Paul Hague: The Business Models Handbook

Introduction: an overview of business and marketing models

People in business often talk about their ‘business model’. By this they mean the way that their business is organized to make money. Business models also have another meaning. They refer to the frameworks and analytical tools that are used in strategic planning.

Once someone is introduced to the model, it makes perfect sense. It is a formula that explains a situation.

The 4Ps: how to design your marketing mix

There is an old saying that marketing is about getting the right product at the right price in the right place with the right promotion. The 4Ps is an extension of this simplistic view.

• The product is the most important part of the marketing mix. It defines who will buy it, how much they will pay, what features they will find appealing and where it could be sold.
• Price is the component of the 4Ps that collects revenue. The other 3Ps incur costs.
• Promotion. People need to be aware of the availability of products and they need to be convinced of their value. Promotion is the means by which this communication takes place.
• Place. The product (or service) is made available somewhere for the customer. It is the channel (or channels) by which the product is distributed.

The 4Ps were coined by Edmund Jerome McCarthy, an American marketing professor. He launched the framework in 1960 in a book entitled Basic Marketing: A managerial approach.

Still holding with the mnemonic of the 4Ps, other authors have added three more elements to the mix:

• People: it is argued that, in many businesses, people are a critical part of the offer.
• Process: the process by which the product is made is part of the offer.
• Physical evidence: in some situations, the physical environment is an important part of the offer.

In 2013, Richard Ettenson, Eduardo Conrado and Jonathan Knowles wrote an article in Harvard Business Review entitled ‘Rethinking the 4Ps’.

They argued that the original 4P model is not suited to the business to business (B2B) world.

In an attempt to shift the focus from products to solutions, they suggested the SAVE framework. SAVE is an acronym for solution, access, value and education.

• Solution (rather than product).
• Access (rather than place). It is important to have access to customers wherever they are and whatever they are doing.
• Value (rather than price).
• Education (rather than promotion). Promotion can be seen as manipulative and, in many B2B markets, trust and reputation are more important.

Consider using a 4P structure when developing a marketing plan. It is particularly useful when entering a new market, launching a new product or developing a new customer segment.

ADL matrix: strengthening a product portfolio or strategic business units

The ADL matrix from the consultants Arthur D Little is a tool that helps managers work out a strategy for their business (or product portfolio), depending on whether it is newly formed or ageing and whether it is strong or weak in its market.

The ADL matrix recognizes four stages to the life cycle. ADL describes the four stages as:

• Embryonic – The business unit is new and in its youthful stage.
• Growth – The business unit has taken off and is showing rapid growth.
• Maturity – Growth is slowing for the business unit.
• Ageing – The ageing business sees sales fall away.

The strength of the strategic business unit (SBU) is measured according to the business’s competitive position.

• Dominant A company in this category is a market leader and could be a monopolist.
• Strong A company in this category is possibly an oligopoly, sharing a strong position with a small number of other companies.
• Favourable A business in this position operates in a fragmented market where there is no dominant player.
• Tenable A company in this category serves a niche.
• Weak A company in this position has poor financial performance and a small position within an aggressive market.

ADL suggests that there are six strategies that could be followed by a business unit:

• Market strategies: moving into a new geography or developing different segments
• Product strategies: launching new products
• Management and system strategies: finding processes that give a competitive advantage
• Technology strategies: investing in research and development
• Retrenchment strategies: building on customer loyalty
• Operations strategies

Any business model that involves life cycles struggles to define how these can be recognized.

A company with a portfolio of products or a number of different business units would use the ADL matrix in three steps:

• Step 1: determine the position of the business in its life cycle
• Step 2: determine the competitive position of the business
• Step 3: plot the position of the business on the matrix

It should now be possible to position the business in one of the appropriate strategy boxes:

• New or growing company with a strong or dominant position
• Mature or ageing company with a strong or dominant position
• New or growing company with a weak position in the market
• Mature or ageing company with a weak position in the market

AIDA: a business model for improving marketing communications

The AIDA framework is one of the most familiar in the world of communications.

• Awareness – The starting point of all effective communications is to be noticed. As a rule of thumb, companies allocate around 2 per cent of revenue for their promotional budget.
• Interest – Achieving a healthy awareness of a product is not in itself enough. There has to be an interest in the offer if the promotion is to generate action.
• Desire – The promotion must now generate a desire for the offer.
• Effective – promotions focus on the one or two parts of the value proposition that are most appealing to the potential customers.
• Action – At its conclusion, the AIDA model looks for action. The action could be the purchase of a product or it could be something less commercial such as a visit to a website or a request for a brochure – whatever are the goals of the promotion.

In 1904, Frank Dukesmith, an American pioneer in the art of salesmanship, suggested that there are four steps leading up to a consumer trialling a product or making a purchase decision. Following Dukesmith’s sequence, the AIDA acronym was coined in an article by CP Russell in 1921.

In 1961 RJ Lavidge and GA Steiner proposed a slightly different model for predicting advertising effectiveness.

• Awareness
• Knowledge
• Liking
• Preference
• Conviction
• Purchase

Ansoff matrix: how to grow your company

The Ansoff matrix provides a model for growth that is based on four strategic premises: market penetration, market development, product development and diversification.

• Market penetration: selling more existing products to existing markets. This situation offers opportunities for: obtaining a greater share of wallet from existing customers; finding new customers within the markets currently served. Farming existing clients and selling them more products is always to be encouraged as the first growth opportunity.
• Market development: selling existing products to new markets. This situation offers opportunities for: selling to new customers in new geographies; selling to new customers in vertical segments not previously served. New customer acquisition has to more than replace the churn if growth is to be achieved. Market development is about finding: new customers in new geographies; new customers in existing geographies.
• Product development: selling new products to existing markets. This situation offers opportunities for: selling new products to existing customers; finding and satisfying unmet needs within existing markets.
• Diversification: selling new products to new markets This situation offers opportunities for: developing new products for new geographical markets or segments; the acquisition of companies in a different field of activity.

