Tag: marketing strategy

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.

Time and Technology

We live in a world where technology and science progress at an ever increasing rate.  It was probably millennia before man progressed to create the wheel. Life in the middle ages was not too different to life in Roman times. Yet today rarely a day goes by without a what once would have been considered a major scientific discovery.  Accelerating technological advancement has become the norm.  Progress affects commerce.  progress affect your business. So you have to be aware and plan for technological change.

There are plenty of examples of businesses ignoring technological change.  The big music retail chains ignored music streaming.  VHS rental became a thing of the past.  Kodak invented the digital camera sensor but then allowed others to develop the digital camera as they focused on film rolls.

Time affects many business resources: manpower, finance, raw materials, knowledge.  The trio of money, quality and time dominate.  To implement the quality demanded by those in the marketplace is often a factor of money and time.

Quality often relies on the available time to market and the technology needed to deliver that quality.  Technology includes the actual features of a product but the support functions used to produce that product.

You also have to consider the lifecycle of a market.  Over time markets develop, they often enter a technological stage.  This affects the consumers perception of the state of the market and your businesses position in that market.  Is your business seen as cutting edge or as old-fashioned?

However in some circumstances appearing old-fashioned can be seen as a benefit.  Take Fender guitars, they sell a lot of instruments which are still made on machines installed in the 1950s and which contain features like neck profiles and electronics which are all but identical to those of 50 years ago.  Many players of the electric guitar still prefer amplifiers which contain valve technology little changed since the early 20th century.

Technology also affects the level of automated support in the marketplace.  This isn’t just production line technology but secondary process technology such as raw material delivery technology, automated aftersales support technology and even automated marketing technology.

It can be industrial technology, like the creation of long-life egg powder for bulk bakers or 5 gigabyte memory cards for digital cameras. It can be workplace technology such as customer databases or production line automation.

There are four aspects to workplace technology:

  1.  Improving the speed of an activity
  2. Improving the precision of an activity
  3. Technology overcoming production limitations
  4. technology reducing costs and wastage

Time is important as it allows faster delivery of best value but it also creates pressures.  You need to be able to strategize faster, implement faster whilst meeting customer expectations faster.

That latter aspect requires careful market monitoring.  Consumer attitudes change over time.  Changing perceptions is fundamental to marketing.

Time can also be a competitive advantage.  Being first into a market, being ‘first there and best dressed’ has long been seen as an advantageous position with sustained market share.  However this view is dependent on a market being ready for the innovation and being both willing and able to assimilate it.

Reducing time required to complete a function can provide market flexibility.  Who hasn’t spent hours pouring over Gantt charts and production networks trying to match available resources to production deadlines?

There are four aspects to new product taxonomy:

  1.  Product renovation:  altering old products which are already in the market place, new designs, new features
  2. Creating copycat products: Products which use technology which exists in the marketplace but which is new to your business
  3. Commercialisation of in-house products – products which exist within your business (for business purposes) which are then marketed to the consumer market.
  4. True innovation: New products created from new emerging technologies.

Innovation implies increased complexity and thus increased risk.  You need to apply marketing functions to educate the market as to the benefits of the new technology

Time affects workplace technology.  You need to pace your time resource to meet market readiness.  You need to exploit technology to introduce innovation over complexity.  The technology may be complex but it needs to make things easier for the consumer.

In terms of marketing, time and technology need to be considered in both strategic and operational terms.

Strategically, time and technology need to be applied to sustain competitive advantage.  Operationally, time and technology need to be leveraged so as to enable first to market, to reduce costs, to develop better systems, etc.

In applying time and technology to your business, you need to be aware of the strategic advantage cycle:

  1. Observe your environment.
  2. Orientate your organisation to that environment
  3. Decide what you need to do to make that environment favourable to your organisation
  4. Act to implement your decision.

Your decision needs to advance and sustain a competitive advantage over your competitors.

