Focus on Core Competences

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

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

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

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

Two aspects of the LSE critique are prominent.

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

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

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

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

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

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

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

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

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

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

Hamad and Prahalad identify four different types of core competency:

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

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

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

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

Brand Architecture

Your choice of brand architecture has a strong influence on your organisational structure and your corporate marketing strategy: it affects how your organisation operates.

When you are developing a brand, someone in your organisation must meet the definition of a brand master; that is an individual who ensures that there is the necessary cohesion across your organisation’s divisions and territories to ensure the brand’s success.

The more a company moves to the position of a ‘branded house’, the greater the amount of cohesion required.

A brand master looks after brand values, not just the physical attributes and functional characteristics of the brand.

Developing a brand architecture is a critical responsibility of the brand master and other senior managers in your organisation. So what are the different types of brand architecture?

The Product Brand Strategy

This is the traditional ‘House of Brands’ approach.  An organisation’s products and services have individual brand names and brands have uniquely identifiable facets. Facets include brand symbols, logos, concepts and statements.

In the product brand strategy a brand name is associated with a single product.  The brand distinguishes that product from others in your range.  The brand has its own significance and meaning. It has exclusive positioning in the market.

An example is the Accor group of hotels.  The group has numerous hotel brands including Sofitel, Ibis, Suit Hotel, Formulae 1 and Motel 6.  Each brand has a unique identifiable market position.  Consumers may actually find it difficult to identify that each of these hotel chains belongs to the same corporate group.

In the extremes of the product brand strategy, a brand has an exclusive market position. The brand is its own market category. The product is so specific and unique that there is no other name for the category than that of the brand. The brand may be protected by patents and other intellectual property rights.

Usually in such an exclusive position, brand extension can only be achieved through reformulation of products.

A product brand strategy has the following advantages:

  • If your business is focused on one market segment, it is a strong offensive strategy with the aim of market domination
  • It is a strategy which allows each of your products to occupy different market segments with specific needs and expectations
  • It is a strategy to consolidate market share by becoming a category leader.
  • Your corporate name becomes discrete, if not hidden.  The focus is on brands, not your corporate identity.
  • The strategy can be used by innovative brands looking to pre-empt a market position i.e. to be the first brand in a new market or segment.
  • A unique brand identity helps consumers perceive brand characteristics
  • A product brand strategy allows risk-taking as the risks associated with one brand do not infect other brands in an business’s portfolio.
  • It allows a firm to dominate shelf space at retailers leaving little room for competitors and new entrants.  Think of your local supermarket cereal aisle, how much space is taken by Kellogg’s products?

However, there are drawbacks to a product brand strategy, predominantly economic drawbacks.

  • A product specific brand strategy can be expensive and it is not for the faint-hearted or businesses with tight finances.
  • It is a strategy which offers increasingly narrow segmentation options and which hinders rapid return on investment.
  • Often high sales volumes are required to justify the costs of the strategy.
  • It is not a suitable strategy for small or saturated markets.

The product brand strategy requires firewalls between brands.  These firewalls prohibit the development of a halo effect where the reputation of one product or brand does not assist the reputation of others in the brand.  Economies cannot cross brand firewalls.

The Line Brand Strategy

This is a variant of the branded house approach where a single brand name is used for products in different categories. One consistent and coherent response is used across market segments.  An example is L’Oreal Studio line, where the brand covers a range of hair products from shampoos and conditioners to hair gels and waxes.

The line brand strategy is often the result of successful brand extension.

There are multiple advantages to the line brand strategy:

  • It reinforces the selling power of a brand.
  • It facilitates further brand extension
  • It reduces launch costs of extension products
  • There can be a halo effect where the reputation of existing products in the line is transferred to new additions to the line.

However, there are also disadvantages.  in particular there are limits to brand extension strategies.  Extension products should have a clear link to existing products which is understandable by target consumers.

Range Brand Strategy

This is the strategy used by firms such as Campbell’s Soups and Black and Decker power tools.  All products are linked through a core brand principle, the brand concept.

Range brand strategy has the following advantages:

  • It avoids a random spread of external communications concentrating focus on a single brand name.
  • It creates brand capital across a range of products.
  • Consumer messages are concentrated on core products but the concepts contained in those messages can cross to peripheral products in the range.
  • A range brand strategy can make it easier to distribute new products as retailers and wholesalers trust the brand’s existing reputation.

A range brand strategy has the following disadvantages:

  • It increases brand opacity as the number of products in the range expands.  Consumers can feel that there is less choice available in the market
  • The range brand strategy can dilute a brand identity and can lead to the need to devise intermediate brand identities.  Findus, the now defunct frozen food brand had such an issue which led to the development of its Lean Cuisine, Gourmet and Seafoods intermediate brands.

