Tag: product development

Wha’s Like Us?

Over the Christmas period, I took my usual trip to my parents in Scotland.  It was there that I noticed three linked news stories.  The first related to a medical research project aimed at the reduction of type 2 diabetes.  Patients diagnosed with type two diabetes were placed on a strict diet rather than being prescribed drugs.  The results of the survey were startling with the vast majority of patients reversing their diabetes symptoms.

Type 2 diabetes is often the result of obesity and poor diet.  It appears that if a patient sticks to the diet they are given, there is a good chance that they will not require a lifetime on prescribed drugs.

Scotland, particularly the west of Scotland has horrific statistics for obesity, poor diet and early death.  This has a direct impact on the health service and if the incidence of type 2 diabetes can be reduced it will have a direct implication on health service budgets.

The second two stories related to the sugar tax which was introduced in the 2016 budget. The tax is aimed at soft drinks containing high levels of sugar.  As a marketer what interested me was the way two soft drinks producers reacted to the new tax, Coca Cola and A.G. Barr.

Barr’s produce Irn Bru, famously “Made in Scotland from Girders”; in truth, made in Scotland using a staggering amount of sugar.  In response to the new tax, Barr’s announced that they would changing the secret recipe of Irn Bru to reduce the sugar content.  This announcement has led to Irn Bru addicts stockpiling cans and bottles of the beverage.  A petition has received thousands of signatures and asks that Barr’s increase the price of Irn Bru to cover the tax rather than reduce the sugar content.    One comment on the petitions states that the recipe shouldn’t be changed as it is only the high sugar content of Irn Bru that cures an individual consumers hangover.  Wha’s like us indeed!

Coca Cola, in reaction to the sugar tax, have announced that they will not be changing their recipe but that Classic Coke would be sold in smaller bottles and at a higher price.  A 1.75 litre bottle of Coke will be reduced to 1.5 litres and will cost 20p more.

It must be noted that, in Scotland, Irn Bru outsells both Coca Cola and Pepsi.

The sugar tax is an attempt by government to ‘nudge’ consumers into making healthier choices.  One of the first acts of David Cameron as Prime Minister was to set up a cabinet office team (now a semi-privatised business called Behavioural Insights) to apply nudge theory to public policy.  The team’s work is based on the work of Richard Thaler, a behavioural economist whose nudge theory won last years Nobel prize for economics.  The aim of nudge theory is to use economic and other factors to achieve the unforced compliance of political and economic aims.  rather than banning high sugar content in soft drinks, the sugar tax makes them more expensive.  Consumers, hopefully, will balk at the high price of the drinks and select cheaper, healthier options instead.  That, or fearing lower sales revenue, manufacturers will change their formulations.  Another example of behavioural economics are the plastic bag levy.

When preparing a strategic marketing plan, it is important that businesses undertake an analysis of the market environment.  This takes in two levels of interaction, with the macro-environment and the micro-environment.  The micro environment, often expressed in terms of Porter’s five forces, includes stakeholders such as consumers.  The macro-environment, often expressed in terms of the acronym PESTEL, includes wider political, sociological and economic factors.

The sugar tax should be included in such an environmental analysis.  Clearly it is politically motivated, it is aimed at changing societal norms, it has an economic impact and there will be a reaction from consumers (such as the petition).  It will also have an impact on those firms supplying sugar to the soft drinks trade.  A significant quantity of the sugar in soft drinks is corn syrup.

Clearly, faced with the same problem, Coca Cola and A.G. Barr have come up with different strategic solutions.

Coca Cola is a worldwide brand and he classic Coke recipe is the same in every country.  A.G. Barr is a regional soft drink manufacturer.  Barr’s market is predominantly the UK and the vast majority of sales of Irn Bru take place in Scotland.  It is unlikely that Coca Cola would want to produce one recipe of Classic Coke for the UK market and a different recipe elsewhere in the world.  Coca Cola’s reaction to the sugar tax is to reduce the quantity in bottles and to raise their price.

Barr’s have taken another route to compliance, rather than raise the price of Irn Bru, affecting sales in their main market, they have chosen to alter their secret recipe.

