Counterintuitive Marketing: Achieving Great Results Using Common Sense
Autor Kevin J. Clancy, Peter C. Kriegen Limba Engleză Paperback – 24 mar 2009
In Counterintuitive Marketing, Clancy and Krieg trace the high rate of business failure back to bad marketing strategy, and the even worse implementation of that strategy. Excess testosterone, they argue, compels senior managers to make decisions intuitively, instinctively, quickly, and, unfortunately, disastrously.
In this informative and enlightening book, Clancy and Krieg confront these "over-and-over-again" marketers, who don't have time to do it right the first time, but endless time and a company bankroll to do it wrong over and over again. The authors draw from their decades of consumer and business-to-business marketing experience to describe the intuitive decision-making practices that permeate business today, and demonstrate how these practices lead to disappointing performance.
Chapter by chapter, Counterintuitive Marketing contrasts how marketing decisions are made today with how they should be made. The authors give equal treatment to targeting, positioning, product development, pricing, customer service, e-commerce, marketing planning, implementation, and more as they present counterintuitive ideas for building and introducing blockbuster marketing programs.
Readers will discover in this iconoclastic treasure chest hundreds of penetrating insights that have enabled the authors' firm, Copernicus, to transform companies and become a "brand guardian" to the Fortune 500 and emerging businesses around the world. The tools to create exceptional marketing programs really do exist, and they are all here in Counterintuitive Marketing, the ultimate practical guide for any company of any size.
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Specificații
ISBN-13: 9781439167250
ISBN-10: 1439167257
Pagini: 368
Dimensiuni: 152 x 229 x 23 mm
Greutate: 0.45 kg
Editura: Free Press
Colecția Free Press
ISBN-10: 1439167257
Pagini: 368
Dimensiuni: 152 x 229 x 23 mm
Greutate: 0.45 kg
Editura: Free Press
Colecția Free Press
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Notă biografică
Kevin J. Clancy is Chairman, CEO, and co-founder of Copernicus Marketing Consulting and Research, a firm that provides marketing consulting and research services to Fortune 500 companies and emerging businesses worldwide. He is the co-author of The Marketing Revolution and Marketing Myths That Are Killing Business. He lives in Gloucester, Massachusetts.
Cuprins
Contents
Preface
SECTION I
Revolutionaries, Pioneers, and Cowboys:
How Testosterone Drives American Business
1 Strategic Plan Your Way to Nowhere
2 Driving Growth: The Little Engine That Could
3 Testosterone Decision-making: The Manly Way to Screw Up
4 Warning: Commonsensical Research Can Be Dangerous to Your Career
SECTION II
Counterintuitive Thinking Behind
Great Marketing Strategies
5 Stunted Brands: Too Much Juice, Too Little Equity
6 Marketing Visionaries: Seeing What Is Not There
7 Guess Again: Intuitively Appealing Targets Are Rarely the Most Profitable
8 Positioning:...And That Would Mean What?
9 Sleeper and Subliminal Effects Don't Increase Sales
10 Direct Marketers Need More Than Just Better Lists
11 Three Scoops for a Quarter Is Two Too Many
12 Give All Your Customers a New Car
13 Raise Your Prices: Uncommon Approaches That Make Sense
14 E-commerce Rules Are the Same as T-commerce Rules
SECTION III
Implementing Counterintuitive
Marketing Programs
15 Prayers and Divine Intervention: No Marketing Miracles to Date
16 Testing in Cyberspace Is Better Than Testing in the World
17 Good Implementation May Be More Important Than a Great Strategy
18 You Can't Measure Success Without a Score Card
19 Always Time to Do It Over; Never Time to Do It Right
Appendix
Acknowledgments
Index
About the Authors and Their Company
Preface
SECTION I
Revolutionaries, Pioneers, and Cowboys:
How Testosterone Drives American Business
1 Strategic Plan Your Way to Nowhere
2 Driving Growth: The Little Engine That Could
3 Testosterone Decision-making: The Manly Way to Screw Up
4 Warning: Commonsensical Research Can Be Dangerous to Your Career
SECTION II
Counterintuitive Thinking Behind
Great Marketing Strategies
5 Stunted Brands: Too Much Juice, Too Little Equity
6 Marketing Visionaries: Seeing What Is Not There
7 Guess Again: Intuitively Appealing Targets Are Rarely the Most Profitable
8 Positioning:...And That Would Mean What?
9 Sleeper and Subliminal Effects Don't Increase Sales
10 Direct Marketers Need More Than Just Better Lists
11 Three Scoops for a Quarter Is Two Too Many
12 Give All Your Customers a New Car
13 Raise Your Prices: Uncommon Approaches That Make Sense
14 E-commerce Rules Are the Same as T-commerce Rules
SECTION III
Implementing Counterintuitive
Marketing Programs
15 Prayers and Divine Intervention: No Marketing Miracles to Date
16 Testing in Cyberspace Is Better Than Testing in the World
17 Good Implementation May Be More Important Than a Great Strategy
18 You Can't Measure Success Without a Score Card
19 Always Time to Do It Over; Never Time to Do It Right
Appendix
Acknowledgments
Index
About the Authors and Their Company
Extras
Chapter One: Strategic Plan Your Way to Nowhere
Considered from one perspective, the 1990s were the best of times. A period of robust economic growth with thousands of new businesses creating hundreds of thousands -- millions -- of new jobs. A time of low interest rates, virtually nonexistent inflation, and a booming stock market and at the close of the decade rising corporate profits.
The phenomenal success of Internet companies has clouded our thinking about business. Tens of thousands of companies have been started. Billions of dollars invested. Market capitalizations greater than corporations with factories, tangible assets, and histories.
Considered from another perspective, the 1990s represented the worst of times. A time of corporate downsizing, Asian economies wracked by instability, workers on the brink of despair, and many great names suffering during a booming economy.
Coca-Cola's decline is a particularly sad story, although one that we believe might have been predicted based on observations we've made throughout this book. Coke announced in early February 2000 that it was cutting its work force by 20 percent -- around 6,000 jobs, including nearly half of those at Coke headquarters, Atlanta -- and shifting more power to executives abroad to try to boost sales around the world. The changes were the most dramatic in Coke's 114-year history.
We're New Englanders and are particularly unhappy to see local companies like Digital Equipment, Gillette, Lotus Development, Ocean Spray, Polaroid, Prime Computer, and Wang merged or hurting.
For many of America's largest corporations, the 1990s were a period of negative organic growth. Entire industries suffered -- airlines, food services, property and casualty insurance, industrial and farm equipment, beverages, forest and paper products, railroads, health care, pipelines, building materials, glass, metals, petroleum refining, and entertainment. Even in 1998, when profits for the entire Fortune 500 were up over 23 percent, some industries were still showing profit declines: building materials and glass, forest and paper products, metals, publishing and printing, savings institutions, engineering and construction, electronics and electrical equipment, and motor vehicles.
