Shareholders Value Creation through Strategic Market Positioning (SVC-2)

What is market share? Does market share mean share of product, share of category, share of channel, share of customer, share of region or share of something else? How does your company define market share? Companies that cannot answer this very important question cannot effectively engage in Strategic Market Positioning (SMP) and in the long term, will find it difficult to invest successfully for growth.

What is Strategic Market Positioning (SMP)? For a business or product line that competes in only one strategic segment, SMP is simply the market share of the business in its strategic market segment. For a company competing in multiple strategic segments, its overall SMP is the average of its SMPs in each strategic segment, weighted by the business’s sales or investment in each strategic segment.

Achieving effective SMP involves analyzing an industry to determine strategic market segments and then making investments in those segments that will lead to increased returns.

Does SMP = Market Segmentation? Normally market positioning is considered as market segmentation. This is totally a marketing technique that involves breaking down market into smaller segments in order to better understand consumer behavior & identify opportunities to increase overall market share.

However on the other hand SMP is different because it creates shareholders return. It brings together the disciplines of strategy and finance to help shape a company’s approach to value creation. Organizations that fail to differentiate between market segmentation and Strategic Market Position may be at risk because the definition of market share often does not correlate with company profitability, returns and strategic potential.

Do you think larger market share provides superior return? As per research by one of the top consulting, larger market share even provides low return in comparison to companies having smaller market share with Strategic Market Positioning. There are several reasons supporting to this finding. The smaller, more profitable company may avoid going head-to-head with larger, more powerful competitors. It may deploy its investments into segments where (among other things) the dominant players simply do not compete. In essence, it positions itself in its industry strategically and allocates more assets in fewer, carefully selected ways. As a result, it has a much higher market share in its chosen segments.

How to create Value through Strategic Market Positioning (SMP)

Following 3 approaches should be followed to create value through SMP-

Be Creative & think Broad: To maximize the chances of identifying successful strategies, think beyond the current business offerings. Apply the Blue Ocean Strategy principle “Reconstruct Market Boundaries” & “Reaching Beyond Existing Demand”. Evaluate other businesses that share the same customers or leverage the same technologies. Consider services as well as product offerings. Identify the range of organic or acquisition initiatives that could be used to pursue potential growth strategies.

Conduct SMP Test: Identify the growth strategies that have the greatest potential to increase the company’s weighted average relative market share, as measured across all strategic segments impacted by the strategy. This will identify strategies that have the potential to improve the company’s overall position on the most important drivers of profitability. Conduct SMP test quantitatively to specific initiatives to see whether market share, appropriately defined, increases or decreases.

Conduct Value Creation Test: “Strategic value” is defined as the net present value of cash flows from higher revenues, lower costs and lower capital requirements that will accrue from the growth opportunity and the existing business being run together versus separately.

We will see an example of Southwest Airline & America West Airline to know how SMP creates higher value.

Southwest Airline & America West Airline started in roughly the same position, but ended in very different places. Both formed as low-cost, low-fare regional carriers, both airlines grew their operations and profits on roughly parallel tracks through the early 1990s.

America West followed a traditional hub-and-spoke design for its flights and became well known for its expansionist strategy. Southwest, on the other hand, grew at a slower pace, taking the time to build up strong positions in specific markets before penetrating additional markets. Southwest’s emerging strategy was creative in that it focused on short haul, high frequency flights in city pairs where the airline could secure a strong market share position, often flying to a secondary, lower-cost airport. In addition, its costs were controlled as a result of the corporate decision to use (and therefore maintain) only one type of aircraft: the Boeing 737.

By contrast, America West’s expansionist strategy called for international routes, which in turn called for a heterogeneous and expensive-to maintain fleet. America West did not base its strategy on the core tenet of SMP: build the type of market share that maximizes high-impact growth and leverages economies to the greatest extent possible.

  Summarize two Airlines positions & Strategies

Summary Stats ( 1990)	South West	American West
Revenue	$1186 M	$ 1315 M
Number of Aircraft	106	104
Types of Aircraft	1	4
Flight Design	Point-to-Point Short Haul	Hub & Spoke

Figure 1: Compares the two airlines in terms of traditional market share and Strategic Market Position to reveal the true impact of their different strategies

 Source: Bloomberg 

Although America West and Southwest had similar US total market shares in 1990, this measure obscures their relative competitive strengths.

