THE RIGHT MARKETING PROJECTS
We propose that the right marketing projects must focus on three elements to drive lasting competitive advantage and security for the short and long term. These elements deliberately ignore inherent product features. Many of the highly successful companies in a given industry do not have the best mousetrap. But they do have excellent marketing. These are the critical elements:
■ A compelling marketing offer that will provide a 2 to 5 year com- petitive advantage, usually without inherent changes to the prod- ucts or services being offered. This offer addresses important client needs — needs that go beyond the strict product capabilities. In fact, the marketing offer changes policies that are rooted in the in- dustry, making the offer look revolutionary to customers and im- possible to competitors. For one detailed example, see Kendall's book, Securing the Future.* We also further discuss examples.
Figure 9.1 In 2001, More Than 1,000,000 People Lost Their Jobs in the United States
*Gerald I. Kendall, Securing the Future, Strategies for Exponential Growth Using the Theory of Constraints, St. Lucie Press, Boca Raton, FL, 1997, Orman Grubb Case Study, pp. 237-247.
■ Market segmentation that removes the risk of economic downturns, geographically oriented or industry-oriented economic cycles. Ad- ditionally, this segmentation stresses using the same employees in different segments, providing lasting security and satisfaction to employees. This is critical, not simply for the sake of making em- ployees happy, but to ensure that there are no demotivators to cre- ativity and that there are constant improvement efforts.
■ Focus on gaining order of magnitude improvement in one factor, which will make the organization 500% better than its closest com- petitor is a factor of importance to its markets. This subject is dis- cussed in the next chapter.
COMPELLING MARKETING OFFER
Many organizations go through huge efforts trying to add features to their products and services. This is especially true in organizations that are in- volved in manufacturing sophisticated or technology driven products. It is also true of organizations producing products with a lot of engineering be- hind them. The more features they add and redesigns they do, the more they are turning their organizations inside out to produce and support these more and more complex products and services. Also, this approach drives the number of projects up.
One excellent example comes from the high technology industry, spe- cifically those companies producing Enterprise Resource Planning (ERP) integrated software solutions. Over the years, these products have become so feature-rich that two major negative effects have resulted. First, custom- ers are now arguing that they should not have to pay the huge price tag for this software because they use only approximately 5 to 10% of its capabil- ity. Second, the complexity of maintaining software that has become so convoluted over time has increased. These problems are brilliantly described in Goldratt’s book, Necessary But Not Sufficient.*
Ask the simple question, “What do my customers complain about?” and the answer invariably comes back to problems customers have with your organization. This information is often not useful to developing a compel- ling marketing offer. The question an organization must answer is, “What rooted industry policies bother the markets in which we operate?”
By rooted industry policies, we imply that customers would complain not just about your organization, but about every company in your industry.
*Eliyahu M. Goldratt, Necessary But Not Sufficient, North River Press, Great Barrington, MA, 2000.
The Right Marketing Projects 139 For example, there is no shortage of these issues in the passenger airline industry today. Some examples of policies and practices that drive airline customers crazy are:
■ Inability to use frequent flyer miles during blackout periods
■ Charges or lack of flexibility to change reservations (now upwards of $100 per ticket per change)
■ Extensive use of hub airports, putting masses of passengers into crowded terminals with poor food choices and long lines at the air- line service counters
■ Canceling flights when an equipment problem occurs
■ Misleading information about flight delays
Goldratt assumed that if an organization could change one or more deeply rooted industry policies, policies that hurt customers, two things would oc- cur. First, it would be difficult for competitors to copy, because policies (especially ones that have been standard in an industry for years) are hard to change. Second, it would enable that organization to easily capture more customers and gain a two-year competitive advantage. This would happen because that organization would be unique in rejecting rooted industry poli- cies and also because competitors will not follow suit.
In the case studies we have read and the studies in which we have been personally involved, we have seen a 5-year competitive advantage. Here are some examples:
1. Furniture Manufacturing — Common industry practices include quantity discounts on a per order basis, forcing retailers to order large quantities (e.g., 3- to 6-month supply from each supplier) with- out knowing what consumer demand will be during that time. It also forces retailers to incur large carrying costs for excessive inventory, among other complications explained in Kendall’s book, Securing the Future. Another practice is minimum freight charges, also forc- ing retailers to delay replenishing partial sets of furniture, leading to lost sales.
