Strategically speaking

As I was finishing up what I was able to on the Situation Analysis late last night, I found myself thinking about Cohen’s Chapter 15, “How to Do Marketing Research the Drucker Way.”  Specifically, “Why Drucker Preferred Thinking to Number Crunching.”  After crunching the numbers and concluding what I already knew would be the key issues, I could see why he preferred thinking.  I just hope I didn’t “rig” my analysis with my preconceived biases.  However, since we had to provide the facts that provide the basis for the key issues, I’m pretty confident I can defend my conclusions.  Maybe, if I had more skin in the game and this was a real business I was dealing with, I wouldn’t mind spending so much time on the number crunching.

Now that I’m off the soapbox, this week’s reading included Drucker’s Marketing Strategy in Chapters 10 through 14 of Cohen’s book, “Drucker on Marketing.”  I think what sticks with me the most is “The Fundamental Marketing Decision.”  “Your first responsibility is deciding what your business is.”  This reminds me of Jim Collins’ “Hedgehog Concept” from his book, “Good to Great.”  It’s in reference to the hedgehog and the fox story.  Actually the “Hedgehog Concept” integrates some of what Jack Welch did at GE.  Essentially, “if you cannot be the best in the world at your core business, then your core business absolutely cannot form the basis of a great company.  It must be replaced with a simple concept that reflects deep understanding of the three intersecting circles.”  The three intersecting circles are what you are deeply passionate about, what you can be the best at and what drives your economic engine.  From there, strategy may change based on changing conditions, but needs to always consider the “Hedgehog Concept.”  Something else that seems to coincide between Drucker and Collins is “We Go All Out Only for Important, Challenging Goals.”  Collins refers to these as BHAG (Big Hairy Audacious Goals).       

Proff. Spotts asked us to comment on three of our non-teammate classmates’ blogs.  Kenny provided a nice summary of this weeks’ reading on Drucker, including the five certainties that can help strategists predict the future.  He also includes a short synopsis of his team’s PharmSim activities and provided comments on three blogs, including both of my teammates’ blogs.  Kristin also chose both of my teammates’ blogs as two of the three which she provided comments.  She also seems reluctant (as I am) of providing too much information on her teams’ PharmaSim activities, since it is intended to be a competition.  The she provided a nice short description of Drucker’s “looking out the window.”  And to complete the trend, Christine also comments on both of my teammates’ blogs as two of her three.  I already knew I had great teammates, so I’m glad to see I was not alone in that assessment.  Christine definitely provided more detail about her team’s PharmaSim activities and I am pretty impressed with the results. 

Specific prompts during class included, “Do you agree that customers determine what business you are in?”  Yes, because without customers, you have no business.  If you decided that your business was to make the highest quality rotary phones on the market, how many customers would you have?  You have to satisfy the customers’ needs or wants.  Otherwise, you will not be in business very long.

Another prompt was “What is the purpose of using historical data to predict the buying habits of customers?”  My answer is because, currently, that’s all there is.  So far, no one can accurately predict the future, except by random guess.  In fact, research has shown that so-called experts are actually worse at long term predictions than the average observer.  This may or may not be a factor named by Daniel Kahneman in “Thinking, Fast and Slow” as the Law of Small Numbers.  Since there are a smaller number of experts, their errors may be exaggerated.  More than likely, though, it is as he explains later, “you should not expect much from pundits making long-term forecasts - although they have valuable insights into the near future.  The line that separates the possibly predictable future from the unpredictable distant future is yet to be drawn.”   Near term trends can be estimated using historical data, but you also need to keep an eye on how much market penetration already exists and what else is going on.  Economic or other factors could collapse the market, but they could also expand the market.  These factors are pretty unpredictable, so all you have left are the factors in which historical data exists.     

 
The last prompt was to think about the metrics to be used for the PharmaSim case.  Since we are kind of competing as teams, I’m not sure how much information about our team metrics we should release.  We are in the process of thinking of them and I'm thinking we should make them BHAG!