Why Customer Service Matters – The Service-Profit Chain

A few years ago, I was reading an article by the motoring journalist Jeremy Clarkson about why he changed the format of the television programme Top Gear from one of journalism to one of entertainment.  One of the reasons he gave was that aerodynamics and mass manufactured components meant that many mass market cars were all but identical. To review these cars often meant focusing in minor details whilst over all performance was all but identical across the market.

So if products across a market are increasingly a homogenous mass, how do you differentiate your offer from that of your competitors. Increasingly service has become the prominent source of differentiation in developed economies.

Customer service, before and after purchase is an increasingly important part of a differentiation strategy.  When Kotler defined the marketing mix for goods, he included only 4 ‘Ps’.  Other marketing academics extended Kotler’s model by adding three more ‘Ps’: People, Process and Physical Evidence; but only in relation to services.

Today, all firms, both those who produce and supply goods, and those in service industries, need to develop a marketing mix which includes the service elements of the extended 7P marketing mix.

There is logic in making customer service matter in your organisation:

  1. Satisfied employees provide better customer service quality.  Satisfied employees stay longer in your organisation and they are more productive. they become more knowledgeable and are more committed to the goals of the organisation.
  2. Service quality is noted by customers and customer satisfaction is increased.
  3. Customers become more loyal and are ‘stickier’, they stay longer with your offer and its is harder for your competitors to prise them away.
  4. Loyal customers are more profitable.  The longer you keep a customer, the more you earn from them. Loyal customers spend more.  They cost less to serve and to promote to.  They are less likely to leave on the basis of price.
  5. There is a positive feedback loop: As employees become further satisfied, this reinforces customer satisfaction.

Developing strong customer service which is closely linked to your brand and corporate identity doesn’t just differentiate your company from your competitors, it is a source of improved revenues at reduced risk.

Kaplan and Norton, when they developed the Balanced Scorecard were thinking along these lines.  Remember, they directly linked:

  1. Better company learning and innovation; to
  2. Better systems and internal processes; to
  3. Better customer results: to
  4. Better financial returns, and those returns could be invested back to:
  5. Better company learning and innovation.

This leads us to the five dimensions of Servqual, the quality assurance system focused on reducing cognitive dissonance in the processes of interaction between an organisation and its stakeholders:

  1.  Reliability:  Your ability to provide services dependably and reliably.
  2.  Responsiveness:  Your willingness to help customers and other stakeholders.  Your willingness to act promptly.
  3.  Assurance:  Customers know you have knowledgeable and courteous staff who inspire trust and confidence.
  4.  Empathy:  You provide caring, individualised attention to stakeholders
  5. Tangibility:  Your service standards are reflected in the physical attributes of your facilities, equipment, and the appearance of your staff.

Running a successful business today is more than maximising profit margins or increasing manufacturing output.  You need a holistic view of your market and your organisation.  You need to improve service in a way which individualises your organisation and which differentiates your business from that of your competitors.  Bad customer service is far more likely to lead to loss of business and company failure that other factors.

 

 

Mintzberg’s Three Modes of Strategy

In the 1980’s the US management academic henry Mintzberg described three modes of strategy-making found in organisations.  Do you recognise your business in one of these modes:

  1.  The Entrepreneurial Mode
  2. The Adaptive Mode
  3. The Planning Mode

The entrepreneurial mode is characterised by bold, risky actions. The organisations role is defined as innovation, uncertainty and brokerage.  This is someone with capital viewing a marketing opportunity. It predominates in new organisations and those operating in new markets.  It is a policy of risk taking.

Entrepreneurial mode strategy is dominated by active scanning for new opportunities.  Opportunity is the driver of strategy and problems are secondary and often ignored.

Power in the entrepreneurial mode is often in the hands of an individual at the head of the firm. An example would be James Dyson, Elon Musk or Richard Branson.  These charismatic leaders often rule by decree.  Often there is no chartered plan of the organisation and operations are based solely on the bosses vision.  The aim is to make dramatic leaps forward in the face of uncertainty.  The CEO often thrives on such uncertainty.

