Marketgeography Strategy
Geography has long been used as a strategic variable in shaping market strategy. History provides many examples of how businesses started locally and gradually expanded nationally, even internationally. Automobiles, telephones, televisions, and jet aircraft have brought all parts of the country together so that distance ceases to be important, thus making geographic expansion an attractive choice when seeking growth.
Consider the case of Ponderosa System, a fast-food chain of steak houses (a division of Metromedia Steak Houses, Inc.). The company started in 1969 with four restaurants in Indiana. By 1970 it had added 10 more restaurants in Indiana and southern Ohio. At the end of 1994, there were almost 800 Ponderosa Steak Houses all over the country.
There are a variety of reasons for seeking geographic expansion: to achieve growth, reduce dependence on a small geographic base, use national advertising media, realize experience (i.e., economies of scale), utilize excess capacity, and guard against competitive inroads by moving into more distant regional markets. This section examines various alternatives of market-geography strategy. The purpose here is to highlight strategic issues that may dictate the choice of a geographic dimension in the context of market strategy.
In modern days, the relevance of local-market strategy may be limited to (a) retailers and (b) service organizations, such as airlines, banks, and medical centers. In many cases, the geographic dimensions of doing business are decided by law. For example, until recently, an airline needed permission from the Civil Aeronautics Board (which was dissolved in 1983 after the airline industry deregulation) to change the areas it could cover. By the same token, banks traditionally could only operate locally.
Local-Market Strategy
Regional-Market Strategy
Of the 2 million retailers in the United States, about half have annual sales of less than $100,000. Presumably, these are all local operations. Even manufacturers may initially limit the distribution of new products to a local market. Local-market strategy enables a firm to prosper by serving customers in a narrow geographic area well. The strategy emphasizes personal service, which bigger rivals may shun.
The regional scope of a business may vary from operations in two or three states to those spread over larger sections of the country: New England, the Southwest, the Midwest, or the West, for example. Regional expansion provides a good compromise between doing business locally and going national.
Regional expansion ensures that, if business in one city is depressed, favorable conditions prevailing in other regions allow the overall business to remain satisfactory. In the 1980s, Marshall Field, the Chicago-based department store (now a division of Dayton-Hudson Company), found itself pummeled by recent demographic and competitive trends in that city. Therefore, it decided to expand into new regions in the South and West. This way it could lessen its concentration in the Midwest and expand into areas where growth was expected.
Further, it is culturally easier to handle a region than an entire country. The logistics of conducting business regionally are also much simpler. As a matter of fact, many companies prefer to limit themselves to a region in order to avoid competition and to keep control centralized. Regional-market strategy allows companies to address America's diversity by dividing the country into well-defined geographic areas, choosing one or more areas to serve, and formulating a unique marketing mix to serve each region. The point may be illustrated with reference to D.A. Davidson & Company, a regional brokerage firm based in Great Falls, Montana. While large brokerage houses, such as Merrill Lynch and Smith Barney, invest the bulk of their research dollars following large, well-established corporations, regional firms mainly concentrate on local companies.10 This helps in establishing a long-term relation such that when these companies need financial guidance, they turn to the firm that understands them.
Many businesses continue to operate successfully on a regional scale. The following large grocery chains, for example, are regional in character: Safeway in the West, Kroger in the Midwest, and Stop & Shop in the East. Regional expansion of a business helps achieve growth and, to an extent, gains market share. Simply expanding a business regionally, however, may or may not affect profitability.
Geographic expansion of a business to a region may become necessary either to achieve growth or to keep up with a competitor. For example, a small pizza chain with about 30 restaurants in an Ohio metropolitan area had to expand its territory when Pizza Hut started to compete aggressively with it.
At times, a regional strategy is much more desirable than going national. A company operating nationally may do a major portion of its business in one region, with the remainder spread over the rest of the country, or it may find it much more profitable to concentrate its effort in a region where it is most successful and divest itself of its business elsewhere.
National-Market Strategy
InternationalMarket Strategy
Going from a regional to a national market presumably opens up opportunities for growth. This may be illustrated with reference to Borden, Inc. A dairy business by tradition, in the 1980s Borden decided to become a major player in the snack food arena. It acquired seven regional companies, among them Snacktime, Jays, and Laura Scudder's, to compete nationally, to grow, and to provide stiffer competition for PepsiCo's Frito-Lay division.
It was the prospect of growth that influenced the Radisson Hotel Corporation of Minneapolis to go national and to become a major competitor in the hotel business. Radisson decided to move into prime "gateway" markets—New York, Los Angeles, Boston, Chicago, and San Francisco—where it could compete against such giants as Marriott and Hyatt.
In some cases, the profit economics of an industry requires going national. For example, success in the beer industry today demands huge advertising outlays, new product introductions (e.g., light beer), production efficiencies, and wide distribution. These characteristics forced Adolph Coors to go national.
Going national, however, is far from easy. Each year a number of products enter the market, hoping eventually to become national brands. Ultimately, however, only a small percentage of them hit the national market; a still smaller percentage succeed.
