It is important that you get the sequence right. The marketing plan is the building block upon which all other components of your business plan is based. It will allow you to make better decisions about:
• Location; this is related to the business information that you have about the location of your customers or your business partners
• Pricing your product or service; this will be related to the pricing intelligence you have about your customer preferences and commercial benchmarking data about your competitors.
• Production method and scale; this is related to the business information you have about supply-demand and the amount of items you need to produce.
• Timing; This is related to your forecasting intelligence and your market-data driven foresight about industry evolution and your industry's phase of development. It would be a strategic error to launch a business that will be impacted by an upcoming recession or is experiencing decline.
• Product-technology developments; this is related to your insights about trends & developments regarding scientific breakthroughs, skills in the labor market, commercial innovations, and market adoption processes.
For market launch, customer acquisition, product development or business expansion purposes, conducting market research can provide you with valuable business information and intelligence. In this blog post, you will learn how to transition from conducting market research to developing your sales strategy and then to develop plans and initiatives as part of your strategy implementation process for the development of a differentiated value proposition to your customers
As digital, AI, and manufacturing technology develops and new venues for product development emerges, it is increasingly becoming possible for product managers to turn their breakthrough concepts into a reality. But just because you can make something, it doesn't mean you should. Product Managers tend to focus on innovation, but they ought to innovate with a goal. Mainly, they should provide as much as possible unique market offerings that can actually drive profit for their organizations by building commercially viable products and financial successful businesses around those offerings. And to build successful products, they need to achieve primarily two things
1) build products the customer actually needs or wants and is willing to pay for.
2) build products that the competition is not already offering to a sufficient extent.
To determine what the customer needs, you should conduct market research. By doing so you will identify opportunities in the market and identify customer problems for which you can provide solutions. What is learned from the research will either validate your product hypothesis and allow you to proceed with confidence or reveal evidence that customers won't adopt your product. So, what exactly is market research?
Market research is a process of collecting data about a product's target marketplace as well as the product's competitive landscape which sometimes is ignored. The state of the target customer base and the competitive environment are interrelated. The data generated from research then enables product managers to provide a product that specifically fulfills the market's requirements. It delivers an overview of the competitive landscape and how attractive your product or brand is. General market overview information including market size, customer segments, and trends can be identified, as well as competitive intelligence related to market structure, key players and brands in the market, and their relative share of the market.
Industry attractiveness and profitability does not only depend on the perception of the customer but also on the competitive intensity or overall industry health. For example your potential customer size might be large but if the competition floods the market with a similar product offering, the eventual customer base to which you will actually be able to sell will shrink. It's generally accepted that systematically monitoring your external business environment is a very important contributor in guiding product managers in improving your business decision-making, adapt your sales strategy and preventing costly miscalculations.
More detailed research about target customers relates to buyer perceptions, needs, and brand and supplier preferences, whereas additional research can concentrate on product usage patterns of the products currently available in the market. If new products are being developed, research may focus more on finding customer pain points and the customer's existing degree of satisfaction with available solutions. A tool to identify this level of satisfaction is the the 'good enough versus not good enough' distinction suggested by innovation management guru Clayton Christensen within the framework of the 'jobs to be done approach'.
And finally, market research can track developments and fluctuations in product pricing, price sensitivity of consumers, and generate a map of prevailing price structures in the market. A research is usually concluded by a market research report containing an assessment of the main competitors, overview of historic and future market trends, M&A activities, existing market segments, market share segmentations, and product pricing strategies. So by testing your market proposition and by making continuous improvements you will end up with a more user-focused product, that will enhance the user experience. It can deliver you business information on who your customers are, what the locations of your customers are, and what the chances are of them buying your product.
Additionally, market research can reveal where and how customers are obtaining information on your product, on what matters, the types of criteria that influenced their purchasing decision, and what motivated them to pay for a product. Similar market intelligence can be obtained often more efficiently through competitors research. SMB entrepreneurs generally hire external market research companies with in-house data collection capabilities to generate market research reports.
All in all, the topics that market research addresses are critical to marketing and sales efforts.
Before conducting market research, it's useful to make a distinction between primary and secondary research sources. Both are used for different research goals and utilize different methods. It's beneficial to look at each method in more detail to compare the benefits of one approach against the other.
Primary research, also known as field research, is the collection of first hand information regarding your market and its customers. It is related to going directly to the source which in the case of SMB entrepreneurs are your target customers or other stakeholders, and asking questions specifically with regards to your product and its consumption by those target customers. Primary research can be carried out through various platforms, including one to one interviews, focus groups, phone interviews, and online surveys.
Secondary research uses pre-existing data from internal and external sources. Internal sources may be your organization's marketing and sales data, financial reports, case studies, and previously commissioned research reports. Examples of external resources include government reports, industry data, public records, and analysis published by market or industry experts. For more in-depth information about the selection of the appropriate research methods, read our blog post
Another major differentiator in market research methods is the the difference between qualitative versus quantitative research. Underneath we have structured the major differences between both research types. For more info and visual representations on the differences see our blog post
Your aim should be to understand and specificaly describe the nature of your customers and competition. Research and analysis of the market for your proposed product or service should have enough depth that validates for yourself and any investors:
• The existence of a feasible market for your product.
• Entry to the market can be successfully achieved within the time planned.
• Your product is distinctive enough to attract your prospected customers.
In general your product will not sell if there is no real or perceived need for it, regardless of how great the producer thinks it is. The product or service must do one or more of the following in order to be successful.
• It fulfills the need of an unfilled market niche. For example it focuses on a niche of a market characterized by non-consumption where certain consumers have not been consuming the product due to a lack of attractive propositions or by low-end consumers where certain consumers are willing to pay a lower price for a lower quality of the same product or more convenient service.
• Contains an obvious or perceived superior quality.
• Have little competition or does not augment scarce supplies in large increments.
• Requires highly specialized experience to make or to use.
Your research will help you confirm the need for the proposed product or service. You can use a combination of primary sources; people you contact during networking activities, and secondary sources such as online and published information developed by external market
research companies.
• Your Product and Customers: Define and list the different types of products or services you will deliver. Provide as much detail as possible. The main segmentation categories are applied as follows:
• Type of product category (size, power, dimensions etc)
• Type of market (consumer or commercial; wholesale or retail; industrial, institutional, governmental)
• Type of retail channels (white label, private label, branded etc)
• Demographics of customer (age, income, education level, occupation) in case of business to consumer market
• Size and industry niche of customer in case of business to business market
Using the resulting working definitions, learn as much as possible about the characteristics of your customers and competitors. For the primary research such as networking, you will need a self-introduction that helps your contacts understand your information needs or you might hire an external market research company for a customized research.
• Market Size: Offer a description of the existing market size in units and dollars. Ensure that you have set the industry boundaries correctly. Defining your industry too broadly risks overlooking important threats and opportunities, whereas defining your industry too narrowly risks overlooking commonalities with segments that matter to your market strategy formulation. Porter's five forces model may also be applied for this task. The rule of thumb is that if at least two of the five forces show considerable supply chain differences the conclusion should be that you are probably dealing with an entirely different industry. Another useful tool is conducting technological or geographical scoping in order to generate accruate industry definitions, and is explained within our informational video.
• Market Share: Percentage share that each of your competitor holds of the market. Also substantiate how you arrived at the percentage share you aim to capture.
The following part of your report is one of the most important elements of your business plan as this information will lead to the development of a monthly sales forecast. This will aid you arrive at realistic financial projections.
• Market Trends/Growth Rate: Describe new and potential markets, potential technological and regulatory changes or issues, and changing customer needs. One
commonly adopted technique for mapping the macro external environment is the PESTEL technique, which stands for Political, Economics, Social, Technological, Environmental, and Legal through which you can map system level institutional dynamics that impact on the competitive landscape.
