29th March 2019
Outside Fortress Europe Excerpts
This Global Business Strategy Blog post is based upon unabridged excerpts from Chapter Five, Analysing Global Markets and the Intelligent Company, in Outside Fortress Europe: Strategies for the Global Market.
Bradshaw, T., Waters, R., & Nicolaou, A. (2019, 26 March). Apple mounts challenge to Netflix by enlisting rivals and stars in video push. Financial Times, p. 1.
Gapper, J. (2019, 27 March). Apple TV+ can reawaken the spirit of Sony. ft.com.
Lex. (2019). Apple TV: hold the applause: Making its streaming service competitive would require big spending on premium content. ft.com.
Waters, R., Nicolaou, A., & Bradshaw, T. (2019). Apple looks to TV as part of its own digital ecosystem: The company is offering more services but questions over pricing remain. ft.com.
What Steve said…
“Some people say, ‘give the customers what they want’, but that’s not my approach. Our job is to figure out what they’re going to want before they do. People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page”.
“Innovation distinguishes between a leader and a follower”.
Steve Jobs, 1958-2011.
Outside Fortress Europe Excerpt
Introduction: Understanding the nature of demand
There are three broad types of market demand:
- Established demand is the type of demand which most managers are familiar with. For example, the most commonly presented data/information in market research reports typically describes existing (mature) demand, e.g. the size of the market (units and/or value), the number of competitors, their relative market shares and so on.
- Latent demand is broadly defined as a market condition where there is an obvious customer need that is not currently being met by any significant number of suppliers. This type of demand is very common in less ‘developed’, poorer countries where there are clear needs but the lack of an ability to pay renders the market unprofitable to supply.
- Incipient demand refers to customer needs and preferences that have yet to be identified. This type of demand is very common in advanced industrial economies where the pursuit of ‘higher-order needs’ is matched by relatively high living standards and a general willingness and ability to pay premium prices for new and novel value propositions.
Because virtually all competitive markets have developed in the ways described above it is possible to explore a range of generalizations relating to them. We consider each demand category in turn, focusing on three aspects:
- Market and industry overview.
- Typical characteristics of demand.
- Global business strategy challenges.
The key elements of each category are presented below as bulleted lists, followed by a more detailed explanatory narrative.
Established demand: Mature(ish) markets
Market and industry overview.
- The market need is known by both consumers and suppliers.
- The market need is fulfilled by existing suppliers.
- The market size can be readily and accurately measured.
- The industry structure is well understood by ‘insiders’ and ‘outsiders’.
- Distribution channels (routes to market) are established.
- Supplier brand reputations (routes to mind) are established.
- Government market ‘protection’ may favour local companies.
Typical characteristics of established demand.
- Mature markets with little growth potential. The actual rate of growth will vary by sector but a figure between 2-5% is the norm for this market definition.
- ‘Clever’ (well informed) customers: buyers have direct or indirect experience of what the product/service does, who supplies it and what the relative merits of dealing with one supplier rather than another are.
- On the supply side, there will be intense and sophisticated rivalry – or cartel behaviour!
- Industry structure is concentrated and normally oligopolistic in nature, i.e. 3-5 firms account for 70-80% of industry revenues.
- There is likely to be excess capacity through the business cycle, particularly in high-fixed cost sectors ranging from commodities and mining to semiconductor fabrication.
- There is potential margin erosion through the business cycle, particularly where there is excess capacity and industry suppliers resort to price competition to ensure they at least cover fixed costs.
The global business strategy challenges of established demand.
- Long term market (segment) leadership.
- Joint ventures and strategic alliances are very common.
- Mergers & Acquisitions (M&A) are very common and contribute to the shakeout phenomenon described [elsewhere] but they are very difficult to manage.
- Reinforce existing customer loyalty through customer relationship management principles (discussed in detail throughout Chapter Six, Strategic Marketing and Global Brand Management).
Exploring established market demand
The rate of growth in a market is a critical determinant of the type of strategies that firms do or should develop. Established demand tends to have low growth levels, i.e. these types of market are typically characterized by a mature context. The market will typically be very large and may well be growing at rates of up to 5% to be classified as mature. Despite such growth, the opportunities for unestablished firms will be limited. ‘Clever customers’ relates to the fact that in mature markets customers are typically well informed about all the options available to them, both in terms of alternative suppliers and alternative technologies. Given choice, customers will choose! Their expectations of ever-higher quality and service will also be continuously raised, not least because of the ‘intense and sophisticated rivalry’ that is a typical feature of mature markets (Doyle, 2008).
