The Business Book

WORKING WITH A VISION 199 Black Monday—October 19, 1987, when stock markets across the world suffered huge losses—was a strategic inflection point that caused massive change in the business environment. and what it is actually doing? understand not just “what” is already running behind on four Actions are driven by the stark happening, but “why.” One method projects.” Why? “Because we are reality of having to win business to achieve this is the “5-why” not allowing enough lead time in the marketplace against the technique, invented in the 1930s when quoting.” The technique can competition; a company’s front-line by the father of Kiichiro Toyoda, be used to interrogate internally personnel are likely to see and adapt the founder of Toyota, and used by and externally caused problems. to a new reality first. They are the Toyota during the 1970s. By asking people best positioned to identify “why?” five times, you can move It is also important to ask the critical issues. from the symptoms to the root cause right questions. Management guru of a problem. For example, the first Peter Drucker claims that “the most This means that leaders in the question might be “why did we serious mistakes are not made as a organization have to be prepared miss the deadline?” to which the result of wrong answers. The truly to listen to people dealing with answer might be “it took longer dangerous thing is asking the customers and suppliers—who to complete the project than we wrong question.” often tend to be at the lower level of thought it would.” Why? “Because a company’s hierarchy—and absorb we underestimated the complexity Which questions to ask what they are saying. It helps to of the task.” Why? “Because we did a Questioning goes beyond looking at have an organizational culture that quick time estimate, without going the competitive environment. Sales encourages this and ensures that through the project requirements bring in revenue, but companies people are not afraid to speak out. in detail.” Why? “Because we were also have to look at costs, because profit lies in the gap between these For the same reasons, it is It is extremely important to be two. Managers must question their just as important for senior able to listen to the people processes, to see where they can management to listen to the kind who bring you bad news. drive efficiencies, reduce costs, and of information being exchanged in Andy Grove so improve their profit margins. corridor conversations, networking functions, and the general office Managers also need to constantly grapevine as it is for them to use question whether there might be competitive analysis and modeling. a better way to do something. For example, perhaps nonessential The “5-why” technique functions could be outsourced. To ensure they understand what is Managers have to be restless, driving or impacting a company’s not complacent, and look for every performance, and what is happening opportunity to increase the profit in the market and the wider world, margin and improve the business. senior executives have to constantly ask questions. They also need to Managers have to use their knowledge and experience to connect all the information they gather, and try to anticipate what the world will look like in five or ten years’ time. What changes might take place in that new world? They then have to position the company to take advantage. This requires thinking through several different scenarios and being able to think “outside the box.” ❯❯

200 AVOIDING COMPLACENCY Victorinox’s business model relied on have to be taken. The development action. British Petroleum (BP), once the sales of its Swiss Pocket Knives, of other products—including owned by the British government, but a strategic inflection point—the watches, travel gear, fragrances, became publicly owned in 1987. prohibition of knives on planes—forced and fashion—that could be sold Its new CEO was John Browne, a it to add luxury products to its range. at airports was accelerated. The nonexecutive director of Intel, who company also began to explore was influenced by Andy Groves’s The impact of the 9/11 terrorist new market opportunities, such as thinking on the importance of attacks on the US in September selling in China, India, and Russia. paranoia. Browne was concerned 2001 was felt across the world; for about something far bigger than some businesses it proved to be Victorinox also took action to rival companies—something that a strategic inflection point. One preserve one of its core strengths— could harm the business of not such company was Victorinox, a skilled and loyal Swiss work force. just BP, but the entire oil industry. manufacturer of the ubiquitous Layoffs were prevented by taking Swiss Pocket Knife. The company crisis measures such as reducing Browne reviewed the available had been producing pen knives shift times, canceling overtime, data on climate change, listened to since 1884, but it was hit by new encouraging planned vacations, experts in the field, and considered airline safety regulations that and temporarily lending workers to the impact on the business of BP. prohibited knives to be carried other Swiss companies. Victorinox He recognized climate change as on board aircraft following the 9/11 not only survived, but thanks to its a slow-manifesting issue, but attacks. This had a drastic effect new products, was able to enhance realized it could impact the oil on Victorinox, because purchases its high-quality brand image. More industry. In 1997 he gave a seminal of its products at airports around than 60 percent of the company’s speech at Stanford University, CA, the world accounted for a significant turnover now comes from items publicly acknowledging climate portion of its annual sales. other than pocket knives. change as a reality and committing BP to do something about it. Corporate sales also tumbled. Averting catastrophe By the beginning of 2002, pocket- To detect the approach of a strategic This was a bold move for an tool sales had fallen 30 percent in inflection point, the CEO of a oil company at a time when rival just a few months. The company company, in conjunction with the companies were trying to ignore recognized that this could board, must analyze all the available the issue. BP pursued a strategy of represent the start of a long decline, hard data, listen to the softer investing in alternative energy, and and that to survive, action would information, and then take decisive it was the first oil company to set targets for reducing its own greenhouse gas emissions. Employees were asked to find ways Real sustainability is about simultaneously being profitable and responding to the reality and the concerns of the world in which you operate. John Browne UK former CEO of BP (1948–)

WORKING WITH A VISION 201 to help meet targets. Browne caused BP’s Helios logo demonstrated its clothes and stores began to look more of a stir when BP launched commitment to finding new types of old-fashioned. Consumers started a new brand identity in 2000. The energy sources. Company responses to to shop elsewhere, but still M&S did bright green Helios logo, named after 10X changes, such as climate change, not change course, despite a sudden the sun god of ancient Greece, was need to be communicated to the market. drop in sales and profits. UK profits accompanied by the slogan: “Beyond continued to tumble from a record Petroleum”. It represented the author Judi Bevan describes a high of $1.6 (£1) billion in 1997 to company’s acknowledgement that it traditional business environment $232 (£146) million four years later, needed to provide more, and smarter, with carpeted executive offices, and the share price dropped by two- types of energy. It also sent a clear waiters with white gloves, and thirds. It was not until the emergency message that the company was not staff rules governing punctuality, appointment of CEO Stuart Rose in complacent; it was prepared to efficiency, and politeness. M&S did 2004 to fend off a takeover that the confront and adapt to difficult issues. not have a marketing department dramatic decline was halted. and its executives believed it did not However, after Browne left need to advertise. Stores did not However, the recovery did not BP in 2007, the new CEO pursued accept credit cards, and payment last: M&S once again risked a different strategy, and the was possible only with cash or complacency with a run of eight alternative energy business was M&S’s own charge card. successive quarters of falling closed down. Any environmental clothing sales to 2013. In response, credibility the company had built When rival retailers appeared the company announced it would was lost when an oil well exploded with a more modern vision and fresh, invest in store revamps, logistics, in the Gulf of Mexico in 2010. contemporary designs, M&S’s and IT, and unveiled plans to turn M&S into an international, Conquering complacency multichannel retailer, connecting In the late 1990s, UK retailer Marks with customers through stores, the & Spencer (M&S) took almost the Internet, and mobile devices. opposite stance to John Browne at BP. Board members largely ignored This is the challenge for all the changing UK and global retail organizations. Businesses must environments, and chose to focus on contend with accelerated change in internal issues. The company was a highly competitive, multichannel, hierarchical and employees were global market, and guard against expected to follow orders. In The complacency—or risk losing out to Rise and Fall of Marks & Spencer, competitors who are able to stay one step ahead. ■ Andy Grove Andrew (“Andy”) Stephen Grove before helping to found the Intel was born in 1936 to a Jewish Corporation in 1968. He became family in Budapest, Hungary, as its president in 1979, CEO in András István Gróf. He hid from 1987, and was Chairman from the Nazis during their occupation 1998 to 2005. He is credited with of Hungary, survived the Siege of the company’s success; during Budapest by the Soviet Red Army, his tenure as CEO, Intel’s stock then fled to the US during the value rose by 2,400 percent, uprising of 1956. Once there, he making it one of the world’s most took the name Andrew Grove, valuable companies. graduated first in his engineering class at college and then studied A dedicated philanthropist, for a PhD in chemical engineering Grove has donated millions of at the University of California, dollars to cancer and neuro- Berkeley. He relocated his parents degenerative disease research. to San Francisco, and worked at He also serves on the board of Fairchild Semiconductor (1963–67), overseers of the International Rescue Committee.

TO EXCEL TAP INTO PEOPLE’S CAPACITY TO LEARN THE LEARNING ORGANIZATION



204 THE LEARNING ORGANIZATION IN CONTEXT W hen a company is Discipline (1990). In this book he devoted to the set out the five disciplines to which FOCUS development and an organization should aspire in The personal approach education of its employees it will order to succeed in the long term: be able to reinvent itself constantly, personal mastery; mental models; KEY DATES adapting to the market due to the shared vision; team learning; and 1920s Charles Allen develops intellectual skills and commitment of systems thinking—the fifth a training program for its employees. If the key to success discipline, which incorporates shipbuilders in the US, which in a rapidly changing marketplace the preceding four. involves personal teaching is adaptability and foresight, then intended to develop loyalty. it makes sense to train and foster The five disciplines talented individuals as a means of The first two disciplines are 1950s Job training becomes marshaling an entire organization. individual. By personal mastery, individualized, replacing the Senge means that individuals teacher with programed This is the essence of what should use their own interest materials that employees work management authority Peter Senge and curiosity to improve their through at their own pace. called “the learning organization,” capabilities. Mental models refers a place “where people continually to ingrained ways of thinking, 1984 Professor Richard expand their capacity to create the which should be challenged so Freeman proposes that results they truly desire, where new that individuals become aware workers are “stakeholders” and expansive patterns of thinking of why they think in a particular and are vital to the survival are nurtured, where collective way, and of the effect this has on of the organization. aspiration is set free, and where behavior. Senge encouraged people are continually learning employees to analyze their own 1990 Peter Senge publishes how to learn together.” To reach subtle mental filters and to be The Fifth Discipline, this ideal a company should adopt a prepared to question and change advocating “the learning collective, community-minded them in order to adapt to the future. organization.” approach so that employees feel part of a worthwhile enterprise The remaining three disciplines that will nurture them, and in are collective. The goal of shared return those employees will show vision involves the members of an commitment to the business. organization deciding together Senge proposed his vision for what they want to create and a corporate utopia in The Fifth agreeing on targets and processes To compete in ...a smart and The work force To excel, tap a constantly adaptable needs to into people’s work force. capacity to changing challenge itself marketplace ...a responsive and the learn. a company needs... and insightful business. approach. The business must learn from its employees and constantly adapt.

working with a vision 205 See also: The value of teams 70–71 ■ Creativity and invention 72–73 ■ Effective leadership 78–79 ■ Organizing teams and talent 80–85 ■ Make the most of your talent 86–87 ■ Organizational culture 104–09 ■ Develop emotional intelligence 110–11 The five disciplines individuals to move in search of defined by Peter Senge a better environment with more enable organizations to opportunity for advancement. It is change and develop estimated that the cost of replacing through both individual an employee is between 10 percent and collective learning. and 175 percent of the departing employee’s salary, depending on Team the field of skill. Data from the learning OECD (Organization for Economic Cooperation and Development) Systems Building showed an increase in skilled labor thinking shared migration around the world starting vision in the early 1990s. Much of this The learning drain was from developing organization countries, and became gain for host countries in North America, Personal Mental Australasia, and Europe. But even mastery models in advanced economies, brain drain was a feature of corporate life. to help them get there. In this way, Employee turnover employees will work toward a goal It is pertinent that Senge’s proposal During the 1990s, the highest because they want to, not because appeared against a backdrop of voluntary staff turnover rates in they are told to. Team learning is corporate brain drain. According to Asia were in Singapore. The the process of employees learning a 2004 paper by Arie C. Glebbeek Singapore hotel industry, for together through discussion and and Erik H. Bax from Groningen example, had an average annual dialogue so that they become more University, the Netherlands, turnover rate of 57.6 percent in effective as a team than they would published in the Academy of 1997, while average annual turnover be individually. Management Journal, when the rates in the retail industry ranged labor market tightened and labor from 74.4 percent to 80.4 percent The fifth discipline is the ability scarcity grew during the 1990s, between 1995 and 1997. One to see the organization as a whole, businesses became concerned with study by Singapore’s Nanyang with its own behavior patterns. the detrimental effects of turnover. Business School in conjunction This capability is crucial in order with the UK’s Cardiff Business ❯❯ for people to recognize potentially Turnover of personnel is one counterproductive behaviors that of the great blights of modern Productivity … comes from have come about simply through corporations and nations alike. challenged, empowered, repetition and have remained A desire for further learning and rewarded teams of people. unchallenged over the years. development motivates talented Jack Welch US former CEO, General Electric (1935–)

