November 2005

Defensive Marketing: How a Strong Incumbent Can Protect Its Position

Reprint: R0511J

There has been a lot of research on marketing as an offensive tactic—how it can help companies successfully launch new products, enter new markets, or gain share with existing products in their current markets. But for nearly every new product launch, market entrant, or industry upstart grabbing market share, there is an incumbent that must defend its position. And there has been little research on how these defenders can use marketing to preemptively respond to new or anticipated threats.

John H. Roberts outlines four basic types of defensive marketing strategies: positive, inertial, parity, and retarding. With the first two, you establish and communicate your points of superiority relative to the new entrant; with the second two, you establish and communicate strategic points of comparability with your rival. Before choosing a strategy, you need to assess the weapons you have available to protect your market position—your brand identity, the products and services that support that identity, and your means of communicating it. Then assess your customers’ value to you and their vulnerability to being poached by rivals.

The author explains how Australian telecommunications company Telstra, facing deregulation, used a combination of the four strategies (plus the author’s customer response model) to fend off market newcomer Optus. Telstra was prepared, for instance, to reach deep into its pockets and engage in a price war. But the customer response model indicated that a parity strategy—in which Telstra would offer lower rates on some routes and at certain times of day, even though its prices, on average, were higher than its rival’s—was more likely to prevent consumers from switching. Ultimately, Telstra was able to retain several points of market share it otherwise would have lost.

The strategies described here, though specific to Telstra’s situation, offer lessons for any company facing new and potentially damaging competition.

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Are You Working Too Hard?

Reprint: R0511B

Stress is an essential response in highly competitive environments. Before a race, before an exam, before an important meeting, your heart rate and blood pressure rise, your focus tightens, you become more alert and more efficient. But beyond a certain level, stress overloads your system, compromising your performance and, eventually, your health.

So the question is: When does stress help and when does it hurt? To find out, HBR talked with Harvard Medical School professor Herbert Benson, M.D., founder of the Mind/Body Medical Institute. Having spent more than 35 years conducting worldwide research in the fields of neuroscience and stress, Benson is best known for his 1975 best seller The Relaxation Response, in which he describes how the mind can influence stress levels through such tools as meditation. His most recent research centers on what he calls “the breakout principle,” a method by which stress is not simply reduced but carefully controlled so that you reap its benefits while avoiding its dangers. He describes a four-step process in which you first push yourself to the most productive stress level by grappling intently with a problem. Next, just as you feel yourself flagging, you disengage entirely by doing something utterly unrelated—going for a walk, petting a dog, taking a shower. In the third step, as the brain quiets down, activity paradoxically increases in areas associated with attention, space-time concepts, and decision making, leading to a sudden, creative insight—the breakout. Step four is achievement of a “new-normal state,” in which you find that the improved performance is sustained, sometimes indefinitely.

As counterintuitive as this research may seem, managers can doubtless recall times when they’ve had an “aha” moment at the gym, on the golf course, or in the shower. What Benson describes here is a way to tap into this invaluable biological tool whenever we want.

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Innovation Versus Complexity: What Is Too Much of a Good Thing?

Reprint: R0511C

What’s the number of product or service offerings that would optimize both your revenues and your profits? For most firms, it’s considerably lower than the number they offer today. The fact is, companies have strong incentives to be overly innovative in new product development. But continual launches of new products and line extensions add complexity throughout a company’s operations, and as the costs of managing that complexity multiply, margins shrink. To maximize profit potential, a company needs to identify its innovation fulcrum, the point at which an additional offering destroys more value than it creates.

The usual antidotes to complexity miss their mark because they treat the problem on the factory floor rather than at its source: in the product line. Mark Gottfredson and Keith Aspinall of Bain & Company present an approach that goes beyond the typical Six Sigma or lean-operations program to root out complexity hidden in the value chain.

The first step is to ask, What would our company look like if it made and sold only a single product or service? In other words, you identify your company’s equivalent of Henry Ford’s one-size-fits-all Model T—for Starbucks, it might be a medium-size cup of coffee; for a bank, a simple checking account—and then determine the cost of producing that baseline offering. Next, you add variety back into the business system, product by product, and carefully forecast the resulting impact on sales as well as the cost implications across the value chain. When the analysis shows the costs beginning to overwhelm the added revenues, you’ve found your innovation fulcrum.

By deconstructing their companies to a zero-complexity baseline, managers can break through organizational resistance and deeply entrenched ways of thinking to find the right balance between innovation and complexity.

