Tramor, a manufacturer of sweets and chocolates in the country of Bayland, hired a group of consultants (BTM) to carry out a strategic review of the company. Tramor requested that BTM should focus on suggesting alternative strategies for achieving growth. Following the review, Tramor plans to make its own decision about which strategy to follow. The board of directors explained to BTM why they were commissioning this review, with the reasons summarised as follows:
1. The company has failed to increase its market share in Bayland over the last four years, with its share fluctuating by less than 1% each year.
2. Profits have been falling gradually, as it has been necessary to keep prices fairly constant to maintain demand. However, both direct and indirect costs have been increasing.
3. The shareholders are getting restless as dividends have fallen and the share price is gradually declining. They want to see both dividends and share price improved by significant growth in the future.
As part of the review, BTM carried out a SWOT analysis, with the key findings being shown in Table 1.
Table 1 – SWOT analysis for Tramor
In addition to producing a SWOT matrix, BTM also drew up its version of Ansoff’s growth matrix, displaying the potential growth strategies it is suggesting for Tramor. The strategies presented are shown in Table 2.
Critically evaluate the four strategies (A, B, C and D) for achieving growth, given the findings of the SWOT analysis. Your answer should include a justification for BTM’s recommendation of adopting strategy C.
The strategic options can be defined by their position in the Ansoff Matrix.
Existing product/existing market
This is a market penetration/consolidation strategy whereby Tramor would try to increase its market share in the existing market. There are some strengths in favour of this strategy. Tramor currently has the highest market share and owns a number of product patents which prevents competitors from copying their products. This strategy would also avoid the weakness of limited product design capabilities, with a team nearing retirement.
An increase in demand may put pressures on the inflexible production system. However, there is scope for changing to a leaner approach, given the increased accessibility of these methods.
Tramor may consider its current products to be cash cows, as it has a high market share, in a shrinking market. Cash cows can be consolidated or grown, by taking over from smaller competitors aiming to leave the shrinking market. Therefore, there may be an opportunity for Tramor to succeed with this strategy.
However, Tramor already has high brand recognition, so an intensive advertising campaign may have limited effect. This strategy also ignores the threats of changing tastes, which could have a great influence on the future growth of the market and of Tramor itself.
New product/existing market
This is a product development strategy whereby Tramor would attempt to sell new products in the existing market. Clearly, Tramor has been good at developing products over the years, given it has a product range of over 300. It also earns some revenue from new products each year. However, this appears to be a current weakness, with a small product design team, who are nearing retirement and may be lacking in new product ideas. This would appear to be supported by the small amount of revenue earned from new products each year. Even if it was decided to replace the product design team, there is poor succession planning, so it may take time for a new team to become successful.
This strategy would also focus on the existing market which, as previously mentioned, is shrinking. Therefore, it may not prove sufficient to satisfy the shareholders’ desire for growth.
One concern for companies following a product development strategy is to be wary of not competing with its own products. By designing products to compete with overseas imports, this may not be the case but it is possible that existing customers would replace one Tramor product with another.
Existing product/new market
This is a market development strategy which aims to sell the existing Tramor products to a new market. In this case, it would be a new geographical market, starting with the United Federation of Torra (UFT). There are clearly opportunities in this market as the Torrean tourists seem to see Tramor products as cult products, developing websites dedicated to them. Confectionery is also seen as a key Baylandian product and therefore is likely to have a good reputation overseas as well as in the home market. This may mean that the brand development overseas may be made easier for Tramor.
Tramor has strengths which would support this strategy. It has strong marketing capabilities, a wide product range and a management team with many years’ experience of the existing products and processes. It also appears to be successful at supply chain management, which would be beneficial to an overseas expansion.
However, it does have one major weakness with regards to this strategy: the lack of experience of overseas expansion.
New product/new market
This is a diversification strategy, which would overcome the threats of the shrinking market and recognise the trend towards healthy eating and sugar-free foods. However, Tramor does not appear to have the strengths to capitalise on this strategy.
The product design team, as mentioned, are ageing. It could be assumed that they are also unfamiliar with this type of product. The manufacturing processes are inflexible and some investment would need to be made in lean manufacturing in order to adopt this strategy. This may take some time, and fail to satisfy shareholders in the short term.
There are some strengths which support this strategy, such as the marketing team, but this would be an entirely new market to them and their knowledge may not be as good in this market. The strategy does not make the most of other strengths, such as the existing distribution channel, instead requiring new relationships.
Conclusion
The TOWS matrix can be used to determine the most appropriate strategy given the findings of a SWOT analysis. The preferred approach is to find a strategy which combines strengths with opportunities.
