Marketing Strategies for Mature and Declining Markets

By Mullins, J.W., Walker, O.C.

Edited by Paul Ducham

MATURE MARKETS

Businesses that survive the shakeout face new challenges as market growth stagnates. As a market matures, total volume stabilizes; replacement purchases rather than first-time buyers account for the vast majority of that volume. A primary marketing objective of all competitors in mature markets, therefore, is simply to hold their existing customers—to sustain a meaningful competitive advantage that will help ensure the continued satisfaction and loyalty of those customers. Thus, a product’s financial success during the mature life-cycle stage depends heavily on the firm’s ability to achieve and sustain a lower delivered cost or some perceived product quality or customer-service superiority.

Some firms tend to passively defend mature products while using the bulk of the revenues produced by those items to develop and aggressively market new products with more growth potential. This can be shortsighted, however. All segments of a market and all brands in an industry do not necessarily reach maturity at the same time. Aging brands such as Adidas, Johnson’s baby shampoo, and Arm & Hammer baking soda experienced sales revivals in recent years because of creative Marketing Strategies. Thus, a share leader in a mature industry might build on a cost or product differentiation advantage and pursue a Marketing Strategy aimed at increasing volume by promoting new uses for an old product or by encouraging current customers to buy and use the product more often. Therefore, in this chapter we examine basic business strategies necessary for survival in mature markets and Marketing Strategies a firm might use to extend a brand’s sales and profits, including the strategies that have been so successful for Johnson Controls.

DECLINING MARKETS

Eventually, technological advances, changing customer demographics, tastes, or lifestyles, and development of substitutes result in declining demand for most product forms and brands. As a product starts to decline, managers face the critical question of whether to divest or liquidate the business. Unfortunately, firms sometimes support dying products too long at the expense of current profitability and the aggressive pursuit of future breadwinners.

An appropriate marketing strategy can, however, produce substantial sales and profits even in a declining market. If few exit barriers exist, an industry leader might attempt to increase market share via aggressive pricing or promotion policies aimed at driving out weaker competitors. Or it might try to consolidate the industry, as Johnson Controls has done in its automotive components businesses, by acquiring weaker brands and reducing overhead by eliminating both excess capacity and duplicate marketing programs. Alternatively, a firm might decide to harvest a mature product by maximizing cash flow and profit over the product’s remaining life. The last section of this chapter examines specific marketing strategies for gaining the greatest possible returns from products approaching the end of their life cycle.

Strategic Choices in Mature Markets

The maturity phase of an industry’s life cycle is often depicted as one of stability characterized by few changes in the market shares of leading competitors and steady prices. The industry leaders, because of their low per unit costs and little need to make any further investments, enjoy high profits and positive cash flows. These cash flows are harvested and diverted to other SBUs or products in the firm’s portfolio that promise greater future growth.

Unfortunately, this conventional scenario provides an overly simplistic description of the situation businesses face in most mature markets. For one thing, it is not always easy to tell when a market has reached maturity. Variations in brands, marketing programs, and customer groups can mean that different brands and Market Segments reach maturity at different times.

Further, as the maturity stage progresses, a variety of threats and opportunities can disrupt an industry’s stability. Shifts in customer needs or preferences, product substitutes, increased raw material costs, changes in government regulations, or factors such as the entry of low-cost producers or mergers and acquisitions can threaten individual competitors and even throw the entire industry into early decline. Consider, for instance, IBM’s experience in the personal computer business. The firm was one of the pioneers and held a commanding global market share in the early years of the PC industry. But then many new competitors around the world entered the market; some—like Compaq—with features that IBM did not offer, and others with me-too machines at much lower prices. Then came competitive innovations like Dell’s manufactured-to-order direct distribution system. All of these changes eroded IBM’s market share and profit margins, and eventually the company sold the business to China’s Lenovo and abandoned the PC market.

On the positive side, such changes can also open new growth opportunities in mature industries. Product improvements (such as the development of high-fiber nutritional cereals), advances in process technology (the creation of minimills for steel production), falling raw materials costs, increased prices for close substitutes, or environmental changes can all provide opportunities for a firm to dramatically increase its sales and profits. An entire industry can even experience a period of renewed growth.

Discontinuities during industry maturity suggest that it is dangerously shortsighted for a firm to simply milk its cash cows. Even industry followers can substantially improve volume, share, and profitability during industry maturity if they can adjust their marketing objectives and programs to fit the new opportunities that arise. Thus, success in mature markets requires two sets of strategic actions: (1) the development of a well-implemented business strategy to sustain a competitive advantage, customer satisfaction, and loyalty; and (2) flexible and creative marketing programs geared to pursue growth or profit opportunities as conditions change in specific product-markets.

