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Market based management


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"A strong market orientation does not occurs by mere proclamation. To attain a strong orientation, a business needs to adopt a market-based management philosophy. This means implementing a process for tracking market performance and restructuring an organization around market rather than products or factories and creating employee culture that is responsive to customers and changing market condition." -Robert J. Best

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Market based management

  1. 1. Market –Based Management Roger J Best Synopsys by Michael Hong
  2. 2. Ultimate Marketing ObjectivesThe ultimate objective of any given marketing strategy should be attract, satisfyand retain target customers.• Attract: Brand Reputation, Customer Preference, Lifestyle etc.• Satisfaction: Quality, Value, Usability, Stature etc.• Retention: Added value, Habituation, lack of alternative How are you going to deliver them?
  3. 3. Who does marketing in your company? MKMarket based business with a Deptstrong market orientation are more CS Cprofitable. Dept• Implement process of tracking market performance• Structure organization around RD E v market not product or factory Dept MF AC Dept Dept LG Dept Marketing isn’t somebody’s responsibilities; Marketing is everybody’s responsibilities. -Jack Welch - 0
  4. 4. Market is constantly changing and so should you.The only thing that is constant is change.• Customer changes: Demographic, life style, and consumption behavior• Competitor changes: Innovation• Environment changes: Economic, Politic, Social, Technology If you are not Market Poor Understanding of of Poor Understanding Customers and Competition Customers and Competition Oriented Stagnant Unfocused Competitive Shareholders Value Position Short Term Short Term Me-Too Sales Tactics Sales Tactics Customer Value Sporadic Business Sporadic Business Excessive Unit Profits Unit Profits Customer Turnover High Cost of Customer High Cost of Customer Market Share Retention and Acquisition Retention and Acquisition Instability
  5. 5. Marketing Driven CompanyMarketing driven organization have different behaviors, systems andmeasurements. Market oriented organization sells products that customers wantrather than what you can make or sell. Market Market ProfitOrientation Metrics Metrics Behaviors Measurement Performance Key Questions • Are we market oriented or sales oriented? • Customer satisfaction or sales revenue? “Marketing is too important to leave to the marketers.” – David Packard (HP)
  6. 6. Winning Strategy for the changingThree management characteristics that make Market Oriented company.• Customer Focus: An obsession with understanding customer needs and delivery customer satisfaction• Competitor Orientation: Continues recognition of competitors’ sources of advantage, competitive position, and marketing strategies.• Team Approach: Cross-functional team dedicated to developing and delivering customer solutions.
  7. 7. Marketing Impact on Customer Satisfaction Replacing the dissatisfied customers with new customers will cost 3 to 5 times more than retaining them. A market based business looks at customer as lifetime partner Customer Base 100% Satisfied Dissatisfied New 70% 30% customers70% Retained Make it easy To make up the lost, Complain Do not for customers marketing must 10% to complain complain 90% acquire 24.9% new customers to stay even. Acquisition cost is 3-5X over retention Retained Lost Lost Remained Care provided 20% 90% loyal 10% 80% 0.6% Lost 2.4% Retained 24.3% Lost 2.7% Retained
  8. 8. Customer Retention ConsiderationsNot all customers are same.• Core Customers – Brand loyal customers• At-Risk Customer – Profitable but not loyal to your brand• Non-profit Customers- Satisfied and retained but not profitable• Spinners – Sales promotion driven customer
