Market Inc.
Applying economics to marketing, Philip Kotler and Louis Stern have rewritten the discipline's rules. Their groundbreaking research continues to drive the profession and inspire the next generation of Kellogg faculty to push the field's boundaries

By Matt Golosinski

Before Kellogg School scholars like Philip Kotler and Louis Stern turned their prodigious intellects to the matter, precious little science attached itself to marketing. As the 1960s began, Kotler recalls the dearth of academic resources addressing marketing in anything other than a superficial way.

"All the marketing textbooks were highly descriptive, like 'an effective salesman has five traits ' and 'a wholesaler does the following,'" says Kotler, who would go on to remedy the situation with more than 100 articles and dozens of books, including his landmark 1967 text, Marketing Management, now in its 12th edition. His seminal 1969 article, "Broadening the Concept of Marketing," was published to acclaim in the Journal of Marketing, and engendered a vigorous discourse that significantly advanced the discipline's theoretical underpinnings, and its horizons.

Similarly, Stern's area of interest - marketing channels, or the various strategies and incentives a firm employs to take products to market - lacked much substantial research, leaving this complex and fascinating subject stalled at a rudimentary stage until he began offering his creative scrutiny.

"For years, there was no theoretical base," says Stern, who earned his doctorate in marketing at Northwestern University. The discussion rarely advanced beyond "the benefits of one- versus two-story warehouses, or how many wholesalers could you fit on the head of a pin." Stern would help radically change channels research through a series of scholarly articles and books, including Marketing Channels (in its seventh edition) and "Distribution Channels as Political Economies: A Framework for Comparative Analysis," published in the Journal of Marketing, in 1980 and earning that periodical's best paper award for the year.

The two colleagues have shared a curiosity and passion for pushing academic boundaries by bringing analytic frameworks to bear on marketing questions, ones that had never before been fully articulated.

The accidental guru
Few people define an entire epoch; even fewer begin the task almost by accident.

But it was Kotler's chance encounter with a Northwestern University finance professor that convinced the M.I.T. economics doctorate to turn his mind to marketing.

The professor was Donald Jacobs, the future Kellogg School dean, and the two met in 1960 during an elite one-year program sponsored by the Ford Foundation at Harvard University. The program hoped to encourage more mathematical analysis in business, a field some believed lacked the necessary scientific rigor to address the emerging management challenges.

"Don told me that marketing really needed to be fortified," remembers Kotler. "He said that Northwestern had a good marketing faculty but needed the scientific aspects advanced."

Though he had not taught marketing, Kotler was receptive, in part because of the misgivings he felt about the way economics regarded marketing activity. "Economists were neglecting two of the main drivers of sales," he says. "They focused only on price as the main influence on demand. They neglected the intense amount of advertising, sales promotion and sales force activity that drove demand. They were flattening - reducing to one - the real drivers of demand and output."

In the 1930s, Edward Chamberlain of Harvard and Joan Robinson of Cambridge University had attempted to incorporate these drivers of demand but their work was largely ignored, says Kotler, who joined Kellogg in 1962.

The simplistic price-oriented model of the market troubled Kotler. He perceived a broad dynamic marketplace with several competitors engaged in complicated interactions and customer relationships, not simple "buy-sell" transactions. "I saw a whole value-adding chain of events going from the manufacturer to the wholesalers to the retailers to the customers, including agents and brokers and advertising agencies," he says. And supplying the manufacturer was a whole chain of firms selling their inputs to companies.

"All that drama was flattened out by economists' wish to incorporate only the forces that could be mathematically modeled. When they said, 'Demand and supply determines the price,' my question was, 'What price? Where? At the manufacturer level, wholesale level, retail level?'"

Kotler began answering these questions, drawing upon a theoretical tapestry that included economics, organizational behavior, decision sciences, mathematics and social psychology. The frameworks he advanced built upon "The Four P's," a model that highlighted the importance of the company putting together an integrated set of decisions on product, price, place, and promotion.

"I elected to take a new approach and base marketing on the concept of guiding optimal decision making," Kotler explains, "regarding such questions as how much to spend on advertising, to setting price and discounts, to determining sales force size, territories and compensation, and many other challenges."

The widespread perception of marketers as manipulators only added to the challenge of revamping the discipline.

"It was the age of books like The Hidden Persuaders," remembers the Kellogg professor, referencing the 1957 Vance Packard title. "It still happens today, with people who see marketing as creating unnecessary wants and needs," he adds.

"Nobody ever asked for a Walkman," Kotler says. "But when Sony created it, millions of people wanted to have one. The same for Apple Computer's iPod. The same for a $3 cup of coffee from Starbucks."

The public sees only "the tip of the marketing iceberg," namely commercials and promotions, leading them to believe that marketing and selling are synonymous, "but they don't see the homework" done to identify opportunities, design and test new products and services, set prices, choose distribution and communication channels, and "launch their offerings with some good chance of success," he says.

