Views of Academics on Strategy Development

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

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

Mintzberg described strategy development as having five attributes:

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

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

Mintzberg went on to describe eight types of strategy:

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

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

The need for an organisation to plan is straightforward:

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

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

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

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

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

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

Whittington (1993) describes four approaches to strategy formulation:

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

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

 

Brexit – A Project Management Perspective

I have tended to shy away from Brexit in this blog and have concentrated on Marketing and Business Strategy.  However, with ten weeks until the UK leaves the EU, I think it is worth looking at the way government has handled Brexit over the last two years.  To do this, I am taking a project management approach.  As anyone who has read some of the articles I have written about Brexit, or indeed anyone who follows my twitter feed, you will understand that I am no fan of the policy.  I see Brexit as a self-inflicted wound on the UK economy.  Indeed, all economic projections on Brexit see it as doing significant harm to the UK economy.  It is estimated that a Brexit deal, as negotiated by Theresa May in the draft withdrawal agreement, will cause a 5% drag effect on the UK.  A no deal Brexit is calculated as causing a 9% drag.  Brexit is the UK economy hobbling itself.  HMS Britain is about to drop a heavy drag anchor which will slow growth and hinder international competitiveness; all for the nebulous concept of ‘sovereignty’.

I say nebulous because those who shouted loudest about parliamentary sovereignty are now the first to shout foul when that parliamentary sovereignty is exhibited.

But this blog entry isn’t about political views or whether there is support for Brexit.  It asks whether the project is being appropriately managed.

Dennis Lock defines the stages of a project in his book, Project Management, the standard text for all business students on that subject.  Perhaps by listing those stages and factors for success and failure given by Lock, we get an idea of how the Brexit project is proceeding and its likely outcome.

The stages of a project listed by Lock are:

  1.  Project Definition
  2. Preparation and Planning
  3. Project Design
  4. Purchasing
  5. Fulfilment
  6. Completion and handover

It is utterly clear that the Brexit project is badly defined.  The referendum question asked one question; whether the UK should remain a member of the EU or Leave the EU.  The result, narrow as it was, was that the UK should leave.  But that answer didn’t provide a single possible outcome.  There was a range of options available and those on the Leave side of the argument didn’t present a single solution.  Britain could leave in a ‘hard Brexit’ or no deal.  Britain could retain close ties with the EU, the EEA model as shown by Norway; or Britain could decide to have a limited relationship: The Swiss model.  It seems that no one in government can decide and cabinet ministers to this day still present different potential outcomes.

Nor was there space left for compromise in the negotiation process, as Mrs May’s ‘red lines’ severely limited the options available.  Clearly Brexit was a poorly defined project.

Lock then describes success and failure factors in project definition:

  1.  Project Scope needs to be clearly stated and understood
  2. Technical requirements are not vague
  3. Estimates of timescale, costs and benefits are not over-optimistic.
  4. Risk Assessments are not incomplete of flawed
  5. The intended project strategy is inappropriate.
  6. Insufficient regard is given to cash flows and the provision of funds required to complete the project
  7. The interests and concerns of stakeholders are not taken into account.
  8. Undue regard is given to the motivation and behaviour of the people who will execute the project
  9. Insufficient regard is given to how those affected by the project will adapt to change
  10. Approval of the project plan is given for political, personal or intuitive reasons without due consideration to the business plan.

Where to start with this list in respect of Brexit!

As stated above, the project scope was vaguely defined.

Technical requirements as a result were vague.  If a soft Brexit was chosen, the technical requirements were completely different to those of a no deal Brexit.

The two year timescale is wholly insufficient to achieve Brexit.  The officials who drafted the Article 50 clause admit this.  But given the short timescale of the article 50 process, it was wholly inappropriate for the government to trigger that clause with absolutely no contingency planning in place.  A better proposal would have to been to do the contingency planning, then trigger Article 50 for the negotiations.  At least with contingency plans in place, the government’s position would be informed and appropriate red lines set.

The government’s Brexit plans completely fail to stand up to any interrogation based on the above list.

