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Stop pushing products—and start
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HBR’S
10
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HBR’s 10 Must Reads series is the definitive collection of ideas
and best practices for aspiring and experienced leaders alike.
These books offer essential reading selected from the pages of
Harvard Business Review on topics critical to the success of
every manager.
Titles include:
HBR’s 10 Must Reads on Change Management
HBR’s 10 Must Reads on Collaboration
HBR’s 10 Must Reads on Communication
HBR’s 10 Must Reads on Innovation
HBR’s 10 Must Reads on Leadership
HBR’s 10 Must Reads on Making Smart Decisions
HBR’s 10 Must Reads on Managing People
HBR’s 10 Must Reads on Managing Yourself
HBR’s 10 Must Reads on Strategic Marketing
HBR’s 10 Must Reads on Strategy
HBR’s 10 Must Reads on Teams
HBR’s 10 Must Reads: The Essentials
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HARVARD BUSINESS REVIEW PRESS
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Copyright 2013 Harvard Business School Publishing Corporation
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Library of Congress Cataloging-in-Publication Data
HBR’s 10 must reads on strategic marketing.
p. cm. — (HBR’s 10 must read series)
Includes index.
ISBN 978-1-4221-8988-7
1. Marketing—Management. 2. Strategic planning. I. Harvard business review. II. Title: HBR’s ten must reads on strategic marketing. III. Title: Harvard
business review’s 10 must reads on strategic marketing.
HF5415.13.H368 2013
658.8'02—dc23
2012037855
ISBN: 9781422189887
eISBN: 9781422191521
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Contents
Rethinking Marketing 1
by Roland T. Rust, Christine Moorman, and Gaurav Bhalla
Branding in the Digital Age 15
by David C. Edelman
Marketing Myopia 29
by Theodore Levitt
Marketing Malpractice 57
by Clayton M. Christensen, Scott Cook, and Taddy Hall
The Brand Report Card 77
by Kevin Lane Keller
The Female Economy 97
by Michael J. Silverstein and Kate Sayre
Customer Value Propositions in Business Markets 113
by James C. Anderson, James A. Narus, and Wouter van Rossum
Getting Brand Communities Right 133
by Susan Fournier and Lara Lee
The One Number You Need to Grow 151
by Frederick F. Reichheld
Ending the War Between Sales and Marketing 171
by Philip Kotler, Neil Rackham, and Suj Krishnaswamy
About the Contributors
Index
195
197
v
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HBR’S
10
MUST
READS
On
Strategic
Marketing
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Rethinking
Marketing
by Roland T. Rust, Christine Moorman,
and Gaurav Bhalla
I
IMAGINE A BRAND MANAGER sitting in his office developing a marketing strategy for his company’s new sports drink. He identifies which
broad market segments to target, sets prices and promotions, and
plans mass media communications. The brand’s performance will
be measured by aggregate sales and profitability, and his pay and future prospects will hinge on those numbers.
What’s wrong with this picture? This firm—like too many—is still
managed as if it were stuck in the 1960s, an era of mass markets, mass
media, and impersonal transactions. Yet never before have companies had such powerful technologies for interacting directly with customers, collecting and mining information about them, and tailoring
their offerings accordingly. And never before have customers expected to interact so deeply with companies, and each other, to
shape the products and services they use. To be sure, most companies use customer relationship management and other technologies
to get a handle on customers, but no amount of technology can really
improve the situation as long as companies are set up to market products rather than cultivate customers. To compete in this aggressively
interactive environment, companies must shift their focus from
driving transactions to maximizing customer lifetime value. That
means making products and brands subservient to long-term
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RUST, MOORMAN, AND BHALLA
customer relationships. And that means changing strategy and structure across the organization—and reinventing the marketing department altogether.
Cultivating Customers
Not long ago, companies looking to get a message out to a large population had only one real option: blanket a huge swath of customers
simultaneously, mostly using one-way mass communication. Information about customers consisted primarily of aggregate sales statistics augmented by marketing research data. There was little, if
any, direct communication between individual customers and the
firm. Today, companies have a host of options at their disposal, making such mass marketing far too crude.
The exhibit “Building relationships” shows where many companies are headed, and all must inevitably go if they hope to remain
competitive. The key distinction between a traditional and a
customer-cultivating company is that one is organized to push products and brands whereas the other is designed to serve customers
and customer segments. In the latter, communication is two-way
and individualized, or at least tightly targeted at thinly sliced segments. This strategy may be more challenging for firms whose distribution channels own or control customer information—as is the
case for many packaged-goods companies. But more and more firms
now have access to the rich data they need to make a customercultivating strategy work.
B2B companies, for instance, use key account managers and
global account directors to focus on meeting customers’ evolving
needs, rather than selling specific products. IBM organizes according to customer needs, such as energy efficiency or server consolidation, and coordinates its marketing efforts across products for a
particular customer. IBM’s Insurance Process Acceleration Framework is one example of this service-oriented architecture. Customer
and industry specialists in IBM’s insurance practice work with lead
customers to build fast and flexible processes in areas like claims,
new business processing, and underwriting. Instead of focusing on
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RETHINKING MARKETING
Idea in Brief
Companies have never before had
such powerful technologies for
understanding and interacting
with customers. Yet too many
firms operate as if they’re stuck in
the 1960s, an era of mass marketing, mass media, and impersonal
transactions.
To compete in an aggressively
interactive environment, companies
must shift their focus from driving
transactions to maximizing
customer lifetime value. That
means products and brands must
be made subservient to customer
relationships. And that means
transforming the marketing
department—traditionally focused
on current sales—into a “customer
department” by: replacing the
CMO with a chief customer officer,
cultivating customers rather than
pushing products, adopting new
performance metrics, and
bringing under the marketing
umbrella all customer-focused
departments, including R&D and
customer service.
Building relationships
Product-Manager Driven
Many companies still depend on
product managers and one-way
mass marketing to push a product
to many customers.
Customer-Manager Driven
What’s needed is customer managers
who engage individual customers or
narrow segments in two-way communications, building long-term relationships
by promoting whichever of the company’s
products the customer would value
most at any given time.
Customer
Product
Customer
Product
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RUST, MOORMAN, AND BHALLA
short-term product sales, IBM measures the practice’s performance
according to long-term customer metrics.
Large B2B firms are often advanced in their customer orientation,
and some B2C companies are making notable progress. Increasingly,
they view their customer relationships as evolving over time, and
they may hand off customers to different parts of the organization
selling different brands as their needs change. For instance, Tesco, a
leading UK retailer, has recently made significant investments in
analytics that have improved customer retention. Tesco uses its
data-collecting loyalty card (the Clubcard) to track which stores customers visit, what they buy, and how they pay. This information has
helped Tesco tailor merchandise to local tastes and customize offerings at the individual level across a variety of store formats—from
sprawling hypermarts to neighborhood shops. Shoppers who buy diapers for the first time at a Tesco store, for example, receive coupons
by mail not only for baby wipes and toys but also for beer, according
to a Wall Street Journal report. Data analysis revealed that new
fathers tend to buy more beer because they can’t spend as much
time at the pub.
On the services side, American Express actively monitors customers’ behavior and responds to changes by offering different
products. The firm uses consumer data analysis and algorithms to
determine customers’ “next best product” according to their changing profiles and to manage risk across cardholders. For example, the
first purchase of an upper-class airline ticket on a Gold Card may
trigger an invitation to upgrade to a Platinum Card. Or, because of
changing circumstances a cardholder may want to give an additional
card with a specified spending limit to a child or a contractor. By offering this service, American Express extends existing customers’
spending ability to a trusted circle of family members or partners
while introducing the brand to potential new customers.
American Express also leverages its strategic position between
customers and merchants to create long-term value across both
relationships. For instance, the company might use demographic
data, customer purchase patterns, and credit information to observe
that a cardholder has moved into a new home. AmEx capitalizes on
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RETHINKING MARKETING
that life event by offering special Membership Rewards on purchases from merchants in its network in the home-furnishings retail
category.
