MARKETING MATERIAL
7220 EMAC97 - Rule of History
THE RULE OF HISTORY - A REPLACEMENT FOR THE BOSTON STRANGLER
David Mercer
(Centre for Strategy and Policy, Open University School of Management, UK[1])
1. INTRODUCTION
A number of commentators have recorded the changing links of suppliers with their customers and have, in particular, commented on the emergence of 'relationship marketing'. There has been less discussion about what this means, in particular in terms of long-term investment in such relationships, for marketing theory in general. The change from an emphasis on static, current positions - implied in much of the existing theory - to more dynamic, long term investments - implicit in building t(ese relationships - has yet to be reflect%d by the main elements in marketing theory. This paper, therefore, looks at some of the major theories from one part of marketing - 'portfolio management' - in the light of these developments.
It starts with a brief description of relationship marketing in the context of investment (using two new models as the framework for this). It then revisits the Boston and GE Matrices, before suggesting a new model (based on investment) to replace these - finishing with a practical rule of thumb which may be more helpful to managers.
2. BACKGROUND
'Relationship marketing' has been one of the most important developments in marketing strategy in recent years. This has been particularly evident in the personal selling context, especially in the case of the complex sale ,where it is best illustrated by the Partnership Triangle:
This diagram usefully emphasises several of the key investments in such a partnership:
THREE WAY INVOLVEMENT - the customer is formally involved with the organisation as a whole, and the relationship with that corporate body - typically enshrined in the formal relationship with the sales professional who is the formal contact - is clearly important, especially in terms of the mutual trust. But the customer's contacts overall are mainly informal ones, with that sales professional but also with a range of staff throughout the vendor's organisation. It is often these 'staff' relationships, built up (invested in) over time, which are most important to, and have the most impact upon, that customer. This is an aspect of the relationship, together with the related investment, which is often forgotten.
INTERNAL STRESS - in turn, the tension between these formal (organisational) and informal (staff) relationships often leads to tension within the vendor organisation - which may be communicated to the customer, with distinctly unwanted results. It takes time (and investment of resources) to stabilise the position.
POWER LIES AT THE BASE - it is no accident that in the diagram the most direct relationships, and the heaviest weighted ones, are at the bottom of the pyramid (triangle); between the equals who interact on various issues from both sides. It is they, and not the senior management, who will ultimately make the partnership work or fail. This is where the investment process takes the longest time (and the greatest resources) to show results.
3. EXISTING MODELS OF MARKETING INVESTMENT
3.1 THE CUSTOMER FRANCHISE
In the different context of consumer markets, one of the most positive ways of consolidating the consumer as the most important focus of the organisation is to look on this relationship, therefore, as a prime asset of the business; one that has been built up by a series of marketing investments over the years As with any other asset, this investment can be expected to bring returns over subsequent years. On the other hand, also like any other asset, it has to be protected and husbanded. This 'asset' is often referred to as the 'customer franchise'.
Thus, at one extreme it may come from the individual relationship developed face to face by the sales professionals and support staff. At the other it is the cumulative image, held by the consumer, resulting from long exposure to all aspects of the product or service, and especially to a number of advertising and promotional campaigns. In some markets the customer franchise may be so strong as to be exclusive; in effect giving the supplier a monopoly with those customers. The customer franchise is, therefore, a very tangible asset, in terms of its potential effect on sales; even if it is intangible in every other respect.
In terms of investment by the company, on the other hand, the Customer Franchise is, to all practical intents, the external alter ego of the brand. The brand is how the producer typically sees the (internal) investment. The Customer Franchise is the outcome of that internal investment; the counterbalancing entry with the customers.
The special characteristics of this investment are shown by the hypothetical 'customer franchise loop' below;
The value of the Customer Franchise can be thought of as starting slowly, but then rising rapidly before it saturates. When investment is removed it follows a similar pattern, but falls more rapidly than when it rose; so that a gap appears between the two curves. This gap, 'hysteresis', represents the cost of failing to maintain the investment. If investment is removed for a significant time this cost could be very high.
3.3 THE RULE OF 123
The underlying effect of this curve is, however, especially evident in the power of the brand leaders; those in the top three slots - and especially the brand leader itself. In FMCG markets, for instance, the brand leader often holds 40% of the overall market or more. This level is usually highly profitable; since in addition to the high value of sales generated, its strong position in the market normally allows the setting of a higher price (and hence significantly higher profit) - and economies of scale are possible (not least in terms of promotional and distribution costs).
The profitability that a brand leader commands usually offers, therefore, ample justification - especially over the longer term ( where such brands can easily maintain leadership for decades) - for the high levels of investment which are needed to achieve this position. The Japanese corporations, who are willing to make such long term investments in markets, have been especially well rewarded for their efforts.
