The Customer Value Ladder

It is obvious that a business’s customer base is its source of income.  Customers spend money with businesses: You hope!

But your customer base in more than a supplier of cash.  Your customers are your primary source of marketing data.  Marketing and business are knowledge-based activities. If you know your customer base, its attributes and opinions, you can predict its movement and they ways it may change.  You can identify what your customers see as best value and develop your organisation to deliver that value.

Customers have both financial and information value. To capture those customers in the first place, you also need knowledge.

Previously in this blog, I have discussed the concept of the customer value ladder.  A similar concept is the ‘ladder of advocacy’.

There are five ‘rungs’ on these ladders:

  1. Prospect
  2. Customer
  3. Supporter
  4. Advocate
  5. Partner

At each stage up the ladder we have different expectations as to the actions of customers.  At the lower levels it could just be purchase or re-purchase.  On higher rungs it could be partnership sharing and referring your business to others.  Obviously if you expect different actions by consumers as they move up the ladder, you will need to employ different tactics and use different promotional techniques and channels.

It is also worth considering that it isn’t only the customer who is moving up the ladder; so are the people they are talking to about your company.

Cross and Smith (1997) advocate that you bond with your customer in different ways as they move up the ladder:

  1. Prospect: Develop Awareness bonding to move them to;
  2. Customer: Where you concentrate on identity bonding to move them to;
  3. Supporter: Where bonding focuses on relationship development so that the customer becomes an;
  4. Advocate: Where bonding concentrates on creating a community. As the community becomes closer, customers become:
  5. Partners: Where you develop partnership bonding

Developing customer relationships is a two-way process.  Simply pumping out emails, newsletters or social media posts is not building a relationship.

On the first rung of the ladder you create a bond through brand and product awareness.  You need to invest in obtaining ‘share of mind’. Once you have obtained a share of mind you need to work to keep it.  You need to work to build on the target customers needs and wants.  This is often best achieved through traditional promotional techniques and channels, e.g. advertising or visits by representatives.  You also need to adapt your marketing mix to meet those customer expectations.

On the second rung of the ladder, you need to build the relationship with your customer group beyond awareness.  You need to attract ‘share of heart’. A bond developed out of shared values and aspirations.  You develop this bond through ’cause marketing’.  this could be through charity support, environmental standards and issue sponsorship.

Berry (1995) defines four types of relationship you can have with a customer:

  1. Legal:  You have a contractual relationship with your customers and that contract provides legal obligations.  You have statutory responsibilities towards your customers such as their sale of goods rights, product safety standards and responsibilities with regard to product description. You have data protection responsibilities towards your customers.
  2. Fiscal:  You have mutual financial relationships with your customers.  You may offer credit or deferred payment.  Credit terms can be a method of financial bonding.
  3. Social:  Businesses have social links with their customer base.  Football clubs offer stadium tours and opportunities to ‘press the flesh’ with current and former players. Venues offer patron-only previews of concerts.  Shops give valued customers ‘pre-launch’ opportunities to view new products. Restaurants offer ‘soft opening’ opportunities to regular diners to test new menus and at new restaurant locations.
  4. Organisational:  In business to business markets there are often organisational relationships between customers and suppliers.  These often develop into ‘partnerships’.

On rung three of the ladder values begin to be exchanged and deep knowledge of customers begins to be developed.  The relationship itself has value at this point.  Customers at this point are now getting something out of their relationship with your firm. This is the beginnings of building a community.  This is where owners’ clubs, social media groups and internet forums begin to have value.  You need to encourage feedback and information exchange.  Loyalty programmes can develop relationships at this point.  Bear in mind that, like many coffee outlets, a loyalty programme has little benefit if you offer membership to everyone!  You cannot ignore customer feedback and keep customers on this rung.

The value to your brand is:

  1.  Having knowledge of your target segment and the wider environment
  2. Your developed ‘share of heart’ and,
  3. The ability of customers on this rung to support those on lower rungs of the ladder

On rung four of the ladder you need to bond through creating social relationships with customers.  Here is the true and proper use of social media in marketing.  But you need to go further.  You need to offer opportunities for your customer base to meet not only your organisation but each other.  This is where customer conventions and fan events are useful.  You can develop product owner’s clubs and offer members discounts on things like servicing and accessories.  Community members need the opportunity to bond

Rung five is the development of partnerships.  This is a further development of developing a community.  An example is Ugg the sheepskin bootmaker who offer ‘brand fans’ opportunities to work for the brand and to help design their footwear.  As a result the customer develops very deep loyalty for your brand.  In business to business markets things go even further where suppliers offer onsite maintenance and service and locate employees in the premises of their customers.  Suppliers may get involved in their customers product design e.g. Rolls Royce helping to design the planes where their engines are to be located.  Suppliers may take over the running of a customers stock control processes and develop systems to help their customers produce products e.g. Just In Time supply software.  Partnership requires mutual respect and the integration of value chains.

At each stage of the value ladder you need to collect different data, use different marketing techniques and promotional tools.  It takes marketing skill to move your customers up the value ladder and to keep them on its higher rungs.

Dealing With Culture

I expect most of us have, at one time or another, worked in an organisation with a corrosive culture.  In such organisations the expected behaviours of the organisations stakeholders damages, and often destroys that organisation.

Then more damage is caused by senior managers trying to impose new cultural norms on the organisation.   Management my be in charge of process and procedure within an organisation but that organisation’s culture belongs to all its stakeholders.

