Hbrã¢â‚¬â„¢s 10 Must Reads: on Marketing Strategy, Harvard Business Review Press, 2013 Torrent
Reprint: R1312G For decades, businesses have sought competitive advantage in "upstream" activities related to making new products—building bigger factories, finding cheaper raw materials, improving efficiency, and then on. But those easily copied sources of advantage are being irreversibly eroded, and advantage increasingly lies "downstream"—in the marketplace. Today the strategic question that drives business concern is not "What else can nosotros make?" just "What else can we do for our customers?" This new middle of gravity demands a rethink of long-continuing strategy principles: First, the sources and locus of competitive advantage now lie outside the firm, and advantage is accumulative—rather than eroding over time equally competitors catch upwards, information technology grows with experience and knowledge. Second, it's no longer about having the better product but near how you position yourself in the market and which companies yous choose to compete against. Third, the stride of change in markets is now driven past shifts in customers' purchase criteria rather than by improvements in products or engineering science.
It's no secret that in many industries today, upstream activities—such as sourcing, production, and logistics—are being commoditized or outsourced, while downstream activities aimed at reducing customers' costs and risks are emerging as the drivers of value cosmos and sources of competitive advantage. Consider a consumer'south purchase of a tin of Coca-Cola. In a supermarket or warehouse club the consumer buys the drink as part of a 24-pack. The cost is about 25 cents a can. The same consumer, finding herself in a park on a hot summer twenty-four hours, gladly pays two dollars for a chilled can of Coke sold at the point-of-thirst through a vending machine. That 700% price premium is attributable not to a better or different product just to a more convenient means of obtaining it. What the customer values is this: non having to remember to buy the 24-pack in accelerate, intermission out one can and observe a identify to store the rest, lug the can around all day, and figure out how to keep it chilled until she's thirsty.
Downstream activities—such every bit delivering a product for specific consumption circumstances—are increasingly the reason customers choose ane make over another and provide the basis for client loyalty. They also at present account for a large share of companies' costs. To put it simply, the center of gravity for most companies has tilted downstream.
Yet business organisation strategy continues to be driven by the ghost of the Industrial Revolution, long afterward the factories that used to be the main sources of competitive advantage take been shuttered and off-shored. Companies are nonetheless organized around their product and their products, success is measured in terms of units moved, and organizational hopes are pinned on product pipelines. Production-related activities are honed to maximize throughput, and managers who worship efficiency are promoted. Businesses know what it takes to make and move stuff. The problem is, so does everybody else.
The strategic question that drives concern today is not "What else tin we brand?" but "What else tin can we exercise for our customers?" Customers and the market—not the manufacturing plant or the product—at present stand up at the cadre of the business. This new heart of gravity demands a rethink of some long-continuing pillars of strategy: Beginning, the sources and locus of competitive advantage now lie outside the firm, and advantage is accumulative—rather than eroding over time as competitors take hold of up, it grows with experience and knowledge. Second, the way you compete changes over time. Downstream, it'southward no longer about having the better product: Your focus is on the needs of customers and your position relative to their purchase criteria. Y'all have a say in how the market place perceives your offering and whom you compete with. Third, the pace and evolution of markets are now driven by customers' shifting buy criteria rather than by improvements in products or engineering science.
Let's consider more than closely how companies tin use downstream activities to upend traditional strategy.
Must Competitive Reward Exist Internal to the Firm?
In their quest for upstream competitive advantage, companies scramble to build unique assets or capabilities and and so construct a wall to prevent them from leaking out to competitors. You can tell which of its activities a business firm considers to exist a source of competitive reward past how well protected they are: If the company believes its edge lies in its production processes, and so institute visits are strictly controlled. If it believes that R&D sets it apart, security around its enquiry labs is closed and armies of lawyers protect its patents. And if information technology prizes its talent, y'all'll find hip work spaces for employees, gourmet lunches, yoga studios, nap nooks, sabbaticals, and flexible work hours.
On a hot mean solar day, consumers gladly pay a 700% price premium for the convenience of buying a common cold can of soda from a vending machine.
Downstream competitive advantage, in contrast, resides exterior the company—in the external linkages with customers, channel partners, and complementors. Information technology is well-nigh often embedded in the processes for interacting with customers, in marketplace information, and in customer behavior.
