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It’s important to recognise when a defensive strategy is the sensible approach in marketing and business. You make want to be more proactive but it can get you into trouble and especially if you don’t have the strengths to support an offensive strategy.

I use the SPACE analysis matrix to help ground management’s natural desire for growth and profit improvement and put it into perspective of the realities of the existing situation.

Defensive Strategy In SPACE

A defensive strategy is recommended by SPACE analysis when:

1. The Industry Attractiveness / Competitive Advantage axis is negative; and
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2. The Financial Strength /  Environmental Stability axis is also negative

It’s a bit like a seven stone weakling going into the boxing ring with Mike Tyson at his peak. It’s best not to stand around and try to fight.

Other Reasons To Follow A Defensive Strategy

A defensive strategy doesn’t have to come out of weakness but from strength.

Sometimes maintaining the status quo suits a market leader or someone who is operating under a high price umbrella of a market leader because profits are high and life is easy. This can be dangerous since the industry is inviting an aggressive move by a new entrant to the market but sometimes “a bird in the hand is better than two in the bush.”

Markets are very comfortable when competitors co-exist in their own little spaces and don’t threaten each other beyond localised skirmishes on the borders.

I’ve known plenty of business owners who don’t want to grow their businesses significantly. They don’t have the desire to manage a big business.

Defensive Strategy Options

Different defensive strategy options apply in different parts of the business.

Defensive Marketing Strategy

First be clear on which product-markets you want to defend, which you want to grow and which you will allow to be taken from you without a serious fight.

The growth-share matrix from the Boston Consulting Group may help as it looks across the market growth rates and your market share to create four categories:

• Stars – growing market, high share
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• Cash cows – stable or shrinking market, high share
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• Question marks – growing market, low market share
  .
• Dogs – stable or shrinking market, low market share

While the framework can be criticised as too simplistic and I want to write more about the strategic options for dog businesses, the basic guidance is:

Stars – to grow aggressively

Cash cows – to defend strongly – these are your main source of profit and cash

Dogs – to harvest i.e. to let your market share drift away as you manage for short term cash and profit.

And question marks live up to their names.

Try to keep rational when things can get emotional. Compare the cost of reaction with the cost of inaction to make sure that what you intend to do makes economic sense.

Defending Your Market

If your important market comes under attack, you need to stand up and fight to protect what you have.

Be aware of the potential threats, what they are and where they may come from. Competitive analysis pays-off by understanding their objectives and their strengths and weaknesses.

If there is a potential weakness in your product or service, as shown by your customer value attribute map and it’s important to your differentiation strategy, close it.

If a competitor attacks you in a core customer account, fight back with equal or greater strength. Match the move with the customer and repeat at a core customer for the competitor.  The aim is to signal that you don’t want an all out price war which will destroy industry profitability but you won’t allow aggressive moves to be rewarded.

Borrowing Defensive Strategy From Warfare To Marketing

Some very interesting books have been written comparing business strategy to warfare.

Typical defences are:

1. The fortified position defence – building barriers to entry to make it difficult to be attacked
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2. Mobile defence – work to identify new market segments and supply tightly focused products s solutions to particular customers wants and needs
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3. Flanking defence – if you fear an attack at the low price end, you can introduce your own fighter brand as a deterrent. Yes it might take some of your sales away from your middle market brand but it may block a new competitor or make things much more difficult.
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4. Counter attack – sometimes it is better to response outside or your own market for fear of sparking a price war that damages all your sales in the core market so to send a signal to the aggressor, you can attack in their core market and cause them as much or more trouble as they are causing you.

Defensive Strategy In Business

Sometimes the focus on a defensive strategy is not to protect a market share position but to protect (or save) the entire business.

Common turnaround measures often include:

• Cost cutting
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• Rationalisation of products – you can’t afford to carry passengers
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• Capacity reduction
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• Cash generation from the sale of unnecessary inventory and equipment

A defensive business strategy may even involve selling or closing large sections of the business which are draining profit or cash.

