Here we outline a process for marketing to assist business strategy in starting a Competitive Advantage (CA) in a broad segment of the market.
(Note- The following is a process as “what seems to have taken place before business successes became fully recognised.” Therefore it should in turn cause success).
For a company with no material advantage over rivals, how can a Competitive Advantage (CA) be started? A route for marketing to assist strategy in securing a CA in a broad market segment involves:
1. Identifying market segments that offer potential CA sources,
2. Increasing sales volume in a chosen market segment, to secure the initial CA sources, and
3. Propelling the CA reinforcing loop for market share gains.
1. Identifying market segments that offer potential CA sources.
The intention is to find a market segment of customer needs with the right features and characteristics in place that would encourage a CA reinforcing loop to actually take effect (to one company’s benefit).
This is the decision as to “where to compete” in the market, such that it would enable a CA to begin as a powerful “how to compete.”
Create your own definition of a customer need segment within the overall industry demand that fulfils both A. and B.
A. Where you are currently market leader or a close 2nd or 3rd in volume sales to that customer need market segment, relative to rivals (or where no company presently serves that segment in a defined manner).
The reason is that in order to secure and exploit CA sources before rivals can, it is usually necessary to reach a minimum threshold level of sales volume before they do. An explanation for this is here.
B. Where the market segment meets the three criteria below for it to enable a CA reinforcing loop to begin.
The greater the extent that the three criteria are fulfilled by any customer need segment where you are currently #1,#2 or near #3 in sales volume, the higher the probability of the loop reinforcing and therefore successfully developing a CA in that market:
Segment criteria needed.
There should be many potential CA sources grouped around serving the customer need segment. CA types and their sources are listed here.
A cluster of CA sources are often found when:
#The segment’s customer need requires the business to be physically geographically close to the customers (either because the need has a service element or involves a heavy product or a regularly purchased product), or
# The segment’s customer need is technical/ advanced/ specialised and can be met by the company being geographically far away from the customer.
The above segment descriptions have numerous fixed costs (scale and scope economies CA), numerous opportunities for extensive learning (learning curve CA) and specific distribution (toll distribution CA) that are clustered around either being geographically local to customers (e.g. Tesco serving a 10 mile radius, Starbucks a 200 metres radius) or highly product centralised into a few large manufacturing centres and product specialised ‘local’ (e.g. Intel).
#Or the customer need segment requires assets (scale and scope economies), processes and knowledge (learning curve), market access positions (toll distribution) or information connection requirements (network effect) that are uniquely specific to that segment and different to the rest of the market.
# Or the segment’s need is significantly different to the rest of the market due to a fundamental, structural difference to that customer segment. See “start a niche advantage” for how to find such segments offering CA sources.
# Or the segment has a key need that offers a lot of headroom for continuous improvement (potentially offering learning curve, scale economies or network effect CAs),
# Or the segment has a desire to receive a lot of content on their subject of passion (as well as express and generate a lot of content, in turn connecting with others sharing the passion). Or a need for solving an information problem which is best solved by involving a lot of connections and often has an urgency associated with it (network effect CA).
# Or the segment’s fundamental need could be better served using only a small fraction of resources compared to incumbent rivals (offering new-to-world innovative business model CA).
Segment criteria needed.
For the CA sources to improve utility or lower costs, the company should clearly recognise the customer needs in order to select and align the most beneficial CA sources. Therefore the customer segment should have:
# One or two fundamental needs overriding all other lesser needs (i.e. low diversity of need variations within that fundamental need segment), with sustainable long term demand for that need.
# Few alternative routes, product options, or channels available for customers to have more diverse need variations met. Otherwise this would permit multiple rivals to compete and inhibit the reinforcing loop.
Segment criteria needed:
# Ideally no defined rivals, by serving an innovative need segment.
# Next best is to have a clear and limited set of few rivals serving the segment (or few rivals of similar sales volume to you). Also that these few rivals compete outside of the segment as well as within, so they have exit options, have attention diversified elsewhere and are less likely to engage in costly struggles for market share.
For the utility-cost improvement to widen a gap over rivals and therefore gain sales, it is beneficial for the segment’s competitors to be in a somewhat ‘zero sum game’ (i.e. they lose sales in that segment proportional to your gain). So rival’s loss of sales lead to a worsening utility-cost gap and weakening customer value.