• Competition: Develop an analysis of who they are, how they operate, and their strengths and weaknesses. Investigate and analyze competitors' market strategies, market niches, means of market differentiation, product/service development strategies, financial performance, life cycles and market types (industrial, commercial, residential, franchise, government) served and under consideration. Competition goes well beyond your existing industry peers and includes other forces that directly influence on competitive intensity and industry profitability. One of the best industry analysis techniques is Porter's five forces model. For more information see our informational video. Another competitors intelligence technique is competitor benchmarking through which industry peers can be assessed from different angels including financial
• A SWOT analysis: addressing the product or organization's strengths, weaknesses, opportunities, and threats, as well as an overview of the organization's capacity to effectively market the product. Given the wide array of topics and areas that a business plan needs to take into consideration, carrying out market research can be an arduous task especially for those new to product management. There are however, several best practices you can adopt to guide you through the process, such as the ones mentioned above. You can also consider getting the help from external market research suppliers for data collection, industry assessment and industry profiling.
Your purpose is to clarify your market, customer, and product definitions and make key decisions about how your business will approach and react to the market. Some of the tasks for doing that are:
• Compare your business to the competition.
• Identify those aspects of your business that make it unique.
• Assess realistically the opportunity for a small firm to compete. This depends on certain sources of competition such as market concentration and market share of the leading players.
• Sufficiently define your target industry by setting the appropriate industry boundaries.
• Make your your product or service descriptions more refined, and clarify your target market, and your target market share.
• Adapt if necessary the steps you will take to produce your products or services.
Summarize your findings in the form of a statement of market strategy that identifies what you will sell, to whom, and why they will buy your product rather than those of the competition. Explain how your strategy enables you to capitalize on opportunities and meet identified threats in the marketplace. To market effectively, you start by segmenting your market. Then you target the most valuable segments, after which you position your offering in each target market.
Positioning strategies are often needs-based, variety-based, or access-based.
One strategy formulation best practice is based on once again Michael Porter's generic strategies concept. This is a group of four generic categories of competitive strategy through which most of the variety of strategic directions adopted by organizations can be categorized and summed up: Differentiation, Cost Leadership, Focus (Cost), Focus (Differentiation).
In summary, the competitive strategies are as follows:
Cost Leadership - Minimizing the costs incurred to business customers in providing value (product or service) to a customer or client.
Differentiation - Implies making ones product unique or differentiated, compared to other competitors or substitute products in the market often based on adding value through quality and investments
Cost Focus - Implies minimizing costs in a focused market segment.
Differentiation Focus - Implies an orientation toward differentiation from other competitors/products within a focused market segment.
The choice for one of these generic strategies inevitably will involve trade-offs and not being willing to sacrifice for your choice will result in the organization getting stuck in the middle with associated negative consequences for branding, positioning, and competitive advantage. Especially wanting to simultaneously adopt both a cost leadership position as well as a differentiation strategy is often not attainable.
There are various specific marketing initiatives to convert the marketing strategy into practice throughout the product life cycle. We have made an overview of such initiatives which constitutes an oversimplification of the BCG matrix (growth share matrix) also known as the cash cow quadrant:
The sales strategy arises out of your market strategy. It contains key decisions about how you will package, price, promote and sell your product or service (5 P's). The sales strategy, combined with the plans that you have made for obtaining market share, will be applied to design the Sales Plan. The Sales Plan also contains monthly sales forecasts for the first year, quarterly forecasts for each of the following two years, as well as your detailed action plan for achieving the plan.
Once you have explored your strategic options, written a business plan and completed a marketing plan, the time to launch the business will have arrived. The sales plan will represent the critical missing link between your strategic marketing orientation and achieving your financial projections within the framework of your business plan and strategy implementation.
1. Market Sizing.
Set out revenue figures monthly for the first year, and quarterly for years two and three. This is your projection of the total sales available in your market. The research and analysis conducted for your Marketing Plan will be most helpful in this endeavor. You may also utilize known figures from identical markets for benchmarking purposes. Taking your intiatial industry definition as the basis, double check that the other markets have sufficient similarities with your industry so that it can be defined as a similar one.
2. Assess sales strategies, the purchasing behavior of your prospect customers, and compare with your competitors
It is highly recommened to take into consideration industry wide best practice methods in terms of selling the services, the use of distribution channels, market segmentation and promotion strategies, pricing trends, and sales cycle. The five P's of marketing is a common technique to distinguish between the core blocks of sales strategy and to apply this during your strategy implementation stage. The 5 P's acronym stands for: Price; Place; Product; Promotion; People. I will address the sales strategy aspect somewhat more extensively towards the end of this blog post.
3. Determine Major Factors That Will Affect Sales
If your research didn’t reveal any significant factors that would cause your business to behave differently from the businesses or other reference points used to estimate market size, you may maintain your estimate. However, major implications deriving from geography or scope or one of the five forces may require an adjustment in your estimate.
4. Identify the Selling Cycle.
Rarely will sales be constant throughout the year. There will be high months and low months. Your research will identify these patterns as well as the causes such as seasonalities, supply-demand mechanisms etc.
5. Set Out Your Sales Forecast.
Method 1: Published Research – Existing written material or internal data may provide average monthly sales figures for the business sector. You may also hire an external market research service provider to access the required data. Modifying factors: business size, age of business, distinctiveness of location, surrounding area, intensity of competition.
Method 2: Supply chain comparables – Either the competition or similar businesses in similar but separate locations. Similarities: Identify resemblances in demographics, psychographics, location, product technology, store size, staff size, amount of competitors, amount of advertising, distribution, age of store, breadth of product line, etc.
Differences: Idem dito to the above. A higher number of observations provides a more solid basis for a more accurate comparison and benchmarking.
Method 3: Expert Experience – In case you’ve been in a similar sort of business as an employee, you may be able to estimate the monthly sales. Use specific data to back up your forecast.
Alternative sources: Industry insiders with experience in the field, such as former employees, managers or owners of existing businesses who can't be considered to be your direct competitors. For example, in a different geographic area
Method 4: Trial Sales Period – To the extent that you make some pre-launch sales of samples in advance, you will have concrete information to support your estimates.
Indicators: The amount of service/product units that were sold by category etc.
Method 5: Survey – You may interview or send out questionnaires to prospects to collect data about their customer attitudes. Include in your survey questions such as, “Would you buy this service?”, and “How frequently would you buy?” Detailed analysis is required to produce valuable business information from survey data. An expression of intent to buy does not equal purchase! Instead of relying on the maximum numbers within the data, select a percentage with which you are comfortable
Summary of calculations: include sample size vs. response rate (percentages), and average purchase x number of customers.
6. Design a sales plan
A good action plan begins with goals and objectives. Your planned market share growth rate and sales forecast function as your overall monthly sales objectives and goals. Next, specify the steps needed to accomplish these goals. For example, based on your research, what is the amount of sales calls needed to close a sale? Based on the the projected ratio of sales calls to sales, how many sales men will your plan need? Once you determine the scope of work to be done by your sales force. Whether you decide to sell, or plan to hire or partner up with a sales partners, take into consideration the following competencies and qualifications that top quality salespersons should ideally posses.
Finally, you should strive to predict the amount of customer contacts by mail, store visit, telephone or other promotional medium required per sale. The assessment of distribution channels and promotion methods such as packaging, publicity, advertising, and display that led to decisions summarized in your sales strategy can now be converted into a concrete sales promotion plan. Deliver as much detail as possible, including in terms of materials, quantities, frequency and target start dates for each activity. As you complete this section of the Sales Plan, you will produce the sales and marketing expense data for your Financial Plan. Then continuously track progress in meeting KPIs and steer direction timely when needed. The latter step is more the domain of strategic management and will be subject of another blog post. You can already find a more extensive description of the main strategic frameworks in one of our informational videos.
The goal of research interviews is to adopt a qualitative structural approach to collecting business analysis data. You are going to gather business information regarding a concrete field to be assessed. As such you need to be certain that you are selecting the appropriate industries as well as industry insiders to interview depending on the goal of your interview. The research analyst or business analyst will formulate questions and save the feedbacks from each of the interviewees.
There are a series of elements to take into consideration when doing research interviews:
Preparing for effective research interviews
There are a couple of steps to take when planning for research interviews:
High performance research interview process
To have an effective research interview progress, take certain actions at the start of the research interview:
The following steps during the research interview
For example, the questionnaire might read.
“What brands of shampoo have you used in the past 4 weeks for washing your hair?”
The following variations are possible:
“What brands of shampoos have you used in the past weeks?” (The timing is omitted)
“What products have you used in the past 4 weeks for washing your hair”. (Instead of brands, we now have products).
