The Missing Metric: Measuring Shelf-Space Profitability

The shelf may well be the most precious real estate in the consumer-retail value chain: In some categories, as much as 80 percent of all purchase decisions are made at the point of sale. Regardless of how much effort went into promotion or product design, the shelf is the point where the consumer meets the retailer, the brand, and the product. The outcome of all those relationships and the buying decision depends entirely on what happens halfway down Aisle 2.

Yet surprisingly little is known about that interaction. In fact, many crucial shelf-space questions are still surprisingly difficult for retailers and manufacturers to answer on the basis of anything but gut instinct. How much is this store’s shelf space worth? What products and brands would make the most profitable use of my space? What products and assortments drive the greatest growth at the shelf? How do I make sure that these are the products my customer wants? These essential questions are still very difficult for retailers and manufacturers to answer.

It doesn’t have to be this way. If retailers and manufacturers had an objective and easily duplicated metric for shelf-space profitability, they could craft better decisions about which products to stock and how to best make use of all that space. Retailers would know which products to carry and which brands to push. Manufacturers would know which promotions were working and which products were underperforming.

The idea isn’t new. In fact, a number of companies have tried to develop ways to find this missing benchmark but have never been able to create a solution simple enough to make the measurement useful. Technological approaches to measuring shelf profitability, such as the use of data from RFID tags, have turned out to be too expensive and complex to serve the purpose. Furthermore, the high level of distrust that typically exists between retailer and manufacturer has made it difficult for the two parties to collaborate deeply on anything, including data sharing.

Fortunately, there are relatively simple ways to measure shelf-space profitability (SSP). The first step is to calculate the cost per linear foot of space in the store network, including all product-related costs: for instance, total store costs, internally funded marketing support, distribution, and servicing and repairs. Next, to understand the overall costs associated with selling a particular product across the store network, apply these total costs to the space allocated to the product in a store. Apply this shelf-space cost to the net cash margin that the product or brand generates across the network to find the SSP for a given manufacturer, category, brand, or set of products and thus better understand growth and profit contribution. By using this metric, retailers and manufacturers are able to learn not only which items are most profitable, but which are most profitable given the amount of space each item uses.

Better information about product performance enables retailers to make better stocking decisions. Better stocking decisions, in turn, make it easier to build a strong relationship not only with manufacturers but with consumers as well. Stocking the right products in the right places is a good way to engender consumer loyalty toward both the store and the brand. Everyone wins with good shelf-space profitability metrics: The store earns a reputation for carrying a strong assortment of goods that are always available, and the manufacturer
can focus on stocking product lines that are recognized as winners.

Source: Booz Allen

Methods used for valuing brands

A number of authors and consulting firms have proposed different methods for brand valuation. The different methods consider that a brand’s value is:

1. The market value of the company’s shares.

2. The difference between the market value and the book value of the company’s shares (market value added). Other firms quantify the brand’s value as the difference between the shares’ market value and their adjusted book value or adjusted net worth (this difference is called goodwill).

3. The difference between the market value and the book value of the company’s shares minus the management team’s managerial expertise (intellectual capital).

4. The brand’s replacement value

4.1. Present value of the historic investment in marketing and promotions.

4.2. Estimation of the advertising investment required to achieve the present level of brand recognition.

5. The difference between the value of the branded company and that of another similar company that sells unbranded products (generic products or private labels). To quantify this difference, several authors and consulting firms propose different methods:

5.1. Present value of the price premium (with respect to a private label) paid by customers for that brand

5.2. Present value of the extra volume (with respect to a private label) due to the brand

5.3. The sum of the above two values

5.4. The above sum less all differential, brand-specific expenses and investments. This is the most correct method, from a conceptual viewpoint. However, it is very difficult to reliably define the differential parameters between the branded and unbranded product, that is, the
differential price, volume, product costs, overhead expenses, investments, sales and advertising activities, etc.

5.5. The difference between the [price/sales] ratios of the branded company and the unbranded company multiplied by the company’s sales. This method is used by Damodaran to value the Kellogg’s and Coca-Cola brands.

5.6. Differential earnings (between the branded company and the unbranded company) multiplied by a multiple. As we shall see further on, this is the method used by the consulting firm Interbrand.

6. The present value of the company’s free cash flow minus the assets employed multiplied by the required return. This is the method used by the firm Houlihan Valuation Advisors.