A archetype thought experiment in the world of branding is to ask what would happen to Coca-Cola's power to heighten financing and launch operations anew if all its physical assets effectually the world were to mysteriously go up in flames one night. The respond, nearly reasonable businesspeople conclude, is that the setback would cost the company time, effort, and money—but Coca-Cola would take piffling difficulty raising the funds to get back on its feet. The brand would easily attract investors looking for future returns.
The second part of the experiment is to ask what might happen if, instead, 7 billion consumers around the globe were to wake up ane morning with fractional amnesia, such that they could non recollect the brand name Coca-Cola or whatsoever of its associations. Long-standing habits would exist broken, and customers would no longer attain for a Coke when thirsty. In this scenario, most businesspeople agree that even though Coca-Cola'due south concrete assets remained intact, the company would find it difficult to scare upwards the funds to restart operations. Information technology turns out that the loss of downstream competitive advantage—that is, consumers' connection with the make—would be a more severe blow than the loss of all upstream assets.
Establishing and nurturing linkages in the marketplace creates stickiness—that is, customers' (or complementors') unwillingness or inability to switch to a competitor when information technology offers equivalent or ameliorate value. Millions or billions of individual choices to remain loyal to a make or a company add upward to existent competitive reward.
Must You Listen to Your Customers?
A company is marketplace-oriented, co-ordinate to the technical definition, if it has mastered the fine art of listening to customers, understanding their needs, and developing products and services that meet those needs. Believing that this process yields competitive advantage, companies spend billions of dollars on focus groups, surveys, and social media. The "vox of the customer" reigns supreme, driving decisions related to products, prices, packaging, shop placement, promotions, and positioning.
But the reality is that companies are increasingly finding success not by being responsive to customers' stated preferences but by defining what customers are looking for and shaping their "criteria of purchase." When asked about the market research that went into the evolution of the iPad, Steve Jobs famously replied, "None. It'southward not the consumers' job to know what they want." And even when consumers practise know what they want, asking them may not be the best way to notice out. Zara, the fast-fashion retailer, places but a small number of products on the shelf for relatively short periods of fourth dimension—hundreds of units per month compared with a typical retailer's thousands per season. The company is fix to respond to actual customer purchase behavior, rapidly making thousands more than of the products that fly off the shelf and alternative those that don't.
Indeed, market leaders today are those that define what performance means in their corresponding categories: Volvo sets the bar on safety, shaping customers' expectations for features from seat belts to airbags to side-impact protection systems and active pedestrian detection; Febreze redefined the style customers perceive a make clean house; Nike fabricated customers believe in themselves. Buyers increasingly use visitor-defined criteria not merely to choose a brand simply to brand sense of and connect with the marketplace. (See the sidebar "How Cialis Beat Viagra.")
Those criteria are too becoming the footing on which companies segment markets, target and position their brands, and develop strategic market positions equally sources of competitive advantage. The strategic objective for the downstream business, therefore, is to influence how consumers perceive the relative importance of diverse purchase criteria and to introduce new, favorable criteria.
Must Competitive Reward Erode over Fourth dimension?
The traditional upstream view is that as rival companies catch up, competitive advantage erodes. Only for companies competing downstream, advantage grows over time or with the number of customers served—in other words, it is accumulative.
For case, you won't find Facebook'southward competitive advantage locked up somewhere in its sparkling offices in Menlo Park, or even roaming free on the premises. The employees are smart and very productive, but they're not the key to the company's success. Rather, information technology's the one billion people who take accounts on the website that correspond the almost valuable downstream asset. For Facebook, information technology'due south all about network furnishings: People who desire to connect want to be where everybody else is hanging out. Facebook does everything possible to proceed its position as the preeminent village square on the cyberspace: The data that users post on Facebook is not portable to whatsoever other site; the time lines, events, games, and apps all create stickiness. The more users stay on Facebook, the more likely their friends are to stay.
Network effects constitute a classic downstream competitive advantage: They reside in the market, they are distributed (you can't point to them, paint them, or lock them up), and they are difficult to replicate. Brands, as well, conduct network furnishings. BMW and Mercedes advertise on tv set and other mass media, even though fewer than 10% of viewers may be in their target market, because the more people are awed by these brands, the more those in the target market are willing to pay for them.