In the airline business, pricing power and operating costs are driven more by share of flights between states or, more precisely, by share of flights between specific city pairs. Travelers prefer to fly an airline that has several daily flights between two points because it gives them more flexibility in the event of a missed or delayed flight. This is better for airlines because they are likely to have larger scale and more efficient operations at each end.

Southwest Airlines recognized this as a critical factor and was careful to enter a new market only when it felt it could achieve substantial strategic share in that market. By contrast, America West assumed that, by entering larger and increasingly international markets, it was strengthening its overall position in the airline market. In fact, it was neglecting its core franchise and spending limited resources to enter new market segments where it had little to offer against strong competitors.

Figure: 2 illustrates the value creation outcome of these two Airlines while adopting different strategies

As America West’s emergence from Chapter 11 in 1994, its stock has declined at a CAGR of -4.9 percent, while Southwest’s stock has grown at a CAGR of 9.9 percent.

Conclusion

Strategic Market Positioning (SMP) is a proven and highly effective tool for creating value. It is founded on the assumption that not all growth is good – in fact, that some growth actually destroys value. SMP helps companies identify the difference and respond accordingly. By being creative and thinking broad to maximize the chances of identifying successful strategies, and by conducting the SMP and value-creation tests, an organization’s leadership can gain valuable insight into organic growth ,acquisitions and other growth investments and be better able to formulate strategies that have the potential to improve the company’s overall performance.

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Myth about Top Line & Bottom Line Growth

What’s your opinion about Top line & Bottom line growth of an organization?

Do you think organization that provides good top line growth always gives good total return to shareholder (TRS) or the organization which perform poorly in terms of both top line & bottom line growth doesn’t provides good return to shareholders or the organization which provides good bottom line growth however lacks in top line growth can deploy good TRS for a long period of time.

If you think yes then you are wrong. Top Line & Bottom Line growth are always a good indicator of high return to shareholder but this is not always true, there are certain number of companies that were not rewarded in terms of Total returns to shareholders (TRS) in spite of giving robust revenue & profit.

Survey conducted by a reputed company for US economic cycle of 1984-1993 shows that 20% companies in spite of being providing faster revenue growth than the median, could not generate good total returns to shareholders (TRS) however there are other 20% companies whose revenue growth were very slow but they have provided excellent total return to shareholders (TRS).

On the basis of TOP LINE & BOTTOM LINE growth we can divide companies into the following categories-

Growth Oriented

These types of organization always does breakthrough innovation & continuously invest in growing industry & segment and provides exceptional returns to shareholders for a very long period of time. These kinds of company’s top line growth outpaced GDP and TRS outperforms S & P 500. These companies grow continuously and provide GDP & market beat returns for more than one business cycle.

TRS (Total Return to Shareholders) Performer

These kinds of organization can’t grow their revenue however they provide very good return to shareholders. These companies compete in slow growth industry like consumer durable, engineering, construction & utilities etc. The keys to their ability to create value were of good execution, cost control and savvy portfolio management. Many of these companies sold or exited lower margin business or bought or enter high margin business. Majority of these kinds of company can’t survive for more than 1 business cycle and were acquired by other competitors however those weren’t acquired continue to struggle for Revenue & Growth unless they embarked on a successful acquisition program or shifting their business mix, they couldn’t survive or fetch enough gain from reducing cost or restructuring their existing business to compensate for the lack of top line growth.

Thus companies that don’t hit top line eventually hits TRS non-performer category and often becomes target of acquisition. Even largest company can’t delay it for very long period of time.

Unrewarded

Unrewarded companies are those that have increased their revenue faster but not rewarded in terms of Total return to shareholders (TRS) however in majority of cases these kinds of companies ultimately rewarded in another business cycle.

The Challenged

Challenged companies are those who underperformed in both increasing faster revenue & Total return to shareholders. These kinds of companies become major takeover target & could not survive for more than one business cycle.

However when same survey company conducted survey for another business cycles of 1994-2003 that shows 65% & 58% of “Growth Oriented” & “Unrewarded” category companies were survived from 1984-93 survey. On the other hand only 35% & 10% of “The Challenged” & “TRS” category companies were survived.

Conclusion:

TRS category result shows that companies need to give as much attention to top line growth as to increasing the bottom line. While cost improvement can drive earning & shareholder value in a near term however they have worst long term odd of survival.

Where to compete is more important than how to compete. The choices a large company makes today about its portfolio mix, and where to place its bets will shape its future growth trajectory for next 5-10 years. Unless the company enjoys the advantage of fast-growing pool of revenues and profit or has ample opportunity to consolidate, growth just with the pace of GDP will difficult to sustain, even though execution is great. Large organization should follow tailwind if they want to grow & provide market beat returns to shareholders. They need to identify industry & segment which out plays GDP growth rate.

