MARKET DEFINITION
Application: Strategy, Planning, NPD/NSD, Communication
The Concept
One of the most fundamental issues that marketers need to think about is how they define the market they operate in. This may sound simple, and it is, but there are many examples of businesses being damaged because their owners had not defined their market correctly. It is important because there is an assumption built into the fabric of a business that gives direction to its activities. If this assumption is not aligned to the market, the business will, in a competitive market, ultimately, fail.
Marketing and sales people can be so overwhelmed by the demands of their day-to-day job that they have very little time to investigate other industries or think about the relevance of different ideas to their market. As one of the classic marketing thinkers, Wroe Alderson, pointed out (Alderson, W., 1957), this results in group think and similar behaviours within markets, some of which is decidedly odd. Different beliefs and conventional wisdom grow up within different industry sectors which become the basis of business policy, such as a fascination with technology rather than what it can deliver. Some of these are profoundly idiotic and out of touch with the realities of the world. As a result, marketers, competitors, and buyers collude to conform to established ideas within markets, which can be restrictive.
A consumer might, for example, shop one morning for a branded, luxury good, perhaps as an important gift. In that market, long established brand names like Gucci or Chanel will be sought out. The shopper will expect their purchase to look and feel expensive, reflecting partly its durability and heritage. Some will even spend large sums on second hand branded pens or watches that are decades old. Yet in the same shopping trip they might also buy an over-the-counter drug (where markets are slow to change and investment is on a seven-year life cycle) and a personal computer (where technologists believe the customers are fast changing and only want cheapness). The precepts of each of these markets contradict, but are genuinely believed by the suppliers and, as a result, accepted by shoppers while they engage in that market.
Gerald Zaltman (Zaltman, G., 2003) has called this set of beliefs “the mind of the market” and it inhibits business opportunities. Occasionally, though, new propositions enter markets that shake up these ingrained attitudes. Richard Branson, for example, showed with his Virgin Atlantic service that it was possible to change the competitive landscape of the airline market by thinking differently and contradicting established group think. In their turn, propositions like First Direct (banking) and Direct Line (Insurance) have shown the wealth that marketers can make by challenging the status quo. So, marketers should take a moment to step out of the established beliefs in their market to see if new approaches can shake up their market a little, open up different opportunities, and create substantial wealth for their shareholders. Many do not, and spend their time projecting trends in sales from recent history, jumping to bash out e-marketing campaigns in the current quarter and combing the internet for reports from respected industry analysts which will confirm their preconceptions. Henry Mintzberg (Mintzberg, H., 2005) said that this is like primitive tribes throwing bones or consulting oracles on which way to go hunting. Instinct, history, and luck mean that they are sometimes right, but they frequently inhibit the potential earnings for their business owners by not stepping back and thinking.
So marketers must define for their company the market on which they will focus and this must be done in clear, customer-centric terms. This may be a generic proposition (like Disney’s “Childhood Magic”), it may be an aspiration aimed at a wide market (like Black & Decker’s famous reorientation to help people make holes rather than merely manufacturing drills), or it may be a carefully defined segment within a wider generic market. Market definition, or re-definition, is a route to profound market insight.
History, Context, Criticism, and Development
The exasperated business professor, Theodore Levitt (Levitt, T., 1960), called the inability to correctly define a market “market myopia” and used the history of American railway companies (the computer companies of their age) to dramatize the damage that such thoughtlessness does. When they first appeared, they were handling a stunning new technology that would revolutionize life in the 19th century as much as (perhaps even more than) computer power did in the 20th. By the end of the 19th century, there were hundreds of thousands of miles of track in the USA alone, some crossing the entire country. The American railway companies then earned huge profits. So anyone approaching the chief executive of one of these companies in, say, 1910, and predicting that there were major new threats to the business that could see them virtually bankrupt by the 1930s/1940s, would be dismissed out of hand. And yet, thanks to the development of the car and the airplane, that is exactly what happened. According to Levitt’s analysis, the American railway companies struggled because they defined their businesses as “trains” rather than “transportation”. Had they focused their businesses on the “transportation market” they would have invested in these new technologies (perhaps backing a young Henry Ford when he needed funds) and moved their businesses in exciting, different directions.
Voices and Further Reading
- Alderson, W., Marketing Behaviour and Executive Action. Richard D Irwin Inc., 1957.
- Levitt, T., “Market myopia”. Harvard Business Review, 1960.
- “The general rule for market definition is that it should be described in terms of a customer need which covers the aggregation of all the alternative products or services customers regard as being capable of satisfying the need.” McDonald, M. and Dunbar, I., 1998.
- Zaltman G., How Customers Think. Harvard Business Press, 2003.
- “The mind of the manager (including both its unconscious and conscious elements) and the mind of the consumer (and its unconscious and conscious elements) interact, forming the mind of the market.” Zaltman, ibid.
Things You Might Like to Consider
(i) Experience shows that this can be enormously difficult to clarify but, once agreed, gives direction to innovation, leadership, investment, and service quality.
