A farewell to the CE mark

Over the past week, I spent some time looking at the UK government’s draft amendments to legislation as a result of Brexit.  I also have had a look at the latest missives from the EU published in preparation for Brexit.  If you are in business, particularly businesses which involve the export and import of goods to and from the EU, this is a necessary process and I would urge you to take time to carry out such research.

There are eight weeks until the UK leaves the EU.  Suffice to say, everything is completely chaotic.  Not least the fact that the UK is way behind in its preparations for Brexit and parliament has reams of legislation to pass before we leave.

The parliamentary half term recess has been cancelled but even with that additional time (eight sitting days), it is unlikely that parliament can get all the necessary law in place before 29 March.  Seven acts of parliament and thousands of statutory instruments need to be passed before the UK leaves the EU for the law to operate.  It is highly unlikely that parliament can achieve that task in the time remaining.

The Department for Business, Energy and Industrial Strategy has taken a novel approach to the necessary amendments.  They have placed them all in a single set of regulations which runs to 619 pages.  This document covers the law of weights and measures, environmental law, product safety and some matters of food law.  Normally such amending legislation would be separate documents classed by subject matter.

The effect of this draft law is to remove all references to the European Union from existing UK law.  It is very much placing a sticking plaster on an amputated limb.  it is a temporary measure and it is unlikely that the amended law will stand for long after Brexit.

One result of the draft legislation is that the CE mark will be removed from UK goods.  The BBC reported on Friday that the UK will replace the CE mark with a new UK Certified Approved mark, UKCA.  This new mark has yet to be published, so with eight weeks to go, manufacturers have no idea as to the certification marks they will need to put on products made for the UK market.

The proposed UKCA mark also appears to be a complete misunderstanding of the purpose of CE marking.  The appear to believe it is a quality mark similar to the old BSI kitemark.  It isn’t.

The old BSI kitemark was a quality mark that told consumers that a product complied with a particular BS standard e.g. double glazing.

The CE mark is a declaration that certain categories of products comply with EU law (regulations and directives).  It shows that the product complies with the general product safety requirement of a particular EU law e.g. You test to the general safety requirement of the Toy Safety Directive, you do not test only to the terms of EN71 the EU safety standard.  Most toys designed for infants are tested to EN71 but also to the baby’s dummy bite test from the UK safety standard.

The CE mark applies to what are called ‘new approach directives’.  There is plenty of EU product safety law where the CE mark is not used e.g. The General Product Safety Directive.

New approach directives allow for type approval.  This means an example of the product is tested for compliance.  The manufacturer also has an approved quality assurance system which ensures that all further production of the product is identical to the tested example.  This removes the need for external batch testing of production and thus reduced costs.

So the CE mark is a compliance mark, but it goes further.  It is also a passport mark.  It allows goods to cross internal state borders within the EEA with no further need for certification or inspection.  So a French manufacturer can have his products certified in France and sell them in Germany.

It is clear that the new UK certification mark will not act as a cross border certification passport.  One must ask why this new mark is necessary as it is a criminal offence to sell unsafe and uncertified goods even if they are not marked.  If the mark is not a compliance passport, it simply reverts to the status of a quality mark like the old kitemark.  The main purpose of the CE mark is lost.

The CE mark was extended to metrological equipment when the market in weights and measures technology was opened.  It allowed manufacturers of weighing and measuring equipment to have them approved in one member state and to sell them across the EU.  This is why the old crown mark disappeared from pint glasses to be replaced by the CE mark.  There is no indication as to what will replace the CE mark on UK manufactured metrological equipment.  I suspect we will go back to the old crown verification mark.

On 1 February, the EU published a question and answer document relating to ‘industrial goods’ exported into the EU after Brexit.  This clearly states that UK producers will no longer be able to apply the CE mark, but it goes further.

It clearly states that UKAS, the United Kingdom Accreditation Service will lose its permission to award notified body status to test laboratories.  UKAS had been campaigning for a continuation of this permission but the EU is clear that it will be removed.  The EU document states that there will be little or no change to existing notified body approvals.

This means that UK test laboratories will no longer be able to issue CE mark type approval permissions to UK businesses.  This affect a wide range of products from toys to industrial machinery.  New models of these products will have to be certified in an EU state before the will be allowed into the EEA.

EU law is clear that responsibility for product safety compliance lies with the responsible person within the EU.  Currently that would be a UK-based manufacturer.  However for goods from ‘third countries, responsibility switches to the manufacturer’s agent within the EU or the person who first imports the goods into the community.  What this means is that UK manufactures wanting to export to the EU will have to arrange for an EU-based agent or to allow the customer importing their goods to the EU to act on their behalf with regard to the safety compliance of their goods.  This adds costs.

