I have just finished the first part of a project that has consumed me for much of the year. I developed something I’ve called the MKG + INV 100, a list of 100 firms with high levels of spending on both marketing and innovation during the 2009 calendar year. I believe this is the first study to examine the role that marketing and innovation together play in creating firm value. 

 

Automakers Ford, Honda and Nissan lead the list. Computer programming and data processing firms, such as Microsoft, Yahoo, eBay, Activision and Intuit dominated the MKG +INV 100 with a total of 29 entries, and drug companies, such as Pfizer, GlaxoSmithKline and Bristol-Myers Squibb also featured strongly with 17 entries.  

 

I was very surprised by just how much value a combined marketing and innovation strategy added – I found that the Return on Assets (ROA) for the MKG + IN 100 was 4.79 percent, Return on Sales (ROS) 6.97 percent, and Return on Equity (ROE) 12.55 percent. To allow for comparison, I calculated performance ratios for a control group of firms that did not spend anything on marketing or innovation. The ROA for the control group was only 0.51 percent, the ROS 3.02 percent and the ROE 4.26 percent.

 

It makes sense that an organization should pursue a strategy that combines marketing and innovation because in order to create value, an organization needs to be capable of developing ground breaking innovations. But at the same time, the firm needs to identify market opportunities, successfully launch new products by demonstrating to consumers how new products meet unmet consumer needs or better satisfy existing needs, build consumer demand for the new products and develop and nurture brands once the new products are in the market.

 

The findings confirm what Peter Drucker once famously said: "Because its purpose is to create a customer, the business has two - and only two - functions: marketing and innovation. Marketing and innovation create value, all the rest are costs.”

 

The report, including the list of the MKG  + INV 100, a selection of results and an outline of the research method, can be downloaded from The CenterForMarketingAndInnovationStudies.com

 

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is also the founding Director of the Center for Marketing and Innovation Studies. See www.CenterForMarketingAndInnovationStudies.com and www.MarketingThroughTurbulentTimes.com

 

Key words:  marketing, innovation, firm performance, Ford, Honda, Nissan, Microsoft, Yahoo, eBay, Activision, Intuit, Pfizer, GlaxoSmithKline, Bristol-Myers Squibb, Peter Drucker, new product development.

 

 

We know that good marketing practice means knowing: (1) who your target market is; (2) what problem(s) your target market is trying to solve; (3) what your brand’s value proposition is; and, therefore, (4) whether your brand will solve your target market’s problem.

But recessions can be tough on brands because the relationship between consumer problems and brand solutions often becomes decoupled and preconceived mental models we hold of our markets are called into question. That’s why we see brands trying to reposition in an effort to remain relevant (think: Starbucks) or hold onto their original position in the hope that the brand will survive the recession (think: Singapore Airlines or Abercrombie & Fitch).

At the start of the recession, Abercrombie & Fitch declared that it would not lower its prices even though sales were down 34% year on year and David Cupps, the General Counsel and Secretary at Abercrombie & Fitch, was quoted as saying the brand would not offer hefty discounts because such “discounts could hurt the brand’s integrity and appeal in the long run” (Los Angeles Times, December 13, 2008). In May 2010, same store sales at Abercrombie & Fitch were down 3% year on year at a time when rival stores were starting to show small gains. One commentator suggested that Abercrombie & Fitch might have lost its appeal and is no longer seen as cool by its target market (www.MarketWatch.com, June 3, 2010). By staying true to its brand position, did Abercrombie & Fitch fail to stay relevant in a changing market?

Singapore Airlines is another example of a brand that stayed committed to its market position during the recession. Just before the financial markets collapsed in 2008, Singapore Airlines converted two of its US-Singapore routes to business class only. The cost to travel on this route was $8,000. Rather than reposition the brand, Singapore Airlines instead choose to park planes and cut costs in an effort to ride out the recession (Fortune, June 24, 2010).  A clever move from a marketing point of view and hopefully one that will pay off for Singapore Airlines.

Not only does the relationship between consumer problems and brand solutions become fragile during such turbulent times but the recession has also exacerbated a general mistrust consumers already had toward brands. This is why some brands have no choice but to reposition or, in the case of AIG, rename.  Bloomberg BusinessWeek (June 7, 2010) reported that AIG has sold and its fund management division, which is now called PineBridge Investments, sold its auto insurance division, which is now called 21^st Century Insurance, renamed it core property casualty company Chartis and renamed its annuities business National Western Life.

Singapore Airlines decided to remain focused on its brand position on the basis that the recession, and its effects on corporate travel, was cyclical.  Indeed, recessions are cyclical but in the case of the Great Recession, the recession has been longer and deeper than any we have experienced in our life times. It takes a bold company to do what Singapore Airlines did.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

Key words:  brand management, marketing strategies, marketing in a recession, target markets, value proposition, consumer trust, Abercrombie & Fitch, Singapore Airlines, Starbucks, AIG.  

It happened again - I was thanked for being a customer. This time, I received a hand written card from SwimOutlet.com, an online swim shop, thanking me for being such a loyal customer. Sure, we buy from SwimOutlet.com a lot as we have four swimmers in the family and from time to time I contact their customer service center to return an item or query an order.  To this day, every interaction I have ever had with SwimOutlet.com has been favorable, which is why I still buy from them, but it meant a lot to me to be acknowledged as a customer. 

Don’t get me wrong, I’m not the kind of person that craves affirmation but as a marketing professor, and probably a critical consumer, I have become increasingly concerned by the way in which organizations treat their customers. What organizations seem to overlook is that the reason they are in business is because of customers.  I think the recession has exacerbated the mistreatment of customers because many organizations did cut the number of people performing customer service roles in an effort to reduce costs. The consequence is that we as customers often have to do more of the “work” that the organization once did for us.

There is no doubt that I get irked by having to do the organization’s work for them. Worse still, however, are the long waits I endure before I can speak to a person when I contact a customer service center. My record so far is one hour – this is the time it took an operator to pick up my call on the Internet for a live chat. I only waited because I would get messages telling me how many people were ahead of me and I foolishly thought that being 5^th in line wasn’t a bad thing (just in case you are wondering, I was on speaker phone and kept working while I was waited to be helped).