One insurance and financial services company we know of also
proved adept at tailoring products to customers’ life events. Customers who lose a spouse, for example, are flagged for special attention from a team that offers them customized products. When a
checking account or credit-card customer gets married, she’s a good
cross-selling prospect for an auto or home insurance policy and a
mortgage. Likewise, the firm targets new empty nesters with home
equity loans or investment products and offers renter’s insurance to
graduating seniors.
Reinventing Marketing
These shining examples aside, boards and C-suites still mostly pay
lip service to customer relationships while focusing intently on
selling goods and services. Directors and management need to
spearhead the strategy shift from transactions to relationships and
create the culture, structure, and incentives necessary to execute
the strategy.
What does a customer-cultivating organization look like? Although no company has a fully realized customer-focused structure,
we can see the features of one in a variety of companies making the
transition. The most dramatic change will be the marketing department’s reinvention as a “customer department.” The first order of
business is to replace the traditional CMO with a new type of leader—
a chief customer officer.
The CCO
Chief customer officers are increasingly common in companies
worldwide—there are more than 300 today, up from 30 in 2003.
Companies as diverse as Chrysler, Hershey’s, Oracle, Samsung,
Sears, United Airlines, Sun Microsystems, and Wachovia now have
CCOs. But too often the CCO is merely trying to make a conventional
organization more customer-centric. In general, it’s a poorly defined
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RUST, MOORMAN, AND BHALLA
role—which may account for CCOs’ dubious distinction as having
the shortest tenure of all C-suite executives.
To be effective, the CCO role as we conceive it must be a powerful
operational position, reporting to the CEO. This executive is responsible for designing and executing the firm’s customer relationship
strategy and overseeing all customer-facing functions.
A successful CCO promotes a customer-centric culture and removes obstacles to the flow of customer information throughout
the organization. This includes getting leaders to regularly engage
with customers. At USAA, top managers spend two or three hours a
week on the call-center phones with customers. This not only
shows employees how serious management is about customer
interaction but helps managers understand customers’ concerns.
Likewise, Tesco managers spend one week a year working in stores
and interacting with customers as part of the Tesco Week in Store
(TWIST) program.
As managers shift their focus to customers, and customer
information increasingly drives decisions, organizational structures
that block information flow must be torn down. The reality is that
despite large investments in acquiring customer data, most firms
underutilize what they know. Information is tightly held, often
because of a lack of trust, competition for promotions or resources,
and the silo mentality. The CCO must create incentives that eliminate these counterproductive mind-sets.
Ultimately, the CCO is accountable for increasing the profitability
of the firm’s customers, as measured by metrics such as customer
lifetime value (CLV) and customer equity as well as by intermediate
indicators, such as word of mouth (or mouse).
Customer managers
In the new customer department, customer and segment managers
identify customers’ product needs. Brand managers, under the customer managers’ direction, then supply the products that fulfill
those needs. This requires shifting resources—principally people
and budgets—and authority from product managers to customer
managers. (See the sidebar “What Makes a Customer Manager?”)
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RETHINKING MARKETING
What Makes a Customer Manager?
IN A SENSE, THE ROLE of customer manager is the ultimate expression of
marketing (find out what the customer wants and fulfill the need) while the
product manager is more aligned with the traditional selling mind-set (have
product, find customer).
Jim Spohrer, the director of Global University Programs at IBM, hires what
UCal Berkeley professor Morten Hansen calls “T-shaped” people, who have
broad expertise with depth in some areas. Customer managers will be most
effective when they’re T-shaped, combining deep knowledge of particular
customers or segments with broad knowledge of the firm and its products.
These managers must also be sophisticated data interpreters, able to extract
insights from the increasing amount of information about customers’ attitudes and activities acquired by mining blogs and other customer forums,
monitoring online purchasing behavior, tracking retail sales, and using other
types of analytics. While brand managers may be satisfied with examining the
media usage statistics associated with their product, brand usage behavior,
and brand chat in communities, customer managers will take a broader and
more integrative view of the customer. For instance, when P&G managers
responsible for the Max Factor and Cover Girl brands spent a week living on
the budget of a low-end consumer, they were acting like customer managers.
The experience gave these managers important insights into what P&G, not
just the specific brands, could do to improve the lives of these customers.
We’d expect the most effective customer managers to have broad training in
the social sciences—psychology, anthropology, sociology, and economics—
in addition to an understanding of marketing. They’d approach the customer as behavioral scientists rather than as marketing specialists,
observing and collecting information about them, interacting with and
learning from them, and synthesizing and disseminating what they learned.
For business schools to stay relevant in training customer managers, the
curriculum needs to shift its emphasis from marketing products to cultivating customers.
This structure is common in the B2B world. In its B2B activities,
Procter & Gamble, for instance, has key account managers for major
retailers like Wal-Mart. They are less interested in selling, say,
Swiffers than in maximizing the value of the customer relationship
over the long term. Some B2C companies use this structure as well,
foremost among them retail financial institutions that put managers
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RUST, MOORMAN, AND BHALLA
in charge of segments—wealthy customers, college kids, retirees,
and so forth—rather than products.
In a customer-cultivating company, a consumer-goods segment
manager might offer customers incentives to switch from lessprofitable Brand A to more-profitable Brand B. This wouldn’t happen in the conventional system, where brand and product managers
call the shots. Brand A’s manager isn’t going to encourage customers
to defect—even if that would benefit the company—because he’s
rewarded for brand performance, not for improving CLV or some
other long-term customer metric. This is no small change: It means
that product managers must stop focusing on maximizing their
products’ or brands’ profits and become responsible for helping customer and segment managers maximize theirs.
Customer-facing functions
As the nexus of customer-facing activity, the customer department
assumes responsibility for some of the customer-focused functions
that have left the marketing department in recent years and some
that have not traditionally been part of it.
CRM. Customer relationship management has been increasingly
taken on by companies’ IT groups because of the technical capability
CRM systems require, according to a Harte-Hanks survey of 300
companies in North America: 42% of companies report that CRM is
managed by the IT group, 31% by sales, and only 9% by marketing. Yet
CRM is, ultimately, a tool for gauging customer needs and behaviors—
the new customer department’s central role. It makes little sense for
the very data required to execute a customer-cultivation strategy to
be collected and analyzed outside the customer department. Of
course, bringing CRM into the customer department means bringing
IT and analytic skills in as well.
Market research. The emphasis of market research changes in a
customer-centric company. First, the internal users of market research extend beyond the marketing department to all areas of the
organization that touch customers—including finance (the source of
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RETHINKING MARKETING
Reimagining the marketing department
The traditional marketing department must be reconfigured as a customer
department that puts building customer relationships ahead of pushing specific products.
To this end, product managers and customer-focused departments report to
a chief customer officer instead of a CMO, and support the strategies of customer or segment managers.
CEO
Chief customer
officer
Customer segment
managers
A B C
Product managers
Customer relationship
management
Market
research
Research and
development
Customer
service
customer payment options) and distribution (the source of delivery
timing and service). Second, the scope of analysis shifts from an
aggregate view to an individual view of customer activities and
value. Third, market research shifts its attention to acquiring the
customer input that will drive improvements in customer-focused
metrics such as CLV and customer equity.
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RUST, MOORMAN, AND BHALLA
Research and development. When a product is more about clever
engineering than customer needs, sales can suffer. For example, engineers like to pack lots of features into products, but we know that
customers can suffer from feature fatigue, which hurts future sales.
To make sure that product decisions reflect real-world needs, the
customer must be brought into the design process. Integrating R&D
and marketing is a good way to do that. Few companies have done
this better than Nokia in Asia, where its market share exceeds 60%.
In an industry where manufacturers must introduce scores of new
offerings every year, the group’s ability to translate customer input
about features and value into hit product offerings is legendary.