When large companies faces headwind i.e. slow growing market and have few options to consolidation in their existing business, opportunity to change growth trajectory are limited then the best approach is to reposition the portfolio business, customers, products & geographies to create a mix with higher potential of growth.

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DO YOU THINK EXCESSIVE ADVERTISEMENT IS COST EFFECTIVE & GOOD FOR BRAND IMAGE/ BUSINESS DEVELOPMENT?

Couple of months back Hindustan Unilever Ltd. (HUL, previously HLL) has blocked all Star and Zee Channels and aired only HUL products ads through out the day. Through this HUL showed advertisement of their major products Lifebuoy, Dove, Ponds and Fair & Lovely through out the day on both Star and ZEE channels. This was a very costly affair for HUL as it has to shed out around USD 4.5 million.

We had a very big debate on this topic on a professional platform of Social Networking Site which involves professional from Advertising agencies, Software, Marketing, Sales & Finance etc.

Majority of the professional were against the ad blocking strategy, as per their opinion this is really waste of money as consumer does not sit to watch ads and continuously showing same ads will give negative impact of advertisement. It doesn’t justify investment strategy for Business or Brand Image Development.

Some professionals even said it will change the business message like Benefits of products to Differentiation of Product/Brand from the other…. or target customer should be changed from ad to ad. etc.

Everybody gives more emphasis on quality and how you reach out to your customers with your product, however other professional said that HUL is already a very big it does not require this kind of strategy, they said it is like a strategy were “I squeeze you and you squeeze me and at the end both would be at the same condition”.

Some other professional said that margin in which HUL works doesn’t vote these kinds of promotional strategy.

Other said if your product’s benefit is not measurable in terms of money and social aspiration, then even you book entire life span on television, consumer is not going to pick your product.

Some other great professional from advertising front said this kind of advertisements cannot make viewer think that HUL products are selling great guns, lets BUY… in fact it can appear to look like a desperate move or like the final punch.

However one of the professional who is closely associated with the sales of most of HUL brands said Unilever’s issue is not brand awareness. The issue is that consumers today are expecting much more from brands in form of innovation & quality and HUL have failed to keep up to the consumer’s expectation in the current decade. That too when in 90′s HUL has taught the Indian consumers the power of good brands. Now it is resulting in either stagnant market share in a growing market or a negative market share year by year. As per him these kinds of strategy is just for a short term for crisis management.

Now my question is, Does excessive advertisement is good for brand building & business growth?

I still feel these kinds of strategy works unless and until it doesn’t come under “ABUSE” marketing.

Ad blocking or excessive advertising is one of the ways to promote your product excessively. I think this type of concept works as consumer will see advertisement of that particular company / product through out the day and it really make impact in the mind consumer about the product.

This kind of strategy should be adopted when a company develops new ads and try to make huge impact of it in the minds of consumer. This kind of advertisement is really helpful for established brand in a particular season and event or in particular scenario.

Take the example of Pepsi & Coke- If you are a sports or cricket lover then you might have seen so many times that during a ODI cricket matches particularly during “ WORLD CUPS” or other major events Pepsi comes out with a new add for that particular event and display it excessively through out the match so that consumer can remember the add. This kind of add always comes up with some sort quiz or promotional tactics. It provides company boost in sales compare to his competitor for some period of time.

PEPSI has been doing the same for last decade or so and they are benefited by this. In a cricket crazy country like India people watch matches whole day and if they see only one company’s advertisement through out the day then it really makes impact in the mind of consumer. Yes pricing & quality are true for each and every company. But sometimes ad blockades / excessive strategy are also very necessary and successful for established brands/new brands. It has given dividends to company like Pepsi.

Example 2 – Whenever any company launches new TV channel they do the same thing. Sometimes in a highly competitive environment you have to penetrate the market. “COLOR TV CHANNEL” does the same, before launching the channel; they give excess advertisement to create awareness about the channel by making huge expenditure on advertisement. Now you see COLOR is one of the top TV CHANNEL in entertainment segment. Yes their contents are also very good but they have created awareness in the minds of consumer by providing excessive advertisement.

In my opinion excessive advertisement is not waste of money it has provided benefits to both new brands and established brands. I think in HUL case it could be a good short term idea to boost its market share or other way I can say HUL’s market share and brand image has declined over a period of time so it was a strategy to strengthen their brand by penetrating consumers mind. So, it was more of strengthening the brand image “HUL” rather than product advertisement.

