Maintained its position in the market c. Alexey Mamakov, Neon-Art-M: “We will fight to maintain our position in the market... Choosing a defensive strategy
Roger Best Chapter from the book “Marketing from the Consumer”
Publishing house "Mann, Ivanov and Ferber"
Intel is the world leader in the microprocessor market. For many years, Intel's share remained at 85% - and this in a growing market. The strategic plan was aimed at maintaining market share, which, in turn, ensured revenue growth despite increased competition. As shown in Fig. 1, a strategy aimed at maintaining its own position allowed the company to maintain incredibly high margins, thanks to which both operating income and the effectiveness of Intel's marketing activities grew over the course of five years. The company's marketing, sales and management expenses generally remained at 15-20%, and in 2003 fell to 14.3% of sales. Advertising costs account for over 40% of Intel's entire marketing budget, designed to maintain market awareness of the brand. In 2003, thanks to this strategy, the company's marketing efforts amounted to $12.8 million; the return on marketing costs relative to revenue was 42.2%. The company managed to reduce the share of marketing expenses relative to revenue, so the return on investment in marketing increased to 297%. Thanks to the chosen strategy, the company continues to maintain revenue growth and increases shareholder value.
Rice. 1. Intel's strategy to maintain market share
When operating in less attractive markets or facing severe resource constraints, a company may be forced to reduce its market share while attempting to optimize the balance between market share and profitability. Sometimes a company has to exit the market altogether - either gradually (reaping the benefits) or quickly (selling off assets). Each defensive strategy is designed to maximize or maintain short-term profits or minimize short-term losses. In this chapter, we will review options for defensive strategies and discuss their role in achieving a company's short- and long-term operating performance.
Offensive strategic plans
The basis of Intel's success over the years has been its ability to successfully implement a strategy aimed at maintaining its existing share of the microprocessor market. A decline in market share would result in a decline in sales volume, revenue and marketing efficiency levels. However, one should not think that a constant amount of necessary resources is sufficient to implement a defensive strategy to protect one’s own market share. To maintain its existing market share, which is growing at 15-20% per year, Intel is forced to constantly release new products and increase its marketing budget. Without this, the company's market share will likely begin to decline.
In general, companies with a significant share of a growing or mature market use defensive strategies to maintain positive cash flow and achieve required levels of profitability. Without such defensive plans, companies would not be profitable in the short term, and businesses would lack the resources to implement long-term offensive plans.
Let us consider as an example the situation presented in Fig. 2. A company operates in four markets and loses money in one of them. The first market (M1) is in its maturing stage, and the company controls a significant share of this market. Its strategic plan is aimed at maintaining its existing share. The second market (M2) is underway slow growth. The company's strategic goal in this market is to increase its own share. The third market (M3) can be characterized as rapidly growing, and here the company seeks to maintain its existing share. In the fourth market (M4), the company loses money; this market is considered unattractive for it. The strategic plan for M4 is based on exploiting existing opportunities while maximizing short-term profits and gradually exiting the market. The fifth strategic plan is related to entering a new attractive market (M5). This is where the company will initially lose money, but overall this market can provide the basis for future business growth, improving the company's market position and maintaining an optimal cash balance in the long term.
Rice. 2. Strategic planning and operating results
With the help of five marketing strategies the company hopes to increase revenue and improve profitability by increasing or protecting its market share or gradually exiting the market. Each of the plans is important for short-term and long-term indicators sales and profitability of the company. In the two markets, defensive strategies need to be implemented to protect the company's existing share. In one market, the company prefers to use a slow exit strategy, trying to maximize profits in the short term.
The main goal of a defensive strategy is to maintain the required level of business profitability and maintain the company's position in strategically important markets where it is worth investing. The indirect goal is to adjust profitability in situations where the company loses its potential for significant growth. In Fig. Figure 3 presents options for defensive strategies that can be used by companies in different situations.
Rice. 3. Strategic plans and defensive strategies
As shown in Fig. 4, a company may be faced with a choice of several possible defensive strategies, depending on market attractiveness and competitive advantages. For example, having serious competitive advantages in an attractive market, a company can choose between maintaining its own share or increasing it. In any case, the essence of a defensive strategy is to maximize short-term profitability and maintain or improve the company's position in the market.
Rice. 4. Company product portfolio and defensive strategies
Defensive Strategy #1: Protect Market Position
Often in conditions of fierce competition, be it sports or business, the best way defense turns out to be attack. It happens that companies that dominate the market and have serious competitive advantages gradually begin to behave more and more carefree, mistakenly believing that they are invincible. Sooner or later, this lack of vigilance leads to more aggressive competitors gaining the upper hand. Preserving and maintaining a solid share of an attractive and growing market, as well as their own competitive advantages, requires constant investment from leading companies.
Defensive Strategy 1A: Protect Market Share
In many areas, leading companies have a market share of over 50%. Depending on the specifics of each market, the conditions under which leaders must defend their position vary significantly. For example, Campbell Soup has 60% of the mature US market for prepared soups. Gillette's share of the razor and blade market, which has also reached its maturity stage, is 70%. Kodak controls more than 60% of the declining US camera film market. These companies' defensive strategies in slow-growing, mature markets are very different from those of other companies in fast-growing markets. For example, Intel has 85% of the rapidly growing market computer equipment; Microsoft controls 95% of the rapidly growing market operating systems for personal computers. In this case, huge marketing efforts are required from both companies in order not to lose their leading position in growing markets. Nevertheless, all leading companies have similar tasks - to invest in order to protect their own market share. Depending on the situation in a particular market, a defensive strategy related to protecting a company’s market share can be implemented in different forms.