Organisational culture is therefore a critical part of strategy making.  Organisational culture is central to developing strategy.  Sometimes organisational culture is so strong, it becomes an organisational ideology.

An organisation isn’t it’s structure, or it’s processes, it is its culture.

So how do you ensure that your organisation does not develop a corrosive or damaging culture?

Henry Mintzberg created the following stages to instilling a new culture in an organisation:

  1.  Root Ideology in a Sense of Mission:  Many organisations begin when a single entrepreneur identifies a mission; a product or service which is to be delivered in a special way; and they select a group of individuals to deliver that mission. In such circumstances, this group, the new organisation, does not develop at random.  the group coalesces because its members share norms and values.  A mission statement added to these shared values helps develop a sense of mission amongst the group.  New organisations tend to be small and unbounded by procedures and policies so the organisation has wide latitude for manoeuvre.  In new organisations, the founding members often have shared beliefs and they want to work together. Finally, the entrepreneur may have strong charisma and a personal devotion to the organisation and its mission.  The entrepreneur can therefore rely on his personality to drive the organisation rather than formal policies or procedures.
  2. Develop the organisational ideology through traditions and sagas:  In an organisation myths develop around important events and the actions of important past leaders.  the organisation develops its own history.  All this forms a database of tradition which members of the organisation share.  these traditions influence behaviour and behaviour feeds back to influence the tradition.  this feedback process creates an organisational ideology.  Believers in the ideology become loyal to the organisation.
  3. Reinforce the ideology through physical identifications:  Think of military units.  Regiments have mascots and traditions.  For example, British submarine crews fly the skull and crossbones on their return to port to emphasise the piratical nature of the submariners wartime role.  Paratroopers have ceremonies when they complete a certain number of training jumps.  Businesses also develop such traditions e.g. McDonald’s ‘burger’ university where staff receive awards for completing training programmes.  Japanese firms are filled with such organisational identifiers, be it only the daily physical warm up before the start of work or singing the company song.  Some individuals will naturally recognise and be attracted to these physical identifiers.  Others can be recruited through the organisation selecting candidates not only on their ability to do the job but also on how they fin in with the organisational culture.  Those who best fit with the organisational ideology should be prime promotion candidates.
  4. Evoke identification with the organisational culture through socialisation and indoctrination:  Think of the Quaker confectionary firms which developed in the UK during the 19th century such as Cadbury and Rowntree’s.  These firms didn’t just create job roles for their staff, they developed sports and social clubs, libraries, hospitals and even model villages in which their staff lived.  the firms ideology and culture was instilled beyond the workplace and into personnel’s social life.  thus the organisational culture becomes internalised and staff behaviour becomes consistent with the organisation’s ideology.

Some organisations become missionary organisations where ideology is strong and the organisation effectively has a life of its own.  Attempts to change organisational culture in such organisations can be difficult and damaging.

Rather than trying to use a sledgehammer to change corporate culture, managers in such organisations are better to act with care and over time.  Develop strategies that achieve goals but which are also compliant with the existing organisational change. Incremental change is often the best approach.

Survival in a Hostile Environment

In most sectors, the UK is a mature market.  What this means is that businesses sell products and services that have existed over time.  For example, the automobile has been around since the late 19th century; home computers since the early 1980s and mobile phones since the mid-1980s.

What this means is that it is rare for a wholly new product to emerge and for a new market category to exist.  ‘New’ products tend to be improvements of previous technology. For example, an electric car is still a car; it satisfies the same function as a vehicle with an internal combustion engine; it has four wheels and you drive it on the public highway.

So in mature markets, growth tends to be slow (and may be beginning to decline).  Consumers buy a replacement product. Consumers may have developed brand loyalty and have a long term relationship with a particular market player.

As growth is slow, rather than attracting new customers, businesses are focused on taking market share from each other.  In mature markets there are established market leaders who have a focus on retaining that market share and market challengers who are trying to take that market share from them.

In mature markets there are often inflationary pressures at play.  Companies may see increased foreign competition and they compete to obtain the same raw materials.  For example, only this week Elon Musk pleaded for more nickel to be mined as he was struggling to obtain enough of the metal for his car batteries.

Also, in mature markets, firms experience major regulatory upheaval.  his could be new ecological standards or, in the car industry, fuel consumption tests.

Businesses in mature markets can be hit by cultural change.  For example, it is likely that the current pandemic will result not only in temporary cultural changes such as the wearing of face masks, but other effects over the longer term e.g. companies moving staff onto home working contracts reducing the need for office accommodation.

As stated above, the United Kingdom is a mature market.  Therefore it currently faces a hostile environment on three fronts; Direct competition from other market players; an oncoming recession; and massive regulatory turmoil created by Brexit.

You may think operating in such a hostile environment is a lost cause: but it is possible to succeed in a hostile environment.  To succeed your business strategy must have the following factors:

  1.  You must make purposeful moves towards market leadership.  However failure to achieve that leadership position, or an inability to maintain market leadership can lead to major problems.  The UK high street restaurant sector is an example.  Several firms in this sector have failed in recent years after aggressive expansion strategies failed and fixed costs like rent have led to big debts e.g. Pizza Express, Frankie and Benny’s, Café Rouge, Carluccio’s, etc.
  2. If your market position is deteriorating, diversification may not be the best approach.  Look to your market core.
  3. If the whole industry appears to be in trouble, the hostile environment may be the perfect opportunity to grab your competitors market share through acquisition.
  4. You may be able to target specialist sectors.

