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Achieving market leadership
© Nathan Mandell

Achieving market leadership
A host of challenges face business leaders today as they strive to create unique value for customers. Winning the battle, say Kellogg School experts, takes a holistic strategy that smashes functional silos and taps diverse resources.

By Matt Golosinski

  Now what?
Advanced Executive Program June 19 - July 15, 2005 Executive Development Program July 10-29, 2005 Program Info
Marketing has been around for at least 5,000 years, with evidence of the profession dating back to the Babylonians. Archeologists have discovered the equivalent of ancient billboards in Rome advertising rental property, and in Pompeii, a display hawking a good place to drink in the suburbs.

The first advertisement in English appeared in 1472: a handbill announcing a prayer book for sale. Two centuries later, the first newspaper ad arrived. Since then, with the expansion of business in the 19th century, and the competitive markets of the digital age, products and services have proliferated, and marketing along with them, until today we find ourselves in a sea of sound and image that tries to convince us to “reach out and touch someone,” “think different,” or “fly the friendly skies.”

Kellogg School faculty say marketing has grown crucial in response to Internet-era competition. Today marketing touches every aspect of an organization. Or it should.

“On one level, everything is marketing,” says Marketing Professor Angela Lee. “You can only talk about functions like finance or organizational behavior when you have some product or service to offer. If I don’t have that, why do I need an accountant?”

Silo busters
No longer a functional “silo” — at least in top organizations such as Starbucks, BMW, Southwest Airlines and the Kellogg School, itself a brand leader in management education — marketing is increasingly the hub through which all organizational functions flow.

Call it “holistic marketing,” as do Kellogg School marketing gurus Philip Kotler and Dean Dipak Jain in their text Marketing Moves: A New Approach to Profits, Growth and Renewal (co-written with Suvit Maesincee). The authors explain how successful firms link marketing to strategy, operations, accounting and other areas to win in the information-based economy.

“Marketing has not kept pace with the technologically sophisticated markets,” says Kotler, the S.C. Johnson & Son Distinguished Professor of International Marketing, who has written more than 20 influential marketing texts over three decades (see Buy the Book). Kotler insists that customers, not products, are scarce today. Holistic marketing argues that firms will only be leaders by embracing a customer-centric model that rethinks corporate strategy, making marketing the lead driver leveraging digital communications to deliver value.

At the heart of this mission, says Jain, is innovation, something at which
Kellogg excels. “Kellogg embraces the culture of change. Leadership, in marketing or any area, requires that you have a clear vision, but with flexibility built into it,” he explains.

Kellogg has remained an academic leader, in part, by breaking down departmental silos to enable faculty to communicate across disciplines, Jain says. This model is one he believes also serves corporate leaders, since marketing is about communications — both outside and inside the firm.

Externally, marketers must connect with customers to cultivate lasting relationships, primarily by solving problems for these customers.

Internally, marketers and their peers have to find common language with which to articulate their collective efforts, or else risk being overtaken by more focused rivals.

Greg Carpenter  
© Nathan Mandell
Marketing Professor Greg Carpenter models a Nike running shoe.

Not just value, unique value
Gregory Carpenter, The James Farley / Booz•Allen Hamilton Professor of Marketing Strategy, contends that marketing plays this internal role by providing “a unifying theme for people’s actions” which can lead to more integration across functions.

“The more integrated you can be, the faster you get to market, the higher the quality of your products, the better the service,” says Carpenter, who cites Starbucks and BMW as two paragons of marketing that understand the importance of educating consumers about their products to create “unique value.”

This accent on ensuring a firm’s internal focus matches up with customer needs comes as the result of decades-long shifts. The “make-and-sell” marketing model prevalent before World War II gave rise to the “sales approach” after the war. Today, even aggressive sales strategies alone prove insufficient. Companies must now “sense-and-respond” to customers’ needs, before customers even articulate those needs.

“We’re used to saying that marketing is about giving consumers what they want,” explains Carpenter. “But as markets become more sophisticated, you find consumers being overwhelmed with choices. One of marketing’s important external roles is educating people to understand and sift through the thousands of choices to come up with something uniquely valuable.”

Kellogg itself serves as a case study, says Carpenter, citing the “tremendous diversity of perspectives” among the school’s faculty, as well as its theoretical rigor dedicated to solving real-world challenges.

Jain says that this eclectic group of scholars produces the cutting edge research and frameworks that differentiates Kellogg from peers through “innovation and excellence.”