With only weeks to go until the Brexit deadline, arguments are still ongoing about factors in the above list.  We should have moved on to the delivery aspects of the Brexit plan by now: project fulfilment.

Lock lists the success and failure factors at the project fulfilment stage:

  1.  Good definition of the project and a sound business case
  2. An appropriate choice of project strategy
  3. Strong support for the project amongst management, in particular those managers responsible for managing the plan
  4. Firm control of changes to the project
  5. Technical competence
  6. Strong quality culture
  7. Appropriate regard for health and safety of all those affected by the plan
  8. Good project communication
  9. Well-motivated staff
  10. Quick and fair resolution of conflict.

Again, where do you start with this list!

The Brexit project has been poorly defined and there is no sound business case for it.  We are actually in a position of a government with a solemn duty to do the best for the country and its people is actively engaged on a mission which does nothing but harm to those interests.

The choice of project strategy, particularly the choice to trigger Article 50 prematurely has been appalling.

Those put in charge of driving May’s Brexit plan have been hard Brexiteers wholly opposed to it.

Fulfilment has been technically incompetent.  We have had ferry contracts awarded to a company with no ships and a port lacking the necessary infrastructure for HGVs.  We have had a trial at an airport designed to hold 5000 HGVs where only 87 HGVs turned up.  It appears we have a government which cannot plan a traffic jam.

Project communication has been appalling.  No deal preparation papers were short, vague and lacking necessary detail.  Risk assessments were incompetently produced and their content was held as secret.  Even when MPs demanded access to them, there was no appetite to share their content.

Staff motivation is clearly absent.  DExEU has the highest staff turnover of any government department.  It is seen by many as the death knell of a civil service career.  Currently the department is advertising for staff who ‘don’t panic’ in the face of pressure.

It is clear that the government, in particular ministers, put in charge of fulfilling the Brexit project simply aren’t up to the task.

Lock explains that in project management there is a direct relationship between cost, time and performance.

It is estimated that Brexit is already costing the UK government around £600 million per week.

The performance and quality of project delivery has been appallingly poor.

Most critical is the time objective.  A project not started in time can hardly be expected to finish on time.  To paraphrase Napoleon, “There is one kind of robber whom the law does not strike at and who steals that which is precious; time”.

It is utterly clear that the Brexit project has been managed horrendously and that it has run out of time.  In such circumstances the best option is probably to abandon the project entirely.

 

Focus on Core Competences

In the UK over the last couple of years, political debate has been dominated, almost to the exclusion of any other subject matter, by Brexit.  It is a subject tearing the UK apart and the splits on whether it is a good idea are as wide as ever.

The guru for the fundamentalist wing of Brexiteers, the ERG, is Professor Patrick Minford of Cardiff University and his small cohort of free market economists, the Economists for Free Trade (formerly Economists for Brexit).

The EFT has seemingly managed the impossible.  There is an old trope that if you ask three economists the same question, you will get three different answers.  Well, the EFT has managed to get virtually every other economic forecast group to agree that its work is nonsense.

The London School of Economics has produced an excellent critique of Minford’s work on Brexit and in particular his Liverpool Model.  The LSE point to Minford’s lack of an evidence base for his forecasts; that his work relies heavy on political dogma rather than scientific method; that his modelling makes huge assumptions and that it ignores current economic theory.

Two aspects of the LSE critique are prominent.

Firstly, that Minford ignores the concept of economic gravity; the proven fact that irrespective of trading terms, most firms do the majority of their export trade with nations and blocs which are geographically close.  So no matter the outcome of Brexit, UK firms will still look at Europe as its primary export destination.

The second huge assumption made by Minford is that manufacturers operate in a market with perfect competition.  Perfect competition assumes that there are many manufacturers in a sector all producing identical goods.  No one company has the power to set the base price in a market and as a result all market entrants focus on cost reduction and profit maximisation.  In markets with perfect competition, the only consumer determinant is price.