2. Medical Laboratories — Giving information to doctors about labo- ratory tests in a standard format, rather than customized to the way that suits individual doctor preference. Refusing to consolidate in- formation in a computer system from different laboratories into a standard format.
3. Steam Generator Manufacturer — Selling steam generating equip- ment to factories rather than the use of the steam, forcing customers to deal with all of the maintenance issues and complexities of the equipment.
4. Glass Manufacturer Selling Glass Components to Other Factories
— Standard policies include providing a shipment of various glass components in a random sequence and replacing broken glass com- ponents on standard manufacturing lead-time schedules.
5. Retail Banking — Standard policy includes extensive written appli- cations and waiting periods for loans and mortgages.
6. Printers — They hide their most precious resource, the graphic art- ists, in the back room to ensure that they are not “bothered” by cus- tomers during the initial design stage. By doing so, they encounter endless rework and aggravation from customers.
7. Medical Products for Hospitals — Hospitals have combined their purchasing power into GPOs: purchasing organizations that negoti- ate great deals with suppliers based on the buying power of several hospitals in a given region. Unfortunately, the resultant GPO poli- cies have some negative side effects to the hospitals. It takes a lot of effort for a hospital to justify a new or a “non-standard” product (i.e., a product for which the GPO does not have a negotiated deal).
Each offer is unique. Even within the same industry, there could be multiple offers that are unique.
The problem we see with many marketing approaches is that the ideas are too easy for the competitors to copy. For example, lowering a price is typically the easiest thing for any competitor to copy. It takes minutes or hours for competitors to not only emulate, but exercise one-upmanship as well.
Many other marketing programs are tactical, rather than strategic, in nature. For example, when we visit marketing departments, we see a lot of effort going into things such as sales campaigns, appearances at trade shows, advertising, catalogs and brochures, packaging, etc. Many marketing de- partments cannot recall the last time they visited one of their existing cli- ents or clients of competitors.
To develop and drive significant business increase from the compelling marketing offer, an organization must take the following steps:
1. Research and document the complaints that the markets have, not with your organization, but with the entire industry. To do this re- quires visits to some existing customers as well as to some prospec- tive customers. The customers sometimes do not reveal these issues through simple questions. The information you want to get out of a customer is what makes it hard for them to do business with your industry. You are more likely to obtain this kind of information from an executive of the customer or from the purchasing vice president than from a procurement agent.
The Right Marketing Projects 141 2. Do a rigorous analysis that ties at least one of those complaints to a common practice or policy in your industry. Use this analysis in sales presentations to customers, showing how that policy leads to negative effects that hurt customers.
3. Determine how you can change the standard practice in a way that will make a noticeable difference in the market.
4. Test your proposed changes within your own organization, to docu- ment and eliminate any concerns before you roll out the change.
5. Pilot the change by visiting selected prospects and seeing if the pro- posed change excites the customers enough to do (more) business with your organization.
6. Train the sales force in how to sell this compelling marketing offer.
Goldratt refers to this process as the “Mafia Offer,” meaning that the organization is putting together an offer too good to refuse. We prefer to use the more conservative term, “Compelling Marketing Offer.” We thank Babcock and Wilcox for this suggestion. Further examples are documented in the Goldratt Satellite Program Modules on Marketing and Sales.*
MARKET SEGMENTATION
Often, an organization’s policies and pricing strategy force people inside the organization to treat all customers the same, when, in fact, the markets are naturally segmented. Goldratt defines a segmented market as one in which the prices and quantities of products sold in that market are totally independent of the prices and quantities of the same product sold in any other market.
For example, the price and quantities of M&M candies sold in a shop at the airport would have no impact on the price and quantities of M&M can- dies sold in non-airport shops. Note that this does not mean that you can sell goods at the airport for any price, despite what some vendors think.
There is a major strategic advantage to segmentation when an organiza- tion can operate in 15 to 20 segments for the same products or services that are independent of each other’s economic cycles. The advantage is multi- plied when the organization can use the same staff resources to service the different segments.
This is a huge advantage because as some segments are encountering a down cycle (for whatever reason — economy, competitors, government regulation, etc.), the organization can shift its resources to the more lucra-
*See Bibliography for information on the Theory of Constraints Self Paced Learning Program (also known as the Goldratt Satellite Program).
tive segments, maintaining sales, profits, shareholder value and job security simultaneously.
