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Thought provoking and comprehensive, this book shows how to build a complete marketing platform around the exploration, creation, and delivery of superior value to customers, collaborators, and the company itself.
as the Driver in
the Digital Economy
Business and marketing strategy are undergoing a sea change. Consider the statements of some of America's business leaders:
Every now and then, a technology or an idea comes along that is so profound, so powerful, so universal that its impact changes everything. The printing press. The incandescent light. The automobile. Manned flight. It doesn't happen often, but when it does, the world is changed forever.
—Lou Gerstner, Chairman of IBM
Embrace the Internet. Bring me a plan as to how you are going to transform your business beyond adding an Internet site.
—Jack Welch, former CEO of GE
The Internet is not just another sales channel. It's not just an advertising medium. It is a tool to change fundamentally how a company does business and how it takes orders from its customers and provides value to them.
—Esther Dyson, Chairman of EDventure Holdings Inc.
These business leaders are focusing on the potential impact of the Internet on future market and business behavior. But the Internet, with its underpinnings in digitalization and networks, is only one of several technological advances dramatically reshaping markets andbusinesses. Others include biotechnology, new materials, new medical treatments, new communication advances, and smart chips. Globalization is another major force affecting our lives. Consumers around the world are exposed to new ways of living and consuming and want many of the things they see. And a growing number of companies are responding by expanding their global reach to satisfy the new appetites. Deregulation and privatization are additional forces opening up markets and creating vast new opportunities.
These changes have made it fashionable for observers to talk in terms of the "old economy" and the "new economy." They see the old economy as having been built on the logic of managing manufacturing industries. Manufacturers apply certain principles and practices for the successful operation of their factories. They try to standardize their products in order to bring down their costs. They continually seek to expand their market and organizational size in order to achieve economies of scale. If they operate in different markets, they tend to replicate their procedures and their outlets. Their guiding principle is to achieve efficiency. And to accomplish this, they manage their firms hierarchically, with a boss on top issuing orders to middle managers who in turn guide the workers. These organizations tend to be centralized and highly controlled by rules.
The new economy (also referred to as the digital economy) is based on the digital revolution and the management of information industries. Information has a number of attributes. It can be infinitely differentiated, customized, and personalized. It can be dispatched to a great number of people who are on a network and can reach them quickly. To the extent that the information is made public and transparent, it will make people better informed and able to make better choices. New economy organizations tend to be flat, decentralized, and open to employee initiative.
Today's economy is a hybrid of the old and the new. It could appropriately be called the "now" or the "next" economy. Lou Gerstner of IBM recently recanted his statement quoted at the beginning of this chapter, saying, "There is no new economy.... The wars haven't changed; it's just that somebody has invented gunpowder."
Companies need to retain most of the skills and competencies that have made them successful in the past. But if they hope to grow and prosper in today's economy, they will need to develop major new understandings and competencies. They must fundamentally rethink and revise their corporate strategies, aligning them with their marketing strategies, and they will have to rethink marketing's role within corporate strategy. In this book, we argue that companies will have to institute a more holistic marketing process for exploring, creating, and delivering value in order to continuously renew their markets. We particularly emphasize that marketing must play the lead role in shaping this new strategy.
This is not the first time that U.S. companies have had to change their corporate mind-set. Years ago, when the American public recognized the outstanding quality of many Japanese and European products, U.S. companies scrambled to upgrade their quality standards and manufacturing performance. They assimilated new ideas about total quality management, benchmarking, outsourcing, faster cycle time, and reengineering. The task of company transformation was placed in the hands of company engineers and manufacturing people.
The advent of the information age has required another corporate mind-set shift. Companies have had to invest heavily in information technology and network connectivity. Their investment in information technology has far exceeded their investment in plants and equipment. With the sudden rise of "pure-click" e-commerce dot-coms in the 1990s, most established companies were taken by surprise. They watched these upstarts create a whole new marketspace—a virtual marketplace—for commercial transactions. They were dumbfounded by the skyrocketing market capitalizations of America Online, Amazon, Yahoo!, eBay, E*TRADE, and other dot-coms, many of which were worth more than Kodak, Gillette, American Airlines, and other corporate giants.
