Marketing Fundamentals: Building Blocks for Success", Study notes of Marketing Theory

Download Marketing Fundamentals: Building Blocks for Success" and more Study notes Marketing Theory in PDF only on Docsity! Strategy: from formulation to implementation The basics of marketing strategy Marketing strategy sometimes claims to pro- vide an answer to one of the most difficult questions in our understanding of competitive markets: how to recognize and achieve an economic advantage which endures. In attempting to do so, marketing strategy, as with the field of strategy itself, has had to address the continual dialectic between analysis and action, or in more common managerial terms between strategy formulation and strategic implementation. At the same time, it has also had to address a perhaps more fundamental question: how far, at least from a demand or market perspective, can we ever develop gen- eral rules for achieving enduring economic advantage. From the late 1960s to the mid-1980s at least, management strategy seemed to be inevitably linked to issues of product-market selection and hence to marketing strategy. Perhaps iron- ically this was not primarily or mainly as a result of the contribution of marketing scholars or indeed practitioners. The most significant initial contributors, such as Bruce Henderson and Michael Porter, were both to be found at or closely linked to the Harvard Business School, but were really informed more by particular aspects of economic analysis: neo-marginal economics and Industrial Organizational Eco- nomics respectively. Labelling the intellectual pedigree for Bruce Henderson and the Boston Consulting Group is rather more difficult than for Michael Porter. This is partly because much of the approach developed out of consulting practice (cf. Morrison and Wensley, 1991) in the context of a broad rather than focus notion of economic analysis. Some of the intellectual pedigree for the approach can be found in Henderson, who was at Harvard also, and Ǫuant (1958), but some basic ideas such as dynamic economies of scale have a much longer pedigree (see, for instance, Jones, 1926). However, in various institutions the marketing academics were not slow to recognize what was going on and also to see that the centrality of product-market choice linked well with the importance attached to marketing. This expan- sion of the teaching domain had a much less significant impact on the research agenda and activity within marketing itself, where the focus continued to underplay the emerging impor- tance of the competitive dimension (Day and Wensley, 1983). Hence the relatively atheor- etical development continued into the process 5 The of codification of this new area, most obviously in the first key text by Abell and Hammond (1979), which was based on a, by then, well- established second year MBA option at Har- vard. The book itself is clearly influenced by the work related to the Profit Impact of Market Strategy (PIMS) project, as well as work in management consultancies such as McKinsey, ADL and, perhaps most importantly, Boston Consulting Group, whose founder, Bruce Hen- derson, had close links with Derek Abell. The MBA course itself started in 1975 with a broad notion of ‘filling the gap’ between what was seen then as the marketing domain and the much broader area of Business Policy, so encompassing issues relating to Research and Development, Distribution and Competitive Costs. The course itself was a second year elective and rapidly expanded to four sections with a major commitment on development and case writing in 1976 and 1977. For a more historical analysis of the ways in which the case method has been used to incorporate new issues in management whilst avoiding some central concerns about the nature of power and influence, see Contardo and Wensley (2002). In retrospect, this period was the high point for the uncontested impact of competitive market-related analysis on strategic manage- ment practice. With the advantage of hindsight, it is clear that a serious alternative perspective was also developing, most obviously signalled by Peters and Waterman (1982), which was to have a very substantial impact on what was taught in strategic management courses and what was marketed by consultancies. It was also a significant book in the sense that, although not widely recognized as so doing, it also attempted to integrate, at least to some degree, earlier work by other relevant aca- demics such as Mintzberg (1973), Pettigrew (1973), and Weick (1976). As the decade progressed, it was inevitable that, at least to some degree, each side recog- nized the other as a key protagonist. Perhaps one of the most noteworthy comments is that in which Robert Waterman challenged the value of a Michael Porter-based analysis of competi- tion. Waterman (1988) argued that the Porter approach does not work because ‘people get stuck in trying to carry out his ideas’1 for three reasons: the lack of a single competitor, the actual nature of interfirm co-operation as well as competition and, finally, the fact that com- petitors were neither ‘dumb nor superhuman’. This is a particular, and rather colourful, way of representing the notion of ‘rational expecta- tions’ (Muth, 1961; Simon, 1979) in economics, to which we will return later in this chapter. Equally, the economists have not taken such attacks lying down: somewhat more recently, Kay (1993) attempted to wrest back the intellectual dominance in matters of corporate strategy and Porter (1990) extended his domain to the nation state itself. The story, of course, has also become complicated in other ways, many of which are outside the scope of this chapter. In terms of key perspectives, Tom Peters has become more and more polemical about the nature of success (indeed, to the extent of arguing in one inter- view that innovative behaviour now depends on ignoring rather than exploiting market evidence), C. K. Prahalad has refined his original notion of dominant logic to reflect in general terms the importance of transferable capabilities and technological interdependen- cies in the development of strategic advantage (for instance, see Bettis and Prahalad, 1995; Prahalad and Hamel, 1990; Prahalad and Bettis, 1989), whist Gary Hamel, who started his work with C. K. Prahalad on Strategic Intent (1989), has moved on to espousing radical and revolu- tionary change (2000) and, of course, Peter Senge (1992) reiterated the importance of infor- mation structures, and Hammer and Champy (1993) introduced a ‘new’ approach labelled business process analysis. In terms of the disciplinary debate, what was originally broadly a debate between econ- omists and sociologists now also involves 1 It is noteworthy that the very representation of the five- forces diagram, for instance, is one which emphasizes that the firm is under pressure from all sides. The basics of 5 analysis encourage actions which are either sub- optimal or indeed dysfunctional. Lacking further experimental or research evidence on this question, this chapter is mainly written around the assumption that we need to recognize, in using these simplifying approaches, that (i) the degree to which they actually explain the outcomes of interest will be limited, particularly when it is a direct measure of individual competitive performance, and (ii) the ways in which the underlying assumptions can cause unintentional biases. The evolution of analysis, interpretation and modelling in marketing strategy from customers to competitors to channels Given that the underlying representation of the competitive market environment has changed so, not surprisingly, have our processes of analysis, interpretation and modelling. Initially, the key focus was on customer-based position- ing studies, in a particular product-market space. Such work remains a key component in the analysis of much market research data, but from the marketing strategy perspective, we need to recognize that the dimensionality of the analytical space has often been rather low, indeed in some situations little more than a single price dimension, which has been seen as highly correlated with an equivalent quality dimension. There are undoubtedly good rea- sons for adopting such a low dimensionality approach