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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Written for marketing and finance directors, CEOs, and strategists, as well as MBA students, this practical book explains the principles and practice behind rigorous due diligence in marketing. It connects marketing plans and investment to the valuation of the firm and how it can contribute to increasing stakeholder value. Completely revised and updated throughout, the Second Edition features new case examples as well as a completely new first chapter containing the results of new research into risk and marketing strategies amongst Finance Directors and Chief Marketing Officers.
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Veröffentlichungsjahr: 2013
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Contents
Foreword
Foreword from the First Edition
A note for busy people: How to get the best out of this book
List of figures
List of tables
Part 1: What is Marketing Due Diligence?
Chapter 1: The lessons of experience
Introduction
Success stories
Failure stories
Seeing a pattern
A new approach
Endnotes
Chapter 2: A process of Marketing Due Diligence
What is marketing?
What is the connection between marketing and shareholder value?
What is the Marketing Due Diligence diagnostic process?
What is the Marketing Due Diligence therapeutic process?
Implications of the Marketing Due Diligence process
Chapter 3: The implications of implementing Marketing Due Diligence
The linkage to shareholder value
The risk and return relationship
A focus on absolute returns rather than risk
Using probability estimates to adjust for risk
Alignment with capital markets
Turning Marketing Due Diligence into a financial value
Highlighting deficiencies and key risks
Implications for users
Part 2: The Marketing Due Diligence Diagnostic Process
Chapter 4: Assessing market risk
Some important background to what constitutes ‘success’
Market risk
Conclusion
Chapter 5: Assessing share risk
What do we mean by share risk?
How do we assess share risk?
Aggregating and applying share risk
The outcomes of share risk assessment
Chapter 6: Assessing profit risk
Introduction
Profit pool risk
Profit sources risk
Competitor impact risk
Internal gross margin risk
Other costs risk
Summary
Part 3: The Marketing Due Diligence Therapeutic Process
Chapter 7: The key role of market definition and segmentation
Introduction
Correct market definition
Market mapping
Chapter 8: Creating strategies that create shareholder value
Starting from where we are
Understanding and managing market risk
Understanding and managing share risk
Understanding and managing profit risk
Summary and conclusions
Chapter 9: Managing high-risk marketing strategies
Allowing for risk
Risk equals volatility
Controllable versus uncontrollable volatility
Using real option analysis
Summary
Chapter 10: Fast track: A summary and reminder of the marketing and finance interface
The lessons of experience
A process of Marketing Due Diligence
The implications of implementing Marketing Due Diligence
Assessing market risk
Assessing share risk
Assessing profit risk
The key role of market definition and segmentation
Creating strategies that create shareholder value
Managing high-risk marketing strategies
Afterword: What to do now
References and further reading
Index
This edition first published 2013
© 2013 Malcolm McDonald, Brian D. Smith, Keith Ward
First edition published by Butterworth-Heinemann 2007
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Library of Congress Cataloging-in-Publication Data
McDonald, Malcolm.
[Marketing due diligence.]
Marketing and finance : creating shareholder value / Malcolm McDonald, Brian D. Smith, Keith Ward. — 2nd Edition.
pages cm
Revision of the author’s Marketing due diligence.
Includes bibliographical references and index.
ISBN 978-1-119-95338-8 (pbk.)
1. Corporations—Valuation. 2. Corporations—Investor relations. 3. Stocks—Marketing. 4. Stocks—Prices. 5. Economic value added. 6. Risk assessment. I. Smith, Brian D. (Brian David), 1961– II. Ward, Keith, 1949– III. Title.
HG4028.V3M372 2013
658.8′02—dc23
2013018235
A catalogue record for this book is available from the British Library.
ISBN 978-1-119-95338-8 (paperback)
ISBN 978-1-118-74889-3 (ebk)
ISBN 978-1-118-74876-3 (ebk)
ISBN 978-1-118-74866-4 (ebk)
Cover design: Cylinder
With thanks to all my friends and colleagues at Cranfield
— Malcolm
For Lindsay, Eleanor, Catherine and Rosalind
— Brian
For Angela, Sam and Rob
— Keith
Foreword
by Anne Godfrey, Chief Executive, CIM
‘Marketers in the boardroom’ has long been a call from those who see marketing as a strategic process rather than the tactical one that is often its fate. However, one glance at the boards of the FTSE 100 and it is clear that we are still some way from that being ‘the norm’.
That said, I would be surprised if marketing wasn’t in the board room, just in another guise. Many of the topics that marketers discuss are so important to an organization that it is hard to see boards not having them on their agenda. Worryingly however many of these processes are given to other areas of the business to manage. So, why is that?
Our experience has shown that there is a combination of forces that lead to professional marketers finding themselves out in the cold at Board level. The first is a fundamental misunderstanding of what marketing is, and the value it can bring to a company, by those in leadership positions. Communications and advertising is the first thing people associate with the ‘m’ word but those in the know understand that this is only part of what a professional marketer has to oversee; it’s the visible tip of the marketing iceberg.
The second force is marketers themselves who are sometimes guilty of exacerbating this narrow view of our profession by focusing on the areas that people enjoy and shying away from the business language that their CEOs expect to hear. A sprinkling of buzz words and leaning on the intangible will quickly lead to business leaders confirming their thoughts on a profession they don’t fully understand.