7. The options of selling at a higher price and/or higher volume and the options of growing through new distribution channels, new countries, new products, new formats … due to the brand’s existence.

Consumers’ Paradigms: A Challenge for Retailers

Source: Booz Allen Hamilton: Retail Innovation in Latin America

Consumers know that they can’t have it all, in terms of getting the best of everything, all the time. Most purchasing decisions involve some form of trade-off in light of constraints such as price, distance, time to shop, or credit.

Our study revealed that consumers have preconceived notions of how to address these trade-offs in the retail world. Whether these notions reflect negative experiences or simply consumers’ perceptions, they often hide frustrations and desires in equal measure. We call these preconceived notions “consumers’ paradigms” and they are associated with the trade-offs that need to be made with respect to products, services, design, quality, assortment, and location.
Although not exhaustive, the following paradigms are based on our fieldwork and reflect the most relevant information at the time of this research. While the concept of trade-offs is applicable to most income classes, our analysis and examples are focused on emerging consumers.

1. “Access to high-ticket items requires a long term-sacrifice.” As shown in our previous study, emerging consumers dedicate a proportionally higher portion of their income to household purchases: In Latin America, they spend approximately 50 percent to 75 percent of their budget on consumer products.

As a general rule, daily needs are the top priority for emerging consumers, followed by emergency purchases and large purchases to stock up. As a result, savings are very limited and so is the emerging consumer’s ability to acquire high-ticket items, such as cars, computers, and household appliances like freezers and microwaves. As an illustration, a 42-inch plasma TV can cost as much as 20 percent to 25 percent of the annual salary of an emerging consumer in Brazil.

The purchase of high-ticket items is made even more challenging for emerging consumers as access to financing is limited. The primary reason for this limitation is clear: Only about 45 percent4 of emerging consumers possess bank accounts in Brazil, for example. Yet even for the “bankable” consumers, obtaining credit can be a challenge, since financial institutions require extensive documentation, such as proof of income, which the vast majority of emerging consumers do not have. Furthermore, even when consumers are able to obtain credit, there is little or no room for debt renegotiating, which impacts the consumers’ credit history,
another important factor in the financial institutions’ decision to grant credit.
In the context of their limited savings capability and financing options, the key question for emerging consumers is, “Can I possibly buy a personal computer or a car?” Our discussion groups indicate that emerging consumers do not believe this is the case, unless they are willing to make a long-term sacrifice: They have to save for an extended period of time and pay relatively high installments, thus giving up on shorter-term consumption. A C-class consumer in Mexico characterizes this situation very well: “Before Elektra, I remember how hard it was to have the discipline and the sacrifice to save to get us our first color TV.”

2. “Better quality must be more expensive.”
“Can I find trendy, quality furniture at a reasonable price? Are my choices limited to traditional, unfashionable staple products if my budget is limited? Can I get higher-quality products at competitive prices?” In the minds of emerging consumers, the answers to these questions are, “No, yes, and no.” They believe superior quality, which they generally associate with intermediate or leading brands, carries a premium in price. This belief can drive the purchasing process to the point where emerging consumers don’t even compare prices and limit the number and type of stores that they visit. A D-class consumer in Chile stated, “I buy my clothes in La Polar or in Lider, because Falabella is not for me.” The same belief holds when emerging consumers shop for other products, such as furniture and electronics.

3. “If a store is nice and trendy, its products must be expensive.”
Emerging consumers take for granted that a modern, trendy shopping environment, carrying
stylish products, also carries a premium price. “C&A stores are really nice and chic; it is not for people like me,” stated a Brazilian C-class consumer. Alternatively, as a B-class Mexican consumer said, “Palacio is expensive, but you find better things, more modern, exclusive; they get the products before other stores, and they run the best brands.” The perception is clear: If a store is trendy, the products must be trendy as well, and therefore expensive.

4. “If the store is small, the assortment must be very limited.”
Emerging consumers believe the store area is an indication of the available assortment. Consequently, they believe that if the store is small, one has to shop around in many other stores or commute to a larger store to access greater variety and, in certain cases, feel comfortable about making the “right choice.”
It is important to note that emerging consumers have often stated their preference for shopping at small stores nearby, as going to larger stores a distance
away requires more time and more expensive transportation, which is significant in the context of their limited budgets.
In the case of mid- to high-ticket items, this paradigm of a clear trade-off between store size and assortment has a much greater impact, as lower-income consumers usually do more research to purchase. As a D-class consumer in a small town in Brazil said: “I bought a new washing machine last month to replace the old one. But it took me five months to have my husband take me to Campinas, where there was a store with broad variety.”

