How market-driven management generates shareholder value ?

Moscow - December 2004 1

How market-driven management generates

shareholder value ?

Professor J.J. Lambin


OUTLINE

1. What is market-driven management?

2. How to create customer value?

3. How customer orientation leads to growth opportunities?

4. How customer value generates shareholder value?


1. What is market-driven management?

Is “market-driven management” really different from traditional marketing management ?


THE AMBIGUITY OF THE TERM “MARKETING”

• Literally, ‘marketing’ means the process of going to the market.

• The term places the emphasis on the “selling and promotional” activities of the commercialisation process.

• Thereby, the importance of the “strategic thinking” activities tends to be underestimated.


THE MARKET ORIENTATION CONCEPTThree Components

• CULTURE

• ANALYSIS

• ACTION



• CULTURE

A business philosophy at the core of a social market economy system,…

…. emphasising the process of customer value creation,…

…. as the best way for the firm to achieve its objectives of profit and growth.



• CULTURE

• ANALYSIS The strategic brain of the firm,…

…used to identify profitable customer activity arenas in which to compete.

(strategic marketing)



• CULTURE• ANALYSIS

• ACTION The commercial arm of the firm…

...used to conquer the target market segments

(operational marketing)



• CULTURE

A state of mind .

Corporate business philosophy.

• ANALYSIS

A set of analysis tools to understand the market.

Strategic marketing.

• ACTION

A set of selling instruments (the 4Ps)

Operational marketing


Components Managerial role Organizational position

Culture A corporate business

philosophy

Top management

Analysis The strategic brain

Strategic business units

Action The commercial arm

The marketing function

MARKET-DRIVEN MANAGEMENTWho is in charge ?


THE MARKET DRIVEN MANAGEMENTConditions of application

• LIBERTY OF CHOICE

Individual choice determines what is rewarding.

• COMPETITIVE EXCHANGE

Competition is the regulating mechanism.

• SOCIAL COLLECTIVE PREFERENCES

Externalities must be taken into account by the firm.


STRATEGIC MARKETINGTwo approaches

• RESPONSE STRATEGIC MARKETING

Find wants and fill them

Innovations are “market pull”.

• CREATIVE STRATEGIC MARKETING

Find new ways to fill existing wants.

Innovations are “supply-push”.


MARKETANALYSIS

R&DACTIVITIES

Unfilledneeds & wants

New product ideas

Is there a need ?(creative marketing)

Is it feasible ?(response marketing)

STRATEGICMARKETING

Cross-functionalco-ordination

THE ROLE OF STRATEGIC MARKETING


EXAMPLES OF DISRUPTIVE INNOVATIONS IN MATURE MARKETS

• The furniture market with Ikea.

• The shoe market with Geox (ventilated soles) and Mephisto (shock absorber)

• The airline market with, Virgin-Express, EasyJet, Ryan Air,…

• The liquid food packaging market with Tetrapak.

• The Kinepolis concept in the movie theater market.

• The digital photography market with Sony, HP, Kodak,…


The Key Market ActorsThe General Case

DISTRIBUTORS COMPETITORS

PRESCRIBERS

CUSTOMERS(user, buyer, payer)

STAKEHOLDERS


Manufacturers:direct customers

SuppliersEnd

customers

Prescribers

Competitors:direct and substitutes

Otherstakeholders

Other customers:licensees,

aggregators,...

Intermediaries:agents, wholesalers,

retailers, ...

The Market viewed as an Eco-system


MARKET-DRIVEN MANAGEMENT (MDM) Its role in the firm

For a firm operating in a market economy, the role of MDM is to design and promote, at a profit, value-added solutions to people and organisations problems.


2. How to create customer value?

Refer to customer’s generic needs and to the customer mental virtual market


THE VALUE APPROACHFROM THE CUSTOMER VIEWPOINT

• What the customer buys and considers “value” is not the product, but the “result” or the service provided by the product.