So, should marketers have a strategic voice in an organization? Absolutely. Do they deserve this as a right? Not necessarily.
Marketers are in the unique position of being able to understand customers and translate that back into the business to influence how it operates and the products and services it develops. This ability to read customer sentiment is even more vital in an age where technology has made brands more accountable for their actions; an environment where mistakes are jumped upon and success creates a buzz, both of which can go viral at the touch of a button.
It is perhaps because of this that we have found Chief Marketing Officers increasingly welcomed at the top table to provide customer insight, with organizations fast realising that their customers are a vital part of their business; something we’ve all known for a long time. However, marketers must ensure that when they get their leader’s attention that they focus on talking the language of business rather than succumb to marketing jargon.
To say that marketers can’t speak the language of business is of course a sweeping generalisation. There are fantastic examples of leading marketers that have transformed organizations and driven up their profits; however they are often the exception rather than the rule.
We also have to ensure that this level of business acumen is present throughout the profession at every level. That’s why we view standards and related competencies as a key component of a professional marketer’s development.
This book outlines a pathway for marketers who want to ensure that their business plans not only take into consideration the intangible, such as brand, but also the tangible elements upon which boards and investors base their investment decisions.
I would urge marketers to read the pages that follow, take the lessons presented and ensure that marketing within your organization gets back to where it belongs, at the strategic hub of its operation.
Foreword
by Charles Tilley, Chief Executive, CIMA
A century ago John Wanamaker, considered by many, the father of traditional marketing said ‘half the money I spend on marketing is wasted; the trouble is I don’t know which half’.
Whilst there is more clarity on the costs of marketing, there is little understanding about the true value of marketing strategies, and other intangibles.
With intangible assets such as brand and reputation now constituting 80% and more of the market value of an organization, it is essential that that these too are measured and managed.
To achieve this finance and marketing must work together, right from the start, when marketing strategies and plans are being developed. They must understand how that strategy will create and preserve value in the short, medium and long term.
But the relationship between marketing and finance has not always been a smooth one. A previous research project, Return on Ideas, done in conjunction with the Chartered Institute of Marketing and the Direct Marketing Association in 2009, highlighted that finance and marketing often ask different questions and they answer them in different business languages. This must be overcome. The most successful businesses are those that are integrated.
Management accountants provide information and analysis – both financial and non financial – to support sustainable decision-making. They are therefore in an ideal position to partner with their marketing colleagues and apply rigour to the analysis of costs, risks and value from marketing strategies.
It is this blend of finance and marketing thinking that will ensure that marketing initiatives deliver sustainable value to the business.
This book outlines a useful framework that finance and marketing colleagues can use to encourage constructive dialogue and to put marketing plans through a ‘due diligence’ exercise. I urge both finance and marketing professions to read it.
Now, more than ever, executives must account for every penny spent. There needs to be a clear understanding of the value created – both tangible and intangible. With effective collaboration between marketers and management accountants this can be achieved.
Foreword from the First Edition
by Sir Michael Perry, GBE
A few years back I was asked to address an Economist conference for senior marketing people on the questions – ‘Why do so few CEOs of major UK companies come from a marketing background? Do marketing people make bad CEOs?’
To start with I was puzzled by the questions. I had spent thirty nine years working in a company, Unilever, where marketing was virtually the default background for the CEOs of successful operating companies. Every such subsidiary had a Marketing Director on its board as well, whose voice carried more weight than anyone’s when it came to business strategy. Even at parent company level, of the ten Executive Chairmen of Unilever plc since the company was formed in 1929, four were marketing men – more than from any other discipline.
A little research soon revealed that this pattern did not by any means hold true for most FTSE 100 companies. Worse still, too many of them did not even have a marketing person on their executive boards. That really got me worrying. In such companies who represents the interests of customers? Where is the analysis of markets and market segmentation done? What about the detailed understanding of competitors and sustaining competitive advantage? Where does the prime responsibility lie for optimizing crucially important shareholder values such as intangible assets – like brands, or good-will? No wonder so many companies run into difficulties.
In the absence of a Marketing Director, it has to be the CEO himself who shoulders this prime responsibility, and since he or she typically comes from a financial, or perhaps a technical or operations background, he needs all the help he can get from his marketing specialists if he is to deliver sustained success. That’s where the experience so skilfully displayed in this book comes in. It is precisely aimed at Chief Executives from non-marketing backgrounds, and it sets out simply and with great clarity what their marketing departments should be capable of delivering for them.
CEOs who have spent their entire earlier career in marketing would also do well to peruse these pages carefully. Shibboleths abound in the marketing trade, and most of us have been guilty at one time or another of keeping alive the myth that much of what we do is neither quantifiable nor expressible in the demanding terms of measured change in shareholder value. Scholarly attempts have been made in the past to find language and techniques for marketing metrics, most of which have helped improve marketing’s accountability to some degree. But this book goes a step further, by insisting that the ultimate test of measurable impact on shareholder value is as relevant for marketing investment, in the widest sense, as for any other deployment of shareholders’ funds.