There is also a duplication of product testing and certification costs.  Firms will have to have test certificates for both the new UK certification mark and the CE mark.  Their quality assurance systems will have to be certified by an EU certified body and the new UK certification body (likely the British Standards Institute).  This is potentially a massive increase in costs.

Major manufacturers based outside the EU, such as Dyson with his vacuum cleaners (made in Malaysia) will have to consider where they will get products certified. For example, do they achieve type approval for an EU market of 550m potential customers; or do they spend the same amount to achieve certification in the UK, a market of 65 million potential customers.  I suspect many firms will prioritise EU certification over UK certification.

The other big news story this weekend was the rumour that Nissan was changing its decision to produce the new Xtrail 4X4 at its Sunderland plant.  This is not a surprise.  80% of Sunderland’s production goes to the EU.  There are major concerns regarding the application of tariffs and on rules of origin being applied to this EU export production as it will substantially increase the cost of production. Eighty percent of the Sunderland production is sent into the EU.  The EU/Japan free trade agreement, removing tariffs and allowing for regulatory equivalence, went into operation on 1 February.

However, there are other concerns.  All EU type approvals for UK produced vehicles lapse in March.  Nissan and other car producers will have to have all their models type approved in another EU state.  There will be no EU approved body for vehicle certification in the UK.  Again this increased costs.

Nissan is one-third owned by Renault.  So it clearly makes sense to locate production of new models within the EU and not in a ‘third country’.

This is the rubber hitting the road of Brexit.  The removal of CE marking and the loss of UKAS as an approval body for EU notified body status signal large increases in cost and restrictions in the ability to move goods across borders.

It is worth noting that the UK government preparation papers for no deal state that businesses reliant on, or with exposure to, EU markets should move their company registration to an EU state in preparation for Brexit so as to ensure continuity.  Such a move would take businesses out of UK corporation tax jurisdiction.

There has been much talk regarding tariffs in the politics of Brexit.  The removal of the CE mark from the UK is a clear signal as to new, non-tariff barriers, which will hobble UK manufacturing.

Dealing with Crises

In the past week, UK retail has seen the collapse, for the second time, of the music retailer HMV and, following a significant corporate fraud, the collapse of the café chain, Patisserie Valerie.

Both of these businesses could be considered as being in crisis for a significant period of time.

In the last blog entry we discussed economists views of risk and the variety of risk attitudes businesses and individuals may have.  Whatever, the risk profile, it is likely that at some time in its lifespan, a business will face a crisis.

Currently the UK is approaching the deadline for Brexit.  If your business is not making contingency plans for the various potential outcomes of the Brexit process, you may be facing a potential crisis.  In fact it is highly likely that the UK will face some form of national crisis, particularly if a withdrawal agreement cannot be reached.  The UK government preparation papers give some idea to the level of crisis the nation may experience.  For example, the Department for the Environment, Food and rural affairs, it is rumoured, is planning a mass slaughter of one-third of the UK’s sheep in the event of a no deal Brexit as a measure to maintain stock prices.

Mintzberg et al. in The Strategy Process: Concepts, Contexts and Cases (Prentice Hall International, 1988) described organisations in crisis as like ‘living in collapsing palaces’.

These palaces are built of tightly interlocking beams and stone blocks.  They are filled with fine and elegant components.  But these palaces are built atop crumbling mountains.

The rigid, cohesive structure of the palaces look completely rational to those existing inside them.  Indeed they look beautiful.  However viewed from the outside, the palace has foundations that are rapidly eroding away.

Such a position is shown by the collapse of HMV.  For decades, HMV was the model of how to sell music.  It easily survived the movement of music sales from vinyl to compact disc.  It easily coped with the shift in physical technology.  It was an elegant palace.  However, it didn’t foresee the arrival of digital downloads and the rise of streaming services.  The movement to digital music files eroded the foundations of HMV’s palace.

The management of HMV continued to shore up their elegant palace despite clear warnings.  it was obvious to those outside that HMV was operating a declining business model.  Some competitors, such as Our Price Music and Tower Records went bankrupt.  HMV’s main competitor, Richard Branson’s Virgin Megastore was sold off as Branson divested much of his music empire shifting his business into areas such as airlines and train services.

Often the more elegant the palace, the less able it is to cope with a crisis.  Its rigid components mesh together so tightly that it cannot react appropriately. The organisation’s perceptions, goals, capabilities and methods of working are beams and blocks tightly aligned and preventing flexibility.  The elegant palace is rigid, solid, stuck and unable to flex.  Such movement is necessary to cope with the shifting foundations.