206 THE LEARNING ORGANIZATION School concluded that poor success by actively fostering the There is no organizational management practices were the education of all employees in order learning without individual major reason for employee turnover. to innovate and adapt. In this The problem of high turnover in respect, Japan’s Honda Motor learning. lower-paid jobs is still an issue. In Company is often cited in case Chris Argyris, the January 2012 edition of the studies as a perfect example of a Donald Schön Harvard Business Review, Harvard “learning organization.” Business School professor Zeynep department store approached the Ton wrote about companies that In the 1980s, while professor Honda team to ask if it could sell had found a way to invest in their of business studies at Stanford the smaller bikes. The sales team staff while keeping product costs University, Richard Pascale analyzed reported back to head office and low: “Highly successful retail the management style of Japanese advised that instead of launching chains ... not only invest heavily in companies, Honda in particular. He the larger bikes, the Super Cub store employees but also have the concluded that “organizational should be the focus of Honda’s debut lowest prices in their industries, agility” was the reason for Honda’s in the US. Instead of dismissing the solid financial performance, and success. As evidence he cited the underlings, the managers took better customer service than entry of the Japanese company into notice and agreed to go with the their competitors. They have the US market in 1959. advice of the sales team. The result demonstrated that, even in the for Honda was phenomenal success lowest-price segment of retail, bad Honda had been preparing to in the US market. In Peter Senge’s jobs are not a cost-driven necessity launch its larger 250 cc and 350 cc model, Honda is an example of how but a choice. And they have proven motorcycles in Los Angeles, but the “every level of an organization that the key to breaking the trade- advance sales team soon realized should feel included and valued.” off is a combination of investment that the big Japanese bikes were in the work force and operational inadequate for road conditions and Questioning precedents practices that benefit employees, the vast distances traveled in the In essence, Senge’s “learning customers, and the company.” US. The team reluctantly sent the organization” draws on earlier models back to Japan for testing. ideas, including those of Harvard’s Learning by listening Meanwhile, the three Japanese Chris Argyris. In 1977 Argyris Peter Senge’s theory about salespeople had been zipping published his theory of “double corporate learning went beyond around Los Angeles on the 50 cc loop learning,” showing that just minimizing labor turnover. He Super Cub, a best seller at home companies and their employees intended it to be a model by which but considered inappropriate for can assess and modify underlying companies could maximize their the power-hungry American biker. ways of thinking to improve their Nevertheless, US interest in the capacity to learn and perform Super Cub grew and Sears effectively. The following year The Honda Super Cub became enormously successful in the US, thanks to managers who listened to their sales staff and broke away from the standard “macho biker” approach.

WORKING WITH A VISION 207 Organizational learning involves both single-loop on routines: the procedures, learning, where errors are identified and corrected, and conventions, or technologies double-loop learning, in which the assumptions that through which companies operate. underlie specific actions are questioned and improved. These perceived negatives became the focus of scholars such as BELIEFS ACTIVITIES RESULTS Argyris and Senge. Interest in the OR TASKS concept of the learning organization grew in the 1990s, as Single-loop learning business conditions became more Results show what needs uncertain and companies more to be fixed or improved. dependent on technology. Double-loop learning In 1993 management innovation Results also reveal the bigger picture: the expert Mark Dodgson, then senior fellow at the Science Policy Unit of culture of the organization—the values the University of Sussex, UK, linked and assumptions that govern behavior. economic uncertainty and rapid technological change to an Argyris joined forces with MIT in particular emerged to dominate increased need for learning at all professor Donald Schön to write thinking in this area. The first, from levels in a company, citing the view the highly influential book Yale professor Charles Lindblom in of psychologists that learning is the Organizational Learning: A Theory 1959, was that action taken in highest form of adaptation. of Action Perspective, which organizations is based on historical Dodgson, like other scholars, made explored theories such as double- precedent rather than on a distinction between loop learning. anticipating the future. The second “organizational learning”—when was set out by Richard Cyert and organizations learn a lesson from a Going further back, the first James March, who in 1963 particular event—and “the learning scientific studies of learning within published their observation that organization,” which embraces a an organization were conducted in behavior in organizations is based continual process of education and the mid-20th century. Two theories implements strategies to initiate that process. In Senge’s opinion, organizations focused on continued learning will gain a competitive advantage in the marketplace. ■ Peter Senge A world-renowned expert on reflection, and engaging its management and organizational employees. As he said on one learning, Peter Senge was born in occasion, a learning organization Stanford, CA, in 1947 and studied “is continually expanding its aerospace engineering at Stanford capacity to create its future.” University. He went on to obtain an MA in social systems and a In 1999, the Journal of PhD in management at MIT, and Business Strategy named Peter is now a senior lecturer at MIT’s Senge a “Strategist of the Sloan School of Management. He Century”—one of the 24 people is also the founding chair of the who had had the greatest global Society for Organizational influence on business strategy Learning (SoL). in the 20th century. Senge pioneered the concept of Key works “the learning organization”—an organization structured in a way 1990 The Fifth Discipline that is conducive to new ideas, 1999 The Dance of Change

208 THE FUTURE OF BUSINESS IS SELLING LESS OF MORE THE LONG TAIL IN CONTEXT Today, companies are no They can now offer a longer constrained by large number of niche FOCUS physical space or costs of Internet business reaching their market. products to many individual customers. KEY DATES 1838 French mathematician ...by buying Consumers have Antoine Augustin Cournot niche items from increasing choice and produces a graph to represent supply and demand. online sellers. want to express their individuality... 1890 British economist Alfred Marshall introduces the concept The future of business of demand curves in his book is selling less of more. Principles of Economics. T he “Long Tail” theory A primary factor in today’s global 20th century Most companies challenges basic principles economy is the Internet, which is sell a limited number of goods, of economics. In the past, shifting the focus from mainstream with the bulk of sales and successful businesses often sold products and markets—represented profits coming from their high volumes of a limited number by the “head” of the demand top-selling items. of products. Now, according to curve—toward a large number of author Chris Anderson, the future niche or low-volume products and 1990s The introduction of of business is in selling less of more markets, as seen in the “tail” of the Internet proves to be a —low volumes of an increasingly the curve. A conventional demand disruptive technology that large number of products. curve is drawn with price on the changes economic and social traditions. 2004 Chris Anderson coins the term “Long Tail” to describe the concept that a larger proportion of sales is likely to come from the tail, rather than the head, of the demand curve.

WORKING WITH A VISION 209 See also: Beating the odds at start-up 20–21 ■ Gaining an edge 32–39 ■ The weightless start-up 62–63 ■ Thinking outside the box 88–89 ■ Small is beautiful 172–77 ■ M-commerce 276–77 ■ Benefitting from “big data” 316–17 vertical axis, and quantity on the SALES Head The Long Tail is based on a representation of a horizontal axis, and demonstrates demand curve of the future marketplace (sales are that people buy more as the price shown vertically, products horizontally). Author falls. Anderson represents sales on Chris Anderson suggests that overall sales of niche the vertical axis and the number products at the thin “tail” of the curve may be of products on the horizontal axis, greater than more popular products at the “head.” showing that growth in many industries will come from the niche Long Tail end of demand—the Long Tail. Removing barriers PRODUCTS Supply was once constrained by factors such as cost of production, from a publisher to meet individual can tailor products and services by physical space for storage, and cost demand. Combined sales of one-of- language and ethnicity, rather than of distribution. Digital processing, a-kind books may be larger than offering to the mass market. Start- online ordering, and electronic that of bestsellers, and so may equal ups are recognizing the Long Tail distribution have removed many more profit. Similarly, iTunes can benefits and using the region’s of these barriers. Selling smaller offer a longer list of music than any diversity to their advantage. One numbers of a greater range of items physical store, and Netflix can example is Brandtology, an online can result in higher overall sales and stream almost any film into your company that analyzes social media profit than selling common items. living room. When offered almost and online chat, in local languages, limitless choice, consumers exert for clients in Singapore and Hong Books, music, and movies are their preferences and spend money. Kong. Native speakers of languages classic examples of the Long Tail such as Mandarin, Japanese, and theory. A traditional bookstore can Asia is a large and growing Korean offer social-media analysis only stock books that are likely to market, but it is fragmented by to provide localized insights and sell. Amazon, however, can list many different cultures. Individual interpretation of key issues within every book, even though some may countries offer numerous niche a particular culture. ■ never be sold. Less popular titles opportunities for companies that that are not stored in its vast warehouses can be shipped direct Chris Anderson Author and entrepreneur Chris editor. Chris Anderson joined Anderson was born in London Wired magazine in 2001, in 1961 and moved with his family where he was editor-in-chief to the US at five. He studied until 2012. He currently lives physics at George Washington in Berkeley, California, and University, then quantum is the CEO of 3D Robotics, a mechanics and science journalism drone manufacturing company. at the University of California, Berkeley; he later was a Key works researcher at Los Alamos National Laboratory. After 2004 “The Long Tail” (published working on two leading scientific in Wired magazine) journals, Nature and Science, he 2006 The Long Tail: Why the joined The Economist, holding Future of Business is Selling various positions (in London, Less of More Hong Kong, and New York), from 2012 Makers: The New technology editor to US business Industrial Revolution

210 TO BE AN OPTIMIST… HAVE A CONTINGENCY PLAN FOR WHEN ALL HELL BREAKS LOOSE CONTINGENCY PLANNING IN CONTEXT I n business, things rarely go as He who fails to plan planned. Companies have to is planning to fail. FOCUS prepare for sudden changes to Winston Churchill Operational risk markets or the environment to ensure that day-to-day business can UK former Prime Minister (1874–1965) KEY DATES continue “when all hell breaks loose,” 1947–1991 Governments as US professor Randy Pausch put it. In 2011, a devastating earthquake and multinational businesses struck Japan’s east coast, followed develop contingency plans Contingency planning sets a minutes later by a large tsunami. for potential nuclear attack course of action to deal with a crisis, The Japanese government’s during the Cold War. whether this is industrial (such contingency plans for earthquakes— as the financial collapse of a key from earthquake-resistant buildings Late 1990s Countries around supplier), human, natural, or technical to an early-warning system and the world put contingency in nature. It requires identifying rapid-response coordination—saved plans in place for the Y2K possible disasters, assessing countless lives. Many companies, or “millennium bug”—an the likelihood of occurrence, and such as NEC, were able to restore anticipated computer failure developing a course of action to operations within minutes thanks due to the millennial date minimize the impact. Having a to their prepared emergency plans. change (from 1999 to 2000). plan enables a company to manage Even natural disasters as large as the crisis and recover quickly. earthquakes can be managed with 2010 A lack of contingency good contingency planning. ■ planning leads to closure of Identify key tasks northern European air space A contingency plan has to be based for the first time, following the on critical business activities. eruption of a volcano in Iceland. A utility company that relies on Businesses lose revenue due to a call-center team to manage the transportation restrictions. customer inquiries should identify alternative premises in case of 2012 Due to the ongoing flood. A marketing company financial crisis, businesses planning for the same incident may around the world draw up need to allow staff to work remotely. contingency plans for the breakup of the Eurozone. See also: Managing risk 40–41 ■ Learning from failure 164–65 ■ Avoiding complacency 194–201 ■ Scenario planning 211 ■ Coping with chaos 220–21