There are other organizations I like to deal with. When I phone Register.com, the organization that hosts some of my websites, a live operator answers my call and then directs me to the appropriate person. Sure, I sometimes wait 5-10 minutes to speak to someone who can resolve my query but it makes a difference to me to have a real person direct my call in the first instance because I don’t much care for listening to menu options to figure out where I need to go for help. AAA is another organization that understands its livelihood depends on customers. Anytime I call AAA, which is normally at the end of the year when the insurance premium is declared for the following year, I am thanked for my 6 years (and growing) of business with AAA.

So, remember the reason you are in business is because of the customers who try your products or services once and come back for more. When was the last time you “mystery shopped” your organization so as to see your organization from the customers’ point of view? What do you do to make your customers feel valued?

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

Key words:  Customer service, customer loyalty, customer retention, marketing strategies, marketing in a recession, call centers, SwimOutlet.com, AAA, Register.com

Last night I was reading the latest copy of Newsweek, the one with the heading “America’s Back” (April 19, 2010). The feature article included short interviews with a number of economic commentators who, predictably, gave mixed messages on whether the economy would recover quickly, along with likely economic growth figures for the short and medium term.

All well and good but can we expect big brands to emerge unscathed? Nielsen previously reported that, on average, marketing spend was down by 9% during 2009.  But, not all marketing spend was down: spending on coupons was up 11.5%, while spending on magazines, television and newspapers was down anywhere from 9-24%.  What this shows is that spending on short-term sales generation was up and spending on long-term brand building was down.

Of interest to me is that when companies come out of the recession, those firms that neglected to continue investing in their brands by focusing on short-term sales generation might find their market shares slide.

This short-termism that has characterized marketing expenditure has also characterized other aspects of business. Think about it: if demand for goods and services is down and cash positions are up (for example, the total cash held by Standard & Poor’s 500 is now over $830b) some fairly drastic cuts have been made in an number of key areas: we know that employee numbers have been slashed and marketing budgets have been cut, and it seems that companies have also looked for other ways to save money by cutting back on R&D and quality. For example, in an article in Boomberg BusinessWeek (April 19 2010), reference was made to a slight drop in Honda’s market share at a time when Honda should be doing well against a troubled Toyota. The view expressed in the article was that Honda was no longer the “Japanese BMW”; its cars look pale alongside newer models from companies such as Nissan, Hyundai, Ford and GM. 

I think we could find a reshuffle among brand leaders in the next 12-24 months with some historically strong brands finding that they are no longer relevant to the market. Of course, with a bit of good luck and good marketing these brands could be strengthened again but some might fall off the radar. Another outcome of the great brand reshuffle is that there will be some great opportunities for brands that are trying to gain traction.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

Key words:  Marketing, brand management, recession, marketing strategies, coupons, brand building, marketing budgets, R&D budgets, employment, cash, Honda, Toyota, cars.

The March issue of Fast Company came out this week and in it was a list of the World’s 50 Most Innovative Companies. Now, I like a good list and I particularly like this one. The list of the World’s 50 Most Innovative Companies is compiled based on expert opinion, data, reports, interviews and debate. More importantly, the list gives “a snapshot of creativity at work in the global market place”. 

When you skim through the top 50, there are some companies you would expect to find on such a list – for example, Facebook, Amazon, Apple and Google took the top 4 spots. A number of other high-profile companies were also on the top 50: HP, Hulu, Netflix, Nike, Intel, GE, IBM, and Disney.

But there were others that really captured my attention – for example, First Solar and PG&E for their work in sustainability and renewables.

Others would be pleased to find themselves on the list – for example, Wal-Mart at #9. For a long time, Wal-Mart positioned itself as excelling in cost leadership and was well regarded for its excellence in supply chain management. But Wal-Mart is now making inroads into sustainability by working with its 100,000 suppliers and encouraging them to “go green”. A number of years ago, Wal-Mart tried to have the same impact on supply chain management with the introduction of Radio Frequency Identification (RFID) tags by mandating their suppliers had to comply with Wal-Mart’s RFID requirements. The use of RFID tags never took off as predicted (I’ve been told it is because the price of RFID tags never really dropped). Let’s hope that Wal-Mart can succeed in their efforts to impact sustainable business practices because without an organization with the clout of Wal-Mart, many managers might have been slower to grasp the concept of sustainability and determine what it means for their organization.

There is another characteristic that defines the inclusion of many firms on the top 50 list. Many have had a substantial impact on the way in which the markets behave. Hulu (#11) and Netflix (#12), for example, are both altering the way in which consumers access TV and movies. The impact of Netflix, with its 11m subscribers who have accessed 2.5b DVDs, Blu-ray discs and video streams since Netflix launched in 1999, has already altered the structure of the industry by making traditional video rental stores an endangered species. Or Patients Like Me (#23), a website that allows you to click on a symptom and connect with others who have the same symptom, identify treatment options and talk to other patients about their experiences. What a great example of peer-to-peer communication and, again, a service that has the potential to change consumer behavior – this time, with respect to how we find health related information. Here’s another one: Sportsvision (#34), a service that captures and analyzes sports movement and provides data that on the ability of a player – how fast the player moves, the player’s offensive ability and reaction time, etc. Very soon, this type of data will infuse Monday morning water cooler discussions about sports games.

Every now and then I stop to reflect upon different iterations of products I have used to satisfy different needs – e.g., listening to music on vinyl records and cassettes, to CDs, to the iPod or making phone calls through a switchboard operator using a phone that shared a party line with three other families, through to Skype. I often feel that when an innovation is successful, I can’t imagine life without it. I feel like that about many of the companies that made the top-50 list. For me, I can’t imagine life without Google or Netflix. Soon, I will probably add the Apple iPad to the list. I wonder what else I will add to my own “can’t live without it” list in five years time.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

Key words:  Fast Company, innovation, consumer behavior, sustainability, top-50 innovative companies, Facebook, Amazon, Apple, Google, Hewlett Packard, HP, Hulu, Netflix, Nike, Intel, GE, IBM, Disney, First Solar, PG&E, Wal-Mart, Patients Like Me, Sports Vision

I teach marketing strategy at the Drucker School of Management, a graduate only School that offers MBAs and Executive MBAs. I witnessed first hand the passion many of my students showed toward Obama, his campaign and his election to President. Many of my students volunteered during the campaign and participated in the grass roots marketing approach used by Obama’s team.

