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Evolutionary Marketing The Levitt Group 13 June 2009 Anthony Freeling Ashridge Strategic Management Centre Copyright A. Freeling 2009 Agenda 1. The challenge for marketing 2. The potential of evolution: Vary Select, Copy loops (VSC) 3. The principles of Making VSC loops work 4. The continuing need for Big Leaps and how to execute them 5. Requirements of the Commercial Operating System Ashridge Strategic Management Centre Copyright A. Freeling 2009 2 Agenda 1. The challenge for marketing 2. The potential of evolution: Vary Select, Copy loops (VSC) 3. The principles of Making VSC loops work 4. The continuing need for Big Leaps and how to execute them 5. Requirements of the Commercial Operating System Ashridge Strategic Management Centre Copyright A. Freeling 2009 3 The dominant strategic marketing approach today is to select a target and focus marketing efforts Kotler describes the heart of modern strategic marketing • Segmenting • Targeting • Product positioning Ashridge Strategic Management Centre Copyright A. Freeling 2009 4 The problem • Continuing disenchantment with the function of marketing (despite some successes) on the part of – Customers who feel short-changed or over charged – Business leaders who have a low opinion of marketing – The marketing community itself: “Marketing as a function is in some danger of being marginalized” (Marketing Science Institute) • Increasing demands from other stakeholders in the fitness landscape – – – – Regulators and governments Shareholders Employees Communities Ashridge Strategic Management Centre Copyright A. Freeling 2009 5 The Big Question How must marketing change to achieve its promise? Ashridge Strategic Management Centre Copyright A. Freeling 2009 6 A definition of strategic marketing • Marketing is the process of creating and communicating winning offers – That are Adapted to an uncertain, competitive market environment, thus attracting customer spend and translating share into profit – That Shape the environment by influencing customer demand and out-manoeuvring competition • Strategic marketing is simply the strategy of choosing where and how to create and communicate these offers – As opposed to tactical marketing which is how specific elements of the offers are created or communicated Ashridge Strategic Management Centre Copyright A. Freeling 2009 7 Potential conflicts in marketing Key factors for success Style of Marketer Speed INTUITION Quick and Dirty? • • Fitness Slow and expensive? Efficiency Run by accountants? • Intuitive marketers can be fit, fast, and efficient But they often resist adding rigour even when it would improve fitness and efficiency Rigorous processes often add fitness first time, but are too slow and resource intensive to repeat RIGOUR Is classic marketing always appropriate for today’s challenges? Ashridge Strategic Management Centre Copyright A. Freeling 2009 8 Agenda 1. The challenge for marketing 2. The potential of evolution: Vary Select, Copy loops (VSC) 3. The principles of Making VSC loops work 4. The continuing need for Big Leaps and how to execute them 5. Requirements of the Commercial Operating System Ashridge Strategic Management Centre Copyright A. Freeling 2009 9 Evolution can show us the way to creativity through better adaptation • Evolution is a universal theory of adaptation which can apply to domains well beyond the original biological domain studied by Darwin • Looking at marketing through the lens of evolution is to see it as a search in a complex landscape for marketing offers that are more “fit” by adapting the offer to the competitive and customer environment • The key to success in an evolutionary system is to be good at variation within a population, selection of the fittest variants, and amplification of the selected variants to ensure they increase their share of the population • In marketing terms, this suggests that the way to evolve most rapidly to winning marketing offers is by being good at varying, selecting and copying (successful trials) Ashridge Strategic Management Centre Copyright A. Freeling 2009 10 The three core elements of evolution in any domain • Interactors that do the living and dying over time (organisms in biology, businesses in economics) • Scarce resources and competition for those resources amongst interactors • Fitness landscape describing whether an interactor is suited to survival in that environment that is "semi-chaotic", hard to predict and which is itself shaped by the interactors that exist – effectively how successful they will be in competition for scarce resources Ashridge Strategic Management Centre Copyright A. Freeling 2009 11 An adaptive fitness landscape • Every interactor has a fitness value • A new interactor affects the fitness of existing ones • So a new interactor shapes the fitness landscape Ashridge Strategic Management Centre Copyright A. Freeling 2009 12 Search on an adaptive fitness landscape • Create a new variation • Select it if it is more fit than the others • Replicate the selected interactors Ashridge Strategic Management Centre Copyright A. Freeling 2009 13 Vary, Select, Copy Loops Copy Select Vary Ashridge Strategic Management Centre Copyright A. Freeling 2009 14 Capital One - an example of fast VSC loops driven by technology • Credit card monoline • Fast growing, excellent share price performance • Based on Information Based Strategy (IBS) which allowed them to “mass customise the company’s products by building massive databases of consumer information and by transforming our company into a scientific testing laboratory…we can deliver the right product to the right customer at the right time and at the right price” • Core idea to