WORKING WITH A VISION 211 PLANS ARE USELESS, BUT PLANNING IS INDISPENSABLE SCENARIO PLANNING IN CONTEXT I n addition to contingency publicly. However, it never comments planning, which involves on the scenarios it discloses, since FOCUS preparing for sudden disaster, this might guide other companies’ Business planning companies also need to prepare for or governments’ decisions. the many alternative futures they KEY DATES face. This is known as scenario Shell’s scenario planning allowed Early 19th century Prussian planning. It has its roots in military it to minimize the impact of an oil military strategist Carl von planning, and companies start the embargo on Western countries in Clausewitz formulates the process by asking: “what if…?” October 1973. Within weeks, the principles of strategic planning. price of crude oil had soared and What is likely to happen in stock markets tumbled. Although 1940s The US Air Force the next two, five, or ten years? Shell was hit by these events, it had considers opponents’ possible Companies have to consider local, already begun to diversify into other actions in order to prepare national, and international events, energy sources, allowing it to recover alternative strategies. and must try to identify underlying more quickly than competitors. ■ trends. They have to determine the 1950s US futurist and military probability of future scenarios, strategist Herman Kahn how they might be affected, and encourages governments how they can prepare to mitigate and individuals to “think the the effects, or even to reap the unthinkable” by imagining benefits. Scenario planning does possible future scenarios. not remove uncertainty, but it can help a company adapt to change. 1967 French philosopher Bertrand de Jouvenel coins Prepared for change During the OPEC oil embargo of the term futurible to mean Oil company Royal Dutch Shell has 1973, Shell’s scenario planning meant “a fan of possible futures.” used scenario planning for nearly it had already decided what it would half a century. Its early work was do in the case of price hikes, allowing 21st century Companies based on intuition, but it has now its executives to act fast and effectively. and governments use scenario developed sophisticated techniques planning for wide-ranging to create scenarios, which it shares issues including food, water, and energy supply, and See also: Managing risk 40–41 ■ Learning from failure 164–65 ■ Avoiding population growth. complacency 194–201 ■ Contingency planning 210 ■ Coping with chaos 220–21

212 IN CONTEXT THE STRONGEST FOCUS COMPETITIVE FORCES Competitive strategy DETERMINE THE PROFITABILITY KEY DATES OF AN INDUSTRY 1921 US economist and statistician Harold Hotelling PORTER’S FIVE FORCES says that as long as there are profits to be had in a market, more and more vendors will arrive to serve it, until it reaches saturation point. 1979 Michael Porter’s “How Competitive Forces Shape Strategy” is published in Harvard Business Review. 2005 W. Chan Kim and Renée Mauborgne publish Blue Ocean Strategy, suggesting that companies should aim for uncontested markets rather than compete with each other in existing markets. 2008 Michael Porter writes The Five Competitive Forces That Shape Strategy. I n order to survive, companies have to understand and respond to competition. So it is natural to look at immediate competitors and established rivals to develop a strategy. However, this can restrict thinking, define competition too narrowly, and ignore other strategic forces. In the 1970s, economist and strategist Michael Porter changed people’s thinking on strategy. Porter’s 1979 article “How Competitive Forces Shape Strategy” showed that awareness of wider competitive forces—those beyond the obvious competing companies— can help an organization understand the structure of its

WORKING WITH A VISION 213 See also: Study the competition 24–27 ■ Gaining an edge 32–39 ■ Leading the market 166–69 ■ Porter’s generic strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17 The profitability of an industry is shaped by five competitive forces... ...the bargaining ...the bargaining ...rivalry among ...the threat of ...the threat of power power existing new entrants. substitute products or of suppliers. of buyers. competitors. services. The strongest competitive force—which varies according to the industry—determines the overall profitability of the industry. industry and develop a position and unionized labor forces—take the market share is tough to win and so that is more profitable and less lion’s share of profits. New players profits are harder to make. Intense vulnerable to attack. According enter the industry on a regular competitor rivalry occurs when to Porter, there are five competitive basis. Substitutes are available there are many competitors, growth forces that collectively define an in other forms of transportation, in the industry is slow, products are industry’s structure, shape the such as trains, buses, and cars. not differentiated and can be easily nature of competitive interaction substituted, competitors are of within an industry, and ultimately Where the forces are much equal size, customer loyalty is low, determine profitability. Now weaker—for example in the and it is difficult and costly to exit referred to as Porter’s Five Forces, software, soft drinks, and toiletries the industry. this model places existing industries—companies can make competitors at the center, a bigger profit. In all industries, The hotel business is just such surrounded by four other forces: profit can be affected by weather an industry. In a city such as New customers, suppliers, potential or cyclical change in the short term, York, there are many hotels. Guest entrants, and substitute products. but in the medium and long term, numbers are relatively static, so ❯❯ it is the structure of the industry Using Porter’s model that drives competition and The first one gets Porter used commercial aviation profitability. Porter is adamant that the oyster, the second as an example to explain the model other factors—such as the type of in action, because the strength product or service, the maturity of gets the shell. of all five forces makes the airline the market, regulation, or level of Andrew Carnegie business one of the least profitable technical complexity—are not industries of all. At the center are defining factors for profitability. US industrialist (1835–1919) established rivals (such as Qatar Airways, Virgin, and Qantas), The force of “rivalry” who all compete intensely on price. Of the five forces, rivalry among Customers can search easily for the existing competitors is the major best deal. Suppliers—in this case determinant of competitiveness aircraft and engine manufacturers and profitability within an industry. In a very competitive industry,

214 PORTER’S FIVE FORCES Industry structure, product accessibility. For example, substitute raw materials or as manifested in the strength soft-drink manufacturers have suppliers. Their power is increased of the five competitive forces, achieved this by introducing if they are large and can threaten branded vending machines, so to step in and produce themselves. determines the industry’s competitors are unable to offer their long-run profit potential. products at that particular place. Oil is an example of a scarce resource that is controlled by a few Michael Porter Buyer power countries. OPEC (Organization of Buyers can demand lower prices the Petroleum Exporting Countries) similar growth is slow; within a or higher product quality from represented the political power of specific star-rating the hotels are all producers when their bargaining oil-exporting countries in 1973 when fairly similar, as are the sizes of the power is strong. Both scenarios it placed an oil embargo on the US. big hotel chains. Customers can result in lower profits for producers, OPEC’s action disrupted supply and choose to go to any hotel, and have because lower prices mean lower forced up the price of oil four-fold. good access to prices. Exit from revenues, and higher-quality the industry is difficult because products usually incur higher New entrants of the upfront investment. Many production costs. Buyers exert If an industry is profitable and there large hotel groups have introduced strong bargaining power when are few barriers to entry, Porter says loyalty programs as part of their there are few of them; they buy that competition will increase and strategy to differentiate their brand. in large quantities; they are price profits will fall. Typically, existing sensitive; they control distribution organizations try to create ways to Substitutes to the final customer; there are deter new entrants. The threat of The most significant of the five forces many subsititutes; and switching to new entrants is high when the cost is not always the most obvious one. another supplier can be done at low of entering the market is low; there For example, even though rivalry is cost. Buyers may also be able to is little government regulation; often fierce in commodity industries, produce the product themselves— customer loyalty is low; existing that may not be the factor that so may use this as a threat. businesses can do little to retaliate; ultimately limits profitability. and economies of scale can be The “threat of substitutes” force Buyers for big supermarkets have easily achieved. Risk is increased is surprisingly important here— huge bargaining power in the food if existing companies have not buyers in these markets can easily and drink industry. Fresh milk is established brand reputation and find substitute raw materials or often at the heart of supermarket do not possess patents, and when products that have attractive prices price wars, because the big chains or are higher quality. What’s more, have significant buying power over Buyer power is high in the food and buyers can switch from one product suppliers. UK farmers have claimed beverage industry because consumers or service to another with little that they are so pressured to reduce can easily find a substitute that may be cost. For example, it costs relatively prices that they often make a loss cheaper or differentiated, such as by little for a consumer to switch from on each bottle of milk produced. offering increased nutritional benefits. tea to coffee, unlike switching from traveling by bicycle to car. Supplier power When the bargaining power of In some industries, companies suppliers is strong, it allows them try to limit the threat of potential to sell higher priced or lower quality substitutes by ensuring wider raw materials. This directly affects the profits of the company that is buying, because it has to pay more for its raw materials. Suppliers have strong bargaining power when there are few of them (but many buyers); they hold scarce resources; the cost of switching raw materials is high; and when there are few

WORKING WITH A VISION 215 Michael Porter The hotel industry is characterized operators. Personal pride in their Born in 1947 in Michigan, by intense competitor rivalry. Some own trucks and the fact that they Michael E. Porter was the hotel chains have introduced loyalty were economically dependent on son of a US Army officer, schemes to try to increase customer their vehicles made them less and lived in different places preference and encourage return visits. price-sensitive as purchasers. around the world as a child. Paccar therefore decided to invest Porter served in the US Army products are nearly identical. An in developing an array of features Reserve following graduation. example of a market with a low with owner-operators in mind, such He received a BSE with high threat of new entrants is the software as luxurious sleeper cabins, leather honors in aerospace and market for personal computers. seats, noise-insulated cabins, and mechanical engineering from Microsoft came to dominate the sleek exterior styling. They offered Princeton University, in 1969, market with its Windows 95 thousands of options for owners to an MBA in 1971 from Harvard operating system. New entrants put their personal signature on their Business School, and a PhD found it hard to break in because trucks, by simply inputting them on in business economics from programs such as Excel, PowerPoint, computers at network dealers. They Harvard University in 1973. and Word are universally used. also offered roadside assistance The author of 18 books and and fuel-efficient, aerodynamic more than 125 articles in the Choosing a position designs. As a result, Paccar has fields of competitiveness and Porter used the US heavy-truck been profitable for more than 68 management, Porter’s manufacturer Paccar to illustrate years in succession, and delivers academic studies encompass the principles of choosing how to better-than-average returns. competitiveness in national, position a company within a given regional, social, and health- industry structure. In a crowded No matter how different care arenas. He has served market, Paccar wanted to find a industries appear on the surface, as an advisor to governments, space where competitive forces Porter’s model offers any company corporations, nonprofit were weak, and where it could avoid a way of assessing profitability organizations, and academics buyer power and price-based rivalry. through analyzing five easily across the globe. calculated, competitive forces. In In the heavy-truck industry, revealing an industry’s underlying Key works where large fleet buyers dominate, structure, Porter’s model simplifies it is hard to create a niche based a mass of information, providing 1980 Competitive Strategy on differentiation. Paccar, based in managers with a clear process for 1985 Competitive Advantage Washington state, chose to focus making sense of industry data and 1990 The Competitive on one group of customers: owner- using it to form effective strategy. ■ Advantage of Nations Defending against the competitive forces and shaping them in a company’s favor are crucial to strategy. Michael Porter

216 IF YOU DON’T HAVE A COMPETITIVE ADVANTAGE, DON’T COMPETE THE VALUE CHAIN IN CONTEXT The interconnected activities through which a company delivers products or services can be viewed as a “value chain.” FOCUS Competitive Advantage The chain consists of primary and secondary value activities. KEY DATES 1933 US economist Edward Primary value Secondary value Chamberlin introduces the activities include inbound activities include concept of product procurement, HR, differentiation in Theory of logistics, manufacturing, Monopolistic Competition. outbound logistics, technology, and marketing and sales, infrastructure. 1970s The idea of competitive advantage takes hold as and after-sales service. Japanese companies begin to outsell US and European Through analysis of its value chain, a company can identify where rivals. This is later attributed to achieve cost or differentiation advantage on its products. to superior management. T he goal of every company celebrated business guru, advised: 1979 US marketing consultants is to create and sustain a “If you don’t have a competitive Al Ries and Jack Trout write competitive advantage so advantage, don’t compete.” Positioning: the Battle for Your that it can sell more products and Mind, outlining how companies generate higher profits than its US professor Michael Porter’s should build a strategy around rivals. As Jack Welch, CEO of US “generic strategies” consist of two their competitors’ weaknesses. multinational General Electric and types of competitive advantage: cost advantage and differentiation 1985 Michael Porter introduces his theories of competitive advantage and the value chain in Competitive Advantage: Creating and Sustaining Superior Performance.

