Creating Market Insight: How Firms Create Value from Market Understanding

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Success, strategy and understanding

‘Furious activity is no substitute for understanding.’

H. H. Williams

In The Hitchhiker’s Guide to the Galaxy, Douglas Adams describes the output of a planet sized computer which, for billions of years, had cogitated on the answer to life, the universe and everything. The answer was, famously, 42.

The joke of course lay in the contrast between the complexity of the question and the anticipated profundity of its answer with the clear inadequacy of the actual answer. The heroes of the story then realised that they needed to understand the question better. For managers seeking the answers to their questions about how to be more profitable, grow faster or whatever, Adams’ work provides a kind of parable. Airport bookshop shelves groan with simple answers that are quick, easy and, when compared to the difficulty of the problems facing managers in real life, hopelessly simplistic. Practising managers, who have to achieve success rather than just write about it, need to understand their questions better.

This chapter therefore aims to help those managers who are the audience for this book by helping them to understand their question better. It starts from the premise that the readers will all have one thing in common; they are all asking something like ‘How can I make my business more successful?’ Working from that premise, we explore what we mean by success, since it is defined differently by different organisations. In exploring success, we find that it is complex, contextual and about learning. We then go on to explore the management research literature in the hope of finding some common, generalisable causes of success. That exploration leads us to the conclusion that, notwithstanding luck and inept or weak competitors, success comes from a strong strategy. Exploring further, we find that, for all the loose usage of the word, strategy is best understood as that set of management decisions by which effort and resources are allocated. The conclusion that success has its roots, usually, in strong strategy, leads us to conclude that part of an enquiring manager’s question ought to be ‘What does a strong strategy look like?’ A synthesis of 40 years of management research allows us to answer that question in terms of a series of characteristics that strong strategies exhibit to a much greater degree than weak strategy. In turn, this prompts the question of how those relatively few firms that create such strong strategies manage to do so. The answer to that question is that all firms create strategy by their own particular blend of vision, planning and making it up as they go along. There is, contrary to what most airport books would have us believe, no ‘best’ way to make strategy. In reality, which blend of these three approaches works best depends on the market conditions. So, success comes from strong strategy, which is the result of an effective strategy making process, which is a function of matching that process to market conditions. So success is underpinned by an understanding of the market.

In short, a better understanding of our question ‘How can we be successful?’ leads us to the conclusion that we need to understand the market better. But we’re getting ahead of ourselves. What is success?

A better understanding of the question ‘how can we be successful?’ leads us to conclude that we need to understand the market better.

What is success?

To most readers of this book, what constitutes success for their organisation is relatively straightforward. In commercial firms, it is about money and in non-profits it is about achieving whatever goals they have in place of money. Depending where you are in the organisation, the measures you use will range from the simple (e.g. sales of a product line) to the more complex (e.g. overall profitability), to whatever it is the organisation exists for (e.g. creation of shareholder value). However, the nature of business or non profit success is more complex than a simple target might express and since this book is, ultimately, about achieving success it is worth pausing for a minute to reflect on the latest thinking about organisational success.

Research into how organisations measure and manage their performance has, in recent years, moved on a long way from the relatively simplistic view that most practising managers use in their day to day work. Indeed, these improvements in the way we measure and understand organisational performance have been called the ‘performance management revolution’.¹ Before looking at how understanding the business environment contributes to organisational performance, it’s useful to understand the key tenets of this new thinking. As elsewhere in this book, the authors have tried to combine depth of content with fluidity of narrative by using text boxes to ring fence important but parallel ideas. In the case of performance measurement, these ideas are captured in Box 1.1.

Research into performance measurement and management has moved on from the relatively simplistic view used by most practising managers.

Box 1.1 New definitions of success

The ‘performance management’ research is an entire, voluminous domain of academic literature and any attempt to summarise it is necessarily superficial; but for our purposes it is sufficient to understand that effective performance has three characteristics:

1. Performance management is contextual. That is, what constitutes success is highly specific to the organisation. In publicly owned companies for instance, what matters is risk adjusted rate of return² so performance objectives depend on where a firm sits in its owners’ portfolio of investments. In small firms, it is more about simple profit and especially cash flow. The implication of this complexity is that no one set of metrics is appropriate to all firms. In short, success is the degree to which an organisation achieves its objectives and these are specific to each organisation.