Invest to protect your position in a growing market
To protect its position in a growing market, a company must make much greater marketing efforts than in a mature market and invest more heavily in the development of new products. The faster a market grows, the more resources are required from a company to maintain its existing market share. If a company does not invest sufficiently, its share of such a market will likely begin to decline. Thus, in a growing market, the risk of a company losing its own position is much higher than in a slowly growing market. Therefore, to maintain its position in such a situation, a company using a defensive strategy is forced to incur significant expenses.
Analysis of statistics on the impact of marketing strategies on company profits (PIMS - Profit Impact of Marketing Strategies) shows that with a market growth of 1%, the change in the share of a company operating in it averages -0.4%. This means that if the market is growing at 10% per year, then the decline in market share of a company that does not implement an appropriate defensive strategy will be 4% per year. If a company controls 20% of the total market and this market is growing at 10% per year, then the market share of this company will decrease by 4% over five years unless measures are taken to compensate for the negative effect of market growth. If the market grows by 15% per year, the share of an individual company in this market will decrease even faster (see Fig. 5).
Rice. 5. Market growth rates and erosion of the share of an individual company
It can be assumed that the impact of market growth on the company's share may be different in different sectors of the economy. Rice. 5 shows that in fact this dependence is approximately the same everywhere. It can be argued that the impact of market growth rates on the erosion of the share of individual companies in this market is comparable for different industries.
Invest to protect the market leader position
Leading companies, for example, Eastman Kodak, Campbell Soup, Cisco Systems, have a strong position in the market, where they receive a significant share of their total profits and revenues. The operating performance of each company as a whole seriously depends on the results of work in this market. Defensive strategies aimed at protecting key market share help ensure the company's short-term profitability and ensure that funds are available to invest in offensive strategies for long-term growth and profitability.
It is difficult to imagine that having a large market share could prevent you from maintaining your share. However, statistics from the Profit Impact Measures of Marketing Strategies (PIMS) show that there is an inverse relationship between the rate at which a company's market share changes and the size of that share. As shown in Fig. 6, the average company experiences a decline in market share of approximately -0.08% for each percentage share. This means that a company with about 30% of the market can expect its share to decline by 2.4% per year. In five years, its market share will be 26.5%. A company controlling only 10% of common market, will suffer smaller losses - its share is much smaller, and over five years it will decrease to 9.6%.
Rice. 6. Erosion of market share and the company's existing market share
Thus, maintaining control over a significant market share even without taking into account the influence external factors leading to the erosion of market share, such as the growth of the market as a whole, the actions of existing competitors or the emergence of new players, requires serious investments from companies. It becomes clear how seriously the company’s existing position in the market and the growth rate of the market itself affect the erosion of the company’s market share. At one time, Eastman Kodak, IBM, AT&T, General Motors and other large companies felt a similar influence. According to statistics, the correlation between the size of a company’s market share and the rate of change in this share is approximately the same for different business sectors (Fig. 6). As we have already seen, a similar dependence exists in a growing market situation.
In order to successfully control a significant market share, companies must constantly increase competitive advantages and take new steps in marketing. A leading company deciding to cut this year marketing expenses for the sake of increasing profitability, risks getting next year decrease in profits and decrease in own market share. Leading companies must: 1) continually invest in new product development, 2) improve products and services faster than competitors, and 3) maintain marketing expenses at a level sufficient to maintain market position.
Invest to protect a minor market position
Of course, not every company can be a market leader. In Fig. Figure 7 presents 4 options for market structure, each of which includes both leaders and followers. A company that ranks second in terms of market share, but is not far behind the leader (market II), finds itself in a situation of difficult choice. Should it attack the leader using an offensive strategy to increase market share? Or is it better for her to protect her own share and maximize profits? Much depends on how strong the market leader's position is and its determination to defend its existing position, as well as on what resources the follower company has and what its planned level of profitability is. Based on these factors, a decision is made to choose one strategy or another. What is a successful strategy for the second-largest follower in the market?
Rice. 7. Market structure and position of existing players
In Fig. Figure 8 provides a profile of two average market runner-up companies, one with above-average profitability and the other with below-average profitability. From the point of view of competitive advantages, a company with a higher level of profitability also achieves higher quality products, due to which it creates greater value for consumers and sells goods at a higher price. high price and receives higher margins. Such companies invest more aggressively in marketing - their marketing expenses are higher both as a percentage of revenue and in in absolute terms compared to similar costs of competitors. As a result, both market share and percentage of use increase production capacity and other resources.
Rice. 8. Strategies of more and less successful follower companies
Follower companies invest more than others in research and development, measured as a percentage of revenue. Thanks to this, companies gain technological advantages, which usually translates into higher quality products. Thus, follower companies that have achieved high level profitability, protect their market position by investing in research and development and marketing. As we have already said, without such investments a business cannot sustain own position even in a slow growing market.