Often, organizations do not segment at all or nearly as effectively as they could for one very simple reason. They believe there is a fair minimum price for their goods or services which covers all of their overhead and gives their organization a “fair” profit. This leads organizations to deadly cost allocation practices for goods and services, distorting what is ultimately good for them and for the different market segments.
For example, what is the value of a tool, such as an electric saw, to a homeowner who may use the tool only a few times a year? Perhaps it is worth $35 to $50. What is the same saw worth to a craftsman, who will use the tool every day, if the saw is sold with an “industrial strength trademark and 5-year warranty?” The answer, in reality, is $125 for a product that is exactly the same.
We know of a truck spring manufacturing company that applied the segmentation strategy beautifully. It used to produce truck springs only for brand new North American trucks. Of course, when economic conditions hit a down cycle, it had to lay off workers and, at one point, almost shut down an entire plant.
This company first explored the aftermarket, selling truck springs as repair parts. As the economic cycle would go into a tailspin for new trucks, the demand for repair parts soared. This is the perfect paradigm for good segmentation. It further segmented by capturing some of the European market.
Segmentation further secures the business as long as an organization is careful to segment its markets and not its resources. Being in two segments rather than one is more secure. However, to have statistical protection and predictability, according to Deming’s criteria, organizations should look towards a segmentation strategy with 15 to 20 segments.
Examples of segmentation include:
1. Airline industry, where, for example, the same seat is worth $500 to a traveler who booked it the night before and $175 to someone who booked 2 months in advance.
2. Car rental companies, which have different prices for business trav- elers and occasional renters.
3. Hotels and motels, which increase their occupancy rates by having special pricing for last minute deals or for Internet bookings.
4. Computer chip manufacturers that sell the same chip for up to three times as much if the order lead time is less than a week as opposed to one month.
5. Cable TV companies, which sell exactly the same wiring and con- verter for prices ranging from $10 per month to $100 per month, depending on what stations the customer wants to watch.
The Right Marketing Projects 143 6. Restaurants that offer half-price deals to people who are willing to
arrive early.
SUMMARY
Most organizations we visit have a mix of projects that are heavily biased towards internal improvements (supply side) rather than dealing with is- sues in their markets (market side). Further, many internal improvements have little or no impact on dealing with the organization’s current constraints, and therefore do not improve the organization’s profits or help it meet its goals.
In marketing, we often witness projects addressing tactics rather than strategy. Marketing strategy should clearly provide both a short- and long- term competitive advantage. To do so, the organization must do more than build a better mousetrap. Marketing must identify problems customers have with the industry as a whole, not just product features. By overcoming one or more of these, especially if these complaints hurt customers in their pock- etbooks, your organization can gain a lasting advantage of typically 2 to 5 years.
Further, market segmentation offers another way to insulate the organi- zation from shifts in market tastes and economic cycles. The key to market segmentation is to strive to enter into 15 to 20 different market segments that are insulated from each other or, even better, go up and down at oppo- site times. Organizations that segment successfully are careful to segment their markets, not their staff. This ensures that they have the flexibility to shift staff to more lucrative segments as opportunities change.
QUESTIONS
9.1 True or False: Sales and marketing functions should always re- port to the same vice president because they have the same goal.
9.2 What are three aspects of marketing that the authors claim are rare in most organizations?
9.3 What types of questions would you have to ask customers and prospective customers in order to analyze a market and put to- gether a compelling marketing offer?
9.4 Why is a compelling marketing offer so difficult for competi- tors to copy?
9.5 How long should it take to analyze a market and put a compel- ling marketing offer into practice? How long should it take be- fore the organization sees tangible results?
9.6 What are some common practices (rooted industry policies) that you have seen in two industries not listed in this book? How might a company change those policies to capture a competitive advantage?
9.7 How should the definition of segmentation cause an organiza- tion to reexamine the way it does business with existing cus- tomers?
9.8 What are some other examples of segmentation besides those included in this book?
9.9 What can you predict, with near certainty, about the fate of an organization that does not have compelling marketing offers and does not practice market segmentation strategy? Why?
9.10 Who, within an organization, needs to be involved in putting together and finalizing the types of marketing strategies out- lined in this chapter?
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