However in many crisis, despite flexibility, the foundations fail and the organisation begins to crack:

  • Top managers are viewed as making faulty predictions
  • Doubts arise as to the ability of managers to make crisis decisions
  • Managers as a result are seen as incompetent liars
  • Idealism and commitment to goals fade
  • Cynicism and opportunism thrives
  • Cuts and reorganisation lead to power games and empire-building.  Cooperation is undermined
  • The processes of disintegration feedback on themselves and are reinforced.

An organisation’s ability to achieve often depends on the expectations of its stakeholders.  If stakeholders expect failure, failures become more likely and other expectations of failure multiply.  The organisation enters a downward spiral of failed expectations

Achievement often relies on ability and effort.  If people expect failure, they leave, and they take their ability, expertise and effort with them.  As a result the level of ability in the organisation falls.  This is particularly the case if potential candidates outside the organisation see it as failing and therefore do not consider joining it.

As a result, job performance falls as staff take on unfamiliar roles.  Staff begin to receive proportionally less reward for their efforts.  Job satisfaction slides.

Conflicts and power struggles develop between managers and teams. Some in the organisation become cynical opportunists.  They make unreasonable demands which elicit exhortations from senior management.  This may result in these manages, in turn being seen as opportunistic cynics.

Such conflicts could be seen across UK industry in the 1970s as nationalised industries suffered crises and unions made increasingly exaggerated claims for pay rises.  It got to the stage where the most minor of disputes ended with all out strikes which hobbled productivity.

Such power struggles often ended with the centralisation of power and responsibility.  In the nationalised industries this meant the appointment of figurehead senior managers who micro-managed.  Senior managers often grabbed powers even though they had little knowledge of how to use them.

In such positions, for an organisation to move forward, it must allow the disintegration to take place.  Take HMV as an example.  When the firm first collapsed, there was an opportunity for its new owners to change its business model; to move into downloads, internet sales and music streaming.  However, the new owners retained the old business model whilst taking significant levels of cash out of the organisation.

In retaining the old business systems the ‘rescuers’ of HMV failed to learn the lessons of the original administration process and it once again failed.

So how do you avoid crises:

  1.  Avoid excesses:  Excessively sticking to processes and prescriptions for management.  This is the ‘computer says no’ response.  It often leads to contingency plans being ignored and issues being oversimplified.  Crises caused by environmental change can be exacerbated.  Such excesses can result in complacency i.e. plans become annual events not continually evolving processes and documents.  To avoid such excesses, employ critical friends, carry out both marketing and market research, benchmark, allow dissenters to speak out, don’t become an organisation of ‘Yes Men’.  Plan to employ strategic strengths and eliminate strategic weaknesses through developing SWOT strategies. Have a Plan A, and a Plan B, and a Plan C,…….
  2. Consider Replacing Top Managers:  Often this is a move needed to end or avoid a crisis.  However competent the existing top management, they can build up an existing ‘group think’.  replacing them gets rid of personal enmities and old assumptions.
  3. Reject Implicit Assumptions:  which underlie existing managerial perceptions and behaviours.
  4. Experiment with Portfolios:  Invest in new products, enter new markets, develop new technologies, develop new operational models and employ new people.  Look at Ansoff’s methods of business growth, market expansion, new product development, brand extension and diversification.
  5. Managing Ideology:  Top management are often seen as the villains of a crisis.  They can exacerbate a crisis by delaying action.  They can steer their organisations into crises.  See Fred Goodwin at RBS or the board of Carillion.  However, if they successfully drive the organisation through the crisis, they can become the organisation’s heroes, for example, Steve Jobs at Apple.  By managing organisational ideology, managers can define their status. Crisis are times of danger but they are also times of opportunity.  Shaping ideology can nurture enthusiasm amongst stakeholders.  Let the language and actions of senior managers mould the organisational ideology.  Let managers become the heroes of surviving the crisis.

 

Risk

Business is, like life, about taking, managing and coping with risk.

Economists categorise a risky activity as having two characteristics:

  1.  The likely outcome, for example the return on an investment; and
  2. The degree of variation in all possible outcomes.

So, a ‘fair gamble’ is one where, on average you will achieve zero monetary profit.  For example, for your investment you have a 50% chance of gaining £100 but you also have a 50% chance of losing £100. On average you do not gain.

An ‘unfair gamble’ means you will have only 30% chance of making that £100 but you have a 70% chance of losing that sum.  On average you will lose by accepting such a gamble.  This is how most casinos operate where the chance of winning always lies on the side of the house.

You also have ‘favourable gambles’.  This is where you have, say, a 70% chance of winning and a 30% chance of losing.  Such situations are referred to as profitable.  Success in business is about seeking out ‘favourable gambles’.

There are also different levels of risk.  So, for your initial stake you have the chance of winning £200, not £100, with the same percentage odds, your bet will be ‘riskier’.

