Imperial Strategic Management.pdf

Session 1 : 11/09/2024 How to think about strategy What is strategy - Not a plan; strategy is more intangible than a specific plan - A way to approach challenges - Not much analytical, more on a creative side - Business strategy defined: - Guidance, direction (e.g. change of direc...

Session 1 : 11/09/2024 How to think about strategy What is strategy - Not a plan; strategy is more intangible than a specific plan - A way to approach challenges - Not much analytical, more on a creative side - Business strategy defined: - Guidance, direction (e.g. change of direction of the company) - Plan comes after strategy is created What is strategic management - Strategic management = strategy - Strategy ≠ planning - Coherent guiding policy, set by CEO, ultimately drives actions - Always starts with a challenge - Strategy formation does not usually start with a long term goal - Companies start with fundamental challenges - How comp comes up against a problem might not always in acc with the long term goal Exercise: match ambition to the company 1. To create a better everyday life for the many people → IKEA 2. When it really matters → AlixPartners (represent why might buy them) 3. To inspire humanity - both in the air and on the ground → jetBlue airways 4. To accelerate the world’s transition to sustainable energy → TESLA 5. To elevate the world’s consciousness →WeWork Note: Big corporations have lots of goals which are the basis of their strategies The single company ambition/goal/vision/mission almost always emerges from corporate communications/PR to post-rationalise the direction o the firm taken - It is NOT the first step in “imagining” a new strategy - Nor is a SWOT analysis! - Starts with the goal → where to play (ie which geographies, which customer segments – do market sizing) → how to win - Where to play usually at the same time as how to win Strategy cascade GOAL → Where to play → How to win → resources required - Usually not started with goal, but are the Challenges that drives decision - 1. Where to play & how to win - Find new opportunities, new markets, do market sizing - Do profitability analysis - 2. Work out what resources are required and what systems need - 3. At the end, marketing department comes up with ambition/goal/whatev that rationalize what you’re doing - Companies are constantly adapting to market realities, industry realities, competitor realities → goals are set at the end Strategy is responsibility of the CEO; the CEO is held accountable by the shareholders to deliver value - How to create winning strategy Warning signs of bad strategy – examples - Focusing on short-term profits or profits of any kind, - Profit = output measures - Profits should not be featured in the strategy. The strategy will generate revenues and drive costs. Ultimately if successful, profits will come in the end - not being prepared to take risks, - Not flexible to changes - Strategy doesnt allow u to adapt to data/market could lead u to the wrong path - Underestimating customers’ needs/competitors/shareholders’ expectations - Bad market research - More buzzwords than clarity - Unwillingness to invest significant enough resources to reinvent the business model in response to market/industry changes - Internal stakeholder priorities placed ahead of customer needs - Belief that competitors cant/wont respond - Financial goals as a proxy for strategy - E.g. want to double the profit/double sizing of business is not a good strategy, it’s an outcome; making financial goals a strategy makes the company forget about other important things e.g. customers (as financial goals makes the company focus on only on themselves) - Financial goals is an output measure not an input Strategy is not a tick-box exercise nor is it merely a process - Strategy is a theory to be tested. A set of interrelated and powerful choices that (may) position a firm to win - Strategy results from tough choices and what to or not to do - High quality, granular, thinking on where to pay and how to win should drive resource allocation and action plans - Overwhelming force applied to a small number of priorities often beats “initiative overload”, in my experience Strategy is…choice. Strategy is not a long planning document; it is a set of interrelated and powerful choices that positions the organisation to win*. In pursuit of the problem to solve, or ambitious opportunity**:  1) Where will we play? 2) How will we win where we have chosen to play? 3) What capabilities must be in place to win? 4) What management systems are required? What scenarios do each of these three points represent? (1) Attractive market/attractive category, BUT firm struggles to win/compete in the market (ie there’s barrier to entry e.g. no scale/resources to compete in) (2) Relatively low barriers to entry, fairly attractive (3) High ability to compete but not very attractive - E.g. food industry / street vendors - Low barriers to entry, difficult to scale - Market flooded with competitors = chance to get market share is low/ more challenging → difficult making money How best to demonstrate good vs bad strategy? Grocery retail is a great place to start when exploring strategic choices and shifting business models Grocery retail has always been a competitive battlefield Covid-19 was a catalyst for incredible innovation Legacy (store) business models were challenged – and now (perhaps…) seem to be rebounding $billions in capital have been invested in new business models We will look back on “Pre-Covid” vs. “Covid” vs. Post-Covid” as a defining period in international grocery retail Carrefour 2022 Summary of strategies 1. Leading the Food Transition for All - focusing on sustainable, responsible, and transparent food sourcing and consumption. - incl initiatives to enhance food quality, reduce environmental impact, and cater to increasingly health-conscious consumers. 