Perhaps the most notable example of something amiss is the collapse of the Internet economy, which we began to see in the first quarter of 2000. Plagued by rising costs, stagnant sales, and modest to nonexistent profits, 70 percent (if not more) of the widely promoted Internet startups of the late 1990s are expected to be out of business within the next few years.
And how do businesses traditionally respond to sluggish growth and declining profits? By blaming the economy, downsizing the workforce, and making acquisitions.
The optimist will point to the growing companies; the pessimist will point to business failures.
Our point: It doesn't make any difference.
For the most part, both the companies that did not grow in the 1990s and many that did share a common failing: they do not know how to market their goods and services profitably. There is a yawning gap between promise and performance, one that we suspect will only widen if executives do not change.
NO MATTER WHAT Business Week SAYS,
P/E RATIOS ARE TOO HIGH
During the two years we have been working on this book, we have been predicting at every opportunity -- professional presentations, meetings with clients, cocktail parties -- that the stock market is on the verge of a significant correction or even collapse. We say this because we see little real growth. Businesses we have observed closely are, with a few exceptions, improving performance through mergers and acquisitions and through downsizing, not through successful marketing programs for established products and services or by introducing flourishing new products.
Then there are the Internet companies, which, despite poor or nonexistent profits, have watched their stock prices climb into the stratosphere: Amazon.com, AtHome, eBay, E*Trade Group, Excite, Infoseek, Lycos, and Yahoo!.
When price/earning ratios reached record heights, a Business Week magazine headline claimed, "They're not as loony as they look." Although the p/e ratio of Standard & Poor's 500-stock index stood at 26.7, almost 4 points higher than the historic 23 the index reached in the early 1990s, "Those p/e's didn't climb to Himalayan heights on mindless speculation," wrote the reporter, who said they are high for good reason: "Over the past three years, reported earnings have grown by more than 50 percent; long-term interest rates have fallen from 8 percent to less than 6 percent, even as gross domestic product expanded; and inflation has dropped from 3.3 percent to 1.4 percent."
Buttressing this argument, the magazine quoted a number of analysts. Edward M. Kerschner, PaineWebber Inc.'s chief investment strategist, argued that just because the long-term average price/earnings ratio was 15 (the actual number as we've calculated it is closer to 17), it is foolish to believe that p/e's must return to that average. "My average age is 23, but I'm never going to be 23 again," he said. "That 'reversion to the mean' thinking is a naive assumption. That was what investors did when they didn't have any better way to analyze the market, so you'd assume the average. With the computers and information we have today, you don't need to do that."
Despite the fact that Mr. Kerschner says "reversion" when he means "regression" (a statistical phenomenon studied for over a century) and that his comment on age is a non sequitur (it has nothing to do with his argument), he does raise an interesting question: Just because p/e ratios have held at around 17 to 1 for decades, does it mean they will be 17 to 1 forever?
In Dow 36,000, James Glassman and Kevin Hassett argue a resounding 'No!' They say that an appropriate p/e for stocks today is 100 to 1.
To Kerschner, Glassman, Hassett, and other stock market cheerleaders, we say "Whoa, hold on there." If there were underlying positive forces in the economy -- population increases, productivity increases, significantly improved trade deficits, rising corporate profits, real growth projected well into the future -- investors would be well advised to pay more for companies today than in the past. It would be rational to do so.
But when the future does not look significantly different from the recent past and the present, and when some economic factors are not what an investor would like to see, one has to wonder whether stock prices are simply irrational. Joseph Kennedy, Sr., is said to have remarked that when cab drivers and shoe shine boys are giving stock tips, it's time to get out of the market, which is how he avoided the crash of 1929.
We don't have to hearken back to 1929. We lived through the burgeoning stock and housing market of the 1970s and 1980s. People began buying because they expected significant appreciation. We watched the housing prices zoom at rates significantly higher than the stock market, only to collapse in 1988. It was recently reported that the Boston area's housing prices, for example, have just caught up to 1988's average.
Whatever the merits of our economic argument, it is hard to believe that a p/e ratio of 783, such as the one Yahoo! Inc. showed on June 15, 1999, or the Glassman-Hassett recommendation of 100 for the market generally, reflects anything more than the "greater fool theory." As you know, the theory holds that no matter what price an investor pays, someone with less sense will come along willing to pay an even higher price. Speculators use the greater fool theory to justify their gambling. A stock may be "fully valued" based on its balance sheet, but speculators believe new fools will drive the price up anyway. Unfortunately, while the world does have many fools, the supply is not infinite.
What happens to profitability when the company has no research and development and therefore no new products, no staff to introduce the new products even if there were some, and no more fat to cut?
MASKING WEAKNESS WITH MORE MERGERS
The intuitive answer to stagnant growth from a typical CEO-CFO duo, supported by their strategic planning department, is to acquire another company. We have seen phenomenal merger and acquisition activity in the past few years. In 1999, AOL merged with Time Warner and announced plans to acquire EMI Music; Exxon merged with Mobil; Ford bought Volvo; Newell bought Rubbermaid; America Online bought Netscape; Clorox bought First Brands; Federated Department Stores bought Fingerhut; DuPont bought Hoechst; Viacom acquired CBS.
Major corporations dropped off the 1998 Fortune 500 list, gobbled up by their rivals. They included Conrail (acquired by CSX and Norfolk Southern), Eckerd (acquired by J. C. Penney), McDonnell Douglas (acquired by Boeing), Morgan Stanley Group (acquired by Dean Witter Discover), Nynex (acquired by Bell Atlantic), Pacific Telesis Group (acquired by SBC Communications), Revco Drug Stores (acquired by CVS), and Vons (acquired by Safeway).
Companies that dropped off the 1999 list include Amoco (acquired by BP), BankAmerica Corp. (acquired by NationsBank), Beneficial (acquired by Household International), Chrysler (acquired by Daimler-Benz), Citicorp (acquired by Travelers Group), Digital Equipment (acquired by Compaq), Dresser Industries (acquired by Halburton), First Chicago NBD Corp. (acquired by Banc One, now part of Bank One), General Re (acquired by Berkshire Hathaway), ITT (acquired by Starwood Hotels & Resorts), Long Island Lighting (acquired by MarketSpan), MCI Communications (acquired by WorldCom), Mercantile Stores (acquired by Dillard's), USF&G (acquired by St. Paul Cos.), Waste Management (acquired by USA Waste), and Western Atlas (acquired by Baker Hughes).
Were the last couple of years unusual for their merger activity? We looked at all of the largest 500 companies in the Fortune magazine listings between 1981 and 1999 -- those with annual sales greater than $1.3 billion or with assets greater than $3.6 billion. We had to look at both sales and asset measures because in 1981, Fortune was providing only asset information for companies like commercial banks, life insurance companies, and diversified financial companies such as securities firms.