in the name of either stability, which is clearly a critical issue if strategic choices are going to be made in this context, and/or a hierarchy of effects in which strategic choices at this level dominate later, more complex choices in a higher dimension perceptual space, but it is often doubtful whether either or both of these rationales are based on firm empirical evidence in many situations. The increased emphasis on the analysis of competitors has also required us to make certain compromises. One, of course, relates to the balance between what might be termed public information, legitimate inference and private information. The other to the fact that our colleagues in business strategy now give emphasis to two rather different perspectives on the nature of competitive firms, one essen- tially based on similarities (strategic groups: McGee and Thomas, 1986), the other on differ- ences (resource-based perspective: Wernerfeld, 1984, 1995a). Sound competitor analysis should at least enable us to avoid making inconsistent assumptions, particularly in the context of public data, like, for instance, assuming that we will be able to exploit an opportunity which is known to all, without a significant amount of competitive reaction. Finally, there is the question of channels or, in more general terms, supply chains. The issue of retailers in particular as independent and significant economic intermediaries rather than just logistical channels to the final consumer has been an important consideration in con- sumer marketing, at least since the 1970s. Similarly, in industrial markets the issue of the supply chain and the central importance of some form of organization and co-ordination of the various independent entities within the chain has been seen as an increasingly impor- tant strategic issue. Both these developments have meant that any strategic marketing analy- sis needs to find ways to evaluate the likely impact of such independent strategies pursued by intermediaries, although in many cases our tools and techniques for doing this remain rather limited and often rely on no more than an attempt to speculate on what might be their preferred strategic action. Beyond this there has been a broader attempt to introduce what has become known as relationship marketing. It is outside the remit of this chapter to provide a full overview, but from a strategic viewpoint there are two impor- tant issues that need to be emphasized. The first is that a recognition of the relatively stable pattern of the transaction relationship within particularly most industrial markets, often described as the ‘markets as networks’ per- 5 The The codification of marketing strategy analysis in terms of three strategies, four boxes and five forces spective, is not necessarily the same as a more prescriptive notion of the need to manage such relationships. Mattsson (1997) provides a very useful comparison and evaluation of the sim- ilarities and differences between the two approaches, which we will discuss later. The second is that whilst the relationship per- spective rightly moves our attention away from individual transactions towards patterns of interaction over longer time periods, it often seems to assume that the motivations of each party are symmetric. In practice, in both con- sumer (Fournier et al., 1998) and industrial markets (Faria and Wensley, 2002), this may prove to be a very problematic assumption. What can now be regarded as ‘traditional’ marketing strategy analysis was developed primarily in the 1970s. It was codified in various ways, including the strategic triangle developed by Ohmae (1982) as reproduced in Figure 4.3, but perhaps more memorably, the most significant elements in the analysis can be defined in terms of the three generic strategies, the four boxes (or perhaps more appropriately strategic contexts) and the five forces. These particular frameworks also repre- sent the substantial debt that marketing strat- egy owes to economic analysis; the three strategies and the five forces are directly taken from Michael Porter’s influential work, which derived from his earlier work in Industrial Organization Economics. The four contexts were initially popularized by the Boston Con- sulting Group under Bruce Henderson, again strongly influenced by micro-economic analy- sis. Whilst each of these approaches remains a significant component in much marketing strategy teaching (see Morrison and Wensley, 1991), we also need to recognize some of the key considerations and assumptions which need to be considered in any critical application. The three strategies It could reasonably be argued that Porter really reintroduced the standard economic notion of scale to the distinction between cost and differ- entiation to arrive at the three generic strategies of focus, cost and differentiation. Indeed, in his later formulation of the three strategies they really became four in that he suggested, rightly, that the choice between an emphasis on com- petition via cost or differentiation can be made at various scales of operation. With further consideration it is clear that both of these dimensions are themselves not only continuous, but also likely to be the aggregate of a number of relatively independ- ent elements or dimensions. Hence scale is in many contexts not just a single measure of volume of finished output, but also of relative volumes of sub-assemblies and activities which may well be shared. Even more so in the case of ‘differentiation’, where we can expect that there are various different ways in which any supplier attempts to differentiate their offerings. On top of this, a number of other commentators, most particularly John Kay (1993), have noted that not only may the cost differentiation scale be continuous rather than dichotomous, but it also might not be seen as a real dimension at all. At some point this could become a semantic squabble, but there clearly is an important point that many successful strategies are built around a notion of good value for money rather than a pure emphasis on cost or differentiation at any price. Michael Porter (1980) might describe this as a ‘middle’ strategy, but rather crucially he has consistently claimed that there is a severe danger of getting ‘caught in the middle’. In fact, it might be reasonable to assume that in many cases being in the mid- dle is the best place to be: after all, Porter The basics of 5 Target segments Multiple market segments Customers Corporation Cost Competitors Product/sevice differentiation Figure 4.3 The strategic triangle Source: Ohmae (1982, p. 92) has never presented significant systematic evidence to support his own assertion (cf. Wensley, 1994). The four contexts The four boxes (contexts) relate to the market share/market growth matrix originally devel- oped by the Boston Consulting Group (BCG) under Bruce Henderson. Although there have inevitably been a whole range of different matrix frameworks which have emerged since the early days, the BCG one remains an outstanding exemplar not only because of its widespread popularity and impact (nowadays even University vice-chancellors have been heard to use terms such as ‘cash cow’), but because there was an underlying basic eco- nomic logic in its development. Many other similar frameworks just adopted the rather tautologous proposition that one should invest in domains which were both attractive and where one had comparative advantage! The market growth/market share matrix, however, still involved a set of key assump- tions which were certainly contestable. In particular, alongside the relatively uncontro- versial one that in general the growth rate in markets tends to decline, there were the assumptions that it was in some sense both easier to gain market share in higher growth rate markets, and also that the returns to such gains were likely to be of longer duration. This issue can be seen as assumptions about first the cost and then the benefit of investment in market share, and has been discussed and debated widely in marketing over the last 20 years (see Jacobson and Aaker, 1985; Jacobson, 1994). The general conclusions would appear to be that: (i) market share as an investment is not on average under-priced, and may well be over-priced; (ii) the