• The result sought by customers correspond to a generic need which is stable over time.

• Technologies are fast changing, while generic needs remain unchanged.


WHAT BUSINESS ARE WE IN ?Examples of generic need definitions

• We (Tetrapak) are selling ”liquid food conservation" solutions (...and not carton containers).

• We (Automatic Systems) are selling "access control" solutions (...and not gates and doors).

• We (General Motors) operate in the “personal mobility” market arenas (…and not simply in the car market).

• We (IBM) are selling “global networking capabilities” ( ...and not only personal computers).

• We (BP) are selling “integrated energy assurance” (… and not simply oil, gas and lubricants).


THE CONCEPT OFVIRTUAL MARKET

1.To achieve the generic result sought, customers engage in different activities, directly or indirectly related to the desired outcome.

2. A “mental virtual market” regroup all the activities undertaken by customers to achieve a specific generic result.

3. Thus, a virtual market represents an end-to-end temporal sequence of logically related activities in the cognitive space of customers.

.

Source: Sawhney and others, 2004 22

Takephotos

Editphotos

0rderprints

Make printsyourself

EmailphotosShare prints

with familyfriends

Create Electronic album

Put printsin photo album

Make flierscards, brochures

0rdermerchandiseWith photos

Archivephotos

Previous KodakInvolvement

with customersTakephotos

Editphotos

0rderprints

Make printsyourself

EmailphotosShare prints

with familyfriends

Create Electronic album

Put printsin photo album

Make flierscards, brochures

0rdermerchandiseWith photos

Archivephotos

THE VIRTUAL MARKET OF KODAKGeneric need: “managing and sharing memories”

Previous KodakInvolvement

with customers


EXAMPLE OF THE DANISH LEGO COMPANY(1)

• Consider Lego, the Danish toy company, In 1995, it had a worldwide construction –toy market share of 72%, in Europe its market share in that category was over 90.

• But children were spending more spare time with computers, video games and television than with traditional toys.

• So while Lego had been gaining market shares, toys in general and construction toys in particular had been losing their share of children’s spare-time activities


EXAMPLE OF THE LEGO COMPANY (2)

• The need addressed by Lego, the Danish toy company, is “family edutainment”…. (education-entertainment) and not construction-toy market.

• The generic need is defined as “...having fun and exercising the mind”

• The Lego virtual market is a convergence of toys, education, interactive technology, software, computers and consumer electronics.


CHARACTERISTICS OF A VIRTUAL MARKET

1. In a virtual market, the activities generally cut across traditional industry and product-market boundaries and are not necessarily in the core business of the firm.

2. Virtual markets absorb a higher proportion of customer spending than a specific product-market, and represents a higher market potential.

3. Internet information technology makes the objective of addressing virtual markets achievable.


EXAMPLE OF VIRTUAL MARKET (1)

• To achieve the “home ownership” generic need, customers might engage with contractors, realtors, insurance companies, mortgage firms, removal companies, telecom, interior designers, …


EXAMPLE OF VIRTUAL MARKET (2)

• In the “personal mobility” virtual market, in addition to car ownership, related activities cover car maintenance, car insurance, roadside assistance, emergency services dispatch, route support, stolen vehicle location, ….


FROM THE “VIRTUAL MARKET” TO THE “META MARKET”

A meta-market is created when the cognitive associations between these activities are reproduced in the physical market place, thereby streamlining customer activities and providing them with seamless experience.