The shakeout phenomenon, whereby firms that haven’t kept pace with the market’s development have been acquired or have gone out of business, will already have occurred. The combination of these market characteristics leads to the problem of ‘excess capacity’ and, consequently, ‘margin erosion’. Excess capacity is a common characteristic of capitalist economies since individual producers will make investment decisions based on their own interpretations of market demand, typically using the same data sets (which are very often collated by industry associations or mainstream market research agencies such as Mintel and Nielsen). Where lead times are long and the rate of growth in the market slows, there is invariably an ‘overhang’ of excess capacity. Market ‘imperfections’ such as government subsidies can lead to extended periods of chronic excess capacity, a scenario where the market forces which would otherwise force bankruptcy or industry restructuring are prevented from doing their job.
The principal strategic management challenge in existing markets is long term market leadership. To paraphrase former GE CEO Jack Welch, ‘if you’re number one or two in a market during a downturn, you catch a cold. Any lower and you get pneumonia’. The second (and related) marketing challenge is to reinforce loyalty among the established customer base. Repeat purchase customers are profitable customers, a factor underlined by the plethora of loyalty schemes and relationship marketing programmes available today. The market leader in a mature market should also constantly strive to identify process innovations, i.e. to drive down costs and thus enhance margins and combat the effects of price erosion. Increasingly, such innovations come from outside the traditional industry structure, a contemporary example being ‘FinTech’, the online platforms across multiple financial service sectors which are undermining the traditional entry barriers and business models of long-established suppliers.
A range of strategic management models and frameworks underpin the importance of market leadership in mature markets, including the BCG ‘Matrix/Box’ and the GE Multi-Factor Directional Policy frameworks discussed [earlier in the chapter] amongst many others. Similarly, market leadership is maintained by securing brand loyalty via an innovative and continuously enhanced value proposition (e.g. Honda in motorcycles, Apple in smartphones). Furthermore, a common characteristic of mature market life cycles is the legacy of shakeout, a process of mergers, acquisitions and bankruptcies whereby industry consolidation leaves only a few firms with profitable, sustainable market positions, a concentrated industry structure known as oligopoly. This highly predictable phenomenon reinforces the market leadership message but, as previously noted, the disciplines associated with maintaining leadership positions are often neglected by successful firms, a function of complacency, arrogance and ‘success-induced incaution’. In general, firms seem to be more capable of throwing away strong market positions rather than sustaining them.
Latent demand: Emerging markets
Market and industry overview.
- The market need is known by potential customers and potential suppliers.
- The market need is not currently being fulfilled by existing suppliers.
- The potential market size can only be estimated, a difficult task given the lack of historical data; proxies are often used, for example, technology adoption in one country compared to another, similar country, e.g. cellular phones in emerging markets.
- The industry structure is not yet determined but is typically fragmented.
- Channels (distribution) are not yet established or are primitive.
- Supplier brand reputations may or may not be known and/or perceived to be desirable or otherwise.
- Government support might be essential to facilitate market entry.
Typical characteristics of latent demand.
- Very early-stage / slowly emerging markets.
- Customers may or may not know about potential solutions or suppliers.
- Strongly associated with poorer, developing countries.
Why no supply?
- Inability to purchase because of low income: described by economists as effective demand, which combines the willingness to buy with the ability to pay.
- Little or no marketing infrastructure exists, e.g. distribution channels, advertising agencies and so on.
- Cost-to-serve is too high to attract suppliers (the negative cash flow phase illustrated in Figure 12).
- Technology is not available to meet the need. For example, in pharmaceutical sectors, there is a known need for a cure for cancer, dementia, Alzheimer’s, Parkinson’s and so on but at this point in time there are no known cures.
- ‘Stupid’ companies lack the vision to see the opportunity, or they see the opportunity but perceive it as unattractive and/or too risky. (The use of ‘stupid’ here is deliberately provocative and of course companies do have the right whether or not to compete in certain market spaces; indeed, this is the essence of strategic management).
The global business strategy challenges of latent demand.
- Companies must take a long-term perspective.
- Consider innovative financing options, for example, countertrade where goods are traded for other goods or natural resources rather than cash.