WORKING WITH A VISION 217 See also: Leading the market 166–69 ■ Porter’s generic strategies 178–83 ■ Red, yellow, or purple? Good and bad strategy 184–85 ■ Porter’s five forces 212–15 Fashion retailer Benetton, advantage. Porter identified a set When you’ve got only launched by the Benetton of activities that businesses can use single-digit market share— family in Italy in the 1960s, to better understand how to achieve and you’re competing with pursues a differentiation these forms of differentiation. These strategy with its bold brand interrelated activities—dubbed the the big boys—you either image. To achieve this, the “value chain” by Porter—describe differentiate or die. company has focused on every the flow of a product from its initial Michael Dell aspect of its value chain, from supply to the final customer. supply to satisfying the latest A company can add value to the US founder of Dell Computers (1965–) consumer fashions. To ensure product at each stage of the chain, Benetton garments are through product-related activities— as “overheads,” secondary value up-to-the-minute, the company its inbound logistics (supply of parts can be generated, for example, manufactures many of its or materials), manufacturing, and through better use of technology. clothes in gray, then dyes after-sales service—and market- them to meet the demand for related activities: outbound In addition to their horizontal whatever colors are in fashion. logistics (the delivery of products activities, companies operate in a Although this is costly in to the end user), and marketing “value system” of vertical activities, production, it minimizes stock, and selling the product. such as a manufacturer who buys reduces wastage, and enables parts from suppliers and outsources the company to respond Gaining the advantage its distribution. Competitive quickly to changing consumer To achieve competitive advantage, advantage relies not only on the tastes. Benetton stores are run a company cannot focus on one company’s value chain, but on the by agents, and garments are activity alone, but needs to value system of which it is a part. shipped directly to the stores consider each of the activities in and immediately placed on the the chain. For example, Mercedes- Reinventing value shelves. This creates a strong Benz pursues a differentiation Porter’s theories on competitive value system, keeps costs strategy, first through producing a advantage were highly influential, lower, and allows each part of high-end product, but also through and have been built upon by other the chain to absorb fluctuations providing outstanding after-sales business theorists. Management in demand. Benetton has more service. Analyzing the value chain scholars Richard Norman and Rafael than 6,500 stores in more than can also help companies to identify Ramirez argued in 1993 that the 120 countries, and its turnover what areas of their business might market complexity of the 1990s exceeds $3.2 (€2) billion a year. be suitable for outsourcing, which required companies to “reinvent” can help the company to achieve the notion of value beyond the linear Benetton’s value chain boosts a cost advantage. thinking of the “chain.” In 1995, its differentiation advantage. US executives Jeffrey Rayport and Clothes can be dyed in fashionable Primary value-chain activities in John Sviokla drew parallels with colors to match customer taste. a company are supported by a series the emerging world of the Internet, of secondary activities, which can suggesting that value could be also be used to achieve competitive added to online activities and advantage. These activities vary products in a “virtual” value chain. ■ by industry, but typically include: purchasing (procurement); human resource (HR) management; technology development, including research and development (R&D); and infrastructure functions, such as finance and legal. Although support activities may be viewed

218 IF YOU DON’T KNOW WHERE YOU ARE, A MAP WON’T HELP THE CAPABILITY MATURITY MODEL IN CONTEXT In level 1 of the Capability B usiness processes are a Maturity Model, initial series of actions taken to FOCUS processes are ad hoc achieve an outcome. The Business processes and poorly controlled. objective might be to produce a product, to pay an invoice, or to KEY DATES In level 2, processes start serve a customer, for example. Adam 1899 US engineer and to be applied to projects Smith was one of the first people management consultant Henry to describe business processes, Gantt develops the Gantt chart and are repeatable. when he dissected the many to illustrate a project schedule. manufacturing processes used in In level 3, processes become an 18th-century pin factory. From 1970s Data-flow diagrams are defined and can be describing the different actions, he developed to allow structured developed the idea of division of analysis of how data moves proactively implemented. labor, where work can be divided from one process to another. into a set of simple tasks performed In level 4, processes are by specialized workers, in sequence. 1979 Philip B. Crosby develops measurable and can be a quality-management Continuous improvement maturity grid in his book managed. The sequence of steps in a process Quality is Free. can often be visualized as a flow By the time level 5 is reached, chart. As Watts Humphrey, inventor 1988 The Capability Maturity processes can be optimized of the capability maturity model Model (CMM) is described by through careful monitoring. (CMM), pointed out, it is always Watts S. Humphrey in an “good to know where you are” in article published in the journal the process. Humphrey developed IEEE Software. the idea that continuous process improvement is based on many 2003 In Business Process small evolutionary steps, rather than Management is a Team Sport, large, revolutionary innovations. Andrew Spanyi claims that His CMM provides a framework for strategy should drive business organizing these evolutionary steps process design, which, in into five levels of development, turn, should drive each of which prepares the way for organizational design. the next. The CMM was developed

WORKING WITH A VISION 219 See also: Keep evolving business practice 48–51 ■ Reinventing and adapting 52–57 ■ Simplify processes 296–99 ■ Kaizen 302–09 ■ Critical path analysis 328–29 ■ Benchmarking 330–31 Adam Smith observed workers making The CMM describes five levels of The strength of CMM is its effective pins in a pin factory and realized that increasing maturity through which measurement of the standardization if the process were split into separate, an organization or team manages of an organization’s processes. This specialized steps, productivity would its processes: in the first level, work is why the model moved from being increase by 240 to 4,800 times. is conducted in a chaotic and ill- used to assess software development, defined way; in the second level, to applications in project with funding from the US Air processes are put in place and management, risk management, Force, and was used as a model for adhered to with some discipline, personnel management, and systems the military to evaluate software and previous successes can be engineering. It provides a starting subcontractors. The model’s repeated; in the third level, processes point for managers looking to improve original goal was to improve are defined, standardized, and can a company’s processes and a software-development processes, be proactively implemented; in the framework for prioritizing actions. but it is now applied as a general fourth level, they are managed and It also offers a way of defining what model of the maturity of processes. monitored; and in the fifth level, “improvement” might really mean. ■ It is often used in evaluating they undergo regular improvement IT service management, for through monitoring and feedback. The whole idea was example, or more widely across to motivate people to think organizational systems. Comparing industries about how they’re working, The CMM can be used to compare different organizations in similar and how to improve it. industries. For example, two Watts S. Humphrey companies could be compared on the basis of their software- development processes. Increasingly, IT projects, which involve complex software development and new system implementation, can impact a company’s operation and profitability, as they affect all of the company’s departments. Watts S. Humphrey Business. After graduating, companies Adobe, Intuit, and he joined the Software Oracle. Humphrey was awarded Software engineer Watts S. Engineering Institute (SEI) at a National Medal of Technology Humphrey, known as the Carnegie Mellon University, in 2003 for his work in software “father of software quality,” Pennsylvania, where he founded engineering. With his wife, was born in 1927 in Michigan, the Software Process Program, Barbara, he had seven children, US. He credited his father with which focused on understanding and died at his home in Florida his approach to problem solving. and managing the software on October 28, 2010, at 83. After high school, where he engineering process. This work struggled with dyslexia, he resulted in the development of the Key works joined the US Navy to serve Capability Maturity Model (CMM), during World War II.  for which he is best known, and 1995 A Discipline for Software inspired the subsequent Engineering Humphrey then studied development of the Personal 1999 Introduction to the Team for a BSc and MSc in physics Software Process (PSP) and the Software Process before completing an MBA in Team Software Process (TSP), 2005 PSP, A Self-Improvement manufacturing at the University which was later adopted by IT Process for Software Engineers of Chicago Graduate School of

220 CHAOS BRINGS UNEASINESS, BUT IT ALSO ALLOWS FOR CREATIVITY AND GROWTH COPING WITH CHAOS IN CONTEXT T he top-down, hierarchical chaos, chaos can be managed and organization of businesses even embraced. US politician Tom FOCUS dates back to the industrial Barrett acknowedged the value Change and uncertainty revolution, when management was of working in an unstable world, all about control. Today’s companies noting that “chaos brings KEY DATES need a radically different approach. uneasiness, but it also allows for 1992 M. Mitchell Waldrop creativity and growth.”  writes Complexity, which The first decade of the 21st explains the theory of the century saw many disruptive events Managing chaos science of complex systems. across the world. These, combined Scientific chaos theory, which with accelerated technological investigates the patterns in complex 1997 Researcher Shona Brown developments, the rise of developing systems such as the weather, says that the edge of chaos nations, and a changing world can be related to organizations. has a structure that allows order, make living with uncertainty Effective leadership, clear vision, companies to be malleable a reality for business today. This open communication, and strong enough to change but not means that companies now need values are necessary to deal with fall apart. a flatter structure, incorporating such complexity. Leaders need to flexibility instead of direct control. set clear boundaries, then allow 1999 In Surfing the Edge of Rather than being overwhelmed by individuals and teams enough space Chaos, Richard Pascale, Mark to self-organize, self-regulate, and Millemann, and Linda Gioja say Chaos theory proposes that complex make their own decisions. Creativity a too-rigid management system systems are highly sensitive to initial and growth are enabled because can have nothing original or conditions. A butterfly’s flapping wings employees have a higher level of innovative emerge from it. in Japan might start a chain of reactions responsibility and accountability that leads to a hurricane in the US. for their work, as well as a bigger 2000 The dot-com bubble investment in the outcome. bursts, causing turmoil in financial markets. A company also has to revisit its strategy continually, with the September 2001 The 9/11 focus on delivering increased value terror attacks in the US have to the customer, to ensure that it far-reaching financial and remains relevant in the changing business impacts around external environment. A more the world. flexible company helps to ensure that staff is involved and can adapt

WORKING WITH A VISION 221 See also: Managing risk 40–41 ■ Reinventing and adapting 52–57 ■ Creativity Thriving on chaos and invention 72–73 ■ Avoiding complacency 194–201 Thriving on Chaos, written Economic, social, and New technology adds by US business expert Tom political events uncertainty. Peters, was published on create chaos. “Black Monday” (October 19, 1987), when stock markets Rigid control no longer works—businesses need to be flexible. around the world crashed. His timing could not have If employees are given more information and involvement, been better. In the book Peters they become more creative, helping the company to be laid out a future of change, stating that everything known flexible and change. “for sure” about management would be challenged—and Chaos brings uneasiness, but it also allows that 100-year-old traditions for creativity and growth. of mass production and mass markets would be threatened. swiftly to change. Such companies retail bank in the UK. The new His forecast was correct. What collaborate more readily with company had to create one new had been a fairly predictable external partners, rather than merely identity, one new way of doing things, business environment transacting with them, to encourage and streamline its IT systems and disappeared; organizations adaptability and shared learning. differing organizational cultures. It and managers had to embrace also needed ways of communicating change, or face collapse. Creativity from chaos positively to customers. A potential source of chaos is Peters correctly predicted internal change and reorganization But the biggest challenge of that the business winners of a company. Involving and all was common to many situations of the future would deal engaging the employees is the of business chaos—motivating proactively with chaos, answer to managing this. In the employees who were harassed by seeing it as a source of market most complex financial services customers and worried about their advantage. Successful integration ever to occur in Europe, own jobs. Through constant companies would be those Halifax Bank of Scotland (HBOS) communication (including daily who could create and add was acquired by Lloyds TSB team briefings on internal changes), quality and value continually following the financial crisis of 2008. workshops on team problem solving to their products and services External chaos (unprecedented and vision building, and measures in response to the ever- economic turbulence) was mirrored for gathering ideas from staff and shifting desires of their by internal chaos—6,000 branches customers, the combined companies customers. He described and 30 million customers had to be showed that chaos can not only be this as “a revolution.” brought together to form the biggest managed, but may be a rich source of growth for a business in flux. ■ There is no sense in pining for the past—the stability we took for granted for so long will never return. Tom Peters

