Marketing in the New Economy Philip Kotler, Ph.D Kellogg School of Management Northwestern University Bangkok, Thailand October 19, 2001.

Marketing in the New Economy

• Philip Kotler, Ph.D

• Kellogg School of Management

• Northwestern University

• Bangkok, Thailand

• October 19, 2001

Trouble Ahead in 2002

• The tragedy of Sept 11, 2001 ushered in new concerns about global trade contraction, supply chain problems, and higher costs.

• Several multinationals are bearing huge losses and laying off workers.

• Hundreds of dot.coms have closed their doors or suffered substantial declines in value.

• Many companies try to mask their problems with creative accounting, or mergers and acquisitions.

• Marketing, the engine that drives growth, is in desperate need of an overhaul.

New Forces in Today’s Economy

• Overcapacity and hypercompetition.– Overcapacity is 25% pharmaceuticals, 30% chemicals,

35% automobiles– Leads to falling prices and margins, mergers, and

company failures

• Ascendant power of customers.– Customer shortage– Price transparency

• Ascendant power of distributors over manufacturers.

• Growth of digitalization and the Internet as major sources of efficiency and profitability.

• Proliferation of channels and media.

• Globalization and global interdependence.

What is Happening to...?

• Sales force

• Advertising

• Marketing channels

• Store-based retailers

• Price premiums

Responding to an Economic Slowdown

• Reevaluate your current resource allocations.– Geographical mix

– Market segment mix

– Customer mix

– Product mix

– Channel mix

– Promotion mix

• Decide whether to attack to gain market share rather than retrench.

• Be sure to maintain the value proposition promised by your brand.

• Try to add value instead of cutting price.• Have a contingency cost reduction plan available.

Winning Through Better Competitive Positioning

• One-way Positioning (Ries and Trout)

• Three-way Positioning (Treacy and Wiersema)

• Five-way Positioning (Crawford and Mathews)

• Total Positioning (Michael Porter)

• Emotional Positioning

• Experience Positioning

One-way Positioning (Ries and Trout)

• Be #1 in some important attribute; you will be the most remembered and preferred.

• #1 should not line-extend; it will lose its focus.

• If you are the second to enter the market, don’t call yourself #2. Call yourself #1 on a different important attribute.

• Al Ries and Jack Trout, Positioning: The Battle for Your Mind (New York: Warner Books, 1982).

Three-Way Positioning (Treacy and Wiersema)

• A company needs to position itself in relation to three value disciplines: Product leadership, operational excellence, customer intimacy.

• Four rules for success:– Become best at one of the three value disciplines.– Achieve an adequate performance level in the other

two disciplines.– Keep improving one’s superior position in the chosen

discipline so as not to lose out to a competitor.– Keep becoming more adequate in the other two

disciplines, because competitors keep raising customers’ expectations about what is adequate.

• Source: Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Reading, MA: Addison-Wesley, 1994)

Five-way Positioning (Crawford and Matthews) - 1

• A company needs to position itself along five attributes: Product, price, ease of access, value-added service, and customer experience.

• A great company will dominate on one of these, perform above average (differentiate) along a second, and be at industry par with respect to the remaining three.

• Assign a number from 1 to 5 to each attribute: 5 (dominant), 4 (differentiated), 3 (on par with industry), 2 (below par), and 1 (poor).

• Source: Fred Crawford and Ryan Mathews, The Myth of Excellence: Why Great Companies Never Try

to Be the Best at Everything (New York: Crown Business, 2001).

Five-way Positioning (Crawford and Matthews) - 2

• A great company will exhibit the pattern 5, 4, 3, 3, 3.

• Anything less than a 3 on any attribute is not sustainable.

• To be dominant or differentiated on more than one attribute is excessive and reduces profitability.

• Being on par requires a company to match its industry’s average performance; a company must not let its standing drop below 3.

Company Examples Wal-Mart is dominant on price, differentiated on product, and on

industry par with access, service and experience.

