In Times of Strife

I sit composing this blog under lockdown due to Covid 19.  Like millions of others, I am stuck at home, only allowed out for daily exercise or to buy essentials.  At my local supermarket, only 10 people are allowed on the store at any one time and the queue of people, standing two metres apart, stretches right around the car park.  At my local pharmacy, it takes forty five minutes to collect a prescription.  Restaurants, leisure centres and thousands of ‘non-essential businesses are closed.  It is likely these restrictions are going to last weeks and even when the strictest restrictions are lifted, the virus will have an effect on our lives for the next year.

The economic effects of the pandemic are likely to last far longer than the outbreak.  Some economists have calculated the economic fall out of Covid 19 will last a decade.  Governments are printing billions upon billions of currency in an attempt to shore up their economies.  Previous plans for extensive infrastructure spending and tax breaks will likely have to be shelved.

Covid 19 will lead to a recession and in the UK that recession may be deep and lengthy.  Economic growth in the UK since the 2106 EU referendum has been slow. Productivity has fallen off a cliff.  In the 3 months to March, the UK economy was stagnant with zero growth. Add the effects of the pandemic on the economy and the economy declines. Add the economic effects of Brexit and that decline spirals downwards. If we only agree the type of deal favoured by Boris Johnson, the calculated effect on UK GDP growth is between 6.8% and 7.6%.  A no deal scenario would have a larger negative effect.  For comparison the equivalent effect of the 2008 crash was 1.3%.

A mix of pandemic, a flatlining economy and Brexit could easily result in a depression.  The only comparable downturn would be the economic stagnation of the 1890s: and Britain no longer has an empire to soften the blow.

Niccolo Machiavelli, in The Prince, says of a recession: “Luck decides half of what we do; the other half is more or less up to us”.

He then talks of how to survive a shock or emergency.  Machiavelli was writing during the Italian renaissance.  Italy was not one country but a group of independent city states. Wars and conflicts between these city states were common.  It was a time to trust no one. Even in your own court, rivals to your throne could be found in your own household. Family conflicts exploded into assassinations and coup d’états.  This was a time when a ruler could gain power one day and lose it the next.

Machiavelli compares emergencies like Covid 19 to a river in spate. A raging torrent which destroys everything in its path.  Such torrents are common in Northern Italy in the Autumn and spring as water sheds off the Alps down narrow valleys.  He states that with such torrents the initial reaction of the majority is to run for high ground and safety.

Machiavelli states that good leaders will prepare for such torrents.  They will build banks and dykes to control the flood when river levels were low.  So he advises repairing the roof whilst the sun shines.  It could be argued that the UK governments policy of austerity has done exactly the opposite.  That is why we now see an NHS with fewer beds, high staff vacancies, a lack of appropriate PPE and too few ventilators.

In his writings, Machiavelli despairs of the ability of the Italian states to withstand turmoil and invasion. He argues that they are only strong and able to withstand such shocks if they are united with common purpose.  So the UK is facing a massive economic shock just as it isolates itself from its nearest markets and neighbours.  And the UK government isn’t helping matters by ignoring joint ventures such as the EU plan to collaborate on the purchase and supply of medical equipment (a plan which both Norway and Switzerland were happy to join).

So a deep and destructive recession is likely: but don’t panic.  Don’t simply use this time to fight fires and short-term problems.  Yes, ensure your business survives the initial economic shock but also plan for the longer-term.

Do not become infected with ‘Anorexia Industrialosa’ (a term invented by Andrew Lorenz).  This is an excessive desire for a business to become leaner and fitter.  This excessive desire can lead to emaciation and death of a company.  Cost cutting leads to poor customer service and excessively limited offers.  Which in turn is rejected by customers.  Earnings suffer and so you cut again leading to even more limited offers and even worse service.  A downward spiral accelerates.

And closing outlets and factories to try and maintain margins can also be a serious error.  You may end up concentrating fixed costs on fewer outlets damaging your ability to maintain margins and making your business unviable.

In modern markets the businesses that do best are those which maintain the interest of their customers and which maintain their customer focus. Excessively reducing your market offer and damaging your customer service is directly against this goal.

So in times of recession you need to put marketing centre stage.  Customer-focus is your prime strategy. You need to concentrate on segments and customers which fit your long-term goals.

Professor Malcolm Macdonald gives the following guidelines for operating during a recession:

  1. Customers are attracted by promises but retained through satisfaction.  If you cannot describe the value a product or service required in the mind of your consumers, you cannot deliver that value. So you need to understand your customers needs.
  2. Don’t try to cover too many market segments.  Focus on those segments that your organisation wants to lead in the long-term.
  3. Reduce your product portfolio but be careful in doing so.  Rid yourself of products which do not provide adequate customer value.  Recently Mars, the confectionery giant, did this reducing its portfolio to only brands it considered as market leaders.
  4. Look at your distribution network. Is it flabby.  Is it too big or too slow.  Are there better distribution methods out there.
  5. Improve the productivity of your promotional spend.  If you have a sales force examine their activities closely
  6. Reduce costs in the unproductive areas of your business.  Use value chain analysis.  Don’t incur costs for servicing unprofitable markets or customers.
  7. Identify your key customer accounts.  Don’t rely on your sales team to do this alone.  Assign senior managers to key accounts.
  8. Don’t let your sales force deal with big customers alone. There is a danger they will all receive maximum discounts in order to keep their business.  Large contracts need to be overseen by senior managers.
  9. Selectively attack competitors key accounts that are attractive to you. Don’t worry if you lose unprofitable customers to do so.
  10. Keep the heart of your business: Key products, key customers and key segments

Use this time of lockdown productively. It is a perfect opportunity to plan and prepare for what is to come in the long-term.