In a hostile environment, successful strategies have the following common characteristics:

  1. The successful firm achieves a lowest delivered cost position relative to their competition but within acceptable quality and pricing policies.  They aim to look for sales volume not large profit margins; or,
  2. They achieve the highest product/service/quality differentiated position relative to their competitors.  They must maintain an acceptable delivered cost structure and a profit margin which is sufficient to allow reinvestment in their diversification.

Those following the lowest delivered cost often grow slowly as they hold down price increases and keep operating margins down to gain volume, fixed cost reductions and improved asset turnover.

Those following a differentiation strategy tend to grow faster through having higher prices and operating margins which cover increased promotion, research and other costs.

In making purposeful moves towards market leadership means moving to and maintaining a winning position; either lowest cost in market or superior price justified through differentiation

Such strategies require careful strategic analysis.  Simply relying on growth/share matrices such as that of the Boston Consulting Group can be a naïve policy as these models often assume that mature markets should be milked for cash.

Also beware relying on experience curves as these lead to a view that high market share, low cost, vertical integration is the sole route to market success.

Instead, analysis should consider:

  1.  Aggressive restructuring towards your core business rather than diversifying into other sectors.  For example, James Dyson has abandoned his electric car project and this week announced 900 job losses across his business as part of a restructuring.
  2. Reinvest towards an average cost, highly differentiated position.
  3. Do not think that cost-leadership can only be achieved through high market share and accumulated experience.  A focus on modern automated processes may mean cost-leadership can be achieved without high market share.  Again, Brexit may make this difficult for UK manufacturers as it impacts just in time delivery chains.
  4. Vertical integration is not necessary to exploit cost leadership.  Integration should be selective and targeted on value added factors.

In a hostile environment, failure to achieve market leadership can lead to problems such as below average products through lack of differentiation and increased external pressures on your business.

If there is one lesson to succeeding in a hostile environment it is that your core business needs to be cherished and you should not be distracted by searching for new markets.

Designing and Delivering More Customer Value

One of the secrets of successful marketing is developing your organisation so that it has fewer, smarter people to deliver more value to customers faster.

However, things are not that simple in complex, mature, competitive markets.  All players in such markets are after the same thing and they are all fighting for the same set of customers.

Some economists will place price as the primary or sole factor in customer value.  this is the perfect competition model. It may be acceptable in simplified economic modelling but it bears no relation as to what happens in real life.

Consumers do not just buy products.  If a product solution was the only factor in consumer purchases, all goods would have the same features and price would be the sole factor in consumer decision making.

The only markets where price is such an over-riding concern are bulk commodity markets, such as steel or oil. Certainly consumer product markets are rarely decided on price alone.

Consumers form brand preferences.  They value things like customer service. Their self-image projected by the use of brands is important to them.  They like to develop brand loyalty.

These brand preferences drive customer expectation.  For example, consumers expect BMW cars to be superbly engineered; They expect Marks and Spencer’s clothes to be well made and good value; They expect McDonald’s burgers to be of a consistent quality and consistency.

When these customer expectations do not match the delivered product, then customers are dis-satisfied and seek alternatives.

More and more, as technology drives product conformity, brands are using halo services to differentiate their products from those of competitors.  Brands today represent more than physical products. Increasingly brands look to expand beyond their traditional product categories. Caterpillar isn’t just a maker of earth moving equipment, they are a clothing brand.

Brands are not only product; they are services, values, promises made by the seller.  They are an amalgamation of aspects which leads to the creation of a ‘personality’.

Smart marketers do not look to sell products: They sell benefits packages. They don’t sell purchase value, they sell usage value.  So if, for example, you are in the seed business, you don’t prioritise the cost of a bag of grain, you sell the likely value of the yield from that pack of grain.

Porter state that there are three ways to deliver more value to customers and to beat your competitors:

  1.  Charge a lower price than that of your competitors
  2.  Help customers reduce other costs
  3.  Add benefits which make your brand more attractive than that of your competitors

To win through price leadership means having an aggressive pricing strategy.  You must become the low cost option (again not just purchase price but usage price). Such a strategy requires organisational scale, market experience, inexpensive locations (outsourcing), superior cost control and supply chain bargaining power.

Often price leadership means offering fewer options in the market.  Lower prices are often driven by not offering free delivery or making the customer do more of the work.  For example, if you forget to print your boarding card at home, they will apply a significant surcharge to print it at the airport.  Ikea make you assemble their furniture.

Such a low cost strategy means relying on tight profit margins and selling in bulk.  It is difficult to sustain such a position over the longer term.

Many firms operating in business to business markets focus on lowering their customers other costs.  this could be through having longer service schedules, energy efficient machinery, easier repairs.  They market by showing customers that the cost of usage over time is lower than that of competitors products. Others offer to share the customers risk by selling on consignment, having low minimum order quantities or issuing exceptional guarantees e.g. no win no fee litigation.

Some firms go further by actively helping their customers lower costs.  Such companies want to be considered a business partner not just a supplier.  they offer customers training and support.  They may locate staff in customers premises to offer functions like on-site maintenance.  They offer services such as computer software and automated re-stocking.

