Chapter One: Why Total Integrated Marketing?
Marketing has lost its way! In country after country, senior executives have become obsessed with making their companies more customer-focused, market-focused, outward-oriented, or some permutation of those qualities often to no avail. Companies cannot win in today's competitive markets by delegating marketing problems to a department. Success in the new marketplace demands integration of the firm's entire set of capabilities into a seamless system with the goal of exemplary customer satisfaction. In an era of total competition, commitment to customers must also be total hence, the title of our book. We want you to rethink your company's entire approach to the marketplace. Nothing less will ensure your success in the markets of tomorrow.
Why do some companies drive home solid shareholder value over the long haul, while others struggle and fade away, even though their short-term performance was like a shooting star? Why are those same winning companies renowned throughout their markets for delivering superior customer value, while their competitors are just average? Is it merely coincidence, or is there more to it? How can some organizations get their act together around the things that matter most to their shareholders and their customers, while others fight internal battles, obsess over trivia, and let opportunities pass them by?
In this book, we search out some of the answers to these questions. One conclusion we have reached is that winning companies everywhere share an incredibly simple characteristic. They are the ones that really do get their act together around the things that matter most to their customers they make a totally integrated offer of value. Their less successful competitors cling to the models of the past with top-heavy bureaucracies, and their managers still believe that their functional specialization matters more than customer value.
This book about creating Total Integrated Marketing is a response to the problems of marketing in an era of revolution. The prospect is for more fundamental, dramatic changes than we have yet experienced or can even imagine. The information revolution has already transformed global competition: What happens in one part of the world reverberates in many others. The search for competitive advantage through innovative products, services, and methods; lower costs of production and distribution; and new organizational forms and relationships is unremitting. Under such conditions, the need for better marketing is overwhelming. But what is "better" marketing? Is it more advertising, brand proliferation, bigger marketing bureaucracies, slicker Web sites, or something much more basic and infinitely more powerful?
This is a simple but critical question because many firms still consider marketing to be overhead. We have heard this question more than once! After plugging the marketing message for half a century, is there really any steam left in marketing? Is there anything left to say? Perhaps surprisingly, there is. Perhaps even more surprisingly, the reason is that many of us have missed the whole point of marketing.
The profound structural changes that characterize the world economy mandate the search for sustained marketing superiority. The economic success of many countries in the latter part of the twentieth century has driven many economies from scarcity of supply to scarcity of demand. Whereas low-level economies limit the scope of competition for the consumer dollar, rising affluence expands discretionary purchases dramatically, and it becomes correspondingly more challenging to induce consumers to buy any specific product. Choosing between a new computer and a European vacation may seem an absurd notion, but in high-level economies such choices between sectors are a reality for many consumers. As competition among sellers becomes intense, a focus on the customer moves from desirable to absolutely essential. It is as simple as that. The customer is inexorably taking center stage in the organization of business activities witness the numerous articles in the business press about customer-based reorganizations. Marketing is, above all else, preoccupied with customers. The need for better marketing is clear. This may be a self-evident message, but many companies appear not to have heard it or understood it.
Marketing and the Profit Motive
When we work with executives, we sometimes ask them: "What are you in business for?" After the initial silence and occasional wry comments and groans that greet such a basic question (surely we had figured that out, and couldn't we get onto more complex matters!) the responses typically center around profit and profitability. Leaving aside the problems of profit measurement and time horizon that often bedevil the translation of this goal into reality, the almost universal focus on profit raises two critical issues. First, why is securing profits important, and second, what is the basic prerequisite for earning profits?
People's reasons for securing profits vary depending on who is answering the question: owner/managers, independent shareholders, or nonowner managers. For managers who own little or no stock in the company, the ultimate organizational goals are typically growth and survival as an independent entity. Organizational survival enhances the manager's own likelihood of economic well-being, while growth may increase chances of the firm's survival and provide opportunities for career advancement. Independent shareholders are most likely to be concerned with the production of economic value after all, economic value enhances shareholder wealth. In the near term, however, for both independent shareholders and owner/managers, organizational survival may be the critical objective. Certainly, for the more than 100,000 business entities (mostly owner/managed) that fail each year in the United States, and the many more that fail around the world, survival must be assured before shareholder value creation becomes a meaningful objective.