Don’t enter a vicious circle of:

  • cutting prices,
  • increasing volumes at low margins,
  • reducing specifications to maintain return on investment,
  •  losing sales
  •  and then cutting prices further

Enter a virtuous benign circle of:

  • Raise prices
  • Have lover volume of sales but at higher margins and revenue
  • Improve your products and promotion
  • Develop higher customer acceptance and therefore volume
  • Allowing for prices to rise again.

 

Marketing Strategy: Warfare or Game

We are all aware of the stereotypes of marketing and PR professionals in the media.  They are either air brained non-entities like Siobhan Sharp in W1a or Steve Coogan’s ultra-aggressive salesman, Gareth Cheeseman.

And such stereotypes seem to feed into the minds of some business managers who treat the marketing function as either a form of warfare or as a complex game.  So, if you are charged with your businesses marketing function, are you to act like a field marshal planning troop movements or like John Nash, the Nobel Prize winning mathematician and inventor of Game Theory.

In truth, running a business is not warfare; and I suspect many business owners would be extremely worried if their staff were treating strategy as a game. You are not organising the D-Day landings; you are not playing Monopoly.

However, that does not mean your business strategy cannot learn from both military strategy and game strategy.  Even I succumb to occasional quoting Sun Tzu’s The Art of War (and even Machiavelli’s The Prince).

The effective marketer will be able to learn from both military strategy and game strategy.

Some of the analogies in marketing that can be lifted from military strategy are:

  1.  Select and maintain your aim
  2. Use surprise with audacity and speed
  3. Maintain morale
  4.  Take offensive action
  5. Secure your defences and never be taken by surprise
  6. Maintain flexibility
  7. Use concentration of force
  8. Use economy of effort.

These principles can be summarised in four broad strategic options:

  • Offensive Marketing:
    • Careful consideration of the market leader’s position
    • Search for and attack weak points in the market leader’s position
    • Attack on as narrow a front as possible like the point of a spear splitting chain mail.
  • Defensive Marketing:
    • Only those in a market leadership position should consider defence as their primary strategy. Everyone else in the market needs to prioritise offense.
    • Attack is the best form of defence
    • Strong competitive moves should always be blocked.
    • Never underestimate or ignore the competition.
  • Flank Marketing:
    • Flank into uncontested areas
    • Use tactical surprise
    • The pursuit is as critical as the attack itself
  • Guerrilla Marketing:
    • Find a niche segment that is small enough to defend but also viable.
    • Regardless of your level of success, never act like a market leader.
    • Be prepared to retreat at short notice especially when faced with threats you cannot deal with.

Competitive strategy can also learn from gaming.  Like in many games, outcomes of marketing strategy are not reliant on the actions of your business alone: Outcomes are also reliant on the actions and reactions of your competitors.

Markets are becoming increasingly competitive as they mature and new technologies are leveraged. The game of marketing is becoming more difficult to win.

There is a real danger that this complexity will lead to the threat of damaging price wars as businesses desperately try to avoid losing customers, share and sales volume.   Increasingly it will appear that the only way to defend against competitors is to cut prices.  This in turn leads to a downward spiral where prices only go down, margins are eroded and profitability disappears.  This is marketing’s version of MAD; Mutually Assured Destruction.

To avoid MAD, you need to ‘manage’; the competitive process and your competitors.  This can be achieved by following these broad guidelines:

  1.  Never ignore new market entrants; particularly those focused on the bottom end of your market.  Look at the success of Lidl and Aldi as discount supermarkets and their effect on the pre-existing groceries market in the UK.  Look at Norton (a company now in administration).  Norton, BSA, Triumph and other UK motorbike manufacturers were once the dominant market leaders but they ignored the ‘cheap’, low powered motorbikes coming from Japan and lost their market dominance to Yamaha and Honda.  The UK motorbike industry went from a position of market dominance to that of also-rans.
  2. Always exploit competitive advantages (unless they are replaced by another advantage which is more attractive, powerful and meaningful to your target customers)
  3. Never launch a new product or take a new initiative without anticipating the probable response of your competitors.

Day (1996) wrote that successful businesses:

“Formulate strategies by devising creative alternatives that minimise or preclude or encourage cooperative competitive responses.  They adroitly use weaponry other than price including advertising, litigation and product innovation. They play the competitive game as though it were chess; by envisioning the long-term consequences of their moves.  Their goal is long-term success rather than settling for short-run gains or avoiding immediate losses.”

Too many businesses focus on past experience for future success.  They focus on past campaigns; they expect competitors to do as they have previously done.  These businesses often fail to ask what their competitors are likely to do in the future.  Often these assumptions are invalidated by small market changes.

Many businesses also look to simplify reality (and not just businesses, much of today’s politics, particularly Brexit, is based on simplification of often highly complex realities).  Such simplification may just be about sustainable in a static market. But ask yourself how many markets are static?

You need to put in effort to learn about your competitors; their strengths and weaknesses; their ways of doing business; their alliances; and their strategic position. You need market intelligence.

In developing business and marketing strategies you are not Napoleon at Waterloo and you are not John Nash building complex mathematical models. That said, the successful marketer will know the principles of military strategy; they will know the rules of the game; and the shape of the game board.  Knowledge of games and military strategy can have a strong influence on business success.

Time and Technology

The hype relating to market disruptors is now somewhat reduced as compared to a couple of years ago but it is still the case that market disruption is a major component of many new businesses.

So what is meant by ‘disruptors’?

Disruptors are entrepreneurs who aim to enter existing markets through leveraging the benefits of new technologies on that market.  So if you have a plan to deliver Pizza via an app, or to sell Books through a website, or to distribute music by digital download, then you are a disruptor.  Some of the biggest businesses in the world could be classed as market disruptors, Amazon, Deliveroo, Uber, AirB&B, Tesla, etc.