Target dominates on product and is differentiated on price compared to average competitors. Target combines “hip design with value pricing.”

Dell dominates on service and differentiates on access, while its competitor Gateway dominates on experience and differentiates on price.

McDonald’s dominates on access and differentiates on service.

American Express dominates on service and differentiates on access

Four Seasons dominates on experience and differentiates on service.

Score Your Companyand Your Competitor

• Company Competitor

• Product

• Price

• Access

• Service

• Experience

• What would you recommend to become a more successful company?

Total Positioning (Michael Porter)

• Ikea

• Southwest Airlines

• Home Depot

• Saturn automobile

• Dollar General

Positioning on Low Price: Dollar General

Dollar General’s mission is to create a better life for people by selling life’s basics at budget prices.

It targets consumers with annual incomes of less than $25,000 and seniors on fixed incomes.

Dollar General is not selling cheap things at cheap prices but good quality at everyday low prices.

To keep its costs down, it does not advertise, accepts only cash, carries primarily private-label brands, sticks to fast-turnover consumables, operates simple stores with inexpensive displays and fixtures, signs short term leases with low-rents, carries only about 4,500 stock keeping units, and locates near public-transit facilities.

Emotional Positioning

• Apple Computer

• Nestle

• Amazon

• Harley Davidson

• Amil

Experience Positioning

• Starbucks: “From a beverage to an experience.”

• Barnes & Noble: “From a bookstore to an experience.”

• Niketown is a three story shoe store.

• REI has installed a climbing wall and customers can test a Gortex jacket in a simulated rainfall.

• Bass Pro Shops lets buyers of fishing rods cast into a test pool

Traditional Marketing Skills

• Marketing research

• Advertising

• Sales promotion

• Sales force management

Competency Skills Needed by Today’s Marketers

• Customer relationship management (CRM)

• Partner relationship management (PRM)

• Database marketing and data-mining

• Telemarketing

• Public relations marketing (including event and sponsorship marketing)

• Brand building

• Experiential marketing

• Integrated marketing communications

• Profitability analysis by segment, customer, channel

Winning With Information

• Real time information systems– Seven-Eleven’s 5th generation information system

connects stores, headquarters, and suppliers.

– Companies are setting up separate web portals for customers, partners, and employees.

• Market planning dashboards– P&G is setting up a dashboard for its marketing

managers that allows them to access templated processes, best practices, testing tools, scripts, industry news, project dates, etc.

Formula for Customer Benefit

• Consumer benefit =– + v(value of market offering)– + b(value of brand)– + r(value of relationship)– - c(cost of market offering)– - t(cost of time)

• The v, b, r, c, and t vary across customer segments and individual customers.

Customer Relationship Marketing (CRM)

• CRM is an old idea practiced by mom and pop stores and salespeople.

• Companies used to reach customers through a single channel: sales force, branches, dealers, telephone, or mail.

• Over time, companies added more channels: call centers, websites, ATMs, kiosks, etc.

• Companies are trying to integrate these channels using CRM software from Siebel, Oracle, or SAP, so that companies can get a complete view of the customer across channels.

• The challenge is to deliver a rich and consistent customer experience in each channel.

• Companies need to treat customers unequally.

• Companies need to migrate customers to lower cost channels.

The Essence of One-to-One Marketing

• Identify your target customers.

• Differentiate your customers by their needs and their value to your company.

• Interact with your customers to form a learning relationship.

• Customize your products, services, and messages.

• Source: Peppers and Rogers The One-to-One Future

What Customer Information to Collect?

• Transaction data

• Demographic data

• Psychographic data (activities, interests, opinions)

• Contact and contextual data

How to Estimate Customer Lifetime Value (CLV)

• Estimate the number of purchase occasions by the customer over a given time horizon.

• Estimate the average amount spent per visit.

• Estimate likely additional purchases through cross selling and upselling

• Subtract the costs of maintaining the account per visit.