cost of gaining market share is less related to the market growth rate and The basics of 6 provide a systematic approach to the central question: the nature of sustained economic performance in the competitive marketplace. Whilst such an objective was clearly recognized in the so-called search for Sustainable Com- petitive Advantage (Day and Wensley, 1988), there remained some central concerns as to whether such a notion was realistic given the dynamic and uncertain nature of the com- petitive marketplace (Dickinson, 1992). Indeed, not only is it dynamic and uncer- tain, but it is also diverse: firms are heteroge- neous and so is the nature of demand. A useful way of looking at demand side heterogeneity is from the user perspective directly. Again, I will avoid terms such as customer or consumer and focus attention on defining the individual or group concerned purely in terms of product or service usage. Arguably from its relatively early origins mar- keting, or at least the more functional focused study of marketing management, has been concerned with managerial effective ways of responding to this heterogeneity, particularly in terms of market segmentation. Indeed, it would be reasonable to suggest that without a sub- stantial level of demand heterogeneity, there would be little need for marketing approaches as they are found in most of our textbooks. Whilst there remains a substantial debate about the degree to which this market-based hetero- geneity is indeed ‘manageable’ from a market- ing perspective (cf. Wensley, 1995; Saunders, 1995), to which we will partly return later in this chapter, our concern at the moment is merely to recognize the substantial degree of heterogeneity and consider the degree to which such diversity on both the supply and demand side facilitates or negates the possibility of developing robust ‘rules for success’. To address this question, we need to consider the most useful way of characterizing the competitive market process. This is clearly a substantial topic in its own right, with propo- nents of various analogies or metaphors along a spectrum including game theory, sports games and military strategy. To illustrate this issue, let us consider the field of ecology, where we observe wide diver- sity in terms of both species and habitat. There are two critical aspects which must inform any attempt to transfer this analogy into the field of strategy. The first is the interactive relationship between any species and its habitat, nicely encapsulated in the title of the book by Levins and Leowontin (1985): The Dialectical Biologist. Particularly in the context of strategy, it is important to recognize that the habitat (for which read market domain) evolves and devel- ops at least as fast as the species (for which, rather more problematically, read the individ- ual firm). For a much more developed discus- sion of the application of such notions as species to competitive strategy at the firm level, see McKelvey (1982). The second aspect addresses directly our question of ‘rules for success’. How far can we identify, particularly through the historical record, whether there are any reliable rules for success for particular species characteristics. Of course, it is very difficult to address this question without being strongly influenced by hindsight and most observations are seen as contentious. However, Stephen Jay Gould (1987, 1990) has perhaps most directly con- sidered this issue in his various writings, particularly the analysis of the Burgess Shale, and come to the uncompromising conclusion that it is difficult if not impossible to recognize any species features or characteristics that provided a reliable ex ante rule for success. It would seem that we should at least be very cautious in any search for rules for success amidst a world of interactive diversity. Hence we should hardly be surprised that marketing strategy analysis does not provide for con- sistent and sustainable individual success in the competitive marketplace. However, we do have a set of theoretical frameworks and practical tools which at least allow us to represent some of the key dynamics of both customer and competitive behaviour in a way which ensures we avoid errors of inconsistency or simple naivety. Models of competition: game theory versus evolutionary ecology 6 The As we have discussed above, most analysis in marketing strategy is informed by what are essentially economic frameworks and so tend to focus attention on situations in which both the competitive structure of the market and the nature of consumer preferences are relatively well established. As we move our attention to more novel situations, these structures tend to be at best indeterminate and therefore the analytical frameworks are less appropriate. We encounter the first of many ironies in the nature of marketing strategy analysis. It is often least applicable in the very situations in which there is a real opportunity for a new source of economic advantage based on a restructuring of either or both the competitive environment and consumer preferences. However, recent detailed work on customer perceptions of market struc- ture actually suggests that in even relatively stable contexts such as autos and motor cycles, the structures may be quite dynamic (Rosa et al., 1999; Rosa and Porac, 2002). To develop a formal approach to the modelling of competitive behaviour we need to define: 1 The nature of the arena in which the competitive activity takes place. 2 The structure or rules which govern the behaviour of the participants. 3 The options available in terms of competitor behaviour (when these consist of a sequence of actions through time, or over a number of ‘plays’, then they are often referred to in game theory as strategies). In this section, however, we particularly wish to contrast game theory approaches, which in many ways link directly to the economic analysis to which we have already referred, and 6 The analogies from evolutionary biology, which raise difficult questions about the inherent feasibility of any systematic model building at the level of the individual firm. Game theory models of competition A game theory model is characterized by a set of rules which described: (1) the number of firms competing against each other; (2) the set of actions that each firm can take at each point in time; (3) the profits that each firm will realize for each set of competitive actions; (4) the time pattern of actions – whether they occur simulta- neously or one firm moves first; and (5) the nature of information about competitive activ- ity – who knows what, when? The notion of rationality also plays a particularly important role in models of competitive behaviour. Rationality implies a link between actions and intentions but not common intentions between competitors. A wider and comprehensive review of the application of game theory to marketing situations can be found in Moorthy (1985). Models describing competitive activity are designed to understand the behaviour of ‘free’ economic agents. Thus, these models start with an assumption of ‘weak’ rationality – the agents will take actions that are consistent with their longer-term objectives. The models also assume a stronger form of rationality – the intentions of the agents can be expressed in terms of a number of economic measures of outcome states, such as profit, sales, growth, or market share objectives. Do the results of the game theory model indicate how firms should act in competitive situations? Do the models describe the evolu- tion of competitive interactions in the real world? These questions have spawned a lively debate among management scientists concern- ing the usefulness of game theory models. Kadane and Larkey (1982) suggested that game theory models are conditionally normative and The basics of 6 competitive analogy. In most military conflicts it is assumed that the problems can be overcome with enough resources and effort, but then this degree of commitment could prove too much from a wider perspective, and hence the old adage of winning the battle but not the war. In terms of limitations sports game analo- gies, or at least the ones with most common currency, which tend to be games of position such as American