The closing section of the research interview should consist of the following:
The research interview process ends with the next follow-up steps:
Research Interview considerations
Research Interviews have a set of benefits:
Research Interviews also have several deficiencies:
There are certain technologies for which strict standards need to uphold in terms of securing their confidential data, intellectual property etc due to the high-degree of innovation, high strategic stakes involved or outright national security concerns. Or there may be industries that involve complex decision making, slow pace of innovation, low degree of standardization, and complex supply chains. Examples are direct business to consumer sectors or industrial production environments. In such cases, provided that you gain the trust of the participants, close observation of the processes and systems can yield the most useful insights in the most effective way.
Purpose of observation as a research method
The power of research observation is based on the following points:
It’s an approach to obtain circumstance-based information within the natural context of the person’s daily work. The major observational methods are mystery shopping research, electronic observation and audit.
The various styles of observation research
There are primarily two types of observation research:
Research Observation objectives and preparation
There are a couple of aspects that you need to take into consideration when planning for observation
Flow of the observation session
A couple of things need to take place before the session:
The various actions to be taken during the observation:
The steps to be taken post-session
Research Observation considerations
The strengths to benefit from can be summed up as follows:
Some of the cons of using observation as a research method are:
Planning Questionnaires and Surveys like a pro
The goal of surveys and questionnaires is to gather data about business information from the stakeholders, be it about their business or opinions. It represents a systematic technique using a set of questions to make inferences about your field of study or to verify whether you are on the right track with achieving your goals. Questionnaires should not be very time consuming for the participant. This will increase the willingness of the participants to contribute and complete the survey. Surveys and questionnaires are useful research methods for a variety of industries and are therefore one of the most adopted research methods.
Figure 1. Sample Telephone Q&A Interview session. Source: Inhouse Data Portal EngineerOnomics [LÖGER Group]
Research Question types
There are a few main types of research questions that you’ll use in a survey:
Closed ended – Most of your questions will be of this closed nature. You will provide the participants the chance to select from a set of answers, rate something a range or scale, or provide a Yes or No answer.
Planning for successful research surveys and questionnaires
There are series of steps to be taken when planning for conducting surveys and questionnaires.
Determine your goal – Define why the survey is being prepared in the first place. You might establish that a survey is the most effective way to obtain opinions on the current state of affairs in a particular industry, regarding specific technologies or other forms of applications
Identify a target group – Who ought to become the respondents why should they contribute? It may be a group of end-consumers who have been using a new system that should be in conformity to your pre-determined goal.
Select the type – Select the type of survey and the kind of questions that you want to ask so that you can get the max benefit from the process. Variants of surveys are panel sampling, telephone surveys, online surveys, focus groups etc.
Establish the sample group size timeline – You need to establish a response rate which represents the amount of people you need a response from out of the sample group. An insufficient number of respondents will compromise the representatives, quality, and validity of your data, for example because it tends to introduce the likelihood of bias.
Choose the research distribution and collection methods – This ask of you that you establish how you will allocate the surveys logistically, what infrastructure to use to gather the information.
Qualify Recruits – Do a pre-screening of the recruited respondents to make sure that you weed out potential participants to that do not fulfil the criteria of your target group. You can use a pre-screening form for that.
Select the sample – Select your sample from the list of respondents and ensure that it meets your established target levels to obtain sufficient respondents providing the information and data.
Establish beforehand whether you are going to complement with interviews (afterwards) – After the survey is completed, ensure that you gather contact information in the survey for follow-up contact.
Plan the research questions attentively – The question needs to be as neutral, clear-cut and flow as logically as possible. It is better to avoid framing questions in a way that influences the outcome beforehand or questions that are confusing to the participant.
Test – It make a lot of sense to test your survey with a least five people, getting their feedback on the user-friendliness of especially the substance of the questions, and why they answered the way they did. This will make sure that the data collected is not inconsistent and clear-cut.
Distribution and project management
This can be done in person – you could use this in a workshop if you wish – or by sending the survey via e-mail or other online tools, such as SurveyMonkey. You can also use your in-house data collection portal and project management material such as a tracker to track how the different stages evolve from recruiting to data collection. Subsequently make appointments and monitor progress.
There are some factors to take into consideration with regards to research logistics
Structuring questionnaire and survey results
The steps to be adopted after the survey is completed are:
Survey and questionnaire considerations
Strengths of using surveys and questionnaires:
Cons to using surveys and questionnaires:
Figure 2. Matching research and learning methods with the subject industry.
A technique to assess which of the various potential benefits, that could be provided by a product, would be most/least attractive/motivating to the consumer. Used in concept development to identify which benefit should be the focus of the concept.
Blind product tests for certain product categories e.g. soft drinks, chewing gum are frequently conducted at central locations, whereas for most household and personal care products, which require a longer period of usage – e.g. washing powders, household cleaners, personal cosmetics etc. – are the products tested by respondents at home. In the latter case, interviewers will conduct a short interview at the placement stage to establish eligibility and to explain the purpose of the study. This will be followed-up by a recall interview on completion of the specified usage period.
The products / brands are usually presented to the consumers without their names, i.e., “blind’ (as this avoids a bias caused by pre-conceived ideas about the product / brand being tested).
We conduct both single product tests (where all respondents test one product only) and parallel placement product tests (where different groups of respondents each test different products).
As in all blind product tests, the purpose of a Parallel Placement Blind Product Test (PPBT), is to assess the consumer’s acceptance of a product after a minimum usage period under realistic home conditions and without the influence of any marketing mix. The product therefore is produced in a plain white pack, without a name but with usage instructions and content declaration, and placed with consumers who can judge it based on past experience. Respondents are interviewed face-to-face in their homes.
When two or more products are tested, each product must be tested by a different group of respondents. At each starting point, an equal number of interviews are conducted per product. Each interviewer must conduct an equal number of interviews for each product in order to avoid any area bias or interviewer bias. There must be equal number of interviews / questionnaires conducted daily and each product has to be placed in the specified sequence.
When the interviewers place the product, they must ensure that the product matches the product code specified in the questionnaire. If the respondent refuses to use a product, he/she is not offered another product and such respondents are normal “losses”. Interviewers need to find respondents who accept specific products before they are allowed to place another.
This type of study is conducted annually (or bi-annually) for tracking purposes. The aim of such study is to establish and monitor the usage, strengths and weaknesses of key brands.
These types of surveys are usually conducted for clients whose main interest is in selling products and services to other businesses. Consequently, they are interested in the perceptions of businesses towards the products and services offered rather than those of end-consumers.
Business research thus differs from consumer research because:
The Brand Price Trade Off study (BPTO) is an adaptation of the conjoint approach for pricing studies. The underlying assumption of the BPTO is that there are two factors that influence the purchase decision – the brand (representing a summarized version of all variables other than price) and its price. The BPTO measures price sensitivity of brands in a competitive context. Therefore, the first stage in a BPTO exercise is to identify the competing brands which constitute the ‘market’ and the range of prices that need to be tested. All respondents recruited for the study are presented with photographs or packs of brands representing the competitive set. All brands in the competitive set are presented at the lowest price for each brand. The respondent is then questioned as follows:
“Suppose you were to visit your usual shop and find these brands of ____________ (MENTION PRODUCT) at the prices shown on this card, which of these brands would you be most likely to buy?”
The price of the selected brand is increased by one level and the respondent is asked to make a second choice. This process is repeated until the respondent refuses to make any purchase at the prices quoted or when the maximum price to be tested has been reached.
The purpose of these tests is to identify the concept, which most effectively communicates the benefits of a product. Usually therefore, more than one concept is tested at the same time in parallel legs. Occasionally, however, each respondent can be asked to look at more than one concept and to give his/her overall preference. The information resulting from the concept test is then used to develop the final advertising campaign. The main selling line/message of the product/service being tested should be included in the heading of the concept. Other information that must be included in the concept is the brand name, intended benefits of the product; why/how the product/service will provide these benefits, and information about the price/size/variants available.
These tests are carried out either door-to-door or in central locations amongst respondents who use products within the specified product category. The respondent is asked to read the concept carefully and is then asked questions such as purchase intent, likes/ dislikes etc.
