Creating Market Insight E-Book

Brian Smith

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 476

Veröffentlichungsjahr: 2011

Beschreibung

"Brian Smith and Paul Raspin demonstrate a thorough and pragmatic approach to creating and applying sound market insight. Using numerous practical examples, learning points and provocative takeaways, they build on established strategic marketing principles to give you actionable knowledge you can apply your business to create lasting market advantage." Beverley Dipper, Market Insight Manager, Microsoft UK Ltd "I have no hesitation in saying buy this book. It will find a front and centre position in your bookshelf, with plenty of post-its marking pages that you will return to again and again." Mark Irvine, Strategy Manager, De Beers Diamond Trading Company "A readable and well-founded description of how to generate actionable customer insight and follow it through with passionate and consistent execution" Dag Larsson Global Brand Insight Director, AstraZeneca Creating Market Insight addresses the key strategic issue facing any company: How do we make sense of our market and find those precious nuggets of knowledge that lead to real competitive advantage? Creating Market Insight: * Explains how firms tailor their market scanning behaviour to work well in the special conditions of their market * Describes the process through which data is translated first into information, and then knowledge * Differentiates routine market knowledge from true insight and details how firms turn insight into value * Provides a detailed, step-by-step process that enables the reader to emulate the success of insightful firms Creating Market Insight is written for managers who need to need to create value in the real world.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

Acknowledgements

Chapter 1 - Success, strategy and understanding

What is success?

Success comes from strong strategy

What does a strong marketing strategy look like?

What is this ‘market’ into which we’re trying to gain insight?

The importance of market understanding

Powerpoints

Chapter 2 - The difficulty of gaining insight

Market complexity is making it harder to create market insight

Market turbulence is making it harder to create market insight

The frequency of failure

The failure of data analytics

Powerpoints

Chapter 3 - How well do you understand your business environment?

The importance of self awareness

Test your understanding

Scanning mechanism

Powerpoints

Chapter 4 - What does market insight look like?

When is an insight not an insight?

A taxonomy of market insight

The end in mind

Powerpoints

Chapter 5 - What do real managers do to understand the environment?

Scanning is generally ad hoc, informal and unsystematic

Scanning is embedded and hard to manage

Scanning is typically under-resourced, unmeasured and unrewarded

There are four major behavioural clusters of business environment scanning

Powerpoints

Chapter 6 - Understanding and assessing the complexity and turbulence of a market

What is a market?

Understanding market complexity

A process for evaluating market complexity

Understanding and evaluating market turbulence

Combining the assessments of market complexity and market turbulence

Powerpoints

Chapter 7 - What is the best way to understand the business environment?

Strengths and weaknesses of Analysts - Analysts are insightful but can be ...

Strengths and weaknesses of Categorists - Categorists are comprehensive but ...

Strengths and weaknesses of Monitors - Monitors can identify major task ...

Strengths and weaknesses of Viewers - Viewers may identify novelties but are unreliable.

The best way depends on the market

Powerpoints

Chapter 8 - Putting it together – how firms create insight

Developing scanning capability to make sense of the business environment

From information to insight

Powerpoints

Chapter 9 - From insight to value

Starting point: what market insight do we have?

What does our market insight imply?

Does it make sense to act on our insight?

How can we ensure that our market insight is acted upon?

The causes of non-implementation

Resolving inadvertent non-implementation

Powerpoints

References

Index of figures

Index of tables

Index

Copyright © 2008

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Library of Congress Cataloging-in-Publication Data

Smith, Brian D., BSc (Hons)

Creating market insight : how firms create value from market understanding / Brian D Smith, Paul G. Raspin.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-98653-0 (cloth)

1. Marketing-Management. 2. Marketing-Planning. 3. Problem solving. 4. Organizational effectiveness. I. Raspin, Paul G. II. Title.

HF5415.13.S594 2008

658.8’02-dc22

2008001326

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Typeset in 11 on 15 pt Goudy by SNP Best-set Typesetter Ltd., Hong Kong Printed and bound in Great Britain by TJ International Ltd, Padstow, Corwall, UK.

Brian To Lindsay, Eleanor, Catherine and Rosalind

Paul To Courtney and James

Preface

This book is written for a specific audience with a definite purpose in mind. It is intended primarily for those whose job includes creating competitive advantage in their marketplace. Its purpose is to help those people create and use the market insight upon which sustainable competitive advantage is usually based.

In writing this book, we have tried to incorporate the lessons we learned as we interviewed dozens of firms and surveyed hundreds of others. These lessons include the centrality of market insight to creating a strong strategy and, subsequently, achieving the organisation’s objectives. They also include lessons about the way individuals and teams go about gathering and sorting the vast amount of data they are bombarded with. Importantly, we also learned that insight is a tightly defined concept, quite distinct from data, information and knowledge. Finally, we learned that creating insight is not a matter of gathering huge amounts of data and crunching it with powerful computers. Rather, it is a creative process of synthesis that is more akin to weaving than distillation.

To make the book more accessible to busy managers, we have used every tool we can think of. We have interleaved theory with practical examples. We have broken out key points and inserted questions to challenge the reader, in an effort to contextualise our findings and move them from the page to the mind of the reader. Finally, at the end of every chapter we have pulled out what we hope are the key points of each chapter.

Our hope is that the lessons we have learned and the manner in which we have conveyed them will achieve our goal. We hope that, on completing this book, readers will be better equipped to create insight, apply it in the market and achieve the organisational goals upon which our economy and society rest.