The overall goal of an entrepreneurial organisation is growth, physical expansion of the organisation, not profitability.  Often this is the CEO wanting to build an empire.

This is a high risk strategic mode and there are lots of examples of existing firms pushing the entrepreneurial mode of strategic development and coming up short.  Jessops, the specialist camera retailer pushed its expansion just as the smart phone arrived, and failed spectacularly.  Pizza Express became a large scale high street restaurant chain; from the base of a single outlet which doubled as a jazz venue; and collapsed with over half a billion pounds of debt, roughly one million pounds of debt per restaurant.

And I have written at length at the collapse of Sinclair following the development of the C5 electric tricycle.

The Adaptive Mode is ‘the science of muddling through’ (Lindblom). It is disjointed incrementalism. The status quo is accepted and there is a lack of clear objectives. Decisions are remedial solutions and progress is through baby steps not giant leaps.  This is often an organisation coming to terms with a complex environment. Any strategy as a coping mechanism.  Focus is on short-term solutions not long-term existence.  Strategic solutions are often taken with a view as to reducing organisational conflict.

The adaptive organisation lacks clear goals and power is often divided between divisional managers and other stakeholders. Decisions are often made in incremental steps due to environmental complexity.  Feedback from stakeholders is often critical to decision-making.

This mode leads to disjointed decisions forced by diverse organisational demands (just look at UK nationalised industries during the 1970s).  Strategy is fragmented and there is no overall coordination. Often there is no overall corporate plan.

The planning mode of strategy development is often found in mature organisations, big businesses and government departments.  Complex analysis is used to define an organisation’s path into the future.  Analysis is undertaken before action is taken. Often there is anticipatory decision-making.  Decisions are interdependent across and organisation.  There is a formalised decision-making process.  Plans anticipate one or more future states.

There is rationality in decision-making through the systematic attainment of goals stated in precise quantitative terms.  Scientific technique is used to develop formal comprehensive plans.

In the planning mode, analysts work alongside managers and play an important part in decision-making.  Systematic analysis and statistics play an important part as a basis for planning. Cost benefit analysis is central to decision-making.

The organisation focuses on both new opportunities and problem-solving but always in a systematic structured way. Risk is analysed and after strategies are implemented, they are regularly reviewed,

The Planning mode is sometimes criticised for being slow, costly and unwieldy.

Most organisations will experience each of these modes of strategic planning during their life. Managers must be aware of the pros and cons of each mode.

 

 

Developing Competitive Advantage

Different industries offer different competitive opportunities: therefore different strategies are required.  There is no one catch all strategy that will be successful across all industries.

So to develop an appropriate strategy for your market, you need to identify the appropriate competitive advantages and hence develop appropriate strategies.

There are three steps to identifying competitive advantage:

  1.  Define the Industry:  What are the market boundaries? What are the ‘rules of the game’? Who are the other players?
  2. Identify the possible competitive moves so as to exploit competitive advantage: What is the life cycle stage of the market? If the market is mature there will be different competitive advantages to a market which is in its growth stage; and therefore different strategies will be applicable. How will the actions of your competitors affect the market?
  3. What is your generic strategy? Differentiation, Cost focus or niche?

Remember successful strategies are the successful completion of a series of competitive moves

The first step, identifying the boundaries of an industry is not as easy as it first appears.  Take a farm shop with a cafe and children’s petting zoo.  Is that business a food retailer and producer; or is it part of the catering industry, or is it part of a wider leisure sector?

In assessing an industry’s boundaries each identified business activity should add perceived value in the minds of potential consumers. That perceived value is the string of benefits accrued by obtaining a product or service.  Some of these benefits can be abstract such as self image. The price is determined by what people are willing to pay to accrue those benefits.  If consumers place low perceived value on goods or services, they will expect those goods and services to come with a low price.

The ‘game’ is to create a disequilibrium between perceived value and the same price offered by competitors. Two factors can be adjusted, the perceived value and the price. this leads to three main options:

  1. Offering more perceived value for the same price as your competitors
  2. Offering the same perceived value as your competitors for a lower price
  3. Offering significantly more perceived value but for a higher price.