What must be taken from these two different positions is that marketing strategy may be different for firms operating in the same market and facing the same issue.  When deciding on strategy, you must consider a wide range of individual factors impacting your business.  Just because one of your competitors takes a particular course of action, that does not mean such a strategy is right for your business

Blue or Red Ocean

An important element in the management of a brand is innovation.  Successful brands are constantly innovating; developing new products and services, developing how those goods and services are delivered and developing new promotional channels.

As products move through their life cycle, they are continually innovated, packaging is redesigned, new features and functionality are added.  Take Listerine: It is currently sold as a mouthwash for bad breath but it started life as a household cleaning detergent.  Take Canon cameras: they launch a new model every six to twelve months and each time there is product adaption such as GPS, internet connectivity and ever higher pixel counts on the cameras sensor.

When looking for new products there are three possibilities:

  1.  An existing product class to meet an existing consumer need.
  2.  A new product class to meet an existing consumer need
  3. A new product class to meet a new consumer need (possibly a need the consumer is yet to realise they have).

An example is Apple.  When Apple launch a new iPhone, it is launching an existing product class to meet an existing product need, the mobile phone.  When it launched the iPod, it was launching a new product class, the digital music player for an existing consumer need, a portable music device.  Apple’s original product, the desk top computer was a new product class, the home computer, for a new consumer need, having a computer in the home instead of in the office or laboratory.

When computers were developed after the World War Two, they were seen as tools for science and mass computation.  In the mid-1970s following the invention of the silicon microchip, computers could be put on a desk but no one considered them a product for the home, they were business tools for accountancy and word processing.  It was innovators such as Sir Clive Sinclair and Steve Jobs who saw the possibility of a computer for the home and with the ZX 80, Sinclair was the first to put his to into that, Blue Ocean.

A word which is in common parlance currently is ‘Disruptor’.  Many business leaders, such as Sir Richard Branson, have disruptor programmes.  Disruptors sit neatly in the second of the three categories.  They are individuals who aim to create new product or service classes to meet disrupt existing market expectations.  These are businesses looking to do things differently and to present a radical marketing mix.  This is was is often termed as Blue Ocean Marketing.

In recent years, many researchers have focused on Blue Ocean Marketing and they have highlighted prominent successes such as Ryan Air, Amazon and Ocado.  Another example of blue ocean marketing is the estate agency business where companies such as Sarah Beeney and HouseSimple are breaking down the value expectations of the traditional estate agency market.

It is generally accepted that markets grow by the reduction of unit prices.  The home computer market is one such example where the cost of a PC has fallen dramatically in real terms.  Unit price falls and sales volumes increase.

However, when a market becomes mature the goal is not to increase sales volumes through expansive growth but to obtain the market share of your competitors.  Often it is not a case of increasing sales volumes but increasing sales value.

No one considers brushing their teeth six times a day.  Most people stick to brushing twice a day, or three times at most.  Our usage of toothpaste doesn’t change so we are unlikely to buy more toothpaste.  However, we may be persuaded to change to a different brand or to buy a more expensive version of toothpaste because it promises to whiten our teeth, kill bacteria or cure bad breath.

Businesses in mature markets aim not to sell more but to get consumers to pay more.  It is not an accident that Dyson vacuum cleaners are amongst the most expensive on the market.

To allow premium pricing, many brands aim to find value innovations, a more for more strategy.  This involves building an unprecedented bundle of marketing mix attributes.

Blue Ocean disruptors often aim to break this model.  They suppress certain value innovations and promote themselves on a single value attribute.

Take as an example Premier Inns.  They broke the accepted rules of the hotel.  They realised that there were huge numbers of consumers who didn’t use hotels.  Hotels were for the wealthy or paid for by your employer.  Students, OAPs and Other demographic groups tended to use B&Bs or to stay with friends rather than the premium prices of hotel chains.

So Premier Inns and the likes of Travelodge removed some of the value innovations of traditional hotels.  There is no room service.  Room decor is basic.  There is no mini bar of satellite TV service.  Breakfast is either from a vending machine or it is a self-service buffet.  These companies offer a value innovation of a hotel bed at a discount price but to enable that price they removed many of the traditional attributes of a hotel stay.