MAINTAINING COMPETITIVE ADVANTAGE

Both analyzer and defender strategies may be appropriate for units with a leading, or at least a profitable, share of one or more major segments in a mature industry. Analyzers and defenders are both concerned with maintaining a strong share position in established product-markets. But analyzers also do some product and market development to avoid being leapfrogged by competitors with more advanced products or being left behind in new applications segments. On the other hand, defenders may initiate some product improvements or Line Extensions to protect and strengthen their position in existing markets, but they spend relatively little on new product R&D. Thus, an analyzer strategy is most appropriate for developed industries that are still experiencing some technological change and may have opportunities for continued growth, such as the computer and commercial aircraft industries. The defender strategy works best in industries where the basic technology is not very complex or is unlikely to change dramatically in the short run, as in the food industry.

Both analyzers and defenders can attempt to sustain a competitive advantage in established product-markets through differentiation of their product offering (either on the basis of superior quality or service) or by maintaining a low-cost position. Evidence suggests the ability to maintain either a strongly differentiated or a low-cost position continues to be a critical determinant of success throughout both the transition and the maturity stage. One study examined the competitive strategies pursued by the two leading firms (in terms of return on investment) in eight mature industries characterized by slow growth and intense competition. In each industry, the two leading firms offered either the lowest relative delivered cost or high relative product differentiation. Similarly, observations by Treacy and Wiersema found that market leaders tend to pursue one of three strategic disciplines. They either stress operational excellence, which typically translates into lower costs, or differentiate themselves through product leadership or customer intimacy and superior service.

Generally, it is difficult for a single business to pursue both low-cost and differentiation strategies at the same time. For instance, businesses taking the low-cost approach typically compete primarily by offering the lowest prices in the industry. Such prices allow little room for the firm to make the investments or cover the costs inherent in maintaining superior product quality, performance, or service over time.

Of course, improvements in quality—especially the reduction of product defects via improved production and procurement processes—can also reduce a product’s cost, as advocates of “Six Sigma” programs point out. There is some evidence, however, that efforts aimed at improving quality in order to increase the benefits customers associate with the product, and thereby produce increased sales and market share, generate greater financial returns for a firm than quality improvement efforts focused mainly on cost reduction. Therefore, in the following sections we discuss quality improvement efforts aimed at differentiating a firm’s offering and making it more appealing to customers separately from methods for reducing an offering’s cost.

It is important to keep in mind, however, that pursuit of a low-cost strategy does not mean that a business can ignore the delivery of desirable benefits to the customer. Similarly, customers will not pay an unlimited price premium for superior quality or service, no matter how superior it is. In both consumer and commercial markets customers seek good value for the money; either a solid, no-frills product or service at an outstanding price or an offering whose higher price is justified by the superior benefits it delivers on one or more dimensions. Thus, even low-cost producers should continually seek ways to improve the quality and performance of their offerings within the financial constraints of their competitive strategy. And even differentiated defenders should continually work to improve efficiency without sacrificing product quality or performance. This point is clearly illustrated in the diagram of the customer value management process in Exhibit 16.1 , which shows that actions to improve customers’ perceptions of quality (whether of goods or service) and to reduce costs both impact customer value. The critical strategic questions facing the marketing manager, then, are, How can a business continue to differentiate its offerings and justify a premium price as its market matures and becomes more competitive? and, How can businesses, particularly those pursuing low-cost strategies, continue to reduce their costs and improve their efficiency as their markets mature?

Exhibit 16.1

METHODS OF DIFFERENTIATION

At the most basic level, a business can attempt to differentiate its offering from competitors’ by offering either superior product quality, superior service, or both. The problem is that quality and service may be defined in a variety of different ways by customers.

Dimensions of Product Quality  To maintain a competitive advantage in product quality, a firm must understand what dimensions customers perceive to underlie differences across products within a given category. One authority has identified eight such dimensions of product quality. These are summarized in Exhibit 16.2 and discussed below.

European manufacturers of prestige automobiles, such as Mercedes-Benz and Porsche, have emphasized the first dimension of product quality— functional performance. These automakers have designed cars that provide excellent performance on such attributes as handling, acceleration, and comfort. Volvo, on the other hand, has emphasized and aggressively promoted a different quality dimension— durability (and the related attribute of safety). A third quality dimension, conformance to specifications, or the absence of defects, has been a major focus of the Japanese automakers. Until recent years, American carmakers relied heavily on broad product lines and a wide variety of features, both standard and optional, to offset their shortcomings on some of the other quality dimensions.

The reliability quality dimension can refer to the consistency of performance from purchase to purchase or to a product’s uptime, the percentage of time that it can perform satisfactorily over its life. Tandem Computers has maintained a competitive advantage based on reliability by designing mainframe computers with several processors that work in tandem, so that if one fails, the only impact is the slowing of low-priority tasks. IBM had difficulty matching Tandem’s reliability because its operating system was not easily adapted to the multiple-processor concept. Consequently, Tandem has maintained a strong position in market segments consisting of large-scale computer users, such as financial institutions and large retailers, for whom system downtime is particularly undesirable.

The quality dimension of serviceability refers to a customer’s ability to obtain prompt and competent service when the product does break down. For example, Caterpillar has long differentiated itself with a parts and service organization dedicated to providing “24-hour parts service anywhere in the world.”