The day after the election of President Obama, I recall a heated discussion in one of my classes. I boldly walked into class and asked my students to link the concept of customer (dis)satisfaction to the election of Obama and tell me what is likely to be the greatest danger Obama faces going forward. 

The discussion was heated mostly because of the celebratory mood among many of my students and perhaps because of a lack of willingness to accept that things might not go well for President Obama. After all, irrespective of your personal political affiliation, there was much to note about the election of President Obama. Aside from the historic significance of his election, as a marketer I was intrigued by the way in which Obama reached out to the people with the compelling message of hope, used social media to rally the masses, and urged people to mobilize and make a difference to the future of the United States. As President Obama stated in the opening lines of his Presidential acceptance speech:

“If there is anyone out there who still doubts that America is a place where all things are possible; who still wonders if the dream of our founders is alive in our time; who still questions the power of our democracy, tonight is your answer.”

But to me, the period within which President Obama was elected also represented a period of great contradiction: on the one hand Obama made people feel hopeful; on the other hand, the speed and severity with which the recession took hold and a fear of the unknown made people feel hopeless. So, we were left with an unusual situation in which hopefulness and hopelessness were finding a way to co-exist.   (Incidentally, this is what motivated me to write by book, “Marketing Through Turbulent Times” to address the contradiction between hopefulness and hopelessness against the backdrop of Obama’s election and the recession and think about what this means for business leaders and marketers.)

The answer to my question of what could go wrong is linked to the basic principles of customer satisfaction. Put simply, when there is a gap between expectations and delivery, people are dissatisfied. To minimize dissatisfaction means to close the gap by either lowering peoples’ expectations or improving delivery.  

Without even taking into account specific changes President Obama has made or is trying to make, the expectations placed on Obama were colossal. To illustrate, here are some quotes from the media at the time Obama was elected, …“[although Obama] must tackle two wars, a calamitous recession and the unexpected … [y]et by a three-to-one majority, American’s are more optimistic with him in charge” (The Economist, January 24, 2009, p. 34).  Or in a poll published in Newsweek on January 26, 2009 (p. 43), 66% said they were very/somewhat optimistic that the new administration would be able to improve the way things are going in the country and 71% were confident Obama would successfully turn the economy around.

With so much hope placed on what President Obama can achieve during his term as President, the chance of Obama living up to expectations will always be slim.  The lessons of marketing apply to Obama just as they do to Procter & Gamble, Exxon Mobil, Mattel or Apple – if the goal is to get people to remain loyal, repurchase (i.e., vote again) and be advocates for your brand by recommending the brand to friends, then the perceived gap between expectations and delivery needs to be closed.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

Key words: President Obama, customer satisfaction, customer dissatisfaction, brand management, political marketing, hope, expectations, delivery

 

There aren’t many companies around that practice marketing the way that Apple does.  I call Apple’s approach to marketing “Heretical Marketing” because Apple clearly departs from accepted beliefs or practices when they develop and launch new products.  Here’s why.

Central to marketing is the goal of identifying customer needs and wants, such as problems consumers have with existing products, and then developing solutions to satisfy those needs.

One of the problems that plagues marketing is its limited success in coming up with ideas that will result in the development of a disruptive innovation.  The problem is that when we go to the market to identify customer needs and wants, people will respond in terms of the mental models they hold of the market. What this means is that when people respond to marketing research, most will do so in terms of the product attributes they are familiar with based on what they know about products currently available on the market. It is difficult, if not impossible, for respondents to suggest solutions for problems they didn’t know they had or evaluate something that is beyond their comprehension.

 Why then did I call Apple a bunch of “Heretical Marketers”? Because, what Apple has become well known for is first developing a solution (a new product) and then building demand for the new product by telling consumers about the needs and wants the new product solves. As Kim of Mac Rumors said when asked about the rumored Apple Tablet, “People hold out hope that Apple will surprise them and make a device they didn’t even know they wanted” (The Los Angeles Times, December 31, 2009).

Other things we read about Apple simply demonstrate good practice: a strong brand we trust to deliver something reliable, exciting and innovative, an organization that manages to build hype and gets free publicity along the way, and an organization that is confident enough in its own ability that it lets the product find its own feet in the market.  As Daniel Lyons wrote recently in Newsweek (Jan 5 2010), “…the cool thing about technology is that no one ever knows how new ideas will evolve.  … The lesson we’ve learned since then is that even the people who created the iPhone could not have imagined what people would do with the device.”

And we know that Apple has been successful not just in monetary terms but in marketing terms because as a consequence of buying the iPod or iPhone, consumer behavior has substantially altered.  There aren’t that many products around that can be attributed with creating categories, forming new reference points for consumers and underscoring cultural shifts.

I liked the title of Lyons’ article: “The Tablet will be what we make of it” because we can’t comprehend the attributes the Tablet will embody, nor do we know who will first adopt the Tablet and what these early adopters will use the Tablet for. And of course, we don’t know how the Tablet will evolve once it hits the market. It will be interesting to look back in a couple of years and see just how much impact the Tablet has had on consumer behavior.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.co

Key words: Marketing strategies, new product development, innovation, technology, Apple iPod, Apple Table, Apple iPhone, consumer behavior, marketing research, cultural shifts

 

 

 

Super Bowl time is almost upon us and once again the question of whether companies should spend money on Super Bowl commercials has arisen.

 Last year, circumstances were quite different. For example, Monday January 26, 2009 was labeled Black Monday because it was the day that many large corporations announced fourth quarter results for 2008 and, predictably, the results were not good. In one day, Home Depot announced it would lay off 7,000 employees, Sprint 8,000, Caterpillar a further 5,000 (for a total of 20,000), Pfizer announced it would buy Wyeth and lay off 10% of the workforce or about 5,000 people, and ING cut 7,000 positions. In total, 71,400 jobs were shed on Monday January 26 2009, making a total of over 200,000 jobs in the first few weeks of 2009 – not to mention the 2.6 million jobs lost in 2008, the most jobs lost in one year since the end of World War II. And of course, job losses continued and unemployment is now hindering a quick economic recovery.

