Prolong an Advantage

Here we outline how marketing can interact with strategy to prolong the duration of a Competitive Advantage (CA). Protecting superior profits from competitor entry.susatin - moat 2

Once established, a 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).

Eventually however, all CAs dwindle into Strengths and then to nil advantage over rivals. This is shown in the diagrams, as companies with high Return on Invested Capital % at year zero progressively decline to the average within several years:

RoIC reversion

 

Marketing’s purpose is to slow the rate of this decline and instead prolong the ebbing CA and its RoIC % for additional years, as suggested by the blue line:

Prolong marketing slowing decay of RoIC

By prolonging a CA for additional years, marketing can grow shareholder value. 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.).

Causes of a decline in Competitive Advantage.
To consider how marketing can slow the decline, first a brief look at why CAs become eroded:

• The needs of customers change and drift away from those the company was originally successful at meeting, reducing any customer utility advantage.
• As the market matures, the increasing diversity in customer needs enable small rivals to enter the market. This results in an existing company experiencing fewer sales into the same fixed cost base, leading to higher cost per unit to reduce any cost advantage.
• Rivals learn how to imitate the superior customer value offered by a CA.
• Technology both advances and becomes cheaper, serving to reduce a customer utility or cost advantage once had.

Marketing that prolongs a Competitive Advantage.
As strategy’s CA declines in its ability to deliver superior customer value, the company becomes increasingly reliant on marketing in two areas:

1. To sustain an individual product line’s customer value relevance to changing customer needs (to maintain competitiveness amongst alternatives), marketing increasingly targets smaller customer segments, conducts research into their requirements, repositions the brand and tailors a marketing mix to their needs.

2. To maintain high sales volume as is necessary to sustain a CA and slow its decline, the above individual product level targeting is duplicated many times to meet multiple need segments, by developing a portfolio of products/ services meeting niche needs within the broad need scope that the CA serves:

Prolong- ca broad, product lines specific

Since Marketing’s actions in 1 and 2 are important to sustaining a CA or strength’s competitive position, earn a RoIC % spread and grow shareholder value, each are worth covering further.

 

Targeting of smaller segments to sustain value competitiveness.
As consumer needs diversify over time and erode the CA, marketing’s segmentation and targeting intentionally limits the volume of customers served in order to better meet the needs of a smaller, more defined and better understood need segment.

But there’s a conflict:

Strategy’s CA enables meeting customer needs better than rivals through the economics of high sales volume throughput into CA sources to better serve broad need segments (e.g. product category segment, geographic area, distribution channel, generalised customer group).

Whereas marketing meets customer needs better than rivals through tailoring customer understanding into products serving lower volume, smaller segment needs (such as segments by product usage, demographics, behaviour, attitudes, problem detection etc.). These typically offer no CA sources due to being smaller than need segments offering enough volume to secure CA sources.

Due to this contrast between how strategy’s CA delivers customer value via high sales volume and how marketing delivers customer value via lower volume customer understanding:

The more sizeable and growing the CA, the less necessary is marketing’s narrow targeting (customer needs cannot be targeted when the company’s CA is actively defining customer need expectations).
The weaker the CA or strength, the more necessary it is for marketing to target well-defined and likely smaller segments, in order to sustain customer value against the ebbing CA competitive position.

Positioning.
There’s also a strong connection between marketing’s brand positioning and extent of CA too. A CA or Strength causes a brand positioning to emerge, because a CA enables superior customer value over rivals and so motivates the customer to remember the brand.

Therefore the more significant a CA, the more motivated and receptive are customers to accept brand positioning prompts that convey that the product can meet their most desired needs.
As the overall CA declines, the brand is often the last remaining CA source to endure (as a switching cost CA type) and therefore justifies reinvestment. Promote and reposition the ebbing brand value to a smaller, defined target, to maintain relevance to customers and motivate them to retain favourable brand associations.