The dream of selling new products to new customers is powerful and yet it is the most difficult route to growing a business.

The Ansoff matrix is named after Igor Ansoff. Ansoff was born in Russia in 1918 to an American father and Russian mother.

The Ansoff matrix is a tool for guiding the strategic growth of a company. It may not be sufficient on its own. Each of the four strategies requires a deeper consideration of the external environment.

The tool is best used in conjunction with others such as PEST (looking at the external environment), AIDA (determining the difficulties of communicating with a new market) or SWOT (establishing a company’s strengths and weakness).

Benchmarking: setting targets for business and marketing KPIs

Success in business is largely about being better than the competition. To be better than the competition it is necessary to have something to compare. These somethings are usually referred to as key performance indicators (KPIs).

The comparisons that are sought through benchmarking could be internal, within a company. They could also be external comparisons. These are most useful as they give an indication of how an organization is performing against a competitor or an industry standard.

The aim of benchmarking is to improve performance. There are four measures of importance:

• Measures of time: how long it takes to produce something, how quickly the phone is answered, the speed of response to an enquiry, the time taken to deal with a complaint.
• Measures of quality: the number of defects in a product, the length of life of a product, the cost of maintenance of a product, the ability of a product to withstand stress, the reliability of a product.
• Measures of cost and effectiveness: the price of a product, the cost per application or use of a product, the cost of maintenance of a product, the savings that a product confers.
• Measures of customer satisfaction: overall satisfaction with a product, satisfaction with different aspects of a product, the likelihood to recommend a product, the likelihood to repurchase a product.

There is no single model for the benchmarking process but there is usually a sequence of steps:

• Step 1: what is the problem that needs benchmarking?
• Step 2: what key performance indicators will help us benchmark?
• Step 3: who can we benchmark against (where there is data available)? Benchmarking examines who is best in industry and it also compares against best practices in other industries.
• Step 4: how do we collect the data and how frequently should we do so?

The Xerox Company is often credited as the originator of benchmarking, which it pioneered in 1979.

The introduction of the NPS, a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix Systems, has given a boost to benchmarking beyond quality.

Blue ocean strategy: kick-starting innovation and new product development

Blue ocean strategy is to guide and stimulate innovation. It is the brainchild of W Chan Kim and Renée Mauborgne, two professors from INSEAD.

They argue that a blue ocean strategy allows the simultaneous pursuit of differentiation and low cost (and not either/or). By moving into a blue ocean (a new market) a company creates new market space and in so doing makes the competition irrelevant.

A key aspect of the model is understanding how value is perceived and how this affects both suppliers and customers.

As part of the process for finding a blue ocean, the authors suggest asking four searching questions about customers and the marketplace.

Reduce: which factors that are offered to customers should be reduced well below industry standards?

Eliminate: which factors offered to customers are taken for granted and should be eliminated?

Create: which factors offered to customers should be created because they have never been offered and they will be valued?

Raise: which factors offered to customers should be raised well above the industry standard?

Sequence of the blue ocean strategy:

• Utility – Is the new idea really useful to people? Is there a strong reason why someone should buy the new product?
• Price – Is the proposed price of the product one that most potential customers will pay?
• Cost – At the price you want to charge and with the anticipated volumes you will sell, will you make a profit?
• Adoption – Will there be any major barriers that will stop you attaining your goals?

Really understand your customers. Look at the outliers and extremes of your customers. Aim for the stars and be happy if you land on the moon!

Boston Consulting Group (BCG) matrix: planning a product portfolio or multiple strategic business units

The Boston Consulting Group (BCG) matrix is a model for strategically planning how each product or subsidiary company within a group is performing.

• The upper-right quadrant is for products of stellar performance. Products within this quadrant have a strong position in their marketplace and enjoy high growth. Not surprisingly, such products are labelled ‘stars’.
• The bottom-left quadrant presents the exact opposite to stars in that a product positioned here has a low market share relative to the principal competitor, and growth would similarly be low. Products in this square are labelled ‘dogs’.
• The bottom-right quadrant represents products that are important within almost every portfolio. These are products with a relatively high market share though growth opportunities are low. Products in the quadrant generate cash for the business because of their strong competitive position. They are therefore ‘cash cows’.
• The top-left quadrant contains products that need support. These products have a low relative market share and a market environment promising strong growth. A product in this quadrant may be able to increase its market share and move east and become a star. However, there is uncertainty as to whether this is possible. There may be factors that inhibit the increase in market share. For this reason, products within the top – left quadrant are labelled ‘question marks’.

BCG argues that a strong company should have a balanced portfolio.

Brand audit: improving the strength of a brand

For most companies and organizations a brand is recognized as one of its most important assets. Yet, assessing the strength of a brand and placing a monetary value on it is not easy.

There are numerous models for carrying out a brand audit.

Interbrand’s economic value-added model assesses the value and ranking of the world’s top brands, and is based on five steps:

• Segmentation
• Financial analysis: the income for the brand is measured according to its ability to generate returns that exceed the cost of capital employed.
• Demand analysis
• Brand strength analysis
• Calculation of the net present value of brand earnings: the future brand revenue and profitability, which is then discounted according to a rate that is deemed appropriate for the industry.

For those who want a simple model they can apply themselves, B2B International developed a brand health model based on three or four inputs:

• Awareness and usage
• Brand position
• Brand delivery
• Recommending the brand (a measure of advocacy leading to the Net Promoter Score ®)

In the 1950s consumer goods companies such as Unilever, General Foods and Procter & Gamble developed the discipline of brand management.

Today almost every major market research company has a tool kit for measuring brands. Millward Brown has its BrandZ, TNS its NeedScope, Ipsos its Brand Value Creator, GfK its Brand Vivo.