Debate about whether or not to advertise during the 2009 Super Bowl provides great insights into the dilemma many marketers were facing at the time. Since a 30 second Super Bowl commercial costs $3m (or $100,000 per second!), the cost was hard to justify when so many people were either being laid off or fearful of being laid off.  Then there were questions of advertising effectiveness. As Bruce Horowitz noted in the USA Today (January 30, 2009), prior evidence suggests a direct relationship between consumer confidence and advertising recall – when consumer confidence is low, advertising recall is also low. Then there is the issue as to the appropriate message to use in a Super Bowl commercial. Is the Super Bowl a time to bring a “moment of joy” to consumers as Pepsi did? Or is the Super Bowl a time to show the company is still around, as Audi did? Or is the Super Bowl best avoided because advertising on the Super Bowl sends the wrong message to employees and constituents, which is why FedEx decided not to advertise during the Super Bowl of 2009 (Horowitz, 2009). As Steve Hayden, the Vice Chairman at Ogilvy Worldwide said, “This is the first Super Bowl of the Great Depression 2.0.”

But the dark days seem to be over and the Super Bowl is just a few weeks away. Let’s hope Super Bowl marks a return to good old-fashioned brand building, something that was lost through the recession.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

Key Words: Super Bowl, Super Bowl Ads, Marketing in a Recession, Marketing Strategies, Advertising Effectiveness, Unemployment, Recession, Job Losses, Black Monday.

 

I have been a sponge for stories about how organizations have reacted during the turbulent times that defined 2009. Sometimes, I have watched in horror as managers panicked and unraveled strategies that had previously made sense. Other times, I have watched marketing and innovation at work as necessity forced managers to reevaluate assumptions held of the market and/or how to reach customers.  One example is the explosion in the use of social media – without the recession, marketing managers might not have been so quick to embrace and experiment with social media and include it as an integral part of their marketing communication strategies.

Here is a list of 10 lessons that I believe define good marketing practice during the turbulent times we experienced through 2009.

1.     Be customer focused and remember that customers are the reason you are in business.

2.     Maintain competitive levels of marketing expenditure. In an earlier post, I reported the results of some analysis I did on firm behavior through the 1980s recession. I found that firms that spent ahead of their competition during the 1980s recession had a higher market value five years after the recession ended than firms that did not.

3.     Be more accountable for marketing expenditure and be willing to demonstrate the return on marketing investment: “marketing must align itself more to the goals and language of finance.”  The current recession has put more pressure on marketing managers to justify every last dollar of marketing expenditure in a way that analysts and chief financial officers understand.

4.     Learn to work with the new metric of cash flow. Traditionally marketing activities have been tied to metrics such as sales, market share, awareness or preference. In 2009, firms sought to maximize profits and hoard cash and marketing managers had to adapt by justifying strategies in terms of their impact on cash flow.

5.     Don’t mess up the brands (Part 1). During a recession, brands can be used to empathize with customers: “I can see by its actions that the brand is on my side”. Examples include JetBlue, Hyundai, Denny’s Walgreen and FedEx – all of which ran special promotions to appeal to the immediate, and often dire needs of customers. But care needs to be taken not to alter the brand’s core market position in an attempt to stay relevant by for example, lowering prices, or cutting costs by reducing quality or making products smaller.

6.     Don’t mess up the brands (Part 2). In an attempt to generate short-term sales, marketing budgets have been diverted away from long-term brand building activities. While organizations need short-term marketing activities to stay afloat, a portion of the marketing budget needs to be retained for long-term brand building activities. If not, the danger is that once the recession ends, organizations will find they own irrelevant and confused brands that have been abandoned by their core customers.

7.     Understand the underlying profitability of customers. American Express provides the best example here of an organization that identified positive and negative customers and then set about firing those customers it deemed too risky. While the strategic fallout was significant, American Express obviously felt it was important to abandon unprofitable customers.

8.     Be decisive: “To do well in turbulent times requires a special blend of management and leadership skills”. During the recession, managers need to control and manage the bottom line while at the same time skillfully communicate a compelling vision, and inspire people to follow that vision. The skills required to manage and lead can appear to be contradictory but both are essential.

9.     Don’t mess up: “Don’t lose opportunities for growth through sloppy execution of the current marketing strategy”.

10. During recessionary times, it is important to focus on generating growth through the excellent execution of the current marketing strategy – this means, avoiding the temptation to divert scarce resources to a plethora of new activities in the hope that one will be successful. But markets are dynamic and evolve and so even during recessionary times, some attention needs to be placed on future growth opportunities.  Therefore, simultaneously engage in a disciplined approach to identify new growth opportunities.

The economic circumstances of 2008 and 2009 were beyond our comprehension – after all most of us did not live through the Great Depression and many of us were not in senior roles during the 1980s recession. The recession will pass and adversity has brought about some positive change and important lessons for marketing.

Jenny Darroch is on the faculty at the Drucker School at Claremont Graduate University. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

 

I have often wondered what it takes for a dominant economy to fail as Spain did in the late 17^th Century, France did in the late 18^th Century, or the Ottoman Empire did in the mid-19^th Century. Niall Ferguson, a Professor of History at Harvard University, provided great insights on this phenomenon in a recent Newsweek article in which he questioned the future of the US (December 7).

The trends Professor Ferguson identified are frightening. He predicts that by 2039, federal debt held by the public will reach 91% of GDP, up from 41% in 2008 (he quotes an even more pessimistic forecast that puts debt at 215% of GDP by 2039). As Professor Ferguson notes, “This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in resources available for the Army, Navy, and Air Force.”