Anyone who has studied marketing knows that price is only one element of the marketing mix.  We know that some consumers are not driven by price when the purchase. We know that for some consumers, product performance or convenience is a more important purchase factor than price.

We also know that, businesses segment markets and target particular customer groups.  That may mean designing products that are different to those of competitors.  It is utterly clear that consumers are faced with numerous choice variables.

In my view, the work of Professor Minford is dogma-driven nonsense and it is astounding that some senior politicians take his work seriously.

What is true is that most organisations have aspects of their business they feel they are really good at and which make them stand out for the competition.  Businesses have competencies.  However, for these competencies to be effective, if they are to have any market effect, they must be core to the expectations of consumers.

Hamad and Prahalad (1990) defined core competencies in an article in the Harvard Business Review entitled Competing for the Future.

  1. A core competency must provide customer benefits and add value.  These benefits must be differentiated from those of your competitors and they must be the reason that consumers choose your products over those of competitors.
  2. Core competencies must be difficult for competitors to copy.  They should be competitively unique.  Consumers must not be able to copy them quickly e.g. protected by intellectual property rights.  They must be a competency your competitors wished they had.
  3. You must be able to leverage core competencies across a wide range of products and markets.  Competencies belong to an organisation, not a product or service or brand.  Does your business have core competencies which allow or enable the production of new products or services.

It is also true that a business cannot be good at everything. If you are good at one competency, it is unlikely that you will be equally good at other competencies  At most a business will have two or three core competencies, otherwise your organisational focus is diluted.

There is no point in believing that you are good at a particular competency if that competency is of no interest to your target customers.

Hamad and Prahalad identify four different types of core competency:

  1.  Unique Core Competencies:  These competencies are uncopyable skills and knowledge bases.  They could include intellectual property and they offer superior customer value and superior returns.
  2. Latent Core Competencies:  These competencies are latent but allow you to operate in a market sector.  A hotel chain could not operate without a wide range of competencies from supply chain managers and skilled professionals such as chefs and event organisers; but only some of these competencies are unique.
  3. Competitive Core Competencies:  These competencies allow a firm to compete in its chosen market.  They are hygiene factors.  For examples retailers will need strong supply chain and logistics skills.  Usually these competencies are held by all successful market players.
  4. Future Core Competences:  Competencies need to change over time as consumer expectations change.  Many UK retailers are failing because they are relying on historical core competencies such as high street locations when retailing has moved on and internet retailers such as Amazon thrive.  Core competencies also need to change so you can dominate tomorrow’s markets.

Core competencies are crucial to your business delivering its proposition to consumers and differentiate your organisation in the marketplace.  They need to be at the heart of your business.  In fact your business should be structured around them.  You must invest heavily in them and you must acquire skills to develop them.  Everyone in your organisation should understand the importance of your core competencies as they are the fabric of a successful organisation.

It is said that evolution is better than revolution.  Brexit is a revolution and it is likely to cause significant harm to the UK economy. It is stripping the UK of one of its core competencies, as an inward investment gateway into Europe.

The concept of core competencies shows how wrong Professor Minford’s assumption of perfect competition is.  No business will succeed if the only advantage it can offer to consumers is a market base level price.

Customers

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

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

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

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

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

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

What you must not do is:

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

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

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

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

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

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

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

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

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

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

So who are your customers?

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

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

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

Remember:

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

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

What benefits do customers seek?

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

To meet that challenge, you need to find out:

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

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

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

The really pertinent questions you need to ask consumers are:

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

 

Acquiring, Retaining and Growing Customers

Anyone who speaks to me about marketing will know my pet peeves.  Chief amongst them is organisations who conflate the term marketing with sales.  You often see the term ‘marketing representative’ used instead of salesman.  House builders have marketing suites on their developments, not sales offices.  But sales is not marketing.

I also see plenty of businesses who have a ‘Sales and Marketing’ department.  I hate this description it smacks of a silo mentality and that a firms marketing activities are subservient to its sales team.  It also usually means that to the organisation’s senior managers, marketing is predominantly a promotional activity.  But promotion is only one element of the marketing mix.

