History’s lessons can no longer guarantee success

The business models on which corporations such as Ford, GM and US Steel were built may no longer be relevant to today’s companies.

When Andrew Carnegie sold his creation, US Steel, to JP Morgan in 1901, his company’s capitalisation of $1.4bn equalled two-thirds of all the money in circulation in the US at that time. In comparative terms, Carnegie was much richer than Bill Gates and he did it all on the back of a simple formula: “Run our works full. We must run them at any price – all other considerations secondary.”

Carnegie knew that the bigger and better the plant, the higher the volume, the greater the economies of the scale, the lower the unit costs (and therefore prices), the greater the market share, the higher the profits. And he milked this logic to the full.

So did Henry Ford. Back in 1913 for example, he offered every customer a $50 rebate if sales reached 300,000 – which, of course, they did. That year, Ford sold more cars than his next ten biggest rivals combined.

We rarely think about it much these days, but marketing’s formative years lay in meeting the needs of companies such as these. To this day, marketing’s greatest triumphs – and its deepest pathologies – can be traced back to these roots.

The power of good marketing was demonstrated in the mid-Twenties by General Motors which, by 1927, had (literally) fought Ford’s factories to a standstill. GM’s marketing innovations such as extra comfort and annual model changes (new product development), different models for different customer priorities (segmentation), plus instalment payments and trade-ins (which made more aspirational products easier to buy) had rendered Ford’s business model obsolete.

GM’s marketing had two pillars. First, understand and make what customers want. Second, persuade them to buy your brand. But together these two pillars – matching supply to demand and connecting seller to buyer – served the same familiar purpose: to keep factories busy and maintain the momentum of that virtuous spiral of increasing economies of scale.

So why the history lesson? Because for most companies nowadays those original formative conditions no longer apply, which means that marketing’s “added value” can no longer be taken for granted.

So what has changed?

Technology, for a start. Markets, too. Last week, for example, KPMG reported that even if the motor industry reduced annual car production by 4 million units, overcapacity would still be in the order of 20 per cent. In Henry Ford and Alfred Sloan’s day, more capacity meant cheaper products. Today, more capacity means higher costs.

Meanwhile, the cutting-edge, scale-driven virtuous spirals are shifting. Today Wal-Mart and Tesco are riding the crest of this particular wave. Their formula: use increased sales volumes to leverage buying power and reduce supply chain costs; pass the benefits on to the customer in the form of reduced prices; use resulting market share increases to ratchet up the momentum even further. Result: a new balance of power.

As underlying conditions change, it’s not surprising that tensions inherent within marketing are intensifying. Ever since the time of GM’s Alfred Sloan, marketers have pursued two apparently contradictory goals. First, organise the company to do what the customer wants (new product development). Second, organise the customer to do what the company wants (marketing campaigns to influence consumer attitudes).

These opposites were united in the context of scale-driven business models: they both helped the works to run full: to deliver the scale benefits that generated extra value for the consumer. It was this that really gave marketing-led companies their zing and energy.

It’s also what generates marketing’s common pathologies. You are already familiar with them:

Companies that treat marketers as brochure producers. Once you’ve decided what to make, what role is left for marketing except to persuade customers to buy it?

Marketing as gimmickry and manipulation. When the balance between getting customers to do what we want and doing what customers want gets out of kilter.

Marketers and other functional specialisms not speaking the same language. By definition, marketers’ eyes are turned outwards to customers while the rest of the company’s eyes are turned inwards to operational imperatives. This breeds different mindsets.

Difficulty in assessing marketing effectiveness and advertising accountability. Deploy exactly the same talents, insights, skills, budgets and strategies in a growth market where a scale-driven virtuous spiral has taken off, and in another market dogged by a vicious circle of hyper-competition, product parity and overcapacity and the results will be totally different.

Status of marketing and marketers. If it’s the underlying business model that really matters, and marketing’s role is to feed it with sales, then it’s not necessary to have marketers on the board. Unless, that is, they are helping to shape the business model itself.

The fact is that the original formula for marketing success as an appendage to a scale-driven production machine is reaching its sell-by date. When it works, it still works wonders, but all too often it doesn’t work. Its approach to matching supply with demand – which takes the form of defining and tweaking the attributes of the products to be pushed through operational sausage machines – is too narrow. And “connecting” via mass advertising is no longer easy or efficient.

So it’s not surprising that most of today’s icon brands are going beyond traditional “good marketing” to invent new means of matching and connecting. Some are building new ways of matching supply to demand into the heart of their business model: Dell’s make-to-order approach, Toyota’s flexible, lean production system; Wal-Mart and Tesco with their just-in-time logistics systems. Others are relying on new methods of connecting with customers: Amazon, Ebay and Google have all demonstrated new ways of connecting buyers to sellers.

Yet others are driving back “up-stream” to trump traditional new product development with real invention: breakthrough drugs and cosmetics, mobile phones, flat-screen monitors, digital cameras and so on.

The best combine elements of all three. Take Apple’s iPod. It’s a hi-tech invention, finessed by snazzy design, which empowers consumers to match and connect with the music they want in a market-transforming way.

The bottom line is this. The fundamental value- creating contribution of marketing is better matching and connecting. Over time, this matching and connecting role came to be seen in terms of a particular set of mechanisms and processes such as market research, advertising and promotion. In reality however, these were just the best ways to do the job given a particular set of historical conditions. For some brands, they may still be the best way. But as new approaches to matching and connecting become possible, they may not. In fact, the opportunities and potential breakthrough innovation in marketing are now tantalising.

Alan Mitchell, asmitchell@aol.com

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