Economic value and organizational survival versus growth can create a serious conflict for owner/managers who believe that they can secure greater value if the firm ceases to operate as an independent entity. Allowing the firm to be acquired may produce greater immediate value than continued independent operations over the long run. This conflict between corporate managers and shareholders is often starkly played out when contemplating hostile bids. Managers are inclined to value independence, whereas shareholders favor immediate value production. Since in capitalist systems, owners' rights are generally regarded as secondary only to debtholders among the various stakeholders, the owners usually prevail.
What about Shareholder Value?
Creating value for shareholders has become a corporate mantra in the past few years. It is a key requirement for firms capitalized in competitive financial markets, such as New York or London. These markets are remorselessly competitive for capital is the ultimate fungible resource, flowing at the touch of a button from one instrument and even one country to another. Managers facing competitive pressures in product markets sometimes forget that unless the firm's financial performance remains competitive, its survival will be in jeopardy.
Good profit levels on an ongoing basis increase the chances of the firm surviving over the long term. This, however, ignores a more basic question: What is the prerequisite for making profits? What must be done to produce the profits that will enhance prospects of survival and growth? What key assets must an organization possess to generate profits on an ongoing basis? To answer these questions, we must switch our attention from capital markets to product markets.
The most obvious place to search for these critical assets is on the firm's balance sheet: cash; accounts receivable; inventory; land, plant, and equipment; and so forth. Although each of these assets may help to produce profits, frequently the asset itself is not essential. Accounts receivable are of little value if the customer cannot pay; nor inventory (finished goods, raw materials, work in process) if there is no market for the products; nor plant and equipment for making these unwanted products. In fact, the situation may be more serious. If a firm with a significant investment in plant and equipment to make products for a particular market experiences a sudden shift in demand, balance sheet assets may turn into strategic liabilities. Management may be best advised to write off its "investment" immediately and address some new opportunity. Too often, however, the prior investment binds the firm to its historic strategy and slows its market response. By contrast, a new entrant, with no such asset baggage may be able to move faster and secure significant advantage over its better established but slower moving rival.
The Cost of Carrying Excess Historical Baggage
In the 1980s, IBM consistently underfunded its commitment to personal computers, preferring to place its major efforts on mainframes its traditional stronghold. This strategic decision not only resulted in Microsoft securing a stranglehold on operating system software, but also allowed the extensive growth of such PC start-ups as Dell, Compaq, Gateway, and Packard Bell. By contrast, shortly after Netscape's entry into Internet browser software, Bill Gates executed a strategic U-turn, and Microsoft wrote off a $100 million investment in software development as it sought to catch up and surpass Netscape. According to Microsoft executives, the change was instantaneous and worldwide. Stop what you're working on and start on this! No one bats 100 percent, not even Bill Gates, but some firms are flexible enough to change quickly and some are not.
Customers as Assets
If you are even partway serious about Total Integrated Marketing, you have to take the view that the only asset the firm really needs over the long run is paying customers. Customers are the sole source of sales revenues all firm activities are costs. Whatever traditional accountants may think, it is the ability of accounting "assets" to contribute to revenue generation that makes them assets, not their historical acquisition cost (less cumulative depreciation, etc.). If the firm has customers, it has revenues, and if revenues exceed costs, it makes a profit. The presence of customers uniquely allows the firm to secure whatever operating assets it requires to produce goods and services. If the firm has customers or even good prospects of getting them in the future it can obtain the capital, real estate, data processing equipment, and people to produce (or secure by outsourcing), finance, and deliver the goods and services. From this perspective, customers are a necessary condition for the production of profit, and are therefore the most important asset we can identify.
Securing and retaining customers is not only a necessary condition for making profits, but also a critical element for organizational survival and growth and, indeed, for creating economic value. The firm's value-creating potential, as measured by its market value, represents the firm's perceived ability to secure and retain customers over the long run, and this is the central job that management must accomplish. If it performs this job well, profits will result. Hence, profits become not only a means of enhancing survival prospects, but also a measure of how well management is performing its most basic task. Profits provide the crucial link between performance in product markets and in capital markets. Using this logic, the difference between the firm's market value and the book value of its assets is a measure of marketing's value added.
Nevertheless, managers shouldn't make the common mistake of indiscriminately accepting everyone who wants to become a customer. Some customers may be too costly to maintain; others may fall outside the scope of the firm's mission; and others may not be able to pay. Better to select customers who can and will pay, than to spend money on sophisticated bad debt management! Careful selection of customers (targeting) is a key element in strategic marketing and a hallmark of firms that practice marketing well.
