Survival in a Hostile Environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Instead, analysis should consider:

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

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

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

Competitive strategy in Emerging Markets

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

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

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

So what is an emerging market?

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

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

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

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

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

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

So what are your strategy options in an emerging market:

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

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

Pioneering in an emerging market can be high risk.

Entry into a market is appropriate when:

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

The following tactical moves:

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

Time and Technology

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

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

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

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

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

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

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

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

There are four aspects to workplace technology:

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

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

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

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

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

There are four aspects to new product taxonomy:

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

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

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

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

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

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

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

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

Why Customer Service Matters – The Service-Profit Chain

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

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

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

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

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

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

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

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

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

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

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

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



Mintzberg’s Three Modes of Strategy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



Responding to Technological Threat

Products have a life cycle.  They are introduced to the market and the standard model of the life cycle follows an S-curve of growth maturity and decline.  Products go into decline for a variety of reason.  It could simply be a matter of public tastes changing. Today, a prominent reason for products entering the decline stage of the life cycle is technological change.

A prominent example of technological change leading to product decline is the market in processing chips.  Although there is some evidence that Moore’s law is no longer applies; for many years the market for chips followed the pattern of double the number of semiconductors on the chip every eighteen months. Of course, when the processing power increased, the old chips became obsolete.

History is littered with such changes.  The replacement of steam trains with diesel electric trains, the rise of the smartphone, digital cameras over film cameras.  The last of these examples is particularly interesting.  Kodak invented the digital camera sensor. They then let others develop it as Kodak continued to focus of producing film rolls. Kodak eventually had to file for bankruptcy protection.

Technology can destroy old industries and creates new ones.  In the 1960s very few saw a market for home computers.

Businesses are often faced with a host of technological threats.  Not just products but technological change in supply and distribution chains (e.g. e-books and music downloads), changes to customer habits (such as internet shopping, fast food home delivery apps), changes to production processes (e.g. 3D printing).  Good managers, or perhaps lucky managers, know some technological threats will never materialise as a threat but others will have a major effect on their business.

It is common for new technology to be developed outside and industry and then applied to that industry.  Often the new technology is developed by new firms entering the market (disruptors)

New technology is often crude and expensive at the outset and sales of old technology may initially continue to grow following the product life cycle curve.  However, the old technology tends to decline within 5 to 15 years of the new technology being introduced.

Existing firms in a market can respond to the new technology in two ways:

  1. Develop new products containing an improved version of the old technology
  2. Fight on two fronts; continue with the old technology whilst developing a presence in the market for the new technology.

When new technology arrives, an existing market member may be facing a host of new market entrants.

So what are the potential strategic responses to the arrival of new technology:

  1. Do nothing
  2. Monitor the new technology through environmental scanning and forecasting
  3. Fight the new technology using public relations; or in extreme circumstances through the courts.  For example, Apple and Samsung fought a long legal battle over the technology in each others smartphones.
  4. Increase organisational flexibility to be better able to address technological threats
  5. Avoid the technological threat by withdrawing from the market and going and doing something different.  John Menzies went from running high street newsagents and stationers to becoming a trade distributor of computer peripherals.
  6. Improve the existing technology in your market e.g. more efficient and cleaner petrol and diesel engines.
  7. Maintain sales by modifying your marketing mix – Price cutting, increased advertising budgets, better after sales service: a non-technological response.

You could also participate in the new technology.  Dyson bought the firm holding the patent for solid state rechargeable batteries with the intention of putting them in his now abandoned electric car project. He also bought a ventilator patent from researchers when the UK government called for a simple design of ventilator in response to Covid-19.

Such participation in new technology can be seen as a defensive action or as an attempt to achieve market leadership.

In deciding to adopt new technology, you need to assess the strategic dimension.  What is the level of acceptable risk?  What commitment in terms of finance, non-money assets and time does adopting the new technology require? What is the correct timing of the commitment? Do you capture early adopters or aim for the mass market? Do you develop the new technology within your firm or do you gain the technology through acquisition?


