Tag: Market 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.

Organisational Buying

Marketing to organisations is different to marketing to consumers. Repeat: MARKETING TO ORGANISATIONS IS DIFFERENT TO MARKETING TO BUSINESSES.

The reason is simple, when selling to consumers you are predominantly selling to individuals.  When selling to organisations; such as businesses, local authorities and government departments; you will likely be selling to a group of people operating within strictly defined protocols.

When I worked in local government, I was a client facing enforcement and advice professional.  I didn’t do much purchasing (the exception being equipment for legal metrology equipment and laboratory services).  For big purchases, such as IT equipment, and routine purchases, such as stationery, my employer had a central purchasing unit staffed by professional buyers.

Even within the purchasing activities I had responsibility for, I had to operate within tight policies.  I had to get a minimum of two quotes for any purchase unless I could show an exceptional reason for not doing so (e.g. only one laboratory could do the required testing).  I also had to show ‘best value’ that the products and services I was procuring could give more ‘bang for their buck’ than the rejected alternatives.

In organisations there are four types of purchase:

  1. Routine Order Products:  These are regular, low risk purchases like stationery.
  2. Procedural Problem Products:  These purchases affect the way work is carried out e.g. buying new software. Often these will involve training beyond the purchase of the product or service.
  3. Performance Problem Products: These purchases improve the users requirements and expectations.  For example buying new machinery which is more productive and less likely to require maintenance.  A major issue is the compatibility of the purchased product with existing equipment.
  4. Political Problem Products:  These are purchases which take resources away from other parts of the organisation.  For example, a business may face a choice between purchasing a new packaging system and a new computerised order tracking system.  The businesses delivery team manager will be put out if the ordering system is not purchased. The businesses operations manager will be put out if the new packaging machinery is not bought.  So the choice of purchase may result in destructive office politics.

The latter category of purchase above is common when businesses are making big strategic purchases which are of high value and which directly affect the future of a business.  Whereas routine purchases may be delegated to an individual member of staff; major purchases are usually made by a group, a ‘decision-making unit’ or DMU.

Members of a decision-making unit will often take up the following roles:

  • Initiator: This is the individual who initiates the purchasing process and proposes a purchasing solution to solve a particular problem. It could be a departmental manager or in organisations using systems such as Kaizen or TQM, an individual employee or group of employees.
  • User(s):  Those who will actually use the product purchased.  This may or not be the initiator.
  • Buyer:  A professional negotiator who carries out the process of the purchase.  For complicated or expensive products or services these negotiations may take significant time and there may be significant lead times before the purchased product is delivered.
  • Influencer:  These members of the DMU may have little or no impact on the process of buying but may have a major impact on the decision to purchase.  This could be the company’s accountant or union representatives within the organisation.
  • Decider:  The person who has the final say on the purchase.  This could be the company owner or in a local authority, a vote by councillors.
  • Gatekeeper: This person controls the flow of information to the DMU.  The personal assistants of senior managers are a good example as they often control who the senior manager talks to and meets as they control his diary.

Political tensions often build in a decision-making unit.  This can be for the following reasons:

  1. Individual self-interest; a particular manager may see a purchase choice as a route to personal advancement or reward.
  2. Operational needs of particular departments: Organisations have limited resources and often choices need to be made as to what to purchase when. If a purchase negatively affects other parts of an organisation, or limits its expectations, tensions can arise.
  3. Professional Pride:  Individuals have professional pride and if a purchasing decision dents that pride, tensions grow.  I have worked in an organisation that treated my profession with contempt.  It was a hugely frustrating experience and guess what, I left.
  4. Different incentives and reward expectations:  If an operations manager receives his bonus based on the productivity of his plant, and the failure to purchase equipment which improves that productivity occurs; you may find that the manager becomes obstructive.

As organisational buying is more complex than consumer purchasing, academics have tried to build frameworks which map the process and develop logical processes.