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Leadership in Your Midst: Tapping the Hidden Strengths of Minority Executives

Minority professionals offer tremendous — yet often overlooked — leadership potential. In this piece, the authors outline four ways companies can leverage their hidden skills and support both their own growth and that of the organization: First, develop a new level of awareness around minority professionals’ invisible lives. Second, appreciate the outsized burdens these professionals carry and try to lighten them. Third, build trust by putting teeth into diversity goals. Finally, help minorities reflect on their off-hours experiences, extract and generalize these lessons, and apply what’s been learned in other settings. When minority professionals are empowered to speak openly and proudly of their lives, their core values, and their skills, it can be truly transformative of themselves, their teams, and society at large.

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You Have More Capital Than You Think

Reprint: R0511E

Senior executives typically delegate the responsibility for managing a firm’s derivatives portfolio to in-house financial experts and the company’s financial advisers. That’s a strategic blunder, argues this Nobel laureate, because the inventiveness of modern financial markets makes it possible for companies to double or even triple their capacity to invest in their strategic assets and competencies.

Risks fall into two categories: either a company adds value by assuming them on behalf of its shareholders or it does not. By hedging or insuring against non-value-adding risks with derivative securities and contracts, thereby removing them from what the author calls the risk balance sheet, managers can release equity capital for assuming more value-adding risk.

This is not just a theoretical possibility. One innovation—the interest rate swap, introduced about 20 years ago—has already enabled the banking industry to dramatically increase its capacity for adding value to each dollar of invested equity capital. With the range of derivative instruments growing, there is no reason why other companies could not similarly remove strategic risks, potentially creating billions of dollars in shareholder value. The possibilities are especially important for private companies that have no access to public equity markets and therefore cannot easily increase their equity capital by issuing more shares.

The author describes how derivative contracts of various kinds are already being employed strategically to mitigate or eliminate various risks. He also shows how companies can use the risk balance sheet to identify risks they should not bear directly and to determine how much equity capacity they can release for assuming more value-adding risk.

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Hiring for Smarts

Reprint: R0511F

Yes, it’s nice when a leader is charismatic and confident. And a great résumé can tell you a lot about a person’s knowledge and experience. But such assets are no substitute for sheer business intelligence, and they reveal very little about a leader’s ability to consistently reach the “right” answer.

How can hiring managers flag individuals with such smarts? Historically, the only reliable measure of brainpower has been the standard IQ test, which is rarely used in business settings because of the specific subjects it tests for—math, reading, and spatial reasoning—and because of its multiple-choice format.

Despite its shortcomings, the standard IQ test is still a better predictor of managerial success than any other assessment tool companies currently use, Justin Menkes argues. It’s true that there isn’t a version of IQ testing that applies to the corporate world, but in rejecting IQ tests altogether, hiring managers have thwarted their own attempts to identify true business stars.

The author defines the specific subjects that make up “executive intelligence”—namely, accomplishing tasks, working with people, and judging oneself. He describes how to formulate questions to test job candidates for their mastery of these subjects, offering several examples based on real situations. Knowledge questions, such as those used in standard behavioral interviews, require people to recite what they have learned or experienced; intelligence questions call for individuals to demonstrate their abilities. Therefore, the questions in an executive intelligence test shouldn’t require specific industry expertise or experience; any knowledge they call for must be rudimentary and common to all executives. And the questions should not be designed to ask whether the candidate has a particular skill; they should be configured so that the candidate will have to demonstrate that skill in the course of answering them.

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The Perfect Message at the Perfect Moment

Reprint: R0511G

Marketers planning promotional campaigns ask questions to boost the odds that the messages will be accepted: Who should receive each message? What should be its content? How should we deliver it? The one question they rarely ask is, when should we deliver it?

That’s too bad, because in marketing, timing is arguably the most important variable of all. Indeed, there are moments in a customer’s relationship with a business when she wants to communicate with that business because something has changed. If the company contacts her with the right message in the right format at the right time, there’s a good chance of a warm reception.

The question of “when” can be answered by a new computer-based model called “dialogue marketing,” which is, to date, the highest rung on an evolutionary ladder that ascends from database marketing to relationship marketing to one-to-one marketing. Its principle advantages over older approaches are that it is completely interactive, exploits many communication channels, and is “relationship aware”: that is, it continuously tracks every nuance of the customer’s interaction with the business. Thus, dialogue marketing responds to each transition in that relationship at the moment the customer requires attention.

Turning a traditional marketing strategy into a dialogue-marketing program is a straightforward matter. Begin by identifying the batch communications you make with customers, then ask yourself what events could trigger those communications to make them more timely. Add a question or call to action to each message and prepare a different treatment or response for each possible answer. Finally, create a series of increasingly urgent calls to action that kick in if the question or call to action goes unanswered by the customer.

