Ansoff's product / market matrix

The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy. Ansoff¶s product/market growth matrix suggests that a business¶ attempts to grow depend on whether it markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below: Market penetration Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives: ‡ Maintain or increase the market share of current products ± this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling ‡ Secure dominance of growth markets

‡ Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors ‡ Increase usage by existing customers ± for example by introducing loyalty schemes A market penetration marketing strategy is very much about ³business as usual´. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research. Market development Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including: ‡ New geographical markets; for example exporting the product to a new country ‡ New product dimensions or packaging: for example ‡ New distribution channels ‡ Different pricing policies to attract different customers or create new market segments Product development Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. Diversification Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

where the objective is building a primary demand. This may include: y y y y y y y y Telling the market about a new product Suggesting new uses for a product Informing the market of a price change Informing how the product works Describing available services Correcting false impressions Reducing buyers⼌ fears Building a company image To persuade: Most advertisements are made with the aim of persuasion. MONEY This M deals with deciding on the Advertising Budget The advertising budget can be allocated based on: y Departments or product groups . 2. Such advertisements aim at building selective brand. To remind: Such advertisements are highly effective in the maturity stage of the product.5 M¶s of Advertising: MISSION: What are the Advertising objectives? MONEY: How much can be spent? (Advertising budget) MESSAGE: What message should be sent? MEDIA: What media should be used? MEASUREMENT: How should the results be evaluated? 1. MISSION OR SETTING THE ADVERTISING OBJECTIVES Advertising Objectives can be classified as to whether their aim is: To inform: This aim of Advertising is generally true during the pioneering stage of a product category. The aim is to keep the consumer thinking about the product.

Messages can be rated on desirability. The message must first say something desirable or interesting about the product. it is less expensive to reach consumers of a widely used brand them to reach consumers of lowshare brands. Even simple clutter from advertisements not directly competitive to the brand creates the need for heavier advertising. soft drinks) require heavy advertising to establish a different image. Above all. on a cost-per-impressions basis. Market Share and Consumer base: high-market-share brands usually require less advertising expenditure as a percentage of sales to maintain their share. Established brands are usually supported with lower advertising budgets as a ratio to sales. The message must also say something exclusive or distinct that does not apply to every brand in the product category. Competition and clutter: In a market with a large number of competitors and high advertising spending. A good ad normally focuses on one core selling proposition. Product substitutability: brands in the commodity class (example cigarettes. a brand must advertise more heavily to be heard above the noise in the market. Additionally. . Their feeling about the product. To build share by increasing market size requires larger advertising expenditures. Message evaluation and selection The advertiser needs to evalÂuate the alternative messages. Advertising frequency: the number of repetitions needed to put across the brands message to consumers has an important impact on the advertising budget. exclusiveness and believability. MESSAGE GENERATION Message generation can be done in the following ways: Inductive: By talking to consumers. and weaknesses gives enough information that could aid the Message generation process. the message must be believable or provable. beer. Advertising is also important when a brand can offer unique physical benefits or features. experts and competitors. its strengths. 3.y y y The calendar Media used Specific geographic market areas There are five specific factors to be considered when setting the Advertising budget. Consumers are the major source of good ideas. dealers. y y y y y Stage in PLC: New products typically receive large advertising budgets to build awareness and to gain consumer trial.

No claim is made about the product except through suggestion. experience. showing a woman thinking of the Frenchie man saving her from a villain. While executing a message the style. y Mood or image: Evokes a mood or image around the product.Message execution. showed a family enjoying Coke. love. or serenity. y Fantasy: Creates a fantasy around the product or its use. Any message can be presented in any of the following different execution styles. tone. such as beauty. Asmi and Platinum ads. words. Lifestyle: Emphasizes how a product fits in with a lifestyle. y Example: Collection. with a game of antakshari when there is a power failure. The message⼌s impact depends not only upon what is said but also on how it is said. y Musical: Uses background music or shows one or more persons or cartoon characters singing a song involving the product. Example: GE and Skoda ads . The character might be animated Example: Ronald McDonald for McDonald⼌s y Technical expertise: Shows the company⼌s expertise. Example: Kingfisher Beer ads. Example: Ads of Old Spice After Shave Lotion y Personality symbol: Creates a character that personifies the product. Example: VIP Frenchie ads. that focus on lifestyle of persons using their products. or a combination of them: y Slice of life: Shows one or more persons using the product in a normal setting. saying the King of Good Times. and format for executing the message should be kept in mind. Some ads aim for rational positioning and others for emotional positioning. Example: Coke 1litre ad. and pride in making the product. Style.