Fragmented Markets

Earlier this week, I was reading and article written in the 1980s by Michael Porter of Harvard Business School.  The article discussed fragmented markets.

the following factors are indicators of a potentially fragmented market:

  • The market is populated by a large number of small and medium-sized companies.  Often these are family-owned firms.
  • Often there is an absence of a clear market leader with the power to shape the market.
  • The market is characterised by differentiated products.
  • The market is most likely technologically sophisticated.  This does not mean that it competitors are cutting edge firms but that specialist equipment is required to operate in the market. the example given by Porter is a distiller who needs specialist equipment like coppers and condensers.

Markets become fragmented through underlying economic causes.  The market will have low entry barriers.  If entry barriers were high, there wouldn’t be so many small firms in it.

There is an absence of economies of scale and there is no steep learning curve.

There are high transportation costs in the market which means production must be local to the end user and there is a limit on the size of production plant.

There are high inventory costs and erratic sales fluctuations.  An example would be a musical instruments retailer.  Inventory costs are high and you will likely have to hold onto stock for a significant period of time.  There will be times when sales are low and times, like Christmas, when sales are high.

There will be no advantage with organisational size when dealing with suppliers and buyers.  Suppliers may be so large that even the biggest firms in the market have no discount leverage.  Alternatively, there are lots of small suppliers in the market and large powerful retailers e.g. the Supermarkets.

A fragmented market will have some diseconomies of scale.  This is and important factor in fragmented markets.  This could be caused by rapid product change e.g. high fashion or technological advances.  Market companies may need to have a wide product range.  For example, guitar manufacturers often need to make a wide range of models to suit different musical styles such as classical nylon string guitars, steel string acoustics, hollow body jazz guitars, rock guitars with humbucker pick-ups, etc.

Consumers in fragmented markets have diverse needs.  So, again with guitars, some players prefer Gibson guitars with fat necks, others prefer Fender guitars with slim necks.  Often the choice of instrument goes with the style of music.  Heavy metal guitarists will prefer Jackson or Schechter guitars.  Progressive rock players will like Ibanez Gems.  Market companies will often offer bespoke products and some market consumers will pay a premium to obtain them.  Instrument manufacturers like Fender, Gibson and Paul Reed Smith have custom shops where instruments are made to the requirements of individual consumers.

Products in fragmented markets have distinct product images which results in product differentiation.  So some musicians will sign for specialised labels dealing with jazz, indie, classical or dance music rather than signing for a major multi-segment company like EMI or BMG.  This may be because of the image the band or musician wants to develop.

A fragmented market may have exit barriers.  These keep marginal firms in the market so as to avoid these exit barriers.  this means that the market cannot consolidate.

fragmented markets often have local regulation i.e. there are British Standards in the industry not European Standards or International standards. Such local regulation restricts the size and scope of the market.

Government may prohibit such consolidation within a market.  For example, the UK government has rules regarding media plurality so one company cannot dominate the newspaper sector.

Fragmented markets are often new markets where no one firm has yet developed the skills and resources to command significant market share.

I’m sure the above criteria are known to many readers of this blog!

So how do you cope in a fragmented market?

Industries are all different so there is no ‘one size fits all’ solution to the fragmented market situation.  Porter developed his generic marketing strategies; Differentiation, Cost Focus and Niche; with fragmented markets in mind.

To survive in a fragmented market companies will need:

  • Tightly-managed Decentralisation: Local management and operations are vital. there may be high levels of personal service.  Senior management must also have tight control of what their local managers are doing.  It requires a careful balance between central control and the ability for small offices to be as autonomous as possible.  this will likely mean tight targets for local managers and performance related rewards.
  • Formula Facilities:  For example, Macdonald’s Drive-through restaurants are often built to a common set of plans.  In fact, the building may arrive prefabricated on the back of a lorry.  Hotel chains will have identical room layouts and décor.
  • Increased value-added:  You could offer increased service levels to accompany a sale or allow local managers to part fabricate finished product e.g. dealer vehicle specifications.
  • Specialisation by Product Type or Market Segment: So Ferrari operate in the sports car market; they do not make people carriers.
  • Specialisation by Customer Type: Target certain customers within a market, so Top Shop targets teenagers whilst other clothes retailers will target the over-40s.
  • Specialisation by Type of Order: An off-licence will sell wine by the bottle but a retail wine merchant will sell wine by the case. Direct marketers like Laithwaites sell wine by the mixed half dozen bottles.  You may offer quicker delivery, smaller minimum order sizes or be less price sensitive than your customers. You may develop the ability to take custom orders.
  • Geographic Focus:  You may concentrate on certain parts of a country or region.  This allows you to economise on the size of your sales force or to have more efficient advertising.  you might only need one distribution centre.
  • Bare Bones:  You may develop a no frills position in the market with low overheads, low staffing costs and lower margins.  This may give you the best position to compete on price.
  • Backward Integration: You integrate your suppliers into your business and put pressure on your competitors who cannot afford such expenditure.

The article by Porter was written in the late 1980s.  Looking at it in 2020, where we have technological disruptors, mass customisation, and markets are increasingly fragmented, Porter’s guidance is particularly apt.


Evaluating strategy

This week, Matt Hancock, the UK government health minister, announced that he had met his self-imposed target of carrying out one hundred thousand tests for the Covid 19 virus.  Except he hadn’t. Seventy three thousand tests had been carried out and a further forty thousand testing kits had been posted to households.

Most sensible individuals would not count a test kit posted as a completed test and would only consider kits returned to laboratories for analysis as a completed test.  What Hancock had done was the long-practised political tactic of ‘moving the goalposts i.e. if you aren’t going to hit the target, you change the target.

this was the second time this week he had done so.  Earlier in the week, he claimed to have met the stated target for supplying personal protective equipment to healthcare workers. However, he only achieve that target by counting surgical gloves individually, rather than in pairs.

In politics you might just get away with such chicanery; in business you cannot.  You need to set SMART objectives.  You must have the resources and capability within your business to achieve those targets.

Business strategies cannot be formulated or adjusted in an environment of changing circumstances without a process of strategic evaluation.

For many strategic evaluation is a simplistic process of collating business returns e.g. growth rates, profit margins, growth in turnover, etc.

However, this line of reasoning often misses the point of the intended strategy.  Critical success factors are often not directly observed and are not easily measured.  Often strategic opportunities and threats appear only when it is too late to measure them.

So strategic evaluation must look beyond simplistic statistics and financial returns. You need to consider the health of your business over the long-term.

You also need to keep one eye on the future and many business metrics, particularly financial metrics look to the past.

Strategic evaluation asks three questions.

  1.  Are business objectives appropriate?  Do they meet the SMART criteria? Do they fit your organisational culture and do they match the expectations of your market?
  2. Are your policies and plans appropriate?
  3. Do results obtained to date confirm or refute the central assumptions on which the strategy rests?

Answering these questions is not simple or straightforward.

Every business strategy is unique.  Your organisation’s culture and the environmental effects on your business will give a different effect that that affecting your competitors.  In short there is ‘no one best way’ and you cannot succeed by simply copying the practices of others in the market.

The central concern of strategy is the selection of goals and objectives.  This requires situational logic.

Strategic review can create conflict within and organisation.  This often relates as to who is best qualified to give an objective evaluation.  You need ‘management by more than results’ but this often runs counter to modern management thinking.

In science, theories can never be proven absolutely true.  However, they can be proven absolutely false if they do not withstand repeated testing. Similarly in business no strategy can be proven optimal, but you can test for critical flaws.