Bear in mind, for most marketing campaigns, you should be looking for a return on investment many times that of your initial stake; your marketing budget.  It is not unusual to expect a return on marketing investment of between 500% and 1000%.  So you are looking at a ‘bet’, not of 100:30 but of between 1:5 or 1:10.

Businesses, like people, will have different risk profiles.  Economists classify such attitudes into these groups:

  • Risk averse
  • Risk neutral
  • Risk-loving

A risk neutral business will only invest when the outcome is likely to be profitable (on average.  They are only interested in fair gambles or better.

A risk averse business will refuse a fair gamble and will only invest when the odds are sufficiently favourable and the potential monetary profit will overcome their inherent dislike of risk.

A risk-loving business will take on an investment even if the strict mathematical calculation of the risk describes the investment as unfavourable.

Think of Richer Sounds, the hi-fi and electronics retailer.  The business has been in operation for over forty years and on average has opened one shop  every couple of years.  The slow careful growth of the firm could easily be described as, at best, risk neutral, and potentially risk averse.

Compare that position to the actions of Fred Goodwin at Royal Bank of Scotland.  One of the accusations made of Goodwin on the banks collapse was that he was pursuing rapid growth at all costs.  He was making investment and purchase decisions whilst ignoring the normal due diligence analyses carried out by the bank’s staff.  This resulted in the disastrous purchase of ABN Ambro, the Dutch bank.  In fact that purchase was not of all of ABN Ambro.  The profitable retail arm of the bank was purchased by Santander.  What Goodwin had purchased for RBS was ABN Ambros’ investment banking arm, which was stuffed full of American sub-prime mortgage debt.

Fred Goodwin was clearly a risk-lover.

Insurance is the opposite of risk.

Insurance is the payment of a small sum to cover unlikely events.  So you are willing to invest £300 a year to insure your car which is worth £15,000 (despite the fact that it is a legal requirement).

However in business, often the cost of insurance is ignored.  There was much anger that, after the disastrous fire, Glasgow School of Art was not insured.  But it is likely that the Charles Rennie MacIntosh designed building was uninsurable as the cost of a policy would exceed the cost of repair or rebuilding the school.  So, a business decision was made not to insure the building.

In such circumstances both a risk neutral manager and a risk loving manager would reject the cost of the insurance offer.

So if you cannot buy an insurance product to cover a business investment, how do you protect your investment?

In traditional gambling, a ‘punter’ will spread his bets.  He will make a small bet on a horse with long odds and a larger bet on the favourite.  If the favourite comes in, he takes his winnings, but if the outsider comes in, he covers his initial stake.

Some professional gamblers tactically ‘bet to lose’.  They make smaller bets against favourites.  Think how often horses listed as favourite fail to win races.

In the financial markets, investment brokers use hedge funds.  They hedge their bets.  So if they buy shares or derivatives with the intention of selling at a particular rise in price, they will cover the risk of that growth in value not occurring by laying a ‘hedge’ with a hedge fund to cover their investment.

For most small businesses, there is little opportunity to hedge or to insure investments in things like product development and market entry. So how do you protect your investment.

Well, that is where Philmus Consulting comes in.

Philmus Consulting can help your business develop robust due diligence systems with respect to food standards, metrology and trading standards.  We can help you with product safety risk assessment and product recall plans.  If you know the risk in a particular regulatory area, you can reduce the chance of the risk occurring and mitigate its effects.

In marketing, risk is reduced through market analysis and marketing research.  You reduce risk by using such information to set realistic business goals.  You reduce risk by creating strategic marketing plans and by defining alternative opportunities.  This can be achieved through the use of tools such as the GE matrix and the Shell Directional policy framework.  You reduce and insure against risk by researching your target market and developing products to meet the needs of that target market. This is by far a more preferable route to product development than that of creating a product and then trying to find a market for it.

 

Brexit – A Project Management Perspective

I have tended to shy away from Brexit in this blog and have concentrated on Marketing and Business Strategy.  However, with ten weeks until the UK leaves the EU, I think it is worth looking at the way government has handled Brexit over the last two years.  To do this, I am taking a project management approach.  As anyone who has read some of the articles I have written about Brexit, or indeed anyone who follows my twitter feed, you will understand that I am no fan of the policy.  I see Brexit as a self-inflicted wound on the UK economy.  Indeed, all economic projections on Brexit see it as doing significant harm to the UK economy.  It is estimated that a Brexit deal, as negotiated by Theresa May in the draft withdrawal agreement, will cause a 5% drag effect on the UK.  A no deal Brexit is calculated as causing a 9% drag.  Brexit is the UK economy hobbling itself.  HMS Britain is about to drop a heavy drag anchor which will slow growth and hinder international competitiveness; all for the nebulous concept of ‘sovereignty’.

I say nebulous because those who shouted loudest about parliamentary sovereignty are now the first to shout foul when that parliamentary sovereignty is exhibited.