Speaking of predicting the future, I think we need to hire Griffin!
http://www.youtube.com/watch?v=PSxuL_54sMk

Promo

This week I attended the WNE College of Engineering’s Annual Spring Gathering and Hall of Fame Induction Ceremony.  The Western New England University College of Engineering Hall of Fame was established in 2002 to recognize graduates and individuals who have distinguished themselves by making a significant contribution to the engineering field and/or the University.  Dennis Lind ’80, Vice President of Design & Engineering and Integrated Facility Planning Strategies for Walt Disney Parks & Resorts® was inducted this year.  It has been three years since the last induction ceremony, but they have the spring gathering every year and this was the first one I’ve attended.  As a recent MSEM graduate, I was invited and curious. 

 

After meeting talking with a number of people, including Dennis, I was privately honored when the College of Engineering’s Dean, Dr. S. Hossein Cheraghi, asked me to join him at his table for dinner.  I ended up sitting next to University President Anthony Caprio.  There was some interesting dinner discussion about the planned speaker at the Law School, Lois Lehrer, a WNE Law School alumna who just a few hours before the dinner announced that she would not be speaking.  For those who don’t know, she works for the IRS and has faced some recent scrutiny for her role in one of the latest controversies.  In the words of Forrest Gump, “And that’s all I got to say about that.”     

As Dean Cherighi was giving his opening remarks (king of a State of the College address), I soon realized the real purpose for the invite.  He was explaining the growth of the College, including the new Ph.D. program in Engineering Management (with 11 current candidates), and then turned to me and said, “So, maybe, when you finish your MBA, you will come back.”  So this was a part the personal selling process for the Ph.D. program.  They are using relationship selling rather than traditional sales techniques.  I should have known because they had already generated and qualified the lead (me) when I attended the first information session that they advertised and held for the new program about a year and a half ago.  The invite was a way of approaching the customer (me) and probing my needs.  I am already pretty much convinced that I will end up applying.  Using the AIDA model, they already have my attention, interest and desire.  However, Im holding off on any action because it depends on what happens at work.  I’m up for a couple of other positions and my ability to commit to more school depends on which position I end up being offered.  So there would be no objections for the College to deal with, but then I will have to go into the personal selling with the wife.  When she has objections with something that I’m planning, she usually lets me know by saying something like, “Your third wife might like that.” J

Deciding how to promote your product or service depends on how familiar customers already are with what you are selling and how much of the market share is yours.  If you are a market leader, you want to use a “pull” strategy or get the customer to demand your product from the retailers.  If you are trying to penetrate or gain market share, you want to use a “push” strategy or get the retailers to help you gain customers.  Trade promotions are usually associated with “push” and consumer promotions with “pull” strategies.  Advertising strategies also depend on your place in the market.  If you are the market leader, it doesn’t really make any sense to use comparisons to another product because that would basically be giving you competitor free advertising.  You want to use comparison advertising when you are entering the market or trying to gain market share.  Market leaders want to use benefits advertising to emphasize product benefits and reminder advertising to maintain awareness and stimulate repurchase.  New or recently added competitor products want to use primary advertising to create awareness and stimulate demand.                 

What Price is Right?

This week we learned about pricing.  We performed a detailed price elasticity exercise and learned that a price which results in calculated price elasticity value of 1.00 would also likely be the point that provides the most positive marketing contribution.  This can be confirmed by looking at the Tradeoff analysis.  The picture below (I finally did it!) shows how Allround stacks up with the increased price of $5.75.  This is very close to where the contribution value would be at its maximum.  It is reasonable to conclude that prices which cause your plot point to be left of the tradeoff line would be elastic (absolute calculated price elasticity >1.0), prices which fall on the line have an absolute calculated price elasticity of unity (=1.0), and prices to the right of the line would be inelastic (<1.0).  Although Drucker calls it a deadly sin, if your pricing objective is profit-oriented, it makes sense to try to be on the line and maximize marketing contribution.
    

  

However, you should also try not to have a myopic view of your market.  If you narrowly defined your market to be OTC Cold medications, the Tradeoffs Plot becomes as shown below.  This could give the false impression that you can raise the price even higher to increase marketing contribution when, in fact, you would be moving your price into the elastic region in the previous plot and not achieve maximum marketing contribution.  It might make sense to raise your price based on the value in the OTC Cold market if you were to introduce new products in the cough and/or allergy markets which you know will cannibalize some of your existing sales, anyway, as long as you also price the new products on (to maximize profit) or to the right of (to gain market share) the tradeoff line.