football rather than games of flow such as soccer, focus on a simple territorial logic and a well-defined and unchanging set of rules (Kierstead, 1972). They also presume a high degree of control over the activities of individual players. Conversely, military analo- gies inevitably focus on conflict, and again, in their most popular manifestations, direct and immediate conflict. The physical terrain often occupies a critical role in the analysis of competitive dispositions and there is a focus on the nature of external factors, as opposed to internal organization and control, and supply logistics. The strategic groups and mobility barriers in the Industrial Organization economics approach recognize the critical asymmetries between competing firms. This approach iden- tifies three methods by which firms can isolate themselves from competition – (1) differentia- tion, (2) cost efficiency and (3) collusion – although the latter issue has tended to be ignored. The developments within the IO para- digm have therefore tended to usefully focus on the nature and significance of various mechanisms for isolating the firm from its competition. The evolutionary ecological anal- ogy, on the other hand, focuses on the notion of scope with the general distinction between specialists and generalists. The ecological approach also raises interesting questions about the form, level and type of ‘organization’ that we are considering. In particular, we need to recognize most markets as forms of organiza- tion in their own right, as those who have argued the ‘markets as networks’ approach have done, and question how far we can justify an exclusive focus on the firm as the key organization unit. Finally, the analogy raises more directly the concern about the interaction between various different units (species) and their evolving habitat. The marketplace, like the habitat, can become relatively unstable and so both affect and be affected by the strategies of the individual firms. As we have suggested, any analogy is far from perfect, as we would expect. The limita- tions are as critical as the issues that are raised because they give us some sense of the bounds within which the analogy itself is likely to be useful. Extending it outside these bounds is likely to be counter-productive and misleading. The Organization Economics approach in practice tends to neglect the interaction between cost and quality. We have already suggested that while the notion ‘focus’ within this analogy is an attempt to recognize this problem, it is only partially successful because it subsumes a characteristic of any successful competitive strategy into one generic category. We must further consider the extent to which we can reasonably reliably distinguish between the various forms of mixed strategies over time and the extent to which the strategic groups themselves remain stable. The limitations of analogies from evolu- tionary ecology are more in terms of the questions that are not answered than those where the answers are misleading. The nature of ‘competition’ is both unclear and complex, there is confusion as to the level and appro- priate unit of analysis, and the notion of ‘niche’ which has become so current in much strategy writing overlooks the fact that, by definition, every species has one anyway. Frequently, business commentators link the concept of a niche to a competitive exclu- sion principle that no two species (identical organisms or companies) can occupy the same niche (compete in the same manner). Ecologists are quite critical of this concept of a niche: A niche, then, in either meaning is a description of the ecology of the species and there is absolutely no justification for supposing that Characterizing marketing strategy in terms of evolving differentiation in time and space 6 The each area has a number of pigeon-holes into which species can be fitted until the community is full. The most unfortunate result of using the term niche is to predispose the minds of readers into thinking that species occupy exclusive compartments in communities and, therefore, competition leads to displacement because there is no room for two species in one niche. We have already seen that competition does not lead to displacement in a number of representa- tive examples. (Pontin, 1982) Central to any notion of competition from a marketing strategy viewpoint is the issue of differentiation in time and space. What makes a real market interesting is that (i) the market demand is heterogeneous, (ii) the suppliers are differentiated, and (iii) there are processes of feedback and change through time. Clearly, these three elements interact significantly, yet in most cases we find that to reduce the complexity in our analysis and understanding we treat each item relatively independently. For instance, in most current treatments of these issues in marketing strategy we would use some form of market segmentation schema to map heteroge- neous demand, some notion of the resource-based view of the firm to reflect the differentiation amongst suppliers, and some model of market evolution such as the product life cycle to reflect the nature of the time dynamic. Such an approach has two major limita- tions which may act to remove any benefit from the undoubted reduction of analytical complex- ity. First, it assumes implicitly that this decom- position is reasonably first order correct: that the impact of the individual elements is more important than their interaction terms. To examine this assumption critically we need some alternative form of analysis and repre- sentation, such as modelling the phenomena of interest as the co-evolution of firms and cus- tomers in a dynamic phase space, which allows for the fact that time and space interact. Second, it assumes that the ways of repre- senting the individual elements that we use, in particular market segmentation and product life cycle concepts, are in fact robust representa- tions of the underlying phenomena. In terms of the adequacy of each element in its own terms, we need to look more closely at the ways in which individual improvements may be ach- ieved and finally we might wish to consider whether it would be better to model partial interactions, say, between two elements only rather than the complete system. Differentiation in space: issues of market segmentation The analysis of spatial competition has, of course, a long history back at least to the classical Hotelling model of linear competition, such as that faced by the two ice-cream sellers on the sea front. The basic Hotelling model, however, did capture the two critical issues in spatial competi- tion: the notion of a space dimension which separated the various competitive suppliers, as well as the fact that these suppliers themselves would have some degree of mobility. In tradi- tional economic terms Hotelling was interested in establishing the equilibrium solution under these two considerations, whereas in marketing we are often more concerned with the impact and likelihood of particular spatial moves, although some notion of the stable long-term equilibrium, if it exists, is obviously important. The Hotelling model provides us with the basic structure of spatial competition: a definition of the space domain, some model of the relation- ship between the positioning of the relevant suppliers within this space, and their relative demands. In marketing, the competitive space is generally characterized in terms of market segmentation. Market segmentation has, of course, received considerable attention in both The basics of 6 marketing research and practice. There is by now a very large body of empirical work in the general field of market segmentation, but even so there remain some critical problems. In particular: 1 We have evidence that the cross- elasticities with respect to different marketing mix elements are likely to be not only of different orders, but actually imply different structures of relationship between individual product offerings. 