Market-Led Strategic Change, Fourth Edition

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Market-Led Strategic Change

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Market-Led Strategic Change Transforming the Process of Going to Market

Fourth edition

Nigel F. Piercy Professor of Marketing and Strategic Management Warwick Business School The University of Warwick

AMSTERDAM • BOSTON • HEIDELBERG • LONDON • NEW YORK • OXFORD PARIS • SAN DIEGO • SAN FRANCISCO • SYDNEY • TOKYO Butterworth-Heinemann is an imprint of Elsevier Butterworth-Heinemann is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA

First edition published by HarperCollins Publishers Ltd 1991 First published as a paperback edition by Elsevier Ltd 1992 Second edition 1997 Reissued with new cover 2000 Third edition 2002 Fourth edition 2009

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09 10 11 12 13 10 9 8 7 6 5 4 3 2 1 To the memory of my mother, Helena G. Piercy (1911–2001)

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Contents

Preface to the fourth edition ix Acknowledgements xiii About the author xv What readers said about market-led strategic change xvii

PART I THE IMPACT OF CUSTOMER VALUE IMPERATIVES 1 Chapter 1 New marketing: marketing is dead, long live marketing! 3 Chapter 2 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity 31 Chapter 3 New marketing meets old marketing: new marketing wins! 81 Chapter 4 Value-based marketing strategy 109 End-of-part cases 147 Case 1 Tata, But Deﬁ nitely Not Goodbye 147 Case 2 Strangling the Fat Lady at EMI? 155 Case 3 The Clouds Raining on the Computer Business 162

PART II DEVELOPING A VALUE-BASED MARKETING STRATEGY 169 Chapter 5 Strategic thinking and thinking strategically 171 Chapter 6 Market sensing and learning strategy: competitive strength through knowing more 219 Chapter 7 Strategic market choices and targets: where to compete and where not to 267 Chapter 8 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest? 309 Chapter 9 Strategic relationships and networks: building the infrastructure to deliver the strategy 343 End-of-part cases 377 Case 4 Big Blue Gets Transparent 377 Case 5 Oh, the Tangled Web They Weave at BAA 388 Case 6 The Wild, Wild Rover 402 Contents

PART III PROCESSES FOR MANAGING STRATEGIC TRANSFORMATION 413 Chapter 10 Strategic gaps: the difference between what we want and what we have got 415 Chapter 11 Organization and processes for change: building the infrastructure to make it happen 431 Chapter 12 Implementation process and internal marketing: making it happen 467 End-of-part cases 517 Case 7 Tesco – Fresh & Queasy in the USA 517 Case 8 When the Peddle Hits the Mittal 526 Case 9 One-Laptop-Per-Child Stirs Up the Grown-Ups 532

Index 539

•• viii Preface to the fourth edition

Yes – I fear the terrible moment has arrived when Market-Led Strategic Change 4 is allowed to escape and wreak havoc on staid and conventional academic views of the world of customers and competitors, and to wallow in the glorious turbulence and disruptive change that characterize modern markets! My target readers remain people of practice – whether managers, students and teachers of marketing and management, or analysts and planners – rather than people of theory. I really have nothing particularly against academic theoreticians (thank goodness, my lie-mode chip appears to be effective), just their irritatingly superior attitudes, unde- served arrogance, stupidly smug expressions, wilfully closed minds and their inherent belief that ‘the trouble with good practice is that you have to ask if it works in theory’ . Why do people with no interest in business get involved in teaching in business schools, when they usually aren’t any good at it? Such persons can best be described as ‘ murally challenged ’ (can’t read the writing on the wall). I really think some of these people need to take a bite from the reality sandwich. The world wants more from us than untested and pointless theorizing.

Thoughts on the future of business schools ‘ If stupidity got us into this mess, why can’t it get us out? ’ (Will Rogers)

Let’s be honest, Market-Led Strategic Change remains a book with attitude, and I remain insincerely apologetic to those who do not like that attitude – sorry, it’s the only one I’ve got.

Changes in the Fourth Edition Constant from the earlier editions of the book is our focus on the ‘ process of going to market’ rather than ‘ marketing ’ , in the conventional sense of what people in marketing departments are assumed to do. This focus underlines the point that customers do not much care how we organize Preface to the fourth edition

ourselves inside the company, until and unless it affects the value they receive. How we perform in the market is a concern for everyone in the organization, not just an issue for the marketing department (if there still is one, which is actually increasingly unlikely). Going to market is a process, usually a cross-functional process, and often an inter-organizational process. The underlying goal of this book is to provide managers and management students with ideas, concepts, and tools for achieving superior performance in their markets. This means that my target reader is not just the marketing specialist, but all those who have to work with marketing processes, whatever their management specialisms. This audience embraces those who may never in their careers ever work in marketing or sales – but who do need to understand what the really important questions are that they should demand to have answered by their marketing colleagues and consultants. For those who are marketing specialists – you need to read it too, to know what the searching questions are you will be asked and how you should go about answering them! In fact, everyone in the world should read it (as long as they buy their own individual copies). The ‘ good news’ for some about the leaner organizations we are now developing is that you may have to spend less on specialist marketing functions. The ‘ bad news ’ is that even if you are in operations, supply chain, fi nance, or human resource management, you now share in responsibility for the way we go to market, so you had better understand how it works! While the focus and goal of the book remain constant from the last edition, there have been substantial changes to the structure of the book. These changes refl ect the feedback from users of the last edition, and the changing realities which managers are now confronting. The rationale for the structure is explained in the fi rst chapter (‘ A route- map for market-led strategic change’ ). To streamline the material and to maintain clarity of purpose, the book has been divided into three parts with 12 chapters. Part I examines the imperatives for a focus on customer value. This part explains the approach we are taking and the requirements for value-based strategy. The major addition here is a chapter that contrasts the somewhat static conventional, ‘4Ps ’ , pro- grammed approach to marketing with the requirements of new marketing for new types of market. The logic for this change is that readers have suggested (somewhat unkindly, I thought) that to establish a basis for ‘new marketing’ , it is helpful to fi rst clarify what is meant by ‘ old marketing ’ , and I guess they have a point. Part II provides a detailed template for developing a value-based marketing strategy. The core material is concerned with market learning, market segmentation and positioning, value propositions and strategic relationships. A new chapter has been added to focus on the challenges of strategic thinking and ‘ thinking strategically ’ about customers, competitors and markets. Part III addresses questions of implementation and change from a process perspective and looks at strategic gaps between intent and reality, organizational change and implementation process and internal marketing.

•• x Preface to the fourth edition

Opportunities to consider and examine the implications for practice are provided in the cases at the end of each part. These have all been newly produced for this new edition.

Supporting materials I hope that many of the users of this book will be managers who simply pick it up from the bookstall or web pages as a potentially useful read from which they may gain some new insights and ideas. Indeed, if you are such a managerial reader – could I just ask if you have considered buying copies for all your colleagues to enrich their lives as well as your own? However, I am equally aware that many users will be lecturers, teachers and trainers in marketing, who want to use the book as part of their marketing teaching and professional development programmes. To persuade as many of the latter group as possible that adopting the book for their students is a really, really good idea that will make them incredibly popular with their students and gain them unbelievably high teaching scores, there is an Instructor’s Manual available for adop- ters of the book. This may be found at http://textbooks.elsevier.com/ manualsprotected/9781856175043. While you will need a password from the publisher, the Instructor’s Manual contains suggested designs for different types of teaching programme, PowerPoint slides for each chapter, suggested frameworks for using the case studies in teaching, and copies of the case studies that were in earlier editions and not this one (in case you want to go on using them with the new edition). There are also photographs of my pathetic but very endearing three-legged cat, who will whimper and starve if you do not adopt the book and ensure that all course participants buy at least one copy (each). Indeed, there is much to be said for the view that people really need to buy three copies of this book – one for home, one for the ofﬁ ce, and one for traveling . . .

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Acknowledgements

It is always the case with work like this that those who deserve thanks are too numerous to mention, and trying to do so would require me to be a much nicer person than I actually am. Many colleagues, business people, research collaborators, and students have played a part in reshaping Market-Led Strategic Change (though admittedly often an unwitting and reluctant part). Nonetheless, I would like to express particular gratitude to Professor David W. Cravens of Texas Christian University, from whom I have learned enormously in our research and writing collaborations. Dave is genuinely inspirational. I would also like to draw attention to Professor Malcolm McDonald, Emeritus Professor at Cranfi eld School of Management, who has had a profound infl uence on my thinking about marketing. Sheila Frost, Departmental Secretary for the Marketing and Strategic Management Group at Warwick Business School, deserves special thanks for numerous kindnesses and supporting activities in getting the book produced and delivered. I suppose I should also thank my proofreaders: Dr Carolyn Strong (University of Bath), Dr Nikala Lane (University of Warwick) and Dr Niall Piercy (University of Bath). It would have been nice if they could have restricted their comments to the typing errors they were actually asked to fi nd. But, what can I say – everyone’s a critic . . . just in some cases not very well-informed critics. I don’t think they got my underlying premise that ‘ if I want your opinion, I’ll give it to you ’. (If that line survives it is absolute proof they did not check the Preface, and are therefore idle as well as picky.) Clearly, the shortcomings and limitations of this book (in the unlikely event they were to exist), and any errors contained, remain the responsibility of the author (until such time as he can fi nd someone else to blame, which usually does not take very long). Nigel Piercy Warwick Business School September 2008 This page intentionally left blank

About the author

Professor Nigel F. Piercy BA, MA, PhD, DLitt is one of the best-known business school academics in marketing and strategy in the UK. He is Professor of Marketing and Strategic Management at Warwick Business School, having previously held a chair in strategic marketing at Cranﬁ eld School of Management, where he was head of the marketing group, and having earlier held the Sir Julian Hodge Chair in Marketing and Strategy at Cardiff University. In addition to UK business school experience, he has been a visiting professor at: Texas Christian University; the University of California, Berkeley; Columbia Business School, New York; the Fuqua School of Business, Duke University, North Carolina; Athens Laboratory of Business Administration; and the Vienna University of Business and Economics. He has presented seminars and workshops at business schools throughout the world. He has managerial experience in retailing, and was in business planning with Nycomed Amersham plc (now part of GE Healthcare). He has extensive experience as a consultant and management workshop speaker with many organizations in different parts of the world; he has worked with managers and management students in the UK, the USA, Europe, the Far East, South Africa and Zimbabwe. He focuses on issues of market strategy development, planning and implementation, and recent company work includes: TNT, EMC, EON, Amey plc, British Telecom, Allied Dunbar, Ford Cellular, AT &T, Honeywell, AIB Group, ICL, Yellow Pages, as well as other smaller organizations. He has presented and chaired management development programmes for: the Chartered Institute of Marketing, the Academy of Marketing, the Institute of Management, the Institute of Directors, the Tavistock Institute and Henley Management College. His research interests are in strategic marketing and strategy implementation, recently emphasizing the sales/marketing interface and the impact of strategic customers on buyer–seller relationships. Professor Piercy has published 18 books and written around 300 articles and papers appearing in the management literature throughout the world. Recent books include: Marketing Strategy & Competitive Positioning 4th edn (with Graham Hooley and Brigitte Nicoulaud) (Hemel Hempstead: FT/Prentice-Hall, 2008) and Strategic Marketing , 9th edn (with David W. Cravens) (Burr Ridge IL: McGraw-Hill/Irwin, 2009). He is also author with Nikala Lane of Strategic Customer Management: Strategizing the Sales Organization (Oxford: Oxford University Press, 2009). Among other awards and prizes, he was the UK Marketing About the author

Author of the Year for three years. He has published academic papers in the Journal of Marketing , the Journal of the Academy of Marketing Science ; the Journal of World Business and the Journal of Business Research , and has written on management and marketing issues in The Sunday Times and The Independent newspapers.

•• xvi What readers said about Market-Led Strategic Change

‘ Much is known about good marketing practice, but little is known about how to transform a company into a ﬁ rst-rate marketing company. Nigel Piercy has provided the best guide I’ve seen to creating a market-led company – replete with work- sheets, diagnostics, and many convincing illustrative cases . . . a very useful and readable book that will make a contribution to many companies that manage to read it and act on it.’ Professor Philip Kotler S.C. Johnson & Son, Distinguished Professor of International Marketing, Northwestern University, Evanston, IL, USA

‘ Professor Piercy lives up to his promise to provide management with a number of tools and techniques to help implement marketing effectively in their own companies so that customer considerations and satisfaction are put at the top of the management agenda. A very practical manual, full of good useful advice . . . I enjoyed reading it.’ Professor John O’Shaugnessy Professor Emeritus of Business, Columbia University, New York, USA

‘ it is not just the chapter titles which are provocative. The more closely one reads the contents of the individual chapters, it becomes apparent that they constitute a healthy mix of foundation material (informative), well-reasoned questioning of certain heretofore unchallenged assumptions and practices (provocative), and clear directions to managers as to how the content of the individual chapters can be put to use in organizations (instructive) . . . I was looking for new insights, What readers said about Market-Led Strategic Change

needless to say I was not disappointed . . . an outstanding contribution. ’ Professor P. Rajan Varadarajan Distinguished Professor of Marketing and Ford Chair in Marketing and E-Commerce, Texas A & M University, College Station, Texas, USA

‘ This is a marvelous, thought-provoking book on how to cultivate and implement a customer-focused strategy within a company. In a time when many marketing texts seem depressingly similar, this book is different and that is very much to the good . . . No reader will walk away from this book without substantial new ideas on making customer-focused marketing work. On that basis, I think it is a book that should be on the shelf of every person seriously concerned with market strategy. ’ Professor Bruce H. Clark Northeastern University

‘ Every once in a while one reads a book and thinks “ This makes so much sense, why didn’t someone write it before? ” Anyone seriously interested in the management of marketing is likely to have this reaction to Nigel Piercy’s Market-Led Strategic Change . . . Refreshing in its candor, stimulating in its arguments, practical in its applicability, Professor Piercy is to be congratulated. Buy it! ’ Professor James M. Hulbert R. C. Kopf Professor Emeritus of International Marketing, Columbia Business School, Columbia University, New York

‘ This book is aimed at the reﬂ ective practitioner who wants to get things done. It is a management perspective on marketing, where marketing is not just the Marketing and Sales Department but a way of life that permeates every corner of the company. Market-Led Strategic Change demonstrates the author’s ability to combine systematic analysis with practical advice for action. The book is rich in practical examples from the author’s own experience and research. ’ Professor Evert Gummesson Professor of Service Management and Marketing, University of Stockholm, Sweden

‘By now everyone knows (or should know) what marketing is and what beneﬁ ts will accrue to the marketing oriented organization. The problem is not WHAT but HOW. Virtually all the recent work on competitiveness and competitive success . . . conﬁ rms that ‘it ain’t what you do, it’s the way that you do it ’ . In his new pragmatic and practitioner-oriented book Nigel Piercy provides usable insights and advice on how to establish,

•• xviii What readers said about Market-Led Strategic Change develop, deliver and sustain long-term customer satisfaction which can be the only guaranteed road to survival and success. I will use the book myself both as an educator and a senior manager/company director. ’ Professor Michael J. Baker Professor Emeritus of Marketing, University of Strathclyde, Scotland, UK

‘ I have always enjoyed reading what Nigel Piercy has to say about marketing, because he always has something interesting and useful to say. This book is no exception. It is creative, original, punchy, practical, challenging, thought-provoking, actionable, and a very enjoyable read to boot. I shall deﬁ nitely be recommending it to as many people as possible. It will make an enormous contribution to marketing practice.’ Professor Malcolm McDonald Emeritus Professor of Marketing, Cranﬁ eld School of Management, UK

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P A R T •••• I The impact of customer value imperatives

The purpose of Part I is to set the scene for what follows (which is a somewhat unoriginal goal for the ﬁ rst Part of a book). This is necessary because what follows is liable to make little sense to the reader unless the foundations have been clariﬁ ed. This is not a conventional book about marketing or strategy, but aims to bridge the gap between the two areas. This should thoroughly upset the reader with some famili- arity with marketing who expects every book about the subject to be a discussion of products and brands, prices, distribution and marketing communications (the conventional marketing programme), with a bit of market research and consumer behaviour stuff thrown in to add a (false) veneer of respectability. The central part of this book might also confuse the reader new to the area who expects it to be all about advertising, selling and consumer psychology. While this traditional stuff can be quite fun, it really does not hit the spot in addressing the real market issues businesses face. Things have changed. Conventional approaches to marketing have not. Therein lies the dilemma . . . First, we have to get some of the basics out of the way (Chapter 1). The objectives and rationale for the book are explained – why we are increasingly talking about ‘ new marketing’ to replace traditional approaches; why I think the market-led strategic change approach is needed; the idea of the process of going to market being more important than marketing as a traditional, functional activity; and the implications for what managers need to know (and what they perhaps do not need to know about). This chapter also introduces some of the major challenges facing managers as themes which run through the book. I also provide a route-map showing the reader the way through the book and hopefully clarifying its rationale. In Chapter 2 I try to tease out the issues of customer satisfaction and customer loyalty – the mantras underpinning much marketing trivia. I think the real customer issues are about customer sophistication Market-Led Strategic Change

and power, and the disappearance of the ‘ mass market ’ forever. Next, I examine the need for a different approach – ‘new marketing’ (Chapter 3). Here we look at what the radical, disruptive changes taking place in markets mean for the need for new marketing approaches to cope and respond. Finally, the themes emerging in the ﬁ rst two chapters are brought together in building a rationale for value-based approaches to marketing strategy (Chapter 4). The logic here is that many of the issues on which we have obsessed in the past – sales transactions, brands, customer relationships – are only a means to an end. The end is achieving superiority in customer value, where the arbiter of what is superior value is, always has been, and always will be, the customer. This provides the foundation for moving into Part II of the book and its structured approach to building a value-based marketing strategy.

•• 2 C H A P T E R • • • • 1 New marketing: marketing is dead, long live marketing!

This chapter . . . This chapter is about scene-setting. This is not an excuse for you not to read it! Here I try to explain what I think is wrong with many of the ways we approach marketing and make a case that focusing on the process of going to market as a set of value-deﬁ ning, value-creating and value-delivering activities is more useful and realistic than talking about marketing departments and conventional marketing programmes. I also identify that one of the critical issues in market-led strategic change is about implementation capabilities that cross traditional functions and organizational boundaries. This sets the agenda for management focus and action somewhat differently to the traditional approach, which you may like and you may not. In case you are not convinced by my compelling prose of the need for radical change in how companies go to market, I then attempt to frighten you with some of the huge challenges we face in re-thinking the process of going to market: the need for genuine innovation in customer value and the accompanying requirement for business agility; building the capacity to survive inevitable yet surprising crises; living with aggressive investor inﬂ uences; understanding and adjusting to the realities of globalization and emerging markets; accommodating the virtual realities created by the Internet; building corporate social responsibility and integrity into the business model; and, actually Market-Led Strategic Change

having a strategy rather than just plans and programmes. These themes pervade the rest of the book. Finally, I provide a route-map which identiﬁ es the rationale and logic for how the book develops, and should help anyone who gets lost on the way!

Introduction The escalating demands of sophisticated, value-oriented customers, the impact of new forms and sources of competition, the effects of new business models emerging in embryonic and mature industries, the sheer weight of the incredible change in technological capabilities, the unpredictability of radical and disruptive change in our markets, the emergence of survival-threatening crises at the speed of light, the realities of globalization and the true impact of emerging markets, accompanied by unprecedented scrutiny of ethical standards and corporate social responsibility . . . these dynamics all make for interesting times for marketing and business executives. However, it is these same developments that make much of traditional marketing look somewhat battered and bruised, not to say sad and inadequate (though in fact, I just did). Clinging to static models of conventional marketing programmes in a world of turbulence, obsessing with tools and techniques that analyse with great precision a world that has disappeared, persisting with conventional ways of doing things in markets where success belongs to innovators – none of these depressing characteristics of marketing bode well for its future as a business discipline. Paddy Barwise and Seán Meehan put the issue nicely when they underline that as products have become more diffi cult to differentiate (largely because there are few real differences between them), companies have resorted to excessive branding and gimmicks, leaving customers less satisfi ed now than they were a decade ago. Their appealing logic is that customers do not want bells and whistles and trivial brand differences – they just want quality products, reliable services and 1 fair value for money, i.e., customer-focused differentiation. People do not want fake offerings from slickly marketed phonies, they want real, authentic offerings from transparent and honest sources. 2 W e stand accused of ‘ marketing malpractice ’ – executives focused on ever- narrower market segments and more trivial product extensions, instead of fi nding out what jobs customers really need to get done and providing purposeful products and genuine innovations to do those jobs. 3 At best, marketing in the conventional sense is a professional discipline struggling to come to terms with the changes that confront it, and struggling to redefi ne itself for a new era. 4 Nonetheless, while traditional approaches to marketing look increasingly obsolete, the challenge of going to market remains critical to company performance. Hence the new mantra: ‘ Marketing is dead, long live Marketing’ .

•• 4 New marketing: marketing is dead, long live marketing!

Reality Check: Is marketing ﬂ ogging a dead horse?

The tribal wisdom of the Dakota Indians, passed from generation to generation, says that ‘When you discover that you are riding a dead horse, the best strategy is to dismount.’ However, in the corporate world, faced with the expired quadruped situation, more advanced strategies are likely: 1. Buy a stronger whip. 2. Change riders. 3. Appoint a committee to study the horse. 4. Lower the standards so that dead horses can be included. 5. Hire outside contractors to ride the horse. 6. Harness several dead horses together to increase speed. 7. Request additional funding from HR for training to increase the dead horse’s performance and create a personal development plan for the horse. 8. Undertake a productivity study with Operations to see if lighter riders would improve the dead horse’s performance. 9. Have the Accounting Department declare that as the dead horse does not have to be fed, it is less costly, carries lower overheads and therefore contributes substantially more to the bottom line than do some other horses. 10. Rewrite the expected performance requirements for all horses. 11. Promote the dead horse to be Marketing Director . . .

Source: Adapted from Wendy Lomax, ‘Tribal Wisdom ’, Academy of Marketing Newsletter , June 2005, p. 22.

So, does the world need yet another book about marketing? In fact, this is a book about the process of going to market, not marketing in the traditional sense – the difference is explained shortly. It also sets out to be controversial not conventional. The book is grounded in working with managers in companies and revelling in the creativity and innovation taking place in the marketplace, not in traditional marketing theory – it is sad that these should be such different things, but they are. There is a small problem with the conventional marketing view of how companies take their products and services to a customer, which is getting more deadly by the day – it assumes and relies on the existence of a world which is alien and unrecognizable to executives who actually have to manage such things for real. It rests on implicit assumptions such as the formalization and integration of ‘ marketing ’ in an organization, not to mention explicit assumptions that market strategies are speciﬁ cally formulated and directly lead to related marketing

5 •• Market-Led Strategic Change

programmes. It assumes that the whole market problem is solved by marketing research to fully understand customers and markets. All these assumptions come from the page of the idealistic, ivory-tower, prescriptive textbook, not the reality as it is perceived, experienced and faced by line executives who have the real problem of managing.

What is ‘ marketing ’ anyway? It always annoys marketing executives (a worthwhile objective in its own right) when you point out that, historically, marketing as a company function only came into being to coordinate sales and advertising activities. From these humble administrative origins grew the empires of brand managers, marketing planners, marketing researchers and customer relationship management. Even more irritating is the way in which the word ‘ marketing ’ is used. It is no exaggeration to say that the word ‘ marketing ’ has almost become a term of abuse denoting high pressure selling, ‘ spinning ’ the truth, selling things no one needs, making false claims for products and services, and even providing dubious advice to political leaders.5 The general perception is that only sales is less attractive than marketing as a profession – and that is fast- changing as sales takes control of strategic customer relationships and gets respectable. In fact, I avoid using the word ‘ marketing ’ in many places in the book and in work with executives: ‘going to market’ instead of ‘ marketing ’ , process instead of functional department, ‘ market-led ’ instead of ‘ marketing-led ’ , and so on. The reason is simple. It is not a ploy to save paper and ink (unless you are a green marketing fanatic – in which case, that’s really what it is). It is simply because markets are more important than marketing, and it helps if we say so. It is also because markets and customers are the responsibility of every manager in a company, not the ‘ property ’ of marketing specialists. I worry about the expression ‘ marketing specialist ’ , and frequently cite the deﬁ nition of the specialist as one who knows more and more about less and less, eventually knowing everything about nothing. It may not be original, but it sure is true. My view of this is that if ‘marketing ’ is what traditional marketing departments do (or did), then ‘ going to market ’ is what companies do (and always will). ‘Marketing ’ may have belonged to marketing specialists, but ‘going to market’ is a process owned by everyone in the organization – the ‘ part-time marketers ’ ,6 the chief executive,7 cross- functional teams 8 – and that is how we have to learn to manage it. The core of market-led strategic change is to focus on the process of going to market and how it is designed and managed.

But why upset the applecart? . . . because if we don’t, someone else will. The more you think about your company’s process of going to market, instead of conventional

•• 6 New marketing: marketing is dead, long live marketing!

marketing, you are likely to become aware of three quite frightening things: customers and markets have changed – radically and forever; many of our companies have set themselves up to make it as difﬁ cult as possible to respond to the ways in which customers and markets have changed; and consequently, the manager’s job has changed – radically and forever. This is a reality from which there is no escape. Consider conventional marketing in the light of the words of Thomas Paine:

‘ A long habit of not thinking a thing wrong, gives it a superﬁ cial appearance of being right. ’ Thomas Paine, (1737–1809), writer and revolutionary

And, by the way, who said it had to be so boring? I think we have another problem in management education and consultancy with what seems to be the ‘MBA mantra’ – to be boring and tedious as a substitute for being innovative and creative. This seems to be what ‘ professionalism’ in areas like marketing leads to. Business is serious stuff – absolutely no giggling allowed! It is almost as if every business school in the world has an unwritten set of MBA Commandments, to which you have to agree if you want to be a ‘ proper ’ manager. In fact, it must look something like this:

Reality Check: The MBA Code of Practice

Thou shalt never smile again. Thou shalt dedicate thy career to being a boring, humourless jerk, for is this not how thy professors are moulded? Thou shalt spread the message that plans and systems matter more than doing things. Thou shalt live by the dictum that those things which cannot be measured precisely and validly to six decimal points, simply do not exist (little things like customer satisfaction and customer value shall not trouble thee . . .) Thou shalt dedicate thyself to driving the creative and unconventional people out of thy organization, for do not they deserve to be in an agency somewhere, where they can do no harm? Thou shall worship at the alter of bureaucracy, for is not the neatness of the organization chart a measure of thy true worth? Thy mission is to attend meetings for the rest of thy life, for is not the number of such meetings a measure of thy productivity?

Oh all right, I am exaggerating a bit, but not that much. In a time when success will depend more than ever on talent, creativity,

7 •• Market-Led Strategic Change

unconventional thinking, innovation, original strategic insights, the intellectual capacity to grasp and understand revolutionary change, and the ability to deliver – this type of ‘professionalization ’ may be less than helpful. Perhaps we should lighten up on the suits and ties, PowerPoint presentations and report writing, complex management science, and concentrate on the things that deliver value, create new opportunities and make money?

The Process of Going to Market What do we mean by the ‘ process of going to market ’ ? The model in Figure 1.1 explains. The simple logic of the model is as follows. Frederick Webster provided the insight that value processes in an organization are concerned with defi ning value, developing or creating value and delivering value to customers.9 Figure 1.1 shows these processes of value defi nition, creation and delivery as making up the horizontal process of going to market and the creation of customer value. Although this type of approach is increasingly infl uential in designing market-led organizations, it is unlikely that the processes will be labelled in this generic way. For example, processes to defi ne value may be named Customer Relationship Management or Marketing Information Systems, processes to create value may be called New Product Development or Brand Development, while processes that deliver value may be recognized as Distribution Management or Customer Service. The specifi c organizational labels matter less than the recognition of the need to provide leadership and coordination to the organizational activities that impact on the value received by customers. The important point is that value processes become the focus

Creativity Innovation Reinvention

Processes that define value e.g., market knowledge and learning, CRM, research, intelligence

Processes that create value Customer e.g., new product development, innovation, value brand development, strategic relationships

Processes that deliver value e.g., channels, supply chain, customer service

Resources Capabilities Figure 1.1 The Strategic relationships process of going to market

•• 8 New marketing: marketing is dead, long live marketing! of our resources (people, technology, funds), our capabilities (skills, competences and abilities), and strategic relationships (partnerships, collaborations, cross-functional integration). The creation and delivery of superior customer value becomes the arena in which we deploy creativity, innovation and sometimes the reinvention of the model of how we do business. This simple process model (which, trust me, we will make much more complicated later on) leads us to identifying some important practical differences in managing the process of going to market, instead of just ‘ marketing ’ . These are:

● we base our strategies on our customers and markets – we are market-led or market-driven;* ● our internal programmes of change and our external actions in the marketplace are driven by that strategy; ● we concentrate on getting our act together around the things that matter to delivering our customer-focused strategy into the market – the ‘ ownership ’ of activities by functional departments, the existence of ‘ specialists ’ in professional disciplines, and conventional organizational structures, are all secondary to this; ● boundaries between traditional functional departments, and even between organizations, are crossed by teams and processes focusing on the creation of value for customers; ● new types of strategic relationships – with customers, collaborators, competitors and co-workers – are more fundamental than contracts and transactions; and ● new ways of doing business are underpinned by information technology, as the infrastructure supporting complex relationships inside and outside the organization.

The perspective of the process of going to market instead of that of traditional marketing has very practical implications. Certainly, this viewpoint does not sit happily with many conventional views of how things should be done. But who cares about conventional views when they are demonstrably out-of-date? In fact, I would go still further. If you look at the many cases of market success studied in this book, in almost no case can you put the success down to structured marketing programmes with impeccably great planning, and the application of advanced theories of market behaviour by traditional marketing departments and executives. They are more often about managers with a sense of what will go with a particular type of customer, putting together a deal that will attract that

*Some people get a bit hung up on whether we should truly be led or driven by the market, or should in fact be leading and driving the market. If asked which of these is meant by market-led strategic change, the only real answer is ‘both’ (because they are the same thing if you think it through and stop playing silly games with words).

9 •• Market-Led Strategic Change

customer, and driving that strategy through the internal and external obstacles. That is really the difference between managing marketing and managing the process of going to market. Of course, marketing activities – new product development, branding, pricing, distribution, marketing communications, and so on – are a part of the process of going to market, and often a vital part. The difference is that the context for marketing should be the process of going to market, not the marketing department.

So what do managers need to know? If this is a book about the process of going to market, then there remains the question of who it is for. It is for actual or future business managers (who may or may not see themselves as ‘ marketing specialists’ ). The content of this book is chosen with two very simple questions in mind. Those questions may be simple, but they seem to have been somewhat neglected recently. The guiding questions are: what does a manager really need to know to improve the company’s process of going to market, to change the way things are done, and to attain superior performance in the marketplace; and, what does a manager need to see when s/he stands back from day-to-day operations to see the big picture of going to market, to ﬁ nd ways of doing it better? These questions suggest that the things a manager really needs to get a handle on, in the process of going to market, are:

● customers – understanding customers and focusing on the market offering we make to them and what it produces in superior customer value; ● marketing strategy – choosing market targets and building a strong market position based on differentiating capabilities to create a robust and sustainable value proposition to customers, driven by networks of critical relationships; ● implementation – driving the things that matter through the corporate environment to the marketplace.

We are pretty short on technical details – pricing theories, new product development programmes, market research techniques, advertising theory, buyer behaviour models, and so on. There is a reason for this. Managers do not need to get involved in technical details and arcane theories. If our focus is the process of going to market, then we probably do not need to know much about: theories of market orientation (let’s just take customers seriously instead); details of marketing programme decisions (let specialists worry about salesperson routing systems and media buying); models of consumer behaviour (because most of them don’t actually tell you what consumers are going to do, and most of us sell to organizations anyway); marketing research techniques (because most of them are about measurement tools as opposed to actually

•• 10 New marketing: marketing is dead, long live marketing!

understanding our markets); or, postmodernism and critical marketing (and I still don’t know what they are, just that they don’t seem to be useful for anything).

Reality Check: Thoughts on meeting postmodern marketers

They said: ‘Smile, it could be worse ’. So, I smiled. And, it got worse.

Interestingly, the things managers do not need to know knock out about 95% of what most conventional training and education courses in marketing do. However, all we are doing is putting the easy (and silly) stuff on hold, to focus on the difﬁ cult things that really matter: customers, market strategy and effective implementation in the process of going to market. These are the tough issues, and the ones we cannot afford to run away from. This has just made life a lot harder. Sorry. The other things that make life a lot harder for managers are the fundamental changes and shift in the pressures and challenges they face. Although it is not exhaustive (even if it is somewhat exhausting), consider some of the issues below as the context for managing the process of going to market.

Challenges for the 21st Century Manager Part of the justiﬁ cation for re-thinking traditional approaches to getting goods and services to market is that the world has changed and the demands on managers have escalated. These are recurring themes throughout the book, but some of the most signiﬁ cant challenges now facing executives include the following.

New business models The business model, or business design, describes how a company makes money – how it generates revenue and profi t by delivering value to customers – including the infrastructure needed to achieve this goal. One of the toughest decisions to confront is when the established business model has become obsolete, and how to change. Tackling ineffi - ciencies and developing better internal organizational processes is an important part of a manager’s role. But coping with ineffi ciencies is pointless if the business model has been displaced by something better – clichés about rearranging the deckchairs on the Titanic spring to mind.

11 •• Market-Led Strategic Change

The inevitable displacement of the recorded music CD by digital music downloads; the unbeatable challenge of the low-cost budget airlines to the established full-service ﬂ yers; the superiority of agile fast-fashion companies like H& M and Zara in speed and cost over established fashion clothes retailers; Google’s attempts to make the value chain in wireless mobile like that in the broadband Internet market (where applications are developed independently of device manufacturers and network operators), could relegate operators to a minor and unproﬁ table role; the impact of open-source (free) computer software from Linux and Sun on conventional software producers like Microsoft – all are examples of new business models displacing the old by offering better value to customers. Increasingly, competition is between business models not products and companies. It follows that companies require a capacity for continuous reconstruction or resilience to overcome forces which do no more than perpetuate the past, to seek out innovation for the future. 10 The choice is between reinvention and renewal, or stagnation and failure. But no one should think this is going to be comfortable. Consider Microsoft’s approach to China.

Reality Check: Microsoft’s business model in China

Microsoft entered the China market in 1962, but its business there has been a disaster. Microsoft’s emerging business model for China is a radical departure from how it operates in the rest of the world. The key problem for Microsoft in China is not brand acceptance – everyone already uses Windows – but counterfeit copies of software bought for a few dollars. China’s slack intellectual property enforcement laws mean Microsoft’s normal pricing strategies were bound to fail. Another problem was city governments like that in Beijing installing free open-source Linux operating systems on workers’ PCs. The policies that made Microsoft market leader in the USA and Europe made little sense in China – Microsoft has had to become ‘ un-Microsoft ’ . China prices for Microsoft products are rock-bottom – instead of charging hundreds of dollars for Windows and Office, it sells a $3 Windows/Office package to students. In China’s back alleys, now Linux often costs more than Windows because it requires more disks. Microsoft’s China strategy abandons the centrepiece of its approach elsewhere – the protection of its intellectual policy at all costs. Tolerating piracy has become part of Microsoft’s long-term China strategy. In China, Microsoft is partnering closely with the government – instead of fighting it, as it does in the USA and Europe – which has opened the company to criticism from human rights groups.

Source: Adapted from David Kirkpatrick, ‘How Microsoft conquered China ’ , Fortune , July 23 2007, pp. 76–82.

•• 12 New marketing: marketing is dead, long live marketing!

Innovation and business agility Innovation means more than producing new products which are marginally different to their predecessors. It is about the quest for delivering superior value, not just making buying more complicated – in the ‘anxiety society’ the luxury of wide choice is driving some people mad, and the ‘ explosion of choice ’ for customers may be unproductive. 11 People ask if the British consumer really needs 38 types of milk, 154 jams and 107 varieties of pasta on the supermarket shelf.12 Products that do too much produce ‘ feature fatigue ’ – hey, it’s not just a dual wake-up alarm clock, it’s a CD player and aromatherapy machine as well – with a shortwave transmitter and a Dictaphone function for recording late- night brainstorms!13

Reality Check: More choice or make it simpler?

In a study in a US supermarket, tasting tables had either 24 or six different jars of jam. Customers generally stopped at the table with greater choice – but only 3% of those who shopped actually bought any jam. Of those who stopped at the table with only six jars of jam, nearly a third of them bought some jam. It seems that while shoppers are attracted by the idea of choice, they shop more when the number of alternatives is lower. People may search for simplification rather than complexity in shopping choices.

Source: Adapted from Gerd Gigerenzer, Gut Feelings: The Intelligence of the Unconscious , London: Allen Lane, 2007.

The challenge of innovation is not about mindless proliferation of unwanted alternatives, it is about creating new ways to deliver superior customer value. But if you look at the organizational changes at companies like Procter & Gamble and IBM in their search for valuable innovations that beneﬁ t customers, real innovation is likely to be disruptive and challenging, not incremental and predictable. In fact, although innovation usually refers to technology and products, the most important innovations may actually be in how we think about and do management – management innovation changes how we all work and are directly linked to sustainable competitive advantage. The constant search for better ways of managing underpins outstanding success at companies like Toyota and Procter & Gamble.14 It is already clear that we are going to have to be slicker and faster than ever before in how we learn and respond to marketplace and competitive change. The structures, processes and bureaucracies of the past simply cannot hack it any more, they are too slow and cumbersome. The organizations from which we go to market will be smaller,

13 •• Market-Led Strategic Change

fl atter, entrepreneurial, often hollow, focused on learning, process- based, externally-oriented, without clear boundaries, and led by strategic relationships inside and outside the company. They will be diffi cult to manage, but what most of us have now simply cannot deliver what is required. Business agility and fl exibility are imperatives. Strategic agility involves companies in developing the capability for nimble, fl exible and fast reactions to change, based on: strategic sensitivity – constantly scanning for information; collective commitment by managers to make fast decisions and not fall back on ‘ individual hesitancy ’ or ‘bureaucratic politics ’ ; and resource fl uidity – deploying the right resources quickly to where they are most needed. 15 Strategic agility may have interesting effects. Zara is a slick and agile company that gets new fashion clothes from cat-walk to store in days. After Madonna’s fi rst concert in Spain on a recent tour, Zara got to work on copying one of her dresses – by the last gig on the same tour many of the fans were wearing the ‘same ’ dress as Madonna – nightmare for Madge!16 The priority for agility spans diverse sectors. In aerospace, Rolls– Royce’s 2008 strategic shifts were explained: ‘We are determined to create a leaner and more agile support structure, better suited to the global markets in which we operate.’ 17 The same goals link overhead reduction and bureaucracy cutting at Cadbury–Schweppes, BP and the big automobile companies. Fat, slow organizations cannot survive anywhere. Crisis survival One of the implications of rapid, turbulent and unpredictable market change is that you will get surprises. Sometimes, they will be nice surprises. Usually they will not be nice surprises: an earthquake in Japan stopped car manufacture at most plants because one component supplier closed down; the 9/11 terrorist attacks in the USA had major impact on the aerospace industry, the airlines, transatlantic tourism, and so on; the global toy business faced huge product recalls of ‘toxic toys ’ and public dismay in 2007, when it was discovered that Chinese suppliers had been using lead-based paint on toys; when the British government decided to distinguish itself by losing computer disks containing huge amounts of citizens’ personal data, TNT was less than amused to fi nd itself named as the courier by ‘ responsible ’ minister Alistair Darling (who was apparently trying to off-load the blame onto an innocent party); the world changed for everyone on 9 August 2007, when we faced the consequences of the sub-prime lending debacle in the USA and the subsequent credit crunch.

Reality Check: Mistakes

‘ Learn from the mistakes of others, for you will never have time to make them all yourself.’

•• 14 New marketing: marketing is dead, long live marketing!

Surprises, and the crises they create, demand an unprecedented level of ﬂ exibility and responsiveness from managers. Failing to respond effectively may have devastating consequences.

Marketing under siege Military strategists will tell you that the most diffi cult battlefi eld manoeuvre is the fi ghting withdrawal – retreating from a lost battle still fi ghting, in good order, and with resources as intact as possible. I have coined the phrase ‘marketing under siege ’ to describe the marketplace equivalent. Many of us will work in markets that are declining, or are under attack, rather than in popular ‘ growth ’ markets, where anyone can make a living. Consider, for example, the situation for tobacco companies. Their business is wholly legitimate, but unfortunately their products are lethally dangerous and highly addictive. The industry is under siege from health authorities, governments and pressure groups, and the fact that fewer people smoke in most developed countries. Nonetheless, companies like BAT remain large employers and are attractive to many investment funds. BAT is looking at strong demand for cigarettes in emerging markets like Russia where smok- ers are upgrading to more expensive cigarettes. Social activists are less than keen on Western tobacco companies exporting their products to developing countries. The industry is consolidating through international mergers and acquisitions. But promotional activities are severely circumscribed by lawmakers and barriers erected to smoke-free new products like nicotine gel, snuff and chewing tobacco – yet alone the continuing quest for a ‘ safe cigarette’ . But whatever else you can say about tobacco – the producers are not popular (notwithstanding their attempts to publicize their records as enlightened employers and a force for social improvement in tobacco-growing countries). The challenges of maintaining a rigorous approach to business, of retaining and motivating talented people, and delivering sustained value to investors in conditions of severe societal hostility and encroaching regulation are considerable. Many more sectors are experiencing siege-like conditions: producers of alcoholic drinks like Diageo have been put in the strange position of advertising aimed to reduce alcohol consumption, because society disapproves of ‘ binge-drinking ’ ; cheap lager at Tesco and cider for 26p a pint at Sainsbury have raised furious protests from anti- drinkers; fast-food companies are looking at increasing criticism of their food and restrictions on their businesses, because of societal fears about an obesity epidemic. Even the mighty Tesco faces attacks because of the creation of ‘ Tesco Towns ’ and reduced consumer choice as small shops are forced to close – society fears the company is simply too powerful and is creating ‘ Tescopoly ’ . Automotive companies are being forced by government policies to invest in ‘green ’ technologies to meet reduced emissions targets, at a time when it seems most consumers are not willing to pay the price for more environmentally responsible

15 •• Market-Led Strategic Change

vehicles – they appear to prefer their gas guzzlers.* And we have not even started to talk about people who make armaments and munitions . . . In many sectors, executives will have to function under attack in the midst of considerable unpopularity, and yet still deliver value to their customers and shareholders.

A global bagel ✝ By mid-2008 it looked like the world was talking itself into a bagel . The sub-prime mortgage debacle in the USA was affecting banks across the world, disasters like the collapse of banks like Northern Rock in the UK and Bear Stearns in the USA, the worldwide ‘credit crunch’ , down- turns in economic indicators of growth, falling house prices, and a marked loss of consumer confi dence all pointed towards a big bagel. Voices of old-style national protectionism were starting to be heard – with Japan rapidly building new barriers to entry for overseas competitors, the USA blocking Chinese technology company investment in their country for ‘ security reasons ’ , and the EU still obsessing about cheap shoes. Analysts and consultants were already starting to draw up lists of the products and retailers most likely to be hit by a reduction in consumer expenditure‡ – they fi gure big ticket items will suffer most, while retailers like Tesco and B& Q are in the best position to survive bad times.18 A serious bagel will undoubtedly create more diffi cult conditions for companies taking their products and services to market. Importantly, however, not all sectors will be affected in the same way, and not all countries will be affected to the same extent. A bagel will underline the growing importance of business agility. Sound counsel is that in bagel-affected economies successful companies do not abandon their strategies, they adapt them – maintaining marketing spend, adjusting product portfolios and prices, emphasizing core values. 19

Aggressive investors The ﬁ rst half of the 2000s saw a prominent and controversial role for private equity investors, who buy businesses and take them into the

*It does look a bit like the thought process of the average 4 4/SUV driver is something like: ‘I love my Range Rover. But . . . global warming, fl ooding, winter storms . . . sorry, next time I get a Hummer with a gun rack, to be on the safe side.’ ✝ The trouble with the word ‘recession’ is that people use it to talk themselves into a loss of confi dence and a consequent economic downturn. I will follow the excellent example of the superb West Wing series, in which White House staffers use the word ‘bagel’ instead of ‘recession’ to avoid spreading gloom, despondency and panic. ‡Actually, I think there is a strong case for the relaxation of the law, such that anyone who uses phrases like ‘global meltdown’, ‘economic downturn’, or ‘credit crisis’ should be punished, perhaps physically – particularly if they are the bankers whose greed and crass stupidity created the problem in the fi rst place. They are talking us into a major problem by undermining consumer and business confi dence and thus causing what they fear to happen.

•• 16 New marketing: marketing is dead, long live marketing!

private sector – seen by some as asset-strippers who destroy businesses and jobs, and by others as turnaround specialists. While the credit crunch of the later 2000s has trimmed their wings somewhat, we still have a situation where a Wall Street ﬁ rm – Cerberus – owns a Big Three automaker (Chrysler), Blackstone has bought Hilton Hotels, KKR has bought Boots, and Debenhams has been through private equity ownership and back out again. The point is that buyers of businesses change how they operate, sometimes for the better, and sometimes not – for example, when Permira and CVC owned the AA they were accused of systematically reducing customer service as part of their cost-cutting.20

Reality Check: The Debenhams debacle

In one of private equity’s most high profile deals, Debenhams, one of Britain’s oldest department store chains, was taken private by TPG Capital, CVC Capital and Merrill Lynch, and then sold back to the market three years later in May 2006, at an enormous profit for the private equity backers – they put in £600 million and took out three times that amount. When taken private, Debenhams looked a perfect candidate – property that could be sold to raise money, scope

Courtesy of Debenhams plc

17 •• Market-Led Strategic Change

for squeezing suppliers on prices, and room for more aggressive trading tactics, with prices slashed. As part of the purchase deal, the backers put £1.1 billion in debt onto Debenhams ’ balance sheet. In private ownership, properties were sold, stores were not refur- bished, deep cost-cutting was implemented and price discounting to shift stock quickly eroded the chain’s brand image. The chain was already failing to meet expected forecasts for sales and profits when it was re-listed, and the share value plummeted. Critics claimed that private equity does not add value to businesses, but instead just hol- lows them out for short-term profit. Fuelled by the company’s repeated profit warnings, late-2007, Debenhams’ shares hit an all-time low, with worries that the mid- market brand was particularly exposed to any consumer downturn. Worries are that the chain is over-burdened with debt, has failed to spend enough on its stores and that regular price discounting has damaged the brand. Nonetheless, the company is fighting to regain its former position by increasing sales, improving margins, opening new stores and refurbishing others. However, by summer 2008 trading conditions had deteriorated, and Debenhams was delaying supplier payments.

Sources: Elizabeth Rigby, ‘Flip or Flop? ’, Financial Times, August 6 2007, p. 9. Jenny Davey, ‘Debenhams Chief Defies the Critics’, Sunday Times , December 2 2007, p. 3-8. Teena Lyons, ‘Debenhams to Delay Paying Bills as Sales Tumble ’ , Sunday Times , June 22 2008, p. 3-3.

To the impact of buy-outs, add the forceful behaviour of activist investors. Nelson Peltz heads a group of investors in Cadbury– Schweppes and is determined to force the company’s management to think along more radical lines, pressuring them to spell out how they intend to improve proﬁ t margins, strengthen the board and return cash to shareholders. The resignation of the company’s chairman was pre- cipitated by investor pressures. Other investors have backed Mr Peltz’s very public demands for change at Cadbury.21 Similarly, Calpers, the American pension group, has set a six month deadline for HSBC, the world’s largest bank in which it has a 3% stake, to come up with a radical plan to improve share performance and meet testing ﬁ nancial targets. 22 Forecasts suggest that investor action to force change in companies will continue to escalate, providing an additional constraint and pressure for managers.23 The days of just paying lip-service to the shareholders seem to be over. If you do not get your act together – they will come and make you.

What globalization really means It is a bit trite to draw managers’ attention to the globalization of their markets. Most have probably noticed. In fact, it has become almost a

•• 18 New marketing: marketing is dead, long live marketing! knee-jerk reaction in companies from almost every sector to suggest that the answer to falling sales growth in the developed world (and just about every other problem too) is renewed efforts to attack the growing demand in emerging markets – usually the ‘BRIC ’ countries of Brazil, Russia, India and China. This is fi ne, if somewhat optimistic. However, it is likely to require very different organizational forms and ways of doing business. Samuel Palmisano, Chairman and CEO of IBM, describes the ‘ globally integrated enterprise ’ (GIE) as the 21st century successor to the multinational corporation. The GIE represents fundamental change with the integration of production and value delivery worldwide – connected and shared business practices will make it possible for companies to easily transfer work from in-house operations to outside specialists. The centre of the GIE is global collaboration with commercial partners and governments.24 But compare this vision to a few harsh but interesting realities: the low-cost car for India has not been produced by any of the global automotive alliances, but by the Indian company Tata – the ‘one lakh car’ (selling for £1250) is the Tata Nano; in 2007, the top tourist sites in India began to refuse to accept the US dollar in payment for admission – they wanted to be paid in a hard currency like the Rupee; in 2006 an Indian company opened a call centre in Britain; 25 the global steel industry has been reinvented by Lakshmi Mittal’s Arcelor Mittal company, growing out of Indonesia, India and the former Eastern Europe, which is now the global market leader; Russian steel-makers are rapidly acquiring steel plants in the USA; though frequently somewhat secretive, the investment vehicles of governments in Asia, the Middle East, and elsewhere are buying companies and brands in the West; six Gulf States alone control sovereign fund assets of $1.7 trillion (secretive, government- controlled investment vehicles) – as much as all the hedge funds in the world put together; the oil and gas business was once led by ExxonMobil and Chevron of the USA and BP and Royal Dutch Shell in Europe, but now is dominated by Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia, who together own a third of the world’s oil and gas production and reserves; and, at the end of 2007, three of the fi ve largest companies in the world were Chinese (PetroChina, China Mobile and Industrial & Commercial Bank of China). 26 Astonishingly, in 2008, amid the meltdown of mainstream banks in their credit crunch, Bangladesh’s Grameen Bank made its fi rst loans in New York, bringing its pioneering microfi nance techniques (very small loans to high credit risk consumers), to the poor of the United States of America who do not rate a bank account.27 Do you see something of a pattern emerging here? Not only are many sectors now dominated by investment from the emerging markets – and many of us in the next few years are likely to have to get used to the idea that ‘ head offi ce ’ is now in Mumbai or Beijing not London or New York – the real export from the emerging markets is not capital, it is new ways of doing business, or new

19 •• Market-Led Strategic Change

business models. Companies who have developed effective ways of doing business in the harsh market conditions they have faced, are likely to ﬁ nd Western markets pretty soft targets. Businesses that have survived tough economic conditions have valuable lessons for others.28 Think about Mumbai’s tifﬁ n boxes, and ask what such radically different approaches could do in other markets.

Reality Check: No such thing as a free lunch

Mumbai’s ‘ dabbawallahs ’ constitute a 5000-strong workforce that every day rushes tens of thousands of tiffin boxes (stacked cylindri- cal tins of food) across the city. The food is prepared in the morning by wives, sisters and maids, and using a relay system they reach the right person by lunchtime. The empty tins are collected after lunch and returned to the housewives who prepare the food. A coded system of numbers and signs on the tiffin box directs it to the correct office. Every day the dabbawallahs, many of whom are illiterate, deliver more than 170,000 meals with almost no mistakes. The tiffin box system has operated successfully for more than 100 years. The system is highly customer-focused but relies on the dabbawallahs ’ feet, heads, bicycles, carts and the luggage compartments of the trains in Mumbai’s suburban rail network. This complex system has no computer databases or software, or barcode scanning, or supply chain strategy, but it is both lean and agile. The extension of business models from emerging markets like India has the potential to revolutionize Western markets.

Source: Adapted from Sarah Murray, ‘Food for Thought for the Financiers ’ , Financial Times , November 19 2007, p. 14.

Virtual realities The impact of virtual communities on the Web, from social networking on sites like MySpace and Facebook to user-generated content on YouTube is seen by some as the move from the hippy counterculture of the 1960s to cyberculture in the 2000s – a sort of ‘ digital utopianism ’ .29 The virtual life led by people through their avatars (three-dimensional graphical, digital representations) on virtual worlds is perhaps illustrative of how weird this is getting.

•• 20 New marketing: marketing is dead, long live marketing!

Reality Check: Second life – or get a life?

Run by San Francisco-based Linden Lab, Second Life is the best- known of the online virtual world sites on the Internet. Second Life has more than 8 million users – or ‘residents’. Roughly half the users are female, and the typical user is aged between 25 and 34, with a full-time job. Residents create an avatar of their choice (often somewhat idealized compared to the real person) and are free to wander or fly though the expanding world, spending Linden Dollars (the virtual world’s currency) – possibly buying virtual clothes and shoes for the avatar in the virtual shops, as well as real-world products. About $2 million a day is spent through conversion of Linden dollars. Rising virtual property prices have become a concern of late, along with bank defaults. Recently, the Liverpool Philharmonic gave a concert allowing Second Life residents to interact with each other during the event, buy virtual refreshments at the shop, and have a chat with the conductor in the bar afterwards. Residents can watch real-world sports events in the company of their virtual friends in a virtual sta- dium. Reflecting its real-world coolness, Virtual Tokyo opened in 2007 (as a marketing and advertising platform for Dentsu, Japan’s largest advertising agency). Sun Microsystems uses its Second Life presence to develop a better understanding of new communications modes. Sun hosted the first Fortune 500 press conference in the ‘Sun Pavillion ’ in Second Life in 2006, attended by 60 avatars including journalists, software developers and Sun customers. Sun can create new products – such as computer hardware – and test them to destruction in Second Life. American Apparel Inc. became the first real-world clothing retailer to set up shop in Second Life in June 2006. The store sells virtual T-shirts for residents to wear. Adidas has sold 21,000 pairs of virtual shoes in its store. Starwood Hotels has built a huge model of its new Aloft hotel on an island, with deluxe pool and designer lounge. Crompco Corp., an underground gas tank testing company, has built a virtual gas station for training employees. IBM has bought a large space used for company and industry meetings of IBMers ’ avatars. In fact, IBM is taking virtual life so seriously, the company has issued etiquette guidelines for employees visiting Second Life, asking colleagues to be ‘sensitive to the appropriateness of your avatar or persona’s appearance when you are meeting with IBM clients’. Second Life is one of ten futuristic initiatives to which IBM has committed $100 million. IBM’s chief executive brags that he has two avatars in Second Life – a casual Sam, and a buttoned-down Sam. Big business interest has been stimulated though commercial life is mainly dominated by small virtual business owners, some of whom are making real money. Some companies are already targeting their customers’ online alter egos with advertising and sales efforts.

21 •• Market-Led Strategic Change

No one is really clear where virtual worlds lead – just that they lead somewhere. Amusingly, among the first applications is the use of virtual worlds as an online teaching device by business schools . . .

Sources: Robert D. Hof, ‘My Virtual Life’, BusinessWeek, May 1 2006, pp. 71–82. Paul Hemp, ‘Avatar-Based Marketing’, Harvard Business Review , June 2006, pp. 48–57. ‘Fancy a Second Life’, Sunday Times, July 15 2007, p. 3-2. Andrew Baxter, ‘A Second Life for Classrooms with Vision’, Financial Times , March 3 2008, p. 12.

While it may be relatively easy to get a handle on the impact of social networking and peer-to-peer communications on customers’ perceptions and preferences (see Chapter 3), the chances are that the virtual economy has a lot more surprises in store.

Coping with paradox Complexity and rapid change also create paradox for management – for example, how to simultaneously combine incremental change with bold new initiatives. The ‘ strategy paradox ’ is that, to succeed, companies must make bold strategic commitments to the future, while they cannot be certain what the future will bring – the paradox is that the same behaviours and characteristics that maximize a ﬁ rm’s probability of notable success also maximize its chances of total failure.30 A key capability for managers is turning out to be the ability to hold two opposing ideas at the same time. Embracing contradictions, and avoiding the oversimpliﬁ cation of ‘ this or that’ or ‘ either/or ’ , produces better decisions and strategies. Success may be based on the ability to reconcile contradictions and integrate profoundly differing views, to establish a vision that drives the business.31

Corporate social responsibility and integrity Many companies have long been involved in corporate philanthropy (charitable donations), mission statements aspiring to superior corporate citizenship, and codes of conduct to guide decision makers in ethical behaviour. This is ﬁ ne and dandy. But things just got a lot more serious. In March 2007, Microsoft dropped one of its UK suppliers because that supplier did not conform to Microsoft’s employment diversity standards. British supermarkets spent much of the same year in an ‘environmental arms race ’ attempting to out-green each other. Environmental issues have become increasingly decisive in customer decision making – the ‘ green consumer ’ is alive and well and populat- ing your markets. But the scope of corporate social responsibility (CSR) has gone way beyond just meeting society’s new standards, to become an essential part of how we compete.32

•• 22 New marketing: marketing is dead, long live marketing!

At one level, things may just work out neatly. Heineken and Diageo teamed up for a CSR project to help African farmers grow sorghum. In fact, what started as a CSR project created sustainable and attractive business, brewing beer from locally grown materials in Africa rather than importing expensive barley.33 Remanufacturing allows companies to recycle materials from used products to produce ‘ like new ’ – Caterpillar has built a highly profi table $1 billion remanufacturing division re-using tractor and engine parts. Similar initiatives span disposable cameras, copiers, compressors, carpet tiles and cell phones. 34 By contrast ‘ social entrepreneurs ’ are a group of ‘ unreasonable people ’ striving to solve economic, social and environmental problems of the world by ‘ disrupting existing industries, value chains and business models ’ to fi nd solutions to poverty, hunger and climate change.35 One of the best-known examples of social entrepreneurs is Muhammed Yunus, founder of Grameen Bank, who pioneered microfi nance (very small loans to borrowers previously seen as uncreditworthy), which has created a big new business for banks in the emerging markets. In fact, the real challenge emerging is to integrate CSR initiatives into the business model in such a way that they represent how we compete and the value proposition we offer to our customer.36 It involves something more profound than just leaping on the latest media-inspired, government-sponsored bandwagon, like retailers getting rid of single- use plastic carrier bags (worthy though that ambition may be). CSR initiatives may identify and stimulate the biggest business opportunities of the future. This is a very big challenge. It may be one of the most important we face. Certainly, if it helps – there is much evidence that our customers, suppliers, managers, employees and business students all think we should try much harder.

Reality Check: CSR and Dell’s business model

Leading computer supplier Dell Inc. faces challenges in rebuilding its value proposition, after losing market leadership to Hewlett–Packard. Dell is leveraging its distinctive competitive competences in initiatives with both business and social benefits – using the strengths of its direct business model to generate collective efforts to reduce energy consumption and protect the environment. The initiative centres on improving the efficiency of IT products, reducing the harmful materials used in them, and cooperating with customers to dispose of old products. Michael Dell’s environmental strategy focuses on three areas: creating easy, low-cost ways for businesses to do better in protecting the environment – providing, for example, global recycling and product recovery programs for customers, with participation requiring little effort on their part; taking creative approaches to lessen the

23 •• Market-Led Strategic Change

environmental impact of products from design to disposal – helping customers to take full advantage of new, energy-saving technology and processes, and advising on upgrades of legacy systems to reduce electricity usage; and looking to partnership with governments to promote environmental stewardship PC. The link between this CSR initiative and the company’s business model and value proposition is clear.

Source: Adapted from Michael Dell, ‘Everyone Has a Choice’, Financial Times Digital Business – Special Report , April 18 2007, p. 1.

Having a strategy Everywhere you go, people have plans. * Most have neatly designed marketing programmes. Plans and programmes are not the same as strategy. In the complex situations we now face the need for a strategic perspective on how we deal with our markets has become imperative. But it has to be clear, understandable, tell people where we are going and what will get us there:

When the business landscape was simple, companies could afford to have complex strategies. But now that business is so complex, they need to simplify. Smart companies have done just that with a new approach: a few straightforward, hard- and-fast rules that deﬁ ne direction without conﬁ ning it.37

One of the most straightforward ways to deal with the question ‘ do we really have a strategy’ is to look for the externally oriented and integrated concept about how we will achieve our objectives and answers to ﬁ ve broad questions:38

Competitive arenas – Where will we be active – in what sectors, markets, segments, technologies? Vehicles – How will we get there – what products and services, value chains, or business model? Differentiators – How will we win in the marketplace – what is our competitive advantage over alternatives faced by the buyer? Staging – What will be our speed and sequence of competitive moves? Economic logic – How will we obtain returns?

The evidence seems to be that most business successes come from careful strategic choices.39 Much of what follows in this book is

*And we should all remember the old joke: Question: How do you make God laugh? Answer: Tell her your plans.

•• 24 New marketing: marketing is dead, long live marketing!

concerned with trying to clarify how we can identify, develop and implement a strategy in how we go to market.

A Route-Map for Market-Led Strategic Change There is a rationale for the way in which the structure of the book is set up to deal with the issues of change and complexity outlined above. It may not be obvious, but there is one! The underlying structure is shown in Figure 1.2 . This structure has two purposes: it is a safety net for readers who get part way through the book and discover they have no idea why they are reading what they are reading – come back to Figure 1.2 and this should put each part in its context; it is a guide for readers who want to pick out the issues most immediately relevant to them rather than starting at the beginning and working through. It has been suggested to me that my enthusiasm for telling stories may make it diffi cult for readers to follow the underlying logic of the book. Naturally, I refute any suggestion I have trouble sticking to the point, but nonetheless hopefully this Figure may assist. More seriously, readers may fi nd it useful to come back to this Figure as they move to each new Part of the book to reinforce the structure of the model we are building. The book is divided into three parts: the fi rst addresses the customer value issue and why this has become dominant in our thinking about how we go to market; the second provides an approach and a template (the strategic pathway) for developing a value-based marketing

Part I Part II Part III Customer value Developing a value-based Processes for managing imperatives marketing strategy strategic transformation

The strategic pathway Change strategy

Market sensing The customer and learning strategy is always Strategic right-handed gaps Strategic market choices Strategic and targets New marketing Organization thinking and meets and processes thinking old marketing for change strategically Customer value strategy and positioning Implementation Value-based process marketing and internal strategy Strategic marketing relationships Figure 1.2 A route- and networks map for market-led strategic change

25 •• Market-Led Strategic Change

strategy (or testing the strategy which a business already has in place); and the third examines processes for managing the strategic transformation businesses face in developing and implementing more effective business strategies (i.e., components for developing a change strategy). The logic behind this is to move from customer value ( why we have to change things) to strategy ( what things we are going to change) to implementation ( how we are going to change them). In Part I we look at the disruptive and radical ways in which customers and markets have changed and the challenge of doing business in these new markets (Chapter 2). In this context we then contrast the conventional model of marketing, which provides the structure for most marketing plans, with some of the realities companies now face in going to market. The traditional static model of marketing programmes (product policy, pricing, marketing communications, distribution and service) does not seem helpful in developing effective, customer-driven marketing actions, yet it is the language of marketing as it has been taught to generations of management students and executives. The conventional view – ‘ old marketing’ – provides us with a start in the search for ‘ new marketing ’ (Chapter 3). This part of the book also builds the logic for value-based marketing strategy. We examine the move in our thinking from a focus on managing transactions (selling things to people), brands and customer relationships to focusing on customer value. Nonetheless, while transactions, brands, customer service and customer relationship management may impact on customer value, the important issue is the value created, not the methods used to create value for different customers (Chapter 4). Part II builds on this foundation to look at how to build and test value-based strategy. First we consider the challenge of strategic thinking and the consequent need for thinking strategically. Strategic thinking highlights a range of issues which are critical in developing a strategic perspective about how and where a business can compete. Thinking strategically is concerned with developing the mind-set that allows us to stand back from day-to-day operations and address the contradictions and risks in making strategic choices (Chapter 5). The next four chapters consider the elements of the ‘ strategic pathway ’ , or process of going to market, shown in Figure 1.3 – sets of interrelated questions to develop and test the robustness of a business strategy. The foundation for the strategic pathway is market sensing and learning strategy. Enhanced understanding of the marketplace, the ability to predict better and to identify value-creating opportunities before the competition does, are hallmarks of effective strategy in modern markets (Chapter 6). Superior sensing capability allows better and more insightful approaches to defi ning and targeting markets and making choices about the segments and niches within them (Chapter 7). At the core of effective strategy is a strongly identifi ed customer value proposition (for the chosen market targets) and a positioning relative to competitors which makes sense to customers and refl ects their priorities (Chapter 8). Underpinning effective strategy is a variety

•• 26 New marketing: marketing is dead, long live marketing!

Strategic thinking and thinking strategically

Market sensing Strategic and market Customer learning choices value strategy and strategy Strategic targets and relationships positioning and networks

Strategic transformation and strategy implementation Figure 1.3 The strategic pathway

of strategic relationships, with customers but also others like collaborators and competitors, which provide a relationship network challenge (Chapter 9). The components or stages of the strategic pathway model are interrelated and in reality people iterate – move from one set of issues to the next and then back again. In this sense, market understanding leads to market target choices and value strategy, but if what we thought was a value-creating opportunity does not actually match the needs of the target market, or if the relationships needed cannot be built, we may go back to the market choices and re-think the strategy. Part III is concerned with change strategy. First, we examine and analyse strategic gaps – differences between plans and strategies (strategic intent) and what we actually have in the marketplace (strategic reality). Tracking the causes of strategic gaps is a foundation for addressing strategy implementation issues and organizational change needs (Chapter 10). Next we examine structural approaches to strategy implementation (marketing organization) and the move towards integration around customer value priorities (total integrated marketing), and the process-based organization (Chapter 11). Finally, we draw together the emerging change-oriented themes into a programme to address strategy implementation barriers, and the potential role of strategic internal marketing in planning and implementing an effective implementation strategy (Chapter 12). The components of change strategy are also highly interrelated and it is likely that in the practical setting it will be necessary to work backwards and forwards between the issues rather than seeing them as a sequence.

Different Ways of Using This Book There are several ways in which this book, and the material it contains, can be used, depending on the reader’s objectives. Whatever

27 •• Market-Led Strategic Change

your specifi c goals, you should understand that while a lot of management books have a single idea which is then stretched out over a couple of hundred pages, my intention here is to have lots of relevant and insightful ideas over every few pages. If you need more detail on any of these ideas, further sources are clearly indicated throughout. Some readers will be using the book as part of an education or training programme in marketing or business strategy. You are best advised to follow the guidance of the people who designed the programme, who will have given a lot of thought to what things they want you to know more about at each point in the programme. Other readers will know that they want to develop an overview of the strategy of going to market. They need to work through the text step-by-step, at the pace that best suits them. The logic to hang on to, which explains the steps in the book, is described in the Route-map section above. For them, starting at the beginning and working through to the end of the book is probably the best approach. However, some readers will be looking for guidance and a new view on specifi c problems they currently face. They need to decide what those important decisions are, and consequently what they need to learn more about. Then, use the Route-map and the chapter headings and sub-headings to home in on the material that seems most relevant to your needs. You can navigate the material in this way, based on where you need to develop better insight and to learn new ways of thinking about the problems companies face in the way they go to market. Nonetheless, whatever your specifi c goal in using the book, be warned that there is a touch of controversy in the way we approach things here. The intention of the approach taken is to move people (marketing and business planning executives in particular) out of their comfort zones and to force them to confront the realities of customer value, strategy and implementation before it is too late for their businesses. As a result, my lack of patience with those clinging to the apparent certainties of a by-gone era may become apparent. Put it this way – if having read the whole book there is any reader who feels they have not been insulted, then please e-mail me and I will send you a personal, customized insult . . .

References and End-notes

1. Barwise , Patrick and Seán Meehan , Simply Better: Winning and Keeping Customers by Delivering What Matters Most , Boston MA : Harvard Business School Press , 2004 . 2. Gilmore , James H. and B. Joseph Pine , Authenticity: What Consumers Really Want , Boston MA : Harvard Business School Press , 2007 . 3. Christensen , Clayton M., Scott Cook and Taddy Hall, ‘ Marketing Malpractice: The Cause and the Cure ’ , Harvard Business Review , December 2005 , pp. 74 – 83 .

•• 28 New marketing: marketing is dead, long live marketing!

4. Stern, Stefan, ‘ Marketing’s Bad Case of Attention Defi cit Dis- order ’ , Financial Times , September 18 2007, p. 18. ‘ Tomorrow’s World: Re-Defi ning the Role of Marketing’ , The Marketer , November 2007, pp. 43–48. 5. Walker , Kirsty , ‘ Stop Listening to Marketing Men, Top Tory tells Cameron ’ , Daily Mail , July 28 2007 , p. 8 . 6. Gummesson, Evert, The Part-Time Marketer , University of Halsted Research Report 90: 3, 1990. 7. ‘ High-Tech CEOs Plugged Into Marketing ’ , Marketing News , June 2 1995. 8. Day , George , Market Driven Strategy – Processes for Creating Value , New York : Free Press , 1990 . 9. Webster , Frederick E. , ‘ The Future Role of Marketing in the Organization ’ , in Donald R. Lehmann and Katherine E. Jocz (eds), Refl ections on the Futures of Marketing , Cambridge, MA : Marketing Science Institute , 1997 , pp. 39 – 66 . 10. Hamel , Gary and Liisa Välikangas , ‘ The Quest for Resilience ’ , Harvard Business Review , September 2003 , pp. 52 – 63 . 11. Davidson, Max, ‘ Anxiety Society! ’ , Daily Mail , July 31 2003, p. 12. ‘ Spoilt for Choice ’ , Daily Mail , June 14 2004, p. 30. 12. Delingpole , James , ‘ The Tyranny of Choice ’ , Daily Mail , June 5 2007 , p. 15 . 13. Rust , Roland T. , Debora Viana Thompson and Rebecca W. Hamilton , ‘ Defeating Feature Fatigue ’ , Harvard Business Review , February 2006 , pp. 98 – 107 . 14. Mol , Michael J. and Julian Birkinshaw , Giant Steps in Management: Innovations That Change the Way We Work , Harlow : FT/Prentice Hall , 2007 . 15. Doz , Yves and Mikko Kosonen , Fast Strategy: How Strategic Agility Will Help You Stay Ahead of the Game , Philadelphia, PA : Wharton School Publishing , 2007 . 16. Stern , Stefan , ‘ Quality Becomes Commodity in Brand Battle ’ , Financial Times , March 14 2007 , p. 12 . 17. Pfeifer , Sylvia , ‘ Greater Output Frames Company Strategy ’ , Financial Times , January 12/13 2008 , p. 18 . 18. Rigby , Elizabeth , ‘ Retail Braced for Survival of the Fittest ’ , Financial Times , March 24 2008 , p. 3 . 19. Quelch , John , ‘ Family Comes First When Marketing Faces Tougher Times ’ , Financial Times , February 18 2008 , p. 14 . 20. Calvert , Jonathan and Jon Ungoed-Thomas , ‘ AA “ Cutting Services ” to Boost Profi t s ’ , Sunday Times , June 24 2007 , pp. 1 – 10 . 21. Wiggins , Jenny , ‘ Cadbury Investors Back Peltz ’ , Financial Times , December 22/23 2007 , p . 1 8 . 22. Ringshaw, Grant, ‘ Calpers Fires HSBC Broadside ’ , Sunday Times , December 30 3007, p. 3-1. 23. Burgess , Kate , ‘ Activists Flex Muscles As Markets Falter ’ , Financial Times , January 8 2008 , p. 19 .

29 •• Market-Led Strategic Change

24. ‘ Globalization’s Offspring ’ , Economist.com , April 4 2007. Palmisano, Samuel J., ‘ The Globally Integrated Enterprise ’ , Foreign Affairs , 85 (3) 2007, pp. 127–138. 25. ‘ Indians Set Up British Call Centre ’ , Daily Mail , August 8 2006, p. 4. 26. Dyer , Geoff and Richard McGregor , ‘ China’s Champions ’ , Financial Times , March 17 2008 , p. 11 . 27. Pimlott , Daniel , ‘ Grameen Bank’s Loans to US Poor ’ , Financial Times , February 16/17 2008 , p. 8 . 28. Sull , Donald , ‘ Emerging Markets Give Flight to New Industry Champions ’ , Financial Times , August 5 2005 , p. 11 . 29. Turner , Fred , From Counterculture to Cyberculture: Stewart Brand, the Whole Earth Network and the Rise of Digital Utopianism , Chicago, IL : Chicago University Press , 2006 . 30. Raynor , Michael , The Strategy Paradox: Why Committing to Success Leads to Failure [and What To Do About It] , New York : Currency Business Books , 2007 . 31. Martin , Roger , The Opposable Mind: How Successful Leaders Win Through Integrative Thinking , Boston, MA: Harvard Business School Press , 2007 . 32. See Hooley , Graham , Nigel F. Piercy and Brigitte Nicoulaud , Marketing Strategy and Competitive Positioning , 4th edn , Harlow : FT/Prentice Hall , 2008 , Chapter 18. 33. Wiggins , Jenny , ‘ Africa’s New Thirst for a Local Brew ’ , Financial Times , January 10 2008 , p. 14 . 34. Hindo , Brian , ‘ Everything Old Is New Again ’ , BusinessWeek , September 25 2005 , pp. 63 – 70 . 35. Elkington , John and Pamela Hartigan , The Power of Unreasonable People: How Social Entrepreneurs Create Markets and Change the World , Boston, MA : Harvard Business School Press , 2008 . 36. Porter , Michael E. and M. E. Kramer , ‘ Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility ’ , Harvard Business Review , December 2006 , pp. 78 – 92 . 37. Eisenhardt , Kathleen M. and Donald N. Sull , ‘ Strategy As Simple Rules ’ , Harvard Business Review , January 2001 , p. 107 . 38. Adapted from Hambrick, Donald C. and James W. Frederickson, ‘ Are You Sure You Have A Strategy? ’ , Academy of Management Executive , 15 (4) 2001, pp. 48–59. 39. Campbell , Andrew and Robert Park , The Growth Gamble: When Managers Should Bet Big on New Businesses, and How They Can Avoid Expensive Failures , London : Nicholas Brealey Publishing , 2005 .

•• 30 C H A P T E R • • • • 2 The customer is always right- handed: customer satisfaction, customer sophistication and market granularity

This chapter . . .

There are two main parts to this chapter. I suggest you take a break after each part to consider the implications (this is a long chapter). First, we tease out some of the contradictions in managing customer satisfaction and loyalty, and conclude that many of us have not done too well in producing satisﬁ ed customers. Secondly, we examine a few of the seismic shifts in markets – both consumer and business-to-business – which are stretching our capabilities to adapt and reinvent how we do business, in a world where mass markets have disappeared and markets are fragmented and Market-Led Strategic Change

granular. We are now even allowed to admit that there is such a thing as a bad customer, with whom we probably do not want to do business.

Introduction A lot of people still think marketing is the greatest thing since sliced bread – indeed was probably responsible for sliced bread. But think about it: if marketing had delivered on all the promises, then companies would align their operations with customer requirements with ease and dexterity; we would have a handle on how markets are changing; and, our marketing would be robust in delivering sustained and superior value to our customers. However, outside the handful of excellent marketing companies in the world, * things do not look much like this. The chapter opens up the customer conundrum (why we say we take customers seriously but rarely do) and the radical market changes that mandate equally dramatic shifts in the way we go to market to achieve business goals in the new types of market we face.

The Customer Conundrum The customer conundrum is that everyone says they believe in customers, but when you look at what they do , they really do not take the customer issue seriously at all. (This is usually reinforced when you ask customers what they think.) Service is seen as servility, satisfaction is confused with loyalty, and when our customer care programmes and customer satisfaction measurement systems do not help us – we are lost for what to do next. Why is it when you look around in most markets companies treat their customers so badly? Is it because they don’t care, or they just can’t help themselves? Or, don’t they know what they are doing?

Customer service is bad all over The critical importance to business survival of providing value to our customers is hardly news to anyone. Just about every sector you go to, companies tell you about their customer care policies and their focus on customer satisfaction. Who are we kidding? Just look at how organizations actually treat their customers:

* . . . and you know who you are, Mr Laﬂ ey, Mr Jobs, Mr Mittall, Mr Immelt, Mr Palmisano, Sir Terry. Indeed, if you are one of the aforementioned, then you may skip this chapter – otherwise not.

•• 32 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

Reality Check: The reality of customer service

The National Health Service has a ‘patients’ charter ’ and boasts slogans like ‘Putting Patients ’ Interests First ’ as well as a management policy of ‘positive customer care ’. John Spiers, then chairman of Brighton Health Care NHS Trust – an £801 million business – decided to put this to the test. He got into a wheelchair and visited the Royal Sussex County hospital in the guise of a disabled outpatient. On arrival, the hospital porter took 40 minutes to respond to his bleep, leading to the conversation:

Patient: Where’s your name tag? Porter: What’s it to you, mate? Patient: You’re supposed to wear one, it says so in the Patients ’ Charter and I’m a patient. Porter: F*** off!

Other surprises for Spiers were: getting into a hospital in a wheelchair is difficult when there are no automatic sliding doors; hospitals, like this one, are full of discarded litter and are very grubby, and the roof leaks when it rains; there were no pillows on the trolley; he was told to expect a 5-hour wait to see a doctor; there was no patient alarm to call help in an emergency; staff gave him incorrect directions, and stripped away his dignity in how they treated him – publicly humiliating him, for example, because he had failed to memorize his ‘ patient number ’. Spiers concluded: ‘If I had really been a frail and elderly patient in pain, I would have been scared and bewildered . . . whatever happened to privacy and dignity?’. Two points spring to mind: how can service standards be so appalling in an expensive ‘ caring ’ business; and, why is it so unusual for a chief executive to sample his or her own customer service?

Source: Adapted from Susan Clark, ‘Vulnerable, Afraid and Humiliated ’, Sunday Times , April 24 1994.

A UK survey published in 2006 found that fully one-quarter of customer service experiences during the previous year had been bad, with 65% of the people surveyed reporting they had taken their business elsewhere after a bad service experience, and more than a quarter claiming that once lost, their business was lost forever. 1 Faced with bad attitudes from the people who sell them goods and services, it is unsurprising that many customers show low levels of satisfaction and display low levels of loyalty to suppliers. The overwhelming reason why customers take their business elsewhere is dissatisfaction with customer service. It really should not be like this – we have the knowledge and the technology to do so much better. Yet all

33 •• Market-Led Strategic Change

the evidence suggests that this is where our obsession with ‘ marketing ’ has got us.

Customer satisfaction and customer loyalty The conventional belief is that satisﬁ ed customers are loyal customers, and loyal customers bring us repeat business, a higher share of their expenditure, and referrals and word-of-mouth recommendations to other customers. That sounds pretty convincing. Unfortunately, in most places marketing spend remains focused mainly on growing customer numbers.

From customer satisfaction to customer loyalty • • • The conventional argument is that satisﬁ ed customers are loyal. One important goal is customer retention (loyalty), because the ﬁ nancial gains can be huge. This is a well-trodden path, but to recap, the advantages of high customer retention are:

● Profi tability – customer loyalty reduces costs and improves profi ts. Frederick Reichheld of the consultancy Bain and Co. writes ‘ customer loyalty appears to be the only way to achieve sustainably superior profi ts’ . The Bain and Co. work suggests that the average company loses 10% of its customers each year but a reduction in loss of customers by only 5% could increase profi ts by 25–85%. 2 ● Productivity – gains in profi tability from customer retention come because: acquiring new customers to replace those we lost costs fi ve times more than the cost of maintaining existing customers; the longer the ‘ life ’ of the customer the higher the sales volume over which acquisition costs can be spread; and the return in investment in marketing to existing customers can be seven times higher than with marketing to prospective customers. 3 ● Sales volume – to hold sales volume constant, with an 80% annual customer retention rate, the customer base will need renewing every 5 years, but if retention is increased to 90%, the base needs to be renewed only every 10 years. Also, the evidence is that not only do loyal customers take less marketing effort, they buy more of the company’s products. Calculating ‘customer lifetime value’ is a powerful way of concentrating minds on the signifi cance of customer retention. ● Actionability – customer retention is one of the things you can measure and evaluate, and build development programmes to improve.

The case for focusing on customer retention has proved overwhelming for a whole generation of managers, and has spawned huge numbers of customer loyalty programmes, and the like. This is exciting stuff, but tends to miss a couple of important truths: customer satisfaction and customer loyalty are still not the same thing; you cannot buy real loyalty that easily; and, some customers you really don’t want to retain because they are bad customers.

•• 34 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

Whoever told you that customer satisfaction and customer loyalty were the same thing – because they lied to you? • • • Put crudely, customer loyalty or retention is about how long we keep a customer (or what share of their business we take), while customer satisfaction is what people think of us – our quality, service, value and so on. These are different things. For example, Figure 2.1 suggests four possible links between customer satisfaction and loyalty: ● Satisfi ed Stayers – this is the situation that is assumed by the customer retention argument above: if you satisfy customers through your quality in product and service, then they will remain loyal, so you reap all the advantages of customer retention. But, in reality, how often do we get lulled into a false sense of security because we confuse these customers with the next type? ● Happy Wanderers – these customers show every sign of being satisfi ed with what you do and how you do it, but they do not (or maybe cannot) give loyalty in return. They may choose to buy elsewhere because: tempting new products and services attract them; they want things they can only get from a competitor; or a technology innovation takes them to the competition. Alternatively, in business-to- business markets, you may lose the satisfi ed customer because: there is a change in key personnel; corporate purchasing policies change; the purchasing company starts a supplier base reduction strategy; or, the company stops outsourcing and produces the product itself. Or maybe the customer just wants a change for the hell of it. These customers will always give you great ratings on the customer satisfaction questionnaire – they just leave when they feel like it. ● Hostages – it is possible that some of our most loyal customers may be highly dissatisfi ed ones. They may be tied to us by: product compatibility (e.g. only our product works in their machines); loyalty

Customer loyalty High Low High

Satisfied Happy Stayers Wanderers Customer satisfaction Hostages Dealers

Figure 2.1 Customer satisfaction Low versus customer loyalty

35 •• Market-Led Strategic Change

incentives (e.g. accumulating enough frequent fl yer miles with the same airline to get the free fl ight); the costs of switching – economic or psychological (e.g. the complications for most people in switching bank accounts are substantial, and some customers are just lazy); corporate policy (e.g. central purchasing tells you where to purchase certain products); or even a form of monopoly if your brand or product is close to unique for the time being. These customers are not satisfi ed – but they are retained (at least for the time being). ● Dealers – these customers are not satisfi ed and move brands and suppliers frequently. Often they will be the buyers most attracted by low prices and the best ‘ deal ’ on the market. This does not make them bad people, they just buy on a different basis.

This model is not just speculation. It comes out of a project with a well-known company which is discovering that as its markets open up to new competitors, customer satisfaction (theirs is very high) is really not the same thing as customer loyalty or retention (theirs is falling rapidly). They are not alone in worrying about this issue. British Airways has found that the defection rate among their ‘ satisﬁ ed ’ customers was 13% – exactly the same as with dissatisﬁ ed, complaining customers.

Why aren’t customer satisfaction and loyalty the same thing? • • • Some managers object to the model in Figure 2.1 – since many have spent fortunes on improving customer satisfaction to build customer loyalty, it is not really surprising that they are not amused to have it suggested that their underlying assumption was wrong. The difference between satisfaction and loyalty is straightforward: satisfaction is an attitude (how a customer feels about our company, product, service), while loyalty is a behaviour (do they buy from us more than once). Using satisfaction (an attitude) to indicate loyalty (a behaviour) does not work particularly well – 90% of car buyers are satisfi ed or very satisfi ed when they drive away from the showroom, but way less than half will buy the same car next time.4 The chances are that some satisfi ed customers will defect – not least because there is a big difference between customers who are just ‘satisfi ed ’ and those who are ‘ completely satisfi ed ’ . 5 One way of thinking about this is to distinguish between behavioural loyalty (what the customer does) and attitudinal loyalty (how the customer feels about us and our products/services). The point of this is that considering only attitudinal loyalty (measuring satisfaction, intention to repurchase, and so on) leads us to make bad marketing investments, because the chances are that only a small proportion of the attitudi- nally loyal are actually behaviourally loyal as well. There are also many non-attitudinal factors that impact on behavioural loyalty to a greater extent: committed loyalists – place a high value on what we offer them, tend to be willing to pay a price premium, and not to switch – they are the Satisfi ed Stayers of Figure 2.1 ; feature loyalists – place a

•• 36 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

high value on one or two ‘must have’ features of the product or service; they may be Satisﬁ ed Stayers or Hostages; convenience loyalists – stick with the present option for an easy and convenient life – I may hate my bank but it’s just not worth the hassle of changing, these are Hostages; channel loyalists – place a high value on the channel of distribution – I prefer Pepsi, but if I eat lunch in McDonald’s every day, I am going to be a loyal Coke consumer because that is all McDonald’s sells – another form of Hostage; lack of choice – some have no alternatives – I believe Toshiba laptop computers are the best in the world, but I use a Dell laptop, because that is what my employer buys, another form of Hostage; and, price loyalists – want the best price for basic product performance, the Dealers in our model.6 William Neal of SDR Consulting is clear – behavioural loyalty is driven by perceived value, so the key to understanding loyalty is value and choice, not satisfaction or attitudes. The bottom line on this is that you need to explore and understand better why some of your customers defect, and some of your customers are retained, and to avoid making simplistic assumptions about customer satisfaction and customer loyalty. This is the real basis for making effective decisions about investments in customer satisfaction, relationship marketing, and loyalty programmes. If you want the beneﬁ ts of customer retention, it takes a lot more than winning questionnaire- based popularity polls.

But can you buy loyalty, anyway? • • • The strong case for leveraging customer retention led to what some called ‘ a mad dash back to the dark ages of marketing’ 7 in a ‘ lemming- like rush ’ 8 to customer loyalty programmes – plastic loyalty cards from fi nancial services fi rms, motor manufacturers and leading retailers like Tesco and Sainsbury; customer magazines; regular customer discounts; collectable vouchers for free fl ights from petrol stations; and, the ‘frequent fl yer’ programmes operated by the major airlines (offering the business traveller who fl ies a lot the chance to save points so that s/he can fl y some more). As sales promotion devices some of these schemes have been highly effective: the Tesco Clubcard is seen as one of the main reasons why Tesco took market leadership from Sainsbury in the UK grocery market. They are particularly effective if they focus on the customers who are most important to us – the big spender, the potential customers for new products, or the most profi table customers. There is, however, one problem that should be noted about customer loyalty programmes – they have very little to do with customer loyalty. As Christopher Hapton, head of the customer loyalty practice at Bain and Co. noted some time ago: ‘ Loyalty is not developed by simply bribing someone to come back next time. ’9 George Day summarizes the critical point succinctly: ‘ Repeat behaviour is for sale, whereas customer loyalty can only be earned.’ 10 In terms of Figure 2.1, what most companies seem to be doing is investing in developing Hostages, not building Satisfi ed Stayers. Is this because ‘ buying ’ a period of repeat purchases from a customer

37 •• Market-Led Strategic Change

is easier than taking customer satisfaction seriously? If so, then conventional loyalty programmes are no more than short-term sales promotion, and will have little long-term effectiveness. Actually, the real big deal with loyalty programmes is the customer information resource they create, which we will consider as a strategic resource for superior market understanding, in Chapter 6. Even then, the use of databases from customer relationship programmes and Internet data sources are not always used perfectly:

Reality Check: Data dereliction

One retailer launched a targeted customer campaign that had a tiny flaw: a fifth of the intended recipients were dead. The letters to them were addressed to ‘Dear Mr Deceased’ and urged them to ‘wake up ’ to what the company had to offer. An insurance company was intrigued to discover that the majority of its customers were astronauts. Further investigations showed that lazy and bored sales staff eager to close deals had simply chosen the first option on the pull-down menu of jobs. (Presumably, if the pull-down menu had been different, the company would have been amazed at how many of their customers were aardvarks.) An insurer was unable to store separate addresses for a couple holding a joint account. When the wife left her violent husband, she sent her new address to the insurance company, which promptly sent a confirmation note to her old home (where her ex-husband was living). The company had to pay to re-house the woman in a new, undisclosed location.

Sources: Adapted from Michael Peel, ‘Letters to the Dead and Other Tales of Data Dereliction’ , Financial Times , September 3 2007, p. 13.

It is important to focus on customer loyalty and customer retention, but this really is not the same thing as customer satisfaction. Also, customer loyalty programmes are no protection against the competitor who delights the customer, offers something new that attracts customers and offers better value in the customer’s terms, or simply cares enough about the customer to build trust and commitment, i.e. to work for a relationship built on something more lasting and stable than sophisticated bribery. Once again it seems we may be in danger of missing the point – do we really care about customers in ways that matter to them?

The real customer problem Rationally speaking one would probably believe that if a company does its best to offer high levels of service and to provide the best possible level of quality in all its dealings with customers, then it would be

•• 38 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

likely to prosper. In many cases this is true because of the lack of competition on precisely those things in all too many markets. But the easy assumption that maximum service and quality pays is not necessarily true for two reasons: we may not understand what service creates customer value, and even if we do we may not be able to deliver it. We will see later that these are key issues underlying the strategic choices of markets and segments we need to confront in building a strong market strategy. It is easy to get suckered by this assumption.

Reality Check: Wal-Mart’s European adventure

Wal-Mart is the world’s biggest supermarket retailer. Its US value proposition of lowest price and highest service has been incredibly successful. As part of its global expansion, in January 1998 Wal- Mart arrived in Germany. However, this is a country where the rules of retailing seem to be ‘the grumpier the better’, the ‘customer comes last’, and ‘shopping is boring’, and the emphasis is on efficiency. Wal-Mart arrived determined to pamper every customer in sight. Wal-Mart’s ‘10 foot rule ’ states that if a customer comes within 10 feet of an employee, the latter must smile and offer to help. Complaints/ requests must be dealt with ‘by sundown ’. In fact, the result has been a major culture clash. The Wal-Mart tactics have infuriated consumers and aroused their suspicions – if someone takes hold of their purchases at the checkout (to pack them in a bag), they think someone is trying to steal from them. Locally employed shop-workers have been found hiding in the lavatories to avoid the embarrassing but mandatory morning Wal-Mart chant – ‘Give us a W’ . . . ‘Give us an A’ . . . (swivel the hips at the hyphen) . . . ‘Wadduya get’ . . . ‘Yeah, Waaal-Mart’. By late-2000 Wal-Mart’s losses were running in excess of £150 million a year in Germany from its 95 stores, and the company was ranked bottom of all retailers in Germany in an annual customer satisfaction survey. Analysts blamed Wal-Mart’s reluctance to adjust its retail model to the demands of German customers. In April 2001 the company announced it was scrapping its expansion plans in Germany and would not be launching the planned 50 new stores by the end of 2002. In 2006, after 8 years of losses, Wal-Mart beat a retreat from Germany, selling its stores to Metro, Germany’s leading retailer, losing $1 billion in the process. Wal-Mart admitted it had completely misjudged German shopping tastes and habits. Being great at the wrong service is very expensive.

Sources: Toby Helm, ‘Service With a Smile Frowned on by Germans ’, Daily Telegraph, October 28 2000. Lucy Farndon, ‘Wal-Mart Is in Retreat from Its Global Empire ’, Daily Mail, July 29 2006, p. 69. Gerrit Wiesmann and Jonathan Birchall, ‘Wal-Mart Sells Out to Metro in Germany’, Financial Times , July 29/30 2006, p. 15.

39 •• Market-Led Strategic Change

Do we know what service to maximize? The ﬁ rst point is that customers are perverse, emotional, awkward, unreasonable people who want things done on their terms not ours. Providing service and quality which is not valued by the paying customer, however well-meaning, is unlikely to gain the business that we want, and, in fact, is a good route to ‘ servicing ’ and ‘ total qualitying ’ ourselves right out of business. Often the problem really does come down to simply not understanding what things really matter most to the customer. In the real world we should never forget that when we are customers we are likely to be not simply harsh but also highly unfair in the judgements we make. For example, in the airline business people talk about the ‘ olive factor ’ – if you forget to put the olive in the martini, the customer thinks you will forget to put the wheels down when you land the plane, and this is not regarded as a good idea. Customers can be very unfair in the judgements they make – but at the end of the day it is allowed, because it is their money . Maximizing the wrong service and quality (as far as the customer is concerned) is expensive and unproductive (as far as we are concerned).

Reality Check: Mickey Mouse meets the US immigration ofﬁ cer

Alarmed by the surly, aggressive and rude attitude of US immigration officers to arriving visitors, which has escalated with ‘ increased security ’ (a good excuse), the US government’s Discover America Partnership is adopting training techniques from Disney’s theme parks. The goal is to learn how to welcome visitors, manage large queues, and respond to ‘ negative reaction ’ from the travelling public. Nonetheless, when the man with the gun yells ‘Any fruit, Buddy?’ , it is unwise to respond ‘Oh, yes please, an apple would be delicious!’ This is on a par with: when you see your friend Jack on the plane, do not shout ‘ Hi! ’

Source: Adapted from Stephen Adams, ‘Welcome to America . . . From Mickey the Immigration Officer ’ , Daily Mail , May 13 2007, p. 53.

Can we deliver what we promised? The second point is that offering the customer service and quality and responsiveness which we cannot really deliver is also potentially a route to disaster. The point is that raising unrealistic customer expectations (in terms of what we can really deliver) will create dissatisﬁ ed customers just as surely as poor product marketing and service delivery. Consider the possibilities in Figure 2.2 , which compares what we promise customers with what they receive. Having a good service offer

•• 40 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

The service and quality we promise High Low Good I am in OK. LOVE – I You get what didn’t know you pay for. you were this good!

OK. I HATE you It’s bad, bastards – but it’s what the customer receives The service and quality you lied to me! I expected.

Figure 2.2 Bad Customer expectations and outcomes

which is fulﬁ lled gets you ‘ OK ’ from the customer, which is not much better than the ‘ OK ’ from the customer who is promised little and gets just that. The danger area is not keeping promises, which engenders customer feelings of hatred (at least in some cases). The interesting opportunity may be under-promising and over-fulﬁ lling against expectations which gets you customer love. The conclusion is that we should think in terms of appropriate service and quality strategies, that match the most important needs of our target customers but also our ability to deliver. For example, one way of looking round at our competitors and how well they are doing, and comparing their performance to ours, is shown in Figure 2.3 . Before we

Impact of service and quality on customer satisfaction/retention

High Low

High

Smart Over- servicers servicers Service and quality level Under- Non- servicers servicers

Figure 2.3 Service and quality Low versus customer satisfaction

41 •• Market-Led Strategic Change

jump to easy conclusions about what works and what does not, why not see what the distribution and spread of competition is – is high customer satisfaction achieved through service and quality or other issues (and if so, which dimensions of service and quality or those other issues), is low customer satisfaction associated with high or low service provision, or is there no clear relationship? Indeed, we might then look at which types of fi rms are doing best in market share and profi tability terms, and see what conclusions that leads us to. Whatever else we may fi nd, it would be good to decide whether we are currently over- or under-servicing, or if we have got it about right, and whether there are low-service opportunities in the market as well as high-service niches. There is actually some truth in the saying ‘ There’s riches in niches ’ . An interesting argument is that actually ‘ the best service is no service’ because if you get things right in the fi rst place, customers do not want your service. 11 In this sense, ‘ the size of a company’s customer service operations is in inverse proportion to the quality of its underlying operations’ .12 According to research by Price and Jaffe (ex-Amazon), customer contacts come in four categories:

about 1 in are triggered by basic which have to be addressed by 7 customer quality defects – ‘ it quality improvements contacts: doesn’t work ’

another 25% take the form of ‘ how which means the company has or so: do I? ’ questions failed to communicate properly or its processes are confusing, and these are the issues to address

about 40%: are ‘ where can I get? ’ if the web page or other self- queries service options are done properly customers should be able to answer these for themselves

the last 20%: are people who want the more the ﬁ rst 80% can be to buy stuff reduced, the more the company can invest in helping customers when they actually need and value it. 13

Happy customers and happy employees Even more worrying when we think about companies’ service delivery capabilities is confusing customer and employee satisfaction – the assumption that if we are terribly, terribly kind to employees, they will be terribly, terribly nice to customers, and we win with both groups.

•• 42 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

External customer satisfaction High Low

High Synergy Internal euphoria ‘happy’ customers ‘Never mind the and ‘happy’ customer, what employees about the squash ladder?’

Coercion Alienation ‘you WILL be ‘unhappy’ committed to customers customers, and ‘unhappy’ Figure 2.4 Internal c ustomer satisfa tion or else . . .’ employees Customer satisfaction Low and the internal market

We really do need to question these assumptions. There is hard evidence that the long-held premise that happy staff make happy customers is not true. 14 Undoubtedly, when employee buy-in is focused on what matters to customers, it can be a powerful competitive weapon. 15 But just consider the relationship between internal (employee) and external (customer) satisfaction shown in Figure 2.4 . This suggests that four possible scenarios result when internal and external customer satisfaction are compared: synergy , which is what we hope for, when internal and external customer satisfaction are high, and we see them as sustainable and self-regenerating. This is the ‘ happy customers and happy employees ’ situation, assumed by many to be obvious and easily achieved. On the other hand, coercion is where we achieve high levels of external customer satisfaction by changing the behaviour of employees through management direction and control systems, which may be very difﬁ cult and expensive to sustain, or alienation, where we have low levels of satisfaction internally and externally, and we are likely to be highly vulnerable to competitive attack in the external market and low morale and high staff turnover in the internal market. Perhaps, worst of all, internal euphoria , is where we have high levels of satisfaction in the internal market, but this does not translate into external customer satisfaction – for example, if internal socialization and group cohesiveness actually shut out the paying customer in the external market. These scenarios are exaggerated, but have provided a useful way of confronting the issues with executives. In the same vein, Stephen Brown tells us that we all got it wrong anyway and that while ‘Customers are a good thing, by and large, provided they’re kept well downwind’ , the real secret is to ‘ torment your customers – they’ll love it ’ . He reckons we all fell for the line that if

43 •• Market-Led Strategic Change

we love customers enough they will love us right back, which is complete nonsense.16 He has a point about teasing, tormenting and tortur- ing people because it really does get their attention, which beats being ignored. Sometimes, you get more by playing hard to get. For example, luxury car maker Ferrari sees enhanced exclusivity in having long waiting lists for its cars. The average waiting time for a new Ferrari is two years – calculated to maintain the brand’s special cachet, but not so long that it drives customers to look elsewhere or creates speculative re-sale markets. Three years waiting is reckoned to be too long for someone paying $300,000 for a 430 Scuderia model, but a year is not long enough. Ferrari deliberately keeps production below demand.17

Reality Check: Hateful Harry

The 2007 publication of the final Harry Potter boy wizard novel – Harry Potter and the Deathly Hallows – brought to its climax the book publishing phenomenon, as the little creep disappeared in a puff of self-generated smoke. The seventh and final (hopefully but not definitely) instalment of JK Rowling’s series broke bookselling sales records throughout the world – 2.6 million copies in the first 24 hours in the UK and 8.3 million in the USA. The series has sold around 352 million copies worldwide. The author barely promotes her books – less as the success of the series grew – and puts a watertight seal around a book until it comes out, with no reviews or hints of the plot. She vetoes HP merchandising deals that she thinks would demean the books. Publication dates are strictly enforced. Consumers may want the book now – but they have to wait. Some bookstores have displays of a new HP book under lock and key to emphasize the message. Others have ‘final count-down’ displays before the launch. The mystery surrounding new HP books drives even more excitement for fans. Fiercely controlled embargoes and midnight launches add to the mystery. The book series is about very effective ‘ anti-marketing ’ . Pretend leaks are common to each book. In 2000 several advance copies were ‘ accidentally ’ sold from an unnamed Wal-Mart in West Virginia, though spookily the world’s press had little trouble in finding one of the buyers to splash them over front pages across the world. The US publishers also dropped hints that there were not enough copies to go around. In July 2007, in the week before publication pirate images of the book appeared on the Internet and online forums hissed with stories about its sources and accuracy.

Sources: Tom Holman, ‘Harry and the Marketing Masterclass’, Financial Times, July 12 2005, p. 12. Ben Fenton, ‘Web Abuzz Over Claims of Harry Potter Leak ’, Financial Times, July 18 2007, p. 7. Stephen Brown, ‘ Torment Your Customers (They’ll Love It)’, Harvard Business Review, October 2001, pp. 83–88.

•• 44 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

The real problems with customer service The real problems are: fi rst , the very real danger that we end up becoming obsessed with the trappings rather than the substance of customer service; and, second, the issues we have raised seem symptomatic of something deeply wrong in our organizations that may be hard to get close to. Let us consider these points, in turn, because they are quite important and warrant a little further thought. It is worrying that by and large it is actually a lot easier to adopt customer care programmes, to train operatives in customer service, and so on, than actually to care about customers in the real sense, and to provide the services they want (the substance not the trappings). Certainly I remain unrepentantly sceptical about top managements who foist such things as customer care programmes on their organizations, without themselves being committed, visible participants. At worst this smacks of lip-service and lack of real commitment where it matters most in the organization, and at best of top management going for the latest ‘ quick- fi x ’ (shortly to be replaced by the next fashionable panacea). Perhaps even more worrying is that many tools and techniques to improve our customer service are misused on a wide scale. They are being used to treat the symptoms not the sickness. They are token, very visible, efforts to cover up, but not solve, the underlying problem. The point is two-fold. First, if we just treat the symptoms (of poor customer service and low satisfaction) without getting to grips with the real underlying problem (of management attitudes and behaviour as well as those of operatives), then we will achieve little of lasting value, and may do considerable harm to our businesses. Second, if we only adopt the trappings of these tools, then the effect may be in the wrong direction in spite of the best intentions, and any benefi cial effect will be short-lived.

Reality Check: Clowning around with kids ’ minds

For the best reasons in the world, people who run hospitals have covered the walls of children’s wards with paintings of clowns, bal- loons, animals, and other cheery things. Entertaining and cheering images should be therapeutic . . . ooops! It turns out that for small children the most scary thing about hospitals is not the needles, or even the dinner trolley – it’s the clowns painted on the walls. A survey suggests the youngest patients are terrified by the red noses and grinning faces. Even patients between 7 and 16 years of age find the clowns ‘scary ’. Clowns were universally disliked by children in the survey. It seems coulrophobia (fear of clowns) is a somewhat commoner condition than expected.

45 •• Market-Led Strategic Change

Unsurprisingly, professional clowns are not very happy about this finding. Nonetheless, smart hospitals have gone back to plain walls.

Sources: Chris Brooke, ‘Send Out the Clowns’, Daily Mail, December 27 2008, p. 43. ‘ Clowns Too Scary for Children’ , AOL Lifestyle, January 16 2008.

The problem is strategy Companies create many of their own problems by confusing customer satisfaction, customer loyalty and the goals of customer service. Unsurprisingly, as we have seen the result is many unsatisﬁ ed customers, disloyal customers and criticisms of customer service delivery. This is bad. What is worse is a failure to identify what levels of customer satisfaction, loyalty and service are needed to implement our marketing strategy with these customers. In some cases, the obvious conclusion from a company’s performance is that its strategy has failed because poor customer service is linked to low customer satisfaction and loyalty, and a poor reputation, with adverse effects on its performance (sales, growth, proﬁ tability). But in other cases, high performance may be driven by low service levels. Look back to Figure 2.3 and remember the Non-Servicers. Then consider the success of arch non-servicer Ryanair.

Reality Check: Ryanair – the master of non-service strategy

Ryanair in 2007 remained the world’s most profitable airline. It is the most successful of the European ‘ no-frills ’ airlines, based on the model of Southwestern Airlines in the USA – offering very low fares but stripping out many of the expensive services provided by conventional airlines. Aggressive Chief Executive Michael O’Leary even plans to go from being a ‘low-cost airline ’ to a ‘no-cost airline ’, by making tickets free, but earning more from additions like food and luggage charges. In some promotions Ryanair has offered to pay people £1 to sit in a seat on the aircraft (i.e., deduct £1 from the airport taxes). Ryanair has given new meaning to the ‘art of cheap ’: a quarter of seats are already ‘ free’ except for airport charges and taxes; the planes are stripped down with seats that don’t recline (you can cram in more passengers instead, and worse, reclining seats break and have to be fixed, which slows you down); no window shades (flight crew have to waste time opening them to land); no seat-back pockets (less cleaning costs); no entertainment; advertising on seat-back

•• 46 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

trays; more than 98% of tickets are sold online (along with insurance, hotels, car rentals and even online bingo); flight attendants sell digital cameras and MP3 players; and soon flights will provide onboard gambling and a cell-phone service. O’Leary’s view is that ‘ You want luxury? Go somewhere else. ’ Passengers who want even minimum services are required to pay for them – choosing to check in at the airport rather than online costs the passenger £4 and the charge is going to increase; those who want to check in luggage pay hefty charges of £20 (Mr O’Leary says he can be away for two weeks with only an overnight bag, and sees no reason why others cannot do the same); speedy boarding costs another £4 per passenger; and, food and water are very expensive on Ryanair planes. Employees are encouraged in O’Leary’s low-cost thinking. Flight crews must buy their own uniforms and staff at Ryanair headquarters must buy their own pens. Staff are banned from charging their mobile phones at work. After a customer sued Ryanair for charging for the use of a wheelchair, the company simply added a ‘wheelchair levy ’ to every ticket instead. Mr O’Leary does not believe in pampering his customers – certainly not the ‘whiners’ who complain: ‘If these policies anger 1% of passengers but the other 99% are really happy with low fares, then that’s fine.’ Famously, when he took over as CEO at Ryanair, O’Leary inherited a passenger, Jane O’Keeffe, who had won ‘free flights for life ’ as the millionth passenger to use the new airline. After 10 years happily enjoying ‘free flights for life ’, Ms O’Keeffe encountered problems with getting seats, and complained to the new CEO demanding compensation. Mr O’Leary notes, ‘We said f*** off ’, and the company refused to countenance a compensation settlement, believing it should show other complainers and litigators that Ryanair never backed down (regardless of the very bad publicity that ensued). Ms O’Keeffe was later awarded her compensation in the Irish courts. Faced with a ‘perfect storm’ of rising oil prices, tougher economic conditions and falling fare levels, leading to a warning of falling profits, Mr O’Leary said his ‘only one response to any consumer uncertainty’ would be to intensify a price war with moves ‘to slash fares and yields, stimulate traffic, encourage price-sensitive consumers, and promote new routes and base developments’. He believes that during recessions travel does not get cut back, but people do look for cheaper alternatives. He made no mention of customer service. Early 2008 saw Ryanair in trouble for ads featuring French President Nicolas Sarkozy and his bride, Carla Bruni, without their permission, as well as an ad with a woman dressed as a sexy schoolgirl. Mr O’Leary said ‘sorry ’, paid the damages to Mr and Mrs Sarkozy, but noted it ‘generated gazillions worth of free PR ’, as he planned to prey on his rivals during the expected economic downturn. Shortly afterwards Ryanair said advertising rulings by

47 •• Market-Led Strategic Change

the UK Advertising Standards Authority made no sense and put its sexy schoolgirl ad on its web page. The company continues to earn its maverick reputation.

Sources: Kevin Done, ‘Ryanair warns of “Perfect Storm” Damage’, Financial Times, February 5 2008, p. 17. Dominic O’Connell, ‘Ryanair Boss Puts Whiners to Flight’, Sunday Times, September 15 2002, p. 3-10. Alan Ruddock, ‘How O’Leary Spread His Wings’, Sunday Times, July 15 2007, p. 3-6 – 3-7. Alan Ruddock, ‘Bullying Passengers Pays for Ryanair Boss ’ , Sunday Times, July 22 2007, p. 3-3. Aaron O. Patrick, ‘Ryanair Ignores Ad Police ’ , Wall Street Journal , March 14–16 2008, p. 6.

The answer to the customer conundrum seems to lie in understanding what aspects of customer service are important to the customers who are important to us, and aligning service capabilities with these priorities. This is about where we want to be in the market compared to competitors and the type of value we want to offer to different customers. In short, without understanding our market strategy, it is impossible to resolve the customer conundrum. What we end up with is providing services to customers who do not value them, or denying services to our target customers because we spread our efforts over all customers. The issue is alignment between service capabilities and marketing strategy. But ﬁ rst – you got to know what the strategy is . . .

The Sophisticated Customer The reason why marketing has to change is because customers and markets have changed. We are now in a business era where ‘ the landscape is fundamentally changed from the environment that drive commerce and organizations for the last hundred years ’. 18 Our problem is that a lot of our thinking about how we go to market (in companies, training and education programmes, and books about marketing) is still founded on assumptions that things are basically the same as they always were (with a few minor, incremental changes that we can take care of). In fact, changes in markets are radical, disruptive and demand new approaches. Consider brieﬂ y some of the disruptive changes we now face: the demands of the vindictive sophisticated customer, radical shifts in consumer market structures, and the fundamental reshaping of business-to-business markets.

The new customer Three words that chill executive souls in just about every company are ‘ the sophisticated customer’ . If those words do not keep your marketing

•• 48 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

and sales executives awake at night, then you probably need to get smarter marketing and sales executives. The single most devastating factor, which is a time-bomb under traditional marketing, is that customers everywhere have wised-up. Whether you are in consumer marketing or business-to-business, you simply have to change the way you do things because your customers know exactly what you are up to. The consequences of not making this transition can be dire. The problem is traditional marketing consistently underestimates the intelligence and street wisdom of the customer. If you go on making assumptions about the future based on the compliant, deferential and easily satisﬁ ed customer, you are heading for a nasty surprise. Sophisticated customers know more and they want more – you will be judged against the standards of the best everywhere, not just against your immediate competitors. The ‘new world ’ in which we all have to compete is one rich in information – but information owned by the customer – the transition we are seeing is from old marketing which said ‘ here we are, this is what we have to offer’ , to new marketing, serving customers who say ‘here we are, this is what we want’ . The information age means there has been a fundamental shift in power between sellers and buyers.19 But it is worse than just customers with higher expectations. Sophisticated customers are also increasingly cynical and hostile towards business and marketing in particular. For example, many consumers are increasingly sceptical about advertising and see only ‘ brainwashing and lies’ ,20 and they complain increasingly loudly about advertising images that are unsubtly based on sex and violence. 21 Even men are fed-up with being mocked in crude advertising gender stereotypes.22 The challenge to the advertising industry is to drop the tired approaches of the 1960s and start ‘ with the fact that you know nothing about people, because all the old certainties are gone ’ .23 At the extreme, anti-business and anti-marketing pressure groups abound – more than 1000, ranging from Greenpeace to ‘Surfers Against Sewage ’ – actively campaigning to change business policies. Des Wilson, a former campaigner, predicted ‘ The militant citizen is becoming an increasing proportion of the population. The tide is still rising’ 24 – he was right. Surveys suggest that British business leaders are now more frightened of the Consumers ’ Association and Greenpeace than they are of trade unions or government ministers.25 The ‘ new consumers’ have evolved from being conformist and deferential and prepared to trust mass advertising, into free-thinking, highly individualistic people, who are sceptical of ﬁ gures of authority. They have exhausted the things they need to buy, and are now concentrating on what they want to buy. They are short on time, attention and trust. 26 Certainly, advertising agencies are fearful of a consumer rebellion in which consumer disinterest may mushroom into frustration, distrust and hostility – brands seen as tolerable today may be the ‘ enemy ’ of the consumer tomorrow. 27 One study describes the new British consumer as ‘an autocrat in a bad mood ’, where consumer restlessness and dissatisfaction are part of a long-term social trend. 28

49 •• Market-Led Strategic Change

Some companies have already responded to the fact that new customers want more than low prices and brands, and compete on the basis of a sense of purpose that goes beyond proﬁ t: at IKEA ‘ We are a concept company’ , or ‘ We’re on your side’ at Virgin. Values and standing for something may be the only way to build a competitive edge in the eyes of the sophisticated customer.29

What new customers say It is actually frightening to try to enumerate the types of demands that are being placed on us by new customers, and how these demands are escalating in size and complexity, but here are my suggestions of what sophisticated customers are saying to us.

Who are you calling ﬁ ckle? I just changed my mind • • • New customers are allowed to change their minds, and they do. Incredibly, it even starts to look like the extended American love affair with burgers and fried chicken is on the wane, not least because Eric Schlosser has pointed out exactly what people are eating in burgers, and it is not very pleasant reading for the squeamish.30

Value is what we say it is . . . • • • Next time you and colleagues are debating product quality and technical standards, and all the other things we know and love, and believe represent quality, remember the Spice Girls.

Reality Spice: Value versus quality

In the Spice Girls’s film, Spice World, having heard the eponymous talents produce their inimitable sounds, someone comments ‘ that was perfect, girls, without actually being any good ’ .

Value is not defi ned by the factory or the supply chain – value is defi ned by the customer. Look around at the examples of those who have established new areas of value and profi t creation, and you can only reach one conclusion – the customer says what is value in his/her terms, and he/she knows it. Traditional approaches of going to market with ‘ confusion marketing ’ 31 – such as, ‘confusion pricing’ to make it so complicated to compare prices that customers stay with you – are really not clever with sophisticated, value-seeking customers. These customers are liable to become very angry if you do not provide them with value in their terms. Sometimes you may think this is irrational

•• 50 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

on the part of the customer – tough. Look at the current trends in the apparently rational, function-driven PC marketplace:

Reality Check: It may be clever, but is it cute?

Does this computer make my bum look big? The makers of PCs (personal computers) used to focus on capability and price. It is rapidly becoming apparent that computer users now want hardware that makes a fashion statement. Apple has proved with its flashy iPods, iPhones and MacBook laptops that its aura of cool creates value for customers – its PC market share doubled in 2005–2008 and its operating margins top 18% compared to 6% at rival Dell. This is not just about the ‘young and hip ’ – other computer users are demanding style as well. Examples include: Lenovo – Attacking the consumer market involves laptops with a bright red top and a high-sheen display that runs right to the edge of the lid, aimed at fashion-conscious students and adults. Tulip – Some ‘limited edition’ PCs come with encrusted jewels, looking more like expensive handbags than computers, they are aimed at wealthy people who drive Bentleys and buy Gucci bags. ASUSTeK – Produces a laptop specifically for car racing fans, with shiny black or yellow covers and Lamborghini logos, it even makes ‘vroom-vroom’ engine sounds when it boots up. Its ‘limited edition’ pink laptop with leather covered case and mouse is aimed at young women. Sony – The Vaio line includes ‘eco-edition’ notebooks with leopard- print exteriors. The company’s pink Vaio laptop is the best-seller in the line and popular with young women. Dell – New consumer PCs come in a choice of colours including bubble-gum pink, yellow green and pink, and Michael Dell notes ‘ We are in the fashion business. The products we sell increasingly make a statement about who you are. ’ Hewlett–Packard – Putting the ‘personal’ back into the personal computer involves a distinctive ‘piano black ’ finish to bring a sense of ‘timeless elegance ’. Customers decide what creates value – we have the opportunity to respond or suffer the consequences. No one said they have to be sensible.

Sources: Steve Hamm and Jay Greene, ‘That Computer Is So You ’, BusinessWeek, January 14 2008, pp. 24–26. Robert A. Guth, Justin Scheck and Don Clark, ‘PCs Get With Style Program to Tackle Apple ’, Wall Street Journal , January 5 2008, p. 26.

51 •• Market-Led Strategic Change

By the way, ‘ Free ’ is one of my favourite prices . . . • • • Sometimes value is about the price sticker, if that is what customers choose. It is unavoidable that new customers will demand many things ‘ free ’ , for which previously they paid money – see back to the Ryanair Reality Check. Think of the revolution in the computer software industry where ‘ open source software ’ (i.e. free) is challenging the position of companies like Microsoft, who cling to the idea that they own intellectual copyright in software and make you pay for it. In fact, OSS is even more revolutionary than just being free – online users amend, reﬁ ne and develop the programs on their own initiative. Internal Microsoft documents note that the ‘ability of the OSS process to collect and harness the IQ of thousands of individuals is simply amazing ’ .32 Indeed, pricing at free is not just about high technology, with circulation ﬁ gures at the Sun and Daily Mirror newspapers tumbling, sooner or later one is likely to take the plunge and become a free newspaper. 33

Loyalty is for sellers not buyers . . . • • • Smart customers know that we want them to be loyal – increasingly they are demanding that we should be loyal to them as well. Customer relationship is going to have to mean more than giving your business to a supplier in return for the right to be sold more. Also, bear in mind that customers who think you have been disloyal and treated them badly may be vindictive. For example, one test is to go to Google and enter the name of your company or any of its brands followed by the word ‘ sucks ’ to ﬁ nd out what customers actually think. The results are unlikely to be pretty. A recent trial of the ‘ sucks ’ test on Google produced 165,000 hits for Wal-Mart, 530,000 for Disney and 767,000 for Google itself. 34 In a strange way these are loyal customers – they are the ones who care enough to tell you (and everyone else) what is wrong with your products and service, instead of just disappearing. In fact, the mid-2000s have seen the emergence of the ‘ Consumer Vigilante ’ – the customer who is so angry about your inadequacies they may be prepared to take extreme action:

Reality Check: Hell hath no fury like a customer scorned

In August 2007, a 76-year-old retired nurse named Mona Shaw smashed up a keyboard and telephone in a Monassas, Virginia, Comcast office. The reason was, she said, that the cable operator had failed to install her service properly. On her first visit to the Comcast office, she was left sitting on a bench in a corridor for two hours waiting to see a manager. She left and returned with a hammer and let loose. Her rallying cry was, ‘ Have I got your attention now?’

•• 52 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

Subsequently, she was arrested, fined $345, and became a media sensation, capturing the minds of frustrated consumers everywhere. The sting of bad service experience may cut so deep that it trans- forms an annoyed customer into a Consumer Vigilante, not just after a refund, but seeking revenge . . .

Source: Adapted from Jena McGregor, ‘Consumer Vigilantes’, BusinessWeek , March 3 2008, pp. 37–42.

Quality or cheap – both, please . . . • • • In many consumer sectors price discounting has become the norm. However, it is important to understand that this is not just because consumers are short of money and therefore only able to buy cheap goods. A Henley analyst notes: ‘ From the consumer’s point of view, it’s not so much trying to save money because we have to. It’s trying to save money because we want to beat the system’ .35 We are starting to see in the UK the well-established inverse price snobbery of the tough US consumer – people who used to brag about how much they spent on an item, now brag about how much they have saved, and the question ‘ What? You paid retail? ’ has become an expression of universal contempt for those foolish enough to pay full prices.

Let’s play the waiting game and see what happens . . . • • • In times of high price inﬂ ation, consumers want to buy quickly (before prices go up again). In times of stable or falling prices, waiting to see if a better deal will come along becomes a lot more attractive. Smart customers know this. It seems new customers are aware that we may need to sell things more than they need to buy them, and have no hesitation in exploiting that situation – why would they?

Make life simpler . . . • • • Providing greater consumer choice was a central part of marketing – more brands, new products, new services and so on. Providing new choices that give greater value because they make peoples ’ lives easier is no problem, even if sometimes a bit strange.

Reality Check: The problem with peas

The problem with peas is how to eat them. Using a spoon, which would be rational, is regarded as uncouth. The approved methods are (1) to spear a few at a time with a fork and mush a few more onto the back of the fork (which is not very pretty), or (2) to turn the fork over and scoop the peas onto the fork, with the assistance of the knife.

53 •• Market-Led Strategic Change

However, a generation of children has now grown up eating mainly fast food and television dinners and lack the cutlery skills required to eat peas (other than the mushy version which sticks to chips). Many children now arrive at school completely unaccustomed to a knife and fork, and schools have to teach them how to use cutlery. The supermarket firm Tesco has become concerned. They sell 30,000 tons of peas a year, but they are eaten mainly by adults. Tesco has asked food scientists to solve the problem by developing a larger pea, with which young people will be able to cope, alongside their burgers and chicken nuggets – the ‘ grands pois ’ . You really could not make this up. But it is increasingly clear that responding to the needs of new customers is going to lead us all into actions and approaches that would previously have seemed bizarre and absurd.

Source: Adapted from Tom Robbins, ‘TV-Food Kids Forget Art of Eating Peas ’ , Sunday Times , December 17 2000.

The problem is when too many product choices make life more complicated not simpler we are in danger of making the purchase of a toothbrush or a bottle of shampoo into an unnecessary life-changing drama for the customer. Product development agency CLK coins the term ‘ choice fatigue ’ to describe just how bewildered and extremely irritated consumers are becoming with the ﬂ ood of product variants (mostly only marginally different to others) they are offered. 36 The simple fact is that proliferation and duplication makes shopping more difﬁ cult and many people have had enough of it – it annoys consumers and increases their cynicism. It also obscures the genuine innovations which we launch.

. . . But not too simple . . . • • • Paradoxically, however, consumers still want a degree of choice. One analyst describes the problem as ‘ selling to the sated ’ , where the issue is that peoples ’ basic needs are just about met and are boring, but the higher level needs now being met are interesting and innovation and choice matters more.37 The new customer wants to be teased, titillated and intrigued (and they may still not buy the product). No one said life was fair (if they did, they lied).

Reality Check: Whining consumers

Notwithstanding customer sophistication and fickleness, research suggests that a high price makes a glass of wine taste better. In the study, when people were given identical glasses of red wine they

•• 54 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

said they got more pleasure from the one they were told cost more (they were told the prices were £5 and £45 a bottle respectively). Brain scans confirmed they were activated far more by the higher- priced wine. When the same test was conducted without the price information, tasters reported the wines to be identical. The results suggest the human brain measures pleasure by mixing real perceptions with expectations about how good something will be. It seems much of the real pleasure in the wine was generated by the high price paid, rather than the quality of the vintage.

Sources: Jonathan Leake and Elizabeth Gibney, ‘High Price Makes Wines Taste Better’, Sunday Times, January 13 2008, p. 1-9. ‘Costly Wine “Fools ” Brain ’, Daily Mail , January 14 2008, p. 4.

. . . But, I don’t like change • • • The challenge imposed by new customers seems to be: innovate and improve, but don’t change the things I like.

Reality Check: Give me back my Wispa!

Cadbury stopped producing the bubbly-chocolate bar Wispa in 2003 in the face of declining demand. But diehard Wispa fans established websites and blogs demanding its return. Clamour on social networking sites MySpace and Facebook led to fans posting short videos on YouTube extolling the virtues of the Wispa bar. Two men took to the stage during Iggy Pop’s set at the Glastonbury festival with a banner saying ‘Bring Back Wispa ’. By the end of 2007, Cadbury had given in to the online pressure and started producing Wispa bars again.

Courtesy of Cadbury–Schweppes plc

55 •• Market-Led Strategic Change

Mars was forced in 2007 to make an abrupt U-turn over a change in its recipe, which included rennet in its Mars bar – rennet is an animal product and its use displeased vegetarians. The veggies mounted media pressure on Mars and got the product changed back to the way it was. However, somewhat spitefully, though they got their way on the rennet, the Vegetarian Society still refused vegetarian status to the Mars bar because it contains battery-farmed eggs. Over to you, Mr Cadbury . . .

Sources: Peter Stebbings, ‘Vegetarians 1, Mars 0’, Daily Mail, May 21 2007, p. 29. ‘Web Wispa-ing Campaign Helps Bring Back a Chocolate Classic ’ , Daily Mail , August 18 2007, p. 5.

Make it specially for me • • • In many sectors we are already seeing the customer demanding some thing different – customized products and services, not the mass- produced version that everyone else gets, and being treated individually. Pioneers of ‘ one-to-one marketing ’ , Don Peppers and Martha Rogers, have founded a business to spread their philosophy of establishing a learning relationship with each customer, to tailor the product and how it is positioned to the needs of the individual. The payoff is higher profi t margins, greater customer loyalty, and a higher share of the customer’s total spending, though they acknowledge that implementation is a huge barrier to achieving these payoffs. However, whether it is the designer fruit juice (you specify the fl avours and the proportions, and watch while it is mixed), or the individualized package of fi nancial services (for example, Halifax’s Intelligence Finance product), there is huge power in treating customers as individuals.

Instant gratifi cation is just not fast enough . . . • • • Waiting for products and services is increasingly unattractive to customers – particularly when the waiting appears to be because it is simply more convenient for the seller than for any other reason. After years of procrastination, 2006 fi nally saw specialist house mortgage lenders launching the ‘ fi ve minute mortgage ’ – giving buyers an immediate offer of fi nance without even a valuation of the property. 38 Now if someone can just sort out the lawyers, we really can have the scenario of: pick the house in the morning, sort out the fi nance and paperwork over lunch, move in at tea-time. If only . . .

But don’t make me angry * . . . • • • Recent years have seen excessive use of the word ‘ rage ’ – as in ‘ air rage ’ , ‘ store rage ’ , ‘ trolley rage ’, even ‘ desk rage ’ , to describe how

* To quote the Incredible Hulk: ‘ . . . you won’t like me if you make me angry! ’

•• 56 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

angry and unpleasant new customers can become if they feel uncomfortable. The responses of airlines and retail stores have not been helpful – having air passengers arrested and refusing to ﬂ y them again, training shop assistants in self-defence, and so on. There is no doubt that new customers are increasingly uninhibited and passionate in their complaints about bad service and poor value. Film-maker Michael Winner, who lists his hobby in Who’s Who as ‘ being difﬁ cult ’ , suggests: ‘The reason the British are complaining is that they have more to complain about, like the surly and unhelpful attitude in shops ’ .39 It may also be why after years of getting away with charging customers about £30 for exceeding overdraft limits or otherwise transgressing the creative rules they put in place, by early 2008 British banks had been obliged to repay at least £560 million to their customers,40 and that’s just a start . . .

Reality Check: The games we like to play

In 2004, bicycle lock manufacturer Kryptonite tried to ignore a blog- ger video that showed how to open its locks with a BIC pen. The video quickly spread across the Internet, forcing the company to spend more than $10 million on lock replacements.

Source: Adapted from Robert D Hof, ‘The Power of US’, BusinessWeek , June 20 2005, pp. 47–56.

And now entertain me . . . • • • Research agency Mintel underlines the apathy, lack of enthusiasm and indifference felt by British consumers towards shopping 41 and concludes ‘shopping must be more fun ’ . In fact, more broadly, the challenge is to manage the customer’s experience as well:

Reality Check: The experience economy

Pine and Gilmore describe the ‘experience economy ’ as the one in which we now work. Companies should realize that they make memories not just products, and create a stage for generating greater value, not just deliver services. They believe that ‘work is theater and every business a stage’. In other words, successful companies do more than just sell goods and services, they create experiences that engage customers in a highly personal and highly memorable way – this is how you prevent your product or service becoming a commodity. Their examples are widespread:

● At theme restaurants like Hard Rock Café and Planet Hollywood, the food is no more than a prop for ‘eatertainment ’.

57 •• Market-Led Strategic Change

● At stores like Niketown, consumers are engaged in fun activities and events as ‘ shoppertainment ’ or ‘ entertailment ’ – Niketown is a show not a shop. ● The Rainforest Café chain has created a jungle representation with streams and jungle noise, and mist rising from the rocks, and its safari-suited servers announce ‘Your adventure is about to begin’ not just ‘ Your table is ready’ . ● A Minneapolis computer installation and repair company is called the Geek Squad. Its ‘special agents ’ are costumed in white shirts with thin black ties, carry badges, drive round in old cars, and turn a boring activity into a memorable encounter. So much so, that customers of this distinctive and memorable computer- repair experience buy Geek Squad T-shirts and lapel pins from the company’s website.

In this sense, experiences are a distinct economic offering, and one from which companies may in future gain revenue. Pine and Gilmore warn, however, that experiences must be ‘ refreshed ’ , or they will cease to attract customers in the same way.

Sources: B. Joseph Pine II and James H. Gilmore, ‘Welcome to the Experi- ence Economy’, Harvard Business Review, July/August 1998, pp. 97–105. B. Joseph Pine and James H. Gilmore, The Experience Economy: Work Is Theater and Every Business A Stage, Boston, MA: Harvard Business School Press, 1999.

The fun of thinking about the experiences we provide for our customers and how memorable they are is the paradoxes it identiﬁ es. For example, Alton Towers theme park has actually found that queuing can enhance the customers’ enjoyment of a visit. Queues are designed to twist around so that the length is not intimidating, but also so that those waiting are exposed to those coming off the ride, to raise the level of anticipation. Closed circuit cameras spot queue jumpers, and invite them to rejoin the end of the line – but only just before they get on the ride. The park has found that customer enjoyment scores are actually lower on quiet days when they can get straight on the rides, than on busy days when they have to wait 15–20 minutes. Queuing appears to be part of making the experience memorable and enjoyable.42 The challenge is to create and manage the experience, to entertain customers.

And now peel me a grape . . . • • • One extension of the experiential marketing trend is seen in the efforts that many companies are having to make to positively pamper their customers. The new customer seems to lay down the challenge: ‘ make me like you! ’ David Freemantle argues that companies that prosper

•• 58 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

across many sectors and countries seem to do so in part by winning competitive advantage simply because their customers like them.43 But customer pampering is going far further than unlocking employees ’ emotional intelligence. For example, the developers of the Bluewater shopping mall in Kent took a ‘ total sensory design ’ approach to the retail environment, including ‘ male crèches’ in which females could park their extraneous men, simplifi ed road access to avoid stress, bigger parking spaces to avoid feeling ‘crowded ’ , and non-shiny fl oors because shiny means slippery and increases worries about falling over. Designing retail environments extends to smells, noise levels and types, colours, lighting, traffi c fl ows, to shape the customer’s shopping experiences and perceptions.44 Retailers are very sensitive on this subject:

Reality Check: Bad retail neighbours

Retail outlets tend to form clusters – clothing retailers aim to be grouped together to attract larger crowds. But there is a problem with shops with strong smells – food outlets do not want to be next to Lush (very smelly toiletries and cosmetics). The most undesirable neighbours are: pawn, porn and prawn. Pawn shops are associated with poverty, porn shops with salaciousness, and wet fish shops smell.

Source: Adapted from Jim Packard, ‘Pawn, Porn and Prawns Are the Most Unpopular Retail Neighbours’, Financial Times , June 5 2006, p. 3.

In 2001, we even saw the London Underground perfuming its stations to relax the atmosphere – however, in this case the hoped-for increase in customer satisfaction may be a long time coming, as one passenger remarked in disgust: ‘ I would dodge dead rats and litter, if this would make the trains arrive on time ’ !45 Interestingly, while many retailers experienced very poor sales at Christmas in 2007, HMV Group reported strong sales in its music stores. HMV is just about the ‘ last man standing ’ in the troubled specialist retail music business on which the supermarkets are rapidly encroaching. HMV is driving sales with its ‘ social hub ’ where customers can play games against each other and buy refreshments in-store, and the company is rolling out a next-generation store format to reinforce this socialization.46 A similar model is being tried at US bookstore Borders, where to the formula of leather chairs, coffee shops and books, has been added a digital centre where customers can download music or books, burn CDs, research family histories, print pictures and order leather-bound books of family photos – all with the help of shop staff who know this stuff and will not embarrass those who do not.47

59 •• Market-Led Strategic Change

And make me feel good about buying things from you . . . make all the bad stuff in the world go away • • • Apart from excellent service and enhanced environments, part of being liked by customers seems to be increasingly about much bigger issues too – we are being held responsible for the woes of the world and being required to do something about them. In the new world, we are required to be seen to behave ethically and to display high levels of social responsibility. Bear in mind – behaving ethically and being socially responsible will not guarantee commercial success, but it may be an important part of survival. It is already very clear that media attention, Internet sites, the spread of organized lobby groups and enhanced sensitivities mean that if you get caught behaving unethi- cally or offending against human rights you will have no place to hide. What it comes down to is that smart companies watch and respond to public opinion to avoid being damaged. In fact, protestors seem to have a grudge against everyone – just about any company you can name is accused of exploiting workers, wreaking havoc in the Third World, or polluting some aspect of the environment.48 In fact, it has almost got to the stage that if you are not on someone’s hate list, you start to wonder if you are doing something wrong! Just imagine the day you get a phone call from your CEO saying ‘ I am embarrassed in front of my peers – our company is so insig- niﬁ cant that no one is protesting against us. Do something!’ Never fear, help is on its way:

Reality Check: A new anti-business protest group is formed

I wish to announce the formation of a new anti-business protest group: the International Domain for I deological Opportunities to Terrorize Someone (IDIOTS). The target is all companies who are not exploiters, polluters, environmental damagers, or guilty of any other such behaviour. You, we find guilty of denying hard-working activists the right to protest against you, and this is a flagrant and cruel abuse of our human rights. You have been warned!

And there will be no secrets any more . . . now, get in that goldﬁ sh bowl and stay there while I keep an eye on you, because I’m in charge now! • • • The new customer demands to know what we are doing and why, and if they don’t like it, they want us to stop. The new watchword is transparency, and it is going to be difﬁ cult for us to live with. Patricia Seybould argues that the net result is that the customer takes control of an industry and reshapes it from outside. She says that managers no

•• 60 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

longer determine the destiny of a company – customers do. Her advice to companies is ﬁ ght the customer revolution if you want, but you will lose – better to start practising ‘ sweet surrender ’ to the inevitable.49

And, what did you just call me? • • • New customers are also less than amused when they ﬁ nd out what some service providers call their customers behind their backs. For example, consider the ‘ secret ’ acronyms scribbled on hospital charts by doctors – ‘ secret ’ until one of them ratted, that is:50

To be found where? Acronym Translation

Patient’s notes SIG Stroppy Ignorant Git

Patient’s notes PAFO P(drunk) And Fell Over

Child patient’s notes FLK Funny Looking Kid

Patient’s notes GROLIES Guardian Reader Of Limited Intelligence in Ethnic Skirt

Patient’s notes FAS Fat and Stupid

Patient’s notes NFH Normal For Here

Female patient’s notes TUBE Totally Unnecessary Breast Examination

Discharge letter TF BUNDY Totally F***** But Unfortunately Not Dead Yet

Patient’s notes TFTB Too Fat To Breathe

Patient’s notes LOBNH Lights On But Nobody Home

Patient’s notes TLR Two-Legged Rat – refers to a patient undergoing experimental treatment

This is wonderful laddish humour. Terribly amusing, until you may reﬂ ect that this is you and me they are talking about. Maybe such attitudes towards your paying customers by doctors helps explain why there are now more alternative medical practitioners in the UK than doctors, and private medicine is booming? Interestingly, in the USA McDonald’s is attacking Starbucks by installing coffee bars with ‘baristas ’ , selling cappuccinos, lattes, mochas and Frappe (similar to Starbuck’s Frappucino). Part of the product concept is that if you buy coffee in McDonald’s instead of Starbucks, you don’t get a ‘condescending look’ for mispronouncing the name of the coffee or the size required (the latter is a jab at the ‘ grande ’ and ‘ venti ’ sizes at Starbucks – at McDonald’s you ask for small, medium or large, thus avoiding the patronizing behaviour of know-it-all teenage servers).

61 •• Market-Led Strategic Change

McDonald’s is in the sixth year of successful turnaround, while Starbucks is struggling.51 It is an interesting thought that not patronizing, insulting and irritating customers may actually have become a source of competitive advantage!

Market Shifts and Quakes The increasingly sophisticated customer is one of the most important market phenomena of the 2000s. However, there is more. A lot of traditional marketing rests on notions like ‘ mass markets ’ , ‘ growth markets ’ and the like. These terms are increasingly meaningless – markets have fragmented and divided into niches in most mature markets; overall market growth is an average which says nothing about the changes within the market. Consider some of these market changes and the idea of market granularity as a better way of thinking about markets. Then face up to the fact that there is such a thing as bad customers.

Consumer market changes Driven by demographics, social change, economic turmoil and cheap technology, consumer markets are changing their structure in numerous signiﬁ cant ways.

The typical family • • • Which would be what exactly? Mum, Dad and 2.4 children looks like it is becoming a mirage. By 2021 a third of UK households will be people living alone, and the chase will be on for the ‘solo pound’ . 52 Within family households, women will be the key breadwinners in a growing number of households and likely to be the ones making the big purchase decisions. 53 Men are becoming husbands and fathers later, becoming ‘ old, new dads ’ behaving differently to younger fathers. One of Europe’s fastest-growing lifestyles is ‘ Lats ’ – unmarried couples living apart, together.54 Marketing products to ‘ families ’ has become greatly more complex, and this trend is likely to continue with more diverse forms of family unit.

Reality Check: Greetings cards for the modern family

Manufacturers of greetings cards have adjusted to some of the realities of modern family units in Britain. The latest cards to appear have updated messages: ‘ For Mummy and Daddy On Your Wedding Day’ ‘ Congratulations On Your Divorce ’

•• 62 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

‘ You’re Divorced! ’ ‘ Happy Christmas to Mum and Boyfriend ’ ‘ Happy Release From Prison!’ (Oh OK, I made that one up) ‘ Congratulations on Your New ASBO ’ (OK, that was me again) The world has changed and greetings cards messages reflect this change.

Source: Adapted from Sinead McIntyre, ‘Happy Divorce! Cards for the Failing Family ’, Daily Mail , May 2 2005, p. 29.

The MySpace generation • • • These are the young who live online, buy online, play online and have growing market power. They are more likely to be reached through MySpace, Bebo, Facebook or YouTube than any conventional media. 55 Also called the Millennials or Generation Y, they are cheesed-off, cynical, demanding and seriously high maintenance. They can be spotted by their boombox headphones, hipster clothes, yoga mat (have to be into well- ness, innit?), laptops, designer coffees, Blackberrys, digital cameras, iPods and iPhones (and indolent expressions). They are different from those who went before. 56 The second generation of the Internet has spawned a global youth culture, linked by blogs, gaming, social networks and shared tastes.57 Many in their 20s and 30s still live at home with their parents – the KIPPERS (Kids In Parents’ Pockets Eroding Retirement Savings).

Reality Check: The Myspace generation and hygiene – some things don’t change

In the USA, Procter & Gamble’s Tide brand claims about half the detergent market. The challenge faced was how to extend the reach of the brand to new types of consumer. P &G created SWASH – an anti-wash brand carrying the Tide logo. Swash products include a stain-removing pen and a ‘smooth- ing spray ’, and are designed to get rid of odours, stains and wrinkles without using water or an iron. Prime target buyers are college students. P &G sells the items at Swashitout.com ( ‘Keep the clothes you love to rewear feeling clean’), and has opened a shop near Ohio State University – Ohio students quickly organized an online competition to see who could go longest without washing their clothes. The company hopes loyalty to Tide may pay off later, when more conventional domestic skills kick in.

Source: Adapted from Robert Berner, ‘Laundry 101: No Water Necessary ’, BusinessWeek , November 19 2007, p. 25.