We do not live in a world of perfect competition where price is the only differentiating factor between market offers.

Obviously every activity to produce goods or services has a cost. The accrued costs of production and supply set the minimum price level at which products can be marketed.  Your business system must remain profitable. External factors such as tariffs and taxes can affect that profitability.  UK businesses currently exporting in a tariff free environment will likely face pressure on profit margins if, as seems likely, not trade agreement can be agreed with the EU and the country reverts to trading on WTO schedules.

The best approach in a market is to offer the highest possible levels of perceived benefit for the lowest possible delivered cost.

In assessing the ‘rules of the game’, you also need to take into account the logic of the business system; how business activities coordinate to achieve a common goal.  Resources needed to achieve common goals also need to be examined e.g. People, technology and finance.

When assessing competitors you need to look at all market entrants, not just core competitors.  that means suppliers, distributors, retailers etc.  You need to know which market players will sub-optimise your whole business system.

Competitive moves are defined as the best way to utilise your defined business systems to provide perceived value.  This is achieving superior performance in at least one business system activity e.g. best after-sales care; or through the innovative combination of several activities i.e. your marketing mix. This is the basis of all successful marketing strategies.

In assessing which competitive moves you need to make, you need to know the stage of the life cycle the market exists in.  Competitive moves will be different in a new emerging industry than in a mature of declining industry.

To identify strategic groups use perceptual mapping.  Plot consumers perception of value (not product quality) against cost.

There are two forms of generic strategy: one dimensional strategies and out-pacing strategies.

One dimensional strategies affect either perceived quality or price.  They are a repeated single move with the intention of retaining a static market position.  They are defensive strategies.  Short life cycle industries, such as fashion will use one dimensional strategies focused on high perceived value.

Businesses with long life cycles such as commodities (gas, electricity, water, etc) can look at low delivered cost strategies.

Using one dimensional strategies in other circumstances can be dangerous.

Out-pacing strategies do not repeat the same strategic move over and over.  You outpace your competitors by moving from one strategic position to another through altering value options.  The timing of outpacing strategies is crucial.  This is very much a dynamic strategy option.

Pre-emptive outpacing strategies are often used by industry leaders to avoid attacks by competitors. Again this is predominantly a defensive strategy option.  this could include shifting the industry life cycle through the development of product standards.  You need to create a pricing reserve so as to invest in process improvements to allow a shift to low delivered cost strategy until the new industry standard is adopted.

Price can be leveraged to prevent market followers from generating cash flow needed to transition to the next industry stage. For example, many saw Betamax video recorders as the premium product but VHS was cheaper and VHS was able to become the industry standards for home video cassettes. Price can be used to prevent new market entrants; possibly through the creation of fighter brands.

Again, the timing pre-emptive outpacing strategies is crucial.

Pro-active outpacing strategies tend to require market maturity and lower growth rates.  The are used to escape maturity stalemate and to avoid destructive price wars. In effect you are changing the rules of the game.

Unbundling perceived value is a common outpacing strategy.  This is achieved through the use of value chain analysis.  You then remove unacceptable costs which do not add to perceived value.  this may be moving from high street stores to out of town warehouses, or even moving to internet distance shopping from traditional retail. Ikea went from a traditional furniture retailer to a supplier of flat pack self-assembly furniture.

Analysing the competitive advantage options in your industry is critical to the achievement of successful strategies.

 

 

 

 

Responding to Technological Threat

Products have a life cycle.  They are introduced to the market and the standard model of the life cycle follows an S-curve of growth maturity and decline.  Products go into decline for a variety of reason.  It could simply be a matter of public tastes changing. Today, a prominent reason for products entering the decline stage of the life cycle is technological change.

A prominent example of technological change leading to product decline is the market in processing chips.  Although there is some evidence that Moore’s law is no longer applies; for many years the market for chips followed the pattern of double the number of semiconductors on the chip every eighteen months. Of course, when the processing power increased, the old chips became obsolete.

