How market-driven management generates shareholder value ?

1
How market-driven management generates
shareholder value ?

• Professor J.J. Lambin

2
OUTLINE

• What is market-driven management?
• How to create customer value?
• How customer orientation leads to growth
  opportunities?
• How customer value generates
• shareholder value?

3

• What is market-driven management?
• Is market-driven management really
  different from traditional marketing management ?

4
THE AMBIGUITY OF THE TERM MARKETING

• Literally, marketing means the process of going
  to the market.
• The term places the emphasis on the selling and
  promotional activities of the commercialisation
  process.
• Thereby, the importance of the strategic
  thinking activities tends to be underestimated.

5
THE MARKET ORIENTATION CONCEPTThree Components

• CULTURE
• ANALYSIS
• ACTION

6
THE MARKET ORIENTATION CONCEPTThree Components

• CULTURE
• A business philosophy at the core of a
  social market economy system,
• . emphasising the process of customer value
  creation,
• . as the best way for the firm to achieve
  its objectives of profit and growth.

7
THE MARKET ORIENTATION CONCEPTThree Components

• CULTURE
• ANALYSIS
• The strategic brain of the firm,
• used to identify profitable customer
  activity arenas in which to compete.
• (strategic marketing)

8
THE MARKET ORIENTATION CONCEPTThree Components

• CULTURE
• ANALYSIS
• ACTION
• The commercial arm of the firm
• ...used to conquer the target market
  segments
• (operational marketing)

9
THE MARKET ORIENTATION CONCEPTThree Components

• CULTURE
• A state of mind .
• Corporate business philosophy.
• ANALYSIS
• A set of analysis tools to understand the
  market.
• Strategic marketing.
• ACTION
• A set of selling instruments (the 4Ps)
• Operational marketing

10
MARKET-DRIVEN MANAGEMENT Who is in charge ?
Components Managerial role Organizational position
Culture A corporate business philosophy Top management
Analysis The strategic brain Strategic business units
Action The commercial arm The marketing function
11
THE MARKET DRIVEN MANAGEMENTConditions of
application

• LIBERTY OF CHOICE
• Individual choice determines what is rewarding.
• COMPETITIVE EXCHANGE
• Competition is the regulating mechanism.
• SOCIAL COLLECTIVE PREFERENCES
• Externalities must be taken into account by the
  firm.

12
STRATEGIC MARKETINGTwo approaches

• RESPONSE STRATEGIC MARKETING
• Find wants and fill them
• Innovations are market pull.
• CREATIVE STRATEGIC MARKETING
• Find new ways to fill existing wants.
• Innovations are supply-push.

13
THE ROLE OF STRATEGIC MARKETING
14
EXAMPLES OF DISRUPTIVE INNOVATIONS IN MATURE
MARKETS

• The furniture market with Ikea.
• The shoe market with Geox (ventilated soles) and
  Mephisto (shock absorber)
• The airline market with, Virgin-Express, EasyJet,
  Ryan Air,
• The liquid food packaging market with Tetrapak.
• The Kinepolis concept in the movie theater
  market.
• The digital photography market with Sony, HP,
  Kodak,

15
The Key Market Actors
The General Case
DISTRIBUTORS
COMPETITORS
CUSTOMERS
(user, buyer, payer)
PRESCRIBERS
16
The Market viewed as an Eco-system
Competitors
Other customers
licensees,
direct and substitutes

aggregators
,...
Prescribers
Other
stakeholders
Manufacturers direct customers
Intermediaries
agents, wholesalers,
retailers, ...
End
Suppliers
customers

17
MARKET-DRIVEN MANAGEMENT (MDM) Its role in the
firm

• For a firm operating in a market economy, the
  role of MDM is to design and promote, at a
  profit, value-added solutions to people and
  organisations problems.

