Product Market Mix Strategy
Product Market Mix Strategy - Ansoff drew up a growth vector matrix, describing a combination of a firm’s activities in current and new market, with existing and new products. The product-market mix strategy is illustrated in diagram below:
Current products and current market: market penetration
Market penetration: the firm seeks to:
a. Maintain or increase its share of the current market with current products.
Present products and new markets: market development
b. Secure dominance of growth markets.
c. Restructure a mature market by driving out competitors.
d. Increase usage by existing customer.
a. New geographical areas and export markets
b. Different package sizes for food and other domestic items so that those who buy in bulk and small quantities are catered for.
c. New distribution channels to attract new customers (e.g. organic foods sold in supermarkets not just specialist shops)
d. Differential pricing policies to attract different types of customer and create new market segments.
New products to present markets: product development
a. Advantage – Product development forces competition to innovate, new comers to the market might be discouraged.
b. The drawbacks include the expense and the risk.
New products and new markets: diversification
Diversification occurs when a company decides to make new products for new markets. It has to have a clear idea of what it hopes to gain from diversification. There are two types of diversification, related and unrelated diversification.
a. Growth - new products and new markets should be selected which offer prospects for growth, which the existing product market mix does not.
b. Investing surplus – funds not required for other expansion needs: but the funds could be returned to shareholders.
c. The firms strengths matches the opportunity if – outstanding new products have been developed by the company’s research and development department. The profit opportunities from diversification are high.
Horizontal integration refers to ‘development into activities which are competitive with or directly complementary to a company’s present activities.’ Sony with its playstation started to compete in computer games.
Vertical integration occurs when a company becomes its own;
a. supplier of raw materials, components or services (backward vertical integration)
b. Distributor or sales agent (forward vertical integration), for example: where a manufacturer of synthetic yarn begins to produce shirts from the yarn instead of selling it to other shirt manufacturers.
Advantage of vertical integration
a. To secure supply of components or raw materials with more control. Supplier bargaining power is reduced.
b. Strengthen the relationships and contacts of the manufacturer with the final consumer of the product.
c. Win a share of the higher profits.
d. Pursue a differentiation strategy more effectively.
e. Raise barriers to entry.
Disadvantages of vertical integration
a. Over-concentration - A company places too many bets on ‘a same end-market product’
b. The firm fails to benefit from any economies of scale or technical advances in the industry to which it has diversified. This is why in the publishing industry most printing is subcontracted to the specialist printing firms, who can work machinery to capacity by doing work for many firms.
Unrelated diversification - conglomerate diversification
Unrelated diversification or conglomerate diversification is very unfashionable now – but it has been a key strategy for many companies in Asia.
Advantages of conglomerate diversification
a. Risk spreading – entering new products into new markets offers protection against failure of current products and markets.
b. High profit opportunities – Ability to move into high growth profitable industries especially important if current industry is in decline.
c. Escape – from the present business if competition is too hot!
d. Better access to capital markets.
e. No other way to grow – expansion in the existing industry might lead to monopoly and government investigation
f. Use surplus cash
g. Exploit under-utilized resources
h. Obtain cash or other financial advantages
i. Use a company’s image reputation in one market to build products and services in another market.
Disadvantages of conglomerate diversification
a. The dilution of shareholders earnings if diversification is into growth industries with high P/E ratios.
b. Lack of a common identity and purpose in a conglomerate organization. A conglomerate will be successful only if it has high quality of management and financial ability at head office where diverse operations are brought together.
c. Failure in one business will drag down the rest.
d. Lack of management experience
e. No good for shareholders – shareholders can spread risk by buying shares in companies in different industries.
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