But this blog entry isn’t about political views or whether there is support for Brexit.  It asks whether the project is being appropriately managed.

Dennis Lock defines the stages of a project in his book, Project Management, the standard text for all business students on that subject.  Perhaps by listing those stages and factors for success and failure given by Lock, we get an idea of how the Brexit project is proceeding and its likely outcome.

The stages of a project listed by Lock are:

  1.  Project Definition
  2. Preparation and Planning
  3. Project Design
  4. Purchasing
  5. Fulfilment
  6. Completion and handover

It is utterly clear that the Brexit project is badly defined.  The referendum question asked one question; whether the UK should remain a member of the EU or Leave the EU.  The result, narrow as it was, was that the UK should leave.  But that answer didn’t provide a single possible outcome.  There was a range of options available and those on the Leave side of the argument didn’t present a single solution.  Britain could leave in a ‘hard Brexit’ or no deal.  Britain could retain close ties with the EU, the EEA model as shown by Norway; or Britain could decide to have a limited relationship: The Swiss model.  It seems that no one in government can decide and cabinet ministers to this day still present different potential outcomes.

Nor was there space left for compromise in the negotiation process, as Mrs May’s ‘red lines’ severely limited the options available.  Clearly Brexit was a poorly defined project.

Lock then describes success and failure factors in project definition:

  1.  Project Scope needs to be clearly stated and understood
  2. Technical requirements are not vague
  3. Estimates of timescale, costs and benefits are not over-optimistic.
  4. Risk Assessments are not incomplete of flawed
  5. The intended project strategy is inappropriate.
  6. Insufficient regard is given to cash flows and the provision of funds required to complete the project
  7. The interests and concerns of stakeholders are not taken into account.
  8. Undue regard is given to the motivation and behaviour of the people who will execute the project
  9. Insufficient regard is given to how those affected by the project will adapt to change
  10. Approval of the project plan is given for political, personal or intuitive reasons without due consideration to the business plan.

Where to start with this list in respect of Brexit!

As stated above, the project scope was vaguely defined.

Technical requirements as a result were vague.  If a soft Brexit was chosen, the technical requirements were completely different to those of a no deal Brexit.

The two year timescale is wholly insufficient to achieve Brexit.  The officials who drafted the Article 50 clause admit this.  But given the short timescale of the article 50 process, it was wholly inappropriate for the government to trigger that clause with absolutely no contingency planning in place.  A better proposal would have to been to do the contingency planning, then trigger Article 50 for the negotiations.  At least with contingency plans in place, the government’s position would be informed and appropriate red lines set.

The government’s Brexit plans completely fail to stand up to any interrogation based on the above list.

With only weeks to go until the Brexit deadline, arguments are still ongoing about factors in the above list.  We should have moved on to the delivery aspects of the Brexit plan by now: project fulfilment.

Lock lists the success and failure factors at the project fulfilment stage:

  1.  Good definition of the project and a sound business case
  2. An appropriate choice of project strategy
  3. Strong support for the project amongst management, in particular those managers responsible for managing the plan
  4. Firm control of changes to the project
  5. Technical competence
  6. Strong quality culture
  7. Appropriate regard for health and safety of all those affected by the plan
  8. Good project communication
  9. Well-motivated staff
  10. Quick and fair resolution of conflict.

Again, where do you start with this list!

The Brexit project has been poorly defined and there is no sound business case for it.  We are actually in a position of a government with a solemn duty to do the best for the country and its people is actively engaged on a mission which does nothing but harm to those interests.

The choice of project strategy, particularly the choice to trigger Article 50 prematurely has been appalling.

Those put in charge of driving May’s Brexit plan have been hard Brexiteers wholly opposed to it.

Fulfilment has been technically incompetent.  We have had ferry contracts awarded to a company with no ships and a port lacking the necessary infrastructure for HGVs.  We have had a trial at an airport designed to hold 5000 HGVs where only 87 HGVs turned up.  It appears we have a government which cannot plan a traffic jam.

Project communication has been appalling.  No deal preparation papers were short, vague and lacking necessary detail.  Risk assessments were incompetently produced and their content was held as secret.  Even when MPs demanded access to them, there was no appetite to share their content.

Staff motivation is clearly absent.  DExEU has the highest staff turnover of any government department.  It is seen by many as the death knell of a civil service career.  Currently the department is advertising for staff who ‘don’t panic’ in the face of pressure.

It is clear that the government, in particular ministers, put in charge of fulfilling the Brexit project simply aren’t up to the task.

Lock explains that in project management there is a direct relationship between cost, time and performance.

It is estimated that Brexit is already costing the UK government around £600 million per week.

The performance and quality of project delivery has been appallingly poor.