Only 195 of those major corporations were still around in 1999; 305 -- or 61 percent -- had been merged, bought, or taken over.
Clearly, when you add the sales and profits of another corporation to your own, you report the consolidated numbers and show growth. As we will see, however, the increases may be more deceptive than real. We suspect that hidden within many companies' quarterly financial reports is the shameful secret that they've been able to report growth only because they've acquired other companies. Strip away the mergers and the acquisitions, and you find a core business that has been limping along because it has ignored the basic purpose of a business: to find and keep customers. It has not put marketing at the center of its business universe.
SHRINK YOUR COMPANY TO GREATNESS
The other intuitive answer to shrinking profits has been to tighten the corporate belt, which usually means reduce staff.
Two years ago we began working on a major strategy project for a corporate giant, one of America's ten largest companies. It involved 18 people from various groups throughout the corporation. Midway though the project we went to a lunch to celebrate a milestone. Half of the original group was gone.
The remaining managers said that every time there is a round of downsizing, the people who are left pick up the work. Said one of these managers, "They call it reengineering, but it's not; it's simply downsizing. There's no change in the processes."
Said another, "We're at our desks at 7:30 in the morning until 7:30 at night. We work on Saturdays, and we even put in a couple hours on Sunday. We hardly see our spouses and our kids don't recognize us." A number of managers believed that, in the next round of downsizing, they would be let go. Many did not seem to care; they were exhausted, saw no end in sight, and felt it might be better to start over at another company.
By the time we finished the study, not one of the original 18 still worked for the corporation. We presented the study to a new marketing vice president who had nothing to do with commissioning it, directing it, or following it. Moreover, this vice president was not a trained marketing professional. Like many people heading marketing departments, he was on rotation. He had been in finance for the last five years, in product development for four years before that. Like many executives, he was on his way to more general management positions. He was bright, aggressive, ambitious, and, as we discovered, a testosterone-driven decision-maker. We will talk about him and his ilk in detail a couple chapters ahead.
This is a sad story. This once-great company had been declining in real growth because it lacked both vision and a strong captain at the helm. Though the view from the bridge seemed to be that shrinking would be followed by efficiencies that would produce the capital to grow the business, we've seen no indication that this is happening.
Gordon Bethune, president of Continental Airlines, talks about the effects of mindless efficiencies in his book From Worst to First (John Wiley & Sons, 1998). He found that when he landed at Continental in 1994, "We had cut costs so much that we simply had nothing to offer anymore. Our service was lousy, and nobody knew when a plane might land. We were unpredictable and unreliable, and when you're an airline, where does that leave you? It leaves you with a lot of empty planes. We had a lousy product, and nobody particularly wanted to buy it." Makes a lot of sense, but not everyone understands.
Indeed, consider the Sunbeam experience, which is a study for anyone interesting in marketing.
CHAINSAW AL TEARS THROUGH SUNBEAM
In October 1997, Albert J. ("Chainsaw Al") Dunlap, CEO of Sunbeam Corp., announced that he was putting the company up for sale: "Having successfully completed the turnaround of Sunbeam and being well on our way to dramatically growing the business, we feel that the timing is right."
Dunlap had gone through Sunbeam like a white tornado. Two days after arriving in July 1996, he was on a conference call to stock analysts: "I just bought $3 million worth of stock, and I love every dollar like a brother. I can tell you, had I been a shareholder and had I read all of the [previous management's] nonsense where there was an excuse for everything...I don't believe in excuses. I saw so many excuses, it's an amazement to me anything got done."
Within weeks Dunlap had announced that he would cut 6,000 jobs, half of Sunbeam's workforce; drop 87 percent of its product line, including clocks, thermometers, scales, furniture, and electric blankets; and cut its manufacturing and other facilities from 53 to 14. In 1996, Sunbeam took a $338 million charge to pay for the one-time costs associated with Dunlap's plan, including nearly $100 million of Sunbeam inventory.
Dunlap is the executive who spent 18 months at Scott Paper, fired 11,000 employees (including 70 percent of Scott's upper management), and contributed mightily to the decline of a once great brand name; he then sold the company to Kimberly-Clark, walking away with $100 million for himself. He wrote a book with Bob Andelman to explain his principles: Mean Business: How I Save Bad Companies and Make Good Companies Great (Times Business, 1996).
He presents himself as the shareholder's champion. Joseph Nocera wrote in Fortune, "A major theme of Mean Business is that in the corporate scheme of things, the shareholder is supreme -- that creating shareholder value should be the only thing that matters to a shareholder. Much of his contempt for other CEOs stems from his belief that they are not as interested in creating shareholder wealth as he is."
Clearly, Dunlap has created wealth for some shareholders. Just days after Sunbeam announced that he was coming on board, the stock, which had been trading around $13 per share, rose 41 percent. By the end of 1997, the stock was over $50 a share. It did not hurt Sunbeam's stock that Dunlap announced record 1997 results: sales up 22 percent and earnings per share of $1.41 -- an impressive reversal from the 1996 per share loss of $2.37.
Potential Sunbeam suitors in 1997, however, were not impressed enough to buy the company. At the end of the year, no one was interested, so Dunlap himself went shopping. He overpaid for Coleman, the outdoor equipment manufacturer, which was losing money, buying it for $2.2 billion, or two times sales. He bought Signature Brands (Mr. Coffee) and First Alert (smoke detectors) for $425 million. Neither seller, Forbes points out, was all that interested in Sunbeam stock. Ronald Perelman took less than half Coleman's price in stock, and Thomas Lee at First Alert took cash. The acquisitions did make Sunbeam a $2.6 billion (sales) company, fulfilling Dunlap's 1997 promise to make Sunbeam a $2 billion company by 1999.
THE PROBLEMS WITH SUNBEAM'S REVENUE FIGURES
However, all was not well. According to Sunbeam's 10K, the company sold $60 million in accounts receivable to raise cash in December 1997. Sunbeam also instituted an "early buy" program for gas grills in the fourth quarter. Retailers such as Kmart and Wal-Mart could buy their summer's grills in November and December of 1997 but not pay for them until June 1998. Also, because retailers do not have a lot of space for off-season items like grills, Sunbeam started a "bill and hold" program that allowed customers to use its warehouses to store the goods they had bought but not necessarily paid for.
These two programs accounted for most of Sunbeam's 1997 revenue gains. They, in fact, did nothing for the company except shift sales from 1998 to 1997. Sunbeam reported a first quarter 1998 loss before taxes of $43.4 million, and when the word got out, the stock dropped 58 percent.
The New York Times reported that Dunlap met with analysts to explain the bad news. "I take full responsibility," said Dunlap, before making clear that it was everyone's fault but his. He blamed the weather. He blamed a retail chain for messing up grills that had to be recalled. Because he was busy working on the acquisitions, he "left a marketing guy in charge of operations. Mistake."