2 Competitive behaviour patterns, which after all in a strict sense, determine the nature of the experiment from which the elasticities can be derived, seem to be, to use a term coined by Leeflang and Wittick (1993), ‘out of balance’ with the cross-elasticity data.4 Beyond this, the topic of market segmentation is covered in much greater depth elsewhere in this book. For the purposes of this chapter we wish to concentrate on the specific question as to how far segmentation provides us with an appropriate definition of the space within which competition evolves. In this sense, the key questions are, as we discussed above, about the dimensionality of the space concerned, the stability of the demand function and the degree of mobility for individual firms (or more correctly individual offerings) in terms of repositioning. 4 This, of course, raises questions about the nature and causes of this imbalance. Leeflang and Wittick, in their original approach, were particularly interested in the notion that forms of conjoint analysis could be used to determine the underlying customer trade-off matrix which is, of course, only partly revealed in the empirical cus- tomer elasticities (because individual customers can only respond to the actual offerings that are available) and which is ‘assumed’ (with some degree of bias and error) by individual competitors in determining their com- petitive actions and reactions. More recently, they have argued that much of the managerial behaviour they observe could be explained by the imbalance in incentive structures in that management will rarely get criticized for reacting to competitive moves! Similarly, Clark and Mont- gomery (1995) have argued that such over-reaction, or as they term it ‘paranoia’, may actually not result in lower performance. The basics of 6 understanding market structures by marrying two different data types – switching probabili- ties and attribute ratings. Despite the fact that the models developed appear to perform well against the appropriate statistical test, there remain basic issues which link to the issue of the time dynamic evolution of the market or demand space. When the model is applied to the well-established dataset on car purchase switching behaviour (Harshman et al., 1982), it is clear that it provides an interesting and informative analysis of the ways in which various customer ‘segments’ have evolved over time both in terms of their size and attribute preferences. However, given the nature of the data and the form of analysis, the dynamic process whereby customer desires change in response to both new competitive offerings and other endogenous and exogenous factors can only be seen in terms of changes in attributes and specific switching decisions. We must now consider, however, particularly in the context of understanding the time-based nature of market strategies, how we might incorporate in more detail a longer-term time dimension with a stronger customer focus. Differentiation in time: beyond the product life cycle – characterizing the nature of competitive market evolution Few management concepts have been so widely accepted or thoroughly criticized as the product life cycle. (Lambkin and Day, 1989, p. 4) The product life cycle has the advantage that it represents the most simple form of path devel- opment for any product (introduction, growth, maturity, decline) but, as has been widely recognized, this remains a highly stylized rep- resentation of the product sales pattern for most products during their lifetime. Whilst it is reasonably clear that it is difficult if not impossible to propose a better single generic time pattern, any such pattern is subject to considerable distortion as a result of inter- actions with changes in technology, as well as both customer and competitor behaviour. Lambkin and Day (1989) suggested that an understanding of the process of product-mar- ket evolution required a more explicit distinc- tion between issues of the demand system, the supply system and the resource environment. However, they chose to emphasize the nature of the demand evolution primarily in terms of diffusion processes. This approach tends to underestimate the extent to which demand side evolution is as much about the way(s) in which the structure of the demand space is changing as the more aggregate issue of the total demand itself. Lambkin and Day (1989) themselves treat these two issues at different levels of analysis, with ‘segmentation’ as an issue in market evolution which is defined as the resource environment within which the process of the product life cycle takes place. Beyond this, more recent research, on the process of market evolution, partly building on some of the ideas developed by Lambkin and Day (1989), has attempted to incorporate some insights from, amongst other areas, evolu- tionary ecology. In particular, work on the extensive disk-drive database, which gives quarterly data on all disk-drive manufacturers, has allowed Christensen (1997) and Freeman (1997) to look at the ways in which, at the early stages in the market development, the existence of competitive offerings seems to encourage market growth, whereas at later stages the likelihood of firm exit increases with firm density. Other computer-related industries have also provided the opportunity for empiri- cal work on some of the issues relating to both the impact of standardization, modularization and the nature of generation effects (Sanchez, 1995), although in the latter case it must be admitted that the effects themselves can some- times be seen as a result of marketing actions in their own right. Much of the market shift towards standard- ization as it evolves can be seen as analogous Research in marketing strategy: fallacies of free lunches and the nature of answerable research questions 7 The to more recent work on the mathematics of chaos, and particular questions of the nature of boundaries between domains of chaos and those of order: often labelled the phenomena of complexity (Cohen and Stewart, 1995). Whether we can use such models to provide a better understanding of the nature of market evolution beyond the basic analogy remains an important question for empirical research. More recent attempts to apply spatial competition models which demonstrate some level of chaotic or complexity characteristics either to competitive behaviour in a retailing context (Krider and Weinberg, 1997), or in the case of both multi-brand category competition (Rungie, 1998) and competition between audit service providers (Chan et al., 1999), show that such models may be able to give us significant new insights as to the nature of competitive market evolution. Distinguishing between information about means, variances and outliers As we indicated at the start of this chapter, much research in marketing strategy attempts to address what is in some senses an impossible question: what is the basic nature of a success- ful competitive marketing strategy. Such a question presumes the equivalent of a free lunch: we research to find the equivalent of a universal money machine. Before we explore this issue further we need to establish a few basic principles. The competitive process is such that: (i) Average performance can only produce average results, which in the general nature of a competitive system means that success 7 The is related to above average and sometimes even outlier levels of performance. (ii) The basic principle of rational expectations is that we can expect our competitors to be able, on average, to interpret any public data to reveal profitable opportunities as well as we can. In more direct terms it means that, on average, competitors are as clever or as stupid as we are. A combination of public information and the impact of basic rational expectations approaches therefore means that the route to success cannot lie in simply exploiting public information in an effective manner, although such a strategy may enable a firm to improve its own performance. (iii) As we have discussed above, the basis of individual firm or unit performance is a complex mix of firm, competitor and market factors. We therefore can expect that any attempt to explain performance will be subject to considerable error given that it is difficult or not impossible to identify an adequate range of variables which cover both the specifics of the firm’s own situation and the details of the market and competitor behaviour. For these reasons research in marketing strat- egy, as in the strategy