Returning to the SPACE analysis, focus should be spent improving the internal characteristics – financial strength and competitive advantage – to buy time for the external issues – environmental stability and the attractiveness of the industry to settle down.

More on Defensive Strategy

The books comparing military and business strategy are worth reading to give you a different perspective on business.

Michael Porter has a chapter on defensive strategy in his classic book on Competitive Advantage.

Many years ago I read the book, “The Fifth Discipline” by Peter Senge and it triggered a long interest in systems thinking and systems dynamics as a way to understand complex situations.

To quickly summarise, this is about how feedback systems either reinforce (creating vicious circles or virtuous circles) or compensate for and balance out change actions so, despite your best efforts, things stay the same.

I think there is immense potential for systems thinking to impact on competitive strategy but few people have taken the idea and run with it to any great extent.

One person who has incorporated systems dynamics into his ideas is author Kim Warren and his work on strategy dynamics. His approach is contrary to normal systems thinking in that it breaks down systems rather than trying to see the impact on the entire big system. Nevertheless, he is interested in how resources and flows change over time, to either explain past performance or to predict and change future performance.

These ideas are well summarised in his book Strategy Dynamics Essentials. I enjoyed reading the book but I wanted more so I signed up for a course at his website. It is a 10 module course available for £450 plus VAT but you can buy modules 1 to 4, 5 to 7 and 8 to 10 for a third of the main price. Since there wasn’t an incentive to make the full commitment to the training, I signed up for the first four modules.

Strategy Dynamics Course Review

You are given a pdf copy of the Strategy Dynamics Essentials book but most of the training is:

• By video, reinforced by quizzes inserted into the video;
• By looking at worked examples in their specialist modelling software;
• By building your own model.

My early impressions are that the course is well put together and taken at a fair speed although people who feel out of their depth with financial information and the concepts of flows during a period and snapshot balances at a particular time may feel pressurised to keep up.

I felt lost in my first attempt to use the Sysdea software but there was a separate video introduction available that made me feel more able to start building my model.

It’s becoming clear that, although specific numbers will vary between businesses, the cause and effect relationships will often share a common logic. This will mean that the model building may be much quicker than the time it takes to fit the information on drivers and the absolute performance together.

Niggles

As I’m going through the course, I find my attention waivers and I’ve had to split it into small sections. I’ve always had a problem staying focused with videos for some reason so it may be more an issue with me than the course.

You can go through the course using a free version of the Sysdea software but, if you’re going to use it on real projects, you’re going to need to rent access to it. That niggles with me even though the cost is small. I suspect that this is more of an issue for me in the period after my illness than it would have been before it because I know my earning power is severely reduced and I aim to keep costs low.

So far, I think the presentation of the dynamics of the situation in a model is shown nicely with graphs within a cause and effect style mindmap but these diagrams start looking very complicated as soon as you add extra resources and relationships. For people well used to the model, I suspect it is very easy to understand but for those unfamiliar, it can look very daunting. That’s a problem for me since I can’t expect my clients to master the model. I keep wondering whether a well-designed spreadsheet would be better in some ways because of the greater familiarity.

When I started, I was sure that I’d buy all 12 modules but as I’m working my way through these first four, I’m getting less certain.

The full title of this book by Fraser Hay is

Self-Employed? Why Your Marketing Isn’t Working (and What You Can Do About It)

In my review posted on Amazon.co.uk, I gave it Three Stars.

Here is my review.

Not as good or as structured as I had hoped

I knew of Fraser from years ago and thought that he talked a lot of sense.

I decided it would be interesting to see how he’d updated his ideas but unfortunately I thought the book was disappointing. Perhaps I expected too much. [continue reading…]

I will introduce you to a way to target your ideal profit based on the break even point formula.

Too often a business owner will have an ideal profit in mind but won’t have worked back from that goal to understand what size and type of business will generate that kind of profit.

I believe you need to be using intentional business planning.

The Break Even Point Formula

The break even point is the position where a business neither makes a profit of loss in a period.

It is based on the cost volume profit relationship that accounts assume although there are some practical difficulties.