He denied that selling gas grills in November and December was an effort to "artificially pump up" 1997's profits. It was, he said, "a well-intentioned market-driven strategy that simply didn't work." It is not clear what that strategy might have been, other than an effort to make the company's finances look good to a not-terribly-inquisitive buyer.
Dunlap promised the analysts that he would be making big savings at Coleman, First Alert, and Signature Brands through plant closings and staff reductions -- 5,100 more workers to fire. That would make those divisions smaller, but would it make them grow? Sure it would.
In announcing first-quarter results, the company said, "Sunbeam expects the integration of its three recent acquisitions and planned new products to generate at least $265 million in incremental annual revenues. These new revenues are expected to come from leveraging complementary international distribution strengths, domestic sales synergies, and accelerated new product development." We love these euphemisms that CEOs come up with when they're driving their companies into the dumpster.
We'll never know whether Dunlap could have actually grown Sunbeam because the board of directors, mostly Dunlap's friends, fired him in mid-June 1998. The new chief executive, Jerry Levin, warned that Sunbeam's sales would suffer for the rest of the year as retailers worked off high inventories of Sunbeam products. Instead of shrinking Sunbeam to greatness, he had shrunk it to insignificance.
RUNNING THE BUSINESS AS IF PLANNING TO SELL
What Chainsaw Al did to Sunbeam (and to Scott Paper) is a notorious example of a situation that is not uncommon. As an executive whom business press reporters loved to hate, Dunlap received considerable coverage of his pronouncements and activities. He is not alone, however, in boosting sales through early bookings, low prices, and promotions. Many executives seem to be running their businesses like homeowners repairing the front steps and slapping a new coat of paint on a house they plan to sell.
They're selling in two ways. They're selling to the public, pushing up the stock price so that they can cash out when they exercise their options. And they're selling out to other companies that are happy to take them over, sometimes (if the seller is a private company) on an earn-out basis in which the buying company takes the selling company's stock and pays shareholders a multiple of earnings. But the buyer does not fork over the full price at the closing. Rather, the buyer puts up, say, 25 percent at the closing, then 25 percent at the end of the next three years. By the end of four years, the sellers have all their money. Meanwhile, the company must show consistent growth, say, 15 percent a year, to achieve the target sale price.
When owners sell on an earn-out basis, many do everything in their power to control earnings over the four-year period. The business may need a new information technology system or 170 new salespeople or three new product launches in the fourth year, but the former owners do not make the investment. They spend as little as possible on marketing, R&D, and human resources. They don't take a penny of profit to spend on a frill like the firm's future health. They take their money and run.
Even if the executives are not involved in a buy-out, those who want to cash out do everything they can to make the business show a profit. They put in a hiring freeze. They offer early retirement. They fire 10 percent of the employees across the board. They cut back advertising, research and development, MIS. They squeeze as much profit as they possibly can out of the business so that the P&L and balance sheet look terrific -- and hope for the best. After all, how many stockholders, who can dump their holdings tomorrow, want to see management reduce earnings by investing in R&D, in new products, or increased advertising and promotion? The owners argue that this is not greed; it is common sense guiding self-interest.
These executives have, in short, no vision for the business (other than "For Sale"). With such a mind-set, the customers are a distraction, with their endless whining for service and repairs, new products and features, and prompt delivery.
It seems that everywhere we go these days, business executives talk about cutbacks. In May 1998 we attended the American Marketing Association's Edison Awards Ceremony in New York City, at which major corporations -- Colgate-Palmolive, Rubbermaid, Quaker State, and Dannon International, among 35 others -- were being heralded as models for new product performance. We were struck by the number of speakers who talked about the cutbacks taking place in their companies and the growing difficulty to innovate and market new products.
We wonder, doesn't anybody see the problems ahead? Aren't the CEOs, CFOs, and strategic planning departments looking five years out? Aren't they working on anything but mergers, acquisitions, and downsizing problems? Where is the strategic planning department? What are they doing to build the business?
WHO KNOWS WHAT LURKS IN STRATEGIC PLANNING?
Only the Shadow knows. Consider this disturbing experience. We recently developed a marketing strategy for a multinational corporation, a plan that involves a $3 billion investment in the United States and another $3 billion investment in Asia. These expenditures will have an impact on the company for the next ten years. Because of the project's size, most meetings involved at least 10 people, and some had 20 or more. They included, of course, senior marketing executives, representatives from corporate headquarters, from the American division, from the Asian unit, from the firm's advertising agencies, and from the corporation's marketing group. But we never met -- let alone worked with -- a representative from this corporation's strategic planning department.
(While this has been generally true in our consulting assignments, perhaps it may be changing. We recently worked with three vice presidents of strategic planning on consulting engagements, but these are rare exceptions in two long careers.)
The corporation has a strategic planning department. The strategic planning division occupies a floor in a building separate from marketing. We don't know how big it is because we've only heard about it; we've never talked to the people or walked through their offices.
We found it odd that we were helping the corporation plan multibillion dollar investments and yet we never discussed the issues with the firm's strategic planners. They were not engaged. Periodically someone from the marketing department, which was leading the project, would say with a grin on his face at a meeting, "Strategic planning has a question."
These questions came out of the blue and were presented without a context. For example, "Strategic planning wants to know the price sensitivity in the marketplace; that is, what would happen if we decreased prices?" Or "When we introduce the new line extension, how much cannibalization will occur?"
These are good questions, but they have to be asked in a context of strategic marketing issues, such as "What target group are you talking about?" If the company is an on-line bookseller, it makes all the difference in the world whether strategic planning wants to know about the price sensitivity of upscale book buyers primarily concerned with convenience and service or the sensitivity of price-conscious consumers shopping for the best deal on the Web.
We answered the strategic planning department's questions, but it was clear even to an outsider that the marketing people and the strategic planners were not cooperating. They were not working together toward a common goal, and this is not uncommon. The strategic planners did not know anything (or seem to care much) about marketing, and the marketing people found the strategic planners a diversion.
STRATEGIC PLANNING ISSUES ARE ESSENTIALLY
MARKETING PROBLEMS
If strategic planners determine that acquisitions, mergers, and downsizing, with all their sound and fury, can somehow lead to greater growth, that is fine. But the strategic planning department is often disassociated from reality. They're not involved in actually growing the company -- they are a staff, not a line function -- and even when they are involved, they don't really know what will happen as a result of the steps they recommend. They base decisions on judgment and intuition, which are often wrong.