Need of the potential customer :To buy a new car

Informationsearch and evaluation

Negotiation andfinancing

Insurance andmaintenance

Repairs andReselling valueThe purchase decision

The cognitive space of the potential customer

The global supply

Cars builders Car dealers Financing Garages andmechanics

CREATING THE META-MARKET“The home ownership virtual market “

Insurance companiesand brokers

Need of the potential customer

Home ownership

Informationsearch and evaluation

Negotiation andfinancing

Insurance andmaintenance

Renovation anddecoration

The purchase decision

The cognitive space of the potential customer

The industry supply

Real estate agencies

Banks, mortgagefirms

Painters and interiors designers

Removal companies

Insurance brokers


META-MARKETSManagerial implications

1. Do not define your reference market in terms of product categories. (cars, metallic gates, detergents, toys…)

2. Refer to the result or the generic outcome customers want to achieve. (personal mobility, access control, home care, edutainment,…)

3. Identify all the activities that, from the customer point of view, are part of the virtual market.

4. Create the reference “meta market” by reproducing in the physical market place the mental associations made by customers.

5. Present the “total solution” customers seek.


BENEFITS OF THE META-MARKET CONCEPT

1. The concept is perfectly aligned on the customer views and therefore facilitates communication.

2. The revenue potential of a meta-market is always larger than the discrete product-market.

3. It enables the firm to offer a “total solution” to customers thereby building exclusivity, loyalty and trust.

4. It helps identifying “growth opportunities” in activities directly or indirectly related to the core service.

5. It helps identifying who are the indirect (or substitute) competitors.


3. How customer orientation leads to growth opportunities?

Analyze the customer activity cycle


THE ACTIVITY CHAIN CONCEPT

• A virtual market is a sequence of logically, directly or indirectly, related activities customers engage in to achieve a specific outcome.


THE ACTIVITY CHAIN CONCEPT

• Pre, or before: when customers are deciding what to do to get the result desired.

• During: When customers are doing what they decided on.

• Post, after: when customers are maintaining the result, reviewing, renewing, extending, upgrading and updating

Source: Vandermerwe, 2000 35

THE PRIMARY ACTIVITY CYCLE

Before:customer is deciding what to do

During:Customer is doing it

Post:Customer is keeping

it goingCustomer-

Activitycycle


STRUCTURE OF THE ACTIVITY CHAIN

• PRIMARY ACTIVITY CHAIN

A sequence of logically and directly related activities customers engage in to achieve a specific outcome.

(Visiting a car dealer on the car ownership chain is a primary activity)

• ADJACENT ACTIVITY CHAINS

A sequence of logically but indirectly related activities engaged by the customer in its search of the problem solution.

(seeking car insurance quotes is a complementary activity that falls in a adjacent chain)

Source: Sawhney and others, 2004 37

Where ?Focus on growth

Primaryactivity chain

Adjacentactivity chain

How ?Type of growth

Reconfiguringexisting activities

Adding newactivities

The Growth Opportunity Matrix

1. Primary chain extension

3. Adjacent chain broadening

2. Primary chainreconfiguration

4. Adjacent chain reconfiguration


1. PRIMARY ACTIVITY CHAIN EXTENSION

“Moving along the customer activity chain by adding new services”

Source: Vandermerwe, 2000 39

THE CUSTOMER ACTIVITY CYCLESearch for value gaps

Before:customer is deciding what to do



it goingCustomer-

Activitycycle

Value Gap

Value Gap


PRIMARY ACTIVITY CHAIN EXTENSION

• Can services be added that precede the sale of the core product?

• Can services be added that follow the sale of the core product?

• Can services be added to accompany the product?

• Can the product be augmented with network based services?

• Can the product be updated with services ?


The Dutch Construction Group Heimans N.V:

Before:Customer is deciding what to do



it going

CustomerActivity

cycle

Value gap: Project development

Value gap:Maintenanceactivities

Core business:Construction

capacity


2. PRIMARY ACTIVITY CHAIN RECONFIGURATION

Changing the structure of the primary chain by shifting the boundary between the activities performed by the customer and by the firm."


2. PRIMARY ACTIVITY CHAIN RECONFIGURATION

• Can customer burdens involving customization be reduced?

• Can customer burdens involving product storage be reduced?

• Can process expertise be leveraged?• Can customers’ inventory control and stocking

processes be replaced?• Can processes unrelated to customers core

competences or strategic objectives be taken over?