When two or more concepts are tested, each concept is usually tested by a different group of respondents. Therefore, when using the door-to-door method, an equal number of interviews must be conducted per concept at each starting area.
An equal number of interviews must be conducted by each interviewer for each concept so as to prevent any interviewer bias creeping in. The daily number of interviews/questionnaires conducted must also be the same while a consistent sequence shall be upheld for each concept.
The interviewers must ensure that the concept matches the concept specified in the questionnaire.
The purpose of such tests is to test how interested consumers are in trying a product, to identify potential purchasers, why they are interested in the product and, finally, whether it fulfils the expectations set by the concept. It is often the final step before test-marketing the product. Again, the method is usually face-to-face interviews conducted at the respondent’s home. However, at times the concept stage can be carried out at a central location followed by the post-usage interview at the respondent’s home.
When two or more products are tested, each product/concept must be tested by a different group of respondents. In case of a door-to-door study, an equal number of interviews are conducted per product at each starting point. Also in this case, an equal amount of interviews/questionnaires should be conducted on a daily basis with every product positioned in a pre-determined sequence. The interviewer ought to do the same number of interviews with respect to individual products or concepts to prevent interviewer bias.
When the interviewers place the product, they must ensure that the product matches the product code specified in the questionnaire. If the respondent refuses to use a product, he/she is not offered another product and such respondents are normal “losses”. Interviewers need to find respondents who accept specific products before they are allowed to place another.
Variations to the above studies include Concept and Look tests whereby respondents are shown the product / pack and Concept and Sniff tests used for the fragrance category of products.
This form of research is based on a fixed sample of households rather than stores. A representative sample of homes is recruited throughout the country and they are asked to fill in a diary on a weekly basis giving details of all the daily purchases they have made during that week. The diary idea is used in order to reduce errors resulting from poor memory and confusion.
The purpose of these studies is to assess awareness, trial, and purchase intent for new brands/products/line extensions. It is usually conducted in the early stages of the product launch and in several waves in order to track the progress of a brand. The interviews for such tests are conducted under normal in-home conditions.
A very comprehensive study to understand all aspects of consumer behavior in an area of interest. It may include the placement of a diary, in which respondents are asked to record their habits/practices/product usage in detail for a limited period.
A technique to determine the important unmet needs of a particular category across geographies. Respondents are shown 100 attributes and asked to rate them on both importance and how well current brands meet each attribute.
This is a variation of a product test used when it is necessary to identify the brand being tested (e.g., when the client wishes to assess the effectiveness of the brand name or whether the package / bottle is easily identifiable).
Mystery Shopping research is a technique of quality assessment in sectors such as retail and services. It is a tool for assessing the quality of both goods and service provision. Companies use this method for self –assessment and / or to benchmark against the competition.
The aim of these studies is to test packaging/name options for various product categories. These studies are usually carried out in a central location.
These are syndicated studies run at regular intervals (for e.g. 3/6/12 months) and based on a fixed representative national sample of adults. Companies can participate in one or more waves of the omnibus. There are, however, fixed limitations regarding the sample size/timing/processing of tabulations.
This type of study can be applied to any study (advertising evaluation, promotional, etc.) as exactly the same questionnaire is administered via the same methodology to a comparable sample of respondents before (pre) and after (post) a particular event for measuring a change affected by that same event. For e.g., pre- and post-advertising effectiveness studies will test the effectiveness of a specific advertising campaign.
A technique where respondents are asked to give their order of preference for the available options overall, and/or evaluating against particular attributes or characteristics.
A form of paired comparison test of more than two products using the model A vs. B, B vs. C, C vs. A. It is useful for early screening as the scores are aggregated and therefore require only a small number of respondents for each pair evaluation.
A study run to assess the effectiveness of a sampling wave in generating usage and purchase. It compares a test sample (or leg) versus a control leg.
Two products are placed with the same respondent, but at different times in this product test.
Respondents are asked about their shopping habits, but also to indicate the importance they attach to particular attributes of a store.
The focus of such tests is to find out spontaneous reactions of consumers to proposed advertising for a brand (pre-launch). These tests are normally conducted in a central location.
This research usually involves the collection of information about sales, purchasing, distribution etc., of a wide range of products on a regular and a continuous basis and then the sale of this information to any client who wishes to buy it, usually on an annual subscription basis.
It also covers some branded products such as the Sales Force Image Study (SFIS) / Consumer Brand Profile Study whereby the same information / data can be provided to different clients (although some of the data can be tailored to each client’s specific requirements).
Allows a respondent to try the product and evaluate its characteristics. Most commonly done for products such as chewing gum and soft drinks, these are also conducted in a central location.
These are full-scale market studies to measure the awareness, usage, purchase/ repurchase intent, attitude, advertising awareness and recall for specific products / brands. The interviews for such studies are conducted under normal in-home conditions. Over-quota interviews are often required to achieve a minimum base size (normally 100) for attitude questions regarding a specific brand.
These studies are done on a regular basis (for e.g., every 3/6/12 months) to track consumer usage and behavior vis-à-vis a product category. Interviewing for such studies is done door to door. The Tracking Study for Wrigley’s are good examples of such studies.
The goal of estimation is to identify the expenses and extent of energy required to run an organization. The research and business analyst and other stakeholders will predict the costs of implementing and upholding a solution and identify what value the solution brings to the organization. The research analyst and stakeholders will also predict the potential of risk impacts. Business Intelligence based forecasting techniques are most used in commodity type vertically integrated industries where the high-degree of commercial information and strategic planning capabilities available inside the organizational boundaries is often outpaced by erratic and dynamic supply-demand developments occurring in the external business landscape, accompanies by great financial costs.
The various existing methods available for making estimations:
Confidence intervals and prediction accuracy
To increase the accuracy about an estimated effect value, the raw estimate technique is calculated as a ratio of the width of confidence interval compared to its primary value and then expressed as a relative value or percentage. The rough order of magnitude estimate will likely be approximately 50% accurate. A final prediction uses more data and information to estimate and tends to have a 10% reliability when set against the actual figures. One practice is to use rolling wave estimates and compare these estimates to the actual values for ensuing stages of the project. A rolling wave estimate will offer more definitive estimates for each stage of work. It is important to do data collection of the real empirical values to keep continuously improve your estimation outcomes.
Precision versus reliability
There is a difference between precision and reliability:
Estimate confidence
There are a couple of points to take into consideration about estimate confidence:
Estimation considerations
Estimation as research or learning method has a couple of pros:
Cons of estimation as a research method are:
In this video presentation the managing director of EngineerOnomics describes how the Five Forces analytical model, and a correct definition of your industry (ie setting appropriate industry boundaries) are necessary for performing effective industry assessments, achieving profitability for your own organization as well as for the entire industry in which you operate. He additionally introduces an innovative way for a more accurate industry definition and explains how EngineerOnomics applies the five forces model to their products.
In this informative video the Managing Director of EngineerOnomics Market Research & Publications assesses some of the major strategic management approaches as well as the key concepts, practitioners, pros and cons associated with each strategic mangement approach.
Product Managers generally associate market research directly with customer or consumer oriented analyses. However equally important for any dimensions of financial performance be it profitability, growth, or shareholder value is competitive research and analysis. Achieving sustainable competitive advantage by strategic positioning is not dependent on a single activity, such as for example pricing, customer segmentation, sales, or the subject of this blog post product development. Yet product development has increasingly become a hot topic and has gained in importance compared to other income generating business activities such as services. In this post we will be going through a step by step product development market research, competitive assessment, and market launch trajectory as it tends to be applied in practice.
The first major step to take when deciding to develop a new venture is to collect commercial data. There are several research methodology best practices that you can use during the process. The first step in your research design is to devise a research hypothesis. To successfully conduct market research, you must establish what it is that you want and need to know. You need to research a hypothesis or test a product theory to gain market insight. Are you researching your pricing strategy for an existing product, or the markets' demand for a breakthrough innovation? Whatever it is that you are trying to explore, the criteria that you use for identifying your research questions and the quality as well as the quantity of the business information that you obtain will be a determining part of the direction of your research design.