History is littered with such changes.  The replacement of steam trains with diesel electric trains, the rise of the smartphone, digital cameras over film cameras.  The last of these examples is particularly interesting.  Kodak invented the digital camera sensor. They then let others develop it as Kodak continued to focus of producing film rolls. Kodak eventually had to file for bankruptcy protection.

Technology can destroy old industries and creates new ones.  In the 1960s very few saw a market for home computers.

Businesses are often faced with a host of technological threats.  Not just products but technological change in supply and distribution chains (e.g. e-books and music downloads), changes to customer habits (such as internet shopping, fast food home delivery apps), changes to production processes (e.g. 3D printing).  Good managers, or perhaps lucky managers, know some technological threats will never materialise as a threat but others will have a major effect on their business.

It is common for new technology to be developed outside and industry and then applied to that industry.  Often the new technology is developed by new firms entering the market (disruptors)

New technology is often crude and expensive at the outset and sales of old technology may initially continue to grow following the product life cycle curve.  However, the old technology tends to decline within 5 to 15 years of the new technology being introduced.

Existing firms in a market can respond to the new technology in two ways:

  1. Develop new products containing an improved version of the old technology
  2. Fight on two fronts; continue with the old technology whilst developing a presence in the market for the new technology.

When new technology arrives, an existing market member may be facing a host of new market entrants.

So what are the potential strategic responses to the arrival of new technology:

  1. Do nothing
  2. Monitor the new technology through environmental scanning and forecasting
  3. Fight the new technology using public relations; or in extreme circumstances through the courts.  For example, Apple and Samsung fought a long legal battle over the technology in each others smartphones.
  4. Increase organisational flexibility to be better able to address technological threats
  5. Avoid the technological threat by withdrawing from the market and going and doing something different.  John Menzies went from running high street newsagents and stationers to becoming a trade distributor of computer peripherals.
  6. Improve the existing technology in your market e.g. more efficient and cleaner petrol and diesel engines.
  7. Maintain sales by modifying your marketing mix – Price cutting, increased advertising budgets, better after sales service: a non-technological response.

You could also participate in the new technology.  Dyson bought the firm holding the patent for solid state rechargeable batteries with the intention of putting them in his now abandoned electric car project. He also bought a ventilator patent from researchers when the UK government called for a simple design of ventilator in response to Covid-19.

Such participation in new technology can be seen as a defensive action or as an attempt to achieve market leadership.

In deciding to adopt new technology, you need to assess the strategic dimension.  What is the level of acceptable risk?  What commitment in terms of finance, non-money assets and time does adopting the new technology require? What is the correct timing of the commitment? Do you capture early adopters or aim for the mass market? Do you develop the new technology within your firm or do you gain the technology through acquisition?

 

Fragmented Markets

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

the following factors are indicators of a potentially fragmented market:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So how do you cope in a fragmented market?

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

To survive in a fragmented market companies will need:

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

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

 

Evaluating strategy

This week, Matt Hancock, the UK government health minister, announced that he had met his self-imposed target of carrying out one hundred thousand tests for the Covid 19 virus.  Except he hadn’t. Seventy three thousand tests had been carried out and a further forty thousand testing kits had been posted to households.

Most sensible individuals would not count a test kit posted as a completed test and would only consider kits returned to laboratories for analysis as a completed test.  What Hancock had done was the long-practised political tactic of ‘moving the goalposts i.e. if you aren’t going to hit the target, you change the target.

this was the second time this week he had done so.  Earlier in the week, he claimed to have met the stated target for supplying personal protective equipment to healthcare workers. However, he only achieve that target by counting surgical gloves individually, rather than in pairs.

In politics you might just get away with such chicanery; in business you cannot.  You need to set SMART objectives.  You must have the resources and capability within your business to achieve those targets.

Business strategies cannot be formulated or adjusted in an environment of changing circumstances without a process of strategic evaluation.