5. “Better service and sales assistance must be more expensive.”
Our study identified service as a highly valued attribute for emerging consumers.
Nonetheless, they usually do not have positive experiences in this respect. It is common for them to find sales assistants too “sophisticated” to understand lower-income consumers, or believe that assistants have a cold and snobbish attitude toward them.

Accustomed to not having technical assistance and good service, emerging consumers believe that complimentary services can only be obtained with higher prices. When one C-class consumer in Colombia commented, “I like K-tronix; they have good products, nice people to help, and they even installed the refrigerator I bought for free,” another consumer responded, ”Nothing is for free, my friend. The cost is somewhere inside the price you paid.”

CMO Thought Leaders: A Snapshot

The book explores how leading marketers are grappling with and surmounting the challenges of heightened customization demands, fragmentation of media and markets, growing pressure for returns on marketing investments, and other crucial issues.

Key Challenges	What the CMOs Are Talking About
Put the Consumer at the Heart of Marketing	􀀗Knowing what consumers are actually thinking & doing 􀀗Changing research and knowledge management practices 􀀗Transitioning the mind-set of a whole organization	“HP knows the top 10 factors that drive customer loyalty, and it measures them constantly. Corporate marketing can then go back to each business and say, ‘Here’s where you’re falling behind in terms of the customer experience you’re providing, and here’s how it relates to market share and margin growth.’” -- Cathy Lyons, CMO Hewlett-Packard
Make Marketing Accountable	􀀗Marketing accountability on two levels 􀀗ROI metrics and the marketing dashboard 􀀗Measuring the impact of new media 􀀗Developing the measurement capability	“The most important thing that’s changed in the last 10 years is measurability of what we do… New channels are regularly emerging that allow us to understand what it is we’re doing as it related to acceptability with the marketplace. And we can do it with much faster turnaround.” - John Hayes, CMO, American Express
Embrace the Challenges of New Media	􀀗Openness to experimentation 􀀗Balancing the new and the old 􀀗Pull vs. push	“ …consumers are in control. It’s more than just click the remote capabilities or the ability to do a browse/search on the Internet. Consumers are telling us that they want to be in control of the storytelling. And as part of that desire, they want to engage in advertising in different ways.” - Beth Comstock, President, Integrated Media, NBC Universal
Live a New Agency Paradigm	􀀗Identifying the right agency partners to meet marketing’s needs 􀀗Creating a new kind of partnership between marketers and agencies 􀀗Balancing cooperation and competition to get the best ideas	“[Agencies] need to get more integrated. They need to collapse structures. They need to go digital. Those that are making those changes are turning away business. Those that haven’t adjusted are struggling.” - Jim Stengel, Global Mktg Officer, P&G
Recognize the New Organizational Imperative	􀀗Balancing generalist and specialist skills 􀀗Driving the training agenda 􀀗Integrating with other functions	“ In marketing, you need to use both halves of your brain…You need to have the analytics. You also need to have the intuition. And you have to be quite flexible at using and leveraging both parts of your brain” - Rob Malcolm, CMO, Diageo
Remain Adaptable	􀀗Making adaptability an inherent part of the marketing agenda 􀀗Raising senior leadership awareness of issues and implications 􀀗Driving marketing as an integral, integrated part of the enterprise	“ I’ve never worked for the same company for more than two years in a row, because FedEx keeps changing. We have new marketing challenges every day.” - Mike Glenn, CMO, FedEx

GRP and TRP

GRP (short for Gross Rating Point) is the sum of ratings achieved by a specific media vehicle or schedule. It represents the percentage of the target audience reached by an advertisement. If the advertisement appears more than once, the GRP figure represents the sum of each individual GRP. In the case of a TV advertisement that is aired 5 times reaching 50% of the target audience, it would have 250 GRP = 5 x 50% -- ie, GRPs = frequency x % reach.

A Target Rating Point (TRP) is a measure of the purchased target rating points representing an estimate of the component of the target audience within the gross audience. Similar to GRP (short for Gross Rating Point) it is measured as the sum of ratings achieved by a specific media vehicle of the target audience reached by an advertisement. For example, if an advertisement appears more than once, reaching the entire gross audience, the TRP figure represents the sum of each individual GRP multiplied by the estimated target audience in the gross audience.