Invest to protect a niche market position
Strategic decision on whether to base the company's development on long-term offensive or defensive marketing plan, companies operating in a narrow market niche also have to accept. For example, one of the niche companies shown in Fig. 7 may opt for an offensive strategy to try to compete with market leaders. Or maybe the market situation will force the company to use a defensive strategy to protect its niche. In many cases, niche companies are essentially the same leaders operating in a narrower segment of the general market. Leaders, followers, and niche companies alike may use defensive strategies in certain situations to protect their position in the market.
In a separate market niche it can work as small business, whose resources are limited, and a large company that makes high profits in a small segment and does not seek to dominate the market. In both cases, the company is a leader in its niche, but its share of the overall market is small compared to the leader's. A company leading in a particular niche faces the same challenges associated with protecting its own position as a market leader.
In Fig. Figure 9 presents a description of two average companies - one of them controls a significant market share, and the other has a small share. As we can see, these companies have only two similarities: the relative quality of the product and the relative costs of promoting the product. The company should strive not only for more high quality product, but also to maximum market coverage and as frequent contacts with consumers as possible - these are decisive factors for the success of any company, no matter how large its market share.
Rice. 9. Strategies for profitable businesses- market leaders and niche companies
To achieve higher profitability than the industry average, a niche company must minimize costs. Since the company operates only in a narrow niche, its product range is quite narrow, the costs of creating new products are low, and advertising costs are lower than those of competitors. In addition, the prices for the products of such a company may be slightly lower than the prices of competitors. If we take the average price in product group for 100, then the price for the products of a niche company will be at the level of 96. But the quality of the products compared to what competitors offer can be estimated at about 123 (if average level take it as 100). It turns out that the products successful company, operating in a specific niche, has a very tangible value for consumers:
Customer Value = Relative Benefits - Relative Price = 123 - 96 = 27
As shown in Fig. 10, a company that operates in a niche and therefore controls only a small share of the market creates more value for the consumer and is therefore more profitable. Such a business achieves higher profits compared to a company that owns a larger market share, but whose products are perceived as having low value. To achieve success in a particular market niche, a company must ensure that the product properties precisely match the needs target audience, ensure optimal coverage of the selected audience and convince consumers that the products offered are of high value.
Rice. 10. Consumer perception of product value, market share and profitability
Defensive strategy 1B: retain the consumer
Protecting your market share is a defensive strategy that has made many companies successful. However, the decision to maintain control of 30% of the market may have different effects on a company's profitability depending on the percentage of customers retained.
Consider, as an example, two companies that each have an average margin per consumer of $400 in the first year and grow by $25 each year that the consumer uses the company's products or services. Let's also assume that it costs each company $500 to acquire a new customer and $100 per year to retain an existing customer. As shown in Fig. 11, having 75% of retained consumers, the company retains the consumer for an average of 4 years. If this indicator is 80%, then the consumer continues to use the company's products or services for an average of five years. This nets the company an additional $199 when discounting the five-year margin to today's value.
Rice. eleven. The Impact of Different Customer Retention Strategies on Profit
Obviously, a company that achieves a higher percentage of customer retention becomes more profitable, even if its market share remains unchanged. Whether a company is a market leader, a follower, or operates in a niche market, it can achieve profits by maintaining its position through a defensive strategy while increasing the number of repeat customers.
Defensive Strategy #2: Optimize Market Position
During the late growth and maturity stages of the product marketing activities companies in commodity markets require special attention in terms of optimization and efficiency. As shown in Fig. 12, it is in the later stages of product development that the company achieves maximum profit from sales. At the moment when production approaches the maximum possible for a particular market, but margins remain high, the company manages to make maximum profit. As sales growth slows, you need to start reducing your marketing expenses. As shown in Fig. 13, with proper management of sales volume, margins and marketing expenses, a company can achieve maximum profits throughout the product life cycle. If a company invests too much in marketing or mismanages price and margin, it risks missing out on opportunities to maximize profits late in product development.
Rice. 12. Product life cycle and marketing ROI
Rice. 13. Product life cycle and marketing ROI factors
Defensive Strategy 2A: Maximize the Net Effectiveness of Marketing Activities
This strategy involves thoughtful margin management and efficient use marketing resources. At the later stages of a product's life cycle, a company can no longer afford either errors in pricing or unnecessary marketing costs for the product - unlike the early stages of product development, when such mistakes can be easily corrected by increasing sales volume. To achieve maximum effectiveness of marketing activities, the company must ensure the optimal ratio of margin and price, rather than price and sales volume.
Strategies based on balancing price and sales, used in the early stages of product development, provide growth in sales, revenue and a higher return on marketing investments. At the stages of late growth and maturity, lowering prices, and therefore lowering margins, will not increase sales. The fact is that the opportunities for market growth at this stage are seriously limited, and competitors are likely to take advantage of the drop in sales. The strategic marketing challenge is to find the right combination of margin and volume that will maximize gross profit:
Gross profit = volume (units) x margin per unit = market demand x market share x (price - variable costs)
Managing your margin is the first step to optimizing your market position. For example, in the personal computer market, the price elasticity for most items is about -2. The margin on the sale of most personal computers is no more than 20%. As the personal computer market approaches maturity, companies operating in this market should reconsider pricing policy to optimize profits in an environment of slowing growth. In Fig. Figure 14 shows how profits will change if the company decides to lower prices by 10% in order to increase sales and optimize its market position. Suppose a personal computer sells for $2000, the margin is 20%, and the price elasticity is -2.
