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* In an increasingly copy-cat economy, the new basis of competition is business model innovation. …

* In an increasingly copy-cat economy, the new basis of competition is business model innovation.
* Unfortunately, the work of business model innovation is too often left undone, at great cost to the organization's longer term growth opportunities and its profitability. This gap is the outcome of marketing's role increasingly being defined around demand generation and brand communications in increasingly fragmented channels, roles that have required many new marketing subspecialties.
* The CMO is ideally suited to facilitate business model strategy decisions, decisions that must be made by the leadership team as a whole.
* Deploying the CMO to facilitate business model innovation will align brand and business strategy, benefiting the success of both.

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  • 1. My goal this morning is to help you reposition marketing to the CEO of your organization or your client’s organization. 1
  • 2. Today CEOs all too often think of marketing as a series of communication tools created by communication specialists to advance sales of current products and services. In other words, sales support. Packard was talking about the work of the senior leadership team in defining where the company wanted to compete and the basis on which it wanted customers to select the company’s offerings, it’s value promise – the foundation on which the emotional brands stand.
  • 3. As a result, the concerns and decisions of the C-Suite and the focus of the marketing departments become uncoupled, with consequences to the organization. Agencies find themselves meeting with lower level specialists, feeling as if tactics have become strategy and there is no core image being developed for the brand. Marketing departments feel financial goals are handed down from above with no opportunity to discuss the growth potential of their businesses and company-wide changes that could enhance growth potential. And both sides of the divide too often fail to ask the tough questions Packard referred to – where should the business compete and on what basis does it want to win business?
  • 4. I learned marketing on the job. My company, Ohmeda – the global leader in anesthesia equipment, faced two huge issues: We had lost about 30 market share points and our product liability costs were threatening our existence as a profitable business. The CEO turned to marketing for the answer. Working cross functionally, we redefined what our business was all about: •  We redefined the business were were in from being a “full line of anesthesia equipment and services” to “we improve anesthesia safety.” •  We redefined our value promise from most reliable to safest. •  We made the hospitals administrators a strategic target market, versus viewing this role as a gatekeeper to the doctor. •  We changed our offering, adding many safety monitors, building them into our machines - creating anesthesia systems - and creating a comprehensive educational program for administrators to help them understand the risks of old machines and new anesthesia systems. •  Even our philanthropy changed. We worked with competitors and customers to create an Anesthesia Patient Safety Foundation to help spread safer anesthesia practices to anesthesiologists and nurse anesthetists. We were doing David Packard marketing, solving our problems.
  • 5. The #1 problems facing CEOs today is maintaining attractive margins as growing competition cuts into profit margins on new and old offerings alike. Is everyone in your organization aligned to address this challenge with a new concept for what your business is all about?
  • 6. When CEO clients talk with me about price competition I tell them it’s time to relearn Economics 101 because it’s finally pertinent. We know these lessons as marketing professionals: •  All consumer purchase decisions are based on perceived value where value is a scale in the customer’s mind with benefits on one side and costs to acquire these benefits on the other. •  Highest value wins, even if the evaluation is not rational as an economist might define rational. Benefits can be emotional or functional, costs can be direct or indirect. •  The same holds true in B2B markets as well. 6
  • 7. The challenge to companies is that once differentiating advantages become requirements to be considered. Think about how the “basic” TV for example has changed over time. Historically, these changes were slow enough that the companies investing in the innovations reaped higher margins (as customers will pay more for more benefits) for an attractive period of time.
  • 8. As benefits become requirements to be considered, a product or service category becomes more and more similar. We call this the “commoditization process.” Price becomes more and more important as benefits are more and more similar, until price alone drives relative value. Free markets give us the most choice at the lowest prices because we have companies driving out costs to stay competitive as products commoditize at the same time as they are innovating to stay ahead of the commoditization curve.
  • 9. The issue for companies is that the speed with which new products and services commoditize is getting faster and faster over time. Here is but one example - music players.
  • 10. This slide was added since the talk using YOU TUBE video on social media speed shown during Fair Shopping’s presentation. (Bottom row is approximated.) Look at the speed of change in social media! We’re no longer comparing animal speeds, we comparing animals to space ships!
  • 11. Proctor and Gamble is one of America’s leading consumer products companies, with well known brands that compete on superiority of benefits. The company’s #1 problem is retaining market share post- recession owing to growing commodity-like competition from store brands. Last year P&G created fighter lines for each of its key brands. When that did not hold market share, P&G started price wars in a number of categories. This was unprecedented in the US! What’s happening to P&G is happening across companies: Less difference in benefits • Maturing categories • Business service sector enabling “copycat” competition. P&G introduces a new product or improvement and it is copied immediately. Excess supply increasing competitive intensity • Internet destroys barriers to entry creating global markets • Global capacity exceeds demand Stronger buyers • Consolidation of industries creates customers with huge buying-power • Internet makes price transparent to consumers and businesses
  • 12. At the same time, the internet shattered marketing into more and more specialties, making marketing’s job harder and more technical.
