Evaluating Brand Extension

Many entries ago, I discussed the theory of product and brand growth proposed by the American mathematician and marketing academic H. Igor Ansoff.

Ansoff believed that there were two customer groups, a brand’s existing customer base and new customers. He also stated that there were two types of brand products, existing products and new products.

This leads to a two by two matrix offering four strategic options for brand growth:

  1.  Market Penetration:  Selling more of your existing products to your existing customer base.  This could be tactics like Buy One Get One Free offers, improving delivery networks and increasing the number of retail outlets.
  2. Market Expansion:  Selling your existing products to new customers.  This could mean geographic expansion of the brand to new territories i.e. to paraphrase Andrea Leadsom, selling innovative jams to the Chinese.  It could mean selling products originally targeted at business customers in the consumer market.
  3. New Product Development/Brand Extension:  This is selling new products to your existing customers.  Dyson make vacuum cleaners but they have extended their cyclone technology into products such as hand driers, room fans, hair dryers and car air conditioning units.  Mars extended their chocolate bar brand into products such as ice cream and milk drinks.
  4. Diversification:  or selling new products to new customers.  Richard Branson’s Virgin group of companies operates a diversification policy. Virgin began as a record shop and importer.  It soon became a music label and a chain of record shops.  Today, the Virgin brand has a radio station, an airline, train franchises, a bank, a hotel chain, an online travel agency and a whole host of other businesses in a variety of sectors.

Ansoff stated that with each step from market penetration to diversification, risk of failure increased.  Diversification is the most risky strategy a business can follow.  It is therefore imperative that a firm looking at diversification strategies carries out comprehensive and accurate strategic planning.

In the early days of Virgin, Richard Branson was of the view that he would do things differently and the standard practice of planning had no place in Virgin’s operations. Virgin after all was a counter culture business.  it is widely known that if Branson hadn’t have signed Mike Oldfield and produced the album Tubular Bells, his company would have failed.  Branson was only able to develop the country house which was used as Virgin’s recording studio thanks to a significant loan from a member of his family.

Richard Branson now states that detailed strategic planning is critical to the success of the Virgin Group.

there is one part of the Ansoff Matrix that is controversial.  Ansoff said that you shouldn’t move on to the next riskiest strategy until all efforts have been exhausted in the lesser risk strategy.  So you do not try to expand your market until you have exhausted all efforts in penetrating your existing market.  Many leading business academics and leaders see this as too restrictive a position.  Business after all is about exploiting opportunities as they arise.

But clearly you need to clearly define the risks and rewards of a business opportunity before you act.  Julian Richer of Richer Sounds, the UK hi-fi retailer has a risk averse approach and has slowly built his brand over fifty years; whereas Richard Branson leaps into new sectors at a pace, giving each new business a defined time to succeed.

For many businesses, growth is defined by diversification or brand extension. For these businesses there is little opportunity to penetrate further or to expand.  For example, farmers will look to sell all their output (the harvest) and they are tied to contracts with suppliers.  For example dairy farmers have close links to dairies.

For these businesses, the instruction has been to diversify.  So farmers built golf courses and hotels, they entered tourism markets and became food manufacturers.  Often these farm-based diversifications are poorly thought through or are ‘me too’ efforts i.e. copying the activities of neighbours.  They have not asked or answered the six crucial questions of brand extension:

  1.  What is the attraction of the new market or product category?  Is the target market growing? Is it less price sensitive than existing markets?  Are existing service levels poor and your existing service offers can thrive?
  2. What advantages do you bring to the new sector?  Do you have better distribution networks? Can you offer better customer service? Can you offer new technologies? Can you provide more efficient manufacture? Do you have higher productivity than your competitors? Can you provide better market coverage and share of voice?
  3. Can you make your market advantages durable?  Do you have intellectual property ownership of technologies? Can you offer the new extension through your existing dealer network? Can you develop exclusive partnerships with retailers? Can you demand eye level shelf space or aisle ends? Can you cut out middle men and sell direct?
  4. What will be the reaction of your new competitors to the market extension? Dyson entered the vacuum cleaner market when the existing market leader, Hoover, was in significant financial difficulty and reeling from the failure of the Sinclair C5 and the disastrous free flights special offer.  Do you have resources available to fight off the reaction of competitors e.g. price drops or aggressive advertising campaigns? Can you offer technological solutions to disrupt competitor’s defence of market share?
  5. How legitimate would your brand be in the new sector? Laughing Cow Cheese is a brand with a child-friendly family image, so an extension into the alcoholic beverage market was not legitimate.  Coca Cola, commonly used as a spirits mixer has successfully extended into the pre-mixed alcoholic beverage market (in conjunction with Bacardi Rum).  Donald Trump released a fragrance.  However it is unlikely that Trump cologne would succeed in the UK where trump is slang for breaking wind.
  6. What does the proposed extension bring to the parent brand?  Some extensions may dilute your existing brand image and identity.

Of course you must seize opportunities to pitch your business ahead but market extensions should simultaneously surprise and leave their mark.  They must be a mix of doing the unexpected and retain brand consistency.

When a brand extension is chosen it must be able to export existing brand attributes and equities; but be able to defend the new market position.

A good example is Apple which caught the music industry on the hop with the development of the iPod and iTunes but retained the brand reputation for design and quality manufacture.

Some firms through history make really surprising leaps into new sectors.  Take as an example Yamaha.

I have just bought an excellent Yamaha acoustic guitar.  Yamaha started in the 19th by making organs and pianos.  Soon it was making guitars and other acoustic instruments.  In World War Two, Yamaha’s factories were turned over to manufacturing military equipment.  After the war, the company repurposed the military manufacturing plant to make motorcycles.  In the 1970’s Yamaha’s piano division started making synthesisers.  This led to the company moving into the semiconductor market where it is now a major producer.

So don’t reject diversification or market expansion as strategies for your business: but if you intend to diversify or expand make sure you have comprehensive SMART strategies in place.

Organisational Buying

Marketing to organisations is different to marketing to consumers. Repeat: MARKETING TO ORGANISATIONS IS DIFFERENT TO MARKETING TO BUSINESSES.

The reason is simple, when selling to consumers you are predominantly selling to individuals.  When selling to organisations; such as businesses, local authorities and government departments; you will likely be selling to a group of people operating within strictly defined protocols.

When I worked in local government, I was a client facing enforcement and advice professional.  I didn’t do much purchasing (the exception being equipment for legal metrology equipment and laboratory services).  For big purchases, such as IT equipment, and routine purchases, such as stationery, my employer had a central purchasing unit staffed by professional buyers.

Even within the purchasing activities I had responsibility for, I had to operate within tight policies.  I had to get a minimum of two quotes for any purchase unless I could show an exceptional reason for not doing so (e.g. only one laboratory could do the required testing).  I also had to show ‘best value’ that the products and services I was procuring could give more ‘bang for their buck’ than the rejected alternatives.

