Tag: Risk

Understanding and managing market share risk

Firstly, lets define market share.

Market share is the total sales of a product or service in a specified market expressed as a percentage of the total sales by all entities offering a similar product or service.

The market share metric was originally created to measure the sale of tangible products in consumer markets it is a measurement which has enduring popularity.  The most precise way to calculate market share is sales as a percentage of the total defined market over a specific period of time.  Market share is possibly a flawed measure of marketing success.  There is no accepted formula which links market share to profitability and it is a difficult measure to apply to services and intangibles.

That said, too many businesses focus solely on financial metrics and not on wider measures of their position in a market.  Carillion issued returns showing a glowing financial situation only a few months before insolvency hit.  Historical financial statistics can, and often are, manipulated; even if it is just to lower the tax bill.  You need to look wider at the position of your firm in the market to ensure survival in that market.

Market share has five main components:

  • Target Market Risk
  • Proposition Risk
  • SWOT Alignment Risk
  • Uniqueness Risk
  • Future Risk

Market share risk is a function of strategic strength.  If you have a weak strategy, it is likely that you have high market share risk; and vice versa.

Understanding and managing market share risk requires the appreciation of the need to engineer the chosen target customer group and you value proposition.  This process is best achieved through the application of marketing due diligence diagnostics.

Target market risk arises from having a poor definition of your target customers.  This is especially important if you target customers are heterogenous.  If you have a single value proposition and your target customers are not all the same (who is?), then the proportion of your target customer group your offer attracts is the upper limit of your market share.

Target market risk is high when marketing strategy does not target defined market segments but targets weakly defined classifications of customers.  Recently the most commonly used weak classification was ‘millennials’; This refers to adults whose eighteenth birthday was after the year 2000.  This is an especially weak category as the term millennial could apply to over one third of the UK population.  That is not a defined target market.  It is also weak to define your market in terms of particular goods and services.

The way to reduce target market risk is to have a deep understanding of both your market and of market segmentation techniques.

You need to carry out rigorous market segmentation processes to analyse your market. This reduces target market risk, which in turn reduces market share risk and thus business risk.

To create real market segments:

  1. Accurately define your market
  2. Decide where the purchase decision is made e.g. Consumers decide which TV to buy but your Doctor will often decide which prescription medicines are needed. You need to fill in the gaps in the following statements:  Our market choice is made at …….. level by ………….
  3. You need to decide what drives the decision to purchase.  Is it hygiene factors or motivator factors.
  4. You then need to cluster your customers by the motivator factors which drive them. Clusters are often driven by needs.
  5. You then need to find your customers within the wider market.
  6. Then you need to test your chosen segments.  Are they accurate? Are they viable? Are they distinct? are they accessible? Are they homogenous?

To reduce proposition risk you need to ensure that your offer appeals to your target customers.  too many entrepreneurs create a product and then try to find customers who are willing to buy it.  Surely it is better to define a target group and then to create a product which meets the needs of that target group?

A major component in proposition risk can be the battle within a company between creating customised products and true mass production. Customised products are those ‘made to measure’ for a particular customer.  Mass production is the creation of identical products for all consumers.  It is the Savile Row suit versus the Burton suit.

Customisation can create luxury product but it is expensive to customise.  Mass production allows for economies of scale.  The problem is that expensive customisation may be the best way to reduce proposition risk.

Offering the same product to two or more market segments may be sub-optimal but it may be the best mix between maximising economies of scale and minimising proposition risk.

Some firms, such as BMW Mini and Brompton Bicycles offer mass customisation.  This often requires highly efficient just in time procedures and significant levels of technology.  Mass customisation will never be as cost efficient as true mass production.

When considering mass production you must also consider your product halo; the services you offer beyond the core product.  There is the extended product, the services and optional extras you offer beyond the core product, and there is the augmented product, the status, emotional associations and ownership experience felt by your customers.