Testing business strategies should fit within four broad categories:

  1.  Consistency:  Is the strategy inconsistent with your businesses wider goals and policies? Is it consistent with your organisational culture?
  2. Consonance:  Strategy must be capable of an adaptive response.  It must be able to change as the environment changes.  Again we must consider the UK government’s current strategy as to obtaining a trade deal with the European Union following Brexit.  It is generally recognised that big, complicated trade deals take significant time to negotiate and agree.  Often they take one or more decades.  The UK government is adamant that it will not extend the Brexit transition period and that a trade deal must be agreed by December.  This timescale appears rushed in normal circumstances.  In the aftermath of the Covid-19 pandemic, this timescale appears to be lunacy.  the government policy has no consonance.  It is unable to adapt to changing circumstances.
  3. Advantage:  Does the proposed strategy create a sustainable competitive advantage?
  4. Feasibility:  Does the proposed strategy fit within your existing resources and not create unsolvable sub-problems?

If your strategy does not pass one of these four tests, it is likely to be a flawed strategy.

Remember competitive advantage is created through having superior resources, superior skills or creating a superior position, than your competitors.

So in selecting a strategy for your business:

  1.  Does it take advantage of special competences that exist in your business and which are needed to answer questions raised by the strategy?
  2. Does your organisation have sufficient internal cohesion, coordination and skills to deliver the chosen strategy?
  3. Does the chosen strategy have the ability to challenge and motivate key personnel?

To maintain a competitive position in a changing environment you need a dual view of strategy and strategic evaluation:

  1. Within day to day operations; and,
  2. In building systems and structures which make strategy delivery an object of daily activity.

Turning things around

All businesses, at some time of other, even the most successful corporations, suffer either stagnation or decline.  This becomes a cause of great anguish amongst investors and in the media.  In the UK, Marks and Spencer often sees headlines about how it is in decline.

However, most of these organisations do not die.  They either grow at a slower rate or they stop growing.  In mature western markets we have got used to a mantra of ‘grow or die’.  But this mantra is often a myth.  Management adjusts to new circumstances, they accept growth will be slower and more difficult.  They move from policies of aggressive growth to defensive positions to maintain existing share and margins.

However, in times of stagnation or decline within an organisation, the market still moves forwards.  Managers have to ‘run to stand still’.  Stagnation of output does not mean stagnation of inputs.  More effort is required to maintain existing market position.  Some managers may vegetate rather than apply additional effort.

Two factors affect business turnaround: the areas of the organisation affected and how time critical the turnaround needs to take place.

Most turnarounds affect:

  1. Organisational profitability and efficiency,
  2. Reclaiming market share, or
  3. Poor asset utilisation.

There are two types of organisational turnaround; strategic turnaround and operational turnaround.

There are two types of strategic turnaround:

  1. new strategies to compete in the same market
  2. strategies to enter new markets.

The latter of these two options is not for times of crisis.

So what options exist to change strategy within your existing market?

  • Move to a larger strategic group within your market. This could be through acquiring competitors, mergers or vertical/horizontal integration.
  • Compete more effectively within your existing your existing strategic group by modifying your competitive weaponry or core skills
  • Move to a smaller strategic group within your industry, downsize or focus on a niche.

The second way to turnaround a business is to improve your operational effectiveness through:

  1.  Increasing revenues (selling more)
  2. Decrease costs – through increased efficiency
  3. Decreasing your asset base – selling stuff
  4. A balanced combination of all three of the above.

Often the distinction between operational and strategic turnaround becomes blurred.  Often changing at an operational level requires new strategies and changing strategy needs new operational tools.

So how do you choose which is the best approach to turnaround for your particular situation:

  1.  Is the business worth saving or is it better to divest and do something else?  An example in John Menzies, the Scottish equivalent of WH Smith.  In the early 1990s, Menzies decided to get out of retailing.  they sold their smaller stores to the McCall newsagent chain and their larger stores to WH Smith.  The business of Menzies was then refocused on the distribution of computer peripherals.
  2. What is the operational health of the organisation. Can you continue to flog a dead horse?
  3. What is the strategic health of the organisation e.g. are you simply reheating the strategies of the past or are new dynamic strategies appearing.

Most turnaround situations are time critical.  Often the survival of business is at stake.