Broadly speaking there are four types of main research methodologies along the two theoretical dimensions consisting of primary versus secondary research sources on the one side, and quantitative versus qualitative research tools on the other side. In general, secondary research is less targeted than primary research because the research is preexisting and can't be entirely tailored to your specific research needs, in case you would need customization. However, it still offers valuable insight especially when conducting competitor research. And it is also cheaper and less time consuming to conduct. One important caveat to note with secondary research, especially when drawn from the internet, is that the data may be out of date, unreliable, biased or based on a bad primary research methodology.
This is a disadvantage of secondary research. To alleviate such a possible concern, and before you decide to include it into your decision-making process, it is recommended that you conduct your own analysis of the methodology used, sample source, sample size, relevance, and age of the available secondary research data. Assuming you can verify you're not engaging with a poor source, secondary research is an extremely valuable research tool. Because it's drawn from industry sources, and usually from your competitor's primary research, it delivers a high-level overview of market opportunities you can exploit. It can also provide robust data pertaining to consumer demographics, emerging industry trends, competitor market share, and industry profiles, all of which represent critical contextual insights that should inform your product decisions.
In practice the distinctions between the two dimensions are not entirely clear cut, and overlap can be observed. Both qualitative- and quantitative research methods collect quantitative data, which concerns itself with facts and figures, and qualitative data, which emphasizes customer sentiment, perception, and behavior. Quantitative research takes a mathematical approach. It collects and analyzes verifiable data which can be utilized to identify emerging trends, consumer attitudes, and establish brand awareness. From this data analysis, you can navigate your way to a predictive assessment.
In other words, your quantitative research about a target demographic segmentation can be used to inform your future business or product development decisions. While quantitative data can account for the numerical extent of an occurrence, qualitative data is often needed to explain the causes of those facts and figures. By studying customer perception and behavior, qualitative data delivers a deeper insight into the market. For example, quantitative data might record the number of customers that bought your product. But qualitative data, which relies on open-ended questions like 'did you like the product?' and 'would you recommend it to a friend', delivers product managers a deeper understanding of how their products will be received and how they are likely to perform in the market. You can think of quantitative data as measuring a phenomenon, and qualitative data as observing the phenomenon.
When both data types are combined, they can guide product managers to delivering products or product updates that will resonate with their customer's needs and experiences. Those new to market research may wonder which type of research to conduct first. While there is no fixed norm as to whether qualitative or quantitative research should be done first, different stages of product development are more appropriate for different research approaches. For example, if your product is new and no prior research has been carried out, qualitative data should be conducted first. By taking a qualitative-first approach, you can identify consumer sentiment to a new product. To bring successful products to the market, you need to develop products consumers want or need, so determining sentiment to a concept through qualitative research is a good start to begin with.
Focus groups - as a qualitative research method are sessions in which a moderator oversees a dialogue based on a scripted set of questions or subjects with consumers from identical demographic profiles. Typically lasting between one and two hours, focus group sessions should take place in neutral locations, may be filmed, or viewed from an observation room, and should be repeated using at least a few different groups to establish balanced and reliable outcomes. While expensive and time consuming, focus groups can be a great way to get current or prospective customers to share their perceptions about a product as well as providing insight on a target demographic's preferences and pain points.
To ensure your focus group delivers actionable data, it is important that your moderator keeps participants focused on the issue they are engaged to discuss. A moderator should also weed out positive or negative viewpoints from throwing the conversation off balance. Ideally, your focus group participants should have some experience with the product or concepts being discussed. And while a moderator should be knowledgeable about the topic and able to clarify participant queries, they must remain objective and avoid intervening with information or opinions that could bias the discussion.
Personal interviews are similar to focus groups, insofar as they involve unstructured, open-ended questions, can last up to an hour and are typically recorded. Both personal interviews and focus groups generate subjective data, and while neither are statistically reliable due to the small sample size, they generate valuable, detailed insight on consumer habits. The key to a successful interview lies in the choice of interviewee and the preparation of your questions. Because personal interviews will engage a small segment of the market, you need to make sure that you are talking to the people that are relevant to your research.
What problems is the interviewee still wrestling with that they would like the solution to? This will help establish areas in which the user's experience with both your product and your organization can be improved. When choosing the people that you're going to interview, you should cast your net wide to ensure you're gaining a diverse sample set of the market. If you only interview people who love your products, you're not going to develop a product that will generate sales revenue. However, a thorough market research execution also lies on secondary research, specifically in relation to your main competitors. To successfully position your product in the market, you need to map and list your primary competitors as well as other important players in your vertical. This requires collecting market reports and public domain industry data that can be included within your final market research report or other strategic planning document. For generating a restricted range of business information, a simple desk Google search or social media platforms can produce a useful overview of competitors in your industry. However, especially product managers of small- to medium sized business who are striving to obtain a comprehensive view of all the forces impacting on their ability to make a profit, either more advanced analysis and off-the-shelf reports need to be purchased or customized research needs to be assigned from specialized external market research companies.
Data Assessment and Market Analysis techniques
To help make sense of your competitive analysis, and to turn your research into a set of actionable insights, begin by looking for common themes in the data you've collated. Delineate the data into headings that explain the purpose of the research and the methodology used, who you spoke to, and their experiences at the awareness, consideration, and decision stages of the purchasing process. An executive summary should be included in your final report, along with an action plan that will leverage the research findings into a new set of business goals for your product. The nature of the content of reports can be distinguished into broadly 4 categories. A descriptive analysis only describes the situation as it is, nothing more nothing less. A normative orientation is characterized by value statements in which the merits of difference conditions are debated and assessed. Thirdly a prescriptive document is more of a blueprint for a set of course of actions as exemplified by consultancy documents or white papers. This often requires more expertise from the side of the authors as well as objectivity, hence is usually done by external parties. Finally, the most sophisticated form of analysis is predictive analytics or scenario planning about future events which requires a vast amount of quantitative data, computing power, as well as qualitative insights based on personal experiences. Unsurprisingly, this is an extremely difficult and a major intellectual effort to be able to do accurately.
The commercial data discovered allows product managers to determine industry potential, market opportunities, gain meaningful customer insights, make product decisions with more certainty, test their value propositions, and improve the usefulness and branding of their product. General market overview information including market size, segments, and trends can be identified, as well as business information relating to market structure, key players and brands in the market, and their relative share of the market.
After you have understood your market and customers, you can begin to focus on strategically positioning your product in the market. You might have a cool app or breakthrough innovation ready to launch, but that isn't always enough. As product manager, you must position your offering in the market so that it sells better than your competitor's offering. You must ensure your product is viewed positively in comparison to the other players in the market. To do this, establish who your customers are, what you're selling them, and why they should buy it. By doing so, you're combining your market and customer research and positioning your brand or product to appeal to your target audience. Competitive and market analytics lets product managers benchmark their efforts against those of their rivals to learn whose market strategies are winning the battle for customers hearts and minds.
Once your research is completed, it is usually presented in the form of a market research report containing information about historic and future market forecasts, existing market segments, product pricing strategies etc. A SWOT analysis may be included, addressing the product or organization's strengths, weaknesses, opportunities, and threats, as well as an overview of the organization's ability to effectively market the product. Given the breadth of topics and areas that touches on, conducting market research can be a daunting prospect especially for those new to product management.
Introduction to market intelligence
Every strategic visionary or leader knows that unique value proposition and competitive advantage by and large rests on roughly three strategic differentiators: the product, the customer, or the channel. Indeed, a go-to-market plan contains many elements of such differentiators that need to be precisely defined in order to maximize its effectiveness. These include defining your market, your offering, value proposition, your partners, and distribution channels.
Product managers improve competitiveness by meeting market needs better than the competition. In a market abundant with similar products, all competing for a restricted customer pool, product managers must give their products and their companies an edge. This edge can come in many forms. It might be providing exceptional customer care, incorporating new product features to better address customer needs, or simply finding the product pricing sweet spot. Whatever angle you take, the goal is the same. Improve the competitive advantage of the product in the market and achieve better financial results for your organization.
So how do you find a competitive edge? A great place to start is by looking at what the competition is doing, and then doing it better. Competitive advantage comes from delivering a unique value proposition to customers that competitor cannot emulate or match. Product managers build competitive advantage by making sure their products are doing something better than other companies' products can do. Doing something that other products don't do that is valued by the customer or doing something that competitors' products cannot do. Although having a superior or innovative product is not necessarily a sufficient requirement to obtain market dominance - and needs to be valued within the context of your overall business strategy - a valuable product can be core asset based on which you can drive overall performance.
