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.

Is Marketing Planning a Strategic or Tactical Process?

Last week in this blog I complained that too many small and medium-sized enterprises see marketing solely as a tactical exercise. I regularly see small businesses advertising for marketing staff and predominantly the job description focuses on day to day activities such as writing social media content, designing print adverts or entering product content onto websites. These activities are no doubt related to marketing; BUT THEY ARE NOT MARKETING.

That last statement may seem counter-intuitive but bear with me.

Advertising is an activity closely linked to marketing.  It is the process which will likely follow the determination of a marketing mix. You can also say the same of sales force management, copywriting and web design.  Those are all activities which derive from the creation of a marketing mix. Marketing isn’t the derivative activities needed after the creation of a marketing mix; it is the analysis of the market, and of an organisation within that market, and the development of a plan which allows that organisation to make best use of profitable gaps in that market.

Marketing is the process of taking the aims, goals and mission of an organisation and putting a consumer focus upon them.  Marketing is the process of giving an organisation a clear and differentiated identity in the minds of consumers.

Business Planning should be structured and systematic process.  It has three main components:

  1.  Objectives: which have to be achieved,
  2.  Actions: which define how objectives are to be achieved
  3.  Resources: what is required to implement those actions

Corporate planning involves creating objectives for all parts of a business.  It is the overall coordination of an organisation’s functionality. Different functions contribute to common organisation wide goals e.g. turnover, profit generation and dividend value. A corporate plan will integrate functional objectives e.g. productivity levels, creation of market share, sales volumes, cash flow, efficiency, quality assurance.

So a corporate plan which aims to improve customer retention will likely lead to a marketing plan focused on key account management and customer service; a human resources plan aimed at attracting high quality staff and an operations plan focused on quality control and assurance.

A strategic corporate plan will be integrative; coordinating functional activity towards common goals.  It will take a whole organisation view and provide collective targets for functional groups.  It’s aim should be to provide focus by defining the overall scope of a business e.g. the markets served, the nature of its activities, so appropriate functional strategies and tactics can be developed.

Corporate plans should be concerned with making major business decisions over the long-term and set required resource profiles.  A corporate plan should match the organisation to the current and future business environment.

I suspect the senior management of many small businesses get the fact that corporate plans are long-term strategy documents. What they then do is assume that anything below the corporate plan level is a short-term tactical planning process.  So marketing is a campaign to campaign process where ad hoc activities are collated in the short-term. So a corporate plan is for five years, but a marketing plan is annual, or seasonal.

Many businesses will also see a marketing plan as being at the same level as other functional plans. I do not see marketing planning in this way.

Marketing is about having a consumer focus to your business.  That focus should be represented in your marketing mix. We know the seven Ps of that mix; Product, Price, Promotion, Place, People, Physical Evidence, Process.

So a marketing plan will directly influence other ‘functional’ plans.  So the process element of the mix will directly affect your operations planning; the price element of the mix will affect your financial planning; the place element of the mix affects your distribution and logistical plans; the people element will affect your human resources planning; The physical evidence element will affect your location and facilities planning; and so on.

So marketing planning is not a traditional functional plan. It sits between your corporate plan and your functional planning because your marketing plan reflects your corporate plan and influences your functional plans.

In truth marketing is both a long-term strategic process and a short-term tactical process. Your marketing plans should have both long-term goals and targets and short-term activities which deliver those long-term goals.

A marketing plan should have a broad focus that defines the market and your organisation’s place in that market.  Bear in mind that the information and problem-solving at this level may appear unstructured, external to the organisation and speculative.

So marketing can impinge on long-term strategic processes such as new product development.  This is strategic marketing planning.

Marketing planning can also be short-term.  These are the day to day activities involved in keeping your organisation on track with its strategic goals.

For example, your strategic plan may require your business to be the market leader (in terms of market share) within five years. However, the market is not static. it changes constantly. New competitors enter the market; others leave; consumers are fickle and change their preferences. So to achieve your long-term strategy, you need to constantly tweak the tactics used to achieve your goal of gaining market share.

So tactical marketing is the process of adapting your plan to the changing market.  This often involves addressing structural processes which are internal to your organisation and which may be repetitive.

Too many SMEs view marketing as only a short-term, tactical, exercise.  They ignore its strategic intent. Marketing is both a long-term corporate process AND a short-term functional process.

