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
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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
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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
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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.
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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.
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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 Requirements
The Marketing function becomes marginalized when discontinuous growth
strategies require a different approach than is appropriate for the incremental growth
strategies driven by marketing and sales. Some of these differences can be seen in the
contrast of the growth strategies arrayed along the continuum of Figure Four.
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Penetrate/Expand the Served Market. Most of these approaches are in the spirit
of continuous improvement or kaizen marketing. Because the direct rivals in the market
are watching each other closely, and looking for the same edges, the gains are
incremental and often short-lived.
SoBe has become a leader in the new age soft drink market by positioning itself
as a healthy refreshment and employing each of these penetration and expansion
strategies. They used “innovative imitation.” to learn from rivals such as Arizona,
Snapple and Mistic. They didn’t do this just to copy them but to find out what to avoid.
They also exploited three converging trends: the emphasis on healthier foods and
beverages, the growing acceptance of natural or holistic treatments, and the aging of the
baby boomer segment. Their brand attitude was quite irreverent, which further helped
them stand out from the rivals. Growth was further accelerated by line extensions such as
herbal tonics that took them toward the nutriceuticals market. Their initial market
success made it easier to improve the quality of their distribution, enter new geographic
markets and gain entree to a number of new, high volume outlet types like club stores and
mass merchandisers.
Expand the Business Scope The more the growth strategy is a discontinuous
departure from the current strategy the greater the reward—at the cost of increased risk
over a longer time horizon. In the middle of the strategy continuum are strategies that
edge the firm outward from the served market but stay within familiar territory. These
strategies are often motivated by two related questions: (1) How can we leverage or
extend our existing competencies into adjacent markets? and (2) Which of the functions
that our customers perform could we perform better? General Electric has used these
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questions to great effect to guide the evolution of the company into services. The
Aircraft Engine Business Group now sells “power by the hour” with a package of
engines, financing including leasing, servicing and certification, with a commitment to
deliver the right engine to an aircraft when the airline needs it. A variant of this strategy
is to leverage the brand equity into new markets where the brand meaning gives it
permission to participate. Sony and Virgin have taken this path with some success.
This strategic trajectory can be accelerated by the convergence of supportive
trends. Thus FedEx found opportunities in global components handling that emerged
from trends in globalized freight flow, outsourcing demands and Internet availability.
Trends may emerge from fringe markets. Snowboarding, microbreweries, and extreme
sports have become popular with wider audiences. Another kind of trend convergence
comes from bottlenecks in trade flows and efforts to eliminate them. Thus 3M foresaw
the need for hospitals to improve patient record retrieval and developed a Health
Information Systems business in response.
Discontinuous Growth Strategies. The intent of these strategies is to reshape the
industry and grab an early lead. The rewards are high, but so are the risks. The risks of
failure will be even higher if the organization is unable to accept the uncertainty and long
pay-back periods. Because discontinuous innovations may take years to come to fruition
the organizational processes and incentives must encourage trial-and-error learning and
accept interim failures. This requires a holistic skill base that combines deep insights into
markets, industry forces, and technological trajectories.
The requisite skills are more likely to be found in Corporate Development, R&D,
top management, consultants or specialized alliance partners. While the marketing
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function may not play a significant role, market research is an essential ingredient. There
is a misguided belief that neither marketing nor most customers are likely to comprehend
what is possible because it is outside their experience. But a balanced appraisal of a
discontinuity requires an imaginative understanding of customer needs, problems and
behaviors.
Discontinuous growth strategies fall into two broad categories. There are those
that exploit a technological discontinuity. While nanotechnology, intelligent materials,
smart sensors, digital imaging and the myriad of breakthroughs in genomics and
proteomics promise revolutionary changes, it is often hard to know in advance if there
will be a disruption. In retrospect the internet did not qualify (with the exception of
eBay-type auctions, portals and search engines) because it mainly reformed existing
processes, without creating entirely new markets.
The second type of discontinuity sees new ways to deliver customer value through
creative strategic thinking—but does not depend on a technological breakthrough. This
may mean breakthrough business designs such as Starbucks in coffee, IKEA in furniture,
and Home Depot in home improvement. A key ingredient to these strategies is a
redefinition of the customer’s needs and (or served market). Thus Callaway innovated
with the Big Bertha to help golfers hit the ball more easily rather than simply improve on
the existing club designs. Bloomberg came to the fore in on-line financial services by
redefining the buyer for data terminals as the trader and analyst, rather than the traditional
focus on the IT manager. While the former wanted features-rich terminals with tailored
analytical screens the latter wanted standardized systems at the best possible price. By
seeing differently Bloomberg joined a host of innovators who have disrupted existing
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industries by challenging conventional practice and thinking. The open question is
whether marketing is too bound by tactical pressures and narrow thinking to be an active
participant or leader in the process of transformation.