Tone: The communicator must also choose an appropriate tone for the ad. Example: DuraCell Ads. Words: Memorable and attention-getting words must be found. Example: In ads for Sunsilk. Get Going because of bad hair FORMAT: Format elements such as ad size. A minor rearrangement of mechanical elements within the ad can improve its attention-getting power. The steps to be considered are: . telephone. or expert source endorsing the product. and insurance companies. optimal delivery can be achieved. likable. This style is common in the over-thecounter drug category. and illustration will make a difference in an ad⼌s impact as well as its cost. though not necessarily by as much as their difference in cost. It could be a celebrity or ordinary people saying how much they like the product. they had hair expert Coleen. The following themes listed on the left would have had much less impact without the creative phrasing on the right: Theme Creative Copy You won⼌t have to stay at home Get Out. Four-colour illustrations instead of black and white increase ad effectiveness and ad cost. and humor is almost always avoided so as not to take mention away from the message. Other companies use emotions to set the toneâ¼´particularly film. Example: Procter & Gamble is consistently positive in its toneâ¼´its ads say something superlatively positive about the product. which stress human connections and milestones. MEDIA The next â¼×M⼌ to be considered while making an Advertisement Program is the Media through which to communicate the Message generated during the previous stage. By planning the relative dominance of different elements of the ad.y Scientific evidence: Presents survey or scientific evidence that the brand is preferred over or outperforms other brands. color. 4. claiming the battery lasts 6 times longer than ordinary batteries y Testimonial evidence: This features a highly credible. endorsing the product. Larger-size ads gain more attention.

5. Research can be in the form of: y y Communication-Effect Research Sales-Effect Research There are two ways of measuring advertising effectives. Test commercials ± test trial of the advertisement to the sample of people Finished testing y y Post-testing It is the assessment of an advertisement⼌s effectiveness after it has been used. It is done in two ways . MEASUREMENT Evaluating the effectiveness of the Advertisement Program is very important as it helps prevent further wastage of money and helps make corrections that are important for further advertisement campaigns. It is done through y Concept testing â¼³ how well the concept of the advertisement is. Researching the effectiveness of the advertisement is the most used method of evaluating the effectiveness of the Advertisement Program. This is be done by taking expert opinion on the concept of the ad. They are: Pre-testing It is the assessment of an advertisement for its effectiveness before it is actually used.

A renowned/successful brand helps an organization to launch products in new categories more easily. g. Extending a brand outside its core product category can be beneficial in a sense that it helps evaluating product category opportunities. The expense of introductory and follow up marketing programs is reduced. powder. Nike¶s brand core product is shoes. The risk perceived by the customers reduces. c. d. Advantages of Brand Extension Brand Extension has following advantages: 1. ii. a. e. and soap. b. it is likely to be accepted by customers in the new business.y y Unaided recall ± a research technique that asks how much of an ad a person remembers during a specific period of time Aided recall ± a research technique that uses clues to prompt answers from people about ads they might have seen BRAND EXTENSION Brand Extension is the use of an established brand name in new product categories. There are economies of scale as advertising for core brand and its extension reinforces each other. There are packaging and labeling efficiencies. and golf equipments. It increases brand image. Mars is no longer a famous bar only. Consumers can now seek for a variety. It makes acceptance of new product easy. Wipro which was originally into computers has extended into shampoo. identifies resource requirements. Cost of developing new brand is saved. . An established brand name increases consumer interest and willingness to try new product having the established brand name. and if these values and aspirations are embodied in the brand. lowers risk. soccer balls. selling and promotional costs are reduced. f. but an ice-cream. For instance. But it is now extended to sunglasses. Brand extension may be successful or unsuccessful. This new category to which the brand is extended can be related or unrelated to the existing product categories. Advertising. chocolate drink and a slab of chocolate. If the customers of the new business have values and aspirations synchronizing/matching those of the core business. basketballs. Instances where brand extension has been a success arei. The likelihood of gaining distribution and trial increases. An existing brand that gives rise to a brand extension is referred to as parent brand. h. The efficiency of promotional expenditure increases. and measures brand¶s relevance and appeal.

