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