  • 13. Let’s look at two areas Pricing used to be easy - few channels, mass market •  Fragmented markets with many channels •  Internet enables daily pricing and pricing experimentation •  New insights into pricing from behavioral economists and consumer marketing experts •  We now have pricing experts in large companies. Pricing used to be the product manager’s job! Advertising was mass, through print, TV and radio •  Now we have hundreds of TV and radio channels and print media •  Social media adds two-way communications and one - on - one communications •  Think of all the new experts: E-mail marketing, social media research experts, navigation experts, SEO experts, webinars, etc.
  • 14. In the past, marketing tactics and company strategy lined up closely. It’s why agencies met with the C-Suite, not narrow experts. The fracturing of marketing led to •  a greater focus on tactics •  a new language •  a stronger need for communications integration Pulling marketing and the C-Suite further apart. And so marketing strategy today refers to communication strategies to build awareness, attitude and other drivers of demand for today’s products and services. Marketing integration refers to integration of marketing message across different communication tools. This is NOT what Packard was talking about. Kotler refers to integrated marketing as all the company’s departments working together to serve the customer’s interests.
  • 15. With the growing gap between company strategy and marketing execution, marketing tactics are losing their power to maintain margins: •  New products and product features are copied quickly, absent intellectual property protection and even then protection can be less strong than hoped for •  Branding has less power as consumers and businesses increasingly control brand image on social media channels •  Marketing communication tactics less powerful as consumers and businesses are tuning out to messaging from companies, including their PR. Is it any wonder that most of today’s advertising spend is on promotion and in-store POP? In other words, it’s all about price in our increasingly copy-cat, commoditized economies. 15
  • 16. The net result •  Marketing deploying tactics with less power •  Operations cutting costs right and left to maintain margins in the face of commoditization, cutting out resources that might be used to differentiate •  Customers, even the brand loyal, less and less loyal, willing to switch brands (among the qualified brands in their consideration set) for a better deal. 16
  • 17. So what do you do? If you can create the lowest cost structure – and retain it – then play the commodity game. Win on price as Wal-Mart, Dollar Stores, and others are doing. Design your business to have the lowest cost structure. •  Wal-Mart innovated processes to pull time and cost out of distributing goods from manufacturers to store shelves •  Today it uses its huge purchasing power to secure private label brands and drive down the prices of branded goods manufacturers But what if you do not want a business that runs this way? Or what if you cannot be lowest cost because of where you are located or labor agreements?
  • 18. Here is Sweden, Electrolux is a company that transformed what its business was all about. Acquired 300 some small appliance brands 1060-1990 (White- Frigidaire in 1986, leading US brand), with cost economies driving profits. It refocused its company from being manufacturing driven - with the retailer at the center - to being consumer driven with the homeowner at the center. •  Built competencies in listening to consumers •  Created a “thoughtful design process” that considers the user in every decision, producing simple and intuitive interfaces, natural materials and other consumer-focused differentiators •  Introduces whole collections versus new products to create emotional impact and experience, deepening the brand 18
  • 19. What I learned by luck at Ohmeda and what Electrolux is doing proactively is business model innovation. Business model innovation is the only way to maintain margins in today’s copy cat economy. Indeed, the basis of competition is switching from features, benefits and prices of products and services to business models. Look behind any consistently leading company and you will find a unique business model. 19
  • 20. The business model is defined by 5 core strategy decisions that every leadership team must answer: this is the marketing work that Packard argued is too important to leave to the marketing department. •  Who is our target market: Electrolux changed its focus from retailers who bought and stocked their appliances to consumers who used their products •  What business are we in? Ohmeda changed it to “We improve anesthesia safety” transforming its offerings in the process •  What is our value promise: H&M is stealing a lot of market share in the US with its value promise of fresh, most up to date looks at affordable prices giving lots of reasons for customers to frequent their shops throughout the season. •  What are our advantages? Sanska leveraged its advantage in managing large construction projects to creating advantages as a developer, developing, constructing and running public infrastructure. •  What is our profit model? IKEA innovated their value chain by having customers construct furniture and the rest is history. All 5 decisions fit must fit together like the mind, lungs, heart, legs and core of an Olympic runner - carving out a market space where the company is one-of-one in offering the most value. 20
  • 21. Business model innovation created higher value. This quote would hold true today. Dell has a totally confused business model. Apple has designed their business to expand access to electronic data and make computing frustration-free. All their neat new products, including APPs, emerge from a solid business model in which offerings are synergistic, increasing user value and company profitability. 21
  • 22. Business model innovation builds consistently higher profitability because all the parts of the organization are aligned to create and enhance advantages and to deliver on the value promise. This alignment - which is what Packard talks about - is what creates the marketplace victories. I like to think about business model innovation as the positioning of the entire offering of the company. But unlike positioning of an individual offering which is constrained by decisions made by other functions and the realities of company strengths and weaknesses, I am free with business model innovation to change many more elements of my company’s offerings!