So it is important to check the operational health of your business before looking for strategic changes.  Is the business in imminent risk of bankruptcy, how much time do you have before bankruptcy, how big is the task of avoiding bankruptcy, what financial resources do you need in the short-term?

Once you have looked at the financial situation do the same for your market, technological and product positions.  You need a full picture of your operational health before you start looking to new strategies.

If your strategy is strong, it could be wasted if your operations are weak.

If your operations are strong but your strategy is weak, you be wasting your efforts.

If both your strategy and operations are weak, You won’t last very long.

I suspect the second of these positions is the case with many SMEs.  They have excellent operational ability but they do not think strategically.  This lack of strategic thought means they are not prepared for market shock.  However, strong operations may give you a grace period within which you can develop new market strategies.

When approaching strategic turnaround you need to assess what magnitude of strategic change is needed. Are you looking to maintain your current market position.  Can you easily build defences to retain that position.  Or do you need to develop a new market position e.g. moving from market follower to market challenger or from market challenger to market leader?

Some businesses may wish to jump two market positions e.g. from follower to leader.  Often such a jump in market position is all but impossible unless the market leader slips or there is a major market or product change.  For example for many years Nokia was the market leader for mobile phones but the arrival of the smartphone allowed Samsung and Apple to overtake them.

Often the best way to move market position is to niche hunt; to search for market segments that increase your strategic position.  However, for some reason this approach is often ignored.

So if you feel your business needs to be turned around:

  1.  Analyse your situation
  2. Calculate what you need to do
  3. Avoid knee jerk reactions
  4. Examine the conditions across your industry. It your industry too rigid? Is the whole industry in decline? Do shifts in market leadership happen regularly? Are your competitors asleep at the wheel?

Managing crises

The is no doubt the world and the economy is in crisis.  The Covid-19 pandemic had brought things to a virtual standstill as we adapt to social distancing and enforced lockdowns.

It is calculated that the UK economy will contract by 35% as a result of the pandemic.  the effects of the virus could be with us for a decade or more.

The UK government, which planned a massive spending spree has just extended its overdraft with the Bank of England and billions are being diverted into supporting incomes.  UK national debt is expected to reach 100% of GDP in the Autumn. This is at a time where every country affected by the pandemic will be competing for loans. Our debt and economic contraction means we will be a higher risk borrower.  This means higher interest rates and a lower credit rating.

In the US unemployment claims have hit a record 22 million.  This represents 15% of the US workforce.  If that is replicated in the UK we are looking at 5 million unemployed; a level of unemployment not seen since the early 1980s.

And still the UK government is resisting calls for an extension to the Brexit transition period stating that the UK will end transitional arrangements with the EU in December.  This matters because the forecasts for a Boris Johnson-style Brexit is a drop in GDP growth of between 6.8% and 7.6%. This is a long-term effect which is expected to affect the UK economy for 15 years or more.  A no deal exit will have a bigger drag effect.  It seems that as HMS Great Britain sails away from its biggest trading partner, those on the bridge are chucking a gigantic drag anchor off the stern.  It beggars belief that those in charge of protecting the UK economy are still following such a nihilistic policy.  We are facing an economic meltdown and our government is about to inflict economic sanctions on itself.

We are likely in for a deep recession.  The government’s reaction to that recession will define whether the economy bounces quickly or the whether the recession becomes a long depression.  A government deliberately putting up barriers to trade and following policy expected to hammer economic growth appears to be one happy with the latter option.

Of course, the primary response of many businesses in such an environment will be to focus on their survival.  This focus can be dangerous, especially if the decision is to contract the business.

This is what happen in America when their two big car manufacturing firms, Ford and General Motors were in crisis.  Senior managers created a survival plan that involved major closures of factories and production lines.  Both firms cut too deep.  They focused fixed costs onto a far smaller operational capacity. This cut deep into margins and di more harm than the initial crisis.  Both companies had to go to the US federal government for a bailout and towns such as Flint in Michigan and Detroit are still trying to cope with the fallout.  This is all described in Michael Moore’s book  Stupid White Men.

