Technology and telecommunications companies have, for too long, relied on three increasingly obsolete business principles. That population expansion will ensure their growth, that R&D investment will protect their futures and that creating uniqueness in their offers will insulate them from competitive forces.
However, this apparent [yellow brick] road to success has resulted in some high profile casualties along the way and in the technology and telecommunications sector, where obsolescence, disruptive technologies and hypercompetition are a constant threat, the risk is even more potent.
Consider Blockbuster. More than a decade ago its market for home movie rentals peaked. It had 9,000 stores and 60,000 employees, and it also turned down the chance to acquire Netflix, just a start-up at the time, for US$50m. For years, Blockbuster relied on population growth and cheaper access to home video equipment to develop its market. It innovated in this insular world, expanding geographically and consolidating distribution networks. It also built uniqueness around the size of its inventory and licensing agreements (and therefore customer choice). But it neglected customer demand for distribution and pricing convenience; both of which were exploited by Netflix (now valued at $20bn).
Blockbuster, like many others companies focused solely on the needs of itself, of converting inventory into cash and through generation of profit via operational efficiency. It was focused only on protecting its own market and not about servicing the needs of a changing customer base. Put another way it led with a sales culture concerned only with fulfilling product demand, not creating it.
Herein lies the danger for any technology or telecommunications company; and the reason why marketing (the customer and market champion of any company) must redefine itself; rejecting the role as an ancillary service to sales and engaging at board level to change an industry that’s at risk of losing focus.
A superior product won’t sell itself
Companies can too quickly becoming blinded by what they see as an indispensable product in a naturally expanding market. Little thought is given to how to expand, mature or redefine the market proactively. The arrival of a disruptive force in our industry is inevitable and companies that work in this myopic way often find themselves too slow to react to change.
Of course, the role of marketing in creating a more sustainable market through product demand and value-satisfaction is well understood. Yet it remains routinely ignored; playing a supportive role and tasked solely with working in a closed loop of product fulfillment.
And when the need to respond to margin or market erosion occurs, companies turn inward. Although not unique to the technology and telecommunications industry (but almost certainly amplified), is the focus on Research & Development as means of survival. Many markets rely heavily on R&D investment; in fact companies including Toyota, Microsoft and Samsung routinely spend over 8% of annual sales revenue on R&D. However, it’s how R&D investment is made and how it impacts the company culturally that needs careful management.
The argument that “too much R&D can be a bad thing” is a difficult one to make, especially in an industry where many of the success stories have come from companies who have placed particular emphasis on R&D disciplines and technical innovation.
However, the initial receptiveness of the market to a new disruptive idea is beside the point. Instead the concern comes from a continued misconception that a superior product will sell itself and that the key to continued growth is continued R&D. Just how sustainable this is over the long-term, as the disruptor becomes the incumbent, must be questioned in a corporate culture that naturally defaults to a position of producing “assets” rather than satisfying a customer need.
Too often marketing has no seat at the R&D table, as such the reality of the market can be ignored. Customers and markets are of course acknowledged by engineers, but so often we see business cases built not on an underlying desire to satisfy a customer demand or redefine a market but instead on the need to increase production or lower unit costs within an establish model. In fact, one could argue that a poorly managed R&D strategy actually reverses corporate and market development. Initial disruptive innovations can, and often are, built against satisfying a need; however they are then followed by a series of innovations designed only to improve the production efficiency of that product to an established market; improving a process or researching improved materials for example. While this, of course, remains beneficial its value is short-term and mustn’t come at the exclusion of addressing the wider, disruptive elements and changing customer needs that may present themselves and that marketing should assemble a business around.
Of course, none of this criticism is designed to come at the expense of any business’s core objective; to generate cash. Instead it is to reinforce the point that today, business has become dangerously short-termist by increasingly positioning marketing as an ancillary service to sales. Without a mature and enlightened marketing operation the goal of sales begins and ends with convincing a customer to exchange cash for goods. Making marketing subservient to this ignores the chance to ensure continued sustainability by understanding market nuances, creating demand and arousing customer interest.
Does business mistake operational efficiency for strategy?
Operational efficiency remains essential in achieving profitability but it doesn’t differentiate a business nor does it create a sustainable market position. A company can only truly outperform its rivals if can create a point of differentiation that can be maintained over the long-term.