A national-market strategy requires top management commitment because a large initial investment is needed for promotion and distribution. This requirement makes it easier for large companies to introduce new brands nationally, partly because they have the resources and are in the position to take the risk and partly because a new brand can be sheltered under the umbrella of a successful brand. For example, a new product introduced under GE's name has a better chance of succeeding than one introduced by an unknown company.
To implement a national-market strategy successfully, a company needs to institute proper controls to make sure that things are satisfactory in different regions. Where controls are lacking, competitors, especially regional ones, may find it easy to break in. If that situation comes about, the company may find itself losing business in region after region. Still, a properly implemented national-market strategy can go a long way in providing growth, market share, and profitability.
A number of corporations have adopted international-market postures. The Singer Company, for example, has been operating overseas for a long time. The international-market strategy became a popular method for achieving growth objectives among large corporations in the post-World War II period.
In its attempts to reconstruct war-torn economies, the U.S. government provided financial assistance to European countries through the Marshall Plan. Because the postwar American economy emerged as the strongest in the world, its economic assistance programs, in the absence of competition, stimulated extensive corporate development of international strategies.
At the end of 1996, according to a U.S. Department of Commerce report, U.S. direct investment abroad was estimated at $716 billion, up from $450 billion in 1993. About 70 percent of U.S. investment overseas has traditionally been in developed countries. However, as many developing countries gained political freedom after World War II, their governments also sought U.S. help to modernize their economies and to improve their living standards. Thus, developing countries have provided additional investment opportunities for U.S. corporations, especially in more politically stable countries. It is interesting, however, that although for cultural, political, and economic reasons more viable opportunities were found in Western Europe, Canada, and, to a lesser extent, Japan, developing countries provided a better return on direct U.S. investment. For example, in 1996 developing countries accounted for about 40 percent of income but less than 30 percent of investment.11
In recent years, overseas business has become a matter of necessity from the viewpoint of both U.S. corporations and the U.S. government. The increased competition facing many industries, resulting from the saturation of markets and competitive threats from overseas corporations doing business domestically, has forced U.S. corporations to look to overseas markets. At the same time, the unfavorable balance of trade, partly due to increasing energy imports, has made the need to expand exports a matter of vital national interest. Thus, although in the 1950s and 1960s international business was considered a means of capitalizing on a new opportunity, in today's changing economic environment it has become a matter of survival.
Generally speaking, international markets provide additional opportunities over and above domestic markets. In some cases, however, a company may find the international market an alternative to the domestic market. Massey-Ferguson decided long ago to concentrate on sales outside of North America rather than compete with powerful U.S. farm equipment producers. Massey's entire organization, including engineering, research, and production, is geared to market changes overseas. It has learned to live with the instability of foreign markets and to put millions of dollars into building its worldwide manufacturing and marketing networks. The payoff for the company from its emphasis on the international market has been encouraging. The company continues to outperform both Deere and International Harvester. Similarly, the Colgate-Palmolive Company has flourished through concentration in markets abroad despite tough competitors, i.e., Procter & Gamble and Unilever, at home.
With the world's biggest private inventory of commercial softwood, Weyerhaeuser has been able to build an enviable export business—a market its competitors have virtually ignored until recently. This focus has given Weyerhaeuser a unique advantage in a rapidly changing world market. Consumption of forest products overseas in the 1990s has been increasing at double the domestic rate of 2 to 3 percent annually. Future prospects overseas continue to be attractive. Particularly dramatic growth is expected in the Pacific Basin, which Weyerhaeuser is ideally located to serve. Moreover, dwindling timber supplies and high oil costs are putting European and Japanese producers at an increasing disadvantage even in their own markets, creating a vacuum that North American producers are now rushing to fill. With a product mix already heavily weighted toward export commodities and with unmatched access to
Other Dimensions of Market-Geography Strategy deep-water ports, Weyerhaeuser is far ahead of its competitors in what is shaping up to be an export boom in U.S. forest products. Exports, which in 1998 accounted for 40 percent of Weyerhaeuser's sales and an even higher percentage of its profits, could account for fully half of the company's total revenues by the year 2000.12
A company may be regional or national in character, yet it may not cover its entire trading area. These gaps in the market provide another opportunity for growth. For example, the Southland Corporation has traditionally avoided putting its 7-Eleven stores (now a division of the Yokado Group of Japan) in downtown areas. About 6,500 of these stores in suburban areas provide it with more than $2 billion in sales. A few years ago, the company opened a store at 34th and Lexington in New York City, signaling the beginning of a major drive into the last of the U.S. markets that 7-Eleven had not yet tapped. Similarly, Hyatt Corp. has hotels in all major cities but not in all resort and suburban areas. To continue to grow, this is the gap the company plans to fill in the 1990s.
Gaps in the market are left unfilled either because certain markets do not initially promise sufficient potential or because local competition appears too strong to confront. However, a corporation may later find that these markets are easy to tap if it consolidates its position in other markets or if changes in the environment create favorable conditions.
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