What to do about the strategic planning situation is easy to state, not so easy to execute (it is a little like taking your own advice). The first issue is how to integrate strategic planning with marketing, since marketing is the most reliable way to grow a business. The problem is that, while the strategic planning department develops the plan to guide the corporation, marketing is often not integrated into strategic planning. (Or as we just saw, marketing develops its plans without consulting strategic planning.) Strategic planners chart the course, but in an appalling number of companies, the strategic planners do not even know the marketing people.
Consider a typical strategic question: A relatively small division within a corporation provides parts to another division that, in turn, provides parts to the end customer. What should this division's function be in the year 2005? Continue to provide parts internally? Provide parts to external customers as well? Should it continue to exist, or should its function be dispersed through the company? Should the company buy the parts from an outside supplier? Should the company invest in the division or try to sell it?
Another example: An international brewer is thinking about introducing its beer into the U.S. market. Expanding globally is part of its strategic vision. Should it make the investment?
More examples: The company has not seen any change in its p/e ratio in seven years, and its p/e ratio is low relative to competitors'. Earnings and profitability have been stalled. The company has cut costs and people, but downsizing has produced only a weaker and demoralized organization. What should it do?
Consider this problem: The company's flagship brand is declining, and to goad sales, management has cut prices and run trade and consumer promotions. Nothing good is happening. What should they do next?
And more: The company has not introduced a successful new product in five years. Now it has developed what it believes is a breakthrough concept, and the CEO wants to know whether to build the plant to produce the product. The plant will cost a minimum of $200 million.
These are the kinds of questions strategic planners tussle with every day. Yet they are, in fact, largely marketing questions. What is the market for the division's parts? How will the market change by 2005? (The only reasonable answer: It needs to be studied.) What do its customers need? How are those customers' needs changing? What -- if anything -- can the division do to influence those changing needs?
The brewer's questions include: How does marketing beer in the U.S. compare to marketing beer at home? What is the best target market for this new import? What positioning and advertising strategy will have the greatest impact on that target? What is the right pricing and distribution strategy? What will all this cost, and what return can the brewer reasonably expect? Marketing questions, all.
Indeed, we believe most strategic planning issues are fundamentally marketing decisions. Which means that marketing is not just important; it is central to the business solar system. Theodore Levitt in his classic The Marketing Imagination wrote, "The purpose of a business is to create and keep a customer." We argue that the purpose of marketing and the purpose of a business are fundamentally the same, since the purpose of marketing is to find and keep customers for the business.
Only through effective marketing does the core business grow. To thrive, a company has to find new customers, has to continue selling to existing customers, and has to sell more products or services to both new and existing customers. That's marketing's job. Yet, throughout the '90s, that appeared to be a counterintuitive notion.
But if marketing is the engine that drives business growth, at too many companies it has thrown a rod.
Copyright © 2000 by Kevin J. Clancy
Considered from one perspective, the 1990s were the best of times. A period of robust economic growth with thousands of new businesses creating hundreds of thousands -- millions -- of new jobs. A time of low interest rates, virtually nonexistent inflation, and a booming stock market and at the close of the decade rising corporate profits.
The phenomenal success of Internet companies has clouded our thinking about business. Tens of thousands of companies have been started. Billions of dollars invested. Market capitalizations greater than corporations with factories, tangible assets, and histories.
Considered from another perspective, the 1990s represented the worst of times. A time of corporate downsizing, Asian economies wracked by instability, workers on the brink of despair, and many great names suffering during a booming economy.
Coca-Cola's decline is a particularly sad story, although one that we believe might have been predicted based on observations we've made throughout this book. Coke announced in early February 2000 that it was cutting its work force by 20 percent -- around 6,000 jobs, including nearly half of those at Coke headquarters, Atlanta -- and shifting more power to executives abroad to try to boost sales around the world. The changes were the most dramatic in Coke's 114-year history.
We're New Englanders and are particularly unhappy to see local companies like Digital Equipment, Gillette, Lotus Development, Ocean Spray, Polaroid, Prime Computer, and Wang merged or hurting.
For many of America's largest corporations, the 1990s were a period of negative organic growth. Entire industries suffered -- airlines, food services, property and casualty insurance, industrial and farm equipment, beverages, forest and paper products, railroads, health care, pipelines, building materials, glass, metals, petroleum refining, and entertainment. Even in 1998, when profits for the entire Fortune 500 were up over 23 percent, some industries were still showing profit declines: building materials and glass, forest and paper products, metals, publishing and printing, savings institutions, engineering and construction, electronics and electrical equipment, and motor vehicles.
Perhaps the most notable example of something amiss is the collapse of the Internet economy, which we began to see in the first quarter of 2000. Plagued by rising costs, stagnant sales, and modest to nonexistent profits, 70 percent (if not more) of the widely promoted Internet startups of the late 1990s are expected to be out of business within the next few years.
And how do businesses traditionally respond to sluggish growth and declining profits? By blaming the economy, downsizing the workforce, and making acquisitions.
The optimist will point to the growing companies; the pessimist will point to business failures.
Our point: It doesn't make any difference.
For the most part, both the companies that did not grow in the 1990s and many that did share a common failing: they do not know how to market their goods and services profitably. There is a yawning gap between promise and performance, one that we suspect will only widen if executives do not change.
NO MATTER WHAT Business Week SAYS,
P/E RATIOS ARE TOO HIGH
During the two years we have been working on this book, we have been predicting at every opportunity -- professional presentations, meetings with clients, cocktail parties -- that the stock market is on the verge of a significant correction or even collapse. We say this because we see little real growth. Businesses we have observed closely are, with a few exceptions, improving performance through mergers and acquisitions and through downsizing, not through successful marketing programs for established products and services or by introducing flourishing new products.
Then there are the Internet companies, which, despite poor or nonexistent profits, have watched their stock prices climb into the stratosphere: Amazon.com, AtHome, eBay, E*Trade Group, Excite, Infoseek, Lycos, and Yahoo!.
When price/earning ratios reached record heights, a Business Week magazine headline claimed, "They're not as loony as they look." Although the p/e ratio of Standard & Poor's 500-stock index stood at 26.7, almost 4 points higher than the historic 23 the index reached in the early 1990s, "Those p/e's didn't climb to Himalayan heights on mindless speculation," wrote the reporter, who said they are high for good reason: "Over the past three years, reported earnings have grown by more than 50 percent; long-term interest rates have fallen from 8 percent to less than 6 percent, even as gross domestic product expanded; and inflation has dropped from 3.3 percent to 1.4 percent."
Buttressing this argument, the magazine quoted a number of analysts. Edward M. Kerschner, PaineWebber Inc.'s chief investment strategist, argued that just because the long-term average price/earnings ratio was 15 (the actual number as we've calculated it is closer to 17), it is foolish to believe that p/e's must return to that average. "My average age is 23, but I'm never going to be 23 again," he said. "That 'reversion to the mean' thinking is a naive assumption. That was what investors did when they didn't have any better way to analyze the market, so you'd assume the average. With the computers and information we have today, you don't need to do that."