Marketing planning is key to adapting to environmental change, allocating resources, consistency in business practice, integration of activities via the marketing mix, motivating and communication with stakeholders and developing control over your organisation.  Marketing is not simply the process of producing some adverts or putting up social media content.

 

Positioning Services

In the Brexit debate, much attention has been paid to UK having some form of custom’s union with the European Union.  Conservative politicians who support Brexit, fear such a union will remove the UK’s ability to make trade deals with other nations.  Jeremy Corbyn speaks of a unique ‘custom’s union for goods’; different from the existing EU custom’s union which includes Turkey but which does not include Norway and the other EFTA nations.

What these statements from UK politicians shows is that very few of them understand the details of international trade.  They talk of WTO rules as if they are some sort of magic bullet; not the least worst option in trade; the fall-back position; the last resort of world trade; trading terms so ‘favourable’ not a single nation in the world uses them.

Corbyn’s comment about a ‘custom’s union for goods’ is a clear indication that our politicians don’t know what they are talking about.  Custom’s unions are almost universally focused on goods.  They do not deal in services.  Service markets face different restrictions such as compliance with professional standards and government legislation.  The EU, in recent years has worked hard in recent years to remove such barriers from its single market.  The EU Services Directive, is one piece of legislation that looked to ensure that service providers could operate across the bloc.  This included attempts to provide a level playing field in terms of professional qualifications and standards.  The Consumer Credit Directive, which was largely based on the UK Consumer Credit Act 1974, looks to create a single legislative framework for the sale of unsecured loans across the whole of the EU.

In debating a ‘custom’s union for goods’, UK politicians appear to ignore the fact that since the 1980s Britain has developed as a services-based economy.  Politicians seem focused on manufacturing; they are ignoring the needs and necessary environment for service providers: Which are now the majority part of the UK economy.

Marketing services is different from marketing goods.

Services have immediacy.  They are time dependent.  Once an aircraft has taken off, you can’t put any more passengers on it.  You can’t put any more diners in a restaurant once the sitting has finished. Once a play has started, you can’t put any more patrons in the audience.  This leads to a need to balance supply and demand.  Airlines and holiday firms do this by operating fluid pricing strategies.

Increasingly services are dependent on technology.  They are often delivered remotely and by distance communication tools such as the telephone and the internet.

Increasingly, customers are involved in the delivery of services.  For example, the business who works closely with the developer to design a website.

Increasingly, customers want a customised service to meet their individual needs.  Again, a business may want a bespoke database and will employ a service provider to build it.

Positioning is about creating a distinctive place in the market for both your company and the services you provide.

This requires two decisions to be made:

  1. The choice of a target market: Where you want to compete.
  2. The creation of differential advantage:  How you want to compete.

So in positioning services, you need to be aware of the particular needs of your target customer.  These needs will determine the target segment of the market.  You then will need to create a services marketing mix which creates differential advantage based on those customer needs.

For services, the extended marketing mix was created.  This extends the 4P mix developed by Philip Kotler (Product, Promotion, Price, Place) and adds three additional ‘P’s; People, Process and Physical Evidence.

Target marketing is based on market segmentation and using positioning tools based on the needs of defined customer groups and their price sensitivity.

Using targeting tools and designing your mix for defined customer segments does not preclude sales to customers outside those groups but by targeting your marketing activity, you make best use of scarce resources such as financial budgets.  targeting marketing is targeting resources on your core customers.  Sales to those outside that core are a bonus.

As stated above, there are three additional elements to the services marketing mix:

  1. People:  People are critical to the provision of services.  Often the creation of a service and its delivery are simultaneous.  People occupy a key position in a customers perception of service quality.  Bad staff often equates to bad service so it is critical to get the right people. Training, monitoring and the REWARDING of staff is critical to good service quality.  People aren’t machines so body language, tone of voice and attitude matter. Airlines spend significant time and money training cabin crew to ensure these attributes send the right message.  If people enjoy their work, this often comes across in their body language.  Systems such as SERVQUAL aim to eliminate harmful interactions by reducing opportunities for cognitive dissonance.
  2. Physical Evidence:  This is the environment in which a service is delivered.  It is tangible evidence of service quality.  When you travel on an airline is your drink served in a plastic tumbler or a glass?  When Gordon Ramsay does a ‘Restaurant nightmare’, a big element of his revamp is to change the restaurant décor. physical evidence can be changing the ergonomics of a service e.g. the layout of equipment in a gym.  There was an outcry when Ryanair proposed ‘standing room only’ on its aircraft (although that was a likely attempt at PR spin).
  3. Process:  is the mechanisms, procedures and flow of activities by which a service is delivered.  Process changes such as the elimination of queuing can radically affect service delivery to target consumers and therefore differential advantage.  So theme parks sell priority tickets which allow patrons to dodge queues.  Airlines offer first class and business lounges. Cruise firms will pick up customers from their homes.  Others such as Amazon Prime offer reduced delivery times.