The individual firm is rarely alone in attempting to secure customers. Competitors seek the same customer assets, and each firm must continually struggle to target and retain the right customers while trying to ensure that competitors end up only with those it finds less desirable. Nor does our rationale mean that profits will necessarily result from attracting and retaining customers. If the costs of this activity are excessive (and intense competition is a factor that may make them so), there will be no economic profit. Although creating and re-creating customers is the key job the organization must accomplish, it is best viewed as a necessary, but not sufficient condition, to achieve profits and survive.
If Customer Acquisition Costs Exceed Customer Lifetime Value...
A lesson we learned in the catastrophic dot-com crashes of the early 2000s is that even for an Internet-based enterprise, some of the basic rules still apply. One such rule is that if the costs of acquiring and retaining a customer are greater than the lifetime value of the customer in question, it is by definition impossible to make a profit. In Europe, for the sensational launch of the state-of-the-art fashion e-tailer Boo.com, crippling marketing and advertising costs in excess of $50 million attracted customers who simply did not spend enough. The spectacular crash of the $100 million company occurred within two years of start-up.
Our case for "Why Marketing?" is twofold. First, most of us operate in a world where customers are not forced to purchase, but choose to purchase. This fundamental change from a seller's market to a buyer's market puts the customer in command and makes a customer focus essential. Second, securing and retaining customers is the activity or process that constitutes the central job description for the firm, both for managers and its employees. The key relationships are summarized in Figure 1.1.
How Did Marketing Lose Its Way?
When you look around, you have to conclude that marketing has got itself into a bit of a mess. Many companies are thoroughly confused about marketing and think it is synonymous with advertising or promotional tactics such as offering frequent flyer miles along with purchases. For others, marketing is simply providing support materials for the sales force (or people believe that marketing is sales and vice versa). In recent years, some companies even seem to have had trouble distinguishing marketing and customer service. We take a hard line on the definition of marketing. Advertising, sales, and customer service may be a part of marketing but they can never be the whole.
To understand how marketing lost its way requires going back to its origins, as envisaged by the progenitor of the modern concept of marketing Peter Drucker. In his book The Practice of Management, nearly 50 years ago, he opined:
[I]f we want to know what a business is we have to start with its purpose. There is only one valid definition of business purpose: to create a customer. It is the customer who determines what a business is. For it is the customer, and he alone, who through being willing to pay for a good or service, converts economic resources into wealth, things into goods. What the business thinks it produces is not of first importance especially not to the future of the business and its success. What the customer thinks he is buying, what he considers "value" is decisive....Because it is its purpose to create a customer, any business enterprise has two and only these two basic functions: marketing and innovation....Marketing is the distinguishing, the unique function of the business....Marketing is not only much broader than selling, it is not a specialized activity at all. It is the whole business seen from the point of view of the final result, that is from the customer's point of view. Concern and responsibility for marketing must therefore permeate all areas of the enterprise. [Emphasis added.]
The only true role of marketing is as a guiding corporate philosophy for the business as a whole. This original conception of marketing has been neglected for many years. In the late 1950s and early 1960s, however, marketing was the "hot idea" that engaged the imagination of senior executives, and consulting firms "marketed" the new approach enthusiastically. In 1961, Columbia Business School launched what was to become the most successful executive program in marketing management in the world. Only nineteen people came to the inaugural offering, but they were virtually all division or company presidents. The response of these and other senior executives to the exciting new marketing concept was to conclude that their companies needed it, and they did what senior executives typically do in this situation, they delegated...found somebody to "do" marketing for them. This attitude changed the marketing concept conceived as a philosophy for the business as a whole into functional departments, often led by a person from sales or a recruit from an advertising agency.
The competitive conditions prevailing at that time meant that in many markets there was still a relative shortage of capacity, and the customer was far from being king. Shortly before he retired, a senior executive at Exxon remarked to one of the authors, "In those days, we made what we wanted to make and they lined up to buy it." This is a far cry from the competitive conditions that prevail in most major markets today. Through the 1960s and 1970s, functionalized marketing was an adequate organizational response to the conditions faced by many firms. This is no longer the case. The function that evolved because of marketplace change has instead become its victim.