2. Four-Pillar Strategic Plan The transformation plan is built on four main pillars: I. A Simplified and Open Organisation: Reduce hierarchical levels, centralize scattered head offices, and eliminate non-essential projects to improve operational efficiency and responsiveness. ii. Improved Productivity and Competitiveness: enhance cost discipline and resource allocation to boost competitiveness. Actions: Implement strict cost management, optimize purchasing processes, cut unproductive costs, and exit underperforming stores. Carrefour aims to save €2 billion by 2020 through these efforts. iii. Setting Standard in Omni-Channel for customers across all formats (online & in-store). - Actions: Strengthen e-commerce capabilities, improve the hypermarket format, and expand convenience stores. 3. Serving Food Quality: Focus on fresh produce, expand organic offerings etc 4. Commitment to Environmental and Social Responsibility - emphasizes sustainable packaging, reducing food waste, and supporting local agricultural production etc 5. Strategic Partnerships - Carrefour plans to collaborate with major tech and retail companies, such as Tencent in China, to leverage digital expertise and enhance customer experiences in new and existing markets. Analysis - What problem is the CEO seeking to solve 1. Digitalization of retail industry - More demand for e-commerce - Customers’ expectation shifted → comp needs to adapt 2. Price discounting for the company (lower price) 3. Industrialization 4. Profit margins - Declining revenue and profit on several years - - Low profit = no money to re-invest (cant keep growing unless reinvest) 3Cs of strategy: Customers, Competitors, Company UCLA organisational theorist (and McKinsey alum) Kenichi Ohmae’s concept of the 3Cs can be used to test a strategy - The resources of the company should align to customers and competition - Customers: not every segment wants the same thing Strategy is about decisions and often, trade-offs - Customers - Competitors - Differentiation: provide better services/quality/offer at a lower price - Cost (price) leadership:  - How to add value to customers + cost incur - What is desirable/beneficial for the comp + cost incur - Cost incur to do better than competition - Company - Have to think about the value the firm can add to customers and the cost u incur Exercise: assess the Carrefour 2022 strategy: - Highlight what you think were Good and Bad elements - Good - - Bad - Doing too much of everything at the same time - Digitalization should not only be focused on home delivery. - Good strategy but since this is carried on for 5 years = not good enough - Strategy itself should have been better - Partnerships with big ass brands e.g. Tencent from China = China is like another world, no one outside is thinking about going there - Tencent was very popular: therefore news worthy, PR worthy but in terms of making material differences to customers, allowing them to do deals that will allow them to give out lower prices to compete with discounters = not so much - Selling high-end stuff, u need ppl in stores - Too complicated: in-store and digitalization would be very difficult to execute - Strategy unclear, where to play unclear, how to win unclear - Should prioritize where to play - Suggest what Carrefour could have done instead (with the benefit of hindsight) - Why lecrec did better? E-commerce Ocado - multi-decade fixed cost investment - Automated logistics = very low cost (low variable cst level) - High cost at fixed warehouse - Altho its losing → still a good strategy: customer acquisition cost could be difficult to implement Like independent contractors Strategic choices on e-commerce E.g. Ocado switched from grocery retail to automation of logistic solutions (tech) → much higher barrier to entry, and sold th tech to others, more ROI A strategic choice for a retailer – the business model Variable cost - Local area served by pick-from-store - Human workforce - Product rate limited to store stock Fixed cost - Dedicated sites on a large scale - Highly automated robot operations - Huge rage of products available - Ocado = tech business selling warehouse solutions to other businesses. Making money from selling technology E-commerce can be more expensive to stores - Margin is better in-stores - No space to scale e-commerce / Click and collect service = not worth doing it Ocado delivers food for u  small local warehouses + avg delivery (high variable cost, some fixed cost) + dont own products, brought products into its warehouses + their own delivery - Later on not enough demand + have to stock loads of stuff + working capital costs very high, lots of fixed costs and variable costs - → in terms of strategic choices, good strategy thinks about whether or not its what customers expect this month + whether comp has the capital in doing it My 7 Tests of Strategy – once the draft document emerges 1. Have we identified the key challenge(s) to solve with this strategy, and is the overall resolution coherent across all its constituent parts? - Have clear business model e.g. ocado 2. Are we targeting right markets and categories, with future growth potential ("where to play")? 3. Do we have a highly differentiated offer or a cost leadership position ("how to win") that will achieve competitive advantage in our chosen fields of play? 4. What business model(s) will deliver the strategy and what resources will we require: assets (people and capital), capabilities (skills, knowledge), systems (structures, culture and technology)? - Note: If undertaking Corporate Strategy, add: "Do we have the right portfolio of businesses?" 5. Are we exploiting external resources (suppliers and partners) to their full potential? 