Acknowledgements

This book is the output of years of work by the authors. It is woven together from both their academic research and their work advising many large firms. As such, this work is an artefact of the support and help provided to the authors by their family, colleagues and friends.

Brian would especially like to thank Professors Hugh Wilson and Moira Clarke and Ms Anita Beale, with whom he worked closely at Cranfield School of Management for much of this research. He would also like to thank all his colleagues at the Open University Business School, which has created a supportive environment for his more recent work.

Paul would like to thank Professor Cliff Bowman who supervised much of the initial research into scanning of the business environment. He would also like to thank his colleagues at Stratevolve for sharing their experiences of working with top teams to create value through market insights.

Both Brian and Paul would also like to thank all those responsible for turning this work into a book, especially all of the staff at Wiley and Ms Lindsay Bruce, for her work in editing and improving our manuscript.

1

Success, strategy and understanding

‘Furious activity is no substitute for understanding.’

H. H. Williams

In The Hitchhiker’s Guide to the Galaxy, Douglas Adams describes the output of a planet sized computer which, for billions of years, had cogitated on the answer to life, the universe and everything. The answer was, famously, 42.

The joke of course lay in the contrast between the complexity of the question and the anticipated profundity of its answer with the clear inadequacy of the actual answer. The heroes of the story then realised that they needed to understand the question better. For managers seeking the answers to their questions about how to be more profitable, grow faster or whatever, Adams’ work provides a kind of parable. Airport bookshop shelves groan with simple answers that are quick, easy and, when compared to the difficulty of the problems facing managers in real life, hopelessly simplistic. Practising managers, who have to achieve success rather than just write about it, need to understand their questions better.

This chapter therefore aims to help those managers who are the audience for this book by helping them to understand their question better. It starts from the premise that the readers will all have one thing in common; they are all asking something like ‘How can I make my business more successful?’ Working from that premise, we explore what we mean by success, since it is defined differently by different organisations. In exploring success, we find that it is complex, contextual and about learning. We then go on to explore the management research literature in the hope of finding some common, generalisable causes of success. That exploration leads us to the conclusion that, notwithstanding luck and inept or weak competitors, success comes from a strong strategy. Exploring further, we find that, for all the loose usage of the word, strategy is best understood as that set of management decisions by which effort and resources are allocated. The conclusion that success has its roots, usually, in strong strategy, leads us to conclude that part of an enquiring manager’s question ought to be ‘What does a strong strategy look like?’ A synthesis of 40 years of management research allows us to answer that question in terms of a series of characteristics that strong strategies exhibit to a much greater degree than weak strategy. In turn, this prompts the question of how those relatively few firms that create such strong strategies manage to do so. The answer to that question is that all firms create strategy by their own particular blend of vision, planning and making it up as they go along. There is, contrary to what most airport books would have us believe, no ‘best’ way to make strategy. In reality, which blend of these three approaches works best depends on the market conditions. So, success comes from strong strategy, which is the result of an effective strategy making process, which is a function of matching that process to market conditions. So success is underpinned by an understanding of the market.

In short, a better understanding of our question ‘How can we be successful?’ leads us to the conclusion that we need to understand the market better. But we’re getting ahead of ourselves. What is success?

A better understanding of the question ‘how can we be successful?’ leads us to conclude that we need to understand the market better.

What is success?

To most readers of this book, what constitutes success for their organisation is relatively straightforward. In commercial firms, it is about money and in non-profits it is about achieving whatever goals they have in place of money. Depending where you are in the organisation, the measures you use will range from the simple (e.g. sales of a product line) to the more complex (e.g. overall profitability), to whatever it is the organisation exists for (e.g. creation of shareholder value). However, the nature of business or non profit success is more complex than a simple target might express and since this book is, ultimately, about achieving success it is worth pausing for a minute to reflect on the latest thinking about organisational success.

Research into how organisations measure and manage their performance has, in recent years, moved on a long way from the relatively simplistic view that most practising managers use in their day to day work. Indeed, these improvements in the way we measure and understand organisational performance have been called the ‘performance management revolution’.1 Before looking at how understanding the business environment contributes to organisational performance, it’s useful to understand the key tenets of this new thinking. As elsewhere in this book, the authors have tried to combine depth of content with fluidity of narrative by using text boxes to ring fence important but parallel ideas. In the case of performance measurement, these ideas are captured in Box 1.1.

Research into performance measurement and management has moved on from the relatively simplistic view used by most practising managers.

Box 1.1 New definitions of success

The ‘performance management’ research is an entire, voluminous domain of academic literature and any attempt to summarise it is necessarily superficial; but for our purposes it is sufficient to understand that effective performance has three characteristics:

1. Performance management is contextual. That is, what constitutes success is highly specific to the organisation. In publicly owned companies for instance, what matters is risk adjusted rate of return2 so performance objectives depend on where a firm sits in its owners’ portfolio of investments. In small firms, it is more about simple profit and especially cash flow. The implication of this complexity is that no one set of metrics is appropriate to all firms. In short, success is the degree to which an organisation achieves its objectives and these are specific to each organisation.