So how can such staggering levels of debt be reduced? If households incur exorbitant levels of debt, short of declaring bankruptcy, they can cut expenses or increase income. Countries can do the same. For a government to increase its income it needs to either increase marginal tax rates or increase the tax base – that is, find ways to encourage economic growth so that people and organizations earn more and the tax on this additional income finds its way into government coffers.

Innovation is critical to long-term economic growth. CNNMoney.com ran an article called “Driving change: innovation is key to the future of the US auto industry” (December 1). The central thesis of the article was that the US auto industry was at a crossroads. Consumers around the world are demanding “greater fuel efficiency and cutting edge design” and the question is whether US automakers can respond or whether the balance of power will move to other economies with emerging auto industries, such as India and Tata Motors. Steve Jobs’ advice to the US auto industry is to “Think different”.

The ability to “think different” is critical to the future success of many industries. To innovate as a way to generating growth within organizations can only help industries and the economy as a whole. Innovation requires inputs: money to support the development of ideas before the idea generates any revenue, a highly skilled labor force capable of working with cutting edge concepts and taking these ideas to market, an infrastructure to support the commercialization of ideas, and business conditions that encourage innovative organizations to stay in the US.

It is easy to see how a recession fuels a downward spiral: demand falls, expenditure is cut, income falls, demand falls (again), etc. When looking at where governments and organizations make expenditure cuts, “safe bets” include R&D because cutting R&D expenditure does not have an immediate effect on consumer demand nor is R&D expenditure tied to the immediate production of goods.

Similarly, education budgets are cut, and in some States such as the State of California, cut drastically. The impact of a deteriorating education system has an even longer-term impact on innovation because it may take years to feel the effects of deterioration in the quality of knowledge workers, people who have the capacity to drive an innovative society.

While I am not convinced we are completely out of the “recession woods” yet, I do believe the time has come to be more future-focused.  In particular, it is time to focus on restoring expenditure in areas that will drive innovation and generate economic growth to such an extent that the income base expands and the level of debt does not eventually blow out to an unconscionable level.

 

I’ve been thinking a lot about video games, partly because we have a lot of them in the house (yes, we purchased Call of Duty 2 the day it came out) and partly because I am intrigued by data indicating that sales of video games, an $11b industry, are down 12% year on year (BusinessWeek, November 23, 2009). The BusinessWeek article outlined the extraordinary efforts marketers are going to in order to get new games noticed when launched. The article also questioned whether sales would recover once the recession ends.

A couple of weeks earlier, Fortune ran an article about Gamemaker Zynga, who makes FarmViille, Mafia Wars and Café World for Facebook. (Fortune, November 9). What caught my attention is that Zynga is only two years old and already has revenue of more that $100m per year – it seems that players spend real money to eventually buy virtual goods such as tractors.

But there is something else that links these two articles together – in both cases they fulfill two basic human needs: (1) playfulness – the basic human need to relax, to amuse oneself, to have fun; (2) affiliation – the basic human need to form friendships and associations with others. In 1938, Henry Murray provided what he considered to be a complete list of human needs; playfulness and affiliation were just two of Murray’s 28 human needs.

It might be that sales of video games have taken a dip because of the recession or it might be that sales of video games have taken a dip because consumers are finding other means to relax and have fun, either alone or with others.  If you follow this logic then soon FarmVille players will move onto something else. The problem is that for most of us, the “something else” is beyond our comprehension.

The need to have fun and socialize has not changed; all that has changed is the way in which we achieve these needs.  In 1964, Peter Drucker wrote: “What to the manufacturer is one market or one category of products is to the customer often a number of unrelated markets and a number of different satisfactions and values”. Or: “Because the customer buys satisfaction, all goods and services compete intensively with goods are services that … are all alternative means for the customer to obtain the same satisfaction”. 

To me, the gaming market provides a great example of how we should not see only similar products as potential competitors but to step back and think about the basic need that games are trying to satisfy. On this basis, all products that satisfy the same human needs are competitors.   Now, if only I had a crystal ball…

The Los Angeles Times ran an interesting story on November 21, 2009:  airlines continue to get great marks for customer satisfaction and fewer people are complaining about bad experiences with airlines.  Industry data doesn’t help explain this phenomenon because, according to the article, airlines are only required to report mishandled baggage, delayed flights and incidents involving pets, tarmac delays and other specific problems, not data on general grievances about fees, rude staff or dirty seats.

Could it be that the airlines are in fact doing a better job at keeping customers happy or might it be that travelers have given up complaining? To understand customer satisfaction (or dissatisfaction), means to understand what customers expect and what they receive. If customer expectations are not being met, then customers are likely to be dissatisfied – the bigger the gap between expectation and delivery, the more disgruntled the customer.  To close the gap, that is to reduce dissatisfaction, means to either improve delivery or lower customer expectations.

While I am well aware that some airlines do a great job and build their brand on customer satisfaction, I think the reality is that we as customers have been conditioned to expect less. I went onto YouTube to look at old commercials and documentaries so as to be reminded about what airline travel used to be like – silver service and fine china service at airports lounges and on planes, free meals (and yes they were meals as we know them), newspapers delivered to your seat, and friendly crew who liked helped customers fly the friendly skies. Air travel was certainly expensive and time consuming and had with it the allure of reaching destinations that many of us had only dreamed of visiting. Air travel was a high involvement purchase, not just because of its cost but also because of the social prestige that went with being able to say you were taking a fight to reach another destination.

But, over time, air travel has become no different to taking a bus. Air travel is cheap and accessible and for many of a necessary means for getting from A to B. Because air travel has become more like a commodity and prices have spiraled downward, airlines are finding new and creative ways to claw back revenue. For example, I read just last week that an airline was putting fixed ads on the back of seats such that sitting in an airline seat is taking on the characteristics of pushing a shopping cart - for the duration of a domestic flight we now have to sit staring at an ad, just as we do pushing a shopping cart around a supermarket.

And so with the holiday season approaching, and with the excitement of traveling to see friends and family, lower your expectations and you won’t be disappointed.

 

I love lists and two have caught my attention this past week: The 50 Best Inventions of 2009, published by Time and a list of the Most Intriguing New Businesses, published by BusinessWeek (November 23, 2009). I always marvel at new ideas, wonder how people came up with them, try and identify the problem the new idea will solve and, of course, reflect upon whether the ideas themselves will be successful or whether the ideas might lead to other more successful ideas. 