Balancing risks and rewards. The widespread aversion to discontinuous growth
strategies is a natural fall-out of the belief that the potential rewards will come too far in
the future at too high a risk. This belief has point and weight, especially in light of the
recent experience with internet-based “change the game” start-ups. But there is a cost
that need to be understood and contained. For example, while the actual rewards may be
realized far in the future, the equity markets account for them in their expectations of
future earnings. If the firm is viewed as mired in slow-growth markets, vulnerable to
emerging technologies and lacking a compelling story about its future growth thrust, the
stock price will surely suffer.
Risk aversion may have more crippling consequences. Certainly the probability
of success goes down sharply when the business ventures beyond incremental initiatives
in familiar markets. But this should not be an excuse for passivity. It is healthier to
properly calibrate the risks and then seek creative ways to reduce the risk exposure.
Guidance on these issues can be found in the matrix in Figure 5 that contrasts the
probability of success of different growth paths.
APPRAISING THE RISK MATRIX
This matrix has many sources, including long-buried consulting reports by firms
such as A.T. Kearney, the extensive literature on the economic performance of
acquisitions and alliances, and numerous post-audits of new product initiatives. The wide
ranges in probabilities absorb some of the variability in the definitions of “newness”, and
“success”, as well as the simplifying consequences of clumping into four cells growth
strategies that belong on a continuum. We have tried to consistently define “success” as
the achievement of the objectives that were used to justify the investment in the growth
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initiative. These estimates have been extensively validated in interviews with consultants
and senior managers.
In deference to the saying that “all generalizations including this one are false”
there are several qualifications to keep in mind. The probabilities do not apply to fastmoving consumer goods (where incremental innovations have high long-run failure rates)
and ethical pharmaceuticals, and do not distinguish whether “new to the company” is also
“new to the world”. Also new markets means new customers and not necessarily new
geographies.
The most obvious messages from this risk matrix are that (1) the farther a firm
ventures from its currently served markets and present products/technologies the greater
the risks, and (2) that unfamiliar markets hold much greater risks than new technologies.
Within this matrix there are also some less obvious insights into how to contain
risks. Starting with the diversification cell where the prospects are most dismal, and even
acquisitions have a poor track record, the imaginative strategist can find opportunities to
learn. These could be exploratory acquisitions intended to learn about the market, internal
venture groups that build capabilities with emerging markets and technologies via
licenses or minority equity stakes in start-ups. The objective is to shift the discontinuous
innovation into a market or product development initiative where the risks are more
palatable. The amount at stake can be managed with joint ventures, fast-to-market/fast-to
fail prototypes, intensive competitive monitoring and ambidextrous organizational
arrangements that have more tolerance for ambiguity. Here is where marketing research
should play a crucial role by orchestrating market probes, delving into the latent needs of
consumers, working with lead users and watching competitive moves. The pay-off from
this expanded role comes from interpreting and communicating what has been learned
about the emerging market and the plausible scenarios that might unfold. What are the
prospects that marketing is ready for this challenge?
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ENHANCING THE CONTRIBUTION OF MARKETING
Discontinuous growth strategies that expand the business scope or reshape an
industry are a different game with unfamiliar rules for most firms. Those that excel have
superior strategic imaginations, staying power and ambidextrous organizations that can
understand and contain the sizeable risks.
It is not inevitable that marketing be marginalized in the identification and
development of these discontinuous innovations. Indeed the eventual success of a
breakthrough requires an informed marketing input to the strategy dialogue. Before
marketing can make this contribution, there must be broader acceptance that marketing is
simultaneously an organizational orientation that ensures the primacy of a market
perspective, a strategic management responsibility for defining and articulating the
eventual value proposition and a functional specialty with expertise in market sensing and
demand stimulation. Marketing must be the expert on the customer, interpreting and
incorporating information about customers into all of the processes involved in defining,
developing and delivering value to these customers.
However, this expertise has been honed in the more predictable setting of
incremental innovation and is not sufficient to cope with the uncertainties of emerging
technologies and breakthrough business models that create tomorrows markets.
Insightful market assessments in these conditions should be guided by four
considerations:
‰
Paint the big picture. During the early exploration the issue is whether
the potential market is “big enough” to be worthwhile. It is premature to
expect precisely calibrated results.
‰
Focus on needs, not products. It is a truism that prospective customers
can’t envision dramatically different products or business models.
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However they can be eloquent about their needs, problems, usage
situations and changing requirements—but only if the right users are
asked.
‰
Use multiple methods. All methods of market analysis are flawed or
limited. A combination of methods may yield conclusions that deserve
greater confidence.