³Now´ is absolutely NOT the time to blindly continue the status quo with your distribution strategies. there can be sound reasons for these perceived weaknesses. There are feedback benefits to the parent brand and the organization. Unfortunately. They want technical documentation that can be produced quickly and cheaply. b. DISTRIBUTION STRATEGY For product-focused companies. It depends not only on the subject matter. defined as maximizing sales and profits. due to concerns about erosion of distributor loyalty or inter-channel cannibalization Failure to periodically re-visit and update distribution strategies Lack of creativity and resistance to change To be fair. however. c. many of these companies often fail to establish or maintain the most effective distribution strategies. It revives the brand. d. hence they also have quality associations QUALITY STRATEGY Here are many different ways in which quality can be approached. More typically. lack of understanding of the ultimate customers and their preferences.2. The image of parent brand is enhanced. Brand meaning is clarified. Unfortunately. Problems that we have identified include: y y y y Unwillingness to establish different distribution channels for different products Fear of utilizing multiple channels. e. It increases market coverage as it brings new customers into brand franchise. The Internet is creating sea-changes in terms of traditional manufacturerdistributor relations. or a failure to acknowledge the importance of a distribution strategy and invest sufficient resources in understanding it. so one might wonder which the best for technical documentation is. there is no simple answer because quality is relative. Customers associate original/core brand to new product. establishing the most appropriate distribution strategies is a major key to success. It allows subsequent extension. It has seen significant waves of disintermediation in multiple . they are due to failings such as simple inertia. a. f. An engineer's approach to quality might be one expressed in terms of technical accuracy and completeness. especially including direct or semi-direct sales. A company's executive board might approach quality in terms of value for money. but also on perceptions of quality from different viewpoints.

Exclusive distribution: Involves limiting distribution to a single outlet. Meanwhile. The product is usually highly priced. An example of would be the sale of vehicles through exclusive dealers. televisions household appliances. Selective distribution is common with products such as computers.product lines. improvements in supply chain management technologies must also be factored into choice of distribution partners. as well as existing strengths to be encouraged Depending on the type of product being distributed there are three common distribution strategies available: 1. and can facilitate cost-effective broadening of distribution channels. 2. It seeks to increase profitability through greater sales volume obtained from new products and new markets. 3. where consumers are willing to shop around and where manufacturers want a large geographical spread. credible and is known by the target audience. At the corporate level. Intensive distribution: Used commonly to distribute low priced or impulse purchase products eg chocolates. InfoTrends can help your company improve its distribution strategies by: y y y y y Mapping your products to the end-user Determining customers¶ channel preferences and comparing these preferences with actual availability Recommending new channels. and why Examining competitors¶ strategies and comparing them and their effectiveness with your own Confidential interviews with your distribution partners to identify areas for improvement. If a manufacturer decides to adopt an exclusive or selective strategy they should select a intermediary which has experience of handling similar products. soft drinks. DIVERSIFICATION STRATEGY Diversification is a form of corporate strategy for a company. Diversification can occur either at the business unit level or at the corporate level. it is most likely to expand into a new segment of an industry that the business is already in. and requires the intermediary to place much detail in its sell. At the business unit level. Selective Distribution: A small number of retail outlets are chosen to distribute the product. it is generally very interesting[clarification .

whereas diversification usually requires a company to acquire new skills.needed] entering a promising business outside of the scope of the existing business unit. The technology would be the same but the marketing effort would need to change. For example. the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company. The different types of diversification strategies The strategies of diversification can include internal development of new products or markets. The conglomerate diversification has very little relationship with the firm's current business. The first three strategies are usually pursued with the same technical. Even if this strategy is very risky. which means that the firm is able to leverage its technical know-how to gain some advantage. new techniques and new facilities. a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. financial. In a competitive environment. Conglomerate diversification (or lateral diversification): The Company markets new products or services that have no technological or commercial synergies with current products but that may appeal to new groups of customers. acquisition of a firm. provide increased growth and profitability. alliance with a complementary company. this form of diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. it could also. and distributing or importing a products line manufactured by another firm Concentric diversification: This means that there is a technological similarity between the industries. if successful. and merchandising resources used for the original product line. licensing of new technologies. and second to get a better reception in capital markets as the company gets bigger. Therefore. Horizontal diversification: The Company adds new products or services that are often technologically or commercially unrelated to current products but that may appeal to current customers. . Diversification is part of the four main growth strategies defined by the Product/Market Ansoff matrix: Ansoff pointed out that a diversification strategy stands apart from the other three strategies.