The Webster Webb framework sets four variables which influence the purchasing decision:

  1.  Environmental:  This is effectively PESTEL analysis and issues such as the actions of competitors.  If the macro-political situation is confused or complicated, firms may be less willing to make major purchases.  Brexit Britain is one such environment, where some firms are actively divesting from the market and others are holding back on major purchases due to market uncertainty.  It is also noticeable that UK productivity has been weak for some time.
  2. Organisational:  Purchases are directly affected by an organisations goals, the organisation’s culture and policies and procedures.  If a firms goal is, like Lloyd’s bank, ‘to be the best for customers’, it is likely that purchases which improve the customer experience will be prioritised. If the organisation has a traditional top-down management structure, the views and personalities of those at the top will strongly affect purchasing decisions.
  3. Interpersonal: The relationships between individuals and the buying centre may affect purchasing decisions.  For example, in the 1970s in the UK, it would be a difficult task to make purchase which significantly cut the number of employees in a firm.  There would be significant resistance from unions and purchases may postponed or not made as a result of how they would affect the union’s members. That was a world where there were major strikes over minor demarcation issues, the most ridiculous was at the BBC where studios were shut down because of a dispute over who was responsible for the Play School clock (the scenery shifters said it was scenery and therefore their responsibility but because it contained electrical components the BBC electricians believed it was their responsibility).
  4. Individual:  Different DMU members will have different attitudes to risk, they will have different personal goals, they will have different experience, they will have different education and training.

The Sheith Framework has similar elements to the Webster-Webb framework. However, it places an emphasis on the psychology of the purchasing process.  it states that there are four factors to organisational buying:

  • The experience of DMU members
  • Factors inherent in the buying process
  • The character of the decision-making process
  • Situational factors

The expectations of DMU members may differ as a result of their functionality.  A firm’s chief engineer will have different expectations to those of the firm’s finance director.  This means sales presentation and literature could be subject to perceptual distortion.

Factors in the decision-making process include perceived risk of the purchase, time pressures, the type of purchase or the organisations orientation i.e. is the organisation pursuing an aggressive or a defensive strategy.  If a firm needs a particular piece of equipment to meet a tight deadline, then it may make fewer procedural checks before making that purchase.  other factors include organisational size.  A routine purchase for a large company may be a major purchase for a small company.

The level of decentralisation may affect purchasing decisions.  As stated earlier, I used to work for a council that had a central purchasing unit which undertook all the purchasing negotiations.  But I have also worked in an organisation where many purchasing decisions were delegated to individual managers and members of staff.

The process of purchasing may affect the buying process.  For example, where purchasing decisions are to be made jointly, there may be more room for conflict than where purchasing decisions are made by individuals

There are four types of organisational conflict:

  • Problem-solving
  • Persuasion
  • Bargaining, and
  • Politicking

Problem-solving and Persuasion are seen as rational sources of conflict.  Bargaining and Politicking are seen as irrational sources of conflict.  But bargaining and politicking are common in organisations.  Who hasn’t been in an organisation without office politics or experienced those office politics becoming toxic?

Situational factors affect purchasing decisions e.g. long lead times for delivery, industrial relations at potential suppliers, takeovers and mergers, financial issues, production breakdowns and tax changes.  For example, McDonald’s in the UK stopped using Heinz tomato ketchup when Heinz headhunted one of their senior managers.  This ‘poaching’ of the manager was seen as a significant breakdown in the relationship between the two companies.

Segmentation is critical to your business

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

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

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

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

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

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

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

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

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

To do this, you must:

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

When considering entering a market segment, You must ask:

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

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

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

In presenting products to market you have three options:

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

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

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

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

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

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

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

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

Ask yourself:

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

 

 

Going Global

Currently, the UK government is promoting the idea of exporting to small and medium-sized businesses.  This is a bit counter-intuitive as at the same time, the government is in such a mess with Brexit, it is highly likely that the conditions for exporting past 29 March 2019 will be such, and barriers to trade so high, that for many small businesses the costs of exporting may become prohibitive.

So what should a small business consider when looking to market their products abroad?

The world is, in many ways shrinking.  Faster communications occur the rise of the internet and cloud computing.  We have faster transport links through the development of faster aircraft and ships.  We have high-speed rail lines and improved road networks.  The result of this improved communications and logistics infrastructure has meant a boom in international trade.