In the case of a TV advertisement that is aired 5 times reaching 50% of the gross audience with only 60% in the target audience, it would have 250 GRPs (= 5 x 50%) -- ie, GRPs = reach x frequency and 150 TRPs (=250 x 60%).

Both of these metrics are critical components to determine the marketing effectiveness of a particular advertisement.

http://www.ksg.harvard.edu/case/3pt/berkovitz.html

Here is a link towards a more detiled outlook on an entire Media Plan.

More to come on these topics in detail soon..

Unique Customer Perception (UCP)

Marketing is a domain which is dynamic i.e. involves change, an important phenomenon not to be overlooked. We have come across a term “Unique Selling Proposition”(USP) which companies feel as a constant factor . Every organisation is an open system of management which means change is inevitable and is associated with environmental factors. Companies need to focus not only on USP of their products but also on the “Unique Customer Perception”(UCP) of the final end users.

The prop of marketing is based on the need identification and the USP's are prepared based on the identified needs . If the needs are wrongly identified then even the USP's which are unique to the product would not serve the purpose. USP identifies a product/service from its competitors while UCP is the perception or picture a customer develops from all types of promotional inputs from the company about their product or service. It is often seen that some brands do extremely well compared to other brands having the same resources. The reason for the brands not to do well is probably the communications which does not reflect the customers perception. So it is not the USP but UCP that plays an important role .This has lead to the concept - “Customer Perception is the Rule and not Customer Satisfaction”.

Remember that a customer always buys a product or service with a lot of expectations which he has derived from the promotional inputs of the company or other sources including word-of- mouth . So a customer would be satisfied when Performance is equal to Expectation while would not be satisfied when Performance does not match with Expectations. Now this expectation is what has been derived from perception.

Perception is not good or bad, right or wrong, it is just the way someone judges an experience based on their value system of what they believe should happen. Since people are unique, each of their perceptions are unique .On the other hand each situation is a "point of contact" with an employee that will tell the customer a "truth" about the company's idea of customer service. Each situation will create expections of what the next experience will probably be like.

Companies spend considerable amount on advertisement and in this world of competitive advantage advertisement has to be repetative in nature. Brand hammering results in brand recall which is a costly affair. So companies need to understand the Unique Customer Perception to facilitate Advertising and Sales Promotional (ASP) efforts towards a better bargain. The cost incurred on advertisement is huge i.e. if we refer to the 5 M's of advertising, http://fmcg-marketing.blogspot.com/2007/11/5-ms-of-advertising.html

Money is a budgetary constrain for an ideal advertising canpaign. Thus UCP has to be rightly analysed for better results by the company to match performance and expectation.

the 5 M's of Advertising

Advocacy Advertising

• Advertising used to promote a position on a political, controversial or other social issue.

• Expresses a viewpoint on a given issue on behalf an institution.

• Is often provided by government agencies and non profit organizations

Advocacy advertising almost always is related to a specific public policy or upcoming legislation. The ad will express an opinion on the issue or position the sponsoring industry or company as a leader in its field or area of expertise, such as health care, the environment, or education.


•Public Health Promotion:
Anti smoking , AIDS prevention

•Public Safety Promotion:
Seat belt usage and fire prevention

•Education-related issues:
Literacy programs

What Makes an Advocacy Advertisement Effective?

A quality advocacy advertisement is well-expressed, phrased in human terms, and articulates the debate on your terms, rather than the opposition’s point of view. Providing research to substantiate your claims make the advertisement more powerful.

Repetition of the key message is important. Although separate advertisements within a campaign may be targeted to different audiences, each of these advertisements should communicate the same central message of the campaign.

Companies use that kind of communication to develop their public image and promote their values (Benetton, De Beers, Kellogg's, Philip Morris…)

Philip Morris : 1996 :
launch of an advertising campaign to publicize its position that kids should not smoke
Broad effort to repair the company’s battered public image
Message provided through athletes and celebrities

Benetton : From 80’S to the end of 2000 :
pointed out society issue but without giving any opinion (AIDS, war, sex, culture…)

DeBeers :
Creates the Diamond Trading Company and implements the « supplier of choice » strategy Publishes the « Best practice principles » which encourages proper working conditions, as well of the respect of the environment

Vertical Marketing Systems (VMS)

A vertical marketing system (VMS) is one in which the main members of a distribution channel--producer, wholesaler, and retailer--work together as a unified group in order to meet consumer needs. In conventional marketing systems, producers, wholesalers, and retailers are separate businesses that are all trying to maximize their profits. When the effort of one channel member to maximize profits comes at the expense of other members, conflicts can arise that reduce profits for the entire channel. To address this problem, more and more companies are forming vertical marketing systems.