2. Performance management is complex. That is, any simple set of measures tends to mislead. Because sales can usually be bought at the expense of profit and both can be achieved by milking assets, and because assets are both tangible but increasingly intangible, only a complex and balanced set of measures tells the whole story. The most well publicised example of this is Kaplan & Norton’s Balanced Scorecard, 3 but multidimensionality is the principle behind most modern performance management.4

3. Performance is about learning as much as control. That is, traditional performance measures were all about controlling managers, noting exceptions and taking corrective action. By contrast, more modern methods are also about challenging assumptions and gaining new insight into the business environment.5 The basis of this newer thinking is that the ability to learn is now often considered a ‘strategic competence’ and a firm’s only basis of long-term sustainable competitive advantage.6

The rather broader perception of success outlined in Box 1.1 is important because, without it, it is much harder to understand what leads to success. Similarly, it is almost impossible to lead a company, or even a team, if each member of that group interprets success differently. If success is more complex than just sales and profits, then understanding what makes firms successful is more complicated too.

Application point: How do you define success?

Given the points made in Box 1.1, how does your organisation define success? If it is in simple performance terms, how might it be improved to better fit the context of your situation and to enable organisational learning?

Success comes from strong strategy

If it has done its job properly, the above heading will have prompted a small episode of cognitive dissonance in the mind of the reader. That is, the reader will have thought ‘No, my experience is that strong strategy and success don’t always go together’. We can all think of examples where a strong strategy was not successful or where success came despite a weak strategy. It has been recognised for a long time that luck plays an important part in business success.7 The link between strategies and success can easily be broken by external events. For example, September 11th when the air travel market collapsed and manufacturers of arms and medical products gained hugely as the military geared up for war. Or the impact of BSE on the UK beef industry. Or, more positively, the luck that compression stocking makers had when the newspapers caught onto the risk of deep vein thrombosis (‘economy class syndrome’) or which condom manufacturers gained from the advent of HIV. Almost every market has its opportunities for good or bad luck.

The challenge for managers is to understand what it is about strategy that correlates to success. In other words: what makes a strong strategy?

By definition, luck is out of our sphere of control, as are many of the things, from legislation to technology to competitors and customers, that drive our market. We can’t generally control these things, only our response to them. The only thing that is within our control is our own strategy. The challenge for managers is to understand what it is about strategy that correlates to success. In other words: what makes a strong strategy? To understand this, and how it connects with understanding the business environment, we need to digress into the strategy content literature, that body of management research that looks for patterns in the strategies of successful companies.

Strategy is perhaps the most loosely used word in the management lexicon. Because strategy is seen as a synonym for important, it is applied to many aspects of management that don’t really merit the term. Worse than this, the abuse of the term leads to confusion and means that any discussion of strategy must begin with defining what we mean by the word. Fortunately, the strategy content literature that studies the components of strategy helps to clarify the resulting confusion. Again, for the sake of narrative flow, this is summarised in Box 1.2.

These two ideas are very useful aids to thinking about strategy. Next time someone uses the word, try to deduce what level of strategy they are talking about - corporate, business unit, functional. Or do they mean a tactic or objective? Try substituting the phrase ‘resource allocation pattern’ for the word strategy and see if it still makes sense; if it doesn’t, they might be talking about objectives or tactics, rather than strategy.

Box 1.2 What do we mean by strategy?

Although academics like to quibble about the semantics, there are two fundamental ideas on which they broadly agree and which clarify what we mean by strategy.

• Strategy is about resource allocation. In fact, a good working definition of strategy is that by Henry Mintzberg8 - ‘a sustained pattern of resource allocation’. This is useful because it helps us distinguish strategy from the two ideas that it is often conflated with - objectives and tactics.

• Strategy is multi-tiered. Resource allocation decisions are made between businesses (corporate strategy) and then within businesses (business unit strategy). Within a business unit, resources are allocated between functions and then within functions.

Given this multi-tiered, resource allocation concept of strategy, our question ‘What is it about strategy that correlates to success?’ has to consider what level of strategy we are talking about. We also need to consider the idea of complementarity, which is addressed in Box 1.3.

In a book about market insight, the area of strategy we’re most interested in is marketing strategy. Note that by marketing strategy, we mean that set of resource allocation decisions about which customers to target and what offers to make to them.9 This is not to be confused with marketing communications strategy, which is about allocating resources between media, messages and audiences. Marketing communications strategy sits below marketing strategy in the decision making hierarchy. This is an important distinction because in many companies (especially smaller and more product-led firms) the marketing function is responsible only for marketing communications whilst the board or leader dictates the marketing strategy proper.

By marketing strategy we mean the set of resource allocation decisions about which customers to target and what offers to make to them.

Box 1.3 The concept of complementarity

As Voltaire said, common sense is not so common. It seems to be common sense that the different components of a business unit strategy work with and against each other and that success depends on getting all the bits right, or at least more right than the competition. This phenomenon is known as ‘complementarity’.10 Roberts describes complementarity as the interactions between variables that affect performance and gives the example that higher quality makes demand less sensitive to price and vice versa. Doing more of one complementary activity makes the other more attractive still. He contrasts complementarity with activities that are substitutes for each other, such as performance-linked pay schemes and close monitoring of employees. Doing more of one substitutable activity makes the other work less well.

In strategy terms, it is not difficult to see that, for instance, a marketing strategy that targets technically discerning customers is complementary to an R&D strategy that focuses on innovation and an HR strategy that focuses on recruiting and retaining technically expert people. This compares with, for instance, a minimum cost, heavily standardised, operational strategy that is most likely to be a substitute for, rather than a complement to, a marketing strategy that offers flexibility and customisation.