In Big Ideas in Services Marketing (Berry, 1987), seven guidelines for services marketing were declared:

  1. Marketing happens at all levels of an organisation.
  2. there must be flexibility in service provision (the ability to customise services).
  3. You need to recruit high quality staff.  You need to treat them well and communicate withthem clearly.
  4. You need to increase the usage of services by marketing to existing customers; customer retention is key.  to keep customers you will likely need to offer service extensions.
  5. You need a quick response facilities for customer service and complaint resolution.
  6. You need to engage with new technology to deliver better service at lower cost.
  7.  You need to differentiate your service through branding.  Branding works the minds of target customers.

 

 

Using Portfolio Matrices to Plan for the Future

In previous blog entries, I have discussed the Boston Consulting Group Growth/Share matrix as a tool for product portfolio management.  However, this matrices is seen by many business academics as flawed.  Some academics have tried to amend the BCG model and even the BCG have attempted to mitigate the matrix’s defects through other tools, in particular their Growth/Gain matrix.

Given the difficulty in developing a model of portfolio management, several large multinational firms employed academics to build portfolio management tools.  Two of the tools developed are the General Electric Multifactor Portfolio Matrix and the Shell Directional Policy Matrix.

The General Electric Matrix compares the attractiveness of a particular market or market segment with your business’s competitive position in that market.  The matrix does not rely solely on market growth.  A number of market attractiveness measures are used including:

  1. Market Size
  2. Market Growth Rate
  3. Beatable Rivals
  4. Market Entry Barriers
  5. Social, Political and Legal Factors

Similarly competitive strength is not based solely on market share.  Again a number of criteria can be selected including:

  1. Market Share
  2. Business Reputation
  3. Distribution Capability
  4. Market Knowledge
  5. Service Quality
  6. Innovation Capability; and,
  7. Cost advantages.

When using the GE matrix, management decide which criteria are to be used.  Each factor is weighted.  The weighting of all factors combined cannot exceed ten.  Each factor is then given a relative importance out of ten.  By multiplying the weighting with the importance factor, a score for each factor is calculated. These scores are added to give a market attractiveness and competitive position score for each product line.

These scores are then plotted on a 3×3 matrix.  From this matrix, five strategic zones are defined:

  • Zone One: In this zone both market attractiveness and competitive position is strong.  The aim for products in this zone is to build and manage sales for market share growth.  This equates to star products in the BCG matrix.
  • Zone Two: In this zone, your competitive position is strong but the market is not particularly attractive.  The proposed strategy is that you manage the product for consistent profits whilst maintaining market share.  This zone equates to BCG matrix cash cows.
  • Zone Three: Here the market is highly attractive but your competitive strength is relatively weak.  It is a zone where the strategic product policy can be determined by the relative strength of your competitors.  If your competitors are weak or passive, your strategy would be to build the products position in the market. If you face strong competition, the aim would be to retain the existing market position of your product.  If your commitment to the market is low, your aim would be to harvest the product for cash.
  • Zone Four:  Here both competitive position and market attractiveness are weak.  This position is similar to a ‘cash dog’. This could be a product in a declining market or a dog product which is difficult to divest (e.g. a required accessory).  This is a product to be harvested for cash
  • Zone Five:  Here both competitive position and market attractiveness are extremely weak.  The aim should be to divest the product. To run down production or to sell it to another party.

There have been a number of criticisms of the GE matrix.  It is a richer tool in terms of content and it is therefore more flexible. However, it is much harder to use than the BCG matrix and it can be affected by managerial bias, power games and empire building.  Decisions on the use of the matrix and resulting strategies need to be made above the level of strategic business units.