  9. 9. Measuring Market Based PerformanceBoth Internal and External Performance Metrics are needed to understandmarketing effectiveness and business performance. Internal Performance External Performance Unit Cost Market Share Manufacturing Overhead Relative Share Marketing Expenses Customer satisfaction R&D Expenses Market Coverage Sales/Employee Product Awareness Inventory Turn Relative Quality Days Account Receivable Relative Price Return on sales Customer Preferences Asset Turnover Relative New Product Sales ROI and ROE Response Time to Problem
  10. 10. Measuring Market Based PerformanceFor financial performance, in-progress market metrics and end-result metricscan be used. Measurement In-Progress Metrics End-Result Metrics Perspective Product Defects Net Profit/Earning Late Delivery Return on Sales Internal Billing Errors Margin per Unit (in-company) Account Receivable Return on Assets Inventory Turnover Asset Turnover Customer Satisfaction Market Share Relative Product Quality Customer Retention External Relative Service Quality Relative new Product Sales (in-market) Intension of Purchase Revenue per Customer Product awareness Market Growth Rate
  11. 11. Profitability by market based accountingBy articulating Net Marketing Contribution, we can produce Market basedaccounting which will help marketing impacts in all performance metrics.Net Profit = Revenue - ExpenseNet Profit = Revenue - Cost of Good Sold – Operating CostNet Profit = Revenue - Cost of Good Sold – Marketing Cost – Other Operating costNet Profit = NMC - Other Operating cost Strategies to grow Strategies to Strategies to grow Market Demand Increase Market Customer Share Purchase Market Market Revenue Variable Cost MarketingNMC = X X Customer - per customer - Demand Share Expenses Strategies to Strategies to Lower Strategies to Increase Enter or Exit Variable Cost per Marketing Efficiency Markets customer
  12. 12. Market PotentialAy any given point in time, there are existing customers who make up currentmarket demand and potential customers who provide the opportunity forgrowing market demand• Narrow Market: Articulated needs of Served customer• Un-served Market: Undiscovered customer’s need• Vertical Market: Whole sales to Retail distribution• Horizon Market: Product line extension Not Affordable Untapped Lack Benefits Market Unable to use OpportunityMarket Demand Not Available Not Aware Market Penetration Market Potential Start Now
  13. 13. Customer Adoption and Market DevelopmentThe rate at which customer enter a market depends on productattractiveness, customer characteristic and marketing effort.Market development pattern can be projected based on Market Potential, MarketPenetration and Rate of Entry.To successfully reach mainstream market, marketer must deliver completesolution that market can accept. 100% Full market Development Market Development Gap Early Mainstream Market Market Early Adopter Early Majority Late innovator Laggards Majority
  14. 14. Product Life Cycle and Marketing ProfitabilityMarketDemand (Unit) Market Demand Volume Units Market Share Time Gross ProfitDollar per (Unit) Price Margin per Unit Cost NET Time MARKETINGMarketing Expenses CONTRIBUTION Marketing Expenses Time
  15. 15. Market Share Development Market Share can be estimated with a simple method of research. Market Share = Promotion X Product X Price X Place X Service % of % of Brand % of Price % of % of Product Awareness Acceptance Availability Repurchase Preference100% Market Development Index (MDI) MDI = (Market Demand / Market Potential) x100 Future Share Development Index(SDI) MDI SDI= (Current Share / Potential share) x 100 Current 0% SDI 100%
  16. 16. Customer ValueGreater the customer value, greater the competitive edge. Value does notnecessary reflects reality. Prioritize value creation based on cost structure. Product Customer Benefit Value Brand Benefit Price Service Benefit (Perceived) (Perceived) Cost Benefits of Purchase Customer Value = Benefits – Cost
  17. 17. Challenges of Market Segmentation “I will know when our business are doing a good job of market segmentation when they can articulate who we should not sell to.” -Chuck Lillis, CEO MediaOne Group Usage Behavior Demographic ? Lifestyle Needs-Based