There are two aspects to market disruption:

  1. The technology
  2. Time.

In fact there is a triad of components to technological disruption; money, quality and time. The implementation of technology in the marketplace has to be a set quality (that demanded by target customers).  It takes money to ensure that quality; and it also takes time to develop that quality.

Recently, Dyson abandoned their project to develop an electric car.  The proposed vehicle was a disruption product.  It was reliant on experimental solid state battery technology. In announcing the project, James Dyson stated his plan to launch the new car in 2021. Many in the automotive sector believed that such a deadline was overly ambitious and that solid state rechargeable batteries would not be commercially ready until the middle of the next decade, at the earliest. Dyson’s 2021 deadline was clearly a rush to market, and that rush risked the product not meeting the expected quality.

This tale mirrors the Sinclair C5, the 1980’s electric recumbent tricycle.  People expected Clive Sinclair, the home computer pioneer, to produce a quality, useable transport solution. Instead they got a pedal car with low power and limited range.  One of the primary reasons for the C5’s failure was the new, experimental batteries designed by Sinclair, were not ready at the time of the C5’s launch.

Technology does not just mean product technology.  There is the technology needed to produce new products (e.g. new machinery such as 3D printers) and then there is technology for support functions – e.g. Artificial Intelligence being used for support calls.

Time to market is clearly a factor on the ability of a firm to have a hold on the development of a market.  The recent rise in the Tesla share price; the firm is now worth more than Volkswagen; signifies that, at least in the minds of city traders, that Elon Musk’s car firm has a technological lead.

Technology is also a measure of customers perception of your status in the market.  Often firms with the best technology are seen as market leaders (whether or not that perception is true).

When discussing time, there is time to market, but there is also the timing of market entry.  Often being first to market is a primary incentive, especially when intellectual property; such as patents and designs; is prominent.

Disruption through technology isn’t just the creation of software apps.

There is industrial technologies, such as the creation of long-life egg powder for cake mixes; or the creation of lightweight but toughened plastics for football boots; or the creation of high capacity memory chips for USB memory sticks and memory cards.

There is workplace technology.  This doesn’t just mean robots on the production line.  It is the application of scientific principles to marketing. For example, the development of graphene for flexible mobile phone screens.

There are four roles for workplace technology:

  1. Improving the speed of an activity;
  2. Improving the precision of an activity;
  3. Overcoming limitations
  4. Reducing Costs

All of these feed in to improving productivity.

Time is important because it is, in today’s world:

  • You need to meet customer expectations faster;
  • People expect ‘best value’ to be delivered faster.

it is a question of relative time, to absolute time.  Dyson’s 2021 deadline was an issue of absolute time.  he may have been better concentrating on relative time.  rather than setting an arbitrary deadline for his batteries to perform, he may have been better concentrating on ensuring his batteries were the most effective and efficient before those of competitors met those criteria.

Consumers attitudes also change over time; and changing consumer perceptions and attitudes is fundamental to marketing.

Rushing to market can be a big mistake.  Take Betamax video tapes as an example. Betamax format was first to market in the home video recorder market but VCR tapes became the market standard.

Being too late to market can also be an issue.  An example is Sony minidisc. This format was the first for digital downloading of music, and it was a better portable offer than compact disc as it was less prone to jumping.  However, Minidisc was launched just as MP3 players hit the market, which used memory chips which made the ‘disc’ bit of the technology redundant.

In 2003, Stalk and Hout wrote that time is the next competitive advantage.  This led to a humorous comment that marketing success was like going to a dance where success in getting a partner relied on being first there and being best dressed.

The best approach is to consider how relative time gives you a competitive advantage.

Rush to market and your technology may not be of the quality demanded by consumers.  It may not be perfected.  Alternatively, if you are a technological laggard, your competitors may beat you to the punch.

Strategic alliances to boost growth

Last week, I mentioned the Ansoff Matrix and the four strategic options for growing a business it proposes.  What is clear from the matrix is that each of the options contains an increasing level of risk.  Several of the options will involve significant level of expenditure. Diversification can be expensive; as is the process of new product development.

With NPD you can spend fortunes on prototype products which never go to market.  It is estimated that James Dyson spent £2 billion on his electric car project before pulling the plug (sorry for the pun) on the concept.  Dyson, when announcing that the car wasn’t going into manufacture said that production would not be financially viable. I also suspect his experimental solid state battery technology was incapable of powering the vehicle.

One way to reduce the costs of, and to some extent the risk of business growth, is to enter an alliance or joint venture.  One wonders that if Dyson had viewed his electric car project as a joint venture with an existing motor manufacturer, instead of slagging them off at the concept launch, his car might have seen the light of day in the marketplace.

Dyson forgot the mantra, ‘No business is an island’. Businesses operate in complex markets where it is likely suppliers, distributors and retailers are shared.

If you are looking to expand your market, either geographically or by moving from commercial markets to consumer markets,, you may well need the expertise and knowledge of those already operating within your expansion target.

When creating new products you may want to spread development costs, or you may need specialist technical know-how.

Diversification is the highest risk and potentially the most expensive growth option for a business.  You may need guidance from those who already know the proposed product category.

At a strategic level alliances should add value by leveraging the optimal level of assets and competencies.

It is increasingly unlikely that a single business can keep all these assets and competencies in-house. ‘No business is an island’. Exclusivity costs.

A partnership or alliance may be the best way to maximise economies of scale.

So a telecommunications firm may choose to partner with an IT firm to create integrated systems.  Computer manufacturers partner with manufacturers of VDUs, processing chips and graphics cards. Car manufacturers share production platforms and car ‘chassis’ designs.

And it isn’t just in production that an alliance can create economies. You can build alliances with retailers, distributors and suppliers.

