BBPS4103

STRATEGIC MANAGEMENT (ASSIGNMENT 1)

SEPTEMBER2015

NAME:

IC NO:

MATRIC NO:
a) Forward Integration

Forward integration is one of three types of vertical integration, which is a form of management
control that involves companies in the same supply chain belonging to one owner. Forward, or
downstream, vertical integration occurs when the company joins with or creates businesses
whose role in the production of its goods occurs after its own; the products move forward after
the company has finished its share of the manufacture. This commonly includes the distribution,
sale or transportation of the goods. In many cases, forward integration is actually a form of
diversification from the company’s usual business. A simple example of forward integration is
when a manufacturer performs its own distribution process. To do so, a product maker normally
must set up distribution centers across the country or its territory to transport goods to retailers
quickly. A manufacturer needs an active sales force that goes out and calls on retail buyers. It
also needs an effective logistics and supply chain management team to oversee the transition
from converting materials into finished products, holding goods in distribution centers and
transporting them to retailers after purchase.

Current Business Example DirectTV by News Corporation

The 2003 purchase of DirectTV by News Corporation is an example of a forward integration

through acquisition. DirectTV is a satellite TV company, and its purchase enabled News
Corporation to use it as a medium to distribute more of its news, movies and television shows by
managing the process itself. In January 2005, shortly after reincorporation in the United States,
News Corporation announced that it was buying out Fox Entertainment Group. In July 2005, in
one of the company's first major Internet purchases, News Corporation purchased the social
networking website Myspace for $580 million. In February 2007, Murdoch announced at the
McGraw-Hill Media Summit that Fox would launch a new business news channel later in the
year, which would compete directly against rival network CNBC. In 2009, News Corp
established NewsCore, a global wire service set up to provide news stories to all of News Corp's
journalistic outlets. On 6 June 2012, News Corporation announced that it would buy out ESPN
Inc.'s stake in ESPN Star Sports to gain full control over the Asian sports network.
b) Backward Integration

Vertical integration describes when a company purchases or starts a company that it either buys
from or sells to and integrates this new business into its own. Forward integration means it is
integrating businesses toward the end customer; backward integration means it is integrating in
the direction away from the customer. Backward vertical integration can be a part of a company's
strategy due to the competitive benefits it provides.

Current Business Example: Amazon.com

Amazon.com backward vertically integrated when it became not only a bookseller but a book
publisher. As a bookseller, Amazon.com buys books from various suppliers, such as publishing
companies. By becoming a publisher itself, it has integrated into its business the role of supplier
and can sell books that its own publishing company publishes.

Booksellers set the price at which Amazon.com can buy a book from them. This in turn limits the
amount that Amazon.com can charge a customer for a book and still make a profit. If
Amazon.com publishes the book itself, it can acquire its books cheaper, as its publishing arm
does not need to produce a profit as an independent publisher would. Additionally, while a
publisher normally would sell its books to a variety of booksellers, Amazon can choose whether
to sell the books it publishes to other bookstores or sell its books only through Amazon.com. In
this way, it can control competition for its books and the price it can charge for them.

Here is the quote that shows how ambitious Amazon was in this strategy.

”Amazon is planning to buy the rights of archive titles and new books in a bid to boost its
margins by cutting out the “middle men” publishing houses whose books it sells online.

Last week the company made its first foray into publishing in America by buying the US rights
to Ian Fleming’s James Bond novels.

Amazon is determined to cement its position as the lead seller of e-books. Through its Kindle
device, Amazon has an estimated 70pc of the ebook market but competitors are catching up.

“All we care about is the Kindle. Strategically, it is the number one priority, and the number two
and three,” an Amazon source said.
 By publishing its own books, Amazon could offer exclusive material on the Kindle, helping to
fend off Apple’s iPad or Kobo, which has formed an alliance with WH Smith."

c) Market Penetration

Market penetration, sometimes referred to as a market share, is a measure of the percentage of

sales volume an existing product or business achieves in relation to the competition. A product
that earns RM25 out of every RM100 of sales of all product sales in its category has a 25 percent
penetration rate, or share. To increase market penetration, a business can employ a number of
strategies in an effort to take sales from its competitors. It is also both a measure and a strategy.
A business will utilize a market penetration strategy to attempt to enter a new market. The goal is
to get in quickly with your product or service and capture a large share of the market. Market
penetration is also a measure of the percentage of the market that your product or service is able
to capture.

Current Business Example: Starbucks Coffee

Starbucks Coffee’s main intensive growth strategy is market penetration. This intensive strategy
supports the firm’s growth by maximizing revenues from existing markets. Starbucks already has
presence in 65 countries around the world. To maximize revenues and growth in these current
markets, the company applies the market penetration intensive strategy by opening more
company-owned stores. Starbucks also applies this intensive strategy for growth through
licensing for merchandise and franchising in some countries, such as Malaysia and Thailand.

Aggressive pricing is a very common tactic. You can use penetration pricing, which is setting
the price of your product or services lower than that of your competitors. This strategy may work
well in price-sensitive markets. You may be able to maintain a decent level of profits due to the
volume of sales decreasing your costs per unit for the product. Additionally, once you have
obtained your market share goal and have achieved a sufficient level of brand loyalty, you may
be able to increase prices.

d) Market Development

Market development is a business strategy whereby a business attempts to find new groups of
buyers as potential customers for its existing products and services. In other words, the goal of
market development is to expand into untapped markets. These potential customer groups may
already be served by competitors or may not be currently marketed to by anyone for the product.