- Seek out joint ventures and strategic alliances with local firms, even if this is not a market entry requirement of the host country.
- Find innovative ways to educate governments, distributors, customers, key influencers etc.
(When exploring latent demand, we do so alongside our discussion of incipient demand, treating them both as high potential emerging markets, albeit with different specific strategic management challenges).
Incipient demand: Emerging markets
Market and industry overview.
- The market need is not currently known by potential customers or distributors.
- This demand-type normally relates to new products or services which have yet to be experienced by consumers or distributors.
- There are no suppliers, although some companies may have a product available but are not prepared to attempt its launch. Recall that Kodak had a digital camera available in the mid-1970s but dismissed it as a toy (and feared the profits cannibalisation consequences of its launch).
Typical characteristics of incipient demand.
- As a general observation, consumers are not good at expressing a desire for something they have yet to experience, rendering many traditional market research methodologies useless.
- On a positive note, having experienced the product or service customers wonder how they ever managed to live without it! Contemporary examples include social networks, smartphones and other sexy technology ‘stuff’, but can apply equally to the mundane, e.g. post-it notes. Also, this observation has deep roots: it was amongst the pillars of J.B. Say’s ‘supply creates demand’ thesis described earlier.
- The potential market size can only be estimated, a challenging task due to the lack of historical data, a problem often compounded by initial customer rejection of the product/service proposition in traditional marketing research approaches, including qualitative methodologies such as focus group research where the participants can touch, feel, taste, smell the product/service concept being tested.
- The industry structure is not yet determined. This can be exploited by leveraging first-mover advantage (see below).
- Distribution channels may or may not be established or intermediaries may resist carrying the new product concept.
- Supplier reputations may or may not be known but their associative identity with the new product concept must be established.
- HUGE growth potential.
Sounds like a tremendous opportunity, but:
- ‘Stupid Companies’ who lack the vision or the bravery to grasp the opportunity.
- ‘Unknowledgeable Customers’ who might not recognise the better and/or cheaper solution to their needs.
- ‘Stupid Distributors’ who prefer the safety of selling existing products over untested offers.
The global business strategy challenges of incipient demand.
- First in and fast to develop the market, i.e. exploit the potential of first-mover advantage.
- Deploy a ‘Sleeper’ technology strategy, always developing the next-generation technologies in parallel rather than sequentially, an approach that has underpinned Intel’s microprocessor dominance for decades and underpins Apple’s brand image superiority.
- Marketing communications: create awareness, persuade, inform, educate, demonstrate, secure word-of-mouth (WOM) such as testimonials, referrals, editorials etc. ‘Influencer’ marketing communications utilising social media platforms are attracting huge resources in multiple sectors.
- Identify early adopters and accelerate innovation uptake (see Rogers, 2003; Moore, 2014).
Exploring emerging market demand: Stupid companies, ‘unknowledgeable’ customers and the core principles of innovation
Although latent demand and incipient demand are fundamentally different, the market dynamics and strategic management challenges associated with them are very similar. High potential, fast-growth markets also tend to be more fragmented, i.e. there are few strong rivals who enjoy entrenched competitive positions. The keyword here is ‘strong’. While there may be many companies competing in an emerging market sector none will have a dominant share (recall the pie-chart analogy discussed earlier).
Two key ‘downside factors’ are typical in high growth potential markets. First, ‘stupid companies’! Despite their obvious growth potential, incipient and latent markets are often ignored by companies who are blind to the opportunities they offer. A self-fulfilling prophecy scenario arises whereby because the market can’t be ‘seen’, it is not developed, particularly by companies whose technologies can be readily substituted. Entrepreneurial new entrants, often with substitute process and/or product technologies, tend to be more able to exploit the potential and are far less likely to suffer marketing myopia.
This scenario is as old as Say’s Law of Markets but was popularised by Kim and Mauborgne in their original Harvard Business Review article (2004) and follow-up 2005 book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (2015, extended edition), a concept which had as its fundamental premise the idea that companies would benefit from seeking out uncontested market spaces rather than struggle for survival in red ocean, fiercely-contested arenas.
Perhaps the greatest challenge with latent and incipient demand is that posed by the existence of ‘unknowledgeable customers’. This statement is not meant in a derogatory sense, hence the quotation marks. It just reflects a basic market ‘fact of life’ that customers are not so good at articulating a desire for something they have yet to experience. On this point, Steve Jobs famously observed (cited in Isaacson, 2011):
Some people say, ‘give the customers what they want’, but that’s not my approach. Our job is to figure out what they’re going to want before they do. People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.