Efficiency improvements in the technology and telecommunications market have helped to push lower costs and improved quality to the customer; the reduced cost of tablet and smartphone products is just one example. However, improvements are easily replicated by the competition and perhaps only give a company a window of several weeks to exploit.
As companies look to drive efficiency through outsourcing, automation or other innovations, it raises the bar for everyone competing in the market. Companies homogenize as they race to the bottom. The UK mobile market is a perfect example. As mobile operators fought to capture market share, heavy price discounting and hardware subsidies forced most to protect profitability through operational efficiencies (network sharing, outsourcing etc.). Net gains were realized only by the end-customer who benefited from greatly reduced prices. There were few competitive gains for the operators who eventually found themselves having to discount further to retain customers who’d been conditioned to associate mobile operator value with price.
Marketing’s place on the board
Relying only on operational efficiency is a mutually destructive path. Unfortunately, strategic intent has given way to the demands of the shareholder. Boards have become focused on measurable financial figures to satisfy short-term quarterly reporting and so naturally their composition is heavily steered towards directors from a financial background.
In such scenarios, customer and strategic focus can too easily be marginalized. The board’s focus becomes less about value-creation and more about managing risk. Of course there are companies that acknowledge the relationship between marketing and driving strategy across multiple functions, but scratch through the veneer and those that have marketing representation at board level remain few and far between.
There are also many companies that expertly understand value-creation and the need to build differentiation. Consider Starbucks. Its customers actually pay for inefficiency. Rather than focus only on operational efficiencies that could drive down the cost of a Latte, it focuses on a more personal, human-touch. The company has long sought to be positioned as the “third place” (home, work, Starbucks) and for many customers, Starbucks has become a hang-out, characterized not by price, but my comfortable seating, wifi and accessible power outlets.
We’ve created hypercompetion and now we fight wars of attrition
Having created our own hypercompetitive markets, the same disproportionate focus on operational efficiency (at the neglect of strategy) can lead to poor M&A practice. Forced to fighting wars of attrition, companies look to limit the competition through market consolidation.
Motives for M&A activity typically revolve around wealth transfer and three core principles; an ability to grow market share quickly, improved profitability through economies of scale and creation of a larger organization that can better access capital markets.
These motives are shareholder friendly in the short term. However approximately 50% of mergers and acquisitions fail to deliver a positive outcome over the medium term. Why? The global consultancy McKinsey suggests that companies too often focus on cost-cutting and integration at the expense of day-to-day activity. Less palatable is the notion that too many acquisitions are undertaken as a lethargic, defensive move to gain critical mass over a competitor.
Unfortunately only a few enlightened organizations can truly claim to have made an acquisition based on a desire to satisfy an emerging customer need, or to grow a new market and disrupt its own, established model. It’s not only Blockbuster’s refusal to acknowledge Netflix as a potential threat; history is littered with such examples. Yahoo reportedly rejected an offer to buy Google at a $5bn valuation (a fraction of its current value), and, although not technically an acquisition, Verizon Wireless rejected Apple advances to be the first network to carry the first generation iPhone based on Apple’s revenue share requirements not suiting the established wireless business model.
Swap brand value for customer value
Maintaining the status quo risks fostering a culture that promotes only operational focus and not market or customer-focus. Building unique and defendable market positions that drive customer value is the key role of today’s marketing functions. MBA graduates have long been taught that marketing should be a core growth-engine for a business. The reality if often very different, with marketing relegated to the position of a supporting, ancillary function.
Of course the criticism goes both ways and marketers must change behavior in order to break through the glass ceiling and achieve wider board influence. Even the greatest companies would be foolish to claim that they are able to directly correlate each and every marketing dollar to financial value in a language understood by finance and operational executives. This is not a criticism of marketing practice, simply the reality that some marketing programs are more difficult to tie to customer lifetime value than others. It’s these grey areas of marketing that make it hard for chief executives and chief financial officers to break away from treating marketing as unaccountable spend with an unclear relation to profit.
And so as marketers, our focus must be on creating clear and long-term value creation that creates demand and builds differentiation ahead of operational efficiency. Of course, our operational teams must still execute on the non-strategic, day-to-day activities, but as marketing leaders we must become broader customer-champions that live-up to what the latest round of MBA graduates are being taught. Too often we lose customer contact and our ability to empathize with their needs. Our influence must dispel the business myths that risk damaging our long-term survival and we must clearly demonstrate why value goes beyond financial improvements. It’s time to tear-up the Yellow Brick Road an find a better route.
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