Among its customer-focused innovation tools is Nokia Beta Labs, a
virtual developer community that brings users and developer teams
together to virtually prototype new features and products, inviting
even “wacky ideas” that may never make it to the marketplace.
(Nokia adopted a different strategy in the United States, using far
less customer input, and has seen its market share slide.)
Examples abound of companies that create new value through the
collaboration of users and producers: Mozilla’s Firefox in the web
browser category, P&G’s Swiffer in the home cleaning category, and
International Flavors and Fragrances’ partnership with B2B customers like Estée Lauder in the perfume market. In a world in which
the old R&D-driven models for new product development are giving
way to creative collaborations like these, R&D must report to the CCO.
Customer service
This function should be handled in-house, under the customer department’s wing—not only to ensure that the quality of service is
high but also to help cultivate long-term relationships. Delta Airlines, for example, recently pulled out of its call centers overseas because cultural differences damaged the airline’s ability to interact
with North American customers. Delta concluded that the negative
impact on the quality of customer relationships wasn’t worth the
cost savings. Now, when customer service gets a call, a representative immediately identifies the caller’s segment and routes her to a
customer-service specialist trained to work with that segment.
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RETHINKING MARKETING
The interaction is captured in the customer information system and
used, in turn, by the customer department to divine new customers’
needs and create solutions.
If customer service must be outsourced, the function should report in to a high-level internal customer manager, and its IT infrastructure and customer data must be seamlessly integrated with the
company’s customer databases.
A New Focus on Customer Metrics
Once companies make the shift from marketing products to cultivating customers, they will need new metrics to gauge the strategy’s
effectiveness. First, companies need to focus less on product profitability and more on customer profitability. Retailers have applied this
concept for some time in their use of loss leaders—products that may
be unprofitable but strengthen customer relationships.
Second, companies need to pay less attention to current sales and
more to CLV. A company in decline may have good current sales but
poor prospects. The customer lifetime value metric evaluates the
future profits generated from a customer, properly discounted to
reflect the time value of money. Lifetime value focuses the company
on long-term health—an emphasis that most shareholders and
investors should share. Although too often the markets reward
short-term earnings at the expense of future performance, that unfortunate tendency will change as future-oriented customer metrics
become a routine part of financial reporting. An international movement is under way to require companies to report intangible assets
in financial statements. As leading indicators such as customercentered metrics increasingly appear on financial statements, stock
prices will begin to reflect them. Even now, savvy analysts are pushing firms to understand customer retention rates and the value of
customer and brand assets.
Third, companies need to shift their focus from brand equity (the
value of a brand) to customer equity (the sum of the lifetime values of
their customers). Increasing brand equity is best seen as a means to
an end, one way to build customer equity (see “Customer-Centered
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RUST, MOORMAN, AND BHALLA
New metrics for a new model
The shift from marketing products to cultivating customers demands a shift in
metrics as well.
Old approach
New approach
Product
profitability
Customer
profitability
Current
sales
Customer
lifetime value
Brand
equity
Customer
equity
Market
share
Customer
equity share
Brand Management,” HBR September 2004). Customer equity has
the added benefit of being a good proxy for the value of the firm,
thereby making marketing more relevant to shareholder value.
Fourth, companies need to pay less attention to current market
share and more attention to customer equity share (the value of a
company’s customer base divided by the total value of the customers in the market). Market share offers a snapshot of the company’s competitive sales position at the moment, but customer
equity share is a measure of the firm’s long-term competitiveness
with respect to profitability.
Given the increasing importance of customer-level information,
companies must become adept at tracking information at several
levels—individual, segment, and aggregate. Different strategic decisions require different levels of information, so companies typically
need multiple information sources to meet their needs.
At the individual customer level the key metric is customer lifetime value; the marketing activities tracked most closely are direct
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RETHINKING MARKETING
marketing activities; and the key sources of data are customer databases that the firm compiles. At the segment level the key metric is
the lifetime value of the segment (the lifetime value of the average
customer times the number of customers in the segment); the marketing activities tracked most closely are marketing efforts targeted
at specific customer segments, sometimes using niche media; and
the key sources of information are customer panels and survey data.
At the aggregate market level, the key metric is customer equity; the
marketing activities tracked most closely are mass marketing efforts, often through mass media; and the key sources of information
are aggregate sales data and survey data. We see that firms will typically have a portfolio of information sources.
Clearly, companies need metrics for evaluating progress in
collecting and using customer information. How frequently
managers contribute to and access customer information archives is
a good general measure, although it doesn’t reveal much about the
quality of the information. To get at that, some firms create markets
for new customer information in which employees rate the value of
contributions.
_______________________
Like any other organizational transformation, making a productfocused company fully customer-centric will be difficult. The IT
group will want to hang on to CRM; R&D is going to fight hard to
keep its relative autonomy; and most important, traditional marketing executives will battle for their jobs. Because the change requires
overcoming entrenched interests, it won’t happen organically.
Transformation must be driven from the top down. But however
daunting, the shift is inevitable. It will soon be the only competitive
way to serve customers.
Originally published in January 2010. Reprint R1001F
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Branding in the
Digital Age
You’re Spending Your Money in All the Wrong Places.
by David C. Edelman
T
THE INTERNET HAS upended how consumers engage with brands. It
is transforming the economics of marketing and making obsolete
many of the function’s traditional strategies and structures. For marketers, the old way of doing business is unsustainable.
Consider this: Not long ago, a car buyer would methodically pare
down the available choices until he arrived at the one that best met
his criteria. A dealer would reel him in and make the sale. The
buyer’s relationship with both the dealer and the manufacturer
would typically dissipate after the purchase. But today, consumers
are promiscuous in their brand relationships: They connect with
myriad brands—through new media channels beyond the manufacturer’s and the retailer’s control or even knowledge—and evaluate a
shifting array of them, often expanding the pool before narrowing it.
After a purchase these consumers may remain aggressively engaged,
publicly promoting or assailing the products they’ve bought, collaborating in the brands’ development, and challenging and shaping
their meaning.
Consumers still want a clear brand promise and offerings they
value. What has changed is when—at what touch points—they are
most open to influence, and how you can interact with them at those
points. In the past, marketing strategies that put the lion’s share of
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resources into building brand awareness and then opening wallets at
the point of purchase worked pretty well. But touch points have
changed in both number and nature, requiring a major adjustment
to realign marketers’ strategy and budgets with where consumers
are actually spending their time.
Block That Metaphor
Marketers have long used the famous funnel metaphor to think
about touch points: Consumers would start at the wide end of
the funnel with many brands in mind and narrow them down to a
final choice. Companies have traditionally used paid-media push
marketing at a few well-defined points along the funnel to build
awareness, drive consideration, and ultimately inspire purchase.
But the metaphor fails to capture the shifting nature of consumer
engagement.
In the June 2009 issue of McKinsey Quarterly, my colleague
David Court and three coauthors introduced a more nuanced view
of how consumers engage with brands: the “consumer decision
journey” (CDJ). They developed their model from a study of
the purchase decisions of nearly 20,000 consumers across five
industries—automobiles, skin care, insurance, consumer electronics, and mobile telecom—and three continents. Their research
revealed that far from systematically narrowing their choices,
today’s consumers take a much more iterative and less reductive
journey of four stages: consider, evaluate, buy, and enjoy, advocate,
bond.
Consider
The journey begins with the consumer’s top-of-mind consideration
set: products or brands assembled from exposure to ads or store displays, an encounter at a friend’s house, or other stimuli. In the funnel model, the consider stage contains the largest number of brands;
but today’s consumers, assaulted by media and awash in choices,
often reduce the number of products they consider at the outset.
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BRANDING IN THE DIGITAL AGE
Idea in Brief
Consumers today connect with
brands in fundamentally new
ways, often through media
channels that are beyond
manufacturers’ and retailers’
control. That means traditional
marketing strategies must be
redesigned to accord with how
brand relationships have changed.