Current Business Example: McDonald's

With a product that’s served in over 117 countries, feeding millions of customers every
day, McDonald’s branding success is undeniable. The key to McDonald’s branding and
marketing success is segmentation and experimentation.

One of the key elements of market development strategy is expanding the business
geographically and McDonald's excel at that. In 1955, Kroc knew that the key to success was
through rapid expansion; thus, the best way to achieve this was through offering franchises.
Today, over 70 percent of McDonald’s Restaurants are franchises. In 1986, the first franchised
McDonald’s opened in the United Kingdom. Now, there are over 1,150 restaurants, employing
more than 49,000 people, of which 34 percent are operated by franchisees. Moreover, there are
over 30,000 these restaurants in more than 119 countries, serving over 47 million customers
around the world. In 2000 alone, McDonald’s served over 16 billion customers. For perspective,
that number is equivalent to providing a lunch and dinner for every man, woman, and child in the
world! McDonald’s global sales were over $40 billion, making it by far the largest food service
company in the world.

For McDonalds, globalization has meant embracing and engaging different cultures while
at the same time retaining a strong enough brand to be immediately identifiable. But how
can you ensure your brand transcends cultures and regional approaches to marketing?
This is where online innovations really come into their own by bridging the cultural and
physical gaps that can inhibit connection with a global audience.

e) Product Development

Basically, there are a few steps in the product development strategy that is vital for it to work.
The first one is to define your product. An accurate description of the product you are planning
will help keep you and your team focused and avoid NPD pitfalls such as developing too many
products at once, or running out of resources to develop the product. The next step is to identify
what the market needs. A series of questions may be asked in this step in order to gain a
thorough knowledge of your target market and its needs and wants. A targeted, strategic and
purposeful approach to NPD will ensure your products fit your market. Then, you need to have
an established time frames so that you will be allowed adequate time to develop and implement
your new products. Your objectives for developing new products will inform your time frames
and your deeadlines for implementation. Make sure to be thoughtful and realistic because some
objectives might overlap but others will be mutually exclusive. Lastly, you need to identify key
issues and approaches. There are many tasks involved in developing a product that is
appropriate for your customers. The nature of your business and your idea will determine how
many of these steps you need to take. You may be able to skip or duplicate certain stages of start
some of the simultaneously.

Current Business Example: Starbucks Coffee

Starbucks Coffee also uses product development as a secondary intensive growth strategy. This
intensive strategy involves creating new products to gain more revenues. Starbucks continues
innovating its product mix. For example, after the firm acquired The Coffee Connection, it
started offering Frappuccino at Starbucks cafés. The company also introduced sodas in 2014.
Through such new products, Starbucks grows through this intensive strategy.

The recently launched Starbucks D-Table has proven to be a fruitful product. It consists of
several important elements which the first is a viral video marketing campaign that intends to
create a strong news-worthy buzz surrounding the product concept and universal appeal of the
idea behind a digital table. Just a few ideas can be to play with the fact that the 'D' in the product
name is used interchangeably with the generic word 'The'. The video highlighted cultural
trendsetter within some of the many contrasting slang dictionaries found in daily communication
globally. Another idea could be to put the table in some people's homes and ask the viewers to
imagine what would be at their D-Table. Finally, to equate the product with the Starbucks brand,
a commercial would be shot which uses hidden camera footage of wide range of people using the
table for the first time at Starbucks location. The objective of the campaigns will be to remain
entertaining and funny to ensure the viral elements, but also at the same time be informational
about the product and brand with real life applications.

e) Related Diversification
Related Diversification is the most popular distinction between the different types of
diversification and is made with regard to how close the field of diversification is to the field of
the existing business activities. Related diversification occurs when a firm moves into a new
industry that has important similarities with the firm’s existing industry or industries. In these
cases, the company starts manufacturing a new product or penetrates a new market related to its
business activity. Under related diversification the company makes easier the consumption of its
products by producing complementing goods or offering complementing services. For example,
a shoe producer starts a line of purses and other leather accessories; an electronics repair shop
adds to its portfolio of services the renting of appliances to the customers for temporary use until
their own are repaired.

Current Business Example: Honda

Honda Motor Company provides a good example of leveraging a core competency through
related diversification. Although Honda is best known for its cars and trucks, the company
actually started out in the motorcycle business. Through competing in this business, Honda
developed a unique ability to build small and reliable engines. When executives decided to
diversify into the automobile industry, Honda was successful in part because it leveraged this
ability within its new business. Honda also applied its engine-building skills in the all-terrain
vehicle, lawn mower, and boat motor industries. Honda has also pioneered new technology in
its HA-420 HondaJet, manufactured by its subsidiary Honda Aircraft Company, which allows
new levels of reduced drag, increased aerodynamics and fuel efficiency thus reducing operating
costs. Honda's solar cell subsidiary company Honda Soltec (Headquarters: Kikuchi-gun,
Kumamoto; President and CEO: Akio Kazusa) started sales throughout Japan of thin-film solar
cells for public and industrial use on 24 October 2008, after selling solar cells for residential use
since October 2007.[51] Honda announced in the end of October 2013 that Honda Soltec would
cease the business operation except for support for existing customers in Spring 2014 and the
subsidiary would be dissolved.