Many of these quality dimensions can be difficult for customers to evaluate, particularly for consumer products. As a result, consumers often generalize from quality dimensions that are more visual or qualitative. Thus, the fit and finish dimension can help convince consumers that a product is of high quality. They tend to perceive attractive and well- designed products as generally high in quality, as witnessed by the success of Samsung’s consumer electronics products. Similarly, the quality reputation of the brand name, and the promotional activities that sustain that reputation, can strongly influence consumers’ perceptions of a product’s quality. A brand’s quality reputation together with psychological factors such as name recognition and loyalty substantially determine a brand’s equity—the perceived value customers associate with a particular brand name and its logo or symbol. To successfully pursue a differentiation strategy based on quality, then, a business must understand what dimensions or cues its potential customers use to judge quality, and it should pay particular attention to some of the less-concrete but more visible and sym- bolic attributes of the product.

Dimensions of Service Quality  Customers also judge the quality of the service they receive on multiple dimensions. A number of such dimensions of perceived service quality have been identified by a series of studies conducted across diverse industries such as retail banking and appliance repair, and five of those dimensions are listed and briefly defined in Exhibit 16.3 .

The quality dimensions listed in Exhibit 16.3 apply specifically to service businesses, but most of them are also relevant for judging the service component of a product offering. This pertains to both the objective performance dimensions of the service delivery system, such as its reliability and responsiveness, as well as to elements of the performance of service personnel, such as their empathy and level of assurance.

The results of a number of surveys suggest that customers perceive all five dimensions of service quality to be very important regardless of the kind of service being evaluated. As Exhibit 16.4 indicates, customers of four different kinds of services gave reliability, responsiveness, assurance, and empathy mean importance ratings of more than 9 on a 10-point rating scale. And though the mean ratings for tangibles were somewhat lower in comparison, they still fell toward the upper end of the scale, ranging from 7.14 to 8.56.

The same respondents were also asked which of the five dimensions they would choose as being the most critical in their assessment of service quality. Their responses, which are shown in Exhibit 16.4 , suggest that reliability is the most important aspect of service quality to the greatest number of customers.

Exhibit 16.2  Dimensions of Product Quality

● Performance   How well does the washing machine wash clothes?

● Durability                                           How long will the lawn mower last?

● Conformance with specifications      What is the incidence of product defects?

● Features                                            Does an airline flight offer a movie and dinner?

● Reliability                                         Will each visit to a restaurant result in consistent quality? What percentage of the time will a product perform satisfactorily?

● Serviceability                                    Is the product easy to service? Is the service system efficient, competent, and convenient?

● Fit and finish                                    Does the product look and feel like a quality product?

● Brand name                                      Is this a name that customers associate with quality? What is the brand’s image?

Exhibit 16.3  Dimensions of Service Quality

● Tangibles              Appearance of physical facilities, equipment, personnel, and communications materials.

● Reliability              Ability to perform the promised service dependably and accurately.

● Responsiveness    Willingness to help customers and provide prompt service.

● Assurance             Knowledge and courtesy of employees and their ability to convey trust and confidence.

● Empathy               Caring, individualized attention the firm provides its customers.

Exhibit 16.4

LOW-COST POSITION

Moving down the experience curve is the most commonly discussed method of achieving and sustaining a low-cost position in an industry. But a firm does not necessarily need a large relative market share to implement a low-cost strategy. For instance, Johnson Controls relies on close alliances with customers, as well as economies of scale, to hold down its inventory and distribution costs. And Michael Dell, as a small follower in the personal computer industry, managed to achieve costs below those of much larger competitors by developing logistical alliances with suppliers and an innovative, Internet-based direct distribution channel.

Some other means for obtaining a sustainable cost advantage include producing a no-frills product, creating an innovative product design, finding cheaper raw materials, automating or outsourcing production, developing low-cost distribution channels, and reducing overhead.

A No-Frills Product  A direct approach to obtaining a low-cost position involves simply removing all frills and extras from the basic product or service. Thus, Ryanair’s flights from secondary airports on the outskirts of major cities, warehouse furniture stores, legal services clinics, and grocery stores selling canned goods out of crates all offer lower costs and prices than their competitors. This lower production cost is often sustainable because established differentiated competitors find it difficult to stop offering features and services their customers have come to expect. However, those established firms may lower their own prices in the short run—even to the point of suffering losses—in an attempt to drive out a no-frills competitor that poses a serious threat. Thus, a firm considering a no-frills strategy needs the resources to withstand a possible price war.

Innovative Product Design  A simplified product design and standardized component parts can also lead to cost advantages. In the office copier industry, for instance, Japanese firms overcame substantial entry barriers by designing extremely simple copiers, with a fraction of the number of parts in the design used by market-leading Xerox.

Cheaper Raw Materials  A firm with the foresight to acquire or the creativity to find a way to use relatively cheap raw materials can also gain a sustainable cost advantage. For example, Fort Howard Paper achieved an advantage by being the first major papermaker to rely exclusively on recycled pulp. While the finished product was not so high in quality as paper from virgin wood, Fort Howard’s lower cost gave it a competitive edge in the price-sensitive commercial market for toilet paper and other such products used in hotels, restaurants, and office buildings.

