Tag: Corporate Strategy

Survival in a Hostile Environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Instead, analysis should consider:

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

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

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

Competitive strategy in Emerging Markets

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

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

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

So what is an emerging market?

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

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

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

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

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

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

So what are your strategy options in an emerging market:

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

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

Pioneering in an emerging market can be high risk.

Entry into a market is appropriate when:

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

The following tactical moves:

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

Competitive Forces Shape Strategy

Market analysis is central to strategy formulation. Dealing with competition is the essence of strategy formulation.

However competition isn’t only defined by other market players.  There are a host of underlying economic and social forces affecting competition.

There are two elements to market analysis: An examination of the macro-environment and an examination of the micro-environment.

The mnemonic PESTEL (or PESTLE) is often used to describe the analysis of the macro-environment. It stands for POLITICS, ECONOMICS, SOCIETAL, TECHNOLOGY, ENVIRONMENTAL, LEGAL.

SO UK businesses over the last five years should have been examining the effects of Brexit on their market, it’s impact on politics, it’s impact on the economy, how it has changed UK society, what technological effects it brings, its effect on environmental policy and how it is going to change the law.

An analysis of the micro-environment also has to take place.  These are factors directly affecting a particular market or market segment.  Michael Porter described these as five forces: Industry Competitors, New Market Entrants, Suppliers, Buyers and Substitute Products.

These collectively impact the profitability of an industry or market segment.

Some economists model on the basis of perfect competition.  However, perfect competition only exist in those models it does not exist in the real world.  More enlightened economics now apply scientific rigour and evidential standards to their modelling.  Yes, this makes models more complex as factors beyond price need to be accounted for in modelling but the results of such models are more realistic.

If Porter’s five forces are strong, entering a market can be incredibly difficult and costly.  Even if the five forces are ‘mild’ they can combine to hamper market entry.

Market entry by new competitors can occur where there are few economies of scale; where products across a market are homogenous, where capital requirements are low or where cost advantages are independent of organisational scale.

Existing market players can leverage a learning or experience curve to protect there market position.  Where there is no learning curve, or it is short.  Where experience is limited.  These barriers to market entry are low.

Often existing market players will use legal barriers such as intellectual property rights to prevent entry.  For example, for many years Cadbury held the patent on the machinery to make Flake bars, so competitors were unable to make generic copies of the bar.  Muller Dairies hold a patent on the corner yoghurt pot and have successfully sued competitors who developed copycat products.

New market entrants can also be blocked through existing market players controlling distribution and supply chains.  This can occur through forward and backward integration of suppliers and sellers within a market.

Government policy can prevent market entry.  Governments may create licensing requirements within an industry such as the arms trade.  Governments create legislation, safety regulations, environmental standards, etc, which limit opportunities for market entry.

Currently in the UK there is a growing political argument over the lowering of food standards and animal welfare standards.  The Johnson government has legislated to lower UK standards and move away from the high common standards held when the UK was a member of the European Union.  This is seen as preparing for a US trade deal and to allow the importation of food from the USA which is often produced with low animal welfare standards and low food hygiene controls. US practices such as chlorine baths for poultry and using Ractopamine on pork cuts is common in the US but currently banned in the UK.  These US practices are attempts to cover up America’s ‘secret epidemic’ of food-borne disease and food poisoning.  Groups of varying political allegiance, including some cabinet members are opposing lowering of food standards to US levels.

Market incumbents often fight back against new market entrants through the use of discount fighter brands.  This is a common tactic in the golf equipment market where the majority of premium club manufacturers own a fighter brand to combat new entrants.

Where market growth is slower, such as in a mature market, entry can be all but impossible.  In such circumstances, significant market change needs to happen to allow entry e.g. Brexit.

Powerful buyers and suppliers affect a market through the use of their bargaining power.  Suppliers can raise prices and limit supply (as OPEC often did with oil).  Powerful suppliers, such as the large supermarket chains can use bulk purchasing to drive down wholesale prices. The tied house system for many years allowed breweries to control the price of beer and limit tenant landlords profitability.

Suppliers are powerful where there are a few dominant supply companies e.g. petrochemicals and where similar industries do not directly compete (e.g. steel fabrication and aluminium smelting).  They can also be powerful when a market is subject to forward integration (raw material suppliers buying finished product manufacturers). So TATA was an Indian steel maker which purchased Jaguar Land Rover the car maker.

