is to persuade consumers that there is good added value through the combination of a reasonable price and acceptable product differentiation. 

This can be a very effective positioning strategy, particularly if the added value involved is offered consistently.

Differentiation (Position 4)

The aim of a differentiation strategy is to offer customers the highest level of perceived added value. Branding plays a key role in this strategy, as does product quality. 

A high-quality product with strong brand awareness and loyalty is perhaps best-placed to achieve the relative prices and added-value that a differentiation strategy requires.

Focused Differentiation (Position 5)

This strategy aims to position a product at the highest price levels, where customers buy the product because of the high perceived value. This the positioning strategy adopted by luxury brands, which aim to achieve premium prices by highly targeted segmentation, promotion, and distribution. 

Done successfully, this strategy can lead to very high-profit margins, but only the very best products and brands can sustain the strategy in the long-term.

Risky High Margins (Position 6)

This is a high-risk positioning strategy that you might argue is doomed to failure – eventually. With this strategy, the business sets high prices without offering anything extra in terms of perceived value. If customers continue to buy at these high prices, the profits can be high. But, eventually, customers will find a better-positioned product that offers more perceived value for the same or lower price. 

Other than in the short-term, Risky High Margins is an uncompetitive strategy. Being able to sell for a price premium without justification is tough in any normal competitive market.

Monopoly Pricing (Position 7)

Where there is a monopoly in the market, there is only one business offering the product. The monopolist doesn’t need to be too concerned about what value the customer perceives in the product – the only choice they have is to buy or not. There are no alternatives. In theory, the monopolist can set whatever price they wish. Fortunately, in most countries, monopolies are tightly regulated to prevent them from setting prices as they wish.

Loss of Market Share (Position 8)

This position is a recipe for disaster in any competitive market. Setting a middle-range or standard price for a product with low perceived value is unlikely to win over many consumers who will have much better options (e.g. higher value for the same price from other competitors).

Overview

Looking at the Strategy Clock in an overview, you should be able to see that three of the positions (6, 7, and 8) are uncompetitive. These are the ones where the price is greater than the perceived value. Provided that the market is operating competitively, there will always be competitors that offer a higher perceived value for the same price, or the same perceived value for a lower price.

Competitive Advantage definition: A benefit (or benefits) that a firm has in comparison to its rivals, allowing it to achieve greater sales and profits and retain more customers than its competitors

2 main types of competitive advantage:

1) Comparative advantage - also known as cost advantage (offers at a lower cost than competitors)

2) Differential advantage - arises from a business' ability to differentiate goods and services from its competition in a way that enables them to be seen as superior to the competition

Competitiveness definition: the ability of businesses to sell their products successfully in the market in which they are based

• Invest in new equipment and technology
• Staff skills, education, and training
• Innovation through investment in research and development
• Enterprise
• The effectiveness of a business' marketing
• Improving quality
• Effective human resource management
• Efficient operational procedures
• Financial planning and control

• High costs involved in getting new technology
• Skilled workers likely to have higher wages
• R&D is very expensive
• Unless a business has developed a very high level of brand loyalty, marketing is not likely to help achieve sustained competitive advantage