   

One of this week’s prompts is to discuss something interesting that is happening in marketing this week.  During the class we touched on how changing pricing strategy can affect your business and I mentioned that J.C. Penney made that mistake.  Here is an article (actually a WSJ blog post) which details how they are continuing to slide as a result of changing to an EDLP retailer.  The specific quote that really pertains to this week’s topic is “The Company noted that results for the quarter also reflect its prior pricing and marketing strategies, which are being changed under new leadership.”  WSJ online requires a subscription, but they usually allow you to view one article per day, so you should be able to see it.

http://blogs.wsj.com/corporate-intelligence/2013/05/07/the-slide-continues-at-j-c-penney/?KEYWORDS=jcpenney+news

This is a good segway into the most recent audio book that I listened to on my long commute, “The Ten Commandments for Business Failure,” by Donald R. Keough.  Don has some personal experience with failure as he was the one who gave us New Coke.  What was interesting is that they actually had pretty sound reasoning based on research that they had performed.  His warning is that, while many believe that we are living in the Information Age, he thinks we are still just in the Data Age and we should not confuse the two.  That, he says, was his mistake with New Coke.  Data supported the decision.  The taste tests that they performed proved that people liked the taste of New Coke better.  But it wasn’t the taste that led to the failure of New Coke.  It was a part of their past that they identified with and didn’t want changed.  Fortunately for Don, they were able to recover.  Maybe J.C. Penney will, too.  Time will tell.  It’s a witty book that I enjoyed very much and highly recommend it.

 

For those interested, the Ten Commandments are as follows:

1. Quit Taking Risks
2. Be Inflexible
3. Isolate Yourself
4. Assume Infallibility
5. Play the Game Close to the Foul Line
6. Don’t Take Time to Think
7. Put All Your Faith in Experts & Outside Consultants
8. Love Your Bureaucracy
9. Send Mixed Messages
10. Be Afraid of the Future

The right price, according to Drucker, is what the customer values the product or service at in the context of the market.  According to Drucker, this is the starting point and you should then consider costs to determine if the product or service can be sold at a profit, either now or in the future if and when costs can be reduced based on learning and experience curves.  When considering costs, you need to consider the entire chain of costs associated with the product or service and recognize opportunities to also improve those costs.      

What's my position?

We’re coming up on the halfway point for the course and, after quite a bit of reading, videos and discussions, we’re finally getting to what I remembered from my undergraduate course on marketing 18 or 19 years ago.  It seems to me there was more emphasis on developing the positioning statement and value proposition back then.  Of course, technology and research has changed a lot in those years and we are integrating our studies into the rest of the necessary elements involve in running a business.

So how do we get the positioning statement and the value proposition to resonate with customers?  The latest audio book that I listened to on my long commute is Jonah Berger’s “Contagious: Why Things Catch On.”  Jonah mentions that a number of books have provided great stories about things that have caught on, but they don’t really explain the “science” behind why things catch on.  He specifically mentions Malcolm Gladwell’s “The Tipping Point” and the Heath brothers’ “Made to Stick.”  However, I’m sure both could provide arguments that their work does discuss the “science.”  Jonah uses the acronym STEPPS, which represents 6 steps to make any product or idea go viral. The 6 steps are social currency, triggers, emotion, public, practical value, and stories.  Social currency is obtained by sharing things that make us look good.  Triggers are easily remembered information that remains at the top of the mind and the tip of the tongue.  Emotion is involved because when we care, we share.  The information or message has to be public; built to show, built to grow.  The information or message has to have practical value.  And, finally, people are storytellers, so great brands learn to tell stories which contain information about their product under the guise of idle chatter (free advertising).  Things that go viral don’t necessarily have to have all 6 steps involved, but these are common among those that do. 

Comparing “Contagious” to other works, Gladwell describes the “three rules of epidemics” in “The Tipping Point.;” The Law of the Few, The Stickiness Factor and The Power of Context.  The Law of the Few includes connectors, mavens (information specialists), and salesmen, which Gladwell suggests are the key to the dissemination of information.  Regarding The Power of Context, Gladwell says “Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur.”  The Stickiness Factor is expanded by Chip and Dan Heath in “Made to Stick: Why Some Ideas Survive and Others Die.”  This book follows another acronym “SUCCES” and can easily be compared to “Contagious.”  They explain that the characteristics that can help make an idea “sticky” are Simple (find the core of any idea), Unexpected (grab people’s attention by surprising them), Concrete (make sure the idea can be grasped and remembered later), Credible (give the idea believability), Emotional (help people see the importance of the idea), and, again, Stories (empower people to use the idea through a story).       