Many companies now like to see themselves as ‘global firms’ which operate across countries, regions and continents.  Going global has allowed these firms to make gains in terms of research and development, production, marketing and financial structures.  They have been able to build cost and reputational advantages which are not available to firms which operate on a domestic basis.

However, to globalise successfully, companies need to ask themselves pertinent questions:

  • What market position do we want in a particular country or region?
  • Who are our competitors, in the chosen market and globally?
  • Can we operate on our own in a new market or do we need a strategic alliances?

If you are considering global expansion, you need to understand the frameworks under which trade will take place. Is there a free trade or cooperation agreement in place?  Are their tariff free quotas? Are you operating on WTO tariffs?  Does GATT24 apply to any trade deal? Do you know the status of the various international trading blocs such as the EU, Mercosur, SADC, TPP, NAFTA, etc.

The WTO developed out of the General agreement on Tariffs and Trade.  Over seven rounds of international talks, the WTO has lowered the average tariff for manufactured goods from 45% to 5%.  However, significantly high levels of tariffs still exist in certain goods classes, e.g. the tariff for motor vehicles and components is 12% and speciality foods can have tariffs of up to 40% on the importation value.

In recent years, the progress of the WTO has stalled.  The eighth round of trade talks, the Doha round, stalled.  Several countries, particularly the Trump administration have distinctly protectionist policies which have weakened the WTO.  In particular, Trump is refusing to appoint members to the WTO council and looks to implement punitive tariffs against individual countries, particularly China, in breach of WTO rules.  Such moves are threatening the viability of the WTO and increasingly it is seen as a failing organisation.

International trading blocs, such as the EU and NAFTA, have been major drivers of trade internationalisation.

This is one of the fascinating things about the Brexit debate.  Brexit supporters shout that they want a global Britain; but the EU record on international free trade is astonishing.

The EU/EEA has 31 member states.  The EU also has 54 FTAs with both countries and trading blocs such as the Southern Africa Development Council.  On top of those deals, the EU offers unilateral free trade to the world’s poorest 48 nations under the Everything but Arms policy.  The WTO has 164 member nations and the EU has free trade arrangements with nearly three-quarters of them.  In addition to full free trade agreements, the EU has a number of cooperation agreements with nations, many of which allow for tariff free quotas for certain products.  For example, the EU has a tariff free quota arrangement with New Zealand for lamb meat.  New Zealand hasn’t exceeded this quota level for a number of years.

The EU is currently in the process of negotiating trade deals with Morocco, Egypt and the South American trade bloc Mercosur.

It is highly unlikely that the UK post-Brexit, will be able to quickly negotiate trade deals equivalent to those of the EU and simply due to market size, it is unlikely that the UK alone will be able to obtain the levels of commitment included in EU deals.

To succeed in international markets, you need a deep understanding of the regional and national attributes of your chosen market.

Firstly, what type of economy is your target market?

There are four basic categories of economy:

  1.  Subsistence Economies:  Where the majority of the population work in basic agriculture and where most output is consumed domestically.  This large parts of Africa.
  2. Raw Material Exporting Countries:  A country or region that is rich in a particular raw material resource, e.g. The Democratic Republic of Congo which has large cooper reserves and which supplies much of the world’s cobalt.
  3. Emerging ‘Industrialising’ Economies:  This includes the BRIC economies.  These countries have a rapidly growing middle class where there is increased demand for Fast-Moving Consumer Goods.
  4. Industrialised Economies:  Which often had lower levels percentage of GDP growth (but actual value of that economic growth can be far more that of emerging economies).  This category includes the USA, most of Europe and Japan.  These countries export manufactured goods and professional services.  They are rich markets for all types of goods.

It is interesting to note that many Brexiters see Africa and the UK’s former colonies as a solution to the trade lost with the EU due to leaving the bloc.  However, you have to consider that the GDP of the whole continent of Africa is less than half that of France.

Secondly, what is the income distribution of your chosen international market?

Developed nations often have a mix of high medium and low-income households.  Developing nations tend to have a small rich elite class and the mass of the population have low incomes, so if you sell products aimed at the ‘middle ground’ such a market may not be viable.  Much of the interest for exporters in the BRIC nations is their growing middle class.