6. Is the strategy sufficiently flexible, and if not, do we believe the benefits outweigh the risks? - ​tesco vs ocado - Tesco with variable cost solution model + in-stores = flexibility helps surviving in covid, labour provides flexibility - Altho lower margins its cus of more variable costs - While Ocado has fixed model = less flexibility = less capacity to scale 7. Are we realistic about the cost to change, and the time it will take? Recommended readings The Crux. Richard Rumelt or Good Strategy, Bad Strategy: the difference and why it matters. Richard Rumelt Playing to Win: How Strategy Really Works. Roger Martin & A.G. Lafley Contemporary Strategy Analysis. R.M. Grant A Plan is Not a Strategy. Roger Martin https://www.youtube.com/watch?v=iuYlGRnC7J8 Follow Roger Martin's Playing to Win blog series on Medium Follow Scott Galloway’s blog series No Mercy No Malice  Session 2: 13/09/2024 Business models: Platforms & Flywheels Characteristics of a Platform Characteristics of Other business 1. Value is created by people outside of its organisation 1. Value chain business: value is created by people - No value creation by itself whatsoever inside of its organisation (by itself) 2. Network effect - Doing everything by itself; having its own 3. Intermediation: merely a middle man (brokerage value chain 2. Success depends on itself services) - Matching: putting ppl in touch w others & allow them to create value, not creating it by itself 4. Scalability 5. Flywheel effect For platforms, scale&users is all that matters: more users = more data = more valuable What is a platform 1. Youtube - Its success depends on external creators creating contents on its platform - Platform: creates envi that others can create content - Having billions of content creators ; creators’ content scales is huge (growth comes from its users) 2. Amazon marketplace: merely a middle man 3. AWS (Amazon Web Services) - Providing infrastructure for others to rent - As they provide the infrastructure, they’re delivering the value themselves (more like supplier-customer rel) What is not a platform 1. Netflix: - Create its own content, not having users on its platform creates the content - value is created by ppl w/in its org generates content or buys it from someone else - Buying someone elses’ content ≠ platform → ppl already created the content not bcause its platform, netflix just made those contents available on its platform - Success depends on its internal - Merely having subscribers doesnt make it a platform 2. Hellofresh: meal delivery service that provides fresh ingredients and recipes to your door - having its own value chain which creates value to customers 3. AWS (Amazon Web Services) - Providing infrastructure for others to rent - As they provide the infrastructure, they’re delivering the value themselves (more like supplier-customer rel) - Would be a platform if: match other storage with people who is in need of access to data storage/centers where AWS acts as a broker What makes a good multi-sided platform (MSP) (Jonathan A. Knee) - Where values is created by people outside of its organisation 1. Network effect: - The network effect is a business principle that illustrates the idea that when more people use a product or service, its value increases. - Every new participant increases the value of the network to existing participants - Youtube: the more ppl create content on its platform, the more value (worth 400bn cus 400bn ppl use it) - facebook/meta: valuable cuz of billions of users r using the platform - For platforms, users is all that matters! users attracts revenue) And data! (makes it valuable) - Example: social network platforms - The network effect significantly applies to digital platforms, dating all the way back to the internet itself. When the internet became more widely used, more people relied on it to conduct work, deepen personal connections, and for research and other functions. - What makes some platforms better than others - Network effects that reinforce a market’s winner-take-all tendency - Industry landscape also plays a role e.g. airbnb likely to enjoy more benefits than uber - Core competitive advantage - 1. Minimum Viable Market Share - Ie Minimum market share at which the network can achieve financial breakeven - Company must have 1) product/service complexity 2) fixed-cost requirements - Product complexity - Uber e.g. ability to deliver a car within 3-5 mins - Airbnb e.g. more listings + property variety + location + amenities - fixed cost req: more fixed cost = more economies of scale (cost adv when prodctn becomes efficien) + higher scalability - For uber and airbnb: financial viability is in its function of local density: available drivers and available property inventory - 2. Customer captivity: Nature and durability of the customer relationships - = ability of a company to retain its customers and prevent them from switching to competitors due to factors like convenience, high switching costs, network effects, loyalty programs, or a superior customer experience. - Captivity achievable thru service quality, offerings, verification of nuanced counterparty credentials, seamless integration of critical data - E.g. Airbnb: captivates thru varieties of factors that shapes the decision to use service (stay in stranger’s house) – experience of others who have used homes (very valuable in terms of trust) - E.g. Uber: not as strong as Airbnb – drivers already driving multiple platforms + inventory availability advantage (lots of listing ie lots of choice for users)  - 3. Extent to which the data generated by the network facilitates product an pricing optimization - Value of the Data = most valuable thing for network-effect businesses - E.g. airbnb: valuable data is the reviews from users - critical to decide whether to stay (whereas Uber, users dont look for reviews to use the service) Network-effect companies arent always great if they contain absence of some characteristics (e.g. fixed-cost scale and customer captivity) - Digital platforms are hard to build and maintain - Digital platforms business have fragile barrier to entry Example of MSP business model: linkedin Subsidy Side (Users/Job Seekers): subsidizes users, job seekers, by allowing them to create profiles, connect/message/interact with others, and access basic services for free. → builds a large user base, which in turn attracts paying customers (employers and recruiters). Monetized Side (Employers/Advertisers): charges employers, recruiters, advertisers for premium services like job postings, premium subscriptions, advanced