In my view, these definitions of marketing are wholly incorrect.  Properly defined, marketing is a critical strategic activity that should sit closely to an organisation’s senior management; not a distant silo subservient to the organisation’s sales team.

That said, sales and marketing are linked activities.  There is no point in a corporation developing a customer focused strategy, if it isn’t enacted by its sales representatives.

Marketing guru, Peter Drucker once said, “the only profit centre is the customer”.

For too long, the focus of sales teams was therefore growing the customer base.  More customers meant more profit and greater market share.

However, in today’s highly competitive markets, the focus has moved.  Bob Weyland said:

“The paradigm has shifted.  Products come and go.  The unit of value is the customer relationship”.

So today, particularly in B2B markets, the focus is about growing and deepening the relationship with your existing customers.

Studies have shown that the cost of obtaining a new customer is five times that of keeping existing customers happy.  The longer you keep a customer, the more you can earn from them.  It can take many years for a new customer to buy at the same level as existing customers.

The focus on existing customers means not taking them for granted.  Every so often you have to do something special for them.  You need to encourage their feedback and react to that feedback.

However, there will always be a process of erosion.  Whatever you do you will lose customers.  For example, the fashion retailer Top Shop targets consumers under the age of 30.  So what happens when that target market ages?  How many sixty year olds will buy clothes from Top Shop?  Like products, customers will have a lifespan.

So as well as retaining existing customers, you will always need to obtain new customers.  And of course you have to turn new prospects into repeat buyers.

In today’s markets, customers have extensive choice.  There is an abundance of suppliers and brands.  So you have to do more than locate prospects.  In addition to locating prospects, you need to sell to them and you need to turn them into repeat buyers.

Generating customer leads is a three-step process.

Firstly you need to define the target market.  That means a structured process of segmentation, targeting and positioning.

My brother runs a small landscape gardening business.  I asked him who his target customers were.  His reply: “Everyone and anyone”.  This is clearly an unrealistic approach. For a start, his business doesn’t have the resources, financial or otherwise, to promote his services to all.  He needed to identify customer groups which were worth obtaining; customer groups which would offer the best returns and who were the best match for his skills.

The targeting and positioning process means that you need to deepen your knowledge of the target market;  you need to know what it wants; what it buys; where it buys; when it buys and HOW it buys.

Secondly, you need to solicit leads through communication tools, the promotion bit of the marketing mix.  Traditionally, this has meant advertising, personal selling, direct mail and events such as trade shows.  Today it may also mean product registrations, event sponsorship, using celebrity advocates.

Remember the internet and social media is a promotional channel, like television or radio when it comes to soliciting leads.

Thirdly, you need to qualify the leads you gather.  Not all leads are worthwhile.  For example, there is little purpose in my brother collecting leads five hundred miles from his base as the cost of travelling to do the job will erode any profit margin.

Some prospects may express an interest in purchasing your goods but will have no intention of actually doing so.  They may lack the means.  I would love to own a vintage Fender guitar, but the cost, and my level of ability on the guitar make that prospect a dream rather than a reality.  Ferrari recently produced a high-end sports car model where to be able to buy the car, you had to prove that you had the ability and expertise to buy it.  You never got to keep the car at your home.  It was kept by Ferrari who would ensure it was safe for you to drive.  Clearly, many motor racing fans would love to drive that Ferrari but would lack the expertise needed to drive it.

It really matters that you identify the BEST leads.  You need to distinguish between hot, warm and cool leads.  Hot prospects are those most able and willing to buy; those most able to buy.

Hot leads need to be prioritised.  It is not worth wasting the time and resources selling to those only partially interested in buying.

A useful selling technique is to use SPIN questions:

  1.  Situation Questions – e.g. how many employees do you have?
  2. Problem Questions  – what problems and difficulties is the customer experiencing? What are they dissatisfied with?
  3. Implication Questions – How do the problems affect the customer?
  4. Need pay-off Questions – What is the value or usefulness of your proposed solutions? e.g. What if I told you that I could reduce the cost of the implication by 80%?