Inventory cost can be lowered through matching customers Just In Time stock control procedures or through providing inventory outsourcing.

Through helping to reduce customers processing costs many firms become the preferred option in a market.  This could be through improving yields; reducing waste and reworking; reducing customer’s labour costs, reducing accidents and lowering energy costs.

Many firms analyse their production chain using customer value analysis.  Offering to lower costs away from that value chain, such as reducing administration costs or the costs of legal compliance can be a profitable marketing opportunity.

Some firms are successful in markets through offering value added.  This could be through a ‘more for more’ strategy where additional features and functions are added for a slightly increased price.  The trick is to bundle features and services which customers value but which come at a relatively low cost.

This could be the offering of product customisation, increased convenience, faster services such as delivery time, adding free coaching or training, offering consultancy services, issuing extraordinary guarantees and member benefit programmes (e.g. executive lounges at airports).

Sources of Marketing Opportunity

Over the past couple of days I have been looking at replacing my rather elderly car.  it has got to the stage where the cost of annual servicing exceeds the cars value.  One of the cars I have looked at is a successor model to a car I owned thirty years ago.  the new car has a bigger fuel injected engine that that old car.  In fact in the model range, it is a significantly superior model version when compared to the old car.

Yet the new modern car offers a far lower nought to sixty time, a lower top speed and only marginally better fuel consumption.

I was astonished.  Surely after thirty years, improvements in these categories would have been made.  Yet it seems that, in terms of performance, things have gone backwards.

That got me thinking.  How was this new model of car a superior marketing offer than its predecessor? How does it provide marketing opportunity?

Philip Kotler, in his breakthrough book Kotler on Marketing describes three sources of marketing opportunity:

  1.  Supply something that is in short supply
  2. Supply a product in a new or superior way
  3. Supply a new product or service (including an IMPROVED product or service)

When goods are services are in short supply buyers should be queuing up to buy them. So in the middle of a pandemic, things like face masks and surgical gloves will be in short supply.  This situation requires the least amount of marketing talent.  the opportunity is obvious to all.  The product is price inelastic so suppliers can charge high prices.  However, such shortages tend to be short-lived; so the market opportunity does not last.

When supplying an existing product you need to examine how you can IMPROVE that product. It doesn’t seem that the manufacturer of the car described above has properly considered what is an improvement.

There are three ways to identify product improvements:

  1. Use the Product Detection Method
  2. Use the ‘Ideal’ method
  3. Use the ‘Chain’ method

The problem detection method assumes consumers are accepting the current versions of goods but that they are not fully satisfied with those versions e.g. I like my new car but it uses too much fuel or I like my new car but I wish it had better acceleration.  Such statements create marketing opportunities.  problem detection is the primary method for product improvement but it is less helpful in terms of new product innovation.

The ‘ideal’ method involves asking consumers what they see as the ideal version of a product.  However consumers creating an ideal product wish list can create contradictions.  When using the ideal method, you may be faced with overcoming these contradictions.  For example, Consumers may like the taste of high alcohol but want them to be lower calories.  However consumers also reject low calorie beers as they have too low an alcohol content and a bad taste.  You can make a low alcohol beer tastier but only by increasing its alcohol content and you can only lower a high alcohol beer’s ABV by reducing its taste.

The consumption chain method examines the steps consumers take to acquire, use and dispose of products.  Are consumers satisfied with the way they consume products and can those steps of consumption be improved.  This could be through changes to the product itself or changes to the ancillary services which surround a product.

By analysing the customer activity cycle around your goods you can inform product improvements.  You also look beyond purchase value and look at your long-term relationship with those consumers (lifetime value).

When supplying a new product or service, you may not be able to rely on customer opinion,  They will not be aware of their need for the product until it appears on the market.  No one foresaw the home computer market. In the 1960’s it was expected that every major city might have a computer.  When desktops arrived they were tools for businessmen and engineers, not a domestic product.  When Apple produced the iPad, people forecast disaster as they saw no market for tablet computers.

Again, there are three models for assessing new product ideas:

  1. First use your company organisation to derive promising opportunities.  This is your sales force listening to customers and investing in blue sky research and development.  This can be a high risk approach
  2. The second method is to create the role of an Ideas Manager.  This is a senior role in an organisation who is tasked with managing product improvement and new product development.  They should lead a multi-disciplinary team with members from across your organisation including engineers, operations managers, marketers and finance.  It is this team who follow a formal process of idea assessment.  This can be new product proposals or improvements suggested by staff through systems like Kaizen and Total Quality Management.  The Ideas Manager should champion the concept of an Ideas Organisation and should take ownership of the decisions of the ideas committee.
  3. The Strategic Breakthrough Model:  This involves even more improvement thinking targeted at breaking through market growth pinch points and blockages.  this could involve finding new customer groups and new market segments.  It could mean geographic expansion of your firm or new sales strategies.  It could be new pricing strategies or financing solutions, e.g. most cars are now bought via leasing agreements as opposed to the old method of hire purchase. It could also mean adding new product features or developing completely new products.

Competitive strategy in Emerging Markets

As the BBC rapidly runs out of content to show due to the pandemic shutdown, it has been showing repeats of Dragon’s Den. One common feature of that programme is entrepreneurs trying to launch a new product or solution in an existing market.  All too often, these pitches end with the Dragon’s rejecting the invitation to invest in the product with the refrain of ‘I’m out’ or ‘there isn’t a market for your product’.