If you have to choose the most important metrics they are:

• unprompted awareness
• the position/associations of the brand
• its loyalty score

These three measures are critical to a brand’s success.

Competitive intelligence: assessing market strengths and weaknesses

Competitive intelligence (CI) is, as the term suggests, market intelligence that is focused on finding out as much as is possible about business competitors.

CI took off in the United States in the 1970s. In 1980, Michael Porter published his book, Competitive Strategy: Techniques for analysing industries and competitors.

CI has become an important tool for multinational corporations. They use CI to benchmark, scenario plan, and identify risks and opportunities.

Conjoint analysis: assessing optimum pricing and the value of component parts

Conjoint analysis is a tool used to determine the value people place on different offers. Marketers have always been suspicious of asking customers simple questions about how much they would pay for a product. Simple questions do not drill down into what people really value. Marketers want to know what people value as this influences the messages, they communicate in trying to create customer interest.

The principle of conjoint analysis starts with a listing of the key attributes of an offer.

The design of the concepts is a crucial step in a conjoint project, and time is required to narrow these down to those that affect buying decisions.

Conjoint analysis is a statistical tool and is based on work by the French economist Gérard Debreu in 1960, and followed by further work by US mathematical psychologist R Duncan Luce and statistician John Tukey in 1964.

It is helped by excellent software, the most famous of which is from Sawtooth.

It is therefore a tool for the statistician rather than the marketer.

The great attraction of conjoint analysis is the ability to arrive at a scientific assessment of what people value.

The number of variables for each attribute needs to be limited to between three and five levels, otherwise the potential combinations of concepts become too large to manage.

Customer journey maps: assessing the current performance of marketing and sales processes

Customers do not arrive out of nowhere. They begin, not as customers, but as prospects, in the first instance becoming aware of a supplier, acquiring knowledge, becoming interested, making comparisons with other suppliers and eventually placing orders. In other words, it is a journey of exploration with different requirements from the supplier at each stage.

The concept of the customer journey is simple. Its usefulness is understanding the many touch points or moments of truth (MOT) that are met on each stage of the journey.

A customer journey map is made up of a spine (the major stages that the customer goes through in the life cycle with the supplier) and all the moments of truth during each of these stages.

Jan Carlzon, the CEO of Scandinavian Airlines, wrote a book called Moments of Truth. The year was 1987 and the book told the story of how Carlzon turned around the ailing airline SAS.

Articles using the term customer journey mapping began appearing around 2010 .

The original customer journey maps were a simple horizontal spine below which hung the moments of truth for each stage of the journey.

Go through every touch point and mark it according to:

• which are essential
• which are performed really well from the customers’ points of view
• which are pain points for the customer
• which touch points customers would be prepared to pay for

Customer lifetime value: estimating customer spend over their lifetime with the company

The concept of customer lifetime value (CLV) acknowledges the importance of keeping a customer over a long period of time. The model is philosophically linked to customer experience, as keeping a customer for a long time means there is an implicit requirement for the customer to be continuously cared for.

The cost of acquisition of a customer will vary considerably from business to business.

The CLV model is especially useful to companies that have an extended relationship with customers – ie customers who continue to buy over a number of years. Some businesses are not like this.

A simple formula is used to calculate the customer lifetime value:

Annual profit per customer × number of years they remain a customer – the acquisition cost = customer lifetime value

The CLV model can drive business strategy: The CLV can help segment customers. Linking the CLV with share of wallet could identify customers with a high lifetime value and a low share of wallet. The CLV analysis may show that customers that arrive by different channels have different lifetime values. The CLV could identify a segment of customers that have been loyal over a number of years. The CLV may indicate that it is worth spending more on acquiring a customer even though this would result in higher upfront costs. The CLV could be useful in improving customer relationship management and customer experience.

CLV first emerged in 1988 in a book entitled Database Marketing, by R Shaw and M Stone.

The biggest problem with the CLV model is the assumption that customers will carry on buying as they always have done.

Customer value proposition: creating a compelling purchase motive

Every company has an offer. The offer is in the form of products or services or a mixture of both. It is what a company sells. Almost always this offer is sold into a competitive environment.

What is relatively new is the way we think about an offer. Sales-orientated companies see their products and services as stock, something that needs to be sold in order to make a profit.

Price is an important driver in a sales-orientated company and the sales teams will always be looking to do a deal.

Marketing-orientated companies take a longer view. They seek to understand the needs of the market and to develop products and services that satisfy those needs.

It is the philosophy of marketing that has led to the term customer value proposition (CVP). A good CVP will differentiate a product and give it a competitive edge.

• Step 1: agree the segments to be targeted with the CVP. Use a directional policy matrix that considers the attractiveness of your CVPs against each segment you serve.
• Step 2: consider personas to be targeted. List all the people in the decision – making unit responsible for choosing a supplier.
• Step 3 : build a portrait of the key decision maker. It is important to understand what makes the key decision maker tick . Give this person a name and suggest their demographics.
• Step 4: establish the behaviours of the key decision maker. Now look at how the key decision maker behaves in their job.
• Step 5: establish the needs of the key decision maker.
• Step 6: compare your company against the competition. A CVP should present the offer as distinct from the competition.
• Step 7: needs that resonate and are differentiated. The top five needs required by customers are now plotted against how the company performs against the competition in meeting those needs.
• Step 8: build a banner headline. A CVP should resonate with customers and be short and snappy.
• Step 9: pass the CVP through the 3D test The CVP needs to be challenged to ensure that it delivers against its promise. If it receives a score of less than 8 out of 10 on any of the 3Ds – desirable, distinctive, defensible – it will be necessary to rework and improve them.
• Step 10: launch, monitor and adjust the CVP. The CVP will need to be communicated internally so that everyone within the company uses it in the same way.

In the early 1940s Rosser Reeves of the advertising agency Ted Bates & Company coined the concept of a unique selling proposition (USP).