Most critical is the time objective.  A project not started in time can hardly be expected to finish on time.  To paraphrase Napoleon, “There is one kind of robber whom the law does not strike at and who steals that which is precious; time”.

It is utterly clear that the Brexit project has been managed horrendously and that it has run out of time.  In such circumstances the best option is probably to abandon the project entirely.

 

The Importance of Relationship Marketing

The traditional view of marketing is activities designed to promote transactional activity: the physical act of selling goods and services.  Little thought was applied other than to creating transactions.

In recent years however, the focus of marketing has shifted from transaction marketing to building relationships.  Increasingly marketing is about developing customer loyalty and creating the most effective long-term relationships with customers.

This makes sense in mature economies where the number of new customers is limited and additional market share is obtained by taking it from competitors.

Transactional marketing:

  • Has a focus on single sales
  • Has a short timeframe
  • Makes little effort to retain customers
  • Has limited customer commitment
  • Has moderate customer contact
  • Quality is the concern of production managers and no-one else.

Relationship marketing:

  • Has a focus on customer retention and building customer loyalty.
  • Has an emphasis on product benefits meaningful to target customer groups.
  • Focuses on the long-term: You accept high costs in the short-term because they lead to larger long-term profits.
  • The emphasis is on high service standards; often tailored to individual customers
  • Has high customer commitment
  • Has high customer contact (to gain information not just building relationships).
  • Product quality is a concern for all stakeholders in an organisation.  The attitude is that minor mistakes can lead to major problems.

In mature markets the costs of obtaining new customers can be far greater than the costs of servicing existing customers.  Relationship marketing and long-term relationships offers greater opportunities for cross-selling, up-selling, strategic partnerships and other alliances.  The focus is on creating significant customer lifetime value.  Relationship marketing can allow the ability to charge price premiums.  Relationship marketing is also a way to develop word of mouth and create customer referrals.  There can be lower marketing costs over the longer term with relationship marketing tactics and greater value can be created from higher order volumes.

To develop a relationship marketing strategy you need to focus on four steps:

  1.  Focus on the between target and existing behaviour
  2. Identify steps to close any gaps between these behaviours
  3. Formulate a programme of benefits that satisfy the core needs of target customers
  4. Formulate a communications plan which aims to modify the behaviour of target customer groups.

Before taking these four steps you need to:

  • Identify key customers where the most profitable long-term relationships can be developed.
  • determine what customers want from a relationship.  Some customers will only want a transaction.
  • categorise customers in terms of current and future potential
  • Tailor goods and services offered to those potentials
  • Examine the expectations of each market segment from both sides, customer and seller.
  • Identify how these two sides can work together in a cost-effective and profitable way.
  • Appoint relationship managers whilst changing operational processes on both sides of the relationship so cooperation is easier.  For example, a logistics firm may offer bespoke computer software which ties customers to their systems.
  • Develop small wins in the first instance and gradually strengthen the relationship.
  • recognise from the outset that different customers will have different expectations that will need to be satisfied if a relationship is to develop.

Focus on Core Competences

In the UK over the last couple of years, political debate has been dominated, almost to the exclusion of any other subject matter, by Brexit.  It is a subject tearing the UK apart and the splits on whether it is a good idea are as wide as ever.

The guru for the fundamentalist wing of Brexiteers, the ERG, is Professor Patrick Minford of Cardiff University and his small cohort of free market economists, the Economists for Free Trade (formerly Economists for Brexit).

The EFT has seemingly managed the impossible.  There is an old trope that if you ask three economists the same question, you will get three different answers.  Well, the EFT has managed to get virtually every other economic forecast group to agree that its work is nonsense.

The London School of Economics has produced an excellent critique of Minford’s work on Brexit and in particular his Liverpool Model.  The LSE point to Minford’s lack of an evidence base for his forecasts; that his work relies heavy on political dogma rather than scientific method; that his modelling makes huge assumptions and that it ignores current economic theory.

Two aspects of the LSE critique are prominent.

Firstly, that Minford ignores the concept of economic gravity; the proven fact that irrespective of trading terms, most firms do the majority of their export trade with nations and blocs which are geographically close.  So no matter the outcome of Brexit, UK firms will still look at Europe as its primary export destination.

The second huge assumption made by Minford is that manufacturers operate in a market with perfect competition.  Perfect competition assumes that there are many manufacturers in a sector all producing identical goods.  No one company has the power to set the base price in a market and as a result all market entrants focus on cost reduction and profit maximisation.  In markets with perfect competition, the only consumer determinant is price.

Anyone who has studied marketing knows that price is only one element of the marketing mix.  We know that some consumers are not driven by price when the purchase. We know that for some consumers, product performance or convenience is a more important purchase factor than price.