All of this begs the questions I posed at the outset, of why there are so few marketing people on the boards of major UK companies. At the heart of the matter, sad to relate, is the fact that many companies either do not put the constant search for long-term competitive advantage at the centre of their thinking, or if they do, they do not believe their marketing departments have much to contribute. For many business leaders today, marketing is synonymous with advertising and sales promotion, and marketing people are caricatured as the flamboyant and not very numerate folk down the corridor who love to remind them, on impeccable historical authority, that half the money they spend is undoubtedly wasted. Not a very promising basis for a relationship grounded in mutual respect and trust.
The third group, therefore, who should take this book very seriously indeed are those Marketing Officers who understand the strategic elements of their role, and who need to break down the barriers that prevent their voices from being heard clearly enough in the boardroom. Marketing people typically do not speak the language of finance and investment, and this book makes a major contribution to the bridging of a gap that has become a major source of business under-performance in the increasingly competitive and globalized world in which we operate.
My advice to Chief Marketing Officers is very simple. You should be responsible for generating the value propositions that achieve sustained customer preference for your company’s products or services. If your CEO does not recognize that, it is up to you to persuade him otherwise, or move somewhere else, where your proper role is fully understood.
The authors of this book rightly refer to the prime importance of measuring shareholder value creation. In recent times the concept of shareholder value has come to mean different things to different people and in different circumstances. The prime responsibility of boards is to secure and safeguard the longer-term prosperity of their business, for the benefit of its owners and its other stakeholders, most especially its customers and employees. Shareholders often see things differently. Owners of public companies, notably institutional investors, have less interest in the longer term than they publicly profess, or indeed demonstrate by their day-to-day trading behaviour on the world’s exchanges. They also accept less of the responsibilities normally demanded by society in return for the benefits of legal ownership. Boards of public companies are therefore always obliged to bear the short-term needs of markets in mind, as they focus strategic thought on their wider responsibility of building longer term prosperity.
Marketing specialists are subject to the same pressures, and all too often they yield to the demand to sacrifice the long term interests of building brand equity, or other intangible asset values, to short term expedience. Careful examination of the contents of this book will remind them of the consequences of so doing. If they and their Chief Executive Officers are equally well informed, perhaps fewer businesses will be crippled by the inevitable results of the short-termism that we all profess to deplore.
A note for busy people: How to get the best out of this book
This book is written for directors and managers of firms operating in the real world. By definition, such readers will be busy people and may not have the luxury to read this book from start to finish before returning to review parts of the book that are especially relevant to their situation.
In recognition of this, we offer some suggestions as to how to gain an overview of the book and the subject of Marketing Due Diligence before attempting to understand and apply it in detail.
Each chapter begins with a short ‘fast track’ section which summarizes briefly its contents. These provide a succinct way to acquaint oneself with the content of each chapter before reading and when returning to it.
In addition, these ‘fast track’ sections are consolidated, with a little editing, into Chapter 10. This chapter therefore provides a good overview of the book and can be read before and/or after reading Chapters 1–9, depending on your learning style.
The main body of the book is split into three parts:
By means of this structure, it is hoped readers will be able to understand the concept and process of Marketing Due Diligence as quickly as possible. Be warned, however, that Marketing Due Diligence is intended as a route to creating sustainable competitive advantage. Our readers will appreciate that it is naive to expect that outcome to be either quick or easy.
List of figures
Figure 1.1
Map of the marketing domain
Figure 2.1
From marketing strategy to shareholder value
Figure 2.2
The outline process of Marketing Due Diligence
Figure 2.3
Questions to explicate the strategy
Figure 2.4
Sensitivity to market risk varies with growth intent and share position
Figure 2.5
Sensitivity to share risk varies with growth intent and competitive intensity
Figure 2.6
Sensitivity to profit risk varies with growth intent and margin
Figure 3.1
Risk-adjusted required rate of return
Figure 3.2
Risk and return
Figure 3.3
Risk and return – the financial markets formula
Figure 3.4
Risk-adjusted required rate of return as shareholders’ indifference line
Figure 3.5
Shareholder value-adding strategies
Figure 3.6
Implementation issues – use of probability estimates
Figure 3.7
Revising initial probability estimates
Figure 3.8
Use of expected values in high-risk strategic investment decisions
Figure 3.9
Comparison of net present value calculations
Figure 3.10
Increasing present values as success becomes more likely
Figure 3.11
Recomputing net present values
Figure 4.1
Share price vs competitive position
Figure 4.2
The impact of strategy and tactics on competitiveness
Figure 4.3
The product and product surround
Figure 4.4
Total available market for floor covering (illustrative)
Figure 4.5
Product/market matrix
Figure 4.6
Market screening process
Figure 4.7
Generalized cumulative and non-cumulative diffusion patterns
Figure 4.8
Product life cycle
Figure 4.9
Product/market strategy and the product life cycle
Figure 4.10
The product/market life cycle and market characteristics
Figure 4.11
Ansoff’s matrix
Figure 4.12
The risk implications of Ansoff’s matrix
Figure 4.13
Analysis of options to improve profit
Figure 4.14
Example: Assessing market risk
Figure 4.15
Pricing theory
Figure 4.16
The impact of price on profit, compared with sales and costs
Figure 4.17
The impact of price on profit, compared with sales and costs