It was not until 1961 that Reeves formally presented his theory of the USP in his book Reality in Advertising.

The concept of customer value propositions had its genesis in the 1980s under Ray Kordupleski who later published Mastering Customer Value Management.

When developing your customer value proposition, focus on just one or two of the most important benefits or features of your product.

Diffusion of innovation: launching new products and services

We all love something new. New is one of the most powerful words in the marketing vocabulary. It promises improvements. It suggests excitement.

In order to explain the process by which a new idea or product is accepted, several theories have been proposed.

• The two-step process. This theory argues that new products and ideas are accepted first by a small group of the population – opinion leaders.
• The trickle – down effect. Many new products are expensive in the first instance. This may give the product status in the eyes of the masses, who wait for the time when the price of the product falls and becomes more affordable.
• The diffusion of innovations. This theory was promoted by Everett Rogers, who argued that any new product would be received in a different way by five groups of people:
  • Innovators (accounting for 2.5 per cent of the population)
  • Early adopters (accounting for 13.5 per cent of the population)
  • Early majority (accounting for 34 per cent of the population)
  • Late majority (accounting for 34 per cent of the population)
  • Laggards (accounting for 16 per cent of the population)
• Crossing the chasm. This theory assumes a gap or chasm between the different groups recognized by Rogers. The chasm theory was promoted by Geoffrey Moore.
• Technology acceptance model. This theory is particularly associated with new technologies in which the adopter would need to believe that it would enhance their job performance without a huge degree of effort.

The diffusion of innovations. Rogers’s model of diffusion has become the most accepted of the theories.

In order that an innovation can get traction amongst a large group of people, there needs to be a ‘tipping point’ – a proportion of people who find the new product attractive.

It is widely held that the tipping point exists between the early adopters and the early majority; that is, at the point where 16 per cent of the population have accepted the innovation.

The diffusion of innovations is now widely accepted as a viable business model.

The model only explains the behaviours of a population with regard to a new product. It does not explain how to motivate that population to buy the new product.

A useful segmentation of your customers is to understand where they sit in terms of the diffusion of innovation.

Aim to get your new products accepted by opinion leaders who will influence the rest of the market.

Directional policy matrix: how to prioritize segments or new ideas

The directional policy matrix (DPM) is a tool for guiding strategic policy. A company with a number of business units may want to know which deserves investment and which should be divested.

Marketers find the DPM an essential business model for guiding their segmentation strategy.

The aim of a successful segmentation is to discover groups of customers with common characteristics that are likely to be the most profitable or that have the highest growth potential.

The DPM is a prioritization tool. The two dimensions of industry attractiveness and business strength help managers to focus on the key issues.

If the weighted scores are plotted on a grid where the market attractiveness is the Y axis and the business unit strength is the X axis, possible strategic directions are suggested.

In the 1970s General Electric (GE) together with McKinsey are credited with developing the first directional policy matrix.

Disruptive innovation model: identifying unique ways of beating the competition

• High market attractiveness/strong competitive strength – invest to protect the brand.
• High market attractiveness/medium competitive strength – invest to develop the brand.
• High market attractiveness/weak competitive strength – focus the brand on certain segments.
• Medium market attractiveness/strong competitive strength – build the brand selectively.
• Medium market attractiveness/medium competitive strength – harvest the brand.
• Medium market attractiveness/weak competitive strength – selectively focus the brand or harvest it.
• Low market attractiveness/strong competitive strength – defend or refocus the brand.
• Low market attractiveness/medium competitive strength – harvest the brand.
• Low market attractiveness/weak competitive strength – consider withdrawing the brand.

A disrupter is a new entrant to a market who sees a gap left by the large incumbent suppliers. Usually, the disrupter is small and eager to win business from anywhere.

The disrupter does things differently.

Over time most customers expect the performance of products to improve and generally they do.

There is a distinction between the disruption that takes place at the low end of the market by a more efficient supplier and one that better meets the needs than the products served by incumbents.

The concept of the disrupter was introduced in 1995 by Joseph Bower and Clayton Christensen in an article in Harvard Business Review entitled ‘Disruptive technologies: catching the wave’.

Edward de Bono’s six thinking hats: brainstorming problems and generating new ideas

The six thinking hats framework is employed to make meetings more efficient and more valuable. The model was devised by Edward de Bono.

The six thinking hats are used for idea generation (such as new product development) and problem solving (such as how to improve customer loyalty).

The tool can be used for problem solving and also for new product development, building new value propositions, arriving at different segments, scenario planning, war games, etc.

The hats represent a specific direction of thinking. This is the strength of the argument for the model because it focuses thoughts of a particular kind.

Edward de Bono is a physician, psychologist and consultant specializing in lateral thinking. He published the Six Thinking Hats as a book in 1985.

The six thinking hats tool needs a moderator. This person should be able to explain what is required, keep an eye on time spent.

EFQM excellence model: improving an organization’s quality and performance

The European Foundation for Quality Management (EFQM), based in Brussels, is a not-for-profit organization established with the purpose of increasing the competitiveness of companies. Central to this objective the organization promotes a model of excellence, which it believes drives competitiveness and quality.

There are three integrated components of the model:

The fundamental concepts: these are the pillars of a company that are required if excellence is to be achieved. The criteria: the ingredients of the excellence recipe and the results they deliver.

RADAR: the control and monitoring process for ensuring excellence.

The model shows how certain components of a company affect its results. The way an organization operates is through five ‘enablers’ and four ‘results’.

• The enablers group Leadership (weight of 100)
• Strategy (weight of 80)
• People (weight of 90)
• Partnership and resources (weight of 90)
• Process, products and services (weight of 140)
• The results group Customer results (weight of 200)
• People results (weight of 90)
• Society results (weight of 60)
• Key performance results (weight of 150)

The RADAR is the final part of the model and it monitors progress.