18
2. How to create customer value? Refer to
customers generic needs and to the
customer mental virtual market
19
THE VALUE APPROACHFROM THE CUSTOMER VIEWPOINT

• What the customer buys and considers value is
  not the product, but the result or the service
  provided by the product.
• The result sought by customers correspond to a
  generic need which is stable over time.
• Technologies are fast changing, while generic
  needs remain unchanged.

20
WHAT BUSINESS ARE WE IN ?Examples of generic
need definitions

• We (Tetrapak) are selling liquid food
  conservation" solutions (...and not carton
  containers).
• We (Automatic Systems) are selling "access
  control" solutions (...and not gates and doors).
• We (General Motors) operate in the personal
  mobility market arenas (and not simply in the
  car market).
• We (IBM) are selling global networking
  capabilities ( ...and not only personal
  computers).
• We (BP) are selling integrated energy assurance
  ( and not simply oil, gas and lubricants).

21
THE CONCEPT OFVIRTUAL MARKET

• 1.To achieve the generic result sought, customers
  engage in different activities, directly or
  indirectly related to the desired outcome.
• 2. A mental virtual market regroup all the
  activities undertaken by customers to achieve a
  specific generic result.
• 3. Thus, a virtual market represents an
  end-to-end temporal sequence of logically related
  activities in the cognitive space of customers.
• .

22
(No Transcript)
23
EXAMPLE OF THE DANISH LEGO COMPANY(1)

• Consider Lego, the Danish toy company, In 1995,
  it had a worldwide construction toy market share
  of 72, in Europe its market share in that
  category was over 90.
• But children were spending more spare time with
  computers, video games and television than with
  traditional toys.
• So while Lego had been gaining market shares,
  toys in general and construction toys in
  particular had been losing their share of
  childrens spare-time activities

24
EXAMPLE OF THE LEGO COMPANY (2)

• The need addressed by Lego, the Danish toy
  company, is family edutainment.
  (education-entertainment) and not
  construction-toy market.
• The generic need is defined as ...having fun and
  exercising the mind
• The Lego virtual market is a convergence of toys,
  education, interactive technology, software,
  computers and consumer electronics.

25
CHARACTERISTICS OF A VIRTUAL MARKET

• 1. In a virtual market, the activities
  generally cut across traditional industry and
  product-market boundaries and are not necessarily
  in the core business of the firm.
• 2. Virtual markets absorb a higher proportion
  of customer spending than a specific
  product-market, and represents a higher market
  potential.
• 3. Internet information technology makes the
  objective of addressing virtual markets
  achievable.

26
EXAMPLE OF VIRTUAL MARKET (1)

• To achieve the home ownership generic need,
  customers might engage with contractors,
  realtors, insurance companies, mortgage firms,
  removal companies, telecom, interior designers,

27
EXAMPLE OF VIRTUAL MARKET (2)

• In the personal mobility virtual market, in
  addition to car ownership, related activities
  cover car maintenance, car insurance, roadside
  assistance, emergency services dispatch, route
  support, stolen vehicle location, .

28
FROM THE VIRTUAL MARKET TO THE META MARKET

• A meta-market is created when the cognitive
  associations between these activities are
  reproduced in the physical market place, thereby
  streamlining customer activities and providing
  them with seamless experience.

29
CREATING THE META-MARKET The home ownership
virtual market
The cognitive space of the potential customer
The cognitive space of the potential customer
Negotiation and
Insurance and
Repairs and
Negotiation and
Insurance and
Renovation and
Information
Information
The purchase decision
The purchase decision
financing
maintenance
Reselling value
financing
maintenance
decoration
search and evaluation
search and evaluation
Need of the potential customer
Need of the potential customer
To buy a new car
Home ownership
Removal companies
Real estate agencies
Banks, mortgage firms
Insurance brokers
Painters and interiors designers
Insurance companies
Financing
Garages and
Cars builders
Car dealers
and brokers
mechanics
The global supply
The industry supply
30
META-MARKETSManagerial implications

• 1. Do not define your reference market in terms
  of product categories.
• (cars, metallic gates, detergents, toys)
• 2. Refer to the result or the generic outcome
  customers want to achieve.
• (personal mobility, access control, home
  care, edutainment,)
• 3. Identify all the activities that, from the
  customer point of view, are part of the virtual
  market.
• 4. Create the reference meta market by
  reproducing in the physical market place the
  mental associations made by customers.
• 5. Present the total solution customers seek.

