How to develop a winning strategy - take the buyer’s mind off price a workshop by Professor Malcolm McDonald Destination Growth 3 rd November 2009

the effect of price on profit the elements of a winning strategy where to start how to do it practical exercises for completion post workshop

the effect of price on profit

the elements of a winning strategy

where to start

how to do it

practical exercises for completion post workshop

Thought Starters Deliverables from your strategic marketing plan: Can you list your key target markets? (in order of priority) Can you describe (quantitatively and qualitatively) the value that is required by each of your key target markets? Is what your company does superior in any way? In each of these key target markets, can you describe how your organisation creates superior value? Do the relevant senior people in your organisation understand and support the above three points? Are all the relevant functions in your company organised in a way that is supportive of delivering the value required by the customer? © Professor Malcolm McDonald

Can you list your key target markets? (in order of priority)

Can you describe (quantitatively and qualitatively) the value that is required by each of your key target markets?

Is what your company does superior in any way?

In each of these key target markets, can you describe how your organisation creates superior value?

Do the relevant senior people in your organisation understand and support the above three points?

Are all the relevant functions in your company organised in a way that is supportive of delivering the value required by the customer?

- 5% Discount -10% Discount Price £10 9.50 9.00 Profit £2 1.50 1.00 Sell 100 133.3 200

- 5% Discount -10% Discount

Price £10 9.50 9.00

Profit £2 1.50 1.00

Sell 100 133.3 200

5% 10% 15% 20% 25% 30% 35% 40% and your present gross profit is .......... If you cut your price You need to sell this much more to break even ............ 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% % 25.0 66.6 150.0 400.0 - - - - - - - - - - - - - - - - - - - - - % 11.1 25.0 42.0 66.6 100.0 150.0 233.3 400.0 1000.0 - - - - - - - - - - - - - - - - % 7.1 15.4 25.0 36.4 50.0 66.7 87.5 114.3 150.0 200.0 275.0 400.0 650.0 1400.0 - - - - - - - - - - - % 5.3 11.1 17.6 25.0 33.3 42.9 53.8 66.7 81.8 100.0 122.2 150.0 185.7 233.3 300.0 400.0 566.7 900.0 1900.0 - - - - - - % 4.2 8.7 13.6 19.0 25.0 31.6 38.9 47.1 56.3 66.7 78.6 92.3 108.3 127.3 150.0 177.8 212.5 257.1 316.7 400.0 525.0 733.0 1115.0 2400.0 - % 3.4 7.1 11.1 15.4 20.0 25.0 30.4 36.4 42.9 50.0 57.9 66.7 76.5 87.5 100.0 114.3 130.8 150.0 172.7 200.0 233.0 275.0 328.6 400.0 500.0 % 2.9 6.1 9.4 12.6 16.7 20.7 25.0 29.6 34.6 40.0 45.8 52.2 59.1 66.7 75.0 84.2 94.4 105.9 118.8 133.3 150.0 169.2 191.7 218.2 250.0 % 2.6 5.3 8.1 11.1 14.3 17.6 21.2 25.0 29.0 33.3 37.9 42.9 48.1 53.8 60.0 66.7 73.9 81.8 90.5 100.0 110.0 122.2 135.3 150.0 166.7 Example : Your present gross margin is 25% and you cut your selling price 10%. Locate 10% in the left-hand column. Below, follow across to the column located 25%. You find you will need to sell 66.7% MORE units.

The Impact of Price on Profit 0% 5% 9% 10% Profit Increase

The impact of price on profit 1,020 1,010 1,010 1,000 Turnover 1.01 1 1 1 Price 54 (+80%) 44 34.3 30 Profit (3%) 570 570 575.7 570 Variable costs 396 396 400 400 Fixed costs 1,010 1,010 1,010 1,000 Volume Price = +1% Costs = 1% Volume = +1% Start point

The Price-Value Cycle Higher volume At lower Margins Lose sales Cut prices Reduce Specifications & promotion to maintain R.O.I Raise price Improve Product & promotion Higher customer Acceptance & volume Lower volume, but Higher revenue from Better margins Vicious Circle Benign Circle Model 1 Model 2

What Does a Strong Strategy Look Like? Previous research has linked superior performance to strategies with these properties: Homogenous market segment definition Segment specific propositions Strategy uniqueness Strength leverage and weakness minimisation Creation of internal and external synergies Provision of tactical guidance Alignment to objectives Alignment to market trends Appropriate resourcing Clear basis of competition These properties were used to assess the outputs of the marketing strategy making process

Previous research has linked superior performance to strategies with these properties:

Homogenous market segment definition

Segment specific propositions

Strategy uniqueness

Strength leverage and weakness minimisation

Creation of internal and external synergies

Provision of tactical guidance

Alignment to objectives

Alignment to market trends

Appropriate resourcing

Clear basis of competition

These properties were used to assess the outputs of the marketing strategy making process