• Results: is the strategy delivering the right results?
• Approaches: does the organization have the right plan to deliver the results?
• Deploy: is everything being deployed in a systematic way to ensure the achievement of results?
• Assess and refine: is there a learning environment that adjusts activities should this be necessary?

In 1988, 14 European business leaders met with the intention of forming a European foundation dedicated to increasing the competitiveness of European businesses.

Four corners: analysing competitor strategies

No company operates in a vacuum. Its success or otherwise is determined by its competitors.

The four corners model, proposed by Michael Porter is a framework for analysing competitors.

The model identifies four elements that give insights into what motivates competitors to take certain actions.

• In the north-west corner sit the ‘drivers’.
• In the south-west corner are the ‘management assumptions’ of a competitor.
• In the north-east corner are the ‘strategies’ of the competitor.
• In the south-east corner are the ‘capabilities’ of the competitor, including all its resources.

Analyse all the drivers that motivate the competitor such as:

financial goals

corporate culture

organizational structure

leadership team

business philosophy

Analyse all the management assumptions that motivate the company such as:

• companies’ perceived strengths and weaknesses
• company culture
• attitude to competitive reactions

Analyse the following to see how the company acts in terms of its strategy:

• the business’s differential position
• where it offers value
• where it is investing
• relationship with the value chain

Analyse the following to see how the company acts in terms of its capabilities:

• financial strength
• marketing strength
• production strength
• patents and copyrights
• workforce strengths

Michael Porter, a professor at Harvard Business School, published his theories on how competitive forces shape strategy in the Harvard Business Review in 1979, and subsequently in his book Competitive Strategy (1980).

Gap analysis: improving areas of weakness in a company

The concept of gap analysis is simple enough. It is the identification of the difference between the current level of performance of a company and where it would like to be. The gap could be in a number of areas of a business:

• Performance gaps with customers
• Product gaps
• Segment gaps
• Geographical gaps

There may be many other gaps in a business such as resource gaps, technology gaps and intelligence gaps.

The gap analysis model is about answering three questions:

• Where are we now?
• Where do we want to be?
• How do we get there?

Steps in gap analysis are as follows:

• Step 1: identify where the problem lies.
• Step 2: obtain a measure of current performance.
• Step 3: determine what the performance should be.
• Step 4: determine a plan for how the gap is going to be filled.

Gap analysis is as old as the hills. However, the term gap analysis is relatively new and was conceived in the 1980s by researchers at the University of Idaho.

Greiner’s growth model: recognition and transition through different phases of company growth

Very few companies stay static for long. Growth, therefore, is almost essential but it brings with it growing pains.

• Growing pains can be financial. Rapid growth requires a good deal of working capital.
• Growing pains can also be felt by employees. Employees say they want their company to grow but may be disturbed when the implications hit them.

Greiner recognized these growing pains and developed a model that helps companies anticipate the problems so they can prepare accordingly.

Greiner identified six phases of growth that most companies are likely to face. The faster a company grows, the shorter the phase of growth.

The six phases identified by Greiner are:

• Phase 1: growth through creativity (crisis of leadership). The founders of a company start small and are involved in everything.
• Phase 2: growth through direction (crisis of autonomy). Formal procedures are installed in this second phase.
• Phase 3: growth through delegation (crisis of control). In this third phase the company has recruited middle managers and the founder is able to delegate.
• Phase 4: growth through coordination (crisis of red tape). The subsidiaries and business units have by now developed into profit centres and are becoming standardized.
• Phase 5: growth through collaboration and cooperation (crisis of identity). As growth continues in phase 5, new structures are introduced to manage the much larger size of the organization. The hierarchical structure of control is replaced by a matrix.
• Phase 6: growth through alliances. Growth is still possible though now more likely through partnerships with other companies. Mergers, acquisitions and outsourcing take place.

Larry Greiner developed his organizational growth model and published an article entitled ‘Evolution and revolution as organizations grow’ in the Harvard Business Review in 1972.

Larry Greiner’s original model had five phases. He added the sixth phase in 1998.

Time is one of the greatest influences on an organization.

Size is the other major influence on the organization.

The speed of change is likely to vary across different industry verticals.

Collaboration and communication is important at every stage and is a key to growth.

Kano model: identifying purchase motivations

When people choose a brand or product, they do so using both conscious and subconscious thought. A model developed by Noriaki Kano focuses attention on what is of value to the customer.

The tool has two axes. The vertical axis measures satisfaction ranging from low at the bottom to high at the top. The horizontal axis measures the degree to which the service or product delivers against what is expected.

The Kano model plots products (or services) against three types of properties or attributes:

• Basic attributes. Basic attributes are the features in products (or services) that, when provided, are regarded as neutral because they are expected.
• Performance attributes. Performance attributes are the requirements that customers have from a service or product that can vary and their satisfaction with the product varies in proportion.
• Excitement attributes. Excitement attributes are the things that we get from services or products that are unexpected and that delight us.

Kano recognizes that the position of attributes changes over time.

Kano identified two more sets of attributes:

• Indifferent attributes. Kano’s model has a zone of indifference that contains attributes that people don’t care about.
• Reverse attributes. Sometimes features are present in an offer and they decrease satisfaction.

Kano asks two questions about each attribute:

• If (name the attribute) improved in its performance, how would you feel? The functional appeal of the attribute.
• If this product did not have (name the attribute), how would you feel? The dysfunctional appeal.

Noriaki Kano, a professor of quality management at the Tokyo University of Science in Japan, published his model in 1984.

Every attribute needs at least two questions (the functional and the dysfunctional) and possibly a third question to determine its importance.

Kotler’s five product levels: adding value to a product or service

Kotler recognized three components that lead to the consumption of products:

• Need: there has to be a basic requirement.
• Want: someone must desire the product, believing it will satisfy the need.
• Demand: this is the desire established through the ‘want’ plus the ability to pay for the product.