You need to consider a countries legal and political environment of your chosen international market.  For example, China has few intellectual property laws and enforcement of the laws that do exist is poor.  So do you want to sell your designer goods in a market where counterfeiting and trademark breaches are common?

Some nations are open to foreign firms; some are less welcoming.  India bothers foreign firms with import quotas, currency restrictions and other hindrances.

On the other hand, Singapore is a market which looks to attract foreign firms with extensive incentives and favourable tax and trading conditions.

Some countries, such as Canada, are extremely politically stable.  Others, the most prominent current example being Venezuela, are not.

You need to examine the cultural environment of your target market.  You need to ask how certain countries treat certain products.  For example, some Indian states have strict laws on the sale of alcohol and the quantity that can be bought (you may have to register with a certain retailer to be able to buy alcohol)). Until recently, it was illegal for women to drive a car in Saudi Arabia; yet in Western Europe many small family cars are directly marketed to women.  Italy has proven to be a difficult market for the large coffee shop chains.  How you drink coffee, and what and when you drink coffee, have strong cultural meaning in Italy.

You need to be aware of a countries folkways, norms and taboos if you are to successfully market your products and services in that market.

There have been some horrendous mistakes made by large firms where they have not taken into account cultural norms.

For example, in Africa, the norm is to label product packaging with the contents of the container.  For example, you show a chicken on tins of Chicken soup. Nestle made a huge mistake when they labelled packs of infant milk formula with the picture of a baby.

Burger King had to pull adverts when the showed a ham sandwich in the hand of a Hindu God (With the strap-line ‘the snack which is sacred’).  Hindu’s are vegetarian.  So a meat product being advertised through the image of a Hindu god was seen as highly blasphemous.  The advertising campaign had to be withdrawn

In many Arabic countries, using the left hand to hold or eat food is seen as highly insulting.  Traditionally, in lands where water and vegetation is scarce, the left hand is traditionally used for cleaning yourself after being to the toilet.

So what are the indicators of market potential:

Demographic Characteristics

  • Levels of Education
  • Population size and growth
  • Population age composition

Sociological Factors

  • Consumer lifestyles, beliefs and values
  • Business norms and approaches
  • Cultural and social norms
  • Languages

Geographic Characteristics

  • Climate
  • Country size
  • Population density
  • Transportation infrastructure and market accessibility

Political and Legal Factors

  • National priorities
  • Political stability
  • Government attitude to global trade
  • Government Bureaucracy
  • Monetary and trade regulations

Economic Factors

  • GDP size and growth
  • Income distribution
  • Natural resources
  • Financial and human resources

When deciding how to enter a market you need to consider whether to export directly or indirectly.  Do you use joint-ventures through licensing or contract manufacturing, management contracting or full joint ownership.  Some countries may require you to have a domestically based partner if you are to operate within their borders.  Do you invest directly in production facilities in the state.  Do you assemble products in those facilities or do you carry out full manufacture from raw materials?

Each of the above options increase the levels of risk in an expansion.  They may require increasing levels of control but equally profit potential may be increased.

You also need to consider whether to follow a global marketing plan where there is little variation in your offer between countries; or whether you develop specific marketing mixes for individual countries or regions.

Customers

In the nineteenth century, retail entrepreneurs such as Henry Gordon Selfridge popularised the mantra, ‘The customer is always right’.

As a trading standards professional with over twenty years experience in dealing with consumer complaints this is a statement I can categorically state is not true.  Customers are often badly in the wrong.

I prefer a variation of the mantra which states, ‘The customer is king’.  This amendment puts the customer in their true position.  Customers are the most important stakeholder in any business.

In business, the customer is the name of the game.  They are the source of your income and profits.  They are the reason that your business exists and survives.

To survive in business, you need to know what your customers want and who they are.  But customer needs change, as do their expectations and habits.  Market segments are in a constant state of flux.

To thrive and succeed in business you need to know more than what your customers want.  You need to internalise customers needs and wants and you need to commoditise them.

What you must not do is:

  • assume you know better about what customers want than they do.
  • think you know what they ‘ought to want’.
  • hope that customers will want what you have decided to make.
  • fail to care what consumers want because you have sales targets and you’ll be able to find someone to offload products to.