  18. 18. Market Segmentation process Need-Based Segmentation Group customers based on similar needs Determine Demographics, lifestyles and Usage Segment Identification Behaviors. Determine market Growth, Competitive Intensity and Segment Attractiveness Market Access. Determine Net Marketing Profitability NMC= [Segment Demand x Segment Share. X Segment Profitability (Revenue per customer –Cost per customer)] Marketing Expenses Segment Positioning Determine Value Proposition for each segment Segment “Acid Test” Test story “Segment Story” Board Marketing Mix Strategy Develop 4P strategy for each segments
  19. 19. Segmentation Case Study After 20 years in the business, Gasoline retailers found that people don’t just buy gas for price alone.Road Warriors Generation F3 True Blue Home Bodies Price Shopper16% 27% 16% 21% 21%Premium Quality Fast fuel, fast Branded Products Convenience Tight on budgetService service and Fast and Reliable House wivesHigh Income food service.Middle-aged Upwardly mobile Moderate incomeMale men and women men and women
  20. 20. Understanding Competitive Position Competitive Position Industry Force Competitor Benchmarking Competitive Advantage Market Entry/Exit Competitor Intelligence Cost Advantage Buyer/Supplier Power Competitor Analysis Differentiation Advantage Substitute/Rivalry Competitive benchmarking Marketing Advantage FAVORABLE PERFORMANCE (Market based) COST Barriers Entry - High Market Share Variable Cost Barriers to Exit - Low Relative Price Marketing Expenses (ROI) Buyer Power – Low Relative product quality Operating Expenses Supplier Power – High Relative Service quality DIFFERENTIATION Substitute – Low Number of distributor Product Performance Rivalry- Low Sales Force Service Quality Promotion (%of sales) Brand Reputation Marketing budget (%of sales) MARKETING PERFORMANCE (Operating) Distribution Channel Unit Manufacturing Sales Effort Direct materials Brand Awareness Overhead Return on Assets Return of Sales Asset Turn Over Account Receivable Sales per Employee
  21. 21. Marketing Mix Strategies
  22. 22. Product Positioning Product Product Sales Physical Retailing Differentiation Price Breath Force Distribution merchandising Market Share = Product Positioning X Marketing Effort New Service Brand Media Sales Customer Product Quality Image Advertising Promotion SupportCase Study :Gel like substance that can shaped and cured to repair worn or broken machine. RC-601 Quick MetalTarget Production Engineers Maintenance WorkersPrice $10 per Tube NAPromotion Provide to technical data to Educate maintenance worker on explain why RC-601 would how to use fix everyday problems work for production engineers with Quick MetalBehavior Engineers do not take risk. Focus on solving problems.
  23. 23. Product Positioning - Brand Differentiation Increase occupancy rate Preference increase by 15% by adding from 47% to 59% with Marriott name Kellogg name Brand Equity Brand Asset Performance that adds Brand Liabilities value to the brand Performance that lowers brand value
  24. 24. Pricing Strategy The goal of pricing strategy should be to improve profit. Any price change will impact volume and margin. Cost based pricing is simple and easy but Market based pricing will impact Customer value, Market share and Profitability Product Life Cycle Pricing Strategy Strategic Account Extensive Plus-One Customer Market BasedCustomer Intelligent Reactive Pricing Pricing Segment (Customer (Market Orientation) Orientation) Perceived Competitive Some Bidding Value in Use Harvest Cost Based Competitor Pricing Based Pricing Low-Cost Producer Skim (Company (Competitive Penetration Orientation) Orientation) None Cost-Plus None Some Extensive Floor Competitor Intelligent
  25. 25. Pricing StrategyPrice elasticity is a measure of how demand for a product is influenced by pricechanges. Price elasticity can help to answer questions like: If I increase my unitprice by 20%, how much unit sales volume will I lose? If I lower my unit priceby 10%, how much unit sales volume will I gain? Price Elasticity = [(Q2-Q1) / ((Q1+Q2) / 2 )] / [(P2-P1) / ((P1+P2) / 2] Where Q1 = initial quantity; Q2 = final quantity; P1 = initial price; P2 = final price Price Elasticity and Performance Price Unite Sales Unite Total Action Volume Revenue Margin Contribution Raise Price Decrease Increase Increase Increase Inelasticity (<-1) Lower Price Increase Decrease Decrease Decrease Unity (=-1) Hold Price No change Maximum No change No change Raise Price Decrease Decrease Increase Inc or Dec Elasticity (>-1) Lower Price Increase Increase Decrease Inc or Dec