Figure 5.1
The process of aggregating and applying share risk
Figure 6.1
Matching the Marketing Due Diligence process to components of business risk
Figure 6.2
Game theory view of industry value chain
Figure 6.3
Different types of games
Figure 6.4
Strategic intent of different types of games
Figure 6.5
Exit barriers
Figure 6.6
Relationship of marketing expenditure and effectiveness
Figure 6.7
Share of voice (SOV) compared to share of market (SOM)
Figure 7.1
Original market map for XYZ book publisher
Figure 7.2
Revised market map for XYZ book publisher
Figure 7.3
A simple market map
Figure 7.4
Market map with contractor
Figure 7.5
Market map with influencers
Figure 7.6
Market map showing volumes
Figure 7.7
Market map with different company/customer types
Figure 7.8
Leverage points at three junctions on a market map
Figure 7.9
Radiator market map
Figure 7.10
Office equipment market map
Figure 7.11
Basic market shape
Figure 7.12
Fragmentation as markets mature
Figure 7.13
Photocopier market 1973
Figure 7.14
ICI Fertilizers’ customer segments
Figure 7.15
Global Tech’s customer segments
Figure 7.16
An undifferentiated market, but one with many different purchase behaviours
Figure 7.17
A highly fragmented market, but where an understanding of needs shows how it can be simplified
Figure 7.18
A segmented market
Figure 7.19
Perceptual map – retirement income
Figure 7.20
Perceptual map – export consultancy
Figure 7.21
Perceptual map – IT company
Figure 7.22
The detail of micro-segmentation
Figure 8.1
Ansoff’s matrix
Figure 8.2
Ansoff’s matrix – shaded interpretation
Figure 8.3
The product life cycle curve
Figure 8.4
The extended/augmented product model: An automotive example
Figure 8.5
A directional policy matrix
Figure 8.6
Porter’s five forces model: An example for wound dressings
Figure 8.7
Gap analysis chart
Figure 9.1
Shareholder value-adding strategies
Figure 9.2
Contingency planning/scenario analysis techniques
Figure 9.3
An integrated process
Figure 9.4
Option value drivers
Figure 9.5
Valuing real options
Figure 9.6
Valuing real options – a simple example
Figure 9.7
Valuing real options – a simple example (continued)
Figure 9.8
Examples of real options
Figure 9.9
A simplified phased investment example – project cash flows
Figure 9.10
A simplified phased investment example – overall DCF evaluation
Figure 9.11
A simplified phased investment example – introducing option values (1)
Figure 9.12
A simplified phased investment example – introducing option values (2)
Figure 9.13
A simplified phased investment example – cash inflows (for phase 2)
Figure 9.14
A simplified phased investment example – valuing the option
Figure 9.15
A simplified phased investment example – reassessing the investment
List of tables
Table 1.1
Firm A five-year performance – sales revenue based
Table 1.2
Firm B five-year performance – market based
Table 1.3
Scope and outputs of different levels of marketing effectiveness
Table 2.1
Sub-components of market risk
Table 2.2
Sub-components of share risk
Table 2.3
Sub-components of profit risk
Table 2.4
Typical steps to reduce market risk
Table 2.5
Typical steps to reduce share risk
Table 2.6
Typical steps to reduce profit risk
Table 3.1
Relative costs of capital (i.e. required rates of return)
Table 3.2
Translating Marketing Due Diligence into a financial value
Table 4.1
Market definitions – financial services sector
Table 4.2
Appropriate strategies at different life cycle stages
Table 4.3
A graduated scale of product category risk
Table 4.4
A graduated scale of segment existence risk
Table 4.5
A graduated scale of sales volumes risk
Table 4.6
A graduated scale of forecast risk
Table 4.7
A graduated scale of pricing risk
Table 4.8
Example: The impact of price on profit
Table 4.9
Calculating the impact of price on profit
Table 5.1
A graduated scale of target market risk
Table 5.2
A graduated scale of proposition risk
Table 5.3
A graduated scale of SWOT risk
Table 5.4
A graduated scale of uniqueness risk
Table 5.5
A graduated scale of future risk
Table 5.6
Evidence sources to support share risk assessment
Table 5.7
Weightings of share risk sub-components
Table 6.1
Sub-components of profit risk
Table 6.2
A graduated scale of profit pool risk
Table 6.3
A graduated scale of profit sources risk
Table 6.4
A graduated scale of competitor impact risk
Table 6.5
A graduated scale of internal gross margin risk
Table 6.6
A graduated scale of other costs risk
Table 8.1
SLEPT analysis example from the organ transplantation therapy market
Table 8.2
Conditions leading to an increase in competitive forces
Part 1
What is Marketing Due Diligence?
Chapter 1
The Lessons of Experience
‘Diligence is the mother of good fortune’
—Benjamin Disraeli
Introduction
There are few things in business life that are more universal or more ubiquitous than the business plan. From the entrepreneur trying to convince his backers, to the CEO of a multinational trying to assuage a room full of demanding investment analysts, the business plan occupies much of the attention of business leaders, their subordinates and those who invest in the enterprise. A strong business plan may not guarantee commercial success, but a weak one almost certainly guarantees failure, so the ability to craft a strong plan and to differentiate between weak and strong plans is, arguably, one of the core capabilities of any business executive. This book is written for those people – owners, executives, investors – whose career and livelihood depends upon their business planning competence. It does not, however, prescribe methodologies for preparing a plan; there are already many good books that do that. Instead, this book addresses a much more neglected question: How do we know if the business plan is likely to succeed? We think this question is important to every executive but, when we conceived the book, we did have two particular audiences and one particular context in mind; senior finance executives, senior marketers and the interface between them. For both, assessing and insuring the success of a business plan is an essential part of their job but, in our experience, the two professions look at this problem from very different perspectives, often leading to conflict where cooperation is, in fact, most needed. We’ve therefore written this book with the aim of encouraging a shared perspective between senior finance and marketing colleagues, one that combines the distinct value each brings to commercial management, with the intention that cooperation at the marketing/finance interface will lead to stronger business plans and better commercial outcomes.