Relief came to these established companies when the dot-com bubble burst. Many new billionaires joined the "90-percent club," defined by those like Jay Walker, the founder of Priceline.com, who lost more than 90 percent of their wealth in the dot-com crash. Still, no companies expect marketspace to disappear. Indeed established companies are embracing the opposite view, that they are in the best position to leverage the Internet. Many are quickly incorporating e-commerce, e-procurement, e-recruitment, e-training, and other electronic pathways into their daily practices and procedures.
The information age has created hypercompetitive markets. Buyers are more aware of competitive offers, more price conscious, and more demanding than in the past. Power has migrated from the manufacturers and retailers to the consumers, who can now define what they want in the way of customized products and services, prices, distribution channels, and even advertising and sales promotion.
The digital economy has reached a stage at which companies must define their scope and the position of their markets more robustly. They need new marketing concepts, capabilities, and linkages that extend far beyond the boundaries of the conventional marketing department. Marketing must be made a greater force in the company's corporate strategy and organization. This is the next transformation imperative determining the fate of companies in the new economy.
In this chapter, we will first look at the major shifts that are creating the digital economy as they redraw industry boundaries and empower consumers. We summarize the resulting new capabilities now in the hands of consumers and business firms. We then discuss how the business mind-set is migrating from old ideas to new ones. We will show how marketing is changing within the context of the digital economy. Finally, we will spell out the framework for the new holistic marketing concept.
MAJOR SHIFTS TOWARD THE DIGITAL ECONOMY
Firms must make nine major shifts in their business and marketing thinking if they are to operate successfully in the digital economy.
From asymmetry of information to the democratization of information
From goods for elites to goods for everyone
From make-and-sell to sense-and-respond
From local economy to global economy
From the economics of diminishing returns to the economics of increasing returns
From owning assets to gaining access
From corporate governance to market governance
From mass markets to markets of one
From just-in-time to real-time
From Asymmetry of Information to the Democratization of Information
Economists argue that markets are the best mechanism to allocate resources, provided that there is perfect and symmetric information, as well as equality of market power and mobility among individual agents. These assumptions, however, do not always hold in the real world. Sellers typically have access to better information than do consumers. Customers tend to be relatively ill informed, information is marketer controlled, and exchanges are marketer initiated. The result is monopolistic competition, in which sellers set the terms while consumers rely on such factors as brand recognition, company reputation, and endless advertising.
Digital technologies are drastically changing this information and power imbalance. More sellers are participating in the Internet marketspace because of its low barriers to entry. More customers can retrieve information about any product, service, or company. Information is ubiquitous and cheap.
Companies, as well as consumers, benefit from the information revolution. Using e-procurement, companies can compare supplier prices and lower their purchasing costs. By setting up extranets with their suppliers and distributors, they can lower their ordering, transaction, and payment costs. They are better able to assess demand and supply conditions. They can then use dynamic algorithms to adjust their prices and outputs, resulting in more efficient resource management.
From Goods for Elites to Goods for Everyone
In the old economy, companies found it too expensive to give individual customers exactly what they wanted. Customers faced a tradeoff between goods that were approximately right but relatively cheap and ones that were exactly right but expensive. Wealthy people could access more customized products or services.
In the new economy, many more people can access customized goods and services. Digital technology has lowered the costs of manufacturing "batches of one." We are seeing evidence of this on Web sites such as Dell.com (computers), Acumins.com (vitamins), IC3D.com (blue jeans), and Sonic.com (customized CDs). The drivers are the creation of a global, standardized communications infrastructure; the Internet; and the Web browser. Professor Ward Hanson sees customization as leading to a "democracy of goods."
From Make-and-Sell to Sense-and-Respond
Make-and-sell has long been the dominant paradigm in business. Make-and-sell companies compete by estimating market demand, planning production, and building up inventory to match supply and demand. They rely primarily on achieving economies of scale, speeding up employees' learning curves, and executing defined procedures in accordance with a prescribed business plan.