2. Performance management is complex. That is, any simple set of measures tends to mislead. Because sales can usually be bought at the expense of profit and both can be achieved by milking assets, and because assets are both tangible but increasingly intangible, only a complex and balanced set of measures tells the whole story. The most well publicised example of this is Kaplan & Norton’s Balanced Scorecard, ³ but multidimensionality is the principle behind most modern performance management.⁴

3. Performance is about learning as much as control. That is, traditional performance measures were all about controlling managers, noting exceptions and taking corrective action. By contrast, more modern methods are also about challenging assumptions and gaining new insight into the business environment.⁵ The basis of this newer thinking is that the ability to learn is now often considered a ‘strategic competence’ and a firm’s only basis of long-term sustainable competitive advantage.⁶

The rather broader perception of success outlined in Box 1.1 is important because, without it, it is much harder to understand what leads to success. Similarly, it is almost impossible to lead a company, or even a team, if each member of that group interprets success differently. If success is more complex than just sales and profits, then understanding what makes firms successful is more complicated too.

Application point: How do you define success?

Given the points made in Box 1.1, how does your organisation define success? If it is in simple performance terms, how might it be improved to better fit the context of your situation and to enable organisational learning?

Success comes from strong strategy

If it has done its job properly, the above heading will have prompted a small episode of cognitive dissonance in the mind of the reader. That is, the reader will have thought ‘No, my experience is that strong strategy and success don’t always go together’. We can all think of examples where a strong strategy was not successful or where success came despite a weak strategy. It has been recognised for a long time that luck plays an important part in business success.⁷ The link between strategies and success can easily be broken by external events. For example, September 11th when the air travel market collapsed and manufacturers of arms and medical products gained hugely as the military geared up for war. Or the impact of BSE on the UK beef industry. Or, more positively, the luck that compression stocking makers had when the newspapers caught onto the risk of deep vein thrombosis (‘economy class syndrome’) or which condom manufacturers gained from the advent of HIV. Almost every market has its opportunities for good or bad luck.

The challenge for managers is to understand what it is about strategy that correlates to success. In other words: what makes a strong strategy?

By definition, luck is out of our sphere of control, as are many of the things, from legislation to technology to competitors and customers, that drive our market. We can’t generally control these things, only our response to them. The only thing that is within our control is our own strategy. The challenge for managers is to understand what it is about strategy that correlates to success. In other words: what makes a strong strategy? To understand this, and how it connects with understanding the business environment, we need to digress into the strategy content literature, that body of management research that looks for patterns in the strategies of successful companies.

Strategy is perhaps the most loosely used word in the management lexicon. Because strategy is seen as a synonym for important, it is applied to many aspects of management that don’t really merit the term. Worse than this, the abuse of the term leads to confusion and means that any discussion of strategy must begin with defining what we mean by the word. Fortunately, the strategy content literature that studies the components of strategy helps to clarify the resulting confusion. Again, for the sake of narrative flow, this is summarised in Box 1.2.

These two ideas are very useful aids to thinking about strategy. Next time someone uses the word, try to deduce what level of strategy they are talking about - corporate, business unit, functional. Or do they mean a tactic or objective? Try substituting the phrase ‘resource allocation pattern’ for the word strategy and see if it still makes sense; if it doesn’t, they might be talking about objectives or tactics, rather than strategy.

Box 1.2 What do we mean by strategy?

Although academics like to quibble about the semantics, there are two fundamental ideas on which they broadly agree and which clarify what we mean by strategy.

• Strategy is about resource allocation. In fact, a good working definition of strategy is that by Henry Mintzberg⁸ - ‘a sustained pattern of resource allocation’. This is useful because it helps us distinguish strategy from the two ideas that it is often conflated with - objectives and tactics.

• Strategy is multi-tiered. Resource allocation decisions are made between businesses (corporate strategy) and then within businesses (business unit strategy). Within a business unit, resources are allocated between functions and then within functions.

Given this multi-tiered, resource allocation concept of strategy, our question ‘What is it about strategy that correlates to success?’ has to consider what level of strategy we are talking about. We also need to consider the idea of complementarity, which is addressed in Box 1.3.

In a book about market insight, the area of strategy we’re most interested in is marketing strategy. Note that by marketing strategy, we mean that set of resource allocation decisions about which customers to target and what offers to make to them.⁹ This is not to be confused with marketing communications strategy, which is about allocating resources between media, messages and audiences. Marketing communications strategy sits below marketing strategy in the decision making hierarchy. This is an important distinction because in many companies (especially smaller and more product-led firms) the marketing function is responsible only for marketing communications whilst the board or leader dictates the marketing strategy proper.