We also know that, businesses segment markets and target particular customer groups.  That may mean designing products that are different to those of competitors.  It is utterly clear that consumers are faced with numerous choice variables.

In my view, the work of Professor Minford is dogma-driven nonsense and it is astounding that some senior politicians take his work seriously.

What is true is that most organisations have aspects of their business they feel they are really good at and which make them stand out for the competition.  Businesses have competencies.  However, for these competencies to be effective, if they are to have any market effect, they must be core to the expectations of consumers.

Hamad and Prahalad (1990) defined core competencies in an article in the Harvard Business Review entitled Competing for the Future.

  1. A core competency must provide customer benefits and add value.  These benefits must be differentiated from those of your competitors and they must be the reason that consumers choose your products over those of competitors.
  2. Core competencies must be difficult for competitors to copy.  They should be competitively unique.  Consumers must not be able to copy them quickly e.g. protected by intellectual property rights.  They must be a competency your competitors wished they had.
  3. You must be able to leverage core competencies across a wide range of products and markets.  Competencies belong to an organisation, not a product or service or brand.  Does your business have core competencies which allow or enable the production of new products or services.

It is also true that a business cannot be good at everything. If you are good at one competency, it is unlikely that you will be equally good at other competencies  At most a business will have two or three core competencies, otherwise your organisational focus is diluted.

There is no point in believing that you are good at a particular competency if that competency is of no interest to your target customers.

Hamad and Prahalad identify four different types of core competency:

  1.  Unique Core Competencies:  These competencies are uncopyable skills and knowledge bases.  They could include intellectual property and they offer superior customer value and superior returns.
  2. Latent Core Competencies:  These competencies are latent but allow you to operate in a market sector.  A hotel chain could not operate without a wide range of competencies from supply chain managers and skilled professionals such as chefs and event organisers; but only some of these competencies are unique.
  3. Competitive Core Competencies:  These competencies allow a firm to compete in its chosen market.  They are hygiene factors.  For examples retailers will need strong supply chain and logistics skills.  Usually these competencies are held by all successful market players.
  4. Future Core Competences:  Competencies need to change over time as consumer expectations change.  Many UK retailers are failing because they are relying on historical core competencies such as high street locations when retailing has moved on and internet retailers such as Amazon thrive.  Core competencies also need to change so you can dominate tomorrow’s markets.

Core competencies are crucial to your business delivering its proposition to consumers and differentiate your organisation in the marketplace.  They need to be at the heart of your business.  In fact your business should be structured around them.  You must invest heavily in them and you must acquire skills to develop them.  Everyone in your organisation should understand the importance of your core competencies as they are the fabric of a successful organisation.

It is said that evolution is better than revolution.  Brexit is a revolution and it is likely to cause significant harm to the UK economy. It is stripping the UK of one of its core competencies, as an inward investment gateway into Europe.

The concept of core competencies shows how wrong Professor Minford’s assumption of perfect competition is.  No business will succeed if the only advantage it can offer to consumers is a market base level price.

Organisational Buying Behaviour and Selling To Local Authorities

Too many small businesses do not differentiate between selling to businesses and selling to consumers.  They assume that there are no differences as to how organisations and the public buy goods and services. The failure to take account of organisational buying behaviour leads to many small businesses assuming that selling to large organisations is too difficult and they  concentrate solely on consumer segments.

I have discussed the four Ansoff market growth strategies several times in this blog.  Ansoff prioritises market penetration as the easiest strategy to grow your presence in the market; that is selling more of your existing products to your target market segments.  Ansoff then argues that once there are no more opportunities for market penetration, the next least risky strategy is one of market expansion; selling your existing products to new markets.  Market expansion could mean expanding your sales geographically but another perfectly plausible strategy is to sell your existing products and services to organisations.

However, business and organisational markets segment differently to consumer markets.  This difference is driven by the nature of organisational buying behaviour.

Consumers often make purchases on the spur of the moment.  They often take the decision to purchase as individuals.  Organisations tend to have structured buying procedures which are followed for the majority of purchases.  The bigger the cost and the risk of the purchase, the more likely that strict purchasing processes will be followed.

It is rare for organisational purchases to be made by an individual.  There will be a group of people behind an organisational purchase.  Where a group of people are involved in a purchase, there will be formal and informal power dynamics.