field as a whole, has almost always tended to be in one of the two categories: 1 Database, quantitative analysis that has relied on statistical and econometric approaches to produce results which indicate certain independent variables that, on average, correlate with performance. As McCloskey and Ziliak (1996) indicated, more generally in econometric work, there is a danger that we often confuse statistical significance with what they term economic significance. This notion of economic significance can, from a managerial perspective, be decomposed into two elements: first, the extent to which the relationship identified actually relates to a significant proportion of the variation in the 7 The COHORT MEANS Figure 4.5 Cohort means 1997). In their original article, Buzzell et al. ‘removed’ much of the variation by calculating cohort means. We can do the same and also use more typical modern computer-generated graphics to represent the results (Figure 4.5). The cohort mean approach, although now not commonly used in strategy research of this sort, will show, as above, some deviations from the straight line trend at sample sizes such as 500, but as samples get even larger the devia- tions become, on average, even smaller: indeed, some textbook representations of the results go as far as merely illustrating the trend with no deviations at all. Hence, in the process of producing a clearer message from the data, we have nearly eliminated nine tenths of the variability in our performance variable. This is much like the ‘trick’ used by many speakers (including, of course, University Professors) of allocating the last five minutes of a one-hour talk to ‘other factors’, or ‘limitations with this approach’, or some such heading. All very well provided that the issues covered in the last five minutes do not really dominate those which were explored in much greater detail in the first 55 minutes! How does one explain the ‘unexplained’ 90 per cent? If we return to the scatter diagram and treat it as if it represented the current performance of 500 business units within a single corporate portfolio in terms of the relationship between return on investment (ROI) and market share, then we can see some of the problems that arise when we try and make managerial evaluations. The first set of problems relates to the nature of the data and the way in the which the axes are measured. In most analyses of this sort, and in the PIMS data as we discussed above, the data are essentially cross-sectional, i.e. either annual or averaged out over a longer fixed period. Any lead or lag effects are therefore excluded and any particular one-off effects are compensated for only to the extent that they are already discounted from the input data, which are normally based on management accounts. The nature of the axes in a standard market share/ ROI analysis is a problem in that they are both ratios. There are very considerable advantages that accrue from using ratios in this situation – most obviously the fact that it is possible to plot The basics of 7 on the same graph units of very different absolute sizes – but we do then have the problem of measurement errors in both the numerator and denominator for both axes. Finally, the basic data are also inevitably limited in the extent to which they can measure the specifics of any particular business unit situation. Using basic financial and accounting data, we cannot take into account issues such as managerial effectiveness as well as the degree of integration to achieve scale economies and efficiencies in terms of marketing and other activities. However, we must also put this overall critique of ‘market share/return’ analysis in context. We should not underestimate the original impact of the ‘market share’ discovery. Even if it only ‘explains’ around 10 per cent of financial performance, this is still a consider- able achievement. The problem is that, as we have seen, even at this level we face difficult interpretation problems. In the end, one per- haps concludes that its greatest impact was merely that it legitimized debate and discus- sion about key competitive market assump- tions in any strategy dialogue. Getting to management action: the additional problem of economics Even if we can identify the source of a particular success or indeed the cause of a particular failure, it is a big jump to assuming that suitable action can be taken at no cost or even at a cost which is justified by the sub- sequent benefits. We therefore need to overlay our notion of practical significance with one of economic significance: a factor or set of factors which explain a significant proportion of success can also be used as a decision rule for subsequent successful management action. This is a big jump. To return to the market share/ROI relationship, even if we conclude that there is a significant correlation between market share and profitability, we have to make two further assumptions to justify an economic rule of ‘investing’ in market share. First, we have to move from the more general notion of ‘correla- tion’ or ‘explanation’ to the much more specific one of ‘causation’. Second, we have to assume that whatever its benefits, market share is somehow underpriced. If our first assumption is correct then broadly it can only be underpriced if either our competitors, both current and potential, have a different view or, for some unspecified reason, happen to value the asset (market share) significantly lower then we do. In fact, in specific situations this latter assumption may be rather less unlikely than it at first appears: our competitors could indeed value the benefits differently given their differing portfo- lio of assets and market positions, but it all depends on the specifics and the details of the individual situation rather than the general. In the end, it is likely that the continued search for general rules for strategic success via statistical analysis and large databases will prove illusory. This does not make the research effort worthless, we merely have to be realistic about what can and cannot be achieved. After all, the in-depth case study narrative approach, which we will consider shortly, often results in another type of economic rule: the truth which is virtually impossible to apply. Perhaps the best example is to be found in Peters and Waterman’s original work. Amongst many memorable criteria for success to be found in In Search of Excellence was that undeniable one: the achievement of simultaneous ‘loose-tight’ link- ages. To those who thought that this might seem contradictory, Peters and Waterman (1982) provided the helpful observation that: These are the apparent contradictions that turn out in practice not to be contradictions at all. (p. 320) The Honda case: interpreting success One of the best known examples of a case history which has been interpreted to generate a 7 The number of marketing strategy lessons is the case of Honda and their entry into the American motor cycle market. The various interpretations and a set of comparative commentaries are to be found in a set of articles in the California Management Review (Mintzberg, 1996a). In summary, the original consultancy study conducted for the UK government by the Boston Consulting Group interpreted the suc- cess that Honda enjoyed in the USA partic- ularly at the expense of the UK imports as the result of substantial economies of scale for their small bikes based on the Cub model, along with a market entry strategy to identify and exploit a new segment and set of customers. Richard Pascale, on the other hand, interviewed rather later a number of the key executives who had worked for American Honda at the time and they told a story which suggested the whole operation was very much on a shoestring and the final success was down to a number of lucky breaks, including a buyer from Sears persuading them to let him sell their small model bikes when they were really trying, and failing, to break into the big bike market. The debate recorded in the California Man- agement Review certainly illustrated how the same story can be interpreted in very different ways. It also emphasizes the problem that learning from the undoubted final success that Honda achieved can be very problematic: even perhaps for Honda itself. It would seem that in many ways one of the underlying dilemmas for Honda, as indeed for any new market entrant, was that if they took the existing market structure as fixed and given then the possibil- ities for them were remote; on the other hand, market knowledge could only really hint at possibilities for new market structures. In the end, Michael Goold (1996), who worked for BCG at the time, concluded that: The (BCG) report does not dwell on how the Honda strategy was evolved and on the learn- ing that took place. However, the report was commissioned for industry in crisis, with a brief of identifying commercially viable alternatives. The perspective required was managerial, not historical. And for most executives concerned with strategic management the primary interest will always be what should we do now? Presumably the (Mintzberg) recommenda- tion would be ‘try something, see if it works and learn from your experience’; indeed there is some suggestion that one should specifically try probable non-starters. For the manager such advice would be unhelpful even irritating. ‘Of course we should learn from experience,’ he will say, ‘but we have neither the time nor the money to experiment with endless fruitless non- starters.’ Where the manager needs help is in what he should try to make work. This surely is exactly where strategic management thinking should endeavour to be useful. Whilst, Mintzberg (1996b) comments: How then did BCG’s clients actually learn from this report? And what lessons did BCG itself take from this particular bit of history? Did it take a good look at its own performance – do some analysis about the impact of its own analysis? The British motorcycle and parts exports to the United States collapsed to 10 million dollars in 1976, the year after the report was published. So much for the result of this practical manage- rial perspective. I believe that managers who have neither the time nor the money to experi- ment are destined to go to the road of the British motorcycle industry. How in the world can anyone identify those endless, fruitless non- starters in advance? To assume such an ability is simply arrogance, and would, in fact, have eliminated many, if not most, of the really innovative products we have come to know. In the terms of our previous analysis we could argue that Goold is focusing attention on the 10 per cent that can be explained analytically, whilst Mintzberg is arguing not only that the 90 per cent is much more important but, much more importantly, that a realization of specific causes of success can be achieved more effect- ively through processes such as learning. This is, in practice, a strong assertion about the efficacy of learning processes in organizations that others might dispute, perhaps most obvi- ously James March, who in a number of The basics of 7 important in industrial markets, will encour- age retail marketers to take their customers more seriously, even to regard them as intelli- gent and rational agents.5 To do so, however, would also mean to recognize severe scepti- cism about the various developments in rela- tionship marketing, such as ‘loyalty’ cards and one-to-one targeting. However, it may also be true that the relationship and network perspectives will, in the longer term, change our perception of the critical strategic questions faced by firms as they and their ‘markets’ evolve and develop. Easton et al. (1993), for instance, suggest that the notion of competition and markets is really only appropriate at specific stages in the life cycle of the firm or business unit. Indeed, their approach could be taken further to suggest that, at the time when there is significant indeterminacy in terms of competitor and customer choice, this way of characterizing strategic choice is, of itself, of limited either theoretical or practical value. Almost by defini- tion, the product technology and market struc- ture needs to be relatively stable for such strategic choices to be formulated, yet by this stage the feasible choice set itself may be very restricted. The argument is, of course, rather more complicated than this and relates to the previous debate between Child (1972) and Aldrich (1979) on the more general issue of strategic choice. Emergent or enacted environments The notion of emergent phenomena has itself emerged as a key concept in organizational strategy. Much of the credit for this must go to Mintzberg (1994), but ironically his analysis of 5 To emphasize this perspective, the ESRC for National Science Week 2002 organized a meeting entitled ‘The Confident Consumer’, which introduced both Richard Scase’s new book Living in the Corporate Zoo (Capstone Publishing, 2002) as well as the ESRC cultures of consump- tion research programme (see http://www.esrc.ac.uk/ esrccontent/researchfunding/cultures_of_ consumption.asp). the concept itself has been rather limited. Indeed, he has tended to define the nature of emergent phenomena in a rather idiosyncratic manner: Much as planners can study and interpret patterns in the organization’s own behavior to identify its emergent strategies, so too can they study and interpret patterns in the external environment to identify possible opportunities and threats (including, as already noted, the patterns of competitors actions in order to identify their strategies). (p. 375) This implies that emergent phenomena are such that they can ex post be related to intentions or actions through time of the indi- vidual actors. However, a more common use of the term emergence incorporates some notion of interpretation at different levels of aggregation. After all, for instance, as a num- ber of authors have previously commented, markets themselves are emergent phenomena. It was originally Adam Smith’s insight that each actor in a market following their own interest could under certain conditions create an overall situation of welfare maximization: in this sense the invisible hand was much more effective than any attempts at local or even global optimization. Others have paid much greater attention to the nature of emergent properties, but we also need to recognize a further distinction between what have been termed emergent and enacted environments. In a number of relevant areas, such as information systems, there is no overall agreement on the nature of the differences (see Mingers, 1995), but in the absolute an emergent environment is one in which there are a set of rules but they are generally undetermining of the outcome states, or at least the only way in which an outcome state can be predicted is by a process of simulation, whereas an enacted environ- ment is one in which the nature of the envi- ronment is itself defined by the cognitive patterns of the constituents. 7 The This distinction is particularly important when we consider the notion of ‘markets as networks’ as a perspective to understand the nature of competitive market phenomena. If we understand the nature of the phenomena we are trying to understand as essentially emergent, then there remains considerable value in attempting to model the relevant structure of rules or relationships that charac- terize the environment.6 If, on the other hand, we are more inclined to an enactive view of the relationship between organizations and their environment, we need to consider the degree to which the structure of the network is not more than a surface phenomenon, itself resulting from other deeper processes: in this analysis we need to consider the phenomena that Giddens (1979) identifies in terms of ‘structuration’. In this process agents and organizations are simultaneously both creators of structures, but also have their action con- strained by these structures. However, even if we are willing to give a relatively privileged ontological status to the detailed network structure in a particular con- text, we may still face insurmountable prob- lems in developing high-level regularities from a more detailed analysis. As Cohen and Stewart (1995) assert: We’ve argued that emergence is the rule rather than the exception, and that there are at least two distinct ways for high-level rules to emerge from low-level rules – simplexity and 6 Actually, even this statement incorporates