emotional. Ask yourself and your entire staff questions that revolve around getting the attention of your defined universe of prospects. Focus exclusively on your buying universe and their environment. motivators. and you become nothing special to anyone. That¶s getting harder and harder to do. y y y Where are our customers on a daily basis? What are they really looking at throughout the day? What is shocking. and urgent enough for them to pay attention to our message and unique marketing proposition? .4 A´s of days of marketing strategy Analyze. What do they do to protect themselves? Filter them. fears. You must target your marketing message so that the intended prospect feels that the services address their needs directly. Find out: y y y y y y Who has money (or who has spent money) on similar products or services? What are their beliefs and values? What are their desires. frightening. You have to analyze the needs of your audience. Ignore them. We bombard consumers with thousands of marketing message daily. You need to be able to identify their core values. Try to apply a one size fits all approach to your marketing. information channels and centers of influence. buying styles. Once you¶ve analyzed the needs of your best prospects and found out where they are you must then grab their attention. Fight back at them. Your only concern must be getting the attention of your target audience. humorous. No buyer or buying population is alike. beautiful. dreams and passions? What are their fears and secrets that they¶d prefer to keep in the shadows? Where do they go on Mondays and Tuesdays and Wednesdays? Why do they buy what they buy? Attention. and sources of diversion. Delete them.

symbol. Money or some other commitment has to take place to make your marketing efforts worthwhile.Accept. The potential buyers have to do something with the information and relationship you¶ve cultivated by taking a specific. no matter what it might be. Today. people do not buy products or services. Well-known brands have the power to command price premium. American Marketing Association defined brand as ³a name. the brands Mercedes. Sony. y y y Once you have their attention you move to the third step in the process. You are in the outcomes business. As we¶ll discuss in detail later. petition signature or membership renewal? BRANDING Branding is a major decision issue in managing products. A brand mark refers to that part of brand which is not made up of words. but can be a symbol or design such as swoosh mark of Nike. term. or design. . You have to get them to accept that your marketing proposition (despite the fact there might be countless other competitors in the marketplace right now) is the best one to help them achieve the outcomes they¶re looking for. They are the basis of consumer relationship and bring consumers and marketers closer by developing a bond of faith and trust between them. According to Business Week. Canon and others enjoy a huge brand-loyal market. Accept. or a combination of them. a phone call to set up an appointment or a visit to your website to order online? Will it be a completed survey. or Golden Arches of McDonald¶s. To succeed you¶ll have to use every tool at your disposal to encourage and get the prospect to accept your proposition. Action You have to get them to act. they buy outcomes. IBM. They have to make the transition from tire kicker or prospect to a full-fledge customer/buyer/member/inductee. with a brand equity value of more than US 30 billion dollars. Will it be a trip to your store. Brands live in the minds of consumers and are much more than just a tag for their recognition and identification. intended course of action. intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competition. sign. the Intel brand is one of the top 10 global brands.

there is very high level of awareness in terms of name recall and recognition. fun loving. Brand identity refers to an insider¶s concept reflecting brand manager¶s decisions of what the brand is all about. servers. logos. Reflection: This refers to defining the kind of people who use it. Culture: Culture includes knowledge. These associations represent what the brand stands for and imply a promise to customers from the organisation members. Relationship: Brands are often at the heart of transactions and exchanges between marketers and customers. It is a symbol of simplicity. Apple computers reflect its culture. carefree people. belief. A brand reflects its various aspects and values that drive it. old. habits. modern and so on. energetic and an achiever. and packaging.BRAND IDENTATY Many brands are largely unknown to consumers and for some others. The reflection of Allen Solly¶s brand is a typical young executive. For instance. and values. about the brand. desktop PCs. David A. that is customers. For example.´ The personality of Boost is seen as young. physical aspects. etc. . Bajaj Pulsar ads communicate ³Definitely male. Selfimage is how a customer sees herself / himself. or people on their own may attribute a personality to a brand. rites and rituals. dynamic. capabilities. The physical dimensions are usually included in the product such as name. The brand name Nike is Greek and relates to Olympics. colours. The physique of IBM brand would be data system. and friendliness. young males. Brand image reflects the perceptions of outsiders. It is reflected in the image of its consumers: young. Culture manifests various aspects of a brand. ³a unique set of brand associations that the brand strategist aspires to create or maintain. rich. Self-Image: This means how a customer relates herself / himself to the brand.´ Brand identity and brand image are sometimes used interchangeably in different texts. features. Pepsi reflects young. Apple conveys emotional relationship based on friendliness. Personality: Marketers deliberately may try to assign the brand a personality. Aaker defines brand identity as. notebooks PCs. Relationship is essentially important in service products. and service. Physique: Physique dimension refers to the tangible. The self-image of users of Bajaj Pulsar motorcycle is believed to that of be tough.