Marketers call those in an organisation involved in a purchase a Decision-making Unit (DMU).  Within a DMU there are six main roles:

  • Initiator:  This individual identifies the issue that must be overcome by the decision to purchase a product or service.  When I worked in Trading Standards this was one of my roles.  I was responsible for the maintenance, calibration and replacement of the services metrological and testing equipment.  I also had to procure the services of test laboratories for formal and informal samples of food, consumer products and fuels.  With regard to the purchase of equipment, which could cost thousands of pounds, I may have identified the need to purchase, but I could not make that purchase on my own volition.  I had to refer the purchase to a group of senior managers.
  • User:  This is the person who will actually use the product or service after it is purchased.  This could be the initiator or it could be other members of staff.  For example, an IT manager may identify the need for new copywriting software but it will be the firms marketers who will use that software.  Many organisations have implemented quality assurance systems such as Kaizen.  A feature of such systems is that staff, through suggestion boxes or quality circles identify where processes could be improved.  In such systems process improvement may mean the purchase and design of new equipment.  So in such circumstances, the user will also be the initiator.
  •  Buyer:  Many organisations will employ a professional buyer to purchase everything from office equipment, IT systems to raw materials and production equipment.  Often large organisations have central purchasing units who carry out the vast majority of purchases in bulk and from a central location such as a head office.  Professional buyers will negotiate the best price for bulk purchases and they will work from detailed technical briefs.  These technical briefs will be created by other members of the decision-making unit.
  • Influencer:  The influencer is a member of the decision making unit who does not directly make the decision to purchase or the decision as to which supplier to use; but they have a major impact on the decision.  This could be an employee of the organisation who has expert knowledge.  So the health and safety manager of a firm may influence the decision to buy machinery by advising the DMU of the law with regard to safety requirements and compliance with legislation such as the Electricity at Work Regulations.
  • Decider:  This is the person who actually makes the decision to purchase.  This could be a senior manager such as a firms managing director or in many cases, the finance director.  The greater the importance of the purchase, the more a senior figure in a firm will be involved with it.
  • Gatekeeper:  These individuals determine the flow of information that reaches the decision-making unit.  Secretaries, executive assistants and PAs often act as a gatekeeper to their busiy bosses.  Technical managers may have a preference for one supplier over another, e.g.  an IT manager may prefer Apple products over those of Microsoft.

The size and make up of the decision-making unit will depend on the size and nature of purchase.  If a company is buying new production line robots, the DMU will be significantly larger than the decision to buy a photocopier.

Organisational purchases can be classified in terms of their level of risk:

  • Routine Order Products:   These items are bought on a regular basis and are unlikely to cause performance problems regarding their use.
  • Procedural Problem Products:  These products will require some level of staff training for their use.  There may be some resistance to these products as staff resent the change to their daily life.
  • Performance Problem Products:  There are risks that the product or service purchased will not meet users’ requirements.  This issue often occurs with the implementation of new technology.
  • Political Problem Products:  Such issues occur where a purchase takes resources from one area of an organisation and gives them to another part of the organisation.  So if a business makes a high value investment in IT and that purchase takes budget from the sales team.  These purchase decisions will likely cause political strife within an organisation.  They can lead to accusations of empire building and arguments about status between managers.

Members of a decision-making unit will often act in their own self interest as well as in the interest of the organisation.  Self interest can get in the way of the aims of an organisation.  Such issues can develop when there are different incentives for different parts of an organisation.  So if an investment means that the sales team may receive lower commission rates, there may be resistance to it.

Local authority purchasing displays all the characteristics of organisational buying behaviour but there are additional considerations.  Many local authorities employ central purchasing units and have expert influencers on purchasing decisions.

Local authorities, by law, must follow best value protocols.  The definition of Best Value is often confused with a requirement to accept the lowest bid; particularly in these times of austerity where local government budgets are squeezed.

Best value does not mean a focus on the lowest bid.  Higher bids may be accepted if they offer more in terms of functionality.  So if a laptop computer is more expensive, but it has more memory and better pre-loaded apps, that may be better value to the authority than the cheaper equivalent product.

Best value protocols require local authorities to obtain multiple contract bids for products and services.  There will nearly always a competitive bidding process.  The need to obtain competitive bids can be ignored only if there are exceptional reasons for doing so. 

For example, one of my roles as a TSO was to obtain the services of expert witnesses and test laboratories.  If I believed that a particular expert or laboratory could provide exceptional value, I could ignore competitive bidding.  I often did this where a product neeed to be tested and I knew that evidence for a criminal trial would require a particular expert opinion.  I often preferred one laboratory because I knew that the court evidence would be provided by the chair of the appropriate British Standards Institution panel.

For large scale of expensive local authority purchases, it will be the case that the decision to purchase will be taken out of the hands of managers and would be taken by a committee of councillors or even a full council vote.  In such circumstances purchasing decisions can become fractious with opinions falling along party lines or even splitting between political groups within the ruling administration.

When entering organisational and B2B markets it is critical that you do your homework.  You need to carefully examine bid specifications.  You need to research the decision-making unit within the organisation and target your marketing activity on those group members who have the most influence on the decision to purchase.  You also need to work hard to get your promotional effort past gatekeepers.