In all of this, however, what I find especially exciting is that innovation is being highlighted. As I have said in a previous blog, since innovation is the engine of economic growth, it is critical to focus our attention on those things that matter if we are to identify constructive ways of getting out of the economic mess we got ourselves into. Add to that the idea that necessity is the mother of invention, and acknowledge that some of our greatest innovations came out of previous recessions (Hewlett Packard at the end of the Great Depression, Atari, Apple and Genentech during the 1980s recession), gives even more impetus to the need to encourage innovation during difficult economic times.

The top 5 inventions on the Time list were:

1.    NASA’s Ares Rocket: to provide more versatility to space missions with respect to the activities that can be performed and the distances traveled.

2.   Tank-Bred Tuna: to solve the problem of diminishing Tuna populations.

3.   The $10m Light Bulb: an energy saving LED light bulb to help reduce the amount of energy used, and related costs.

4.   The Smart Thermometer: to help regulate home heating and cooling by wirelessly turning appliances off and on.

5.    Controller-Free Gaming: to help gamers (e.g., those that play games like Xbox) to play the game by body movement not hand held controllers. The advantage: total immersion in the game.

While the order of the Time list was based on votes, The BusinessWeek 25 Most Intriguing Ideas were not rank ordered. But there were certainly common themes: five related to healthcare (cancer, diabetes and vaccine treatments, online communication with doctors, health and fitness), six related to sustainability (e.g., electric vehicles, reusing waste, harnessing natural resources); and nine related to new media and new technology (e.g., iPhone apps, enhancing online advertising and tracking online behavior).

As a marketer, it is not so much the complexity of the idea itself that intrigues me but the impact the idea will have on the market. Questions I often consider are whether the innovation will encourage consumers to value different attributes, as the Prius has done by encouraging consumers to refocus their discussion of cars around attributes such as eco-friendly and miles per gallon; or whether the innovation will result in a change in behavior, as the iPod did with respect to music consumption behavior; or whether the innovation will lead to a change of opinions, as the anti-aging enzyme resveratrol did, and enzyme which is found in red wine.

Ultimately, for the innovation to be successful consumers need to adopt it but for the innovation to offer a sustainable competitive advantage to the sponsoring organization, the innovation often needs to cause a market shift.  It will be interesting to look back on the ideas profiled in these latest lists and see which of them are successful and, of course, to understand why.

 

 

A recent article in BusinessWeek (September 14, 2009) indentified organizations headhunters look to when trying to identify management talent. General Electric, IBM and Hewlett-Packard were cited as organizations that develop executives who thrive elsewhere, The Coca-Cola Company does not.

The reason given is that "the very attributes that make Coke a great company - an iconic brand and an unmatched global distribution system - also make it easy for young mangers to rise without having to develop the entrepreneurial skills necessary to compete in other areas."  

What a fascinating contradiction. According to Interbrand, Coke is the #1 brand in the world.  What makes a great brand? Interbrand suggests that a great brand contains a compelling idea, stays true to its core purpose and values, and is the central organizing principle that guides decision- making within the firm. While strong brands need to stay relevant, strong brands do not constantly change what they stand for. And those who manage the organization’s brands need to ensure that the organization constantly delivers on its brand promise.

But here is another contradiction. In the same study, IBM was ranked the #2 brand in the world, General Electric #4 and Hewlett-Packard #11. What’s the difference then between an executive from The Coca-Cola Company and one from these other three companies? 

It seems that to excel in such an organization with strong brands means to develop a strong mental model as to what the organization and its brands stand for. Perhaps the difference then is that those working for organizations that face more rapid change due to say technological change, are more adept at changing the mental models they hold of the industry, the organization and its brands. This might then explain why some folk transition into new roles in new organizations better than others. 

Dear [insert the name of your favorite retailer here]

It is hard to believe that another year has passed and I will soon be visiting your store again to buy holiday gifts. 

I am a bit concerned about something, however, and thought I’d drop you a note. It seems that many retailers have slashed inventory this year, perhaps more so than previous years. One of my favorite sources of information, Fortune magazine, said that Abercrombie & Fitch’s inventory is down 42%, Ann Taylor is down 30% and Talbots is also down 30%. I hope you aren’t doing the same.

Look I know there has been a recession going on. And I get it that consumers haven’t been spending as much lately. But let me explain to you the problem. When I come into your store to buy holiday gifts, I have already made a decision to buy from your store. From your point of view, the hard part is over – I am here, in your store, with money to spend.

Let me tell you the things that annoy me the most about holiday shopping

1.     The noise, the crowds and the frantic nature of holiday shopping. I know you can’t do anything about this but I thought I’d start with the easy ones.

2.     Sales associates [I know you probably have a fancy name for them like “Customer Satisfaction Representatives”] who have forgotten that the reason you are in business is because you have customers like me. I do get irked by shop assistants who act as though they have better things to do than work in your store and help me out.

3.     Not being able to find what I am looking for because your merchandise is in illogical places and then spending 20 minutes walking around aimlessly either trying to find someone to help me or trying to find the item myself.

4.     Not being able to find what I am looking for because you are out of stock.

Now, let’s think about that last point for a minute. I want to explain why this point continually haunts me by illustrating with a personal story. A few years ago, we wanted to buy our son an Xbox for Christmas and, as it turned out, so did many other people. Every day for about five days, we visited BestBuy, Circuit City, Good Guys, Target, EB Games, Game Stop, FYE, and Wal-Mart in an effort to locate an Xbox. Each time, we asked three simple questions: (1) what time do deliveries arrive into store; (2) could the sales associate let us know how many Xbox units would be allocated to the store; (3) could we “book” and pay for an Xbox in advance.  The answers were pretty uniform: (1) deliveries come in over night, but arrive anytime in the morning; (2) sales associates don’t know how many units are allocated to the store; and (3) no, you can’t reserve and pay for the product. In addition, many sales associates rolled their eyes at us and, if we asked whether more units were due before Christmas, we would get a fairly standard reply “I don’t know, perhaps you could come back later”, or a more “helpful” reply was “it might pay to shop around”.  It became clear to us was that the burden was firmly placed on our shoulders, the shoulders of the customer, to do the work in order to spend money. Doesn’t make sense, does it? I really hope we are not in for another year like this.

