Welcome to Marketing Principles and Processes Module 1 WHAT IS MARKETING? Peter R. Dickson...

Welcome to Marketing Principles and Processes

Module 1

WHAT IS MARKETING?WHAT IS MARKETING?

Peter R. Dickson©Backbone Press 2009

This is all we have. All we will ever have. Space-ship Earth. Using her resources the best way we can today and tomorrow is our sacred responsibility.

The Big PictureThe Big PictureThe Big PictureThe Big Picture

The answer is ever better innovation and diffusion of new products and services that better use scarce resources, and do not destroy the Commons: our common air, common water, common values and common good.



Marketing is the business discipline responsible for innovation and diffusion of innovation processes. The one discipline taught in Business Schools that teaches product and brand development processes’ best practice, customer relationship and service best practice, and supply chain best practice.

Before we discuss the practice of profitable marketing, we apply fundamental economic theory to explain why superior marketing is so important to the future of the Earth, the future of the United States and, for that matter, every nation. The following is just one example…


Marketing and HumanityMarketing and HumanityMarketing and HumanityMarketing and Humanity

Between 1935 and 1965, the infant death rate around the world decreased by 90% as a result of the world-wide diffusion of antibiotics. The efficient diffusion system that developed created a new world-wide market so everyone, everywhere could have access to the new drugs. The result was a world-wide increase in life-expectancy of 10 years.

Marketing and HumanityMarketing and HumanityMarketing and HumanityMarketing and Humanity

Great innovation and great diffusion of the innovation. It is one of the most successful meeting-a-need marketing success stories ever told and that will ever be told: the invention, development, branding, advertising, selling, pricing, distribution and after sales-servicing of antibiotics.

It is the practice of profitable marketing at its best.

Prosperity and Wealth CreationProsperity and Wealth CreationProsperity and Wealth CreationProsperity and Wealth Creation

The first principle of wealth creation is that progress, happiness and wealth comes from the value that technological innovation adds in use: e.g., electric cars over gasoline driven cars.

Schumpeter Wealth Creation PrincipleSchumpeter Wealth Creation PrincipleSchumpeter Wealth Creation PrincipleSchumpeter Wealth Creation Principle

This value that technological innovation (large or small) adds in use is called the Schumpeter Principle, after economist Joseph Schumpeter who called it “creative destruction”.

So what is Marketing? Marketing is responsible for the product development process and the direction of research and development that creates such innovation and creative destruction.

The Smith Wealth Creation PrincipleThe Smith Wealth Creation PrincipleThe Smith Wealth Creation PrincipleThe Smith Wealth Creation Principle

The second fundamental principle of wealth creation is that trading exchanges create wealth. We call this the Smith Principle after Adam Smith, who used this principle in his famous book An Inquiry into the Nature and Causes of the Wealth of Nations, as an argument for global free-trade. It is explained in the following example.


Two individuals, X and Y meet. X has 10 Units of A in his possession and ownership and Y has 10 units of B in his possession and ownership. They discuss whether they would like to barter two units of A for two units of B.

X agrees because he values two of B much more than two of his 10 units of A. Y agrees because he values two of A much more than two of his 10 units of B. They make the exchange. (Economies of Scope are represented here)


Kaboom

Wealth is created!


Both X and Y now own possessions that are more valuable than before the exchange.

Value, wealth and welfare have been increased by the trade.

As A and B generalize to anything (including A or B being money). It is the principle behind free-trade, and the encouragement of more trade that creates more exchanges that creates more wealth.

Marketing and Wealth CreationMarketing and Wealth CreationMarketing and Wealth CreationMarketing and Wealth Creation

Marketing is responsible for all exchange processes with customers and for creating customer exchanges. It is also responsible for creating profitable product and service innovations.

Marketing is responsible for these two wealth creating effects and their dynamic.

The Wealth Creation DynamicThe Wealth Creation DynamicThe Wealth Creation DynamicThe Wealth Creation Dynamic

The dynamic is that these two wealth creation effects (innovation and exchange) amplify each other. It is called a positive feedback system.

A positive feedback effect is when A increases B and B increases A. Thus if A increases then B increases, which leads to a further increase in A, which leads to a further increase in B.

It can be visualized as the following.

Exchanges Exchanges Innovation Innovation

Innovations create more exchanges, more exchanges create more wealth and capital that is invested in more innovation and creating more exchanges.