Avoid segments with a sprawling mass of numerous potential rivals. The more rivals, the less of a % drop in sales each one experiences to your % gain.
# No rival to have a CA in specifically serving that segment (and preferably not a CA in serving a broader customer need segment, of which that is a sub-segment).
# A reasonable growth rate for the segment relative to the industry itself. Note- a high growth segment enables rivals to gain enough sales to imitate own securing of CA sources and so nullify any CA in the process.
Suggested ways to segment.
To find a customer need segment that best fulfils both A and B’s criteria and therefore offers the highest probability of securing a CA, seek to re-define the market in numerous ways along high-level, fundamental need parameters:
• by broad, fundamental customer need,
• by core fundamental technology,
• by product category,
• by product that could have a service element added/ a service that can be ‘productised’ and the service largely removed or delivered remotely,
• by product that combines with other related needs,
• by distribution channel,
• by new higher-level definition of the customer’s ultimate need,
• by customers purchasing at different times,
• by geographical region,
• by a 2nd decision maker in the buying process or a pre-qualifying decision maker (e.g. distributor for end customers, parent for their child),
• by purchasing via a specific payment preference,
• a need segment that indicates the company to already have a nascent CA. For example, 3 product lines in a product portfolio may have profit margins above the rest and could indicate an underlying broad need segment where a nascent, underdeveloped CA source underpins all 3.
• by significant CA source itself. The opposite to segmenting the market is to assume that an identified source of competitive advantage could be so significant as to carve out a new, previously unrecognised customer need segment of demand.
This re-defining of the market should be a creative process leading to ten or more different ways of segmenting broad customer needs.
Broad market segments, not narrow marketing segmentation.
These are high-level fundamental need segments that should represent a sizeable percentage of the overall market, because the intention is to gain volume over direct rivals in order to secure CA sources.
This is not marketing segmentation along more narrow variables such as product usage, demographics, behavioural/ attitudinal, benefits sought, geo-demographic, problem detection etc. The reason is because these narrow, smaller marketing segments generally constrain volume and therefore likely offer nil CA sources available in being a share leader of such a small segment (and a lack of scale relative to likely larger rivals).
The process above enables a company to choose a customer need segment:
– offering long term sustainable demand from the fundamental need,
– against segment rivals the company decides to compete with,
– that has a structural fit with the company and its existing strength, based upon currently being #1, #2 or close 3rd volume leader within the segment, and
– offering viable CA sources to potentially dominate the segment.
2. Marketing to increase sales volume in that market segment offering CA sources.
Crossing a volume threshold.
Having found a customer segment offering CA potential to a volume leader or challenger, the company will likely need to exceed a sales volume threshold beyond that of rivals’ volume, in order to financially justify securing the initial CA source(s).
For the reason why a sales unit volume threshold ideally needs to be passed, click here.
Marketing to grow sales volume.
To close the gap between current sales volume and the target sales volume threshold, marketing seeks to increase sales volume in that chosen market need segment area.
A fundamental customer need segment that offers broad, underlying, economic CA sources to the volume leader in that segment will likely be a segment that spans across more than one narrow product line’s need or specific customer segment:
Therefore it is likely that marketing will seek to increase volume across multiple products, in order to secure a CA source to the benefit of those product lines or categories. So a strategic marketing objective may be to “increase total sales volume by x% across these product lines or categories, in order for ___ CA source to be invested in, to the benefit of those customers.”
This offers marketing a variety of ways to grow volume in each individual product line/ category. Marketing initiatives can be tailored as to be most effective in growing or sustaining sales in each product situation, ranging from tactical mix with immediate effect through to marketing strategy with delayed effect:
• Widening any limiting bottleneck in the buying process.
• Increasing reach of marketing communications.
• Price promotions.
• Prolonging retention of existing customers.
• Increasing existing customer’s frequency of purchase or size of purchase.
• Winning new customers via market penetration.
• Developing a new product to expand market of demand or enter a related market.
• Entering a new distribution channel.
Marketing budget allocation is focused on these product lines of strategic importance, to increase total sales volume within a target broad need segment identified as offering CA sources to a volume leader. Those products outside of the focus would therefore receive less capital as a result.