Rice. 14. The impact of changes in prices for personal computers on profits from their sale
As we can see, as a result of the price reduction, sales volume will increase by 20%, market share will increase by 1%, and revenue will increase by $16 million. In a company focused on maximizing sales, such a result would be perceived as a serious success. However, due to the margin squeeze associated with the price drop, the company will actually earn $16 million less.
In a mature market, if a company chooses to increase price by 10%, it will result in lower sales volumes, lower market share, and lower revenue. However, this defensive strategy will allow the company to generate an additional $8 million in gross profit. If the priority strategic objective is to optimize market position and maximize profits, then it makes sense to increase the price. Reducing marketing costs at this stage of the product life cycle can also improve the effectiveness of marketing efforts:
Net efficiency = gross profit - marketing expenses = marketing = gross profit - (costs of attracting consumers + events + costs of retaining consumers)
In conditions of declining market demand it is necessary to reduce investments in marketing associated with attracting new consumers and concentrate the main marketing expenses on retaining existing consumers. Let's remember that attracting new customers costs a company 5-10 times more than retaining existing ones. In addition, fewer new consumers are appearing in a market that is approaching the peak of its potential. At this stage, the company should strive to maintain existing market share with minimal marketing expenditure if the percentage of retained customers is already high enough. If the number of retained customers is small, the company will not be able to achieve maximum profit, since it will have to spend too much on attracting new customers to maintain existing sales and maintain its own market share.
Defensive Strategy 2B: Narrow Market Focus
As shown in Fig. 4, a company's existing product portfolio may allow for the use of various defensive strategies.
Should a company invest to enhance its competitive advantage? Or spend more to protect your own market share? Or concentrate efforts on a narrower segment to maximize profits? Depending on the market situation, any of the mentioned strategies can achieve the goal.
A narrowing market focus strategy makes the most sense in two situations: when a company does not have enough resources to invest to defend its existing market position, or when focusing on a narrower segment can provide the company with higher profits.
Focusing on a narrower market segment requires a defensive strategy, which involves narrowing the market focus and reducing market share in order to increase profitability. This approach is likely to reduce revenue and reduce the marketing budget, but at the same time the company can achieve a higher level of profitability in relation to revenue. As shown in Fig. 15, the point of narrowing the market focus is to increase efficiency. In this situation, traditional mass market tools turn out to be less effective than narrowing the market focus. Although when using new strategy While sales and profits decline, the company's marketing returns increase from $2 to $3 for every $1 spent on marketing. The company has to reduce sales to improve efficiency and profitability.
Rice. 15. Selective market focus, marketing resources and marketing productivity.
Defensive Strategy #3: Maximize Revenue, Exit Market
IN life cycle any commodity market there comes a point when the market begins to lose its attractiveness. The company must now concentrate on managing short-term profits, regardless of competitive advantages. In some mature or declining markets, a company can generate significant cash flow by using a defensive revenue maximization strategy. In other cases, the best defensive strategy may be a gradual exit from the market (what we called “reaping the benefits” in previous chapters) or a quick exit from the market (often associated with the sale of some assets). In either case, a defensive strategy is designed to maximize cash flow in the short term.
Defensive Strategy 3A: Ensure Necessary Cash Flow
In many mature markets, demand remains strong for many years. Without the ability to optimize its position in the market, a company may decide to remain in it in order to make short-term profits. This defensive strategy requires only minimal marketing resources and most often involves cutting prices. Many companies sell products that have reached the maturity stage this way - at a price lower than competitors, and without additional services. As a rule, such goods are not advertised and are often sold without deferred payment. The seller's goal is to maximize profits in the short term. After some time, a moment comes when this tactic exhausts itself. Then the company decides to leave the market.
Defensive strategy 3B: gradual or rapid exit from the market
At some point, a company with a certain product portfolio may need to exit the market. In this case, the company must make a choice between a slow exit (reap the benefits) and a fast exit (cease operations in the market and sell assets). If gradual exit promises additional profits, it makes sense to choose this particular strategy and get additional profits. But if a company is already losing money, it makes sense to quickly shut down operations and cede market share. In this case, profits also increase in the short term because the company stops losing money.
Gradual withdrawal from the market: price
If a company continues to operate in a market that is no longer attractive to it and where its competitive advantages are not so strong, its strategic position gradually weakens and its profits begin to decline rapidly. When a narrowing strategy does not produce the desired operating results, it may be worth considering exiting the market. However, rather than losing share to competitors and going out of business, a company might try the following short-term strategy: systematically raise prices and reduce marketing costs.
For example, consider the situation presented in Fig. 16. Two out of five products of a company operating in the chemical sector do not generate enough revenue to cover the marketing costs associated with them. The company's competitive advantages as a whole are at an average level. At the same time, the market is becoming less and less attractive. According to management, the best way out in this situation is to sell the business. But it is not possible to quickly find a buyer, so the decision was made to use a strategy of gradual exit from the market.
Rice. 16.