Today, many companies compete by a sense-and-respond paradigm. Sense-and-respond companies invite customers to define their broad needs and even participate in choosing the exact attributes they want; they trigger their activities in response to orders; and they use digital technology to fill orders quickly. Sense-and-respond companies are superior to make-and-sell companies because they:
stimulate the development of more original products,
produce technically superior products more quickly,
become more customer-centric and fulfill consumer needs more effectively, and
lead to higher profitability
From Local Economy to Global Economy
The Internet permits companies to expand their geographical reach exponentially. In the new economy, companies don't have to be big to be global. For the first time, small companies can reach prospects anywhere in the world. They can locate anywhere. And conversely, large companies with multiple geographical locations can reconsider how many locations they truly need. According to Robert Baldock:
In industries such as textiles, direct selling has also had a big impact. With the help of multimedia aids like CD-ROMs, garment industry buyers in Europe and America are communicating directly with factories in India and the Far East, in many cases cutting out the need for an agent in those places. Designers in New York can send their latest designs electronically to factories in Asia where they are cut and sewn in quantities determined by orders that have in turn been gathered electronically from around the world and transmitted to the factory via the Internet. The only travel that needs to be done is by the garments themselves.
Companies need to consider the consequences of international marketing via the Internet because it presents both advantages and disadvantages. The key enabling platforms have been the availability of logistics (e.g., FedEx services) and financial institutions (e.g., credit cards), which make international transactions as easy to conduct as local ones. Customers no longer have to buy from high-priced merchants in their own country if the same goods are available from low-priced merchants abroad. This situation may lead national governments to enact legislation to restrict using the Internet to order goods from abroad.
From the Economics of Diminishing Returns to the Economics of Increasing Returns
Company growth in the industrial age was limited by the operation of the law of diminishing returns. Size brought bureaucracy, slower response time, and greater risk aversion. Market leaders defended their turf by attempting to control sources of supply, securing patents, and waging lawsuits against aggressive newcomers. Procter & Gamble, for instance, developed new products and product extensions to control shelf space, and The Home Depot attacked local hardware stores by offering greater variety at lower prices.
In the new economy, information explodes. Data can be replicated, stored, transferred, decomposed, and recombined in multiple ways. On the Internet, shelf space is unlimited. Shoppers can enter every site. Companies with limited resources can achieve tremendous scale in very little time.
Growth in the new economy is governed by self-reinforcing cycles. Consider Metcalfe's law, which states that "the cost of the network expands linearly with increase in network size, but the value of the network increases exponentially." Many e-businesses require a significant number of network members, and the member benefits will increase nonlinearly with a growing number of members. According to researchers for the McKenna group:
Early in 1998 "ecompare.com" opened with no hint as to what it offered. Its owners left it to visitors to find out what was behind the entry page. They offered only one thing: Each visitor could register and receive ten free shares in the company. Within a few weeks, ecompare had more than three million registered users. From this "regular clientele," the company built up a virtual shopping network within a few months.
In marketspace, a company must make a large up-front investment to create offerings and build networks, but the variable costs thereafter are relatively modest. Some products and services (e.g., information, music software) can be reproduced digitally and delivered electronically with essentially zero marginal cost. This negligible cost of increasing capacity, combined with the ubiquity of reach, stimulates a rapid growth in demand. Therefore, the new economy operates with increasing returns to scale.
In the new economy, companies must design strategies to exploit abundance. The first Internet company in an industry category that achieves a large customer base will tend to attract additional users at a much lower cost because of its visibility and word of mouth. Al Ries and Laura Ries go so far as to postulate a "Law of Singularity," which says that one Internet firm will own the category and all the others will trail hopelessly behind, if they exist at all.
Excerpted from MARKETING MOVES by Philip Kotler - Dipak C. Jain - Suvit Maesincee. Copyright © 2002 by Harvard Business School Publishing Corporation. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.