another critical assumption. As Mingers notes in commenting on assumptions about the nature of social systems and the degree to which they can be seen as self-producing (autopoietic), even those who develop such an analysis define the nature of the organizations and their environ- ment in unexpected ways: Luhmann . . . in conceptualizing societies as autopoi- etic . . . (sees them) as constituted not by people but by communications. Societies and their component subsystems are networks of communicative events, each communication being triggered by a previous one and leading in turn to another . . . People are not part of society but part of its environment. (p. 211) complicity.7 Can we write down the equations for emergence? The short answer is no . . . Essentially what is needed is a mathematical justification for the belief that simple high- level rules not only can, but usually do, emerge from complex interactions of low-level rules. By ‘emerge’ we mean that a detailed derivation of the high-level rules from the low- level ones would be so complicated that it could never be written down in full let alone understood. (p. 436) It seems that whilst Cohen and Stewart warn convincingly about the dangers of drowning in the detail of low-level rules, they give only limited useful advice as to the practical nature of the alternatives. There has recently been a spate of interest in mathematical approaches under the general title of ‘Complexity’. In the context of the economics of forms of market organization, perhaps the most obvious is that due to Kaufmann (1995): Organizations around the globe were becoming less hierarchical, flatter, more decentralized, and were doing so in the hopes of increased flexibility and overall competitive advantage. Was there much coherent theory about how to decentralize, I wondered. For I was just in the process of finding surprising new phenomena, that hinted at the possibility of a deeper understanding of how and why flatter, more decentralized organizations – business, political or otherwise – might actually be more flexible and carry an overall competitive adavantage. (pp. 245–246) With a fine, if unintentional, sense of irony, the chapter in Kauffman’s book which addresses 7 Cohen and Stewart use specific meanings for both ‘simplexity’ and ‘complicity’ which roughly describe phe- nomena where in the former case similar low-level rules create high-level similar structures, whereas in the latter case ‘totally different rules converge to produce similar features and so exhibit the same large scale structural patterns’ (p. 414). As they emphasize, in the case of complicity one of the critical effects is the way in which ‘this kind of system . . . enlarges the space of the possible’ (original emphasis). The basics of 7 these questions has the same title as the infamous Peters and Waterman classic, ‘In Search of Excellence’. Interestingly, however, Kauffman is drawing a distinction between the ‘lesser’ criteria of ‘excellence’ compared with ‘optimality’! Kaufmann goes on to discuss the logic of what he calls a ‘patch’ structure in which at various levels the form of organization involves a series of relatively autonomous subunits, which under certain conditions are more effective at achieving a system-wide performance maxima compared with the more extreme options which he terms, rather con- troversially, the fully integrated ‘Stalinist’ sys- tem, or the fully autonomous ‘Italian leftist’ system! However, despite the fact that some of these general notions are now to be seen in the mainstream of strategic management thought (see Stacey, 1995), we should remain cautious. Horgan (1997) suggests that we should be cautious of the likely advances to be made in the field that he has dubbed ‘chaoplexity’: So far, chaoplexologists have created some potent metaphors, the butterfly effect, fractals, artificial life, the edge of chaos, self-organized criticality. But they had not told us anything about the world that is both concrete and truly surprising, either in a negative, or in a positive sense. They have slightly extended the borders of our knowledge in certain areas, and they have more sharply delineated the boundaries of knowledge elsewhere. (p. 226) Marketing processes Not surprisingly, the 1990s saw a renewed interest in the marketing process and partic- ularly in the nature of the processes which support the development of a marketing ori- entation. This approach has been encouraged by the renewed attempts to model the nature of marketing orientation due to both Narver and Slater (1990) and Kohli and Jaworski (1990). In essence, the shift is one that Herb Simon (1979) recognized in his original dis- tinction between substantive and procedural rationality, in which he suggested that it was an appropriate response to the problem of bounded rationality to focus attention more on the appropriate process for arriving at a par- ticular choice rather than developing a general analytical approach to make that choice in any particular situation. Much empirical research, in particular that based on key informant surveys, has been undertaken to establish the extent to which various operational measures of marketing orientation are correlated with commercial success. On top of this, there has been work to establish some of the possible antecedents for such orientation, including measures related to the accumulation and organizational disper- sion of market research data. The results remain somewhat contradictory, but it seems likely that some level of association will finally emerge, although whether it will ach- ieve the minimum 10 per cent target which we considered earlier is rather another question. It is worth noting that, even for samples of only 50, we can roughly speaking achieve a sig- nificant result, using the ‘normal’ p < 0.05 criterion, and yet only have about 5 per cent of the variability ‘explained’. On top of this, we need to address more fundamental questions about the underlying logic of procedural rationality in this context. As we have suggested above, it is reasonable to argue that some consideration in any mar- keting context of each element in the 3Cs (customers, competitors and channels) must surely be seen as sensible. How far such a process should be routinized within a partic- ular planning or decision making schema is another matter. Much of the writing in the area of marketing orientation suggests that the appropriate mechanisms and procedures are unproblematic, yet everyday experience in organizations suggests that achieving an effective response to the market is difficult and indeed may not be susceptible to pro- grammed responses. 8 The advantage is itself measured only in seconds: it is reasonable to assume it is somewhat longer in product and service markets! We can try and resolve the problem by looking at the behaviour of what might be called successful outliers, but here we face a severe issue of interpretation. As we have seen, as we might expect the interpreta- tions of such success are themselves ambiguous and often tautological: we often end up really asserting either that to be successful one needs to be successful or that the route to success is some ill-defined combination of innovation, effectiveness and good organization. It may well be that the best we can do with such analysis is to map the ways in which the variances of performance change in different market contexts: just like our finance colleagues we can do little more than identify the conditions under which variances in per- formance are likely to be greater and therefore through economic logic the average perform- ance will increase to compensate for the higher risks. Finally, we may need to recognize that the comfortable distinction between marketing management, which has often been framed in terms of the more tactical side of marketing, and marketing strategy is not really sustain- able. At one level all marketing actions are strategic: we have little knowledge as to how even specific brand choices at the detailed level impact or not on the broad development of a particular market, so we are hardly in a position to label some choices as strategic in this sense and others as not. 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