shape the marketplace by offering a tailored price to each customer • Between 1989 and 1991 conducted 200 tests before identifying first winner - low introductory rate, balance transfer - a new offer • Later, ran tests varying message strategy, price, credit line, product features and acquisition strategy for same credit scores to find which combination of marketing activities led to best outcomes - combinations were often a surprise • Tests enabled them to successfully target new customer segments (e.g. subprime). Also could use tests to identify when to exit markets (winnowing) e.g. balance transfers before competitors • By 2000 conducted tens of thousands tests a year • Strategy based upon outstanding analytical capabilities Ashridge Strategic Management Centre Copyright A. Freeling 2009 15 Tesco is an evolutionary marketer that creates value for customers through rapid adaptation Ashridge Strategic Management Centre Copyright A. Freeling 2009 16 Agenda 1. The challenge for marketing 2. The potential of evolution: Vary Select, Copy loops (VSC) 3. The principles of Making VSC loops work 4. The continuing need for Big Leaps and how to execute them 5. Requirements of the Commercial Operating System Ashridge Strategic Management Centre Copyright A. Freeling 2009 17 Making VSC Loops Work - Principles 1. Avoid Analysis-Paralysis through better intuition 2. Experiment smartly to reduce the cost and time of creating variants 3. Achieve fitness through sharper selection Ashridge Strategic Management Centre Copyright A. Freeling 2009 18 Klein and Intuition • Experts do not follow rational choice models • In fact they rarely compare options • Instead they recognize patterns that activate “action scripts” • They use their expertise in the form of mental models to simulate how the action script would work • If all seems OK, they act, else they try another action script Ashridge Strategic Management Centre Copyright A. Freeling 2009 19 Barriers to developing intuition in marketing • Separation of marketing tactics and strategy prevents experts developing experience in the overall marketing task • Marketing managers do not stay long enough in the same job to develop deep expertise • Change leads to discounting the experience of seasoned marketers • Marketing processes are systematized reducing the opportunity for people to make regular judgment calls and gain maningful experience • Performing against simple metrics to achieve bonuses replaces the original marketing goal • IT leads to training focusing on using the system rather than making proactive decisions Ashridge Strategic Management Centre Copyright A. Freeling 2009 20 Improving VSC loops - Situation Awareness • Situation Awareness (SA) is being aware of what is happening around you and what that information means to you now and in the future. • Breaks down into three separate levels – Perception of the elements in the environment – Comprehension of the current situation – Projection of the future status • Depends on mental models of how things work to go from perception to comprehension and projection, which is key to speeding up VSC loops • Also defines what cues you will look for in the environment Ashridge Strategic Management Centre Copyright A. Freeling 2009 21 Smart Experimentation - Reducing the Cost and Time • Pilots and Prototypes – – – – Shops CRM Geography (regions or countries) Quick prototypes • New technologies – Computer models and simulations: Car crash for $300 – High throughput testing: Drugs, CRM, statistical price experiments – Monte Carol simulations • Loyalty Cards – Tesco and the banana man – Harrah’s and the free steak dinner • Digital Marketing – Google AdWords Ashridge Strategic Management Centre Copyright A. Freeling 2009 22 Fitness through Sharper Selection • The challenge: how do you know your marketing is fit? – Advertising has shown how hard it is • Research the right Marketing Metrics – Behaviour not attitudes or statements: 95% claim to wash hands, 63% do) • Statistical experimental design vs Thoughtful tinkering – Yield management can be designed – New products require thought and intuition • “The availability of experiments has trumped the asking of good questions” - Steven Levitt, author of Freakonomics • Quantitative research – Fast turnaround: Omnibus surveys, Web panels, Conjoint, SurveyMonkey • Qualitative research – Less Focus Groups – More ethnography • Econometrics Ashridge Strategic Management Centre Copyright A. Freeling 2009 23 Improving VSC loops - case examples Improvements Examples Vary • • • • • • Experiment cheaply “Co-creation” with customers Spare capacity for testing Computer simulation Intuition to guide action Executional agility • • • • • • Nokia, Capital One SAP, Linux Google BMW, Pfizer Tesco Zara Select • • • • • Maintain situational awareness On-line concept screening Develop rules of thumb Use data to balance intuition in testing Use regular cross functional meetings • • • • • P&G Nokia United Biscuits Tesco Tesco Copy • Invest in infrastructure to scale rapidly • Discipline to drop failures • Integration between marketing and other functions • Outstanding executional capabilities Ashridge Strategic Management Centre Copyright A. Freeling 2009 24 • Google • Capital One • Oracle, Boeing • Tesco, P&G Seven ways to speed up marketing VSC loops • Immersion in the customer experience • Know your landscape • Develop rules of thumb • Use pilots and Prototypes • Conduct smart experiments • Use quantitative research and econometrics to sharpen selection • Use qualitative research to improve intuition Ashridge Strategic Management Centre Copyright A. Freeling 2009 25 Agenda 1. The challenge for marketing 2. The potential of evolution: Vary Select, Copy