Option A, the market penetration approach, seems to be in the strengths/threats segments which should use strengths to overcome threats. However, it is doubtful that the particular strengths in this strategy would overcome the threat of changing tastes and the declining market in Bayland.
Option B, the product development approach, seems to be in the weaknesses/threats segment which should be avoided at all costs, as these strategies are likely to fail.
Option D, the diversification approach, appears to fall in the weaknesses/opportunities segment. Whilst the external factors are in place for growth, Tramor does not seem to have the capabilities or resources needed to capitalise on them. There may be competitors to whom the opportunities also exist, who have greater capabilities in this area.
Option C, the market development approach, appears to mainly combine strengths with opportunities. This would be the strategy most likely to succeed. However, it must be carefully planned as there is one weakness still to overcome, the lack of overseas experience.
Evaluate the different methods (organic growth, mergers, acquisitions and strategic alliances) for implementing strategy C and explain which method would be the most appropriate to Tramor.
If Tramor is to adopt the market development approach, it needs to consider how to enter the market. There are a variety of methods, each of which will be analysed in turn.
Organic growth – this is achieved by developing internal capabilities and using retained profits and internal resources to grow.
Organic growth would help Tramor to develop a better understanding of the new market and have complete control over the growth and the way in which it is achieved. The experienced managers, whilst lacking knowledge of the new market, may enjoy the opportunity to deliver a new strategy themselves. However, whilst this method has its benefits, it has not always been the method of choice for Tramor, which has experience of past acquisitions.
Indeed, the lack of knowledge of the proposed market, as well as the lack of experience in overseas expansion, is likely to hinder this growth and either make it too slow to satisfy the shareholders, or to lead to its failure. Therefore, this method is unlikely to be the most appropriate.
Merger – If Tramor were to merge, they would develop a new legal entity with another company, in this case presumably in UFT. This seems a rather extreme step for Tramor to take, as it would mean sharing all profits with the other party. Tramor already has a good brand name with very high recognition. This would presumably be lost if a merger was to take place, unless it was incorporated into the new name. The merger would affect all Tramor’s operations, not just the new venture into UFT.
A merger would have most of the benefits of acquisition and with less risk, so may be considered. However, it does not seem to be the most appropriate method in this case.
Acquisition – An acquisition would occur if Tramor were to take over ownership of another company. If they could find a suitable company in UFT, this would give them a rapid entry into the market and overcome any issues with the lack of knowledge of this market and the culture of the consumers. Tramor may choose to acquire either a manufacturer in UFT, thus providing access to production capabilities as well as the distribution channel. Alternatively, it may choose to acquire further down the supply chain, e.g. a confectionery retailer to ensure access to the consumer.
The speed of entry would allow Tramor to take advantage of the current desire for its products in UFT as well as satisfy the shareholders who are getting restless. Tramor also has experience in acquisition and so should be able to use this experience to help ensure success.
However, this would be the most expensive route into the new market and Tramor would bear all the risk of failure as there would be no partner to share it with.
Strategic alliance – This could be a good alternative to mergers or acquisitions, gaining access to knowledge, whilst sharing the risk, but also the rewards of this strategy. Although there are different approaches to strategic alliances, the basic principle is that two, or more, organisations work together and share knowledge and resources to deliver a specified strategy. Different alliances can include joint ventures, franchising and licensing, as well as informal alliances.
An alliance with a distributor in UFT would allow Tramor to continue to produce in Bayland, whilst gaining access to distribution channels and therefore the end consumer in the new market. This may not be quite sufficient, as Tramor’s production capabilities are rather inflexible and may not be able to cope with increased demand.
Using licensing would allow manufacturers in UFT to produce and sell Tramor products. This could be a very good way to access the market, but may take time for the manufacturers to be capable of production (unless using flexible manufacturing processes) and would lead to some loss of control over the quality of the final product. This would also reduce the potential income from this venture for Tramor; it may increase sales volume, but Tramor would only receive the licence fee and any agreed profit share.
It may be that Tramor enters a series of alliances to ensure it makes the most of the full potential of the new market. For example, it may be beneficial to enter into an alliance with the company owning the website which lists purchase locations of Tramor products. The website could be developed into an essential marketing tool for the strategy. Additionally, there could be an alliance with a manufacturing company. However, this could lead to a loss of secret recipes, handed down over the years.
Conclusion
Whilst mergers, acquisitions and organic growth all have their benefits, it would seem that strategic alliances offer one of the faster entries into the market. Tramor could carefully select organisations which will give it the fastest and safest route into the market.