Alliances are not just for big multi-nationals. take the example of McKean Foods, a Haggis producer. McKean started selling haggis online and received lots of interest from the United States of America.  However, the USA bans imports of haggis as a measure against the spread of the disease Scrapie, which affects sheep.  this ban is completely non-sensical as McKean operates in the UK/EU where animal welfare and food standards regulations are amongst the most comprehensive in the world.

So as McKean Foods cannot export Haggis to the USA, clearly an alliance with a US manufacturer would allow growth through market expansion.

In modern markets there are the following motivations for alliances and joint vewntures:

  1. Globalisation: Many companies are now compelled to work on the world stage.  Globalisation has also led to shorted product lifecycles. the mobile phone market is a clear example of product lifecycle contraction. Contrary to the argument for Brexit, the world is becoming a smaller place and around the world nation states are joining forces to create economic blocs e.g. Mercosur and the South African Development Alliance.
  2. Assets and Competencies: As stated above, a single company cannot be good at everything.  It is almost certain you are going to need specialist knowledge and expertise available through alliances.  An alliance can allow your company to concentrate on its core attributes whilst ancillary functions are outsourced to external specialists.  So, for example, fast food chains link with firms operating home delivery apps such as Just Eat and Deliveroo.
  3. Risk:  Alliances can work to reduce risk.  Financial commitments can be shared.  Going it alone could mean isolation from industry and technical standards.  For example, small food producers wanting to supply UK supermarket chains are expected to meet British Retail Consortium standards which often go beyond EU and UK legislation.
  4. Learning and Innovation:  Alliances and joint-ventures allow businesses to learn. that learning can help firms develop sustainable competitive advantage.

For joint-ventures to be successful, you need more than a strategic fit.  You need a cultural fit as well.  You must be able to work with your chosen partner.  If your business is risk averse, a partnership with a buccaneering high risk operator will be unlikely to succeed.  A fine example is the failed joined venture between BP and the Russian oil firm TNK.  That partnership became distinctly frosty and hostile and in the end BP could no longer work with TNK.

 

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.

Don’t get caught in the commodity trap

A few days ago I read a recruitment advertisement for a local small business.  The advertisement could be summarised as follows:

Joe Smith Ltd requires a marketing person to support our sales team. The person should be able to think of tactics which will help our sales team increase revenues. The successful candidate should be a marketing graduate and have experience of graphic design software. Touch typist essential.

This type of advertisement infuriates. It takes an extremely old fashioned view of the marketing profession. It also indicates a firm that may be falling into the commodity trap.

The first issue I have with this type of vacancy is that it treats marketing as a function of the sales team. It sees marketing as an exercise in gimmickry and as an exercise in solely promotion.

As we have regularly discussed in this blog, this definition of marketing gets things the wrong way round. Marketing is no a function of sales; your sales force is a function of your marketing planning.  A sales force is one aspect of an extended marketing mix (covering, in part, people, promotion, process and physical evidence).

Rather than your sales force driving the activities of your marketing team, your marketing team; the strategies the develop and the plans they put in place; drives the activities of sales representatives.

This is a firm which is not using marketing strategically.  Marketing is clearly seen as a short-term function moving from one unrelated activity to another; rather than as a strategic function which brings together different activities into a cohesive whole.

But that isn’t all that is wrong with this advert and it points to a management attitude that the firm is trading in commodities.

So what is a commodity?

The Oxford English Dictionary defines commodity as a raw material or an agricultural product.  This definition doesn’t really help much.

the Oxford Dictionary of Marketing doesn’t define the qword commodity but it does define commoditization:

The process of becoming a commodity categorised by higher volumes, less differentiation, wider availability and usually lower prices.

Some of the signs of commoditisation can be inferred from the recruitment advertisement:

  • Sales over marketing
  • Turnover over profit margins
  •  A marketing mix reduced to one P – Price
  • New customers over customer retention
  • Increasing revenues over reducing costs through value chain analysis
  • A ‘perfect competition approach: Every competitor in the market offers identical products and services and the only point of differentiation is price.

Some academics see commoditisation as an increasing phenomenon as the rate of technological change increases.  This is especially the case with Professor Patrick Minford, the Brexit-supporting academic whose economic modelling of the UK economy assumes price as the sole determinant of consumer choice.

But the commoditisation of markets is not a foregone conclusion.  Firms have control over their position in a market.  they can choose where to compete in a market and they can target the most appropriate segments in a market.

If your competitors reduce their prices, that does not mean you have to reduce your prices; and you have the ability to weaponize other aspects of the marketing mix to compensate for the discrepancy between your price and that of your competitors.

Continued price reduction is not an immutable law and customers do not buy on price alone.  You are not serving the best interests of your organisation by letting your profit margins slide.

Lemmings are not the brightest animals. If a market collapses on your watch and you collapse your prices to match that market, you are at fault.

It is your job as a manager not to wait on the commodity slide. there will be more winners in a market containing distinctive brands than in an unbranded commodity market. be a brand, not bland.

We know, through the work of academics like Professor Malcolm Macdonald that only ten percent of the customers in any market will have price as their primary buying criteria.

Let’s take a closer look at price.

We know that in developed markets, like the United Kingdom, 90% of customers would prefer to purchase on the basis of non-price criteria and 10% will buy solely on the basis of price.  That 10% don’t care about non-price attributes and are not engaged with a brand

We also know that in undeveloped markets, a given proportion of consumers would like to opportunity to purchase on the basis of non-price criteria. However, in undeveloped markets you will still get the same 10% of consumers who are price-only purchasers.

Often it is assumed that purchasers in undeveloped markets are influenced only by price because no research or analysis has taken place to discover appropriate non-price criteria.  This latent need isn’t addressed because of bad marketing practice.