Business plans appear to vary greatly between different types of company, but when one dissects them, they are in fact remarkably similar in their fundamentals. Whatever the nature of the enterprise, most business plans are, in essence, a request, a description and a promise. They request the allocation of some resources, describe how those resources will be used and promise to deliver an objective. Whether the plan is a two-pager for a small business or a 15Mb PowerPoint deck for a strategic business unit of a global multinational, it almost always boils down to that fundamental structure of a request, a description and a promise. This is no coincidence. It is an obvious and direct corollary of the simple reality that almost all businesses require investment in order to achieve their goals and almost all investors want to know how their money is going to be spent.
With well over a century of executive experience and academic research behind us, the three authors of this book have been involved in more business plans than we like to be reminded of. We’ve prepared them, presented them, analysed them and followed up on their outcomes. We have written them ourselves and been through the plan presentation and approval ritual many times; and we’ve coached hundreds, perhaps thousands, of executives through the process in industries ranging from consumer goods to pharmaceuticals and from high technology to incontinence products. By and large, we find the business plan review process, as it is practised in most companies, to be ineffective or at least inefficient. It is supposed to produce agreement on a plan that has a high probability of delivering its promises. In practice, it often does the opposite. Executives, operating in a highly uncertain environment, write plans that they think will work but in which the risks are poorly understood. They anticipate the challenges of their leaders and build in spare resources and soft targets. Their leaders, without their subordinates’ knowledge of the market environment but with long experience of how executives behave, counter these tactics by instinctively demanding better outcomes and less expenditure, whatever the initial proposal. Overall, the outcome is a plan in which there is more resigned acceptance than committed agreement and one in which the probability of delivering the objectives is low or, worse, poorly understood. To quote one executive from our research, the business plan review process, rather than being an essential and value-adding activity, is often a game that gets in the way of doing business.
This book is written for those executives who write and assess business plans and who want their time spent planning to create value rather than to be a political game. The bulk of the book, from Chapter 2 onwards, describes a two-part process for improving a business plan: diagnosis of its weaknesses and then therapeutic steps to address them. The process, which we’ve called Marketing Due Diligence, is based on our extensive practical experience and on many years of studying the experience of firms whilst working as professors at some of the world’s leading business schools. Before we become immersed in that, however, this chapter aims to introduce some of the basic ideas in the book by discussing some educative examples of business success and failure.
Success stories
As the English proverb has it, success has many fathers whilst failure is an orphan. This reminds us that it is almost impossible to attribute corporate success to one cause. To succeed, firms need to do the right things, to do them well and, not least, to be blessed with luck. But notwithstanding that, our research has revealed to us a pattern of features that characterize almost every successful business strategy and which can be seen in the following well-known examples.
Starbucks: A holistic offer based on insight and culture
From its humble origins in 1970s Seattle, Starbucks now has about 20,000 outlets worldwide, an annual revenue approaching $12 billion1 and has become an icon of urban life. Much of this success is attributable to its core strategy developed by its CEO Howard D. Schultz, who led both its initial expansionary phase after he acquired the firm in 1988 and, resuming the CEO role, its impressive comeback after the 2007 crash.2
The core of Schultz’s strategy is to create neighbourhood coffee shops with an atmosphere and experience that differentiate them from the multitude of rivals, which include local, single store, coffee shops and other ‘me too’ chains, as well as indirect rivals such as McDonald’s. In his interviews (see, for example, the interview with Howard Schultz3), Schultz talks compellingly about the challenge of balancing growth with maintaining that differentiation. He has even talked of growth itself as a carcinogen to the culture and values that underpin the friendly, high-quality, localized experience that he sees as central to Starbuck’s competitive positioning. And whilst Starbucks, like many global multinationals, has become one of those companies that everyone likes to criticize, its commercial success is one that many companies would like to emulate.
The interesting question is what Starbucks might tell us about strategy. Out of the many things that Starbucks teaches us, two things stand out. Firstly, their 1990s expansion was into a new market. Although there were, of course, local coffee shops it was by no means certain that the market was the size that it turned out to be. Schultz’s insight was to infer, from the presence of other coffee shops and other social meeting places, that there existed a market for a ‘Third Place’ (to use Ray Oldenburg’s term4) between work and home. His second insight was to understand the holistic nature of an offer to the customer required to differentiate Starbucks from its competitors. He could have simply emphasized the quality of the coffee or competed on price but he eschewed both of these traditional approaches because he perceived that product and price (two of the traditional 4 or 7Ps of marketing) were simply components of the experience he wanted to offer to the customer.
In his interviews and in his book,5 Schultz talks about everything from the importance of grinding coffee on the premises to the need to prevent local initiatives diluting the brand experience, but the two lessons that are most generalizable to other businesses are the identification of a new, or at least dormant, market space and the essentially holistic, coherent nature of a strong customer offer.