222 ALWAYS DO WHAT IS RIGHT. IT WILL GRATIFY HALF OF MANKIND AND ASTONISH THE OTHER MORALITY IN BUSINESS IN CONTEXT T he US author Mark Twain temptations. In the 1980s, for said we should “always do example, the price of Guinness FOCUS what is right,” but this has shares was inflated to assist the Business ethics not always been the case in company’s takeover bid for Distillers, business. High-profile scandals a leading Scotch whisky company. BEFORE such as Enron and Lehman Brothers 1265 Italian philosopher and in the 2000s have led to a collapse Businesses worldwide are under theologian Thomas Aquinas of public trust in companies. greater scrutiny to be ethical in states: “no man should sell their practices. In 2011–13 several a thing to another man for Individuals are often tempted to multinational companies came more than it is worth.” use immoral means to further their under fire for shifting profits between aims. J. D. Rockefeller controlled the countries, thereby avoiding large tax 1807 The UK and US outlaw US oil industry in the 19th century liabilities. Though not illegal, many the Atlantic slave trade. because of underhanded methods regard it as immoral, and consumer to put competitors out of business. perception can affect profit. ■ 1948 The United Nations Today, some corporate companies (UN) adopts the Universal are, in essence, a collection of In 2013, several oil companies came Declaration of Human Rights. individuals who want their company under investigation by the EU antitrust to get ahead of the competition, but authority for preventing other companies 1970 US economist Milton are also alert to opportunities for from entering the price assessment Friedman claims: “the social personal gain. They may even go process, thereby distorting oil prices. responsibility of business as far as illegal phone hacking or is to increase its profits.” price collusion. For example, in 2013 Dow Chemicals was ordered to pay 1970s The term “business $1.2 billion for price-fixing. ethics” comes into common use in the US. Executives may be tempted to break the law because of pressure 2011 The UN Human Rights from shareholders for results or for Council endorses Guiding performance-related bonuses. Gains Principles for Business and from share prices and the value of Human Rights, which sets the business overall pose additional global standards for human rights and business activity. See also: Play by the rules 120–23 ■ Profit before perks 124–25 ■ Collusion 223 ■ Creating an ethical culture 224–27

WORKING WITH A VISION 223 THERE IS NO SUCH THING AS A MINOR LAPSE IN INTEGRITY COLLUSION IN CONTEXT I n a market economy, We have always known that companies are in commercial heedless self-interest was bad FOCUS competition with one another. Ethics of competition It is illegal for them to “collude” morals; we now know that to fix prices or make secret trade it is bad economics. KEY DATES agreements. However, collusion and 11th century Legislation in collaboration are close relatives, and Franklin D. Roosevelt England outlaws monopolies sometimes companies argue that and restrictive practices. the way in which they “work US former President (1882–45) together” does not constitute 13th century King collusion. Rival companies have businesses in the US, Korea, and Wenceslaus II of Bohemia been known to “collaborate” in Japan secretly colluded to raise passes a law to prohibit order to gain advantage over other the price of lysine (an ingredient in iron-ore traders from working competitors, or to increase profit. animal feed) above its average price together to increase prices. They might do this by sharing in the international market. Within restricted information, limiting nine months the illegal cartel had 1790s After the French the supply of goods to influence the raised prices by 70 percent. Gains Revolution, agreements by price, or fixing prices. Two airlines for the companies and individuals members of the same trade hit the media in 2007 when they would have been significant if they to fix prices are declared were accused of price-fixing. Staff had not been caught. Several void, unconstitutional, and at British Airways had tipped off executives went to prison and US “hostile to liberty.” staff at competitor Virgin Atlantic company, Archer Daniels paid the over fuel surcharges. British largest antitrust fine in US history. ■ 1890s The Sherman Act in Airways admitted to collusion, and the US makes it illegal for large was fined $195.5 (£121.5) million. companies to cooperate with rivals to fix their outputs, Accountability prices, or market shares. Individuals in large organizations sometimes consider themselves 2000s The Treaty of Lisbon infallible. In the mid-1990s, five prohibits anticompetitive agreements, including price- See also: Play by the rules 120–23 ■ Profit before perks 124–25 ■ Morality in fixing, in the European Union. business 222 ■ Creating an ethical culture 224–27

224 IN CONTEXT MAKE IT EASIER FOCUS TO DO THE RIGHT Business ethics THING AND MUCH HARDER TO DO KEY DATES THE WRONG THING 44 BCE Roman lawyer Marcus Tullius Cicero writes De CREATING AN ETHICAL CULTURE Officiis, discussing ideals of public behavior. 1200s Italian philosopher and theologian Thomas Aquinas argues that price has a strong moral aspect. Early 1900s US president Theodore Roosevelt declares that businesses should “act for the interests of the community as a whole.” 1987 “Ethical Managers Make Their Own Rules,” a Harvard Business Review article by Adrian Cadbury, highlights the conflict between ethical and commercial considerations, and the increasingly close scrutiny of corporate decisions. T he fundamental assertion of business is that it exists to make a profit. However, the way that companies make a profit has come under intense scrutiny, particularly in the global economy. The first recorded reference to moral principles was Cicero’s De Officiis, written in 44 BCE, which stated that “right is based, not upon men’s opinions, but upon Nature.” In the 13th century, the philosopher and theologian Thomas Aquinas defined the principle of natural law, saying that as a reflection of God’s rational plan, our idea of what is naturally right is also rational: an action is ethical if it is judged to be rational, or reasonable. This is still

WORKING WITH A VISION 225 See also: Leading well 68–69 ■ Effective leadership 78–79 ■ Organizational culture 104–09 ■ Avoid groupthink 114 ■ Profit before perks 124–25 ■ Morality in business 222 ■ The appeal of ethics 268 The company’s The company The company The company The company leader recruits new orients new publishes and recognizes people to its communicates and rewards demonstrates people for ethical behavior. ethical their values ethical its code of culture. conduct. behavior. as well as their skills. A company must be proactive across its entire operation in order to make it easier to do the right thing and harder to do the wrong thing. the basis for ethical conduct today. very important. The Institute for Stephen Covey Aquinas also asserted the first Ethical Leadership, based in principles for the marketplace, Canada, defines an ethical business Born in Salt Lake City, Utah, in pointing out that the price set as “a community of people working 1932, Dr. Stephen Covey was for a product is a moral issue. together in an environment of an internationally respected mutual respect, where they grow leadership authority, teacher, A more moral world personally, feel fulfilled, contribute to organizational consultant, and The notion of what is acceptable a common good, and share in the author. He grew up on a farm in the business world today has personal, emotional, and financial in Utah and was bound for an changed radically from earlier rewards of a job well done.” There is athletic career, but in his late centuries. Slave labor was a shared understanding that success teens he was struck by a the norm for cotton and sugar depends on a myriad of relationships degenerative disease that led plantations in the US until —both internal and external—not all him to require crutches while the mid-19th century. At the of which are under the organization’s walking for several years. He same time, workers (including control, but which it can influence studied business administration children) were exploited during through the ethical way it operates. at the University of Utah, then the industrial revolution in Europe, spent two years as a Mormon being forced to work long hours, An ethical business that employs missionary in Britain before at low wages, in unhealthy people from diverse backgrounds earning an MBA at Harvard conditions. A pioneer in showing starts by agreeing and documenting and then a PhD at Brigham that business could make a profit its own principles or standards, Young University. In 1983 he while pursuing an ethical path which are often termed the opened the Covey Leadership was Welsh social reformer Robert company’s “charter” or “code of Center in Provo, Utah, which Owen, whose New Lanark Mill, conduct.” These standards become later became the Franklin near Glasgow, Scotland, became the reference point for decision Covey Company. Covey died world famous for its moral rather making in the working environment, in 2012, at 79. than commercial values. particularly when employees are faced with difficult decisions. Key works Today, companies have to consider every aspect of their However, it takes more than a 1989 The 7 Habits of Highly operation—from sourcing written pledge to ensure an ethical Effective People ingredients to marketing policies— business. Organizations have to 1991 Principle-Centered in order to be judged ethical by their foster a culture in which it is far Leadership consumers. Employment policies are easier for people “to do the right thing and much harder to do the ❯❯

226 CREATING AN ETHICAL CULTURE Fashion businesses use materials and labor from all around the world. Consumers increasingly demand transparency about goods and policies, so they can buy with a clear conscience. wrong thing,” according to US leadership expert Stephen Covey. Faced with daily decisions about the right way to behave, employees have to know what “doing the right thing” actually means. A company’s policies covering everything from safety to accepting gifts from suppliers exist to ensure that people understand how they are expected to conduct business appropriately. Driven from the top the limits of law” and “rules of the relationships according to principles. Companies that prioritize an ethical game” that ensure “open and free These natural laws and governing culture often select employees for competition without deception or values are universally valid. their values as much as their skills, fraud.” However, the 2007–08 and ensure that new employees are financial crisis showed clearly that Ethical leadership made aware of their role and codes, laws, and regulations are not Typically, leaders in ethical responsibilities, and also how things enough to maintain ethical business organizations are not domineering. are done in the organization. Such standards. Leaders with personal They are likely to have an open, companies are eager to ensure that integrity are vital to enact and engaging style and to be good new staff both hears the company’s encourage ethical behavior listeners, able to tune in to issues values and sees them affirmed in the throughout an organization. By across the business. The company actions of people around them. espousing the company’s principles they create will have a clear Such a culture has to be driven at every opportunity and at every structure with well-defined roles and from the top. US economist Milton level, leaders can continually responsibilities, be transparent, Friedman famously said that the demonstrate their importance with promotion based on merit, and social responsibility of business is within organizational culture. a well-communicated strategy, so to increase its profits “subject to that employees know what they In Principle-Centered Leadership, have to do and where they fit in. We’re pioneers and Stephen Covey describes trust, we want to show that respect, integrity, honesty, fairness, Leaders with personal integrity this model works, that it equity, justice, and compassion as are a powerful influence on others. can become self-sustaining. the “laws of the universe,” classing Numerous studies have shown them as essential values for ethical that good people can make bad Ali Hewson leaders. Covey is best known for his decisions when acting in groups, book The 7 Habits of Highly particularly in stressful situations. Irish ethical businesswoman (1961–) Effective People, in which he To avoid the risk of unethical proposed that ineffective people try “groupthink,” the CEO has to set to manage their time around the right tone for everyone in the priorities, whereas effective people organization. Effective governance lead their lives and manage their is critical, and relies on good