The only winner in a commodity market will be the last business able to sustain a profit margin whilst being the lowest cost producer.

As a small to medium-sized enterprise, can you sustain the pressures of being the lowest cost producer? Do you have economies of scale to allow this?  Do you have a plan which can eradicate all your competitors from the market? Do you want to invest your reducing levels of profit to maintain this position?

Some products could be considered as commodities but there is no such thing as commodity markets.  Whatever business you are in, you have the full marketing mix at your disposal which includes product halo elements like customer service and delivery efficiency.  Use the full mix to maximise your market position, not just price.

Segmentation is critical to your business

If you have ever watched the television programme Dragon’s Den, which has just begun a new series on BBC2, you will see may businesses fail to get and investment from one of the dragons.  Only a minority of the entrepreneurs are successful and many are told, “There is no market for your product”.

The problem is that many of the investors enter the room thinking they can create a market for their product or that they can create new market segments.

These businesses have a problem as the dragons are well aware that markets ‘;just are’. They already exist as an entity and cannot simply be created, however good the entrepreneur thinks their idea is, if there isn’t a pre-existing market for it, it will fail.

Of course, there are exceptions to this position particularly with new technologies, but even then new technologies are usually new answers to old questions.  They represent a technological shift in a market which already exists.

Markets also have a life of their own. You cannot invent a market and you cannot create market segments out of thin air. Busineses do not create market segments, markets segment themselves. Markets and market segments are made up of living, breathing people.  Those people have presumptions, assumptions and emotions and it is very dangerous for you to project you assumptions about market behaviour on a pre-existing market segment.

It is very dangerous to create grand theories as to how a market will segment.  It is also dangerous to prepare ‘ideal’ segmentation bases.  Segments shift and morph they are not set in stone.

Markets do not reform themselves to match your pre-conceptions. it is a real mistake to build concrete boxes and tr try and fill them with the population of a market.

I am reminded of the episode of Some Mother’s Do ‘Ave Them where Frank Spencer faces an RAF intelligence test. Spencer had to fit shaped wooden blocks into a chart on a wall within a set time period. Rather than selecting the right shape for the right hole, Spencer tries hammering any shape into any hole.  The result is disaster.  The shaped wooden blocks are jammed in the chart and when Spencer tries to remove them he pulls the chart from the wall taking bricks and plaster with it.  Spencer’s attempt to force the blocks (pre-existing segments) into his choice of holes (his concrete boxes) is equivalent to total business failure.

Rather than trying to create a market and develop new segments, you need to analayse the existing marketplace and adapt your offer to meet pre-existing segments.

To do this, you must:

  1.  Decide exactly what business you are in.
  2. Do appropriate qualitative research as to the issues affecting market segments and the market as a whole.
  3.  Do appropriate quantitative market research, measured using cluster analysis as to market demographics, consumer attitudes, and product usage (who owns what, who uses what)
  4.  Find common needs so as to define segments.
  5.  Define segments in terms of demographics and usage
  6.  Populate segments in terms of demographics
  7.  Prioritise those segments which are a best fit for your business
  8. Test segments before launch

When considering entering a market segment, You must ask:

  • Is the proposed segment identifiable?
  • Do target customers recognise the segment?
  • Do you have the resources to reach the segment?
  • Is the segment viable over the longer-term?
  • Do distributers and retailers recognise the segment?
  • Is your offer distinctive within the segment
  • Does your offer attract a price premium? If not, is it worth entering the market?
  • Does your offer attract higher than average profit margins? (this is the asset test as to whether a market segment is worth entering).

When marketing to different segments you need to prioritise segments on two factors; the attractiveness of the market segment to your business; and the skills are resources within your business that can be used to deliver customer needs.

This is where tools like the GE Matrix and the Shell Directional Policy Framework become incredibly useful.

In presenting products to market you have three options:

  1. Undifferentiated marketing: where the same offer is made to all market segments
  2. Focused marketing: where you specialise you offer to meet the wants and needs of a single market segment.
  3. Differentiation; Where you develop different marketing mixes (different offers) for different market segments.

In the modern economy, if you aren’t talking in terms of segments, you aren’t talking of markets. For the modern economy segmentation is difficult but necessary.  In may ways, the mass market is dead.

Think of the music industry.  In the early 1960s, you had a few mass markets, Popular Music, Classical Music, Jazz, and Folk Music.  Fans were pigeon-holed into these broad categories. Over time, these mass markets have splintered into a multitude of different sub-genres.  Take rock, you now have classic rock, indie rock, grunge, prog, metal, etc.  Each of these sub-genres have segments.  Heavy metal has thrash, death metal, Nu-metal and even prog-metal.  No one in the music industry talks in terms of pop fans or jazz fans anymore.  (this is also because the music consumer is likely to have access to and listens to many different forms of music).

But you also have to beware not to micro-segment.  Gibson guitars got into real financial trouble last year and part of the reason was the production of a massive number of different products trying to cope with micro-specialist markets.  They did this without putting in place the mass customisation processes common amongst manufacturing businesses.  The result was a confused product offer and huge manufacturing costs which directly impacted profit margins.

Gibson was a prime example that business is a profits game, not a revenues game.

Another important aspect of successful segmentation is to choose segments which are easier to defend. You are defending your ability to maximise profits.

What is certainly true, is that if you don’t have an accurate picture of what your target segments are, you won’t win the game.

So market segmentation is a key tool in the battle to gain customers.

Ask yourself:

  • Do you know the current state of segmentation within your business?
  • What are the key target segments for your business that make up your target market?
  • Do you know what segmentation does for your business?
  • Are your chosen segments durable?
  • Have you prioritised certain segments?
  •  Are there appropriate targets you need to target?
  • Do you want to target multiple segments and how are you going to do that?