63 •• Market-Led Strategic Change

Mind you, the same generation has been labelled the ‘ Tiswas Generation ’ (thirty-somethings with no savings), who are heavily in debt and face working into their mid-70s because they are not investing in pensions.58

Saga louts * • • • It has been suggested that most advertisers target 18–34 year olds because the average age of brand managers is about 25.59 Conversely, bumper stickers in the USA proclaim the arrival of the ‘ SKIers ’ (Spending the Kids ’ Inheritance) – also known as the WOOFies (Well Off Older Folk). As the ‘ baby-boomers ’ reach retirement age, it seems many do not plan to leave their wealth to their children – there is ‘ a declining bequest ethic’ .60 In most developed countries, older consumers are set to account for the bulk of the growth in expenditure on many products – and the signs are they do not want geriatric tools, they want cool stuff.61 Marketing responses in targeting older consumers through specialist media or including ‘ oldies ’ in ads are likely to be less effective than developing new products aimed at the older – Saga’s cruise business is growing at 40% a year, and the company does a nice line in insurance for senior skiers (shunned by other insur- ers). Interestingly, the growth market for Sony’s Playstation was older consumers not younger buyers. The new ‘grey generation’ truly does appear to be dedicated to growing old disgracefully.

Reality Check: Phones that just make phone calls

The Jitterbug Dial is a large Samsung clamshell phone. The buttons are big and clearly labelled. Text on the screen is large and easy to read. It has no menu button, since there are no menus. It has a dedicated on/off button. A rubber gasket round the earpiece makes it more comfortable and excludes ambient noise. It simulates a proper dial tone when it is ready to make a call. The OneTouch version has only three buttons: one dials a pre-arranged number, one places other calls, and one turns it off. The Jitterbug does not take photographs, receive e-mails, surf the Web, download music, show movies or make coffee. It makes phone calls. Guess who that one is aimed at?

Source: Adapted from Stephen H. Wildstrom, ‘For Puzzled Seniors Only’ , BusinessWeek , December 11 2006, p. 24.

* For the younger reader like myself, I should point out that apparently Saga is a company specializing in products and services for the over-50s, and that many of their customers behave badly on holiday – think Keith Richards falling out of a tree.

•• 64 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

The pink market • • • The Economist has coined the term ‘ Womenomics ’ to describe the increased economic purchasing power of women and their growing cultural power – fi nding that increased female participation in the paid labour force has had more impact on the growth of the world economy than China or new technology. 62 The Economist study found that women dominated household decisions, but are increasingly signifi cant in areas traditionally seen as male-dominated, such as technology, cars and fi nancial services. In the USA, the ‘ Miranda complex ’ describes the phenomenon of successful women hiding their large incomes and denying their professional status for fear of intimidating potential partners.63 Female purchasers are already a prime and distinct target – a women-only airline called Fly Pink with pink airplanes has been planned, and Sheila’s Wheels, the female-only car insurance, is already a reality. Coutts & Co., the private bank, is forging links with high fashion to update its image, and appeal more to affl uent women, though may end up a victim of its own stereotyping. 64 The feminiza- tion of markets and marketing is likely to be a major trend.

The wealthy • • • Notwithstanding economic turndown in some markets, rising food and energy prices and the like, very wealthy consumers remain an intrigu- ing target. For example, amid crashing retail sales in the 2007 holiday season, US luxury retailer Saks Inc.’s wealthy clientele allowed it to buck the trend, leading the somewhat smug CEO to note that notwithstanding the credit crunch, ‘ Our customer feels good ’. 65 The newly rich of China, Russia and India are important customers for Rolls–Royce cars and other luxury items. The ‘ super-rich ’ in Europe (worth more than £30 million a head) constitute the ‘ platignum pound ’ , and their taste for luxury has not been abated by economic slowdown, creating rapidly growing demand for private jets, concierge services and personal shoppers. 66 Interestingly, some wealth-related trends are counter-intuitive. The improving fortunes of low-cost supermarkets Aldi and Lidl in 2008 have been driven by their increasing appeal to higher-income groups who ﬁ nd themselves under pressure from mortgage costs, escalating taxes, and so on. The less well off apparently have less interest in ultra- cheap supermarkets.

The poor • • • In spite of the comments above, markets do not consist solely of MySpacers, afﬂ uent oldies and the wealthy. In the UK, the MySpacers are balanced by the ‘ ASBO Generation ’ , * and the wealthy by the low- income, while in the USA the ‘ poverty business ’ focuses on the working

* And before you criticize Anti-Social Behaviour Orders (ASBOs), just remember they are the only qualiﬁ cations some of these kids will get.

65 •• Market-Led Strategic Change

poor, who have no access to credit or health care. Even more apposite, remember that while the USA and Europe debate the merits of the iPhone, more than half the people alive in the world today have never made a telephone call of any kind. While Europe congratulates itself on using biofuels to power vehicles and thus save the world, riots are taking place in emerging markets where crops devoted to biofuels mean that there is no food to eat. While growing numbers of wealthy middle- class consumers in India, Russia and China are buying luxury goods from the West, 70% of India’s population lives in the rural country- side where the population is poor, and the infrastructure at its worst, and successes have been products adapted to these conditions – 4 cent sachets of soap, salt and tea from Hindustan Lever sold in small shops, bus-stop stalls and roadside cafes, $20 wind-up radios from Philips, the $900 Hero-Honda Splendour motor cycle.67

Ethnic markets • • • Greater freedom for people to move around the world and to relocate their homes adds to growing ethnic diversity in domestic markets. In the UK estimates suggest that population trends will soon create ‘ super diverse ’ cities, where no ethnic group will form a majority – immigration to the UK will come from countries scattered across the world. Ethnic communities and a pluralist society are already creating new opportunities for companies agile enough to ﬁ nd them – ‘ multicultural marketing ’ no longer just means selling abroad. 68

The green and ethical consumer * • • • The ‘ green consumer ’ is the one who distinguishes between brands and companies on the basis of societal/environmental impact and ethical standards (though they may be less impressed by corporate ‘ posturing ’ , or the ‘ kermitization of business ’ than some companies think). Real shifts in attitudes are diffi cult to assess – for example, while consumers claim they would pay a 5–10% price premium for many ethical products, such brands usually have tiny market shares. 69 Retailers call this the ‘30:3 phenomenon’ – 30% of consumers say they think about workers ’ rights, animal welfare and the state of the planet when they choose what to buy, but actual sales fi gures show only about 3% act on those thoughts.70 There are moral confl icts for the green consumer too – the trend for healthier eating has led to a massive rise in the number of laboratory animal tests for food additives and health supplements.71 Nonetheless, commentators suggest that ethical consumption is one of the most signifi cant branding issues in modern markets, and underlies the major changes in many sectors, and explains such factors as the strong sales growth of ‘ hybrid ’ cars, ‘ cruelty-free ’ beauty products, and dramatic

* Question : What’s green and ﬂ ies? Answer : An eco-hypocrite.

•• 66 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

growth in the sales of organic foods. Certainly, sales of ‘ ethical ’ products in the UK were estimated by Mintel at £2 billion in 2006, with spending on Fairtrade, free-range and organic products rising by 62% since 2002. 72 What should most worry us is the possible hidden or ‘ stealth ’ segment of customers apparently loyal to your products, but who are poised to switch as soon as a viable and more ethical alternative emerges – they buy your product at the moment, but they would rather not.73

The Neo-Cromwellians • • • The 2000s have seen the resurgence of the puritan consumer, dedicated to purging pleasure wherever it is found. These are the ones who want everybody else to drink less, stop smoking, live healthier lives (in Neo- Crom terms), stop driving, stop taking overseas holidays and stop fl y- ing. They represent a culture of restricting other people’s pleasures (perversely taking pleasure in so doing), and are somewhat po-faced to say the least. 74 The only saving grace about the Neo-Croms is they keep getting things wrong. For example, many ‘ healthy option ’ foods contain more risky ingredients and fat than the non-healthy options. Having pushed people to abandon their domestic appliances to save energy, they must have been infuriated when Reckitt showed that dish- washers are more effi cient than hand washing (i.e., use less heating power). With their spurious claims that whatever they want banned is for health, safety or security reasons, the Neo-Croms have gained enormous media infl uence and are changing things. *

Reality Check: Neo-Cromwellians and the anti-pleasure movement

Neo-Croms believe that people who smoke cigarettes are evil and should be stopped. They shroud their arguments in spurious and unproven arguments about passive smoking, but really they just don’t like people enjoying things. They have succeeded in having smoking banned in public buildings, aircraft, and so on. Neo-Croms also believe passionately that people should stop driving – especially driving beautiful, big, chunky 4 4s like Range Rovers and BMW X5s. Even if the vehicles get hybrid engines or run on chip fat, the Neo-Croms will still disapprove.

* Mind you, the bright spark Neo-Croms who decided in 2008, on the basis of minimal evidence, to persuade women that eating chocolate causes brittle-bone disease, are on to a real loser. Casual observation will tell you that even if every bone in their bodies instantly turns to talcum power, you will never part women from chocolate, and may suffer serious physical harm in any such attempt.

67 •• Market-Led Strategic Change

But when it comes to people who smoke while driving a 4 4 – they are by definition the spawn of Satan, and must be stopped, in order for their eyes to be gouged with red-hot pokers. There is no objective evidence whatever that smoking poses a road safety risk (and there is some evidence suggesting the reverse). Nonetheless, smoking while driving will soon become an offence on ‘ safety ’ grounds. Of course, the real offence to the Neo-Croms is people enjoying two things at the same time.

Scared consumers • • • The 2000s have seen the consumer in many countries becoming increasingly jittery and liable to change perceptions and behaviours in response to perceived threats in the world – the credit crunch, rising prices, environmental catastrophe, international security and so on. * Many perceived threats refl ect ‘ counterknowledge ’ – defi ned as ‘ misin- formation packaged to look like fact’ , meeting people’s apparent thirst for delusion.75 Others refl ect urban legends and conspiracy theories.76 Scaremongers are usually wrong, but people in the ‘ anxiety society’ are usually gullible. For example: expert opinion was that BSE (‘ mad cow disease ’ ) would kill 500,000 people, which was later revised to 200; the ‘ Millennium Bug ’ was going to destroy civilization, and nothing happened; the ‘ bird fl u ’ pandemic was said in 2005 to be about to kill 150 million people, and we are still waiting. Major scares follow a consistent pattern: they begin with a genuine problem, which is then misread by bad science (usually confusing causality with association and using inappropriate projections); the media hype the story for its news impact; the tipping point is when the issue is taken up by politicians, who produce absurdly over-the- top responses (normally inappropriate, expensive and more damaging than the original problem). 77 Unreasoning panic and bad-tempered dismissal of sceptics ensues. At one level, scare-mongering leads to the relentless squeezing of businesses by zealous enforcement of pointless regulations based on spurious ‘ science ’ .78 At another level, the vulnerability of consumers to trendy ‘ scares ’ introduces a new kind of volatility into consumer demand and a new shaping force for consumer perceptions. It is likely that fashionable fears will create crises for many companies. This is not new – Aaron Wildavsky commented in 1989: ‘ How extraordinary! The richest, longest lived, best protected, most resourceful civilization, with the highest degree of insight into its own technology, is on the way to becoming the most frightened. ’79 He was

* It is apposite that after reviewing the disastrous retailer sales ﬁ gures for December 2007, my dear wife’s only comment was ‘ Well, it appears we have statistical conﬁ r- mation of your meanness at Christmas . . . ’

•• 68 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

right. We got there. It was never more true that for many ‘ perception is reality ’ , and that is what we have to live with. For example, there are views that ‘ global warming ’ is the biggest scare yet perpetrated on humankind, and that climate change is part of a natural cycle and process upon which people have relatively little impact. Certainly, anyone who challenges the zealots upholding the new religion of global warming are demonized as heretics. 80 Of course, it matters less from a business perspective that global warning is a myth, than that people have accepted the global warming credo, and now we are expected to respond to its dictates.

Market granularity One major implication of the fragmentation of markets is the need to reconsider the impact of ‘ megatrends ’ and to focus on ‘microtrends ’ at a much lower level of aggregation. The term ‘mass market’ is becoming redundant and truly unhelpful, yet much conventional marketing still has this focus. In the 1980s, John Naisbitt wrote inﬂ uentially about ‘ megatrends ’ transforming our lives, in which he correctly described such things as the move from an industrial society to an information society and from national economies to a global marketplace.81 Now the argument is that the era of ‘megatrends ’ is over, and we should instead focus our thinking on ‘microtrends ’ – small forces behind today’s big changes.82 Mark Penn argues that the issue is no longer huge cultural shifts, but detecting the emergence of numerous new ‘ identity groups ’ who have not been noticed by companies.83 He thinks, for example, that ‘ sun-haters ’ are likely to become as inﬂ uential as the anti-smoking fascists. His logic is that change is driven by small trends that creep up on us and that it takes only 1% of people to create a movement that can change the world – small shifts in taste and behaviour have a huge knock-on effect. Microtrends create new niche markets – perhaps the unrecognized demand for a chain of hygi- enic upmarket tattoo parlours will be important. The point is that too often we speak in very general terms about market trends – growth markets, mass markets, declining markets and so on – and collect data that describe broad trends where differences within populations are averaged-out. Opportunities come from a much deeper understanding of markets at the ‘ granular ’ level.84 This is why McKinsey has established a team of analysts in India to study ‘ granular growth decompositions ’ .85 We will return to the critical issue of developing deep market understanding as the basis for effective strategy in Chapter 6.

Reshaped business-to-business markets The shift in business-to-business markets (B2B), whether selling consumer goods into the value chain, or selling industrial products, is mainly concerned, in market after market, with the emergence of the powerful, dominant customer. Some dominant customers do not play

69 •• Market-Led Strategic Change

nicely with their suppliers. As market attrition, competitive forces and mergers and acquisitions impact on industry structure, many B2B suppliers are faced with unprecedented levels of concentration in the customer base, where a small number of customers constitute a signiﬁ cant proportion of total demand. Dominant customers have an unprecedented amount of power in deciding who they deal with, and how many – supply base reduction strategies. For example, in 2005 Ford decided to dump half its 2000 component suppliers in an effort to reduce its $90 billion a year purchasing budget. Ford’s goal was to have seven ‘ key suppliers’ covering about half its global purchasing, with which suppliers it would have a close relationship – the rest are bought as commodities or shut out altogether.86 One executive from a Ford supplier comments: ‘ In my opinion, [Ford] seems to send its people to ‘hate school’ so that they learn to hate suppliers. The company is extremely confrontational. After dealing with Ford, I decided not to buy its cars. ’87 In a similar supply base reduction, in 2007, as part of its cost-cutting, Airbus revealed plans to cut its core network of suppliers from 3000 to about 500, with potentially devastating effects on the European aerospace industry’s network of suppliers.88 Buyers with dominant market power are likely to use that power in dictating terms and conditions to suppliers, who may have no option other than accept what is on offer or walk away and lose massive amounts of business. For example, Tesco, the dominant UK supermarket, is frequently accused of uneven treatment of suppliers. In 2005 Competition Commission ﬁ gures showed around 2600 suppliers provided more than £9 billion of sales to Tesco. However, the largest supplier had less than 3% of Tesco sales and the median supplier less than one-hundredth of one per cent. If a large supplier loses a contract, to Tesco it is only 1–3% of Tesco sales, but for the supplier it could mean losing 10–30% of sales with no alternative outlet.89 British supermarkets stand accused of rampant bullying and intimidation of suppliers.

Reality Check: The rough side of being a supermarket supplier

The Big 4 supermarkets – Tesco, Sainsbury, Asda and Morrisons – hold nearly 80% of the UK grocery market. Tesco alone accounts for 31% of the market. In some local areas Tesco has such market control that the areas are called ‘Tesco Towns ’ subject to ‘ Tescopoly ’ . Supermarkets have been accused of abusing the power they have over their suppliers. Less than helpfully from a supplier perspective, the Competition Commission says its role is to protect consumers not suppliers. Supplier complaints about their treatment by UK supermarkets include: Listing fees – huge lump-sum payments for placement of new products or just to get access to supermarket shelves.

•• 70 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

Price pressure – forcing prices down to unsustainable levels, through threatening and aggressive behaviour and bullying e-mails, and sometimes suspicious ‘phantom bids’ at online auc- tions which further drive down prices paid to suppliers. Changing contracts retrospectively – for example, reneging on contract terms and demanding large cash payments to ensure future business. In 2006, Asda demanded £368 million from food and drink firms, including £45 million from Unilever alone, telling suppliers they would be classed as ‘preferred ’, ‘complacent’ or ‘ underperforming ’ on the basis of their response. Kellogg’s resistance led to Asda discounting their cornflakes (prompting other supermarkets to follow) and hitting Kellogg’s profit margins. Retrospective price cuts – demanding rebates from suppliers retrospectively and without the choice of refusal. Marketing costs – forcing suppliers to contribute to supermarket marketing costs, for example paying for supermarket price wars, under threat of blacklisting. Unilaterally extending credit terms – in 2005, Sainsbury tried to impose new terms on 1900 suppliers so they would wait up to 49 days before being paid instead of 21 days. Compensation – forcing suppliers to retrospectively compensate retailers for lower than expected sales. Product standards – imposing unreasonable product requirements on suppliers – Britain’s farmers are forced to throw away as much as a third of their fruit and vegetables because they fail supermarkets’ cosmetic requirements – Tesco tests potatoes with a ‘brightness meter’ to see if the skin is shiny enough. Contracts – more than two-thirds of suppliers have no formal contract, because the supermarkets will not agree terms (and accept being bound by them). Intervening in suppliers ’ businesses – food producers are told to use specific carriers to deliver goods to supermarkets, to find that these carriers charge excessive freight rates, knowing that the producers have no choice. Category captains – supermarkets avoid direct contact with fresh food producers so staying at arm’s length from production, with purchasing effectively subcontracted to category captains, avoiding links to the low wages and poor working conditions imposed on suppliers by low prices.

Sources: Jonathan Leake, ‘Picky Stores Force Farmers to Dump Veg ’, Sunday Times, July 17 2005, p. 1-6. Lucy Farndon, ‘ASDA Faces a Supplier Revolt Over Cash Demands’, Daily Mail, March 30 2006, p. 79. Richard Fletcher, ‘Big Chains Surge as Suppliers Scrape By ’, Sunday Times, June 4 2006, p. 3-7. Teena Lyons and Patrick Tooher, ‘Crackdown on Way for Sore Bullies’, Daily Mail, March 20 2005, p. 1. Joanna Blythman, ‘The Big Stores Behave Like Medieval Barons’, The Mail on Sunday , November 4 2007, p. 4.

71 •• Market-Led Strategic Change

For suppliers the search is for business strengths to counter the power of dominant customers – strong brands that pull products through the value chain, alternative distribution channels and customers, or building stronger product portfolios. For example, Northern Foods – maker of Goodfellas ’ pizzas, Fox’s biscuits and a range of retailer own-label food products – competes on quality, and is consequently in a strong position to negotiate with retailers. Northern is prepared to walk away from contracts that do not pay enough, and tries to pin customers down by contract – charging penalties to retailers who do not take delivery of as many products as promised, do not keep their side of the deal, or who want recipes changed. The objective is to produce distinctive products with appropriate marketing support that retailers and consumers will pay for. Goodfellas ’ pizzas hold more than 30% of the British frozen pizza market, making it difﬁ cult for retail merchandisers to ignore.90 In 2008 Northern Foods was prepared to close a Lincolnshire factory making pasta ready-meals, rather than accept lower prices imposed by a retailer customer. Companies like Unilever, Nestlé and French group Danone have been more successful than most in ‘ premiumtizing’ their brands to avoid price cuts and other pressures from retail buyers.91 The search for advantage and balancing power in dealing with dominant and powerful customers is one of the biggest challenges facing B2B sellers in increasingly concentrated markets.

Bad customers Yes, we are allowed to say it – there are bad customers. They may be bad in several ways and for several reasons. With increasingly sophisticated customers and the new market dynamics described above, this is not trivial. The leading US electronics retailer, Best Buy, estimates that as many as 100 million of its 500 million customer visits each year are undesirable – the goal is to get rid of the 20% of customers who are unprofi table. 92 This is not without risk – ‘ fi ring ’ customers can make you very unpopular (and not just with the ones you fi re). But the issue is becoming more urgent and bigger by the day – are there some customers with whom we do not want to do business, and what can we do about it?

Bad customers who play the rules • • • Some customers are smart, sophisticated and they enjoy using our own rules against us – they return excessive amounts of product for refund; they pay off the credit card every month, so there are no charges; they cherry-pick the special offers in the store and buy nothing else; and so on. Actually, in the latter case, we probably exaggerate the effect – recent evidence suggests that extreme cherry-pickers, who buy only items on sale, are not as numerous or proﬁ t-draining as supermarkets thought. Dedicated bargain-hunters are 1% of shoppers not 15%, which means the threat to proﬁ t is not that great.93 It looks like the biggest danger here is overreacting. It was probably not a great idea for B & Q to make the

•• 72 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

headlines for banning a grumpy granddad from all their stores for complaining too much, or sending him a letter calling him a ‘ silly old sod ’ , although it was probably very satisfying.94 Nor did Lidl in Swansea come away with much credit when they banned an elderly lady for persistently pushing her trolley into the checkout the wrong way round, but I bet they were glad to see the back of her!95 And the Tesco store manager who threatened an elderly disabled couple with a car parking ﬁ ne because they were too slow going round the store, probably had some difﬁ cult explaining to do.96 Punishing customers for sticking to the rules we made, or for just being annoying can be very risky.

Bad customers who break the rules • • • A completely different category is people who break the rules – sometimes to the extent of criminal fraud. These are the ‘demon customers ’ (as opposed to ‘ angel customers ’ ),97 well-known to retailers in particular and very much unwanted. Devil or demon activities include: ‘ wardrobing ’ – buying an expensive item of clothing, wearing it for a night out, then returning it for refund; ‘ pack attacks ’ – damaging the packaging of an item on display to buy it later at a discount; ‘ excessive ’ returning – making large numbers of purchases and returning them all – buying a product, claiming manufacturer rebates, returning the product, then buying it back at returns prices; buying loss-leaders and selling them at higher prices on eBay. 98 Sometimes, demon behaviour is simply undisguised theft – a recent survey found that around 7% of adults who use self-service checkouts in supermarkets fail to scan some of the items to get them free. 99 Technology can assist in identifying demons, but you have still got the problem of how to get rid of them – a start is to cut back on promotions and sales tactics that attract them, and to remove them from mailing lists. Bear in mind that although demon customers are most easily spotted in the retailing connection – there is no reason to imagine that sharp practices by customers only occur in shops or are restricted to consumers.

Reality Check: Shooting yourself in the foot

In 2007 an insurance company which shall remain nameless cooper- ated in TV exposés of fraudulent insurance claims, with several interviews with their head spook – let’s call him Mr Pretend Policeman, or Mr PP for short. (Don’t get me wrong, I love it when commercial organizations decide they have the right to behave like the police force.) Mr PP revealed how rigorous his company is in pursuing fraudulent claims to the grave and beyond (this neatly reinforcing the popular stereotype that insurance companies love taking your money,

73 •• Market-Led Strategic Change

but will move heaven and earth to avoid paying out on claims). But his real winner was to suggest that if there is a disputed claim, say on your house insurance, then his company will cancel your other policies with them, like your motor insurance (which you would then find it near impossible to replace with another company). He actually smiled (more of a sly grimace actually) when he said this. In one fell stroke, Mr PP destroyed the rationale for his company’s expensive cross-selling strategy. The company has spent several years more or less giving away small whole-life insurance policies to build the database that would allow cross-selling of diverse products. Why would any sane person now buy more than one policy, at most, from this company if a dispute on a claim (which can happen to anyone) allows the company to punish you by cancelling your car insurance? Advice to the street-wise: never buy more than one policy from any one company – spread your business around to minimize the risk you will be abused by Mr PP or one of his ilk. It is rumoured that local dentists did great business with the company’s marketing and sales executives, many of whom had ground their teeth to a pulp when they saw Mr PP’s pronouncement destroy their cross-selling strategy.

Bad customers who make the rules • • • Sophisticated and powerful customers make the rules, and the issue is whether we want to, or whether we can do business on those terms. The clearest examples are in the B2B sector, as discussed earlier. Nonetheless, the sophisticated consumer is wising up to the fact that sometimes we need to sell the things more than they need to buy the things. We saw that in B2B markets, high levels of concentration in the customer base put major customers in the position to deﬁ ne the terms of the deal and to challenge the seller to turn them down. The dominant customer issue raises important questions about how to improve bargaining power and when to simply walk away.

Reality Check: Gotcha!

A Marketing Director recently explained why he wanted to kill his Sales Manager. He had imported 20,000 DVD players from the Far East for £15 a machine. The plan was to sell these to small stores and chains with a wholesale price of £25, and a recommended retail price of £50. So far, so good. However, Mr Numpty the Sales Manager was delighted to report that he had been able to sell 10,000 players in a single deal to one of the UK’s largest supermarket chains – let’s call them NastyCo – for

•• 74 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

£17.50 a player, allowing the supermarket to sell them for £20. He was pleased with himself. He became less pleased when the Marketing Director pointed out that the remaining 10,000 machines were unsaleable, other than to NastyCo. Why would any independent retailer buy the machines for a wholesale price of £25, when NastyCo was retailing them for £20? The Marketing Director says the worst of it was knowing that someone at NastyCo was grinning and saying ‘do you think they have had that conversation yet – shall we make the call?’ Sure enough, when the call came, NastyCo offered £10 a player for the remaining 10,000 machines. He had to accept – losing £25,000 on the overall deal. That is why he wants to kill Mr Numpty his Sales Manager.

So, Where Does That Leave Marketing? In denial? The simple fact is that radical and disruptive changes in customer attitudes and behaviour, and in the forces that are driving market structures seem to have left much conventional marketing behind. Life for executives was a great deal easier when customers were thought to be compliant and cooperative (and actually should be rather grateful that we are prepared to share our fantastic products with them), and when we could talk about ‘ mass markets ’ without looking silly. If those days ever existed, they are now over. The challenge is to update how we do marketing to reﬂ ect the ways in which customers and markets have changed. In the next chapter I build the foundation for this updating by comparing traditional marketing ways of looking at things and the real priorities in companies.

References and End-notes

1. ‘ UK Customers Fed Up With Bad Customer Service’ , April 25 2006, www.businesszone.co.uk . 2. Reichheld , Frederick J. and W. Earl Sasser , ‘ Zero Defections: Quality Comes to Services ’ , Harvard Business Review , September/ October 1990 , pp. 105 – 111 . 3. Mazur, Laura , ‘ Accountability ’ , Marketing Business , July/August 1996 . 4. Reichheld , Frederick F. , The Loyalty Effect , Boston, MA : Harvard Business School Press , 1996 . 5. Jones , Thomas O. and W. Earl Sasser , ‘ Why Satisﬁ ed Customers Defect ’ , Harvard Business Review , November/December 1995 , pp. 88 – 100 .

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6. Neal, William D., Observations on Loyalty, Atlanta, GA: SDR Consulting, 1997. Neal, William D., Satisfaction Be Damned, Value Drives Loyalty , Atlanta, GA: SDR Consulting, 1998. 7. ‘ Paying Lip-Service to the Loyalists’ , Business Age , April 1 1996. 8. Mazur, Laura, ‘ Brands ’ , Marketing Business , April 1997. 9. ‘ The Databases of the Argument ’ , Marketing Week , November 18 1994. 10. Day, George, ‘ Tying In an Asset ’ , in Understanding CRM , London: Financial Times , 2000. 11. Price , Bill and David Jaffe , The Best Service Is No Service: How to Liberate Your Customers From Customer Service, Keep Them Happy and Control Costs , San Francisco, CA : Jossey-Bass , 2008 . 12. Mitchell , Alan , ‘ If You Want to Be Loved, Just Do It Right ’ , Financial Times , March 27 2008 , p. 16 . 13. Price and Jaffe, Best Service . 14. Mitchell , Alan , ‘ In the Pursuit of Happiness ’ , Financial Times , June 14 2007 , p. 14 . 15. Rucci , Anthony B. , Steven P. Kirn and Richard T. Quinn , ‘ The Employee–Customer–Proﬁ t Chain at Sears ’ , Harvard Business Review , January/February 1998 , pp. 83 – 97 . 16. Brown , Stephen , ‘ Torment Your Customers (They’ll Love It) ’ , Harvard Business Review , October 2001 , pp. 83 – 88 . 17. Dinmore , Guy , ‘ Calculated Waiting List Fuels Demand for Ferrari Models ’ , Financial Times , October 27 2007 , p. 22 . 18. Godin , Seth , Meatball Sundae: Is Your Marketing Out of Synch? , London : Piatkus Books , 2008 . 19. Mitchell, Alan, ‘ Discovering the New World ’ , Marketing Business , February 2001, p. 29. Mitchell, Alan, Right Side Up: Building Brands in the Age of the Organized Consumer , London: HarperCollins, 2001. 20. Johnson , Luke , ‘ Advertising May Not Be Good for Business ’ , Sunday Business , August 4 1996 . 21. Poulter , Sean , ‘ Bad Taste Billboards ’ , Daily Mail , April 15 1997 . 22. Parkinson , Dan , ‘ Why Men Want a Break From the “ Mocking ” Commercials ’ , Daily Mail , August 23 2005 , p. 26 . 23. Fernandez, Marcus, creative director at Myrtle, quoted in Tom Leonard, ‘ Don’t Mention the A-Word, We Are Media Neutral Now ’ , Daily Telegraph , March 17 2000. 24. Wilson, Des, quoted in Matthew Lynn and Rufus Olins, ‘ Under Pressure ’ , Sunday Times , September 10 1995. 25. Shrimsley , Robert , ‘ Business Leaders Dread Consumer Group’s Wrath ’ , Financial Times , April 17 2001 . 26. Lewis , David , The Soul of the New Consumer , London : Nicholas Brealey Publishing , 2000 . 27. Voight , Joan , ‘ The Consumer Rebellion ’ , Adweek , January 10 2000 , pp. 46 – 50 . 28. Chandy , Caroline , The Dissatisfaction Syndrome , London : Publicis Trends Group , 2001 .

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29. Jones , Robert , The Big Idea , London : HarperCollins Business , 2000 . 30. Ives, Laurel, ‘ Uncle Sam Turns His Back on Burgers’ , Daily Telegraph , March 6 2001. Schlosser, Eric, Fast Food Nation: The Dark Side of the All-American Meal , New York: Houghton-Mifﬂ in, 2000. 31. Curtis , James , ‘ Clear as Mud ’ , Marketing Business , February 2001 , p p . 1 6 – 1 8 . 32. Platt, Ed, ‘ The Revolution Starts Here ’ , The Business , February 17 2001. 33. Fenton, Ben , ‘ Sales Woes for Mirror and Sun Fuel Talk of Freesheet ’ , Financial Times , January 12/13 2008 , p. 4 . 34. Jarvis , Jeff , ‘ Love the Customers Who Hate You ’ , BusinessWeek , March 3 2008 , p . 5 8 . 35. Quoted in Tomkins, Richard, ‘ The Power of Price Cannot Be Discounted ’ , Financial Times , May 14 1999. 36. Matthews , Virginia , ‘ Simplicity Is the Consumer’s Choice ’ , Financial Times , December 10 1999 . 37. Tomkins , Richard , ‘ Selling to the Sated ’ , Financial Times , M a r c h 22 2000 . 38. Goff , Sharlene , ‘ Lenders Set to Launch the “ Five-Minute Mortgage ” ’ , Financial Times – FTMoney , June 24/25 2006 , p. 1 . 39. Eaton , Lynn , ‘ Britons Become Top Complainers ’ , Sunday Times , September 5 1999 . 40. Goff , Sharlene , ‘ Banks Pay Out £560 million for Unfair Fee Claims ’ , Financial Times , March 6 2008 , p . 4 . 41. Alleyne , Richard , ‘ Shoppers Stay at Home as Sales Lose Their Sparkle ’ , Daily Telegraph , January 6 2001 . 42. ‘ A Day Out With All the Fun of the Queue’ , Daily Telegraph , July 17 1997. 43. Freemantle , David , What Customers Like About You: Adding Emotional Value , London : Nicholas Brealey Publishing , 1999 . 44. Clover , Charles , ‘ Persuading Us to Shop Until We Drop ’ , Daily Telegraph , January 2 1999 . 45. Wendlandt , Astrid , ‘ It’s Sure to Get Up Travellers ’ Noses ’ , Financial Times , April 24 2001. 46. Billing , Soren , ‘ HMV Credits “ Social Hub ” with Rise in Holiday Sales ’ , Wall Street Journal , January 18/20 2008 , p. 6 . 47. O’Donnell , Jayne , Sharon Silke Carty and Erin Kutz, ‘ Borders Opens Bookshelves to Digital Services ’ , US Today , February 14 2008 , pp. B1A – B2B . 48. Taylor , Ben , ‘ The Household Names the Mob Loves to Hate ’ , Daily Mail , May 2 2001 . 49. Seybould , Patricia , The Customer Revolution , New York : Random House , 2001 . 50. ‘ Alive and Well, the Sick Jokes Doctors Use at Your Expense’ , Daily Mail , December 20 1997. ‘ Learn to Speak the Lingo ’, Daily Mail , February 5 2008, p. 43.

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51. ‘ Coffee Clutch: McDonald’s Brews a Test for Weakened Starbucks ’ , Wall Street Journal , January 8 2008, pp. 14–15. 52. Goodman , Matthew , ‘ Single-Minded Firms Go Chasing the Solo Pound ’ , Sunday Times , October 30 2005 , p. 3- 6 . 53. Doughty , Steve , ‘ Women Tightening Their Grip on the Purse Strings ’ , Daily Mail , August 3 2007 , p. 21 . 54. Baxter , Sarah , ‘ Microtrendies Are Taking Over the World ’ , Sunday Times , August 26 2007 , p. 1 - 24 . 55. Hempel , Jessi , ‘ The MySpace Generation ’ , BusinessWeek , December 12/19 2005 , pp. 63 – 72 . 56. Hira , Nadira A. , ‘ You Raised Them, Now Manage Them ’ , Fortune , May 28 2007 , pp. 26 – 33 . 57. Hamm , Steve , ‘ Children of the Web ’ , BusinessWeek , July 2 2007 , pp. 48 – 58 . 58. Barrow , Becky , ‘ Heading for a Poverty-Stricken Future, the Tiswas Generation ’ , Daily Mail , March 7 2008 , p. 7 . 59. Guthrie , Jonathan , ‘ Business Is Not Ready for the Grey Pound ’ , Financial Times , September 27 2007 , p. 15 . 60. Eckblad , Marshall , ‘ Boomers May Want It All and Leave Little to Heirs ’ , Wall Street Journal , December 6 2007 , p. 35 . 61. Guerra , Francis and Jonathan Birchall , ‘ Boom Time ’ , Financial Times , December 6 2007 , p. 13 . 62. ‘ Why Womenomics Is the Force of the Future ’ , Daily Mail , October 18 2007, p. 33. 63. Allen-Mills , Tony , ‘ “ Miranda Complex ” Hits US Women ’ , Sunday Times , September 30 2007 , p. 1 - 22 . 64. Friedman , Vanessa , ‘ Coutts Responds to the Rise of Afﬂ uent Women ’ , Financial Times , July 14/15 2007 , p. 16 . 65. O’Connell , Vanessa , ‘ U.S. Retailers Confront the Wealth Gap ’ , Wall Street Journal , November 22 2007 , p. 6 . 66. Goff , Sharlene , ‘ Wealthy’s Desire for Luxury Goods Rises Unabated ’ , Financial Times , December 10 2007 , p. 4 . 67. Hamm , Steve , ‘ The Trouble with India ’ , BusinessWeek , M a r c h 1 9 2007 , pp. 4 9 – 5 8 . 68. Vence , Deborah L. , ‘ Multicultural Marketing: the Undocumented ’ , Marketing News , October 15 2005 , pp. 11 – 12 . 69. Grande , Carlos , ‘ Ethical Consumption Makes Mark on Branding ’ , Financial Times , February 20 2007 , p. 24 . 70. Skapinker , Michael , ‘ There Is a Good Trade in Ethical Retailing ’ , Financial Times , September 11 2007 , p. 15 . 71. Woolf , Marie , ‘ Health Food Fads Spark Huge Rise in Animal Testing ’ , Sunday Times , December 30 2007 , p. 1 - 1 . 72. ‘ Caring Shoppers Will Splash £2bn This Year ’, Daily Mail , October 13 2006, p. 35. 73. Fraser , Karen , ‘ Conﬂ icted Consumers ’ , Harvard Business Review , February 2007 , pp. 35 – 36 .

•• 78 The customer is always right-handed: customer satisfaction, customer sophistication and market granularity

74. Grande , Carlos , ‘ No Smoke Without Ire in Rise of Puritan Consumer ’ , Financial Times , July 25 2005 , p. 18 . 75. Thompson , Damien , Counterknowledge: How We Surrendered to Conspiracy Theories, Quack Medicine, Bogus Science and Fake History , Atlantic Books , 2008 . 76. Jack , Albert , That’s Bollocks: Urban Legends, Conspiracy Theories and Old Wives Tales , Penguin Books , 2007 . 77. Booker, Christopher and Richard North , Scared to Death: From BSE to Global Warming – Why Scares Are Costing Us the Earth , London : Continuum , 2007 . 78. Hitchens , Peter , ‘ The Scares That Are Just Hot Air ’ , The Mail on Sunday , November 18 2007 , p . 7 0 . 79. Wildavsky , Aaron and Mary Douglas , ‘ Explaining Our Fears ’ , Science , March 11 1989 , pp. 1211 – 1212 . 80. Lawson , Nigel , An Appeal to Reason: A Cool Look at Global Warming , London : Duckworth , 2008 . 81. Naisbitt , John , Megatrends: Ten New Directions Transforming Our Lives , Futura Publications , 1988 . 82. Penn, Mark J. and E. Kinney Zalesne, Microtrends: The Small Forces Behind Today’s Big Changes , Allen Lane, 2007. 83. Wroe , Martin , ‘ Back to the Future 2008 ’ , Sunday Times , December 23 2007 , p. 1 - 12 . 84. Vigerie , Patrick , Sven Smit and Mehrdad Baghai , The Granularity of Growth: Making Choices That Drive Enduring Company Performance , Cyan/Marshall Cavendish , 2007 . 85. Stern , Stefan , ‘ Managers in Search for a Grain of Good Sense ’ , Financial Times , December 27 2007 , p . 1 1 . 86. Mackintosh , James and Bernard Simon , ‘ Ford to Focus Business From “ Key Suppliers ” ’ , Financial Times , September 30 2005 , p . 3 2 . 87. Quoted in: Liker, Jeffrey K. and Thomas Y. Choi, ‘ Building Deeper Supplier Relationships ’ , Harvard Business Review , December 2004, pp. 104–113. 88. Hollinger , Peggy , ‘ Suppliers Sound Alarms at Airbus Cuts ’ , Financial Times , June 16/17 2007 , p. 21 . 89. Giles , Chris and Henry Tricks , ‘ Suppliers ’ Woes Could Provide Limitation to Retailer’s Ambitions ’ , Financial Times , June 3 2005 , p . 2 4 . 90. Laurence , Ben , ‘ Northern Foods Goes Upmarket ’ , Sunday Times , October 14 2007 , p . 3 - 1 7 . 91. Rigby , Elizabeth and Jenny Wiggins , ‘ Supermarkets Face Battle with Suppliers ’ , Financial Times , January 5/6 2008 , p. 15 . 92. McWilliams , Gary , ‘ Minding the Store: Analyzing Customers, Best Buy Decides Not All Are Welcome ’ , Wall Street Journal , November 8 2004 , p . A 1 . 93. Lee , Louise , ‘ Where Have All the Tightwads Gone? ’ , BusinessWeek , October 15 2007 , p . 1 6 .

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94. Tozer , James , ‘ Grumpy Old Ron, Banned by Every B& Q in Britain ’ , Daily Mail , November 11 2004 , p. 5 . 95. Gill, Charlotte , ‘ Ve Haf Ways of Making You Queue! ’ , Daily Mail , February 3 2004 , p. 15 . 96. ‘ Couple Told: You Took Too Long to Go Round Tesco ’ , Daily Mail , December 1 2007, p. 48. 97. Selden, Larry and Geoffrey Colvin, Angel Customers and Demon Customers: Discover Which Is Which, and Turbo-Charge Your Stock, Portfolio, 2003. 98. Rubens , Paul , ‘ How to Get Rid of “ Devil ” Customers ’ , FT.com , June 13 2007 . 99. ‘ 2 m Britons Admit Self-Scan Thefts’ , AOL Money , December 13 2007.

•• 80 C H A P T E R • • • • 3 New marketing meets old marketing: new marketing wins!

This chapter ... Given the challenge of radical customer and market change we examined in the last chapter, now we can contrast traditional models of the marketing programme to the new challenges and demands we face, and the dramatically different agenda managers face in the process of going to market. This agenda is going to be the basis for many careers in ‘new marketing ’ and for getting marketing back onto the top management agenda, from where it has slipped in recent years. The reason is that the conclusion to which we are working is that marketing is strategy – only when you have a strategy can you make sensible decisions about customer service, responding to market changes and investing in marketing actions. This sets us up for the next chapter looking at value-based marketing strategy.

Introduction Marketing as an organizational function has been around for quite a while now. The word has become part of the business vocabulary, and you would Market-Led Strategic Change

think that everything would be hunky-dory. But I am going to suggest to you that everything in the world of corporate marketing is far from hunky-dory. It is actually in crisis. Our focus in this chapter is on the inadequacies of conventional marketing programmes in achieving business goals in the new types of market we face. This opens the way to examining value-based marketing strategy as the way forward (in Chapter 4).

Old Marketing Has Not Kept Up with New Markets and New Priorities It is a bit unfair, because ‘ old marketing ’ is as much to do with attitudes, stereotypes and prejudices of the past as it is with marketing programmes. Nonetheless, the most familiar model in marketing is the ‘ marketing mix ’ or ‘ marketing programme ’ – it is certainly how we have trained executives to think about planning their marketing operations. I have two major points to make here: ﬁ rst, the traditional model has simply not kept up with the way that markets have changed; and, second, it is impossible anyway to make appropriate decisions about investments in marketing actions/programmes without understanding the strategy being pursued and what it is intended to achieve. The commonest depiction of marketing activities is in the form of the marketing mix, along the lines shown in Figure 3.1 . Traceable to the 1960s,1 it was McCarthy who classiﬁ ed marketing tools into four groups which he called the ‘ four Ps ’ of marketing: product, price, place and promotion.2 In modern parlance, ‘place ’ is often labelled as ‘distribution ’ or ‘ value chain ’ , and ‘ promotion ’ is commonly ‘ marketing communications ’ . Some people group product and price issues together as the ‘value offering’ and distribution and communications as the ‘ marketing tools ’ . These formulations of half a century ago have been useful in bringing thinking together around the offering sellers make to the customer and how it is promoted and distributed. They provide a basic building block in understanding seller actions in going to market, and

Marketing Marketing Customer strategy programme marketplace

The value offering * Product policies * Pricing policies

Figure 3.1 * Place /distribution Marketing tools Marketing strategy * Promotion /marketing and marketing communications programmes (the marketing mix)

•• 82 New marketing meets old marketing: new marketing wins!

provide a structure for planning marketing operations. However, the marketing mix/programme structure blinds us to many of the highest priorities really faced in the process of going to market. Let’s consider each area in turn – bearing in mind that you can get chapter and verse on each of these areas in any conventional marketing textbook.3

Products, Brands and Innovation Product policy The main issues seen as part of product policy are: deﬁ ning the product itself , with its ‘ bundled-in ’ services, and its purpose and positioning against the competition; selecting an effective product mix to service target markets, including groupings into product lines and ranges that make sense to the customer; creating a branding policy that will have meaning and identity for the customer, to represent our competitive positioning and value proposition, and often also to provide a management focus (e.g. in the form of brand or product management and planning); developing and launching new products to meet emerging customer needs, to ﬁ ll gaps in our product range, or to replace obsolete products; and, managing product deletions , where products are withdrawn from the market. A wealth of conceptual and analytical tools exist to support decision making in this area, which we will not open up here, since they are covered in depth in the conventional literature. Examples include: the ‘ augmented ’ product model showing the different levels and sources of value that can be offered to the customer; portfolio models to assess the com- pleteness and balance of the product mix; brand management models and planning structures; the product life cycle model, identifying different market conditions and hence effective marketing policies, depending on the stage of life cycle reached; new product development protocols and methods; and, product deletion strategies and evaluation techniques. Nonetheless, new product failure rates remain incredibly high, and the logic of traditional product policies (e.g., never design a product mix where you compete with yourself) are increasingly challenged by strategic innovations (e.g., consider proactive cannibalization, where you set out to compete with your own products before someone else does).

Reality Check: Winging it in new product development

Scientists at NASA in the USA built a gun specifically to launch dead chickens at the windscreens of airliners, military jets and the space shuttle, all travelling at maximum velocity. The goal was to test the strength of new windscreens by simulating bird collisions.

83 •• Market-Led Strategic Change

British railway engineers were eager to test the windshields of new high speed trains using the gun. Arrangements were made and the gun arrived in Britain. When the chicken was fired from the gun at the train windshield, the engineers were shocked that the bird smashed through the shatter-proof windshield, blasted through the control console, snapped the engineer’s back-rest in two and embedded itself in the back wall of the cabin. The horrified engineers sent the test results to NASA and begged for advice. NASA responded with a one-line memo: ‘Next time, defrost the chicken. ’

Brands In Chapter 4 I will suggest that we are now in an era of value- based strategy, where relying on a brand strategy to survive is looking increasingly dubious. Marketing people never stop going on about brands – the company as the brand (e.g. Tesco), the product as the brand (e.g. the Mars bar), the person as the brand (e.g. Richard Branson), the customer as the brand (yes, we’ll come back to that one). Perhaps the ﬁ rst point is – if you want to know what branding is, never ask someone from an advertising agency, unless you like lec- tures on the philosophy of meaning and have plenty of time. Young & Rubicam, for example, claim that brands have replaced religious faith as the thing that gives purpose to peoples’ lives 4 – these people really should get out more. The simplest explanation of a brand was Stephen King’s view that: ‘ A product is something that is made in a factory. A brand is something that is bought by a customer. ’ In other words, the brand is the ‘core identity’ we are selling – advertising people like to talk about the ‘ brand personality ’ and to give brands human identities – Martini and Coke as ‘extrovert ’ brands that want you to join in, but Timotei shampoo as an ‘ introvert ’ brand saying shyly ‘ you can come to me if you want’ 5 . Much talk is of the ‘ soul ’ of the brand. (Or as Dilbert would say – ‘ isn’t it amazing people actually get paid for doing this ’ !) Nonetheless, brands exist to serve customers, not the other way around.6 In addition, we should not forget that there are major difﬁ - culties in establishing new brands in existing markets. This results in a somewhat less than dynamic rate of change and innovation.

So what’s wrong with that? There is nothing wrong in active and nicely managed product development and planning processes and branding. Where it goes wrong is where carefully planned product and brand policies produce,

•• 84 New marketing meets old marketing: new marketing wins! and institutionalize, incremental and often marginal changes in our offering to the market. This simply does not hack it. Conventional ‘ me- too’ products and brands are increasingly encountering the ‘limitation of imitation ’. The critical issue is radical innovation in the value we provide to our customers. While true innovation addresses superior customer value, many of our existing bureaucratic processes in marketing are geared towards marginal changes in products and brands and not making mistakes.7 Increasingly, the key survival factor is the ability to build creative, innovative companies. A new corporate model is taking shape in successful organizations, which focuses on creativity and innovation to provide new pathways to growth. As technology and information become commoditized and globalized, so the advantage of making things cheaper, faster and better diminishes and profi ts decline. Design strategy begins to play a key role in product differentiation, decision making and understanding the consumer experience. Creative innovation becomes the key driver of growth, because companies create products that address consumers ’ unmet and often unarticulated needs. The successful creative corporation emerges with a new ‘innovation DNA ’ and a fast-moving culture that routinely beats the competition because of high success rates in innovation.8 Companies like Apple, Google, Toyota and General Electric are rated as the most innovative in the world.9 The move by Apple from computers to the music and movie business; the evolution of Google from Internet search to advertising, to data organization, to online software, to mobile phones; the dominance of Toyota in hybrids and the quest for the fi rst plug-in electric car; GE’s search for ‘ imagination breakthroughs ’ has led into emerging market initiatives and green technology – all represent the power of ideas in changing markets and achieving step-changes in performance. Breakthrough ideas represent the new market power – ‘ cool power ’ . Steve Jobs at Apple has achieved a step-change in the music business because of the iPod – not even a new product, but one which was a better-conceived and better- designed version of an existing product – because Jobs has the power to attract customers with his superior ideas.10 The challenge for marketing is to drive creative and powerful innovations that make a difference and re-shape markets. This is where you fi nd the above-average earnings that you want.11 The bureaucracy of conventional product policy can follow later, if needed, and a lot of it can be outsourced to technical agencies anyway. Indeed, innovation at Google appears to the outsider to be almost anarchic – disordered, in disarray and embroiled in uncomfortable uncertainty, living on the edge of chaos, as one Google director says ‘It’s far easier to beg for- giveness than to ask permission’12 – but that’s the way they like it at Google. And, that’s how they have built the capability to handle multiple, simultaneous, radical innovation initiatives. There are many risks in what Google is doing – but one of the larger ones is that someone buys a marketing book and decides that they need to have a properly structured product and brand strategy . . .

85 •• Market-Led Strategic Change

Price and Value Price policy The principal issues which make up total pricing policy are usually identiﬁ ed as: price positioning in terms of level against competitors and customer expectations (e.g. ‘ skimming ’ the market with a high price versus ‘penetration ’ pricing with a low price to gain volume and market share); price levels and relativities within the product mix or range, and brand choices, we are offering, and the margins created; types and forms of price discounting in different customer markets; and pricing in different customer markets – export versus home, direct sales versus transfers to subsidiaries, bidding versus list prices, key accounts versus general market prices. Most conventional attention is given to methods of computing prices: cost-based (e.g., add a percentage for margins to the full cost of the product); market-based (e.g., ‘ what the market will bear’ ); competition-based (e.g., equal competitors ’ prices, or establish a position above or below theirs).

So, what’s wrong with that? Probably there are two important things wrong with the traditional marketing perspective on price: ﬁ rst, that price-setting is seen as just a calculation based on costs and competition, and has little to do with customer value; and, second, that prices are set by junior executives in marketing departments. Wrong, on both counts. Price is a critical issue that positions a product or company in the marketplace, and it is a strategic management choice, not a junior executive toy like producing brochures.

Price and profi t • • • There is an incredibly direct link between price and profi t – similar sized changes in reducing costs or increasing sales volume never have the same profi t impact as price. A McKinsey survey calculated that a 1% increase in price improves operating margin by 11.1%.13 This alone makes price a high-level management choice. Certainly, setting prices low may have attractions, for example with a radical innovation.

Reality Check: Pricing an innovation in value

Strategic pricing for demand creation may be a powerful way to get high volume quickly and establish a market position competitors cannot equal. The Swatch watch transformed the wristwatch from a functional item used to tell the time, into a mass-market fashion

•• 86 New marketing meets old marketing: new marketing wins!

accessory. The product combined the accurate time-piece with creative designs and emotional appeal. The company’s project team had to determine the strategic price for the innovatory product. At the time, cheap, high precision quartz movement watches from Japan and Hong Kong were dominating the mass market (priced at around $75). The Swatch watch was priced aggressively at $40 – a price at which customers could buy several watches as fashion accessories. The low price left no profit margin available for the Japanese and Hong Kong companies to imitate the Swatch and undercut its price. The Swatch project team worked back from the strategic price to arrive at a target cost, and to design a suitable production system.

Sources: W. Chan Kim and Renee Mauborgne, ‘Strategy, Value Innovation and the Knowledge Economy’, Sloan Management Review, Spring 1999, pp. 41–54. ‘The Pioneers of Innovation ’, Global Finance , April 1999, p. 10.

Nonetheless, marketing has long stood accused of ‘ snatching defeat from the jaws of victory’ in making poor price decisions unsupported by market knowledge.14 For example, to stop existing mortgage borrowers leaving for low rates elsewhere, HBOS offered them the low rates usually given to new customers. However, the bank could not offer rock-bottom rates to everyone, so edged up prices overall, and became uncompetitive. HBOS market share fell to 8% in 2007, compared to 21% the year before, and the head of retail banking left the company.15

Price as a quick-fi x • • • The trouble is there is a terrible temptation that when times get hard, you use price as a quick-fi x. If products are stuck in the channel of distribution, or if sales are lower than anticipated, a major customer is being troublesome, or the competition is taking our market share, a knee-jerk reaction is to cut prices. Price cutting usually works in gaining sales volume, notwithstanding the fact it frequently undermines profi tability – recent examples include deep discounting by the car companies in the USA to shift models, and the panic discounting by British retailers looking at slow Christmas sales in 2007. The trouble with discounting is that it tells the whole world you have problems, and builds expectations of more discounts for those who wait. The massive risk is also that price cutting leads to commoditization – we end up in a situation where we sell only on low price, and get trapped in a spiral of further price reductions until profi t disappears altogether. For Western fi rms, attempting to compete on price against competition from lower-cost competitors in countries like China or India is highly unattractive. Generally, getting into a head-on price war with a direct competitor is not a good place to be – the loser is usually the fi rst one to blink – because everyone makes less money.

87 •• Market-Led Strategic Change

Price sensitivity • • • Much conventional thinking also assumes that customers are highly aware of prices and show high price sensitivity. In many cases these assumptions are ﬁ ne, in others they are quite wrong. The whole point of Fairtrade coffee is that it seeks out the consumer who is prepared to pay more for coffee, while the business-class seat seeks out the traveller willing to pay a massive premium to avoid sitting in the back of the aircraft. There is also the question of when and how people are sensitive to price, if indeed they are. For example, sports club members paying a monthly fee are more likely to attend and renew their memberships than people who make a single annual payment – partly because the monthly subscription is a constant reminder of the price being paid. 16 Even car dealers are moving away from haggling and towards ﬁ xed prices because the Internet makes prices more transparent, and female buyers and Generation Y customers appear to dislike price bargaining more than they like getting a ‘ special ’ price.17

Price visibility • • • One of the hidden challenges is to manage price visibility for competitive advantage. Price is perhaps the easiest thing for consumers, the media and government to attack. When price is highly visible you can be attacked and damaged because your prices are too high (e.g., food and power prices) or because they are too low (e.g., poor working conditions in clothes factories in China are blamed on the £6 dress in Primark; supermarkets are held responsible for teenage delinquency because they sell lager for 22p a can and cider for 26p a pint; * Asda’s £2 chicken is linked to unpleasant battery farming conditions). Price visibility also invites attacks if you charge different prices to different markets/customers (e.g., charging more for holidays during school breaks penalizes parents and families; charging different prices for air tickets through different channels really annoys the people who pay more; differences between your Web price and your store price for the same product have been known to infuriate customers; and M &S took a lot of ﬂ ack when people found out it was charging 82% more for sandwiches in London compared to the North of England). Managing the visibility of price may be difﬁ cult. Certainly, the ‘ secret sales ’ attempted by British retailers before Christmas 2007 (circulating money-off vouchers to established customers, holding ‘ guerrilla sales’ in-store at short notice, and sending out e-mails with discounts) were ineffective because everyone found out.

Price architecture • • • Managing price architecture may be more effective. 18 For example, the low-cost airlines have a deserved reputation for low fares, but much

* The party animals amongst you, tempted to rush down to Sainsbury’s for 26p cider should be warned – the promotion only lasted a single day after the press and politicians started carping about social responsibility – which is kind of the point I was making.

•• 88 New marketing meets old marketing: new marketing wins!

of their revenue is generated by additional charges for check-in facilities, luggage, credit card payment and so on. In the USA, Wal-Mart has attacked the position of Best Buy and Circuit City, not by reducing the price of electronics products, but by offering lower-cost warranties.

Price and strategic vulnerability • • • Generally, marketing thinking does not address price and strategic vulnerability. For example, the costs of being investigated by the UK or EU authorities for suspected price ﬁ xing or other anti-competitive behaviour are extremely high. The EU currently has a Competition Commissioner with all the restraint of a rabid Rottweiler in pursuing investigations and taking legal action. At the very least, mishandled price strategy can lose a company its pricing freedom, in the sense that changing prices becomes too complicated and risky. The world was generally not happy with Microsoft when it became apparent that it was making an 85% margin on the Windows operating system, and the company has been pursued by competition regulators ever since. 19

Strategic pricing • • • It is also dangerous to miss the opportunities of strategic pricing initiatives. In some cases price may be a critical part of a new business model.

Reality Check: Reinventing the pricing model

Kodak, after disaster in its failure to respond quickly enough to the impact of digital technology on the photography business, has developed a strategy to reinvent the inkjet printer. The Kodak Easyshare printer reverses the conventional logic of pricing printers and refill cartridges. The prevailing business model is the ‘razor and blades’ strategy invented by Gillette – you sell the product (razor or printer) at less than cost and make profits on the supplies the customer must buy for the product to go on working (the razor blades or the ink cartridge). With the Kodak product, you pay more than normal for the printer ($149–$299), but the refill cartridges are relatively cheap ($9.99 for black and white and $14.99 for colour). The cost per print is around 10 cents compared to 24 cents for the nearest Hewlett–Packard equivalent. The target is the heavier printer users, who under the traditional model effectively subsidize light users.

Sources: Steve Hamm, ‘Kodak’s Moment of Truth’, BusinessWeek, February 19 2007, pp. 42–49. John Gapper, ‘A Bid to Reprint the Pricing Rule Book ’, Financial Times , May 21 2007, p. 13.

89 •• Market-Led Strategic Change

A radical reinvention of the value proposition to the customer, based on the pricing model, is also shown by British-based drug-maker Janssen–Cilag. In effect, the company has offered the NHS expensive cancer drugs with a ‘ money-back guarantee ’ – if the patient fails to make adequate progress, then the NHS gets the drug for free. This strategy changes the rules of the game radically. The risk of errors in diagnosis and waste of extremely expensive drug treatments (£10,000 to £50,000 per patient) is thus borne by the seller, encouraging NHS take-up of the treatment.20

Customer value • • • There is little doubt what matters most in pricing is customer value. Delivering products and service at prices that represent good value to our customers is the real challenge. This is dependent on a profound and deep understanding of how different customers understand and use our products. Of course, sometimes you will get it wrong – Sony’s Playstation 3 lost out to Nintendo mainly because it was priced too high and price reduction was unavoidable; Apple’s iPhone was priced too high at launch in the USA, leading to a rapid reduction in price and lots of problems with angry consumers who had bought early at the full price. Part of meeting this challenge may be about educating customers to look at products and services in terms of the value they produce rather than just how much they cost. Mapping customer value aims to set value as the offer, not price. 21 The term ‘customer value management ’ has been coined to describe an approach to collecting and analysing data to demonstrate in money terms the superior value that products deliver to customers – turning salespeople into ‘ value merchants ’ rather than sellers of products.22 This approach is likely to be highly inﬂ uential in business-to-business marketing. What becomes clear is that price is not simply a way of recovering costs, or even of determining the level of demand for the product. Price has a profound impact on how customers use and perceive the product or service and the long-term relationship we have with the customer. 23 Price is linked to our strategic position in the market and whether we can sustain it. It may be an important part of reinventing the business model. Adverse publicity about prices and pricing behaviour can seriously damage a company’s corporate reputation. Some forms of pricing behaviour can lead to senior executives being sent to prison. This makes it a kind of bigger deal than simply one element of the ‘marketing mix’ based on cost-plus calculations in the marketing or accounting department.

Distribution Channels and Value Chains Channel management Perhaps the ‘ Cinderella ’ of marketing for too long was the channels and logistics systems that actually get our products and services

•• 90 New marketing meets old marketing: new marketing wins!

into the hands of the paying customer. The problem is that in many instances the control of distribution is located with the operations area, supply chain or distribution management, not with marketing. The trouble with this is that the customer probably does not care too much how we organize it, the customer is typically unreasonable and selﬁ sh enough to think that the following is really what distribution is about: is the product/service available in the outlet I want to use, when I want to buy it? how long do I have to wait to get delivery of the product and how sure am I it will get here on time? can I get spare parts, maintenance and after-sales service quickly and reliably and do I believe the promises made about spares and maintenance? In other words, the distribution system, however sophisticated, is about simple service to the customer – and that is why it is seen as part of the marketing process. The principal issues to be addressed in distribution are about channels on the one hand, and logistics on the other: selecting, motivating and controlling distributors and outlets; deciding on the intensity or exclusivity of outlets in the channel of distribution; and, providing the promise and reality of the delivery and services that the customer wants, through our transportation arrangements, our stockholding and the location of our warehousing in the marketplace. The alternative to channels of distribution with intermediaries is direct marketing of goods by manufacturers to users. Recent years have seen the growth of direct marketing approaches: loyalty programmes used to build databases to target consumers; telephone call centres using databases to segment markets as the base for telemar- keting campaigns; customer information collected from Internet users being used to target them with new product messages sent by e-mail.

So, what’s wrong with that? Traditional views of distribution fall short of reality in several quite important respects. To begin with, the Internet represents a more subtle change than providing the opportunity to bombard customers with e-mail messages and online ads. The digitization of products changes the rules of the game completely – whether it is music, TV and video, movies, software, computer games, ﬁ nancial services, information services, and the like – once the product can be distributed in digital form via the Web the dynamics and control of the value chain are different. Similarly, even if the product cannot be digitized (e.g., a seat on an aircraft), the channel can be (Internet-based booking, payment and seat allocation). But even this underestimates the capacity of the Web to create and support new business models. Ebay in its original form was probably a prototype for what is coming – it provided a powerful peer-to-peer marketing machine, circumventing conventional distribution channels and marketing intermediaries. A more recent example is the convergence of consumer social networking on the Internet and distribution channels. Firms like Zlio.com provide an online service allowing users to set up their own online shops in ﬁ ve minutes. Zlio shops are a way

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of recommending products to friends and relatives in return for a small commission from the supplier, and represent the rapidly growing phenomenon of social shopping. The most common Zlio shops are enthusiasts ’ stores – for example, specializing in Japanese manga items, sports memorabilia, chilli sauces – or birthday present wishlists.24 However, in more conventional cases the power and concentration in buying bases like that for grocery products (as discussed in the last chapter), puts distribution and value chain issues way up on the strategic agenda – this is increasingly a key survival issue for companies. Choices and designs of value chains becomes a higher priority than attempts to manage conventional distribution channels. In fact, extreme responses may include ring-fencing existing business and seeking out more attractive markets where distributor concentration does not create the same imbalance in power:

Reality Check: Enough is enough!

Procter & Gamble’s 2005 purchase of Gillette created a company with more than $60 billion in revenues and $200 billion in stock market value, and a larger portfolio of megabrands (each generates more than $1 billion in annual sales) than any other company in the world. One attraction of the merger was to create a brand portfolio that provides greater bargaining power when dealing with retailers like Wal-Mart, Carrefour, Tesco and Metro. However, the merger represents a more fundamental change in P&G’s business model. The combined company is aiming at the world’s 6 billion consumers, not the most affluent 1 billion, by expanding its focus on the ‘ lower-income ’ consumer in developing markets like India and China and providing them with affordable products. Importantly, rather than working with global retailers like Wal-Mart and Carrefour in emerging markets, P &G is shifting its route to market. In China, for example, the strategy involves a huge distribution system staffed by an army of individual Chinese entrepreneurs – what P&G calls a ‘down-the-trade system ’. Individual Chinese salespeople take P &G products into towns and areas with small villages, where a one-person kiosk sells shampoo and toothpaste.

Sources: ‘It Was a No-Brainer ’, Fortune, February 21 2005, pp. 59–64. Jeremy Grant, ‘Mr Daley’s Mission: To Reach 6bn Shoppers and Make Money ’ , Financial Times , July 15 2005, p. 32.

Indeed, P & G is not alone in looking at radically new value chain positioning strategies. A number of brand owners have established their own retail outlets to overcome the limitations of existing distribution channels: Lego sells its toys in its own outlets to counter the power

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of ‘ category killers ’ like Toys’R’Us; Apple and Sony operate their own outlets to get closer to the buyers of their sophisticated products.

Reality Check: Going direct

Several brand owners are extending their channel strategy from reliance on conventional retailers to establish a position at the retail level of the value chain. Nespresso, a subsidiary of Nestlé, is establishing ‘coffee boutiques’. Located at prestigious addresses like New York’s Madison Avenue and London’s Beauchamp Place, the boutiques are lined with dark wood panelling, discreetly lit, with plush interiors. Nespresso previously sold coffee capsules for espresso machine by mail-order (and online) to members of the ‘Nespresso Club ’, and then started selling branded coffee machines.

Nespresso Gemini CS 100 Pro Photograph courtesy of 2A

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Nespresso plans further retail expansion – taking the brand into hotels, restaurants, offices and first-class airline lounges. The goal is to enable an increasing number of people to experience the brand first-hand. The brand experience is hoped to lead to purchase of the coffee machines and accessories. The strategic logic for such moves is that branded consumer goods companies are often at the mercy of third-party retailers when it comes to the marketing and placement of their products. The goal is to move beyond selling a ‘product in a box’ to offering a superior ‘ service experience ’. Nespresso’s objective is to become a lifestyle brand and this is reflected in its new channel strategy.

Sources: Adapted from Jenny Wiggins and Haig Simonian, ‘How to Serve a Bespoke Cup of Coffee ’ , Financial Times , Tuesday April 3 2007, p. 10.

Indeed, reinvented online channels can reverse traditional logic – long tail theory suggests that the biggest money is in the smallest sales because the economics of distribution has fundamentally changed.25 Long tail theory comes from the music and publishing sectors, but can be applied to many others. Old-style distribution in music emphasizes big hits and best-sellers. But with Internet economics, costs of inventory and distribution are close to zero, so the long tail of non-hits may be where the real value lies. For example, in 2004 in the USA, books selling more than 250,000 copies sold 53 million copies in total, but books selling less than 1000 copies sold a total of 84 million copies. In these terms, Amazon is a ‘ long tail aggregator ’ because it brings the non-hits together. 26 There are two long tail rules: make everything available, and help me ﬁ nd it.

Reality Check: Long tail power

In 1988, Joe Simpson, a British mountain climber, wrote a book called Touching the Void describing a near-death experience in the Andes. The book sold only modestly and was soon forgotten. A decade later, Jon Krakauer wrote Into Thin Air, another book about a mountain climbing tragedy, which was a considerable publishing success. Suddenly, Touching the Void started to sell again. Random House rushed out a new edition to keep up with demand. Booksellers promoted it in their Into Thin Air displays. The revised paperback edition spent 14 weeks on the New York Times bestseller list. Touching the Void now outsells Into Thin Air more than two to one.

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The secret is Amazon.com recommendations – suggesting people who liked Into Thin Air would also like Touching the Void. Amazon combines infinite shelfspace with real-time information about buying trends and public opinion. Unlimited selection reveals truths about what consumers want and how they want to get it.

Sources: Chris Anderson, ‘Big Earnings from Small Sales ’, Sunday Times , October 29 2006, p. 3-13. Chris Adams, The Long Tail: How Endless Choice Is Creating Unlimited Demand , London: Random House, 2007.

The underlying point is that while conventional marketing concentrates on how to manage distributors in a traditional vertical channel, the world has moved on and the really big decisions are about how to conﬁ gure and manage a value chain that delivers superior value to our customers. In many cases the underlying rationale and economic model underpinning traditional distribution channels is fast becoming obsolete.

Marketing Communications The most visible and ‘ glamorous ’ aspects of marketing programmes are in the area of marketing communications. However, the key point to make is that however exciting and creative, this is about linking our product and price offer to our customers and nothing else. Creative awards and advertising agency hype notwithstanding, the management problems are: deciding objectives for the communications programme; integrating the different forms of communication (getting the ad agency and the sales force doing things even vaguely compatible would be a start in the right direction in many cases); and evaluating in mundane terms like value-for-money what we are actually getting for our spend on communications (not easy, incidentally, but not impossible). The communications methods open to us in delivering marketing to the customer can be classiﬁ ed as: advertising and promotion, sales and account management, and public relations. Broadly in each of these areas, the principal issues to be addressed can be summarized as follows: deciding on the role of each form of communications in delivering the market strategy to the marketplace, i.e. the target customer; setting objectives for each form of communications which represent achieving the role we want it to play; managing the communications process, for example, in advertising and sales promotion this is likely to be about handling relations with external agencies, budgeting, and evaluating the success of the spend against objectives; the integration of communications activities – this is not just in deciding what role they should all play but actually arranging it – comparing the messages delivered by

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salespeople to the positioning our advertising is trying to gain, balancing the attractions of short-term gains from a price cut or special deal with the long-term position we are trying to build for a brand, or simply coordinating ad campaigns, sales promotions and sales calls.

Advertising and promotion • • • Advertising involves using mass media like TV, radio, press, outdoor and transport media to reach large audiences, but also more specialized vehicles like direct mail, exhibitions, trade publications and also includes the communications role of product packaging, point-of-sale displays, sales literature, etc. While advertising may be about building brand image and awareness (or other goals), sales promotion is much more short-term, e.g., price cuts to shift stock, coupons to motivate product trial, customer competitions and incentives, distributor incentives, ‘ special offers ’ , collectables and the like.

Sales and account management • • • Personal selling involves face-to-face representation by seller to buyer, plus the supporting materials for presentation, display, etc. Selling may be by a manufacturer’s own direct sales force, third party suppliers, or by members of the channel of distribution. Sales management issues centre on the recruitment and selection of salespeople, motivation, reward and organization of the sales force. Account management arrangements vary from call centre operations to provide customer service to cross-functional teams dedicated to the needs of particular customers or groups.

Public relations • • • It is a label greatly abused in practice, but public relations is intended to refer to the creation and maintenance of corporate images relevant to different audiences, e.g., shareholders, regulators, suppliers, customers.

So, what’s wrong with that? There is nothing inherently wrong with these approaches to communications with the marketplace, particularly if they are integrated and linked clearly to our business strategy. However, where it seems to go wrong is in clinging to the familiar models of the past when the world has fundamentally changed, and this seems to be what marketing is doing. Let’s take them in turn.

Advertising and promotion • • • Traditional advertising and promotion (in consumer markets) tends to be based on mass markets – we have an advertising agency develop

•• 96 New marketing meets old marketing: new marketing wins! attractive ads, which are then placed in mass media like television and print (newspapers and magazines). But in the same way that mass markets are increasingly an illusion, the mass media of conventional advertising no longer exist. The proliferation of digital and wireless communications channels is spreading the mass audience over hundreds of narrowcast TV and radio channels and websites, hundreds of specialist print media, as well as computers, video-game consoles and mobile phones. In the USA, in the 1960s an advertiser could reach 80% of US women with an ad spot on the three main TV channels – now even a hundred TV channels could not get close to this audience coverage.27 (And even if they could, TV viewers are getting good at ways of bypassing the adverts when they watch TV – so-called ‘avoidance technology’ .) Besides, the ITV audience in Britain is increasingly characterized as the old and the poor.28 As far as brands are concerned, advertising was concerned with ‘ Big Ideas ’ that would connect a brand, emotionally with millions of consumers, but now the ‘Small Idea’ is in the ascendant – targeting individuals or specialized communities of customers.29 Mass communications are giving way to micro-communications, with individualized messages needed for individual consumers. The strength of companies like Google, in search, and Facebook, MySpace and YouTube, in social networking and video sharing, is that the interests of users are revealed by their searches and networking, and provide precision in targeting messages. Specialist networking sites, like Mothercare’s Gurgle.com for new parents and Sermo for medics, provide opportunities for very focused communications. For example, Lego now enlists infl uential consumers as evangelists, spreading the word in their networks, After a new train kit was shown to 250 Lego train evangelists, their word-of- mouse communications helped 10,000 units sell out in 10 days with no other marketing. 30 It is unsurprising that online advertising is taking an increasing share of advertising expenditure – actually right now it’s the only bit that is not declining. But, it’s not just a case of sticking ads on the Web instead of on commercial TV channels. Online marketing communications are increasingly different. Social networks, like Bebo, Facebook and MySpace, blogging sites and reality games, like Perplex City, do not provide a passive audience receiving and responding to conventional advertising. There is a degree of interaction, peer-to-peer infl uence and resistance quite unlike conventional media. Consumer reactions to advertising are shaped by friends, family and contacts linked by the technology. Interestingly, as Facebook has tried to introduce behaviour- targeted advertising onto its website, user reactions have been hostile – users are concerned about privacy and object to their online networking behaviour being monitored to benefi t advertisers – yet without the users, the site has nothing to sell advertisers.31 User-generated advertising content – sometimes called ‘ citizen advertising’ – further illustrates this interactivity. Consumers can use blogging and networking sites to upload their own versions of adverts – sometimes

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fl attering, sometimes not. Sometimes, companies invite people to create ads for their products. The underlying trend is for advertisers, instead of badgering consumers to passively absorb ads, to involve the public in creating ads and participating in the advertising process. Samsung has developed an approach to link users to interactive billboards in Hollywood and Manhattan’s Time Square, allowing them to put up text messages on the billboards for thousands to see. It is beginning to look like simply using online media as a substitute for traditional media is a big mistake. The online audience on social networking sites like Facebook and MySpace is getting fed-up with the avalanche of ads – they are spending less time on these sites, seeking out ad-free environments like blogging, and paying little attention to the ads, because they went there to meet their buddies not to buy stuff. Catch 22 for advertisers is that more aggressive advertising on these sites can lead to even more frustrated and stroppy users.32 There is a risk that even though online ads become more ‘ relevant ’ through behavioural- targeting, users will increasingly screen them out, and retreat to ‘ walled gardens ’ , or private online communities, where they can escape commercial messages. We can expect online users of social networks to take control over their own online data. Traditional online advertising will not go away, it will just become increasingly ineffective.33 Where we go from here is a more fundamental re-think of how advertising works than just sticking more and more ads onto online sites. It is also not surprising that conventional advertising agencies have been wrong-footed by the degree and speed of these changes. Many do not have the skills to manage online media or the combination of online and offl ine in a single campaign. Major companies like Unilever are insourcing advertising, as marketing services agencies struggle to keep up with rapid changes in the media, while others like Nokia are going for multiple agency teams.34 Procter & Gamble, Dell, and Johnson & Johnson are trying to create new types of advertising groups that blend different functions.35 Major agencies are fi ghting for relevance by becoming ‘ brand navigators ’ , which devise the overall message, then subcontract the work – to interactive shops, direct marketing agencies and so on.36 Increasing emphasis is being placed on high levels of creativity and the ability to work across media, as with the Cadbury gorilla campaign.

Reality Check: The Cadbury gorilla

Fallon Worldwide is renowned as an agency that pushes the enve- lope creatively, and persuades large advertisers to make unconventional and controversial ads. In 2007 for an ad for Cadbury Dairy Milk, Fallon put a man in a gorilla suit and had him play the Phil Collins piece ‘In the Air Tonight’.

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The only reference to chocolate was a slogan at the end ‘A glass and a half full of joy ’. After the 90-second ad was aired in August, it quickly became an Internet hit, with 7 million downloads from YouTube, ‘viral ’ circulation by e-mail, postings on Facebook and blog sites, and dozens of spoof copies. This led in turn to free editorial coverage in mainstream media – including an uninterrupted showing on Australian TV news, where the ad was not even on the air. Sales of Cadbury Dairy Milk rose 9% in the two months after the ad debut. The investment in a conventional TV campaign was leveraged by viral marketing. But no one can explain what the gorilla has got to do with the chocolate.

Sources: Aaron O. Patrick, ‘Fallon in London Hones an Unconventional Edge’, Wall Street Journal, December 11 2007, p. 6. Carlos Grande, ‘Aping of Ad Helps to Drum Up Chocolate Interest ’, Financial Times, December 12 2007, p. 23.

A wholesale reinvention of the advertising process is being driven by consumer reactions to conventional approaches, media change and the still-emerging potentials of the Internet. Traditional marketing does not seem to have got this yet.

The sales organization or strategic customer management • • • Meantime, in the sales organization a different type of revolution has been taking place, in business-to-business marketing particularly, which also seems to have been largely ignored by conventional marketing (possibly because marketing executives are in denial about this one too).37 As technology makes products more substitutable, it is estimated that salesperson effectiveness accounts for as much as 40% of business-to-business choice of supplier. Expenditure on the sales function exceeds that on higher-profi le advertising and sales promotion. Even though salespeople are expensive in salaries and other costs, sales organizations employ more people than marketing does. Indeed, major corporations are transferring resources from traditional marketing to new-style strategic sales organizations. Some of the most important decisions being faced at the front of companies, where they meet their customers, are concerned with managing the customer portfolio. Decisions regarding where to make investments to strengthen customer relationships, where to offer reduced levels of sales support, and how to handle the position with dominant customers, are among the most critical a company faces. Increasingly, the sales function has moved beyond the role of implementing marketing strategy to one of leadership in strategy: Today’s competitive environment demands a radically different approach. Specifi cally, the ability of fi rms to exploit the

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true potential of the sales organization requires that company executives adopt a new mindset about the role of the selling function within the ﬁ rm, how the sales force is managed, and what salespeople are expected to produce. The sales function must serve as a dynamic source of value creation and innovation within the ﬁ rm. 38

The force driving the move towards ‘ strategic customer management ’ is the powerful, demanding B2B customer.39 Again, conventional marketing seems to have missed this shift, and still looks at sales as part of the marketing communications programme. I am sorry to be the one who tells you – but basically marketing departments are downsizing, disintegrating and sometimes disappearing, while the strategic sales and strategic account management functions are growing. Those who manage strategic customer relationships tend to have the CEO’s ear, more than those who witter on about brands and adverts . . .

Public relations or corporate reputation management • • • Lastly, while public relations has been concerned with the trivia of press releases and sponsorship deals and the like, corporate reputation has become an increasingly strategic issue impacting on the ability of companies to compete effectively. Recent estimates have examined what difference corporate reputation really makes to the value of a company. Communications Consulting Worldwide predicts what would happen to the stock price of several major corporations if they could switch corporate reputations with a peer which has a better reputation, so: if Wal-Mart had the reputation of Target, its stock would rise 4.9% (boosting market value by $9.7 billion); if Coca-Cola had the reputation of Pepsi, its stock would rise 3.3% (worth $4 billion); if Colgate had the reputation of Procter & Gamble, its stock would rise 6.2% (increasing market value by $2 billion).40 This just got a lot more serious than arranging boxes at Wimbledon for favoured customers (unless I am one of them, in which case it is a ﬁ rst rate idea). Managing risk to corporate reputation has acquired a high priority in many companies because of the impact of reputation on market value and the ability to compete. Reputational risk is subject to systematic management attention in major companies.41 The damage to companies like BP (plant safety issues), Siemens, Volkswagen, Samsung and BAE (bribery corruption allegations), Mattell (safety issues in chil- drens ’ toys), Next and Asda (using ‘slave labour’ in overseas factories), is massive and warrants a strategic response. However, it is clear that our conventional marketing approaches in this area have tended to be ‘ mere “ messaging ” , nifty marketing and PR ’ .42 In fact, while companies used to control their identities and the content of messages about themselves, now information about a company is ‘ created, exchanged, and modiﬁ ed by a vast, distributed ecosystem of employees, customers, partners, communities and interest groups ’ . 43 While at one time managers used to control channels

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of communications, ‘Today, channels are exploding in number, easy to use, freely available and, as a result, now “ belong to everyone ”’. 44 Generally, it seems that the marketing department has not provided the analytical power and capabilities to anticipate potential problems and develop mechanisms to deal with them. In many companies, the role has been ceded to ‘ chief attention ofﬁ cers ’ or corporate affairs directors, where ‘ A corporate affairs director might now have to develop a greater focus on major public policy issues, build an intelligent position on human rights, and establish relationships with NGOs and diplomats ’ .45 Companies may have to take an increasingly aggressive stance in protecting corporate reputations that goes way beyond simple PR. When an organization ﬁ nds itself in the position of being ‘ the accused ’ , opponents care less about whether you are guilty and mostly about beating you. It may be the strategic response to reputation attack is never to admit guilt and to meet each accusation with a counter-attack. While PR is essentially a conciliatory engagement with attackers, a strategic response may be more aggressive. The rule seems to be that when you have done wrong is the time to be repentant and conciliatory (traditional PR), but when you have been wronged the response should be a vigorous defence.46

Reality Check: Corporate reputation damage control

Eric Dezenhall in the USA is known as the ‘pit-bull of public relations’, who protects the reputations of clients not through soft, fuzzy concepts and press releases but by going after the enemies of clients like ExxonMobil. When Greenpeace USA found itself subject to an Internal Revenue Service audit in 2005, they blamed Public Interest Watch (a Washington non-profit organization, heavily funded by ExxonMobile) who had filed a complaint accusing Greenpeace of abusing its tax-exempt status. The Wall Street Journal revealed close links between PIW and Dezenhall’s communications company, well-known for its stealthy assaults on its clients’ enemies. Campaigns associated with Dezenhall Resources include: ExxonMobile – arranging for a counter-demonstration, in which participants waved placards declaring ‘Capitalism Rocks’ and ‘Stop Global Whining’, to deflect attention from an anti-company environmental protest (participants have since denied that they were paid by Dezenhall’s firm). Chemicals Industry – casting doubt over the fairness of a TV exposé.

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Motel 6 – undermining claims by a couple who said they had been spied on in their room, preventing a TV investigation by exposing the couple as con artists. O’Melveny & Myers – retained by this law firm representing former Enron CEO Jeffrey Skilling, preparing a strategy to pay newspaper pundits to challenge whistleblower Sherron Watkins (the law firm later asserted it had nothing to do with a proposed anti- Watkins effort).

Sources: Eamon Javers, ‘The Pit Bull of Public Relations ’, BusinessWeek , April 17 2006, pp. 84–85. Eric Dezenhall and John Weber, Damage Control: Why Everything You Know About Crisis Management Is Wrong, New York: Portfolio, 2007.

Certainly, a major point of concern is that companies often seem uncertain how to repair damaged reputations – it may take a careful analysis of what is causing reputational damage, which constituencies are affected (customers, investors, employees), and what needs to be ﬁ xed. Responses to reputational damage vary from charm offensives to more rigorous counter-attacks. 47 For example, 2008 saw BAE Systems, Britain’s largest defence contractor, launching a large-scale advertising campaign and road-show based on the theme ‘ Real Pride, Real Advantage ’ to ‘ reinvigorate ’ its image among key stakeholders. This move may be connected to an array of bribery investigations linked to BAE across the world and the negative press associated with them.48 Corporate reputation represents a cross-functional challenge for companies, which goes way beyond the traditional remit of ‘PR ’ and marketing communications. Once again, marketing appears determined to turn its back on the real problems facing management and to concentrate on trivia.

The New Marketing Challenge

Anyone feeling suicidal yet? Sometimes when you look at the generally poor performance we have achieved in sorting out customer satisfaction and loyalty, the radical changes in customer markets everywhere, and the inadequacies of conventional marketing approaches in coping with the things that really matter, it can get a tiny bit depressing. Actually, it shouldn’t be. All the factors we have described create a massive pressure for change in how we go to market. Certainly, that change will be disruptive for many traditional ways of doing things. But where else are you likely to ﬁ nd the new opportunities in markets if not through understanding the drivers of customer satisfaction and loyalty and the ways in which markets are

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Renewal Coping/ adaptation mechanisms Disruptive pressures on existing business models

Revolution Radical market and customer change/trends

Value-creating opportunities for new business models Reinvention Designing new Figure 3.2 ways of doing business Market revolution drives renewal and reinvention

reshaping? The model in Figure 3.2 provides a framework to express this more optimistic view – and one that can be used operationally in a company to confront the issue. Certainly, the changes in many markets do amount to a revolution – the differences between markets largely refl ect the stage the revolution has reached. Radical market and customer change does provide disruptive pressures on the established players in the market. The challenge for them is to understand the specifi c changes unfolding and where they are going, and to respond with coping and adaptation mechanisms – renewal. The same market changes identify the new opportunities to create superior value for customers by designing new business models, i.e., to develop new ways of doing business which are aligned with market change – reinvention . Tracking the specifi cs of fundamental market changes and the disruptions created is the basis for developing effective responses and evolving new business models. Of course, one interesting question is whether the existing competitors in a market are capable of reinvention, or whether emerging value- creating opportunities will instead be exploited by new entrants to the market. It is not inevitable, but the recurring experience seems to be that the new entrant, unencumbered by existing ways of doing things will take the prize. When the laptop computer market became obsessed with the size and weight of the machines, the fi rst sub-three pound laptop did not come from Dell, IBM or Hewlett–Packard, it came from Sony. Sony had no real track record or capabilities in the computer business, it is just very good at making things smaller. In the move to develop electric and hydrogen-powered vehicles as an alternative to high- pollution petrol fuels, it is small start-ups, notably in Silicon Valley,

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which are driving innovation, not the big car-makers who have been reluctant to invest and slow to respond.49

Old marketing meets new marketing Our conventional marketing tools may not be adequate to cope with decisions and environments of this kind. Marketing programmes and the elements of marketing programmes (the marketing mix) are the ‘ language ’ of marketing as portrayed in textbooks, enshrined in marketing education and training programmes, and captured in marketing plans. The issues raised are ﬁ ne and important, except in one respect. They miss the point and they distract us into focusing on operational trivia, when we should be thinking about more important things. The really important issue is not product planning and branding, it is innovation and change. The really important issue is not computing and setting prices, it is how price positions us in the market, how the visibility of price exposes us to attack, and how we manage customer value. The really important issue is not distribution channels, it is the value chain. The really important issues are not advertising campaigns and media or sales management, they are communications in a new media world and the strategic management of customer relationships. In any case, most of the operational details can be, and increasingly are, outsourced to specialists (advertising agencies, product development specialists, and so on). It is as if old marketing were mainly concerned with market manipulation (through brands, advertising, promotion and so on), while new marketing focuses on innovations in customer value, managing the whole value chain and engaging in a new world of communications technology. In short, the really important issue is not operational marketing management, it is strategy. The very real conclusion is that marketing is strategy.

Marketing is strategy Coping with market disruption is a big deal in its own right, and a recurring theme in market-led strategic change, but we have also seen that traditional marketing thinking – obsessed with the marketing mix and marketing programmes – has not done well in keeping up with how things have changed. In many companies, the standing of marketing is at an all-time low. The way forward is to recognize that marketing is strategy, not programmes of advertising and promotion around tired brands. Nirmalya Kumar argues that the way for marketing to get back on the CEO’s agenda is to address the issues that matter to the CEO – and doing a bit of market research and placing ads does not really hack it. His conclusion is that ‘ the fate of marketing hinges on elevating the role of marketing executives from promotions-focused tacticians to customer-focused leaders of transformational initiatives that are

•• 104 New marketing meets old marketing: new marketing wins!

strategic, cross-functional, and bottom-line oriented’ .50 The centre of his argument for a strategic perspective on marketing is value. The next stage is to look at value as the basis for strategy (Chapter 4), and then how we can develop value strategies (Part II).

References and End-notes

1. Borden , Neil H. , ‘ The Concept of the Marketing Mix ’ , Journal of Advertising Research, June 4 1960 , pp. 2 – 7 . 2. McCarthy , E. Jerome , Basic Marketing: A Managerial Approach , 12th edn , Homewood, IL: Irwin , 1996 . 3. If you are desperate for this approach before you get into this chapter, then we provide this kind of coverage in: Cravens, David W. and Nigel F. Piercy, Strategic Marketing, 9th edn, Burr Ridge, IL: McGraw-Hill/Irwin, 2009. 4. Tomkins , Richard , ‘ Brands Are New Religion Says Advertising Agency ’ , Financial Times , March 1 2001 , p . 1 7 . 5. Bennett , Oliver , ‘ I’m a Tall Blonde Burger ’ , Independent on Sunday , November 17 1996 . 6. Rust , Roland T. , Valarie A. Zeithaml and Katherine N. Lemon , ‘ Customer-Centered Brand Management ’ , Harvard Business Review , September 2004 , pp. 110 – 118 . 7. Vence , Deborah L. , ‘ Just a Variation on a Theme ’ , Marketing News , February 1 2007 , pp. 18 – 20 . 8. Nussmaum , Bruce , ‘ The Evolution of the Creative Company ’ , BusinessWeek , August 8/15 2005 , pp. 52 – 53 . 9. McGregor , Jena , ‘ Most Innovative Companies ’ , BusinessWeek , May 14 2007 , pp. 5 2 – 6 4 . 10. Colvin , Geoff , ‘ Power: A Cooling Trend ’ , Fortune , December 10 2007 , pp. 37 – 51 . 11. Henry , David , ‘ Creativity Pays: Here’s How Much ’ , BusinessWeek , April 24 2006 , p . 7 6 . 12. Lashinsky , Adam , ‘ Chaos by Design ’ , Fortune , October 2 2006 , p p . 3 4 – 4 2 . 13. Cram , Tony , ‘ Boost Brand and Profi t With the Right Price ’ , Financial Times , August 6 2004 , p . 1 1 . 14. Cressman , George E. , ‘ Snatching Defeat From the Jaws of Victory: Why Do Good Managers Make Bad Pricing Decisions? ’ , Marketing Management , Summer 1997 , pp. 9 – 19 . 15. Croft , Jane , ‘ Diffi cult Time for Hornby and HBOS ’ , Financial Times , June 16/17 2007 , p. 17 . 16. Cram, ‘ Boost Brand and Profi t ’ . 17. Welch , David , ‘ Haggling Starts to Go the Way of the Tail Fin ’ , BusinessWeek , October 29 2007 , pp. 71 – 72 . 18. Roegner , Eric V. , Michael V. Marn and Craig C. Zawada , ‘ Pricing Gets Creative ’ , Marketing Management , February 2005 , pp. 25 – 30 .

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19. Abrahams , Paul , ‘ Microsoft Makes 85% Margin on Windows System ’ , Financial Times , November 18 2002 , p. 25 . 20. Timmions , Nicholas , ‘ Drugmaker’s Proposal to NHS: We’ll Pay If Cancer Treatment Fails ’ , Financial Times , June 4 2007 , p. 1 . 21. Smith , Gerald E. and Thomas T. Nagle , ‘ Pricing the Differential ’ , Marketing Management , May/June 2005 , pp. 28 – 32 . 22. Anderson , James C. , Nirmalya Kumar and James A. N a r u s , Value Merchants: Demonstrating and Documenting Superior Value in Business Markets , Boston, MA: Harvard Business School Press , 2007 . 23. Gourville , John and Dilip Soman , ‘ Pricing and the Psychology of Consumption ’ , Harvard Business Review , September 2002 , pp. 91 – 96 . 24. Palmer , Maija , ‘ Social Shoppers Find Goods Well Recommended ’ , Financial Times , January 21 2008 , p. 16 . 25. Anderson , Chris , ‘ Big Earnings from Small Sales ’ , Sunday Times , October 29 2006 , p. 3 - 13 . 26. Anderson , Chris , The Long Tail: How Endless Choice Is Creating Unlimited Demand , London : Random House , 2007 . 27. Bianco , Anthony , ‘ The Vanishing Mass Market ’ , BusinessWeek , July 12 2004 , pp. 58– 62 . 28. Kleinman , Mark , ‘ ITV Audience “ Is Old and Poor ” ’ , Sunday Times , July 17 2005 , p. 3-1 . 29. Helm , Burt , ‘ Struggles of a Mad Man ’ , BusinessWeek , December 3 2007 , pp. 44 – 50 . 30. Hof , Robert D. , ‘ The Power of Us ’ , BusinessWeek , June 20 2005 , pp. 47 – 56 . 31. Vara , Vauhini , ‘ Facebook Ad Program Is Changed Over Privacy ’ , Wall Street Journal , December 7–9 2007 , p. 7 . 32. Ante , Spencer E. and Catherine Holahan , ‘ Generation MySpace Is Getting Fed Up ’ , BusinessWeek , February 18 2008 , pp. 54 – 56 . 33. Dyson , Esther , ‘ The Coming Ad Revolution: Google and Microsoft Are So Yesterday ’ , Wall Street Journal , February 12 2008 , p. 15 . 34. Patrick , Aaron O. , ‘ Nokia Hopes Two Teams Are Better Than One ’ , Wall Street Journal , January 10 2008 , p. 4 . 35. Vranica , Sizamme , ‘ Transformed by the Internet ’ , Wall Street Journal , January 2 2008 , p. 28 . 36. Helm, ‘ Struggles of a Mad Man ’ . 37. A more detailed coverage of this topic can be found in: Piercy, Nigel F. and Nikala Lane, Strategic Customer Management: Strate- gizing the Sales Organization , Oxford: Oxford University Press, 2009. 38. The Sales Educators , Strategic Sales Leadership: Breakthrough Thinking for Breakthrough Results , Mason, OH : Thomson , 2006 . 39. See: Hooley , Graham , Nigel F. Piercy and Brigitte Nicoulaud , Marketing Strategy and Competitive Positioning , 4th edn , Harlow : FT/Prentice Hall , 2008 , chapter 15 .

•• 106 New marketing meets old marketing: new marketing wins!

40. Engardio , Pete and Michael Arndt , ‘ What Price Reputation? ’ , BusinessWeek , July 9 & 16 2007, pp. 70 – 79 . 41. Eccles , Robert G. , Scott C. Newquist and Roland Scatz , ‘ Reputation and Its Risks ’ , Harvard Business Review , February 2007 , pp. 104 – 114 . 42. Stern , Stefan , ‘ Wanted: Chief Attention Ofﬁ cers Who Can See Round Corners ’ , Financial Times , February 1 2008 , p. 14 . 43. The Arthur W. Page Society , The Authentic Enterprise , New York : Arthur Page Society , 2007 . 44. Ibid. 45. Ibid. 46. Dezenhall , Eric and John Weber , Damage Control: Why Everything You Know About Crisis Management Is Wrong , New York : Portfolio , 2007 . 47. Anders , George , ‘ Companies Seem Uncertain How To Restore Tarnished Reputations ’ , Wall Street Journal , January 9 2008 , p. 6 . 48. Pfeffer , Sylvia , ‘ BAE Systems Launches Ad Blitz ’ , Financial Times , January 31 2008 , p . 1 8 . 49. Reed , John , ‘ Electric Cars: How Plug-In Cars Picked Up Speed and Credibility ’ , Financial Times , January 8 2008 , p. 11 . 50. Kumar , Nirmalya , Marketing As Strategy: Understanding the CEO’s Agenda for Driving Growth and Innovation , Boston, MA : Harvard Business School Press , 2004 .

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C H A P T E R • • • • 4 Value-based marketing strategy

This chapter . . . This chapter is where we start to look at the implications of what has gone before – new types of challenges for executives in managing the process of going to market, aggressive demanding customers, fragmenting markets, the weakness of traditional marketing approaches in coping with the issues that matter to business performance. This chapter is built around the argument that value drives effective strategy. We can look at marketing strategy built around transactions, brands and customer relationships – all of which may be important – but what really matters is how these activities and resources build customer value. Even then, we have a problem – customer value is not the straightforward idea it may seem, and teasing out what drives superior value for different groups of customers is a major challenge. It is also one of the most important challenges to face up to. If you can get a company to really take customer value seriously, instead of just paying lip-service to it, you have probably just made a major contribution to enhancing business performance.

Introduction The last chapters made the case that so far many of us have not done too great a job in taking customers seriously, and traditional marketing has failed to keep Market-Led Strategic Change

up with the way things have changed. The other side of the coin is that our customers are taking us very seriously indeed. We are in the midst of what can only be called a revolution in the types and levels of demands that customers are making. We need revolutionary approaches to how we go to market to cope with this reality. In this chapter, I want to describe an evolution from marketing which is primarily about transactions (selling stuff), to our obsession with brands and relationships, to arrive at value-based strategy as the inevitable response to escalating and diverse customer demands. Basically, if you read the last couple of chapters and still thought the answer was a bit more customer servility and a plastic loyalty card – boy, are you in for a surprise. However, better you get that surprise now, than when your business meets the smart customer.

Value as the driver of business and marketing strategy What I want to underline is the evolution of market processes from transactions to value – what some people call new marketing . However, the driving force in this transition is not clever marketing people – it is sophisticated, demanding, invasive, angry, vengeful, unreasonable customers. The driving force of new marketing is the new customer , as revealed in Chapter 2. The challenge is to keep up with the demanding and sophisticated customer we identiﬁ ed and described. Changes in the process of going to market are driven by the sophisticated customer and the need for customer loyalty along the lines shown in Figure 4.1 . This suggests several phases in the development of our approaches to marketing.

Transactional marketing • • • With relatively unsophisticated customers when loyalty is low, traditional marketing responses have often been low-quality products,

Customer loyalty High Low

High

Value-based Relationship marketing marketing

Customer sophistication

Transactional Brand marketing marketing and selling

Low Figure 4.1 Value- based marketing

•• 110 Value-based marketing strategy backed by excessive advertising and promotion, and the ‘hard-sell ’ , where the complaining customer is treated as the ‘enemy ’ . This approach to marketing is associated with aggressive selling and the main emphasis is sales volume and revenue.

Brand marketing • • • As loyalty becomes more important (because of the potential impact of retention on proﬁ tability, not because we like customers), we still see customers as pretty stupid, and marketing stresses brand and image, anything except price and real value, and complaining customers are bought off, e.g. with free products. In protected markets or industries dominated by a few companies, customers are loyal because they have no choice (or think they don’t), and have to be thankful for what they get.

Relationship marketing • • • When we ﬁ nd that as our customers get smarter, loyalty disappears, we respond with ‘ relationship ’ marketing – customer satisfaction surveys, loyalty schemes, complaint response systems, customer care programmes, and so on.

Value-based marketing • • • The trouble is what we see now is the challenge of building and sustaining high loyalty with smart customers who demand openness and transparency, and the ‘ picky, fault-ﬁ nding, hard-nosed, sophisticated customer ’1 who forces us towards continuous improvement in the things that matter most to customers. This is the era of value-based marketing, and we are only just starting to realize what it means for how we manage the process of going to market. Consider each of these aspects of marketing in turn. But please bear something in mind – no one is trying to say that transactions, brands and customer relationships do not matter any more. What we are saying is that the issue has become how these approaches to the way we go to market succeed in creating value for different types of customers.

Transactional Marketing and Selling The issue in transactional marketing is the sale, the deal, the contract and the immediate revenue and proﬁ t. This sounds old-fashioned. It is. It is still alive and well in some sectors like the retail car trade. For example, the former chief marketing ofﬁ cer of Coca-Cola advises us that the traditional marketing approach is: ‘When you can’t genuinely add value for your customer (compared to what your competitors are offering) pull the wool over their eyes instead. ’2 Oh yes, I really do think the worst kinds of transactional marketing are still around.

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Reality Check: Even in the car trade . . .

A long-time bastion of traditional, transactional sales approaches, even the car trade is having to wake up to what new customers want and demand. It seems that car showrooms are full of smarmy, arrogant, conniving and downright crooked people. At least, that is how some car dealers describe their enemy – the customers. Toyota found in a pilot scheme at its showrooms in Bristol and Grimsby that female customers, in particular, found the macho and patronizing manner of staff to be objectionable and unacceptable. Female customers (or more importantly non-customers) disliked the atmosphere of car showrooms, the dirty toilets, the machine-brewed coffee, and being ignored by salespeople. The fact is that female consumers make or influence about 80% of car purchases, and 60% of company fleet managers are women. Nonetheless, traditional sales approaches are clear and reinforced by conventional sales training: (1) when a couple enters the showroom, sideline the woman (after all, what do girlies know about cars?); (2) find out what the man wants to buy; (3) explain carefully to the man that this is not really what he wants to buy because he is basically a good bloke, who you would like to have as a mate, but he is a bit stupid; (4) show him that what he really wants to buy is coin- cidentally the very car that you have available to sell . . . Let’s not forget that this is the sector that has invested serious money in training by hypnotherapists to try to hypnotize customers, and trains salespeople to play ‘ good cop and bad cop ’ to manipulate customers. Is it really surprising that current estimates suggest that the majority of car purchases will very soon be partly or wholly Internet-based? At least Toyota has responded to the changed marketplace (maybe belatedly, but it is a start). It now gives interested customers a choice of brochures, Internet purchasing, or if all else fails, talking to salespeople. Salespeople are being put in separate offices, and will stay away from the customers unless they are asked for advice. The sad truth is that many people would rather buy a car from a computer screen than talk to the people employed to sell cars.

Sources: Ray Massey, ‘Would You Sell a Brand New Car to These People?’ , Daily Mail, July 21 1997. Giles Chapman, ‘Auto Suggestion ’, Daily Telegraph , May 23 1998. Ray Massey, ‘Why Female Buyers Hate Macho Car Men’ , Daily Mail , January 17 2001.

Indeed, Douglas Rushkoff argues that corporate selling has moved on from being merely intrusive and misleading, to become coercive in a very negative sense, observing that ‘ Coercion is much more debilitat- ing than persuasion or even inﬂ uence . . . Coercion seeks to stymie our rational processes in order to make us act against – or at the very least, without – our better judgment’ .3 He describes how the complaints

•• 112 Value-based marketing strategy

department of one Japanese department store is scented, to induce feelings of dread in consumers. (And this, incidentally, from a man who reverse-engineered the recruiting practices of religious cults, so that an advertising agency could apply them to selling products.)

Reality Check: Selling blue jeans

Douglas Rushkoff describes the techniques used to sell in retail locations like clothes stores. They often depend on sex. He quotes the techniques used by one female salesperson to sell jeans: ‘I kind of tilt my head to one side and stare at the guy’s butt. Then, as soon as he notices I’m looking, I quickly glance away and pretend to be caught. I can hold my breath and get my face all flushed. It works every time. ’

Source: Adapted from Douglas Rushkoff, Coercion, New York: Little Brown, 2000.

Transactional marketing is also about things like revenue enhancement through customer penalty policies:

● airlines who make you pay the full price for a new ticket if you happen to lose yours (notwithstanding the fact that your booking is in their computer system), with a possible refund later, naturally less a large administration fee deduction; ● insurance companies who charge you penalties, commission and administration fees if you cancel an insurance policy early; ● banks who charge you a penalty if you withdraw your own money too frequently, or at a time they don’t like, and then charge you for the letter they send to tell you they are ﬁ ning you; ● hotels who charge you for the room you booked, unless you give them 72 hours notice that you can’t make the trip, presumably on the grounds that you should have known you were going to be ill and stay at home. 4

Is it really surprising that as customers have wised up, they are getting their own back?

Reality Check: Management training

There are two essential rules in management: One . The customer is always right. Two . They must be punished for their arrogance. (Attributed to Dogbert)

113 •• Market-Led Strategic Change

However, before we blame salespeople for all our problems and think of better ways to punish them, there are two complications to bear in mind. First , if you found yourself thinking that stories of over-aggressive selling and a fi xation with sales revenue targets are kind of old- fashioned, then consider this. If anywhere in your value chain you have salespeople or intermediaries (like Independent Financial Advisers in fi nancial services) who are paid wholly or largely in volume-based commission, then you just bought yourself transactions, and you just incentivized a transactional relationship between your company and your customer. Furthermore, if all you use to evaluate market success is short-term sales volume and revenue fi gures, then your company has made it even clearer that what matters most is sales transactions. If you don’t believe me, try asking some of the customers concerned. Secondly , be aware that all some customers want from us is effi - ciently managed transactions. In business-to-business marketing, for example, we may represent a routine, possibly quite trivial, purchase for the buying organization. In this case, is it surprising that the buyer does not want to be our friend (have a relationship) and is not that concerned about our brands and advertising, and just wants simple transactions that can be routinized? Besides some buying organizations do not do ‘ friendly’ – they buy on price and specifi cation and that is all that really matters. This is to say that for some buyers the way we manage the sales relationship and sales transactions may be what creates or destroys value for them, in their terms.

Brand Marketing Branding products, services and companies is so central to conventional views of marketing it is hard to imagine a time when brands would not be the most important part of any marketing organization. Brands were the way we would improve over transactional marketing and build customer loyalty. However, the power of branding as the single, sole answer to the marketing strategy problem is on the wane.

Reality Check: Branding realities – EUW!

I used to make a silly joke about the problem with branding being that it was very painful for the cows. I have stopped doing this. In 2007 the latest trend for body decoration enthusiasts, moving on from tattoos and piercings, was having their skin branded in the style of a Texas prize steer. Red-hot metal brands or cauterizing pens, which burn at more than 1000 degrees Centigrade, are used to sear a design permanently into the flesh. Films of the experience can be found on YouTube.

•• 114 Value-based marketing strategy

I sense a marketing opportunity – competitions to nominate a teenager of your choice for the branding process . . .

Source: Adapted from Brendan Montague, ‘It’s the Brand New Body Craze – And It Hurts ’, Sunday Times , October 28 2007, p. 1-8.

Brands are an extremely important way for sellers to make their products distinct from those of competitors. They matter because for customers they: identify the source of the product, reduce risks, reduce search costs, make promises, convey symbolic values, and provide a signal of quality.5 They focus management attention on brand equity or value – deﬁ ned as the brand assets (or liabilities) linked to a brand’s name or symbol that add to (or subtract from) a product or service – with four dimensions: brand awareness, perceived quality, brand associations and brand loyalty.6 Perhaps where it goes wrong from a business viewpoint is when we start seeing the brand as an end in its own right, rather than just a means to an end, and when we think competing through brands makes us stronger than we really are. It does not help when people from advertising agencies are running around claiming that ‘ brands are the new religion ’ ,* as if nothing had changed.7 Advertising guys have a lot of enthusiasm for the softer aspects of brand value – they wax lyrical about brands as an object of love or as ‘lovemarks ’ in a world where products are ‘ mysterious ’ and ‘ intimate ’ and inspire ‘ loyalty beyond reason ’ .8 Products that are ‘loved ’ create customer evangelists and brand zealots who generate buzz through recommendation. 9 Personally, I think the boys and girls in adland should get out a bit more into the real world. And, don’t people do some really silly things in the name of ‘ branding ’ ?

Reality Check: What’s in a name – a lot of fees for advertising agencies?

Under different management teams, building society Abbey National morphed into abbey (lower case, different background) and within two years to Abbey (capital A, different colour background). The ‘ customer-friendly ’ move from Abbey National to abbey earned advertising agency Wolff Olins £500,000, cost the company another £11 million and featured in a £15 million advertising campaign.

*. . . in which case, I would like to announce the formation of the Brand Atheists Society.

115 •• Market-Led Strategic Change

Subsequently putting the capital ‘ A ’ back into Abbey is estimated to have cost another £9 million. The successive make-overs were described as a ‘rebrandin g process’ by the company, and a complete waste of money by its customers.

Sources: James Ashton, ‘A Costly Sign of the Times as Spaniards Splash Out ’ , Daily Mail, February 26 2005, p. 101. Darren Behar, ‘The £9 m Capital Gain ’ , Daily Mail , April 30 2005, p. 31.

Brands are a lot of fun, and change markets But before we get too anti-brand, it’s worth noting that brands are major company assets. The BusinessWeek /Interbrand list of the top 100 global brands in 2006 put the following brand values on the top brands: (1) Coca-Cola ($67 billion); (2) Microsoft ($57 billion); (3) IBM ($56 billion), (4) GE ($49 billion); (5) Intel ($32 billion); (6) Nokia ($30 billion); (7) Toyota ($28 billion); (8) Disney ($28 billion); (9) McDonald’s ($28 billion); and (10) Mercedes–Benz ($22 billion). 10 For better or worse, this means that a huge share of the market value of companies like these is down to the brand. Indeed, part of the global momentum achieved by Chinese companies is supported by the development of strong Chinese brands to compete internationally – Haier, in electrical appliances, Lenovo, in computers, Gome, in electronics retailing, and Wahaha, in drinks, are among the leaders.11 Nonetheless, we should probably not exaggerate how well people know the brands of which we are so proud. A survey of young US consumers found that most did not have a clue where their brands came from (and didn’t seem to care much either). Respondents identiﬁ ed Nokia (from Finland) and Samsung (from Korea) as Japanese, and Lego (from Denmark), Ericsson (from Sweden) and Adidas (from Germany) as US brands.12

Cool brands win Nonetheless, it really is true that some brands earn their way because they become cults – they are cool. The top 10 cool brands in the UK in 2006 were: (1) Aston Martin; (2) Alexander McQueen; (3) iPod; (4) Agent Provocateur; (5) Bang & Olufsen; (6) Google; (7) Green & Blacks; (8) Tate Modern; (9) Jimmy Choo; and (10) Vivienne Westwood. They are brands judged to be ‘ desirable among many style leaders and inﬂ uencers ’ and have ‘a magic about them signifying users have a sense of taste and style’ .13 Interestingly, ‘ cool ’ or ‘ breakaway ’ brands seem to be those that have actually cut down on the traditional advertising hype and really connected with customers.14 These are the special kinds of brand that create brand junkies.

•• 116 Value-based marketing strategy

Reality Check: BMW Mini buzz

The retro-designed BMW Mini, with its unique snout and bulldog shape, based on the 1959 classic, was launched in 2003 as ‘quin- tessentially cool ’. The first deliveries in the USA of the Mini soft-top came with a seal to be broken when the roof is raised for the first time, with a mock contract committing owners to keep the roof down as long as they can stay true to the Mini’s open-minded spirit. The launch focused on ‘ guerrilla ’ tactics not advertising – unconventional stunts and humour to spark a buzz. First Mini sightings in the USA involved a model strapped to the top of a 4 4 with the message: ‘What are you doing for fun this weekend? ’ The Mini appeared in football stadi- ums watching the games like a fan. In 2006 BMW put ads in US magazines ranging from Maxim to New Yorker that were encrypted so they could only be read by their current 150,000 US Mini owners – they have been sent a ‘kit’ allowing them to decrypt the ads to find web pages leading to free prizes and invitations to Mini events. Non-owners just have to remain curi- ous and perhaps slightly jealous. The message is that owning a Mini is being part of an exclusive club.

Sources: Gail Edmonson, ‘The Mini Just Keeps Getting Mightier ’, BusinessWeek, April 5 2004, p. 26. Burt Helm, ‘For Your Eyes Only ’, BusinessWeek , July 31 2006, p. 66.

Brands do not make you unbeatable However, the devastating brand illusion is that brands make you unbeatable – the strongest brand always wins. It is not true. When I was brought up in marketing, we were always shown lists of the ‘ world’s greatest brands ’ . These were the leading examples of the pin- nacle of marketing’s achievement, they were the models from which we should learn what marketing was really about, if we could ever aspire to the giddy heights of a brand manager job. These lists are still around, and some people (many of whom should know better) still believe the mythological power of the big brand. Unfortunately, if you look at the recent history of some of those brand icons, the reality is a little different. The brand bubble has burst.

Reality Check: The demise of the brand icons

Coca-Cola is the most valuable brand in the world. Thirty years ago, Coca-Cola ran one of the most famous ad campaigns of all time – they stood 200 multi-ethnic young people on a hilltop in Italy and had

117 •• Market-Led Strategic Change

them sing ‘I’d Like to Buy the World a Coke ’. Former CEO, Roberto Goizueta, said he would never rest until the ‘C’ on the cold tap in English-speaking countries stood for Coke. The CEO said he was not selling a drink, but a ‘piece of genius ’. Coca-Cola had become the second most understood word on the planet – Coca-Cola advertising even invented the modern Father Christmas in 1931. By 1999 Coke had more than half the world soft drink market. The power of the global master brand, supported by global advertising of some $1.6 billion, seemed unchallengeable. Or it did until the world started falling out of love with carbonated soft drinks. Coke’s share prices fell from $85 in June 1998 to $47 two years later, and has hovered at around $50 since. In 2000 Coca-Cola announced the cut of 6000 jobs – one-fifth of its global workforce – and heavy costs being incurred in withdrawing large stocks of unwanted Coke concentrate from its global supply chain. Coca- Cola has tried to keep up with the fragmenting soft drinks market by producing local brands – its best-selling cola in India is Thums Up not Coke – and by launching products to meet growing demand for bottled water, flavoured water, juice-based drinks, flavoured iced tea and coffee drinks, and high energy drinks. None of these new products carries the Coke brand name. In 2000 Coca-Cola planned the launch of milk-based drinks for children, and the extension of the Coke brand onto fashion and sports clothing, and was partnering with Nestlé, the Swiss food group, to market ‘new beverages ’, such as health drinks, teas and ready-to-drink coffee. A joint venture with Procter & Gamble took Coke into the juices and snacks market, plus an agreement with Disney to sell children’s drinks under the Disney brand. By 2001 the company had more than 200 brands. Weak sales and profit falls continued into 2001. In 2004 Coke veteran Neville Isdell was brought out of retirement to shake up management and launch new products. Health-conscious consumers continue to shy away from sugary carbonated drinks. Levi-Strauss denim blue jeans were a symbol of youth and rebellion – the symbol of the macho Old West, the connoisseur’s brand of choice. People used to say proudly ‘Just bury me in my 501s ’ . The baby-boomers of the 1960s wore their Levi 501 blue jeans as the uniform of rebellion. The trouble is the baby-boomers are still wearing their Levi’s to do the family shop in Sainsbury’s and to wash the Volvo on a Sunday afternoon. To the young buyer of blue jeans, there is nothing cool about Levi’s – they are indeed the jeans your Dad wears – their uniform is chinos and combat trousers (and definitely not Levi’s Docker brand chinos, because your Dad wears them too, after he has finished washing the Volvo). Denim jeans have become old people’s clothes – even Prime Minister Tony Blair wore blue jeans. The only jeans acceptable to the 15–24 year old market in the 2000s come from design houses like Donna Karen, Tommy Hilfiger and Calvin Klein, not from Levi-Strauss. The blue

•• 118 Value-based marketing strategy

jeans market is now driven by fashion not by brands like Levi. In 1999 Levi-Strauss closed half its US factories and laid off 6000 staff, because of a 13% fall in sales, with the closure of overseas factories following close behind. By 2004, posting its largest annual loss, the company pushed ahead with selling a mix of jean styles through different types of stores. The brand has been taken downmarket into discount store ranges. Marlboro, the Philip Morris brand, is the most widely recognized cigarette brand in the world. The lonely ‘Marlboro Cowboy’ has rid- den everywhere. Marlboro was one of the first of the global brands to signal that an era of brand-based competition might be coming to an end. This signal was sent on ‘Marlboro Friday ’. ‘Marlboro Friday’ was April 2 1993. Philip Morris faced a tough situation in the US cigarette market – market share was being eroded by sales of low-price, unbranded, generic cigarettes in supermarkets and filling stations across the US. Philip Morris did the one thing that brand-owners are not supposed to do – they took the huge gamble of cutting the price of Marlboro by 20% (40 cents a pack). They then extended deep price-cutting to other premium cigarette brands. This desperate attempt to hold market share immediately drove their share price dramatically down and impacted on the value of brand-based company stocks across the world. Investors took the view that if the only thing you can do when times get tough is to cut the price of a brand – then the brand is not worth much after all. The term ‘brand equity’ has never seemed quite the same ever since.

Source: Richard Tomkins, ‘Fallen Icons’, Financial Times, February 1 2000. Rupert Steiner, ‘Coke Chief’s Latest Daft Idea – a Cola Tap in Every House’, Sunday Times , March 18 2001.

Blind branding So, is the brand dead? No, of course it isn’t. What has reached the end of the road is ‘ blind branding ’ – believing that the brand alone will create superior customer value. The challenge is focused branding that creates customer value in the customer’s terms. It may have to be a lot different. Brands are always going to be important, but you need more to succeed with new customers than a neat brand name, slick packaging and spurious brand values built through advertising. There are some other issues too.

Private brands One reality for brand-based companies is that private labels are encroaching on their markets in many sectors. About 40% of total supermarket sales in the UK are retailer private branded goods. Private

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label competition can come from deep discounters like Aldi, from supermarkets like Tesco and Asda, or from specialist retailers, like H & M and Zara in fashion. The power of retailers to challenge the position of brand-owners has grown dramatically, and private label alternatives are attractive to many customers. Five years ago, Asda sold clothes to less than one in ten of its customers, now that fi gure is closer to one in three and Asda is close to being the largest clothing retailer in the UK.15 Private labels can compete effectively in many product sectors. They can be classifi ed as: the generic or ‘ value ’ category – the low-cost alternative; the copycat brand , imitating the brand leader but at a lower price; the premium store brand, which may even be sold at higher prices than the manufacturer brand equivalents; and value innovators at companies like Aldi and IKEA, which offer their own value for money brand.16 Tesco, the 900 pound gorilla in the UK retail scene, has neatly segmented its own-label offering into three levels: ‘value ’ (cheap), ‘ standard ’ (mid-market) and ‘ fi nest ’ (upmarket), and the company generates half its revenue from own-label products (double what it was ten years ago). Developing value propositions and innovations to cope with this challenge is increasingly diffi cult for premium brand owners. Inevitably, questions should be raised about the desirability of basing strategy for the future on brand when it is under attack by private labels. In fact, in some sectors the brightest future for manufacturers may be producing private label products rather than investing in their own consumer brands, which is a major culture shift to say the least – the rules are very different. For example, no one outside the chocolate business has heard of Barry Callebaut – in fact it is the world’s biggest chocolate maker. Most Barry Callebaut customers put their own names on the product. Whether it is a branded bar from a multinational, or a gourmet pra- line from a specialist, the chances are the chocolate came from Barry Callebaut. The business model is set up for the business-to-business value chain with clients ranging from confectionery companies like Nestlé, Hershey and Cadbury, to food companies like Kraft, Kellogg and Unilever, as well as thousands of hotels, restaurants and confectionery shops. The company is very successful at what it does, and has no consumer brand.17

Brand liabilities Your brand may be the most important way in which a customer iden- tiﬁ es your offering/product. In some cases this may serve only to remind the customer how much they hate you, your products and everything you stand for. If you do not believe me – try asking the guys at Tesco about the anti-supermarket campaigners. When the pre-Volkswagen Skoda brought new models to the UK in the mid-1990s, they did ‘blind and seen’ tests. With the badges removed and no way to identify the vehicle as a Skoda, consumers

•• 120 Value-based marketing strategy

were impressed with the design and price, but with the badge and identity revealed, perceptions of the design were less favourable and estimated value by potential consumers was several hundred pounds lower. This is negative brand equity – when the brand reduces the market value of the product. * As customers dream up ever-more demanding ways to judge companies – ethical standards, environmental responsibility, national origin (see Chapter 2) – then the chances for the brand to become a liability increase.

Counterfeit brands One of the huge risks in brand-based business strategies is that if the strategy works and the brand becomes successful you are exposed to copying and counterfeiting of your brand, and with customers who are quite happy to buy the counterfeit (indeed, some brag about it more than if they had bought the real brand – in a backlash against the high prices of some designer goods). You lose out both ways – you lose potential sales (directly, and indirectly when prospective customers see just who appears to own your brand); and then you get blamed when the counterfeit product falls apart, because it is rubbish quality. Some copying is just competitors pushing their luck, and that you can do something about. Fashion retailer Warehouse had to settle out of court for selling a £20 copy of a £650 Jimmy Choo clutch bag; M& S was obliged to destroy thousands of £9.50 handbags which were just a little too similar to the £495 original from Jimmy Choo; and the same designer took compensation from New Look for its Bonbon shoes, which infringed copyright.18 Though sometimes you can just end up looking silly. Apple was very disgruntled when the sex toy shop Ann Summers advertised a vibrat- ing product called the ‘ iGasm ’ which plugs into an Apple iPod and vibrates at different speeds with the music played. The adverts based on Apple’s signature silhouette did not go down too well either. Apple made threatening noises, but Ann Summers just offered them free iGasms to cheer them up. Sometimes the best advice is to keep quiet and hope the problem goes away. More serious is illegal pirating and counterfeiting. In the USA counterfeiting is estimated to cost businesses $200–250 billion a year, and the UK market for counterfeit goods has passed £9 billion. 19 Luxury goods makers claim that more than 90% of Louis Vuitton and Dior items sold on eBay are fakes. Some counterfeiting has been linked to organized

* It also reﬂ ected the history of Skoda in producing low quality vehicles, and the fact the brand had become a joke in the UK: Q: Why do Skoda’s have heated rear windscreen? A: To keep your hands warm when you are pushing them. Q: How do you double the value of a Skoda? A: Fill it with petrol. Q: What do you call a Skoda with a sun roof? A: A skip.

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international crime and terrorist organizations, rather than just oppor- tunists. It has been estimated that counterfeit goods may be as much as 7–10% of all world trade, with the huge proﬁ ts available driving rapid growth. China accounts for nearly two-thirds of counterfeit goods, and other hot spots are the Philippines, Vietnam, Russia, Ukraine, Brazil, Pakistan and Paraguay. Consumer electronics and luxury goods are the most commonly counterfeited, though copiers also go after car parts, motorcycles, memory chips, pharmaceuticals, cigarettes, and shoes.20 In fact, one interesting argument is that there is such a thing as ‘promotional piracy ’ – an alternative to price cuts in advertising a product, creating ‘ buzz ’ and expanding the user base for the product. The most proﬁ table response to piracy depends on the type of customer faced. There may be no single correct trade-off between sales lost to piracy and the sales generated by the buzz from pirated copies in circulation. So, when Napster started out and music piracy was a marginal activity, it made sense for record labels to write off a few cheapskate customers and raise prices for the rest (older more prosperous customers willing to pay for music). Once the pirating sector embraced even those customers, then they had to slash CD prices. In this sense, for some industries, piracy has become a useful new distribution channel. 21 Of course, brand owners can pursue legal actions against counterfeit- ers and counterfeit distributors, and are aggressively doing so in many sectors. The exception is, of course, China, where suing for damages is widely recognized to be a waste of time and money. Legal authorities in many countries will seize counterfeit goods when they are discovered. However, consumers continue to buy counterfeit brands – often knowingly and willingly – which is something of a worry for the long- term strength of strategy based on brand. To base your business on an asset that can be easily copied – with customers happy to buy the copies – is an increasingly high risk to take.

Brands that go wrong Dependence on brand-strength to compete should also be put in the context that sometimes things go wrong with the brand, and leave you weak in the marketplace. The adoption of the luxury Burberry brand as the hallmark of football thugs and chavs is a well-known example – from which the brand has been trying to recover, to get back to the position where it can sell its clothes for very high prices. There are many other examples of brand and company demise caused by this kind of brand trajectory.

Reality Check: Stella Artois – wife beater

Stella Artois was a marketing triumph – the strong lager that claimed in unashamedly upmarket advertising, to be ‘ reassuringly expensive ’ .

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But the brand became associated with the ‘wrong sort’ of drinker – those who pub landlords characterized as ‘minimum drinking, maximum aggravation ’. Because Stella is stronger than most beers, it has a tendency to make some people drunker and more aggressive more quickly – hence the unflattering name ‘wife beater’ (thought to come from the impoverished white people in the USA known as ‘ trailer trash’, whose white, sleeveless T-shirt is known as a ‘wife- beater vest ’). There is a major clash between the expensive art-house mini- movies used to advertise Stella and the sponsorship of tennis at the Queen’s Club, and where the brand has ended-up. The hugely successful advertising positioned the brand as stylish and very French (even though it is made in Belgium). But price discounting in supermarkets and off-licences conflicted with this image, and wider and wider availability in all kinds of pubs undermined this position. Stella remains the drink of choice for binge-drinkers aiming to get blind-drunk.

Source: Adapted from Victoria Moore, ‘Wife Beater ’, Daily Mail, November 15 207, pp. 38–39.

Strategic brand management The most important point about branding is that while the creativity is fun, the important link is to business strategy, not the expensive aspirations of the advertising agency. Brands are one way of making strategy real. Procter & Gamble in the USA suggests there are ﬁ ve new strategic branding lessons:

Innovate, innovate, innovate – standing still is not an option even with currently market leading brands. Move fast – or lose out – customers may be hooked on innovation but they are not prepared to wait. Minimize exposure to Wal-Mart * – powerful retailers like categories (e.g., laundry) not brands (e.g., Tide) and they use their muscle – P & G is one of the few large suppliers to Wal-Mart that has sustained above-average proﬁ tability, achieved by moving from basic products like paper towels (that can easily be challenged by retailer private labels) to higher-margin products like health and beauty care, including its Olay skin products. The new media message – the splintering of traditional media can be turned to advantage, P& G has mastered ‘ surround-sound marketing ’ , engulﬁ ng consumers in brand messages from in-store

* If you are in the UK, substitute the name Tesco. If you are in Europe, substitute the name Carrefour. The message is the same.

123 •• Market-Led Strategic Change

demonstrations, to retailer close circuit TV, to product placement in TV shows, to websites. Think broadly – P &G has moved from detergents to trying to solve every problem in the home. While Colgate–Palmolive was focusing on tubes of toothpaste, P & G went for a greater ‘ share of mouth’ with innovations like the cheap spin toothbrush and premium-priced Whitestrips teeth-whitening kits.22

This said, brands are not the only way of approaching strategy – they are a means to an end. Nonetheless, brands may play a key role in strategic positioning and developing an effective value proposition for a target market or segment.

Reality Check: Re-positioning the Scion brand

One of the problems faced by Toyota in the USA was the genera- tional issue: the average buyer of Toyota and Lexus was 54. Many first-time car buyers associate Toyota with older drivers. Toyota’s Scion division was created in California in 2003, to appeal to Generation Y consumers (expected to dwarf the market size of Generation X by 2020). Scion grew from Toyota’s Project Genesis, a failed attempt to bring younger buyers to the Toyota marque in the USA.

Courtesy of Toyota Motor Sales, USA, Inc

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Scion positions its ‘funky’ cars as the first stepping stone in a young car buyer’s journey. The unit has built Scion as a ‘guerrilla brand ’, and has pioneered new ways of plugging in to the lifestyle of its target customers. Newspaper and TV advertising has been avoided in favour of promotional events like taking the cars unan- nounced to trendy music and clothing stores, as well as nightclubs. ‘ Street teams’ hand out invitations to parties featuring its vehicles. It supports DJs and film-making competitions and is a key sponsor of a national video game league. Scion has also set up its own record label and a Scion release clothing line. By 2006, the median age of Scion buyers was 31 (it would have been lower, but several of the Scion models have been a surprise hit with buyers in their late-40s). Importantly, the top vehicle on the Scion owners’ ‘aspirational’ list is the sleek Lexus IS saloon. Nonetheless, Scion sales have been disappointing but Toyota is persisting with its strategy to find ways to connect with trend-setting young people.

Sources: Bernard Simon, ‘Scion Brand Greases the Wheels for Toyota ’, Financial Times, April 26 2006, p. 10. Bernard Simon, ‘Toyota Finds Scion Tough Going ’, Financial Times , March 25 2008, p. 22.

Does the brand create customer value and how? One important, increasingly critical, distinction is that ‘Brands exist to serve customers, not the other way around ’ , and the suggestion that we should focus on the customer equity (the customer’s perception of the value in the buying transaction), not simply the value or equity of the brand.23 Certainly, it would be foolish to deny that some products are bought because of the intangible values associated with the brand. Recently, Rick Waggoner, CEO of General Motors, noted that: ‘ The automobile is a lust object. Intellectualizing the car business is a big mistake.’ 24 He has a point. Would any luxury product survive without a strongly protected brand image? How else could Louis Vuitton charge $650 for its signature duffel bag and $2950 for its Suhali Lockit handbag? How else could Gucci be looking at 30% annual sales gains? How come Rolex can get people to pay £10,000 for a watch that does not even keep infal- lible time (it is a chronometer not digital)? Clearly some products create value through intangibles and brand associations. But to believe that all brands achieve this is a different proposition. The truth is that to survive now you may need a brand, but you need more than a brand. You need value . When markets change, and new types of competition emerge, having the greatest brand in the world will not help you. You need more and you need to change. If all you can do when times get tough for a brand is to cut prices, then really your brand is not worth much. Brands are certainly one way of delivering value to customers, but only part of the requirement.

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The symptoms of problems for brand-based companies are several. While branded goods companies continue to launch new products, it is becoming more and more difﬁ cult to repeat the success of the blockbuster brands of the past. One visionary even claims that the real problem is that brands are becoming less a way of reaching out to customers and more of a barrier to getting closer to them. Alan Mitchell argues that the problem is that brand-building may be a distancing process that creates a rigid set of pre-packaged products and brand images or values, policed by the brand manager, which cannot respond to changing customer processes. He argues that increasingly we are in a world where customers seek the right to specify their own bundles of attributes and to create and manage their own ‘ brands ’ . Interactive marketing and radical one-to- one product and service customization may have made the traditional concept of brand obsolete.25 Along these lines, and very much to the point, Peter Doyle26 suggested that we should be auditing brands for their value-enhancing characteristics: is there any effective proposition to the customer – does the brand offer some unique beneﬁ t not offered by other brands and not easily imitated by them; is the brand effectively integrated into business processes to sustain its proposition – for example, quality control, service and delivery performance; is the brand in a market environment where it can prosper – or will strong competitors and low price players destroy its chances? His conclusion matches ours – just to have a brand achieves little, this is ‘ blind branding ’ – the issue is whether the brand delivers value to customers (and hence, by the way, to shareholders). In essence, we may have to learn to see brands as less of a goal and more as what results from good marketing – John Deighton of Harvard Business School suggests ‘ Marketers are a little too desperate to build brands, but if they build strong customer relationships the strength of the brand will follow. ’27 And so, the answer to the customer problem apparently became ‘ relationship marketing ’ .

Relationship Marketing So, what is the deal with relationship marketing? The 1990s saw just about everyone telling businesses that they had to get with relationship marketing as the only way to do ‘ new marketing ’ in modern markets – a major ‘ paradigm shift’ for marketing theory and practice. 28 The difference between conventional marketing and relationship marketing, we were told, was the move from emphasizing the transaction (the single sale of a product or service) to focusing on the continuing relationship with the customer.

But, what did relationship marketing really do for us? In fact, relationship marketing remains an interesting approach in many situations, which has helped to revitalize marketing in some

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companies. It can do the following types of thing for us. It tells us that the relationship we build with the customer is an asset that may provide enduring competitive strength, and that we have to have a broader perspective that recognizes that we have more than one type of customer and market, and this means relationship marketing involves all employees across traditional boundaries, in building and sustaining customer relationships. Because we focus on relationships in all these areas – customer and partners – instead of just transactions, then we turn from competition and conﬂ ict to mutual cooperation and mutual interdependence with customers and strategic partners.29 Our market strategy has also to be into the broader setting of networks of interdependent ﬁ rms linked by strategic alliances, joint ventures and new types of joint trading agreements 30 – some now use the term ‘ viral marketing ’ to describe the web of relationships spreading to our customers’ customers.31 Relationship marketing focuses our attention on customer retention – the efforts we make to build a lasting relationship with the customer, not just selling a product or service in a one-off transaction, and it offers competitive strength from micro- segmentation and customizing – using our enhanced knowledge of the customer to take our value proposition down to the segment of one customer with customized or adapted offers and products.32

Is it the answer? Relationship marketing is an important development in marketing practice – but a new paradigm or theory of marketing? I think not. We also need to be very cautious about making promises we cannot keep in the guise of relationship marketing. Speaking as a ‘ segment of one ’ – is British Airways really going to give me more leg-room in an economy seat and let me smoke on the fl ight because I tell them this is what I want; is the Sainsbury Bank actually going to give me a different account to anyone else’s; is Marks & Spencer going to use its database to stock trousers that are long enough for me; is BMW going to change more than the marginal extras on the vehicle to retain me as a customer? I really do not think so. All the evidence is that what they all actually want to do is to sell me fi nancial services. Great relationship from a customer perspective (not). Part of the problem may be that some customers simply do not want to have a relationship with you. A conundrum for the fi nancial service sector – where many of the fi rms see relationship management as their salvation – is that many of their most attractive, affl uent customers are saying things like: ‘ Do not telephone me to tell me that you are my personal banker and that you have some wonderful new products. Stop sending me letters and leafl ets about your products. I do not want to have lunch with you, play golf with you or go to the races with you. I just want you to leave me alone!’ Now that puts a different perspective on relationship marketing.

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There does seem a danger that because marketing people have discovered relationships * they assume that relationship strategies will be greeted with open arms by their customers. The evidence suggests that this is not the case. Before getting carried away – ask the question: are we embracing relationship marketing because it is a better way to meet our customers’ needs, or because it meets our needs inside the company? If the answer is the latter – there is nothing necessarily wrong with this, just don’t expect your customers to get excited about it. Besides, look what it turned into – plastic loyalty cards and call centres.

Reality Check: The richness of call centre relationships

Caller: I’ve been ringing 0700 2300 for two days and I can’t get any help. Operator: Where did you get that number from, sir? Caller: It was on the door. Operator: Sir, those are our opening hours. Caller: Does your European breakdown motoring policy cover me when I am travelling in Australia? Operator: Doesn’t the name of the product give you a clue? Technical Support: I need you to right-click on the Open Desktop. Customer: OK. Technical Support: Did you get a pop-up menu? Customer: No. Technical Support: Can you tell me what you have done up to this point? Customer: Sure. You told me to write ‘ click ’ and I wrote ‘ click ’ . Teenage Caller: I wonder if you could help me. Help Desk: What’s the problem. Caller: My dad bought me a computer last week, and I was taking out a CD when the phone rang. I was also eating pizza. With the CD drawer open, I set the pizza on it to pick up the phone. Help Desk: What happened then? Caller: Well, the CD drawer took part of the pizza inside the computer. Now I can’t get the drawer open. It’s a really big mess. Can you help? Help Desk: This is bad, very bad. Caller: Well, I’m really hungry. Can you help me get the pizza out?

Source: Adapted from Victoria Moore, ‘Help! I’m Plain Stupid’, Daily Mail , December 27 2006, pp. 32–33.

* And, it should be remembered that it is a matter of human genetics that no male over the age of 16 can actually say the word ‘ relationship ’ without trembling inwardly, though ‘ commitment ’ is even worse . . .

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Customer relationship management systems Companies around the world are spending millions on Customer Relationship Management (CRM) technology. CRM includes: data warehouses; customer service systems; call centres; e-commerce; Internet marketing; operational systems (e.g., order processing, invoic- ing, etc.); and sales systems (automated appointment making and contact management). To the average consumer this mainly means call centres located in India and the Far East. Companies were promised much more by CRM sellers and advocates. For example, CRM was to be a ‘customer-responsive strategy’ that would gain competitive advantage by: delivering superior customer value by personalizing the interaction between the company and the customer; demonstrating the company’s trustworthiness; tightening the connection with the customer; and, achieving the coordination of complex capabilities (functions and resources) within the company. 33 What they actually got was mostly call centres located in India and the Far East. For a start, you probably do not need complex CRM technology if: customers only buy the product once in a lifetime; the unit value of the product is low; customer lifetime value is low; customer churn is high throughout the industry, and there is no contact between the seller and the ultimate buyer.34 Then, you don’t need call centres located in India and the Far East. Advocates talk about the potential for aligning company resources seamlessly around customer relationships, in a company-wide process of change. They talk about the impact of CRM on customer retention, the prospects for getting rid of unprofi table customers, the customized ‘ one-to-one ’ relationship with the individual customer, and a wealth of customer information on real purchase behaviour to enhance decision making. Some even aspire to the creation of a new role of Chief Relationship Offi cer. (S/he would presumably be the one in charge of the call centres located in India and the Far East.) There are good reasons why CRM has been renamed Customer Relationship Myopia in some companies. The information collected focuses on the past (historical sales records), on our own customers (not the ones the competition got and we lost), and only on measured behaviours (what people bought, not what they think). This is not a great basis for driving radical innovation and coping with disruptive market change. CRM also seems to restrict management to tactical actions – like ‘ fi r- ing ’ customers who do not appear profi table (based on short-term, historical calculations). There are two problems here: getting rid of customers who were going to become profi table in the future, and retaining those who used to be profi table but are unlikely to be so in the future; and getting caught dumping customers who have done nothing ‘ wrong’ . For example, credit card company Egg, owned by Citigroup, had a lot of questions to answer when it withdrew credit cards from 161,000 people in 2008 – 7% of its customers. Their public line was that,

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following the credit crunch, they were weeding out customers with a ‘ higher than acceptable risk profi le ’ . In fact, they appeared to also be culling customers with faultless borrowing records who had the unfortunate characteristic of paying off their bills every month and thus incurring no charges for Egg.35 Oh dear – caught lying and abusing honest, decent customers – not good. * It got worse when the credit rating agency Fitch pointed out that Egg’s actions were likely to cause an increase in defaults and write-offs among affected customers – because they are likely to repay every other card fi rst, since they can no longer use the Egg card.36 Nonetheless, leveraging CRM data can, however, make substantial improvements in operational effi ciencies.

Reality Check: The sky’s not the limit

Satellite giant BSkyB spent a lot of 2007 weeding out the cheap- skates among their pay-TV subscribers. Skinflint and flat-broke customers have been quietly frozen out. The company has phased out the enticing introductory rates, and pushed the credit quality of the average subscriber to an all-time high. The ploy was to reduce discounts to eliminate ‘offer riders’ from the customer base – those casual customers who switch between rivals according to who has the best promotion. The result was to increase the number of new customers paying the full-price subscription three-fold. Pushing out the less affluent has also helped Sky improve its customer retention rate – cancelled contracts have been reduced to 10% of the base. Improved retention is coupled with a rise in average spending per user to a record £421 a year.

Sources: Andrew Edgecliffe-Johnson and Ben Fenton, ‘BSkyB Hits Peak of Its Investment in Broadband ’, Financial Times, February 7 2008, p. 20. Simon Duke, ‘Sky Gets Tough with Skinflint Subscribers to Boost Shares ’ , Daily Mail , February 7 2008, p. 80.

CRM has also achieved remarkably good results in sharpening up service response times and the ability to target customers more precisely in some markets. But this is an operational or tactical contribution. In some ways CRM has provided companies with the technology to annoy and irritate their customers faster than ever before – like those call centres in India and the Far East. And, about those call centres in India and the Far East. Some of us better get used to the idea that pretty soon it is likely to be global

* Of course, Egg denies all such charges. Out of respect for their reputation, I will avoid comments about them having egg on their faces.

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Impact of supplier on cost structure and competitiveness High Low

High Critical Show- partner to stoppers create manage to competitive reduce risk advantage Market risk/ lack of choice Recurring Leverage consolidate, manage for simplify, financial manage by impact exception Figure 4.2 How B2B Low purchasers look at supplier relationships

Indian and Chinese companies outsourcing their call centres to Europe and the USA. Then their executives will be able to come out with all the nonsense – ‘ You know it works wonderfully well, their graduates are so good and work for such low wages, you really wouldn’t know you were talking to someone in Poland or Louisiana instead of Mumbai or Beijing . . . ‘ . I bet they’ll enjoy it too. ’ * The reality about CRM is that you cannot avoid the fact that it is people not software that build customer relationships.37 And then, the issue is still how does managing customer relationships inﬂ uence our ability to deliver superior value to customers?