In the famous funnel metaphor, a
shopper would start with several
brands in mind and systematically
narrow them down to a final
choice. His relationship with both
the manufacturer and the retailer
ended there. But now, relying
heavily on digital interactions, he
evaluates a shifting array of
options and often engages with the
brand through social media after a
purchase. Though marketing
strategies that focused on building
brand awareness and the point of
purchase worked pretty well in the
past, consumer touch points have
changed in nature. For example, in
many categories today the single
most powerful influence to buy is
someone else’s advocacy.
The author describes a “consumer
decision journey” of four stages:
consider a selection of brands;
evaluate by seeking input from
peers, reviewers, and others; buy;
and enjoy, advocate, bond. If the
consumer’s bond with the brand
becomes strong enough, she’ll
enter a buy-enjoy-advocate-buy
loop that skips the first two stages
entirely.
Smart marketers will study the decision journey for their products
and use the insights they gain to
revise strategy, media spend, and
organizational roles.
Evaluate
The initial consideration set frequently expands as consumers seek
input from peers, reviewers, retailers, and the brand and its competitors. Typically, they’ll add new brands to the set and discard
some of the originals as they learn more and their selection criteria
shift. Their outreach to marketers and other sources of information
is much more likely to shape their ensuing choices than marketers’
push to persuade them.
Buy
Increasingly, consumers put off a purchase decision until they’re
actually in a store—and, as we’ll see, they may be easily dissuaded at
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that point. Thus point of purchase—which exploits placement, packaging, availability, pricing, and sales interactions—is an ever more
powerful touch point.
Enjoy, advocate, bond
After purchase, a deeper connection begins as the consumer interacts with the product and with new online touch points. More than
60% of consumers of facial skin care products, my McKinsey colleagues found, conduct online research about the products after
purchase—a touch point entirely missing from the funnel. When
consumers are pleased with a purchase, they’ll advocate for it by
word of mouth, creating fodder for the evaluations of others and
invigorating a brand’s potential. Of course, if a consumer is disappointed by the brand, she may sever ties with it—or worse. But if
the bond becomes strong enough, she’ll enter an enjoy-advocatebuy loop that skips the consider and evaluate stages entirely.
The Journey in Practice
Although the basic premise of the consumer decision journey may
not seem radical, its implications for marketing are profound. Two
in particular stand out.
First, instead of focusing on how to allocate spending across
media—television, radio, online, and so forth—marketers should
target stages in the decision journey. The research my colleagues
and I have done shows a mismatch between most marketing allocations and the touch points at which consumers are best influenced.
Our analysis of dozens of marketing budgets reveals that 70% to
90% of spend goes to advertising and retail promotions that hit consumers at the consider and buy stages. Yet consumers are often influenced more during the evaluate and enjoy-advocate-bond stages.
In many categories the single most powerful impetus to buy is
someone else’s advocacy. Yet many marketers focus on media spend
(principally advertising) rather than on driving advocacy. The
coolest banner ads, best search buys, and hottest viral videos may
win consideration for a brand, but if the product gets weak
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BRANDING IN THE DIGITAL AGE
reviews—or, worse, isn’t even discussed online—it’s unlikely to survive the winnowing process.
The second implication is that marketers’ budgets are constructed to meet the needs of a strategy that is outdated. When the
funnel metaphor reigned, communication was oneway, and every
interaction with consumers had a variable media cost that typically
outweighed creative’s fixed costs. Management focused on “working media spend”—the portion of a marketing budget devoted to
what are today known as paid media.
This no longer makes sense. Now marketers must also consider
owned media (that is, the channels a brand controls, such as websites) and earned media (customer-created channels, such as communities of brand enthusiasts). And an increasing portion of the
budget must go to “nonworking” spend—the people and technology
required to create and manage content for a profusion of channels
and to monitor or participate in them.
Launching a Pilot
The shift to a CDJ-driven strategy has three parts: understanding
your consumers’ decision journey; determining which touch points
are priorities and how to leverage them; and allocating resources accordingly—an undertaking that may require redefining organizational relationships and roles.
One of McKinsey’s clients, a global consumer electronics company, embarked on a CDJ analysis after research revealed that
although consumers were highly familiar with the brand, they tended
to drop it from their consideration set as they got closer to purchase.
It wasn’t clear exactly where the company was losing consumers or
what should be done. What was clear was that the media-mix models the company had been using to allocate marketing spend at a
gross level (like the vast majority of all such models) could not take
the distinct goals of different touch points into account and strategically direct marketing investments to them.
The company decided to pilot a CDJ-based approach in one business unit in a single market, to launch a major new TV model. The
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Block That Metaphor
Then: The Funnel Metaphor
For years, marketers assumed that consumers started with a large number of
potential brands in mind and methodically winnowed their choices until
they’d decided which one to buy. After purchase, their relationship with the
brand typically focused on the use of the product or service itself.
Now: The Consumer Decision Journey
New research shows that rather than systematically narrowing their choices,
consumers add and subtract brands from a group under consideration during
an extended evaluation phase. After purchase, they often enter into an openended relationship with the brand, sharing their experience with it online.
Consider & buy. Marketers often overemphasize the “consider” and “buy”
stages of the journey, allocating more resources than they should to building
awareness through advertising and encouraging purchase with retail
promotions.
Evaluate & advocate. New media make the “evaluate” and “advocate” stages
increasingly relevant. Marketing investments that help consumers navigate
the evaluation process and then spread positive word of mouth about the
brands they choose can be as important as building awareness and driving
purchase.
Bond. If consumers’ bond with a brand is strong enough, they repurchase it
without cycling through the earlier decision-journey stages.
chief marketing officer drove the effort, engaging senior managers at
the start to facilitate coordination and ensure buy-in. The corporate
VP for digital marketing shifted most of his time to the pilot, assembling a team with representatives from functions across the organization, including marketing, market research, IT, and, crucially, finance.
The team began with an intensive three-month market research project to develop a detailed picture of how TV consumers navigate the
decision journey: what they do, what they see, and what they say.
What they do
Partnering with a supplier of online-consumer-panel data, the company identified a set of TV shoppers and drilled down into their
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BRANDING IN THE DIGITAL AGE
Many brands
Fewer brands
Final choice
BUY
BUY
Consider
Evaluate
The loyalty loop
Bond
Advocate
Enjoy
BUY
behavior: How did they search? Did they show a preference for manufacturers’ or retailers’ sites? How did they participate in online communities? Next the team selected a sample of the shoppers for
in-depth, one-on-one discussions: How would they describe the
stages of their journey, online and off? Which resources were most
valuable to them, and which were disappointing? How did brands
enter and leave their decision sets, and what drove their purchases in
the end?
The research confirmed some conventional wisdom about how
consumers shop, but it also overturned some of the company’s
long-standing assumptions. It revealed that off-line channels such as
television advertising, in-store browsing, and direct word of mouth
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were influential only during the consider stage. Consumers might have
a handful of products and brands in mind at this stage, with opinions
about them shaped by previous experience, but their attitudes and
consideration sets were extremely malleable. At the evaluate stage,
consumers didn’t start with search engines; rather, they went directly
to Amazon.com and other retail sites that, with their rich and expanding array of product-comparison information, consumer and expert
ratings, and visuals, were becoming the most important influencers.
Meanwhile, fewer than one in 10 shoppers visited manufacturers’
sites, where most companies were still putting the bulk of their digital
spend. Display ads, which the team had assumed were important at
the consider stage, were clicked on only if they contained a discount
offer, and then only when the consumer was close to the buy stage.
And although most consumers were still making their purchases in
stores, a growing number were buying through retail sites and choosing either direct shipping or in-store pickup.
The research also illuminated consumers’ lively relationships
with many brands after purchase—the enjoy-and-advocate stage so
conspicuously absent from the funnel. These consumers often
talked about their purchases in social networks and posted reviews
online, particularly when they were stimulated by retailers’ postpurchase e-mails. And they tended to turn to review sites for troubleshooting advice.
