A fortnight ago I wrote about the types of risk inherent in marketing and business plans. So how do you minimise such risks?
The answer is to plan for such risks.
Macdonald identified three principal areas of risk:
- Market Risk: That the market you are targeting doesn’t exist or it is too small to be viable.
- Share Risk: That the level of market share you are targeting is unavailable or it is financially unviable to obtain that share.
- Profit Risk: That the levels of profit available in the market are less than your target; that the profit pool in the market is smaller than forecast; and that costs in the market are higher than estimated.
Each of these risk areas was then sub-divided into five categories of risk.
Your sensitivity to market risk varies dependent on your growth intent and your share position:
- If you plan for high levels of market growth but you have low market share, you are moderately sensitive to market risk
- If you have low market share and low growth intent, you have low sensitivity to market risk
- If you have high market share in a high growth market, you have high sensitivity to market risk
- If you have low growth intent and high market share, you have moderate sensitivity to market risk.
Therefore it is important that you do not make poor assumptions about the growth rate of the market.
Your sensitivity to share risk varies with growth intent and competitive intensity in the market:
- High growth intent combined with low competitive intensity means a moderate sensitivity to share risk.
- Low growth intent combined with high competitive intensity also means a moderate sensitivity to share risk.
- Where there is low competitive intensity if you have low growth intent, you have low sensitivity to share risk.
- If you have a high growth intent in a competitively intense market, you have high sensitivity to share risk.
Share risk occurs when you have made poor assumptions in your strategic planning.
Strategies are sensitive to profit risk if you make poor assumptions about prices and costs. A fine example is the failure of the East Coast rail franchise operation by Virgin/Stagecoach. In the words of Chris Grayling, the Transport Secretary, “They got their sums wrong”. Virgin stagecoach underestimated the costs of running the line and the potential profits available. As a result they overbid for the franchise and found it impossible to run the line and break even.
Sensitivity to profit risk arises from growth intent and level of profit margin:
- High growth intent in a market with high margins means moderate sensitivity to profit risk.
- Low growth intent in a market with high margins means moderate sensitivity to profit risk
- Low growth intent in a market with low margins produces a moderate sensitivity to profit risk.
- High growth intent in a market with low margins means a high sensitivity to profit risk. A clear example would be the collapse of Carillion.
To mitigate such sensitivities, you need to develop a marketing due diligence process that considers market size, market share and profit assertions of your plan. The outcomes of marketing plans need to be moderated by your sensitivity to the risks existent in the market.
So what steps do you take to reduce risk?
The most common way to mitigate market risk is to gather increased information about the market therefore reducing the number of risk inducing assumptions. For the five sub-categories of market risk the following are typical steps:
- Product Category Risk: Target another well established product category within the market and use the data that exists about that product
- Market Existence Risk: Target another well established segment within the market or use data about another product used by your target market segments.
- Sales Volume Risk: Either reduce the expected sales volumes produced by the plan or ensure that sales volume targets are supported by solid market research data.
- Forecast Risk: reduce the forecast increase in market growth below historical levels or use market research data to support your forecasts.
- Pricing Risk: Either reduce planned pricing levels or gather market research data on acceptable pricing.
The following are typical steps to avoid Share Risk:
- Target Market Risk: Use research to develop needs-based segmentation and use this to manage your product portfolio.
- Proposition Risk: reduce this through better informed market segmentation and targeting decisions. Use the 7 Ps of the marketing mix to adjust your proposition.
- SWOT Risk: Use SWOT analysis and strategic management tools aligned to SWOT analysis such as a TOWS matrix.
- Uniqueness Risk: Target different segments using different value propositions. This is expressed in the seven farmers segmentation example of Professor Malcolm Macdonald.
- Future Risk: Identify environmental factors and their implications for strategic business units. This can be achieved through PESTEL analysis.
The following steps help to reduce profit risk:
- Profit Pool Risk: Careful assessment of the profit pool available in the market and its trends. Target markets with large and growing profit pools.
- Profit Sources Risk: Assess in detail the sources of profit in the market. Increases in profits are better coming from a growing profit pool in the market as opposed to gaining profits at the expense of competitors.
- Competitor Impact Risk: Assess the impact of proposed strategies on your competitors. Focus such impact on smaller, less powerful rivals.
- Internal Gross Margin Risk: Make realistic assessments of the core costs in a market. Use similar products or services existent in the market or in similar segments.
- Other Costs Risks: Make realistic assessments of the costs involved and refine costs estimates based on those assessments.
Whilst it is impossible to eliminate market or business risks entirely, it is possible to mitigate them to a practical minimum. This is achieved through the use of accurate and scientific marketing planning.