A critical element in blue ocean marketing is ‘identifying your oilfield’; the bundle off value attributes which are not offered by other providers.  Often this can be through identifying an area of market growth not utilised by others.  This can even be areas which others in the market see as unprofitable.

Blue ocean marketing is often a high risk strategy.  For every blue ocean success, there are thousands of failures.  Take Bic as an example.  Bic was an early blue ocean pioneer.  It applied blue ocean strategies to the pen market.  Until Bic invented the disposable ballpoint pen, writing implements were seen as premium products.  People would buy expensive fountain pens which would last a lifetime.

Bic then applied the disposable pen model to the cigarette lighter market.  Again smokers would buy a refillable lighter which would last many years.  Bic soon became the market leader in the lighter market.  Bic applied blue ocean marketing principles again, taking on the likes of Gillette in the razor market.  Again success.

However, Bic then tried to enter the mobile phone market competing with the likes of Ericsson and Nokia.  Bic produced a phone which was able of making calls but which didn’t have the accessories offered by their competitors such as games, internet access and a camera.  The Bic mobile phone was an utter disaster.

Other blue ocean firms, such as the Easy group, best known for the value airline EasyJet, have also had mixed fortunes in applying blue ocean strategies outside their original markets.

Blue Ocean innovations are risky.  The television programme Dragon’s Den is replete with failed blue ocean pitches.  Only a small minority of blue ocean innovations succeed.  So is it worth considering only blue ocean marketing?  Is it always advisable to ditch traditional incremental product innovation and to offer a radical alternative offer.  Is the concept of making a superior product to your competitors dead and is  modern marketing solely the strategy off meeting consumer needs in a different way?

Traditionally product innovation was all about creating a superior offer.  However, some marketing academics dismiss this approach as ‘Red Ocean’.  A blood filled sea of cutthroat competition where sharks fight to consume a shoal of tuna.

These academics argue that market disruption is the concept of our times.  To succeed you must think in a  radically different way and blue ocean marketing is the methodology.  To succeed you must think differently and offer distinct value propositions.  You must look at existing market beliefs and challenge them.  You must suppress some traditional product or service attributes and enhance those which promote difference.

However, these studies often concentrate solely on blue ocean success stories ignoring the many failures such as the Bic mobile phone.

There are also lessons to be learnt from Blue ocean failures:

  1.  Value innovations are not the only way to create new brands
  2. Value innovation – suppressing an attribute seen as necessary by existing market players – is no guarantee of success if there is insufficient demand for that innovation.
  3. Value innovation can lead to no innovation at all.

Some of the most successful products and brands in today’s market rely on traditional ‘red ocean’ innovation.  The iPhone is one such example.  It’s success is through the constant innovation of an existing product by adding better or additional functionality.

So if you are considering a new product or entering a mature market, do not only think of blue ocean innovation or a radical marketing mix.  Sometimes the answer is just to provide a superior product to your competitors.

 

 

Why firms use Brand Extension

The Ansoff Matrix tells us that brand extension as a growth strategy is a riskier option than market penetration and market expansion; although it is less risky than diversification.  Ansoff also stated that brand and product extensions should only take place once market penetration and market expansion opportunities had been exhausted.  So in today’s marketplace, why do so many firms choose brand extension as their primary method of growing their brand?

Well the answer is that many of today’s commercial markets are mature.  Market Penetration and expansion opportunities are scarce and increasingly costly.  Rather than starting from scratch in a new market, it is easier to enter it with an existing brand.

In his book The New Strategic Brand Management, J.P. Kapferer give advice on whether brand extensions is an appropriate strategy.  He strongly believes that in mature and luxury markets it is necessary.

Many luxury brands use extension as a core business model.  In these markets it can provide increased brand power and profitability.  This is why major names in the fashion industry introduce perfumes, luggage and watches.  Some fashion designers, such as Victoria Beckham extend their design services to products like cars.  Mrs Beckham apparently designed the interior trim of the Range Rover Evoque.

A successful brand extension relies on the business’s ability to create a distinct competitive advantage through leverage of existing reputation in a new, growing, market sector.