Innovative Production Processes  Although low-cost defender businesses typically spend little on product R&D, they often continue to devote substantial sums to process R&D. Innovations in the production process, including the development of automated or computer-controlled processes, can help them sustain cost advantages over competitors.

In some labor-intensive industries, a business can achieve a cost advantage, at least in the short term, by gaining access to inexpensive labor. This is usually achieved by moving all or part of the production process to countries with low wage rates, such as China or Mexico. Unfortunately, because such moves are relatively easy to emulate, this kind of cost advantage may not be sustainable. Also, as developing nations become increasingly successful economically, wages and other operating costs tend to rise, thereby reducing the cost advantages of outsourcing to those countries.

Low-Cost Distribution  When distribution accounts for a relatively high proportion of a product’s total delivered cost, a firm might gain a substantial advantage by developing lower-cost alternative channels. Typically, this involves eliminating, or shifting to the customer, some of the functions performed by traditional channels in return for a lower price. In the consumer banking industry, for example, automated teller machines helped reduce labor costs and investment in bricks-and-mortar branch banks. But they also reduced the amount of personalized service banks provided to their customers, which may help explain why average customer satisfaction with banks fell by more than 8 percent from the mid- 1990s to the early years of this century.

And that, in turn, helps to explain why Barclays Bank, Bank of America, and many other European and North American banks are developing and analyzing Customer Data- bases to identify the needs and preferences of different market segments, redesigning branches to make them more welcoming, and adding personal services—everything from free museum tickets to customer lounges and free coffee—to strengthen customer satisfaction and loyalty.

Reductions in Overhead  Successfully sustaining a low-cost strategy requires that the firm pare and control its major overhead costs as quickly as possible as its industry matures. With increasing globalization in recent years, many companies have learned this lesson the hard way as the high costs of old plants, labor, outmoded administrative processes, and large inventories have left them vulnerable to more efficient foreign competitors and to corporate raiders.

MAINTAINING MARKET SHARE

Since markets can remain in the maturity stage for decades, milking or harvesting mature product-markets by maximizing short-run profits makes little sense. Pursuing such an objective typically involves substantial cuts in marketing and R&D expenses, which can lead to premature losses of volume and market share and lower profits in the longer term. The business should strive during the early years of market maturity to maximize the flow of profits over the remaining life of the product-market. Thus, the most critical marketing objective is to maintain and protect the business’s market share. In a mature market where few new customers buy the product for the first time, the business must continue to win its share of repeat purchases from existing customers.

Many strategies continue to be relevant for holding on to customers as markets mature, particularly for those firms that survived the shakeout period with a relatively strong share position. The most obvious strategy for such share leaders is simply to continue strengthening their position through a fortress defense. Recall that such a strategy involves two sets of marketing actions: those aimed at improving customer satisfaction and loyalty, and those intended to encourage and simplify repeat purchasing. Actions like those discussed earlier for improving the quality of a firm’s offering and for reducing costs suggest ways to increase customer satisfaction and loyalty. Similarly, improvements to service quality, such as just-in-time delivery arrangements or computerized reordering systems, can help encourage repeat purchases.

Since markets often become more fragmented as they grow and mature, share leaders may also have to expand their product lines, or add one or more flanker brands, to protect their position against competitive inroads. Thus, Johnson Controls has strengthened its position in the commercial facilities management arena by expanding its array of services through a combination of acquisitions and continued internal development. Many of those new services were developed in response to changing customer desires or emerging environmental trends, such as the growing demand for “greener” commercial buildings with more sustainable energy requirements and a smaller impact on the Natural Environment.

Small-share competitors can also earn substantial profits in a mature market. To do so, however, it is often wise for them to focus on strategies that avoid prolonged direct confrontations with larger share leaders. A niche strategy can be particularly effective when the target segment is too small to appeal to larger competitors or when the smaller firm can establish a strong differential advantage or brand preference in the segment. For instance, with fewer than 50 hotels worldwide, the Four Seasons chain is a small player in the lodging industry. But by focusing on the high end of the business travel market, the chain has grown and prospered. The chain’s hotels differentiate themselves by offering a wide range of amenities, such as free overnight shoeshines, that are important to business travelers. Thus, while they charge relatively high prices, they are also seen as delivering good value.

Ethical Perspective 16.1  Pros and Cons of Varying Service Levels According to Customers’ Profitability

From a purely economic viewpoint, tailoring different levels of service and benefits to different customer segments depending on their profitability makes sense, at least in the short run. In an era when labor costs are increasing while many markets, especially mature ones, are getting more competitive, many firms argue they cannot afford to provide extensive hands-on service to everyone. Companies also point out that they’re often delivering a wider range of products and services than ever before, including more ways for customers to handle transactions. Thanks to the Internet, for example, consumers have better tools to conveniently serve themselves. And finally, service segmentation may actually produce some positive benefits for customers— more personalized service for the best customers and, in many cases, lower overall costs and prices for everyone else. For instance, Fidelity Investments now gets about 550,000 Web site visits each day and more than 700,000 daily phone calls, three-quarters of which go to automated systems that cost the company less than a dollar each, including research and development costs. The rest are handled by human operators, at a cost of about $13 per call.