analytics, advertising options. This monetized side benefits from the large user base on the subsidy side. Linkedin games: - used word games as marketing tools e.g. included the world deadpool → ryan reynolds retweeted - → a subtle example of money side Platforms in B2B: Cluster market: saw a need where researchers/scientists to get access to equipments → Matching unused equipment in labs w ppl who want that equipment Data they got: where all equipments r located in UK, which equipment is more in demand, who r the main users, kinds of research being done Shared asset models depend on networked markets and platform solutions Ask: what value-add for the user/customer makes a platform “sticky”? - FOMO - Causes u more opportunities to leave than to stay makes it sticky - Lock-in effects - E.g. Bookingsystem on the clustermarket- makes the platform sticky - booking system allows users to schedule and reserve equipment, lab space, and other scientific resources in real time. usage conflicts are minimized. - → provides convenience in matching, helps simplifying the use of the platform - The booking system created “lock-in effect” ie the effect where users become dependent to the platform: - Dont wanna replace it with smth else cuz it’s already convenient Note: difficulties of running a platform: monetizing it (harder than getting it up and running!) The flywheel effect - A flywheel strategy is a set of logically interlinked entities and/or actions that enable a company to achieve growth through building momentum → Cycle of how companies create value - The flywheel effect makes business build momentum, accelerates, grows almost by itself - Flywheel effect helps accelerate business growth - Not only accelerate themselves but also have a positive effect on other flywheels within comp/group. - Flywheels can be applied to simple and complex firms Breakthrough moment to achieve flywheel effect: how? → 3 areas to focus (Jim Collins) 1. Disciplined people: having the right leader + having right ppl work for ur company 2. Disciplined thought: - Confronting the brutal facts about a situation and rectifying it. - Hedgehog concept: Deciding what ur comp does that is the best in the world (or country) & sticks with it 3. Disciplined action: - Culture of discipline: Fanatical adherence to the Hedgehog Concept and refusing to do anything that is not in line with this or pursue other opportunities that can divert the company. - Technology accelerators: look for new technologies that can increase performance Example: amazon and uber flywheels Amazon marketplace: customer exp -> traffic -> more sales -> lower prices Customer experience is key (#1 principle) -> Excellent customer experience drives traffic to Amazon.com. -> Sellers are attracted to put their products on Amazon.com. -> This would create a greater selection of products for customers. At the same time the increased sales on Amazon.com allows Amazon to lower their cost structure and reduce prices. This, along with customer experience, increases the traffic on Amazon.com. Amazon Web Services (AWS) 1. AWS launches in South Africa and, based on their performance elsewhere, attracts partners. 2. These partners have employees who get AWS certified developing skills within the country. 3. Customers adopt AWS. In South Africa both Standard Bank and Vodacom have announced in the last few months that they are adopting AWS. 4. This leads to more demand for skills, which attracts more companies to become partners or existing partners to grow their skill base. Uber: - If it moves into geographic location → ppl wanna use - Snowball effect: The more coverage, the more drivers there will be, the faster the pickup will be → the more people will use uber → less driver downtime → lower price due to more utilisation → more demand - To create snowball effect: Uber paid thousands of ppl to drive around london to increase supply/demand - more demand more supply - Uber also doesnt cost much to grow - providing same service + needs bigger server to deal w volume - Drivers take all the risk Platform problems: supply and demand not matching Flywheels delivered rapid growth for tech businesses in recent years - Highly valued digital businesses seeking to disrupt adjacent categories - ▪ Low marginal cost to deliver offerings to consumers (at a variety of price points) funded by low cost of capital since 2008 - ▪ Flywheels and hyperscaling became the strategy of choice for US-based and China-based mega firms (e.g., Meta, Tencent) - ▪ Single-brand entities such as Facebook, Google quickly became complex corporations (Meta, Alphabet) What stops flywheel effect: the Doom Loop (Jim Collins) - The single biggest way to stop the momentum of a Flywheel is to change direction  - E.g. comps that changes its strategy regularly, has a different focus every year, does an annual restructuring, chops and changes its sales teams and people, etc. Flywheel examples Walmart: not a digital business (No users at the center) - Sells low price goods → ppl come to buy cuz of low price → walmart sells more → lower its costs Amazon: convenient Bytedance (tiktok) - The more ppl uses tiktok, the better the algorithm → the better advertising becomes targeted → the more money they can target the marketing agencies and brands that use tiktok - Share prices drop significantly - Tech giants flywheel relies on growth and cheap capital  - As soon as growth slows / concerns around demand thru recessions (e.g. covid) → valuation drops - Platform companies are very sensitive to shocks - Why is apple more resilient? → because of its hybrid structure - On one side it has a platform (whole ecosystem that allows ppl to create content etc) - On the other hand it has hardware business that locks users into the ecosystem: users cant use apple system on other devices Corporate Strategy & Flywheel A cost-economies of scale flywheel can exist in value-chain business operating independent BUs/brand fascias - Benefit: economies of scale - brands can share cost - No demand benefits: u dont buy Krut champagne just