There are four strategies. . Attract competitor¶s customers. Social image: This focuses on what social image the brand holds in terms of its esteem for customer¶s social and reference groups. one for each of the quadrants: Market Penetration Strategy When the product is in the current market. 3. it can still grow. 2. there are three approaches to develop the market: 1. quality. This is the ratio between what are the involved costs and the perceived delivered value. Identify the potential users. that it would always take care of customer¶s interest and the people behind the brand can be trusted. Trustworthiness: This means the customer¶s extent of faith in the brand¶s performance. when certain outcomes result from the marketing of a product or service because of its brand name that would not occur if the same product or service did not have the name. Ansoff's Product-Market Expansion Grid Ian Ansoff has proposed a useful framework called the product/market expansion grid for detecting new intensive growth opportunities. Identification: To what extent customers feel emotionally attached to the brand. There are three major approaches to increasing current product's market share: 1. Customers are concerned about how fault free and durable the brand is. 3. This means psychological association with what the brand stands for in the customer¶s perceptions. 2.BRAND EQUITY ³Brand equity is defined in terms of marketing effects uniquely attributed to the brands ± for example.´ Performance: The aspect of brand equity focuses on the physical and functional attributes of a brand. Convince non-users to use the product. Their association with the brand is important because it matches their self-concept and aspirations. Market-Development Strategy When the current product is launched in a new market. Value: This refers to the customer¶s value perception of the brand. Sell in new locations. and service. based on their judgement. Expand distribution channels. This reflects reliability of the brand. Encourage current customers to buy more.

distribution channel access. market size. This allows the business user to compare business strength. The diversification strategies are of three types: 1. demand variability. This tool compares different businesses on "Business Strength" and "Market Attractiveness" variables. the intensive growth strategies could be to: 1. market size. global opportunity. . Develop different quality levels. Improve the technology. and market share for different strategic business units (SBUs) or different product offerings. production capacity. profit margin relative to competitors. OLD NEW PRODUCTS PRODUCTS OLD Market MARKETS Penetration NEW Market MARKETS Development Product Development Diversification GE Matrix Positions and Strategy GE Matrix or McKinsey Matrix is a strategic tool for portfolio analysis. Develop new features. Concentric Diversification Strategy: Develop new products with the earlier technology for new segments 2. Conglomerate Diversification Strategy: Develop new products for new markets. 3. Diversification When a new product is launched in a new market. growth in market share. The vertical axis of GE matrix is industries attractiveness< which is determined by the factor Market growth rate. market attractiveness. It is similar to the BCG Matrix and actually the GE / McKinsey Matrix is an extension of the BCG Matrix multifactor portfolio analysis tool. 2. macro environmental factor The horizontal axis of GE matrix is strength of business unit some factors that can be used to determine business strength include.Product-Development Strategy When a new product is launched in the current market.Market share. brand equity. industries profibility. 3. diversification makes good sense as better opportunities are found outside the present business. Horizontal Diversification Strategy: Develop new products with new technology for old customers.

The company should allocate resources in this business and focus on growing the business and increase market share. Based on clear understanding of all of these factors decision makers are able to develop effective strategies.The GE / McKinsey Matrix is divided into nine cells . the market size and the current sales will distinguish each SBU. The business is strong and the market is attractive. or get rid of these SBUs and invest the resources into more promising and attractive SBUs. Some of them may consume to much resources and are not promising while others may need additional resources and better strategy for growth.nine alternatives for positioning of any SBU or product offering. Segment 3: This is the worst segment. The nine cells in the matrix can be grouped into three major segments: Segment 1: This is the best segment. Segment 2: The business is either strong but the market is not attractive or the market is strong and the business is not strong enough to pursue potential opportunities. develop better cost-effective offering. Further. Based on the strength of the business and its market attractiveness each SBU will have a different position in the matrix. Decision makers should consider either repositioning these SBUs into a different market segment. Decision makers should make judgment on how to further deal with these SBUs. . Businesses in this segment are weak and their market is not attractive.

etc. The firm's margin or profit then depends on its effectiveness in performing these activities efficiently. It is in these activities that a firm has the opportunity to generate superior value. hiring. control systems. ‡Service: the support of customers after the products and services are sold to them. ‡Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. ‡Human resource management: employee recruiting. so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. and their distribution to manufacturing as they are required.Porter's Generic Value Chain Inbound Logistics > Operation > Outbound Logistics > Marketing & Sales > Service > Margin Firm Infrastructure HR Management Technology Development Procurement The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities. thereby resulting in a profit margin. training. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. ‡Technology development: technologies to support value-creating activities. and equipment. company culture. ‡Outbound Logistics: ‡ the warehousing and distribution of finished goods. The primary value chain activities are: Inbound Logistics: the receiving and warehousing of raw materials. development. . and compensation. Marketing & Sales: the identification of customer needs and the generation of sales. supplies. ‡ Procurement: purchasing inputs such as materials. These primary activities are supported by: The infrastructure of the firm: organizational structure.

