Every organization has a vision & in order to achieve that vision organization develops corporate strategy.
How to develop an optimal corporate strategy that carries both Blue Ocean & Red Ocean products?
What is market share? Does market share mean share of product, share of category, share of channel, share of customer, share of region or share of something else? How does your company define market share? Companies that cannot answer this very important question cannot effectively engage in Strategic Market Positioning (SMP) and in the long term, will find it difficult to invest successfully for growth.
What is Strategic Market Positioning (SMP)? For a business or product line that competes in only one strategic segment, SMP is simply the market share of the business in its strategic market segment. For a company competing in multiple strategic segments, its overall SMP is the average of its SMPs in each strategic segment, weighted by the business’s sales or investment in each strategic segment.
Achieving effective SMP involves analyzing an industry to determine strategic market segments and then making investments in those segments that will lead to increased returns.
Does SMP = Market Segmentation? Normally market positioning is considered as market segmentation. This is totally a marketing technique that involves breaking down market into smaller segments in order to better understand consumer behavior & identify opportunities to increase overall market share.
However on the other hand SMP is different because it creates shareholders return. It brings together the disciplines of strategy and finance to help shape a company’s approach to value creation. Organizations that fail to differentiate between market segmentation and Strategic Market Position may be at risk because the definition of market share often does not correlate with company profitability, returns and strategic potential.
Do you think larger market share provides superior return? As per research by one of the top consulting, larger market share even provides low return in comparison to companies having smaller market share with Strategic Market Positioning. There are several reasons supporting to this finding. The smaller, more profitable company may avoid going head-to-head with larger, more powerful competitors. It may deploy its investments into segments where (among other things) the dominant players simply do not compete. In essence, it positions itself in its industry strategically and allocates more assets in fewer, carefully selected ways. As a result, it has a much higher market share in its chosen segments.
How to create Value through Strategic Market Positioning (SMP)
Following 3 approaches should be followed to create value through SMP-
Be Creative & think Broad: To maximize the chances of identifying successful strategies, think beyond the current business offerings. Apply the Blue Ocean Strategy principle “Reconstruct Market Boundaries” & “Reaching Beyond Existing Demand”. Evaluate other businesses that share the same customers or leverage the same technologies. Consider services as well as product offerings. Identify the range of organic or acquisition initiatives that could be used to pursue potential growth strategies.
Conduct SMP Test: Identify the growth strategies that have the greatest potential to increase the company’s weighted average relative market share, as measured across all strategic segments impacted by the strategy. This will identify strategies that have the potential to improve the company’s overall position on the most important drivers of profitability. Conduct SMP test quantitatively to specific initiatives to see whether market share, appropriately defined, increases or decreases.
Conduct Value Creation Test: “Strategic value” is defined as the net present value of cash flows from higher revenues, lower costs and lower capital requirements that will accrue from the growth opportunity and the existing business being run together versus separately.
We will see an example of Southwest Airline & America West Airline to know how SMP creates higher value.
Southwest Airline & America West Airline started in roughly the same position, but ended in very different places. Both formed as low-cost, low-fare regional carriers, both airlines grew their operations and profits on roughly parallel tracks through the early 1990s.
America West followed a traditional hub-and-spoke design for its flights and became well known for its expansionist strategy. Southwest, on the other hand, grew at a slower pace, taking the time to build up strong positions in specific markets before penetrating additional markets. Southwest’s emerging strategy was creative in that it focused on short haul, high frequency flights in city pairs where the airline could secure a strong market share position, often flying to a secondary, lower-cost airport. In addition, its costs were controlled as a result of the corporate decision to use (and therefore maintain) only one type of aircraft: the Boeing 737.
By contrast, America West’s expansionist strategy called for international routes, which in turn called for a heterogeneous and expensive-to maintain fleet. America West did not base its strategy on the core tenet of SMP: build the type of market share that maximizes high-impact growth and leverages economies to the greatest extent possible.
Summarize two Airlines positions & Strategies
|Summary Stats ( 1990)||South West||American West|
|Revenue||$1186 M||$ 1315 M|
|Number of Aircraft||106||104|
|Types of Aircraft||1||4|
|Flight Design||Point-to-Point Short Haul||Hub & Spoke|
Figure 1: Compares the two airlines in terms of traditional market share and Strategic Market Position to reveal the true impact of their different strategies
Although America West and Southwest had similar US total market shares in 1990, this measure obscures their relative competitive strengths.
In the airline business, pricing power and operating costs are driven more by share of flights between states or, more precisely, by share of flights between specific city pairs. Travelers prefer to fly an airline that has several daily flights between two points because it gives them more flexibility in the event of a missed or delayed flight. This is better for airlines because they are likely to have larger scale and more efficient operations at each end.
Southwest Airlines recognized this as a critical factor and was careful to enter a new market only when it felt it could achieve substantial strategic share in that market. By contrast, America West assumed that, by entering larger and increasingly international markets, it was strengthening its overall position in the airline market. In fact, it was neglecting its core franchise and spending limited resources to enter new market segments where it had little to offer against strong competitors.