To further assist in securing the sales volume, ways to minimise a direct rival’s ability to hinder sales growth might include:
• Avoiding detection by obscuring sales gains with below-the-line marketing communications.
• Delaying their response by taking marketing actions that they are immobile to respond to (e.g. structurally immobilised, reluctance to cannibalise their existing products).
• Reducing their keenness to respond, by timing marketing initiatives to compete for customers in an area that a key rival is currently focussed away from, as they pour resource into a different area.
3. Propelling the reinforcing loop.
Having increased volume sufficiently to gain the initial CA source(s), a CA reinforcing loop can now begin:
The CA source is incorporated into the company and marketing castes the raised customer utility/ lowered company cost advantage into relevant customer value:
Each cycle of this loop pushes the company’s per unit cost down the cost curve with an increasing customer utility per unit, such that rivals increasingly cannot match your customer value:
Therefore the aim now is to quickly compound the cycle as ‘time-based competition,’ to widen the gap between own customer value and that of rivals. This involves compressing the time it takes to complete a full cycle of the reinforcing loop that involves:
1. Increasing sales to the next threshold necessary to secure further CA sources (or compound existing CA sources by further reinvesting into them).
2. Selecting CA sources of greatest contribution to customer quality or lowering of company cost,
3. Incorporating the CA source into the business (via Operations, HR, IT, Logistics etc.).
4. Marketing configuring the CA source into meaningful customer value.
5. Scaling the organisation’s capability to fulfil increasing sales orders.
6. Reinvesting sales proceeds into the original CA source or into securing new CA sources (as capital reinvested in either will earn RoIC>CoC), in order to further raise customer value.
“The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.” Gary Hamel and C.K Prahalad.
At this initial stage of securing a CA source, the advantage itself is small and surmountable by rivals. Given enough time, competitors can react and close any growing customer value gap. Their marketers will assess own customer value relative to alternatives and make adjustments to sustain margins and sales.
It is after multiple cycles of the reinforcing loop driving down cost and raising customer utility, when an insurmountable gap in customer value truly develops. Rivals may try to match customer value by using their shareholder value to subsidise it- competing at a loss- but this isn’t sustained for long.
Birth of a brand.
As the CA enables marketing to deliver marginally superior customer value over a sustained period of time, it is increasingly recognised by consumers. To enjoy the superior value, they are motivated to make the mental effort to remember the brand and are therefore receptive to positioning prompts.
This receptiveness gives marketing the invaluable opportunity to greatly enhance the perceived customer value of the product. This is achieved by conveying how it fulfils higher level needs and desires for the customer, leading to the creation of brand value to both customers and shareholders.
Domination of a broad need segment of the market.
Repeated cycles of the reinforcing loop leads to an accumulation and concentration of CA sources into serving a broad need segment of the market.
The subsequent progressive lowering of cost/ raising utility per unit gives marketers a greater scope to develop products that meet the needs of a wider audience beyond the original target market. The sales volume from this in turn leads to securing yet more CA sources.
Market share growth from the reinforcing loop will follow this “S” curve:
Initially a slow growth in sales. Next a rapid expansion phase as the CA gains traction in delivering superior customer value- brand awareness begins, word-of-mouth within customer networks etc. Followed by a slowing of sales growth, as the customer need segment’s sales ‘boundary’ is reached (the same boundary as the CA scope extends to, since the CA sources were selected that best deliver value to that customer need segment).
The edge of this boundary is marked by customers who see no superior customer value between yours and alternative product offerings.
If the above is not feasible, then seek a niche segment.
The above 3 steps show a merging of marketing with strategy in their shared aim to deliver superior customer value. The creation of a competitive advantage leads to a RoIC % spread and the sales growth accommodates more invested capital, the two combining to grow shareholder value.
However, there may be no opportunities found to secure a CA within a broad need segment.
A company may re-define its market by segmenting into broad needs in tens of different ways and identify several examples offering CA sources to the volume leader, but none of these segment definitions where the company could possibly become a volume leader or close challenger.
Therefore the next best alternative move is to accept the inability of trying to dominate a broad segment of the market and instead to search for gaining a CA in dominating a niche segment (and sustain SV across the rest of the business outside of that niche).