WORKING WITH A VISION 227 teamwork and communication achieve. It is also committed to sustainable fashion common between the board and the CEO. A measuring and publishing its practice. Any company partnering board that has a defined structure progress against sustainability with Made-by must analyze the and a healthy culture of debate will targets and has a full-time “green ethics of every aspect of operations, be more likely to recognize emerging guardian” to focus on improvement. from the fibers used in products to problems and take timely, The company also has a “Conscience factory conditions for workers. appropriate action. Team,” made up of people from Companies can also inspire across the organization, which is customers to act in a socially This was not the case at Enron, a responsible for addressing social, conscious way: some garments company that has become one of the environmental, and ethical issues. carry a symbol of a crossed-out most infamous examples of trash can, encouraging consumers unethical leadership. The Enron Ethical companies often to recycle them. Corporation started as a small gas- demonstrate ethical commitment by pipeline business in the US and partnering with organizations that Ethical business is also good grew to become the nation’s can help them to improve their business. Customers are attracted to seventh-largest publicly held standards. Ted Baker is a member of companies they can feel good about, corporation. CEO Jeffery Skilling Made-by, a European not-for-profit more talented staff is attracted and actively cultivated a culture that organization that strives to improve stays longer, and shareholders are would push limits; his mantra was social and environmental conditions shielded from the type of share-price “do it right, do it now, and do it in the fashion industry and to make falls that overtook Enron. ■ better.” But despite a clear set of values for employees to espouse, Ethical trading depends on more than internal business practices and executives manipulated accounting culture: a company’s materials, suppliers, and business partners must also rules and disguised enormous losses be ethically sound. To aid transparency, some companies and organizations and liabilities. Enron collapsed in publish data on aspects of their business, such as production locations, 2001; Skilling and chairman Ken Lay energy mix, recycling levels, and diversity among employees. were tried together on 46 counts, including money laundering, bank fraud, insider trading, and conspiracy. Doing the right thing Energy mix Disposal of waste Employee diversity British fashion brand Ted Baker began life as a shirt specialist in Glasgow, Scotland, in 1988, and now has stores in the Americas, Europe, Asia, and the Middle East. The company is known for its irreverent designs, but in contrast to its styling, it strives to be an exemplar in the way it runs its business. To make this a reality rather than just a statement on its website, Ted Baker strives to ensure that environmental, social, and ethical matters are integral to its business operations, so that employees are always in tune with its high standards. Ted Baker has set targets to continuously improve the overall sustainability of its collections, so employees know what they have to

SUCCES SELLING MARKETING MANAGEMENT

SFUL

230 INTRODUCTION B y definition, marketing Naturally there are dangers of the “marketing mix”—such as is the field of management inherent in trying to predict the product or service itself, the devoted to selling. It is the the future using this type of places where it is sold, its price, link between production and profit, forecasting. The marketer must and any promotional offers—can providing the expertise for taking also be aware of changing tastes, be adjusted accordingly. Japanese a product or service through the technology, politics, and economic camera company Konica Minolta, most appropriate channels to find conditions, so that the business for example, uses specialized the people most likely to buy it. can adapt quickly, avoiding what technology to monitor sales data, To fulfil this goal, it is crucial to management scholar Theodore competitor activity, and market become adept at understanding Levitt famously called “marketing trends in real time so that the market. This means closely myopia.” For example, as consumers it can respond effectively. studying the behavior and lifestyle have become increasingly reliant of the customer so that a product on mobile phones and tablets, Marketing strategies or service can be developed to be businesses with foresight have Arguably the product or service irresistible in every way, from the developed mobile-commerce offered is the most critical purpose, function, quality, and look channels and reaped the benefits. component of the marketing mix. of it, to the speed at which it is For most companies, each product delivered, the places it is sold, its In the quest to anticipate or service in its product portfolio price, and the level of customer customer needs and wants, some has its own cycle of growth, and service support offered. of the most progressive companies can be managed to maximize profit gather data and examine it on a by prioritizing the marketing Knowing the customer daily basis so that key elements spend. For example, for food group That is the theory. In practice, Mars, its best-selling namesake making your customers love you Marketing takes a day to chocolate bar has been a long- by always putting them first and learn. Unfortunately it takes standing source of profits, funding fulfilling their needs and desires is the corporation’s expansion into the biggest challenge of marketing. a lifetime to master. other areas, such as ice cream Collecting data about the purchase Philip Kotler and pet food. history of customers is a starting point. Combined with analyzing US marketing expert (1931–) To help decisions about any available demographic and diversifying into such new markets, lifestyle statistics, such data can be companies can use a diagrammatic used to build a marketing model— tool such as Ansoff’s Matrix, which essentially a mathematical formula plots existing and potential that indicates potential purchase products or services according rates for a given set of variables. to the risk factors involved. If a business decides to develop and

SUCCESSFUL SELLING 231 market something new, how it offers, sweepstakes, and price Companies found to have acted presents the offering and gets discounting—can be deployed dishonestly or conveyed partial the message to consumers is an in the short term to garner initial truths about their eco-credentials important consideration. In planning interest. They can be especially can be accused of “greenwashing,” a launch, another valuable tool, the effective for product launches in and will find it hard to win back AIDA Model, provides clear-cut areas where many rivals fight for public opinion. In fact, no matter criteria for defining the features of shelf space, such as household how appealing a company’s sales any new product or service: how it cleaning and candy. proposition, consumers increasingly grabs consumers’ attention, holds want the people they buy from to their interest, generates desire, and One of the oldest strategies for have a social conscience. For this is perceived to be attractive. communicating with customers is reason, it is vital for management word of mouth. In the age of social to consider the role of ethics within Concurrent with developing a media, generating buzz about a the organization, and to develop the specific product or service for a new product or service increasingly company’s code of behavior toward particular market, creating a brand relies on reaching specific groups suppliers, employees, consumers, is equally important. The goal through Facebook, Twitter, YouTube, and the community. Although should be to make the brand and other online means, and shareholders may see corporate synonymous with a set of unique encouraging them to spread the responsibility as the least important product qualities. In the words word. When a branded video goes commercial priority, it is now an of marketing expert Seth Godin: viral, the potential global reach runs integral part of the marketer’s “A brand is the set of expectations, into tens of millions. If relatively strategy for successful selling. ■ memories, stories, and relationships low-cost communications methods that, taken together, account for a like this are effective, it can lead Don’t find customers for your consumer’s decision to choose one marketers to ask, why advertise? products, find products for product or service over another. But for long-term image building, your customers. If the consumer ... doesn’t pay a and for reinforcing brand values, Seth Godin premium, make a selection, or advertising still has a role to play. spread the word, then no brand For example, a sustained advertising US entrepreneur (1960–) value exists for that consumer.” plan can take an audience from children to adults with recognizable Promoting the product slogans, jingles, and formats. Once the optimal product or service has been developed in conjunction Staying on message with brand identity, there is the Businesses must carefully consider question of how to get the word out the messages that they send to to potential customers. Promotions customers and their rivals, since the and incentives—such as special marketplace can judge them harshly.

232 MARKETING IS FAR TOO IMPORTANT TO LEAVE TO THE MARKETING DEPARTMENT THE MARKETING MODEL IN CONTEXT Marketing is too This data can then be important to leave processed by the FOCUS to the marketing Marketing models marketing department department. to calculate a model of KEY DATES 1961 The Marketing Science potential product Institute is founded. performance. 1969 US academic Frank Bass It affects key It must be rational, publishes a seminal marketing decisions about based on data gathered model that can be used to products, planning, predict demand. and expenditure. from all areas of the business. 1970s Complex measurement models and decision-making C ompanies need to study buying patterns of consumers, models are developed. their customers’ buying along with other variables relating habits carefully in order to to the product. These are entered 1980 The launch of in-store plan business marketing strategies. into a mathematical model or scanners at checkouts gives Using a mathematical model to equation programmed to make a marketers new data and plan product strategies and aid customized calculation. The results prompts the development of decision making is an integral part will help to quantify the potential sophisticated new models. of any modern marketing practice. performance of products in different Marketing computer programs use channels aimed at various market 1982 The journal Marketing sets of numerical data about the segments. By examining the data, Science launches, focusing on mathematical models for marketing purposes. 1990s Intelligent marketing- information systems computerize many routine modeling functions, providing daily updates and projections.

SUCCESSFUL SELLING 233 See also: Managing risk 40–41 ■ How fast to grow 44–45 ■ Organizational culture 104–09 ■ Avoid groupthink 114 ■ Good and bad strategy 184–85 ■ Forecasting 278–79 ■ Marketing mix 280–83 ■ Benefitting from “big data” 316–17 Marketing is inherently data and the longer the historical team around the world confers once about producing results. period it covers, the more accurate a week to examine data and make the results will be. Models reassure decisions in response to buying Geoff Smith members of the business that every behavior. As McDonald says, “it’s scenario has been investigated. the data sources that help create VantagePoint Marketing (1962–) Marketers can choose from the brand and keep it dynamic.” ■ different models or design their own, but the key to making the model work is data. marketers and others in an Gathering and using data Market research is valuable, but it organization can measure projected Consumer goods maker Procter & can be very time consuming to gather product growth, or return on Gamble (P&G) has invested heavily data that is representative of the age, investment, and make informed in data gathering and modeling, gender, and background of consumers. decisions on how to optimize the implementing digital processes Computer models do the work faster. combination of factors most likely from the factory to the shelf in to generate market success. order to capture data and feed it back. The data can be used to Gathering the required data for make immediate adjustments to modeling is crucial. Information product planning and distribution, is needed from all areas of the as well as added to a massive business so that every step in the database for future use. According process of getting the product from to CEO Robert McDonald in 2011, the drawing board to the customer “Data modeling, simulation, and is factored in. When David Packard, other digital tools are reshaping the co-founder of Hewlett-Packard, how we innovate.” said that “marketing is far too important to leave to the marketing P&G focuses on internal data- department,” he was implying that gathering processes and also relies the plans made by marketers can heavily on market information from come to nothing if the rest of the external partners. The leadership organization is not fully engaged. In addition to getting approval on plans The origin of marketing models and budgets, marketers should communicate with all departments Models of consumer behavior is raised by one percent how to gather data and share it once date from the 1960s. They grew might this affect demand? Then decisions have been made. out of a need to make marketing in 1969 Stanford University’s more scientific and less driven Frank Bass devised his Bass Using the data, the marketer by instinct or unproven ideas. model, which is still used to can simulate product tests and predict how fast new products input variations using different In the 1960s US scholar will be adopted and spread assumptions about elements of Robert Ferber advocated the through a market. the marketing mix, such as market use of mathematical simulation conditions and consumer behavior. techniques and models. These Decision Support Systems The greater the amount of relevant became known as measurement (DSS) use measurement models models because they were to project the outcome of new devised to measure demand decisions, adding variables— for a product as a function of such as previous outcomes in various independent variables— similar contexts—to help for example, if the selling price marketers make optimal choices.