Businesses, like products and brands, have a lifespan.  Businesses will fail.  Crises like Covid-19 and the credit crunch often weed out those companies which are badly managed, have weak business plans and some which are simply unlucky.

Mintzberg outlined causes of business collapse.  These can be summarised as follows:

  • ‘One man rule’ – this can happen when businesses have a figurehead manager determined to follow a course of action based on his/her personal perceptions (and to be honest it is more than likely a ‘him’ rather than a ‘her’).  These firms often have a lack of management depth.  They may have a weak finance function and an unbalanced top team.  It has long been a criticism of UK businesses that they’re boards are dominated by accountants not engineers or marketers.
  •  Poor budgetary control – Firms that have poor cashflow forecasts, incompatible margins, poor costing systems and the incorrect valuation of assets.  Firms now put the value of their brands on their balance sheets.  But brands are intangible and therefore incredibly difficult to value.  Too many businesses look back to the financial results of the past; expecting the same level of results in the future; they do not properly forecast potential financial results
  • Poor responses to change – Not properly monitoring competitive trends and economic change. Some firms overtrade.  An example is Jessops, which was a small specialist camera retailer.  It rapidly expanded its store network and started selling items like laptops. In my town, Shrewsbury, population 80,000, Jessops had two retail outlets. But when everyone carries a digital camera on their phone there simply wasn’t the consumer demand to maintain so many outlets.
  • Gross Errors – For example, Gerald Ratner, the high street jeweller, beign recorded saying his stores sold ‘crap’ in an after dinner speech.  This destroyed the Ratner’s brand and had a incredibly damaging effect on other brands in the group such as H Samuel.
  • Focus on one big project – In some ways this links to last week’s blog about Arnhem.  General montgomery was focused on his big plan, Operation Market Garden, rather than smaller incremental operations, such as opening up Antwerp’s port, which required fewer assets and which may have had a greater impact on the campaign.  In today’s Sunday Times, not normally a paper to criticise the new right wing orthodoxy, there is a damning article stating that Boris Johnson’s government ignored the necessary intitial planning for Covid-19 because they were too focused on their big project, planning for a no deal Brexit.

Business collapse has symptoms.  Signs that a business is failing include a tendency for creative accounting (see Carillion as a prime example); the delaying f financial results; low staff morale and ‘doom-mongering amongst middle managers.  So if your middle managers are behaving like Private Fraser; repeatedly saying ‘we’re doomed’; it may be an indication of trouble ahead.

W Stewart Howe, in his book Corporate Strategy, outlines steps to recover from a crisis.  Firstly, to again refer to Dad’s Army, or possibly The Hitch-hikers Guide to the Galaxy, “DON’T PANIC!”:

  1. Recognise the issues within the crisis
  2. Evaluate those issues.
  3. Take emergency action.
  4. Stabilise your business
  5. Return to growth.

The most dangerous course in a crisis is to take incorrect actions which hasten organisational failure.

There are two sources of crisis; from organisational shortcomings; and from environmental effects.  Businesses fail when those two elements interact.

It is important not to simply rely on perceptions from within your organisation.  Getting a ‘critical friend’ or an external view can be important in surviving a crisis.  It is the time for trouble-shooters.  Defects within your organisation will affect your perceptions of the crisis.  There may be a willingness to blame your organisational defects on the effects of the environment.  Reality can be distorted.

Reactions to crises vary.  Some may try to ignore the crisis.  President trump initially described Covid-19 as a hoax.  He then said he had it ‘beat’.  Now America has the most recorded deaths from the virus and the highest rate of infection.

There may be attempts to blame the crisis away.  This can often be seen in accounting reports where poor results are blamed on the environment rather than the business’s reaction to that environment.  Again, see Trump’s claims that the US’s poor response to the Covid-19 virus is because ‘the germ is clever’.