 

 

Strategies to Grow a Brand

Last week I discussed the strategic options for market leaders and I pointed out that in most first world countries, most markets for goods and services are mature.  This means that options were restricted to three main choices:

  1. Growth through increased usage by existing customers
  2. Growth through taking competitors’ market share
  3. Growth through finding new uses for existing products

Here are some examples of brands being built through these strategies and associated tactics.

The first example is Bailey’s Irish Cream liqueur where the brand was built through building volume of use per capita.  This strategy involves shifting usage of the product from low volumes to higher volumes.

Bailey’s was a mature brand and it had developed a restrictive image.  It was seen as a drinks for special occasions, particularly Christmas and New Year. Bailey’s was a drink for little old ladies and due to it’s sweet taste it was served in small measures.

For Bailey’s to improve its market position and to have long-term survival, this image had to change as did the way in which Bailey’s was used.

An extensive marketing campaign making massive changes to Bailey’s marketing mix was instigated. Advertising promoted the liqueur to young women.  They were encouraged to consume Bailey’s over ice in large glasses. New Bailey’s glassware was sent to pubs and nightclubs. Consumer packs containing the larger glass were distributed to retailers. Bailey’s was promoted as a drink for any occasion, not just Christmas, a beverage for a night out on the town.  Bailey’s took the opportunity to sponsor Sex and the City, at the time the most popular television programme amongst women in the 18 to 35 age demographic.  the drink was reimagined as one for those who are outgoing and as one of fellowship.

This new image significantly increased usage and sales of Bailey’s amongst target segments.

There are three levels of growing usage per capita which were leveraged in the Bailey’s campaign.

  1. Abandoning Cost-Plus Pricing: Prices are set based on the price point of the most popular product in a geographical area.
  2. Gaining Local Monopolies: This does not mean gaining more than 35% of the market (the traditional definition of a monopoly situation).  Local monopolies are created by flooding the marketplaces with opportunities to purchase and consume the product.  Everywhere the target consumer goes or congregates, they should have an opportunity to purchase.
  3. Adapting Prices to the Buying Situation: So the prices for Bailey’s in a night club will be more than in a pub or bar. The price of Bailey’s in a retail situation will be lower than at a venue.

Specific marketing plans need to be created for each purchase opportunity.  For Bailey’s this could mean different marketing mixes for supermarkets, bars, restaurants, vending machines and hotel mini-bars, off licences and general stores.

Coca Cola, the long time market leader in the soft drinks market has continually developed and amended such segmental strategies for decades.

In addition Coke has two critical alliances to grow sales; with Macdonald’s and with Bacardi.

The McDonald’s alliance targets young consumers and looks to continually refresh Coca Cola’s customer base.  It aims to build the habit of consuming Coke amongst teenagers who will hopefully continue to consume the cola for the rest of their lives.

The alliance with Bacardi, which includes pre-mixed bottles of rum and coke, targets adult drinkers and the use of the cola as a mixer. Bacardi Rum is the world’s most consumed spirit drink.

The second way to grow a brand  in a mature market is to address barriers to consumption.

Surprisingly Coca Cola were slow to address the issues consumer’s had with their product, in particular health concerns and concerns that the soft drink contained too much sugar.  Sugar free soft drinks like Tab and even Coke’s main rival Diet Pepsi, were established in the market long before Diet Coke arrived.

However, Coke has used its market position to launch a series of healthy option to break down consumer’s reluctance to buy the drink.  They now produce a range of low sugar and sugar free options such as Coke Life (with added vitamins), Caffeine Free Coke, Diet Coke, Coke Zero (No sugar) and Caffeine Free Diet Coke.

However both these strategies only go so far.  The easiest and most cost effective option is to get your existing customers to consume more of your product.

There are two ways to increase existing consumers consumption. To get them to use more of the product and to get them to use the product more often.  You want to turn consumers who only buy a small amount of your product into customers who are medium consumers and medium consumers into heavy consumers.  You want to turn occasional customers into regular customers and regular customers into ‘dominant customers who will only purchase your brand)

Every marketer should be aware of the Pareto Principle (80% of your returns come from 20% of your activities). Similarly the heavy use/dominant customer group represents 10% of brand buyers and 50% of brand volume.  To grow this heavy/dominant group you need to use behavioural segmentation to target particular consumers.

You need to ask consumers why they are reluctant to buy your product and address their specific barriers to consumption. You need to build a marketing mix based on specific product improvements and higher experiential benefits.  It is very rare to find that consumers reluctance to purchase a product is simply to do with the product’s image.

You also need to ask why consumers prefer other brands.

The third way to grow a brand in a mature market is growth through addressing new uses and situations.

You have to ask:

  1. Your brand is for what?
  2. Your brand is for whom?
  3. Your Brand why?
  4. The brand against whom?

Consumers want solutions to particular problems. They want a five millimetre hole, not a five millimetre drill bit. Can your product solve multiple problems e.g. Listerine began life as a household detergent now it’s sold as mouth wash.

A Porsche 911 isn’t the car for the school run or going to the supermarket but the Porsche Cayenne 4×4 can be used for those purposes and provide sport’s car performance. Car firms often enter into joint venture to allow brands to meet new uses.  For example, Aston Martin have a joint venture with Toyota to produce a small, fuel efficient city car.

Growth can also be obtained through getting existing consumers to ‘trade up’.  This is why, when you go to a Volkswagen dealership you are bombarded with a multitude of options for your car. Brompton Bicycles go one further and allow consumers the opportunity to effectively design their folding bike from a dizzying array of product options. You can produce gift packs or extend your brand to related uses e.g. the Christmas box of fragrances which contain aftershave, deodorant, shaving balm, shampoo, shower gel, etc.