You aren’t selling products or services but solutions and capabilities.

So how do you calculate if a customer is worth getting?  One method is to analyse the customer acquisition cost against prospective customer lifetime profit.

For example:

  1.  Cost of sales representative = £100,000 per annum (this is the total cost not just their salary)
  2. Average number of calls per annum by the sales representative = £200
  3. Average cost per sale = £2000

This is an underestimate of the cost of customer acquisition as it ignores work on advertising, promotions and administration.

  1. Annual revenue from customer = £10,000
  2. Average number of years of loyalty = 2 years
  3. Profit margin = 10%
  4. Customer lifetime profit = £2000

This may appear to be a breakeven situation but the prospective customer lifetime profit is an over-estimate as profit margins will vary between customers.

So in this example the company is actually paying to acquire the customer.  The cost of acquiring the customer exceeds their worth to the company.

Once you have obtained a new customer, your next task is to keep them.  You have to develop a customer and move them through development stages.  This is often referred to as the ‘customer ladder’.  Customers move from prospects, to first-time customer, to client, to advocate, to member, to partner, to part owner.

To make a first time buyer a client, they must be satisfied; not dissatisfied or ambivalent.  It is therefore crucial to develop a customer satisfaction index and to listen to your customers.  You need to estimate the cost of losing customers.  Do you need to improve your customer services.  remember social media makes it very easy for dissatisfied customers to tell others.  You need to resolve customer complaints quickly.  You need to accept responsibility to win back goodwill.  Remember ‘the customer is king’.

Once a first time buyer becomes a repeat customer, you need to identify key accounts.  You need to classify customers by ‘depth of repeat’.  You need data on frequency, recency and monetary value of a customer’s purchases.

Remember retained customers are better targets for cross-selling and up-selling.  They reduce the cost of service through familiarity with your products and systems.  Highly satisfied repeat customers become advocates and create word of mouth.  Long-term customers are also less price sensitive.

Advocates represent the statements “the best advertisement is a satisfied customer” and “Satisfied customers become apostles”.

In some markets it is possible for satisfied customers to become members e.g. a golf club will often accept ‘pay and play’ customers but to survive in the long-term it will need a robust membership.  Car manufacturers operate owner’s clubs which offer special benefits and privileges.  Rock bands and TV shows develop fan clubs.  If customers switch away from these clubs, they lose the membership benefits.

In B2B markets, often the aim is to develop a partnership with a customer.  Software firms get customers to help develop and amend their products.  They use beta testing where trusted customers get to use prototype programmes, to identify bugs and to suggest improvements. Aerospace manufacturers will work closely with engine manufacturers.  The finished aircraft will be an effective joint-venture.

In a part-ownership model, the customer is a critical stakeholder.  This is the model used by building societies, cooperatives, community owned pubs, credit unions and buying clubs.  Customers have a direct say in the organisations policies and procedures.

So, if you want you business to be a success in today’s highly competitive business environment, it is not enough to garner new customers, you need to keep customers and develop them not just in terms of profit growth but in terms of an ever closer relationship.

 

 

The New Consumer and the Implications for Marketing Strategy

The 1990s saw the rise of a new type of consumer which represents a significant social change and which reflects a more confident but more cynical consumer.  This change isn’t just represented in the way consumers buy goods and services; it is increasingly evident in culture and politics.  There is a real possibility that the election of Donald Trump and the vote for Brexit are a direct result of this shift in consumer behaviour.

For much of the 20th century, consumers were often viewed as conformist, differential children.  This status was a direct result of the hardship of events from the 1920s to the 1950s.  During that period, consumers faced the hardship of the depression that resulted from the Wall Street Crash; they experienced the rationing, shortages and hardship of World War Two; and in Europe they faced the significant costs of rebuilding the damage caused by the war.   Austerity was the norm and that drove conformity.

In the UK, there was rationing until the mid-1950s and successive governments nationalised what they saw as key industries.  Nationalisation clearly saved some industries from oblivion but it often resulted in a lack of consumer choice and terrible service standards. UK consumers had no choice but to accept what those nationalised industries gave them.