The purpose of strategic marketing The overall purpose of strategic marketing planning, and its principal focus is the identification and creation of sustainable competitive advantage © Professor Malcolm McDonald, Cranfield School of Management

The overall purpose of strategic marketing planning, and its principal focus is the identification and creation of sustainable competitive advantage

Definition of marketing Marketing is a process for: defining markets quantifying the needs of the customer groups (segments) within these markets putting together the value propositions to meet these needs, communicating these value propositions to all those people in the organisation responsible for delivering them and getting their buy-in to their role playing an appropriate part in delivering these value propositions (usually only communications) monitoring the value actually delivered. For this process to be effective, organisations need to be consumer/ customer-driven © Professor Malcolm McDonald, Cranfield School of Management

Marketing is a process for:

defining markets

quantifying the needs of the customer groups (segments) within these markets

putting together the value propositions to meet these needs, communicating these value propositions to all those people in the organisation responsible for delivering them and getting their buy-in to their role

playing an appropriate part in delivering these value propositions (usually only communications)

monitoring the value actually delivered.

For this process to be effective, organisations need to be consumer/

customer-driven

Map of the marketing domain Asset Base Define markets & understand value Create value proposition Deliver value Monitor value © Professor Malcolm McDonald

The value chain Provider Customer Consumer © Professor Malcolm McDonald, Cranfield School of Management

Ansoff matrix Market Penetration Product Development Market Extension Diversification Present New increasing technological newness increasing market newness Present New PRODUCTS MARKETS

Strategic planning exercise (gap analysis) 1 revenue

Strategic planning exercise (gap analysis) 2 profit

Profit improvement Productivity improvement Sales growth Product development Market development Market penetration Change asset base Existing assets Cost reduction Improve asset utilisation (experience and efficiency) Increase price / reduce discounts Improve product / sales mix (margins) Convert non- users New segments Take competitors’ customers Increase usage Growth focus Cash and margin focus Investment Innovation Diversification Divestment Redevelopment of capital resources Capital Utilisation focus New markets Existing markets

Investment

Innovation

Diversification

Divestment

Redevelopment of

capital resources

low high low high Price Speed © Professor Malcolm McDonald, Cranfield School of Management

Middle Middle Middle low low low high high high © Professor Malcolm McDonald, Cranfield School of Management

Personalising segments OIO0599.

Global Tech Koala Bears Teddy Bears Polar Bears Yogi Bears Grizzly Bears Andropov Big Bears Uses an extended warranty to give them cover. Won’t do anything themselves, prefer to curl-up and wait for someone to come and fix it. Small offices (in small and big companies). 28% of market Lots of account management and love required from a single preferred supplier. Will pay a premium for training and attention. If multi-site, will require supplier to effectively cover these sites. (Protect me). Larger companies 17% of market Like Teddy Bears except colder! Will shop around for cheapest service supplier, whoever that may be. Full 3rd-party approach. Train me but don’t expect to be paid. Will review annually (seriously). If multi-site will require supplier to effectively cover these sites. Larger companies 29% of market A ‘wise’ Teddy or Polar bear working long hours. Will use trained staff to fix if possible. Needs skilled product specialist at end of phone, not a bookings clerk. Wants different service levels to match the criticality of the product to their business process. Large and small companies 11% of market Trash them! Cheaper to replace than maintain. Besides, they’re so reliable that they are probably obsolete when they bust. Expensive items will be fixed on a pay-as-when basis - if worth it. Won’t pay for training. Not small companies 6% of market My business is totally dependent on your products. I know more about your products than you do! You will do as you are told. You will be here now! I will pay for the extra cover but you will ……! Not small or very large companies. 9% of market © Professor Malcolm McDonald

Koala Bears

Teddy Bears

Polar Bears

Yogi Bears

Grizzly Bears

Andropov Big

Bears

Uses an extended warranty to give them cover. Won’t do anything themselves, prefer to curl-up and wait for someone to come and fix it.

Small offices (in small and big companies). 28% of market

Lots of account management and love required from a single preferred supplier. Will pay a premium for training and attention. If multi-site, will require supplier to effectively cover these sites. (Protect me).

Larger companies 17% of market

Like Teddy Bears except colder! Will shop around for cheapest service supplier, whoever that may be. Full 3rd-party approach. Train me but don’t expect to be paid. Will review annually (seriously). If multi-site will require supplier to effectively cover these sites.

Larger companies 29% of market

A ‘wise’ Teddy or Polar bear working long hours. Will use trained staff to fix if possible. Needs skilled product specialist at end of phone, not a bookings clerk. Wants different service levels to match the criticality of the product to their business process.

Large and small companies 11% of market

Trash them! Cheaper to replace than maintain. Besides, they’re so reliable that they are probably obsolete when they bust. Expensive items will be fixed on a pay-as-when basis - if worth it. Won’t pay for training.