The Economist: Side stepping in time to the future
It is hard to think of a business more different from Starbucks, an iconic brand of early 21st century consumerism, than The Economist, a global business magazine that was founded in 1843 ‘to take part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress’.6 Owned along with the Financial Times by the Pearson Group, The Economist seems to share little strategic context with Starbucks, other than strong competition; but there are interesting parallels and contrasts. Operating in an established market for business and management information, there is no doubt that the market exists. But the plethora of existing competitors such as Business Week and other newspapers and the explosion of new, web-based, information sources means that The Economist has a huge challenge to be profitable. However, it has established a uniquely attractive brand and, as part of the Economist Group, continues to grow revenues and profit in an environment that might be expected to be especially difficult for what is essentially a premium priced newspaper.
The Economist reinforces a lesson from Starbucks (which of course it predated) and tells us at least two more. Like Schultz’s Starbucks strategy, The Economist attempts a strongly differentiated value proposition. In this case, it is based upon a level of knowledgeable, independent insight with which others struggle to compete. To complement this, it wraps its value proposition in a slightly arrogant, aspirational brand position.
The additional lessons from The Economist strategy are less obvious but just as important. Its choice of position in a very crowded market is based on avoiding or side-stepping its competitors. The Economistchooses to avoid competing, for example, on timeliness, industry specificity or price, as web-based news services, trade magazines and free, loss-leading, consultants’ reports do respectively. This avoidance of head-on competition is one of the characteristics of strong strategy that we will return to.
The third lesson from The Economist concerns change. In a market environment that has been hugely disrupted by technological, political and social trends, a premium, UK-centric, paper newspaper was uniquely vulnerable, as the profit margins of other ‘quality’ newspapers attest. The web and mobile devices threaten paper; email reduces attention spans; and globalization reduces the UK to a secondary country in economic terms. The Economist’s strategy, however, anticipates these changes and makes use of market trends. Its electronic versions complement its paper editions; its content has globalized into regional editions and the quality of its content aims to win share of the reducing amount of quality reading time.
Like all of these examples, The Economist is a whole case study in itself but the three lessons of tailored proposition, competitive side-stepping and ‘going with the grain’ of market changes are the three that have the most applicability to other businesses.
Yamazaki Mazak: Matching itself to the market
It would be easy, by choosing well-known examples, to inadvertently imply that strategy lessons come only from the big brand names that everyone recognizes. But this would be misleading. Some of the most important strategy lessons are to be learned from firms that most of us have never heard of because they occupy specialized markets or sell only to other companies and not to consumers. An outstanding example of this is Yamazaki Mazak, the world leader in the machine tools market, a sector which is expected to reach $166bn by 2017.7 Like the other markets described above, the machine tools market is competitive and there is no shortage of alternatives for Yamazaki Mazak’s customers to choose from. But the nature of this business, like many capital-intensive, business-to-business sectors, doesn’t lend itself to creating a relatively monolithic value proposition that is clearly and simply differentiated from the alternatives. The business is complex both technologically and also in terms of product categories, geography and the industry sectors it must serve.
Bridging all of this complexity of different product categories, industry specialisms and geographical variation, however, is a pervasive underlying strategy. The hallmark of Yamazaki Mazak’s strategy is its unusually developed global network of technology centres and manufacturing facilities. This developed partly as a result of force majeure, following the market and major customers.8 However, it led to a relative strength, compared to its competitors, in the capability to design and support customized solutions for machine-tool users. This and other strengths in understanding customer processes shaped their strategy. At the same time, the company’s strategy was shaped by recognition of its relative weaknesses, such as relatively high costs (compared to cheap imitators) and, at least in its early years, the burden of a weak brand and Japanese name. It is the shaping of its strategy to fit with its unique profile of strengths and weaknesses that emerges as a lesson from Yamazaki Mazak. More obvious strategies might have been to compete on price or on technological superiority; but the former is vulnerable to low-cost competition and the latter is very hard to sustain across a wide range of product categories with short life cycles and in the face of intense US and European competition. In simple terms, Yamazaki Mazak achieved market leadership by being ‘customer intimate’ to use the term coined by Treacey and Wiersema9 but it was not this strategy itself that created its competitive advantage. Yamazaki Mazak’s strategy would not have worked as well had it been tried by another firm with a different unique profile of strengths and weaknesses. This is because customer intimacy, in this market, depends on a global network, an understanding of customers’ specific needs and, perhaps, something in Yamazaki Mazak’s culture that is hard to articulate.
So the particular lesson to learn from Yamazaki Mazak, and many other specialized, knowledge-based companies, is the importance of strategy as an alignment process. Strong strategies leverage strengths against market opportunities and mitigate or correct weaknesses in the face of market threats. Effective strategies often depend, therefore, on understanding that alignment process.
Essilor: Growing the pie
Essilor is another company most people have not heard of but that anonymity has a slight irony to it, given that many readers will be reading these words looking through its products. Essilor, a French company, is the world’s largest manufacturer of ophthalmic lenses, with sales of about 4 billion Euro and operations in over a hundred countries. At first look, Essilor’s strategy reveals nothing more than those of Starbucks, The Economist and Yamazaki Mazak. Like the others, it has tried to develop a distinctive customer offer based on distinctive capabilities and, in doing so, attempts to avoid comparison with direct rivals. However, closer examination of this sector raises a question that yields another lesson of strong strategy.