Suppliers are also powerful where the supplied industry is not critical to their survival or profitability.  The Ravenscraig steelworks, built by the nationalised British steel to make plate steel for the automotive industry was a weak supplier wholly dependent on the Leyland car works at Linwood and the Ford plant at Bathgate.  When those car plants closed, there was no market for Ravenscraig’s steel.

Buyers are powerful when purchases are large, concentrated and central.  They are also powerful where large scale purchases are technologically complex e.g. supercomputers.

Buyers are also powerful where products are homogenous e.g. buying potatoes.  they are also powerful where they can buy a readily available alternative e.g. buying cane sugar compared to buying beet sugar.

Buyers are also powerful when the product purchased is not critical and can be easily cut from the buyers systems.

Buyers can also be powerful when they look to integrate back up the supply chain.

Substitute products limit profit opportunities they can reduce opportunities during market boom times and they can temper the ability to raise prices.

Existing competitors often jockey for market position.  Intense rivalries for market leadership exist if all market players are of similar size and there is no dominant market leader.  Slow industry growth (mature markets) can create fights for market share which limit opportunity.  Competitors can be strong where products are undifferentiated or where it is easy for customers to shift supplier.  In such markets, fixed costs can be high, products are often perishable (agricultural goods such as milk) or there could be a reliance on high sales volumes due to low profit margins (high street fashion).  Existing competitors can be powerful where there is overcapacity in a market (such as car production) or where markets are slow-moving such as musical instruments or antique furniture.  For example, once a pianist has bought a piano, how long will it be before they need to replace it (if they ever need to).

Often markets have high exit barriers, such as environmental clean up costs or the need for expensive specialist machinery.  This means competitors may stay in a market when in other circumstances they would have diversified elsewhere.

To succeed where industry competition is strong, you need to focus on market positioning, influencing the balance of the market and exploiting industry change. You also need to build defences so you are less vulnerable to the strategic attacks of other market players.

Fragmented Markets

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

the following factors are indicators of a potentially fragmented market:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So how do you cope in a fragmented market?

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

To survive in a fragmented market companies will need:

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

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

 

Turning things around

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

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

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

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

Most turnarounds affect:

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

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

There are two types of strategic turnaround:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What kind of Business Are You?

What is your state of readiness to supply your market?  Do you anticipate what consumers need or want? Are you prepared to move your customers to the next stage of the market e.g. electric cars or 5G?

To answer these questions you need to know what type of business you are and what is the position of the market life span.

Only with that information at hand can you adopt a market strategy that is appropriate and get that strategy applied with the correct timing.

You need to forecast your environment: Decide at what point you want to grab the market. Do you want to intercept the market at a certain stage of its life span or do you want to lead and direct the market?

This means that there are several types of company in a market. It also destroys the myth that ‘First in is best dressed’. take the early 80’s home video market: Betamax was first to market, and some still consider it a superior quality option, but VHS was able to intercept the market with a cheaper, better distributed product.  VHS won the home video format battle and Betamax was consigned to the history books.

Being the prime mover in a market is not always an advantage.

In every market there will be a number of companies and as the market life cycle progresses different businesses will rise to prominence as others decline. Like everything else, markets have entropy.

Businesses in a market can be classified under one of four categories:

  1. Market Scopers:  These are the innovators who create new markets and who operate at the start of the market life cycle.  they create new product, services and distribution channels. They have a go to attitude and scope out a market rather than aiming to satisfy it. the following lessons can be taken from Market Scopers:
    1. Know the state of readiness of consumers for the market, the product or the innovation.  Sir Clive Sinclair scoped the market for home computers and had extraordinary success. He tried to scope the market for electric vehicles but did so on false assumptions and the C5 was a disaster.
    2. Know how big the market is or could become.  Focus on realised demand not latent demand.
    3. Know how the market wants to buy the product.  For example, who buys carpets over the internet?
    4. Know what price the market will bear, so as to maximise returns.
  2. Market Makers:  These businesses operate in the early growth stage of the market.  They are the creators of a mass market e.g. Henry Ford with his aim to make motoring a practice for the masses.  These businesses generally garner the largest market share and become market leaders.  They create ‘best value’ but are often insufficiently agile to withstand the pressure as a market segments.  Often these businesses are driven by product development rather than market change. These are growth stage market leaders.
  3. Market Changers:  These businesses aim to move the market elsewhere by forcing their competitors to modify their offer.  Market changers are companies like Tesla which has pushed established car manufacturers into the development of electric vehicles.  These companies focus on technology and price/quality analysis.  They look to provide services unavailable elsewhere. They can force the existing market into decline.
  4. Market Exploiters:  These companies are fast followers of technology.  Many ‘market disruptors’ are market exploiters.  They take advantage of market fragmentation as disparate segments emerge.  They develop ‘new best value’ through branding and new service functionality.  Exploiters follow a market follower or market challenger strategy.