Kapferer argues that five basic assumptions must be met if a brand extension is to succeed:

  1. The brand must already have strong equity and a strong asset base.  Trust levels with consumers must be high.  The extension must offer strong customer benefits, both tangible and intangible.
  2. Assets must be transferable to the extension.  Consumers must believe and acknowledge that the new extension product will be endowed with the benefits already associated with the brand.
  3. Extension products must offer a real perceived competitive advantage in the minds of consumers compared to the products of competitors.
  4. The brand’s values must be relevant to the market segment into which it will be extended.  However, the segmentation of the new market should be done in such a way as to make it difficult for competitors to react quickly.
  5. The brand extension must be competitive in the long run.  That means you need to provide sufficient resources to achieve market leadership and to develop productivity.

Brand extension can also be a defensive strategy.  It can also be linked to efficiency and productivity measures.

  1. Firms use brand extension to reduce media and other costs.  Rather than the expense of separate campaigns for different products, they are merged into a single mega-brand.
  2. Some brands operate in declining product categories.  To avoid market contraction and closure, these brands need to expand into new segments.  In 2003, Porsche entered the 4×4 market.  A time when the market for sports coupe was declining.
  3. In business to business markets, brand extensions can evolve as a result of the need to provide ever-increasing customer value.  For example, a firm providing office cleaning services may begin to offer the provision and maintenance of house plants, or furniture, or art, to its existing customers.  British Gas faced new competition when the UK utilities market was opened up to competition.  They extended their base by offering domestic white goods maintenance to their existing customers.
  4. A brand’s market can be cyclical or seasonal.  Brand extension may be necessary to flatten out that cycle.  The Bill Paterson film, Comfort and Joy took inspiration from a real life  and very violent war between the operators of ice cream vans in Glasgow.  The real war was a very nasty affair between organised crime gangs who were using the vans to sell drugs.  In the film, it was a battle to preserve territorial boundaries.  The main protagonist of the film, a radio DJ played by Bill Paterson, got the competing firms to cooperate by extending their brands into the sale of deep-fried ice cream fritters which could be sold in the winter. (the film was made before the advent of the deep fried Mars Bar).
  5. Brand extensions can also be a result of a firm having insufficient resources to maintain a wide brand portfolio.  By merging brands the costs of packaging and promotion can be shared.  Scarce resources can be targeted on productivity or quality improvement.  In such circumstances, brand extension can a curse into a blessing turning a house of brands into a branded house.
  6. Brand extensions can get round promotional and advertising restrictions.  The promotion of tobacco products is widely prohibited.  Brands such as Dunhill are now as well, if not better known for their luggage and accessories than their cigarettes.  In many states it is illegal to advertise prescription drugs directly to consumers.  Pharmaceutical firms therefore extend their brand into over the counter medicines.

Brand extension can be a risky growth strategy but if you are operating in a market which is mature and meets the above circumstances, brand extension may be a better option than a full diversification.

Are you thinking strategically

A few years ago, I carried out a metrological inspection of a local factory.  I was escorted around the factory whilst carrying out my various duties by the company’s production manager. The production manager was in high spirits. After many years, he had finally got his board to employ an American efficiency consultant.  The consultant was to look at their production processes and suggest productivity improvements.  I jokingly quipped that the best such measure would be for the company to move premises. The production manager smiled wryly. I suspect this was also his view but he would never get such a measure through the firm’s family dominated board.

The factory had been built by the family firm in the 19th century.  It had been located on its current site; on the edge of the town centre and next to the railway station; for over one hundred years.  The factory was on one side of the main thoroughfare into town.  The company offices sat on the other side of this busy road.  It was a rabbit warren of buildings and often the easiest to move from one production department to another was to walk out of one door onto the main road and walk along the pavement to another entrance.  The factory site sloped meaning that many of the production processes happened on different ground levels.  Despite being next to the railway station, the company’s products were predominantly delivered by road.  This meant that lorries and tankers had to traverse narrow streets many of which were now residential.  Beside the factory were railway arches which were too low for many commercial vehicles.  Many parts of the factory were dark, dingy and dirty.  There was a real problem with rodents and major electrical re-wiring was urgently needed.

Another division of the same company was as a house builder and many of the estates around the factory had been built by that company.