there are three generic strategies that a company can undertake to attain competitive advantage: cost leadership. it is often able to charge a premium price for its products or services in the market. Competitive strategies focus on ways in which a company can achieve the most advantageous position that it possibly can in its industry. and selling at a standard market price. wherein the latter is the way in which companies can earn a price premium. The profit of a company is essentially the difference between its revenues and costs. Example : Deccan Airlines. Some general examples of differentiation include better service levels to customers.Porter¶s Generic Strategies Analysis Introduction Porter¶s generic strategies framework constitutes a major contribution to the development of the strategic management literature. Differentiation When a company differentiates its products. and focus. Firms can target their products by a broad target. Main aspects of Porter¶s Generic Strategies Analysis Companies can achieve competitive advantages essentially by differentiating their products and services from those of competitors and through low costs. According to Porter. differentiation. The company with the lowest costs would earn the highest profits in the event when the competing products are essentially undifferentiated. Porter used the terms µcost leadership¶ and µdifferentiation¶. Cost leadership The companies that attempt to become the lowest-cost producers in an industry can be referred to as those following a cost leadership strategy. better product performance etc. thereby covering most of the marketplace. in . Therefore high profitability can be achieved through achieving the lowest costs or the highest prices vis-à-vis the competition. or they can focus on a narrow target in the market.

Organizations¶ can make use of the focus strategy by focusing on a specific niche in the market and offering specialized products for that niche. Both these companies have a niche of premium products available at a premium price. Companies employ this strategy by focusing on the areas in a market where there is the least amount of competition (Pearson.comparison with the existing competitors. . Moreover. Focus Porter initially presented focus as one of the three generic strategies. Ferrari and Rolls-Royce are classic examples of niche players in the automobile industry. successful differentiation strategy of a firm may attract competitors to enter the company¶s market segment and copy the differentiated product. This is why the focus strategy is also sometimes referred to as the niche strategy. 1999). they have a small percentage of the worldwide market. Some problematic areas include the difficulty on part of the firm to estimate if the extra costs entailed in differentiation can actually be recovered from the customer through premium pricing. This strategy provides the company the possibility to charge a premium price for superior quality (differentiation focus) or by offering a low price product to a small and specialized group of buyers (cost focus). Moreover. but later identified focus as a moderator of the two strategies. Differentiation has many advantages for the firm which makes use of the strategy.

But competition is not perfect and firms are not unsophisticated passive price takers. the role of a leading firm. Rivalry In the traditional economic model. The Concentration Ratio (CR) is one such measure. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. 25. This discipline may result from the industry's history of competition. and strategic analysts are interested in these differences. With only a few firms holding a large market share.the industry is concentrated. If rivalry among firms in an industry is low. competition among rival firms drives profits to zero. The intensity of rivalry among firms varies across industries. A high concentration ratio indicates that a high concentration of market share is held by the largest firms . the competitive landscape is less competitive (closer to a monopoly). SUPPLIER POWER THREAT OF NEW ENTRANTS OFSUBSTITUTES RIVALRY THREAT BUYER POWER DEGREE OF RIVALRY I. none of which has a significant market share. The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). a maverick . the industry is considered to be disciplined. However. the trend is to define industries in terms that convey more information than distribution of market share.Porter's Five Forces Porters fives forces model is an excellent model to use to analyse a particular environment of an industry. Economists measure rivalry by indicators of industry concentration. Explicit collusion generally is illegal and not an option. Rather. and 50 firms in an industry also are available). The concentration ratio is not the only available measure. Michael Porter provided a framework that models an industry as being influenced by five forces. A low concentration ratio indicates that the industry is characterized by many rivals. These fragmented markets are said to be competitive. firms strive for a competitive advantage over their rivals. in low-rivalry industries competitive moves must be constrained informally. The CR indicates the percent of market share held by the four largest firms (CR's for the largest 8. or informal compliance with a generally understood code of conduct.