Fender owns the Squier brand of electric guitar.  Often there is little to distinguish a basic Fender guitar from a high-end Squier guitar.  So if the products are of equivalent quality what would you choose.  I suspect most guitar players prefer to have the Fender name on the guitar headstock.

It is therefore possible to have a mass produced core product but to offer a variety of service options and optional extras to suit the needs of heterogenous consumers.

to lower proposition risk, you need a clear understanding of the nature of your value proposition, its components and its attractiveness to consumers

SWOT alignment risk is where your strategy does not align with organisational strengths and weaknesses; or it fails to exploit opportunities; or it fails to defend against threats.

Previously, I have criticised many business start-up programmes for getting new business proprietors to do a SWOT analysis without going further and defining strategies to deal with SWOT issues.

SWOT analysis requires the alignment of internal business factors with external market factors.  It is not simply the listing of these factors.  You must use SWOT analysis to identify key market factors and to suggest key issues.  You must then develop strategies to address these issues.

So BMW’s strength in engineering excellence allow their vehicles to be marketed as a driving experience and status symbol not just a car.  Apple’s focus on design allows their products to be aspirational and ‘cool’.

Weaknesses are only weaknesses if they are meaningful to the customer and it is uncommon, i.e. not shared by all suppliers in the market.  A weakness must also be costly or difficult to correct to be a true weakness and it must not be able to be compensated by other factors.

A strength is a strength if:

  • it is valuable to the customer
  • It is rare (not possessed by competitors)
  •  It is imitable (hard to copy)
  •  it is aligned i.e. you are best placed to leverage the strength.

Uniqueness risk is lowered by not going head on against your competitors.  If all competitors have the same offer it is easy for consumers to switch preferences.  Uniqueness risk is usually a result of poor targeting.  Remember much of marketing strategy is about the creation of difference and creating competitive advantage through that difference.

Today’s strong market may be tomorrow’s weak market.  I recently watched a repeat of the programme Who Do You Think You Are? which focused on his links to the Kilner glassware firm.  Clarkson wondered where the fortune of his Kilner relatives went.  The truth is that the glass bottle and jar market collapsed with the arrival of new plastics and his ancestors made a critical error in not buying new bottling technologies which were snapped up by their competitors.

The Kilner’s business failed because they did not properly assess future risk. Similarly, the record industry failed to properly assess the future risk of download technology and allowed Apple and other non-music related firms to dominate their market.

To prevent future risk, you should constantly be scanning your macro-environment, use PESTEL analysis.  If a high level of future risk is evident in your market, you need to accurately forecast potential market change through future scenario building.  you cannot sit in your comfort zone.  Look beyond your existing market for potential new entrants and disruptors offering new market models and supply technologies.

 

Evaluation of decision-making

How do you make decisions?  Do you use a structured analytical process or do you use gut-feeling and hunches?  Do you just copy the actions of your competitors – creating a ‘me-too’ culture?

Working on hunches, gut-feeling or relying on assumption can be a dangerous path in making business decisions.  If it leads to a ‘me-too’ culture it can destroy important points of difference and weaken your competitive advantage. Worse it can mean wasting scarce resources and budgets on products and plans which have little or no chance of achieving your stated goals.

For example, a couple of years ago, I met with a businessman looking to develop a recipe costing app for chefs and caterers.  Discussing this product with the businessman, I asked how the product calculated the mark up of a finished dish.

His response was that all catering businesses used the same basic formula for calculating profit margins i.e. the whole industry was using a simple cost-plus method of price calculation and that every dish on a menu had a similar profit margin element.

This assumption astonished me.  I went to my office and did some desk research.  I found that the proposed product was working on a myth.  Worse it was predicating a practice which most academics teaching at catering colleges, and to students on hospitality degrees, thought inappropriate and a bad practice.

The restaurant trade is probably the riskiest business sector.  Up to 80% of new restaurant businesses fail within the first year.  Often the cause is poor cash flow.  Perhaps one reason is that catering businesses were relying on the poor pricing practice of a common mark up rather than pricing their meals in terms of the value customers see in them, rather than a flat accounting formula.

