Chapter Three

A Framework for Market Leadership

In this chapter we introduce a Framework

a set of theories accepted to serve as the guiding principles of marketing strategy.

that you will find helpful in your quest to be the competitive leader in your market. This Marketing Framework is based on the book written by Michael Treacy and Fred Wiersema; “The Discipline of Market Leaders”.
Most businesses compete in a customer focused highly competitive global market. The way to succeed in this market is to focus on the customer. When using this framework you need to know who your customers are, where they are, and what you have to do to get them to buy from you rather than from someone else. And you want to know how your competitors are likely to react to your strategy.
To start you need to understand the principle of differentiation. Success in business requires that you be both different from and better than your competitors. To accomplish this you need to find a way to provide value to your customer better than the competition in a clear and distinct way. What is value? The regard that your product is held to deserve; the importance, worth, or usefulness to your customer. Or, the importance or worth that is sometimes expressed in money.
Bain & Company published The Elements of Value in the September 2016 issue of the Harvard Business Review detailing the elements of value and how customers evaluate a product or service.
Bain's research identifies 30 fundamental attributes they call “elements of value” that drive consumer decision making. The elements are divided into four categories — functional, emotional, life changing, and social impact — and explain the inward and outward-facing needs consumers seek to have met. Understanding these needs is absolutely critical in sales and marketing. The more elements of value you can provide for, the greater your customers’ loyalty.
Conjoint analysis is a statistical technique used in market research to determine how people value different attributes (feature, function, benefits) that make up an individual product or service. Conjoint analysis and perceptual choice experiments will help you to understand what your customers want and also what your competition is doing. For an explanation on how to conduct conjoint analysis and perceptual choice experiments read Sawtooth Software's Research Paper.
“Discrete choice analysis simulates demand for different combinations of product features, pricing, and other components are powerful and useful tools, but they are designed to test consumer reactions to preconceived concepts of value—the concepts that managers are accustomed to judging. Coming up with new concepts requires anticipating what else people might consider valuable. ” reference: Bain.com. A skill that Steve Jobs enjoyed.
The second principle is the assumption that customers have the final say on whether to buy from you or not. Customers go through a decision making process. They look at all the possible available product data and attributes in the market. As there is so much information they cannot consider everything. Typically the customer will segment their needs and wants into separate “bundles” so they can narrow down which options will provide the highest value and satisfaction.
The first bundle is operation factors which include price, delivery, service, and reliability. The second bundle is product features and or designs which include product attributes, style, innovation and technology. The third bundle is the question of whether it meets the customer’s needs or does the job they hired your product to solve that will make their life better.
The customer classifies the product or services into these three bundles and then mentally gives them a score in each one of these dimensions.
When the customer decides which one of those dimensions is the most important to themselves, they pick the product that's the best on this dimension. It is important to exceed their expectations in at least one dimension in order to prevail over the competition. If price is the primary consideration they will likely choose the product with the lowest price. If design and visual appeal are of importance, they will choose the product with the best design. If “customer care” is their number one concern they might choose the company with the best customer support, as long as the product delivers satisfaction or and is good enough on the other two dimensions. This assumption approximates the way customers make decisions.
If you believe the assumption, that the customers have the final say on whether to choose you or not and they choose the product that delivers the best on the bundle of attributes they care the most about, that suggests that if you want to be the first in the markets that you serve, you better be the best at something and good enough at the other two. That should be your market strategy. As a marketing strategist, you will need to decide on which bundle you want to be the market leader. Once you decide, you can begin to structure your business, prioritize resources, allocate resources and make pertinent employment decisions.
An important concept to understand is fair value. To visualize this concept we will use a value map. On the vertical axis, there is relative costs to the customer. On the horizontal axis; relative benefits. The map demonstrates that if you offer more benefits, customers are willing to pay a higher price. If you charge a lower price, customers will expect fewer benefits, as long as what you offer appears to be fair. More precisely, customer value equals customer-perceived benefits minus customer-perceived price. So, the higher the perceived benefit and/or the lower the price of a product, the higher the customer value and the greater the likelihood that customers will choose that product. Or, it will be cancelled out of the market because you're not offering a fair value. Those values were identified in the Bain study as products and services that address four kinds of needs: functional, emotional, life changing, and social impact.