Despite the fact that Mr. Kerschner says "reversion" when he means "regression" (a statistical phenomenon studied for over a century) and that his comment on age is a non sequitur (it has nothing to do with his argument), he does raise an interesting question: Just because p/e ratios have held at around 17 to 1 for decades, does it mean they will be 17 to 1 forever?
In Dow 36,000, James Glassman and Kevin Hassett argue a resounding 'No!' They say that an appropriate p/e for stocks today is 100 to 1.
To Kerschner, Glassman, Hassett, and other stock market cheerleaders, we say "Whoa, hold on there." If there were underlying positive forces in the economy -- population increases, productivity increases, significantly improved trade deficits, rising corporate profits, real growth projected well into the future -- investors would be well advised to pay more for companies today than in the past. It would be rational to do so.
But when the future does not look significantly different from the recent past and the present, and when some economic factors are not what an investor would like to see, one has to wonder whether stock prices are simply irrational. Joseph Kennedy, Sr., is said to have remarked that when cab drivers and shoe shine boys are giving stock tips, it's time to get out of the market, which is how he avoided the crash of 1929.
We don't have to hearken back to 1929. We lived through the burgeoning stock and housing market of the 1970s and 1980s. People began buying because they expected significant appreciation. We watched the housing prices zoom at rates significantly higher than the stock market, only to collapse in 1988. It was recently reported that the Boston area's housing prices, for example, have just caught up to 1988's average.
Whatever the merits of our economic argument, it is hard to believe that a p/e ratio of 783, such as the one Yahoo! Inc. showed on June 15, 1999, or the Glassman-Hassett recommendation of 100 for the market generally, reflects anything more than the "greater fool theory." As you know, the theory holds that no matter what price an investor pays, someone with less sense will come along willing to pay an even higher price. Speculators use the greater fool theory to justify their gambling. A stock may be "fully valued" based on its balance sheet, but speculators believe new fools will drive the price up anyway. Unfortunately, while the world does have many fools, the supply is not infinite.
What happens to profitability when the company has no research and development and therefore no new products, no staff to introduce the new products even if there were some, and no more fat to cut?
MASKING WEAKNESS WITH MORE MERGERS
The intuitive answer to stagnant growth from a typical CEO-CFO duo, supported by their strategic planning department, is to acquire another company. We have seen phenomenal merger and acquisition activity in the past few years. In 1999, AOL merged with Time Warner and announced plans to acquire EMI Music; Exxon merged with Mobil; Ford bought Volvo; Newell bought Rubbermaid; America Online bought Netscape; Clorox bought First Brands; Federated Department Stores bought Fingerhut; DuPont bought Hoechst; Viacom acquired CBS.
Major corporations dropped off the 1998 Fortune 500 list, gobbled up by their rivals. They included Conrail (acquired by CSX and Norfolk Southern), Eckerd (acquired by J. C. Penney), McDonnell Douglas (acquired by Boeing), Morgan Stanley Group (acquired by Dean Witter Discover), Nynex (acquired by Bell Atlantic), Pacific Telesis Group (acquired by SBC Communications), Revco Drug Stores (acquired by CVS), and Vons (acquired by Safeway).
Companies that dropped off the 1999 list include Amoco (acquired by BP), BankAmerica Corp. (acquired by NationsBank), Beneficial (acquired by Household International), Chrysler (acquired by Daimler-Benz), Citicorp (acquired by Travelers Group), Digital Equipment (acquired by Compaq), Dresser Industries (acquired by Halburton), First Chicago NBD Corp. (acquired by Banc One, now part of Bank One), General Re (acquired by Berkshire Hathaway), ITT (acquired by Starwood Hotels & Resorts), Long Island Lighting (acquired by MarketSpan), MCI Communications (acquired by WorldCom), Mercantile Stores (acquired by Dillard's), USF&G (acquired by St. Paul Cos.), Waste Management (acquired by USA Waste), and Western Atlas (acquired by Baker Hughes).
Were the last couple of years unusual for their merger activity? We looked at all of the largest 500 companies in the Fortune magazine listings between 1981 and 1999 -- those with annual sales greater than $1.3 billion or with assets greater than $3.6 billion. We had to look at both sales and asset measures because in 1981, Fortune was providing only asset information for companies like commercial banks, life insurance companies, and diversified financial companies such as securities firms.
Only 195 of those major corporations were still around in 1999; 305 -- or 61 percent -- had been merged, bought, or taken over.
Clearly, when you add the sales and profits of another corporation to your own, you report the consolidated numbers and show growth. As we will see, however, the increases may be more deceptive than real. We suspect that hidden within many companies' quarterly financial reports is the shameful secret that they've been able to report growth only because they've acquired other companies. Strip away the mergers and the acquisitions, and you find a core business that has been limping along because it has ignored the basic purpose of a business: to find and keep customers. It has not put marketing at the center of its business universe.
SHRINK YOUR COMPANY TO GREATNESS
The other intuitive answer to shrinking profits has been to tighten the corporate belt, which usually means reduce staff.
Two years ago we began working on a major strategy project for a corporate giant, one of America's ten largest companies. It involved 18 people from various groups throughout the corporation. Midway though the project we went to a lunch to celebrate a milestone. Half of the original group was gone.
The remaining managers said that every time there is a round of downsizing, the people who are left pick up the work. Said one of these managers, "They call it reengineering, but it's not; it's simply downsizing. There's no change in the processes."
Said another, "We're at our desks at 7:30 in the morning until 7:30 at night. We work on Saturdays, and we even put in a couple hours on Sunday. We hardly see our spouses and our kids don't recognize us." A number of managers believed that, in the next round of downsizing, they would be let go. Many did not seem to care; they were exhausted, saw no end in sight, and felt it might be better to start over at another company.
By the time we finished the study, not one of the original 18 still worked for the corporation. We presented the study to a new marketing vice president who had nothing to do with commissioning it, directing it, or following it. Moreover, this vice president was not a trained marketing professional. Like many people heading marketing departments, he was on rotation. He had been in finance for the last five years, in product development for four years before that. Like many executives, he was on his way to more general management positions. He was bright, aggressive, ambitious, and, as we discovered, a testosterone-driven decision-maker. We will talk about him and his ilk in detail a couple chapters ahead.
This is a sad story. This once-great company had been declining in real growth because it lacked both vision and a strong captain at the helm. Though the view from the bridge seemed to be that shrinking would be followed by efficiencies that would produce the capital to grow the business, we've seen no indication that this is happening.
Gordon Bethune, president of Continental Airlines, talks about the effects of mindless efficiencies in his book From Worst to First (John Wiley & Sons, 1998). He found that when he landed at Continental in 1994, "We had cut costs so much that we simply had nothing to offer anymore. Our service was lousy, and nobody knew when a plane might land. We were unpredictable and unreliable, and when you're an airline, where does that leave you? It leaves you with a lot of empty planes. We had a lousy product, and nobody particularly wanted to buy it." Makes a lot of sense, but not everyone understands.