If you want to test Voltaire’s maxim, look at the business bookshelves next time you are in an airport. Complementarity is a piece of common sense that is largely ignored by all those books that proclaim that doing something to one part of your business (e.g. HR processes or IT systems or leadership style or whatever) will lead to instant, huge success. The reality is that few business initiatives have much impact without considering the complementarity of the initiative with the other parts of the business process.

We are most interested in marketing strategy for two reasons. Firstly, this is because the marketing strategy is the functional strategy most concerned with the external environment. That is not to say other functions are insular but functions such as operations and research tend to focus on those parts of the external environment that affect them directly, such as suppliers or technological developments. Marketing (remember, we mean choice of customers and offers, not promotion) involves understanding the whole external environment. Secondly, in most companies, it is the marketing strategy (i.e. the choice of what to offer to whom) that forms the starting point for the operational, product development and other functional strategies. Again, we do not need to be purist about this. Market-led does not need to mean ‘marketing department led’, but in most firms the primary responsibility for telling the firm where the market is going lies with the marketers, whatever job title they have and whatever department they work in.

In most firms, primary responsibility for understanding where the market is going lies with marketers, regardless of job title or department.

The basic premise of this book, therefore, is that success (in as much as we can control it in the face of luck) comes from making good resource allocation decisions; and the decisions that depend most on market insight are those about marketing strategy. Hence, it is important that we know what a strong marketing strategy looks like and what that implies for understanding the market.

Application point: What’s your marketing strategy?

Given the discussion in this section, how would you define your marketing strategy? Who is really responsible for setting that strategy? To what extent does your marketing strategy complement your other functional strategies?

What does a strong marketing strategy look like?

Given that marketing strategy is that set of management decisions concerning which customers to target and what to offer them, we can get back to the question of ‘What is it about strategy that correlates to success?’ By that, of course, we are not looking for tactical panaceas, such as CRM, of the type peddled by some consultants. Instead, we are looking for common characteristics about marketing strategies that are associated with success. In other words, if we sorted all the marketing strategies in the world in order of success, would we see a pattern?

The answer is a surprisingly clear yes. The detailed answer is discussed and explained in another of our books,9 but can be summarised in five points:

1. Strong marketing strategies define real segments

Marketing strategies work best when their targets are ‘real’ segments. That is, they pass the classic tests that good segments are homogenous, distinct, accessible and viable. In practice, this means that real segments are based on customers’ needs and motivational drivers. Contrast this with what passes for segmentation in many marketing strategies, but which is really classification into groups according to available data such as age, gender, income or, in B2B markets, industry, size and usage.11

Real segments work because all of the customers within a real segment respond in much the same way if offered the same compelling value proposition. By contrast, data-driven classifications are often heterogeneous in their needs and motivations and the customers within them show varying responses to any one offer. A good test of your segmentation is to look at the distribution of your sales across the customers in your market. If your marketing strategy is demonstrating a Pareto-type effect (e.g. 80 % of business coming from 20 % of customers) poor segmentation is often to blame.

Poor segmentation often results in a Pareto-type effect (e.g. 80 % of business from 20 % of customers).

2. Strong marketing strategies tailor the offer

Marketing strategies work best when they tailor their offer around the needs and motivations that define the segment. That is, they adapt the ‘marketing mix’ of product (or service), promotion, price, place (i.e. channel), people, process and physical evidence to meet the needs of the target segment. In practice, companies can rarely afford - and customers are rarely willing to pay for - total customisation, but the best companies do design their offer around the segment, even when that means adding cost.12 Contrast this with what passes for tailoring in many marketing strategies, which is often limited to the tweaking of the easily malleable parts of the mix such as price or promotion.

A price sensitive market usually indicates that your offer is not sufficiently or acceptably tailored.

Tailoring works most obviously when, as in many markets, customers have a choice. Given a choice, we will choose that offer which best meets our needs. If no offer meets our needs better than the others (i.e. the offers are commoditised), we choose on price. A good test of your tailoring is the price sensitivity of your product or service. If your market is very price sensitive, it is usually an indication that your offer is not sufficiently or acceptably tailored to the needs of the target segment.

3. Strong marketing strategies are unique

Marketing strategies work best when the target and the offer are different from those of the competition. That is, compared to the competitors’ strategies, they define their target markets differently, or they prioritise them differently and, because it is tailored, the offer made to them is noticeably different from the competitor. In practice, this means uncovering and satisfying needs-based segments that the competitor has either overlooked or not targeted.13 Contrast this with what occurs in many markets; marketers from the same industry culture create unsurprisingly similar offers and target them at segments defined using the same classification data bought from the same market research companies.

Uniqueness works because it effectively side steps competition rather than going head on with it. By defying or negating direct comparison, a unique strategy often comes to dominate its target segment, achieving strong loyalty and relative price inelasticity. A good test of your strategy uniqueness is to consider what your customers would do if your firm disappeared tomorrow. If you are unique, your customers would not have an immediate replacement, or would feel significantly saddened by your disappearance. If not, they would replace you quickly and with little thought.

What would happen if your firm disappeared tomorrow? If you are unique, customers would not have an immediate replacement. If not, they would replace you quickly and with little thought.