Essilor describe the four strands to their strategy10 thus:
Innovation not only in products but also in services and marketing approaches;
Growth from the emerging middle classes of developing economies, supported by acquisition and partnerships;
Market development to expand the use of their products;
Focus on mass-customization rather standardized lenses.
This strategy is interesting when compared to the more obvious alternatives. It would have been easier, at least superficially, to focus on the existent, developed markets, perhaps using scale to compete on price or customization to dominate that segment of the market. But asking the question ‘Who has Essilor fought?’ reveals the advantages of their strategy. It would appear that their growth has come either from people who have never bought lenses before (in developing markets) or by increasing the size of the market (by volume or value) in developed markets. From a competitor’s point of view, Essilor’s strategy has had little impact on them and has in fact expanded the profit pool of the sector (that is, the total profit made by all competitors in the industry). In doing so, Essilor has avoided stimulating a competitor response. Such a response would have either led to a price war and commoditization or, perhaps, increased direct competition through sales and marketing activity.
So, the lesson we can draw from Essilor is to avoid ruffling feathers. Strategies such as theirs lead to growth without upsetting the competition and stimulating a response. Other firms, unable to do this, might design their strategies to have a small impact across many competitors or to impact heavily only on weak competitors. Whatever the detail, a characteristic of strong strategy is that it avoids the consequences of walking up to the biggest, strongest competitor and poking it in the eye. Despite the aggressive, combative language often used to describe strategies, it seems that strong strategies avoid fights when they can.
This small handful of success stories, chosen to represent a breadth of business types, is of course meant only to be illustrative. Whilst there is much published academic work, including our own, about what makes firms successful, we find that short, interesting anecdotes about real firms are a better way to introduce our concepts. Later in the book, we’ll develop the idea of what makes a strategy successful and how to apply this knowledge to achieve success and create shareholder value. For now, we think it would be worthwhile to reinforce our points from the opposite perspective of business failure.
Failure stories
It’s too easy to criticize firms that have failed. We have enough experience of success and failure to know that it is rarely the result of stupidity, laziness or some other vice and more often born out of the honest mistakes that always accompany trying hard. We therefore write this section in admiration of those who tried and with thanks for the lessons we can draw rather than with any sense of superiority. That said, the commercial failure of organizations filled with bright, educated and committed people provides specific lessons as well as a general warning against hubris.
Blockbuster: Left behind
For about 20 years after it was founded in 1985, Blockbuster might have seemed an exemplar of success rather than failure. It rose, largely by acquisition as the sector consolidated, to dominate the video and game rental market and was a major brand in 18 countries. At its height, it had some 60,000 employees in thousands of stores. It also appeared to adapt well to market change, managing well the transition from VHS to DVD formats and developing its proposition to include by-mail services. Its strong brand made it so valuable that, in 1994, Viacom purchased Blockbuster for $8.4 billion, although it later reversed that decision. And yet by 2010 Blockbuster was bankrupt, with some $900 million of debt. Soon after that, it was acquired for $320 million and the new owners, Dish Network, began to close its many unprofitable stores.
Blockbuster’s demise didn’t happen because people stopped watching movies at home. In fact, many analysts expected the home entertainment sector in which it operated to thrive in times of recession as customers cut back on trips to the cinema. Rather, Blockbuster reinforces, from a negative perspective, the importance of responding to market changes and maintaining a differentiated value proposition. Its core value proposition of renting physical formats such as DVD has low barriers to entry and, since Blockbuster failed to offer the customer very much beyond access to the movie, their offer was easy to copy and hard to price at a premium. Their direct competition included other rental chains but also local general stores offering to rent the most popular films. Indirect competition came from the relatively low cost of buying a movie at a supermarket or other outlet. But perhaps Blockbuster’s most striking failure was to respond quickly enough to the availability of on-demand video enabled by broadband access. This brought new competitors, notably Netflix, and, although Blockbuster eventually developed an on-demand based offer, it still failed to differentiate its value proposition. And, with an undifferentiated offer, Blockbuster was essentially fighting head-on with its competitors.
No one at Blockbuster would have advocated a strategy that involved going head-on with competitors with an undifferentiated offer. Nor would they have chosen to allow new technology to enable new competitors to find new routes to market, but that’s more or less exactly what they did. Even when they held a dominant position in the sector, they failed to use that position and their financial strength to build a sustainable competitive position. The basic concepts that explain their demise – low entry barriers, differentiation, technological change and new entrants – have all been written about for decades and were surely known and understood by Blockbuster’s experienced and well-paid board. Yet Blockbuster has gone, in about two decades, from a very successful business to a footnote in the history of strategy.