‰
Probe and learn. Most successful discontinuous growth strategies follow
a halting development path, marked by stop-and-go metamorphoses,
before emerging from a series of market experiments with a feasible
application. This requires a process of successive approximations and
accumulating learning. The path to market of fiber optics, cellular phones
was guided by probes with immature versions of these products, learning
from these probes and trying again in different market segments.
These diverse sources of market information flowing from the periphery create
white noise that may obscure the weak signals. To fully appreciate the implications there
must be an openness to a diversity of viewpoints, a willingness to challenge entrenched
mental models, and an organizational climate that encourages continuous
experimentation and accepts “well intentioned failure.” Marketing can and should play a
central role in building this learning capacity.
Expanding the Role of Marketing
When marketing is in top form it will contribute to a discontinuous growth
strategy in three ways.
Navigation through effective market sensing and sharing of market information
and anticipation of opportunities. Discontinuous opportunities signal their arrival long
before they bloom into full-fledged commercial success. However the signal-to-noise
ratio is initially low so one has to work hard to appreciate the early indicators These
weak signals usually come from the periphery, where new competitors are making
inroads and unfamiliar business models or technologies are used. Here marketing can
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play a role by widening its peripheral vision outside the currently served market. These
insights should be followed up with investments in small market probes of the best
opportunities.
Articulation by refining and renewing the core value proposition in light of
emerging opportunities. The main issue here is to link technological possibilities with
valid market concepts, and then specifying the mechanisms for taking the new product or
service offering to the market. This requires a willingness to challenge the prevailing
mind-set in the industry, and overcome the constraints of tradition that make incremental
innovations the comfortable way to grow.
Orchestration by providing the essential “glue” for a coherent market-driven
whole. This last role for marketing ensures that the new business model or product
offering continues to be aligned with the emerging market and adapted to shifting
requirements and competitive moves.
When the marketing mindset and function pursues an expansion of its role with
discontinuous growth strategies while continuing to play a lead role with incremental
growth, it will help the CEO satisfy the corporate growth imperative.
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REFERENCES
1 Richard Foster and Sara Kaplan, Creative Destruction, New York: Currency, 2001.
2 Clayton M. Christensen, The Innovators Dilemma, Harvard Business School Press,
1997.
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Figure One
Why is it Imperative to Grow?
Focus on
Shareholder
Value
Demanding
Customers
• less loyalty and
more churn
• changing
requirements
Growth
Imperative
Accelerating
Technological
Change
• shorter life cycles
• discontinuities and
disruptions
Intensifying
Competition
• eroding advantages
• saturated markets
• too much of everything
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Figure Two
Growth and Shareholder Value
You can’t save your way to prosperity.
Wayne Calloway
ex.-CEO, PepsiCo
Total Return to
Shareholders*
Growth
(CAGR)
15 %
Revenue
Growth
7%
Above
Median
Below
Median
Unprofitable
Growth
0%
Below
Median
Profitable
Growth
10 %
Cost
Cutting
Above
Median
Profit
Growth
* Five year rolling average – S&P 500 – from 1996 to 2001
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Figure
Three
Figure
Four
From R & D to Connect & Develop
R&D
Labs
Consumer
Insights
Trade
partners
Customer
teams
Employees
Joint
Development
Suppliers
Research
Institutions
Virtual
networks
Contract
labs
VC’s
Source: Larry Huston, VP Innovation, Procter & Gamble
Alliances
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Figure
Four
Figure Five
Sources of Growth
Incremental
Growth Initiatives
• Extend the line
• Reduce defections
• Innovative imitation
• Exploit shifts in
needs / demographics
• Expand geography
• New channels
Penetrate / Expand
Served Market
Increasing rewards
Greater Risks
Longer time frames
• Reconfigure the
value chain
• Seek adjacent
markets
• Look for trend
convergence
• Leverage brand
equity
Expand the Business
Scope
Discontinuous
Growth Strategies
• Find a new value
profile
• Anticipate value
migration
• Redefine the served
market
• Exploit
technological
discontinuities
Reshape the Industry
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FigureFigure
Five Six
Balancing Risk and Reward Along the Growth Path
P(S) = Probabilities of success
New to Company
Product
Present
New Product
Development
P(S) = . 40 -.55
Diversification
a) Internal Innovations
P(S) = . 05 - .15
b) Acquisition
P(S) = . 35 - .45
Line extensions
Market Development
Incremental
P(S) = . 60 -.75
a) Internal innovations
P(S) = . 25 -.30
b) Joint venture
P(S)
P(S) ==..45
45 -.50
Market Expansion
Present
New to Company
End-Use Market
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