So you need to know exactly what customers want.  Except that is an impossible task. Often customers don’t know what they really want. This is a position clearly exposed by the current Brexit debate where supporters of the UK leaving the EU have vacillated between various different definitions of Brexit from a fictitious ‘world trade deal’ under WTO rules, to a ‘Canada Plus Plus Plus’ super-duper trade deal, to having the rights of EU membership without the costs.  Ask three Brexiteers as to their chosen Brexit ‘product’ and you will get three different answers.

However, even if it is impossible to know exactly what consumers want, you can reduce risk of customer indecision by carrying out market research.  You ask customers what they want, you don’t guess.  Again Brexit is a case in point. If a market researcher surveyed consumers over two variants of a product and the result of that survey was 52%/48%, the research would likely be treated as inconclusive and in need of repetition.

Market research is not marketing research.  Market research is examining the composition of markets, customer needs and wants, etc.  Marketing research is the examination of a firm’s marketing activities and its ability to access markets.

Market research is not easy and you’d be amazed what some senior managers in business have said about it:

  • “We’ve never done it”
  • “Qualitative research is too touchy-feely”
  • “How do you find out what customers themselves do not know”
  • “This organisation works on numbers; not loose concepts of ideas”
  • “The market research agencies we use don’t do that type of stuff”
  • “Sorry, the finance people won’t buy it”
  • “”Product managers hold the research budget and they have sales targets”
  • “Spending money on that hits our profit centre”.

Market research done properly informs management decision-making.  It is not a substitute for creative or professional decision-making.  Again there is a parallel with Brexit.  Many members of parliament say they personally oppose Brexit but that, because the majority in their constituency was to leave, they must obey the instruction of that majority. But such an attitude is not the role of MPs.  Members of Parliament are representatives, not delegates.  Their role is not to obey instructions, it is to use their own good judgement and to make decisions on the basis of the facts placed before them.  That role, to paraphrase Burke, is based on three duties; first, to do what is good for the country; second, to do what is good for constituents and third, party organisation: In that order and where the first duty predominates over the other two.

Similarly management decision-makers have a duty to do what is good for those who hold shares in the business.  That duty may conflict with the results of market research.

Like scientific and pseudo-scientific methodologies, market research has limits of error and when making decisions these limits of error must be carefully explained.

Market research is not an end in itself.  It is simply a method of reducing risk.

So who are your customers?

Customer knowledge is the biggest asset your organisation has.  Like any asset, you need to know it, maintain it and maximise the returns from it.  To do this you need to develop a robust Marketing Information System which can be used to;

  • analyse data for trends and changes
  • gives understanding behind the reasons for changes in customer behaviour
  • and which supports the marketing skills of your organisation and which allows you to do something about the changes in consumer behaviour you have identified.
  • Identifies what consumers buy from you and from your competitors.

It must be remembered that customers do not buy product features; they buy benefits or solutions to their problems.

Remember:

  1.  A product is what a product does;
  2. Customers just need to get things done;
  3. They need products to do those things;
  4. People don’t want a washing powder, they want clean clothes.

So don’t just measure sales data, measure the needs and problems of consumers which leads to those sales and which motivate purchases.  Does your firm measure more than basic sales data?

What benefits do customers seek?

Good marketing is not doing what you are good at but doing what your customers want you to do.

To meet that challenge, you need to find out:

  • What your customers wants and needs are.  The problems they need to solve and the jobs they need to do.  You need to find out where consumers ‘hurt’
  • What your customers need and want from you.  What they believe you can do for them, what they believe you are capable of offering; compared to what you actually can offer; and what they believe you are incapable of delivering.
  • What will your customers need in three months time, a year’s time and in five years’ time.

These are deceptively easy questions which are incredibly difficult to answer.  However, you need to know the answers to those questions in order to know:

  1. Where to put the money for maximum return
  2. Which customers do you want to invest time and money in.
  3. What products and services you need to develop.
  4. What products do you need to divest from or put on hold.

The really pertinent questions you need to ask consumers are:

  • What will the purchase and use of our products do for them and how will it affect a consumer’s status amongst their peers?
  • What will other people think of the consumer by their use of your products and services?
  • What will the consumer enjoy about their use of the product or service; or the result of such use?
  • Will consumers enjoy the relationship created with the producer through their purchase of the product? And will they want to maintain that relationship through repeat purchases?