A Simple Value Map

 

a value map
In this simple illustration based on the idea that for a generic product, facial tissues, lower price for one tissue delivers greater customer value. Some logical inferences can be drawn about the value delivered. Product H delivers more value than product P. Similarly, product P delivers more value than product K.
In this example the H brand is the lowest price per box and lowest price for one tissue. The P brand cost per tissue is slightly lower than K brand. In this example if the customer only valued price they would purchase the H brand.
The framework suggests that you need to offer fair value on two of the bundles, and offer something better than fair value on one of the bundles, the bundle you are going to be the leader on. So, imagine a marketplace where everybody is trying to deliver fair value and somebody is delivering something of superior value. What's going to happen in that marketplace?
What is seemingly fair value is constantly changing over time as a function of competitive reaction. Fair value is not a static concept. Companies that perform well on multiple elements of value have more loyal customers than the rest.

The Marketing Framework

 

Framework illustration
With this understanding, we can now examine the framework. The three crosshatches are fair value lines. I have them drawn symmetrically on this axis, but it does not have to be symmetric. To implement this framework in your marketplace you must figure out what product/service attributes relate to each bundle in your market and define that dimension.
What are the product attributes that matter to the customer? Are they design? Are they technology? Whatever it is, define that dimension. First, you have to figure out how much customization is available in your market and define that dimension. The second thing you do with this framework, is anticipate where fair value is. This is the trickiest part of this framework. What are customer’s expectations on each axis?  And where is the reference point of the fair value line on each of these axis points. Sometimes people think about fair value as the average of what everybody offers. Sometimes nobody offers fair value. For example, I would say in the airline business people expect an operational excellence on time arrival. And very few airlines deliver fair value for on time arrival. But that is what people expect and I would say, most of the competitors in the market are below fair value. Sometimes, everyone is above fair value. In some mature markets, people don't care about some of the bells and whistles, and everyone is delivering at least what they need.
Determining where fair value is on each of these axis requires market research. Once you figure out the definition of value for each bundle, the next step is to plot where your company is delivering on each of these axes relative to fair value. Are you above fair value in operations? Are you meeting fair value or below fair value on each one of these axes? Next step, determine where your competition is on each of these axes and then start designing your market strategy. You develop a short-term strategy and a long-term strategy designed to beat the competition! With a well designed long-term strategy, you are ultimately looking to be the best at one dimension and good enough on the other two. In the short term it might be that your strategy is to be the best at customer intimacy, but you're not at fair value in operations. Your short term goal might be to improve your value in operations, but in the long term you're looking to be the leader in Customer Intimacy greater than fair value in Operations and at fair value in Product Performance.
Your chosen leadership strategy will have implications for everything you do in your firm. If your leadership strategy is to be an operational excellence company, the allocation of resources should be prioritized for information technology to support efficiency. A Product Performance superior company, tends to be more Research and Development centered. Their customers are looking to find a Purple Cow. These companies tend to hire the kinds of people that are very innovative, that thrive in a unstructured environment, do not care for top-down organizations, and need a lot of free rein. In a customer intimacy strategy, you have to focus on prioritizing market research, customer knowledge and customer centric marketing. The customer must come first. Once you decide on your leadership strategy, you can begin to form the other aspects of your business strategy.
Recall there are three dimensions to the framework. The operational excellent company attempts to deliver a combination of quality, price, and ease of purchase that nobody else can match. The company's culture will reward efficiency and abhor waste. The performance superiority company will attempt to deliver value in the product area and will be continually adding new features and benefits. These companies are known for innovation and imaginative out of the box thinking. The customer intimacy company bonds with it's customers. The focus is on what the customer wants, not what the market wants.
The first step in using this framework is to think within the market for your product and your firm and ask what does it mean to be operational excellent, performance superior and customer intimate?  It's  customization, segmentation and delivering what the customer demands. The central rule for sustained market leadership is to dominate a market by continuing to improve year-to-year.