This intensifies rivalry. dominated the retail household appliance market. firms are able to improve revenues simply because of the expanding market. even when the venture is not profitable. the firm must produce near capacity to attain the lowest unit costs. High exit barriers cause a firm to remain in an industry. 7 Strategic stakes are high when a firm is losing market position or has potential for great gains. rivalry intensifies. Roebuck and Co. 2 Slow market growth causes firms to fight for market share. intense. For example. ‡ Creatively using channels of distribution . 8 High exit barriers place a high cost on abandoning the product. from the 1950's to the 1970's Sears. The rivalry intensifies if the firms have similar market share. When a customer can freely switch from one product to another there is a greater struggle to capture customers.using vertical integration or using a distribution channel that is novel to the industry. based on the firms' aggressiveness in attempting to gain an advantage. or weak. 6 Low levels of product differentiation is associated with higher levels of rivalry. 5 Low switching costs increases rivalry. A common exit barrier is asset specificity. a firm can choose from several competitive moves: ‡ Changing prices . 4 High storage costs or highly perishable products cause a producer to sell goods as soon as possible.improving features. implementing innovations in the manufacturing process and in the product itself.for example. . on the other hand. When total costs are mostly fixed costs. In pursuing an advantage over its rivals. Exploiting relationships with suppliers .raising or lowering prices to gain a temporary advantage. moderate. Improving product differentiation . In a growing market.firm seeking a competitive advantage can displace the otherwise disciplined market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price. 3 High fixed costs result in an economy of scale effect that increases rivalry. If other producers are attempting to unload at the same time. Since the firm must sell this large quantity of product. The intensity of rivalry commonly is referred to as being cutthroat. high levels of production lead to a fight for market share and results in increased rivalry. competition for customers intensifies. with high-endjewelry stores reluctant to carry its watches. leading to a struggle for market leadership. Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market. When a rival acts in a way that elicits a counter-response by other firms. Brand identification. When the plant and equipment required for manufacturing a product is highly . The intensity of rivalry is influenced by the following industry characteristics: 1 A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The firm must compete. tends to constrain rivalry.

. and by hospitals that are for-profit enterprises. with intense competition. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept. a shakeout is inevitable _ Surviving rivals will have to grow faster than the market _ Eventual losers will have a negative cash flow if they attempt to grow _ All except the two largest rivals will be losers _ The definition of what constitutes the "market" is strategically important. Whatever the merits of this rule for stable markets. price wars. it is clear that market stability and changes in supply and demand affect rivalry. is populated by hospitals that historically are community or charitable institutions. it implies that: _ If there is a larger number of competitors. Litton was successful in the 1960's with its contracts to build Navy ships. these assets cannot easily be sold to other buyers in another industry. A point is reached where the industry becomes crowded with competitors. Rivalry is volatile and can be intense. There is greater possibility for mavericks and for misjudging rival's moves. and demand cannot support the new entrants and the resulting increased supply. At other times.specialized. This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services. by hospitals that are associated with religious organizations or universities. If this rule is true. and company failures. 9 A diversity of rivals with different cultures. Cyclical demand tends to create cutthroat competition. The industry may become crowded if its growth rate slows and the market becomes saturated. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A shakeout ensues. local hospitals are highly cooperative with one another on issues such as community disaster planning. divesting from the shipbuilding plant was not feasible since such a large and highly specialized investment could not be sold easily. for example. This is true in the disposable diaper industry in which demand fluctuates with birth rates. defense spending declined and Litton saw a sudden decline in its earnings. 10 Industry Shakeout. But when the Vietnam war ended. As the firm restructured. and Litton was forced to stay in a declining shipbuilding market. The hospital industry. and the largest competitor will have no more than four times the market share of the smallest. BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable market will not have more than three significant competitors. and philosophies make an industry unstable. and in the greeting card industry in which there are more predictable business cycles. creating a situation of excess capacity with too many goods chasing too few buyers. histories.

steel cans. Consider the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable. IV. In the disposable diaper industry. tire retreads are a substitute. To the manufacturer of automobile tires. components.yet they are not rivals in the aluminum can industry. Suppliers. Threat Of Substitutes In Porter's model. a threat of substitutes exists when a product's demand is affected by the price change of a substitute product.as more substitutes become available. III. retreading remains a viable substitute industry. cloth diapers are a substitute and their prices constrain the price of disposables. and other supplies. substitute products refer to products in other industries. These containers are substitutes. The competition engendered by a Threat of Substitute comes from products outside the industry. In reality few pure monopsonies exist. there can be other concerns in assessing the threat of substitutes. the demand becomes more elastic since customers have more alternatives. Buyer Power The power of buyers is the impact that customers have on a producing industry. Supplier Power A producing industry requires raw materials . the buyer sets the price. if powerful.labor. the relationship to the producing industry is near to what an economist terms a monopsony . The following tables outline some factors that determine buyer power.a market in which there are many suppliers and one buyer. But in the trucking industry new tires are expensive and tires must be replaced often. and telephone lines. In the truck tire market. and plastic containers. new tires are not so expensive that car owners give much consideration to retreading old tires. Under such market conditions. when buyer power is strong. Today. such as selling raw materials at a high price to capture some of the industry's profits. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. can exert an influence on the producing industry. The price of aluminum beverage cans is constrained by the price of glass bottles. The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment. but frequently there is some asymmetry between a producing industry and buyers. A close substitute product constrains the ability of firms in an industry to raise prices. . In general. A product's price elasticity is affected by substitute products . While the threat of substitutes typically impacts an industry through price competition. To the economist. Except in remote areas it is unlikely that cable TV could compete with free TV from an aerial without the greater diversity of entertainment that it affords the customer. satellite.II. The following tables outline some factors that determine supplier power.