4. Strong marketing strategies anticipate the future

Marketing strategies work best, as we have already said, when they meet customers’ driving needs with tailored value propositions in a way that is different from any competitor. All of this, of course, assumes some sort of stasis in customer needs. In fact, the strongest strategies anticipate the way customers’ needs are changing and emerging.14 They then target and design the offer accordingly. Contrast this with the process for bringing new offers to market in many companies. Natural caution and politicised approval systems place a premium on quantified market research and ‘proof’ that the product or service will sell. Since such data is predominantly retrospective, it rarely anticipates the future of the market.

Anticipating the future works precisely because markets change. This can take the form of changes in customer needs, competitive forces, channels to market or other factors. When it happens, the match between an offer and the customer needs that had led to competitive advantage is undermined and lessened, a phenomenon known as strategic drift.15 A good test of your anticipation is to think through the needs which currently drive your customers’ behaviour and, especially, how these are changing. If your strategy is anticipative, it will address these changes.

If your strategy is anticipative, it will address the changing needs which drive customer behaviour.

5. Strong marketing strategies are SWOT aligned

Marketing strategies work best when, by their choice of target segments and the offers they make to them, they create SWOT (Strengths, Weaknesses, Opportunities and Threats) alignment. That is, they make good use of what the firm is better at than its competition and manage to negate the effects of any relative weaknesses they have. Contrast this with the strategy of many firms, which have a strongly subjective and inaccurate view of their strengths and weaknesses. Hindered by this ignorance, they attack markets they can’t win and ignore or underresource those they could win.16

If your strategy differs markedly in targets and offers from current outcomes, this is an indication that the strategy may lack SWOT alignment.

SWOT alignment works because competitors in any market differ, each having a distinctive profile of strengths and weaknesses, both tangible and intangible. By choosing to target customers and make offers based on those, SWOT alignment first helps achieve some degree of strategy uniqueness. It then leads the firm to attack segments in which it is especially well placed to compete. At the same time, SWOT alignment avoids allocating effort to segments where the firm will always be at a competitive disadvantage. A good test of SWOT alignment is to compare current successes and failures with your current strategy. In the absence of a formal SWOT analysis, current outcomes are strongly indicative of relative strengths and weaknesses. If your strategy differs markedly in targets and offers from current outcomes, this is an indication that the strategy may lack SWOT alignment.

If creating a strong strategy were not difficult, everyone would do it. The result would be competitive parity, not advantage.

These five characteristics of a strong strategy are daunting. Few companies score strongly on all of these tests and perhaps none on the extended list of strategy tests shown in our earlier work. However, three illustrative examples of those that do are given in Box 1.4.

Box 1.4 Examples of strong strategies

Creating a strategy that meets the criteria of a strong strategy is difficult. If it were not, everyone would do it and the resultant strategies would merely achieve competitive parity, not advantage. Even excellent strategies rarely excel at all five criteria, let alone the extended list discussed in our earlier work. And even when they do, it is a constant struggle to maintain such strategy superiority.

However, the task is not hopeless, as a couple of examples have proved.

BMW have a relative weakness of high costs and relative strengths in their engineering and design competencies and their brand heritage. Their marketing strategy, across their range, is to target segments driven by the love of driving and self actualisation needs around discernment and peer respect. To this segment they offer not simply status, but status based on perceptions of intelligence, exclusivity and discernment. Importantly, their offer is not simply promotional (‘The Ultimate Driving Machine’) but encompasses everything from choice of upholstery materials to after sales service. In doing so, BMW’s strategy achieves a high degree of SWOT alignment as well as passing the other four tests.

Waitrose is a 2nd tier player in the extremely competitive UK food retailing sector. It therefore suffers scale disadvantages when it is caught between Tesco, Asda (Wal-Mart), Sainsbury’s and Morrisons. Waitrose again target a discerning segment driven by needs for variety, quality and a less anonymous customer experience. That they achieve this at a price premium is the result of a very coherent offer to their target segment, covering everything from what they sell and how they sell it to how they recruit, retain and manage their people. Again, it is summarised in a strap-line – ‘Good food honestly priced’ – but it is much more than mere promotional positioning.

Xerox provide a B2B example of strong strategy. Again, they eschew the head-on battle with their imitators who will always be cheaper. Their strapline ‘The Document Company’ reveals the targeting of customer firms who want to manage their knowledge, rather than just buy photocopiers. In doing so, Xerox leverages its technical superiority and anticipates future trends in which knowledge management becomes central to their customers’ own strategy. As with the previous examples, the Xerox strategy involves not just a promotional positioning but a coherent offer across the whole marketing mix.

All three of these examples involve tailoring offers around needs-based segments in a way that is relatively unique, anticipatory and SWOT aligned.

Application point: How strong is your marketing strategy?

Given the discussion in this section about the five characteristics of a strong marketing strategy, how would you assess the strength of your organisation’s marketing strategy? To the extent that your marketing strategy has weaknesses, what do these imply about your understanding of your market?

These characteristics and examples provide an answer to our question about what leads to the complex, contextual and learning oriented success we seek. The more of these tests a strategy passes, the more likely it is to be successful. All of which naturally begs the question ‘What do we need to create strong strategy?’

The answer to that question is in two parts. Firstly, a process for making strategy that fits both the market conditions and the culture of the firm. This is discussed at length in our earlier book9 and summarised in Box 1.5. The second ingredient is the raw material on which all strategy making processes work – market understanding and insight. This is discussed in the following section.

To create a strong strategy we need a process that fits combined with market understanding and insight.

Box 1.5 How do firms create strong strategies?