Facial Tissue Market

Market share chart
Statista reports that Kleenex has 50% of facial tissue sales, Puffs 17% and store brands 13.4%.
Procter & Gamble bought the Charmin Paper Company in 1958. P & G introduced Puffs Basic Facial Tissues, which replaced Charmin® Facial Tissues. The brand was nationally available in the early 1980s. They added colorful and decorative packaging and added lotion and scents and a touch of Shea butter. Since 2010 Puffs has introduced its "Best Face Forward" campaign. Puffs were designed to help one look and feel their best. They introduced new and exciting Puffs tissue box designs. Promoted that Puffs products are dermatologist tested to be extra gentle, launched the revolutionary flexible SoftPack packaging and improved the Puffs Plus Lotion tissue so that they are gentle on sensitive skin.
The Kleenex Brand history is a story of care. It began in the 1920s, when Kimberly-Clark, offered women the first hygienic, disposable cleansing cloths. Soon Kleenex Tissue had replaced the handkerchief as indispensable care of men, women and children for colds, allergies and the flu. Today they are transforming the act of sharing a Kleenex® Tissue at the right moment into a simple, meaningful and universal gesture of care. Kleenex is a registered trademark of Kimberly-Clark Worldwide, Inc. The Kleenex name has become, or as a legal matter nearly has become, genericized. The popularity of the product has led to the use of its name to refer to any facial tissue, regardless of the brand. Like P & G Kimberly-Clark emphasizes in their product promotion 'customer care' and competes by providing more than fair value on the customer intimacy axis.
With the emergence of new interfaces — messaging, chatbots, voice — powered by Artificial Intelligence, customers have new ways to explore product possibilities. These discovery mechanisms are often highly curated: think Spotify. Algorithms don’t notice (nor do they care about) branding efforts, celebrity endorsements, or publicity campaigns — and there’s a very real possibility they’ll soon sit squarely between an organization and its customers. This poses a potential problem for consumer packaged goods and retailers. If there is no longer a physical place where a brand might exist and come to life for consumers, how will brands connect with shoppers? A generic name like Kleenex might be the consistent pick of algorithms.
The store brand competes on the operations axis with a lower price per tissue and box. Using the Bain list of elements that provide value facial tissues compete on these values: reduces anxiety, wellness, therapeutic value, attractiveness, simplifies, organizes, quality, cost and sensory appeal.
Framework illustration facial tissue values
When Apple introduced the iPad, it set the expectations for what a tablet should be. When you have a brand new market and nothing existed before, customer's expectations are at the origin. They don't have any expectations because the product doesn't exist. When a new product comes into the marketplace it tends to enter with a new product feature. When the iPad was first introduced to the public it came with product features better than what people expected.
As time goes by, people started to expect that a tablet had to have at least those features similar to the iPad, and that became the new fair value. There was pressure on Apple to come up with new features to maintain their position as market leader. This resulted in the development of the iPad Mini which featured a smaller size screen. Better resolution and software changes added value to exceed customer’s expectations. Over time, those new features became the new expectation. It is easy to understand that as a product becomes more mature in the market, the fair value or the customer expectations will increase. A mature product category is typically accompanied by high customer expectations. If you want to enter a mature category, you have to deliver products that meet high customer expectations. In most markets, if the expectations of product features become so high, it becomes hard to differentiate to be a sustainable market leader. Many times, what you tend to see is competition on the operational bundle. Companies will deliver those products benefits at a cheaper price. For efficient, low cost personal computers, the features are quite high and the price is driven down. What you see is high expectation on both the operational and the performance superiority dimension.
The trend in mature markets is that operational excellence is high, performance superiority is high, but the customer intimacy line is not as high. For example in personal services, you might have very high expectations on customer intimacy. You expect your barber to provide the hairstyle that you desire. It may be that they use state of the art products and are very good at operational excellence. So you might see in some markets that there are very high expectations on customer intimacy and high expectations on performance superiority, but not as high in operational excellence. Hence price is equal for a hair cut and shops avoid price wars as they will lead to a race to the bottom that know one will win.