The Wealth Creation Feedback EffectThe Wealth Creation Feedback EffectThe Wealth Creation Feedback EffectThe Wealth Creation Feedback Effect

Pot of gold


Bigger pot of gold

Innovation Innovation Exchanges Exchanges

As innovation increases, exchanges increase and the wealth and capital increases. Capital is both a driver and a product of this dynamic.

Even bigger Pot of Gold


Even bigger Pot of Gold

Innovation Innovation Exchanges Exchanges

It is called a virtuous economic cycle or circle that drives economic growth, prosperity and capital creation.



This happens when the practice of innovation and exchange (marketing) is unappreciated, depreciated , trivialized, misunderstood, mocked and disparaged.



This happened in China three times in the 15th Century, 19th Century and 20th Century.

The Wealth of NationsThe Wealth of NationsThe Wealth of NationsThe Wealth of Nations

The Schumpeter-Smith feedback dynamic is latent in all societies but every so often it becomes very active in a lucky country. When this happens such an economy and society shines brightly for a 100-200 years or so. Examples are the Netherlands in the 1600s, Britain from 1780-1930, United States from about the 1850s, Germany from the 1870s, Japan from the early 1960s and South Korea in the 1980s.

Trading and Wealth CreationTrading and Wealth CreationTrading and Wealth CreationTrading and Wealth Creation

Today China is experiencing the most powerful Schumpeter-Smith wealth creation effect ever. It is growing the economy of a billion plus people at about an average of 10% a year, year after year.

And when Chinese domestic marketers become very skilled at marketing in China they will apply these new skills and their capital to global marketing.

And India will not be far behind. Whither the U.S.?

A Short Story Of CivilizationA Short Story Of CivilizationA Short Story Of CivilizationA Short Story Of Civilization

Trade and then trading Empires grew out of the production of agricultural surpluses that could be traded and led to the diffusion of all sorts of innovations.

A Short Story Of CivilizationA Short Story Of CivilizationA Short Story Of CivilizationA Short Story Of Civilization

If you click on the next 11 slides quickly you will see the stars come to life. Click back 11 times quickly and notice the red physical distribution trade links and how they drive the bursts of prosperity and civilization. Then proceed slowly through the 11 slides.

11,000 BC End of last ice-age. A more arid climate leads nomadic hunters and gatherers to the cropping of wheat and barley in Jordan. Villages, agriculture surpluses, labor specialization, and trading are invented

6,000BC: The cultivation of rice is invented in China

After several thousand years the fertile crescent is farmed out and tribes move on to greener pastures. The farming of rice expands across South East Asia. Goats, sheep, cows, pigs and water-buffalo are domesticated

3000BC: The first great trading civilizations are created along great rivers. Moving cargo along rivers is 1/20th cost of moving by camel or cart.

500 BC - 500 AD: Trading boats venture out into the Mediterranean and South China Seas. Rome dominates other great trading center Carthage, then Europe with its Roman Roads. China dominates Asia. Overland trade begins between the super-powers.

Other great trading ports, cities and civilizations evolve.

500-1200 AD: The Western dark ages. Raiding dominates trading. Some civilizations decline because of climate change, others are destroyed by warrior tribes.

800-1300 AD: The Islamic “Enlightenment” restores trade in Europe and with Asia. Mongols create Eurasian trading Empire.

1400-1700 AD: The emergence of the merchant adventurers of Venice, Italy, Portugal, Spain, Holland and England. The trading of slaves, spices, plants, precious metals and crafts dominates using newly invented sailing ships.

1700-1800: The development of the Baltic States, Russia and North America.

1900-2000: The steamship, container ship and air-cargo shrink the world. The US, China, Japan, and Germany dominate.

Global Trading System DynamicsGlobal Trading System DynamicsGlobal Trading System DynamicsGlobal Trading System Dynamics

New communication, transportation and quality control innovations have greatly reduced transaction costs associated with global sourcing and it has led to a massive system dynamic that is driving huge redeployments of capital, labor and skills around the world.

The gains from trade are unequal, with the winners being the economies with marketers (traders) who respond to market forces fast and well.

Retailers and shareholders reinvest profits or invest in manufacturing and services insulated from global competition or leading global competition. Demand increases generally for all goods as a result of falling prices (an income effect) and in particular for the lower priced goods (a substitution effect).

New communication and transportation technologies reduce transaction costs. Low labor costs and quality and on-time delivery assurance contracts make supplier attractive.