The Shell Directional Policy (created by research financed by Shell Oil) does something a bit different to the GE matrix and the BCG matrix in that it looks to the future rather than relying on existing product portfolios.

The Shell Matrix compares the attractiveness of a market or segment with the potential for profitability in that market.  Again multiple weighted factors are used to give products scores. Again a three by three matrix is produced which delivers eight strategic positions:

  1. Leader: Here a firm has strong competitive capabilities and strong profitability prospects.  this is your core market where you have a leadership position.
  2. Growth Leader:  Here prospects for profitability are average but you have strong competitive capabilities. Here you look to improve the prospects of profitability using tools such as value chain analysis.
  3. Try Harder:  Here prospects for profitability are strong but your competitive capabilities are only average.  the aim is to improve those competitive capabilities through training and recruitment.
  4. Double or Quit:  Here prospects of profitability are strong but your competitive capabilities are weak.  So the decision is whether it is worth investing in improving those capabilities.
  5. Custodial Growth:   Here both profitability and competitive capabilities are average.  This and Double or Quit are similar to the Question Mark products of the BCG matrix.
  6. Phased Withdrawal:  Here profitability is average but your competitive capabilities are weak. The aim is a managed withdrawal from the market or segment.
  7. Cash Generation: Here you have strong competitive capabilities but the prospects for high profit margins are weak.  This equates to the BCG matrix cash cow.
  8. Disinvest: Here both competitive capabilities and profitability prospects are weak.  This is a dog product ripe for disinvestment.

Both the Shell Matrix and GE matrix require significant levels of information gathering and analysis. However, if your in business, shouldn’t you be doing this anyway?

All portfolio management matrices have strengths and weaknesses.  When using these tools you must be aware of those strengths and weaknesses.  perhaps the best option is to use these matrix tools in combination.

These are tools to help strategic decision-making: They are not the source of mandatory instruction.

So use these tools, in full awareness of their attributes to give a rounded and comprehensive view of your product portfolio.

Declaring Your Mission

On a number of occasions during my career, I have been part of teams tasked with writing an organisational mission statement.  When managers have approached the team the task the response has been one of despondency.  “it isn’t my job to define the corporate mission”, colleagues have complained. “This is not part of my job”, they gripe. “Surely our mission is obvious”, they grumble.

Often the document produced is bland, generic and tells stakeholders nothing about the individuality of the organisation.

But a clear mission statement which defines the unique purpose and which distinguishes your business from that of competitors is critical to the business planning process.  The mission statement should also define the boundaries within which you want your organisation to operate.

A properly drafted mission statement combines your primary objective and your core organisational values.

There are four major influences on the content of a mission statement.

  1.  Corporate Governance:  To whom is your organisation responsible? What is the regulatory framework in which you operate? Who oversees your organisational executive? Who does your organisation serve?  What constraints are placed on senior management to ensure the rights of stakeholders are upheld?
  2. Stakeholders:  Who are you customers? Your suppliers? Shareholders; Distributors: Retailers; and the wider public.  Are your organisational policies equitable to all groups or do you favour particular stakeholders?  What power and influence does each group wield?
  3. Business Ethics:  What are your organisation’s views on social and corporate responsibility?  What are the cultural attitudes and beliefs of the society(ies) where you operate?
  4. Cultural Context:  Your mission will be affected by the cultural environment.  there will be the internal culture of your organisation and the external culture of society.  Both must be reflected in a mission statement.

Often mission statements are either too narrowly or too broadly defined.  An American shipbuilding firm’s mission statement simply says, “We make good ships”.  this statement has only a product focus and tells you nothing about the organisations wider values and the environment within which it operates.

The mission statement of Scottish Power appears to be too broadly defined:

“To be recognised as a highly-rated utility-based company trading in electricity, other utility and related markets, providing excellent quality and service to customers and above average returns to investors”

What does the Scottish Power say about the organisation.  The mission statement appears to be saying the obvious, it appears generic and trying to be all things to all stakeholder groups. If anything, it reflects the public sector, bureaucratic history of the organisation.

Richer Sounds, the specialist Hi-Fi and home electronics retailer has a mission statement which doesn’t mention electronic audio; although it does say work should be fun.

Is your mission statement too broadly or too narrowly defined?