To judge their products' competitive advantage, product managers should determine what makes their products unique. This requires understanding what your competitors are doing in the market. A useful tool for this purpose can be benchmarking which uses relevant metrics to identify market leaders and opportunities for your organization to improve. While keeping track of every existing or theoretical competitor may not be realistic, successful product managers will create profiles of their industry and the various companies and products vying for positions within it. Think of them like consumer personas in a marketing campaign. But this time, you are profiling products and organization. When someone in the industry makes a move, you can predict and anticipate based on these profiles, how everyone is likely to react. Competitive intelligence provides a through understanding on the market and your competitors' moves within it.
Product managers must constantly monitor the market because it is always changing. They must be aware of ongoing shifts in consumer trends and demands as well as the ever-changing activities of their competitors. Think of it as a surveillance system that picks up on signals from the environment. Failure to pay sufficient attention to the external business environment, will soon see them lagging in their industry. While monitoring the marketplace demands on a product managers time and resources, it also provides an invaluable steady stream of competitive intelligence. The competitive intelligence collected can be analyzed, and input into road maps and product strategies. Gaps in the market and opportunities to gain a competitive edge will be revealed. This is the essence of competitive market analysis.
When conducting a market assessment, it is important to become aware of the institutional framework in which your business operates and to map how your organization is embedded within it. To gain this essential macroscopic view of the market, product managers use the presto or PESTEL technique, which stands for political, regulatory, economic, social, technological, legal and other. By taking a step back and examining the macro environment in which your product will live you get the bigger picture, where all the external influences that can affect the path of your product are in play. These include technological advances, changing customer needs, emerging markets, increased competition, and economic factors that may affect you and your customers. For example, legislation introduced on various level of state can have a strong spill-over effect on commercial operations and impact on a product's success in the market. For a more extensive quantitative case study on the impact of corporate tax legislation on small-and medium sized business, read our previous blog post titled "The strong link between the 2017 US TCJA corporate tax rate cuts and the deteriorating trend in the US labor market & small businesses activity", published on 03/04/2020.
An excellent meso level analytical model that will assist you in doing a market asessment is for example Michael Porter's Five Forces framework. A five forces analysis is a valuable framework for assessing the structure of a market. By assessing the power of suppliers, the power of buyers, threat of new entrants, the threat of substitutes, and the degree of rivalry in a market, a product manager can determine the drivers behind the level of profitability in the overall market. By assessing how those forces are changing over time, the product manager can gain a better understanding of how the market might become attractive or less attractive. For example, a market with low entry barriers, high intensity in rivalry and little differentiation in products might be an unattractive market from a financial point of view. The model just demonstrates very nicely how your external business environment directly impacts your ability to make a profit.
Nothing affects your company's success in the wider marketplace as much as your competitors' success or lack thereof as well as the economic attractiveness of your industry. What your competitors do well and poorly as well as how your industry is organized provides lessons and insight into how your business can position its products. Carving out a place in the market requires taking all relevant factors into consideration.
Therefore you should not only analyze existing competitors, but also possible new competitors that could emerge. In fact, anticipating tomorrow's competitors today often is the difference between being overwhelmed or being prepared to compete when a new competitor emerges. Many strategy errors derive from mistaking the relevant industry, defining it too broadly or too narrowly. Defining the industry too broadly risks ignoring differences among products, customers, or geographic regions that are important to strategic positioning, and profitability. Many product managers take an overly narrow perspective, identifying only those competitors that offer the same product to the same type of customers. Looking for competitors only within one's own industry or focusing on direct and established rivals, is often not effective. Competitors can come from unexpected directions. There is also always the looming threat of disruptive innovations coming unexpectedly from outside of your industry boundaries or among one of the five forces. Also, product strategists should be aware of the the possibility that industry boundaries can shift and cross-disciplinary collaboration can reshape the playing field.
How to apply competitive intelligence within the context of your go-to-market plan?
There are two common ways to use this information to carry out comparative product assessments. First is a value proposition statement. This is a comparison of important buying criteria used by potential customers, your target market when making the decision to purchase. Depending upon the product or service, it may include such factors as quality, price, customization capability and even brand identification and familiarity. Each of the criteria is looked at to compare your company's ability to provide value as compared to that of competitors, but also your ability to negotiate with your supply chain partners or your ability to form strategic alliances. It will show your strengths and weakness in relation to the other options on the market and expose any value gaps that must be addressed, whether during design, development, or launch. A feature set comparison compares use cases and features of a specific product. And with those insights, product managers can adjust and adapt their products to succeed in the marketplace, or even try to attempt to actively shape the balance of forces in the market in their favor, which for example could be achieved by creating suitable industry wide standards for their products.
Assessing the strategic marketplace positioning
Its very rare to create a product or service so unique that it creates a new industry or stands alone in the marketplace. Even dominant players have competition whether in general or in niche categories. Competitors occupy different positions in the marketplace. Some are market leaders dominating their markets and enjoying large market share. Some are market challengers, aggressively pursuing strategies to gain market share and take over the position of a market leader.
Some are market followers content to let others lead and they simply emulate competitors' product innovations launching me-too products that require minimal R&D or marketing investment, which enables them to sell their products at lower price points, but which comes at a cost for average industry profitability. Some are market niche players who deliver specialized, or niche products developed to serve only small segments in the marketplace that competitors have ignored. Comparing and understanding competitors market positions gives product managers great insight into each competitor's product focus, and likely future product moves. A competitors' market position illuminates its SWOT, that is its strengths, weaknesses, opportunities, and threats.
Market positions often shift, which requires product managers must analyze the competitive dynamics. Which competitors are gaining and losing share in the market? Which are becoming offensive players, which are becoming defensive? Which market niches are gaining product capabilities that could help them move outside their niche? Which market followers are investing more in R&D that could indicate that they intend to become a challenger? Which market challengers are outspending the market leader to make a play for market leadership? Gaining insights about market positions helps product managers plan their own product strategies. Which market position does the firm want to occupy? What product capabilities will it have to acquire or strengthen to gain and hold the position it has staked out.
Successful product strategies that lead to profitability
All businesses need to make a profit to survive. Doing that may require expanding into new markets or increasing your resources. The product strategy will detail how this product will assist in achieving the company's overall business goals. There are many aspects to consider before launching a product on its journey, and an effective product strategy is the route map to getting it there. Are you going to diversify your product features or expand with the same product in other market? Are you going to improve the quality of your current product or are you going to simplify it to sell it at a lower price point?
Successful product strategies change and evolve using feedback from customers and the marketplace to find opportunities for improvement or opportunities for strategic alliances. Input from senior management, new technological advances, fresh competition, business partners, and opening of new markets can all further affect the day to day evolution of a product strategy. Product managers must be prepared to react quickly to internal and external factors, without losing their overall focus on making their product vision a reality.
This is why prototyping and market testing are so valuable. Using customer feedback to guide requirements and development enables product managers to keep their fingers on the customer's pulse and their focus on the market. And the marketplace is where another mistake often occurs, ignoring competitive threats. Ignoring what competitors are doing, both good and bad, makes a product strategy vulnerable to irrelevance in the marketplace. Attempting to bring a product to market without understanding the competitive landscape can be fatal.
To avoid this, it's vital to conduct thorough research on your competitors within the context of a broader industry structure. Ask yourself where you see your product fitting into the marketplace. Is it intended to appeal to the widest possible customer base? Or is it to be designed to cater to a more narrowly segmented but exclusive market? Product developers and managers should objectively verify where their company is situated to accomplish their product plans. Is the plan objective to have a broadly appealing offering, is the company prepared to scale up production and distribution? Is it capable of handling sudden demand? Is the marketing unit of the team prepared to move into new growth areas when the opportunity to so arises?
Know the market fully before launching your product into it. And finally, many product managers make the mistake of failing to prioritize must-haves versus nice-to-haves. Must-haves are the critical features a product needs to have to solve a customer's problem. The nice-to-haves are added features that aren't central to the task but are intended to make the product more attractive to the customer. Focusing on the nice-to-haves too early in the process risks losing focus and creating a shiny new product that doesn't satisfy the customer's need.