In organisations there are four types of purchase:

  1. Routine Order Products:  These are regular, low risk purchases like stationery.
  2. Procedural Problem Products:  These purchases affect the way work is carried out e.g. buying new software. Often these will involve training beyond the purchase of the product or service.
  3. Performance Problem Products: These purchases improve the users requirements and expectations.  For example buying new machinery which is more productive and less likely to require maintenance.  A major issue is the compatibility of the purchased product with existing equipment.
  4. Political Problem Products:  These are purchases which take resources away from other parts of the organisation.  For example, a business may face a choice between purchasing a new packaging system and a new computerised order tracking system.  The businesses delivery team manager will be put out if the ordering system is not purchased. The businesses operations manager will be put out if the new packaging machinery is not bought.  So the choice of purchase may result in destructive office politics.

The latter category of purchase above is common when businesses are making big strategic purchases which are of high value and which directly affect the future of a business.  Whereas routine purchases may be delegated to an individual member of staff; major purchases are usually made by a group, a ‘decision-making unit’ or DMU.

Members of a decision-making unit will often take up the following roles:

  • Initiator: This is the individual who initiates the purchasing process and proposes a purchasing solution to solve a particular problem. It could be a departmental manager or in organisations using systems such as Kaizen or TQM, an individual employee or group of employees.
  • User(s):  Those who will actually use the product purchased.  This may or not be the initiator.
  • Buyer:  A professional negotiator who carries out the process of the purchase.  For complicated or expensive products or services these negotiations may take significant time and there may be significant lead times before the purchased product is delivered.
  • Influencer:  These members of the DMU may have little or no impact on the process of buying but may have a major impact on the decision to purchase.  This could be the company’s accountant or union representatives within the organisation.
  • Decider:  The person who has the final say on the purchase.  This could be the company owner or in a local authority, a vote by councillors.
  • Gatekeeper: This person controls the flow of information to the DMU.  The personal assistants of senior managers are a good example as they often control who the senior manager talks to and meets as they control his diary.

Political tensions often build in a decision-making unit.  This can be for the following reasons:

  1. Individual self-interest; a particular manager may see a purchase choice as a route to personal advancement or reward.
  2. Operational needs of particular departments: Organisations have limited resources and often choices need to be made as to what to purchase when. If a purchase negatively affects other parts of an organisation, or limits its expectations, tensions can arise.
  3. Professional Pride:  Individuals have professional pride and if a purchasing decision dents that pride, tensions grow.  I have worked in an organisation that treated my profession with contempt.  It was a hugely frustrating experience and guess what, I left.
  4. Different incentives and reward expectations:  If an operations manager receives his bonus based on the productivity of his plant, and the failure to purchase equipment which improves that productivity occurs; you may find that the manager becomes obstructive.

As organisational buying is more complex than consumer purchasing, academics have tried to build frameworks which map the process and develop logical processes.

The Webster Webb framework sets four variables which influence the purchasing decision:

  1.  Environmental:  This is effectively PESTEL analysis and issues such as the actions of competitors.  If the macro-political situation is confused or complicated, firms may be less willing to make major purchases.  Brexit Britain is one such environment, where some firms are actively divesting from the market and others are holding back on major purchases due to market uncertainty.  It is also noticeable that UK productivity has been weak for some time.
  2. Organisational:  Purchases are directly affected by an organisations goals, the organisation’s culture and policies and procedures.  If a firms goal is, like Lloyd’s bank, ‘to be the best for customers’, it is likely that purchases which improve the customer experience will be prioritised. If the organisation has a traditional top-down management structure, the views and personalities of those at the top will strongly affect purchasing decisions.
  3. Interpersonal: The relationships between individuals and the buying centre may affect purchasing decisions.  For example, in the 1970s in the UK, it would be a difficult task to make purchase which significantly cut the number of employees in a firm.  There would be significant resistance from unions and purchases may postponed or not made as a result of how they would affect the union’s members. That was a world where there were major strikes over minor demarcation issues, the most ridiculous was at the BBC where studios were shut down because of a dispute over who was responsible for the Play School clock (the scenery shifters said it was scenery and therefore their responsibility but because it contained electrical components the BBC electricians believed it was their responsibility).
  4. Individual:  Different DMU members will have different attitudes to risk, they will have different personal goals, they will have different experience, they will have different education and training.

The Sheith Framework has similar elements to the Webster-Webb framework. However, it places an emphasis on the psychology of the purchasing process.  it states that there are four factors to organisational buying:

  • The experience of DMU members
  • Factors inherent in the buying process
  • The character of the decision-making process
  • Situational factors

The expectations of DMU members may differ as a result of their functionality.  A firm’s chief engineer will have different expectations to those of the firm’s finance director.  This means sales presentation and literature could be subject to perceptual distortion.

Factors in the decision-making process include perceived risk of the purchase, time pressures, the type of purchase or the organisations orientation i.e. is the organisation pursuing an aggressive or a defensive strategy.  If a firm needs a particular piece of equipment to meet a tight deadline, then it may make fewer procedural checks before making that purchase.  other factors include organisational size.  A routine purchase for a large company may be a major purchase for a small company.

The level of decentralisation may affect purchasing decisions.  As stated earlier, I used to work for a council that had a central purchasing unit which undertook all the purchasing negotiations.  But I have also worked in an organisation where many purchasing decisions were delegated to individual managers and members of staff.

The process of purchasing may affect the buying process.  For example, where purchasing decisions are to be made jointly, there may be more room for conflict than where purchasing decisions are made by individuals

There are four types of organisational conflict:

  • Problem-solving
  • Persuasion
  • Bargaining, and
  • Politicking

Problem-solving and Persuasion are seen as rational sources of conflict.  Bargaining and Politicking are seen as irrational sources of conflict.  But bargaining and politicking are common in organisations.  Who hasn’t been in an organisation without office politics or experienced those office politics becoming toxic?

Situational factors affect purchasing decisions e.g. long lead times for delivery, industrial relations at potential suppliers, takeovers and mergers, financial issues, production breakdowns and tax changes.  For example, McDonald’s in the UK stopped using Heinz tomato ketchup when Heinz headhunted one of their senior managers.  This ‘poaching’ of the manager was seen as a significant breakdown in the relationship between the two companies.

The Communications Element of the Marketing Mix

Before you decide to spend money on advertising; or any other kind of external communications; or indeed, how much to spend; you need to know if your choice of communications are the best way to meet your marketing objectives.  It is often the case that advertising budgets can become a solution looking for a problem.

You also need to ask, are communications the priority?  Do other aspects of your marketing mix needing fixed first?

There is no point in spending thousands advertising a new feature of your product if consumers are complaining about how terrible your after sales service is.