By marketing strategy we mean the set of resource allocation decisions about which customers to target and what offers to make to them.

Box 1.3 The concept of complementarity

As Voltaire said, common sense is not so common. It seems to be common sense that the different components of a business unit strategy work with and against each other and that success depends on getting all the bits right, or at least more right than the competition. This phenomenon is known as ‘complementarity’.¹⁰ Roberts describes complementarity as the interactions between variables that affect performance and gives the example that higher quality makes demand less sensitive to price and vice versa. Doing more of one complementary activity makes the other more attractive still. He contrasts complementarity with activities that are substitutes for each other, such as performance-linked pay schemes and close monitoring of employees. Doing more of one substitutable activity makes the other work less well.

In strategy terms, it is not difficult to see that, for instance, a marketing strategy that targets technically discerning customers is complementary to an R&D strategy that focuses on innovation and an HR strategy that focuses on recruiting and retaining technically expert people. This compares with, for instance, a minimum cost, heavily standardised, operational strategy that is most likely to be a substitute for, rather than a complement to, a marketing strategy that offers flexibility and customisation.

If you want to test Voltaire’s maxim, look at the business bookshelves next time you are in an airport. Complementarity is a piece of common sense that is largely ignored by all those books that proclaim that doing something to one part of your business (e.g. HR processes or IT systems or leadership style or whatever) will lead to instant, huge success. The reality is that few business initiatives have much impact without considering the complementarity of the initiative with the other parts of the business process.

We are most interested in marketing strategy for two reasons. Firstly, this is because the marketing strategy is the functional strategy most concerned with the external environment. That is not to say other functions are insular but functions such as operations and research tend to focus on those parts of the external environment that affect them directly, such as suppliers or technological developments. Marketing (remember, we mean choice of customers and offers, not promotion) involves understanding the whole external environment. Secondly, in most companies, it is the marketing strategy (i.e. the choice of what to offer to whom) that forms the starting point for the operational, product development and other functional strategies. Again, we do not need to be purist about this. Market-led does not need to mean ‘marketing department led’, but in most firms the primary responsibility for telling the firm where the market is going lies with the marketers, whatever job title they have and whatever department they work in.

In most firms, primary responsibility for understanding where the market is going lies with marketers, regardless of job title or department.

The basic premise of this book, therefore, is that success (in as much as we can control it in the face of luck) comes from making good resource allocation decisions; and the decisions that depend most on market insight are those about marketing strategy. Hence, it is important that we know what a strong marketing strategy looks like and what that implies for understanding the market.

Application point: What’s your marketing strategy?

Given the discussion in this section, how would you define your marketing strategy? Who is really responsible for setting that strategy? To what extent does your marketing strategy complement your other functional strategies?

What does a strong marketing strategy look like?

Given that marketing strategy is that set of management decisions concerning which customers to target and what to offer them, we can get back to the question of ‘What is it about strategy that correlates to success?’ By that, of course, we are not looking for tactical panaceas, such as CRM, of the type peddled by some consultants. Instead, we are looking for common characteristics about marketing strategies that are associated with success. In other words, if we sorted all the marketing strategies in the world in order of success, would we see a pattern?

The answer is a surprisingly clear yes. The detailed answer is discussed and explained in another of our books,⁹ but can be summarised in five points:

1. Strong marketing strategies define real segments

Marketing strategies work best when their targets are ‘real’ segments. That is, they pass the classic tests that good segments are homogenous, distinct, accessible and viable. In practice, this means that real segments are based on customers’ needs and motivational drivers. Contrast this with what passes for segmentation in many marketing strategies, but which is really classification into groups according to available data such as age, gender, income or, in B2B markets, industry, size and usage.¹¹

Real segments work because all of the customers within a real segment respond in much the same way if offered the same compelling value proposition. By contrast, data-driven classifications are often heterogeneous in their needs and motivations and the customers within them show varying responses to any one offer. A good test of your segmentation is to look at the distribution of your sales across the customers in your market. If your marketing strategy is demonstrating a Pareto-type effect (e.g. 80 % of business coming from 20 % of customers) poor segmentation is often to blame.

Poor segmentation often results in a Pareto-type effect (e.g. 80 % of business from 20 % of customers).