What they see
To better understand consumers’ experience, the team unleashed
a battery of hired shoppers who were given individual assignments, such as to look for a TV for a new home; replace a small TV
in a bedroom; or, after seeing a TV at a friend’s house, go online to
learn more about it. The shoppers reported what their experience
was like and how the company’s brand stacked up against competitors’. How did its TVs appear on search engines? How visible were
they on retail sites? What did consumer reviews reveal about
them? How thorough and accurate was the available information
about them?
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The results were alarming but not unexpected. Shoppers trying to
engage with any of the brands—whether the company’s or its competitors’—had a highly fractured experience. Links constantly failed,
because page designs and model numbers had changed but the references to them had not. Product reviews, though they were often positive, were scarce on retail sites. And the company’s TVs rarely turned
up on the first page of a search within the category, in part because of
the profusion of broken links. The same story had emerged during
the one-on-one surveys. Consumers reported that every brand’s
model numbers, product descriptions, promotion availability, and
even pictures seemed to change as they moved across sites and into
stores. About a third of the shoppers who had considered a specific
TV brand online during the evaluate stage walked out of a store during the buy stage, confused and frustrated by inconsistencies.
This costly disruption of the journey across the category made
clear that the company’s new marketing strategy had to deliver an
integrated experience from consider to buy and beyond. In fact, because the problem was common to the entire category, addressing it
might create competitive advantage. At any rate, there was little
point in winning on the other touch-point battlegrounds if this problem was left unaddressed.
What they say
Finally, the team focused on what people were saying online about
the brand. With social media monitoring tools, it uncovered the
key words consumers used to discuss the company’s products—
and found deep confusion. Discussion-group participants frequently gave wrong answers because they misunderstood TV
terminology. Product ratings and consumer recommendations
sometimes triggered useful and extensive discussions, but when
the ratings were negative, the conversation would often enter a
self-reinforcing spiral. The company’s promotions got some positive response, but people mostly said little about the brand. This
was a serious problem, because online advocacy is potent in the
evaluate stage.
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Taking Action
The company’s analysis made clear where its marketing emphasis
needed to be. For the pilot launch, spending was significantly shifted
away from paid media. Marketing inserted links from its own site to
retail sites that carried the brand, working with the retailers to make
sure the links connected seamlessly. Most important, click-stream
analysis revealed that of all the online retailers, Amazon was probably the most influential touch point for the company’s products during the evaluate stage. In collaboration with sales, which managed
the relationship with Amazon, marketing created content and links
to engage traffic there. To encourage buzz, it aggressively distributed
positive third-party reviews online and had its traditional media
direct consumers to online environments that included promotions
and social experiences. To build ongoing postpurchase relationships
and encourage advocacy, it developed programs that included online
community initiatives, contests, and e-mail promotions. Finally, to
address the inconsistent descriptions and other messaging that was
dissuading potential customers at the point of purchase, the team
built a new content-development and -management system to
ensure rigorous consistency across all platforms.
How did the CDJ strategy work? The new TV became the top seller
on Amazon.com and the company’s best performer in retail stores,
far exceeding the marketers’ expectations.
A Customer Experience Plan
As our case company found, a deep investigation of the decision
journey often reveals the need for a plan that will make the customer’s experience coherent—and may extend the boundaries of the
brand itself. The details of a customer experience plan will vary according to the company’s products, target segments, campaign
strategy, and media mix. But when the plan is well executed, consumers’ perception of the brand will include everything from discussions in social media to the in-store shopping experience to
continued interactions with the company and the retailer.
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For instance, Apple has eliminated jargon, aligned product descriptions, created a rich library of explanatory videos, and instituted off-line Genius Bars, all of which ensure absolute consistency,
accuracy, and integration across touch points. Similarly, Nike has
moved from exhorting consumers to “Just Do It” to actually helping
them act on its motto—with Nike+ gear that records and transmits
their workout data; global fundraising races; and customized online
training programs. Thus its customers’ engagement with the brand
doesn’t necessarily begin or end with a purchase. And millions of
consumers in Japan have signed up to receive mobile alerts from
McDonald’s, which provide tailored messages that include discount
coupons, contest opportunities, special-event invitations, and other
unique, brand-specific content.
These companies are not indiscriminate in their use of the tactics
available for connecting with customers. Instead they customize
their approaches according to their category, brand position, and
channel relationships. Apple has not yet done much mining of its
customer data to offer more-personalized messaging. Nike’s presence on search engines shows little distinctiveness. McDonald’s
hasn’t focused on leveraging a core company website. But their decisions are deliberate, grounded in a clear sense of priorities.
New Roles for Marketing
Developing and executing a CDJ-centric strategy that drives an integrated customer experience requires marketing to take on new or
expanded roles. Though we know of no company that has fully developed them, many, including the consumer electronics firm we
advised, have begun to do so. Here are three roles that we believe
will become increasingly important:
Orchestrator
Many consumer touch points are owned-media channels, such as
the company’s website, product packaging, and customer service
and sales functions. Usually they are run by parts of the organization
other than marketing. Recognizing the need to coordinate these
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channels, one of our clients, a consumer durables company, has
moved its owned-media functions into the sphere of the chief marketing officer, giving him responsibility for orchestrating them.
Along with traditional and digital marketing communications, he
now manages customer service and market research, product literature design, and the product registration and warranty program.
Publisher and “content supply chain” manager
Marketers are generating ever-escalating amounts of content, often
becoming publishers—sometimes real-time multimedia publishers—
on a global scale. They create videos for marketing, selling, and servicing every product; coupons and other promotions delivered through
social media; applications and decision support such as tools to help
customers “build” and price a car online. One of our clients, a
consumer marketer, realized that every new product release required
it to create more than 160 pieces of content involving more than 20 different parties and reaching 30 different touch points. Without careful
coordination, producing this volume of material was guaranteed to be
inefficient and invited inconsistent messaging that would undermine
the brand. As we sought best practices, we discovered that few companies have created the roles and systems needed to manage their
content supply chain and create a coherent consumer experience.
Uncoordinated publishing can stall the decision journey, as the
consumer electronics firm found. Our research shows that in companies where the marketing function takes on the role of publisher in
chief—rationalizing the creation and flow of product related
content—consumers develop a clearer sense of the brand and are
better able to articulate the attributes of specific products. These
marketers also become more agile with their content, readily adapting it to sales training videos and other new uses that ultimately
enhance consumers’ decision journey.
Marketplace intelligence leader
As more touch points become digital, opportunities to collect and
use customer information to understand the consumer decision
journey and knit together the customer experience are increasing.
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But in many companies IT controls the collection and management
of data and the relevant budgets; and with its traditional focus on
driving operational efficiency, it often lacks the strategic or financial
perspective that would incline it to steer resources toward marketing goals.
More than ever, marketing data should be under marketing’s control. One global bank offers a model: It created a Digital Governance
Council with representatives from all customer-facing functions.
The council is led by the CMO, who articulates the strategy, and attended by the CIO, who lays out options for executing it and receives
direction and funding from the council.
We believe that marketing will increasingly take a lead role in distributing customer insights across the organization. For example,
discoveries about “what the customer says” as she navigates the CDJ
may be highly relevant to product development or service programs.
Marketing should convene the right people in the organization to act
on its consumer insights and should manage the follow-up to ensure
that the enterprise takes action.
Starting the Journey
The firms we advise that are taking this path tend to begin with a
narrow line of business or geography (or both) where they can develop a clear understanding of one consumer decision journey and
then adjust strategy and resources accordingly. As their pilots get
under way, companies inevitably encounter challenges they can’t
fully address at the local level—such as a need for new enterprisewide infrastructure to support a content management system.
Or they may have to adapt the design of a social media program to
better suit the narrow initiative. In the more successful initiatives
we’ve seen, the CMO has championed the pilot before the executive
leadership team. The best results come when a bottom-up pilot is
paralleled by a top-down CMO initiative to address cross-functional,
infrastructure, and organizational challenges.