  • 23. (Added since talk) This finding is startling. If everyone is not on the same page, how can you ever get alignment? Business model strategy decisions, made by the leadership team and communicated broadly place everyone on the same page, building the alignment needed to win on price or compete profitably against price.
  • 24. Every company or business unit has a business model but all too often it is left unstated or taken as fixed, defined by industry practices, history or serendipity. Or, if leadership teams have defined the business model, they do not communicate it. The business model is like the root system of a tree and its trunk with branches the categories or markets of the company and leaves the individual offerings. The root system and trunk give rise to healthy leaf growth and new branches, but all too often marketing department and C-Suites focus only on the leaves -- raking them up so to speak. Or, C-Suites focus on strategy, but it’s about another tree, a focus uncoupled from current business which can compromise organic growth. Or C-Suite is only about cost synergies through industry consolidation. This tactic works for a few years, but then what? You have a larger company with an even more challenging profit growth target and too weak a business model for achieving it. This is what’s happened in pharmaceutical markets and banking. 24
  • 25. If you want marketing to be smack in the center of the C-Suite, an active part of strategy discussions, you must speak the language of the C-Suite: Growth, profitability and valuation. Business model innovation is the bridge between marketing and the C-Suite that focuses everyone on the right decisions. And the highest value-added role of the CMO, backed by her staff and agency talent, is to facilitate the C-Suite’s business model innovation decisions, the part of marketing that Packard argued is too important to leave to the marketing department alone. 25
  • 26. CMOs are uniquely positioned to facilitate business model strategy within the C-Suite for a number of reasons: •  The understand how to secure customer and market insight. Without new insight, it’s hard to innovate your business model effectively. •  The are used to working cross-functionally e.g., on new product development •  They are charged with the outside-in view, vital to business model strategy decisions (Sales is the voice of the company to the customer, marketing the customer to the company.) •  Marketing talent tends to be more intuitive and creative and conceptual, all key to business model innovation •  Marketing tactics must align with the business model, as marketing tactics are key to execution.
  • 27. Marketing and sales planning starts out at step 4, once the C-Suite hands out sales and profit growth forecasts. You must start early and focus your planning initially on Step 1. Before you break your business into parts and look at SWOT of each part, evaluate your business model.
  • 28. This is what the process looks like - starting at top line decisions and moving downwards. Business model strategy, functional strategies and functional tactics all align, creating business model success.
  • 29. Business model innovation must be an annual practice. Holding onto the rock face for too long while climbing, holding onto a product or service for too long without changing it, and holding onto a business model for too long without evolving it will all lead to failure. •  Wal-Mart in the US is losing share to different business models - Target; Tesco; Dollar Stores and Amazon. Wal-Mart needs to evolve its business model if it wants to regain market share. •  Electrolux will encounter the same problems as great design is becoming an expectation to be considered in appliances. How can Electrolux better leverage the professional side of its business to build differentiation on the consumer side?
  • 30. In conclusion, remember that any new product, service, category or business model will feel like a wonderful rafting trip at the start. 30
  • 31. But managing gets more challenging as the market becomes more competitive. When this happens we tend to get focused on marketing strategy tactics and not true strategy, what I’d call business model strategy.
  • 32. We forget what is creating our rapids - the current of commoditization which is like the gravity of the economy. It is there. You cannot eliminate it. All you can do is •  Never forget that it exists. All products, services, categories and companies are headed towards the waterfall. The question is: How far away are you? •  Row UPSTREAM while you can through business model innovation. You’ll build the lowest cost position that can survive profitably competing on price or you’ll build a superior and hard-to-copy value promise that will keep your business in calmer waters.
  • 33. A required competency for marketing departments going forward is business model innovation. 33
  • 34. Please step into your highest value-added role as a CMO – facilitating your C-Suite’s business model decisions. It will make managing the marketing strategy and tactics so much easier.
  • 35. ICanPilot, a start-up aimed at disrupting consultants, is creating a cloud-based software tool to guide a company team through the business model innovation process, using my proprietary frameworks. Look for their offering on my Website sometime this Fall, 2011.