Sort those issues which are a priority, then think about your communications mix.

Your communications strategy must reflect your organisational goals and the critical success factors you set.

When choosing your mix of communications tools (PR, TV advertising, print, social media, etc) you need the appropriate mix of push and pull media.  Push media is pushing your product into the minds of consumers e.g. traditional advertising. Pull media is getting consumers to demand your products from retailers and other suppliers (this could be media like social media and PR).

A strategy that is all push and no pull; or vice versa; is unlikely to succeed in modern markets.

And you cannot rely on past methodology.  The world of communications is constantly mutating.  In the 1950s most communications were broadcast monologues.  Today, the aim of communications is often to create two and three way communication.  Communications is about conversations; between companies and their customers; between existing customers; and between customers and prospective customers.

The level of advertising and communications spend do not automatically lead to results and simply trying to match the share of voice of a market leader may be a process in wasting scarce resources.

Definitely do not choose communications channels out of habit.

The best way to decide on your communications mix is:

  1. Match communications tools based on their strengths and ability to match the purpose of the communications.  For example social media is a step towards creating electronic word of mouth and a brand community (although other communications tools will be needed to meet those objectives). Social media is not a proven sales channel.  Remember the mnemonic DRIP (Differentiate, Reinforce, Inform, Persuade).  Depernding on the purpose of your message different communications tools will be appropriate.  For example, advertising may be the priority if you are aiming to differentiate your offer from that of your competitors; print media and PR may be the best way to inform your customers of product attributes; Social media may be a good way of reminding existing customers of your products; Sales Representatives may be the best way to persuade your target customers to buy.
  2. Match your communications profile to the expectations of your target audience.  So if you aim to sell fashion to the under thirties, social media and digital communications may be the priority in your mix.  If you are selling stairlifts to pensioners, direct mail and television advertising may be the priority.  it is not by accident that daytime TV is filled with adverts for over-50’s pension plans and disability aids.  Tesco will show families with children in their communications; BMW will show male professionals and executives.  Look for archetypes, not stereotypes.
  3. Integrated communications campaigns work better.  Promotion and other communications should be part of a wider customer journey.  It is a mistake to put all your communications in one channel.  I see small business after small business heavily investing in social media as their sole communications channel thinking they have found a silver bullet to solve their communications ills; they haven’t, they simply could be wasting their finite communications budget.  It is best to integrate communications channel that work well together and which compliment each other.  Choose channels that are synergistic and may create a greater whole than individual channels.

You need to map that customer journey from their first awareness of your brand through to them being repeat purchasers and then habitual purchasers.

Commercial communications are increasingly two way interactions.  You should reflect this in your communications strategy. Do not shout a monologue into the void. Focus on conversation, duologue and dialogue.  Increasingly getting target customers to talk to each other is a top-level aim of commercial communications.

We live in an over-communicated society.  Consumers are bombarded with commercial messages every day.  It isn’t a case of being the one who shouts loudest, be the one who shouts differently.  Stand apart from the communications churn.

To do all this you need a communications and advertising plan which:

  • Sets a budget
  • Determines your target audience
  • Determines the content of communications
  • Decides your media mix
  • Decides on advertising frequency
  • Defines how communications will be classed as successful

Your advertising objectives should be to:

  • Convey information
  • Alter perceptions and attitudes
  • Create desires
  • Establish connections
  • Direct actions
  • Provide reassurance
  • Remind
  • Give reasons for purchase
  • Demonstrate product/service features
  • Generate enquires and footfall

Those objectives should be SMART (Specific, Measurable, Achievable, Realistic and Time Bound)

And remember the Six I’s of Digital Communication:

  1.  Integrate across media channels. It is not by accident that Amazon, Uber, Just Eat, Trivago and other internet-based retailers and service providers all use traditional advertising channels.
  2. Create Independence of location: think remote marketing and remote delivery.
  3. Think Industry restructuring: Digital is often about disrupting existing market models.
  4. Think Individualisation: We live in a world where new technology and just in time supply chains mean mass customisation and micro-targeting of communications
  5.  Think Interactivity: Conversation not monologue

Increasingly, communications are as much about creating a brand community as pushing products onto consumers. The communications models of even twenty years ago are no longer appropriate.  Look to the future of communication, not the past.

 

What is value? How do you design and deliver it?

Ed Rensi, the CEO of McDonald’s said:

“We are in the value business”.

John Thompson, chair of Microsoft said:

“Get fewer, smarter, people to deliver more value to customers faster“.

So what do they mean by value?

Well, I’m pretty sure what they don’t mean by value.  They do not mean aim the cheapest offer in the marketplace.  Being the cheapest, focusing on price alone, does not automatically produce best value in the minds of consumers.  Don’t think of how much value you give to customers; think how much worth customers see in your offer.

By focusing on price alone, rather than the wider marketing mix, you risk your products and services being seen as commodities  Indeed, many products formerly seen as commodities, such as Albert Bartlett potatoes, are now marketed on a wide range of marketing mix factors, not just price.  To enable this a product halo of associated brand factors and service elements has been bolted on to the physical product, a particular variety of potato.

If you focus on price and limit your vision to the physical product.  If you do not care about the product surround of benefits and services, then all consumers have to judge your products on is the price.  In such circumstances the only winner is the company that can sustain low margins over the long-term.

This creates a world of perfect competition, where goods and services are identical and the only marketing factor is price.

Such a position doesn’t square with Evian being able to charge a 10% additional premium on bottled water, or Starbucks being able to charge 20% extra for a cup of coffee, or branded salt being 10% more expensive than a supermarket own brand.

People develop brand preferences.  They derive value from brand identifiers, both tangible and intangible.  brands are familiar and they bring expectation of ‘worth’. Evian don’t sell water, they sell purity.

You are not selling physical products alone. You are selling additional benefits, tangible and intangible, some of which fit within the self actualisation needs described in Maslow’s hierarchy. Aim to sell a benefits package not just purchase value. Represent worth in the minds of consumers.

Porter describes three ways to deliver value:

  1.  Charge a lower price than your competitors
  2. Help your customers lower other costs
  3. Add benefits to make your offer more attractive.

To win through lower pricing, you need to aim for price leadership.  But this strategy requires deep pockets and the ability to produce in volume.  You need to be able to exploit economies of scale and to exploit the experience curve.

As an undergraduate, I sat in many a seminar looking at case studies where firms focused on cutting costs but in doing so reduced their capacity and lost economies of scale. Factory closures designed to improve efficiency and cut costs just reduced the firms cost base to a level where margins were unsustainable.

This is the strategy of the category killer.  The example of a category killer often quoted in academic texts is Toys R US.  The firm formerly famous for Geoffrey the Giraffe aimed to have the largest selection of toys at the cheapest prices. Of course, Toys R Us is no longer around having gone bankrupt a few years ago.