The production manager wanted to improve productivity and to grow production but he had little available space to store raw materials and finished products.  As much of the equipment used in the factory was bulky, the factory had effectively been built around it.  This meant that the business was stuck with aging infrastructure which was difficulty and costly to maintain.  It was also virtually impossible to reconfigure production lines for more efficient processes.

The production manager could also see that tactically it was a good time to carry out a move.  The area of town where the factory was located was a target for regeneration.  The local council had plans to carry out significant improvements to the area.  Many of the light industrial buildings which used to be located around the railway station had either been demolished or converted to make way for housing.  A big project was underway to attract new residents to the town.  At the same time, a new business park, partly funded by the local development agency was expanding on the town’s northern edge.  Not only did the business park open up the possibility of a modern factory on a single level, it had direct road links to the local motorway network.  Transport logistics would be much easier.  A modern factory, on a single level would also allow for easier production line ergonomics and the implementation of just-in-time stock control.  A new factory would allow room for production to expand to supply more customers and new markets.  A new factory would allow for increased product development and entry into different market segments.

I could also see marketing advantages.  The company manufactured high quality specialist lubricants for the automotive and aeronautical sectors.  Many of their high-profile customers premises looked more like scientific laboratories than production facilities.  For example, the company supplied many of the leading sports car manufacturers operating in Formula One and other leading race series.  It supplied companies such as British Aerospace and Airbus.  Surely it would be advantageous for two major elements of its marketing mix, its process and place, to attempt to mirror that of its major customers?

A few months later, I returned to the factory to carry out some follow-up work.  I asked the production manager about the consultants report.  I was told it had been rejected out of hand by the controlling family.  They had voted to stay put in the factory their antecedents had built.  The consultants carefully presented arguments about efficiency and modern production processes were dismissed out of hand.  The board baulked at the initial capital costs of a move and ignored the long-term efficiency savings of a more modern facility.  It seemed history and tradition was more important than future viability.

Strategic business management has changed over the last forty years.  Aaker (1995) described these changes:

  1. Budgeting – This was the traditional method of allocating resources in a strategic manner.  Budgets were allocated to various functions and monitoring of these budgets was used as a method of controlling complex processes.
  2. Long-Range Planning – This was a move away from annual budget settlements.  Greater emphasis was placed on forecasting future market events.  The extrapolation of trends was used to plan future sales, profits and costs. Long-range plans were used as a basis for decision-making.
  3. Strategic Planning – A specific overall direction of travel for a firm would be determined and control of planning activities centralised.  Trends are used to examine the overall business environment.
  4. Strategic Management – This is the situation today.  Strategies are formulated and their implementation managed.  The focus of planning and forecasting is putting agreed strategies into practice.  The focus of strategy is managing change and transforming the business to meet current market conditions.

Marketing too has seen change.  Initially industry focused on making products.  The more you made the more successful you would become.  This focus on production ignored important things such as the quality and consistency of products or the needs of consumers.

Company’s then developed a product focus where the aim was to reduce wastage, reworking and increase product consistency.

The trend then moved to a sales focus.  Marketing activity was focused solely on increasing sales.  Many firms still have a structure where marketing activity is predominantly focused on sales figures and promotional activity.

Today many organisations are applying marketing practices across all of their functionality.  The focus is to meet the individual needs of customers.  For example firms such as Brompton Bicycles, Mini and Reebok allow customers to effectively design their own products from a seemingly endless range of product options.

The lubricant manufacturer is still located in my local town centre.  They are now storing finished products in an additional building (which involves transferring barrels of product by fork lift across a street which is a bus route).  This building had preciously been leased to a gym chain and the rental income used to offset some costs.  This rental income has now been lost and what was once a dance studio and function room is now filled with barrels of oil.

It seems that the company has been set in aspic.  I suspect that its ability to be fleet of foot and to explore new markets has been seriously hampered.  I also suspect that its ability to adapt to new customer demands and to defend against attacks by competitors has also been hampered.  I suspect the firm is surviving and defending its market position rather than being at the forefront of changes in its market.  It had the chance to change and modernise.  It didn’t take it and I hope that decision doesn’t harm its viability in the long-term.