The point here is, you determine what the customer values and their expectations for fair value on each axes? Determining the fair value can be the most challenging part of the framework. It might be that the barber has to try and exceed fair value with location, pleasant conversation, reading material and managed wait time. Your value to your customers dictates your success. And where does value come from? Emotion! In an interview by Forbes with Janet Crawford, a pioneer in applying neuroscience principles to business, Crawford explained that customer decisions start and end with how they feel.
Market research and industry predictions based on experience can help narrow it down. Some people use the average of all competition to plot the fair value. Sometimes fair value is at the minimum, and all the firms are above fair value on some dimension. Other times, fair value or customer expectations are higher than any firm can deliver. For example in the airline industry, I would argue customer expectations are for 100% on time landings and on time take offs, but no firm commits to that. Or, can perform to that level.
In this example you might be higher than any other firm on delivery and cost. The first step in this framework is to determine the axis definition and determine where you are. Settle on your fair value mark and plot how your firm will deliver that fair value. Fair value in our industry is marked by the intersecting line. Follow-up by doing market research obtaining some managerial insight on where the company is on these different dimensions relative to fair value. The firm might fall below fair value on performance superiority but above fair value on operational excellence and customer intimacy may be on the low end. If that's where your firm is then plot the competition. Perhaps the competition is below you in operational excellence, above you in performance superiority, and hits fair value on customer intimacy. The next step is to develop a strategy. Plan a short term strategy and a long term strategy. In the short term, you have to meet fair value on two dimensions and excel on one.
Framework image
Customer expectations will change like it did for the iPad. This requires you to re-evaluate your framework over time. Consider this as a dynamic strategy, because when you make a move your competition will react. Like you they're not standing still. Plan well what the competition is going to do as this enables you to anticipate those kind of moves over time. Finally, you need to think about how costly it is to improve on these different axis. The cost might affect your strategy. Perhaps its very cost prohibitive to move along the product axis. Netflix has been pouring money into original programs such as “Stranger Things” and “The Crown” to fend off competition from other streaming services and continue to attract new subscribers around the world. The company now says it plans to spend as much as $8 billion on content next year — up from an earlier estimate of $7 billion — far outstripping the investments expected from rivals Hulu, Amazon.com Inc. and HBO. Netflix in the fall of 2017 reported that wagers on original programming and international expansion are paying off as the streaming service again posted strong subscriber growth amid an increasingly competitive streaming video market. The Los Gatos, Calif., company ended its third quarter with 104 million paid streaming subscribers globally. It added 5.3 million streaming users in total, outpacing the 4.4 million net additions it had projected. “We’re continuing to increase the content offering and we’re seeing that reflected in viewing around the world. So we try to maintain that feeling that consumers have that were a great value in terms of the amount of the content we have relative to the prices.” - Reed Hastings
You may want to consider whether or not this is the correct short term strategy or maybe that it is something you will put in place for the long term as Netflix has done. At times you have to invest more to be able to move effectively . Additionally, these dimensions are not independent. If I move along the product dimension, it will require me to change my cost position and change my efficiency. I might be lowering my operational excellence. And similarly, as I become more product featured or product focused to deliver the technology and design, I may become less customer intimate. Careful and deliberate thought must be given to the interactions of all these processes. This framework maps in a very direct way the intricacies and complexities of your marketplace, your firm, and your competition.