Another way to offer low cost to customers is to look for those who are willing to give up certain benefits for a lower price, e.g. offering mobile phones that can take calls but which don’t have cameras or MP3 players embedded.

You can also look at cost unbundling e.g. delivering items adds £100 to the retail price, so unbundle that cost and charge £80 separately for delivery.  this adds £20 to the profit margin.

There are significant limitations on a low cost strategy.  In particular, it can be extremely difficult to sustain a low price, low margin strategy over the long-term.  Look at what happened to Toys R Us, to Woolworths or to Carillion.

Can you offer value by reducing your customers other costs.  This is a well used strategy in B2B and industrial markets.  It requires the ability to show your target customers that despite a higher price your products and services offer better value over time.

For example Caterpillar offer guarantees that their earth-moving equipment breaks down less often, can be repaired quicker than the equipment of competitors, that it will last longer and it will have a higher second-hand value.

Other firms will offer customers value by reducing peripheral costs. BT do not just supply IT and telecommunications equipment.  They offer management services so customers can outsource the running of ITC provision.  Effectively BT becomes a partner in the business.  Other firms offer exceptional guarantees that, if cost savings cannot be identified the value of promised savings will be subtracted from the offer price.

Can you help your customers reduce their ordering and supply chain costs.  This could be as simple as reducing the required administrative paperwork or even by just adding a an automatic re-order button on your website.

Can you help you customer lower inventory costs e.g. by adapting your systems to cope with their just in time stock control systems?  Can you offer on consignment sales (what used to be known as Sale or Return).  Can you offer to outsource your customers inventory management?

Can you offer customers reduced processing costs by improving yields, reducing waste and rework, reducing labour costs or reducing energy costs?

Can you help reduce administrative costs by offering 24 hour helplines, shipment tracing and offering better customer accessibility.

The third way of offering more benefits to consumers for an equivalent price to that of your competitors.  You offer value-added products and services. You offer customisation. Look at car manufacturers such as Mini who offer mass customisation to consumers through leveraging new technology and just in time manufacturing.

Can you offer faster and better service? Can you offer coaching and training provision around your core product? Can you offer software tools expanding the functionality of your hardware? Can you offer membership benefits.

In conclusion, can you offer value to target segments by:

  1.  Lowering costs below the level of your competitors allowing prices to be cut whilst retaining margins?
  2.  Offering services, guarantees and functionality which helps your customers reduce other costs?
  3. Offering value-added?

Some detail about Porter’s Generic Strategies

In the 1980s Michael Porter of Harvard Business School created his generic strategy model.  In it he suggests that there are three potential strategies for a business to follow when creating a marketing plan: Cost Focus, Differentiation, and Focus (Niche).  He suggests that businesses who try to adopt two or more of these strategies simultaneously enter a marketing wilderness; a wasteful middle of the road position.  Other academics have gone further to describe this middle ground position as a marketing death zone.

There has been some controversy over Porter’s three generic strategy model. Academics point to some businesses which are clearly not following the model. However, many of these businesses either prove Porter’s point or are clear exceptions to his rule which use tactics to mitigate the effects of a middle of the road position.

The point of Porter’s model is that a focus on one of the three generic strategies allows marketers to create clear and meaningful selling propositions.  Porter’s position is that businesses should choose a generic strategy and stick to it.  They need consistency when pursuing a strategy and they should choose a strategy which matches their organisational strengths.

Porter originally defined cost leadership as a strategy aimed at achieving the lowest cost of production so prices were lower than competitors.  This is the strategy pursued by businesses such Lidl and RyanAir.  The strategic focus is to drive down costs to reduce prices and to use that lower price position to increase market share.  The aim is to become the market leader.

This position has seen some criticism.  It was the strategy of Carrillion, the construction and public service contract firm which went spectacularly bust a few years ago.  Carillion aimed to always be the low bidder for contracts. When costs increased due to issues such as construction delays, or if they failed to achieve a contract, Carillion were bidding at such a low margin, their earnings were wiped out and they had to increase borrowing to an unsustainable level.  The company was even using subcontractors as a line of credit; often refusing to pay the agreed subcontractor price.

A second form of cost focus is the concept of Best Value i.e. not being the cheapest offer in the market but offering the best value to customers e.g. by offering better post purchase service and other product halo functionality i.e. functionality which does not cost a lot to supply but which target customers value.

A cost focus strategy can be created through:

  • Building the size of the organisation and creating economies of scale
  • Using tools like value chain analysis to identify the value factors important to customers
  • Relocating manufacture to areas of the world with cheaper labour costs.
  • Increasing operational efficiency and effectiveness e.g. Just in Time supply chains
  • Increasing productivity
  • Building strategic alliances and vertical integration
  • Finding cheaper sources of supply.
  • A focus on organisational learning
  • Creating cost linkages
  • Good timing i.e. time to market
  • Superior management and leadership skills
  • Investments in new and advanced technology
  • Smart buying.

The benefits of cost leadership come from out performing your competitors (something Carillion failed to do).  You must be able to resist the five forces of your businesses micro-environment – Supplier and Customer bargaining power, new market entrants, current competitors and substitute products and services.

There can be serious problems with a cost focus approach.  You are highly vulnerable if cheaper alternatives come on the market and you can enter a downward spiral in margins if a price war begins.  You also need to be able to maintain cost advantages over the long-term.

A cost-focus strategy is best used in price driven markets in order to gain market leadership from complacent competitors with higher cost bases.

Cost leadership requires the construction of efficient scale facilities and a vicious pursuit of cost reduction through exploitation of the experience curve, tight cost controls and avoiding marginal customer accounts (Carillion made all their customer accounts marginal).  it also requires cost minimisation in areas such as after sales service, sales force, advertising, etc.

In a differentiation strategy, you focus on a particular element of your marketing mix that customers see as important.  This could be being seen as a quality leader, a technology leader, speed to market and speed of supply, reliability, design, after sales service levels, unique product features and brand image.  It means developing stronger and more meaningful relationships with the stakeholders and customers of your business.

So BMW are renowned for engineering excellence and consistency.  Apple are leaders in the visual and tactile design of their products, etc.

Bear in mind the focus mix factor is consistent across the product range when other factors vary, this allows large firms to address the mass market and adapt products for particular market segments.  However, on occasions the focus factor is inconsistent with a target market. This is why Toyota created Lexus so as to enter the executive and luxury car market.  Other firms create ‘fighter brands, a defensive strategy against their primary brand being undercut and to make market entry more difficult.

Again, scale of operations is required to ensure the target mix factor can be properly maintained across a product range.  Often a a differentiation strategy is best employed where products are very similar across the market e.g. cigarettes, beer.

