Strategy Dynamics Briefing 41: Important implications of the customer choice pipeline

This briefing offers some observations that, whilst illustrated by Briefing 40, are far more general. Here they are…

1. The difference between good strategy and poor can be massive, as the contrast between the two cases in briefing 40 clearly shows. We have previously pointed out that superior profitability is not the main concern of investors, who tend to value growth in earnings. Furthermore, performance differences on such measures are not typically very wide. On the other hand, firms may differ by orders of magnitude, in terms of the growth they achieve. Southwest Airlines, Ryanair and easyJet are not just 20% or 50% larger than their weaker rivals, but many, many times bigger, and have achieved vastly higher growth rates to get there.
2. It is unlikely that continuing to do the same thing over long periods of time is optimal in most situations, unless the environment and the business are extremely stable. The brand launch in briefing 40 was slow and marginally attractive with a constant marketing spend, but radically improved when spending rates were changed, both in total and in its allocation.
3. Fraction of turnover decision rules are most unlikely to be advisable. The obvious point from the brand launch is that, whilst the brand had not taken off, there was no revenue of which a fraction could be allocated to marketing spend. But even when revenue was significant, it made no sense to allocate a fixed fraction of revenue to marketing, either in total or for any of the marketing components.
4. Performance at any time depends on the entire history of what has happened previously. The sales and profit rates for the brand depended on all the decisions on all spending rates that had happened earlier. There was a sharp growth in disloyal customers in the middle year, for example, reflecting strongly the peak in values advertizing from months seven to 12. Had that peak not happened, then the large stock of interested consumers by month 12 would not have been available for the subsequent peak in trial promotion spend to exploit.
5. A minimum “input” is needed to make a business system perform at all. Had this brand invested only, say, $5 million per month, it would never have hit sales rates sufficient to pay for its own marketing, no matter how that small sum was allocated. Figure 1 gives more information about the flows around disloyal and loyal customers. It shows that, whilst some consumers are being pumped up the chain by the brand’s promotion spending, others are slipping back down the chain. They could be attracted to competing products, or cease to find the brand’s values interesting enough to continue being loyal, or buying it at all. With too little marketing spend overall, these backflow rates negate the small forward flows of consumers as soon as numbers in the upper stages become significant. These backflows also explain why companies continue to advertize products everyone knows about. There are always factors at work that push customers back down these pipelines, so continued effort is nearly always required in order to keep customers up at the top of the chain.
6. There is a maximum “output” that any finite system can sustainably deliver. Although essentially obvious, it is remarkably common for organizations to act as though it were not true. The limit is already becoming evident by the end of this product’s launch – at least when the strategy is well executed! You have 32.3 million consumer buying this brand and only this brand, and the realistic limit [given the persistent back-flows, is not far above this level. From that point, you would be extracting the maximum cash flow that this finite market can deliver. You might temporarily extract more, by killing the marketing spend, but then those back-flows will be unrestrained and your customers, sales and profits would start to fall.

Figure 1: Consumer flows in both directions for the brand launch.

Until next time…

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Take care about “delays“!
Managers understand perfectly well that delays occur between events in their world or the decisions they take and the impact these have on performance results. This understanding is not, however, entirely accurate.

The simple causal links for the brand all operate instantaneously. Clearly, sales volume today, multiplied by price today equals revenue today. And advertising today makes customers aware today. But the flow-to-stock causality is also instantaneous — the moment a new customer is captured, the number of customers increases by one. There is thus no delayed causality whatever in the brand architecture.

There is no mechanism in the real world (aside from the weird phenomena in quantum physics!) for cause and effect to be separated in time. Delays only arise if something is stored from one moment to another, which is precisely what resources or stocks do. The item stored may be physical, such as the time a new car spend on the production line. There are also information delays, e.g. from when you order that car and its manufacture begins. All kinds of performance gains have of course come from reducing both kinds of delay. Both types are termed “pipeline” delays because something — a physical “something” or information – acts like it entered a pipe, and taken some time to move along the pipe and come out the other end.

This briefing summarises material from chapter 6 of Strategic Management Dynamics, pages 348-353.

Read more about the book on the Strategy Dynamics website