The price of silicone pigments, basic and specialty products was immediately raised by 10-19%. At the same time, prices for primary colors and color enhancers rose first by 10%, and after 6 months - by another 10%. Overall, the price of primary colors increased by 22.5% and color enhancers by 25%. In addition, marketing costs were reduced. The market reaction was quite predictable. Sales of silicone pigments, core and specialty products fell 14-18%. Sales of heavily priced primary colors and color enhancers fell by 33% and 35%, respectively. However, after 18 months, consumer outflows have slowed. As shown in Fig. 17, rising prices partially offset the loss of sales - revenue fell from $183 million to $170 million. Moreover, each of the products now provided positive marketing effectiveness. Overall marketing effectiveness more than doubled, from $16 million to $36.1 million.
Rice. 17. Operating results of a chemical company
With such operating performance, it was not difficult to find a buyer. You may ask why, after achieving profit, the company did not continue to operate in this segment. First, profitability levels were still lower than the company average. The activities of this division negatively affected the performance of the company as a whole and reduced shareholder value. Secondly, the market remained unattractive, and the company did not abandon its intentions to use the released resources in a more attractive market.
Gradual exit from the market: marketing resources
In many cases, a company is unable to raise prices to maximize short-term profits. For example, it is not easy to raise the price of soft drinks. In this case, the company may decide to reduce its marketing budget for such products and reduce its market share. For example, PepsiCo's Slice brand of soft drinks has a small market share and only a minimal marketing budget. The brand accounts for less than 5% of the entire lemon-lime drinks segment - compare to Sprite, which has 56% of the segment. Pepsi tried various strategies to revitalize the brand or reposition it, but the market share remained small. Stopping spending money on marketing support Slice, Pepsi is trying to get the maximum possible profit from selling drinks under this brand, gradually leaving the market.
In consumer goods markets, where the advertising activity of competitors is high, the company risks losing a significant part of the market by reducing its advertising budget. Statistics based on data from the Profit Impact of Marketing Strategies Study (PIMS) show that the rate of change in a company's market share is directly dependent on changes in the size of the advertising budget. Below we provide a calculation of the rate of decline in a company's market share after cutting its advertising budget by 25% over three years. If the market share in the first year was 10%, then after three years, as a result of a decrease in marketing activity, it will decrease to 9.6%:
Market share = market share (1.00 + (0.05 x change in advertising budget))3 = (3 years) = 10% x (1.00 + (0.05 x (- 0.25)) = 10% x (1.00 - 0.0125)3 = 10% x 0.96 = 9.6%
If the advertising budget is large enough, this strategy can provide significant savings. As long as the product generates adequate margins, the company can increase short-term profits by reducing marketing costs and gradually reducing market share. Profits received from operations in a market that is decided to be gradually abandoned are, as a rule, reinvested in more attractive commodity markets.
Quick exit from the market
One of the most difficult decisions for any company is to immediately divest a product that is no longer attractive and try to sell off some assets. It is very difficult to stop producing products with which a company began its activities, as well as those in which a lot of money and effort have been invested. As a result, companies remain in a disadvantageous market position for too long with weak or very mediocre competitive advantages.
In Fig. 18 shows the range of clocks and timers that General Electric produced in the late 1970s. Many of them were sold in unattractive markets and had weak competitive advantages. Over time, the company abandoned all of these products because none of them met its overall operational objectives.
Rice. 18. General Electric's strategy for exiting unattractive markets
A company's exit from a particular market segment is carried out by selling this part of the business or by ceasing operations and selling assets. In most cases, companies seek to find a buyer for an existing business. This approach typically provides higher sales revenue and preserves jobs for staff.
A strategy to quickly exit the market may not always be feasible. For example, a company that has signed a 25-year contract with the government to produce military missiles will not be able to quickly stop working - it has an obligation to deliver within a certain period. Manufacturers of pharmaceuticals and other medical products that may be vital to consumers also sometimes find it difficult to cease operations for ethical or legal reasons. And even without such restrictions, quickly leaving the market if you cannot find a buyer turns out to be extremely difficult.
Choosing a defensive strategy
Consider a company whose product portfolio is less attractive than the market average and whose competitive advantages do not differentiate it from other market participants. The net effectiveness of marketing activities is $25 million per year. The company makes a good profit, but in the absence of serious competitive advantages and in an insufficiently attractive market, using an offensive strategy to increase its own share would be unwise. But even in the current situation, the company is making a profit, so it is too early to talk about a gradual exit from the market. Two alternatives remain: protecting existing share or narrowing market focus.
From Fig. Figure 19 shows that if a company decides to use a strategy to protect its own market share, it will have to invest in marketing, research and development to maintain control of 30% of the market. In this situation, we can expect the company to generate $240 million in revenue over the next three years. The net effectiveness of marketing activities will be $30 million; however, marketing expenses will also require $30 million. It turns out that when implementing a strategy aimed at protecting the existing market share, the productivity of marketing activities will be 1.0 - expenses are equal to efficiency.
Rice. 19. Choosing between two alternative defensive strategies
Another strategy is also possible - to narrow the market focus and concentrate on a narrower segment. By implementing this strategy, the company will deliberately reduce its own share from 30% to 20%. At the same time, the average price and margin per unit of goods will increase, and marketing costs will decrease. As a result, revenue will decrease by $60 million, but the net effectiveness of marketing activities will increase from $30 million to $40 million. With marketing expenses of 20 million, marketing productivity will be 2.0 - twice as much as with the strategy of protecting existing market share.
