In many situations, a company may find reducing a part of its business strategically more useful than expanding it. The market-dilution strategy works out well when the overall benefit that a company derives from a market, either currently or potentially, is less than it could achieve elsewhere. Unsatisfactory profit performance, desire for concentration in fewer markets, lack of top management knowledge of the market, negative synergy vis-à-vis other markets that the company serves, and lack of resources to develop the market fully are other reasons for diluting market position.
There was a time when dilution of a market was considered an admission of failure. In the 1970s, however, dilution came to be accepted purely as a matter of strategy. Different ways of diluting a market include demarketing, pruning marginal markets, key account strategy, and harvesting strategy.
Demarketing, in a nutshell, is the reverse of marketing. This term became popular in the early 1970s when, as a result of the Arab oil embargo, the supply of a variety of products became short. Demarketing is the attempt to discourage customers in general or a certain class of customers in particular on either a temporary or permanent basis.
The demarketing strategy may be implemented in different ways. One way involves keeping close track of time requirements of different customers. Thus, if one customer needs the product in July and another in September, the former's order is filled first even though the latter confirmed the order first. A second way of demarketing is rationing supplies to different customers on an equitable basis. Shell Oil followed this route toward the end of 1978 when a gasoline shortage occurred. Each customer was sold a maximum of 10 gallons of gasoline at each filling. Third, recommending that customers use a substitute product temporarily is a form of demarketing. The fourth demarketing method is to divert a customer with an immediate need for a product to another customer to whom the product was recently supplied and who is unlikely to use it immediately. The company becomes an intermediary between two customers, providing supplies of the product to one customer whenever they are needed if present supplies are transferred to the customer in need.
The demarketing strategy is directed toward maintaining customer goodwill during times when customer demands cannot be adequately met. By helping customers in the different ways discussed above, the company hopes that the situation requiring demarketing is temporary and that, when conditions are normal again, customers will be inclined favorably toward the company. In the long run, the demarketing strategy should lead to increased profitability.
Pruning-of-Marginal Markets Strategy
A company must undertake a conscious search for those markets that do not provide rates of return comparable to those rates that could be attained if it were to shift its resources to other markets. These markets potentially become candidates for pruning. The pruning of marginal markets may result in a much higher growth rate for the company as a whole. Consider two markets, one providing 10 percent and the other 20 percent on original investments of $1 million. After 15 years, the first market will show an equity value of $4 million, as opposed to $16 million for the second one. Pruning can improve return on investment and growth rate by ridding the company of markets that are growing more slowly than the rest of its markets and by providing cash for investment in faster-growing, higher-return markets. Several years ago, A&P closed more than 100 stores in markets where its competitive position was weak. This pruning effort helped the company to fortify its position and to concentrate on markets where it felt strong.
Pruning also helps to restore balance. A company may be out of balance when it has too many diverse and difficult markets to serve. By pruning, the company may limit its operations to growth markets only. Because growth markets require heavy doses of investment (in the form of price reductions, promotion, and market development) and because the company may have limited resources, the pruning strategy can be very beneficial. Chrysler Corporation, for example, decided in 1978 to quit the European market so that it could use its limited resources to restore its position in the U.S. market. The pruning strategy is especially helpful in achieving market share and profitability.
In most industries, a few customers account for a major portion of volume. This characteristic may be extended to markets. If the breakdown of markets is properly done, a company may find that a few markets account for a very large share of its revenues. Strategically, these key markets may call for extra emphasis in terms of selling effort, after-sales service, product availability, and so on. As a matter of fact, the company may decide to limit its business to these key markets alone.
The key-markets strategy requires:
1. A strong focus tailored to environmental differences (i.e., don't try to do everything; rather, compete in carefully selected ways with the competitive emphasis differing according to the market environment).
2. A reputation for high quality (i.e., turn out high-quality products with superior performance potential and reliability).
3. Medium to low relative prices complementing high quality.
4. Low total cost to permit offering high-quality products at low prices and still show high profits.
The harvesting strategy refers to a situation where a company may decide to let its market share slide deliberately. The harvesting strategy may be pursued for a variety of reasons: to increase badly needed cash flow, to increase short-term earnings, or to avoid antitrust action. Usually, only companies with high market share can expect to harvest successfully.
If a product reaches the stage where continued support can no longer be justified, it may be desirable to realize a short-term gain by raising the price or by lowering quality and cutting advertising to turn an active brand into a passive one. In any event, the momentum of the product may continue for years with sales declining but with useful revenues still coming in.
Because they reduce a firm's strategic flexibility, exit barriers may prevent a company from implementing a harvesting strategy. Exit barriers refer to circumstances within an industry that discourage the exit of competitors whose performance in that particular business may be marginal. Three types of exit barriers are (a) a thin resale market for the business's assets, (b) intangible strategic barriers as deterrents to timely exit (e.g., value of distribution networks, customer goodwill for the other products of the company, or strong corporate identification with the product), and (c) management's reluctance to terminate a sick line. When exit barriers disappear or when their effect ceases to be of concern, a harvesting strategy may be pursued.
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