The strategy process literature (that is, the study of how firms make strategy) is a huge field of research that overlaps with the strategy content literature (the study of what strategy is) mentioned earlier in this chapter. Again, every academic in the field has his or her personal view but for the managers reading this book three points are important:

Prescription is not description

Most of the textbooks used in MBAs and other courses prescribe similar models of rational, formal planning. These differ in detail from one another but not in principle. The key point to understand is that these are primarily prescriptions of what academics recommend and not very good descriptions of what happens in reality.17

Strategy making is firm specific

The descriptive research describes a reality in which strategy is formed by a mixture of processes, from the formal to the ad hoc, from the political to the enforced. Different academics have identified 3, 4, 5, 6 and even 10 approaches to making strategy.18 In practice, all firms use some of each approach in a hybrid strategy making process that is characteristic of the firm.

What works is what fits

The innumerable possible hybrid ways of making strategy work best when they fit the market. Complex markets tend to need formal planning; fast markets need intuitive vision; and all markets need a little ‘make it up as you go along’. Furthermore, the hybrid process has to fit the organisational culture. So what emerges is what academics call a contingency model. Strategy making processes make strong strategies when they fit both the market conditions and the company culture, and the best hybrid is rarely the same as the textbook prescription.19

Application point: How do you make strategy?

If firms make strategy by a combination of planning, vision and ‘making it up as we go along’, what are the proportions of each approach used by your organisation? Do you feel it works well? In what way might it be improved?

What is this ‘market’ into which we’re trying to gain insight?

So far in this chapter, we’ve argued that success is complex and contextual and, to be sustained, we have to be able to learn from it. Further, we have maintained that, although luck plays a part, success flows from a strong strategy. And we have explicated what we mean by a strong strategy with reference to five characteristics that strong (i.e. successful) strategies share. Those characteristics all share a common feature. In order to consciously craft a strategy that has any of them, as opposed to stumbling across a strategy which has one or more characteristics by happenstance, we have to understand the market. To understand a market well, we have to be clear about what we mean by ‘market’ because that term is used almost as loosely as is the term strategy.

In order to craft a strong strategy, we have to understand the market.

The superficial definition of a market, given off-the-cuff by most managers, is something about customers, present and potential. Pressed a little harder, this is extended to include competitors and perhaps channels to market. In other words, managers pay most attention to what they perceive as important and make decisions accordingly. Hambrick and Mason called this an executive’s ‘constructed reality’,20 an important idea when understanding how managers make sense of their world.

The habit of managers to bias what they look at in the market and create their own ‘constructed reality’ means that there is a danger that our biases will define the market for us. To counteract this, we need some sort of model, a mnemonic or memory aid, to remind us what is included in ‘the market’ that we seek to understand. Almost every strategic planning textbook has something of this sort, each often reflecting the author’s interest in a specific aspect of the business environment. Each of these different perspectives has something valuable to offer as well as weaknesses. Our own synthesis of the different models yields Figure 1.1, which we will use to structure much of the rest of this book.

All models are an attempt to simplify reality in order to aid understanding. 21 In doing so, they necessarily approximate reality, suggesting sharp division between categories where, in reality, the distinctions are less clear. Our model is no exception to this weakness but attempts to buy as much clarity as possible at the cost of only a little simplification.

Figure 1.1Components of the business environment.

Remote and task environments

The first distinction to make in understanding the business environment is between the task environment and the remote environment. The distinction between the two lies in the directness of their impact on the firm and the degree of control that the firm has over them. Hence the broad categorisation, in Figure 1.1, of the remote environment as social, legal, economic, political and technological environment. In general, firms can have little or only indirect influence over the remote environmental factors, which tend to act on the market not directly but via their influence on the task environment. The task environment consists of the customer, channel, supplier and competitor environments. These components of the task environment can be influenced, which is not to say managed, by the firm and changes in it are felt directly by the firm. As with any simplification, there are grey areas. Regulatory changes, for instance, are usually classed as legal, but flow from politics driven by social or technical changes. Suppliers making own label products become competitors. This overlap should not overly concern managers because what matters is that everything significant is noticed, not what boxes everything fits into. Omission is a more serious sin than commission in this case.

Firms have little influence over remote environmental factors, which act on the market via their influence on the task environment.

The implications of the business environment for any firm can be simple or compound. That is, clear changes in any one area can impact more or less directly on the business or multiple changes can combine to impact on the business in a more subtle and complex way. Typically, simple implications are easier to see and manage than the compound variety, as the examples in the next two sections illustrate.

Simple implications of the remote environment

Any of the five components of the remote environment can have simple implications for a firm’s marketing strategy.

Any component of the remote environment can have simple implications for marketing strategy.

Social factors encapsulate the structure and values of the society in which the strategy must operate. So examples of social changes that have simple implications for marketing strategy are:

• The demographic bulge in many developed economies, leading to an increase in demand for everything from retirement cruises, to second homes to incontinence aids.

• The ‘feminisation’ of values among young men, changing radically the acceptance and positioning of men’s cosmetics and toiletries, for instance.

• The ‘death of deference’ to authority in many developed economies, leading to increased customer expectations in many sectors, especially professional and public services.

Legal factors encapsulate both statutory issues affecting the firm and the regulations to which they lead. So examples of legal changes that have simple implications for marketing strategy are:

• The passage of employment law and regulation that influences the microeconomics of delivering the offer to the target segment, especially in some low margin service businesses, such as catering.