Vertical integration is the expansion of a company by moving forward or backward within your vertical market or industry.

An example of forward integration might be ITC buying wheat from farmers to produce Aashirwad atta and Sunfeast biscuits recently.

• Corporate VMS - A group of companies performing different tasks under one ownership.
• Contractual VMS - Independent companies that join together for mutual benefit. Producer, wholesaler and retailer have sub-groups.

• Producer/Wholesaler - Franchise operations fall in this category. The manufacturer licenses the wholesaler to distribute the product.
• Producer/Retailer - Another franchise operation where the retailer must meet certain quotas to operate under the company name. Must be a strong company name.
• Retailer/Wholesaler - If the wholesalers are the owners they encourage retailers to band together to buy as a group to receive more desirable pricing. If the retailers are the owners, they are called co-operatives. They buy from the jointly-owned wholesaler and share the profits those purchases generate.

• Administered VMS - The big dog in the meat house concept. Whoever wields the most economic power within the group can force greater cooperation and support from other members of the group.

If you can't go vertical, go horizontal. Horizontal simply means that instead of companies being under your control in a vertical stack. They are beside you as equals. You don't control them, they don't control you. But, you still need each other. If you are a small business or just starting you may need them more than they need you.

SERVQUAL or Gaps Model

There are seven major gaps in the service quality concept, which are shown in Figure 1. The model is an extention of Parasuraman et al. (1985). According to the following explanation the three important gaps, which are more associated with the external customers are Gap1, Gap5 and Gap6; since they have a direct relationship with customers.

· Gap1: Customers’ expectations versus management perceptions: as a result of the lack of a marketing research orientation, inadequate upward communication and too many layers of management.

· Gap2: Management perceptions versus service specifications: as a result of inadequate commitment to service quality, a perception of unfeasibility, inadequate task standardisation and an absence of goal setting.

· Gap3: Service specifications versus service delivery: as a result of role ambiguity and conflict, poor employee-job fit and poor technology-job fit, inappropriate supervisory control systems, lack of perceived control and lack of teamwork.


· Gap4: Service delivery versus external communication: as a result of inadequate horizontal communications and propensity to over-promise.


· Gap5: The discrepancy between customer expectations and their perceptions of the service delivered: as a result of the influences exerted from the customer side and the shortfalls (gaps) on the part of the service provider. In this case, customer expectations are influenced by the extent of personal needs, word of mouth recommendation and past service experiences.


· Gap6: The discrepancy between customer expectations and employees’ perceptions: as a result of the differences in the understanding of customer expectations by front-line service providers.

· Gap7: The discrepancy between employee’s perceptions and management perceptions: as a result of the differences in the understanding of customer expectations between managers and service providers.

The SERVQUAL instrument has been the predominant method used to
measure consumers’ perceptions of service quality. It has five generic dimensions or factors and are stated as follows (van Iwaarden et al., 2003):

(1) Tangibles. Physical facilities, equipment and appearance of personnel.

(2) Reliability. Ability to perform the promised service dependably and accurately.

(3) Responsiveness. Willingness to help customers and provide prompt service.

(4) Assurance (including competence, courtesy, credibility and security). Knowledge and courtesy of employees and their ability to inspire trust and confidence.

(5) Empathy (including access, communication, understanding the customer). Caring and individualized attention that the firm provides to its customers.

PEST Analysis

PEST factors play an important role in the value creation opportunities of a strategy. However they are usually beyond the control of the corporation and must normally be considered as either threats or opportunities. Remember macro-economical factors can differ per continent, country or even region, so normally a PEST analysis should be performed per country.

In the table below you find examples of each of these factors.