any firm should be able to enter and exit a market. however. Barriers to entry arise from several sources: 1 : Government creates barriers.V. over time driving down profits for all firms in the industry. Banks competed through strategies that emphasized simple marketing devices such as awarding .Falling prices. Firms also may be reluctant to enter markets that are extremely uncertain. then profits always should be nominal. For example. These are barriers to entry. the markets that banks could enter were limited by state governments. most banks were local commercial and retail banking facilities. Although the principal role of the government in a market is to preserve competition through anti-trust actions. In reality. but regulates the industry. Threat of New Entrants and Entry Barriers It is not only incumbent rivals that pose a threat to firms in an industry. The franchise to a cable provider may be granted by competitive bidding. As a result. or the expectation that future prices will fall. government permits a monopoly. but once the franchise is awarded by a community a monopoly is created. the possibility that new firms may enter the industry also affects competition. In theory. The regulatory authority of the government in restricting competition is historically evident in the banking industry. we would expect some firms to exit the market thus restoring a market equilibrium. Barriers reduce the rate of entry of new firms. thus maintaining a level of profits for those already in the industry. so the federal government has enacted legislation to review and restrict prices. when industry profits increase. But if firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering the market. These are normal accommodations to market conditions. Illustrative of this kind of barrier to entry is the local cable company. When profits decrease. Barriers to entry are more than the normal equilibrium adjustments that markets typically make. barriers can be created or exploited to enhance a firm's competitive advantage. Industries such as utilities are considered natural monopolies because it has been more efficient to have one electric company provide power to a locality than to permit many electric companies to compete in a local market. Barriers to entry are unique industry characteristics that define the industry. Local governments were not effective in monitoring price gouging by cable operators. Until the 1970's. especially if entering involves expensive start-up costs. government also restricts competition through the granting of monopolies and through regulation. industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. deters rivals from entering a market. and if free entry and exit exists. From a strategic perspective. we would expect additional firms to enter the market to take advantage of the high profit levels. such entry-deterring pricingestablishes a barrier. To restrain utilities from exploiting this advantage.

2 : Patents and proprietary knowledge serve to restrict entry into an industry.toasters to new customers for opening a checking account. To operate at less than MES there must be a consideration that permits the firm to sell at a premium price . 4 : Organizational (Internal) Economies of Scale. Polaroid sued for patent infringement and won. In 1975. The second reason is that potential entrants are reluctant to make investments in highly specializedassets. For example. then we can determine the amount of market share necessary for low cost entry or cost parity with rivals. These assets are both large and industry specific. banks were permitted to cross state boundaries and expand their markets. For example. potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails. If sales for a long distance operator fail to reach 10% of the market. The greater the difference between industry MES and entry unit costs. Asset specificity is the extent to which the firm's assets can be utilized to produce a different product. When an industry requires highly specialized technology or plants and equipment. This is the point at which unit costs for production are at minimum . In the late 1970's. 3 : Asset specificity inhibits entry into an industry. preventing others from using the knowledge and thus creating a barrier to entry.. Kodak had much capital invested in its photographic equipment business and aggressively resisted efforts by Fuji to intrude in its market. when firms already hold specialized assets they fiercely resist efforts by others from taking their market share. The most cost efficient level of production is termed Minimum Efficient Scale (MES). in long distance communications roughly 10% of the market is necessary for MES. So industries with high MES deter entry of small. the firm is not competitive. New entrants can anticipate aggressive rivalry. Deregulation of banks intensified rivalry and created uncertainty for banks as they attempted to maintain market share. the most cost efficient level of production.such as product differentiation or local monopoly. The existence of such an economy of scale creates a barrier to entry. start-up businesses. Asset specificity provides a barrier to entry for two reasons: First. Kodak attempted to enter the instant camera market and sold a comparable camera. the greater the barrier to entry.i. . keeping Kodak out of the instant camera industry. the strategy of banks shifted from simple marketing tactics to mergers and geographic expansion as rivals attempted to expand markets. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the instant photography industry. If MES for firms in an industry is known.e. Ideas and knowledge that provide competitive advantages are treated as private property when patented. When banks were deregulated.