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Marketing and the Ceo's Growth Imperative

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Marketing and the Ceo's Growth Imperative MARKETING AND THE CEO’S GROWTH IMPERATIVE by George S. Day Corporate leaders are being squeezed between the pressure by equity markets, for sustained growth in earnings, and shrinking opportunities for growth in their saturated and hotly contested markets. This squeeze is being worsened by the recent stock market plunge which has ruled out growth by stock swap acquisitions and precluded accounting manipulations that artificially grow earnings. This puts organic growth close to the top of the personal agendas of most Chief Executive Officers. Will CEO’s get much help from marketing in resolving their organic growth dilemma? The growth gurus, including Clay Christensen, Richard Foster, Gary Hamel and C.K. Prahalad, are dismissive. In their view marketing is too close to the immediate demands and requirements of current customers and competitors to be a source of breakthrough sources of growth. At the same time new organizational forms are subordinating marketing’s traditional functional role in the innovation process. My intention is first to challenge this restrictive view, because it is not in the organization’s best interest to have marketing performing below potential, and then show how good marketing practice can enhance fast-paced growth through discontinuous innovation. WHY IS IT IMPERATIVE TO GROW? The growth imperative is shaped by the four forces in Figure One. They impinge on top management by imposing constraints and requiring challenging objectives. At the 1 top is the intense focus on shareholder value creation. Bonuses and option awards are increasingly linked to this metric, and the market clearly rewards companies that deliver profitable growth. Figure Two illustrates the rewards from maintaining revenue growth and profit growth above the median for the S&P 500. The achievement of these superior returns is constrained by demanding customers and intensifying competition. Most managers bemoan the reality that there is too much of everything (except customers) in their markets. Intensifying competition for these scarce customers puts continuing pressure on margins, and limits opportunities for profitable differentiation. Meanwhile the customers are expert at playing rivals against each other in search of price concessions, and have become less loyal. An extreme case is the U.S. mobile phone market where the churn rate went from 20 percent in 1998 to 35 percent in 2001. How is a high rate of superior growth in total returns to shareholder achieved in the face of slow growth markets? Richard Foster and Sara Kaplan make a compelling case that only substantial or discontinuous innovations deliver superior shareholder value. They also contend that more than 90 percent of all innovations are “incremental.”; they are necessary for continuous improvement but don’t change the competitive balance. Technology innovations play a dual role in the quest for superior returns. On one hand discontinuous innovations frequently offer performance that current customers can’t readily use, with lower profits than a business can support. The reluctance of incumbents to pursue these innovations provides an opening for new entrants. Conversely sustaining technologies offer performance improvements for existing customers, and help established firms maintain their lead by delivering superior value. Is marketing equipped 2 to help top management fend off attacks from discontinuous innovations while capturing the value from sustaining technologies? WHAT ROLE FOR MARKETING? As the growth trajectory accelerates, from seeking incremental gains within the current market arena to pursuing breakthroughs from discontinuities in the strategy, the marketing function becomes steadily marginalized. This is partly due to the short-run tactical priorities that come with any functional responsibility. A further reason is that the innovative organizational arrangements needed to manage the uncertainties of a discontinuity tend to subordinate all functions. But the main reason is that the skill sets needed to initiate and manage an array of discontinuous growth strategies have been migrating from marketing to other parts of the organization. This is not a healthy development because the strategy dialogue becomes unbalanced. When internal or technology considerations are predominant, the voice of the customers will not be clearly heard and the ability to match customer needs with technological possibilities is compromised. Before we can propose a more assertive role for marketing we need to assess each of these reasons more deeply. Functional Myopia The myopia of successful firms in general, and marketing in particular was revealed most clearly by Clay Christensen2. The question he asked was, why are firms reluctant to participate actively in potentially disruptive technologies that initially attack low priority peripheral markets? He concluded that the mental models that guide how 3 managers make choices are strongly shaped by their intimate familiarity with existing customer’s needs and may lead them to underappreciate that the “disruptive” technology may offer different benefits that are highly valued by non-customers. They may also be misled because of the initial inadequacies in the performance of the disruptive technology, and underestimate the potential for improvement. The tendency to fixate on serving and retaining current customers is reinforced by rewards and incentives that emphasize short-run market share and profitability. Even the strategy development process is culpable here because the emphasis on competitive benchmarking and competitive advantages leads managers to assess what their competitors are doing and resolve to do it better. As a result the sales and marketing groups are quick to match competitive moves and react to demands from important customers. At the extreme all the energy of the development organization can be absorbed by these incremental reactions. One health care and beauty aid maker found that almost 95 percent of all their development projects were package changes, line extensions and other incremental improvements. Because they were deemed to be urgent they crowded out resources for next generation or platform projects with longer term payoff. This portrait particularly indicts the sales and marketing functions in firms with a dominant sales and/or product orientation. It is surely overdrawn as a characterization of market-driven organizations. Their culture, capabilities and configuration equip them to better anticipate threats and opportunities from outside their served market. But it is a continuing struggle to prevent being customer-compelled, by accepting every customer request, or converging toward the competition. 4 Organizational Subordination Two examples of innovative organizational designs will give a flavor of how leading companies are coping with a proliferation of new technologies and market opportunities, while getting greater productivity from their innovation processes. Both are designed to take advantage of cross-functional, team coordination enabled by advances in network technologies. Their net effect however is to shift the organizational power balance from the functional groups toward process-based teams. A related consequence is that traditional marketing tasks are being dispersed throughout the enterprise. Procter & Gamble is leading the move away from the traditional R&D model that is self-sufficient and resource intensive to a more fluid, and open “Connect & Develop” approach. The objective is to better connect the 150 technologies, 8000 researchers, 600 external partners and 5 Global Business Units and improve access to technologies developed outside the company. The elements are recognizable: a global technology council to figure out how to leverage all the technology, an InnovationNet that hosts 600 web-sites for global project teams and captures business building insights, numerous communities of practice, search and information tools for mining the scientific literature and global patent data on the web, and an array of external partnerships. As the schematic in Figure Three shows, consumer insights have many sources and uses, but don’t rely on marketing as the gate keeper. Marketing research does play a crucial role in this complex web by describing consumer problems and latent needs that the Connect & Develop network can address. 5 Global firms such as IBM, Citicorp, ABB and Coca Cola are evolving toward opportunity-based designs that have two levels. The foundation level is the business units that do the day-to-day work, deliver current results and house the enabling resources in functional, product, industry or geographic units. On top there are focused “opportunity units”, catalyzed by entrepreneurs from within the firms, who are authorized to mobilize these resources to pursue breakthrough opportunities in global accounts that cut across geographies or require integrated solutions from several business units. These opportunistic teams combine deep customer knowledge with insights into what is feasible with the firm-wide resource base and prospective technologies, and are incented to pursue these non-traditional opportunities without (too much) resistance from their functional or geographic superiors. While the opportunities are likely to be spotted by the sales and marketing groups, the project team and its leader can be located anywhere. Long gone are the days where the salesforce “owns” the customer or the marketing function is the sole source of market insights. Strategic
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