Kotler proposes five levels of a product:

Core product: the starting point of Kotler’s concept is the core product. This is the product with its benefits as seen by the customer.

• Generic product: this represents the qualities that are associated with a product.
• Expected product: these are the things that customers anticipate they will receive when they buy a product.
• Augmented product: these are the things that add value to a product and are often intangible.
• Potential product: this is the product of the future.

All products have a price. This should be based on their perceived value, though often prices are simply built on costs plus a margin.

Philip Kotler, in his book Marketing Management, published in 1967, describes the five levels of a product.

Kotler built on earlier work by Theodore Levitt.

Market sizing: assessing the size and value of a served or potential market

There are two measures of market size – the total available market (TAM) and the served available market (SAM). The SAM is that which a company supplies with its products and in which it competes against other companies producing similar products. The TAM is wider and includes competitive and substitute products.

There are three different approaches to assessing the size of the market:

Demand – side. This is the bottom-up approach where research from end users is applied to statistics on the market.

Top – down. It takes a bird’s-eye view of the market from published reports and macro data.

Supply – side. This is the assessment of market size built up from estimates of the revenue of each competitor.

In the 1920s and 1930s Nielsen in the United States began audits of products, effectively assessing sales through grocery stores.

Maslow’s hierarchy: differentiating market positioning

Maslow’s hierarchy of needs helps us to understand motivations. It is a theory described as five levels in a pyramid.

Abraham Maslow was born into a Brooklyn slum in 1908. He published his theory of human motivation in a paper in 1943. After Maslow’s death in 1970, research by Clayton Alderfer suggested that Maslow’s five groups of needs could be reduced to three – existence, relatedness and growth (the ERG theory).

• Level 1: survival needs
• Level 2: development needs. Once established, the company must now become sustainable.
• Level 3: relationship needs. At the time of the start-up, sales are everything.
• Level 4: structural needs. The growing business needs to slough its informal ways and impose structures and reporting hierarchies.
• Level 5: recognition needs. The company is now large and has a brand that must be cherished and protected .
• Level 6: self-actualization needs. This is the level where a company places great emphasis on corporate social responsibility (CSR).

Advertising agencies know it is a waste of time promoting features and benefits around the bottom of Maslow’s hierarchy.

Ad agencies know that customers are motivated by emotional factors higher up the pyramid.

McKinsey 7S: a company ‘health check’ audit tool

The consultancy firm McKinsey developed a model with seven elements, each an indicator of the health of the company. The seven elements all begin with the letter S and so the model is known as the McKinsey 7S framework.

• Three of the seven elements of the model are referred to as hard elements. They are strategy, structure and systems.
• Alongside these hard elements are four soft elements. They are skills, style, staff and shared values.

The model is a useful tool for carrying out an audit of the company to determine where its strengths and weaknesses lie.

The model can be put into practice in five steps:

• Step 1: audit the 7S elements for alignment
• Step 2: determine what the 7S elements should look like
• Step 3: decide what changes must be made
• Step 4: implementing the plan
• Step 5: monitor and review

Mintzberg’s 5Ps for strategy: devising a competitive strategy

Henry Mintzberg, an academic and a business thinker, developed a model for helping classify and understand business strategies. He recognized five different types, each named with a P:

• Strategy as a Plan: an intended course of action
• Strategy as a Ploy: a manoeuvre to beat the competition
• Strategy as a Pattern: a strategy that emerges, perhaps by accident
• Strategy as a Position: a brand that stands out against competitors
• Strategy as a Perspective: the unique way the company works within its market

MOSAIC: setting objectives for current and potential opportunities and how to reach them

It is a framework for addressing macro and micro business issues. MOSAIC is an acronym for mapping, objectives, strategy, action, implementation and controls

• A map is an essential part of any journey. Mapping the market takes time. It is also a job that is never finished. It is important that the mapping stage does not bog down the process through the obsession with finding ‘just one more piece of information’.
• Objectives are a statement of the way forward. The acronym SMART defines the setting of the goals.
• A strategy is the blueprint for meeting the objectives.
• The strategy has to be turned into an action plan. This is where tactics, people, resources and timing come into play.
• Implementation is the process of putting the plan into effect. The implementation is unlikely to go exactly as planned.
• The plan will have a critical path, which must be tracked so that if a problem is faced it can be solved.

The MOSAIC framework was developed in 1996 by B2B International as a tool to drive action from market research studies.

Net Promoter Score®: a tool for driving customer excellence

The Net Promoter Score ® (NPS) is a measure of customer satisfaction and loyalty and is used to determine how likely customers are to recommend and promote a company.

In B2B markets the average NPS is between 20 and 30.

The NPS has found appeal because, according to its inventor, Fred Reichheld of Bain & Company, it is the ‘One Number You Need To Grow’.

The appeal of the NPS is its simplicity. As the name of the tool suggests, it delivers a metric on the net number of people who are advocates of a brand or company.

New product pricing (Gabor–Granger and van Westendorp): pricing new products

A well-thought-out pricing strategy is crucial for optimizing both sales volume and profit.

Every company needs to ask itself the question ‘Am I charging optimum prices that will generate the maximum profits for my sales?’

The Gabor – Granger pricing tool is often used to establish price perceptions of new products. It was developed in the 1960s by two economists (André Gabor and Clive Granger).

A more sophisticated variation of the Gabor – Granger technique is a tool developed by Peter van Westendorp. Respondents are shown or told the features and benefits of a product (or service) and the price sensitivity measurement (PSM) tool determines pricing options based on four questions:

• At what price would you consider this product/service to be cheap?
• At what price would you consider this product/service to be too expensive?
• At what price would you consider this product/service to be priced so cheaply that you would worry about its quality?
• At what price would you consider this product/service to be too expensive to consider buying it?

Two price points:

• The indifference price point (IPP). This is where the number of respondents who regard the price as cheap is equal to the number of respondents who regard the price is expensive.
• The optimum price point (OPP). This is the price at which the number of customers who see the product as too cheap is equal to the number who see the product as too expensive. This is typically the recommended price.