cuz you’re an hermes customer (unlike platform business) Case study: Disney: has been exploiting revenue interconnection for decades Films as centre: great content center = can monetize in different ways Does its own content creation ▪ At Disney, synergies between the business units are created by cross-selling (revenues) ▪ Cross-selling is an internal network effect – providing each member unit access to demand economies of scale ▪ When we add in the Lucasfilm (Star Wars) property, and digital properties Hulu, Disney+ it just drives the flywheel faster Benefit beyonds cost saving cuz everything is linked A flywheel cuz user knows that its from disney + all linked tgt → creates value cuz it links everything tgt Case study: McKinsey & Company - All business units get the benefits from being a part of mckinsey Case study: Deloitte and EY - Positive & negative network effects for member firms & service lines in global accounting firms - Negative effects for one to work in Deloitte: - Conflict of interest (as a result of due diligence) - one cant do consulting for accounting clients → can lose clients as cannot provide services - Scandals by client can impact the whole firms Guest speaker: Epic games The Epic Games Flywheel & The Creative Flywheel – what defines the success of epic games - Unreal engine: - develops fortnite/ what supplies fortnite - Inform the R&D for Epic Games Publishing when publish other games - Informs R&D of all the different parts of Epic Games store - UGC: User Generated Content - = where anyone can build games and expanding the games market beyond what many thought was possible - Around 50% of fortnite battle royale is driven by creative maps (user-generated content) - The more user generated content created, the more players are engaged - Players engaged get incentivised to become creators - Risk: Very important for users to trust the UGC. Workshops - Fortnite x Lego - Different PG ratings → Access to broader target audience: more child friendly (lego) - Cross-products e.g. lego skins in fortnite → increase sales and revenues for both (more ppl will link their accounts to get the skins) - Collaboration: collaboration helps companies grow its own flywheels independently thru collaboration How do we measure growth for a flywheel/partnership - 1. Cost structure - There are areas of growth - American mcdonalds vs asia mcdonalds - r they different? - Growth: Measure sales - Why only in US? Cultural différences – white ppl loves junk foods - Genshin impact & mcdonalds - 2. Market penetration of geo (#) x Dohort Demographic (LTV) = Total $ upside - Example: genshin impact & mcdonalds - Why choose to operate in diff geographical markets - Different geographical markets offer different opportunities - E.g. US → good place to collaborate w junk food brands as junk foods r popular Cannibalistic vs. Incremental Strategy What’s Netflix’s Strategy? way forward: ai-powered ugc phase 1: AI as a tool to help people making games. Game creations will be faster and more efficient. Startups will come in and develop special AI tools to help creators in their current workflow AIGC's examples: 1. AI + Human co-creation: Using AI tools for asset generation via texts, voice, image prompts to help making game lores, stories, quests, and art. Co-pilot tools for coding that will make the most technical part of UGC game development significantly more accessible for inexperienced creator 2. Prompt sharing and search. Companies will make great prompts available as shareable/sellable artifacts to be available to creators 3. Novel game mechanics: Game creators are coming up with new ways to play games that attract more players. e.g. some games use special rules to create random levels or challenges. Now, with AI, creators can make these rules even more creative and dynamic. Some companies are making tools that let game masters create custom monsters, environments, and adventures on the spot. 4. Content Discovery: Creators wielding the power of generative AI tools will produce more content than ever before 5. Creator Monetization. Building creation tools with generative AI may be less costly to maintain and upgrade, allowing new platforms to pay creators better. 6. Moderation: AI-powered tools will also need to be moderated themselves to prevent creators from abusing the tools, and to prevent hallucinations from creating unwelcome assets, situations, or behaviors phase 2: new creation paradigms - new companies will start creating entirely new ways for people to make and experience games and other digital creations, unlike anything we have now. Engines and operating systems will be built with AI. Companies will build new systems where AI is part of everything, from how the game looks to how you interact with it. AI will be used in ways we haven’t seen before. It will feel different - Generative AI powering the underlying creation engine. We predict that creation engines built from the ground up for generative AI might enable new creation paradigms and UX, have custom rendering capabilities, and/or be built with a programming language made specifically for AI-powered creation. These AI native engines may be cloud-based with reimagined technical and data architecture oriented towards rapid iteration and creation on any device at runtime. roblox and minecraft (building game) makes creation tools more accessible roblox: more children friendly with educational physics tools minecraft: core building and survival gameplay The creator-content-player flywheel. - Both games benefitted from a strong flywheel of players who converted into creators that would make content for new players. There are strong network effects as the platform accumulates more great content and creators. A powerful toolset. - Minecraft and Roblox built a strong toolset for creators over many years, which enabled a diversity of new rulesets and game loops to be tested and built. Creation became a form of play The importance of social, organic growth. - Minecraft and Roblox both benefited from strong creator adoption both from