Chapter 9 Alternative Business Strategies Objective: discussing what strategic alternatives can be considered
What are the strategic alternatives? • What are the strategic alternatives that should be considered? Which one is optimal? • Among the alternative business strategies, “product life-cycle strategies” and “strategies for different industry positions” will be discussed here.
Product Life Cycle • PLC is an analysis of the actual or potential sales of a product or business segment through the various stages of its marketable life. • It is a means of mapping the strategic direction of the product. • The underlying idea here is that in order to set effective strategies for the long term, some knowledge of the general direction of similar businesses and the potential strategies that competitors will use is required.
Although PLC cannot set strict rules as to what strategy should be followed, various circumstances surrounding each stage of the PLC tend to suggest some options. • The PLC analysis can be used to determine the most reasonable strategic options for a business and can also help to determine the potential strategies of competitors. • The major drawbacks of this analysis is that it is difficult (1) to identify which stage of the PLC the product is in, (2) to determine the factors that affect the product’s movement through the stages, to forecast the (3) sales level at each PLC stage, (4) the length of each stage, (5) the shape of the PLC curve.
The PLC analysis can be applied to an industry (the PLC can show how the sales for all hotels or foodservice establishments are progressing), industry segment (which could represent sales for a segment e.g. foodservice industry is commonly divided into fast-food, casual-dining, fine-dining and institutional foodservice) , concept (which would include types of businesses within each industry segment e.g. within fast-food segment, there are hamburgers, fried chicken, pizza, and Chinese food etc), brand (which includes each different hotel or foodservice company e.g. Hilton Hotels), product or service offering (each unique product or service appear in restaurants and hotels - fads), and location (which could refer to country, region, city, part of a city).
Product Life-Cycle Sales and profits ($) Sales Profits Time Product Introduction Growth Maturity Decline Losses/develop- invest-ment mentstage
Introduction • This phase is applicable only for new individual brands or for new concepts. Because the industry as a whole must be considered to be in the maturity stage. • It is the highest-risk stage because the business is new and untested and experienced competitors are present. • Profits will usually be limited by high opening costs and normal inefficiencies caused by lack of experience. • Frequently, restaurants show excellent profits at the start, because of the curiosity factor, however, when the customers’ curiosity wears off, the restaurant needs to rely on its quality to keep sales up.
Since few customers may be aware of the business, extensive use of promotional strategies is required. • New businesses generally have very little available cash for effective campaigns. This forces most businesses to rely heavily on product, pricing (market penetration pricing), and place (location and atmosphere) as their primary opening strategies. • If the product is unique in a way that creates an exceptional amount of word-of-mouth advertising, then promotion will not be as necessary.
Growth • If the business, concept or segment survives the introduction stage, then it goes into a period of accelerated growth in sales. • This means that the product has been accepted by target customers as a suitable alternative to previous choices. That is why, this is generally the most profitable stage for any product category. • Suppliers are more numerous and also in their own growth stage, so prices for food, beverage and operating costs may be lower.
Competing firms will enter, since profits are up. If a business can dominate a market through a penetration strategy, high entry costs, or a reputation for excellence, then competitors may think twice before entering. • The leader will face attacks from new entries and smaller followers. Unless major mistakes are made, most likely it would retain its position.
Maturity • Declining profits and price competition are the two indicators of the maturity phase. Sales are either increasing slightly or have leveled off. • Sales increases will be limited to natural market expansion, much as the growth of the population in the region or country or when new occasions for use are developed. • At maturity, there are often too many competitors chasing the same customer. Stronger concepts take business away from weaker competitors.
Promotional strategies will be stressed, but quality and value will be the lasting competitive advantages. Product differentiation will also be important, as customers grow tired of the same offerings. • Entry or expansion for smaller competitors will come through the establishment of niches in the market. These will be either through a protected or unexploited location, or though developing a differentiated product.
Decline • When products (restaurants) experience major declines in revenues and negative bottom lines, closing the doors is a viable option. • However, this would not be feasible idea for a hotel losing money, since the hotel could have an asset value of several million dollars, owners are motivated to hold onto the property until a regular profit returns, or until a buyer is found.
Strategies for Different Industry Positions • Each business may decide, based on its position in the industry, what strategies are possible and logical for it to pursue. • There are different expressions for a business’s position in its industry. Here, Kotler’s categorization will be used: market leaders, market challengers, and market nichers. • Each market position dictates different strategies.
The Leader • Each segment within an industry will have a leader. For some segments, the lead position may not be easily recognized. • For the hospitality industry, the primary measure of leadership is overall sales, plus unit sales for restaurants and REVPAR for hotels (average daily rate times occupancy percentage). • Leaders will benefit from name recognition and financial resources, but each leader’s primary focus will be on competing with rivals (challengers) within each market.
For leaders to remain on top, they must focus on protecting their strengths, basically they should continue to what got them to their present position. • They must also incorporate strategies that will make it more difficult for challengers to gain momentum. This could be through increasing market penetration, product additions, or diversifying into related businesses (concentric diversification). • A common problem for market leaders is that they may focus so much on their strengths and they may miss major shifts in their competitive environment. • That is why, they should commit to core strategies, plus adopt successful strategies of market challengers and nichers.
Challengers and Nichers • Imitating the leader may allow a business to survive, but it is not enough in today’s competitive environment. Therefore, for long-term success, every business must gain some type of an advantage. • If a challenger or nicher is to increase its share of the market, it must not play by the rules of the leader, it must change the rules of the game with the goal of neutralizing or temporarily paralyzing the leader. • Since, most often the leaders are large and have rigid organizational structures, they are slow in making rapid responses. There, the challenger has an advantage.
There are various types of attacks for the challenger or nicher. One is flanking attack to circumvent the strengths of the leader e.g. Domino’s Pizza. • The safest strategy for the nicher is to find a geographic niche that leaders or challengers are not likely to pursue.