From an ethical standpoint, however, many people question the inherent fairness and potential invasion of privacy involved in using a wealth of personal information about Individual Consumers as a basis for withholding services or benefits from some of them, especially when such practices are largely invisible to the consumer. You don’t know when you’re being shuttled to a different telephone queue or sales promotion. You don’t know what benefits you’re missing or what additional fees you’re being charged. Some argue that this lack of transparency is unfair because it deprives consumers of the opportunity to take actions, such as concentrating their purchases with a single supplier, switching companies, or paying a service fee that would enable them to acquire the additional services and benefits they are currently denied.

From a strategic view, there are also some potential dangers in cutting services and benefits to customers who have not generated profits in the past. For one thing, past behavior is not necessarily an accurate indicator of a customer’s future lifetime value. The life situations and spending habits of some customer groups—college students, for instance—can change dramatically over time. In addition, looking only at a customer’s purchases may overlook some indirect ways that the customer affects the firm’s revenues, such as positive word-of-mouth recommendations and referrals to other potential buyers. And some customers may not be spending much with a company precisely because of the lousy service they have received as a result of not spending very much with that company. Instead of simply writing off low-volume customers it may make more strategic sense to first attempt to convert them into high-volume customers by targeting them for additional promotions, by trying to sell complementary goods and services, or by instituting loyalty programs (e.g., the airlines’ frequent-flier programs).

Finally, by debasing the satisfaction and loyalty of low-volume customers, firms risk losing those customers to competitors. In a mature industry, particularly one with substantial economies of scale, such a loss of market share can increase unit costs and reduce the profitability of those high-volume customers that do remain loyal. And, a creative competitor may find ways to make other firms’ cast-off customers very profitable after all.

EXTENDING VOLUME GROWTH

Market maturity is defined by a flattening of the growth rate. In some instances growth slows for structural reasons, such as the emergence of substitute products or a shift in customer preferences. Marketers can do little to revitalize the market under such conditions. But in some cases a market only appears to be mature because of the limitations of current marketing programs, such as target segments that are too narrowly defined or limited product offerings. Here, more innovative or aggressive marketing strategies might successfully extend the market’s life cycle into a period of renewed growth. Thus, stimulating additional volume growth can be an important secondary objective under such circumstances, particularly for industry share leaders because they often can capture a relatively large share of any additional volume generated.

A firm might pursue several different marketing strategies—either singly or in combination—to squeeze additional volume from a mature market. These include an increased penetration strategy, an extended use strategy, and a Market Expansion strategy. Exhibit 16.6 summarizes the Environmental Situation where each of these strategies is most appropriate and the objectives each is best suited for accomplishing. Exhibit 16.7 then outlines specific marketing actions a firm might employ to implement each of the strategies, as discussed in more detail in the following paragraphs.

Increased Penetration Strategy  The total sales volume produced by a target segment of customers is a function of (1) the number of potential customers in the segment; (2) the product’s penetration of that segment, that is, the proportion of potential customers who actually use the product; and (3) the average frequency with which customers consume the product and make another purchase. Where usage frequency is quite high among current customers but only a relatively small portion of all potential users actually buy the product, a firm might aim at increasing market penetration. It is an appropriate strategy for an industry’s share leader because such firms can more likely gain and retain a substantial share of new customers than smaller firms with less-well-known brands.

The secret to a successful increased-penetration strategy lies in discovering why non- users are uninterested in the product. Very often the product does not offer sufficient value from the potential customer’s view to justify the effort or expense involved in buying and using it. One obvious solution to such a problem is to enhance the product’s value to potential customers by adding features or benefits, usually via line extensions.

Another way to add value to a product is to develop and sell integrated systems that help improve the basic product’s performance or ease of use. For instance, instead of simply selling control mechanisms for heating and cooling systems, Johnson Controls offers integrated facilities management programs designed to lower the total costs of operating a commercial building.

A firm may also enhance a product’s value by offering services that improve its performance or ease of use for the potential customer. Since it is unlikely that people who do not know how to knit will ever buy yarn or knitting needles, for example, most yarn shops offer free knitting lessons.

Product modifications or line extensions will not, however, attract nonusers unless the enhanced benefits are effectively promoted. For industrial goods, this may mean redirecting some sales efforts toward nonusers. The firm may offer additional incentives for new account sales or assign specific salespeople to call on targeted nonusers and convert them into new customers. For consumer goods, some combination of advertising to stimulate primary demand in the target segment and sales promotions to encourage trial, such as free samples or tie-in promotions with complementary products that nonusers currently buy, can be effective.

Finally, some potential customers may be having trouble finding the product due to limited distribution, or the product’s benefits may simply be too modest to justify much purchasing effort. In such cases, expanding distribution or developing more convenient and accessible channels may help expand market penetration. For example, few travelers are so leery of flying that they would go through the effort of calling an insurance agent to buy an accident policy for a single flight. But the sales of such policies are greatly increased by making them conveniently available as an optional purchase through the credit-card companies travelers use to pay for their flights.