The problem I have in all of this is that I have already decided to spend money at your store but then the burden is placed on me to pursue the products I want to buy. It reminds me of Kmart, who filed for Chapter 11 bankruptcy protection in 2002. There were many given to explain Kmart’s demise. One of them was inadequate investment in technology to such an extent that Kmart could not track, order and distribute inventory into stores. Please don’t fall into the same trap by cutting back on your inventory too severely.

I know this has been a tough year for you and I sincerely hope the holiday season goes well for you as I like your store and hope to visit you again in the New Year.

Yours truly, 

Jenny Darroch

 

In today’s Los Angeles Times (November 1, 2009), I came across a small article suggesting that consumers are starting to switch from private labels back to big-brand names again, you know, the brands supplied by companies such as Procter & Gamble, Colgate-Palmolive and Kellogg. In the article, store brands (also known as private labels) were positioned as inferior to big-brands. And the fact that consumers are willing to buy big-brands again was seen as a sign that consumers are opening their wallets, just a little bit wider.

The October issue of the Costco magazine contained an interesting article about private labels.  When private labels started back in the early 1980s, they were also referred to as generics. The packaging was plain white, the lettering solid black and the product quality inferior. Back in the  early 1980s when I was in College, inferior was just fine because the products were cheap and we were not proud: inferior breakfast cereal, inferior flour, inferior coffee, inferior soap, and inferior toilet paper were definitely better than no breakfast cereal, flour, coffee, etc. But, things have changed and private labels are now considered equal to or better than the national brands – this is certainly the promise made by Dick DiCherchio, the COO of Costco. 

The recession came at a good time for private labels. Positive attitudes towards private labels have increased and this has flowed through to demand as consumers have been forced to take a look at their household expenditure and trim costs. In fact, the October issue of the Consumer Report said that consumers could save 27% by buying private labels.

One advantage big-brands had in the past is that they often led the way with innovation – think the Swifter for example. Even this advantage seems to be eroding as private-labels are striving to become innovators and trend-setters – in fact, in the first half of 2009, private labels accounted for just over a quarter of all new product introductions.

The recession will come to an end. To compete in the post-recession world, marketers of big-brands will need to focus on excellent execution of the current brand strategy and, if they want to remain competitive, stay focused on innovation in order to stay ahead of private labels. For private labels to grow in significance the new emphasis on innovation will need to be maintained and the retail stores themselves will need to pay more attention to their own retail brand because the strength of the private label lies, of course, in the strength of the retail brand.

 

And so it’s been 80 years since Black Tuesday – the day in which stocks plunged by 12% (having fallen by 13% the day before) triggering the Great Depression.

If we were celebrating a marriage, we would be giving diamonds and pearls after 80 years.  Hardly appropriate today when consumers are shunning luxury goods and instead preferring to consume small luxuries such as Sprinkles cup cakes, candy and soda.  It’s a shame we aren’t talking about the 42-year anniversary because the appropriate anniversary gift then is improved real estate, or the 43^rd year anniversary where the gift is travel or the 44^th year anniversary where the gift is groceries (not all that romantic I know). But giving any of these gifts would certainly have the added benefit of lifting the economy out of recession.

We all know that consumers are spending less during this recession. Even if consumers can afford to maintain their lifestyle we see evidence of changes to spending: stealth wealth has returned where people who can still afford to consume luxury goods are having to hide the fact; or affluent deprivation where consumers feel poorer and so cut back on expenditure out of concern for their future and the impact rising health care costs, rising energy costs, depleted retirement accounts and likely increases in taxes to allow the government to repay the deficit will have on their lifestyle.

We wait with bated breath to see what the next 12 months will bring.

 

I read today that McDonald's has pulled out of Iceland.

The decision to withdraw is a combination of rising costs due to the weak Kronar against the German Mark (all products for McDonad's in Iceland come from Germany) and the inability to hike prices a further 20% to recoup losses. To raise prices would have made the Big Mac in Iceland the most expensive in the world.

For McDonald's, exiting Iceland is not the first time that the corporation has exited a country. Recent examples include Barbados in 1996 and Bolivia in 2002 (among others).

What is interesting to me is that we always expect big brands such as McDonald's to sustain anything that is put in its path both locally and internationally. In this case, the weak Icelandic economy was just too much. The same almost happened to Starbucks when it launched in Vienna, Austria (the coffee capital of the world). In this case, the problem was taking a standardized product and rolling it out internationally without knowing what local reaction would be.

Necessity is the mother of invention and the owner of the McDonald's Franchise in Iceland is going to reopen as Metro - this time, using local produce. What is likely is that by combining the McDonald's system with local tastes could result in some quite interesting innovations. I'm not sure how Starbucks influenced coffee consumption in Vienna or Vienna influenced coffee consumption in Starbucks but Starbucks is still in Vienna and, yet again, I am sure Starbucks had to make some adjustments in order to succeed.

 

 

 

Every now and then I come across an innovation that makes me stop and think “what a great idea” [or: “why didn’t I think of that?”]. It happened again the other night when I was watching television and I saw an ad for PowerMat – a wireless recharging device that will solve one of the BIG problems of today: how to find the right cords, and enough power sockets, to charge phones, hand held electronic games, MP3 players and the like.  For our family of four, this problem is exacerbated when we travel:  four cell phones, at least two iPods, and at least one PSP to charge in a hotel with only two available power sockets, all of which have to compete with the laptop that also needs to be recharged. For some reason, I am the one who usually sneaks around the hotel room at 3 in the morning to switch over devices so everyone is charged up and ready for the next day.

There have been other innovations that have made me stop and think “what a great idea”: wheels on suitcases, an idea attributed to Northwest Airlines pilot Bob Plath in 1989; cell phones, which were first available commercially in 1984; Post-it Notes, which 3M started distributing in 1980; the revolutionary Pampers disposable diaper launched by Procter & Gamble in 1961; or the Swifter, another Procter & Gamble invention, launched in 1999.