Companies face a huge variety of marketing situations and must have a clearly defined set of operational goals. Some of these goals are short-term, others are longer-term. Having formulated operational goals and determined our place in each separate market, the company must develop a set of strategic plans, which, as a rule, includes both offensive and defensive strategies. Offensive strategies are designed more for growth and increasing market share, while defensive ones ensure short-term profitability and protect an existing market position. Both are equally important to achieving the operational goals of a business.
Summary
Companies have short-term obligations to investors - achieve financial results related to growth and profitability. At the same time, the interests of investors and employees of any company require a set of strategic plans designed to improve the company's position in the long term. The main purpose of a defensive strategy is to protect the company's position in strategic markets while ensuring short-term growth and profitability in accordance with the company's objectives.
Defensive strategic plans directly determine the level of profitability a company can achieve in the short term and protect the company's existing market position to ensure future profits. Typically, companies have to use defensive strategies to protect positions in strategically important markets. For example, a company may decide to defend its share in an attractive market where its competitive advantages are stronger than those of other players. A defensive strategy to protect market share may also include measures to retain existing customers. The implementation of this strategy allows you to increase profits, while the market share and revenue remain practically unchanged. A company may decide to focus its efforts on a narrower segment of the market in order to use available resources more productively, maintain a position in the chosen segment, and achieve higher profits.
Maintaining control over a certain market share requires additional marketing efforts. Market factors - the rate of market growth, the size of the market share, the emergence of new competitors - contribute to the erosion of the existing market share if they are not countered by planned actions to enhance competitive advantages or additional marketing activities. The weakening of the company's competitive advantages in the field of sales of new products, product quality and service also lead to the erosion of the company's market share - as well as a decrease in commercial activity and the effectiveness of marketing communications.
In less attractive late-growth or mature markets, opportunities for further business growth become increasingly limited and margins decline. A company may decide to abandon the defensive strategy of “investing to protect market share” in favor of another strategy of “investing to optimize market position.” A profit maximization strategy may involve increasing prices and decreasing both sales volume and revenue, and/or reducing marketing expenses just enough to retain existing customers. Using a strategy of focusing on a narrower segment, the company goes even further, raising prices so as to reduce the number of consumers to the optimal one and provide more high profits per unit of production with a decrease in sales volume.
Finding itself in an unattractive market or having little competitive advantage, a company may decide to exit the market. If operations in this market can be profitable in the short term, it is worth using a gradual exit strategy. This strategy involves raising prices or cutting marketing costs, or sometimes both. The implementation of such a defensive strategic plan allows the company to gradually cease operations in the market without losing profits. If a company is already losing money in one of the markets or would like to free up its resources for reinvestment in a more attractive area, it makes sense to stop operations immediately. Strategy quick exit from the market, as a rule, involves the sale of part of the business associated with an unattractive market in order to maximize proceeds from the sale of tangible and intangible assets. If the sale fails, the company usually decides to simply cease operations. However, in some cases, it may be impossible for legal or ethical reasons to cease operations in an unattractive market. Companies often hesitate for too long to part with part of the business that has long ceased to be effective. By failing to free up resources in a timely manner, the company misses the opportunity to reinvest in aggressive strategies in more attractive markets that could generate revenue growth, market share, and business profitability in the future.
Market logic and strategic thinking
- How do defensive strategies contribute to the company's operational goals (sales, market share, profitability)?
- What is the difference between offensive and defensive strategies?
- Why is it more difficult to protect share in a growing market than in a slow or non-growing market?
- Why do leading companies have to work harder than their followers to protect their market share?
- What operational aspects enable the follower to achieve the same level of profitability as the market leader?
- What aspects of positioning and marketing efforts must be emphasized in order to achieve high levels of profitability while deliberately narrowing the market focus within a particular niche?
- A company with a high enough customer value can achieve high profits by using a niche strategy of narrowing its market focus. Why?
- How do defensive strategies affect a company's long-term market position and profitability?
- Compare a defensive strategy aimed at protecting a company's market share with an exit strategy. How does each affect the company's short-term profits and market position?
- Why does a company decide to use a strategy of narrowing its market focus and concentrating its efforts on a single, narrow market segment?
- What are the main objectives of a strategy related to maximizing cash flow?
- Under what conditions does a company decide to exit the market rather than continue to defend its share?
- When should a company use a gradual exit strategy and how does such a strategy affect the company's profitability in the short term?
- When should a company use a rapid exit strategy and how does such a strategy affect the company's profitability in the short term?
- Why do companies continue to support projects that occupy the least profitable positions in the overall product portfolio, rather than simply withdrawing from these markets?
Marketing tools: performance assessment
Each of these marketing effectiveness tools can be accessed at rogerjbest.com or prenhall.com/best.
Donald Potter, “Strategy to Succeed in Hostile Markets,” California Management Review (Fall 1994): 65-82.
Sidney Schoeffer, “Market Position: Build, Hold or Harvest,” PIMS Letter No. 3 (1978): 1-10.