• The passage of environmental legislation that places responsibility for disposal of products or packaging onto the supplier, placing both additional trading requirements onto the firm but also providing opportunities to other firms who might provide this service.

• The passage of increased safety or financial regulations that creates opportunities for the specialist service firms that service this need. Regulations affecting health and safety at work and the Sarbanes-Oxley Act are examples of these.

Economic factors generally refer to macroeconomic factors that impinge on the business. So examples of economic factors that have simple implications for marketing strategy are:

• The growth rate of the national economy, providing an underlying driver of market demand in both consumer and business markets.

• The macroeconomic policies of governments that might provide specific stimulus or restraints on particular sectors of the economy, such as the public sector.

• The health of international or regional economy and the multilateral or bilateral economic agreements between governments that might influence demand either generally or in specific sectors.

Political factors generally refer to political policy factors that impinge on the business in a broader manner than legislative change. So examples of political factors that have simple implications for marketing strategy are:

• Policy towards the public versus private provision of public services such as health, education, transport or defence, which can create or destroy opportunities for commercial organisations.

• Policy towards the environment and development, which can influence strategy choice (e.g. by influencing the attractiveness of a target segment) and implementation through, for instance, local planning regulations.

• Issues of international relations, such as trading agreements, embargoes and, in extremis, war, which can directly and drastically influence strategy, especially in sectors such as arms or sensitive technology.

Technological factors refer to scientific developments that encroach on the business either directly or indirectly. So examples of technological factors that have simple implications for marketing strategies are:

• The development of technologies that impact broadly on the entire business process across all sectors, such as the development of the internet or mobile communications or, less recently, the impact containerisation had on physical transportation costs.

• Technological changes directly and specifically relevant to that sector, such as the effect that PCR (polymerase chain reaction) technology had on the biotechnology sector, or directed drilling technology had on the oil and gas sector.

• Combinations of technological developments and their incorporation into new business processes that significantly change the way that value can be delivered, such as lean manufacturing techniques or offshoring.

Application point: What are the implications of your remote environment?

Considering the discussion in this section, and the examples of remote environment implications, what do you think are the main implications of your remote environment for your organisation?

Simple implications of the task environment

Any of the four components of the task environment can have simple implications for a firm’s marketing strategy.

Any component of the task environment can have simple implications for marketing strategy.

Customer factors refer to the needs of actual and potential customers and especially the way unsatisfied needs translate into market segmentation.22 So examples of customer factors that have simple implications for marketing strategies are:

• Customers’ ‘hygiene’ needs, such as the need to comply with basic quality, safety or compatibility standards. CE marking or software/hardware compatibility issues are examples of these.

• Customers’ higher needs, such as the need to satisfy higher performance, relationship or emotional needs. Ease of use, flexibility and self fulfilment are examples of these.

• Segmentation deriving from higher needs. Segments that assume basic performance but are driven by higher needs, such as specialist professional services or luxury goods, are examples of these.

Competitor factors refer to any alternative ways of satisfying the needs of the target customer segment.23 So examples of competitive factors that have simple implications for marketing strategies are:

• Direct competitive factors. That is, changes in the offering made by direct substitutes, such as price, performance, convenience etc. Supermarket price wars and the technical competition between Intel and AMD are examples of this.

• Substitute competitive factors. That is, changes in the offering made by alternatives to the existing product or service. Rail, low cost airlines and teleconferencing are all substitutes for one another in the business travel market.

• New entrant competitive factors. That is, the entry of new players (and therefore new capital and competencies) into the market. The entry of supermarkets into personal financial services and of Dell into consumer electronics are examples of this.

Channel factors refer to issues regarding the delivery of the offer, or any part of it, to the market. So examples of channel factors that have simple implications for marketing strategies are:

• Promotional channel factors, involving the development of media through which to address the customer. Web, mobile and the advent of digital printing are examples of this.

• Purchasing channel factors, involving development of channels through which the product may be purchased and/or delivered. Online stores, telesales and the extension of ATMs to sell mobile phone time are examples of this.

• Physical distribution factors, involving the changes to channels by which physical products are sold. The concentration of power in the hands of some retailers and the end of restrictive practices in car sales franchises are examples of this.

Supplier factors refer to the influence of suppliers on the business environment. So examples of this include:

• Suppliers creating consumer loyalty for certain components of the offering, such as the ‘Intel Inside’ campaign.

• Suppliers controlling the supply of vital components, as used to be the case in the supply of diamonds to jewellery manufacturers.

• Suppliers constraining cost structures by near monopolistic control of critical materials, knowledge, or technology, such as in the oil market or in the control of source codes for software.

Application point: What are the implications of your task environment?

Considering the discussion in this section, and the examples of task environment implications, what do you think are the main implications of your task environment for your organisation?

These examples of simple implications, where the connection between the business environment and the firm is relatively straightforward, serve two purposes. Firstly, they illustrate that the list of potential simple implications of the business environment is huge and difficult enough on its own for a manager to understand with any rigour. Secondly, they are reminders, when considered carefully, that many critical forces acting on a market are not simple implications of one factor but, in fact, compound implications of multiple factors in the remote environment, task environment or both.

Combined implications

If, even in our simplified model of the business environment, there are nine directions (five remote and four task) from which important business implications can arise in a simple manner, this leaves almost endless possibilities for compound implications. Indeed, it appears that the most fundamental forces causing markets to change and shift arise from combinations of business environment factors. Consider two examples of powerful shifts in markets, the first B2B, the second B2C, and use the idea of combined implications to understand them better.