The above product had been developed with an incorrect and dangerous assumption at its core.  And so its viability and attractiveness to prospective customers was fatally flawed.

Worse, decisions about this product were made without proper research and proper evaluation of its workability and feasibility.

Over the years, I have also met numerous businesses who do marketing the ‘wrong way round’.  They design a product and then go searching for a market for that product.  Surely a better approach is to examine the needs and wants of the market, and to design a product to meet those needs rather than assuming that a market exists for a preconceived product.

A common activity during my years of food law enforcement was meeting farmers’ wives keen to diversify into cake or jam-making.  Usually this was because they had won a prize at the local Women’s Institute or the had been told by friends that their home-made jam was delicious.  These new start businesswomen had often only carried out the least amount of marketing research possible.  They had carried out no research into the viability of mass production of their recipe; no research into the amount of competition already operating in the homemade jam market; no research into the law regarding the sale of jam (that jam is a prescribed description with strict compositional standards of sugar and fruit content); and no research into developing year round production, not simply seasonal production.  There was little or no thought amongst these prospective jam-making businesses if they were attacking the competition head on; no attempt to find market gaps and develop products in those gaps.

Good decision-making is based on three factors:

  1.  Intelligence –  Do you have all the appropriate intelligence which enables you to make the decision?
  2. Alternatives – Have you explored all the possible alternatives?
  3. Evaluation – Have you evaluated the feasibility, suitability and acceptability of the  outcome of your decision; both for your target market and also within your organisation (the physical, human and financial implications).

Decision-making needs to be objective.  You need to understand the potential implications of your decisions and have contingencies in place.

Such pre-planning does not make decisions infallible but you will greatly reduce the risks inherent in the decision and increase your chances of success.

Prevarication in decision-making is also dangerous.  Continually delaying decisions can be as dangerous as not making the decision in the first place.  you shouldn’t wait to make a decision because you have failed to gather every miniscule piece of information connected to it.  You need information which relates to what is most probable and what is most prominent in relation to the decision. One of the most important factors in today’s markets is swiftness of decision-making and this may make it more dangerous to delay a decision than to make the wrong decision.

If you are aware of the risks associated with a decision, and the probability of those risks occurring, you can plan contingencies appropriately.

To ensure decisions are effective, you need to evaluate the functional, technical and human criteria of those decisions at the following levels:

  1.  Strategic fit:  Does the decision fit within your corporate aims and goals?  Does it fit within your organisation culture; your brand image; your existing product range; and your social and environmental policies?
  2. Operational fit:  Will your organisation need to be modified or changed as a result of the decision?  Does the decision improve your operations? Does it fit within the constraints affecting your organisation? Does the impact of the decision offer sufficient reward for the risk incurred? Does your organisation have the ability to adapt to the change and accept it?
  3. Tactical Fit:  Do you need to change processes and procedures as a result of the decision.  What impact does the decision have as opposed to the benefits offered.  Remember, process belongs to the management of an organisation but the culture of an organisation belongs to all its stakeholders.

Marketing is about the development of a customer-focused organisation.  It is therefore critical that organisational decisions are assessed for their impact on your customer experience.

Of course, there are dilemmas in decision-making and the decision-making process may not always seem rational.  Such distractions as concerns that you do not have all the available information, that you have insufficient time for making the decision or that you lack the appropriate skills to make the decision.  Such distractions may make you fearful of the decision-making process.

But there are rational fears and irrational fears.  It is rational to fear that a wrong decision may affect reward.  it is rational to fear a bad decision may affect career prospects.  It is rational to fear that bad decisions may affect your social esteem.

All decisions are associated with such rational risks; so you need robust assessment processes.

One of the best ways of making decisions is to have a structured decision-making process which appropriately assesses risk.  Such a process must include the ability to amend decisions over time.