As dialogue marketing proliferates, it may provide the solid new footing that Madison Avenue seeks.

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Get Aggressive About Passivity

Reprint: F0511A

If managers always acted on their values, heroic whistle-blowing might never be required. But, research shows, people don’t think that doing the right thing is part of their jobs.

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The Trouble with CFOs

Reprint: F0511B

Because of high turnover, CFOs have less and less time to learn the ropes—yet they’re shouldering more and more responsibility. A reallocation of time is in order.

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Crap Circles

Reprint: F0511C

The most dubious business plans can appear solid, even smart, when illustrated with snappy circle-and-arrow graphics. Look closely, though, and you’ll see that many of these diagrams are full of it.

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Leading from the Factory Floor

Reprint: F0511D

Fixing a dysfunctional plant isn’t easy, but it can be done if you involve everyone in the overhaul.

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Banana War Maneuvers

Reprint: F0511E

How Dole beat Chiquita by working around a restrictive EU trade policy instead of struggling against it.

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Oil and Troubled Waters

Reprint: F0511F

When a crisis forces outside directors to navigate major changes, investors and directors must adopt new roles. The case of Royal Dutch/Shell provides useful lessons.

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What? Me, Worry?

Reprint: F0511G

Espionage expert H. Keith Melton shows how executives can best guard their company secrets.

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The Department of Mobility

Reprint: F0511H

By centralizing oversight of business travel and transportation, companies can improve efficiency, raise employee satisfaction, and reduce costs.

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If You Want to Lead, Blog

Reprint: F0511J

Sun Microsystems president and COO Jonathan Schwartz explains how blogging has enhanced public perception of his company and fostered loyalty within.

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Is There a Patient in the House?

Reprint: F0511K

The best solution to the looming shortage of nurses and doctors may be to move chronic disease monitoring and care out of hospitals and into people’s homes.

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Riding the Celtic Tiger

Reprint: R0511A

John Dooley, BioSol’s vice president of strategic research, has been making a name for himself at the biotechnology company’s offices in Ireland. He’s been doing so well, in fact, that the firm has offered him a promotion to director of strategy at headquarters—in California.

He’s lived abroad before. In the 1980s, making a living in Ireland was tough: Jobs were scarce and unemployment was high. So John and his wife, Fiona, moved to Massachusetts, where John attended MIT. They were not alone; many of their friends and family members also moved out of Ireland then. John and Fiona enjoyed their time in Boston; they became active in a large expatriate community and established reputations in their professional fields.

By 1999, however, the Celtic Tiger was running at full speed. The Irish economy was booming and the whole country seemed to be bursting with possibility. When John was offered a job at BioSol’s Dublin subsidiary, he and Fiona moved home and never looked back—until now. The new promotion would give his career a huge boost, but accepting it would mean uprooting his family and becoming an expat again. Ireland’s economy is going strong now, but what if it doesn’t last? Should John cast his lot with his country or his company?

Commenting on this fictional case study are Raj Kondur, the CEO of Nirvana Business Solutions in Bangalore, India; James Citrin, a senior director at Spencer Stuart in Stamford, Connecticut; Maurice Treacy, the director of biotechnology at Science Foundation Ireland in Dublin; and Arno Haslberger, who teaches HR management at Webster University Vienna in Austria, and Sharman Esarey, also based in Vienna, editor of the annual report of the Organization for Security and Co-operation in Europe.

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Scanning the Periphery

Reprint: R0511H

Companies often face new rivals, technologies, regulations, and other environmental changes that seem to come out of left field. How can they see these changes sooner and capitalize on them? Such changes often begin as weak signals on what the authors call the periphery, or the blurry zone at the edge of an organization’s vision. As with human peripheral vision, these signals are difficult to see and interpret but can be vital to success or survival.

Unfortunately, most companies lack a systematic method for determining where on the periphery they should be looking, how to interpret the weak signals they see, and how to allocate limited scanning resources. This article provides such a method—a question-based framework for helping companies scan the periphery more efficiently and effectively. The framework divides questions into three categories: learning from the past (What have been our past blind spots? What instructive analogies do other industries offer? Who in the industry is skilled at picking up weak signals and acting on them?); evaluating the present (What important signals are we rationalizing away? What are our mavericks, outliers, complainers, and defectors telling us? What are our peripheral customers and competitors really thinking?); and envisioning the future (What future surprises could really hurt or help us? What emerging technologies could change the game? Is there an unthinkable scenario that might disrupt our business?).

Answering these questions is a good first step toward anticipating problems or opportunities that may appear on the business horizon. The article concludes with a self-test that companies can use to assess their need and capability for peripheral vision.

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