 

Protected Food Names: The Next BREXIT Battle

Last week, Marcus Fysh, the hard Brexit-supporting Conservative backbench MP sent out a tweet evoking a post-EU Britain where we could enjoy American feta cheese and Chinese businessmen could quaff English champagne.

I found this tweet maddening as it highlighted some Brexiteers utter ignorance of current food protections and that by breaching them, British exports could be seriously endangered.

Let’s start with the American Feta.  What Mr Fysh does not seem to realise is that American ‘feta’ is a completely different product to the genuine Greek cheese.  Greek Feta is usually made from goat’s milk (and occasionally sheep’s milk).  The American version is made from cow’s milk.

American cheese, although there are some exceptions to prove the rule, is generally regarded as terrible.

Then there is the use of the term Champagne.  This has already been the subject of a long and bitterly fought trade dispute between America and France.  In fact a solution was only negotiated once the EU became involved and used its scale to exert influence on the US government.

Champagne has a PDO, a protected designation of origin.  This means that the use of the name champagne can only be applied to sparkling wines from that region of France.   The EU has negotiated with other administrations around the world to ensure that other wines do not use the term.

In America, some wine makers continued to use the term champagne to describe their wines.  In 2006 the EU and the US governments agreed that all new wine production would stop using the term champagne.  Wine that had already been produced could continue to use the name until stocks were exhausted.

As with most international agreements, there is a legal loophole.  This relates to the treaty of Versailles signed at the conclusion of World War One.  The treaty contained a clause to deal with a dispute on the naming of wines in France and Germany.  The US government was a signatory to the treaty but the US senate did not ratify the wine clause.

What this means is that US wine producers who have been in continuous production since the 19th century can continue to use the term Champagne as long as they use the statement ‘California Champagne’.

In the 1920s, America went into the prohibition era.  The sale and consumption of alcohol was all but banned (some individuals could get a certificate from their Doctor stating that they could consume alcohol, on prescription, for health reasons!).

What this meant was that the vast majority of wineries were shut down by the US government.  A handful, who were producing for export only, survived.

Even after prohibition, the US wine industry struggled.  It went into a steep decline and only recovered in the 1970s.

There are a handful of Californian wine producers (I can only find four) that can continue to use the term ‘California Champagne.  As most US wineries only date from the 1970s, they cannot use the term.

It is also worth mentioning that ‘California Champagne’ is a different wine from that produced in France. French champagne is a wine made from Chardonnay or Pinot Noir grapes.  ‘California Champagne’ tends to be made from Zinfandel grapes.

Of course, the term ‘California Champagne’ can only be used within the United states.  One winery bottles its export product under the term ‘California Sparkling Wine’.

Mr Fysh also fails to recognise the disparity between the size of the French wine industry and that of the UK.  UK wine production is a growing niche sector.  French wine production dwarves the UK industry.  Fysh is expecting an industry which employs around 1200 people to compete with one which employs twenty times that number.  It is like saying Morgan cars are a direct competitor of Ford.

There are effectively three layers of protection for speciality regional foods within the EU.

Products such as whisky are protected by a specific EU directive (the Spirit Drinks Directive).  Whisky is defined as; “grain alcohol matured in oak barrels for a minimum of three years”.  Scotch is given additional protection in that the maturation process must take place in Scotland.

Then there are PGOs.  These are protections where the location of the food production is protected.  For example, Scotch Beef and Welsh Lamb must be reared and produced in Scotland and Wales respectively.  Often it is the place of production alone that offers the protection.

Finally, there are PDOs.  These are protected designations of origin where there is a specific recipe, production method or list of ingredients which is representative of a particular geographic area.  Foods with PDOs include Parma Ham, Parmesan cheese, Melton Mowbray Pork Pies, Stilton Cheese, Rutland Bitter, Arbroath Smokies, Cornish Dairy Ice Cream and the Cornish Pasty.

To use a name with a protected designation of origin, it must follow the declared production process AND it must be produced within the declared geographic area.  For example, a Melton Mowbray Pork Pie must have its crust moulded around a wooden dolly, not rolled out with a rolling-pin; the pie must be produced within the specified area around the town of Melton Mowbray.