Whether your firm treats marketing as a philosophy or (as is more common) a departmental activity, there will undoubtedly be a set of activities that people with a marketing or product management title customarily perform (though people with general management or even sales titles sometimes handle these responsibilities). In the company's view, these tasks are what marketing is all about. It is essential, however, to view the marketing function in the broader context of a marketing philosophy. The way that marketing activities must be conducted today is radically different from the way they have historically been performed and demands a much higher degree of skill. These skills are not limited to mere technical excellence in classical modern marketing, but encompass reaching out across the boundaries that have traditionally existed within and around the organization. How else will you be able to draw on all the resources and capabilities required to win marketplace rewards in a hypercompetitive world? Without these skills, the effort will be neither integrated nor will it embody the total commitment necessary to win. As Ron Dennis, chief executive of the McLaren-Mercedes Formula One team once put it, "To come in second means being the first of the losers."
At its simplest, the biggest reason we advocate Total Integrated Marketing as a management approach for winners is that it is a road map for dragging marketing processes out of marketing departments and putting them back where they belong in the center of the company. You cannot really be a specialist in a company-wide management philosophy. It is foolish even to try. Instead, Total Integrated Marketing reverse-engineers by starting with customer value and working back to see what must be improved to deliver better value than competitors can provide. Most times, the answer is not that a bigger, more powerful marketing department is needed usually it will be about combining marketing processes with others to create a seamless offer of value to the customer. To be even more direct if I am your customer, be assured I have no interest whatever in your departmental structures, your specialist functions, your planning systems, your coordination problems I positively do not care about any of those things. I just want a better deal than the next guy offers, or I'll buy from the next guy.
Total Integrated Marketing encompasses marketing as a philosophy as well as a set of activities that have traditionally been performed in marketing departments. In an early incarnation, lodged firmly in the marketing department, the function essentially referred to managing the "marketing mix" the implementation programs that the firm would develop for a particular market or market segment. Later, in the era of "strategic marketing," the choice of markets and market segments, and the manner in which the firm positioned its offering(s) in those markets and segments, became logical extensions. The coming era of Total Integrated Marketing must embrace both, but it also requires that we go much further orienting the firm as a whole to the changing customer, competitor, and general environment, and capitalizing on all its capabilities regardless of function. Illustrative of this transition, two McKinsey consultants, in discussing the changes taking place at Kraft, described the issues that the company had to face:
The sources of customer value were no longer just marketing-based. The entire organization, from R&D to marketing, to packaging, to manufacturing and distribution, to field the sales representatives working the customers, was essential to identifying and delivering value to consumers.
But to successfully orient the firm as a whole, and to achieve a high degree of interfunctional cooperation, senior corporate management must play a major leadership role. As a Kraft executive put it: "...no-one below the CEO possesses an integrative consumer perspective. No-one provides cross-functional leadership and no-one is fully accountable for anticipating consumer needs and responding quickly and effectively."
If the entire organization is to develop an external focus, senior management leadership is vital. Senior managers must take responsibility for the organizational changes necessary to facilitate Total Integrated Marketing. Functional marketers, unlike quality advocates, have proven to be ineffective advocates of change; they lack the organizational engineering skills necessary to accomplish the task. To survive and win the competitive battle in the twenty-first century, Total Integrated Marketing must be the watchword.
What Is Total Integrated Marketing?
Taking Total Integrated Marketing seriously is no small undertaking. In this book, we look at the task in three ways. First, in Chapters 2 through 5, we build a case that the marketing process provides the most powerful mechanism for real integration. We also lay down a framework for understanding and explaining the critical core elements of the strategic marketing process as well as the essential top management role of stewardship.
Second, in Chapters 6 through 11, we develop a framework for assessing the most critical interfaces for marketing processes: finance/accounting; operations; sales; research and development; customer service; and human resources. In each case, we examine the strategic and operational aspects of these relationships and provide a perspective for identifying conflicts to manage and collaborative opportunities to exploit. The overarching objectives are to build productive connectivity among specialists and to lay down the foundation for a corporate community focused on customer value.
Finally, we bring things together in Chapter 12 with an agenda for making Total Integrated Marketing a way of life in your company, emphasizing the implementation tools that you can use to achieve effective execution.
Our goal is to provide you with a framework for designing and managing change that will deliver superior shareholder value by outperforming your rivals in building customer value. That framework is Total Integrated Marketing.
Copyright © 2003 by James M. Hulbert, Noel Capon, and Nigel F. Piercy