Extended Use Strategy  Some years ago, the manager of General Foods’ Cool Whip frozen dessert topping discovered through marketing research that nearly three-fourths of all U.S. households used the product, but the average consumer used it only four times per year and served it on only 7 percent of all toppable desserts. In situations of good market penetration but low frequency of use, an extended use strategy may increase volume. This was particularly true in the Cool Whip case; the relatively large and homogeneous target market consisted for the most part of a single mass-market segment. Also, General Foods held nearly a two-thirds share of the frozen topping market, and it had the marketing resources and competencies to capture most of the additional volume that an extended use strategy might generate.

One effective approach for stimulating increased frequency of use is to move product inventories closer to the point of use. This approach works particularly well with low- involvement consumer goods. Marketers know that most consumers are unlikely to expend any additional time or effort to obtain such products when they are ready to use them. If there is no Cool Whip in the refrigerator when the consumer is preparing dessert, for instance, he or she is unlikely to run to the store immediately and will probably serve the dessert without topping.

One obvious way to move inventory closer to the point of consumption is to offer larger package sizes. The more customers buy at one time, the less likely they are to be out of stock when a usage opportunity arises. This approach can backfire, though, for a perishable product or one that consumers perceive to be an impulse indulgence. Thus, most superpremium ice creams, such as Häagen-Dazs, are sold in small pint containers; most consumers want to avoid the temptation of having large quantities of such a high-calorie indulgence too readily available.

The design of a package can also help increase use frequency by making the product more convenient or easy to use. Examples include single-serving packages of pudding or salad to pack in lunches, packages of paper cups that include a convenient dispenser, and frozen-food packages that can go directly into a microwave oven.

Various sales promotion programs also help move inventories of a product closer to the point of use by encouraging larger volume purchases. Marketers commonly offer quantity discounts for this purpose in selling industrial goods. For consumer products, multi- item discounts or two-for-one deals serve the same purpose. Promotional programs also encourage greater frequency of use and increase customer loyalty in many service industries. Consider, for instance, the frequent-flier programs offered by major airlines or the “rewards” programs offered by credit-card providers.

Sometimes the product’s characteristics inhibit customers from using it more frequently. If marketers can change those characteristics, such as difficulty of preparation or high calories, a new line extension might encourage customers to use more of the product or to use it more often. Microwave waffles and low-calorie salad dressings are examples of such line extensions. For industrial goods, however, firms may have to develop new tech- nology to overcome a product’s limitations for some applications. For instance, Johnson Controls recently acquired Prince Automotive to gain the expertise necessary to develop instrument panels and consoles incorporating the sophisticated electronics desired by top- end manufacturers such as BMW and Mercedes-Benz.

Finally, advertising can sometimes effectively increase use frequency by simply reminding customers to use the product more often. For instance, General Foods conducted a reminder campaign for Jell-O pudding that featured Bill Cosby asking, “When was the last time you served pudding, Mom?”

Another approach for extending use among current customers involves finding and promoting new functional uses for the product. Jell-O gelatin is a classic example, having generated substantial new sales volume over the years by promoting the use of Jell-O as an ingredient in salads, pie fillings, and other dishes.

Firms promote new ways to use a product through a variety of methods. For industrial products, firms send technical advisories about new applications to the salesforce to present to their customers during regular sales calls. For consumer products, new use suggestions or recipes may be included on the package, in an advertising campaign, or on the firm’s Web site. Sales promotions, such as including cents-off coupons in ads featuring a new recipe, encourage customers to try a new application.

In some cases, slightly modified line extensions might encourage customers to use more of the product or use it in different ways. For example, Australian, French, Chilean, and even a few large U.S. winemakers have attempted to attract more young consumers and broaden the variety of occasions at which they drink wine rather than beer or other beverages. They have pursued these objectives by blending fruitier, less tannic wines, designing whimsical labels and logos—such as the Yellow Tail wallaby from Australia and Fat Bastard from France—and lowering prices to between $3 and $9 a bottle. Consequently, U.S. consumers drank a record 278 million cases of wine in 2005, and consumption has been grow- ing at a brisk 3 percent annual rate.

Market Expansion Strategy  In a mature industry with a fragmented and heterogeneous market where some segments are less well developed than others, a market expan- sion strategy may generate substantial additional volume growth. Such a strategy aims at gaining new customers by targeting new or underdeveloped geographic markets (either regional or foreign) or new customer segments. Once again, share leaders tend to be best suited for implementing this strategy. But even smaller competitors can employ such a strategy successfully if they focus on relatively small or specialized market niches. Pursuing market expansion by strengthening a firm’s position in new or underdeveloped domestic geographic markets can lead to experience-curve benefits and operating synergies. The firm can rely on largely the same expertise and technology, and perhaps even the same production and distribution facilities, it has already developed. Unfortunately, domestic geographic expansion is often not viable in a mature industry because the share leaders usually have attained national market coverage. Smaller regional competitors, on the other hand, might consider domestic geographic expansion a means for improving their volume and share position. However, such a move risks retaliation from the large national brands as well as from entrenched regional competitors in the prospective new territory.