Trying to launch a new solution to an old problem is probably the hardest thing to do in business.  Why invent a new product to dig a hole when solutions like spades and mattocks already exist.  The new product needs to be better than the existing solution. In fact it probably needs to be better over a range of criteria; ergonomics, price, availability, value for money, durability, etc.

That doesn’t mean there aren’t new markets and a space in the world for new product solutions.  New markets emerge all the time.  In the 1960’s no one foresaw the home computer; when apple launched the iPad, they were derided for launching a product no one wanted or needed.

So what is an emerging market?

Generally, emerging markets are defined as newly-formed or re-formed industries driven by technological innovation, shifts in cost relationships, the emergence of new consumer needs or other changes in the economy or society.

A factor of emerging markets is that there tends to be few ‘rules of the game’. How the market is expected operate hasn’t been established.

There are common structural factors which characterise emerging industries.  these relate to the absence of established bases of competition and the initial small size of the industry.

  1.  Technological uncertainty:  What is the best technical configuration of the new product category.  For example which is better, a lithium battery car or one powered by a hydrogen fuel cell.
  2. Strategic Uncertainty:  There appears to be ‘no right’ strategy.  Different market players approach the market in different ways e.g. positioning, supply chains, distribution, customer service, etc. Products are configured differently or different production technologies.  For example, the common layout of the pedals in a car took many years to become established.  Different models of car used to have different layouts of accelerator, brake and clutch. Strategy can also be uncertain due to a lack of information about prospective consumer groups and the actions of competitors.
  3. High Initial Costs but Steep Cost Reductions:  New products in emerging markets tend to begin with small production volumes.  There is a lack of experience in producing the new product so manufacture takes longer and there can be increased wastage.  However, the production learning curve can lessen rapidly and as workers become more experienced in its production. Firms develop better, more efficient processes and procedures.  Productivity can rise rapidly as sales increase.
  4. Prevalence of Embryonic Companies and Spin-offs: New technologies see a lot of new market entrants.
  5. Consumers tend to be first time buyers:  Marketing is focused on product take up or getting consumers to switch to your new offer.
  6. Planning for a short-time horizon:  the pressure in the market may be to meet rising demand for the new technology.  market players suffer production bottlenecks and a lack of production capacity.  The focus in the business is on the now: firefighting current problems; not looking to the long-term future.  For Example, when Tesla launched its 3 model electric car, it lacked the production capacity to meet demand and customers faced long delays in obtaining their vehicle.
  7. Subsidy:  There may be government subsidy of new market entrants particularly in areas of societal concern.  For example, the UK government subsidised the insulating of people’s homes and the installation of solar panels.  Currently the UK government is subsidising the search for a Covid-19 vaccine.  The UK government is also interested in creating ‘gigacities’ large battery farms to store electricity generated through wind and solar.  But beware, subsidy can skew a market and make the market dependent on political decisions.

Emerging markets can experience early mobility barriers.  New markets often rely on proprietary technology and manufacturers may have significant control over supply and distribution channels.  They may hoard access to raw materials e.g. the UK is looking to build factories to produce the batteries for gigacities but lithium, the metal used in the batteries is extremely rare and difficult to obtain.  there may be a lack of skilled labour to produce the new technology and the market may lack cost advantages of experienced workers.  This lack of cost advantages can be made more significant through the newness of the technology needed to produce the product and through competitive uncertainties.  Likely there will be significant risk in the sector and thus the opportunity cost of capital can be high.

The nature of entry barriers in emerging markets is a key factor.  Often success in these markets is less from the need to command massive resources and more from the ability to bear risk.

So what are your strategy options in an emerging market:

  1.  You act to shape the industry structure:  You get to set the rules of the game through your product configuration, your pricing strategy and your marketing approach.
  2. There are externalities in industry development:  there is a balance to achieve between industry advocacy and the self interest as to your market position.  You may have to ensure that industry players are, in some way, interdependent on each other. this can be through setting industry standards, setting up trade bodies and establishing industry codes of practice.  The big supermarket chains are all members of the British retail Consortium which sets standards as to product quality and supply.  Those firms that do not comply with these industry standards can be forced to disappear if they refuse to accept industry norms.
  3. You can change the role of suppliers and channels:  you may be able to shift the orientation of suppliers and distributors by getting them to accept your procedures and standards.

You have to make big decisions when entering an emerging market.  Do you pioneer in the market or do you act as a market follower. Being fist in can be a benefit but it can also be risky.  Sega were first in to the computer game console market but suffered as Microsoft and Sony undercut their pricing structure. This is also an example of existing firms seeing your emerging market as an opportunity and using their existing scale and resources to drive you out.

Pioneering in an emerging market can be high risk.

Entry into a market is appropriate when:

  • The image and reputation of your firm is important to the buyer e.g. Nike entering the golf club market
  • Early entry is to initiate the learning process i.e. get ahead of the learning and experience curves. Experience is difficult to imitate.
  • Customer loyalty offers great benefits and those benefits lie with the first on the market.
  • Absolute cost advantages can accrue through securing the purchase of raw materials.

The following tactical moves:

  • Commit to the suppliers of raw materials – become their favoured customer
  • Finance ahead of actual need.
  • Entry to the market MUST be as a result of careful strategic analysis.

Competitive Forces Shape Strategy

Market analysis is central to strategy formulation. Dealing with competition is the essence of strategy formulation.