Indeed, the very nature of network effects is that they are accumulative. Just other downstream advantages—particularly those related to amassing and deploying data—are accumulative too. Consider Orica, an explosives company mired in a article business in Australia. The primary concern of its customers—quarries that boom rock for utilize in landscaping and construction—was to meet well-defined specifications while minimizing costs. Considering the products on the market were virtually duplicate, the quarries saw no reason to pay a premium for Orica's or any other company's explosives. At the same fourth dimension, Orica knew that blasting rock is not as straightforward as information technology may appear. Many factors bear on the performance of a blast: the profile of the rock face; the location, depth, and diameter of the bored holes; even the conditions. Mess up the complex formula for laying the explosives often enough and your profits crumble into dust and go blown away by the air current.
Orica realized that customers harbored much unspoken anxiety about handling the explosives without accidents, non to mention transporting and storing them safely. If it could systematically reduce fifty-fifty some of those costs and risks, it would be providing meaning new value for the quarries—far in excess of any price reduction that competitors could offering. And then Orica'due south engineers set to work gathering data on hundreds of blasts across a broad range of quarries and found surprising patterns that led them to understand the factors that determine blast outcomes. Using empirical models and experimentation, Orica developed strategies and procedures that greatly reduced the uncertainty that, until and so, had gone hand in hand with diggings rock. It could at present predict and control the size of the rock that would issue from a nail and could offering customers something its competitors could not: guaranteed outcomes within specified tolerances for blasts. Quarries shortly shifted to Orica, despite lower prices from competitors. Not only had the company adult an edge over rivals, but the reward was accumulative: As Orica amassed more than data, it further improved the accuracy of its blast predictions and increased its advantage relative to its competitors.
Can You Choose Your Competitors?
Conventional wisdom holds that firms are largely stuck with the competitors they have or that emerge contained of their efforts. But when advantage moves downstream, iii disquisitional decisions tin decide, or at least influence, whom you play against: how you position your offer in the mind of the customer, how y'all place yourself vis-à-vis your competitive gear up within the distribution channel, and your pricing.
If yous're in the drinkable business and you've developed a rehydrating drink, yous accept a option of how to position information technology: as a convalescence drink for digestive ailments, as a half-time potable for athletes, or as a hangover reliever, for example. In each instance, the client perceives the benefits differently, and is likely to compare the product to a different ready of competing products.
In choosing how to position products, managers have tended to pay attention to the size and growth of the market and overlook the intensity and identity of the competition. Downstream, you tin can actively place yourself within a competitive set or away from information technology. Brita filters compete against other filters when they are placed in the kitchen appliances section at big-box stores, for instance. But Brita changes both its comparison prepare and the economic science of the consumer decision when the filters are placed in the bottled-water aisle at supermarkets. Here Brita filters have a competitive cost advantage, delivering several more gallons of clean water per dollar than bottled water. Of class, not all buyers of bottled h2o are buying solely for the criterion of price (some are ownership for portability, for example), but for those who are, Brita is an attractive selection.
Brita changes its competitive set when information technology is placed in the bottled h2o alley at the supermarket instead of with kitchen appliances at a big-box store.
If you would prefer non to exist compared with whatever other brands, so yous're better off marketing, distributing, and packaging your products in ways that avoid familiar cues to customers. A trip to the grocery store or a glance at online catalogs shows how similar many products' packaging is: Most yogurts are sold in exactly the same pack size and format, and their communications are frequently and then indistinguishable that consumers cannot recall the make subsequently having seen an advertisement. The lack of differentiation encourages competition, when many of these brands would be ameliorate off fugitive information technology.
Finally, pricing has a strong influence on whom you compete with. When Infiniti launched its improvement car, the G35, in 2002, it was hailed as a BMW-beater. The automobile, loosely based on the legendary Nissan Skyline, rivaled the BMW 5 series in terms of interior space and engine power, but it would have struggled to compete for a couple of reasons: The 5 series is aimed at experienced BMW buyers—or at least buyers who accept previously endemic a luxury motorcar. Also, the v series is very expensive, and when customers are shelling out that kind of money, they're not looking for value—they're looking for an established brand and value suggestion. Infiniti chose to position the G35 against the BMW iii series instead. The right pricing accomplished that objective: Many consumers, especially automobile buyers, use price as a key benchmark in forming their consideration prepare.