31
BENEFITS OF THE META-MARKET CONCEPT

• 1. The concept is perfectly aligned on the
  customer views and therefore facilitates
  communication.
• 2. The revenue potential of a meta-market is
  always larger than the discrete product-market.
• 3. It enables the firm to offer a total
  solution to customers thereby building
  exclusivity, loyalty and trust.
• 4. It helps identifying growth opportunities
  in activities directly or indirectly related to
  the core service.
• 5. It helps identifying who are the indirect
  (or substitute) competitors.

32
3. How customer orientation leads to growth
opportunities? Analyze the customer
activity cycle
33
THE ACTIVITY CHAIN CONCEPT

• A virtual market is a sequence of logically,
  directly or indirectly, related activities
  customers engage in to achieve a specific
  outcome.

34
THE ACTIVITY CHAIN CONCEPT

• Pre, or before when customers are deciding what
  to do to get the result desired.
• During When customers are doing what they
  decided on.
• Post, after when customers are maintaining the
  result, reviewing, renewing, extending, upgrading
  and updating

35
THE PRIMARY ACTIVITY CYCLE
Before customer is deciding what to do
Post Customer is keeping it going
During Customer is doing it
Customer- Activity cycle
36
STRUCTURE OF THE ACTIVITY CHAIN

• PRIMARY ACTIVITY CHAIN
• A sequence of logically and directly
  related activities customers engage in to achieve
  a specific outcome.
• (Visiting a car dealer on the car
  ownership chain is a primary activity)
• ADJACENT ACTIVITY CHAINS
• A sequence of logically but indirectly
  related activities engaged by the customer in its
  search of the problem solution.
• (seeking car insurance quotes is a
  complementary activity that falls in a adjacent
  chain)

37
The Growth Opportunity Matrix
Adding new activities
1. Primary chain extension
3. Adjacent chain broadening
How ? Type of growth
4. Adjacent chain reconfiguration
2. Primary chain reconfiguration
Reconfiguring existing activities
Primary activity chain
Adjacent activity chain
Where ? Focus on growth
38
PRIMARY ACTIVITY CHAIN EXTENSION
Moving along the customer activity chain by
adding new services
39
THE CUSTOMER ACTIVITY CYCLE Search for value gaps
Before customer is deciding what to do
Value Gap
Post Customer is keeping it going
During Customer is doing it
Customer- Activity cycle
Value Gap
40
PRIMARY ACTIVITY CHAIN EXTENSION

• Can services be added that precede the sale of
  the core product?
• Can services be added that follow the sale of the
  core product?
• Can services be added to accompany the product?
• Can the product be augmented with network based
  services?
• Can the product be updated with services ?

41
The Dutch Construction Group Heimans N.V
Before Customer is deciding what to do
Value gap Project development
During Customer is doing it
Customer Activity cycle
Post Customer is keeping it going
Core business Construction capacity
Value gap Maintenance activities
42
2. PRIMARY ACTIVITY CHAIN RECONFIGURATION
Changing the structure of the primary chain by
shifting the boundary between the activities
performed by the customer and by the firm."
43
2. PRIMARY ACTIVITY CHAIN RECONFIGURATION

• Can customer burdens involving customization be
  reduced?
• Can customer burdens involving product storage be
  reduced?
• Can process expertise be leveraged?
• Can customers inventory control and stocking
  processes be replaced?
• Can processes unrelated to customers core
  competences or strategic objectives be taken
  over?