• Add the value of the new referrals by the customer.

• Take the present value of this net income stream with an appropriate discount rate.

Database Marketing is Expensive!

• Requires a tremendous investment in information

gathering about individual customers and prospects.

• Requires constant updating of information.

• Some critical information may not be available.

• Requires a high investment in hardware and software.

• Requires integrating individual customer information

from a variety of sources.

• Requires people skilled at data mining.

• Requires managing and training employees, dealers, and

suppliers.

Does Every Business Need CRM? • No. The following businesses may not benefit from CRM:

– Businesses where the CLV is low.

– Businesses with high churn.

– Businesses where there is no direct contact between the seller and ultimate buyer.

• Companies that are in the best position to invest in CRM.

– Companies that collect a lot of data (banks, insurance companies, credit card companies, telephone companies).

– Companies that can do a lot of cross-selling and up-selling (GE, Amazon, etc.).

– Companies whose customers have highly differentiated needs and are of highly differentiated value to the company.

A Company’s Balance Sheet is a Lie

• Physical plant and inventory. Yes.

• But where on the balance sheet is the value of the firm’s intangible assets?

THE ART OF MARKETING IS THE ART OF BRAND BUILDING

*

IF YOU ARE NOT A BRAND,YOUR ARE A COMMODITY.

*

THEN PRICE IS EVERYTHINGAND THE LOW-COST PRODUCER

IS THE ONLY WINNER!

There is No Such Thing as a Commodity

• Mobil conducted a study of 2,000 gasoline buyers and identified five segments:

– Road Warriors (always driving)

– True Blues (brand or dealer loyal)

– Generation F3 (liked convenience store aspect)

– Homebodies (fills up at nearest station)

– Price Shoppers (20% of all the buyers)

• Mobil rolled out Friendly Serve: cleaner property, bathrooms, better lighting, well-stocked stores, and friendlier personnel.

• Mobil charged $.02 more and sales increased by 20-25 percent.

A Brand Must be More Than a Name

• A brand must at least be able to trigger a word or set of associations (features and benefits).

• A brand also stands for an anticipated process (McDonald’s, Amazon).

• A great brand has personality attributes and value attributes that trigger emotions (Harley-Davidson).

• A great brand represents a widely understood and credible promise of value backed by an organization able to deliver it. (Sony)

• The ultimate brand builders are your employees and operations, in other words, your performance, not your marketing communications.

Your Company’s Brand

1. What word does your brand own?

2. Write down other words triggered by your brand name?

A. Circle the favorable words; square the unfavorable words.

B. Underline the words that are favorable but not widely known.

C. Double underline the words that are unique to your company.

3. Are any of the following a source for strengthening your brand’s personality?

A. FoundersB. SpokespersonsC. CharactersD. ObjectsE. Stories and mythologies

Two Views of What a Brand Should Be

• “The brand must be an essence, an ideal, an emotion. ” It must be supported by beautiful logos, clever tag lines, creative turns, edgy names, rave launch parties, big ticket giveaway promotions, and publicity buzz-making. (Advertising agency view)

• “The brand should have a target group in mind and be positioned to solve one of their problems better than competitive offerings.” Furthermore the brand’s reputation is ultimately based on product quality, customer satisfaction, employee communications, social responsibility, etc. (Kevin Clancy, CEO of Copernicus)

Branding Components

• Name

• Slogan

• Logo

• Colors

• Stationery and business cards

• Offices

• Trucks

• Dress code

Tools for Building Brands• Advertising (e.g.,Absolut Vodka)

• Sponsorships (e.g., Kodak and Olympics)

• Clubs (e.g. Nestle’s Casa Buitoni Club)

• Company visits (e.g., Cadbury’s theme park, Hallmark’s Museum)

• Trade shows

• Traveling exhibits

• Worldwide web casts of presentations, roundtables, entertainment

• Distribution outlets (e.g., Haagen-Dazs)

• Public facilities (e.g., Nestle Nestops)

• Social causes (e.g., American Express)

• High value for the money (e.g. buzz created by Ikea, etc.)