What matters is the types of relationships customers want Some customers actively demand a relationship focus from sellers, and then we really are talking about powerful leverage for competitive advantage. This pressure comes mainly in business-to-business marketing – either from distributors or industrial end-user customers. Here there is a major change in customer priorities that puts relationship management high on the agenda.

Business-to-business customer relationships • • • For example, one way of underlining the point that in B2B marketing, customers deﬁ ne the relationships that they will have with different suppliers is to look at the type of sifting mechanisms that professional purchasers use. One example is given in Figure 4.2. This model shows

* Always, remember the old adage: ‘ In defeat: malice. In victory: revenge. ’

131 •• Market-Led Strategic Change

the purchaser balancing two issues in deciding the relationship to have with a supplier: do they matter to me because they have a large impact on my cost structure and competitiveness (or not), and am I at risk, because I cannot source the product elsewhere? From the purchaser’s perspective: the show-stoppers are not important to me but I cannot source the product elsewhere, so the only added-value I want is to take that market risk away (e.g., guarantee my supplies); recurring relationships are with suppliers still not with a major impact on my operation, but also easily replaced, and here I just want supply chain and transactional effi ciency (meet my requirements or I go to your competitor); leverage relationships are sellers with a signifi cant impact on my costs, but who I can replace if I have to, so the conversation is about price and terms of trade, nothing else; and critical relationships are with those offering something unique that is very important to me – here we may be looking for a partnership with a strategic supplier to create joint competitive advantage. 38 The search for closer more profi table and sustainable relationships with strategic customers (the most important, though not necessarily the largest) has led to large investments in major account and strategic account management systems. These differ in the relationship existing between buyer and seller as suggested in Figure 4.3 . The major account relationship involves the seller dedicating resources to a major customer – an account team, specialized salespeople,

Major account selling The seller devotes specialized resources to dealing with an Seller Buyer important major account, e.g., an account team, specialized salespeople, but the relationship is transactional

Strategic account investment The seller dedicates resources to the buyer organization and plans around the individual Seller Buyer customer’s needs, e.g., may locate specialist personnel at or near the buyer ’s locations

Strategic account partnership The buyer and seller collaborate, plan jointly, and both invest resources and share risks; cross- Seller Buyer boundary links extend beyond purchasing and sales to include management and technology

Figure 4.3 Relationships with strategic customers

•• 132 Value-based marketing strategy customized service offers – but the relationship remains primarily a transactional one: we sell, they buy (we hope). Strategic account investment takes things closer with a customer we see as of strategic importance – we are likely to have a strategic account management team planning around the customer’s existing and future requirements, and we may even locate specialist personnel near or in the buyer’s premises. For example, P & G has a 200 person team wholly dedicated to Wal-Mart (the single customer that constitutes 20% of P& G’s business) located in Arkansas near to the customer’s headquarters, along with around 450 other suppliers. In the UK, Tesco is starting to attract suppliers like Disney similarly to locate at their head offi ce. Strategic account partnership is where buyer and seller collaborate and plan operations jointly across the organizational boundaries between them, sharing risks and developing broader technology and management links, almost like a merged company. The automotive industry provides many examples of this kind of partnership between car-makers and suppliers of components, tyres, electronics, entertainment products and so on. We discussed the Ford approach to strategic suppliers in Chapter 2. This takes the signifi cance of relationship marketing way beyond plastic loyalty cards and call centres. The important thing about this is that it is the customer who defi nes the relationship on offer, not the seller. In fact, the one way to really irritate important B2B customers is to mis-read the relationship – commonly thinking you are a lot more important to the customer than you really are. This can be a very expensive error, and you need to be realistic about where you stand in the customer’s view of the supply base.

Customer relationship-based market segmentation • • • One neglected idea that arises from the above points is that relationship requirement is potentially a very revealing way of segmenting markets. If we genuinely seek to distinguish important differences between customers, then maybe one way is to look at what they want from us in terms of a relationship (both type and degree of involvement). At least then we could focus on the customer groups where we are best able to deliver the relationship that they want. For example, Figure 4.4 suggests that if we look at the customers in our market in terms of whether they want a long-term relationship with their suppliers, and the closeness of the relationship they want, we may ﬁ nd very different types of buyer: relationship seekers – the type of customer becoming a major force in industrial marketing, who wants a long-term relationship with the supplier and a high degree of closeness or partnership in things like developing new products; relationship exploiters – customers who will take every advantage they can get from relationship offers for whatever they can get, but at the end of the day shop around, and your investment in the relationship does not buy you customer loyalty or retention; loyal buyers – customers who want a long-term relationship, but not a close one – think of the ﬁ nancial services example above; and arm’s length transactional customers – will shop around for the best

133 •• Market-Led Strategic Change

Type of relationship customer wants with supplier

Short-term/ Long-term transactional Close relationship Relationship Relationship seekers exploiters

Closeness wanted by customer in supplier relationship Arm’s length Loyal transactional buyers Figure 4.4 customers Segmenting markets Distant by customer relationship relationship requirements

deal, will probably buy on price, and do not want a close relationship with the supplier. An example might be buyers of staple chemicals for industrial applications. This is not particularly profound. However, executives may ﬁ nd it is a good way of re-thinking our priorities in investing time and effort in building customer relationships, and it may be a useful balance to the consultants’ euphoria over relationship marketing as the solution to any problem you care to name.

Reality Check: Who says I want a relationship with you?

In one company in the advertising business, at the height of the relationship marketing boom, top management bought into the idea of relationship marketing big time (I think someone had fool- ishly let them go on a management short-course). They cascaded this idea down through the company until it reached the sales force. Salespeople were now to be coached in building customer relationships. In reality, they were selling directory advertising mainly to small and medium-sized enterprises, booked on an annual basis. The result was top management waxing lyrical about customer relationships, but customers who were saying: ‘Go away and leave me alone. I do not want to have lunch with you, or sit and drink coffee with you. I am too busy. You are just not that important to me. Let me place the order on the Internet, and stop trying to waste my time’, or words to that effect. The other result was severely irritated customers and a very unhappy sales force.

•• 134 Value-based marketing strategy

Where does that leave us with relationship marketing? Actually, what all this means is that relationship marketing is potentially very useful – it can give a new life to marketing and market strategy in particular, but you don’t have to learn anything new. We probably should not dismiss relationship marketing as a fad (which it may turn out to be) or ‘ putting old wine in new bottles ’ (which it probably is) or ‘academic theory’ (which it certainly is) – take the opportunity to use relationship marketing to build customer focus in the company, to involve the people you need, and to drive market-led strategic change. You get this for free – it would be churlish not to take advantage! The opportunity is to use relationship marketing to help in: putting the marketing process (not the marketing department) back on centre- stage in companies that have been looking elsewhere for leadership; getting the management focus back to the customer; involving every part of the company in concentrating on value for the customer; and putting the customer higher on the agenda than advertising and marketing programmes. For most of us, this is just too good to miss out on. However, believing that relationship marketing is the killer approach because it guarantees customer satisfaction and loyalty is where it all goes wrong. As we saw in Chapter 2, customer satisfaction (the attitude) is a poor predictor of customer retention (the behaviour). The argument emerging is that value, as perceived by the customer, is what predicts and drives loyalty – value is what links satisfaction and retention.39

Relationship rhetoric versus relationship reality The situation we have reached is that ‘relationship rhetoric’ has reached the end of the road – believing that investing in customer relationship-building has value in its own right. In looking to prevent the ‘premature death’ of relationship marketing, Susan Fournier and colleagues are forced to concede that as it is currently practised, relationship marketing has not generally brought us closer to customers, it has forced us further apart – consumers have begun to view companies as enemies, not allies, and they are ﬁ ghting back. 40 My friend Malcolm McDonald takes a somewhat stronger and more cynical view about relationship marketing as yet another management fad:

Remember ‘relationship marketing ’? The domain quickly became occupied by happy-clappy, touchy-feeley, weepy- creepy, born-again zealots without any underpinning process. Apart from which, ‘delighting’ or ‘exciting’ all customers is the quickest way to bankruptcy! 41

The point is that relationships are important only as a route to learning and delivering superior value in the customer’s terms. We will come back to relationship marketing, when we look at the network of relationships that have to be managed in developing our strategic

135 •• Market-Led Strategic Change

pathway (Chapter 9). However, for the moment, we can say that alone relationship marketing is not a sufﬁ cient answer to evolving market demands. Increasingly, we are looking for better ways to address what really constitutes value for our customers.

Value-driven Strategy Where many companies now fi nd themselves is desperately pursuing customer retention and profi tability goals, as a route to enhancing shareholder value, but at a time when branding strategies and relationship marketing programmes seem to have run out of steam. This is an era of value-driven strategy. The new challenge of competing on value is about fi nding ways of ‘ bridging the gap between brand and customer value’ :

Marketing has focused on creating brand value, particularly in the brand-conscious eighties, rather than exploring customer value and translating this into a value proposition through branding . . . Creating a unique selling proposition for product brands and exploiting them through predictable stimulus- response tools falls short of the modern customer’s level of sophistication. . . . Today’s marketing challenge is to bridge the widening gap between brand and customer value, which is increasingly generated through supply chain leadership, networks of relationships and individualized customer service. 42

Similarly, Noel Capon and Mac Hulbert describe as one of their fundamental principles of strategic marketing, the principle of customer value:

success in targeted market segments is directly related to the fi rm’s ability to provide perceived value to customers . . . A cor- ollary of this principle is that although fi rms develop, produce, and deliver products and services, customers perceive value only in the benefi ts that these products and services provide. 43

A yet stronger statement of the importance of value in shaping management thinking about marketing was made by Peter Doyle:

The essential idea of marketing is offering customers superior value. By delivering superior value to customers, management can in turn deliver superior value to shareholders. Indeed this formula – customer value creates shareholder value – is the fundamental principle of capitalism.44

There is substantial and growing evidence that real value innovations are what changes the structure of an industry, creates a new market space for the pioneer, and opens up a gap between them and the competition.45

•• 136 Value-based marketing strategy

However, there is a big difference between value-based strategy in the process of going to marketing and traditional marketing – what Philip Kotler has openly called ‘ neanderthal marketing ’ . Marketing has always been about innovation – new products, new services, new advertising and promotion – but weak at real innovation that abandons the ‘rule-book ’ . Too much so-called innovation has been replacing existing products with updates or variations of the same thing. For example, an Economist Intelligence Unit report interviewed executives from leading companies throughout the world about their approaches to innovating for the benefi t of their customers and shareholders: ‘ What counts, conclude the participants, is value innovation . This is defi ned as creating new value propositions . . . that lead to increased customer satisfaction, loyalty and – ultimately – sustainable, profi table growth . . . Market leaders are just that – pioneers. ’46 Obviously, there is nothing much new in talking about value and marketing. But what is frighteningly new is the incredible and paradoxical challenge of building customer value with the new customer. Value-based strategy is not straightforward, and it does not provide the ‘ single answer’ – any more than brand or relationship strategies did. For example, Michael Treacy and Fred Wiersema47 underlined the fact that value does not have a single meaning in any market – customers determine what creates value, and different customers buy different value. They argue that market leaders are those who focus on delivering superior customer value in line with one of three ‘ value disciplines ’ : operational excellence – providing reliable products and services at competitive prices, delivered with minimal diffi culty or inconvenience, for example, the superb Federal Express courier service; customer intimacy – segmenting and targeting markets precisely so as to tailor offerings very precisely to match exactly the demands of those niches, for example, retailers like Nordstrom; and, product leadership – offering leading-edge products and services, such as Johnson & Johnson’s Vistakon disposable contact lenses that caught competitors off guard, making it diffi cult for them ever to catch up. One of the dangers that these writers warn us about is the simple- minded managerial assumption that ‘value ’ means cheap, i.e. if you get unit costs down faster than your competitors, then you can have lower prices and dominate the market. It really is not that simple. Don’t get me wrong – sometimes superior customer value is exactly about having low prices, like the ‘ no frills ’ airlines. But, the lean, low- price business model of the ‘no frills’ airline is not the only way to create value. In fact, the more you consider what creates customer value, the more are the paradoxes and surprises you encounter. But, fi nding new ways of creating value offers direct impact on profi ts:

● Although derided as ‘ un-English ’ for doing so, the Alton Towers theme park has introduced an ‘ X-Celerator Pass’ , which costs £65 for adults (compared to the normal £21 entrance ticket). The X-Celerator Pass lets you do all the bad things you always wanted to do: you can park in the ‘ wrong ’ place closer to the rides, you can enter the rides

137 •• Market-Led Strategic Change

at the exit gate, and most importantly you get to jump the one hour queues for the rides and attractions.48 This is such a wonderful idea, it is almost evil. ● In the USA, H.J. Heinz announced that its EZ Squirt Ketchup would be available in ‘ Blastin ’ Green ’ as well as the conventional tomato colour, in a cone-shaped bottle to encourage children to draw pictures on their food with the ketchup. It was shortly followed by a ‘ Funky Purple ’ version. The idea is to make mealtimes more interesting for the foul 6–12 year old. It may sound weird, but stuck in a mature market with little growth, this product variant took 6% of the $500 million US market in seven weeks, and its annual sales target in 90 days.49 Making boring food fun looks like value creation as far as children are concerned, and we all know who decides what ketchup gets bought.

In fact, the only certainty is that if your target customers do not think you are providing them with value, they are going to let you know about it.

Reality Check: When we say ‘ value ’ we mean it . . .

In January 2001, Nicholas Griffin, a sex shop owner, offering ‘ hardcore’ pornographic videos, was fined £5826 by York magistrates ’ court. The reason was that the pornographic films he sold were not explicit enough. Customers of Little Amsterdam, in York, and The Adult Shop, in Grimsby, complained at paying £50 for ‘ hardcore ’ films, that turned out to be too tame, containing old films that could be seen on normal television. Mr Griffin was prosecuted under the Trades Description Act. Said Mr Griffin: ‘I am amazed that people have the audacity to complain about things like that. ’ Said the head of York Trading Standards: ‘They felt embarrassed and reluctant to come forward, but also felt cheated . . . ’ .

Sources: ‘Sex-Shop Boss Fined Because His Porn Wasn’t Hard Enough’ , Daily Mail , January 19 2001. Sally Pook, ‘Sex Shop Is Fined Because Its Videos Are “ Too Tame ” ’ , Daily Telegraph , January 19 2001.

Jim Maxmin, Chairman of Global Brand Development, summarizes nicely the types of challenges that an era of value-based strategy and sophisticated customers pose for us all:

The real challenge for marketers now is the creation of real value in an environment where e-commerce is rapidly com- moditizing products and services. Perception of value has changed. Technology has made the corporation transparent.

•• 138 Value-based marketing strategy

How do you embrace this marketplace when your customers know more than you do? How do you embrace loyalty when your customers are just one click away from leaving?50

The search for customer value But even when we all agree that customer value is what going to market is all about, we still have some issues. There are huge problems in the fact that managers always assume that they know what drives value for their customers (even when they have no intention of providing that value), and the fact that customer value is not a simple or stable commodity.

The dangers of assumptions about value It is all too easy to assume that we know what drives value (and that whatever does remains the same year-in year-out). It is increasingly clear that customers deﬁ ne what creates value and that different customers buy different value at different times.51 To start, consider some of the commonest managerial preconceptions about what is most important to customer value.

We know what our customers want • • • Perhaps the most frightening thing you can hear managers in a company say is that they already know what their customers want – they know what creates customer value. Maybe they are right. Or, maybe they have not bothered to ﬁ nd out. Maybe they would have been right ten years ago, but things have changed. These are executives who say things like:

● . . . no one would ever buy a car off the Internet (big news to Ford and GM who are making this the central part of 21st century car distribution, as they ﬁ ght to take back control of the value chain and actually make some money); ● . . . no one would ever bank with a grocery store (big news to Tesco and Sainsbury with their neat front-end ﬁ nancial services, which demote the suppliers of the products to anonymous middlemen); ● . . . no one can replace a doctor (actually there are more alternative medical practitioners in the UK than General Practitioners – you may have to pay them large sums of money, but they make you better and see you when it is convenient for you not them – now let’s talk about what drives value).

I admire managers who genuinely understand what is driving important things like value in their markets. I am less enthusiastic about those who assume they know, because they usually get it wrong.

139 •• Market-Led Strategic Change

Bung in some customer service • • • Some executives try to trivialize the whole issue of customer value by suggesting that just enhancing customer service will solve all the problems – answer the phones quicker, smile for the customers, that kind of thing. In fact, some of the most successful operations around do the reverse – they reduce service expenditures to offer lower prices and a different customer experience. Examples range from IKEA in furniture to no-frills hotels to budget airlines – for some groups of customers, lower prices are the way to drive value up.

Make it cheaper • • • This, of course, opens the way for the corporate beancounters (account- ants) to leap into the fray and claim smugly that they were right all along – just get costs down, get prices down, and you are bound to offer the best customer value (i.e., be the cheapest supplier around).

Reality Check: Orchestral efﬁ ciency

A management consultant’s report on an orchestra’s performance of Schubert’s Symphony No. 8 in B Minor (the ‘ Unfinished Symphony ’ ): ‘ After attending a rehearsal of this work, we make the following observations and recommendations: 1. We note that the twelve first violins were playing identical notes, as were the second violins. Three violins in each section, suitably amplified, would seem to us to be adequate. 2. Much unnecessary labour is involved in the number of demisemiquavers in this work. We suggest that many of these could be rounded up to the nearest semiquaver thus saving practice time. The simplification would also permit more use of trainee and less-skilled players with only marginal loss of precision. 3. We could find no productivity value in string passages being repeated by the horns. 4. We regard the long oboe passages to be extremely wasteful. What notes this instrument is called upon to play could be shared out equitably amongst the other instruments. Conclusion: if the above recommendations are implemented the piece under consideration could be played in less than half an hour with concomitant savings in overtime, lighting and heating, wear and tear on the instruments and hall rental fees. Also, had the composer been aware of modern cost- effective procedures, he might well have finished his work.’

•• 140 Value-based marketing strategy

The trouble with this position is that in many markets being in the bargain-basement is not a good place to be. You lose out to the next competitor who can lower costs and reduce prices faster than you – look back to the earlier comments on coping with competitors from countries with lower cost structures (p. 87). Alternatively, consider some of the luxury brands we have discussed – much of the market position of products like Rolex, Louis Vuitton, Ferrari is deﬁ ned by high prices, and they seem to do rather well.

Or, perhaps take customer value seriously? • • • Taking customer value seriously implies challenging stereotypes and assumptions about what matters to customers, a constant search for value-creating opportunities, and a high level of responsiveness to align company resources with new opportunities. This is not trivial. It requires us to think strategically about our markets and customers and often to develop new ways of doing business.

Value as rational cost/benefi t analysis One barrier frequently faced is ‘rational thinker ’ in the company, who truly believes that customer value is a simple quantitative computa- tion, deducting product cost from benefi ts received, dismissing all that which cannot be measured or which appears ‘irrational ’ . This is a reasonable engineering perspective. It is a perspective that is increasingly important in dealing with major customers who demand proof of added-value from suppliers.52 We will discuss this further when we look at value propositions (Chapter 8). But to assume that we know all the things that drive customer value, to assume only the things that we can measure matter, and to assume that the drivers of value stay the same is just a little optimistic given our current level of performance in achieving value superiority in most companies and markets (which generally is not great). In fact, one of the greatest disservices done to companies by the otherwise impressive initiatives in quality management and supply chain effi ciency is they have sold the message that value is measurable and rational. It is often neither of those things.

Value migration Yet worse, among the more deadly assumptions is the one that treats customer value as a stable, unchanging issue. Once you have found out what drives value, then you set yourself up to deliver it and everything should be ﬁ ne? Well, not if what matters most to some or all customers changes – either because their priorities change or because a competitor comes up with something that taps into a neglected source of customer value. Consider laptop computers and business travellers. Just about every business person travelling gets stuck with carrying around a laptop – it

141 •• Market-Led Strategic Change

shouldn’t be so in this day and age but it is (I personally suspect a secret alliance between computer manufacturers and chiropractors, along the lines of ‘ we’ll give them bad backs, and you can fi x them ’ ). The point is that only a few years ago, the key buying factors were things like: how much computing power does it have (to run the ever- larger software packages); how long does the battery last (to equal the length of the fl ight); how bright is the screen (because we all need to run our PowerPoints in direct sunshine, don’t we?). But then, everyone had the big chip, the long-lasting battery and the bright screen. Then we wanted the laptop to be as thin as a magazine and to weigh less than three pounds, or we weren’t going to buy it. Interestingly, the fi rst sub-three pound laptops were not from IBM, Hewlett–Packard or Dell (whose smallest machines appeared to be about the weight of a small automobile). It was, of course, Sony who made the breakthrough with the Vaio range, from outside the PC sector. Sony did not have much of a reputation in computing or much of a service network, but its laptop was small and cute, and changed the rules of the game. The point is that things change – value ‘migrates ’ from one feature or attribute to another.53 Indeed, value migration describes the bigger issue of how value fl ows away from outmoded business designs towards others that are better equipped to create utility for customers and profi t for the company. Identifying value shifts in our markets and developing responses that achieve and sustain value growth is a high priority which must be addressed. Customer value is complex, multi-dimensional, unstable and idiosyncratic. Just paying lip-service to customer value is not good enough. It is a complex construct. It is probably the one that matters most to us.

Where Now? This brings us to the end of the foundation-building part of the book. Hopefully, we have seen enough to agree that customer markets – consumer and B2B – are changing dramatically and permanently. Customer satisfaction remains elusive, the demands of sophisticated customers are escalating, and markets have fragmented and become granular. Traditional marketing approaches – the way most of our marketing executives have been trained and the way we develop marketing plans and actions in companies – look increasingly inadequate to cope with customer and market change. Marketing has become mainly an issue of strategy focused on customer value. Go-to-market strategies based on managing transactions (sales), brands, or customer relationships can only be judged in terms of whether they deliver superior customer value. It is the customer value that really matters – not the sales management, the branding or CRM. If you are even partly with me at this stage, the next part of the book teases out the most important issues in developing a value-based marketing strategy (and testing the robustness of strategies already in place).

•• 142 Value-based marketing strategy

References and End-notes

1. Mitchell , Alan , ‘ Evolution ’ , Marketing Business , March 1997 , p. 27 . 2. Zyman , Sergio , The End of Marketing As We Know It , New York : HarperCollins , 2000 . 3. Rushkoff , Douglas , Coercion , New York : Little Brown , 2000 . 4. Fram , Eugene H. , ‘ The Customer Penalty Box ’ , Marketing Management , Fall 1997 , pp. 60 – 63 . Fram, Eugene H. and Michael S. McCarthy, ‘ The True Price of Penalties ’ , Marketing Management , Fall 1999, pp. 49–56 . 5. Keller , Kevin Lane , Strategic Brand Management: Building, Measuring and Managing Brand Equity , Upper Saddle River, NJ : Pearson , 2003 . 6. Aaker , David A. and Erich Joachimstaler , Brand Leadership , New York : Free Press , 2000 . 7. Tomkins , Richard , ‘ Brands Are the New Religion, Says Advertising Agency ’ , Financial Times , March 1 2001 . 8. Roberts, Kevin, Lovemarks: The Future Beyond Brands , Powerhouse Cultural Entertainment Books, 2006. 9. McConnell , Ben and Jackie Huba , Creating Customer Evangelists: Proﬁ t from Turning Loyal Customers Into a Volunteer Sales Force , New York : Kaplan Business Books , 2007 . 10. Kiley , David , ‘ Best Global Brands ’ , BusinessWeek , August 7 2006 , p p . 5 4 – 6 6 . 11. Roberts , Dexter , ‘ China’s Power Brands ’ , BusinessWeek , November 8 2004 , pp. 44 – 50 . 12. Woyke , Elizabeth , ‘ Flunking Brand Geography ’ , BusinessWeek , June 18 2007 , p . 1 4 . 13. ‘ Cool Brands: Britain’s Coolest Brands 2006’ , Sunday Times , September 26 2006. 14. McGirt , Ellen , ‘ Breakaway Brands ’ , Fortune , September 18 2006 , p p . 1 1 – 1 2 . 15. Stern , Stefan , ‘ Quality Becomes Commodity in Brand Battle ’ , Financial Times , March 14 2007 , p. 12 . 16. Kumar , Nirmalya and Jan-Benedict E. M. Steenkamp , Private Label Strategy: How to Meet the Store Brand Challenge , Boston, MA : Harvard Business School Press , 2007 . 17. Simonian , Haig , ‘ Chocolate Maker Is the Power Behind the Wrappers ’ , Financial Times , July 19 2007 , p. 22 . 18. Newling , Dan , ‘ Could Choo Tell My Bag’s a Lookalike? ’ , Daily Mail , November 12 2007 , p. 3 . 19. Kean , Danuta , ‘ How to Stop Piracy: Catch the Consumers Young ’ , Financial Times , October 1 2007 , p . 1 6 . 20. Balfour , Frederick , ‘ Fakes! ’ , BusinessWeek , February 7 2005 , p p . 4 4 – 5 1 . 21. Croxson , Karen , quoted in: Harford, Tim, ‘ Piracy’s Hidden Treasures ’ , FTMagazine , April 5/6 2008 , p. 11 .

143 •• Market-Led Strategic Change

22. Byrnes , Nanette , ‘ Branding: Five New Lessons ’ , BusinessWeek , February 14 2005 , pp. 26 – 28 . 23. Rust , Roland T. , Valerie A. Zeithaml and Katherine N. Lemon , ‘ Customer-Centered Brand Management ’ , Harvard Business Review , September 2004 , pp. 110 – 118 . 24. Taylor , Alex , ‘ Gentlemen, Start Your Turnaround ’ , Fortune , January 21 2008 , pp. 59 – 63 . 25. Mitchell , Alan , ‘ Evolution ’ , Marketing Business , July/August 1997 , p. 39 . 26. Doyle , Peter , Value-Based Marketing: Marketing Strategies for Corporate Growth and Shareholder Value , Chichester : John Wiley , 2000 . 27. Deighton , John , quoted in Alan Mitchell, ‘Evolution ’ , Marketing Business , July/August 1997 , p. 39 . 28. Gronroos , Christian , ‘ From Marketing Mix to Relationship Marketing ’ , Management Decision , 32 ( 2 ) , 1994 , pp. 4 – 20 . 29. Jagdish , N. Sheth and Atul Parvatiyar , ‘ The Evolution of Relationship Marketing ’ , International Marketing Review , 4 ( 4 ) , 1995 , pp. 397 – 418 . 30. Webster , Frederick , ‘ The Changing Role of Marketing in the Corporation ’ , Journal of Marketing , October 1992 , pp. 1 – 17 , Cravens, David W., Nigel F. Piercy and Shannon H. Shipp, ‘ New Organizational Forms for Competing in Highly Dynamic Environments: The Network Paradigm’ , British Journal of Management , 7(3), 1996, pp. 203–218 . 31. Ody , Penelope , ‘ Focusing On Customers ’ , in Understanding CRM , London : Financial Times , 2000 . 32. Peppers, Don and Martha Rogers, Enterprise One to One: Tools for Building Unbreakable Customer Relationships in the Interactive Age, Piatkus, 1997. 33. Day , George , ‘ Tying In an Asset ’ , in Understanding CRM , London : Financial Times , 2000 . 34. Kotler, Philip, ‘ New Marketing for the New Economy ’, Proceedings: Society for Marketing Advances Conference , Orlando, FL, November 2000. 35. Ashton , James and Robert Watts , ‘ Good Payers Face Being Axed by Credit Card Firms ’ , Sunday Times , February 3 2008 , p. 1 - 7 . 36. Croft , Jane , ‘ Customers ’ Anger Could Damage Egg ’ , Financial Times , February 15 2008 , p. 4 . 37. Pfeffer , Jeffrey , What Were They Thinking? , Boston, MA : Harvard Business School Press , 2007 . 38. Lane , Nikala and Nigel Piercy , ‘ Strategic Customer Management: Designing a Proﬁ table Future for Sales Organization ’ , European Management Journal , 22 ( 6 ) , 2004 , pp. 659 – 668 , Piercy, Nigel F., ‘ The Strategic Sales Organization ’ , The Marketing Review, Vol. 6 2006, pp. 3–28 .

•• 144 Value-based marketing strategy

39. Gale , Bradley T. , Managing Customer Value: Creating Quality And Service That Customers Can See , New York : Free Press , 1994 . Neal, William D., ‘A Rebuttal: “ Loyalty Really Isn’t That Simple ”’ , Marketing News , August 14 2000 . 40. Fournier , Susan , Susan Dobscha and David Glen Mick , ‘ Preventing the Premature Death of Relationship Marketing ’ , Harvard Business Review , January/February 1998 , pp. 43 – 51 . 41. McDonald , Malcolm , ‘ On the Right Track ’ , Marketing Business , April 2000 , pp. 28 – 31 . 42. Maklan , Stan and Simon Knox , Competing on Value: Bridging the Gap Between Brand and Value , London : Pitman , 1998 . 43. Capon , Noel and James Mac Hulbert , Marketing Management in the 21st Century , New Jersey : Prentice Hall , 2001 . 44. Doyle , Peter , Value-Based Marketing – Marketing Strategies for Corporate Growth and Shareholder Value , Chichester : John Wiley , 2000 . 45. Kim , W. Chan and Renee Mauborgne , ‘ How to Leapfrog the Competition ’ , Wall Street Journal , March 6 1997 , ‘ Pioneers Strike It Rich ’ , Financial Times, August 11 1998 . 46. Mazur, Laura , ‘ Wrong Sort of Innovation ’ , Marketing Business , June 1999 , p . 3 9 . 47. Treacy , Michael and Fred Wiersema , The Discipline of Market Leaders , London : HarperCollins , 1995 . 48. Weaver , Maurice , ‘ Step Aside, I’ve Got a Ticket to Ride ’ , Daily Telegraph , August 18 2000 . 49. Edgecliffe-Johnson , Andrew , ‘ Children Learn to Love Their Greens ’ , Financial Times , December 10 2000 . 50. Quoted in Thatcher, Mandy, ‘ Deﬁ ning Strategy in a Digital Age ’ , Marketing Business , March 2001, p. 13. 51. Treacy and Wiersema, Discipline of Market Leaders. 52. Anderson , James C. , Nirmalya Kumar and James A. Narus , Value Merchants: Demonstrating and Documenting Superior Value in Business Markets , Boston, MA: Harvard Business School Press , 2007 . 53. Slywotsky , Adrian J. , Value Migration: Strategies to Pre-empt the Markets of Tomorrow , Boston, MA : Harvard Business School Press , 1996 .

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P A R T •••• I End-of-part cases

One useful exercise is to think through some of the issues raised in the preceding Part of the book, in the context of some stories about what is happening for real in different companies and sectors. What follows is more like ‘stories ’ than traditional academic ‘ case studies ’ . Rather than posing a series of questions about each case (which would tell you what I think the issues are), I suggest that the questions you should ask yourself are quite simple: (1) what is going on here; (2) what is likely to happen next; and (3) what lessons can we acquire from these events that we can take away and apply elsewhere? Incidentally, if you are just reading the book for fun rather than academic study – please don’t use this as an excuse to skip the cases, because they are intended to be interesting business stories in their own right, which help us think about the important things in business.

Case 1: Tata, But Deﬁ nitely Not Goodbye In 2006, for the ﬁ rst time, Indian acquisitions of overseas companies exceeded those of foreign companies buying into the country – outward-bound deals were worth $22.4 billion compared with $11.3 billion in company purchases from outside India. Bankers in Mumbai joke about ‘reverse colonization ’ . Importantly, India is experiencing the impact of a new breed of companies which are the product of a Market-Led Strategic Change

decade of restructuring since 1991, when India began dismantling its socialist economic system and allowing greater foreign competition, although some analysts think that China’s economy grows because of its government, while India’s economy grows in spite of it. The 2000s have seen growing recognition of the role of India’s Tata Group as the undisputed leader of the country’s push overseas. That strategy dates to the early 2000s when Tata’s chairman commissioned a sweeping strategy review for the group, including a study to compare India with China. He was struck by the audacity of ambitious Chinese projects, into which companies were able to ‘ grow ’ and develop, and decided to ‘ think big ’ and steer a course for Tata to become a global heavyweight. Tata is India’s most proliﬁ c purchaser of international companies. The group’s biggest international takeovers between 2004 and 2007 were:

Date announced Target Value ($ Billions)

Jan 2007 Corus 11.30

March 2007 Bumi Resources * 1.10

Feb 2005 NatSteel Asia 0.47

Feb 2000 Tetley Tea 0.41

July 2005 Teleglobe International 0.24

June 2006 Eight O’Clock Coffee 0.22

Nov 2006 R itz–Carlton Boston 0.17

April 2006 Millennium Steel 0.17

Nov 2004 Tyco Global Network 0.13

Dec 2005 Brunner Mond 0.12

* Tata acquired a 30% stake in Bumi Resources

In 2008 Tata acquired Britain’s Land Rover and Jaguar from Ford. By 2008 Tata had 330,000 employees worldwide, with 26% of them outside India.

Where did Tata suddenly come from? Tata did not ‘suddenly ’ come from anywhere. The group is 140 years old, and is a strong force in the domestic market in India, where it has 98 operating companies and 289,000 staff – more than any other private sector company in India. The group’s stand-alone revenue is around $29 billion, with $2.8 billion proﬁ ts. Founded by entrepreneur Jamsetji Tata in the mid-19th century, the group is controlled by three trusts,

•• 148 End-of-part cases

and is headed by a family member – Ratan Tata, a Cornell-trained architect. Mr Tata is 70 but remains the dynamic presence and the driving force behind the company’s global ambitions. He personally chairs key operating units like Tata Steel and Tata Motors. Although Tata is a conglomerate, it is a lot lighter in structure than a Western equivalent – there is no central strategy or consolidated fi nancial statements. The group is bound together by small staffs at the holding companies Tata Sons and Tata Industries. These two – chaired by Ratan Tata – provide the strategic vision, control the Tata brand, and lend a hand with big deals. Bombay House exerts infl uence through a Group Corporate Offi ce – nine senior executives sit on the boards of Tata companies and act as ‘ stewards ’ , mentoring managers and promoting corporate social responsibility. Partly as a result of its trust-based governance, the group has built a long history of enlightened projects to alleviate poverty and hunger by investing in education, health and agricultural development projects. Tata has ambitions to reinvent solar energy to bring affordable power to villages that are off the power grid.

What is Tata about? Three businesses account for most of Tata’s sales and proﬁ ts (around 75%): Tata Steel, Tata Consultancy Services (TCS) in the IT market, and Tata Motors. The major components of the Tata empire are shown in Figure C1.1 . Tata’s international expansion began in earnest in 2000, when Tata Tea, the group’s beverage division, bought Britain’s Tetley Tea – the company that invented the tea bag – for £271 million. Since then, almost all parts of the group have made substantial overseas acquisitions: TCS has

Tata VSNL Motors ($2.0bn) ($7.2bn)

Tata Tata Tata Tea Steel ($910M) ($6.6bn) Group

Tata Consultancy Indian Hotels Services ($4.2bn) * Figures are 2007 sales in US dollars

Figure C1.1 The Tata empire*

149 •• Market-Led Strategic Change

bought IT businesses from Chile to the UK; Tata Tea has made purchases in the USA and South Africa; and Tata Motors purchased Daewoo’s truck unit in Korea. The group’s Indian Hotels, operating under the brand name Taj, has bought hotels in Sydney, New York and other countries – in 2005 acquiring the Ritz-Carlton in Boston. Tata has purchased stakes in Indonesia’s biggest coal mines, and steel mills in Singapore, Thailand and Vietnam. Tata’s acquisition of Tyco International’s undersea telecom cables for $130 million makes it the world’s biggest carrier of international phone calls. Its purchase of British company Icat International makes Tata a major supplier of outsourced industrial design for US car and aerospace companies. Once Jaguar and Land Rover are consolidated, the Tata group will earn more revenue from its UK-based companies than from its India-based units. Many purchases gain Tata strategic position in global markets, though often not with a high profi le. For example, the 2008 purchase of soda-ash maker General Chemical Industrial Products of the USA for $1.01 billion makes Tata Chemicals one of the world’s largest soda-ash producers and gives access to markets in North America, Latin America and the Far East, complementing its existing markets. Soda-ash is used in making glass and in washing powder, among other things. Among the highest profi le deals were the takeover of rival Anglo- Dutch steel-maker Corus in 2007 for £6.7 billion by Tata Steel, and the Tata Motors purchase of the Jaguar and Land Rover businesses from Ford for around $2 billion (with Ford contributing around £300 million to Jaguar and Land Rover’s pension funds). Mr Tata took Tata Motors, then mostly a truck maker, into the passenger car business nine years ago, in defi ance of market opinion. It is now India’s number two car- maker. Around two-thirds of Tata acquisitions have been in the UK, and once Jaguar and Land Rover are consolidated, it is likely that the UK businesses will generate more of Tata’s group revenue than its India-based units. Tata Steel has bought mills in Singapore, Thailand and Vietnam and is expanding output in India. Once fully consolidated, Corus will add £9.7 billion in additional revenue. This deal makes Tata the world’s fi fth largest steel-maker, greatly expands Tata’s range of fi nished products, secures access to US and European auto-makers, and boosts its steel-making capacity fi ve-fold, with steel mills added in Pennsyvania and Ohio. These last acquisitions tilt the balance between Tata’s domestic and international sales to the global market. Tata Motors is building new plant in India, sharply boosting output of its small truck, the Ace. A new venture with Fiat will produce 150,000 cars and 250,000 trucks annually. In 2008, Tata Motors also unveiled the Nano car – the world’s cheapest passenger car priced at one lakh (100,000 rupees or about $2500). The Nano was created because Mr Tata promised India a ‘ one-lakh car’ , but with low profi t margins and high development costs the project is likely to take more than fi ve years to get into profi t. Meanwhile, critical of the vehicle’s emissions and fuel use, environmentalists claim that the Nano will be known as ‘the car that ate India ’. Nonetheless, the collective rush by

•• 150 End-of-part cases auto-makers into low-cost cars refl ects the fact that although there are 900 million cars on the world’s roads, two-thirds of the global population does not have one, and that is the real target market for the future. The Nano represents a new business model that includes distributing the vehicle in kit form for assembly by the distributor, to reduce production and supply chain costs. Many see the Nano as one of Tata’s biggest gambles. Controversy also surrounds the deal to buy Jaguar and Land Rover from Ford, with questions raised about Tata’s ability to manage upmarket brands. The deal with Ford promises to transform Tata Motors from an emerging markets specialist into a global producer with the full range of vehicles from trucks to small and luxury passenger vehicles. Overtures from Fiat to expand its relationship with Tata into Europe, in return for access to Jaguar’s advanced technology and Land Rover’s four-wheel drive systems, may reveal Tata’s strategy with these brands, although the deal with Ford may pose problems for such collaborations. Tata collaborates extensively with Fiat in India, including vehicle and engine production and a shared dealer network, but currently sells cars in only a few European countries. Tata Consultancy Services has been riding the software and technology services outsourcing boom, giving TCS explosive growth in the past fi ve years. It is now developing its own software for transportation, retail, fi nance and other industries. The 2004 acquisition of Tyco’s undersea cables has helped turn VSNL – a formerly government- owned operator – into one of the world’s biggest international voice and data providers. Interestingly, BusinessWeek suggests TCS is now more American than IBM – TCS collects 51% of its revenues in the USA, while IBM gets only 35% of its business there. Tata Tea acquired Tetley Tea in 2000, and herbal tea-maker Good Earth, as well as 30% of bottled water brand Glacéau in 2006. In 2007 Glacéau was sold to Coca-Cola at a large profi t, and further acquisitions are expected. The Indian Hotels unit is the proprietor of Taj luxury hotels, but also owns or manages elite properties like New York’s Pierre, Boston’s Ritz-Carlton, and San Francisco’s Camden Place. It is planning more than 100 budget hotels under the name Ginger. The formation of Tata Advanced Systems and Tata Industrial Services marks Tata’s aggressive expansion in the newly liberalized Indian defence sector. While Tata has indirectly supplied the defence sector through its steel, automotive and software products, the new subsidiaries show a strategy of focusing directly on defence. This strategy includes a large number of partnerships with defence groups in Europe, Israel and the USA. In 2008 Tata unveiled an agreement with Sir Richard Branson to launch Virgin Mobile in India to challenge its larger rivals for part of what is the fastest-growing mobile phone market in the world. The brand will target young Indians under a brand franchise agreement with Tata Teleservices . In addition, Tata Communications is looking at spending $600 million over the next fi ve years, to roll out a WiMax

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wireless network in India, to boost the currently tiny number of broadband users in the country. In addition, Tata is planning to launch a full- service bank as soon as restrictions preventing industrial groups from owning stakes in banks are relaxed. Financial services are a growing focus for Tata, and becoming a universal bank would consolidate this thrust. The group overseas strategy has been generally to combine low-cost production in emerging economies like India, with sales in the high- margin markets of the West. Tata Steel, for example, has access to cheap supplies of government-allocated iron ore, which it can ship to operations in south-east Asia, and in time to Corus ’ markets in Europe. Nonetheless, Tata has found a way to acquire companies across the globe yet to still tread gently. Mergers are more akin to strategic partnership than to aggressive venture capitalism. In all its deals Tata has signalled its respect for workers, and up to 2008 it had not laid off any workers or closed any facilities in its overseas acquisitions (although it has had layoffs at home). For example, in its acquisition of Daewoo’s commercial trucks business in Korea in 2004, Tata had to win an auction: Tata executives were enrolled in Korean language classes; company brochures were translated into Korean; and Tata began making presentations to employees, the local mayor, public ofﬁ cials and even Korea’s Prime Minister. With the auction won, Tata formed a joint board of directors to develop a strategy to expand Daewoo’s product line and boost exports. Tata executives from India working with Daewoo were required to shave their moustaches because Koreans prefer a ‘ clean ’ look. To date, Tata’s governance and history has encouraged a ‘ hands-off ’ approach to its acquisitions. The purchase of Land Rover and Ford is an example of how Tata manages its acquisitions.

Buying Land Rover and Jaguar from Ford In 2008, Tata Motors concluded the $2 billion purchase of Land Rover and Jaguar from Ford. This is the highest proﬁ le takeover of an established European car-maker by an emerging Asian manufacturer so far. Ford acquired Jaguar for $2.5 billion in 1989 and Land Rover for $2.75 billion in 2000. While Land Rover has performed well in recent years, Jaguar has seen huge sales declines in Ford’s core US market, and has been unproﬁ table for years. Ford is selling the brands as part of its strategy to refocus on its core Ford and Lincoln brands, and to raise cash to help fund Ford’s turnaround (the company has lost more than $15 billion in the last two years). Contrary to damaging, spoiler rumours that Tata aimed to sell the brands on as soon as a deal with Ford was reached, Tata’s plan was to retain the brands ’ British character and leave their management largely intact. Tata has the potential to add value in the supply chain by cooperating on engineering and development, which can be done at lower cost in India. There is also the opportunity to build the brands’ business in Asian auto markets in which Tata is highly experienced.

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In preparation for the takeover, in March 2008, Tata executives spent two days in talks with UK union leaders to assure them that there were no plans to drastically change the business structure of the two businesses when they were bought. The stress was on Tata’s long-term investment culture and desire to keep the structure of acquired companies mostly intact. As part of the deal, the UK factories are to remain open until 2011, and Ford becomes the main supplier to the new owner, providing engines, stamping and other components. However, the terms of the sales preclude passing Ford technology to third parties, which constrains Tata’s freedom to do deals with partners like Fiat. In particular, there was to be no attempt to ‘Indianize ’ the companies. Mr Tata explains that moulding an acquired company to look and function more like its parent is a ‘ more Anglo-Saxon ’ concept. In the West the expectation is that an acquired business will take on its owners ’ operating characteristics. He states that Tata does not consider itself capable of micro-managing acquired businesses from India, even to the extent that this approach is sometimes misunderstood as neglect. Mr Tata says his approach is to seek out companies with sound business plans and good corporate ethics, and then to avoid the destructive pressure for short-term proﬁ ts, in favour of a more patient investment philosophy. Tata pledged to preserve the historic identities of the Jaguar and Land Rover brands. However, while acquiring luxury brands like Jaguar is attractive for Tata compared to developing its own, Tata faces an uphill struggle to turn Jaguar and Land Rover into luxury manufacturers that can compete with BMW, Mercedes, Porsche and Audi.

What is the downside and the dilemmas for Tata? To some tastes Tata is seen as taking big risks – in which Mr Tata actively encourages his executives, incidentally. The fi erce bidding war for Corus, for example, may have led Tata to pay too much for the business – Corus is a company long characterized by very poor management, which was struggling to avoid heavy losses, and still has margins way below those at Tata’s own steel operations. Analysts question the wisdom of getting involved with the loss-making Jaguar business. The Wall Street Journal comments that Tata is making multi-billion dollar ‘ bets’ in its quest to become one of the fi rst globally-recognized Indian brands – with the fear that some of the wagers will fail. It is also true that Tata faces growing challenges in its domestic market, where foreign companies are entering the automotive and hotel sectors, and costs are rising due to salary infl ation and a stronger Rupee. Recently, the Nano – the ‘ one lakh car ’ – has attracted a mixed press. Honda’s chief executive disputed the low-cost car business model, suggesting that bad roads and high fuel prices would keep many emerging market travellers on motor-cycles for many years to come. In addition, the lucrative China market may be an illusion as car-buyers in China are losing their enthusiasm for small, cheap vehicles.

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In addition, Renault and Bajaj (the Indian motorcycle-maker) are discussing a plan to make a car in India that would sell for around $3000, which would be close to the price of the Nano models above the base model. Toyota, General Motors and Suzuki all produce low-priced vehicles in India and Hyundai is entering the market. India with its large pool of ﬁ rst-time car-buyers and cheap engineering and manufacturing skills is rapidly becoming the biggest world centre for low-cost car production.

The Tata Nano Courtesy of Tata Motors Ltd

In addition, there has been vocal resistance to the spread of Tata ownership in some markets. When Orient-Express, a New York-listed company, rejected a tie-up with the Taj hotel chain, on the grounds that a link with Tata would tarnish its premium brand image – they stood accused of ‘ discrimination ’ , ‘ quasi-racism ’ and ‘ arrogance ’ by Indian politicians and newspapers, although Mr Tata simply described the Orient-Express response as ‘ unfortunate ’ . Interestingly, earlier deals for Ritz-Carlton and Four Seasons properties in the USA did not attract the same response. More recently, the chairman of the Jaguar Business Operations Council in the USA went public with the claim that the US public was not ‘ ready for ownership out of India of a luxury car brand such as Jaguar ’ . However, this concern was not shared by the Jaguar company’s management, who were reported to be ‘completely relaxed’ about the deal, and optimistic that Tata ownership would be beneﬁ cial. Similarly, trades union Unite backed the Tata purchase in favour of rival bids from Mahindra & Mahindra and buy-out group One Equity Partners. The two brands are estimated to have made a joint proﬁ t of $1.2 billion in 2007, although Jaguar lost about $550 million.

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However, others worry about the compatibility of managing a portfolio with the world’s cheapest car and some of the most expensive under the same ownership, and the lack of experience in managing luxury brands in the Tata group. Mr Tata’s view is that if Unilever can manage a portfolio running from cheap soap to luxury cosmetics, it cannot be all that difﬁ cult to combine basic and luxury products under single ownership. Of course, there is nothing to stop Tata ‘ring-fencing ’ its luxury brands – in the way the Toyota did with Lexus – rather than integrating them with other businesses. There are also some concerns that Tata top management may be spreading itself too thin over too many diverse ventures. In particular, Ratan Tata is 70 years old and may be the last family member to run the business. He has no evident successor from the Tata family and succession to the top job remains an uncertainty for the businesses ’ future. The group is putting a greater emphasis on moving up the value chain through stronger branding. Executives see building global brands as a natural evolution, emulating the successes of Japanese and Korean companies in the past. However, it is possible that the rate of expansion may slow. Sources: Ray Hutton, ‘ Fiat Boss Hopes Tata Will Share Jaguar’s Secrets ’ , Sunday Times , February 3 2008, p. 3-2. Jackie Range, ‘ India’s Tata Extends Global Reach’ , Wall Street Journal , February 1–3 2008, p. 6. Joe Leahy, ‘ The Burning Ambition of the Tata Group ’ , Financial Times Special Report: India and Globalization , January 25 2008, p. 5. Jo Johnson, Joe Leahy and Any Yee, ‘ Tata Dismisses Concerns Over Luxury Marques ’ , Financial Times , January 10 2008, p. 24. Eric Bellman and Stephen Power, ‘ Tata Expansion Adds Risk’ , Wall Street Journal , December 27 2007, p. 1. Clay Chandler, ‘ India’s Global Reach ’, Fortune , October 29 2007, pp. 63–68. Manjeet Kripalani, ‘ Tata: Master of the Gentle Approach ’ , BusinessWeek , February 25 2008, pp. 64–66. Mike Spector and Edward Taylor, ‘Tata Tells Union It Won’t Force Change ’, Wall Street Journal , March 5 2008, p. 29.

Case 2: Strangling the Fat Lady at EMI? The music industry The recorded music business has been under siege since high-quality digital downloading of music from the Web became viable for consumers. Early downloads were poor quality and difﬁ cult to undertake, but this soon changed. The biggest disruptions have been the ability of consumers to access ﬁ le-sharing websites and to download music without payment (pirated copies of published music), and the Apple-led iTunes and iPod (and now iPhone) innovation to pioneer paid music downloads. Importantly, Apple has used the clout of the iPod to impose low and uniform prices on the record labels. By 2008 the music industry was looking at revenues from all recorded music shrinking another 10% against the previous year – following

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declines throughout most of the 2000s. Importantly, the growth of digital downloads slowed in 2007, and failed to compensate for crashing CD sales. According to BPI ﬁ gures, sales trends have developed as below:

Physical sales Digital sales (No. of singles sold)

2003 30.9 m—

2004 25.5 m 5.8 m

2005 21.4 m 26.5 m

2006 13.9 m 53.0 m

The value of physical sales of CDs has fallen from $21.1 billion in 2005 to $15 billion in 2007. By contrast, while digital sales tripled in 2005 to $1.1 billion, and almost doubled in 2006 to $2.1 billion, they rose only 38% to $2.9 billion in 2007. By 2008 music sales in all forms were at a fi ve-year low. The dominant factor causing the music industry problems remains online piracy – illegal downloads outnumber the legal by 20 to one. In addition, analysts suggested that digital sales can only be enhanced if record labels and telecommunication fi rms work together to make it easier to listen to music on mobile phones. The music industry initially tried to fi ght the disruptions it faced – enormous efforts to close fi le-sharing websites like Napster, and to pursue consumers in legal actions for downloading pirated copies of music – but the real search is for a sustainable business model for the new music industry. While the music labels have been trying to protect the CDs from which 90% of their revenues used to come, the world has moved on. Several strategic themes are apparent:

1. Legal downloading for money • • • The growth of digital music sales has slowed dramatically, at the same time that CD sales have declined. The biggest impact here has been Apple’s iTunes site. In addition, in 2008 MySpace joined with three of the largest record companies to launch its own music service – MySpace Music. With free listening supported by advertising and paid downloads (and merchandise and concert tickets) the goal is to link MySpace’s huge social networking membership to the catalogues of the largest music companies. The venture is a major challenge to the dominance of iTunes. Nonetheless, 2008 was the ﬁ rst year when song- writers and publishers earned more from broadcasts and legal downloads than from sales of CDs.

2. Legal downloading for free • • • In 2008 the latest innovation hoped to rescue the struggling recorded music industry was the launch of a legal downloading service called Qtrax. The Qtrax model is that it is an advertising-supported site from

•• 156 End-of-part cases which music fans can download songs free of charge, in return for viewing advertisements. Unlike previous similar attempts like Spiral Frog, Qtrax has done licensing deals with all leading music labels and many independents, and has a much larger online catalogue than Apple’s iTunes. A joint venture between Google and a Chinese online music company, global music companies and dozens of small local labels to provide free, licensed music downloads, is part of Google’s ﬁ ght against Baidu.com for the Chinese online search market, but may be a road map for the future of the music industry.

3. Disintermediation • • • One part of the Web revolution has been the move by some artists to publish and sell their work directly on the Web as downloads. The most famous example is the Arctic Monkeys’ ‘ I Bet You Look Good on the Danceﬂ oor ’ , which was the fastest-selling UK debut single of all time, after a MySpace campaign. Established artists like Peter Gabriel (a founder member of Genesis) have raised money to record and distribute their own albums. This trend is not restricted to rock music – hordes of contemporary, avant-garde, classical and jazz composers are using the Internet to sell their creations. The attraction is to eliminate the label, the publisher and the distributor and market the music, or the artists, direct to fans. Some Web-based offers to music fans, like Sellaband and Slicethepie, offer ‘ punter equity ’ , letting band followers invest in their favourite artists, for example to fund recording an album. In many ways the issue is bands as brands. Lifestyle brands like Agent Provocateur, Diesel and Coca-Cola are looking to partner with bands to use the music as a communications tool – in 2008 Groove Armada left Sony BMG to sign with drinks giant Bacardi, who will release the band’s music through their own label and download platforms.

4. Reintermediation • • • Mobile phone makers Nokia and rival Sony–Ericsson have pioneered music downloading services for users of their phones – free in Nokia’s case. This undermines the growing position of mobile operators like Orange and Vodafone as providers of music services to their subscribers, but reﬂ ects a reaction to iPhone’s invasion of the mobile phone business, bringing its links to Apple’s iTunes with it. Some mobile phone companies have invested heavily in their own music services – in the USA AT& T (with Napster), Verizon and Sprint have all gone in this direction. In 2007, a Japanese pop group called GreeeeN – an anonymous quartet of dental students – recorded the ﬁ rst song to accumu- late one million downloads to mobile phones. Globally, there are more downloads to mobile phones than to computers.

5. Music has no value • • • Some conclude that recorded music no longer has a monetary value – it is a free commodity. The money is in other aspects of the product.

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For example, major artists make 75% of their earnings from touring. Live Nation is the world’s largest concert promoter – 35 million people attend its shows every year. Live Nation is attacking the record labels by poaching their artists and offering them a one-stop shop – making the albums, selling the merchandise, operating the tours, running the website, producing the videos and creating new products that link with the act (for example, video games like Guitar Hero). It is even possible to sell albums ‘ on the out ’ – freshly-minted copies of the performance as fans leave the concert venue. The ﬁ rst big Live Nation signing was Madonna in 2007, who left Warner to sign a $120 million ten-year contract with Live Nation to handle every part of her business except publishing. In 2008 Live Nation signed a $100 million deal with Irish rockers U2 to handle the band’s merchandising, digital and branding rights, and hip-hop star Jay-Z dropped Def Jam, the label where he was once President, for a $150 million deal with Live Nation. The Rolling Stones were also in talks with Live Nation. In the UK, the Mama group has a similar model, generating income from live venues, managing artists like Kaiser Chiefs and Franz Ferdinand, and selling concert tickets and merchandise – they aim to make money not from selling CDs but from the relationship between musicians and their fans.

6. Why own the music? • • • For many years Steve Jobs at Apple has maintained that people want to buy and own music, which is the model for his iTunes site. However, there are signs that the consumer may be moving towards subscription services for music, like RealNetwork’s Rhapsody service – the subscription buys rented access to millions of songs for a monthly rental. Part of the shift is driven by the fact that people accustomed to paying a monthly charge for their mobile phone may see little problem in paying a little more each month for a music subscription, to access more music than they could ever anticipate buying. By 2008 Apple was in talks with the record companies to sell iPods and iPhones with unlimited music downloads from iTunes (consumers would pay around a $100 higher price for the device or a subscription of $7–8 a month) because their main proﬁ t stream comes from the devices not the iTunes downloads. While Nokia is offering $80 per device to music industry partners (to be divided according to market share) to get its ‘comes with music ’ service started, Apple is offering the music industry only $20 per device. This is the context in which EMI’s music business operates.

The EMI music business Founded in 1897 as the Gramophone Company, merged with Columbia in 1931 to create Electric and Musical Industries (EMI), and demerged from the Thorn electrical conglomerate in 1996, EMI is one of the world’s four largest recorded music groups. It is widely seen as the weakest of the majors. In market share, Universal holds about 25% of

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the wholesale recorded music business worldwide, Sony BG has 21%, Warner MG 14%, EMI 13%, and others 27%. In 2006, EMI and rival Warner were making bids for each other, but no deal was forthcoming, as a result of clashes over management control and concerns about regulatory risks. EMI’s music business was in disarray early in 2007 – CD sales were collapsing, the American business was heavily in loss, their biggest recording artist was in rehab, high profi le artists were abandoning traditional arrangements to do lucrative deals with retailers, concert promoters, or consumers themselves, and repeated profi t warnings were issued by then Chief Executive Eric Nicoli. At this stage, several private equity fi rms in the USA expressed interest in buying EMI, with Warner rumoured to be interested in buying EMI back from a private equity takeover, later when regulatory issues were clearer. In fact, private equity fi rm Terra Nova, headed by Guy Hands, took over the music company EMI in 2007. Terra Firma paid £3.2 billion for the music label that includes the Beatles, Coldplay, the Spice Girls and Robbie Williams among its stars. It was one of Europe’s last big leveraged deals before the credit squeeze stalled cheap debt.

Terra Firma’s track record Terra Firma was spun out of the investment bank Nomura in 2002. Major successes for CEO Guy Hands include: Waste Recycling Group – making £1 billion profi t from a 2006 deal; Odeon Cinemas – reviving an ailing franchise; and Angel trains – making £450 million in a mid- 1990s turnaround. Less successful ventures include: Le Meridien – the £1.9 billion hotel chain collapsed in 2003; Thresher off-licences – sold at no profi t after seven years of trying to turn the business around; Rockingham – losing £50 million on a racetrack; an excursion into television rentals came to an ugly end with the default of Boxclever; army homes – slammed for ‘appalling conditions’ for troops, though likely to make a £2 billion profi t on the deal. Insight into Hands’ business approach comes from the time when he ousted managers at the Odeon cinema chain, one of his purchases, because he said they were always jetting off to Hollywood to see fi lm premieres – Hands explained: ‘ They thought they were in the movie business, but actually they were in the popcorn business. ’

Hands-on strategy at EMI Eric Napoli, EMI Group chief executive, quit the company as Terra Firma took over, leaving with around £3 million. Hands appointed a trio of private equity executives with no music industry experience to cover ﬁ nance, business transformation and strategic relationships. His view was that: ‘You don’t need people with an “ ear ” for hits. People will tell you what they like. It’s not magic. It is called market research. ’ Tony Wadsworth, a traditional music industry executive, stepped

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down as chairman and CEO of the UK business shortly before Hands’ restructuring was announced.

Source: Getty Images

Hands was convinced that the EMI business model was based on three out-of-date characteristics – believing that enough CD hits will make enough money to cover everything else, thinking that conglom- erates of labels beneﬁ t from economies of scale, and pushing a single type of music onto consumers from each label. He wanted to change EMI’s bloated bureaucracy into a lean, customer-focused organization, with more talent scouts and fewer middle managers. His vision was ‘ Our job is to monetize music for the artist. ’ Early moves by Hands were to threaten to drop music artists who were not working hard enough and to ‘ unpick ’ its executives ’ pay packages. Hands promised fundamental change in how EMI approached the music business, warning that artists would have to meet their side of the bargain. This was followed by tight restrictions on new artist signings and marketing budgets, with substantial job losses planned – some 30% of artists paid an advance never actually recorded an album and 30% of CDs produced were destroyed because of poor publicity and low sales. In the past EMI pushed its sales staff to get CDs into shops, even if many were returned for refund. Ruthless cost-cutting addressed excessive mollycoddling of music stars – the new management objected to EMI spending £130 million a year in a music division that only makes £60 million in proﬁ ts. Thousands of artists were dropped from EMI’s 14,000 strong roster.

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Weeks after the take-over, Hands faced a classic talent business dilemma – whether to re-sign Radiohead, one of EMI’s best-known bands, at a time when sales were falling and he was desperate to cut costs. Hands made a low offer and Radiohead left amid enormous publicity. Critics said Hands just did not understand the music business, while others thought he understood it only too well. Radiohead chose to launch their newest album on the Internet, inviting fans to pay whatever they wanted for it (which turned out generally not to be very much – the average was about £2.88 and two-thirds of the download- ers paid no more than the handling charge of 45p). Nonetheless, some of the biggest-selling artists like Robbie Williams and Coldplay started threatening to hold back new albums because of the uncertainty at EMI, and their managers formed the ‘Black Hand Gang ’ to organize protests about changes at EMI. Robbie Williams declared himself ‘ on strike’ , putting his album on hold and refusing to go on tour. The Rolling Stones were looking to move to Universal after 31 years with EMI (taking their back catalogue with them), and Paul McCartney and Joni Mitchell opted to launch their latest albums through Starbucks coffee shops. In 2008, it looked like Disney – one of the rare bright spots in the embattled music industry – would be hand- ing international distribution to Universal at the end of its contract with EMI in 2009. Hands has challenged the underlying strategic assumptions at EMI, and has worked for a major culture change in the company. He has even looked at ways for bands to be sponsored, like football teams. His strategy rests on £200 m of cost cuts – with the marketing budget to shrink from over 20% of total spending to 12–15% – and restructuring so A & R (the Artists & Repertoire Department) is no longer responsible for anything other than fi nding talent, with marketing and promotion in a new music services division, and fi nance and legal in a back offi ce division. He believes EMI has spent too much on existing artists and not enough on fi nding new ones. Nick Gatfi eld – responsible for the success of Amy Winehouse and Mika – has been hired from Universal to run A & R in the USA and Europe. Critics say that Hands ’ EMI deal is the classic example of private equity overpaying in a boom, and then resorting to crude cost-cutting when times get tough. Interestingly, establishing a centralized marketing function at EMI, runs counter to practice at the music majors, where marketing is controlled by the individual record labels owned by each company. It is more akin to the model at consumer goods companies like Unilever and Procter & Gamble. His goal is to make EMI the world’s most innovative, artist-friendly and consumer-focused music company, working in a partnership with artists based on transparency and trust. However, the era of multimillion advances has ended, and rewards will be based on sales. When announcing his new strategy, Mr Hands needed two hefty bodyguards to get into the offi ce. His conclusion on the music business was that: ‘ History can teach us: everyone thought the recordable cassette was the end of the music business – it wasn’t – we just have to re-invent the business model. ’

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In 2008 Hands recruited an executive from Google to head EMI’s digital operations. Early signs were a relaxation in EMI’s position on online piracy, with possibilities for advertising-supported music downloads and allowing fans to put music from EMI’s back catalogue on their websites. A year after the purchase, with sales still slipping, artists in revolt, music-industry insiders and bankers believed that Hands was about to get his ﬁ ngers burnt. Meanwhile, bankers at Citigroup were still stuck with £2.5 billion of EMI debt on their books, unsold since the buyout. Sources: Loretta Chao and Ethan Smith, ‘ Google to Strike Back at Baidu in China ’ , Wall Street Journal , February 6 2008, p. 32. Andrew Edgecliffe-Johnson and Joshua Chafﬁ n, ‘ Hands Seeks to Head Off Revolt at EMI’ , Financial Times , January 12/13 2008, p. 15. James Ashton and Dominic Rushe, ‘ Help! ’ , Sunday Times , January 13 2008, p. 3-5. Andrew Edgecliffe-Johnson and Martin Arnold, ‘ Hands to Raise New Equity and Cut Third of EMI Music’s Staff’ , Financial Times , January 14 2008, p. 1. Paul Sloan, ‘ Keep On Rocking in the Free World ’ , Fortune , December 10 2007, pp. 69–72. Andrew Edgecliffe-Johnson, ‘Apple in Talks to Sell iPod and iPhone with Unlimited Music’ , Financial Times , March 19 2008, p. 1.

Case 3: The Clouds Raining on the Computer Business Many claimed that the era of the Personal Computer (PC) had ended by the early-2000s – computers would be worn like clothes, computing power would be accessed from the Internet, mobile phones would replace PC functions, and so on. To such critics, the PC is seen as ‘ yesterday’s computing platform’ . However, the changes in the PC marketplace are more subtle than these views would suggest – for example, in the period from 1995 to 2005, annual PC sales jumped from 50 million to 200 million, and continue to rise, particularly in the emerging markets. The funeral and wake for the PC may have been premature. However, the structure of this marketplace has evolved in several ways of considerable signiﬁ cance to the strategies of PC manufacturers and software developers, and the signs are that this ecosystem is looking at an even more profound change in the near future.

The computer ecosystem In the mid-2000s the typical way that someone would buy a PC would be to log onto the Dell website, choose a model with the most powerful Intel processor you could afford, then load it up with Windows XP or Vista and Microsoft Ofﬁ ce – the staples of desktop software. The ‘ Big Three ’ – Microsoft, Intel and Dell – relied on mutually supportive business models to maintain control of this ecosystem for the PC business. Microsoft added more and more features to its software (many of which far exceeded normal users ’ computing requirements),

•• 162 End-of-part cases

to encourage users to keep upgrading to new versions of Windows and Offi ce, leading Intel to make faster and faster chips to handle the new software, while Dell used its direct sales approach to sell cheaper and cheaper boxes. ‘ More, Faster, Cheaper ’ was the theme that linked the Big Three together. However, while this business model worked well for some time, it also became a recipe for bloated and ineffi cient software from Microsoft, ineffi cient chips from Intel and poor customer service from Dell. The inevitable development, notwithstanding the maturity and sophistication of the business, is that others have found ways to make money from the desktop PC, profi ting from a computing platform that was thought to be securely in the hands of Microsoft, Intel and Dell.

The technology ecosystem implodes The Big Three have problems. Microsoft was years late in delivering the new Windows operating system, Vista – the program got too big to be managed, and it has proved unpopular with users. Meantime, by delivering its software as a service over the Internet, Google has been able to release new products more quickly. Open-source software providers like Sun and Linux offer free or low-cost downloadable operating systems and ofﬁ ce programmes to rival Microsoft’s. Intel has reached the physical limits of speed – smaller, faster chips leak too much power. Meanwhile, Intel’s hated rival AMD ended Intel’s monopoly in PC and server chips. By putting several slower processing cores on a single chip, AMD has come up with a better design, forcing Intel to change course. With some believing AMD chips to be superior, computer manufacturers were freed from the years of Intel bullying to pay top prices for its microprocessors. After years of being strong-armed by Intel, number two in the business AMD is now attracting the best design talent in the industry. Nonetheless, AMD continues to complain about Intel’s aggressive and unfair tactics, attracting the interest of competition regulators. Dell has ended its exclusive deal with Intel and ships some Dell servers with AMD chips, somewhat weakening one of the industry’s closest alliances, and pointing the way to Dell PCs carrying AMD chips as well. Working with Microsoft’s arch-enemy, Dell also loads Google software on PCs before they are shipped. Google needs to secure a position in front of computer users, before new packages arrive that favour Microsoft’s own search software. Google is primarily known as an Internet company, but has developed a ‘ software-lite ’ strategy for the PC, using Dell to distribute lightweight toolbar and desktop search products, that contrast with Microsoft’s bloated equivalent software. Dell has also evolved its value chain strategy in order to reach new markets, particularly those where the direct sales approach is unpopular. Dell has lost market share to Hewlett–Packard and Lenovo. Dell is broadening its business model to target computer re-sellers – specialty vendors who design and install computer systems for corporate customers. In addition, Dell is developing a global retail strategy that

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includes selling computers in stores (Wal-Mart, Best Buy, Staples, and Guitar Center in the USA; Carphone Warehouse and Tesco in the UK; Carrefour in Europe; BicCamera outlets in Japan; and Gome in China). Experimental Dell own-branded stores are expected to expand, along with kiosks located inside shopping malls. While Windows is still ubiquitous, the days when PC-makers feared reprisals from Microsoft if they stepped out of line seem to be over. For example, part of IBM’s business strategy is based on open-source software development and extension to displace Microsoft’s dominance: IBM computer code is given to the Apache free open-source web server, and Apache is then incorporated into IBM’s commercial software; 600 IBM programmers are paid to work on the Linux open-source operating system and key IBM patents have been given to Linux developers. Microsoft is now in the unfamiliar position of trying to copy Google’s approach to software development, Intel is imitating AMD’s approach to chip design, and Dell is trying to look more like Apple, whose company-owned stores have helped breathe new life into the AppleMac.

Clouds and reinventing the IT world While its software and search strategy has already undermined Microsoft’s dominance, Google has further plans to reshape the sector based on its search strengths. Google does not just use its computing grid to process Web searches, but also to supply services such as word processing, spreadsheet and e-mail programs – applications that have long been the mainstays of Microsoft’s proﬁ tability. By supplying business computing as a set of simple services, Google (and other utility providers like Salesforce.com and Amazon Web Services) threaten to render large parts of the IT industry obsolete. Google operates a globe-spanning network of computers that answer search queries instantly by processing mountains of data – whirring away in large, dark, refrigerated data centres. People at Google call this network ‘ the cloud ’ . One challenge of programming at Google is to leverage the cloud – to push it to do things that would overwhelm other machines and networks. For example, a partnership with IBM aims to plug universities around the world into Google-like computing clouds. Google engineers teach the cloud new tricks as it grows in size and sophistication – in 2007 they added four new data centres, at an average cost of $600 million a piece. Importantly, in building this cloud, Google is poised to take a new role in the computer industry. Google’s cloud is a network of hundreds of thousands – by some estimates 1 million – cheap servers, each storing huge amounts of data, to make search faster. Unlike its predecessor, the supercomputer, Google’s system never ages – as individual computers die, they are replaced individually with newer, faster boxes. This means the cloud regenerates as it grows, almost like a living thing. As the concept of computing clouds spreads, it expands Google’s footprint way beyond search, media and advertising, and Google could become, in effect, the world’s primary computer. IBM’s head of research operations notes,

•• 164 End-of-part cases

‘ Compared to this, the Web is tiny ’ . No corporate computing system can match the effi ciency, speed and fl exibility of resources like Google’s cloud. It is estimated that Google can carry out a computing task for one-tenth of what it costs a typical company. Big data centres linked to form a cloud encapsulate the full disruptive potential of utility computing – if people and businesses can rely on central stations to fulfi l all (or most) of their computing needs, they will be able to drastically reduce their expenditure on their own hardware and software – revenue that currently goes to Microsoft and the other tech giants.

The emerging ecosystem A move towards clouds represents a fundamental change in how we handle information. It is almost the computing equivalent of the evolution in electricity supply from a hundred years ago, when farms and businesses closed down their own power generators and bought power instead from effi cient industrial utilities. Until the end of the 19th century, businesses had to run their own power-generating facilities, producing all the energy to run their machinery. As industrial technology advanced, generators grew more sophisticated but were still located at the site of a business and maintained by its employees. Power generation was assumed to be an intrinsic part of running a business (much as data processing is now). The invention of the alternating-current electric grid at the turn of the century overturned that assumption. Supplying electricity to many users from central stations achieved huge economies of scale, and the price of electricity fell rapidly. The transformation in the supply of computing promises to be as dramatic as that in electricity supply. The electricity utility comparison model fi ts neatly with Google’s grand vision, established a decade ago, ‘ to organize the world’s information and make it universally accessible’ . Other companies are also infl uential. Amazon has opened up its own networks of computers to paying customers, initiating new users to cloud computing. Signifi cantly, as the volumes of data from business and scientifi c research expand, computing power is turning into a strategic resource, or a form of capital. For clouds to reach their potential, they need to be as easy to program and navigate as the Web. This suggests growing markets for cloud search and software tools – a natural business for Google, and competitors like Amazon.com. As this strategy unfolds, people are starting to see Google as poised to become the dominant force in the next stage of computing. Companies and research organizations may eventually hand over most of their high-level computing tasks to a world-spanning network of computers forming a cloud. It is likely that all sorts of new business models will emerge. The pioneers in a position to dominate this fi eld are:

● Google – the only search company built from scratch around hardware, and investing more than $2 billion a year in data centres, and

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the leader in cloud computing; Salesforce.com is partnering with Google in a joint venture – Google’s cloud is best at sifting through data, but Salesforce.com has strengths in running business applications like accounting packages and lets companies write their own programs to run on its servers. ● Yahoo! – smaller and poorer than Google, with software not perfectly suited to cloud computing, but as the leading patron of Hadoop (a free software framework that supports distributed applications running on large clusters of commodity computers processing huge amounts of data), it could end up with a lead. ● IBM – dominant in business computing and traditional supercom- puters, IBM is teaming up with Google to get a foothold in clouds. IBM is launching a pilot cloud system for the government of Vietnam, and has built a showcase cloud centre in Ireland. ● Microsoft – still currently dominated by its proprietary software, Microsoft is strong on the fundamentals of cloud science, and is building massive data centres in Illinois and Siberia. ● Amazon – the ﬁ rst to sell cloud computing as a service (Amazon Web Services); while smaller than rivals, its expertise in this area could provide a boost for the retailer in the next-generation of Web services from retail to media.

Because of computing’s modularity, companies will have many options as they move into the utility computing era. In contrast to switching over to electricity utilities, buyers do not face an all-or- nothing choice. While capital-constrained smaller companies may have strong incentives to quickly adopt the full utility model, larger companies are more likely to pursue a hybrid approach – supplying some hardware and software requirements themselves and buying others over the grid. But ultimately, it is likely that most business computing will migrate to the computing cloud. A powerful facilitator of the migration to cloud computing will be grid technologies developed at Cern (the European particle physics centre) which provide for speeds 10,000 times faster than a typical broadband Internet connection. Grids based on dedicated ﬁ bre-optic cables and modern routing centres (instead of the hotch-potch of cables and routing equipment designed mainly for telephony, on which the Internet runs), mean there are no outdated components to slow data ﬂ ow. The Cern grid linking research and university institutions is effectively a parallel Internet. Already used in drug design, the grid allowed researchers to analyse 140 million compounds – a task that would have taken the standard Internet-linked PC 420 years.

Dilemmas For companies in the computing and related areas, the big dilemma is whether cloud computing will be the next major disruption in information technology. If it is, then the questions become about timing – when will it impact – and the effects on the business models of

•• 166 End-of-part cases existing companies – disruptions usually beneﬁ t some while punishing others, and predicting which is which is not always easy. Disruption may also be about quite new business models, which may be driven by new entrants to the sector, to which established competitors will need a response. In the meantime, the problem remains maintaining awareness of a disruption that may have devastating impact on the established structure of the market, and trying to plan around that disruption without knowing exactly when it will impact. Sources: Richard Waters, ‘ Computer Pack Top Dogs Lose Their Bite ’ , Financial Times , June 5 2006, p. 19. Stephen Baker, ‘ Google and the Wisdom of Clouds’ , BusinessWeek , December 24 2007, pp. 49–55. Nicholas Carr, The Big Switch: Rewiring the World , From Edison to Google, W.W. Norton & Co., 2008. Nicholas Carr, ‘ A Revolution Is Taking Shape’ , Financial Times Special Report: Digital Business , January 30 2008, p. 1. Jonathan Leake, ‘Coming Soon: Superfast Internet ’ , Sunday Times , April 6 2008, p. 1-10.

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P A R T •••• II Developing a value-based marketing strategy

Part II of the book provides a structured approach to assessing the robustness of a business’ strategy in its markets. It provides a mechanism for structuring executive views on strategic direction, as well as for auditing the strength of what comes out of conventional (usually backward-looking) planning systems, before the resulting plans kill the business stone-dead. We start in Chapter 5 by examining the types of issues that should be considered in developing a value-based marketing strategy (strategic thinking), alongside the perspective relevant to actually producing an innovative strategy (thinking strategically). Simply recognizing the existence of big changes in the marketplace is not enough to generate effective responses, there is the challenge of developing a perspective which looks at the emerging pattern and confronts the big choices that must be made. We provide the strategic pathway model as a structure to capture the output of strategic thinking ( Figure 5.1 ). The following set of four chapters examines the components of the strategic pathway model:

● Market Sensing and Learning Strategy (Chapter 6) is concerned with market knowledge and its use – simply put ‘ What do you know about this customer or market that gives you the chance to do better than the alternatives in front of that customer or market?’ , or perhaps ‘What do you know that everyone else does not know that gives you a competitive advantage, and how will you sustain that advantage?’ ● Strategic Market Choices and Targets (Chapter 6) looks at where you are going to compete and what your targets are – in the setting of changing market boundaries, new types of competition, market invasion by competitors in related sectors, and the granularity of the market in terms of the segments and niches within it and how these are changing. Market-Led Strategic Change

Strategic thinking and thinking strategically

Market sensing and Strategic market learning Customer choices strategy value and strategy Strategic targets and relationships positioning and networks

Strategic transformation and strategy implementation

Figure 5.1 The strategic pathway

● Customer Value Strategy and Positioning (Chapter 8) examines the need to establish a clear value offering that matters to the customer in question and to understand the comparisons the customer makes between alternative ways to solve their problems (how are we positioned against the competition in the customer’s eyes). ● Strategic Relationships and Networks (Chapter 9) examines the relationships which must be managed for a strategy to be effective – not just with customers but also with collaborators, with co-workers, with competitors and others – and the interactions between these stakeholders that support or hinder the implementation of the strategy. The strategic pathway model is not an exhaustive coverage of every issue or idea that will be faced in practice, but it provides a framework into which new issues can be ﬁ tted. The pathway is iterative – we have to work backwards and forwards through the components to allow for their impact on each other. In the next Part of the book we provide an audit tool to assess a company’s strategic pathway (Chapter 10). The rationale for this Part of the book is: strategic thinking drives us to examine the process of going to market structured around the strategic pathway, the outcome of the pathway is a strategy that drives us to examine the processes to be addressed in strategy implementation and the transformation of an organization to achieve alignment with the strategy. There is some pretty heavy material included here. But there again, no one said a strategic perspective on the market was going to be easy (and if it was, you would not have bought a book about it . . .) However, it seems to be the bit about marketing that really matters to businesses.

•• 170 C H A P T E R • • • • 5 Strategic thinking and thinking strategically

This chapter . . . The purpose of this chapter is to try to clarify what we mean by marketing as strategy (because that is the basis for what follows in the next set of chapters describing the strategic pathway). But more than that, it emphasizes the difference between ‘strategic thinking’, as opposed to focusing on marketing operations and tactics. This is important because it is often difﬁ cult for managers to separate themselves from day-to-day operations – physically or mentally – yet this is vital. At the risk of being cute, I then want to suggest that not only are the issues different, the perspective should be too – that is to say that the challenge is also ‘thinking strategically’ . It is not enough to recognize that some issues have strategic signiﬁ cance – it is also important to address them in a different way. On this basis, we can then move on to the building blocks for creating a value-based marketing strategy.

Introduction – What Is Strategy Anyway? In Chapter 1 we said that having a strategy was a good start to making marketing effective in delivering superior customer value. We said strategy was about: competitive arenas – where will we be active, vehicles – how will we get there, differentiators – how will Courtesy BAE Systems Market-Led Strategic Change

we win in the marketplace, staging – what will be our speed and sequence of competitive moves, and the economic logic – how will we obtain returns? Of course, it is also about simple things like being best at doing the things that matter most to customers and ﬁ nding new and better ways of doing things to achieve this. While strategy may sound esoteric and academic and daunting (which is how strategic planners like to win their own personal turf wars), it is really about these things. In fact, all the complex strategy stuff is just to help with these things (and if it isn’t, maybe we should not bother with it). This too may be worth remembering next time your planners and analysts want to show you the latest techniques and computer software. There is also something to be gained from understanding what strategy is not.

What strategy is not Most important, strategy is not the same as strategic planning . If we think planning is the same as strategy, then we probably also confuse analytical techniques with strategy – matrices, models, expert systems and so on – and hope the techniques will make the decisions for us. The saving grace for strategic planning was that it has not done as much harm as it might have done, because no one took much notice of the plans that the planners produced. * It is not before time that some of us are getting very sceptical about generalized ‘ rules ’ and prescriptive models as routes to developing strategy. Most analytical approaches would have suggested that Google had no chance of making money up against Microsoft, eBay was a silly idea, Hewlett–Packard could never beat Dell, and so on – all for sound theoretical reasons connected to market share, growth rates and sustainable competitive advantage. They would have been damaging and wrong. The next confusion is that we think strategy is the same as operational effi ciency. It is not. A lot of management thinking in recent decades has been dominated by the global pursuit of operational effi ciency – total quality management, new technology for automation, business process re-engineering, value engineering, core competency focus, lean supply chains, agile manufacturing systems, and so on. This pursuit of operational effi ciency has had enormous benefi ts in improving product and service quality and reducing unit costs in many industries. However, one effect is that the rapid diffusion of ‘ best practices ’ achieved through benchmarking against competitors is that industries have become more effi cient without individual companies becoming more profi table – because benchmarking and best practice make companies more similar, not more differentiated. Michael Porter clarifi es the confusion: ‘Opera- tional effi ciency means you’re running the same race faster, but strategy is choosing to run a different race because it’s the one you’ve set yourself up to win. ’1

* ‘ . . . about as much use as a one-legged man in an arse-kicking contest ’ is how one CEO explained to me how much he valued strategic plans.

•• 172 Strategic thinking and thinking strategically

Superior operational effi ciency may give you a short-term advantage over competitors, but then it will be copied or bettered by them. Strategy is about competitive advantage through differentiating against the customer’s alternatives, continuous innovation to sustain that advantage, and organizing to achieve ‘fi t’ in maintaining the advantage. Porter clarifi es again: ‘ A company can outperform its rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost or do both. ’2 The trouble is that your moment of greatest strategic vulnerability is probably when you are experiencing greatest success, because it is then that the seeds of complacency are sown – this is ‘ the fatal arrogance of success’ . The more successful and dominant you are, the greater the risks of complacency. One paradox of strategy is that you probably need to be making new strategic decisions at the time when you feel least inclined to do so. While success brings profi ts, growth and unbounded optimism, it also has a way of blinding executives to the many organizational dangers that creep in at the same time. 3 The importance of strategic clarity is underlined by the new era of disruption for business that we have been describing – achieving and maintaining competitive advantage is about revolution and reinvention, not incremental change from the past.

Revolution, reinvention and renewal We argue elsewhere in more detail that the key words to describe modern markets are revolution, reinvention and renewal:4 revolution – in the ways industries and markets operate and the sources of competition which become important, and consequently in the strategies that successful organizations pursue; reinvention – in the creation of new business models that make traditional ways of doing business obsolete as routes to delivering and sustaining superior customer value; and renewal – in the strategies of change and repositioning by companies whose business models have become outdated, as they rebuild and respond to change. Increasingly the priority is not just short-term performance but building the robustness to bounce back, to change, to survive, to turn things around. Hard-nosed managers are frequently sceptical about the use of emotive words like the trio of Rs above. *

What is strategy about? So far, we have said what strategy is and is not, but we probably get further if we ask what strategy is about.

* Some managers even suggest we may not know our ‘ Rs ’ from our elbows, though risking substantial personal injury as a result of making such comments.

173 •• Market-Led Strategic Change

Strategy is about breaking free • • • To paraphrase two major milestone publications about strategy by Michael Porter5 and Gary Hamel and C. K. Prahalad, 6 strategy is about breaking free from: an obsession with management tools that are spectacular and seductive in improving operational effi ciency but are not strategy (e.g., total quality management, benchmarking, time-based competition, outsourcing, reengineering, lean supply chain management, and so on); industry dogma – an industry is a group of organizations with similar capabilities and supply technologies, while a market is defi ned by customer needs and demands7 – customers do not care about industries, just meeting their needs; the industry ‘ rules ’ – Gary Hamel says there are three kinds of companies in all industries: rule makers, who built the industry, rule takers, who follow and imitate, and rule breakers, like IKEA and Virgin, who implement revolution in the industry and re-invent the business;8 the present to create the future, and particularly not trying to preserve the past – Hamel and Prahalad estimate senior managers spend only 1–3% of their time looking at the future; tactics – ‘strategy is revolution; everything else is tactics ’; 9 ‘ sameness ’ – Michael Porter argues that a company can only outperform its competitors if it establishes a difference that delivers greater value to customers or creates comparable value at a lower cost (or both); and, hostility to change – change is seen as unpleasant and is resisted mainly when it is something nasty imposed on us from above (and when it is a synonym for cost-cutting and downsizing), not when it is about growth, new ways of doing things and new activities that we choose for ourselves. But strategy is also about much more than just breaking free of these constraints and burdens – it is about defi ning what we are going to be in the marketplace, or what Hamel and Prahalad have called building a ‘ strategic intent ’ : 10 a stable but stretching perspective of how to win, based on our core competences as an organization. 11 It may not be straightforward to achieve these aims. Actually, it rarely is. Indeed, one of the biggest challenges managers face in developing effective strategy is to ensure that the strategy is not a product of the biases (and possibly the ignorance) of the existing management team – those biases are likely to be rooted in the organization’s past successes not its future needs.12 The issue we have to grapple with is – how do we develop strategic thinking that is revolutionary and creative in our organizations? How do we get beyond talking about new strategic ideas and actually create them? How do we overcome limiting stereotypes and assumptions that constrain the future? The challenge is to ‘put innovation back into strategy ’ .13

Strategic Thinking So what are the big strategy issues that should be central to our thinking about how we go to market? It is impossible to catalogue every new idea that comes along. I have picked out below some of the major strategic

•• 174 Strategic thinking and thinking strategically

Strategic dilemmas Social The growth legitimacy mandate

Marketing Crisis and Reinvention as failure and renewal strategy

Timing and The limitations speed of imitation Radical innovation Figure 5.2 Strategic thinking

questions that look like they are going to be exercising top management minds over the next few years. Nothing can be exhaustive because new ideas are coming through all the time, but these themes provide us with insights into how to go about putting together a robust strategy, which we can apply in developing our strategic pathway (the detailed ‘what ’ of market strategy). These themes are summarized in Figure 5.2 . While conventional marketing thinking clings to the relative certainties of devising promotional programmes, strategic thinking has to grapple with the uncertain, the confusing, the paradoxical, the unstable and the risky. This is often difﬁ cult. That is good – it explains why companies pay you a lot of money to do it. But strategic thinking is rarely going to be clear and unambiguous.

Reality Check: Obvious answers in strategy?

‘ For every complicated problem there is an answer that is clear, simple – and wrong’ (H. L. Mencken)

Source: Quoted in: Stefan Stern, ‘The Mania for Measuring That Will Send You Off Target ’, Financial Times , July 24 2007, p. 16.

Marketing as strategy We ended Chapter 3 with the conclusion that marketing that matters is about strategy – programmes and tactics can follow later, but they do not substitute for strategic insight. Indeed, one big danger we face is that of active inertia – when we respond to changes in the market

175 •• Market-Led Strategic Change

by accelerating activities that succeeded in the past. When the world changes – sometimes radically – a company trapped by active inertia will do more and more of the same things they always did. While there is an impression of purposeful activity, there is no strategy of change to deal with the new external realities. 14 We have a problem, hopefully also teased out in Chapter 3, in that we have invested much time and effort in getting good at operational marketing activities – the ‘4Ps ’ – and far less in developing strategic capabilities in marketing. The trouble is what companies and their CEOs are desperately seeking is a strategic perspective on the marketplace and the route to market. Nirmalya Kumar summarizes this issue nicely: ‘ The demand from CEOs is for foresight rather than hindsight, for innovators, not tacticians, and for marketing strategists, not marketing planners . . . We have nothing to lose except hierarchies, national and functional boundaries, and most of all, the four Ps ’ .15 The factors in Figure 5.2 underline some of the complexities that are faced by marketing executives in taking a leadership role in strategy: strategic dilemmas and uncertainties regarding causes and consequences; the growth mandate demanding growth in markets which have slowed down and the gambles involved; the pressure for creative reinvention and renewal in the business model; the related limitations of imitation , where simply copying rivals replaces strategic thinking; the unremitting pressure for radical innovation that breaks the ‘ rules ’ and delivers a step-change in performance; the issues of timing and speed – fast strategy or not, ﬁ rst-mover advantage or not; the shock effects of crisis and failure which will be experienced more often as business risks increase, but which must be survived; and, the quest for social legitimacy in meeting both societal and business goals.

Strategic dilemmas Life is rarely straightforward or uncomplicated and strategic thinkers have to accept the need for difﬁ cult choices, and to study the risk pro- ﬁ le of alternative strategies.

The strategy paradox • • •

Michael Raynor presents one of the dilemmas we face as the ‘strategy paradox ’ .16 He makes the point that the best-performing ﬁ rms often have more in common with bankrupt companies than with other businesses that have just managed to survive – many of the traits we have come to associate with high performance are also the ingredients of total collapse. He concludes, ‘ The same behavior and characteristics that maximize a ﬁ rm’s probability of notable success, also maximize its probability of total failure’ , and that this is the hidden strategy paradox facing companies. It arises because managers have to make bold strategic commitments to the future – markets, products, developing distinctive capabilities – yet they do not know what the future will bring, and if their assumptions about the future are wrong, they will fail.

•• 176 Strategic thinking and thinking strategically

For example, Sony positioned its Betamax as a video recording device to tape TV programmes. It turned out that consumers wanted video machines to play rented movies, and the lower-priced VHS format won out. Sony developed a cutting edge product, understood its customers and executed its strategy well. It failed because things did not turn out as assumed. According to Raynor, the danger is that, realizing the risks of failure they face, managers shy away from the bold commitments that success seems to demand and instead choose timid, unremarkable strategies, sacriﬁ cing any chance of higher performance for a better chance at simple survival. His answer is that companies should hedge their bets – at the same time as committing to a core strategy, we should create strategic options based on different possible scenarios. For example, in the late-1980s, Microsoft simultaneously kept options open with different operating systems – Windows, MS-DOS, OS/2, writing applications for Apple – positioning itself for success under different industry scenarios. He urges maintaining strategic ﬂ exibility, under which a company develops and manages a broad range of strategic options (that give the company the right but not the obligation to make extra investments in the future). Perhaps the greater paradox is that the mandate appears to be total commitment to a bold strategy, but keeping options open (just in case we’re wrong).

Strategic goals • • • The pursuit of goals is central to strategic development. However, one dilemma facing the strategic thinker is that ‘The more precisely defi ned your goals, the more constrained the means you can use to pursue them ’ ,17 suggesting the importance of being fl exible about goals. Over and above goals fl exibility, is the question of priorities in goals – profi tability or growth, short-term or long-term, corporate synergy or stand-alone unit performance – and the tensions between them. The tension between goals pulling in different directions can trap decision makers in an unproductive cycle – swinging between a growth push and a productivity push, swinging between a focus on strategy and execution, swinging between centralization and decentralization. The resolution of this tension in confl icting goals is important but rests on our ability to decide which goal is most important to the company. 18 This is complicated by varying management opinions about which are the priorities – as well as the general feeling that we want everything, please.

Schlimmbesserung • • • Schlimmbesserung is a German word literally meaning ‘ worse improvement ’, and refers to the unintended consequences of what we do – efﬁ ciency drives that reduce efﬁ ciency, cost-cutting exercises that become prohibitively expensive, and so on – or ‘ revenge effects ’ . For example, planting trees as a strategy for offsetting greenhouse gas emission turns out to have the unfortunate effect that planting trees

177 •• Market-Led Strategic Change

can make global warming worse if they are grown in the snow-covered northern latitudes, because the dark surface of the tree reﬂ ects less of the sun’s heat back into space than does the pristine white snow.19 There is merit in thinking about the downside of new developments and changes at the outset – ‘ excessive optimism risks revenge effects ’20 – and monitoring for emerging revenge effects. Somehow the excitement of new strategic ideas has to be balanced by thorough review and continuous monitoring for potentially unforeseen consequences and what they cost, and the degree to which they can undermine the value of the strategy, so we can change.

The growth mandate Many companies are experiencing the squeeze between investor demands for sustained earning growth and shrinking and fi ercely contested markets. In the past, marketing has tended to fi xate on serving and retaining current customers, which is reinforced by company rewards and incentives that emphasize short-term market share and profi tability. Marketing should be central to corporate growth but is in danger of being marginalized in important decisions about growth strategy. Marketing’s role is to contribute to a fi rm’s growth through better anticipation of market opportunities and evaluation of risks, tighter linking of technological possibilities with market concepts, and faster adjustment to sifting market needs and competitive moves. 21 The role of strategic marketing in meeting the corporate mandate for growth is underlined as achieving growth becomes more diffi - cult for many companies. Conventional revenue-boosting tactics are running out of steam and becoming less effective, creating a ‘growth crisis’ for many companies. 22 One study shows the seriousness of the growth crisis – over a substantial period of years, companies entering the Fortune 50 averaged growth in revenues of 9–20% in the fi ve years before they entered this elite group, and 29% the year they entered (often via a large acquisition), but 93% of these companies never subsequently achieved revenue growth above 2% again, with corresponding collapse in their share prices.23

When growth stalls • • • Research also suggests that companies lose momentum for four main reasons – all of which are within management control, if they are spotted early enough. Growth plans may fail because of:

● Premium-position captivity – holding the premium position in a market where you deal with the most demanding customers, offer high performance products and get the highest prices, becomes a trap when new competitors with lower cost structures enter or customer tastes change. Product innovation loses its ability to protect premium prices and brand and marketing strengths no longer protect market

•• 178 Strategic thinking and thinking strategically

share. Processes and activities developed for the top end of the market become a barrier to shifting strategy. ● Innovation management breakdown – there are severe problems in managing the internal business processes for updating products and services or creating new ones. ● Premature core abandonment – there are failures to fully exploit growth opportunities in existing core markets, for example when acquisitions and growth initiatives are in areas distant from existing customers, products and channels. ● Talent bench shortfall – there is a lack of leaders and staff with the skills and capabilities required for strategy execution.

This logic suggests that guarding against growth stalls should be high on the strategy agenda. 24

Building growth platforms • • • The challenge is building a basis for sustained growth that counters tendencies for growth to stall. One approach is to focus on establishing new growth platforms. In this model, we see real, proﬁ table, strategic growth that leverages the company’s capabilities and knowledge, created by building new growth platforms on which the company can build families of products, services and businesses and extend their capabilities into multiple new domains. Possibilities for developing new growth platforms come about when changes like new or converg- ing technologies, social pressures, or changing regulatory environments create the opportunity to meet some unmet customer need. The challenge then is building the capabilities to exploit the opportunity. Research suggests that new growth platform innovation is very different to traditional product or service innovation, and has a much deeper strategic importance.25 Google is illustrative of building new growth platforms as the basis for growth strategy:

Reality Check: Googling growth

While 2008 sees concerns that advertising revenues may be soft and there are doubts how Google will fare in an economic downturn, it is a long time since anyone saw Google as just a search engine. Because of the information it collects about consumer and business behaviour in search, and its dominant position, Google search has provided the platform to develop a series of new businesses in different markets and facing different competitors: Added-value services – attracting users involved the development of services like e-mail and Google Map.

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Advertising – search knowledge provides the basis for targeting advertising communications, which may yet be linked to social networking behaviour as well. Social networking – OpenSocial is an alliance of 50 competitors to Facebook, aiming to develop universally compatible applications and open up social websites to targeted ‘ social advertising ’ . Mobile phones – Google has established the Open Handset Alliance to reshape the mobile phone business by offering a free Linux-based mobile phone operating system, Android. Google wants every phone to be a Google phone, with Google’s mobile operating system on as many different handsets as possible. Android is an open-source operating system, open to software developers to build applications. Google is also bidding for wireless spectrum in the USA, and may operate its own mobile network. Online software services – in direct competition with Microsoft, Google is offering applications software online for business users. Healthcare – in 2008 Google announced plans for a digital health records system to give users more control over their personal healthcare, with the Google database at the centre of a broader health information system. This platform may provide the foundation for a more automated health information service. This move is part of spreading confrontation with Microsoft’s personal health records system. Cloud computing – Google plans for its globe-spanning data centres to form a network – a ‘ cloud’ – capable of answering search queries instantly, but much more in terms of areas like scientific research and completely new businesses that go beyond search, media and advertising.

Each new business is linked to the search platform, but each has the potential for developing into a new growth platform creating a new cluster of businesses around new opportunities.

Sources: Richard Waters, ‘Google’s Buried Treasure’, Financial Times, July 23 2003, p. 11. Kevin Allison and Richard Waters, ‘Key to It All’, Financial Times, September 24 2007, p. 11. Kevin J. Delaney and Vauhini Vara, ‘ Google Aims to be the World’s Data Organizer ’, Wall Street Journal , November 27 2007, p. 6. Stephen Baker, ‘Google and the Wisdom of Clouds ’ , BusinessWeek , December 24 2007, pp. 49–55.

Adjacency and hidden assets for growth • • • In some cases, the search for growth opportunities may be stimulated by the fact that the existing core business has reached its potential, and what is needed is a new core business. One estimate is that two-thirds of companies will have to redeﬁ ne their core business over the next

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decade because of forces ranging from globalization to the impact of the Internet.26 Research suggests that veering dramatically away from the existing core – for example, through a new acquisition in a booming market – may be less attractive than looking for change closer to home. Opportunities may exist, for example, in: undervalued business platforms , such as undeveloped adjacencies; untapped insights into customers , such as unrecognized segments; or underexploited capabilities , or hidden assets in the business.27

Reality Check: Brand revolution at P&G

P &G has a highly successful range of tooth-whitening products – recently adding Crest Whitestrips Plus Tartar Protection to its extensive range. When the range was launched in 2001, it created a new personal care category. The initiative was based around adhesive film technology from its R&D laboratories but also bleaching expertise from its household care business.

Source: Adapted from A. G. Lafley and Ram Charan, The Game-Changer , New York: Crown Business, 2008.

Adjacencies are unexploited customer segments, geographical markets or services. Nike successfully took its sports shoes from sport to sport, and into new product areas like golﬁ ng clothes, balls and equipment, and left Reebok behind as a result. 28 Success in adjacency moves is not automatic, however. Ford bought garage services company Kwik- Fit as part of a strategy of spreading into lucrative add-on automotive services. The adjacency was an illusion. Ford paid £1 billion for Kwik- Fit, and three years later sold it to venture capitalists for £330 million. Ford claimed to have learned a lot from the experience.29 Hidden assets in the business are strengths which are lying dormant. Hidden assets include: customer relationships – your reputation for expertise, your high level of interaction with customers; strategic ‘ real estate ’ – your strong market position, your place in the value chain; networks – your installed user base, user communities, links with suppliers; information – your proprietary technical know-how, software systems valuable outside your company. Exploiting hidden assets has several advantages: they are likely to generate more growth than product extensions, but with less risk than new products or new markets; they reinforce the core business, rather than cannibalize it; and, rivals cannot easily imitate them.30

The growth gamble • • • Going for growth usually involves risks. Research by Campbell and Park takes the view that, in fact, low growth is the norm not the exception,

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and in all the cases they examined managers were investing in too many projects, most of which had little chance of success. Most of the successes they found were the result of careful strategic choices, rather than multiple experiments or portfolios of initiatives. They believe that, in some circumstances, we need to have the confi dence to face down unrealistic expectations for above-average growth. At the very least, they say that we should carefully evaluate: (1) the value advantage – do we have a signifi cant advantage or disadvantage in offering superior value to this new market; (2) the profi t pool – is the profi t pool in this new market attractive or unattractive; (3) leadership/sponsorship – do we have strong leaders for the new project and sponsors in the parent company that give us an advantage; (4) existing businesses – is the impact of the new business on the existing business positive or negative? These authors counsel considerable caution before launching another venture in pursuit of elusive and possibly illusory growth.31

Reinvention and renewal But the demand is more than just revenue growth. The underlying challenge may be more about redesigning the underlying business model to reinvent the way a business operates. The problem you may face is that because business leaders crave certainty and investors prefer steady and predictable performance, companies try hard to stick to proven ways of doing things. In this way, companies become tied to business models that used to work and things that used to be true. But in the outside world, customers change – they want new and different products and services and they want them delivered in new and different ways.32

Reality Check: Dell’s new strategic thinking

For two decades Dell’s direct selling model in the personal computer business was seen as unbeatable. However, in the mid-2000s Dell’s sales and profits slipped as a result of changes in customer buying habits and the competitive landscape. CEO Michael Dell acknowledges that the company developed tunnel-vision around its sales model, which for 20 years had relied on direct sales of customized computers over the telephone and Internet. The direct model was close to a religion at Dell – it allowed the company to ship custom-built machines while avoiding holding costly inventory. The very flexibility of the direct model contributed to Dell’s problems. Dell made profits by convincing customers to upgrade from

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basic models by buying additional memory and processing power. But this strategy unravelled as customers began to place more emphasis on price over performance. The move to lower prices meant that Dell was putting features into its products that customers did not value enough to pay for. Dell has moved from the direct model to a multi-channel sales model using retail stores and selling to third parties designing computer systems for companies. But sales to retail outlets and channel partners are less profitable, pushing Dell towards $3 billion in cost cuts to support its new strategy.

Source: Adapted from Kevin Allison, ‘Analysts Assess Dell’s New Strategic Thinking’, Financial Times , April 7 2008, p. 26.

Lawler and Worley, in Built to Change , point out that even as senior managers congratulate themselves on getting a grip on the business in uncertain times, they may be creating bigger problems for the future:

Organizations are encouraged to institutionalize best practices, freeze them into place, focus on execution, stick to their knit- ting, increase predictability and get processes under control . . . These ideas establish stability as the key to performance. As a result, organizations are built to support enduring values, stable strategies and bureaucratic structures, not to change. 33

Market leaders, in particular, who have past successes to keep them warm, may be particularly resistant to changing the way they do business. Making the case for change may encounter attitudes like these: arrogance – the implicit (sometimes explicit) belief it is impossible to do things better than we already do; ignorance – although accepting that others might be able to do things better, we are doing as well as we possibly can and don’t know how to improve; denial – defensiveness and avoiding discussion of the need for change in how we do things.34 Accordingly, organizations struggle to change their business models. A lack of change creates a legacy business – a sitting target for fast- moving new competitors, because you have failed to adapt to changing conditions. Lawler and Worley add: ‘Organizational change is difﬁ cult because management systems are designed, and people are rewarded, for stability . . . creating a stable organization to perform in a complex, and rapidly changing environment is following a recipe for failure. ’ The need is for experimentation, learning and, when necessary, reinvention of the business model. 35 Strategic thinking addresses the need for reinvention and renewal of the business model, but this may require getting past major organizational pressures favouring the status quo and ﬁ nding ways to make discussion of fundamental change legitimate in the company.

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The limitations of imitation Faced with the need for strategic change, one temptation is to look carefully at what others are doing in the market, and do something pretty similar (though hopefully better and different in some important ways).

Playing catch-up • • • However, failing to achieve a leadership position leaves companies in the weak situation of continually playing ‘catch-up ’ to try to claw back business, usually by close imitation of those who have innovated. This is the relatively weak situation in which Microsoft ﬁ nds itself at present. It is possible to achieve success as the ‘ second mover ’ in a market (see below), but then you have to have something better than the ﬁ rst mover to achieve an advantage.

Reality Check: Microsoft and playing catch-up

Google and Apple combined are now worth about the same as Microsoft in market capitalization, and they each dominate a new area that was open to Microsoft. Google pioneered online paid search and Apple made a profitable business out of digital music. Microsoft is now left trying to break into markets that were created by others rather than pioneering its own. Xbox was built to challenge Sony’s already powerful PlayStation. Microsoft’s new Internet search product was built to try to win business from Google. The Microsoft Zune music player is a late attempt to break Apple’s hold on the digital music market with the iPod. New online software products are an attempt to equal Google’s offering. The failed attempt to take over Yahoo! was driven by the goal of catching up with Google in online search. Microsoft underlines ‘imitation’s limitations’, and will have to lead a new business opportunity from the front to impress investors.

Source: Adapted from ‘Imitation’s Limitations’, Financial Times, July 18 2007, p. 14.

Benchmarking • • • Operations management, in particular, has driven almost universal adoption of benchmarking – comparing ourselves to others on the key metrics we believe to underpin performance in our industry. To monitor productivity in operations this is useful. Where it goes wrong is when companies measure themselves against their competitors instead

•• 184 Strategic thinking and thinking strategically of having a strategy. There is the potential for a vicious circle of competitive benchmarking, followed by imitation and pursuit of the leaders on the benchmark in question.36 Competitive differentiation and innovative strategy that breaks free from the rest in the value offered and the competitive advantage achieved is unlikely to be built simply by imitating rivals on operational metrics. The strategic goal is difference versus the rest not using benchmarks to become identical to competitors. Interestingly, lean production theorists criticize Toyota for falling productivity against operations benchmarks and rate it lowest of all the major car producers – they are piqued because most of lean production theory equates with ‘copy Toyota’ . Notwithstanding the disap- proval of benchmarkers, the same decade of ‘decline ’ has seen Toyota make solid proﬁ ts, unusual in the automotive sector, while challenging General Motors for the number one position in the global auto industry. Operations benchmarks may mislead when we consider bigger issues of strategy.

Intellectual leadership • • • Increasingly, competitive strength lies in new ideas not simply new products and routes to market. Imitating competitors’ strategies is unlikely to develop the radical new ideas that can change industries. Leadership may be about more than simply market share (by defi nition just a benchmark of our sales compared to competitors in the existing market). It may be about new types of market power other than that achieved by size and volume. An interesting distinction coming out of international relations research is the distinction between ‘ hot power ’ and ‘ cool power ’ . For example, when Rockefeller ran Standard Oil he destroyed the competition by underpricing them until they failed, and getting the rail- roads to refuse to carry their products. This traditional kind of power is ‘ hot power ’. In today’s economy, a big idea is worth more than a big market share. Hot power is becoming increasingly irrelevant. In an information economy, start-up costs and fi xed costs are so low, new competitors can spring up wherever there is an opportunity. Online banks, retailers and service providers like brokerages have taken huge amounts of business away from established players. In online media, the formerly dominant owners of TV, radio, music and publishing are trying to understand what advantage they have left – their vast infrastructure of transmitters and printing presses matters less every day as online media develop. This is ‘ cool power’ . Cool power beats hot power – Apple has always had a small market share in computers, never enjoying market power, a big distribution network, or huge factories, but Steve Jobs had the iPod idea that has transformed the online music business, and undermined most traditional music companies (and the iPod was not even a new kind of product, just a better-conceived, better-designed version of an existing product).37 Leadership in ideas and infl uence in a market or

185 •• Market-Led Strategic Change

industry – intellectual leadership – may be one of the most potent strategic weapons that frees our thinking from an obsession with market share. The Roman politician Cato once noted: ‘ When Cicero spoke, people marvelled. When Caesar spoke, people marched. ’ 38 Real leadership in an industry or market may be about the ability to inﬂ uence and to build a platform, rather than traditional types of market power. Consider, for example, the impact of the Toyota Prius in giving Toyota intellectual leadership in the race for cleaner motor vehicles, which has now translated into market leadership in this rapidly growing part of the automobile industry.

Reality Check: The Toyota Prius

Toyota has never been a radical innovator in products – much more of a copier and improver – but the exception is the Prius. The Prius is generally perceived as the lead innovation in hybrid, petrol-electric vehicles with the lower fuel use and emissions demanded by environmentalists. In fact, the Prius is far from being the ‘ greenest ’ car around – vehicles like the VW Polo have that distinction. It was not the first hybrid vehicle to reach the market – Honda got there first. It has not been a massive seller – reaching global sales of the first million Prius cars took Toyota ten years. Toyota had previously no great environmental record and the bulk of its sales are conventional vehicles, including a fair share of ‘ gas guzzlers ’ like the Tundra. Buying and running a Prius is estimated to cost around $ 5000 more over five years, compared to buying a standard petrol-driven car. In spite of its fuel-efficiency, buying a Prius was about political correctness not saving money. Early high-profile users were Hollywood celebrities, keen to show how they were saving the world. The Prius has become a symbol of environmental awareness – visible evidence of a driver’s green commitment. Toyota claims about a 90% market share for hybrids, although hybrids account for only a tiny sliver of the car market – about half a per cent of the 66 million passenger vehicles sold annually. The Prius provides Toyota with a strong platform for further developments in more environmentally friendly cars, such as the plug-in electric car, and the Toyota RiN ‘healthy living ’ concept car was on display in 2007. Although it was neither the first nor technically the best in bringing hybrid technology to the market, Toyota is widely perceived as the leader in hybrid technology and what follows.

Sources: Bernard Simon and Michiyo Nakamoto, ‘Toyota Puts On the Pressure in Hybrid Car Race’, Financial Times, July 26 2007, p. 21. Ray Hutton, ‘Toyota Takes the Green Road to Be World No. 1 ’, Sunday Times , September 2 2007, p. 3-5. John Reed, ‘Health Drive Moves into Higher Gear ’ , Financial Times , November 27 2007, p. 29.

•• 186 Strategic thinking and thinking strategically

Radical innovation Another of the themes we introduced in Chapter 1 was the imperative of innovation – not incremental change to products and services, but deep- seated change in the way we approach the market, and a deep focus on customer value – everything else is just variation on a theme.39 It is estimated that minor innovations make up 85–90% of most companies ’ development portfolios, but rarely generate the growth that companies seek – at a time when companies should be taking bigger, but smarter, risks, their bias is in the other direction. 40 The failure to innovate has been tracked to: (1) paying too much attention to the company’s currently most profi table customers; (2) creating products and services that do not do the jobs customers want done; and (3) the misguided application of fi nancial analysis as an accomplice in the conspiracy against innovation.41 In fact, authors like Daniel Pink argue that the very basis of value creation is shifting from the disciplines of logic, science and linear thinking to the intuitive, non-linear processes of creativity and imagination.42 Terms like the ‘ imagination economy ’ describe the move from technology and services to create value to creativity and imagination. 43 The focus is on innovation so radical it may even frighten customers – a major concern at companies like Samsung and LG, worried that the growing sophistication of their products will put off buyers. 44 True innovation is geared towards customer value, but goes beyond new products to companies completely rewiring themselves. Leading innovators are changing their industries not just their products. For example, according to BusinessWeek ’s ranking, the fi ve most innovative companies in the world in 2007 were:

1 . Apple – the master of product and store design, driving business from the music industry to mobile phones. 2 . Google – has lifted search advertising to where it is now, with a famously chaotic innovation process that has led it into everything from radio ads to online offi ce software. 3 . Toyota – dominance in hybrids could lead to the fi rst plug-in electric car, with a continuous improvement process which is copied worldwide. 4 . General Electric – CEO Jeffrey Immelt’s push for ‘imagination breakthroughs ’ , or growth opportunities worth $ 50–100 million are leading GE into emerging markets and green technology. 5 . Microsoft – to some more a fast follower than a leading innovator, but with a massive R & D budget to enhance Windows and Offi ce.45

These companies are managing deep-seated change, not just in products but in their business models. Consider the following aspects of radical change: disruptive innovation – innovation that changes the way an industry operates; cannibalization – the resulting forces that drive successful companies to compete with themselves; value innovation – the companies that pioneer change; big ideas – nurturing the big ideas that will change an

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industry; and innovation networks – the shift in managing innovation to open business models and cross-boundary collaboration.

Disruptive innovation • • • The failure of many major organizations to innovate and change is in some important ways explained not because managers are complacent or necessarily stupid, but because they do what the textbooks tell them to do. Clayton Christensen describes what he calls the ‘ innovator’s dilemma ’ .46 He was puzzled why seemingly smart companies so often get it wrong. Why, he asked, when the computer market moved from mainframes to mini-computers was IBM left behind, and then when the market moved again from mini-computers to personal computers, were the makers of mini-computers (Digital, Wang, Nixdorf, and the rest) left behind in their turn? Could it be that these companies were too stupid and too blinkered to see how the market was changing? Or was there something else at work? Christensen argues that the PC is an example of a ‘ disruptive technology ’ . Generally, new technologies tend to do things better from the customer’s viewpoint – these are ‘ sustaining technologies’ because they allow us to sell similar things to current customers, but better, cheaper and faster. But, the distinguishing characteristic of the disruptive technology is that it does the job worse than the existing technology – but it is cheaper. However, as disruptive technologies improve over time, and get to do the job adequately, then their lower prices drive the existing technology out of the market. Disruptive technologies are fundamentally different to conventional or ‘ sustaining technology ’ .

Reality Check: Disruptive technology in the excavator market

Until the 1920s, the established technology for excavators was the steam shovel. This was followed by the machines powered by the internal combustion engine, which did the job better, and was a sustaining technology. Most large steam shovel excavator manufacturers made the transition successfully. In 1947, J C Bamford developed the hydraulic shovel, or backhoe. This did a poor job – it could only handle small bucketfuls of earth, far smaller than was demanded by the big contractors in mining and sewage construction. The JCB was, however, cheap, because it worked off the back of a tractor. Initially its market was restricted to digging narrow trenches in the street. As its technology became more robust, backhoes attacked the main excavator market. Few of the traditional manufacturers survived.

Source: Adapted from Clayton M. Christensen, The Innovator’s Dilemma , Boston, MA: Harvard Business School Press, 1997.

•• 188 Strategic thinking and thinking strategically

Established manufacturers are bad at coping with these breakthroughs because they are so good at serving their customers. These companies knew about the innovations in question, the reason they did not adopt them was that their customers did not want them. The new technology appeals to less sophisticated, lower margin customers. The product is not as good as what went before. It is not what our (currently) most profi table customers want. In other words, sticking to tried-and-tested strategies with our major customers may blind us to changing market needs and competitors with new technologies. The risk we face is that established fi rms, excel- ling in the core competences that keep their biggest customers happy, fail to see the threat of disruptive innovation in time because their customers do not see it, need it, want it, or ask for it.47 It gets worse too – while the disruptive innovation undermines some business models, it may at the same time be a sustaining technology for others. The Internet, for example, disrupted Compaq’s distributor-based approach to computer marketing, but was an important sustaining technology for the direct marketers Dell and Gateway – the Web allows them to serve customers in the same way they always did, but faster and cheaper. Christensen also tells us that few established fi rms succeed in adapting to disruptive innovation. The best hope is to create an independent business with a completely new business model designed to attack the competition, including its parent company. It also has to ignore the wishes of existing major customers – he calls this ‘agnostic marketing’ , or the ‘ innovator’s solution ’ .48 But, of course, this throws up the awful spectre of competing with ourselves – cannibalization – which is anathema to the conventional marketer.

Cannibalization49 • • • One of the strongest traditional arguments against radical innovation is that we simply compete with ourselves – we cannibalize our own sales to our existing customer base. Executives often believe that it is unproductive for a company to compete with its own products and services, rather than targeting those of competitors – it risks under- exploiting existing investments for no gain in sales (or probably profits). However, the idea of ‘ proactive cannibalization ’ has taken grip of many strategists’ minds. At its simplest the logic is compelling – someone is going to compete with you and attack the sales of your products and services, so you might as well do it yourself and retain the customer. More elegantly expressed:

What causes some ﬁ rms to be radically innovative over long periods of time, whereas many others ossify and perish? We suggest that the answer lies in the extent to which ﬁ rms are prepared to give up the old and embrace the new. Firms must break out of the natural human trait that propels them to use yesterday’s bag of tools to solve tomorrow’s problems.

189 •• Market-Led Strategic Change

They must do so today, while they still have options, not tomorrow, when they will have nothing left but a useless bag of tools. They must be willing to cannibalize before there is nothing left of value to cannibalize. 50

These researchers conclude that, although it is counter-intuitive for many managers and organizations, willingness to cannibalize is one of the most powerful drivers of radical product innovation.51 Of course, in some cases you may have little alternative anyway, but even then you have to be careful.

Reality Check: British Airways’ ‘ Go ’

Faced with the invasion of the British and European internal flight market by ‘no frills ’, low price operators like easyJet and Ryanair, BA needed to respond to stop the decline in market share. Having looked at buying their new competitors or putting them out of business (the full extent of BA’s competitive strategy repertoire from time imme- morial), and being prevented by the European regulators from doing either, BA’s response was to establish its own ‘ no frills ’ airline – Go. However, from the start Go was priced substantially higher than the ‘no frills’ operators, but offered less service and convenience than BA’s regular flights. Predictably, the major effect of Go was to cannibalize sales of BA flights, with little impact on the ‘no frills ’ operators, who continued to expand. By 2001, BA was ready to sell Go (for much less than the original asking price). Go was sold to venture capitalists 3i for £110 million, who promptly resold the business to easyJet, the rival low-cost airline. The end-result seems to be the conclusion that a conventional full-cost airline lacks the will or the ability to operate a ‘no frills’ operation, and BA has simply established a stronger competitor for itself. It appears to be a case of the biter being bit. A similar result was achieved by Buzz, launched by KLM as its low-cost brand, which was bought by Ryanair in 2003 for £15 million.

Sources: Dominic O’Connell, ‘Cassani Throws a Book at Men Who Failed Go ’ , Sunday Times, October 26 2003, p. 3-11. Kevin Done, ‘Ryanair Swoops to Land Buzz in £15 Million Deal ’ , Financial Times , February 1/2 2003, p. 1.

Defensive cannibalization – or at least cannibalization resulting from defensive strategies – is different to proactive cannibalization, when the price of innovation is to compete with your own products. For example, Intel’s continuous improvement of computer chips and Gillette’s continuing introduction of improved shaving technology show proactive cannibalization that has positive beneﬁ ts.

•• 190 Strategic thinking and thinking strategically

Value innovation • • • Broad-based innovation is increasingly critical – extending far beyond new products and services to include ideas, processes, business practices and designs52 – and is not just concerned with marketing’s traditional preoccupation with new product development, and minor brand extensions. Gary Hamel is critical, for example, of the type of product- led, incremental change led by marketing departments in the past – his challenge is that we should be creating radical new products, concepts and business models or face the alternative of ‘crash and burn ’ – he says, ‘ Radical, non-linear innovation is the only way to escape the ruthless hyper-competition that has been hammering down margins in industry after industry’ .53 For example, in one major research programme, the study of 100 major new business launches found that 86% were ‘ me-too ’ launches, or incremental improvements, but these generated only 62% of launch revenues and 39% of profi ts. By contrast, the other 14% of launches – those radical enough to create or re-create markets – generated 38% of revenues and a massive 61% of profi ts. 54 Quite simply, the reality is that as products tend to converge and become more similar, it is no longer possible to beat the competition by making incremental improvements and changes, because they will be instantly copied, and in modern markets you quickly reach the point of diminishing returns.55 An important insight comes from the work of W. Chan Kim and Renée Mauborgne at INSEAD. Their observation is that between 1975 and 1995, 60% of the Fortune 500 companies disappeared. The reason was that in industry after industry companies building innovative businesses raced ahead by replacing established fi rms who were focused on improving existing businesses. Their research suggests that the really high-performing companies in every sector are those who achieve ‘value innovation ’ – they do not just imitate competitors, or invest for competitiveness against established rivals, they innovate in new value for customers. They suggest that one useful exercise is to assess our portfolios of products and service on their ‘Pioneer– Migrator–Settler ’ map, because innovation linked to value determines our real growth prospects (see Figure 5.3 ). Their categories are:

● Settlers – these offer ‘ me-too ’ value, based on equalling what their competitors do, usually in the same way that they do it, but often cheaper; ● Migrators – these offer conventional value improvements over competitors, e.g., in product function improvements or design; and ● Pioneers – these are the businesses that represent real value innovations, e.g., the Sony Walkman, the Dyson bag-less, cyclone carpet cleaner, the Swatch watch, and so on.

A portfolio that is heavy with Settlers leads to a company’s decline. One dominated by Migrators offers some growth potential, but is vulnerable to the strength of a value innovator. The issue is whether we

191 •• Market-Led Strategic Change

Pioneers: High-growth value innovate trajectory

Migrators: improve value Figure 5.3 The Pioneer–Migrator– Settler map Source: Adapted from Settlers: W. Chan Kim and Renée me-too Mauborgne, ‘ Value businesses Innovation: The Strategic Logic of High Growth ’ , Current Planned Harvard Business Review, portfolio portfolio January/February 1997, pp. 102–113

are gearing our planning towards Pioneers, or merely settling for the status quo . The challenge is to continuously shift the portfolio away from Settlers. This may produce very different conclusions to those based on just looking at current numbers like market share, sales revenue, customer satisfaction and proﬁ tability – because these numbers all represent the past not the future.56

Big ideas • • • In many ways the heart of radical innovation is the search for ‘big ideas’ , rather than settling for ‘ small ideas ’ . To stay relevant and to succeed, companies need bold innovative strategies. But this relies on the ability to create and resource ‘big ideas ’, and to overcome inertia, narrow- mindedness and risk aversion that provide barriers to true innovation – ‘ big think strategy’ .57 For example, 2007 saw the launch of the iPhone by Apple – the cutest mobile phone in the world, albeit based on out-of-date technology – with mixed sales results. On the face of things, hardly a ‘big idea’ – you might ask whether the world actually needs another mobile phone, but it is an obvious extension of the iPod and iTunes music business, and there is the prospect of competing against the Blackberry in the business market. In fact, as the underlying iPhone strategy unfolds, it starts to look like a very big idea indeed. By allowing software manufacturers to create programs custom-built for the iPhone – freed by the iPhone’s breakthrough touch screen from the constraints of ﬁ xed buttons and small screens – the goal is to allow the iPhone to develop into the ‘ third great platform ’ for software makers, after the personal computer and the Internet. It may not work, but it is certainly a ‘ big idea ’ .58 After a history of missing out on some of the ‘ big ideas ’ when they arrived, IBM is putting some of its brightest and best talent behind new ventures that break free of the existing business.

•• 192 Strategic thinking and thinking strategically

Reality Check: Nurturing the next big idea

The fear in companies like IBM of missing out on new technologies and new opportunities, as the company has in the past, has changed the way it identifies and pursues promising new ideas. Because new ideas fall between organizational boundaries and sometimes conflict with existing business units, they are managed differently. ‘Horizon Three’ businesses, as opposed to Horizon One businesses (mature businesses like mainframe computers) or Horizon Two businesses (current growth businesses), are protected from the rest of the organization. They are put in separate organizational units with dedicated teams, providing visibility and management sponsorship. The young Horizon Three business units are insulated from traditional management methods and performance yardsticks – efficiency measures can squeeze the life out of a promising new idea. There is a clear understanding that Horizon Three businesses benefit from personal sponsorship by senior managers, to prevent middle managers using their power to block new developments, that might not fit their personal agendas.

Source: Adapted from Richard Waters, ‘Never Forget to Nurture the Next Big Idea’, Financial Times , May 15 2001.

Growing emphasis is being placed on developing an ‘ ideas culture ’ in companies.59 However, in IBM as in many other companies, the search for big ideas as the basis for radical innovation increasingly relies on collaboration with others and open-source approaches, rather than relying on in-house development.

Innovation networks • • • The growing importance of collaboration and cooperation in innovation is underlined by Lynda Gratton’s research into ‘ hot spots ’ of 60 energy and innovation in companies. Her research sees ‘ hot spots’ as points where people work together in exceptionally creative and collaborative ways. For ‘hot spots’ to emerge, they need: (1) a cooperative mind-set, (2) an ability to span boundaries, and (3) a successful igniting of purpose – followed by making productive capacity available to create real value. The old, protective barriers set up by businesses around themselves are increasingly a barrier to the new open business models that underpin radical innovation.61 Insight into new forms of collaboration and open-source innovation comes from Don Tapscott’s Wikinomics . 62 A ‘ wiki ’ is a piece of software that allows thousands of people to edit the same website. Tapscott’s view is that if people from all over the world can get together to create an encyclopaedia – Wikipedia – there are no limits to what they can create.

193 •• Market-Led Strategic Change

Wikinomics brings people together on the Web to create a giant new brain. Companies are exploiting this in the form of ‘ crowd-sourcing ’ . When Procter & Gamble needed a new chemical to remove red wine stains from clothing, instead of turning to their own R& D department, they created a website called InnoCentive, where anyone could come up with a solution and be paid. The logic is that 1.5 million people on the Web are more likely to come up with the solution than 9000 chem- ists in the company. Many companies have realized that going ‘ open source’ or collaborating and sharing ideas means many innovations can be created and developed outside the company. At Procter & Gamble, in a massive turnaround of a business that had stalled, under A. G. Laﬂ ey the company has abandoned its reliance on in-house R &D. The classic corporate drive to research and develop was replaced by a ‘ connect and develop ’ strategy of working with outside partners. By 2007, 35% of P & G’s new products came from outside the company. Under Mr Laﬂ ey, P & G’s performance has seen a step-change improvement, and rival Unilever has been left behind. This is an ‘ era of open innovation’ .63 Worldwide innovation networks are increasingly central to maintaining and enhancing competitiveness. This may involve a worldwide research and development organization. Microsoft is tapping into a new talent pool with its advanced technology centre outside Beijing. IBM has major labs in China, Israel, Switzerland, Japan and India. For smaller companies, global innovation networks involve loose structures of in-house engineers, contract designers and manufacturers, university scientists and technology suppliers brought together around a single project. At a time when technology crosses borders faster than ever – because of the Internet, cheap telecoms and advances in interactive design software – the location of R& D matters less than who controls the networks.64 It is likely that radical innovation will lie at the heart of strategic thinking in many companies. As we noted earlier, the most important innovations may be in how we change the ways in which we work, organize and manage65 – the issue is not just a new product, but a new business model.

Timing and speed One of the most topical questions in strategic thinking concerns business agility and the capability in an organization to move quicker than competitors in responding to change, defending against attack and taking a new strategic position. However, having the capacity to move fast does not necessarily mean that this is the right thing to do in every situation.

Business agility • • • We saw in Chapter 1 that growing emphasis is being placed on the value of strategic agility – developing nimble, ﬂ exible and fast

•• 194 Strategic thinking and thinking strategically reactions based on enhanced strategic sensitivity to change, managers committing to making fast decisions, and fl uidity in resources in the organization. This is the basis for ‘ fast strategy ’ .66 Donald Sull defi nes agility as ‘a company’s ability consistently to identify and seize opportunities more quickly and effectively than rivals ’ , drawing on four qualities: (1) making sense of the outside world to spot opportunities as they emerge; (2) making the right choices from the opportunities that present themselves; (3) making things happen quickly; and (4) making mid-course corrections as new information becomes available. 67 Sull argues that agility and fl exibility allow a company to respond to change when the change is experienced rather than devising detailed plans.68 Much of our thinking about organizational structure and process is driven by the need to become leaner and faster, relying more on collaborative strategic relationships and fl atter structures to replace the slow-moving hierarchies of the past. We will look at this area in more detail in Chapter 11.

Fast strategy, or not so much • • • Part of the innovation imperative discussed earlier is speed. Richard Branson explains: ‘ A good idea for a new business tends not to occur in isolation, and often the window of opportunity is very small. So speed is of the essence’ .69 In many companies the time to bring new products to market has halved in the last few years: at Nissan, the development time for new cars used to be 21 months, now it is 10½ months; Nokia and Motorola used to take 12–18 months to develop new mobile phone models, now it is 6–9 months; H& M can get fashion clothes from sketch pad to the racks in its stores in just three weeks; Samsung partnered with XM Satellite Radio to bring the ﬁ rst portable satellite radio combined with music player to store shelves in 9 months from the partners shaking hands on the deal. At the other end, it also follows that fast innovators like Virgin and Google are also fast to get out when things underperform.70 However, there is actually a danger that we invest in opportunities too quickly, particularly if we see a ‘ quick win ’ in prospect. Managers are constantly pressured to deliver ‘ quick wins ’ – how else do we ward off low morale, build momentum, calm down the City analysts, defend against aggressive investors?71 The systems modeller Russell Ackoff notes the dilemma with fast moves for quick returns: ‘The only problems that have simple solutions are simple problems . . . Complex problems do not have simple solutions ’ .72 Worse, there is a long history of cash-rich companies leaping into strange investments – it is more than thirty years since Gulf Oil tried to buy the Ringling Brothers Circus, in an interesting move from hydrocarbons to lion-taming, but the temptation for leaps into the dark remains. Cash-rich companies tend to rush to invest in new markets when it might be more sensible to hang back. Perversely, of course, net free cash may encourage management to ﬁ ght wars of

195 •• Market-Led Strategic Change

attrition – long-term struggles where the huge costs are justiﬁ ed by the prospect of a winner-takes-all outcome. In the 1990s, Microsoft won a war of attrition against Netscape for control of the Internet browser market, only to face competition from Firefox – a browser developed by the open-source software community. Sometimes the winner does not take all.73

First mover advantage, or maybe not • • • Conventional strategic wisdom suggests that fi rst-mover advantage means that the innovator – the fi rst product to enter the market – will have an enduring strength over rivals. Initially, there is no competition in the market, and by the time competitors arrive the fi rst mover will have secured a strong, defensible position in the market, which is diffi cult for them to beat. Of course, this only works if the fi rst mover also invests heavily in the technology and infrastructure to support the market position – moving fi rst is not a strategy in itself.74 The trouble is that as markets change in the turbulent and unpredictable ways we have described (Chapter 2), being the second mover or later has never looked so good. Being fi rst means picking up a lot of market development costs and overcoming a lot of barriers that the second mover can avoid, as well as becoming the target for new entrants to the market. For example:

● Lowe’s versus Home Depot – Home Depot in the USA more or less invented the home improvement superstore, and grew a big company on the back of the concept. The now departed CEO Robert Nardelli took the view in 2000 that Home Depot would do best to compete on price, cost and operational effi ciency. But this provided the space for Lowe’s to enter the market with brighter stores, wider aisles and more helpful salespeople, as the alternative to ‘ Big Bad Orange ’ (Home Depot), and a greater appeal to the growing number of female customers for home improvement products. Lowe’s edge came from observing the fi rst mover and competing differently. Lowe’s fi nancial performance has been outstanding, Home Depot’s less so. ● Advanced Micro Devices (AMD) – Intel was the pioneer of computer chips, achieving a dominant position as the desired standard by computer buyers – they looked for the ‘Intel Inside’ logo. Since 2006, when AMD ended Intel’s near-monopoly in server and PC chips, AMD has been eating into Intel’s market with superior products, in spite of the blood feud between the two companies and very aggressive tactics by Intel. Intel has recovered some of its market position through price-cutting and new product launches, but it has created a market that it now has to share with AMD and others.75

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Active waiting • • • In fact, in some situations strategy may be more about ‘active waiting ’ , rather than speed and trying to establish a ﬁ rst-mover advantage. Donald Sull argues, for example, that really attractive business opportunities are quite rare, and their timing is almost never under the control of an individual company, suggesting that we should be ready when the big opportunities emerge and protect resources during the long periods of business as usual. He ﬁ gures that successful businesses often falter because managers experienced in stable, familiar markets stumble when they enter less certain, volatile markets – and because they are seduced by the idea that they can gaze deeply into the future and create a long-term strategy that will produce sustainable advantage. Managers cannot create a golden opportunity just because the business is in decline or investors are demanding more growth. Active waiting involves anticipating, making preparations, ready to seize opportunities and deal with threats, when they arise.76 Making a reasoned decision on how quickly to move and the type of business model appropriate to deliver the speed required has become a key part of strategic thinking. The most obvious answers are not necessarily the most useful ones. The strategic issue is not just what to do but when and how quickly?

Crisis and failure We underlined the issue of surviving crises in Chapter 1 – as well as the unpredictability of many such traumas and the disastrous consequences they can bring. In fact there are several different crisis situations to include in our thinking: crises that arise from events or changes which are not of our causing (it’s not our fault); those that reﬂ ect problems in our company (it’s our fault); and those that reﬂ ect the failure of our strategies (it’s their fault). Of course, most people in the outside world don’t care whose fault it was – but it helps us get our mind around the impact of nasty surprises on the business.

It’s not our fault • • • One type of problem is the ‘ sniper crisis ’ . For example, consider the 1982 recall of Tylenol painkillers in the USA after seven people died after a lunatic spiked bottles of pills. This is an emergency for which the company is generally not to blame (even though it might have done more to prevent it). In fact, the makers of Tylenol gained much acclaim for their response to the crisis in withdrawing the product, making packages tamper-proof, and so on. Certainly you will be judged by your ability to cope with this kind of crisis. However, what is worrying is how this type of problem can quickly morph into the second kind of crisis. One spectator sport, of course, is looking at the excuses that managers come up with for why things went wrong, and it wasn’t their fault.

197 •• Market-Led Strategic Change

Reality Check: (Un)Imaginative excuses

The problem with making excuses is that people remember the excuses long after the problem has gone away – usually laughing at the perpetrator. Examples include: Sports Direct – profit warning issued the day after the England football team crashed out of the 2008 European football cham- pionships, because apparently sports shirts stopped selling (there may actually have been wider problems at the sportswear retailer). Blacks Leisure – apparently global warming explains their falling sales and margins. Retailers – blaming the weather for poor results has become an art form, e.g., M&S blaming poor sales on heavy rain in the summer 2007, though the rain apparently had no similar effect on Primark or New Look. In a single week in 2007 companies as diverse as Royal Bank of Scotland, British Airways and Trinity Mirror all blamed the poor weather for weak business results. But you seemingly cannot win. In winter 2008, John Lewis blamed their sales slump on the unseasonably warm weather. Likely candidates as standard excuses for the next couple of years: the weather; downturn in the housing market; the ‘ credit crunch ’ ; uncertainty about government change; certainty about government change; the weather.

Sources: Alistair Gray, ‘Come Rain or Shine, Excuses Offer a Degree of Light Relief’, Financial Times, December 22/23 2007, p. 18. Alistair Gray, ‘ John Lewis Blames Warm Spell for Sudden Slump in Weekly Sales’ , Financial Times , February 23 2008, p. 15.

It’s our fault • • • The second kind of crisis is more problematic, because the company is held responsible because of its carelessness, wrongdoing, or arrogance. Scandals at Enron, Arthur Andersen and Siemens are illustrative.77 Consider the position at Mattel. In 2007, Mattel, maker of Barbie dolls and Fisher-Price toys, had to withdraw thousands of products because some of the Chinese-made toys were decorated with lead paint. The recalls cost about $ 100 million. The company’s CEO and chairman, in a spectacular illustration of ‘ snatching defeat from the jaws of victory ’ , turned attention away from what Mattel was doing to make things better when he declared in the Wall Street Journal that the company had been right not to tell regulators about the hazardous toys – he ended up being hauled in front of a Senate committee for a public thrashing. He managed to deﬂ ect attention from Mattel being caught out by errors in supply chain arrangements, and focus it on Mattel’s

•• 198 Strategic thinking and thinking strategically

previous ﬁ nes for not reporting hazards quickly, and to have questions raised about whether large customers are putting excess pressure on suppliers to reduce costs and actually causing the crisis themselves. Old saying: ‘ when in a hole, stop digging ’ .

It’s their fault • • • Unexpected success of our competitors that displace the position we believed we had secured in a market can be nasty. For example, in 2008 US aircraft maker Boeing had to deal with the shock of the US Airforce’s unexpected decision to give European aircraft maker Airbus the $ 40 billion contract to replace its ageing fl eet of 500 Boeing tankers. The decision was certainly also a surprise to senior US politicians who were outraged at the Airforce decision to use a European supplier for a major defence contract. For Boeing, the outcome was unexpected, and was the most recent in a series of damaging setbacks. The loss of this contract is likely to raise questions about Boeing’s other military aircraft projects. They were not expecting this body blow to the business, but now have to fi nd a way to recover. The initial reaction was to formally contest the deal – faced with the prospect of abandoning its tanker business altogether, Boeing succeeded in persuading the US Government Accountability Offi ce that the Air Force was at fault and the deal should be renegotiated.78 A similar situation is faced by Toshiba in recovering from losing the next-generation DVD format wars with Sony. This was an especially bitter shock after ‘strategic partners’ like Microsoft, Wal-Mart and some of the Hollywood studios backed Toshiba and it looked like the Toshiba format would win hands down.

Reality Check: Format wars

The battle over the format for the next generation of DVD players was fought for five years between two rival groups: Sony led a group backing its Blu-ray technology, which it believes is the superior format; while Toshiba promoted its HD-DVD, which was cheaper and more affordable for consumers. Toshiba built support for its format among movie studios (for selling their movies) and among major retailers for selling the players and discs. In January 2008 Warner Brothers unexpectedly abandoned HD- DVD as a format for selling its movies, and a month later Wal-Mart announced it would no longer stock Toshiba’s HD-DVD discs or players and was going over exclusively to Sony’s Blu-ray, following similar moves by Target, Best Buy and Blockbuster. This was the tipping point in the format wars between Sony and Toshiba. The Warner decision, in particular, was a major shock to Toshiba. Toshiba’s CEO

199 •• Market-Led Strategic Change

was so angry with Warner executives at the resulting press conference, he lost his cool, big time. Late-February 2008 Toshiba announced its withdrawal from the high-definition DVD business. Losing the DVD business is a serious blow to Toshiba’s plans to expand its consumer electronics business, and its strategy of delivering interconnected digital electronics products with HD-DVD at the centre. Shortly afterwards, the company warned investors of a 31% fall in expected profits for the coming year. Toshiba may have underestimated Sony’s determination not to lose another format war – twenty years earlier Sony’s Betamax had lost out to VCR. Failure to secure an HD-DVD deal with Bollywood or in China may also have been a critical problem. Former Toshiba sup- porter Microsoft was quickly in talks with Sony about sharing Blu- ray and incorporating a Blu-ray player in the next generation of Xbox 360 games consoles.

Sources: Yukari Iwatani Kane, ‘Toshiba Regroups After Ceding Fight Over DVD Format’, Wall Street Journal, February 20 2008, p. 6. Mariko Sanchanta, ‘Sony Wins Next-Generation DVD Battle ’, Financial Times , February 20 2008, p. 28. Andrew Edgecliffe-Johnson and Maija Palmer, ‘ Betamax Memories Are Erased at Last as Blu-ray Triumphs’, Financial Times, February 20 2008, p. 28. Sarah McBride, ‘Blu-ray Lands a Major Ally ’ , Wall Street Journal , January 7 2008, p. 7.

Toshiba now has to shift its strategy to focus on televisions, personal computers and disc players to win back its place in the consumer living-room. Interestingly, Toshiba CEO Atsutoshi Nishida suggested ﬁ ve tips for overcoming a crisis of this kind: (1) keep in mind that business without risk is business without growth; (2) work with the facts and listen to the market, not your ego; (3) act quickly and decisively, delay makes things worse not better; (4) be a proactive leader and clearly communicate your decisions; and (5) be resilient and continue 79 to innovate, success is not forever, nor is failure.

