Alternative Grand Strategies: Market penetration vs Market development dilemma for U.S-EU SMEs

October 7, 2022

Alternative Grand Strategies: Market penetration vs Market development dilemma for U.S-EU SMEs

Based on anecdotal evidence from observations of the business environments in the developed markets of North America and the EU in the 21st century, this blog aims to argue the case for the moderation in the reliance of market penetration strategy as the optimal grand strategy for achieving developed markets operating entities, but in particular developed markets SMEs’ long term objectives.   Since grand/master/corporate level strategies are the strategies for achieving a diversified/multi-business firm’s long term objectives the prudent selection of the optimal mix of the more than dozen available strategies demands careful strategic analysis and strategic choice by forward thinking organizations. Master strategies can be classified in a variety of ways, but the four common ones are: 1. Growth Strategies a) Concentration strategies; b) Integration strategies; and c) Diversification strategies The rationale for pursuing growth strategies is apparent because absent sustainable/profitable growth the going concern status of any entity would be negatively impacted regardless of the firm’s age, size, industry, country of origin, etc 2. Stability/Neutral Strategies These strategies dictate that that the company keeps doing what it has been doing to maintain its competitive position.  Firms most likely to pursue stability strategies are? 3. Decline/ Defensive Strategies These are generally short-run reactions to poor management or to unexpected environmental events such as competitors’ actions. When are these strategies appropriate? 4. Exit/Closure Strategies: – Involves closing down the firm.  The basic exit/closure strategies are a) liquidation; and; b) bankruptcy. Now, let’s delve a bit more into the market penetration growth strategy which is perhaps one of the most widely used grand strategy alternatives pursued by the vast majority operating entities world-wide. However, this concentration strategy may be a suboptimal choice for developed markets companies but it especially handicaps developed markets SMEs.  The statement might seem too broad and/or ambiguous because multi-business companies need to pursue more than one grand strategy to achieve their overall long term objectives and that fact is indeed obvious.  So what is the argument being forwarded here? Well, the argument is grounded in how the market penetration strategy is selected, i.e. what analysis produced the choice for the market penetration strategy vs. say market development or product development strategies? Was the choice derived primarily from subjective judgment ala managerial experience, gut feeling, intuition, etc, or was the selection/choice the outcome of applying a comprehensive strategy formulation framework ending up with an analytic tool such as the quantitative strategic planning matrix [QSPM] for strategic choice (stage 3- decision stage).  QSPM is a strategic/analytic tool used to evaluate alternative set of strategies. Traditionally, there has been a divide between academics and professionals regarding whether QSPM or other analytic tools produced the optimal mix of the grand strategies to achieve a firm’s long term objectives.  Academics assert that the QSPM is superior because it is comprehensive and gives organizations the vehicle to objectively select the optimal grand strategies by evaluating a number of alternative strategic options. Well, QSPM is comprehensive and largely objective but not “purely” objective. Consequently, one could poke a few holes in the QSPM’s objectivity “purity” (implicit or otherwise).  Why? Primarily due to: a) how the weightings of the key factors (Internal SW and external OT) are determined (subjectivity involved), and b) how the attractiveness scores (AS ) are determined (subjectivity involved) and ultimately the influences of a+b on the total attractiveness score (TAS)  which guides the selection of the strategic alternatives (grand strategies) to achieve an organization’s long term objectives. . The above preamble hopefully lays the foundation for the discussion(s) to follow on the rationale for market penetration being suboptimal for developed market operating entities in particular for developed markets SMEs. What is market penetration strategy? Market penetration involves seeking growth for current products in current markets, normally requiring more aggressive marketing efforts.  Market penetration then is an internally focused strategy, nonetheless, an organization could also augment the internal effort(s) with external efforts via horizontal acquisition(s) of competitors. Due to the relatively high dependency on current products in current markets enabled by organizational capabilities, there is a modest/minimal risk in pursuing this strategy. There may be several factors which are skewed in favor of the moderation argument advanced by the author, i.e. moderating the high reliance on the market penetration strategy in developed markets by developed markets operating entities but especially why the high reliance on market penetration may prove fatal or present existential risks to developed markets SMEs.  There is room to discuss just a couple of the dominant/prominent factors. The universe of enterprises in the developed economies of North America and the E.U. in particular the balk of U.S. SMEs have historically derived the vast majority of their revenues and earnings from the captive domestic market because the U.S. is a relatively large market with affluent consumers “endowed” with relatively high disposable incomes vs their developing/emerging markets brethren. Further, consumption accounts for circa 70% of the U.S. GDP.  Consequently, there were/are modest incentives for U.S. SMEs to venture into the developing/emerging markets which were/are plagued by moderate/high  global business risks [political, sociocultural, financial, geographic, legal, etc] inclusive of institutional voids which hampered the profitable exploitation of even the most opportunistic developing/emerging markets. Thus, reliance on the high demand/consumption in the U.S. domestic market and modest/moderate foreign competition was indeed a very good deal for these SMEs. Consequently, market penetration [drive to saturate current markets with current products] was/is a low hanging fruit /no-brainer. Fast forward to the 21st century and there is arguably an ongoing shift in the center of economy activity from the developed world to the emerging/developing economies of Asia, LATAM, Africa and MENAT.  Several multilateral organizations [IMF, WTO, etc] and numerous economists from a host of investment banking and independent research entities have projected that circa 50%+ of incremental world GDP growth during the first half of the 21st century will come from  emerging/developing markets but in particular from the rapidly developing economies of Asia which account for perhaps 45% of today’s global population of circa 7.1 billion people. It is therefore advised/suggested that developed markets operating entities should head east to seek sustainable profitable growth rather than keep spinning their wheels fighting for dwindling market share in the west, i.e. they should keenly evaluate the more aggressive/more riskier alternative concentration growth strategy termed market development (a grand strategy). Buttressing and supporting the argument for analyzing/selecting the market development vs market penetration as the optimal grand strategy for developed markets SMEs are two key forces: 1) Relatively low secular GDP growth rates in developed markets, and 2) Declining/aging populations in developed markets. These two forces should send clear signals to those entities who may have bet the farm on market penetration to ensure their long term going concern status. The influence of the first force on the outcome of market development versus market penetration strategy is obvious in that slower economic growth will tame consumer demand and hence would negatively impact firm revenue and profitability. The second force is the one that should make developed markets SMEs managers sleep like babies (i.e. work up every two hours crying). Why?