Conclusion
Market analysis thus provides insight into how and why the market is evolving and how your competitors impact on your ability to make a profit. A broad understanding of the market including your external business- and institutional environment allows you to predict how competitors might act and how consumers are likely to react. In the context of decade long ensuing trend characterized by business consolidation and individual specialization, it is more than ever important to think comprehensively and systematically about competition, product management and strategic planning. By obtaining contextual industry insights, market oversight, and predictive foresight you strengthen your situational awareness, strategic positioning, and bargaining power, which in turn will enable unique value propositions, sustainable competitive advantages, and ultimately organizational survival.
Systems thinking as an overarching concept derived from the multidisciplinary Systems Theory, is an invaluable tool that allows professionals and practitioners to adopt a big picture perspective and to deal with complexity. Most notably in the social- and management sciences, but foremost in beta science fields, problem solving will be the result of thoroughly understanding dilemma's, paradoxes, and causality. Going well beyond the confines of network theory - which is more the domain of the Information Communication Technologies - the ability to adopt a system thinking approach is one of thé top emerging Post-covid era competencies for Small and Medium Sized businesses to have in such practices as marketing forecasting, product portfolio management, human resource management, innovation management, and strategic planning.
The problems of today arise out of the "solutions" of yesterday
Professionals do not only operate within their own departmental system but also within the larger internal system as well as within the external business environment of their organization. Problems that were "solved" in one area of the organization, regularly reappear as new problems in another part of the organization. For example, top management are under pressure by shareholders to increase profits. Managers then tend to reduce labor costs by firing staff from mid-management. This might please shareholders, but within 3 to 4 years the company will likely be faced with a leadership crisis. Moreover, human resources will likely be confronted with training- and talent acquisition issues. Human resource professionals that are well-versed in system thinking, can point out the causality between these seemingly unrelated factors and can come up with initiatives to let go of- or redevelop staff in ways that will not lead to future leadership crises.
Cause and effect are not located in vicinity of each other by space and time
This law is especially a practical tool in order to be able to make distinctions between on the on side direct or immediate reasons and on the other side more impactful root causes, as well as between on the one side progress indicators and on the other side result indicators (indicators that show the results in retrospective versus indicators that show whether you are on the right track). For example, the influence of the human resource department on organizational performance is probably a less direct factor compared to other strategic performance enablers and critical internal processes such as customer service or manufacturing. This distance between more indirect factors however do not make their eventual impact less relevant, but it does make it more difficult to to identify their role and to measure them. Another example is that many senior managers focus predominantly on conventional financial performance indicators, which are in essence retrospective result indicators. This often leads them into attempts to solve financial problems through applying costs-cutting measures without really tackling the root causes. The most crucial processes to examine in reality are usually not the obvious value-adding critical internal processes involved in logistics, development etc. Rather, they are the enabling or background processes that support investment decisions. These include how market research is systematically conducted, how such analysis is converted into competitive- and financial projections, how HR plans and budgets are negotiated etc. These types of processes are where many organizations' most serious handicaps reside in creating innovative and market-disruptive growth ventures.
The places where interventions have the largest impact are simultaneously the places that are the least visible
Experienced system thinkers always look for the least obvious solution to a problem. For example, lagging financial performance attract everybody's attention, but hardly anyone will come up with the idea to ask human resources for help. Nonetheless, by tweaking the way human resources are managed will eventually translate into a large impact on the successful implementation of strategy, simply because the driving internal forces of human resources lie at the root of much of the value creating process. Through strategy mapping, and measuring progress indicators or applying predictive data analytics methods, the value creation process can be identified and visualized. An example in case, is that a causality has been demonstrated between how an increase in employee satisfaction of 4% - through a series of cause-effect relationships - had eventually a considerable consequence at the opposite end of the value chain in the form of an increase of a company's shareholder value of around $250 million.
The easiest way out is also the easiest way to get back in
An important advantage of systems thinking is that it helps to see problems from another broader perspective. Much too often do we tend to fall back on overly obvious one-size-fits-all recipes that have proven their worth in the past without re-evaluating it critically within the new context. For example, innovating managers often try to start new-growth business using processes that were designed to make mainstream business run effectively. Truly operating on a strategic level entails assessing a problem from new perspectives, by using creativity to challenge any vested assumptions that you may have and visualizing different possibilities, while withstanding the temptation of automatically re-using tested formulas. Granted, not reinventing the wheel through the adoption of benchmarking and best-practices can determine to be an equally sufficient cost-effective strategy. But in the face of increasing political-economic unpredictability, underestimating and overlooking the importance of studying a problem from the correct unit of analysis e.g. micro, meso, macro, has the potential to cause greater damage.
If you cut an elephant into two pieces, you won't get two small elephants
Though you will likely get a bloody situation. In other words, if you try to decompose a system to be able to analyze the separate parts, the possibility exists of you destroying the system. Organizations are complex systems in which interaction and unstable feedback loops take place within and between various subsystems, components, and parts. Therefore, it is best to understand an organization holistically. However, most managers consider subsystems of their organization as separate functions and limit their attentions to their own field. Sometimes this is born out of miscalculated policies or simply out of sheer lack of resources to operate cross-disciplinary. Large companies have put a lot of effort into creating inter-disciplinary collaboration, but Small and Medium Sized business (SMBs) don't always have capabilities to do the same. As a result, leadership of the functions may very well be able to uncover the root causes of their unit, but they will hardly see the dynamic interplay between their policies and that of others. Exactly those interfaces where different systems and parts of a system meet, are simultaneously the places that cause problems and where change interventions will have the greatest impact, by factoring in the time, locational, as well as human contextual dimensions. The lack of resources to create cross-functional teams can be effectively overcome by adopting a systems thinking approach to problem solving and decision-making.
Conclusion
For at least a couple of decades now, we have been going through an era characterized by strong trends towards the reward of meticulous specialization, short-termism, and lack of situational awareness. The devaluation of- and sometimes an outright assault on deviations from this norm, have now become immensely problematic and risky as complexity, consolidation, and uncertainy are becoming the new norm. Hence taking a critical reflective mindset, and embracing a historical approach, represent the modern requirements and competencies for the development of creative problem solving and effective decision making processes. In short, we advocate that Small- and Medium Sizes Businesses problems solvers and decision-makers in various strategic management realms increase their systems solutions capabilities to achieve higher levels of successful policy-, strategy-, and planning implementation performances.
The critical role of Human Resources professionals in designing and upholding high standards in labour relationships, policies and practices is now more important than ever. As the uncertainty in the labor market has increased, the risk of employee relations practices and the psychological contract becoming more unbalanced is also on the rise. In many cases therefore, achieving a sufficient degree of institutional embeddedness is what is needed within the area of employee-employer relationships.
What are employer-employee relationships?
Employee relations refers to activities between the employer organization and its employees. Specifically, the activities would cover the terms and conditions of employment. Examples of area's are discrimination, harassment, slander, privacy, and increasingly gaining in importance is environment, health and safety (EHS) in the worplace. It is the responsibility of HR professionals to ensure that the appropriate processes, programs, policies, and practices are pursued to create constructive employer-employee relationships. Examples of such HR programs are collective bargaining frameworks, arbitration, mediation, conflict resolution etc. The ensuing outcome of more engaged employees will generally lead to a more productive workforce which leads to greater long-term value for the organization. The opposite situation of poor relationships between the employees and the employers may cause financial costs, damage to the company's public image and often reduce productivity. Hence is it one of the prominent components of corporate social responsibility.
The critical role of regulatory compliance
One of the many important and strategic roles of HR professionals is ensuring regulatory compliance. However, the complexity and diversity of today's labour market poses a number of regulatory compliance risks. An example is the common practice of using independent contractors, which employers may utilize for reasons of workplace flexibility or to cope with uncertainties related to entering a new market. Making sure the individual is truly an independent contractor and not an employee as specified in certain employment and tax laws may lead to the reclamation of salaries, taxes, and benefits, besides potential fines. To mitigate against such risks, HR ought to come up with- and clearly communicate programs and guidelines, including harmonized definitions, for the use of independent contractors. An example of a guideline that ensures the independent relationship, is that the contractor should maintain control over when, where, and how the work is conducted.