a developer and social standpoint. Many of the top YouTubers grew and promoted the ecosystem. Rich creator / developer ecosystems. - Both games have community forums, tutorial videos, textbooks, and wikis, often fan made, that help newcomers acclimate to the game and help with the player-creator conversion. Live-service attention. - Roblox and Minecraft were both consistently updated by their developers, adding new tools, creatures, biomes, etc. as well as fixing bugs and glitches and engaging the community. Robust Moderation. - contents being created are being more monitored to prevent e.g. NSFW Financial incentives. - Both games have Developer and Partner programs that allow creators to monetize their creations, incentivizing high quality, popular content. Session 3: 18/9/24 Industries, Categories & Markets Why companies seek to enter new markets - Companies regularly enter new markets (new countries/new customer segments) - To answer “where to play?” and “how to win?” you must assess new market potential - Market sizing presents a quantitative view of what value could be captured at a point in time after the initial entry - Sizing is ALWAYS an estimate, given the many variables involved…the question is “how wrong will you be?” Entering new markets help companies achieve incremental volume and revenue Where? New geographies Who? New segments e,g,: - Expanding existing operations into - Consumers: from the bottom of the cities/town/rural areas Within a country pyramid and the middle classes to the - Entering an Adjacent country super-rich; from gen alpha to baby - Entering a Completely new region or boomers/silent gen country - Businesses (b2b): from startups and smes to global multinationals Why do companies wanna estimate the size of new markets - Revenue its gna get - Investment & what would the company get back from the investment What is an industry consist of → Firms and competing firms (ie suppliers) What does a “category” consist of? → Product and services & Subcategories What does a market consist of → People (consumer market), Buyers B2C markets: - B2C categories consist of goods & services - B2C markets are made up of people People in places - Market data: Statista (accessed via Imperial College Library) www-statista-com.iclibezp1.cc.ic.ac.uk/ - Industry data: Ibisworld, List of Industries – www.ibisworld.com/united-kingdom/list-of-industries/ - Supply side: goods and services produced → and sold to market Units of measure “Industry” → supply side in marketing is “Market” → demand side in marketing is usually the CUSTOMER usually the CATEGORY TYPICALLY MEASURED IN BOTH: TYPICALLY MEASURED IN: ▪ Number of units of products/ services sold (volume) ▪ Number of customers (or other grouping such as number of households) → enables calculation of “volume share of category” → enables calculation of “market share” ▪ Monetary value of products/ services sold → enables calculation of “value share of category” Volume share: quantity Value share: $ sales TAM-SAM-SOM model 1. TAM. :Total Available Market Represents Market Potential at a point in time Total/entire market size – people capable of acquiring my product/service (ALL that HAS CAPABILITY to use) e.g. ppl eligible to open bank in India + has smartphone 2. SAM.:Serviceable Available Market Represents 100% Market Share at a point in time Number of potential customers that could be interested in buying my product or service (my choice of target customer segments) (porion of TAM that u can actually reach w ur products/services) (market that CURRENTLY USES or could be potentially be INTERESTED in USING) Typically limited by geography and demographics e.g. ppl who r already using neobanks in india 3. SOM.:Serviceable Obtainable Market Represents your firm’s “Share of Market” at a point in time a share of market that company hopes to achieve Portion of SAM that u will acquire w/ ur product/service Estimated target market share that could be achieved, considering economic trends, existing players’ shares, expected demand/forecast, countries, distribution channels - Ie the “potential”, the comp’s market share. Will be revenue for your company e.g. ppl who r already using revolute You should choose the most appropriate unit of measure (UoM) People? Households? Business? → nature of the market and how the category is purchased defines this Answer: b) household Families living in one home would be unlikely to have multiple subscriptions.. So if choose UK residents w credit card = overestimating market size Exercise: True or false TAM: All the people capable of buying tea in India SAM: All the people buying tea in India's seven major cities SOM: All the people buying my company's tea brand in Mumbai Answer: False: Geography has to be the same AND scope has to be the same 1. Geography difference: india vs india’s seven major cities vs Mumbai 2. Scope difference: different market size 3. TAM is unrealistic (number of ppl capable of buying is basically everyone) - Scope of TAM SAM SOM has to be consistent, same unit, same measure What is TAM. and whats it for - = potential buyer - VC is obsessed with TAM: it indicates the growth potential and scalability of a startup - If SAM close to TAM = bad, no more growth potential - The entire population is unlikely to be “addressable” – has to exclude from TAM - “Not accessible” E.g. luxury goods/comp: think about affordability Do we need to exclude low income population? Ans: no, still have ability to purchase 2 ways to calculate SAM 1. Slice-down method (top-down) – starting with a population no. (customers): TAM → SAM → SOM  2. Category-first estimation Starting with SAM, then figure out SOM – Suitable for entering a market anywhere in the world with a product/service offering that is similar in comparison to the competition, there is often category sales data available that you can make use of. – You can make the assumption that people in your SOM may switch to your brand from elsewhere within the SAM. – And if you’re lucky you can find a category forecast in Statista (or similar) which predicts