Special editions of products can also help consumers ‘trade up’.  Fender guitars produce special edition models of their guitars which are produced in small numbered batches. For example, the alternative reality series where each month a short run of guitars is produced with novel body shapes, different neck woods, different switching options and pick up configurations.

Most whisky distillers give consumers to trade up to 10, 15, 20 and 25 year old maturations, they produce cask strength whiskies and age their brand in different casks e.g. bourbon or sherry casks.

Growth can be developed through line extension.  Think of the number of formats and sizes in which Coca Cola is sold.  Coke’s largest sales are not in bottles or cans, single items or in multipacks, it is the sale of syrup to bars and caterers for mixing with carbonated water at the point of sale.

You can provide incremental variance (e.g. Volkswagen’s huge choice of engine options)

You can multiply the physical forms of your product, so Ariel washing detergent comes as a powder, a liquid, in tablet form and as a gel sachet.  You can provide different versions of your brand for different purposes; so Dettol produces an all purpose cleaner but also specific product options for bathrooms and kitchens.

Line extensions represent 85% of new products placed on the market.

However, when creating line extensions you should beware hyper-segmentation.  New line extensions must have mass appeal.

To manage line extensions well you need to:

  • Improve cost accounting to minimise additional costs in the value chain
  • Prioritise resources to high margin extensions
  • Your sales force should be able to describe the reason for the each extension in a few words
  • You withdraw products as consumers move over to line extensions (you will likely need to encourage such withdrawal).

Finally, you can grow a brand through innovation.  Colgate toothpaste is regularly reformulated with new innovative options such as sensitivity relief, whitening and gum health solutions)

Colgate is an example of incremental innovation so a premium product moves to being the standard product over time as innovations are introduced.

Some firms are seen as innovation champions and they are aware of the benefits and impact of an innovation from its inception.  these innovation champions know they can leverage higher price points than their competitors confident in the knowledge that the innovation provides real customer benefits.  Innovation champions also work to gain more prominent shelf positions, such as eye-level and aisle ends.  They will be willing to pay supermarkets for these locations.  Innovation champions will also clearly advertise innovation benefits including prominent display of innovations on packaging.

Strategies for Market Leaders

In this blog, I have already covered strategies for businesses targeting a specific market niche. I thought it would be worthwhile looking through the other end of the telescope and examining likely strategic choices for market leaders.

So what is an appropriate definition of a market leader? Is it all to do with scale?

Well, many market leading firms are big companies, but that situation is not always the determinant of a market leader.

A better definition of a market leader is typically the firm with the largest market share.  Through its pricing; advertising intensity and share of voice; and its rate of new product introduction, a leader dominates the marketplace. The market leader becomes the benchmark for the industry.

So it is perfectly possible for a small or medium-sized firm to be a market leader.  As one wise owl once said, “There is no such thig as a small business; only businesses which haven’t got big yet”.

Market leadership is not determined by a company’s size.  This is particularly true in fields such as cutting edge new technologies.

Market leadership is a measure of an organisation’s ability to determine the nature and bases of competition within a particular market.

Market leadership is also a question of definition. Bot Aston Martin and Fiat make motor vehicles; but is Aston Martin in the same market as Fiat. The latter makes mass market family cars. The former makes luxury sports cars. Are those the same market?

So what are the primary strategies for a market leader?

They are:

  1. How best to expand the total market
  2. How best to defend the existing market share
  3. How best to increase market share.

Market leaders will generally gain most by expanding their market. For example, in the 1960s and 1970s Honda looked to expand the market for motorcycles to consumers not normally associated with bikes such as women and commuters.

Another way to expand the market is to find new uses for existing products. A fine example is Goretex; a product normally associated with waterproof clothing but now being applied to Elixir guitar strings to make them last longer and remain ‘bright’.

To increase market size you can try to increase usage of products. Hence bottles of shampoo suggest two applications rather than one and chocolate biscuits are sold in packs of five or six; meaning the average family needs to buy two packets rather than one.

Predominantly being a market leader is a defensive position. Leaders are the target for others to attack. To remain in the lead you must repel those attacks and stop market share leakage.

That means the creation of fighter brands to stop competitors undercutting your primary product range. It means horizontal and vertical integration to deny competitors resources.

The large coffee shop chains have been accused of pushing out independent competitors by opening multiple stores in the same area.  Who would buy from an independent where there are three stores of a well-known brand within walking distance of each other?

Think of the cereal or washing detergent aisles in supermarkets.  You will find multiple product options from market leaders which denies market followers shelf space and eye-level product locations.

Market leaders need to set the pace of the market e.g. through product innovation and new product launches.

Being a market leader costs.  It is rare for a market leader to be the most profitable firm in the market (although turnover may be higher than that of competitors).  Profit margins are often lower because of additional spending needed to fund defensive strategies.

So market leaders will try to minimise profit margin losses through efficiency and cost minimisation programmes. This could mean just in time stock control and distribution channel efficiency.

To expand market share several possible strategies are possible.

A market leader can expand its share through the heavy rotation of advertising to increase share of voice.  A leader can improve and expand its distribution channels or introduce price incentives to increase sales.  Mergers, takeovers and exclusive distribution deals can also be used to expand market share.

Market leaders need proactive strategies; they cannot be passive in the market.  Over the longer-term, the most important factors affecting a market leaders performance will be the quality of its products or services relative to those offered by competitors.

A leader’s market share and its profitability is strongly related to:

  1. Return on investment matching market share increases
  2. Above average rates of investor turnover (i.e. there is a thriving market in the organisation’s shares); and,
  3. There is a lower ratio of marketing expenses to sales revenue i.e. there are marketing economies of scale.

Market leaders often experience high investment activity which is a drag on profitability. This commitment to project investment intensity means it is harder to sustain growth of the firm.