The ‘unknowledgeable customer’ challenge is changing slowly in business-to-business markets as organizational buyers take a more strategic approach to purchasing. Even here, though, fear of technological obsolescence and general ‘procurement myopia’ presents a difficult marketing challenge.
From a strategic management perspective, the challenge of latent and incipient markets is to be first and fast, i.e. to rapidly enter the market and to quickly build entry barriers as it develops. As we have demonstrated throughout this chapter, it is a basic tenet of market economics that high growth potential markets will always attract new entrants and that strong rivals will quickly emerge. As market and technology life cycles become increasingly shorter the requirement of rapid ‘time to market’ becomes acute.
Substantial evidence exists which demonstrates that, with few exceptions, there are tremendous marketing and financial benefits associated with first-mover advantage. Numerous studies have demonstrated that first movers typically gain both high market share and superior long-term profitability as the following list from a strategic brand management perspective indicates (Doyle, 1989, 2008):
- Pioneers typically win 29% market share.
- Early followers gain 17%.
- Late entrants only manage 12%.
- Pioneers typically earn 30% more long-term return on investment (ROI) than followers.
The following list and subsequent evaluation of selected line items illustrate why it is that first movers are typically so successful by examining the reasons why followers underperform:
- Customer inertia.
- Customer loyalty profiles.
- Customer switching costs.
- First mover’s ‘experience curve’ cost advantage.
- First mover’s aggressive defence of its market leadership position.
- First mover ties up best distribution channels.
- First mover enjoys generic brand associations.
- The network effect.
Customer inertia refers to the general fact that, other things being equal, customers will not put effort into switching brands just because a new supplier emerges. If the first mover is effective in developing the market it is highly likely that strong customer loyalty profiles will develop, i.e. customers enjoy strong brands and are likely to be highly satisfied with the first mover’s offering. In the marketing literature, there is a huge debate as to whether consumers tend to be brand loyal versus brand fickle. Loyalty profiles do vary depending on the type of market (e.g. consumer versus B2B) and its dynamics (e.g. emerging versus mature) but, as a general observation, if the first mover company continues to ‘do the right things’ as the market develops, it should be able to secure strong long-term customer loyalty. This is particularly the case where customers will incur heavy switching costs in changing their supplier, a factor that the first mover can, of course, heavily influence. We discussed this earlier with reference to entry barriers and we elaborate a little here in the context of first-mover advantage.
There are three categories of customer switching cost:
- Economic: Switching costs here include downtime, retraining, systems compatibility, etc. Many industrial firms build in these factors by linking capital goods with consumables, for example, Xerox with photocopiers (machine plus toner), Caterpillar (bulldozers plus spare parts), Rolls-Royce (aero-engines plus maintenance contracts and parts), Hewlett Packard (printers plus inkjet cartridges) and so on. In consumer markets, Gillette does exactly the same (shaving systems plus consumable blades and facial hygiene products). This ‘business model’ is known as after-marketing and can be hugely profitable.
- Psychological: Switching costs here reflect the human condition that buyers tend to be risk-averse (e.g. ‘nobody ever got fired for buying IBM’, ‘better the devil you know’, etc.). More positively, the trend towards ‘partnership sourcing’, ‘relationship management’ and ‘network marketing’ build in strong emotional as well as economic ties in Business-to-Business (B2B) markets while effective brand management builds strongly on positive motivations in consumer markets.
- Political: Switching costs here reflect internal powerplays within the decision-making unit and/or external dependencies such as reciprocal trading agreements and feature strongly in B2B market environments. These are often very difficult to identify but are essential to acknowledge when developing customer-focused marketing strategies (see Chapter Six, Strategic Marketing and Global Brand Management).
The first mover will have the economic advantage of quickly falling costs based upon its rapid descent down the experience curve, an edge that they should use to aggressively defend their market position via building entry barriers. One of the most powerful entry barriers is to tie up distribution channels by securing the best locations and becoming the preferred supplier to the trade. Another benefit the first mover enjoys is the generic brand association with the product, for example, iPhone, Post-it, Xerox, Thermos.