Finally, a company must capture processes, successes, and failures when it launches a pilot so that the pilot can be effectively
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adapted and scaled. A key consideration is that although the basic
architecture of a CDJ strategy may remain intact as it is expanded,
specific tactics will probably vary from one market and product to
another. When the consumer electronics firm discussed here took
its CDJ strategy to East Asia, for example, its touch-point analysis revealed that consumers in that part of the world put more stock in
blogs and third-party review sites than Western consumers do, and
less in manufacturers’ or retailers’ sites, which they didn’t fully
trust. They were also less likely to buy online. However, they relied
more on mobile apps such as bar-code readers to pull up detailed
product information at the point of purchase.
The changes buffeting marketers in the digital era are not incremental—they are fundamental. Consumers’ perception of a brand
during the decision journey has always been important, but the
phenomenal reach, speed, and interactivity of digital touch points
makes close attention to the brand experience essential—and
requires an executive-level steward. At many start-ups the founder
brings to this role the needed vision and the power to enforce it.
Established enterprises should have a steward as well. Now is the
time for CMOs to seize this opportunity to take on a leadership role,
establishing a stronger position in the executive suite and making
consumers’ brand experience central to enterprise strategy.
Originally published in December 2010. Reprint R1012C
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Marketing Myopia
by Theodore Levitt
E
EVERY MAJOR INDUSTRY was once a growth industry. But some that
are now riding a wave of growth enthusiasm are very much in the
shadow of decline. Others that are thought of as seasoned growth industries have actually stopped growing. In every case, the reason
growth is threatened, slowed, or stopped is not because the market
is saturated. It is because there has been a failure of management.
Fateful Purposes
The failure is at the top. The executives responsible for it, in the last
analysis, are those who deal with broad aims and policies. Thus:
• The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The
railroads are in trouble today not because that need was filled
by others (cars, trucks, airplanes, and even telephones) but
because it was not filled by the railroads themselves. They let
others take customers away from them because they assumed
themselves to be in the railroad business rather than in the
transportation business. The reason they defined their
industry incorrectly was that they were railroad oriented
instead of transportation oriented; they were product
oriented instead of customer oriented.
• Hollywood barely escaped being totally ravished by television.
Actually, all the established film companies went through
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LEVITT
drastic reorganizations. Some simply disappeared. All of them
got into trouble not because of TV’s inroads but because of
their own myopia. As with the railroads, Hollywood defined
its business incorrectly. It thought it was in the movie business
when it was actually in the entertainment business. “Movies”
implied a specific, limited product. This produced a fatuous
contentment that from the beginning led producers to view
TV as a threat. Hollywood scorned and rejected TV when it
should have welcomed it as an opportunity—an opportunity to
expand the entertainment business.
Today, TV is a bigger business than the old narrowly defined
movie business ever was. Had Hollywood been customer oriented
(providing entertainment) rather than product oriented (making
movies), would it have gone through the fiscal purgatory that it did?
I doubt it. What ultimately saved Hollywood and accounted for its
resurgence was the wave of new young writers, producers, and directors whose previous successes in television had decimated the
old movie companies and toppled the big movie moguls.
There are other, less obvious examples of industries that have
been and are now endangering their futures by improperly defining
their purposes. I shall discuss some of them in detail later and analyze the kind of policies that lead to trouble. Right now, it may help to
show what a thoroughly customer-oriented management can do to
keep a growth industry growing, even after the obvious opportunities have been exhausted, and here there are two examples that have
been around for a long time. They are nylon and glass—specifically,
E.I. du Pont de Nemours and Company and Corning Glass Works.
Both companies have great technical competence. Their product orientation is unquestioned. But this alone does not explain
their success. After all, who was more pridefully product oriented
and product conscious than the erstwhile New England textile
companies that have been so thoroughly massacred? The DuPonts
and the Cornings have succeeded not primarily because of their
product or research orientation but because they have been thoroughly customer oriented also. It is constant watchfulness for
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MARKETING MYOPIA
Idea in Brief
What business are you really in? A
seemingly obvious question—but
one we should all ask before demand for our companies’ products
or services dwindles.
The railroads failed to ask this
same question—and stopped
growing. Why? Not because people no longer needed transportation. And not because other
innovations (cars, airplanes) filled
transportation needs. Rather, railroads stopped growing because
railroads didn’t move to fill those
needs. Their executives incorrectly
thought that they were in the railroad business, not the transportation business. They viewed
themselves as providing a product
instead of serving customers. Too
many other industries make the
same mistake—putting themselves
at risk of obsolescence.
How to ensure continued growth
for your company? Concentrate on
meeting customers’ needs rather
than selling products. Chemical
powerhouse DuPont kept a close
eye on its customers’ most pressing concerns—and deployed its
technical know-how to create an
ever-expanding array of products
that appealed to customers and
continuously enlarged its market.
If DuPont had merely found more
uses for its flagship invention,
nylon, it might not be around
today.
opportunities to apply their technical know-how to the creation of
customer-satisfying uses that accounts for their prodigious output
of successful new products. Without a very sophisticated eye on
the customer, most of their new products might have been wrong,
their sales methods useless.
Aluminum has also continued to be a growth industry, thanks to
the efforts of two wartime-created companies that deliberately set
about inventing new customer-satisfying uses. Without Kaiser Aluminum & Chemical Corporation and Reynolds Metals Company, the
total demand for aluminum today would be vastly less.
Error of analysis
Some may argue that it is foolish to set the railroads off against aluminum or the movies off against glass. Are not aluminum and glass
naturally so versatile that the industries are bound to have more
growth opportunities than the railroads and the movies? This view
commits precisely the error I have been talking about. It defines an
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Idea in Practice
We put our businesses at risk of
obsolescence when we accept any
of the following myths:
Myth 1: An ever-expanding and
more affluent population will
ensure our growth.
When markets are expanding, we
often assume we don’t have to
think imaginatively about our businesses. Instead, we seek to outdo
rivals simply by improving on what
we’re already doing. The consequence: We increase the efficiency
of making our products, rather
than boosting the value those
products deliver to customers.
Myth 2: There is no competitive
substitute for our industry’s
major product.
Believing that our products have no
rivals makes our companies vulnerable to dramatic innovations from
outside our industries—often by
smaller, newer companies that
are focusing on customer needs
rather than the products
themselves.
Myth 3: We can protect ourselves
through mass production.
Few of us can resist the prospect
of the increased profits that come
with steeply declining unit costs.
But focusing on mass production
emphasizes our company’s
needs—when we should be
emphasizing our customers’.
Myth 4: Technical research and
development will ensure our
growth.
When R&D produces breakthrough
products, we may be tempted to
organize our companies around
the technology rather than the
consumer. Instead, we should
remain focused on satisfying
customer needs.
industry or a product or a cluster of know-how so narrowly as to
guarantee its premature senescence. When we mention “railroads,”
we should make sure we mean “transportation.” As transporters, the
railroads still have a good chance for very considerable growth. They
are not limited to the railroad business as such (though in my opinion, rail transportation is potentially a much stronger transportation
medium than is generally believed).
What the railroads lack is not opportunity but some of the managerial imaginativeness and audacity that made them great. Even an
amateur like Jacques Barzun can see what is lacking when he says,
“I grieve to see the most advanced physical and social organization
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of the last century go down in shabby disgrace for lack of the same
comprehensive imagination that built it up. [What is lacking is] the
will of the companies to survive and to satisfy the public by inventiveness and skill.”1
Shadow of Obsolescence
It is impossible to mention a single major industry that did not at one
time qualify for the magic appellation of “growth industry.” In each
case, the industry’s assumed strength lay in the apparently unchallenged superiority of its product. There appeared to be no effective
substitute for it. It was itself a runaway substitute for the product it
so triumphantly replaced. Yet one after another of these celebrated
industries has come under a shadow. Let us look briefly at a few
more of them, this time taking examples that have so far received a
little less attention.