Philip Kotler and Paul Bloom, “Strategies for High-Market Share Companies,” Harvard Business Review (November-December 1975): 63-72.
Donald Clifford and Richard Cavanagh, The Winning Performance: How America's High and Mid-Size Growth Companies Succeed (New York: Bantam Books, 1985).
Carolyn Woo and Arnold Cooper, “The Surprising Case for Low Market Share,” Harvard Business Review (November-December 1982): 106-113.
Robert Linneman and John Stanton Jr., “Mining for Niches,” Business Horizons (May-June 1992): 43-51.
Robert Hamermesh and Steven Silk, “How to Compete in Stagnant Industries,” Harvard Business Review (September-October 1979): 161-168.
V. Cook and R. Rothberg, “The Harvesting of USAUTO?” Journal of Product Innovation Management (1980): 310-322.
Kathryn Rudie Harrigan, “Strategies for Declining Businesses,” Journal of Business Strategy (Fall 1980): 27.
George Seiler, “Colorful Chemicals Cuts Its Losses,” Planning Review (January-February 1987): 16-22.
New record turnover of €1.9 billion
Spelle in December 2017 - “Contrary to the trend” - these words can quite accurately characterize the development of enterprisesKroneover the past few financial years.
While many agricultural machinery manufacturers had to sharply reduce turnover,Kronesucceeded in this financial yearachieve record sales. Since the production of cargo trailers also showed a record high, the group's total turnoverKroneamounted to 1.9 billion euros (1.8 billion euros in the previous year).
Domestic turnover increased by 1.6% compared to the previous year (to 515.5 million euros) and is distributed as follows: 30.8% - agricultural machinery, 69.2% - cargo trailers. Overall turnover of the concernKronedomestically was 27.2% versus 28.4% in the previous year.
Sales incomeKroneabroad amounted to 1.4 billion euros; Compared to the previous year, this represents an increase of 7.6%. Of the foreign trade turnover, 30.7% falls on agricultural machinery, 69.3% - on vehicles. Thus, the share of the foreign market in total turnover amounted to 72.8%, which is slightly higher than the level of the previous year (71.6%).
In the 2016/2017 financial yearincome from sales of a group of cargo trailers amounted to about 1.3 billion euros, i.e. with a surplus compared to the previous period.
Germany, with a market share of 27.2% and a turnover of 356.6 million euros (364.7 million euros in the previous year), remains the largest sales market.
ConcernKronecontinues to increase its presence in foreign markets, increasing turnover to 956 million euros (855 million euros in the previous year). The most important markets include: Western Europe- 43.8% (41% in the previous year), as well as Eastern European markets - 21.6% (26.5% in the previous year).
INagricultural machinery segment Since the end of 2016, the increase in market prices for milk has had a positive impact. ConcernKronealso took advantage of this trend and, due to favorable market developments, especially in the second half of the year, was able to increase operating revenues to EUR 582.8 million (EUR 569.8 million in the previous year).
This was particularly driven by the following markets: Germany - 27.3% (25.1% in the previous year), Western Europe - 33.1% (32.4% in the previous year), North America - 15.4% ( 20.4% in the previous year), Eastern Europe - 9.9% (10.6% in the previous year), others - 14.3% (11.4% in the previous year).
Financial situation/Financing
In the 2016/2017 financial year, the balance sheet total increased from 931.7 million euros to 1,031.3 million euros.
The total investment volume of EUR 76.0 million (EUR 37.1 million in the previous year) and the change in the composition of the consolidated companies of EUR 6.9 million are countered by depreciation in these areas of EUR 31.1 million.
Revenues consist primarily of investments in various production sites and the first full integration withBrü ggen Holding GmbH & Co. KG.
As a result of the net profit for the year, equity at the reporting date increased to EUR 486.1 million (EUR 445.3 million in the previous year). However, the share of equity capital decreased slightly from 47.8% in the previous year to 47.1% as a result of higher working capital at the reporting date, as well as the above investment activities.
During the reporting period, medium- and long-term capital raised increased to EUR 286.1 million (EUR 254.3 million in the previous year). The concern has at its disposal medium- and long-term capital in the amount of 772.1 million euros (700.6 million euros in the previous year). This provides not only stocks, but also most of the debt.
Employees
Due to the expansion of the concernKroneThe number of employees worldwide increased to 4,497 in the past financial year (4,281 in the previous year). The number of students decreased slightly compared to the previous year from 261 to 243 people.
Investments V security future
Volume of investments of the concernKroneamounted to approximately EUR 76 million (EUR 37.1 million in the previous year), which were mainly allocated to the new paint shop at the Werlte plant, the construction of a new distribution center to supply spare parts for all cargo trailers and the automated production of components at the Herzlak plant.
The mechanical production at the Spelle plant has further adapted its processing technology and capacity to meet growing demands. In addition, a new industrial robot for loading and unloading machines was put into operation.
Bernard Krone, co-founder of the concern Krone , pleased with the results of the financial year.
"In the segment of agricultural machinery low prices milk made us nervous at first; fortunately they recovered within a year. Our strategy with new branches - to get closer to customers - is also working in the cargo trailer sector.
In addition, we note that we are increasingly being approached as a service provider, especially in the areas of data digitization and telemetry. These features go a long way toward creating more efficient and cost-effective machines and trailers.