The most fundamental forces causing markets to change arise from combinations of business environment factors.

Pharmaceutical markets have long been dominated by two main types of firm, or strategic sets as they are more correctly called.24 In simple terms, generic firms make and sell off-patent drugs, competing on price and manufacturing efficiency at relatively low gross margins. By contrast, research led firms spend heavily on research and sell patent-protected drugs at relatively high gross margins. Historically, the market has been dominated, in terms of share of profit and shareholder returns, by the research led firms. More recently, however this sector has struggled to grow and deliver shareholder returns.25 On the surface, this appears to be due to customers (principally public and private healthcare providers) trying to reduce their costs by shifting from patented to cheaper generic drugs. However, this is not a new customer need. It has always been the intent of customers to reduce costs. So the phenomenon to understand is why this potential problem has arisen now. The idea of combined implications provides this understanding.

What is happening is a gradual commoditisation of many parts of the pharmaceutical market. In terms of the microenvironment, this can be seen as:

• The growth of the segment that is driven primarily by cost control rather than excellence of clinical results.

• The complementary development of the generic suppliers into powerful competitors.

• The corresponding growth of channels to market for generic products, especially ‘Key Account’ sales teams and distributors.

In terms of the remote environment driving the task environment, the important factors can be identified as:

• Socially, a demographic bulge creating higher demand, combined with reduced deference leading to higher expectations of healthcare providers.

• Political goals of ‘prudence’ manifested as attempts to stabilise healthcare costs, combined with a reluctance to increase tax burdens and easier low cost imports from developing countries.

• Economic trends of steady but modest GDP growth and inflation, hindering inflationary growth.

• Technically, ‘flattening’ of innovation rates reducing, over time, the clinical differences between patented and generic products.

Although even this analysis is a simplification of reality, it begins to explain the predicament of so many research led firms. Equally, it helps to explain how some firms misread the environment and anticipated a boom market. This is the inevitable result of selective, incomplete reading of the environmental drivers. In this case, the demographic bulge on its own suggested a positive future for the sector.

The second example is a more positive one, the rapid growth of low cost air travel in Europe. On the surface, this looks like a simple example of price elasticity but looking at it from a business environment perspective reveals a more detailed picture.

In terms of the task environment, this dramatic and rapid change can be seen as the result of:

• Customer factors, as several distinct segments either appeared, grew or shifted from domestic only to regional (e.g. European). These included the short break segment, the business travel segment and even very specialist niches such as the ‘stag weekend’ segment.

• Competitive factors, which included both new entrants and direct competitors growing the market and the premium airlines’ lack of ability to adapt, inadvertently emphasising the value of low cost airlines.

• Channel factors, in that the internet enabled the low cost model to a degree that would have been much more difficult in a pre-internet age.

• Supplier factors, in that both regional airports (subsidised by regional development goals) and aircraft manufacturers (involved in a price war) both enabled the model to appear.

In terms of the remote environment, the important factors can be identified as:

• Socially, higher expectations and less xenophobia, resulting partly from many years of package holidays.

• Legally, the EU-led reduction in barriers to travel and encouragement of intra-European business.

• Economically, the increasing affluence at even modest levels, shifting ‘mini breaks’ from a luxury to a regular purchase.

• Politically, a reluctance to react to the environmental costs of low cost air travel.

• Technologically, both the development of the internet channels but also management processes that allowed much higher utilisation of the main assets, the aircraft.

Again, this example is not meant to be exhaustive but merely illustrative of how combined implications drive markets, usually in a way that is more significant and longer lasting than the outcomes of simple implications.

The importance of market understanding

What the preceding discussion illustrates is both the need to understand the market environment and the difficulty of doing so. Both are illustrated by the travails of companies that failed to do so. The partial failure of Vodafone to understand the implications of convergence in ICT markets, or of General Motors to anticipate changes in the car market, are reminders that even the best, well-resourced firms struggle with making sense of the business environment. But some firms do achieve it. IBM’s shift to high added value consultancy and Zurich’s impressive management of the potentially commodity insurance market are examples of excellence. The rest of this book is an account of our research into how firms excel at distilling market insight from the complexity of the business environment.

Even the best, well-resourced firms struggle with making sense of the business environment.

Powerpoints

• The success of an organisation is not simply the achievement of a number, but the achievement of a balanced mix of objectives, specific to that organisation, in a manner that allows organisational learning.

• Success is usually associated with strategies that demonstrate the five properties of a strong strategy.

• All effective strategy making is based on understanding the market.

• The market consists of remote and task environments, each of which have multiple subcomponents.

• All of the subcomponent parts of the market can carry important implications for the firm, either in their own right or in combination with other parts of the market.

• Understanding the implications of the market environment is critical to making strong strategy and hence to success.

2

The difficulty of gaining insight

‘Change is not made without inconvenience, even from worse to better.’

Richard Hooker

The conclusions of Chapter 1, that success flows from strong strategy and that strong strategy in turn requires an understanding of the business environment, may seem obvious to some readers. In fact, it’s unlikely that many executives would say that strategy and market understanding are anything but critically important activities. But executives’ actions speak louder than their words. There are many research papers describing how executives actually spend their time (see for instance the classic of its type,1 and its companion study made 30 years later2