Personas: improving the focus of marketing messages

In order to achieve targeted communications that are effective, we should have someone in mind.

A persona is a particular character. It is a description of someone, not just anyone. It is the image, the face and personality of a person. If we can characterize a persona within a group of customers, it becomes easier to target them.

Once the persona has been developed, the real work begins of developing the communication messages.

The concept of personas goes back to the early 20th century and Jungian psychology. It has been adopted by marketers relatively recently. In the 1980s, Alan Cooper, an American software designer and programmer, pioneered the use of personas as a tool to help create high-tech products.

PEST: assessing four major macro factors that shape a company’s future

The PEST tool is used to examine the macro and micro factors that determine threats and opportunities within the marketplace.

The PEST usually precedes the SWOT as it feeds into the SWOT’s opportunities and threats.

The origins of the PEST model are vague. One of the first mentions of the four factors was by Francis Aguila, a professor at Harvard Business School who, in 1967, wrote a book entitled Scanning the Business Environment.

Porter’s five forces: assessing five economic factors for competitive intensity

Michael Porter recognized five forces that bear down on companies.

• Industry rivalry. The central force, the one that is usually in the face of every business, is the rivalry that exists with other competitors in the market.
• Bargaining power of suppliers. Suppliers can have a huge influence on competitiveness.
• Threat of substitutes. A company’s competitive position can be weakened by substitutes. Almost all products have some form of substitution.
• Threat of new entrants. The cosy position enjoyed by suppliers to a market can be disrupted by new players.
• Bargaining power of buyers. In some markets there are a limited number of large buyers who can dictate prices and terms.

Porter’s generic strategies: pinpointing the strongest competitive position

Michael Porter with his generic strategies starts at the beginning.

His thesis is that there are three important positions that a brand can take:

• Low-cost (cost leadership)
• Niche (focus)
• Differentiation

A good strategy is one that is solidly located in one of the three positions. The worst place to be is stuck in the middle where a brand tries to stand for everything and, in doing so, achieves nothing.

Price elasticity: outlining opportunities for raising or lowering prices

Price elasticity is an important concept in business. It describes the relationship between the price of the products and the demand for those products.

The formula used to determine price elasticity is based on the change in volume demand relative to the change in price of the product.

When the price elasticity is less than – 1.0 it is inelastic. Most industrial products have a price elasticity of around – 0.7 or – 0.8.

The economist Alfred Marshall in 1890 is credited with defining the elasticity of demand in his book Principles of Economics.

Price quality strategy: guiding a company’s pricing strategy

The relationship of price and quality is at the heart of the model described by Philip Kotler.

• High quality/high price – a premium strategy.
• High quality/medium price – a good value strategy.
• High quality/low price – an excellent value strategy.
• Medium quality/high price – danger of overcharging.
• Medium quality/medium price – middle of the road strategy.
• Medium quality/low price – a good value strategy.
• Low quality/high price – an exploitative strategy.
• Low quality/medium price – a false economy strategy.
• Low quality/low price – a cheap strategy.

The three strategies that will not work are high price/low quality, medium price/low quality and high price/medium quality.

A simplified model (author unknown) proposes four, rather than nine, positions.

• Premium
• Penetration: the aim of the company using this strategy is to quickly win market share
• Economy
• Skimming

Skimming can also refer to the strategy of taking high profits within a market from the small number of people who are prepared to pay a very high price.

It should be borne in mind that Kotler’s price quality strategy is set in the framework of a competitive marketplace.

Product life cycle: determining a long-term product strategy

Through understanding the product life cycle it is possible for a company to develop a marketing strategy at each stage.

• Pre-birth. At some stage an idea for a product is conceived.
• Youth. As stated above, the launch period of a new product can be difficult. The new product needs to acquire a high level of awareness and this in turn must be supported with an appropriate promotional budget.
• Growth. After a time, the awareness of the product will increase and sales will grow significantly.
• Maturity. Eventually the new product becomes mainstream.

Old age. Eventually, the applications for the product will decline or new products will come on to the market that can better serve customers’ needs.

In 1933 Otto Kleppner, the founder of a New York advertising agency, recognized different phases of a product’s growth that required appropriate types of advertising: pioneering, competitive and retentive.

In 1966 Raymond Vernon, an American economist, published an article that described how products move through a life cycle.

As a result of this 1966 article, Vernon is frequently credited with inventing the term ‘product life cycle’.

Product service positioning matrix: positioning products according to quality and service value

This framework has been developed to assist companies to match their product and service offer to leverage a price premium.

There are four important positions that can be identified on the matrix:

• Premium positioning – high product superiority/high service superiority
• Technical leadership – high product superiority/low service superiority
• Service leadership – low product superiority/high service superiority
• Low-cost leadership – low product superiority/low service superiority

The model was developed in 2016 by Carol-Ann Morgan, a B2B market-research consultant, as a direct result of working with B2B companies seeking to identify and justify a price premium.

Segmentation: using customer groups to gain competitive advantage

Identifying needs and recognizing differences between groups of customers is the role of the marketer. Different groups of customers are segments. Segmentation is therefore at the heart of marketing.

The statistical approach to a needs-based segmentation has become extremely popular and it is an important, impartial means of finding interesting and possibly more relevant ways of addressing the customer base.

It was not until 1956 when Wendell R. Smith wrote an article entitled ‘Product differentiation and market segmentation as alternative marketing strategies’ that segmentation as we know it today was born.

Service profit chain: connecting employee satisfaction and performance with company profits

Company managers know that there are only three ways to increase profits – sell more, charge more, or reduce costs. The service profit chain model argues that there is a fourth way.

The chain begins with employees and feeds through to increased profits.