I would like to have your views on this.

Do you think these kinds of advertisement should be allowed? Have you done these kinds of ad blockage/ excessive advertisement to improve your brand image or business development? Do these kinds of strategy is valid in your country / location?

Please share your views…….

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What is Sales?

These definition of sales are accumulated from top professional of different fields & industries like Marketing, IT, Finance, Banking etc.

“The concept of sale arises due to various needs of each individual. Each individual can’t posses all goods that he requires to satisfy himself. In order to satisfy his all needs a person has to forgo something in order to get something and that is called sales.

In other words we can say Sales is a medium of exchange to garner value to each other in exchange for something. In olden times it was barter system where people use to exchange goods to goods like Rice to wheat etc to satisfy each others need.

Now sales are totally currency base where one people get currency in return of goods & service. In accounting terminology it is called Revenue where currency is generated by selling goods or services.”

“Sales is just an art to convince consumer that they will get full value for their money.”

“Sales is either convincing or confusing a contact and converting him as customer.”

“Sales is a natural process of energy-Cybernetics strategy where the tension or needs of buyers are met by the sellers of the items which satisfy those need.”

“Sales is a combination of Art, Skills and science and said to be happen when both the parties comes to the mutual unique agreement on the subject.”

“Sales is the art by which one could sell the product with less effort and minimum of arguments at the willing price.”

“Sales is a process in which a commodity or asset changes over from hand to hand for a definite consideration, popularly through currency.”

“Sales may be defined as the planning, direction and control of personal selling including recruiting, selecting, equipping, assigning, routing, supervising, motivating and paying as these tasks apply to the sales force. The major objectives being:

1. Increase sales volume
2. Contribute to profit
3. Growth.”

“Sales is a holistic process required to develop, manage and execute a mutually beneficial transaction of goods or services in exchange of currency that is equivalent to beneficial value!! In short it is an exchange of goods or services for money that is equal to the aspiration and value of the purchaser. It is not just an art, it has defined pools of skills. It requires skills from the SELLER which entail product knowledge, value for money and convincing power as against BUYER skills of UNDERSTANDING need, negotiations and Value for money aspiration. It has to meet this criterion!!”

“Sales are the pinnacle activity involved in selling products or services in return for money or other compensation. It is an act of completion of a commercial activity which is completed by the seller, starts with an agreement to an appropriation or request followed by the passing of property or ownership in the item and the application and due settlement of a price, the obligation for which arises due to the seller’s requirement to pass ownership, being a price the seller is happy to part with ownership of or any claim upon the item. The purchaser, though a party to the sales does not execute the sale, only the seller does that. To be precise the sale completes prior to the payment and gives rise to the obligation of payment. If the seller completes the first two above stages (consent and passing ownership) of the sale prior to settlement of the price, the sale is still valid and gives rise to an obligation to pay.”

“Sales is culmination or fulfillment of a genuine or sometimes not so genuine need generally existing aware fully or unaware fully (as a latent potential in seed form), in an individual and is brought about (or manifested) when the factors of approach by the salesman with his convincing power or otherwise, buying capacity or affordability by the buyer and buyer’s interest etc. are matched.”

“Sales is an Art where you should be able to sell a Comb to a bald man!”

“A sale is the pinnacle activity involved in selling products or services in return for money or other compensation. Sale – an agreement (or contract) in which property is transferred from the seller (vendor) to the buyer (vendee) for a fixed price in money (paid or agreed to be paid by the buyer).”

“Classic definition is exchange of goods / services with some value derived in the exchange mechanism which could be immediate or future. This began with barter, but now are contracts where one party derives or extracts value add from special customerized goods and / or services immediately, over a period of time in exchange for a currency value which again can be negotiated and put down in contract terms and conditions.”

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Sales Persons preparation & approach while meeting C-level Executives

Before meeting with C-level executive a sales guy must get all the information about the company and its competitor. Sales person should give more emphasis on how “the company will be benefited with the product rather than just showing common benefits of the product”.

Pitch should be made according to C-LEVEL executive’s functional discipline-

A CFO of a company will be more interested in ROI, Payback Period, Cash Flow generation etc.

CEO of a company will be more interested on, how the product will provide operation efficiency, Strategic advantage to the company as compare to his competitor etc.

One the other hand CIO officer would be more inclined to know about products technical details like Life cycle of the product, Availability of updation, Functionality of product & Product usability etc.

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