To achieve a differentiation strategy you need:

  • A strong brand identity
  • the ability to identify and utilise what customers see as important
  • High performance over a spectrum of attributes
  • The ability to create strategic break points
  • Cost parity with your competition in areas which affect differentiation
  • Packaging innovation and the ability to build in additional features
  • Speed of distribution
  • Distribution breadth or depth
  • High service levels
  • Better after-sales service
  • Flexibility
  • Focused relationship building

You derive benefit from a differentiation through creating distance from your competitors and through creating market competitive advantage.

It can be difficult to sustain the bases of differentiation e.g. fashion brands quickly find that high street retailers quickly adopt design features.  Firms such as H & M will have similar styles in store within days of London fashion week.  Differentiation needs to be meaningful to target consumers; they must value the difference.

Too often a differentiation strategy focuses on the core product and not the halo surrounding it. Differentiation factors can become less important over time.  Car stereos used to be a novelty, now you would complain if your car doesn’t have an MP3 port.

Differentiation can mean a loss of cost competitivity and you can lose barriers to market entry.

A differentiation strategy is best used in mature markets where points of difference are small but important.  Differentiation points must be such that it is difficult for competitors to copy them e.g. protected via intellectual property.

A focus or niche marketing strategy is often the best bet for SMEs.  Here you concentrate on a single identified market segment (or a small number of closely related segments).  you need to create a strong specialist reputation.

The benefits of niche marketing means you have a detailed understanding of your market through which you can create barriers to entry.  You also have the ability  to concentrate your resources and efforts on a clearly defined market.

A niche strategy can make it difficult to grow your market or to spread your business to new sectors.  For example, Xerox were so well known as a photocopier brand, their attempt to enter the desk top computer market failed spectacularly.

A niche strategy is best used by firms with small market share or who are new to the market.

 

 

Hearts and Minds, not Words

Currently, as the general election campaign in the UK gathers pace, television and radio news programmes are filled with the nadir of journalism, the vox pop.  Journalists are on every high street and in every market square asking ‘random’ members of the public their views on policies and who they intend to vote for in December.

The overuse of the vox pop (from vox populi, the Latin for voice of the people) shows a distinct collapse in the standards of British broadcast media.  When I did my journalism training, the vox pop was seen as the last resort tactic to be deployed when it was a slow news day.  Now, it appears no story can pass without microphones being stuffed under the nose of ‘random’ members of the public.

You will note that I have put inverted commas around the word random.  This is because there is a real danger that vox pops are anything but random.  And the same danger applies to much on street market research.  There are very good reasons that major polling companies, many of whom also carry out market research, no longer rely on street research and instead prefer to use telephone polling.

Vox pops and street research can be self selecting.  Often, those carrying out the survey will only get the attention of those who hold strong views on an issue; often those whose views are at the extremes of public opinion.

The BBC in particular has come in for some criticism over its use of vox pops. They have been accused of preying on those with educational disabilities and on focusing on areas of the UK where educational attainment is low and social deprivation is high.  these areas often coincide with areas where support for Brexit is highest.

Whatever your politics, it must be recognised that you are not going to get a broad view of public opinion if you only survey the midweek street market in a northern working class town.

There are other issues with relying on words and not doing deeper research into the thoughts and emotions which sit behind those words.

The characteristic British ‘reserve’ may be a bit of a stereotype. The idea that a British person won’t strenuously complain about bad service to the restauranteur but on leaving the premises will complain to each other about how terrible it all was.  many a comedian has played on this stereotype, most notably the Rook restaurant sketch by the Two Ronnies.

But there is some truth in the stereotype.  Comedy simply doesn’t work if at its core there is not a kernel of truth.

What is certain is that people often say one thing but think and feel something else.  And if you are solely relying on people’s words for your marketing research, you may be in for trouble.

There is a second problem, research based on peoples’ words often relies on an assumption that we are always rational beings.

This is why many economists rubbish the views of the economist Professor Patrick Minford; the Pet academic of the hard Brexit cause.  In particular, Minford’s ‘research’ models rely on the concept of perfect competition. That the primary determinant for consumer purchases is price.  Yet every day, every minute and every hour consumers make purchase choices which do not match Minford’s price rational.

Take as an example your purchase of salt.  Salt is a commodity.  All manufacturers of salt effectively sell the same product crystalline Sodium Chlorate.  Yet brands like Saxa dominate the salt market.  These brands have a price premium over generics and supermarket own brands. Yet they still outsell the generic option.

I was in the supermarket last week and needed headache tablets.  I had two options the supermarket generic or the market leading brand.  The pills were identical in strength, both contained the same level of active ingredient.  The branded version was over £4.00.  The supermarket own-label option was 49p.  I bought the supermarket brand but it was clear from the store shelf that the branded version was the preferred option.

It is clear that often consumers purchase for a wide range of reasons and often those reasons are irrational.  This fact also shows that much of Professor Minford’s work is, to put it politely, pure bunkum.

We buy products based on a whole range of irrational and often emotional stimulae; and we may not, for a host of reasons, wish to give a true and accurate reason for those purchases.

Take the purchase of salt.  We act irrationally and prefer the branded option. One reason could simply be familiarity.  Saxa may be the brand our mothers bought. Our ‘inner monkey’ takes over when we buy salt.  The brand brings connotations of our childhood and watching our mothers cook. We buy because of the feeling of familial warmth imbued in the brand. We buy Saxa salt because our mothers bought it.  Our mothers buy Saxa salt because our grandmothers bought the brand.

Research has shown that consumers offered a well-known brand and a generic unbranded alternative will select the branded option; even when they are told prior to their selection that the generic pack has identical contents to the branded option.

Choosing one identical item over another simply because of what is printed on a label is clearly irrational. It shows that we often do not buy on the basis of price but on the basis of emotional responses.  In marketing and in business, feelings matter.

In Emotional Branding: How Irrational Brands Can have Competitive Edge (Travis, 2000), Sir Richard Branson is quoted as follows:

“The idea that business is strictly a business affair has always struck me as preposterous.  For one thing, I’ve never been particularly good at numbers: But I’ve done a reasonable job with feelings – and feelings alone. That accounts for the success of the Virgin brand in all its myriad forms.  It is my conviction that what we call shareholder value is best defined in how employees and customers feel about your brand.  Nothing seems more obvious to me that a product or service only becomes a brand when it is imbued with profound values that translate into fact and feelings which employees can protect and customers embrace.  These values shape my rather simple view of business but they are, or should be, universal”.

Irrationality prevails.  Emotions can over-ride fact.  This is clearly shown in the UK election debate and views on Brexit.  Brexit will harm the UK economy and its the countries place in the world.  The damage may prevail for decades.  All facts point to this. Our politicians know this. We know Boris Johnson is a liar.  His lying is a proven fact; so much so, that statement isn’t legally libellous; yet still much of the electorate will vote for him simply based on irrational emotional responses.  Despite Johnson’s long history of lying, many people still feel they can ‘trust’ him.