However competition isn’t only defined by other market players.  There are a host of underlying economic and social forces affecting competition.

There are two elements to market analysis: An examination of the macro-environment and an examination of the micro-environment.

The mnemonic PESTEL (or PESTLE) is often used to describe the analysis of the macro-environment. It stands for POLITICS, ECONOMICS, SOCIETAL, TECHNOLOGY, ENVIRONMENTAL, LEGAL.

SO UK businesses over the last five years should have been examining the effects of Brexit on their market, it’s impact on politics, it’s impact on the economy, how it has changed UK society, what technological effects it brings, its effect on environmental policy and how it is going to change the law.

An analysis of the micro-environment also has to take place.  These are factors directly affecting a particular market or market segment.  Michael Porter described these as five forces: Industry Competitors, New Market Entrants, Suppliers, Buyers and Substitute Products.

These collectively impact the profitability of an industry or market segment.

Some economists model on the basis of perfect competition.  However, perfect competition only exist in those models it does not exist in the real world.  More enlightened economics now apply scientific rigour and evidential standards to their modelling.  Yes, this makes models more complex as factors beyond price need to be accounted for in modelling but the results of such models are more realistic.

If Porter’s five forces are strong, entering a market can be incredibly difficult and costly.  Even if the five forces are ‘mild’ they can combine to hamper market entry.

Market entry by new competitors can occur where there are few economies of scale; where products across a market are homogenous, where capital requirements are low or where cost advantages are independent of organisational scale.

Existing market players can leverage a learning or experience curve to protect there market position.  Where there is no learning curve, or it is short.  Where experience is limited.  These barriers to market entry are low.

Often existing market players will use legal barriers such as intellectual property rights to prevent entry.  For example, for many years Cadbury held the patent on the machinery to make Flake bars, so competitors were unable to make generic copies of the bar.  Muller Dairies hold a patent on the corner yoghurt pot and have successfully sued competitors who developed copycat products.

New market entrants can also be blocked through existing market players controlling distribution and supply chains.  This can occur through forward and backward integration of suppliers and sellers within a market.

Government policy can prevent market entry.  Governments may create licensing requirements within an industry such as the arms trade.  Governments create legislation, safety regulations, environmental standards, etc, which limit opportunities for market entry.

Currently in the UK there is a growing political argument over the lowering of food standards and animal welfare standards.  The Johnson government has legislated to lower UK standards and move away from the high common standards held when the UK was a member of the European Union.  This is seen as preparing for a US trade deal and to allow the importation of food from the USA which is often produced with low animal welfare standards and low food hygiene controls. US practices such as chlorine baths for poultry and using Ractopamine on pork cuts is common in the US but currently banned in the UK.  These US practices are attempts to cover up America’s ‘secret epidemic’ of food-borne disease and food poisoning.  Groups of varying political allegiance, including some cabinet members are opposing lowering of food standards to US levels.

Market incumbents often fight back against new market entrants through the use of discount fighter brands.  This is a common tactic in the golf equipment market where the majority of premium club manufacturers own a fighter brand to combat new entrants.

Where market growth is slower, such as in a mature market, entry can be all but impossible.  In such circumstances, significant market change needs to happen to allow entry e.g. Brexit.

Powerful buyers and suppliers affect a market through the use of their bargaining power.  Suppliers can raise prices and limit supply (as OPEC often did with oil).  Powerful suppliers, such as the large supermarket chains can use bulk purchasing to drive down wholesale prices. The tied house system for many years allowed breweries to control the price of beer and limit tenant landlords profitability.

Suppliers are powerful where there are a few dominant supply companies e.g. petrochemicals and where similar industries do not directly compete (e.g. steel fabrication and aluminium smelting).  They can also be powerful when a market is subject to forward integration (raw material suppliers buying finished product manufacturers). So TATA was an Indian steel maker which purchased Jaguar Land Rover the car maker.

Suppliers are also powerful where the supplied industry is not critical to their survival or profitability.  The Ravenscraig steelworks, built by the nationalised British steel to make plate steel for the automotive industry was a weak supplier wholly dependent on the Leyland car works at Linwood and the Ford plant at Bathgate.  When those car plants closed, there was no market for Ravenscraig’s steel.

Buyers are powerful when purchases are large, concentrated and central.  They are also powerful where large scale purchases are technologically complex e.g. supercomputers.

Buyers are also powerful where products are homogenous e.g. buying potatoes.  they are also powerful where they can buy a readily available alternative e.g. buying cane sugar compared to buying beet sugar.

Buyers are also powerful when the product purchased is not critical and can be easily cut from the buyers systems.

Buyers can also be powerful when they look to integrate back up the supply chain.

Substitute products limit profit opportunities they can reduce opportunities during market boom times and they can temper the ability to raise prices.

Existing competitors often jockey for market position.  Intense rivalries for market leadership exist if all market players are of similar size and there is no dominant market leader.  Slow industry growth (mature markets) can create fights for market share which limit opportunity.  Competitors can be strong where products are undifferentiated or where it is easy for customers to shift supplier.  In such markets, fixed costs can be high, products are often perishable (agricultural goods such as milk) or there could be a reliance on high sales volumes due to low profit margins (high street fashion).  Existing competitors can be powerful where there is overcapacity in a market (such as car production) or where markets are slow-moving such as musical instruments or antique furniture.  For example, once a pianist has bought a piano, how long will it be before they need to replace it (if they ever need to).

