This looks at why marketing’s purpose is to prolong the duration of a Competitive Advantage (CA).
Marketing’s impact on financial results.
Once established, a Competitive Advantage (CA) and its subsequent Return on Invested Capital % spread may endure for 3, 7, 15 or more years and grow shareholder value during that period (as covered here).
Marketing can grow shareholder value by prolonging a CA for additional years. A company with a CA that lasts for the next 5 years may be worth £50m in today’s valuation to its business owner shareholders. But if the CA could be prolonged for an extra 2 years, the same company is worth £53m today (see calc):
Eventually, all CAs dwindle into Strengths and then to a negligible advantage over rivals. The result is that the company’s Return on Invested Capital % gradually drifts downwards to industry average Cost of Capital over the years.
Marketing’s purpose is to slow the rate of this decline and instead prolong the ebbing CA and its excess RoIC % above Cost of Capital for additional years:
Marketing can prolong the duration of an advantage by closer connecting and adapting the company’s CA or strength with the market’s changing needs.
Causes of a decline in Competitive Advantage (CA).
To consider how marketing can prolong a CA, first a look at why CAs become eroded:
1. The needs of customers change and drift away from those the company was originally successful at meeting, reducing any CA’s customer utility advantage.
2. The customer need is now fully satisfied, such that no further CA advancements in utility raising would bring additional customer value,
3. As the market matures, the increasing diversity of customer needs enable small rivals to enter the market. This may result in an existing company experiencing fewer sales into the same fixed cost base, leading to higher cost per unit to reduce any cost advantage.
4. As the market grows, rivals are able to secure their own scale economies and so reduce a leader’s cost advantage.
5. Rivals learn over time how to match the superior customer quality or utility offered by a CA.
6. Technology both advances and becomes cheaper, serving to reduce a customer utility or cost advantage once had.
7. Internal factors often follow a success: corporate cost structure bloat, bureaucracy, apathy, organisational bottlenecks, cost of complexity or other diseconomies of scale etc.
First shaping customer expectations, later adapting to customer needs.
A company in the process of growing a CA is able to shape customer value expectations of the product.
Later, the CA ceases to grow and plateaus with the company defining a high customer value that rivals are unable to imitate.
But as the CA declines into a strength and the “quality utility to the customer – cost to the company” gap shrinks, rival customer value draws closer to comparison and the company’s ability to shape or define customer value attenuates. Instead it becomes more necessary for the company to increasingly adapt to changing customer value expectations now outside of its control.
A CA declines into a mere Strength with minor RoIC spread.
Strengths differ from CAs in that Strengths were previously a CA source; the reinforcing loop nature of the CA causing the company to significantly excel in a dimension of customer value over rivals:
However a Strength no longer has this reinforcing loop generating an improvement in customer utility or lower company costs for every future unit sold, due to the causes of a CA decline listed above.
Instead, if a company can identify no business strategy to secure CA sources and compound the CA with sales growth, then as the CA declines into a Strength and the ‘customer utility- cost to the company’ gap over rivals shrinks, the company is increasingly reliant upon marketing to feedback from the market as to how the company should adapt itself to the market:
Marketing as joining together the Market and CA.
Marketing’s purpose is to prolong the CA or strength, by maintaining the CA or Strength’s relevance in the market and so minimising the first three causes of a CA’s decline:
1. The needs of customers change and drift away from those the company was originally successful at meeting,
2. The customer need is now fully satisfied such that the CA brings no additional customer value,
3. The increasing diversity in customer needs over time enable rivals to enter the market and take away market share.
A company with a declining CA or strength will nevertheless have a high market share in serving a customer need segment that desires the customer value produced by that ebbing CA or strength. It is this dominant volume position in a need segment that should enable a company to prolong its competitive position, because its marketing can:
– ‘out-target’ its rivals in being able to serve smaller sub-segments, with the act of serving multiple targets being a fixed cost and the high volume market domination enabling a scale economy advantage in diluting such fixed costs over more customers, to lower per unit cost below that of rivals,
– ‘out-learn’ its rivals in understanding the needs of customers in those segments, and subsequently
– ‘out-customise/ adapt’, as the market research and changes to the marketing mix are again a fixed cost offering scale economies and also faster up the learning curve in serving a higher volume of customers.
To grow the company’s shareholder value, marketing’s purpose is to prolong the CA or strength by “out-targeting, out-learning and out-adapting” to customer needs better than rivals.
The CA audit and marketing objectives lay the foundations to achieving this.