Figure: 2 illustrates the value creation outcome of these two Airlines while adopting different strategies
As America West’s emergence from Chapter 11 in 1994, its stock has declined at a CAGR of -4.9 percent, while Southwest’s stock has grown at a CAGR of 9.9 percent.
Strategic Market Positioning (SMP) is a proven and highly effective tool for creating value. It is founded on the assumption that not all growth is good – in fact, that some growth actually destroys value. SMP helps companies identify the difference and respond accordingly. By being creative and thinking broad to maximize the chances of identifying successful strategies, and by conducting the SMP and value-creation tests, an organization’s leadership can gain valuable insight into organic growth ,acquisitions and other growth investments and be better able to formulate strategies that have the potential to improve the company’s overall performance.
Chinese economy is growing very fast. It is estimated that it will grow nearly 10% for the next 2 years and by 2030, 36% of world’s Incremental GDP will come from China. China is taking huge advantage of its cost efficiency & leverage manufacturing to serve other regions also. Chinese growth depends upon emergence & fast growing segment of middle group or we can say “good-enough” market segment.
Majority of MNCs provide goods & services in high margin premium segment facing huge dilemma and competition from “good-enough” market segment.
Dilemma in the sense that company is not sure whether to jump into “good-enough” segment or continue with the premium segment. If they jump into good-enough then it can cannibalize their premium segment sales or in other case if they can’t enter “good-enough” segment then other local competitors will take some of the market share locally- Chinese people gives more importance to good-enough market segment where they buy almost same quality of products at lesser price.
Good-enough segments are growing and changing very fast and it becomes more than ½ of the total Chinese market segment.
What should be MNC Company’s strategy regarding good-enough segment? How to determine whether they need to jump into this segment or not? What should be their approach in catering to this segment?
DECISION TO ENTER INTO GOOD-ENOUGH SEGMENT
It can be very tough decision for any MNCs providing services in premium segment to get attracted & involve in catering to 62% market share of good-enough segment.
They have to do their homework properly before jumping into this segment. They need to find out few question i.e. Are the premium segment is still attractive? Is it growing? Are companies still achieving high returns or returns are eroding? What is your position in a current market? Are you a market leader or niche player?
If the company finds that growth of the premium segment is slowing down & returns are eroding and there is future threat from local competitors to capture some premium segment market. In this circumstances company has to take a call to enter into good-enough segment market however they should clearly strategize their approach, how they are going to enter, whether they expand organically or acquire an existing player. How to capitalize on strong geographic distinction so that new offering couldn’t cannibalize premium offering?
However one more important reason that justifies MNCs to get into this segment is that if they don’t enter into this segment then they will face tough competition from local Chinese company not only in the local Chinese market but also in their own backyard.
HOW TO ENTER INTO GOOD-ENOUGH SEGMENT
The goal for the organization is to lower their manufacturing costs, introduce simplified product & services & broaden their network while maintaining reasonable quantity. There are 2 ways through which companies can enter into good-enough segment-
Attacking From Above
MNCs providing goods & services in premium segment should employ and offensive-defensive approach to enter middle market/good-enough segment. They should enter good-enough segment to defend against the rise of local competitors and erosion of premium segment.
GE Healthcare strategy to enter into good-enough segment and simultaneously protect its premium segment is a very good example of attack from above.
GE Healthcare employed to expand sales of its MRI equipment in China. The company created a line of simplified machines targeted at hospitals in China’s remote and financially constrained second and third-tier cities where other MNCs rarely ventured. That good enough territory has all the right conditions. It was a fast-growing market whose customers purchasing criteria weren’t likely to change soon. GE’s cost structure allowed it to compete with other middle market players in the industry. And there was little risk that the company would cannibalize its premium line of diagnostic machines; large city hospitals were not keen on downgrading their MRI equipment.
GE Healthcare was able to defend its position against local upstarts. The company is trying to develop the optimal product portfolio and is addressing such issues as how best to service the equipment. GE captured 52% of $238 million market in 2004 generating roughly $120 million in sales. GE is replicating the same strategy in other developing countries including India.
Buying way In
MNCs that can’t alter their cost or process quickly enough to compete with local players should use break-through approach to enter good-enough segment market by way of merger & acquisition.
Gillette is a very good example of entering into good-enough segment by way of merger & acquisition.
Gillette’s Duracell division throughout the 1990s was losing market share to lower- price competitors like Nanfu who controlled more then 50% of the market. By 2002 Gillette’s Duracell share of the Chinese domestic battery market was mere 6.5%.
Gillette management team recognized that its Duracell unit was at a cost disadvantage compared with its rivals and concluded that it will be difficult to broaden the brand’s market penetration. Facing with such an odd Gillette decided to buy into good-enough segment market by acquiring a majority stake in Nanfu but Gillette was extremely careful to protect Duracell’s & Nanfu’s brand in their respective segment. Gillette continues to sell premium batteries in China under the Duracell brand and has maintained Nanfu as the leading national brand for the mass market. The dual branding, cost synergies, sales growth, broadened product portfolio, economies of scale, and distribution to more than 3 million outlets in China have paid off for Gillette, Which has seen significant increase in its operating margin in China.
