Tag: customer focus

What is Business About?

What is the aim of your business?

I would hazard a guess that the response to that question will be dominated by the growth of turnover and profits. That the primary goal will be a financial metric.

This is very much the culture in the United Kingdom.  Company boards are dominated by finance executives with backgrounds in banking and accountancy.  When business journalists report on annual reports, when press releases are drafted, the headline is often about profit growth or an explanation as to why losses were incurred.

However, such a reliance on financial statistics can be misleading and it can mask the true health of a business.  Carillion, the failed construction and public procurement firm posted profits year after year.  When the firm collapsed, it was found that those profits were being generated by dodgy accounting practices, using subcontractors as a line of credit and by bullying subcontractors to accept payments far below the actual value of the contract.  Carillion may have been profitable but its strategy of growth by always being the cheapest option backfired spectacularly.  Contracts were drawn up in such a way that even the shortest delay in the completion of the work made contracts unviable.

Marketers view business differently and although we respect the need for financial prudence and the need for income generation, we also look to other metrics to define the health of a business.

Theodore Levitt, the long-time Professor of Marketing at Harvard University, said:

“The purpose of a business is to create and keep a customer”.

To many business leaders, that sentence ends at the word create: little or no attention is paid to the ‘keep a customer’ bit.

It is true that for a business to survive in the long-term it needs a constant stream of new customers but the business shouldn’t focus solely on new customer acquisition. Supporting and serving your existing customer base is as important.

The United Kingdom is a mature market.  That means that for most businesses to gain new customers, the primary strategy is to take those new customers from your competitors. Market share is gained at the expense of your competitors.

Of course there are exemptions to this rule, particularly if you are dealing with new technology but most major market sectors, from automobiles to food, there will be an existing option available and your task is to take business from that option.

In his book, The Loyalty Effect, Frederick Reichfield looked at the results obtained when businesses lost fewer customers each year.

The book attracted a lot of interest amongst business leaders, until many of them discovered how difficult and costly customer retention can be.  Many of these business leaders thought they could achieve the customer retention targets promoted by Levitt by tweaking existing tactics.  They failed to recognise that increasing customer retention was a strategic issue which involved major changes in the way their companies operated.

Many of these businesses thought they could improve customer retention levels by automating their customer relationship management.  They thought the focus was on reducing the cost of customer retention. They were wrong. Costs were reduced, the return on investment improved, but retention levels remained static.

However, businesses which treated customer retention as a strategic, not a tactical issue, and who gave customer retention priority, showed some startling results.

Where businesses set a target to increase customer retention by 5%:

  •  Credit card businesses increased profits by 120%
  •  Credit insurance, the lowest benefitting sector, showed a profit increase of 20%
  •  Other sectors examined showed a profit increase, on average, of 40%

This clearly showed that in a mature, sophisticated market, customer retention is critical to the generation of increased profits possibly more important than new customer acquisition.

As stated in previous blog entries, customers are fickle.  They will only stay loyal to a business as long as a better offer is unavailable (or what they perceive to be a better offer).  Customers will only stay with a business as long as they believe they are getting better value from that business than from its competitors.  They must get their needs and wants satisfied in a way which answers the question; What’s in it for me?”

For example, when FairTrade promoted their offer as: Protecting the Environment; Trader Rights; and Animal Welfare: returns fell.  But when the promoted their brand as: Healthier Food; Quality Food; and Child Friendly: results improved and the brand improved its customer retention.

So what are the steps involved in developing customer retention:

  1. Constantly add customer value. Products and services cannot be static in a dynamic market.  There needs to be new reasons for customers to buy your product over that of your competitors. that is why washing powders and toothpastes are constantly being reformulated.
  2. You need to know what your customer base wants.  Too many businesses assume they know what customers want and do not ask them.
  3. Satisfy customer needs and wants.  Give customers what they actually need and want not what you think they need or want.
  4. Make sure that customer get more of what they need and want from your businees than from your competitor’s offer.
  5. Make sure customers Know that they will get more of what they need and want from your business than from those of your competitors.

And beware customer value migration.  Consumer needs and wants will drift over time.  Things that were highly valued five years ago, and seen as factors which differentiated your product from that of your competitors, may now be seen as generic and of lower worth.

Identifying Competitive Advantage

Marketing strategy is about creating a consumer-focused business which has sustainable and relevant competitive advantage.

Davidson (1997) said:

“Competitive advantage is achieved when you do something better than your competitors.  If that something is important to customers, or if a number of advantages can be combined, then you have an exploitable competitive advantage.”

So how do you go about identifying the competitive advantages in your business and how do you apply them to your marketing strategy to ensure you create exploitable differences in your business compared to that of your competitors? How do you turn your areas of expertise and excellence into customer-focused advantages?

The answer is a two-part process, understanding the strategic options available and understanding what attributes of your products and services customers believe to be important.  it is perfectly possible to have a strong advantage over your competitors; but if that advantage is not seen as important by your target customers, it may not be sustainable or effective.

Michael Porter of Harvard Business School identified three generic marketing strategies:

  • Cost Leadership
  • Differentiation; and
  • Focused Differentiation (or niche marketing)

Cost leadership was later split into two sub categories, overall cost leadership and focused cost leadership.

These generic strategies underpin all marketing activity.  They are crucial to developing sustainable competitive advantage.

To develop a competitive advantage strategy you need to make two decisions:

  1.  Decide on your generic strategy;
  2. Determine the strategic scope of your business.

Let’s examine each of Porter’s generic strategies and select potential areas for competitive advantage within them.

Cost leadership is about seeking overall cost leadership in your chosen market, or focused segments within that market.  Do not consider this as simply being the cheapest offer in the market.  There are plenty of products priced at their industry average level which use a cost leadership strategy.  Cost leadership is about bearing down on costs to maximise margins.  However, it can be a ‘best value’ strategy not a cheapest price strategy.