For many strategic evaluation is a simplistic process of collating business returns e.g. growth rates, profit margins, growth in turnover, etc.

However, this line of reasoning often misses the point of the intended strategy.  Critical success factors are often not directly observed and are not easily measured.  Often strategic opportunities and threats appear only when it is too late to measure them.

So strategic evaluation must look beyond simplistic statistics and financial returns. You need to consider the health of your business over the long-term.

You also need to keep one eye on the future and many business metrics, particularly financial metrics look to the past.

Strategic evaluation asks three questions.

  1.  Are business objectives appropriate?  Do they meet the SMART criteria? Do they fit your organisational culture and do they match the expectations of your market?
  2. Are your policies and plans appropriate?
  3. Do results obtained to date confirm or refute the central assumptions on which the strategy rests?

Answering these questions is not simple or straightforward.

Every business strategy is unique.  Your organisation’s culture and the environmental effects on your business will give a different effect that that affecting your competitors.  In short there is ‘no one best way’ and you cannot succeed by simply copying the practices of others in the market.

The central concern of strategy is the selection of goals and objectives.  This requires situational logic.

Strategic review can create conflict within and organisation.  This often relates as to who is best qualified to give an objective evaluation.  You need ‘management by more than results’ but this often runs counter to modern management thinking.

In science, theories can never be proven absolutely true.  However, they can be proven absolutely false if they do not withstand repeated testing. Similarly in business no strategy can be proven optimal, but you can test for critical flaws.

Testing business strategies should fit within four broad categories:

  1.  Consistency:  Is the strategy inconsistent with your businesses wider goals and policies? Is it consistent with your organisational culture?
  2. Consonance:  Strategy must be capable of an adaptive response.  It must be able to change as the environment changes.  Again we must consider the UK government’s current strategy as to obtaining a trade deal with the European Union following Brexit.  It is generally recognised that big, complicated trade deals take significant time to negotiate and agree.  Often they take one or more decades.  The UK government is adamant that it will not extend the Brexit transition period and that a trade deal must be agreed by December.  This timescale appears rushed in normal circumstances.  In the aftermath of the Covid-19 pandemic, this timescale appears to be lunacy.  the government policy has no consonance.  It is unable to adapt to changing circumstances.
  3. Advantage:  Does the proposed strategy create a sustainable competitive advantage?
  4. Feasibility:  Does the proposed strategy fit within your existing resources and not create unsolvable sub-problems?

If your strategy does not pass one of these four tests, it is likely to be a flawed strategy.

Remember competitive advantage is created through having superior resources, superior skills or creating a superior position, than your competitors.

So in selecting a strategy for your business:

  1.  Does it take advantage of special competences that exist in your business and which are needed to answer questions raised by the strategy?
  2. Does your organisation have sufficient internal cohesion, coordination and skills to deliver the chosen strategy?
  3. Does the chosen strategy have the ability to challenge and motivate key personnel?

To maintain a competitive position in a changing environment you need a dual view of strategy and strategic evaluation:

  1. Within day to day operations; and,
  2. In building systems and structures which make strategy delivery an object of daily activity.

Turning things around

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

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

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

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

Most turnarounds affect:

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

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

There are two types of strategic turnaround:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Communications Strategies and the Communications Mix

Fill (2002) outlined four strategic approaches to the marketing communications mix; the Promotion element of the marketing mix.  These are:

  1. Positioning
  2. Audience
  3. Platform
  4. Configuration

A positioning strategy uses market analysis and segmentation to create communications strategies focused on the achievement of SMART marketing goals.  This approach aims to target finite resources efficiently and direct communication effort to the most valuable markets.  This approach has three parts; segmentation of the market; selection of target segments and positioning within markets.

To successfully achieve a positioning communications strategy, you need choose the market segments most attractive to your firm; matching your organisational goals so that you maximise returns.  A positioning strategy should position your products and your brand to meet the perceptions and expectations of target audience.  You therefore need to know your consumers needs.