3. ADJACENT ACTIVITY CHAIN BROADENING

Introducing new services, not typically part of the primary chain, but closely associated with it.


3. ADJACENT ACTIVITY CHAIN BROADENING

• Can products become platform for embedded services?

• Can the existing customer base be “rented”?

• Can the existing customer interface be leveraged?


4. ADJACENT ACTIVITY CHAIN RECONFIGURATION

Taking charge of activities in an adjacent chain.


4. ADJACENT ACTIVITY CHAIN RECONFIGURATION

• Can services be added to integrate complementary customer activities?

• Can services be added to leverage the brand?

• Can services change the way customers acquire products?


MANAGING THE RISKSThree types of risk

1. CAPABILITY RISK

2. MARKET RISK

3. FINANCIAL RISK


1. CAPABILITY RISKS

• Can we execute and deliver?

• Do we have the organizational culture to sell services?


2. MARKET RISKS

• Will customers adopt the service provided?

• Are we credible as a service provider among our customers base?


3. FINANCIAL RISKS

• Can we make money?

• Is the initial cost of development not too high?


4. How customer value generates shareholder value?

Analyze the customer response chain


Customer value triggers a chain of effects

Perceivedvalue

Satisfaction Trust Affect

LOYALTY


• TRUST

The willingness of the customer to rely on the ability of the brand to perform its stated function.

• AFFECT A brand’s potential to elicit a positive emotional response as a result of its use.

TRUST AND AFFECT


• PURCHASE LOYALTY Repeated purchases of the brand

• ATTITUDINAL LOYALTY A dispositional commitment in terms of some unique value associated with the brand

LOYALTYBEHAVIORAL AND ATTITUDINAL


The Satisfaction-Loyalty Relationship

SATISFACTION

PURCHASE LOYALTY

1 = completely dissatisfied5 = completely satisfied

52 3

0%

50%

100%

1 4

Highly competitive marketLow switching costsMany substitutes

Source. Chaudhuri and Holbrook, 2001

57

Customer value(utilitarian and hedonic)

Brand strengths(differentiation and

share of voice)

Brandtrust

Brandaffect

Purchaseloyalty

Attitudinalloyalty

Marketshare

Relativeprice

Impact on the Economic Performance


NET PROFIT CONTRIBUTION (NPC)

NPC = Marketdemand

xMarketshare x

Priceper unit

- Variable cost per unit

Marketing expenses

-


NET PROFIT CONTRIBUTION (NPC)

NPC = Marketdemand

xMarketshare x

Priceper unit

- Variable cost per unit

Marketing expenses

-

Strategies to target the virtual

market

Strategies to increase

market share

Strategies to increase value for customers

Strategies to increase marketing

efficiency


CONCLUSIONS

1. Market-driven management implies culture,analysis and action. In the global economy, being action-oriented in not enough.

2. Customers are looking for the total solution of their problems and the firm should target the customer mental reference market .

3. Referring to customer mental virtual markets offer to the firm attractive growth opportunities.

4. Customer value generates satisfaction, trust and loyalty, thereby creating shareholder value.


BIBLIOGRAPHY

• J.J. Lambin (2000), Market-driven Management, London, Palmgrave Macmillan. See also the Russian translation, Saint Petersburg, Piter 2004.

• S. Vandermerwe, (2000), “How Increasing Value to Customers Improves Business Results”, Sloan Management Review, Fall.

• A.Chaudhuri and M.B. Holbrook, (2001), “The Chain of Effects from Brand Trust and Brand Affect to Brand Performance: the Role of Brand Loyalty”, Journal of Marketing, Vol.65, April.

• M. Sawhney, S. Balasubramanian and V.V: Krishnan,(2004), “Creating Growth with Services”, Sloan Management Review, Winter.

How market-driven management generates shareholder value ?

Documents

Transcript of How market-driven management generates shareholder value ?