MathMarketing Pty Ltd ABN 14 563 955 163
Strategy
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Author Subject File name Date
Hugh Macfarlane Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
How to define a strategy the team understands In business, there is endless debate about ‘strategy’. Yet the term is often confusing or misunderstood. In many businesses, strategy refers to anything ranging from business goals and target markets to specifics such as website management. A scattergun approach often ensues. There are broad business strategy considerations for any business before it develops a go-to-market strategy. Will you be a cost leader, will you gain an edge through differentiating yourself from rivals, or will you take a highly targeted line? Whatever you do, don’t try to have a bet each way. Bring into play a consistent strategy – what renowned Harvard Business School professor Michael E. Porter calls “focus”. If you can’t be a cost leader or offer a differentiated product to the whole market, then focus only on a market segment in which you can achieve these goals. Think, too, about factors that will transform your business from being good to great. Why will your business stand out? And why will it accelerate past other rivals in the long run? In our experience, this last point is crucial. Momentum is a great outcome, but how do you get it? In business-to-business (B2B) marketing, organisations often come up with a great idea, try it once and then go looking for another great idea. This is fatally flawed. Not only is it hard to get good at anything this way, but the market becomes confused. Consumer marketers know that perceptions take a long time to build. They create ads and sell their message consistently. As B2B marketers, we have to do the same. Back to our question, though: what is strategy? First, it needs to be seen in the following context. Objectives (what do you want to achieve?) Strategy (how?) Tactics (what will you do?) Plan (in what order, how often and who?)
In this context, go-to-market strategy boils down to three points: 1.
What are you going to sell?
2.
To whom?
3.
Through whom?
Choose where to play Your first priority is to choose where to play (which product markets do you participate in, which do you ignore, and how much of the budget do you allocate to each product market).
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
Regardless of your decisions, make sure you have broad internal support for this market strategy so everyone in the business is on the same wavelength.
Choose how to play Next, identify the correct strategy for each product market. This requires a careful allocation of the marketing budget to factor in: Environmental Marketing (EM) – getting the market ready through advertising, PR and other positioning activities Channel Readiness (CR) – getting the channel ready through recruitment of direct and/or indirect channels, creating collateral for them to use, training them and managing their skill and motivation levels Demand Generation (DG) – getting the market and the channel together through seminars, white papers, tele-prospecting and so forth. Decide how to allocate a scarce budget Finally, build this into a matrix that reflects: the priority for each of the product markets in which you participate the maturity of each of these product markets the ‘correct’ allocation of budget to EM, CR and DG for each stage of buyer maturity. The result will be a strategy that translates into a budget that reflects the maturity of your buyers.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
How to earn more profit than your competitors What do you do when a tough competitor enters your space? Many businesses cut their prices, starting a “race to the bottom” as their previously unassailed niche becomes just another commodity product or service. This strategy carries the seeds of its own destruction. In his classic book, The Competitive Advantage of Nations, Harvard Business School professor Michael Porter outlines five forces that shape competition: New competitors enter the market Rivalry among existing competitors intensifies Substitute products arrive Some buyers gain greater buying power than others Suppliers assert greater bargaining power The classic case of a business re-inventing itself is Nokia, which switched from being a forest products producer to a mobile phone manufacturer as competition from cheaper timber producers eroded its margins. Australian examples of substitute products abound – from generic pharmaceuticals to “home brand” items on supermarket shelves. Porter’s book studies the reasons that some industries are destined to be more profitable than others. This is useful for businesses that can easily exit their original industry and dive into another, more profitable sector – but it doesn’t give much hope those of us who are locked into a niche from which there is no possible re-invention. After all, a telco is always going to be a telco.