Of course, no amount of stickiness really matters if you don’t know or understand the size of the market you are getting in to.  For PharmaSim this week, we were asked to estimate the market demand and the market value of each of the line extensions considered.  The line extensions are a children’s 4 hour cold liquid, a 12 hour multi capsule and a 4 hour cough liquid.  Figuring market demand really depends on how you define your market.  Some could argue that the 12 hour multi capsule could span into all four categories (cold, cough, allergy, and nasal); therefore, the existing market units purchased is 541.9 million units purchased as shown on the brands purchased report and the industry growth rate is currently 2.6% and forecast to be higher as shown in the industry outlook report.  So a conservative estimate for market demand would be 541.9 million times 1.026, or 556 million units sold.  Manufacturers’ sales as also shown on the manufacturer sales report totaled $1,899.5 million for the current period for an average of $3.505 per unit.  The market update report shows an average increase in price of 2.6% compare to an inflation rate of 6.4% and the forecast inflation rate is 7.0% as shown on the industry outlook report.  Conservatively assuming the same 2.6% increase in price would mean an average of $3.596 per unit, so the market demand of 556 million units would be estimated to have a value of $1,999.6 million.  Since the 12 hour multi capsule would be targeting the same market, there would be some product cannibalism.  However, the 12 hour multi capsule cost $1.03 per unit compared to the $1.37 per unit for our current product as shown on the pricing decision report.

For the 4 hour cough option, the brands purchased survey shows cough medications to be 13.9% of the current 541.9 million market units purchased, or a market demand of 75.3 million units.  However, the manufacturer sales report shows that the growth in the cough market was negative 7.4%.  It’s difficult to say whether that is a true representation, since that report limits itself to brands specifically listed as cough medications.  People may simply be buying multi brands due to the limited number of choices of strictly cough medications (just Coughcure and End) and their relatively high cost.  Although cough medications represent 13.9% of units sold, the $379.6 million in manufacturer sales represents 20% of the total $1,899.5 million market.  I would still use the 2.6% expected sales increase but 2.6% price increase over the average total and estimate a market of 77.3 million units with $277.8 million market value.  There would be some product cannibalism, since a fair amount of Allround is already sold in the cough market, but the new cough liquid capsule cost $1.27 per unit compared to the $1.37 per unit for our current product as shown on the pricing decision report.

For the 4 hour children’s cold medicine, the brands purchased survey shows cough medications to be 75% of the current 541.9 million market units purchased, or a cold market demand of 406.4 million units.  This has to be broken down further to see who would be specifically interested in children’s dosages.  There is currently only one brand that is purely a 4 hour children’s cold medication (Coldcure) and they sold 45.3 million units.  It would be easy to assume that they were selling exclusively to young families, but the brand purchased survey shows that 28.9% of the units of Coldcure sold were actually to mature families.  This could be because grandparents are buying for their grandchildren or the mature families are just looking for smaller doses.  Young families make up 26.7% of the OTC medication market and mature families make up 29.8%.  Coldcure currently captures 28.4% of the young families with cold market (compared to 21.7% for Allround) and 10.5% of the mature families with cold market (compared to 22.7% for Allround) for a cross section total of 19% of both.  So what is a good estimate of how much of the cold market would actually be in the children’s cold market if there was more direct competition?  It is difficult to say, but I’ll guess about half of the young families demand plus a tenth of mature families demand could be dedicated to children’s medication.  So about 16.33% of the 406.4 million units represent 66.4 million current market demand for children’s cold liquid.  I would still use the 2.6% expected sales increase but 2.6% price increase over the average total and estimate a market of 68.1 million units with $244.9 million market value.  There would be some product cannibalism, since a fair amount of Allround is already sold in the children’s cold market, but the new children’s liquid capsule cost $1.25 per unit compared to the $1.37 per unit for our current product as shown on the pricing decision report.

So what did Drucker mean by “charging what the market will bear” as one of the deadly sins?  I think he meant that if you charge too much, but what the market bears, that will invite competition to steal customers away from you a lot quicker than they would have if you had a more reasonable price.