Failure • • • The turbulence and disruption which are now commonplace in the markets we face had one very clear implication – we will fail more often than in the past, so the issue is how we prepare to survive the disaster. The existence of failure is one of the unmentionables in many businesses. But there is an interesting argument that actually most things fail. Paul Ormerod draws an analogy between biology and economics to point out that, on the one hand, 99.99% of all biological species that have ever existed are now extinct, and on the other that more than

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10% of all the companies in America disappear each year. 80 Ormerod follows the logic of Schumpeter’s ‘creative destruction’ (old ideas, technologies and skills are replaced by the new, which is what creates progress). He argues that adaptation is the key to survival and that the weak fall by the wayside – of the top 100 global companies in 1912, only 19 were still in the list by 1995, the rest having declined, been absorbed into other companies, or gone bankrupt. Companies fail because they do not adapt to their customers’ changing needs, or to new competitors. Brands fail because they do not evolve, or they evolve in the wrong way. There is a strong case that success is both relative and usually transitory – believing otherwise is to be deceived by the ‘halo effect’ surrounding management theories and heroes. 81 It is easy to mistake spectacular short-term success for long-term success. Cisco, the US Internet equipment maker, was fi rst hailed as an all-conquering colos- sus, then damned as an irresponsible shambles by the same people. ABB, the Swiss-Swedish engineering group, enjoyed incredibly positive media coverage and academic acclaim in the 1990s, for the story to change dramatically in a couple of years.82 Nothing lasts forever . . . Indeed, at P & G the company enjoys a success rate of 60% on innovations, but the CEO A. G. Lafl ey says that is as high as he wants it to go – any higher would be playing safe. Lafl ey says that the challenge is ‘ to encourage hope, discourage blind faith’ . P& G’s feminine care division actually has a ‘fail forward ’ award every year to recognize the failures from which the company has learned. 83 The nature of crisis and business failure underlines the search for business agility we noted in Chapter 1. One strategic challenge now is to sustain the slickness and speed of manoeuvre to spot trouble and get clear before it is too damaging. We will pursue this issue further in examining organizational change issues in Chapter 11. Part of our strategic thinking has to accommodate the temporary nature of success and the need to continually adapt. Those who stand still are simply waiting to have their businesses taken away from them.

Reality Check: Making mistakes

Q: What is the secret of your success? A: Two words. Q: What are they? A: Right decisions. Q: How do you make right decisions? A: One word. Q: What is that? A: Experience. Q: How do you get that experience? A: Two words. Q: What are they? A: Wrong decisions.

Source: Adapted from Stefan Stern, ‘U Turn If You Want to On the Road to a Bad Decision ’, Financial Times , October 16 2007, p. 16.

201 •• Market-Led Strategic Change

Why do we get caught unawares? • • • However, perhaps a bigger issue – regardless of whose fault it is – is how we let ourselves get taken unawares by emergencies, which are often not that unpredictable. A recent review of the literature of disaster suggests two major issues: (1) the nature of human cognition – we can imagine terrible things happening, but not soon, and not to us; and (2) the incentives to prepare for disaster are often very poor. 84 Nonetheless, examining ‘ worst case scenarios ’ is becoming a priority in many areas of decision making, as executives try to steer a path between wilful inaction (pretending things cannot go wrong) and reckless overreaction (avoiding situations where there are risks, or spending on protection against risks which are not very serious). People are susceptible to two opposite and unhelpful reactions to the risk of disaster – panic and utter neglect.85 Strategic thinking needs to recognize and evaluate the potential for crisis and failure and how to cope. The cost and type of potential ‘ damage control ’86 should factor into assessing the attractiveness of a strategic option.

Social legitimacy Another of the themes we introduced in Chapter 1 was concerned with social legitimacy and corporate social responsibility. Strategies developed for the future in today’s companies increasingly have to satisfy moral concerns as well as commercial goals. This has become a seriously big deal.

Ethical standards • • • In the past, ethics concerns in marketing and sales were focused on issues like misleading buyers and misrepresentation as a form of dishonesty, and the avoidance of such situations. However, the moral dimension of business has greatly expanded, and along with it the ethical issues surrounding strategic decisions. That broadening of interest has extended ethical dilemmas to: the way in which a company treats its employees and the demands it places upon them; standards in the way in which supplier relationships are conducted, and the dangers of treating some unfairly by favouring others; the requirements for fair and proper behaviour in the conduct of relationships with partners in strategic alliances and networks; relationships with competitors and whether they are managed with integrity; as well as concerns about customer relationships.87 Behaviour that is regarded as uncompetitive, in particular, can attract substantial penalties. In growing numbers of companies, formal ethics codes and processes require decision makers to show that they have displayed due diligence in evaluating the ethical dimension of their choices and decisions. Even without this formal requirement, smart managers are increasingly reluctant to risk actions that may be perceived as unethical

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and impact negatively on corporate reputation and the costs of doing business. Transgressions may not even bring direct penalties, but the long-term impact on costs and strategic freedom are unlikely to please shareholders or customers. Put it this way – few CEOs, in my experience, relish explaining unethical practices to their shareholders, the media and their customers, and are unlikely to thank you for providing them with the opportunity to do so. When the CEO says ‘ get your cards ’ , s/he is unlikely to be inviting you to a game of whist. Other stakeholders may be even less pleased.

Reality Check: Bad boys, bad boys, watcha going to do when they come for you?

BAE is Britain’s biggest defence contractor, and is one of the UK’s biggest employers – 34,000 of its 96,000 employees are in the UK. BAE has achieved outstanding success in the US market – which accounts for 54% of the global £580 billion spent on defence each year. BAE is the biggest foreign supplier to the Pentagon. In the UK, an aggressive company culture has caused frequent conflicts with the British government. The company has also been accused of private intelligence-gathering operations that secretly infiltrated anti- arms trade groups and other ‘dirty tricks ’ to stifle protesters. BAE’s stellar performance has been surrounded by a media- storm of criticism relating to accusations of corrupt business practices in overseas markets. Allegations include: Saudi Arabia – bribing Saudi officials for lucrative arms contracts: claims are that Prince Bandar was paid £1 billion over ten years by BAE under the £43 billion Al Yamamah deal to supply Tornedo fighter jets (which both parties deny); South Africa – claims of bribes for warplanes, leading to inflated prices; Tanzania – Tanzania’s top corruption investigator plans criminal charges relating to BAE’s sale of a £28 million radar system for air traffic control; the Serious Fraud Office is looking at off-shore payments through agents associated with the Czech Republic (a planes deal), Chile (another planes order) and Romania (refurbishment of two frigates); Australia – paying ‘hush money ’ to two Australian airlines to silence them about toxic fumes escaping into the cabins of BAe 146 jets. In December 2006, controversially the Serious Fraud Office dropped its investigation into BAE’s dealings in Saudi Arabia, although continuing to probe activities in six other countries. Then Prime Minister Tony Blair was accused by a senior judge of ‘holding a gun ’ to the prosecutor’s head, to get him to drop the probe into the Saudi arms deal for ‘security reasons’. In fact, there were government concerns that the corruption investigation would jeopardize the £4.43 billion deal to sell Typhoon fighter jets to Saudi Arabia, because Riyadh was not pleased with the threatened exposé. A judicial review

203 •• Market-Led Strategic Change

later castigated Blair and his officials for giving in to Saudi political pressures and abusing public trust by claiming national security as the reason for the action. Less susceptible to Saudi pressure than the British, in June 2007 the US authorities launched their own probe into the Saudi deal, and requested legal assistance from the UK (which was not forthcoming), this announcement taking 8% off BAE shares. Links between Downing Street aides and BAE, revealed in SFO investigations, have done little to repair the company’s relationships with the UK government. A major concern is that investigations into bribery corruptions by US authorities will harm relationships with the Pentagon, even if no action is taken against the company, and further acquisitions in the US may be blocked by the Department of Justice. In mid-2007 former Lord Chief Justice Lord Woolf was appointed to chair a BAE ethics committee to scrutinize how the company con- ducts arms deals with foreign governments. Late in 2007 CEO Mike Turner announced he would be leaving his job in 2008, five years earlier than planned. In 2008, in the wake of continuing negative publicity surrounding the company’s involvement in the SFO investigation into the Saudi arms deal, BAE planned a big advertising campaign in an attempt to ‘ reinvigorate’ its image with key stakeholders, with the theme ‘ Real Pride, Real Advantage ’ .

Sources: ‘Arms Firm Waged Dirty War on Protestors ’, Sunday Times , September 28 2003, p. 1-1. Karl West, ‘Lord Woolf to Chair BAE Ethics Group ’ , Daily Mail, June 12 2007, p. 63. Alex Brummer, ‘BAE Tightens Its Defences ’ , Daily Mail, October 17 2007, p. 73. Michael Peel, ‘Pressure on Ministers over BAE Probe’, Financial Times, December 7 2007, p. 4. Sylvia Pfeifer, ‘BAE Systems Launches Ad Blitz ’, Financial Times, January 31 2008, p. 18.

Corporate Social Responsibility (CSR) • • • We introduced the related issue of CSR in Chapter 1.88 The issue concerns the impact of business on societal issues as diverse as environmental concerns to employment conditions. At the very least, strategic thinking has to examine the social impacts of proposed strategies, and consider whether they are justifi ed. The reality is that factories and distribution networks almost unavoidably produce pollution of various kinds, and this becomes an issue which must be justifi ed by benefi ts offered and offsetting opportunities. A defensive perspective on CSR requires that we factor such issues into thinking about strategy. The risk is that our strategy fails because, for example, we cannot deal with the suppliers required, our customers will not accept the legitimacy of what we are doing, or competitors exploit our vulnerability in a ‘ holier than thou ’ stance. As we noted in Chapter 1, a proactive stance on CSR goes much further and looks for ways to combine societal goals with business goals

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in our business model. This is intellectually far more challenging but may constitute one of the most important opportunities for breakthrough strategies in new markets. Whole Foods is an extreme example, but makes the point.

Reality Check: The wholesome Whole Foods Market phenomenon

Whole Foods Market is a US food retailer with a value proposition to sell organic, natural and healthy products to consumers who are passionate about food and the environment. Social issues are central to what makes Whole Foods unique and able to charge premium prices. Sourcing emphasizes purchases from local food producers through each store’s procurement process – buyers screen out foods containing any one of 100 common ingredients the company considers unhealthy or environmentally damaging, and the same standards apply to products made internally, so baked goods contain only unbleached and unbromated flour. Environmental standards extend to the way stores are built and the use of energy and to recycling. The company has created the Animal Compassion Foundation to develop more natural and human ways of raising farm animals. All aspects of the business directly reflect its value proposition. The business started as a farmer’s cooperative in Texas in 1980, and has expanded to employ 43,000 workers and achieve annual sales of £2.6 billion. Its green credentials are given a fashionable lustre by celebrity customers such as Charlize Theron, Gwyneth Paltrow and Angelina Jolie. Whole Foods arrived in the UK in 2007, opening a store in Kensington, with plans to roll out to other metropolitan centres – it believes the UK can support 40 of its large stores. The UK market for organic food is expected to be worth £2.4 billion by 2010. The Whole Foods model relies on attracting the provenance-conscious consumer, and selling smaller baskets of higher margin products rather than the traditional weekly family shop.

Sources: Michael E. Porter and Mark R. Kramer, ‘Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility’, Harvard Business Review, December 2006, pp. 78–92. Elizabeth Rigby, ‘ Whole Foods Opens Flagship Store’, Financial Times, June 2 2007, p. 16. Sean Poulter, ‘Organic Store That’s a Whole Lot of Trouble for the Supermarkets ’, Daily Mail, June 7 2007, p. 31.

The CSR question will be considered further in examining value propositions in Chapter 8.

205 •• Market-Led Strategic Change

Thinking Strategically Creating the space to think strategically means recognizing that strategy involves different processes and mind-sets to planning and budgeting. Planning and budgeting is essentially about the short-term and existing strategies, strategizing is mainly about the longer-term and new strategies. The difference can be discussed around the structure in Figure 5.4 . Moving management thinking from operations to strategy is not easy – it may mean separating them mentally and physically from day-to-day business to allow a longer-term focus. This is rarely easy. Thinking strategically is about strategizing processes. It may also be about weird people who do not talk like real managers, but have good ideas. But it is also about the way people think, and ideas like the ‘ opposable mind ’ , to achieve breakthrough thinking and creative outcomes.

Strategizing We need to be a lot more deﬁ ant in demanding creativity and originality in marketing that goes a lot further than natty advertising campaigns and cute branding. Consider two horrible words. First, tactivizing – I have invented this word to describe the process of innovation and originality in marketplace tactics – in advertising, in sales promotion, in pricing, in packaging, in selling approaches and in distribution. There is nothing whatever wrong with creativity in tactics. Far from it – positioning a brand in the customer’s mind may be a critical element of competitive success, coming up with innovative ways of capturing the customer’s attention may be vital to stand out from the competition. The danger is when we confuse the smart tactics with having a strategy. Second, strategizing – most important is creativity in developing new ways of doing business and new processes of going to market.

Strategizing

Management processes

Planning/ budgeting

Existing/same New Strategy Figure 5.4 Strategizing processes

•• 206 Strategic thinking and thinking strategically

This is where reinvention comes in – it is about developing a new business model. The importance of strategizing is underlined by a simple but very powerful quotation from the writings of Peter Drucker: ‘ A company beset by malaise and steady deterioration suffers from something far more serious than ineffi ciencies. Its “ business theory” has become obsolete.’ 89 In short, let’s emphasize creativity in building new strategies – strategizing – not just in new advertising and promotional ideas – tactivizing. Smart tactics should follow smart strategies, not the other way around. Interestingly, research by McKinsey suggests that less than half of executives are satisfi ed with their company’s approach to making strategic decisions. Strategy consultant Cognosis has investigated peoples ’ experience of strategy development and their attitudes towards the process, and fi nds that managers seem to be crying out for strategy approaches that engage both head and heart – very few managers were engaged to the extent they found their company’s strategic thinking exciting.90 There is work to do here in many companies.

Barriers to strategic thinking and thinking strategically In fact, there are a lot of barriers to thinking strategically in companies, derived from how they are currently organized and managed. Some barriers are easier to deal with than others.

Doing new stuff in old organizations • • • Most organizations are not designed to do new things, they are designed to do more of the same. Gary Hamel jokes: ‘Trying to get an organization to innovate is like trying to teach a dog to walk on its hind legs. If you get its full attention and hold a biscuit in front of its nose, it might take a few steps. But as soon as you turn your back, it goes down on all fours’ .91 Hamel argues that ‘ management monotony ’ undermines innovation by its obsession with budgeting and ‘ best practice ’ , while management innovation – changing decision-making, organizational structure and how time is used – leads to the most dura- 92 ble competitive advantage. However, the fact is that most managers work in organizations that give no incentive to explore new ways of doing things. In fact, there may be positive incentives not to try. Researchers suggest that in some companies, being innovative can positively damage your career – the rewards of success may be small, while the risks of being pilloried if the project fails are substantial – and innovators may be seen as an ‘irritating virus ’ that should be subtly discouraged. In one project researchers observed: ‘ The usual organizational antibodies were applied in an attempt to neutralize it: withholding of funding, general naysaying and subtle signals that it might not be “ career smart” to associate with the project.’ 93 Innovators need to be sensitive to organizational politics and the need for top manager champions as well as creative.

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The halo effect • • • Phil Rosenzweig describes the ‘ halo effect’ as ﬁ rst among a series of delusions surrounding management decision making. The halo effect looks at the company’s overall performance and makes attributions about its culture, leadership, values and so on, to arrive at invalid statements of what drives performance – attributions based on prior performance are a poor indicator of the real success factors for the future. Management delusions confuse correlation with causality and look for simple, single explanations of performance.94 Once delusions become part of management culture, it is difﬁ cult to persuade people that they are wrong. Tracking the delusional stereotypes and assumptions held dear by managers helps to understand why clever people make bad, short-sighted decisions. For example, consider the Abilene Effect.

Reality Check: The Abilene effect

The Abilene Paradox helps explain how decisions just emerge without ever actually being ‘ made ’ . There are four people in a car going north from Coleman, Texas to Abilene, some 53 miles away. It is hot. The drive is dusty and tedious. Earlier someone had suggested interrupting a nice family game of dominoes to go on a four hour round-trip to eat at a not very good restaurant. When back home, one by one all four confess they would rather have stayed at home . . . ‘I only went along with it because I thought the rest of you wanted to go’ . No one wanted to go to Abilene. It just happened.

Source: Jerry Harvey, quoted in Stefan Stern, ‘U Turn If You Want to On the Road to a Bad Decision ’ , Financial Times , October 16 2007, p. 16.

Evidence-based management • • • Almost in despair, Jeffrey Pfeffer asks ‘What were they thinking?’ when he looks at business decisions that fail to consider the unintended consequences of their actions, rely on naive theories of behaviour and ignore obvious answers.95 Challenging management assumptions – delusions – and stereotypical views of what will work and what won’t has led to the call for ‘ evidence-based management ’ . The challenge of evidence-based management is to substitute hard evidence for ingrained management beliefs which are often based on ﬂ imsy information, ‘ miracle cures ’ from consultants, ﬂ awed thinking about ‘ best practice ’ , and frequently are little more than ‘ half-truths and total nonsense ’ .96 Of course, this presumes that we use evidence to challenge false beliefs, not as a barrier to screen out any new ideas for which hard evidence is scarce. Neither is the intention to succumb to the ‘ mania for

•• 208 Strategic thinking and thinking strategically

measurement ’ as a substitute for thinking strategically. The goal is to challenge prevailing misconceptions before it is too late.

Weirdos There is also something in the view that fresh thinking about important issues should not be the preserve of conventional executives skilled in running the existing business. Companies need to think about attracting unconventional people with unconventional ideas – weird people – to become in-house mavericks. However, managing mavericks will be far from easy, every one a prima donna , because ‘ stars don’t work for idiots’ and they need a ‘maverick-friendly ’ environment in which to operate. Google is a high performer that employs strange people, but this is not just about the new economy – companies like IBM and Procter & Gamble are also exploring ways of capturing maverick creativity and innovation to channel it into mainstream business. 97 Geeks may yet rule the world – in fact, they may do already, but are too shy and nerdish to tell the rest of us. Having strange people in the company may be a corporate resource. Dan Cable argues that if your goal is to create something that is valuable, rare and hard to imitate, then compared to your competitors, your people need to be downright strange.98 He argues that far from benchmarking against competitors, we should aim to accentuate differences in our thinking, even to the point of becoming a little weird. That way you can focus on an obsession with commitment to doing things differently (and better) than anyone else. Strange is weird but good in thinking strategically.

The opposable mind Research by Roger Martin reveals the interesting characteristic of successful strategic leaders is their ability to reconcile contradictions and to integrate profoundly differing views – integrated thinking, or the ability to hold two opposing ideas in mind at the same time.99 While most decision makers follow a ‘ this or that ’ , ‘ either/or ’ approach that over- simpliﬁ es the complexities of the real world, integrative thought processes allow people to embrace contradictions and build better strategies. For example, Isadore Sharp of Four Seasons hotels has created one of the world’s most respected luxury hotel brands. When he started out, the industry was dominated by two business models: large hotels that had the economy of scale to offer business travellers extra services; and small hotels that offered intimacy but few services. Conventional logic was you had to have revenue from at least 1000 rooms to offer secretarial help, fancy communications and stylish dining facilities. Sharp realized that many business travellers wanted both intimacy and service, and importantly they would pay for it. He fused elements of two contradictory business models to create a successful new strategy.

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Similarly, when A. G. Lafl ey took over at Procter & Gamble in 2000 it was losing market share to cheap generics and retailer brands, profits were falling, and it had just issued two consecutive profi t warnings. Senior managers were in two camps: those who wanted to cut prices and compete on price, and those who wanted to invest in new products. Rather than choosing between price or quality, Lafl ey improved innovation by outsourcing half of all product development to smaller companies and laboratories, while also cutting the cost of centralized R & D. He said: ‘ We weren’t going to win if it was an “ or ” . . . Everybody can do “ or ” ; everybody can do trade-offs. But you’re not going to win if you are in a trade-off game. ’ Learning to be an integrative thinker may be diffi cult, but the need for fresh thought processes to deal with the world’s contradictions and complexities suggests we should try.

The power of creativity, judgement and emotion Much of the reality of thinking strategically is about intuition and emotion rather than fact-based rational choices. (Actually, strategic thinking and new models can be linked to hard analysis in the ways we look at next.)

Emotion • • • There are some grounds for wondering whether the way we approach strategy shows an over-reliance on rationality, as we try to make complex decisions ﬁ t into our strategic decision-making frameworks.100 Strategic thinking needs to generate emotional engagement as well as intellectual excitement. Henry Mintzberg complains in Strategy Bites Back that ‘ Everybody is so serious. If that gets us better strategies, ﬁ ne. But it often gets us worse ones – standard, generic, uninspiring. Strategy doesn’t only have to be a position, it has to inspire. So an uninspiring strategy is really no strategy at all. ’101 He has a point – it may be hard work thinking strategically, but there should be some joy as well.

Gut-feeling and strategic intuition • • • Interestingly, there is pretty solid evidence that gut feeling or intuition often beats considered reasoning in making complex choices – this is, the intelligence of the subconscious. Intuition is a neurologically based behaviour that has evolved to ensure that humans respond quickly when faced with a dilemma – too much data disrupts the process. The more variables we consider, the harder it is to make the right decision. What we describe as ‘ rules of thumb’ may be based on complex calculations, but they allow us to simplify complex situations and make an appropriate response. 102 Leaping to a quick decision, or having a hunch, results when the unconscious sifts through the situation in

•• 210 Strategic thinking and thinking strategically front of us looking for a pattern, throws out irrelevant information and focuses on what really matters. The unconscious mind is so good at this it often delivers a better answer than protracted and more deliberate ways of thinking – the power of thinking without thinking.103 In trying to make management and marketing more ‘scientifi c’ we may have overlooked the power of people to make smart decisions through intuition. In fact, the research goes further. Science reveals that the so-called ‘ Aha! ’ moment is a fl ash of insight or a special form of intuition – strategic intuition. Science identifi es three types of intuition: ordinary intuition is just a feeling or gut instinct, expert intuition is snap judgements, when you instantly recognize something familiar, and strategic intuition is not a vague feeling but a clear thought. This gives us three types of strategic ideas: strategic analysis, where you study the situation you face, strategic intuition, where you get a creative idea for what to do; and strategic planning, where you work out the details of how to do it.104 In fact, the logic of strategic intuition has other implications too. It suggests that grandiose corporate statements about ‘set big goals and do whatever it takes to achieve them’ are not only banal but also wrong. The commonplace formula has things backward – instead of setting goals fi rst, better to watch for opportunities with large payoffs at low risk, and only then set goals. In this way we can progress through ‘ opportunistic innovation’ . Fixed goals lead organizations to miss out on the profi ts of opportunistic fl exibility.105 However, persuading managers trained in conventional top-down planning and budgeting systems that there is a better way of doing things based on strategic intuition may be tough.

Judgement • • • Related work focuses on judgement as a characteristic of successful management decision making and leadership. Making judgement calls is arguably the central element of leadership. Good judgement calls result in well-informed, wise decisions that produce desired outcomes. But judgement is difﬁ cult to pin down. Certainly research suggests that judgement does not occur in a single moment, but grows out of a process: preparation – cutting through complexity to get to the heart of an issue and looking for ideas; the call – a clear ‘ yes ’ or ‘ no ’ and explanation; execution – making it happen while learning and adjusting along the way.106 Understanding how leaders sense, frame and align issues, as they prepare to make judgement calls, may be critical to making strategic thinking effective. Aligning strategic thinking with the process through which senior managers make judgement calls is likely to enhance the chances we are taken seriously.

Leadership and thinking strategically • • • Stimulating and rewarding creativity and innovation is mainly an issue of leadership. There are lots of views on what form that leadership

211 •• Market-Led Strategic Change

should take. For example, Paul Horn, Director of IBM Research, suggests the following guidelines:

● Under-defi ne jobs – so people have the time, space and freedom to develop new things without being totally constrained by a defi ned role. ● Brainstorm with people who use what you sell – customers bring problems, but also give you credibility in pursuing change. ● Do not over-map the journey – being over-analytical and demanding to know the outcome at the start can kill creative thinking. ● Pair visionaries with implementers – to cultivate both sets of skills. ● Encourage the fl ow of ideas outside work – social interaction can facilitate new ideas. ● Evaluate the process not the short-term result – ask how things are moving and what is happening, not where’s the result?107

Others suggest that the role of the manager is to protect those working on innovative projects from attack and criticism from the rest of the organization – particularly the ‘ brand police ’ with their vested interests in existing brands not innovations,108 and the importance of designing and leading supportive cultures. Bringing in outsiders, partnering with customers, establishing separate organizational units are all described by companies as part of their attempts to provide a useful setting for creativity and innovation.109 In this sense, the manager’s role is to remove the obstacles and barriers to creativity and innovation.

Gulp, No One Is Ever Going to Understand All This . . . You were warned that strategic thinking has to deal with a diverse set of issues that are incredibly diffi cult to pin down to specifi cs and are ambiguous and confl icting, and that’s why you get paid a lot for doing strategy. However, this does not mean you want the resulting strategy to be so complex and diffi cult to understand that only you know what it means (you think), and you are struggling to express it in ways that anyone else can understand. This has been a failing of strategizing in the past – very clever, but nothing ever happens because no one knows what you are talking about. This is why we are moving on to pin strategy down in the strategic pathway (Figure 5.5 ): a set of issues that can be clearly communicated, where decisions are made explicit, and plans can be developed. Strategic thinking complicates things, the strategic pathway simplifi es them. Strategic thinking is what gets you to the strategic pathway. But there again, it probably only does this if you create the space to think strategically . . .

•• 212 Strategic thinking and thinking strategically

Thinking strategically

Strategic Strategic thinking pathway

Figure 5.5 Getting to the strategic pathway

References and End-notes

1. Quoted in: James Surowiecki, ‘ The Return of Michael Porter ’ , Fortune , February 1 1999 , pp. 135 – 138 . 2. Porter , Michael E. , ‘ What Is Strategy ’ , Harvard Business Review , November/December 1995 , pp. 61 – 78 . 3. Simons , Robert , ‘ How Risky Is Your Company? ’ , Harvard Business Review , May/June 1999 , pp. 85 – 94 . 4. Piercy, Nigel F., Tales from the Marketplace: Stories of Revolution, Reinvention and Renewal , Oxford: Butterworth–Heinemann, 1999. Cravens, David W., Gordon Greenley, Nigel F. Piercy and Stanley Slater, ‘ Mapping the Path to Market Leadership ’, Marketing Management , Fall 1998, pp. 29–39. 5. Porter , Michael E. , ‘ What Is Strategy? ’ , Harvard Business Review , November/December 1995 , pp. 61 – 78 . 6. Hamel , Gary and C. K. Prahalad , ‘ Competing for the Future ’ , Harvard Business Review , July/August 1994 , pp. 122 – 128 . 7 . K a y , John , ‘ Learning to Deﬁ ne Your Core Business ’ , Financial Times , December 1 1995 . 8. Hamel , Gary , ‘ Strategy as Revolution ’ , Harvard Business Review , July/August 1996 , pp. 69 – 82 . 9. Hamel, ‘ Strategy as Revolution ’ . 10. Hamel , Gary and C. K. Prahalad , ‘ Strategic Intent ’ , Harvard Business Review , May/June 1989 , pp. 63 – 76 . 11. Prahalad , C. K. and Gary Hamel , ‘ The Core Competence of the Corporation ’ , Harvard Business Review , May/June 1990 , p p . 7 9 – 9 1 . 12. Christensen , Clayton M. , ‘ Making Strategy: Learning by Doing ’ , Harvard Business Review, November/December 1997 , pp. 141 –156 .

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13. Makrides , Constantinos C. , All the Right Moves: A Guide to Crafting Breakthrough Strategy , Boston, MA : Harvard Business School Press , 2000 . 14. Sull , Donald , Why Good Companies Go Bad and How Great Managers Remake Them , Boston, MA : Harvard Business School Press , 2005 . 15. Kumar , Nirmalya , Marketing as Strategy: Understanding the CEO’s Agenda for Driving Growth and Innovation , Boston, MA : Harvard Business School Press , 2004 , p. 26 . 16. Raynor , Michael , The Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do About It) , New York : Currency Business Books , 2007 . 17. Jasper , James , Getting Your Way: Strategic Dilemmas in the Real World , Chicago, IL : University of Chicago Press , 2006 . 18. Dodd , Dominic and Ken Favaro , ‘ Managing the Right Tension ’ , Harvard Business Review , December 2006 , pp. 62 – 74 . 19. Matthews , Robert , ‘ Unforeseen Consequences ’ , Financial Times , May 24 2007 , p. 16 . 20. Tenner , Edward , Why Things Bite Back: Technology and the Revenge of Circumstances , Vintage Books , 1997 . 21. Day , George S. , ‘ Feeding the Growth Strategy ’ , Marketing Management , November/December 2003 , pp. 15 – 21 . 22. Slywotsky , Adrian J. and Richard Wise , ‘ The Growth Crisis – and How to Escape It ’ , Harvard Business Review , July 2002 , pp. 23 – 83 . 23. Laurie , Donald L. , Yves L. Doz and Claude P. Sheer , ‘ Creating New Growth Platforms ’ , Harvard Business Review , May 2006 , pp. 80 – 90 . 24. Olson, Matthew S., Derek van Bever and Seth Verry, ‘ When Growth Stalls ’ , Harvard Business Review , March 2008, pp. 50–61. Olson, Matthew S. and Derek van Bever, Stall Points: Most Compa- nies Stop Growing – Yours Doesn’t Have To , New Haven, CT: Yale University Press, 2008. 25. Laurie et al., ‘ Creating New Growth Platforms ’ . 26. Zook , Chris , Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Proﬁ table Growth , Boston, MA : Harvard Business School Press , 2007 . 27. Zook , Chris , ‘ Finding Your Next Core Business ’ , Harvard Business Review , April 2007 , pp. 66 – 75 . 28. Zook , Chris and James Allen , ‘ Growth Outside the Core ’ , Harvard Business Review , December 2003 , pp. 66 – 73 . 29. Arends , Brett , ‘ Ford “ Learns a Lot” as It Sells Kwik-Fit for £330m ’ , Daily Mail , August 13 2002 , p. 57 . 30. Slywotsky and Wise, ‘ The Growth Crisis ’ . 31. Campbell , Andrew and Robert Park , The Growth Gamble: When Leaders Should Bet Big on New Businesses, and How They Can Avoid Expensive Failures , London : Nicholas Brealey , 2005 . 32. Stern , Stefan , ‘ Business Models Need Fixing Even If They Are Not Broken ’ , Financial Times , July 4 2006 , p. 11 .

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33. Lawler , Edward E. and Christopher G. Worley , Built to Change: How to Achieve Organizational Effectiveness , San Francisco CA : Jossey-Bass , 2006 . 34. Manzoni , Jean-François, ‘ How Companies Can Go From Good to Great ’ , Financial Times , August 19 2004 , p. 11 . 35. Lawler and Worley, Built to Change. 36. Kim , W. Chan and Renée Mauborgne , ‘ Think for Yourself – Stop Copying a Rival ’ , Financial Times , August 11 2003 , p. 9 . 37. Colvin , Geoff , ‘ Power: A Cooling Trend ’ , Fortune , December 10 2007 , pp. 37 – 51 . 38. Quoted in: Tichy , Noel M. and Warren G. Bennis , Judgment: How Winning Leaders Make Great Calls , New York : Portfolio , 2007 . 39. Vence , Deborah L. , ‘ Just a Variation on a Theme ’ , Marketing News , February 1 2007 , pp. 18 – 20 . 40. Day , George S. , ‘ Is It Real? Can We Win? Is It Worth Doing? ’ , Harvard Business Review , December 2007 , pp. 110 – 120 . 41. Christensen , Clayton M. , Stephen P. Kaufman and Willy C. Shih , ‘ Innovation Killers ’ , Harvard Business Review , January 2008 , pp. 98 – 105 . 42. Pink , Daniel , A Whole New Mind: Why Right-Brainers Will Rule in the Future , London : Cyan Books , 2006 . 43. Colvin , Geoffrey , ‘ The Imagination Economy ’ , Fortune , July 10 2006 , p. 29 . 44. Gowers , Andrew , Guy de Jonquieres and Anna Fiﬁ eld , ‘ When the Cutting Edge Frightens the Customers ’ , Financial Times , October 14 2005 , p . 1 4 . 45. McGregor , Jena , ‘ Most Innovative Companies ’ , BusinessWeek , May 14 2007 , pp. 52 – 64 . 46. Christensen , Clayton M. , The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail , Boston, MA : Harvard Business School Press , 1997 . 47. Donath , Bob , ‘ Big Customers May Cause Bigger Dilemmas ’ , Marketing News , September 11 2000 , p . 1 6 . 48. Christensen , Clayton M. and Michael E. Raynor , The Innovator’s Solution: Creating and Sustaining Successful Growth , Boston, MA : Harvard Business School Press , 2003 . 49. This section leans heavily on David W. Cravens, Nigel F. Piercy and George S. Low, ‘ The Innovation Challenges of Proactive Cannibalization and Discontinuous Technology ’ , European Business Review , 14(4), 2002, pp. 257–267. 50. Chandy, Rajesh K. and J. Tellis Gerald , ‘ Organizing for Radical Product Innovation: The Overlooked Role of Willingness to Cannibalize ’ , Journal of Marketing Research , November 1998 , pp. 474 – 487 . 51. Chandy , Rajesh K. and Gerard J. Tellis , Organizing for Radical Product Innovation , Boston, MA : Marketing Science Institute , 1998 , Report 98-102 .

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52. Shervani , Tasaddura and Philip C. Zerrillo , ‘ The Albatross of Product Innovation ’ , Business Horizons , January/February 1997 , pp. 57 – 62 . 53. Hamel , Gary , Leading the Revolution , Boston, MA : Harvard Business School Press , 2000 . 54. Chan , W. Kim and Renée Mauborgne , ‘ Pioneers Strike It Rich ’ , Financial Times , August 11 1998 , p. 11 . 55. Jones , Robert , The Big Idea , London : HarperCollins Business , 2000 . 56. Kim, W. Chan and Renée Mauborgne, ‘ Value Innovation: The Stra- tegic Logic of High Growth’ , Harvard Business Review , January/ February 1997, pp. 102–113. Kim, W. Chan and Renée Mauborgne, ‘ Pioneers Strike It Rich ’ , Financial Times , August 11 1998, p. 11. 57. Schmitt , Bernd H. , Big Think Strategy: How to Leverage Bold Ideas and Leave Small Thinking Behind , Boston, MA : Harvard Business School Press , 2007 . 58. Allison , Kevin , ‘ Apple Unveils iPhone Grand Plan ’ , Financial Times , March 10 2008 , p. 23 . 59. Overell , Stephen , ‘ Good Ideas to Generate More Good Ideas ’ , Financial Times , June 28 2005 , p. 16 . 60. Gratton , Lynda , Hot Spots: Why Some Companies Buzz With Innovation – And Others Don’t , Harlow : FT/Prentice Hall , 2007 . 61. Chesbrough , Henry W. , Open Business Models: How to Thrive in the New Innovation Landscape , Boston, MA : Harvard Business School Press , 2006 . 62. Tapscott , Don and Anthony Williams , Wikinomics: How Mass Collaboration Changes Everything , London : Atlantic Books , 2007 . 63. Ancona , Deborah and Henrik Bresman , X-Teams: How to Build Teams That Lead, Innovate and Succeed , Boston, MA : Harvard Business School Press , 2007 . 64. Engardio , Pete , ‘ Scouring the World for Brainiacs ’ , BusinessWeek , October 11 2004 , pp. 62 – 66 . 65. Mol , Michael J. and Julian Birkinshaw , Giant Steps in Management: Innovations That Change the Way We Work , Harlow : FT/Prentice Hall , 2007 . 66. Doz , Yves and Mikko Kosonen , Fast Strategy: How Strategic Agility Will Help You Stay Ahead of the Game , Philadelphia, PA : Wharton School Publishing , 2007 . 67. Quoted in: Cane, Alan , ‘ Flexibility Takes Over from Plans in an Agile World ’ , Financial Times , November 21 2007 , p. 6 . 68. Cane, ibid. 69. Quoted in: Hamm , Steve , ‘ Speed Demons ’ , BusinessWeek , M a r c h 27 2006 , pp. 67 – 76 . 70. Hamm, ibid. 71. Stern , Stefan , ‘ Easy Appeal of a Quick Win Will Lead to Losses in the End ’ , Financial Times , February 27 2007 , p. 12 . 72. Ackoff , Russell , Management f-Laws: How Organizations Really Work , Axminster, Devon : Triarchy Press , 2007 .

•• 216 Strategic thinking and thinking strategically

73. London , Simon , ‘ A Surplus of Cash Inevitably Leads to a Short- age of Sense ’ , Financial Times , November 30 2005 , p. 13 . 74. Witzel , Morgen , ‘ First Mover Advantage: Prelude to a Longer Plan’ , Financial Times , August 12 2002 , p. 9 . 75. Jon Burger, ‘ Second-Move Advantage ’ , Fortune , March 20 2006 , p p . 9 – 1 1 . 76. Sull , Donald , ‘ Strategy as Active Waiting ’ , Harvard Business Review , September 2005 , pp. 120 – 129 . 77. Gapper, John , ‘ No Reason to Put Mattel on the Rack ’ , Financial Times , September 17 2007 , p. 15 . 78. Done, Kevin, ‘ Victory in US Gives EADS a Timely Lift ’, Financial Times , March 3 2008, p. 23. Weitmann, Hal and Demitri Sevastopulo, ‘ Harshest Setback in Boeing’s Woes’ , Financial Times , March 3 2008, p. 23. 79. Kane , Yukari Iwatani , ‘ Toshiba’s Strategy for Post-HD DVD World ’ , Wall Street Journal , March 3 2008 , p. 25 . 80. Ormerod , Paul , Why Most Things Fail: Evolution, Extinction and Economics , Chichester : Wiley , 2008 . 81. Rosenzweig , Philip , The Halo Effect: and Eight Other Delusions That Deceive Managers , New York : Simon & Schuster , 2007 . 82. Stern , Stefan , ‘ Superstar Yarns That Dazzle and Delude ’ , Financial Times , January 3 2007 , p. 8 . 83. Laﬂ ey , A. G. and Ram Charan , The Game-Changer: How You Can Drive Revenue and Proﬁ t Growth with Innovation , New York : Crown Business , 2008 . 84. Skapinker , Michael , ‘ When Disaster Strikes ’ , FTMagazine , February 2–3 2008 , pp. 30 – 31 . 85. Sunstein , Cass R. , Worst-Case Scenarios , Boston, MA : Harvard University Press , 2007 . 86. Dezenhall , Eric and John Weber , Damage Control: Why Everything You Know About Crisis Management Is Wrong , New York : Portfolio , 2007 . 87. Nigel , F. Piercy and Nikala Lane , ‘ Ethical and Moral Dilemmas Associated with Strategic Relationships between Business-to- Business Buyers and Sellers ’ , Journal of Business Ethics , 72 , 2007 , pp. 87 – 102 . 88. See: Hooley , Graham , Nigel F. Piercy and Brigitte Nicoulaud , Marketing Strategy and Competitive Positioning , 4th edn , Harlow : FT/Prentice Hall , 2008 , Chapter 18 . 89. Drucker , Peter , ‘ A Turnaround Primer ’ , Wall Street Journal , February 2 1993 . 90. Stern , Stefan , ‘ Wanted: More Emotion and Less Rationality About Strategy ’ , Financial Times , February 20 2007 , p . 9 . 91. Quoted in: Stern , Stefan , ‘ Corporate Doers and Thinkers Miss a Chance to Experiment ’ , Financial Times , January 25 2006 , p. 15 . 92. Hamel , Gary and Bill Breen , The Future of Management , Boston, MA : Harvard Business School Press , 2007 .

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93. Leifer , Richard , Christopher M. McDermott , Gina Colarelli O’Connor , Robert W. Verzer , Lois S. Peters and Mark Rice , Radical Innovation, Boston, MA: Harvard Business School Press, 2001 . 94. Rosenzweig , Phil , The Halo Effect … and Eight Other Business Delu- sions That Deceive Managers , New York : The Free Press , 2007 . 95. Pfeffer , Jeffrey , What Were They Thinking? Unconventional Wisdom About Management , Boston, MA : Harvard Business School Press , 2007 . 96. Pfeffer , Jeffrey and Robert I. Sutton , Hard Facts, Dangerous Half-Truths and Total Nonsense: Proﬁ ting from Evidence-Based Management , Boston, MA : Harvard Business School Press , 2006 . 97. Taylor , William and Polly LaBarre , Mavericks at Work: Why the Most Original Minds in Business Win , New York : Harper , 2008 . 98. Cable , Daniel M. , Change to Strange: Create a Great Organization by Building a Strange Workforce , Philadelphia, PA : Wharton School Publishing , 2007 . 99. Martin , Roger , The Opposable Mind: How Successful Leaders Win Through Integrative Thinking , Boston, MA : Harvard Business School Press , 2008 . 100. Kay , John , ‘ Beware the Pitfalls of Over-Reliance on Rationality ’ , Financial Times , August 20 2002 , p. 9 . 101. Mintzberg , Henry , Bruce Ahlstrand and Joseph P. Lampel , Strategy Bites Back , FT/Prentice Hall , 2004 . 102. Gigerenzer , Gerd , Gut Feelings: The Intelligence of the Unconscious , Allen Lane , 2007 . 103. Gladwell , Malcolm , Blink: The Power of Thinking Without Think ing , Harmondsworth : Penguin , 2006 . 104. Duggan , William , Strategic Intuition: The Creative Spark in Human Achievement , New York : Columbia Business School , 2007 . 105. Ibid. 106. Tichy , Noel M. and Warren G. Bennis , ‘ Making Judgment Calls: the Ultimate Act of Leadership ’ , Harvard Business Review , October 2007 , pp. 94 – 102 . 107. Horn , Paul , ‘ Creativity and the Bottom Line ’ , Financial Times , November 17 1997 . 108. Houlder, Vanessa, ‘ Keeping a Lid on Egos at Work ’ , Financial Times , January 26 1998. Francis, Ty, ‘ Breaking Brand Barriers’ , Marketing Business , April 2001, pp. 26–27. 109. Skapinker , Michael , ‘ Open Your Company to New Ideas ’ , Financial Times , January 16 2001 .

•• 218 C H A P T E R • • • • 6 Market sensing and learning strategy: competitive strength through knowing more

This chapter . . . This chapter opens up the ﬁ rst stage of the strategic pathway, concerned with the sensing and learning processes that underpin strategy. We address the issue of competitive strength, through the question of: what do you know that gives you an edge or advantage and how can you sustain that advantage over your competitors? However, instead of just looking at the same old tools of marketing research and the like, I want to focus on what people are doing to better understand their customers and markets and to raise their companies’ ‘market IQ ’ on a broader basis. Let’s consider the black swan perspective – the ‘unknown unknowns’, and the shift in thinking we need from ‘doing market research ’ (mainly about techniques of data collection) to market sensing (mainly the process of understanding customers and markets). We can look at some of the newer knowledge-generating approaches Market-Led Strategic Change

that are proving interesting – ethnography, looking for the things which are ‘ hidden in plain sight ’ , neuromarketing, Internet-based sensing, futurology and marketing intelligence activities. Much of the shift from traditional approaches to market sensing is about emphasizing interpretation rather than just generating data. We ﬁ nish off with a look at some lessons in learning from those who have made learning work in generating competitive advantage, and an approach to enhancing a company’s sensing capabilities around key markets and customers. This approach will be severely irritating to died-in-the wool, paid-up members of the marketing research profession. Guess what? I don’t care. What matters is learning and understanding to create competitive advantage.

Introduction Marketing information is diffi cult because it is the area of marketing that is surrounded by most misconceptions and misunderstanding. It is the area where it is easiest to convince ourselves that the answer to all our problems is to do more marketing research, or collect more information and store it on a computer database – i.e. make a token gesture and ignore what really matters, so we can get on with doing things the way we have always done them. It is the area of marketing that sounds most academic, esoteric and theoretical (for which read: often impracti- cal, vague and useless in the real world). It is the part of marketing that is most easily and most defensibly ‘ delegated ’ to junior executives – after all, ‘ real managers ’ are too expensive and important to spend time digging up market information and processing it – the trouble is that the expensive managers then take no notice of what the information says. Information offers us huge leverage because it is not really about doing surveys and collecting facts and fi gures, or building computer- ized databases – these are just the trappings. Marketing information is about how we understand, think about and deal with the environment, i.e. the customer, the partner and the competitor. This is why information gives leverage – if you can infl uence how decision makers and operational staff think about the marketplace, then you have a good chance of infl uencing what they do . This is the reason market sensing and learning is positioned as the fi rst part of the strategic pathway – it provides the foundation for what follows. Superior market knowledge is the basis for more insightful market choices, better understanding of customer value, and a realistic view of the relationships and relationship networks that underpin a strategy.

Understanding customers and markets The unhappy but recurring truth is that most companies have little or no idea why their customers behave as they do. Much of the time we just

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do not know how consumers (in particular) assess value and arrive at their decisions. Not least among the problems is that they may not know either (which makes a bit of a nonsense of asking them actually).1 Gerald Zaltman notes some of the greatest ‘marketing fallacies’ to include the idea that people think in a well-reasoned or rational linear way, and that consumers can readily explain their thinking and behaviour. 2 But this does not diminish the importance of building a superior understanding of the customer and the market, it just means it is more complicated than sending out surveys. Just about every sector you look at there is one common factor – those who know more, those who learn more, those who exploit that market knowledge, tend to be the best performing companies. For example, there is research support for believing that companies that systematically monitor customer experience can take important steps to improve it and impact positively on performance. Companies are looking beyond the databases and call centres of Customer Relationship Management (CRM) to establish new approaches to Customer Experience Management (CEM). CEM captures and communicates what a customer thinks about the company at all points of contact and locates the places to add value in the gaps between customer expectations and company performance. The barriers to achieving this performance improvement do not include lack of information but factors like: too much emphasis on CRM (which just captures facts about existing customers); lack of management attunement to customer needs; and fear of what customer experience data may reveal.3 Another barrier to enhanced understanding of customers and markets is the perspective managers adopt. We considered the ‘granularity of growth’ earlier – that mega-trends are less revealing for decision making than micro-trends (p. 69). This view suggests the importance of developing an understanding of market that goes down to a granular level, and the McKinsey authors note: ‘We believe that the leaders of large institutions need to avoid taking an averaged view of all their businesses; instead they should manage them with greater focus at a more detailed level.’ 4 Simply looking at averages like market share and customer satisfaction metrics leaves a company vulnerable to those who instead invest in building superior insights into the market and 5 developing truly distinctive capabilities. Increasingly, building a genuinely superior understanding of customers and markets will rely on an intensity of market knowledge which is unprecedented.

Knowledge intensity We noted earlier that one of the characteristics of agile fast-moving businesses is that they show a high level of strategic sensitivity – they have a high level of awareness of what is happening around them and what is going to happen next. Fast, nimble companies are very good at scanning for information and insight.6 In fact, there is a strong argument that one of the attributes of leading companies is that they are

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fact-obsessed.7 Fact-based management and evidence-based management are approaches that allow managers to challenge corporate decision-making assumptions and stereotypes and look for new knowledge and its implications – breaking free of the ‘ dangerous half-truths and total nonsense ’ to which managers all too often cling.8 In fact, it can be argued that the only way companies can take risk out of the business is by paying closer attention to how customers are changing and how markets are developing. A characteristic of successful companies like Toyota, Coach, Samsung and Target is that they are more ‘ risk-shapers ’ than ‘ risk-takers ’ because of their superior market knowledge. Adrian Slywotsky summarizes the challenge of becoming a knowledge-intense organization:

The best countermeasure for defeating customer risk is creating and applying proprietary information about your customers . . . It’s answering the question: what do we know about customers that others don’t? And then using that information to make and keep proﬁ table customers for life. 9

Reality Check: The importance of knowledge

If you can keep your head when all those about you are losing theirs – you are simply not aware of the real situation.

Raising your market IQ One interesting view of the market knowledge challenge has been described as raising a company’s ‘market IQ’ . Many companies show signs of a low market IQ: they don’t look closely enough at their customers and so miss opportunities; or they look only at a slice of the market, or base conclusions solely on current transactions data; they take a piecemeal approach to market information, which produces little value in identifying untapped customers and new markets. The goal is instead to think more broadly. Research by the Business Management Performance Forum underlines that ‘ companies are failing to respond to fast-changing markets because they are unable to understand and adjust to what their customers want . . . businesses are struggling to meet the demands of increasingly competitive international markets and sophisticated clients. ’ Typically companies take a ‘ rear-view mirror’ approach to their markets, looking backwards not forwards, and fail to ‘ read ’ their markets as a result.10 The signs of a low market IQ are: (1) a focus largely on current customers – normally using internal data that say nothing about

•• 222 Market sensing and learning strategy: competitive strength through knowing more

non-customers or lost customers or potential new customers; (2) basing strategies on information that is shared by all rivals – executives reject the chance to develop their own thorough and independent view of a market and rely on things like published reports, leading to timid strategies that mirror those of competitors; (3) reliance on qualitative market research – instead of looking for hard data and evidence on which to base decisions; and (4) a pattern of taking a piecemeal approach – characterized by narrow, one-time studies, which are expensive and never integrated.11 The focus of this chapter is providing a basis for evaluating and enhancing a company’s market IQ – tracking the full breadth of sources of knowledge and learning processes, rather than just thinking about market research techniques.

The crunch questions It follows that the crunch questions to ask in looking at this ﬁ rst stage of the strategic pathway are simple: what do you know? In particular, what do you know that is not obvious to every rival in this business – what do you know that they don’t? Where does your superior insight create us a competitive advantage, an edge, a difference that matters, a way of delivering value better and to higher levels than the competition? And, while you’re at it – if you believe you have learned more than the others and you have the basis for building competitive advantage from that market knowledge, how do you plan to sustain that learning advantage as a basis for how you compete long-term?

Black Swans and White Swans An interesting perspective on the challenge of market knowledge and learning capabilities comes from swans. * The black swan analogy has been developed by Nassim Nicholas Taleb, 12 but it comes from a much earlier time. In the 17th century the black swan issue fascinated philos- ophers and when news of the ﬁ rst sighting of a black swan in Australia trickled back to Europe, it became an analogy of things we can and cannot know with certainty. John Stuart Mill, the classical economist and philosopher put it so: ‘ No amount of observation of white swans can allow the inference that all swans are white, but the observation of a single black swan can refute that conclusion’ .13 The black swan issue underlines a severe limitation to our learning from observations and experience, and the fragility of our knowledge.

*I know – horrible, hissy things that ﬂ ap their wings at you, but bear with me on this for a moment, it’s only an analogy, dear.

223 •• Market-Led Strategic Change

Source: istockphoto.com

An immediate thought is to question how much of what we do in marketing research is actually about counting white swans and ignoring the possibility that there are black swans. We can count white swans, weigh them, segment the white swan market using swan demographics, but we still can’t answer the question, ‘ are all swans white?’ . We can say ‘ probably . . .’ or ‘ on the basis of the evidence available to us . . . ’ or ‘ drawing on our extensive scientiﬁ c samples . . . ’ , the answer is ‘ yes ’ . And we would be wrong. But the issue goes further. Taleb considers the black swan an analogy for highly improbable events which happen in every sector of human activity that share three characteristics: (1) they are highly unpredictable – they are outliers beyond the realm of regular expectations; (2) they have massive impact; and (3) after one has occurred we try to make it appear less random and more predictable than it actually was – so thus we avoid learning anything from the black swan occurrence. One telling point is that most organizations and the people in them fall vulnerable to the impulse to simplify, narrate and categorize, rather than opening ourselves up to the ‘ impossible ’ . He argues that we fool ourselves into thinking we know more than we actually do, restricting our knowledge to the irrelevant and inconsequential, so that large events continue to surprise us. Worse, we seem never to learn that we don’t learn from unpredicted events.

Reality Check: Predictability

Any event, once it has occurred, can be made to appear inevitable by a competent market researcher.

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Taleb argues that the 9/11 terrorist attack on the USA was a black swan event – unpredictable, massive global impact, and from which few insightful lessons have been learned. Similarly, Google is a black swan – it should not have worked, no rational analysis would have supported it, but it is one of the most impactful business platforms in the world. Taleb’s point is that black swan logic makes what you don’t know far more relevant than what you do know, but many of our approaches to things like business risk assessment and market research measurement speciﬁ cally exclude the possibility of a black swan – because it is improbable. Strangely, when Donald Rumsfeld came out with his most ridiculed statement, which went a long way to making him the former US Defense Secretary, he was not wrong. He said:

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things that we know we know . . . We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns . . . the ones we don’t know we don’t know. 14

Black swan events are the ‘unknown unknowns’ to which he referred. Understanding the impact of improbable black swan events is central to a more sophisticated approach to market knowledge. However, if you have to explain this to your CEO, please try to express it more clearly than did Mr Rumsfeld, or you may share his career trajectory.

Reality Check: Black swan perspective

The black swan is a matter of perspective. A turkey is fed for a thousand days. Every day it is lulled more and more into feeling that the human feeders are acting in its best interests. But on the 1001st day, the butcher arrives and there is a surprise. But the surprise is for the turkey, not the butcher – he knew all along that this was going to happen. Some crises may be ‘gray swans ’.

Source: Nassim Nicholas Taleb, quoted in: ‘Fear of a Black Swan’, Fortune , April 14 2008, pp. 44–45.

The black swan model underlines that, more than ever before, developing robust approaches to market knowledge must build objective, open-minded inquiry systems that scan the periphery of the market and encourage experimentation, rather than relying on proba- bilistic estimates and samples that simply obscure the real changes that matter.15 In many situations working on the interpretation of

225 •• Market-Led Strategic Change

information may be a higher priority than simply acquiring information. Investment in establishing new kinds of market learning processes may be a high priority for many companies weak in scanning and interpreting the outside world. This chapter provides some guidelines for those going in this direction. If you need more convincing about ‘ unknown, unknowns ’ , consider the following account published in The Sunday Times in 1996, describing events at the Bloemfontein Pelanomi Hospital:

. . . every Friday over a period of months a couple of years ago, hospital staff found the patient occupying a certain bed in intensive care lying dead with no apparent cause. At ﬁ rst it seemed coincidental. Then doctors feared a ‘killer disease ’ . Deaths continued. Finally, a nurse noticed the Friday cleaning lady doing her weekly chores. This maid would enter the ward, un-plug the life-support systems beside the bed, plug in her ﬂ oor polisher, clean the ward and once again plug in the patient, leaving no trace of the cause of the patient’s death. How many died in the South African Floor Polisher Massacre?

None of us can ever afford to believe that we have all the relevant facts and can ignore new, unexpected information.

From Market Research to Market Sensing We are not going to discuss all the conventional technology of marketing information systems – marketing accountancy techniques, marketing research methods and things like questionnaires and sample design, sources of information, or building mathematical models and integrated marketing information systems. All that can come later if you need it. 16

Reality Check: Marketing researchers

Q: How do market researchers take their exercise? A: They jump to conclusions

Managers are not there to design questionnaires, collect data, build models and so on (or they should not be). Those are jobs for market researchers, agencies and technicians. What managers have to do is to understand . To understand the customer, the distribution systems, the partners in an alliance, the competitor and the big changes in the marketplace that can make us rich or put us out of business. Perhaps the greatest indication of the importance of superior market sensing is the surprises it uncovers for companies: one US record company was amazed to discover that the biggest purchasers of its rap and techno music were grandparents – they buy the records for young

•• 226 Market sensing and learning strategy: competitive strength through knowing more

people, whose parents will not buy it because they do not want it in the house.17 That is why the issue is market sensing – how those of us inside the company understand and react to the marketplace and the way it is changing. This is actually a more difﬁ cult issue than market research techniques, but it is more important too.

What is the difference between market sensing and marketing research? Many managers will challenge this difference – they would. They have been trained to believe that precise information and immaculate information systems are the hallmark of professional management. The difference is actually very real. It is the difference between what we know and understand, and what can be measured scientifi cally and presented to us in research reports. One way to explain this difference is with Murphy’s Law – the principle that if something can go wrong, it will. Many of the predictions of Murphy’s Law have been denied by scientifi c, rational research. What we know is that Murphy’s Law is right and the scientifi c researchers are wrong. Consider the following examples from the fascinating research of Robert Matthews,18 which actually demonstrate this:

Murphy’s Law predicts: Scientiﬁ c research says: The reality is:

When your breakfast toast Experiments show that if toast is Few of us toss our breakfast toast falls on the ﬂ oor it will land tossed in the air a large number of in the air – it normally slides off the face down if it can. times, it will land face down only plate because you are reading the half the time, as probability theory paper. When this happens the toast would predict. will land face down most of the time, and this can be proved.

If your queue in the bank or The mathematics of queues When you are in a queue you are supermarket can be beaten indicate that in the bank or not interested in averages, you just by the neighbouring one, it supermarket are subject to want to be out fastest. If there are, will be. random delays, and on average for example, three queues of the will tend to move at the same same length, the chances are only 1 rate . Therefore all queues have in 3 that your queue will suffer fewer the same chance of fi nishing fi rst. delays than the others – two-thirds of the time the other queues will do better and will fi nish before us.

This leads to three points of comment about research and management: if something is true and you know it to be true, having someone measure it and write you a report about it does not make it any more or less true – it simply stops you doing something about it, while you wait for the research to be done; most research is crude and arbitrary in the assumptions it makes – this reﬂ ects technology and budgets, not competence – and measuring the wrong things badly is not an inspiring description of what

227 •• Market-Led Strategic Change

we should use to make decisions; and, the real challenge is not making market research more sophisticated, it is trying to ensure that the things that managers ‘know ’ and ‘ understand ’ are the right things and they are well understood. As we will see shortly, this is actually something we can work on. It also leads to identifying the important information needs, and the role that market research can usefully play. Actually, others go even further, and blame the shortcomings of marketing research for the decline of marketing’s corporate inﬂ uence: Most marketing research has degenerated into an overused set of tools and techniques, often selected on the basis of a low-cost supplier. Research has become commoditized, just like the toilet paper aisle at Wal-Mart . . . Marketing research has wrapped itself in a set of beliefs and methodologies that are rooted in refuted behaviorist psychological concepts.19 Ouch! But it makes you wonder why we go on thinking that ‘ doing a bit of market research ’ is the answer to all our problems.

Reality Check: Consumer psychology gets rude

In 1999 the supermarket Tesco instructed its suppliers of melons to grow more small melons for them – no more than 1lb 3 ounces. The reason? Because it had received market research findings from its consumer psychologists suggesting that the fashionable preference for smaller female breasts – epitomized by the model Kate Moss and the actress Gwyneth Paltrow – explained why women shoppers were rejecting large melons in favour of small ones. Focus groups of female shoppers suggested that breast size was the most likely subconscious factor influencing the choice of a melon. The Tesco psychologist’s report also dwelt on the idea that when choosing a melon, customers liked to feel around the blossom end of the fruit with its nipple-like scar . . . Is it just me, or does anyone else think that Tesco’s market researchers should try to get out more, and perhaps get a life? I believe it was Robert Townsend who said of psychologists: ‘I have nothing against 55 year old bachelors who live with their mothers, until they set themselves up as arbiters of normality. ’ Let me save Tesco a lot of money in further research. The reason people do not like big melons is that they crush the rest of the shopping, they are difficult to carry, they fall out of the shopping bag, and they do not fit on the cool shelf in the fridge, and you end up throwing most of it away because it rots and stinks before you can eat it all. I would guess that anyone who has worked in a supermarket for more than five minutes could have told you this. Source: Adapted from Peter Birkett, ‘Sales of Smaller Melons Go from Bust to Boom ’ , Daily Telegraph , May 3 1999.

•• 228 Market sensing and learning strategy: competitive strength through knowing more

Broadly, the difference between market sensing and marketing research is that market sensing describes the processes in the organization that develop management understanding about the external world, while marketing research is mainly concerned with techniques of data collection and reporting – surveys, observation studies, market experiments and so on. The difference is between process (understanding) and technology (collecting data through formal techniques). There is, however, good evidence that one major stimulus for market sensing is marketing research results – it is not so much that one is superior to the other, more that they are different. Indeed, one way of underlining the difference between sensing and formal information collection in marketing research is to consider the mythology that has built up around marketing information.

Reality Check: The myths of marketing information

Myth 1 – We Need More Marketing Information. There seems to be a built-in presumption in the minds of many analysts that if you give managers more information they will make better decisions. Much of this presumption rests on the ‘scientific’ model of decision making. Managers are also party to this conspiracy – the research evidence is that however much information they already have, when faced with a decision managers will demand more information. If anyone says they need more information – try asking them ‘why? ’ Myth 2 – We Need Marketing Information Faster. With scanning at the retail electronic point-of-sale, we can monitor sales and cash flow by the hour! More to the point are questions about what information we need, how complete it is, and what we use it for, than simple technology-driven speed of delivery. Myth 3 – If We Try Hard Enough, We Can Know Everything. If we can just crunch enough numbers, then we will know everything there is to know about this market – and then we cannot get it wrong. Actually, you can never have the most important information because it does not exist when you need it. Myth 4 – We Know What Marketing Information We Want. Surely no one still believes that managers know what information they want? Myth 5 – We Know Why We Want the Information – which does not tie-up very well with the role information actually seems to play in organizations. Myth 6 – Well, We Know What We Don’t Need To Know. One fast way into understanding the culture and dogma of an organization is to look at its information resources. But don’t just look at what information they collect – look at the information they choose not

229 •• Market-Led Strategic Change

to collect; look at the information they discard; look at the information they receive but discredit and refuse to believe. Myth 7 – We Measure What Matters. The evidence is that what most of us measure is not what matters, but what is easiest to measure. Myth 8 – We Know What We Know. More often assumed than tested. Myth 9 – We Know Who Decides What We Know. Do we really know who makes the hidden choices that determine how your organization understands the outside world? Myth 10 – Well, We Know What It Means. But, how often are companies wrong-footed in the marketplace simply because they ignore important information for the reason that it is inconsistent with managers’ past experience?

Dispelling some of these myths is useful because it moves us closer to the reality of information in the organizational setting. One more time: the issue is superior understanding of customers, so the issue is the process of market sensing and understanding, not just the techniques of market research. I have tried to capture this in Figure 6.1 , which compares sources of marketing knowledge with the processes of management understanding.

Processes of management Sources of marketing knowledge understanding

Internal records Management CRM data information Databases systems Interpretation

Surveys Observation Marketing Market tests research Market sensing Market capabilities understanding Ethnography Internet Cross-over Futurology tools

Scanning Marketing Trends intelligence Clues

Figure 6.1 Marketing research versus market sensing

•• 230 Market sensing and learning strategy: competitive strength through knowing more

Unreality Check: A little known fact . . .

It has recently been discovered why there are never any teaspoons in the kitchen when you want to make a cup of tea. It is because while you are out at work, teaspoons migrate upstairs and transmute into wire coat hangers in the wardrobes. All right, it may be silly, but no worse than some of the things that market researchers come up with.

Limitations of conventional market research Apart from anything else, we do no one any favours when we exaggerate what marketing research can do. Conventional marketing research is used and badly abused in many situations, and at the heart of the problem is that we have been brought up in traditional marketing to expect far too much from marketing research.

Unreasonable expectations • • • We expect market research to give us new ideas for products and services and to tell us which is the best advertising. But innovation is not democratic, so if one person in a thousand has a great idea, why do we bury it as ‘ 0.001% of the sample said . . . ’ or more likely ignore it as ‘ other responses ’ ? The US advertising legend George Lois goes further. He says doing research is about being careful and ‘Being careful guarantees sameness and mediocrity’ .20 He says his two best campaigns were the Braniff airlines ‘ If You’ve Got It, Flaunt It’ ads of 30 years ago, and the 1990s poster campaign for the then unknown clothing designer Tommy Hilﬁ ger, which listed the few ‘great designers for men ’ as: R---- L-----, P-----C-----, C----- K----, and T---- H------. * These campaigns infuriated company lawyers, market researchers and competitors, and were outstanding successes for the companies concerned. The ‘ big idea’ is not a votable issue – surveys of opinion about them are meaningless.

The limits of questions • • • We want to know things – so we ask people questions and call it market research. Why do we believe that people know, or will tell us the things we want to know? Scientiﬁ c market research techniques have become much more sophisticated in the past 20 years, and still

* Yes, OK, it took me a while too. They are: Ralph Lauren, Pierre Cardin, Calvin Klein and Tommy Hilﬁ ger.

231 •• Market-Led Strategic Change

fail to predict the result of national elections, unless they are already a foregone conclusion. Those same sophisticated techniques were used to test the taste of Coca-Cola’s ‘ new Coke ’ on 190,000 people prior to launch. The taste test results were positive. The product failed miserably. People do not buy the product for its taste – new Coke just was not ‘cool ’ . Bob Worcester of the MORI research agency says: ‘ Ten per cent of people believe ICI makes bicycles. You show them a list of products like paints and fertilizers, throw in bicycles as a dummy, and one in ten will tick it.’ Fifty years ago a US academic surveyed Americans’ attitude towards the Metallic Metals Act – 38% said it should be passed. There was no such thing as the Metallic Metals Act.21

The right result • • • How often is it true that market research gives us the answers we want because it studies the segment of the market that gives the ‘right result’ – of course, most existing customers say they are satisﬁ ed, why should they own up to being stupid and buying the wrong product; of course most existing customers say they are happy – do you want them to wear a sign saying ‘ I am stupid’ ; what about the customers who left or never tried us?22 Marketing databases, like those created from the retailer loyalty schemes, are wonderful – but what about consumers who do not join the scheme, or only visit the store infrequently – are they of no interest, because proﬁ ling them by recency, frequency and monetary value will tell you they do not matter (so do they starve to death, or shop elsewhere?). *

We don’t believe it • • • When Disney transferred its Disneyland format to Europe – EuroDisney near Paris – the company lost $921 million in the fi rst year. The decision to enter the European market was well-supported by research: fi g- ures showed the growing number of European visitors to the US theme parks. In the conventional Disney way, the location was based on modelling population fi gures – 17 million people live within a 2 hour drive of the Paris site, and 109 million within a 6 hour drive, which are much better fi gures than the US parks show. The fi gures were encouraging, but the launch of EuroDisney was an expensive lesson in the importance of market understanding not market research. The company ignored the failure of amusement parks in France, it dismissed anti-Disney demonstrations as insignifi cant, and it ignored the fact that European holiday

* Though actually my favourites are the consumers who give false names – Stalin, Hitler, Pol Pot and the like. They have the pleasure of being addressed as ‘ Mr Stalin ’ by shop staff, but also when they get junk mail addressed to ‘ Mrs Pol Pot’ , they know exactly who to thank.

•• 232 Market sensing and learning strategy: competitive strength through knowing more

patterns are completely different to those in the USA – people in Europe have longer holidays and spend less on each. Myopia also led the company to ban alcohol from its park – you try telling the French they cannot drink wine at lunchtime and see what happens! Excellent research that ignores the things that really matter (because no one asks the right questions) reinforces company myopia and costs a lot of money to put right.

Excuses • • • Research can provide you with the perfect justiﬁ cation for ignoring new market opportunities. Initial evaluations of tofu, organic toma- toes and alfalfa sprouts as food suggested they were for weirdos only. Organic food is one of the fastest-growing categories in the fresh food sector. The future is not best predicted by opinion polls.

Reality Check: Studying the past

Those who do not study the past will repeat its errors. Those who do study the past will find other ways to foul up.

You probably think this is just a petulant tirade against market researchers? * Well, try the following test.

The elephant in the market When a family suffers a trauma – such as incest or alcoholism – it often refuses to acknowledge it, a syndrome known to therapists as ‘ the elephant in the living room ’ – which everyone steps around and pretends is not there.23 Well, maybe we should think about the elephant in the market, or maybe the elephant in the company. When you look at the things that are studied by our market analysts and researchers, published by our research agencies, and reported in our marketing information systems – are they really the things that matter to managers in understanding the market (or are they the things that we always measure because they are easiest to measure)?

* For reasons that wholly escape me, a junior colleague once left this written on my whiteboard: ‘ Question : What’s the difference between God and a professor? Answer : God does not think she is a professor. ’ I think she must have been thinking of someone else, weren’t you, Carolyn?

233 •• Market-Led Strategic Change

Reality Check: Ignoring the elephant in the market

Under CEO, now executive chairman, Stuart Rose, retailer Marks & Spencer has seen a major renewal of its business in the 2000s. However, M&S entered the 2000s with severe trading problems. Its profitability and share price were collapsing – shares down from a 1997 peak of 650p to just over 150p in late-2000. While successful competitors, such as Next and Matalan, had spotted emerging customer needs and met them, M &S seemed to be hobbled by its history and its cumbersome management structure. Importantly, in the late-1990s confidential company surveys revealed then that customers were losing faith with M &S. But when M& S sales collapsed, the fall was completely unexpected and a shock to senior management in the company. Then-Chairman Sir Richard Greenbury claims that he was never shown the confidential surveys or informed of their findings. Whether they did not think the loss of customer faith in M &S service or ability to provide ‘value for money’ was important enough to tell the CEO, or whether they were afraid to tell him, management did not pass on the message from the customers. This appears to have been some kind of ‘collective myopia ’ in the company – a refusal to face the really big challenge. Some suggest that M& S management had come to believe that they could not fail.

Sources: Kate Rankine, ‘Marks Ignored Shoppers’ Fall in Faith’, Daily Telegraph, October 30 2000. Michael Skapinker, ‘ How to Bow Out Without Egg on Your Face’, Financial Times, March 8 2000. Peter Martin, ‘Look Out: It’s Behind You ’ , Financial Times , May 15 1997.

This is an interesting analysis in most companies. Figure 6.2 suggests that any question of information differs in two respects: importance and urgency. Different types of research question are then divided into:

● Priorities – important and urgent questions that need speedy answers to support management decision making. Issues like quality performance and brand performance would probably fall here – they are core issues for most of us and if things go wrong we need to react. ● Time wasters – questions that do not really matter, they may be ‘ nice-to-know ’ , but that is all. These should be ignored. ● Short-term dilemmas – urgent but unimportant questions that should be resolved by a judgement call not extensive study. Dwight Riskey of Pepsi-Co calls these ‘the curse of the brand manager’ – issues like the colour of the package, the typeface for the logo, Riskey describes these as the ‘ tyranny of the in-box. People busy themselves with lots of tiny, immediate projects, winning momentary job satisfaction while avoiding bigger issues that are important to their business’ .24

•• 234 Market sensing and learning strategy: competitive strength through knowing more

Importance of information

High Low High

Short-term Priorities dilemmas Urgency of Urgency information Time Strategic wasters

Figure 6.2 Strategic Low and non-strategic marketing information

● Strategic – questions that may not be important to the day-to-day running of the business, but are critical to long-term direction. This might include questions like ‘Are there limits to our growth potential in this market and what are they? ’

The challenge is simply this – look at what happens in a company and see where the efforts and resources go. How much of the information is truly strategic (i.e. vital to the long-term direction of the business) and how much goes on short-term dilemmas and time wasters? You may be depressed by the conclusion – typically 1–10% of the effort goes into the strategic area that generates 90–99% of the value. Conventional marketing research is limited in how much it can contribute to meeting strategic information needs – we may need to look more broadly at cross-over tools and intelligence approaches. Building market knowledge and understanding needs to use any and every source of insight available and reject none out of hand.

Reality Check: Spotting the most important information

This is the transcript of an actual radio conversation between a US naval ship and the Canadian authorities off the coast of Newfoundland, released by the Chief of Naval Operations: Canadians: Please divert your course 15 degrees to the South to avoid a collision.

235 •• Market-Led Strategic Change

US Ship: Recommend you divert your course 15 degrees to the North. Canadians: Negative. You will have to divert your course 15 degrees to the South to avoid a collision. US Ship: This is the Captain of a US ship. I say again, divert YOUR course. Canadians: No. I say again, you divert YOUR course. US Ship: THIS IS THE AIRCRAFT CARRIER USS LINCOLN, THE SECOND LARGEST SHIP IN THE UNITED STATES ATLANTIC FLEET. THREE DESTROYERS, THREE CRUISERS AND NUMEROUS SUPPORT VESSELS ACCOMPANY US. I DEMAND THAT YOU CHANGE YOUR COURSE 15 DEGREES TO NORTH, I SAY AGAIN, THAT’S ONE FIVE DEGREES NORTH, OR COUNTERMEASURES WILL BE TAKEN TO ENSURE THE SAFETY OF THIS SHIP. Canadians: We are a lighthouse. Your call. The moral: Believing you have all the facts you need is risky, even if you have a nuclear missile with you.

The New Cross-over Tools between Measurement and Management Understanding One of the excellent developments in recent years has been the spread of new approaches to building deeper market understanding, which span the gap between traditional quantitative surveys and purely open-ended intelligence gathering. They are not really conventional marketing research approaches or traditional intelligence activities, but are really cool.

Ethnography A signiﬁ cant advance of recent years has been the use of ethnographic approaches to developing enhanced market understanding. Some suggest this is ‘ marketing research ’ , but I don’t see any clipboards or questionnaires. How you classify it matters less than whether it has potential for creating new insights into a market. We saw earlier that research suggests it may be mistaken for executives to assume that consumers think in a well-reasoned or rational way, or that they can readily explain their own thinking and behaviour. Accordingly, asking customers direct questions may give misleading results, and observa- tional techniques like ethnography may be more insightful. Ethnography is a social science based on anthropology and its use in marketing studies is based on the idea that richer information and insight can be generated by deep immersion in the consumer’s life, rather than asking questions.

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When WD-40 wanted to reposition a product line as essential bathroom cleaners, the company undertook an open-ended approach to try to understand how consumers clean and how they shop. In-home eth- nographies and focus groups examined consumer cleaning habits and product usage. They found consumers engage in two types of cleaning: weekly deep cleans and quick daily cleaning, and liked the idea of a brand focused on the bathroom. The brand’s new positioning – X14 as The Bathroom Expert – and its competitive differentiation, come directly from insights into how people clean.25 Similarly, when Procter & Gamble wanted to revitalize its Mr Clean brand, it sent people out to watch housewives cleaning bathrooms, without really knowing what they were looking for. One thing they found was that housewives balanced insecurely on the edge of the bath to clean the ceiling and walls with brooms or mops. The P &G initiative resulting was Mr Clean Magic Reach – an extendable tool with change- able pads allowing users to easily clean high and tight corners of the bathroom. This and several other new product launches tripled the size of the Mr Clean US business in two and a half years.26 There are a growing number of cases where traditional research approaches have failed to identify the insights important to new marketing strategy initiatives, but where qualitative, ethnographic approaches have proved full of insight. This extends way beyond consumer products. Xerox’s work practice technology group manager notes; ‘Standard marketing research and statistical data is often frus- tratingly shallow when you want to move towards designing technology. ’ Ethnography and anthropology can provide insights that remain uncovered in traditional quantitative research methods.27

Reality Check: Insights from ethnography

Marriott used an ethnographic research agency to rethink the hotel experience for an increasingly important customer segment: the young, technology sophisticated ‘road warrior ’. A team including a designer, an anthropologist, a writer and an architect spent six weeks touring hotels in 12 cities. They loitered in hotel lobbies, cafés and bars, and asked guests to graph what they were doing hour by hour. The findings were: hotels are generally good at serving large parties, but not small groups of business travellers; hotel lobbies tend to be dark and poorly designed for doing business; Marriott lacked places where guests could comfortably combine work with pleasure outside their rooms. The result was the reinvention of the lobbies of Marriott and Renaissance Hotels, creating for each a social zone, with small tables, brighter lights and wireless Web access. Another area allows solo travellers to work in larger, quiet, semiprivate spaces.

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General Electric used ethnographic research to develop its competitive positioning in the plastic fibres business – providing material for high value products like fire-retardant jackets and bullet-proof vests. Researchers interviewed presidents, managers and engineers at textile makers, touring their offices and photographing their plants. One major insight caused GE to rethink their strategy: GE thought that the fibres industry was a commodity business based on obtaining the cheapest materials. What it found instead was an artisan-based industry where customers wanted to collaborate from the earliest stages to develop high-performance materials – these are people with curiosity who like to get their hands dirty. GE now shares prototypes with customers, by-passing executives, and working closely with engineers on technical questions. A considerable advantage has been achieved in access to a new market. Intel used ethnographic research to examine the use of computers by children in China. The work involved a two-and-a-half year study of Asian families in seven countries, examining their lives and values. In the USA the conventional parents’ belief is that a child should be bought a computer in the early stage of his/her development – exposing the child to computing at the earliest age. In China, parents believe the opposite – they want children to learn Mandarin, and the computer is a distraction from this. This insight led Intel designers to launch a PC aimed at the Chinese home education market, which has a touch- sensitive screen that allows users to write in Mandarin, tracing the order in which the character is being written (correct stroke order being an important part of the learning process). Chinese parents also had misgivings about allowing children unlimited Internet access. Locks and keys are important symbols of authority in China. Instead of installing a software-based key on the PC, Intel included a physical locking mechanism, visible elsewhere in the room, and reassuring to parents.

Sources: Spencer E. Ante, ‘The Science of Desire ’, BusinessWeek, June 5 2006, pp. 98–106. Kim Thomas, ‘Anthropologists Get to the Bottom of Customers’ Needs’ , Financial Times , Wednesday August 24 2005, p. 9.

Hidden in plain sight • • • Deep immersion in the way that people live their lives through approaches of this kind is associated with many successful growth and innovation strategies, following the logic that looking at things through the customer’s eyes reveals the things that are ‘hidden in plain sight ’. 28 The Apple iPod – currently an icon of innovation success – was not a profound breakthrough in technology. But while Sony struggled to design the perfect music player, Apple focused on how people might interact with digital change, and created the iPod/iTunes platform. The search is for better ways of understanding how people behave and

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live their lives, with executives looking at themselves from the outside, rather than focusing inwardly on current successes. CRM technology, while doing little for customer service, collects rich data, which can also be interpreted to see what is hidden in plain sight. Dunnhumby Ltd is the Tesco owned agency which has provided the basis for the insightful analysis of customer data which has become the hallmark of Tesco’s growth in the UK. The agency is now operating in the USA, and runs Kroger’s loyalty card programme. The effects are already being felt at Kroger. Identifying customer groups like ‘budget- conscious’ and ‘ family-focused ’ is guiding Kroger store design and promotions strategy. Price promotions for best-selling products have been stopped in favour of those for store brands bought by the most price- sensitive customers. Coffee, previously arranged by brand and origin, is now divided into caffeinated and decaf sections, because the data show consumers look for that distinction ﬁ rst. Kroger is growing faster than industry average based on detailed customer knowledge.29 While not ethnographic, the interpretation of detailed CRM data provides a powerful means of decoding shopper needs and wants if they are used properly.

Neuromarketing • • • One variation on this theme of deeper customer knowledge from unconventional approaches is ‘ neuromarketing ’ . Consider, for example, the use of magnetic resonance image (MRI) scanning to explore the consumer mind. Research agency Neurosense has worked with fl avour and fra- grance houses to provide physiological evidence that their fragrances and tastes do induce the mood change they claim to produce. Other projects include predicting what people are likely to recall, based on the amount of memory encoding that occurs when people are scanned viewing a product, and comparing how the brain reacts to new product prototypes compared to existing products. 30 While developed as medical technology, functional MRI use aims at probing consumer preferences for different kinds of products. Critics see the development as sinister and a misuse of technology. Nonetheless, Ford and Chrysler in the USA have used scans to monitor brain activity as people examine car interiors.31 Interestingly, fi ndings are more sugges- tive of the limitations to how much peoples’ behaviour can be changed by marketing stimuli, rather than providing new all-powerful tools of infl uence.32 Nonetheless, it is interesting to see teams of neuroscientists and psychologists working with designers to create houses that not only look good, but also feel good.33 While in its early stages, neuromarketing may be an interesting source of new insights into customer behaviour.

Internet sensing It is pretty obvious that the Internet provides a whole new set of ways to observe and evaluate customers and markets. Some are more surprising than others.

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The Wisdom of Crowds • • • James Surowiecki coined the term ‘ the wisdom of crowds ’ to describe the phenomenon whereby groups may be remarkably intelligent, and often smarter than the smartest people in them.34 Recall that, earlier, we discussed the impact of ‘ crowdsourcing ’ on radical innovation strategy – in the form of open source collaborations. With more than a billion people in the world online, an increasing number of companies are using Internet-based services to tap into the collective intelligence of employees, customers and outsiders to generate new ideas and insights. 35 We noted earlier that external scientiﬁ c networks already contribute 35% of Procter & Gamble’s new products. Eli Lilly taps into the wisdom of crowds with ‘prediction markets’ to forecast better. IBM runs an ‘ Online Innovation Jam’ , inviting clients, consultants, and employees’ families to provide new ideas and insights into technology – and the new ideas are open-source: they are fair game for anyone who logs on. The IBM hope is that 100,000 minds will lead to new ideas so powerful they will transform technology, alter human behaviour and lead to new businesses for IBM.36

Blogs • • • Companies are also waking up to the value of ‘ blogs ’ (web logs or a form of online diary) as a way of listening to and talking to customers. The promise is to understand better the shifting landscape of opinions about businesses, brands and reputations. 37 For example, Dove, the Unilever beauty brand, engaged with consumers to debate the nature of ‘ real beauty’ online, underpinning its distinct brand positioning. Nike asked consumers for video clips of their football skills, to get closer to understanding how consumers use sports footwear. The engagement may be uncomfortable – Coke was distinctly unamused by YouTube video clips showing people making small explosions by putting Mentos mints in Diet Coke, but later relented and joined in the fun. 38 The ‘ blogosphere ’ is becoming an important way to engage with consumers.

Virtual reality • • • We looked at the strange phenomenon of virtual reality worlds like Second Life in Chapter 1 and pondered what they might be for. Well one thing that is happening is the use of Second Life by companies to get reactions to different business scenarios. For example, IBM has established IBM Land on Second Life, a network of 12 islands, to test new forms of internal communications, new applications and new business models.39 Companies are turning to virtual ofﬁ ces and landscapes as tools for employees and business partners to collaborate and learn.40

Social networks • • • Relatedly, others are using the social network phenomenon as a learning mechanism. In 2007, Procter & Gamble launched two social networking sites to gain insight into consumer habits and interests by using the

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online forum to allow women to tell their stories and learn from each other about such issues as breast cancer, careers and families. 41 Other companies monitor online searches relevant to their products, and conversations about them on sites like Facebook and MySpace.

Futurology Some companies are using futurologists and scenario planners to challenge their assumptions and to make sense of new trends. Shell, for example, has a lengthy history of scenario planning – looking at things that might happen and how to react if they do. Prompted by the 9/11 terrorist attacks and the collapse of Enron, they have focused on themes of insecurity and mistrust to develop three scenarios of the ways in which the world may develop: low-trust globalization – a legalistic world with intrusive controls, encouraging a short-term attitude to fi nancial returns and vertical integration; open doors – a pragmatic world with built-in security certifi cation and close links between investors and society encouraging cross-border integration; and, fl ags – a dogmatic world of confl icts over values and religions putting a brake on globalization, where gated communities and national standards exacerbate fragmentation and make country risk management essential. The goal is to take managers out of their comfort zones and encourage open-minded approaches to the big ‘ what if . . . ’ questions. 42 Trained futurists have three key approaches: careful examination – looking more closely than most people do at what is really going on around us, with the aim of seeing things coming before the competition does; scenario-building – developing descriptions of how things may unfold, and then identifying warning signals in each scenario and watching the world closely for these signals; and visioning – working out not only what is likely to happen but what you want to happen.43

Reality Check: Warning signals at Visa

In the late-1990s, Visa feared the threat of online payment systems. They built four scenarios, including one where a venture capital- funded start-up began a new Web payment system and defeated Visa, and one where online rivals fizzled out and failed. The company began to track signals that might suggest scenario number one was beginning, e.g., the number of new online businesses that signed up to the new Web payments systems, the level of advertising by start-up rivals, and their capitalization. By 2001, all those measures were declining. As a result of scenario planning, Visa had not rushed in to invest in its own online payments system, and had avoided being dragged into an unprofitable area.

Source: Adapted from Graham Bowley, ‘The Time Lords’, FTMagazine , January 27/28 2007, pp. 17–23.

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Futurologists struggle with the fact that they are not always right about the future. In many ways this is not the point. It provides another way to challenge an organization’s assumptions and stereotypes and focus attention on the external challenges to be faced.

Reality Check: Getting the future wrong

Dionysius Lardner, Irish scientist 1823 – ‘Rail travel at high speeds is not possible because passengers, unable to breathe, would die of asphyxia.’ Two hundred years later, it does appear that rail travel at high speeds is indeed impossible, but for quite other reasons. Dr Heinrich Dreser, head of Beyer drug research laboratory, 1898 – announced he had found a non-addictive substitute for morphine. It was called heroin. Irving Fisher, professor of economics at Yale University, 1929 – said that shares were at a permanently high plateau. The Wall Street crash followed soon afterwards. Coco Chanel, 1966 – ‘It’s a bad joke that won’t last. Not with winter coming’ . Talking about the mini-skirt. Ed Yourdon, software expert, 1999 – ‘I expect New York to resem- ble Beirut if even a subset of the Y2K infrastructure problems actually materialize . . . Y2K is so worrisome, in my opinion, that I will make sure my family isn’t there [in New York] when the clock rolls over to January 1, 2000. ’ Nothing happened.

Source: Adapted from Martin Wroe, ‘Back to the Future: 2008 ’, Sunday Times , December 23 2007, p. 1-12.

Marketing Intelligence Marketing intelligence efforts are a more familiar approach to examining trends and changes. In reality, many of the most valuable inputs to enhanced market sensing will be messy, qualitative, subjective and incomplete market intelligence. As with the cross-over tools, importantly, precise measurement is not the only route to understanding.

Reality Check: Information and analysis versus common sense

During World War II, at the request of the Royal Air Force, researchers were tasked with identifying the most important areas on aircraft that should be protected with additional armour. Conventional wisdom was that armour protection should be concentrated on the engines and the fuel tanks.

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The researchers therefore arranged to inspect bombers returning from actual raids over enemy territory shortly after they landed. The methodology involved identifying bullet and shrapnel damage and carefully assessing the concentration and severity of damage to each aircraft. Their findings were stunning – conventional wisdom appeared quite wrong. On the aircraft they examined there was little if any enemy damage to the engines and fuel tank areas, suggesting no need for additional armour plating in these locations. Fortunately, their report was quashed when one of the fliers pointed out that they were examining the planes which survived and got home, and maybe they should look at some of the ones that got shot down, mainly through hits in the engines and fuel tanks . . . .

Many companies now have in-company intelligence units to coordinate and disseminate soft data and improve shared corporate knowledge.44 If the issue is, for example, competitors’ promotional activities, knowing what they are doing and responding is what matters, not having it written in a report with full statistics and graphics. The goal is to know something that your competitor does not, or if we all have the same information to use it more effectively than the competitor. Intelligence is about knowing things, rather than measuring them. Intelligence is about spotting patterns of change in the market and using that understanding to respond, not complex market research projects.

Reality Check: Marketing intelligence

In any organization, there is always one person who knows exactly what is going on – that little creep must be fired!

The issue of competitive intelligence is not new – as long ago as 1981 BusinessWeek published The Business Intelligence Beehive , describing how Japanese companies had set up surveillance posts through the heartland of the US computer industry in Silicon Valley in California, to monitor US technology development by hiring American software experts. Competitive intelligence sources run all the way from readily available ‘ open sources ’ (like press clippings, government records, trade shows, industry reports) to observation of competitors’ activities and interviews with competitors’ suppliers, customers, former employees, present employees and so on. This is not particularly sophisticated. Yet US research still divides companies into: intelligence ostriches – who did not use intelligence gathering, and did not believe their competitors gathered intelligence about them; compared to, intelligence eagles – who know these competitors are watching their every move, and do the same in return.45

243 •• Market-Led Strategic Change

You might like to raise the issue of which category your company falls into. It might help if you know that an agency called OTA/Off The Record Research already claims to have intelligence informants in all the world’s largest companies,46 and with the outbreak of peace, many spies have moved into lucrative corporate intelligence work. 47 The point is that while intelligence may be no more than a press cutting, a chat with a competitor’s employee at a meal, a note from a salesperson about a rumoured new product coming out, compared to the beautifully produced marketing research report complete with statistics and graphics, if our goal is understanding then it is probably a better source.

Trends and clues Although they may not easily be considered in conventional marketing research exercises, one of the major contributions of intelligence gathering is to identify important market trends and changes, and to identify important indicators or clues for how those changes will work out.

Trendspotting • • • In some ways related to futurology, some companies are making substantial investments in enhancing their capabilities to identify and react to important trends in markets and customer behaviour. For example, top tips for success in 2008 were: ‘ aroma-emitting ’ clothes which will release scents based on the wearer’s mood; the Bubelle dress that uses sensors to change colour in line with the wearer’s emotions; the sQuba, the world’s fi rst ‘ drive and dive ’ amphibious car; Mo’s Bacon bar, the world’s fi rst bacon-fl avoured chocolate. These are all real examples. Before laughing at them, consider how many of us would have predicted the run-away success of the iPod and the Nintendo Wii before the event, or would we just have thought they were weird?48 Web service trendwatching.com has 8000 trendspotters across the world e-mailing in daily reports on emerging products or move- ments on customer behaviour. Trendspotters are predicting changes as diverse as: the emergence of peer-to-peer lending, in which lenders and borrowers meet online and by-pass banks; the emergence of the colour blue as the brand of popular environmentalism and good citizen ethics; cooperative consumption through fractional ownership of products like cars; the convergence of beauty and medicine as customized workouts based on personal genetic profi ling to help people keep fi tter and look better. 49

New identity groups • • • Mark Penn argues that the reality of studying trends is that the issue is no longer seismic cultural shifts, but detecting the emergence of large numbers of new ‘ identity groups ’, which have not yet been identiﬁ ed

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by companies or policy makers. It was Penn who identiﬁ ed ‘ soccer mom ’ swing voters for the 1996 Clinton US presidential election. His 75 identity groups who are shaping the future include: ‘ cougars ’ – women dating younger men; ‘living apart togethers ’ – couples in long-term relationships who do not live together; ‘ aspiring snipers ’ – the one per cent of Californians aged 16 to 22 who said they expect to be urban snipers within ten years; ‘ vegan children ’ ; ‘ extreme commuters ’ ; ‘ internet married ’ and ‘ old new dads ’ .50

Reality Check: Trend czars at Target Corporation

Target Corporation is a successful US retailer mainly of products for the home and clothing. When Target employees travel, they are expected to do more than attend their meetings – they are also expected to write reports about various trends they come across around the world. These reports supplement the work of official ‘ trend groups’ whose purpose is to travel the world and uncover new, popular themes in home décor, clothing and other retail lines. Target’s Executive VP for Marketing says the effect is create ‘trend czars’ in every area of the company. Target’s focus of trend gathering goes beyond traditional consumer research, and it provides an edge against competitors like Wal-Mart. Spotting trends is the beginning, but Target’s integrated operations like in-house design bring those trends to Target shoppers faster.

Sources: Christopher Lawton, ‘We Are All Marketers Now’, Wall Street Journal, August 1 2007, p. D9. Noel Capon, The Marketing Mavens, New York: Crown Business, 2007.

The quest for cool • • • In fact, spotting trends may just be the ﬁ rst stage in participating in them. In the USA, General Motors has concluded that its cars are just not cool enough – young, urban trendsetters on the East and West coast are ignoring them. The company has turned to Steve Stoute to help them add a ‘ hip-hop ’ ethos to their brands, to resonate with a younger, more trendy audience. Stoute’s skill is to put urban fashion and lifestyle into the mainstream. He characterizes his ﬁ rm as the ‘ McKinsey of pop culture’ . Stoute says he is helping executives to understand the ‘tanning of America’ – a generation of black, Latino and white consumers with the same ‘ mental complexion ’ and ‘ shared experiences and values ’ . He is connecting GM with hip-hop artists like Jay-Z and using social and music media to reposition GM brands. Of course, it remains to be seen whether GM can become cool before it runs out of money. 51

245 •• Market-Led Strategic Change

Interestingly, Tokyo is increasingly recognized as the home of cool. For this reason, fashion houses like Abercrombie & Fitch, H& M and Zara are using Japan as the testing ground for new ideas. For example, in 2006 the creative director of bagmaker LeSportsac noticed Tokyo shoppers gravitating towards larger sizes of their casual nylon bags. She discovered that fashion stylists in Tokyo’s up-market Omotesandro district used big bags to lug their gear around. High school girls started to mimic them, and the bigger bags caught on with cool shoppers in the rest of Japan and the world. She says, ‘ I can see something happen in Tokyo and watch the ripple effect across the Paciﬁ c to New York and then watch as it goes back to LA’ . 52 Now even Google uses Japan as a real-life laboratory to gather feedback on new types of search and cutting-edge hardware used by Japan’s discerning consumers.53

Looking for clues • • • It is also worth bearing in mind that executives tend to have informal indicators of change that they take very seriously. Economic prosperity may be judged by what taxi drivers discuss, restaurant bookings, the volume of junk mail, the queue of limousines outside expensive hotels. Anecdotal evidence appears well before anything shows in hard data. 54 For example, the hotel fi rm Travelodge mischievously publishes a survey of the books most often left in hotel rooms. This provides a crude index of which books are most ‘ put-downable ’ and unlikely to be retained by readers. Before you ask, in 2007 the ‘ winner ’ was The Blair Years by Alistair Campbell, closely followed by Don’t You Know Who I Am? by Piers Morgan. So, the evidence suggests this survey is a pretty good indicator of the most boring and tedious books around.55 In a different context, Nam Yong’s successful leadership at LG Electronics has been built around a focus on consumers instead of competitors. On his travels, Mr Yong pokes around people’s living rooms everywhere from Brazil and Russia to the UK and USA. He is interested in how consumer electronics have become about lifestyle and emotion and how this will matter to LG. He was surprised, for example, that many London homes do not have much space for a large TV because living rooms have a fi replace on the wall where Koreans would normally place a 50-inch fl at-screen TV.56 Where and how executives collect clues that support their market sensing is important for two reasons: fi rst, it may generate challenging new insights; second, they may get the wrong end of the stick, and cling to meaningless indicators.

Deep mining • • • Some attention has been gained by companies offering ‘ deep mining ’ on the Internet and with services like dismantling competitor products to identify components and suppliers.

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Reality Checking: Smashing research

When Apple launched the iPhone in June 2007, one of the first customers was a company called iSuppli in California. Their role was to smash the product into pieces. ‘ Teardowns ’ like this provide the means to identify which companies have won contracts to supply internal components. This intelligence is of enormous value to other handset manufacturers, but also to stock market investors. The data identify little- known suppliers who may benefit from the iPhone run-away success, and also allow predictions of how Apple’s cost of manufacturing for the device may fluctuate.

Source: Adapted from Chris Hughes, ‘Banks Delve Deep to Locate Esoteric Data’, Financial Times , September 14 2007, p. 23.

But play nicely and don’t be naughty There are some major constraints on what you can do in this area. The penalties of transgression may be substantial. There are both legal and ethical issues. There may be very fi ne line between intelligence gathering and economic espionage. Interestingly, the Trident Group is thought to be the only US corporate intelligence fi rm staffed by ex-KGB agents, and specializing in the Russian market. Many CIA operatives enter business intelligence work when they leave government service – many more than in the past.57 However, it is worth bearing in mind that there are some fairly clear limits to what is acceptable in commercial intelligence gathering. Long known for a macho, ‘ win at all costs’ corporate culture, Boeing saw a deal to sell refuelling tankers to the Pentagon frozen when documents revealed that a Pentagon offi cial may have tipped Boeing off about a lower bid from Airbus, with the offi cial later being given a job at Boeing (and then fi red when the story broke). In 2003 Boeing was banned indefi nitely from bidding on military satellite projects. The reason was that Boeing was found to possess documents from rival Lockheed Martin that helped win earlier rocket contracts. The Pentagon also transferred $1 billion of future business to Lockheed Martin. The CEO and Chairman of Boeing left the company abruptly in 2003. 58 People are getting increasingly sensitive about what you know about them and how you fi nd out. A manager at Camelot, the national lottery company, was caught out using false identities (i.e., lying) to gather intelligence from rival companies, which Camelot wanted to beat off to win the 10-year lottery licence. She was forced to resign, but on this occasion Camelot escaped penalties other than bad publicity. 59 Ethical concerns also surround the practice of doctors providing access to NHS patient information (paid access) to private health companies selling their services.60 The willingness of doctors to monetize their patient

247 •• Market-Led Strategic Change

information may yet extend to sharing peoples’ health data with insurance companies. Procter & Gamble was embarrassed in 2001, when forced to admit that a company working on its behalf had trawled through the garbage at Unilever to gather intelligence about its rival. Some care is needed in gathering intelligence in terms of how would you feel if people knew you were doing things this way, and whether you feel justiﬁ ed in using intelligence that has been gathered in dubious ways (even if done so by others)?

Managing customer knowledge Where it all comes together is in the question of how well we manage knowledge for competitive advantage with our customers. Diverse sources of insight into customer and markets are increasingly being brought together as key ways of building better understanding and developing better learning capabilities – the challenge is becoming to manage customer knowledge better than our competitors do. Peter Drucker pointed out, for example, that 90% of the information that companies collect is internal – market research and the like that only tells the company about itself. The challenge is to build knowledge about customers, about non-customers, about new markets they do not serve and new technologies that they do not yet possess.61 W e may yet see a new organizational role emerging – the Chief Knowledge Ofﬁ cer.62 In case this sounds like an impossible dream that can never be realized, a recent study shows us four ways to improve the availability and use of customer knowledge so it impacts on our strategic choices: 63

● Creating ‘ customer knowledge development dialogues ’ – for example, in the USA Chrysler’s Jeep division runs customer events called ‘ Jeep Jamborees’ , attracting enthusiasts from far and wide. As well as observing customers using the vehicles in skills-related events, Jeep employees connect with customers through informal conversations and semi-formal roundtables. Jeep employs engineers and ethnographic researchers to build from this a better understanding of Jeep owners ’ relationships with their vehicles. This understanding drives changes to existing models and plans for new models. ● Operating enterprise-wide ‘ customer knowledge communities ’ – for example, IBM uses a collaborative Internet workspace called the CustomerRoom, focused on its major accounts, where individuals throughout the company’s divisions and functions can exchange knowledge about particular accounts, including customer contacts and changes, proposals being developed, and research opportunities that can address a customer’s emerging needs. ● Capturing customer knowledge at the point of customer contact – for example, one ﬁ nancial services company is already experimenting with call centres that focus on potential customer defections. Based on a combination of customer activity information and customized solutions that address customer dissatisfaction issues, customer

•• 248 Market sensing and learning strategy: competitive strength through knowing more

service representatives can make product offers tailored to win the proﬁ table customer back to the company. ● Demonstrating management commitment to customer knowledge – management has a responsibility to invest resources, time and attention in maintaining customer dialogues and communities as a commitment to customer focus. For example, the Vice President of marketing at Ford’s LincolnMercury division actively participates in, and encourages other employees to monitor, customer-related chat- rooms on the Internet.

Managing customer knowledge is about building understanding and better responses to customer needs and how they are changing. What it comes down to is this. You may cling to the idea that customer focus is about running the occasional customer care campaign, and that marketing information is about running surveys and writing reports, if you wish. However, market leaders across the globe are developing superior market understanding and sensing capabilities because they know that learning is the basis for developing superior strategies. You work out the difference and what it means for your company.

Interpretation With multiple sources of marketing knowledge that can be exploited (see Figure 6.1 ), the link between sensing and management understanding relies on processes of interpretation. Smith and Fletcher make a compelling case that we should focus more attention on the process of interpretation, giving decision makers a rounded view of what all their evidence is saying. They propose a ‘data-rich intuitive analysis ’ which is more holistic than focusing on a single source or type of information. Intuition should be included in interpretation processes, though accepting that it may be plain wrong.64 The integration, though imperfect, of hard marketing research data, softer data from approaches like ethnography and intelligence gathered from activities like futurology and trendspotting, is central to what we described earlier as evidence-based management that challenges stereotypes and takes executives outside their comfort zones to confront head-on how markets and customers are changing and where the opportunities are emerging. It relies on a sense of open-minded enquiry which has often been missing in the past. The goal is learning and sustaining learning to create competitive advantage.

Lessons in Learning Importantly, examples of effective and insightful market sensing suggest that market learning does not just rely on technology and formal study. One of the hardest things we have to do in building customer focus is simply to learn to listen better to customers. This is not about

249 •• Market-Led Strategic Change

sophisticated surveys and tests or huge computer databases, just about listening and being prepared to learn. If you can ﬁ nd better ways of listening to customers, the pay-off may be enormous. The surprise again and again is that customers will actually talk to you and help you learn how to be better if you are just prepared to listen.

Storytelling Some major organizations have adopted storytelling as a way of listening and learning – not as silly as it sounds because it comes out of the insights of Gerald Zaltman at Harvard Business School. The goal is to fi nd out the things that are missed by the conventional surveys and focus groups, and the method is to get real-life stories from customers about how they behave and what they really feel.65 Some of the results are impressive: Kimberley-Clark reinvented the baby’s disposable nappy business. The paradox in this market is that every time a baby graduates to underpants from nappies you lose the customer forever. * The issue was would people buy ‘ training pants ’ – a transition product that looks like underpants but works like a nappy? K-C sent small teams of individuals (many themselves in the midst of the trauma of toilet training their own children) into consumers ’ homes to hear real-life stories. What they discovered was that the real stress in toilet-training came from parents ’ feelings of failure, and dread of someone looking at their child in horror and asking ‘ Oh, is your child still in nappies? ’ Nappies are an indicator of child development, not just a waste-disposal product. This is what really matters to young parents, but it is not what they say in conventional surveys and focus groups. K-C launched Huggies Pull- Ups training pants in 1991, and by the time the competition caught-up they had a $400 million business. Intuit is a computer software company, whose worldwide success with Quicken personal fi nance software grew out of listening to customers’ problems in balancing their cheque books, let along getting a computer to do it for them. Chairman Scott Cook, says ‘ People don’t buy technology. They buy products that improve their lives.’ He concluded that personal fi nance software that could only be operated by the computer-literate 12 year old in the family would just get turned off. They have gone to a lot of trouble to listen to customers. They have ‘ usa- bility labs’ where non-users come in and try to make the product work. They have a programme called ‘ Follow Me Home ’ – a kind of formal- ized stalking when employees go home with the customer, have a tour of their cheques and bills boxes, and look over their shoulders while they use the Intuit software. They also leave a cassette recorder so when it all goes wrong the customer can hit the Record button and say what happened. Customer stories are the basis for product improvement and the creation of highly user-friendly software, and also new products – they found that small business owners were using Quicken home

* Well, actually, you lose the customer for about 75 years, but that is another story . . .

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ﬁ nance software to keep their business accounts. The product was not designed for this purpose, but people preferred it to conventional business accounting software that forces you to learn double-entry book- keeping, when you don’t need to. Today, Intuit’s ‘ QuickBooks ’ is used in thousands of small businesses around the world. This is not high technology stuff. But, when was the last time anyone in your company came back with some ‘ war stories ’ from customers and got taken seriously?

Watching customers Other companies have discovered you can learn just by watching the people who set the standards. The fancy name is generating ‘holistic customer insights ’ , but it’s really just about watching and learning: The power tools company Black & Decker achieves its innovative product designs and features by watching people using the tools and asking them about the experience and what would make it better (in the context, of course, of the well-known male bonding ritual with power tools). At Sony, marketing innovative consumer electronic products, they have an even simpler logic: they say our employees are our customers, so let’s give them the product to take home and test, and then they can tell us about it. At Nike the business is not really sports clothing, it is fashion – so they employ ‘trend observers ’ , to follow and observe the setters of trends in fashion – urban youth, sports stars, pop stars and so on. This is pretty simple stuff, but the evidence is few companies do it, or do it well.

Meeting customers There is actually a big learning experience for most of us not just in meeting customers, but meeting them in the real world, where the product or service is consumed, is likely to tell you things you will not otherwise learn. Talking to passengers actually on the long-haul fl ight or waiting in the airport will tell you how angry and frustrated they are at their loss of control over the process and what really irritates them, more so than nice controlled interviews later when the fl ight is just a (bad) memory. Just talking to people walking round the supermarket will tell you more about what they like or don’t like, than questionnaire surveys will. For example, one bank went for a glass-wall design for its offi ces for customer contact staff – the design won prizes, and was received favour- ably in market tests. The bank thought it made staff more approachable – in the actual event customers felt robbed of their privacy and were very uncomfortable, and were prepared to say so when asked.66 Similar effects exist in the business-to-business setting. For example, a key aspect of implementing a vertical marketing strategy with one manufacturer was that the company was not organized around markets, it was structured around products, and that was the way managers

251 •• Market-Led Strategic Change

liked things. There was much resistance to an industry sector-based strategy which cut across different product departments, to put together the product range customers wanted. One of the most inﬂ u- ential ways that this resistance was reduced was simply by organizing events and social functions around the target industrial sectors (actually in the form of training seminars and charity events). The effect of having senior managers meet customers informally and talk to them was fundamentally to shake the corporate belief that strategies were about products not markets. Unhappily the frequent experience in meeting executives is their carefully rehearsed reasons why it is not appropriate for managers, for example from important departments like production and logistics and customer service, to ‘ waste ’ time on visiting customers.

Customer days Following the same logic, one very powerful way of getting customers taken seriously in the company is if we can get them to come to us – to enter the corporate lair and tell us what they think of us and our products. Although this is most obviously applicable to business-to-business market, it can be done anywhere. For instance, CIGNA, a major health insurance organization in the USA, has faced a process of strategic change from marketing to employers, to marketing to employees. One problem the company faced was that managers believed that what they knew about their old markets would apply to their new markets. It did not. The marketing vice-president confronted this problem in stages. First he asked teams of managers to specify the key customer needs and preferences for the new market. Second, he organized Customer Days, when groups of customers visited the company to tell managers what they believed were their needs and preferences. Stage three was to wait a short period while managers licked their wounds. Stage four was to ask managers to compare the two lists and their recommendations of how the company needed to change its approaches to attack the new market. He says this was a brutal process but changed managers ’ minds about a few important issues. Surveys and research reports may be excellent things (or not) – generally they do not seem as powerful a form of communication as real customers who come to spit in your eye, and tell you face-to-face what they really think of you. Put it this way, if Lou Gerstner was able to run IBM and still spend 40% of his time talking to customers – what are the rest of us doing?

Building customer scenarios Another approach is to map out broader ‘ customer scenarios’ , that identify the whole context in which customers buy, or meet the challenge to ‘get inside the lives of your customers’ . 67 For example, two

•• 252 Market sensing and learning strategy: competitive strength through knowing more

shoppers arrive at an electrical goods store looking for a refrigerator – they seem identical and probably get treated the same. In fact, the fi rst shopper needs the new fridge to replace one that died the night before, to save the frozen food from melting, while the second is looking for a fridge for the house he is building that will not be fi nished for months. They have very different needs – the customer scenario of the fi rst is ‘ emergency replacement’ , and of the second ‘ furnish a new home’ . Treating them the same misses major opportunity – e.g., to sell a whole kitchen to the home furnisher, and insurance to the emergency buyer. Originator of the concept Patricia Seybould describes customer scenario building as focusing on the goal a target customer needs to fulfi l in a particular situation, mapping the scenario and looking for ways to improve it from the customer’s perspective. For example, the business traveller frequently needs to change air fl ights, but receives no support in the hotel, suggesting the potential for Internet-based in-room services to facilitate fl ight re-booking.

Listening not evaluating If we are privileged enough that our customers will tell us things, our role is not to evaluate and disagree because we know better. Our role is to keep quiet, listen and learn. In fact, perhaps the single most diffi cult thing to confront in this whole area is that customers may see things differently to us. They may have very different ideas about what matters about our products and services. This is very unfair – we are the experts, after all. If we say the computer switch belongs on the back of the box, or you cannot have a TV rental delivered on a Sunday or in the evening, or the offi ce has to shut at lunchtime so people can eat, or guests should not walk on the grass in front of the hotel, then surely people should bow to our superior wisdom and professional expertise? I think not. Taking the trouble to fi nd out what matters to paying customers, respecting, not rubbishing those priorities, and doing something about them is likely to be a painful process for many of us. It may be one of the most powerful sources of competitive advantage and real customer focus, and it may be staring us in the face.

What about the complainers? In an ideal world where we got everything right there would be no customer complaints. We do not live in an ideal world. If we do not receive any customer complaints it does not mean all is well – do not confuse silent customers with satisfi ed customers. It probably means our customers think so poorly of us they cannot even be bothered to tell us how bad they think we are. The fi gures about dissatisfi ed customers and complaining behaviour are depressingly well-known: most dissatisfi ed customers do not complain to us – probably only 4–5% bother; dissatisfi ed customers tell everyone except us; dissatisfi ed customers buy less and seems to do their

253 •• Market-Led Strategic Change

best to get others to buy less as well; but typically the cost of complaint resolution is 10–25% of the cost of ﬁ nding a new customer; often people do not complain because they know we will make complaining a horrible and demeaning experience.68 But perhaps the real point is – what does a company learn from the customers who complain?

Enhancing Sensing Capabilities69 The focus of market sensing is managers’ understanding of the market. We have shown that understanding is not the same as information. It is about developing new ways of looking at the outside world, to improve the way in which we develop our market strategies and deliver our marketing programmes. This is a process that we can manage for greater effectiveness in most companies. This is not something to be taken lightly. What we are building up to is no less than a challenge to the organization’s culture.

Reality Check: Challenging the status quo

An interesting story from the operations research literature of World War II illustrates the importance of challenging the way things are. Researchers made a film of the military drill used by soldiers to load and fire the big guns, looking for ways of improving efficiency. They found that in slow-motion the film showed that at the end of the drill, just before firing the gun, two soldiers who played no other role stood to attention behind the gun. No one could explain what this was for, but assumed it was essential because that was how it was always done. Finally a World War I veteran looked at the film and said ‘Ah, yes, of course . . . they used to hold the horses to stop them bolting! ’

The underlying problem is that telling people what their problems are, and by implication to get their act together, has proved to be a singularly ineffective approach to winning peoples’ commitment and achieving effective strategy implementation. This is for a number of reasons. First, corporate culture may be such a barrier that they simply do not believe us. Culture has been deﬁ ned in many ways, but a useful deﬁ nition of culture is ‘ the way we see things here’ . This includes the process of selecting the information we accept and what we reject, the issues we monitor and those we ignore, and all the assumptions we make inside the organization about the outside world – what works in this market and what does not, who the competitors are and how they respond to competitive challenges, what matters to customers, how the market is changing or not changing, and so on. The underlying point is that people

•• 254 Market sensing and learning strategy: competitive strength through knowing more

in organizations develop simplifi ed models, which become their shared understanding of the world. The problem arises when that shared understanding becomes out-dated and infl exible, and yet we still cling to it – and, after all, we must be right because everyone around us agrees. Second, ‘ telling ’ people what their problems are is unlikely to gain their ‘ ownership ’ of those problems – communication effectiveness demands that we recognize the importance of employee and manager perceptions of events and the strength of two-way communication to identify problems in those perceptions. Quite simply, it is naive to expect attempts at one-way communication to change people’s minds about things. Third, it is too easy to be simplistic in assuming that we know how managers search for information and use it when they have it for decision making. There is abundant evidence to suggest that the information search and use in organizations is complex and refl ects many needs other than making better decisions. It follows that a critical precursor to strategy implementation and change is that the people who have to change in a company see the need and reasons for change. But, just telling them does not seem to work. This suggests the need for an approach to improving the understanding that managers and specialists have of their markets, which uncovers the problems to be solved and identifi es the new challenges to be met, but which involves ‘ fi nding out’ what matters, not just being told. In this situation the role of the marketing planner or analyst becomes one of managing the process of market sensing, not simply the provision of information and conclusions. The approach described below is a simple method of achieving some of these things.

A structure for market sensing This approach is simple and accessible to managers. The goal is simply to provide a structure for executives and planners to articulate what they know about changes outside the company, and to identify the most critical gaps in that knowledge. There are two stages. First , we need to specify: which environment facing the company we are evaluating and the dimension of the environment to be analysed (see comments below on how to manage these choices for maximum effect); the time-frame (normally 3–5 years); and the market in question also should be specifi ed. The task then is to brainstorm the events in the chosen part of the company’s environment which might take place or which are currently developing. The most important events are listed (and also mnemonic codes for ease of reference). However, the framework also requires that we identify specifi c effects on the company if this event takes place. If we cannot do this – the event is too broad and should be defi ned more narrowly, or it is unimportant to our analysis. Then, we need to do two further things: assess the current view of the probability of the event happening (initially a subjective ‘guesstimate ’ which we may want to test and evaluate further), and the likely effect of the event on the business if it does happen (the suggested scale runs from 1 Disaster to

255 •• Market-Led Strategic Change

Probability of the event occurring

High Medium Low 7 Field of Utopia 6 dreams

5 Effect of the event on the Things to company* 4 watch

3 Future Danger 2 risks

*1 Disaster, 2 Very bad, 3 Bad, 4 Neutral, Figure 6.3 A 5 Good, 6 Very good, 7 Ideal framework for market sensing

7 Ideal). We should try to build a full view of the most important aspects of the environment as they impact on the company. Secondly , the events (or their codes) are then entered on the model in Figure 6.3 – positioned by the scores we have placed on the probability of each event occurring and the effect of the event if it does occur. The broad categories of event are categorized into: utopia – events with a very good effect which are very likely to occur; ﬁ eld of dreams – events that are highly desirable but seem unlikely to happen the way things are at the moment; danger – events that are very threatening to the company and are very likely to happen; future risks – undesirable events that seem unlikely to happen, but which we may want to monitor in case they become more likely; and, things to watch – where we do not see the probability as very high and the impact is relatively neutral, but where monitoring is needed in case either of these changes. What we now have is a model of the outside world, which we can use for testing the robustness of proposed market strategies, identifying information gaps and evaluating market attractiveness. However, making this truly effective is far more about how the process of market sensing is managed, rather than just ﬁ lling in forms and building models.

Managing the market sensing process The approach described above is very simple to implement. It is accessible and provides a structure for the information and intelligence in the company, and captures a picture of the outside customer and competitor

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world as it is currently understood in the company. This is, however, only a starting point in achieving our goal of building and sharing real market understanding so that it impacts on strategic decisions and implementation. There are a number of key issues to be addressed in managing this process, which are summarized as a checklist in Table 6.1. The ﬁ rst two points relate to how to focus thinking to the maximum advantage, the next three are concerned with linking market sensing to planning, and the last points address the issue of how to enrich the sensing process.

Choosing the environment • • • The ﬁ rst issue is what approach to the outside world is potentially most needed to confront change and inﬂ uence behaviour in the company.

Table 6.1 Checklist for Managing Market Sensing

Questions Examples Goals

What environment needs Business, Market, Competitive, FOCUS on the area where addressing to improve our Technological, Legal, International our assumptions are weakest market understanding, customer Environments and our market understanding focus and market strategies? is poor How should we subdivide the Business Environment: FOCUS on the most critical environment to understand it Political, Economic, Social and aspects of the chosen better? Technological environment How should we interpret the Impact on customer relationships LINK TO PLANNING by impact of changes we identify Impact on market size and share confronting the importance in the chosen environment? of changes to our strategies Who should interpret the picture Managers to specify: how are LINK TO PLANNING by built and what are the critical we exploiting the good things challenging conventional questions they should address? and defending against the bad views about strategies and things in our strategies, and information needs and use how are we monitoring the most critical issues How do we link our new market Plans must state explicitly how LINK TO PLANNING by understanding to decision they reﬂ ect changes, opportunities demanding that implications making? and risks in the most critical areas are addressed in detail and of the environment not ignored What information should be Published studies, reports, ENRICH THE SENSING provided? research studies, corporate PROCESS by stimulating intelligence etc. ‘out of the box’ thinking Who should be Planning team, cross-functional ENRICH THE PROCESS by consulted/involved? representatives, line managers, bringing more viewpoints suppliers, customers, outside to bear to challenge experts conventional company management assumptions

257 •• Market-Led Strategic Change

The basic framework described above can be used to evaluate the Business Environment, the Market Environment, the Competitive Environment, and the Technological Environment, the Legal Environment and the International Environment, in different companies and to deal with different types of problems. For example, in one clothing company we used the most general version of the model (the Business Environment), and the model produced by executives was ‘ Utopian ’ in the extreme – i.e. every event they could identify in the environment around their business fell into the Utopia cell of the model shown in Figure 6.3. This suggests that managers believe they know everything and everything is certain. When asked if they had considered re-naming the company the ‘ Smug Corporation ’ , the executives said things like ‘ You have to understand, we do not have competitors, only imitators.’ When the scanning was re-focused onto the competitive environment, their views started to change quite dramatically.

Subdividing the environment to focus attention • • • The second point of focus is how to subdivide the environment to ensure that people address the most important aspects, and highlight the gaps in understanding that are most critical. For example, with one high-technology company, which was led by R & D and driven by scientiﬁ c innovation in products, one glaring omission in management thinking was about competition – as evidenced by recent new product failures and as claimed by the company’s marketing manager (who felt he was largely ignored). This problem was approached by asking teams of managers associated with new product projects to speciﬁ cally address the Competitive Environment in their planning. This was subdivided into: Direct Competition (i.e. other companies in the same industry producing the same type of product); Customer Competition (i.e. the tendency in key markets for customers to develop their own materials and to substitute this for product purchase); Generic Competition (i.e. different technologies capable of serving the same customer needs). This has become a permanent and essential part of the company’s new product planning, because their views on market positioning have changed dramatically, developing, for example, into deals with key customers to help them produce their own products and collaborations with companies outside the industry to use the newer technologies becoming available to meet customer needs.

Identifying the impact of environmental changes • • • If events that happen outside are of any importance it is because they inﬂ uence something that matters to the company. There is advantage therefore in addressing at the earliest stage what these impacts may be. For example, in viewing the Market Environment we could ask for each event to be analysed in terms of its impact on customer/supplier

•• 258 Market sensing and learning strategy: competitive strength through knowing more relationships, or with the Competitive Environment, the impact of each event on our market share. The aim is to encourage thinking to be very speciﬁ c to the company and its goals.

Interpreting the model for strategy building • • • The most important issue is how we interpret the model of the environment that has been built. Here there are three questions to stress and demand attention. Given that the model is a picture of the things happening outside which we regard as most important to the survival and prosperity of the company, then we should demand responses to the following questions:

● We have identiﬁ ed the changes in this market which are potentially very advantageous for our performance in this market, and which are likely to happen (Utopia in the model) – the question is: where, explicitly and realistically are we exploiting those factors in our market strategies ? ● We have also identiﬁ ed the changes in this market which are potentially major threats, and which are also likely to happen (Danger in the model) – the question is: where, explicitly and realistically are we defending against these changes in our market strategies ? ● If it has been done properly then the model we have produced shows the things that are most important to our position in this market – the question is: are we monitoring and evaluating these factors in our marketing information system ?

It is amazing how often executives have to admit that their plans and strategies do not address the real changes in the marketplace where they intend to operate – this is the moment when new thinking about strategies may become possible for the fi rst time, because managers are confronted with their own logic. Even more surprising are situations where managers are forced to admit that their information systems do not focus on the things that really matter to their performance – the systems report the fi gures and statistics that are easiest to report and that have always been reported. There is also another type of question that can be raised around our model of the environment: are there things we can do to reduce uncertainties around important issues, to improve the power of the model; and, are there things we can do to change the position of events in the model? An initial response to the fi rst of these questions may be negative. This is not always necessarily true. For example, in work with a company targeting the water industry in the build-up to privatization, one major unknown at the time was the form that privatization would take, which was a barrier to developing market strategies. Clearly the government is unlikely to provide such information ahead of time – but it was possible to go to a specialized agency in contact with senior civil servants and politicians and to get a pretty good idea of the plans, which is what the company did.

259 •• Market-Led Strategic Change

To some the second question may appear even more outlandish – how can a company change the environment? Clearly in the general sense it cannot. However, the point of making the whole exercise focused bears fruit here. If, for example, the largest issue in the ‘ Danger ’ area is competitive entry with a new product, then maybe the strategy to pursue is one of collaboration. This is an area where creative thinking may become possible, as we ease people away from the status quo represented by corporate culture. For instance, in the USA, Hershey, the chocolate company, came very close to persuading the federal authorities to change the date of the change to daylight saving time into November, instead of being in October. The reason is because parents do not like their small children making ‘trick or treat’ visits to houses after dark – an extra hour of daylight on October 31 (Halloween) is worth several million dollars’ worth of extra chocolate sales in the USA. The company failed in this attempt, but it remains surprising how creative thinking may be about ‘ unchangeable ’ events in the environment, given the chance.

Linking market sensing to plans • • • If the beneﬁ ts of this approach are to be realized, then the conclusions reached by understanding the environment that matters should be linked to the decisions made about market strategies. This may take no more than agreement that strategic market plans must state explicitly how they reﬂ ect changes in the most critical aspects of the environment.

Providing information as a stimulus to thinking • • • Another decision requiring careful thought is what information should be provided to the executive and planning teams scanning the environment, through written reports, presentation by outside experts, and so on. The key to handling this seems to be not to overload people with new information but to provide enough that is new to help people break the mould. Certainly, it is disastrous at any point to suggest to people that they are wasting their time because everything has been done before by ‘ Corporate Intelligence ’ or by ‘ Market Research ’ departments. The aim here is to enrich the sensing process, not to truncate it.

Who should be consulted and involved? • • • Perhaps the most actionable lever for enriching the sensing process is consultation and participation. The argument is clear: it is that consultation with managers and employees and their participation is critical to determining their responses to market developments. This follows the principle that giving discretion to managers and empowering them to ﬁ nd solutions and innovations is a powerful lever for strategic change, which should not be underestimated. Clearly, the marketing analyst can use the framework provided here to undertake an appraisal of the market environment as an individual exercise, but this is unlikely to impact on the problems we set out to

•• 260 Market sensing and learning strategy: competitive strength through knowing more solve, and ignores a major opportunity to build consensus on the need and direction for change. The issues to consider in managing participation in this type of exercise are:

● A team – if we want ‘ ownership ’ and commitment, then we need to involve the key players in implementation in the analytical stage of planning, for how else can we get a ‘ buy in ’ to new strategic directions? ● Cross-functional representation – one of the most powerful levers for change in major corporations is the use of the powerful and informed cross-functional team, which pools specialized expertise around a focused problem. At the simplest level, it may be that people from operations and R & D can contribute useful insights into market change. At a deeper level, if we expect cooperation and support across departments for market strategy implementation, then it makes sense to have them involved and consulted in the process. ● Line and staff specialists – similarly, managers from line roles and staff roles may bring very different insights and sources of intelligence to the table, and challenge conventional ways of addressing the market. There is also the question of gaining credibility and ‘ buy in ’ from line management as a foundation for effective implementation of resulting strategies. ● Outsiders – in some situations it may be possible to gain from the involvement of outsiders who bring new information and understanding of the markets we are appraising. This might include suppliers, customers, or experts from the relevant research institutes and universities. ● Culture shakers – it is sometimes good to include company ‘ non-conformists ’ to shake some of our conventional beliefs and assumptions. ● Unhardening the categories – Alan Kantrow 70 suggests that all humans suffer not just from hardening of the arteries, but also ‘ hardening of the categories’ – the traditional ways in which we look at information in the company – and we risk becoming ‘prisoners of our categories ’. Part of our task is to break the information we have into different categories to see what we learn – new market deﬁ nitions, different types of customer segment, different ways of comparing ourselves to our competitors, different ways of grouping customer priorities, and so on. Remember the (alleged) quotation from former US President Ronald Regan: ‘ It is not interpreting the future that is difﬁ cult, the problem is predicting the past. ’

It may not be possible to exploit all these sources of inﬂ uence over the creation of market understanding in all cases, and it may not be necessary to do so. The principal points are summarized in Table 6.1 as a checklist for consideration in managing the process of building and sharing market understanding with managers. The point of this is very simple – the tools for building and reﬁ n- ing market understanding have to be placed in the hands of the line managers and technical specialists upon whom we depend for the

261 •• Market-Led Strategic Change

effective implementation of market strategies. How can we expect people to commit to something when they do not see the reason for it? These market sensing procedures have been developed to work with line managers and planning teams to enrich and enhance their understanding of the most critical aspects of their markets, to use this as the basis for developing market strategies of which they may take ‘ownership ’ and drive through to effective implementation, with all that is implied in terms of organizational change and disruption to the status quo.

A note of caution However, a word of warning. These are fundamental issues not to be taken lightly – there are risks as well as opportunities. For the most part people in organizations do not cling to the familiar way just out of perversity or bloody-mindedness (although there are exceptions to this), but because it is a way of getting on with the things that we think matter. When we start to tamper with the ﬂ ow and use of marketing information we have to run the risk of reducing performance in the short term. For example, we can compare the opportunities and risks like this:

The Problem The Opportunities The Risks

There is too limited a fl ow of Increase the fl ow and amount of Information overload. customer and market information. information to put more important issues on the agenda. Key managers have adopted a Force managers to confront Abandoning the accepted and simplifi ed model of what works in and cope with a different view assumed model of the world the market and what matters to of the world, and to track the creates confusion, uncertainty customers, which is invalid. implications for strategy. and self-doubt which ‘ freezes ’ decision makers. We ignore the impact of major Develop new sensing approaches Managers become so fearful changes in the marketing that change our view of what is and intimidated by the speed environment. happening, and how we need to and complexity of change in change our strategy. the outside world, they cannot make decisions. Strong group consensus in Operate on the inertia and ‘ group We create resistance to our decision making, which think ’ by redesigning group change, confl ict between means they will not look at new memberships and the ‘ ownership ’ groups, internal competition information or new ways of of critical information. and political in-fi ghting. doing things.

People do not adopt simpliﬁ cation mechanisms, group consensus, a false sense of stability, and so on, for the hell of it. These are mechanisms which allow us to make sense of things (however arbitrarily and inﬂ exibly) and to get on with things (like making decisions and doing the work). We may have to change some of these things to get a new strategic direction – but slowly and with care may be advisable unless chaos is the intention.

•• 262 Market sensing and learning strategy: competitive strength through knowing more

What Comes Next? Market sensing and learning capabilities provide the basis for making better and more insightful market target choices (Chapter 7), for understanding better where the new value-creating opportunities exist (Chapter 8), and for assessing the relationship network underpinning a business strategy and often determining its success or failure (Chapter 9). Market sensing is the foundation for the strategic pathway. It is sad that we do not have any fancy business-school jargon that captures this yet (trust me we will invent some), but the truth of the matter seems to be: those who know more stuff, make more money. Now, let’s talk about where they make it – in carefully chosen markets and segments.

References and End-notes

1. Carbone , Lewis P. , ‘ What Makes Customers Tick? ’ , Marketing Management , July/August 2003 , pp. 23 – 27 . 2. Zaltman , Gerald , How Customers Think: Essential Insights into the Mind of the Market , Boston, MA : Harvard Business School Press , 2003 . 3. Meyer , Christopher and Andre Schwager , ‘ Understanding Customer Experience ’ , Harvard Business Review , February 2007 , pp. 117 – 126 . 4. Viguerie , Patrick , Sven Smit and Mehrdad Baghai , The Granularity of Growth: Making Choices That Drive Enduring Company Performance , London : Cyan/Marshall Cavendish, 2007 . 5. Ibid. 6. Doz , Yves and Mikko Kosonen , Fast Strategy: How Strategic Agility Will Help You Stay Ahead of the Game , Philadelphia, PA : Wharton School Publishing , 2007 . 7. Davenport , Thomas H. and Jeanne G. Harris , Competing on Analytics: The New Science of Winning , Boston, MA : Harvard Business School Press , 2007 . 8. Pfeffer , Jeffrey and Robert I. Sutton , Hard Facts: Dangerous Half- Truths & Total Answers , Boston, MA : Harvard Business School Press , 2006 . 9. Slywotsky , Adrian and Karl Weber , The Upside: From Risk Taking to Risk Shaping: How to Turn Your Greatest Threat Into Your Biggest Opportunity , New York : Crown Business , 2007 . 10. Guerrera , Francesco , ‘ US Groups “ Fail to Understand Customer Needs ” ’ , Financial Times , June 5 2006 , p . 2 7 . 11. Duncan , Calvin P. , Constance M. O’Hare and John M. Matthews , ‘ Raising Your Market IQ ’ , Wall Street Journal , December 3 2007 , p . R 4 . 12. Taleb , Nassim Nicholas , The Black Swan: The Impact of the Highly Improbable , London : Allen Lane , 2007 .

263 •• Market-Led Strategic Change

13. Quoted in: Smith , David , ‘ When Catastrophe Strikes Blame a Black Swan ’ , Sunday Times , May 6 2007 , p. 2 - 4 . 14. Ibid. 15. Day , George S. , ‘ Managing the Market Learning Process ’ , Journal of Business and Industrial Marketing , 17 ( 4 ) , 2002 , pp. 240 – 252 . 16. If you are desperate for a more traditional view of marketing research, have a look at: Cravens, David W. and Nigel F. Piercy, Strategic Marketing , 9th edn, Burr Ridge, IL: McGraw-Hill Irvin, 2009, Chapter 5. 17. Thornhill , John , ‘ The New Consumer Is Always Right ’ , Financial Times , August 21 2000 . 18. Matthews , Robert , ‘ Murphy Really Does Sock It to Us ’ , Daily Telegraph , April 2 1997 . 19. Schultz , Don E. , ‘ MR deserves blame for Marketing’s Decline ’ , Marketing News , February 15 2005 , p. 7 . 20. Lamons , Bob , ‘ Research Won’t Yield the Big Idea ’ , Marketing News , November 18 1996 . 21. Bowen , David , ‘ There’s No Safety in Numbers ’ , Independent on Sunday , October 20 1996 . 22. Reed , David , ‘ Information ’ , Marketing Business , March 1996 , p. 56 . 23. Harris , Robert , ‘ Our Dance Around the D-Word ’ , Sunday Times , August 4 1996 . 24. Quoted in: Murphy , Ian P. , ‘ Urgency of Strategic Research ’ , Marketing News , January 6 1997 . 25. Fielding , Michael , ‘ A Clean Slate ’ , Marketing News , May 1 2007 , p . 9 . 26. Morrison , Scott , ‘ Design Holds the Key to Cleaning Up in World Market ’ , Financial Times: Creative Business Special , September 13 2005 , p. 2 . 27. Thomas , Kim , ‘ Anthropologists Get to the Bottom of Customers ’ Needs ’ , Financial Times , August 24 2005 , p. 9 . 28. Joachimsthaler , Erich , Hidden in Plain Sight: How to Find and Execute Your Company’s Next Big Growth Strategy , Boston, MA : Harvard Business School Press , 2007 . 29. Rohwedder , Cecilie , ‘ Decoding Needs and Wants of Shoppers ’ , Wall Street Journal , December 24–28 2007 , p. 4 . 30. Murphy , David , ‘ It’s a No-Brainer ’ , The Marketer , December 2006 , pp. 19 – 21 . 31. Hamilton , Joan O’C. , ‘ Journey to the Center of the Mind ’ , BusinessWeek , April 19 2004 , pp. 66 – 67 . Owen , Glen , ‘ Marketing Brainwave ’ , The Mail on Sunday , July 10 2005 , p. 49 . 32. Mitchell , Alan , ‘ Advertisers Turn to Science to Get Inside Consumers ’ Heads ’ , Financial Times , January 5 2007 , p. 10 . 33. Moye , Catherine , ‘ All in the Mind ’ , Financial Times , September 15/16 2007 , p. 1 . 34. Surowiecki , James , The Wisdom of Crowds: Why the Many Are Smarter Than the Few , London : Abacus , 2005 .

•• 264 Market sensing and learning strategy: competitive strength through knowing more

35. Hof , Robert D. , ‘ The Power of US ’ , BusinessWeek , June 20 2005 , p p . 4 7 – 5 6 . 36. Hempel , Jesse , ‘ Big Blue Brainstorm ’ , BusinessWeek , August 7 2006 , p. 70 . 37. Durman , Paul , ‘ Firms Line Up to Rocket into Blogosphere ’ , Sunday Times , May 8 2005 , p. 3 - 9 . 38. Grande , Carlos , ‘ Businesses Urged to Capitalise on Web Comment ’ , Financial Times , April 5 2007 , p . 3 . 39. Nuttall , Chris , ‘ Virtual Mirror on the Real World ’ , Financial Times , December 15 2006 , p . 1 0 . 40. Clark , Don , ‘ New Life for Virtual World ’ , Wall Street Journal , April 10 2008 , p . 3 0 . 41. Cornwell , Lisa , ‘ P & G Launches Two Social Networking Sites ’ , Marketing News , February 1 2007 , p . 2 1 . 42. Tricks , Henry , ‘ Future-Gazing Is on the Cards ’ , Financial Times , October 24 2005 , p . 1 3 . 43. Bowley , Graham , ‘ The Time Lords ’ , FTMagazine , January 27/28 2007 , pp. 18 – 23 . 44. Stewart , Thomas A. , ‘ Getting Real About Brainpower ’ , Fortune , November 27 1995 . 45. Shermach , Kelly , ‘ Much Talk , Little Action on Competitive Intelligence ’ , Marketing News , August 28 1995 . 46. Bogler , David , ‘ Many Ears Kept to the Ground ’ , Financial Times , March 13 2000 . 47. Overell , Stephen , ‘ Masters of the Great Game Turn to Business ’ , Financial Times , March 23 2000 . 48. Wroe , Martin , ‘ Back to the Future:2008 ’ , Sunday Times , December 23 2007 , p. 1 - 12 . 49. Ibid. 50. Penn , Mark J. and E. Kinney Zalesne , Microtrends: The Small Forces Behind Today’s Big Changes , London : Allen Lane , 2007 . 51. Lowry , Tom , ‘ A McKinsey of Pop Culture? ’ , BusinessWeek , M a r c h 26 2007 , pp. 104 – 108 . 52. Rowley , Ian, ‘ Testing What’s Hot in the Cradle of Cool ’ , BusinessWeek , May 7 2007 , p. 46 . 53. Hall , Kenji , ‘ Japan: Google’s Real-Life Lab ’ , BusinessWeek , February 25 2008 , pp. 55 – 58 . 54. Smith , David , ‘ It’s the Taxis, Stupid ’ , Sunday Times , May 11 2001 , p . 3 - 5 . 55. ‘ Campbell Book the Most Put Downable ’ , Daily Mail , August 29 2007, p. 26. 56. Fiﬁ eld , Anna and Song Jung-a , ‘ Home Front in the Battle for Sales ’ , Financial Times , October 16 2007 , p . 2 8 . 57. Javers , Eamon , ‘ I Spy – For Capitalism ’ , BusinessWeek , August 13 2007 , pp. 55 – 56 . 58. Holmes , Stanley , ‘ Boeing: What Really Happened ’ , BusinessWeek , December 15 2003 , pp. 35 – 39 .

265 •• Market-Led Strategic Change

59. Gadher , Dipesh , ‘ Camelot Knew Manager Was Spying on Rivals ’ , Sunday Times , February 24 2008 , p. 1 - 7 . 60. Templeton , Sarah-Kate , ‘ Patient Access Is “ Sold ” by GPs ’ , Sunday Times , August 19 2007 , p. 1 - 5 . 61. Drucker , Peter , Peter Drucker On the Profession of Management , Boston, MA : Harvard Business School Press , 1998 . 62. Unpublished London Business School report, quoted in Richard Donkin, ‘ Doing the Knowledge ’ , Financial Times , July 15 1998. 63. Lesser , Eric , David Mundel and Charles Wiecha , ‘ Managing Customer Knowledge ’ , Journal of Business Strategy , November/ December 2000 , pp. 35 – 37 . 64. Smith , D. V. L. and J. H. Fletcher , The Art and Science of Interpreting Market Research Evidence , Chichester : Wiley , 2004 . 65. Leiber , Ronald B , ‘ Storytelling: A New Way to Get Close to Your Customer ’ , Fortune , February 3 1997 . 66. Kay , David , ‘ Go Where the Consumers Are and Talk to Them ’ , Marketing News , January 6 1997 . 67. Seybould , Patricia B. , ‘ Get inside the Lives of Your Customers ’ , Harvard Business Review , May 2001 , pp. 81 – 89 . 68. Doyle , Peter , Marketing Management and Strategy , 2nd edn , Hemel Hempstead : Prentice-Hall , 1997 . Walther , George R. , Upside-Down Marketing , New York : McGraw-Hill , 1994 . Barley , Peter , ‘ Looking for Trouble ’ , Marketing Business , September 1994 , pp. 21 – 24 . 69. This section is based on: Piercy Nigel F. and Nikala Lane, ‘Marketing Implementation: Building and Sustaining a Real Market Understanding’, Journal of Marketing Practice: Applied Marketing Science , 2(3), 1996, pp. 15–28. 70. Kantrow , Alan , The Constraints of Tradition , New York : Proﬁ le Business , 2006 .

•• 266 C H A P T E R • • • • 7 Strategic market choices and targets: where to compete and where not to

This chapter . . . The focus is now on market strategy – choosing the markets and segments where we are going to compete. This is less straightforward than is often suggested. Defi ning markets is not a one-off, throw-away that we do just so we can worship the false god of market share. Markets are fl uid, and those who fail to see this get trapped in a competitive box, where they will perish. Close study of shifting products and customers in a competitive domain and mapping market structures may help move from fi xed views of markets to more useful ones. Marketing people love market segmentation – dividing markets into groups of customers to provide targets. This is great except for one thing – it completely misses the point. Conventional market segmentation obsesses with techniques and is largely tactical – where best to place ads to reach the same targets as everyone else. A strategic approach to segmentation highlights the priorities of aligning company resources around benefi ts delivered to customers and the barriers to achieving this. Seen in strategic terms, market positioning is about the identifi cation and domination of uncompeted market space, rather than more conventional comparisons Market-Led Strategic Change

between ourselves and the competition. Making market and segment choices is complex and overwhelmingly important to get right – it is based on the attractiveness of the customer opportunity and how well we can exploit it. Market choice then links to value propositions – what do we have to offer our chosen customers – and key relationships – can we manage the relational demands of this market?

Introduction We took the fi rst step in our strategic pathway as the development of market sensing capabilities. The fi rst area where superior market understanding should impact is on the market choices that we make and then re-make as we learn more. This is the topic for this chapter, leading then to considering our value proposition and key relationships. A critical part of building and designing an effective market strategy is the key choices we make about our markets ( Figure 7.1 ): market defi nition and the competitive box – how we select part of the outside world and identify it as our market, and avoid the trap of short- sighted, fi xed market defi nitions; market segmentation and targeting – how we identify groups within the market as targets for our products and services; market positioning – where we want to be in a market relative to the competition; and market choices – what we decide makes a market or segment attractive to us and a position we take good or bad, and the choices we make about where to concentrate and to establish our marketing priorities.

Market definition and the competitive box

Market Strategic market segmentation Market choices and and positioning targets targeting

Market choices

Figure 7.1 Strategic market choices and targets

•• 268 Strategic market choices and targets: where to compete and where not to

Market Defi nition and the Competitive Box The fi rst point is simple but dogmatic – in an era where the Internet is daily fuelling the blurring of traditional product-market boundaries, new business models are being created, radical innovation is changing the rules – there is nothing fi xed or static about the defi nition of the market where you hope to earn a living. The danger is that you can be trapped by the ‘competitive box ’ into believing that markets stand still and the boundaries stay the same.