Cost Leadership
Differentiation
Focus
But how do you optimise profit for your own firm? Some approaches adopted by businesses going through disruptive change include surveying their customers or their competitors, and changing their method of operation. These are legitimate approaches, but it is unclear why one approach would work and another fail. According to Porter, there are two major strategies used by businesses to make more profit than their competition: Spend less than your competitor on production costs –without losing quality. Charge more for your product or service – without increasing costs significantly.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
Marketers misuse two of Porter’s key terms: The term “differentiation” is used by Porter to describe products for which buyers will readily pay a premium. Marketers often use the word “differentiation” to describe the reason they believe customers should buy their product. Wrong! It’s not about a few differences in features and benefits. Your strategy needs to go deeper than that. Marketers also use the term “lowest-cost producer” to refer to the cheapest price of an item or service. Wrong again! The two key strategies for making your business more profitable than your competitors are very specifically about maximising profit. Spending less, or “cost leadership” in Porter’s words, means bending your unique resources or capabilities until you can sustainably make the same product as your competitor for less than it costs them to make it. Charging more, or “differentiation”, means harnessing your abilities to build a product for which buyers will willingly pay more – and without increasing your costs significantly to do so. If you can command a 10 per cent premium, your costs must rise by less than 10 per cent. But what if neither of these strategies is exactly right for you? Whatever you do, don’t try to do a bit of each. That answer is not to mess with your differentiator and then trim your costs, but to work with an expert to bring into play a strategy that Porter calls “focus”. This will involve applying either of these powerful techniques narrowly. If you can’t be a cost leader or offer differentiated product to the whole market, then focus only on the market segment for which you can.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
How to build a great business (from a good one) Standing out from the crowd is tough when your competitors are also working towards the same end. Occasionally, though, a business that has been doing ‘fine’ suddenly starts doing better than fine. In fact, it goes from being good to great. For some, this success is temporary and they soon slink back into the pack. A select few make a significant shift and go on to achieve sustained greatness. How does a good business become a great one? Hot on the heels of his groundbreaking work with co-author Jerry Porras on the bestselling management book Built to Last: Successful Habits of Visionary Companies, researcher and author Jim Collins set out to answer this question. As a result, he produced an even better book, Good to Great: Why Some Companies Make the Leap … And Others Don’t.
Collins’ team of researchers drew up a list of extraordinary companies that met three criteria – they had to have performed at or below the rest of the market for 15 years; then undergone a change; and then significantly outperformed the stock market for 15 years or more. Collins wanted to understand what these businesses had done to transform themselves into market leaders. His findings suggest there are seven keys to creating a great business.
Disciplined people 1.
Adopting level 5 leadership: build enduring greatness through a paradoxical blend of personal humility and professional will.
2.
Considering who first, then what: begin by getting the right people on the bus (and the wrong people off it) and then work out where to drive it.
Disciplined thought 1.
Confronting the brutal facts (yet never losing faith): all good-to-great companies began their transition by analysing the facts of their reality while being determined to rise above that reality.
2.
Embracing the hedgehog concept: this entails getting clear answers to three questions: what are you deeply passionate about? what do you know you can be the best in the world at? what drives your economic engine?
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
Disciplined action 1.
Fostering a culture of discipline: getting sustained great results requires selfdisciplined people who take disciplined action.
Level 5 leadership
First who… then what
Disciplined People
Confront the brutal facts
Hedgehog concept
Disciplined Thought
Culture of discipline
Technology Accelerators
Disciplined Action
Flywheel
2. Using technology as an accelerator: good-to-great companies avoid technology fads, but become pioneers in carefully selected technologies. 3.
Creating ‘flywheel momentum’: sustainable transformations follow a pattern of buildup and breakthrough. Like pushing a flywheel, it takes effort to get things moving, but persistence builds momentum and breakthrough.
In our experience, the final idea needs further examination. Momentum is a great outcome, but how do you get it? In business-to-business (B2B) marketing, organisations often come up with a great idea, try it once and then go looking for another great idea. This is fatally flawed. Not only is it hard to get good at anything this way, but the market becomes confused. Consumer marketers know that perceptions take a long time to build. They create ads and sell their message consistently. As B2B marketers, we have to do the same. Create campaigns that last for years, and execute them again and again. Refine those plans when necessary, but only after robust measurement and testing. Adhere to these rules and you’ll soon hear that flywheel humming.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
How to decide where to play Strategic decisions involve choice: deciding what to do and, importantly, what not to do. This leaves businesses facing a conundrum. CEOs and managers understand the power and importance of focus, but what should they focus on, and what should they ignore? You may have heard about cash cows. The Boston Consulting Group created a business analysis model in 1970 known as the Growth-Share Matrix. The model invites us to map products against market share and market growth. It slots businesses into four categories: cash cows (high market share in a slow-growing market), dogs (low share in a mature market), question marks (low share in a fast-growing market) and stars (high share in a fast-growing market). This leads to some important considerations. If the market is growing and you enjoy a high share, invest enough to maintain your position, but no more. With some profit growth, this scenario may be cash neutral. If the market is growing, but you have a low share, tough decisions are required. Invest if you are confident of improving your market share or consider exiting the market. In more mature markets that are no longer growing, it is best to opt out if your share is low and save your investments for growth markets. And finally, the cash cow. If the market has matured and growth is low, but you enjoy a high share, celebrate your success and take the cash. Use it to fund highgrowth opportunities. The BCG matrix is a useful portfolio-management tool but it has some major deficiencies as a decision-making aid for new product markets. For example, a market that is growing strongly seems attractive. But if this market is only small and has intense competition, it becomes less desirable. Corporate giant GE and the McKinsey & Company consulting firm have teamed up to evolve the BCG model into a more general-purpose decision-making tool. Their Portfolio Planning matrix, which considers the most attractive markets and the strongest products, is a simple but powerful model allowing businesses to make complex decisions.