New communication and transportation technologies reduce transaction costs. Low labor costs and quality and on-time delivery assurance contracts make supplier attractive.

Retailer/distributor develops a trading alliance with new source.

Domestic and global sources in existing trade alliances come under pressure to innovate, to reduce prices and increase services.

Retailer/distributor profits increase and or consumer prices drop in very price-competitive markets.

Domestic manufacturing output contracts as profits are lowered by global competition.

Employment in manufacturing sectors exposed to fierce global price competition shrinks. Sectors that are insulated, such as health care, benefit from lower supply prices. Other sectors that lead the world in production and manufacturing innovation, such as pharmaceuticals, aerospace, and forest products, flourish.

If the net effect of shifting investment and employment is a recession, then the retailing/ distribution sector will react to reduced sales by seeking more global suppliers who will reduce cost of goods sold. If they do not, competitors will, and they will gain market share.

Retailer/distributor “discovers” a new global source of supply.


The World has greatly prospered :

2000 2007World Trade $8 trillion $18 trillionWorld GDP $32 trillion $52 trillion Fortune Magazine, July 23, 2007

But the U.S. still dominates: 2005U.S. GDP (% household consumption) $9 trillion (70%)

Japan GDP $3.6 trillion (54%)

Germany GDP $2.2 trillion (57%)

China GDP $1.6 trillion (41%)



China and India are growing at 8-10% a year, the U.S. at 3%. But its OK say the experts:

“It will take years of venture capital flowing in before the Chinese let go of a rote approach to work and truly embrace entrepreneurial innovation” Jack and Suzy Welch Business Week, July 2, 2007, p. 112

The ex-CEO of GE and ex-Editor of the Harvard Business Review are wrong. And we should be scared of our own “rote” marketing practices.

Global Trading ImplicationsGlobal Trading ImplicationsGlobal Trading ImplicationsGlobal Trading Implications

Our future prosperity depends on our companies and entrepreneurs ever improving their marketing skills (their innovation and diffusion of innovation), the way they think about market dynamics and understand the interaction of supply and demand.

Understanding Supply and DemandUnderstanding Supply and DemandUnderstanding Supply and DemandUnderstanding Supply and Demand

A stable market, in stable equilibrium, is actually a failed rather than a successful market.

Markets should always be getting more efficient, introducing new technologies that creatively destroy the status quo.

Markets are about change; about growth, transformation, decline and fall, and not stability. Markets are about disequilibrium and not equilibrium.


Supply is always changing as product, production and trading processes are constantly being tinkered with by managers. This changes both the level and variance of supply and demand.

Every so often a really major transforming technology comes along that creates a whole new product life-cycle. B/W TV - Color TV - HD Flat-screen TV; Videos –DVD; Portable cassette players – MP3.

Buyers’ preferences and wants are always being changed by changes in supply

Suppliers’ products and processes are always being changed by changes in

demand

The variation in supply is constantly changing The variation in supply

is constantly changing The variation in demand is constantly changing

The variation in demand is constantly changing



Every firm’s supply offering is always changing as managers tweak product design processes, production processes, distribution processes, selling processes to lower costs and increase consumers’ preferences for the product or service offering. That is what managers are hired to do, including managing the product life-cycle.

When a new innovation is introduced/launched the variance in the supply offering increases but demand may not change much. Sales of the new innovation are low despite a lot of effort teaching potential consumers about the advantage of the innovation, changing their preferences and changing demand. The market is fermenting. Sometimes demand never takes off!

Introduction Growth Maturity

Market fermenting Market making Market equilibrium

A Theory of Market DynamicsA Theory of Market DynamicsA Theory of Market DynamicsA Theory of Market Dynamics

Product Innovation Life-CycleSales

Time

But when demand does take-off, supply has to greatly increase to keep up with demand. Imitators enter the market with “their” variation of theproduct innovation and supply but it is often standardized around a dominant design. Diffusion of the new innovation occurs through greatly expanded distribution reach. Advertising is about competitive comparisons.Profits are greatest. It is happy times for most suppliers.



Time Introduction Growth Maturity


ZXKGBVQJ did not become the standard! What did?


At the maturity stage there is little product design improvement and supply does not appear to change much. Market shares stabilize around Brand loyalty and the rate of change in demand and supply greatly decreases. Price competition increases, particularly as suppliers innovate on production process costreduction.