The Break Even Point Formula is:

Fixed Costs
Contribution margin % or contribution margin per unit

Using the contribution margin % will generate a sales revenue value for the business to break even while using the contribution margin per unit will generate the sales volume needed.

Example, fixed costs of £400,000 and contribution margin of 30% creates a break even point of:

400,000/30% = £1,333,333

The Profit & Loss Account would show:

Sales                1,333,333

Contribution         400,000

Fixed Costs        (400,000)

Profit                               £0

What is The Ideal Profit?

To avoid confusion in owner-manager businesses where the method of profit extraction is often done by whatever method reduces the overall tax bill, I find it easiest to target a profit before any owner’s salary, payroll costs and benefits are deducted.

Adapting The Break Even Formula To Find The Sales For Your Ideal Profit

If you apply the concept in its purest form, without trying to reflect real world issues, the formula to find the sales value for your ideal profit is:

(Fixed Costs + Ideal Profit)
Contribution margin %

Taking the example above and targeting a profit of £100,000 gives an ideal profit formula calculation of:

(400,000 + 100,000)/30% = £1,666,667

Sales                1,666,667

Contribution         500,000

Fixed Costs        (400,000)

Profit                    £100,000

If you want to find the sales volume, use the contribution margin per unit.

Adapting The Ideal Profit Formula For Real World Issues

First I believe it’s a good idea to recognise the concept of fixed costs creep.

This is where, despite the definition of fixed costs, the expenses increase as the business gets bigger and more complex.

Initially I was tempted to include an allowance to recognise a % of sales value e.g. the fixed costs creep allowance could be 5% of sales in some businesses and 10% in others and even more in some.

But that creates problems with the formula as it means the sales to find the ideal profit formula depends on itself creating a calculation loop.

The two ways around this are:

To include a fixed cost creep allowance in the top line, making the ideal profit formula:

Fixed Costs + Ideal Profit + Fixed Cost Allowance
Contribution margin %

The example, if you assume a fixed cost allowance of £50,000,

(400,000 + 100,000 + 50,000)/30%

= £1,833,333

Sales                1,833,333

Contribution         550,000

Fixed Costs        (450,000)

Profit                    £100,000

Alternatively, you can apply an uplift to the sales value of 5% to 10% and make the formula:

(Fixed Costs + Ideal Profit) x (1 + Fixed Cost Allowance %)
Contribution margin %

In the example we’ve been using, if we allow 10% for fixed cost increases,

(400,000 + 100,000)/30%*(1 + 10%)

= 1,833,333

Sales                1,833,333

Contribution         550,000

Fixed Costs        (450,000)

Profit                    £100,000

The second method, building a percentage uplift into the equation has the benefit that it is immediately scalable as you calculate the sales needed to reach different profit targets without having to make some kind of intuitive assessment.

I should also point out that you can’t accept your fixed costs “As Is” if you want to make it easier to get to your ideal profit.

If you’re wasting money on staff (or family members) who contribute far less than they earn, you’re building a big barrier between you and the money you want. Please see Are You (Or A Team Member) Part Of The Cargo Or The Crew?

You need to trim your fixed costs and get rid of areas where you are wasting money (see Zero Based Thinking For Difficult Decisions and How To Reduce The Break Even Point In A Business )

How Much Should The Fixed Cost Uplift Be In the Ideal Profit Formula?

This depends on three things:

• The contribution margin. You can’t plan growth where fixed costs increase at a faster rate than the contribution on sales.
• How determined the business owners intend to be to stay frugal. Some feel the need to invest in costs that present a better image.
• The pressure within the business to need extra resources to process additional transactions. I explain in the article about fixed cost creep that costs are driven by many things and pressure builds up to a stage where additional resources have to be bought.

If you are looking at a business which must experience a big growth in sales value, it is a good idea to include an extra cost allowance in the top line of the ideal profit formula to allow for additional sales and marketing costs.

(Fixed Costs + Ideal Profit + Marketing Costs) x (1 + Fixed Cost Allowance %)
Contribution margin %

This recognises the different cause and effect relationships at work:

• Many fixed costs respond to the level of business activity – they increase as the effect of increased sales revenue.
• Sales and marketing costs are intended to cause the increased sales revenue.