Maker’s Mark Strategy

Brands such as Laughing Cow and Bel cheese use a maker’s mark strategy.  Often such a strategy derives from a historical symbol used to identify the products of a specific manufacturer of a generic product.  The brand relates to the manufacturer, not the product.  The oldest trademark in the world, the Bass Brewery red triangle began life as a mark used to identify barrels for collection at Taverns.

Endorsing Brand Strategy

Firms such as General Motors use an endorsing brand strategy.  General motors owns several brands of car including Pontiac, Chevrolet and Buick.  But the GM brand is used to link these entities at dealer networks.

In this strategy the main brand promotes consumer choice whilst the endorsing brand assumes a secondary, supportive position.

An endorsing brand strategy allows freedom of movement as brands are introduced or dropped from the corporate portfolio.  The endorsing brand may have less equity than the individual brands but it can evolve a powerful image capable of being recalled by consumers.  It can be an economical way to give substance to a corporate identity and a way of ensuring technical assurance for a brand.

Often the Endorsing brand strategy involves the development of a brand hierarchy:

  1. The endorsing brand is a quality guarantee
  2. The individual brand concept creates a specific promise
  3. The brand creates distinction, personalisation and even pleasure.

Umbrella Brand Strategies

The flexible umbrella brand creates a single brand level where products are given separate identities.  Apple uses such an approach where desktop computers are Macintosh; Laptops are Macbook, tablets are iPad, music players are iPod and mobile phones are iPhones.  An umbrella brand can cover several product categories and give a unified identity to a highly diversified range.

Inflexible umbrella identities gives subsidiaries a significant amount of autonomy.  This can be useful when looking to capture market share.  The brand is a corporate identifier not a product specific mark.  For example, the Mitsubishi trademark can be found on cars, electrical goods and even ships.  Communications are based on product attributes and advantages. The umbrella brand may appear distant and cold.  The brand identity can be diluted.  With luxury brands, an umbrella brand identity can communicate common attributes to consumers.

To align umbrella brands, there is often the use of a ‘Masterbrand’.  This appears similar to the endorsing brand strategy but in this case the parent brand dominates.  This is a branded house approach where the Masterbrand provides a frame of reference and sub-brands align to embody the Masterbrand.  The prototype Masterbrand was Nivea where a wide range of branded products is collated under a single concept; love and care.

A Masterbrand structure can create significant market power and economies of scale.

Source Brand Strategy

This strategy is similar to an umbrella brand strategy.  In this strategy the over-riding brand is more than a simple endorsement.  It is the brand which holds sway and which gives individual products a seal of approval. It is a strategy often used in the perfume and fashion markets e.g. Polo by Ralph Lauren or Jazz by Yves Saint Laurent,  However there is a danger that a source brand may devolve to become an endorsing brand.

A source brand can give a sense of difference and depth however the need to reflect the core identity of the brand gives strict boundaries that make brand extension difficult.

 

The Challenger Credo

Business is about competition.  It is therefore often compared to sport.

Take the Premier League in football.  You have leaders, teams which year after year compete for the English title.  These are teams like Manchester United, Liverpool, Chelsea and Arsenal.  If they do not win the league, they usually obtain the qualification spots for European competitions.

Also in the league, you have ‘Strivers’.  These are teams who are competing not to get relegated.  Their goal is survival.  Some succeed and stay in the league another year: Others fail and exit the league.

There is a third category of team in the league.  These are teams who look to challenge the established order by becoming one of the league leadership group.  In recent years such teams include Watford, Leicester and Bournemouth.  Often these are teams previously seen as unfashionable but which have received significant financial power through a new billionaire owner.

In business the term challenger is often used to describe businesses ‘in the middle of the league’.  Such a general description is an incorrect definition of the concept of a challenger firm.  There is more to being a challenger than being ‘of the middling sort’. Being a market challenger is as much a state of mind as it is a statement of intent.

I can think of sport’s clubs who are happy to maintain a mid-league position.  Owners want a club which breaks even financially and meets its role as a form of entertainment but who do not want to incur the significant costs associated with being in a leadership position.

Similarly there are businesses who do not want market leadership as being a leader costs in terms of defending that position.  Being a market leader is often not a position in which profits can be maximised. It costs to be a leader.

To be a market challenger, is to have ambitions which exceed your conventional marketing resources.  This means being strategically and tactically bold to overcome the resource gap.

So what are the core challenger characteristics?