The competitive box The competitive box model shown in Figure 7.2 is a way to convince the non-believers that there are big things going on in most markets, which can destroy the incumbents if they do not open their eyes (yes, that is you). You can try this. The trap of the competitive box reﬂ ects the tendency of managers to build a ﬁ xed mental map of the industry in which they compete. The competitive box puts a ring-fence around familiar competitors using similar technology to produce similar products and services for a shared customer base – these are the ‘ usual suspects ’ we mean when we talk about our competitors. We know these people well – we probably swap personnel with them every so often, we go to the same trade fairs and exhibitions as they do, we belong to the same trade associations,

The competitive box

The usual suspects Known competitors, operating in traditional ways with the existing, known customer base and competing for market share through incremental innovation New types of New business competitor models

Conventional value propositions

New New customers customers Existing customer base

New customer base

Figure 7.2 The trap of the competitive box

269 •• Market-Led Strategic Change

and so on. Competition is probably based on brand, and the measure of success is probably market share in the familiar customer base, with great excitement about small percentage point changes in brand market shares. The fences we build – the boundaries of the competitive box – are what blind us to the real sources of competition and prevent us from developing appropriate strategies. Research confi rms this observation – studies suggest that when they identify their competitors managers tend to think of a relatively small number of fi rms and they use supply-based attributes (what fi rms are and what they do) rather than demand-based attributes (how customers see substitutes), and this determines which competitors they take seriously.1 In fact, what you see in sector after sector is that the most deadly competitor is not the person you sat next to at last year’s trade con- vention, it is someone you probably never even heard of (and if you did, you didn’t take them seriously). The examples of managers being suckered by the competitive box are numerous: banks who simply did not believe that grocery retailers and Internet sites could be retail banks; booksellers who did not believe that anyone would buy books off the Internet; airlines who did not believe that business travellers would use a ‘no-frills ’ carrier with no ‘ free ’ food and drinks; a travel industry that did not believe that people would buy fl ights and holiday packages online or direct. Established fi rms sit back and watch as new types of competitor and new business models take their customers away. Worse, the new players bring new customers into the market – for example, more people fl y because of the low-cost airlines – and dominate this growth. There is another problem. In some companies, by taking conventional advice and following industry rules, you see managers taking an operation that has developed an unconventional business model outside the competitive box, and forcing it back inside the box. The ‘ rules ’ say you have to be a manufacturer or a retailer, so you have to choose one or the other, this way the stock market knows what to compare you with. Body Shop is a case in point. Body Shop was always one of the worst and most ineffi cient retailers in the world. It survived this shortcoming by virtue of its image of environmental responsibility but also a steady fl ow of exceptionally innovative new products. Competitors copied the image and the products and brought Body Shop down with a bump. New management became determined to make Body Shop into a conventional retailer, which it never was, while weakening its image and watering-down its product innovation. They will probably succeed, and in so doing they will create a chain of quasi-conventional cosmetics shops, that they can sell to someone else. A major challenge to managers is to understand the competitive box they have created and to identify the real challenges posed by how markets are reshaping and redefi ning themselves. The alternative is to sit back and watch the business being taken away – probably ending up as a low-profi t commodity supplier.2

•• 270 Strategic market choices and targets: where to compete and where not to

Redefi ning markets There are valuable insights to be gained in most organizations by looking at, and frequently reviewing, the practical defi nition of our markets, in terms of specifi c products and services, and specifi c customer types. Not enough people do this on a regular basis. We know that markets change – so surely how we defi ne the markets that matter to us should be constantly under review and revision? To start with, there are obviously some basic parameters that should be defi ned so we know where we are competing, and planning, and so on: the geography of the market; the industrial sectors included; the type of consumer in demographic terms; the product/service applications or customer needs; the range of products/services that go into the market to meet these needs; and the broad types of customer within this need market. This can lead to a very productive analysis of the customer differences and thus potential segments within the total market. But this is not about a conventional statistical analysis using traditional categories and measurements. Conventional market defi nitions refl ect industries which are groups of companies linked by technology or product similarities. What we are interested in is markets . Markets are based on customer needs and demands. The results of re-thinking market defi nitions may be surprising. For example, one well-known whisky brand cut its price in response to a similar move by an own-label version. In fact, the own-label initiative had had no impact on the whisky brand because they were selling to different customer groups. By cutting price, the company alienated its customers and ended up with weaker margins and sales, which also weakened its ability to respond to its real competitor for its customer – new white spirits. The truth is customers just do not fi t traditional industry defi nitions of markets: you think you make crisps, the retailer thinks that the category is salty snacks, but the customer-defi ned market is lunch.3 The way in which management understands and defi nes the market may be one of the most signifi cant strategic issues of all. Compare the market perspectives at Sony and Nintendo and the different strategic direction that results.

Reality Check: Going for a Wii?

In the computer games console business, Nintendo’s Wii – based around a motion sensitive ‘Wiimote’ or wand, allowing the player to translate physical moves into changes on the screen – has mas- sively outsold Sony’s pioneering Playstation 3 (and also Microsoft’s X-Box). The motion-sensitive controller allows people to stand up off the couch to serve the virtual tennis ball or hit the imaginary

271 •• Market-Led Strategic Change

baseball. Notwithstanding the emergence of player injuries with the Wii (bloody noses and fractured collarbones from playing baseball, broken teeth and pulled hamstrings from bowling), in 2007 the Wii was outselling the Playstation by three to one in Japan, the USA and Europe. Nintendo’s CEO knew from the outset that he could not compete with Sony and Microsoft by attempting to attract 18–35 year old men who wanted to play ‘shoot-em up ’ games, and knew he could only succeed by reaching out to a broader market. The triumph of the Wii strategy was to expand the market for the Wii (and its companion DS machine) – more than half Wii users are women and the game has attracted children, adults and senior citizens alike. This strategic direction is reinforced by the launch of WiiFit – an exercise game based on a balancing board enabling users to practice virtual yoga or skiing. Sony has fought back against the Wii with dramatic price cuts on the Playstation to regain sales momentum. However, the underlying strategic challenge for Sony is much greater than this. Sony’s market is the consumer’s living room. Sony wants to convince consumers that its games consoles are ‘essential living room hardware ’, capable of seamless integration with other Sony devices. The vision is that the consumer will buy Playstation 3, connect it to a high-definition Sony Bravia LCD TV, use the PS3’s Blu-ray disc drive to watch movies, watch clips on Grouper, Sony’s video-sharing site, use the PS3 to download music and films from PlayStation Network, and so on. Currently, Sony loses money on every Playstation sold. This is a very challenging strategy based on a different market perspective.

Sources: Mariko Sanchanta and Chris Nuttall, ‘Sony Slashes Cost of Playstation 3’, Financial Times, July 10 2007, p. 19. Mariko Sanchanta, ‘ Nintendo Aims to Keep Virtual Players Off the Sofa ’, Financial Times , January 5/6 2008, p. 14. Mariko Sanchanta, ‘Nintendo Beats Sony in Christmas Console War ’ , Financial Times , January 8 2008, p. 22.

The product–customer matrix One practical approach that has great leverage in helping to get executives to look at markets in a new way is described below – the product– customer matrix ( Figure 7.3 ). This matrix is simple: all it asks us to do is to identify the different types of product or service going into the market we have chosen, and the different types of different customer, which defi nes the total market. But, there are some important angles here. Let us consider products fi rst. This is the fi rst catch – we are only interested in products as they are seen to be different by the customer , i.e. they meet different needs , as they are felt by the customer.

•• 272 Strategic market choices and targets: where to compete and where not to

Market:

Products 1. 2. 3. 4. 5. 6. 7. Total Customers 1.

Figure 7.3 The Total product–customer matrix

Reality Check: Products in retail banking

In attempting to identify their product groups, managers from a retail bank produced a computer printout listing their retail bank products, which was fully five inches thick, because they had some 600 or more different products. This did not fit the matrix. But if you think not about the bank’s back office operations, but what matters in the front office to the customer, there are only six customer benefits in the retail bank market and thus only six types of product. As a customer I want to:

● lay my hands on ready money when I need it; ● have my savings held safely; ● buy things before I have the money to pay for them; ● pay bills via cheques and debits; ● get income from my savings; and ● acquire some services like insurance, investment advice, and so on.

The customer does not really care how many different ways the bank has of producing an overdraft, s/he just wants to buy a car before s/he can afford it. In this sense, there are only six retail bank products.

Now we can talk about customers . Customers need to be grouped on the basis of important differences between them that matter to how we get to market – their most important needs, their priorities, signiﬁ cant differences in their behaviour. For example, in a corporate bank (i.e. one

273 •• Market-Led Strategic Change

dealing only with companies, not retail customers), managers ’ defi nitive list of customer types in the corporate banking market was: small companies, medium-sized companies and large companies. (This incisive and deeply-analytical model, incidentally, represents how most bankers traditionally view this market.) In fact, this grouping tells you nothing of any real importance about customer differences. After a lot of debate, these executives decided to classify corporate customers according to the strategy the customer is pursuing – because that predicts the customer’s need for fi nancial services, and the critical products and success factors. For example, ‘ market share strategy ’ companies need good liquidity products, but companies pursuing a ‘ profi t-reconstruction strategy’ are likely to value most highly fi nancial effi ciency products, and so on. This provided them with a novel and creative way of choosing customer targets, and specializing the total ‘ offering ’ around the customer’s needs. Once the product–customer matrix is constructed it can be used for a number of signifi cant purposes:

● look at market size and trend, product by product, and customer by customer; ● look at the market and product life cycle stage, product by product, and customer by customer; ● look at our present strategic position product by product and customer by customer, evaluate whether our real strength is in products or relationships with particular customers, and thus the best way to grow the business; ● ﬁ nd out where we make most of our proﬁ t in the market, i.e. from different products and services going to different customers; ● identify where we are achieving the highest levels of customer satisfaction and loyalty; ● isolate those parts of the market where we have the greatest competitive advantage over our competitors; ● identify the parts of the market in which we are actually doing business – the ‘ competed market ’ ; ● look at our real market share in the market we really compete.

The value of this type of analysis is demonstrated by the performance of Federal Express – one of the most successful companies in the world – in a strategy of improving customer satisfaction and profi tability, by defi ning the needs of different customer segments in a better way to offer customers in each target segment expertise and service tailored to their specifi c needs – the value proposition is different for each customer segment. For example, companies like Intel are offered a specialized international logistics support system because this is a critical customer need – the effect, for example is that Intel does not have warehouses in China, the FedEx airplanes are the warehouses. One attraction of this matrix approach to market redefi nition is that it opens up questions about who is the real customer and the structure of the value chains operating in this market. Mapping market structure is an excellent way to open eyes about these issues.

•• 274 Strategic market choices and targets: where to compete and where not to

Mapping market structure and change It is often very insightful to produce a map of existing or future structure of the market, to clarify who the real customers are, to allow comparison with competitors and to identify new opportunities. For example, Figure 7.4 shows a market structure map compiled for one region’s annual use of central heating units. There are two customer groups: construction companies using heating units in new buildings, and domestic customers upgrading their homes. The customers are reached through independent distributors, small hardware retailers, large retail hardware chains, construction sub-contractors and direct sales by the manufacturers. A well-constructed market structure map indicates clearly the end-user customers, and shows the relative roles of distributors, construction sub-contractors, retailers and other marketing intermediaries in reaching end-users. Market structure map analysis should emphasize end-users. One of the most frequent dif- ﬁ culties is that managers see intermediaries as their customers, and never look at the impact of the real end-use market. This is very short- sighted and blinds executives to real market trends. The ﬁ gures shown in the market structure map are for all suppliers to the market in the region. They can be compared to existing and planned sales of an individual company through each structural link to identify areas of weakness and strength against competitors – for example, by calculating market share for each link – and to aid establishing market

Production Consumption 100,000 units 100,000 units Direct sales 10,000 units Commercial construction companies 84,000 units 42,000 units Construction 75,000 units Independent (85,000 units) sub- distributors contractors

42,000 units 7,000 units Production 40,000 Small of central units hardware heating retailers units 2,000 units

5,000 units Large 5,000 units hardware Domestic retailers customers Direct sales 1,000 units (15,000 units)

Figure 7.4 Mapping market structure and trends for central heating units Source: Adapted from David W. Cravens and Nigel F. Piercy, Strategic Marketing , 9th edn, Burr Hill, IL: McGraw-Hill/Irwin, 2009.

275 •• Market-Led Strategic Change

strategy priorities. Profi tability data will highlight differences between different links, from an industry and an individual company perspective. Trend and forecasts can be incorporated to highlight shifts in channel importance and necessary changes in channel strategy. Anticipated changes in product use by different customers is also highly signifi cant. Redefi ning markets in this way and looking outside the competitive box to the underlying market structure provides the foundation for looking at market segmentation and targeting issues.

Market Segmentation and Targeting4 One big difﬁ culty in working on market segmentation is that everyone thinks they know what it is, and no one thinks it is strategic. They don’t. It is.

Market segmentation The theory is simple. We divide a market into groups of buyers who make coherent targets – for example, by age, gender, geographic location, socio-economic group or lifestyle for consumers; or company size, industrial sector and the like for industrial buyers. Conventional thinking is that we can then develop consistent marketing programmes based on the important characteristics of the customers in a segment, with potentially different marketing approaches for each segment (see Figure 7.5 ).

Market segments

ABCD

Product Differentiated Price Marketing marketing actions actions across Communications market segments Distribution & service

Consistent value offerings for each market segment

Figure 7.5 Consistency versus differentiation in market segmentation

•• 276 Strategic market choices and targets: where to compete and where not to

To many operational marketing and advertising executives, market segmentation is quite simply about tactical issues like: where to advertise to get the best audience ‘reach ’ for our promotional messages; which types of distributive outlet have the optimum customer proﬁ le; and where the sales force can locate potential customers. This is one of the many reasons why markets are too important to be left in the hands of marketing executives. In fact, segmentation is a fundamental issue of market strategy with far-reaching effects – indeed, ultimately the only real logic for how we organize the whole company is our understanding of the structure of the market (i.e. market segmentation). The other misconception about segmentation is that if you could simply collect enough statistical information about the market, then the ‘ right ’ segments would be identiﬁ ed automatically by the computer. In the real world, notwithstanding the wonders of database marketing, in most cases you cannot get ‘ enough ’ information anyway, but even if you could, approaching segmentation like this would miss the whole point about the power of creativity in segmenting markets to create competitive differentiation. Nonetheless, data from systems like CRM can be a stimulus to creative approaches to segmentation.

Reality Check: Market segments at Tesco

By virtue of its Clubcard loyalty programme, dominant British retailer Tesco has what is probably the biggest collection of people’s personal data in the UK. Clubcard has tracked the shopping habits of up to 13 million British families for more than a decade. The information is used to build a detailed picture of the type of people shopping at Tesco – it can tell the retailer if you have just had a baby, if your children have left home, your social class and what sort of a cook you are. Each product like a ready-meal can have up to 45 values associated with it – expensive or cheap, Tesco-branded or Birds Eye, an ethnic recipe or traditionally British, and so on. The programme is operated by Dunnhumby – mostly owned by Tesco. Dunnhumby makes about £30 million a year selling the data to consumer goods companies like Procter & Gamble and Unilever. At the simplest level, Tesco divides its customer into ‘convenience shoppers ’ (subdivided into ‘time-poor, food-rich ’ and ‘can’t cook, won’t cook’, and ‘ price sensitive ’ customers (‘stretching the budget ’ and ‘cheapest I can find’). Some 29% are more discerning and opt for ‘finer foods ’ (whether ‘natural chefs’ or ‘cooking from scratch’). The ‘ mainstream customers ’ (who buy lots of ‘kids stuff ’ or ‘commonplace brands ’) are the mid-market group. ‘Less affluent ’ shoppers make up 27% of Tesco’s market (with sub-categories such as ‘traditional ’ and ‘ price sensitive’). However, by ‘layering ’ Dunnhumby can build richer analyses longitudinally and by adding other data sources.

277 •• Market-Led Strategic Change

The lifestyle analysis of the Dunnhumby customer segmentation data identifies: upmarket (24%) – affluent, younger consumers who are time-conscious, enjoy luxury, are willing to experiment, and are oriented towards healthy eating and environmental benefits; mid- market (53%) – including the mainstream (younger consumers with broad tastes), the convenience buyer (to whom food is ‘ fuel ’ and microwaveable foods are popular) and the traditional buyer (older, tends to like the art of cooking and with a fixed shopping list); and the cost-conscious (23%) – younger, in the market for kids products, and price sensitive looking for staples at good prices. The customer data and groups identified within the market have underpinned strategic moves at Tesco, such as: the move into smaller-format stores; the launch of the Internet shopping site; and the development of new offers like the Tesco mobile phone, pet insurance and the ‘ Finest ’ food range. More than half Tesco’s sales come from own-label products (twice the level of a decade ago), and the own-label range is divided into three tiers to match the major market segments: ‘ value ’ ,‘ standard ’ and ‘ finest ’ .

Sources: Elizabeth Rigby, ‘Eyes in the Till ’, FTMagazine, November 11/12 2006, pp. 16–22. Stefan Stern, ‘Quality Becomes Commodity in Brand Battle ’ , Financial Times, March 14 2007, p. 12. Nirmalya Kumar and Jan- Benedict E. M. Steenkamp, Private Label Strategy, Boston, MA: Harvard Business School Press, 2007.

However, at the strategic level segmentation is really about one thing and one thing only – the customer benefi t from the product or service. Take the absolute classic example of segmentation – in the toothpaste market. A major piece of market research conducted by Haley 5 in the USA in the late 1960s remains the model for this marketplace, more than forty years later. Surely, if ever a product should rationally be an undifferentiated commodity product it is toothpaste. Functionally the product is a grinding compound, chemically very similar to the compound used to remove surface blemishes on the paintwork of a car (although there may be differences in fl avour). However, the customer benefi t segmentation of this market shows that it is far from being a price-led commodity market. Haley’s model distinguishes between: the sensory segment – mainly children infl uenced primarily by the favour and appearance; the sociable segment – young adults for whom the product is a cosmetic; the anxious segment – primarily families concerned about the decay prevention properties of the toothpaste; and the independent segment – value-oriented buyers who choose on the basis of price. Lest it be suspected that this is all a bit theoretical and you can only get into customer-benefi t segmentation if you have a king’s ransom to spend on clever market research, consider the following case.

•• 278 Strategic market choices and targets: where to compete and where not to

Reality Check: An exhausting market

The General Manager of the Spares Division of one of the imported car firms in the UK had a beef about replacement exhausts. He could not understand why his potential customers for replacement exhausts were so ‘irrational ’ – or, as he actually put it, ‘stupid’. His case was that with the first exhaust replacement, in the majority of cases, only the back pipe needed replacing, costing on average £40, if purchased from the manufacturer’s distributor. If the customer went to a high-street exhaust and battery outlet, s/he would probably be sold a complete new exhaust system for about £100. This appears to be economic madness to an engineer with expert knowledge of the motor business. We worked out a benefit-segmentation model in a couple of hours over discussions with him. The sort of segments that appeared were: ● the wealthy high dependence driver – people like the self- employed, who rely on the car for income, whose primary product benefit is dependability; ● the impoverished high dependence driver – people like single- parent families, or the elderly, whose life-style crashes if the car breaks down, and who also seek dependability above all else; ● the scared driver – who just wants the fear of mechanical breakdown taken away; ● the ignorant driver – who wants expertise to solve the problem; and ● the value-seeking driver – whose main interest is price. The model is probably not exactly right. What it does do is suggest why the majority of the car exhaust market is not driven by price. In fact, the conclusion reached was that whatever customer-benefit you identify, Kwik-Fit has beaten you to it! The General Manager concluded that this was not a market worth the cost of fighting.

Markets may also look very different if we adopt customer loyalty segmentation . Think back also to the view we took of the relationship between customer satisfaction and customer loyalty – we distinguished between the Satisﬁ ed Stayers, the Hostages, the Happy Wanderers, and the Dealers (pp. 35–36). In fact, this model gives us a novel basis for thinking about the link between ‘loyalty segments’ and market strategy (Figure 7.6 ). This suggests that appropriate strategies may be very different for each loyalty segment: with the Satisﬁ ed Stayers we should invest to reward and reinforce loyalty to stimulate referrals and continued retention; with the Hostages the goal should be to focus on building positive commitment, instead of relying on inertia to retain the business; with the Happy Wanderers we may emphasize innovations in the value offer to retain their interest; while being aware of the

279 •• Market-Led Strategic Change

Loyalty segments Our customers Competitors’ customers

Committed to us and rate Committed to competitors Satisfied Stayers us highly, they show little and rate them highly, show interest in competitors little interest in us

Loyal customers, but this Repeat buyers for Hostages may only be inertia, may competitors, but may be be vulnerable to competitors interested in us

Show little positive Little commitment to Happy Wanderers commitment, may become competitors, may be interested in alternatives interested in our offer

Show strong preference for No commitment to Dealers the best ‘deal’ on the market, competitors – open to with low supplier loyalty superior offers

Figure 7.6 Customer loyalty-based segmentation

different balance between costs of retention and the benefi ts with this type of customer (they may not be retained long however much we spend); while with the Dealers investments in relationships and retention are likely to be unproductive, so we may emphasize transactional effi ciency. The exact characteristics of the satisfaction/loyalty segments will vary between companies, but loyalty segmentation provides a platform for developing market strategies that truly refl ect important customer characteristics, not just demographics. This may be worth trying out for part of your business to see what you learn. Bain & Co. research suggests loyalty-based segmentation can be a powerful route 6 to enhanced profi tability. Going further in this direction, there is much untapped potential in segmenting markets on the basis of customer relationship-seeking characteristics , as an antidote to relationship marketing myopia (treating all customers the same). Recall earlier we distinguished between customers on the basis of the type of relationship they want with suppliers and the intimacy of the relationship they want. This suggests the type of customer relationship-seeking segments shown in Figure 7.7 , where the best strategies for our own and the competitors ’ customer differ substantially between segments. This time the logic is that the type of relationship that customers want to have with their suppliers is the major determinant of their receptiveness to different relationship marketing strategies.

•• 280 Strategic market choices and targets: where to compete and where not to

Relationship segments Our customers Competitors’ customers

Invest in customer relationship Find ways to offer a Relationship management and loyalty relationship that is superior in seekers programmes to give a close the customer’s terms to attract relationship that is long term away from competitors

Emphasize superiority in Focus on retention through value offering and rewards Loyal buyers the value offering and not for long-term retention superior through relationship emphasis to those of competitors

Control expenditures on Offer relationship-based Relationship loyalty incentives and provide incentives to switch suppliers, exploiters economic contact, e.g. through but control costs to allow for Internet short retention

Emphasize value offering and Arm’s length Demonstrate superior value avoid relationship investments transactional offering and lack of ties or unless can be converted to customers barriers to switching loyal buyers

Figure 7.7 Customer relationship-based segmentation

Again this is speculative, and the details of the relationship seeking characteristics of customers will vary greatly between markets and companies. The point is that segmentation is about a lot more than descriptive customer demographics. A number of companies who have tried this model have found it insightful.

Broad segments and micro-segments An interesting and topical distinction is between broadly conceived market segments and those with a much narrower defi nition. Broad segments often refl ect management enthusiasm for developing stereotypes of different buyers in the market, while narrow or micro- segments refl ect the growing market granularity we discussed earlier. Broad segmentation approaches are illustrated by a bank’s research examining clues in customers ’ statements to identify: hedonistic grazers – impulsive and spontaneous with a tendency to live for the moment, compared to Bridget Jones, instant fun seekers who do not like to postpone fun and extravagance longer than necessary; material martyrs – extremely organized, control freaks who plan purchases in advance and prefer to buy furniture than to go out, introverted and home-loving they are careful and frugal; and steady builders – mature, settled and stable, a strong sense of responsibility and debate expenditure rather than buy spontaneously. 7 The goal is a deeper understanding of how fi nancial services relate to different lifestyles.

281 •• Market-Led Strategic Change

At the broadest level, Experian’s MOSAIC system identiﬁ es 61 types of people – or British tribes – largely based on postcodes. Their tribes include:

● Global Connections – high earners in expensive homes, professional occupations, active pursuits, aged 25–34, with a hedonistic lifestyle. ● High-spending Elders – retired early, well-off and living in expensive areas, liberated from work and family responsibilities, smart appearance, stability is important to them, but may enjoy active sports. ● Sprawling Subtopians – middle-aged families with adult children, living on large suburban estates, conservative tastes and a bias towards buying British, enjoy DIY and gardening. ● Tower-block Living – live in deprived neighbourhoods, many with long-term sickness or unemployed, a mix of single, older and younger people, striving to achieve status through ownership of designer label clothes or cosmetics and self-indulgent and reckless spending. ● White-van Culture – young couples who have bought their own council house, energetic and optimistic, earning a good living as a tradesman, traditionalists, strong loyalty to employer and family. ● Green-belt Guardians – wealthy commuters and farmers in traditional village communities, lovers of wildlife and the environment but drive 4 4s, children will own a pony. 8

Reality Check: A guide to the male shopper

In turning attention from female consumers to males, the following archetypes have been identified. A fun game for females is to locate males of their acquaintance in this framework: The Metrosexual – the affluent urban sophisticate, aged 20–50, to whom consumerism has a deeper meaning associated with quality and beauty rather than mere commerce. To him, shoes are objets d’art. Men’s grooming will never be the same again. D & G, Beiersdorf and Polo Ralph Lauren do good business with the Metro. The Maturiteen – knowledgeable, responsible, mature and pragmatic, with poise attributed to baby boomer parents who treated their children as equals. A technology master, adept at online research – the in-house shopping consultant. A radical view of brands – Adidas, Sony and Unilever are good at playing along with the Maturiteen. The Modern Man – neither Retro nor Metro, a sophisticated consumer in his 20s and 30s. A bigger shopper than his Dad, but

•• 282 Strategic market choices and targets: where to compete and where not to

still a sports fan. Moisturiser and hair gel are perfectly ordinary to him, though possibly not manicure. Philips Norelco used locker room humour to get the modern man comfortable with its Bodygroom below-the-neck shaver. The Dad – largely off the radar and when he does appear it is as the embarrassing father looking for advice from his kids on how to become cool. Yet they are at peak earning power. Dyson and Patek Philippe are reaching out to Dads. The Retrosexual – if the Metro champions the female ethos, the Retrosexual is screaming ‘Stop!’. This traditionalist has lived through the same cultural turmoil and consumerism as Modern Man and the Metro, but rejects feminism and happily wallows in traditional male behaviour. He yearns for the way things were in the good old days before moisturiser for men. Burger King has this guy nailed, as does P &G’s Old Spice brand. He worries about getting clean – the more expensive the soap product, the girlier it is – how clean can you get before other guys notice . . .

Source: Adapted from Nanette Byrnes, ‘Secrets of the Male Shopper ’, BusinessWeek , September 4 2006, pp. 45–54.

But while broad segmentation deals in customer stereotypes based on factors like demographics, social and residential characteristics (which can be useful counters to the belief that all customers are the same), many applications now focus on much more narrowly deﬁ ned segments as targets. For example, Chicago-based Hyatt Hotels & Resorts has targeted the gay, lesbian, bisexual and transgender market (GLBT) with its own GLBT website to make its image more attractive to this market, particularly gay, male travellers.9 On the other hand, Marriott Hotels is developing designer, boutique hotels to specialize in the needs of the younger, wealthier, more fashionable traveller – the fastest growing 10 niche in the US hotels market. More extreme, car-makers are tuning incentives to carefully deﬁ ned slivers of the car-buying public, in some cases tying an incentive like a price-cut to an individual car or truck. 11 In part, this micro-segmentation is driven by ‘ microtrends ’ and the new ‘ identity groups ’ we discussed earlier (Chapter 6). It is also related to the tendency for mature markets to fragment into slivers and niches, as competitors seek out new opportunities. For example, at one stage the disposable baby nappy market was really just Huggies and Pampers. In the face of intense private label competition, Kimberly- Clark has branched out into Huggies Convertibles, Overnites and Little Walkers, and Procter & Gamble has launched Pampers Swaddlers, Cruisers and Easy-Ups. Kimberly-Clark has followed this with its Supreme Gentle Care line for small babies and Supreme Natural Fit

283 •• Market-Led Strategic Change

Corporate mission Values Strategic Strategic intent segmentation Market position

Resource allocation Marketing plans Managerial Operational segmentation management Figure 7.8 Strategic (sales, advertising) and managerial segmentation

for older babies and toddlers. Both brands are fragmenting the market to promise parents more comfort for their baby and to maintain a premium price position against retailer brands. 12

Strategic market segmentation Where this is leading us is into another way of opening up the market segmentation issue, which is to distinguish between strategic and managerial segmentation issues – as suggested in Figure 7.8 . Strategic segmentation is led by customer beneﬁ ts and relates to broad issues like corporate mission and value and strategic intent and market position. Managerial segmentation is the more familiar level of managerial planning and resource allocation and operational issues of sales and advertising allocation. Most people only see the managerial aspects of segmentation and ignore its strategic signiﬁ cance. The development of segmentation strategy at US electronics giant Best Buy illustrates the power of a strategic approach to segmentation in transforming how a company understands its customers and goes to market in new ways.

Reality Check: Soccer mom scores at Best Buy

In the USA, consumer electronics retailer Best Buy provides an interesting example of strategic market segmentation. Although the company was accounting for around 17% of the US and Canada consumer electronics market, nonetheless 2003 saw the piloting of Best Buy’s ‘ customer-centricity’ strategy, radically shifting the company’s strategic emphasis from products and technology to customers.

•• 284 Strategic market choices and targets: where to compete and where not to

Courtesy of Best Buy Co. Inc.

The goal is to focus on the most attractive customers based on the important differences between them in their purchasing and preferences in consumer electronics. The customer base has been segmented into basic lifestyle groups. High priority target groups are described as: Jill – the ‘soccer mom’, who is the main shopper for the family, but often avoids electronics stores, well-educated and confident, wants to enrich her children’s lives with technology, yet intimidated by technology and jargon. Barry – the wealthy professional man, who demands the latest technology and best service. Buzz – the young ‘tech enthusiast ’, who wants technology and entertainment. Ray – the family man, who wants technology that improves his and his family’s life. Mr Storefront – the small business customer who can use Best Buy’s product solutions and services. Other interesting segments are the Carries (young, single females) and the Helen and Charlies (older couples whose children have left home).

285 •• Market-Led Strategic Change

Stores are being adapted to serve at least one dominant customer segment shopping at the store – though Jill and Barry stores are a frequent combination of segments in the same store. At the store level, employees are trained to recognize and focus on the needs and preferences of the target segments for that store. Indications are that stores converted to focus on the target segments perform substantially better than other stores. The Best Buy example illustrates the levels of segmentation: the strategic issues are concerned with consumer lifestyles and the benefits that different types of consumers seek in choosing and purchasing consumer electronics. The managerial issues are concerned with identifying target segment members, redesigning stores to serve chosen segments and providing employees with the training and power to focus on the segment targets. Operational segmentation issues are concerned with delivering relevant messages to targets, and supporting the segmentation strategy at store level.

Sources: Ariana Eunjung Cha, ‘In Retail, Profiling for Profit’, Washington Post, Wednesday August 17 2005, p. A01. Matthew Boyle, ‘Best Buy’s Giant Gamble ’ , Fortune , April 3 2006.

But let’s consider the conventional view of segmentation and then get a bit more real about segmentation strategy.

Conventional views of market segmentation • • • Traditional views of segmentation are concerned with: the methodology of identifying segment targets – for example, dividing markets by geographic or demographic characteristics, or more sophisticated statistical clustering techniques; the criteria for testing the robustness of the segments identiﬁ ed as marketing targets – for example, are segments measurable, accessible, sustainable, actionable, and stable enough to make good targets; and the segmentation strategy decision – do we develop separate products and/or marketing programmes for different segments (differentiated marketing), focus efforts on certain segments (concentrated marketing), or ignore segment differences and treat all customer groups the same (undifferentiated marketing). If this is not clear, then we have provided the technical underpinnings elsewhere.13 The only problem with this conventional approach is that it largely misses an important point. It is concerned only with the operational aspects of marketing. It ignores the strategic issues almost entirely. This may explain why there is growing evidence that companies do not use segmentation theory to much extent beyond targeting advertisements into media based on demographics.

•• 286 Strategic market choices and targets: where to compete and where not to

Indeed, the typical (but recurring) responses of managers in workshops to conventional segmentation are revealing. They say things like:

● Is the fact that we can segment markets any reason why we should segment markets? ● Should we allow our marketing strategies to be driven primarily by the availability of the information technology that facilitates sophisticated market segmentation? ● If, as competitors, we all pursue the conventional, mechanical approaches, using the same techniques, and often the same databases – surely we all end up with the same segments and no competitive advantage (indeed, maybe more competition in the critical segments because everyone goes after them)? ● What’s the use to anybody of identifying and choosing market segments that nobody in the organization owns? ● Fancy segment labels are all well and good, but they do not fi t the marketing plan and they don’t get budgeted for. ● It is fi ne being imaginative about basing segments on customer needs and benefi ts sought, but how do you turn that into quantifi - able targets with specifi c customers for the sales force? ● Don’t we have to revert to demographic and geographic segmentation anyway, because those are the only things we can easily measure, and see what we’ve got and where we’re going?

Such responses have led us to build an extended model of segmentation to use with executives to work on market segmentation questions, and to confront the practical issues they raise. Importantly, we should recognize that different approaches to segmentation can be used for different purposes.14

An extended model of market segmentation • • • Our extended model – which can be used as a diagnostic framework to sort out segmentation issues for a company – is shown in Figure 7.9 . This model is based upon two important propositions: ﬁ rst , that there is a need to distinguish between strategic and operational organizational levels in dealing with the segmentation issue; secondly , that in order to address the issue of implementation it is necessary to examine the internal organizational context, as well as the external marketplace in considering segmentation. The suggestion is that in each of these areas the managerial agenda to be addressed is different, as suggested in Figure 7.9 and outlined below. To begin with, strategic–explicit issues relate to strategic segmentation and the goal is to focus on the fundamental customer beneﬁ ts sought in different parts of the market, whether from physical product differences or from non-product attributes. It is quite possible that the conventional criteria of segment evaluation do not validly or usefully apply to what is built here. The pursuit of a strategic market vision may quite reasonably be judged by criteria other than measurability, and the

287 •• Market-Led Strategic Change

Explicitness and focus

Explicit/external Implicit/internal

Strategic Strategic segmentation • Customer benefits • Organizational structure • Qualitative approach • Information processing • Links to mission and • Corporate culture and vision history

Managerial segmentation

Organizational • Sales and distribution • Conventional organization

decision-making level segmenation bases • Advertising and • Quantitative approach promotion • Conventional tests • Media buying and criteria of choice • Pricing tactics Figure 7.9 An Operational extended model of market segmentation

like. At this level, segmentation models might be better judged by such criteria as: the ability to create and sustain competitive differentiation and advantage; innovativeness in how the market is attacked; the compatibility with mission; providing a coherent focus for thinking in the organization; and consistency with corporate value and cultures. The relevant techniques for generating strategic segmentation in the fi rst place are more likely to be qualitative and creative than quantitative and scientifi c. This is arguably the practical link between corporate mission and the marketplace – it is where the broad concepts and ideas in the mission statement can be related to customer needs and benefi ts in a specifi c marketplace. However, it is at this decision-making level that we must also recognize the other characteristics of strategic decision making: levels of uncertainty and ambiguity are high; information is scarce; and the market environment is enacted or constructed rather than objectively known. On the other hand, operational–explicit issues are critical issues, but which are also the most familiar ones: the choice of conventional segmentation bases and the application of quantitative methodology to identify segment characteristics. Here the conventional tests probably do apply, and the goals are primarily managerial in allocating resources, and operational in the tactical management of marketing programmes. Where it gets more interesting is with strategic–implicit issues. This is a set of issues that have been largely neglected by conventional segmentation, although they are likely to be critical to successful implementation of segmentation strategies. These issues are concerned with the fundamental implications of market segmentation for the ‘inner workings ’ of the organization. These issues are likely to include the following

•• 288 Strategic market choices and targets: where to compete and where not to areas: organizational structure – strategic market vision may be incompatible with organization structures (and the related organizational decision-making processes and information fl ows) raising a variety of practical questions that are central to the ability of an organization to implement a segmentation strategy because segments are never ‘owned ’ or taken seriously, because they fall between the jurisdictions of existing departments or SBUs; information and reporting systems – fundamental problems may be that new segment targets may be incompatible with existing information processing systems and diffi cult to identify and evaluate in conventional terms or to set targets, allocate responsibilities, or monitor progress; internal decision-making process – if segments are conceived and defi ned in a radically different way to the conventional market targets a major implementation barrier may arise concerned with whether the new segments will become a genuine focus in marketing plans and whether they will be recognized and gain resources in the budgeting process; corporate culture – here the issue is the acceptability of new segments to the people in the organizations in terms of values, ethos, internal rules, evaluation systems and the like. If new segments represent radical change and are potentially threatening to the status quo and the current distribution of infl uence and control, there may well be hidden barriers to implementation which are powerful. It is the neglect of issues such as these that really lies behind the observed failure of many innovative customer-benefi t based segmentation models, when this construction of the market produces segment targets in which the people in the organization have little belief or confi dence. Lastly, there is the question of operational–implicit issues : internal organizational issues, but at an operational level: sales and distribution organization – are the segment targets easily identifi able by salespeople and accessible through existing distribution channels and are they compatible with the way these processes are currently structured; advertising and promotion campaigns – are the segment targets reachable as separate targets through our existing procedures and capabilities for marketing communications; market research – do we have information organized around these segment targets to identify them, to size and measure opportunities, and to evaluate our performance; pricing tactics – do we currently have the facilities to price differently to segment targets? These issues, though frequently hidden and ignored, are with tactical problems in implementing segmentation: where segments cut across sales and distribution systems and cannot be adequately serviced by either; where marketing communications, pricing and market research systems are not set up to deal with, or differentiate between, segments of the type proposed. The practical conclusion is that we should screen segments not just in terms of ‘market attractiveness’ (the conventional criteria), but also in terms of ‘ internal compatibility ’ , in the way suggested in Figure 7.10 . The critical implementation issue is compatibility and consistency between segment targets and organizational attributes, both overt and covert. However, to identify such issues of internal compatibility may require more detailed analysis of the kind discussed below.

289 •• Market-Led Strategic Change

Internal compatibility

High Low High Attractive Attractive segments segments but that match with with poor match company with company capabilities capabilities

Unattractive Unattractive

attractiveness segments segments Market segment but with match to that do not match company with company capabilities capabilities Figure 7.10 Segment Low attractiveness and internal compatibility

Reality Check: Segmenting a market to the death

Pursuing the corporate banking example, the strategic vision of top management was to target corporate customers for financial services according to the customer’s own corporate strategy (which would predict customer needs and priorities for financial services), with product offering and marketing programmes built around, for instance, ‘market-share driven ’ companies as compared to ‘ profit- reconstruction strategy’ companies. As we saw, this defined an unusual and novel strategic segmentation model which offered considerable potential competitive advantage. However, many problems emerged in attempting to implement this segmentation model in the bank. The powerful branch network in the bank saw the new corporate market segmentation as a threat to their own business – they called it ‘ cherry-picking ’ – and lobbied against it, as well as effectively withholding cooperation. It was impossible to value or target the new segments because the bank’s information system coded only customer size and industry type. The new segments did not ‘ fit ’ with the established planning system and were largely ignored when targets were set and when promotional resources were allocated. Lack of information meant that salespeople were given little support in how to identify corporate customers in terms of the new segments, and so largely ignored them. The new ‘ marketing’ idea of segmenting the bank’s customers by need and

•• 290 Strategic market choices and targets: where to compete and where not to

benefit found little support among management, who defended the status quo as ‘prudent banking’ practice. The strategy was a complete failure. This may be an extreme case, but it illustrates the pointlessness of market segmentation – however innovative – that ignores issues of integration and consistency inside the organization. The corporate banking operation was closed.

Consistency and integration • • • The argument above suggests that overall we can reduce the market segmentation issue to two critical questions to evaluate relevance and the practical usefulness of a given segmentation model, in terms of whether it can be implemented at all by a given organization. These critical issues relate to: questions of consistency, or the internal compatibility of segment targets with organizational characteristics; and, questions of integration, or the relationship between strategic and operational aspects of segmentation. This is illustrated in Figure 7.10 . Consistency is concerned with the ‘ ﬁ t ’ between the explicit/external and implicit/internal issues in segmentation, at both the strategic and at the managerial/operational levels. On the other hand, integration refers to the ‘ﬁ t’ between the strategic segmentation model and the managerial/ operational level; and between internal issues at both these levels. To go about addressing these issues, stimulus questions for executives are:

● What is the existing or achievable ‘ fi t ’ or internal compatibility between the ‘ strategic segmentation ’ model of the external customer marketplace, and the internal organization structure, information systems, processes like planning and budgeting, and corporate culture? ● What is the existing or achievable ‘ fi t ’ or internal compatibility between the ‘managerial/operational segmentation’ model of the external customer marketplace, and the sales and distribution organization, advertising and promotion management, media buying, market research systems, and pricing administration? ● How compatible is the strategic segmentation at the managerial/ operational level, can customer benefi t groups be translated into accessible target segments? ● How compatible are the internal issues at the ‘strategic ’ level with their counterparts at the ‘ managerial/operational ’ level – in terms of organization, information, planning, budgeting, people and so on?

Although it cannot provide easy answers, this framework provides a structure by which managers may evaluate the real nature of market segmentation for their companies and for identifying implementation barriers to segment-based strategies. In practical terms this is a useful device for bridging the gap between the conventional theory of market segmentation and the implementation of segmentation strategies.

291 •• Market-Led Strategic Change

Segmentation is a powerful strategic tool for focusing on customer needs and building competitive advantage from that focus. But we have to be realistic and think segmentation through to the capabilities and characteristics of the organization as well, or we end up with a brilliant market strategy that does not work.

Market Positioning At one level, market positioning is about where you are located in the marketplace, largely as judged by customers, compared to the rest. For example, research by Experian links British supermarkets to the social characteristics of consumers in the following way:

● Waitrose – the supermarket to be seen in, frequented by career professionals and the well educated; ● Sainsbury’s – broad appeal but particularly favoured by young, well-educated shoppers who are cosmopolitan in their tastes, liberal in their outlook, and less likely to have children; ● Tesco – very broad appeal, attracting families, pensioners, the more price-conscious, and professionals; ● Asda – attracts more ‘ down to earth types ’ , classifi ed by Experian as the ‘ ties of community’ group, typically from coalfi eld regions, old steel and shipbuilding towns, and places with docks and chemical plants, mingled with younger families living in newer homes; ● Morrisons – attracts those from close-knit, inner-city and manufacturing town communities, though the integration of Safeway stores provides a broader appeal including those defi ned as ‘ rural isolationists ’ ; ● Netto – the bottom of the social heap, attracting families on low incomes often living on large council estates found in the outer sub- urbs of provincial cities. 15

Of course, such approaches to market positioning are very crude, and for retailers probably reﬂ ect geographic location of stores and historical origins as much as anything else. They are also in danger of blinding us to change – Aldi and Netto, the low-cost format European retailers, are increasingly competing with Tesco for ‘ middle England ’ by offering luxury goods like lobster and champagne at very low prices. However, more to the point is the question of choice – how does a company want to be located and perceived in a market, compared to the alternatives?

The logic of ‘ blue oceans ’ and ‘ red oceans ’ Milind Lele considers the goal of strategy to be the creation of monop- olies, on the grounds that research shows that nimble companies can create dominance in niche markets through creativity in how they go to market and deliver value. They can ﬁ t into the spaces between traditional competitors. They grow by identifying and exploiting a

•• 292 Strategic market choices and targets: where to compete and where not to

monopoly neglected by their peers. For example, Enterprise Rent-A- Car manages to earn bigger and more consistent proﬁ ts than Avis and Hertz. Enterprise challenged the industry belief that people rent cars when they want to travel, spotting that people also rent cars when their own vehicle is being repaired. They set themselves up to deliver cars to customers at home, tapping and dominating a market untouched by Hertz and Avis. 16 Market and segment choice becomes about ﬁ nding spaces where there is no competition. Similarly, Kim and Mauborgne put forward a compelling argument that competing in overcrowded industries is no way to sustain high performance, and suggest that the real opportunity is to create ‘ blue oceans ’ of uncontested market space, as opposed to trying ‘red ocean’ strategy in existing heavily competitive market space. They argue that the prospects in red oceans are shrinking in most sectors, and growth will come primarily from blue oceans. 17 They contrast the imperatives in red and blue oceans:

Red oceans . . . Blue oceans . . .

Compete in existing market space Find uncontested market space

Beat the competition Make the competition irrelevant

Exploit existing demand Create and capture new demand

Equal the conventional value/cost Break the value-cost trade-off

Set the company’s operations up to Set the company’s operations up to align with a strategic choice of pursue differentiation and low cost differentiation or low cost

In this sense, market and segment choice is far more creative and has far greater strategic signiﬁ cance than conventional approaches would allow.

Creating new market space The ground-breaking body of research compiled by W. Chan Kim and Renée Mauborgne at INSEAD constitutes a compelling case that successful companies reshape their industries and sometimes create new ones.18 What they describe is how managers in high-performing companies across the world have succeeded in systematically looking outside the conventional boundaries and structures to ﬁ nd the unoccupied territory that represents a real breakthrough in value. This section leans very heavily on their work and the companies they have studied. This approach underlines the importance of our earlier view of ‘ thinking strategically ’ (Chapter 4). Kim and Mauborgne tell us that companies know that they must innovate to succeed, but too often they interpret this as head-to-head competition with rivals for a bigger share of existing markets. This is the route to long-term decline. Successful growing companies innovate by creating

293 •• Market-Led Strategic Change

new markets or reinventing existing ones. They identify six basic paths to creating new market space, applicable to all industries. The difference between conventional strategic thinking and that needed to create new market space is summarized in Table 7.1, and discussed below.

Looking across substitute industries • • • Conventional strategy focuses on competing directly with known competitors offering similar products and services to ours (the competitive box). However, actually companies do not just compete with each other within the industry – they compete with substitutes in seemingly unrelated industries. For example, e-mail competes with postal services, because both get messages from one place to another, but using different technologies. The founder of Intuit software, famed for its low-cost and easy-to-use personal ﬁ nance software packages, did not see his competitor as other software producers. He saw the main competitor as the pencil, because it is cheap and easy to use. By focusing on ease of use and cheapness to compete with the pencil, Intuit created a new market space for personal ﬁ nance software, and grew the market by a factor of 100. It is in the space between industries that opportunities

Table 7.1 Creating New Market Space*

Conventional ways of Conventional head-to-head Strategic thinking to create looking at competition competition new market space

The industry Focuses on conventional competitors Emphasizes looking across and market share substitute industries for opportunities

The strategic group Focuses on competitive position Emphasizes looking across within a conventional group of the strategic groups within the competitors industry

The buyer group Focuses on better performance with Emphasizes redeﬁ nition of the the conventional buyer group buyer group

Scope of product and Focuses on improving the value of Emphasizes complementary service offering the product service offering within the product and service offers that conventional industry boundaries go beyond the conventional industry boundaries

Functional-emotional Focuses on improving price and Emphasizes taking a different orientation of the performance in line with the perspective on the functional- industry functional-emotional orientation of emotional orientation of the the conventional industry conventional industry

Environment Focuses on adapting to external Emphasizes participation in trends shaping external trends

* Source : Adapted from W. Chan Kim and Renée Mauborgne, ‘Creating New Market Space’, Harvard Business Review , January/February 1999, pp. 83–93.

•• 294 Strategic market choices and targets: where to compete and where not to

exist for creating new markets. One way of breaking free of competition with rivals in an industry is to ﬁ nd substitutes and to look at why buyers choose one substitute over another – the goal is then to concentrate on the strengths of both substitutes and eliminate everything else. An illustrative example is Southwest Airlines.

Reality Check: The real secret of the success of Southwest Airlines

Southwest is famous as the innovator of ‘no frills ’ flying, on which the European airlines easyJet and Ryanair have successfully based themselves. In mid-2007 Southwest reported its 64th straight quarter of profitability – a record unmatched in the industry. Southwest now flies more domestic passengers in the USA than any other airline. The airline has substantially grown the market on the routes it flies. The factors underlying Southwest’s success go far beyond cost savings achieved by eliminating in-flight meals and drinks. While conventional US airlines were locked in head-to-head competition based on traditional tactics, Southwest side-stepped all of that and created a new market: short-haul air transport. Southwest created the concept of frequent point-to-point flights – its average flying distance is only 425 miles – with fares up to 60% below conventional airlines, using airports in smaller, less-congested cities. The Southwest strategy was to move across substitute industries. For short-haul destinations, surface transport, i.e., the car, is a substitute for flying. They focused on the reasons why people choose to fly instead of driving – it is to save time, not to watch films, eat meals, let alone worry about multiple-class seating or designated seats. Southwest created point-to-point flights to make short-haul travel even quicker, and used secondary airports to avoid the delays in getting to and through congested major city airports. Their frequent flights counter the advantage to the car driver of leaving when they want. The other ‘benefits’ of flying were eliminated. The effect is that Southwest has created a market space between conventional flying and surface transport. This is encapsulated in their strategic principle, which is to: ‘Meet customers’ short-haul travel needs at fares competitive with the cost of automobile travel. ’

Sources: W. Chan Kim and Renée Mauborgne, ‘Southwest Airlines’ Route to Success ’, Financial Times, May 13 1999. Orit Gadiesh and James L. Gilbert, ‘Transforming Corner-Office Strategy into Frontline Action ’, Harvard Business Review , May 2001, pp. 73–79.

Looking across strategic groups within the industry • • • The Sony Walkman, Polo Ralph Lauren and Toyota’s Lexus are all ideas that created new markets by breaking free of the conventional strategic

295 •• Market-Led Strategic Change

groups in their industries. Strategic groups are mainly companies pursuing similar strategies obsessed with improving their competitive position within the group. Existing industry players or new entrants can achieve major gains by changing the way in which they compete. For example, the Sony Walkman combined the transistor radio and the ‘ ghetto blaster ’ to create the personal stereo – combining convenience with ‘coolness ’ – and took business from both the existing strategic groups and attracted new customers, varying from joggers to commuters, into the market. Similarly, in the US luxury car market, Toyota’s Lexus was positioned between the high-end group of Mercedes, BMW and Jaguar and the low- end group of Cadillac and Lincoln. Polo Ralph Lauren created a market worth $5 billion for ‘ high fashion with no fashion ’ by combining the appeal of haute couture with classic designs. The critical issue is focusing on the factors that make buyers trade up to a higher price strategic group or trade down to a lower group, and eliminating everything else. Another example is the Formula 1 low-budget hotel chain.

Reality Check: Breaking free of strategic groups

In the mid-1980s, one and two-star hotels in France were in trouble – no growth, low occupancy rates, poor profitability. Existing competitors competed by trying to improve against each other, creating more of the same. In creating the Formula 1 budget hotel chain Accor asked the fundamental question of why do people looking for cheap accommodation trade up to a two-star hotel or trade down to a one-star hotel? They found that two-star hotel customers trade up for the ‘sleeping environment ’ – one-star hotels were dirty, noisy and had bad beds. The other amenities such as larger rooms and restaurants were irrelevant. One-star customers went there for the very low price – often half the rate of the two-star hotel. Accor’s strategy was to focus on the distinctive strengths of both strategic groups and eliminate or reduce everything else – its Formula 1 hotels offer cleaner, quieter rooms, with better beds like the conventional two-star hotel, but at the price of a traditional one- star hotel room. Its operating costs are lower than the traditional two-star hotel because it eliminated restaurants and lounges, and kept furniture, room size and other amenities to a minimum. It took custom from both strategic groups and expanded the market. By 1999, Formula 1 had a market share larger than the sum of the next five largest competitors. They had created a new market space in between the traditional strategic groups of competitors.

Source: Adapted from W. Chan Kim and Renée Mauborgne, ‘Finding Rooms for Manoeuvre ’ , Financial Times , May 27 1999.

•• 296 Strategic market choices and targets: where to compete and where not to

Redefi ning the buyer group • • • In conventional thinking, competitors converge on a common and shared defi nition of the target customer – and then compete hard for a share of that customer’s attention and business against each other. Separating members of the chain of customers – purchasers, users and infl uencers – with different concepts of what is good value identifi es opportunities to recreate the market by focusing on the buyer group neglected by conventional competitors. For example, in the industrial lighting business, traditional strategies focused on corporate purchasing managers who buy on the basis of how much light bulbs cost, and how long they last – so all suppliers compete head-to-head on these value drivers. The Dutch company Philips understood that price and bulb-life do not account for the full cost of lighting – these lamps contain toxic materials that involve customers in high disposal costs (in which purchasing offi cers, quite reasonably, have little interest). Philips changed its focus away from corporate purchasing offi cers to chief fi nance offi cers and public relations departments. It launched Alto, an environmentally friendly bulb, to appeal to chief fi nance offi cers (on lower total user costs including disposal) and to PR departments (on environmental image issues). The Alto replaced more than 25% of the total market for traditional industrial fl uorescent lamps in the USA.

Look across to complementary products/services • • • Often the convergence of existing competitors on maximizing the value of their products within the boundaries of the industry’s products and services makes them blind to the opportunities represented by complementary products and services (often from outside the conventional industry boundaries). For example, when the Bert Claeys Group in Belgium built Kinepolis in 1988, the world’s ﬁ rst megaplex with 25 screens and 7600 seats, taking 50% of the market within a year, one of the factors they addressed for customers was the cost and difﬁ culty of getting a babysitter. In another example, Virgin Megastores combined CDs, videos, computer games, and stereo and audio equipment in a single store to solve their customer’s complete entertainment needs. Compaq provides another illustration of the power of complementa- rity in creating new markets.

Reality Check: Compaq’s server strategy

Compaq created the computer server industry in the early 1990s, but found that the speed of imitation in the computer industry meant they quickly faced many competitors. Rather than try to compete with the others on product improvements, Compaq tried to reinvent the market it had shortly before created. Compaq looked beyond

297 •• Market-Led Strategic Change

the server itself to the network of complementary services that surrounded it – finding that 90% of the customer’s costs came from installing and maintaining servers, and only 10% from buying the hardware. Suppliers were united in focusing on maximizing the price-performance of the server hardware, even though this was the least costly element for the buyer. Compaq’s 1993 launch of ProLiant servers had some important differences. The Compaq product came with new software – to automatically configure the server hardware making installation simple and error-free; and to diagnose maintenance needs before components broke down. Compaq remains leader in the server market, but it is a market which they have made attractive to many additional customers by reducing the costs of owning a server.

Source: Adapted from W. Chain Kim and Renée Mauborgne, ‘Try Complementary Medicine’ , Financial Times , June 3 1999.

Rethink the functional-emotional orientation of the industry • • • Competition in industries tends to be on one of two bases of appeal. Some industries compete mainly on price and functional performance, the appeal of these industries is ‘rational ’ . Other industries compete largely on emotions, for example, cosmetics. It is rare that there is only one way to compete in any industry. However, companies’ strategies educate customers in what to expect, so rational industries become more functional and emotional industries become more emotional. Companies can create market space by breaking out of this convergence and shifting the functional-emotional orientation of the industry. The aim is to appeal to a different customer motivation by transforming a product or service whose appeal is functional into one that is emotional, or vice versa. These opportunities may be even more attractive if they allow the company to develop a simpler lower-cost business model (by removing the ‘extras ’ that add to price in an emotion-orientated industry), or if it is possible, to add emotion and pleasure of use to a previously functional industry. Swatch and The Body Shop provide good illustrations.

Reality Check: Making the functional fashionable and the emotional functional

Until the early 1980s, budget watches were a functional item, sold cheaply, used solely to keep track of time. The industry leaders were Citizen and Seiko, competing by using quartz technology to improve

•• 298 Strategic market choices and targets: where to compete and where not to

accuracy, and digital displays to make reading the time simpler. Low price was critical. Swatch’s Swiss parent company, SMH, had a design mission to combine powerful technology with artwork, colours and flamboyance. Swatch created a market space by making the budget watch a fashion item – they transformed the industry’s conventional functional orientation into an emotional one. They also grew the size of the market – traditionally people owned only one cheap watch, because that met the functional need to tell the time. Swatch achieved multiple repeat purchases from buyers encouraged to match the wrist watch they wore with their clothes, mood and social occasion. The Body Shop created a new market in the cosmetics industry by shifting the appeal from an emotional one to a functional one. Unlike conventional cosmetics companies, the Body Shop did not sell ‘ glamour, hope and fantasy ’ in expensive packaging, it sold health and well-being in cheap, refillable plastic bottles. While conventional competitors spent heavily on R&D and image-creating advertising, the Body Shop used simple, natural products, at reasonable prices with no hype. The Body Shop created a new market space by shifting the appeal from emotions to functionality. Both examples illustrate a further issue. Once you have created a market space, imitative competitors are likely to flood in (as the Body Shop found in particular), so the challenge is further reinvention. The Body Shop’s market space was steadily invaded by direct imitations as well as ‘natural collections ’ from large companies like Boots. The latest reinvention has come not from Body Shop, but from one of its former suppliers – Lush. Lush is dedicated to producing effective personal care products out of fresh fruit, vegetables and cream, making the products freshly by hand, printing their own labels and making their own fragrances. They are vehemently opposed to animal testing of ingredients. Lush stores are laid out like ‘beauty delis ’ with soap shaped like slabs of cheese and round ‘ bath bombs’ piled high like apples. A fresh counter, like those used to sell fish, is piled with ice chips to preserve beauty products that must be used within 24 hours. Prices are by weight and products are wrapped in greaseproof paper complete with stickers with sell- by dates. Founder Mark Constantine says ‘Our aim is to have the youngest, freshest products in the history of cosmetics ’. Lush has created a new market space, which it is more difficult for competitors to enter.

Source: W. Chan Kim and Renée Mauborgne, ‘Coffee Blended with Emotion’, Financial Times, May 20 1999. Bernice Harrison, ‘Lush Cosmetic Chain for Grafton Street’, Irish Times, October 4 2000. ‘Market Miscellany’, Sunday Telegraph , May 6 2001.

299 •• Market-Led Strategic Change

Participate in shaping external trends • • • Industry changes can be important sources of new market space. The danger is that conventional company responses are incremental and passive as events unfold. The issue is how a trend will change the value that a company can deliver to a customer.

Reality Check: The Cisco kids are not kidding

Cisco Systems was quick to recognize that the world was hampered by slow data exchanges and incompatible computer networks, at the same time that demand for network computing was exploding – at that time the number of Internet users was doubling every 100 days. They could see that the data exchange and compatibility problems would only get worse, constraining the trend towards networking. Getting ahead of this trend, Cisco invested heavily in developing routers, switches and other networking devices that offered fast data exchanges and contributed towards achieving a seamless computing environment. By 1999, 80% of Internet traffic flowed through Cisco products, and its margins in this new market were in the 60% area.

Source: Adapted from W. Chan Kim and Renée Mauborgne, ‘From Trend to Quantum Leap ’ , Financial Times , June 10 1999.

But, Will the Big Idea Work? Good ideas tend to ﬁ nd backers – but the question is: how do we ﬁ g- ure out which ones will work and make money? Research at INSEAD suggests that there are four sets of economic conditions that successful business ideas have in common, and which we should evaluate before getting carried away with the creativity, innovativeness and 19 technology. This framework provides us with an excellent structure for asking the big questions about the ‘big idea’ . They suggest that the ‘ Winning Business Idea ’ index comprises:

● Buyer utility – what is the compelling reason why customers should buy the new product or service? ● Strategic pricing – how is the price approach going to attract the mass of buyers and grow the market? ● Business model – how can the company proﬁ tably deliver the new idea to the market – does it have the appropriate capabilities and cost structure? ● Adoption hurdles – are there any compelling ideas why the new idea may be rejected by employees, partners, or society/lawmakers?

•• 300 Strategic market choices and targets: where to compete and where not to

The ﬁ rst two tests determine the new idea’s potential to generate sales and win customers. The second two tests concern the ability to generate proﬁ table growth.

Buyer utility • • • The novelty of the technology and the ideas it creates may blind us to the rudimentary question of the value of the innovation and whether there is a reason for people to choose it in preference to alternatives. Technology innovation is not the same thing as buyer utility. Many failures score highly on technology, just not on buyer utility.

Reality Check: Philips ’ CD-I

The Dutch electronics group Philips invested the time of its world- class R&D staff and several billion dollars on developing CD-I – a video machine, music system, games player and teaching tool in a single package. The company’s thinking was that this machine would be the most important innovation in the industry since the video player. The CD-I was promoted heavily as the ‘Imagination Machine’. The product was a failure, in spite of its outstanding engineering and innovativeness. There was simply no compelling reason why the customer would buy it. The CD-I player did so many different things that customers could not understand how to use it. The product also lacked attractive software titles – while in theory it could do almost anything, in practice it could do very little.

Source: Adapted from W. Chan Kim and Renée Mauborgne, ‘How to Tell a Flyer from a Failure ’, Financial Times , January 23 2001.

The INSEAD research suggests that there are six ‘ buyer utility levers ’ , and we should think carefully about which of these levers we can use in each stage of the buyer’s experience: of purchasing, in delivery and use of the product, in supplementing and using the product, and in disposing of the product. The utility levers are: customer productivity – does the innovative product or service remove important barriers to the customer’s productivity, e.g., Tesco’s Internet grocery shopping saves the consumer time and effort in basic shopping activities and frees them from conventional shopping hours; simplicity – does the innovative product or service reduce the most signiﬁ cant sources of complexity for the customer, e.g., Intuit’s Quicken personal ﬁ nance software takes accounting jargon out of personal accounting; convenience – does the innovative product or service remove the hassle from a major inconvenience faced by the customer, e.g., Virgin’s lim- ousine service from home to airport and back for business class travellers removes one of the biggest sources of inconvenience for them;

301 •• Market-Led Strategic Change

risk – what does the innovative product or service do to counter the greatest uncertainties that buyers face; fun and image – does the innovative product or service counter blocks to customer enjoyment by adding emotion and image, e.g., Starbucks coffee shops were origi- nally far more than a place to drink coffee, and have suffered as this is what they have become; environmental friendliness – does the innovative product or service reduce or eliminate the things causing greatest harm to the environment, e.g., environmentally friendly light bulbs use less mercury and eliminate the need for special disposal.

Strategic pricing • • • The INSEAD research suggests that successful innovations are also characterized by strategic prices that create demand and win customers not just from within the current industry, but also from other industries. Successful companies focus on the costs of alternatives and substitutes, not just prevailing prices in their own industries.

Reality Check: Strategic pricing across industries

Corporate executives tend to buy first- or business-class tickets for air travel. These are expensive – a trip from London to the USA may cost £5000. The cost of this level of travel accounts for the bulk of corporate travel budgets. An alternative is to use a corporate jet. These cost tens of millions of pounds and hold a tiny share of the total corporate travel market. Executive Jet, a Berkshire Hathaway company, devised a pricing model whereby companies got the convenience and cachet of private air travel, but at the price of the annual business class travel budget. Their model consisted of selling shares of time in using a corporate jet. They took business from premium-ticket airline customers, and also from customers preferring a time share rather than continuing full ownership of their own corporate jet that would spend much of its time sitting in the hangar.

Source: Adapted from W. Chan Kim and Renée Mauborgne, ‘Now Name a Price That’s Hard to Refuse’ , Financial Times , January 24 2001.

Proﬁ table strategic pricing can take several forms: direct sales; rent- ing or leasing; time-share; ‘ slice-share ’ (e.g., unit trust investment); ‘ equity for price ’ (e.g., Hewlett–Packard exchanges servers for a share of the customer’s revenue). There are many options to straightforward price lists and payment on the purchase.

•• 302 Strategic market choices and targets: where to compete and where not to

Business model • • • Successful innovators start with a strategic price, allow for proﬁ t and work back into what this makes the cost target. The business model then has to hit the cost target without losing utility or increasing price: replacing conventional raw materials with newer cheaper ones; eliminating or outsourcing low added-value activities in the supply chain; digitizing activities, e.g., Internet ordering and exchanges. Using partnerships to build and reinforce capabilities is also critical.

Adoption hurdles • • • Major barriers in understanding and attitudes towards the innovation may be of decisive importance to success.

Reality Check: Monsanto’s genetically modiﬁ ed seeds

Monsanto developed genetically modified seeds and created a completely new market. The new seeds had many advantages over traditional products for farmers – less risk of crop failure due to disease or bad weather, lower costs, less need for pesticides, a longer shelf- life for some products, and a cleaner environment and food quality benefits to consumers. Most of these claims were scientifically verifiable. Yet the failure Monsanto experienced was severe enough that to survive it had to merge with the drugs group Pharmacia and Upjohn in 2000. Monsanto totally underestimated the acceptability of its innovation. The main adoption hurdle was posed by the green movement, and its media support, that claimed the company was defying the laws of nature for the sake of profit, as well as entrenched objections from supporters of organic farming. While the UK supermarket firm Tesco staged the grand gesture of removing all GM-food from its shelves, it was Monsanto that paid the price.

Source: Adapted from W. Chan Kim and Renée Mauborgne, ‘Are You Sure the World Is Ready? ’, Financial Times , January 25 2001.

Hurdles to adoption may come from: employees (threatened by the launch of the innovation and what it does to their role); partners (e.g., distributors side-stepped by direct sales channels); or society at large. Obstacles should be identiﬁ ed at the outset and dealt with fairly and effectively. In fact, there is evidence that the best innovators turn their customers and colleagues into collaborators by presenting them with an idea they can improve on – not a fait accompli – so they have a stake in the innovation.20

303 •• Market-Led Strategic Change

Evaluating new ideas • • • This framework is an excellent one, which we can use operationally to evaluate whether demand can be built for the innovation, and whether we have the capabilities to develop a business model to meet that demand and to overcome the obstacles to adoption that we face in the marketplace.

Reality Check: The Iridium phone

Motorola and its partners spent $5 billion developing and $140 million launching Iridium – a satellite communications system – with the slogan ‘Anytime, Anywhere ’. This product was launched in 1998 with the goal of redefining the world of mobile phones. It was the first mobile phone that could provide uninterrupted wireless communication anywhere in the world, regardless of country or terrain, via a global system of satellites linked to ground-based digital services. Demand estimates had been optimistic – more emphasis had been placed on solving technology challenges than evaluating global use potential and how to access it. For example, in many geographical areas rapidly expanding demand for ground-based digital wireless systems had reduced the need for global satellite systems. At its peak the Iridium venture attracted less than 100,000 subscribers, compared to the break-even figure of 500,000, and the company’s forecast of 2 million users by 2002. In March 2001 Iridium closed, unable to find a last minute buyer; its 66 satellites are expected to crash into the sea and the company took its place among the 20 largest bankruptcies in US history. The phone was heavy and it needed a range of attachments to work. It could not be used in cars or buildings (which tends to be where business people want to use mobile phones). It was expensive – $3000 for the phone and call charges of $7 a minute, compared to conventional $150 cell phones and competitive call charges. Iridium failed to provide a compelling reason why customers should buy, and its pricing was unattractive to target users. The company greatly over- estimated customer take-up. While the technological capabilities were fantastic, Iridium faced problems in matching its cost structure to an acceptable price for customers. Hurdles to adoption were not considered until it was too late to do things to overcome them.

Source: Adapted from Christopher Price, ‘Iridium: Born on a Beach but Lost in Space ’ , Financial Times , August 20 1999.

Importantly, the issues surrounding the creation of new market space demand that we rethink how we deﬁ ne and understand markets and substitutes (avoid the trap of the competitive box), and how we see segments within our markets. It leads us directly to the question of how to choose when we face alternatives.

•• 304 Strategic market choices and targets: where to compete and where not to

Market Choices Re-thinking market defi nitions, market segments and targets is likely to very quickly confront us with choices. If we cannot pursue all the markets we have identifi ed, if we cannot attack all the segments we can see – then how do we set priorities and decide where to focus? We have been warned of the strategic weakness in trying to be all things to all people – but how do we set our priorities? At the corporate level, more and more strategy is driven by market focus in the fi ght for market leadership. The thinking is that focus creates a strong position in the minds of the customer: Volvo owns safety, Xerox owns copiers, Kleenex owns tissues. There is strong evidence that one key to sustained performance and the survival of a company is choosing attractive markets and entering early, but also making a timely exit from industries where it is no longer possible to compete profi tably.21 We saw several examples of the importance of the timing of such moves in Chapter 5. But how do we confront the market choices important to our business? The world is full of portfolio models and decision aids. Perhaps the most straightforward is one that prioritizes by looking at: market (or segment) attractiveness – the degree to which an opportunity fi ts with our goals and capabilities; and, market position – how well we believe we can do in this market or segment. Obviously, neither of these things is static. Market attractiveness and market position can both change. Bear in mind too that the factors that make markets attractive are not the same for all companies. For example, fast-moving fashions in clothes may make a market unattractive for some retailers, while a company like Zara has a different business model, designed to offer ‘ live collections’ that change every week in response to short-lived fashion trends, and can produce a new fashion line in days. In other words, high market volatility is extremely unattractive to one competitor, but highly attractive to another. Issues like how well buyers in this market will receive our value proposition and niche opportunities should also be considered. The market position you can take will depend on what you do – the strategy, the value proposition and so on. For example, the Body Shop International is expanding its branch and distribution network to channel its cosmetic products to new international markets – but in different retail formats depending on customer needs and behaviour in each market. While direct marketing operations are planned for Switzerland and Canada, the ‘micro-store ’ outlet is more suitable for expensive large city sites and markets like Japan. Accepting that things change, our logic is shown in Figure 7.11 – assuming we grade a market or segment as high or low in attractiveness, and the position we take as strong or weak, then the options and priorities are:

● Core business – areas where the market offers the potential for us to achieve our goals and which ﬁ ts our capabilities and competence,

305 •• Market-Led Strategic Change

Market attractiveness

High Low Strong

Core Peripheral business business Market position

Illusion Dead-end business business

Figure 7.11 Market Weak attractiveness and position

and where we believe we can take a strong market position. Such areas are a high priority for investment. ● Peripheral business – where the market is less attractive to us (there is no growth, competition is tough, margins are low, and so on), but we can take a strong position. These may be areas where we continue to do business, but unless they bring us other beneﬁ ts they are not a high priority for investment. ● Illusion business – these are highly attractive markets that offer everything we want, but where we can or do take a weak position. These markets and segments are an illusion because the market looks great – but we can never get a pay-off. ● Dead-end business – these are the lowest priority because the market is not attractive to us, and we can only take a weak position.

Clearly, this is a crude and often uncomfortable view of the markets and segments we have identiﬁ ed. It can be a very useful tool, because it forces us to face up to realities. When we add to this our thoughts about our strategy – our competitive advantage with different customer groups, the sustainability of our market position, the robustness of our brand or value proposition, i.e. movement from one issue to another within the market strategy – then the picture may be even more valuable. However, experience suggests we may ﬂ ush out some interesting things:

● cases where all our thinking is about defending our market position in peripheral business – because it is where we have always been; ● executives who champion new markets and segments but can see no way of taking a strong position – they drive us into the illusion business;

•• 306 Strategic market choices and targets: where to compete and where not to

● the deep-seated and vigorous defence of markets which are dead- end business, because we just refuse to accept that one of our traditional markets has become less attractive or that we have been overtaken by new competitors.

What Next? These are vitally important questions to confront before we commit to a market strategy. Do not forget, however, that we need to think also about the value proposition and key relationship components of market strategy in making these judgements – how else can we be sure about the strength of our market position, unless we know what it is based on and whether we can sustain it through collaborations and employees and defend against competitors? These are our next topics.

References and End-notes

1. Clark, Bruce H. and David B. Montgomery, Managerial Identiﬁ cation of Competitors , Cambridge, MA.: Marketing Science Institute, Report No. 98-127, 1998. 2. Cravens , David W. , Nigel F. Piercy and Artur Baldauf , ‘ Management Framework Guiding Strategic Thinking in Rapidly Changing Markets ’ , Journal of Marketing Management , 2009 , forthcoming . 3. Mitchell , Alan , ‘ Marketers Seek Oasis from Blur ’ , Marketing Business , September 27 1996 . 4. This section of the chapter leans heavily on: Piercy, Nigel F. and Neil A. Morgan, ‘ Strategic and Operational Market Segmentation: A Management Analysis’ , Journal of Strategic Marketing , 1, 1993, pp. 123–140. 5. Haley , Russell I. , ‘ Beneﬁ t Segmentation: A Decision-Oriented Research Tool ’ , Journal of Marketing , 32 July 1968 , pp. 30 – 35 . 6. Markey , Rob , John Ott and Gerard du Toit , ‘ Winning New Customers Using Loyalty-based Segmentation ’ , Strategy and Leadership , 35 ( 3 ) , 2007 , pp. 32 – 37 . 7. ‘ Bank Asks Lying Expert to Study Accounts ’ , Sunday Times , November 19 2000, p. 3-1. 8. Poulter , Sean , ‘ Forget Class, Its Postcodes that Count ’ , Daily Mail , September 13 2007 , pp. 32 – 33 . 9. Vence , Deborah L. , ‘ Divide and Conquer ’ , Marketing News , July 15 2007 , pp. 15 – 20 . 10. Arlidge , John , ‘ Marriott Goes for Boutique Hotels ’ , Sunday Times , November 11 2007 , p . 3 - 7 . 11. Simon , Bernard , ‘ Carmakers Tailor Their Promotions to Rev Up Sales ’ , Financial Times , February 11 2008 , p . 1 6 .

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12. Birchall , Jonathan , ‘ New Tactics in the Battle for Babies ’ Bottoms ’ , Financial Times , August 25 2006 , p. 8 . 13. Cravens, David W. and Nigel F. Piercy, Strategic Marketing , 9th edn, Burr Ridge, IL: McGraw-Hill/Irwin, 2009, Chapter 3. 14. Yankelovich , Daniel and David Meer , ‘ Rediscovering Market Segmentation ’ , Harvard Business Review , February 2006 , pp. 122 – 131 . 15. Wilkes , David , ‘ Supermarket Snobs ’ , Daily Mail , October 10 2007 , p . 2 5 . 16. Lele , Milind M. , Monopoly Rules: How to Find, Capture, and Control the World’s Most Lucrative Markets in Any Business , London : Kogan Page , 2007 . 17. Kim , W. Chan and Renée Mauborgne , ‘ Blue Ocean Strategy ’ , Harvard Business Review , October 2004 , pp. 76 – 84 . 18. Kim , W. Chan and Renée Mauborgne , ‘ Value Innovation: The Strategic Logic of High Growth ’ , Harvard Business Review , January/February 1997 , pp. 102 – 112 . Kim , W. Chan and Renée Mauborgne , ‘ Creating New Market Space ’ , Harvard Business Review , January/February 1999 , pp. 83 – 93 . Kim , W. Chan and Renée Mauborgne , ‘ Knowing a Winning Business Idea When You See One ’ , Harvard Business Review , September/October 2000 , pp. 129 – 138 . 19. Kim , W. Chan and Renée Mauborgne , ‘ Knowing a Winning Business Idea When You See One ’ , Harvard Business Review , September/October 2000 , pp. 129 – 138 . 20. Schrage , Michael , Serious Play , Boston, MA : Harvard Business School Press , 1999 . 21. Owen , Geoffrey , ‘ The Secrets of Corporate Survival ’ , Financial Times , August 28 2000 .

•• 308 C H A P T E R • • • • 8 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

This chapter . . . The purpose of this chapter is to underline the importance of developing and communicating a rigorous understanding and statement of the value that we offer to a customer. But this has to be a bit more than the strap-line from an advertisement (which nobody much believes anyway). Deeper market understanding (market sensing) gives you a better chance of knowing what drives value for different types of customer. Making smart choices of market targets should reﬂ ect your ability to offer Market-Led Strategic Change

value to target customers. Your value strategy is more than a simple cost/benefi t analysis. Customer value is more complex than having the lowest price or the highest technical quality. Customer value refl ects what you stand for – your corporate values, as well as your prices. Your corporate values may undermine any other advantage you have in a market, or create new areas of customer benefi t. Corporate social responsibility is increasingly linked to competitive advantage. Your value offering is the basis for how you differentiate against the rest and for the position you occupy in the market. Your value offering comes out of your marketing assets. Your value proposition needs to be clear and to focus on what drives value for the target customer. This amounts to a substantial challenge in a world where many executives do not have the faintest idea what really matters to their customers.

Introduction Our progress along the strategic pathway so far has involved trying to put a handle on the things we can do to learn better from the customer through our market sensing capabilities, and then to exploit this market understanding in the critical market choices that we make – which markets, which segments, which niches should we make our targets? This only makes sense if we also have the capability to offer superior value to those customers in those target markets. The third stage in developing the strategic pathway is concerned with the value proposition to our customers. First, we consider what value is to a customer, and then look at the company issues we may need to work on to refi ne and articulate our value proposition. As pictured in Figure 8.1, these tools consist of: market mission and values – what do we want to be and to stand for in this market, how does this relate to corporate goals and mission (if it does), and how do our values enhance customer value; competitive differentiation and positioning – what do we have to build a difference between what we offer and what our competitors offer in the customer’s eyes, and how do we use this to build a sustainable and profi table competitive position in the market, based on superior customer value; and, marketing assets – what competitive advantages do we have in intangible assets, like company reputation, unique capabilities and brand identity, that can be used to build our market strategy, because these resources create value for customers? These are tools that can help us address the issue of customer value in the company. But the most critical issue is whether we know what value means to our customers in the fi rst place.

•• 310 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

Market mission and values

Customer Competitive value Competitive differentiation strategy and positioning positioning

Marketing assets

Figure 8.1 Customer value strategy and positioning

Customer Value Because it is just about the most important issue for managers to confront, we spent a lot of time in Chapter 4 describing the value challenge we are facing, particularly as it is posed by the sophisticated customer. We saw that customer value is about much more than leaning the operation to get prices lower or quality higher. We saw that the new customer wants high quality and low prices, but that we face constant surprise and paradox in what creates customer value. We saw that value is defi ned by customers not companies, and that the most important drivers of value change dramatically over time and are different for different customers. We saw that value is infl uenced by how we treat customers, how we respond to them and how they judge our qualities, as well as products and prices. One of the greatest challenges we face in market sensing is identifying and tracking the value drivers for different types of customers. However, if we go back to basics, customers develop value expectations and make purchases based on their perceptions of a product’s benefi ts compared to the total cost of the purchase (in price but also time, effort, diffi culty and so on). It follows that superior customer value is created when the buyer’s total experience is very favourable compared to expectations, and compared to their perceptions of the equivalents provided by competitors. An overview of the sources of superior customer value, which we can exploit to meet the value demands of customers, is suggested in Figure 8.2: our capabilities, skills and resources – what we are good at doing and what we are able to do, that matters to the customer; our organizational processes , of service delivery and value creation, to do things the way the customer wants, not the way that happens to be most convenient for us;

311 •• Market-Led Strategic Change

Capabilities, skills and resources

Commitment Superior Organizational and service customer processes capabilities value

Innovation and change Figure 8.2 Sources processes of superior customer value

the commitment and service capabilities of our people – what the customer ﬁ nds when dealing with us; and innovation and change processes – our ability to get better at doing the things that matter and to ﬁ nd new ways of ‘ delighting ’ customers, and to respond to shifts in customer needs and preferences. As we suggested in looking at market sensing and learning – we may just have to get better at listening to customers and learning from them, otherwise we have little chance of bringing our capabilities to bear on customer value. However, there is another point we really have to expand here, because it is the one that managers really struggle to capture – customer perception is reality.

Customer perception is reality The truth is that value is not created in the factory or the back offi ce, customer value exists only on the customer’s terms and refl ects the customer’s priorities and preferences – look back to the illustrations in Chapter 2 of the demands of the sophisticated customer, if you need convincing all over again. You may say the customer is irrational, ill- informed, misguided, short-sighted and so on, which is what we do say, but value exists only when the customer decides it does. Knowing what means value to our customers is therefore rather important. We may get nice surprises or we may get nasty surprises. Royal Mail was plagued by customers demanding that it cut the length of queues in Post Offi ces. So, it did just that. The trouble was

•• 312 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

that its customers believed the (actually shorter) queues were longer than ever. Managers found the quickest way to cut customer perceptions of queuing times was to repaint Post Ofﬁ ces. Customers in clean, redecorated Post Ofﬁ ces reported they had queued for a shorter time, even though it was not true. The issue is not just standing in line, it is queuing in squalor. Royal Mail managers ’ bonuses now depend in part not just on meeting performance targets, but on whether customers believe they are meeting those targets.1 If we do not know what the value drivers are for our customers, we are likely to do the wrong things for the right reasons. For example, one company believed speed of service was the key to customer value, so trained telephone staff to be quicker, but lost market share because in fact customers wanted time to chat and resented being hassled. 2 When Federal Express went for faster delivery speed to please customers they also achieved the reverse – the extra speed caused more misdirections and errors, and what customers actually value most is getting the parcel. There are a couple of additional complications to really knowing what value is to your customers.

Different customers buy different kinds of value3 • • • This is true both within the market (see market segmentation by customer beneﬁ ts, pp. 280–281) and more surprisingly in different markets. Look, for example, at the portable clockwork radio, designed by a British inventor and manufactured in Africa, which created a sensation in the developing countries – where for large parts of the market, radio ownership is high priority, but the cost of batteries is prohibitive.

Things change – value ‘ migrates ’4 • • • This suggests that value propositions become less effective over time and unless you fi nd ways to enhance or re-focus the value in your product or service, buyers will migrate to alternative value concepts. Only a few years ago the big deal with the laptop computer was its power (to run big programs), its battery life (to last the transatlantic fl ight) and the brightness of the screen. Now, it’s the weight – if it weighs more than three pounds, I don’t want it. For example, after a decade when ‘ fast fashion ’ ruled the High Street in the UK, and fi rms like Primark, Peacocks and supermarkets like Asda and Tesco thrived, there are growing signs that this is over – the consumer is now suffering from ‘ fast fashion fatigue’ and is moving towards ‘ slow fashion ’ (more expensive clothes, kept longer, with fewer shopping trips involved).

Individualization of value • • • Don Peppers uses the term ‘ one-to-one marketing’ to focus on value issues at the individual customer level, and the need to customize products and services accordingly. Value to many buyers of jeans is that they ﬁ t tight round the bum. The giant Levi-Strauss and Co. developed the ‘ Personal Pair ’ (later Original Spin) customized tailoring service for

313 •• Market-Led Strategic Change

its famous blue jeans. Customized software is used to design tapered- leg jeans to the individual customer’s body measurements, input by a trained sales assistant. The program identifi es a ‘ prototype ’ which is closest to the customer’s size, fi nal adjustments are made to perfect the fi t, and these measurements go to the factory electronically, from where the perfect fi t individually-tailored Levi’s go to the customer. The product is coded to allow easy re-ordering of an identical fi t. Their next move was to put touch-screen computers in ‘ measure me up’ kiosks to allow customers to design their own jeans. This is an important part of Levi’s fi ght-back strategy. 5 Worldwide, the clothing industry is adopting mass customization technology to allow clothing to be designed and produced for the individual consumer. Stores as diverse as Brooks Brothers in the USA, Harrods in London and Bon Marché in Paris use body scanning to measure dimensions and produce clothes customized for the individual. 6 Customer value may vary across customer groups, it may be highly unstable and shift from one product attribute or service characteristic to another, and may be idiosyncratic to the individual customer. It is rarely the stable, unemotional and rational, measurable cost-benefi t analysis suggested by the operations literature. This does not mean customer value should be ignored – just that it is harder to work with than some suggest.

Selling value In business-to-business markets, the emphasis on customer value is underlined by the move towards ‘customer value management’ , as a key way of selling value to customers instead of products and services.7 This approach focuses on gathering and analysing data to demonstrate in monetary terms the value that products bring to customers. It links naturally to the growing demand by corporate purchasers for suppliers to quantify and ‘ prove ’ the value they add through their products and services. This approach identifi es the stages of: conceptualizing value – being specifi c about what constitutes value in this market; developing value propositions – statements of the advantage we have on the issues that matter most to customers; substantiating value propositions – quantifying the value advantage to customers; tailoring market offerings around value and transforming the salespeople into ‘ value merchants ’ – more refi ned targeting with a sales force selling value not product; and, prof- iting from value-added – through higher prices and a fair return.8 There is a compelling logic in turning salespeople into ‘ value merchants ’ in this way. However, the application is limited by several factors: that buyers may be motivated by factors other than measurable cost savings and service value; that short-term benefi ts in cost savings may be less signifi cant in a relationship with a strategic supplier than building a shared platform for long-term growth; and, that intervening factors may negate a supplier’s advantages in costs, such as the concern for suppliers to support a customer’s stance on corporate

•• 314 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

social responsibility issues like environmental protection and employment conditions. This last issue links in neatly to the next section – the impact of market mission and corporate values on customer value.

Market mission and values9 Although quantifying added-value is an important challenge to sellers, mediating factors between quantiﬁ ed value and purchase include issues like what does the supplier stand for and what corporate values do they demonstrate – is there reasonable ﬁ t between the buyer’s values and the supplier’s? At the extreme, a customer’s judgement of your mission and corporate standards may actually rule you out as a supplier – the purchaser may not want to be seen dealing with you because of your reputation and behaviour – or more positively may overcome your shortcomings in product standards and process, because your values reinforce those of the customer.

Mission statements Perhaps the strategic analysis most demanded by companies and executives, but all too often the least rewarding aspect of working with companies on market strategy, is mission analysis. In theory, mission is where we start, because it tells us the broad purpose of the operation and gives us the framework within which to develop sets of specifi c objectives and programmes – as suggested by Figure 8.3 . The logical sequence is that we start with basic purposes (mission), determine specifi c goals (objectives), fi gure out what we need to do to achieve these things (market strategies) and how we are going to do it in the marketplace (marketing programmes).

Mission Starts the process of strategizing and planning Objectives

Results from Market strategy strategizing

Results from Marketing programmes planning Figure 8.3 Mission and marketing strategy

315 •• Market-Led Strategic Change

The results of mission analysis tend to be statements of varying length that state what we want our business to be. Examples of the shorter ones include: Pepsi – ‘We will be an outstanding company by exceeding customer expectations through empowering people guided by shared value ’ ; Kentucky Fried Chicken – ‘ To provide families with affordable, delicious chicken-dominant meals’ ; Sony – The ‘ BMW ’ slogan: ‘ Beat Matsushita Whatsoever ’ ; Avis – ‘ We Try Harder ’; Walt Disney – ‘ to make people happy ’ ; Wal-Mart – ‘ Low prices every day’ . . . ‘ to give ordinary people the chance to buy the same things as rich people’ ; 3 M – ‘ to solve unsolved problems innovatively ’ ; and Google – ‘ not to be evil ’ .10 Other mission and vision statements run to many pages and hundreds of words, and consume many hours of management time in their construction. Some are more purposeful than others.

Reality Check: Back from Beyond Petroleum

In 2007, Tony Hayward became CEO of BP, following in the foot- steps of charismatic and visionary leader Lord John Brown, much famed for his ‘Beyond Petroleum ’ slogan for the company. Hayward’s vision statement for the company, which appeared on the company intranet, was seen as his (successful) pitch for the top job. His vision statement focused on the changes he wanted to see at the top of the organization and a leadership style that ‘is too direc- tive and doesn’t listen sufficiently well ’. He emphasized the need to rebuild a safety culture (following several disasters at BP refineries), but for the company to remain at the edge of technology – doing big things. He wanted profound changes in structure, culture and behaviour and vowed to get BP back to being industry leader by cutting unacceptably high costs and aggressively growing revenues. The vision statement has become the basis for BP’s new organizational and business strategy across its global operations.

Source: Adapted from Sheila McNulty, ‘Hayward Outlines His “ Vision ” for BP ’ , Financial Times , January 15 2007, p. 19.

However, for many companies, the results of this corporate soul- searching seem mixed at best. Interestingly, Enron’s mission statement famously declared the company to be ‘ open and fair ’ . McDonald’s has the mission of existing to ‘ provide great-tasting food backed up by excellent operations and friendly service in a relaxed, safe, and consistent restaurant environment ’ . The effectiveness in creating service quality should be considered in the light of the (hopefully untypical) customer experience in Chester of receiving a printed receipt reading ‘One regular Coke – no f***ing ice ’. 11 Indeed, Collins and Porras

•• 316 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

take the view that if you actually have a raison d ’ être or real sense of vision and purpose, then ‘a visitor could drop into your organization from another planet and infer the vision without having to read it on paper ’ .12 Nonetheless, people insist on putting mission statements on paper, on plastic cards, on the ofﬁ ce wall, and goodness knows where else besides, so we should probably take the issue seriously.

Reality Check: Mission and competitive differentiation

Chief Executive: Sales have gone through the floor, and we are trading at a loss. But I think our mission statement – ‘Frankly we couldn’t care less ’ – has the competition worried.

If mission statements are to contribute anything, then they must: reﬂ ect our core competences and how we intend to apply them to creating customer value, and how we plan to sustain them; be closely tied to the critical success factors in the marketplace – the things we have to be good at to survive; and, tell our employees, managers, suppliers and partners what contribution is required from them to deliver our promise of value to the customer. If they do not do this – they are of no use in building market strategy. But, in reality, often, they do not. Frankly, most of the time they do not. The trouble with talking about mission is that at the extreme it becomes top management ego-massaging and ‘ holier than thou ’ posturing, and has little to do with running the business and providing value to the customer. Indeed, I have been driven to suggest to some companies whose version of mission analysis is pure, non-operational motherhood, that we are prepared to provide them with the ‘ Instant Mission Kit ’ , shown in Figure 8.4 . This kit is guaranteed to produce a mission statement of bland, non- operational, motherhood, with which no one will disagree, but which will not change a single thing in the business and the value it provides to the customer – but at least it is quicker than the usual weeks of heart-searching, so you will not waste as much time. Bear in mind it took 300 people to come up with British Energy’s somewhat bland statement of mission.13

Does it ever do any good? • • • Perhaps surprisingly – yes, it does seem to work for some companies. Anything that forces us to go back to the basics of asking us what we are doing and why, has the potential to make a contribution. Probably the best part of the whole thing is challenging our business deﬁ nition.

317 •• Market-Led Strategic Change

Mission statement components Tick as required We wannabe: … a market leader … a total quality supplier … a socially responsible producer … a green/environmentally friendly firm … a caring employer … a safeguarder of shareholder interests … a global player … a provider of excellent service … dedicated to improving life on this planet … a good corporate citizen … a customer-oriented organization … a responsible partner with distributors … a builder of human dignity … with the imagination to think bigger … respectful of nature and living things Figure 8.4 Nigel’s instant mission kit

For instance, mission analysis was useful in identifying different ways to defi ne the business of a British gardening centre fi rm, at different levels of abstraction from its core business of simply growing plants and selling them. The levels mission analysis identifi ed were: horticulture – we grow plants and sell them, and can develop the business by doing more of the same; gardening services – we add value by providing advi- sory and information services to support the sale of plants and equipment, and we may grow into new markets like garden design services, landscaping, estate maintenance; leisure/entertainment – we see our role as fi lling people’s leisure time, so we add leisure facilities – catering, children’s entertainments to create a ‘day out’ and we develop (probably by leased areas) into new outdoor leisure product areas – camping, caravanning, do-it-yourself; and dream fulfi lment – we specialize in meeting the needs of the person to whom the perfect home and garden is the ideal and central to their lifestyle.* In fact this company chose to pursue the leisure/entertainment mission, and rationalized their operation around this. For these managers mission analysis was central to the practical issue of sorting out how they identifi ed the market, the target customer and the appropriate direction in which to take the business.

*I have referred to this case in a lot of speeches and talks over the last couple of years. I used to scoff at the ‘ dream fulfi lment ’ mission. I stopped after being attacked by a group of very affl uent senior managers, who came up to me after my speech and pointed out that the one thing they loved in life was their house and garden – and they would willingly drive hundreds of miles to get to a gardening centre that understood their dreams, if only I could tell them where it was! This just goes to show none of us should forget about fi nding out what really matters to the customer, before jumping to ‘ obvious ’ conclusions!

•• 318 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

The danger is that we get carried away with the excitement and creativity in mission analysis and with the insights it can provide. Mission analysis which forgets the realities of our core business is dangerous, and unhelpful to the people who actually have to run the business. Deﬁ ning core business is about identifying our distinctive skills, resources and capabilities and using these in markets where they give a competitive advantage. This is why Marks & Spencer did well in ﬁ nancial services (capitalizing on its reputation with customers), while BT did badly in buying equipment manufacturers (BT was a phone company). The critical issue is whether an activity matches our core capabilities. This said, certainly many companies will tell you that mission analysis was the single most valuable thing they have ever done. Indeed, in some organizations, mission analysis has provided the broad logic for divisionalizing and developing strategies for complex businesses in very simple terms. One well-known example is a UK brewery that undertook mission analysis at the corporate level with the results described below:

The brewery’s Organizational and Strategies developed missions market characteristics Drink A static market leading to Compete for market share a traditional bureaucratic against competitors by large organization driven by the advertising spends and new pressure of production brands. Acquire new outlets effi ciency and economies where possible. of scale. Catering At the time, a by-product Compete for customer of being in the business of spend by greater variety running public houses. of food in pubs. Acquire restaurants. Acquire hotels. Entertainment Pubs are leisure centres. Acquisition of gaming clubs, The expertise is fi lling gambling machines, holiday peoples’ leisure needs. camps, tour operators, private sports clubs. Chemicals The unavoidable Strategy of R &D-based by-product of brewing. collaborations with third parties to exploit the chemical materials in markets as diverse as blood replacement, fi sh food and genetic engineering.

In this instance mission analysis provided an enduring structure (lasting more than 20 years) for developing organizational planning, and identifying strategies, on the basis of capabilities in the different customer or user markets to be competed. However, things

319 •• Market-Led Strategic Change

change – sometimes dramatically – eventually, the company withdrew altogether from the drinks and catering business and no longer brews beer, focusing wholly on the entertainment mission. The sorts of benefi ts that this kind of market-based mission analysis can give us are: defi ning the market from the customer’s perspective, i.e. the need or problem to be solved, so we get better insight into what matters to the customer; mapping out the different types of customer market in which we need to develop different types of market strategies and programmes if we are to be a serious player; helping us to see where the real competition is coming from, and where it is going to emerge; and, fi nding us new areas into which we can develop where the link to our current business is our customer base and our capabilities. On this basis mission analysis can be used productively, but needs to be used with care to avoid some of the stranger conclusions to which I have alluded.

So, how do we sort out a market mission? • • • It is clear from the above that mission analysis is potentially confusing and open to abuse – personally I hate being asked about mission. Nonetheless, executives show great enthusiasm for building statements of their vision and mission. If we are going to get involved in this analysis as part of building market strategy and clarifying our value proposition, then at least let’s do it systematically. The problems with mission statements (aside from pretentiousness) seem to be lack of clarity, lack of focus on markets and ambiguity.

Structuring mission content • • • Views about the desirable content of Mission Statements are many and varied. However, we can distinguish four major areas: statements relating to organizational philosophy; the specifi cation of the product- market domain or scope for the organization; defi nition of organizational key values for participants; and, the identifi cation of critical success factors in the marketplace or industry faced. These issues vary in focus – internal or external – and scope – broad and narrow as shown in Figure 8.5 . Many views suggest that the centre of mission is the defi nition of the central purpose, or organizational philosophy – even creating a form of ‘corporate constitution’ . Some see this area as encompassing the broad issues: the grand design, quality orientation and atmosphere of the enterprise, and the fi rm’s role in society, or the combination of managerial culture and ethos with social responsibility and public image. More focused perspectives emphasize specifi c service to internal and external stakeholders, and the identifi cation of values, beliefs, guidelines, aspirations and thus the creation of a unifying force in the organization. In the simplest terms, the underlying question here is ‘ what do we want this organization to be and to stand for ? ’

•• 320 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

Internal External

Organizational Product- philosophy market domain

What do we Where are we want to be? going to operate?

Broad Mission Broad statement Narrow Narrow

Organizational Critical success key values factors

How do we want What do we have our people to to be good at? behave?

Figure 8.5 Internal External A structured model of mission

Others look to mission to defi ne product-market domain – where the organization is to operate, which shifts from a focus on internal to external issues: the defi nition of the customer-base, the product/service offering, location or geographic coverage, and the core technologies or capability to be exploited. In the simplest terms, the central question to be addressed here is ‘where are we going to compete, or what is our fi eld of operation and what are our core capabilities ? ’ Providing guides to action for members of the organization means defi ning organizational key values – this relates to ideas about defi n- ing the core values or principles which, or the policies and behaviour that, underpin the distinctive competence and value system. Some see this area as building corporate culture and ‘ selling ’ corporate beliefs to employees, or motivating employees to achieve the organization’s objectives, and even providing the basis for appraisal and reward. In the simplest terms, the central question here is ‘ what do we want people in this organization to be good at , and how do we want them to behave ? ’ Less easily identifi ed in the traditional approach are suggestions about the external impact of mission. These are taken here as the identifi cation of critical success factors in the market or industry faced. In the simplest terms the central issue here is: ‘ What do we have to be good at to succeed in this market or industry? ’

321 •• Market-Led Strategic Change

Analysing mission statements • • • We can use the structures in Figure 8.5 as a diagnostic tool to confront the mission issue in organizations, either in building a Mission Statement for the ﬁ rst time, or in evaluating an existing statement. The procedure is:

● Summarize the key points of our existing or proposed new Mission Statement; ● From those key points identify the following dimensions of mission: organizational philosophy – what do we see as the enduring purpose of our organization, its unique characteristics, and what it wants to achieve; product-market domain – where do we intend to operate and compete, what are our products, what needs do they meet, who are our customers, what technologies will we apply, what are the boundaries of our markets, what are our core capabilities; organizational key values – what values, norms, guidelines, do we think are important in our organization, what things do we want people to have in their minds when they make decisions, and carry things out for us; and, critical success factors – what things do we have to be good at to survive and prosper in our market place? ● Using the structure in Figure 8.5, look at the consistency between the different parts of our mission: do the critical success factors derived from the mission actually make any sense in terms of the product- markets the organization has chosen – or are we trying to be good at things that don’t matter? Does the organization’s ‘ philosophy ’ relate to the key values we try to transmit to people who make decisions in the organization, or are there inherent confl icts because we have not thought things through enough? Do these key values (services, quality, social responsibilities, or whatever) relate directly to the critical success factors in these product markets – or do our internal values have nothing to do with what matters in the marketplace? Has the organization chosen sensible product-markets where its philosophy or sense of purpose makes sense? If we work through this process, what conclusions can we reach about: the adequacy of our mission statement; the consistency between internal issues of philosophy and key values, and external issues of product-market domain and critical success factors? ● Our conclusions may lead us to revise what we want to refl ect in our Mission Statement, or to revise the draft Mission Statement, the critical requirement is to move backwards and forwards between these stages – discussing, revising, testing, re-thinking – until we can move from the draft Mission Statement to the fi nal version; ● Finally, we can test our Mission Statement with: our managers, our employees, our shareholders, our customers and our suppliers.

If nothing else, a systematic structural analysis of the mission issue takes us forward from the vague, open-ended, wafﬂ e that some executives produce. Experience in testing this approach in-company suggests it can be a good way to ﬁ nd if there is anything useful here to build market

•• 322 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

strategy, and to highlight the process of matching our core capabilities with our internal values and with the critical success factors we need outside. The goal is a statement or a clarity that can be understood by customers (and other stakeholders) which communicates what type of company you are and what you stand for. In modern markets, these issues are of escalating importance to consumers and business buyers.

Corporate values and customer value One of the important themes for 21st century business that we introduced in Chapter 1 was corporate social responsibility (CSR). In mission analysis, when considering organizational key values and philosophy in the light of critical success factors in our market domain, it is increasingly mandatory to consider a company’s position on social responsibility issues, and how that position is perceived by customers. One driver of customer value (which may be positive or negative) is the organization’s stance on major issues like sustainability, environmental damage and employment issues. Corporate values have a growing impact on customer value at several levels. We further underlined the issue of social legitimacy as part of our process of thinking strategically about how and where we go to market (Chapter 5).

Reality Check: Changing Wal-Mart

Lee Scott, CEO of Wal-Mart since 2000, aims to transform the company from a focus on low prices into a leading business advocate for environmental and social sustainability – responding to an unremitting wave of criticism from socially concerned investors and environmental campaigners. But he says ‘I had to go out and meet with people who just did not like us.’ With a low-key style and apparent sincerity, Scott has been winning the trust of activist investors and other vocal critics in his drive to refashion Wal-Mart’s reputation. Traditionally, Wal-Mart simply ignored its critics including trades unions. Business necessity has forced Wal-Mart to change its stance. Tellingly, the company avoided becoming a target for the Democrats in the run-up to the November 2008 presidential elections.

Source: Adapted from Jonathan Birchall, ‘I Had to Go Out and Meet With People Who Just Did Not Like Us ’, Financial Times , April 7 2008, p. 16.

The Kermitization of business * • • • CSR has been deﬁ ned by a European Commission Green Paper as ‘ a concept whereby companies integrate social and environmental concerns

* Like Kermit the frog in the Muppets . . . ugly, a stupid voice, a terrible sex-life, but very green.

323 •• Market-Led Strategic Change

in their business operations and in the interactions with stakeholders on a voluntary basis.’ 14 The Green Paper identifi es four factors underpinning growing attention by executives to CSR issues: the new concerns and expectations of consumers, public authorities and investors, in the context of globalization and industrial change; social criteria infl uencing investment decisions of individuals and institutions; increased concern about the damage caused to the physical environment by economic and business activity; and the new transparency of business activities created by new media and new information communications technologies. Nonetheless, CSR attracts a mixed press among businesspeople. Some argue that it is not the role of business to become involved in social issues – the goal of management is to deliver value to shareholders, and for them to disburse earnings as they wish. This line suggests that if society requires certain behaviours from business (or that business should desist in certain actions), then it is up to lawmakers to produce appropriate regulation to enforce society’s wishes, and for society to pick up the bill through higher prices. In this view, corporate philanthropy – voluntarily funding ‘ good works’ like charities and the arts – is tolerated within limits as a contribution to reputation as a ‘good corporate citizen ’ .15 A more extreme perspective suggests incompatibility between business and social aims. They point to the ‘ little green lies ’ that suggested it was possible to make a company environmentally friendly while still being cost-effective and profi table, when really it isn’t.16 They point to the unintended consequences of CSR initiatives – such as the planting of trees in Uganda to off-set greenhouse gas emissions in Europe, which seemed a great idea, but actually entailed the eviction of Uganda farmers from their land – some at gunpoint – to make room for a for- est.17 They argue that, in any case, customers have different concerns in different countries and hence different perceptions of what constitutes good corporate responsibility – in China the hallmark of a social responsible company is safe, high-quality products, while in South Africa what matters most is a company’s contribution to social needs like healthcare and education.18 The contrasting view suggests that since business is part of society it has an obligation to pursue social initiatives that are to the benefi t of the communities they populate – at the very least to minimize and repair damage to the environment created by value chain operations, and possibly much more. However, this view has developed into a case that social initiatives are not simply a way of making good damage done, but of developing new kinds of competitive strength based on innovative business models. The issue then becomes the ways in which CSR impacts on the value offering made to customers. A powerful piece of advocacy by Porter and Kramer offers the prospect that: ‘ If . . . corporations were to analyze their prospects for social responsibility using the same frameworks that guide their core business

•• 324 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

choices, they would discover that CSR can be much more than a cost, a constraint, or a charitable deed – it can be a source of opportunity, innovation, and competitive advantage. ’19 Others refer to the ‘ sustainability sweet spot ’ where shareholders’ and society’s interests overlap – such as Unilever’s Project Shakti in India, training 13,000 women to distribute its products to rural customers, providing increased family incomes but also expanding Unilever market penetration. In these terms, sustainability is about conducting business in such a way that it beneﬁ ts customers, business partners, communities and shareholders at the same time – ‘the art of doing business in an interdependent world’ . The argument gaining currency is that it makes commercial sense for a company to anticipate and respond to society’s emerging demands, on the grounds that sustainable companies are more likely to be proﬁ table companies. 20 The most pressing issue, however, is the link between CSR and the value offering made to customers.

CSR destroys customer value • • • For better or worse, your value offering may be undermined because of your company’s CSR position. Buyers will either genuinely not want to do business with you because of what you stand for, or they will not want to buy from you for fear of sin by association – they do not want to be castigated by their own shareholders or by the media and lobby groups for dealing with you. You have become too hot to handle. The other problem is when a company tells the world how responsible they are, only for the world to ﬁ nd out they have been telling porkies. One way for companies to cope with the pressure to support social causes is to pass the buck onto their suppliers. As noted earlier, we have seen a company like Microsoft dropping suppliers because they fail to meet Microsoft standards on employee diversity, in common with a variety of other companies adopting similar approaches.21 Meanwhile, to establish its credentials as a socially responsible company, Wal-Mart is pushing for greater diversity in the upper levels of its top law ﬁ rms, 22 as well as demanding that all suppliers measure the greenhouse gas emission and label products to show how much carbon went into their manufacture. 23 Clearly, sanctions threaten non-con- forming suppliers. Recently, Gap withdrew a line of children’s clothes from its shelves, following allegations of forced child labour at Indian sub-contractors. In common with other clothes retailers, Gap moni- tors the behaviour of suppliers in its value chain, and in 2007 stopped working with 23 factories.24 In a growing number of cases, if you cannot meet a customer’s requirements for your company’s standards in environmental and employment standards, you have no value and they cannot buy from you. It matters little if the customer’s motivation is a genuine concern for social issues, or the desire to look clean.

325 •• Market-Led Strategic Change

There is additional risk for suppliers in making promises regarding social initiatives and standards, and then being found to be an ‘ eco-hypocrite ’ . A nice example of eco-hypocrisy was demonstrated by the British government in 2008. When it was proposed that Cabinet ministers should give up their gas-guzzling Jaguar cars for more environmentally friendly vehicles like the Toyota Prius, ministers went into a frenzied panic and refused, claiming that such a policy would send the ‘ wrong signals ’ to British industry. Others thought maybe the government was failing to live up to its green rhetoric. 25 Both consumers and business customers are rapidly wising up to half-hearted environmentalism. Pre-emptive social initiatives may also be important to maintaining a value offering. For example, the US cola giants have undertaken to restrict the sales of their products in schools, as a way of avoiding the tough measures proposed by activists concerned with obesity and dia- betes in young people.26

CSR parity strategies • • • In other situations, the issue is maintaining parity with competitors in CSR initiatives, just to avoid being screened out by buyers. For example, 2007 saw the start of an ‘environmental arms race’ between UK supermarkets, each claiming to be greener than the other. Marks & Spencer’s announcement that it intended to be carbon neutral by 2012, was followed by claims from Tesco that it would carbon label all its products, and similar eco-promises from Sainsbury’s. One analyst noted: ‘ Whether M & S wants to save the rainforest or save itself from Tesco is the question.’ Certainly the new retail mantra is ‘ Green pays. Green brings in customers.’ 27 Interestingly, in response to claims that retailers provide too much wasteful packaging, the green competition between supermarkets has rapidly moved to criticisms of suppliers’ excessive product packaging policies and promises to sanction suppliers who do not reduce packaging (and, of course, pick up the tab for doing so). Keeping up with the competition in social responsibility initiatives may be the minimum requirement for staying in the market. Falling behind the rest may make you unacceptable to the customer – you have no value offering.

CSR as a competitive tool • • • Social policies may be used more proactively to establish a new form of competitive differentiation in some situations. The positive side of all this is that your company’s stance on CSR may add to the value of what you offer customers – even to the level of becoming a selling point. For example, Dell and Hewlett–Packard both actively exploit the energy-saving characteristics of their new computers as part of their value propositions – reﬂ ecting big business enthusiasm for environmental initiatives that pay their own way.28 In this sense, CSR becomes an active part of the value proposition.

•• 326 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

Reality Check: Ecomagination

In 2005, General Electric – the world’s largest company – launched its ecomagination initiative. Ecomagination grew out of GE’s long- term investment in cleaner technologies, and places these technologies under a single brand.

Courtesy of General Electric Company, USA

To qualify for the ecomagination brand, products must significantly and measurably improve the customer’s environmental and operating performance. The company is rigorous in selecting projects that are both wanted by customers and financially viable. The ecomagination vision is driven by the principle that its green initiatives will have a positive impact on GE’s competitive position and financial performance. The focus on greener products is part of CEO Jeffrey Immelt’s plan to reduce GE’s exposure to low-growth industries and reshape its portfolio to more profitable sectors. In 2007, GE reported it had doubled sales of environmentally friendly products to $12 billion over the previous two years, on track to meet its target of £20 billion in green sales by 2010.

Sources: Fiona Harvey, ‘GE Looks Out for a Cleaner Profit’, Financial Times , July 1 2005, p. 13. Francesco Guerrera, ‘GE Doubles Eco-Friendly Sales ’, Financial Times , May 24 2007, p. 28.

CSR creates customer value • • • The most extreme case is where CSR becomes the value proposition. In sectors as diverse as automotives, retailing, high technology, and health and beauty, ethical consumerism is at work. Unimpressed by conventional philanthropic commitments, the ethical consumer is focused on environmental impact and the treatment of staff and suppliers.29 Accordingly, a growing number of companies are thinking ‘ beyond the green corporation ’ to a situation where eco-friendly and socially responsible practices drive business performance. 30

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Reality Check: Microﬁ nance

Microfinance is best-known for its application in the rural areas of Bangladesh by Grameen Bank, headed by Muhammed Yunus. Grameen loaned very small amounts to women seeking to start small enterprises, but who could not borrow from banks because they did not have accounts or a high enough credit rating. Micro-loans of $100–150 are enough to allow the purchase of a loom or a farm animal and make a huge difference. Started in 1976, Grameen has made more than $6.5 billion in loans to 7 million people in the country. In fact, the interest payments are high enough on micro-loans that they are profitable business for the lender. Hedge funds, venture capitalists and other big investors are being attracted into the microfinance business. Microfinance is expanding from Asia into Latin America. The fear is that the balance will be lost and the new lenders will simply trap poor borrowers in a maze of debt. If balanced, microfinance offers social benefits and high profits.

Sources: John Authers, ‘Major Victories for Micro-Finance’, Financial Times , May 18 2005, p. 13. Keith Epstein, ‘Microfinance Draws Mega Players ’ , BusinessWeek, July 9/16 2007, pp. 96–97. Keith Epstein and Geri Smith, ‘ The Ugly Side of Micro-Lending ’, BusinessWeek, December 24 2007, pp. 39–46.

Whether the impact is negative in undermining other aspects of the value proposition, neutral in simply keeping up with the competition, or positive in creating a competitive advantage in the customer’s eyes, the relationship between CSR and customer value is complex and increasingly important. What you stand for, and your standards of behaviour, impact on customer value. These qualities may be an important determinant of our ability to differentiate our value offering and position advantageously against the competition. Let us turn our attention to these broader issues.

Competitive Differentiation and Positioning A further difﬁ cult issue on which to work with companies is that of competitive differentiation, and the result that it achieves in positioning one company’s offering as providing distinctive value in the customer’s judgement – and hopefully in the target customer’s eyes better and preferable to the alternatives. These words seem to be ones that create problems for executives, perhaps because they sound like vague theoretical notions. Competitive differentiation and positioning are neither vague nor academic, they are about delivering what the customer values, to get the results we want, and to do this we have too ﬁ nd and exploit our core capabilities.

•• 328 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

Competitive differentiation The best-known approach to simplifying this issue is that provided by Michael Porter of Harvard Business School. 31 Twenty years on, Porter’s model is still current in the debate about strategy. Porter insists that in spite of the apparent complexity of competitive strategy, there are two, and only two, sources of competitive advantage: low cost and differentiation. This leads to the identifi cation of three generic strategies, as in Figure 8.6 . Porter’s view of our competitive choice is that we can compete on a broad or narrow scope (in the same way we have already discussed segmentation), but that we are then either a price leader or a differentiator. The two most relevant points from Porter’s work for our present purposes are: fi rst, we should think in terms of our own competitive strategy type (to avoid the danger of becoming a ‘ stuck in the middle ’ fi rm which is weak and vulnerable, because it is neither one thing nor the other – neither a differentiator nor a price leader); and second, we can use the structure to see how groups of our competitors are positioned in terms of their strategies – i.e. what are the ‘ strategic groups ’ and how well do these groups perform. For instance, we might be able to break the complex market for personal writing instruments into: broad scope/price leadership – throw-away ball-point pens, generic products; broad scope/differentiators – mass market brands, Parker, Schaeffer, etc., differentiated by branding, design, packaging and so on; narrow scope/price leadership – own- label pens, badged hotel pens, etc.; narrow scope/differentiators – exclusive brands like Cross, Mont Blanc, etc. It is often very revealing of the reality of what works competitively and what doesn’t (i.e. what value means to different customers), to try this simple way of reducing a complex competitive market to a few basic groups.

Sources of competitive advantage

Low cost Differentiation

Cost/price Differentiation Broad leadership strategy strategy scope Competitive Narrow Focus strategy

Figure 8.6 Porter’s generic strategies

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However, this leaves untouched the question of how differentiation can be achieved. Porter is adamant that differentiation must be added to operational effi ciency if we are to perform well: ‘ The arith- metic of superior profi tability then follows: delivering greater value allows a company to charge higher unit prices; greater effi ciency results in lower average unit costs.’ 32 This comment is important, and raises three signifi cant questions for us in building a market strategy: (1) What differences can we establish or exploit between ourselves and the others in this market? (2) In what ways do these represent superior value to all or some of our customers in this market? (3) Can we sustain this form of differentiation and defend it against ‘ me-too ’ imitation by existing or new competitors? One of the problems we face is that in many markets the spread of approaches like benchmarking, ‘ best practice ’ , shared technology and distribution, drives out real differentiation between competing fi rms and products. Superfi cial differentiation of products and services that are essentially identical does not fool customers indefi nitely (if at all). The issue is real differences that matter to customers – which we can sustain. Porter’s argument is that if competitive strategy is about being different, then the essence is positioning ourselves by choosing to perform activities differently, or choosing to perform different activities than our rivals. For example, all banks and insurance companies offer the same products (as far as customers are concerned), but First Direct and Direct Line introduced direct marketing compared to conventional branch networks and face-to-face selling. On the other hand, IKEA is differentiated from conventional furniture stores by substituting self- service for personal selling, and having customers do their own pick- up and delivery. The logic is that competition can be seen as ‘ the process of perceiv- ing new positions that woo customers from established positions or draw new customers into the market ’ ,33 and in this sense it is highly entrepreneurial. Strategic positions are suggested to come from three distinct sources: variety-based positioning – producing a specialized sub-set of an industry’s products or services, i.e. become a specialist; needs-based positioning – targeting a particular group of customers, for example in exclusive private banking, or in home furnishings by specialized fi rms like IKEA and Habitat; or, access-based positioning – where customers differ on the best way of reaching them, for example the rural cinema company Carmike provides small cinema services tailored to the needs of rural communities, or First Direct’s 24-hour telephone banking service in the UK reaches those who work through conventional banking hours. In broad terms this asks us to choose: are we a product specialist or a customer specialist? Porter also points out that approaching competitive differentiation and positioning in this way only produces a sustainable competitive advantage if two further conditions exist: competitors cannot imitate or equal our position with their current operations; and the activities needed to support the position we want to take in the market fi t to each other and to our capabilities.

•• 330 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

In short, this says for our strategy to be effective, it needs to reﬂ ect what we are best at doing – our core capabilities – not what our competitors can do just as well.

Core competences We need to combine what we are good at doing with the model of competitive differentiation and positioning – how can we differentiate effectively if we do not understand our competences and capabilities? Then we can focus on the issue of value to the customer, and the marketing assets we have at our disposal to create the value which underpins competitive positioning. In a widely admired Harvard Business Review article in 1990, C. K. Prahalad and Gary Hamel34 examined the characteristics of companies that have succeeded in inventing new markets, quickly entering new markets and dramatically shifting patterns of customer choices in established markets. They concluded that the common characteristic is that these companies understand, exploit, invest to create and sustain their core competences. This notion has become a central idea in strategic thinking. Examples of focus on core competences include: Sony – the capacity to miniaturize; Philips – optical-media expertise; Citicorp – competence in systems; 3 M – competence with sticky tape; Black and Decker – expertise with small electrical motors; Canon – skills in optics, imaging and microprocessors; Casio – competence in display systems. They see competences as the most basic corporate resource, which leads to success in apparently diverse markets and products, and suggest even the largest company is unlikely to have more than ﬁ ve or six core competences. This view of core competences can be combined with our earlier view of competitive differentiation by thinking about our differentiating capabilities – at the level of the market, segment and customer, which of our capabilities or competences create value for a customer, differentiate us from competitors, and around which we can build a sustainable market strategy? A company’s core competences may not produce differentiating capabilities at the market or customer level – you may be the best in the world at something which no one is prepared to pay for.

Differentiating capabilities Differentiating capabilities put together the theories of differentiation and core competences in a speciﬁ c market. At this level our concern is when we have to build a market position – what competitive differentiation can we use to create value for a customer in this market or segment?

Reality Check: Jack’s Rules

‘ If you don’t have a competitive advantage, don’t compete.’ Jack Welch, then CEO, General Electric

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We need to think very hard about which of our company’s core capabilities are valuable to us in a particular market:

● does this capability create value for the customer in this market – if not, it is no use to us in developing a strategy for this market; ● will competitors ﬁ nd it hard to copy this capability – if every company can do this as well as we can, there is no competitive advantage, because we all offer the same value proposition; ● what is the probably duration of the uniqueness – how long have we got before the competition can catch us up; ● who is the primary beneﬁ ciary of the capability – does it relate to particular segments of the market, where we should focus; ● does another capability satisfy the same market need – we face competition from substitution; ● is the capability we believe we have really superior to the competition, or are we kidding ourselves?

In the real world, competing on capabilities is a moving target. However, perhaps the greatest single barrier to getting market strategy to work effectively is the fact that many executives will tell you that in their business the market is a commodity market, and consequently the only thing that matters is price and product specifi cation. The reality is, of course, that price and product specifi cations do matter in most markets, but anything and everything can be differentiated. This may sound preposterous, but let us consider it for a moment. Actually, nothing has to be a commodity. No one is saying it is easy , or necessarily cheap, but with creativity and a simple focus on innovation and novelty in what matters to the customer, there are differentiation opportunities everywhere . Useful insights into the question of differentiating capabilities come from Treacy and Wiersema’s study The Discipline of Market Leaders . 35 Their view is that market leaders dominate their chosen areas by achieving the highest value in the customer’s eyes where: since different customers buy different types of value, few companies excel at everything, so the issue is one of choosing customers and narrowing the value focus, because market leaders excel in offering a specifi c dimension of value; as value standards rise, so do customer expectations, so you have to improve every year or be outpaced by competitors; and producing an unmatched level of a particular value requires a superior operating model dedicated to that kind of value. This leads Treacy and Wiersema to identify the ‘ value disciplines ’ followed by market leaders, as operational excellence, product leadership and customer intimacy (see p. 137). In the same way that Porter tells us not to be a ‘ stuck in the middle’ company, that is neither low-cost nor differentiated, neither fully broad nor focused in scope, Treacy and Wiersema argue that, at the market level, the leaders choose a value discipline and ruthlessly specialize in it. The choice of value discipline commits the company to a particular

•• 332 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

strategic pathway. Of course, these issues force us back to reconsidering how well we understand our customers and how we deﬁ ne and segment the market, and we may not be able to make decisions here until we have worked through issues of marketing assets and the key relationships involved in the strategy. Nonetheless, the important point at this stage is to force us to confront issues of competences and capabilities, the scope and form of differential advantage and whether any of this creates value for the customer – because no advantage in customer value equals no strategy. Looking at competitive differentiation and positioning should involve us in some painful soul-searching about our core competences and capabilities, our strategic positioning options, and the route to achieving higher value for a target customer through our differentiating capabilities. However, we cannot ﬁ nalize our views on competitive differentiation and positioning without examining also our available marketing assets.

Marketing Assets As we move from issues like core competences and strategic position to asking what we have got that can create value for a customer in our market, it is useful to be brutally honest about what marketing assets a company has compared to its competitors (and in some cases, as we will see, what ‘ marketing liabilities ’ ). Marketing assets refers to all those intangibles, which may impact on the customer’s perception of us and our products and services. This includes our history, our reputation, our expertise, and our brands. Marketing assets are revenue- and income-generating resources of the business, which normally cost us a small fortune to create and maintain, and which probably distinguish between the winners and the losers in most markets. However, marketing assets are a bit of a problem for three reasons: they are intangible ; most businesses do not place any accounting value on them (or if they do it is written off as quickly as possible as ‘ goodwill ’ ); accordingly, they are almost impossible to monitor or even to measure in most conventional management accounting systems.

What are marketing assets? There is no universal framework for listing marketing assets that works for all companies, but we can make a start by thinking about: our differentiating capabilities; our customer relationships; our channel power; our corporate reputation; and our brands. Differentiating capabilities were discussed earlier as our cutting edge in the marketplace that grows out of our core corporate competences

333 •• Market-Led Strategic Change

and our strategic positioning choices. The test for whether something is a differentiating capability is simple – does it use our resources to give us an advantage over the competitor in the customer’s eyes? Examples of what this can mean in practice include:

● Singapore Airlines – while performing a great many commercial air transportation functions well, is widely acknowledged as the industry leader in customer service delivery . ● Nycomed Amersham (now part of GE Healthcare) – a specialized producer of radioactive and related products for medical diagnosis and treatment is renowned for its R& D and new product development, but has a logistics systems that can process orders for radioactive products instantly and deliver them safely and quickly to locations anywhere in the world – with products that are decaying from the moment of production, where the documentation needed to take such materials across national boundaries is ﬁ endish, and where the doctor needs the product tomorrow at the latest, then this company’s expensive expertise in logistics gives a unique competitive advantage from the customer’s point of view. ● Intuit’s ‘ Quicken ’ personal ﬁ nance software dominates the market because this company’s culture and organizational processes are totally connected to making the product so customer-friendly that anyone can use it (see back to pp. 250–251 for more information about how they do it, and put to shame so many other software producers).

Customer relationships provide a marketing asset in the sense that loyalty and trust give us the ability to defend market share and open up new markets. We will focus on advantages of superior customer relationship management in the next chapter. Channel power concerns our dominance or weakness in the distribution channel – our market share in key outlets and share of shelfspace in supermarkets for consumer packaged products. If this does not sound important consider the following case. Mars launched the Mars Ice Cream bar (in fact, an obscenely wonderful product) as a major new market entry. The product created a new quality thresh- old – it turned a child’s treat into an adult indulgence. The strategy of turning chocolate bars into ice creams has been imitated by countless competitors. However, Mars lost money on this product. The reason – Unilever-owned Walls, the market leader, owned the distribution channel that mattered: it had a stranglehold on impulse-buying outlets like local newsagents. Walls literally owned the freezers in these outlets and did not allow other manufacturers shelf space. With the best branding and marketing communications in the world, Mars could not compete effectively in this market because it did not have the critical marketing asset in distribution needed to succeed.36 Market information can be a critical marketing asset in the sense that being able to understand the market or customer better and to respond faster and more effectively to customer demands creates competitive

•• 334 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

advantage. Consider the scenario below and ask where the competitive advantage comes from:

Check into any Ritz–Carlton hotel anywhere in the world and you will be greeted not only by the doorman, but also by a number of small, pleasant surprises. The hotel does not need to ask the name of your employer, your home address, whether you want a non-smoking room, or if your preference is for a non- allergenic pillow. All this information was obtained during your previous visit to the Ritz–Carlton . . . you sense that the hotel staff is somehow able to anticipate and respond to your every need, providing you with a feeling of satisfaction that comes from being among people who care about you as an individual. ‘Why would I ever stay anywhere else? ’ you wonder.37

Corporate reputation has always been recognized as a marketing asset (or liability). As buyers become more sophisticated and judge- mental this is becoming an even more signiﬁ cant factor – the company’s reputation may impact very directly on brand value for customers (see Chapter 3). The impact of company reputation on brand value is far more important than the endless (and boring) debate about corporate logos and headed notepaper. Perhaps the most widely-recognized marketing asset is the brand. We discussed branding in the context of customer value-based strategy in Chapter 4. We recognized the power of strong brands to create and change markets and the unique contributions of ‘cool brands’ . We also recognized the vulnerabilities of brands as a basis for strategy and the imperative of taking a strategic brand perspective that focuses branding onto customer value.

Marketing assets, value propositions and market strategy Intangible marketing assets are a central issue in developing what we will offer the customer as our value proposition. Brands and other marketing assets are resources. They are a means to an end. What we are starting to realize is that the ‘ end ’ in question is customer value. This is why, for example, Coca-Cola now talks about ‘ value marketing’ not ‘ brand marketing ’ , and the chief marketing ofﬁ cer is clear: ‘ You have to really understand how your brand creates value ’38 (or otherwise). Similar comments could be made about other assets like corporate reputation. The next question is whether from our marketing assets, capabilities and values we actually have a value proposition.

Do We Have a Value Proposition? If we have got a good idea about our target markets and segments, and have linked our vision and mission to our strategic positioning and

335 •• Market-Led Strategic Change

thought through our differentiating capabilities, particularly in terms of our marketing assets and brands – the question is: do we have a value proposition for our customer? The central part of the business strategy, which connects internal processes to improved performance with customers, is the value proposition. The value proposition describes the unique offering we make to the customer, with all its hard and soft dimensions, and how the company will differentiate itself from the rest in its target market segments. Worryingly, research suggests as many as 75% of executive teams do not have a clear consensus around the customer value proposition. 39 One approach that may be useful in getting speciﬁ c is provided by Kaplan and Norton.40 They take the Treacy and Wiersema ‘ value disciplines ’ we considered earlier, divide them into components and ask for each, which provides a differentiator, and which is no more than a general requirement in the market (which all competitors are likely to have)? In these terms, companies following an operational excellence strategy need to excel at competitive price, customer-perceived quality and lead-time and on-time delivery for purchasing. Those with a product leadership strategy must excel at product functionality, features and product/service performance. A customer intimacy strategy stresses the quality of relationships with customers and the complete- ness of the solution offered. Nonetheless, the match between what we believe creates value and the customer’s perspective is critical. For example, Dell Computers drove its growth for nearly two decades offering value based on technology and choice, using its direct business model for superior supply chain efﬁ ciency. However, when they encountered the China market they found buyers who placed a high value on face-to-face contact and relationship quality in commercial transactions. Dell’s traditional value proposition did not provide value in this market and Dell now sells through Gome retail stores in China (and is moving towards a global multi-channel strategy). In other situations, companies use their mission and value statement as the value proposition as well because this is the best statement they have of what they stand for that they believe matters to buyers.

What type of value proposition? In business-to-business markets, value propositions may be even more precise and even more critical to business performance. However, although the term ‘ customer value proposition ’ is widely used, there is no real agreement on what constitutes a value proposition or makes it effective. In the B2B context, researchers identify three kinds of value proposition: all benefi ts – when asked to construct a value proposition, managers list all the benefi ts they believe their offering might deliver to target customers, with the risk they claim advantage from features that actually provide no benefi t to target customers; favourable points of difference – recognizing that customers have alternatives, identifi es what differentiates the offering from the next best alternative, which

•• 336 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

risks assuming that all favourable comparisons create value for the customer; and resonating focus – concentrates on the one or two points of difference that deliver, and with improvement will continue to deliver, greatest value to target customers, though this relies on deeper knowledge of what drives value for the customer. The researchers conclude that customer value propositions with resonating focus should be the gold standard. 41 They distinguish between these approaches to describing value to customers in the following way:

All benefi ts value Favourable points Resonating focus proposition of difference value value proposition proposition Approach: Lists all the Identifi es all Focuses on benefi ts customers favourable points the one or receive from the of difference in the two points of market offering market offering, difference whose compared to improvement alternatives will deliver the greatest value to the customer Responds to Why should we Why should we What is the most the customer’s buy your offering? buy your offering important thing for question: instead of your us to know about competitors’? your offering? Risk/cost: We may assert We assume We need deeper benefi ts which do favourable knowledge of not really create differences create what drives value customer value value for the for the customer customer

This is a neat way of delivering the central message about the value proposition to the customer – it has to make you the best alternative in terms that matter to the customer, not just in terms of what you are good at or how superior you feel to the competitor. Without a value advantage in the customer’s terms, you are probably only going to get the business on low price. Not understanding your value advantage in the customer’s terms, means you stand a good chance of reducing prices and proﬁ ts to get the business, when in fact you already had it. Interestingly, although this logic has been developed in the B2B context, it is quite persuasive in examining value propositions in consumer markets as well.

So, do we have a value proposition or not? Do not just say ‘yes ’ and move on. Try writing it down. If we do not know what we have to offer each of our customers that makes us more attractive than the next to that customer, that we know we can deliver to that customer, then we do not have a market strategy.

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For example, the written value proposition for a leading ﬁ nancial services company called their Customer Proposition reads as follows, and describes the position they aim to take in the customer’s mind:

● I am more than just a customer with . . . ● All my personal ﬁ nancial needs are met by . . . ● I get top value prices from . . . ● My money is safe with . . . ● I can understand . . . ● I would always recommend . . . ● I ﬁ nd it easy to deal with . . . ● I get the best possible service from . . . ● I can trust . . . to look after my interests ● . . . is where I want to work ● I know that . . . supports people with more than money.

Similarly, in automotive Daewoo took fast market share at its launch in the UK through an explicit value proposition that formed the core of its consumer advertising:

● DIRECT – treating customers differently, with no intermediaries ● HASSLE-FREE – no sales pressure or haggling about prices ● PEACE OF MIND – features that are traditionally ‘ extras ’ are bundled in with every car ● COURTESY – openly respecting customer needs and preferences throughout the purchase and use process.

Interestingly, the clarity and power of the Daewoo value proposition to its target in the UK was so clear and compelling that the conventional car companies never developed an effective response. When the opportunity presented itself, through the ﬁ nancial collapse of the Daewoo conglomerate parent organization in Korea, General Motors bought Daewoo Motors. Within two years, GM paid the ultimate com- pliment to Daewoo’s value proposition: they changed the name of the company to Chevrolet and dismembered the Daewoo value offering. If you are that much of a threat that they have to take your name away and hope people forget you ever existed, then you must be on to something. Another way of expressing the value proposition is shown in Figure 8.7 , which compares retailers ’ value delivery for a national discounter chain, a regional chain and small independent stores in the same product market. If the national chain offers low prices for a broad range of goods always in stock at convenient locations (the usual discounter proposition), then these are the aspects of the customers’ experience that the company aims to over-deliver relative to the competition. Underperformance against purchase criteria like personal assistance and store appearance/atmosphere can be see as a deliberate strategic choice, which creates cost savings to reinforce the price advantage. The small independents can compete only through a value proposition of

•• 338 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

Small National independent Regional discounter Customer purchase criteria stores chain chain Low prices

Wide product selection

Rural location convenience

Reliability

Products are in stock

Product quality

City location convenience

Selection within categories

Personal assistance

Store appearance/atmosphere

Poor Excellent Figure 8.7 An Performance against customer criteria illustrative retailer value proposition

convenience, personal assistance and store quality. The regional chain is likely to struggle to construct a value proposition that is convincing relative to the two main competitors.42 There is no ﬁ xed format for what a value proposition should look like. You can use the framework we have developed in this chapter (and might also look back to Chapter 4 on strategic thinking) to check that you have considered all the issues that help, and can track how each contributes to building a statement of the value for our customers, that will establish a strong position for us in this market. These are rich and complex issues, but they are the ones which are essential to building an effective and strong market strategy. However, we have not ﬁ nished yet, the last strand that links to our market choices and our value proposition is the key relationships that will drive the strategy. We turn attention to this in the next chapter.

References and End-notes

1. Summers , Diane , ‘ Letters Chiefs Aim to Deliver Quality ’ , Financial Times , March 6 1995 . 2. Heller , Robert , ‘ The Art of Delighting Customers ’ , Financial Mail on Sunday , August 6 1995 .

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3. Treacy , Michael and Fred Wiersema , The Discipline of Market Leaders , New York : HarperCollins , 1995 . 4. Slywotsky , Adrian , Value Migration , Boston, MA. : Harvard Business School Press , 1996 . 5. Hewson , David , ‘ Jean Genius: One to One Marketing ’ , Sunday Times , June 11 1995 . ‘ Levi’s Woos Youth With Custom-Made Jeans ’ , Marketing Week , September 17 1998 . 6. Freeman , Hadley , ‘ Nothing in Your Size? Stores Seek to Measure U p ’ , Guardian , September 6 2006 . ‘ Levi’s Extends Its “ 10 Second Fitting Kiosk ” Market Tour ’ , The WiseMarketer.com. September 6 2006 . 7. Anderson , James C. , Nirmalya Kumar and James A. N a r u s , Value Merchants: Demonstrating and Documenting Superior Value in Business Markets , Boston, MA : Harvard Business School Press , 2007 . 8. Anderson et al., Value Merchants. 9. This section has its origins in: Piercy, Nigel F. and Neil A. Morgan, ‘ Mission Analysis: An Operational Approach ’ , Journal of General Management , 19(3), 1994, pp. 1–19. 10. Sanghera , Sathnan , ‘ Why So Many Mission Statements Are Mission Impossible ’ , Financial Times , July 22 2005 , p. 13. Gadiesh, Orit and James L. Gilbert, ‘Transforming Corner-Ofﬁ ce Strategy Into Frontline Action’ , Harvard Business Review , May 2001, pp. 73–79 . 11. Thomas , Lesley , ‘ Millions Spent on Firing Firms With Missionary Zeal ’ , Sunday Times , March 25 1995 . 12. Collins , James C. and Jerry I. Porras , Built to Last: Successful Habits of Visionary Companies , New York : Random House , 2005 . 13. Kellaway , Lucy , ‘ Statements that Sum Up Mission Impossible ’ , Financial Times , March 20 2000 . 14. Commission of the European Communities , Green Paper: Promoting a European Framework for Corporate Social Responsibility , COM , July 2001 , p. 6 . 15. Grow , Brian , ‘ The Debate Over Doing Good ’ , BusinessWeek , September 5/12 2005 , pp. 78 – 80 . 16. Elgin , Ben , ‘ Little Green Lies ’ , BusinessWeek , October 29 2007 , pp. 45 – 52 . 17. Faris , Stephen , ‘ The Other Side of Carbon Trading ’ , Fortune , September 3 2007 , pp. 67 – 74 . 18. Maitland , Alison , ‘ A Responsible Balancing Act ’ , Financial Times , June 1 2005 , p. 11 . 19. Porter , Michael E. and Mark R. Kramer , ‘ Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility ’ , Harvard Business Review , December 2006 , pp. 78 – 92 . 20. Savitz , Andrew and Karl Weber , The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social and Environmental Success and How You Can Too , San Francisco, CA : Pfeiffer Wiley , 2006 .

•• 340 Customer value strategy and positioning: what have you got to offer, how does it make you different to the rest?

21. Taylor , Andrew , ‘ Microsoft Drops Supplier Over Diversity Policy ’ , Financial Times , March 24/25 2007 , p. 5 . 22. Birchall , Jonathan , ‘ Wal-Mart Lays Down the Law ’ , Financial Times , February 21 2007 , p. 11 . 23. Harvey, Fiona , ‘ Winds of Change Beginning to Blow ’ , Financial Times: Special Report on Sustainable Business , October 12 2007 , p . 1 . 24. Johnson , Jo and Aline van Duyn , ‘ Pressure on Clothes Retailers After Gap Child Labour Allegation ’ , Financial Times, October 29 2007 , p . 6 . 25. Parker , George , ‘ Cabinet Splits on Ditching Jaguars for Hybrid Prius ’ , Financial Times , March 19 2008 , p . 5 . 26. Ward , Andrew , ‘ Soft Drinks Producers Act to Deﬂ ate Calls for Regulation ’ , Financial Times , August 19 2005 , p. 5 . 27. Davey, Jenny and Ben Laurance , ‘ Trading Bright Green Ideas ’ , Sunday Times , January 21 2007 , p. 3 - 5 . 28. Anders , George , ‘ Dell and H–P Cast Energy Savings as an “ Eco-Push ” that Pays Its Way ’ , Wall Street Journal , November 21 2007 , p. 7 . 29. Grande , Carlos , ‘ Ethical Consumption Makes Mark on Branding ’ , Financial Times , February 20 2007 , p. 24 . 30. Engardi , Pete , ‘ Beyond the Green Corporation ’ , BusinessWeek , January 29 2007 , pp. 50 – 64 . 31. Porter , Michael E. , Competitive Advantage: Creating and Sustaining Superior Performance , New York : Free Press , 1985 . Porter, Michael E., ‘ The Five Competitive Forces That Shape Strategy ’ , Harvard Business Review , January 2008, pp. 78–93 . 32. Porter , Michael E. , ‘ What Is Strategy? ’ , Harvard Business Review , November/December 1996 , pp. 61 – 78 . 33. Ibid. 34. Prahalad , C. K. and Gary Hamel , ‘ The Core Competence of the Corporation ’ , Harvard Business Review , May/June 1990 , p p . 7 9 – 9 1 . 35. Treacy and Wiersema, Discipline of Market Leaders. 36. Mitchell , Alan , ‘ Changing Channels ’ , Marketing Business , February 1995 , pp. 10 – 13 . 37. Hart , Christopher W. , ‘ Made To Order ’ , Marketing Management , Summer 1996 , pp. 11 – 23 . 38. Quoted in Mitchell, Alan, ‘ Evolution ’ , Marketing Business , February 1999, p. 28. 39. Kaplan , Robert and David P. Norton , The Strategy-Focused Organization , Boston, MA : Harvard Business School Press , 2001 . 40. Ibid. 41. Anderson , James C. , James A. Narus and Wouter van Rossum , ‘ Customer Value Propositions in Business Markets ’ , Harvard Business Review , March 2006 , pp. 9 1 – 9 9 . 42. This illustration is adapted from: Collis, David J. and Michael G. Rukstad, ‘Can You Say What Your Strategy Is?’ , Harvard Business Review , April 2008, pp. 82–90.

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C H A P T E R • • • • 9 Strategic relationships and networks: building the infrastructure to deliver the strategy

This chapter . . . One of the problems with marketing folks is that as soon as you use the word ‘relationship ’ they think you mean with customers, and then assume that everything is taken care of with Customer Relationship Management (CRM) * technology. This is not helpful. What we can see in this chapter is that strategy is underpinned by a network of relationships that determines in large part whether the strategy stands up and whether it can be implemented. Strategy is about customers obviously, but it is also about our relationships with collaborators in alliances and partnerships, where we stand with competitors and the contingent inﬂ uencers who shape the landscape, and with the people in our own organization. Here we look at several different elements of the relationship networks surrounding strategy. This provides the remaining component of the strategic pathway.