Marketing mix.
Marketing mix’s tactical decisions on pricing, promotion, product and distribution are also affected by the extent of CA:

The weaker the CA and its inability to heighten customer value, the more important it is to customise the whole of mix to 1. best fit the needs of an increasingly defined and smaller target and 2. communicate the remaining brand value, both of which add up to delivering marginally superior customer value.
Such whole-of-mix fitting is best coordinated by the marketing department.

(The more significant the CA, the less necessary is the coordination of the whole of mix due to: 1. Customers are more receptive to brand positioning and therefore marketing focusses more on branding and mix’s communications, and 2. Elements of the mix- notably product and distribution- will be fundamental to the CA itself and therefore of business strategic importance and outside of the scope of marketing’s implementation).

The individual product mix variables themselves fit the CA-oriented framework:

The product is the company’s best expression of its understanding of the target customer’s needs and desires, developed by applying underlying CA sources to better meet needs over rivals.
For the product, Marketing communications and channels are then developed to:

• Enhance the product’s perceived and actual customer value, as to enable it to be priced to earn above threshold margin profits,
• Ensure high reach to the target audience and open up any bottlenecks in the buying process that might restrict the full sales potential that the product customer value could secure, to maximise sales volume to sustain an underlying CA or strength.

For this full product+communication+channel proposition, price can then be set within three dimensions:

• By CA objective: setting a lower, penetration price in order to raise sales volume to grow a CA. Later setting a higher, skimming price in order to harvest profits from a strong CA.
• By the segment’s price elasticity of demand’s sensitivity to price increases or reductions that affect sales volume.
• Within the above two, use ‘dynamic pricing’: in buying situations where convenience to the customer is high and price sensitivity low, the price can be raised. And priced lower in buying situations when the convenience is relatively low and price sensitivity high.

In summary, as a CA’s competitive position weakens in delivering superior customer utility at a lower cost, to ensure that a product line’s customer value remains competitive, marketing should increasingly:

1. Target more defined and therefore likely smaller need segments,
2. Invest in and reposition the remaining brand value,
3. Customise the whole-of-mix to each target segment, and
4. Decide individual marketing mix actions to maximise customer utility and, through pricing, set the customer value to either penetrate sales and sustain a CA, or to skim sales to harvest a CA position.

 

Coordinating the product portfolio to prolong the CA.
As a company’s CA weakens, marketing can sustain customer value by targeting smaller segments and subsequently understanding and serving customer needs better.
So the CA’s coverage of a broad customer need segment divides into numerous niche need products and a portfolio emerges (a portfolio might also develop as a result of growing a CA into new market segments, but here the focus is on prolonging an ebbing CA).

The portfolio is where strategy’s broad CA economics meets with marketing’s targeting intimacy, to sustain customer value in the marketplace.

Smaller volume target segments, but the CA still needs high overall volume.
However, the CA was created by becoming a 1st, 2nd or 3rd volume leader in a broad or niche need segment of the market. So the CA still needs high overall sales to:

– block rivals from entering and serving the same customer needs,
– maintain sales into the same fixed cost structure to avoid margins falling,
– generate cash to reinvest into developing the CA or relative strength, and
– sustain the unit volume throughput that underpins the economics of the CA sources.

Therefore the reason for a portfolio of multiple products/ categories/ varieties is to maintain high overall sales into the CA sources or relative strength.Prolong funnels

Marketing as a ‘caretaker’ of the CA.
The increasing reliance upon marketing’s targeting of niche needs and management of a portfolio means that marketing becomes a new caretaker of the CA. The reason is because the marketing strategy’s “where we compete” decision making (targeted product lines and portfolio management) replaces the previous business strategy’s “where we compete” decision (sales volume leadership in a broad or niche customer need segment) that caused the CA to originally be created.

The original broad need segment targeting (“where we compete”) is no longer sufficient in the marketplace. It is obsolete in terms of delivering customer utility, as customer needs have become more sophisticated, different and nuanced.
Therefore marketing’s targeting and portfolio management can keep the company in touch with market reality, meet market demand, drive sales and so sustain the CA for as long as possible.

For marketing to be a caretaker of the CA and effectively decide growth and “where we compete” in a manner that prolongs the CA, it requires marketing to understand how the CA works.