To get around the retaliation problem, a regional producer might try to expand through the acquisition of small producers in other regions. This can be a viable option when (1) the low profitability of some regional producers enables the acquiring firm to buy their assets for less than the replacement cost of the capacity involved and (2) synergies gained by combining regional operations and the infusion of resources from the acquiring firm can improve the effectiveness and profitability of the acquired producers. For example, Heileman Brewing Company grew from the 31st largest U.S. brewer of beer in the mid- 1960s to the 4th largest by the mid-1980s through the acquisition of nearly 30 regional brands. Heileman took control of strong regional brands such as Old Style, Carling, and Rainier, but because it had no dominant national brand it avoided antitrust opposition to its acquisition program. After acquisition, Heileman maintained the identity of each brand, increased its advertising budget, and expanded its distribution by incorporating it into the firm’s distribution system in other regions. As a result, Heileman achieved a strong earn- ings record for two decades, until the firm was itself acquired by an Australian brewer.

In a different approach to domestic market expansion, the firm identifies and develops entirely new customer or application segments. Sometimes the firm can effectively reach new customer segments by simply expanding the distribution system without changing the product’s characteristics or the other marketing-mix elements. A sporting goods manufacturer that sells its products to consumers through retail stores, for instance, might expand into the commercial market consisting of schools and amateur and professional sports teams by establishing a direct salesforce. In most instances, though, developing new market segments requires modifying the product to make it more suitable for the application or to provide more of the benefits desired by customers in the new segment.

One final possibility for domestic market expansion is to produce private-label brands for large retailers. Firms whose own brands hold relatively weak positions and who have excess production capacity find this a particularly attractive option. Private labeling allows such firms to gain access to established customer segments without making substantial marketing expenditures, thus increasing the firm’s volume and lowering its per unit costs. However, since private labels typically compete with low prices and their sponsors usually have strong bargaining power, producing private labels is often not a very profitable option unless a manufacturer already has a relatively low-cost position in the industry. It can also be a risky strategy, particularly for the smaller firm, because reliance on one or a few large private-label customers can result in drastic volume reductions and unit-cost increases should those customers decide to switch suppliers. 

Global Market Expansion—Sequential Strategies  For firms with leading positions in mature domestic markets, less-developed markets in foreign countries often present the most viable opportunities for geographic expansion. Firms can enter foreign markets in a variety of ways, from simply relying on import agents to developing joint ventures to establishing wholly owned subsidiaries—as Johnson Controls has done by acquiring automotive seat and battery manufacturers in Europe.

Regardless of which mode of entry a firm chooses, it can follow a number of different routes when pursuing global expansion. 30 By route we mean the sequence or order in which the firm enters global markets. Japanese companies provide illustrations of different global expansion paths. The most common expansion route involves moving from Japan to developing countries to developed countries. They used this path, for example, with automobiles (Toyota); consumer electronics (National); watches (Seiko); cameras (Minolta); and home appliances, steel, and petrochemicals. This routing reduced manufacturing costs and enabled them to gain marketing experience. In penetrating the U.S. market, the Japanese obtained further economies of scale and gained recognition for their products, which made penetration of European markets easier.

A second type of expansion path has been used primarily for high-tech products such as computers and semiconductors. For the Japanese it consists of first securing their home market and then targeting developed countries. Japan largely ignored developing countries in this strategy because of their small demand for high-tech products. When demand increased to a point where developing countries became “interesting,” Japanese producers quickly entered and established strong market positions using price cuts of up to 50 percent.

A home market—developed markets—developing markets sequence is also usually appropriate for discretionary goods such as soft drinks, convenience foods, or cosmetics. Coca-Cola, for instance, believes that as disposable incomes and discretionary expenditures grow in the countries of South America, Asia, and Africa those markets will drive much of the company’s future growth. Similarly, firms such as the French cosmetics giant L’Oreal have positioned a number of different “world brands”—including Ralph Lauren perfumes, L’Oreal hair products, and Maybelline and Helena Rubinstein cosmetics—to convey the allure of different cultures to developing markets around the world.

Strategies for Declining Markets

Most products eventually enter a decline phase in their life cycles. As sales decline, excess capacity once again develops. As the remaining competitors fight to hold volume in the face of falling sales, industry profits erode. Consequently, conventional wisdom suggests that firms should either divest declining products quickly or harvest them to maximize short- term profits. Not all markets decline in the same way or at the same speed, however; nor do all firms have the same competitive strengths and weaknesses within those markets. Therefore, as in most other situations, the relative attractiveness of the declining product-market and the business’s competitive position within it should dictate the appropriate strategy.

DECLINING MARKETS

Although U.S. high school enrollment declined by about 2 million students from 1976 through the early 1990s, Jostens, Inc., the leading manufacturer of class rings and other school merchandise, achieved annual increases in revenues and profits every year during that period. One reason for the firm’s success was that it saw the market decline coming and prepared for it by improving the efficiency of its operations and developing marketing programs that were effective at persuading a larger proportion of students to buy class rings.