Thanks to our high investments in the plants in Werlte and Herzlack, we are taking the side of the region. We look to the future with confidence, finallyKronecaters to two new megatrends: global population growth and connectivity. As before, this will result in increased demand for food and increased freight traffic.”
Direct sales is a business model that always involves direct communication with the client. Therefore, the experience of a successful company can become a valuable contribution to the development of any big business. During our existence, we have formulated five most important principles that help us remain among the leaders.
Build trust in the brand When positioning the brand, a clear proposal must be created that will display the usefulness of the product and its value to the consumer. And in fact, the proposed product must correspond to the declared value. Trust is built on this. Only by fulfilling the stated obligations (on product quality, its effectiveness), can one achieve the trust and loyalty of consumers, distributors, and partners. For example, we have a system for returning goods if they don’t suit you or you don’t like them for some reason. It is more important to satisfy the customer's needs, not just sell an offer. It is much easier to maintain the loyalty of existing customers than to constantly look for new ones.
Surprise your customers Introduce innovations (technological and scientific) into products and services - this is the only way to develop them and improve their quality. Carrying out scientific research with the involvement of external partners and the introduction of innovations is an integral part of our company’s activities in the development and production of products.
Use available communication channels. For example, we use development ecommerce and digital marketing tools. The company sees social media as an effective tool for communication between distributors and consumers, as well as a platform for communication between distributors.
We also take advantage of the Internet technologies available today. By visiting the company's website, the consumer can obtain comprehensive information about the product, select a suitable (geographically) distributor, and submit an application to purchase the product. About 60% of purchases are made using this tool.
Keep up with the times Follow trends and try to predict their development. Now the world is much more dynamic than it was 3-5 years ago, and in order to stay afloat, you need to be able to grasp on the fly everything that is happening around you in order to make the right move.
Let me give you an example: we are constantly launching new products in the beauty field - in a market we have long conquered. And this year we entered a completely new path for us, but popular among young people, by launching energy drinks. Thanks to the positioning and quality of the product itself, we achieved a wow effect. Wherein New Product fully complies with the company’s operating principles and values.
Share success with partners For us, the main measure of success is the achievements of our millions of distributors around the world. Their victories are victories for the entire company, so we understand the value of every employee and distributor. All of them are the main driving force that allows the company to be where it is now. Therefore, the focus is on long-term sustainable development and providing support to all business participants to fully realize their potential.
Consider local characteristics For the success of multinational brands, a local approach is important. To achieve good sales and customer loyalty, get involved in your local communities. This will allow you to get to know each other better, and the companies to make effective decisions for a particular market.
We constantly develop and implement training and information projects to support our employees, distributors and partners. This approach allows you to organize work effectively and reminds people that they are members of the same team and the work of each of them is important. We also actively participate in the life of local communities, supporting and organizing various social initiatives. Working for the benefit of society, we contribute to the development of our own business.
A variant of the “milking” strategy is a strategy of maintaining positions, when the company, avoiding investments aimed at ensuring growth, spends enough money to maintain product quality, production capacity and customer loyalty. The use of this strategy is most appropriate in cases where the decline in the industry is calm and systematic, there are pockets of unsatisfied demand, price pressure is not too great, the company has the necessary assets and competencies, and this type business feeds into its other activities. The strategy of maintaining a position may be preferable in the case of an investment strategy when there are no growth opportunities in the industry, and the use of a strategy to increase market share threatens the growth of retaliatory aggression from competitors. The strategy can be long-term in nature - and used as cash cow management - or temporary - when it is used until the uncertainty in the industry is resolved.
The disadvantage of this strategy is that if market conditions change, reluctance or slowness in restoring investment may lead to a decline in market share.
If there is a steady decrease in market share, a decrease in profit margins and working capital, an increase in debt, and frequent changes in management, then the enterprise strives to change the position of the business and implements the following reduction strategies:
A strategy for reducing costs and increasing efficiency throughout all stages of creating customer value;
An asset reduction strategy aimed at getting rid of low-profit, impaired assets or divisions of the firm that are not related to the future strategy of the firm;
Development of new strategies that involve generating greater income.
In addition to growth strategies in unattractive markets or in unattractive business areas, an enterprise can use consolidation strategies. Consolidation (downsizing) strategies may concern markets, product lines, or business units.
Market shrinkage is the opposite strategy of market development: a firm reduces the presence of existing products by withdrawing them from weakening markets. Firms pursue this strategy if performance across different markets fluctuates widely.
Product line reduction is when a firm reduces the number of products it offers to the market. This strategy is the opposite of product development strategy and is used when firms decide that certain market segments are either too small or too costly to continue serving.
In divestment (counter-diversification), enterprises sell part of their business to another enterprise, as this usually means leaving a particular market and reducing the production line of a product. This strategy is the opposite of the diversification strategy. Enterprises resort to it if the manager finds out that a certain type of business does not meet the company's requirements and goals.
In pursuit of the goal of protecting its position or abandoning business, an enterprise can resort to a “harvest” strategy, which is implemented through:
Selling a business (often to your competitors);
Merging with competitors, but maintaining independence;
Refusal to develop a direction, for example, carrying out production, but ceasing marketing of goods.