KNOW THE CUSTOMER SO WELL THAT THE PRODUCT FITS THEM AND SELLS ITSELF UNDERSTANDING THE MARKET



236 UNDERSTANDING THE MARKET IN CONTEXT Every successful business... FOCUS ...gathers data about the ...assesses the market Focused marketing needs of its present and environment—including competitors, distributors, KEY DATES potential customers. the economy, technology, 1920s The concept of market research emerges in the US. and social trends. 1941 Robert K. Merton invents It can then develop the idea of the focus group. the products that will solve customer problems, 1953 Peter Drucker says the first step for any business is to and so meet an ask: “Who is the customer?” existing demand. 1970 US economist Milton A product that fits the Friedman puts forward the customer will sell itself. business model of shareholder maximization. 1998 Marketing professor Robert V. Kozinets coins the term “netnography” to refer to the theory of ethnography as applied to Internet users. 1990 US professor Gerald Zaltman develops the first neuromarketing technology, ZMET, to analyze consumers’ subconscious reactions to advertising imagery. T o be successful in a market, core of this market is the prospective that consumers are struggling an enterprise needs to customer, who will be influenced with. Once these are identified, understand both the by many of those environmental a business needs to respond environment in which it wants factors, but will also be driven by innovatively, to deliver the products to do business, and the way individual needs and preferences, and services that will be seen as consumers in that environment which will affect what products perfect solutions. think and act. The marketing and services he or she buys. environment is the world beyond Gathering data the confines of the organization— This means that to understand This analysis may sound simple, the world that its customers live the market, a company must but given that any particular in—and includes the state of the make sense of the “broad brush” market might number thousands or economy, government regulations, of the external environment and, millions of individuals, how does a social attitudes, current issues, at the same time, fathom the marketer go about understanding competing companies, distribution psychological profile and how those people think and infrastructure and partnerships, personality of the consumer. The behave—let alone what problems or and technological changes. At the end purpose of these investigations unfulfilled wants they have, both is to identify the biggest problems

SUCCESSFUL SELLING 237 See also: Stand out in the market 28–31 ■ Focus on the future market 244–49 ■ Make your customers love you 266–69 ■ Forecasting 278–79 ■ Marketing mix 280–83 ■ Maximize customer benefits 288–89 individually and collectively? The Being customer driven … advised that a business centered starting point is to fully explore the is about building a deep on the customer was the only sure world in which the customer lives. way to realize growth. “There is What are the basic motives that awareness of how the only one valid definition of business drive buying decisions? What value customer uses your product. purpose,” he wrote, and that is “to does the customer place on price, create a customer.” By this he quality, and design? Among all Ranjay Gulati meant that a customer’s willingness the social, cultural, financial, to pay for goods or services is the and technological forces in the Harvard business professor catalyst that propels businesses to environment, which ones turn raw materials and resources particularly affect the customer? all of the major economies of the into products for sale. Without the A marketer wants to know the West, bringing to an end the upward customer’s desire or need, there is practical details of the customer’s growth that had, with the exception no impetus for commercial activity; daily life. How does that person live of a few slow years, persisted since and conversely, without commerce, on a day-to-day basis? Does he or the end of World War II. Everyone in nothing can be produced to meet she have tasks that could be made business was thinking about how the customer’s demand. easier? What other kinds of problems to survive the lean times ahead. could the company potentially Drucker suggested that when solve? The goal of all this research, Recession struck in the very customers buy something, they according to influential management same year that Drucker published are not thinking about the product thinker Peter Drucker, “is to make the work that would later be hailed or service itself, but about the selling unnecessary.” as a masterpiece, Management: usefulness of it to themselves. Tasks, Responsibilities and For them, value lies in the problem- Beating the recession Practices (1973), in which he solving ability of the purchase. In 1973, Drucker advised business leaders to “know and understand Although Drucker’s idea is the customer so well the product or now at the core of most modern service fits him and sells itself.” At marketing theory and practice, that time, the corporate world was in at the time it was a counter to the turmoil as recession took hold across prevailing management approach of the 1970s, which advocated the maximization of shareholder value. ❯❯ Peter Drucker One of the most quoted experts in unfolding, he moved to England management and marketing, Peter as the Nazis rose to power, Drucker was exposed to big ideas before settling in Los Angeles, during his childhood years in where he became a professor of Vienna, Austria. Born in 1909, politics, and later a professor his father was an economist and of management. Drucker wrote lawyer, and his mother was one of 39 books on the subjects of the first women in Austria to study economics, leadership, and medicine. The couple regularly management. He died in 2005. held salons in their home and the young Drucker was encouraged to Key works sit in on these discussion evenings, which were regularly attended by 1946 The Concept of the prominent professionals. Corporation 1954 The Practice of Armed with a degree in Law Management from Hamburg University, and 1973 Management with a budding journalistic career

238 UNDERSTANDING THE MARKET Skaterboarders are a niche market, and have a specific set of requirements from equipment and fashion brands. Micromarketing can help businesses reach niche markets such as this one. This theory placed the wealth of the because the corporate-centered insulted one of his own products, corporation, rather than the needs strategy has proved no guarantee joking that its low price was and wants of the customer, at the of longevity. Business in the 21st possible due to its poor quality. core of a business. It held that century has become more people- Offended customers abandoned business should be run solely to centered with a number of huge the store and $800 (£500) million increase profits, which would boost success stories helping to sway was wiped off the value of the the value of stock prices and allow management further toward company, which nearly went under. the company to return value to the customer-oriented strategies. This notorious example shows how shareholders—who, after all, own businesses who treat customers the business. This way of thinking In 2010, business professor with contempt can pay a very had been introduced by economist Richard Martin wrote an article for high price. Milton Friedman in an article he the Harvard Business Review, wrote for The New York Times in heralding “The Age of Consumer Knowing the market 1970, and it was later developed Capitalism.” He claimed that we are Since Drucker’s initial proposition further by business professors now living in an era in which that a business must get to know Michael Jensen and William shareholder value is no longer the the customer intimately, the market Meckling in their paper, “Theory of primary goal. “For three decades, place has matured, making the task the Company.” As the title implies, executives have made maximizing of understanding the consumer, Jensen and Meckling’s thesis was shareholder value their top priority,” customer groups, and the market not generally concerned with the he wrote. “But evidence suggests as a whole, far more complex. One world beyond the company—it that shareholders actually do better of the reasons is fragmentation, focused on the relationship between when firms put the customer first.” meaning that consumers are now upper management and shareholders, divided among many small markets rather than the relationship between An example of a serious failure that are constantly in flux, and may management and the market. to prioritize the customer is that of suddenly emerge from nowhere. the British jewelry company, Ratners. These micromarkets are defined by 21st-century thinking By the late 1980s, Ratners was the the common aspirations, likes, or The concept of shareholder world’s biggest jeweler, with 2,000 needs of the consumers within maximization was a dominant force stores on two continents. The them. Each consumer is subject to in the last few decades of the 20th stores sold jewelry at low prices century, but the importance of and were very popular—until the Whether it’s Google or Apple understanding the market and of disastrous speech by the company’s or free software, we’ve got customer-centered management chief executive, Gerald Ratner, at some fantastic competitors has gradually gained favor, partly the Institute of Directors in 1991. In and it keeps us on our toes. his talk, supposedly about the Bill Gates company’s success, he instead CEO of Microsoft (1955–)

SUCCESSFUL SELLING 239 Research is formalized most important in the marketing Marketers have developed new curiosity. It is poking and environment. These encompass strategies for online information gender, life stage, income, trends, gathering, such as personalized, prying with a purpose. current issues, and the influence of or one-on-one, marketing, in which Zora Neale Hurston key individuals in the public eye. a single consumer’s interests and wants can be recorded and US anthropologist (1891–1960) The challenge for the marketer compiled to create a detailed profile. is finding out how all of these a wide spectrum of external factors, things influence customers and, Psychographic profiling is one so it is crucial to understand these consequently, what motivates them way that marketers attempt to to get to their hearts and minds. to buy. The obvious starting point make sense of diverse consumer is to ask questions. This basic interests, by corralling individuals Price cutting by competitors, for premise developed during the 1960s with shared interests and example, can divide the customer’s and 1970s into a formal process motivations into groups that can attention, providing enticement but of question-and-answer known be targeted. Whereas businesses also potentially damaging a brand’s as market research. Researchers used to define their customers value in the eyes of the consumer. gathered both quantitative evidence demographically, for example as A business therefore needs to know (from simple questions directed Baby Boomers or Generation X, how sensitive their existing and toward a large audience) and a psychographic profile is much potential customers are to price. qualitative evidence (through direct more detailed. It is put together observation or in-depth discussion by using information about a The distribution system, which with a small sample of individuals). consumer’s daily habits; favorite determines how products and Qualitative research is usually brands, music, and athletic services get to potential buyers, is regarded as the more valuable of personalities; media habits; also a vital aspect to consider. A the two in getting a grasp of why leisure activities; vacation business should figure out how to a customer accepts or rejects a destinations; and much more. deliver products and services in a product, and in understanding the way that best suits purchasers. The realities of customers’ lives. Social media and online Internet has transformed how this communities have encouraged happens, and customers now Personalized marketing people to define themselves by an expect sellers to understand where, Since the 1990s, business has forged ever-more specific set of when, and how they want to buy. a direct path of communication characteristics, likes and dislikes. with the customer via the Internet. At the same time, the Internet has allowed businesses to glean ❯❯ Types of research The state of the economy, level of interest rates, regulatory law, and technological change can sway customers, while social and cultural forces are arguably the Focus groups were used extensively in the late 20th century to gather informal comments and opinions on products, as shown here in a scene from the TV show, Mad Men.

240 UNDERSTANDING THE MARKET MUSIC SPORTS VACATION LEISURE Personalized marketing makes use of Consumer A information gathered from social media and other platforms to create tailor-made advertising. Consumer A is an active, athletic individual, and would respond to marketing that speaks to this lifestyle. Customer relationship marketing Consumer B makes use of historical data to produce individual marketing. Consumer B is an avid TV watcher; an online retailer could make recommendations for DVDs based on previous purchase history. Psychographic profiling allows Consumer C marketers to find common ground among a diverse group of individuals. A canny marketer aiming for consumers A, B, and C could use their shared taste in music as a way forward for a campaign. access to much of this information, useful in the 1990s with the increase (CEM), because it captures the providing companies with copious in call centers. Management can customer’s immediate interaction amounts of data for marketing divert calls from customer with the seller, whereas CRM uses purposes. Software that tracks and service—or listen in—to learn what a customer’s history. analyzes customer preferences via issues consumers may be having, their online and mobile activities what could be improved, and what The field of neuroscience has has enabled companies to engage problems they have that need to be taken the idea of customer in what is called customer solved. Marketers have dubbed this understanding to the next level, relationship marketing (CRM)— “customer experience management” advancing Drucker’s premise that using the data extracted about businesses needed to drill down customers and their preferences People are unlikely to know into the customer psyche and to sell more products and services that they need a product discover how decisions are made. to them. Amazon, for example, uses which does not exist. Several studies by branding guru a customer’s shopping history to John Harvey Jones Martin Lindstrom have caused a recommend similar products and sensation by proposing that, no to show online browsers what other UK industrialist (1924–2008) matter how consumers may answer customers with the same interests in face-to-face research, the only have recently bought. way to know what subconsciously motivates them to buy is to measure Real-time data changes to their brainwaves when Telephone customer service sits at exposed to certain images, sounds, the other end of the spectrum from and smells. According to Peter social media. Pioneered in the Drucker, “the main objective of 1980s, it began to prove even more neuromarketing is decoding the process that take place in the

SUCCESSFUL SELLING 241 customers’ mind, in order to Did Alexander Graham Although Peter Drucker emphasized discover the desires, wishes, and Bell do any market the importance of knowing the the hidden causes of their options, research before he customer, he did not narrow this to so that there is a possibility to get just asking the customer what they them what they want.” invented the telephone? want; he intended that business Steve Jobs should also think ahead and find Neuromarketing is one way of ways to innovate. “The “want” a understanding the customer, and doesn’t mean we don’t listen to business satisfies may have been it is actively used by companies customers, but it’s hard for them felt by the customer before he was such as Google and Disney to test to tell you what they want when offered the means of satisfying it,” consumer impressions. However, it they’ve never seen anything he reasoned. “It remained a is not in itself a solution to knowing remotely like it.” potential “want” until the action what customers want to buy. A of businessmen converted it into broader perspective is needed to Steve Jobs instinctively effective demand. Only then is truly understand a market and the understood what the consumer there a customer and a market.” elements that shape it. In some wanted because he had the same cases it is pure innovation, driven problem: the lack of a well-designed, Professor Ranjay Gulati by a desire to transform the way portable device that would make maintains that the first step in people live through technology, that communication and information- understanding the new, highly gives customers something they gathering fun and easy. competitive market of the 21st didn’t realize they wanted, though century is asking customers the the need for it was there. Apple’s right questions; the most important iPad is an example of how forward ones being what problems and thinking about what customers issues they are dealing with. But lives could be like can lead to he says that a business must make market success. a creative leap to figure out the innovations that will serve those Innovative solutions customer needs, if they want to When the iPad was unveiled in survive in the market place. ■ 2010, investors and the press were sceptical, wondering who would want one, given that a laptop computer had more functions and was only slightly bigger. The iPad was a sellout because customers loved using it—it was fun and fast, and allowed them to do all the things they enjoyed on their iPod touch but with a bigger screen and a keyboard that was easier to use. Apple CEO Steve Jobs claimed in an interview with Fortune magazine never to have done consumer research. “It isn’t the consumer’s job to know what they want,” he reportedly said. “That Steve Jobs of Apple encouraged the company to consider the changing technological world and people’s existing daily habits to provide an innovative solution to an unfelt need: the iPad.