  26. 26. Place - Channel StrategyMore manufacturers are going to direct to customer market as technologyadvance in CRM and online channel. Channel Performance Customer Reach Operating Efficiency Service Quality Manufacturers Direct Channel System Indirect Channel System Direct Online Tele- Direct Agent Sales Sales marketing Marketing Wholesalers Retailers Customer Market
  27. 27. Place - Channel StrategySales force is creating a source of competitive advantage when sales effort isvalued by customers and can not be matched by competitors. Well trained sales force can generate higher Quality sales result Never be short on number of sales head count Coverage EMPLOYE E
  28. 28. Promotion - AdvertisingThree key objectives of Advertising• Build Awareness: Build a level of awareness with respect to brand/product• Reinforce the message: Maintain a level of awareness• Stimulate Action: Motivate target customers to take a specific action Customer Response Index (CRI) Action 90% 16% Intension 68% Interested 77% No Action 10% 2% Comprehend 54% No Intension 68% 8% Aware 77% Not Interested 23% 8% Don’t Comprehend 46% 29% Unaware 37% 37% 100% Awareness Comprehension Interested Intension Action Media Reach Frequency Benefit Price Availability Media Frequency Content Relevancy Test/Trial Selection Creative Ad Switching Choice cost T&C
  29. 29. Process of Building a Marketing Plan Situation Analysis Review market forces, competitive position & Current performance Assess Strength, Weakness, Opportunity and Threat SWOT Analysis Access market attractiveness, and competitive Strategic market Plan advantage. Develop strategic market plan and performance objective Tactical Marketing Mix Develop 4P strategy: Product, Price, Place and promotion Strategy Marketing Budget Adequate budget to achieve marketing objectives Performance Timeline An estimate of profit performance is made for each year of a 3-5 year strategic marketing planning horizon Performance Evaluation Share, sale revenue, Profitability
  30. 30. Strategic Market Planning Protect Product Diversification Market Grow Diversification Offensive Defensive Strong Offensive (Grow) Focus (Protect) (Grow) DefensiveMarket Attractiveness (Protect) Offensive Offensive Offensive (Grow) (Grow) (Grow) Defensive Defensive Defensive (Protect/Harvest) (Protect/Focus) (Protect/Focus) Harvest Weak Defensive Defensive Defensive (Exit or Harvest) (Exit or Harvest) (Exit or Harvest) 11 Weak Strong Competitive Advantage
  31. 31. Conclusion: Market is customer.Recognizing the customer as the primary unit of focus, market-based businesswill expand the focus to customers and market, not just product or unit sold.• Attract new customers grow market share• Grow the market demand by bring more customers into market• Enter new market to create new source of customer If you are Market Poor Understanding of Passion for Customer Customers and Competition Satisfaction Oriented Grow earning & Encourage Customer Shareholders Value Complaints Improve Profit Address Source of Performance Dissatisfaction Improve Marketing Improve on Process over Productivity Product Lower cost of Customer Improve Customer Acquisition Satisfaction and Retention
  32. 32. Thank YouMichael Hong Marketing ConsultingMichael is a Senior Marketing Management professional with exceptional skills and experience in e-Commerce Marketing. Michael has 20 years of marketing and marketing communications experienceat corporations such as AT&T and LG Electronics. He is a creative marketer and a thought leader indigital marketing and multicultural marketing industry. He spoke at numerous conferences such asInternet Retailer and the eM9-Marketing Conference.Specialties: Advertising Strategy, Planning and Execution, Digital Marketing (SEO, SEM, Social media, Word-of-Mouth), Direct Marketing, Multicultural Marketing, B-B MarketingEducation: Cornell University, Ithaca, New York B.A. 1985 School of Art, Architecture and City Planning2 Brookstone Dr. Boonton Twps., NJ 07005 (C) 201 841 9659