"Our concept is that when you do great marketing in the 'homework' stage, you don't need hard selling," says Kotler, who, among other distinctions, earned the American Marketing Association's Paul Converse Award for his contributions to the field, the AMA's inaugural Distinguished Marketing Educator Award, and 10 honorary degrees from abroad. Kotler says that marketing's aim is to create high customer value and satisfaction through solving customer problems.

Another revelation, expressed in "Broadening the Concept of Marketing" (co-authored with fellow Kellogg scholar Sidney Levy), shook the profession too. Contending that "everyone markets," this research showed how marketing plays a critical role not only for businesses, but also for nonprofit and government organizations. Kotler would soon build on this insight to launch the field of nonprofit organization marketing and social marketing - marketing ideas, such as "say no to drugs" and "don't litter." Kotler went on to argue that not only are goods, services and ideas marketed, but also places and persons and has written extensively on this.

Broadening marketing charted a new course for the field, though not everyone welcomed the news. "Some wanted to restrict marketing to buy-and-sell transactions, but we won the debate," says Kotler.

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Power player
Of marketing's Four P's, Stern's research has focused most on "place," the way firms deliver their products. What to the layperson may initially seem straightforward is anything but.

As a young student, Stern grew interested in the richness and power dynamics of commercial relationships.

"The genesis of my academic life was really as an undergraduate economics major at Harvard and especially during a course called Industrial Organization," explains Stern, who is also an expert on antitrust and consumer protection issues. The course included discussions about ideas such as John Kenneth Galbraith's countervailing power, a theory of political modification of markets by such entities as trade unions and citizen's groups.

But power struggles were also part of the dynamics between, say, a manufacturer and major supplier.

"These kinds of issues, where there would be power at one end of the chain and power at the other end, were fascinating to me," recalls Stern.

These dynamics also have significant implications for how organizations bring goods to market and perfect their chosen channel.

"For example, do they want to set up their own retail outlets or market through existing retailers?" says Stern. "Will they have their own sales force or use independent manufacturers' representatives, rent a space in a public warehouse or own their own distribution centers?" And once they make these decisions, how do they make the structures they construct work effectively and efficiently? The key questions concern focusing on design and management issues, explains Stern.

Because no business today is likely to go to market using only a single channel, but rather multiple ones, considerable competition can emerge among channels.

"There can be a lot of cross purposes," Stern says. "You have to tailor your channels so they don't blow up on you. You do this by aligning incentives and by making sure the system is adaptive enough."

Stern, who among other honors has been named one of the 12 best teachers in U.S. business schools by BusinessWeek and has earned the AMA's Irwin Distinguished Marketing Educator Award and its Converse Award, has spent much of his career trying to articulate the complexities of channels.

The subject can be remarkably subtle.

"While business folk often look for the 'ready, fire, aim' stuff, we say hold the fort - there are too many interactions going on and you have to look closely at them," says Stern.

To get at this complexity, Stern's research has provided a much-needed unifying framework to an otherwise ad hoc array of analyses. For instance, "Distribution Channels as Political Economies" argued convincingly for the need to "encompass both economic and sociopolitical determinants" of channel member behavior. And texts such as Marketing Channels, co-authored with Kellogg Associate Professor Anne Coughlan, bring a strong theoretic perspective to channel design and implementation.

"I've drawn upon all sorts of literatures to do this," says Stern, "but the main thing has been understanding one of the big primary forces, which comes out of economics: the 'make or buy' decision. Do you do things for yourself, or do you go to an open marketplace and buy the services?"

Answering such questions forces one to examine points of power and conflict - critical issues in the management of distribution.

"To magnify that political economy perspective, I drew upon a lot of social psychology and sociology," says Stern.

A tradition continued
The example and inspiration of Kotler and Stern continues today, providing direction for other Kellogg School marketing peers.

"In a sense, the marketing field might be divided into two periods: BK (Before Kotler, along with Sid Levy) and AK (After Kotler)," says Alice Tybout, the Harold T. Martin Professor of Marketing and chair of the Kellogg Marketing Department. "Phil and Sid shaped the field by defining marketing as a strategic activity, and one that was universally applicable to all situations related to exchange. This was radical."

Tybout also praises Stern, a person she has known for most of her academic life and cites his "dauntingly" high standards for performance and his passionate and disciplined approach to his work. As a doctoral student at Northwestern when Stern arrived in 1973, Tybout recalls being inspired by his rigorous theoretical methodology and has "tried to follow in Lou's footsteps and pursue a similar strategy in my own work."

Coughlan has also been influenced by Stern's contributions, although she is quick to note, "Lou's research has shaped many academics' work in the field, not just mine."

Coughlan says that Stern was instrumental in her decision to join the Kellogg marketing faculty.

"I have learned an enormous amount from Lou over the years," she says. "He has always had a great gift for speaking about channels to audiences of all sorts, from academics to MBA students and practitioners."

This drive to carry forward the mission and possibilities of marketing has most defined the spirit and contribution of Kotler and Stern, two champions of the marketing science they helped to create.