(ii) A radical market definition can give a new entrant real advantage if it is moving into an established market, which is dominated by complacent suppliers who all have a common view of the market need. The new entrant can quickly gain share by defining its offer more closely to customer needs.
(iii) Market definition can give direction to the whole firm, not just marketing functions.
Agreeing BT’s service concept
BT is one of Europe’s leading telecommunications companies. Its principal activities include local, national, and international telecommunications services, including high value internet services and complex business IT offers. In the UK, it serves over 20 million business and residential customers with a wide range of communications services including voice, data, internet, multi-media, and a range of managed and packaged communications solutions. It also provides network services, as a wholesaler, to other licensed operators. Its experience over the last twenty years is a good illustration of the need to be clear about the concept a business is putting to a market. Although its early experience of liberalization and privatization has made it one of the global pioneers in competitive telecommunications, it took the company a while to find the most effective direction.
PUBLIC SECTOR RESTRICTIONS
Up until 1984, British Telecom (as it was then known) was a government department, with all that that entailed. For example, prior to privatization, there were no real capital budgets and all investment money was provided by the Treasury. This meant that, like many of the then government institutions, it was often a low priority for funding. Under a right-wing government issues like defence, police, and security were higher priorities. Under a socialist government, on the other hand, issues like health and social benefits came to the fore. As a result, by the mid 1980s the majority of BT’s infrastructure was under-funded and out-of-date. For example, throughout its network it was still using the “Strowger” electro-mechanical exchange for telephone switching (invented by a US undertaker in the 1880s) and much of this equipment was in a poor state of repair or in scarce supply. The British public had to apply to this government body for a telephone, which came in either black or cream. It was hard-wired into the network and, called Customer Equipment, was owned by the government (as were the wires and cables in the backbone network). There was also a three-month waiting list for a new phone while repairs could take over a week and were often poorly done.
In addition, the organization reflected its history as an engineering-led government department. For instance, while BT had the biggest fleet of vans in Europe after the then Soviet army, there were few qualified accountants, no appreciable profit, and no marketing department to speak of. Also, customers were served in strict order of request. This meant that a low earning residential customer was given exactly the same priority as a high earning business user.
In the run-up to privatization in 1984, the company embarked on a massive project aimed at separating Customer Equipment from the backbone network by introducing a socket at the entry into the customer’s premises. This, coupled with new legislation, enabled the country to create a competitive market in the supply of telecommunications equipment ranging from single telephones to large scale private switches, bought by companies to handle their internal telephone calls.
SURVIVING IN A NEW COMPETITIVE ERA
Upon privatization, BT (together with several new, competitive entrants) started selling communications equipment. The race was on to capture as much of the market as possible before every major buyer had replaced their government rented apparatus with new technology. The company set up an extensive sales and marketing organization which spent all of its time focusing on selling equipment. This market was vibrant from the time of privatization to about 1990 and still exists. As it peaked, however, the company began to wonder what it would earn revenue from. It began to explore the sale of computers and IT equipment because “clearly the telecommunications market is mature”.
However, there were even bigger and more dramatic changes to come. The British Telecommunications Act of 1984 had included a provision to introduce network competition. This was the first instance of this anywhere in the world and few believed it was viable. While it might now seem strange, most industry experts thought that competitive network telecommunications was an unrealistic aim and unworkable. Telecommunications businesses were thought to be natural monopolies that would not benefit from competition. This proved to be wrong.
After an initial set-up period, two other network competitors began operating in the UK. As they established their networks, BT began to realize that huge network revenues, which had been taken for granted, were now at risk. Managers at the time were heard to say that if they lost the “dialled revenue” from some of their major customers they may as well have given the equipment away because it affected profits so dramatically. In other words, they had been so focused on revenue from equipment sales that they had neglected the impact of revenue from calls.
MARKETING HUMAN RELATIONSHIPS INSTEAD OF TECHNOLOGICAL PRODUCTS
Ridiculous as it now sounds, it was only about four years after privatization that the company accepted that it was in the market of communications and its service was about communications. The director of advertising at the time, Adrian Hosford, oversaw this dramatic change in emphasis. It included the creation of a series of memorable advertisements, some of which have now become part of British culture. Much of the public, for instance, will still recall those with actress Maureen Lipman starring as “Beattie” and her “ologies”. These began to make the process of communication human and had a measurable effect on the amount of telephone calls and therefore increased network revenue.
However, the most dramatic examples were the series of advertisements starring actor Bob Hoskins. These were designed by Hosford’s team to exploit a piece of research which showed that men in families (before mobile phones) were often, at the time, the “gatekeepers” of the family’s communications by phone, limiting the amount they talked and the amount of time the rest of the family spent on the phone. The campaign included advertisements which showed the positive and negative way a middle-aged man might talk to his elderly mother, and the positive effect of using the phone as part of the full repertoire of human communications in all contexts.
The company continues to use this approach in many of its core programmes. If it had simply limited itself to providing products, the business would have been badly damaged, perhaps irreparably. BT’s market is “human communication”.
RATING: Practical and powerful