Successful mission statements are:

  1.  Credible:  It should reflect realistic ambitions from the view of your stakeholders?
  2. Specific Capabilities:  Embrace your core expertise.  Relate that expertise to your organisational future.
  3. Aspiration:  The mission statement should act as a source of motivation to the people in your organisation.  This should matter more than financial returns.  The mission statement must make individuals want to commit to your organisation and encourage internal stakeholders to make valuable contributions.

However, you need to define the boundaries of your ambition within a mission statement.

  1. Product Scope:  How do you categorise your products?  Do you do so in technological terms? Do you offer different products in different target markets or segments? Do you categorise products individually or collectively?
  2. Market Scope:  Who utilises your products?  Are you focused on a B2C or a B2B market?  What demographic groups do you target?  Do you target particular industry segments? What distribution channels do you use?  What features of the consumer do you target?
  3. Geographic Scope:  Are you a ‘local shop for local people’?  Are you regional? Are you national? Are you international?
  4. Stakeholders:  You need to consider both internal and external stakeholders.  Internal are stakeholders with a particular interest in your organisation.  Michael Porter talks of five internal stakeholder groups – ‘The Five Forces’ affecting an organisation.  This includes staff and unions, shareholders, management and business owners.  There are primary and secondary external stakeholders.  Primary external stakeholders include suppliers, distributors, financiers and your competitors. Secondary external stakeholders have a looser relationship with your organisation and include government agencies, local government, political pressure groups and society in general.

As the aim of a mission statement is to give clarity to your business purpose, it cannot be bland or poorly defined.  Some firms use the mission statement to declare strategic intent.  Others prefer to declare such intent in a separate vision statement.

You may receive the following attitudinal responses to the idea of a mission statement:

  1.  Faint Support:  Stakeholders will pay lip service to the mission statement especially if it is dominated by the views of management whose attitude is that stakeholders and corporate governance are constraints on the organisation.
  2. Passionate Support:  This is where the mission statement is central to the values and philosophy of managers.  The mission statement becomes the driver of corporate aims and aspirations.
  3. Dissipated Mission:  Strategic decisions are the responsibility of external stakeholders concerned with corporate governance and regulation.  This is common in public sector bureaucracies.  Sometimes the mission becomes lost; dominated by day to day management and tasks.  This was a criticism of BS5750 companies before the standard morphed into ISO9000 series.  Firms using the standard were criticised for having incredibly well documented systems despite the product of those systems being poor.  The mission focus appeared to be concentrated on process and not the results of that process.
  4. Non-consensual Mission:  Passionate external stakeholders dominate your mission, particularly those stakeholders with strong ideological views.  It becomes impossible to create an organisational mission which satisfies all stakeholder groups’ demands.  Your mission may become highly political.  An example is the nationalised industries of Britain in the early 1970s.  The country entered a period of industrial strife as unions argued that the organisational mission was to satisfy the demands of their members, not the customer, not management and certainly not the demands of government.  If your mission is non-consensual, your organisation will suffer.

A mission statement is a reference point for your strategic decision-making.  It is therefore critical that you take time, thought, and care over its development.

Beware the Big Bad BCG

When I say beware of the big bad BCG, I am not referring to Roald Dahl’s friendly giant.  I am also not referring to the inoculation every UK teenager gets and which produces a large purple pustule on your arm.  What I mean by the big bad BCG is the Boston Consulting Group’s Growth Share Matrix which is a prominent method of portfolio analysis.

Drucker (1963) identified that portfolio analysis was an important strategic marketing tool.  He declared that it helped firms:

  • Identify tomorrow’s breadwinners
  • Identify today’s breadwinners
  • Identify products capable of making a contribution to turnover
  • Identify yesterday’s breadwinners
  • Identify also-rans; and
  • Identify failures.

Every student studying business at college or university is taught the Boston Consulting group growth share matrix as the predominant method of analysing a company’s product portfolio.  However the matrix must be treated with care and it cannot be used in isolation.  Doing so could lead to some very expensive mistakes.

The BCG matrix plots the rate of market growth for a product or strategic business unit (SBU) against that product/SBU’s market share when compared with the largest competitor in the market. The latter is plotted on a logarithmic scale.

When using the matrix to examine product portfolios, you must consider the future potential of the market.  This can be achieved through using the market growth rate as one of the matrix elements.

What results from the matrix is an expression of a products competitive position.