For example, in the UK, up until the mid-1970s, if you wanted a telephone, you could only get one from the nationalised Post Office and you had little choice of design or colour.

Prior to 1950, there was no such thing as the teenager.  Prior to that date, when you left school you went straight from being a child to being an adult.  You wore the same style of clothes as your parents, you listened to the same radio programmes and your choice of music was classical or jazz.

Compare that world to now.  Consumers have a vast variety of goods and services from which to choose and switching is easy.

During the austerity of the middle part of the 20th century, social views were one of conformity.  People talk about the greyness of 1950s Britain.  Everything seemed drab and ordinary.  Your life was effectively planned.  You lived with your parents until you got married.  Society expected 2.4 children, a Morris Minor and a three-piece suit.

If you listen to political interviews of that time, it is astounding how differential journalists were of those in authority.  Searching questions were rare and if asked, would be treated as contemptuous; as if the interviewer was attacking the politicians honour.  It was a cultural norm that elected officials and government ministers were your ‘betters’.

For a minority, the Swinging Sixties represented a casting off of this social and cultural straightjacket. However, for the majority of UK residents, those outside London’s cultural fulcrum, the greyness of the 1950s remained until well into the 1970s.

L.P. Hartley summarised it nicely in his 1953 novel, The Go Between:

“The past is another country, they do things differently there”.

In the 1990s, the UK shifted from a state where austerity was the norm to an environment of affluence.  Whatever your political views it is clear that Britain was a wealthier place after the Thatcher premiership.  Consumers expectations changed. They moved from a position of conformity to one of individualism.  They expect choice and extremely high levels of customer service.

During the austerity between the 1930s and the 1950s, consumption was about survival.  Consumers purchased what they needed to survive. Today, they buy what they need and what represents their personality.  The mindset of consumers has shifted up Maslow’s hierarchy of needs towards self-actualisation.

There is another side to the move towards individualism, consumers are becoming increasingly cynical.  They are less trustful of authority and less trustful of advertising.

This is clearly shown in our attitude to both journalists and politicians  It is why the likes of Nigel Farage and Donald trump aim to present themselves as anti-authority and not part of an elite.

Of course, take one look at the credentials of many of these politicians, and they couldn’t be more establishment.  Farage was privately educated at Dulwich College, he is the son of a city trader and is a former merchant banker.  Trump inherited his billions from his father; he went to select schools.  Since childhood Trump has lived a life of luxury, private jets, limousines and gold-plated lifts.   Both these individuals have nothing in common with the ‘man in the street’.

Like Trump’s election, Brexit is a symptom of the increased cynicism.  I guarantee that the vast majority of those who voted to leave the EU had not a clue of about what the EU did, how it operated or its structures; what they wanted was to express their cynicism of politics in general and to give the government a kicking.

So old style consumers were constrained by income, limited choice and the availability of goods.  The new consumer is cash rich, has almost unlimited choice.  Compared to the last century, consumers now face a significant increase on calls on their time.  They are time short so need answers quickly and efficiently delivered.

Increasingly, social tribes are breaking down.  For example, in the 1950s you supported your local football team.  If you lived in Manchester, you supported United of City.  In the early 1960s, if you were under 23, you were a mod or a rocker.  Now Manchester United have fans located all over the world and there is a proliferation of musical and cultural genres.  Where once you were part of an individual cultural tribe, it is now the norm for an individual to be a member of many tribes and to act in a number of social roles.  It is now almost expected for someone to be a wife, mother, manager, co-worker, charity campaigner, councillor, simultaneously.

The increased expectations of consumers means that businesses need to understand consumers better.  They need to directly attend to those consumers needs.  If they do not, they are doomed to failure.

Increasingly consumers are using their purchasing power to regain some control over their lives and to alleviate their frustrations resulting from hectic modern lives.  Most see their life as more uncertain than that of their parents.  Their buying habits have become a prescription against such frustration.  Uncertainty has also weaponised nostalgia, a critical element in Brexit.  Consumers have greater vulnerability; they feel anything can happen at any time.