The most stable, competitive markets are typically dominated by 2 - 3 brands; between them accounting for around 70% of the total sales. For maximum stability the ratio of share between these should typically be that the brand leader should hold twice the share of the second and three times the share of the third - this is 'The Rule of 1:2:3'.
As with many of our most successful new concepts, it is only a rule of thumb; so the exact ratios vary from market to market, and even the average may vary somewhat - depending upon what parcel of products is examined. The Boston Consulting Group (1985), for example, also suggest that the brand leader should hold twice the share of the second brand, but they differ in detail when they suggest that it should hold four times that of the third brand (giving a rule of 1:2:4!). But the general principle of the Rule of 1:2:3 seems to hold.
3.4 THE POWER DIAMOND
To allow for the investment implications of these findings, some changes can be made to existing theory by the addition of new factors. Thus, in terms of competitive advantage, the benefits conferred by the customer franchise (typically implemented via the investment to build a powerful brand), can be seen in two additions to Porter's model Simplifying matters somewhat, we would suggest that competitive power can be built on four (not just two) main fronts - which make up the 'power diamond':
Two of the factors, 'Differentiation' and 'Scale Advantage', are those at the heart of Michael Porter's work. The other two, 'Market Position' (reflecting the 'Customer Franchise' created) and 'Brand Investment' (representing the cumulative resource deployed) are not usually considered in competition theory. It is the total area between these (which reflects the overall power of the brand), and how the cutting edges (the corners of the diamond) are deployed in practice, which indicate how much competitive leverage the brand may be able to generate.
On the other hand, a major problem arises when we try to make similar amendments to one of the main tools for handling marketing investments taught in business schools; the Boston Matrix.
4. PORTFOLIO MODELS
4.1 BOSTON MATRIX - 'Boston Strangler'
It might seem fortunate that this element of theory is limited in application. As is shown by the conventional labelling on the axes above, the (upper left) quadrant, where all the action takes place, only applies to brand leaders and to a range of markets with growth rates in excess of 10% per annum. Although it may work well in such situations where, in essence (typically as a conglomerate), you are balancing cash flow across a range of market leaders in quite distinct markets (and, most usefully, in high-tech markets which are growing rapidly), it clearly should be of interest to only a small minority of organisations.
Regrettably it has, like many management theories, been corrupted by later additions; aimed at making it easier to use by the less sophisticated manager. These simplifications have, though, also made it seem to be more general in application. Thus, the version which is usually taught (and certainly the one which is remembered) uses very memorable descriptions for the quadrants, which are largely unrelated to the original usage;
The danger which afflicts this gross oversimplification is that it is very seductive, not least in its concentration on current positions, and in the seduction almost all the value of the original is lost. Managers forget that the axes are quite specific and, instead, categorise their own offerings by gut-feel. As a result the positioning within the matrix reflects personal prejudices rather than (as in the original) objective facts. Worse still, what these positions mean is then distorted by the emotive labels given to the boxes. The 'Cash Cow' has to be milked. It has no future, even though, as we saw earlier with the Rule of 123, such offerings represent the future of the organisation as well as its past. Stars demand our attention, which may result in too much emphasis, especially in the short term, on investment in new products at the expense of the main strengths of the business. The practical defects of this theory have recently been highlighted by the work of Armstrong and Brodie (1994) which claimed that those who used the Boston Matrix, or were even exposed to it, were more likely to make incorrect investment decisions!
It is for all the above failings, coupled with its stranglehold on business school teaching of marketing investment, that we have referred to it - with a considerable degree of laissez majesté - as the 'Boston Strangler' in the title of this paper!
4.2 THE GE MATRIX - Three Choice Box
The GE (General Electric) MATRIX, on the other hand, is a less widely taught matrix, but one which is probably used more than others by practising corporate strategists. Like the Boston Matrix, though, it can only be used at the business unit level and above - since it is a device for managing portfolios rather than individual products or services. On the other hand, the factors it plots are more 'intuitive', and hence meaningful to managers, than those used by some other approaches, and it is less obviously tied to the short term. Thus, the vertical axis simply plots the 'product/market attractiveness'; in other words how worthwhile is the business. The horizontal axis covers 'business strength/competitive position'; what is the organisation's competitive advantage in each. In its correct usage, calculating these positions can be a long process (though, in essence, they still reflect judgements these are carefully weighted - in unsophisticated hands, however, that can lead to a false sense of security!). Thus, we prefer a simpler version, the '3 Choice Box':
For most, relatively unsophisticated, users this simpler version offers a more immediate picture. It has the great virtue that it surfaces the many subjective decisions which lie beneath the surface of the original (here only you decide where your entry lies within it - you cannot sub-contract that decision to fancy mathematics). It also highlights the fact that there is a spectrum of outcomes.