The 2×2 grid produced in the matrix relies on four assumptions:

  1. Margins and funds generated increase with market share as a result of experience and scale effects.
  2. sales growth depends on cash to finance working capital and increases in capacity.
  3. To increase market share you need to invest cash which supports share-gaining tactics.
  4. Growth slows as  products reach life cycle maturity.  At maturity, additional cash can be generated without loss of market share.  This cash can be used to support new products and those which are in the growth segment of their life cycle.

Each of the four quadrants produced by the matrix has a distinctive name:

  1. Dogs:  These products have low market share and low growth.  They produce low profit levels or even losses.  They take up valuable management time.
  2. Question Marks:  (previously known as Problem Children)  These products have low market share but high growth.  They require cash investment if they are to succeed with an improved market position.  Often these are adolescent products entering the growth stage and there is a strategic choice between supporting them or divesting: picking winners and losers.
  3. Stars: These products have high market share and a high growth rate.  These are often market leading products.  Cash is needed to maintain market position and to defend against competitors.  Often star products are not the most profitable due to the cost of maintaining market position.  However, over time these products can become….
  4. Cash Cows:  These products have high market share but a low growth rate.  These are often established mature products.  These products generate cash which can then be used to support stars and selected question marks.  Often these products produce economies of scale and high profit margins.

Harris et al. (1992) expanded the matrix to add two additional ‘quadrants’:

5.  War Horses:  which have high market share but negative growth

6.  Dodos:  Which have low market share and negative growth.

A further suggested group is products which sit between cash cows and dogs.  These ‘cash dogs’ can be harvested for additional margins.

The BCG matrix suggests four potential product strategies:

  • Build:  Increase market share by investing in a product or SBU
  • Hold:  Defend your current position (useful for cash cows.
  • Harvest:  Increase short-term cash flows (Dogs and rejected question marks).  This is for products with no long-term future where you mortgage the product’s future for short-term gain.
  • Divest:  Get rid of products which are a drain on turnover and make better use of the money invested in them elsewhere.

There are significant pitfalls with the use of the BCG growth-share matrix for portfolio analysis.  It needs care in its interpretation.  It provides a snapshot of the current position.  It often results in products being required to meet unrealistic growth targets.  It also requires that products and SBUs need individual management.

Other typical mistakes in the use of the BCG matrix are:

  • Businesses investing heavily in an attempt to improve the market position of dog products
  • Businesses maintaining too many question mark products which means that resources are spread too thin.
  • Draining cash cows of funds which weakens them prematurely.  Alternatively investing too much in cash cows so funds cannot be used to support question marks and star products.
  • Seeing portfolio analysis as offering more than a contribution to management of products and that a products position produces only one potential strategy e.g. You must only defend a cash cow or that you must divest dog products.

For SMEs, the BCG matrix can be a poor tool to use.  It is unlikely that an SME’s products are going to be market leaders unless they operate is a specific niche market.

Properly used, BCG growth share matrix is a relatively easy to use tool for management and can offer a useful basis for strategic thought.  It can help identify product portfolio priorities.

However, it can be a poor guide for wider strategies as only market growth rate and market share are considered and other market factors are ignored.

It is difficult to calculate market share, particularly that of your competitors.  Smaller firms will nearly always have a smaller level of market share than that of multinationals.  The model driven by the matrix sees cashflow as being dependent on market growth.  This is not necessarily the case.

The BCG growth-share matrix fails to recognise the nature of marketing strategy and the forms of competitive advantage which will lead to success.

If you are going to use the BCG growth-share matrix, it is best to do so in conjunction with other portfolio models such as the GE strategic direction matrix,  The BCG growth-gain matrix and the Shell Directional Policy matrix.

 

Views of Academics on Strategy Development

It is generally accepted that marketing strategies are developed with assessments of the market, managerial expectations and organisational capabilities.

However, strategy and planning remain two of the most misunderstood words in the business lexicon.

Mintzberg described strategy development as having five attributes:

  • Planning – the direction of the organisation
  • Ploys – to deal with and outwit the competition
  • Patterns – a logical stream of actions
  • Position – how the organisation is located in the marketplace
  • Perspectives – Reflections of how the management team view the world.

Peter Drucker summarised these attribute as: What is our business? What should it be?

