The broad choices of strategic ‘positioning’ for the brand in briefing 65 were already made. We know who we want to serve — the 3 million potential consumers. We know what we want to serve them with — a product with some value curve of benefits. And we know how we wish to serve them — by capturing their interest with advertizing and making the brand available through sales effort into stores. These positioning choices are not the end of “choosing a strategy”, though. The launch looked just about worth pursuing, given the choices about how to undertake it, but were these the best choices. Strategy must also include deciding on:
What to do, when and how much?
A “strategy” for the brand launch implies a coordinated set of choices – how much advertizing, how much sales effort, and what price. The scenario in briefing 65 made simple, static choices — advertizing of $0.5 million per month, sales effort of 50 people, and a wholesale price of $9.00. Maybe different values would be better, and maybe changing those values would be better still. We need some more information:
- Advertizing spend of $0.5m/month is enough to reach just 4 % of the potential consumers. The impact of advertising is a highly non-linear – $1.0m/month reaches just over 20 % of the market, and $1.5m reaches over 60 %. So maybe our advertizing was so low that it would take a very long time to capture most consumers.
- The 50 sales people can each make 50 calls/month, so with 20000 stores it will take some 8 months to visit them all. But since their calls will not be successful without consumer demand, perhaps we should delay sales effort until consumer interest is significant. (In practice, sales effort focuses on consumer demand that will arise from advertizing, but this possibility is not included in this simple case).
- The wholesale price determines the retail price through the addition of the stores’ mark-up, and this affects consumers’ purchase rate through a simple price elasticity — a higher price reduces consumption and a lower price increases it. If consumers are sufficiently price sensitive, then, a lower initial price could increase consumption and potential store profits and improve the success of our salesforce.
So, perhaps a better launch strategy might look something like Table 1. Start advertizing heavily to win consumer interest, delay sales effort until there is enough demand for stores to take the product, and price low to grow volume and stores’ commitment. Next, keep advertizing strongly to capture the potential market quickly, and sell heavily to grow distribution. Lastly, raise price and cut sales and marketing to extract profitability. (In practice, ‘raising price’ is more likely to result from lower discounts and promotions, rather than by a real increase in headline prices).
Table 1: A possibly improved launch strategy for the brand.
|Month||Advertizing||Sales people||Wholesale price|
The result of this strategy, compared with simple, static policies is shown in figure 1 (dashed lines indicate incomplete structure). As can be seen, it is not just somewhat better than the original plan—it is radically better, achieving much larger and more rapid uptake by consumers and stores, breaking into profit after just 12 months, and driving high rates of profit thereafter.
Figure 1: Much-improved performance from the varying decisions of the better strategy. (Click image to view larger)
This is a common feature of strategic initiatives:
The difference between poor strategies and better ones for exploiting a single opportunity can be vast.
It can now be seen why the first two questions—whether to embark on a new initiative, and what strategy to adopt in doing so—cannot in practice be disentangled. Given this latest approach to the strategy, the product launch is a good move to pursue; under the original policies it was not.
Until next time…
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We never know the path not taken
Since we only have information on what past performance has actually been, it is common for organizations to be quite unaware of how much stronger their performance could have been, had they acted otherwise than they did. The obsession with cost control, ‘efficiency’, and maximizing profit margin ratios has a particularly poisonous effect that leads many strategies to badly under-deliver on their potential. Choosing to spend less money or effort than would be worthwhile causes resources to be built less quickly than they could, and interdependence then further puts the brake on progress.
This does not imply simply throwing more money at a strategy, regardless of whether it is working or not. Information on how fast resources are building will indicate if the strategy likely will work, and if not, it can be killed quickly.
This briefing summarises material from chapter 8 of Strategic Management Dynamics, pages 525-526.
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