the future consumption/penetration rate. – TAM DOES NOT ALWAYS NEED TO BE CALCULATED Slice-Down vs. Category-First calculations. formula. Slice-down calculations (Number of customers SAM) Category-first calculations (Category value SAM) Slice-Down vs. Category-First Category-first market sizing estimate 1) What are some of the advantages of this method? – quick 2) What could be some of the limitations? – Assumptions, has to verify statistical info (could lead to wrong answer) 3) What category/market characteristics would this method best apply to? - Well establish firms/market – relatively stable firms Estimating your Share of the Market (SOM): SOM calculations. ie how many customers do i think i might be able to sell to, at a specific point in time? - Note: SOM also converted into sales value - How to get SOM e.g. ask consumers to register interests Companies usually plan several years ahead when calculating their SOM (typically 3-5 years out) Don’t be a “1 percenter” when calculating SOM ▪ Defaulting to a market share assumption of 1% will mark you out as an amateur: - 1% of any given market is likely to be unrealistically high for a typical new entrant! - How big would your operations need to be (units per year) to achieve a 1% share of the market? - What is 1% of automotive sales in the USA, for example? ▪ Find reference class examples from similar contexts to get to a realistic percentage SOM estimate When calculating SOM: dont forget to do bottom-up check (build-up) Build up: what does the firm has to do to fulfil the demand you’re predicting, what are the segment needs & behaviors, what are the constraints (production capacity? Outlet growth rate? Platform scaling? Funding delays? → consider everything on operational level that could affect/slows ur growth Factors you should bear in mind when calculating % share of market (SAM/SOM): Which one should u use? = Category one (all snacks) → altho market share is lower, this demonstrates potential product growth into larger market (can grow popcorn at the expense of other expense) whereas for subcategory, demand is already realized, not much room for growth Question to ask: → r u creating new demand or switching it → where is the demand coming from? Is it from existing demand (switching products) or new demands for purchases that has never happened – In this case its from ppl eating snacks (existing demand) Compound Annual Growth Rate (CAGR) = year-on-year growth, compounded - Applies to savings, mortgages, etc A broad definition of category potential is useful the further ahead in time you look Entering with a NEW OFFERING - For first movers, new entrants into the market: use SLICE DOWN - Category-first is more suitable for existing market, can find examples in the market to use as proxy - James: use both: start w easiest way and cross-check to see which one is most appropriate - Serve existing needs → start w existing category - Fulfill unmet needs with untapped growth potential → do slice downs & surveys Historical demand can’t usually be applied to new, innovative products & services - it would be misleading Exercise: FIVE GUYS: Category-first exercise It is 2013 and you are part of the Strategy team at Five Guys in the USA, planning to enter the UK market Category sales value (five guys enter market 2013) (forecast value of burger bar category in UK) Annual revenue of Gourmet Burger Kitchen in UK 1) If you were looking at the forecast five years ahead for the Burger Bar category, what would the size of the SAM be (in number of customers) in 2018? Assume an average purchase frequency of one meal, six times per year at a £15 average meal spend per person. - Category-first calculation Size of market (customers) = Size of category in value ($) of all sales / Sales per year / Volume / Average Price - Category Spend = £3.23bn [2018 value of the Burger Bar market in the UK] - Customers = £3,200m divided by (1*6*15) 90 = 35.9mn customers 2) Five Guys aims to be twice as big in revenue terms as GBK is expected to be in 2018. What % share of the Burger Bar category would it need in 2018 to achieve this SOM? - GBK forecast annual revenue 2018 is £81.7m - Divide this (£81.7m) by the 2018 forecast value of the category from Q1 and x 100 for % - (£3.23bn*100) = 2.52% - this is GBK’s SOM (as a percentage of the SAM) - ▪ If Five Guys was twice as big in market share %, it would be 5% (ie twice as big) - it is an estimate in the future based on forecasts, so please round up - ‘false accuracy’ lacks credibility Exercise 2: India neobanks - TAM: People who is eligible to open bank acc in india + has smartphones - SAM: People who are currently having bank accounts in indea - SOM: People who are using internet banking/neo banking When constructing a market size estimate, ask yourself: SAM/TAM ▪ Are we growing the category (expanding the SAM)? ▪ Where will the new demand (SAM) come from: - New (incremental volume) consumption? - Switching from other categories into ours? - Switching from other sub-categories into ours? SOM ▪ OR are we stealing share from competitors (SAM stays the same size but our SOM grows within it as our competitors’ share shrinks)? ▪ Have we picked the optimum future year for our SOM estimate? Reading Marketing Analysis Toolkit: Market Size and Market Share Analysis (Thomas steenburgh & Jill avery) - Purpose: allows u to size a market and generate sales forecast (thru market build-up methodology) 1. Measuring a market - by identifying all the potential buyers in the market - Types of markets: potential market, available market, target market - 2. Estimating market demand - by segmenting potential buyers into groups and analyze the usage dynamics of each group - + consider existing buyers to understand product replacement cycles to estimate existing demand Market demand calculations = (# of buyers in the market) x (annual quantity purchased by an avg buyer) x (avg price paid for a unit) - - When estimating market demand → need to qualify estimation as appropriate given a certain level of marketing investment - - If there are competition for the product and product has substitutes offered by competitors, the market demand includes the demand for all the products in the category - Substitutes and competition: If the product has competitors, market demand includes all products in the category (not just one brand) - Primary demand: measures the total volume by customers for a product category (e.g. razors) - Secondary demand: measures the total volume demanded by customers for a specific brand/product (e.g. Gillette razors) - Therefore, a market forecast is affected by not only the firm’s marketing expenditure but also the spending by competitors - Three Constraints on Marketing’s Impact on Demand: 1. Market Minimum: The base level of demand that would occur anyways without any marketing. 