It is also notable that consumers increasingly use purchases to ‘cheer themselves up’.  This is particularly notable amongst the group described as ‘Millennials’.

It is also noticeable that consumers expectations of service levels are outstripping product satisfaction.  Clear evidence of a focus on the experience of purchases not simply a focus on product features.

So what are the lessons for marketing strategy:

  1.  You need to reconnect with your customers.  Do not fall back on traditional demographic categories such as age, ethnicity and income.  Marks and Spencer has struggled over recent years trying to match its products to the new image consumers see themselves as having.  Discounters such as Aldi and Lidl saw a big rise in ‘middle class’ customers.
  2. You need to become better at directing messages to an increasingly cynical consumer audience who have immediate access to communication technology.  Consumers can now express their satisfaction, or dissatisfaction, instantly; and too a mass audience.  It is noted that highly critical reviews can be far more influential than formal advertising campaigns.  Consumers are becoming smarter.
  3. There is now a focus on creating ‘street buzz’.  Increasingly companies are getting better at selecting and using selected opinion formers rather than developing advertising hype.  For example, Ugg, the sheepskin boots manufacturer, don’t do much in the way of traditional advertising, they rely on consumer advocacy, appropriate brand advocates and ‘superfans’.  To develop buzz, Ugg employ bloggers and vloggers, who don’t just promote the brands footwear but talk about other associated issues such as music, art and fashion.  Through the spread of social media and the internet, there is an increased focus on viral marketing.

This law of increasing individuality has resulted in greater competitive intensity.  Markets are becoming more competitive.  As a response, there is an over-riding need to individualise products and to tailor services (the product surround) to consumer’s needs.

This is the development of ‘micro-segmentation’; the impact of which on many businesses is increased price transparency and a focus on ensuring that consumers feel empowered.  Businesses now face pressures to cut costs and maintain profit margins whilst not raising prices.  A common result is product downsizing.

Businesses also need ‘complicated simplicity’.  Yes that is an oxymoron.  As a single consumer can belong to a wide range of ‘tribes’, you cannot typecast.  You cannot put consumers in boxes of generic description.  Increasingly businesses created individual customer profiles and design products with those profiles in mind.

Much of the success of Amazon has been the tailoring of offers to individual consumers.  Yes, Amazon used new technology to disrupt the bookselling market but now they use increasingly sophisticated algorithms to tailor their product offers.  they are continually improving this process.

The rise of the new consumer has huge implications for marketing strategy.  You need to supercharge your marketing agility to meet consumers demands and to meet their increased expectations.

Developing Customer Retention Strategies

Most senior managers in a business talk of developing customer or brand loyalty.  The principle is that the longer you keep a customer, the more you earn from them.   To survive in the long-term, you need to develop high lifetime value.

However, loyalty is fickle.  Successive academic studies have shown that even the most loyal of customers will switch to a competitor if the believe there is better value on offer.

In this blog we have also discussed that there is no longer a product which is purely defined by the definition goods.  All products have a service element and often the opportunity to differentiate goods from those of competitors and to add distinctive value.

This makes it odd that in some sectors little is done to retain customers and customer service is, quite frankly appalling.  For example how many of us have been stuck on the telephone line for what seems like an age to a bank or utility firms call centre with no ‘call back’ option.

Then there are industries where customer retention seems to be an alien concept and customer lifetime value appears to be the last thought of company directors.  The car insurance industry is one such sector.  The aim appears to be to get consumers to switch every year by only offering discount to new customers.

In business to business markets, where there are often fewer customers, higher purchase costs and complicated contracts, there is often a constant battle to adapt and improve service capabilities and product functionality.  In such markets, customer retention is the key to business growth and survival.

Senior managers shouldn’t confuse customer or brand loyalty with customer retention.  You don’t develop brand loyalty strategies, you develop customer retention strategies.