2. Strong marketing strategies tailor the offer

Marketing strategies work best when they tailor their offer around the needs and motivations that define the segment. That is, they adapt the ‘marketing mix’ of product (or service), promotion, price, place (i.e. channel), people, process and physical evidence to meet the needs of the target segment. In practice, companies can rarely afford - and customers are rarely willing to pay for - total customisation, but the best companies do design their offer around the segment, even when that means adding cost.¹² Contrast this with what passes for tailoring in many marketing strategies, which is often limited to the tweaking of the easily malleable parts of the mix such as price or promotion.

A price sensitive market usually indicates that your offer is not sufficiently or acceptably tailored.

Tailoring works most obviously when, as in many markets, customers have a choice. Given a choice, we will choose that offer which best meets our needs. If no offer meets our needs better than the others (i.e. the offers are commoditised), we choose on price. A good test of your tailoring is the price sensitivity of your product or service. If your market is very price sensitive, it is usually an indication that your offer is not sufficiently or acceptably tailored to the needs of the target segment.

3. Strong marketing strategies are unique

Marketing strategies work best when the target and the offer are different from those of the competition. That is, compared to the competitors’ strategies, they define their target markets differently, or they prioritise them differently and, because it is tailored, the offer made to them is noticeably different from the competitor. In practice, this means uncovering and satisfying needs-based segments that the competitor has either overlooked or not targeted.¹³ Contrast this with what occurs in many markets; marketers from the same industry culture create unsurprisingly similar offers and target them at segments defined using the same classification data bought from the same market research companies.

Uniqueness works because it effectively side steps competition rather than going head on with it. By defying or negating direct comparison, a unique strategy often comes to dominate its target segment, achieving strong loyalty and relative price inelasticity. A good test of your strategy uniqueness is to consider what your customers would do if your firm disappeared tomorrow. If you are unique, your customers would not have an immediate replacement, or would feel significantly saddened by your disappearance. If not, they would replace you quickly and with little thought.

What would happen if your firm disappeared tomorrow? If you are unique, customers would not have an immediate replacement. If not, they would replace you quickly and with little thought.

4. Strong marketing strategies anticipate the future

Marketing strategies work best, as we have already said, when they meet customers’ driving needs with tailored value propositions in a way that is different from any competitor. All of this, of course, assumes some sort of stasis in customer needs. In fact, the strongest strategies anticipate the way customers’ needs are changing and emerging.¹⁴ They then target and design the offer accordingly. Contrast this with the process for bringing new offers to market in many companies. Natural caution and politicised approval systems place a premium on quantified market research and ‘proof’ that the product or service will sell. Since such data is predominantly retrospective, it rarely anticipates the future of the market.

Anticipating the future works precisely because markets change. This can take the form of changes in customer needs, competitive forces, channels to market or other factors. When it happens, the match between an offer and the customer needs that had led to competitive advantage is undermined and lessened, a phenomenon known as strategic drift.¹⁵ A good test of your anticipation is to think through the needs which currently drive your customers’ behaviour and, especially, how these are changing. If your strategy is anticipative, it will address these changes.

If your strategy is anticipative, it will address the changing needs which drive customer behaviour.

5. Strong marketing strategies are SWOT aligned

Marketing strategies work best when, by their choice of target segments and the offers they make to them, they create SWOT (Strengths, Weaknesses, Opportunities and Threats) alignment. That is, they make good use of what the firm is better at than its competition and manage to negate the effects of any relative weaknesses they have. Contrast this with the strategy of many firms, which have a strongly subjective and inaccurate view of their strengths and weaknesses. Hindered by this ignorance, they attack markets they can’t win and ignore or underresource those they could win.¹⁶

If your strategy differs markedly in targets and offers from current outcomes, this is an indication that the strategy may lack SWOT alignment.

SWOT alignment works because competitors in any market differ, each having a distinctive profile of strengths and weaknesses, both tangible and intangible. By choosing to target customers and make offers based on those, SWOT alignment first helps achieve some degree of strategy uniqueness. It then leads the firm to attack segments in which it is especially well placed to compete. At the same time, SWOT alignment avoids allocating effort to segments where the firm will always be at a competitive disadvantage. A good test of SWOT alignment is to compare current successes and failures with your current strategy. In the absence of a formal SWOT analysis, current outcomes are strongly indicative of relative strengths and weaknesses. If your strategy differs markedly in targets and offers from current outcomes, this is an indication that the strategy may lack SWOT alignment.