Again, like fixed costs, it may be better to allow for the extra marketing costs on the other side of the equation so that they automatically increase as the profit target increase.

(Fixed Costs + Ideal Profit) x (1 + Fixed Cost Allowance %) * (1 + Marketing Costs %)
Contribution margin %

The Growth Impact On Contribution Margins

So far we have assumed that current contribution rates can be assumed to apply in a future, bigger business.

It is certainly true that some variable costs should reduce as volumes increase. The business owner should be able to negotiate better buying prices and the business may become more efficient through economies of scale and economies of learning.

However, to get the growth in sales revenue, the business may have to offer lower prices to attract sales from bigger companies or financial incentives to get the existing customers to buy more.

This means that it is wise to allow for a lower average contribution margin going forward.

This will increase the sales needed to reach the ideal profit and mean more fixed cost resources are needed to support the bigger business.

The formula can then become

(Fixed Costs + Ideal Profit) x (1 + Fixed Cost Allowance %) x (1+ Marketing Costs %)
(Existing Contribution margin % – Reduction in Contribution %)

Taking the example I’ve been using, where I’m going to allow 10% for extra sales and marketing costs and a 3% reduction in contribution rate from 30% to 27%, the sales to reach the ideal profit of £100,000 is…

(400,000 + 100,000)/(30%-3%) *(1 + 10%) * (1 +10%)

=500,000/27%*1.1*1.1

= £2,240,741

The Profit & Loss Account will look like this:

Sales                2,240,741

Contribution         605,000

Fixed Costs        (455,000)
Marketing Cost     (50,000)

Profit                    £100,000

How Accurate Is The Ideal Profit Formula?

The quality of the calculation depends on the quality of the thinking behind the assumptions.

The idea isn’t to be exact but to give an indication of the approximate size of the business needed to give the business owner the profit he or she wants.

It’s intended to help close the gap between this is where you are to this is where you want to be.

You could do a profit forecast under particular assumptions and look at the results, and decide the profit isn’t up to standard. Then you could do another forecast by tweaking some assumptions.

And keep going through this iterative process until you reach your ideal profit.

But that would take a lot of time and again, there is no certainly that the forecast you have is accurate.

The Ideal Profit Formula is a very quick way to understand the ball-park of the size of business needed.

Practical Tips To Using The Ideal Profit Formula

I would make your assumptions on the conservative, cautious side.

Growth is unpredictable and every banker sees plenty of hockey stick forecasts that show sales and profits shooting up in future years. Few of them are reached.

I wrote a very popular article about the marketing mix:

Marketing Mix: 4 P’s or 7 P’s of Marketing or Extended Even More?

I then extended it to look at the different versions with widely different P’s. I’ve now decided to have separate articles for each of the different number of marketing P’s.

The original marketing mix that has become widely known is Product, Price, Promotion and Place.

The 11 P’s of Marketing

Version 1 – 11 P’s of Marketing for Web 2.0

Product
Pricing
Promotion
Placement
People
Process
Physical evidence
Privacy
Personal Interests
Personal (e.g. social) Networks
Public Commentary (e.g. product/service ratings, etc.)

http://www.beatenetworks.com/blog/index.php?/archives/18-The-11-Ps-of-Marketing.html

Version 2 – The 11 P’s in a Remarkable Brand

Principles
Play (guest experience)
Promise
Place
People
Production Elements
Props
Price
Promotion
Press
Performance Reviews & Prizes

http://www.remarkablebranding.com/articles/11_Ps.html

Version 3

Product
Price
Place
Promotion
People
Partnership
Productivity
Personalization
Physical Image
Protocol
Privacy

http://www.infibeam.com/Books/info/nik-tehrani/contemporary-marketing-mix-digital-era/9781438938752.html

What Do You Think About The 11 P’s Of Marketing?

Do you find any of these more helpful than the traditional marketing mix? 

Leave a comment below.

The Other Versions Of The Marketing Mix

If you want to look at how the other versions have developed, here are the links.