Innovation is part of what allows firms to become “market makers,” as Professor Daniel Spulber writes in Market Makers, a strategic management text. He defines a market maker as an organization that is not simply providing better products and prices to consumers, but providing more convenient service to customers and suppliers. Companies must create new products, or devise a better way of bringing them to market.

“Companies can no longer think of themselves as just producers of products or suppliers of specialized services,” says Spulber. These firms must understand their roles as market creators, instead of viewing the market as an external force beyond their control.

So how has marketing ended up in the center of the corporate universe? The answer has something to do with the Enron/Andersen debacle, global competition, and green ketchup.

Hard facts of intangible value
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The collapse of Enron and Arthur Andersen, when viewed superficially, would seem only to serve as a primer on the Seven Deadly Sins. Upon inspection, though, the situation also reveals a struggle with issues of valuation that increasingly underpin the global market. What the crisis in financial reporting shows, says Accounting Professor Mark Finn, is that marketers, accountants and others must work together to create a common framework that communicates an organization’s tangible — and intangible — value.

Today’s firms produce goods and services, such as computer software, whose tangible value is minimal, but whose intangible value — intellectual capital, say — is enormous, and difficult to get down on traditional balance sheets.

“What has happened over the last 30 years is that the market’s valuation of companies has diverged and grown relative to the accountants’ valuation of companies,” says Finn. “This cannot be written off as irrational exuberance. It’s undeniable that the traditional transactions-based accounting model is not capturing all the intangible value locked up in these companies, a lot of which is in the marketing operations, including the brand value.”

Enron was only a recent example of a crisis that Finn says has steadily grown over three decades as bricks and mortar operations have declined in importance. Many firms today, including traditional industrial companies, have come to believe that the traditional accounting models failed to capture the scope of their endeavors, leaving such things as customer service and specialized expertise off the balance sheets. So the firms have rewritten accounting rules to try solving the dilemma. These tools, however, lacked any universal standards.

Some companies outside the United States, such as India’s Infosys, a software company that produces a supplementary balance sheet alongside its traditional one to capture assets such as brand and human capital, have begun addressing the crisis. U.S. firms have yet to touch this approach, which Finn notes is based on appraisals and market values, frameworks more familiar to economies that have experienced bouts with high inflation. “Accountants are afraid of doing this,” Finn says. “It would involve a complete transformation of the American accounting model.”

In fact, Finn sees the Enron situation as having forced a retrenching within accounting that embraces traditional transactions-based models.
“The problem is, the crisis itself originated from a lack of confidence in this very model,” says Finn.

Finn’s recommendation, which he says has lost support in the post-Enron era, is to build a model where firms hire appraisers and marketing specialists to assess the marketing-related intangibles and provide that information in the financial statements.

Otherwise, the future of financial accounting as an industry is in jeopardy, Finn believes.

Beverly Walther  
© Nathan Mandell
Accounting Information & Management Professor Beverly Walther hugs a brand leader.

Speaking the same strategic language
While Finn’s analysis accentuates systemic corrections involving marketing and accounting, the two disciplines interact in other ways. Finn’s colleague, Accounting Professor Beverly Walther, notes that these departments now often come together earlier in the product development stages.

“Companies are revisiting their accounting cost systems to ensure they get an accurate idea of how much it costs to manufacture a product or provide a service,” says Walther. “That’s critical information for marketers.”

She notes that there is no one true product cost for a diversified company, so accounting decisions made when setting up the product costing system must incorporate a myriad of determinations.

“These decisions can dramatically affect the data you get out of the cost system,” Walther explains. “When most people think of marketing, they think of designing some sales promotion. They don’t think that marketing can pervade all the communications taking place between the firm and its constituents.”

Indeed, this is what Kellogg faculty say marketing must do. Stephen Burnett, professor of strategic management and faculty director for the Kellogg Executive Education Program, has worked with executive clients to enhance their marketing efficacy. He has written about his findings in the forthcoming Kellogg on Integrated Marketing.

“Marketers must be wizards at what they do, but they must also possess a strong working understanding of corporate finance, accounting, manufacturing, and information technology,” says Burnett, who will serve as academic director for a new Executive Education program called “Creating the Market-focused Organization” this November. His research has found that the most telling variable in whether a client successfully revamps its marketing department was how the firm viewed marketing’s role. “If it was perceived as a ‘Marketing Department’ problem, then almost nothing changed,” Burnett states. “If marketing was perceived as a total organizational issue, then improvements were significant and sustained.”