Dry cleaning
This was once a growth industry with lavish prospects. In an age of
wool garments, imagine being finally able to get them clean safely
and easily. The boom was on. Yet here we are 30 years after the boom
started, and the industry is in trouble. Where has the competition
come from? From a better way of cleaning? No. It has come from synthetic fibers and chemical additives that have cut the need for dry
cleaning. But this is only the beginning. Lurking in the wings and
ready to make chemical dry cleaning totally obsolete is that powerful magician, ultrasonics.
Electric utilities
This is another one of those supposedly “no substitute” products that
has been enthroned on a pedestal of invincible growth. When the
incandescent lamp came along, kerosene lights were finished. Later,
the waterwheel and the steam engine were cut to ribbons by the
flexibility, reliability, simplicity, and just plain easy availability of
electric motors. The prosperity of electric utilities continues to
wax extravagant as the home is converted into a museum of electric
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gadgetry. How can anybody miss by investing in utilities, with no
competition, nothing but growth ahead?
But a second look is not quite so comforting. A score of nonutility
companies are well advanced toward developing a powerful chemical
fuel cell, which could sit in some hidden closet of every home silently
ticking off electric power. The electric lines that vulgarize so many
neighborhoods would be eliminated. So would the endless demolition of streets and service interruptions during storms. Also on the
horizon is solar energy, again pioneered by nonutility companies.
Who says that the utilities have no competition? They may be
natural monopolies now, but tomorrow they may be natural
deaths. To avoid this prospect, they too will have to develop fuel
cells, solar energy, and other power sources. To survive, they
themselves will have to plot the obsolescence of what now produces their livelihood.
Grocery stores
Many people find it hard to realize that there ever was a thriving establishment known as the “corner store.” The supermarket took over
with a powerful effectiveness. Yet the big food chains of the 1930s
narrowly escaped being completely wiped out by the aggressive expansion of independent supermarkets. The first genuine supermarket was opened in 1930, in Jamaica, Long Island. By 1933,
supermarkets were thriving in California, Ohio, Pennsylvania, and
elsewhere. Yet the established chains pompously ignored them.
When they chose to notice them, it was with such derisive descriptions as “cheapy,” “horse-and-buggy,” “cracker-barrel storekeeping,”
and “unethical opportunists.”
The executive of one big chain announced at the time that he
found it “hard to believe that people will drive for miles to shop for
foods and sacrifice the personal service chains have perfected and to
which [the consumer] is accustomed.”2 As late as 1936, the National
Wholesale Grocers convention and the New Jersey Retail Grocers Association said there was nothing to fear. They said that the supers’
narrow appeal to the price buyer limited the size of their market.
They had to draw from miles around. When imitators came, there
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would be wholesale liquidations as volume fell. The high sales of the
supers were said to be partly due to their novelty. People wanted
convenient neighborhood grocers. If the neighborhood stores would
“cooperate with their suppliers, pay attention to their costs, and improve their service,” they would be able to weather the competition
until it blew over.3
It never blew over. The chains discovered that survival required
going into the supermarket business. This meant the wholesale
destruction of their huge investments in corner store sites and in
established distribution and merchandising methods. The companies with “the courage of their convictions” resolutely stuck to the
corner store philosophy. They kept their pride but lost their shirts.
A self-deceiving cycle
But memories are short. For example, it is hard for people who
today confidently hail the twin messiahs of electronics and chemicals to see how things could possibly go wrong with these galloping
industries. They probably also cannot see how a reasonably sensible businessperson could have been as myopic as the famous
Boston millionaire who early in the twentieth century unintentionally sentenced his heirs to poverty by stipulating that his entire estate be forever invested exclusively in electric streetcar securities.
His posthumous declaration, “There will always be a big demand
for efficient urban transportation,” is no consolation to his heirs,
who sustain life by pumping gasoline at automobile filling stations.
Yet, in a casual survey I took among a group of intelligent business executives, nearly half agreed that it would be hard to hurt their
heirs by tying their estates forever to the electronics industry. When
I then confronted them with the Boston streetcar example, they
chorused unanimously, “That’s different!” But is it? Is not the basic
situation identical?
In truth, there is no such thing as a growth industry, I believe.
There are only companies organized and operated to create and
capitalize on growth opportunities. Industries that assume themselves to be riding some automatic growth escalator invariably descend into stagnation. The history of every dead and dying
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“growth” industry shows a self-deceiving cycle of bountiful expansion and undetected decay. There are four conditions that usually
guarantee this cycle:
1. The belief that growth is assured by an expanding and more
affluent population;
2. The belief that there is no competitive substitute for the industry’s major product;
3. Too much faith in mass production and in the advantages of
rapidly declining unit costs as output rises;
4. Preoccupation with a product that lends itself to carefully controlled scientific experimentation, improvement, and manufacturing cost reduction.
I should like now to examine each of these conditions in some detail. To build my case as boldly as possible, I shall illustrate the points
with reference to three industries: petroleum, automobiles, and electronics. I’ll focus on petroleum in particular, because it spans more
years and more vicissitudes. Not only do these three industries have
excellent reputations with the general public and also enjoy the confidence of sophisticated investors, but their managements have become
known for progressive thinking in areas like financial control, product
research, and management training. If obsolescence can cripple even
these industries, it can happen anywhere.
Population Myth
The belief that profits are assured by an expanding and more affluent
population is dear to the heart of every industry. It takes the edge off
the apprehensions everybody understandably feels about the future.
If consumers are multiplying and also buying more of your product
or service, you can face the future with considerably more comfort
than if the market were shrinking. An expanding market keeps the
manufacturer from having to think very hard or imaginatively. If
thinking is an intellectual response to a problem, then the absence
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MARKETING MYOPIA
of a problem leads to the absence of thinking. If your product has an
automatically expanding market, then you will not give much
thought to how to expand it.
One of the most interesting examples of this is provided by the
petroleum industry. Probably our oldest growth industry, it has an
enviable record. While there are some current concerns about its
growth rate, the industry itself tends to be optimistic.
But I believe it can be demonstrated that it is undergoing a
fundamental yet typical change. It is not only ceasing to be a growth
industry but may actually be a declining one, relative to other
businesses. Although there is widespread unawareness of this fact,
it is conceivable that in time, the oil industry may find itself in
much the same position of retrospective glory that the railroads
are now in. Despite its pioneering work in developing and applying
the present-value method of investment evaluation, in employee
relations, and in working with developing countries, the petroleum
business is a distressing example of how complacency and wrongheadedness can stubbornly convert opportunity into near disaster.
One of the characteristics of this and other industries that have
believed very strongly in the beneficial consequences of an expanding population, while at the same time having a generic product for
which there has appeared to be no competitive substitute, is that the
individual companies have sought to outdo their competitors by improving on what they are already doing. This makes sense, of course,
if one assumes that sales are tied to the country’s population strings,
because the customer can compare products only on a feature-byfeature basis. I believe it is significant, for example, that not since
John D. Rockefeller sent free kerosene lamps to China has the oil industry done anything really outstanding to create a demand for its
product. Not even in product improvement has it showered itself
with eminence. The greatest single improvement—the development
of tetraethyl lead—came from outside the industry, specifically from
General Motors and DuPont. The big contributions made by the industry itself are confined to the technology of oil exploration, oil
production, and oil refining.
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Asking for trouble
In other words, the petroleum industry’s efforts have focused on improving the efficiency of getting and making its product, not really
on improving the generic product or its marketing. Moreover, its
chief product has continually been defined in the narrowest possible
terms—namely, gasoline, not energy, fuel, or transportation. This
attitude has helped assure that:
• Major improvements in gasoline quality tend not to originate
in the oil industry. The development of superior alternative
fuels also comes from outside the oil industry, as will be
shown later.