There are around 80 UK foods which are given EU-wide name protection. Until recently, there were campaigns to add further UK foods to the PDO/PGO list.  For example, in Scotland, campaigns were started to get both Dundee Cake and the Forfar Bridie PDO protection.

Geographic protections guarantee product consistency and quality.  They create a marketable branding identity.  They can add a price premium.  They can help to protect jobs and artisan production.

Most geographic protections have arisen from campaigns by producer groups, consumers and local people.  Many such groups have fought for years the ensure protected status.

And then along comes Brexit.

With six months to go until the UK leaves the EU, there is little solid information as to what will happen to protected name status after Brexit.  The UK government has stated that it intends to create a separate system of food protections.  The EU has put protected food descriptions near the top of their demands as part of the exit settlement.  The EU has stated that it will not revoke existing UK food name protections within the bloc after Brexit. However, if the UK does not reciprocate, that position could change.

However, six months to go leave insufficient time for protected food producers to plan for life outside the EU.

Clearly, the UK government can regulate as to what happens within the UK market.  It is questionable whether it will have the negotiating heft to demand that similar protections exist outside UK borders.

Food name protections are a factor in the UK negotiations at the WTO.  And the sharks are circling.

In New England, where Cornish fishermen and tin miners emigrated in the 18th and 19th centuries, pasties are a common food.  Producers in that part of the United States want to apply the description Cornish to their products.

American distillers have already stated that they want to reduce the prescribed maturation period for whisky from three years to two.  They want to mature whisky in metal tanks, not oak barrels.

Asian whisky producers want to describe their products as ‘Scotch’.

So what happens if Mt Fysh gets his wish? What happens if the UK accepts American Feta and sells sparkling wine to Asia with the description Champagne?

The likely impact on UK exports to the EU would be disastrous.  EU states would simply refuse to allow UK production into their markets.  Bear in mind that the vast majority of UK food exports go to Europe.  UK foods containing ingredients such as ‘American Feta’ would not be allowed into our biggest export market.

Then there is the impact on UK producers.  If American distillers flood our market with 2-year-old gut rot;  if Chinese distillers start producing ‘Scotch’ for their domestic customers; the impact on the Scottish distillery industry will be disastrous.

With his crass, and frankly insulting, tweet, Marcus Fysh is putting at risk premium food exports and thousands of UK jobs.

Brexit and Regulation

Over recent months, this blog has focused on marketing strategy.  However, there is more to Philmus Consulting than strategic marketing planning.  This consultancy also offers guidance on regulatory due diligence in relation to food standards and consumer protection law.

So this week I want to address the thorny issue of Brexit and its effect on the regulatory environment within which UK businesses operate.

Of course, this subject isn’t wholly divorced from marketing planning.  Analysis of the political and legislative environment is a prominent part of the market analysis process.  Government and regulators are often key stakeholders in the policies and procedures of businesses.

You may be aware that I wrote to Michael Gove shortly after his appointment as Secretary of State for the Environment, Food and Rural Affairs. My letter tried to get some information as to DEFRA’s preparedness for Brexit.  I chose to highlight two areas of food regulation, Organic Certification and Products of Designated Origin.

I chose these two topics as they brought the issue of regulatory diversion into sharp relief.  Also in my mind was Gove’s comments at the referendum that we’d “had enough of experts”.  I did wonder if Theresa May was getting some revenge in early ass DEFRA is a department filled with experts and where attention to regulatory detail is often required.

I did get a reply from Mr Gove’s office but it was less than satisfactory.  I got a holding letter which stated that no detail could be given until the conclusion of the exit negotiations and that only after the Article 50 process was concluded, could such planning take place.

Last week, the UK government released its first tranche of contingency plans in the event of ‘no deal’.  One of these documents concerned the certification of organic food.  That contingency paper confirmed my worst fears of the UK government’s lack of preparedness for Brexit and the regulatory chaos that will be thrust upon UK businesses as a result of Brexit.

The UK government is slowly drip feeding industry with these contingency documents and have taken 18 months to do so.  The EU produced their equivalent documents six months ago.

