Strategic development and marketing planning
5.4 Tools for strategy development
5.4.1 Growth strategies
An organization that is looking at how best to grow and expand can think about this problem by considering whether to look at new products or new markets. The avail- able choices are represented in Ansoff’s Product/Market matrix. This suggests four possible options, which are outlined in Figure 5.2 – market penetration, market development, product development and diversification.
Market penetration
Market penetration means trying to sell more of the existing product in the existing market. To do this, an organization may try to persuade existing users to use more, or non-users to use, or to attract consumers from competitors. There are many examples of marketing tactics that would support a market penetration strategy.
Promotional offers such as ‘Air Miles’ are designed to encourage existing customers to make greater use of their credit cards. In Malaysia, Public Bank’s offer of a free mobile phone to new and existing customers for its ACE account (subject to a minimum balance) is another attempt at market penetration by encouraging new purchases from existing and new customers. Usually, a market penetration strategy is more appropriate when the market still has room to expand. In a mature market (where most of the likely buyers have already bought the product), market penetra- tion is more difficult because the organization will need to attract customers directly from competitors, and this is often more difficult than trying to attract new customers to the market. In the UK, the market for current accounts is largely satu- rated. One or two of the newer entrants, such as the Internet bank, Smile, have tried to follow a market penetration strategy by encouraging customers of other banks to switch their accounts, but most providers appear to be focusing their efforts on retaining customers and exploiting opportunities to cross-sell.
Products Existing
Existing
New
New
Product development Market penetration
Market development Diversification Markets
Figure 5.2Ansoff’s Product/Market matrix.
Market development
Market development involves the organization trying to identify new markets for its existing products. Most commonly, this strategy is associated with expansion into new markets geographically. For example, when American International Group (AIG) became the first foreign insurer to obtain a licence to operate in China, it was engaging in market development via geographical expansion. In the US, Morgan Stanley was originally established as an investment bank. The Glass-Steagall Act prevented an expansion into other domestic markets, and so Morgan Stanley grew primarily by overseas expansion. However, deregulation has mean that movement into new market segments is also an important approach to market development. For example, following its conversion from building society to bank, the UK-based Alliance and Leicester pursued a market development strategy by expanding its banking services into corporate markets.
Product development
Growth through product development means developing related products and mod- ifying existing products to appeal to current markets. The diversity of new mortgage products that have become available in the UK market provides an example of mod- ifying existing products to make them more attractive to current markets. The history of American Express is dominated by a series of examples of product development.
Initially, the company focused on money orders, travellers’ cheques and foreign exchange. In 1958, American Express issued its first charge card. Subsequently the company also launched credit cards, targeting both new customers and existing charge-card customers. A strategy of this nature relies on good service design, pack- aging and promotion, and often on company reputation to attract consumers to the new product. Case study 5.2 demonstrates the use of product development as a strat- egy by HBF Health Fund Inc. in Australia.
Case study 5.2 HBF Health Fund Inc.
The Hospital Benefits Fund of Western Australia Inc. was incorporated in 1941 to provide private health insurance services to the people of Western Australia.
Since then, HBF (as it has become known) has grown to be the largest private health insurance organization in Western Australia, with a 65 per cent share of the private health insurance market. Incorporated as a mutual organization, HBF has nearly a million members – which is almost half the total population of the state of Western Australia. The HBF brand is instantly recognized by over 99 per cent of the population, and the organization is renowned for its service to members, high ethical standards and sound financial management.
In the late 1980s and early 1990s the emerging global economy, where com- petitive advantages lie in ever-increasing scale, presented HBF with the chal- lenge of continuing to service the needs of its members whilst competing with national (and even international) competitors with, in some cases, operations many times the size of its own.
Case study 5.2 HBF Health Fund Inc.—cont’d
Without a member-base or any brand awareness in other parts of Australia, it was soon realized that attempting to replicate the scale-based strategies of the major competitors by expanding HBF’s operations nationally would expose the organization to an unacceptably high level of risk whilst simultaneously diverting attention away from servicing the needs of its members, all of whom lived in WA. Rather, a decision was taken to expand the organization’s opera- tions to cover complementary services for members, focusing on the key strate- gic advantages available to HBF, particularly the relationship it had with its members.
The first products identified were domestic general insurance products for home, contents and motor vehicle. However, the general insurance market in WA was already mature and dominated by a small number of well-established players. Also, with a history deeply rooted in private health insurance, the HBF brand had become synonymous with this in WA. Stretching the brand to cover domestic insurance products was therefore a significant challenge.
The approach taken by HBF was to differentiate its general insurance prod- ucts from those already in the market by emphasizing the attributes that had developed around the HBF brand as a provider of private health insurance.
HBF focused on its organizational strengths of service to members, mutuality and high ethical standards. Whilst the established players in the domestic insur- ance market clearly held a competitive advantage in the ‘manufacture’ of gen- eral insurance products, they were unable to match the depth of the relationship HBF had with its members.
Although growth in the general insurance portfolio was slow initially, HBF members who purchased domestic insurance products from the organization soon discovered that the qualities attributed to the health insurance service were also present in the general insurance service.
Despite slow growth initially, HBF was able to persevere with its product development initiative because, as a mutual organization, it is accountable to its members (customers) and not the capital market. Where the traditional capital markets would have demanded a financial return from the investment in a new line of business, HBF was able to take into account the strategic value being generated, represented by a growing acceptance of the new line of business by members.
By 2005, HBF’s general insurance business had gained a 12 per cent share of the market in Western Australia. It is generating annual returns on capital of approximately 25 per cent and is growing policy numbers by 15 per cent per annum. The investment in the general insurance business has produced an average annual return of over 20 per cent after tax.
HBF followed a similar strategy with the launch of a Retirement and Investment Advisory business in 2003. After only two years of operation, HBF Financial Services reached an operating break-even. It is projected to generate positive cash flows by the end of 2006.
Continued
Diversification
Diversification tends to be a more risky strategy, as it involves an organization moving into new products and new markets. Pure diversification may be relatively unusual in financial services, but the development of bancassurance represents a form of diversification as established banks move into the provision of insurance- related products. Similarly, the decisions by traditional banks to offer Islamic bank- ing products can also be seen as a form of diversification.