Finally entering into good-enough segment in China can be double bonanza for MNCs. Just like Chinese good-enough segment market Indian good-enough segment market is also very big & growing very fast. MNCs can use experience of Chinese good-enough market and replicate the same in Indian market. In order to achieve cost efficiency or economies of scale MNCs can make a hub in South-East Asia region to cater both India & China’s good-enough market segment.
Does your organization an international player and provides goods & services world wide? Are you competitive in foreign soil, if no then you need to restructure your global business strategy?
Lot of companies make mistake by following a single world wide strategy which make organization uncompetitive in foreign soil that impact their overall global business.
How to develop global business strategy? The best way is to regionalize strategy according to cultural, political, legal and economical condition.
Organizations like Toyota, GE & Wal-Mart have successfully created regionalize strategy to enhance growth & profitability.
Increasing cross-border integration has enhanced the prospect of regionalization. Data suggests that regionalized location attract more FDI and some difference between the reason can combined with similarity to expand the regions overall economic activity.
Defining your regions depends upon characteristic like geography, culture, administrative, political & economical condition.
There are 5 different ways to build regional strategy. Every regional strategy has its own strengths & weakness. It is upon an organization to choose strategy according to their business, products & benefits. Organization can use combination of any of these strategies. Toyota is the only organization that uses all the 5 combinations to built an overall global strategy.
Home Base Strategy:
In this type of strategy organization maintain R & D and manufacturing in the country of origin. This type of strategy is useful when economies of concentration outweigh those of dispersion. Bulk of the fortune 500 company still follows this type of strategy. Even organizations that move on globally followed home base strategy for a very long period of time.
Fore more than a decade Toyota serve their international clients through direct export. GE did the same for home appliances & Bayer in Pharmaceuticals.
This type of regional strategy is very effective for time-sensitive items to get to the market very quickly however these strategy cut down organizations future growth potential and it can put themselves in trouble once market matures or when there are some uncertain economic condition.
Spanish fashion company Zara faces the same problem when value of dollar depreciates again Euro. These makes Zara’s cost of production inflated against their competitors who relay more on dollar-denominated imports from Asia.
The strategy involves setting up or acquiring business outside the home region that report directly to the home base. The advantage of this strategy is that it provides faster growth in non home region and the opportunity to average out economic shocks and cycles across region.
Though portfolio strategy is simple however it takes time to implement if organization wants to expand through organic growth. Even though if organization takes Merger & Acquisition route then also it takes some time.
Again Toyota is a very good example of this kind of strategy. Toyota applied its renowned production system (its distinct competitive advantage) to factories it built in the most important overseas market North America, however it took around 10 years to develop those facilities.
Companies that wanted to add value to their regional level develops HUB strategy. Hub strategy provides shared service with in a region to different countries. This kind of strategy develops to create economy of scale because such resources may be hard for one country to justify.
In a purest form Hub strategy is a multiregional version of the home base strategy. Hub strategy often involves transforming a foreign operation in a stand-alone unit.
Toyota began producing a limited number of locally exclusive models in its principal foreign plants. Each plant has its own platform with products designed for sale within the region.
The challenging in executing a Hub strategy is achieving a right balance between customization & standardization. Companies too responsive to interregional variation risk adding too much cost or sacrificing too many opportunities to share cost across the regions. As a result, they may find themselves vulnerable to attacks from companies taking a more standardized approach. On the other hand, the companies that try to standardize across regional hub- and in so doing overestimate the degree of commonality from region to region-are vulnerable to competition from local players.
The Platform Strategy:
Hubs spread fixed cost across countries within a region. Interregional platforms go a step further by spreading fixed cost across the region. Most automaker tries to reduce the number of basic platform they offer worldwide in order to achieve economies of scale in design, engineering, administration, procurement and operations.
Toyota achieves economies of scale by reducing their platform from 11 to 6 and invested in global car brand such Camry and Corolla.
The idea behind reducing the number of platform is not to offer less varieties but to offer variety with cost effectiveness.
One drawback of platform strategy is that taking platform standardized too far can backfire if regional customization creates excessive disparity across regions.
It focuses on economies of specialization as well as scale. Companies that adopt this strategy award certain regions broad mandates to supply particular products or perform particular roles for the whole organization.
Toyota’s innovative international multi-purpose vehicle (IMV) fuel common engines and manual transmissions for pickup trucks, SUV’s and minivan from Asian plants to four assembly Hubs in Latin America & Africa. These parts are then forwarded on to major global markets except US, where vehicles are larger.
One drawback of this strategy is that it can’t handle variation in country, national or regional condition that’s why Toyota IMV excludes the US.
Toyota features in all the above mentioned five strategies. It provides perhaps the most compelling and complete example of how the effective application of regional strategies can develop a powerful global strategy and it makes Toyota number 1 automaker in the world.
Does your organization follows appropriate regional and global strategy? Please find out by clicking on below mentioned link.