Different types of company need to target different market stages for market entry.  timing into the market is critical where consumer needs and market segments are continually changing.  A major factor is the rate of market progress and its taxonomy. This is how quickly consumers adapt to changing market technology: Do you target early adopters or laggards?  You also need to be aware of how quickly consumers change their definition of best value in a market.  For example, how many consumers would now buy a car that doesn’t have Wi-Fi or an iPod dock?

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.

Fancy a game of risk?

Life is risk. Every day we take risks.  We take risks with the choice of what we buy. We take risks when we decide to cross the road. Every decision we take has some level of risk.

Building a business is all about weighing up and taking risks.

Business stakeholder value links the level of risk involved in an investment with the required level of return needed for the investor to take on the investment. This is referred to as the risk-return relationship.

Imagine a graph with two axis. One axis is the perceived risk; the other is the level or required return. Zero risk could be considered as investments in a stable economy in instruments such as government bonds. These offer low returns but those returns are all but guaranteed.

Investing in a company with a volatile history will be considered to have greater risk than a company with a calm history.  For the investment in the volatile firm to occur, a greater rate of return would be required.

For many investors the risk associated with an investment will be assessed through extrapolating past performance on the future value of shares.

This results in the capital asset pricing model where the cost of equity capital (the return demanded by investors) increases with the perceived risk of the investment.  Risk is measured in terms of the volatility of the investment over time.

The OED definition of an entrepreneur is, “the owner or manager of business enterprise who through risk-taking and initiative attempts to make a profit”.

However, such risk-taking has boundaries. Company directors have a responsibility to maximise returns for stakeholders BUT they also have a responsibility to ensure that the business survives over time.  That means they must ensure that stakeholders investment is secure.  Directors and investment managers need to carry out due diligence and take reasonable precautions.  They need to take time to consider and assess those things which could go wrong.

Risk is events or actions that may affect an organisation’s ability to survive and compete in its chosen market as well as maintaining its financial strength, positive public image and the overall quality of its people and services.

This is where the marketers definition of risk differs from the risk definition of financial managers.  Rather than a backward looking, money-based assessment of risk, marketers look forward to potential risks many of which have no financial basis.

There are four types of risk in a business enterprise:

  1.  Financial Risk
  2.  Strategic Risk
  3.  Operational Risk
  4.  Hazard Risk.

There are also two sources of risk:

  1. Internal Risk – Which should be within the control of the organisation; and,
  2. External Risk – Which is driven by events external to the organisation and where the organisation has little or no control.

Financial internal risks include liquidity and cash flow. Strategic internal risks would include R&D, intellectual capital, and the integration of mergers and acquisitions.  Internal operational risks include accounting controls, information systems, recruitment and securing your supply chain.  Internal hazard risks include public access to buildings and facilities, the safety of products and the effect on the environment.

Financial external risks include interest rates, foreign exchange values and the ability to get credit. Strategic external risk includes the actions of competitors, changing customer tastes, technological change and levels of demand. External operational risks include government regulations, changing cultures and brand competition. External hazard risks include natural disasters and the effect of the environment on a business; contractual demands and the stability of suppliers.

Assessing business risk should not simply be a backward-looking exercise based on previous financial performance. To fully assess risk you should be looking forward to the future and at the social, environmental, cultural and political effects to com.  These elements are at the core of marketing and market analysis.

You should be looking forward to:

  • Create stronger and better growth
  • Ensure a stable business less prone to change
  •  Develop better quality staff
  •  Create customer acquisition opportunities and to ensure customer retention
  •  Develop consistent operations
  •  To acquire lower costs of finance through lower perceived risk
  •  To drive lower costs
  •  To ensure robust supply and distribution chains.

Marketing risk has two main factors:

  1.  Primary Demand Risk:  This is similar to financial risk and is external to the organisation. It is a factor out with the control of marketers. It relates to economic life cycles; currency and exchange rate fluctuations and changes in technology.
  2.  Market share risk:  This is a relative, not an absolute risk. It is the risk of not acquiring a particular prospect or nto retaining a particular customer.