*In fact, CRM should probably stand for ‘Customer Relationship Myopia’, for reasons we discussed in Chapter 4, but I digress . . . Market-Led Strategic Change

Introduction The issue we have to confront next is: if we are going to deliver our value proposition to our target markets and segments, on the basis of how we understand these markets, then what are the key relationships they will drive this through, and can we rely on and successfully manage those relationships. The ﬁ rst question is – relationships with who and why? The areas where relationship-building is most critical in an era of value-based strategy are those shown in Figure 9.1. This underlines that critical relationships are with customers, but also with employees and managers in the company (co-workers), and external collaborators, as well as with competitors and contingents. However, in the real world the issue is also networks of linked relationships. Accordingly, what we need is an approach that addresses the critical issues, including these relationships: with the customer – can we keep the promises we have made in the value proposition to our customers; with competitors and contingents – how vulnerable is our market strategy to competitive attack, how well do we understand our competitors ’ capabilities and will the strategy survive, and how well do we stand with the market controllers – for example, government regulators, City analysts, shareholders, or key players who exert inﬂ uence over the customer and the competitor; with collaborators – does our strategy rely on partnerships with other organizations such as suppliers, distributors, supply chain partners, and so on, and can we manage these relationships effectively; and with co-workers * – can and will

Customer relationships

Competitor Strategic and contingent relationships Collaborator relationships and networks relationships

Co-worker relationships

Figure 9.1 Strategic relationships and networks

*Apologies for using the word ‘co-workers’ to refer to the employees and managers in our company, but it alliterates too well with the other relationships and I could not resist.

•• 344 Strategic relationships and networks: building the infrastructure to deliver the strategy

the employees and managers in this company deliver the quality, the service, and the brand values on which the market strategy relies? The result of all these is a relationship network that can support our strategy or provide major barriers. This is a neat and tidy model. Things are often somewhat less clear- cut in the real world. It is often difﬁ cult to sort out the type of relationships we have with different parties.

Reality Check: The tangled relationship network

Company X produces speciality pharmaceutical chemicals for the healthcare industry. X was approached by a customer for a new material to be supplied for clinical diagnostic purposes, which had been designed by the customer’s R&D Department. Company X had the production facilities for the new compound, but did not have access to the raw materials needed or the packaging plant required. The customer agreed to supply the raw materials from another source, and arranged for Company X to lease packaging line time at Company Y (Company Y also supplies the customer but is the major competitor of Company X). Company X supplies the new material to the customer in bulk for re-packaging and in specialized packaging for laboratory use. The customer packages the bulk material itself. Company X and the customer both sell the bulk material and the packaged material to other healthcare companies, including Company Y. (This is a real situation, but the companies concerned would just as soon not have their names published). This arrangement has proved profitable for all concerned, it just isn’t neat and tidy.

We may have to look at customer, competitor and collaborator relationships when it is the same company we are talking about in each relationship, and this may pose particular problems – if we attack a competitor with a new product which is also a customer for existing products, do we undermine the original business, for example? If we form a partnership with a company, how does it affect relationships we have with other companies?

Customer Relationships We looked at the relationship marketing ‘ revolution ’ in Chapter 4, and were warned off the ‘ rhetoric of relationship ’. Our conclusion was that relationship focus has a great deal to offer – better information about customers, customers who forgive us when we get things wrong, etc. – but

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that the real test is whether the relationship we have with our customers enhances the value of what we offer them (in their eyes not ours). However, before we go any further, it is time to ask some searching questions about customer relationships: do we know what the relationship with the customer has to be, for our market strategy to work; does the customer know and accept this; can we actually deliver that relationship in the customer’s terms; does having a strong customer relationship necessarily make a customer attractive to us? In short, we need to be really sure we are not making the mistake of being taken in by ‘ relationship rhetoric ’ , when we should be focusing on hard relationship reality. Do not forget that what customers actually see of your ‘ relationship strategy ’ is: sales promotions and direct communications based on database information – and I personally am delighted to get a personalized letter from the CEO about Heinz Baked Beans, it certainly made my day (not) – and loyalty programmes, or as they have been called ‘customer detention ’ programmes that are intended to tie-in business (or restrict the customer’s freedom and choice as some would say). None of this seems particularly related to the philosophy of mutual interdependence that we know is what relationship marketing is really about.

Do we know what we want the relationship to be? If we have got this far and the answer to the question is ‘ no ’ , then we need to think again. We should be able to write down the relationship with the customer that grows out of our market focus, and our value proposition. Try it. That statement should tell us, if our strategic position and value proposition are going to stand up: how close does the relationship have to be – the choices range from essentially a transactional relationship (we are only interested in the one-off sale) through to almost partnership with the customer; the qualities needed in the relationship – what do we need to have customers believe about us, e.g. our integrity, our service level, our quality, our technology compared to the competition; and the life-cycle of the relationship – how long has it got to last for the market strategy to be viable?

Do we have that relationship or can we get it? This is about getting realistic and challenging any belief that we can take a strong competitive position just by telling customers that we are going to be nice to them (countless millions of pounds have been spent over the years on advertising to do just that, and it has not proved very effective). If the relationship positioning we want depends on customer beliefs about us – let us ﬁ nd out what they do believe about us by asking them. A lot of companies are shocked to ﬁ nd that customers have long memories – they remember you and what you did before you got the relationship marketing rhetoric. The critical issue is – are

•• 346 Strategic relationships and networks: building the infrastructure to deliver the strategy

customer beliefs about us supportive to our market strategy or are they a barrier? The same applies to trust . If our market strategy rests on the assumption that customers trust us – then maybe we should ﬁ nd out if they do. Does our company reputation support our market strategy or create a barrier? Customers do not have to believe you are a wonderful company or trust you with their lives, in order for you to do business. People often do business with companies they do not trust. What we have to avoid is building a market strategy that relies on beliefs and trust which do not exist.

Reality Check: British bankers

British banks are incredibly profitable. They are tightly managed to deliver value to their shareholders. The costs of events like the credit crisis caused by the US sub-prime lending feeding frenzy are passed on to their customers. In the event of a disaster like the Northern Rock collapse, they expect the government to pick up the bill, which it does. However, it would be a little optimistic to believe that bank customers trust banks and believe in their integrity. A European survey suggests barely more than a quarter of European consumers believe that their bank acts in their best interests rather than doing what is best for bank profits. Charging illegal and unfair fees for services like overdrafts and letters has done little to enhance their reputation with consumers. The bullying and lying tactics adopted by the banks to deter customers from claiming refunds on unfair overdraft penalties did not impress the Financial Services Authority. Neither are many bank customers overly impressed with the raft of new charges introduced after banks were banned from using ‘unfair and illegal’ penalty fees, to replace the lost profits. However, British banks may have missed a trick. In the USA, an interesting bank business has built up around reviving the discharged debts of bankrupts, mainly based on banks ‘failing ’ to update credit reports after debts have been discharged by the court, they have created debts that do not die whatever the law says. Banks behave the way they do because they can. But to build a strategy that relied on customer beliefs in integrity, fairness or customer trust would be unwise.

Sources: Jane Croft, ‘Banks Put Profit First, Say Customers ’, Financial Times, November 7 2007, p. 14. Robert Burner and Brian Grow, ‘Prisoners of Debt ’, BusinessWeek, November 12 2007, pp. 44–51. Michael Peel, ‘OFT Rebuts Case on Bank Charges’, Financial Times, November 16 2007, p. 4. Gwyneth Rees, ‘Banks Are Clawing Back Lost Penalty Fees’, Daily Mail , August 29 2007, p. 17.

347 •• Market-Led Strategic Change

Can we deliver that relationship? Getting customers is not the same thing as retaining them, as we saw in Chapter 4. Attracting customers is largely about making promises. Retaining customers is much more about keeping these promises. We saw in Chapter 2 the risks in mismanaging customer expectations. The question at this stage is: when we look at the customer relationship deﬁ ned by our market strategy, do we have the capabilities to maintain and enhance that relationship? This forces us to look at our internal resources (our people, systems, procedures and structures) but also to the other key relationships we have to manage to maintain the customer relationship. If we cannot resolve this issue we need to go back to the value proposition and think again. Making customers promises that you cannot keep is dangerous.

Relationships versus attractiveness There is also the complication that how attractive a customer is to us (the prospects of achieving our goals and building proﬁ table business), is not necessarily the same as the strength of the relationship we have with the customer. A classic dilemma for the sales manager is to persuade salespeople to spend less time with customers who are really nice to them (lots of coffee and cakes), and more time with customers who are the best prospects (who are often argumentative and demanding because they know how important they are). Figure 9.2 illustrates the dance-hall dilemma – why do the ones I fancy never fancy me, and vice versa.* Building and reinforcing the loyalty of customers who are attractive (proﬁ table, good future prospects, etc.) may make sense if you are sure you can pick them, but you need to have effective ways of

Customer relationship Strong Weak

Prime target Targets for customers – conversion – High achieve synergy as are they attractive we retain the ‘best’ enough to be customers (we hope) worth chasing?

Sticky Mutual Customer customers – antipathy – attractiveness Figure 9.2 The Low they want us, we they don’t want us, dance-hall dilemma – don’t want them, we don’t want them, the ones I fancy never so what do we do? end of discussion fancy me and vice versa

*The analogy will be readily understood by all male readers, who were ever teenag- ers, and who ever went to a dance. It may be lost on others.

•• 348 Strategic relationships and networks: building the infrastructure to deliver the strategy handling other customers too (and ways of recovering the situation if you invest in customers who do not pay off). A particular challenge surrounds the issue of what to do about customers who provide unattractive prospects, but who have or want a close relationship with us. Customer divestment decisions involve a variety of different situations and possible responses. Relevant actions in different circumstances may be: reassess the relationship – have we misunderstood or mishandled the customer – is there a way to improve their attractiveness; educate the customer – is the customer inclined to understand our position, and perhaps withdraw from the relationship; renegotiate the value proposition – is there a way to make the customer’s business more attractive by removing some elements of cost, and would the customer agree to this; migrate the relationship – might the customer be a more attractive prospect for other providers, and can this transition be managed; or (last resort), terminate the relationship – if there is complete incompatibility between our goals and the customer’s, then we exit. 1 The point we made in Chapter 2 that knee-jerk reactions to ‘ bad customers ’ are dangerous is underlined by the network of relationships in a market – actions we take in one network relationship may easily reverberate elsewhere in the network.

Competitor and Contingent Relationships Now let’s talk about relationships with competitors and contingents – they share the characteristic that they may react to what we propose to do and they may stop us. For a start, we need to be realistic about the type and level of competition in our target markets. This sounds so obvious, but many companies are very poor at putting strategy development into the real competitive environment. This is a route to nasty surprises. We need to give some serious attention to issues like: really understanding the competition, particularly in terms of their ability to respond or retali- ate to our market strategy; and continually up-dating our view of the sources of competition in our market – not just the existing ‘me-too ’ competitors but new entrants, because then we can focus on the level and type of competitiveness in this market. However, let us get some fundamental issues out in the open before continuing:

● Every organization has competitors – whether you accept it or not. Talk to senior people from the police service. These managers say they have no competitors – there is only one police service. What else do you call the amazing growth in private security ﬁ rms for the home and the business? Then ask yourself why there are more alternative health practitioners in the UK than there are doctors in general practice. Everyone has competitors. ● We know who our competitors are – just about every organization says this. An awful lot of them are wrong. Take the examples

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we looked at earlier: the retail banks who persistently claimed that building societies and insurance companies could not compete in the retail banking market; the airlines who did not believe that ‘ no frills ’ operators like easyJet and Ryanair could survive. Competitive myopia is a common condition and can prove fatal. ● Competitors are in our industry – many of us tend to identify competitors as ﬁ rms with the same technology, the same type of products and services, as us: this is the industry (see back to the Competitive Box in Chapter 7 if you don’t believe me). Customers are not interested in the ‘industry ’ , only in meeting their own needs. The real competition may come from outside our industry: electronic communications reduce the need to travel or freight paper around the world; music competes with clothing for the young consumer’s leisure spend; management consultants compete with corporate banks by reducing the need for companies to borrow (e.g. to fund stockholding); industrial companies produce their own raw materials instead of outsourcing and turn from customers into competitors.

Sorting out these basics goes before evaluating our relationships with competitors.

Really understanding the competition Getting to grips with competition is about far more than just listing the companies that sell similar products and services to us. It is far more about challenging conventional assumptions about what drives our key competitors, understanding their strengths and weaknesses, their limitations and problems, and their likely strategies. A conventional framework for structuring this is shown in Figure 9.3 . This framework suggests we should build a competitor response profi le for each key player in the market and constantly revise it. This should help in confronting the likely reactions to our market strategy from each competitor. This is a minimum requirement. However, an insightful competitive profi le should also take into account the psychology of the competition in this market – basically how mean and aggressive are the competitors? For example, try categorizing competitors in the way show in Figure 9.4. This involves identifying competitors who will: fi ght to the death in this market, possibly regardless of the short-term commercial consequences, because this is their home turf, or because they just like a good fi ght; show disdain by not reacting to our strategy, because they do not see us as a serious threat worth worrying about; make a weak counter-attack to protect their own position, but not very aggressively or competently; or, simply ignore us and leave us alone, for one reason or another – they don’t think we are worth the effort, and they are not equipped for a fi ght anyway.

•• 350 Strategic relationships and networks: building the infrastructure to deliver the strategy

Competitor’s goals Competitor’s strategy What are they trying What is this company’s to achieve in this current strategic market? position?

Competitor’s response profile Is this competitor satisfied with its current position? What are the likely moves they may make? Where is this competitor most vulnerable? What is this competitor sensitive about, what is most likely to provoke a competitive reaction?

Figure 9.3 Competitor analysis Competitor’s strategic Competitor’s Adapted from assumptions – capabilities – Michael E. Porter, How does management What are their strengths Competitive Strategy , look at the market? and weaknesses New York: Free Press, 1980.

Competitive reaction to our move? Ye s N o

Fight to Show High the death disdain aggression Competitive Weak Ignore Low counter-attack us

Figure 9.4 How ugly are the competitors around here?

Analysing like this can be surprisingly revealing. It is not a wasted effort if you identify the real threats of aggression in the market. The thing to avoid at all costs is the ‘ ﬁ ght to the death ’ competitor, because these conﬂ icts are a fast way of losing a lot of money. This is an analysis that needs to be carried out regularly in each important market – things change. As recently as 2002, BusinessWeek was advising its readers that a key survival skill in the IT business was ‘ getting out of Microsoft’s way ’ .2 In the Google-era, that advice looks a bit out-of-date.

351 •• Market-Led Strategic Change

Reality Check: Cat ﬁ ght!

VMware produces software that supports virtualization – allowing companies to run tasks simultaneously on a single server by fool- ing each application into thinking it has sole use of the machine. It is one of the most important companies to emerge from the software industry in the mid-2000s. Larry Ellison, founder of Oracle, takes a different view of his new rival. He dismisses VMware’s prospects in competition with Microsoft, and declares that the base level of software on which virtualization depends was ‘ so simple, his cat could write it ’ . Diane Greene, VMware founder, responded in an interview with the FT, that ‘If his very smart cat could write it, my very smart tor- toise could write his database. ’ These guys are not going to play nicely together. Further pet- related competitive insights are awaited.

Source: Adapted from Richard Waters, ‘VMware undaunted by Rival’s Catty Comments ’ , Financial Times , January 19/20 2008, p. 19.

In case this proposition that competition is about psychology as much as economics sounds dubious, consider the continuing competitive war between Tesco and Sainsbury. The nature of Tesco’s competitive stance can be judged from an often-repeated anecdote from the days of restricted Sunday trading in the UK. A Tesco store was reported on Sunday for illegal trading and was ﬁ ned and ordered to close. The following Sunday, every Sainsbury in a 50-mile radius of that Tesco store was systematically reported for illegal trading and consequently ordered to close. This may have been an unhappy coincidence, but most people suspect not. It does not matter if this story is true – it is probably not (it was more likely a 100-mile radius), and we should never let the facts get in the way of a good story. The point is that when Sainsbury talked about the possibility of a price cutting campaign and Tesco immediately said it would match every price cut made every inch of the way – everybody believed that Tesco would do exactly that. The market knows, if the major competitor attacks Tesco on price, Tesco will hit back immediately and fully. Stalk and Lachenauer call this playing ‘hardball ’ and suggest that winners in business play rough and do not apologize for so doing.3

Reality Check: These guys really don’t play nice

The retail grocery market in Britain is not above playing tricks. Following the takeover of Asda by US retail giant Wal-Mart, Safeway

•• 352 Strategic relationships and networks: building the infrastructure to deliver the strategy

regarded Asda as its main competitor. Safeway’s strategic goal appears to have been to cause so much market disruption that sooner or later one of its competitors would buy their company to shut them up. Internal company documents reveal Safeway’s ‘saboteur shopper’ tactics – sending its employees into its rival’s stores to cause confusion at busy times, pretending to be customers, clogging up checkouts by demanding price checks at the last minute, causing long queues at counters. The Safeway report gloated of one such campaign: ‘The queues on the tills were about 45 feet long and customers were dumping their baskets and leaving . . . ’ . Another tactic is large groups of staff arriving outside Asda stores and bombarding customers with Safeway leaflets – at one point in 2000 estimated to be 10 million leaflets a week. Asda simply laughed the tactics off, but may have been more worried by the reaction of Tesco’s spokesman on the arrival of Wal-Mart in the UK: ‘The Yanks have got a reputation for turning up for wars late and claiming they won them.’ A friendly business this is not. In 2004, Safeway was taken over in part by Wm Morrison, and selected stores shared out between the other supermarket firms.

Sources: Richard Price, ‘Safeway’s Saboteur Shoppers Wage War on Asda’, Daily Mail, August 12 2000. ‘Talking Heads ’, Sunday Times, August 15 1999.

Similarly, the animosity between BA and Virgin Atlantic began in the early 1990s, when Virgin accused BA of unfairly poaching customers with some very dubious tactics like hacking into Virgin’s booking system. BA was forced to apologize ‘ unreservedly ’ and pay damages to Virgin. But the antagonism between the companies has never reduced. In 2007 BA was fi ned a record £270 million for participating in a price- fi xing cartel. Virgin was part of the cartel but escaped punishment as a reward for blowing the whistle on the deal. Revenge is sweet – but who at BA thought that they could play games like this with Virgin and get away with it – did you think they were your friends all of a sudden?4 Part of the objective in putting strategy into a competitive context is to avoid being trapped in vulnerable positions. If you get into head- on competition with an aggressive market leader, they will fi ght back, and if they are strong enough they will win. Success often comes by avoiding head-on confl ict and outmanoeuvring the competition. That success is also about playing to your own strengths and to your competitors’ weaknesses. If our analysis suggests that we are targeting the same markets with the same value proposition and the same marketing methods as strong, aggressive competitors – why would we expect to be successful?

353 •• Market-Led Strategic Change

But where is the competition coming from in this market? At one level this simply says we should know who the competitors are in this market. Undoubtedly true – but not the full story. We also want to know where the new competitors will come from: potential new entrants to the market – such as retail fi rms entering the fi nancial services industry; and the threat of substitute products and services that meet the customer’s needs, but may come from a different industry or technology, for example Dyson’s entry to the carpet cleaner market, with a radically different technology and value offering. Both are vital to know, both are diffi cult to track. At least so it seems. In fact, if you look at the examples given above – the fi nancial services sector had been told for the best part of two decades that multiple retailers could easily and forcefully attack their sector; and the Dyson product innovation was actually offered to the main competitors (Hoover and Electrolux) before Dyson launched it himself. Maybe some nasty surprises shouldn’t be? If you need further convincing – go back to the competitive box (p. 269). Nonetheless, the point to be made is that we need to continually monitor for new competitive threats that may radically change the attractiveness of the chosen market and undermine our value proposition. The test of whether we are getting there is: ● Do we understand the competition well enough to predict their strategic moves, and to maintain our competitive advantage? ● Does this include existing and potential competitors, and potential new technologies coming into the market? ● Does our value proposition give us a specifi c positioning that plays to our strengths and avoids head-on competition, so that we can build a strong and defensible foothold in the market? If we do not have a competitive differentiation that separates us from the competition in the customer’s eyes – then we have no competitive advantage and this market strategy will fail. In this case, we need to think again. This issue has proved so problematic in working with executives, we have developed a specifi c market sensing technique that focuses on competition (see pp. 257–258). Now, what about ‘ contingents ’ , whatever that is supposed to mean. *

Allowing for critical contingents As we saw in Chapter 4, one of the deﬁ ning characteristics of the era of value-based strategy is that there is a whole bunch of people and organizations apparently dedicated to stopping you from putting your strategy into action. To be fair, they could also be one of your major strengths in getting things done faster than your competitors, it just does not seem

*Well, it may not be elegant English, but yet again it alliterates with the other relationship themes and that is good enough for me.

•• 354 Strategic relationships and networks: building the infrastructure to deliver the strategy to work out this way too often. The deﬁ ning characteristics of our contingents are: they are not strictly speaking competitors, but they may react in a similar way to your market strategy; they have the potential for restricting your freedom of action, i.e. stopping you from doing what you want to do, either literally or because their actions add to the cost of implementing your strategy; and the relationship you have with them may be a critical determinant of your ability to put your strategy into effect and deliver your value proposition to your customers. It is not easy to come up with a deﬁ nitive list of contingents – it varies too much between companies and markets. However, the list below is illustrative of what we should be thinking about in assessing the strength and direction of the relationships we have and what this means for our ability to implement our intended market strategy.

Shapers • • • Increasingly, there are forces in the market that shape and change attitudes and beliefs about the industry and our company. For large companies, City analysts and the information they provide to the media are a major determinant of a company’s freedom of action. One of the most direct impacts of poor relationships with such commentators is that they inﬂ uence shareholder opinion – possibly more than company management can. The management of relationships with vocal shareholder groups is becoming increasingly critical for some companies. For example, American Air is under intense shareholder pressure to sell strategic assets to lift its share price (which halved during 2007) – effectively, the move towards a strategy of becoming a ‘virtual airline’ is being driven by shareholders not by management.5

Regulators • • • Whether stimulated by competitors, the media, government pressure, or public opinion, the growing role of regulators in restricting the freedom of actions of companies may be critical. Relationships with regulators may be a critical implementation capability. The European Union Competition Commissioner is dedicated to a continuing series of sector-wide investigations. In 2008, this extended to the pharmaceutical business to fi nd if drug companies are using their strong market position to block competitors from selling cheaper generic copies, opening with dawn raids on the offi ces of Britain’s leading drugs companies. 6 This Commissioner is the same sweet lady who hit Microsoft with a $1.35 billion fi ne in 2008 for failing to comply with a 2004 antitrust order – her dogged determination to rein in Microsoft saw another two cases being opened as this last fi ne was extracted.7

Recommenders • • • Those who lead opinions for or against your products and services may be a critical target for relationship-building and sustaining efforts. Indeed, for some this may be the most critical area. For example, in

355 •• Market-Led Strategic Change

the medical products area, your standing with medical journal writers and medical schools may be a crucial determinant of whether your new products and ways of doing business are accepted by the medical profession. Similarly, in the building products marketplace, architects and designers do not buy the products but they have a decisive role in recommending and specifying them to builders. Online commentators may be a critical factor which is particularly difﬁ cult to inﬂ uence: when it was announced on January 9 2007, the Apple iPhone featured on more blogs than the US president; Wikipedia had an iPhone entry within minutes of the Apple announcement; and YouTube accumulated more video clips for the iPhone than for Gucci or the Pope. Online commentary is an as yet poorly understood source of product recommendation (or the reverse). Relationships with recommenders may be an important advantage or disadvantage for your strategy.

Gatekeepers • • • In some markets, recommenders turn into gatekeepers. For example, in the mainframe computer business it was always the case that the company’s IT Department acted as a determinant of whether your products were even considered by management. As we saw in Chapter 3, professional purchasing ofﬁ cers adopting a strategic perspective on sourcing are a powerful determinant of the relationship you can have with a customer – if you do not ﬁ t the sourcing strategy, you are shut out of the customer’s business.

Suppliers • • • Your relationships with important suppliers may be critical. For example, in August 2005 BA cancelled around 700 ﬂ ights and could not feed its passengers. It was taken out of the air by baggage-handler strikes in sympathy with workers at Gate Gourmet – supplier of BA’s food. As Gate Gourmet’s key customer (80% of its sales), BA had pressured prices down to the point where the company was collapsing, trying to change out-dated employment practices unilaterally to cut costs, and threatening to go into bankruptcy. But, having outsourced its catering to cut ‘ costs and complexity’ from the business, BA did not have an alternative supplier. Companies that cut themselves off from employment issues at their suppliers are taking a big risk. The Gate Gourmet debacle is estimated to have cost BA £40 million plus lost business, and a £10 million hike in the payments to Gate Gourmet for food.8 The challenge is ﬁ nding new ways to form productive relationships with suppliers, not just to cut costs, but to collaborate on product and service innovation.9

Supply chain partnerships • • • Further, as supply chains are managed as single entities, the relationship of a company with its supply chain collaborators may deﬁ ne its strategic freedom. For example, in the retail grocery sector there is a strong push to reduce the number of new product launches, to reduce

•• 356 Strategic relationships and networks: building the infrastructure to deliver the strategy

the number of products that retailers have to stock. This fundamentally restricts the freedom of supply chain members to innovate. For companies involved in these type of supply chain integrations, the ability to implement new market strategies is likely to depend on the ability to successfully negotiate with supply chain partners – suppliers, distributors and even competitors.

Reality Check: Re-shaping the diamond business

Traditionally, De Beers, the world’s largest diamond miner, acted to set diamond prices and to control supply – acting as buyer of last resort for other producers. However, the opening of big mines outside its control in the 1990s shifted De Beers’ focus away from controlling the supply of rough diamonds to fostering demand for them. De Beers has 120 years’ experience of weaving its way through African politics, from founder Cecil Rhodes ’ imperialist dreams, to the company’s dealings with South Africa’s apartheid regime, and now to the demands from African governments for a share of the business. The loosening of De Beers’ control on the market was driven by the powerful trend of ‘beneficiation’ – the demand by African states for a greater share of their own diamond wealth. The political imperative of ‘beneficiation’ has led to the location of profitable operations like diamond cutting and manufacturing in countries where the stones are mined. Only by cooperating with governments ’ development aims has De Beers maintained its market position as the biggest producer of rough diamonds. In Botswana, location of two of De Beers’ most valuable mines, diamond sorting has been placed in a desert estate next to Gaborone’s airport. The decision to ‘Africanize ’ a function previously conducted in London was made by the Botswana government. Beneficiation is also taking place in Namibia, the Democratic Republic of Congo and Angola. In South Africa a black empowerment consortium owns 26% of De Beers mining operations. De Beers ’ managing director says: ‘Beneficiation is not about altruism but about good business; it creates much closer relationships with our partners. ’

Sources: William MacNamara, ‘De Beers Cedes Diamond Grip to African States’, Financial Times, November 29 2007, p. 6. Michael Skapinker, ‘De Beers Chief Seeks Fresh Settings ’, Financial Times, March 17 2008, p. 14.

What I am saying is that you do not just have to proﬁ le and understand your direct competitors, you need to identify and proﬁ le a range of contingent forces as well, to get a view about what type of relationship you have with the important ones, and whether this is a barrier to successfully implementing your strategy.

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Collaborator Relationships For most ﬁ rms, going to market has always involved dependence on other ﬁ rms – suppliers of raw materials and components, advertising agencies, distributors, and so on. The idea that our market strategy relies for success on collaborating effectively with others to get the product or service to the customer is hardly new. We have always been vulnerable to failure in supply or blockages in the distribution channel. However, the issue of collaboration goes a lot further – it includes various forms of partnership with other organizations. This increases our dependence on others to drive our market strategy and suggests areas of risk to consider in putting the strategy in place.

Reality Check: How much competition do customers really want?

In 2007 the CEOs of Microsoft and Cisco launched an unusual campaign to reassure customers that a new era of head-to-head competition between their companies would not hamper the development of big new technology markets. The companies pledged more cooperation, creating joint teams of engineers to collaborate on areas of overlap. As Microsoft attacks the ‘unified communications ’ market bringing together voice, e-mail and instant messaging, it is in more direct competition with Cisco. Cisco’s move from network ‘ plumbing ’ into applications like video conferencing raises the potential for competition with Microsoft on a broader front. Customers were concerned that the overlap meant that in all-out competition, Microsoft and Cisco products would be designed not to work with each other. Enterprise customers were uneasy with the prospect of all-out war between Microsoft and Cisco in unified communications, and were delaying purchases of equipment.

Source: Adapted from Richard Waters, ‘Microsoft, Cisco Reassure Clients’ , Financial Times , August 21 2007, p. 19.

Let us consider the following issues: the move from outsourcing (buying-in products and services) to strategic alliances and networks (partnerships of various kinds); the risks of collaboration; and the problems of managing partnerships in implementing market strategy. The goal is to identify the critical collaboration links that lie under our market strategy, and to see how vulnerable this makes us.

•• 358 Strategic relationships and networks: building the infrastructure to deliver the strategy

From outsourcing to alliances and networks One way of categorizing collaborative relationships is shown in Figure 9.5 . This suggests that getting progressively closer to collaboration with others, we can distinguish between:

● Outsourcing – an ‘ arm’s length ’ relationship where we simply contract to buy goods and services on a normal basis, e.g. advertising, market research and direct marketing expertise are typically bought- in expertise. However, we need to consider also the trend to outsourcing critical activities like personal selling and for most ﬁ rms the unavoidable reality that they will rely on distributors to get their products and services to customers. Some outsourcing may involve enduring relationships and close cooperation. ● Partnership – a closer type of relationship where companies recognize each other as partners, and there are varying degrees of inter- company coordination and integration. ● Alliance – a joint venture where ownership of an activity or operation is shared with a collaborator. ● Vertical Integration – we fully own the activity or operation. 10

There are many factors driving companies to explore partnerships and strategic alliances as critical components of their market strategies. Quite simply, the use of collaborative arrangements has escalated

Closeness of Nature of the relationship relationship

Outsourcing Arm’s Low Purchase of goods and services length from outside the company, possibly over the long term Short-term focus, but coordinated Short-term activities between partner companies

Longer-term focus with integration of Partnership Long-term activities between partner companies

‘Permanent’ arrangement with Permanent partner companies highly integrated

Joint Shared ownership in an operation Alliance venture with a collaborator company

Vertical Full ownership of the activities Ownership integration or operations High

Figure 9.5 Types of collaborative relationship

359 •• Market-Led Strategic Change

because of conditions of rapid change and high risk in the marketplace, together with demands for skills and resources that exceed a single fi rm’s capabilities. The goals we seek in partnering and alliance include: cost effi ciency – it may be cheaper to use the expertise of a specialist than to do something in-house – McDonald’s has partnerships with regional distributors servicing all outlets in a region to reduce delivery and ordering costs, and Procter & Gamble outsources basic sales roles because it is more effi cient to do so; customer service – integration between fi rms in the supply chain can improve service (and prices) for customers; marketing advantage – integration can acquire greater marketing expertise, gain entry to new markets, and provide better access to technology and innovation – for example, in marketing offi ce equipment in the USA, Xerox partners with Ryder, the transportation fi rm, to deliver and install equipment, reducing costs and retaining price competitiveness; strategic advantage – an alliance may offer greater market access and control; and profi t stability and growth – for many companies, prospects of reduced costs and enhanced profi ts, and access to more markets and higher market share are the goals of partnership – more broadly, alliances may provide the opportunity to learn and absorb other companies’ skills (although that works both ways).

Reality Check: Bollywood partnerships

Bollywood is the Indian film industry, characterized by movies with extravagant story lines, exotic locations, and colourful music and dancing. Production costs of Bollywood films are very low compared to Hollywood – an average of around $1.5 million compared to an average of $51 million in Hollywood. In 2005, while Bollywood made twice as many films as Hollywood, they gained less than 10% of the revenue of Hollywood movies. In addition to the domestic Indian market, Bollywood’s most lucrative audience is the ‘brown pound ’ – non-resident Indians (NRI) in the UK, America, Canada and Australia. Worldwide, Bollywood is a $10 billion industry with 3.1 billion tickets sold every year (more than Hollywood’s 2.9 billion). Bollywood has benefited from the growing economic power of the Indian middle class and the NRI market. Bollywood’s success and market access has attracted Hollywood’s attention. The first major partnership is between Sony Pictures and Eros International, enabling Sony to distribute Hindi films in the USA. The first big co-production of a locally produced Bollywood movie by Sony and its partner in 2007 – Saarwariya – was a milestone, though poorly received by local critics in India. Sony has marketing expertise but as yet a weak understanding of the local market. Other Hollywood studios are looking to develop local Indian partnerships to get access to this market and the NRI film consumer globally.

•• 360 Strategic relationships and networks: building the infrastructure to deliver the strategy

In 2008, India’s entertainment giant Reliance pursued its ‘Hollywood strategy ’ by teaming up with Steven Spielberg’s Dreamworks in a $600 million deal to start a new studio. Reliance aims not just to be an investor but a strategic partner.

Sources: Tarquin Hall, ‘London, the True Heart of Bollywood ’, Sunday Times , August 26 2007, p. 3-7. Joe Leahy, ‘It’s Lights, Korma, Action for Hollywood ’, Financial Times, January 2 2008, p. 18. Ronald Grover, ‘For Dreamworks, a Dream Deal ’, BusinessWeek , June 30 2008, p. 34.

In some industries commentators are suggesting that competition in the future will no longer be between individual fi rms, but between alliances of fi rms. This is already becoming a signifi cant issue in the airline, automotive and computer businesses, and areas like utilities. These industries are all illustrative of a new type of competition – between alliances and consortia, not individual organizations, which may cause us to re-think some of our assumptions about who can do what.

Network organizations In fact, there is more to consider – the spread of collaboration, partnership and alliance strategies has led in many industries to the emergence of a wholly new organizational form: the hollow or network organization. For example, in the US Calyx and Corolla (C & C) is a good example of a prototype for the network organization. C & C has in effect reinvented the way Americans buy fl owers, by selling perishable cut fl owers from catalogues (and an Internet site). The C& C network is shown in Figure 9.6 – customers order fl owers from C & C’s catalogue pictures or website, C& C passes the order electronically to the selected grower (based on stock availability), and Federal Express collects the fl owers from the grower (branded with the C& C logo and packaging) and delivers them to the customer. This case is remarkable in two aspects. First , it cuts out three middlemen from the traditional channel for cut fl owers (wholesalers, distributors and retailers) and gets fl owers to the customer that are up to nine days fresher than fl owers bought from a conventional retailer. Second , this is a ‘ virtual ’ or ‘ hollow ’ organization – C& C adds value through a catalogue and computer links, it does not grow fl owers, own warehouses, operate retail outlets, or run a distribution or delivery fl eet, and it operates with only a small core staff, so can quickly reposition to follow changing customer requirements. 11 Established in 1989, C & C was the fi rst ‘ virtual ’ fl ower company (and was acquired by Vermont Teddy Bear in 2004). Similarly, in the US mobile phone business mobile virtual network operators (MVNO) buy wholesale capacity from established mobile carriers and resell branded mobile services. While Disney has not been

361 •• Market-Led Strategic Change

Customers

1. Customer orders from catalogue: phone, fax, mail, e-mail 4. Federal Express delivers flowers

Federal Calyx & Corolla Express

3. Federal Express collects flowers 2. C&C notifies order to Federal Express and the chosen flower grower Figure 9.6 The Flower by computer Calyx & Corolla growers hollow networked organization

able to make this model work and has withdrawn from the market, Virgin Mobile US operates a proﬁ table and expanding MVNO targeting the youth market, collaborating with established carrier Sprint.12 In the UK Tesco has developed a no-frills, pay-as-you-go mobile phone business aimed at the less well-off with 1.4 million customers, by 13 utilizing spare capacity on O 2 ’s network.

Reality Check: Googliﬁ cation

Alliances and partnerships are becoming characteristic of strategy in the IT sector. The end of 2007 saw Google announcing two ambitious strategic initiatives in the span of a week. Both were concerned with building platforms for collaboration. OpenSocial – aims to reduce Facebook’s social networking dominance by building an alliance of more than 50 peers and competitors of Facebook. The Google initiative provides common standards for social networks, so developers can write one application which will run on all networks complying with OpenSocial standards. MySpace, Yahoo! and others have joined – and pressure is on Facebook to do likewise. Open Handset Alliance – this initiative to redefine the mobile phone business offers software and programming tools for others to use in building a new class of smartphone handsets and information services. The goal is ‘net neutrality ’ so network service providers should not be allowed to deny people access to certain websites or prioritize certain content. Conventional telecom

•• 362 Strategic relationships and networks: building the infrastructure to deliver the strategy

carriers believe they have the right to do exactly this – Google and its partners disagree with them. Google and collaborators are working to make the mobile phone business work more like the Internet.

Sources: Spencer E. Ante, ‘Tim Wu, Freedom Fighter’, BusinessWeek , November 19 2007, pp. 88–90. Brent Schlender, ‘Is Google Spinning Out of Control’, Fortune, December 10 2007, p. 23. Chris Nuttall, ‘Yahoo Backs Google’s Standards Drive ’, Financial Times , March 26 2008, p. 25.

We saw earlier that in the advertising world many conventional advertising agencies lack the skills to deal with digital communications, social networks and buzz marketing. Major agencies are struggling to adopt a ‘brand navigator’ role. The brand navigator devises an overall message, then farms the work out to relevant people – interactive agencies, direct marketers, creative hotshops, media specialists and so on. Agencies repositioning as brand navigators at the centre of a network of suppliers of specialized expertise include Saatchi & Saatchi, TBWA, BBDO and Ogilvy & Mather. The collaborative network offers a new way of doing business that matches radical change in the communication industry. 14 Progress in this direction of hollow entities delivering value through loose-knit collaborations is driven by the efforts of ﬁ rms like Procter & Gamble and Johnson & Johnson to create new types of advertising ‘holding companies’ to blend different functions from multiple sources.15

Reality Check: The mania for brand alliances

Co-branding is when two previously unrelated companies combine their brands to create a new product or service. Partnering in brand alliances provides a route to collaborative innovation: Rezidor – owner of Radisson Hotels, has partnered with Missoni, an Italian fashion house, to create a new international chain of ‘ lifestyle ’ hotels under the name Hotel Missoni. Philips – the Dutch electronics company, co-brands its Senseo coffee machine with the Douwe Egbert coffee company. Siemens and Porsche Design have collaborated on a range of kettles, toaster and coffee machines. John Deere – the tractor company, has a deal with St Lawrence Homes in the USA to create the prestigious John Deere Signature Community, each home with a John Deere-designed landscape, but importantly also a John Deere riding lawn tractor to get around the grounds.

363 •• Market-Led Strategic Change

Collaborations that crash However, the search for competitive advantage by developing networks based on strategic alliances and partnerships has also seen some major failures: indeed, despairing of companies’ claims that every alliance and acquisition they make represents ‘ synergy ’ , * one commentator has coined the term ‘ygrenys ’ to describe what they actually get. 16 This word is not actually Welsh – it comes from reversing the word ‘ synergy ’ . It describes situations where combining businesses reduces their value instead of increasing it. Developing networks of collaborating and allied organizations can provide powerful competitive leverage. However, collaboration creates dependence, and we need to think very hard about that vulnerability – how good are we at managing in partnerships, and where will we be left if the partnership fails? More generally, the potential attraction of collaboration and alliance in implementing our market strategy needs to be evaluated carefully against how well partners will carry the value proposition forward, how vulnerable we will be if the collaboration or alliance does not work out, and our capabilities in managing partnerships with other companies.

Reality Check: The Airbus experience of the joys of collaboration

The Airbus A380 is the world’s largest airliner. March 2008 saw the first commercial flight when Singapore Airlines first A380 landed at Heathrow. The A380 gives airlines a new choice – previously if they wanted a plane to carry more than 350 passengers it had to be the Boeing 747 (the ‘jumbo jet’). Nonetheless, the A380 was running two years late and billions of euros over budget. The delays led Federal Express to bail out and order planes from Boeing instead – penalty payments owed to FedEx may reach $100 million. The 10-year project to develop the A380 was both expensive and complex. The A380 will break even when 370 are sold, but by mid-2008, Airbus had sold only 192. Until 2001, Airbus was a loose amalgamation of national aerospace companies, making finance and control of the project difficult. The stakes were so high that in spite of deep animosity and rivalry, Airbus and Boeing decided to collaborate on the project. The collaboration began and soon ended in acrimony, when the two sides could not even agree on what the plane would look like. Airbus became a single company under the ownership of EADS, the Franco-German aerospace and defence company, and continued

*The so-called ‘2 2 5 Effect’, where the new entity is worth more than the sum of its parts.

•• 364 Strategic relationships and networks: building the infrastructure to deliver the strategy

the A380 project alone. The project involved expenditure of $12 billion, a third to be recouped from aid by four European governments. Boeing’s screams of ‘illegal subsidy’ to the US government and the European Union are still reverberating.

Source: Getty Images

The new arrangement showed much division between the French and German owners. For example, French and German engineers used different and incompatible computer systems, leading to an expensive redesign of the plane’s wiring and extra costs of around £3.9 billion – 25 aircraft had to be completely rewired. This cross-border clash led to one of the most expensive errors in the history of commercial aviation. The company tries to project an image as a seamless, pan- European entity, but in reality is a mix of four national companies, each clinging to its own traditional operating procedures and har- bouring cross-border jealousies. The Airbus operation spans four countries: France, Germany, Spain and Britain – each comes with a government attached and constant political meddling. Political pressures constrain production choices and complex arrangements were made to bring components made in the other countries to the Toulouse factory for assembly – wings are made in Wales and tails in Spain. Work was parcelled out to countries on the basis of national rather than commercial interests. The company needs to rationalize and restructure, but anticipates bitter conflicts as the individual Airbus countries seek to protect their turf.

Sources: Dominic O’Connell, ‘Airbus’s Big Jumbo Killer Gets to Work’, Sunday Times, March 23 2008, p. 3-9. Nelson D. Schwartz, ‘Big Plane, Big Problems ’, Fortune, March 5 2007, pp. 53–55. Peggy Hollinger and Gerrit Wiesmann, ‘House of Conflict: How Rivalries Have Disrupted the Steep Climb of Airbus’, Financial Times, November 14 2006, p. 17. Carol Matlack, ‘ Wayward Airbus ’, BusinessWeek , October 23 2006, pp. 46–48.

365 •• Market-Led Strategic Change

Managing partnerships and collaborations The signs to look for to judge if a partnership is going to work include the following:

● Corporate compatibility – for a partnership to work the cultures and business objectives must mesh. The IBM/Microsoft collaboration probably never stood a chance given the totally different cultures of Bill Gates’ irreverent and entrepreneurial software company, and IBM’s bureaucracy. The alliance died because the partners were both going after the same market – IBM with OS/2 that Microsoft had produced for it, and Microsoft with Windows that it had produced for itself. Microsoft won. ● Management style and techniques – similarities in operating styles help. McDonald’s and Coca-Cola share a similar management approach and have an effective and highly integrated partnership. ● Mutuality – the partnership is stronger if both sides get beneﬁ ts not otherwise obtained, and if there is trust and commitment on both sides. ● Symmetry – partnerships between ‘ equals ’ stand the best chance. 17

In fact, some recent research suggests that many of our original ideas about how to manage collaborations are ineffective and we have to think about organizations that form alliances ‘ co-evolving ’ through shifting webs of relationships – importantly, the issue is learning new ways of managing, not simply plugging in the old ways.18 We probably also have to get used to the idea that most of the things we measure to plan and control need to be different in an alliance as compared to a single organization. 19 However, if any kind of partnership-based strategy is to be pursued, then it is also necessary to consider the costs and time involved in managing these issues: establishing the partnership – identifying, negotiating with and striking a deal with another organization; monitoring the partnership – carefully evaluating the effectiveness and strength of the relationship; strengthening the partnership – where necessary investing time and effort in the joint activities needed to improve the effectiveness of the partnership; and, getting out of the partnership – given the high failure rates of alliances and partnerships, much more attention is being given to agreeing the way out when the relationship has reached the end of its useful life. * Part of our thinking needs to be given to identifying the collaborations and other relationships that underpin going to market with our value proposition. Perhaps the most critical issues are vulnerability and capability – how fragile is our strategy to a failure in key collaborations, and do we have the capability to manage collaborations where

*As they say, corporate alliances are like a form of marriage. We all believe in marriage, which is why so many of us have several of them . . .

•• 366 Strategic relationships and networks: building the infrastructure to deliver the strategy they underpin the market strategy? Negative conclusions here may also drive us back to questioning our market choices and the robustness of the value proposition in the real marketplace. We also need to think about the degree to which collaboration may actually undermine our value proposition. For example, many air travellers are beginning to question the honesty of an airline that takes your booking (e.g., BA) and then puts you on another airline’s plane (e.g., American Air) – presumably if we had wanted to ﬂ y American Air (highly unlikely), then we would have booked American Air?

Co-worker Relationships We have emphasized already the importance of our people in delivering service and value to put our strategy into effect (Chapter 2), and the importance of pan-company marketing that integrates all the factors that impact on the customer into a single value proposition. We will not repeat these arguments here. The task at this stage is to look at our value proposition and to question whether our people can and will deliver the promise to the customer. The risk is that we make promises to our customers that will not be kept if the company’s internal values do not match. 20 Several points are worth adding. First , do not assume that because we have developed a great new market strategy everyone else in the company is going to agree. Why would they – it’s not their strategy, it’s yours. Second , we need to be realistic about our capabilities. The question is: can we deliver this strategy to the customer, with these people, these skills, these tradi- tions, this culture, these processes, these structures and boundaries? The question is not (usually) if we started again from scratch could we deliver the strategy? As Cisco’s Chief Globalization Ofﬁ cer responded when asked why all the innovation in networks was coming out of Asia: ‘ The reason God was able to create the world in seven days is because there was no installed base.’ 21 Most of us have to live with legacy rather than start from scratch. Frank Cespedes describes the sort of problems faced inside organizations in making strategy happen:

● When IBM planned to release its System 9370 mainframe, the launch was marked by a squabble between product managers and sales managers – the product managers wanted the computer released quickly, but the sales managers wanted to meet quotas of existing products before the launch (when customers would stop buying until the new product was out). The product managers won. The launch was then plagued by lack of cooperation from sales management, and poor product sales. ● At a telecoms ﬁ rm, a programme of enhanced maintenance and repair services effectively and unwittingly killed the sales of a system upgrade that sales were launching with a major customer.

367 •• Market-Led Strategic Change

● At a packaged goods ﬁ rm, brand and sales units use different measures of retail distribution. Relationships between the units are plagued by misunderstanding and mistrust because they are using different information systems. 22

Frank’s point is that if we want a seamless process of going to market, then we have to work for it. He has developed the idea of ‘ concurrent marketing ’ – the goal is better coordination of product, sales and service management, but not by vague demands for better ‘ teamwork ’ , but by carefully developing mechanisms for cross-functional cooperation with clear lines of primary and joint authority, and with new personnel policies that reﬂ ect the new priorities in training and career paths. Third , it is easy to underestimate people’s capabilities – what they can really do if they are given the chance.

Reality Check: Motivation

Due to the present economic situation, the light at the end of the tunnel has been turned off until further notice. The floggings and hangings will continue until morale improves.

However, in most organizations relatively few of our employees and managers are skilled in mind-reading. If we do not discuss, explain, listen, problem-solve and bargain – why would we expect the people in the organization to drive the value proposition for us? Yet, as we saw in Chapter 2, poor customer service is still the main reason why people switch suppliers – it is even more important than price.23 The face of the business seen by the customers is about your people, not your fancy systems and software. More of this when we look at internal marketing (see pp. 495–510). However we do it, we need to evaluate our emerging market strategy against the co-worker relationship issue. Our conclusions may even challenge the market choices we have made, and undermine our belief in the value proposition – then we need to do more thinking.

Reality Check: Just getting the geeks to stay would be a start . . .

How to make a ‘ Microserf’ smile? Appoint a Chief Happiness Officer. In 2007 staff morale at Microsoft was low – share value was static, Google-envy was rampant, and the delays to Vista were depressing everyone. Retaining key staff was a challenge – they all wanted to work for Google. The CEO appointed a new type of HR person focused on: re-recruiting the people the company did not want to lose; providing a more flexible workplace; and added perks – she

•• 368 Strategic relationships and networks: building the infrastructure to deliver the strategy

won undying love by introducing 458 new Starbucks I-cup machines and providing a restaurant-based meal delivery system. Microsoft now has its own wine – Blue Monster, the label showing a sharp- toothed blue creature and the tagline ‘Microsoft – change the world or go home ’. Blue Monster reminds people that Microsoft still has a sense of humour. After her first two years a memo pops up on Microsoft message boards listing all the ways that Microsoft is superior to Google, enti- tled ‘Just Say No to Google ’. It is authored by a Microsoft engineer who left and came back.

Sources: Michelle Conlin and Jay Greene, ‘How to Make a Microserf Smile ’, BusinessWeek, September 10 2007, pp. 57–59. Stacy-Marie Ishmael, ‘Microsoft Drinks to the Blue Monster ’, Financial Times , September 17 2007, p. 14.

The Network of Key Relationships We have looked at relationship marketing and alliances and partnerships as components of our market strategy. But in particular this chapter has asked us to test our market choices and our value proposition very hard against a number of key relationships:

● the relationship with the customer , and with different market segments, in terms of the promises tied up in our value proposition and brands, and whether we can keep those promises; ● the relationship with competitors and contingents of different kinds, and in particular whether the competitive differentiation and strategic position we have built will stand up against the level and type of competition we will face, and the impact of external actions by others; ● the relationship with collaborators of various kinds, and the degree to which outsourcing and partnerships and alliances we may have assumed in developing our market strategy, are actually going to work, and ● the relationship with co-workers – the people we rely on inside the company to implement and drive the value proposition.

At each stage we have identiﬁ ed new opportunities – to use relationship marketing, to segment the market by relationship type, to position against competitors, to examine new networking possibilities, and so on. But we have also stressed that our conclusions about these relationships and their impact on the market strategy may well drive us back to re-thinking market choices and re-working the value proposition. A last point is that, in reality, these areas of relationship management are not really separate, but part of a hidden network of relationships, which go a long way towards deﬁ ning our real implementation

369 •• Market-Led Strategic Change

capabilities and the real implementation barriers our strategy faces. Part of our thinking should be about the network, not just the individual relationships. For example, Figure 9.7 summarizes the network of relationships that undermined Robert Ayling’s strategy at British Airways in the late 1990s. Ayling’s strategy of globalization, alliances, cost-cutting and premium branding (focused on business class and ﬁ rst-class passengers) was in ruins by the end of the 1990s. The ability of BA to manage the key relationships needed to support that strategy had failed to materialize: employees were alienated, and there had already been industrial action with the prospect of more; customers were switching brands both to higher service providers and low-cost airlines; the company had antagonized a range of competitors into hostile actions; alliances and distribution channels were a shambles. Over and above these individual problems, failure in each area of the relationship matrix fuels problems in the others – alienated employees do not deliver good service to customers; collaborators and competitors stimulate the regulator’s interest; hostile competitors impact on employee perceptions of the company; and so it goes on. In many ways what is most worrying is how problems in one area feed off problems in another area of the relationship network, and the situation deteriorates fast. Certainly, BA under Ayling is an excellent example of a company developing a strategy that was wholly dependent on the company’s ability to manage a complex network of relationships, ignoring the fact that the company did not have the skills and capabilities required to do this.

Customers Customer satisfaction levels falling; premium passengers switching brands; higher service image weakened

Competitors and contingents Virgin antagonism continues; Collaborators low-cost operators attacking BA USAir alliance crashed; through courts; European Strategy American Air alliance stalled; regulator investigates; travel agents are hostile no help from government

Co-workers Climate surveys go down; new branding is resisted; industrial action takes place and more is threatened

Figure 9.7 British Airways relationship network

•• 370 Strategic relationships and networks: building the infrastructure to deliver the strategy

Another relationship network that demonstrates the powerful links between different relationship domains, and how strategy can unravel because we fail to manage relationship networks effectively, is the one surrounding the Boeing 787 – the ‘ Dreamliner ’ .

Reality Check: The Boeing Dreamliner

The Boeing 787 – the Dreamliner – was developed as the Boeing challenge to the Airbus A380 super jet. While Airbus has opted for the giant A380, potentially seating 800 passengers, Boeing chose the more efficient mid-size jet. The Dreamliner is a radical design shift – built out of lightweight carbon-reinforced plastics, it promises a 20% reduction in fuel, as well as a quieter and more comfortable ride for passengers. About 50% of the primary structure of the 787 is made of plastic composites. This is Boeing’s main weapon in the battle to dominate the market for mid-sized jets – those that seat between 200 and 400 passengers. When the first 787 was displayed in Seattle in July 2007, Boeing had logged 642 orders, and was effectively sold out until 2014. However, as the 2008 delivery dates loomed, it became clear there would be substantial delays in delivering the aircraft on time, because of problems in completing the final assembly – it emerged that the first aircraft displayed in July 2007 was actually held together with temporary fasteners. The 787 is the best-selling new aircraft in Boeing’s history, but it appears they cannot manufacture it to deadline. Customer relationships: Boeing has close relationships with airline buyers, though probably no closer than Airbus’. Airline purchasing is both complex and fluid. Aircraft manufacturers have always faced tough questions about whether airlines have ordered more planes than they can afford – some buyers will renege or disappear before the planes are made, so the risk is adding excess capacity or too many planes in the market if they misjudge the dependability of customers. Airlines can place firm orders for planes or options to buy. However, if faced with delays in deliveries, airlines have no hesitation in resisting supplier ‘rationing ’ and switching purchase to another manufacturer, or demanding large penalty payments. Although Boeing had expected customers to accept ‘modest delays ’ in agreed delivery dates, in January 2008 Qantas became the first airline to announce it was seeking damages from Boeing for late- delivery of the 787. In March, Virgin Atlantic joined the list of those looking for large compensation for late-delivery. With further delays announced All Nippon Airways issued a blistering statement attacking Boeing, expected to lead to a large claim for compensation. Competitor and contingent relationships: Boeing has a deep- seated rivalry with Airbus, but underestimated Airbus’s determination to develop the massive A380 and take leadership in the commercial

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jet business. Nonetheless, delays and overspends at Airbus in getting the A380 to market gave Boeing breathing space. The smaller Airbus A350 offers direct competition to the Dreamliner as well. As the leading US aircraft manufacturer, Boeing has received support from the public authorities – tax breaks from Washington State, bond repayments ‘ forgiven’ in Kansas, as well as benefiting from Japanese and Italian government aid to local contractors. Part of an on-going dispute with Airbus, in 2005, Boeing started formal litigation at the World Trade Organization over government subsidies for Airbus. Part of the strategy is to signal to the markets that Airbus may lose its government loans, and struggle with aircraft development and production as a result. Collaborator relationships: A key element of the Dreamliner strategy is the widespread outsourcing of manufacture. Boeing itself is responsible for about 10% of manufacturing (by value) – the tail fin and final assembly. The rest is done by 40 partners, with the wings built in Japan, the carbon composite fuselage in Italy and the USA, and the landing gear in France. Boeing is positioned as the ‘systems integrator ’ rather than manufacturer – 70% of the components in the Dreamliner are sourced from outside the USA. The Dreamliner has 367,000 parts, sourced from a global network of 900 suppliers. By commandeering the makers of composite fuselages, Boeing has shut Airbus out from this technology for the time being. The Dreamliner is the first plane in Boeing’s history to be designed largely by other companies. In the event, managing a supply chain this complex stretched Boeing’s capabilities, and there have been major problems with missing and poorly fitted components and delays. By March 2008, Boeing was struggling with redesign of the attachment of the wings to the plane, promising further delays. The selling point of novelty and economy achieved through outsourcing has turned out to be the biggest source of problems for Boeing. Co-worker relationships: When W James McNerney became CEO in 2005, he inherited an organization with problems. Widely publicised corporate misbehaviour was highlighted by the jailing of Boeing’s former chief financial officer for holding illegal job negotiations with a senior Pentagon official, the indictment of a manager for allegedly stealing some 25,000 pages of documents from his former employer, Lockheed Martin Corp; and the judicial finding that Boeing had abused attorney-client privilege to help cover up internal studies showing that female employees were paid less than men. Multiple forms of misconduct in scattered geographical locations suggested the company was plagued by a ‘ poisonous’ ,‘win-at-all-costs ’ culture. Moreover, the company had never fully integrated the business after the merger of Boeing with McDonnell Douglas Corp in 1997, leaving bitter rivalries between management groups. Internal controls were weak – for example the links between sales and operations had a long history of orders being won for planes the company could not

•• 372 Strategic relationships and networks: building the infrastructure to deliver the strategy

make. Management was not well set-up to deal with radical new operations and supply chain challenges. The Dreamliner project has been delayed through unsolved technical problems and manufacturing hold-ups. Trades unions are unhappy with the loss of jobs at Boeing resulting from outsourced manufacture. In October 2007, the head of the Dreamliner project was removed. The aircraft business is tough and involves high technology, international competition and is severely affected by economic and currency conditions. Nonetheless, the Dreamliner issues that are most problematic rely on relationship management capabilities more than technology and selling.

Sources: Stanley Holme, ‘Boeing: What Really Happened ’, BusinessWeek , December 15 2003, pp. 35–39. Stanley Holmes, ‘Cleaning Up Boeing ’, BusinessWeek, March 13 2006, pp. 63–68. John Gapper, ‘A Cleverer Way to Build A Boeing’, Financial Times, July 9 2007, p. 11. Keith Epstein and Judith Crown, ‘Globalization Bites Boeing ’, BusinessWeek, March 24 2008, p. 32.

While relationships and the networks they form are intangible and easy to ignore, it is beginning to look like the capability to manage complex networks is a core resource in companies. Unfortunately, it also starts to look like it is a scarce resource. One important test of the robustness of a market strategy is to identify the relationships upon which it relies and then to question hard the ability of the company to manage those relationships effectively and successfully.

What Comes Next? The relationship network analysis completes our review of the strategic pathway. It completes our model of the tests to determine if we have a robust and innovative strategy for a market. In Chapter 10 we will look at a checklist of the questions to ask in conducting an audit of the strategic pathway. This chapter also looks at strategic gap analysis as a way of trying to pin down the difference between what we want (our strategic intention and plans) and what we have got (the strategic reality). The most interesting part of auditing the strategic pathway is that it gives a good indication of whether we actually have a strategy for the market in question, and whether it is any good. The most interesting part of a strategic gap analysis is that it uncovers the barriers to making the strategy real. In practice, a lot of those barriers reﬂ ect the way we organize a business and how we manage the implementation of strategy rather than external factors like competition and technology. Our Chapter 10 analyses lead us towards examining the management of structure and process in Chapter 11 (how we run the business) and implementation and internal marketing strategy in Chapter 12 (how we get things to happen).

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References and End-notes

1. Mittal , Vikas , Matthew Sarkees and Feisal Murshed , ‘ The Right Way to Manage Unproﬁ table Customers ’ , Harvard Business Review , April 2008 , pp. 94 – 102 . 2. Hamm , Steve , ‘ What’s a Rival to Do? ’ , BusinessWeek , November 18 2002 , pp. 93 – 94 . 3. Stalk , George and Rob Lachenauer , ‘ Hardball: Five Killer Strategies for Trouncing the Competition ’ , Harvard Business Review , April 2004 , pp. 62 – 71 . 4. Massey , Ray , ‘ The £270m Revenge ’ , Daily Mail , August 2 2007 , p. 6 . 5. Cameron , Doug , ‘ American Airlines Urged to Sell Off More Assets ’ , Financial Times , September 28 2007 , p. 28 . 6. Charles Forelle and Jeanne Whalen , ‘ EU opens Up Antitrust Probe with Raid on Drug Makers ’ , Wall Street Journal , January 17 2008 , p. 1 . 7. Charles Forelle , ‘ EU penalizes Microsoft a Record $1.35 Billion ’ , Wall Street Journal , February 28 2008 , p. 4 . 8. Donkin , Richard , ‘ The Small Step from Outsourcing to Out of Control ’ , Financial Times , September 8 2005 , p. 17 . Dominic O’Connell , ‘ Dog’s Dinner ’ , Sunday Times , August 21 2005 , p. 3 - 5 . 9. Hagel , John and John Seely Brown , The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization , Boston, MA : Harvard Business School Press , 2005 . 10. Lambert , Douglas M. , Margaret A. Emmelhainnz and John T. Garder , ‘ So You Think You Want a Partner? ’ , Market Management , Summer 1996 , pp. 25 – 41 . 11. Cravens , David W. , Nigel F. Piercy and Shannon H. Shipp , ‘ Network Organizational Forms for Competing in Highly Dynamic Environments: The Network Paradigm ’ , British Journal of Management , 7 ( 3 ) , 1996 , pp. 203 – 218 . 12. Taylor , Paul , ‘ Mobile Phone Resellers Forced to Take Stock ’ , Financial Times , October 3 2007 , p. 25 . 13. Parker , Andrew , ‘ Tesco Mobile under Threat ’ , Financial Times , December 27 2007 , p . 1 3 . 14. Helm , Burt , ‘ Struggles of a Mad Man ’ , BusinessWeek , December 3 2007 , pp. 44 – 50 . 15. Vranica , Suzanne , ‘ Transformed by the Internet ’ , Wall Street Journal , January 2 2008 , p. 28 . 16. Northedge , Richard , ‘ Ygrenys: When 2 2 No Longer Equals 4 ’ , Financial Times , February 22 2000 . 17. Lambert et al. , ‘ So You Think You Want a Partner? ’ . 18. Eisenhardt , Kathleen M and D. Charles Galunic , ‘ Coevolving: At Last a Way to Make the Synergies Work ’ , Harvard Business Review , January/February 2000 , pp. 91 – 101 . 19. Cravens , Karen S. , Nigel F. Piercy and David W. Cravens , ‘ Assessing the Performance of Strategic Alliances: Matching

•• 374 Strategic relationships and networks: building the infrastructure to deliver the strategy

Metrics to Strategies ’ , European Management Journal , 18 ( 5 ) , 2000 , pp. 529 – 541 . 20. Gordon , William and Hamish Pringle , Brand Manners – How to Create a Self-Conﬁ dent Organization to Live the Brand , London: Wiley , 2001 . 21. Kirkland , Rik , ‘ Cisco’s Display of Strength ’ , Fortune , November 12 2007 , pp. 28 – 35 . 22. Cespedes, Frank V., ‘ Beyond Teamwork: How the Wise Can Synchonize ’ , Marketing Management , 5(1), pp. 25–37. 23. ‘ Bad Customer Service Is Top Reason Consumers Switch Carriers ’ , www.mobilemedia.com/news/33661.html .

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P A R T •••• II End-of-part cases

As before, I suggest that the material covered in the preceding part of the book should be reviewed in the context of some stories from real, live markets. Also, as before, I think the best questions to be asking are the simplest: (1) what is going on here; (2) what is likely to happen next; and (3) what lessons can we acquire from these events that we can take away and apply elsewhere?

Case 4: Big Blue Gets Transparent Through much of the 20th century, under the leadership of founder Thomas J. Watson and his son, Thomas Jnr., International Business Machines (IBM) ruled computing and defi ned the US multinational. From the days of tabulating machines all the way to the Space Age (when IBM mainframes helped chart the path for man to the moon), IBM was a paragon of power, prestige and far-sightedness. Bold gambles characterize IBM’s history. During the Great Depression, Watson increased manufacturing capacity for tabulating machines, pushing IBM to the edge of insolvency, but with a big pay-off when the US Social Security Act of 1935 required the government to keep records – only IBM could meet the demand for data-processing machines. In the early 1960s, IBM had reached a plateau, and Watson gambled everything on the fi rst mainframe – the System/360. Costing more than $5 billion to develop, it was the biggest ever privately fi nanced commercial project of its time. It offered the revolutionary new concept of compatibility, allowing customers to use the same printers and other peripherals with any 360 machine. Market-Led Strategic Change

Around this time, IBM acquired the nickname ‘ Big Blue’ because of the colour of its muscular blue mainframe computers (mirrored in the blue suits adopted by IBM executives). The next big leap of faith was in 1981, when CEO John M. Opel unveiled the IBM Personal Computer. The PC became an overnight sensation, even though IBM was not able to sustain its early success. Indeed, by the 1990s, IBM had become a slow-moving maker of computer hardware, with a services business that was an afterthought to mainframes and PCs. At this stage, the world of information technology appeared to have left IBM behind.

Source: Getty Images

Bringing Big Blue back from the brink Lou Gerstner’s turnaround of the giant computer company has become management history. When he arrived at IBM on April Fool’s Day 1993, he found a company with 266 book-keeping systems, 128 chief information ofﬁ cers and 339 different surveys for measuring customer satisfaction. IBM lost 200,000 jobs and £10 billion between 1986, when it was at the height of its success, and 1994 when Gerstner’s leadership started to have an effect. When Gerstner arrived at IBM, the company’s market share was plummeting, cash was draining fast from the business, the organization was acutely unable to innovate – a contemporary IBM quip was that ‘ new products don’t get launched at IBM, they manage to escape’ . Senior executives, including Gerstner’s predecessor John Akers, had given up on the idea that the group could be saved and were preparing to break it up into a series of ‘Baby Blues’ . Gerstner, late of Harvard Business School, McKinseys and American Express, did not break the business up, but turned it around to once again deliver good returns to shareholders.

•• 378 End-of-part cases

His central strategy fl ew in the face of conventional wisdom: IBM would use its size to become an ‘integrator ’ – assembling systems from the mass of components provided by its own product divisions and by its competitors. At the time industry thinking was that the future belonged to specialist technology companies that could bring new products to market extremely quickly, and change strategy in an instant. Vertically integrated giants like IBM, making everything from microprocessors through to operating systems and fi nished computers and software, were thought to have no place in the new fragmented world of technology. IBM’s very poor performance from the late-1980s onwards seemed to justify this view. In fact, Gerstner’s services-led strategy aimed to turn IBM into the integrator of choice for large corporations. In the six years up to 2001, Gerstner increased IBM’s revenue by 19%, net income by 83% and earnings per share by 250%, adding 100,000 new employees to the payroll. Admittedly, a revenue growth of 4% a year is not spectacular, given this period was one of very high information technology spending growth throughout the world. Nearly all the growth (and all the new jobs) came from IBM Global Services, the consulting and outsourcing unit. Sales of hardware stagnated and software did not do much better. It is also the case that the mid-1990s were a period of drastic and painful middle management blood-letting at IBM. There are also concerns that Gerstner’s focus on making IBM a services business, blinded him to important competitive shifts, in which IBM lost out. For example, Cisco walked away with the multi-billion dollar market for networking equipment, even though much of the technology was developed in IBM laboratories. Similarly, IBM failed to counter Sun Microsystems’ spectacular late-1990s push into the Unix server market, and the company was slow to challenge Oracle in relational databases (another invention of IBM laboratories). It may also have been short-sighted to allow new upstarts, like BEA in middleware and EMC in storage, the freedom to become market leaders in these fi elds.

Moving on from the trauma of turnaround In 2002 Samuel J. Palmisano succeeded Lou Gerstner in the top job at IBM. Following Gerstner’s dramatic strategic shift at the company, commentators saw Palmisano as no more than a caretaker of Gerstner’s strategy. In fact, Palmisano provided far more in changing IBM structure, management and strategic direction. Early signs that Palmisano planned to manage the company differently to Gerstner came at the ﬁ rst IBM board meeting of 2003, when he asked the board to cut his 2003 bonus and set it aside as a pool of money to be shared by about 20 top executives, based on their performance as a team. Palmisano also put an end to the 92 year old IBM Executive Management Committee – the 12-person inner sanctum that had presided over IBM’s strategy and initiatives. Instead, Palmisano favoured working with three new teams of people, covering operations,

379 •• Market-Led Strategic Change

strategy and technology, drawn from throughout the company, to bring the best ideas to the table, and to move more quickly than the old IBM bureaucracy permitted. Palmisano is building a fl atter organization with fewer bureaucratic levels, and allocating $100 million to teach 30,000 managers to lead, not control their staff. His goal was to build a new strategy to put IBM back at the forefront of technology. Called ‘ e-business on demand ’ the initiative aimed to allow IBM to supply computing power as if it were water or electricity. The strategy was to be a unifying force for IBM, bring closer together the almost autonomous ‘ fi efdoms ’ in software, chips and computers. Palmisano planned to have IBM get back to the position where it set the industry agenda, using its R& D to leap ahead with grid computing and self-healing software. In its fi rst year, ‘ e-business on demand ’ took a third of IBM’s $5 billion R & D budget. The ‘ e-business on demand ’ strategy had the potential to cut technology user costs by 50%, though achieving this was dependent on a decade of rolling out new technologies and new ways of doing business: companies would have to simplify into a unifi ed network, based on a small number of servers, using open standards so all machines can speak to each other; to achieve effi ciency in server and software usage, virtualization (a process in which many machines appear to be one) gets more work out of equipment by farming work out across them; all networks and data centres would have to be linked to create a giant computing grid allowing access to more information and computing power; if a company ran out of capacity, it would buy computing power from a supplier, as needed, instead of building a new data centre; and new Web-based services will speed up tasks yet more. Nonetheless, while this was a brave initiative, few technology companies have succeeded in falling as far as IBM did, and then getting back to the top. Certainly, many of the heavyweights in technology – from Hewlett–Packard to Microsoft – are pushing research into next- generation computing systems that will rival IBM’s. IBM’s general manager for ‘ e-business on demand ’ notes: ‘ in 1996, we had the benefi t of being considered irrelevant. [Microsoft’s William H.] Gates and [Steven A.] Balmer felt pity on us. Now they are all watching us. If we don’t move fast, they will pass us. ’ The new initiative provided Palmisano with the tool to remake IBM. Gerstner’s reforms started the process, by shifting IBM towards software and services, but Palmisano’s ‘ e-business on demand ’ went much further. He was counting on the initiative to create the best IBM sales growth since the 1990s. New offerings already include servers running the free Linux operating system and grid software that pools the power of scores of networked computers into a virtual supercomputer.

Managing the next transformation Far from simply under-studying Lou Gerstner, Palmisano has the goal of freeing IBM from the conﬁ nes of the $1.2 trillion computer industry, which is growing at just 6 per cent a year. Much of the traditional

•• 380 End-of-part cases world of computing has become a commodity business. Instead of just selling and servicing technology, IBM is using its resources to help companies rethink and remake how they run their businesses. Palmisano is looking for an annual revenue stream of $50 billion in business consulting and outsourcing services. By packaging low-cost technology augmented with sophisticated software, IBM sells customers business transformation services. IBM aims to ride on top of the commodity wave, rather than drowning in it. By 2005, the change at IBM was remarkable. The number of employees focused on business services rather than pure technology had gone from 3500 in 2002 to more than 50,000, out of a total of 330,000 IBM people. After selling the loss-making PC division to China’s Lenovo Group, Palmisano has been buying business services companies, including Daksh, a 6000-employee Indian customer-relations company. The risks are considerable. Mistakes in implementation will give slower growth and lower profi ts, undermining IBM’s research-driven business model and its position in the corporate technology world. Falling short in delivery could put IBM back to where it was in the 1990s. The initial challenge was to make the grand vision – now known as business process transformation services – into a ‘ must have ’ for cor- porates, without offering overly favourable terms – technology companies have a long history of underestimating the actual costs of running customers ’ computing operations. IBM faces strong competition in a new area. One potent rival is Accenture – the services company that has interests in business process outsourcing. While Accenture cannot rival IBM’s technology skills, it is stronger in business expertise. Challenging both IBM and Accenture are aggressive Indian outsourc- ers like Wipro and Tata Consultancy Services. Palmisano’s vision also involves reinventing the services industry by injecting disciplines of product development and delivery, more usually found in product markets, and doing this on a global scale. Turning services – by defi nition delivered by people – into repeatable processes is a massive organizational and cultural shift for the business. The move blurs the line between the services and software business models – for example, merging services into software to allow services developed for one project to be applied to others subsequently. By 2005, in spite of early IBM successes in the outsourcing area, the success of Palmisano’s services strategy was far from assured. Sales growth was slow. The era of multibillion dollar outsourcing contracts had come to an end. Critics saw underlying weaknesses exposed in IBM’s services strategy: that it did not deliver on the original promise of services; that its method of delivering services did not bring consistent benefi ts for customers around the world, many of whom actually face very similar problems; and, the lack of a standardized approach had led IBM to miss out on some of the hottest markets, such as security. With services performance continuing to disappoint, in 2006 IBM began shifting executives from its traditional computing business into senior positions in the services arm in an effort to inject new momentum into the fl agging division. Meantime, IBM’s traditional information

381 •• Market-Led Strategic Change

technology businesses remained under substantial pressure from low-cost competitors.

Learning to compete in new ways In 2004 almost half IBM’s $96 billion revenues came from tech services like outsourcing (after the sale of the PC business to Lenovo). However, increasingly major customers, like Louis Vuitton and Target in retail, were turning to Indian companies like Wipro in Bangalore for tech services solutions. In fact, the services business is less proﬁ table than other IBM activities: operating margins in services in 2004 were 25%, compared to 31% for hardware and 87% for software. However, only services offer the growth on the massive scale that IBM wants.

The commoditization threat • • • A major challenge posed by low-cost generic competition like Wipro is commoditization. IBM experienced the effects of commoditization in hardware (the much copied IBM PC, for example), but now is looking at commoditization in services as well. New Indian competitors, for example, operate low-cost, low-wages business models. IBM, on the other hand, had 260,000 employees in the USA and other developed countries (the other 60,000 were in lower-cost regions), and 164,000 pensioned reti- rees. Palmisano’s strategic response has two main components.

Strategic geographies • • • First, to deal with the India-threat, he aimed to challenge newcomers like Wipro by taking the low-cost model right back at them. Following disappointing sales in services in 2004, the company eliminated 14,500 jobs, mainly in Europe, hiring 14,000 people in India in 2005, adding to IBM’s increasing staff rosters in emerging markets – ‘ strategic low- cost geographies ’ in IBM terminology. Of the services group programmers writing customer code, about half (26,000 or so) were already located in India, Brazil or China. By now India accounted for the largest number of IBMers outside the USA. With India-based employment exceeding 50,000, more than a quarter of all services personnel and one-sixth of all IBM employment would be in India – making it larger in India than Wipro, Infosys or Tata Consultancy Services. The head of the IBM services operation positions growth in the developing world as part of implementing a ‘ global delivery model ’ for services, together with a much tighter ‘services supply chain’ . Palmisano is committed to growing IBM revenues 5% a year and earnings per share least 10% – for a company IBM’s size, this means adding the equivalent of a Wipro every ﬁ ve months. In 2006 Palmisano unveiled an additional $6 billion investment in India. By late 2007 IBM was recognized as the leader of the Indian tech services industry, with 10% of the industry workforce, and Bangalore and New Delhi were home to IBM’s largest research and development

•• 382 End-of-part cases laboratories outside the USA. The IBM Indian workforce of 53,000 con- stituted 15% of the worldwide total IBM employment. Expansion has been rapid – in the ﬁ rst half of 2007 alone IBM signed up $1.4 billion of long-term contracts in India. In addition, integrating India into global operations has allowed IBM to eliminate 20,000 jobs in high-cost markets such as the USA, Europe and Japan.

Strategic collaboration initiatives • • • Second, Palmisano is gambling on a strategy of giving away intellectual property in software, patents and ideas. His thinking is that spreading these riches around means the entire industry will grow faster, opening new opportunities for IBM to sell high-value products and services that meet this new demand. By adopting a strategy of ‘ openness ’ , IBM aims to tap into a major new ‘ spur to innovation itself’ . The company spends $5.7 billion a year on R& D, but by sharing discoveries wants to make the industry grow faster. A big part of this sharing plan is collaborating with customers and even rivals to invent new technologies. In hardware, IBM has co-developed with Sony and Toshiba a break-through chip called the Cell, which could eventually transform all IBM computers. In software, embracing Linux and other open-source software has given IBM new platforms on which it is building most of its new high-growth applications. Giveaways to open-source software groups, customer groups, universities and other IT companies have been extensive and diverse:

● IBM contributed management software to the Apache Geronimo project – a collaboration of programmers aiming to create an open- source version of the software most businesses use to run their most demanding applications. ● The company has organized a ‘ patent commons ’ – giving away over 500 software patents in 2005, with value at least $10 million, to be used free by anyone working on an open-source project. ● A retail industry group has been given rights to patents for Internet access in stores, to make it easier to collate information about customers as they are served. ● Top university engineering and business schools are receiving money and expertise to create a new academic discipline called Services Sciences, Management and Engineering. By 2005 this programme had cost IBM $10 million. ● IBM research labs has 600 programmers spending all their time improving Linux – but they cost less than the $500 million a year it would take IBM to develop and maintain its own operating system. Funds saved are channelled into proprietary software that works on Linux.

Estimates suggest the IBM giveaways to be worth at least $150 million a year. The secret is that IBM seldom gives away a technology unless is has intellectual property and expertise that will enable it to make money

383 •• Market-Led Strategic Change

if the technology is widely adopted. The support for open-source software is a challenge to Microsoft’s proprietary applications software. For example, in China IBM is working to convince policy-makers and business leaders that using open-source software makes more sense than buying Microsoft’s. Nonetheless, IBM is in a highly competitive marketplace with a growing list of rivals. Dell has started to look at the tech services marketplace, where low-end work like computer maintenance could provide major growth. Although it is only one-third of IBM’s size, Accenture is seen by many customers as a better problem solver than IBM.

The new IBM organization The strategic evolution of the IBM business model has been reﬂ ected in the way the business is managed and what the organization has become. For example, IBM has changed from a company once dominated by lifetime employees selling computer products to a ‘ conglomeration of transient suppliers ’ . IBM has worked to get rid of the command and control structure of the past, and to build a culture of connection and collaboration – within the company as well as outside. For example, resolving a technical problem in the wake of Hurricane Katrina meant using the company’s Blue Pages Plus expertise locator on the corporate intranet, locating the right people, establishing a web page that can be edited by anyone with access to act as a virtual meeting room, and a team of IBM staff in the USA, Germany and the UK designing a solution to the problem.

Global integration • • • IBM is also revamping its ‘people supply chain’ . In the 20th century IBM was the pioneer of the multinational business model – creating ‘ mini-IBMs’ in each country with their own administration, manufacturing and services operations. But this approach is too top-heavy at a time when lean Indian tech companies and Chinese manufacturers produce high-quality goods and services at a fraction of the costs of multinationals. IBM now pioneers what it calls ‘globally integrated operations’ , with the goal of lowering its costs but also providing superior service. This model groups people around the world into competency centres (collections of people with speciﬁ c skills), with the aim of having low costs in some places but in others having highly skilled employees close to customers. Rather than each country’s business unit having its own workforce entirely, many people are drawn from competency centres. The thinking is that in areas like tech services low-cost labour is essential (to equal Indian and Chinese competitors ’ costs), but not sufﬁ cient (to supply high levels of specialized skills). IBM’s radical makeover in its 200,000 person services workforce includes: not being a multinational but a globally integrated enterprise – IBM no longer runs a mini-IBM in each country and region, and has reduced administrative

•• 384 End-of-part cases

employee numbers and reassigned technical specialists; moving beyond outsourcing – performing work for clients where it can be done most competitively; assembling A-Teams – when IBM wins a new client, it picks a team to suit that client’s needs, selecting people from around the world with the right skills and costs; and avoiding commodity businesses – IBM cannot operate as inexpensively as Indian challeng- ers, so focuses on taking human labour out of tech services.

The software bounce Notwithstanding Palmisano’s emphasis on making IBM the leading tech services business in the world, by late 2006 it was apparent that software had become IBM’s fastest-growing business. The $16.8 billion software division – second only to Microsoft in the world software business – was emerging as the most reliable growth engine. While the overall company grew by 1% in 2006, software grew by 5%. In part fuelled by a rapid sequence of software acquisitions – more than 30 software companies purchased in four years – the plan is to use the acquisitions to tap new software lines, while milking mature products for profi ts. Margins are signifi cantly higher for software compared to services. Interestingly, new software products also benefi t services – sales often include huge service contracts, and customers who buy new software typically spend fi ve times as much on services to install and maintain it. Software now looks to be the driving force behind improving IBM’s performance. Two factors explain this. At the start of the 2000s, the software division performance was held back by the slow decline of the operating systems business. However, by the mid-2000s the focus was on middleware – software that acts as a layer between operating systems and applications, making it possible to run complex IT systems. Middleware is more than half IBM software sales. Second, a rapid escalation in acquisitions of software companies has extended software opportunities for IBM. IBM’s software strategy now shows a dramatic contrast to the business models of rivals like Microsoft, Oracle and SAP. While these companies have been rushing to create vertically integrated ‘ stacks ’ of software, extending all the way up to applications used by individual workers, IBM has concentrated on creating a ‘horizontal ’ layer of middleware that lies at the centre of IT systems, where most workers never encounter it. The IBM strategy rests on a single belief – that legacy corporate IT systems, measured in trillions of dollars of value, require extensive work as companies try to integrate them better, build on them and adapt them to new business purposes. IBM has built fi ve middleware brands – Lotus, Tivoli, Websphere, Rational and the DB2 database business – each of which as a stand- alone business would rank among the world’s 25 biggest software businesses. IBM’s middleware strategy aims to position the company to take advantage of the major shift taking place in the global software market – the growth of ‘ service-oriented architecture ’, or broader and

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more fl exible software platforms on which companies can build more adaptable technology, capable of changing with their business needs. This market shift vindicates IBM’s decision in the late-1990s to move away from the applications business, instead partnering with other software companies, while it builds broader platforms. However, other broad trends in the software market are more challenging for IBM. Open-source software has been championed by IBM in its support for the Linux operating system, to challenge Microsoft. However, low-margin open-source software is moving into other parts of middleware. IBM itself offers open-source versions of some of its middleware for the low end of the technology market, like application server software. If more advanced parts of middleware are commoditized, IBM’s position could be threatened, unless it can continue to move up into higher value areas of software. A second challenge for IBM comes from the emerging trend towards ‘ software as a service ’ – the business of providing applications online as a service to companies, pioneered by Salesforce.com and taken up by Google. Customers buying these services will no longer need to buy IBM hardware systems and IT integration. This could pressure IBM to step up as a full service provider, which would mean reversing the decision to keep IBM out of the applications business, which has underpinned its profi table partnerships with other software producers. Late-2007 IBM unveiled its biggest ever acquisition, with the $5 billion cash purchase of software company Cognos – Canada’s largest software company with 4000 employees. The deal represents IBM’s response to the rapid consolidation of the business intelligence software market, which was triggered by Oracle’s purchase of Hyperion and SAP’s agreement to buy Business Objects. The move accelerated IBM’s acquisition-based drive to boost the size of its software business, which by this stage accounted for 20% of IBM revenues and 40% of gross profi ts. Business intelligence software draws data from a range of corporate systems to give managers a view across their operations. It is seen as a strategically important part of the software market. Owning Cognos should help IBM sell more of its other middleware, including its websphere and DB2 database products. In 2008, in an attempt to restore its position in the $20 billion a year data storage market, IBM bought Moshe Yanai’s XIV Corporation for $300 million. Mr Yanai was responsible for one of IBM’s most stunning defeats in the 1990s, when he designed computer storage discs for EMC, that displaced IBM’s in data centres around the world – IBM’s market share went from 80% to 35% in a fi ve-year period and has not recovered. Although XIV has only 50 engineers and a handful of customers, it has the technology that could disrupt the storage industry again. XIV’s Nextra technology is more effi cient and economical than the current generation of storage, and opens up new opportunities in data storage, such as storing and analysing feeds from security cameras. IBM hopes to be the fi rst with a new storage platform that will fuel growth for companies with very large content archives, such as Google and MySpace.

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Evolving strategy at IBM By early 2008 Palmisano’s review of progress at IBM suggested that the repositioning was going broadly to plan. In Palmisano’s ﬁ rst six years at the company, revenue has grown only slowly – in 2008 it was up just 15% from when he took over, although earnings have grown 35%. After a period of decline, IBM stock was back above the $103 level of the date when Palmisano took over. Palmisano’s major emphasis was now on emerging markets. In 2008, IBM was in the process of reorganizing to tailor its structures to the needs of developing countries, where its sales account for 21% of total revenues, but are growing at a 20% annual rate. IBM is creating new markets groups for the Americas, based in Brazil; for the Middle East, Africa and Eastern Europe; and for Asia – breaking them away from the mature US, European and Japanese markets. The separation is aimed to protect the investments from being traded off against issues in the mature markets. The company is looking at 50 target countries which are currently small markets, but which will be big in the future. Mid-2008, the growing emerging markets emphasis provided IBM with some protection against the declining economic situation in the USA, since corporate spending appeared more robust outside America.

The dilemmas for IBM IBM exemplifi es many of the strategic renewal challenges faced by companies in rapidly changing markets and the types of organizational transformation needed to implement new strategies. However, moving towards the end of the fi rst decade of the 21st century, there are major concerns about the continuing transformation of IBM. Worrying questions are being asked about whether the transition to becoming a tech services company has stalled in the face of low-cost competition, aggressive competition and market change. While the vision of a new type of globally integrated enterprise focused on new types of service product is compelling, questions surround the ability of the company to implement that vision effectively, globally and rapidly enough to meet competitive threats. Moving towards a collaborative business model, sharing R& D with customers, developers and competitors, raises the spectre of another Xerox, where new ideas are exploited more effectively by others than by the originators. The commitment to open-source software development and attempts to make open-source the industry standard, may backfi re and undermine the strength of the IBM software division, which is currently the main source of revenue growth for the company. Growth driven by acquisition, rather than organically by in-house or collaborative R & D, may undermine the coherence of the business and its knowledge generation for superior IBM service offerings.

Sources: Simon London, ‘How Big Blue Came Back from the Brink ’, Financial Times, November 12 2002, p. 12. Steve Hamm, ‘Beyond Blue’ , BusinessWeek ,

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April 18 2005, pp. 36–42. David Kirkpatrick, ‘IBM Shares Its Secrets ’, Fortune, September 5 2005, pp. 60–67. Richard Waters, ‘IBM Repackages Its Brainpower ’ , Financial Times, July 11 2006, p. 12. Richard Waters, ‘ Big Blue Looks to Be More in the Pink after Changing Tack’ , Financial Times, February 28 2008, p. 30. Richard Waters, ‘ IBM Agrees $5bn Cash Deal for Cognos’ , Financial Times, November 13 2007, p. 33. William M. Bulkeley, ‘ To Play Storage Game, IBM Calls in Old Foe’ , Wall Street Journal, January 11–13 2008, p. 26. William M. Bulkeley, ‘ IBM’s Palmisano Eyes Developing Markets’ , Wall Street Journal, February 14 2008, p. 5. William M. Bulkeley, ‘ IBM Earnings Jump 26% on Strong Overseas Sales ’ , Wall Street Journal, April 17 2008, p. 5.

Case 5: Oh, the Tangled Web They Weave at BAA BAA (the British Airports Authority) owns Heathrow, Gatwick and four other UK airports, including Glasgow and Edinburgh. The UK airports group was privatized in 1987, but became a subsidiary of an international consortium led by Spain’s Grupo Ferrovial in 2006. The consortium includes CDP, the Canadian pensions institution, and the private equity arm of the Government of Singapore Investment Corporation. BAA styles itself ‘ the world’s leading airport company’ . BAA has become one of the most vilifi ed brands and companies in the UK. The organization is closely linked to the deplorable standards of service for passengers at British airports, excessive charges for airlines using their airports, failing miserably in managing airport security emergency measures, and an obsession with manipulating passengers ‘trapped ’ in their airports to spend money at BAA’s retail operations and concessions. The company has experienced diffi culties in retaining managers, refl ecting growing tensions between BAA and its Spanish owners, and vocal critics range from the airlines to the government (the latter concerned not simply about anti-competitive practices at BAA, but also the negative impact of British airport standards on the success of the 2012 Olympics on which many British politicians’ futures rest). The attention of regulators both at the Civil Aviation Authority and the Competition Commission was focused on the company from 2007 onwards. Certainly, Heathrow is world-renowned for having the longest queues, the worst baggage restrictions, the surliest staff, the most unpleasant security shambles, the dirtiest public areas, the fewest lounges, the highest prices for food and drink and the most misdi- rected luggage of any airport in the developed world. Nonetheless, Heathrow is the busiest airport in the world and the second most profitable airport. In fact, many of the worst aspects of BAA’s performance actually refl ect the issue of airport capacity – Heathrow, for example, in 2007 handled 67 million passengers in facilities designed for 40–45 million. In particular, lack of runway capacity will inevitably continue to constrain further growth and cause delays. Heathrow has only two runways, compared to four in Paris and six in Amsterdam. Hopes that the opening of the new Terminal 5 in 2008 would recover some of BAA’s reputation were misplaced, since the March opening was

•• 388 End-of-part cases

Source: Getty Images

surrounded by chaos and judged to be a fi asco – thousands of lost bags, hundreds of fl ights cancelled and more delayed, passengers forced to fl y without their bags, escalators and lifts paralysed. BA was looking at a bill of at least £50 million for cancelled fl ights, but a more serious dent in its long-term reputation and that of its Heathrow hub. One commentator noted at the time: ‘ The basic problem is that you are dealing with two horribly ineffi cient organizations in the form of BA and BAA. When you put them together, you get something like this. ’ BA was looking at delaying its full transfer to Terminal 5 until October 2008 and for fi nancial compensation from BAA. Both BA and BAA stood accused in Parliament of undermining ‘UK plc’ as a result of the T5 catastrophe.

The role of Ferrovial Spanish-based infrastructure group Ferrovial bought BAA in 2006 for £10.3 billion, and took the company off the stock market. Only some £500,000 was Ferrovial’s own funds, the remainder of the purchase was funded by debt. BAA chief executive, Mike Casper, who had led the ﬁ ght to maintain the independence of BAA, was replaced by Stephen Nelson – previously retail director at BAA, and earlier marketing director at supermarket company Sainsbury. In the ﬁ rst 18 months of Ferrovial ownership the company was surrounded by a storm of criticism from the media and from the airlines, which pay substantial fees for using BAA’s airports.

The security problem • • • Ferrovial’s ownership of BAA had barely started when the government instigated an airport security clampdown triggered by an alleged

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terrorist plot to blow up transatlantic fl ights, which resulted in the worst kind of abject chaos at London’s airports. As fl ights were cancelled and security procedures intensifi ed, the inadequacy of BAA’s infrastructure was exposed. The company faced a storm of criticism from passengers, media commentators and airline bosses. Ryanair, in particular, accused BAA of ignoring the needs of its customers, refusing to devote enough staff to security screening, and infl ating its charges – Ryanair took particular exception to the hand-written pho- tocopied note given by the BAA duty manager to passengers who had missed their fl ights stating ‘ BAA is not responsible for compensating passengers for missing fl ights. Please refer to your airline’ . British Airways, Virgin, BMI and American Airlines produced a litany of similar complaints. There is a strong case that the British government has shown a complete lack of planning regarding security – instead creating a kind of ‘ security theatre ’ by playing catch-up to a succession of perceived threats. Government concerns are dominated by appeasing media critics and creating an illusion of security, regardless of the effect of their policies in imposing chaos on airport management. At times security queues at Heathrow have exceeded a quarter of a mile. Nonetheless, in February 2008 Greenpeace campaigners appeared to have little problem evading BAA’s ‘ high security’ systems and procedures, to get air-side, climb on the tail of a BA aircraft and festoon it with banners protesting about the climate effects of the proposed third Heathrow runway. Tensions between the new owners and BAA management have led to a series of high-profi le departures by senior and middle- management BAA executives. Initial tensions centred on the inter- ference by the Spanish owners in local publicity and PR activities. However, Ferrovial’s poor handling of the security crisis triggered a second wave of high-profi le management departures.

Financing issues • • • Ferrovial faces substantial problems in refi nancing the package used to buy BAA. The consortium took out big loans to buy BAA, planning to quickly refi nance the deal. It could have cut the cost of borrowing by issuing bonds backed by future Heathrow and Gatwick revenues. However, uncertainties over the CAA’s position on BAA prices and profi ts, and the wider international credit squeeze prevented this happening. In the fi rst nine months of the 2007/8 fi nancial year, BAA generated cash of £800 million, but paid out £890 million on its capital spending plans, and faced an interest bill of £329 million. BAA is saddled with £6 billion in debt, which Ferrovial continues to struggle to restructure. Meantime, BAA’s credit rating has been down- graded, and Ferrovial’s net income plunged 48.5% in 2007. There are some fears that the real problem is that having borrowed so heavily to make the purchase, Ferrovial is starving BAA of cash. There were suspicions that BAA was in breach of the covenants on some of its loans at the end of 2007. By the middle of 2008, it was clear that BAA could run

•• 390 End-of-part cases out of operating cash by the end of 2009 without additional fi nancing. Early in 2008, BAA was looking for a £1 billion loan secured against its regional airports. Ferrovial has had to conduct a fi re sale of businesses to reduce its debt burden. The BAA World Duty Free chain was sold to Italy’s Autogrill for £547 million in March 2008, but other sales include: Bristol Airport stake – gone for £105 million; Sydney airport stake – gone for £408 million; Budapest Airport – gone for £1.3 billion; six Australian airports – gone for £343 million; BAA property arm – going for an estimated £600 million; and jointly owned airport offi ce space and other development sites – gone for £265 million. BAA, as well as refi nancing the loans taken out to buy the company, also has to fi nd a new capital expenditure fi nancing package to pay for its ambitious spending plans. Along with the completion of Terminal 5 at Heathrow, costing more than £4 billion, BAA plans to demolish and rebuild the airport’s Terminal 2, and also to refurbish and expand Gatwick. In the longer-term, the company wants to build a controversial third runway and sixth terminal at Heathrow, likely to cost around £9 billion if it is approved by the government. The problem is that as Ferrovial sells assets it is diluting both its value and its cash fl ow. BAA’s operational cash fl ow, some £1 billion in 2007, remains insuffi cient to meet debt service requirements as well as its tax and capital expenditure bill. Additional borrowing will be necessary to deliver the capital expenditure investment programme BAA has promised the regulator. Mid-2008 Ferrovial secured fresh fi nancing of £7.65 billion for BAA, in the form of a loan from nine banks over a fi ve to six year period.

Opposition to expansion • • • In fact, BAA faces opposition to its expansion plans both from environmental campaigners and from the local communities around airports, who will be exposed to yet more noise. BAA has worked jointly with the Department for Transport in its environmental modelling to test the effects of Heathrow expansion (indeed BAA has paid for some of the work) and producing the DoT report, to which BAA is now asked to ‘ respond ’ . BAA suggests that there is no local noise problem, while critics suggest that the fi gures have been ‘ managed ’ somewhat strangely to permit this conclusion to be drawn. Documents leaked to the The Sunday Times in March 2008 revealed that BAA had colluded with government offi cials to ‘ fi x ’ evidence in favour of a new third runway at Heathrow. This could account for the surprising consultation document conclusion that it would be possible to bolt a new airport the size of Gatwick onto Heathrow without any adverse environmental impact. The leaked documents show even the government’s own watchdog – the Environment Agency – criticizes the fl awed and incomplete evidence in the Department for Transport (DfT) report. The picture emerging is one where BAA colluded with the DfT: BAA providing instructions to DfT offi cials on how to ‘ strip out ’ data

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that indicated environmental targets would be breached by the airport; BAA repeatedly selected alternative data showing negligible impact on noise and pollution; the DfT gave BAA unprecedented access to confi - dential reports and allowed the company to help rewrite the consultation document; and the fi nal document signifi cantly reduced forecasts of anticipated carbon emissions caused by the proposed new runway by not including incoming international fl ights. BAA has also used an extensive network of lobbying and PR groups, headed by senior Labour fi gures, with access to the government, to promote its plans for the third Heathrow runway. Critics of the company see this as a cynical attempt by BAA to sustain its profi ts and its grip on the market, irrespective of the impact on the environment and residents. Concerns also surround the degree of collusion between a government department and a private company to deceive the public and policy-makers. Ruth Kelly, Transport Secretary, was in daily contact with BAA management but refused to meet protestors against the Heathrow expansion. In a move that underlines the company’s alignment with the Labour government, BAA’s chief executives launched a public attack on the opposition Conservative party for daring to express concerns about the plans for a third Heathrow runway. One emerging fact from documents reluctantly released by the government under the Freedom of Information Act was that runway expansion would create an ‘ island of noise’ over the Queen’s residence at Windsor Castle. BAA appears willing to risk even snarling Corgi- power. In addition, although the relevant maps were omitted from the consultation documents, it also transpired that the Heathrow expansion planned to make part of the M25 motorway the crash zone for the third Heathrow runway. More seriously for BAA, the fi asco of the Terminal 5 opening in March 2008 raised major questions about BAA’s competence to manage expansion and the undesirability of allowing them to expand with a third Heathrow runway.

Abuse of power • • • BAA is also accused of abusing its monopoly in its airports by the way it treats potential competitors. BAA has moved into the lucrative area of off-airport car parking. Critics suggest it is abusing its legal powers by overcharging for access to airport forecourts and threatening to seize rival car parking operators’ land under compulsory purchase orders. For example, in 2008 one independent car parking operator at BAA’s Glasgow airport was looking at charges levied by BAA rising from £5000 a year to £150,000 a year, simply for using the roads that give access to the airport forecourt. BAA denies accusations of bullying behaviour on the grounds they are simply looking out for their own interests.

Employee reactions • • • In 2008 BAA found itself in conﬂ ict with employees over its attempts to close their ﬁ nal salary pension scheme, among other changes in their

•• 392 End-of-part cases

employment conditions. About 5000 workers, including fi re-fi ghters, security, maintenance, administrative and clerical staff were threatening to close Britain’s biggest airports in 2008. While the fi rst strikes threatened in 2008 were cancelled at the last minute, the threat of industrial action by employees to cripple airports continues. The inability of BAA management to deal effectively with the problem of outdated working practices lies at the heart of the company’s failure to root out ineffi ciencies in the operation. For example, union opposition to fl exible working deals makes it diffi cult for BAA to roster staff to deal with fl uctuating passenger demand. Unions are in a strong position at airports – even a short stoppage is seriously damaging. For example, a single day’s stoppage at Heathrow costs British Airways alone £20 million, plus the knock-on effects on ticket sales and general confi dence. The unions claim that BAA is only interested in cost-cutting, not improving conditions for employees or passengers.

The Heathrow hassle – making a bad joke of customer service with a snarl The most violent criticisms of BAA relate to the ‘Heathrow hassle ’ – the sheer, nightmare-like, unpleasantness of travelling through the airport. It does not help that, among its other ploys for both annoying and extracting revenue from airline passengers, BAA is renowned for managing security systems in ways that allegedly provide for commercial advantage. For example, there is an interesting synergy between BAA-employed ‘ security ’ staff confi scating cosmetics and personal care products from passengers (using complex ‘ regulations ’ about permitted package sizes, and the ‘ essential ’ enclosure of the packages of hand cream in small plastic envelopes, which apparently prevents them from becoming a threat to aircraft security), which allows passengers to go through security, forfeit their possessions and then replace their cosmetics at high prices at the BAA-owned retail concessions air-side. Interestingly, BAA maintains that it has solved the queuing problems at Heathrow and Gatwick – notwithstanding the views of the airlines and their passengers. In particular, BAA claims that security queue measurements show waiting times of less than 10 minutes (the thresh- old at which they become liable for fi nancial penalties). Unfortunately, investigations by Booz Allen Hamilton for the CAA suggest that BAA achieved this remarkably improved performance by simply not measuring the queues from the back, but from near the front. BAA’s passenger survey – its Quality Service Monitor – apparently shows very high customer satisfaction levels throughout the past fi ve years, regardless of security alerts and other problems. Airline chiefs at Virgin and BMI suggest that BAA is systematically manipulating and distorting the data to achieve these effects, and that BAA fi gures are wildly at odds with those collected by independent surveys. A 2008 ploy of subjecting passengers in the new Terminal 5, as well as in Terminal 1, to the intrusive and humiliating process of being fi ngerprinted

393 •• Market-Led Strategic Change

and photographed in the terminal, is illustrative of BAA’s passenger policies. The fi ngerprinting and photographing of passengers is claimed to be for ‘ security ’ . In fact, it is a way of mixing domestic and international passengers to maximize the traffi c in the duty free and other retail outlets in the terminal. As pointed out by the Information Commissioner, fi ngerprinting passengers in this way is almost certainly illegal under the Data Protection Act. The Home Offi ce denies that fi ngerprinting is required for security purposes. BAA appears happy to invade personal privacy to achieve greater retail sales. BAA says that those who refuse fi ngerprinting will not be allowed to fl y. Abusing security concerns for commercial gain underpins the BAA approach. BAA backed off from fi ngerprinting in the new Terminal 5 24 hours before it opened. The company says it has ‘ postponed ’ fi ngerprinting, and apparently intends to go ahead with this process at all its airports, whether it is illegal or not.

The BAA viewpoint Critics take the view that Ferrovial has squeezed the maximum profi t out of the British airports it controls, for the minimum investment. The BAA perspective is that the fees charged to airlines are just about the lowest in Europe, and that the operational airport problems refl ect capacity and infrastructure problems that they inherited, and that Ferrovial cannot be held responsible for these problems. They argue that the current problems refl ect many years of lack of investment, which preceded Ferrovial’s purchase of BAA.

Whose fault? • • • The BAA view is that fl ight delays and poor passenger experience at Heathrow and Gatwick refl ect the same failings identifi ed in 2002, which simply have continued to get worse in the following fi ve years. Indeed, Ferrovial makes the point that if the airports had not been such a mess, then they would not have been an attractive purchase. They claim that their much criticized retail operations at the airports actually heavily subsidize airport services. BAA blames the airlines (which are actually their main customers) for many of the problems, and the Home Offi ce for the delays and mismanagement of airport security and immigration control – indeed, they appear to blame everybody but themselves. BAA CEO Stephen Nelson was adamant in 2007 that BAA had no responsibility for 94% of the delays at Heathrow. He argued that the major hold-ups occur at check-in (responsibility of the airlines) and immigration (responsibility of the Home Offi ce).

Price increases • • • In 2007/8 BAA made it clear that they wanted a substantial hike in the prices charged to airlines, as a prerequisite for investment in improved services (and BAA proﬁ tability). This move predictably attracted much hostile criticism from the airlines. Nonetheless, BAA maintained the position that there would be no further investment, and the Heathrow

•• 394 End-of-part cases improvements would be postponed, without higher prices. The Competition Commission backed a CAA decision not to allow BAA the price increases it wanted. BAA management dropped heavy hints that without the price increases there would be no additional investment in improving Heathrow facilities in the lead-up to the 2012 Olympics (a matter of considerable sensitivity to the Labour government). In the event, BAA was allowed a 23.5% rise in Heathrow prices for the 12 months from April 2008, likely to produce an additional cost of £20 a ticket in landing fees. Charges will continue to increase in each of the following four years by 7.5% above the rate of retail infl ation. Gatwick charges will rise by 8.2% in 2008 and 2% above infl ation for the following four years. This ruling allows charges at Heathrow to rise by 86% over fi ve years at Heathrow, and 49% at Gatwick. In effect, although BAA’s rate of return is pushed down, large price increases were permitted. The regulators pushed down the cost of capital from 7.75% to 6.2% (i.e., how much the regulator thinks BAA has to pay for the capital it needs to run and invest in the business). BAA complains that this does not take into account the risks involved in running airports – accusing the CAA of creating ‘ regulatory shock’ , a sudden and unjustifi ed drop in the cost of capital that will disrupt the company. The CAA shows no sign of relenting on this issue – it told Ferrovial during the bid process that they should not assume the cost of capital would remain the same. Furthermore, BAA claims the price increases are inadequate, while the airlines claim that the regulators continue to reward BAA for its ineffi ciencies. BAA claimed its ability to refi nance its £10 billion debt pile was placed in jeopardy because of the price control proposals for Heathrow and Gatwick. The Competition Commission did, however, criticize BAA, demanding greater transparency over its World Duty Free retail operation, and warning that failure to fi x the Heathrow delays would result in large fi nancial penalties. Even under existing arrangements, BAA was fi ned a further £146,000 by the CAA in 2007 for the delays and poor customer service at Heathrow, bringing its total in regulatory penalties to £4 million since July 2003. Nonetheless, the fi nancial penalties are relatively trivial compared to the price increases allowed. The potential for being fi ned £7 million in 2009 is small in comparison with the £925 million it will earn in charges in 2008–9. As far back as 2002, the Competition Commission expressed concern that BAA’s World Duty Free shops concession was operated by a subsidiary of BAA in the absence of competitive tendering, and a lack of competition between outlets selling duty-free products. BAA operates a ‘ single till ’ system where its highly profi table commercial activities, mainly rental income from its retail and other concessions, subsidize the airport charges levied on airlines.

BAA’s bargaining power • • • The unexpectedly generous price increases allowed to BAA reﬂ ect a number of unusual factors. Ferrovial’s rocky ﬁ nancial position may have

395 •• Market-Led Strategic Change

helped. Reeling from the disastrous collapse of Northern Rock in 2007, the Labour government had no desire to see BAA collapse to become its ‘ Southern Rock ’ . Interestingly, it was only after the CAA approval of its price increases that BAA revealed that it would not be able to complete the Heathrow East upgrade in time for the London Olympics.

The reactions • • • CAA’s unexpectedly generous ruling on prices was followed by several reactions. With uncharacteristic unanimity, leaders of four of Britain’s leading airlines – easyJet, bmi, Virgin Atlantic and Ryanair – shared the same stage with the same message: calling for the break-up of the ‘ highly indebted ’ and ‘fi nancially unstable ’ BAA operation. They met with Transport Secretary Ruth Kelly to urge her to reform airport regulation and order the break-up of BAA. Along with BA, these airlines want BAA’s monopoly removed to allow separate airport owners to compete for business from the airlines. easyJet retained law fi rm Lane & Partners as adviser and notifi ed BAA of its intention to seek a judicial review of the price increases. They were also threatening to refuse to pay the higher charges. Soon after, MPs on the Commons’ Transport Select Committee called for BAA’s break-up on the grounds that its monopoly was ‘ bad for passengers and bad for aviation’ . On the same day that Terminal 5 was opened by the Queen, MPs were accused of effectively hanging a ‘ For Sale ’ sign on Gatwick airport. The MPs were confi dent that an airport sell-off would happen – whether voluntarily or by force. City commentators suggest that what Ferrovial has done is to overpay for a business, gear it as highly as possible, then wait for the regulator to bail them out – which CAA has effectively done by allowing airport charges at Heathrow and Gatwick to reach around £6.8 billion over the next fi ve years. In April 2008, as the initial report by the Competition Commission made the prospect of a break-up of Ferrovial’s British airport monopoly more likely, Commission investigators censured BAA for trying to improperly infl uence consultants advising the Commission.

But, do popularity points bring prizes? • • • BAA appears to have sacrifi ced customer satisfaction in order to cut costs and avoid investment. However, under existing arrangements, BAA has neither the incentives nor the desire to provide anything more than the most basic level of service for passengers, as opposed to shoppers, in the airport. The issue is whether the company faces a backlash resulting from their unquenchable thirst for cash from ‘imprisoned ’ shoppers in the airport. Critics contrast the image of broken travelators, inadequate seating, fi lthy toilets and constant queues with BAA’s enthusiasm for maximizing the profi t it makes from its shopping concessions. The new Terminal 5, for example, is a major attempt to increase passenger expenditure on the ground, through a retail-and-restaurant

•• 396 End-of-part cases offering. The new Terminal boasts a Gordon Ramsay restaurant and personal shoppers at its Harrod’s outlet. The terminal will have more advertising than almost any other airport in the world – BAA research suggests that anxious travellers are particularly susceptible to advertising messages, so they will be exposed to 50–120 ads in the time from when they arrive to when they can fi nally escape onto their fl ights. The T5 billboards are offered to advertisers for £1.5 million a year. BAA maintains that T5 will solve many of the problems at Heathrow. Nonetheless, more than half the passengers using T5 will have to suffer the extreme inconvenience of being bussed to their planes – the highest proportion at any major European terminal. The new terminal offers no additional Heathrow capacity (as it opens, other areas will be closed for overdue refurbishment – the £3.4 billion Heathrow East project to revamp terminals 1 and 2), but it does have 112 shops, and about the same retail square footage as out-of-town shopping sites like Bluewater and Lakeside. The retail revenue stream is vitally important to BAA – it is worth more than £600 million a year. BAA takes a double-digit cut of the sales of leased retail areas – sometimes as high as 40% of retail spend. In return, retailers enjoy a low competition environment, in which stores do not compete with each other in signifi cant product categories. Critics suggest T5 is more a bazaar of upmarket retail outlets than a serious attempt to improve passenger service standards. BAA has a vested interest in maximizing the amount of passenger shopping time in its terminals, and employs various ploys to achieve this goal. BAA is very unpopular. But the company is under little or no incentive to improve passenger satisfaction levels. More satisfi ed passengers will not spend more, increase revenue streams by recommending use of the airport to others, or provide any other tangible benefi t to BAA. Dissatisfi ed passengers may complain and be more diffi cult to deal with, but they cannot easily impact on BAA’s revenues and profi ts. Those who complain too much or too loudly can anyway be removed from the airport and prevented from travelling by BAA staff, calling on their ‘security ’ rationale for passenger bullying and assault, backed- up by aggressive armed airport police (apparently the latter are people who like guns but are not qualifi ed to be employed as police offi cers outside the airports). Indeed, many of the factors about which passengers complain most – fl ight delays, extra-long check-in times, confi scation of property in the name of security – have a positive commercial benefi t for BAA, by increasing the time people have to shop in the airport and their need to replace personal products. It is unlikely that any more than a marginal effect could be felt by passengers choosing not to fl y at all because the airport experience is so horrible. Some international passengers may be able to arrange travel so as to avoid BAA airports, and Heathrow in particular, but the numbers are not likely to be high enough to worry BAA. Passengers have become resigned to the fact that the unhelpful airport staff, surly ‘ security ’ people, loutish ‘ police offi cers’ and ineffective cleaners, really do not care what passengers think, because they do not have to care.

397 •• Market-Led Strategic Change

The only real sign of competition is that a new, faster train service would become increasingly attractive for short-haul travellers with journeys within the UK or to near Europe. British Airways has already voiced its concerns that growing numbers of business travel passengers may avoid Heathrow by avoiding air travel. However, the reality of this competitive threat depends on the growth and improvement of the key rail services, which does not seem imminent. BAA’s main paying customers are, of course, the airlines. The airlines do care very much that passengers are subjected to unpleasant experiences at the hands of BAA; they do care about fl ight delays and cancellations; they do care about lost baggage. The airlines are in a situation where substandard BAA behaviours, over which the airlines have little or no control, impact on passenger satisfaction with the airlines, and consequent airline choices and volume of business. British Airways, for example, is particularly concerned that business travellers paying premium business-class and fi rst-class fares will go out of their way to avoid Heathrow (and consequently choose alternative airlines), for example, choosing to make Amsterdam the hub instead of Heathrow, and favouring KLM/Air France over BA as a consequence. Nonetheless, the airlines have relatively little choice other than to accept BAA’s behaviour – there is no alternative to using the facilities provided by BAA. They can complain, and frequently do, but other than that they have little leverage to impact on BAA. The only parties with any real power to hurt BAA are the Civil Aviation Authority and the Competition Commission – who effectively set the prices BAA can charge the airlines and the rules of the game, such as whether BAA should be forced to divest some of the airports it controls to encourage greater competition. The critical issue for BAA is whether passenger service levels and the vocal complaints of airlines will actually make any difference to the airport and competition authorities. Could a position be reached where, for example, the CAA was prepared to levy massive fi nes on BAA, whenever it inconven- ienced passengers, as some critics have urged? Theoretically, the government and the airport authorities have three options for improving the British airport situation. First , they could break BAA’s monopoly of the London airports – for example, forcing the company to sell its Gatwick interests. BAA says this would make no difference because the basic problem of capacity and airport infrastructure would not change. Second , they could overhaul the regulatory regime, to promote better service and provide incentives for BAA performance improvement as an airport operator. However, the relevant authority – the Civil Aviation Authority – is feeble, and unlikely to have the nerve to undertake this approach to any real extent that exceeds the current token fi nes. Third , the government could force a more rational allocation and pricing of fl ight slots at Heathrow, to refl ect their scarcity. On the grey market, Heathrow take-off slots have often changed hands for more than £5 million a pair in the past, depending on the arrival and departure times, but the looming ‘open skies’ free-for-all fi nds airlines willing to pay more than £20 million a pair for

•• 398 End-of-part cases

scarce and desirable take-off and landing slots. In 2008, as a result of the ‘open-skies ’ treaty to liberalize transatlantic aviation, Continental paid a record $209 million for four pairs of take-off and landing slots at Heathrow. This could provide the resources needed to fi nance airport service improvements. However, it looks as though Whitehall has no appetite for a fi ght of this kind. In particular, while one way to improve London’s airports would be to price the growth out of fl ying, to bring demand back in line with capacity, it is unlikely that any government would have the political will to do this.

The dilemmas for BAA BAA remains in the strange position of having inherited the infrastructure of a publicly owned airports authority – particularly responsibility for matters of airport security in which there is, and should be, no commercial advantage – and the type of monopoly position (control of all of London’s major airports) appropriate to a public authority, but arguably less appropriate to a commercial company seeking to make a return on its investment for shareholders. The airports authority also fi nds itself being held in part responsible for the image of the country presented to foreign visitors (particularly by a government keen to justify its support for the 2012 Olympics), and the government desire for greater airport capacity. Ferrovial’s ownership started with a poorly managed crisis, which has shaped relationships since. The investors clearly expected this to be a sleepy infrastructure investment, but in fact it has proved to be a political minefi eld. This was never going to be a comfortable position to occupy – which the CAA was at pains to point out to Ferrovial when the purchase was negotiated. Ferrovial’s most serious omission was to think that the regulators would not seize on the highly leveraged BAA deal and clamp down on BAA’s returns, after years of relative laissez-faire . Certainly, BAA is in a position where it is vulnerable to attack from those representing passengers and from vocal airlines protesting about increases in airport fees impacting on fares, and the poor service they receive. Nonetheless, to remedy the infrastructure that drives the poor performance of the airports, BAA needs access to increased capital and robust revenue streams. Stakeholders fi ghting to limit BAA’s revenue and capital sources are the same ones who are the most critical of BAA’s performance, and who most want to see increased investment for performance improvement. The biggest threat to BAA is action by the government and regulatory bodies, stimulated and supported by stakeholder attacks on BAA, before the company has the opportunity to address the factors underlying its problems. BAA price increases to airlines have been restricted by the CAA and it remains subject to the threat of the break-up of the company as a result of Competition Commission investigation. There is a possible scenario in which Ferrovial ‘ walks away ’ from the airports operation.

399 •• Market-Led Strategic Change

Part of the BAA problem is that while the airlines and passenger groups have vociferously called for the break-up of the BAA London airports monopoly, such a move has previously been rejected by government ministers, who look to BAA to provide more airport capacity. Environmental protestors opposing the expansion of air travel have called the House of Commons building the ‘ headquarters of BAA ’ , underlining what they believe to be an over-close and corrupt relationship between ministers and the airports authority. An additional complication is that research by the UK air regulatory authorities – the CAA and National Air Traffi c Services – suggests that there is a further constraint to airport growth, which needs to be addressed. Their models suggest that with new runways at Heathrow and Stansted, there will simply not be enough room in the skies over London for all the extra fl ights which are planned – the third Heathrow runway would add 230,000 fl ights a year. Their submission to the Competition Commission notes that air traffi c expansion in the south- east ‘ would not [leave] suffi cient airspace capacity to accommodate the scale of predicted traffi c growth on the basis of current and predicted technology’ . They offer the prospect of London’s air traffi c noise spreading to homes in the south Midlands and East Anglia to deal with the overspill. This threatens BAA’s plans for achieving higher performance through capacity expansion. Early in 2008 rumours spread that the government was alarmed by the scale of the opposition to expansion at Heathrow and Stansted, and was secretly quite happy with BAA threats to delay further investment if facing tough new fi nancial targets set by the CAA. Faced with an imminent general election and a weak position in the polls, Labour ministers were concerned about the political consequences of proceed- ing. The political prospect was raised (not for the fi rst time) of building an additional London airport, possibly in the Thames estuary, away from residential areas and allowing 24 hour fl ight take-offs and landings. A new airport would bring to an end expansion plans at BAA-owned Heathrow, Gatwick and Stansted. The only obstacles to this happening are political will, rather than fi nancial or technological challenges. While the government and BAA have long enjoyed a cosy relationship – BAA’s communications strategy director is Tom Kelly who was formerly offi cial spokesman for Tony Blair, and several key Labour offi cials have worked for BAA or pro-aviation lobby groups – if expansion at Heathrow becomes a big vote loser, this relationship may become less friendly. BAA executives appear to have been shocked by the hostility the company faces from the public and from business, particularly over Heathrow. Even the staid Financial Times is prepared to regard Heathrow as Britain’s most hated facility and BAA the country’s most hated company. Heathrow’s failings have topped the agenda several times in talks between big business and Prime Minister Gordon Brown. In September 2007 Ferrovial earmarked £17 million for ‘ fi x the basics ’ at Heathrow – mainly for painting and cleaning – in an attempt to head-off further criticisms. A BAA management shake-up in 2007 included the appointment of Sir Nigel Rudd, lately chair of Alliance

•• 400 End-of-part cases

Boots and one of the leading fi gures in British business, as chairman. In late-2007 BAA launched a ‘charm offensive’ with CEO Stephen Nelson touring the boardrooms of leading companies to explain BAA’s poor performance. By 2008 it appeared increasingly as though time was running out for BAA. A torrid week for BAA at the end of February 2008 saw: fi gures released by the Association of European Airlines showing that passengers at Heathrow and Gatwick suffered the worst fl ight delays among all leading European airlines in 2007; a Sunday Times article and a Channel 4 TV documentary, authored by investigative journal- ist Andrew Gilligan, accusing BAA of rigging satisfaction and service quality statistics, bullying competitors and failing to provide adequate airport security; and front-page stories showing Greenpeace protestors climbing over an airplane on the runway at Heathrow, having evaded security procedures. At this point, BAA’s chief executive, Stephen Nelson, stepped down as a result of a management shake-up instigated by chairman Sir Nigel Rudd as his fi rst big decision at the company. He may have had his hurt feelings assuaged by the £2.6 million he was paid in his last year with BAA. Mr Nelson was replaced by Colin Matthews, bringing experience in both the utility and airline sectors. Rudd’s goal was to exchange Mr Nelson, with his background in retail and consumer industries, for Mr Matthews, former head of water company Severn Trent, and with experience at British Airways. Mr Matthews brings a track record of working within a regulated utility and of dealing with irate stakeholders, and has overseen business break-ups at Severn Trent and Hays, the business services group. He moved into the CEO position on April Fool’s Day 2008. Any hope he would have a good start following a successful opening of Terminal 5 was misplaced – it was a disaster. Mr Matthews fi rst public statement was an apology for the T5 mess. And he still faces the major challenges of pricing issues at Heathrow and Gatwick, responses to BAA’s application for an extra runway and capacity expansion at Stansted, and the Competition Commission’s conclusions regarding BAA ownership of London’s main airports. Rudd is looking to Matthews to fi x the Heathrow problems, but there are bigger concerns that the sheer scale of the problems faced by BAA may make its current business model unworkable and unsustainable. Certainly, in mid-2008, former BA CEO Robert Ayling concluded that BAA had a fl awed business model that has contributed to the bankruptcy and near collapse of many airlines, and has turned Heathrow into a ‘national dis- grace ’ . He fi rmly opposes further expansion at Heathrow. Sources: Dominic O’Connell, ‘BAA May Run Out of Cash, Warns Bank’ , Sunday Times, January 27 2008, p. 3-3. Philip Stevens, ‘British Airways Catches the Heathrow Disease ’, Financial Times, December 18 2007, p. 13. Dominic O’Connell, ‘Aviation Chiefs Trim BAA’s Wings ’, Sunday Times , October 7 2007, p. 3-7. Martin Wolf, ‘ Break-Up of BAA Is Not the Answer’ , Financial Times, August 24 2007, p. 11. Andrew Gilligan, ‘ BAA “Rigged Figures ” to Hide Airport Delays ’, Sunday Times, February 24 2008, p. 1-10. Kevin Done, ‘Latest Chief Poised to Steer Course Through Minefi eld’ ,

401 •• Market-Led Strategic Change

Financial Times, February 28 2008, p. 3. Dominic O’Connell, ‘Squeeze on BAA Could be Terminal ’, Sunday Times, March 2 2008, p. 3-7. Jon Ungoed- Thomas and Marie Woolf, ‘ Revealed: The Plot to Expand Heathrow’ , Sunday Times, March 9 2009, p. 1-1. Jon Ungoed-Thomas and Marie Woolf, ‘ The Great Heathrow Evidence Fit-Up ’, Sunday Times, March 9 2008, p. 1-7. Dominic O’Connell, ‘Airlines Unite to Push for BAA Break-Up’ , Sunday Times, March 16 2008, p. 3-2. Jon Ungoed-Thomas, ‘ Labour’s Flying Club Lobbies for BAA’ , Sunday Times, March 16 2008, p. 1-10. ‘ Who Wants a Third Runway After This? ’, Sunday Times, March 30 2008, pp. 1-12 – 1-13. James Slack, ‘Fingerprint Plan for Terminal 5 Passengers Could Breach Data Laws ’ , Daily Mail, March 24 2008, p. 11. Kevin Done, ‘ BAA Chief to Attack Tories on Heathrow’ , Financial Times, June 25 2008, p. 4. Bob Ayling, ‘ Third Runway Is a Flight of Fancy ’, Sunday Times, May 4 2008, p. 1-21. Dominic O’Connell, ‘BAA Censured for “ Interfering ” in Break-up Probe ’, Sunday Times , April 27 2008, p. 3-1.

Case 6: The Wild, Wild Rover Rover dates back a century to when Lord Austin founded the Austin Motor Company, which merged with Morris and Rover in 1952 to create the British Motor Corporation. A string of owners have adopted a variety of business models to try to run Rover – Britain’s last volume car-maker, but have never secured its long-term viability. Rover has always been a focus for governments – usually those frightened of the electoral consequences of Rover’s demise – the media, the trades unions and the public. The most recent changes in ownership have been from BMW to the Phoenix Group and thence to Shanghai Automotive (SAIC). However, the fate of Rover was probably sealed more than forty years ago in the ‘ British Leyland blunder ’ . Rover’s local MP describes the MG Rover saga as ‘ an industrial Eastenders – part business story and part soap opera ’ . Nonetheless, Rover and MG are ‘ heritage ’ brands in the automotive marketplace, with many devoted fans in Europe and the USA.

The sad history of Rover

The recent history of Rover contains a series of botched rescue attempts, frequent ownership changes and ever-declining performance by the company.

The British Leyland blunder • • • A Labour government in 1968 – that of Harold Wilson – engineered the merger of Leyland, Rover’s parent company, with the British Motor Corporation, to create a giant national champion in the motor industry – British Leyland. The UK plan backﬁ red. British Leyland never succeeded in welding its mass of component operations into a coherent whole. Importantly, British Leyland took Rover, an upscale brand, into

•• 402 End-of-part cases the mass market, but without achieving genuine mass scale. The merged giant was forced into a rights issue in 1972, and was among the ﬁ rst big British companies to collapse after the oil price shock of 1974.

Nationalization • • • Nationalization was not successful either. A second Wilson government took British Leyland into state hands in 1975 rather than risk major job losses through private sector restructuring. British Leyland was being torn to pieces by industrial relations disputes at this time – including the infamous ‘BO strike’ triggered by the smell of a worker. The pound appreciated, crippling Rover export sales. Over eight years, the government put £900 million into Rover, to sustain its existence.

Privatization • • • When Margaret Thatcher came to power, Sir Michael Edwardes, Rover’s executive chairman, took on the unions – fi ring the plant convenor, known as ‘ Red Robbo ’. Under the leadership of Thatcher’s appointment of Sir Graham Day, the company was renamed as the Rover Group. A partnership with Honda gave Rover a technology lifeline, but at a cost – Rover gave up the right to compete with Honda in markets like the USA, and became dependent on Honda-based cars. Thatcher was determined on political principle to privatize the car business, and leapt at the chance to sell Rover to British Aerospace in 1988. However, privatization did not work either. BAe was a diversifi ed conglomerate and offered Rover no synergies or benefi ts other than private ownership.

The BMW years • • • BAe sold Rover to BMW in 1994. This was a moment of real hope for Rover – BMW needed to increase its scale without diluting the prestige of its brand, and saw Rover as the answer to this need. But BMW moved slowly in establishing control over Rover, and strong Sterling at the end of the 1990s was a major obstacle. Some Rover models were selling in Europe, but at a loss. BMW poured £3.4 billion into Rover after buying it in 1994. In 1999, with losses mounting, the Quandt family that controls BMW lost patience, and the BMW CEO who had purchased Rover left BMW. The British government tried desperately to keep BMW at Rover’s Longbridge plant with offers of state aid, but BMW was set on a new course – they wanted the Mini brand, but not Rover. In the last year of its ownership, BMW lost £800 million on the Rover operation.

The Phoenix arises • • • By 2000 BMW had given up any hope of turning around the loss- making Rover business, and announced the sale of Rover to Alchemy, a private equity ﬁ rm led by Jon Moulton – who planned to whittle Rover down to a niche producer of the MG sports car. However, the Alchemy

403 •• Market-Led Strategic Change

Source: istockphoto.com

solution was anathema to the Labour government, local councillors and the still vociferous and inﬂ uential trades unions. Under government pressure, BMW sold instead to Phoenix – a four-man team of local businessmen led by John Towers, a former Rover chief executive. Phoenix claimed that Rover could be saved as a volume car producer, and won control of a rebranded MG Rover for £10 – as well as receiving a dowry from BMW to fund job losses. The Phoenix deal with BMW was complex. Rover was sold for a token price, but also with an interest-free loan of £427 million from BMW, to be repaid by 2049, though earlier if MG Rover made a proﬁ t. The plan was that these reserves would allow Phoenix to replace the ageing Rover 25 and Rover 45 models. The Rover 25 and Rover 45 accounted for around two-thirds of MG Rover sales at this time, but were long in the tooth and needed replacing by 2004 or 2005. There was also potential to develop a new model in the Rover 75 line – the Tourer Concept Vehicle – shown at motor shows in 2002.

•• 404 End-of-part cases

Phoenix, MG Rover’s parent company, lost £187 million pre-tax in 2001. But in the same year, respected trade journal Autocar awarded MG Rover its ‘ Achievement of the Year ’ award to mark the company’s turnaround. While sales were continuing to fall – by about 12% in the fi rst year of Phoenix ownership – MG Rover was the unlikely star of the British Motor Show in Birmingham. The MG SV – a 200 mph super- car to take on the likes of Maserati and Porsche – won the plaudits of the motoring press and the public alike. Meanwhile, production workers at Longbridge continued to wonder about the wisdom of spending millions of pounds on Qvale, the Italian sports car company that provided the basic design for the SV. It was clear to the Phoenix consortium from the outset that Rover could only survive in a world of global car giants if it secured a sustainable partnership with another mass car producer, and this was the major priority. Phoenix kept Rover going for fi ve years. But they did this by burning through the BMW endowment and cash from asset sales. Losses were cut, but Rover operations continued to bleed cash. By this stage, Rover was producing 150,000 cars a year in an industry where mass market producers need to make 3 million cars a year to be internationally competitive. Phoenix failed to use the BMW cash to produce new models, which might have made Rover an attractive purchase for one of the global car-makers; they were simply rebadging existing models. Rover survived by cutting costs and selling assets. In addition to the £427 million loan from BMW and stock worth £350 million (in the form of 40,000 unsold cars when it bought Rover), the company sold land, a parts business, engine technology and model rights to Chinese manufacturers. More than £1 billion passed through the company. Certainly, operating losses exceeded £500 million during Phoenix’s ownership of Rover. Meanwhile, the Phoenix directors caused outrage by awarding themselves lavish pay and perks, including a £10 million loan note, a £16.5 million pension pot, and control of a lucrative car loans business. Valuable assets were taken out of Rover and put into Phoenix. Phoenix directors paid themselves salaries at a level of twice that paid to the board members of BMW. BMW was furious and branded Phoenix as the ‘ unacceptable face of capitalism ’ as a result of their treatment of Rover assets. A House of Commons committee later accused the Phoenix directors of ‘ fi nancial sleight of hand ’ .

Rover runs out of road By 2004 time was running out for Phoenix; the company needed a partner and turned to the emerging markets. A venture with India’s Tata did not work out. Talks had focused on making a small Tata car in Britain and selling it as the Rover 15, although an alliance with Tata would not have provided a replacement for the Rover 25. A relationship with China Brilliance wasted more time and money. Yang Rong, a Chinese entrepreneur, ﬁ rst showed interest in buying Powertrain, the engine company that was by now a subsidiary of Phoenix. Then the

405 •• Market-Led Strategic Change

plan was for MG Rover technology and Yang’s investment to provide entry to the Chinese market. The deal failed when Yang was ousted as chairman and CEO of China Brilliance, one of the country’s largest vehicle manufacturers.

The Chinese rescue – back from the brink? • • • Rover looked to Shanghai Automotive in China to rescue the situation. The motivation for the purchase of Rover by the Chinese is clear. SAIC was already China’s largest car-maker, producing more than 600,000 cars a year, but had nothing to call its own. SAIC started out as a components manufacturer in 1958, made tractors in the 1960s and entered joint ventures to produce cars in the 1980s. SAIC was making cars only in joint ventures with Volkswagen and General Motors – copies of VW and GM designs made to their manufacturing blueprints. SAIC’s only brand was Wuling – a line of commercial vehicles. The last SAIC branded car – the Shanghai – had not been produced since 1991. Control of Rover promised SAIC control over its own brand and designs, and freedom from the dictates of Western suppliers – in 2005 90% of the passenger vehicles on the roads of China were foreign makes and the market was growing at around 35% a year. The Rover purchase was also seen as a bridgehead for international expansion. Rover announced that Shanghai Automotive, which already made cars under licence, would be investing in Rover in return for brands and technology, and that Rover would be rescued from its diffi culties by the Chinese. Certainly, SAIC gave MG Rover £67 million in return for access to vehicle technology. This was expected to be part of a much larger deal with SAIC paying MG Rover £200 million in total for rights to use the Rover brand name, Rover’s K-series engine technology, and the rights to make Rover models in China. The partners were to commit to designing and building four new models. The plan was to move production of the Rover 25 to China and import it back into the UK, which would have cost 2000 jobs in the UK. The British government was prepared to offer MG Rover a holiday from VAT and corporation tax payments, and the Chinese regional assistance grants to facilitate the deal. Rover also took advantage of the imminence of a general election to ask the government for further £100 million to keep the deal alive. In fact, SAIC was baffl ed by the Rover announcement, since they had only been interested in a joint venture with Rover, and no actual deal had been done. In particular, SAIC was adamant that none of its cash would go to the four owners of Phoenix at any stage, because of the political ramifi cations. There was also alarm in Shanghai at the prospect of a £400 million black-hole in Rover’s pension fund, and the degree of asset- stripping that the Phoenix directors had carried out. SAIC had envisaged two joint ventures, both majority owned by them, but not being exposed to the risk that if MG Rover went bust they would be exposed to liability for pensions, redundancy payments and possible litigation by suppliers. The Blair government agreed the pre-election loan, but with SAIC unwilling to proceed, Rover moved into the hands of the receivers.

•• 406 End-of-part cases

The Rover collapse • • • By April 2005 the MG Rover car plant at Longbridge was silent, Rover’s 6100 workers had been told to stay at home, some 70 key suppliers were refusing to send components because they did not believe that they would ever be paid, and the company was moving into administration. Some 19,000 jobs among suppliers in the Midlands were at risk, in addition to the Rover jobs. As the Rover board met to appoint PriceWaterhouse Coopers as administrators, Patricia Hewitt (then Trade and Industry Secretary) quickly broom-sticked to Birmingham, joined later by Prime Minister Tony Blair and Chancellor Gordon Brown, amid intense media and political interest. The Labour government was looking at the prospect of going into an imminent general election with 12,000 job losses in the West Midlands. When SAIC could not be contacted to step into the breach, under political pressure the Department of Trade and Industry provided a £6.5 million loan to pay staff for another week and give time to clarify the SAIC situation. On April 15 2005, in a letter to Patricia Hewitt, the Chinese made it clear that they were not interested in taking on MG Rover as a going concern. Rover sales in the last year of its operations had fallen from 356,000 to 106,680, with just 6500 vehicles sold in the last month. In its last year MG Rover’s level of productivity had fallen to just 16.3 cars per year for each employee – compared, for example, to 320 cars per employee at the Nissan plant in Sunderland. The only lifeline was £1 million a day from the government to keep things going – probably designed to delay Rover’s ﬁ nal collapse until after the general election in May 2005. The receivers announced in May 2005 that MG Rover had run up liabilities of £1.8 billion, and there was only an estimated £80 million in assets available to the unsecured creditors claiming £1.37 billion. It also became apparent that the Phoenix directors had kept Rover in business by raiding the accounts of Powertrain – the successful engine-making division – which collapsed with debts of £127.6 million, £102 million of which was owed by Rover. While there was no evidence of malpractice, it appeared that MG Rover had been trading while insolvent.

Chinese whispers and other party games Having caused the Labour government a pre-election crisis by pulling out of the rescue deal for MG Rover, in late-April 2005 SAIC revealed that it believed it had taken possession of the iconic Rover name as the result of its earlier agreement with the company. This caused some dismay to the government ofﬁ cials still trying to keep MG Rover alive – it robbed them of one of the group’s most valuable assets. An MG Rover spokesman insisted that the brand was still part of the group, while BMW maintained it still had control of the marque, having allowed MG Rover to use it free of charge. SAIC held the position that it had acquired the Rover brand as part of its £67 million deal with the company – building the case that it had the right to the Rover 75

407 •• Market-Led Strategic Change

and to produce and sell Rover cars in China. SAIC’s claims that it had exclusive rights to the brand and to produce Rover cars and engines – a claim rejected by the bankruptcy administrators – was a substantial barrier to selling all or part of Rover to interested bidders.

The Nanjing rescue • • • In July 2005 Nanjing Automobile, China’s oldest vehicle manufacturer, bought MG Rover for £53 million, beating a fi eld of more than a hundred interested buyers, in a bitterly contested and high profi le auction. This set the stage for an apparent battle between Nanjing and SAIC, the latter having also bid at a lower price. Nanjing and SAIC were jointly responsible for the collapse of Rover, which was triggered when both withdrew from joint ventures with Rover because of the company’s fi nancial weakness. Nanjing planned to ship much of Rover’s plant and equipment to China, and to start production again in the West Midlands of the MG TF sports car and the MG ZT saloon. Nonetheless, SAIC still maintained that it owned the designs for Rover’s small and large cars and engines. Nanjing is one of China’s most internationally ambitious car-makers, but is widely seen as a weaker performer than rivals like SAIC. Nanjing faced some major challenges in getting Rover production started again:

● Engineering – fi nishing development work on engines to meet new emission standards and testing production lines to ensure they still worked. ● Purchasing – fi nding suppliers for components in Europe, where many had lost money in unpaid bills when Rover collapsed, and could be reluctant to risk the same happening again, or look to Asia for lower cost components. ● Distribution – many Rover dealers were owed large sums when Rover collapsed and had moved on to other things, so a network of dealers might have to be established from scratch. ● Staffi ng – recruiting managers and employees familiar with Rover operations could be diffi cult if they have moved on to other employment, while the alternative of recruiting new staff meant additional training costs. ● Intellectual property – design rights for engines, Rover 25 small cars and the large Rover 75 saloon apparently were sold to SAIC for £67 million. Honda (a former Rover partner) had removed or destroyed blueprints for structural parts of the Rover 45 mid-sized car, based in part on the old Honda Civic. The sportscar designs were transferred to SAIC in 2005 by mistake. SAIC promised robust action to defend its rights, extending to the MG range, though Nanjing and the Rover administrators believed the MG range was excluded from the deal.

The rebirth of Rover? In March 2007 Nanjing, which had shipped several of MG Rover’s old assembly lines to China, began production there of a car derived from

•• 408 End-of-part cases the MG TF and a saloon for the Chinese market. Nanjing’s MG 7 (its version of the Rover 75) was a slow seller in China compared to the near-identical SAIC equivalent. The company had struggled to restart production of the MG TF sportscar in Nanjing and in the UK. After several postponements, in May 2007 Nanjing Automotive relaunched sportscar production, after a two-year hiatus since Rover’s collapse, in a ceremony in MG Rover’s old plant in Longbridge. Margaret Hodge, Industry Secretary, was quick to try to take credit by calling the plant reopening ‘ good news for UK manufacturing ’ and claiming that Nanjing’s investment at Longbridge was ‘re-establishing MG as a global brand ’ which underlined ‘ the continuing strength of our automotive industry’ . In fact, Nanjing was using only a fraction of the sprawling Longbridge plant capacity, and employing 130 staff, and a year later full-scale production had still not started. The chairman of Nanjing’s UK operation, Wang Hongbiiao, said he planned to produce 25,000 cars a year at Longbridge by 2008, and twice that number within two years. The company planned to build a network of around 50 MG dealers in the UK, and to begin selling cars on the European continent by 2008. Nanjing had also held discussions about possible assembly of MG cars in Ardmore, Oklahoma. None- theless, the CEO of Fiat – Nanjing’s foreign joint venture partner – had expressed concerns that the Chinese company was being ‘ distracted ’ by the MG project, with the result Fiat was considering scrapping its Nanjing partnership in favour of working with another Chinese car-maker.

The SAIC factor • • • Nanjing’s regional rival SAIC had also been active in the period since MG Rover’s collapse. SAIC had bought Ssangyong, the South Korean producer, in 2005. SAIC also owned the rights to former Rover models, which it produced in China under the ‘ Roewe ’ brand. One outcome of the muddled sale of MG Rover had been that both SAIC and Nanjing produced versions of the old Rover 75 and the MG ZT sports car. SAIC had the intellectual property rights following a deal done before MG Rover collapsed. Nanjing bought the tooling and equipment to make the cars, as well as rights to the MG name from MG Rover’s administrators. SAIC also inherited the planned successor to the mid-sized Rover 45, but was prevented from using the Rover brand by Ford’s acquisition of the Rover name (now believed to be part of the Land Rover and Jaguar sales package negotiated with Tata). At a late stage before the 2006 launch of the vehicle, SAIC was forced to rename its version of the Rover 75, the Roewe 750. Around 15,000 Roewe 750s were sold in China in 2007.