Often the analysis of market leaders product portfolio shows profits are generated through ‘cash dogs’ and ‘wildcat’ products not from cash cows (where cash generated need to be reinvested to support new product innovations).

Being a market leader should be the aim of all businesses.  In the game of commerce, that is the goal. However, some firms can be happy being in a ‘strong second position’. Being a strong second means profits can be generated but the costs associated with market leadership can be avoided.

The Life Cycle and Arthur D. Little

Every business owner should be aware of the product life cycle. They should be aware of the standard model of the PLC and where each of their products exist in their life cycle. they should also know if products in their mix have the ability to deviate from the standard model.

In the standard model of the product life cycle, there are four stages:

  1.  Introduction:  It takes time for a new product to be accepted by consumers. When a product is first introduced sales may be slow and the costs of promotion and distribution may be high. It is highly likely that new products will be loss-making.  The role of marketing is to increase sales and build the market. Price skimming or penetration strategies predominate.
  2.  Growth:  Sales rise. The rise in sales may be rapid; which may cause issues with having sufficient manufacturing capacity to meet demand. This is currently an issue with Elon Musk’s Tesla model 3.  Marketing’s focus shifts to brand building and creating offers which result in customer retention and brand loyalty. The business looks to new customer acquisition and expanding its base.
  3. Maturity:  This is the longest stage of the product life cycle.  Sales plateau. Profits may fall as efforts are made to defending and maintaining your market position. Products are innovated and reformulated.
  4. Decline:  At this stage sales fall.  It could be that a product is no longer seen as fashionable. New products in the market may be seen as a better option. Advances in technology may make existing products obsolete. Marketing activity on products at this stage may be minimal. Products may be abandoned, replaced or harvested for cash.

Of course not all products follow the standard model of the product life cycle. Some products become staples. Others may have cyclical or seasonal appeal. Often new uses can be found for old products. Lucozade was a brand of soft drink for invalids but it was reformulated and is now sold as a sports energy drink. Listerine began life as a household detergent but is now sold as mouth wash. Lyle’s Golden Syrup has been sold under the same branding for over 200 years.

The product life cycle is a critical analytical tool for product portfolio and product mix management.

It isn’t just individual products that have a life cycle. Brands have a lifespan and so do industries.

In 1973, Arthur D. Little created his Strategic Condition Matrix.  This measured industry maturity and a companies position in its chosen market.

Little defined four stages of industry maturity:

  1. Embryonic
  2. Growth
  3. Mature
  4.  Ageing.

Note that these stages mirror those of the product life cycle.

Little also defined five categories of competitive position:

  1.  Dominant:  It is rare for a company to find itself in this position.  It often relies on having a monopoly or having protected technological leadership.  A firm in a dominant industry position can exert significant influence on the behaviour of others in the industry and therefore has a vast range of strategic options.
  2.  Strong:   A firm is not as dominant but still has a significant level of strategic choice. A firm can act without its market position being unduly threatened by competitors.
  3.  Favourable:  The industry is fragmented but there is a clear market leader. Firms can exploit particular strengths through the use of appropriate strategies.
  4. Tenable:  Firms are vulnerable to increased competition in the market. Few options exist for a firm to strengthen its position.  Profitability is driven through specialisation.
  5. Weak:  Firms struggle to compete and possibly have unsatisfactory performance.  If you cannot improve your situation, you will be forced out of the market.  This position may be the home of inefficient firms and small traders who fight every day to make ends meet.

Other academics have added a further category of competitive position, Non-viable, where withdrawal from the industry sector is the only strategic option.

For each combination of competitive position and industry life stage, Little suggests the following strategy options:

  1.  Dominant Market Position: 
    1. Embryonic: Here the aim is to grow fast and to build barriers to market entry by potential competitors. Firms should act with offensive strategies in mind.
    2. Growth:  Again you look to grow fast through cost leadership.  You balance strategies between defence and attack.
    3.  Mature:  The aim is to defend your existing market position.  Cost minimisation is increasingly important. You attack weaker competitors.
    4.  Ageing: You again defend your market position and focus on profitable sectors. You consider abandoning unprofitable parts of the market.
  2.  Strong Market Position:
    1. Embryonic:   Grow fast and differentiate you offer from those of competitors.
    2. Growth:   Lower costs and differentiate your offer. Attack smaller and weaker firms
    3.  Mature:  Lower your cost base, differentiate or focus your offer.  Note these are Porter’s generic marketing strategies.
    4.  Ageing:  Harvest the market for cash.
  3.   Favourable Market Position:  
    1.  Embryonic:  You grow fast through differentiation
    2.  Growth:  Lower your cost base, differentiate your offer, attack smaller and weaker firms.
    3.  Mature:  Focus on particular market sectors and differentiate your offer. Hit smaller and weaker firms hard.  Create barriers to entry.
    4.  Ageing:  Harvest the market for cash
  4.  Tenable:
    1.  Embryonic:  Look to grow the industry and focus on profitable sectors
    2.  Growth:  This position is that of a problem child in the BCG matrix. You have the choice of holding onto your existing market position, you can look to a profitable niche or you can aim to grow the market. You may want to harvest the market for cash.
    3.  Mature:  You either hold on to your existing position in the market of you withdraw from the industry
    4.  Ageing: A managed withdrawal from the market is required.
  5.  Weak:
    1.  Embryonic:  Search for a profitable niche and attempt to catch others in the market.
    2.  Growth: Find a profitable niche or withdraw from the market
    3.  Mature:  A managed withdrawal from the market
    4.  Ageing:  Withdraw from the industry

Most western economies, USA, Europe, etc. are mature.  As a result, for many small firms, the most profitable strategy is one of niche marketing.