What role can HR play in solving the dilemma associated with institutional alignment?
Reconscilling workforce rights and procedures with organizational values and your business strategy is relatively more straightforward when your company is based in one jurisdiction. The other side of the equation is to ensure environmental fitness between on the one hand your company policies and on the other hand the local laws and regulations when you operate in multiple jurisdictions. Common dilemma's facing HR departments in such situations are questions surrounding to what extent to pursue the path of convergence or divergense from headquartes or HR centres of excellence? How does our product strategy impact that trade-off? Do we pay more attention to the relevant society at large and it's stakeholders, or do we emphasize shareholder interested? How well does our approach to controversial societal topics correspond to what they teach students in the host country's educational system? Human Resources Department with the right expertise of relevant multidisciplinary disciplines such as Institutional Economics, Socio-Economics or Business History will be best positioned to most effectively address those kind of dilemma's and general matters of employee-employer relationships.
Although throughout the world there are are common rights and duties covered by statutes and regulations related to equal treatment and opportunity, there can be considerable differences between countries and localities, impacting upon HR's role within the workforce relationship strategy implementation process. Varieties of labour market contingencies requires you to have the right set of competencies to achieve the right amount of embeddedness between your internal HR architecture and external institutions.
US Corporate tax rate reduction (TCJA) impact on the US labor market
According to our quantitative and qualitative research into the US labor market, the introduction of the US TCJA 2017 Corporate Tax rate cuts from 35% to 21% has had a strong correlation with recent developments in the US labor market economy and the business activity of small enterprises, all taking a hit since 2017 and 2019 onward. The sudden deep dive in the overall amount of job offers made, number of vacancies created (Figure 1), as well as the negative impact of the TCJA 2017 on the amount of freelancers and start-ups operating within the US economy (Charts 1 & 3) can be observed by looking at the three charts and the outcomes of mour correlation analyses. The associated positive coefficients range from 0.4 to 0.45 for the correlations between the forecasted corporate tax rate and the amount of job offers & vacancies, to 0.93 for the correlation between the effective corporate tax rate and the start-up rate. The analysis was corrected for possible moderating effects such as trade disputes and geopolitical events.
Figure 1
Forecasted impact of the TCJA on the US labor market
The tax rate reduction really came into effect only recently in 2019, and therefore it is still too premature to determine whether the decline in the above mentioned labor market indicators amounts to a structural break. Neither do the findings necessarily determine a causal relationship. But based on historical data, my future forecast calculations (Figure 2), and making inferences across different geographical units, it is already clear that a drastic policy measure such as the TCJA has disproportionately benefited large corporations at the expense of small enterprises. The only market area where job growth continues in an upward trend is at large employers with 5000+ employees, although close to flattening out. The latter development is much more likely to improve working conditions of large company employees eg salary increases, whereas positive spill-over effects to the external business environment will hardly occur.
Figure 2
(Effective) corporate tax rate correlation with the start-up rate
If a natural rebound does not take place or a more balanced re-distributive fiscal policy is not implemented through corrective measures, the declines in the growth of small business service providers have the potential to seriously hamper entrepreneurship and innovation, as illustrated by the decline of the start-up rate (Figure 3). Against conventional wisdom, the fact that the tax cut reductions simultaneously applied to small businesses does little too mitigate the negative effect for smaller business especially for service providers that rely on larger organizations for business generation. Tax breaks have not proven to improve productivity, most breakthrough innovations take place at small enterprises, and SMEs create most of the jobs by far. Only insiders with the right background and extensive know-how about the inner workings of the labor market can detect such developments, generating insights at the juncture of macro-economics, politics and human resources.
Figure 3
Sources
https://data.worldbank.org/indicator/SL.EMP.1524.SP.ZS?end=2019&locations=US&name_desc=false&start=2010
https://www.researchgate.net/publication/227470312_Start-up_rates_and_innovation. A cross country examination.
https://economicdynamics.org/meetpapers/2018/paper_472.pdf
https://www.slideshare.net/upwork/freelancing-in-america-2019/1
https://taxfoundation.org/tcja-economic-growth-effects-testimony/
https://www.businessnewsdaily.com/11330-how-tcja-is-affecting-smbs.html
https://spendmatters.com/2018/11/21/number-of-us-freelancers-dropped-in-2018-but-talent-pool-still-deep/
https://www.statista.com/statistics/685468/amount-of-people-freelancing-us/
https://www.gartner.com/smarterwithgartner/gartner-quarterly-update-on-global-workforce-trends/
https://tradingeconomics.com/united-states/corporate-tax-rate
https://www.bls.gov/news.release/jolts.t16.htm
https://www.bls.gov/news.release/jolts.nr0.htm
Digital & data disruption is on the verge of affecting many established industries like the Automotive one and by capillarity, their furnishers and partners. In this first series of Engineeronomics blog posts for the Technical Recruitment Agency Löger. MFG Labs Project Manager Paul-Mehdy M’Rabet explains how established companies can internally enable the development of user-centric digital services by building a Services Division. His proposal is to build a Strategy Hub consisting of a Specialist Product Team and “Catalyst Employees” working together in the context of a new strategic realignment.
Legacy businesses going digital and analytical
Many entities – start-ups and SMEs essentially - are scanning the customer journey of established companies to identify opportunities. They are looking at opportunities where they can take advantage of their speed of execution and their creativity to meddle and grasp cash or strategic data.
The goal of these start-ups and SMEs is to become a lasting cornerstone player without supporting the heavy investments required to sustain the value chain. And they can! Money, data and cutting-edge digital technologies are more accessible than ever.
The first reflex for many established companies is to pay an agency and consultants to build the services they need. There is a logic behind it: they don’t know how to build services themselves so they hire someone who does. But this is a mistake.
Indeed, agencies might know better than you how to build a service. What most of them don’t know are the ins and outs of your industry, your customers, and their needs. So basically, you will pay them to learn it. It’s a better investment to pay yourself to learn how to build a service!
What established companies should actually do is to build their own “ Digital Services division”. Making digital services is not what pays the bill of established companies. Selling cars, selling plane tickets, clothes or renting hotel rooms does.
Divisions responsible for the core operations of established companies know that and may be reluctant and unwilling to give up responsibilities and scope to this new division. So established companies should make sure to have the services division onboard and to spend time explaining the strategy behind this.
Then they should hire the head of “Services division”. The should be sponsored by the board, be at the right place in the line management and ready to play some politics with the other significant stakeholders of the company.
Building a new division from scratch is quite of a headache. That’s why you many companies do it by adopting an offshoring strategy or through acquisition. For example, Groupe Renault acquired Intel’s French embedded software R&D activity in 2017.
Offshoring is cheaper if you take into account development only. Once you add management effort, delays caused by cultural gaps, incoordination, time difference and increased time to market, you may want to think about it twice.
Whichever solution you choose, keep in mind the following points:
Now that your “Service Division” is up and running, the most difficult task that lies ahead is to fill the cultural gaps. Chances are your “Service Division” will follow the Agile methodology, that can be summed up as follows: build fast, frequently (2-3 weeks), deploy it as frequently as possible and if a project is running late, change the scope and don’t make any concession on planning or quality.
Other divisions of established companies don’t work this way. For example in the automotive industry, the electrical architecture in vehicles is decided years before the car hit the streets. Meanwhile services requests are expressed by sales and marketing month – sometimes weeks – before the expected date.
Chances are you need some enablers in your core product to make great services. For example, an IoT manufacturer may need to add new BLE chips in their object to offer indoor positioning capabilities and use them in a digital service. How to match the two agendas?
Surviving the Disruption Strategically
Unfortunately, massive digital disruption threat isn’t a matter of acknowledgment anymore. All management processes from operational, customer, innovation to regulatory need to be reorganized and reinforced to offer differentiated customer value.
To execute the digital strategy you should implement a new aligned culture, a new way of teamworking, and new type of leadership. This applies to almost every aspect of your organization – Talent acquisition, Information Capital, and Organizational Capital.
This is very challenging. In order to convert this challenge into an achievable goal, don’t hesitate to be accompanied by experts to lead the non-product related operations so you can focus on what matters the most: building user-centric digital services to survive the disruption.