Indeed, consider the Sunbeam experience, which is a study for anyone interesting in marketing.
CHAINSAW AL TEARS THROUGH SUNBEAM
In October 1997, Albert J. ("Chainsaw Al") Dunlap, CEO of Sunbeam Corp., announced that he was putting the company up for sale: "Having successfully completed the turnaround of Sunbeam and being well on our way to dramatically growing the business, we feel that the timing is right."
Dunlap had gone through Sunbeam like a white tornado. Two days after arriving in July 1996, he was on a conference call to stock analysts: "I just bought $3 million worth of stock, and I love every dollar like a brother. I can tell you, had I been a shareholder and had I read all of the [previous management's] nonsense where there was an excuse for everything...I don't believe in excuses. I saw so many excuses, it's an amazement to me anything got done."
Within weeks Dunlap had announced that he would cut 6,000 jobs, half of Sunbeam's workforce; drop 87 percent of its product line, including clocks, thermometers, scales, furniture, and electric blankets; and cut its manufacturing and other facilities from 53 to 14. In 1996, Sunbeam took a $338 million charge to pay for the one-time costs associated with Dunlap's plan, including nearly $100 million of Sunbeam inventory.
Dunlap is the executive who spent 18 months at Scott Paper, fired 11,000 employees (including 70 percent of Scott's upper management), and contributed mightily to the decline of a once great brand name; he then sold the company to Kimberly-Clark, walking away with $100 million for himself. He wrote a book with Bob Andelman to explain his principles: Mean Business: How I Save Bad Companies and Make Good Companies Great (Times Business, 1996).
He presents himself as the shareholder's champion. Joseph Nocera wrote in Fortune, "A major theme of Mean Business is that in the corporate scheme of things, the shareholder is supreme -- that creating shareholder value should be the only thing that matters to a shareholder. Much of his contempt for other CEOs stems from his belief that they are not as interested in creating shareholder wealth as he is."
Clearly, Dunlap has created wealth for some shareholders. Just days after Sunbeam announced that he was coming on board, the stock, which had been trading around $13 per share, rose 41 percent. By the end of 1997, the stock was over $50 a share. It did not hurt Sunbeam's stock that Dunlap announced record 1997 results: sales up 22 percent and earnings per share of $1.41 -- an impressive reversal from the 1996 per share loss of $2.37.
Potential Sunbeam suitors in 1997, however, were not impressed enough to buy the company. At the end of the year, no one was interested, so Dunlap himself went shopping. He overpaid for Coleman, the outdoor equipment manufacturer, which was losing money, buying it for $2.2 billion, or two times sales. He bought Signature Brands (Mr. Coffee) and First Alert (smoke detectors) for $425 million. Neither seller, Forbes points out, was all that interested in Sunbeam stock. Ronald Perelman took less than half Coleman's price in stock, and Thomas Lee at First Alert took cash. The acquisitions did make Sunbeam a $2.6 billion (sales) company, fulfilling Dunlap's 1997 promise to make Sunbeam a $2 billion company by 1999.
THE PROBLEMS WITH SUNBEAM'S REVENUE FIGURES
However, all was not well. According to Sunbeam's 10K, the company sold $60 million in accounts receivable to raise cash in December 1997. Sunbeam also instituted an "early buy" program for gas grills in the fourth quarter. Retailers such as Kmart and Wal-Mart could buy their summer's grills in November and December of 1997 but not pay for them until June 1998. Also, because retailers do not have a lot of space for off-season items like grills, Sunbeam started a "bill and hold" program that allowed customers to use its warehouses to store the goods they had bought but not necessarily paid for.
These two programs accounted for most of Sunbeam's 1997 revenue gains. They, in fact, did nothing for the company except shift sales from 1998 to 1997. Sunbeam reported a first quarter 1998 loss before taxes of $43.4 million, and when the word got out, the stock dropped 58 percent.
The New York Times reported that Dunlap met with analysts to explain the bad news. "I take full responsibility," said Dunlap, before making clear that it was everyone's fault but his. He blamed the weather. He blamed a retail chain for messing up grills that had to be recalled. Because he was busy working on the acquisitions, he "left a marketing guy in charge of operations. Mistake."
He denied that selling gas grills in November and December was an effort to "artificially pump up" 1997's profits. It was, he said, "a well-intentioned market-driven strategy that simply didn't work." It is not clear what that strategy might have been, other than an effort to make the company's finances look good to a not-terribly-inquisitive buyer.
Dunlap promised the analysts that he would be making big savings at Coleman, First Alert, and Signature Brands through plant closings and staff reductions -- 5,100 more workers to fire. That would make those divisions smaller, but would it make them grow? Sure it would.
In announcing first-quarter results, the company said, "Sunbeam expects the integration of its three recent acquisitions and planned new products to generate at least $265 million in incremental annual revenues. These new revenues are expected to come from leveraging complementary international distribution strengths, domestic sales synergies, and accelerated new product development." We love these euphemisms that CEOs come up with when they're driving their companies into the dumpster.
We'll never know whether Dunlap could have actually grown Sunbeam because the board of directors, mostly Dunlap's friends, fired him in mid-June 1998. The new chief executive, Jerry Levin, warned that Sunbeam's sales would suffer for the rest of the year as retailers worked off high inventories of Sunbeam products. Instead of shrinking Sunbeam to greatness, he had shrunk it to insignificance.
RUNNING THE BUSINESS AS IF PLANNING TO SELL
What Chainsaw Al did to Sunbeam (and to Scott Paper) is a notorious example of a situation that is not uncommon. As an executive whom business press reporters loved to hate, Dunlap received considerable coverage of his pronouncements and activities. He is not alone, however, in boosting sales through early bookings, low prices, and promotions. Many executives seem to be running their businesses like homeowners repairing the front steps and slapping a new coat of paint on a house they plan to sell.
They're selling in two ways. They're selling to the public, pushing up the stock price so that they can cash out when they exercise their options. And they're selling out to other companies that are happy to take them over, sometimes (if the seller is a private company) on an earn-out basis in which the buying company takes the selling company's stock and pays shareholders a multiple of earnings. But the buyer does not fork over the full price at the closing. Rather, the buyer puts up, say, 25 percent at the closing, then 25 percent at the end of the next three years. By the end of four years, the sellers have all their money. Meanwhile, the company must show consistent growth, say, 15 percent a year, to achieve the target sale price.
When owners sell on an earn-out basis, many do everything in their power to control earnings over the four-year period. The business may need a new information technology system or 170 new salespeople or three new product launches in the fourth year, but the former owners do not make the investment. They spend as little as possible on marketing, R&D, and human resources. They don't take a penny of profit to spend on a frill like the firm's future health. They take their money and run.