Although choosing to avert competitors may minimize caput-on competition, there is no guarantee that yous won't still have to contend with competitors you didn't want or inquire for. Only if yous've done your homework and established authority on your criterion of buy, me-as well competitors will be putting themselves in an unfavorable position if they choose to follow you.
Surprisingly, you have more say in determining who your competitors are if you're a later entrant in a market than if you intermission new ground. A afterward entrant can choose to compete directly with an incumbent or to differentiate, whereas an incumbent is bailiwick to the decisions of later entrants. But an incumbent is non helpless: Information technology can stay ahead of competitors by continually redefining the market and introducing new criteria of purchase.
Does Innovation Ever Mean Better Products or Applied science?
Like prime real manor in a crowded city, customers' mindspace is increasingly scarce and valuable as brands proliferate in every category and existing ones are sliced wafer-sparse. Companies compete ferociously against one some other not to prove superiority but to plant uniqueness. Volvo does not claim to make a ameliorate machine than BMW does, nor the other way around—just a dissimilar one. In customers' minds, Volvo is associated with safety, while BMW emphasizes the joy and excitement of driving. Because the 2 automakers emphasize unlike criteria of buy, they appeal to very dissimilar customers. In a global written report aimed at finding out what "excitement" meant to customers, respondents were asked to "describe the almost heady mean solar day of your life." When the results were tallied, information technology turned out that BMW owners described exciting things they had washed—white-h2o rafting in Colorado, attending a Rolling Stones concert. In contrast, the nearly heady solar day by far in the lives of Volvo owners was the birth of their get-go child. Brands compete by convincing customers of the relative importance of their criterion of purchase.
That is not to say that the upstream activities associated with building safer or faster cars don't affair. The production remains an essential ingredient in demonstrating the brand'southward positioning on its called benchmark. The product and its features turn the abstruse, intangible promises of the make into real benefits. Volvo'due south product innovations really exercise make its cars safer, reinforcing a lasting brand association with its customers. But the production itself does non occupy a more privileged position in the marketing mix than, say, the right advice or distribution.
Where Else Does Innovation Reside?
The persistent belief that innovation is primarily about building better products and technologies leads managers to an overreliance on upstream activities and tools. But downstream reasoning suggests that managers should focus on market activities and tools. Competitive battles are won by offering innovations that reduce customers' costs and risks over the unabridged purchase, consumption, and disposal cycle.
Consider the example of Hyundai in the depths of the Nifty Recession of 2008–2009. As the economy faltered, American chore prospects looked painfully uncertain, and consumers delayed purchases of durable goods. Automobile sales crashed through the flooring. GM's and Chrysler's long-term financial problems resurfaced with a vengeance, and both companies sought regime bailouts. Hyundai, which primarily targeted lower-income customers, was particularly difficult striking. The visitor's U.South. sales dropped 37%.
As overall demand plunged, the immediate response of nearly car companies was to slash prices and curlicue out discounts in the form of cash-back offers and other dealer incentives. Hyundai considered these options, but it eventually took a unlike approach: Information technology asked potential customers, "Why are y'all non buying?" The resounding answer was "The risk of ownership during the financial crunch—when I could lose my task at any time—is simply likewise high."
Then instead of offering a toll reduction, Hyundai devised a risk-reduction guarantee to target that concern direct: "If y'all lose your task or income within a yr of buying the car, you can return information technology with no penalty to your credit rating." Called the Hyundai Assurance, the guarantee acted like a put choice, addressing the heir-apparent'southward primary reason for property dorsum on the buy of a new vehicle. The programme was launched in Jan 2009. Hyundai sales that month near doubled, while the industry'southward sales declined 37%, the biggest January drop since 1963. Hyundai sold more vehicles that calendar month than Chrysler, which had four times every bit many dealerships. Competitors could easily have matched Hyundai's guarantee—however they didn't. They continued to slash prices and offer cash incentives. The Hyundai Assurance was a downstream innovation. Hyundai didn't innovate to sell improve cars—it innovated by selling cars better.