Jostens’ experience shows that some declining product-markets can offer attractive opportunities well into the future, at least for one or a few strong competitors. In other product-markets, particularly those where decline is the result of customers switching to a new technology (e.g., students buying personal computers instead of portable typewriters), the potential for continued profits during the decline stage is more bleak.

Three sets of factors help determine the strategic attractiveness of declining product- markets: conditions of demand, including the rate and certainty of future declines in volume; exit barriers, or the ease with which weaker competitors can leave the market; and factors affecting the intensity of future competitive rivalry within the market. The impact of these variables on the attractiveness of declining market environments is summarized in Exhibit 16.8 and discussed below.

Conditions of Demand  Demand in a product-market declines for a number of reasons. Technological advances produce substitute products (such as electronic calculators for slide rules), often with higher quality or lower cost. Demographic shifts lead to a shrinking target market (baby foods). Customers’ needs, tastes, or lifestyles change (the falling consumption of beef). Finally, the cost of inputs or complementary products rises and shrinks demand (the effects of rising gasoline prices on sales of recreational vehicles).

The cause of a decline in demand can affect both the rate and the predictability of that decline. A fall in sales due to a demographic shift, for instance, is likely to be gradual, whereas the switch to a technically superior substitute can be abrupt. Similarly, the fall in demand as customers switch to a better substitute is predictable, while a decline in sales due to a change in tastes is not.

As Exhibit 16.8 indicates, both the rate and certainty of sales decline are demand characteristics that affect a market’s attractiveness. A slow and gradual decline allows an orderly withdrawal of weaker competitors. Overcapacity does not become excessive and lead to predatory competitive behavior, and the competitors who remain are more likely to make profits than in a quick or erratic decline. Also, when most industry managers believe market decline is predictable and certain, reduction of capacity is more likely to be orderly than when they feel substantial uncertainty about whether demand might level off or even become revitalized.

Not all segments of a market decline at the same time or at the same rate. The number and size of enduring niches or pockets of demand and the customer purchase behavior within them also influence the continuing attractiveness of the market. When the demand pockets are large or numerous and the customers in those niches are brand loyal and relatively insensitive to price, competitors with large shares and differentiated products can continue to make substantial profits. For example, even though the market for cigars shrank for years, there continued to be a sizable number of smokers who bought premium- quality cigars. Those firms with well-established positions at the premium end of the cigar industry have continued to earn above-average returns.

Exit Barriers  The higher the exit barriers, the less hospitable a product-market will be during the decline phase of its life cycle. When weaker competitors find it hard to leave a product-market as demand falls, excess capacity develops and firms engage in aggressive pricing or Promotional Effort to try to prop up their volume and hold down unit costs. Thus, exit barriers lead to competitive volatility.

Once again, Exhibit 16.8 indicates that a variety of factors influence the ease with which businesses can exit an industry. One critical consideration involves the amount of highly specialized assets. Assets unique to a given business are difficult to divest because of their low liquidation value. The only potential buyers for such assets are other firms who would use them for a similar purpose, which is unlikely in a declining industry. Thus, the firm may have little choice but to remain in the business or to sell the assets for their scrap value. This option is particularly unattractive when the assets are relatively new and not fully depreciated.

Another major exit barrier occurs when the assets or resources of the declining business intertwine with the firm’s other business units, either through shared facilities and pro- grams or through vertical integration. Exit from the declining business might shut down shared production facilities, lower salesforce commissions, damage customer relations, and increase unit costs in the firm’s other businesses to a point that damages their profit- ability. Emotional factors can also act as exit barriers. Managers often feel reluctant to admit failure by divesting a business even though it no longer produces acceptable returns. This is especially true when the business played an important role in the firm’s history and it houses a large number of senior managers.

Intensity of Future Competitive Rivalry  Even when substantial pockets of continuing demand remain within a declining business, it may not be wise for a firm to pursue them in the face of future intense competitive rivalry. In addition to exit barriers, other factors also affect the ability of the remaining firms to avoid intense price competition and maintain reasonable margins: size and bargaining power of the customers who continue to buy the product; customers’ ability to switch to substitute products or to alternative suppliers; and any potential diseconomies of scale involved in capturing an increased share of the remaining volume.

Exhibit 16.8

DIVESTMENT

When the market environment in a declining industry is unattractive or a business has a relatively weak competitive position, the firm may recover more of its investment by selling the business in the early stages of decline rather than later. The earlier the business is sold, the more uncertain potential buyers are likely to be about the future direction of demand in the industry and thus the more likely that a willing buyer can be found. Thus, Raytheon sold its vacuum-tube business in the early 1960s even though transistors had just begun replacing tubes in radios and TV sets and there was still a strong replacement demand for tubes. By moving early, the firm achieved a much higher liquidation value than companies that tried to unload their tube-making facilities in the 70s when the industry was clearly in its twilight years.

Of course, the firm that divests early runs the risk that its forecast of the industry’s future may be wrong. Also, quick divestment may not be possible if the firm faces high exit barriers, such as interdependencies across business units or customer expectations of continued Product Availability. By planning early for departure, however, the firm may be able to reduce some of those barriers before the liquidation is necessary.