'chocolate sales might have peaked in Western countries'

Supposing that the Western obsession with ‘Size Zero’ means that young women in developed countries don’t buy chocolate any more? It might make perfect sense to move into the chewing gum market because these same diet-conscious young women might want to chew gum all day to keep from feeling hungry. There is also the obesity problem in rich countries and the rising criticisms of food companies for marketing fatty foods to children. You can see why chocolate sales might have peaked in Western countries while chewing gum has lots of growth potential.

Personally, I love chocolate and hate chewing gum. So are they just completely different customer groups? Is that how it works, like cats and dogs, so that people are either cat people or dog people – chocolate or chewing gum? Either way could be good news for Cadbury. If it really is like the difference between cat lovers and dog lovers, then Cadbury will be trying to gain new, extra customers from a different market segment and a lot of them will inevitably be Wrigley customers at the moment. If the same people often buy both, then Cadbury would be trying to sell a new product to their existing customers. At the moment it’s a product that those customers have to buy from a competitor company (Wrigley) because Cadbury don’t sell chewing gum. Bars of chocolate and packets of chewing gum are both small, quite cheap items to buy. They are sold from the same kinds of outlets. You can see why Cadbury thinks it knows how to do this.

So now war has been declared. Cadbury is going to compete directly for Wrigley’s customers head-to-head.

'the big retailers are very important in this battle for market share'

Competitive strategy can be great fun. You can think of it as a war game or a game of chess – depending on your preferences. In terms of competitive strategy, Cadbury will be attacking Wrigley as the market leader in chewing gum. Instead of tanks and guns they will be battling it out with brands (established versus new), marketing campaigns, customer loyalty, discounts to retailers and fighting over shelf space in supermarkets. The big retailers are very important in this battle for market share. Whose chewing gum will they want to sell: Wrigley’s or Cadbury’s? And anyway, why would anyone want to buy chewing gum from a chocolate company?

I think I’d rather go down the gym.

Futher reading

• Competitive advantage - how can companies gain the upper hand?
• The chewing gum war - the two dominant players are fighting for their market shares
• Join the discussion - do you think Cadbury will suceed in the chewing gum market?

About the author

Susan Segal-Horn is Professor of International Strategy at the OU Business School. Susan's research focuses on international service industries and service multinationals, and she has published a number of books.

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Primark is a major UK retail group employing more than 11,800 people. It operates 122 stores in the UK and Ireland, where it trades under the name of Penneys. Approximately one-third of its stores are currently in Ireland and two-thirds in the UK.

The UK high streets and malls are packed with no-frills fashion retailers. That means that Primark has plenty of competitors all aiming at the same type of customers. It is not easy to sell cheap fashion. Well-established rivals such as Matalan and Bhs are struggling, while results at Primark are booming.

The market segment targeted by Primark is the fashion conscious under-35s with the slogan "Look good pay less". It offers fashionable clothes at very competitive prices (for example, jeans for £4) and reasonable quality: in other words, a value for money strategy. In competitive strategy terms, Primark is a pursuing a classic 'focus cost leadership' strategy.

The American management professor Michael Porter of Harvard University developed a well-known approach to the competitive strategy of firms. He argued that companies could achieve a higher rate of profit (or at least potential profit) in one of two ways: they could either provide a product or service that is identical to that provided by rival companies, but at a lower cost than rival firms, or they could provide a product or service that is differentiated from that of rival firms such that customers would be prepared to pay more for their product than for a rival firm's product.

The first approach would mean that the firm has a cost advantage over rival firms, allowing it to pursue a 'Cost Leadership' strategy; the second approach would mean that they had a differentiation advantage, allowing it to pursue a 'Differentiation' strategy. Firms selling a 'no-frills' product are usually attempting a cost leadership strategy, such as Easyjet (UK) or SouthWest (USA) airlines. The 'focus' part of Primark's strategy is the specific customer segment it focuses on i.e. that of the under-35s. It is not attempting to sell to everybody. It has selected a particular customer segment, just as the '18-30' holiday company has selected a clear market segment based on age group within the leisure industry.

In the last three years Primark has got a lot of things right. Some of its strongest successful competitors are TK Maxx and George at Asda. However, although all three are in the 'value' segment and therefore have similar market positioning, the other two have different strategies to that of Primark. TK Maxx sells heavily-discounted prestige brands and George at Asda has created its own private-label brand mostly at out-of town stores. Primark is a high street retailer which has a family of brands and focuses much more on buying, logistics and supply chain management rather than branding.

In its pursuit of ever-lower costs, teams of buyers in UK and Ireland travel internationally both to identify fashion trends and to seek out the most competitive suppliers. The company uses computerised customs clearance (speed to market) and dedicated warehousing and distribution facilities, such as the giant warehouse owned and run by the logistics company TNT but dedicated solely to Primark stock distribution. This one warehouse is centrally located for the whole UK market, near a junction of the M1 motorway and it houses 50% of Primark's UK stock, receiving 30 lorry loads each day. (This warehouse was destroyed by fire in November 2005). Computerised warehousing and distribution systems are linked to computerised daily sales and stock information (rapid restocking of fast-selling items) by size and colour for each item in every store to optimise turnover.

What lessons can we learn from Primark's success?

1. They understand their customers' requirements very well, providing them with high fashion items at very low prices.
2. They have a very clear market positioning at the cheap end of the market. That helps them avoid some of the 'stuck-in the-middle' positioning problems faced by other competitors such as Marks & Spencer or BhS.
3. They manage their costs very tightly, mainly by sourcing overseas in developing economies. This is obviously critical for businesses pursuing a low-cost strategy.
4. They have so far been very clever in their choices of which catwalk fashion items to copy for the mass market.
5. Their time-to-market has been very fast, both in terms of copying designs rapidly after they come out & in terms of getting the new stock into their stores while items are still 'hot'.

So how sustainable is Primarks' 'no-frills' strategy over the longer-term? A cost leadership strategy is a perfectly sustainable strategy but it does require very tight management. To continue to be a market leader with this strategy the company must in practice not just be low cost but lowest cost in their market segment. What tends to go wrong is management allowing overall efficiency levels to drift slightly. In particular, managers must recognise that a low cost strategy is not a cheap strategy for a company to pursue. It demands continuously high levels of investment in the latest technology - for example, for warehousing & distribution or point-of sale. As the singer Dolly Parton once famously said: "It takes a lot of money to look this cheap."

Further reading 

• The importance of brands – the value of brands explained by this extract based on Open University Business School course material
• Competitive advantage – in business, the race is always to the swift, but how can companies keep ahead?
• Contemporary Strategy Analysis 4th edition (Chapters 7, 8 & 9) by R. M Grant, published by Blackwell

About the author

Susan Segal-Horn is Professor of International Strategy at the OU Business School. Susan's research focuses on international service industries and service multinationals, and she has published a number of books.

Subscribe to Susan Segal-Horn's posts