Even if the executives are not involved in a buy-out, those who want to cash out do everything they can to make the business show a profit. They put in a hiring freeze. They offer early retirement. They fire 10 percent of the employees across the board. They cut back advertising, research and development, MIS. They squeeze as much profit as they possibly can out of the business so that the P&L and balance sheet look terrific -- and hope for the best. After all, how many stockholders, who can dump their holdings tomorrow, want to see management reduce earnings by investing in R&D, in new products, or increased advertising and promotion? The owners argue that this is not greed; it is common sense guiding self-interest.
These executives have, in short, no vision for the business (other than "For Sale"). With such a mind-set, the customers are a distraction, with their endless whining for service and repairs, new products and features, and prompt delivery.
It seems that everywhere we go these days, business executives talk about cutbacks. In May 1998 we attended the American Marketing Association's Edison Awards Ceremony in New York City, at which major corporations -- Colgate-Palmolive, Rubbermaid, Quaker State, and Dannon International, among 35 others -- were being heralded as models for new product performance. We were struck by the number of speakers who talked about the cutbacks taking place in their companies and the growing difficulty to innovate and market new products.
We wonder, doesn't anybody see the problems ahead? Aren't the CEOs, CFOs, and strategic planning departments looking five years out? Aren't they working on anything but mergers, acquisitions, and downsizing problems? Where is the strategic planning department? What are they doing to build the business?
WHO KNOWS WHAT LURKS IN STRATEGIC PLANNING?
Only the Shadow knows. Consider this disturbing experience. We recently developed a marketing strategy for a multinational corporation, a plan that involves a $3 billion investment in the United States and another $3 billion investment in Asia. These expenditures will have an impact on the company for the next ten years. Because of the project's size, most meetings involved at least 10 people, and some had 20 or more. They included, of course, senior marketing executives, representatives from corporate headquarters, from the American division, from the Asian unit, from the firm's advertising agencies, and from the corporation's marketing group. But we never met -- let alone worked with -- a representative from this corporation's strategic planning department.
(While this has been generally true in our consulting assignments, perhaps it may be changing. We recently worked with three vice presidents of strategic planning on consulting engagements, but these are rare exceptions in two long careers.)
The corporation has a strategic planning department. The strategic planning division occupies a floor in a building separate from marketing. We don't know how big it is because we've only heard about it; we've never talked to the people or walked through their offices.
We found it odd that we were helping the corporation plan multibillion dollar investments and yet we never discussed the issues with the firm's strategic planners. They were not engaged. Periodically someone from the marketing department, which was leading the project, would say with a grin on his face at a meeting, "Strategic planning has a question."
These questions came out of the blue and were presented without a context. For example, "Strategic planning wants to know the price sensitivity in the marketplace; that is, what would happen if we decreased prices?" Or "When we introduce the new line extension, how much cannibalization will occur?"
These are good questions, but they have to be asked in a context of strategic marketing issues, such as "What target group are you talking about?" If the company is an on-line bookseller, it makes all the difference in the world whether strategic planning wants to know about the price sensitivity of upscale book buyers primarily concerned with convenience and service or the sensitivity of price-conscious consumers shopping for the best deal on the Web.
We answered the strategic planning department's questions, but it was clear even to an outsider that the marketing people and the strategic planners were not cooperating. They were not working together toward a common goal, and this is not uncommon. The strategic planners did not know anything (or seem to care much) about marketing, and the marketing people found the strategic planners a diversion.
STRATEGIC PLANNING ISSUES ARE ESSENTIALLY
MARKETING PROBLEMS
If strategic planners determine that acquisitions, mergers, and downsizing, with all their sound and fury, can somehow lead to greater growth, that is fine. But the strategic planning department is often disassociated from reality. They're not involved in actually growing the company -- they are a staff, not a line function -- and even when they are involved, they don't really know what will happen as a result of the steps they recommend. They base decisions on judgment and intuition, which are often wrong.
What to do about the strategic planning situation is easy to state, not so easy to execute (it is a little like taking your own advice). The first issue is how to integrate strategic planning with marketing, since marketing is the most reliable way to grow a business. The problem is that, while the strategic planning department develops the plan to guide the corporation, marketing is often not integrated into strategic planning. (Or as we just saw, marketing develops its plans without consulting strategic planning.) Strategic planners chart the course, but in an appalling number of companies, the strategic planners do not even know the marketing people.
Consider a typical strategic question: A relatively small division within a corporation provides parts to another division that, in turn, provides parts to the end customer. What should this division's function be in the year 2005? Continue to provide parts internally? Provide parts to external customers as well? Should it continue to exist, or should its function be dispersed through the company? Should the company buy the parts from an outside supplier? Should the company invest in the division or try to sell it?
Another example: An international brewer is thinking about introducing its beer into the U.S. market. Expanding globally is part of its strategic vision. Should it make the investment?
More examples: The company has not seen any change in its p/e ratio in seven years, and its p/e ratio is low relative to competitors'. Earnings and profitability have been stalled. The company has cut costs and people, but downsizing has produced only a weaker and demoralized organization. What should it do?
Consider this problem: The company's flagship brand is declining, and to goad sales, management has cut prices and run trade and consumer promotions. Nothing good is happening. What should they do next?
And more: The company has not introduced a successful new product in five years. Now it has developed what it believes is a breakthrough concept, and the CEO wants to know whether to build the plant to produce the product. The plant will cost a minimum of $200 million.
These are the kinds of questions strategic planners tussle with every day. Yet they are, in fact, largely marketing questions. What is the market for the division's parts? How will the market change by 2005? (The only reasonable answer: It needs to be studied.) What do its customers need? How are those customers' needs changing? What -- if anything -- can the division do to influence those changing needs?
The brewer's questions include: How does marketing beer in the U.S. compare to marketing beer at home? What is the best target market for this new import? What positioning and advertising strategy will have the greatest impact on that target? What is the right pricing and distribution strategy? What will all this cost, and what return can the brewer reasonably expect? Marketing questions, all.
Indeed, we believe most strategic planning issues are fundamentally marketing decisions. Which means that marketing is not just important; it is central to the business solar system. Theodore Levitt in his classic The Marketing Imagination wrote, "The purpose of a business is to create and keep a customer." We argue that the purpose of marketing and the purpose of a business are fundamentally the same, since the purpose of marketing is to find and keep customers for the business.
Only through effective marketing does the core business grow. To thrive, a company has to find new customers, has to continue selling to existing customers, and has to sell more products or services to both new and existing customers. That's marketing's job. Yet, throughout the '90s, that appeared to be a counterintuitive notion.
But if marketing is the engine that drives business growth, at too many companies it has thrown a rod.
Copyright © 2000 by Kevin J. Clancy