The service profit chain concept was first proposed in an article in Harvard Business Review in 1994 by James

The key components of Nordstrom’s success have been hiring nice, capable people, targeting high-level customers and offering the very best customer service. These are the key ingredients for the service profit chain.

SERVQUAL: aligning customer expectations and company performance

Service quality, shortened to SERVQUA , is a model designed to find out the match between a company’s service performance and customers’ expectations.

The SERVQUAL model is based around five service dimensions, which make the acronym RATER:

• Reliability
• Assurance
• Tangibles
• Empathy
• Responsiveness

Service quality can be reduced to an equation expressed as people’s perceptions of the service they receive (P) minus their expectations of that service (E).

The gaps that can be identified through SERVQUAL are:

• Gap 1 – the knowledge gap
• Gap 2 – the standards gap
• Gap 3 – the delivery gap
• Gap 4 – the communications gap
• Gap 5 – the customer satisfaction gap

The SERVQUAL model was developed by three academics, Parsu Parasuraman, Valarie Zeithaml and Len Berry, following research they carried out between 1983 and 1988.

SIMALTO: identifying the customer value placed on product or service improvements

SIMALTO is another trade-off model that enables marketers to work out what people value and where they would like to see improvements. The name is an acronym for simultaneous multi-attribute level trade-off.

John Green, a market researcher who began life working for Xerox, developed the SIMALTO concept and presented it at a market research conference in Oslo in 1977.

Stage gate new product development: planning the development and launch of new products and services

It is important therefore that the new product’s potential success is fully evaluated before the launch. This has led to the development of a stage gate process with a go/no-go decision required at each stage.

The model begins with ideation and is followed by five stage gates:

• Idea screen
• Stage 1: concept creation
• Stage 2: business case
• Stage 3: product development
• Stage 4: test and validation
• Stage 5: launch and monitor

In the 1940s, stage gate processes were introduced to build new, complex chemical plants.

SWOT analysis: analysing growth opportunities at product, team or business level

The most famous of all business models is the SWOT.

When preparing a SWOT, it is easy to confuse strengths and opportunities.

The origins of the SWOT tool began with research carried out by Stanford Research Institute (SRI) in 1960. The research, led by Albert Humphrey.

System 1 and System 2 thinking: identifying the emotional forces that drive decisions

Behavioural economists recognize two levels of thinking when it comes to decision making. The first level of thinking is called System 1. It is fast, automatic and arises out of the subconscious.

System 2 thinking is easier to analyse. It is the slow, calculating, conscious and logical way in which decisions are made.

There are a number of factors that influence the biases:

• Anchoring
• Availability
• Optimism and loss aversion. There is an old saying in business that ‘everything costs more than you thought and takes longer than you thought’.
• Framing
• Sunk cost

USP: pinpointing the unique selling point of a product or service

Finding a USP can be difficult.

The steps in discovering a USP are as follows:

• Step1 – select your target audience
• Step 2 – identify the needs of the target audience
• Step 3 – identify the unmet needs of the target audience
• Step 4 – rank order the needs and unmet needs
• Step 5 – list all the elements of your value proposition
• Step 6 – match your value proposition against those of competitors
• Step 7 – consider the processes by which your products are produced
• Step 8 – select a benefit, a feature or a story that will resonate with the target audience

The concept of the USP arose within advertising agencies in the 1940s.

The idea of the USP was introduced by Rosser Reeves of Ted Bates & Company in the United States in 1940.

The term USP has largely been replaced by the concept of the customer value proposition (CVP).

Value-based marketing: adding value to products and services to improve profitability

The price can be manipulated higher if the seller has a strong value proposition.

Product-focused companies are not good at selling value; they are good at selling products.

Value-based marketing is all about understanding the needs of the customer and ensuring that the product, together with its benefits, is positioned at the right price to collect the maximum amount of value.

• Discover. The discovery phase is about understanding the customer.
• Commit. It is at this stage that the company begins to take aim at segments that value its offer.
• Create. Value marketing companies know the importance of delivering an excellent customer experience.
• Assess. A VBM company is a listening company.
• Improve. Following on from the assessment and customer feedback, the VBM company will be aiming to spot gaps between expectations and delivery and will close those gaps wherever it can.

In the 1980s and 1990s articles were written by McKinsey consultants on value marketing. In 2002 Nicolas DeBonis, Eric Balinski and Phil Allen wrote a book entitled Value-Based Marketing for Bottom Line Success: 5 steps to creating customer value.

Value chain: identifying product or service value during the manufacturing process

Michael Porter identified five activities in the value chain within a company:

• Inbound logistics
• Operations
• Outbound logistics
• Marketing and sales
• Service

Porter identified four support activities within companies:

• Infrastructure
• Human resources
• Technology development
• Procurement

The value chain model was proposed by Michael Porter in his book entitled Competitive Strategy published in 1980.

Value equivalence line: managing price and product benefits in a business strategy

Products or brands can be plotted on a graph in which the Y axis reflects the perceived price and the X axis the perceived benefits. The line that bisects the X and Y axes is the value equivalence line (VEL).

In 1994 Bradley Gale made the observation in his book Managing Customer Value that ‘value equals quality relative to price’.

The concept of the VEL was described in 1997 an article in the McKinsey Quarterly by Ralf Leszinski and Michael Marn entitled ‘Setting value, not price’.

The theory of the VEL is based on the assumption that people are rational in their actions.

Value net: how to benefit from competitor collaboration

The idea that businesses should cooperate rather than fight all-out wars was developed by Adam Brandenburger and Barry Nalebuff. They proposed the value net model, which puts a company in the centre of its universe with four forces surrounding it.

• Customers
• Suppliers
• Competitors
• Complementors

Complementors are organizations that offer something that makes a business stronger.

In developing their model, Brandenburger and Nalebuff were inspired by game theory.

The game is played by moving different levers – components in the value net tool. These components are referred to as PARTS, an acronym for players, added value, rules, tactics and scope.