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Planning New Businesses, Downsizing Older Businesses

 Planning New Businesses, Downsizing Older Businesses

Corporate management often desires higher sales and profits than indicated by the
projections for the SBU portfolio. The question then becomes how to grow much
faster than the current businesses will permit. One option is to identify opportunities
to achieve further growth within the company’s current businesses (intensive growth
opportunities). A second option is to identify opportunities to build or acquire businesses that are related to the company’s current businesses (integrative growth opportu

nities). A third option is to identify opportunities to add attractive businesses that are
unrelated to the company’s current businesses (diversification growth opportunities).
➤ Intensive growth. Ansoff has proposed the product–market expansion grid as a framework
for detecting new intensive growth opportunities.11 In this grid, the company first
considers whether it could gain more market share with its current products in
current markets (market-penetration strategy) by encouraging current customers to buy
more, attracting competitors’ customers, or convincing nonusers to start buying its
products. Next it considers whether it can find or develop new markets for its current
products (market-development strategy). Then it considers whether it can develop new
products for its current markets (product-development strategy). Later it will also review
opportunities to develop new products for new markets (diversification strategy).
➤ Integrative growth. Often a business’s sales and profits can be increased through
backward integration (acquiring a supplier), forward integration (acquiring a
distributor), or horizontal integration (acquiring a competitor).
➤ Diversification growth. This makes sense when good opportunities exist outside the
present businesses. Three types of diversification are possible. The company could
seek new products that have technological or marketing synergies with existing
product lines, even though the new products themselves may appeal to a different
group of customers (concentric diversification strategy). Second, the company might
search for new products that appeal to its current customers but are technologically
unrelated to the current product line (horizontal diversification strategy). Finally, the
company might seek new businesses that have no relationship to the company’s
current technology, products, or markets ,
ness strengths not only match the key success requirements for operating in the target
market, but also exceed those of its competitors. Mere competence does not constitute a competitive advantage. The best-performing company will be the one that can
generate the greatest customer value and sustain it over time.
An environmental threat is a challenge posed by an unfavorable external trend
or development that would lead, in the absence of defensive marketing action, to deterioration in sales or profit. Threats should be classified according to seriousness and
probability of occurrence. Minor threats can be ignored; somewhat more serious threats
must be carefully monitored; and major threats require the development of contingency plans that spell out changes the company can make if necessary.
Internal Environment Analysis
It is one thing to discern attractive opportunities and another to have the competencies
to succeed in these opportunities. Thus, each business needs to periodically evaluate its
internal strengths and weaknesses in marketing, financial, manufacturing, and organizational competencies. Clearly, the business does not have to correct all of its weaknesses, nor should it gloat about all of its strengths. The big question is whether the
business should limit itself to those opportunities in which it possesses the required
strengths or consider better opportunities to acquire or develop certain strengths.
Sometimes a business does poorly because its departments do not work together
well as a team. It is therefore critically important to assess interdepartmental working
relationships as part of the internal environmental audit. Honeywell, for example, asks
each department to annually rate its own strengths and weaknesses and those of the
other departments with which it interacts. The notion is that each department is a “supplier” to some departments and a “customer” of other departments. If one department
has weaknesses that hurt its “internal customers,” Honeywell wants to correct them.
Goal Formulation
Once the company has performed a SWOT analysis of the internal and external environments, it can proceed to develop specific goals for the planning period in a process
called goal formulation. Managers use the term goals to describe objectives that are specific with respect to magnitude and time. Turning objectives into measurable goals
facilitates management planning, implementation, and control.
To be effective, goals must (1) be arranged hierarchically to guide the businesses in
moving from broad to specific objectives for departments and individuals; (2) be stated
quantitatively whenever possible; (3) be realistic; and (4) be consistent. Other important
trade-offs in setting goals include: balancing short-term profit versus long-term growth;
balancing deep penetration of existing markets with development of new markets; balancing profit goals versus nonprofit goals; and balancing high growth versus low risk.
Each choice in this set of goal trade-offs calls for a different marketing strategy.
Strategy Formulation
Goals indicate what a business unit wants to achieve; strategy describes the game plan
for achieving those goals. Every business strategy consists of a marketing strategy plus