Mintzberg went on to describe eight types of strategy:

  1.  Planned strategies:  Deliberate and precise intentions
  2. Entrepreneurial strategies:  Emerging from a personal vision (emphasised by businessmen like Elon Musk and SpaceX)
  3. Ideological strategies:  The collective vision of the management team
  4. Process strategies: Which result from an organisation’s leadership taking control of a process
  5. Umbrella strategies: Based on objectives set by the organisation’s leadership.
  6. Disconnected strategies:  Set by organisational sub-units and only loosely connected.
  7. Consensus strategies:  Where members of an organisation converge on strategic patterns
  8. Imposed strategies:  Where the external environment dictates a pattern of actions upon an organisation.

The extent to which strategies are achieved is often determined by the way in which organisational resources are allocated.

The need for an organisation to plan is straightforward:

  1. Plan to co-ordinate activities
  2. Plan to ensure the future is taken into account
  3. Plan to be rational
  4. Plan to control

Richardson and Richardson (1989) found eight critical problems for planning:

  1. How best to manage and identify organisational stakeholders.
  2. How to anticipate the long-term.
  3. How to plan for the foreseeable things that can go wrong.
  4. How to turn product or market dreams into reality.
  5. How to create cost-cutting and contribution-creating opportunities.
  6. How to create a responsive team culture which combines resources to meet changing market conditions and to increase customer satisfaction
  7. How to create a base for innovation
  8. How to make the most of the unexpected; both opportunities and to survive shocks.

Over the decades academics have disagreed on the best approach to take when developing strategies.  Mintzberg describes the following strategic schools:

  1.  The Design School:  Where there is a focus on strengths, weaknesses, opportunities and threats (SWOT analysis).  This leads to clear but simple strategies and there is very much a top down approach to strategy development.
  2. The Planning School:  Where strategy is developed through formal distinct steps which are driven by planners and senior managers.
  3. The Positioning School: driven by academics like Michael Porter and the Boston Consulting Group.  Strategy development is an analytical process based on generic strategies with a focus on hard data.  This approach to strategy uses techniques like game theory and value chains.
  4. The Entrepreneurial School:  Where the focus is on the chief executive or another figurehead e.g. Richard Branson, James Dyson, or Elon Musk.  There can be real issues with this approach when the figurehead is no longer around.  Apple suffered when Steve Jobs left and there were concerns following his death. Similarly the death of Anita Roddick of the Body Shop.
  5. The Cognitive School:  Where the focus is on the mental processes underpinning strategy.  The focus is on cognitive biases and how information is processed e.g. SERVQUAL
  6. The Learning School:  where strategy is developed through a series of small incremental steps e.g. Kaizen.  Strategy and implementation are inter-related.
  7. The Power School:  Strategy development derives from those who hold power.  It results from the politicking of organisational players.  On the micro-organisational level this is the power plays of managers and union officials.  On the macro level it relates to joint ventures and both vertical and horizontal integration.
  8. The Cultural School – where strategy is based on common interest.  Social progress is created through the organisational culture.  This is best exhibited by Japanese management culture in the 1970s and 1980s.
  9. The Environmental School:  Strategy focuses on the demands placed on an organisation by its environment (‘contingency thinking’).  Environment limits strategic options.

Mintzberg argues that each of these schools only views a part of the strategic picture.  They are two-dimensional views of the strategic picture.  He proposes a further strategic school which creates a 3D image; The Contingency School; which combines the best aspects of all the other options.

Whittington (1993) describes four approaches to strategy formulation:

  1.  The Classical Approach:  Which is underpinned by economic theory.  There is a focus on profit maximisation.  This approach requires rigorous intellectual analysis and there is a view that the internal and external environment can be controlled.
  2. The Evolutionary Approach: Where strategy cannot control the environment.  Managers recognise strategic options and keep them open as long as possible.  Long-term strategies are seen as unproductive and you are better off using a series of short-term strategies.  An overall strategy emerges as short-term strategies succeed or fail.
  3. The Procession Approach:  Small steps turn into a strategic pattern.  One strategy builds on those which have come before.
  4. The Systematic Approach:  The focus on the implementation of strategies is crucial and is influenced by the organisational culture.  Strategy needs a social context.  No one strategic approach is suitable for all organisations.

Too many businesses do not consider their approach to strategy.  In SME’s, ‘the way we do things round here’ and the views of the business proprietor often dominate.  Many businesses would be best placed to employ an external expert to help them manage the strategy development process. This individual can identify and debunk organisational biases.