• Major innovations in automobile fuel marketing come from
small, new oil companies that are not primarily preoccupied
with production or refining. These are the companies that
have been responsible for the rapidly expanding multipump
gasoline stations, with their successful emphasis on large and
clean layouts, rapid and efficient driveway service, and quality gasoline at low prices.
Thus, the oil industry is asking for trouble from outsiders. Sooner
or later, in this land of hungry investors and entrepreneurs, a threat
is sure to come. The possibility of this will become more apparent
when we turn to the next dangerous belief of many managements.
For the sake of continuity, because this second belief is tied closely
to the first, I shall continue with the same example.
The idea of indispensability
The petroleum industry is pretty much convinced that there is no
competitive substitute for its major product, gasoline—or, if there is,
that it will continue to be a derivative of crude oil, such as diesel fuel
or kerosene jet fuel.
There is a lot of automatic wishful thinking in this assumption.
The trouble is that most refining companies own huge amounts of
crude oil reserves. These have value only if there is a market for
products into which oil can be converted. Hence the tenacious belief
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in the continuing competitive superiority of automobile fuels made
from crude oil.
This idea persists despite all historic evidence against it. The evidence not only shows that oil has never been a superior product for
any purpose for very long but also that the oil industry has never really been a growth industry. Rather, it has been a succession of different businesses that have gone through the usual historic cycles of
growth, maturity, and decay. The industry’s overall survival is owed
to a series of miraculous escapes from total obsolescence, of lastminute and unexpected reprieves from total disaster reminiscent of
the perils of Pauline.
The perils of petroleum
To illustrate, I shall sketch in only the main episodes. First, crude oil
was largely a patent medicine. But even before that fad ran out, demand was greatly expanded by the use of oil in kerosene lamps. The
prospect of lighting the world’s lamps gave rise to an extravagant
promise of growth. The prospects were similar to those the industry
now holds for gasoline in other parts of the world. It can hardly wait
for the underdeveloped nations to get a car in every garage.
In the days of the kerosene lamp, the oil companies competed
with each other and against gaslight by trying to improve the illuminating characteristics of kerosene. Then suddenly the impossible
happened. Edison invented a light that was totally nondependent on
crude oil. Had it not been for the growing use of kerosene in space
heaters, the incandescent lamp would have completely finished oil
as a growth industry at that time. Oil would have been good for little
else than axle grease.
Then disaster and reprieve struck again. Two great innovations occurred, neither originating in the oil industry. First, the successful development of coal-burning domestic central-heating systems made
the space heater obsolete. While the industry reeled, along came its
most magnificent boost yet: the internal combustion engine, also invented by outsiders. Then, when the prodigious expansion for gasoline finally began to level off in the 1920s, along came the miraculous
escape of the central oil heater. Once again, the escape was provided
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by an outsider’s invention and development. And when that market
weakened, wartime demand for aviation fuel came to the rescue.
After the war, the expansion of civilian aviation, the dieselization of
railroads, and the explosive demand for cars and trucks kept the industry’s growth in high gear.
Meanwhile, centralized oil heating—whose boom potential had
only recently been proclaimed—ran into severe competition from
natural gas. While the oil companies themselves owned the gas that
now competed with their oil, the industry did not originate the natural gas revolution, nor has it to this day greatly profited from its gas
ownership. The gas revolution was made by newly formed transmission companies that marketed the product with an aggressive ardor.
They started a magnificent new industry, first against the advice and
then against the resistance of the oil companies.
By all the logic of the situation, the oil companies themselves
should have made the gas revolution. They not only owned the gas,
they also were the only people experienced in handling, scrubbing,
and using it and the only people experienced in pipeline technology
and transmission. They also understood heating problems. But,
partly because they knew that natural gas would compete with their
own sale of heating oil, the oil companies pooh-poohed the potential
of gas. The revolution was finally started by oil pipeline executives
who, unable to persuade their own companies to go into gas, quit and
organized the spectacularly successful gas transmission companies.
Even after their success became painfully evident to the oil companies, the latter did not go into gas transmission. The multibilliondollar business that should have been theirs went to others. As in the
past, the industry was blinded by its narrow preoccupation with a
specific product and the value of its reserves. It paid little or no attention to its customers’ basic needs and preferences.
The postwar years have not witnessed any change. Immediately
after World War II, the oil industry was greatly encouraged about its
future by the rapid increase in demand for its traditional line of
products. In 1950, most companies projected annual rates of domestic expansion of around 6% through at least 1975. Though the ratio of
crude oil reserves to demand in the free world was about 20 to 1,
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with 10 to 1 being usually considered a reasonable working ratio in
the United States, booming demand sent oil explorers searching
for more without sufficient regard to what the future really
promised. In 1952, they “hit” in the Middle East; the ratio skyrocketed to 42 to 1. If gross additions to reserves continue at the average
rate of the past five years (37 billion barrels annually), then by 1970,
the reserve ratio will be up to 45 to 1. This abundance of oil has weakened crude and product prices all over the world.
An uncertain future
Management cannot find much consolation today in the rapidly expanding petrochemical industry, another oil-using idea that did not
originate in the leading firms. The total U.S. production of petrochemicals is equivalent to about 2% (by volume) of the demand for
all petroleum products. Although the petrochemical industry is now
expected to grow by about 10% per year, this will not offset other
drains on the growth of crude oil consumption. Furthermore, while
petrochemical products are many and growing, it is important to
remember that there are nonpetroleum sources of the basic
raw material, such as coal. Besides, a lot of plastics can be produced
with relatively little oil. A 50,000-barrel-per-day oil refinery is
now considered the absolute minimum size for efficiency. But a
5,000-barrel-per-day chemical plant is a giant operation.
Oil has never been a continuously strong growth industry. It has
grown by fits and starts, always miraculously saved by innovations
and developments not of its own making. The reason it has not
grown in a smooth progression is that each time it thought it had a
superior product safe from the possibility of competitive substitutes, the product turned out to be inferior and notoriously subject
to obsolescence. Until now, gasoline (for motor fuel, anyhow) has escaped this fate. But, as we shall see later, it too may be on its last legs.
The point of all this is that there is no guarantee against product
obsolescence. If a company’s own research does not make a product
obsolete, another’s will. Unless an industry is especially lucky, as oil
has been until now, it can easily go down in a sea of red figures—just
as the railroads have, as the buggy whip manufacturers have, as the
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corner grocery chains have, as most of the big movie companies
have, and, indeed, as many other industries have.
The best way for a firm to be lucky is to make its own luck. That
requires knowing what makes a business successful. One of the
greatest enemies of this knowledge is mass production.
Production Pressures
Mass production industries are impelled by a great drive to produce
all they can. The prospect of steeply declining unit costs as output
rises is more than most companies can usually resist. The profit possibilities look spectacular. All effort focuses on production. The result is that marketing gets neglected.
John Kenneth Galbraith contends that just the opposite occurs.4
Output is so prodigious that all effort concentrates on trying to get
rid of it. He says this accounts for singing commercials, the desecration of the countryside with advertising signs, and other wasteful
and vulgar practices. Galbraith has a finger on something real, but he
misses the strategic point. Mass production does indeed generate
great pressure to “move” the product. But what usually gets emphasized is selling, not marketing. Marketing, a more sophisticated and
complex process, gets ignored.
The difference between marketing and selling is more than semantic. Selling focuses on the needs of the seller, marketing on the needs
of the buyer. Selling is preoccupied with the seller’s need to convert
the product into cash, marketing with the idea of satisfying the needs
of the customer by means of the product and the whole cluster of
things associated with creating, delivering, and, finally, consuming it.
In some industries, the enticements of full mass production have
been so powerful that top management in effect has told the sales
department, “You get rid of it; we’ll worry about profits.” By contrast, a truly marketing-minded firm tries to create value-satisfying
goods and services that consumers will want to buy. What it offers
for sale includes not only the generic product or service but also how
it is made available to the customer, in what form, when, under what
conditions, and at what terms of trade. Most important, what it
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