  1.  Challengers embrace intelligent naivety.  They do not accept the historical norms of a market or its traditional process models.  The rules written by others aren’t the challenger’s rules.
  2. Challengers build a ‘lighthouse identity’.  They take and communicate their own position and they are clear where they stand on issues affecting the market.  They project that sense to target consumers like the beam of a lighthouse.
  3. Challengers take thought leadership of their category.  Apple isn’t the leader in the mobile phone market; Dyson aren’t the leader in the vacuum cleaner market; but both these companies lead their sectors in terms of design and thought.
  4. Challengers create symbols of re-evaluation.  They seek to continually shake up the consumer’s view of the market or brand category.  So Apple and Dyson continually add functionality and features to their products which alter the consumer’s expectations of the category.
  5. Challengers are willing to sacrifice.  Rejection isn’t the fear of challengers.  They fear indifference.  Be willing to sacrifice that which does not present a strong position to your target audience.
  6. Challengers are willing to over-commit to build a market position.  This over-commitment could be in the form of guerrilla marketing or to go a step further than your competitors to gain a market foothold.
  7. Challengers use PR and social networks to enter social culture.  the use of communications is strategic.
  8. Challengers become ideas-centred.  they need to continually come up with new ideas to keep their presence fresh.  They don’t do the same thing over and over again.

Research has shown ten potential challenger narratives.  These are:

  1.  The Feisty Underdog:  This is the classic challenger narrative.  It’s David versus Goliath.  It is often the position of the initial market disruptor.
  2. The Peoples’ Champion:  Challengers can develop a market position where they are seen as fighting to make the consumer the real winner.  They fight against the market’s ‘cynical fat cats’.  Take the mobile phone network Giff Gaff as an example.
  3. The Missionary:  These challengers want to bring a new way of thinking to a market category.  An example is The Body Shop which promoted natural and environmentally sound cosmetics manufacturer.
  4. The Democratiser:  This is the Robin Hood challenger wanting to take from the few to give to the many.  For example, H & M, the fashion retailer looks to give high fashion looks usually only available to those who can afford designer prices, to the mass market.
  5. The Enlightened Zagger:  These are challengers who divert from the cultural current in a market.  When competitors ‘zig’, they ‘zag’.  This is a brand by opposition to expected norms not matching the propositions of others.
  6. The Real and Human Challenger:  These challengers are clear to show that there are people behind the brand, not just AI and algorithms.  They promote human to human communication.  They aim to make a human and emotional connection.  There is personal commitment to quality and service.
  7. The Visionary:  These challengers aim to transcend the category.  An example is Whole Foods, the American grocery chain which uses the vision statement “Whole Foods, Whole People, Whole Planet”.  This statement reflects the triple bottom line of People, Planet, Profit. That business is more than the aggregation of wealth.
  8. The Next Generation:  These challengers look to get consumers to re-evaluate the market.  Tesla are an example as it gives an image of the future through alternative energy production and electric vehicles.
  9. The Game-Changer: These challengers offer a significantly different proposition that changes the market.  Such challengers have included Airbnb, and budget airlines such as Ryanair.

As challengers often lack the resources to compete against market leaders head on, they have a duty to be flexible, fleet-of-foot and imaginative.  As the  nuclear physicist Sir Ernest Rutherford said or UK scientific research, “We have no money, therefore we are obliged to think”.

 

Market Breakpoints

Predicting the future is the easy part. It’s knowing what to do with it that counts”.

Faith Popcorn, 2001

A fundamental aspect of any competitive marketing strategy should be the anticipation of major environmental or structural change. Today marketers are operating in an environment which is increasingly volatile – and potentially malevolent.  Just look at recent ‘megatrends’.

  1.  The explosion in information and communication technologies and their increasing power.
  2. Market globalisation.
  3. A shift from manufacturing and the exploitation of natural resources to economies based on knowledge, information, innovation and added value.
  4. The decoupling of the physical economy from the virtual economy of financial markets.
  5. Geographic rebalancing and the emergence of a new world order, particularly China.
  6. The twilight of government.  This is clearly evidenced by the current political chaos in the UK.
  7. Sector convergence
  8. The growth in new forms of business organisation e.g. social enterprises.
  9. The shift of the economic centre of gravity from multinational conglomerates to smaller, nimbler, more agile firms.
  10. The increasing influence of environmentalism.
  11. The increasing speed, complexity and unpredictability of change.

Such industry or sectoral changes are often referred to as industry or market breakpoints.  The consequences of such breakpoints can be extensive and as a result existing strategies become obsolete.  Look at how many traditional retailers have failed to adjust to the impact new technology has had on their business.