44
3. ADJACENT ACTIVITY CHAIN BROADENING

• Introducing new services, not typically
  part of the primary chain, but closely associated
  with it.

45
3. ADJACENT ACTIVITY CHAIN BROADENING

• Can products become platform for embedded
  services?
• Can the existing customer base be rented?
• Can the existing customer interface be leveraged?

46
4. ADJACENT ACTIVITY CHAIN RECONFIGURATION

• Taking charge of activities in an adjacent
  chain.

47
4. ADJACENT ACTIVITY CHAIN RECONFIGURATION

• Can services be added to integrate complementary
  customer activities?
• Can services be added to leverage the brand?
• Can services change the way customers acquire
  products?

48
MANAGING THE RISKSThree types of risk

• 1. CAPABILITY RISK
• 2. MARKET RISK
• 3. FINANCIAL RISK

49
1. CAPABILITY RISKS

• Can we execute and deliver?
• Do we have the organizational culture to sell
  services?

50
2. MARKET RISKS

• Will customers adopt the service provided?
• Are we credible as a service provider among our
  customers base?

51
3. FINANCIAL RISKS

• Can we make money?
• Is the initial cost of development not too high?

52
4. How customer value generates shareholder
value? Analyze the customer response chain
53
Customer value triggers a chain of effects
Perceived value
Satisfaction
Trust
Affect
LOYALTY
54
TRUST AND AFFECT

• TRUST
• The willingness of the customer to rely on the
  ability
• of the brand to perform its stated function.
• AFFECT
• A brands potential to elicit a positive
  emotional response
• as a result of its use.

55
LOYALTY BEHAVIORAL AND ATTITUDINAL

• PURCHASE LOYALTY
• Repeated purchases of the brand
• ATTITUDINAL LOYALTY
• A dispositional commitment in terms of some
• unique value associated with the brand

56
The Satisfaction
-
Loyalty Relationship
PURCHASE LOYALTY
100
Highly competitive market
Low switching costs
Many substitutes
50
0
5
2
3
1
4
SATISFACTION
1
completely dissatisfied
5
completely satisfied
57
Impact on the Economic Performance
Customer value (utilitarian and hedonic)
Brand trust
Purchase loyalty
Market share
Brand affect
Attitudinal loyalty
Relative price
Brand strengths (differentiation and share of
voice)
58
NET PROFIT CONTRIBUTION (NPC)
Variable cost per unit
Price per unit
Marketing expenses
Market share
-
Market demand
-
NPC
x
x
59
NET PROFIT CONTRIBUTION (NPC)
Strategies to target the virtual market
Strategies to increase value for customers
Variable cost per unit
Price per unit
Marketing expenses
Market share
-
Market demand
-
NPC
x
x
Strategies to increase market share
Strategies to increase marketing efficiency
60
CONCLUSIONS

• 1. Market-driven management implies
  culture,analysis and action. In the global
  economy, being action-oriented in not enough.
• 2. Customers are looking for the total
  solution of their problems and the firm should
  target the customer mental reference market .
• 3. Referring to customer mental virtual
  markets offer to the firm attractive growth
  opportunities.
• 4. Customer value generates satisfaction,
  trust and loyalty, thereby creating shareholder
  value.

61
BIBLIOGRAPHY

• J.J. Lambin (2000), Market-driven Management,
  London, Palmgrave Macmillan. See also the Russian
  translation, Saint Petersburg, Piter 2004.
• S. Vandermerwe, (2000), How Increasing Value to
  Customers Improves Business Results, Sloan
  Management Review, Fall.
• A.Chaudhuri and M.B. Holbrook, (2001), The Chain
  of Effects from Brand Trust and Brand Affect to
  Brand Performance the Role of Brand Loyalty,
  Journal of Marketing, Vol.65, April.
• M. Sawhney, S. Balasubramanian and V.V
  Krishnan,(2004), Creating Growth with Services,
  Sloan Management Review, Winter.