Reducing costs and risks for customers is central to any downstream tilt—indeed, it is the master means of creating downstream value. Not surprisingly, many of the cases we've examined illustrate this: Facebook reduces its customers' costs of interacting with friends; Orica reduces quarries' blast risks; Coca-Cola reduces the client's costs of finding a cool, refreshing potable the moment she's thirsty.
Is the Pace of Innovation Set up in the R&D Lab?
The product innovation treadmill is an upstream imperative. In fact, engineering innovations are sometimes thought to be the greatest threat to competitive advantage. Just such changes in the market are relevant only if they upend downstream competitive advantage. You don't demand to sweat every product launch and every new feature introduction by a competitor—just those that attempt to wrest control of the customers' criteria of purchase. After all, it was not the appearance of digital photography that ultimately doomed Kodak—it was the company'southward failure to steer consumers' shifting buy criteria.
By contrast, after more than a century of shaving technology innovation, Gillette all the same controls when the market moves on to the next generation of razor and blade. Fifty-fifty though for the past three decades competitors accept known that the next-generation product from Gillette volition carry ane additional cutting edge on the blade and some added swivel or vibration to the razor, they've never preempted that tertiary, fourth, or fifth blade. Why? Because they have little to proceeds from preemption. Gillette owns the customers' criterion—and trust—and then the boosted blade becomes apparent and viable merely when Gillette decides to introduce it with a billion-dollar launch campaign. 4 blades are better than three, but just if Gillette says then. In other words, technological improvements don't drive the pace of change in the industry—marketing clout does.
High failure rates for new products propose that companies are continuing to invest heavily in production innovation just are unable to movement customers' purchase criteria.
Market change can be evolutionary, generational, or revolutionary, and each type can exist understood in terms of consumer psychology. Evolutionary changes push the boundaries of existing criteria of purchase: higher horsepower or ameliorate fuel efficiency for cars, faster processing speeds for semiconductor chips, more-potent pills. Generational changes introduce new criteria that complement quondam ones, often opening upwardly new market segments: carbohydrate-free soft drinks, hybrid vehicles, pull-up diapers, in one case-a-24-hour interval medications where multiple pills were previously required. Revolutionary changes don't just introduce new criteria, they render the old ones obsolete: The new video-game controllers from Nintendo Wii changed how people interact with their games; impact screens and multitouch interfaces changed what customers expect from a smartphone; a vaccine for tuberculosis, AIDS, or malaria would brand current treatments virtually redundant within a couple of decades.
The power required to button a revolutionary change through the marketplace is greater than that required to move a market through a generational modify, and that power in plough is greater than the market muscle required to introduce an evolutionary alter. In each instance, the quality of the production innovation—the increased benefits relative to current products—helps move the market, merely it does non guarantee a shift. High failure rates for new products in many industries propose that companies are continuing to invest heavily in product innovation simply are unable to movement customer purchase criteria. Technology is a necessary merely insufficient condition in the evolution of markets. It's the downstream activities that motion customers through evolutionary, generational, and revolutionary changes.
Tilt
An ongoing downstream tilt in industry subsequently industry calls into question many ingrained assumptions about business—in particular, those almost competitive advantage, competition, and innovation.
The downstream tilt has item resonance for iii kinds of companies: The first is companies that operate in product-obsessed industries, such as applied science and pharmaceuticals. The possibilities of downstream value creation and the potential for building competitive advantage in the marketplace tend to be eye-opening for such firms. The second is companies operating in maturing industries whose products are increasingly commoditized. These firms are smashing to find sources of differentiation that practice not rely on hands replicated products or product advantages. The third is companies seeking to movement upwards the value chain. Downstream activities provide a fashion to build new forms of customer value and lasting differentiation.
The critical locus of both value and competitive advantage increasingly resides in the marketplace rather than within a company. Activities that concenter customers by reducing their costs and risks and repel rivals past building unassailable sources of differentiation correspond the key to competing downstream. The downstream playing field has its ain set of rules, and managers who learn to play the game achieve an early advantage.
A version of this article appeared in the December 2013 issue of Harvard Concern Review.
Source: https://hbr.org/2013/12/when-marketing-is-strategy
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