The network effect describes a market condition whereby a critical mass of inter-dependent customers uses a common ‘platform’ to consume a product or service. For example, people join Facebook, LinkedIn, Twitter and other social networks and either explicitly or implicitly encourage friends and family to join them also. People will join a specific service not necessarily because it’s the best, but because it’s the most prevalent. The network inter-dependency may be real, e.g. file exchange of Microsoft Windows-designed software applications; or perceived, for example, the assumption that the market leader must be the best/safest choice because all those other customers who have chosen it can’t be wrong (e.g. 8 out of 10 cats prefer Whiskas).
As markets become more competitive the benefits of first-mover strategies are often short-lived, primarily due to rapid technology transfer which, in turn, leads to shorter market life cycles and rapid imitation by competitors. More generally, a broad range of pitfalls associated with proactive first-mover strategies has been identified in the literature. The following list provides a sample of the dangers:
- Customer rejection.
- Customer apathy.
- The technology is premature.
- Market entry is premature.
- R&D project costs rapidly escalate.
- Market development costs rapidly escalate.
- Product development is deficient.
- Poor market targeting.
- Insufficient budgets, particularly for market development.
- Inadequate cross-functional coordination.
Clearly, many of these are interrelated. Companies often underestimate the costs of innovation, both before and after launch, thus leaving inadequate resources to complete the project. Many of the issues listed above relate to poor timing, either because the company is not adequately prepared or because the customers are not ready for the product. The crucial point to note, however, is that all these issues can be addressed if appropriate preparation and planning are undertaken. Throughout this Chapter, we acknowledge the pitfalls associated with first-mover innovation strategies, but we aim to offer solutions to deal with the identified dangers. Recall the self-fulfilling prophecy syndrome: if the expectation is of failure then failure is the most likely outcome.
Considering first-mover strategies (alongside their pitfalls) from a tactical perspective, the marketing challenge is to develop communication strategies that inform, educate and demonstrate the advantages of the product to customers who might initially be reluctant to accept and/or understand the message. Furthermore, the power of word-of-mouth (WOM) should be harnessed by seeking endorsement and testimonials from early adopters of the product and recall our earlier mention of social media ‘influencer’ marketing communications. The following quote from Sony founder Akio Morita in his hugely engaging autobiography of himself and the company he moulded into Japan’s first truly global brand concisely summarizes the point that it is the innovative company’s marketing communications challenge to educate customers about the benefits associated with its products (Morita, 1988):
You must not expect the customer to understand the benefits of your technologies. That’s your job!
Morita also notes that if Sony had listened to the customer too literally then the Walkman, one of the most successful mass-market products of all time (the original and its multiple variants sold 385m units over the three decades from launch in 1979), would never have been launched: potential customers could not possibly conceive the benefits of a non-recording tape recorder! It is in this sense that we describe customers as ‘stupid’, i.e. that it is the supplying company’s task to educate and persuade them to change their routine purchasing habits.
Extensive research has demonstrated that some customers are more open to being educated than others, particularly when innovative technology is highly complex or is merely new to a particular society. A textbook example of the latter is the marketing of the contraceptive pill to many devout Catholic South American countries during the 1990s (e.g. Argentina). Here the challenge was to educate the customers about contraception and how to use the pill rather than to inform them of how the technology worked. Working against suppliers was ‘the power of the pulpit’ (God and the Pope), a fierce and deep-rooted societal/cultural ‘rival’. In the US, meanwhile, the marketing communications challenge was to focus on reduced side effects, ease-of-use, packaging and a heavy B2B sales push through physicians and pharmacies.
Outside Fortress Europe Excerpt References
Doyle, P. (1989). Building Successful Brands: The Strategic Options. Journal of Marketing Management, 5(1), 77-95.
Doyle, P. (2008). Value-Based Marketing: Marketing Strategies for Corporate Growth and Shareholder Value (2 ed.). Chichester: John Wiley & Sons.
Isaacson, W. (2011). Steve Jobs: The Exclusive Biography. London: Abacus.
Kim, W. C., & Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review(October), 76-84.
Kim, W. C., & Mauborgne, R. (2015). Blue Ocean Strategy Extended Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston: Harvard Business Review Press.
Moore, G. A. (2014). Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers (3 ed.). London: HarperBusiness.
Rogers, E. (2003). The Diffusion of Innovations (5 ed.). New York: Free Press.
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