Often markets have high exit barriers, such as environmental clean up costs or the need for expensive specialist machinery.  This means competitors may stay in a market when in other circumstances they would have diversified elsewhere.

To succeed where industry competition is strong, you need to focus on market positioning, influencing the balance of the market and exploiting industry change. You also need to build defences so you are less vulnerable to the strategic attacks of other market players.

Time and Technology

We live in a world where technology and science progress at an ever increasing rate.  It was probably millennia before man progressed to create the wheel. Life in the middle ages was not too different to life in Roman times. Yet today rarely a day goes by without a what once would have been considered a major scientific discovery.  Accelerating technological advancement has become the norm.  Progress affects commerce.  progress affect your business. So you have to be aware and plan for technological change.

There are plenty of examples of businesses ignoring technological change.  The big music retail chains ignored music streaming.  VHS rental became a thing of the past.  Kodak invented the digital camera sensor but then allowed others to develop the digital camera as they focused on film rolls.

Time affects many business resources: manpower, finance, raw materials, knowledge.  The trio of money, quality and time dominate.  To implement the quality demanded by those in the marketplace is often a factor of money and time.

Quality often relies on the available time to market and the technology needed to deliver that quality.  Technology includes the actual features of a product but the support functions used to produce that product.

You also have to consider the lifecycle of a market.  Over time markets develop, they often enter a technological stage.  This affects the consumers perception of the state of the market and your businesses position in that market.  Is your business seen as cutting edge or as old-fashioned?

However in some circumstances appearing old-fashioned can be seen as a benefit.  Take Fender guitars, they sell a lot of instruments which are still made on machines installed in the 1950s and which contain features like neck profiles and electronics which are all but identical to those of 50 years ago.  Many players of the electric guitar still prefer amplifiers which contain valve technology little changed since the early 20th century.

Technology also affects the level of automated support in the marketplace.  This isn’t just production line technology but secondary process technology such as raw material delivery technology, automated aftersales support technology and even automated marketing technology.

It can be industrial technology, like the creation of long-life egg powder for bulk bakers or 5 gigabyte memory cards for digital cameras. It can be workplace technology such as customer databases or production line automation.

There are four aspects to workplace technology:

  1.  Improving the speed of an activity
  2. Improving the precision of an activity
  3. Technology overcoming production limitations
  4. technology reducing costs and wastage

Time is important as it allows faster delivery of best value but it also creates pressures.  You need to be able to strategize faster, implement faster whilst meeting customer expectations faster.

That latter aspect requires careful market monitoring.  Consumer attitudes change over time.  Changing perceptions is fundamental to marketing.

Time can also be a competitive advantage.  Being first into a market, being ‘first there and best dressed’ has long been seen as an advantageous position with sustained market share.  However this view is dependent on a market being ready for the innovation and being both willing and able to assimilate it.

Reducing time required to complete a function can provide market flexibility.  Who hasn’t spent hours pouring over Gantt charts and production networks trying to match available resources to production deadlines?

There are four aspects to new product taxonomy:

  1.  Product renovation:  altering old products which are already in the market place, new designs, new features
  2. Creating copycat products: Products which use technology which exists in the marketplace but which is new to your business
  3. Commercialisation of in-house products – products which exist within your business (for business purposes) which are then marketed to the consumer market.
  4. True innovation: New products created from new emerging technologies.

Innovation implies increased complexity and thus increased risk.  You need to apply marketing functions to educate the market as to the benefits of the new technology

Time affects workplace technology.  You need to pace your time resource to meet market readiness.  You need to exploit technology to introduce innovation over complexity.  The technology may be complex but it needs to make things easier for the consumer.

In terms of marketing, time and technology need to be considered in both strategic and operational terms.

Strategically, time and technology need to be applied to sustain competitive advantage.  Operationally, time and technology need to be leveraged so as to enable first to market, to reduce costs, to develop better systems, etc.

In applying time and technology to your business, you need to be aware of the strategic advantage cycle:

  1. Observe your environment.
  2. Orientate your organisation to that environment
  3. Decide what you need to do to make that environment favourable to your organisation
  4. Act to implement your decision.

Your decision needs to advance and sustain a competitive advantage over your competitors.

Why Customer Service Matters – The Service-Profit Chain

A few years ago, I was reading an article by the motoring journalist Jeremy Clarkson about why he changed the format of the television programme Top Gear from one of journalism to one of entertainment.  One of the reasons he gave was that aerodynamics and mass manufactured components meant that many mass market cars were all but identical. To review these cars often meant focusing in minor details whilst over all performance was all but identical across the market.

So if products across a market are increasingly a homogenous mass, how do you differentiate your offer from that of your competitors. Increasingly service has become the prominent source of differentiation in developed economies.

Customer service, before and after purchase is an increasingly important part of a differentiation strategy.  When Kotler defined the marketing mix for goods, he included only 4 ‘Ps’.  Other marketing academics extended Kotler’s model by adding three more ‘Ps’: People, Process and Physical Evidence; but only in relation to services.

Today, all firms, both those who produce and supply goods, and those in service industries, need to develop a marketing mix which includes the service elements of the extended 7P marketing mix.