Marketing that understands the CA can better support it.
For marketing to understand how the CA or relative strength actually functions in delivering superior customer value, it first needs identifying as follows:

1. Where is the CA?
Find the present scope of the CA in terms of where in the market the company currently has an advantage over direct rivals.
Performance metrics of existing product lines can indicate where: long-term strong profit margins, high customer retention rates, sales growth beyond market’s growth rate, market share domination of a need segment.
The subsequent hazy understanding of the CA’s scope of customer need can be brought into focus by asking “out of the customers who produce these favourable performance measurements, what broad need do they all have in common that the company serves so well?”

Prolong- finding where the CA is

2. What is the CA?
By understanding where in the market in terms of customer needs the company appears to have a CA, this can direct the asking of the question “why?” repeatedly:
Why are we good at meeting this need? Why are we better than rivals? Why can they not copy us?
The answers serve to identify a high level CA type(s) and its subsequent CA sources, to then state:
“In meeting this broad need segment______________ (where we compete), we are the preferred choice because of __________________ (“this CA type and these CA sources or relative Strength” as how we compete).”
The result is an understanding of the CA’s functioning.

Prolong- understand how the CA functions

Manage the portfolio to sustain the CA.
Having identified the CA or relative strength, marketing can make portfolio growth decisions in light of their impact on the CA.

Specifically, assessing marketing growth options as “where we compete” along:

a. Increasing existing customer retention.
b. Grow share of spend of existing customers.
c. Win new customers.
d. Develop new products in existing markets.
e. Enter new markets.
f. Enter new distribution channels.
g. International growth.

… That fit within a proven route to prolonging a CA (as “how we compete”):

First, concentration of a CA.
The aim is to serve all possible customer demand within the existing market that the CA could enable the company to better meet over rivals. This leads to sustaining sales volume to prolong existing CA sources (or even increase sales to secure additional CA sources, as described in starting a broad or niche CA):Prolong matrix expansion

Typically this would involve growth options a,b,c or d above. Therefore:
– Seek all possible variations of customer needs that could benefit from the CA or strength.
– Select growth options that could make use of many existing CA sources.
– Innovate new solutions for customers, made possible as a result of the CA sources.
For example, if the CA type is:

• Distribution toll- Develop new products that could be best delivered as a result of the company’s distribution ownership.
• Learning curve- Win new customers by identifying their nascent, emerging needs that could be met by your technological advances.
• Or a strength in customer service – Grow share of existing customers’ spend, by making it easier for them to switch their other related purchases to yourself.

Next, expansion of a CA.
The aim is to only enter new markets where the company has a CA in serving the new market AND where the increase in customer volume also supports the CA sources in the existing markets. Otherwise, an advantage in entering the new market may lead to a diminished advantage in the original market, as company resources disperse and cost of complexity rises by competing in two sectors. The result would be expansion to no net gain for shareholders.Prolong matrix 2

Typically this would involve growth options d, e, f or g. Therefore:
– Find new markets whose customers will value the existing CA and as a result drive sales volume into both enhancing existing CA sources, as well as potentially starting CA sources specific to the new market too.
– Creatively redefine the business itself to find such growth opportunities; “are we in the business of meeting this current need, or could we be in the business of meeting a broader need of greater relevance to the consumer’s life or value chain?”

This marketing expansion path serves to 1. Prolong a RoIC % spread and 2. Maximise Invested Capital into that spread, for maximum shareholder value.Prolong matrix 3

Conclusion.
As a CA deteriorates in terms of its utility-cost advantage over rivals and breadth of market scope, here we show how marketing can sustain a CA by two fundamental actions.
Marketing’s targeting of niche needs (including market research, positioning and mix) and management of a portfolio enables the company to:

• stay in touch with the market reality of changing customer needs,
• block out rival entry, and
• sustain sales volume to prolong the economics of an ebbing CA.

The result is a longer period of years with a CA where the company can grow shareholder value.
Eventually the CA will merely become a minor strength. At this point, marketing focuses on sustaining shareholder value that was created from the past CA.