A View On Brand Portfolio Management, Innovation, Profitability And Corporate Culture.
Thoughts on balancing current customers and the company product or service portfolio with new areas of growth: can these be reconciled - and what does it require to balance them in terms of structure and culture?27 October 2011
Everything we do in marketing is to:• Attract more customers.• Retain existing customers with the right profile.• Grow the revenue of existing customers.• Grow the profit margin/ customer.• Grow the asset value of the business. This is a function of the number, value and profit margin of customers and the strength of the brand/ cost structure of the business. All the marketing metrics we put in place are diagnostic tools we use to understand why we are growing - or not growing - relative to the above objectives - and thereby align our operations with our strategy.
It is true that:• Outside of size, the only ways to achieve superior performance are: – By having a niche focus; – By creating exceptional products and services; – By being different enough so that consumers will pay for it; – By changing the competitive paradigm.• Whilst the first three makes a company competitive, the last one makes a company leapfrog competitors: • The top 20 companies in the Fortune 2010 list of fastest growing companies received $3,40 in incremental market capitalisation for every $1 of revenue growth. • For the companies that created new categories, this was $5,60!
Let us look at the traditional Ansoff matrix to balance growth: companies balance attracting new customers with launching new products and services. Increasing technological new-ness Markets Sell new products to Aim to saturate existing markets the market Market Product (or all segments) (or segments) penetration development Products Extend Market Sell new products to Diversification existing products new markets extension to new markets and/ or segments (or segments)Increasing market new-ness
Let us introduce category creation as a major new area of growth. This requires radical thinking, not easy to reconcile with traditional thinking and operations. Increasing technological new-ness Markets Market Product penetration development Sell new products to Most companies try and manage Market new markets Products existing customer and product/ Diversification and create service revenue with new extension revenue from new customers new markets and products: the operational altogether requirements for these are very Incremental innovation different. It is unlikely they will both co-exist with ease. Category creationIncreasing market new-ness
Levels of profitability by type of innovation: if you compare where the exponential benefit to profitability is largest, it is within niche markets, products with regular incremental innovation and revolutionary new products or services. Profitability New categories HighLow margin Revolutionary new products marginspaces, only spacescompetitive Niche markets advantage volume Differentiated offers, i.e. better service Commoditised – most airlines Moderate to fair Low – commoditised margin spaces Highly differentiated Degree of competitiveness
Profitability growth should be exponential. If we compare Ansoff with what we learn about incremental profitability, we can hypothesize: Increasing technological new-ness Markets Market Product penetration development Market Products Exponential increases in profit margin: Diversification more customers at the sameextension rate of profitability and resource utilization will increase revenue and the magnitude of profit, whilst incremental and radical innovation will lead to an exponential growth in profit margin.Incremental innovation Category creationIncreasing market new-ness
One growth area focus on resource optimisation(processes & control), the other on brand value proposition optimisation(vision, innovation & collaboration). Increasing technologicalThe same or more customers with new-nessincremental or radically different Marketsnew products and services, at highermargins and most likely withincreases in the cost structure of thecompany. In the instances of radical Market Productproducts, these will be new business Brand value propositionunits. penetration development renewalBetter capacityutilisation: more Market Productscustomers at the same Diversificationor a slightly highercost-base. extension Incremental innovation Resource optimisation Category creationIncreasing market new-ness
The different areas have different organisational requirements. It is important to acknowledge that and structure accordingly. This will also have cultural implications. Increasing technological new-ness Markets A lean operational Incremental innovation “machine” produces Market Product collaboration & Greater requires standardised technocratic focus, less adherence to theproducts and services penetration development autocracy, a commitment to core customer using standardised ongoing improvement and businessstructures, processes and trained staff. Clear management Deviation leads to Visionary leadership, networks Market structures, processes & Products inefficiencies and a Diversification of influencers and controls; internalbreakdown in quality. extension degree of collaborators, collaborative focus, even Cost control management imperative. autocracy approach, working with small independents Incremental innovation Category Radical innovation requires new people & approaches. Traditional creation structures can kill such innovation. Often these needs to be in differentIncreasing market new-ness companies.
How do we balance current growth with potential growth?• Separate incremental innovation: making existing products better, with radical innovation: creating new categories.• The first one uses new technology to “update” features and benefits of products and services for consumers (i.e. a new Gillette razor blade).• The latter uses existing or new technology to design new categories.• These two areas are hardly ever able to sit side-by-side, the latter requires different ways of thinking and doing. That is why companies like P&G uses small companies to do this, or Apple uses applications designers that do not work for them. Verganti says that companies that are very successful at this use influencers and collaborators extensively. Consumer research using traditional approaches are not that useful here.• Incremental innovation is easier: it is updating existing products and services to make the delivery better for consumers. Here the secret is to be first, not second or last. Traditional consumer research is more useful here.• Generally, experiential and experimental research is great for radical innovation.