2. Market Potential: The point at which additional marketing expenditures become ineffective because the market is fully tapped. 3. External Market Environment: The potential demand is influenced by external factors beyond marketing efforts.  As a company increases its marketing expenditures: - From Market Minimum to Market Forecast: - Initially, as more money is spent on marketing, market demand rises rapidly. This is because the marketing is making more consumers aware of the product, encouraging them to purchase it. - Market Forecast: - At this point, based on the planned level of marketing spending, the company can expect a certain level of demand. This level of demand reflects the projected outcome if the company spends that amount on marketing. - Approaching Market Potential: - As marketing expenditures continue to increase, the rate of demand growth slows down. There’s less room for marketing to further increase demand because most potential customers are already aware of the product or have already made their purchases. - Market Potential: - At this point, marketing has reached its maximum effectiveness. Spending more money on marketing will not lead to further demand growth. The market is saturated, meaning most customers who would be interested have already bought the product. - Sensitivity to Marketing Expenditure: - The relationship between the market minimum and market potential determines how sensitive demand is to marketing. - ie as the company increases or decreases its marketing spend, there is a noticeable corresponding change in consumer demand. - A large gap between market minimum and market potential means demand is highly sensitive to marketing. - A small gap indicates that demand is less sensitive to marketing efforts. - Market demand = market demand in units * avg retail price point in market - Retail price point = price at which consumers purchase the product 3. Estimating product demand (secondary demand) - Product demand measures the total volume of the firm’s product which will be purchased by a particular customer group in a particular time period in a particular marketing environment under a particular marketing program - Product demand depends on: - 1) firm’s level of marketing expenditure as compared to competitors’ spending levels - 2) effectiveness & efficiency of marketing expenditures vs our competitors - Our firm should gain demand vs the competition when we outspend them and when the money we spend works harder for us cuz it is put to use more effectively/efficiently Product demand in units/dollars = product demand in units * average price point of firm 4. Calculating market share - Helps understand how our firm is doing vs the competition - Market share is measured in two ways: - Unit Share: The percentage of total market demand in units that a firm has captured. It is calculated as: Unit Share = Product demand in units / Market demand in units Unit Share = Product demand in units / Market demand in units - Dollar Share: The percentage of total market demand in dollars that a firm has captured. It is calculated as: Dollar Share = Product demand in dollars / Market demand in dollars Dollar Share = Product dollar sales / Market dollar sales - Unit Share vs. Dollar Share: - A company with a high unit share (selling many products) may not necessarily have a high dollar share (revenue from sales). This can happen if a company sells products at a lower price, which increases unit sales but results in lower revenue per unit. - Companies may pursue different strategies: some aim to capture unit share by selling many products, while others focus on maximising dollar share by selling fewer units at a higher price. - 5. Calculating market penetration (and product penetration) - To see how much rom there is for a company to grow the primary and/or secondary demand - Penetrated market: set of consumers who are buying products in the category - Market penetration index: measures the % of consumers in potential market who are currently purchasing a product in the category Market penetration index = market demand / # of consumers in potential market - Low market penetration index - = have room to grow the primary demand in the market (as it indicates that many potential customers are not currently buying) - High market penetration index - = most market growth has already been realised - Product (or brand) penetration index: calculates % of consumers in particular target market who are purchasing particular product (or brand) Product penetration index = product demand / # of consumers in the target market - Low product penetration = opportunity to grow the product/brand demand within the target market - High product penetration index = strong performance in the target market and limited opportunities for incremental growth Roles of demographics in strategy (https://www-statista-com.iclibezp1.cc.ic.ac.uk/topics/10801/demographics-of-india/#topicOverview) - comprehensive demographic data is essential for creating policies and social programs that can leverage demographic change, ideally supporting development goals of the country. - data helps the government design policies that address demographic transitions, enabling the country to align its development goals with changing population dynamics.