In developing forecast strategies to take account of breakpoints you must clearly understand the definition of an industry breakpoint.

Strebel (1996) describes a market breakpoint as:

A new offering to the market that is so superior in terms of customer value and delivered cost that it disrupts the rules of the competitive game: a new business system is needed to deliver it.  The new offering typically causes a sharp shift in the industry growth rate whilst the competitive response to the new business system results in a dramatic realignment of market shares.”

Note the use of the word ‘disrupts’.  This is the source of the term ‘disruptors’ which is so commonly used to describe new tech start-ups.

Once a breakpoint has occurred, existing market players need to respond, often dramatically, or recognise the significant negative implications on their position and performance in the market.

There are numerous examples of market breakpoints.  Consider:

  • The impact of the internet on the package holiday market
  • The arrival of low-cost carriers on the airline industry
  • Kodak’s failure to recognise the implications of digital camera technologies (despite the fact they invented the imaging sensor).

Despite the impact of such breakpoints, you will still find business managers ignoring the impact of such change with the assumption that their industry will carry on as before.  However, in today’s commercial environment, no industry is safe from such breakpoints.

Strebel defines two types of breakpoints:

  1.  Divergent Breakpoints:  There is a sharp increase in the variety of competitive offerings and consequently more consumer choice.
  2. Convergent Breakpoints:  These develop from changes and improvements in the systems used to deliver offerings which result in lower delivery costs.

Breakpoint are created through:

  • Technological breakthroughs
  • The economic cycle causing a radical rethink of product or service delivery.
  • New sources of supply at reduced cost
  • Changes in government policy
  • Shifts in consumer values/expectations
  • Identification of new business opportunities and the divergence of competitors’ responses and behaviour as a result.
  • Shifts in distribution networks and the changing power balance between marketers and retailers.
  • New market entrants with different perspectives
  • Declining returns forcing a radical rethink in how a business should develop into the future.

Marketing planners need to identify where breakpoints are most likely to occur and in what form they will take.

In your planning you need to be proactive, not just reactive.

No manager should operate within a closed environment.  They all need to look beyond the internal environment of their organisation.  They shouldn’t just rely on historical financial data.  All managers need to take account of potential future trends.  But how many managers are provided with incentives or rewards for the redefinition of products, processes or company attitudes?

The competitive cycle tends to fluctuate between convergent and divergent breakpoints.  Divergent breakpoints are the creation of variety in the market. Convergent breakpoints are survival of the fittest.

  1.  Divergence of offerings in an attempt to be different
  2. An emphasis on innovation and creation of variety develops
  3. Breakpoint
  4. Some innovative products succeed, others fail.
  5. Focus develops on the successful products
  6. There is a convergence of offerings to match the successful products
  7. Breakpoint
  8. Products become so similar there is little choice in the market.
  9. There is divergence of offerings in an attempt to be different.

A good example is video tape.

In the 1970s, if you wanted to see a film, you went to the cinema or you waited for the film to appear on television.

Then the video tape industry developed smaller, cheaper tape and the home video market took place.  There was an explosion in home video technologies, the most prominent being Betamax and VHS.  Betamax failed and VHS became the industry standard.  Then along came DVDs.  These were technologically superior.  For a while VHS and DVD co-existed but it didn’t take long for VHS tapes to disappear from the market. DVD and then Blu-ray became the standard.  Today the market for DVDs is under threat due to downloads and streaming services such as Netflix and Amazon Prime.

How you watch movies has gone through several market breakpoints.  Cinemas have also reacted with the rise of the IMAX screens, immersive sound systems and special events such as fan preview screenings.

Faced with increasingly rapid change and the ever-faster breakpoint cycle, marketers are faced with a series of issues:

  1. Balancing short-term and long-term goals
  2. Increasingly needing to be both market-orientated and customer-driven
  3. Higher customer expectations
  4. Creative and strategic segmentation
  5. Achieving leadership in chosen segments
  6. How best to add value and differentiate market offers from those of competitors
  7. Pricing for competitive action
  8. Increasing the effectiveness of distribution channels
  9. New technologies
  10. Shifting market boundaries and globalisation
  11. Improving marketing and control systems

Hamel and Prahalad (1994) offer three rules on future planning:

  1.  Step off the corporate treadmill.  Don’t become preoccupied with day-to-day issues.  Focus on the few really important issues which contribute to competitive advantage.
  2. Compete for industry foresight and learn to forget.  Learn how the market is changing and forget some of the traditional roles and patterns of behaviour in the market.
  3. Develop a new strategic architecture.  Concentrate and leverage strategy to make better use of marketing assets.