There is logic in making customer service matter in your organisation:

  1. Satisfied employees provide better customer service quality.  Satisfied employees stay longer in your organisation and they are more productive. they become more knowledgeable and are more committed to the goals of the organisation.
  2. Service quality is noted by customers and customer satisfaction is increased.
  3. Customers become more loyal and are ‘stickier’, they stay longer with your offer and its is harder for your competitors to prise them away.
  4. Loyal customers are more profitable.  The longer you keep a customer, the more you earn from them. Loyal customers spend more.  They cost less to serve and to promote to.  They are less likely to leave on the basis of price.
  5. There is a positive feedback loop: As employees become further satisfied, this reinforces customer satisfaction.

Developing strong customer service which is closely linked to your brand and corporate identity doesn’t just differentiate your company from your competitors, it is a source of improved revenues at reduced risk.

Kaplan and Norton, when they developed the Balanced Scorecard were thinking along these lines.  Remember, they directly linked:

  1. Better company learning and innovation; to
  2. Better systems and internal processes; to
  3. Better customer results: to
  4. Better financial returns, and those returns could be invested back to:
  5. Better company learning and innovation.

This leads us to the five dimensions of Servqual, the quality assurance system focused on reducing cognitive dissonance in the processes of interaction between an organisation and its stakeholders:

  1.  Reliability:  Your ability to provide services dependably and reliably.
  2.  Responsiveness:  Your willingness to help customers and other stakeholders.  Your willingness to act promptly.
  3.  Assurance:  Customers know you have knowledgeable and courteous staff who inspire trust and confidence.
  4.  Empathy:  You provide caring, individualised attention to stakeholders
  5. Tangibility:  Your service standards are reflected in the physical attributes of your facilities, equipment, and the appearance of your staff.

Running a successful business today is more than maximising profit margins or increasing manufacturing output.  You need a holistic view of your market and your organisation.  You need to improve service in a way which individualises your organisation and which differentiates your business from that of your competitors.  Bad customer service is far more likely to lead to loss of business and company failure that other factors.

 

 

Mintzberg’s Three Modes of Strategy

In the 1980’s the US management academic henry Mintzberg described three modes of strategy-making found in organisations.  Do you recognise your business in one of these modes:

  1.  The Entrepreneurial Mode
  2. The Adaptive Mode
  3. The Planning Mode

The entrepreneurial mode is characterised by bold, risky actions. The organisations role is defined as innovation, uncertainty and brokerage.  This is someone with capital viewing a marketing opportunity. It predominates in new organisations and those operating in new markets.  It is a policy of risk taking.

Entrepreneurial mode strategy is dominated by active scanning for new opportunities.  Opportunity is the driver of strategy and problems are secondary and often ignored.

Power in the entrepreneurial mode is often in the hands of an individual at the head of the firm. An example would be James Dyson, Elon Musk or Richard Branson.  These charismatic leaders often rule by decree.  Often there is no chartered plan of the organisation and operations are based solely on the bosses vision.  The aim is to make dramatic leaps forward in the face of uncertainty.  The CEO often thrives on such uncertainty.

The overall goal of an entrepreneurial organisation is growth, physical expansion of the organisation, not profitability.  Often this is the CEO wanting to build an empire.

This is a high risk strategic mode and there are lots of examples of existing firms pushing the entrepreneurial mode of strategic development and coming up short.  Jessops, the specialist camera retailer pushed its expansion just as the smart phone arrived, and failed spectacularly.  Pizza Express became a large scale high street restaurant chain; from the base of a single outlet which doubled as a jazz venue; and collapsed with over half a billion pounds of debt, roughly one million pounds of debt per restaurant.

And I have written at length at the collapse of Sinclair following the development of the C5 electric tricycle.

The Adaptive Mode is ‘the science of muddling through’ (Lindblom). It is disjointed incrementalism. The status quo is accepted and there is a lack of clear objectives. Decisions are remedial solutions and progress is through baby steps not giant leaps.  This is often an organisation coming to terms with a complex environment. Any strategy as a coping mechanism.  Focus is on short-term solutions not long-term existence.  Strategic solutions are often taken with a view as to reducing organisational conflict.

The adaptive organisation lacks clear goals and power is often divided between divisional managers and other stakeholders. Decisions are often made in incremental steps due to environmental complexity.  Feedback from stakeholders is often critical to decision-making.

This mode leads to disjointed decisions forced by diverse organisational demands (just look at UK nationalised industries during the 1970s).  Strategy is fragmented and there is no overall coordination. Often there is no overall corporate plan.

The planning mode of strategy development is often found in mature organisations, big businesses and government departments.  Complex analysis is used to define an organisation’s path into the future.  Analysis is undertaken before action is taken. Often there is anticipatory decision-making.  Decisions are interdependent across and organisation.  There is a formalised decision-making process.  Plans anticipate one or more future states.

There is rationality in decision-making through the systematic attainment of goals stated in precise quantitative terms.  Scientific technique is used to develop formal comprehensive plans.

In the planning mode, analysts work alongside managers and play an important part in decision-making.  Systematic analysis and statistics play an important part as a basis for planning. Cost benefit analysis is central to decision-making.

The organisation focuses on both new opportunities and problem-solving but always in a systematic structured way. Risk is analysed and after strategies are implemented, they are regularly reviewed,

The Planning mode is sometimes criticised for being slow, costly and unwieldy.

Most organisations will experience each of these modes of strategic planning during their life. Managers must be aware of the pros and cons of each mode.