Things come together • • • At the end of 2007 the two halves of MG Rover were reunited with the merger of SAIC and Nanjing Automotive, in what was effectively the take-over of Nanjing by SAIC. SAIC paid $286 million for

409 •• Market-Led Strategic Change

the core operations of Nanjing, including the MG brand. The Chinese government approved the deal as a way of achieving consolidation in its motor industry and creating a globally competitive car-maker. The combined company has a production capacity of around 1.6 million cars, and has been nicknamed by the motor industry ‘Chinese Leyland’ . The deal aimed to lead to a wider range of models carrying the revived MG brand, some to be sold in the UK. Given the unsuitability of the Roewe name for export use, and the problems with using the Rover brand, it is planned new cars will be badged MG. The merger also brought to an end Nanjing’s disappointing car- making joint venture with Fiat, with the Italian group selling its 50% stake but planning to continue cooperation in commercial vehicles and components. SAIC planned the production of the MG TF roadster in Nanjing in mid-2008, with manufacture at Longbridge to start shortly after that. The long-awaited re-launch was subject to delay as SAIC struggled with quality issues and rebuilding the Rover tooling shipped to China. Serious concerns surrounded the quality of the vehicle. Nonetheless, the relaunch of the MG two-seater, which has a passionate UK and US following, marks the European debut for a Chinese-made car. About 70% of the vehicle, including engines, will be made in China and 30% in Europe.

Dilemmas for the new Chinese Rover business Access to the China car market for the MG brand looks promising. The China auto market is second only to the US in terms of vehicles sold, and car sales grew 35% in 2007. Nonetheless, China has dozens of domestic car-makers – many backed by local governments – engaged in ﬁ erce competition with the multinational giants which have increasingly targeted the Chinese market. In 2007 both Chinese and foreign companies have cut prices to attract customers, seeking to increase scale and market share. There remain major questions about whether the SAIC/Nanjing merger will create a car business that can take a strong position in this ﬁ erce competition. Internationally, the potential for Chinese producers in the global automotive market is also unproven. Most of the major international players – such as Ford, GM and Chrysler – are going through the painful process of downsizing because production capacity is out of line with international demand for vehicles. In retrospect, looking at the history of the business, it seems that none of Rover’s owners to date – corporatist British Leyland, the government, conglomerate British Aerospace, car genius BMW, or private buyer Phoenix – ever managed to resolve the company’s fundamental dilemma. That dilemma is that the brand is too small to succeed in the mass market, and yet too common to retain its prestige position, leading to failure to establish a strong position in international markets. Rover clung to the middle of the market and failed, notwithstanding government interventions which simply postponed the inevitable (usually for matters of political convenience). The question is whether the

•• 410 End-of-part cases new ownership can address this fundamental dilemma, and how it can address worries about quality associated with Chinese products.

Sources: Dominic O’Connell, ‘Why the Chinese Want to Buy Rover ’, Sunday Times, March 13 2005, p. 3-1. Krishna Guha, Jonathan Guthrie, John Grifﬁ ths and Jean Eaglesham, ‘The Wrong and Winding Road: Decades of Blunders That Took Rover to Ignominy ’, Financial Times, April 13 2005, p. 17. Alex Brummer, Dominic O’Connell and Andrew Porter, ‘The Getaway’ , Sunday Times, April 10 2005, p. 3-5. John Reed, ‘Nanjing Automobile Begins UK Production of MG Cars ’, Financial Times, May 30 2007, p. 20. Ray Hutton, ‘ China Tie-Up Paves Way for MG Rover Revival ’, Sunday Times, December 23 2007, p. 3-3. Patricia Ho, ‘SAIC Motor’s Parent Sets Accord with Rival Yuejin ’, Wall Street Journal, December 27 2007, p. 2. John Reed, ‘MG’s Two-Seat Roadster Poised to Return, Financial Times , February 5 2008, p. 23.

411 •• This page intentionally left blank

P A R T •••• III Processes for managing strategic transformation

Part III turns from the generation of robust marketing strategy, to the issues of implementation and change – what it takes to drive a strategy through an organization to successful and proﬁ table delivery into the marketplace. Actually getting things done and making important things happen has always been a weakness in marketing. The job does not stop with the beautifully produced plans, and the superb PowerPoint presentations. Strategic initiatives which do not happen, because no-one could be bothered to address the change processes required, are a waste of time and resources, and frequently career- threatening – getting managers excited about a new strategic direction and then not delivering has been compared to pushing into the queue in a pub in Glasgow: you can do it, but only ever once . . . First, in Chapter 10 we provide a structure for auditing the strategic pathway that we developed in Part II of the book – this aims to systematically answer the question of whether we have a strategy for this market and whether it is any good. It helps to focus our attention onto areas where we may need to do more work. The second part of this chapter examines the issue of strategic gaps or identifying and explaining the differences between strategic intent (what we want) and strategic reality (what we’ve got). Importantly, understanding the reasons for strategic gaps provides a foundation for addressing implementation and change issues in a way that is driven by strategic priorities. In Chapter 11, we examine the organizational issues surrounding the process of going to market – comparing the conventional marketing organization to the demands of responsiveness and innovation from customers, and the consequent emergence of new organizational forms built around value processes. The underlying need is for total integration in what we offer customers and developing organizational mechanisms that are up to this challenge. Market-Led Strategic Change

The last chapter draws together these themes and looks at implementation as a process that should be managed as actively and carefully as we manage the processes underpinning strategy generation (Chapter 12). We consider the sources of organizational barriers to strategic change and the potential of strategic internal marketing as a systematic way of enhancing a business ’ implementation capabilities.

•• 414 C H A P T E R • • • • 10 Strategic gaps: the difference between what we want and what we have got

This chapter ... If you are the sort of reader who does not like checklists, then you will hate this chapter because it has loads. There is an audit framework to overview the strategic pathway – you can use it as an aide-memoire of what we have covered in the last few chapters, or you can use it operationally to evaluate a company’s progress towards developing a robust, innovative and sustainable strategy in a speciﬁ c market. Then there is a framework for identifying the differences between what we want (and plan) and what we have actually got (the reality) – ﬁ nding the strategic gaps on which to focus attention. There are always strategic gaps. The value of identifying them is it tells you what you can do and what you probably cannot – or at least what it is going to take to change things. This sets us up to look at the process of organizational change and the role of an implementation strategy to back up our route to market.

Introduction This chapter sets out to do two things. First , since we have completed our review of the components of the strategic pathway, now it is time to look at the Market-Led Strategic Change

pathway as a whole and to ask the question of whether we can see a robust and innovative strategy developing, and identifying what areas need more work. The fi rst part of the chapter provides an audit framework to accomplish this. Second , if the strategic pathway makes sense, then many of the problems in getting things done can be seen as strategic gaps – the differences between what we want (our strategic intent) and what we get (our strategic reality). This is an interesting analysis for several reasons but particularly because it provides the mechanism for asking why strategic gaps exist and what we can do about them. This links neatly to the questions of developing organizational change and implementation strategies (which we look at in Chapters 11 and 12). However, this is probably also a good point to stand back for a moment and ask whether all this stuff actually matters. It is all well and good thinking and talking about strategy and change, and reinvention and transformation, but can anyone actually make this happen and make money from it? Actually, quite a few people seem to do both these things. While leading-edge companies like Procter & Gamble and IBM provide benchmarks, an interesting illustration of the power of a company getting its act together around its customer markets comes from the giant business-to-business organization, Thomson Corporation. 1 With the acquisition of Reuters, Thomson has become the largest information services company in the world. The company sells information services to businesses and professionals in the fi nancial, legal, tax and accounting, scientifi c and health care sectors, with the bulk of revenues generated through subscriptions. Thomson’s reinvention of its customer strategy has combined traditional and non-traditional research methods to produce a deeper understanding of the front-end user. Seeing the world through the eyes of the user has led Thomson to change market defi nitions, evolve new forms of product development strategy, modify pricing models, and even redefi ne who is considered the real customer. Thomson’s approach involved fi rst mapping out the company’s markets and reframing the defi nition by breaking the market down by end- user instead of purchasing company. This provided a clearer picture of the real addressable market whose needs could realistically be served. The second stage involved developing a better understanding of customers’ objectives and their workfl ow – combining quantitative survey data with ‘ day in the life ’ ethnographic research on how users did their jobs. A key part of the research was the ‘ three minutes ’ question – what were users doing three minutes before they used the products and for three minutes afterwards. The result was a detailed understanding of the activities of different kinds of people who relied on Thomson information products in their jobs. One outcome was changing product development priorities – developing new products around user needs, but focused on the biggest ‘ pain points’ in the user’s day – which aspects of their jobs were so problematic they would pay to make them better? Users were clus- tered into groups with different priorities and needs to guide product

•• 416 Strategic gaps: the difference between what we want and what we have got development efforts. The Thomson approach also involves continually evaluating and refi ning the market strategy, including sales and product development people up-front in the research, employing effective customer feedback mechanisms and gradually spreading the strategy across segments and businesses within the group. Through the period of implementation of this transformational market strategy, Thomson has not seen huge revenue growth, but has enhanced profi tability – operating profi t runs at around 20% – and has improved the quality of the sales revenue. Revenue is stable (83% is subscription income, with a renewal rate of more than 90%), giving Thomson the strength of repeatable, predictable and profi table business in a highly volatile market. The Thomson illustration is apposite for two reasons. First, it suggests that the things we have been discussing so far in this book can be put into practice with a positive impact on business performance. Second, it underlines that while having an effective strategy is important, so is implementation. This chapter looks at getting the act together around strategy, opening the way for the remaining two chapters to look at implementation and change issues.

Auditing the Strategic Pathway In Part II of the book we identifi ed the components of a strategic pathway: market sensing and learning strategy (Chapter 6), strategic market choices and targets (Chapter 7), customer value strategy and positioning (Chapter 8), and strategic relationships and networks (Chapter 9). Our perspective in approaching the strategic pathway was defi ned by the challenges of strategic thinking and thinking strategically (Chapter 5). This framework provides a basis for developing a value-based marketing strategy (Chapter 4). Recall that in Chapter 1 we said that one of the major challenges for managers in the new environment was actually ‘ having a strategy ’ in the fi rst place? One recent commentary sadly reinforces this imperative: ‘ It’s a dirty little secret: Most executives cannot articulate the objective, scope, and advantage of their business in a simple statement. If they can’t, neither can anyone else.’ Companies that do not have a simple and clear statement of strategy are those most likely to fail in implementation of strategy, or worse simply do not have a strategy making sense of what they are doing and where they are going.2 Given the common observation of frustrated managers and frontline employees resulting from the lack of a shared strategy, the strategic pathway is a simple model to guide the development of a strategy that focuses on delivering superior value in a target market. Bear in mind that the pathway components are highly interrelated and linked, not independent (so, for example, new market insights should feed into market defi nition and targeting and the value proposition, and so on). There is some advantage in taking an overview of progress with the strategic pathway for two reasons. First, it is often helpful just to get

417 •• Market-Led Strategic Change

our minds around the whole thing, but second, in the practical setting it is often useful to have a mechanism for articulating strategy and strategic needs to managers. For these reasons, as Appendix 1 to this chapter, I have included an audit checklist for the strategic pathway. It simply asks a series of questions about each part of the strategic pathway and whether they need more attention. Just to make it fun for the more competitive reader, the checklists ask for an evaluation of each question on a 10-point scale, and at the end of each section you can total the scores to get a score out of 100. The idea is to focus thinking on the questions and issues where we are weakest and need to do more. This is not perfect – you can change it if you want. But it provides a way of evaluating our progress in addressing the issues raised by each component of the pathway, and highlighting priorities for more attention. It is also a mechanism for taking an overview of the pathway model. If it helps in either of these ways, it’s yours to use. If the strategic pathway gives us a basis for judging whether we have a robust strategy, we need to turn our thinking to what it will take to implement the strategy, and particularly the difference between what we have got and what we want in driving the strategy.

Market(ing) Intentions Versus Market(ing) Realities We have covered a lot of ground in attempting to clarify what the substance of going to market is about – contrasting customer satisfaction and sophistication to make important choices in what we offer; comparing tired, old marketing approaches with new market realities; and thinking strategically around the strategic pathway. Now we reach the stage of testing out which bits matter most to the individual or organization, as part of clarifying what needs to go on our personal agendas for creating market-led strategic change. The pursuit of market-led strategic change suggests that we are seeking something new. But one issue is whether we have got our marketing ‘ act ’ together or not, and what it takes to keep it together or get it together around our strategic goals.

Getting the Marketing Act Together One of the major practical problems we face in dealing with this lengthy, overlapping, conﬂ icting, uncertain, messy and complicated set of issues that make up market strategies and marketing programmes, is packing the whole thing together, i.e. creating the ‘value offering’ that matters to the customer. It seems inherent in the nature of the issues we are managing that all too often it goes wrong because we do not succeed in doing this effectively – where effectiveness is judged by the customer not by ourselves. We may start with grandiose ideas about our mission and our competitive positioning, and how we can achieve these through differentiation and advertising strategy, and the like. But what matters is the

•• 418 Strategic gaps: the difference between what we want and what we have got

reality of what this turns into in the marketplace (i.e. what the customer receives, perceives and consequently evaluates and talks about). This is about what some have taken as the difference between ‘ intended ’ and ‘ realized ’ strategies. There is a compelling logical argument surrounding this distinction,3 but for present purposes we are dealing with something really very simple: intended strategy or strategic intent – what we think the business is about, or want the business to be about, in the marketplace; and perceived strategy or strategic reality – what the business is actually about in the marketplace, as it is perceived by the people who run the business, and ultimately as it is perceived by the target customer (the ones we have lost, as well as the ones we have gained, incidentally).

Strategic gap analysis Before we set about changing the way we do things, one of the things we should really sort out is where we are now. This is the point of the straightforward strategic gap analysis shown in Figure 10.1 – where we compare our strategic intent (our plans and strategies) to the strategic reality (where we really are in the customer marketplace). In other words, the goal is to evaluate our performance in translating our market strategies into marketing realities in the marketplace. We can do strategic gap analysis to evaluate our present position, before building new strategies and plans, or later as a way of evaluating our success in changing things as well. For these purposes, strategic intent is what we think the business is seen to be doing in the marketplace – the underlying question here is ‘ for our strategy to be real, what would our marketing operations have to achieve?’ – and strategic reality what the people who run the business and the customer tell us the business is really about in the marketplace. What we ask is: what is our intention (in the plan or strategy) and what do we actually have, in areas like:

● Our products and services , in terms of such issues as quality compared to competitors, fullness of range, image and brand identity compared to alternatives, design attributes, functional features and ‘ extras ’ , reliability of services, and so on.

Strategic Strategic Comparison intent reality

Strategic gaps Figure 10.1 Strategic gap analysis

419 •• Market-Led Strategic Change

● Our pricing and value proposition , in terms of the real position in price level against competitors and alternatives (prices customers are quoted and pay rather than published list prices), and how we are seen in ‘ value for money ’ compared to competitors. ● Our communications in terms of the quality and role of our selling efforts and our coverage of the market, the image and awareness created by advertising, the effectiveness of our promotions, and so on, all as compared to our competitors. ● Our distribution , in terms of the availability of the product in the marketplace (at the time, in the form, in the place that the customer wants it), the quality of the service provided in terms of waiting time, service provision, maintenance, and so on. ● Our customer relationships, in terms of how customers feel about us and how we stand against our competitors. ● Our strategic positioning , in terms of the stage of the life cycle our product has reached, the strength of our market position, our success in achieving a differentiation in the customer’s eyes, and what we have achieved in customer satisfaction.

If it helps in doing this, then use the diagnostic framework provided in Appendix 2 to this chapter. In using the diagnostic, the areas you choose will depend on what is most important to your strategy – you need one diagnostic sheet per issue to be examined. But bear in mind that on most of these issues we are not looking for sophisticated, research-based quantifi cation to start with – qualitative input in the form of two or three bullet points in each box of the diagnostic is often enough to achieve what we need. More sophisticated inputs can be developed later, if the exercise is paying-off for us. Incidentally, while there is no doubt we are likely to get some useful insights into how well our strategies are translated into reality by completing the analysis ourselves, as objectively as possible, and focusing on the strategic gaps that we identify, the real insights come when we ask our staff in the fi eld, our sales and service people, our technical departments, in the company what they believe to be the strategic reality, i.e. let us see what the people who are in touch with the market day-to-day tell us about the reality. There is, of course, only one logical conclusion, which is that ideally we ask our customers, and our distributors, what is the strategic reality that they perceive in our marketing programme and our strategic positioning. This can be turned into an expensive and sophisticated market research exercise, or it can be much simpler. The point is that the real answer to whether we have got our marketing act together or not can only come from one source – the paying customer. We may have to make do with second-best – distributors, salespeople, outside experts – but all they are really doing is giving us their views about what matters to the end-paying customer. There may well be practical diffi culties in doing this, but the further you progress down this list of participants in the analysis, the better the results are going to be. With each new set of inputs to understanding the strategic reality as it is perceived by others, we are going to

•• 420 Strategic gaps: the difference between what we want and what we have got collect new strategic gaps and further ideas for what conclusions we should reach. There is also a variation that may be useful in applying this diagnostic. We assumed above that our view of strategic intent was both correct and, by implication, fully understood. If we are not completely comfortable with this, we can also test the strategic intent column as well by asking the same people what the strategic intent was as they understand it, in delivering the strategy to the market. This may well lead us to incorporate in our conclusions quite simply that strategic gaps exist because the key players – like salespeople, service staff, distributors and so on – did not know what was required of them in making the strategy happen. In fact, American researchers have suggested that if you really talk to service and distribution employees about their work priorities, it is clear that their real mission in most cases is simply to stay out of trouble, i.e. which customers can we ignore and give poor service to, without getting pain from the company? Now compare that to the marketing plan . . . The type of issues and questions which this process of diagnosis is likely to throw up are:

● Are there serious gaps between what we think the strategy is and what the perceived reality is? ● Why do these strategic gaps exist, what could be done to move the reality closer to the intent, would this be possible and would it pay? ● Are some of the strategic gaps realistically impossible to close, is our strategy hopelessly out of line with our resources and capabilities? ● Where in formulating strategies and planning marketing programmes do we confront the strategic reality as it is described to us by the sales force, the distributors, the customer? ● Is the problem one of reformulating the strategy (i.e. moving the intent closer to the reality) or managerial action (i.e. moving the reality closer to the intent)?

If done thoroughly this piece of analysis can achieve two major things for us: ﬁ rst, it uncovers how well we translate our market strategies into integrated operational programmes of action, and second, it forces us to look not just at our goals and creative ideas, but at what the operational personnel and the paying customers tell us it really looks like from their point of view. The results can be both revealing and insightful in their own right, but can also push us towards asking how we can actually go about changing and adapting to the realities of the match between our company’s capabilities and what matters most in the marketplace. More speciﬁ cally, the output from this analysis is likely to fall into the following categories, which can be handled differently:

● Strategic gaps because the marketing and other departments or functions are poorly integrated – look at Chapter 11 for some views on this and some tools to close the gap.

421 •• Market-Led Strategic Change

● Strategic gaps because line management does not accept the valid- ity of the strategic intent – consider the issue of market sensing and understanding in Chapter 6 and internal marketing in Chapter 12. ● Strategic gaps because the strategic intent is out of line with corporate capabilities, or they represent aspirations not shared by the people who actually run the business – consider processes for change in Chapter 11 and implementation strategy in Chapter 12. ● Strategic gaps because the marketing programme is not resourced in line with the strategic intent – consider the process problems described in Chapter 11. ● Strategic gaps because there are too many internal barriers to make the strategic intent real – consider the internal marketing issues in Chapter 12. ● Strategic gaps because when plans and strategic intents were conceived, we did not take the implementation issue seriously – see Chapter 12 on implementation strategy and strategic internal marketing. What next? If we have reached the position where we have a clear idea of the robustness of the strategic pathway and the resulting strategy, and a clear view of the strategic gaps that exist or are anticipated, then the issue becomes about implementation and change – how do we plan to close the strategic gaps and execute the strategy? At this stage, it is time to consider issues concerning organization structure and the processes which support change (Chapter 11), and the development of explicit implementation and internal marketing strategies to create change (Chapter 12). In the real world, all things tend to be iterative. The conclusions we reach at this stage may indicate the way forward to achieve the effective implementation of a new strategy, or they may suggest that this strategy cannot be made to work effectively in this organization, with these people, with these structures and processes, and this level of resource support. Either conclusion is better than the usual executive behaviour of writing plans, doing presentations and standing back to see that nothing much happens as a result of the effort, and this now has to be explained to senior management (usually by blaming the sales force or any other convenient scapegoat).

References and End-notes

1. This illustration is based on: Harrington, Richard J. and Anthony K. Tjan, ‘Transforming Strategy One Customer at a Time’, Harvard Business Review , March 2008, pp. 62–72. 2. Collis, David J. and Michael G. Rukstad, ‘Can You Say What Your Strategy Is?’, Harvard Business Review , April 2008, pp. 82–90. 3. Mintzberg , Henry , ‘ Opening Up the Deﬁ nition of Strategy ’ , in Henry Mintzberg and J. Brian Quinn , The Strategy Process , 2nd edn , London : Pearson , 1997 .

•• 422 Strategic gaps: the difference between what we want and what we have got

APPENDIX 1 TO CHAPTER 10 A checklist for auditing the strategic pathway

STRATEGIC THINKING How are we doing?

Needs more As good as attention we can get

1. Do we have the mechanisms and processes that 12345678910 create the space to confront the challenges in marketing as strategy rather than marketing as tactics and operations? 2. Are we able to identify and make explicit the 12345678910 dilemmas implicit in strategic choices and test the underlying assumptions in what we do in the marketplace? 3. Do we understand the mandate for growth and 12345678910 how/if this can be achieved? 4. Does our perspective allow for reinvention rather 12345678910 than incremental change? 5. Are we able to think about strategy which is more 12345678910 than simply imitating and following competitors? 6. Have we accommodated the threats and 12345678910 opportunities in radical and disruptive innovation in our thinking? 7. Do we take seriously the issues of timing and 12345678910 speed to market and make strategic choices? 8. Have we considered how we will cope with 12345678910 failure and potential crisis if the strategy fails? 9. Does our thinking address the issues of social 12345678910 legitimacy and corporate responsibility in ways appropriate to the market? 10. Have we developed the approaches and 12345678910 processes that facilitate thinking strategically and imaginatively about the business and its future – are we able to think strategically?

TOTAL SCORE OUT OF 1OO

423 •• Market-Led Strategic Change

MARKET SENSING AND LEARNING STRATEGY How are we doing?

Needs more As good as attention we can get

1. How well do we understand our customer 1 2 3 4 5 6 7 8 910 groups and their changing priorities?

2. What information advantages do we have over 1 2 3 4 5 6 7 8 910 the competition and are we exploiting them in building a higher Market IQ?

3. How well do we link our internal information 1 2 3 4 5 6 7 8 910 sources and conventional marketing research to management understanding of the market (i.e. market sensing)?

4. How well are we focusing our information 1 2 3 4 5 6 7 8 910 search on strategic priorities?

5. How well are we exploiting the full range of 1 2 3 4 5 6 7 8 910 approaches (conventional, cross-over and intelligence) to build a learning advantage?

6. Are we an intelligence eagle or an intelligence 1 2 3 4 5 6 7 8 9 10 ostrich?

7. How well do we manage our customer 1 2 3 4 5 6 7 8 910 knowledge to create a continuing learning process?

8. How carefully do we approach the process of 1 2 3 4 5 6 7 8 910 interpreting and re-interpreting what we have learned about the market?

9. Do we look for a structured approach to market 1 2 3 4 5 6 7 8 910 sensing and interpretation around plans and strategies?

10. How well do we actively manage the sensing 1 2 3 4 5 6 7 8 910 process to create and sustain competitive advantage? TOTAL SCORE OUT OF 1OO

•• 424 Strategic gaps: the difference between what we want and what we have got

STRATEGIC MARKET CHOICES AND TARGETS How are we doing?

Needs more As good as attention we can get

1. Have we got a view of market deﬁ nition based 12345678910 on customer needs and customer differences, as opposed to products and demographics?

2. Can we identify the competitive box for this 12345678910 market and how the external changes will impact on us?

3. Can we map the structure of the market and 12345678910 identify critical changes in the ﬂ ow of products and services to end-users?

4. How well do we understand the underlying 12345678910 segmentation structure of the market based on customer beneﬁ ts and relationships sought, and the way it is likely to change?

5. How well do we link external segmentation 12345678910 models to internal structures, processes and capabilities?

6. How well do we understand our positioning in 12345678910 the market relative to others?

7. Do we understand whether we are a ‘blue 12345678910 ocean’ or a ‘red ocean’ competitor and if this is what we want?

8. How thorough are we in regularly examining 12345678910 the market for new market space opportunities?

9. Have we carefully evaluated and agreed the 12345678910 criteria that make a market or segment attractive to us, and a position in the market good or bad for us?

10. How good are we at applying those agreed 12345678910 criteria to make explicit and reasoned market and segment investment choices?

TOTAL SCORE OUT OF 1OO

425 •• Market-Led Strategic Change

CUSTOMER VALUE STRATEGY AND How are we doing? POSITIONING Needs more As good as attention we can get

1. How well do we incorporate value as it is 12345678910 perceived by different customer groups (segments) in our plans and strategies?

2. Do we exploit the opportunities that exist to 12345678910 quantify and demonstrate added value to customers?

3. Have we got all we can from mission analysis 12345678910 to link corporate values to market success factors and internal consistency?

4. Can we anticipate the corporate social 12345678910 responsibility pressures and opportunities in this market, and set ourselves up to defend ourselves and exploit new value-creating opportunities?

5. How well do we understand the competitive 12345678910 differentiation between different players in this market?

6. How well can we identify our core 12345678910 competencies compared to others in the market and exploit them to create value?

7. How good are we at identifying and using 12345678910 our differentiating capabilities to build a customer value advantage in key segments and markets?

8. How well can we identify and evaluate 12345678910 our marketing assets, and deploy them strategically to build a competitive advantage? 9. Do we have clear and impactful value 12345678910 proposition to the customer that makes us stand out from the rest?

10. Do we understand what type of value 12345678910 proposition we have and whether this is the most advantageous in this market?

TOTAL SCORE OUT OF 1OO

•• 426 Strategic gaps: the difference between what we want and what we have got

STRATEGIC RELATIONSHIPS AND NETWORKS How are we doing?

Needs more As good as attention we can get

1. Can we identify the parties with whom 12345678910 effective relationships are essential to drive the market strategy?

2. Do we fully understand what our value 12345678910 proposition means to our relationship with the customer and what it will take to deliver the value proposition?

3. Do we understand the type of relationship 12345678910 that different types of customer want to have with us and how this matches our capabilities?

4. Do we have a deep understanding of 12345678910 competitor and other contingent forces in the marketplace that can undermine our strategy – and how to cope?

5. How well do we understand the psychology 12345678910 of our competitors and the emerging sources of new types of competitors?

6. Have we allowed for the collaborations 12345678910 and partnerships that will be required to reach the customer (including those with distributors and retailers)?

7. Are we actively building the management 12345678910 abilities and systems needed to manage those partnerships and supply chain relationships?

8. Do we fully understand what the market 12345678910 strategy requires of our co-workers? 9. Are we sure that co-workers can and will 12345678910 deliver what is required to drive the value proposition?

10. Do we have a full picture of the relationship 12345678910 network that underpins our market strategy, and the management challenges it poses?

TOTAL SCORE OUT OF 1OO

427 •• Market-Led Strategic Change

THE STRATEGY How are we doing?

Needs more As good as attention we can get

1. Do we have clear objectives and goals for 1 2 3 4 5 6 7 8 910 what the strategy should achieve?

2. Is what we are proposing compatible and 1 2 3 4 5 6 7 8 910 supportive to company mission and values, or sense of purpose?

3. Have we deﬁ ned the competitive arena in 1 2 3 4 5 6 7 8 910 which we plan to compete – what sectors, markets, segments, technologies?

4. Have we identiﬁ ed the business model we 1 2 3 4 5 6 7 8 910 need, i.e. the value chain and the products and services we will provide?

5. Have we identiﬁ ed and tested our source of 1 2 3 4 5 6 7 8 910 competitive differentiation over alternatives – what is our real competitive advantage?

6. What is the timing – when do we need to act 1 2 3 4 5 6 7 8 910 and over what time period?

7. Do the sales and ﬁ nancial forecasts 1 2 3 4 5 6 7 8 910 make sense against company goals and expectations?

8. Can we reduce our strategy to a simple 1 2 3 4 5 6 7 8 910 statement that can be communicated to people in the company and partner organizations?

9. Will the strategy gain support from the people 1 2 3 4 5 6 7 8 910 in the company and partner organizations?

10. Do we have a clear plan for how we will 1 2 3 4 5 6 7 8 910 monitor progress with the strategy and demonstrate achievements? TOTAL SCORE OUT OF 1OO

•• 428 Strategic gaps: the difference between what we want and what we have got

APPENDIX 2 TO CHAPTER 10 Diagnosing strategic gaps

STRATEGY (define the item or issue in the strategy on which to focus)

STRATEGIC INTENT STRATEGIC REALITY STRATEGIC GAPS (list in simple terms how the (list in simple terms what this (compare the differences strategy needs this item to issue looks like in practice) between intent and reality and look or perform) summarize the gaps) * * *

* * *

REASONS FOR THE STRATEGIC GAPS AND CHANGES NEEDED (for each important strategic gap between intent and reality, identify the reasons and what would have to change for this gap to disappear)

429 •• This page intentionally left blank

C H A P T E R • • • • 11 Organization and processes for change: building the infrastructure to make it happen

This chapter . . . This is where we talk about the vexed issue of organizing for marketing (or actually not as turns out frequently to be the case these days). As a formal or professional business function, marketing is in the dog-house – its status has probably reached an all- time low. If you look at the weak and tokenistic way we organized ourselves to do marketing, this is not wholly surprising. If we follow the logic of market- led strategic change, then the issue is how do we get a company’s act together around what matters to customers? We have coined the term ‘total integrated marketing ’ to identify this goal – pulling everything together across the different departments and external partner organizations to deliver superior value to customers. Sounds easy. It is not. It helps if we put marketing into the context of the major shifts in organizational design being experienced in companies (which helps), and then adopt a process-based perspective on marketing (which helps a lot more). The agenda for building the type of organizational infrastructure capable of managing the innovation, change, collaboration and new business models we have been describing is not Market-Led Strategic Change

straightforward. However, it probably matters quite a lot if we are serious about getting stuff done. It is more about managing processes for change than building bigger marketing departments.

Introduction We have said that many of the strategic gaps that provide barriers to doing new things result from how we have organized ourselves – specialist departments ﬁ ghting turf wars, divisions vying for control of resources, poor capabilities for collaborating with partners because they are ‘ outsiders ’ , and cultures of risk aversion that favour the status quo . * However, the days of throwing organizational resources at marketing, hoping this will make it work are over. In fact, there are a lot of people around who think marketing is a bit of a liability in the organization and should disappear. The status of marketing has slipped somewhat. This is all well and good but the challenge of getting to market remains. In fact, if we look at how we went about organizing for marketing, the results were not too impressive, and it is not surprising that people might think more of this is a waste of money we don’t have. However, not all is gloom and doom. The growing recognition of the competitive strength of integrating all the things that matter around customers – total integrated marketing – provides the opportunity for re-opening the question of how we should set ourselves up to create, sustain and implement market strategy. Even more encouraging is if we look at the context provided by the ways in which organizations are changing at the broad level to cope with turbulent environments, intense competition, the need for innovation, challenges of collaborating across organizational boundaries and the priority of managing talent, then this resonates with the role of marketing as strategy rather than operations as we have been describing it here. Most particularly, the new emphasis on managing process rather than structure provides the platform for a dialogue about process-based marketing, which may be one of the most important conversations for the CEO to have.

Marketing’s Organizational Status Notwithstanding the fact that marketing people are universally warm and cuddly, love their cats, stand up for the National Anthem, phone their Mums regularly, recycle their paper waste, never ﬂ y, measure their carbon footprints, and are vigorously politically correct in all aspects of their lives, it appears that marketing is not always perceived as a positive force for good in organizations.

* . . . and anyone who likes their music deserves what they get.

•• 432 Organization and processes for change: building the infrastructure to make it happen

No one loves us any more One of our earliest fi ndings about marketing organization was that marketing people appear to be pathologically unable to avoid upset- ting everyone else in the organization. Part of this may refl ect their obnoxious personalities, but it is also because, as Philip Kotler pointed out some thirty years ago, one of the problems with being a conscien- tious marketing executive is that to do your job well in the customer’s terms, you are likely to have to persuade other people in the company to do their jobs less well in their terms, for example: product variants cause production and operations costs to rise; multiple price lists aggravate accounting systems; multi-channelling upsets salespeople; service offers put pressure on customer service; and so it goes on. The result of differences in perspective and departmental goals and objectives is confl ict – hidden or open, but confl ict nonetheless. When marketing’s organizational status is low they tend to lose the internal battles. The trouble is, it may be the most important battles they lose, because things like managing to achieve customer satisfaction and value and making market strategies work, are the most likely to cause discomfort elsewhere in the organization. It is perhaps less than surprising that the result is that marketing executives are frequently not the most loved individuals around. A study by Synesis for the Marketing Forum found that the majority of executives in other functions (Finance, Human Resource Management, Logistics, Sales/Customer Service, Production and IT) rated their marketing team’s effectiveness as adequate at best and often poor. HR Directors commented: ‘ Marketers should be more communicative . . . more pragmatic and less egotistical ’ , while fi nance directors described their marketing peers as ‘ brash . . . wide-boys . . . fl ash . . . uncontrollable . . . into freebies . . . never in the offi ce . . . over-enthusiastic ’ .1

Reality Check: Inter-departmental conﬂ icts with marketing

Never argue with stupid people. They drag you down to their level and then beat you with experience.

More recently, Susan Baker reported her research into what non- marketers think of marketing people – they want to have the best of everything, make heavy use of statistics and incomprehensible terminology, and insist on taking long lunches when everyone else is cutting back. More speciﬁ cally, non-marketers’ messages to their marketing colleagues are:

● You’re not accountable – marketing people consider themselves the ‘ chosen ones ’ , deserving quick promotion, with little company

433 •• Market-Led Strategic Change

loyalty, and incur high costs without demonstrating value (and take the credit for other peoples ’ work when things go right). ● You’re (a touch) arrogant – marketing people get what they want by using (and abusing) market research and jargon. ● You have long lunches – marketing people are seen to operate off- site and have long lunches, and to have a general air of ‘busyness ’ with no apparent purpose. ● You’re always in meetings – marketing people do nothing but hold meetings, lack structure in their work, and show a heavy internal orientation. ● You work a shorter day – marketing people swan around while others do the real work. ● You’re unaccountable, untouchable, slippery, expensive – marketing people are out of touch with their colleagues. 2

OK, you may say, so what if the spanners in the factory, the beancounters in accounting and the bleeding hearts in HRM don’t like us much? Well, it gets worse.

No one listens to us any more One potentially disastrous outcome of the low esteem in which many functional specialists appear to hold marketing is that they stop listening . Research by Elliot Maltz and Ajay Kohli suggests that when marketers try to share insights and information with other departments, they are frequently ignored or misunderstood – often the fi ght now is actually to get marketing’s voice heard in the company. 3 Part of the problem is that marketing may make insuffi cient or weak efforts at communicating with other departments. However, there is more to it than that. For example, in studying the integration of marketing and R& D, research fi ndings suggest that it is inter-functional rivalry and political pressures that severely reduce R& D’s use of information supplied by marketing personnel.4 It seems it’s not just that they don’t like us – they won’t believe what we say either. That is pretty serious.

Reality Check: People in R& D?

They are the ones who can tell you the volume of a jar of jam, and the viscosity and specific gravity of the jam. They just can’t get the lid off the jar. R & D executives are like a lighthouse in the desert – brilliant but of no practical use.

•• 434 Organization and processes for change: building the infrastructure to make it happen

But what about the marketing department? Surely this can’t be right – who cares if they like us, as long as we have a powerful marketing department to get things done? Actually, as will see shortly, the formal integration of marketing has always been hard to fi nd in real companies – most marketing departments have very limited direct control over so-called marketing issues. In fact, there is growing evidence that the functions we used to assume would belong in the marketing department are being dispersed yet further across the organization. As marketing priorities are changing to cope with the new marketplace, marketing is fragmenting across the company – the competition to ‘ own the customer ’ and to control the business processes that drive customer value appears to be one that conventional marketing has lost. In reality, there has been vocal opinion for some time which suggests that the traditional marketing department is a thing of the past, as market strategy moves to a relationship focus instead of transaction, and that centralized marketing organizations are ‘ dinosaurs ’ .5 Popular commentators have long said top management considers marketing departments to be ‘a millstone around an organization’s neck ’ and that ‘ marketing departments are in top management’s sights ’. Certainly, in the UK and the USA the majority of main boards in leading companies do not have marketing representatives. At the end of the day – if there is a better way of going to market than having traditional marketing departments, then they will disappear. As one commentator puts it: ‘Theoretically, the marketing department should have been “the voice of the customer ” within the corporation. But in practice, over the past few decades, that voice seems to have been all but silent. ’6 For example, there are strong signs that in many major companies, management is shifting resources from marketing to sales and account management, recognizing that these areas are more crucial to achieving the goals of marketing and business strategy. 7 Certainly, currently in leading US companies, the chief marketing offi c- ers last only 26 months on average (half the tenure of the heads of other functions), as traditional marketing fails to deliver what companies want and need.8 It is not helpful to the marketing cause when research suggests that there is no signifi cant evidence of any positive fi nancial impact being achieved by having a senior marketing executive in the top management team. 9 It seems that marketing has become ‘a professional discipline struggling to come to terms with the changes that confront it, and struggling to defi ne itself for a new era.’ 10 Unhappily, the present status of marketing in the organization probably represents the dilemma we uncovered in Chapter 3 – that traditional approaches to marketing are increasingly irrelevant to business performance, and only marketing as strategy can deliver value. However, more positively, it is for exactly these same reasons that people are seeing the ‘ rise of the strategic marketer’ – the new ‘growth champions ’ focused on customer-centric strategy.11 The search is for a

435 •• Market-Led Strategic Change

new deﬁ nition of marketing as a strategic business function focused on customer value, which may not need to be a specialized organizational function or department.12 In the same way that old marketing fails to meet the challenges of new markets (Chapter 3), old forms of marketing organization fail to meet the challenges of making value-based marketing strategy real. We can now do two things: we can look at the vestiges of the traditional marketing organization, because in many places you still ﬁ nd these hanging on, but then we can look at the challenges of managing integrated processes in new types of organization.

Organizing for Marketing Let’s just have a quick look at the mess we made of organizing for marketing when we had the chance, just to convince ourselves that the answer to the problem is not trying to build giant marketing departments.

The rise and fall of the marketing empire For a long time it looked like the smart thing to do to make marketing effective was to organize it. There is a lot of theory that suggests we need to have marketing departments: if we want to implement marketing strategy we need marketing structure; how we organize marketing may be at least part of how we differentiate ourselves from our competitors; the way we organize refl ects how we divide up the market; the way we structure determines how information fl ows in the company; structure determines resource control; and so on. If you want chapter and verse on this stuff, you can fi nd it elsewhere.13 Organization is a signifi cant competitive weapon, and it can be a way of changing important things. However, where it all started to go wrong was with the myth of the all-powerful corporate marketing department. People began to assume that everyone would and should have a textbook marketing department. It was very convenient to assume that: there would be a marketing department , formally organized and resourced around the market entities that matter most – geographical areas, customer types, product groups, specialized marketing functions and so on; naturally there would be a chief marketing executive , a powerful fi gure in the company, controlling signifi cant resources and directly managing the customer interface; marketing functions (elements of the ‘marketing programme’ ) would be integrated into the marketing department; marketing would be the voice of the market and customer in the company, and, since structure follows strategy and we all believed in being market-oriented, then it followed logically that to implement marketing we would naturally organize marketing along the lines above. What is even worse is that the people who wrote textbooks and designed executive education and training in marketing went along

•• 436 Organization and processes for change: building the infrastructure to make it happen

with these assumptions – because if we assume that the organization is sorted out, then we can talk about more interesting things like new product development and advertising, and so on. The trouble is that for most companies these assumptions come from cloud cuckoo land – they simply are not true, and in most cases they never were. In fact, experiences with a variety of organizations suggest that one of the things that went wrong in many UK companies was that we simply did not organize ourselves properly to make marketing happen. Indeed, in some cases we organized to make it virtually impossible for it to happen effectively. With collaborators, I did a number of research studies of how companies in different sectors organized for marketing.14 We found in a large number of companies there were no structures or systems whatsoever for implementing marketing. In many others marketing structures were weak token gestures with no real chance of changing anything. We had to conclude that generally speaking companies did not organize to make marketing happen in any real way – even if they thought and said that they did.

The reality of corporate marketing organization For a start, in what we believe to be a reasonably representative sample of the heart of British manufacturing industry, about half the companies did not have a marketing department or a Chief Marketing Executive. This is not to say that having a marketing department is a ‘ good ’ thing and not having one is a ‘ bad ’ thing – far from it, because life is rarely that simple. It does mean that the conditions assumed as ‘ normal ’ in how we have all been trained in marketing, simply do not exist in many companies, and that is a major cause for concern. Where we did ﬁ nd marketing departments they were typically very small in headcount. Where we found marketing organizations, we asked – what are these Marketing Departments actually responsible for? The astonishing conclusion was that many had formal responsibility only for advertising and market research. Very few had any serious integration of even a very partial listing of ‘ marketing ’ responsibilities. In fact, we found that in large numbers of the companies, ‘marketing ’ areas like sales, distribution, customer service, exporting and trade marketing, did exist, were formally organized, but were organizationally separated from the Marketing Department and the Chief Marketing Executive. Indeed, one interesting insight was gained by looking at marketing ‘ critical success factors’ as perceived by executives. Basically the more important the critical success factor was thought to be, the less likely it was to be handled by the marketing department. We decided to dig deeper and look at what were the decision areas where Marketing Departments played some kind of role. In fact, there seemed to be ﬁ ve broad areas of involvement of marketing departments: selling , product policy , marketing services , corporate strategy and physical distribution . Now this is a little closer to the conventional view of what marketing is about, but the results do not mean that all CMEs are

437 •• Market-Led Strategic Change

Responsibilities High

Strategy/ Integrated/ services full-service marketing marketing departments departments

Small Large Size (headcount)

Limited/ Selling- staff role oriented marketing marketing departments departments

Low Figure 11.1 Types of marketing department

responsible for all these areas, simply that these are how responsibilities fall into groups. It was clear that the responsibility factors above were not shared equally by all the CMEs and Marketing Departments, so we took each company’s scores on the responsibility factors, and grouped the companies according to their scores. The result is shown in Figure 11.1 . What we found was that, in terms of responsibilities (shared as well as formally ‘ owned ’ ), we could identify four quite different types of Marketing Department.

● Integrated/full-service marketing departments . These were the closest we found to the ‘textbook ’ model, and they showed a relatively high degree of integration of marketing functions and personnel. These organizational units had high scores on all the responsibility factors, so they controlled or inﬂ uenced the major marketing decisions, and they are large units in terms of headcount in the company. Make no mistake, these departments have ‘ clout ’ – they have a high power ranking in their companies. ● Strategy/services marketing departments . These marketing departments showed a much lower degree of integration, their high responsibility rating comes from product policy, marketing services and corporate strategy, not from selling or physical distribution. They were also much smaller units – in some cases only two or three people. However, they were powerful. This power came not from involvement in line marketing activities, but from being close to strategic issues and planning, and thus close to top management. Small, non-integrated units, but high-powered with ‘ clout ’ and inﬂ uence. ● Selling-oriented marketing departments . These were large departments in headcount, but scored far less in terms of integration and

•• 438 Organization and processes for change: building the infrastructure to make it happen

had relatively low scores in the strategic areas – corporate strategy, product policy and so on. They were dominated by the selling responsibility. They were, however, generally relatively powerful in perceived rank within the business. ● Limited/staff-role marketing departments . These were small departments, with the lowest scores on all the responsibility factors, and were mainly involved with staff services like market research and sales promotion. They were not powerful. Indeed, they seemed largely peripheral to the main business of the company – token gestures towards the marketing concept.

With few exceptions, most executives recognize the situations described as relating to their own companies. Indeed, one of the exercises we have used with executives is to ask them to judge which type of marketing department they have in their companies, and to describe what it is like to work in such a department – what are the problems, the barriers, and so on.

What is it like to work in a strategy/services marketing department? • • • The most common complaint here is (and I quote one executive, for whose sentiments I take no responsibility): ‘ the meat-heads in the fi eld, who just won’t listen, who can’t think past today, and don’t understand what we are trying to do with the business!’ Less emotionally, people describe the problems of being isolated from the fi eld operation, the problems of communication with the sales and distribution operations, and the lack of line authority over people in the fi eld. People also describe being uncomfortable with reliance on only informal infl uence and advocacy, and on top management sponsors, for the credibility and acceptance of the sophisticated marketing strategies and plans they produce.

What is it like working in a selling-oriented marketing department? • • • The real answer is, just the same as working in a Sales department, because there is a lurking suspicion that these are repackaged, rela- belled sales operations, rather than marketing departments as such. One executive (for whose articulations I also disclaim responsibility, but include for balance) suggested somewhat forcibly to me that the real problem he faced was ‘ the MBA fairies at head ofﬁ ce, who have never met a customer or done a deal in their lives, and should get their hands dirty before they try and tell us about marketing strategy! ’ You will understand that people get a bit heated about issues such as these. What people describe is isolation from centralized decision making, and lack of involvement or consultation about major strategic marketing decisions. They describe how intelligence from the ﬁ eld is apparently ignored, and their problem is to ‘ sell volume not quality’ . People

439 •• Market-Led Strategic Change

describe the domination of short-term, urgent issues over longer-term marketing questions. These executives describe company views of marketing as purely high-pressure selling, razzmatazz and hype, and lavish executive entertainment expenses.

What is it like working in a limited/staff role marketing department? • • • People in this situation gain sympathy from most audiences as the great unloved of the marketing community. These are the purveyors of sales brochures, the organizers of sales promotions and sales conferences, the doers of market research (which is almost always ignored by decision makers), the progress-chasers. People here describe their role as the marketing ‘ go-fers ’ , as being peripheral and powerless at the edge of things – isolated both from the ﬁ eld and strategic levels. The only problem is that every so often, someone turns round and holds you responsible for declining sales and market share, poor strategic positioning, or the like, because you are the Marketing Department, aren’t you?

What is it like working in an integrated/full-service marketing department? • • • Maybe marketing executives are just natural whingers, but any expectation that executives from this type of marketing organization will be evidencing smug smiles and happy dispositions compared to their less fortunate peers is quickly dashed. Executives here describe the effects of bureaucracy – committees to coordinate the disparate parts of the marketing operation; inter-departmental committees about budgets, production issues, staffi ng and training, etc., memos and reports and jurisdiction disputes, and so on. They describe inter-departmental confl ict – with fi nance, with operations, with corporate planning. They describe the intervention of top management and inter-departmental committees in ‘marketing ’ issues like advertising and promotion – where everyone is an ‘ expert ’ . They describe having token control of resources, where allocation decisions are really made by others. They describe the pressure to ‘ disintegrate ’ marketing in the perpetual ‘ empire-building ’ game in their organizations.

How did it all go wrong? If we put together these various pieces of evidence, what emerges is a list of fundamental things that seemed to go wrong in how we organized ourselves for marketing. Even with what we have found so far we can ask ourselves the following questions: is this really the way to effective implementation of innovative market strategies; is this really how we are going to achieve the focus on customers and customer satisfaction in the companies, that we said we wanted; is this really how we are going to pack together our strategies and marketing programmes to create a distinctive differentiated total offering to the

•• 440 Organization and processes for change: building the infrastructure to make it happen customer; or is this where some of the worst strategic gaps originate? Just consider what we are really saying about how companies have tried to organize for marketing.

Isolation of strategy from operations • • • In many of the real situations we ﬁ nd, companies have developed marketing organizations, apparently designed purposefully and spe- ciﬁ cally to drive an impenetrable wedge between strategies and operations in marketing .

Reactive, short-term marketing • • • Given the choice between thinking long-term and going for short-term results in income, and demonstrably solving urgent operational problems, most of us will probably plump for the latter most of the time – it is easier, more comfortable, more familiar, it is what we are good at, and in many of the organizational situations we have described above it is apparently what the company seems to want us to do.

No direction or mission • • • It follows from the last two points that by separating strategic marketing issues from the operational level of doing things, with the resulting dangers of short-termism and reactive marketing, then we may well have organizationally created for ourselves a headless monster stum- bling from crisis to crisis. If that is how you are running your marketing, then the achievement of a strategic direction, or the drive of a customer-oriented mission, is likely to be just a little bit elusive.

No market leadership in strategy • • • In many of the real marketing organizations we have studied, those wonderful visionary concepts of the marketing department as the voice of the customer in the corridors of power, the constant provider of the discipline of the marketplace, are simply cloud-cuckoo-land. If you organize marketing around sales brochures, or short-term selling operations, or keep the marketing organization weak and peripheral, then you have already made your choice about marketing’s voice in long-term strategy. The question is – did you mean to make that choice; and indeed, did you realize you had made it?

Weak implementation of marketing • • • If you follow the conventional logic, then how you organize something is how you implement what you are trying to do. For reasons not unrelated to those above, if you look at how companies actually organize for marketing, then it is not a bad indicator of just how serious they are about actually making it happen – or not, as the case may be.

441 •• Market-Led Strategic Change

Strategy follows structure • • • What we have seen and been told about by executives all too often can be described as the exact reverse of the rational, conventional logic. Far from the strategies chosen leading to the adoption of appropriate organizational structures to implement marketing, we see the existing structures (because of what they stand for) as a prime determinant of what goals and strategies are actually adopted by a company. This may sound perverse, unless you dig a little deeper and ask what organizational structure really represents. When you get past the ‘ rational ’ explanations, structure is about: power – the organization chart is a snap-shot of who runs the organization (and who doesn’t); inertia and the status quo – because structure tells us about who runs things, it also tells us what are the vested interests in the present position, and it is not hard then to fi gure what they are likely to buy in terms of strategic change (and what they won’t); status – issues of organizational level and position, relative departmental size, recognition in key memberships of decision-making committees, and so on, are about status or perceived power and sponsorship (or the lack of it); culture – or simply ‘ the way we do things here ’ – is partly shown by organization positions, and the ‘ share of voice ’ that different parties have in making important decisions (or the lack of it); information – information is the other dimension of organizational structure, because structure shows us how the information fl ows – or perhaps more revealing yet, what information does not fl ow. It seems impossible to avoid concluding that many of the problems we have faced in getting the marketing act together have been because we missed the point about marketing being more than just another specialized function. But before anyone starts running around demanding that marketing should be reorganized, I think we may have missed the boat on that one. The reality is increasingly that we have to forget about marketing departments and look at what new types of structure we need to focus on customers, to develop new strategies, to deliver the service that matters, to integrate, to collaborate, to manage partnerships, and to manage change. The good news is that the role of marketing is becoming much more strategically important – but this means marketing processes not marketing departments . The issue of the type of marketing department may still be important in some companies, along with the questions about its effectiveness in driving market strategy – you need to have a look at what you have got, and use that as the basis for identifying the real implementation problems you face in getting things done. See where your marketing department falls on the model in Figure 11.1 , and see what that tells you about the real problems. Perhaps the most serious shortcoming in how we set about organizing for marketing was the weak integration of processes around customer value that you get by having specialized departments and functions. Increasingly, we are talking about ‘ total integrated marketing ’ and process-based marketing as ways of addressing the priority of getting the act together in how to go to market.

•• 442 Organization and processes for change: building the infrastructure to make it happen

Total Integrated Marketing15 New ways of going to market have a clear implication: we have to focus on integrating and coordinating everything in the company that goes towards identifying, meeting and delivering the customer’s value requirements – we have to pull together all the activities and processes in the company that impact on customer value, by the way we manage the process of going to market (see Figure 11.2). The critical question in the new ways of delivering superior value to customers is marketing as a process, not marketing as a department or function. This is a bigger challenge than just reorganizing marketing departments. It suggests one or two problems too. The trouble is that traditional ‘command and control’ organizations appear to have been established precisely to prevent us integrating and coordinating things around the customer. Rigid, hierarchical organizations do not permit the merging of systems, activities, people or anything much else. People and what they do have been put in boxes, and the boxes have been put in divisions, and lines have been drawn between them – those lines have become a straitjacket preventing movement, change, or integration, and resisting the challenges of those who try to achieve these things.

The overwhelming priority of integration There is not much new in suggesting that getting the real marketing job done – i.e., delivering superior value to customers – requires

Accounting Production Supply & finance & operations chain Sales

Partner Processes that define value organizations

Alliances Processes that create value

Networks Processes that deliver value

Human Purchasing Research & Customer resource & supply development service management

Figure 11.2 Total integrated marketing

443 •• Market-Led Strategic Change

working with other functions better and more effectively. For example, inter-functional coordination is central to how people understand what makes an organization market oriented,16 and to the attainment of customer service goals and customer value. The trouble is, the fact that people have to keep saying it kind of suggests we may not be too good at doing it. What this all suggests is that integration is actually now the main challenge facing marketing, and it is not likely to be achieved by re-building the departmental bureaucracies of the past (or worse, starting them for the ﬁ rst time). It is not just me. For example, Northwestern University’s Don Schultz tells us that in the customer markets that we now face:

‘. . . integration of the entire organization becomes critical. Everything must work together, ﬁ t together, and appear together for the customer . . . increasingly it is viewed as a way to develop and implement the critical customer’s view of the organization. An organization can no longer consist of a group of unrelated activities and work groups because customers won’t accept that. ’ 17

Inter-functional partnership Marketing has generally not been very good at managing across functional or organizational boundaries. We should focus on the potential for conﬂ ict (which needs to be managed) between functions and the prospect of shared interests and partnership (which should be exploited), with each of the main functions in the company and beyond – and maybe we should do this before everyone consigns marketing to the corporate rubbish bin? Marketing folks really are going to have to learn to play nicely with the other boys and girls, or face the harsh consequences of not doing so. Exact priorities for inter-functional partnerships will depend on the situation faced and the strategy in question, but examples of critical cross-functional relationships include:

● Marketing and Finance/Accounting – viewing customers as assets with impact on shareholder value provides a basis for avoiding traditional conﬂ icts on marketing resource allocation, and lining internal systems up with customer value imperatives. ● Marketing and Operations – the challenge is matching internal capabilities in operations and supply chain management, e.g., in speed, ﬂ exibility, quality management, operational systems – with market opportunities. ● Marketing and Sales – in many situations the sales force represents the ability of the company to implement marketing strategy, which is constrained by lack of ‘buy-in ’ , and traditional sales management practices which do not support strategic change. ● Marketing and R & D – the challenge is building structures to link innovation and research capabilities with market opportunities.

•• 444 Organization and processes for change: building the infrastructure to make it happen

● Marketing and Customer Service – customer service operations may represent the most important point of contact between a customer and the company and impact directly on customer perceptions of value, mandating alignment with strategic initiatives. ● Marketing and Human Resource Management – the key issue may be building competitive advantage through the quality of the people in the company, with major implications for aligning processes of recruitment, selection, training, development, evaluation and reward with business strategy requirements.

Many successful companies display characteristics of cross-functional effectiveness. This capability may be a key attribute of the market-led company of the future.

Routes to totally integrated marketing There is no perfect solution that ﬁ ts all situations to achieve better integration across functions, but there are a lot of things than can be adapted and tried out. Some perspectives on achieving total integration are considered brieﬂ y below.

Pan-company marketing for real this time • • • The words ‘ pan-company marketing ’ have been around a long time, and a lot of managers have paid lip-service to them, before retreating back into their functional silos. If it is real, then pan-company marketing is about aligning everyone on the organization around the same customer commitment and market focus – everyone from the CEO to the telephone salesperson. This is about achieving a customer-centric philosophy for the whole company to be embraced by everyone, and needs the support of knowledge management, relationship management and supply chain management. Put another way, if everyone knows what the brand stands for, it helps determine investment and new product priorities, the choice of business partners, distribution strategies, the risks worth taking, the areas to ‘ lean ’ , and so on. If that is the ideal, then the issue remains – what are the tools we can use to get there (or at least closer than we are now)?

Leadership and vision • • • Certainly, the advocacy of pan-company marketing and the fully customer-centric company has got to be about more than running around telling people that ‘ Marketing is everything and everything is marketing’ ,18 which seemed to be the approach last time around. Something which is ‘ everything ’ is liable to become ‘ nothing ’ pretty quickly. We have argued elsewhere that for a totally integrated marketing effort to be effective, then the core strategy of the organization needs to be the driver of all the functional activities that affect the customer. Increasingly, customers will accept nothing less than totally

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integrated marketing (about which they could not care less) to deliver them superior value (about which they care quite a lot). This may turn out to be a deﬁ ning characteristic of effective company leadership.

Communicating out of the silo • • • A start is to look at how well, how regularly and how effectively we have built channels of communication between marketing and the rest of the company. This is about interaction and its effects. 19 The paradox is that executives who pride themselves on skills and expertise in communicating with customers often seem unable to ﬂ ex those same skills and expertise inside the company. Research suggests that the reason why marketing insights are often ignored or misunderstood by other departments is how often and in what manner marketing communicates with other functions. 20

Collaborative relationships inside the company • • • Integration based on building collaborative relationships is mainly about informal processes, based on trust, mutual respect and information sharing, the joint ownership of decisions and collective responsibility for outcomes.21 Some people suggest that what we really need to do is to build alliances and use the same skills inside the organization in partnering, as we have tried to do outside the organizational in inter-company and supply chain alliances.

Formal mechanisms for integration • • • A lot has been written about formal mechanisms for integration, particularly in areas like new product development, although the evidence of what works in different situations is mixed. 22 The types of mechanisms for achieving integration include the following: relocation and design of facilities – mainly concerned with using spatial proximity to encourage communication and exchange of information between people and to reduce conﬂ icts; personnel movement – including joint training programmes with other functions, job rotation, and so on, with a goal of helping people understand and allow for the language, goals, perspectives, problems and priorities of other functions; rewards – some suggest changing reward systems to pay people for achieving higher level goals not just functional objectives to provide managers with incentives to interact more with other functions and bring their goals into line; formalization of procedures – others take the approach that centralized control over procedures and systems is the route to achieving better integration across functions – for example, project investment proposal documentation that requires coordinated input from marketing, ﬁ nance, operations and IT is one way to encourage working together around a common goal; social orientation – others suggest that part of the problem may be solved by encouraging people in the organization to interact in a social, non-work related setting, as a way to let them understand each other better and to avoid

•• 446 Organization and processes for change: building the infrastructure to make it happen

conﬂ icts;* project budgeting – another approach is to centralize control over ﬁ nancial resources so that they are channelled to the project and its team, not to functional departmental managers.

Process focus • • • We noted earlier that many organizations are moving away from reliance on functional organizations – departments staffed by ‘specialists ’ – to reorganize around processes, such as innovation, customer support and so on. In part, this reﬂ ects the weaknesses of functional organizations, but also the need to respond faster and more effectively to change – this demands that we work ‘in parallel’ not ‘ in sequence ’ . Marketers may have a number of speciﬁ c skills to bring to the process party – identifying innovation opportunities; brand building capabilities; and experience in building networks and partnerships that can work together to deliver superior value.

Cross-functional teams • • • One established and possibly overused tool is the use of teams drawing members from diverse functions and levels in the company. The main idea is to pool the talent needed to solve a problem or manage a project all the way through – focusing on the goals of the organization not the department or function – but the subsidiary beneﬁ ts are reducing barriers between functions and the team members acting as ‘translators ’ and mediators in inter-functional relationships on a longer-term basis. Some companies even include suppliers, distributors and customers in this type of team, to achieve integration across the organization’s boundaries, as well as between functions inside the organization. The danger, of course is that teams become a battlegound for turf control, power plays and budget ﬁ ghts.

Reality Check: The six phases of a new project

1. Enthusiasm. 2. Disillusionment. 3. Panic. 4. Search for the guilty. 5. Punishment of the innocent. 6. Praise, honour and rewards for the non-participants.

*Those who rely too heavily on this solution have probably never witnessed the blood spilling at the average company inter-departmental football or cricket match, or the careers ruined at the ﬁ rm’s Christmas party.

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Organization structure • • • Some major approaches to improving cross-functional integration bring us back to the issue of structure – and the management dictum ‘ if all else fails, let’s reorganize’ . Noel Capon and Mac Hulbert describe some of these approaches as follows: inclusion organizations – sharing marketing responsibilities rather than putting them in a department; business process organizations – one outcome of the re-engineering movement has been the attempt to organize around business processes by some companies, so the company retains functional structures but much of the work is done by cross-functional process-based teams; customer management organizations – although it is a mixture of structural change and information technology, the current trend towards Customer Relationship Management systems is a form of this approach to integration. The problem with approaching the integration issue through structural change alone is that we may achieve no more than conformity, not genuine commitment across the company, and people will just keep their heads down until the latest management fad has run its course.23

Internal marketing • • • One of the key tasks facing marketing in the future may be internal marketing – marketing the customer, the strategy and the marketing process to all parts of the organization. Increasingly, this responsibility may extend to developing and sustaining relationships with alliance partners and other organizations in the network, because they also impact on the value that we deliver to the customer. We will develop a practical framework for internal marketing strategy later (see Chapter 12).

A strategic approach to total integration • • • There are major limitations in thinking about the relationship between marketing and each of the other functions in the organization: fi rst, there may be no marketing department, or if there is one it may fall far short of the ‘ marketing function ’ ascribed to it by the textbook; and second, the key issue is probably about the network of relationships spanning functions, projects and interest groups in the organization – e.g., what is the point of marketing getting cosy with fi nance if this destroys its credibility with operations? The need is for a strategic approach to integration, not a piecemeal one. However, if we accept that many existing approaches to organizing marketing do not deliver the strategic change capability that we need, and even if we buy into the notion of total integrated marketing, we probably still do not have an answer to what is marketing going to look like in the organization of the future. We can add two additional sets of insights: fi rst, the way we organize for marketing will refl ect the ways in which organizations themselves are changing, so we can look at that; and, second, the development of a process perspective seems essential, so we should delve into that as well. There is no all-encompassing

•• 448 Organization and processes for change: building the infrastructure to make it happen

ready-made answer to how we should organize to make marketing processes effective, but these ideas may help.

New Types of Organization How we think about organizing resources and people to implement new types of strategy and to manage marketing processes should be considered in the context of broader shifts in the way in which organizations are being shaped and managed. Indeed, some argue that as the key link between the fi rm and the outside world, marketing should perform a leadership role in organizational change initiatives. 24 Organization design is an imperative for senior management, and a key element of corporate strategy. Traditional approaches to organizational structure – usually vertically oriented with ad hoc changes and overlays – make critical aspects of organizational working more complex and less effi cient. If organizing models lag behind the demands of new strategies, there are obvious limits on how well a company can perform in implementing strategy.25 While fl atter organizations (with fewer management levels) are being created, as well as more disaggregated organizations (with more functions outsourced to partners), and traditional hierarchies are being broken down, the debate about the characteristics of the new organization and the shape it will take continues. We are looking at the ‘new organization ’ resulting from major organizational design shifts and replacing traditional structures with innovative approaches that refl ect management priorities, new business models and change in the competitive landscape. Much of the challenge is to strip unnecessary complexity out of organizations to enhance agility and performance.26

The new organization27 Traditional structures • • • Conventional approaches to organizing usually consist of business units, operating similarly but separately, controlled by a central authority (head ofﬁ ce) that determines strategy and watches over implementation. This is a system of ‘command and control ’, made visible in organization charts that lay down organizational hierarchy. Boston Consulting Group reports that ‘ the imperialist corporate center ’ remains the commonest type of headquarters/business unit relationship. Even when companies decentralize decision making and accountability, they often recentralize when they run into trouble. The failing of the traditional approach is that it creates barriers to the spread of knowledge across the organization and to achievement of economies of scale. Ideas and commands ﬂ ow vertically between the centre and the business unit, creating ‘ silos ’ with little communication across the business units. Globalization frequently leads to attempts to add a ‘ matrix overlay’ . For example, Philips established both national

449 •• Market-Led Strategic Change

geographic organizations and product divisions, held together with coordinating committees designed to resolve conﬂ icts between the two lines of command. The matrix overlay has proved problematic, and Philips is pulling back to a more conventional structure. Effective organization design requires more than ad hoc structural changes. In traditional organizational structures, units were either within the organization and closely connected to other units, or they were outside the organization and not connected at all. Transactions with external suppliers were at arm’s length. The line between what was inside and outside the organization has become blurred with the rapid growth in joint ventures, alliances and other strategic relationships. Partnering and inter-organizational collaboration strategies further underline the need for new organizational approaches.

Organizational design shifts • • • Many organizations have implemented major changes in the way they manage and organize, and many others are re-thinking their needs. The shift may be substantial. IBM has, for example, changed from a company once dominated by lifetime employees selling computer products to a ‘ conglomeration of transient suppliers’ – in the modern IBM, 50% of employees have worked for the company for less than ﬁ ve years; 40% of the 320,000 employees are ‘ mobile ’ , meaning they do not report daily to an IBM site; and about 30% are women. Changes in the ways in which companies are organized are driven by communications technology, the globalization of production and sales and the transfer of responsibility to outsiders for core business functions, through outsourcing, joint ventures and alliances. Change is also mandated by the way in which individuals work to carry out their job responsibilities, and the emergence of the ‘ networked worker ’ – working electronically from a knowledge-base and constantly communicating. For many organizations, reducing organization costs may be a major part of recovering competitiveness.

Reality Check: Organizational change at Cadbury–Schweppes

Cadbury–Schweppes is the world’s largest confectionery business. Under competitive pressure and the close attentions of activist shareholder Nelson Peltz, Cadbury–Schweppes is radically reshaping its business. Cadbury has relatively low profit margins compared to its competitors – Cadbury averages 10%, compared to 18% at Wrigley and Hershey. The low margins are linked to Cadbury’s complex operating structure, with many brands and manufacturing sites.

•• 450 Organization and processes for change: building the infrastructure to make it happen

The restructuring at the company involves the US drinks business – Dr Pepper, 7-Up and Snapple – being spun off as a separate operation and possibly sold. The goal is to find savings of around $500 million a year from the remaining confectionery business, including closing some global manufacturing operations. The biggest focus is on overheads – sales, general and administrative costs. Some administrative functions are to be outsourced. The organizational structure at Cadbury has become too complex with too many overlaps. Organizational costs account for 20% of turnover, as compared to 12% for Cadbury’s rivals. The restructuring is to cost around $900 million.

Sources: Ben Laurence, ‘Cadbury Sheds 5,000 jobs in Drastic Revamp’, Sunday Times, June 17 2007, p. 3-1. Jenny Wiggins, ‘Cadbury Sweet Talk on Confectionery Revival Fails to Move Sceptics’, Financial Times, Wednesday June 20 2007, p. 22 .

Innovation • • • A key force shaping the new organizational form is the imperative for enhanced rates and effectiveness in innovation to achieve organic growth. Increasingly, innovation is achieved by companies looking outside their boundaries for knowledge and expertise, rather than relying on internal R& D or marketing initiatives. Companies like IBM and Procter & Gamble have opened their organizational boundaries to partner with innovation drivers from outside their companies. The management of cross-boundary relationships requires new approaches to organizing.

The knowledge-based worker • • • Innovation and growth depend increasingly on knowledge workers or professionals. Knowledge workers have ‘ thinking-intensive ’ jobs.28 They represent a growing proportion of the employees of large companies – possibly as much as 25% of employees in fi nancial services, media and 29 pharmaceuticals. Knowledge workers may operate more effectively as ‘ internal partners ’ rather than conventional employees. Knowledge workers have been identifi ed as the source of future wealth for companies, but a resource that requires different organizational approaches to achieve effectiveness. The management of knowledge workers may put less emphasis on formal structure and reporting lines, and more emphasis on: (1) leadership, concerned with the individual, the team and goals; (2) talent management, to provide career development paths in fl attened organizations, and to retain talent in the organization; and (3) a culture of innovation and creativity. ‘ Talent marketplaces ’ inside the organization allow capable employees to plot their own career paths internally.30 The effective management of talent may make many traditional organizational practices increasingly unattractive.

451 •• Market-Led Strategic Change

Managing culture • • • The active management of the culture of an organization may be a key element of achieving and sustaining competitive advantage. Toyota aims to have employees who are self-motivating and to a high degree self-directing, and the ‘Toyota Way’ embodies the values and culture that guide decision making. Toyota’s progression to becoming the number one automaker in the world has been characterized by initiatives that focus on avoiding complacency and emphasizing change.

Reality Check: The Toyota way

The distinct business beliefs and methods at Toyota have their origins in the five principles laid down in 1935 by the founder, Sakichi Toyoda, though they were not formally documented until 2001, when the company recognized that the growing number of Toyota employees outside Japan needed to be trained in their use. PILLAR I: Challenge – we form long-term vision, meeting challenges with courage and creativity to realize our dreams. Kaizen – ‘Continuous improvement – we improve our business operations continuously, always driving for innovation and evolution. Genchi Genbutsu – ‘Go and see for yourself ’ – we go to the source to find the facts to make correct decisions, build consensus, and achieve our goals. PILLAR II: Respect – we respect others, make every effort to understand each other, take responsibility, and do our best to build mutual trust. Teamwork – we stimulate personal and professional growth, share the opportunities for development, and maximize individual and team performance. Everything Matters Exponentially: Toyota’s management regularly launch organizational initiatives to enhance shared corporate values. In 2007, having reached the position where Toyota is neck-and-neck with General Motors to be the world’s biggest car- maker, within two months Toyota launched a far-reaching initiative called EM2 – ‘Everything Matters Exponentially’. In the USA EM 2 is a total re-examination of product planning, customer service, sales and marketing, and involves retraining all US factory workers. The key is a relentless reinforcement of a culture that avoids the ‘big company disease’ of complacency which lets bad habits set in.

Sources: Thomas A. Stewart and Anand P. Raman, ‘Lessons from Toyota’s Long Drive’, Harvard Business Review, July/August 2007, pp. 74–83. David Welch, ‘ Staying Paranoid at Toyota ’ , BusinessWeek , July 2 2007, pp. 80–82 .

Collaborative working • • • Companies emphasize the importance of organizing around teams. Executives are increasingly expected to work as team members, but

•• 452 Organization and processes for change: building the infrastructure to make it happen

also to be skilled at constructing effective teams. Boston Consulting Group explains how at Linux, the open-source software ‘ community ’ , teamwork managed to deal with a virus that had breached a vulnerable spot in the operating system – 29 people, many of whom had never met, employed by a dozen different companies, living in many different time zones, and stepping outside their job descriptions, accomplished in 29 hours what would otherwise have taken weeks or months. Linux emphasizes community not structure, and work principles that energize teams and reduce costs.

Informal networks • • • Culture change and effective teamwork requires insight into the informal networks that employees create outside their company’s formal structure. Mapping networks shows most people combine with clusters of eight to ten people with whom they communicate most, and with whom they feel ‘ safe ’ . Some inﬂ uential individuals move across network clusters – they are ‘ knowledge mules’ who carry ideas from one corporate silo to another and thereby generate new ideas. Knowledge ‘ mules ’ , or brokers, are critical to innovation. Higher levels of interaction between employees is associated with the ability to solve complex organizational problems.

Organizational diversity and external relationships • • • New organizations are likely to contain contradictions – some parts centralized, others not; close and loose relationships between business units will co-exist in the same company. Organization structures in the future may consist of some strategically aligned businesses linked closely where there are opportunities to create value from leveraging shared capabilities, but other business units with loose relationships because greater value lies in a differentiated focus. Outsourcing core business functions to partner organizations poses another collaborative working challenge. Some organizations have insourced back functions that had been outsourced – for example, some banks are bringing payment processing back into their companies to leverage the data for insights that will provide new business platforms. Dependence among businesses creates new sources of uncertainty and risk. Companies may develop extended organizational forms to cope. One type of structure may manage outsourced operations, and another structure may work better for internal activities. Boeing’s partners’ ‘ council meetings ’ are illustrative of new approaches to managing and organizing relationships with external partners.

Organizational agility and fl exibility The new organization places emphasis on fl exibility and agility. Markets and competitive scenarios that change rapidly place a priority on speed and responsiveness. Traditional organizational forms may be too slow in response to exploit new opportunities as they occur and respond effectively to competitive threats. Speed may require fi nding

453 •• Market-Led Strategic Change

new ways to identify opportunities, launching initiatives with agile teams, breaking the unwritten rules of the organization, outsourcing tasks to specialists, and using the same business model again to exploit further opportunities.31 Toyota, for example, emphasizes ‘ the criticality of speed ’ , constantly focusing on ﬂ exibility and market responsiveness, and the organization is designed to be faster than that of competitors. The design of an organization affects its ability (and willingness) to respond quickly. The advantage of doing things faster than the competition is clearly established in various kinds of business. Zara’s skill in moving fashion from design to the store in weeks instead of months enables the retailer to market new designs ahead of its competitors. At Toyota, teams of designers, engineers, product planners, workers and suppliers are required to work face-to-face, in the process Toyota calls obeya – literally ‘ big room ’ . This dramatically cuts the time it takes to get from drawing board to showroom. It took only 19 months to develop the 2003 Solara – well below the industry average of about three years.32 Organizations that set themselves up to do things faster often have a competitive advantage. Business agility provides a competitive strength based on ﬂ exible technology and structures, and new working practices that allow organizations to remove bottle-necks and points of rigidity. In the past, organizations were designed with stability in mind. The priority now is to build organizations that are capable of changing. One of the strengths of self-managing teams and small, close-to-the-customer business units, is greater organizational responsiveness and speed in adapting to changed circumstances.33

Employee motivation The effective design of new organizations is, in part, related to the motivation and aspirations of the people who work at all levels in the company. Booz, Allen & Hamilton research underlines that for talented people in Western companies today, fi nancial incentives matter far less than non-fi nancial factors – esteem, a challenging and varied job, the chance to work on teams, the opportunity to interact with interesting people. It is dangerous to assume that people are motivated only by money and to design organizations and processes on that basis. For example, IBM has shifted the emphasis in annual bonus schemes from the performance of the employee’s individual unit and towards that of the company as a whole. At Toyota, most of a manager’s bonus is linked to the performance of the business in the whole of his/her region, and only a small part to individual performance. The life aspirations of individuals entering professional and management roles are also signifi cant. Conventional approaches to organizing run the risk of creating organizations in which the most talented individuals cannot work productively. Managing the ‘ new workforce ’ in an era of globalization, connectivity and collaboration will require more sophisticated approaches to organizing than the centralized ‘ command and control ’ methods of the past.34

•• 454 Organization and processes for change: building the infrastructure to make it happen

Reality Check: The Millennials

The new employees now starting or preparing for organizational careers are variously called ‘the Millennials ’, the ‘MySpace Generation ’, or ‘YouTube Disaffecteds ’ – they live, buy, play and socialize online.

Source: Getty Images

455 •• Market-Led Strategic Change

Social networking websites are a way of life. Many are fed-up about jobs, health care and debt. Currently in their teen years, the MySpace Generation will be the staff of our major organizations within a few years. The children of the baby-boomers – twentysomethings or Generation Y – are already marching into the workplace. They are ambitious, demanding and question everything. They are different. They have many tattoos and piercings. When it comes to loyalty, the company is the last on the list. They are never far from Lindsay Lohan. They actually think Lily Allen is funny. They always seem to be at the gym. The idea of a ‘work ethic ’ doesn’t work. Home is the only safe place to be (so many continue living with their parents). If they don’t like the job – they walk out (because the worst that can happen is moving back home). Work/life balance is very important. They want interesting work from the first day, and for people to notice and react to their performance. They are expected to be the most high-maintenance workforce in the history of the world, but also the most high-performing.

Sources: Jessi Hempel, ‘The MySpace Generation’, BusinessWeek , December 12/19 2005, pp. 63–70. Nadira A. Hira, ‘You Raised Them, Now Manage Them’, Fortune, May 28 2007, pp. 26–33. Michelle Conlin, ‘ Youth Quake ’ , BusinessWeek , January 21 2008, pp. 32–36 .

The organizational context from which we go to market is changing substantially and rapidly. Traditional organizational forms simply cannot survive in the modern situation – they are too slow and unrespon- sive, too bureaucratic and too expensive. New organizations may be based on networks and inter-organizational partnerships to facilitate collaboration. New organizations place emphasis on the management of process more than the management of administrative structures. Importantly, this provides us with the background to consider a process- based perspective on marketing as well.

Process-based Marketing A process-based perspective on marketing has several possible levels, which can be useful in addressing the types of changes needed to drive strategy through. We can consider marketing as value processes that cut across the whole organization (or possibly the network including external collaborations), and we can take a process perspective on key decision-making processes like marketing planning and budgeting.

Managing organizational marketing processes We saw that a key characteristic of the new organization is an emphasis on managing organizational process, rather than an emphasis on

•• 456 Organization and processes for change: building the infrastructure to make it happen

structure.35 Figure 11.3 illustrates possible new forms as companies move away from traditional hierarchical structures. The logic is that traditional, vertical organizational hierarchies have been the norm in the past and led to functional organizational structures. However, numerous pressures are pushing towards an emphasis on process- based structures leading in time to the completely horizontal organizational structure. However, in this progression hybrid structures are likely: overlaying processes onto functional organizations and later building a functional overlay to complement a process-based structure.36 At the time of this research, a study of 73 companies by the Boston Consulting Group placed 32% in the hierarchy, 38% in the process overlay and 30% the functional overlay form. No horizontal structures were reported. The prevailing organizational forms appear to be the hybrid overlay structures. As suggested in Figure 11.3 , the structures of large established companies are moving toward horizontal business processes while retaining integrating functions (planning, human resources) and specialist functions (research and development, operations). The processes are major clusters of strategically important activities such as new product development, order generation and fulﬁ lment, and value/supply chain management. As companies adopt process structures, various organizational changes occur including fewer levels and fewer managers, greater emphasis on building distinctive capabilities using multi- functional teams, customer value-driven processes and capabilities, and continuously changing organizations that reﬂ ect market and competitive environment changes.37

Functional overlay

Traditional Horizontal vertical Functional Process organizational organizational structure structure structure hierarchy

Process overlay

Hybrid structures

Figure 11.3 Changing organizational themes Source: Adapted from Day, ‘ Aligning the Organization to the Market ’, 199735

457 •• Market-Led Strategic Change

From a marketing perspective, this hybrid organizational form may take the form shown in Figure 11.4 , which is based on observation of several major companies moving their organizations in this direction.38 The names given to major processes vary but are concerned in general terms with deﬁ ning, creating and delivering value. The processes are led by senior executives. Support for processes comes from resource groups, which may be conventional functional departments or business units, or external collaborators. Coordination mechanisms link process management with resource group management, such as business plans and planning groups or cross-functional teams. While this kind of change is still evolving, consumer goods companies like Kraft Foods have pioneered the move toward hybrid structures, and away from traditional product and brand management approaches in order to place greater emphasis on customer management. Kraft organizes its teams around three core processes: the consumer management team replaces the brand management function to focus on customer segments; customer process teams replace the sales function to serve retail accounts, and the supply management team manages the logistics function. A strategic integration team develops effective overall strategies and coordinates the other teams. Functions remain but their role is to coordinate activities across teams to ensure that shared learning takes place, to acquire and develop specialized skills, to deploy specialists to the cross-functional process teams and to achieve scale economies.39

Processes that define value e.g. knowledge management, CRM

Process Processes that create value leadership e.g. new product development, innovation Processes that deliver value e.g. logistics, customer service, value chain relationships

Coordination mechanisms to link Specialist resource groups support process process and managers e.g. functional departments, resource business units, external collaborators leadership Resource group leadership

Figure 11.4 Process-based organization for marketing Source: Adapted from Cravens and Piercy, Strategic Marketing , 9th edn, 200938

•• 458 Organization and processes for change: building the infrastructure to make it happen

Decision-making processes – planning and budgeting A narrower view of process focuses on key decision-making activities like planning and budgeting for marketing. This is also interesting in offering leverage for change. However, much of our conventional thinking has tended to be about tools and techniques rather than processes.

Conventional views of planning and budgeting • • • In most organizations, whatever you are trying to do, you probably have to produce a plan for it. Some people do not like plans, planning or planners. Mintzberg argues that planning is not strategic thinking and the goal of those who promote planning is to reduce managers ’ power over strategy making, and that real strategic change requires inventing new categories not just rearranging old ones. 40 He has a point. However, a more telling point is that if you do not produce a plan, most companies will not give you the money and people you need to do stuff. A conventional view of a marketing plan is shown in Figure 11.5. The usual pattern is that we start with corporate goals and constraints, undertake analysis of our markets identifying our strengths and weaknesses and the opportunities and threats that exist, and turn this into a written statement of what we want to do and the actions that are needed. With some variations, most corporate planning approaches look a bit like this.

Corporate goals Corporate mission Corporate/strategic Corporate constraints planning

Market analysis and choices Market segmentation Competitive comparisons Internal analysis Strategic SWOT: Strengths, Weaknesses, marketing Opportunities and Threats planning

Market strategy Marketing programmes Tactics and actions Marketing Evaluation and control plan

Implementation strategy Sales management Alliance management Internal marketing Implementation

Figure 11.5 Conventional marketing planning

459 •• Market-Led Strategic Change

When we look at budgeting, we also tend to think about the best ways to calculate budgets, so they are linked to our plans – based on economic analysis, management science models or corporate ‘ rules of thumb ’ like ‘ percentage of sales’ . The trick we tend to miss is that decision-making processes are rarely about technique and science and they are much more about people and organizations. Consider for a moment how managers really think about planning and budgeting.

How managers see planning and budgeting • • • If you ask managers naive questions like ‘ what do you want planning to achieve? ’ and ‘ what goes wrong with planning in your company?’ , the results are interesting.41 First, a lot of them want to tell you the questions are silly because everyone knows that planning is a waste of time and kills initiative, plans are inﬂ exible, inaccurate and nobody uses them anyway, and planning is a meaningless corporate ritual. If you persist, * then it appears that what managers want from planning is: a good plan – predictable but they mean actionable not sophisticated; teams and ownership – to get things to happen; continuous process – so planning is part of managing not just a ritual; identifying real information needs ; building understanding of strategy and shaking dogma in the company. Interestingly, few managers want more systems, techniques and management science in planning. If challenged to explain why they don’t stop whining and achieve these planning outcomes, managers tend to describe a scenario of pitfalls in conventional planning that include: analysis instead of planning – lots of models but no conclusions; information search instead of decisions – lots of research that leads nowhere; incrementalism – the argument is about minor departures from what we did last year, nothing new; vested interests – the powerful get their way every time; organizational ‘ mind-set ’ – constraints from the corporate view of the world; resistance to change – disruption is avoided; no ownership or commitment – no one believes in the plans produced; no resourcing – management will not fund plans produced; no implementation – because there is no budget; and diminishing effort and interest – because the whole thing is a waste of time. Very little of what managers say about planning has to do with systems and techniques of analysis – much has to do with the behaviour of people within a process operating in an organizational environment. Similarly, if you ask managers about getting budgets for marketing in the company, they suggest that budgets are inﬂ uenced and largely determined by factors like: ● Power – the power of the marketing function (if there is one) relative to other players in the organization, in terms of organizational structures, participation in important decisions, and status.

* Yes, someone did once call me ‘ an obnoxious, irritating little toad ’ . I had to point out that I am not little.

•• 460 Organization and processes for change: building the infrastructure to make it happen

● Strategic contingencies – just how important and critical a company believes its market problems and its customers are. ● Control – who sets the rules and the agenda for the budgeting process, which interests participate in the budgeting decisions, who chooses the ‘rational ’ techniques to be used in calculating marketing budgets. ● Political inﬂ uence – who controls the information, and exerts control over what people think. ● Bargaining and advocacy – how good people are at building cases and doing deals to get resources. ● Corporate culture – the acceptability or otherwise of resource-claims for marketing in the historical frame of reference of ‘ the way we do things here ’ .

This is not the place to unpack academic research about these different issues. It is the place to say that these are the issues to be addressed in managing the marketing budgeting process. The key to using decision-making processes as tools for building and creating organizational change is in managing the process, not the tools and formal systems.

Managing planning and budgeting as process • • • One way of presenting planning to managers as a process is shown in Figure 11.6 . This shows planning as a multi-dimensional process with analytical, behavioural and organizational dimensions. This shifts the focus from what we do to how we do it, and provides a framework for managing planning as a process. The analytical dimension is about tools and techniques – the tools for the job. But the behavioural dimension is about the people involved and their perceptions of planning activities. The organizational dimension is concerned with the context

Techniques Analytical Procedures dimension Systems Planning models

Managerial perceptions Participation Planning Behavioural Strategic assumptions process dimension Motivation Commitment Ownership of output

Structure Organizational Information dimension Culture Figure 11.6 A multi- Management signals dimensional model of marketing planning

461 •• Market-Led Strategic Change

in which planning takes place. The goal now becomes managing all the dimensions of planning in a consistent way to achieve the outcomes wanted.

Reality Check: An abrasive approach to managing planning process

3 M is a global enterprise manufacturing more than 60,000 products from a base of 112 technology platforms, and consists of 28 autonomous business units, of which Abrasive Systems Division (ASD) is one. ASD is 3M’s original business and operates in a mature market supply abrasives mainly to manufacturing companies. At 3M (UK), the early 1990s saw ASD showing falling market share, accompanied by declining staff morale (compared to other company units and benchmark companies outside 3M). The appointment of Stuart Lane as ASD business unit manager in 1992 had three key goals: to restore sales growth to a minimum of 5% p.a., to return gross margin to the levels of the 1980s, and to bring the employee satisfaction level to at least the company average. Lane’s first observations shocked him. They showed that people felt: they were not treated with respect or thanked for jobs well done; they lacked freedom to use initiative and make decisions; there was little information-sharing and too much bureaucracy. Lane’s first decision was, somewhat perversely, to double the ASD sales growth target from the 25% required by senior management (for 1992–1996) to 50%. In collaboration with 3M’s Corporate Marketing business planners he designed what he describes as ‘a semi-formal, structured, iterative process ’ of planning for ASD. The new planning process started with a two-day planning workshop in spring 1992, followed by five further workshops over the following three months. Lane sees the workshops as critical to developing a robust plan for ASD, but also the team-building, ownership, enthusiasm and commitment to make the plan happen, as well as confidence among the team members that they were actually going to achieve the ambitious, ‘ stretch ’ goals for ASD. Lane was clear from the outset that it was worth sacrificing some sophistication in favour of simplicity and involvement to win people’s support. The planning was linked directly to an implementation process with three key elements: first, a written plan, presented to management, but also reduced to an A5 card containing the essence of the plan in simple and memorable terms; second, the launch of the new plan to the ASD organization at the annual sales conference, and distribution of the A5 cards to be kept at the front of people ’s diaries; and, third the introduction of Segment Action Teams (with a member of the management team as leader, but including people from sales, marketing, customer service and technical services from different

•• 462 Organization and processes for change: building the infrastructure to make it happen

levels in the organization), to take responsibility for segment-specific tactics and programmes. The Segment Action Teams have evolved into a key and permanent part of the ASD structure. The results achieved by 1996 were: a 53% growth in sales, a 100% growth in gross margin contribution, a 30% increase in market share, and employees satisfaction 12% above the company average. This was achieved, recall, in a mature market showing little growth.

Source: Adapted from Stuart Lane and Debbie Clewes, ‘The Implementation of Marketing Planning: A Case Study in Gaining Commitment at 3M (UK) Abrasives ’, Journal of Strategic Marketing , 8(3), 2000, pp. 225–240.

Actively managing planning as a process may then identify such tools as: training and development – appropriate planning tools need to be available to the right people; including change agents in planning; designing participation to enrich planning and to build ownership and commitment; building effective planning teams ; providing process facilitation through management and external support; making ownership the top priority. The key point is that designing planning processes to build the momentum and support for change provide very real leverage on organizational change, which is accessible and usable. It goes beyond seeing planning as a corporate ritual to making planning process a driver of change.

What’s Next? An important part of preparing for market-led strategic change is putting a handle on the organizational environment from which we go to market, and shifting the conversation away from functional structure disputes to questions of integration around customer value and the management of key processes. However, we now need to turn our attention to the issue of strategy implementation – getting things to happen.

References and End-notes

1. ‘ Marketers – Not “ Soft ” Enough ’ , Marketing Business , November 1998, p. 10. 2. Baker, Susan , ‘ What Non-Marketers Think About You ’ , Marketing Business ( supplement ) , September 2000 , pp. v – vii . 3. Cited in Fazio Maruca, Regina, ‘Getting Marketing’s Voice Heard’, Harvard Business Review, January/February 1998, pp. 10–11. 4. Maltz , Elliot , William E. Souder and Ajith Kumar , ‘ I n ﬂ uencing R & D/Marketing Integration and the Use of Market Information

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by R & D Managers ’ , Journal of Business Research , 5 2 ( 1 ) , 2001 , pp. 69 – 82 . 5. Webster , Frederick , ‘ The Changing Role of Marketing in the Corporation ’ , Journal of Marketing , Winter 1992 , pp. 1 - 17 . Achrol , Ravi S. , ‘ The Evolution of the Marketing Organization: New Focus for Turbulent Environments ’ , Journal of Marketing, October 1991 , pp. 77 – 93 . Piercy , Nigel F. and David W. Cravens , ‘ The Network Paradigm and the Marketing Department: Developing a New Management Agenda ’ , European Journal of Marketing , 29 ( 3 ) , 1995 , pp. 7 – 34 . 6. Mitchell , Alan , ‘ The Future of Marketing ’ , Marketing Business , September 1997 , pp. 26 – 30 . 7. Webster , Frederick E. , Alan J. Malter and S. Ganesan , ‘ The Decline and Dispersal of Marketing Competencies ’ , MIT Sloan Management Review , 46 ( 4 ) , 2005 , pp. 35 – 43 . 8. Kiley , David and Burt Helm , ‘ The Short Life of the Chief Marketing Offi c e r ’ , BusinessWeek , December 10 2007 , pp. 63 – 65 . 9. Nath , Pravin and Vijay Mahajan , ‘ Chief Marketing Offi cers: A Study of Their Presence in Forms’ Top Management Teams ’ , Journal of Marketing , 72 ( 1 ) , 2008 , pp. 65 – 81 . 10. Stern , Stefan , ‘ Marketing’s Bad Case of Attention Defi cit Disorder ’ , Financial Times , September 18 2007 , p. 18 . 11. Precourt , Geoffrey , CMO Thought Leaders: The Rise of the Strategic Marketer , New York : Booz Allen , 2007 . Harter , Gregor , Edward Landry and Andrew Tipping , ‘ The New Complete Marketer ’ , strategy business , 48 Autumn 2007 , pp. 1 – 10 . 12. ‘ Tomorrow’s Word: Re-evaluating the Role of Marketing ’ , The Marketer , November 2007 , pp. 43 – 48 . 13. Piercy , Nigel F. and David W. Cravens , ‘ Marketing Organization and Management ’ , in Michael J. Baker (ed.), The IEBM Encyclopedia of Marketing , 2nd edn , London : International Thomson Press , 2000 , pp. 186 – 207 . 14. See, for example: Piercy, Nigel F., Marketing Organization: An Analysis of Information Processing, Power and Politics, London: Allen & Unwin, 1985 . Piercy , Nigel F. , ‘ The Role and Function of the Chief Marketing Executive and the Marketing Department ’ , Journal of Marketing Management , 1 ( 3 ) , 1986 , pp. 265 – 290 . Piercy , Nigel F. , ‘ The Role of the Marketing Department in UK Retailing Organizations ’ , International Journal of Bank Marketing , 4 ( 2 ) , 1989 , pp. 46 – 65 . Piercy , Nigel F. and Neil A. Morgan , ‘ Marketing Organization in the UK Financial Services Industry ’ , International Journal of Bank Marketing , 7 ( 4 ) , 1989 , pp. 3 – 10 . 15. This section is based on: Hulbert, James M., Noel Capon and Nigel F. Piercy, Total Integrated Marketing: Breaking the Bounds of the Function , New York: Free Press, 2002; London: Kogan Page, 2005.

•• 464 Organization and processes for change: building the infrastructure to make it happen

16. For example, see: Slater, Stanley F. and John C. Narver, ‘ Market Orientation and the Learning Organization ’ , Journal of Marketing , 59 July 1995, pp. 63–74. 17. Schultz , Don E. , ‘ Integration Is Critical for Success in the 21st Century ’ , Marketing News , September 15 1997 , p . 2 6 . 18. McKenna , Regis , ‘ Marketing Is Everything ’ , Harvard Business Review , January/February 1991 , pp. 65 – 79 . 19. Kahn , Kenneth B. and John T. Mentzer , ‘ Marketing’s Integration with Other Departments’ , Journal of Business Research , 42 , 1998 , p p . 5 3 – 6 2 . 20. Maruca , Regina Fazio , ‘ Getting Marketing’s Voice Heard ’ , Harvard Business Review , January/February 1998 , pp. 10 – 11 . 21. Ellinger , Alexander E. , ‘ Improving Marketing/Logistics Cross- Functional Collaboration in the Supply Chain’ , Industrial Marketing Management , 29 , 2000 , pp. 85 – 96 . 22. Maltz , Elliot and Ajay K. Kohli , ‘ Reducing Marketing’s Conﬂ ict with Other Functions: the Differential Effects of Integrating Mechanisms ’ , Journal of the Academy of Marketing Science , Fall 2000 , pp. 479 – 492 . 23. Capon , Noel and James M. Hulbert , Marketing Management in the 21st Century , Englewood Cliffs, NJ : Prentice-Hall , 2000 . 24. Vence , Deborah L. , ‘ Take the Lead ’ , Marketing News , April 1 2007 , p p . 1 2 – 1 4 . 25. Bryan , Lowell L. and Claudia I. Joyce , Mobilizing Minds: Creating Wealth from Talent in the 21st-Century Organization , New York : McGraw-Hill , 2007 . 26. Ashkenas , Ron , ‘ Simplicity-Minded Management’ , Harvard Business Review , December 2007 , pp. 101 – 109 . 27. This section is adapted from The New Organization: A Survey of the Company , Special Report: The Economist , January 21 2006. 28. Bryan and Joyce, Mobilizing Minds. 29. Bryan and Joyce, Mobilizing Minds. 30. Bryan and Joyce, Mobilizing Minds. 31. Hamm , Steve , ‘ Speed Demons ’ , BusinessWeek , March 27 2006 , p p . 6 8 – 7 6 . 32. Kerwin , Kathleen , ‘ Christopher Palmeri and Paul Magnusson, ‘ Can Anything Stop Toyota? ’ , BusinessWeek , November 17 2003 , p p . 6 2 – 7 0 . 33. Lawler , Edward and Christopher Worley , Built to Change: How to Achieve Sustained Organizational Effectiveness , San Francisco, CA: Jossey-Bass , 2006 . 34. ‘ The Future of Work‘ , BusinessWeek, August 20–27 2007, pp. 4 1 – 9 5 . 35. Day , George S. , ‘ Aligning the Organization to the Market ’ , in Donald R. Lehman and Katherine E. Jocz (eds), Reﬂ ections on the Futures of Marketing , Cambridge, MA : Marketing Science Institute , 1997 , pp. 6 9 – 7 2 .

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36. Ibid. 37. Ibid. 38. Cravens , David W. and Nigel F. Piercy , Strategic Marketing , 9th edn , Burr Ridge, IL : McGraw-Hill Irwon , 2009 . 39. Day, ‘ Aligning the Organization ’ , p. 72. 40. Mintzberg , Henry , ‘The Rise and Fall of Strategic Planning ’, Harvard Business Review , January/February 1994 , pp. 107 – 114 . 41. Piercy , Nigel F. and Neil A. Morgan , ‘ The Marketing Planning Process: Behavioral Problems Compared to Analytical Techniques in Explaining Marketing Planning Credibility ’ , Journal of Business Research , 29 , 1994 , pp. 167 – 178 . Piercy , Nigel F. and Neil A. Morgan , ‘ Organizational Context and Behavioural Problems as Determinants of the Effectiveness of the Strategic Marketing Planning Process ’ , Journal of Marketing Management , 6 ( 2 ) , 1990 , pp. 127– 144 .

•• 466 C H A P T E R • • • • 12 Implementation process and internal marketing: making it happen

This chapter . . . This chapter looks at getting stuff done. The world is generally no longer very impressed with people who have great ideas and great plans that never come to anything. Part of the challenge of market- led strategic change is actually changing things. The last word of the title was not included accidentally. However, changing things in organizations and making strategies happen is not always straightforward. In fact, those who have tried it will tell you it is never straightforward. Most approaches to marketing tend to emphasize wonderful and detailed analysis of trivia, splendidly written and produced plans – three-colour graphics, desktop published, leather covers – and fantastic PowerPoint presentations. This is all wonderful (well, actually it’s not, but never mind that), but the issue is making things happen as a result. We take a two-stage approach here: ﬁ rst, we will open up the whole area of strategy implementation and put a handle on the types of problems we should anticipate, and how to build an implementation strategy to deal with them; and, second, we will look at strategic internal marketing as a way of packaging our implementation strategy to make it acceptable to the company. Market-Led Strategic Change

Introduction Why do we need to make an issue out of strategy implementation? The evidence suggests that up to 80% of company change initiatives fail. The ability to implement may be more important than the quality of the strategy itself – execution may be more important than good strategic vision.1 Some would go as far as to say that implementation is strategy – on the grounds that without a systematic management approach to the execution of plans and strategies, they simply will not happen, and so remain ideas that never become strategy in any real sense. Others suggest that implementation is different to strategy – it is the diffi cult part – they argue that fi nding out what a company needs to do in its markets is easy, it is putting new things into effect that is diffi cult.* Whichever view is taken, to ignore implementation when we look at market strategy is to ignore an important part of the reality that executives face. The approach to working on this has two elements: building implementation strategies for our market strategies, and turning these into internal marketing programmes to match our external marketing programmes. We can build up to this in the following way. To start, we can look at why we have implementation problems at all and the problems we face in getting people to put the implementation question on the management agenda. Then we can look at the sources of the barriers to getting market strategies to work, as they are perceived by executives. The end-product, to which we are progressing, is the early identifi cation and evaluation of the implementation problems facing our plans and strategies, and the identifi cation of the strategies needed to overcome those barriers. This feeds into the operational techniques of internal marketing.

Reality Check: Another month ends . . .

All targets met. All systems working. All customers satisfied. All staff eager and enthusiastic. All pigs fed and ready to fly . . .

*The late Tom Bonoma, scholar of marketing implementation at Harvard Business School, was fond of remarking that ‘The average table-top could tell you what you should be doing. A piece of fauna in the ﬁ eld outside could tell you what your strategy should be. The issue is whether you can do it.’

•• 468 Implementation process and internal marketing: making it happen

Implementation capabilities One of the things that emerges from the debate about execution is that there is a corporate resource that we can label as ‘implementation capabilities ’ . The ability of people and organizations to get things done is not neatly defi ned by academics, but is instantly recognizable by executives. However, what is also apparent is that a company’s implementation capabilities may be: time-specifi c – things change; culture- specifi c – what works in one place may not work elsewhere; partial – being good at doing one type of thing does not necessarily transfer to others; latent – we may not yet have learned how to do things; internally inconsistent – some parts of the organization are better at doing stuff than are others; strategy-specifi c – we are good at doing one type of business; and person-specifi c – some individual managers may be the ones who get things done. 2 The important point is that implementation capabilities are not a given that you should take for granted, but something you should evaluate carefully. One implication is that trying to create and execute a strategy for which a company lacks implementation capabilities is a fast way to fail, and probably lose a lot of money in the process. Another implication is that enhancing and sustaining implementation capabilities may be one of the most important elements of managing strategic change in a company.

Why do we need internal marketing? The reaction of some executives to talk of internal marketing is that they have enough problems already in dealing with the external market, without getting involved in all this stuff. But there is one major barrier to putting strategies and plans into effect. That barrier is provided by the people, the systems and procedures, the departments and the managers, whose commitment and participation are needed to implement strategies effectively, i.e. the internal customers for our plans and strategies. Many parts of companies do not understand the concept of being market-driven, and often do not know what market strategy means, and many employees have no idea what their jobs have to do with customers and meeting their needs. In this scenario the basic point is maybe we need to do something about internal customers of all kinds to get our act together with the external customer. The trouble is that the conventional training and development of executives, quite reasonably, has focused on the external environment of customers, competitors and markets, and the matching of corporate resources to marketplace targets. The argument we now present is that, while analysing markets and developing strategies to earn a living in the external marketplace remains quite appropriately a central focus, it is frequently not enough on its own to achieve the implementation of market strategies. In addition to developing marketing programmes aimed at the external marketplace, there is a need to carry out substantially the same process for the internal marketplace within our companies, to

469 •• Market-Led Strategic Change

achieve the organizational change that is essential to make those external strategies work. It is often surprising that those same executives who have been trained and developed to cope with behavioural problems – like ‘ irrational ’ behaviour by consumers and buyers, or the problems of managing power and conﬂ ict in the distribution channel, the need to communicate to buyers through a mix of communications vehicles and media, and trying to outguess competitors – have taken so long to arrive at the conclusion that these same issues have to be coped with inside the company.

Why do we need employees on our side? Some managers have the insight to build their whole approach around the issue of employee commitment and buy-in to strategy.

Reality Check: Nice people to do business with

Hal Rosenbluth is CEO of Rosenbluth International, the world’s third largest travel management company (now part of American Express) – 2002 turnover of $3 billion and operating in 24 countries. Rosenbluth has a very distinctive view about how to treat his employees and why. His view is that employees come first, and customers come second. His initiatives with his 5000 ‘ associates ’ include: his ‘ Crayola survey’, where staff are invited to send him crayon drawings showing their feelings about the company; and his ‘ Ambassadors ’ Council’ in which randomly selected employees are flown to the Philadelphia headquarters to discuss with senior management how to improve the business. Some strategies are highly counter-intuitive, such as the investment in video-conferencing to enable customers to reduce their travel commitments. Rosenbluth says he has always dreamed of creating a company based on friendship. He has actually asked some customers to stop doing business with his company – because he will not subject his employees to rudeness on the telephone. He looks for one main thing in employees (and potential acquisitions) – they need to be nice people. It is perhaps unsurprising that this company has a reputation for being nice people to do business with.

Source: Adapted from Alison Maitland, ‘Always Nice People to Do Business With ’ , Financial Times, March 20 2001 .

Other managers simply fail to gain the trust of their colleagues – typically being seen to withhold important information or support from people.3 In fact, some talk of an employee ‘ misery epidemic ’ in which

•• 470 Implementation process and internal marketing: making it happen

three-quarters of all workers hate their jobs – largely the fault of line managers who have forgotten what it feels like to be a worker. People become miserable at work due to: anonymity – we feel no one cares we are there; immeasurability – we don’t know if we are doing a good job or not; and irrelevance – we feel our work does not matter much, one way or the other. 4 Failing to address these issues creates a serious competitive vulnerability for a company in delivering its market strategy effectively. Workers say they want good managers who show them some respect. 5 The results of taking this seriously may be startling for traditional companies. At HCL Technologies in India workers get to grade their managers, and the results are made public to anyone who wants to see them.6 This sounds a radical way of making a point, but it may be one of several innovative ideas on how to lead organizations coming from emerging market companies. Certainly if you do not win the commitment and support of your employees for what you are trying to do, your customers may pay a high price.

Reality Check: The waiters ’ game

Waiters in restaurants often have to tolerate abuse from their supervisors (the irascible chef and maitre d ’ who feels s/he has to live up to this image), and unreasonable customers (that’s you and me, remember). While they cannot get back at the supervisors, the customers are another matter . . .

● one waiter describes how when a customer complained about the sauce on his steak, the waiter simply took it outside and licked the sauce off, before re-presenting the glistening steak to the customer ● a waitress describes her revenge on a customer who clicks his fingers and tugs her apron to get attention – she wipes his morning croissant around the lavatory rim before serving it, and says she finds this extremely cathartic so on these occasions her smile is quite genuine ● many servers describe spitting in the food and drink of irritating customers ● those who complain about cold coffee may find that the rim of the cup is steam-heated for a moment or two to produce an amusing yelp of pain when it touches the customer’s lip ● another waiter returns tips he regards as inadequate with the loud and embarrassing comment ‘I couldn’t possibly, you clearly need this more than me ’ ● an industry expert opines ‘If you don’t tip at least 10 per cent, I bet you have ingested your waiter’s saliva at least once’.

471 •• Market-Led Strategic Change

Source: istockphoto.com

Now, try me again, what was that you were saying about ‘ customer service’ and ‘service quality’? Let’s go back to the idea of the employee as terrorist and that is more like the truth in this industry.

Source: Adapted from Chris Brooke, ‘Take a Tip and Be Nice to the Waiter’ , Daily Mail , February 9 1998 .

However, getting employees on our side may require very different approaches to leadership than in the past. Old leadership models based on what people used to be like are increasingly ineffective. The new generation of workers has grown up in families where authority

•• 472 Implementation process and internal marketing: making it happen is shared and there was no dominant father fi gure, and they tend to have stronger ties to sibling fi gures that parental-type managers. The importance of knowledge-based work underlines the interactive nature of the new workforce. Interactives are not looking for father fi gures as leaders but for role models who ‘ engage them as colleagues in meaningful corporate projects, ideally creating a collaborative community ’ .7 The challenge of leadership is becoming more complex and certainly different in new organization types (see Chapter 11). Interestingly, recent research characterizes British managers as becoming more overbearing and dictatorial at the expense of productivity, suggesting we may not all have cottoned on just yet to the ways things are changing in organizations and what is required for effective leadership.8 Indeed, while the importance of leadership is well-known, we are only just beginning to understand the real importance of ‘ followership ’ .9 Based on the observation that large companies are increasingly dependent on how well they understand low-ranking employees and make them effective, Kellerman suggests followers are becoming more important and leaders less so.10 As the Internet fl attens traditional lines of command, it empowers grassroots employees in organizations. Increasingly, low-ranking employees drive organizational change. Best Buy’s retail channel vice president applies this to her own company, and the success of its local store initiatives: ‘ Look at why big companies die. They implode upon themselves. They create all these systems and processes – and they end up with a very small percentage of people who are supposed to solve complex problems, while the other 98% of people just execute. You can’t come up with enough ideas that way to keep growing. ’11 In fact, Kellerman divides followers into fi ve categories based on how much they care about the organization, and advises each group should be managed differently: bystanders – observe, but don’t participate, happy with the status quo ; participants – somewhat engaged and can support or oppose leaders; activists – eager, energetic and engaged, but can support or oppose leaders; diehards – highly dedicated, their cause is all-consuming; and, isolates – detached, don’t care what their leaders think.12 Focusing on followership as well as leadership underlines our goal in aligning employees with strategies, but also highlights the challenges in doing this effectively. Tellingly, Kellerman notes: ‘ Bad leaders . . . cannot possibly do what they do without bad followers. They depend on them absolutely. ’ The revitalization or transformation of a company may be in large part dependent on: incorporating employees fully in the challenge to change the ways they deal with confl ict and learning; leading differently to maintain employee involvement; and instilling the disciplines that will help people learn new ways of behaving and sustain that new behaviour.13 Managers who fail to get their employees to understand what they are doing and why, and to build their enthusiasm, should not be surprised when change programmes turn into disasters or an expensive joke.

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Why do we need managers on our side? Managers are people too (mostly). The implementation and internal marketing issue is not just about front-line employees. Total integration (see Chapter 11) needs the buy-in of managers throughout the organization to drive strategy through. It is also the case that managers who do not like the change you are working for, may prove adept at stopping it from happening:

Reality Check: How managers can block change

Bob Garrett describes from his research how ‘ready, aim, fire ’ approaches by companies to implementing change produce confusion, demoralization and resistance to change. Emotional reactions to planned change run through: denial – managers refuse to believe the change is real, and continue working as before, hoping everything will be alright; fear – when the change does not go away, managers’ denial gives way to fear – what will it do to me – and energies are diverted into playing politics; grieving – people lose enthusiasm and energy as they grieve for the way things used to be; resistance – a mixture of denial, fear and grieving lead to resistance to change, whether active or passive. Work at a leading financial services company identifies how groups and managers can resist change in the following ways:

Energy

Low High

The ‘yes . . . but’s The High or ideal malicious obedience

The Understanding The Low dangerous dinosaurs enthusiasts

How groups can block effective change in a company

•• 474 Implementation process and internal marketing: making it happen

The‘Dangerous Enthusiasts ’ are high in energy but low in understanding, and run around the organization demanding rapid change without authority, and little understanding of the goals of the change. The ‘Yes . . . But’s are those who understand very well what the changes were about, but have little inclination to do anything about them (‘yes . . . but’ is a polite way of saying ‘no’ without actually saying it). Capable of producing devastatingly logical reasons why they cannot implement the change now or in the foreseeable future, if pushed they turn nasty and use the ‘ Malicious Obedience ’ defence – ‘ I did exactly what you asked, no more and no less. If things went wrong, it is not my responsibility because you gave the orders.’ The ‘ Dinosaurs ’ , on the other hand, are not malevolent – they just do not understand what is going on, and they do not want to play anyway. The implementation goal is to move the other groups towards ‘The Ideal ’ – those with understanding of the change needed and the energy to implement it.

Sources: Bob Garrett, ‘Never-Ending Challenge of Change’, Financial Times , December 10 1999. Bob Garrett, Twelve Organisational Capabilities: Valuing People at Work , London: HarperCollins, 2000 .

However, there is evidence that all is not well in management support for their organizations. The Roffey Park Institute (a leading UK management training and research body), reveals in its management agenda research that many middle and junior executives have very different views of their organizations compared to those of senior managers. In their 2007 study, ﬁ ndings were: 82% of board directors felt their organizations ’ leadership was good or excellent, but only 52% of middle managers described their companies leadership so optimisti- cally; 37% of board directors declared morale in their organizations to be high, but only 9% of middle managers agreed; and, while only 26% of board directors found a mismatch between the ‘ espoused values ’ of their organizations and what actually went on, some 75% of middle managers saw exactly this gap.14 Assuming that people are on the side of strategic change just because they have the title ‘ manager ’ may be unwise. Importantly, we are beginning to recognize the managers ’ everyday decisions can create or destroy a company’s strategy – the cumulative impact of resource allocation at any level has more real world effect on strategy than plans developed at headquarters. Joseph Bower, for example, recounts how a company controller was confused by an expenditure request from an important division for a new chimney. Nothing else just a chimney, though a very large chimney. He ﬂ ew out and discovered that division managers had built an entire new plant using work orders that did not require corporate approval. The chimney was the only thing that could

475 •• Market-Led Strategic Change

not be broken down into small enough chunks to escape scrutiny. The division was right to want to expand capacity, but it did raise the question of who was actually running the company. 15 Putting a handle on manager’s goals and aspirations that affect their choices looks more and more critical to successful strategy implementation. The bottom-line is that we should insist that it is not acceptable or reasonable for senior managers to adopt a ‘ don’t blame me’ attitude as a response to organizational barriers to strategic change or to the ‘ irrational’ behaviour of those who hold different views about the desirability of that change. Real commitment to improving the process of going to market must involve a managerial duty of creating the culture and conditions necessary to permit strategic change to happen.

Why do we need collaborators on our side? From the commentary in Chapter 9 concerning strategic relationships and the increasing dependence of companies on cross-boundary collaboration, it follows that building and sustaining effective ties with allies is a challenge. The ﬁ eld of strategic alliances and partnerships is full of failed relationships. The reliance on third parties holds political, reputational and logistical risks.16 Yet, as we have seen, networked organizations based on collaboration are core to the success of companies like IBM and Procter & Gamble. While internal marketing is normally framed in terms of winning the support of managers and employees inside the company for strategic change, increasingly that internal marketplace will extend to partner organizations, whose buy- in is also needed to make strategy implementation effective.

‘ Ah, but you can’t change culture . . . ’ * We all use the word ‘culture ’ in the context of implementation and internal marketing. Indeed, people increasingly recognize that the culture of a company can be one of its most important sources of successful innovation and competitive advantage. Some even say that the culture is the brand. It is certainly one of the most distinctive attributes of a company – for better or worse. The trouble is that many of us do no more than pay lip-service to culture, because someone told us we could not change it. In fact, one of the most irritating reactions encountered in working with executives on implementation and internal marketing projects comes from a certain type of snivelling ‘ it won’t work here’ person,

*Pause at this point to allow the personnel, human relations and organizational behaviour people to whine about how unfair life is, and you can’t change culture, and sniff about management instrumentalism and social engineering.

•• 476 Implementation process and internal marketing: making it happen usually located in human resource management. * These people seem to have some hang-up about the word ‘ culture ’ . They whine that ‘culture is the company ’, and that you ‘ can’t change culture’ and that ‘ social engineering is bad ’. I am sorry if this offends people who theo- rize about this type of thing. Basically, this view is garbage. You can change the culture of any organization. You may not like what it takes or what it costs, but you can do it. In some cases, it is the only thing you can do. Repeat after me: ‘ You can change culture . . . . ’ .

Implementation Versus Strategy17 Traditionally, implementation has been regarded as what follows after new market strategies have been created, plans have been written, approval has been obtained, and what remains is simply a matter of telling people what to do and waiting for the results to happen. If we thought about implementation at all, then we saw it as the logistics of getting things organized. We focused on developing the organizational arrangements needed for the new strategy – allocating responsibilities across departments and units, and maybe creating new organizational structures where necessary. We allocated resources in the form of budgets and headcount to support the activities underpinning the strategy to the appropriate parts of the organization. We produced ‘ action lists ’ and ‘ action plans ’ and did presentations to tell people the way things were going to be done. We developed control systems to monitor outcome performance in sales, market share, profi t and so on, to evaluate the success of the strategy, and to take remedial action if things were not turning out how we wanted them. However, there are some very substantial problems in approaching implementation in this way. First , it is illogical to plan strategies that are not fi rmly rooted in the organization’s capabilities, and yet we seem to set up planning systems to do precisely this. Second , organizational structure and resource allocation are important, but on their own they are very weak, and usually very slow, routes to the organizational change inherent in many new market strategies. Third , outcomes like sales, market share and profi t are what we want to achieve, but the driver of these outcomes is likely to be the behaviour of people in the organization who impact on what the customer receives in service and quality, which suggests we should focus on the behaviour not just the outcomes. Organizational processes that treat implementation as an afterthought when the real work of generating innovative strategies and writing strategic plans has been done, are counter-productive for a number of reasons. The ‘ dichotomy ’ between strategy formulation

*. . . and when was it we allowed Personnel Departments to start calling themselves Human Resource Management, and pretending they had some useful role to play in the company?

477 •• Market-Led Strategic Change

and implementation that exists in many organizations, is fraught with dangers:

● it ignores or underestimates the potential link between market strategy and a company’s unique implementation capabilities and weaknesses – strategies should logically exploit the things we are good at doing, and avoid dependence on the things that our competitors do better; ● more generally, it risks ignoring the competitive advantage that may be achieved by identifying and exploiting the organization’s core capabilities and competences in each market, by refl ecting the views of the ‘ professional planner’ in the corporate ivory-tower, not the understanding of those who are working in the marketplace concerned; ● it encourages a weak linkage between strategy plans and operating plans – strategies that cut across operating plans and budgets and do not fi t departmental plans are likely to be ignored and under-valued inside the organization; ● it ignores the hidden but often highly signifi cant ‘ inner workings ’ of the organization – the culture and how it shapes people’s behaviour; boundaries between functions, regions and organizational interest groups which may provide barriers to communication and cooperation; and the role of the powerful and infl uential in the organization; ● it may prevent a company from ever exploiting ‘ time-based ’ market strategies, or from realizing fi rst-mover or pioneer advantages in a market – traditional approaches to implementation are too slow and cumbersome to support fast change in market strategy. For example, in markets where the most important competitive advantage comes from the company’s ability to execute effectively a succession of appropriate, but increasingly short-lived, strategic initiatives (for example, as Canon has done in bringing new computer equipment to market), then traditional approaches to planning and strategy and implementation provide an insurmountable barrier to market success; ● it ignores the practical problems of understanding the real capabilities and practical problems faced, as a company moves into operating through a network of collaborations and strategic alliances with other companies. If we separate strategy from implementation in how we run things, then we create problems for ourselves. Traditional approaches do little to overcome these self-induced barriers to change. Quite simply, we need better ways of integrating strategy and implementation. This problem is unlikely to be solved through management advocacy, presentations, internal communications to tell people the way things should be done, or management sabre-rattling and threats. They are unlikely to be overcome by tighter control systems and budgeting, or reorganization. These are the types of barriers that drive us to look more closely at the implementation issue in transforming the process of going to market.

•• 478 Implementation process and internal marketing: making it happen

So, What Is the Thing about Implementation? How can implementation be seen as no more than after-thought by so many companies? Many have concluded that the market strategy which looks good, makes managers feel good, but has no effect whatever on the realities of running the business and changing its direction is a harmful and expensive waste of time. In fact, as shown above, in many cases the real problem is not strategizing and planning, it is implementation . The underlying danger is that we constantly underestimate the degree and type of change that will have to happen if our plans and strategies are to succeed. It is not enough to talk about organizing things and producing action lists on their own – we have to put a handle on the deep-seated, strategic change in our organization that we need for the market strategy to happen . This is the real implementation thing. In fact, marketing implementation failures often occur for a number of very simple reasons. At least if we can see where implementation goes wrong we can make a start. It comes down to issues like these:

Separation of planning from management • • • If we organize, staff, operate and organizationally separate planning and the strategy processes from line management of the business, we create a fundamental divide, which may be difﬁ cult to bridge. Admittedly, participation of line executives in strategy making is expensive in cost, time, the conﬂ icts to be confronted and, not least, in terms of top management stress – but if we are serious about making market strategy work, that may be the price we have to pay.

Hopeless optimism • • • The isolation and separation of strategy from running the business means many strategies and plans are so far removed from practical reality, that it is probably just as well that they never get to the implementation stage. We certainly need vision, but not ﬁ ction.

Implementation is recognized too late • • • The excitement of identifying and researching new strategies may mean we never face up to the implementation issue until it is too late. Examining implementation issues after we have already committed ourselves and everyone else to what we are going to do is ineffective for two reasons: ﬁ rst, we end up with the strategic plans that cannot realistically be implemented with the resources, people, capabilities and systems that we actually have; and we persist stubbornly with strategies that make sense economically only because we have totally ignored the real organizational change and implementation costs. Implementation realities really do need to be an integral part of our planning, not something we think about afterwards.

479 •• Market-Led Strategic Change

Denial of implementation problems • • • Some top managers simply deny the existence of barriers, obstacles and hurdles in implementing strategic plans – ‘ if this is the way we say it is going to be, then this is the way it is going to be! ’ Sabre- rattling statements by top management make them feel good, and make managers ’ lives apparently easier, because s/he has been told there is no such thing as an implementation problem, so clearly there isn’t one. Unfortunately, life is rarely quite this simple. Many of the most signiﬁ cant implementation barriers are covert, and become more covert but not less problematic when they are driven underground by macho top management posturing.

Implementation bolted-on at the end • • • Many of the problems are created or at least worsened, because we still see implementation as something bolted-on at the end of developing plans and strategies, when the ‘ real ’ work has been done, just to tidy up the loose ends. In some ways this reﬂ ects the attitude that producing plans is clever, while going away and putting them into effect is an inferior activity to be left to others. If that sounds exaggerated, just look at who gets the ‘ brownie points ’ in an organization’s career paths – the planners or the doers? Implementation is effective only when it is clearly integrated with the rest of the strategy process and before the plan is ﬁ nalized.

Fixation • • • When managers rush into a decision because they cannot tolerate the uncertainty surrounding an issue, premature decisions may lead them to become ﬁ xated on the features of an apparent solution, even after repeated failures to make it work.

Implementation is a black-box • • • Lastly, where senior managers over-react, and when the signal is sent by the organization that a market strategy will be ‘ diffi cult ’ to implement, managers may dump it immediately before they get burnt fi n- gers. When implementation barriers are carefully and explicitly broken down into sources and types of obstacles, two things can be achieved. First , some of the barriers actually disappear – they were just the myths and stereotypes of the corporate culture. Second , once we fl ush out the real implementation issues explicitly and in detail, we may be able to construct implementation strategies to cope with the problems and to get the strategy to happen. At the very least we end up with an explicit and detailed case for changing a strategy that will be too expensive to implement. At best, we create an implementation strategy that matches each major element of the plan. Let’s get to grips with the fact that market strategies and marketing plans that do not confront implementation realities contain the seeds of their own failure – so it is not very surprising when they fail.

•• 480 Implementation process and internal marketing: making it happen

Reality Check: Implementation pitfalls

The pitfalls in moving from strategies and plans to effective implementation and success include: Strategic inertia – things never get started because executives resist change or fail to give them priority. Lack of stakeholder commitment – not having everyone on board, particularly at middle management levels, where progress can be blocked. Strategic drift – a lack of focus on where the strategy should end up, leading to failure to reach that destination. Strategic ‘dilution’ – an absence of strong drive behind the strategy means that managers give more priority to operational decisions than strategic goals. Failure to understand progress – not having the appropriate metrics to monitor progress towards strategic goals. Initiative fatigue – too many ‘top priority’ projects lead to cynicism and inadequate emphasis on the strategy. Impatience – expecting results too quickly, and giving up when the reality is slower. Not celebrating success – failing to recognize and reward mile- stones that lead towards the strategic goal.

Source: Adapted from Mike Freedman, ‘The Genius Is in the Implementation ’, Journal of Business Strategy, March/April 2003, pp. 26–31 .

Implementation Denial – But We Don’t Have a Problem * Perhaps the most basic reason of all why market-led strategic change and hence the implementation issue are completely ignored by companies is quite simply that they do not believe that they have a problem, or that they need to change anything, or even if they do think things are going wrong they will not change – until it is too late. Table 12.1 illustrates just such an approach to avoiding change, revealed by Yes, Prime Minister . This should sound familiar to many managers. If we assume that some things need changing – because it is unlikely you will have concluded that all is one hundred per cent perfect in your company’s process of going to market, and that current strategies are all we need. Then consider that organizations (and, indeed, different parts of the same organization) often differ dramatically in two important respects: (1) the perception that there is a problem which should be taken seriously (or conversely that there really isn’t

* So kindly take your smart ideas and get lost!

481 •• Market-Led Strategic Change

Table 12.1 The Four-stage Approach to Avoiding Change Just Because Something Has Happened

Stage What we say is . . .

1 There may be something . . . but we don’t need to do happening anything. 2 There really is something . . . but we should do nothing. happening 3 There really is something major . . . but there is nothing we happening can do. 4 Something major has deﬁ nitely . . . we probably could have happened done something, but it’s too late now!

Source: ‘The Foreign Ofﬁ ce Standard Approach’, adapted from Jonathan Lynn and Anthony Jay, Yes, Prime Minister , London: BBC Books, 1987 .

a problem at all); and (2) the willingness to try something new to solve the problem (or, on the other hand, the lack of willingness so to do). We can put this together to produce the picture shown in Figure 12.1 . A ﬁ rst step in getting to grips with the marketing implementation issue is to ask where we are currently on this model. Which of the following best describes the situation in the company, department, or unit: ● Closed Minds – We do not accept that we have any kind of problem in the market that could not be solved by a new brochure, the salespeople working harder, or sending our junior staff on training courses. Therefore, why should we change? And, anyway, we’re not going to change! The Closed Minds can be mightily frustrating. It is

Perception that there is a problem

High Low

Ready Blissful to go ignorance High to change Willingness Low Figure 12.1 Worried stayers/ Recognizing the frightened Closed implementation rabbits minds problem and preparing for change

•• 482 Implementation process and internal marketing: making it happen

no accident that our graphic shows a gentleman studying the ground in front of him, with his rear stuck in the air. One chief executive has assured me that he was so frustrated in his attempts to build customer responsiveness in a bureaucratic and slow-moving company he sneaked in at the weekend and put on every ofﬁ ce wall a copy of the ‘ Kill the Snake ’ sign. He says it did not change much, but it irritated the bureaucrats and that made him feel much better.

Table 12.2 The Snake

IF YOU SEE A SNAKE . . . 1. Do not write me a memo about it. 2. Do not commission a consultant’s report to identify the snake’s characteristics. 3. Do not form a committee to review the ‘snake situation’ and to adjudicate on departmental snake responsibilities. 4. Do not apply to Human Resources to appoint a Manager of Snake Affairs. 5. Do not go home pretending that you have not noticed the snake and hope it has gone away by the morning. KILL THE SNAKE! (then say sorry to whoever owned the snake, and explain that it has gone a bit limp)

● Worried Stayers – Yes, we know we’ve got problems, yes, we know we are under threat, but if we just stick to doing things our way it’s bound to come right in the end, isn’t it? Besides, it’s cheaper. (This is similar to waiting for a bus that never turns up, and refusing to budge from the bus stop, because we are convinced it is at that precise moment that the bus will arrive.) Alternatively, labelled the Frightened Rabbits – OK, we’ve got some problems, but please keep extremely quiet about it, because the trick is to keep still in the middle of the road and concentrate very hard on staring at those head- lights coming towards us . . . Our graphic shows just such a warm, cuddly bunny-wunny waiting to be fl attened by a truck. ● Blissful Ignorance . . . We are always open to new ideas and thoroughly enjoy talking about them, but we don’t think we need them, because we’ve got it right already, so ‘ if it ain’t broke, don’t fi x it! ’ Delightful people – as the graphic shows they are always reading the Financial Times and Harvard Business Review – they just never do anything, because they don’t think they need to. ● Ready to Go – Yes, we’ve got a problem in the market, and yes we want to solve it. The graphic shows a friendly face. Give us the tools and we will fi nd the resources, commitment and money to use them and make it happen. It is important, though, that this should be measured and planned change not panic leading to the ‘ headless chicken ’ scenario. (We have to avoid what has been called by cynical

483 •• Market-Led Strategic Change

commentators on government policy the ‘ Politicians ’ Syllogism ’ , i.e. Step One : We must do something. Step Two : This is something. Step Three : Therefore we must do this.) 18

That sounds harsh. How could it be that we have problems in the market and we do not ever see them? Quite easily, if you look at our analysis of the market sensing issue. But there is more to it than this. Tom Bonoma and Bruce Clark 19 make some interesting observations on this issue with their ‘ Marketing Performance Assessment ’ framework. To start with, they point out the following basics:

● Satisfaction with marketing performance depends on what management expected in the ﬁ rst place. Jubilation or despair depends not just on the actual results achieved, but on the psychological distance between what was thought achievable and what was achieved. If we expect poor results and get mediocre ones we may be highly delighted. This has, of course, nothing to do with the potential we might have achieved. ● How much marketing effort we have to make to get a given result depends on our skills and our structures . As a consequence, we may get good results with minimal effort, or bad results with massive efforts, depending on the match between what we have got and what the market needs. This complicates further seeing whether we have got a marketing problem, or if one is on the way. ● Our results depend on the environment – market trends, competitive action and so on. Our results may look good because of external factors totally outside our control – we may even do well in spite of our marketing competence (or strictly our lack of it), if we are in the right place at the right time. Of course, relying on such good fortune continuing carries a bit of a risk.

The point is that seeing how good or bad our marketing performance is may be far from straightforward. Now, consider the different strategies for achieving market-led strategic change that are implied from Figure 12.1 : illuminate the problem – if the goal is to move from ‘ Blissful Ignorance ’ to ‘ Ready to Go ’ , then the problem is changing the perception that ‘ we don’t have a problem ’ ; unfreeze the inertia – if the goal is to move from ‘ Worried Stayer ’ / ’Frightened Rabbit’ to ‘ Ready to Go’ , then the problem is increasing the willingness of the organization to do something about the problem; illuminate the problem and/or unfreeze the inertia – if the goal is to open the ‘ Closed Minds’ , then this is the most problematic situation of all – perhaps the most difﬁ cult choice here is where do you start – can you do both things at the same time and move straight to ‘ Ready to Go ’ , or do you work on one thing at a time and go through the ‘ Blissful Ignorance ’ or ‘ Frightened Rabbit’ stage on the way; or, create a new reality – when the people are ‘ Ready to Go ’ , then the goal is to build a programme of market-led strategic change and drive it through to implementation.

•• 484 Implementation process and internal marketing: making it happen

However, the underlying question, we have yet to tackle, is: why are there implementation problems anyway?

So, Why Doesn’t It Work? Before we jump to conclusions about where things need changing (or in anticipating future difﬁ culties), let’s just consider how planning and strategy-building goes wrong. Figure 12.2 , adapted from Tom Bonoma,20 is a good starting point.

The strategy versus the implementation skills This suggests that the trouble with diagnosing implementation problems is that you have to think about the strategy (which may be appropriate or inappropriate) as well as execution skills (which may be good or bad) to try to decide what is going wrong. The possible situations to consider are:

● Success – if we have a sound strategy, matched by good implementation skills, then we would reasonably expect success in meeting our targets for growth, share, proﬁ ts and so on – as long as our expectations in setting these targets were realistic. ● Trouble – we may conclude the strategy is good – it is the right thing to do – but our skills and capabilities for implementing it are poor. The strength of the strategy may never become apparent, because we are bad at putting it into effect. This is, of course, what we normally assume to be the explanation when things go wrong – after all it is

Strategy

Appropriate Inappropriate

Good Success Roulette skills Execution

Bad Trouble Failure

Figure 12.2 Diagnosing the implementation problem

485 •• Market-Led Strategic Change

obvious that our great plans and strategies go wrong only because of the incompetence of line management in the ﬁ eld. ● Roulette – this is a gamble because we rely on excellence in our implementation skills and capabilities to drive a weak strategy. This gives us time to improve the strategy. Otherwise we end up in the failure box. ● Failure – a weak strategy and poor implementation skills. This is hard to diagnose because the weakness of the strategy is hidden by the implementation failure. The danger is we invest more and more effort to improve the execution of an inappropriate strategy.

This may sound an obvious analysis to do before we act on implementation failures – if so, why do so few of us actually think it through like this? However, it does get more complicated if we allow for the fact that life is inherently unfair – things change. Notwithstanding our wise words about matching strategy to our differentiating capabilities, the unavoidable consequence of market-led strategic change is that you may have to reposition to survive in a market, in ways that require new capabilities, and the inevitable consequence of real markets is that strategies do not stay appropriate for ever. The implementation issue may change because of the degree of stretch we are asking from people in the company. For example, consider the model in Figure 12.3, which raises the question of whether we need ‘strategies for stretch or more of the same? ’ The judgement we make here is likely to be highly indicative of the type of implementation barriers we face and the approaches needed to develop an effective implementation strategy.

Fit of strategy with company capabilities, systems, structures

Good Poor

Synergistic Stretch New strategies strategies Market strategy

Old Conventional Obsolete strategies strategies

Figure 12.3 Matching strategy to company capabilities

•• 486 Implementation process and internal marketing: making it happen

Where our market strategy is essentially a continuation of the type of approach we usually take – i.e. conventional strategies – it follows there is probably going to be a good fi t with the company’s capabilities, and relatively few new implementation problems. An example of this type of strategy from the retail sector is the growth from increased market share achieved by sales promotions, new product launches, competitive price positioning and so on. The implementation tasks here are probably mainly concerned with action planning, resource allocation, internal communications and the day-to-day leadership skills of line management. On the other hand, look at the case of synergistic strategies . This is where we have developed new market strategies to achieve the things we need in the external market, but they are designed around existing company capabilities and systems. We may be doing new things – but they are the things we know how to do and have the resources to do. An example from the retail sector is the move of major players like Sainsbury and Tesco into petrol retailing and fi nancial services – entry into totally different product-markets but based on customer franchise and sound retailing skills. Implementation strategy may be about no more than resource acquisition, action planning and internal communications, so that managers know what the new strategies are. What is more worrying is where our plans and strategies are relatively conventional for the company, but have a poor fi t with company capabilities, systems and structures – critical people have left, we have been left behind by the competition, or perhaps the market has changed in its requirements. Then we are left attempting to drive obsolete strategies , which are familiar but no longer appropriate to the company. A classic example was the determination of Encyclopaedia Britannica to continue selling books through direct selling, when the market was moving to CD-ROM. The problems then are surviving the short-term with what we have got, but as quickly as possible developing new strategies to cope with new realities. This leads to the case of stretch strategies – the new things we need to do to perform in the changing external marketplace, but which are unfamiliar and currently do not fi t well with the company’s capabilities and systems. An example of this type of strategy is provided by the move of computer companies from selling technology to relationship-based marketing of solutions to customer problems, involving huge changes in culture and priorities. These strategies may be the only route to marketplace success – but only if we can execute them effectively. In this situation, we may need to think not just about what we have to do to develop organizational learning and changing internal systems and structures to implement the strategy, but also about what we have to do to develop a programme of organizational change, and ultimately how we manage the processes of strategy building to win commitment and support for new strategies. The greatest risk is that we confuse synergistic strategy with stretch strategy – that way we assume there is no implementation issue to address.

487 •• Market-Led Strategic Change

Reality Check: Making assumptions . . .

ASSUME This is the word that makes an ASS out of U and even worse, out of ME

However, before jumping to easy conclusions about why things go wrong – let’s test our great strategies and how we handled them ﬁ rst.

Testing out the strategy versus blaming the salesperson Before we can expect our market strategies to achieve anything, we need people to know about, to understand, to believe in, to accept, and then to do them. This applies both to top management whose support we need, right down to ﬁ eld people, whose actions and commitment we depend on.

Reality Check: Management message to the sales force

We didn’t say it was your fault . . . We just said we were going to blame you.

Some of the basic questions we should ask are set out in Figure 12.4. First , if we have not produced a coherent and complete strategy that is linked to tactics and actions, we can hardly be surprised if nothing happens as a result of it. How many of the plans and strategies that never ‘ happen ’ , are really no more than vague, grandiose management aspirations and ego-trips, or at the other extreme are no more than pro- jected ﬁ nancial budgets? Second , if we produce brilliant ivory-tower plans that, realistically, are impossible for this company, with this management, at this time, can we really expect any more than lip-service (and that only if we are lucky)? Here again Tom Bonoma21 has outlined some of the common scenarios we create for ourselves:

● Management by assumption – we assume ‘someone ’ will get the nitty-gritty work done, so in reality ‘ no one ’ does.

•• 488 Implementation process and internal marketing: making it happen

Test the strategy Results Reason

Is this really a coherent No No This strategy does and complete strategy? implementation not tell us what to do

Ye s

Lip-service – we may Is this strategy capable of No No agree with the strategy being implemented by this implementation but we cannot put it company at this time? into effect

Ye s

We do not accept this Have we communicated the No No strategy – let’s see what strategy – adapted it, won implementation counter-implementation support for it? can do! Ye s Implementation (maybe)

Figure 12.4 Testing market strategies

● Structural contradictions – we create strategies that our systems and structures simply cannot deliver. ● Empty promises marketing – we build programmes which rely on abilities and resources we have not got and cannot get. ● Bunny marketing – we have no clear strategy, so we create a profu- sion of plans instead. (The analogy is the man with lots of rabbits who needed an ox, but no matter how much he bred more rabbits, he never seemed to end up with an ox. * )

Third , if we are not prepared to make the effort to communicate and to win support (adapting our plans if need be), non-acceptance and counter-implementation must surely follow, rather than ‘ ownership ’ and commitment. Indeed, some would say that one of the outstanding skills of middle management throughout the world is counter-implementation – dogged, pervasive, determined and effective efforts to ensure that something will not happen. If that sounds exaggerated, consider the ‘ D’s of counter-implementation, and see how many you recognize in your company.

* Just lots of very happy bunnies.

489 •• Market-Led Strategic Change

Reality Check: The ‘ D’s of counter-implementation

A management guide to stopping unwelcome changes in the organization: Deflecting goals – we say to the planner ‘what you want (A) is just a little bit too “ ambitious ” , so let’s go after something a little bit more modest instead (B) ’, (where, of course, B is not even vaguely related to A). Diverting resources – the money and the people and the time are suddenly absorbed in “ urgent ” work elsewhere, (with profuse apologies) but never to return. Dissipating energies – if enough hassle and aggravation are created, you can wear most people down eventually. Delaying decision – if you can put things off long enough, the trou- blemakers may leave or just lose interest and forget about it, or it may just be too late. Destroying credibility – rumour, innuendo and even the right sort of praise can make anyone suspicious about a new plan and its sponsors. Consider for a moment the instructions in the excellent Yes, Prime Minister for rubbishing someone or something threatening, by offering unstinting support: Stage One : Express absolute support. Stage Two: List all the praiseworthy features, especially those which make the person unsuitable for the job, or the project impossible to accept. Stage Three: Continue to praise these qualities to the point where they become positive vices. Stage Four : Mention the bad points by defending and trying to excuse them. Deflating Excitement – if the problem is that people are getting excited about a new strategy and are in danger of making it happen, then make them feel bad about it, and take the fun out of it – that should slow them down. Depth Charge – if all else fails, outright conflict and attack may work, particularly if they don’t see it coming until it is too late – maybe because you ‘ forgot ’ to ask them to the meeting that matters.

However, the real point is that if you ignore people by not listening to them and not actively working for their support – do not be surprised if they turn on you. Let’s just think that one through before we blame the salesperson for our failed plans and strategies.