There may be a failure to plan for the exceptional.  There is an ‘It’ll never happen to us’ culture.  Again, in the Sunday Times report, Boris Johnson’s government is criticised for ignoring expert advice on the levels of PPE and ventilators required to be available to cope with the Covid-19 outbreak.  The BBC reported yesterday that some hospitals will run out of PPE this weekend, but the UK exported lots of PPE to China in February.  It could also be argued that the austerity of the last decade critically damaged UK public services ability to cope with a major emergency such as Covid-19.  It could also be argued that the focus on deficit reduction, rather than debt reduction, hamstrung the UK’s ability to react.

Successive government’s have been accused of only planning for the short to medium-term; ignoring necessary long-term objectives.  Often in businesses, long-term planning is formulaic. This all makes reacting to unexpected events difficult.

Often the early signs of a crisis are ignored.  This certainly happened in China where the Doctor who initially reported the outbreak was ridiculed.  Many argue that the UK’s initial response to the outbreak was also lackadaisical e.g. the delays in closing schools and imposing lockdown.  People are still flying into the UK with no checks at airports to see if they are carrying the virus.

People fear rapid change and crisis is often created by a rapid change.  In such circumstances we often incorrectly look to the past.  An example is all the references in the media to the 1918 ‘Spanish’ flu outbreak.  Those making the comparison often ignore that the environment around that pandemic were completely different.  the virus spread in transit camps for troops and in refugee camps from the First World War.  Many of the troops and refugees in these camps were living in squalor and had depressed immune systems.  The ‘churn’ of people moving through these camps was a perfect environment for the flu to spread.

Some, in the face of crisis, will go into denial.  Initially this was Donald Trump’s response; that the virus was a hoax.  People in denial will see no need for strategic realignment.  Those in the UK government still pushing for an end to the Brexit transition in December could also be seen as being in denial.

Those responsible for creating plans and strategies will often see those strategies as being perfect and not needing alteration in the face of a crisis.  they may try to delay reactions to a crisis to maintain those strategies and to prevent strategic change.  But ‘normal’ behaviour in the face of a crisis will often make things worse, not better.

Centralising control in a crisis to inappropriate people can exacerbate that crisis.  Again, look at the actions and statements of President Donald Trump.

Finally, in a crisis, do not live in a collapsing palace.  Palaces are large robust buildings. But if the land beneath those palaces begins to crumble, the palace will collapse.  This goes back to the biblical parable of the man who built his house on sand.  Palaces on subsiding ground can only be shored-up temporarily.  to survive a crisis you need to be flexible.  The large solid prop forward of a business which normally tries to bulldoze its way through the market is less suited to surviving a crisis than the fleet of foot winger of a business.

To survive a crisis:

  • Avoid excesses and ‘magic bullet’ strategies – no one prescription can render a crisis impossible. You need agility
  • You may need to replace senior management or lok externally to your organisation for solutions (consultants or trouble shooters)
  • Have the capacity to act with urgency.
  • Reject implicit assumptions – they are often wrong
  • Experiment with your portfolios.  Look for new markets, new products, new technology, new routes to market and new ways of operating.  Recognise experimentation so that it can be properly managed.  People who have an experimental mindset are often never satisfied.  They will always strive for better results.
  • Look to change your management ideology.  Senior managers are often seen as the villains in a crisis.  They can be seen as steering an organisation towards a crisis rather than away from it.  they can become fall guys.  An example is Demi Moore’s character in the film Margin Call.  She is sacked not because she was to blame for the crisis but because the CEO needed a sacrificial lamb to placate the bank’s board.  Changing your management ideology may be the best way to recover from a crisis.

Remember, the Chinese symbol for crisis is made up of two other symbols; one representing danger; the other representing opportunity.  To survive a crisis, look for opportunities in that crisis; do not see events solely in terms of danger.

Remember the guidance of Sun Tzu in The Art of War:

“There is no one constant supremacy”. “Victorious campaigns are unrepeatable they take form in response to the infinite varieties of circumstance”.