4.3 THE INVESTMENT MULTIPLIER
As we have seen, though, the most important shortcoming of these techniques, even of the GE Matrix, is that they emphasise the short-term (and operating costs). This works against our findings, which require that marketing must be seen as an investment. We, therefore, take the investment philosophy further in the new theory of the 'Investment Multiplier', our answer to the Boston Matrix (hence the Boston Strangler).
We saw earlier that the most successful brands have very long lives, and the Rule of 123 celebrates this fact since it is the normal state in stable markets (that is in markets where brand leadership positions do not change, even over the longer term). Thus a new product/service package entering the market (which, in a more positive vein than the equivalent Problem Child of the Boston Matrix, we would call a 'STARTER') can be plotted (in terms of the investment being made in it) on two dimensions; that of the cumulative investment level itself, and that of time:
If the product/service is (like the great majority) unsuccessful (called in our terminology a 'LOSER' rather than a Dog), the investment is eventually cut off and 'death' occurs (but at the hands of the product owner, not as the 'natural' occurrence predicted by the Product Life Cycle)..
If it is in the state of limbo where it is not clear whether or not it will be a long term success (though it may be one in the shorter term - the time scales involved are such that the true long-term potential may not be obvious for a decade or more), the investment will continue; until, most often, it plateaus. Thus, when it is realised that it does not after all have major potential (in view of its equivocal position, we would describe this as a 'RUNNER' rather than a Star) further investment is usually limited.
Just a few products or services will reach long-term positions, at 1 or 2 or 3, but these will be the major cash generators which drive successful organisations (and are called by us 'WINNERS', not the rather derogatory Cash Cows). Thus, eventually, the investment levels - for a successful brand - are likely to reflect its profit performance. High investment will return high profits (once again, assuming success) and lower investment lower profits. Hence, the investment graph also is a good (albeit indirect) indicator of performance.
The difference in philosophy, at this stage, is most evident in the terminology; of Runners versus Stars and Winners versus Cash Cows. We believe that Winners are to be cared for (and not Cash Cows to be milked), where Runners have to be carefully assessed (and not automatically presumed to be future Stars).
If you plot the historical performance of your current brands (allowing for them to plateau as investment is eventually matched by depreciation) it is likely that you will get a pattern such as:
This can be simplified if we ignore the cumulative figures building during the launch, and extend the plateau back to the launch time:
It should be obvious, from this, that the normal pattern is of an inverted pyramid. Our rule of thumb which encapsulates these ideas is: The higher performance brands are also the longer lived ones.
The 'Investment Multiplier' incorporates this rule of thumb by simply mirroring in the future what has happened in the past:
The 'multiplier' in this case is not that shown on the vertical axis, since it is assumed that one way or another the performance (the profit out, say) is roughly proportional to the investment put in. It is, instead, the life of the brand. The accompanying rule of thumb is that: a successful high investment brand multiplies its return by having a longer life - over which the annual returns accumulate.
We can, finally, apply the boxes equivalent to those of the Boston Matrix (with their new terminology):
This diagram stild contains the important lesson of the Boston Matrix, that of mortality. Complacency, even when you have the brand leader, is ultimately rewarded by death . More than this, though, it graphically illustrates the odds against long-term success; and the significant leverage to be gained if success can be achieved. Most important, it highlights the importance of maintaining those few winners; where the Boston Matrix, and much of marketing mythology, takes exactly the reverse view (and demands that you milk them to death!).
Even so, though it is not as complex in application as the original Boston Matrix, it is less memorable than the successful, bowdlerised (Cash Cow) version. As mentioned earlier, our experience is that the most successful descriptions of marketing practice are encapsulated in 'rules of thumb'. The advice thus given is typically stated in simple terms - with very practical implications, so that it can be easily applied to real-life situations. At the same time, presentation in this format clearly warns the user that this is only an approximation.
5. THE RULE OF HISTORY
So, in the context of the 'investment multiplier', a more general approximation - or practical rule of thumb - can be derived. This is the 'Rule of History';
THE HISTORY OF A BRAND IS THE BEST INDICATOR OF ITS FUTURE. IF IT HAS BEEN A HIGH PERFORMER, IT WILL CONTINUE TO BE SO. IF IT HAS BEEN LONG-LIVED, IT MOST PROBABLY WILL HAVE A LONG LIFE IN THE FUTURE TOO.
This simple rule of thumb suggests results which are almost exactly the reverse of what existing models - especially the Product Life Cycle and the bowdlerised Boston Matrix - would predict; yet this rule of thumb more accurately reflects the reality as we have observed.
REFERENCES
Armstrong, J Scott and Brodie, Roderick J (1994), Effects of Portfolio Planning Methods on Decision Making: Experimental Results, International Journal of Research in Marketing, Vol 11
Henderson, Bruce D (1985) "The Rule of Three and Four" The Boston Consulting Group
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