You must also recognise that everyone has four states of identity:

  1. The Worry Self
  2. The Actual Self
  3. The Idealised Self; and
  4. The Fantasy Self

So which of these identities do you want to target.  Insurance firms target the worry self; Firms selling family hatchbacks target the actual self. Firms selling designer clothes target the idealised self; luxury brands often target the fantasy self.

A positioning strategy is key for developing brands. You develop a brand position which shows what the brand does, what the brand means and how the brand gives value.

FMCG (fast-moving consumer goods and other highly competitive, low margin sectors often favour a positioning strategy.

Positioning is an audience focused, not a product focused activity.  It is focused on brand meaning, brand values and differentiating your brand from that of your competitors.

Audience based strategies focus on the different ways items are purchased and the supply chain.  For example, the audience for consumer goods tends to be individuals whereas the audience for industrial goods tends to be buying groups which contain influencers. the decision to purchase a new piece of machinery will be made by a group within an organisation but that group will contain ‘influencers’ who initiate and advise on the purchase e.g. the Production Manager.

So your communications strategy will alter depending on the audience your message is intended for.  Your audience could be the end users of your product such as consumers, it may be your suppliers and retailers or it could be other stakeholders in your business such as shareholders and financiers.

This means there are three audience-focused communications strategies:

  1. Push strategies intended to target supply channel members.
  2. Pull strategies which target end users.
  3. Profile strategies aimed at third-party stakeholders.

Push and pull strategies work in relation to how product is drawn through the distribution chain.  You use push communications, such as sales representatives and trade press advertising to push your production onto the shelves of retailers and wholesalers (this can include using communications to attain prime locations in stores such as eye-level shelves.  Pull strategies , such as television advertising, target the generation of demand in the end users of your production i.e. you target consumers who then demand that retailers stock your goods.

Profile advertising is similar to a positioning strategy as you use communications to secure your identity in the minds of third parties.  This could be using PR and your corporate website to attract investors.

An audience strategy is about using the right communications tools to lock your products and brands in the minds of the intended audience.

All too often I see firms, particularly SMEs focusing much of their communications budget on social media advertising.  Some of this, like YouTube advertising is Pull advertising no different to traditional TV and Cinema advertising.  However, much of social media communication is push or profile communication.  It’s intention is to build a brand identity and develop customer retention.  It is a pretty poor way to lock your brand identity into the needs of consumers or to attract new customers.

You cannot operate solely on a pull strategy or a push strategy.  You need a bit of both.  You need to communicate with end users to generate demand and you need to communicate with intermediaries to ensure that that demand can be satisfied.

A platform strategic approach aims to express a brand promise through brand values and differentiated claims.  But to do so it must be consistent and be anchored in corporate principles.  It involves the development of a brand theme which is made up of consistent promises.

There are three platform types:

  1. Creative – Messaging consistent big ideas across different communications channels.
  2. Brand Concept – Which are routed in the brand identity but use different creative ideas (Guinness advertising is a brand concept strategy)
  3. Participation Platforms – using interactive channels such as social media to engage in dialogue with end users.  the aim is to integrate the brand into people’s lifestyles.

The final strategic approach is a configuration strategy which focuses on the way communications are structured.  This strategy is based on the form and format of communications e.g.

  • The frequency of contact between parties
  • The direction of communications either vertically down distribution channels or horizontally across a market.
  • The modality of the communication – how it is to be transmitted e.g. print, digital, TV, Radio, person to person, etc. Whether communication is formal or informal; regulated or spontanious.
  • The content of the communication is it a direct advertisement or is it indirect communication such as PR and social media chat? Does the message directly focus on a subject or is it a ‘nudge’ to alter behaviour.
  • The exchange relationship – Is the communication aimed at creating a long-term collaborative relationship or is it an ad-hoc, one off contact?
  • The climate within which the communication is sent e.g. the level of trust between parties, compatibility between parties, etc.
  • The power dynamic: Who holds the power in the relationship, you or your customer?

None of the above strategies are mutually exclusive and you will find many organisations using a combination of all four strategy types in their communications mix.