Not small companies 6% of market

My business is totally dependent on your products. I know more about your

products than you do! You will do as you are told. You will be here now! I will

pay for the extra cover but you will ……!

Not small or very large companies. 9% of market

Listen to how customers talk about category need Customer View Advice cutting costs future technology direction Help design & configuration process engineering electron commerce Run international network disaster recovery Supplier View fast PAD family multimedia FRADs PIX firewall Solutions Gigabit Ethernet solutions high performance LAN support

Customer View

Advice

cutting costs

future technology direction

Help

design & configuration

process engineering

electron commerce

Run

international network

disaster recovery

Supplier View

fast PAD family

multimedia FRADs

PIX firewall

Solutions

Gigabit Ethernet

solutions

high performance

LAN support

Understand the different category buyers Business perfectionist Radical thinkers Profit engineer Save my budget Business general Save my career Conservative technocrat Technical idealist Radical architect “ Reward” “ Relief” Technical Business

Micro-segments Why (benefits sought) Who And How When Where What is bought 10 9 8 7 6 5 4 3 2 1 Micro-segment

Quick Segmentation Exercise Write down the main benefits sought by customers Divide them into: Hygiene factors Motivators (those that contribute towards the customer’s decision on who to buy from) Take the ‘motivators’ and choose the 2 main ones Estimate the percentage of customers at each end Cross multiply them to create a perceptual map Give them names

Write down the main benefits sought by customers

Divide them into:

Hygiene factors

Motivators (those that contribute towards the customer’s decision on who to buy from)

Take the ‘motivators’ and choose the 2 main ones

Estimate the percentage of customers at each end

Cross multiply them to create a perceptual map

Give them names

Example = Copier Paper Service delivery – (Fast, paper always ‘there’ – point of delivery availability of products; service levels) Product fit for purpose - (Hi quality print finish for colour copiers; consistency of quality; paper that doesn’t screw up in the machine; print definition; no waste) Environmental factors - (Recyclable) Level of support - (Delivered in small lots; consignment stock; easy ordering {on-line]; delivered to difficult locations)

Service delivery – (Fast, paper always ‘there’ – point of delivery availability of products; service levels)

Product fit for purpose - (Hi quality print finish for colour copiers; consistency of quality; paper that doesn’t screw up in the machine; print definition; no waste)

Environmental factors - (Recyclable)

Level of support - (Delivered in small lots; consignment stock; easy ordering {on-line]; delivered to difficult locations)

Level of Support (less demanding) 20% 80% Low High (want lots of support) Breath of Product Range (buy a narrow range But big quantities) 70% 30% Low High (buy a broad range) 80% (hi support requirements) 24% Prima Donnas (expect to have their every whim catered for) 6% Dictators (know their power as large volume users) 30% (broad product range required) 20% (lo support requirement) 56% Drag Queens 70% (narrow product range required) 14% Easily Satisfied (paper is not Key to their business Just want reliable supply)

Easily Satisfied

(paper is not

Key to their business

Just want reliable

supply)

SWOT analysis By segment , what value is required by the customer? What value are you offering to entice the customer to buy from you Avoid SWAGs © Professor Malcolm McDonald, Cranfield School of Management

By segment , what value is required by the customer?

What value are you offering to entice the customer to buy from you

Avoid SWAGs

STRENGTHS WEAKNESSES OPPORTUNITIES THREATS WRONG

Strengths It can create value for the organisation It is unique It is inimitable It is lasting Opportunities It is large It is accessible It is lasting Weaknesses It is meaningful to the customer It is unique It is difficult to fix Threats It is significant It is lasting

Strengths

It can create value for the organisation

It is unique

It is inimitable

It is lasting

Opportunities

It is large

It is accessible

It is lasting

Weaknesses

It is meaningful to the customer

It is unique

It is difficult to fix

Threats

It is significant

It is lasting

Strategic marketing planning exercise - SWOT analysis 1 2 3 4 5 You Comp A Comp B Comp C Comp D Total 100 1 2 3 4 5 1. SEGMENT DESCRIPTION It should be a specific part of the business and should be very important to the organisation 2. CRITICAL SUCCESS FACTORS In other words, how do customers choose? 3. WEIGHTING (How important is each of these CSFs? Score out of 100) 1 2 3 4 5 THREATS 5. OPPORTUNITIES / THREATS What are the few things outside your direct control that have had, and will have, an impact on this part of your business? 6. KEY ISSUES THAT NEED TO BE ADDRESSED What are the really key issues from the SWOT that need to be addressed? OPPORTUNITIES 4. STRENGTHS / WEAKNESSES ANALYSIS How would your customers score you and each of your main competitors out of 10 on each of the CSFs? Multiply the score by the weight.

Relevant? The Times 19 th Jan 2005

Invest/ build ? Maintain Manage for cash Relative company competitiveness Portfolio analysis - directional policy matrix (DPM) High Low High Low Segment attractiveness No change Present position Forecast position in 3 years NB. Suggested time period - 3 years

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