Cost leadership strategies are about creating low-cost structures and investing resources in the areas where consumers derive value.  You need to control overheads and develop economies of scale.  You need to minimise costs in subsidiary processes (including marketing!) whilst concentrating assets on primary processes.  It often requires global supply chains and sourcing of materials and labour. Manufacturing is often outsourced to regions with lower labour costs.  Cost leadership means leveraging experience effects and applying new technologies such as artificial intelligence and manufacturing automation.

Companies choosing a cost leadership strategy need to be wary of bigger, better resourced competitors entering their chosen market segments.  Creating and sustaining economies of scale are crucial to this strategy.  Such economies can be hard to achieve without significant market share and difficult to maintain if market share is falling.

It is also difficult to alter fixed costs over the short or medium term.

Cost leadership is a high volume strategy which suits commodity products.

As already stated the basic drivers of a cost leadership strategy are economies of scale, driving efficiencies, leveraging purchasing power and using experience effects in manufacture.  Another crucial aspect of cost leadership is leveraging industry relationships through joint research and development, using common manufacturing platforms and having close ties to suppliers and distributors.  it is a strategy that drives vertical integration and just in time supply chains.  You need efficient infrastructure to drive this strategy so it often requires close links to government and regulators.

Identifying those areas where a cost focus is applied is also crucial.  Take Dyson, by no means the cheapest offer in the vacuum cleaner market, they choose to design in the UK; where customers perceive difference; but manufacture in the Far East, driving down manufacturing and labour costs.

A differentiation strategy requires the development of different product offers for different market segments and customer profiles. For example, most flag carrier airlines, such as British Airways, have differentiated product offers where first class, business and economy passengers receive different levels of service on the same flight.

It is crucial to identify sources of differentiation that are perceived as important by different customer groups.  The source of differentiation is what creates customer-value.  The George Clooney film, Up in the Air, has a scene where the main character discusses the various benefits he receives from the many frequent flier offers he gets.  The level of benefits received is important to his character, it helps express his identity.

A differentiation strategy can be a means to being able to demand a price premium.

To be able to use a differentiation strategy effectively, you need to be able to create reasons for purchase.  You have to be innovative and flexible. Often perception of product or service performance is more important than the actual performance when creating difference.

In creating a differentiation strategy, costs often outweigh the benefits.  Innovations are often rapidly replicated by competitors.  Customer needs may shift over time, making chosen points of differentiation obsolete.

Take the car market.  For many years, performance was prioritised.  Then consumers became concerned about fuel efficiency.  Today, with the rise of hybrid and electric vehicles, customer seek differentiation in terms of environmental standards.  Since the recent emissions test scandal, the sale of diesel vehicles has fallen dramatically.

So what are points for product differentiation:

  • Product Performance:  Quality, durability and capability when compared to competitors’ offers.  You have to give consumers a reason to pick your product over those of competitors.
  • Product Perception:  This is often more important than actual product performance and can develop brand loyalty
  • Customer Experience: An increasingly important element in creating a successful offer and points of difference.
  • Product Augmentation:  Add to consumer value.  Use the product halo to offer better customer service, better after-sales maintenance and more efficient packaging, etc.

Focus or niche marketing means concentrating on a narrow range of activities in selected market segments.  This is the strategy of being a market specialist and often requires detailed customer knowledge.

A narrow focus increases a businesses exposure to downturns and market factors.  It is easy for consumers to shift away from a niche as fashions and interests change.

A niche can be a focus on a particular geographic region tailoring products to local needs.  It can mean serving customer groups seen as being too small for larger competitors.  However, such segments must be viable and offer adequate turnover and margins.  Niche marketing requires an end-user focus and short distribution chains.  For example Hasselblad focus on high-end large and medium format cameras used by professional fashion and art photographers and sell their products predominantly through specialist business-only suppliers.  Niche strategies require specific price points and quality standards.  often the focus is on a single product line

Porter argued that a business should select one of these strategies and that they should not attempt to combine them. He argued that to do so would mean being ‘stuck in the middle’; a marketing death zone.

Take the major airlines when the short-haul discount brands entered the market.  At first they tried to match Easyjet and Ryanair with price offers whilst also maintaining differentiated provisions in business and first class.  This strategy backfired spectacularly.  In recent times, these flag carriers have revamped aircraft and airport lounges, offering more premium priced provision to business and first class customers whilst reducing economy provision, particularly on long-haul flights.

Sources of competitive advantage must be relevant to your current and future market and they must be achievable with your existing resource base.  You must be able to defend them, putting in place barriers to replication e.g. using intellectual property rights.  Often competitive advantage is skills-based.

A useful tool in assessing competitive advantage is the Boston Consulting Group Strategic Advantage Matrix.  This compares the size of a competitive advantage with the number of ways to achieve a competitive advantage.  The result is four market positions:

  1.  Stalemate Industries: Where there are few ways to create competitive advantage and the level of such advantage is small.  This is often the position in commodity markets, and therefore infers a cost focus strategy.
  2. Volume Industries:  Where there are few ways to create competitive advantage but the level of advantage is large.  Such markets are dominated by firms able to leverage economies of scale.
  3. Fragmented Markets:  Where the size of the advantages are small but there are many ways to create competitive advantage.  This type of market suits niche businesses.
  4. Specialist Markets:  Where there are many ways to create competitive advantage and the size of such advantage is large.  These are markets dominated by specialist professionals using innovative technology.

In summary, to develop competitive advantage, you need to;

  1.  Understand your chosen market and the appropriate generic strategy for that market.
  2. Properly apply that generic strategy making the most of your organisation’s resources and expertise.