And emotion affects business to business markets.  In fact it has been shown that B2B markets can react more emotionally than consumer markets.

So when carrying out market research and developing marketing plans think emotions NOT words.

In the power of emotions, John O’Shaughnessy said, “Emotions are the energisers of meaning”.

John Kenneth Galbraith said, “The ordinary person wheeling their shopping basket down the supermarket aisle is in touch with their deepest emotions”

Think mind of the customer not voice of the customer. Understand what drives emotions and understand what lies behind aspirations.

Remember 95% of mental function is driven by non-conscious influences and automatic cues derived from familiarity patterns.  Think, how often do you get annoyed when supermarkets re-arrange their shelves and you can’t find items in the familiar locations?

My local supermarket has just completed a major re-arrangement of its stock.  Now, some product categories are spilt between aisles.  This is deliberate.  consumers now have to search different aisles for regular purchases.  They have to pass goods they do not regularly buy, and there exists opportunities for additional emotional purchases of less regularly purchased items.

Remember, people will often give what they feel is the right answer to market research questionnaires.  That may well lead your business to a low price/low margin strategy.

Also, people will only respond to the ‘bells and whistles’ of a brand if it is capable of deriving an emotional response.  People want brands to make them happy.

Audit, Audit, Audit

Every business person will be aware of the financial audit process where accountants pour over the books to assess whether financial reports are accurate. Or you may be aware of the quality audit process of ISO9000 series standards where external and internal auditors pour over your processes and procedures looking for breaches of standard protocols.

In some ways these activities give auditing a bad name.  They are seen as bureaucratic nit picking where the focus is on minute detail and not the overall thrust of a policy.  In respect of quality audits it has often been said that you end up with immaculate and detailed processes but that the end product can still be useless.

But auditing is important because, particularly with a marketing audit, it provides the information required to ensure that a chosen strategy will succeed.

The first half of a strategic marketing plan is effectively a series of audits.  You ‘audit’ the external macro-environment through PESTEL analysis i.e. the likely prospects in the fields of Politics, Economics, Society, Technology, Environment and Law.  You ‘audit’ the ‘micro-environment’, the external factors directly affecting a business through tools like Porter’s five forces (Suppliers, Buyers, Potential Market Entrants, Substitute Products, Competitors): And of course you need an Internal Marketing Audit.

Tools like the Shell Directional Policy Framework and the GE matrix can only be used properly when managers have solid information as to the capabilities, resources and assets.

An internal marketing audit needs to match your organisational capabilities, assets and competencies to the needs and wants of your chosen market.  This is the process of competitive positioning.

Strategic marketing planning  requires that you identify the needs of the market and identify the capabilities of your organisation.  You also need to identify the capabilities and competencies you do not have and which you need to develop to operate in chosen market segments.

So what are your organisational capabilities and assets include:

  •  Financial assets:  Not just your bank balance but the ability to get funding and access to credit.
  • Physical assets:  Your premises, and facilities e.g. Are your shops in the right location, are your distribution centres located for the most efficient supply chains?
  • Operational assets:  Plant, Production Machinery, Process Technologies
  • People assets: Knowledge levels, staff quality, number of staff, etc.
  • Legally enforceable assets: Intellectual property, franchise contract terms, production licences, etc.
  • Internal systems:  Management Information Systems, Customer databases, etc.

You also need to assess your marketing assets:

  1. Customer-based Assets:  This includes your perceived brand image and reputation; Consumer recognition of your corporate identity, brand franchises, customer loyalty, the ability to create defendable market positions and through these assets the ability to obtain higher margins
  2. Market Leadership:  Do you enjoy the benefits of market leadership.  This doesn’t just mean having the greatest level of market share.  It includes leadership of share of voice and having a distribution network which allows the greatest level of market coverage.  Do you have the power to demand prominent eye-level shelf space?
  3. Country of Origin:  Different cultures prefer and appreciate different brand and product attributes.  Does your brand benefit by its relation to its country of origin e.g. German cars have a reputation for good build quality and the quality of their engineering.  Welsh lamb and Scottish beef both have a reputation for high quality.
  4. Uniqueness of Product or Service:  Do you do something no one else does.  Do you have a key, distinctive sets of assets.  Apple have strong marketing assets in the appearance and design of their products and the level of innovation.

You need to assess your distribution-based assets.  This means assessing the size and quality of distribution networks.  This assessment isn’t just one of geography; it is an assessment of whether your distribution network allows the correct level of intensity in the marketplace.

Think of Pizza Express.  This was a business which was created with a unique identity; reasonably priced Italian food together with live music (mainly Jazz).  It expanded to a chain of 550 restaurants.  So it achieved significant market intensity, but in doing so it lost its uniqueness and became yet another high street restaurant chain.

You need to assess whether your distribution network is fit for purpose; whether you can guarantee supply lead times and react quickly to market change.  You need to assess your level of control over your distribution and supply chains.  Do you control your marketplace or, as is the case with the big supermarkets, your retailer controls the marketplace.  For example, Irn Bru is the market leading soft drink in Scotland and McDonald’s wanted to sell it in their restaurants; but Coca Cola had sufficient market power to prevent Irn Bru being sold in McDonalds and they retain their position as the soft drink supplier in McDonald’s premises.

You need to assess you internal assets which lie outside you marketing function and their ability to be deployed to assist your marketing efforts.  Can these assets be deployed to create new market advantages.  Can you use cost structures to create greater profit margins? Can you gain better productivity and plant usage (e.g. process ergonomics).  Can you gain economies of scale?  Do you have better information systems than your competitors?

Can you utilise you market alliances?  Do you have agreements with third parties which allow access to markets through local distributors?  CAN YOU USE CONSULTANTS TO GAIN MANAGEMENT EXPERTISE?  Do you have exclusive access to technological developments and processes? Can you gain through licensing and joint ventures (for instance many car manufacturers now share chassis platforms which lowers costs).  Are you able to gain exclusivity? For example, when the iPhone was launched in the UK it was sold exclusively through Carphone Warehouse.

Organisational competencies; the abilities and skills within a company, can be classed as follows:

  • Strategic Competencies:  Management’s skill and ability to push strategies forward and their ability to communicate a strategic vision.
  • Functional Competencies:  The functional skills of people in your organisation, human resources management, operations, IT, etc.  In marketing, can you properly manage customer relations and channels. Do you properly manage your product portfolio and do you have good new product development processes?
  • Organisational Competencies:  Your ability to manage the day-to-day challenges of your businesses.  This includes areas such as sales force co-ordination, the ability to run promotional campaigns such as special offers and discounts, the ability to coordinate external relationships with suppliers, distributors and retailers.
  • Internal Competencies:  The abilities and skills of those in your organisation at a strategic, functional and operational level.  This includes specialist and professional skills e.g. an HGV licence, academic and professional qualifications, etc.
  • Team Competencies: Often the sum is greater than the individual.  A team that works well and efficiently, formally and informally.  Teamwork is a skill.
  • Corporate Level Competencies: Your organisational skills as a whole e.g. the ability to exploit a knowledge base and having effective and efficient communication channels.