What binds these ideas together is that all solve consumer problems: finding cords and power sockets to recharge devices, carrying suitcases around airports and hotels, being accessible by phone when away from the office or home, keeping track of pages in a document or book, no-fuss management of diapers, and cleaning surfaces without breaking backs.

Something else common to these ideas is that consumers are not likely to have been able to articulate the solution – i.e., consumers probably did not say: “I have a problem when I charge electronic devices because I can never find my the right power cords or enough power sockets. Can you develop a wireless recharging device for me?” Alternatively, consumers might have articulated the problem (or PowerMat developers might have observed the problem by watching consumers in action): “I can never find the right power cords to enable me to charge all of my devices”. Here, the problem was evident to PowerMat who then set about developing a solution.

I don’t know the story behind PowerMat but the process might also have begun with a solution, for example, wireless technology, looking for a problem. In this case, the technology existed but for the solution to succeed, the developers had to link it to a consumer need. Early indicators suggest PowerMat did uncover a substantial unmet need (the problem of recharging) and product reviews suggest that the PowerMat will be successful.

There is something else that binds together the examples I have used. In all cases, they led (or in the case of PowerMat, will lead) to a fundamental change in consumer behavior.  If PowerMat is in fact as successful as the early reviews suggest, it will permanently change the way we recharge electronic devices.  If PowerMat can stay ahead of the curve as competitors join this new market created by PowerMat, then it will be attributed with having redefined the way we do things.

As companies look for strategies to generate growth, that is innovative and exciting ways to redefine the organization post-recession, it is important to think in terms of the problems and solutions framework outlined above. That is, remember that not all consumers can articulate a problem they have with current product offerings. Plus, the majority of consumers are unable to come up with solutions to problems they have with current product offerings. To find exciting ways to generate growth then, marketing managers and new product development teams need to focus on problems, both explicit and latent, and set about finding solutions to these problems.  History tells us that sustainable competitive advantage comes about by developing innovations that solve consumer problems, innovations that shape behavior and create new markets.

 

I have always been intrigued by the idea of firing customers. During turbulent times, the pressure has been on managers to make decisions that allow the organization to build up substantial cash reserves. And so the challenge has been on understanding the profitability of customers and the cash flow implications of doing business with them

This kind of analysis begs the question then of whether customers should be “demoted” or “fired” customers.  Old news but still a good example is that of American Express, who offered to pay some customers $300 each if they closed their accounts with American Express by April 30, 2009. At the time, American Express was rightly concerned about the increasing risk of credit card defaults.

But what are the long-term implications of firing customers? It is easy to conduct a cost benefit analysis using numbers. This is what American Express no doubt did when it decided which customers to fire and what it was worth to incentivize customers to leave. What is more difficult, however, is to put a value on negative word of mouth, made even easier by social media. American Express has certainly had its fair share of negative word of mouth.

While we know that the economy moves in cycles and there was certainly talk of a correction before the recession hit. It was difficult, however, to predict the speed and severity with which the current recession hit. So, it is easy to be an armchair critic and suggest that organizations should avoid the acquisition of potentially unprofitable customers in the first place.

But even though customers are the reason you are in business, not all customers are worth retaining. A bad customer is one that will put the organization at risk financially. A really bad customer is one that not only puts the organization at risk financially but also jeopardizes the overall strategic position of the organization. Thus, it is important to understand both the financial and strategic implications of doing business with all customers.

As organizations are looking to implement marketing strategies for growth, good management and marketing practice should not be forgotten. Drucker’s five famous questions need to be asked: What is our mission? Who is our customer? What does the customer value? What are our results? What is our plan? Linking together Drucker’s ideas of customers and results, I’d add the question of how profitable is each customer group before going out and acquiring customers for the sake of growth itself. 

Last week, the Dow broke through the psychological barrier of 10,000 and many breathed a sigh of relief. The call went out that the economy was about to emerge from what can be characterized as the darkest period of turbulent times in recent history.

There certainly are green shoots indicating that the worst of the recession is behind us. When reporting relatively strong third quarter results for Google, CEO Eric Schmidt said, "While there is a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and now feel confident about investing heavily in our future."

Similarly, Steven Bird of Safeway described his Coffee Index, a measure of consumer confidence (The Los Angeles Times, October 16). When the recession first hit, consumers switched from lattes to coffee and now Bird can see a swing back to lattes again.  Likewise, consumers are starting to shift back to premium wines.  All signs that some consumers feel that the economy has reached the bottom and we can start to return to some simple pleasures of life.

As we frantically look for evidence of economic recovery, we need to take care not to mistake all measures as signals that consumer spending is on the rise again. Take computers as an example. I read in BusinessWeek (October 26) that many consumers have put off buying new computers because they didn’t want to end up with Microsoft Vista. Now that Microsoft has launched Windows 7, a lot of people will be in the market trading in eight-year old machines. The point of this example is not to mistake an increase in the purchase of computers as a signs of economic growth.

The National Bureau of Economic Research (NBER) defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months”. Gross domestic production (GDP) and employment are seen by NBER as the primary measures of economic activity.  When I talk to senior managers, many feel that sales are now flat and no longer declining. This is certainly encouraging news. Add to that encouraging quarterly results with supporting comments by CEOs that the bottom of the economic downturn might in fact have been reached.

But, predicting economic recovery is quite another story. In the State of California, for example, almost 1 in 5 people are said to be affected by the recession through job loss, or a reduction in hours and/or pay. Those who work for the State of California, fear that more bad news is on the way with State revenues likely to be about $1b less than what was forecast for the current year. Add to that the “Lost Generation” (BusinessWeek October 19), a generation of college graduates who have not been able to get work and who might consume differently as a result of the impact (both financially and psychologically) the recession has had on them.

The point of all of this is that while signs that the recession is drawing to a close might excite us, turbulent times will continue as we find innovative ways to generate growth. As James E. Skinner, the CEO of Neiman Marcus said, the recession “is forcing us to experiment”.