Time Introduction Growth Maturity


Then a market transforming new technology platform or product design comes along that kicks off a new product innovation life-cycle. An example is the invention of the manual type-writer whose product life-cycle lasted from about 1880-1960, its replacement by the electric type-writer whose life-cycle lasted from 1920-1990, its replacement by the word-processor whose life-cycle lasted from 1960-1990 and its replacement by the PC whose life-cycle started around 1980 and continues. Transformational

new product

Old product


Product Innovation Life-Cycle

Introduction Growth Maturity Introduction

Market fermenting Market making Market equilibrium Market fermenting

Sales

Creative DestructionCreative DestructionCreative DestructionCreative Destruction

Encyclopedia Britannica did not develop a CD-ROM version in late 1980s.

As a result it faced more fun competition at one-tenth the price.

Sales and direct salesforce imploded.

Encyclopedia Britannica (owned by a charitable foundation) had chance of creating a Britannica CD-ROM in 1988.

Instead developed an interactive CD-ROM version of Compton’s, its low end brand of encyclopedia. In 1989 it was an instant hit.

Senior management did not want to change customary selling process: salespeople faced dramatic declines in commissions. So what did they do?

Try to sell the books and CD together!

Then came Google and Wikipedia! Massacre!


A way of thinking a little deeper about the product-life-cycle is to see the market as constantly changing, sometimes very rapidly, sometimes much more slowly, in the following way.


When a new innovation is introduced by a supplier into the market, customer preferences change and standards of quality change and demand changes.

Suppliers rush in to serve what they believe to be the new demand. This creates imbalances of supply and demand and increased competition in the old market and new market.

This way of marketing thinking about market dynamics is illustrated in the following figure. It is a superior way of thinking about product-life cycles and is a superior way of thinking about competition.


Buyers’ preferences and wants are always being changed by changes in supply.

The variation in consumer demand is constantly changing

Sellers learn directly and by observing other sellers how to add customer and shareholder value

Sellers with superior market analysis skills that are listened to are more competitive.

The supply of products and processes is constantly changing

Supply will shift to serve the demand of the most profitable market segments

The economic processes change the economic structure that changes the social and political structure.

Sellers who implement faster are more competitive.

Markets are always in disequilibrium. Competition increases as supply exceeds demand.

Sellers with an insatiable self-improvement drive are more competitive.

Effective products and process are quickly imitated and improved

Competition forces sellers to try new ways of serving customers and reducing costs



This is the way that Cyrus McCormick thought. He was driven, a great market analyst, and he was brilliant at implementation. In theory and in practice, in principle and process he was a marketing genius.

After reading his story you will understand the importance of economic, political, technological, and socio-cultural forces, and what marketing in practice is about.

It is also a case study about company failure.


Of FORTUNE magazine’s 100 biggest firms in1956, only 25 were still on the list in 2006. Each year in the U.S. 800,000 new companies are launched, over 100,000 are taken over, 100,000 fail and 700,000 are terminated.

So why do some businesses die and some businesses thrive? Some of it has to do with being lucky.

A lot depends on their processes. So how should we think about processes?

Purchasing Processes

Supply Processes

Manufacturing Processes

Selling Processes

Distribution Processes

Service Processes

Selling Processes

Distribution Processes

Service Processes

Purchasing Processes

Supply Processes

Manufacturing Processes

Manufacturer A

Manufacturer B

Manufacturer C

Thinking About Competitive ProcessesThinking About Competitive ProcessesThinking About Competitive ProcessesThinking About Competitive Processes

Economies are made up of chains of manufacturers that each add value. It is called an added-value supply chain.


Organizations are designed around the flow of added-value processes and activities within the processes. Marketing managers must understand this flow from the inside-out and outside-in. But added-value process analysis is not enough. It is too one dimensional. It is too sequential. It needs to be hierarchical as well as sequential.

Learning processes

Resource deployment processes

System control processes

Primary added-value processes -supply-manufacturing-selling-distribution-service-

Customer satisfaction, quality, waste and cost control

HR, R&D, budgeting and planning processes

Benchmarking, training, process improvement techniques

Firms have to have superior higher-order processes that determine their primary added-value processes.


American Business Schools must produce American marketers with world-beating product innovation and diffusion process thinking skills. If not our future is dismal.

The Big Picture The Big Picture The Big Picture The Big Picture

That is why Marketing is the most important, most exciting discipline taught in Business Schools.

The Big Picture The Big Picture The Big Picture The Big Picture

Welcome to Marketing Principles and Processes Module 1 WHAT IS MARKETING? Peter R. Dickson...

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