 

The advantages of market segmentation

I have often discussed Porter’s generic marketing strategies in this blog. As you will be aware, Michael Porter of Harvard Business School stated businesses could follow three strategic routes, differentiation, cost focus and niche.

Differentiation means developing an offer attractive to each segment of a market.  Cost Focus means targeting your spending on those areas which target customers value and offering the ‘best value’ offer in the market. Niche means choosing a narrow, target segment and developing a product offer which meets the needs of that target group.

Porter goes on to say that a firm trying to carry out more than one of these strategies simultaneously risks death in a marketing ‘no man’s land as they waste scarce resources and develop muddled strategies.

All three of these strategies rely on the management of firms understanding the importance of market segmentation.  The process of finding out what segments exist in your market and which are suitable targets for your business is critical to successful marketing.

The methods of segmenting markets sit on a spectrum from ‘descriptors’ to ‘motivators’ i.e. those factors which simply describe your potential customers to those things which actually define why consumers buy.

Using descriptors is a rather old fashioned way of segmenting markets. This is segmentation by race, occupation, geography, gender, age, etc.  When you here of businesses targeting ‘millennials’ this is segmentation by descriptor.  It is a poor method of segmentation as, in many countries, ‘millennial’ will describe about a quarter of the population.  It is not a sensible segmentation category as there will be a huge difference in the needs, wants and tastes of such a large grouping. Another descriptor categorisation is the A, B, C1, C2, D, E, system developed for the UK census.  This is segmentation by social class.  Alan Sugar may describe himself as working class, but he is a millionaire businessman and member of the House of Lords. I doubt very much that he still desires the needs and wants of someone who collects his bins.

Using descriptors to segment markets can be seen as easy, efficient and cheap.  It appears to offer quick wins and requires little change within organisations. But such an approach is tactical not strategic.

The science of market segmentation has moved on from descriptors as the primary method of segmentation.  Marketing strategists now rely on motivators i.e. what actually motivates customers to buy particular products.

This approach targets personality, the higher motivators on the Maslow hierarchy such as self actualisation needs, emotions, community and relationships, the desire for experience and perceptions of brand.

The use of motivators is real segmentation BUT:

  • It is a more difficult approach than using descriptors.
  • It requires more research
  • It costs more
  • It may lead to process inefficiencies
  • It may result in lower economies of scale
  • It is a method that thrives on changes to organisational structures and cultures.

However, using motivators to segment markets offers tactical and strategic gains to a business:

Tactical Gains

  • Better targeting of marketing activities on market segments which actually want your products or services
  • More efficient promotion of products and your brand.
  • Less marketing wastage as your mix is directed at the correct customer groups
  • Improved customer retention
  • ‘Improved’ service levels as you are targeting those who truly appreciate what you do.  You do the ‘right’ things that the segment values
  • More efficient production as you are making products which will be sought and bought.
  • You are able to achieve price premiums and through higher prices, increase profit margins
  • You will achieve more focused new product development.

Strategic Gains

  • You can create unique customer propositions by gaining insights into customer needs, and you are able to act on those insights.
  • You have clear market positioning from the customers’ perspective.
  • You are able to create a market position which separates you from the offer of your competitors in the minds of target customers.
  • You create brand value and personality.
  • You develop retention and loyalty through creating relationships with your customers
  • You can develop sustainable competitive advantage
  • You can influence your market, take the influence Apple has had on the design and functionality of smartphones
  • You can develop market leadership, not just in terms of market share but also leadership of thought and share of voice.
  • You can develop premium prices and margins
  • You can increase profitability.

Modern motivator-based market segmentation is critical to business success in the 21st century. If you are an SME and expect your business to be attractive to all, you may not be making the most of your budgets and resources.

Name brands strategically

It is critical that when you name brands you do so with your marketing strategy in mind.

You have to balance an emphasis on creating a distinctive market offering with the weight you place on the origin of your products and services.

Between these two options lies a range of brand name strategies:

  • A Corporate Brand:  This is where you create a unified approach across all products and services.  An example would be Heinz where the corporate brand dominates above a descriptive product name.  Linking products together like this creates a strong corporate image.  This approach allows economies of scale by linking product reputation and having a single marketing budget.  The reputation of one product can have a halo effect to other products in the range.  If you buy Heinz Baked Beans and see them as the premium product in that segment, you become more likely to buy Heinz Tomato Soup or Heinz Ketchup.  However, this halo effect works both ways and if a product is seen as a poor offering, that bad reputation can infect other products in the brand range.
  • Multi-branding:  This is a strategy used by conglomerates like Proctor and Gamble.  Each product or line has its own identity and brands are wholly separate.  This strategy fits with a diversified strategy where the company competes in a wide range of markets. So P&G have a cosmetics brand, a shampoo brand, several food brands, several soap and washing products brands, etc.
  • Endorsed Approach:  This is where both the company brand and the product brand are used. The product brand usually dominates.  Unilever has begun to use this approach where the Unilever logo appears on the back of packs.  Probably the longest use of this strategy is Kellogg’s,  Where the Kellogg’s name sits above well known brands such as Fruit and Fibre, Frosties, Coco Pops and Rice Krispies.  This approach allows products under a descriptive brand to create a strong and linked identity whilst there is a reassurance created by the reputation of the corporate brand.  This can be very useful for new product development.  However, unlike the corporate brand used by Heinz the corporate brand is a secondary mark.  It is possible for the use of the corporate brand to vary in prominence using this approach e.g. Kellogg’s is more prominent on Corn Flakes (a ‘bland’ brand) than on Coco Pops (a youthful and vibrant brand). You buy Corn Flakes because they are made by Kellogg’s, you buy Frosties because the kids focus on Tony the Tiger.
  • Range Branding:  Here you have different brands for different product ranges.  You create a family of brands.  So Volkswagen/Audi Group have a range of brands aimed at different markets e.g. Volkswagen Saloons and family cars, Audi executive saloons, Seat, mid-market cars, Skoda for the value car market and Bugati for the luxury sports car market.  Toyota adopted such an approach when it was felt that the corporate brand did not sit well in the Executive and Premium segments of the automotive market.  Toyota therefore created the Lexus brand.
  • Private Branding:  This is a strategy used by buying groups and distribution chains.  The most prominent example in the UK is probably Spar.  Here independent businesses share a brand that represents their buying group.  Spar is such an example where independent traders combine to use a single brand and create economies of scale.
  • Generic Branding:  This is where there is no brand name and goods are sold solely on the basis of a product descriptor.  This is the North Korean communist approach to branding.  It is the strategy for dog products or commodities where the only mix factor is price. It is not a strategy commonly seen in mature markets.