loops (VSC) 3. The principles of Making VSC loops work 4. The continuing need for Big Leaps and how to execute them 5. Requirements of the Commercial Operating System Ashridge Strategic Management Centre Copyright A. Freeling 2009 26 The Limitations of Fast Loop Marketing Fast Loop marketing many not be the right approach: • When you wish to shape the marketplace through a major innovation • When it can no longer adapt fast enough • When marketing experiments are too expensive or too slow Ashridge Strategic Management Centre Copyright A. Freeling 2009 27 VSC loops stop working • You may miss major opportunities - problem of local optimum at B • The environment may have changed leaving you a dinosaur - General Motors, Luxury goods? • A market leader is blocking your way Ashridge Strategic Management Centre Copyright A. Freeling 2009 28 Choosing between VSC and Big Leaps VSC • Tesco • Capital One • Kodak Healthcare (solution) Procter & Gamble Big Leap • Experiments slow or expensive • Need to shape landscape fast • Able to identify where demand lies • Landscape has changed a lot • Lost Situation Awareness • Experiments cheap and quick • Adapting the prime goal • Demand uncertain • Landscape is familiar • Good Situation Awareness Ashridge Strategic Management Centre Copyright A. Freeling 2009 • Boeing (new plane) • Pfizer (blockbusters) • Kodak Healthcare (machine) 30 P&G demonstrates the combination of occasional big leaps with ongoing adaptation • Different, slower moving consumer landscape than Tesco (as there is slower pace of innovation and competitors do not move so fast) • Nevertheless, still clearly very hard to predict success in advance - something like 80-90% of packaged goods innovations fail • Primary measure of success is the same - share of customer spend in their market • We see that P&G invests far more resources in larger scale product innovation than Tesco - and is far more successful in these launches than most of their competitors • Leading the way in Open Innovation - e.g. Swiffer Dusters, Crest SpinBrush, Olay SK-II Regenerist, Mr. Clean Magic Eraser, Glad Press’n Seal • Part of this success is continual adaptation of innovations over time, for example internationally • P&G is also highly innovative in marketing tactics - from advertising to soap operas to web marketing to buzz marketing Ashridge Strategic Management Centre Copyright A. Freeling 2009 31 ADAM - the rigorous approach to Big Leaps Analyse • • • • • Consumer trends Customer segments Competitor position Brand positioning Market opportunities Analyse • • • • • Product attributes Marketing strategy 4P’s Brand plan Go to Market approach • • • • Execute marketing tactics Launch new product Manage cross-functionally Conduct CRM programmes • • • • Ad hoc Market research Tracking research Sales results Market share Analyse Decide Act Measure Ashridge Strategic Management Centre Copyright A. Freeling 2009 32 Agenda 1. The challenge for marketing 2. The potential of evolution: Vary Select, Copy loops (VSC) 3. The principles of Making VSC loops work 4. The continuing need for Big Leaps and how to execute them 5. Requirements of the Commercial Operating System Ashridge Strategic Management Centre Copyright A. Freeling 2009 33 Tesco’s fast VSC loops are implemented through a strong, well adapted Commercial Operating System to provide rapid adaptation to customers • Integration throughout the value chain, from store to head office – TWIST “Tesco week in store together” – Process simplicity • Clubcard – Knowledge is well disseminated from the store – Everyone shares a common Situation Awareness. • Apprenticeship culture – Individual employees have the capabilities to operate – Every little helps – People at all levels can innovate “try it and see”. • Performance management system – Balanced Scorecard (The Tesco “steering wheel”) – Combining customer, operations, people and finance measures Rapid adaptation to customer behaviour Ashridge Strategic Management Centre Copyright A. Freeling 2009 34 A Commercial Operating System (how companies manage themselves to conduct their marketing and sales operations) has four elements Processes, structure and Interactions • Core marketing and sales processes • Clear responsibilities • Calendar and rhythm of the year • Interactions across organisation structure Framework and tools • Methodologies • Templates • Decision Tools Talent and Skills in Pivotal Roles • Right people • Training • Apprenticeship Metrics and Performance Management • Measurement (Balanced Scorecard) • Incentives • Accountability Source: McKinsey Ashridge Strategic Management Centre Copyright A. Freeling 2009 35 Good Strategic marketing - Summary • Use fast Vary, Select and Copy loops to improve fitness, speed and efficiency – Lots of tests – Maintain situational awareness by • Valuing immersion in the marketplace • Developing intuition and rules of thumb through experience • Using data to balance intuition – Develop executional capacity to copy by • Investing in infrastructure to scale rapidly • Integrating marketing with other functions • Use Big Leaps only when appropriate - but recognise that sometimes it is – Adopt the rigour of ADAM unless you have the insight of Jobs – Always follow a Big Leap with VSC loops – Challenge frequently to check if risk/return of Big Leap has been wrongly estimated • Develop a Commercial Operating System to support this by – Installing a few simple processes with supporting tools – Structuring marketing around integrators and specialists – Adopting the apprenticeship model to build skills and intuition – Measuring and rewarding staff on customer behaviour more than attitudes Ashridge Strategic Management Centre Copyright A. Freeling 2009 36