•• 490 Implementation process and internal marketing: making it happen

What about execution skills and competences? With all this said, however well-developed and researched are our market strategies, and however carefully we evaluate implementation issues and build implementation strategies, one critical resource we should absolutely not ignore is the ability of our line managers to put plans into effect – their execution skills. Quite simply, however much strategy we talk and however many plans we write, in reality, the way the strategy implementation process is managed at the interpersonal level is likely to be one critical determinant of implementation success. In fact, in many cases it is true that managers ’ personal skills of leadership and action may have to substitute for having the right structures and administrative policies – because external markets change faster than companies can respond with their formal systems. One way of looking at managerial execution skills is as follows:

● Interacting skills – this refers to how a manager behaves and inﬂ u- ences the behaviour of those around him/her, and includes leadership by example and setting the standards by providing a role model, as well as bargaining and negotiating and using power to get the right things to happen. In most organizations, the managers who have superior interacting skills are well known for their bias for action and getting things done. ● Allocating skills – this is about how a manager sets the agenda for others by budgeting time, money and people around the highest priorities to achieve implementation, even if this is at the expense of ‘ fair play’ and administrative ‘neatness ’ . In some cases this may even involve ‘ cheating ’ the system to get things done, and reward those who perform – even if this is not formally approved behaviour. ● Monitoring skills – refers to how the manager develops and uses feedback mechanisms that focus on the critical issues for success, rather than just the information provided by the company’s information systems. This may involve face-to-face discussions, participation in key tasks, and coaching, more than score-keeping and awarding penalties. ● Organizing skills – in the sense not of designing formal organizational arrangements, but of networking and arranging and ﬁ xing things to achieve the right kind of action. 22

The importance of these issues is that managers ’ execution skills represent a hidden but vital resource for strategy implementation. This is a resource we need to consider when we look at the internal market and ask questions like: what are we really good at doing here, and who do we need on our side to make the strategy happen? However, with all this said, our strategies may fail because they are put into effect badly. At one level, this may be relatively straightforward – the skills needed are not available, things are done badly, and so on. This can happen to any company – you think you are close to the

491 •• Market-Led Strategic Change

customer, you train people, you set up systems and processes, and it is all rendered obsolete because the market changes. One level of the execution problem is that a great gap opens up between what we do and what the market wants, while we are looking the other way. The remedy here is simple – close the gap. However, at a deeper and more worrying level, a company may have learned routines for implementing strategies, which are fl awed and ineffective – but, in spite of the fl aws we continue with the routine. This is what Chris Argyris calls ‘ designed error’ . 23 The problem is that we not only have to fi nd out what is wrong with the implementation process, but also why we continued unaware that it was wrong, or why when we knew it was wrong we still did nothing about it, i.e. the defensive routines that people have, to protect themselves from the discomfort and disruption of having to change. The real execution or implementation barrier is usually not gaps in skills, or even recalcitrant attitudes and change-resisting behaviour from line managers and operatives. The real barrier is those defensive routines and the ‘ designed error ’ that they protect from challenge. If we are to get to grips with an implementation strategy , then we have to confront these issues.

Reality Check: The major obstacles to strategy execution

Research suggests that the top obstacles to effective strategy execution are: Inability to manage change effectively and overcome resistance to change – managing change well is vital to effective strategy implementation, though where change impacts on corporate culture, then moving too fast may be dangerous. Poor or vague strategy – good implementation capabilities cannot compensate for a strategy that is weak or ambiguous – if strategy is unclear or weak, then implementation is irrelevant. Not having guidelines or a model to guide strategy implementation efforts – managers want a logical model to guide implementation efforts and actions, particularly in translating strategic imperatives into practical actions. Poor or inadequate information sharing among individuals/units responsible for strategy execution – poor sharing of information or poor knowledge transfer and unclear responsibility and accountability make it unlikely strategy implementation will be effective. Trying to execute a strategy that conflicts with the existing power structure – working against the power structure presents a major obstacle to implementation effectiveness, and

•• 492 Implementation process and internal marketing: making it happen

underlines the importance of gaining the support of the influ- ential in the organization and forming coalitions to share implementation responsibility. Unclear responsibility or accountability for implementation decisions or actions – lack of clarity in responsibility for implementation and the achievement of measurable progress presents another obstacle to effective implementation.

Source: Adapted from Lawrence G. Hrebiniak, ‘Obstacles to Effective Strategy Implementation’, Organizational Dynamics, Vol. 35 No. 1 2006, pp. 12–31 .

Building Implementation Strategies It has been suggested that the key to getting a handle on implementation is developing systematic implementation models: One key reason why implementation fails is that practicing executives, managers and supervisors do not have practical, yet theoretically sound, models to guide their actions during implementation. Without adequate models, they try to implement strategies without a good understanding of the multiple factors that must be addressed, often simultaneously, to make implementation work. 24 The approach to this issue we take here is described in more detail in articles by me and Ken Peattie, 25 looking at how successful implementers really do it, in a variety of different companies. The underlying goal is to anticipate implementation barriers as early as possible, to allow us to steer a path between ignoring such problems, or seeing them as totally intractable. The logic is of four stages in developing implementation strategies, and of iteration backwards and forwards between those four stages to build a complete picture in the way shown in Figure 12.5 . The output is either movement forward in terms of generating an implementation strategy, or feedback to the planning process indicating that some barriers cannot be overcome and the relevant strategies are likely to fail if not adapted in some signiﬁ cant way. The four stages are as follows.

Screen strategies for implementation problems • • • At the earliest stage possible, we screen the strategy possibilities we have identiﬁ ed for implementation barriers, in terms of the acceptability of each key strategy to the company. In particular, note that the earlier this issue is faced, the less wasteful the planning process will be for two reasons: ﬁ rst, if there is an absolute barrier, and a strategy is not capable of being implemented, it can be abandoned or ‘ shelved ’ before it has used up too much time and effort; however, secondly, if we identify problem areas early enough we can devote more time to solving them. Implementation barriers may be fundamental cultural

493 •• Market-Led Strategic Change

1. Screen strategies for implementation problems early

2. Isolate and evaluate implementation problems in detail

3. Identify and evaluate key players

Figure 12.5 4. Develop credible, costed implementation strategies – or reject the strategy Screening strategies for implementation problems

mismatches, but often down-to-earth factors like obtaining a budget or headcount – where company policies forbid increased expenditure, or recruitment, or simply expenditure on something like advertising may be seen as ‘ wasteful ’ by the corporate culture.

Isolate and evaluate priority implementation problems • • • Once we have isolated the strategies which, on fi rst sight, are high in priority and pose problems in the company, then these can be further analysed. We can examine the forces surrounding the implementation of these key strategies facing implementation barriers, and try to see the balance between opposing and favourable forces and the likely impact of the various factors identifi ed. It is not unusual, for instance, to fi nd that some of the reasons ‘ why not ’ for a strategy, which are apparently ‘ insol- uble’ , when tested are not as overpowering as we fi rst thought. While generally the picture that emerges from isolating problems should give us an overview of all those signifi cant factors of different kinds in the company which relate to getting our strategy implemented, and which are most important, we probably will need to refi ne and reconsider this overview in two ways. First, we can evaluate the key players in our implementation problems. And, second, we can ask what else would have to happen to move the issues, to see if this changes the picture.

Evaluate key players in implementation • • • First, if our thinking has produced little insight into what is likely to prevent things happening, or what we have to do to make them happen, we may not have got to the heart of the problem – so we may have to be a lot more speciﬁ c about the people, the departments, the committees and so on, that we have to cope with. We should look for: inﬂ uential supporters – they are involved in the critical decisions and are on our side,

•• 494 Implementation process and internal marketing: making it happen and need to be kept on-side; infl uential opposition – the key players in the company who are infl uential and involved, but almost inevitably will oppose our plans, and whose impact must be balanced against our support, and questions asked whether there are ways we could win their support or move them out of the critical decision process; non-involved supporters – they are not infl uential in the decision but support our goals and plans, so the main possibility to consider is what may be done by us or them to increase their infl uence over the decision; and non-involved opposition – they provide unhelpful ‘ noise’ in the system, but since they are not directly infl uential we may not see these as a major threat.

Develop implementation strategies • • • By going through the implementation issues in this detailed way, we hope to turn apparently intractable, unbeatable barriers into things that may be moved, at least a little. Naturally, in taking this approach we have to accept that some things cannot be overcome – however creative our implementation tactics and strategies may be. One underlying goal is ‘ de-mystifying ’ the barriers to making plans work in different situations. Experience suggests that it is very easy to see some elements of a strategic plan as impossible to implement, not because they fail to make ﬁ nancial sense, but simply because they are innovative, different to how ‘ we do things here ’ , are against ‘ company policy ’ , ﬂ y in the face of ‘organizational myths’ , and so on. Working with planners on such issues suggests that breaking barriers down into their constituent parts and addressing them at this level frequently leads to the conclusion that strategies may be feasible after all, if we can integrate an appropriate implementation strategy with our strategic plans, and if we are prepared to look into the organizational realities of how things happen in our companies. So far, we have an approach to open the closed minds by illuminat- ing the problems and unfreezing the inertia. First, we test our strategies for their adequacy and then we break down implementation barriers into their smallest components and see what we can do about them. We do this early, systematically and iterate between the strategy and the barrier. Then, we can either say that a strategy should be abandoned, or that we know what to do to make it work. We can then use an internal marketing framework to put implementation strategy into effect.

Strategic Internal Marketing Because it is still relatively new, the term ‘internal marketing’ is diffi - cult to pin down to a specifi c defi nition, suggesting a dilemma: ‘ What to call this emerging area of internal alignment, engagement or whatever. Clearly, the new discipline is holistic. It must be inclusive. It is cross-functional and just involve selling, service and operations. Most importantly, it must focus on delivery of corporate promises, both internally and externally. ’ 26 Here we distinguish between operational and strategic internal marketing.

495 •• Market-Led Strategic Change

What we are calling ‘strategic internal marketing’ has the goal of developing a type of marketing effort aimed at the internal marketplace in the company that parallels and matches the marketing programme aimed at the external marketplace of customers and competitors. This model comes from the simple observation that the implementation of external market strategies implies changes of various kinds within organizations – in the allocation of resources, in the culture of ‘ how we do things here’ , and even in the organizational structures needed to deliver our market strategies effectively to our customer segments. Such changes may not be welcomed by those most directly affected. In practical terms, the attraction of internal marketing is that exactly those same techniques of analysis and communication, which are used for the external marketplace, can be adapted and used to market our plans and strategies to important targets within the company. Indeed, one of the major attractions of talking about ‘ internal marketing ’ instead of culture change, implementation and so on, is that we know how to do it. The goals of the internal marketing plan are taken directly from the implementation requirements for the external marketing plan, and the objectives to be pursued. Depending on the particular circumstances this process might include: gaining the support of key decision makers for our plans – and all that those plans imply in terms of the need to acquire personnel and fi nancial resources, possibly in confl ict with established company ‘ policies ’ , and to get what we need from other functions like operations and fi nance departments; changing the attitudes and behaviour of employees and managers , who are working at the key interfaces with customers and distributors, to those required to make plans work effectively; winning commitment to making the plan work and ‘ ownership ’ of the key problem- solving tasks from those units and individuals in the fi rm whose working support is needed; and ultimately managing incremental changes in the culture from ‘ the way we always do things ’ to the ‘ the way we need to do things to be successful ’ and to make the market strategy work.

Operational internal marketing The term internal marketing reﬂ ects the views of different people who have used the technique in different settings. This is clearer if you look at the sources of internal marketing. Company expenditures on internal marketing usually reﬂ ect these types of approaches.

Service marketing and quality • • • The original and most extensive use of internal marketing was in improving the quality of service at the point-of-sale in services businesses like banking, leisure, retailing and so on – the so-called ‘ moment of truth’ for the services marketer. Some call this ‘selling the staff ’ , because the ‘ product ’ promoted is the person’s job as a creator of customer service and value. Now, I have nothing against efforts to introduce a bit of customer care in the retail store or the bank – a tad

•• 496 Implementation process and internal marketing: making it happen

less offensiveness and arrogance in dealing with paying customers is all to the good. However, all too often these internal marketing programmes are, in practice, essentially tactical and restricted to the operational level of the organization. There is a substantial theoretical underpinning for this form of internal marketing, which comes mainly from the ‘ Nordic School of Services ’ .27 In fairness to advocates of this form of internal marketing, there is a lesson here for us all, if we believe that our carefully prepared market strategies are let down by the quality of implementation at the point of sale. It is apparent and obvious that marketplace success is frequently largely dependent on employees who are far removed from the excitement of creating market strategies – service engineers, customer services departments, production and fi nance personnel dealing with customers, fi eld sales personnel, and so on. For example, US research suggests we should all think more carefully about the impact of such things as organizational communications on employees – as ‘ advertising’s second audience’ .28 The chances are that employees are more aware and more infl uenced by our advertising than are our customers, so we should use that productively to deliver messages to employees. At its simplest, the disgruntled employee produces the disgruntled customer, and then we all have problems. Tom Bonoma has hit this nail right on the head: ‘ treat your employees like customers, for your customers will get treated like employees’ . 29 Given how appallingly badly so many of us treat our employees, the real enormity of the task becomes apparent. Internal marketing focusing on customer service and quality strategies can help here. Put another way: ‘ You want to create the same buy-in to the products, services, and philosophy of your organization among your employees as you would hope for among customers’ – in other word to ‘ light their fi re ’ . 30

Reality Check: Make It Hampton

When the Hampton Inn hotel chain in the USA was ready to roll out 122 changes to its products and services, its new marketing campaign was called ‘Make It Hampton’. But this campaign was aimed at hotel managers and workers, not guests. Building internal brand enthusiasm and employee motivation involved: building a giant model of a hotel to showcase the improvements and to allow employees to experience them; motivational conference calls; focus groups, targeted newsletters and new training materials. The end of the first phase of ‘Make It Hampton ’ saw a 5% increase in market share, and a similar growth in the percentage of highly satisfied customers.

Source: Adapted from Susan Drake, Michelle J. Galman and Sara M. Roberts, Light Their Fire: Using Internal Marketing to Ignite Employee Performance and Wow Your Customers , New York: Kaplan Business, 2005 .

497 •• Market-Led Strategic Change

Brand ambassadors • • • Related to the last point is the extension of relationship marketing to the relationship with employees and managers and the goal that they should become ‘ brand ambassadors ’ for the company. Brand owners like Unilever, SABMiller, Cadbury–Schweppes and BT are among those with established internal marketing excellence programmes to achieve this goal.31 For example, at Honda all new staff receive the ‘Book of Everything ’ containing the normal employee handbook information but also an extensive explanation of the Honda brand philosophy with the goal of ‘Spreading ‘ Honda-ness ’ ’ . 32 Others see this as ‘internal branding ’ – building employee understanding and their buy-in to corporate brand values. For example, BP uses a behaviour reward scheme to show employees how to turn its brand values into actions that improve performance.33

Internal communications • • • The largest growth in this area has been investment in internal communications programmes of various kinds – where ‘communication ’ is understood as telling our employees what is going on, and delivering messages that support the business strategy. Although up-to-date ﬁ g- ures are scarce, one 2001 study suggests that the Fortune Top 200 ‘ most admired companies ’ spent an average of $1.6 million each in internal communications efforts.34 Conventionally, where it happens at all, it tends to be a responsibility of the Human Resources Department. This is a start, but there is a danger we miss an important point – communication is a two-way process – we are supposed to listen as well as tell people things. Perhaps the most visible sign of commitment to internal communications to win employee commitment to strategies of customer service is the huge investments made by some successful companies, to build programmes that justify management changes to employees and explain the background to things like media stories about the company. Indeed, BT has actually formally merged internal communications with public relations. The manifestations are mundane: company newsletters, conferences, training, video-conferencing, satellite TV transmissions, interactive video, e-mail, Web-based internal blogs, and so on. The trouble is most of this is about instructing and informing people rather than winning their real involvement and participation. This may be why internal communications go wrong. It may also be why, whatever company you visit, the presentations come with the same stock artwork, the same canned music and the same zooming and ﬂ ashing words (thank you very much for your contribution there, Microsoft PowerPoint). Even as you read this, how many middle managers are there in the world doing TV-style fades between ‘ virtuous circles ’ and three-pronged strategies? What is this obsession with 1950s style drawings of men at desks and women with briefcases to deliver the message that ‘ People

•• 498 Implementation process and internal marketing: making it happen

Are Our Greatest Asset ’ ? * Why is it that regardless of all this, the message in the presentations always seems to be the same: sell more and work harder? The fundamental problem in many internal communications programmes is – they become about telling and persuading, not listening. This is internal selling not internal marketing . Listening to employees can be done, and it seems more effective in changing attitudes and building commitment than sending out yet more insanely boring company newsletters.

Reality Check: The myth of the noble employee

E. L. Kersten is a subversive. He is a founder of Despair Inc., selling posters, mouse mats and mugs that take the cheesy messages of motivational posters of eagles and sunsets, and reverses them. The originals have slogans like ‘Dare to Soar ’ while the Despair version has the same rowers slicing though the water in perfect rhythm with the slogan: ‘Get to work. You aren’t being paid to believe in the power of your dreams’. Another picture shows the leaning tower of Pisa with the caption ‘Mediocrity: it takes a lot less time and most people won’t notice the difference until it’s too late ’. Dr Kersten’s view in his ‘Art of Demotivation’ project is that the ‘noble employee’ is a myth and we should expose employees as the rude, arrogant, lazy and offensive exploiters they really are. He argues that most employees are average or below average (true by definition), suggesting logically they are not a company’s ‘greatest asset ’ but in fact its greatest liability. Conventional management is based on the assumption that most employees are essentially decent, honest and hard-working – this is what Kersten calls the ‘noble employee myth’. This myth encourages managers to encourage and motivate employees. He argues it is time to confront the inherent weakness of employees: they moan exces- sively; they resist change; they look after their own agendas; they bring their problems to work; they make bad decisions; they make mistakes; they alienate customers; they are rude, arrogant, lazy, unresourceful, ill- mannered and offensive and exploit their employers’ generosity. In Kersten’s model of ‘Radical Demotivation’ workers are demotivated but this is achieved in ways that are cheap and deliberate and better for the company and the worker. Demotivated workers are more productive because they are satisfied with less, feel desperate loyalty to the company, need less recognition, are pessimistic and

*Let’s be honest, if our people really were our ‘greatest asset’, we would probably have sold them long since . . .

499 •• Market-Led Strategic Change

work hard as a way of salvaging their identity because they have acute self-doubt. Techniques include developing a culture of blame and giving employees very limited choices – constantly reminding employees that ‘ things could be worse ’ . Dr Kersten’s views are somewhat heretical, but like all subversion they provide a basis for challenging easy and silly assumptions – in this case about people at work.

Sources: Lucy Kellaway, ‘Good Managers Make Sure They Devalue Their Employees ’ , Financial Times, May 29 2005, p. 11. E. L. Kersten, The Art of Demotivation – A Visionary Guide to Transforming Your Company’s Least Valuable Asset – Your Employees , Austin, TX: Despair Ink, 2005.

Innovation management • • • Internal marketing frameworks have been used to place, and gain use of, innovations like computers and electronic communications in the IT ﬁ eld. These applications use tools of market analysis and planning to cope with and avoid resistance to change. The argument here is that people in an organization are customers for our ideas and innovations. This encourages us to: look at customer needs – even in hierarchical companies people are not robots waiting to be told what to do, so making the effort to understand their needs increases the likely effectiveness of innovation; deliver the goods – the needs of customers tell us what matters most to them; and avoid raising unrealistic expectations, which is as dangerous with internal customers as it is with external customers.

Corporate positioning • • • Others talk of internal marketing in terms of creating awareness, understanding of, and cooperation with functions, departments or processes inside the company. This is about creating an image, and just letting people know we are there and what we do. This may be of particular signifi cance, for example, to gaining infl uence for the non- integrated marketing department, in the absence of formal power or ‘clout ’ in the company, or of sharing the idea that we are all involved in managing the process of going to market, rather than it being what marketing executives do. This form of internal marketing is also becoming more signifi cant as formal marketing organizations disappear in some companies, and are replaced by new organizational arrangements like process-based teams, network collaborations and so on. The need to explain who does what and how things operate becomes more important not less.

Internal markets instead of external markets • • • The terms internal market and internal marketing have also been applied to internal relationships between different parts of the same

•• 500 Implementation process and internal marketing: making it happen

organization – making them suppliers and customers as a way of improving the focus on efﬁ ciency and value. This is common in total quality management programmes, and in wider applications like the reform of the UK National Health Service. This can all go horribly wrong though.

Reality Check: Internal marketing may be bad for your health

A prestigious health insurance company moved to a huge new office block, with an expensive, state-of-the-art catering facility built next to the office block in the company’s new ‘park’. Concerned with issues of efficiency in the internal market, management pressured the manager of catering to ‘sell’ the new restaurant and catering facilities to employees, and proposed to evaluate his success by restaurant usage rates by employees. As an entrepreneurial sort of fellow, he toured the new offices (his marketplace) and quickly arranged for the removal of all kettles, coffee machines, soft drink machines, snack facilities and microwaves and toasters, with which employees had equipped themselves, and then pressured departmental managers to enforce company rules about employees not eating or drinking at their work stations. The result is a high usage figure for the catering facility – employees have nowhere else to get food or drinks. Management is delighted. However, they now have to deal with a bunch of very unhappy employees who are getting meaner by the day and are liable to lynch the catering manager some day soon (a serious risk, in fact, since the company is in Texas).

There are some interesting issues here, which may be relevant to our companies, but there is another dimension to internal marketing as well.

Strategic internal marketing (SIM) SIM is the direct parallel to our external market strategy and marketing programme, but which aims at winning the support, cooperation and commitment we need inside the company if our external market strategies are to work. The key issue here is the organizational and cultural change needed to make marketing happen. We know why we need it and where it comes from – but what does it involve? The logic here is really quite straightforward.

Internal market orientation • • • Interestingly, emphasizing the links between internal and external marketing, recent attention has been given to ‘ internal market

501 •• Market-Led Strategic Change

orientation ’ as a foundation for success. In the same way that external market orientation has been linked to the effective implementation of external marketing strategies, the same may apply to internal market orientation. The logic is that internal market orientation increases the responsiveness of a market-oriented company to external market conditions, because it allows management to better align external market objectives with internal capabilities. However, this symmetry relies on assessment of internal market orientation as a precursor to action.35 Lings and Greenley (2005) propose that assessing internal market orientation should encompass directly parallel measures to those associated with external market orientation, thus internal market orientation involves the generation and dissemination of intelligence pertaining to the wants and needs of employees, and the design and implementation of appropriate responses to meet those wants and needs.36

Internal marketing strategy • • • In broad terms the issue is what is needed to gain the successful implementation of an external market strategy. It is here that we need to confront the real implications of our external market strategy for the internal customer – the decision makers, managers, operatives and others without whose support, cooperation and commitment the external strategy will fail. This is the most critical question in the whole internal marketing exercise. It may be worth consulting the people directly concerned – doing internal market research. It is certainly worth incorporating some diversity of opinion. As we learn more, we can come back and redraft and rethink our conclusions here. It is here that we should take a view of what it is likely to cost us to achieve these things and the deadline for achieving them to implement the external marketing strategy on time.

The structure of SIM • • • A structure for an internal marketing programme is summarized in Figure 12.6 . The easiest way to make practical progress with internal marketing, and to establish what it may achieve, is to use exactly the same structures that we use for planning external marketing. This suggests that we should think in terms of integrating the elements needed for an internal marketing mix or programme, based on our analysis of the opportunities and threats in the internal marketplace represented by the company with which we are working. This is shown in Figure 12.6 as a formal and legitimate extension of the planning process. In fact, in this model we take the internal marketing programme not only as an output of the planning process and the external marketing programme, but also as an input , i.e. constraints and barriers in the internal marketplace should be considered and analysed as a part of the planning process at both strategic and tactical levels. For our proposals to make sense in practice, we rely on this iterative relationship.

•• 502 Implementation process and internal marketing: making it happen

Strategy

Plan

Internal External Targeted at key marketing marketing Targeted at key groups in the programme programme customers, segments company, alliance Product Product and niches, and other partner companies, Price Price external influencers and other influencers Communications Communications Distribution Distribution

Figure 12.6 Internal and external marketing

The starting point is that the market strategy and the planning process may deﬁ ne an external marketing programme in the conventional way, and less conventionally the internal marketing programme needed to make it happen. However, it may well be that internal barriers suggest to executives that some external strategies are not capable of being implemented in the time-scale concerned, and we have to feed back into the planning process the message that some adjustments are needed. The structure of an internal marketing programme is shown in Figure 12.7, consisting of: the product – at the simplest level the market strategies and the marketing plan in which they are written up, as well as the values, attitudes and behaviours that are needed to make the marketing plan work effectively; the price – not our costs, but what we are asking our internal customers to ‘ pay ’ , when they buy in to the product and the marketing plan, such as sacriﬁ cing other projects that compete for resources with our plan, but more fundamentally the psychological cost of adopting different key values, and changing the way jobs are done, and asking managers to step outside their ‘ comfort zones ’ with new methods of operation; communications – the most tangible aspect of the internal marketing programme is the communications media and the messages used to inform and to persuade, and to work on the attitudes of the key personnel in the internal marketplace, including not only written communications, but also face-to-face presentations to individuals and groups who are important to the success of the plan; and distribution – the distribution channels element of the mix is concerned with the physical and socio-technical venues at which we have to deliver our product and its communications: meetings, committees, training sessions for managers and staff, seminars,

503 •• Market-Led Strategic Change

Programme Contents Examples

Product The strategy and the plan, For example, the written plan, including the values, attitudes the new company initiative and behaviours needed to make them work

Price What we are asking internal For example, stepping out of customers to ‘pay’ – other comfort zones for new types projects abandoned, personal of operations and psychological adjustment to change

Communications Media and messages to inform For example, reports, plans, and persuade presentations, videos, roadshows

Distribution Physical and social venues for For example, meetings, work-groups, delivering the product and training sessions and workshops, communications informal meetings, social occasions

Figure 12.7 Internal marketing programmes

workshops, written reports, informal communications, social occasions, and so on. Interestingly, there is a case that the real internal market distribution channel is lining-up recruitment training, evaluation and reward systems behind marketing strategies, so that the culture of the company becomes the real distribution channel for internal marketing strategies. For example, to support customer commitment, it is increasingly common for companies to involve major customers in staff recruitment and selection decisions; staff promotion and development decisions; staff appraisal, from setting the standards to measuring the performance; staff reward systems, both ﬁ nancial and non-ﬁ nancial; organizational design strategies; and internal communications programmes. This is one route to sustaining interdependent, shared values and shared strategies.37

Internal market measurement • • • It also follows that we can use our marketing research techniques inside the company to get to grips with who has to change, in what way, how much and what the patterns are, in our internal marketplace. As with the external marketing programme, we should not neglect the importance of measuring results wherever possible. This may be in terms of such criteria as people’s attitudes towards the market strategy and their commitment to putting it into practice, or customer perceptions of our

•• 504 Implementation process and internal marketing: making it happen success in delivering our promises to them – or, perhaps more appo- sitely, our lack of success as presented by complaints and so on.

Internal marketing targets • • • Again, in exact parallel with the conventional external marketing plan, our internal marketing programmes should be directed at chosen targets or segments within the market. The choice of key targets for the internal marketing programme should be derived directly from the goals of the external marketing programme, and the types of organizational and human change needed to implement market strategies. The internal marketplace may be segmented at the simplest level by the job roles and functions played by groups of people, e.g. top management, other departments and marketing and sales staff. Increasingly, internal marketing may also be concerned with partners in alliances and networks, where the issue is positioning our market strategies with employees and managers in alliance organizations. Indeed, as organizations become more complex and reliant on the effectiveness of networks of collaborators, this may become a major role for internal marketing.

Internal marketing evaluation • • • There is also the question of what we can measure to see if we are achieving internal marketing goals. Ideally metrics should be quantifi ed and objective: for example, reduced customer complaint rates or higher customer satisfaction scores. This may be ambitious and we should not abandon important objectives because they are diffi cult to evaluate – we may have to settle for a subjective or qualitative evaluation, which is better than nothing. However, the possible problems to be anticipated in implementing internal marketing strategy programmes effectively should not be underestimated. For example, Don Schultz suggests that many, if not most, internal marketing approaches fail, for the following reasons: lack of fi nancial measures of internal marketing success – the goal should be to link measurable behavioural changes to fi nancial returns for the business; weak management cohesion – the organizational location of responsibility for internal marketing is confused and those responsible have no authority or responsibility for the people whose behaviours they are trying to change; lack of senior management support – internal marketing is not perceived as a senior management issue, but rather is the concern of middle managers with all the inherent problems of turf wars and organizational politics; no connection between internal stakeholders and external customers – the diffi culty for employees in non-customer-facing roles to understand how internal marketing affects them, or how they affect the external customer; and lack of a management calculus – there are no clear ideas about the value or return of internal marketing and an effective internal marketing planning system. Schultz suggests that we should apply the lessons of integrated marketing communications in internal as well as external marketing.38

505 •• Market-Led Strategic Change

The hidden face of strategic internal marketing • • • As well as giving us a model for analysing internal marketing needs, this structure also provides a way of going deeper into the real workings of the company. For example, the model in Figure 12.8 suggests that when we get to a company we may start by asking about the techniques, the systems and so on, but behind this the really important questions are ‘ Who runs the organization? ’ and ‘ Who has infl uence in this organization? ’ This encourages managers to go beyond the superfi cial aspects of how their organizations work in planning internal marketing, to distinguish between a level of surface analysis, which is primarily about plans, techniques and systems, and the level of structure and process analysis. This can have the effect of widening the debate from simply the presentation of the plan to the company to the more diffi cult and covert issues of power and culture in companies in the way shown. One attraction is that managers are often far more comfortable using the term ‘ internal marketing ’ to focus attention on the elements of the corporate environment inside the company that need to be changed in order to implement marketing plans, and that this terminology provides an acceptable and legitimate framework for unpacking the issues in the company. It may sound tacky, but it seems to work in getting to grips with the processes inside the organization, not just sending out glossy brochures.

Organizational Surface Structural Processual levels

Critical What are the plans, Who runs things Who has influence questions systems and here? here – sets the agenda, procedures in owns key processes, this business? is an ‘expert’?

Internal Product: Product: Product: marketing Plans and strategies New strategic direction Individual’s job, status, role levels Price: Price: Price: Opportunities Loss of control, Adjustment to given up status, initiative change, new culture Communications: Communications: Communications: Information, Sponsorship, Persuasion, image, market research agenda-setting influence, choice of criteria Distribution: Distribution: Distribution: Reports, Policies, Informal communications presentations participation network, social interaction

Figure 12.8 Levels of internal marketing

•• 506 Implementation process and internal marketing: making it happen

But, does strategic internal marketing really work? It all depends on exactly how you defi ne what is internal marketing, but certainly research at Northwestern University in the USA has found internal marketing to be one of the top three determinants of a company’s fi nancial performance – quite simply, companies with better integration of internal and external marketing report better fi nancial results.39 Other studies suggest that a lot of organizations are struggling to deliver their brand propositions to the external customer because of inadequate investment in the internal marketplace and a lack of internal marketing40 – though again this depends on a particular defi nition of internal marketing. More broadly, the case evidence suggests that internal marketing has something to offer in achieving the sorts of strategic change we want, though it is not a perfect solution. Consider the following examples drawn from our work with different types of organizations.

Commercializing a museum • • • Perhaps some of the simplest examples of the real barriers to implementing customer-focused market strategies come from the public sector, where even now the marketing concept is still regarded as innovative. In one case, for instance, the new marketing director of a public sector museum was trying to implement a strategy of converting an open-air museum site into a historical ‘ theme park ’ . While apparently broadly supported by the organization (i.e. lip-service was paid), there were substantial barriers slowing down and reducing effective implementation. One such barrier was the operating personnel and the traditional culture of the museum. Quite simply, personnel were being asked to abandon their training as custodians and protectors of exhibits, and to become entertainers in costume who encouraged the ‘customer ’ to handle and use exhibits. There was a major difﬁ - culty in achieving the transition for employees from ‘ policeman ’ to ‘ entertainer ’ . More covertly, at a deeper cultural level, the senior managers of the organization had some considerable personal distaste for commer- cialization of their traditional arts and heritage-oriented organization by their political masters. Accordingly, they were obliged to give open support for obvious reasons, but real commitment was less forthcoming. This pervasive attitude impacted on allocations of budget, man- power and the priorities imposed by the organization. It is these issues which provided the real agenda for the senior marketing executive – not the problems of generating a creative and innovative market strategy and plan for the museum. Similar problems exist in other public service organizations faced with imperatives to become ‘ market oriented ’ and ‘ commercial ’ . The internal attitudes and potential resistance to income-generating activities from managers and operatives from the ‘public service’ tradition – hidden behind approving lip-service to marketing concepts – pose the most serious (but the most covert and difﬁ cult) barrier to actually

507 •• Market-Led Strategic Change

implementing the new market strategies being devised by executives in such organizations.

Strategic change at a corporate bank • • • Another case example involves one of the secondary banks in the UK. The bank consisted of a large retail branch network, backed by a number of small specialist units at the London centre. One of these units was Corporate Banking, servicing mainly multinational company headquarters in the City of London. The plan developed by this unit created a new market strategy of servicing medium- and large-sized corporate customers in all areas covered by the retail branch network (currently in the Retail Branch managers’ remit), with the goal of a substantial increase in market share in the corporate market for the group. On the face of things the internal marketing needs were to inform branch managers of the new strategy, and to use this to reduce the pressure from the network for more staff to cover the corporate market. Branch managers were required to provide sales leads and market intelligence to the centre. Admittedly, branches would lose potential income, but they had never succeeded in realizing much of that potential anyway. However, at the political level, an apparently rational strategy was deeply tied up with the power struggle within the organization – in terms of the centralization of control of the branches, the clash of cultures between technical City-based bankers and banking ‘ salesmen ’ in the ﬁ eld, and indeed ultimately the actual survival of the corporate banking unit. The real ‘ price ’ to be paid by branch managers was far more than potential loss of income – it was far more to do with a loss of autonomy for the branch manager in the local area, and a down-grading in status to an operator of ‘commodity ’ consumer and small business banking. The internal marketing strategy evolved proved far more problematic than the external strategy. The key elements were written and spoken sponsorship from the chief executive – epitomized by a short memo to all branch managers, reading ‘ The train is now leaving the station. You are either on it or . . . ’ – as well as joint planning between branch managers and corporate banking executives to gain some participation and communication between the branch managers and the corporate banking executives. This was reinforced by operating on the evaluation/reward system to offer the branch manager some ﬁ nancial gain from assisting the corporate executive to exploit ‘ his ’ area, and greater rotation of staff between the branches and the centre. The company paid a substantial price for the new corporate banking strategy, in time spent on winning branch managers round, and in increased managerial staff turnover at the branch level. It would be wrong to suggest that internal marketing offers easy answers to the problems of implementing market-led change. What is shown is the additional insight that can be generated leading to an agenda of implementation issues at various levels. It should be said also that the case

•• 508 Implementation process and internal marketing: making it happen demonstrates vividly that the external strategy and its direct costs may be only the tip of the iceberg compared with the efforts and costs required to create change through an internal marketing strategy.

Cross-selling in a retail fi nancial services organization • • • In a medium-sized fi nancial services organization, the strategy, designed by the central Marketing Department and championed by the new General Manager, was ‘ cross-selling ’ between two divisions: the retail banks and the fi nance company. The concept was that since the banks and the fi nance company shared the same geographical areas, it would make sense for the bank to refer commercial loan business to the fi nance company, and for the fi nance company to push its commercial customers into banking with the group. Indeed, it was such an obvious strategy the new General Manager could not understand why it had not already happened. At a wholly rational level, this strategy was the product and the price was the commission sacrifi ced by managers in referring business across divisions rather than selling more of their own products. Distribution and communication was by written plan, presentation at sales conferences, and so on. The effect in Year 1 of the new strategy was zero results in cross-selling. Of course, if you dig deeper the product is really not just cross-selling, it is a changing role for the branch manager and increased control at the centre. The most intractable issues were the hidden political and cultural barriers represented by the costs to managers of collaborating closely with divisional counterparts historically perceived, at best, as competitors – cultural barriers made worse by differences in ethnic and educational background and professional training between the divisions. The approach taken here hinged on the formation of joint planning and problem-solving teams, and the redesign of the management information system to allow clear measurement of the implementation and success of the new strategy. Progress with implementing the cross-selling strategy continues in this company – with some remaining confl icts and breakdowns. Success is diffi cult to evaluate but recent discussions with branch managers suggest awareness of what they themselves describe as a change in the ‘ culture ’ of their company, and quite tangible operational changes in how the two operating divisions work together. Cross-selling is now happening in a signifi cant way. In one sense this is a success story – they now do cross-selling. But, if you look at the real cost to the business of getting cross-selling to happen – the strategy is an unmitigated disaster. At current levels, it will take about 20 years for the margins earned through cross-selling to pay back the cost of the joint-planning team exercise, let alone the staff turnover they created on the way. In these terms the strategy is an abject failure. One of the lessons we have learned is that if you plan your internal marketing strategy at the same time as your external market strategy,

509 •• Market-Led Strategic Change

your ﬁ nancial evaluation may actually mean something, because it will include the real costs of implementation. You may well reject a market strategy when you see the ‘ hidden ’ costs of implementation. Some research evidence supports the internal marketing case. The case evidence suggests that it helps, but it is difﬁ cult to generalize. But, where companies do make the internal marketing effort, it seems to have a good effect, and many more companies are now formalizing it in the search for effective implementation of market strategies that ‘ stretch ’ their companies. There are some cases that suggest that internal marketing may be the ideal vehicle to build the collaboration between marketing process management and other functions and external partners that we discussed earlier. So, there may be value in adding an internal marketing structure to our market-led strategic change – because the evidence is that currently most of us simply don’t bother.

Where Does that Leave Us with Strategy Implementation? The approach to implementation described here has tried to pull our thoughts together around the simple notion that the only thing that matters in all this is what we actually deliver to a paying customer. However, when we focus on implementation, we can separate out a long-term and a short-term issue. The short-term issue is what has mainly occupied us so far – getting things to happen now . The longer- term issue is about how we manage things to avoid the implementation problems we have considered here. What this means is that there is a need to consider both process management and execution skills in implementation. The difference is that managing the strategy process has the goal of integrating implementation and change issues with the market strategy, with the goal of avoiding the emergence of implementation barriers. On the other hand, execution skills are concerned with how to manage a way though the change problems and barriers, which stand in the way of market strategy. While these are different approaches, they are not mutually exclusive, and in most practical situations we will need to give attention to both. The reasons for this are suggested in Figure 12.9 . The implementation scenarios suggested are four: weak implementation – where the management of process and execution skills are inappropriate to drive a market strategy; management-driven implementation – where the emphasis is on leadership and control by management to put a strategy into effect and to overcome problems or barriers that may exist; implementation-driven strategy – where the emphasis is on exploiting the capabilities of the existing organization and adapting strategies to ‘ ﬁ t’ with this reality; and integrated strategy and implementation – which achieves implementation by both managing key processes and applying management execution skills. The weak implementation scenario is largely based on managers assuming that once plans and strategies are written, then people will

•• 510 Implementation process and internal marketing: making it happen

Process management

High Low

Integrated Management- Strong strategy and driven implementation implementation skills Execution Implementation- Weak Weak driven implementation Figure 12.9 Execution strategy skills versus process management in marketing strategy implementation

go away and make them happen. Some managers make these assumptions implicitly in how they approach things, and then get upset when their edicts and commands are not put into effect or are implemented half-heartedly or haphazardly. Any market strategy that matters to an organization deserves to have implementation taken more seriously than this. The management-driven implementation scenario is probably closest to the traditional view of how things should be managed. The emphasis is on line management to take charge, to overcome obstacles, to lead, to coerce and to make things happen – it relies on high quality management execution skills to overcome implementation barriers. It is fast to put into practice and in the short term may achieve change, but the problem is it lacks longer-term effectiveness in sustaining change. The implementation-driven strategy scenario is where the focus of market strategies is dominated by exploiting existing capabilities and skills in the organization, mainly by adapting market strategies to ‘ ﬁ t ’ with the organization’s existing competences. This is also fast to be put into effect, and will keep implementation costs low. It is weaker in achieving strategic change because the emphasis is on exploiting what we already have, not developing new capabilities – this is ﬁ ne until the point when our capabilities do not provide what the market wants, i.e. our strategy becomes outdated by market change. The integrated strategy and implementation scenario is the ideal to which we aspire. Implementation is not an issue because it is fully integrated with the market strategy, and we are not forced to cling to existing skills and processes, because part of developing strategy is developing the appropriate processes, structures, skills and capabilities to drive the strategy. It is slower to achieve and expensive, and in the short-term not outstandingly effective. It is probably the only route to

511 •• Market-Led Strategic Change

long-term sustained strategic change. It is also the scenario we understand least well, and ﬁ nd rarely in practice. We will assume, however, that this is the situation to which we aspire. With that broader challenge laid down, it only remains to overview the managerial agenda for market-led strategic change.

An Agenda for Market-Led Strategic Change This book is about transforming the company’s process of going to market. That transformation is achieved by being market-led , and by managing the difﬁ cult, messy and uncomfortable process of strategic change which this implies for organizations. Much of what we have considered here is about building an effective agenda for change as our central focus.

So, what are the real problems? At the simplest, the logic of this book is based on the observation that the real problems are generally not about the lack of sophisticated skills and techniques. The challenge is to look at the whole process which creates a market offering of value to customers. This is much broader than looking at ‘ marketing ’ in the conventional sense – it involves everyone in the company and it crosses traditional departmental boundaries and even organizational boundaries to focus our attention ﬁ rmly on what the customer gets that creates value for that customer and differentiates us from the competition.

Market-led . . . The logic we have pursued is that if you cut through the corporate trappings to the real substance – there is only one thing that links and integrates everything and gives a purpose to everything, and that is the customer. Being market-led is about interpreting customer demands and needs to the key players inside the organization and changing their priorities. It is about the integration of all company activities and investments around what matters most to our survival – the customer for what we do. For a start, strategy needs to be creative, accessible and exciting, not bureaucratic and mysterious – strategic thinking and the strategic pathway provide a way to handle this issue.

. . . strategic change The sad truth is that, for most of us, tackling these underlying, basic problems is not about ﬁ ne-tuning and marginally improving tactical and technical marketing performance. It is about deep-seated, fundamental strategic change in our organizations. It is about changing cultures, challenging the status quo , breaking the inertia, coping with

•• 512 Implementation process and internal marketing: making it happen

obstacles and resistance to change, changing the distribution of power and how management controls the operation – just a few trivial issues like that!

Market-led strategic change So, market-led strategic change has two components. The fi rst – being market-led – is about the up-front content, focus and integration of our value offering to become better at doing the things that matter to the paying customer. The second – strategic change – is about coping with the revolution created by being market-led. Creating the momentum for strategic change starts with isolating and defi ning the strategic issues, i.e. establishing the agenda to be addressed. That is the real control that managers exert over an organization. Now would be a good moment to remind ourselves of the route map we laid down for market-led strategic change (MLSC) at the start of the book (summarized in Figure 1.2). This identifi ed an agenda with three elements: recognizing the customer value imperatives that companies face; developing innovative and robust marketing strategies; and the processes needed to manage strategic transformation. In the right situation, the MLSC structure can be turned into a company-wide programme. The agenda can be integrated into an existing management training and development programme, leading to training and development work for key executives. It can be addressed as part of organizational development, leading to changes in our structure, systems and procedures. It may simply be the agenda for the next Board meeting or a Director’s workshop. In other situations we may have to pick the issues off, one at a time, using whatever resources and support we can get. The important thing is to get started.

But where do we start? In times of turbulence and change we need to think very seriously about what we need to do to help managers cope, and to answer the manager’s top three questions. * The greatest barriers to success in the struggle for a customer focus come from traditional organizational structures and processes, and employee attitudes and beliefs – so, William Band says, the way we manage organizations and people will have to change.41 Tom Bonoma talks about the critical ‘ marketing subversives ’ , 42 who take advantage of ‘ loose ’ money, people and time, to make marketing work, in spite of the company’s policies and procedures. William Band talks about marketing’s ‘organizational revolutionaries’ attacking the status quo with

* The manager’s top three questions are always the same, they are: (1) What about me?, (2) What about me?, and (3) What about me?

513 •• Market-Led Strategic Change

planned change strategies – he argues that where you start depends on how fast change is needed and where the leadership comes from, and he identiﬁ es the following options: annexation – start with the part of the organization that is most willing to change and has the greatest chance of success, and add extra ‘chunks ’ later; perestroika – where top management leads the change process, dragging the organization behind, screaming and kicking; guerrilla campaign – a bottom-up, hidden, selective exploitation of opportunities for change as they occur; and palace coup – those who want change take control. Making change happen is a personal commitment and a personal risk. But as John F. Kennedy once said, ‘ If not us, who? If not now, when? ’ . It may be somewhat unoriginal and trite (and why break the habit of a lifetime now), but the following seems to be a wholly appropriate thought with which to end this book: Somewhere in the African jungle this morning a gazelle will wake up. The gazelle knows it must run faster than the fastest lion, otherwise it will die. Somewhere else in the jungle a lion wakes up. The lion knows it must run faster than the slowest gazelle, otherwise it will starve. The moral is whoever you are, wherever you are, you’d better wake up and start running . . . !

References and End-notes

1. Kaplan , Robert S. and David P. Norton , The Strategy-Focused Organization , Boston, MA : Harvard Business School Press , 2001 . 2. Piercy , Nigel F. , ‘ Marketing Implementation: the Implications of Marketing Paradigm Weakness for the Strategy Execution Process ’ , Journal of the Academy of Marketing Science , 26 ( 3 ) , 1998 , pp. 222 – 236 . 3. Moules , Jonathan , ‘ Managers Failing to Gain the Trust of Their Workers ’ , Financial Times , November 5 2007 , p. 4 . 4. Lencioni , Patrick M. , The Three Signs of a Miserable Job: A Fable for Managers (And Their Employees) , San Francisco, CA: Jossey-Bass , 2007 . 5. Coombes , Andrea , ‘ Workers Want Good Managers and Some Respect ’ , Wall Street Journal , November 12 2007 , p. 31 . 6. McGregor , Jena , ‘ The Employee Is Always Right ’ , BusinessWeek , November 19 2007 , pp. 80 – 82 . 7. Maccoby , Michael , The Leaders We Need: And What Makes Us Follow Them , Boston, MA : Harvard Business School Press , 2007 . 8. Timmins , Nicholas , ‘ Rise in Dictatorial Company Managers ’ , Financial Times , December 12 2007 , p. 6 . 9. Riggio, Ronald E. , Ira Chaleff and Jean Lipman Blumen (eds), The Art of Followership: How Great Followers Create Great Leaders and Organizations , San Francisco : Jossey-Bass , 2008 .

•• 514 Implementation process and internal marketing: making it happen

10. Kellerman , Barbara , Followership , Boston, MA : Harvard Business School Press , 2008 . 11. Quoted in: Anders, George, ‘ How to Empower Passionate Employees ’ , Wall Street Journal , December 24/26 2007, p. 27. 12. Kellerman, Followership. 13. Pascale , Richard , Mark Millman and Linda Gioja , ‘ Changing the Way We Change ’ , Harvard Business Review , November/December 1997 , pp. 127 – 139 . 14. Quoted in: Stern, Stefan, ‘ The Lofty View from Davos Could Be Just a Mirage ’ , Financial Times , January 29 2008, p. 14. 15. Bower , Joseph L. and Clark G. Gilbert , ‘ How Managers’ Everyday Decisions Create or Destroy Your Company’s Strategy ’ , Harvard Business Review , February 2007 , pp. 7 2 – 7 9 . 16. Beattie , Alan , ‘ Unchained Malady: Business Is Becoming Ever More Exposed to Supplier Problems ’ , Financial Times , August 25 2005 , p. 13 . 17. This section draws from: Piercy, Nigel F. and Frank V. Cespedes, ‘ Implementing Marketing Strategy’ , Journal of Marketing Management , 12, 1996, pp. 135–160. Cespedes, Frank V. and Nigel F. Piercy, ‘ Implementation of Strategy ’ , in Malcolm Warner (ed.), International Encyclopaedia of Business and Management , London: Routledge, 1995. Piercy, Nigel F., ‘ Implementing Marketing Strategies’ , in Colin Egan and Michael J. Thomas, Strategic Marketing, Oxford: Butterworth– Heinemann, 1998. 18. Lynn , Jonathan and Anthony Jay , Yes, Prime Minister, Volume II , London : BBC Books , 1987 . 19. Bonoma , Thomas V. and Bruce Clark , ‘ Assessing Marketing Performance ’ , in Thomas V. Bonoma and T. K. Kosnik , Marketing Management: Text and Cases , Homewood, IL : Irwin , 1990 . 20. Bonoma , Thomas V. , The Marketing Edge: Making Strategies Work , New York : Free Press , 1985 . 21. Ibid. 22. Ibid. 23. Argyris , Chris , Strategy, Change and Defensive Routines , New York : Harper and Row , 1985 . 24. Alexander , L. D., Strategy Implementation: Nature of the Problem, in D. Hussey (ed.), International Review of Strategic Management , 2(1), 1991, Chichester : Wiley , p. 74 . 25. Piercy , Nigel F. and Kenneth J. Peattie , ‘ Matching Marketing Strategies to Corporate Culture: The Parcel and the Wall ’ , Journal of General Management , 13 ( 4 ) , 1988 , pp. 33 – 44 . Piercy, Nigel F., ‘ Diagnosing and Solving Implementation Problems in Strategic Planning ’ , Journal of General Management , 15 (1), 1989, pp. 19–38 . 26. Schultz , Don E. , ‘ D e ﬁ nition of Internal Marketing Remains Elusive ’ , Marketing News , January 15 2006 , p. 6 . 27. Gummesson , Evert , Marketing: A Long Term Interactive Relationship , Gottenburg : Anderson Sandberg Dheen Ltd. , 1988 . Gronroos,

515 •• Market-Led Strategic Change

Christian, Strategic Marketing and Management in the Service Sector , Cambridge, MA: Marketing Science Institute, 1983 . 28. Gilly , Mary C. and Mary Wolﬁ nberger , Advertising’s Second Audience: Employee Reactions to Organizational Communications , Cambridge, MA : Marketing Science Institute , 1996 . 29. Bonoma , Thomas V., Employees Can Free the ‘Hostages ’ , Marketing News, March 19 1990, pp. 14 – 15 . 30. Drake , Susan , Michelle J. Galman and Sara M. Roberts , Light Their Fire: Using Internal Marketing to Ignite Employee Performance and Wow Your Customers , New York : Kaplan Business , 2005 . 31. ‘ Marketing Capability – Blend for Flexibility’ , Brand Strategy , July 17 2006, p. 30. 32. Croft , Martin , ‘ Training and Development: Brand Ambassadors ’ , Marketing Week , March 8 2007 , p. 39 . 33. Dowdy , Clare , ‘ Internal Branding ’ , Financial Times , November 6 2001 , p. 4 . 34. ‘ Sorrell Starts Internal Marketing Acquisitions Drive ’ , Marketing Week , July 12 2001, p. 10. 35. Gounaris , Spiro P., ‘ Internal-Market Orientation and Its Measurement’ , Journal of Business Research, 59 ( 4 ) , 2006 , pp. 432 – 448 . 36. Lings , Ian N. and Gordon E. Greenley , ‘ Measuring Internal Market Orientation ’ , Journal of Service Research , 7 ( 3 ) , 2005 , pp. 290 – 305 . 37. Ulrich , Dave , ‘ Tie the Corporate Knot: Gaining Complete Customer Commitment ’ , Sloan Management Review , Summer 1989 , pp. 19 – 27 . 38. Schultz , Don E. , ‘ Building an Internal Marketing Management Calculus ’ , Interactive Marketing , 6 ( 2 ) , 2004 , pp. 111 – 129 . 39. Chang , Julie , ‘ From the Inside Out ’ , Sales & Marketing Management , August 2005 , p. 8 . 40. ‘ Survey Reveals “ Inadequate ” State of Internal Marketing’ , Marketing Week , July 3 2003, p. 8. 41. Band , William A. , Creating Value for Customers: Designing and Implementing a Total Corporate Strategy , New York : John Wiley , 1991 . 42. Bonoma , Thomas V. , ‘ Marketing Subversives ’ , Harvard Business Review , November/December 1986 , pp. 113 – 118 .

•• 516 P A R T •••• III End-of-part cases

As before, I suggest that the material covered so far should be reviewed in the context of some stories from real, live markets. The difference at this stage is that you should be in a position to take ideas from anywhere in the book, and adopt a more integrated perspective. As before, I think the best questions are the simplest: (1) what is going on here; (2) what is likely to happen next; and (3) what lessons can we acquire from these events that we can take away and apply elsewhere?

Case 7: Tesco – Fresh & Queasy in the USA Tesco is the UK’s dominant retailer, taking around 30% of the national grocery market, and the company has overtaken Argos/Homebase to become the UK’s biggest retailer of non-food items. It is the world’s third largest retailer after Wal-Mart and Carrefour. Its annual group sales are pushing £53 billion, with proﬁ ts of £2.75 billion in 2008. Tesco.com is one of the world’s most successful Internet retailing models with 850,000 customers and sales growing at around 30% a year. The company’s growth and business performance up to the mid-2000s has been outstanding. After a decade of extraordinary growth, Tesco is nearly twice the size of its nearest competitors, Asda and Sainsbury, and takes £1 in every £8 spent in Britain’s shops. However, for much of that time Tesco has faced only weak competition – Morrisons was embroiled in the problematic acquisition of Safeway, Sainsbury had a legacy of major operational problems and even Market-Led Strategic Change

Asda wobbled after it was bought by Wal-Mart. For this decade, Tesco appeared unbeatable and unstoppable. However, by mid-2008 there were growing signs that Tesco’s performance could be faltering. A slowdown in sales growth over Christmas 2007 saw £1 billion wiped off Tesco’s market value. Underlying sales growth in the UK was running at 3–4% compared to the 5–6% of earlier years, as rivals like Morrisons and Sainsbury have bounced back. Proﬁ t forecasts in the City have been trimmed, and Tesco had lost market share for three quarters in a row. Tesco shares fell 15% in the ﬁ rst quarter of 2008. Full year results were stronger, but investors were also unhappy to see a steady stream of senior executives leaving Tesco to join its rivals.

Tescopoly in the UK Tesco has become a profoundly unpopular company. In 2008, when Tesco collected awards at the Retail Week ‘ industry Oscars ’ – leader of the year for CEO Sir Terry Leahy and ‘ consumers ’ favourite retailer ’ – on the walk to the stage the Tesco executives were booed by their peers not cheered. Anti-Tesco protests are widespread among local communities resisting the arrival of new superstores in their towns and fi ghting the growing dominance of Tesco Express local stores in suburban areas. Some 2000 small independent food shops close every year because of supermarket competition. Competition Commission recommendations appear aimed directly at curbing Tesco’s growth. Tesco’s reputation is one of aggressive treatment of competitors, brutal almost feudal treatment of suppliers, and transgressions like collusion to fi x prices in the dairy business. In 2008, when the Guardian newspaper published articles alleging that Tesco was avoiding paying UK taxes, the company moved rapidly to silence its critics through the courts, leading the Guardian to observe: ‘ It is hard to think of another large public company that would resort to such bullying tactics. ’ Tesco’s 2008 AGM saw angry critics fl ying in from India, China and the USA to attack Tesco strategy, as well as a TV chef demanding better conditions for Tesco’s battery-farmed chickens, amid much television and press publicity.

Internationalizing Tesco

In the 1990s Leahy started serious efforts to develop the Tesco business abroad. It has grown to a portfolio of around 12 different markets, employing 450,000 people, with the international business generating £7.6 billion in sales and £370 million proﬁ t. Tesco is increasingly looking to its international businesses to drive growth. About 80% of group capital is being spent on overseas expansion. While internationalization has been part of Tesco’s strategy for some time, the way conditions are developing for the company in the UK now makes success in the international operations a much higher imperative. In 2008 the UK still accounted for 76% of Tesco sales and 78% of proﬁ ts. International growth at Tesco has a mixed history. A purchase of the French supermarket chain Catteau in 1993 was a disaster, and the

•• 518 End-of-part cases

company pulled out of its Taiwan operation because of poor results in the face of competition from Carrefour. However, the company has growing businesses in Eastern Europe – the Czech Republic, Poland, Slovakia and Hungary. In 2007 Tesco began rolling out Tesco-Express type stores in Japan, suggesting after four years of trying they had fi nally found an effective format. The company is looking for aggressive expansion in the world’s second-biggest economy. It has around 150 stores in Japan – of which about 50 are its own-branded Tesco Express outlets. Tesco entered Japan in 2004, through acquisition of the Tsurakame chain of discount supermarkets. The venture was dogged by early setbacks, and returns were the lowest of all Tesco’s international markets. Japan is not an easy market – Carrefour withdrew in 2005 and Wal-Mart is struggling. Tesco operates around 50 hypermarkets in China, on the east coast between Beijing and Shenzhen. In 2008 Tesco took its Express convenience chain into China as well – the fi rst Tesco Legou Express opening in February. China became the eighth overseas market to get the Tesco Express format, joining Thailand, Japan, South Korea, Ireland, Turkey, the Czech Republic and Hungary. The multi-format approach increasingly characterizes Tesco’s international strategy. In 2008 the company acquired the South Korean discount chain Homeover for just under £1 billion, adding 36 stores to its existing Korean business. The importance of international success underlines the signifi - cance of Tesco’s entry into the USA with its Fresh & Easy retail concept. Leahy’s international strategy has been based on only entering emerging markets with fragmented local competition, a large population and potential for rapid economic growth to boost consumer spending. Entry to the USA is a major departure from this successful strategy.

Tesco’s American adventure The USA has been the graveyard for many British retailers’ international strategies. It is a fi ercely competitive marketplace and entries by fi rms like Marks & Spencer and Sainsbury have been disasters. Nonetheless, Tesco has committed £1.25 billion over fi ve years to its new Fresh & Easy convenience store format in the USA. Leahy stands to make an £11.5 million bonus if the venture pays off. The goal is to have 200 stores open by the end of the 2008/9 fi nancial year, though it could be a chain of 1000 stores by 2012 if the retail format is favoured by US consumers. A rapid roll-out is important to making the low- margin business model work. Initial store openings were in California in 2007, with plans for more in Arizona and Nevada, and possibly Mexico. This rate of expansion is unprecedented for Tesco – its next biggest overseas market is Thailand, where it took 9 years to open 220 stores. Tesco has almost no brand recognition in the USA – when the F & E team fi rst went to the USA they could not even lease cars easily – people would say ‘ are Tesco good for the money?’

519 •• Market-Led Strategic Change

The Fresh & Easy concept Tesco’s US market entry is based on a small-store format – loosely based on the Tesco Express, but emphasizing low price for high quality and healthy food – operating as Fresh & Easy (F &E) not as Tesco branded stores.

Developing market understanding • • • The Tesco commitment to its US strategy is underlined by the intense efforts to build an understanding of the US market. Researchers probed the refrigerator contents of and lifestyles of US families, checking the time they got up, what they ate for breakfast and when they shopped. The retailer even prepared meals for them. For two weeks 50 senior Tesco directors and managers lived the ‘ American dream ’ – shopping and eating with US families on the West Coast, even sharing their leisure activities. Amid intense secrecy a prototype store was built in Los Angeles – the cover story was that they were making a movie, and executives used plastic bags of cash rather than corporate credit cards to buy things for the mock store, rather than risk tipping off rivals what they were doing. People were ﬂ own in from San Francisco, Las Vegas and Phoenix to test new ideas and products – more than 200 focus groups toured the store. Interestingly, part of the F &E strategy is to open its small stores in poor inner-city areas largely unpopulated by rival retailers – the US ‘ grocery gap’ , where areas like South Central Los Angeles lack supermarkets and the city’s poorest residents pay the highest prices for food at small local stores with limited access to fresh food.

Fresh & Easy’s market positioning • • • The F & E positioning is between the discount, cut-price supermarkets and the trendy, upscale ‘ organic ’ food stores. The major competitors in the health-conscious market are Trader Joe’s and Ralphs, featuring attractive stores with unpackaged fresh produce and expansive salad bars. The business model positions F& E as a hard discounter, with costs kept low by keeping product ranges and store formats identical across the chain. The goal is to undercut competitors like Trader Joe’s by 10–25%. F & E CEO Tim Mason notes ‘ The brand is designed to be as fresh as Whole Foods, with value like a Wal-Mart, the convenience of a Walgreens and product range of a Trader Joe’s’ . Nonetheless, initial reactions were mixed – some consumers complained that the ‘ Fresh & Easy ’ name sounded more like a chain of chicken ranches, or a tampon.

The Fresh & Easy value proposition • • • The proposition is low-cost fresh food. Much of the fresh produce and premium ready meals are locally-sourced – F& E sells large sushi packs for under £2 and Australian wine for £1. Prices are low because stores are located in low-rent areas. Some locations are planned for ‘food deserts ’ – areas like Compton in Los Angeles, which other retailers

•• 520 End-of-part cases have avoided. The F& E stores are small by comparison with normal supermarkets – at 10,000 square feet they are less than a third the size of the average supermarket. Many of the ideas like the free-sample and recipe kitchen and signs about being a good neighbour are very similar to Trader Joe’s and Whole Foods, but the prices are substantially lower. For the USA, F& E is a radical innovation in the form of a neighbour- hood convenience store with a distinctive offering. While related to the Tesco Express format, the goal was not to transfer the Tesco format from Britain to America, but to design an American store for American consumers. As in all its operations, Tesco adapts to local market conditions. In the US chain there are no British products and no Tesco logos. The US operation in California is painfully ‘ hip ’ . The head ofﬁ ce has life-sized surf boards pinned to the walls, middle-aged executives are squeezed into tight jeans, and CEO Tim Mason from the UK, normally ‘ suited and booted ’ , has taken to wearing friendship bracelets. The stores are predominantly painted green and include parking spaces reserved for hybrid cars and bicycle racks. For the ﬁ rst time in its history, Tesco has become directly involved in food production. It operates a food preparation facility – dubbed the Fresh & Easy Kitchen – at its central distribution centre near Los Angeles. The company decided to set up its own kitchen because of concerns about using third-party suppliers who did not meet their standards. Forty per cent of the ingredients for the kitchen, as well as pre-packed fresh products for the stores, are provided by Wild Rocket Foods and 2 Sisters Food Group. These two UK suppliers have each invested $100 million in setting up food processing plants adjacent to the Tesco distribution ‘ campus ’ . None of Tesco’s US competitors operates similar kitchen facilities.

The underlying relationship network • • • The F & E operation rests on a complex set of strategic relationships and networks, some of which provide the strengths of the F &E business model, and some of which underline weaknesses in Tesco’s US operation. The consumer relationship is potentially problematic. F& E is mainly own-brand, which is a risk with brand-obsessed US consumers. The stores are utilitarian and basic in a country where this is far from the usual food retail expectation. There are few staff on hand to assist, which is unusual for US stores and their service culture. The F& E stores use self-service checkouts to reduce costs, which is difﬁ cult for the elderly and non-English speaking consumers – Americans are used to being served. Neither are there any of the money-off coupons and vouchers to which US consumers are accustomed. There may be good reasons why other retailers in the USA have decided not to try to change middle America’s shopping and eating habits. The competitor relationships are critical to F& E’s survival. Initially, it seemed that the push-back from US competitors was muted, and

521 •• Market-Led Strategic Change

Tesco believed that the local retailers assumed that F& E was so radical it would not be a threat to them. In fact, the F & E venture is being closely tracked by US competitors. Some analysts suggested that lining your tanks up on Wal-Mart’s front lawn and expecting them to be ignored was a little optimistic. Wal-Mart is planning small-format grocery stores in the Phoenix area and Safeway is launching small stores in northern California. Indeed, Wal-Mart has hired a former Tesco executive to head its defence. The signs are that Wal-Mart’s fi rst-ever small stores under the banner ‘Marketside ’ will adopt a green logo with a stylized tomato, egg and grape design, suggesting a greater emphasis on healthy eating and fresh produce – and indicating an all-out war with Tesco’s F& E operation. The fi rst Wal-Mart Marketside locations are close to F & E sites. The Wal-Mart Marketside stores will be built around a ‘ premium offering ’ rather than low cost – with less focus on price than F& E and more emphasis on ‘ meal solutions’ , with food prepared in-store. The Safeway ‘ Market by Vons’ small-store format has been launched in California – described as ‘very pretty’ but ‘ very expensive’ by Tesco’s Tim Mason. The competitive responses by both Wal-Mart and Safeway are avoiding the F & E low price position. Part of the F& E strategy relies on a new approach to supplier relationships . One critical part of the strategy developed by Tesco was to bring UK-based suppliers with them to the USA. This has the strength of securing expertise in the type of product preparation required for Fresh & Easy. However, it also has the attraction of avoiding dependence on local suppliers in the USA, who would likely be in the pocket of Wal-Mart or other US supermarkets – being a new, small customer for suppliers dealing with US retail giants would be a very weak and vulnerable position likely to lead to product shortages, short deliveries and poor service from suppliers. Tesco avoided this problem by bringing with them suppliers already trained to toe the Tesco line – unlikely to cause problems and risk their standing with Tesco in the UK. Relatedly, back-offi ce functions have been outsourced to Bangalore in India to keep administration costs low. There have been some problems regarding existing partnership relationships . One cost of Tesco’s entry into the USA was the demise of collaborative relationships that had been established over time with US companies. A joint venture with Safeway in home shopping – Grocery Works – was ended by Safeway because of the F& E venture. Tesco owns 84% of Dunnhumby, the loyalty card research fi rm, and their largest client in the US – Krogers – was evaluating the viability of the relationship in the light of Tesco’s entry into US food retailing. Perhaps the most problematic part of the F &E relationship network relates to relationships with employees and trades unions . The main grocery workers’ union – the United Food and Commercial Workers Union – represents almost 90,000 people in southern California. It is part of the Alliance for Healthy and Responsible Grocery Stores – a coalition of community groups, faith-based organizations and unions. The alliance was formed after a long strike by California grocery workers in 2003, and has since succeeded in blocking Wal-Mart superstore developments.

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This alliance is a vocal critic of Tesco, accusing the company of arrogance, being out of touch with local communities, and failing to appreciate the close ties between consumers and grocery workers. The deal-breaker is Tesco’s employment of non-unionized staff. Notwithstanding requests from the unions for meetings, backed by letters from Hillary Clinton and Barack Obama, Tesco has refused to meet union representatives. Obama urged Tesco to work with local communities to develop community-beneﬁ ts agreements – written pledges of the rewards a store opening would bring to local areas. As he moved ever closer to the US Presidency, Obama renewed his pleas direct to Leahy on union membership, though with no discernible effect on the company’s position. The union is also looking to British Labour MPs to support its campaign. The union stepped up its campaign, dubbing the Tesco chain ‘ Fresh & Queasy’ and questioning the freshness of its products (using television programme evidence about shortcomings in hygiene and waste control in Tesco’s UK food stores). The union’s website accuses Fresh & Queasy of being the ‘ Wal-Mart of the UK’ with a ‘ bad record ’ on selling organic foods. The union was behind the establishment of a new group called Health First, which was the group that brought a successful court case against Tesco on the basis that its main warehouse did not meet environmental planning law – similar tactics have been used to stop the expansion of Wal-Mart in California.

The early F &E results Tesco declined to honour an earlier undertaking to break out the US results in its 2008 annual report, fuelling growing rumours that the early performance of F& E was falling short of expectations. Tesco strongly rebutted such claims. In March 2008, after a frenetic opening programme of 61 stores in ﬁ ve months, Tesco announced a three month ‘ pause ’ in store openings on the west coast (although store openings resumed in July in Los Angeles). F& E losses up to February 2009 were predicted at £100 million compared to £62 million the previous year. Jeff Adams (former Tesco chief in Thailand) was parachuted into the US business as Chief Operating Ofﬁ cer – with plans he should be used in Chicago and the Midwest, once the California, Nevada and Arizona operation reaches critical mass. In April 2008 Tesco announced plans to cash in on part of its property portfolio by selling off some UK stores, to help fund its international expansion. Suppliers were reporting disappointing sales at F& E, and that F &E stores were struggling to attract customers. While Tesco had targeted weekly sales at $12–$22 a square foot, one analyst reported sales densi- ties in F & E were as low as $5 a square foot. One unsourced report suggested F& E was missing internal targets by as much as 70%. Analysts began to predict that F & E losses would escalate in 2009 – possibly to more than double previous estimates. Consumer blogs described the F & E stores as ‘ boring, sterile and depressing ’ , and branded goods suppliers (frustrated by the fact that more than half F & E’s 3500 products

523 •• Market-Led Strategic Change

are own-label) have not been slow to spread rumours that the chain is on its knees. Others suggest that the F& E retail concept is fl awed and cannot succeed. Tim Mason used the break in store openings to ‘ tweak ’ the F & E model: prices – consumers did not get the low price image, so ‘extra- low price ’ promotions have been introduced – what Mason calls ‘ turning up the volume on price ’ ; promotion – introducing discount couponing around stores offering $5 off a $20 shop; products – new fresh food lines added; shopping trolleys – bigger trolleys outside the stores because small trolleys suggest small shopping trips; and store design – more colours to make the stores ‘warmer ’ and less sterile. He is also fi ghting very high wastage rates with fresh products. Nonetheless, in April 2008 the company announced plans for a second distribution centre and kitchen in northern California. Leahy was positively gushing in presenting his 2008 report, claiming F &E was ahead of budget and that the F& E stores already had a ‘special place’ with US consumers. These judgements are grossly unfair, based on the fi rst few months ’ trading of a new business. It will not be clear for a considerable period of time whether F & E will succeed. However, the issue becomes whether pressures will lead to premature exit from the business and the potentially disproportionate effect of the F& E venture’s performance on Tesco’s UK and other overseas businesses.

Dilemmas for Tesco’s Fresh & Queasy The F & E positioning is between the discount supermarkets (e.g., Wal- Mart) and upmarket, stylish ‘ gourmet ’ retailers like Trader Joe’s (and to a lesser extent the much larger Whole Foods Market and Bristol Farms). F & E offers more fresh and organic foods than the discounters, but is cheaper than the gourmet outlets. The classic dilemma is whether they have found a proﬁ table and defensible new market space, or whether they have in effect created a ‘ stuck in the middle’ operation that is neither one thing nor the other, which will lose out on price to the discounters and on product quality to the gourmet stores. If F & E has uncovered a new market space, then the question remains whether it can be defended or whether it will simply be invaded by new formats developed by established US competitors or by new entrants. There appears little in the F& E format that could not be copied and bettered by competitors. These issues have not been resolved and will determine whether F& E survives competitive attacks. It is noteworthy that the new formats developed by Wal-Mart and Safeway to compete with F & E have avoided low price positioning. Certainly, the factors that drove Tesco’s initial success in the UK (radical price discounting) and then allowed the company to sustain and consolidate its position (market power used against suppliers, blocking competitors access to new sites, and political clout) simply do not exist in the USA. To local suppliers, Tesco is a small, new entrant with little buying power and they are unlikely to tolerate the aggressive attitudes

•• 524 End-of-part cases to which Tesco exposes suppliers at home. Tesco has no record of working with trades unions and local communities, which is a requirement in the California marketplace. Tesco’s clout in the UK is backed by muscle weight which it simply does not have in the USA. It remains to be seen if the company can adjust to these realities and develop new ways of working. In the short-term, Tesco faces the problem of whether the retail format it has piloted in the south-west USA, in the form of Fresh & Easy, will be capable of successful expansion elsewhere in America. Will a format that matches the characteristics of California and Arizona consumers really travel to Oklahoma, Wisconsin and New York? Unlike the UK, there are relatively few genuinely national food retailers in the USA, refl ecting this market diversity in America. Moreover, while the early operation in the south-west has several important protections built into the business model – most importantly the import of European suppliers to make the supply chain secure – there is a major question mark over the extent to which these protections can be maintained in a larger expansion in the USA. If Fresh & Easy has to change supply chain strategy to expand, dealing mainly with local suppliers, then the viability of the operation becomes more questionable. However, perhaps the largest dilemma for Tesco to confront with Fresh & Easy in the USA is not simply ‘will it work? ’ but ‘ how much will it hurt us if it fails ’ ? The immediate costs of failure in the USA would not be devastating – stores could be disposed of, and so on. The real damage would be the impact of failure on the rest of the business. It would raise the question that if Tesco can be beaten in one market, then perhaps it can be beaten in another – perhaps even in the UK. At a time when the Tesco UK juggernaut is beginning to slow, and Leahy is coming towards the end of his tenure as CEO with no obvious successor apparent, this is potentially a major new vulnerability for the business. The F& E operation is minute in terms of the total Tesco business, but with its very high profi le underlining its strategic importance, failure would have a disproportionate effect on Tesco’s strength. Certainly, if Tesco cannot succeed in the USA, then its aspirations towards being a genuine global competitor to Wal-Mart are at an end. In particular (much to Leahy’s disgust) Tesco went through the late-1990s and started the 2000s with its shares considerably undervalued by the stock market. This largely refl ected the market’s nerv- ousness about Tesco’s aggressive expansion strategy. A public failure in the USA would provoke an unprecedented crisis for the business, and would very likely depress its share value yet again. In these circumstances, Tesco would become an attractive target for a strategic investor. The opportunities for an aggressive investor to release value for shareholders would be very attractive, for example: spinning off as separate businesses the different retail formats, the international operation and the Internet operation; selling assets like the land and property bank (estimated value of £14 billion alone); selling key operating retail sites to competitors. Such moves would transform the Tesco business, release huge value for shareholders, and probably meet with the

525 •• Market-Led Strategic Change

wholehearted approval of the British regulators and critics of Tesco’s market dominance. However, the legacy business would be nothing like the current Tesco operation, and Leahy’s strategy would be in tat- ters. The incoming CEO would fi nd that the Tesco business model was broken. This scenario would be attractive to many suppliers who have had their profi t margins crushed by Tesco’s aggressive and oppressive use of its market power. Some might even play a role in orchestrating and supporting the investor-led restructuring of Tesco, as a way of reducing their dependence on the company. If Sainsbury were fi nally to be purchased by private equity interests and to undergo a similar type of restructuring, the UK retail grocery market would be a very different prospect for suppliers. The F & E platform is intended to form a launch pad for a broader push against Wal-Mart, both in the USA and in other global markets where the two retailers compete against each other. If F & E fails, then Tesco is left without this component of its global competition strategy. This is an urgent issue. Tesco has placed India top of its target list after the USA. Its talks with local partner Bharti collapsed, and Bharti went on to partner with Wal-Mart, leaving Tesco to identify another possible partnership and play ‘ catch-up ’ to Wal-Mart again.

Sources: Jenny Davey and William Kay, ‘ Tesco Fails to Find America Easy’ , Sunday Times, April 6 2008, p. 3-8. Elizabeth Rigby, ‘ Tesco’s Trolley May Have Started to Wobble ’, Financial Times, April 5/6 2008, p. 19. Jonathan Birchall and Tom Braithwaite, ‘ Tesco Denies Claims of US Troubles ’, Financial Times , February 27 2008, p. 22. Elizabeth Rigby and Jonathan Birchall, ‘Tesco US Subsidiary Moves Into Food Production ’, Financial Times, December 2 2007, p. 22. Jenny Davey, ‘ Tesco Drives Into America ’, Sunday Times, June 10 2007, p. 3-1. Kerry Capell, ‘Tesco: California Dreaming? ’, BusinessWeek , February 27 2006, p. 38. Aaron O. Patrick, ‘ Tesco Alleges Libel by Guardian in Tax Stories ’, Wall Street Journal, April 7 2008, p. 4. Elizabeth Rigby, ‘ Leahy Hits Back Over Fresh & Easy’ , Financial Times, April 16 2008, p. 21. Elizabeth Rigby, ‘ US Tesco Chief Dons Lucky Shirt to Fend Off Criticism’ , Financial Times , June 16 2008, p. 17.

Case 8: When the Peddle Hits the Mittal ArcelorMittal is the world’s largest steel business. The group employs some 330,000 people in 60 countries and makes around 130 tonnes of steel a year – 10% of world production. This is a high share of the market in a fragmented industry – the next largest players are Japan’s Nippon Steel and Korea’s Posco, making only about 30 tonnes of steel a year each. However, the achievement of this scale of operations has rested on the reinvention of the mature steel industry on a global basis and can be traced largely to the strategic insight of one man – Lakshmi Mittal. Mittal spent two decades of deal-making before, in 2006, combining Mittal Steel with Arcelor – the world’s second largest steel business at that point, and his main rival. The deal cost £18.1

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billion. Mittal’s offer for Arcelor provoked a nationalistic backlash from Arcelor management and European politicians but the hostile bid succeeded in mid-2006. The decision was made by Arcelor shareholders, not politicians. Acquiring Arcelor was an audacious move because Mittal had broken continental Europe’s hold on its industrial champions. Recall, the European Union has its very origins in the 1950s plan to integrate the coal and steel industries of Western Europe, which provided the springboard for political integration into the disaster that is now the European Union. However, the industry dominance of the ArcelorMittal group has little to do with simple organic growth. It results from the rapid amalgamation of a large number of small steel- makers. The Mittal side was built up from about 25 mergers, while Arcelor came into being in the early 2000s from the merger of Usinor, Arbed and Aceralia – the national steel groups of France, Luxembourg and Spain respectively.

The traditional steel industry As recently as the 1990s, the steel industry was considered by many to be a 150 year old ‘sunset sector ’ with one foot in the grave. Steel- making had fallen on hard times and this was seen as impossible to reverse. The modern form of the steel industry had existed for 150 years. Steel was dominated by companies that considered themselves as national businesses, and which were often subject to state control or ownership. Until the 1990s around 10% of world steel output was subject to state control – for example, in the former Soviet bloc. These producers were prone to fl ooding the market with cheap materials to maintain output quotas (thus encouraging price volatility and jeopard- izing profi tability). The privatization of steel businesses through the 1990s reduced this tendency. For decades, steel companies were among the worst performing in the world – steel was fragmented, fi nancially weak and plagued by oversup- ply. Suppliers of coal and iron ore, and major customers like carmakers were far stronger than steel-makers and dictated terms. Each economic cycle downturn sent some steel companies into bankruptcy. Worse, the steel business had a non-entrepreneurial management approach, which, for many, was a legacy from state ownership. The underlying business model shared by traditional steel-makers was based on tonnages, not profi tability, and regionalization – steel industry executives did not look beyond their home regions, because they never thought steel could be transported globally, or supplied to global customers. But the 2000s saw a resurgence in the steel sector, spurred partly by a big rise in demand from China, but also by a series of mergers and takeovers which put the sector on a more profi table and sustainable footing. The person who did most to push the industry into this new position – manifested by a threefold rise in steel prices between 2001 and 2006 and greatly improved profi ts for steel-makers – was Mittal.

527 •• Market-Led Strategic Change

Interestingly, ‘ Big Steel ’ had operated as a ‘ gentleman’s club ’ , and Mittal was certainly not a member. Broadly, most members of that ‘ club ’ have retired or gone to the great golf course in the sky, while Mittal owns their assets. Mittal’s personal wealth is estimated at £20 billion by Forbes , and he is ranked the world’s ﬁ fth richest person. He is the largest shareholder in ArcelorMittal, with a 45% stake.

The start of the Mittal legend Lakshmi Mittal embodies the rise of a new type of Indian entrepreneur – conﬁ dent and commanding on a world stage. Mittal comes from a family with steel industry interests in India, but until the mid-2000s he was regarded as a fringe player in world steel – a maverick with an eye for bargain Third World steel plants, and big ideas, but not much else. The Mittal legend starts in 1975, when he was going on holiday in Japan and his father asked him to stop off in Indonesia on the way. Mittal Senior had bought property in Indonesia with a view to building a steel plant, but then decided against it, and wanted the land sold. Lakshmi Mittal decided differently – he raised loans and built a steel plant on the land (the holiday got cancelled). His efforts to develop the Indonesian plant led him into international expansion. Searching for a supply of raw iron to feed his Indonesian plant, Mittal identiﬁ ed an unlikely prospect – a struggling business in Trinidad, which he purchased in 1989. He then bought plant in Mexico (along with Germany, the USA, Czech Republic, Algeria, South Africa, Kazakhstan, Poland and the Ukraine – to mention only the larger deals).

The Mittal reinvention In retrospect, Mittal’s impact on the steel industry represents the ‘new world ’ taking on ‘ old world’ economic interests. It underlines global shifts in the location of power and money in key sectors. It is one of the few examples to date of an outsider revolutionizing an old, mature industry by bringing in new ideas, which may be a prototype for change in other mature industrial sectors. Mittal’s insight was that steel industry earnings could be boosted through a process of consolidation to build bigger companies that could dictate prices to customers. This is especially relevant in a market where demand was being driven up by the demands of China and India for steel. Consolidating a fragmented global business is at the centre of Mittal’s strategy. The thinking is that larger companies – particularly in a cyclical industry like steel – have a greater ability to moderate production to ﬁ t with demand patterns and so keep prices and proﬁ ts high. Bigger companies also have the advantage of spreading costs like R& D over a larger sales base, and providing a better service to global customers like the automotive industry. It is this aspect of his strategy that competitors are belatedly trying to imitate – NKK and Kawasaki, the two large Japanese companies have

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merged to form JFE, while US Steel and Nucor, the two biggest US steel-makers, also went on the acquisition trail. In Russia, large steel companies have emerged by combining smaller formerly state-owned companies, and have become involved in international merger activity. However, in addition to consolidation as such, Mittal’s strategic vision was also to look at the steel business as a globalized sector, in which plants and customers could be tied together through shared operating procedures and market intelligence.

Becoming industry leader The implementation of Mittal’s strategy saw a period through the 1980s and 1990s during which he purchased struggling and often out-of-date steel plants in countries like Trinidad and Tobago, Kazakhstan and Mexico, transforming them into proﬁ table businesses. He borrowed techniques from more successful industries like chemical and car- making to increase quality and cut costs. The 2000s saw Mittal buying run-down state-owned plant in Eastern Europe as well as the unwanted assets of large steel-makers (in the downturn of the economic cycle those assets were often acquired cheaply). Until 2004, when Mittal bought the US-based International Steel Group, nearly all Mittal’s most important steel-making assets were in low-cost countries, away from the world’s main industrialized centres. The addition of advanced-technology steel-making in high cost countries illustrates the ‘ reverse globalization ’ effect where businesses in the west are increasingly being acquired by rivals in Asia or other emerging nations. Key Mittal acquisitions were:

1989 Iron & Steel Co. Trinidad & Tobago N/A

1992 Sibalsa Steel Mexico £117 m

1994 Sidbec-Dosco Canada £250 m

1998 Karmet Kazakhstan £522 m

2003 Nova Hut Czech Republic £498 m

2005 Kryvly Rih Ukra ine £2.6 bn

2005 International Steel United States £2.5 bn

2006 Arcelor Luxembourg £18 bn

Late-2007 saw Mittal unveiling a $35 billion global expansion, to be spent partly on two steel plants in India in the states of Jharkand and Orissa, and partly on expanding production capacity in other regions experiencing high demand. In 2008 Mittal bought US-based Bayou Steel for $475 million, and was making a strategic move for Erdemir – Turkey’s largest steel-maker. Mittal was also trying to

529 •• Market-Led Strategic Change

acquire Germany’s steel supplier Dillinger Hütte, though facing strong opposition. He was also making complex plans to rebuild iron ore mining businesses in West Africa – Liberia, Senegal, Mauritania and Guinea. Other deals were under way to acquire major coal mining interests. Mittal’s approach to restructuring new acquisitions as he built the global business followed a tried-and-tested plan:

● Transition ‘ SWAT ’ team – remove most existing managers and replace with Mittal executives to get the company running on a commercial basis quickly. ● Fix the liquidity – re-establish credit with suppliers to assure a steady fl ow of raw materials, and end barter arrangements that encourage corruption and reduce cash fl ow. ● Debug – bring in Mittal technicians to improve operations and rework maintenance schedules to cut down time. ● Product mix – shift to production of higher-value products like cold- rolled steel, and try to sell to end users not middlemen. ● Integrate – form regional groups to boost purchasing power and prevent plants from competing with each other for the same customers. ● Prune – close or sell off non-core subsidiaries and gradually cut back on staffi ng.

Mittal’s progress has attracted some undesirable publicity. Some controversy has surrounded Mittal’s contact with governments across the world. In 2001, he made a £125,000 donation to Tony Blair’s Labour Party, at about the time that the then prime minister Blair wrote to the Romanian government supporting Mittal’s bid to take over Sidex, a large Romanian state-run plant. In 2005 he donated a further £2 million to the Labour Party, though maintaining the gifts were not related to the Sidex deal. Mittal also has close links to the long-serving president of Kazakhstan, who has been accused of human rights abuses and involvement in bribery cases in the USA. In addition, Mittal has been embroiled in a ‘ slave labour ’ row amid claims that Mittal’s Kazakh mines are dangerous and scores of employees have died. Earlier claims in the industry were that Mittal management tended to take short-cuts where health and safety issues were concerned. Both accusations are strongly denied by Mittal. In 2007, Mittal was ﬁ ned $100 million in South Africa for ‘ anticompetitive ’ pricing. He also throws the most lavish parties in the world – his daughter’s wedding celebration cost $55 million and included a party at Versailles – shocking some of his more conservative peers in India. While a family man, Mittal broke away from his father and younger brothers when he went international in 1994, and was not slow to exploit his younger brother’s troubles to buy his ailing steel plant in Bulgaria in 2008 for £40 million less than the asking price.

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Dilemmas for Mittal Perhaps the biggest concern for ArcelorMittal is simply: what comes next? It is possible that Mittal will continue growth through further acquisitions. The company might perhaps go after Nippon Steel (which would cost not much more than the price paid for Arcelor). Interestingly, Mittal and Nippon already have collaboration in joint operation of fi nishing plants in the USA. Certainly, Mittal appears keen to move ArcelorMittal towards the ‘ high-tech ’ sectors of the steel industry, where long-term growth prospects are strong. However, Mittal faces problems in growing the business in the key Asian markets. The company is struggling to expand in India – and has invested $29 billion in extending plant there. Certainly, Mittal has its eye on the high quality iron ore in Jharkhand region and wants the mining rights. However, so does Tata, and it is more Tata’s home turf than Mittal’s. It is also vital for the company that it gains a more substantial foothold in China. The Chinese government has indicated that it does not want foreign companies to have controlling stakes in medium and large Chinese steel mills, leaving large foreign steel-makers in a position where they have to produce steel outside China and then ship it in, which is costly. Mittal has been pursuing minority stakes in China’s Hunan Valin and Laiwu steel businesses, with a view to later gaining majority stakes, but with mixed success. By 2007 the Hunan Valin joint venture was operational but the government had yet to approve the minority stake in Laiwu, and in the end Mittal gave up. However, frustrated in these efforts to gain controlling stakes in larger Chinese steel- makers, Mittal is spending $1.7 billion to boost ownership of the small, closely held Chinese steel company, China Oriental Group (having taken the precaution of obtaining an option on the shares that would give a majority holding in time). However, even this ploy may be blocked by the Chinese government. Mittal needs a way into the huge and still growing China market. However, it is also signifi cant that in 2005 China became a net steel exporter, refl ecting an easing of the internal demand for steel and increased local production. China now makes about 35% of world steel. There are substantial fears that this trend will continue, causing an excess of steel to enter the world market and depressing prices, in the same way that state-owned plants used to in the ‘ bad old days ’ . The China government regards steel as a strategic industry and is consolidating its own industry around six large steel-makers, and the growing fl ow of steel from China is potentially going to destabilize the steel business again. Another continuing problem for Mittal – and for all steel-makers – is that control of the steel industry could soon rest again with those who control (and set prices for) iron ore and coal. Mittal and Tata are in confl ict over getting control of India’s iron ore reserves. However, Mittal is also watching the BHP Billiton offer to buy Rio Tinto – between

531 •• Market-Led Strategic Change

them they control the majority of the world’s iron ore and the merger would undoubtedly increase iron ore prices. Consolidation in the iron ore mining sector could have the same effect on prices as the Mittal strategy did for steel-makers. For this reason, Mittall has been acquiring iron ore mines, and now supplies 50% of its own needs from those sources. Interestingly, the Chinese government is also taking an interest in the BHP/Rio deal and ﬂ exing its muscles to play a role in shaping any deal that emerges. While, in 2008, steel-makers are facing 65% increases in iron ore prices, they also face even higher increases in the coal used to make steel. There may be an emerging business model which links iron ore and coal ownership to steel plants and distribution channels. However, this would probably require a reinvention on a par with Mittal’s impact on the steel sector alone. Sources: Dominic O’Connell, ‘ Year When Mittal Proved His Mettle’ , Sunday Times, December 31 2006, p. 3-7. Peter Marsh, ‘Man of Steel with a Showman’s Flair for Flying in the Face of the Improbable ’, Financial Times , December 23/24 2006, p. 9. Peter Marsh, ‘Showing a New Spark of Life ’ , Financial Times Special Report: FT Steel Industry, June 14 2006, p. 1. Stanley Reed, ‘The Raj of Steel ’ , BusinessWeek, December 20 2004, pp. 18–22. Mark Franchetti, Robert Winnett and Holly Watt, ‘ Miners Face “Su icide Mission ” ’ , Sunday Times, June 10 2007, p. 1-4. Stanley Reed, ‘ Mittal and Son ’, BusinessWeek , April 16 2007, pp. 44–52. Natalie Obiko Pearson, ‘Arcelor, Liberia Share an Acid Test’ , Wall Street Journal, May 30– June 1 2008, p. 4.

Case 9: One-Laptop-Per-Child Stirs Up the Grown-Ups The One-Laptop-Per-Child (OLPC) programme is a leading example of the combination of philanthropic endeavour and corporate social responsibility with more conventional for-profi t business organizations, and the relationships emerging between them. It may be a prototype for the way in which such combinations will work in the future, and the problems that exist in linking for-profi t and not-for-profi t enterprises.

The origins of OLPC OLPC originated with a team of education and technology experts from the Massachusetts Institute of Technology in 2004. Their goal was to overcome the digital divide between the world’s ‘ haves ’ and ‘ have- nots ’ in access to computers and the Internet. Their plan was to make a $100 laptop on a non-proﬁ t basis for the poor children of the world. Their focus was on the problems of gaining access to computers for children in classrooms across the world, rather than more commercial market-based goals. In 2005, Nicholas Negroponte, a professor on leave from MIT to lead the OLPC project, unveiled the project to the world at the World Economic Forum in Davos, in all its compelling simplicity: design a

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$100 laptop and within four years get it into the hands of the world’s poorest schoolchildren. World leaders and corporate benefactors jumped in to support the project. Google and News Corp put in £2 million funding each. In 2006, OLPC attracted roughly $7.6 million in donations, and some $16.5 million in 2007. Negroponte travelled the world collecting pledges from developing countries to buy the laptop in bulk. The OLPC team designed a rugged, innovative laptop with good software for learning – the small green and white device is designed to operate on very little power (a small solar screen can keep it going), it can resist rain and dust, its screen stays bright in direct sunlight, and it connects wirelessly to the Internet. It runs on open-source software. The $100 price target has been more difﬁ cult and the machine sells for $188. The XO went into full production in October 2007.

Resistance and denial However, at the outset, the OLPC group was ridiculed by the computer industry – technology industry experts said that the extreme drop in cost they wanted was ‘impossible ’ . Intel’s Craig Barrett called an early version of the OLPC computer ‘a $100 gadget ’ that would never succeed, while Microsoft’s Bill Gates said ‘ Geez, get a decent computer where you can actually read the text and you’re not sitting there crank- ing the thing while you’re trying to type ’. (An early prototype of the OLPC machine included a wind-up handle, but this feature was later dropped.) Even those who approved of the OLPC concept saw it as little more than a charitable undertaking. Moreover, some potential users had major reservations about the OLPC machine. Libya had planned to buy up to 1.2 million XO laptops until government ofﬁ cials became concerned that the machines lacked Microsoft Windows, and that service, teacher training and future upgrades would be a problem. One Libyan ofﬁ cial noted: ‘ I don’t want my country to be a junkyard for these machines . . . The Intel machine is a lot better than the OLPC’ . Nigeria failed to honour its pledge to purchase a million OLPC laptops, because they were more than $100. The higher price also made OLPC vulnerable to Taiwanese, Indian and Israeli sellers of inexpensive Windows laptops. Importantly, from its outset, the OLPC project was a threat to the PC world dominance of software giant Microsoft and chip-maker Intel. The MIT team had designed a machine that did not use Windows or Intel chips, preferring open-source software and AMD chips. The laptop also offered computer manufacturers substantially higher margins than desktop PCs, which were now looking under threat as well.

The impact of OLPC? By 2007 it was clear that many of the companies in the technology sector were targeting the world’s poor. Although it does not normally sell computers, Intel had developed low-cost computers aimed at students

533 •• Market-Led Strategic Change

in third-world countries, with its Classmate PC and Eduwise laptop. Intel has marketed the project aggressively, although it stands to make little money from it. Its rival, AMD, was pledging to get half the world’s population online with its Personal Internet Communicator device. Microsoft was supporting the establishment of kiosks in villages in developing countries where residents share access and pay only for usage. Some analysts saw these moves as little more than PR and defensive attempts to make sure their brands and technology have a foot in the door once these countries turn into real markets. However, other technology companies have made moves that are neither PR nor charity:

● In 2007 Dell Computer, the world’s number two computer company, launched a desktop computer in China selling for as little as $366 – more than 60% below the price of its previously cheapest machine. ● Quanta Computer, the world’s largest contract manufacturer of laptops, announced it would start making laptops selling for only $200. (Quanta is also making the OLPC XO machine.) Quanta has transformed its OLPC project team into a new business unit to create a new market. ● AMD offers a PC in India, with local partner HCL, for around $200.

Similarly, late in 2007, Asustek launched its EeePC – a low-cost notebook with a 7-inch screen, running on Linux or Microsoft, and with fl ash memory instead of a hard drive. Asustek was offering the EeePC for $199 to governments of developing countries prepared to place bulk orders. Asustek aimed to sell 200,000 machines in 2007, and more than 3.8 million in 2008. In fact, they sold 300,000 in the fi rst two months, and 2008 sales are estimated as 5 million units. Asustek is also a partner in Intel’s Classmate PC programme, through which Intel is seeking a share of the educational market for computers in the developing countries. In 2008 Acer became the fi rst top tier computer company to announce the launch of a low-cost laptop, focusing on ultra-mobility as well as low cost. Acer had initially rejected the idea of a low-cost laptop, but changed its mind after seeing the success of the Asustek EeePC. Analysts see this as an emerging and developing new market segment which will drive the future growth of the laptop market. By 2008 a wide range of hardware manufacturers were racing to introduce their own low-end portable computers. The logic is that the new low-price category could sharply expand the market for computers. The target is kids, college students and others who want an inexpensive way to get on the Internet and do other chores. The new ‘ netbooks ’ are priced at around $250.

New allies for OLPC? The turning point in the technology industry’s stance on OLPC came with the growing realization that the poor have marketing power – the

•• 534 End-of-part cases

vast majority of the world’s population, that does not currently have a computer, will be the driver of growth for the future in the technology sector. While computer access is taken for granted by people at the top of the ‘pyramid ’ of world income, the technology industry began to recognize the opportunity provided by developing a computer for the next billion of population. In fact, when the size of the business opportunity was understood, the ‘ impossible ’ low-cost computer suddenly became viable in quite straightforward ways: costs are cut by using a cheaper form of liquid crystal display, not having a hard disc, and running on open-source software instead of Microsoft Windows. Computer prices have been kept high by persuading buyers they need more memory, storage and processing power. While the number of transistors on integrated cir- cuits has doubled every two years, driving the technology industry to produce ever-more powerful devices, now the priority has changed to using the most advanced technology to produce ‘ older ’ and simpler specifi cations. Intel had been an especially fi erce critic of OLPC. In May 2007, Negroponte appeared on CBS’s ‘60 Minutes’ TV programme, and accused Intel of trying to drive his not-for-profi t venture out of business. Intel’s Craig Barrett called the idea ‘ crazy ’ . OLPC accused Intel of selling its Classmate at below cost to drive the XO out of the market. Two months later Intel announced it was joining OLPC’s board, though the agreement included a ‘ nondisparagement clause’ under which Intel and OLPC agreed not to criticize each other. Intel also made a multimillion dollar contribution to OLPC. There was agreement to work jointly on an Intel-based OLPC device.

Falling out big time . . . Although it had joined the OLPC board, Intel continued to compete with the OLPC project – signing deals to sell hundreds of thousands of its Classmate machines in Nigeria, Libya and Thailand – all markets on which OLPC had been relying for sales. Intel was also testing the Classmate in at least 22 other developing countries, and donating thousands of machines to get started in these countries. Meantime, OLPC was struggling. Negroponte reversed the strategy of persuading developing countries to buy one million laptops each, and started accepting much smaller orders. The project reversed its decision not to sell the device to the American consumer. In November 2007 OLPC began selling pairs of laptops to US and Canadian consumers for $399 – one computer goes to a student in a poor country and one to the buyer. However, suppliers began grumbling about missed forecasts and lowered volume expectations. Many of OLPC’s informal agreements with world leaders seemed to be unravelling. It also became apparent that Intel’s overseas sales force was selling the Classmate as superior to the OLPC machine, for example in Nigeria and Mongolia, using marketing materials that claim the Intel machine is better. In Peru, for instance, where the Education Ministry had agreed

535 •• Market-Led Strategic Change

to buy 272,500 OLPC laptops for primary school pupils, the local Intel representative tried to scare the buyers off, claiming OLPC machines and power adapters did not work. Negroponte communicated with Intel’s CEO and demanded that Intel stop selling the Classmate. Intel said there was room in the market for many machines and refused to stop. For example, Nigeria’s concerns about the rising price of the OLPC machine may be related to Intel’s visit to the country and the resulting offer to donate 3000 Classmates and to train 150,000 teachers to use the computer in the classroom. Similarly, Microsoft denies Negroponte’s claim that Microsoft offering developing countries a $3 software package (including Windows, a student version of Microsoft Ofﬁ ce, and educational programs), was a countermeasure to undermine the OLPC threat to the dominance of Windows. Early customers were Libya, Egypt and Russia, all using low-cost Windows-based laptops from suppliers like Asustek, not the OLPC machine. At the beginning of 2008 the tension between OLPC and Intel reached a peak, with Intel being thrown off the OLPC board. The uneasy partnership ended acrimoniously, with Intel accused of ‘ shameless behaviour ’ . Intel described the split between the company and the OLPC project as being caused by a ‘ philosophical logjam’ . OLPC responded with a 10-point list of complaints, accusing Intel of constantly criticiz- ing the project’s XO laptop and promoting its own Classmate range to developing countries. Negroponte claimed that Intel had not lived up to any part of its written agreement with OLPC. He also claimed that the intensity of Intel’s competitive efforts against OLPC increased after Intel joined the OLPC board. Shortly later, OLPC President Walter Bender – who had launched the OLPC Peru deployment – left the operation abruptly after a dispute with Negroponte. Bender did not approve of Negroponte abandoning the OLPC open-source software ideal, to work with Microsoft.

Dilemmas for OLPC By 2008, with fewer than a million XO laptops sold, OLPC was entering a retrenchment period – it plans to hand more of the development and support of its XO laptop and software to technology companies, including Microsoft, which is almost ready with a version of Windows for the XO machine. OLPC will concentrate on developing prototypes and other new concepts. Interestingly, OLPC has lost its Chief Technology Ofﬁ cer, who has left to establish her own business. Her intention is to get the price of a low-cost laptop for emerging markets down to $50. One question is whether OLPC has actually achieved its aim of enhanced computer access for the world’s poor by stimulating the technology sector to see this market as an opportunity, more than by its direct efforts. OLPC may have in effect forced a group of companies to develop a laptop with the goal of making it as cheap as possible. In one sense, the OLPC project has been derailed by the power of

•• 536 End-of-part cases its idea – the for-profi t companies were so threatened by the planned $100 price tag they rushed headlong into producing their own low-cost machines, plunging OLPC into direct competition with well-known brands like Intel and Microsoft. Certainly, Negroponte says that OLPC is in the education business not the laptop business, even though OLPC is left as a niche player in a market where developing countries have a choice of cheap laptops for their schoolchildren. Perhaps as a consequence, sales of the OLPC machine have been slow – three years into the programme only 2000 students in pilot programmes had received computers from the OLPC programme. Negroponte’s goal of 150 million users by the end of 2008 is unattain- able. The fi rst big OLPC production run began in China in October 2007 and was for 300,000 laptops – but many were destined to go to US users. Nonetheless, the ‘Give One, Get One ’ campaign achieved strong uptake in the USA, with users willing to pay $399 for an XO if it meant another XO would be given free to a child in the developing world. OLPC America is being launched to extend the cheap laptop concept for children in the USA. The strength of the OLPC idea appears robust at the consumer level, which may be the enduring advantage OLPC will enjoy. Another major issue is the degree to which OLPC really provides for-profi t companies with the opportunity to pursue socially desirable goals as part of their business models, or whether OLPC is simply a new type of competition to be beaten. It remains unclear whether a fully successful OLPC project would have been compatible with the business goals of the established players in the market, or how it could have been made so. The compatibility between social and business goals remains challenging. Indeed, OLPC itself stands accused of ‘cultural imperialism’ in its efforts to stampede into other countries’ education systems. India’s Education Secretary is quite clear his priority for primary schools is reading and writing abilities, not computers. Teachers in Peru have expressed scepticism about the laptops being distributed because they are not part of a comprehensive educational project and the children do not understand what the computers are for. Certainly, OLPC’s experience of working with aggressive for-profi t partners also underlines some of the potential diffi culties in partnerships between not-for-profi t organizations and commercial companies. Relying on unpaid support and only a small paid team, OLPC appears to have lacked the culture or experience to handle relationships with predatory and aggressive commercial organizations. Nonetheless, backers like Google and AMD are holding fi rm. By mid-2008 Negroponte made no secret of his need to recruit a CEO for the project, most likely from the PC industry, although what he says he wants is someone who will ‘ view the world as a mission, not a market ’ .

Sources: Kathrin Hille, ‘The Race for the $100 Laptop ’, Financial Times , April 9 2007, p. 8. Steve Secklow and James Bandler, ‘ A Little Laptop with Big Ambitions: How a Computer for the Poor Got Stomped by Tech Giants’ , Wall

537 •• Market-Led Strategic Change

Street Journal, November 24 2007, p. A1. Chris Nuttall, ‘ Non-Proﬁ t Hits Out at Intel’ , Financial Times, January 5/6 2008, p. 18. Steve Hamm, ‘ Wanted: One CEO for One Laptop Per Child’ , BusinessWeek , March 17 2008, p. 64. Chris Nuttall, ‘PC-Makers Mull Their Margins As the Low-Cost Laptop Arrives ’ , Financial Times, January 31 2008, p. 11. Don Clark, ‘Racing to Offer “ Netbooks ’ ’ ’ , Wall Street Journal , April 9 2008, p. 26. Steve Hamm and Geri Smith, ‘Social Cause Meets Business Reality ’, BusinessWeek , June 16 2008, pp. 48–57.

•• 538 Index

3M, Abrasive Systems Division (ASD) growth BAE Systems: margins doubled , 462–3 ethical problems , 203–4 Abbey National, rebranding issues , 115–16 reputation problems , 102 Abilene Paradox , 208 Bagel, global , 16 Account management , 96 Banking: Advertising and promotion , 96–9 British banks integrity issues , 347 and brands , 97 market segmentation , 290–1 in Google/Facebook/MySpace/You product types , 273 Tube , 97 BAT under siege , 15 online advertising/marketing , 97–8 Behavioural and attitudinal loyalty , 36–7 public relations , 96 Benchmarking , 184–5 sales and account management , 96 Best Buy target groups , 284–6 TV avoidance technology , 97 Black swans analogy , 223–6 TV and radio , 97 Blacks Leisure, excuses , 198 user-generated content , 97–8 Blind branding , 119 see also Marketing communications Blogs for listening/talking to customers , 240 Agility see Business agility Blue jeans, how to sell , 113 Airbus, collaboration example , 364–5 Blue ocean/red ocean positioning logic , 292–3 Alliance relationships , 359 BMW, advertise the Mini in USA , 117 Alton Towers Theme Park, X-Celerator Pass , Body Shop International: 137–8 created new market space , 289 Amazon: failings of , 270 book recommendations , 94–5 seeks new markets , 305 own networks , 165 Boeing: AMD, attacks Intel , 163 , 196 Dreamliner relationship problems , 371–3 Apple: refuelling tankers contract lost , 247 iTunes/iPod/iPhone , 155 , 192 Bollywood partnerships , 360–7 research with teardowns , 247 BP, Tony Hayward vision statement , 316 uses ethnography , 238–9 Brand/value marketing , 114–26 Asda, market position , 292 about brand marketing , 114–16 about value marketing , 125–6 Bad customers , 72–5 blind branding , 119 about bad customers , 72 brand liabilities , 120–1 who break the rules , 73–4 brand unbeatability illusion , 117–19 who make the rules , 74–5 brand/customer value gap , 136 who play the rules , 72–3 brands as assets , 116 Index

Brand/value marketing (Contd. ) dominant customer issues , 70–2 , 74 brands in trouble , 122–3 supermarket supplier problems , 70–1 cool brands win , 116–17 see also Bad customers copycat brands , 120 counterfeit brands , 121–2 Cadbury-Schweppes: negative brand equity , 120–1 gorilla advertisement , 98–9 premium store brands , 120 and investors , 18 private brands , 119–20 restructuring plans , 450–1 Procter & Gamble fi ve lessons , 123–4 stops selling Wispa , 55 strategic brand management , 123–5 Call centre relationships , 128 Brands , 84–5 Calyx and Corolla, ‘virtual ’ fl ower company , brand alliances , 363 361–2 brand navigators , 363 Camelot, using false identities , 247 brand personality , 84 Cannibalization , 189–90 brand strategy , 84 Catering, forced usage problems , 501 and limitation of imitation , 85 Cern particle physics centre , 166 as marketing assets , 335 Change: and TV/radio advertising , 97 how mangers can block , 474–5 British Airports Authority (BAA) problems (case objections to , 55–6 5) , 388–402 resistance to , 183 about BAA , 388–9 Channel management , 90–1 bargaining power , 395–6 see also Distribution channels calls for a break-up , 396 Chemicals industry, reputation problems , 101 dilemmas , 399–402 Chrysler’s Jeep division, Jeep Jamborees , 248 Ferrovial’s role , 389–93 Cisco: abuse of power , 392 develops routers and switches , 300 employee relations , 392–4 Microsoft collaboration , 358 fi nancing issues , 390–1 Citizen advertising , 97–8 opposition to expansion , 391–2 Cloud computing , 164–7 security problems , 389–90 Clustering of retail outlets , 59 Heathrow hassle , 393–4 Co-branding , 363 political issues , 398–9 Co-worker relationships , 367–9 price increases , 394–5 and keeping customer service healthy , 368 unpopularity issues , 396–7 overcoming strategy launch problems , 367–8 whose fault? , 394 Coca-cola, brand name problems , 117–18 British Airways: Collaborative working, within new customer loyalty and retention , 36 organizations , 452–3 fails to manage its network of relationships , Collaborator relationships , 358–67 370 about collaborator relationships , 358 ‘GO ’ cannibalizes BA fl ight sales , 190 alliances , 359 poaching customers from Virgin , 353 brand alliances , 363 BSkyB, CRM policy , 130 brand navigators , 363 Business agility , 194–5 corporate compatibility issues , 366 and managers , 13–14 crashing collaborations , 364–5 strategic agility , 14 escaping from , 366 Business models: management style/techniques issues , 366 and competition , 12 managing partnerships/collaborations , 366–7 and the manager , 11–12 mutual benefi ts issues , 366 Business windows of time , 195–6 network organizations , 361–3 and active waiting , 197 outsourcing , 359 Business-to-business (B2B): partnerships , 359 customer value management , 314–15 reasons for , 359–60 market changes , 69–72 time and costs of , 366

•• 540 Index

vertical integration , 359 and the wealthy , 65 Collaborators, need for , 476 and womenomics , 65 Commission, volume-based issues , 114 Consumer vigilantes , 52 Compaq, creates server market , 297–8 Contingent relationships , 354–7 Competition: about contingents , 354–5 and business models , 12 gatekeepers , 356 customer , 258 recommenders , 355–6 direct , 258 regulators , 355 generic , 258 shapers , 355 Competitive box , 269–70 suppliers , 356 see also Market deﬁ nition and the competitive supply chain partnerships , 356–7 box Core competences , 331 Competitive differentiation and positioning , Corporate reputation management , 100–2 328–33 Corporate social responsibility (CSR) , 22–4 , about competitive differentiation , 329–30 204–5 , 323–8 access-based positioning , 330 business/social aims incompatibility , 324 commodity market issues , 332 as a competitive tool , 326 competences, capabilities and scope issues , 333 as a destroyer of customer value , 325–6 and core competences , 331 and eco-hypocrisy , 326 differentiating capabilities , 331–3 environmental issues , 324 needs-based positioning , 330 parity strategies , 326 Porter’s generic strategies , 329–30 as a source of opportunity and variety-based positioning , 330 innovation , 325 Competitor relationships , 349–54 ‘ sustainable sweet spot ’ , 325 about competitor relationships , 349–50 to create customer value , 327–8 aggression in the market , 351–3 Corporate value and customer value , 323–8 competitor analysis , 350–1 Counterfeit brands , 121–2 new competitor threats , 354 Crisis and failure , 197–202 ugliness of the competitors , 350–1 failure , 200–1 understanding the competition , 350–3 getting caught unawares , 202 Complainers , 253–4 making mistakes , 201 Computer business issues (case 3) , 162–7 not our fault , 197 Amazon networks , 165 , 166 our fault , 198–9 AMD attacks Intel , 163 their fault , 199–200 cloud computing , 164–7 Crisis survival , 14–15 dilemmas , 166–7 Culture, changing problems , 476–7 Google’s cloud network , 164–6 Customer conundrum , 32–48 IBM: about service problems , 45–6 adopts open source software strategy , 164 about strategy problems , 46–8 teams with Google , 166 can we deliver? , 40–2 Linux free/low cost operating systems , 163 expectations versus outcomes , 41 Microsoft/Intel/Dell under siege , 163–4 service/quality versus satisfaction , 41 Personal Computer (PC) market , 162–3 what is customer value? , 38–9 Sun attacks Microsoft , 163 which service to maximise? , 40 Confusion pricing , 50–1 Customer days , 252 Consumer market changes , 62–9 Customer Experience Management (CEM) , 221 ethnic markets , 66 Customer intimacy , 137 families, changes to , 62–3 Customer knowledge, acquiring , 248–9 green consumer , 66–7 Customer pampering , 58–9 MySpace generation , 63 Customer perception, reality of , 312–14 Neo-Cromwellians , 67–8 changes with time , 313 and the poor , 65–6 customer differences , 313 scared consumer , 68–9 individualization , 313–14

541 •• Index

Customer relationship management (CRM) , and price , 90 129–34 search for , 139–42 about CRM systems , 129–31 and selling value , 314–15 arm’s length customers , 133–4 value as cost/benefi t analysis , 141 business-to-business relationships , 131–3 value expectations , 311–12 call centres overseas , 130–1 value migration , 141–2 critical relationships , 132 see also Competitive differentiation and and ethnography , 239 positioning ; Customer perception, reality leverage relationships , 132 of ; Value to customer assumptions loyal buyers , 133 Customer-focused differentiation , 4 major account relationships , 132–3 Customer/employee issues: market segmentation issues , 133 happy customers and staff , 42–4 recurring relationships , 132 internal euphoria , 43 relationship exploiters , 133 staff alienation , 43 relationship seekers , 133 staff coercion , 43 strategic account investment , 133 synergy working , 43 strategic account partnership , 133 Customers, sophisticated see New/sophisticated unwanted relationships , 134 customers Customer relationships , 345–9 Customized products and services , 56 about customer relationships , 345–6 attractiveness issues , 348–9 Daewoo, successful value proposition , 338 can we deliver? , 348 Dakota Indians on dead horses , 5 can we get what we want? , 346–7 De Beers, Africanizes its functions , 357 do we know what we want? , 346 Debenhams, and private equity , 17–18 trust issues , 347 Decision simplifi cation , 54 with unattractive customers , 349 Dell Inc: see also Collaborator relationships ; Competitor and corporate social responsibility (CSR) , 23–4 relationships ; Contingent relationships moves from direct selling only , 182–3 Customer satisfaction/loyalty/retention , 34–8 under siege , 163–4 and actionability , 34 Design strategy , 85 behavioural and attitudinal loyalty , 36–7 Differentiating capabilities , 331–3 buying loyalty? , 37–8 Disruptive innovation , 188–9 and data dereliction , 38 Distribution channels , 90–5 dealers , 36 channel management , 90–1 and happy staff , 42–4 and direct marketing , 91 happy wanderers , 35 distribution systems , 91 hostages , 35–6 long tail theory , 94 loyalty and retention , 38 Web issues , 91–5 and productivity gains , 34 Dominant customer issues , 70–2 and profi tability , 34 Dunnhumby market segmentation , 278 and sales volume , 34 satisfi ed stayers , 35 Eco-hypocrisy , 326 Customer scenario building , 252–3 Elephant in the market syndrome , 233–6 Customer service issues , 32–4 EMI music business (case 2) , 158–62 2006 UK survey , 33–4 about EMI , 158–9 Customer value , 311–15 Guy Hands reorganises , 159–62 about customer value , 311–12 new centralized marketing function , 161 and brand gap , 136 Radiohead leave , 161 business-to-business management , 314–15 Terra Firma takes over , 159 dangers of assumptions , 139–41 see also Music industry (case 2) differences between customers , 313 Emotion/inspiration , 210 perception is reality , 312–14 Employee motivation, within new organizations , Peter Doyle on , 136 454–6

•• 542 Index

Employee/customer issues see Customer/ about growth , 178 employee issues adjacencies for , 180–1 Employees, winning their trust and commitment , building growth platforms , 179–80 470–3 Google’s growth , 179–80 and followership , 473 growth fails from: leadership issues , 472–3 innovation management breakdown , 179 poor manager problems , 471–2 premature core abandonment , 179 Enterprise Rent-A-Car, found market niche , 293 premium-position captivity , 178–9 Ethical consumer , 66–7 talent bench shortfall , 179 Ethical issues , 60 , 247 growth gamble , 181–2 Ethical standards , 202–4 hidden assets for , 181 Ethnic markets , 66 Gut feeling/intuition , 210–11 Ethnography , 236–9 Evidence based management , 208–9 Haley toothpaste market segment Exhaust system replacement not price driven , 279 research , 278 Experian’s Mosaic segmentation system , 282 Halo effect , 208 Experience economy concept , 57–9 Hampton Inn hotel chain, motivates managers ExxonMobile, reputation problems , 101 and workers , 497 Harry Potter selling , 44 Fairtrade coffee, price issues , 88 HBOS, poor pricing decision , 87 Families, changes to , 62–3 Heinz, EZ Squirt Ketchup , 138 Federal Express: Home Depot versus Lowe’s , 196 customer satisfaction strategy , 274 Horizontal business processes , 457 speedup causing extra misdirections , 313 Hospital patient notes , 61 Floor polisher massacre , 226 Hot power/cool power , 185–6 Followership , 473 Hyatt Hotels & Resorts, targeting by , 283 Formula 1 budget hotel chain , 296 Futurology , 241–2 IBM: getting it wrong , 242 adopts open source software strategy , 164 big idea nurturing , 193 Gap, and CSR , 325 CustomerRoom , 248 Gatekeepers, relationships with , 356 product launch problems , 367 General Electric: using virtual reality , 240 Ecomagination , 327 and virtual life , 21 use ethnography , 238 IBM (case 4) , 377–88 Global bagel , 16 current evolving strategy , 387 Globalization , 18–20 dilemmas , 387–8 cars , 19 early days , 377–8 globally integrated enterprises (GIEs) , 19 ﬁ nds new ways to compete , 382–4 oil , 19 Gerstner brings services-led strategy , 378–9 Going to market , 6 global integration , 384–5 manager issues , 10–11 the new organization , 384–5 process model features , 9 Palmisano and business process transformation process of , 8–11 services , 380–2 traditional marketing comparisons , 9–10 Palmisano launches ‘e-business on demand ’ Google: strategy , 379–80 areas of growth , 179–80 software bounce , 385–6 cloud network , 164–6 strategic collaboration initiatives , 383–4 and the music industry , 157 unveils the PC , 378 Open Handset Alliance initiative , 362–3 Imitation, limitations of , 184–6 OpenSocial initiative , 362 benchmarking , 184–5 Green consumer , 66–7 intellectual leadership , 185–6 Growth mandate , 178–82 playing catch-up , 184

543 •• Index

Implementation of strategy see Strategy Kids in hospital , 45–6 implementation Kimberley-Clark, training pants/Huggies , 250 Informal networks, within new organizations , Knowledge-based workers, within new 453 organizations , 451 Innovation: Knowledge-intense organizations , 221–2 about innovation , 187–8 Known and unknown unknowns , 225 ‘ big ideas ’ search , 192–3 Kodak, Easyshare printer pricing , 89 cannibalization , 189–90 Kraft Foods, hybrid structures , 458 disruptive innovation , 188–9 Kryptonite lock problem , 57 innovation networks , 193–4 innovative companies , 187 Leadership, and thinking strategically , 211–12 and marketing , 85 Leadership issues , 472–3 value innovation , 191–2 Levi-Strauss, brand name problems , 118–19 Wikinomics , 193–4 Limitation of imitation , 85 within new organizations , 451 Listening not evaluating , 253 Innovation and business agility, manager Live Nation musical activities , 158 challenges , 13–14 Long tail theory , 94 Innovation and change, and new marketing , 104 Lowe’s versus Home Depot , 196 Innovation management , 500 Loyal buyers , 133 INSEAD buyer utility levers , 301–2 Loyalty: Insurance, and cross-selling , 73–4 behavioural and attitudinal , 36–7 Intel: buying loyalty , 37–8 under siege , 163–4 , 196 by sellers , 52 use ethnography , 238 see also Customer satisfaction/loyalty/ Intellectual leadership , 185–6 retention Inter-functional partnerships , 444–5 Lush, creates new market space , 299 critical cross-functional relationships , 444–5 Internal marketing , 469–70 McDonald’s, selling Frappe type coffee , 61–2 collaborators, need for , 476 Male shopper, the , 282–3 see also Employees, winning their trust Manager challenges: and commitment ; Managers, need for aggressive inventors , 16–18 commitment ; Strategic internal marketing coping with paradox , 22 Internal marketing, operational , 496–501 corporate social responsibility (CSR) , 22–4 brand ambassadors , 498 crisis survival , 14–15 corporate positioning , 500 global bagel , 16 innovation management , 500 innovation and business agility , 13–14 internal communication efforts , 498–9 integrity , 22–4 internal instead of external markets , 500–1 market globalization , 18–20 listening, importance of , 499 new business models , 11–12 Nordic School of Services , 497 siege situations , 15–16 service marketing and quality , 496–7 strategy, is there one? , 24–5 Internet for observing customers , 239–41 Web and virtual realities , 20–2 Intuit: Managers, need for commitment , 474–6 customer assets , 334 don’t blame me attitudes , 476 Quicken home ﬁ nance software , 250–1 resistance to change problems , 474–5 Investors: Managing culture, within new organizations , 452 activist investors , 18 Market changes , 62–75 aggressive , 16–18 about market changes , 62 , 75 market granularity , 69 Jam choices , 13 see also Business-to-business (B2B), market Janssen-Cilag, drug pricing policy , 90 changes ; Consumer market changes JCB, a disruptive innovation , 188 Market choices , 305–7 Judgement , 211 core business , 305–6

•• 544 Index

dead-end business , 306 see also Market positioning illusion business , 306 Market sensing, and learning , 219–63 peripheral business , 306 about sensing and learning , 220 , 249–50 see also Market defi nition and the competitive black swans analogy , 223–6 box ; Market positioning ; Market complainers , 253–4 segmentation customer days , 252 Market defi nition and the competitive box , Customer Experience Management (CEM) , 221 269–76 customer scenario building , 252–3 competitive box , 269–70 knowledge-intense organizations , 221–2 market structure map , 275–6 known and unknown unknowns , 225 product-consumer matrix , 272–4 listening not evaluating , 253 redefi ning markets , 271–2 meeting customers , 251–2 Market IQ , 222–3 predictability , 224–5 Market mission and values see Mission raising market IQ , 222–3 statements storytelling as a method , 250–1 Market positioning , 292–304 understanding customers , 220–1 across strategic groups approach , 295–6 watching customers , 251 adoption hurdles , 303 Market sensing management , 254–62 blue ocean/red ocean logic , 292–3 about managing market sensing , 254–5 , 256–7 buyer utility issues , 301–2 checklist for , 257 by UK supermarkets , 292 choosing the environment , 257–8 with complementary products/services , 297 consultation issues , 260–2 creating new market space , 293–300 environmental changes, impact of , 258–9 evaluating new ideas , 304 linking market sensing to plans , 260 functional-emotional orientation approaches , a market sensing structure , 255–6 298 opportunities/risks balances , 262 red/blue oceans concept , 292–3 providing information , 260 redefi ning the buyer group , 297 reducing uncertainties , 259 shaping external trends , 300 strategic building model , 259–60 strategic pricing , 302 sub-dividing the environment , 258 substitute industries approach , 294–5 Market sensing, and research , 227–36 ‘ Winning Business Idea ’ index , 300–4 elephant in the market syndrome , 233–6 Market segmentation and targeting , 276–92 limitations of research , 231–3 about market segmentation , 133 , 276–7 excuses , 233 broad segmentation , 281–3 limits of questions , 231–2 a bank’s research , 281 right result , 232–3 Experian’s Mosaic system , 282 unreasonable expectations , 231 consistency and integration , 291 Murphy’s Law , 227 conventional views on , 286–7 myths of marketing information , 229–30 customer loyalty segmentation , 279–80 research question types: customer relationship-based segmentation , priorities , 234 280–1 short-term dilemmas , 234 Dunnhumby segmentation: spotting the most important , 235–6 cost-conscious , 278 strategic , 235 mid-market , 278 time wasters , 234 upmarket , 278 sensing/research differences , 227–31 extended model , 287–8 Market sensing, enhancing capabilities see Market Haley toothpaste research , 278 sensing management micro-segmentation , 283–4 Market understanding/measurement , 236–42 strategic segmentation , 284–92 blogs , 240 Best Buy segmentation , 284–6 ethnography , 236–9 strategic-implicit issues , 288–9 futurology , 241–2 tactical-implicit issues , 289 internet sensing , 239–41

545 •• Index

Market understanding/measurement (Contd.) getting heard problem , 434–6 neuromarketing , 239 and how strategy follows power , 442 social networks , 240–1 organization types: virtual reality , 240 integrated/full service , 438 , 440 wisdom of crowds , 240 limited/staff-role , 439 , 440 Market-led strategic change (MLSC) agenda , selling-oriented , 438–40 512–14 strategy/services departments , 438–9 about (MLSC) , 513 poor direction/mission , 441 market led basics , 512 poor leadership , 441 real problems basics , 512 and R & D rivalry , 434 starting , 513–14 reactive/short term , 441 strategic change basics , 512–13 see themselves unloved , 433–4 Market-led strategic change (MLSC) route map , seen as unaccountable, arrogant and expensive , 25–7 , 513 433–4 Marketing as an activity: strategy/operations isolation , 441 about marketing , 4–8 weak implementation , 441 conventional marketing , 7 why they fail , 436–42 and innovation , 85 see also Total integrated marketing traditional marketing , 4 , 9–10 Marketing, organizing for , 436–42 see also Going to market ; New marketing ; Old how things go wrong , 440–2 marketing ; Process-based marketing ; Total reality of Marketing organizations , 437–40 integrated marketing rise and fall of empires , 436–7 Marketing assets , 333–5 see also Total integrated marketing about marketing assets , 333 Marketing as strategy , 175–6 brand , 335 see also Value-based marketing strategy channel power , 334 Marks & Spencer, collective myopia , 234 corporate reputation , 335 Marlboro cigarettes, brand name problems , 119 customer relationships , 334 Marriott, using ethnography , 237 differentiating capabilities , 333–4 Mars, changes recipe , 56 intangible , 335 Mattel, excuses for lead paint , 198–9 market information , 334–5 MBA Code of Practice , 7 Marketing communications , 95–102 Microfi nance, and CSR , 328 about marketing communications , 95–6 Microsoft: public relations/corporate reputation in China , 12 management , 100–2 Cisco collaboration , 358 sales organization/strategic customer and CSR , 325 management , 99–100 maintaining morale , 368–9 see also advertising and promotion playing catch-up with Google and Apple , 184 Marketing intelligence , 242–9 under siege , 163–4 about marketing intelligence , 242–4 Mission analysis , 315–16 deep mining , 246 Mission statements , 315–23 in-company intelligence units , 243 analysis procedure , 322–3 intelligence ostriches and eagles , 243 basic requirements , 317 interpretation issues , 249 brewery example , 319 legal/ethical issues , 247–8 characteristic examples , 316 looking for clues , 246 dangers of , 319 managing customer knowledge , 248–9 for defi ning organizational key values , 321 new identity groups , 244–5 for defi ning organizational philosophy , 320 quest for cool , 245–6 for defi ning product-market domain , 321 trendspotting , 244 good examples , 318–20 Marketing mix/programme , 82–3 for identifying critical success factors , 321 Marketing organization shortcomings , 432–6 and marketing strategy , 315 corporate marketing organizations , 437–40 structuring content , 320–1

•• 546 Index

Mittal (case 8) , 526–32 and the value chain , 104 about ArcelorMittal , 526–7 New projects, six phases of , 447 becomes industry leader , 529–30 New types of organization , 449–56 dilemmas , 531–2 about new organizations , 449 Mittal legend , 528 collaborative working , 452–3 Mittal reinvention , 528–9 employee motivation , 454–6 traditional steel industry , 527–8 informal networks , 453 Mittal, Lakshmi, ArcelorMittal company , 19 innovation , 451 Mobile virtual network operators (MVNOs) , knowledge-based worker , 451 361–2 managing culture , 452 Monsanto, genetically modifi ed seed problems , organizational agility and fl exibility , 453–4 303 organizational design shifts , 450 Morrisons, market position , 292 organizational diversity , 453 Motel 6, reputation problems , 102 traditional structures , 449–53 Motorola, fails with Iridium phone , 304 New/sophisticated customers: Mumbai’s dabbawallahs , 20 about new customers , 48–50 Murphy’s Law , 227 about sophisticated customers , 49 Music industry (case 2) , 155–8 change, objections to , 55–6 Apple iTunes/iPod/iPhone , 155 , 158 and confusion pricing , 50–1 crashing CD sales , 156 customer pampering , 58–9 disintermediation , 157 customized products and services , 56 Google ventures , 157 decision simplifi cation , 53–4 legal downloading for free , 156–7 ethical issues , 60 legal downloading for money , 156 experience economy concept , 57–9 Live Nation activities , 158 and instant gratifi cation , 56 piracy problems , 156 loyalty by sellers , 52 reintermediation , 157 mind changing , 50 shrinking revenues , 155–6 price/value issues , 52 Web downloading , 155 quality/cheap issues , 53 see also EMI music business (case 2) rage issues , 56–7 shopping environment , 59 NASA’s chicken gun , 83–4 and strong smells , 59 National Health Service, and customer service , 33 and transparency , 60 Neanderthal marketing , 137 on value , 50–2 Negative brand equity , 120–1 waiting game , 53 Neo-Cromwellians , 67–8 whining customers , 54–5 Nespresso gives Nestlé a direct outlet , 93–4 Nintendo’s Wii, outsells competition , 271–2 Netto, market position , 292 Nordic School of Services , 497 Network organizations , 361–3 Nycomed Amersham, customer assets , 334 Networks of key relationships , 369–73 Neuromarketing , 239 Oil: New marketing , 3–28 and globalization , 19 about new marketing , 4–8 holders of reserves , 19 going to market process , 8–11 Old marketing , 82–3 , 104 market-led strategic change , 25–7 O’Melveny & Myers, reputation problems , 102 see also Manager challenges ; Price ; Value-based One-Laptop-Per-Child (OLPC) story (case 9) , marketing strategy 532–8 New marketing challenge , 102–5 about OLPC , 532–3 about the challenge , 102–3 dilemmas , 536–8 how marketing is strategy , 104–5 early doubts , 533 innovation and change , 104 impact and competition , 533–5 old/new marketing meet , 104 Intel opposition , 535–6 revolution drives renewal and reinvention , 103 Online advertising/marketing , 97–8

547 •• Index

Operational effi ciency, and strategy , 172–3 Product leadership , 137 Operational excellence , 137 Product policy , 83–4 Operational internal marketing see Internal Product-consumer matrix , 272–4 marketing, operational Public relations , 96 Opposable minds , 209–10 Public relations/corporate reputation Orchestral effi ciency , 140 management , 100–2 Outsourcing relationships , 359 Quality/cheapness issues , 53 Partnership relationships , 359 Peas and children , 53–4 Rage issues , 56–7 Personal computers (PCs): Recommenders, relationships with , 355–6 style/appearance issues , 51 Red/blue oceans concept , 292–3 see also Computer business issues (case 3) Regulators, relationships with , 355 Philips: Relationship exploiters , 133 Alto launched to fi nance offi cers , 297 Relationship marketing , 126–36 unsuccessful with CD-I player , 301 about relationship marketing , 126–8 , 135–6 Pioneer-Migrator-Settler map , 191–2 call centre relationships , 128 Playing catch-up , 184 relationship rhetoric , 135–6 Positioning see Competitive differentiation and see also Customer relationship management positioning (CRM) Post Offi ce queues , 312–13 Relationship seekers , 133 Predictability , 224–5 Relationships see Co-worker relationships; Price: Collaborator relationships; Competitor and customer value , 90 relationships; Contingent relationships; poor decision by HBOS , 87 Customer relationships; Strategic price architecture , 88–9 relationships and networks price discounting , 86 Reputation issues , 100–2 price policy , 86 Retail outlet clustering , 59 price positioning , 86 Revenue enhancement by penalty policies , 113 price sensitivity , 88 Revolution, reinvention and renewal , 173 price visibility , 88 Rosenbluth International, looks for nice people , price-setting , 86 470 and profi t , 86 Rover (case 6) , 402–11 as a quick fi x , 87 about Rover , 402 strategic pricing , 89–90 history , 402–5 and strategic vulnerability , 89 with BMW , 403 Pricing, confusion pricing , 50–1 with British Leyland , 402–3 Private brands , 119–20 nationalization , 403 Process-based marketing , 456–63 Phoenix days , 403–5 horizontal business processes , 457 privatization , 403 hybrid overlay structures , 457–8 into receivership , 407 managing organizational processes , 456–8 Nanjing take over , 408–9 planning and budgeting: SAIC negotiations , 406 , 408–10 conventional , 459–60 SAIC problems , 410–11 how managers see , 460–1 Tata talks , 405–7 managing as a process , 461–3 Royal Mail, Post Offi ce queues , 312–13 Procter & Gamble (P & G): Ryanair, non-service strategy , 46–8 InnoCentive website , 194 Lafl ey chooses outsourcing , 210 Safeway, saboteur shopper tactics , 353 Mr Clean revitalized , 237 Sainsbury’s, market position , 292 purchase of Gillette and China venture , 92 Sales and account management , 96 strategic branding lessons , 123–4 Sales organization/strategic customer SWASH for the MySpace generation , 63 management , 99–100

•• 548 Index

Sales people, as value merchants , 314 product (strategies and plan) , 503 , 504 Samsung clamshell phone , 64 structure of , 502–4 Schlimmbesserung , 177 targets , 505 Second Life (Linden Lab) , 21–2 see also Internal marketing Selling value, and customer value , 314–15 Strategic pathway checklist , 423–8 Service: Strategic pricing , 302 and angry customers , 52–3 Strategic relationships and networks , 343–73 see also Customer service issues about strategic relationships , 344–5 Sex shop, gave bad value , 138 BAs relationship failures , 370 Shapers, relationships with , 355 networks of key relationships , 369–73 Ship meets lighthouse , 235–6 tangled relationship example , 345 Shopping environment , 59 see also Co-worker relationships ; Collaborator Siege situations for managers , 15–16 relationships ; Competitor relationships ; Singapore Airlines, customer assets , 334 Contingent relationships ; Customer Social entrepreneurs , 23 relationships Social networks, for learning , 240–1 Strategic thinking , 174–212 Sony: about strategic thinking , 174–5 , 212–13 and Betamax , 177 corporate social responsibility (CSR) , 204–5 fi ghts Wii , 272 crisis and failure , 197–202 format wars , 199–200 ethical standards , 202–4 Sophisticated customers see New/sophisticated marketing as strategy , 175–6 customers reinvention and renewal , 182–3 SouthWest Airlines, found successful strategy , and resistance to change , 183 295 schlimmbesserung , 177 Speed/business windows , 195–6 strategic dilemmas , 176–8 Spice Girls, and value , 50 strategic goals , 177 Sports Direct, excuses , 198 strategic pathway , 212–13 Stella Artois, brand issues , 122–3 strategy paradox , 176–7 Strategic account investment , 133 timing, speed and agility , 194–7 Strategic account partnership , 133 see also Growth mandate ; Imitation, limitations Strategic agility , 14 of ; Thinking strategically Strategic change, market led , 25–7 Strategic vulnerability , 173 Strategic customer management , 99–100 Strategizing , 206–7 Strategic gaps , 415–29 Strategy: about strategic gaps , 415–17 about strategy , 24–5 , 171–4 auditing the strategic pathway , 417–18 and breaking free from: diagnosis aid , 429 hostility to change , 174 marketing intentions versus realities , 418–22 industry dogma , 174 strategic gap analysis , 419–22 industry rules , 174 Strategic internal marketing (SIM) , 495–510 management tools , 174 about SIM , 495–6 , 501 and customer satisfaction/loyalty , 46–8 communications , 503 , 504 and operational effi ciency , 172–3 distribution , 503 , 504 and strategic intent , 174 does it work examples: and strategic planning , 172 a bank power struggle , 508–9 Strategy implementation , 468–95 , 510–12 commercializing a museum , 507–9 about implementation , 468–9 cross-selling at fi nancial services , 509–10 avoiding problems , 510–11 evaluations , 505 building an implementation strategy , 493–5 hidden organizational benefi ts , 506 development of , 495 internal market orientation , 501–2 evaluate key players , 494–5 internal market strategy , 502 evaluate/isolate problems , 494 measurement issues , 504–5 formulation versus implementation , 477–8 price (to internal users) , 503 , 504 Implementation, need for , 469

549 •• Index

Strategy implementation (Contd. ,) Supplier relationships , 356 implementation-driven , 510–11 Supply chain partnerships , 356–7 integrated strategy/implementation-driven , Swatch: 511–12 creates market space , 298–9 making things happen now , 510 as a fashion accessory , 86–7 management-driven , 510–11 satisfaction against expectations , 484 Tactivizing , 206 screening out problems , 493–4 Target Corporation, use of trend czars , 245 short term issues , 510 Targeting see Market segmentation and see also Strategic internal marketing (SIM) targeting Strategy implementation, obstacles , 479–93 Tata Group (case 1) , 147–55 black-box implementation , 480 about Tata , 147–9 bolted-on approach , 480 downside and dilemmas , 153–5 bunny marketing , 489 external deal possibilities , 154–5 communication failures , 489 Indian Hotels unit , 151 counter-implementation , 489–90 Nano-one lakh car , 153–4 empty promises , 489 takeovers , 150 late recognition , 479 Tata Advanced Systems , 151 management by assumption , 488 Tata Communications , 151–2 managing change , 492 Tata Consultancy Services , 151 obsolete strategies , 487 Tata Industrial Services , 151 optimism dangers , 479 Tata Motors , 150–1 pitfall list , 481 Jaguar/Land Rover deals , 151 , 152–3 planning/management separation dangers , Tata Steel , 152 479 Tata Tea , 151 poor information sharing , 492 Tata Teleservices , 151 poor/vague strategies , 492 Tata’s organization , 149–50 power structure confl icts , 492–3 Tesco: problem denial , 480 market position , 292 skills/capabilities not fi tting , 485–6 market segments , 277–8 stretching people , 486 , 487 melon sizes , 228 structural contradictions , 489 under siege , 15 testing versus blame , 488–90 Tesco in USA (case 7) , 517–26 unbending fi xation , 480 about Tesco , 517–18 unclear responsibility/accountability , 493 American adventure , 519 weak-implementation , 510–11 Fresh & Easy concept , 520–3 Strategy implementation, problem denial , 481–5 dilemmas , 524–6 blissful ignorance , 483 early results , 523–4 closed minds , 482–3 internationalization , 518–19 frightened rabbits , 483 Tescopoly in the UK , 518 ready to go , 483–4 Thinking strategically , 206–12 worried stayers , 483 barriers to , 207–9 Strategy implementation, skills/competences doing new things , 207 required , 491–2 emotion/inspiration , 210 allocating skills , 491 evidence based management , 208–9 interacting skills , 491 gut feeling/intuition , 210–11 monitoring skills , 491 halo effect , 208 organizing skills , 491 judgement , 211 Strong smells , 59 and leadership , 211–12 Sun Microsystems: opposable minds , 209–10 attacks Microsoft , 163 strategizing , 206–7 and Second Life , 21 tactivizing , 206 Supermarket suppliers, problems of , 70–1 weirdos , 209

•• 550 Index

Thomson Corporation: all beneﬁ ts propositions , 336–7 about Thomson , 416 Daewoo success with , 338 demonstrates strategy implementation , 417 favourable points of difference propositions , unique market mapping approach , 416–17 336–7 Toshiba, format wars , 199–200 resonating focus propositions , 337 Total integrated marketing , 443–9 retailers ’ value delivery example , 338–9 about total integrated marketing , 443–4 Value to customer assumptions , 139–41 critical cross-functional relationships , 444–5 add customer service , 140 integration as an overwhelming priority , 443–4 make it cheaper , 140–1 inter-functional partnerships , 444–5 what customers want , 139 routes to: Value-based marketing strategy , 109–42 collaborative relationships , 446 about value as the driver , 110–11 communicating out of the silo , 446 transactional marketing and selling , 110–11 , cross-functional teams , 447 111–14 formal integration mechanisms , 446–7 see also Brand/value marketing ; Relationship internal marketing , 448 marketing ; Value-driven strategy leadership and vision , 445–6 Value-driven strategy , 136–9 organization structure , 448 customer intimacy , 137 pan-company marketing , 445 and customer value issues , 136 process focus , 447 operational excellence , 137 strategic approach , 448–9 and product leadership , 137 Toyota: value innovation , 137 and benchmarks , 185 and value perception , 138–9 business beliefs and methods , 452 Virtual realities , 20–2 Prius hybrid , 186 Visa, avoids online payment system , 241 Scion and the younger buyer , 124–5 VMware, ﬁ ghts rough with Oracle , 352 traditional and new sales methods , 112 Volume-based commission issues , 114 Transactional marketing and selling , 110–11 , 111–14 Waiters, withstanding abuse , 471–2 about transactional marketing , 111 Waitrose, market position , 292 coercion issues , 112–13 Wal-Mart: ‘friendly ’ on business-to-business , 114 European adventure , 39 revenue enhancement by penalty policies , 113 Leo Scott seeks environmental and social volume-based commission issues , 114 sustainability progress , 323 Transparency , 60 WD-40, repositioned in market , 237 Trend czars , 245 Weirdos , 209 Whining customers , 54–5 Unilever, project Shakti (India) , 325 Whole Foods Market, natural/healthy products , 205 Value, what is it? , 50–2 Wikinomics , 193–4 Value chains , 95 , 104 ‘ Winning Business Idea ’ index , 300–4 see also Distribution channels Wisdom of crowds , 240 Value expectations , 311 Womenomics , 65 Value innovation , 191–2 Pioneer-Migrator-Settler map , 191–2 Zara, different business models , 305 Value merchants , 314 Zlio shops , 91–2 Value propositions , 335–9

551 ••