So how do you develop customer retention:

  1.  Target Customers:  Not all customers are worth building a relationship with over the longer-term.  Some customers are habitual brand switchers.  Some will not generate significant lifetime value; they will not provide sufficient income or their service demands incur excessive costs.  Some customers; disruptive ‘zombies’; may actually disrupt service provision and affect a firm’s relationship with other more profitable customers.  This is a classic marketing segmentation and targeting approach.  You should aim to retain, high value, frequent use, loyalty-prone customer groups who recognise your product as having high service values and utility.  You need to identify those customers  in that group who are most likely to defect to competitors and ask whether they are worth retaining.  You then need to build a value-added strategy to meet those customers demands.  For loyalty-prone customers, it is important to maintain communication bonds.  It is worth remembering the Pareto principle that 80% of turnover comes from 20% of your customer base.
  2. Bonding:  You need various levels of strategy to bond customers and service providers together.  You need to select the  level of strategy most appropriate for the bond with each customer:
    1. Level One:  You bond through financial incentives.  You provide discounts for bulk purchase or you provide a loyalty scheme for repeat purchase.  However, such financial incentives are easily copied by competitors.
    2. Level Two:  You develop more than just price incentives; you build sustainable competitive advantages through the creation of social as well as financial bonds.  Customer service encounters are often also social encounters.  To build social bonds, you require frequent communication.  You need to provide community of service through and entertainment activities.  for some customers you need to make them feel that they are being treated as an individual.  For example, Harley Davidson runs events for their owner’s club; Las Vegas casinos offer ‘High Rollers’ the use of luxury suites and special tables.
    3. Level Three:  You need to develop financial, social and structural bonds.  The relationship should feel more like a partnership than that of a supplier and a customer.  This often involves the creation of bonds which tie the customer to your company.  For example some logistics firms provide customers with packing equipment which only works with the logistics firm’s systems..  Such structural bonds often create formidable barriers against customer switching and new competitors entering the market.
  3. Internal Marketing:  To build high quality service delivery, you need high quality performance from employees.  Recruitment and employee selection is often key to bonding as is employee retention. Retained employees often develop expert knowledge about your products and services.  You need to provide high quality staff training.  You need effective communication channels with your staff and they need to be appropriately motivated.  Staff need to have technical competence but they also must be able to relate to customers.  All your staff, from your receptionist to your engineers, are part-time marketers.
  4. Promise Fulfilment:  You must make credible realistic promises, keep those promises and give your staff the knowledge and equipment to deliver upon them.  this is the keystone of maintaining customer relationships.  They are the cues to match customer expectations and to avoid customer disappointment, dissatisfaction and defection to competitors.  The mantra should be ‘under-promise; over-deliver’.  First impressions count so your first contact with customers is critical. For example, Marriot Hotels have a ‘first ten minutes strategy’ to ensure the relationship with hotel guests gets off on the right foot.
  5. Building Trust:  Customer retention relies on building trust.  Services are intangible.  To ensure retention you need to keep in touch with customers and modify services to respect their views.  This means providing guarantees which inspire confidence and which reduce perceived purchase risk.  Your policies need to be considered fair by consumers.  Staff must recognise required high levels of conduct with consumers.
  6. Service Recovery:  Solving problems can restore customer trust.  Ideally, potential problems should be eliminated before they actually happen; but that isn’t always possible.  If incidents occur, systems should be capable of modification so those incidents cannot be repeated.  This means having a quality assurance system capable of adaptation such as Kaizen or Six Sigma.  Systems should be tracked to identify service failures. Customers should be encouraged to report problems.  Monitor complaints and their resolution.  Follow up on service provision.  Most importantly, train and empower your staff to deal with problems and complaints before they escalate.  Successful resolution of a complaint can actually increase a customer’s positivity about a service provider.  This is called the recovery paradox.  But if the complaint recurs, the increased positivity can dissolve into dissatisfaction and recrimination.  Service recovery can encourage organisational learning and service staff should be motivated to report problems.  Effective service recovery systems can increase customer retention.