In fact, organizational structure and philosophy hugely divide leading firms from bottom feeders, says Ranjay Gulati, the Michael L. Nemmers Distinguished Professor of Technology and E-Commerce, who has studied the impact of what he calls “other focused” operating models in companies’ performance. He discovered that regardless of industry, winning firms built their marketing and organizations strategies around relationships — with customers, suppliers, alliance partners and employees.

“Firms are discovering that capital takes many forms,” says Gulati. “‘Relational capital,’ defined as the value of a firm’s network of relationships, is key in developing a total solution for customers.” Relationship-centric organizations leverage their alliances or vendor network, says Gulati, and top firms find client solutions by “creating offerings with a higher value proposition” than commodity-based transactions on the lowest rung of what he terms the “customer relationship ladder.”

“A solution is not an extension of an existing product line or the mere bundling of services with products,” says Gulati. “It is a fundamentally new approach to creating incremental value.”

  Jim Dana
© Nathan Mandell
Management & Strategy Professor Jim Dana Jr. takes a Southwest Airlines plane for a spin.
Professor James Dana, another Kellogg strategy expert, sees examples of such solutions in his research into demand uncertainty, channel coordination and pricing.

Citing his studies of the airline and hotel industries, Dana says that smart firms in these arenas routinely use marketing and pricing techniques to differentially target the value customers and the lower-value customers. This strategy is especially important given the fixed-capacity of planes and hotels.

“My research challenges the view that airlines are all about trying to squeeze the last dollar out of the business traveler,” says Dana. “I emphasize that airlines are actually saving the business traveler money by filling up all the otherwise unused capacity.”

The trick, he says, is to fill this capacity with low-valuation customers “without creating availability difficulties for those people for whom you built the hotel or airliner in the first place, which is the business-class traveler.”

Strategy and marketing really meet in the sophisticated pricing and programs surrounding travel and hospitality, says Dana. While hotels and airlines are offering lower rates, these come with conditions designed to maintain a desired balance among all customer value strata. Consequently, “there are a lot of hoops the consumer must jump through,” Dana says.

Sunil Chopra and Sharon Novak  
© Nathan Mandell
Managerial Economics & Decision Sciences Professors Sharon Novak and Sunil Chopra stand behind the BMW logo.
What if they had a fire sale and nobody in operations could put it out?
Operations experts are also drawn into a firm’s marketing strategy. Professors Sunil Chopra and Sharon Novak counsel their students to pay attention to details that many dot-coms, in particular, ignored. Elements such as supply chain management are among the most significant considerations.

“You have to look at marketing from the strategic level and ensure that what you are trying to sell is consistent with what the operations function is doing well,” says Chopra, the IBM Distinguished Professor of Operations Management. Chopra cites Dell Computer as one firm doing this. “With Dell, there is a complete match between what their marketing is telling people to do — buy our computer because we offer you customization at a reasonable cost in a reasonable time — and what their operations deliver.”

Not so with some of the start-ups that went belly up, says Novak. She cites Webvan, the online grocer, as one that took a decent idea but failed to explore the operational logistics adequately.

“Webvan certainly had a position to occupy, from the marketing perspective,” says Novak. But its marketers forgot to check in with the operations people before taking on delivery challenges that required coordinating a fleet of trucks. Issues such as time-slots and penalties for missing those slots soon loomed large.

“When you add in all the additional costs assumed in that business model, it wasn’t a money maker,” says Novak.

So how could Webvan and other dot-coms have prevented this disconnect between marketing and operations? For starters, by introducing the two parties to one another early in the design process, a strategy whose importance Chopra says is gaining more recognition, despite logistical hurdles.

“Boeing no longer will begin producing a prototype until it has a running simulation of the factory that will make the product,” says Chopra, adding that even seemingly superficial marketing choices — changing a fabric color — can impact inventories and cost.

Too often, though, the marketing people on the design side are separated in time and location from the manufacturing activity to decide how to outline the processes and how much they will cost. “If you’ve missed that communication,” Novak says, “it makes it incredibly difficult to catch areas of potential conflict early enough to resolve them.”

Related Stories
  Buy the Book
  Interview with Professor Lakshman Krishnamurthi

Step out from behind the one-way glass
If marketing serves a vital internal purpose, it’s equally important in communicating with customers. By figuring out people’s motivations, marketers can best fill consumer demand.

“There are two main approaches to thinking about the economy,” says Angela Lee. One is economics, which looks at the world on an aggregate level, and the other is psychology, which tracks specific variables within certain groups. “Psychology will continue to become relevant for marketers who must get inside the consumer’s mind and then differentiate a product based upon this information,” says Lee.