With these tools in mind, here are some practical steps to assess product markets:
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
1.
List all the reasons why one market is more attractive than another, and pick the five best answers.
2.
Do the same for strengths: what are the five factors that best describe why you are strong in one product market and weak in another?
3.
Identify the managers in your business with a strong knowledge of markets. Explain your rating system (maybe 1-5) carefully, and ask managers to independently rate each product market. Then collect the scores.
After the debate about the scores subsides, you will be surprised at the clarity of the picture that emerges in relation to your market options. Use this vision wisely: select product markets in which you should invest heavily and cull those you have been advised to quit. Such portfolio analysis is a simple, but powerful, way to collect the opinions of many well-informed managers. It will help you make decisive calls on where to bet your business’s cash and resources. Try it and you will thank your lucky stars – and cash cows.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
How to play right Strategy is about deciding what to do and what not to do. In the same vein, choosing how to play is inextricably linked with choosing where to play. For a business, it comes down to choice – that is, assessing which markets are attractive and which the business is best placed to target. Managers must then select the right strategies. In essence, this requires answers to just three questions: what are you going to sell? to whom are you going to sell it? through whom are you going to reach that market? How do you choose the right strategy for each market? The answer lies in understanding your buyers and the maturity of the market. In 1957, the ‘technology adoption lifecycle’ model emerged as a way of explaining buyer maturity (Iowa State College used it to track farmers’ purchasing patterns for hybrid seed corn). Six years later, academic Everett Rogers broadened and popularised the concept in his book Diffusion of Innovations. Even if Rogers does not ring a bell, you are probably familiar with elements of his thesis. The term ‘early adopter’, for instance, is used frequently today in management talk, as is the expression ‘laggard’ (those who buy well after everyone else).
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Geoffrey Moore brought the concept back to life in 1991 in his bestseller Crossing the Chasm, and again in 1995 with the even more successful book Inside the Tornado. Moore points out that the adoption model is one for describing buyers, not products. The question is not “where is my product on the curve?” but “where are my buyers on the curve?” Why is this important? Because the strategy that is right for early adopters is completely inappropriate for pragmatists. So you had better know your buyers. Enthusiasts and visionaries who quickly adopt new technologies are seeking a strategic advantage. They are happy to team with you to turn your unproven technology into a complete solution, provided they can be among the first to test it. The pragmatists, on the other hand, want to see some evidence that this new technology works.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
I want to be first
Prove it! Show me someone like me getting benefit
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Therefore, the right strategy in a new market is to find the visionaries. It is all right to offer them an incomplete solution provided you offer lots of services to help overcome any early deficiencies. The ‘chasm’ to which Moore refers is that horrible waiting period when the early adopters have done their thing, but the pragmatists are not yet convinced that the product is safe to buy. With pragmatists, you need to target a very narrow group so they can take comfort from seeing other similar businesses adopt and profit. Your strategy flip-flops on many fronts. It will change from: direct to indirect and back to direct again broad to ultra-narrow, to broad (and then look for niche add-ons) value pricing, to market pricing, to aggressive price leadership. With this model in mind, here are some practical steps to help make your bets right. 1.
Make a list of the product markets you have chosen to enter.
2.
Use the collective wisdom of your team to determine how mature most of the buyers are for each of these product markets.
3.
Select the strategy that matches this stage of buyer maturity.