If creating a strong strategy were not difficult, everyone would do it. The result would be competitive parity, not advantage.

These five characteristics of a strong strategy are daunting. Few companies score strongly on all of these tests and perhaps none on the extended list of strategy tests shown in our earlier work. However, three illustrative examples of those that do are given in Box 1.4.

Box 1.4 Examples of strong strategies

Creating a strategy that meets the criteria of a strong strategy is difficult. If it were not, everyone would do it and the resultant strategies would merely achieve competitive parity, not advantage. Even excellent strategies rarely excel at all five criteria, let alone the extended list discussed in our earlier work. And even when they do, it is a constant struggle to maintain such strategy superiority.

However, the task is not hopeless, as a couple of examples have proved.

BMW have a relative weakness of high costs and relative strengths in their engineering and design competencies and their brand heritage. Their marketing strategy, across their range, is to target segments driven by the love of driving and self actualisation needs around discernment and peer respect. To this segment they offer not simply status, but status based on perceptions of intelligence, exclusivity and discernment. Importantly, their offer is not simply promotional (‘The Ultimate Driving Machine’) but encompasses everything from choice of upholstery materials to after sales service. In doing so, BMW’s strategy achieves a high degree of SWOT alignment as well as passing the other four tests.

Waitrose is a 2nd tier player in the extremely competitive UK food retailing sector. It therefore suffers scale disadvantages when it is caught between Tesco, Asda (Wal-Mart), Sainsbury’s and Morrisons. Waitrose again target a discerning segment driven by needs for variety, quality and a less anonymous customer experience. That they achieve this at a price premium is the result of a very coherent offer to their target segment, covering everything from what they sell and how they sell it to how they recruit, retain and manage their people. Again, it is summarised in a strap-line – ‘Good food honestly priced’ – but it is much more than mere promotional positioning.

Xerox provide a B2B example of strong strategy. Again, they eschew the head-on battle with their imitators who will always be cheaper. Their strapline ‘The Document Company’ reveals the targeting of customer firms who want to manage their knowledge, rather than just buy photocopiers. In doing so, Xerox leverages its technical superiority and anticipates future trends in which knowledge management becomes central to their customers’ own strategy. As with the previous examples, the Xerox strategy involves not just a promotional positioning but a coherent offer across the whole marketing mix.

All three of these examples involve tailoring offers around needs-based segments in a way that is relatively unique, anticipatory and SWOT aligned.

Application point: How strong is your marketing strategy?

Given the discussion in this section about the five characteristics of a strong marketing strategy, how would you assess the strength of your organisation’s marketing strategy? To the extent that your marketing strategy has weaknesses, what do these imply about your understanding of your market?

These characteristics and examples provide an answer to our question about what leads to the complex, contextual and learning oriented success we seek. The more of these tests a strategy passes, the more likely it is to be successful. All of which naturally begs the question ‘What do we need to create strong strategy?’

The answer to that question is in two parts. Firstly, a process for making strategy that fits both the market conditions and the culture of the firm. This is discussed at length in our earlier book⁹ and summarised in Box 1.5. The second ingredient is the raw material on which all strategy making processes work – market understanding and insight. This is discussed in the following section.

To create a strong strategy we need a process that fits combined with market understanding and insight.

Box 1.5 How do firms create strong strategies?

The strategy process literature (that is, the study of how firms make strategy) is a huge field of research that overlaps with the strategy content literature (the study of what strategy is) mentioned earlier in this chapter. Again, every academic in the field has his or her personal view but for the managers reading this book three points are important:

Prescription is not description

Most of the textbooks used in MBAs and other courses prescribe similar models of rational, formal planning. These differ in detail from one another but not in principle. The key point to understand is that these are primarily prescriptions of what academics recommend and not very good descriptions of what happens in reality.¹⁷

Strategy making is firm specific

The descriptive research describes a reality in which strategy is formed by a mixture of processes, from the formal to the ad hoc, from the political to the enforced. Different academics have identified 3, 4, 5, 6 and even 10 approaches to making strategy.¹⁸ In practice, all firms use some of each approach in a hybrid strategy making process that is characteristic of the firm.

What works is what fits

The innumerable possible hybrid ways of making strategy work best when they fit the market. Complex markets tend to need formal planning; fast markets need intuitive vision; and all markets need a little ‘make it up as you