Peter Tan, president and CEO of McDonald’s (China/Hong Kong), agrees. The networked business world has demanded that marketers “know their customers better than they know themselves,” he says.

The new competitive environment brought about by the Internet has radically shifted how producers reach consumers, says Tan ’83. “Businesses are increasingly forced to shift from a product/supply-driven approach, to one that is customer-led. While it remains important to understand and focus on core competencies, it’s critical to understand the opportunities and threats evolving at a pace not seen in the past.”

Businesses wanting to achieve enduring profitable growth, says Tan, must build brand-loyal customers — customers who aren’t buying a product just because the company is offering a deal, but because of the firm’s reputation.

To build brand-loyal customers, Tan notes that marketers must inhabit the same spaces as their customers to predict behavior even before it emerges.

This is what Marketing Professors Robert Kozinets and John Sherry have done in their ethnographic research, field studies of consumers that draw upon anthropological techniques. Both have studied people’s behavior within “servicescapes” such as NikeTown. Kozinets, who expresses antipathy for traditional focus group research conducted from behind a one-way mirror, insists there’s no substitute for going into the lives of your customers to gain insights.

“The key is to get where consumers are actually consuming things the way they usually do, and to understand them and their behaviors on their own terms,” says Kozinets. “What many marketing managers want is a ‘software solution’ that lets them pretend to know their customer. People are very complex. It takes a pretty wise, intelligent, motivated person to comprehend even one other person. To expect technology to do that is lazy and naïve.”

Carpenter cites several examples of companies adopting ethnographic marketing approaches. The former chairman of Harley-Davidson, for instance, used to spend weekends riding motorcycles with his customers.

“A half-day of a senior executive’s time can be extremely valuable, but so can doing mountains of market research,” Carpenter says. “You can learn a huge amount by spending a couple hours with consumers.”

Angela Lee  
© Nathan Mandell
Marketing Professor Angela Lee poses on a Harley-Davidson, a product whose popularity is the result of savvy marketing.

Disruptive technologies
If ethnography is the hands-on approach to gaining consumer insights, technology still plays a major role.

Jim McNerney is chairman and CEO of 3M Corp., and a member of the
Kellogg Dean’s Advisory Board. He says that 3M employs Voice of the Customer (VOC) methodology to capture key VOC inputs and ideas.

“One of our important customer links is our sales and technical services representatives, whose responsibilities include providing feedback from customers to our R&D teams and our management about our customers’ expectations,” McNerney explains.

But disruptive technology such as video recorders have allowed people to skip commercials, and have reduced the efficacy of Prime Time to reach a mass market, since viewers can tape and watch a show outside its scheduled time.
Michael Mazzeo, professor of management and strategy, insists that marketers must leverage these technologies.

“It’s harder to get a mass audience to watch commercials during “Friends,” but we can have Jennifer Aniston wear a Diet Coke shirt during the episode,” suggests Mazzeo.

Media fragmentation can work in the favor of smart firms. For instance, home improvement shows may not draw high numbers of viewers, Mazzeo notes, but they attract people likely to buy a window manufacturer’s product.

Maybe, adds Mazzeo, these technologies even mean marketers go back and change what they design at the product development stage.

Marketing metaphysics
Mazzeo’s point is one that Lee reminds her students about. A product is not static. It can change over time, and not simply in appearance.

“If you change the price of your product, it may, in the mind of the consumer, become a very different product,” says Lee.

Marketing then seems more like philosophy with its considerations of reality as an interplay between the mind and the world.

And what about that green ketchup? Does it represent a real innovation, or is it a symbol of creative fatigue induced by a hyper-competitive market?

“Even within marketing we are saying we have to do more, because we don’t have that many new products,” says Lee.

Lee is not predicting the end of marketing, but believes marketers must think more deeply about their roles.

“Say I’m selling drills,” Lee says by way of example. “Only I’m not really selling a drill; I’m selling you a hole in the wall. If I take a step back, I have to ask why you need that hole — maybe to hang a picture. But I may be able to sell you pictures, or something to make the wall look nice without a picture. I may sell you a projection system.”

Take one more step back and what marketers are really selling is something extraordinary: Possibility. Living up to this task means marketers, as never before, must be leaders, says Jain.

“Companies must anticipate future or unarticulated needs if they wish to excel,” he explains.

“Leadership demands vision and relentless passion. These qualities have taken Kellogg to the top echelon, and continue to drive our innovation as we live up to our brand promise: to provide holistic education that creates full human beings, as well as corporate leaders.”

©2002 Kellogg School of Management, Northwestern University