Political (incl. Legal)	Economic	Social	Technological
Environmental regulations and protection	Economic growth	Income distribution	Government research spending
Tax policies	Interest rates & monetary policies	Demographics, Population growth rates, Age distribution	Industry focus on technological effort
International trade regulations and restrictions	Government spending	Labor / social mobility	New inventions and development
Contract enforcement law Consumer protection	Unemployment policy	Lifestyle changes	Rate of technology transfer
Employment laws	Taxation	Work/career and leisure attitudes Entrepreneurial spirit	Life cycle and speed of technological obsolescence
Government organization / attitude	Exchange rates	Education	Energy use and costs
Competition regulation	Inflation rates	Fashion, hypes	(Changes in) Information Technology
Political Stability	Stage of the business cycle	Health consciousness & welfare, feelings on safety	(Changes in) Internet
Safety regulations	Consumer confidence	Living conditions	(Changes in) Mobile Technology

Completing a PEST analysis is relatively simple, and can be done via workshops using brainstorming techniques. Usage of PEST analysis can vary from business and strategic planning, marketing planning, business and product development to research reports.

Sometimes extended forms of PEST analysis are used, such as SLEPT (plus Legal) or the STEEPLE analysis: Social/demographic, Technological, Economic, Environmental (natural), Political, Legal and Ethical factors. Also Geographical factors may be relevant.

Ansoff Matrix

The product/market grid of Ansoff is a model that has proven to be very useful in business unit strategy processes to determine business growth opportunities. The product/market grid has two dimensions: products and markets.

Over these 2 dimensions, four growth strategies can be formed:

- market penetration,

- market development,

- product development, and

- diversification.

Market Penetration:

Company strategies based on market penetration normally focus on changing incidental clients to regular clients, and regular client into heavy clients. Typical systems are volume discounts, bonus cards and customer relationship management.

Market Development:

Company strategies based on market development often try to lure clients away from competitors or introduce existing products in foreign markets or introduce new brand names in a market.

Product Development:

Company strategies based on product development often try to sell other products to (regular) clients. This can be accessories, add-ons, or completely new products. Often existing communication channels are leveraged.

Diversification:

Company strategies based on diversification are the most risky type of strategies. Often there is a credibility focus in the communication to explain why the company enters new markets with new products. This 4th quadrant (diversification) of the product/market grid can be further split up in four types:

- horizontal diversification (new product, current market)

- vertical diversification (move into firms supplier's or customer's business)

- concentric diversification (new product closely related to current product in new market)

- conglomerate diversification (new product in new market).

3C's model - Ohmae

The 3C's Model is a strategical look at the factors needed for success. It was developed by Kenichi Ohmae, a business and corporate strategist.

The 3C’s model points out that a strategist should focus on three key factors for success. In the construction of a business strategy, three main players must be taken into account:

A. The Corporation

B. The Customer

C. The Competitors

Only by integrating these three C’s (Corporation, Customer, Competitors) in a strategic triangle, a sustained competitive advantage can exist. Ohmae refers to these key factors as the three C’s or strategic triangle.

The Corporation

The Corporation needs strategies aiming to maximize the corporation’s strengths relative to the competition in the functional areas that are critical to achieve success in the industry.

Selectivity and sequencing

The corporation does not have to lead in every function to win. If it can gain decisive edge in one key function, it will eventually be able to improve its other functions which are now average.

Make or buy

In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share of its assembly operations. If its competitors are unable to shift production so rapidly to subcontractors and vendors, the resulting difference in cost structure and/ or in the companies ability to cope with demand fluctuations may have significant strategic implications.

Cost-effectiveness

Improving the cost-effectiveness can be done in three ways. First by reducing basic costs, second by exercising greater selectivity (orders accepted, products offered, functions performed) and third by sharing certain key functions with a corporation’s other businesses or even other companies.

The Customer

Clients are the base of any strategy according to Ohmae. Therefore, the primary goal supposed to be the interest of the customer and not those of the shareholders for example. In the long run, a company that is genuinely interested in its customers will be interesting for its investors and take care of their interests automatically. Segmentation is helping to understand the customer.

Segmenting by objectives

The differentiation is done in terms of the different ways that various customers use a product.

Segmenting by customer coverage

This segmentation normally emerges from a trade-off study of marketing costs versus market coverage. There appears always to be a point of diminishing returns in the cost versus coverage relationship. The corporation’s task is to optimize its range of market coverage, geographically and/ or channel wise.