Above all, set your strategy with confidence, and don’t get lost in the chasm.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
How to allocate limited budget There is never enough money and never enough resources in a business. Whether you work in a multinational corporation with billions of dollars to splash around, or a micro business with only a few staff, budgeting is always tough. How do you allocate this limited budget to greatest effect? It pays to remember the process for forming a business strategy. Work out where to play (which markets are you targeting, which are you ignoring, and how much money will you allocate to each market?). Decide how to play (set the correct strategy for each product market, taking into account the maturity of buyers). Recognise the likely level of expenditure in each of these maturity stages. Allocate expenditure according to these priorities while also considering buyer maturity. Businesses typically split budgets and resources between three major marketing streams: Environmental Marketing (how you condition the market) – key activities include positioning your brand in the minds of the buyers, and influencing their perceptions of your brand. Demand Generation (how you identify willing buyers) – this is how you fill your sales funnel by taking buyers on a journey. They progress from being untroubled about the problems you solve, to becoming troubled, then acquiring an interest in a solution, getting clarity on options and, finally, becoming engaged. Channel Readiness (how you recruit, train, equip and enthuse your direct and indirect channels) – there is no point filling your sales funnel if you don’t have resources ready to progress buyers through it. Whether you sell through a direct sales force or through partners, a good portion of your budget will be consumed preparing your channel for battle. In 2005, MathMarketing and MarketingProfs.com released a study on sales and marketing alignment. The study’s insights into 1400 businesses in 84 countries provide an opportunity to influence budget strategies. There are only two rules to consider when allocating funds between the three aforementioned streams – first, plan to spend less than 25% of your budget on environmental marketing and, second, allocate more than 40% on demand generation.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
These are only rules of thumb, of course, but the logic applies whether you are a multinational company or a start-up. Larger businesses can benchmark their settings on each of these decisions, while smaller ones benefit from being able to change their settings more rapidly. However, for each stage of buyer maturity (using marketing luminary Geoffrey Moore’s Chasm Theory) there is a ‘correct’ strategy. Each strategy requires a different emphasis on environmental marketing, demand generation and channel readiness. How to bet Early market (25%) Product 1 Product 2 Product 3 Bowling alley (25%) Product 4 Product 5 Product 6 Tornado (30%) Product 7 Product 8 Product 9 Main street (5%) Product 10 Product 11 Product 12 End of life (15%) Product 13 Product 14 Product 15
% focus
10% 5% 10% 5% 10% 10% 20% 10%
5%
10% 5%
EM
DG
CR
(20%)
(35%)
(45%)
0% 0% 0% 0% 25% 1% 3% 3% 25% 5% 0% 3% 50% 0% 3% 0% 25% 3% 1% 0%
25% 3% 1% 3% 50% 3% 5% 5% 25% 5% 0% 3% 25% 0% 1% 0% 50% 5% 3% 0%
75% 8% 4% 8% 25% 1% 3% 3% 50% 10% 0% 5% 25% 0% 1% 0% 25% 3% 1% 0%
Our final task is to marry these concepts. To do so we factor in: the product markets that are in, and out, and whether you are investing ahead of expected growth, holding firm, or milking an old market the ideal strategy for each of these product markets the type of expenditure that is required for each stage of the market (splitting between Environmental Marketing, Demand Generation and Channel Readiness) the level of expenditure required to create alignment between sales and marketing. It all adds up to a limited budget being well spent.
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Funnel Vision™ - How to define a strategy the team understands Strategy_white_paper 5 February 2008
By Hugh Macfarlane, Founder of MathMarketing and author of The Leaky Funnel. These articles are copyright MathMarketing, 2006. They may not be copied or published without express the written agreement of MathMarketing.
About MathMarketing In Australia, Asia, North America and Europe, MathMarketing has served many leading and aspiring businesses who seek to align Sales and Marketing and pursue growth. These include AAPT, Aviva, AXA, CA, Canon, Citibank, Colonial, Ernst & Young, GE, IBM, NEC, Nokia, Optus, Oracle, SAP, Sony, Telstra, Vodafone, World Vision, and Zurich. These businesses have been wrestling with at least one of a number of common problems: •
Lack of a clear plan
•
The team lacks the necessary B2B marketing skills
•
Sales and Marketing events lack return
MathMarketing's Funnel Logic™ is an approach to Sales and Marketing used by leading and aspiring businesses around the world, as they seek to align Sales and Marketing to the way businesses buy. Funnel Logic plays out through a variety of services that include: planning workshops, marketing training, an executive game using a simulated market, effectiveness benchmarking, thought-leadership articles and a popular business novel. The sales and marketing problems mentioned above affect every business at some stage, to some degree. When one or more of these problems strike, the flow of your funnel is affected measurably: “Lack of a clear plan” Sales and Marketing plans for many businesses are: not sufficiently actionable, not aligned to the strategy, not followed, or sometimes there just isn't a plan at all. “The team lacks the necessary B2B marketing skills” People involved in your organisation's efforts to earn new business from your business customers and prospects have gaps in the either the breadth of their B2B marketing skills or depth in certain key areas. “My sales & marketing events lack return” Most sales kick-off meetings are not measured for their return on investment. At best, businesses measure return based on the reactions of the attendees to the ‘comfort’ factors of facilities, food, organisation and the individual sessions of the event. A little digging shows there are questions about the ROI of most sales kick-off meetings. Next? To learn more about these problems and how MathMarketing solves them, visit www.mathmarketing.com or phone +61 3 9948 0022.
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