242 ATTENTION, INTEREST, DESIRE, ACTION THE AIDA MODEL IN CONTEXT T he AIDA model is the be used to create desire, before foundation of modern finally laying out a simple way for FOCUS marketing and advertising that desire to be met—the means Marketing models practice. It outlines the four basic to buy. On website advertising, this steps that can be used to persuade might be a direct link; on TV, print, KEY DATES potential customers to make a or billboards it may be a website, 1898 E. St. Elmo Lewis purchase. The first three steps lie store name, or telephone number. describes the principle that in creating attention (A), developing would become AIDA. interest (I), and building desire (D) Commercial potential for the product, before the fourth In the movie industry, the stages of 1925 US psychologist Edward step—the “call to action” (A)—tells AIDA are used to great effect. Movie Kellogg Strong Jr. refers to them exactly how and where to buy. studios often begin their marketing AIDA in The Psychology of campaigns months in advance with Selling and Advertising. AIDA is often expressed as giant billboard posters to attract a funnel, because it channels the attention to the new movie. Short 1949 US marketing executive customer’s feelings through each “teaser” trailers follow, which provoke Arthur F. Peterson expresses stage of the communication process interest by offering a tantalizing AIDA as a sales funnel, in toward reaching a sale. glimpse of the movie without Pharmaceutical Selling, giving too much away. Desire is Detailing and Sales Training. AIDA in practice instilled by the release of the full Attracting the customer’s attention trailer, which is carefully crafted to 1967 US professors Charles is the first challenge, and this may show the highlights of the movie, Sanclage and Vernon be achieved by using an arresting from big explosions and special Fryburger propose the EPIA catchphrase, offering a discount or effects to witty lines of dialogue. model: Exposure, Perception, something for free, or demonstrating On the opening weekend, Integration, Action. how a problem can be solved. Once advertisements in newspapers and someone’s attention has been on television spotlight the movie’s 1979 US academics Robert seized, it must be turned into release, provoking action by L. Anderson and Thomas genuine interest. This is best done inviting the consumer to go and E. Barry propose adding by providing a succinct assessment buy a ticket. brand loyalty to the various of the product’s benefits to the hierarchy of effects models consumer, rather than simply One of the movie hits of 1999, based on AIDA. listing the product’s main features. The Blair Witch Project, had an Problem-solving claims, results- innovative approach to AIDA that based advice, or testimonials can made use of new viral marketing

SUCCESSFUL SELLING 243 See also: Stand out in the market 28–31 ■ Creating a brand 258–63 ■ Who invented AIDA? Promotions and incentives 271 ■ Why advertise? 272–73 ■ Generating buzz 274–75 Management expert Philip techniques. Before the movie’s first moviegoers were urged to buy Kotler references Edward showing, the filmmakers created a tickets before those few showings Kellogg Strong Jr.’s book The website that offered an intriguing sold out. The movie cost just $35,000 Psychology of Selling and insight into the background to the to make, but generated revenues of Advertising (1925) as the movie. It presented snippets of more than $280 million worldwide. source of AIDA. However, movie as “found film footage,” and Strong’s book gives credit for left viewers wondering whether E-marketing and AIDA the idea to advertising pioneer the story of the movie was fiction The advent of e-commerce prompted Elias St. Elmo Lewis (1872– or reality. The website grabbed award-winning UK copywriter Ian 1948), maintaining that Lewis attention, and continued to gain Moore to suggest NEWAIDA as a formulated the slogan “Attract interest as more video clips and more relevant model for e-marketing: attention, maintain interest, audio files were added. The buzz AIDA preceded by navigation, ease, create desire” in 1898 and around the “myth” of the Blair Witch and wording. It seems that as that he later added the fourth grew, creating further desire to see markets have become more complex, term “get action.” the movie. The call to action came marketers require ever-clearer ways in the form of a very limited release; of perceiving the customer journey. ■ The first use of the AIDA acronym is commonly The AIDA model attributed to C. P. Russell’s article “How to Write a ATTENTION Sales-Marketing Letter,” Make the customer aware of the product or service using an published in the US advertising trade magazine Printers’ Ink in eye-catching advertisement or an arresting offer. 1921—Russell was also one of its editorial staff. He outlined INTEREST the basis of the four-step Hold the customer’s interest by providing infomation process and pointed out that about the advantages of the product or service and “reading downward, the first letters of these words spell the its benefits to the customer. opera Aida.” He advised, “When you start a letter ... say ‘AIDA’ to yourself and you won’t go far wrong ...” DESIRE Generate the customer’s desire to buy by convincing them that the service or product will meet their needs. ACTION In practice, few messages Make it as easy as take the consumer all the way from awareness to purchase, possible for the customer to make but the AIDA framework suggests the qualities of the purchase. a good message. Philip Kotler US marketing guru (1931–) SALE

MARKETING MYOPIA FOCUS ON THE FUTURE MARKET



246 MARKETING MYOPIA Demand for Product A dries up and growth slows. IN CONTEXT The company cuts Product B is already in FOCUS production costs and development; customers Customer service boost profits. say this will suit them KEY DATES better than Product A. 1874 French mathematical economist Leon Walrus Demand for Product A Production of recognizes that small changes continues to fall. Product A is replaced in consumer preferences have a big impact on business. by Product B. 1913–1914 Henry Ford, US The company struggles The company continues industrialist, installs the first to survive. to grow. production line, and informs companies that cheaper per-unit costs are the key to their sustained growth. 1957 US marketing theorist Wroe Alderson stresses that a business needs to grow and adapt to changes in order to survive and thrive. 1981 US marketing thinkers Philip Kotler and Ravi Singh coin the term “marketing hyperopia” to describe the problem of businesses having a clear view of distant issues but not of close ones. W hen a company has a needs to look ahead and constantly changes, and flexible enough to fixed idea of what evaluate new openings in the adjust, it can find ways to tempt products or services it market. If it does not, growth will customers and prosper. The astute wants to sell, and a narrow idea of stagnate and, ultimately, decline. approach, Levitt said, is to build a who it is selling to, it runs the risk business around the customer, of failure because it is not easily In Levitt’s view, when a rather than around the company. able to adapt to changes in market business is concentrating on how He proposed that “an industry is a conditions. It will miss opportunities to sell its products and is blind to customer-satisfying process, not a to expand and conquer new market the changing circumstances and goods-producing process.” areas. Harvard Business School desires of customers, it will not be professor Theodore Levitt dubbed prepared for shifts in the market. Grow or die this lack of foresight “marketing For example, a sudden change in Underlying Levitt’s idea is the myopia,” a term he first used in an the economy or government policy, inevitable growth pattern of a article of the same name, published a new technology, or a social crisis business. At first a business enters in the Harvard Business Review in can have an almost immediate the market with a product or 1960. He stressed that a company effect on the buying public. If a service and may enjoy rapid company is prepared for such

SUCCESSFUL SELLING 247 See also: Finding a profitable niche 22–23 ■ Make your customers love you 264–67 ■ Maximize customer benefits 288–89 ■ Feedback and innovation 312–13 growth. But all growth eventually Selling is not marketing.... the Detroit (General Motors, Ford, and tapers off because the market has entire business process [is] a Chrysler) dominated the domestic already bought enough of the and global markets. They produced product or service, or develops tightly integrated effort to 93 percent of the automobiles sold different priorities. The company discover, create, arouse, and in the US, and controlled 48 percent with marketing myopia turns of world sales. One-sixth of the US inward to see how it can trim the satisfy customer needs. work force was employed directly or costs of manufacturing or make Theodore Levitt indirectly by the industry. other internal cost-saving measures. Nevertheless, cracks were These tactics may offset a decline era for several decades, Levitt’s beginning to show. in profits for a while, but eventually idea may not have seemed very they will not be enough to save the relevant at the time. Still, he cited In 1955, the Big Three had business from failing. Levitt, convincing examples in US industry enjoyed a record year. However, however, reasoned that an industry to support his case. In particular, he demand fell dramatically in 1956 can continue to grow long after the accused automobile manufacturers and 1957 because so many obvious marketing strategies have of marketing myopia. consumers had already bought been used, if the management is cars. This sales slump was partly totally focused on the customer. The automobile industry responsible for the recession of On the surface, the US auto 1958, during which manufacturing Levitt asked the corporate industry appeared unstoppable. By as a whole declined. This was heads of America in 1960, “What 1960 the “Big Three” in the city of the first economic downturn in business are you in?”, demanding the US since the Great Depression. that they shift their focus from Meanwhile, car manufacturers in manufacturing to customer Germany, the UK, France, and satisfaction. This concept is taken Japan were threatening the for granted in the current age dominance of the Big Three. geared to customer analysis and niche marketing, but given that the “Detroit never really researched US economy had boomed in the the customer’s wants,” alleged 1950s, enjoying its most prosperous Levitt. “It only researched the kinds of things which it had already decided to offer.” By the time US carmakers realized what had happened, they found it difficult to adjust. After a series of dud models and marketing failures, they finally rebounded in 1965 with the ubiquitous “muscle” cars such as the Ford Mustang—but they would never again have such an iron grip on the market. Before Theodore Levitt’s groundbreaking article in 1960, marketing was not considered a ❯❯ Abandoned automobile factories in Detroit are a reminder of the US economic downturn in the late 1950s. Theodore Levitt argued that carmakers failed to adapt to their customer’s needs.

248 MARKETING MYOPIA Shortsighted marketing focuses on current customers and their needs but overlooks potential new markets, leading to missed opportunities and more modest profits. Farsighted marketing is adaptable, allowing businesses to shift their focus to reach a wider range of consumers with a broader product offering. Returns can then be much greater. serious endeavor worthy of the first book to take a scholarly and Express to take up the position management attention; instead scientific approach to marketing. of CEO at struggling car rental it was a formulaic task left to the Kotler’s key teachings are that the company Avis. He rebuilt the sales or production departments. customer should be at the center of business by focusing on two But “Marketing Myopia” prompted any business, and that profit is interdependent principles: put both the corporate and academic derived not merely from selling but customers first; and create a worlds to start thinking differently. from delivering satisfaction to working environment in which customers: thinking which is still at employees love what they do. For Taking marketing seriously the core of most MBA programs. the first time the business began to Around the same time that Levitt make a profit. was writing that pivotal article, he The effect of Levitt and Kotler’s inspired a student, Philip Kotler, ideas on the corporate world was Customer service who would take his proposition almost immediate. In 1962, By 1964 Avis was expanding. The further to cement a fundamental executive Robert Townsend had man appointed as manager of change in the way managers just been lured from American operations in Europe, Africa, and approached business. Kotler the Middle East, Colin Marshall, studied at Harvard in 1960 for his The entire corporation must was another believer in Levitt’s postdoctoral work in mathematics, be viewed as a customer- customer-centered approach, and having already completed a PhD in creating and customer- deployed it with great success. economics at the Massachusetts Within ten years he was running Institute of Technology (MIT). satisfying organism. the entire company from New York, Exposed firsthand to the ideas of Theodore Levitt overseeing innovations that gave Levitt and other marketing customers better service, and professors, he began to develop a making Avis the market leader. In rigorous outline for the role of 1981, when he was recruited to help marketing in any organization. The save British Airways (BA), he result was published in 1964, and turned around the fortunes of the Marketing Management is still airline in a tough environment, regarded as the seminal textbook on creating a successful model of the subject. It is credited with being service-oriented business. His