Gateway: Playing a zero-sum game
During the 1990s, the transition of the PC market from a geeky niche to a mass-market consumer goods market led to the emergence of several firms that seemed to contend for leadership. One of these was Gateway Inc., whose cow-patterned boxes and extensive advertising helped to create the market. It’s hard to imagine now, but Gateway were talked about in the same context as Dell as one of the new firms shaping and controlling this vibrant new market. After selling its online business to AOL in 1998, it focused on selling direct to consumers and shifting its focus from high-end and business machines to low-cost and home machines, including the acquisition of eMachines for $262 million in 2004. Like all PC makers, Gateway was hit by the dotcom crash of 2000/2001 and sought volume and scale as a response to a commoditizing market. It also retreated into its home market and tried to enter the consumer electronics market. This strategy failed, partly due to some operational aspects, such as problems with customer service, but mostly because it didn’t deliver the profit margins promised in the business plan. Selling both through direct channels and low-end retailers, prices eroded much faster than expected and competitor response meant that low prices were not rewarded with increased share. The company shed executives and, in 2007, it was sold in parts to Acer and the MPC Corporation. At that time, Gateway’s share price was $1.90, compared to a 1999 high of $84.00, a quite spectacular destruction of shareholder value.
The lesson of Gateway, and indeed that of some of its rivals in the PC sector who also went out of business, is not that building scale in a commoditizing market is necessarily wrong. That sector has eventually consolidated to a small number of major players who benefit from economies of scale and supplier power, although they are now facing the challenges of an industry transition involving tablets and cloud computing. But this kind of ‘grow to survive’ strategy involves very narrow profit margins and, accordingly, the need to make good judgements about future costs, prices and the ability to avoid or minimize aggressive competitor response. Crucially, Gateway’s strategy in the PC sector made poor, inaccurate forecasts about costs and prices. This is a phenomenon often seen as a by-product of an adversarial business planning process, when combative boards make executives feel pressured to deliver unrealistic numbers. In addition, Gateway’s pricing tactics were simplistic and, in the eyes of their competitors, confrontational. They gave firms like Compaq, Dell and HP no choice but to respond with their own price reductions, effectively reducing the profit pool of the sector overall. Attempts to grow share by price wars are a kind of zero-sum game, in which any gain in profitability is somebody else’s loss and, especially when combined with poor costing estimates, reduce the probability of the business plan delivering on its promises.
Microsoft’s Zune: So what’s better?
Some strategy failures can be put down to insufficient or inappropriate assets, but in 2006 Microsoft was the world’s largest software company when it responded to the shift of music from CDs to digital media, four years after the launch of Apple’s iPod. As we now know, it was good strategic judgement to predict that Apple’s success would change the industry and that digital downloads and portable devices were a sector worth entering. Microsoft did some things very well, especially in getting the four largest music labels to sign distribution agreements. It developed a good product, Zune, and a supporting marketplace infrastructure that, over the course of four generations, had some innovative features. Given that by that time Apple had already sold 100 million iPods, the market was developed and ready for exploitation. Yet Microsoft Zune failed completely.11 In the first six months, it sold only 1.2 million units and in the next year sold less than a million more. Although the company tried to revive the product as the MP3 player market grew hugely, none of its technical innovations made any difference and technical problems, such as software glitches, added to its problems. Eventually, in June 2011, Microsoft announced the discontinuation of all Zune hardware and a year later announced plans to discontinue the brand. It’s not clear how much money Microsoft lost on Zune but, whatever the figure, it was additional to the damage to Microsoft’s corporate brand and reputation as an effective commercializer of technology.
Perhaps the first lesson to draw from the Zune story is that failure is not just for small, under-resourced or incompetent companies. Microsoft is a great company and, although they carry the incumbent’s burden of being everyone’s favourite company to criticize, they will go down in history as a company that changed the world. This makes it all the more remarkable that they could fail so ignominiously with Zune and points to failings in their strategy that were either missed by or, worse, created by their business plan review process. In the case of Zune, we can strip away the detail about product design and marketplace infrastructure and see that, compared to a great product like the iPod, it offered nothing different. Markets have inertia of their own and, since Apple had spent four years getting everyone to love their product, customers need a reason to buy something different from what everyone else is buying. Zune failed to provide any significant point of differentiation to the iPod in its overall value proposition. Underlying this was a failure to gain any insight into how this market is segmented and what differentiated value propositions may have appealed to different segments.
Nortel: Playing the wrong game
Whilst all real-world examples of failure are necessarily simplifications, some must be more simplified than others and the challenge is to identify the lesson to be learned whilst also recognizing the wider context. This is especially true of the Nortel case. Nortel had its origins in the 19th century and, for most of its history, made telephony switchboard and related equipment. In the 1970s, it was among the first to recognize the importance of the digital revolution in its sector. It grew quickly in the technology boom of the 1990s and at one point represented over one third of all the value in the Canadian Stock Exchange. But the end of the 20th century and the beginning of the 21st saw it struggle and in 2009 it filed for protection from its creditors. Eventually, what value was left in the company was picked over by Apple, Google and others bidding for Nortel’s few remaining valuable patents.
There are numerous possible explanations for Nortel’s demise, all of which play a part in the story. Nortel failed to recognize the market bubble and so made poor predictions about the size and profitability of their market. Their leaders seemed to have forgotten the value of a healthy bottom line and used financial devices such as customer financing to disguise their problems. But, for our purposes, perhaps the most important factor was how they responded to the technology changes and disruptive innovation that occurred in their market. Nothing Nortel could have done would have prevented this change of course, nor could Nortel have prevented the emergence of new competitors, such as Cisco, enabled by the new technology. But the strategy of John Roth, appointed as CEO in 1997, made things much worse.12