Market share risk is affected by how much time, money and effort a business puts into:

  •  Customer research and the understanding of customer attitudes
  •  Product Research and Development
  •  Price maintenance and preventing price entropy
  •  Brand identity and differentiation
  •  Communications activities

Much of the role of marketers is the assessment of non-financial risk and then putting systems and structures in place to minimise or prevent such risk.  What makes the marketing risk game interesting is that your competitors are doing the same and will no doubt find different solutions and focus on different areas of risk.

The best ways to reduce marketing risk are by getting closer to your target customers, improving the quality of your marketing activities and increasing investment in marketing to a level greater than that of your competitors.

Does your organisation properly define the Sales and Marketing relationship?

Does your business have a Sales and Marketing department?

Do you call your sales force ‘Marketing Representatives’?

Do you have a sales office or a marketing suite?

When you employ marketing staff or consultants, do you measure their performance on the basis of sales KPIs?

I have found many businesses which can answer all these questions in the affirmative and that is puzzling.  These businesses clearly have a confused definition of two separate but linked specialisms.

Worse, the description Sales and Marketing is worrying as it gives prominence to the activity of personal selling over the strategic role of marketing professionals.

Sales is the activity of personal selling usually based on the employment of a cohort of sales representatives and involves direct face to face communication between the seller and the buyer.  It is a promotional activity based on two-way communication.  Sales presentations are also often designed to meet the needs of individual customers based on specific buyer demands and taking into account knowledge of the buyers status and issues.

Personal selling is often an expensive communication channel. You have to pay for expenses such as cars, travel expenses and a sales office. The total bill for a sales representative can be double their salary.  The practice of the traditional sales representative model is also changing through the increasing use by organisations of centralised purchasing teams.

Sales representatives are increasingly having to learn new skills.  Often the focus is now on the retention of profitable customers whilst the zombie customers that represent costs are abandoned.  Sales reps are now Customer Service Representatives, where the focus is on long-term customer retention as opposed to short-term one-off transactions.  Salesmen are now also expected to provide knowledge and database management providing market research data and administration.  Their role is to promote products and develop solutions; not just to sell.  Representatives are now problem solvers who develop partnerships with their clients.  They satisfy needs and add value.

The stereotypical image of the salesman as a  slick, fast-talking charmer is gradually disappearing to be replaced with that of the thoughtful, knowledgeable professional.

However, personal selling is not a stand alone business activity.  It sits as one part of a wider marketing mix.  It is only one element of a comprehensive marketing strategy.

Modern sales practice depends on:

  1. Target market choice: the targeting of profitable accounts.  This requires a wider of your targets through market segmentation and key account identification.  These wider strategic marketing functions provide for effective sales force management.
  2. The creation of differential advantage: The start of  successful marketing strategy.  This strategy needs to be embedded in the sales plan and be effectively communicated to all staff involved in the sales process.  The sales force must be able to articulate the differential advantage to customers.

One danger is that your sales representatives dilute your differential advantage by caving in to customer demands for price concessions.  it is also important that product benefits are communicated in terms that are understandable to the customer.

So sales activity relies on the strategic objectives of your marketing plan.

There are four generic marketing strategies depending on your market position.  These reflect the four quadrants of the Boston Consulting Group Growth/Share matrix:

  1.  Build your market: grow market share and sales volumes; increase your levels of distribution and increase your service levels. prospect the market for new accounts
  2. Hold your market position: maintain your market share, sales volumes and service levels. Limit prospecting
  3. Harvest the market: Increase earnings by reducing costs and targeting the most profitable customers. Reduce the cost of service. Reduce market prospecting. Transfer less profitable accounts to telemarketing.
  4. Divest: Limit sales visits to the most profitable accounts and increase order levels to minimise stock levels. No market prospecting.

Each of these marketing positions requires a different sales strategy:

  1.  Build:  Requires high call rates to existing accounts.  Highly focused sales activity during calls. Increased prospecting for new customers.
  2. Hold: Maintain current call levels.  Moderate focus during calls.  Call on new customers as they appear.
  3. Harvest: Call on profitable accounts. Move others to email contact and telemarketing. Don’t prospect for new customers.
  4. Divest:  Apply quantity discounts to hive volume accounts.

Perhaps the term Sales and Marketing should be reversed to recognise the strategic role of marketing.  it is your marketing strategy that determines the activity of your sales force.  Your sales force should not determine your marketing and corporate strategy.  This would be a better representation of the relationship between marketing and sales.

Even better, your marketing function should be allied to your wider corporate planning rather than being located as a silo function of your sales team. Strategic marketing planning should be a central part of your organisations top-level business planning.