a compatible technology strategy and sourcing strategy. Although many types of marketing strategies are available, Michael Porter has condensed them into three generic
types that provide a good starting point for strategic thinking: overall cost leadership,
differentiation, or focus.12
➤ Overall cost leadership: Here the business works to achieve the lowest production and
distribution costs so that it can price lower than competitors and win more market share. Firms pursuing this strategy must be good at engineering, purchasing,
manufacturing, and physical distribution; they need less skill in marketing. Texas
Instruments uses this strategy. The problem is that rivals may emerge with still lower
costs, hurting a firm that has rested its whole future on cost leadership.
➤ Differentiation: Here the business concentrates on achieving superior performance in
an important customer benefit area, such as being the leader in service, quality,
style, or technology—but not leading in all of these things. Intel, for instance,
differentiates itself through leadership in technology, coming out with new
microprocessors at breakneck speed.
➤ Focus: Here the business focuses on one or more narrow market segments, getting
to know these segments intimately and pursuing either cost leadership or
differentiation within the target segment. Airwalk shoes, for instance, came to fame
by focusing on the very narrow extreme-sports segment.
Firms that do not pursue a clear strategy—“middle-of-the-roaders”—do the
worst. International Harvester fell upon hard times because it did not stand out as lowest in cost, highest in perceived value, or best in serving some market segment.
Middle-of-the-roaders try to be good on all strategic dimensions, but because strategic
dimensions require different and often inconsistent ways of organizing the firm, these
firms end up being not particularly excellent at anything.
Strategy formulation in the age of the Internet is particularly challenging. The
chemical company Solutia, a Monsanto spinoff, copes by creating four different, possible short-term scenarios for each strategy. This allows the firm to act quickly when it sees
a scenario unfolding. Sun Microsystems holds a weekly meeting with the firm’s top decision makers to brainstorm strategies for handling new threats. By revisiting strategic
plans frequently, both companies are able to stay ahead of environmental changes.13
Program Formulation
Once the business unit has developed its principal strategies, it must work out detailed
supporting programs. Thus, if the business has decided to attain technological leadership, it must plan programs to strengthen its R&D department, gather technological
intelligence, develop leading-edge products, train the technical sales force, and
develop ads to communicate its technological leadership.
After these marketing programs have been tentatively formulated, the marketing
people must estimate their costs. Questions arise: Is participating in a particular trade
show worth it? Will a specific sales contest pay for itself? Will hiring another salesperson contribute to the bottom line? Activity-based cost (ABC) accounting should be
applied to each marketing program to determine whether it is likely to produce suffi-
cient results to justify the cost.14
Implementation
A clear strategy and well-thought-out supporting programs may be useless if the firm
fails to implement them carefully. Indeed, strategy is only one of seven elements,
according to McKinsey & Company, that the best-managed companies exhibit.15 In
the McKinsey 7-S framework for business success, strategy, structure, and systems are
considered the “hardware” of success, and style (how employees think and behave),
skills (to carry out the strategy), staff (able people who are properly trained and
assigned), and shared values (values that guide employees’ actions) are the “software.”
When these software elements are present, companies are usually more successful at
strategy implementation.16 Implementation is vital to effective management of marketing process, as discussed later in this chapter. Feedback and Control
As it implements its strategy, the firm needs to track the results and monitor new developments in the internal and external environments. Some environments are fairly stable from year to year. Other environments evolve slowly in a fairly predictable way. Still
other environments change rapidly in significant and unpredictable ways.
Nonetheless, the company can count on one thing: The marketplace will change. And
when it does, the company will need to review and revise its implementation, programs, strategies, or even objectives.
A company’s strategic fit with the environment will inevitably erode because the
market environment changes faster than the company’s 7-Ss. Thus a company might
remain efficient while it loses effectiveness. Peter Drucker pointed out that it is more
important to “do the right thing” (effectiveness) than “to do things right” (efficiency).
The most successful companies excel at both.
Once an organization fails to respond to a changed environment, it has difficulty
recapturing its lost position. This happened to the once-unassailable Motorola when it
was slow to respond to the new digital technology used by Nokia and others, and kept
rolling out analog phones.17 Similarly, Barnes & Noble did not immediately recognize
the threat posed by Amazon.com’s Internet-based book retailing model; then, as a
latecomer to e-commerce, it had more of a struggle establishing itself. Clearly, the key
to organizational health is the firm’s willingness to examine the changing environment and to adopt appropriate new goals and behaviors. High-performance organizations continuously monitor the environment and use flexible strategic planning to
maintain a viable fit with the evolving environment.

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