• User community building (e.g., Harley-Davidson)

• Founder’s personality (e.g., Colonel Saunders)

New Theory of Brand Building• Companies should clarify the corporation’s basic values and build the

corporate brand. Examples: Sony, Harley-Davidson

• Companies should use brand managers to carry out the brand’s tactical work but senior management should shape the brand strategies.

• Companies need to develop a more comprehensive brand-building plan using all customer-facing processes--events, seminars, news, telephone, email, person-to-person—to create positive customer experiences at every touchpoint.

• Companies need to define the brand’s basic essence to be delivered wherever it is sold. Local executions can be varied as long as they deliver the feel of the brand.

• Companies must use the brand value proposition as the key driver of the company’s strategy, operations, services, and product development.

• Companies must measure their brand-building effectiveness by a comprehensive set of measures including customer perceived value, customer satisfaction, customer share of wallet, customer retention, and customer advocacy.

Conclusions• Brand price premiums have fallen and will fall

further because of hyper-competition and e-commerce.

• The two best defenses against lower prices are customer relationship management (CRM) and stronger branding.

• CRM requires a high investment and operating expense but it can pay in certain situations.

• Brand building requires more tools than advertising. Ultimately, brands are built through performance, not advertising.

E-Commerce May Restore Transaction-Oriented Marketing

• Electronic marketplaces have significantly reduced search and transaction costs for finding the lowest price globally.

• The Internet will lead to lower prices!

• E-procurement will help offset the price fall.

• Fight price transparency with value transparency!

CEO’s Views About the Internet

• “Embrace the Net. Bring me a plan 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. The future company will operate with a digital nervous system.” – Bill Gates, Chairman of Microsoft

Which Internet Steps Should be Taken First?

• Developing the company’s website(s)

• Selling online (e-commerce)

• Buying online (e-procurement)

• Recruiting online

• E-learning online

• Developing the company Intranet

• Developing Extranets

• Developing Enterprise Resource Planning (ERP)

• Developing Supply Chain Management (SCM)

• Developing Customer Relationship Management (CRM)

Winning Through Exploiting the Internet• Research a new product on the Internet (panel

research, chat rooms).• Create a site to explain how an existing or new product

works (ex., Tide).• Create a site that consults on a category (Colgate on

dental problems).• Create a site that consults on the customer’s profile

(Elizabeth Arden).• Sponsor a chat room around your product category.• Answer email questions instantly (Nestle baby care

questions).• Send free samples of new products (freesample.com).• Send coupons of new products (coolsavings.com).• Customize your product (Acumin vitamins).• Offer to sell very large orders direct.• Offer valuable information to people who will register

on the site.

E-Commerce: “Kiss the Stores Goodbye?”

• Travel agents (Travelocity.com)

• Brokers (E*trade.com; Schwab.com)

• Banks and insurance companies (First Direct.com, Direct

Line.com)

• Music stores (CDNow; MP3.com)

• Book stores (Amazon.com)

• Toy stores (e*toys)

• Car dealers (Edmunds.com; Autobytel.com)

• Supermarkets (Peapod.com; netgrocer.com; streamline.com;

cybermeals.com)

• Newspapers (cnn.com)

How Digital Is Your Company?

• How much do you sell online?– Dell (80%); Cisco (90%); Schwab (50%)

• How much customer service do you give online?

• How much procurement do you do online?

• How much recruitment do you do online?

• How much learning do your people do online?

New Marketing Rules for the New Economy

• Exploit e-business.

• Build and use a customer database to manage the customer portfolio.

• Focus on customer lifetime value, customer value management, customer share, and customer profitability.

• Shift promotion funds away from broad advertising toward narrowcasting promotion and events.

• Go electronic and paperless.

• Partner with your employees, customers, suppliers, and distributors for co-prosperity.