The organic products contingency paper was written for a no deal scenario.  However, my reading of the law is that the effect of the UK becoming a ‘third country’ will be the same on the organic sector whatever the result of the article 50 process.  The impact of EU exit and the UK government’s utter failure to plan, could destroy the UK organic food sector completely.

Currently, the UK, as an EU member, implements the EU Organic Products Directive.  What this means in practice is that the UK complies with the EU-wide definition of organic food.  A food producer wanting to describe their food as organic, must meet strict criteria as to the use of organic production processes.  There are strict limits on the use of inorganic fertilisers and pesticides.  If a producer wants to be classed as an organic producer, they must be certified as meeting organic standards and they must keep detailed records in relation to their organic status.

Getting organic status is expensive and can be extremely time-consuming.  Achieving organic certification can cost thousands.  I know one farm which spent nearly a decade working to ensure their land met organic standards.

There are nine organic certification bodies in the UK.  three of these bodies are based in the Republic of Ireland.  Each has been licensed by the EU to issue organic certificates to UK food producers.

Once a UK producer has achieved organic status, they can mark their food labels with the EU green leaf passport.  This symbol allows the food to travel throughout the single market with no further certification checks.

I wrote to Mr Gove as it was clear to me that leaving the EU would mean the collapse of this certification process.

The government’s contingency document confirms my fears but it also contains one crucial detail which may mean that organic production in the UK becomes financially unviable.

The document states that, “in the event of no deal”, all UK organic certificates will lapse.  UK organic certification bodies will no longer be authorised to issue organic status certificates to UK food producers.  The UK will have to set up a new system of organic certification.

Certification bodies will have to be licensed by the UK government.  This could be a lengthy process as the UK government will have to set up the certification system and carry out effective audits of the certification bodies to ensure that they comply with new UK-only organic standards.  Only after these bodies have been licensed by the UK government can new organic certificates be issued to food producers.  Existing organic food producers will have to reapply for organic status and pay certification fees.

The effect is immediate disruption to the supply of UK organic produce.

But it gets worse.  The contingency document states that the UK will continue to accept organic food produced under the EU system with no further checks.

So whilst UK production of organic food is disrupted, EU producers have full, unfettered access to the UK market.

So what if you want to export organic food to the rest of Europe.  Well, the contingency document is clear on that.  It must be noted that organic food is a value-added export product.

It is clear that once the UK becomes a third country UK organic food will not be able to use the green leaf passport. UK food described as organic will be subject to additional inspections at EU state borders and, if it uses the green leaf logo unofficially, will likely not be allowed access to the single market.

UK organic producers will have to be certified by an EU-based certification body which is licensed to operate within the UK.  Currently, no such body exists.

As the UK will be a ‘third country’, even if the producer is certified by an EU-licensed certification body, the food will need to be clearly marked as being of ‘non-EU origin’.

So UK exporters of organic foods will face expensive dual certification and this could be increasingly expensive if EU and UK organic standards diverge.  UK organic exports will likely face additional controls and barriers at EU borders.

Whilst UK producers flounder in the regulatory molasses of Brexit; with increased bureaucracy and additional costs; EU organic producers will have free unfettered access to the UK market; a distinct competitive advantage.

Such a competitive imbalance, and the likely reduction in margins due to the cost of additional UK bureaucracy, could easily make organic production in the UK unviable.

In this article, I have concentrated on one issue in one market sector; but this is just one example amongst thousands.  Similar issues occur across the UK economy, from toys, to pesticides, to motor vehicles, to financial services, cosmetics, metrology; to name but a few.

There is now six months until Brexit day.  Even if the UK government comes up with new systems of certification and regulation, it is highly unlikely that such systems will be in place for March next year.

Much of the media attention regarding Brexit has been focussed on custom’s tariffs.  But regulatory issues are a far more problematic concern.  Deal or no deal, the UK government’s failure to recognise the problems of regulatory divergence, and their appalling lack of preparation are going to be a costly and disruptive issue for UK business.

A prominent component in the arguments from Brexit was freeing the UK from EU bureaucracy.  Of what I have read of the UK government’s contingency plans, the solution to the loss of EU red tape is…..even more UK red tape.