Business strategy may sound simple but it’s also the single most important activity you’ll engage in in your career. A business strategy will determine success or failure, launch careers and destroy others. For anyone who may doubt the importance of developing a sound strategy, take the case of this large consumer cosmetics maker.
A few years back, a certain large cosmetic maker’s sales and profits were in a slight decline. R&D suggested adding new product lines, manufacturing called for consolidation so longer production runs could reduce costs, accounting wanted to cut the marketing budget and sales – well, they thought you can solve everything with more budget. As the executives struggled they turned to a marketing professor at Wharton business school who examined the data and came up with a strategy.
The company had segmented the market into four distinct customer segments: Caucasian and Hispanic women under 45 years and over 45. Into these four segments they sold six cosmetic product lines (brands). The data showed that the previous year’s sales were just shy of $300 million while the advertising and promotional (A&P) spend was $150 million which generated $54.5 million in profits. As the professor plotted the data he noted a relationship between advertising and promotional spend (A&P) and market share. As you look at figure 1 below, note the shape of the sigmoid curve (S curve) showing how initial spending yields meager results but continued spending pushes the product up the market share curve to a point that eventually flattens out. This is where, again, added spending yields scant additional results.
In the figure below note where each of the products lies on the S curves. It’s obvious some products would benefit from additional spending while one (product named “gold”) has already achieved maximum benefit.
Figure 1: Example plot for one segment showing the relationship between market spend and market share. This plot is for example purposes only and would vary by segment plotted. All product names are disguised at the company’s request.
After examining the data, the Wharton professor simulated optimizing the A&P spend by reducing the A&P spend on selected products in specific segments while increasing the spend for others to push targeted products up the S curve. The initial results showed that for the same $150 million A&P spend the large cosmetic company could increase sales to just under $460 million (from $300) and profits would triple rising to $162.5 million (from $54.5). But, as they say on the infomercials “Wait, there’s more”. The professor was then able to show how reducing the A&P to $141 million could optimize the spend and boost sales to $469 million while profits rose to $177 million – incredibly, $122 million in additional profit over the previous year!
What can we learn from this cosmetic company and the analysis that the Wharton professor conducted:
- The world is S: Initial efforts may yield meager results, but they will come to a “Tipping Point” where market share gains accelerate. To understand this point, plot your data (market share vs sales force time or A&P spend or both) then simulate allocating additional resources to push selected products to the top of the S curve!
- Strategy is resource allocation: The Wharton professor was able to show how better (not more) resource allocation could boost market share and improve profits 3X!
- Strategy involves analysis: To develop a good strategy and know where to best allocate resources requires a keen understanding of the market dynamics.
Understanding the market and how different forces can change its dynamics is the responsibility of anyone developing a strategy (and thus any business leader). Don’t make the common mistake of thinking this doesn’t apply to your market…it applies to every market, the only difference being the resource allocation may be “time”, (or people, etc.) rather than “money”. The cosmetic company followed the professor’s advice. By re-allocating resources, company profits tripled while they slightly reduced A&P spend.
Allocation of resources is the definition of strategy. Where will you allocate yours?