Each of these strategies has strengths and weaknesses:

  • A corporate brand creates strength across product ranges and creates a unified identity.  It allows economies of scale as marketing costs can be spread across product groups.  However product failure can infect other products and damage the corporate brand (e.g. New Recipe Coca Cola).
  • Multi-branding allows for individual differentiation across brands and allows for the development of specific brands for separate market segments.  This allows brands to build a firewall against the spread of reputational damage if another brand fails.  However, this approach is expensive and separate promotional budgets are required for each range.  Each market segment must be able to support its own brand.  It is hard to reposition products from declining markets.
  • An endorsed brand approach allows products to be supported by the corporate reputation.  It also allows different products to create their own identity.  However, new product failure can impact your corporate brand (e.g. Sinclair computers and the C5 electric vehicle) and the corporate brand can limit the image (and price) of a product brand).
  • A range brand can allow a strength to be conveyed across products or services.  Promotional costs can be spread across a product range whilst creating separate range identities. But product failure can impact a range of products and the positioning of ranges in the market can create quality and price ceilings (and floors).  No one would pay £1000 for a Squier electric guitar and you wouldn’t see a Fender electric guitar for £200.  The £1000 Squier would bite into Fender’s  market position and if you could get a Fender for £200, the Squier brand would be unnecessary.
  • Private brands often mean little promotional spend by the retailer and this can limit the ability of the retailer to create an identity different to that of the private brand. Sellers are constrained by the rules of the buying group.  Marketing decisions are controlled by the distributor.  However it can create cost efficiency as marketing costs are shared.
  • Generic brands have little or no marketing spend and packaging costs are minimal.  However, it is a perfect competition model where price is all.

 

Identifying Competitive Advantage is Critical to Successful Marketing Planning

In The Origin of Species by Natural Selection, Charles Darwin wrote:

“The most successful species are those which adapt best to a changing environment.  The most successful individuals are those with the greatest competitive advantage over others”.

 The same principle applies in business.  The most successful companies are those which adapt best to changing markets by having greater competitive advantages than their competitors.

In defining his three generic marketing strategies, the Harvard academic Michael Porter stated that competitive advantage grows out of the value that a firm creates and draws out from its customers. This value must exceed the cost of its creation. Value will depend on what consumers are willing to pay to obtain the perceived competitive advantage.

That value could be the achievement of value at a lower cost than that of competitors, a cost focus strategy.  It could be offering additional benefits for an equivalent price, a best value strategy. It could be providing unique benefits for a higher price, a cost leadership through differentiation strategy.

These strategies match two of Porter’s three generic marketing strategies, Cost Focus and Differentiation.

Of course, Porter describes a third generic marketing strategy, Niche.  This is offering specialist targeted products and services, often achieving a price premium, to specific groups of consumers.  So with this strategy your competitive advantage will often be driven by specialist knowledge or products to meet specific specialist needs.

Porter suggests that competitive advantages can be achieved through value chain analysis.  Identifying areas where targeted consumers perceive value and investing in those value activities.

Value chain analysis looks into business processes in two areas; primary activities, the process of production; and support activities, tasks which assist the production process.

Primary activities include:

  • Bringing raw materials into the production process
  • Modifying raw materials to create finished products
  • Distributing finished products to market
  • The marketing of finished products
  • Provision of after sales service

Support activities include:

  • Procurement of components and raw materials
  • Technological development (R&D, process improvement, quality assurance)
  • Human Resource Management
  • Infrastructure development (e.g. automation of processes, IT improvements)

Porter suggests businesses need to continually look for areas of improvement along the value chain.  This suggestion lends itself to concepts such as Kaizen, Six Sigma and total quality management.  He also suggests that businesses need to be aware of the value chains of competitors and others in their production chain such as suppliers, distributors and retailers.

Another quote often cited, from an anonymous source is:

“The only true competitive advantage comes from out innovating the competition”.

You cannot out innovate your competitors if you do not know their market offer as well as their strengths and weaknesses.

For many businesses, the issue is not obtaining a competitive advantage.  Most successful new entrants to a market do so on the basis of an identified competitive advantage. The issue is maintaining that competitive advantage.  Some competitive advantages can be protected, through intellectual property laws such as copyright, patents and trade marks. Copyright laws in the UK include the ability to protect designs.  Other protections include secret recipes and trade secrecy clauses in employment contracts.

Breaches of such contract terms can often lead to long and costly legal actions.  A notable example is the long-running legal battle between Mattel, the maker of the Barbie Doll, and an ex-employee who moved to a competitor and created the Brats doll.

Cravens (1996) identified the following sources of competitive advantage:

  • Superior skills
  • Superior resources
  • Superior control processes
  • Country of Origin
  • Brand reputation and image
  • The ability to produce higher profitability (e.g. economies of scale or process experience)

Cravens also identified positional advantages:

  • Superior customer value
  • A lower cost base
  • Differentiated product offerings

These positional advantages should lead to improved performance outcomes:

  • Customer satisfaction
  • Better customer retention and increased loyalty
  • Market share growth
  • Better distribution networks

To maintain these advantages, profits must be re-invested.

Often the primary competitive advantage is doing things better than your competitors.  This could be through combining small advantages to create a greater whole and a single advantage which can be exploited.

However, to create a winning business strategy, more than one competitive advantage may be required.

Here is a list of ten competitive advantages:

  1. Superior product or service benefit
  2. A perceived advantage or superiority amongst target consumers (e.g. Fender guitars, Titleist golf balls, BMW saloon cars)
  3. Low-cost operations (note not necessarily resulting on low cost products; this is about bigger profit margins).
  4. Global experience, skills and reach
  5. Legal advantages
  6. Superior industry contacts and relationships
  7. Economies and advantages of scale
  8. Competitive toughness and a determination to win
  9. Superior competences (e.g. a luthier who has been making instruments for 20 years compared to an unskilled Chinese production line worker)
  10. Greater assets (e.g. Amazon can apply greater resources to search engine optimisation than a small trader, and Amazon can also rely on Zipf’s law to dominate click responses).

Other advantages can be added to this list:

  • Intellectual capital
  • Attitude to creativity and innovation – accepting you will often fail
  • Service support sophistication
  • Better market knowledge
  • Superior technology
  • Using complex selling structure to tie customers in (e.g. petrol manufacturers selling franchises to service station operatives which include proprietary equipment such as petrol pump technologies and forecourt software.)
  • Better speed to market (although being first doesn’t always mean you win e.g. Betamax video cassettes and VCRs)
  • Brand Reputation
  • A focus on customer experience
  • Better supply chain management.