Segmenting the market once more

In fierce competition, competitors are likely to be dissecting the market in similar ways. Over an extended period of time, the effectiveness of a given initial strategic segmentation will tend to decline. In such situations it is useful to pick a small group of customers and reexamine what it is that they are really looking for.

A market segment change occurs where the market forces are altering the distribution of the user-mix over time by influencing demography, distribution channels, customer size, etc. This kind of change means that the allocation of corporate resources must be shifted and/ or the absolute level of resources committed in the business must be changed.

The Competitors

Competitor based strategies can be constructed by looking at possible sources of differentiation in functions such as: purchasing, design, engineering, sales and servicing. The following aspects show ways in order to achieve this differentiation:

Power of image

When product performance and mode of distribution are very difficult to distinguish, image may be the only source of positive differentiation.

Capitalizing on profit- and cost structure differences

Firstly, the difference in source of profit might be exploited, from new products sales etc. Secondly, a difference in the ratio of fixed costs and variable costs might also be exploited strategically. A company with lower fixed cost ratio can lower prices in a sluggish market and hence gain market share.

Hito-Kane-Mono

A favorite phrase of Japanese business planners is hito-kane-mono, standing for people, money and things. They believe that streamlined corporate management is achieved when these three critical resources are in balance without surplus or waste. For example: Cash over and beyond what competent people can intelligently expend is wasted. Of the three critical resources, funds should be allocated last. The corporation should firstly allocate management talent, based on the available mono (things): plant, machinery, technology, process know-how and functional strength. Once these hito (people) have developed creative and imaginative ideas to capture the business’s upward potential, the kane (money) should be given to the specific ideas and programs generated by the individual managers.

The 7S McKinsey model

Most of us grew up learning about 'the 4Ps' of the marketing mix: product, price, place, promotion. And this model still works when the focus is on product marketing. However most developed economies have moved on, with an ever-increasing focus on service businesses, and therefore service marketing. To better represent the challenges of service marketing, McKinsey developed a new framework for analyzing and improving organizational effectiveness, the 7S model:

The 3Ss across the top of the model are described as 'Hard Ss':

• Strategy: The direction and scope of the company over the long term. • Structure: The basic organization of the company, its departments, reporting lines, areas of expertise, and responsibility (and how they inter-relate). • Systems: Formal and informal procedures that govern everyday activity, covering everything from management information systems, through to the systems at the point of contact with the customer (retail systems, call centre systems, online systems, etc).

The 4Ss across the bottom of the model are less tangible, more cultural in nature, and were termed 'Soft Ss' by McKinsey:

• Skills: The capabilities and competencies that exist within the company. What it does best. • Shared values: The values and beliefs of the company. Ultimately they guide employees towards 'valued' behavior. • Staff: The company's people resources and how they are developed, trained, and motivated. • Style: The leadership approach of top management and the company's overall operating approach.

In combination they provide another effective framework for analyzing the organization and its activities. In a marketing-led company they can be used to explore the extent to which the company is working coherently towards a distinctive and motivating place in the mind of consumer.

BCG matrix

The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product's market grows the better it is for the company.

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

1. Stars (=high growth, high market share)
- use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.
- frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.
2. Cash Cows (=low growth, high market share)
- profits and cash generation should be high , and because of the low growth, investments needed should be low. Keep profits high
- Foundation of a company
3. Dogs (=low growth, low market share)
- avoid and minimize the number of dogs in a company.
- beware of expensive ‘turn around plans’.
- deliver cash, otherwise liquidate
4. Question Marks (= high growth, low market share)
- have the worst cash characteristics of all, because high demands and low returns due to low market share
- if nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.
- either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash

The BCG Matrix method can help understand a frequently made strategy mistake: having a one-size-fits-all-approach to strategy, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

A. Cash Cows Business Units will beat their profit target easily; their management have an easy job and are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their businesses which are mature and not growing anymore.

B. Dogs Business Units fight an impossible battle and, even worse, investments are made now and then in hopeless attempts to 'turn the business around'.

C. As a result (all) Question Marks and Stars Business Units get mediocre size investment funds. In this way they are unable to ever become cash cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become a cash cow (or star), or otherwise companies are advised to disinvest and try to get whatever possible cash out of the question marks that were not selected.

Some limitations of the Boston Consulting Group Matrix include:

• High market share is not the only success factor

• Market growth is not the only indicator for attractiveness of a market

• Sometimes Dogs can earn even more cash as Cash Cows